PROFESSIONAL MISCONDUCT

By: Mrs. Surbhi Bansal M.Com., FCA

Sec.2 (2): Members deemed to be in practice: If he

(i) Engages himself in practice of accountancy, or (ii) Offers to perform audit related services or holds himself out to the public as an accountant, or (iii)Renders professional service or assistance in Matters of accountant interest etc., or, (iv)Renders such other services which as per opinion of the council, to be rendered by C.A. in practice. (Mgt. consultancy service) Explanation : ( ) C.A. who is salaried employer of C.A. in practice shall be deemed to be in practice for limited purposes of training articled cler!. (") C.A. shall be deemed to be in practice if he, in his professional capacity (not in personal#employee$s capacity) acts as li%uidator, trustee, e&ecutor, adviser ' same or ta!es up an appointment mate by (ovt. or court or other legal authority. )owever for this purpose his engagement shouldn$t be on a salary*cum* full time basis. Significance of certificate of ractice: As per +udicial ruling, (i) -nce a member of ICAI appears before I... authorities etc. he can so appear only in his capacity as a C.A. (ii) .hus for period of suspension, he can$t practice as I... practitioner even if he is having law degree. (iii) .hus, a member of ICAI can$t have other capacity, separable from his capacity to practice as a member of the Institute. Section !: A member in practice can$t use any other designation than that of a Chartered Accountant nor any other description whether in addition thereto or in substitution therefore. )owever they can use any other letter etc. indicating degree of other institutions. Section " : /isabilities for purpose of membership : (i) If he isn$t " yrs. or (ii) If he is of unsound mind as per a competent Court, or (iii) 0ndischarged insolvent, or (iv) /ischarged insolvent but hasn$t obtained from the court a certificate starting that his insolvency was by misfortune without any misconduct on his part, or (v) Convicted of an offence involving moral turpitude unless he has been granted a pardon etc. or (vi) If removed from membership of ICAI due to misconduct. If the person fails to disclose the fact that he suffers from any of disabilities aforementioned, it will constitute professional misconduct on his part. Section #$ : 1rocedure in en%uires for disciplinary matters : Complaint Council /isciplinary Committee Council )igh Court (if need arises)

Complaint

Council whether it is fit for case or not (1rima facie opinion 3hether complaint is fit. It is not deciding)

fit unfit re+ect

/.C. (Ist 2chedule) ()aving evidences e&planation ' than recommended report supply to council Council 1ass the decision 4efer to ).C (If in Ist 2chedule to be removed from register for more than 5 yrs. if it falls in IInd schedule)

(i) (ii)

(iii)
(iv) (v) (vi)

At first stage, council is framing +ust prima facie opinion with respect to complaint. It is not deciding whether C.A is guilty or not. 6ormally no fresh evidences are permitted before council, once the disciplinary committee submitted its report to council. )owever council may permitted the same at its own discretion. .he recommendation report of /.C. in to be given to C. A concerned before submitting it to the council ' it is also giving opportunity of being heard. .he C.A. concerned will appear to council either himself or may be represented by some other C.A (not by 7ower) 3ithout any complaint, the council may also ta!e any action suo*moto.

Section #%: 1enalty for falsely claiming to be a member : Any person who : (i) 6ot being member of ICAI represents that he is a member of Institute or uses the designation Chartered Accountant, or (ii) 8eing member of ICAI but not having C-1 represents that he is in practice or practices as CA, 2hall be punished. Section #! : Maintenance of Branch office : Office: 3here name 8oard of firm is affi&ed or which is described as place of business on any professional stationary. .hus a C.A can have a name plate of himself describing him as Chartered Accountant but not that of the firm at his place of residence, as it will be construed as branch As a general rule, 9ach one of such offices should be in separate charge of a member of Institute. Exception (&o separate in charge is needed)

(i) (ii) (iii) (iv) (v)

'or (e(ber practicing is )illy *reas In plains for period : months in winter season, ' .emporary office not to be mentioned as place of 8usiness ' Correspondence continue at permanent office, '. 8efore coming to plains in every winter ' at close of such office in plains, inform ICAI. 6ame board of firm to be displayed at temporary office only during these : months.

(i) (ii) (iii)

'or all (e(bers If second office is located in same accommodation or premises or If second office is located in same city, or If second office is 7ocated within 5; !ms. <rom Municipal limits of city in which I st office in situated.

Schedules

First Schedule (order passed by council. Refer to H.C. only if C.A. is to be remo ed from register of members for more than ! yrs.) P"rt # (1" clauses ) CA in practice P"rt 2 (" clauses ) CA in ser ice P"rt $ (" clauses) CA general First Schedule

Sec !d Schedule (Straight forward refer to H.C.)

P"rt # (1# clauses) CA in practice P"rt 2 (2 clauses) CA general

Part I (C.A. in Practice) Clause 1 : Allows any person to practice in his name as a C.A. unless such person is also a C.A. in practice and is in partnership with or employed by himself. Clause 2 : 1ays # allows # agrees to pay or allow directly or indirectly any share commission or bro!erage in fees or profits of his professional business to any person other than a member or partner or retired partner or legal representative of deceased partner. 3idow can continue to receive a share of firm if partnership agreement contains a provision. 6ow onwards, on death of sole proprietor, the name of the firm will be !ept in abeyance by the institute for one year so that to enable the widow of deceased to sell g#w of the firm. <or deaths

on of offer :;th Aug, =>

on or before "=th Aug, =>

Normal Cases Disputed Cases 6ame will be !ept in .ill one year from the date of abeyance upto one years settlement of dispute provided from death information as to dispute is received by ICAI within year of death.

If firm name is still available with ICAI. 0pto ">th Aug, == (irrespective of time lag between date of death ' "=th Aug, =>).

Clause 3 : Accepts # Agrees to accept any part of the profits of the professional wor! of a lawyer, auctioneers, bro!er or other agent who is not a member of institute. Clause 4 : 9nters into partnership with any person other than C.A. in practice or a person resident without India who but for his residence would be entitled to be registered or whose %ualification are

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recogni?ed by (ovt.# Council # provided C.A. shares in fee # profits of business of partnership both within and without India. .his clause applies only to profession of C.A. and not to other business, which is covered by clause . Clause 5 : 2ecures, either through the services of a person not %ualified to be his partner or by means which are not open to a C.A., any professional business. Clause 6 : 2olicits clients or professional wor! either directly or indirectly, by circular, advertisement, personal communication or by any other means.@ (a) Adv. And note in ress : As a general rule he can+t advertise !"ce tion : (i) change in partnership, address and tel. no. having bare statement of fact and no. of insertion and limited distribution of new spares. (ii) Classified ad. In +ournal # news letter of institute for sharing professional wor!#partnership, etc. provided firm name and address is not given. (b) !# anel#ent $or allot#ent o$ audit% ro$$. &or' : -nly if penal$s e&istence is !nown. 6o roving en%uiries Auote fee only if en%uired. 6o printed # cyclostated copies of fee. 2houldn$t respond to empanelment re%uiring registration or other fee or other deposit. However as per new notification, a C.A. can respond to tender etc. if required b !ovt. a"enc etc. #n t$is case, $e can pa reasonable price for tender document. For earnest mone , if services are restricted to C.A. as per law, t$e can%t deposit ot$erwise t$e can. (c) Pu(lication in tele hone % other directories : 2ection of C.A. belonging to particular town # city. 6ormal letters, logical order. 4easonable payment, no restriction on entries. 6o impression of publicity. (d) )es ondin* to +endors, Adv. % Circulars : 2houldn$t 4espond to (i) adv. <or appointment. (ii) Auotation for services restricted to C.A. and (iii) In%uiry for %uotation of fee if it is made to more than one C.A. )owever, they can respond(i) in other areas(other than audit) where they compete with non C.A. and (ii)in outside country(even in audit field) if receipts are in foreign currency(ensure not to constitute undercutting and also confirm to minimum fee restrictions prescribed by ICAI) )owever as per new notification, when matter relates to audit and related services, which as per law can be provided only by a C.A. the member may respond to such adv.#%ueries#letter etc. if same is sought by 3orld ban!#IM<#Asian development 8an! or similar Institution or any (ovt. Co. or entity sponsored by (ovt.#nationali?ed Institution or any similar body. (e) Issuin* -and .ills : .o persons other than clients such as changes in ta&.

(f) Pu(lication o$ .oo's and Articles : 6o indication as to association with any firm of C.A. (g) Issue o$ *reetin* cards or invitation : /esignation and name of the firm may be printed on invitation provided sent to clients relatives and close friends. (h) )ovin* in/uiries : 6o sending of such in%uiries to prospective clients. (i) See'in* &or' $ro# ro$essional collea*ues : 6ot permissible e&cept in a(ii)i.e. +ournal. (+) Sco e o$ )e resentation 0%S 225(3) : Merely state that he has acted independently and may indicate willingness but no e&tra publicity. 6o derogatory remar!s against company. (!) Acce tance o$ &or', e#anatin* $ro# a client introduced (1 other C.A. : 2houldn$t accept. Client should come through the introducing C.A. (l) Pu(lic Intervie& : 6o publicity, details about firm # professional attainments. (m) Adv. 0r .onde" 2o. : 1rohibition. (n) 3e(4site : CA # CA firm free to create own website (no std. <ormat, no restriction on colour). 3ebsite run on Bpull$ mode not on Bpush$. Can mention 3ebsite Address on professional. stationery. 2pecific.$ pull$ re%uest for : (i) 6ature of services rendered. (ii) Area of 9&p. of partners. (iii) Area of e&p. of employees. (iv) 6o. of articled cler!s. (v) 6ature of assignment handled. Can%t "ive : (i) 6ame of clients and fee charged, (ii) 6o logo, (iii) 6o photograph(however passport si?e photograph of member can be given) (iv) 6o Adv. (v) 4ef. About website (other than that of ICAI and (ovt. related.). Articles etc. of professional interest can be given. 8ulletin 8oards can be provided. Chat room between client and CA is permitted. 7isting on suitable search engine is permitted if restricted to CA, Indian C1A etc. /etails shouldn$t solicit client or adv. 2ecrecy of matters of clients through website. If he is member of a professional body or chamber of commerce offering listing permitted. 2trict compliance with guidelines is re%uired. Address of website can be diff. from name of the firm but should be as near as possible to such name of CA#CA firm). Address of website intimation to ICAI alongwith annual membership form. Mention date upto which it is updated. .hey can provide services through other websites also provided contact address of CA and professional achievement is not given. Clause 5 :

Advertises his professional attainment or services or uses any designation or e&pression other than Chartered Accountant on professional. documents, visiting cards, letter heads or sign boards unless it be a degree of an 0niversity established by law in India or recogni?ed by the Central (overnment or a title indicating membership of ICAI or any other institute recogni?ed by Central (ovt.#by Council. )e can$t use words li!e income*ta& consultant, cost consultant or management consultant. Can$t use BMember of 1arliament$, etc. in addition to that of Chartered Accountant. 1ersons eligible otherwise, sub+ect to permission may practice as advocates but can$t use designation CChartered Accountant@ and CAdvocate@ simultaneously. 6ame, description and address of member (firm) may appear in any directory or list of members of a particular body (alphabetically). )e may provide appropriate directorship held and reasonable personal details (outside Interest) but not name of clients and services offered by his firm. 1hotograph and brief particulars in maga?ine (6o payment#6o Adv.). Advertisement is permissible (not bolder than substance) (i) 4ecruiting staff in own office. (ii) 4ecruiting staff or ac%uiring#disposing business#property on behalf of client. (iii) 2ale of 8usiness#1roperty acting as trustee, li%uidator or receiver. 2uccess in e&ams may be given without any undesirable publicity w.r.t member#firm#cler!. May appear on ..D. films#4adio, etc. describe themselves as Chartered Accountant %ualification but no reference, as to name#address#services of firm. It is a duty of C. A to insure that host doesn$t refer to any such thin!. 1ublicity is permitted for appointment of position of local#national importance, etc. .hey may mention membership of ICAI but not firm. 0se of glow sign*board#light or large si?e board is not proper. )e may have a name board of himself at residence but not of a firm. 1rospectus of the company in which he is a director shouldn$t advertise his professional attainment. <irm name not permissible. 9&pression li!e CIn association with EE..@ , CAssociates of EEEEE@ not proper. 0se of logo not permissible at all. Clause 6 : Accept a position as Auditor previously held by another chartered accountant or restricted state auditor without first communicating with him in writing. 1rofessional reasons for not accepting Audit fee. (i) 6on*compliance of provisions of section ""F and ""5. (ii) 0ndercutting of fee. (iii) 6on*payment of undisputed audit fee (e&cept sic! unit) (iv) Issuance of %ualified 4eport. In first three, if he accepts professional misconduct. In (iv), he may accept if he thin!s that attitude of retiring auditor wasn$t proper and +ustified. 8ut if he %ualified it for good and valid reasons, he should refuse. If dispute regarding fee not paid, he (incoming) may use his influence in favour of his predecessor to have dispute settled. If prospective clients tells the member about change of auditor. As! him if retiring one has been informed, if yes communicate with retiring. If not, as! reasons for change if no valid reasons he shouldn$t accept. )owever, if he chooses to accept, communicate with retiring. Incoming can act after waiting for reasonable time for a reply. Mere posting Cunder certificate of posting@ is not sufficient. 1ositive evidence (ac!nowledgement) that letter has in fact reached the person.

 Applies to all audit assignment including internal concurrent, ta& audit, healthy practice for special audit u#s F"("A) of I... Act also. -utgoing should sent a reply as soon as possible (6o violation of confidentiality). /uty of communication is absolute ' re%uired is every case, even when appointment is made by government or when if previous auditor !nows about the appointment. .he incoming auditor should communicate with previous auditor who was there in same capacity. .a!e care of new point in AA2*F. Clause 7 : Accepts an appointment as auditor of a company without ascertaining from it whether re%uirement of section ""5, in respect of such appointment have been duly complied with. Clause 18 : Charges#offers to change accepts#offers to accept w.r.t. any professional employment, fee based on a G of profits or which are contingent upon findings or results of such employment, e&cept in cases which are permitted. 6ot contingent if fi&ed by court#public authority. 9&ception (may by G of profits) : (i) 4eceiver or li%uidator (G of reali?ation). (ii) Auditor of Co*op. 2ociety (G of paid up#wor!ing capital, gross#net income#profit. (iii) Daluer. Clause 11 : 9ngage in any 8usiness (occupation other than profession of C.A. unless permitted by council so to engage. )owever, he can always become director (not M./.) in a company provided he#his partner is not interested in such co., as an auditor. 9:eneral Per#ission; (i) 9mployment under C.A.#C.A. firm. (ii) 1rivate tutorship. (iii) Authorship of 8oo!s#Articles. (iv) )olding 7ife Insurance Agency licence (4enewal Commission.). (v) Attending class and appearing in any e&ams. (vi) )olding public elective office (M.1., M.7.A.) (vii) )onorary office of charitable H educational institute. (viii) 6otary public, Iustice of peace, 2pecial 9&ecutive Magistrate and li!e. (i&) 1art time tutorship under coaching organi?ation of institute. (&) Daluation of paper, paper setter, head*e&aminer or moderator for any e&am. (&i) 9ditorship of professional +ournal. (&ii) Acting as 2urveyor#7oss Assessor under Insurance Act. (&iii) 4ecovery consultant (&i ) Insurance bro!erage. 9S eci$ic Per#ission; ( ) <ull time#1art time employment in 8usiness concerns provided he#his relative not having sub. intt. (") <ull time#1art time employment in non*business concern. (:) Managing /irector#3hole*time /irector concern. (F) Intt. In family 8usiness concern. (5) Intt. In agriculture#allied activities with help of hired labour. (J) Intt. In any educational institute.

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(K) 1art time#<ull time lectureship for courses other than C.A. e&ams. (>) 1art time#<ull time tutorship under any educational institute other than coaching org. of institute. (=) 9ditorship of +ournal other than professional one. ( ;) Any other 8usiness#-ccupation considering it to be necessary to ta!e permission. )owever, they may act as li%uidator trustee, e&ecutor, etc., or may ta!e an appointment made by (ovt.#Court#7egal Authority in professional. capacity provided it is not a salary*cum*full*time basis. If not designated as M./. or 3.../. but entrusted with whole#substantially the whole of management of affairs of company, deemed to be M./. .he Council at its "F"nd meeting noted the recommendations made to it by the 9&ecutive Committee and accordingly passed the following resolution as a part of and in continuation of the e&isting resolution under 4egulation =;A which appears as Appendi& no. = to the C.A. 4egulations, =>> (";;" edition) I. I2 <04.)94 49-7D9/ that the general and specific permission granted by the Council is sub+ect to the condition that H (i) Any member engaged in any other business or occupation, in terms of general or specific permission granted as per Appendi& 6-. (=) shall not be entitled to perform any attest function e&cept in the following cases: (a) Authorship of boo!s and articles. (b) )olding of 7ife Assurance Agency 7icence for the limited purpose of getting renewal commission. (c) Attending classes and appearing for any e&amination. (d) )olding of public elective offices such as M.1., M7A ' M7C. (e) )onorary office*bearership of charitable, educational or other non*commercial organi?ations. (f) Acting as 6otary 1ublic, Iustice of the 1eace, 2pecial 9&ecutive Magistrate and the li!e. (g) 1art*time tutorship under the Coaching -rganisation of the Institute. (h) Daluation of papers, acting as paper*setter, head*e&aminer or a moderator for an e&amination. (i) 9ditorship of professional +ournals H (not in employment) (+) Acting as surveyor and 7oss Assessor under the Insurance Act, =:> (not in employment). (!) Acting as 4ecovery consultant in the 8an!ing 2ector (not in employment) (l) Any coaching assignment organi?ed by the Institute, its 4egional Councils and 8ranches of 4egional Councils. (m) 9ngagement as 7ecturer in an 0niversity, affiliated college, educational institution, coaching organisation, private tutorship, provided the direct teaching hours developed to such activities ta!en together do not e&ceed "5 hours a wee!. (n) 9ngagement in any other business or occupation permitted by the 9&ecutive Committee from time to time. (o) Insurance bro!erage. (ii) A member who is not entitled to perform attest function shall not be entitled to train articled cler!s.

Clause 12 : Accepts a position as auditor previously held by another in such condition as to constitute undercutting. Consider the $ollo&in*: (i) Auantum of wor!. (ii) Incidental and out -f poc!et e&penses.

(iii) -ther terms of appointment. Clause 13 : Allows a person not C.A. or a member not his partner to sign on his or his firm behalf, any 8#2, 1'7 A#c. report of financial statement, PA)+ < II In relation to C.A. in service (a) (b) If pays#allows#agrees to pay directly#indirectly to any person any share in emoluments of the employment underta!en by member. Accepts#agrees to accept any part of fees, payment or gain from a lawyer, C.A., bro!er engaged by company, firm or person or agent or customer of such company, firm or person by way of commission or gratification. /iscloses confidential information ac%uired in the course of his employment e&cept as and when re%uired by law#permitted by employer. PA)+ < III In relation to C.A. (*enerall1) (i) (ii) (iii) If he includes in any statement, return or form to be submitted to council, particulars !nowing them to be false. If he, not being a fellow styles himself as a fellow. /oesn$t supply information called for, or doesn$t comply with re%uirement as!ed for, by council or any of its committees. S!C=2> SC-!>0?! &eferred to H.C. for decisions PA)+ < I Pro$essional #isconduct in relation to C.A. in ractice. Clause 1 : /iscloses information ac%uired in the course of his professional engagement to any person other than his client, without consent of his client or otherwise than as re%uired by any law for the time being in force. 4e%uest for disclosure must come from client. Dut in relation to unlawful act b client : (i) 6o duty on C.A. to inform I... Authorities. (ii) 6o duty to shield him from conse%uences of ta& frauds. (iii) /isclosure immediately. If small fraud may be made with submission of current return. (iv) (enuine mista!e#omission client won$t ob+ect to ma!e complete disclosure. (v) <raud in past returns#A#c. in which no same C.A. Client Is advised to disclose. )e may continue to act. (vi) <raud relates to A#c. e&amined#reported by same C.A. client advised to disclose. If he refuses, disassociate himself and disclose the same in report to authorities. (vii) If fraud in returns#a#c. currently being prepared client advised to disclose. 9lse reservation in his report and disassociate with return. ( iii) Member$s assignment is dispensed with before A#c. completed#reported on#return submitted no further duty. (i&) 4elates to A#c. not prepared#reported by member, for e&ample where he is preparing business returns while fraud is there is individual return of partner, he may continue with 8usiness A#c. but under no obligation to do so. (&) Impression on Client : (a) /isclosure only penalty, non disclosure with fine#imprisonment.

(c)

(b) Intimation by member to I... authorities about disassociation can start investigation against client. (&i) 2ummon the member to e&amine him on oath, legal e&pert advice is ta!en. (&ii) <or production of 8oo!s of Accounts#/ocuments 9&pert advice. Clause 2 : If he certifies#submits in his#his firm$s name a report of an e&amination of financial statements unless e&amination is made by him # a partner # employee # another C.A. in practice. Clause 3 : 1ermits his # his firm$s name to be used in connection with estimate of earnings contingent upon future transaction in manner which may lead to belief that he vouches for accuracy of the forecast. )e may participate in preparing and servicing them provided he clearly indicates source of information, basis of forecasts and ma+or assumption and so long as he doesn$t vouch for accuracy of the forecasts. Clause 4 : 9&presses his opinion on <inancial 2tatement of any 8usiness # 9nterprise in which he, his firm or partner has substantial intt. 0nless he discloses intt. Also in his report. Council clarification : )e or his firm name shouldn$t accept. (i) Accept auditorship of college in which he$s lecturer. (ii) Accept auditorship of trust wherein he#partner is either employee or a trustee. 9nterprise#8usiness in which he$s either owner or partner shouldn$t accept. 9nterprise#8usiness in which his partner#relative has sub. intt. /isclose the fact if audit the same. Company in which he is director shouldn$t accept. Company in which his 1artner#4elative is director having sub. Intt. /isclose the fact if audit the same. )e should ta!e care of the same while acting as .a& Consultant#<inancial Advisor also. Members not to write 8oo!s of Account of clients. 2t. Auditor not to become its Internal Auditor. Clause 5 : <ails to disclose a material fact !nown to him which is not disclosed in the <inancial 2tatement, but disclosure of which is necessary to ma!e financial statements not misleading 4efer to 2A1* : BMateriality$ and A2. Clause 6 : <ails to report a material misstatement !nown to him to appear in a financial statement with which he is concerned in a professional capacity. Clause 5 : Is grossly negligent in conduct of his professional duties. )e should perform it with due s!ill and care. 7i!e in circulation of newspapers (certification). Clause 6 : <ails to obtain sufficient information to warrant the e&pression of opinion as his e&ception are sufficient material to negate the e&pression of opinion. )e shouldn$t e&press it before obtaining re%uired information. )e should reproduce (brief self*e&planatory e&planation) the notes of %ualificatory nature in report to enable reader to !now importance of these %ualification. Clause 7 : <ails to invite attention to any material departure from generally accepted procedure of audit applicable to the circumstances.

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 4efer to AA2 . Clause 18 : <ails to !eep moneys of his client in separate ban!ing A#c. or to use such moneys for purposes other than those for which they are intended. '(planations : (i) Advance received by C.A. against services to be rendered doesn$t fall under this clause. (ii) It doesn$t apply to e&penses to be spent within reasonably short time. .hese need not be deposited into separate ban! account. PA)+ 4 II @e#(ers o$ the Institute :enerall1. Clause 1 : Contravenes any of the provisions of this Act or 4egulation made thereunder. Mainly in connection with Articles, part*time employment, restriction on fees. So(e i(portant points: $. Monthly payment of stipend to every article. It must be confirmed beyond all doubts that payment has been made. #. It is duty of C.A to forward article deed to ICAI. ,. A CA can$t ta!e loan from any enterprise in which article is interested. )owever he may accept the same from any enterprise where in articles farther or relative is interested. 8ut it must not be ta!en as a consideration for admitting the article into firm. %. 6ow no premium can be accepted by C.A -. 1ractice wor! only after obtaining C-1. Clause 2 : Is guilty of such other act or omission as may be specified by the Council in this behalf, by notification in the (a?ette of India. &O./'/0*./O&S )e shouldn$t be cost auditor of company in which he (i) Is auditor (ii) Is officer#employee, (iii) 1artner, or in employment of officer#employee of co., (iv) 1artner or in employment of company$s auditor, (v) Indebted for L ;;; 4s., guarantor. Member in practice can$t become auditor of company., while he$s an employee of cost auditor of co. A member who is an employee shall be deemed to be guilty if he is willfully ' grossly negligent in conduct of his duty as employee. C.A in practice is to maintain proper 8oo!s of Accounts including Cash 8oo! # 7edger. If he accepts more than sp. ta& audit assignments (:;). If becomes member of C<A in addition to C.A. Accepts less fee than specified. ) * + partner 5;;; :;;; , - partner =;;; J;;;

7arge cities 2mall cities

'(ception : (i) )onarary for Charitable, Club. (ii) 448 8ranches. (iii) 6ewly concern (" yr.) (iv) Certificate#Attestation#4eport under I. Act.

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 A Chartered will be guilty of professional misconduct, if he accepts statutory auditorship of 120# listed Co.#(ovt Co.#-ther 1ublic Co. having turnover e&ceeding 5; crores in a year and accepts any other wor! or services with regard to same underta!ing on a remuneration which in total e&ceeds the fees payable for carrying out the statutory audit of the same. As auditor of a concern while he is indebted to the concern or has given any guarantee for limits fi&ed in the statute ' in other cases e&ceeding 4s. ;,;;;.

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AUDITIN% AND ASSURANCE STANDARD

**S 1 $ B*S/0 R/&0/ 2ES 3O4ER&/&3 *& *56/.
6ocu(entation : .he auditor should maintain documentation of the important matters. /ntegrity7 Ob8ectivity and /ndependence : Auditor should be interest free. )e must possess %ualities such as honesty, sincereness, fairness, ob+ectivity, etc. S9ills and 0o(petence : Auditor must have ade%uate training, competence and e&perience. 0onfidentiality : Auditor must not disclose any confidential information regarding his client to any third party. )owever, he may disclose, if H (i) .here is a specific permission of client or (ii) 4e%uired by law. :or9 perfor(ed by others : Auditor may rely on wor! done by others i.e. other auditors or e&perts or his assistants provided he e&ercised due s!ill and care and there is nothing to doubt. lanning : <or proper conduct of wor! in efficient and timely manner. *udit Evidence : 2ufficient and appropriate evidence should be obtained by performing compliance and substantive procedures. *ccounting Syste(s and /nternal 0ontrols : Management is responsible for maintaining the same. .he auditor has to chec! their ade%uacy. 0onclusion and Reporting : Auditor is re%uired to e&press opinion on financial information on the basis of conclusions drawn from evidences. )e is re%uired to conclude whether * (a) <inancial information is prepared using consistent and acceptable accounting policies. (b) <inancial statements comply with relevant regulations. (c) .here is ade%uate disclosure of all material matters. .here should be clear e&pression of opinion in report. If the report is other than un%ualified, auditor should state the reason for the same.

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**S; # OB<E0./4E *&6 S0O E O' .)E *56/. O' '/&*&0/*2 S.*.EME&.S
.he term M(eneral. 1urpose <inancial 2tatementsM include 8alance 2heet, 1rofit and 7oss Account and other statements and e&planatory notes which from part thereof. $. Ob8ective of an *udit * .he audit of financial statements is underta!en with the ob+ective to Menable the auditor to e&press an opinion on such financial statements. <or this, it is essential that financial statements are prepared as per the recogni?ed accounting policies and practices and relevant statutory re%uirements. .he auditorMs opinion does not constitute an assurance as to future viability of the enterprise, or the efficiency or effectiveness with which its management has conducted the affairs of the enterprise. #. Responsibility for the financial state(ents * .he management is responsible for maintaining an up to date and proper accounting of various transactions entered into during the course of the year. .he auditor is responsible for forming and e&pressing an opinion on the financial statements. .he audit of the financial statements, does not relieve the management of its responsibility. Scope of an *udit * .he auditor decides the scope of his audit having regard to a. .he terms of the engagement b. .he re%uirements of the relevant legislation c. .he pronouncements of the Institute (ICAI) d. .he +udgments of various courts of law )owever, the terms of engagement can not supercede the pronouncements of the Institute or the provisions of relevant legislation. %. Organising an *udit * .he audit should ade%uately cover all aspects of the enterprise which are relevant to the financial statements under audit. .he auditor should be reasonably satisfied that the information contained in the accounting records, etc. is reliable and sufficient..he auditor should compare the financial statements with accounting records and other source data to satisfy himself that there is no variation between the two. )e should assess the basis of selection of accounting policies and their consistent application. )e should satisfy himself about the compliance with the various relevant laws and rulings of various courts of law. /nherent li(itations of *udit * .he auditor, with a view to forming his opinion on the financial statements follows certain audit procedures. )e recogni?es that because of the limitations inherent in the test chec!s, audit and any system of internal control, some material misstatement may remain undiscovered. It is true that in many situation a material misstatement by management may be discovered in the course of an audit, but such discovery is not the main ob+ective of the audit. )owever, the auditor should e&tend his procedures, if he has any indication that some fraud or error, which is li!ely to result in material misstatement, may have ta!en place. .he auditor is primarily concerned with, the items, which, whether individually or as a group, are material in relation to the affairs of an enterprise. )owever, in the absence of any definite standard to +udge materiality, the auditor should ma!e a decision about it on the basis. of his professional e&perience and +udgment. .he auditor is not e&pected to perform duties, which are outside the scope of his competence, e.g. determining physical condition of certain assets. If there are any constraints as regards the scope of audit, he should set them out in his report and render a %ualified opinion or a disclaimer of opinion, as deemed appropriate.

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**S; , 6O05ME&.*./O&
N/ocumentationN refers to the wor!ing papers prepared or obtained by the auditor and retained by him in connection with the performance of his audit. $. 'or( and 0ontent of =or9ing papers * .hese are affected by matters such as H a. .he nature of the engagement b. .he form of auditorMs report c. .he nature and comple&ity of the clientMs business. d. .he nature and condition of the clientMs records and degree of reliance on internal controls, and e. #. .he need in particular circumstances for direction, supervision and review of wor! performed by assistants.

reparation of =or9ing papers * <ollowing care should ta!en while preparing for wor!ing papers * a. 3or!ing papers should be designed and properly organi?ed b. .hey should be standardi?ed c. .hey should be ade%uately complete and detailed d. All significant matters, which re%uire the e&ercise of +udgment and the auditorMs conclusion as regards them, should be included in wor!ing papers. e. .he auditor should ensure that the schedules, analysis and other wor!ing papers prepared by the client and utili?ed in the course of the audit have been properly prepared. f. In case of recurring audits, some wor!ing paper files may be classified as permanent audit files and current audit files. 0ontents of per(anent *udit file 1 a. Information concerning the legal organi?ational structure of the entity, such as Memorandum and Articles of Association in case of a company, and relevant regulations in the case of a statutory corporation. b. 9&tracts or copies of important legal documents, agreements and minutes relevant to the audit. c. A record of the study and evaluation of internal controls related to the accounting system. d. Copies of audited financial statements of previous years. e. Analysis of significant ratios and trends. f. Copies of management letter, issued by auditor, if any: g. 4ecord of communication with the retiring auditor, if any, before the acceptance of the appointment as auditor. h. 6otes regarding significant accounting policies. i. 2ignificant audit observations of earlier years. +. 7ist of officers, their financial powers and authorities. !. 7ist of offices, factories, godowns, depots etc. 0ontents of current audit file a. Correspondence relating to acceptance of annual reappointment. b. 9&tracts of important matters in the minutes of 8oard meetings and general meetings, as are relevant to audit. c. 9vidence of the planning process of the audit and audit programme. d. Analysis of transactions and balances. e. A record of nature, timing and e&tent of auditing procedures performed, and the results of such procedures. f. 9vidence that the wor! performed by assistants was supervised and reviewed. g. Copies of communication with other auditors, e&perts and other third parties.

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h. i. +. !. I. -.

7etters or representation or confirmation received from the client. Copies of letters or notes concerning audit matters communicated to or discussed with the client, including the terms of the engagement and material wea!ness in relevant internal controls. Conclusions reached by the auditor concerning significant aspects of the audit. Copies of the financial information being reported on, and the related audit reports. . 4eports of branch auditors, internal. auditors and stoc! auditors etc.

O=nership and 0ustody of :or9ing apers 3or!ing papers are the property of the auditor. )e may, at his discretion, ma!e any portions or e&tracts from his wor!ing papers available to the client. .he auditor should adopt reasonable procedures for custody and confidentiality of his wor!ing papers and should retain them for a time sufficient to meet the needs of his practice and satisfy any pertinent legal or professional re%uirements of records retention.

:.e.f >$?>%?#>>- On=ards

It is to be considered in auditing of financial information. 2ufficient ' appropriate documentation to provide a record of basis for auditors report and to demonstrate that audit was performed in accordance with AA2 and applicable legal and regulatory re%uirements. /ocumentation (wor!ing papers) is the record of audit procedures performed, relevant audit evidence obtained ' conclusions the auditor reached. It may be recorded on paper or electronic or other media. Audit documentation for a specific audit engagement is assembled in an audit file. Pur ose o$ A.>:4 (i) Assisting Audit team to plan ' perform the audit (ii) Assisting members of audit team to direct # supervise the wor! etc as per AA2* K. (iii) /emonstrating the accountability of Audit team for its wor!. (iv) 4etaining a record of matters of continuing significance to future audits of the entity. (v) 9nabling an e&perienced auditor to conduct reviews as per statement on 1eer 4eview. (vi) 9nabling an e&perienced auditor to conduct e&ternal reviews as per applicable legal or other re%uirement. For#, Content and !"tent o$ Audit >ocu#entation:4 Auditor should prepare documentation that enables an e&perienced auditor, having no previous connection with the audit, to understand.

(vii) (viii) (i&) (&)

6ature, timing, e&tent (6.9) and results of Audit procedures Audit 9vidence obtained .he conclusions reached on significant matters. In relation to audit procedures designed to address identified ris! of material misstatements, conclusions that are not otherwise readily determinable from the documentation of procedures or evidences.

Auditor to document (a) -ral discussion and (b) Management response. If auditor has identified audit evidence that contradicts # is inconsistent with auditor$s final conclusion regarding a significant matter, he (auditor) should document how he addressed the contradiction. Audit to record

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(i) 3ho performed the audit wor! ' date of such wor! (ii) 3ho reviewed specific audit documentation ' date of such review.

Auditor should record the identifying characteristics of the specific items tested. If in e&ceptional circumstances, auditor departs from basic principle or procedure in an AA2, he should document the reasons for the same. After date of audit report, if (in e&ceptional situations) auditor performs new procedures etc. he should document the changes necessary including:

(i) 3hen ' by whom such charges were made ' reviewed (if applicable) (ii) 2pecific reasons for the changes, ' (iii) .he effect (if any) of changes on auditors conclusion.

After completing Audit file, auditor shouldn$t delete any documentation. )owever he may ma!e addition he should ta!e care of above, same is the case with documentation of new information received after A.4$s date. Auditor, should (regarding documentation)

(i) (ii) (iii) (iv)

Maintain its confidentiality ' sale custody. 1rotect its integrity 9nable its accessibility ' retrievability, ' 9nable its retention for a period sufficient to meet the needs of the firm ' legal and professional re%uirements (sub+ect to legal re%uirements but not shorter than ; years from date of audit report).

)e should adopt proper control procedures to maintain integrity, accessibility and retrievability of data whether documentation is in paper, electronic or other media.

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**S; %
.)E *56/.OR@S RES O&S/B/2/.A .O 0O&S/6ER 'R*56 *&6 ERROR /& *& *56/. O' '/&*&0/*2 S.*.EME&.S
$. 'raud ; fraud refers to intentional misrepresentation of financial information by one or more individuals among employees, management, those charged with governance, or third parties. A fraud may involve a. Manipulation or falsification of accounting records b. Misappropriation of assets c. 2uppression or omission of effects of transactions from records or documents d. 3rong accounting procedures e. Misapplication of accounting policies Error * It refers to unintentional mista!es in financial statements. <or e.g. a. Mathematical or clerical mista!e b. -versight or misrepresentation of facts c. Misapplication of accounting policies Responsibility for detection of fraud and error * 1revention and detection of fraud and error is the responsibility of the management, and for this purpose it should implement and continuously operate an ade%uate system of internal control. .he audit should be planned in such a way that there is reasonable e&pectation of detecting material misstatement in the financial information resulting from fraud and error %. /nherent 2i(itations of an *udit a. .he test nature of an audit will involve +udgement as to the areas to be tested and the number of transactions to be e&amined. b. Audit evidence in many cases is persuasive, and not conclusive c. Material misstatements resulting from frauds are more difficult to detect than those resulting from errors because frauds will usually involve acts with a view to conceal frauds. d. Audit programme is drafted only to help the auditor *to achieve the ob+ective of framing and e&pressing an opinion on financial statements. If the auditor adheres to basic principles governing an audit, e.g. 1erformance of audit wor! with re%uisite s!ill and competence, he will not be responsible for any subse%uent discovery of material misstatement in financial information resulting from fraud or error. -. 6iscussion and inBuiries * In planning the audit, the auditor should discuss with other members of the audit team, the susceptibility of the entity to material misstatements in the financial statements resulting from fraud or error. In addition the auditor should ma!e in%uiries of the management regarding the accounting and internal control system in place to prevent and detect error. In order to obtain insights regarding the susceptibility of the entity to management fraud, the auditor should see! the views of those who are charged with governance on the ade%uacy of accounting and internal control systems in place to prevent and detect frauds and error, the ris! of frauds and error and the competence and integrity of management.

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C. *udit Ris9 * 3hen assessing inherent ris! and control ris! in accordance with AA2*J, the auditor should consider how the financial statements might be materially misstated as a result of fraud or error. 8ased on his assessment of inherent and control ris!, the auditor should design substantive procedures to reduce to an acceptably low level the ris! that misstatements resulting from fraud and error that are material to the financial statements ta!en as whole will not be detected. !. rocedures =hen circu(stances indicate a possible (isstate(ent 1 3hen the auditor encounters circumstances that indicate presence of material misstatements resulting from fraud

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and error, the auditor should perform procedures to determine whether the financial statements are materially misstated. 3hen the auditor identifies a misstatement, he should consider whether such a misstatement might be indicative of a fraud and if there is such an indication, he should consider the implication of the misstatement in relation to other aspects of the audit, particularly the reliability of management representation. 3hen the auditor confirms that, or is unable to conclude whether, the financial statements are materially misstated due to fraud or error, he should consider a necessity for a disclosure in the financial statements and if ade%uate disclosures are not made, the necessity for a suitable disclosure in audit report. ". D. 6ocu(entation ; .he auditor should document fraud ris! factors identified and his response to such factors. Manage(ent representation ; .he auditor should obtain a management representation that a. It is responsible for the implementation and operation of accounting and internal control systems that are designed to prevent and detect fraud and error, b. It believes that the effect of uncorrected misstatements, both individually and in aggregate, is immaterial, c. It has disclosed to the auditor all facts relating to frauds or suspected frauds !nown to the them, and d. It has disclosed to the auditor the results of its assessment of the ris! that the financial statements may be materially misstated as a result of fraud or error.

$>. 0o((unication ; 3hen the auditor identifies a misstatement resulting from fraud or error, ,he should communicate that information to the appropriate level of management on a timely basis, and consider the need to report such matters to those charged with governance and if re%uired to regulatory and enforcement authorities. .he auditor should communicate to the management any material wea!ness in internal control related to the prevention or detection of fraud and error, which has come to his attention as a result of the performance of the audit. $$. *uditor unable to co(plete the engage(ent ; If the auditor concludes that it is not possible to continue performing the audit due to material misstatements, he should consider the professional and legal responsibilities applicable in the circumstances including responsibilities to persons who made the audit appointment or regulatory authorities. .he AA2 specifies that in such circumstances the auditor should consider the possibility of withdrawal from the engagement ..he AA2 also specifies that if fraud or suspected fraud was a factor in the e&isting auditorMs withdrawal from the engagement, the e&isting auditor should estate the facts relating to these matters to the incoming auditor.

