PAPER – 6: AUDITING AND ASSURANCE

PART – I : ACADEMIC UPDATE

(Legislative Amendments / Notifications / Circulars / Rules / Guidelines issued by
Regulating Authority)

Revised Chapter 7-Company Audit-I is given hereunder:

1. ELIGIBILITY, QUALIFICATIONS AND DISQUALIFICATIONS OF

AN AUDITOR
The provisions relating to eligibility, qualifications and disqualifications of an
auditor are governed by section 141 of the Companies Act, 2013 (hereinafter
referred as the Act). The main provisions are stated below:
(1) A person shall be eligible for appointment as an auditor of a company
only if he is a chartered accountant.
It may be noted that a firm whereof majority of partners practising in India
are qualified for appointment as aforesaid may be appointed by its firm
name to be auditor of a company.
(2) Where a firm including a limited liability
partnership is appointed as an auditor of
a company, only the partners who are
chartered accountants shall be
authorised to act and sign on behalf of
the firm.
(3) Under sub-section (3) of section 141
along with Rule 10 of the Companies
(Audit and Auditors) Rules, 2014 Fig.: Is the person eligible for
(hereinafter referred as CAAR), the appointment as auditor?*
following persons shall not be eligible
for appointment as an auditor of a
company, namely-
(a) a body corporate other than a limited liability partnership registered
under the Limited Liability Partnership Act, 2008;
(b) an officer or employee of the company;

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 56 INTERMEDIATE (IPC) EXAMINATION: NOVEMBER, 2021

(c) a person who is a partner, or who is in the employment, of an officer

or employee of the company;
(d) a person who, or his relative or partner -
(i) is holding any security of or interest in the company or its
subsidiary, or of its holding or associate company or a
subsidiary of such holding company;
It may be noted that the relative may hold security or interest
in the company of face value not exceeding Rupees 1,00,000.
It may also be noted that the condition of Rupees 1,00,000
shall, wherever relevant, be also applicable in the case of a
company not having share capital or other securities.
Students may also note that in the event of acquiring any
security or interest by a relative, above the threshold
prescribed, the corrective action to maintain the limits as
specified above shall be taken by the auditor within 60 days
of such acquisition or interest.
The following points merit consideration in this regard:
(a) The value of shares of Rupees 1,00,000 that can be held
by relative is the face value not the market value.
(b) The limit of Rupees 1,00,000 would be applicable where
the securities are held by the relative of an auditor and
not where the securities are held by an auditor himself
or his partner. In case of an auditor or his partner,
securities of even small value shall be a disqualification.
(c) Grace period of 60 days for corrective action shall apply
only in respect of securities held by relatives. This would
not apply to auditor or his partner.
[The term “relative”, as defined under the Companies Act,
2013, means anyone who is related to another as members of
a Hindu Undivided Family; husband and wife; Father (including
step- father), Mother (including step-mother), Son (including
step- son), Son’s wife, Daughter, Daughter’s husband, Brother
(including step- brother), Sister (including step-sister).]

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Example

Ex 1: Mr. A, a practicing Chartered Accountant, is holding securities

of XYZ Ltd. having face value of ` 900. Whether Mr. A is qualified for
appointment as an auditor of XYZ Ltd.?
As per section 141(3)(d)(i), an auditor is disqualified to be appointed
as an auditor if he, or his relative or partner holding any security of
or interest in the company or its subsidiary, or of its holding or
associate company or a subsidiary of such holding company.
In the present case, Mr. A is holding security of ` 900 in XYZ Ltd.
Therefore, he is not eligible for appointment as an auditor of XYZ Ltd.
Ex 2: Mr. P is a practicing Chartered Accountant and Mr. Q, the
relative of Mr. P, is holding securities of ABC Ltd. having face value of
` 90,000. Whether Mr. P is qualified from being appointed as an
auditor of ABC Ltd.?
As per section 141(3)(d)(i), a person is disqualified to be appointed as
an auditor if he, or his relative or partner is holding any security of or
interest in the company or its subsidiary, or of its holding or associate
company or a subsidiary of such holding company. Further, as per
proviso to this section, the relative of the person may hold the
securities or interest in the company of face value not exceeding of
` 1,00,000.
In the present case, Mr. Q. (relative of Mr. P), is having securities of
` 90,000 face value in ABC Ltd., which is as per requirement of proviso
to section 141(3)(d)(i). Therefore, Mr. P will not be disqualified to be
appointed as an auditor of ABC Ltd.
Ex 3: M/s BC & Co. is an Audit Firm having partners Mr. B and Mr. C,
and Mr. A the relative of Mr. C, is holding securities of MWF Ltd.
having face value of
` 1,01,000. Whether M/s BC & Co. is qualified from being appointed
as an auditor of MWF Ltd.?
As per section 141(3)(d)(i), a person is disqualified to be appointed as
an auditor if he, or his relative or partner is holding any security of or
interest in the company or its subsidiary, or of its holding or associate
company or a subsidiary of such holding company. Further as per

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proviso to this section, the relative of the person may hold the
securities or interest in the company of face value not exceeding of
` 1,00,000.
In the instant case, M/s BC & Co, will be disqualified for appointment
as an auditor of MWF Ltd. as the relative of Mr. C (i.e. partner of M/s
BC & Co.) is holding the securities in MWF Ltd. which is exceeding the
limit mentioned in proviso to section 141(3)(d)(i).
Ex 4: M/s RM & Co. is an audit firm having partners CA. R and CA. M.
The firm has been offered the appointment as an auditor of Enn Ltd.
for the Financial Year 2016-17. Mr. Bee, the relative of CA. R, is
holding 5,000 shares (face value of ` 10 each) in Enn Ltd. having
market value of ` 1,50,000. Whether M/s RM & Co. is disqualified to
be appointed as auditors of Enn Ltd.?
As per section 141(3)(d)(i), a person shall not be eligible for
appointment as an auditor of a company, who, or his relative or
partner is holding any security of or interest in the company or its
subsidiary, or of its holding or associate company or a subsidiary of
such holding company. However, as per proviso to this section, the
relative of the person may hold the securities or interest in the
company of face value not exceeding of ` 1,00,000.
In the instant case, M/s RM & Co. is an audit firm having partners CA.
R and CA.
M. Mr. Bee is a relative of CA. R and he is holding shares of Enn Ltd.
of face value of ` 50,000 only (5,000 shares x ` 10 per share).
Therefore, M/s RM & Co. is not disqualified for appointment as an
auditors of Enn Ltd. as the relative of CA. R (i.e. partner of M/s RM &
Co.) is holding the securities in Enn Ltd. which is within the limit
mentioned in proviso to section 141(3)(d)(i) of the Companies Act,
2013.
(ii) is indebted to the company, or its subsidiary, or its holding or
associate company or a subsidiary of such holding company,
in excess of Rupees 5,00,000; or
(iii) has given a guarantee or provided any security in connection
with the indebtedness of any third person to the Company or

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its Subsidiary, or its Holding or Associate Company or a

Subsidiary of such Holding Company, in excess of Rupees
1,00,000.
(e) a person or a firm who, whether directly or indirectly has business
relationship with the Company, or its Subsidiary, or its Holding or
Associate Company or Subsidiary of such holding company or
associate company, of such nature as may be prescribed;
Students may note that for the purpose of clause (e) above, the term
“business relationship” shall be construed as any transaction
entered into for a commercial purpose, except –
(i) commercial transactions which are in the nature of
professional services permitted to be rendered by an auditor
or audit firm under the Act and the Chartered Accountants Act,
1949 and the rules or the regulations made under those Acts;
(ii) commercial transactions which are in the ordinary course of
business of the company at arm’s length price - like sale of
products or services to the auditor, as customer, in the
ordinary course of business, by companies engaged in the
business of telecommunications, airlines, hospitals, hotels and
such other similar businesses.

(f) a person whose relative is a Director or is in the employment of the

Company as a director or key Managerial Personnel.
(g) a person who is in full time employment elsewhere or a person or a
partner of a firm holding appointment as its auditor, if such person
or partner is at the date of such appointment or reappointment
holding appointment as auditor of more than twenty companies
other than one person companies, dormant companies, small
companies and private companies having paid-up share capital less
than Rupees 100 crore.
(h) a person who has been convicted by a Court of an offence involving
fraud and a period of ten years has not elapsed from the date of
such conviction.

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(i) a person who, directly or indirectly, renders any service referred

to in section 144 to the company or its holding company or its
subsidiary company.
It may be noted that, for the purposes of this clause, the term
"directly or indirectly" shall have the same meaning as assigned
to it in the Explanation to section 144, i.e.
In case of auditor being an individual, either himself or through
his relative or any other person connected or associated with
such individual or through any other entity, whatsoever, in
which such individual has significant influence or control, or
whose name or trade mark or brand is used by such individual,
shall be termed as rendering of services directly or indirectly by
the auditor; and
In case of auditor being a firm, either itself or through any of its
partners or through its parent, subsidiary or associate entity or
through any other entity, whatsoever,
in which the firm or any partner of the firm has significant
influence or control, or whose name or trade mark or brand is
used by the firm or any of its partners, shall be termed as
rendering of services directly or indirectly by the auditor.
Section 144 of the Companies Act, 2013 prescribes certain services not
to be rendered by the auditor. An auditor appointed under this Act shall
provide to the company only such other services as are approved by the
Board of Directors or the audit committee, as the case may be, but which
shall not include any of the following services
(whether such services are rendered directly
or indirectly to the company or its holding
company or subsidiary company), namely:
*
Fig.: Auditor restrained from entering into certain services

(i) accounting and book keeping services;

(ii) internal audit;
(iii) design and implementation of any financial information system;
(iv) actuarial services*;

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(v) investment advisory services;

(vi) investment banking services;
(vii) rendering of outsourced financial services;
(viii) management services; and
(ix) any other kind of services as may be prescribed.
*Actuarial services broadly pertain to services relating to evaluation of
financial impact of risks using range of mathematical and statistical
methods
It may be noted that an auditor or audit firm who or which has been
performing any non- audit services on or before the commencement of
this Act shall comply with the provisions of this section before the closure
of the first financial year after the date of such commencement.
Example
CA. Poshin is providing the services of investment banking to C Ltd. Later
on, he was also offered to be appointed as an auditor of the company for
the current financial year. Advise.
Section 141(3)(i) of the Companies Act, 2013 disqualifies a person for
appointment as an auditor of a company who, directly or indirectly, renders
any service referred to in section 144 to the company or its holding
company or its subsidiary company. Section 144 of the Companies Act, 2013
prescribes certain services not to be rendered by the auditor which includes
investment banking services.
Therefore, CA. Poshin is advised not to accept the assignment of auditing as
the investment banking service is specifically notified in the list of services
not to be rendered by him as per section 141(3)(i) read with section 144 of
the Companies Act, 2013.
(4) Where a person appointed as an auditor of a company incurs any of the
disqualifications mentioned in sub-section (3) after his appointment, he
shall vacate his office as such auditor and such vacation shall be deemed
to be a casual vacancy in the office of the auditor.

CASE STUDY
Facts of the Case: Mr. A, a chartered accountant, has been appointed as an auditor

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of Laxman Ltd. in the Annual General Meeting of the company held in September,
2016, which assignment he accepted. Subsequently in January, 2017 he joined Mr. B,
another chartered accountant, who is the Manager Finance of Laxman Ltd., as partner.
Provisions and Explanation: Section 141(3)(c) of the Companies Act, 2013
prescribes that any person who is a partner or in employment of an officer or
employee of the company will be disqualified to act as an auditor of a company.
Sub-section (4) of Section 141 provides that an auditor who becomes subject, after
his appointment, to any of the disqualifications specified in sub-sections (3) of
Section 141, he shall be deemed to have vacated his office as an auditor.
Conclusion: In the present case, Mr. A, an auditor of Laxman Ltd., joined as partner
with Mr. B, who is Manager Finance of Laxman Limited. The given situation has
attracted sub- section (3)(c) of Section 141 and, therefore, he shall be deemed to have
vacated office of the auditor of Laxman Limited in accordance with sub-section (4) of
section 141.

2. APPOINTMENT OF AUDITOR
Section 139 of the Companies Act, 2013 contains provisions regarding
Appointment of Auditors. Discussion on appointment of auditors may be
grouped under two broad headings-
(I) Appointment of First Auditors.
(II) Appointment of Subsequent Auditors.

Fig: Meeting for appointment of Auditor*

*
Source of image : http://newhavenscience.org

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 PAPER – 6: AUDITING AND ASSURANCE 63

Appointment of Auditor [Section

139]

Subsequent
First Auditor
Auditor

Other than Government Other than Government

Government Company defined Government Company defined
Company [Section u/s 2(45) [Section Company [Section u/s 2(45) [Section
139(6)] 139(7) 139(1)] 139(5)

Appointment by Appointment by
BOD Appointment by Members in AGM Appointment by C
C&AG within 60 & AG within 180
days from the days from the
within 30 days DOR commencement of
from DOR year

in case of failure
in case of failure: BOD within 30
Members in EGM days Hold the office
within 90 days from 1st AGM to
6th AGM subject
in case of failure to fulfillment of Hold the office till
Members in EGM certain conditions the conclusion of
with in 60 days the AGM

Hold the office till

the conclusion of
the first AGMS

Hold the office till

the conclusion of
the first AGM

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2.1 Appointment of First Auditor

2.1.1 Appointment of First Auditors in the case of a company, other than a
Government Company
As per Section 139(6), the first auditor of a company, other than a Government
company, shall be appointed by the Board of Directors within 30 days from the
date of registration of the company.
In the case of failure of the Board to appoint the auditor, it shall inform the
members of the company.
The members of the company shall within 90 days at an extraordinary general
meeting appoint the auditor. Appointed auditor shall hold office till the
conclusion of the first annual general meeting.