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**S 1 - *56/. E4/6E&0E

Sufficient and *ppropriate : 2ufficiency refer to %uantum of evidences, whereas appropriateness refer to %uality. 9vidences should be seen in totality. Obtaining the Evidences 0o(pliance 3hether internal control have been designed and these are operating effectively throughout the period. rocedures Substantive 4egarding completeness, accuracy and validity of transactions and balances.

Reliability of Evidences : 9&ternal 9vidences more reliable. Internal 9vidences reliable if internal controls are effective. 3ritten are more reliable than oral. 0onsistency : If evidences from one source are inconsistent with those obtained from other sources, auditor is re%uired to perform e&tended procedures. Methods : a. /nspection 1 It involves e&amination of records, documents or assets, etc. b. 0o(putation 1 i.e. to chec! the arithmetical accuracy of data and records. c. *nalytical Revie= rocedures 1 9&amination of significant ratios and trends. d. /nBuiry and confir(ation 1 obtaining appropriate informations from persons orally or In written form. e. Observation 1 witnessing a process being performed by others.

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**S; C R/SE *SSESSME&. *&6 /&.ER&*2 0O&.RO2S

According to this standard, it is the responsibility of the management to develop and operate. an ade%uate. system of accounting and internal control. .he auditor should ac%uaint himself with the accounting system and internal control system in order to develop an effective audit plan. .he auditor should use his professional +udgment to assess audit ris! and to design audit procedures to ensure that it is reduced to an acceptably low level. $. *ccounting Syste( * Accounting system refers to the series of tas!s and records of an entity by which transactions are processed as a means of maintaining final records. .he auditor should obtain an understanding of the accounting system sufficient to identify and understand a. Ma+or classes of transactions, b. Manner of initiation of transaction, c. 2ignificant accounting records, supporting documents and specific accounts in the financial statements, and d. .he accounting and financial reporting process. #. /nternal 0ontrol Syste( * It refers to all the policies and procedures adopted by the management of the entity to assist in achieving managementMs ob+ective of: a. Conducting the business in an orderly and effective manner, b. Adherence to management policies. c. 2afeguarding of assets, and d. /efection of fraud and error in a timely manner F.he /nternal 0ontrol Syste( co(prises of i. .he 0ontrol Environ(ent ; It refers to the overall attitude, awareness and actions of the directors. and management regarding the internal control system and its importance in the entity. //. 0ontrol rocedures ; Control procedures are additional policies and procedures established by the management to achieve entityMs specific ob+ectives. .hese procedures include preparation of periodic reports, approving and controlling access to documents and records etc. ,. *udit Ris9s ; Auditors ris! is the ris! that the auditor may give an inappropriate opinion when the financial statements are materially misstated. Audit ris! has three components vi?., inherent ris!, control ris! and detection ris!.* /nherent Ris9 ; Inherent ris! is the susceptibility of an account balance or class of transaction to a material misstatement either individually or when aggregated with misstatements of other balances or classes, assuming that there were no internal controls. .he auditor should study and evaluate the degree of inherent ris! in order to determine the audit plan. )e should also consider other factors, which might compensate for an otherwise high degree of inherent ris!. /nherent 2i(itations of /nternal 0ontrols .he ob+ectives of internal control can only be reasonably, and not absolutely, achieved due to the following limitations inherent in the system: a. ManagementMs concern about the operating system, b. .ransactions of unusual nature may be missed by most controls, c. 1otential of human error, d. Circumvention of controls through collusion, e. Abuse of control by the person who is himself responsible for e&ercising it, f. Inade%uacy of procedures due to changes in conditions, and g. Manipulations by management.

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0ontrol Ris9.; Control ris! is the ris! that a misstatements could occur in an account balance or class of transaction and that could be material, either individually or when aggregated with other misstatements, will not be prevented or detected and corrected on a timely basis by the accounting and internal control system. /. reli(inary *ssess(ent of 0ontrol Ris9 In order to ma!e a preliminary assessment of the control ris!, the auditor should obtain an understanding of the accounting system and related internal controls. .he preliminary assessment of control ris! Mis the process of evaluating the li!ely effectiveness of an entityMs accounting on internal control system in preventing or detecting and correcting material misstatements. .hus the auditor should assess the control ris! as high when a. .he entityMs accounting and#or internal control system are#is not effective, or b. It would be inefficient to evaluate the effectiveness of the accounting and internal control system. //. .est of 0ontrols .ests of controls are performed by an auditor to obtain audit evidence about the effectiveness of the a. 3hether the accounting and internal control systems are suitably designed to prevent or detect and control material misstatements, and b. -peration of internal controls throughout the period. M .est of control may include the following procedures: Inspection of the documents and records, In%uiries about and observation of internal controls that leave no audit trail, 4e*doing on a test basis, activities performed automatically by the system, and .esting of internal controls operating on computeri?ed applications.

///. 'inal assess(ent of control ris9 -n the basis of the results of the test of control the auditor should evaluate whether the preliminary assessment of control ris! was correct or do they need to be revised. )e should accordingly determine any modification in the nature, timing and e&tent of audit procedures. C. Relationship bet=een assess(ent of /nternal and 0ontrol Ris9s ; .he auditor should ma!e a combined ,assessment of the inherent and control ris!s. .his is because the management often reacts to inherent ris! situations by designing suitable accounting and internal control system to prevent or detect and correct material misstatement. 6etection Ris9 ; /etection ris! is the ris! that an auditorMs substantive procedures will not detect a misstatement that e&ists in an account balance or class of transactions that could be material, either individually or when aggregated with misstatements in other balances or classes. .here is an inverse relationship between detection ris! and the combined level of inherent and control ris!s. .hus when inherent and control ris!s are high, acceptable detection ris! should be low to reduce the audit ris! to an acceptably low level. It should, however, be noted that the assessed levels of inherent and control ris! cannot be sufficiently low to eliminate the need to perform substantive procedures. 3hen the auditor determines that the detection ris! regarding material assertion in the financial statements cannot be reduced to an acceptably low level, the auditor should e&press a %ualified opinion or a disclaimer of opinion as may be appropriate. ". /nternal 0ontrols /n a S(all Business * .here may be inade%uate segregation of functions among a small number of persons who perform accounting procedures.. )owever through an effective supervision by the owner or manager of the business who has direct personal !nowledge of the business and its transactions, this limitation can be neutrali?ed. 8ut where effective supervision is lac!ing, the auditor should largely depend upon subtractive procedures to form his opinion as regards financial information.

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0o((unication of :ea9nesses in /nternal 0ontrol * Any material wea!ness in the internal control noticed by the auditor during the course of his evaluation or audit procedures should be communicated in writing to the management in a timely manner. )owever, such communication should ma!e it clear that the audit e&amination has not been designed to determine the ade%uacy of internal controls.

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AAS& ' REL(IN% UPON T)E *OR+ OF AN INTERNAL AUDITOR

.hough wor! of internal auditor can be useful to the statutory auditor, the statutory auditor alone will be responsible for his report and for determination of the nature, timing and e&tent of the auditing procedures.

Scope and Ob8ective of /nternal audit function: It depends on the si?e and structure of the enterprise and the re%uirements of its management. .he internal audit broadly covers following areas: a. 4eview of accounting system and internal controls b. 9&amination for management of financial and operating information. c. 9&amination of the economy, efficiency and effectiveness of the operations. d. 1hysical e&amination and verification. Relationship bet=een internal and external auditors: a. Although the internal and e&ternal audit functions are different as regard their role and ob+ectives, the e&ternal auditor can usefully draw on the wor! of internal auditor to determine the nature, timing and e&tent of the auditing procedures. b. )owever, the e&ternal auditor should carefully sub+ect the relevance of the internal control system to his own e&amination. c. .he e&ternal auditor will alone be responsible for his report and the reliance on the internal auditorMs wor! will in no way reduce his responsibility. 3eneral evaluation of /nternal audit function: .he e&ternal auditorMs evaluation and conclusions as to the internal audit function should ta!e into account the following: a. Organlsational status : 3hether the internal auditor reports directly to top management and is free of any other operating responsibility, whether there are any restrictions as regards the wor! of the internal auditor should be evaluated by e&ternal auditor. Scope of coverage: .he nature and depth of coverage of the internal auditorMs assignment vis* a*vis the management should be ascertained and how the management acts upon his recommendations. .echnical co(petence: 3hether the internal audit is under the charge of persons with appropriate professional training and proficiency should be considered. 6ue rofessional care: 3hether the internal audit function is property planned, supervisedN reviewed and documented should be ascertained.

b.

c. d.

0oordination: 3hen the internal auditorMs wor! is to be relied upon. .he e&ternal auditor should ascertain the internal audit plan and discuss with him at an early stage to determine the areas where reliance may be placed. .he internal. and e&ternal auditors should meet at regular intervals to ensure effective coordination. .hey should share the information, which may help each other. Evaluating specific internal audit =or9: )e should review the internal auditorMs wor! ta!ing into account the following factors a. .he scope of wor! and related audit programme are ade%uate for the e&ternal auditorMs purpose. b. .he wor! was properly planned and the wor! of .assistants was properly supervised, reviewed and documented. c. 2ufficient appropriate evidence was obtained. d. Conclusions reached are appropriate in circumstances and any reportO prepared are consistent with the results of the wor! performed. e. Any e&ceptions disclosed by the internal auditorMs procedures are properly resolved. .he e&ternal auditorMs conclusions as to the review of the specific wor! should be documented. )e should also test the wor! of the internal auditor on which he intends to rely. .he nature, timing and e&tent of his tests will depend on his evaluation of internal audit function.

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**S; " *56/. 2*&&/&3

.he first step in audit process is planning. 9very audit should be carefully planned to ensure highest technical standards ma!e best use of audit personnel and achieve utmost efficiency. Audit plan helps to: a. 9nsure that appropriate attention is devoted to important areas of audit. b. 2ee that potential problems are promptly identified. c. 9nsure that wor! is completed on time. d. Coordinate the wor! done by other auditors and e&perts. e. 0tili?e the assistants properly. 'actors to be considered =hile planning the audit are: a. Comple&ity of the audit. b. 9nvironment in which the entity operates. c. 1revious e&perience with the client. d. Pnowledge of clientMs business. Eno=ledge of the client@s business: It will enable the auditor to identify the events, transactions and practices, that in his +udgment, may have a significant effect on the financial information. .he auditor can obtain such !nowledge from: a. the clientMs annual report to its shareholders, b. minutes of meetings of shareholders, 8oard of /irectors etc, c. internal financial management reports, d. previous yearMs audit wor!ing papers, e. discussion with client, f. the clientMs policy and procedures manual, g. consideration to the state of economy and its affect on clientMs business, and h. visit of the clientMs premises and plant facilities. 6evelop(ent of an overall plan: .he overall plan should cover the following: a. .erms of audit engagement and statutory responsibilities. b. 6ature and timing of reports or other communication. c. 4elevant legal and statutory re%uirements. d. Accounting policies of client and changes therein. e. 9ffect of new accounting or auditing pronouncements on the audit. f. Identification of critical audit areas. g. Conditions re%uiring special attention. h. /egree of reliance as regards accounting system and internal control. i. 1ossible rotation of emphasis on specific audit areas. +. 6ature, timing and e&tent of audit evidence to be obtained. !. 3or! of internal auditors and reliance to be placed on them. I. Consideration to branch auditorMs report. m. Allocation of wor! between +oint auditors and the procedures for its control and review. n. 9stablishing and coordinating the staff re%uirements.

6eveloping the audit progra((e : .he auditor should prepare a written audit programme setting forth the procedures that are needed to be implemented while carrying out the audit plan. )e may ta!e into account the reliance to be placed on internal controls. .he auditor has some fle&ibility in deciding when to perform audit procedures. 8ut, sometimes he may have no discretion as to timing, such as, observing the stoc! ta!ing by the clientMs personnel. .he audit programme should consider previous yearMs audit programmes and should be modified, if necessary.

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**S; D 5S/&3 .)E :ORE O' *& EG ER.

An auditor during the course of an audit may have to place reliance on the wor! of an e&pert. An e&pert is a person who possesses special s!ill, !nowledge: and e&perience in a particular field, other than accounting and auditing. 6eter(ining the &eed to use the :or9 of an Expert: /uring the audit, an auditor may see! to obtain, either independently or from the client, audit evidence by way of reports, opinions, valuations and statements of e&perts, such as value of certain types of assets, actuarial valuation etc. In determining whether to use the wor! of an e&pert, the auditor should consider the materiality of an item, the nature and comple&ity of item etc. S9ills and 0o(petence of Expert : .he auditor should satisfy himself regarding the e&pertMs s!ill and competence by considering his professional %ualifications, e&perience and reputation in the field in which the auditor is see!ing evidence. Ob8ectivity of the Expert : .he auditor should consider the ob+ectivity of the e&pert. 2uch ob+ectivity may be affected if the e&pert is an employee of the client or is otherwise related to the client. Evaluation of the :or9 of an Expert: , .he auditor should see! reasonable assurance that the e&pertMs wor! constitutes appropriate audit evidence in support of the financial information. )e should see whether the e&pert has used the source data, which are appropriate in the given circumstances. )e should also obtain an understanding of various assumptions and methods used by e&pert to determine their reasonableness. In case the wor! of the e&pert does not support the related representation in the financial statement, the auditor should attempt to resolve the inconsistency by discussions with the clientM and the e&pert. )e may apply additional procedures, including engaging another e&pert. 9ven after performing necessary audit procedures, the auditor concludes, that the wor! of the e&pert is inconsistent with the information in the financial statement or the wor! of e&pert does not constitute appropriate audit evidence, he should e&press a %ualified opinion, a disclaimer of opinion or an adverse opinion, as appropriate. Reference to Expert in *udit Report : In case of an un%ualified report, the auditor should not refer to the wor! of an e&pert. In case of %ualified opinion, he may refer to or describe the wor! of the e&pert to e&plain the nature of his reservation. )e, may refer the name of the e&pert sub+ect to prior consent of the report.

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**S;$> 5S/&3 .)E :ORE O' *&O.)ER *56/.OR

AA2* ; is applicable only to components audits and it e&cludes +oint audit form its purview. .he procedures laid down in AA2* ; are applicable where the financial statement of a component of business, <or 9&ample, branch, sales depot etc. are material. 3here several components, immaterial in themselves, are together material in relation to the financial statement as a whole, this AA2 is applicable.

0OM O&E&. Any branch, division, subsidiary, I.D., or associates etc. whose financial information is used in the financial statements of client. rincipal *uditor@s rocedures: .he following procedures are recommended on the part of principal auditor: . Advise the other auditor of the use that is to be made of his wor! and report. ". .he principal auditor should also inform the areas re%uiring special consideration and the timetable for completion of audit. :. Advise the other auditor of the significant accounting auditing and reporting re%uirements. F. Ascertain from other auditors any limitation on the scope of his wor! by the terms of engagement. 5. Consider the significant findings of the other auditor. J. .he principle auditor is not re%uired to evaluate the professional competence or independence of other auditor e&cept in doubtful situation, K. )e may re%uire the other auditor to submit responses to a %uestionnaire regarding the audit wor! performed. >. )e may discuss with the other auditor and concerned branch official the audit findings affecting the financial statements of the branches. =. If necessary, he may re%uire that supplementary tests be performed or he may himself perform such tests. ;. In case of foreign branch, the principal auditor should consider the %ualification, e&perience and e&pertise of the foreign branch auditor. 6ocu(entation: . .he principal auditor should maintain in his wor!ing paper # files the financial statement of the branches, which are audited by other auditor. )e should also document the manner in which he has applied the audit procedures and conclusions thereof. ". 3hen the other auditor has %ualified his audit report, the principal auditor should refer in his wor!ing paper the manner in which he dealt with the same. 0oordination bet=een *uditors: . .here should be coordination between the principal auditor and branch auditor so what they can discharge their responsibility effectively. ". .he other auditor should bring to the notice of principal auditor any of his significant findings, adhering to the time scales, ensuring compliance with legal re%uirements, etc. :. If the principal auditor re%uires a specific audit procedure to be carried out or to answer a detailed %uestionnaire, the other auditor should comply with the same. Consideration of 4eport of -ther Auditor . .he principal auditor should %ualify or disclaim his opinion when he concludes that he cannot use the wor! of the other auditor and has not been able to perform sufficient additional procedures with respect to the financial statements submitted by the branch auditor. ". .he principal auditor should consider the %ualification of the branch auditorMs report in relation to the financial statement of the entity as a whole. 6ivision of Responsibility: . .he principal auditor is not responsible for wor! carried out by the other auditor unless there are doubtful . circumstances ". .he principal auditorMs report should clearly state the division of responsibility by indicating the e&tent to which the financial statement of branches audited by other auditors have been included in the financial statement of the entity e.g. the number of branches # divisions audited by other auditors.

2'

**S 1 $$ Manage(ent Representation

Manage(ent Representation 1 written # oral confirmation by them w.r.t. items included in financial statement. Exa(ple : (i) <or <inancial 2tatement as a whole. (ii) <or Accounting 1olicies. (iii) Investments. (iv)1rovision for claims, etc. .ypes of MR2 : (i) 7etter issued by management. (ii) 7etter from auditor outlining his understanding, duly ac!nowledged and confirmed by management. Ele(ents : Addressed to Auditor. /ated and signed by proper authority. M47 date Q A4 date. <or specific transfer there may be separate M47s.

Manage(ent Representation as *udit Evidence : )e should use his professional +udgement to decide the areas in which M47 is re%uired. Management 4epresentation should be in writing. Auditor should see! corroborative evidences. 9valuate its reasonableness and consistency. 1erson rendering Management 4epresentation should be well informed. Management 4epresentation 7etter can$t be substitute for other audit evidences. 2ometimes it may be only evidence.

6ocu(entation : of both types of Management 4epresentation 7etters. Refusal by Manage(ent : Auditor as!s for M47 Management 4efuses Auditor should himself prepare it with a re%uest to ac!nowledge the same. Management Ac!nowledges -P Management refuses 7imitation on 2cope of wor! of auditor

Management provides -P

2(

**S;$# <O/&. *56/.ORS

6ivision of :or9 : .he +oint auditors should divide the audit wor! in anyone of the following basis: . ". :. F. Components of financial statements (eographical location <unctional areas and activities 1eriod basis

.he division of wor! among +oint auditors should be ade%uately documented and communicated to the entity. 0oordination a(ong <oint *uditors: 3here a company auditor comes across matters, which are relevant to the areas of responsibility of their +oint auditors, he should communicate it immediately to the other +oint auditors to discharge himself of the responsibility. Relationship a(ong <oint *uditors: 9ach +oint auditor is responsible for the wor! allocated to him. )owever, in respect of following areas, all the +oint auditors are +ointly and severally responsible. . ". :. F. Audit wor! not divided among +oint auditors and carried out by all of them. Matters, which are brought to the !nowledge of +oint auditors by one of them and on which there is an agreement among the +oint auditors. Collective decisions ta!en by +oint auditors such as the decision regarding the nature, e&tent and timing of the audit procedures to be carried out. Compliance and disclosure re%uirements as per statute.

In case the information is brought to the other +oint auditors by an auditor after submission of the audit report, the other +oint auditors would not be responsible for such matter. 9ach +oint auditor is responsible for drafting his own audit programme and determine nature, e&tent of chec!ing etc. 9ach +oint auditor should !eep appropriate wor!ing papers, which enables him to come to a conclusion regarding the financial statements. In the case of audit of a large entity with several branches. In such a case, it is the separate responsibility of each +oint auditor to review the reports of the branches allotted to him and to ensure that they are properly incorporated into the accounts of the entity. In respect of branches, which do not fall under any division or ?one, which were separately assigned to different +oint auditors, they may agree among themselves regarding the division of wor! relating to such branch returns. 9ach +oint auditor is entitled to rely upon the wor! carried by other +oint auditors. It is not necessary for a +oint auditor to review the wor! performed by other +oint auditors or perform any tests to ascertain whether the wor! has actually been performed in accordance with generally accepted audit procedures. If one of +oint auditors also carries out the audit of branches or other division of the entity, the +oint auditors. are entitled to rely upon the wor! carried out by him, unless the other +oint auditor specifically brings out any material discrepancy. Reporting Responsibilities: 3here the +oint auditors are in disagreement with regard to any matter, each one of them should e&press his own opinion through a separate report. .he +oint auditor is not bound by the views of the ma+ority of +oint auditors regarding matters to be covered in the report.

2)

**S 1 $, *56/. M*.ER/*2/.A

Materiality : Material items are those which may influence the +udgement of users of statement.

It may be %uantitative # %ualitative. It depends upon H

(i) 2i?e of item (ii) 6ature of item, (iii) 2tatutory provisions, etc.

Materiality to be considered from both point of views H

(i) Individual A#c., and (ii) -verall financial statement.

Auditor to consider materiality while H

(i) /etermining 6.9 of audit procedure, and (ii) 9valuating effect of misstatement. )elationshi (et&een @aterialit1 and Audit ris'

/egree of audit 4is! and Materiality 7evel.

Reason H (enerally management # employees don$t commit fraud in high value items. Moreover, as a general practice, auditor chec!s high value items in detail. .hus it is less ris!y that high value < ' 9 may not be detected. .hus high materiality level leaves audit ris! at lower degree. .hus inverse relation. rocedure and considerations by *uditor 1 Auditor decides upon mat level during planning stage which may be c$an"ed during progress of audit. May be increased#decreased for specific A#c.

If A41 indicates misstatements, auditor should adopt other procedures to estimate it. Aggregate uncorrected misstatement R
(i) 2pecific misstatement identified by Auditor S (ii) Aggregate uncorrected misstatements (not identified) S (iii) 6et effect of uncorrected misstatement identified during previous year$s audit.

Auditor concludes aggregate uncorrected misstatement are material

As! management to ad+ust f. st.

Mgt. does -P

Mgt. refuses %ualify # adverse

"#

**S;$% *&*2A./0*2 RO0E65RES

NAnalytical review procedureN refers to analysis of significant ratios and trends including the resulting investigation of fluctuations and relationships that are inconsistent with other relevant information or which deviates from predicted amounts. .he auditor should apply analytical review procedures at the planning and the overall stages of audit. &ature and purpose of *nalytical rocedures: Analytical review procedures includes both inter*firm and intra firm comparisons. .he latter is vis*a*vis: a. Comparable information for prior periods. b. 1redictive estimates prepared by auditor e.g. estimation of depreciation change. c. Anticipated results of the entity such as budgets or forecasts. d. 2imilar industry information * entityMs ratio of sales to debtors with industry averages. It depends on the auditorMs +udgment as to the nature of procedures, methods arid level Jf applications. urposes I stages of application of *nalytical Revie= rocedures: .he analytical review procedures can be used by the auditor for the following purposes # at following stages: i. 3hile planning the nature, timing and e&tent of other audit procedures. ii. As a means of substantiating the financial assertion relating to business transactions. iii. -verall review of the financial statements in the final review stage of the audit. Stage / ; lanning the audit: Analytical review procedures assist in understanding the business and in identifying areas of potential ris!. It may indicate aspects of the business of which the auditor was not aware, Stage // ; *nalytical revie= tas9s as useful substantive procedures: .he following are the factors that need to be considered while applying analytical procedures as substantive tests: . 9&tent of reliance that can be placed on analytical procedures and results derived thereof. ". 6ature and comple&ity of the business. :. 4eliability of information available F. 4elevance of information available. 5. 2ources from which information is available i.e. internal#e&ternal sources. J. Comparability of the information available. K. Pnowledge gained by the auditor in the previous yearMs audit. >. AuditorMs understanding of the effectiveness of the accounting and internal control systems and types of problems that in prior periods have given rise to accounting ad+ustments. Extent of reliance that can be placed on *nalytical rocedures: .he e&tent of reliance that the auditor places on the results of analytical procedures depends on the following factors: . Materiality of the items involved. . ". -ther audit procedures directed towards the same audit ob+ectives e.g. other procedures performed by the auditor in reviewing the collectability of accounts receivable. :. Accuracy with which the e&pected results of analytical procedures can be predicted. F. .he auditor should also test the control over the preparation of information used in applying analytical procedures. State /// ; Overall revie= at the end of the audit: .he auditor should apply analytical procedures at the end of the audit when of in overall conclusion as to the consistency financial statement with that of auditorMs !nowledge of the business. .he drawn thereof is intended to corroborate the evidences found during the audit of individual element or components, of the financial statement. 3here, based on analytical pr ocedures, the auditor

"1

concludes that he has to apply further procedures before forming conclusions, then he has to apply such procedures which he considers deemed fit. /nvestigation of unusual ite(s: 3hen analytical procedures identify ma+or fluctuations or relationships that are inconsistent with other relevant information, the auditor should investigate and see! e&planation from management and other corroborative evidences.

"2

**S 1 $*56/. S*M 2/&3

Sa(ple 65S ME.ER *udit Sa(pling 1 Meanin" H Application of audit procedure on .ess t$an /001 of items within a class of tr.#A#c. 8alance It may be statistical or non2statistical.

It re%uires s3ill and competence on part of auditor. Auditor should try his level best to choose sample which should be true representative of
population. Choosing all items above certain amount is not sampling. 6esign of *udit Sa(ple 1 It depends on following : (i) Audit Ob4ective * 2pecific ob+ective and procedures. (ii) 5opulation * It should be appropriate. (iii) 6tratification * /ividing $etero"eneous (different characteristics) population in more $omo"eneous (similar characteristics) sub*population. <or getting same level of assurance, it results in smaller sample si?e. Sa(pling 5nits 1 Individual units constituting the population. SiHe of Sa(ple 1 Auditor should consider overall population, tolerable error, e&pected error and sampling ris!. Method of Sa(pling 1 9ach item in population should have e%ual chances of being chosen. .hus H ( ) &andom 6ample * use of random no table. 9ach sampling unit has e%ual probability of being selection. (") 6 stematic 6ample * )aving fi&ed interval, between any consecutive units selected. )owever, it can be adopted only when population is not structured in a way that it corresponds to a particular trend. (:) Hap$a7ard 6election * 6o intention to include#e&clude a particular item. 9%uivalent to ( ). Expected Error ; If auditor e(pects error in sample H lar"er sample si?e, otherwise smaller sample si?e. .olerable Error 1 Ma(imum 'rror in population that auditor is ready to accept for a given sample si?e. Evaluation of Sa(ple Results 1 6teps are as follows : /st7 Step 1 *nalysis of Error in Sa(ple 1 Iudge whether an item is error or not. If sufficient and appropriate evidence can$t be obtained regarding a specific item, it could be an error. Auditor to chec! Q cause of error and its impact on other phases of audit. Common trend in error e&tended procedures. //nd Step 1 ro8ection of Error 1 1ro+ect it to entire population by appropriate method. Consider both %uantitative and %ualitative aspects of error found while pro+ecting. ///rd Step 1 Reassessing Sa(pling Ris9 1 If error in population L tolerable error, 9ither revise sampling ris! or e&tend audit procedure.

""

Sa(pling Ris9 ; It arises from possibility that auditor$s conclusion based upon sample may be different from conclusion that would have been reached if complete population were sub+ected to same audit procedure. If auditor willing to accept less ris! large si?e of sample to be chosen. It is always there in sampling.. Sa(pling Ris9 In Compliance 1rocedure In 2ubstantive 1rocedure 4is! of under reliance 4is! of incorrect re+ection 4is! of over reliance 4is! of incorrect acceptance More ris!y May lead to erroneous opinion by auditor.

7ess ris!y 7eads to more wor! to be

performed by auditor

"$

AAS < 16 :oin* Concern

3oing 0oncern : an entity is said to be going concern if it is li!ely to continue in e&istence for foreseeable future. It is a fundamental accounting assumption (A2* ). *uditor+s 0onsideration : whether going concern assumption adopted by management holds goods. .here may be indicators when auditor should adopt e&tended procedures. I!dic"t rs : Fi!"!ci"l
1. *egati e net worth+wor,ing cap. 2. Arrears + discontinuance of 1i idends ". Ad erse financial ratio $. Substantial losses (operating). !. 5orrowings approaching maturity but no prospects of renewal + repayment %. Short term borrowing for long term asset financing. '. *o payment to creditors on due date. (. *o compliance with terms in loan agreement. ). *egati e cash flow from operation. 1#. Rearrangement with creditors for reduction liability. 11. Change from creditors to cash on deli ery transaction with supplier.

O,er"ti!1. -oss of ,ey management .without replacement. 2. -oss of ma/or mar,et or or supplier. ". -abour unrest stri,es etc. $. -oss of ma/or licence4 franchise4 etc.

Other
1. .ending legal proceedings 2. Change in 0o t. .olicy affecting the entity ad ersely. ". *on2compliance with Statutory re3uirements

2uch indications may be mitigated (compensating) by some positive factors. <or e&ample
H labour difficulties may be solved by negotiations and compromises, or loss of some ma+or supplier may be compensated by availability of some alternate source of supply.

8ut in case of %uestion regarding going concern, auditor should obtain sufficient and
appropriate evidence e.". ) /iscussion with management. ") 4eviewing events after 8alance sheet date. :) .a!ing legal advice. F) Analyse future plans of management.

"!

*udit procedures 1 0onclusion and Reporting If doubt regarding (oing Concern Assumption -btain Audit 9vidence 9valuate those 9vidences ' Conclude whether
3oing 0oncern is *ppropriate 3oing concern is inappropriate 3oing concern Buestion is not resolved 3hether financial statements disclose such fact

/ue to Mitigatory <actors

auditor considers whether it needs to be disclosed in financial statements by the management 8f 6es As, mgt. to disclose the same 8f mgt. do not disclose 3ualify the report *o clean report

-therwise clean

.he effect is material and pervasive

report

Ad erse report

6es

*o

*ormally 7odified clean report report (5ut he may (3ualify pro ide disclosure in his audit report as well)

8f mgt. discloses clean report+ modified (disclosure)

" .

-n :;th 2eptember, ";;; a company$s issued and paid up capital was 4s."5 crores comprising of fully paid e%uity shares of 4s. ; each. .his included 4s.5;,;;,;;; capital issued for cash, 4s.F,5;,;;,;;; capital issued for purchase of business, 4s."; crores on issue of bonus shares from time to time by capitali?ing various reserves including 4s.5 crores by capitali?ing capital redemption reserve. .he company had fi&ed assets costing 4s." crores on which depreciable provision was 4s. .=5 crores, which was e%ual to the full cost of depreciable assets. .he balance 4s.5 la!hs represented the cost of land. It has discontinued its operations for last many years. .he company had made investments in various companies to the tune of 4s.:; crores. 0nfortunately, all the investee companies have turned out to be 8I<4 cases. 6othing is e&pected to be reali?ed on such investments. .he company has dues from customers totaling to 4s.F.=5 crores of which 4s.F.=; crores are due from businesses, which have become defunct. .he balance 4s.5 la!hs are due for over : years. .he accumulated losses are 4s. ; crores. .he

"%

amounts due to suppliers are 4s.: crores and they are overdue. .he balancing figure in the 8alance 2heet refers to loan from <inancial Institutions. 3or!ers who had put in long years of service have lodged claims for termination benefits of 4s. ; crores, which have been decreed in their favour. 6o accounting entry has been passed for the same since the decree on * * ==K. In the light of AA2* J, relating to (oing Concern, you are as!ed to write appropriate paragraph of audit report. (ive reason for supporting your report. 8C.A. Final, Nov., 9000: *ns.: Considering these indicators and as per the facts of the case, the company is not a going concern as on 2eptember :;,";;; on account of following reasons : (i) .he company has discontinued its operations for last many years. Its productive fi&ed assets are fully depreciated. .he only productive asset left is land worth 4s.5 la!hs. (ii) .he claim of wor!ers for termination benefits amounting to 4s. ; crores though decreed on Ianuary , ==K has not been provided for in the boo!s of account. .he accumulated loss of the enterprise would be much higher if these losses were provided for. .he amounts recoverable from customers totaling 4s.F.=5 crores of which 4s.F.=; crores are due from business which are totally defunct are doubtful of recovery in its entirety. 9ven the balance amount is due for more than : years. .he company has not been able to pay to its suppliers amounting to 4s.: crores which are overdue. .he company$s investment to the tune of 4s.:; crores are not reali?able and are worthless in view of the fact that all investor companies have turned sic!. .he accumulated loss of the enterprise would be much higher if the loss on account of diminution in value of investment was provide for. .he balance figure for term loan from financial institutions wor!s out to be 4s. K crores as per records which the company is unable to pay.

(iii)

(iv) (v)

(vi)

(vii) .he net worth of the company is completely eroded and there are no mitigation factors or any support from the group company or financial institution that would prevent its ultimate collapse. .hus, in view of the aforesaid financial operating and other indicators, the assumption of going concern is not appropriate. 2ince the %ualification is very material and all pervasive an adverse opinion rather than a Bsub+ect$ to %ualification would be re%uired. 1aragraph in the Audit 4eport. C.he Company has discontinued its operations for last many years and has not been able to honour its obligation t creditors and financial institutions for %uite some time. .hus total accumulated losses are 4s.5F.5 crores (and not asEEEE. 4eported). After ta!ing into account the above factors we are of the opinion that the company is not a going concern as on 2eptember :;, ";;; and, thus the using of going concern assumption in the preparation of financial statements is inappropriate. In our opinion, considering the information given in preceding paragraph, the financial statements do not give a true and fair view of the financial position of the company at 2eptember ";;" and the results of its operations for the year that ended@.

"'

**S; $! I5*2/.A 0O&.RO2 'OR *56/. :ORE

Ob8ective * .o establish standards on %uality control: a. 1olicies and procedures of an audit firm for audit wor! generally, and b. 1rocedures regarding the wor! delegated to assistants on an individual audit. Meaning of certain ter(s a. Auditor *M .he person with final responsibility for the audit. b. Audit firm * A proprietary or a partnership firm providing audit service. c. 1ersonnel * All partners and professional staff engaged in the audit practiced of the firm. d. Assistants * 1ersonnel involved in an audit other than auditor. /(ple(entation of Iuality 0ontrol * .he audit firm should implement %uality control policies to ensure that all audits are conducted in accordance with Auditing and Assurance 2tandard (AA2s). Essential factors for incorporating Buality control in audit =or9 * . a. 1rofessional 4e%uirements * Adherence to basic principles such as independence, integrity, ob+ectivity, confidentiality, etc. b. 2!ills and competence * Audit personnel should have re%uired degree of s!ill and competence. c. Assignment * Audit wor! should be assigned only to competent personnel. d. /elegation * .here is to be sufficient direction, supervision and review of wor! at all levels. e. Consultation * Consultancy within and outside the firm with e&perts. f. Acceptance and 4etention of clients * 9valuation of prospective client and review of e&isting client should be done. g. Monitoring * Continued ade%uacy and effectiveness of %uality control policies should be monitored. .he firmMs %uality control policy should be effectively communicated to its personnel. Iuality control for /ndividual *udits * .he %uality control policies applicable to firm should be implemented for individual audits to the e&tent applicable. .he audit wor! should be delegated to assistants with professional competence and should be appropriately directed and supervised. Audit assistants should be informed of the nature of business, accounting policies, possible accounting or auditing problems. .hey should be e&plained of what is e&pected of them and how to achieve it. .hey should be informed about the importance of audit programme, time budgets and overall audit plan. Supervision * 1ersons with supervisory responsibilities should a. Monitor the progress of audit, b. 8ecome informed of and address significant accounting and auditing %uestions raised during the audit, c. 4esolve the differences of professional +udgment and consider the level of consultation as appropriate. Revie= * 4eview of wor! of audit staff should be carried out to ensure that the: a. 3or! has been performed as per the audit programme. b. 3or! performed has been ade%uately documented. c. All significant matters have been resolved or are reflected in audit conclusions. d. -b+ectives of the audit procedures have been achieved, and e. Conclusions e&pressed are consistent with the wor! performed. Matters to be revie=ed On a ti(ely basis a. -verall audit plan and the audit programme. b. Assessment of inherent and control ris!s. c. Changes to be made to audit plan and programme. d. /ocumentation of the audit evidence obtained from substantive procedures and the conclusions drawn there from. e. Any amendment to the financial statement arising out *of the auditorMs e&amination, and the auditorMs proposed observations # report. 1ersons not connected with audit may be re%uested to perform additional procedures before issuing the auditorMs report.

"(

**S;$" *56/. O' *00O5&./&3 ES./M*.ES

*ccounting Esti(ate *An appro&imation of an item in the absence of a precise means of measurement. <or e&ample, provision for ta&ation, provision for warranty claims, provision for a loss from a law suit, accrued revenue etc. Responsibility for *ccounting Esti(ates * Management is responsible for ma!ing accounting estimates included in financial statement. &ature of *ccounting Esti(ates * .he determination of accounting estimates may be simple or comple&, depending upon the nature of the item. Accounting estimates may be determined as part of the routine accounting system operating on a continuous basis, or may be non*routine only at the end of the period. .he uncertainly associated with an item, or lac! of. ob+ective data may ma!e it incapable of reasonable estimation. *udit rocedures * .he auditor should ensure that an accounting estimate is reasonable in circumstance, and when re%uired, is appropriately disclosed in the financial statements. <ollowing approaches should be used in the audit of an accounting estimate a. 4eview and test the process used by management to develop the estimate. b. 0se an independent estimate for comparison with that prepared by management, or c. 4eview subse%uent events, which confirm the estimate made. d. -btain e&ternal evidence, where possible, to corroborate internal evidence. e. 9valuate the data and assumptions on which the estimate is based and ensure reasonableness and consistency of assumptions. f. 0se of e&perts in case of comple& estimating process g. 4eview the counting appropriateness of formula used by management. h. .est the calculation procedures used by management. i. 3here possible, compare accounting estimates made for prior periods with actual results of those periods. Evaluation of Results of *udit rocedures * .he final assessment of an accounting estimate would be based on the auditorMs !nowledge of the clientMs business and its consistency with other audit evidence obtained during the audit. If he of the opinion that the accounting estimates prepared by the management is significantly different from that assesses the auditor, he should re%uest the management to revise the same, If the management refuses to revise the estimate, it would be considered a misstatement and the auditor would need to consider its effect on the financial statements.

")

AAS < 17Su(se/uent !vents

SubseBuent Event : 2ignificant events occurring between 8alance sheet date and Auditor 4eport$s date. *uditors duty and *udit procedures : 9nsure that all events upto A4 date re%uiring ad+ustment#disclosure (as per A2*F) in f. statement have been identified and incorporated.

4eview management$s procedure for identification of sub events. In%uiring entity$s lawyer regarding litigation. 4eading entity$s latest interim f.st., budgets. Cash flow statements#forecasts, etc. 4eading minutes of meetings of shareholders, 8.-./. and other e&ecutive committees. In%uiring management about significance of sub events. If another auditor audits the component of entity, principal auditor should ma!e similar en%uiries and procedures w.r.t component regarding events between another auditors report and principal auditor$s report.

Reporting : If management doesn$t agree for such events which as per auditors opinion should be incorporated then %ualify # adverse report. (,$ ? , 1 % ? C) *S 1 % Events occurring after B?S 6ate

'vents Confirmin" Conditions e&isted At 8#2 date

'vents confirmin" conditions which arise after 8#2 date

'vents affectin" going concern

Ad+ustment in f. st.

6o ad+ustment. If material,

Ad+usted in

Then only disclosure.

f. st.