CASE STUDY
Facts of the Case: Managing Director of Pigeon Ltd. himself wants to appoint
CA. Champ, a practicing Chartered Accountant, as first auditor of the company.
Provisions and Explanation: Section 139(6) of the Companies Act, 2013 lays
down that the first auditor of a company shall be appointed by the Board of
Directors within 30 days from the date of registration of the company. In the
instant case, the proposed appointment of CA. Champ, a practicing Chartered
Accountant, as first auditor by the Managing Director of Pigeon Ltd. by himself is
in violation of Section 139(6) of the Companies Act, 2013, which authorizes the
Board of Directors to appoint the first auditor of the company.
Conclusion: In view of the above, the Managing Director of Pigeon Ltd. should
be advised not to appoint the first auditor of the company.
2.1.2 Appointment of First Auditors in the case of Government Company:
A “Government company” is a company in which not less than 51% of the paid-up
share capital is held by the Central Government or by any State Government or
Governments or partly by the Central Government and partly by one or more State
Governments, and includes a company which is a subsidiary company of such a
Government company.
Section 139(7) provides that in the case of a Government company or any
other company owned or controlled, directly or indirectly, by the Central
Government, or by any State Government, or Governments, or partly by the
Central Government and partly by one or more State Governments, the first

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auditor shall be appointed by the Comptroller and Auditor-General of India

within 60 days from the date of registration of the company.
In case the Comptroller and Auditor-General of India does not appoint such
auditor within the above said period, the Board of Directors of the company
shall appoint such auditor within the next 30 days. Further, in the case of failure
of the Board to appoint such auditor within next 30 days, it shall inform the
members of the company who shall appoint such auditor within 60 days at an
extraordinary general meeting. Auditors shall hold office till the conclusion of
the first annual general meeting.

CASE STUDY

Facts of the Case: The first auditor of Bhartiya Petrol Ltd., a Government
company, was appointed by the Board of Directors.
Provisions and Explanation: In the case of a Government Company, the
appointment of first auditor is governed by the provisions of Section 139(7) of the
Companies Act, 2013 which states that in the case of a Government company, the
first auditor shall be appointed by the Comptroller and Auditor-General of India
within 60 days from the date of registration of the company. Hence, in the case of
Bhartiya Petrol Ltd., being a government company, the first auditor shall be
appointed by the Comptroller and Auditor General of India.
Conclusion: Thus, the appointment of first auditor made by the Board of
Directors of Bhartiya Petrol Ltd., is null and void.

2.2 Appointment of Subsequent Auditor/Reappointment of Auditor

2.2.1 Appointment of Subsequent Auditors in case of Non Government
Companies:
Section 139(1) of the Companies Act, 2013 provides that every company shall,
at the first annual general meeting appoint an individual or a firm as an auditor
who shall hold office from the conclusion of that meeting till the conclusion of
its sixth annual general meeting and thereafter till the conclusion of every sixth
meeting.
The following points need to be noted in this regard-
(i) Before such appointment is made, the written consent of the auditor to
such appointment, and a certificate from him or it that the appointment,

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if made, shall be in accordance with the conditions as may be prescribed,

shall be obtained from the auditor.
(ii) Under Rule 4 of The Companies (Audit and Auditors) Rules, 2014, the said
certificate shall state the following:-
(a) the individual or the firm, as the case may be, is eligible for
appointment and is not disqualified for appointment under the Act,
the Chartered Accountants Act, 1949 and the rules or regulations
made thereunder;
(b) the proposed appointment is as per the term provided under the
Act;
(c) the proposed appointment is within the limits laid down by or under
the authority of the Act;
(d) the list of proceedings against the auditor or audit firm or any
partner of the audit firm pending with respect to professional
matters of conduct, as disclosed in the certificate, is true and correct.
(iii) The company shall inform the auditor concerned of his or its appointment,
and also file a notice of such appointment with the Registrar within 15
days of the meeting in which the auditor is appointed.
2.2.2 Appointment of Subsequent Auditors in case of Government
Companies:
As per section 139(5), in the case of a Government company or any other
company owned or controlled, directly or indirectly, by the Central Government,
or by any State Government or Governments, or partly by the Central
Government and partly by one or more State Governments, the Comptroller
and Auditor-General of India shall, in respect of a financial year, appoint an
auditor duly qualified to be appointed as an auditor of companies under this
Act, within a period of 180 days from the commencement of the financial year,
who shall hold office till the conclusion of the annual general meeting.
Therefore, it is to be clearly understood that in case of government companies
or companies controlled by government, auditor is appointed by Comptroller
and Auditor general of India in the manner provided in Section 139(5) and
139(7). It is to be remembered that Comptroller and auditor general of India is
independent constitutional authority which audits all receipts and expenditure
of Government of India and state governments including those of bodies,

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corporations financed by government.

2.3 Filling of a Casual Vacancy
As per Section 139(8), any casual vacancy in the office of an auditor shall-

(i) In the case of a company other than a company whose accounts are
subject to audit by an auditor appointed by the Comptroller and
Auditor-General of India, be filled by the Board of Directors within 30
days.
If such casual vacancy is as a result of the resignation of an auditor, such
appointment shall also be approved by the company at a general meeting
convened within three months of the recommendation of the Board and
he shall hold the office till the conclusion of the next annual general
meeting.
(ii) In the case of a company whose accounts are subject to audit by an
auditor appointed by the Comptroller and Auditor-General of India,
be filled by the Comptroller and Auditor-General of India within 30 days.
It may be noted that in case the Comptroller and Auditor-General of India does
not fill the vacancy within the said period the Board of Directors shall fill the
vacancy within next 30 days.

2.3.1 Casual Vacancy by Resignation:

As per section 140(2) of the Act, the auditor who has resigned from the
company shall file within a period of 30 days from the date of resignation, a
statement in the prescribed Form ADT–3 (as per Rule 8 of CAAR) with the
company and the Registrar.

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In case of the companies referred to in section 139(5) i.e. Government company,

the auditor shall also file such statement with the CAG along with the company
and the Registrar.
The auditor shall indicate the reasons and other facts as may be relevant with
regard to his resignation.
In case of failure, the auditor shall be liable to a penalty of fifty thousand rupees or
the remuneration of the auditor, whichever is less, and in case of continuing failure,
with further penalty of five hundred rupees for each day after the first during which
such failure continues, subject to a maximum of Two lakh rupees as per section
140(3).

CASE STUDY
Facts of the Case: CA. Donald was appointed as the auditor of PS Ltd. at
the remuneration of ` 30,000. However, after 4 months of continuing his
services, he could not continue to hold his office of the auditor as his wife
got a government job at a distant place and he needs to shift along with
her to the new place. Thus, he resigned from the company and did not
perform his responsibilities relating to filing of statement to the company
and the registrar indicating the reasons and other facts as may be relevant
with regard to his resignation.
How much fine may he be punishable with under section 140(3) for non-
compliance of section 140(2) of the Companies Act, 2013?
Provisions and Explanation: For non-compliance of sub-section (2) of
section 140 of the Companies Act, 2013, the auditor shall be punishable
with fine, which shall not be less than fifty thousand rupees or the
remuneration of the auditor, whichever is less but which may extend to five
lakh rupees, under section 140(3) of the said Act.
Conclusion: Thus, the fine under section 140(3) of the Companies Act, 2013
shall not be less than ` 30,000 but which may extend to ` 5,00,000 .

Other Important Provisions Regarding Appointment of Auditors

(1) A retiring auditor may be re-appointed at an annual general meeting, if-
(a) he is not disqualified for re-appointment;
(b) he has not given the company a notice in writing of his unwillingness to
be re - appointed; and

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(c) a special resolution has not been passed at that meeting appointing
some other auditor or providing expressly that he shall not be re-
appointed.
(2) Where at any annual general meeting, no auditor is appointed or re-
appointed, the existing auditor shall continue to be the auditor of the
company.

3 ROTATION OF AUDITOR
3.1 Applicability of Section 139(2) Rotation of Auditor:
As per rules prescribed in Companies
(Audit and Auditors) Rules, 2014, for
applicability of section 139(2) the class of
companies shall mean the following
classes of companies excluding one
person companies and small companies- Fig: Rotation of Auditors*

Class of Companies for Rotation of Auditor

↓
including Listed Companies
+
excluding OPC (One Person Company) and Small
Companies

All companies having

paid up share capital
of below threshold
All unlisted public All private limited limit mentioned,
companies having companies having
paid up share capital paid up share capital but
≥` 10 crore ≥ ` 50 crore
having public
borrowings from
financial institutions,
banks or public
deposits
≥ ` 50 crore

*
Source of image: the hindu business line.com

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(i) all unlisted public companies having paid up share capital of rupees ten
crore or more;
(ii) all private limited companies having paid up share capital of rupees fifty
crore or more;
(iii) all companies having paid up share capital of below threshold limit
mentioned above, but having public borrowings from financial
institutions, banks or public deposits of rupees fifty crores or more.
Example

Rano Pvt. Ltd. is a private limited Company, having paid up share capital of ` 42
crore but having public borrowing from nationalized banks and financial
institutions of ` 72 crore, manner of rotation of auditor will be applicable.
As per section 139(2), no listed company or a company belonging to such class
or classes of companies as mentioned above, shall appoint or re-appoint-
(a) an individual as auditor for more than one term of five consecutive years;
and
(b) an audit firm as auditor for more than two terms of five consecutive years.
Provided that -
(i) an individual auditor who has completed his term under clause (a)
shall not be eligible for re-appointment as auditor in the same
company for five years from the completion of his term;
(ii) an audit firm which has completed its term under clause (b), shall
not be eligible for re-appointment as auditor in the same company
for five years from the completion of such term.
Therefore, provisions of Section 139(2) relating to rotation of
auditors are applicable only to listed companies and class of
companies satisfying conditions stated in para 3.1 above.
Example

Jolly Ltd., a listed company, appointed M/s Polly & Co., a Chartered Accountant
firm, as the statutory auditor in its AGM held at the end of September, 2016 for
11 years. Here, the appointment of M/s Polly & Co. is not valid as the
appointment can be made only for one term of five consecutive years and then
another one more term of five consecutive years. It can’t be appointed for two

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terms in one AGM only. Further, a cooling period of five years from the
completion of term is required i.e. the firm can’t be re-appointed for further 5
years after completion of two terms of five consecutive years.

The following points merit consideration in this regard-

(1) As on the date of appointment, no audit firm having a common partner
or partners to the other audit firm, whose tenure has expired in a company
immediately preceding the financial year, shall be appointed as auditor of
the same company for a period of five years.
Example

M/s XYZ & Co., is an audit firm having partner Mrs. X, Mr. Y and Mr. Z,
whose tenure has expired in the company immediately preceding the
financial year. M/s ABZ & Co., another audit firm in which Mr. Z is a
common partner, will also be disqualified for the same company along
with M/S XYZ & Co. for the period of five years.

(2) Every company, existing on or before the commencement of this Act

which is required to comply with provisions of this sub-section, shall
comply with the requirements of this sub- section within a period which
shall not be later than the date of the first annual general meeting of the
company held, within the period specified under sub-section (1) of section
96, after three years from the date of commencement of this Act.
Examples

Ex 1: Mr. Raj, a Chartered Accountant, is an individual auditor of Binaca

Limited for last 5 years as on March, 2013 (i.e. existing on or before the date
of Commencement of Companies Act, 2013). Keeping in view the transition
period as stated in the Companies Act, 2013, Mr. Raj can continue the audit
of Binaca Ltd. upto the first annual general meeting to be held after three
years from the date of commencement of the Act.
Ex 2: M/s Raj & Associates, a Chartered Accountants Audit Firm, is doing
audit of Binaca Limited for last 11 years as on March, 2013 (i.e. existing on
or before the date of Commencement of Companies Act, 2013). Keeping in
view the transition period as stated in the Companies Act, 2013, M/s Raj
Associates can continue the audit of Binaca Ltd. upto the first annual general
meeting to be held after three years from the date of commencement of the
Act.

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Students may interlink the above example with Illustrative table

explaining rotation in case of individual auditor as well as audit firm
which has been given after the 3.2 i.e. Manner of rotation of Auditors
by the Companies on Expiry of their Term.*
(3) It has also been provided that right of the company to remove an auditor
or the right of the auditor to resign from such office of the company shall
not be prejudiced.
(4) Subject to the provisions of this Act, members of a company may resolve
to provide that -
(a) in the audit firm appointed by it, the auditing partner and his team
shall be rotated at such intervals as may be resolved by members;
or
(b) the audit shall be conducted by more than one auditor.
(5) The Central Government may, by rules, prescribe the manner in which the
companies shall rotate their auditors.
3.2 Manner of Rotation of Auditors by the Companies on Expiry of
their Term:
Rule 6 of the Companies (Audit and Auditors) Rules, 2014 prescribes the manner
of rotation of auditors on expiry of their term which is given below-
(1) The Audit Committee shall recommend to the Board, the name of an
individual auditor or of an audit firm who may replace the incumbent
auditor on expiry of the term of such incumbent.
(2) Where a company is required to constitute an Audit Committee, the Board
shall consider the recommendation of such committee, and in other
cases, the Board shall itself consider the matter of rotation of auditors and
make its recommendation for appointment of the next auditor by the
members in annual general meeting.
(3) For the purpose of the rotation of auditors-
(i) in case of an auditor (whether an individual or audit firm), the period
for which the individual or the firm has held office as auditor prior
to the commencement of the Act shall be taken into account for
calculating the period of five consecutive years or ten consecutive
years, as the case may be;

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(ii) the incoming auditor or audit firm shall not be eligible if such
auditor or audit firm is associated with the outgoing auditor or audit
firm under the same network of audit firms.
Explanation I - For the purposes of these rules the term “same
network” includes the firms operating or functioning, hitherto or in
future, under the same brand name, trade name or common control.
Explanation II - For the purpose of rotation of auditors,
(a) a break in the term for a continuous period of five years shall
be considered as fulfilling the requirement of rotation;
(b) if a partner, who is in charge of an audit firm and also certifies
the financial statements of the company, retires from the said
firm and joins another firm of chartered accountants, such
other firm shall also be ineligible to be appointed for a period
of five years.
*Illustration explaining rotation in case of individual auditor

Number of consecutive Maximum number Aggregate period

years for which an of consecutive years which the auditor
individual auditor has been for which he may be would complete in
functioning as auditor in appointed in the the same company in
the same company [in the same company view of column I and
first AGM held after the (including II
commencement of transitional period)
provisions of section
139(2)]
I II III
5 Years (or more than 5 3 years 8 years or more
years)
4 years 3 years 7 years
3 years 3 years 6 years
2 years 3 years 5 years
1 year 4 years 5 years

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Note:
(1) Individual auditor shall include other individuals or firms whose
name or trade mark or brand is used by such individual, if any.
(2) Consecutive years shall mean all the preceding financial years for
which the individual auditor has been the auditor until there has
been a break by five years or more.
*Illustration explaining rotation in case of audit firm

Number of consecutive Maximum number of Aggregate period

years for which an audit consecutive years for which the firm
firm has been functioning which the firm may be would complete in
as auditor in the same appointed in the the same company
company [in the first AGM same company in view of column I
held after the (including transitional and II
commencement of period)
provisions of section
139(2)]
I II III
10 Years (or more than 3 years 13 years or more
10years)
9 years 3 years 12 years
8 years 3 years 11 years
7 years 3 years 10 years
6 year 4 years 10 years
5 years 5 years 10 years
4 years 6 years 10 years
3 year 7 years 10 years
2 years 8 years 10 years
1 years 9 years 10 years

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Note:
(i) Audit Firm shall include other firms whose name or trade mark or
brand is used by the firm or any of its partners.
(ii) Consecutive years shall mean all the preceding financial years for
which the firm has been the auditor until there has been a break by
five years or more.
(4) Where a company has appointed two or more individuals or firms or a
combination thereof as joint auditors, the company may follow the
rotation of auditors in such a manner that both or all of the joint auditors,
as the case may be, do not complete their term in the same year.
As you would have noticed, the provisions relating to
disqualifications and rotation of auditors are meant to ensure that
audit function remains unbiased. These legal provisions also provide
enough safeguards so that auditors can form their opinion in an
independent and highly professional manner without any bias.

4 PROVISIONS RELATING TO AUDIT COMMITTEE

4.1 Applicability of section 177 i.e. Constitution of Audit Committee:
Where a company is required to constitute an Audit Committee under section
177, all appointments, including the filling of a casual vacancy of an auditor
under this section shall be made after taking into account the recommendations
of such committee.

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all public
companies with a
paid up capital 
` 10 crore

Class of
Companies to
constitute Audit
Committee
[including Listed
Public
Companies]
all public companies,
having in aggregate, all public
outstanding loans or companies having
borrowings or turnover  ` 100
debentures or crore
deposits >` 50 crore

Diagram showing class of companies to constitute Audit Committee

As per provisions of Section 177 of Companies Act, audit committee
performs important functions including making recommendation for
appointment, remuneration and terms of appointment of auditor of the
company, reviewing and monitoring auditor’s independence and
performance & effectiveness of audit process, examination of financial
statements and auditor’s report thereon.
It is to be remembered that audit committee consists of directors of the
company. It consists of minimum 3 directors with independent directors
forming majority. Besides, audit committee also performs other important
functions. Audit committee helps in ensuring better standards of
corporate governance.
It is important to know that in addition to listed public companies, following
classes of companies shall constitute an Audit Committee -
(i) all public companies with a paid up capital of ten crore rupees or more;

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(ii) all public companies having turnover of one hundred crore rupees or
more;
(iii) all public companies, having in aggregate, outstanding loans or
borrowings or debentures or deposits exceeding fifty crore rupees or
more.
Explanation: The paid up share capital or turnover or outstanding loans, or
borrowings or debentures or deposits, as the case may be, as existing on the
date of last audited Financial Statements shall be taken into account for the
purposes of this rule.
Therefore, provisions of constitution of audit committee are applicable
only to listed companies and public companies satisfying criteria as stated
above.
Example
XYZ Ltd., a public company having paid up capital of ` 9 crore but having turnover
of ` 150 crore, will be required to constitute an Audit Committee under section
177 because the requirement for constitution of Audit Committee arises if the
company falls into any of the prescribed category.

4.2 Manner and procedure of selection and appointment of auditors

Rule 3 of CAAR, 2014 prescribes the following manner and procedure of
selection and appointment of auditors-
(1) In case of a company that is required to constitute an Audit Committee
under section 177, the committee, and, in cases where such a committee
is not required to be constituted, the Board, shall take into consideration
the qualifications and experience of the individual or the firm proposed
to be considered for appointment as auditor and whether such
qualifications and experience are commensurate with the size and
requirements of the company.
It may be noted that while considering the appointment, the Audit
Committee or the Board, as the case may be, shall have regard to any
order or pending proceeding relating to professional matters of conduct
against the proposed auditor before the Institute of Chartered
Accountants of India or any competent authority or any Court.

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(2) The Audit Committee or the Board, as the case may be, may call for such
other information from the proposed auditor as it may deem fit.
(3) Subject to the provisions of sub-rule (1), where a company is required to
constitute the Audit Committee, the committee shall recommend the
name of an individual or a firm as auditor to the Board for consideration
and in other cases, the Board shall consider and recommend an individual
or a firm as auditor to the members in the annual general meeting for
appointment.
(4) If the Board agrees with the recommendation of the Audit Committee, it
shall further recommend the appointment of an individual or a firm as
auditor to the members in the annual general meeting.
(5) If the Board disagrees with the recommendation of the Audit Committee,
it shall refer back the recommendation to the committee for
reconsideration citing reasons for such disagreement.
(6) If the Audit Committee, after considering the reasons given by the Board,
decides not to reconsider its original recommendation, the Board shall
record reasons for its disagreement with the committee and send its own
recommendation for consideration of the members in the annual general
meeting; and if the Board agrees with the recommendations of the Audit
Committee, it shall place the matter for consideration by members in the
annual general meeting.
(7) The auditor appointed in the annual general meeting shall hold office
from the conclusion of that meeting till the conclusion of the sixth annual
general meeting, with the meeting wherein such appointment has been
made being counted as the first meeting.

5 AUDITOR’S REMUNERATION
As per section 142 of the Act, the remuneration of the auditor of a company
shall be fixed in its general meeting or in such manner as may be determined
therein. However, board may fix remuneration of the first auditor appointed by
it.
Further, the remuneration, in addition to the fee payable to an auditor, include
the expenses, if any, incurred by the auditor in connection with the audit of the
company and any facility extended to him but does not include any
remuneration paid to him for any other service rendered by him at the request

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of the company. Therefore, it has been clarified that the remuneration to

Auditor shall also include any facility provided to him.

6 REMOVAL OF AUDITORS
6.1 Removal of Auditor Before Expiry of Term
According to Section 140(1), the auditor appointed
under section 139 may be removed from his office
before the expiry of his term only by a special
resolution of the company, after obtaining the
previous approval of the Central Government in
that behalf as per Rule 7 of CAAR, 2014-
Fig: Auditor leaving office of the auditor*

(1) The application to the Central Government for removal of auditor shall be
made in Form ADT-2 and shall be accompanied with fees as provided for
this purpose under the Companies (Registration Offices and Fees) Rules,
2014.
(2) The application shall be made to the Central Government within 30 days
of the resolution passed by the Board.
(3) The company shall hold the general meeting within 60 days of receipt of
approval of the Central Government for passing the special resolution.
It is important to note that before taking any action for removal before expiry
of terms, the auditor concerned shall be given a reasonable opportunity of
being heard.

Direction by Tribunal in case Auditor acted in a Fraudulent Manner:

As per sub-section (5) of the section 140, the Tribunal either suo motu or on an
application made to it by the Central Government or by any person concerned, if it
is satisfied that the auditor of a company has, whether directly or indirectly, acted in
a fraudulent manner or abetted or colluded in any fraud by, or in relation to, the
company or its directors or officers, it may, by order, direct the company to change
its auditors.
However, if the application is made by the Central Government and the Tribunal
is satisfied that any change of the auditor is required, it shall within fifteen days
of receipt of such application, make an order that he shall not function as an
auditor and the Central Government may appoint another auditor in his place.

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It may be noted that an auditor, whether individual or firm, against whom final
order has been passed by the Tribunal under this section shall not be eligible
to be appointed as an auditor of any company for a period of five years from
the date of passing of the order and the auditor shall also be liable for action
under
section 447.

It is hereby clarified that in the case of a firm, the liability shall be of the firm
and that of every partner or partners who acted in a fraudulent manner or
abetted or colluded in any fraud by, or in relation to, the company or its director
or officers.
As you would notice, the provisions of removal of auditor before expiry of
his term are also meant to safeguard auditor’s independence by imposing
strict conditions like prior approval of Central government.
6.2 Appointment of Auditor Other Than Retiring Auditor
Section 140(4) lays down procedure to appoint an auditor other than retiring
auditor who was removed-
(1) Special notice shall be required for a resolution at an annual general
meeting appointing as auditor a person other than a retiring auditor, or
providing expressly that a retiring auditor shall not be re-appointed,
except where the retiring auditor has completed a consecutive tenure of
five years or as the case may be, ten years, as provided under sub-section
(2) of section 139.
(2) On receipt of notice of such a resolution, the company shall forthwith send
a copy thereof to the retiring auditor.
(3) Where notice is given of such a resolution and the retiring auditor makes
with respect thereto representation in writing to the company (not
exceeding a reasonable length) and requests its notification to members
of the company, the company shall, unless the representation is received
by it too late for it to do so,-
(a) in any notice of the resolution given to members of the company,
state the fact of the representation having been made; and
(b) send a copy of the representation to every member of the company
to whom notice of the meeting is sent, whether before or after the
receipt of the representation by the company. and if a copy of the

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representation is not sent as aforesaid because it was received too

late or because of the company's default, the auditor may (without
prejudice to his right to be heard orally) require that the
representation shall be read out at the meeting.
Students may note that if a copy of representation is not sent as aforesaid, a
copy thereof shall be field with the Registrar.
Curtailing right of the auditor regarding circulation of copy of
representation in the case of appointment of auditor other than retiring
auditor under section 140(4) of the companies act, 2013:
If the Tribunal is satisfied on an application either of the company or of any
other aggrieved person that the rights conferred by section 140(4) of the
Companies Act, 2013 are being abused by the auditor, then, the copy of the
representation may not be sent and the representation need not be read out at
the meeting.

7. CEILING ON NUMBER OF AUDITS

It has been mentioned earlier that before appointment is given to any auditor,
the company must obtain a certificate from him to the effect that the
appointment, if made, will not result in an excess holding of company audit by
the auditor concerned over the limit laid down in section 141(3)(g) of the
Companies Act, 2013 which prescribes that a person who is in full time
employment elsewhere or a person or a partner of a firm holding appointment
as its auditor, if such person or partner is at the date of such appointment or
reappointment holding appointment as auditor of more than twenty
companies other than one person companies, dormant companies, small
companies and private companies having paid-up share capital less than ` 100
crore, shall not be eligible for appointment as an Auditor of a Company.
In the case of a firm of auditors, it has been further provided that ‘specified
number of companies’ shall be construed as the number of companies specified
for every partner of the firm who is not in full time employment elsewhere.
This limit of 20 company audits is per person. In the case of an audit firm having
3 partners, the overall ceiling will be 3 × 20 = 60 company audits. Sometimes,
a chartered accountant is a partner in a number of auditing firms. In such a case,
all the firms in which he is partner or proprietor will be together entitled to 20
company audits on his account. Subject to the overall ceiling of company audits,

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how they allocate the 20 audits between themselves is their affairs.

CASE STUDY
“ABC & Co.” is an Audit Firm having partners “Mr. A”, “Mr. B” and “Mr. C”,
Chartered Accountants. “Mr. A”, “Mr. B” and “Mr. C” are holding appointment as
an Auditor in 4, 6 and 10 Companies respectively.
(i) Provide the maximum number of Audits remaining in the name of “ABC &
Co.”
(ii) Provide the maximum number of Audits remaining in the name of
individual partner i.e. Mr. A, Mr. B and Mr. C.
(iii) Can ABC & Co. accept the appointment as an auditor in 60 private
companies having paid- up share capital less than ` 100 crore, 2 small
companies and 1 dormant company?
(iv) Would your answer be different, if out of those 60 private companies, 45
companies are having paid-up share capital of ` 110 crore each?
Fact of the Case: In the instant case, Mr. A is holding appointment in 4
companies, whereas Mr. B is having appointment in 6 Companies and Mr. C is
having appointment in 10 Companies. In aggregate all three partners are having
20 audits.
Provisions and Explanations: Section 141(3)(g) of the Companies Act, 2013 states
that the following persons shall not be eligible for appointment as an auditor of a
company i.e. a person who is in full time employment elsewhere; or a person, or a
partner of a firm holding appointment as its auditor, if such person, or partner is at
the date of such appointment, or reappointment holding appointment as auditor of
more than twenty companies other than one person companies, dormant companies,
small companies and private companies having paid-up share capital less than ` 100
crore.
As per section 141(3)(g), this limit of 20 company audits is per person. In the case
of an audit firm having 3 partners, the overall ceiling will be 3 × 20 = 60 company
audits. Sometimes, a chartered accountant is a partner in a number of auditing
firms. In such a case, all the firms in which he is partner or proprietor will be
together entitled to 20 company audits on his account.