$#

AAS 28 4 A2=3?!>:! =F +-! .0SI2!SS

Obtaining the 9no=ledge ; Auditor should obtain !nowledge of the business to identify#understand the events transactions and practices that may have a significant effect on financial statements or audit report. (eneral !nowledge of economy and industry (level of auditor$s !nowledge is less than that of management). Pnowledge at the start of the engagement updation during audit. Continuous need for !nowledge (!nowledge is refined and added in later stages of Audit). In continuous engagement, he$ll update information to identify significant changes since last audit. Sources : 'or !.*.: (i) 1revious 9&perience. (ii) /iscussion with people with entity. (iii) /iscussion with internal auditor. (iv) /iscussion with other auditor (Advisor). (v) /iscussion with !nowledgeable people outside entity. (vi) 1ublication. (vii) 7egislation and 4egulation. (viii) Disits to entity#plant. (i&) /ocuments produced by entity (minutes, manuals, plans), etc. Eno=ledge assist hi( in follo=ing : i) Assess ris! and problems ii) 1lan and perform audit effectively. iii) 9valuating audit evidence.
8etter service to clients.

$1

AAS < 21 Consideration o$ ?a& and )e*ulation in an audit o$ $.st.

&on;0o(pliance : Act of commission ; omission by entity (intentional # unintentional), which are contrar to prevailing laws or regulation.

Management$s responsibility to ensure that entity$s operations are conducted as per laws
and re"ulations. Management$s responsibility for prevention and detection of non*compliance. Management should H (i) Monitor legal re%uirements. (ii) /esign and operate proper I.C. (iii) /evelop publicise and follow code of conduct. (iv) .raining to employees. (v) Monitor compliance with code of conduct. (vi) 9stablish legal department. (vii) Maintain register of significant laws. (viii) In larger entity, to ensure these responsibilities may be assigned to Internal auditor or Audit committee. *uditor+s 0onsideration : Auditor is#can not be held responsible for preventing non*compliance.

.he ris3 of non*detention of non*compliance is $i"$er. 8ut audit may reveal condition#events compliance. .hus he should accordingly plan and perform audit. <or this, he should perform :
. )e should obtain "eneral understandin" of (A) 7egal and regulatory framewor3 applicable to entity and (8) )ow entity comply with it. ". 1erform procedures to identit non2compliance to be considered when preparin" f.st. specificall . Inspect correspondence with relevant authorities :. 2ufficient and appropriate evidence for compliance with those laws and regulation having effect on material amounts and disclosures in financial statement. (suc$ laws are 3nown and considered w.r.t. f. st.: 9&cept , ", :, auditor need not test compliance. In%uire mgt. as to compliance

)owever, there may be instances of possible non*compliance came to auditors notice

(fine penalt , etc.: 3ritten M47 that management has disclosed to auditor all !nown # possible non* compliance effecting preparation of f. st. rocedures : 3hen non2compliance is discovered : 0nderstanding nature#circumstances etc. to evaluate possible effect on f.st. /ocumentation and discuss with management. May consult entity$s lawyer. Consider implication of non*compliance w.r.t. other phases of audit (&eliabilit of M&.). If unable to obtain information about suspected non*compliance H consider its effect on A.4.

$2

0o((unication ? Reporting of non;co(pliance : T M"!"-e.e!t T Users / A.R. I/ he T Re-ul"t r0 Auth rities 9nly if re3uired by statute etc.

Communicate it to 2222222 Concludes that 8s unable to determine 591 and Senior mgt. *on2compliance has non2compliance due to 7at. :ffect on f.st. limitations imposed by or 3ualify+ad erse 7gt.+:ntity Circumstances ;ualify + disclaim Consider its :ffect on AR :ithdra=al fro( Engage(ent : )e may withdraw if management doesn$t ta!e remedial steps considered necessary by auditor, even if non*compliance is not material to f.st. )e may see! legal advice (e.". Management involvement in non*compliance) 3hen incoming auditor communicates, tell him reasons of such withdrawal (not of its affairs)

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**S 1 ## J/nitial Engage(ents 1 Opening Balance

/nitial Engage(ents : (i) 3hen financial statements are audited for st time or (ii) 2ome other auditor audited the financial statement for preceding period. Opening Balance : A#c. 8alances e&isting at beginning of the period i.e. closing balance of preceding period b#f to current period. It reflects the effect of : (i) .ransaction # 9vents of preceding period, and (ii) A#c. policies applied in preceding period. Evidence : -btain sufficient app. evidence that : 8a: Correctl b;f. (b) -pening 8alance don%t contain misstatements affecting current pd. f.st. and (c) Consistent application of appropriate A;c. polic . *udit rocedure : )e should consider : (i) A#c. policy followed by entity. (ii) .ype of preceding period$s. A.4. H clean # modified (iii) 6ature of opening 8alance H ris! of misstatement. (iv) Materiality of opening balance for current pd$s f.s.t.

'inancial State(ent for preceding period

Audited b some ot$er Auditor 2ufficient App. evidence (for -p. bal.) by having audited financial statement or (enerally reliance on them /uring C.T. audit, indication of misstatement in opening balance 9&tended procedures

Not Audited 9&tended 1rocedure (i) 0* K 02: Audit 9vidence as part of audit procedure during current year. (ii) Others : may chec! records underlying op. balance or see! e&ternal confirmations.

*udit 0onclusion K Reporting : If unable to obtain sufficient app. evidence regarding opening balance H %ualified # disclaimer. If opening balance contain misstatement affecting C.T. financial statement and which is not properly incorporated disclosed in financial statement H %ualified # adverse.

$$

**S;#, RE2*.E6 *R./ES

.he auditor should perform audit procedures designed to obtain sufficient appropriate audit evidence regarding the identification and disclosure by management of related parties and the related party transactions that are material to the financial statements. Existence and 6isclosure of Related arties : . )e should * a. 4eview the entity$s procedures for identification of related parties. b. 4eview his wor!ing papers for the prior year for names of !nown related parties. c. 4eview shareholders records to determine the names of principal shareholders or appropriate, obtain a list of principal shareholders form the share register, d. 4eview the +oint venture and other relevant agreements entered into by the entity. e. 4eview statutory records li!e memorandum and articles of association, minutes of board and shareholders$ meetings and other relevant records such as register of director$s interest. ". 3here the financial reporting framewor! re%uires disclosure of related party relationships, the auditor should satisfy himself that the disclosure is ade%uate.

.ransactions =ith Related arties : . .he auditor should review information provided by directors and !ey management personnel of the entity identifying related party transactions. /uring the course of the audit, the auditor should carry out detailed procedures, which may identify the e&istence of transactions with related parties. ". .he auditor needs to be alert for transactions, which appear unusual in the circumstances and may indicate the e&istence of previously unidentified related parties. Exa(ine /dentified related party transactions: . In e&amining the identified related party transactions, the auditor should obtain sufficient appropriate audit evidence as to whether these transactions have been properly recorded and disclosed. ". (iven the nature of related party relationships, evidence of related party transactions may be limited. 8ecause of such transactions, the auditor would consider performing procedures such as: a. Confirming the terms and amount of the transaction with the related party. b. -btaining confirmation from persons associated with the transaction, such as, ban!s, lawyers, guarantors and agents. Manage(ent Representations: .he auditor should obtain a written representation from management regarding: a. b. .he completeness, accuracy and validity of information provided regarding the identification of related parties, and .he ade%uacy of related party disclosure in the financial statements.

*udit conclusion and Reporting: If he is unable to obtain sufficient appropriate audit evidence concerning related parties and transactions with such parties or concludes that their disclosure in the financial statements in not ade%uate, he should e&press a %ualified opinion or a disclaimer of opinion in his audit report, as may be appropriate.

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**S;#% *56/. 0O&S/6ER*./O&S RE2*./&3 .O E&./.ES 5S/&3 SER4/0E OR3*&/S*./O&S

.he Auditor should consider how a service organisation affects the client$s accounting and internal control systems so as to plan and develop an effective audit approach. 0onsiderations for .he *uditor of the 0lient 3hen the services provided by service organisations are limited to recording and processing of transactions of the client and the client retains authori?ation and maintenance of accountability, the client might be able to implement effective policies and procedures within its organisations. )owever, the client may have to rely upon the policies and procedures of the service organisation where the latter e&ecutes the transactions and maintains accountability on behalf of the client. 3hile planning his audit, the auditor should determine the significance of activities performed by the service organisation and their relevance to the audit. In doing so the auditor should consider:

6ature of the services provided. .erms of contract. Material financial statement assertions that are affected by the use of the service organisation. Inherent ris!s associated with those assertions. 9&tent to which the client$s systems interact with those of the service organisation. Client$s internal controls that are applied to the transactions processed by the service organisation. .he capability and financial strength of the service organisation. /ocumentation of systems manual of the service organisation. Information available on general controls and computer systems controls relevant to the client$s application.

4eports of the auditor or internal auditor of the service organisation.

3hen the auditor of the client concludes that the activities of the service organisation are significant to the entity and to his audit, he should obtain sufficient understanding of the service organisation$s accounting and internal control system. If the information he is able to gather is insufficient, he should consider the need to re%uest the auditor of the service organisation to furnish him information on specified areas. Service Organisation+s *uditor+s Report 3hen the auditor of the client uses the report of the auditor of service organisation, he should consider: a) .he professional competence of the reporting auditor, and b) 6ature and content of the report. .he report submitted to the client$s auditor would ordinarily be one of the two types as follow: .ype * ; Report of Suitability of 6esign .he contents of this report are a. A description of the service organisation$s accounting and internal control 2ystem, and b. An opinion by the service organisation$s auditor that i. .he above description is accurate, ii. .he systems controls have been placed in operation, and iii. .he accounting and internal control systems are suitably designed to achieve their stated ob+ectives. 2uch reports help the auditor of the client in obtaining an understanding of the accounting and internal control systems installed and operated by the service organisation.

$%

.ype B ;Report on Suitability of 6esign and Operating Effectiveness .he contents of the report are a. A description of the service organisation$s accounting and internal control systems, b. An opinion by the service organisation$s auditor that: i. .he above description is accurate, ii. .he systems controls have been placed in operation, iii. .he accounting and internal control systems are, suitably designed to achieve the stated ob+ectives, and iv. .he accounting and internal control systems are operating effectively based on the results of the tests of control. In addition to the report on operating effectiveness, the service organisationMs auditor should identify the tests of controls performed and their results. .he clientMs auditor should consider whether the controls tested by the other auditor are relevant to the clientMs transactions. .he clientMs auditor can also use such reports as an evidence of lower control ris! assessment. 8ased on the control ris! assessment, the clientMs auditor determines the nature, timing and e&tent of substantive procedures. )e may also re%uest the auditor of the service organisation to perform substantive tests in certain areas. )owever the audit report of the client should not contain reference to the report received from the service organisationMs auditor.

$'

AAS < 25 C=@PA)A+IB!S C=@PA)A+IB!S FI2A2CIA? )!P=)+I2: < F)A@!3=)A

0o(paratives : 0orresponding figures Amount and other disclosures for preceding 1eriod are included as part of Current year <inancial 2tatement (Applicable in India and thus covered by AA2 H "5) 0o(parative f. st. Amount and other disclosures for preceding period are included for comparison but not form part of Current year financial statement (6ot applicable in India) (6ot covered by AA2 H "5)

*uditor+s responsibility : 2ufficient ' Appropriate evidence that corresponding figures meet re%uirement of relevant financial reporting framewor!. 9&tent of audit procedure is less for corresponding figures as compared to current period figure. )e should assess whether H (ii) A;c. policies used for corresponding figures are consistent with those of C.T. figures. (or whether appropriate ad+.# disclosure made) (iii) Corresponding figure a"ree with amount and disclosure in prior period (or whether appropriate ad+.# disclosure made) Also ta!e care of AA2 H "". Reporting : Auditor 4eport (opinion) is on current period financial statements as a whole, including corresponding figures. AuditorCs )e ort on Previous Period Modified Auditor to chec! whether matter giving rise to such modification is 5nBualified?clear 8ut during audit procedures comes across a material misstatement, affecting prior years financial statement. Audit or e&amine whether disclosed by mgt. Tes (Clear, may highlight in in his A.4.) 6o modify regarding corresponding figure.

4esolved by mgt. Clear report (If material, then may highlight in his A4)

unresolved Modify regarding corres* ponding figure. whether affects C.T. figures &o U

Aes Modify regarding C.T. figures also

If prior pds f.st. not audited, state in A4 that corresponding figures are un*audited.

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**S;#C .ERMS O' *56/. E&3*3EME&.

.he auditor and the client should * agree on the terms of the engagement. .he agreement should be in writing. *udit Engage(ent 2etters: .he auditor should send an engagement letter, preferably before the commencement of the engagement, to help avoid any misunderstanding. rincipal contents of audit engagement letter a. -b+ective of Audit of financial statements. b. ManagementMs responsibility for the financial statements. c. ManagementMs responsibility for selection and consistent application of accounting policies and accounting standards. d. ManagementMs responsibility for preparing the financial statements on a going concern basis. e. ManagementMs responsibility for ma!ing +udgements and estimates that are reasonable and prudent. f. ManagementMs responsibility for the maintenance of ade%uate records and internal controls. g. .he scope of audit, including reference to applicable legislation, regulations, etc. h. .he fact that having regard to test nature of an audit, persuasive rather than conclusive nature of audit evidence together with inherent limitations of internal control system, there is an unavoidable ris! that some fraud and error may remain undetected. i. 0nrestricted access to whatever records, documentation and other information re%uested in connection with audit. *dditional (atters in the engage(ent letter a. 1lanning of the audit b. 3ritten confirmation from management in connection with audit c. 4e%uest for the client to confirm the terms of engagement by ac!nowledging the receipt of the engagement letter. d. Any other reports or letters the auditor e&pects to issue. e. <ees and billing arrangements. f. Involvement of other auditors and e&perts g. involvement of internal auditors and other staff of the client. h. Arrangement with predecessor auditor. i. Any restrictions of the auditors liability, where such possibility e&ists. *udit of 0o(ponents (e.g. Subsidiary7 Branch7 6ivision7 etc) 3hen the auditor of parent company is also the auditor of its subsidiary, branch or division, he should consider certain factors li!e legal re%uirements, independence of management, degree of ownership by parent, e&tent of wor! performed by other auditors etc in deciding whether to issue separate engagement letters. Recurring *udits .he auditor should consider whether the circumstances re%uire the terms of the engagement to be revised and whether there is a need to remind the client of the e&isting terms of the engagement. *cceptance of a change in engage(ent In case an auditor. is re%uested to change the engagement to one that provides a lower level of assurance before completion of the engagement, he should consider the appropriateness of doing so and should agree on the new terms.

A change in circumstances that affects the entityMs re%uirements or a misunderstanding concerning the nature of service originally re%uested would ordinarily be considered a reasonable

$)

basis for re%uesting change in engagement.

8efore agreeing to change, the auditor should consider, any legal or contractual implications of the change. 3here the terms of engagement are changed, the auditor and client would agree on new terms. .he auditor would not agree to change of engagement if there is no reasonable +ustification for doing so. If the auditor is unable to agree to a change of the engagement and is not permitted to continue the original engagement, he should withdraw from the engagement and consider any obligation to report the circumstances necessitating the withdrawal to other parties, vi?. 8oard of directors or shareholders.

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**S;#! 0OMM5&/0*./O&S O' *56/. M*..ERS :/.) .)OSE 0)*R3E6 :/.) 3O4ER&*&0E
3overnance: .he term Cgovernance@ is used to describe the role of persons entrusted with supervision, control and direction of an entity. *udit Matters of 3overnance interest: .hose matters that arise form the audit of financial statements and are in the opinion of the auditor, both important and relevant to those charged with governance in overseeing the financial reporting and disclosures process. Relevant ersons: a. .he auditor should determine relevant persons who are charged with governance and with whom the audit matters of governance interest and to be communicated. b. .he auditor uses his +udgment to determine the relevant persons. c. )e considers the governance structure of the entity the circumstances of engagement, relevant legislations, etc. d. )e also considers the importance and sensitivity of the audit matters. e. 3here it is not possible to identify the relevant persons, the auditor comes to an agreement with the entity with whom the audit matters of governance are to be communicated. f. Communications of governance matters may be included in the audit engagement latter. g. .he engagement letter may include the form of communications and the relevant persons with whom such communications shall be made. *udit (atters o$ governance interest to be co((unicated. a. .he general approach and overall scope of audit b. Any e&pected limitation or any additional re%uirements c. .he selection of or changes in, significant accounting policies and practices, that have or could have a material effect on the entityMs financial statements. d. Audit ad+ustments that could have a significant effect on the entityMs financial statements or auditorMs report. e. Material uncertainties that may cast a doubt on the going concern assumption. f. /isagreement with management that could be significant to entityMs financial statement or auditors report. g. 9&pected modifications to the auditorMs report. h. Material wea!ness in the internal control system. i. Auestions regarding managementMs integrity and fraud involving management. .i(ely co((unications: .he auditor should communicate the audit matters of governance interest on a timely basis. .his enables those charged with governance to ta!e appropriate action. 'or(s o$ co((unications: .he communications can be made orally or in writing. .he form is affected by factors such as:* a. .he si?e, operating structure, legal structure and communications process of the entity. b. .he nature, sensitivity and significance of the audit matters to be communicated. c. .he arrangement made with respectN to periodic meetings or reporting of audit matters of governance interest. Oral 0o((unications of audit (atters: In this case, the auditor should document in the wor!ing paper the matters communicated and any responses to those matters.

!1

Other (atters: Communications between the auditor and those charged with governance cannot be regarded as a substitute for such %ualified, adverse or disclaimer of opinion. 0onfidentiality: .he re%uirements of professional pronouncements, legislations or regulations may impose obligations of confidentiality that restrict the auditorMs communications of audit matters of governance interest. In such cases the auditor may wish to consult a legal counsel. 2a=s and regulations: .he re%uirements of professional pronouncements, legislations or regulations may impose obligations on the auditor to ma!e communications on governance related matters. .hese additional communications re%uirements may affect the form, content and timing of communications with those charged with governance.

!2

**S;#" .he *uditor+s Report on 'inancial State(ents

Basic ele(ents of an *uditor+s Report a. .itle: It may be appropriate to use the term CAuditor@ to distinguish the auditor$s report from report issued by others. b. *ddressee: .he auditor$s report should be appropriately addressed as re%uired by the circumstances of the engagement and applicable laws and regulations. c. Opening or /ntroductory paragraph: .he report should identify the financial statements that have been audited including the date and period covered by the financial statements. .he report should include a statement of responsibility of the entity$s management and of the auditor. d. Scope paragraph: .he report should describe the scope of the audit by stating that the audit was conducted in accordance with the auditing standards generally accepted in India. .he report should include a statement that the audit provides a reasonable basis for opinion. e. Opinion paragraph: .he report should clearly indicate the financial reporting framewor! used to prepare the financial statements and e&press an opinion on the true and fair view in accordance with that financial reporting framewor! and where appropriate the compliance with the statutory and #or regulatory re%uirements. f. 6ate of the report: .he report should be dated as of the completion date of the audit, which should not be earlier than the date on which the financial statements are signed or approved by the management. g. lace of signature: .he report should name the specific location which is ordinarily the city where the audit report is signed. h. *uditor+s signature: .he report should be signed in the name of the firm, the personal name of the both as appropriate. *uditor+s Report .he auditor should incorporate in his report, the matters specified by a statute or regulator and#or report in the form prescribed by them in addition to the re%uirements prescribed above. An un%ualified opinion should be e&pressed when the auditor concludes that the financial statements give a true and fair view in accordance with the financial reporting framewor! used for preparation and presentation of the financial statements. 0nder following situations auditor$s report may have to be modified: Matters that do not affect the auditor$s opinion. Matters that do affect the auditor$s opinion including %ualified opinion, disclaimer of opinion or adverse opinion.

In respect of matters that do not affect the auditor$s opinion, the auditor should modify the report by adding a paragraph to highlight a matter for e&ample some uncertainty regarding a going concern problem which is unresolved ,or a significant uncertainty the resolution of which is dependent on future events and which may significantly affect the financial statements and the same has already been incorporated by management in financial statement. In such matters, the opinion paragraph would refer to the fact that the auditor$s opinion is not %ualified in this respect. Matters that do affect the auditor$s opinion: .he AA2 specifies that in respect of matters that do affect the auditor$s opinion a. A B%ualified opinion$ should be e&pressed when the auditor concludes that an un%ualified opinion cannot be e&pressed but that the effect of any disagreement with the management is not so

!"

material and pervasive as to re%uire a adverse opinion, or limitation on scope is not material and pervasive as to re%uire a disclaimer of opinion. b. A MdisclaimerM of opinionM should be e&pressed when the possible effect of a limitation on scope is so material and pervasive that the auditor is unable to obtain sufficient appropriate audit evidence and is hence unable to e&press an opinion on the financial statements. c. An Madverse opinionM should be e&pressed when the effect of a disagreement is so material and pervasive to the financial statements that the auditor concludes that a %ualification of the report is inade%uate to disclose the misleading or incomplete nature of the financial statements. Opinion other than an unBualified opinion: 3henever the auditor re%uires an opinion other than un%ualified, a description of all the substantive reasons should be included in the report and %uantification of the possible effect(s), individually and in aggregate, on the financial statements should be mentioned in the report. 2i(itation on Scope: .he AA2 also re%uires that in case there is a limitation on scope that re%uires e&pression of a %ualified opinion or a disclaimer of opinion, the auditorMs report should describe the limitation and indicate the possible ad+ustments that might have been necessary had the limitations not e&isted.

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**S; #D /&'ORM*./O& SAS.EMS E&4/RO&ME&.

0o(puter /nfor(ation Syste(s (0/S): CI2 environment. is one where one or more computers of any type or si?e is involved in the processing of financial information of significance to the audit, where those computers are operated by the entity or by a third party. 'actors to deter(ine the effect of 0/S@ environ(ent on the audit a. .he e&tent to which CI2 environment is used to record, compile and analyse accounting information. b. .he system of internal control in e&istence in the entity with regard to flow of complete and correct data to the processing centre and the processing, analysis and reporting tas!s underta!en in the installation. c. .he impact of computer based accounting system on the audit trail that would otherwise e&ist in a manual system. S9ills and co(petence needed in 0/S environ(ent: .he auditor should have sufficient !nowledge of the CI2 to plan, direct, supervise, control and review the wor! performed. )e should consider whether any speciali?ed s!ills are needed in the conduct of the audit. If the use of professional possessing speciali?ed s!ill is planned, the auditor should in accordance with AA2* = N0sing the wor! of an e&pertN obtain sufficient, appropriate audit evidence that the wor! performed by the e&pert is ade%uate for the purpose of the audit. lanning an audit in 0/S environ(ent@ a. .he auditor should obtain an understanding of the accounting and internal control systems, sufficient to plan the audit and to determine the nature, timing and the e&tent of audit procedures. b. In planning the portions of the audit, which may be affected by the environment, the auditor should obtain an understanding of the significance and comple&ity of the CI2 activities and the availability of data for use in the. audit. Matters to be considered =hile planning a. .he CI2 infrastructure (hardware, operating systems) and application software used by the entity. b. 2ignificance and comple&ity of computeri?ed processing in each significant accounting application. c. /etermination of the organi?ational structure of the clientMs CI2 activities and e&tent of concentration or distribution of computer processing throughout the entity. d. /etermination of availability of data. e. 1otential for Computer Assisted Audit .echni%ues. &ature of ris9s and the internal control characteristics in 0/S environ(ents (a) ?ac' o$ transactions trails H 2ome CI2 may provide complete transaction trail, however some may not provide it (-74.). If there is absence of trail, the ris! will be high (I4 S C4). (b) 0ni$or# rocessin* o$ transactions < 0niform processing of transaction can eliminate clerical errors which are there with manual processing. )owever, programming errors may occur. (c) lac' o$ se*re*ation o$ $unctions < .he e&tent of segregation of functions present in manual systems may not be there in CI2 environment. .hus, an individual performing many computer related wor!s may be in a position to perform incompatible function. (d) Potential $or errors and irre*ularities in the develo #ent, #aintenance and e"ecution o$ Co# uter In$or#ation S1ste# < .he potential for human error in development, maintenance ' e&ecution of CI2 may be greater than in manual system (due to technical incompetence). (e) Initiation or e"ecution o$ transaction auto#aticall1 #a1 not (e authoriDed or docu#ented < CI2 may initiate certain transactions automatically. .he authori?ation of these transactions may not be documented (for 9&. H 941)

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(f) (g)

(h)

>e endence o$ other controls over co# uter rocessin* < Manual control procedure may also be used while implementing CI2. Potential $or increased #ana*e#ent su ervision #a1 serve to enhance the entire internal control structure < If management uses all the technologies ' tools to review ' supervise the CI2 department of entity, the ris! will be reduced. Potential $or use o$ co# uter4assisted audit techni/ues < /ue to peculiarities of some transaction and systems, auditor may be re%uired to apply CAA..

Evaluating the reliability of the *ccounting and /nternal 0ontrol Syste(s .hese systems should a. 9nsure that authori?ed, correct and complete data is made available for processing. b. 1rovide for timely detection of errors. c. 9nsure that in case of interruption in the wor!ing of the CI2 environment due to power, mechanical or processing failures, the system restarts without distorting the completion of entries or records. d. 9nsure the accuracy and completeness of the output. e. 1rovide ade%uate data security against fire and other calamities, wrong processing, fraud, etc. f. 1revent unauthori?ed amendments to the programs. g. 1rovide for safe custody of the source code of the application software and the data files. *ssess(ent of Ris9: 8ased on an understanding of the CI2 environment, the auditor should ma!e an assessment of inherent and control ris!s for material financial statements in accordance with AA2* J N4is! Assessments and Internal ControlN. *udit rocedures: .he auditor should consider the CI2 environment in designing audit procedures to reduce audit ris! to an acceptably low level. )e should ensure that ade%uate procedures e&ist to ensure that the data transmitted is correct and complete. . 6ocu(entation: a. )e should document the audit plan, the nature, timing and the e&tent of audit procedures performed and the conclusions drawn from the evidence obtained. b. In CI2 environment, some of the audit trail may be in the electronic form. )e should satisfy himself that such evidence is ade%uately and safely stored and is retrievable in its entirety as and when re%uired.

!%

**S;,> EG.ER&*2 0O&'/RM*./O&S

$. Ob8ective: .o establish standards on the auditorMs use of e&ternal confirmations as a means of obtaining audit evidence. #. External 0onfir(ation :* It is the process of obtaining and evaluating audit evidence through a direct communication from a third party in response to a re%uest for information about a particular item affecting assertions made by the management. .he auditor should determine whether the use of e&ternal confirmations is necessary. ,. rocess of External 0onfir(ations: a. 2electing the items for which confirmations are needed. b. /esigning the form of the confirmation re%uest. c. Communicating the confirmation re%uest to the appropriate third party. d. -btaining response from third party. e. 9valuating the information or absence thereof.

%. Situations =here External 0onfir(ations (ay be used: a. Accounts balances and their components b. .erms of agreement or transactions with third parties. c. 8an! 8alance and other information from ban!ers. d. 2toc! held by third parties. e. 1roperty title deeds held by third parties. f. Investments purchased but delivery not ta!en. g. 7oans from lenders h. 7ong outstanding share application money. -. Reliability of evidence obtained by External 0onfir(ations: It depends on * a. .he application of appropriate procedures by the auditor in designing the e&ternal confirmation. b. 1erforming e&ternal confirmation procedure and evaluating the re%uest of the e&ternal confirmation procedures. c. .he control which the auditor e&ercises over confirmation re%uest and responses. d. .he characteristics of respondents e. Any restrictions included in the response or imposed by management. C. Relationship of7 External 0onfir(ation rocedures to the *uditor@s *ssess(ent of /nherent Ris9 and 0ontrol Ris9. .he auditor should assess whether the evidence provided by the confirmations reduces audit ris!s for the related assertions to an acceptably low level. If the auditor is satisfied that the evidence provided by the confirmations alone is not sufficient, he should perform additional procedures. !. *ssertions *ddressed by External 0onfir(ations ; .he ability of an e&ternal confirmation to provide evidence relevant to a particular financial statement assertion varies. .he e&ternal confirmation of an account receivable provides strong evidence regardingM the e&istence of the account as at a certain date. Confirmations also provides evidence regarding the operation of cut*off procedures. )owever, such confirmation does not provide all the necessary audit evidence relating to the assertion regarding valuation. 3hen obtaining evidence for assertions not ade%uately addressed by confirmations, the auditor

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considers other audit procedures to complement confirmation procedures or to be used instead of confirmation procedures. ". .i(ing of External 0onfir(ations ; 9&ternal confirmation may be re%uested either at the date of financial statements or as at any other selected dates close to the date of financial statements. .he date may be settled in consultation with the management. 3hen the level of inherent and control ris! is high, the auditor may decide to confirm balances at a date other than the period end. D. 6esign of the External 0onfir(ation ReBuest1 .he auditor should design e&ternal confirmation re%uests to the specific audit ob+ective. $>. &ature of /nfor(ation being confir(ed ; In designing the re%uest, the auditor consider the type of information respondents will be able to confirm readily since this may affect the response rate and the nature of evidence obtained. 4espondents will be more willing to a confirmation re%uest containing management authorisation. $$. rior Experience ; .he auditor should consider the information from audits of earlier years while designing e&ternal confirmation re%uests. $#. 'or( of confir(ation reBuest1 0se of 1ositive and 6egative Confirmations: Positive con$ir#ation re/uest ; It as!s the respondent to reply to the auditor in all cases either by indicating the respondentMs agreement with the given information, or by as!ing the respondent to fill in information. 2e*ative con$ir#ation re/uest ; It as!s the respondent to reply only. in the event of disagreement with the information provided in the re%uest. 6egative confirmation re%uest should be used when: a. the assessed level of inherent and control ris! is low, b. a large number of small balances is involved, c. a substantial number of errors is not e&pected, and d. the auditor has no reasons to believe that respondents will disregard these re%uests. A combination of positive and negative combinations may be used. $,. 0haracteristics of Respondents .he reliability of evidence is affected by the respondentMs competence, independence, authority to respond, !nowledge of the matter being confirmed, and ob+ectivity. .herefore, the confirmation re%uest should be directed to appropriate individual. .he auditor also assesses whether certain parties may not provide an ob+ective or unbiased .response to a confirmation re%uest. .he auditor considers the effect of such information on designing the confirmation re%uest and evaluating the results, including determining whether additional procedures are necessary. $%. .he external confir(ation process ;

.he auditor should maintain control over the process of selecting those to whom a re%uest will be sent, the preparation and sending of confirmation re%uests, and the responses to those re%uests. )e should ensure that it is he (the auditor) who sends out the confirmation re%uests, the re%uests are properly addressed, and that it is re%uested that all replies and the undelivered confirmations are delivered directly to the audit. )e should perform alternative procedures when no response is received to a positive e&ternal confirmation re%uests. .he auditor should consider whether there is any indication that e&ternal confirmations received may not be reliable. .he auditor should also consider the authenticity of the response and perform appropriate procedures to dispel any doubts. -ral confirmations should be documented in wor! papers. If the confirmation process and alternative procedures have not provided sufficient appropriate audit evidence regarding an assertion, the auditor should underta!e additional procedures to

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obtain sufficient appropriate audit evidence.

Any discrepancy revealed by the e&ternal confirmations received or by additional procedures carried out by the auditor might have a bearing on the assertions and the accounts within the given assertion not selected for e&ternal confirmation. .he auditor in such a case, should re%uest the management to verify and reconcile the discrepancies. )e should also consider the causes and fre%uency of e&ceptions reported by respondents. If the responses received indicate a pattern of misstatements, the auditor should reconsider his assessment of inherent and control ris! and also consider the effect on his audit procedures. Manage(ent ReBuests 3hen the auditor see!s to confirm certain balances or other information, and management re%uests the auditor not to do so, the auditor should consider whether there are valid grounds for such a re%uest and obtain evidence to support the validity of managementMs re%uests. .he auditor should also see! the management to submit its re%uest in a written form, detailing therein the reasons for such re%uest. If the auditor agrees to managements re%uests not to see! e&ternal confirmation regarding a particular matter, the auditor should H a. document the reasons for acceding to the managementMs re%uest, and b. apply alternative procedures to obtain sufficient appropriate evidence. If the auditor does not accept the validity of managementMs re%uest and is prevented from carrying out the confirmations, there has been a limitation on the scope of the auditorMs wor! and the auditor should consider the possible impact on the auditorMs report. .he auditor should, however. in this case also, document the re%uest made by the management along with the reasons given by the management as well as his own reasons for acceding to the managementMs re%uest.

!)

**S 1 ,$ E&3*3EME&.S .O 0OM /2E '/&*&0/*2 /&'ORM*./O&

$. OB<E0./4E 1 .o establish standards on professional responsibilities of an accountant when an engagement to compile financial statements or other financial information is underta!en and form and content of the report to issued in connection with such a compilation so that the association of name of the accountant with such financials is not misconstrued by a user of those statements or information as having been audited by him. #. OB<E0./4ES O' * 0OM /2*./O& E&3*3EME&. 1 .he ob+ective of a compilation engagement is an accountant to use accounting e&pertise, as opposed to auditing e&pertise, to collect, classify summari?e financial information. .his re%uires reducing detailed data to manageable and understandable form without the re%uirement to test the assertions underlying that information. ,. 3E&ER*2 R/&0/ 2ES O' * 0OM /2*./O& E&3*3EME&. 1 .he accountant should comply with the CCore of 9thic@ issued by ICAI. .he ethical principles are H (a) Integrity, (b) -b+ectivity, (c) 1rofessional Competence and due care, (d) Confidentiality, (e) 1rofessional conduct, and (f) .echnical 2tandards If the accountant is not independent, a statement to that fact should be made in the accountant$s report. 3hen an accountant$s name is associated with financial information compiled by him, the accountant should issue a report. %. RES O&S/B/2/.A O' M*&*3EME&. 1 It includes H (a) 9nsuring that the financial information generated in the entity is correct, complete and reliable. (b) Maintaining ade%uate accounting and other records and internal controls. (c) 2electing and applying appropriate accounting policies. (d) 9stablishing controls designed to safeguard the assets of the entity. (e) .o deter fraudulent or other dishonest conduct and to detect any fraud that occurs. (f) Assuring that the entity complies with laws and regulation applicable to its activities. A compilation engagement carried out by the accountant does not relieve the management of these responsibilities. .he accountant should obtain an ac!nowledgement from the management of its responsibility for the appropriate preparation and presentation of financial statements or other information. -. 6E'/&/&3 .)E .ERMS O' .)E E&3*3EME&. 1 .he accountant should ensure that there is a clear understanding the terms of the engagement by means of an engagement letter helps avoid misunderstanding regarding matters such as the ob+ective and scope of the engagement and the e&tent of the auditor$s responsibilities. .he engagement letter would include H (a) 6ature of the engagement (b) <act that the engagement can$t be relied upon the disclose frauds or defalcations (c) 6ature of the information to be supplied by the client. (d) <act that the management is responsible for H i. Accuracy and completeness of the information supplied including maintenance of ade%uate accounting records and internal control. ii. 1reparation and presentation of financial statements in accordance with applicable laws.

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2afeguarding the assets of the entity and preventing and detecting fraud and other irregulations. iv. 9nsuring that activities of the entity are carried in accordance with applicable laws and regulations. v. 9nsuring complete disclose of all material and relevant information to the accountant. (e) Intended use and distribution of the information, once compiled. (f) 8asic of accounting on which financial information is to be compiled. (g) .he fact that the management is responsible to the users for the information to be compiled by the accountant. (h) 8asis on which fees would be computed and any billing arrangements. (i) 4e%uest for the client to confirm the forms of engagement by ac!nowledging the receipt of the engagement letter. C. 2*&&/&3 *&6 6O05ME&.*./O& 1 .he accountant should plan the wor! so that an effective engagement will be performed. )e should document matters which care important in providing evidence that the engagement was carried out in accordance with this Auditing and Assurance 2tandard and the terms of the engagement. !. RO0E65RES 1 (a) .he accountant should obtain a general !nowledge of the business and operation of the entity and should be familiar with the accounting and practice of the industry in which the entity operates. (b) )e should be familiar with the form and the content of financial statements # other financial information which is appropriate in the circumstances. (c) )e should re%uest management representation letter covering significant information or e&planations given orally on which he considers representations are re%uired. (d) If he becomes aware that the information supplied by management is incorrect, incomplete or unsatisfactory, he should consider performing additional procedures, e.g. ma!ing in%uiries, assessing internal controls, etc. If the management refuses to provide additional information, he should withdraw from the engagement. (e) )e should read the compiled information and consider whether it appears to be appropriate in form and free from obvious material misstatements. S E0/*2 0O&S/6ER*/O&S 1 (a) Clients having an Identified 4eporting <ramewor! H in this case, the accountant should ensure that the financial statements or other financial information compiled comply with the re%uirements of the identified financial reporting framewor!. If case o any material departure, the fact should be stated in the notes to the Accounts or other compiled financial information as well as in the accountant$s report. (b) Clients having not Identified <inancial 4eporting <ramewor! H since accounts are normally assumed to be compliant with the generally accepted accounting practices, including the accounting standards issued by ICAI, the different basis of compilation should be set out in the 6otes to the Accounts or other compiled financial information as well as the report issued by the accountant on compilation 6on*Compliance with the Accounting 2tandards H if the accountant becomes aware of material non*compliance with the relevant Accounting 2tandards, the same should be brought to the attention of the management. If the same is not rectified by the management, it should be included in the notes to the accounts and the compilation report of the accountant. Accounting 9stimates made by Clients * if it appears that certain estimates made by the client are unreasonable, the accountant should draw these to the attention of the management for consideration.

iii.

".

(c)

(d)

D.

RE OR./&3 O& 0OM /2*./O& E&3*3EME&. 1 .he financial statement or other financial information compiled should be approved by the client before the compilation report is signed

%1

by the accountant. It is essential that the accountant clearly brings out the nature of wor! with the financial statements and the nature of wor! performed by him. .he report on compilation should be in following lay out H (a) .itle H .he title should be CAccountant$s 4eport on compilation of unaudited <inancial 2tatements@ (and not CAuditor$s 4eport@). (b) Address H .he report should be addressed to the appointing authority. (c) Identification of the financial information. (d) 3hen relevant, a statement that the accountant is not independent of the entity. (e) A statement that management is responsible for H (i) Completeness and accuracy of the underlying data and complete disclosure of all material and relevant information. (ii) Maintaining ade%uate accounting and other records and internal control. (iii) 2electing and applying appropriate accounting policies. (iv) 1reparation of financial statements and other information in accordance with applicable laws and regulations, if any. (v) 9stablishing controls to safeguard the assets of the entity and preventing and detecting fraud or other irregularities. (vi) 9stablishing controls for ensuring that activities of the enterprise and carried out in accordance with applicable laws and regulations. (f) A statement that the engagement was performed in accordance with his Auditing and Assurance 2tandard. (g) A statement that neither an audit nor a review has been carried out and that according no assurance is e&pressed on the financial information (h) /ate of report (i) 1lace of signature, and (+) Accountant$s signature H the report should be signed by the accountant in his personal name. 3here a firm is appointed, the report should be signed in the personal name of the accountant and in the name of the firm. .he membership number assigned by ICAI should be mentioned.