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Conclusion:
(i) Therefore, ABC & Co. can hold appointment as an auditor of 40 more
companies:
Total Number of Audits available to the Firm Number = 20*3= 60
of Audits already taken by all the partners
In their individual capacity = 4+6+10= 20
Remaining number of Audits available to the Firm = 40
(ii) With reference to above provisions an auditor can hold more appointment
as auditor = ceiling limit as per section 141(3)(g)- already holding
appointments as an auditor. Hence (1)Mr. A can hold: 20 - 4 = 16 more
audits. (2) Mr. B can hold 20-6 = 14 more audits and (3) Mr. C can hold
20-10 = 10 more audits.
(iii) In view of above discussed provisions, ABC & Co. can hold appointment as
an auditor in all the 60 private companies having paid-up share capital less
than ` 100 crore, 2 small companies and 1 dormant company as these are
excluded from the ceiling limit of company audits given under section
141(3)(g) of the Companies Act, 2013.
(iv) As per fact of the case, ABC & Co. is already having 20 company audits and
they can also accept 40 more company audits. In addition they can also
conduct the audit of one person companies, small companies, dormant
companies and private companies having paid up share capital less than
` 100 crores. In the given case, out of the 60 private companies, ABC & Co.
is offered 45 companies having paid-up share capital of ` 110 crore each.
Therefore, ABC & Co. can also accept the appointment as an auditor for 2
small companies, 1 dormant company, 15 private companies having paid-
up share capital less than ` 100 crore and 40 private companies having
paid-up share capital of ` 110 crore each in addition to above 20 company
audits already holding.
Council General Guidelines, 2008 (Chapter VIII): In exercise of the powers
conferred by clause (ii) of Part II of the Second Schedule to the Chartered
Accountants Act, 1949, the Council of the Institute of Chartered Accountants of
India hereby specifies that a member of the Institute in practice shall be deemed
to be guilty of professional misconduct, if he holds at any time appointment of
more than the “specified number of audit assignments of the companies under

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Section 224 and /or Section 226 of the Companies Act, 1956 (now section
141(3)(g) of the Companies Act, 2013).
It may be noted that in the case of a firm of chartered accountants in practice,
the specified number of audit assignments shall be construed as the specified
number of audit assignments for every partner of the firm.
It may also be noted that where any partner of the firm of chartered accountants
in practice is also a partner of any other firm or firms of chartered accountants
in practice, the number of audit assignments which may be taken for all the
firms together in relation to such partner shall not exceed the specified number
of audit assignments in the aggregate.
It is further provided that where any partner of a firm or firms of chartered
accountants in practice accepts one or more audit assignments in his individual
capacity, or in the name of his proprietary firm, the total number of such
assignment which may be accepted by all firms in relation to such chartered
accountant and by him shall not exceed the specified number of audit
assignments in the aggregate.
(1) In computing the specified number of audit assignments-
(a) the number of such assignments, which he or any partner of his firm
has accepted whether singly or in combination with any other
chartered accountant in practice or firm of such chartered
accountants, shall be taken into account.
(b) the number of partners of a firm on the date of acceptance of audit
assignment shall be taken into account.
(c) a chartered accountant in full time employment elsewhere shall not
be taken into account.
(2) A chartered accountant in practice as well as firm of chartered accountants
in practice shall maintain a record of the audit assignments accepted by
him or by the firm of chartered accountants, or by any of the partner of
the firm in his individual name or as a partner of any other firm as far as
possible, in the prescribed manner.

Ceiling on Tax Audit Assignments: The specified number of tax audit

assignments that an auditor, as an individual or as a partner of a firm, can
accept is 60 numbers. ICAI has notified that a chartered accountant in practice

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shall be deemed to be guilty of professional misconduct, if he accepts in a

financial year, more than the specified number of tax audit assignments u/s
44AB.

8. POWERS/RIGHTS OF AUDITORS
The auditor has the following powers/rights while conducting an audit:
(a) Right of access to books, etc. – Section 143(1) of the Act provides that
the auditor of a company, at all times, shall have a right of access to the books
of account and vouchers of the company, whether kept at the registered office
of the company or at any other place and he is entitled to require from the
officers of the company such information and explanation as he may consider
necessary for the performance of his duties as auditor.
It may be noted that according to section 2(59) of the Act, the term ‘officer’
includes any director, manager or key managerial personnel or any person in
accordance with whose directions or instructions the Board of Directors or any
one or more of the directors is or are accustomed to act;
The phrase ‘books, accounts and vouchers’ includes all books which have any
bearing, or are likely to have any bearing on the accounts, whether these be the
usual financial books or the statutory or statistical books; memoranda books,
e.g., inventory books, costing records and the like may also be inspected by the
auditor. Similarly the term ‘voucher’ includes all or any of the correspondence
which may in any way serve to vouch for the accuracy of the accounts. Thus, the
right of access is not restricted to books of account alone and it is for the
auditor to determine what record or document is necessary for the purpose of
the audit.
The right of access is not limited to those books and records maintained at the
registered or head office so that in the case of a company with branches, the
right also extends to the branch records, if the auditor considers it necessary to
have access thereto as per Section143(8).
Example
X Ltd. restrains its company auditor from visiting another branch at different
location and having access to the inventory records maintained at that branch
because the branch is already audited by another auditor and the report has been

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received. Here, it may be noted that the company auditor has right to visit the
branch, even if the branch accounts are audited by another auditor, if he considers
it necessary to do so for the performance of his duties as auditor.
(b) Right to obtain information and explanation from officers - This
right of the auditor to obtain from the officers of the company such information
and explanations as he may think necessary for the performance of his duties
as auditor is a wide and important power. In the absence of such power, the
auditor would not be able to obtain details of amount collected by the
directors, etc. from any other company, firm or person as well as of any benefits
in kind derived by the directors from the company, which may not be known
from an examination of the books. It is for the auditor to decide the matters in
respect of which information and explanations are required by him. When the
auditor is not provided the information required by him or is denied access to
books, etc., his only remedy would be to report to the members that he could
not obtain all the information and explanations he had required or considered
necessary for the performance of his duties as auditors.
(c) Right to receive notices and to attend general meeting – The auditors of
a company are entitled to attend any general meeting of the company (the right is
not restricted to those at which the accounts audited by them are to be discussed);
also to receive all the notices and other communications relating to the general
meetings, which members are entitled to receive and to be heard at any general
meeting in any part of the business of the meeting which concerns them as auditors.
Section 146 of the Companies Act, 2013 discusses right as well as duty of the
auditor. According to the section 146:
“all notices of, and other communications relating to, any general meeting shall
be forwarded to the auditor of the company, and the auditor shall, unless
otherwise exempted by the company, attend either by himself or through his
authorised representative, who shall also be qualified to be an auditor, any
general meeting and shall have right to be heard at such meeting on any part of
the business which concerns him as the auditor.”
Thus, it is right of the auditor to receive notices and other communications
relating to any general meeting and to be heard at such meeting, relating to
the matter of his concern, however, it is duty of the auditor to attend the same
or through his authorised representative unless otherwise exempted.
(d) Right to report to the members of the company on the accounts

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examined by him – The auditor shall make a report to the members of the
company on the accounts examined by him and on every financial statements
which are required by or under this Act to be laid before the company in
general meeting and the report shall after taking into account the provisions of
this Act, the accounting and auditing standards and matters which are required
to be included in the audit report under the provisions of this Act or any rules
made there under or under any order made under this section and to the best
of his information and knowledge, the said accounts, financial statements give
a true and fair view of the state of the company’ s affairs as at the end of its
financial year and profit or loss and cash flow for the year and such other
matters as may be prescribed.
(e) Right to Lien – In terms of the general principles of law, any person
having the lawful possession of somebody else’s property, on which he has
worked, may retain the property for non-payment of his dues on account of the
work done on the property. On this premise, auditor can exercise lien on books
and documents placed at his possession by the client for non payment of fees,
for work done on the books and documents. The Institute of Chartered
Accountants in England and Wales has expressed a similar view on the following
conditions:
(i) Documents retained must belong to the client who owes the money.
(ii) Documents must have come into possession of the auditor on the
authority of the client. They must not have been received through
irregular or illegal means. In case of a company client, they must be
received on the authority of the Board of Directors.
(iii) The auditor can retain the documents only if he has done work on the
documents assigned to him.
(iv) Such of the documents can be retained which are connected with the work
on which fees have not been paid.
Under section 128 of the Act, books of account of a company must be kept at
the registered office. These provisions ordinarily make it impracticable for the
auditor to have possession of the books and documents. The company provides
reasonable facility to auditor for inspection of the books of account by directors
and others authorised to inspect under the Act. Taking an overall view of the
matter, it seems that though legally, auditor may exercise right of lien in cases
of companies, it is mostly impracticable for legal and practicable constraints.

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His working papers being his own property, the question of lien, on them does
not arise.
SA 230 issued by ICAI on Audit Documentation (explanatory text, A- 25),
“Standard on Quality Control (SQC) 1, “Quality Control for Firms that Perform
Audits and Reviews of Historical Financial Information, and Other Assurance and
Related Services Engagements”, issued by the Institute, provides that, unless
otherwise specified by law or regulation, audit documentation is the property
of the auditor. He may at his discretion, make portions of, or extracts from, audit
documentation available to clients, provided such disclosure does not
undermine the validity of the work performed, or, in the case of assurance
engagements, the independence of the auditor or of his personnel.”

9. DUTIES OF AUDITORS
Sections 143 of the Companies Act, 2013 specifies the duties of an auditor of
a company in a quite comprehensive manner. It is noteworthy that scope of
duties of an auditor has generally been extending over all these years.
(1) Duty of Auditor to Inquire on certain matters: Under provisions of
section 143(1), it is the duty of auditor to inquire into the following
matters-
(a) whether 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 prejudicial to the interests of the
company or its members;
(b) whether transactions of the company which are represented merely
by book entries are prejudicial to the interests of the company;
(c) where the company not being an investment company or a banking
company, whether so much of the assets of the company as consist
of shares, debentures and other securities have been sold at a price
less than that at which they were purchased by the company;
(d) whether loans and advances made by the company have been
shown as deposits;
(e) whether personal expenses have been charged to revenue account;

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(f) where it is stated in the books and documents of the company that
any shares have been allotted for cash, whether cash has actually
been received in respect of such allotment, and if no cash has
actually been so received, whether the position as stated in the
account books and the balance sheet is correct, regular and not
misleading.
The opinion of the Research Committee of the Institute of Chartered
Accountants of India on section 143(1) is reproduced below:
“The auditor is not required to report on the matters specified in sub-
section (1) unless he has any special comments to make on any of the
items referred to therein. If he is satisfied as a result of the inquiries, he
has no further duty to report that he is so satisfied. In such a case, the
content of the Auditor’s Report will remain exactly the same as the auditor
has to inquire and apply his mind to the information elicited by the
enquiry, in deciding whether or not any reference needs to be made in
his report. In our opinion, it is in this light that
the auditor has to consider his duties under section 143(1).”
Therefore, it could be said that the auditor should make a report to the
members in case he finds answer to any of these matters in adverse.
(2) Duty to report:
Under provisions of Section 143(2), the auditor shall make a report to the
members of the company on the accounts examined by him and on every
financial statements which are required by or under this Act to be laid
before the company in general meeting and the report shall after taking
into account the provisions of this Act, the accounting and auditing
standards and matters which are required to be included in the audit
report under the provisions of this Act or any rules made thereunder or
under any order made under sub-section (11).
Further, auditor has to report whether to best of his information and
knowledge, the said accounts, financial statements give a true and fair
view of the state of the company’s affairs as at the end of its financial
year and profit or loss and cash flow for the year and following
matters as prescribed under relevant rules:-

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(a) whether the company has disclosed the impact, if any, of pending
litigations on its financial position in its financial statement;
(b) whether the company has made provision, as required under any
law or accounting standards, for material foreseeable losses, if any,
on long term contracts including derivative contracts;
(c) whether there has been any delay in transferring amounts, required
to be transferred, to the Investor Education and Protection Fund by
the company.
As per section 143(3), the auditor’s report shall also state–
(a) whether he has sought and obtained all the information and
explanations which to the best of his knowledge and belief were
necessary for the purpose of his audit and if not, the details thereof
and the effect of such information on the financial statements;
(b) whether, in his opinion, proper books of account as required by law have
been kept by the company so far as appears from his examination of
those books and proper returns adequate for the purposes of his audit
have been received from branches not visited by him;
(c) whether the report on the accounts of any branch office of the company
audited under sub-section (8) by a person other than the company’s
auditors has been sent to him under the proviso to that sub-section and
the manner in which he has dealt with it in preparing his report;
(d) whether the company’s balance sheet and profit and loss account dealt
with in the report are in agreement with the books of account and
returns;
(e) whether, in his opinion, the financial statements comply with the
accounting standards;
(f) the observations or comments of the auditors on financial transactions
or matters which have any adverse effect on the functioning of the
company;
(g) whether any director is disqualified from being appointed as a director
under sub- section (2) of the section 164;
(h) any qualification, reservation or adverse remark relating to the
maintenance of accounts and other matters connected therewith;

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(i) whether the company has adequate internal financial controls with
reference to financial statements in place and the operating
effectiveness of such controls;
However, it may be noted that the reporting requirement on
adequacy of internal financial controls (IFCs) with reference to
financial statements shall not be applicable to a private company
which is a–
(i) One person company; or
(ii) Small company; or
(iii) Company having turnover less than ` 50 crore as per latest
audited financial statement and having aggregate
borrowings from banks or financial institutions or any body
corporate at any point of time during the financial year less
than ` 25 crore.
(j) such other matters as may be prescribed. Rule 11 of the Companies
(Audit and Auditors) Rules, 2014 prescribes the other matters to be
included in auditor’s report. The auditor’s report shall also include
their views and comments on the following matters, namely:-
(i) whether the company has disclosed the impact, if any, of
pending litigations on its financial position in its financial
statement;
(ii) whether the company has made provision, as required under
any law or accounting standards, for material foreseeable
losses, if any, on long term contracts including derivative
contracts;
(iii) whether there has been any delay in transferring amounts,
required to be transferred, to the Investor Education and
Protection Fund by the company.