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**S 1 ,# E&3*3EME&.S .O ER'ORM *3REE6 5 O& RO0E65RES RE3*R6/&3 '/&*&0/*2 /&'ORM*./O&

$. /&.RO650./O& 1 In an engagement to perform agreed upon procedures, the auditor is engaged by the client issue a report of factual findings, based on specified sub+ect matter of specified elements, accounts or items of a financial statement. <or e&ample, an engagement to perform agreed upon procedures may re%uire auditor to perform certain procedures concerning, say, accounts payable, accounts receivable, purchases from related parties, etc. .his AA2 may also provide useful guidance for engagement to perform agreed upon procedures regarding non*financial information, provided he has ade%uate !nowledge of the sub+ect matter and reasonable criteria e&ist on which to base his findings. OB<E0./4E 1 .o establish standard and provide guidance: on the auditor$s professional responsibilities when an agreed upon procedures regarding financial information is underta!en and on the form and content of the report that the auditor issues in connection with such an engagement. OB<E0./4E O' *& *3REE6 5 O& RO0E65RES E&3*3EME&. 1 .he ob+ective on an engagement is for the auditor to carry upon procedures engagement is for the auditor to carry out procedures of an audit nature to which the auditor and the entity and any appropriate third parties have agreed and to report on factual findings. .he auditor simply provides a report of the factual findings of agreed upon procedures, no assurance is e&pressed by him in his report. .he report is restricted to those parties that have agreed to the procedures to be performed since others, unaware of the reasons for the procedures, may misinterpret the result. %. 3E&ER*2 R/&0/ 2ES O' *& *3REE6 5 O& RO0E65RES E&3*3EME&. 1 .he auditor should comply with the Code of 9thics, issued by ICAI. .he ethical principles are H (a) Integrity (b) -b+ectivity, (c) 1rofessional competence and the care, (d) Confidentiality (e) 1rofessional conduct, and (f) .echnical 2tandards. 3hen the auditor is not independent, a statement to that effect should be made in the report of factual findings. .he auditor should conduct an agreed upon procedure engagement in accordance with this AA2 and the terms of the engagement. -. 6E'/&/&3 .)E .ERMS O' .)E E&3*3EME&. 1 .here should be a clear understanding among the auditor, the client and other specified parties, who will receive copies of the report of factual findings regarding the agreed procedures and the conditions of the engagement. .he nature to be agreed include the following: (a) 6ature of the engagement (b) 2tated purpose for the engagement

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(c) Identification of the financial information to which he agreed upon procedures will be applied. (d) 6ature, timing and e&tent of the specific procedures to be applied. (e) 7imitations on distribution of the report of factual findings. 3hen such limitation would be in conflict with legal re%uirements, the auditor, would not accept the engagement. .he auditor should send an engagement letter documenting the !ey terms of the appointment. An engagement letter helps avoid misunderstanding regarding such matters as the ob+ectives and scope of engagement, the e&tend of auditor$s responsibilities and the form of report to be issued. 2*&&/&3 *&6 6O05ME&.*./O& 1 .he auditor should plant the wor! so that an effective engagement will be performed in providing evidence to support the report of factual findings, and evidence that the engagement was carried out in accordance with this AA2 and the term of the engagement. RO0E65RES *&6 E4/6E&0E 1 .he auditor carry out the procedures agreed upon and use the evidence obtained as the basis for the report of factual findings. .he procedures may includes H (a) In%uiry and analysis. (b) 4ecompilation, comparison and other clerical accuracy chec!s. (c) -bservation (d) Inspection (e) -btaining confirmations. RE OR./&3 1 .he report needs to describe the purpose and agree upon procedures in details to e&tent of wor! performed. .he report should also clearly mention that no audit ore review wor! has been performed. .he report should certain H (a) .itle (b) Addressee (ordinarily the appointing authority), (c) Identification of specific financial or non*financial information (d) A statement that the procedure performed were those agreed upon with the recipient, (e) A statement that the engagement was performed in accordance with this AA2. (f) Identification of the purpose for which the agreed upon procedures were performed, (g) A listing of the specific procedures performed. (h) A description of the auditor$s factual findings. (i) A statement that procedures performed do not constitute either an audit or a review, and, as such, no assurance in e&pressed. (+) A statement that had the auditor performed additional procedures, an audit or a review, other matters might have come to light that would have been reported, (!) A statement that the report is restricted to those parties that have agreed to the procedures to be performed. (l) A statement (when applicable) that the report relates only to the elements, accounts, items or financial or non*financial information specified and that it does not e&tent to the entity$s financial statement ta!en as a whole, (m) /ate of the report, (n) 1lace of signature, (o) Auditor signature H .he report should be signed by the auditor in his personal name. 3hen a firm is appointed the report signed in the personal name of the auditor and the firm. .he membership number assigned by ICAI should also be mentioned.

C.

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**S ,, Engage(ents to Revie= 'inancial State(ents

3eneral rinciples of a Revie= Engage(ent $. .he auditor should comply with the Code of 9thics issued by the Institute of Chartered Accountant of India. #. .he auditor should conduct a review in accordance with the AA2. ,. <or the purpose of e&pressing negative assurance in the review report, the auditor should obtain sufficient appropriate evidence primarily through in%uiry and analytical procedures to be able to draw conclusions. Scope of a Revie= .he procedures re%uired to conduct a review of financial statements should be determined by the auditor having regard to the re%uirements of this AA2, relevant legislation, regulation and, where appropriate, the terms of the review engagement and reporting re%uirements. .er(s of Engage(ent .he auditor and the client should agree on the terms of the engagement. lanning $. .he auditor should plan the wor! so that an effective engagement will be performed. #. In planning a review of financial statements, the auditor should obtain or update the !nowledge of the business including consideration of the entity$s organi?ation, accounting systems, operating characteristics and the nature of its assets, liabilities, revenues and e&penses. :or9 erfor(ed by Others 3hen using wor! performed by another auditor or an e&pert, the auditor should be satisfied that such wor! is ade%uate for the purposes of the review. 6ocu(entation .he auditor should document matters which are important in providing evidence to support to review, and evidence that the review was carried out in accordance with this AA2. rocedures and Evidence $. .he auditor should apply +udgment in determining the specific nature, timing and e&tend of review procedures. #. .he auditor should apply the same materiality considerations as would be applied if an audit opinion on the financial statements were being given. ,. .he auditor should in%uire about events subse%uent to the date of the financial statements that may re%uire ad+ustment of or disclosure in the financial statements. %. If the auditor has reason to believe that the information sub+ect to review may be materially mis* stated, the auditor should carry out additional or more e&tensive procedures as are necessary to be able to e&press negative assurance or to confirm that a modified report is re%uired. 0onclusion and Reporting $. .he review report should contain a clear written e&pression of negative assurance. .he auditor should review and assess the conclusions drawn from the evidence obtained as the basis for the e&pression of negative assurance.

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#. 8ased on the wor! performed, the auditor should assess whether any information obtained during the review indicates that the financial statements do not give a true and fair view (or Bare not presented fairly, in all material respects,$) in accordance the framewor! used for the preparation and presentation of financial statements and relevant statutory re%uirements, if any. ,. .he report on a review of financial statements should contain the following basic elements, ordinarily in the following layout: (a) (b) (c) .itle5, Addressee, -pening or introductory paragraph including, (i) Identification of the financial statements on which the review has been performed, and (ii) A statement of the responsibility of the entity$s management and the responsibility of the auditor, 2cope paragraph, describing the nature of a review, including: (i) A reference to this AA2 applicable to review engagements, or to relevant laws or regulations, (ii) A statement that an audit has not been performed, that the procedures underta!en provide less assurance than an audit and that an audit opinion is not e&pressed, 2tatement of negative assurance, /ate of the report, 1lace of 2ignature, and Auditor$s signature and membership number assigned by the Institute of Chartered Accountants of India. 2tate that nothing has come to the auditor$s attention based on the review that causes the auditor to believe the financial statements do not give a true and fair view (or Bare not presented fairly, in all material respects$) in accordance with the framewor! used for the preparation and presentation of financial statements (negative assurance)J, or If matters have come to the auditor$s attention, describe those matters that impair a true and fair view (or a fair presentation, in all material respects) in accordance with the framewor! used for the preparation and presentation of financial statements including, unless impracticable, a %uantification of the possible effect(s) on the financial statements, and either: (i) 9&press a %ualification of the negative assurance provided, or (ii) 3hen the effect of the matter is so material and pervasive to the financial statements that the auditor concludes that a %ualification is no ade%uate to disclose the misleading or incomplete nature of the financial statements, give an adverse statement that the financial statements do not give a true and fair view (or Bare not presented fairly, in all material respects$) in accordance with the framewor! used for the preparation and presentation of financial statements, or If there has been a material scope limitation, describe the limitation and either: (i) 9&press a %ualification of the negative assurance provided regarding the possible ad+ustments to the financial statements that might have been determined to be necessary had the limitation not e&isted, or 3hen the possible effect of the limitation is so significant and pervasive that the auditor concludes that no level of assurance can be provided, not provide any assurance.

(d)

(e) (f) (g) (h)

%. .he review report should: (a)

(b)

(c)

(ii)

-. .he auditor should date the review report as the date the review is completed, which includes performing procedures relating to events occurring up to the date of the report. )owever, since

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the auditor$s responsibility is to report on the financial statements as prepared and presented by management, the auditor should not date the review report earlier than the date on which the financial statements were approved by management.

**S ,% *udit Evidence;*dditional 0onsiderations for Specific /te(s

*R. * : *..E&6*&0E *. )AS/0*2 /&4E&.ORA 0O5&./&3 .he auditor should perform audit procedures designed to obtain sufficient appropriate audit evidence during his attendance at physical inventory counting. 6efinitions $. 1hysical verification of inventories is the responsibility of the management of the entity. #. 3hen inventory is material to the financial statements, the auditor should obtain sufficient appropriate audit evidence regarding its e&istence and condition by attendance at physical inventory counting unless impracticable, due to factors such as the nature and location of the inventory. ,. If unable to attend the physical inventory count on the date planed due to unforeseen circumstances, the auditor should ta!e or observe some physical counts on an alternative date and where necessary, perform alternative audit procedures to assess whether the changes in inventory between the date of physical count and the period end date are correctly recorded. %. 3here attendance at the physical inventory counting is impracticable, the auditor should consider whether alternative procedures provide sufficient appropriate audit evidence of e&istence and condition of inventory to conclude that the auditor need not ma!e reference to a scope limitation. Manage(ent Representations .he auditor should obtain a written representation from management concerning: (a) (b) .he completeness of information provided regarding the inventory, and Assurance with regard to adherence to laid down procedures for physical inventory count.

*udit 0onclusions and Reporting If the auditor is unable to obtain sufficient appropriate audit evidence concerning the e&istence of inventory or ade%uacy of procedures adopted by the management in respect of physical inventory count or concludes that the disclosure of inventory in the financial statements is inappropriate, he should consider its effect in his audit report. *R. B : /&I5/RA RE3*R6/&3 2/./3*./O& *&6 02*/MS 6efinitions $. .he auditor should carry out audit procedures in order to become aware of any litigation and claims involving the entity which may have a material effect on the financial statements. #. 3hen litigation or claims have been identified by the management or when the auditor believes hey may e&ist, and are li!ely to be material, the auditor should see! direct communication with the entity$s lawyer. ,. .he letter, which should be prepared by management and sent by the auditor, should re%uest the entity$s lawyer to communicate directly with the auditor.

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%. If management refuses to give the auditor permission to communicate with the entity$s lawyers, this would be a scope limitation and should ordinarily lead to a %ualified opinion or a disclaimer of opinion. Manage(ent Representations .he auditor should obtain a written representation from management concerning: (a) (b) .he completeness of information provided regarding the identification of litigation and claims, and .he ade%uacy of litigations and claims disclosures in the financial statements.

*R. 0 : 4*25*./O& *&6 6/S02OS5RE O' 2O&3 .ERM /&4ES.ME&.S .he auditor should perform audit procedures designed to obtain sufficient appropriate audit evidence for valuation and disclosure of long term investments. 6efinitions 3hen long*term investments are material to the financial statements, the auditor should obtain sufficient appropriate audit evidence regarding their valuation and disclosure. Manage(ent Representations .he auditor should obtain a written representation from management concerning: (a) .he completeness of information provided regarding valuation and disclosure off long term investments. (b) .he valuation of long term investments in the financial statements including ade%uacy of provision for diminution in such values, wherever re%uired. *udit 0onclusions and Reporting If the auditor is unable to obtain sufficient appropriate audit evidence concerning the e&istence, valuation of long term investments or concludes that their disclosure in the financial statements is not ade%uate, he should consider its effect in his audit report. *R. 6: SE3ME&. /&'ORM*./O& .he auditor should perform audit procedures designed to obtain sufficient appropriate audit evidence for appropriate disclosure of segment information. 6efinitions 3hen segment information is material to the financial statements, the auditor should obtain sufficient appropriate audit evidence regarding its disclosure in accordance with the applicable identified financial reporting framewor!. Manage(ent Representations .he auditor should obtain a written representation from management concerning: (a) .he completeness of information regarding segments and disclosure thereof, and (b) Appropriateness of the selected segments based on ris!s and returns, and (c) .he organi?ational structure of an enterprise and its internal financial reporting system and deviation therefrom. *udit 0onclusions and Reporting If the auditor is unable to obtain sufficient appropriate audit evidence concerning segment information or concludes that their disclosure in the financial statements is not ade%uate, he should consider its effect in his audit report. Effective 6ate .his Auditing and Assurance 2tandard becomes operative for all audits related to accounting periods beginning on or after st April, ";;5.

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%uid"!ce N te ! Re1isi ! / Audit Re, rt

4evision of Audit 4eport after the same has been issued, in case auditor considers necessary to do so. If Auditor becomes aware subse%uent to his audit report that facts may have e&isted at that date which might have affected his report had he been aware of such facts at time of issuance of A.4. It doesn$t apply to developments after date of A.4. or where contingencies already disclosed in financial statement. <or e.g. H Apparent mista!e, wrong information about facts, subse%uent discovery of facts, etc. 4evision of A.4. doesn$t free the member from professional misconduct, committed by him. Auditor may advise the management to amend financial statement before issuing the A.4. Auditor may issue the revised report referring therein earlier report if management ensures that everyone in receipt of previously issued financial statement alongwith A.4. is informed of the situation. )owever, for company$s revise report till A#c. at adopted at A(M. <or others, revise within reasonable time but not later than issuance of A.4. for immediately ne&t A#c. period. If management doesn$t ensure auditor, he may see! legal advice, notify the client that A.4. no longer be associated with financial statement, notify 4egulatory Agencies and ma!e app. 2tatement at A(M. If management doesn$t ensure the same auditor may conclude to withdraw from further engagement. Auditor being partnership firm, same partner should sign revised report. If not, give reasons. 4evised report should be self contained. 3uidance &ote on *uditor+s Report on Revised *ccounts of 0o(panies7 before circulation to shareholders 3hen amended accounts are re*approved by the boards of the Company and 2tatutory Auditors are re%uested to ma!e a report once again on the amended accounts. Auditor to ensure that all copies of original accounts and report are returned to him and ade%uate disclosure of the fact of revision appears as a specific note on the amended accounts. )owever, if notes to amended accounts don$t contain any note on revision or if such a note is not considered by statutory auditor as ade%uate, it will be his duty to refer to the fact of revision of accounts, in his report. Council decided that re*opening or rectification of Accounts after they have been adopted at the A(M s$ouldn%t be permitted any circumstances.

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S,eci"l As,ects N !&2"!3i!0lassification of &B'0 : *. 68<C is one whose principal business is that of receiving deposits or that of financial institution. . 9%uipment 7easing Company. ". )ire 1urchase <inance Company. :. Investment Company. F. 7oan Company. 5. 468C i.e. 4esiduary non*ban!ing co. that receives deposits under any scheme. B. MB'0 (Mutual benefit 'inancial 0o.) : i.e. 6idhi Co. notified by Central (overnment u#s J"; A of Companies Act. 0. MB0 (Mutual Benefit 0o(pany) : i.e. potential 6idhi co. wor!ing on lines of 6idhi co. but not so notified by 2ec. J";A of Companies Act and Central (overnment. Company having minimum net owned fund and preference share capital of ; lacs. 6. M&B0 (Miscellaneous &on;ban9ing co.) : i.e. Chit <und company. 3here a company enters into an agreement with specified number of subscribers to subscribe a certain sum and everyone of them be entitled to a pri?e amount. (may be by lot). *56/. RO0E65RE . Ascertaining the business of the Company. ". 9valuation of I.C. 2ystem. :. 4egistration with 48I which is compulsory for companies having net owned funds of 4s." crores. Also ascertain whether it has submitted %uarterly return with 48I about li%uid Assets within 5 days in specified form. Moreover, it must transfer at least ";G of its net profit to reserve fund before any dividend is declared. ). N<FC 5ublic Deposit Directions (i) 1ublic deposit in accordance with the credit rating assigned to it. (ii) Interest calculations. (iii) 68<C accepted public deposit or renewed it only after written application received by the depositor in a specified form. (iv) 1ublic deposits should be accepted only after advertisement or statement in lieu of advertisement has been filed with 48I. (v) Chec! deposit register (payment on due date). (vi) Investment in approved li%uid assets and it should be !ept in safe custody. (vii) Audited statement submitted within 5 days of )olding A(M to 48I. (viii) Annual 4eturn within J months from close of year submitted to 48I. (i&) If not accepting deposits, see 8oard resolution in this behalf. (&) <or (roup holding investment company, see board resolution to identify the group. =. N<FC 5rudential Norms Directions (i) Compliance with income recognition and Accounting 2tandards, etc. (ii) Classification as 2tandard # 2ub*standard # /oubtful # 7oss Asset. (iii) Income from 61A on reali?ation basis. (iv) 1revious year$s 61A A#c. continue or not.

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0)E0E;2/S. 'OR &B'0 $. EBuip(ent 2easing 'inance 0o(pany: (i) Chec! whether proposals for e%uipment 7easing are accepted only after proper credit appraisal. (ii) .he auditor should verify the ade%uacy of system in place for ensuring installation of assets and their periodical physical verification. (iii) .he auditor should chec! the system to monitor whether Asset is ade%uately insured and properly maintained should be in place. (iv) Derify the lease agreement. (v) .he auditor should ensure that leasing transactions are classified and accounted as per A2* = C7ease@. (vi) 9nsure that the provisions relating to asset classification, provisioning and income recognition laid down for lease financing by 68<Cs are observed. #. )ire urchase 'inance 0o(pany i. .he auditor should ascertain whether there is an ade%uate appraisal system for e&tending hire*purchase finance. ii. .he auditor should verify that payments for assets are made directly to the vendor and the assets are property charged in the name of the 68<C. iii. .he auditor should ascertain the ade%uacy of system in place to ensure installation of the asset and their periodic physical verification. iv. If the finance is against vehicles, the registration certificate should contain an endorsement in favour of the 68<C. v. Auditor should verify the system to ensure that hirer have not sold the assets or encumbered them. vi. 3hether hire*purchase instalments are received regularly. vii. .he auditor should verify that hire purchase assets are ade%uately insured. viii. Chec! the valuation of goods sold on hire purchase and goods repossessed. i&. 9&amine the method of accounting followed for appropriation of finance charges over the period of hire purchase contract. ,. /nvest(ent 0o(pany (i) .he Auditor should physically verify the investment certificate. If these are lodged with another institute#ban! obtain a certificate to that effect. (ii) Derify whether investments made by the 68<C are within limits.
-end 1!< of net owned funds to single borrower 2!< of net owned fund to single group of borrowers 2!< of net owned funds to single borrower

2ame is the case with investment. 7ending S investments $#< of net owned fund to single group of borrowers (iii) (iv) Derify that no loans have been advanced on the security of its own share. Derify whether income in the form of interest, dividend and capital gains is properly recogni?ed. (v) .est Chec! the bills#contract notes received from bro!ers w.r.t. prices in the stoc! mar!et on the respective dates. (vi) Derify the board minutes for authori?ation of purchase and sale of investments. (vii) 2hares#2ecurities held through depository, obtain confirmation from /.1. (viii) Chec! whether investments have been valued as per 68<C 1rudential 6orms and A2 : CAccounting for Investments@. (i&) -btain a list of subsidiary#group company from 68<C.

'1

(&)

Chec! the investments made in subsidiary # group companies for basis for price paid, %uantum of investment made etc. (&i) Ascertain that investments in un%uoted debentures and bonds have not been classified as investments but as term loans for the purpose of asst classification, provisioning and income recognition. (&ii) Incase of securities lent # borrowed under securities lending scheme of 298I, verify the terms and conditions of the agreement. %. 2oan 0o(pany i. Ascertain whether there is system in place for proper appraisal, and sanction of loans. ii. Derify the terms ' conditions of loan agreement and security obtained. iii. Chec! whether ade%uate records are maintained as regards the bill discounting facilities. iv. Chec! whether the loans are within the limits specified for single and group borrowers. v. 6o loans should be given of the security of 68<Cs own shares. vi. Chec! whether norms for asset classification, provisioning and income recognition as specified for credit facilities have been adhered to. vii. .he auditor may also obtain balance confirmation from the borrowers. viii. Chec! whether there is ade%uate system to ascertain creditworthiness of client for co. engaged in business of providing short term fund in IC/ mar!et. *56/. O' B*&E BORRO:ERS <or those 6on*corporate 8orrowers en+oying wor!ing Capital 7imits of 4s."5 lacs and above from the 8an!ing 2ystem. .erm 8orrowing includes (for purpose of limit) : (i) 1ac!ing Credit facility. (ii) Cash Credit facility (iii) 7oans H 2ecured and 0nsecured. (iv) -#/. (v) /eferred 1ayment facility. (vi) (uarantee (a) 1erformance, (b; financial. (vii) 8ill /iscounting facility. (viii) Any other Credit facility. .o submit such audited statement and report to concerned ban!, at earliest but not later than > mont$s from the close of Accounting year. *56/. RO0E65RES (i) Auditor to use his professional s!ills and e&perience and apply such audit tests as re%uired by circumstances. 4eport is special purpose report as it is to be given to lending ban!.

(ii) Consider materiality. 1erform compliance procedures. (iii) -btain all relevant informat and e&planation from the client being audited. (iv) 9ntity may choose any Chartered Accountant. (v) Auditor to obtain letter of engagement and list of boo!s of A#c. # records maintained by the entity before underta!ing audit assignment. (vi) Chec! compliance with terms of documents etc. (1artnership#.rust /eed) so far as they relate to A#c. and audit. (vii) <igures of immediately preceding year for comparisons (viii) (AA2*"" ' "5). (i&) Any material departure of A#c. from accepted principles # 1olicy followed in preceding year should be reflected in notes to A#c. # Auditor$s report. (&) -verall consideration whether financial statement give a true and fair view. It should help the lending ban!er in evaluation of loan proposals and strict financial discipline.

'2

Special *uditor Report : can be called by a lending ban!, if circumstances wants. 2ubmitted on quarterl basis, it is in addition to normal audit report which is on annual basis). #nformation re"ardin" : (i) Actual 1roduction. (ii) Actual production as G of rated capacity. (iii) 2ales. (iv) Cash of goods sold # cost of production. (v) (ross margin. (vi) Interest on ban! borrowing. (vii) Interest on others. (viii) Age*wise classification of raw material and finished goods. (i&) 8asis of valuation of raw material and finished goods. (&) Age wise classification of 8#4 and other receivables due from domestic parties and for e&ports. (&i) 2ome ratio etc. also be given. (&ii) Information w.r.t. following (a) 8alances at the end of each month of the %uarter for ma+or categories of stoc!, receivables and bills receivables, (b) .a& assessments and payments made during the %uarter. (c) Actual disbursement of capital e&penditure during the %uarter, (d) -utstanding contracts. (e) .he contingent liability, (f) Investment made during the %uarter and the income from such investments including profit on sale of investments. (g) 7oans given during the %uarter, (h) 7oans raised during the %uarter (i) -verdue statutory liability at the end of the %uarter, (+) Amounts due but not paid at the end of the %uarter in respect of (a) loans from ban!s, (b) public deposits and (c) other loans, and (!) <igures of cash losses during the last " years to be stated on the basis of the annual accounts. If such accounts were not audited this fact should be stated.

'"

*56/. O' 0O;O ER*./4E SO0/E./ES Auditor$s ob+ective to see how far the decisions are in line with co*operative principles. Interest of members, provision in respective law of state and provision of bye*laws of society. Managing Committee of society does the following : (i) Custody and maintenance of moveable#un*moveable property. (ii) Maintenance of account for receipt#payment. (iii) 2ummon and attend all meetings. (iv) Peeping all registers and records re%uired by Act. *uditor : C.A. or diploma holder or having served as auditor in co*operative department of (overnment. Appointment by 4egistrar and report submitted to him and to society also. Audit fee may be w.r.t., wor!ing capital at prescribed rates. 8oo!s of accounts re%uired for : (i) 2um of money received and e&panded. (ii) All sales and purchases and accounts of st. in hand. (iii) Assets and liabilities. <urther different boo!s can also be maintained by the society. <or limited lia. 2ociety, no member other than a registered society can hold share*holding e&ceeding ";G of shares or 4s. ,;;;. 6o loan to any person other than member. 2pecial permission to grant loan to another society. Accept loan#deposits from members#others sub+ect to bye*laws. Investment in : (i) Central#2tate Co*operative 8an!. (ii) Approved securities. (iii) 2hare security bond, etc. of any other society with limited liability. (iv) Any co*operative ban! if approved by 4egistrar. (v) -ther money permitted by Central#2tate (overnment. "5G of pt. .ransferred to 4eserve <und before distribution to members. 4egistrar may reduce it but at least ;G is even then re%uired. It may use 4eserve fund in 8usiness of a society or may invest or for some public purpose. 2ome 2tate Act provide for compulsory contribution to education fund of state. -ver due debts for J m H 5 yr. and more than 5 years classified and reported upon. -verdue interest e&cluded from interest outstanding in calculation of pt. 2ome Act provide that 8ad debts can be written off only if certified as 8ad. Auditor to see e(istence, owners$ip and valuation of asset. 2pecial report to registrar for e.". : (i) 1ersonal profiteering by members. (ii) /etection of fraud. (iii) Mis*management. (iv) 0rban co*operative ban!, disproportionate advances to vested interest groups. (v) 4ec!less advancing .hen he provides a class to society. If society is unsatisfied, it may appeal to 4egistrar and he may direct to review the audit classification. *udit Report :

'$

(i) (ii) (iii) (iv) (v) (vi)

All necessary information and e&planation. A#c. give all information re%uired by Act. 1 ' 7 true and fair view. 8#2 true and fair view of state of affairs. 1roper 8oo!s of Accounts maintained. 1'7 and 8#2 in agreement with 8oo!s of Accounts.

Schedules to the re ort $or : (i) .ransaction contrary to Act, rules and 8ye*laws (ii) 2ums not brought into A#c. (iii) Material#property appearing as doubtful#bad. (iv) Material irregularity in e&penses#reali?ation of money. (v) Any other matter specified by registrar. )e may also have to answer two sets of %uestionnaire called audit memos. (i) (ii) (eneral nature (Applicable to all) 1ractical nature (li!e for )ousing agriculture, etc.)

Multi St"te C & ,er"ti1e S cieties Act4 2552

Boo9s of *?c: =.r.t : (i) All sum of money received ' e&pended ' matters of receipt # e&ps. (ii) All sale ' 1urchase of goods. (iii) All assets ' liabilities. (iv) <or M2C-2 engaged in production, processing ' manufacturing their, utili?ation of materials or labour or other items of cost as may be specified in by*laws of society. Iualification of *uditors (Sec. !#): A chartered accountant under CA Act, =F=./is%ualification: (i) 8ody corporate. (ii) -fficer # 9mployee of M2C-2. (iii) 1artner # 9mployee of -fficer # 9mployee of M2C-2. (iv) Indebted # (uarantor for amount L ;;;#* *ppointed of auditors (Sec. !>): (i) <irst auditor by board within one month of registration date to hold office until conclusion of st A(M. It board fails then in general meeting. (ii) 2ubse%uent auditor at each A(M to hold office from conclusion of that meeting until conclusion of ne&t A(M. o=er K 6uties of *uditors (Sec. !,): 4ight to access at all times to boo!s, A#C 5 ' Douchers to re%uire information ' e&planation from employee # officers etc.

Followin" inquiries s$all be made ?+@ 89:A (i) 7oans ' advances made by M2C-2 on basis of security, properly secured ' whether terms aren$t pre+udicial to interest of M2C-2 # members. (ii) .ransaction of M2C-2 represented merely by boo! entries are not pre+udicial to interest. (iii) 3hether personal 9&ps. have been charged to revenue. (iv) In case it is stated in 8oo!s of M2C-2 that any shares have been alloted for cash whether cash actually been received ' if no cash has been so received, whether positions stated in boo!s ' 8#s are correct ' not misleading. 0ontents of *uditors report (Sec. !,): .o member of M2C-2: Sec !, (,): (i) 8#s. .rue ' fair view of sate of affairs ' (ii) 1'7 A#c. .rue ' fair view of 1rofit or 7oss: Sec !, (%): (i) 3hether obtained all information ' e&planation EEEEEE

'!

(ii)

3hether, proper boo!s of A#c !ept by M2C-2 ' proper returns received from branches EEE. (iii) 3hether report on A#c of any branch office forwarded to him ' how he dealt with the same EE.. (iv) 3hether M2C-2$s 8#s ' 1'7 A#c are in agreement with the boo!s of account ' return. 3here any matters aforesaid are in negative reasons. Special *udit of MS0OS (Sec. !!) In case Central (overnment or 2tate (overnment either alone or both hold 5 G or more of paid*up share cap. In such M2C-2. Central (overnment may direct either a C.A or M2C-2$s auditor to conducts special audit ' ma!e a report to it. Cases for special audit: (i) Central (overnment is of opinion that affairs of M2C-2 aren$t being managed in accordance with self help ' Co*operative principles or sound business principles or: (ii) M2C-2 managed in manner li!ely to cause serious in+ury # damage to interest of trade # industry or business to which it pertains or (iii) .hat the financial position of any M2C-2 is such as to endeager its solvency. Auditor has same powers ' duties as in 2ec. K:. -n receipt of report of special audit, Central (overnment may ta!e such action as it considers necessary. /nBuiry by 0entral Registrar (Sec. !") Central 4egistrar may: (i) -n re%uest from federal co*operation to which M2C-2 is affiliated or (ii) A creditor or (iii) At least #: of member of board or (iv) At least #5 of total member of M2C-2 holds an en%uiry or direct some person to en%uire into constitutions, wor!ing ' financial condition of M2C-2. )owever before in%uiry, 5 days notice to be given to M2C-2. Central 4egistrar or person authorised, shall have following powers: (i) <ree access to boo!s # A#c # Cash # 1roperties in custody of M2C-2 ' summon any person to produce the same at any place specified by him. (ii) 4e%uire the officer to call A(M by giving notice of at least K days or if officers fail # refuses, he may call it himself. (iii) 2ummon any person having !nowledge to appear before him ' e&amine him on oath. Central 4egistrar with : months of receipt of report communicate the report of en%uiry to society, <I ' to person at whose instance it is needed. /nspection of MS0OS (Sec. !D) Central 4egistrar may EEEE (re%uired by same as in case of in%uiry) 1owers: (i) Access to boo!s # sec EEEE. In event of serious irregularity, ta!e them into custody, verify the cash balance of society ' sub+ect to permission of Central 4egistrar call a meeting, if necessary. (ii) 9very officer # member shall furnish information w.r.t. wor!ing of society as re%uired by Central 4egistrar. Copy of report within : months communicated to M2C-2.

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*56/. O' M5.5*2 '5&6S Auditor to be appointed by trustees. 4eport also forwarded to trustees. 9very asset, Management Company to !eep proper boo!s of accounts, records, etc. for each scheme. *udit Report : (i) -btained all information and e&planation. (ii) 8alance 2heet and 4evenue Accounts H .rue and fair view. (iii) Accounts prepared in accordance with 6inth 2chedule. /nspection and *udit : 298I may appoint one or more persons as inspectin" officer for following purposes : (i) 8oo!s of accounts maintained by Mutual <unds (ii) 1rovision of Act complied with. (iii) 2ystem procedures are ade%uate. (iv) 1rovision of Act or rules violated. (v) Investigate into complaints. (vi) Affairs are in interest of investors. ReBuire(ent of &inth schedule (Mutual funds) (i) Mar! all investments to mar!et. .hus carry investments in 8#s at MD. (ii) /ividend # 8onus to be recogni?ed on the date when share is %uoted on 9&*div # 9&*8onus basis on 2#9. ' not on date of declaration. (iii) <or interest bearing investments, interest income must be accrued on a day*to*day basis. (iv) <or determine holding cost of investment, BAverage Cost$ method is to be followed. (v) .ransaction of purchase # sale of investment to be recogni?ed as of trade date ' not as of settlement date. (vi) 3here interest on investment has been accrued ' hasn$t been received for " months beyond due date, provision, is to be made for income as accrued ' no further accrual is made for such investment. (vii) <or open ended scheme, difference between 21 ' <D of unit should be credited # debited to reserve. <D being credited to capital A#c. also treatment of e%uali?ation A#c is to be ta!en care of. (viii) <ore close*ended scheme, the par value of unit has to be ad+usted to capital A#c ' difference should be to reserves. (i&) Cost of I should include bro!erage, stamp ' any other direct charge. (&) 0nderwriting commission is recogni?ed only if there is no development on the scheme. 3here there is development, the full commission received should be reduced from the cost of investments. 3eneral clarification 0lose Ended $. -pen only for specified period say F5 days in which public may subscribe. #. .raded in stoc! e&change. ,. /aily 6AD %. 6o such account Open Ended $. -pen every time. Any one can subscribe them any time #. 8ought ' sold by M.< itself ,. 3ee!ly 6AD. %. 9%ualisation A#c

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*56/. O' 6E OS/.OR/ES .o maintain following records and documents : (i) 4ecord of sec. /emateriali?ed#re*materiali?ed. (ii) .ransferor, transferee and date of transfer. (iii) 4egister of beneficial owner (8.-.). (iv) Instruction received. (v) Approval notice, cancellation or pledge. (vi) /etails of participants. (vii) /etails of securities eligible for /9MA.. (viii) -ther specified by board. Intimate 298I the place of maintaining records and documents. 1reserve for minimum 5 years. If !ept electronically, ensure integrity of system and precaution. 298I may appoint one#more inspecting officer for following purposes : (i) 9nsure that boo!s of accounts maintained by depository, participants, or agents. (ii) 7oo! into complaints. (iii) 3hether provision of Act, 8ye*7aws, etc. being complied with. (iv) 3hether system, procedures followed. (v) Affairs conducted in interest of investors or securities mar!et. 9very issuer shall submit on a %uarter basis, the details of changes in share capital during the %uarter to the concerned stoc! e&change. It should be audited by a %ualified Chartered Accountant or a practicing Company 2ecretary. It is submitted for the purpose of reconciliation of total issued capital, listed capital and capital held by the depositories in /9MA. form. It should also contain an updated status of register of members of issuer. <urther, the issuer shall immediately bring to the notice of the depositories and the stoc! e&changes, any differences observed in its issued, listed and the capital held by depositories in demateriali?ed form.

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*56/. O' /&6/RE0. .*G Conducted on behalf of (overnment. <or detecting and preventing ta& evasion. It is for use for * 3overn(ent /ndustry K Service 0onsu(ers providers (i) Increased 4evenue (i) awareness of changes (i) 8etter .a& compliance with reduced ta& rates (ii) 7ess cost of administration (ii) .a& planning (ii) <aith of general public (iii) Complete self*assessment (iii)Corporate governance (iv) .a& awareness (iv) (ood internal controls (v) 8roader .a& 8ase Methodology : 9valuation of Internal Control. Information (historical) of the company. Audit planning by audit team. Conduct of Audit 4eport on Indirect ta& audit.

S0O E O' /&6/RE0. .*G *56/. 6on*availment of short#e&cess availment of 9&port Incentives. (oods imported duty with free or payment at concessional rates, sub+ect to conditions classified incorrectly or without complying with the conditions. .ransfer 1ricing issues. Applicability of central e&cise and availability of e&emption on the activity and the products. .he valuation of goods not removed in normal course using valuation methods not in line with the central e&cise valuation rules. .he utili?ation of goods procured on concessional duty for specific uses#for genral uses. .he availing of inadmissible cenvat credit and mis*utilisation of credit. .he passing on of duty suffered on imported goods and of locally manufactured goods in e&cess of actuals. .he structural rigidity built into the method of production or mar!eting and distribution. .he authori?ation levels of the indirect ta& function, not specifically set out in line with general authori?ation for the organi?ation. 1rocedural non compliance which could lead to demands and losing of benefits. .he liability under service ta& on services provided being ignored.

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EG0/SE *56/. #>>> (i) All assesses paying duty L cr. p.a. (ii) ; la!hs Q duty Q crore. once in two years. (iii) /uty Q ; la!hs Ma&imum ";G of units on rotation basis. RO0E65RE O' EG0/SE *56/. #>>> Selection of *ssessee 4is! factor. If bad trac! record then high priority. 6es9 Revie= gather in formation about the assessee without interacting 6ocu(enting /nfor(ation %uestionnaire .ouring Disit the units of assessee to actual running. *udit lan list vulnerable areas, dynamic plan. 4erification conduct of actual audit on a scheduled date. *udit ob8ection and *udit ara if short#non payment. /iscuss with assessee . Ma!e ob+ection but not of mere procedural lapse. *udit Report )e ma!es draft report. /iscuss with superior officers. .hen finalise. 9&cise Audit ";;; good and participative audit. Auditor must be thorough about laws and having good accounts bac!ground.

(#

E&ER3A *56/. Activity that serves the purposes of assessing energy use pattern of a factory or energy consuming, e%uipment and identifying energy saving opportunities. 9nergy Auditors to give recommendation. <unction of energy Auditor : (i) Auantify energy cost and %uantity. (ii) Correlate production to energy cost. (iii) 9nergy database format. (iv) Compliance of organi?ation for policy aspect. (v) )ighlight areas needing attention. (vi) Conduct preliminary and detailed energy audits. (a) /ata collection and analysis (b) Measurements, mass and energy balances (c) 4eviewing energy procurement practices. (d) Identification of energy efficiency pro+ects and techno*economic evaluation. (e) 9stablishing action plan including energy saving targets, staffing (f) 4ecommendations on goal setting. Audit team to have representation from various sections. A standard of energy#p.u. to be derived then compared with actuals. Methodology to Energy *uditing a. reli(inary Energy *udit : ( ) It typically involves two or three days of plan visit. (") It is also referred to as wal!*through audit. (:) -ne may rely on data supplied by the unit or personally read from meters installed in the industry. (F) In many instances, the meters installed in the industry do not show accurate reading. (5) Ideally, the energy auditor must carry proper portable instruments and ma!e recommendations.

b. 6etailed Energy audit : ( ) It goes much beyond the %uantitative estimates of cost and savings. (") .he scope of the audit assignment is discussed in detail with the plant personnel. (:) .he study involves details e&amination of ma+or energy consuming e%uipment. (F) .he study proposes specific pro+ects#feasibility study for replacement proposals, providing a cost*benefit analysis of the recommended measures.

(1

E&4/RO&ME&.*2 *56/./&3 /isclosure of environmentally related data regarding environmental ris!s its impact, policy target, cost and performance, etc. to interested parties. Multi*disciplinary thus conducted by a team of e&perts from various disciplines. Mainly for Internal use. 9nvironmental Impact Assessment (9IA) is a pre*re%uisite to start an industry which forecast the e&pected damage to the environment and means re%uired to mitigate the damage. Its ob+ective is to evaluate the efficiency of the utili?ation of resources and identifying the areas of ris!s and to control the generation of pollutants and waste, etc. <ollowing aspects should be considered : ". ?a1out and desi*n : Ade%uate provision for pollution control measures, etc. :. @ana*e#ent o$ resources : It should be used in such a manner to produce best output and minimum waste. F. Pollution Control S1ste# : It should be in e&istence. 5. !nviron#ent Sa$et1 @easures : li!e emergency plans, aware, etc. to meet the contingency. J. @edical E -ealth care $acilities : 4egarding wor!ers. K. Industrial -1*iene : >. =ccu ational health : According to type of industry. =. In$or#ation Assi#ilation and )e ortin* S1ste# : Authorities and responsibilities should be clearly defined. ;. !IA @ethodolo*1 : /egradation of 9nvironment and mitigatory measures should be suggested. . Co# liance to )e*ulator1 @echanis# : .o avoid penalty, etc. ". Concern $or the societ1 :
. 6ame, address, etc. ". /ate of last 9A4 submitted :. Consumption of input during current and previous year. F. 1ollution generated and types. 5. J. K. >.