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One Person Company

Private
Exemption from Company Small Company
reporting on
adequacy of IFCs Having turnover
< ` 50 crore and
Borrowings < ` 25 crore

[Notes : (1) Students may not that the auditor is also required
to report on certain additional matters specified under CARO,
2016 which is discussed later under Para 10 Reporting under
Companies (Auditor’s Report) Order, 2016.
(2) Students are also required to refer guidance note on
Reporting under section 143(3)(f) and (h)of the Companies
Act, 2013.
(iv) (1) Whether the management has represented that, to the
best of it’s knowledge and belief, other than as disclosed
in the notes to the accounts, no funds have been
advanced or loaned or invested (either from borrowed
funds or share premium or any other sources or kind of
funds) by the company to or in any other person(s) or
entity(ies), including foreign entities (“Intermediaries”),
with the understanding, whether recorded in writing or
otherwise, that the Intermediary shall, whether, directly
or indirectly lend or invest in other persons or entities
identified in any manner whatsoever by or on behalf of
the company (“Ultimate Beneficiaries”) or provide any
guarantee, security or the like on behalf of the Ultimate
Beneficiaries;
(2) Whether the management has represented, that, to the
best of it’s knowledge and belief, other than as disclosed
in the notes to the accounts, no funds have been
received by the company from any person(s) or
entity(ies), including foreign entities (“Funding Parties”),
with the understanding, whether recorded in writing or
otherwise, that the company shall, whether, directly or
indirectly, lend or invest in other persons or entities

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identified in any manner whatsoever by or on behalf of

the Funding Party (“Ultimate Beneficiaries”) or provide
any guarantee, security or the like on behalf of the
Ultimate Beneficiaries; and
(3) Based on such audit procedures that the auditor
has considered reasonable and appropriate in the
circumstances, nothing has come to their notice
that has caused them to believe that the
representations under sub-clause (i) and (ii)
contain any material mis-statement.
(v) Whether the dividend declared or paid during the year by the
company is in compliance with section 123 of the Companies
Act, 2013.
Further, in case of government companies and companies controlled
by government, the Comptroller and auditor general of India shall
direct the auditor of such companies the manner in which accounts
of such companies are required to be audited. The copy of such
report shall be submitted to the Comptroller and auditor general of
India. It is to be further noted that Comptroller and auditor general
of India has a right to conduct supplementary audit of financial
statements of such companies within 60 days of receipt of audit
report.
(3) Duty to Sign the Audit Report: As per section 145 of the Companies Act,
2013, the person appointed as an auditor of the company shall sign the
auditor's report or sign or certify any other document of the company, in
accordance with the provisions of section 141(2).
Section 141(2) of the Companies Act, 2013 states that where a firm
including a limited liability partnership is appointed as an auditor of a
company, only the partners who are chartered accountants shall be
authorised to act and sign on behalf of the firm.
The qualifications, observations or comments on financial transactions or
matters, which have any adverse effect on the functioning of the company
mentioned in the auditor's report shall be read before the company in
general meeting.

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(4) Duty to comply with Auditing Standards: As per section 143(9) of the
Companies Act, 2013, every auditor shall comply with the auditing
standards. Further, as per section 143(10) of the Act, the Central
Government may prescribe the standards of auditing as recommended by
the Institute of Chartered Accountants of India, in consultation with and
after examination of the recommendations made by the National
Financial Reporting Authority.
(5) Duty to report on frauds:
I Reporting to the Central Government: As per sub-section (12) of
section 143 of the Companies Act, 2013, if an auditor of a company in the
course of the performance of his duties as auditor, has reason to believe
that an offence of fraud involving such amount or amounts as may be
prescribed, is being or has been committed in the company by its officers
or employees, the auditor shall report the matter to the Central
Government within such time and in such manner as may be prescribed.
In this regard, Rule 13 of the Companies (Audit and Auditors) Rules, 2014
has been prescribed. Sub-rule (1) of the said rule states that if an auditor
of a company, in the course of the performance of his duties as statutory
auditor, has reason to believe that an offence of fraud, which involves or
is expected to involve individually an amount of ` 1 crore or above, is
being or has been committed against the company by its officers or
employees, the auditor shall report the matter to the Central Government.
The manner of reporting the matter to the Central Government is as
follows:
(a) the auditor shall report the matter to the Board or the Audit
Committee, as the case may be, immediately but not later than 2
days of his knowledge of the fraud, seeking their reply or
observations within 45 days;
(b) on receipt of such reply or observations, the auditor shall forward
his report and the reply or observations of the Board or the Audit
Committee along with his comments (on such reply or observations
of the Board or the Audit Committee) to the Central Government
within 15 days from the date of receipt of such reply or observations;

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(c) in case the auditor fails to get any reply or observations from the
Board or the Audit Committee within the stipulated period of 45
days, he shall forward his report to the Central Government along
with a note containing the details of his report that was earlier
forwarded to the Board or the Audit Committee for which he has
not received any reply or observations;
(d) the report shall be sent to the Secretary, Ministry of Corporate
Affairs in a sealed cover by Registered Post with Acknowledgement
Due or by Speed Post followed by an e-mail in confirmation of the
same;
(e) the report shall be on the letter-head of the auditor containing
postal address, e-mail address and contact telephone number or
mobile number and be signed by the auditor with his seal and shall
indicate his Membership Number; and
(f) the report shall be in the form of a statement as specified in Form
ADT-4.
II. Reporting to the Audit Committee or Board: Sub-section (12) of
section 143 of the Companies Act, 2013 further prescribes that in case of
a fraud involving lesser than the specified amount [i.e. less than ` 1 crore],
the auditor shall report the matter to the audit committee constituted
under section 177 or to the Board in other cases within such time and in
such manner as may be prescribed.
In this regard, sub-rule (3) of Rule 13 of the Companies (Audit and
Auditors) Rules, 2014 states that in case of a fraud involving lesser than
the amount specified in sub- rule (1) [i.e. less than ` 1 crore], the auditor
shall report the matter to Audit Committee constituted under section 177
or to the Board immediately but not later than 2 days of his knowledge of
the fraud and he shall report the matter specifying the following:
(a) Nature of Fraud with description;
(b) Approximate amount involved; and
(c) Parties involved.
III Disclosure in the Board’s Report: Sub-section (12) of section 143 of the
Companies Act, 2013 furthermore prescribes that the companies, whose

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auditors have reported frauds under this sub-section (12) to the audit
committee or the Board, but not reported to the Central Government,
shall disclose the details about such frauds in the Board’s report in such
manner as may be prescribed.
In this regard, sub-rule (4) of Rule 13 of the Companies (Audit and
Auditors) Rules, 2014 states that the auditor is also required to disclose in
the Board’s Report the following details of each of the fraud reported to
the Audit Committee or the Board under sub- rule (3) during the year:
(a) Nature of Fraud with description;
(b) Approximate Amount involved;
(c) Parties involved, if remedial action not taken; and
(d) Remedial actions taken.

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Sub-section (13) of section 143 of the Companies Act, 2013 safeguards

the act of fraud reporting by the auditor if it is done in good faith. It states
that no duty to which an auditor of a company may be subject to shall be
regarded as having been contravened by reason of his reporting the
matter above if it is done in good faith.
It is very important to note that the provisions regarding fraud reporting
shall also apply, mutatis mutandis, to a cost auditor and a secretarial
auditor during the performance of his duties under section 148 and
section 204 respectively.
If any auditor, Cost Accountant, or company secretary in practice
does not comply with the provisions of sub-section (12), he shall,—

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(a) in case of a listed company, be liable to a penalty of five lakh

rupees; and
(b) in case of any other company, be liable to a penalty of one lakh
rupees.
Reporting on Frauds already detected and reported: The auditor
should apply professional skepticism to evaluate/verify that the fraud was
indeed identified/detected in all aspects by the management or through
the company’s vigil/whistle blower mechanism so that distinction can be
clearly made with respect to frauds identified/detected due to matters
raised by the auditor vis-à-vis those identified/detected by the company
through its internal control mechanism.
Since reporting on fraud under section 143(12) is required even by the
cost auditor and the secretarial auditor of the company, it is possible that
a suspected offence involving fraud may have been reported by them
even before the auditor became aware of the fraud. Here too, if a
suspected offence of fraud has already been reported under section
143(12) by such other person, and the auditor becomes aware of such
suspected offence involving fraud, he need not report the same since he
has not per se identified the suspected offence of fraud.
However, in case of a fraud which involves or is expected to involve
individually, an amount of ` 1 crore or more, the auditor should review
the steps taken by the management/those charged with governance with
respect to the reported instance of suspected offence of fraud stated
above, and if he is not satisfied with such steps, he should state the
reasons for his dissatisfaction in writing and request the management/
those charged with governance to perform additional procedures to
enable the auditor to satisfy himself that the matter has been
appropriately addressed. If the management/those charged with
governance fail to undertake appropriate additional procedures within 45
days of his request, the auditor would need to evaluate if he should report
the matter to the Central Government in accordance with Rule 13 of the
Companies (Audit and Auditors) Rules, 2014.
Reporting under Companies (Auditor’s Report) Order, 2016 [CARO,
2016]: The auditor is also required to report under clause (x) of paragraph
3 of Companies (Auditor’s Report) Order, 2016, whether any fraud by the

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company or any fraud on the Company by its officers or employees has

been noticed or reported during the year. If yes, the nature and the
amount involved is to be indicated.
The scope of auditor’s inquiry under this clause is restricted to frauds
‘noticed or reported’ during the year. It may be noted that this clause of
the Order, by requiring the auditor to report whether any fraud by the
company or on the company by its Officer or employees has been noticed
or reported, does not relieve the auditor from his responsibility to
consider fraud and error in an audit of financial statements. In other
words, irrespective of the auditor’s comments under this clause, the
auditor is also required to comply with the requirements of SA 240, “The
Auditor’s Responsibility Relating to Fraud in an Audit of Financial
Statements”.
[Notes: For detailed provisions of CARO, 2016, students may refer
Para 10 Reporting under Companies (Auditor’s Report) Order, 2016]
Example: The head accountant of a company entered fake invoices of credit
purchases in the books of account aggregate of ` 50 lakh and cleared all
the payments to such bogus creditor. Here, the auditor of the company is
required to report the fraudulent activity to the Board or Audit Committee
(as the case may be) within 2 days of his knowledge of fraud. Further, the
company is also required to disclose the same in Board’s Report.
It may be noted that the auditor need not to report the central government
as the amount of fraud involved is less than ` 1 crore, however, reporting
under CARO, 2016 is required.
(6) Duty to report on any other matter specified by Central Government:
The Central Government may, in consultation with the National Financial
Reporting Authority (NFRA), by general or special order, direct, in respect
of such class or description of companies, as may be specified in the order,
that the auditor's report shall also include a statement on such matters
as may be specified therein.
However, as per the notification dated 29.03.2016, till the time NFRA is
constituted, the Central Government may hold consultation required
under this sub-section with the Committee chaired by an officer of the
rank of Joint Secretary or equivalent in the MCA and the Committee shall
have the representatives from the ICAI and Industry Chambers and also

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special invitees from the National Advisory Committee on Accounting

Standards (NACAS) and the office of the C&AG.
[Note: Students may note that Companies (Auditor’s Report) Order,
2016 has been notified in this perspective which is discussed later
under Para 10 Reporting under Companies (Auditor’s Report) Order,
2016]
(7) Duties and powers of the company’s auditor with reference to the
audit of the branch and the branch auditor are discussed separately
in the chapter under heading 13 branch audit.
(8) Duty to state the reason for qualification or negative report: As per
section 143(4), where any of the matters required to be included in the
audit report is answered in the negative or with a qualification, the report
shall state the reasons there for.

10. REPORTING UNDER COMPANIES (AUDITOR’S REPORT) ORDER,

2016 [CARO, 2016]
The Central Government, after consultation with the committee constituted
under proviso to section 143(11) of the Companies Act, 2013, and in
supersession of the Companies (Auditor's Report) Order, 2015 dated the 10th
April, 2015, has issued the Companies (Auditor’s Report) Order, 2016, (CARO,
2016) under section 143(11) of the Companies Act, 2013, dated 29th March,
2016. The requirements of the Order are supplemental to the existing provisions
of section 143 of the Act regarding the auditor’s report.
The Order is not intended to limit the duties and responsibilities of auditors but
only requires a statement to be included in the audit report in respect of the
matters specified therein.
Applicability of the Order: The CARO, 2016 is an additional reporting
requirement Order. The order applies to every company including a foreign
company as defined in clause (42) of section 2 of the Companies Act, 2013.
However, the Order specifically exempts the following class of companies-
(i) a banking company as defined in clause (c) of section 5 of the Banking
Regulation Act, 1949;
(ii) an insurance company as defined under the Insurance Act,1938;

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(iii) a company licensed to operate under section 8 of the Companies Act;

(iv) a One Person Company as defined under clause (62) of section 2 of the
Companies Act;
(v) a small company as defined under clause (85) of section 2 of the
Companies Act; and
(vi) a private limited company, not being a subsidiary or holding company of
a public company, having a paid up capital and reserves and surplus not
more than ` 1 crore as on the balance sheet date and which does not have
total borrowings exceeding ` 1 crore from any bank or financial institution
at any point of time during the financial year and which does not have a
total revenue as disclosed in Scheduled III to the Companies Act, 2013
(including revenue from discontinuing operations) exceeding ` 10 crore
during the financial year as per the financial statements.
It may be noted that the Order shall not be applicable to the auditor’s report
on consolidated financial statements.

Banking company

Private limited
company subject to
Insurance company
fulfilment of specified
conditions
Exempted
Class of
Companies

Company licensed to
Small Company operate under section 8
of the Companies Act

One Person Company

EXAMPLES
Ex. 1: ‘Educating Child’ is a limited company registered under section 8 of the
Companies Act, 2013.

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In the given case, ‘Educating Child’ is licensed to operate under section 8 of the
Companies Act, 2013. Therefore, CARO, 2016 shall not be applicable to
‘Educating Child’ accordingly.
Ex. 2: Ashu Pvt. Ltd. has fully paid capital and reserves of ` 50 lakh. During the
year, the company had borrowed ` 70 lakh each from a bank and a financial
institution independently. It has the turnover of ` 900 lakh.
In the given case of Ashu Pvt. Ltd., it has paid capital and reserves of ` 50 lakh
i.e. less than ` 1 crore, turnover of ` 9 crore i.e. less than ` 10 crore. However,
it has maximum outstanding borrowings of ` 1.40 crore (` 70 lakh + ` 70 lakh)
collectively from bank and financial institution.
Therefore, it fails to fulfill the condition relating to borrowings. Thus, CARO,
2016 shall be applicable to Ashu Pvt. Ltd. accordingly.
Matters to be included in the Auditor’s Report: Paragraph 3 of the Order
requires the auditor to include a statement in the auditor’s report on the
following matters, namely-
(i) (a) whether the company is maintaining proper records showing full
particulars, including quantitative details and situation of fixed
assets;
(b) whether these fixed 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 books of account;
(c) whether the title deeds of immovable properties are held in the
name of the company. If not, provide the details thereof;
(ii) whether physical verification of inventory has been conducted at
reasonable intervals by the management and whether any material
discrepancies were noticed and if so, whether they have been properly
dealt with in the books of account;
(iii) whether the company has granted any loans, secured or unsecured to
companies, firms, Limited Liability Partnerships or other parties covered
in the register maintained under section 189 of the Companies Act, 2013.
If so,

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(a) whether the terms and conditions of the grant of such loans are not
prejudicial to the company’s interest;
(b) whether the schedule of repayment of principal and payment of
interest has been stipulated and whether the repayments or receipts
are regular;
(c) if the amount is overdue, state the total amount overdue for more
than ninety days, and whether reasonable steps have been taken by
the company for recovery of the principal and interest;
(iv) in respect of loans, investments, guarantees, and security whether
provisions of section 185 and 186 of the Companies Act, 2013 have been
complied with. If not, provide the details thereof.
(v) in case the company has accepted deposits, whether the directives issued
by the Reserve Bank of India and the provisions of sections 73 to 76 or
any other relevant provisions of the Companies Act, 2013 and the rules
framed there under, where applicable, have been complied with? If not,
the nature of such contraventions be stated; If an order has been passed
by Company Law Board or National Company Law Tribunal or Reserve
Bank of India or any court or any other tribunal, whether the same has
been complied with or not?
(vi) where maintenance of cost records has been specified by the Central
Government under sub-section (1) of section 148 of the Companies Act,
2013 and whether such accounts and records have been so made and
maintained.
(vii) (a) whether the company is regular in depositing undisputed statutory
dues including provident fund, employees' state insurance, income-
tax, sales-tax, service tax, duty of customs, duty of excise, value
added tax, cess and any other statutory dues with the appropriate
authorities and if not, the extent of the arrears of outstanding
statutory dues as at the last day of the financial year concerned for
a period of more than six months from the date they became
payable, shall be indicated;
(b) where dues of income tax or sales tax or service tax or duty of
customs or duty of excise or value added tax have not been
deposited on account of any dispute, then the amounts involved

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and the forum where dispute is pending shall be mentioned. (A

mere representation to the concerned Department shall not
constitute a dispute).
(viii) whether the company has defaulted in repayment of loans or borrowing
to a financial institution, bank, Government or dues to debenture holders?
If yes, the period and the amount of default to be reported (in case of
defaults to banks, financial institutions, and Government, lender wise
details to be provided).
(ix) whether moneys raised by way of initial public offer or further public offer
(including debt instruments) and term loans were applied for the
purposes for which those are raised. If not, the details together with delays
or default and subsequent rectification, if any, as may be applicable, be
reported;
(x) whether any fraud by the company or any fraud on the Company by its
officers or employees has been noticed or reported during the year; If yes,
the nature and the amount involved is to be indicated;
(xi) whether managerial remuneration has been paid or provided in
accordance with the requisite approvals mandated by the provisions of
section 197 read with Schedule V to the Companies Act, 2013? If not, state
the amount involved and steps taken by the company for securing refund
of the same;
(xii) whether the Nidhi Company has complied with the Net Owned Funds to
Deposits in the ratio of 1:20 to meet out the liability and whether the Nidhi
Company is maintaining ten per cent unencumbered term deposits as
specified in the Nidhi Rules, 2014 to meet out the liability;
(xiii) whether all transactions with the related parties are in compliance with
sections 177 and 188 of Companies Act, 2013 where applicable and the
details have been disclosed in the Financial Statements etc., as required
by the applicable accounting standards;
(xiv) whether the company has made any preferential allotment or private
placement of shares or fully or partly convertible debentures during the
year under review and if so, as to whether the requirement of section 42
of the Companies Act, 2013 have been complied with and the amount
raised have been used for the purposes for which the funds were raised.

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If not, provide the details in respect of the amount involved and nature of
non-compliance;
(xv) whether the company has entered into any non-cash transactions with
directors or persons connected with him and if so, whether the provisions
of section 192 of Companies Act, 2013 have been complied with;
(xvi) whether the company is required to be registered under section 45-IA of
the Reserve Bank of India Act, 1934 and if so, whether the registration has
been obtained.
Reasons to be Stated for Unfavourable or Qualified Answers: Where the
answer to any of the questions referred to in paragraph 3 of the Order is
unfavourable or qualified, in the auditor's report, the auditor shall also state the
basis for such unfavourable or qualified answer, as the case may be.
Further, where the auditor is unable to express any opinion on any specified
matter, his report shall indicate such fact together with the reasons why it is not
possible for him to give his opinion on the same.

Example: The company has dispensed with the practice of taking inventory of
their inventories at the year-end as in their opinion the exercise is redundant,
time consuming and intrusion to normal functioning of the operations. Explain
reporting requirement under CARO, 2016.
Reporting for Physical Verification of Inventory: Clause (ii) of Para 3 of
CARO, 2016, requires the auditor to report whether physical verification of
inventory has been conducted at reasonable intervals by the management and
whether any material discrepancies were noticed and if so, whether they have
been properly dealt with in the books of account.
The physical verification of inventory is the responsibility of the management
of the company which should verify all material items at least once in a year
and more often in appropriate cases.
In the given case, the above requirement of physical verification of inventory by
the management has not been taken place and therefore the auditor should point
out the same under CARO, 2016. He may consider the impact on financial
statement and report accordingly.

11. DISCLOSURE IN THE AUDITOR’S REPORT

The following paragraphs deal with the manner of qualification and the

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manner of disclosure, if any, to be made in the auditor’s report.

AS-1 – Disclosure of Accounting Policies
In the case of a company, members should qualify their audit reports in case –
(a) accounting policies required to be disclosed under Schedule III or any
other provisions of the Companies Act, 2013 have not been disclosed, or
(b) accounts have not been prepared on accrual basis, or
(c) the fundamental accounting assumption of going concern has not been
followed and this fact has not been disclosed in the financial statements,
or
(d) proper disclosures regarding changes in the accounting policies have not
been made.
Where a company has been given a specific exemption regarding any of the
matters stated above but the fact of such exemption has not been adequately
disclosed in the accounts, the member should mention the fact of exemption in
his audit report without necessarily making it a subject matter of audit
qualification.
In view of the above, the auditor will have to consider different circumstances
whether the audit report has to be qualified or only disclosures have to be
given.
In the case of enterprises not governed by the Companies Act, the member
should examine the relevant statute and make suitable qualification in his audit
report in case adequate disclosures regarding accounting policies have not been
made as per the statutory requirements. Similarly, the member should examine if
the fundamental accounting assumptions have been followed in preparing the
financial statements or not. In appropriate cases, he should consider whether,
keeping in view the requirements of the applicable laws, a qualification in his
report is necessary.
In the event of non-compliance by enterprises not governed by the Companies
Act, in situations where the relevant statute does not require such disclosures
to be made, the member should make adequate disclosure in his audit report
without necessarily making it a subject matter of audit qualification.
In making a qualification / disclosure in the audit report, the auditor should
consider the materiality of the relevant item. Thus, the auditor need not make

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qualification / disclosure in respect of items which, in his judgement, are not

material.
A disclosure, which is not a subject matter of audit qualification, should be made
in the auditor’s report in a manner that it is clear to the reader that the
disclosure does not constitute an audit qualification. The paragraph containing
the auditor’s opinion on true and fair view should not include a reference to the
paragraph containing the aforesaid disclosure.

12. JOINT AUDIT

The practice of appointing Chartered Accountants as joint auditors is quite
widespread in big companies and corporations. Joint audit basically implies
pooling together the resources and expertise of more than one firm of auditors
to render an expert job in a given time period which may be difficult to
accomplish acting individually. It essentially involves sharing of the total work.
This is by itself a great advantage.
In specific terms the advantages that flow may be the following:
(i) Sharing of expertise.
(ii) Advantage of mutual consultation.
(iii) Lower workload.
(iv) Better quality of performance.
(v) Improved service to the client.
(vi) Displacement of the auditor of the company taken over in a take - over
often obviated.
(vii) In respect of multi-national companies, the work can be spread using the
expertise of the local firms which are in a better position to deal with
detailed work and the local laws and regulations.
(viii) Lower staff development costs.
(ix) Lower costs to carry out the work.
(x) A sense of healthy competition towards a better performance.
The general disadvantages may be the following:
(i) The fees being shared.

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(ii) Psychological problem where firms of different standing are associated in

the joint audit.
(iii) General superiority complexes of some auditors.
(iv) Problems of co-ordination of the work.
(v) Areas of work of common concern being neglected.
(vi) Uncertainty about the liability for the work done.
The Institute of Chartered Accountants of India has issued Standard on Auditing
(SA) 299 (Revised), “Joint Audit of Financial Statements” which lays down the
principles for effective conduct of joint audit to achieve the overall objectives
of the auditor as laid down in SA 200 “Overall Objectives of the Independent
Auditor and the conduct of an audit in accordance with Standards on Auditing”.
This Standard deals with the special considerations in carrying out audit by joint
auditors. It requires that–
(i) the engagement partner and other key members of the engagement team
from each of the joint auditors should be involved in planning the audit.
(ii) the joint auditors should jointly establish an overall audit strategy which
sets the scope, timing and direction of the audit, and also guides the
development of the audit plan.
(iii) before the commencement of the audit, the joint auditors should discuss
and develop a joint audit plan. In developing the joint audit plan, the joint
auditors should:
(a) identify division of audit areas and common audit areas;
(b) ascertain the reporting objectives of the engagement;
(c) consider and communicate among all joint auditors the factors that
are significant
(d) in directing the engagement team’s efforts;
(e) consider the results of preliminary engagement activities, or similar
engagements performed earlier.
(f) ascertain the nature, timing and extent of resources necessary to
accomplish the engagement.