AUDIT REPORT FORMAT (eneration of ha?ardous waste in current and previous year. %uantity of sold waste. /isposal practice for waste. 1ractice for conservation of natural resources

=. Additional proposal for environmental protection.

(2

PEER RE6EI*
In March ";;", .o assure that profession is conscious of its responsibilities and strive its best to ensure that highest standards are observed by all practicing members rendering audit and attestation services to the society. In involve e&amination of the systems and procedures of the 10. .o ensure that in professional assignments, the member of ICAI. (a) Comply with technical standard, and (b) )ave proper system to maintain %uality of wor!. PEER RE6IE*

Stage;$

2*&&/&3

Stage;//

EGE05./O&

Stage;///

RE OR./&3

$. !# anel#ent o$ $. Initial #eetin*: between $. reli(inary Report of )evie&ers: .he reviewer reviewer ' 10 to confirm the Revie=er: At end of review should be member of ICAI accuracy of responses to the preliminary report to 10 having at least ; years %uestionnaire. (before any report to 8oard) audit e&perience in case its system ' (cumulative) ' currently in #. Co# liance )evie&: that is procedure found to be independence, maintenance practice. deficient or where non* of professional s!ills and compliance has been #. Inti#ation to ractice unit: standard consultation, staff noticed. 6o preliminary In writing information of its selection ' supervision ' report otherwise. 4eport on selection for pear review office administration to latter head dated and alongwith a panel of : understand wor!ing and reviewers signature, reviewers ' a copy of the control procedures of 10. membership no. ' reviewers %uestionnaire. code no. ,. Selection o$ Attestation ,. Initial co##unication (1 services !n*a*e#ents: )e #. )e l1 to Preli#inar1 P0 : Choice of reviewer to may modify his initial sample )e ort: In writing within " board within 5 days from selected for review in days from receipt of the receipt of information . consultation with the 10 at preliminary report from 3ithin month of receipt of e&ecutions stage. reviewers. intimation, send completed o$ )ecords: ,. Interi# %uestionnaire along with %. )evie& )e ort o$ Co# liance E su(stantive complete list of client. )evie&er: If reviewer not a roach: Compliance satisfied with reply, interim %. Selection o$ sa# le procedure to !now report to 8oard. .he 8oard Attestation service worthwhile ness of IC. .hen recommend to 10 ' instruct en*a*e#ent: 4andom he decided whether to rely on the reviewer to carry out basis for review. IC or not. In case of rely, his review again after J months 6.9 of sub procedure will be to verify whether systems -. Con$ir#ation o$ visit: less e&tensive ' vice*versa. 'd procedures have been

("

4eviewer in consultation with 10 fi& the dates for on site review to complete the peer review process in the four months of receipt of initial intimation to 10.

Compliance procedure not modified appropriately. necessary if si?e of firm is small# medium. )e may %. Final )e ort o$ )evie&s: If reviewer is satisfied with adopt only sub procedure. reply of 10. <inal report should incorporate the findings.

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0lause %D of listing agree(ent (0orporate 3overnance) It is the system by which companies are directed and controlled by the management in the best interest of the sta!eholders and other ensuring greater transparency and better and timely reporting (financial). 9ntity re%uired to obtain a certificate from auditors for compliance of conditions of corporate governance. .his certificate to be anne&ed to directors report and also sent to 2.9. along with annual return. . Board of 6irectors: optimum combination of 9/ ' non 9/ with at least 5;G of 8-/ comprising non 9/. If non 9/ chairman At least #: of 8oard comprise of independent directors else at least V of 8oard comprise of independent directors. Independent director is a non*9/, who fulfills all the following conditions * (i) )e shouldn$t have (apart from receiving managerial remuneration any other material pecuniary relationship # transaction with the co., its promoters. Management # 2ubsidiary which (in +udgment of 8oard) may affect independence of +udgment of 8oard. (ii) 6ot related to promoters or persons occupying management positions at 8oard level or at one level below the 8oard. (iii) 6ot been e&ecutive of co. in proceeding : <.T. (iv) 6ot partner # e&ecutive (this year or 1r. : <.T) of (i) 2tatutory #internal audit firm and (ii) legal # consulting firm having material association with co. (v) 6ot a material supplier, service provider or customer or lesser # lessee of co. (vi) )e is not a substantial shareholder of the company owning "G or more of bloc! of voting shares. Company agrees that all pecuniary relationship # .ransaction of non 9/ vis*W*vis co. shall be disclosed in Annual 4eport. #. *udit 0o((ittee Minimum : members (any director) with "#: independent. All members financially literate. Chairman independent director. Minimum no. of meetings in a year F. one meeting before finalisation of A#c Ma&imum gap between " meetings is F months. Auorum director. " members or #: of members (higher) ' out of which minimum of " independent

Co. secretary shall act as secretary of A.C. A.C. to invite financial e&ecutive of co. in its meeting. )owever, they can meet without his presence too. A.C (i) 3ill maintain laison with Co. ' auditor. Consider: (a) Matter to be included in directors responsibility statement. (b) 4eview functioning of whistle blower mechanism (if any).

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(c) 4eview performance of statutory # internal auditors. AC Mandatorily review (i) Management discussion ' analysis of financial statements. (ii) 2tatement of significant related party transaction. (iii) Management letter # letters of IC wea!nesses issued by statutory auditors. (iv) Internal audit reports relating to internal control wea!nesses. Appointment # 4emoval # .erms of remuneration of chief internal auditor. :. Re(uneration of 6irectors: 4emuneration of non*9/ decided by 8-/, after obtaining prior approval of shareholders. If stoc! option to non*9/. 7imit for ma&imum no. to be granted to non* 9/ in one <.T. ' in aggregate to be disclosed alongwith disclosure of elements of remuneration pac!age. /etails of incentives, service contract in annual report. F. Board procedures: Meeting F times a year with ma&imum gap : months between two meetings. Code of conduct for 8oard # 2enior management laid by 8-/. A director not to be a member in more than ; committees or chairman in more than 5 committees across all companies in which he$s is a director. -. Manage(ent: (a) (b) Management discussion ' analysis report should form part of annual report. /isclosure of all material transaction having personal interest, having potential conflict with interest of the company a large.

J. Shareholder: In case of Appointment # 49*appointment of a directors, shareholders must be provided with its brief resume, nature of this e&pertise ' names of companies in which he holds directorship. (a) (b) (c) 2hareholders: Information li!e %uarterly results to be put on companies web*site or on 2.9$s site. 2hareholders: 8oard committee under chairmanship of non*9./ to loo! into redressing of shareholders ' investors complaints. 2hareholders: .o e&pedite the process of share transfer this wor! to be delegated to an officer or share transfer agent.

!. Subsidiary 0o(pany: At least one independent director of holding company shall be a director in material non* listed Indian subsidiary company. (ii) AC of holding shall review the financial statement (particularly investment) by unlisted subsidiary company. (iii) Minutes of 8oard meeting of unlisted subsidiary company to be placed at board meeting of holding co. ". 6isclosures: (i) (ii) (iii) (iv) (v) (vi) 2tatement on transaction with related parties in ordinary course of bussiness#not in ordinary course of business to be placed before A.C. /etails of transaction with related parties or other not on arms length to be placed before A.C. with management +ustification. <inancial 2tatement to disclose (with management e&planation) A#C treatment difference from A#C standard. 1rocedure to inform 8oard ris! assessment ' its minimi?ation procedures. Company to disclose Audit Committee (%uarterly) use of funds raised through issue. Criteria for ma!ing payment to non*9/. (i)

=. 0EO ? 0'O 0ertification : .he C9- and the C<- or any other person heading the finance function discharging that function shall certify to the 8oard that :

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(a) .hey have reviewed financial statements and the cash flow statement for the year and that to the best of their !nowledge and belief : i) these statements do not contain any materially untrue statement or omit any material fact. ii) .hese statements together present a true and fair view of the company$s affairs. (b) .here are no transactions entered that are fraudulent, illegal and violative of the company$s code of conduct. (c) .hey accept responsibility for establishing and maintaining internal controls. (d) .hey have indicated to the auditors and the Audit committee i. 2ignificant changes in internal control during the year, ii. 2ignificant changes in accounting policies during the year. iii. Instances of significant fraud. $>. Report on 0orporate 3overnance : .here shall be separate section on Corporate (overnance in the Annual 4eports of company with a detailed compliance report on Corporate (overnance. . 0o(pliance : .he company shall obtain a certificate either from the auditors or practicing company secretaries regarding compliance of conditions of corporate governance. 0lause %D of 2isting *gree(ent . (a) <or entities see!ing listing for the first time, at the time of see!ing in principle approval for such listing. Section #D#* of the 0o(panies *ct7 $D-C 9very public company having minimum paid up capital of rupees five crore, shall constitute an audit committee immediately on the enactment of Companies (Amendment) Act, ";;;. i.e., with effect from /ecember :, ";;;

(b) <or e&isting listed entities which were re%uired to comply with Clause F= which is being revised, i.e., those having a paid up share capital of 4s.: crores and above or net worth of 4s."5 crores or more at any time in the history of the company, by April , ";;5. ". .he audit committee having minimum three directors as member. .wo thirds of the members of audit committee shall be independent directors. :. the Chairman of the Audit Committee shall be an independent director F. A representative of the e&ternal auditor, when re%uired shall be present as an invitee for the meetings of the Audit Committee

.he audit committee shall have minimum three directors of which two*third of the total number of such directors shall be directors other than managing or whole time directors .he members of the Audit Committee shall elect a Chairman for amongst themselves. .he auditors shall attend and participate at meetings of the audit committee.

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AUDITIN% UNDER 6AT

. DA. is a ta& on the value added to the commodity at each stage in production and distribution chain. ". DA. is an indirect ta& on consumption. :. .he total amount of ta&, which is to be collected at the final, or retail point of sale, is collected in instalments. F. Ma+or states who have introduced DA. have generally incorporated audit provisions in their DA. legislation. 5. 2ection J ( ) of the Maharashtra Dalue Added .a& (7evy and Amendment) Act, ";;5, re%uires the dealers, having sales or purchases e&ceeding 4s.F; lacs, to get their accounts audited by a Chartered Accountant. J. .he following steps re%uired to be ta!en by the auditor while auditing under DA.. (a) Bnowled"e of <usiness : .he auditor should refer AA2 H "; BPnowledge of the 8usiness$ issued by ICAI. .he auditor to obtain preliminary !nowledge of the industry and of the nature of ownership, management and operation of the entity to be audited. .he !nowledge of business is important not only to the auditor but also to his staff engaged in the audit. (b) Bnowled"e about t$e CAD .aw and Allied .aws : .he auditor and his staff should obtain a detailed !nowledge of the 2tate DA. law under which the audit is to be conducted. .he auditor should study the DA. law starting from the definition of various terms, the procedure to be adopted. (c) Ascertainin" t$e Ma4or Accountin" 5olicies Adopted b t$e Auditor : .he auditor should !now the ma+or accounting policies based in which, boo!s of accounts have been recorded. (d) 'valuation of #nternal Control : 8efore determining the e&tent of audit chec!s to be applied, i.e. whether to go in*depth or to do only test chec!, the auditor should ascertain whether there is an internal chec! system in operation in the entity. (e) Obtainin" t$e list of all t$e Accountin" &ecord Maintained b t$e Auditor: .he auditor should obtain a complete list of all the accounting records relating to sales#purchase of goods. *56/. RO3R*M i. .he turnover of sales#purchases of goods has been properly determined. .he sales turnover arrived at by applying the generally accepted accounting policies may not be the same as re%uired under the DA. law. ii. .he turnover of purchases should be tested to enable the auditor to get the purchases eligible for grant of input ta& credit segregated from other purchases. iii. .he auditor is e&pected to list out the due dates of filing of returns and find out the reasons for delay in filing the returns, if any. iv. .he auditor should apply tests as will enable him to ascertain whether the auditee is eligible for composition. v. .he auditor may also be e&pected to chec! the consolidation of the returns filed for all the periods covered in the year under audit. vi. .he auditor should chec! whether all the transactions relating to sale and purchase are entered in the boo!s of account and have been ta!en into consideration while filing the returns. *56/. RE OR. 5&6ER .)E 4*. 2*:

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At the end of the audit the auditor has to arrive at his conclusion on the mattes to be reported in the audit report. .he format of the audit report is generally prescribed under the relevant DA. law and the auditor has to fill in all the columns of the audit report that are applicable. )is opinion is on the ade%uacy of accounting records, correctness and completeness and arithmetical consistency of returns filed.

AUDIT OF MEM2ERS OF STOC+ E7C)AN%E

9very active member shall get his accounts audited by a chartered accountant. Company can also become a member of stoc! e&change. 298I may levy monetary fine ' penalties on any person in following cases: (i) (ii) (iii) <ailure to furnish document information etc. re%uired by 8oard <ailure to maintain boo!s of accounts#returns. <ailure by sponsor of any collective investment scheme including M.<. to obtain registration certificate. .o comply with terms of such certificate, to dispatch unite certificate, to refund application money, to invest money in desired manner ' in specified securities. <ailure to Issue contract notes in form re%uired, to deliver security, ma!e payment to client, charging e&cess bro!erage.

(iv)

(v) <ailure to enter into agreement with client. (vi) 1erson dealing#communicating on basis of price sensitive information. (vii) <ailure to disclose aggregate of shareholding in body corporate before ac%uiring furthers share ' to ma!e public announcement to ac%uire share at minimum price in case of ta!eovers.

8usiness at 2.9. can be transacted only by its members. .hey enter into transaction either on their own behalf or their clients or sub*bro!ers.

MAR%IN . /ue to wide fluctuations in prices of securities over a period of time, the e&change levies margin on its members. ". .his certain deposit is to be !ept with e&change by its members. :. .his mechanism is adopted, in order to restrict e&cessive speculations and safeguard the interest of the investors. F. .he members are re%uired to collect margins from their clients and deposit it with the clearing house of e&change. 5. .he three types of margins are H $. 4olatility Margin : (a) .he volatility margin is imposed to curb e&cessive volatility in the securities. (b) It is also used to prevent building up of e&cessive outstanding positions. (c) .his margin is calculated at the discretion of stoc! e&change to charge margin on any particular security because of its volatile nature, on specific percentage. #. 3ross Exposure Margin : (a) It is the percentage of net cumulative outstanding position in each security that the member should !eep with the e&change at all times.

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(b) .his margin is calculated on continuous basis. (c) .his margin is to be !ept with stoc! e&change in advance. (d) (ross e&posure is calculated on all securities unli!e volatility margin which is on any specific security. ,. Mar9 to Mar9et Margin : (a) .his margin is imposed to cover a loss that a member may incur in case the transaction is closed out at the closing price of the trading day, which is different from the price at which the transaction has been entered into. (b) It is the notional loss if net cumulative outstanding position in all the securities were closed out at closing price of relevant transaction date, for a specific member. .A ES O' M*REE. .here are four types of mar!et. I. &or(al Mar9et 1 All orders which are of the regular lot si?e or multiples thereof are traded in the 6ormal Mar!et. <or /*mat shares, lot si?e is share.

II. Odd lot Mar9et 1 An order is called an odd lot order if the order si?e is less than the regular lot si?e, such orders are traded in the odd lot mar!et. 8ut for order matching both price ' %uantity should tally with each other. III. Spot Mar9et 1 in all respects spot orders are similar to the normal mar!et orders e&cept that spot orders have different settlement periods vis*W*vis normal orders. 1ay in pay out ta!es place on the same day. ID. *uction Mar9et 1 2toc! e&change on behalf of their members initiate auctions to purchase from the mar!et, the number of shares short deposited by the members. In this way, they complete the settlement process. 7oss is recovered from members but profit it any deposited to investors education ' protection fund. .A ES O' OR6ER BOOES As has been e&plained above, a member has various options regarding the type of order he wants to place. 3hen an order is received it is given a uni%ue number and a uni%ue time stamp. In case, an order could not be matched, then they are stored in a different boo! in price H time priority in the following se%uence. 8est price 3ithin price, by time priority. .hus when two orders are entered at the same time the one with a better price gets priority. 2imilarly, incase two orders were entered at the same price, the one which was entered earlier gets priority. .he follo=ing types of boo9s are (aintained in the 0apital Mar9et i. Regular 2ot Boo9 1 .his boo! contains only regular lot orders and order do not have any of the following attributes attached to them. All or 6on (A-6) Minimum fill (M<) 2top 7oss (27) ii. Special .er( Boo9 1 All the orders, which have any of the following attributes, are recorded in this boo!. .hey are H All or 6-6 (A-6) Minimum <ill (M<) iii. Stop;2oss Boo9 1

2top loss orders are stored in this boo! till the trigger price is reached or surpassed. 3hen the trigger price is reached or surpassed, the order is released in the regular lot boo!. .he stop loss conditions are met under the following circumstances.
)#

Buy order 1 a buy order in the stop loss boo! gets triggered when the last traded price in the normal mar!et reaches or e&ceeds the trigger price of the order. Sell order 1 a sell order in a stop loss boo! gets triggered when the last traded prices in the regular mar!et reaches or falls below the trigger price of the order.

iv. Odd 2ot Boo9 1 .he odd lot boo! contains all orders with lot si?e lesser than the mar!etable lot. v. Spot Boo9 1 .he spot boo! contains all orders having different settlement periods only. .he system attempts to match an active spot order with a passive spot order in the boo!. vi. *uction Boo9 1 Auction 8oo! contains orders that are entered for all auctions. OR6ER M*.0)/&3 R52ES (i) .he best buy*order is matched with the best sell order. (ii) It is obvious that a seller would li!e to sell at the highest available price. (iii) .hus, the best buy*order is the one with the highest price. (iv) At the same time, a buyer would li!e to buy at the lowest available price. (v) .hus the best sell*order is the one with the lowest price. (vi) .hus the trading system tries to find for the seller the best possible buying price and the best possible selling price for the buyer. Order Matching Rule
Buy Ity rice 5;; :>.=; F;; :> ;; :K ;;; :J :;; :5.5; Best price (Buy) highest Sell Ity rice ";; := 5;; F; K;; F ";; F .5; ;;; F" Best sell (lo=est price)

(vii) -rders that match with other orders are called Bactive$ orders while those, which do not match, are called Bpassive$ orders. (viii) .he system always matches orders with passive orders in order to clear earlier orders on priority basis. Order conditions : .he order matching conditions fall into three categories i. .ime 4elated conditions ii. 1rice related conditions iii. Auantity related conditions i. .i(e Related 0onditions a. 6ay order 1 A day order is valid only for the day on which it is entered. It gets automatically cancelled if not matched by the end of the day. b. 3ood till cancelled order 1 A (.C order remains in the system until it is cancelled by the trading member. .he ma&imum number of days for which a (.C order is valid is notified by the concerned stoc! e&change. c. 3ood .ill 6ays?6ate order (3.6) 1 In such orders the trading member specifies the days # date upto which the order shall remain valid. .he stoc! e&changes specify the ma&imum permissible term of such orders. d. /((ediate or 0ancel orders (/O0) 1 An I-C order allows a member to buy or sell a security as soon as the order is released into the system, failing which the order is cancelled. If it is partially matched remaining %uantity is automatically cancelled. rice Related 0onditions a. 2i(it rice order 1 An order where the trader specifies his offer price is called a limit price order. 8uyer H Ma& price upto which he is willing to pay. 2eller H Minimum price is which he ready to sell.

ii.

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b. Mar9et price order 1 An order t buy and sell securities at the best mar!et price at the time of placing the order. c. Stop loss price order 1 2top loss price orders get activated when the mar!et price reaches or crosses a threshold price specified in the order 8refer stop loss boo3:. iii. Iuantity Related conditions a. 6isclosed Iuantity Order (6I) 1 A /A order allows a trading member to disclose only part of the order %uantity to be displayed. <or e&ample in a buy order for 5;; units only ;; units will be disclosed, when these are purchased the buy order for the ne&t ;; units are disclosed to the mar!et. b. Mini(u( fill orders (M') 1 Minimum fill orders allow the members to specify the minimum %uantity by which an order should be filled. c. *ll or &one order (*O&) 1 All or none orders allow the members. 1ut the order into mar!et with the condition that only whole %uantity should be matched. d. Short Sell 1 .he seller sells the shares even if he doesn$t own then. .hese are speculative order (for bear). In this case, the orderer anticipates a decline in the price of shares. )owever, it is ris!y as he has to s%uare up the transaction within the day. SE..2EME&. SAS.EM *. S.O0E;EG0)*&3ES .here are two types of settlement systems that can be adopted in stoc! e&changes H Accounting period system and rolling settlement system. 6ow*a*days, stoc! e&change in India adopts rolling settlement only. a. *ccounting period settle(ent syste(s ; .here is a predetermined period of usually K H " days, over which total trades are aggregated. Cumulative net obligations of each member are calculated on last day of cycle. It is more speculative than the rolling settlements. It may lead to payment crisis in case of wide fluctuations in the mar!et. b. Rolling Settle(ent 9ach day constitutes an accounting period and that days traders are settled after " H : days. (. S :) rolling settlement was in operation in India upto : to C.S"@ rolling settlement system from st April, ";;:.
st

March, ";;:, which was switched on

.rades o#s at end of day are to be settled with BU$ business day form transaction. .S", transaction on Monday pay in ' pay out ta!es place on 3ednesday. .rades on each single day settled separately from trades done earlier or subse%uent trade days. 6etting of trades is done only for the day ' not for multiple days (as earlier in settlement period). It adopts DA4 (Dalue at 4is!) based margining approach. If member fails to deliver shares sold the e&change conducts an auction session on .S: to meet short fall due to non*delivery.

6erivatives

It has two mechanism futures ' options. Contracts are available for trading with one months ' three months e&piry. .M (.rading member) ' CM (Clearing member) CM H (i) .M H CM (8oth) (ii) 1CM (professional CM)

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1remium is paid on entering each option. .rading in inde& options also available.

*56/. O' *00O5&. All active members of stoc! e&changes are re%uired to get their accounts audited by a Chartered Accountant. Active member is any member who has conducted business in securities even for a single day in the year. Boo9s of *ccounts and other 6ocu(ents Sub8ected to *udit A member holding membership of many stoc! e&changes or different segments of same e&change (derivatives#capital mar!et segment), he has to maintain separate records and documents with respect to each e&change or each segment. A member of the e&change is re%uired to maintain the following boo!s of accounts H 4egister of transactions # 2auda 8oo! Clients ledger (eneral ledger Iournal 4egister Cash 8oo! 8an! pass boo! /ocuments (received # delivered) register Members contract boo! showing details of all contracts entered into by him with other members of the same e&change. Counterfoils or duplicates of contract notes issued to clients. 3ritten consent of clients to the contracts entered into as principals. Margin deposit boo!. 4egister of accounts of sub bro!ers. Copies of agreements with sub*bro!ers. Copies of margin statements down loaded from the e&change. /etails of spot delivery transactions. Clients database and member client agreement. Copy of registration certificate of each sub*bro!er. Copy of the power of attorney # board resolution authori?ing the directors # employees to sign the contract notes. Copies of pool account statements. *udit rocedures . 6aily .ransactions 2ist (Sauda Boo9) .his is the basis record maintained by the member containing details of all transactions entered by them on a daily basis. It contains information on 6ame of the client 2ecurities traded on behalf of client 4ate and %uantity of securities bought and sold. /aily transaction register contains a record of all the following categories of transactions i. Member$s own business on the e&change ii. Member$s business on behalf of his clients iii. Member$s business with his clients on a principal to principal basis iv. Member$s own business with member$s of other stoc! e&changes v. Member$s business on behalf of his clients with members of other stoc! e&changes vi. 2pot transactions

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". 0ontract &otes 9very member of the stoc! e&change has to issue contract notes to its clients for all business e&ecuted on their behalf within "F hours of the e&ecution. In reference to contact notes, the auditor should ensure that i. Contract notes are serially numbered ii. .hese are in the format prescribed by relevant e&change. iii. 8ro!erage has been charged within specified limits and shown separately iv. -rdering time should be reflected on contract notes along with the time of e&ecution of order. v. Member#authori?ed signatory should sign contract notes. vi. 8ro!erage, 2ervice ta& ' security transactions ta& shown separately. :. 0lient bills (i) client during a period. (ii) (iii) It contain summary of all trades e&ecuted on behalf of the It shows the net amount receivable from or due to the client. .he auditor should ensure their proper postings.

F. 0lients ledger It contains transactions with each client. .he auditor should e&amine i. .ransactions remaining unsettled for a long time. ii. 3hether amounts received from clients is consistently different from the contract bills. iii. .hat amounts received or paid as loans or deposits have not been passed through clients ledger. iv. Confirmation of balances received from clients of the member.

5. Settle(ent ? 4allan control account (a) the e&change or clearing house. (b) nil after settlement. (c)

It shows the net amount receivable from or payable to .he auditor should verify that balance in this account is If not reconciliation should be obtained.

J. Margin 6eposit Boo9 It records the margin deposited by the member with the Clearing house. .he auditor should chec! i. 3hether margin has been in accordance with 298I guidelines. ii. .he margin statement downloaded from the stoc! e&change # clearing member should be verified. iii.3hether margins have been properly calculated, collected and paid iv.Any e&emptions from deposit of margin for particular trades available to the members K. Me(ber+s o=n .rading *ccount (a) .he auditor should verify the entries with the bills raised for trading on own account. (b) )e should also ensure that there is a proper system for revenue recognition and closing stoc! from such transactions. (c) 6o bro!erage is charged on this account. >. Ban9 boo9 .he member holds a fiduciary position in the security trading system and hence certain restrictions are imposed on the operation of the ban! account in respect of his clients. According to these restrictions H

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*. 6o money be paid into clients account other than i. Money held or received from clients ii. Money for replacement of withdrawal by accident from such account. 0. 6o money can be paid from clients account other than (i) 2ettlement with the client (ii) 1ayment to clearing house on behalf of client (iii) Money for replacement of deposit by accident into such account. =. 6ocu(ents Register ? (/n=ard ? Out=ard) Register It contains particulars of securities including their distinctive numbers received from or delivered to the client in physical form. 3ith regard to documents register, the auditor should chec! i. 8alance of stoc! as shown in deposit register segregated into client stoc! and own stoc!. ii. .he reasons for client$s stoc! remaining with the member for a long time. iii. .he auditor should also physically verify the stoc!s. ;. 6e(aterialiHed securities (a) 6ow*a*days, most of the securities have been converted into demateriali?ed form because of benefits of electronic trading system. (b) 0nder this system, each member has to maintain two demat accounts. (c) -ne of these is used to hold its own securities and !nown as C8eneficiary Account@. (d) .he other one, B1ool Account$, is meant for trades e&ecuted on behalf of clients. (e) .he securities meant for sale are transferred to the B1ool Account$ from where these are given to the clearing house on the relevant pay in day. (f) .he audit procedures should include i. whether securities received n pool account have been transferred to client$s /emat Account within F> hours. ii. 4easons for holding a particular security in pool account for an unreasonable time. iii. 9nsuring that securities lying in pool account have not been used to settle member$s own trade obligations. *udit Report: (i) 3e have audited 8#s ' 1'7 a#c of .......... (ii) -btained all information ' e&planation (iii) 1roper boo!s of a#c ' records specified by securities contracts (regulation) rules are !ept. (iv) 8ro!er complied with re%uirement of e&change . 2o for as they relate to maintenance of a#c ' was regular in submitting re%. information to 2.9. (v) In our opinion ' to best of our information ... (true). Matters to be considered by SEB/ =hile granting registration to a prospective stoc9bro9er: . Is eligible to be admitted. ". )as necessary infrastructure. :. )as past e&perience in business of securities. F. Is not sub+ected to in disciplinary proceedings by stoc! e&change. )it or ta9e orders (i) .hese are a variations of mar!et orders. (ii) <aster order e&ecution. (iii) <or the %uantity specified, the system attaches the counter touchline price to it. (iv) .he order will be matched while all une&ecuted orders of this type are automatically !illed. Bought out deals (i) Companies may place its e%uity intended to be offered to be public with a sponsor member at a mutually agreed price through the Concept of 8ought out deal.

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(ii) .hus after buying out the total e%uity. 2ponsor member would sell the shares of the company to the public through Coffer for sale@. (iii) It ensures faster availability of funds to the company for timely completion of its pro+ects and also a listed status on a later date. 0ircuit Brea9ers Individual security wise $. /n securities: (a) (b) (c) (d) .o curb e&cessive volatility. May be "G, 5G, ;G or ";G based upon categories of shares. It is calculated w.r.f closing price of previous trading day. <or e&ample, if on :*;J*";;5 the closing rate of A<.9C I6<-2T2 is 4s. ;; the price band in case of ";G circuit brea!er is >; (7ower free?e)and "; (upper free?e). Mar!et wide

#. Mar9et =ide 0.B. (a) 3.e.f ;"*;K*";; . (b) : stages of inde& movement ;G, 5G and ";G (c) It brings about trading halt in mar!et nationwide (all mar!ets) (d) .he G are calculated into absolute points of inde& variations on %uarterly basis, based upon closing inde& of last day of trading in a %uarter. (e) 2o far only twice in Indian history (f) Kth May, ";;F ""nd May, ";;J

M 1e.e!t

;G 8efore pm H hour halt H before "::; pm H V )r. halt -n or after "::; H 6o halt 8efore

5G pm H " hour halt hour halt H before " pm H

";G )alt for remainder of the day.

on or after " pm H halt for remainder of day.

/epending upon time of inde& movement ' its percentage trading may be halted for specified time period. 6epositories and 6e(aterialisation : (a) 62/7 ' C/27 !eep record of ownership of securities electronically in boo! entry form. (b) .ransfer of ownership of securities is done by simple account transfers. *dvantage : (I) 7i%uidity of scripts (immediate transfer and register) (II) 4eceive bonus and right as direct credit to A#c. (III) Much lower ris! of bad deliveries. (ID) 2aving of stamp duty.

)%

(D) (DI) (DII) (DIII)

2aving of courier charges. 6o physical certificates (no ris! of getting them misplaced) 4eduction in bro!erage. 9asy settlement with clearing house.

0learing and Settle(ent Mechanis( . the securities pay*in obligations of members are downloaded by the clearing agency. ". .he members ma!e available the re%uired securities in their pool accounts with /epository 1articipants (/1s) by the prescribed pay*in time for securities. :. .he depository runs an electronic file to transfer the securities from the pool accounts of members with /1s to the /1 account of the clearing agency. F. .he securities are transferred on the pay*out day by the depository from the /1 account of the clearing agency to the /1 accounts of members. 5. 2elect ban!s have been empanelled by clearing agency for electronic transfer of funds. J. .he members are informed electronically of their pay*in obligations of funds. K. .he members ma!e available re%uired funds in their accounts with clearing ban!s by prescribed pay*in day. >. 2ame way, funds are transferred on the pay*out day by the clearing ban!s from the account of the clearing agency to the accounts of members.

MANA%EMENT 8 OPERATIONAL AUDIT

M*&*3EME&. *56/. : CM.A. concern itself with whole field of activities of concern, from top to bottom, primarily concerned with whether the general management is functioning smoothly and satisfactorily.@ D.!. &ose
It is audit of mana"ement.

(Management Audit R -p. audit S 4eview of ade%uacy and competence of top management).
1rimary accent is on evaluating managers ability to manage.

Sco e o$ @ana*e#ent Audit . 1urposes of organi?ation. ". Management 2tructure. :. 4eports re%uired by the management. F. Internal controls. 5. 6ature of production of 8usiness. J. 1roduction planning. K. <actory layout, design and installed capacity. >. 1ersonnel policy. =. Material management. ;. 2ales management. . /ecision ma!ing process.

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". 8oo!s and 4ecords. :. <inancial Managements. .hus, management audit includes all the elements of op. audit also. 2eed % >esira(ilit1 o$ @ana*e#ent Audit . 'or detecting and overco(ing current proble(s 1 Managerial problems and related operational difficulties can be spotted before their adverse effects. .his is thus forward loo!ing approach. ". /t is another tool to assist the organiHation in acco(plishing desired ob8ectives 1 Management Audit %uestionnaire pinpoint the important problem areas. .hus corrective actions can be ta!en so that organi?ational ob+ectives can be achieved with utmost efficiency. :. )elpful for ailing industries 1 Management audit is helpful in detecting the problems of such industries and providing the suggestion to improve them. It becomes more important if such industries are to be ta!en over by government etc. F. ublic sector underta9ings 1 In such 120s mostly problems occur because of poor management which may be improved by conducting management audits. =r*anisin* @ana*e#ent Audit ( ) (") (:) (F) (!) (%) /evising statement of policy. 7ocation of audit function within organi?ation or outside Allocation of personnel. 2taff training program. =ime and other aspects. >re3uency. Conductin* @ana*e#ent Audit

(etting facts through interview. Measuring performance through Management Audit %uestionnaire. Concluding it. -ral recommendation for improvement. @ana*e#ent Audit )e orts

( ) =ral )e orts : emergency wants. )owever not considered reliable. 6o permanent record but corrective steps can be ta!en immediately. (") Interi# &ritten re ort : If it is advisable to inform management before regular report for their early consideration. (:) )e*ular &ritten re orts : formal report at end of wor!, may be short or long. (F) Su##ar1 &ritten re ort : EFlas$% reports summari?ing various individual reports. <or top management. Integrated approach. It facilitates management by e&ception because management (top) has not time to go to through those lengthy individual reports. =r*anisation o$ &ritten re ort ($) 'or(at (i) (ii) (iii) (iv) (v) (vi) (vii) : .itle -b+ectives. 2cope. <indings, conclusions and opinions. 4ecommendations. Auditee$s view. 2ummary.

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.ehavioural As ects in @ana*e#ent Audit <inancial auditor deal with figures, Management auditor with people.
Colleagues in own department. 2taff of auditee department .op management.

Causes : ) Staff # line conflict : Management Auditors are staff, thus line unhappy. )easons (i) 6ormally staff has superiority comple& they don$t wonna understand line considering it to be inferior. (ii) 2taff may give irresponsible advice without +udging its feasibility. (iii) 7ine doesn$t co*operate with staff. (iv) 7ine doesn$t provide sufficient information to staff. (v) 7ine doesn$t use staff advice property. (vi) 2taff has fault finding advice. (vii) 2taff doesn$t consider line before advising. 2) 0ontrol : Auditee fear that his actions will have adverse effect on top management. .hey have fear of criticism, fear of changes and punitive actions due to H (i) insensitive audit practices and (ii) )ostile audit style. :) 0hanges : 4esistance to changes. Auditor$s recommendation for changes to which auditee resists. Solution to such ro(le# . ". :. F. 5. J. K. >. <or constructive benefit. Ma&imum service. Minimum interference with regular op. -fficers should be informed and review findings with them before submission of formal management audit report to top management. .rust and friendly atmosphere. Constructive criticism. &eportin" Met$ods : 1articipative. 2uggest with those who have to implement them. 4ight management culture, good auditee and right auditor. +hree cases . Auditor -b+ective Auditee -ffensive Management indifferent. ". Auditor cantan!erous Auditee progressive. Management indifferent. :. Auditor progressive Auditee participative. Management ob+ective.

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Manage(ent *udit ? Operational *udit EMana"ement audit would concern itself with whole field of activities of concern from top to bottom primarily concerned with whether general management is functioning smoothly and satisfactorily.@ 2 ..(. 4ose EOperational Audit is underta!en at the instance of management for providing it with information and appraisal of operations and activities.@ @ana*e#ent Audit Audit of Management 3ider Auality of Managing = erational Audit Audit for management 6arrow Auality of operational effectiveness

.ypes of operational Audit

. 'unctional *udits: <unction are means of categorisation of activities of a business. It deals

with functions of an organisation. <unction audit re%uires specilisation by auditor. <or e.g.:* production, payroll. ". Organisational Audits: .o emphasis how efficiently ' effectively functions interact. :. Special *ssign(ent: At the re%uest of Management <or e.g.:* causes of ineffective I. system.

6ifferences bet=een 'inancial ? Operational *uditing . urpose: opinion on financial information # effectiveness ' efficiency of operations. ". *rea: only financial statements # all activities :. Reporting: to all shareholders, ban!ers # to management. F. End .as9: reporting # suggestions. $. #. ,. %. -. C. !. ". D. 'inancial -pinion on financial information. -nly financial information 4eport to shareholders It ends in report 8y C.A 8y independent Compulsory Tearly -ld concept $ # , % C ! " D Operational -pinion on effectiveness ' efficiency of operation All activities 4eport to management It ends in report including suggestions 8y team of e&pert May be by is house team -ptional It depends Comparatively new approach

2eed $or = erational Audit (ecause < ( ) 9&ecutives no time to collect information and locate problems. 1reoccupied with their own problems. (") Managers generally relied upon. (") Information transmitted by managers biased. (F) Conventional nature of internal audit report and mechanical nature, as it does not provide recommendations. (!) -ther reports (performance) own limitation. (%) -peration of control no idea of environmental condition. 3hereas the operational auditor is always supposed to be open*minded. (') 2urvey costly, time consuming.

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=(Fectives o$ = . Audit . *ppraisal of control H Internal controls provide the essential means to ensure proper performance in each functional or organi?ational area for accomplishing the desired organi?ational ob+ective. -perational auditing deals with the administrative controls and its purpose is to determine whether the controls are ade%uate. ". Evaluation of perfor(ance 1 /uring performance evaluation, an operational auditor is heavily dependent upon availability of acceptable standards. :. *ppraisal of ob8ectives and plans 1 .hough controversial, one school of thought holds that operational auditing can be stretched to evaluate management ob+ectives and plans. If the management policy favours installation of controls, controls would have to stay within the policy frame. .herefore, the basic things that should be evaluated is management policies, plans and ob+ectives. F. *ppraisal of organiHation structure 1 -rganisational structure provides the line of relationship and delegation of authority and tas!s. .his is also another important area for appraisal by the operational auditor.

Internal Auditin* E = erational Auditin* CInternal Auditing is an independent appraisal activity within an organi?ation for review of operation as service to organi?ation.@ #nstitute of #nternal Auditors. N.F.
Aforesaid definition e%uals Internal and -perational Audit. -perational Audit is not different from internal Auditing, it is merely an e(tension of Internal

auditing into operational area.@ >i$$erence (et&een the t&o *.

Cadmus.

erception : .raditionally, Internal auditors appraised financial and A#c. controls. 8ut gradually started covering non*A#c. control as well. )owever, approach is to e&amine the same from monetary point of view only. <or e.g. .o Internal auditor loss of 4s. ,;;; because of wrong totaling is important but for operational one, carrying of maintenance program of machine is more important. .hus, difference in approach. 3hile the Internal auditor$s approach (.raditional) is about monetary # Auantitative terms. -perational Auditor give more importance to the %ualitative aspect ( vi7. attending to customers complaints, etc.).

8. /ssues : According to few, area of operational audit is young while Internal audit is old concept. 9&tension of scope of operational audit to recommendation of specific changes. As per 7indberg ' Cohn, operational auditors shouldn$t involve in installing systems and controls of operational areas whose audit they$re e&pected to perform. 2ame way, as per Institute of Internal Auditors. Internal auditor should also be completely ob+ective in his approach. .hus, we can understand operational audit as an e&tension of internal auditing with definite wor! content stretching beyond traditional field of internal auditors (financial A;c.: 9very aspect of operational audit, however, is towards management policies, management ob+ects and goals only. C. Ob8ectives : operational auditor try to verify fulfillment of plans and other re%uirements and focus on ob+ectives and their achievement. )aving good !nowledge of business aspects. -pen minded, well ac%uainted with performance yard*stic!s, which he apply with suitable ad+ustments. 6ow, the modern definition of Internal auditing is broad enough to embrace the areas covered by operational auditing as well.