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(iv) each of the joint auditors should consider and assess the risks of material
misstatement and communicate to other joint auditors.
(v) the joint auditors should discuss and document the nature, timing, and
the extent of the audit procedures for (I) common and (II) specific allotted
areas of audit to be performed.
(vi) the joint auditors should obtain common engagement letter and common
management representation letter.
(vii) the work allocation document should be signed by all the joint auditors
and communicated to those charged with governance.
It further states that, in respect of audit work divided among the joint auditors,
each joint auditor shall be responsible only for the work allocated to such joint
auditor including proper execution of the audit procedures. On the other hand,
all the joint auditors shall be jointly and severally responsible for:
(i) the audit work which is not divided among the joint auditors and is carried
out by all joint auditors;
(ii) decisions taken by all the joint auditors under audit planning in respect of
common audit areas;
(iii) matters which are brought to the notice of the joint auditors by any one of
them and there is an agreement among the joint auditors on such matters;
(iv) examining that the financial statements of the entity comply with the
requirements of the relevant statutes;
(v) presentation and disclosure of the financial statements as required by the
applicable financial reporting framework;
(vi) ensuring that the audit report complies with the requirements of the
relevant statutes, applicable Standards on Auditing and other relevant
pronouncements issued by ICAI.
In case a joint auditor comes across matters which are relevant to the areas of
responsibility of other joint auditors and which deserve their attention, or which
require disclosure or require discussion with, or application of judgment by other
joint auditors, the said joint auditor shall communicate the same to all the other
joint auditors in writing prior to the completion of the audit.

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It may be noted that the joint auditors are required to issue common audit report.
However, where the joint auditors are in disagreement with regard to the opinion
or any matters to be covered by the audit report, they shall express their opinion
in a separate audit report. In such circumstances, the audit report(s) issued by the
joint auditor(s) shall make a reference to each other’s audit report(s).
[Note: Student may refer SA 299 (revised) “Joint Audit of Financial Statements”
reproduced in “Auditing Pronouncements” for comprehensive knowledge.]

13. AUDIT OF BRANCH OFFICE ACCOUNTS

As per section 128(1) of the Companies Act, 2013, every company shall prepare
and keep at its registered office books of account and other relevant books
and papers and financial statement for every financial year which give a true
and fair view of the state of the affairs of the company, including that of its
branch office or offices, if any, and explain the transactions effected both at the
registered office and its branches and such books shall be kept on accrual basis
and according to the double entry system of accounting.
It may be noted that all or any of the books of account aforesaid and other
relevant papers may be kept at such other place in India as the Board of
Directors may decide and where such a decision is taken, the company shall,
within 7 days thereof, file with the Registrar a notice in writing giving the full
address of that other place.
Students may also note that the company may keep such books of account or
other relevant papers in electronic mode in such manner as may be prescribed.
Sub-section (2) provides that where a company has a branch office in India or
outside India, it shall be deemed to have complied with the provisions of sub-
section (1), if proper books of account relating to the transactions effected at
the branch office are kept at that office and proper summarised returns
periodically are sent by the branch office to the company at its registered office
or the other place referred in (1).
Further, sub-section (8) of section 143 of the Companies Act, 2013, prescribes
the duties and powers of the company’s auditor with reference to the audit of
the branch and the branch auditor. Where a company has a branch office, the
accounts of that office shall be audited either by the auditor appointed for the
company (herein referred to as the company's auditor) under this Act or by any
other person qualified for appointment as an auditor of the company under this

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Act and appointed as such under section 139, or where the branch office is
situated in a country outside India, the accounts of the branch office shall be
audited either by the company's auditor or by an accountant or by any other
person duly qualified to act as an auditor of the accounts of the branch office in
accordance with the laws of that country and the duties and powers of the
company' s auditor with reference to the audit of the branch and the branch
auditor, if any, shall be such as may be prescribed:
It may be noted that the branch auditor shall prepare a report on the accounts
of the branch examined by him and send it to the auditor of the company who
shall deal with it in his report in such manner as he considers necessary.
Further as per rule 12 of the Companies (Audit and Auditors) Rules, 2014,
the branch auditor shall submit his report to the company’s auditor and
reporting of fraud by the auditor shall also extend to such branch auditor to the
extent it relates to the concerned branch.
Using the Work of another Auditor: When the accounts of the branch are
audited by a person other than the company’s auditor, there is need for a clear
understanding of the role of such auditor and the company’s auditor in relation
to the audit of the accounts of the branch and the audit of the company as a
whole; also, there is great necessity for a proper rapport between these two
auditors for the purpose of an effective audit. In recognition of these needs, the
Council of the Institute of Chartered Accountants of India has dealt with these
issues in SA 600, “Using the Work of another Auditor”. It makes clear that in
certain situations, the statute governing the entity may confer a right on the
principal auditor to visit a component and examine the books of account and
other records of the said component, if he thinks it necessary to do so. Where
another auditor has been appointed for the component, the principal auditor
would normally be entitled to rely upon the work of such auditor unless there
are special circumstances to make it essential for him to visit the component
and/or to examine the books of account and other records of the said
component. Further, it requires that the principal auditor should perform
procedures to obtain sufficient appropriate audit evidence, that the work of the
other auditor is adequate for the principal auditor's purposes, in the context of
the specific assignment. When using the work of another auditor, the principal
auditor should ordinarily perform the following procedures:
(a) advise the other auditor of the use that is to be made of the other
auditor's work and report and make sufficient arrangements for co-

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ordination of their efforts at the planning stage of the audit. The principal
auditor would inform the other auditor of matters such as are as requiring
special consideration, procedures for the identification of inter -
component transactions that may require disclosure and the time-table
for completion of audit; and
(b) advise the other auditor of the significant accounting, auditing and
reporting requirements and obtain representation as to compliance with
them.
The principal auditor might discuss with the other auditor the audit procedures
applied or review a written summary of the other auditor’s procedures and
findings which may be in the form of a completed questionnaire or check-list.
The principal auditor may also wish to visit the other auditor. The nature, timing
and extent of procedures will depend on the circumstances of the engagement
and the principal auditor's knowledge of the professional competence of the
other auditor. This knowledge may have been enhanced from the review of the
previous audit work of the other auditor.

14. COST AUDIT

Cost Audit is an audit process for verifying the cost of manufacture or
production of any article, on the basis of accounts as regards utilisation of
material or labour or other items of costs, maintained by the company.
It is covered by Section 148 of the Companies Act, 2013. The audit conducted
under this section shall be in addition to the audit conducted under section
143.
As per section 148 the Central Government may by order specify audit of items
of cost in respect of certain companies.
Further, the Central Government may, by order, in respect of such class of
companies engaged in the production of such goods or providing such services
as may be prescribed, direct that particulars relating to the utilisation of
material or labour or to other items of cost as may be prescribed shall also be
included in the books of account kept by that c lass of companies.
In this regard, the Central Government has notified the Companies (Cost
Records and Audit) Rules, 2014 which prescribes the classes of companies
required to include cost records in their books of account, applicability of cost

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audit, maintenance of records etc.

Applicability for Maintenance of Cost Records: Rule 3 of the Companies (Cost
Records and Audit) Rules, 2014 provides the classes of companies, engaged in
the production of goods or providing services, having an overall turnover from
all its products and services of ` 35 crore or more during the immediately
preceding financial year, required to include cost records in their books of
account. These companies include Foreign Companies defined in sub-section
(42) of section 2 of the Act, but exclude a company classified as a Micro
enterprise or a Small enterprise including as per the turnover criteria provided
under Micro, Small and Medium Enterprises Development Act, 2006. The said
rule has divided the list of companies into (A) Regulated sectors and (B) Non-
regulated sectors.
Maintenance of Cost Records: As per Rule 5 of the Companies (Cost Records
and Audit) Rules, 2014, every company under these rules including all units and
branches thereof, shall, in respect of each of its financial year, is required to
maintain cost records in Form CRA-1. The cost records shall be maintained on
regular basis in such manner as to facilitate calculation of per unit cost of
production or cost of operations, cost of sales and margin for each of its
products and activities for every financial year on monthly or quarterly or half-
yearly or annual basis.
Additionally, as per clause (vi) to Paragraph 3 of the CARO, 2016, the auditor
has to report whether maintenance of cost records has been specified by the
Central Government under section 148(1) of the Companies Act, 2013 and
whether such accounts and records have been so made and maintained.
Applicability of Cost Audit: Rule 4 of the Companies (Cost Records and Audit)
Rules, 2014 states the provisions related to the applicability of cost audit
depending on the turnover of the company as follows-
(i) Classes of companies specified under item (A) “Regulated Sectors” are
required to get its cost records audited if the overall annual turnover of
the company from all its products and services during the immediately
preceding financial year is ` 50 crore or more and the aggregate turnover
of the individual product(s) or service(s) for which cost records are
required to be maintained under rule 3 is ` 25 crore or more.
(ii) Classes of companies specified under item (B) “Non-Regulated Sectors”
are required to get its cost records audited if the overall annual turnover

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of the company from all its products and services during the immediately
preceding financial year is ` 100 crore or more and the aggregate turnover
of the individual product(s) or service(s) for which cost records are
required to be maintained under rule 3 is ` 35 crore or more.
Who can be Cost Auditor: The audit shall be conducted by a Cost Accountant
who shall be appointed by the Board of such remuneration as may be
determined by the members in such manner as may be prescribed.
It may be noted that no person appointed under section 139 as an auditor of
the company shall be appointed for conducting the audit of cost records.
It may also be noted that the auditor conducting the cost audit shall comply
with the cost auditing standards ("cost auditing standards" mean such
standards as are issued by the Institute of Cost Accountants of India, constituted
under the Cost and Works Accountants Act, 1959, with the approval of the
Central Government).
Appointment of Cost Auditor: Rule 6 of the Companies (Cost Records and
Audit) Rules, 2014 requires the companies prescribed under the said Rules to
appoint an Auditor within 180 days of the commencement of every financial
year. However, before such appointment is made, the written consent of the
cost auditor to such appointment and a certificate from him or it shall be
obtained.
The certificate to be obtained from the cost auditor shall certify that the-
(a) the individual or the firm, as the case may be, is eligible for appointment
and is not disqualified for appointment under the Companies Act, 2013,
the Cost and Works Accountants Act, 1959 and the rules or regulations
made thereunder;
(b) the individual or the firm, as the case may be, satisfies the criteria provided
in section 141 of the Companies Act, 2013 so far as may be applicable;
(c) the proposed appointment is within the limits laid down by or under the
authority of the Companies Act, 2013; and
(d) the list of proceedings against the cost auditor or audit firm or any partner
of the audit firm pending with respect to professional matters of conduct,
as disclosed in the certificate, is true and correct.
Every referred company shall inform the cost auditor concerned of his or its

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appointment as such and file a notice of such appointment with the Central
Government within a period of 30 days of the Board meeting in which such
appointment is made or within a period of 180 days of the commencement of
the financial year, whichever is earlier, through electronic mode, in Form CRA-
2, along with the fee as specified in Companies (Registration Offices and Fees)
Rules, 2014.
The cost auditor appointed as such shall continue in such capacity till the expiry
of 180 days from the closure of the financial year or till he submits the cost
audit report, for the financial year for which he has been appointed.
Removal of Cost Auditor: The cost auditor may be removed from his office before
the expiry of his term, through a board resolution after giving a reasonable
opportunity of being heard to the cost auditor and recording the reasons for such
removal in writing.
It may be noted that the Form CRA-2 to be filed with the Central Government
for intimating appointment of another cost auditor shall enclose the relevant
Board Resolution to the effect.
It may further be noted that the above provisions shall not prejudice the right
of the cost auditor to resign from such office of the company.
Casual Vacancy in the Office of a Cost Auditor: Any casual vacancy in the
office of a Cost Auditor, whether due to resignation, death or removal, shall be
filled by the Board of Directors within 30 days of occurrence of such vacancy
and the company shall inform the central government in Form CRA-2 within 30
days of such appointment of cost auditor.
Remuneration of Cost Auditor: As per rule 14 of the Companies (Audit and
Auditors) Rules, 2014-
(a) in the case of companies which are required to constitute an audit
committee-
(i) the Board shall appoint an individual, who is a cost accountant, or a
firm of cost accountants in practice, as cost auditor on the
recommendations of the Audit committee, which shall also
recommend remuneration for such cost auditor;
(ii) the remuneration recommended by the Audit Committee under (i)
shall be considered and approved by the Board of Directors and
ratified subsequently by the shareholders;

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(b) in the case of other companies which are not required to constitute an
audit committee, the Board shall appoint an individual who is a cost
accountant or a firm of cost accountants in practice as cost auditor and
the remuneration of such cost auditor shall be ratified by shareholders
subsequently.
Qualification, Disqualification, Rights, Duties and Obligations of Cost
Auditor: The qualifications, disqualifications, rights, duties and obligations
applicable to auditors under this Chapter shall, so far as may be applicable,
apply to a cost auditor appointed under this section and it shall be the duty of
the company to give all assistance and facilities to the cost auditor appointed
under this section for auditing the cost records of the company.
Submission of Cost Audit Report:
(i) To the Board of Directors of the Company- The cost auditor shall submit
the cost audit report along with his reservations or qualifications or observations or
suggestions, if any, in Form CRA-3. He shall forward his report to the Board of
Directors of the company within a period of 180 days from the closure of the financial
year to which the report relates and the Board of Directors shall consider and
examine such report particularly any reservation or qualification contained therein.
(ii) To the Central Government- The company shall within 30 days from
the date of receipt of a copy of the cost audit report prepared (in pursuance of
a direction issued by Central Government) furnish the Central Government with
such report along with full information and explanation on every reservation or
qualification contained therein in Form CRA-4 in Extensible Business Reporting
Language (XBRL) format in the manner as specified in the Companies (Filing of
Documents and Forms in Extensible Business Reporting language) Rules, 2015
along with fees specified in the Companies (Registration Offices and Fees)
Rules, 2014.
Provided that the companies which have got extension of time of holding AGM
under section 96 (1) of the Companies Act, 2013, may file form CRA-4 within
resultant extended period of filing financial statements under section 137 of the
Companies Act, 2013.
If, after considering the cost audit report and the, information and explanation
furnished by the company as above, the Central Government is of the opinion,
that any further information or explanation is necessary, it may call for such
further information and explanation and the company shall furnish the same

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within such time as may be specified by that Government.