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RE4/E: O' SAS.EMS *&6 RO0E65RES S1ste#s 1 2ystem is defined as a set interrelated components which wor! together to accomplish a common ob+ectives. rocedures 1 1rocedures are the means by which policies are implemented. 1rocedures entail the use of documents in accordance with precise instructions or methods to be used. 2tandard procedures facilitate control of business operations. Revie= of Syste(s and rocedures H .he review of systems and procedures is underta!en to improve the methods, to get away from the old ways and traditional routines and to reduce the cost in completing the processing the paper wor! H eliminating waste, duplication and inefficiencies. .he important thing in the evaluation of systems and procedures is to ma!e sure that they are designed to produce the desired results in the conte&t of activities # operation of the organi?ation. All deviations must be called to the attention of different levels of management depending upon the importance of seriousness of deviations. .he evaluation of a system or procedure actually includes three separate considerations. <irst, is the system of procedure meeting all of the current re%uirements X 2econd, is it operating effectively X and third, what is the degree of effectiveness X .o determine whether a system or procedure is meeting current re%uirements, the following among other things, should be considered : i. Is the system or procedure designed to promote achievement of the company$s ob+ectives, and is it accomplished effectively X ii. /oes the system or procedure operate within the framewor! of the organi?ational structureX iii. /oes the system or procedure ade%uately provide methods of control in order to obtain ma&imum performance with the least e&penditure of time and effort X iv. /o the routines designated in the system or procedure indicate performance in logical se%uence X v. /oes the system or procedure provide the means for effective coordination between one department and another X vi. )ave all re%uired functions been established X vii. )as the necessary authority been designated to carry out responsibilities X viii. Can any changes be made to improve effectiveness X Manage(ent *udit Iuestionnaire Manufacturing including urchasing function (i) Manufacturing overview (ii) 1roduction planning (iii) 1roduction (iv) Inventory (v) 1urchasing Mar9eting (i) Mar!eting overview (ii) 2ales (iii) Mar! of research (iv) Advertising (v) 1hysical /istribution ersonnel (i) 1ersonnel overview (ii) Manpower planning (iii) Industrial 4elations

<or each of sub heads following points must be mentioned: (a) 7ong*range plans (b) 2hort or medium range plans (c) -rgani?ational structure (d) 7eadership (e) Communication (f) Control.

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IN6ESTI%ATIONS
/&4ES./3*./O& *&6 *56/. Investigation implies systematic and critical e&amination of accounts and record of a business enterprise for a specific purpose. .he specific purpose may be evaluation of state of affairs or establishing of a fact . ". :. F. 5. J. *56/. (eneral -pinion 6o doubt year 2t. re%uirement C.A /&4ES./3*./O& . 2pecific ". <act :. /oubt F. 6o fi&ed period 5. It depends J. Any person

S.E S /& /&4ES./3*./O& . /etermine scope#ob+ectives of Investigation ". <ormulate Investigation programme. :. 9&amine#2tudy various records. F. Analysis, interpretation of finding 5. 1reparation of report. S ecial Issues in Investi*ation : $. 3hether investigator to underta!e /001 ; 6elective verification : It depends on circumstances. <or cash defalcation ( ;;G) # 1rofitability (selective basis). #. 3hether he can put reliance on audited statements : It depends. If doubt in audited statement, then no reliance but for amount of g#w, he may rely for selective information. ,. <or obtaining opinions of e(perts : (et the written consent of client before referring. %. Case arises out of dispute ; conflictin" claims : )e should be ob+ective and professional. -. &efrain from issuing speculative opinion. C. &efuse to be futuristic. !. 4etain all wor3in" papers. B5S/&ESS /&4ES./3*./O&S C.A. may be re%uested to the study of financial statements and as!ed to report on them. <inancial statements comprise of profit and loss account and balance sheet. )e should ta!e care to consider the following : rofit and 2oss *ccount 1 2tudy or profit and loss account should cover profit statements over a period of 5 H K years in order to cover all possible phases of business cycle. .his will also enable the accountant to establish a trend between various related elements of profit statement.

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1.>e reciation: (i) 3hether ade%uate depreciation has been provided on a consistent basis. (ii) Incase of revaluation of assets, depreciation should be provided on revalued amount and over their estimated useful life. (iii) <or leasehold property, it should be ascertained whether an ade%uate provision has been made for the deterioration charge that may be payable at the end of lease period. 2.+urnover : (i) .urnover of the company should be segregated between various products, types of customers, territory etc. (ii) -rder boo!s should be e&amined to identify and eliminate fictitious entries. (iii) Income and e&penses should be bro!en proportionately between manufacturing and trading operations. 3.3a*e Structure : (i) Method of computing wages and rate of wages should be chec!ed. (ii) Any unusually high wage payment should be analysed. (iii) If the business has suffered labour disturbance in the past then it should be chec!ed whether a long lasting settlement has been reached. 4. @ana*erial re#uneration: (i) Chec! that remuneration payable is not e&cessive (ii) It should be in accordance with the provisions of Companies Act, =5J. (iii) 9ven if no or nominal remuneration has been paid, it should be ad+usted to arrive at true profitability. -. !"ce tional and non4recurrin* ite#s: .hese items disturb the trends of the profits. .herefore, the effect of these items along with their ta& implications should be ad+usted to arrive at maintainable profits. 6. )e airs and @aintenance: (i) Ma+or repairs and over hauling +obs are generally underta!en at any interval of : to F years. It should be ensured that these e&penses have been systematically appropriated over a period of time. ()owever, ta!e care of Accounting 2tandard H "J). (ii) It should be correctly bro!en into capital and revenue e&penses. !. 0nusual 1ear: Investigating accountant should eliminate results of one or more years which disturbs the trend due to e&ceptional factors, while arriving at maintainable profits. Balance Sheet: .he elements of 8alance sheet may be studied as under H $. 'ixed *ssets 1 <i&ed assets may be studied as regards with (i) Age of fi&ed assets in order to determine replacements that may be re%uired in the future. (ii) Incase proper repair and maintenance has not been ensured, a provision for heavy e&penditure on repairs that may be re%uired should be made in the value of the assets. (iii) Incase of revaluation of fi&ed assets, depreciation should be provided on the revalued amount.

#./nvest(ents 1 (i) Current investments should be valued at mar!et price. (ii) 7ong term investments should be valued at cost. )owever, a permanent decline in value should be provided. (iii) 1re*ac%uisition profits should be reduced from cost of investment.

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,. 6ebtors 1 (i) .he bad debts should be ad+usted in the year of sale unless the write off is on account of a slump or fall in international prices. (ii) A study of credit period allowed by a business which shows rise in credit period over the period of investigation is indicative of diminishing sales. (iii) Age H wise classification of debts helps in understanding the nature of customers and wor!ing capital re%uirement of business. %. Stoc9 and =or9 in progress 1 (i) .hese assets should be consistently valued as per generally accepted accounting policies. (ii) /ue allowance for damaged, obsolete and show moving items should be made. -. Other liBuid assets 1 .hese assets include cash in hand and readily reali?able ban! balances. It is prudent to insure cash in hand. C. /dle assets 1 Idle assets may be in the form of unused plant, e&cessive cash holdings or obsolete stoc!s etc. .he investigating accountant should ignore assets from the net worth of the business. 2iabilities:; $. .axation: (i) It should be verified that ade%uate provision for ta& has been made. (ii) Incase there have been reopening of cases in the past, the final liability should ascertained from the order passed by the authority. (iii) Any temporary ta& benefit should be disregarded. #. 0apital (i) .he investigator should ascertain a proper balance between owners and debt capital. A disproportionate ratio can handicap the business. (ii) It should be verified that the capital is reasonable as compared to fi&ed assets and wor!ing capital. .he underlying purpose of conducting such an investigation is to enable the accountant in predicting with reasonable accuracy the future positioning of the business. <or e&ample, he may be able to determine the allowance re%uired for replacement of worm out fi&ed assets or the turnover as over the coming period or the wor!ing capital re%uirements etc. /nvestigation under 0o(panies *ct7 $D-C G)e$er to Sec.235, 235, 237, 248, 245, etc. $ro# Co# anies ActH Investi*ation $or valuation o$ shares in rivate co# an1 6etworth 8asis Tield 8asis

/nvestigation on Behalf of /nco(ing artner .he purpose of this investigation is for the incoming auditor to !now whether * (i) .he terms offered to him are reasonable (ii) )is capital contribution would be safe and applied usefully. .he investigator should ta!e care of the following *

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(i) (ii) (iii) (iv) (v) (vi)

Ascertain the history of inception and growth of the firm. 2tudy the provisions of the partnership deed. 2crutiny of the profitability and the rate o return of the firm$s business over a period of time. 9&aminations of the assets and liability position of the firm. .his helps in determining the tangible asset bac!ing, impending liabilities etc. 1osition of orders on hand the range and %uality of customers should be thoroughly e&amined. 2tudy the composition and %uality of !ey personnel$s employed.

(vii) 2tudy the important contractual and legal obligations. (viii) Ascertain the reasons for offer of admission to a new partner. (ix) (x) Manner of computation of good will of admission and retirement of a partner should be ascertained. .he standing and reliability of other partners and their personal reputation should be properly +udged.

/nvestigation on Behalf of Ban9 roposing to *dvance 2oan to a 0o(pany. A ban! is primarily interested in !nowing H (i) the purpose for which a loan is re%uired, (ii) the sources from which it would be repaid and (iii) the security that would be available to it. .he investigating accountant, should collect information on the following H ($) .he purpose for which the loan is re%uired and the manner to invest the amount of the loan. (#) .he schedule of repayment of loan submitted by the borrower. (,) .he financial standing and reputation en+oyed by directors and officers of the company. (%) 3hether the company is authori?ed by the Memorandum or the Articles of Association to borrow money for the purpose for which the loan will be used. (-) .he history of growth and development of the company during the past 5 years. (C) 9ffect on economic position of the company due to economic, political and social changes that are li!ely to ta!e place during the period of loan. .o investigate the profitability of the business, the investigating accountant should ta!e the under* mentioned steps H (d) 1repare a condensed income statement from the 1rofit and 7oss Accounts for the previous five years, showing various items of income and e&penses, gross and net profits earned and ta&es paid annually during each of the five years. (e) Compute the under*mentioned ratios H Compute the under*mentioned ratios H (i) (ii) (iii) (v) 2ales to Average 2toc!s held 2ales to fi&ed assets. 9%uity to fi&ed assets. Auic! assets (the current assets that are readily reali?able) to %uic! liabilities.

(iv) Current Assets to current liabilities. (vi) 9%uity to long term loans. (vii) 2ales to 8oo! debts. (viii) 4eturn on Capital 9mployed.

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(f) 8rea!*up of annual sales product*wise. 4erification of assets and liabilities included in the financial state(ent sub(itted by the applicant: .he investigator should prepare schedule of assets and liabilities in them the particulars given below: $.'ixed *ssets: (i) /escription of the item. (ii) (ross value (iii) /epreciation rate used (iv) .otal depreciation written off (v) 6ature of charge on assets created (vi) 4evaluation of the assets if carried out recently (vii) 8asis of revaluation. #./nventory: (i) .he different types of raw material and finished goods held. (ii) 8asis of valuation of the inventory. (iii) 2low moving and obsolete items. (iv) In case the stoc! has been pledged or hypothecated the fact should be stated. (v) Assessment of the redundancy of stoc! conse%uent to changes that occurred after balance sheet. ,.Sundry 6ebtors: (i) Composition of debtors. (ii) Age wise classification debtors. (iii) .he ade%uacy of the provision if any created. (iv) Classification as follows H a. /ebts due in respect of which the credit has not e&pired. b. /ebts due in respect of which the credit has e&pired. c. /ebts due from directors and employees. d. /ebts due from subsidiary companies or affiliated companies. e. .he subse%uent recovery of debts after the 8alance 2heet date. %./nvest(ent: .he schedule of investment should be prepared showing date of purchase, cost, nominal value, mar!et value and in case it is pledged for a loan, the details of people. -.Secured 2oans: .he loans should be classified between debtor and other showing there in the secured and unsecured classification. .he particulars of the assets pledged for securing the debt should be clearly stated. C. rovision for .axation: .he brea!up of the year wise provisions and a note on the ade%uacy of a each provision shall be provided. !.Other liabilities: A statement to the effect that all the liabilities have been properly disclosed showing the age wise analysis of trade creditors. "./nsurance: A statement of insurance policies giving details of the ris! covered and the particulars of the prepayment D.0ontingent liabilities: A list should be provided giving a brea! up of the contingent liabilities e&isting. <inally, the investigator should ascertain whether any other application has been made by the applicant for loans to other institutions or agencies and if so the result of such applications on the date of review.

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rocedure for investigation of frauds $. Cash )ecei ts < .he probability of cash being diverted before being entered in the boo!s is very high and hence (i) Income received from different sources should be scrutini?ed. (ii) Carbon copies of receipts mar!ed Bduplicate$ should be scrutini?ed. (iii) .he record of small or negligible sources of income such as sales of scrap or sale of waste paper. (iv) 4ecoveries from customers and sundry parties along with deductions on account of cash discounts should be reviewed and chec!ed thoroughly. 2.Cash Pa1#ents < $) Ac!nowledgement for payments has to be carefully scrutini?ed #) Care is re%uired where a figure appears to have been erased on altered on such ac!nowledgement. ,) 1ayment by bearer Che%ues should be chec!ed. %) 1ayment as regards wages should be e&amined for possible over totaling of wage sheets and entries regarding dummy wor!men. -) Chec! whether payment has been made in respect of supplies which have not been received. C) 1etty Cash 8oo! itself should be vouched and totaled. ,. .alances in custo#ersC led*er < .he first steps is to find out ($) debited in respect of goods received. (#) those in the sales dayboo!. (,) Amounts ad+usted on account of goods returned or difference in price as well as amounts written off as bad debts should be chec!ed. 8alance confirmations from customers. .est the entries in the order boo! with 3hether the customers are properly

(%)

%. .alances in Su liers led*er < ( ) .he 8ought Iournal should be vouched by reference of (oods Inward 8oo!. (") Amounts have been correctly credited in respect of goods duly received or not. (:) 4e%uest the supplier to furnish statements of their accounts to find out whether or not any balance is outstanding or due and (F) Confirm that allowances and rebates given by them is correctly ad+usted. -. >e$alcation o$ stoc' < ( ) .he defalcation of trading stoc!, etc. is usually possible through a collusion among a number of persons. (") Chec! whether there is (a) A system of stoc! control, and e&istence of detailed record of the movement of stoc!, or (b) Availability of sufficient data from which such a record can be constructed. (:) 1hysically chec! the %uantities in stoc! and those shown by the stoc! boo!. (F) 2hortages observed on physical verification of stoc! should be reconciled with the discrepancies observed on chec!ing the boo!s. /nvestigation for Revie= of rofit ? 'inancial 'orecasts G:uidance note on Pro$it ForecastH

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Chartered Accountants are re%uired to investigate into the profit forecasts of a business for various purposes li!e purchase of a business or sanction of loan etc. As per guidance notes issued by the ICAI a Chartered Accountant should consider the following aspects while conducting review of profit forecasts. 1. Preli#inar1 considerations (i) -btain in writing the scope of wor! (ii) 1rocure the following information in written from (a) 1eriod covered by forecast (b) .he assumptions used (c) .he purpose of forecast (d) .he ultimate user of the forecast. 2. :eneral considerations (i) -btain a clear understanding of client$s business and its environment. (ii) 4eview the accounting policies. (iii) Chec! the reasonableness of various assumptions. (iv) 4eview the method of forecasting. 3. S eci$ic considerations (i) Chec! whether correct accounting policies have been consistently applied over the period of forecast. (ii) 9nsure proper disclosure of e&tra ordinary items. (iii) Incase where purpose of forecast is to estimate fund re%uirements, ensure that proper bifurcation has been made between wor!ing capital and long term capital re%uirements. (iv) 1roper investigation into the current status of the entity should be made. (v) 9valuate the opinion of other e&ports. (vi) 9nsure the proper e&planatory notes supplement the forecasts. (vii) .he investigator should properly ad+ust inflationary factors and ma!e reasonable inter firm comparisons. .he report of the investigator should cover the following aspects. (i) .he assumptions used (ii) .he forecasts made (iii) Conclusions of the review.

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DUE DILI%ENCE
($) (#) (,) (%) (-) .his term is used is relation to corporate restructuring. Corporate restructuring includes internal reconstruction, amalgamations, mergers, +oint ventures etc. Corporate restructuring involving #ore than one art1 should be lanned properly. .hus, due diligence revie& is performed to chec! whether it is $easi(le and desira(le to ac%uire # merge the unit. /iscipline*wise it can be classified as follows: (a) 0o((ercial ?operation 6ue 6iligence : i.e. to chec! whether the target is commercially feasible. (b) 'inancial 6ue 6iligence : .o chec! the financial feasibility of the target by e&amining the financial statement and devising their profit trends. (c) .ax 6ue 6iligence (6irect and /ndirect) : 3hether the target is paying appropriate ta&es on a regular basis. Moreover, ascertain what are the ta& benefits available to target. (d) /nfor(ation syste( 6ue 6iligence : 3hether information system of target is providing right information to the right management at the right time in the right %uantity. (e) 2egal 6ue 6iligence : 3hether the target is complying with all the applicable laws and regulations. (f) Environ(ental 6ue 6iligence : .o chec! the compliance of target with environmentally related rules and regulations. (-) ersonnel 6ue 6iligence : .o ascertain whether the employees of target company are efficient.

'/&*&0/*2 65E 6/2/3E&0E

2ometimes it is interpreted as complete /ue /iligence review as it ascertain the $inancial i# lications of all other /ue diligence reviews, yet its scope is less than over all /ue /iligence reviews. A full*fledged financial /ue /iligence review includes the following:* ($) BR/E' )/S.ORA O' .*R3E. *&6 B*0E3RO5&6 O' /.S ROMO.ERS:; )ow Company was set up, who were original promoters, its survival strategies in past, any regulatory re%uirement, history li!e nature of production, location, product# service and mar!ets, franchises, licenses, patents, 4 ' /, legislation ' regulation, information systems. (#) *00O5&./&3 O2/0/ES:; Appropriateness, effect of recent changes in A#c policies, effect on overall profitability and their correctness. Areas where A#c polices of target are different from that of ac%uiring enterprise and their effect. (,) Revie= of 'inancial State(ent:; In accordance with statute, relevant framewor! and A#c standards. 4eview the operating results, e&traordinary items. Comparison of actual figures with budgeted figure. .rading results of last F*5 years, valuation of intangible assets, special attention to over valued assets or hidden liabilities. (%) .axation:;

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(-) (C)

4egularity of payment of various ta&es to government, ta& affects of mergers. 0ash 'lo=:; Cash generating abilities and ma+or trends. 'inancial ro8ections:; <or ne&t 5 1rs with detailed assu# tions and wor!ings on optimistic, pessimistic and most li!ely basis. If pro+ections are inappropriate highlight the areas. Manage(ent and E(ployees:* 2tatus of wor! force, staff and their demands etc. e&cess wor! force and implications, pay pac!age, employee benefit 1<, gratuity, 9.2.I. leave and superannuation etc. to be ta!en care of. Statutory co(pliance:; 7ist of applicable laws, punitive charges etc. 'ine? enalty; 0ontents of 6ue 6iligence Report (i) 2ummary (ii) )istory of .arget (iii) )istory of 1romoters (iv) 4eview of -perational /./ (v) 4eview of <inancial /./ (vi) 4eview of .a& /./ (vii) 4eview of Information system /./ (viii) 4eview of 7egal /./ (ix) 4eview of 9nvironmental /./ (x) 4eview of 1ersonnel /./ (xi) 23-. Analysis (9ii) 2uggestion

(!)

(")

111

TA7 AUDIT
0nder I... Act, audit is to be conducted by an Accountant. It defines accountant as a C.A. within meaning of C.A. Act ' any other person entitled to be appointed as an auditor of a company u#s ""J of Company Act. 8ut as per C.A. Act, it will nevertheless a necessary re%uirement that the member concerned must hold a certificate of practice. 8ut for Co. op. societies, the auditor appointed under the relevant statute provision need not be a C.A. but he can conduct the ta& audit. *udit of ublic trusts (Sec. $#*) 9&emption from I... u#s ' " provided : . .he person in receipt of the income has made an application for registration of the trust# Institute to C.I... 8efore e&piry of one year from date of creation of trust. ". 3here total income L 5;,;;; in any previous year, the accounts of trust# Institute have been audited. As per guide published by ICAI, the audit programme in this case will be as follows : (A) reli(inary (i) -btain resolution from trust (2cope of audit) (ii) 7etter of appointment from trust ' communicate with previous auditor. (iii) Certificate as to op. balance of Assets ' 7iabilities ' fund (iv) 7ist of 8oo!s of A#c (v) Certificate from trust as to system of A#c ' I.C. (vi) 7ist of institutions# activities run by trust (vii)Certified true copy of deed of trust. Routine chec9ing (i) Chec! 8oo! of A#c. (ii) Douch transactions. 3hether within power and authorised, 1roperly A#c for, recorded on the basis of system of Accounting etc ' funds applicable towards ob+ects of the trust. (iii) -btain trial 8alance on closing date certified by trust. (iv) -btain 8#s ' 1 ' 7 A#c authenticated by trustee. *?c rinciples: 0sually accepted A#c 1rinciples. In 1articular. (i) All assets verified properly valued ' depreciated. (ii) All liabilities properly A#c for. (iii) Investment properly classified ' mar!et values shown. (iv) -#s due to trust properly A#c for. Its recoverability e&amined. 1rovided made for irrecoverable. *nnexure to *udit Report:; (i) Certified list of persons u#s :(:). (ii) 2tatement for items specified in anne&ure to form ;8. (iii) Derify information supplied by trustees in light of available mater.

(8)

(C)

(/)

*udit u?s %%*B Any person get his A#c audited by an Accountant who: (i) Carrying on 8usiness, total turnover or gross receipt L F; la!h 4s. (ii) Carrying on 1rofession, if gross receipt L ; la!h 4s. (iii) Carrying on 8usiness if profits ' gains from 8usiness are deemed to be profits ' gains of such person if he has claimed has income to be lower than deemed one. Audit by specified date i.e. : st -ctober. *pplicability of *?c Standards In case of charitable # religious organisations, A2 will not apply if all activities are not of commercial, industrial or business nature. 9ven if a small portion of activates of an entry is commercial, industrial

112

or 8usiness in nature, A2 would apply to all its activates including those which are not commercial, industrial or 8usiness in nature. Section $%-:; (i) Income under head 9.usiness or ro$essionC or $ro# other sourcesC be computed in accordance with either cash or mercantile regularly employed by the assessee. (ii) C.(. may notify A2 to be followed (iii) If A.-. not satisfied about correctness or completeness of A#c of Assessee or where method, of a#c followed have not been regularly followed by the assessee, he may ma!e assessment A2 per method 1rovided u#s FF. As (I...) Mandatory for those following #ercantile system. (i) A2 I relating to disclosure of A#c policies (ii) A2 II relating to disclosure of prior period ' e&traordinary items ' changes in A#c 1olicies. .he ta& auditor is not computing the income but (i) reporting on A#c ' (ii) reporting on relevant information furnished in form no. :C/. .hus in case of non* compliance with A2, the C.A should ma!e appropriate %ualification# disclosure in the audit report. *udit Report:; (i) <orm :CA S :C/ for person carrying on 8usiness or profession who is re%uired under any other law to get his A#c audited ' (ii) <or :C8 S :C/ for others. 'ORM &O. ,06

Y2ee rule J((")Z

State(ent of particulars reBuired to be furnished under Section %%*B of the /nco(e;.ax *ct7 $DC$

*R. *
$. #. ,. %. -. C. 6ame of the assessee Address 1ermanent Account 6umber 2tatus 1revious year ended Assessment year : : : : : : OOOOOOOOOOOOOOOOOOOOOOOOOOOOOOOOOOOOOOO OOOOOOOOOOOOOOOOOOOOOOOOOOOOOOOOOOOOOOO OOOOOOOOOOOOOOOOOOOOOOOOOOOOOOOOOOOOOOO OOOOOOOOOOOOOOOOOOOOOOOOOOOOOOOOOOOOOOO OOO:
st

MarchOOOOOOOOOOOOOOOOOOOOOOOOOOOO

OOOOOOOOOOOOOOOOOOOOOOOOOOOOOOOOOOOOOOO *R. B

!.

(a) If firm or Association of 1ersons, indicate names of partners#members and their profit sharing ratios. (b) If there is any change in the partners#members of their profit sharing rations, the particulars of such change. (a) 6ature of business or profession. (b) If there is any change in the nature of business or profession, the particulars of such change. (a) 3hether boo!s of account are prescribed under section FFAA, if yes, list of boo!s so prescribed. (b) 8oo!s of account maintained. (In case boo!s of account are maintained in a computer system, mention the boo!s of account generated by such computer system.) (c) 7ist of boo!s of account e&amined.

".

D.

11"

$>.

3hether the profit and loss account includes any profits and gains assessable on presumptive basis, if yes, indicate the amount and the relevant sections (FFA/, FFA9, FFA<, FF8, FF88, FF88A, FF888 or any other relevant section). (a) Method of account employed in the previous year. (b) 3hether there has been any change in the method of Accounting employed vis2G2vis the method employed in the immediately preceding previous year. (c) If answer to (b) above is in the affirmative, give details of such change, and the effect thereof on the profit or loss. (d) /etails of deviation, if any, in the method of accounting employed in the previous year from accounting standards prescribed under section F5 and the effect thereof on the profit or loss.

$$.

$#.

(a) Method of valuation of closing stoc! employed in the previous year. (b) /etails of deviation, if any, from the method of valuation prescribed under section F5A, and the effect thereof on the profit or loss. Amounts not credited to the profit and loss account, being, H (a) .he items falling within the scope of section ">, (b) .he proforma credits, drawbac!s, refunds of duty of customs or e&cise, or refunds of sales ta&, where such credits, drawbac!s or refunds are admitted as due by the authorities concerned, (c) 9scalation claims accepted during the previous year, (d) Any other item of income, (e) Capital receipt, if any. 1articulars of depreciation allowable as per the Income*.a& Act, =J in respect of each asset or bloc! of assets, as the case may be, in the following form:H (a) /escription of asset#bloc! of assets. (b) 4ate of depreciation. (c) Actual cost or written down value, as the case may be. (d) Additions#deductions during the year with dates, in the case of any addition of an asset, date put to use, including ad+ustments on account of H (i) Modified Dalue Added .a& credit claimed and allowed under the Central 9&cise 4ules, =FF, in respect of assets ac%uired on or after st March, ==F, (ii) Change in rate of e&change of currency, and (iii) 2ubsidy or grant or reimbursement, by whatever name called. Amounts admissible under sections ::A8, ::A8A, ::AC, :5, :5A88, :5AC, :5CCA, :5CC8, :5/, :59:H (a) /ebited to the profit and loss account (showing the amount debited and deduction allowable under each section separately), (b) 6ot debited to the profit and loss account. (a) Any sum paid to an employee as bonus or commission for services rendered, where such sum was otherwise payable to him as profits or dividend. Y2ection :J ( ) (ii)Z. (b) Any sum received from employees towards contributions to any provident fund or superannuation fund or any other fund mentioned in section "("F)( (), and due date for payment and the actual date of payment to the concerned authorities under section :J( ) (va). Amounts debited to the profit and loss account, being:H (a) 9&penditure of capital nature,

$,.

$%.

$-.

$C.

$!.

11$

(b) 9&penditure of personal nature, (c) 9&penditure on advertisement in any souvenir, brochure, tract, pamphlet or the li!e, published by a political party, (d) 9&penditure incurred at clubs:H (i) As entrance fees and subscriptions, (ii) As cost for club services and facilities used, (e) (i) 9&penditure by way of penalty or fine for violation of any law for the time being in force. (ii) Any other penalty or fine. (iii) 9&penditure incurred for any purpose which is an offence or which is prohibited by law, (f) Amounts inadmissible under section F;(a), (g) Interest, salary, bonus, commission or remuneration inadmissible under section F;(b)#F;(ba) and computation thereof, (h) Amount inadmissible under section F;A(:) read with rule J// and computation thereof, (i) 1rovision for payment of gratuity not allowable under section F;A(K), (+) Any sum paid by the assessee as an employer not allowable under section F;A(=), (!) 1articulars of any liability of a contingent nature. $". $D. #>. 1articulars of payments made to persons specified under section F;A(")8b). Amounts deemed to be profits and gains under section ::A8 or ::A8A or ::AC. Any amount of profit chargeable to ta& under section F and computation thereof.

#$. [ (i) In respect of any sum referred to in clause 8a), (c), (d), or (e) of section F:8, the liability for which:H A. 1re*e&isted on the first day of the previous year but was not allowed in the assessment of any preceding previous year and was H (a) paid during the previous year, (b) not paid during the previous year, 8. 3as incurred in the previous year and was H (a) paid on or before the due date for furnishing the return of income of the previous year under section :=( ), (b) not paid on or before the aforesaid date. In respect of any sum referred to in clause 8b: of section F:8, the liability for which H

(ii)

A. 1re*e&isted on the first day of the previous year but was not allowed in the assessment of any preceding pervious year H (a) nature of liability, (b) due date of payment under second proviso to section F:8, (c) actual date of payment, (d) if paid otherwise than in cash, whether the sum has been realised within fifteen days of the aforesaid due date: 8. 3as incurred in the previous year:H (a) nature of liability, (b) due date of payment under second proviso to section F:8, (c) actual date of payment, (d) if paid otherwise than in cash, whether the sum has been realised within fifteen days of the aforesaid due date. [ 2tate whether sales ta&, customs duty, e&cise duty or any other indirect ta&, levy, cess, impost, etc., is passed through the profit and loss account.

11!

##.

(a)

(b) #,. #%.

Amount of Modified Dalue Added .a& credits availed of or utili?ed during the previous year and its treatment in the profit and loss account and treatment of outstanding Modified Dalue Added .a& credits in the accounts. 1articulars of income or e&penditure of prior period credited or debited to the profit and loss account.

/etails of any amount borrowed on hundi or any amount due thereof (including interest on the amount borrowed) repaid, otherwise than through an account payee che%ue Y2ection J=/Z. (a) [ 1articulars of each loan or deposit in an amount e&ceeding the limit specified in section "J=22 ta!en or accepted during the previous year:H (i) name, address and permanent account number (if available with the assessee) of the lender or depositor, (ii) amount of loan or deposit ta!en or accepted, (iii) whether the loan or deposit was s%uared up during the previous year, (iv) ma&imum amount outstanding in the account at any time during the previous year, (v) whether the loan or deposit was ta!en or accepted otherwise than by an account payee che%ue or an account payee ban! draft. [ (.hese particulars need not be given in the case of a (overnment company, a ban!ing company or a corporation established by a Central, 2tate or 1rovincial Act.) (b) 1articulars of each repayment of loan or deposit in an amount e&ceeding the limit specified in section "J=. made during the previous year:H (i) name, address and permanent account number (if available with the assessee) of the payee, (ii) amount of the repayment, (iii) ma&imum amount outstanding in the account at any time during the previous year, (iv) whether the repayment was made otherwise than by account payee che%ue or account payee ban! draft #-. /etails of brought forward loss or depreciation allowance, in the following manner, to the e&tent available: Serial Number Assessment Year Nature of loss/allowance (in rupees) Amount as returned (in rupees) Amount as assessed (give reference to relevant order) emar!s

#C. #!.

2ection*wise details of deductions, if any, admissible under Chapter DIA. (a) 3hether the assessee has deducted ta& at source and paid the amount so deducted to the credit of the Central (overnment in accordance with the provisions of Chapter UDII*8. If the answer to (a) above is in negative, then given the following details:

(b)

Serial Number

"articulars of head under which ta# is deducted at source

Amount of ta# deducted at source (in rupees)

$ue date for remittance to %overnment

$etails of payment& $ate/Amount (in rupees)

emar!s

11%

#".

(a)

In the case of trading concern, given %uantitative details of principal items of goods traded: (i) opening stoc!, (ii) purchases during the previous year, (iii) sales during the previous year, (iv) closing stoc!, (v) shortage#e&cess, if any. In the case of manufacturing concern, give %uantitative details of the principal items of raw materials, finished products and by*products: 4aw materials (i) opening stoc!. (ii) purchases during the previous year, (iii) consumption during the pervious year, (iv) sales during the previous year, (v) closing stoc!, (vi) [ yield of finished products, (vii) [ percentage of yield, (viii) [ shortage#e&cess, if any. <inished products#8y products (i) opening stoc!, (ii) purchases during the pervious year, (iii) %uantity manufacturing during the previous year, (iv) sales during the previous year, (v) closing stoc!, (vi) shortage#e&cess, if any.

(b) A.

8.

[ Information may be given to the e&tent available. #D. In the case of a domestic company, details of ta& on distributed profits under section the following form:H (a) total amount of distributed profits, (b) total ta& paid thereon, (c) dates of payment with amounts. 5*- in

,>. ,$. ,#.

3hether any cost audit was carried out, if yes, enclose a copy of the report of such audit Y2ee section :=(=)Z. 3hether any audit was conducted under the Central 9&cise Act, =FF, if yes, enclose a copy of the report of such audit. Accounting ratios with calculations as follows:H (a) (ross profit#.urnover, (b) 6et profit#.urnover, (c) 2toc!*in*trade#.urnover, (d) Material consumed#<inished goods produced.

5lace OOOOOOOOOOOO Date HOOOOOOOOOOOO OOOOOOOOOOOOOOOOOOOOOO &otes:

2igned: OOOOOOOOOOO 6ame: OOOOOOOOOOO Address:

11'

$. #.

D$e Anne(ure to t$is Form must be filled up fallin" w$ic$ t$e Form will be considered as incomplete. D$is Form and t$e Anne(ure $ave to be si"ned b t$e person competent to si"n Form No. @CA or Form No. @C<, as t$e case ma be. *nnexure *R. *

$. #. ,. %. -. C.

6ame of the Assessee Address 1ermanent Account 6umber 2tatus 1revious year ended Assessment year

: : : : : :

OOOOOOOOOOOOOOOOOOOOOOOOOOOOOOOOOOOOOOOO OOOOOOOOOOOOOOOOOOOOOOOOOOOOOOOOOOOOOOOO OOOOOOOOOOOOOOOOOOOOOOOOOOOOOOOOOOOOOOOO OOOOOOOOOOOOOOOOOOOOOOOOOOOOOOOOOOOOOOOO OOOOOOOOOOOOOOOOOOOOOOOOOOOOOOOOOOOOOOOO :

st

March

OOOOOOOOOOOOOOOOOOOOOOOOOOOOOOOOOOOOOOOO

*R. B
6ame of 8usiness
S/. &o. $. #. ,. %. -. C. !. ". D. $>. $$. $#. $,. $%. $-. $C.

Code[
0urrent year receding year

ara(eters 1aid*up share capital 2hare Application Money 4eserves and 2urplus 2ecured loans 0nsecured loans Current liabilities and provisions .otal of 8alance 2heet (ross turnover (ross profit Commission received Commission paid Interest received Interest paid /epreciation as per boo!s of account 6et 1rofit (or loss) before ta& .a&es on income paid#provided for in the boo!s

2igned: OOOOOOOOOOOOOOO 5lace OOOOOOOOOOOOOOOOO Date OOOOOOOOOOOOOOOOO &ote: 1lease enter the relevant code pertaining to the main area of your business activity.

11(

EDP : AUDIT
$. 0urrent /. .rends : (i) 9nd user computing (ii) (iii) (iv) (v) (vi) (vii) (viii) (ix) (i) (ii) (iii) (iv) (v) (vi) (vii) (viii) (ix) /eclining )ardware prices, increase in micro user 4/8M e&tensive use 2ystem development and CA29 tools adopted by many users.. 2hift from /-2 to 06IU ' C language. Pnowledge based and decision support systems. Increased data communication and networ!ing 0se of 9/I (9lectronic data interchange) 2canners and voice recognition system for input. 0nintentional 9rrors (ine&perienced persons) 1rogram modification can ta!e place with a view to fraud. Improper use of /22. Auditors participation in 2/7C is necessary. 0se of sophisticated audit software. /ata communication and networ!ing H new ris!. /ata security problems. Move towards 9/I (9limination of much of traditional audit trail). Change in nature of audit evidence.

#. /(pact on *uditing :

+IP!S =F !>P ACC=02+ SIS+!@S .atch Processin* Processin* s1ste#s +i#e Sh. E Service .useu O.&D 6 stem <atc$ 8"roup: of transaction, &ead updation inquir D6 * one computer and more tr. File, master file, processin" comple(, t$an one use. 6.<. * an batc$ totals, simple no audit trail. entit processin" for rarel found ot$ers. File S1ste#s Flat File S1ste#s Iser own t$eir data, data redundanc . For same transaction, updation to be made at man place. E6 OrganiHation Structure $. 9/1 Manager. #. 2ystem analyst. ,. 1rogrammers %. Computer -perators. -. Input 1reparation (roup. C. 7ibrarian. !. /ata Control (roup. Inte*rated data (ase s1ste#s 6et of inter related master file, eas updation, data ware$ousin", immense volume, cross inde(in".

11)

rereBuisites auditing in 0/S Environ(ent. 1. S'ill E Co# etence :.o determine over all audit ris!, understanding I.C. to perform tests and to evaluate results thereof. 2. Ano&led*e o$ .usiness : 9ntity$s attitude towards I..., usage compared with industry, recent and planned charges. 3. Plannin* : .o plan understanding about organi?ation structure, significance of comp. 1rocessing, comple&ity, availability of data source documents, files, etc. 4. Assess#ent o$ )is' : 4is! may be due to deficiencies in CI2 environment and they may increase potential for errors of fraudulent activities. )e should consider the following for ris! assessment $. -wn application # pac!ages. #. Industrial environment. ,. 1ervasive CI2 controls. %. Access to sp. function # data. -. Ability to change and develop the report. C. /ocumentation. !. <actors affecting %uality of evidence (paperless). ". 2p. ris! (9lectronic funds trf.). D. 9nd*user computing. $>. 7ac! of time, discipline or !nowledge to monitor results of processing. 0o(pensating for loss of audit trail : $. Arranging for sp. print*outs of additional informal. #. 1rogrammed interrogation facility. ,. Clerical recreation. %. .esting on total basis. -. 4elying on alternative tests. C. 2pecial Audit .echni%ue. /&.ER&*2 0O&.RO2S /& 0OM 5.ER B*SE6 SAS.EM .hese controls include both manual procedures and procedures designed into the computer system. .he controls can be broadly classified into general controls and application controls. /. 3eneral 0ontrols (eneral controls relate to the environment within which computer based accounting systems are developed, maintained and operated. .hey apply to all individual applications. (eneral I. controls include: $. OrganiHation and (anage(ent controls .hese controls provide organi?ational framewor! to I. activities. #. *pplication syste( develop(ent and (aintenance controls /esigned to provide reasonable assurance that systems are developed and maintained in an efficient and authori?ed manner. ,. 0o(puter operation controls .hese controls ensure that authori?ed persons only who perform authori?ed programs and that all errors are prevented and detected by the systems access the system. %. Syste( soft=are controls .hese controls are designed to ensure that ac%uisition and development of system software is properly authori?ed and documented. -. 6ata Entry and progra(s controls

12#

.hese controls provide reasonable assurance that all transactions are properly authori?ed and access to data and programs are to restricted persons. /. application controls Application controls are controls over the thoroughness, accuracy and validity of accounting information. .hese controls include: $. 0ontrols over inputs .hese controls are designed to provide reasonable assurance that, (a) (b) (c) All transactions are authori?ed. .ransactions are not lost or improperly added or modified. .he system detects and reports incorrect transactions.

#. 0ontrols over processing and co(puter data files .he ob+ective of these controls is to provide assurance that, (a) (b) All transactions are properly processed. 1rocessing errors are identified and corrected on a timely basis.

,. 0ontrols over output .hese controls are designed to provide the accurate outputs are timely provided to authorised persons. 0o(puter *ssisted *udit .echniBues (0**.) (5sed in *uditing through the co(puter) $. *udit Soft=are: It is a set of computer programs used by the Auditor, as part of his Auditing 1rocedures, to process data of audit significance from the entity$s accounting system. .he Auditor should use such programs only after he proves their validity for Audit purposes. Audit 2oftware may consist of: (a) ac9age rogra(s 1 .hese are generalised Computer 1rograms, that perform data processing li!e reading computer files, selecting information, performing calculations, creating data files and printing reports in a format specified by the Auditor. May be used at many clients site. urpose :ritten rogra(s 1 .hese are Computer 1rograms, designed by the Auditor # entity # outside programmer, to perform Audit tas!s in specific circumstances. .he Auditor may sometimes use the programs of the entity in the same or in a modified form. 8ut it may not be used at many clients site thus cost consideration should ta!en care of. 5tility rogra(s 1 .hese are programs of the entity, designed for non*audit purposes, but for performing common data processing functions li!e sorting, creating and printing files. .hese are not designed specifically for audit purpose. Syste( (anage(ent soft=are 1 .hese are enhanced productivity tool that re%uire specialised !nowledge on part of auditor. )owever these are not specifically meant for audit purposes. .hus used with much s!ill and care. <or e&ample flow chart review systems. It may be used for comparing source code with ob+ect code.

(b)

(c)

(d)

#. .est 6ata: .he Auditor enters a set of test data into the entity$s computer system and compares the results with predetermined results. .est data are used to test specific controls # specific processing characteristics in computer programs li!e online password and data access controls. .he test data are chosen by the Auditor. .hey may be of the following types H (a) (b) .esting a set of data selected from previously processed transactions7 in the entity$s system, se aratel1 from the normal processing procedure. 9stablishing a du((y unit to which test transactions are posted durin* the normal processing cycle of the entity. (Called integrated .est <acility). )owever, the dummy entries should subse%uently be eliminated from the entity$s accounting records. .hese are used mainly on line real time systems.

121

5SE O' 0**. CAA. are used to perform various Audit 1rocedures li!e H . .ests of 6etails of transactions and balances e.g. use of Audit software to test all # few transactions in a computer file. As substantive procedures. ". *nalytical Revie= rocedures e.g. use of Audit software to identify unusual fluctuations or unusual items. :. 0o(pliance .est of 3eneral /. 0ontrols e.g. use of test data to test access procedures to the program libraries. F. 0o(pliance .est of /. *pplication 0ontrols e.g. use of test data to test the functioning of a programmed procedure. 5se of 0**. ? *udit Soft=are Syste(s in 'raud 6etection: . 9ven while auditing in an 9/1 environment, the Auditor is re%uired to plan his wor! by e&ercising reasonable care and s!ill in such a manner that there is reasonable e&pectation of detecting material misstatements in the financial information resulting from fraud or error. ". 0se of the above CAA. # audit software systems will help the Auditor to identify errors and frauds in the accounting and internal control system. :. )owever, frauds are intentional and generally deep*laid. 3hile auditing through the computer with ade%uate !nowledge of computer systems may highlight some frauds, there is not empirical evidence to prove the assertion that the use of audit software systems has unearthed well* concealed frauds. .hus it cannot be conclusively said that use of audit software systems increases the probability of detection of fraud due to inherent limitation present in any audit. 0onsideration in use of 0**.s $. Computer !nowledge, e&pertise and e&perience of the auditor. #. Availability of CAA.s and suitable computer facilities. ,. Impracticability of manual tests. %. 9ffectiveness and efficiency. -. .iming. Steps in application of 0**.s $. 2etting ob+ective of CAA.. #. Content and accessibility of entity$s files. ,. .r. type to be tested. %. 1rocedure to be performed on data. -. /efine output re%. C. 1ersonnel. !. 4efine cost and benefit estimates. ". 9nsure documentation of CAA. use. D. Arrange administrative activities. $>. 9&ecute CAA. application. $$. 9valuate the results.

.he *uditor should ta9e the follo=ing (easures to control 0**. applications 0ontrol of Soft=are *pplications 0ontrol of .est 6ata

122

1articipate in the design and testing of the computer programmes.

Control the se%uence of submission of test data. 1erform test runs containing small amounts of test data before submitting main audit test data. 1redict the results of test data and compare with actual test data output, both for individual transactions and also in total. Confirm that only current version are used to process test data. -btain reasonable assurance regarding the continued use of programs throughout the period of audit.

Chec! the coding of program to ensure conformity with detailed program specifications. 4eview of operating system instructions to ensure proper running of software in the entity$s computer application. 4un audit software first on test files before ta!ing up the same on main data files. 9nsure use of correct files. -btain evidence as too implementation of audit software as planned. 9stablishment security measures to safeguard manipulation of data files ' his audit software. )e should arrange for proper vendor support.

6ocu(entation : about planning, e&ecution audit evidence, etc. 0**.s in s(all business co(p. Environ(ent : (i) 7ess reliance on I.C. thus, greater emphases on tests of details and application of audit procedures. (ii) If small volume of data H manual methods. (iii) Impracticable use of CAA. due to absence of technical assistance. (iv) <ew program may not run on small computers. (v) .hus it may not be practicable to use CAA. in small business environment in all cases. *uditors involve(ent in co(puteriHation. 5lannin" Dopic ($) (#) (,) (%) (-) (C) (!) '(ecution ($) (#) (,) (%) (-) 0nderstanding user re%uirements. 7imitation and scope of standard pac!ages. 1roper training of staff at all levels. -rgani?ation must be service oriented. <le&ibility. Comp. <irst time H feasibility study. )ardware # 2oftware specification. 1hysical planning and site preparation. -rgani?ation structure. Corporate computeri?ation plan. 1ro+ect plan for every application. /41 (/isaster recovery plan).

12"

ReBuire(ent for internal auditor ReBuire(ents for co(p. *udit progra( syste( : (i) 2implicity (ii) 0nderstandability (iii) Adaptability (iv) Dendor technical (v) 2tatisticals sampling (vi) Acceptability support tech. (vii) 1rocessing capabilities (viii) 4eport writing A lications $. Inventories %. 9nergy #. 1ayrolls -. .ravel ' .elephone ,. Maintenance C. 2ales

12$

12!

SER6ICE 2UREAU
Consideration of followin" mattes wit$ client : $. #. ,. %. O=nership and stability : 2hare holders, cr. rating, other clients, commercial appropriate staff. 2ocation : Conditions (geographical and others) machine loading (high or low). Bac9 up : 2tand by arrangements. 6ocu(entation education and progra(s7 etc. : 2ystems and program documentation manual, staff training, approved changes, authori?ed owner of copyrights of programs ownership of data files. -. 2iability of bureau for : 7osses to lateness, fraud, confidentiality, corruption of megnatic media. C. 0ontrol : -ver data processed, reconciliation, amendments and error reports, file retention. !. ac9ages : 2tandard software pac!age, re%. of input and format and output. *udit consideration of co(p. Bureau. Movement of data outside client%s premises, data preparation. Followin" matters s$ould be considered : (i) 7iaison between user and bureau. (ii) 2ystems testing. (iii) 4esponsibility for file conversion. (iv) 4esponsibility for re+ection. (v) -utput procedures defined. (vi) Control over maintenance of master file. .agging and .racing . It is used for compensating loss of audit trail. ". It involves tagging the clients input data in such a way that relevant information is displayed at !ey points to be verified by the auditor. :. .he hard copy generated is made available only to the auditor. <or e.g. sales order in e&cess of ; la!h etc. F. It uses actual data, thus %uestion of elimination of special entries (as in integrated test data facility) does not arise at all. 5. )owever, all erroneous data may not necessarily be tagged. J. Auditor uses his professional +udgment to decide the !ey point. Effect of .0 environ(ent on *udit rocedure (i) 6ot practicable to implement suff. Internal controls. .his control ris! is high. (ii) 6o need for compliance procedure. )e may directly switch over to substantive procedure. (iii) )e may use CAA.$s (Audit 2oftware) (iv) )e may perform audit wor! on a preliminary data (surprise visits) (v) 2pecific internal control characteristics. Effect of on line syste( on *udit rocedure (i) 7ess Audit trail (ii) Authorisation ' accuracy of on line transaction must be chec!ed. (iii) )e should include technical persons in Audit team. (iv) )e should perform compliance preliminary if the preliminary assesses control ris! as less than high. (v) 2ub procedure should include CAA. (normally I.<).

12%

(vi)

Auditor should carry out 1re*implementation review of -74. system if possible.

&ote: -n data base I.C w.r.t. access the /ate 8ase must be properly securitinised.

12'

Audit / Pu;lic Sect r U!dert"3i!OB<E0./4ES O' *56/. O' S5

In 120, there is involvement of public fund. .hese funds should be utili?ed considering public interest. 6ormally, these funds are lavishly used by management. 3hile auditing, auditor has to chec! whether these funds have been used in a manner so as to hurt the basic ob+ectives behind creation of 120. (1ublic 3elfare) .hus the main ob+ective of auditor in such case is to chec! the substance of transaction entered into by the 120. Auditor has to chec! whether transactions mainly e&penses confirmed to propriety norms.
RO R/E.A

*56/.

C1ropriety Audit stands for verification of transactions on the test of public interest, commonly accepted customs J standards of conduct@. 1ropriety is that which meets the tests of public interest, commonly accepted customs and standards of conduct and particularly as applied to professional performance, re%uirement of law, (overnment regulations and professional codes@ H 9.7. Pohler. It shifts the emphasis to substance of transaction. It re%uires transactions (mainly e&penses) to conform to certain general principles : a) 9&pense is not prima facie more than the occasion demands and same degree of vigilance is e&ercised as should be e&ercised in respect of his own money. b) Aut$orit e&ercises its power of sanctioning e&penses to pass an order which will not accrue to its own advantage. c) <unds not utili?ed for benefit of a particular person#group. d) Apart from a"reed remuneration, no other avenue is !ept open to benefit management personnel, employees and others. RO R/E.A E2ME&. u?s. ##! ($*) : a) 3hether terms on which secured loans and secured advances have been made are not pre4udicial to the interests of the compan or its members. conditions li!e security, interest, repayment period and other business considerations. b) 3hether transactions of company which are represented merely by boo3 entries are not pre+udicial to the interest of company, i.e. effects of boo!*entries, unsupported by transactions, etc. c) 3hether investment of company (other than 8an!ing#Investment company) in form of share, debenture and other securities have been sold at a price lower t$an its cost, i.e. to see reasonableness of decision to sell at loss. d) 3hether personal e(penses have been charged to revenue. RO R/E.A E2EME&. 5&6ER 0OS. *56/. RE OR. : b) Matters appearing clearly wrong in principle or apparently wrong. c) Cases where company$s funds have been used in negligent#inefficient manner. d) <actors which could have been controlled but haven$t been, thus, resulting in increase in cost of production.

12(

RO ER.A E2EME&.S /& 0*RO7 #>>, a) If the company has given or ta!en loans, secured or unsecured, to#from companies, firms or other parties listed in the register maintained under section :; of the Companies Act, whether the rate of interest and other terms and conditions of such loans are prima*facie pre+udicial to the interest of the company. In this case, the auditor will have to loo! into the reasonableness of the rate of interest and the terms and conditions of such loans. In other words, he will have to see whether the terms and conditions, including the rate of interest are apparently adverse to the interests of the company, having regard to the circumstances of the company at the time of ta!ing the loans and the terms normally available. )e is to e&ercise his +udgment based on commercial considerations li!e urgency, security offered etc. If the overdue amount of the loan given to or ta!en from companies, firms or other parties listed in the register maintained under section :; of the Companies Act is more than rupees one la!h, what reasonable steps have been ta!en by the company for recovery#payment of the principal and interest. In ma!ing this e&amination, the auditor would have to consider the facts and circumstances of each case, including the amounts involved. It is not necessary that steps to be ta!en must necessarily be legal steps. /epending upon the circumstances, period of delay and other similar factors, issue of reminders or sending of advocate$s or solicitor$s notice may amount to reasonable steps. .he auditor should as! the management to give in writing the steps which have been ta!en. .he auditor should arrive at his opinion only after consideration of the management$s representations. c) 3hether the transactions needed to be entered in a register in pursuance of section :; of Companies Act have been made at prices which are reasonable having regard to the prevailing mar!et prices at the relevant time. 2ection :; re%uires that every company shall !eep one or more registers in which shall be entered separately the particulars of all contracts or arrangements to which sections "=K and "== of the Companies Act apply. As regards the reasonability of prices, the auditor is not e&pected to ma!e a roving mar!et in%uiry but to e&amine price lists, %uotations, prices for other parties etc. he should also ta!en into account the factors such as delivery period, %uality, %uantity involved, credit terms etc. d) Is the company regular in depositing undisputed statutory dues including 1rovident <und, Investor 9ducation and 1rotection <und, 9mployee 2tate Insurance, Income*.a&, 2ales .a&, 3ealth .a&, Custom /uty, 9&cise /uty, cess and any other statutory dues with the appropriate authorities and if not, the e&tent of the arrears of outstanding statutory dues as at the last day of the financial year concerned for a period of more than si& months from the dat they became payable, shall be indicated by the auditor. e) 3hether the company has made any preferential allotment of shares to parties and companies covered in the register maintained under section :; of the Companies Act and if so whether the price at which shares have been issued is pre+udicial to the interest of the company. ;) RO R/E.A *56/.; ROB2EMS It is a moral term. Auditing re%uires verifiable propositions establishment of which is very difficult for propriety audit. It has itinerant element of sub+ectivity. )owever, C and A( has developed norms of propriety for e&penses of public funds but it may not apply to transactions of private sector. If management formulates norms of propriety for the entity, the element of sub+ectivity will get reduced. <or e.g. H .ravel by air (feasible if saves time). .he +udgement of auditor shouldn$t be sub+ective. 0OMM/..EES O& 5B/0 5&6ER.*E/&3S It e&amine the Audit report. It can select some enterprises each year to e&amine whether affairs of same are managed in accordance with sound business principles, etc. It doesn%t however e&amine mattes of ma+or (overnment policy or day*to*day administration.

12)

 It gives its findings and recommendations in its report which are presented to 1arliament # 2tate 7egislatures. .ypes of *udits (1) Pro$essional (2) Su le#entar1 Audit u%s. 617(4)

Supple(ent *udit C ' A( may comment upon or supplement the report submitted by the professional auditor. C ' A( may issue directives to the auditors in regard to the performance of their function. 1erson so authorised may well be the auditor of the company. .he form ' content of supplementary audit report may be specified by C'A(. 2upp Auditor may concentrate more on efficiency aspects. .he person so authorised is having same powers as auditors. 0OM RE)E&S/4E *56/. 2cope is regarding chec!ing of investment decisions, 1ro+ect formulation, MI2, Capacity utilisation, Management, 0se of material, 7abour, Idle capacity, Capital cost, Cost control measure, 4 ' / programs, 4epair ' maintenance etc. 6irections of 0 K *3 : (a) Syste( of *ccount : $. 9&amine the following systems and give deficiencies along (4eceipts#9&penses#.rial 8alance#Inventories, etc.) #. Allocation of e&penses during construction. ,. 8an! 4econciliation 2tatement. %. Control and subsidiaries account are updated and reconciled regularly. -. 9&amine accounting policies. (b) Syste( of 'inancial 0ontrol : $. /elegation of financial power whether legally made. #. 3hether credit from ban! are monitored regularly.

with

suggestions

1"#

2AN+ AUDIT
.here are mainly F types of 8an!s : ( ) Commercial 8an! (:) Co*operative 8an!s

(") 4egional 4ural 8an! (F) /evelopment 8an!.

Special 'eatures of Ban9s : . Custody of 7arge Dolume of Monetary Item. ". 7arge Dolume and Dariety of .ransactions. :. 3ide 6etwor! of 8ranches and /epartments. F. -ff*8alance 2heet items (no entry li!e guarantees etc.) 5. 4egulated by (overnment authorities. 'ORM K 0O&.E&. O' '/&*&0/*2 S.*.EME&. J4ertical for() 0apital and 2iabilities (5 heads) Capital 4eserve and 2urplus /eposits 8orrowings -ther liabilities and provision *ssets (J heads) Cash and 8alance with 48I 8alance with 8an!s and money at call and short notice. Investment Advances <i&ed Assets -ther assets Contingent 7iabilities and 8ills for collection (aggregate amount to be shown on face of 8alance sheet and details by way of a note. O& '*0E O' RO'/. *&6 2OSS *00O5&. . /nco(e ; Interest 9arned * -ther Income ". Expenditure ; Interest e&pended ; -perating e&penses * 1rovision and Contingencies :. rofit ? 2oss ; 6et profit (loss) for the year ; 1rofit # 7oss brought forward F. *ppropriations ; .ransfer to 2tatutory 4eserve ; .ransfer to other 4eserves ; .ransfer to (overnment # 1roposed /ividend ; 8alance carried over to 8alance 2heet. Signature : <inancial statements of a ban!ing company incorporated in India to be signed by manager # principal officer and by at least : directors. .hat of foreign 8an!ing Company to be signed by Manager # Agent of the 1rincipal -ffice in India. *ppoint(ent of *uditor : Appointment of Auditor of 8an!ing Company to be appointed at A(M of shareholders wherein fee is also determined. (Approval of 48I regarding appointment). Appointment of Auditor of 6ationalised 8an! by 8an! concerned acting through its 8-/ (approval of 48I) their fee determined by 48I in consultation with Central (overnment. Auditor of subsidiaries of 28I as well as their remuneration is decided by 28I.

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Auditor of 28I and their remuneration by 48I in consultation with (overnment 8an!. 448$s auditors and their fee determined by 8an! concerned with approval of Central (overnment. *uditor+s Report <or Nationalised <an3, 4eport to Central (overnment stating : (i) 8alance 2heet is full and properly drawn up and .rue and <air Diew. (ii) .ransactions of 8an!s within their powers. (iii) 4eturns received from offices and branches of 8an!s are ade%uate. (iv) 1 ' 7 A#c. shows true balance of profit or loss. <or <an3in" Companies, in addition to reporting u#s ""K, also to state whether H (i) Information and 9&planations are satisfactory. (ii) .ransactions of company within power of company. (iii) 4eturns received from branches are ade%uate. (iv) 1'7 shows true balance of profit or loss. (v) Any other matter to be brought to notice of the share holders of the company. *udit of 0o(pliance =ith S2R ReBuire(ent 2tatutory Central Auditor to verify compliance with 274 re%uirements on " odd dates in different months of a financial year not being <ridays. 4eport of Management and 48I. !"a#ination o$ 2 As ects (i) Correctness of figures of /.7 (/emand ' .ime 7iabilities) on reporting <riday (last <riday of second preceding fortnight), and (ii) Maintenance of li%uid asset on selected date. Steps : i. 2ee circulars of 48I regarding composition of /.7, ii. 8ranch auditor to verify correctness of cash on " odd dates (8r. 6ot maintain assets # securities), iii. 4eview 4eturn from un*audited branches. iv. It is e&amination on test basis consolidation regarding /.7 position prepared by the 8an!. v. 9&amine e&clusions and inclusions from # in the liabilities. vi. Derify computation of li%uid Assets and following are treated as cash : (a) /eposits with 48I by 8an!ing Company incorporated outside India. (b) Cash#8alance by 8an!ing Companies with itself or with 48I. (c) 8alance maintained by 2cheduled 8an! with 48I in e&cess of balance re%uired to be maintained. (d) 6et 8alance in current A#c. in India by 2cheduled 8an!. (e) 8alance by 448 with 2ponsor 8an!. vii. 1rice of gold shouldn$t e&ceed current mar!et price. viii. Derify amount of unencumbered approved security. i&. 1rovision for 9&penses and 7iabilities not to be included in /.7. &. 6umber of unaudited branch and reliance on returns, etc. to be disclosed by central statutory auditor in his report. 0* /.*2 *6EI5*0A CAde%uacy of capital resources of a 8an! in relation to ris!s associated with its operation@ All Indian scheduled commercial 8an!s (e&cluding 448) ' foreign 8an!s operating in India to maintain CA 4atio at a minimum of ;G. 8an!ing operations are ris!y thus it is more appropriate for a ban! to maintain ade%uate capital funds corresponding to ris! associated with its operations. <rom
st

6ovember ;F public sector ban! re%uire to maintain it at =G and private sector ban! at ;G. Capital Ade%uacy 4atio R

*apital funds \ ;; is! wto assets ) off '/S (tems

Capital <unds

1"2

($) .ier / 0apital (#) .ier // 0apital

L (1aid up capital S 2t. reserve S disclosed free 4eserves) R It includes following i.e. undisclosed 4eserve, general 1rovision ' 7oss reserves, )ybrid debt capital instruments ' subordinated debt.

(9%uity investments in subsidiary S Intangible Assets S current ' 8#f loss)

.ier II Capital can be ma&imum ;;G of .ier I capital Darious assets after e&posing to varying degrees of ris! as specified. 0O&05RRE&. *56/. CAudit or verification of transactions or activities of an organisation concurrently as the transaction or activity ta!es place.@ It is done on regular 8asis. Mandatory for 8an!s to cover at least : (i) (ii) (i) (ii) (iii) (iv) (v) 5;G of total deposits ' 5;G of total advances <ollowing should be considered : 7arge # very 7arge branches 2pecial branches 7arge problem branches ).-. department dealing with treasury#funds management ' handling Investment 1ortfolio. Any other branch#deptt. at discreation of ban! It can be underta!en by internal inspection staff or outside C.A. Scope of 0oncurrent *udit : /aily Cash .ransactions, purchase ' sale of share ' securities physical verification, procedure for opening new A#c Derification of Advances, foreign 9&change .ransaction, )ouse !eeping (4econciliation. 8alancing of ledger etc.) , /etermination of revenue 7ea!age, fraud prone areas, )igh Dalue transactions, 2afe custody of security form, ../.2., statement, ).-. return etc., study of 48I 4eport ' Inspection 4eport dealing with customers complaints. Its ob+ective is to see whether transactions or decisions are within the policy parameters valid down by ).-., they don$t violate instructions of 48I ' they are within authority. 4emuneration of auditor is fi&ed by ban!. Minor irregularities to be rectified on the spot. 2erious irregularities reported to ).-. #].-. 1roper reporting ' at proper interval. 4eported on ; th of ne&t month#%uarter but flash report can be submitted immediately,

*56/. 0OMM/..EE Me(ber : 9&ecutive director, nominee of Central (ovt. ' 48I, CA director ' one of non* official directors 4eview Internal inspection# appointment ' 4emuneration of Concurrent Auditor# Conducting training 1rogrammes etc.

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&ORMS 'OR /&4ES.ME&. 8an!s to frame suitable Investment policy. Classification of Investment )eld to maturity Available for 2ale )eld for .rading /isclosure in A#c same as present J categories. )E26 .O M*.5R/.A Intention 8asis. ).M "5G of 8an!s total Investment. <ollowing not to be Covered #Counted for "5G (i) 4e*capitalisation 8onds from govt. of India. (ii) Investment in subsidiary ' Ioint Denture. (iii) Investment in /ebenture#8onds if deemed to be in nature of advance If issued for pro+ect finance (: Trs. or more) -r If issued for wor!ing capital finance (less than yr.) and 8an!s state is ;G is issue. and Issue is part of private placement. 1rofit on sale of such I to 1'7 A#c ' thereafter Capital 4eserve A#c. 7oss to 1'7 A.#c. Carried at ac%uisition cost. If ac%uisition Cost is more than face value there amortise the premium. 4ecognise permanent dimunation. )E26 'OR .R*6/&3 (i) Intention to trade for short term price#Interest rate gain (ii) to be sold within =; /ays (iii) 1rofit or loss on sale to 1'7 A#c (iv) Mar!ed to Mar!et at Monthly#<re%uent intervals. *4*/2*B2E 'OR S*2E (i) If not is above " categories. (ii) 1rofit or 7oss on sale to 1#7 A#c. (iii) Daluation Individually script*wise Mar!ed to Mar!et at %uarterly#fre%uent interval. (iv) /ept. to be 1rovided (appreciation ignored) /ebit to 1'7 A#c ' e%uivalent amt. .o be transferred from I <luctuation 4eserve A#c to 1'7 A#c. /&4ES.ME&. '250.5*./O& RESER4E (i) minimum 5G of investment within 5 years (only w.r. to held for trading and available for sale) (ii) Ma&imum upto ;G of 1ortfolio (iii) .ransfer ma&imum amount of gains realised on sale of Investment in 2ecurities to Investment <luctuation 4eserve (I<4)

1"$

(iv) I<4 eligible for inclusion in .ier*" Capital. (v) .ransfer to I<4 as appropriation to net 1rofit Cbelow line@ after statutory 4eserve. Shifting a(ong categories of / (i) .o # from ).M Approval of 8-/. 2hifting can ta!e place once a year at beginning of year. (ii) <rom A<2 to )<. with approval of 8-/ # A7C-# Investment Committee. (iii) <rom )<. to A<2 (enerally not allowed only in e&ceptional situation with permission of 8-/ # ACC- # I Committee. (iv) .ransfer at ac%uisition Cost # 8oo! value # Mar!et value on date of .ransfer (least) depreciation provided for. /nco(e Recognition on / : (i) Accrual 8asis on securities if guaranteed by Central govt. (ii) -therwise if owners right is established. (iii) <rom mutual funds on cash 8asis. Bro9en period /nterest 8an!s not to capitali?e 81I paid to seller as part of cost but treat as e&ps. in 1'7 A#c. 06R (0orporate 6ebt Restructuring) (i) <or corporate debt of entities facing problems which are outside purview of 8I<4 etc. (ii) Apply to multiple 8an!ing A#c etc. with -#2 e&posure of ; crore or more. (iii) 1rovision for sacrifice of Interest at ).-. 8oo!s. SOME /M OR.*&. M*..ERS .O BE 0O&S/6ERE6 BA *56/.OR Bills for 0ollection $. All documents accompanying the bill should be received and entered in the register by a proper officer. ". .he accounts of the principals should be credited only after realisation of the bill. :. It should be ensured that bills sent by one branch to another branch for collection are not included twice in the amalgamated balance sheet. Bills urchased . At the time of purchase of the bills, an officer should verify that all documents of title are properly assigned to the ban!. ". 2ufficient margin should be !ept while purchasing or discounting of a bill. :. All irregular outstanding accounts should be periodically reported to the head office. F. Incase of purchase or discounting of a bill, proportionate income should be recogni?ed between the periods. 0redit 0ard Operations . .here should be effective screening of applications with reasonably good credit assessment. ". .here should be strict control over storage and issue of credit cards. :. .he system whereby the merchant confirms the unutili?ed balance of the customer 3ith the ban! before accepting payment should be properly installed. F. .here should be a system of prompt reporting by the merchants of all settlements accepted by them through credit cards. 5. All the reimbursements should be immediately charged to the customerMs account. J. Items overdue beyond a reasonable period should be identified and attended to carefully. J. .here should be a system of periodic review of credit card holderMs accounts.

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2O*&S : . 7oan documents to be chec!. ". Chec! the securities hypothecated against loan. :. Chec! the internal control, procedures for loans applied by the ban!. F. 3hether loan agreements (sanction limits) within authority of ban!. 5. 3hether ban! is properly following up the loan. J. Chec! 61A and their provisions. K. Interest calculations. >. 3hether there is healthy turnover in account. =. 3hether repayment schedule is made considering repayment capacity of borrower. ;. If borrower is a company, whether there is proper resolution to borrow amount from ban!. . Audit of ban! borrower.

RE4/SE6 & * &ORMS7RE'ER .O 0)*R.S O& .)/S .O /0

1"%

%ENERAL INSURANCE COMPAN(

*pplicability of *S to 3./.0. : . A2 H : As per /irect Method only. ". As H F 6ot applicable w.r.t. liabilities arising out of I. 1olicies. :. A2 H = 6ot applicable w.r.t. incomes of insurance business. F. A2 H : As per regulation. Apply A2 H : where regulation is silent. 5. A2 H K Applicable in each case irrespective of its applicability clause. *uditors+ Report : . (a) obtained all information (b) proper boo!s of Ac#. Maintained. (c) 1roper returns received from branches. (d) 8alance sheet, revenue A#c., 1'7 A#c., 4'1 A#c. in agreement with boo!s. (e) Acturial valuation of liability certified. ". (i) Opinion on : (a) 8alance sheet H true and fair view of affairs. (b) 4evenue H true and fair view of surplus # deficit. (c) 1 ' 7 H true and fair view of profit # loss. (d) 4 ' 1 H true and fair view of receipt # payment. (ii) <inancial 2tatement prepared in accordance with regulation. (iii) Investment as per reg. (iv) A#c policies appropriate. :. 0ertify that (i) 4eviewed management report and no mista!e therein. (ii) Insurer complied with terms of registration. F. 0ertificate that (i) Derified cash balance and securities. (ii) 9&tent of verification of investment etc., relating to any trust underta!en by insurer as trustee. (iii) 6o asset in contravention of Act. ReBuire(ent of schedule B to /R6 * Regulation #>># Part 1 A%c rinci les $or re . o$ $inancial in$or#ation (i) Applicability of A#c std. (ii) 1remium (iii) 1remium /eficiency (iv) Ac%uisition cost (9&pand in the period in which incurred) (v) Claims (vi) Daluation of Investment (vii) 7oan (viii) Catastrophe /isaster 4eserve

Part 2: >isclosure

1"'

Part 3: :eneral Instruction (7ast year figures, notional income, 1rovision#4eserve) Part 4: @ana*e#ent )e ort Confirmation for validity of registration Conformation that all statutory dues have been paid. Conformation that shareholding pattern is in accordance with law. Conformation that solvency margin is maintained Conformation that valuation of I Conformation that management has not invested any money outside India. Conformation that overall ris! e&posure Conformation that operation in other countries Conformation that aging of claims Conformation that %uality of asset ' portfolio Conformation that payment to parties in which director are interested 4esponsibility statement. /&4ES.ME&.S . Investment in other than approved investment if : (i) 2uch investment Q "5G of total investment, and (ii) Consent of all /irectors. ". Insurer not to invest in one insurance # investment company e&ceeding H (i) ;G of total asset of insurer, or (ii) "G of share capital#debenture of company concerned. <or other companies (other than insurance # investment company) "G is replaced by ;G. :. <unds of policy holders not to be invested outside India. F. 9very insurer to !eep at all times (i) at least ";G of Assets (ii) at least :;G (including (i) (iii) at least 5G of total assets (iv) at least ;G of total assets (v) upto 55G Central (ovt. 2ecurities. 2tate (ovt. and other guaranteed securities )ousing ' loan to 2tate (overnment in approved securities under infrastructure # social sector. -ther securities.

:uidelines (ii) 1roper 8alance between infrastructure and social sector. (iii) 8ased on rating of assets. (iv) 4ating by independent agency (v) 2hould be at lest CA A@ grade. (vi) In shares in actively traded # li%uid investment. Baluation o$ Invest#ent (i) )eal !state < Investment property : )istorical cost less acc. /ep. 7ess impairment loss. 4esidual value as ?ero. (ii) >e(t Securities < as Bheld to maturity$ H )istorical cost. (iii) !/uit1 % >erivative Active @ar'et < <.D. at 8#2 date. Impairment as e&ps. Changes in <.D. in C<air Dalue change A#c.@ (iv) 0nlisted and other < at ).C. provision made for diminution in value such provision may be reversed but increased carrying amount not to e&ceed its historical cost.

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4ER/'/0*./O& Pre#iu# Credited to separate 8an! A#c. 6o 4is! Assumption without receipt of premium. .hree types of premium H for direct business for re*insurance business and share of co*insurance premium. 4ecognised over policy period. As per ris! pattern. 2ome portion of premium allocable to succeeding period thus called unearned premium. 4eserve for une&pired ris!. 1remium deficiency R e&pected cost H related unearned premium. 1rovision to be made. Internal controls and procedures. Cover notes serially numbered. 1remium recognition on aforesaid criteria. Company not at ris! for uncollected premium, short premium, not collected in time, etc. 4einsurance loo! for all its details. Collection after 8#2 date whether relating to year under audit. Co*insurance, company$s share of premium. 1remium register chronologically in order of time of premium. /ue date and date of collection. Tear end transactions. 2ervice ta& applied on premium 4efund of premium. Beri$ication o$ clai#s . 1rovision for all unsettled claims. ". -nly for those co. is legally liable. :. 6ot e&ceed insured amount. F. 9vent after 8#2 date. 5. Average clause. J. Co insurance, provision only for its share. K. 4easons for long delays after claim lodged. >. 0nder litigation, legal advice. =. 1rovision net of salvage value. ;. 6o contingent lia. 3.r.t. claim intimated. . Intimation within reasonable time. ". Claim paid duly sanctioned. :. Claim paid for its share in co*insurance. F. Claim paid after salvage accounted for. 5. Claim paid discharge note from claimant. 0ne" ired )is' )eserve 6ot all ris! e&pire as on 8#2 date. 4is! will be there in succeeding year w.r.t. premium received in this year, thus provide for H (i) 5;G of all other types and (ii) ;;G for marine )ull.

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OOO G is to be ta!en of net premium income i.e. premium received, net of reinsurance premium paid. Rei!sur"!ce >acultati e .roportional =reaty ;uota Share =reaty Surplus treaty Auto2far treaty .ools :&cess of loss treaty (@-) =reaty *on?proportional =reaty Stop loss treaty

Facultative Particular ris! thus consideration of each ris! separately. +reat1 : within limits of treaty covering all !inds of ris! within treaty.. Pro ortional +reat1 G. Juota Share fi& G of all policies issued under defined slope of business. Sur lus : cedes amount which it doesn$t want to retain with it. Auto4$ar : After cession of its surplus treaties. Pools : Members cedes to pool a portion of business directly written by them. 2on4 ro ortional : on basis of loss. K? treat1 : U7 on prevent : If more than one ris! are affected, limit#loss is arrived at separately. K? on non4 revent : 7osses considered on together basis. (Aggregate). Sto ?oss : 1rotect the company from losing more than specified amount for given class of business.

Solvency Margin : .o maintain e&cess of assets over amount of its liabilities at all times, highest of following : i. 5; crores ( ;; cr. <or reinsurer) ii. ";G of net premium income. iii. :;G of net incurred claims. If non*maintenance of 2.M., insurer to submit a financial plan to authority indicting plan of action, else it shall deemed to be insolvent and wound up by court. OOOOOOO for valuation of *ssets : ]ero value to following : (i) Agent 8al. ' outstanding premium in India not reali?ed within :; days. (ii) Agent 8al. ' outstanding premium outside India not reali?able. (iii) /ebts not reali?able. (iv) Advances. (v) <urniture, fi&tures, stationery. (vi) /eferred e&penses. (vii) 1 ' 7 App. A#c. (viii) 4einsurer A#c. outstanding for more than : months. (i&) 1reliminary 9&penses. Computer 9%uipment # )ardware # 2oftware. Investments as per norms.

0o((ission Commission is the consideration payable for getting the insurance business. .he internal control in this area are aimed to ensure that commission is paid in accordance with rules and

1$#

regulations of the company, terms of the agreement and legal re%uirements. .he internal controls with regard to commission may include: 9stablished guidelines for determining appropriate terms for agency contracts. Appropriate guidelines for calculation of commission. Appropriate system is put in place to ensure timely processing of commission and regular reconciliation of general ledger and premium register. Commission payments are made in accordance with established guidelines. Correlate with this years business.

Manage(ent Expenses .he following internal control measures may be adopted for management e&penses Clear management guidelines are issued to cover authori?ation level of employees # mangers for ordering products and services. Authori?ed personnel receive products and services only. 1urchases should be made only from approved vendors who should selected on the basis of tenders received from them. .he management who should also en%uire into unusual costs should regularly review wor! processes and operating e&penses. Authori?ed personnel should release payments only. .he company$s policy on travel and entertainment e&penses should be clearly laid out and communicated. A proper system should be established for complication of employee records, computation of wage bills and disbursement of the same.

Operating Expenses Related to /nsurance Business All administrative e&penses relating to insurance business should be mentioned in schedule F to the financial statement. .he Insurance Act re%uires that. 9&penses in e&cess of 4s.5 lacs or G of net premium, which ever is higher, should be shown separately, and 9&penses not directly relating to insurance business should be shown separately for e&ample, e&penses relating to investment department, ban! charges etc. *gents+ Balance .he audit procedures, which may be followed with regard to agent$s balance, are as follows H Derify whether agent$s balances and outstanding balances in outstanding premium account have been listed, analysed and reconciled for the purposes of audit. Derify whether recoveries of large outstanding have been made in post audit period. Derify whether there is any old outstanding debit or credit balances as at the year end which re%uire ad+ustment. A written e&planation maybe obtained from the management is to their nature. Derify that agents balances do not include employees$ balances and balances of other insurance companies. Derify that no credit of commission is given to agents for businesses directly procured by it. Douch ad+ustments # payments against old outstanding balances in agents account. 9nsure that the relevant control account in the (eneral 7edger is reconciled with the subsidiary records.

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.axation .he procedures to be adopted by the auditor while auditing provision for ta&ation are given below H .he auditor should chec! whether provision for ta&ation has been made after ta!ing into account the specific provisions relating to general insurance companies. .he auditor should in addition to financial statements e&amine other accounts furnished by the company to C ' A(. .he auditor should e&amine the income of foreign branches and foreign countries and the impact of double ta&ation avoidance treaties. .he auditor should see that all ./2 certificates have been !ept and deduction on the same is claimed. .he auditor should assess the implications of wealth .a& Act, =5K on the company. .he auditor should see the system of service ta& collection and the payments to statutory authorities and filling of returns. .he auditor should e&amine sale ta& implications on sale of salvage. 0O;/&S5R*&0E (i) 7arge business ris!s are shared between more than one insurer. (ii) .he leading insurer issues the documents, collects premiums and settles claims and renders statements of Accountants to the co*insurers. (iii) .he auditor should chec! that the premium account is credited on the basis of statements revived from the leading insurer. (iv) Auditor should chec! the communication in the post audit period and obtain a written confirmation to the effect that all incoming advice have been accounted for. (v) .he claims provisions and claims paid should also be verified. (vi) <or outgoing co*insurance the auditor should scrutini?e the transactions relating to outgoing business, i.e. where the company is the leader.

4erification of Reinsurance /n=ards .he 4einsurance inward underwriting should be as per the norms and guidelines prescribed in the Insurance Act, =:> I4/A 4egulations as well as the company$s approved programme. .he auditor should verify the reinsurance inward transactions are as per the arrangements with re*insurers. .he auditor should e&amine the accounting policy of the company in regard to reinsurance business received, premium received and payment of commission and claim costs. .he auditor should satisfy himself about the system of control over the reinsurance inward programme. .he auditor should e&amine the foreign currency transactions and ensure that they comply with Accounting 2tandards (A2) , Accounting for 9ffects of Changes in <oreign 9&change 4ates. .he auditor should e&amine whether the outstanding claim figures have been properly obtained well in time, under proper arrangements and ade%uate provision has been made for outstanding claims. .he auditor should chec! whether provision has also been made for claims incurred but not reported. Closing balance of the re*insurer$s accounts should be reconciled and confirmation should be obtained form them. 4erification of Reinsurance Out=ard .he auditor should apply the following verification measures for reinsurance outward transactions

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.he auditor should verify that reinsurance outward transactions are as per the norms and guidelines prescribed in the Insurance Act, =:>, I4/A 4egulations and company$s approved reinsurance programme. .he auditor should verify that insurances have been ceded as per agreements entered into with various companies. .he auditor should verify the confirmations received form re*insurers regarding claims for losses submitted to them. .he auditor should e&amine the aspects of reinsurance cession premium, commission receivable, paid claims* recovered, outstanding losses* recoverable from re*insurers. .he auditor should e&amine the foreign currency transactions and ensure that they comply with Accounting 2tandard (A2) H . .he auditor should set whether the sub*ledger balance tallies with general ledger control account. )e should also scrutini?e selected accounts of re*insurers. )e should verify any old outstanding claims paid or outstanding at the end of the year. .he auditor should loo! into events after balance sheet date which might have significant impact on recovery of claims H paid or outstanding.

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COST AUDIT
Cost Audit comprise , (i) Derification of Cost Account records, and (ii) 9&amination of these records to ensure that they adhere to Cost Accounting principles, plans, procedures and ob+ectives. .ypes of 0ost *udit ( ) =n (ehal$ o$ #ana*e#ent : (i) 9stablishing accuracy of cost data (ii) 3hether ob+ectives of Cost Account being achieved. (iii) Abnormal losses and gains with causes. (iv) /etermine unit cost of production (v) 1roper overhead rates. (vi) <i&ation of contract price. (vii) Improving %uality of Cost Accounting 2ystem. (") =n .ehal$ o$ a Custo#er : <or Cost plus contracts (:) =n .ehal$ o$ :overn#ent : <or subsidies etc., may be to determine fair price. (F) .1 +rade Association : Maintenance of a price. (5) Statutor1 Cost Audit : 0#s. ":: 8 of the Companies Act 0nder*noted circumstances may also warrant the introduction of Cost Audit : (i) 1rice fi&ation, (ii) Cost variation within the industry, (iv) .a& assessment (v) .rade dispute. (iii) Inefficient management

*dvantage of 0ost *udit .o Manage(ent . reliable data ". chec! on wastage :. inefficiency ' corrective action F. M89 5. 8udgetary control ' 2tandard Costing J. Daluation of closing stoc! K. detection of error and fraud (ii) Materials ^ ^ ^ ^ ^ .o Society .o Shareholder . <i&ation of 1rice 1roper records are ". Iustification of !ept for material, price increase by wages, etc. increase in cost of production .o 3overn(ent Cost plus contract Ceiling price Inefficient unit. 1rotection to certain industries 5. 2ettlement of .rade dispute. J. )ealthy competition among units in industry. . ". :. F.

:eneral $eatures o$ Cost )ecords 4aw material, processed material, consumable stores, etc. 1urchased, issued and balance. Cost to include all direct charges upto wor!s. 2eparate records for wastage, spoilage losses, etc. Method to ad+ust the loss.

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Method of valuation actual or standard costing.

(iii) Manufactured co(ponents K /nter(ediaries : ^ 2eparate records ^ Auantity and value ^ 3astage (iv) Stores and Spare arts : ^ 4eceipt, issues and balances. ^ Auantity and value. ^ All direct charges upto wor!s ^ 0sed should be charged to relevant head. ^ 3astage separately shown. (v) :ages and Salaries : ^ 1roper 4ecords to show attendance and earnings. ^ 4ecords to show overtime wages, piece rate wage earned, incentive wages and earnings of casual labourer. ^ Idle time. ^ 9&tent of wages and salaries capialised. (vi) Overheads : ^ 1roper maintenance of records. ^ Classified under wor!s, Administration and selling and distribution overheads. ^ Allocation of or. to deptt., etc. ^ If allocation on method other than actuals the variation and its treatment. (vii) Service deptt. Expenses including Expenses on utilities : ^ 9&penses on power, fuel, water and steam (purchased or generated) ^ 9&penses on subsidi?ed canteen. ^ Maintenance deptt. 9&penses. ^ Allocation on reasonable basis. (viii) 6epreciation : ^ Cost, date of installation, rate of depreciation, and amount of depreciation provided. ^ -ld assets. ^ Minimum rate of depreciation in Company Act. ^ A2*J. (i&) ac9ing : ^ ^ ^ Auantity and cost of pac!ing material. 3ages and other e&penses on pac!ing. Income received by sale#disposal of spoiled, re+ected waste materials. 1roper records. 4eceipt, issues and 8alances (%uantity and value). 8asic of Daluation. 2ales reali?ation. 9&penses on further process of by*product.

(&) By;products : ^ ^ ^ ^ ^ (&i)

roduction and Sales : ^ 4ecords (%uantity and value) ^ 2eparate records of pac!ed and unpac!ed finished goods. ^ 4ecords of 2ales and inventory. Classified as raw materials, stores and spare parts 3I1 and finished goods. 2eparate records (%uantity and value). 1hysically verified. 4easons for shortage and e&cess. Method to determine cost of 3I1 and finished goods.

(&ii) /nventories : ^ ^ ^ ^ ^

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^ Methods to be followed consistently. (&iii) 4ariances : ^ If 2tandard Costing i.e. other than actuals then procedure followed to wor! out cost of the products. ^ 4easons for variances. (&iv) 0ost State(ents : ^ As part of cost records. ^ w.r.t. each product. ^ <orm of cost sheet (prescribed). (&v) Reconciliation of 0ost and 'inancial *ccount : ^ .o ensure accuracy. ^ Dariations clearly indicated an e&plained. ^ 1eriod of reconciliation Q financial year of company. ^ /ifference between sales reali?ation and total cost and then it is reconciled with financial 1'7 A#c. for the period. ^ 2pecific information in 8oth A#c. not to be different. (&vi)Royalty : ^ ^ ^ ^ ^ 4ecords of 4oyalty paid. 3ith terms of agreement. 8asis of computation. Allocation to different cost centers, etc. If it is a direct charge or overhead.

(&vii) Statistical Records : ^ 1lant utili?ation, idle machine time, capital employed, capital 3.I.1. ^ 1ercentage of different raw materials. ^ .o have control over various operations and costs. (&viii) /nter 1 0o(pany transfer : ^ 6ormally, no inter co. transfer below cost. ^ 9nsure against shifting of profits between corporate investors. ^ 1roper valuation of inter*company transfer to generate revenue (duty and ta&). rogra((e of 0ost *udit (c) 4eview of Cost Accounting 4ecords : .his will include : i) Method of costing in use H batch, process or unit. ii) Method of accounting for raw materials, stores and spares, wastages, spoilage defectives, etc. iii) 2ystem of recording wages, salaries, overtime and spares, wastages, etc. iv) 8asis of allocation of overheads to cost centers and of absorption by products and apportionment of service department$s e&penses. v) .reatment of interest, recording of royalties, research and development e&penses, etc. vi) Method of accounting of depreciation. vii) Method of stoc!*ta!ing and its valuation including inventory policies. viii) 2ystem of budgetary control. i&) 2ystem of internal auditing. (d) Derification of cost statements and other data. .his will include the verification of : i) 7icensed, installed and utili?ed capacities. ii) <inancial ratios. iii) 1roduction data. iv) Cost of raw material consumed, wages and salaries, stores, power and fuel, overheads provision for depreciation etc.

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v) vi) vii) viii)

2ales reali?ation. Abnormal non*recurring and special costs. Cost statements. 4econciliation with financial boo!s.

Exe(ption fro( 0ost *udit .he e&emption from Cost Audit on year*to*year basis in the following situation : (i) .emporary Closure of the company#products. (ii) 6egligible production activity. Fees : A 8 C 0o(pany having an authoriHed 0apital 7ess than 4s."5 la!h 4s."5 la!h or more but less than 4s.5 crore 4s.5 crore or more *(ount of fees to be paid 4s. 5;; 4s. ,;;; 4s.",;;;

Appropriate documents are re%uired to be furnished along with application for e&emption : (i) .rue copy of complete Annual 4eport containing balance sheet and profit and loss account for the year for which e&emption is being sought along with copies of the same pertaining to preceding two years. (ii) An affidavit containing full facts of capacity utili?ation turnover and financial status of the company, duly signed by two /irectors of the company and authenticated by a 6otary 1ublic. (iii) A brief note#status report on steps ta!en by the management for revival of the said unit.

Steps in 0ost *udit Revie= ^ verification of cost data ^ 4efer to financial statement ^ 4eporting. 0ost *udit Report 3ithin >; days of end of <.T. to Central (overnment. A copy to company whether H (iii) All information (iv) 1roper Cost Account records as re%uired. (v) 1roper returns from 8ranches. (vi) 8oo!s give information in manner so re%uired. (vii) Cost statement as specified in anne&ure are !ept by company. (viii) In his opinion, true and fair view of cost. *uditor+s observation and suggestions M (i) Ade%uacy or otherwise of Cost Accounting 2ystem and suggestions for improvement thereof. (ii) Ade%uacy or otherwise of 8udgetary control system, if any. (iii) Matters clearly wrong in principle. (iv) If price charged for related party transactions is different from normal price and its impact. (v) Areas of decline profitability or loss with reasons, including default on payment to (overnment, <.I. and 8an!s, etc. (vi) 2teps re%uired under competitive environment. (vii) 9&port commitments vis*W*vis actual e&ports. (viii) 2cope of internal audit of records and its ade%uacy, etc. .rue and fair cost of production : (iv) Accepted Cost Accounting principles. (v) Costing system appropriate to product.

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(vi) (vii) (viii) (i&) (&)

Materiality. Consistency. 1rescribed form. 9limination of prior period ad+ustments. Abnormal losses ignored in determination of cost.

0o(posite *udit It is not feasible due to : (i) /ifferent information system (accounting data # costing data). (ii) -b+ective of Audit. (.rue and <air financial statement Ds. Cost). (iii) Classification of accounting data (A#c head vs. Cost centres). (iv) Confidentiality. (Cost Audit 4eport is more confidential). (v) Applicability (for all Co. vs. 2ome Industries). (vi) .ool of Management (overall results vs. wea!nesses in cost the system) (vii) 9&tensive 6ature: (cost auditor also on propriety ' efficient aspects).

*nnexure to 0ost *udit Report

( ) (") (:) (F) (5) (J) (K) (eneral. Cost Accounting 2ystem 1rocess of manufacture. Auantitative /etails ([). (A) Ma+or Input Materials # Components Consumed ([). (8) 2tandard # Actual consumption of input material per unit. 8rea!*up of cost of input materials imported during the year ([). (A) 1ower, fuel and utilities ([). (8) 2tandard # Actual consumption of power, fuel and utilities in terms of %uantity per unit of production. 2alaries and wages ([). 4epairs and Maintenance. <i&ed Assets 4egister and /epreciation. (ross 8loc!, /epreciation and 7ease 4ent. -verheads ([[) 4esearch and /evelopment 9&penses ([[) 4oyalty and technical !now how charges ([[) Auality Control 9&penses ([[). 1ollution Control 9&penses ([[). Abnormal non*recurring costs ([[) (A) 6on*moving stoc! at end of the year ([[) (8) 3ritten off stoc! during the year ([[) (A) Inventory valuation at end of the year. (8) 1hysical verification of stoc!. 2ales of product under reference (%uantity, rate amount for current and previous year). Margin per unit of output ([) Competitive margin against imports ([[) Dalue Addition and /istribution of earnings ([[). <inancial position and 4atio Analysis ([[). Capitalisation of 4evenue 9&penditure ([[). 4elated party transactions. Central 9&cise 4econciliation for product under reference. 1rofit 4econciliation.

(>) (=) ( ;) ( ) ( ") ( :) ( F) ( 5) ( J) ( K) ( >) ( =) (";) (" ) ("") (":) ("F) ("5) ("J) ("K) (">)

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[ KK

Data for current ear /st previous ear and 9nd previous ear. Data for current and 9 previous ear for product under reference and for factor as a w$ole.

AUDIT REPORT
.R5E *&6 '*/R : <inancial statements are reported to be as true and fair when all of the following hold good * 4easonable evidence is obtained in support of the transactions recorded in the boo!s of account, Accounting entries passed in the boo!s of account are in conformity with the applicable accounting principles and standards followed consistently, .he financial statements prepared represent a true summary of transactions that too! place during the year, .he process of classification and aggregation followed in preparation of the financial statements is fair and does not hide a material fact nor does it highlight something which may distort the real state of affairs. .he form of accounting statement is in the re%uired form, if any, .he accounting statements do not contain any misstatement, .he material transactions recorded in the boo!s are neither illegal nor beyond the legal powers of the client, and All statutory and relevant disclosures have been made.

*56/. RE OR.S 5&6ER 0OM *&/ES *0.7 $D-C Report under section ##! ($*) 2ection ""K ( A) re%uires the auditor to ma!e specific enBuiries during the conduct of his audit. )e is, however, not re%uired to report on these matters unless he has any special comments to ma!e. It should be understood that the auditor should only en%uire on the specified matters and is not to investigate into them. .he matters re%uired to be en%uired into are 3hether loans and advances made by the company on the basis of security have been properly secured and whether the terms on which they have been made are not pre+udicial to the interests. 3hether transactions of the company, which are represented merely by boo! entries, are not pre+udicial to the interests of the company. 3hether the company is not an investment company within the meaning of section :K" or a ban!ing company, whether so much of the assets of the company as consists of shares, debentures and other securities have been sold at a price less than that at which they were purchased by the company. 3hether loans and advances made by the company have been shown as deposits. 3hether personal e&penses have been charged to revenue account. 3here it is stated in the boo!s and papers of the company that any shares have been allotted for cash, whether cash has actually been so received in respect of such

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allotment, and if no cash has actually been so received, whether the position as stated in account boo!s and balance sheet is correct, regular and not misleading. Report under Section ##!(#) .he auditor has to state whether, in his opinion the said accounts give the information re%uired by this act in the specified manner and give a true and fair view. in the case of the balance sheet, of the state of the company$s affairs as at the end of its financial year, and in the case of the profit and loss account, of the profit or loss for its financial year. Report under section ##!(,) .he auditor$s report should state 3hether he has obtained all the information and e&planations which to the best of his !nowledge and belief were necessary for the purpose of his audit, 3hether in his opinion, proper boo!s of account as re%uired by law have been !ept by the company so far as appears from his e&amination of those boo!s, and proper returns for the purposes of his audit have been received from branches not visited by him, 3hether the report on the accounts of any branch office audited under section ""> by a person* other than the company$s auditor has been forwarded to him as re%uired by clause (C) and how he has dealt with the same in preparing his report, 3hether the company$s 8alance 2heet and 1rofit and 7oss Account dealt with by the report are in agreement with the boo!s of accounts and returns, 3hether, in his opinion, the 1rofit and 7oss Account and balance sheet complied with the accounting standards referred to in section " (:c), 3hether any director is dis%ualified from being appointed as a director under section "KF( ). 3hether any cess payable by the company has been so paid and if not the amount not so paid. .he companies (2econd Amendment) Act, ";;" provides for section FF A which states as follows: (i) A cess on companies will be levied for purpose of rehabilitation or revival of sic! industrial Co. (ii) .hese provisions are made in sections FF A to FF <. (iii) .he amount to be collected must be in a range of .;;5G to . G on value of annual turnover annual gross receipts more as the Central (overnment may notify from time to time in official ga?ette. (iv) .he company shall pay the amount to Central (overnment within : months from close of every financial year. Report under section ##! (%*) 0OM *&/ES (*56/.OR+S RE OR.) OR6ER7 #>>-

Short title7 application and co((ence(ent

.his order may be called the Companies (Auditor$s 4eport) -rder, ";;5. It shall apply to every company including a foreign company as defined in section 5= of the Act, e&cept the following H a 8an!ing company as defined in clause (c) of section 5 of the 8an!ing 4egulation Act, =F= ( ; of =F=), an insurance company as defined in clause (" ) of section " of the Act, a company licensed to operate under section "5 of the Act, and

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a private limited company with a paid up capital and reserves not more than fifty la!h rupees and does not have loan outstanding twenty five la!h rupees or more from any ban! or financial institution and does not have a turnover e&ceeding five crore rupees.

6efinitions ; In this -rder, unless the conte&t otherwise re%uires CAct@ means the Companies Act, =5J ( of =5J), Cchit fund company@, Cnidhi company@ or Cmutual benefit company@ means a company engaged in the business of managing, conducting or supervising as a foreman or agent of any transaction or arrangement by which it in into an agreement with a number of subscribers that every one of them shall subscribe to a certain sum of instalments for a definite period and that each subscriber, in his turn, as determined by lot or by auction or by tender or in such other manner as may be provided for in the agreement, shall be entitled to a pri?e amount, and includes companies whose principal business is accepting fi&ed deposits from, and lending money to, members, Cfinance company@ means a company engaged in the business of financing, whether by ma!ing loans or advances or otherwise, of any industry, commerce or agriculture and includes any company engaged in the business of hire*purchase, lease financing and financing of housing, Cinvestment company@ means a company engaged in the business of ac%uisition and holding of, or dealing in, shares, stoc!s, bonds, debentures, debenture stoc!s, including securities issued by the Central (overnment or by any local authority, or in other mar!etable securities of a li!e nature. CManufacturing company@ means a company engaged in any manufacturing process as defined in the <actories Act, =F> (J: of =F>), CMining company@ means a company owing a machine, and includes a company which carries a the business of a mine either as a lessee or occupier thereof, C1rocessing company@ means a company engaged in the business of processing materials with view to their use, a sale, delivery or disposal, C2ervice company@ means a company engaged in the business of supplying, providing, maintaining and operating any services, facilities, conveniences, bureau& and the li!e for the benefit of others, C.rading company@ means a company engaged in the business of buying and selling goods.

*uditor+s report to contain (atters specified in paragraphs % and - * 9very report made by the auditor under section ""K of Act, on the accountants of every company e&amined by him to which this -rder applies for every financial year ending on any day on or after the commencement of this -rder, shall contain the matters specified in paragraphs F and 5. Matters to be included in the auditor+s report ; .he auditor$s report on the account of a company to which this -rder applies shall include a statement on the following matters, namelyH (i) 3hether the company is maintaining proper records showing full particulars, including %uantitative details and situation of fi&ed assets, 3hether these fi&ed assets have been physically verified by the management at reasonable intervals, whether any material discrepancies were noticed on such verification and if so, whether the same have been properly dealt with in the boo!s of account,

If a substantial part of fi&ed assets have been disposed off during the year, whether it has affected the going concern, (ii) 3hether physical verification of inventory has been conducted at reasonable intervals by the management, .

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Are the procedures of physical verification of inventory followed by the management reasonable and ade%uate in relation to the si?e of the company and the nature of its business. If not, the inade%uacies in such procedures should be reported, 3hether the company is maintaining proper records of inventory and whether any material discrepancies were noticed on physical verification and if so, whether the same have been properly dealt with in the boo!s of accounts,

(iii)has the company granted any loans, secured or unsecured to companies, firms or other parties covered in the register maintained under section :; of the Act. If so, give the number of parties and amount involved in the transactions. 3hether the rate of interest and other terms and conditions of loans given by the company, secured or unsecured, are prima facie pre+udicial to the interest of the company, 3hether receipt of the principal amount and interest are also regular, If overdue amount is more than one la!h, whether reasonable steps have been ta!en by the company for recovery of the principal and interest, )as the company ta!en any loans, secured or unsecured from companies, firms or other parties covered in the register maintained u#s. :; of the Act. If so, give the number of parties and the amount involved in the transactions. 3hether the rate of interest and other terms and conditions of loans ta!en by the company, secured or unsecured, are prima facie pre+udicial to the interest of the company.

3hether payment of the principal amount and interest are also regular. (iv) is there an ade%uate internal control system commensurate with the si?e of the company and the nature of its business, for the purchase of inventory and fi&ed assets and for the sale of goods and services. 3hether there is a counting failure to correct ma+or wea!nesses in internal control system. (v) 3hether the particulars of contract or arrangements referred to in section :; of the Act have been entered in the register re%uired to be maintained under the section.

3hether the transactions made in pursuance of such contracts or arrangements have been made at prices which are reasonable having regard to the prevailing mar!et prices at the relevant time, (.his information is re%uired only in case of transactions e&ceeding the value of five la!h rupees in respect of any party and in anyone financial year). (vi) in case the company has accepted deposits from the public, whether the directives issued by the 4eserve 8an! of India and the provisions of sections 5> A and 5>AA or any other relevant provision of the Act and the rules framed there under, where applicable, have been complied with. If not, the nature of contraventions should be stated, If an order has been passed by Company 7aw 8oard or 6ational Company 7aw .ribunal or 48I or any Court or any other .ribunal whether the same has been complied with or notX (vii) in the case of listed companies and # or other companies having$ a paid*up capital and reserves e&ceeding 4s.5; la!hs as at the commencement of the financial year concerned, or having an average annual turnover e&ceeding five crore rupees for a period of three consecutive financial years immediately preceding the financial year concerned, whether the company has an internal audit system commensurate with its si?e and nature of its business, (viii) where maintenance of cost records has been prescribed by the Central (overnment under clause (d) of sub*section ( ) of section ";= of the Act, whether such accounts and records his been made and maintained, (i&) is the company regular in depositing undisputed statutory dues including 1rovident <ill Investor 9ducation and 1rotection <und, 9mployees$ 2tate Insurance, Income*ta&, 2ales*ta&, 3ealth .a&, 2ervice .a&, Custom$ /uty, 9&cise /uty, cess and any other

1!2

statutory dues with the appropriate authorities and if not, the e&tent of the arrears of outstanding statutory dues as at the last day of the financial year concerned for a period of more than si& months from the date they became payable, shall /e indicated by the auditor. In case dues of sales ta& / income ta& / custom ta& / wealth ta& / e&cise duty / cess have not been deposited on account of any dispute, then the amounts involved and the forum where dispute is pending may please be mentioned. (A mere representation to the /epartment shall not constitute the dispute). 3hether in case of a company which has been registered for a period not less than five years, its accumulated losses at the end of the financial year are not less than fifty percent of its net worth and whether it ha incurred cash losses in such financial year and in the immediately preceding financial year. 3hether the company has defaulted in repayment of dues to a financial institution or ban! or debenture holdersX If yes, the period and amount of default to be reported,

(i&)

(&i)

(&ii) 3hether ade%uate documents and records are maintained in cases where the company has granted loans and advances on the basis of security by way of pledge of shares, debentures and other securities, If not, the deficiencies to be pointed out. (&iii) 3hether the provisions of any special statute applicable to chit fund have been duly complied withX In respect of nidhi ; mutual benefit fund # societies, 3hether the net*owned funds to deposit liability ratio is more than of balance sheet, : "; as on the date

3hether the company has complied with the prudential norms on income recognition and provisioning against substandard / doubtful ; loss assets, 3hether the company has ade%uate procedures for appraisal of credit proposals / re%uests, assessment of credit needs and repayment capacity of the borrowers, 3hether the repayment schedule of various loans granted by the night is based on the repayment capacity of the borrower.

(&iv) If the company is dealing or trading in shares, securities, debentures and other investments, whether proper records have been maintained of the transactions and contracts and whether timely entries have been made therein, also whether the shares, securities, debentures and other securities have been held by the company, in its own name e&cept to the e&tent of the e&emption, if any, granted under section F= of the Act, (&v) 3hether the company$ has given any guarantee for loans ta!en by others from ban! or financial institutions, the terms and conditions whereof are pre+udicial to the interest of the company, (&vi) 3hether term loans were applied for the purpose for which the loans were obtained, (&vii) 3hether the funds raised on short*term basis have been used for long term investment, if yes, the nature and amount is to be indicated, (&viii)3hether the company has made any preferential allotment of shares to parties and companies covered in the 4egister maintained under section :; of the Act and if so whether the price at which shares have been issued is pre+udicial to the interest of the company, (&i&) 3hether securities or charge have been created in respect of debentures IssuedX (&&) 3hether the management has disclosed on the end use of money raised by public issues and the same has been verified, (&&i) 3hether any fraud on or by the company has been noticed or reported during the year, If yes, the nature and the amount involved is to be indicated.

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a.

Reasons to be stated for unfavourable or Bualified ans=ers * 3here, the auditor$s report, the answer to any of the %uestions referred to in paragraph F is unfavourable or %ualified, the auditor$s report shall also state the reasons for such unfavourable or %ualified answer, as the case may be. 3here the auditor is unable to e&press any opinion in answer to a particular %uestion, his report shall indicate such fact together with the reasons why it is not possible for him to give an answer to such %uestion. *uditor should consider follo=ing =hile rendering (odified report i. .he auditor should identify the statements of facts and opinions, which re%uire %ualification. ii. 3here the auditor is in active disagreement with something, which the management had done he would either give an adverse report or disclaim his opinion. iii. 3here the disagreement with the management is only in respect of a particular item, he may %ualify his report. iv. 3here the item is material enough to distort the true and fair view of state of affairs of the company, he may give an adverse opinion in respect of such item. v. 3here the item concerned is not material, he may even ignore the aspect and issue a clean report.

b.

*56/.OR+S SE *R*.E RE OR. .O 6/RE0.ORS . .he management of the company may re%uire from the auditor a separate report in addition to his report under section ""K of the Act. ". .he ob+ective of such reports is to provide the management with detailed information regarding procedures, systems, wea!nesses in internal controls etc. :. 2uch reports should be detailed enough to highlight the wea!ness and suggestions to improve. F. )owever, the auditor should ta!e care that matters, which are material enough to be reported to the shareholders are not contained in his report to the directors. 5. .hus, auditor$s separate report to director can not be substituted for an otherwise modified report. *56/. 0ER./'/0*.ES *&6 *56/. RE OR. . A certificate is a written confirmation of the accuracy of the facts stated therein and does not involve any estimate or opinion. ". .he auditors certificate represents that he has verified certain figures and is satisfied about their accuracy. :. )owever, a report, is a formal statement made after an en%uiry or e&amination of the specified .matters under the report and the auditors opinion thereon. F. .hus the opinion may differ from one auditor to another as it involves personal +udgement. *56/. O' 0OM *&A ROS E0.5SES According to section " (:J) of the Companies Act, =5J B1rospectus$ means any document described or issued as a prospectus and includes any notice, circular, advertisement or other document inviting deposits from the public or inviting offers from the public for the subscription or purchase of any shares in, or debentures of a body corporate. In order to protect the investors from deceiving offers, the Companies Act has specified certain information to be furnished in detail in the prospectuses. Reports to supple(ent the prospectus .wo reports on financial aspects to be included in a prospectus are 4eports of the statutory auditor or +oint auditors of the company, and 4eport of the accountant. A person who is eligible to be appointed, as an auditor shall be %ualified to act as an accountant.

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*spects 0oncerning the *uditor Signing of the Report ; .he re%uirements of signing of these reports are same as in case of signing of audit report under the Companies Act, =5J. 'ees for issue of reports ; .he fees for ma!ing a report to be attached to the prospectus would be determined on the basis of agreement between the auditor and the directors of the company. 0onsent 2etters ; According to section J; (:) of the Act, the auditor should give in writing his consent to act in such capacity. .he letter should accompany the prospectus when submitted for registration. 2iability for (isstate(ents in prospectus ; According to section J" of the Companies Act, =5J every person who Oas authori?ed the issue of prospectus will be liable to compensate every person who has incurred any loss or damage due to untrue statement in the prospectus. 2ection J; (:) provides that Chartered_ Accountants will be liable only for untrue statements made by them in the capacity of e&pert. 3here the auditor is made to compensate for any loss, he may claim contribution from other persons. )owever, a professional accountant will not be so liable if he can prove that the prospectus was issued without his !nowledge or consent and that on becoming aware of its issue, he forthwith gave reasonable public notice that it was issued without his consent, or he withdrew his consent in writing before delivery of the prospectus for registration, or after the delivery of prospectus for registration but before allotment of shares, on becoming aware of the untrue statement, he withdrew his consent in writing and gave reasonable public notice of the withdrawal and of the reasons therefore, or he was competent to ma!e the statement and that he had reasonable ground to believe and did upto the time of allotment of shares or debentures believe that the statement was true.

Rights of the auditors ; .he auditors have right to access the boo!s of account, other records and call for any necessary information from the company. 0o((unication of the report 1 .he reports of auditors are addressed to the 8oard of /irectors of the company.

*spects 0oncerning the *ccountant .he reporting accountant is re%uired to report on the profits and losses for the preceding five years and on the position of assets and liabilities. )e should separately disclose items of e&tra ordinary nature in the profit statement. )e may also have to ad+ust the figures in income statement on the following grounds H All prior items should be ad+usted in the year to which they relate and not in the year in which they came to be !nown, All items of material nature which are not li!ely to recur should be ad+usted in the preparation of profit trend statement, such items may be )eavy repairs and renovation, or /iscontinued operations # business, or Abnormal losses

3here accounting policies have not been consistently followed, the accountant should compute the figures for all periods under report based on the policies applied in the latest period.

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3here the statement of trend of profits contains an interim period or bro!en period, the accountant may adopt either of the two approaches. )e may treat the interim period as part of the whole year. In this case, the items of the income and e&penditure should be based on the yearly trend for the period covered by the report, or

)e may view the interim period as a separate accounting period and items of income and e&penditure will be reported at actual for the period. 2imilar will be the treatment for estimated provisions in the accounts. 3ith preparing the report to be included in the prospectus, the accountant ta!es up great responsibility. .hus he should ta!e a note of .he manner in which the directors, in their estimate of current and future profits, have dealt with the figures shown in the accountant$s report and with the matters to which the directors$ attention was drawn in that report, Material facts !nown to him, in relation to directors$ estimates, .he manner in which the directors have dealt with any special circumstance. Darious certificates and representations submitted to him by the management. In case there is a misstatement in his report and a liability to compensate a person for loss incurred as a result of the misstatement arises, the accountant can protect himself from such liabilities in the manner as discussed for the statutory auditors.

*56/. RE OR.S ? 0ER./'/0*.ES O& '/&*&0/*2 /&'ORM*./O& /& O''ER 6O05ME&.S 298I has been issuing several guidelines for disclosure and investor protection, which include certain financial information to be disclosed. .his is in addition to information re%uired as per schedule II to the Companies Act, =5J. .his information is re%uired to be audited by a Chartered Accountant. ReBuire(ent regarding audit of financial infor(ation in offer docu(ents: 1ara F of 1art A* of clarification UID re%uires that all financial information forming part of offer documents shall be audited. .he following are the various financial information which form parts of offer documents. $. *uditor+s Report .he offer document should include Auditor$s 4eport on the profit and loss statement for the five years immediately preceding the issue of prospectus and on the assets and liabilities as on the date of issue of prospectus. *d8ust(ents in state(ent of profit or loss and assets and liabilities: Clause "; at 1art )I of 2chedule II to the Companies Act, =5J re%uires that Cany report re%uired under 1art II of this schedule shall either (i) indicate by way of note any ad+ustments as regards the figures of any profits or losses or assets and liabilities dealt with by the report which appear to the persons ma!ing the report necessary or (ii) ma!e those ad+ustments and indicate the fact that the ad+ustments have been made. 3here there is a %ualification by the auditor with regard to statement of profit or loss, assets and liabilities, all ad+ustments shall be made in the respective statements itself. Extraordinary /te(s 1rofit or loss arrived at before and after considering the e&traordinary items should be disclosed. .he disclosure of such item should be on Cnet of ta& basis@. #. Material 0hanges in *ctivities

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.he offer documents shall also disclose the changes in the activities of the issuer, which may have had a material effect on the financial statements. <or e&ample, /iscontinuance of lines of business. 7oss of agencies or mar!et and other similar factors. Addition of new lines of business. It is not intended to identify the impact of each change which is part of normal business activities e.g. updating the technology, normal change in product mi&, change in ordinary agency relationship. .he intention is to identify the changes, which pertain to separate ma+or lines of business. .he management shall prepare the statement disclosing the above. .he auditor should chec! the correctness of the information based on his !nowledge of the company$s operations. In the case of discontinued operation the*following information shall be disclosed. 6ature of the discontinued operation 9ffective date of discontinuance for the accounting purposes. Manner of discontinuance (sale # abandonment etc.) .urnover of the discontinued operation. ,. Significant *ccounting olicies All significant accounting policies followed in the preparation of offer document should be disclosed. %. .ransactions =ith 0o(panies in N ro(oter 3roupO /isclosure in offer document is called for in respect of 2ales or purchases between companies in the promoter group when sales or purchases e&ceed in value, in aggregate, ;G of the sales or purchases of the issuer. Material items of income or e&penditure arising out of transactions within the promoter group.

-. 6isclosure under the heading NOther /nco(eO 3here such income e&ceeds ";G of net profit before ta& the various details of Cother income@ shall be disclosed, vi?., 2ources and other particulars of such income Indication whether it is recurring or non*recurring and has arisen out of business activities # other than the normal business activities. .he computation of ";G has to be made in relation to net profit or net loss before ta& and e&traordinary item. .he concerned income should be after netting off of e&penses, and such netting off is only for computing the relevant Cother income@. <or the purpose of disclosure in the relevant statement of profit or loss the incomes # e&penses should disclosed at gross amounts in the usual manner. .he disclosure should be 2ource, 6ature, Amount, 4ecurring or non recurring, and 3hether on account of normal business activity or not. C. 6isclosure of Bifurcated .urnover .urnover of products manufactured by the company

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.urnover of products traded by the company and /etails of products not normally dealt in by the company but included in above should be mentioned separately.

'inancial /nfor(ation in Respect of =hich the *uditor should give Separate Report to the Manage(ent .here are some other financial information that should be provided by the management and the same should be audited by the auditor of the issuer company. .he report should also be contained in the offer documents. (a) .ax shelters <or proper understanding of future maintainable profits the incidence of ta& should be properly e&plained by way of appropriate disclosure. .he auditor should e&amine the detailed computations made by the management to arrive at the figure of provisions for ta&ation, which has been disclosed in the annual accounts.

(b) *ccounting Ratios. .he following accounting ratios for each of the accounting periods for which financial information is given 9arnings 1er 2hare 4eturn on 6et 3orth and 6et Asset Dalue 1er 2hare .he auditor should satisfy himself that for ma!ing various computations for the above accounting ratios, the various items of profit # loss assets and liabilities have been properly ad+usted.

Earnings per share It may be (i) basic earnings per share or (ii) diluted earnings per share. Net "roift/ loss for he period attributable to e+uity shareholders 'asic -arnings per Share = ,eighted average number of e+uity shares outstanding during the period
$iluted -arnings "er Share = Net profit attributable to e+uity shareholders (after ad.ustment for diluted earnings Average number of weighted e+uity shares outstanding during the period (assuming the conversion of diluted potential e+uity shares)

4eturn on 6et 3orth .he formula used is * Net profit before e#traordinary items but after ad.usted ta# Net worth e#cluding revaluation reserve at the end of the year .he term ad+usted ta& refers$ to ta& provided for the period after ad+usting ta& attributable to e&traordinary items. 3hile calculating net worth, the effect of, revaluation should be ignored. In order words, the assets would be valued on historical cost basis. &et *ssets 4alue er Share 6AD shall be calculated on the basis of the latest audited balance sheet. It can be computed either by net assets method or net e%uity method. In the case of net asset method the total liabilities and preference capital are deducted from the total assets. In the case of net e%uity method, e%uity share capital is added to reserves and surplus, deducting there from miscellaneous e&penditure and debit balance of profit and loss account.

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.he auditor should consider Intangible assets are not ta!en into account (unless they have been paid for) 4evaluation of assets have not been ta!ing into account BArrears of preference dividend should be provided for Net Asset /alue -+uity shares at the end of the accounting period

.he formula for 6AD per share is

(c) 0apitaliHation State(ent .he capitali?ation statement shows total debt and net worth and the debt # e%uity ratio before and after the issue is made. 3here there is a change in the share capital since the date as of which the financial information has been disclosed in the offer document, a note shall be included e&plaining the nature of the change. (d) 6isclosure of ro8ect Expenditure .he following information should be anne&ed to the -ffer /ocument actual e&penditure incurred on the pro+ect upto a date not earlier than " months of filling the prospectus with 298I or 4egister of Companies whichever is later means and sources of financing such e&penditure year wise brea! 7ip of the Be&penditure proposed to be incurred on the said pro+ect. .he auditor should obtain a management representation regarding details of pro+ect e&penditure and the means and sources of financing such e&penditure and year*wise brea!*up of e&penditure proposed to be incurred on the pro+ect. .here is no need to audit the information as it is based on estimates arrived at by management. (e) Bridge 2oans /etails of bridge loans or other financial arrangement if any, for incurring e&penditure on the pro+ect and which would be repaid from the proceeds of, the issue. (f) 2oans .he principal terms of loans and assets charged as security should be disclosed. (g) 6isclosure under NBasic of /ssue riceO .he following information shall be disclosed 912 i.e. 912 pre*issue for the last three years (ad+usted for changes in capital) 1#9 pre*issue * comparison with 1I9 of industry (giving source of information) Average return on net worth in the last three years Minimum return on increased net worth re%uired to maintain pre*issue 912. 6AD per share after issue and comparison thereof with the issue price.

(h) *uditor+s 0ertificate on rofit 'orecast .he offer documents should also include a forecast of estimated profits for the financial year ending immediately before the date of offer document (if such information is not already given in the offer document) and for the financial year ending immediately after the date of the offer documents. .his should be supported by an auditor$s certificate, which lists the ma+or assumptions on which the forecast is based and gives assurance on the arithmetical calculations derived, from such assumptions.

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COMPAN( AUDIT 8 COMPAN( AUDITOR

6/4/6E&6S
&efer to C$art on Dividend and Case 6tud from stud material.

4ER/'/0*./O& O' 6/4/6E&6 )e should e&amine the Memorandum and Articles of Association of the Company to determine the rights of different classes of shareholders to whom dividend has been paid. )e should ensure that dividends can only be distributed out of profits. .he capital of the shareholders can not be used for he purpose of payment of dividends. )e should ascertain whether profits earmar!ed for the purpose of dividend have been computed in accordance with the re%uirements of section ";5 of the Companies Act. )e should ascertain whether the rate of dividend has been recommended properly in a meeting of the 8oard of /irectors. )e should inspect the shareholders minute boo! to verify the amount of dividend declared and confirm that the amount does not e&ceed the amount recommended by the directors. )e should see that profits appropriated for payment of divided are after transfer to reserves an amount in accordance with the rules framed by the Central (overnment. )e should e&amine the list of shareholders as drawn from the 4egistrar of 2hareholders and see that the total amount of dividend payable companies with the /ividend Account. If a separate ban! account is opened for payment of dividends, he should chec! the transfer of total amount of dividends payable from the /ividends Account. )e should verify the amount of unclaimed dividend with the /ividend Account, ban! 1ass 8oo! and dividend warrants as have been returned undelivered. )e should see that where the dividend is declared, distributed or paid by a domestic company (not a foreign company), the ta& on distributed profit at the rate of ;G is paid with in F days from the date of declaration, distribution or payment of dividend whichever is earliest. Y2ection 5(;) of the Income .a& Act, =J Z .he auditor should see that the dividend which remains unpaid or unclaimed within :; days of the declaration of the dividend, such unpaid or unclaimed dividend has been transferred to a special ban! account entitled C0npaid /ividend Account of OOOOOOOOO Company 7imited # Company 1vt. 7imited@. .he transfer must be made within K days from the date of e&piry of :; days. 2uch an account is to be opened only in a 2cheduled 8an!. If any dividend remains unpaid or unclaimed for a period of seven years from the date of transfer, the amount standing to the credit of the special ban! account has to be transferred by the company to the fund called Investor 9ducation and 1rotection <und.

*56/.ORS 65.A :/.) RE3*R6 .O 6E RE0/*./O& $. Companies Act provides only minimum rates. .he company can charge depreciation at a higher G also. (or it means lesser life). #. .he company can adopt different methods for different type of assets provided the same is consistently followed. ,. Change in method of depreciation should be with retrospective effect and only if it is re%uired by statute or accounting standard or if it results in better presentation. %. .he accounts must disclose the methods which have been used to calculate depreciation. -. 7ow*value items may be fully depreciated provided this is disclosed appropriately in the accounts.

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C. /epreciation should be calculated from the date when the asset is ready to use. !. 3hen the asset is installed during the year, chec! that it is only pro*rate depreciation that appears in the accounts. ". In case of revaluation of assets, chec! the depreciation on revalued part (whether charged to 1rofit ' 7oss Account or revaluation reserve.

REFER TO RELE6ANT SECTIONS OF COMPANIES ACT FOR DIS<UALIFICATION4 APPOINTMENT4 REMO6AL AND REMUNERATION OF COMPAN(=S AUDITOR

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