Duty to Report on Fraud: The provisions of section 143(12) of the Companies
Act, 2013 and the relevant rules on duty to report on fraud shall apply mutatis
mutandis to a cost auditor during performance of his functions under section
148 of the Act and these rules.
Cost Audit Rules Not to Apply in Certain Cases: The requirement for cost audit
under these rules shall not be applicable to a company which is covered under Rule
3, and,
(i) whose revenue from exports, in foreign exchange, exceeds 75% of its total
revenue; or
(ii) which is operating from a special economic zone.
(iii) which is engaged in generation of electricity for captive consumption
through Captive Generating Plant.
Penal Provisions in Case of Default: If any default is made in complying with
the provisions of this section,
(a) the company and every officer of the company who is in default shall be
punishable in the manner as provided in sub-section (1) of section 147;
(b) the cost auditor of the company who is in default shall be punishable in
the manner as provided in sub-sections (2) to (4) of section 147.

15. PUNISHMENT FOR NON-COMPLIANCE

Section 147 of the Companies Act, 2013 prescribes following punishments for
contravention:
(1) If any of the provisions of sections 139 to 146 (both inclusive) is
contravened, the company shall be punishable with fine which shall not
be less than twenty-five thousand rupees but which may extend to five
lakh rupees and every officer of the company who is in default shall be
punishable with imprisonment for a term which may extend to one year
or with fine which shall not be less than ten thousand rupees but which
may extend to one lakh rupees.
(2) If an auditor of a company contravenes any of the provisions of section
139 section 143, section 144 or section 145, the auditor shall be
punishable with fine which shall not be less than twenty-five thousand

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rupees but which may extend to five lakh rupees or four times the
remuneration of the auditor, whichever is less.
It may be noted that if an auditor has contravened such provisions
knowingly or willfully with the intention to deceive the company or its
shareholders or creditors or tax authorities, he shall be punishable with
imprisonment for a term which may extend to one year and with fine
which shall not be less than fifty thousand rupees but which may extend
to twenty-five lakh rupees or eight times the remuneration of the
auditor, whichever is less .
(3) Where an auditor has been convicted under sub-section (2), he shall be
liable to-
(i) refund the remuneration received by him to the company;
(ii) and pay for damages to the company statutory bodies or authorities
or to members or creditors of the company for loss arising out of
incorrect or misleading statements of particulars made in his audit
report.
(4) The Central Government shall, by notification, specify any statutory body
or authority of an officer for ensuring prompt payment of damages to the
company or the persons under clause (ii) of sub-section (3) and such
body, authority or officer shall after payment of damages the such
company or persons file a report with the Central Government in respect
of making such damages in such manner as may be specified in the said
notification.
(5) Where, in case of audit of a company being conducted by an audit firm,
it is proved that the partner or partners of the audit firm has or have
acted in a fraudulent manner or abetted or colluded in an fraud by, or in
relation to or by, the company or its directors or officers, the liability,
whether civil or criminal as provided in this Act or in any other law for the
time being in force, for such act shall be of the partner or partners
concerned of the audit firm and of the firm jointly and severally.
It may be noted that in case of criminal liability of an audit firm, in respect
of liability other than fine, the concerned partner(s), who acted in a
fraudulent manner or abetted or, as the case may be, colluded in any fraud
shall only be liable.

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16. AUDIT REPORT

Management is responsible for the preparation of the financial statements.
Management also accepts responsibility for necessary internal controls to
enable the preparation of financial statements that are free from material
misstatement, whether due to fraud or error.
The purpose of an audit is to enhance the degree of confidence of intended
users of the financial statements. The aforesaid purpose is achieved by the
expression of an independent reporting by the auditor as to whether the
financial statements exhibit a true and fair view of the affairs of the entity.
Thus, an Audit report is an opinion drawn on the entity’s financial statements to
make sure that the records are true and fair representation of the transactions
they claim to represent. This involves considering whether the financial
statements have been prepared in accordance with an acceptable financial
reporting framework applicable to the entity under audit. It is also necessary to
consider whether the financial statements comply with the relevant statutory
requirements. The main users of audit report are shareholders, members and all
other stakeholders of the company.

17. FORMING AN OPINION ON THE FINANCIAL STATEMENTS-

OBJECTIVE OF THE AUDITOR
17.1 The objectives of the auditor as per SA 700 (Revised), “Forming An
Opinion And Reporting On Financial Statements” are:
(a) To form an opinion on the financial statements based on an evaluation of
the conclusions drawn from the audit evidence obtained; and
(b) To express clearly that opinion through a written report.
The auditor shall form an opinion on whether the financial statements are
prepared, in all material respects, in accordance with the applicable financial
reporting framework.
17.2 To form opinion - Auditor to obtain Reasonable assurance

In order to form that opinion, the auditor shall conclude as to whether the
auditor has obtained reasonable assurance about whether the financial

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statements as a whole are free from material misstatement, whether due to

fraud or error.

That conclusion shall take into account:

(a) whether sufficient appropriate audit evidence has been obtained;
(b) whether uncorrected misstatements are material, individually or in
aggregate;
(c) The evaluations
17.3 Evaluations by the Auditor
The auditor shall evaluate whether the financial statements are prepared in
accordance with the requirements of the applicable financial reporting
framework.
This evaluation shall include consideration of the qualitative aspects of the
entity’s accounting practices, including indicators of possible bias in
management’s judgments.

17.3.1 Qualitative Aspects of the Entity’s Accounting Practices

1. Management makes a number of judgments about the amounts and
disclosures in the financial statements.
2. SA 260 (Revised) contains a discussion of the qualitative aspects of
accounting practices.
3. In considering the qualitative aspects of the entity’s accounting
practices, the auditor may become aware of possible bias in management’s
judgments. The auditor may conclude that lack of neutrality together with
uncorrected misstatements causes the financial statements to be materially
misstated. Indicators of a lack of neutrality include the following:
(i) The selective correction of misstatements brought to management’s
attention during the audit
Example
Correcting misstatements with the effect of increasing reported
earnings, but not correcting misstatements that have the effect of
decreasing reported earnings.

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The combination of several deficiencies affecting the same

significant account or disclosure (or the same internal control
component) could amount to a significant deficiency (or material
weakness if required to be communicated in the jurisdiction). This
evaluation requires judgment and involvement of audit executives.
(ii) Possible management bias in the making of accounting estimates.
4. SA 540 addresses possible management bias in making accounting
estimates.

Indicators of possible management bias do not constitute misstatements for

purposes of drawing conclusions on the reasonableness of individual
accounting estimates. They may, however, affect the auditor’s evaluation of
whether the financial statements as a whole are free from material
misstatement.

17.4 Specific Evaluations by the auditor

In particular, the auditor shall evaluate whether :
(a) The financial statements adequately disclose the significant accounting
policies selected and applied;
(b) The accounting policies selected and applied are consistent with the
applicable financial reporting framework and are appropriate;
(c) The accounting estimates made by management are reasonable;
(d) The information presented in the financial statements is relevant, reliable,
comparable, and understandable;
(e) The financial statements provide adequate disclosures to enable the
intended users to understand the effect of material transactions and
events on the information conveyed in the financial statements; and
(f) The terminology used in the financial statements, including the title of
each financial statement, is appropriate.
Example:
If an amount or disclosure in the financial statements is under
greater scrutiny by users of the financial statements, then a smaller
misstatement may be considered more significant.

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A misstatement may be objectively determinable or may involve a

degree of subjectivity through estimation, allocation or uncertainty.

17.5 Form of Opinion

Unmodified Opinion: The auditor shall express an unmodified opinion when
the auditor concludes that the financial statements are prepared, in all
material respects, in accordance with the applicable financial reporting
framework.
Modified Opinion: If the auditor:

(a) concludes that, based on the audit (b) is unable to obtain sufficient appropriate
evidence obtained, the financial statements audit evidence to conclude that the financial
as a whole are not free from material statements as a whole are free from material
misstatement; or misstatement,

the auditor shall modify the opinion in the auditor’s report in accordance
with SA 705.

17.6 Auditor’s Report

The auditor’s report shall be in writing. A written report encompasses reports
issued in hard copy and those using an electronic medium.
This SA-700 requires the use of specific headings, which are intended to assist
in making auditor’s reports that refer to audits that have been conducted in
accordance with SAs more recognizable.
17.6.1 Auditor’s Report for Audits Conducted in Accordance with Standards
on Auditing
Basic Elements of an Audit Report are given below:
1 Title: The auditor’s report shall have a title that clearly indicates that it
is the report of an independent auditor.
For example, “Independent Auditor’s Report,” distinguishes the independent
auditor’s report from reports issued by others.

2. Addressee: The auditor’s report shall be addressed, as appropriate,

based on the circumstances of the engagement. Law, regulation or the terms
of the engagement may specify to whom the auditor’s report is to be addressed.

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The auditor’s report is normally addressed to those for whom the report is
prepared, often either to the shareholders or to those charged with governance
of the entity whose financial statements are being audited.
3. Auditor’s Opinion: The first section of the auditor’s report shall include
the auditor’s opinion, and shall have the heading “Opinion.”
The Opinion section of the auditor’s report shall also:
(a) Identify the entity whose financial statements have been audited;
(b) State that the financial statements have been audited;
(c) Identify the title of each statement comprising the financial statements;
(d) Refer to the notes, including the summary of significant accounting
policies; and
(e) Specify the date of, or period covered by, each financial statement
comprising the financial statements.

Expressing an unmodified opinion on financial statements

When expressing an unmodified opinion on financial statements, the auditor’s
opinion shall, unless otherwise required by law or regulation, use one of the
following phrases, which are regarded as being equivalent:
(a) In our opinion, the accompanying financial statements present fairly, in
all material respects, […] in accordance with [the applicable financial
reporting framework]; or
(b) In our opinion, the accompanying financial statements give a true and
fair view of […] in accordance with [the applicable financial reporting
framework].
“Present fairly, in all material respects” or “give a true and fair view”
The phrases “present fairly, in all material respects,” and “give a true and fair
view” are regarded as being equivalent
When the auditor expresses an unmodified opinion, it is not appropriate to use
phrases such as “with the foregoing explanation” or “subject to” in relation to
the opinion, as these suggest a conditional opinion or a weakening or
modification of opinion.

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4. Basis for Opinion:

The auditor’s report shall include a section, directly following the Opinion
section, with the heading “Basis for Opinion”, that:
(a) States that the audit was conducted in accordance with Standards on
Auditing;
(b) Refers to the section of the auditor’s report that describes the auditor’s
responsibilities under the SAs;
(c) Includes a statement that the auditor is independent of the entity in
accordance with the relevant ethical requirements relating to the audit
and has fulfilled the auditor’s other ethical responsibilities in accordance
with these requirements.
(d) States whether the auditor believes that the audit evidence the auditor
has obtained is sufficient and appropriate to provide a basis for the
auditor’s opinion.
5. Going Concern: Where applicable, the auditor shall report in
accordance with SA 570 (Revised).
6. Key Audit Matters: For audits of complete sets of general purpose
financial statements of listed entities, the auditor shall communicate key audit
matters in the auditor’s report in accordance with SA 701.
When the auditor is otherwise required by law or regulation or decides to
communicate key audit matters in the auditor’s report, the auditor shall do so
in accordance with SA 701.
Law or regulation may require communication of key audit matters for audits
of entities other than listed entities,
For example, entities characterized in such law or regulation as public
interest entities.
The auditor may also decide to communicate key audit matters for other
entities, including those that may be of significant public interest, for example
because they have a large number and wide range of stakeholders and
considering the nature and size of the business.

Examples of such entities may include financial institutions (such as banks,

insurance companies, and pension funds), and other entities such as charities.

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7. Responsibilities for the Financial Statements: The auditor’s report

shall include a section with a heading “Responsibilities of Management for the
Financial Statements.”
SA 200 explains the premise, relating to the responsibilities of management
and, where appropriate, those charged with governance, on which an audit in
accordance with SAs is conducted. Management and, where appropriate, those
charged with governance accept responsibility for the preparation of the
financial statements. Management also accepts responsibility for such internal
control as it determines is necessary to enable the preparation of financial
statements that are free from material misstatement, whether due to fraud or
error. The description of management’s responsibilities in the auditor’s report
includes reference to both responsibilities as it helps to explain to users the
premise on which an audit is conducted.
This section of the auditor’s report shall describe management’s
responsibility for:
(a) Preparing the financial statements in accordance with the applicable
financial reporting framework, and for such internal control as
management determines is necessary to enable the preparation of
financial statements that are free from material misstatement, whether
due to fraud or error;[because of the possible effects of fraud on other
aspects of the audit, materiality does not apply to management’s
acknowledgement regarding its responsibility for the design,
implementation, and maintenance of internal control (or for establishing
and maintaining effective internal control over financial reporting) to
prevent and detect fraud.] and
(b) Assessing the entity’s ability to continue as a going concern and
whether the use of the going concern basis of accounting is appropriate
as well as disclosing, if applicable, matters relating to going concern. The
explanation of management’s responsibility for this assessment shall
include a description of when the use of the going concern basis of
accounting is appropriate.
❖ Auditor cannot conclude that management has provided with all
relevant information agreed in the terms of the audit engagement
agreement without confirming with management whether such
information has been provided.

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❖ When those individuals who have signed the engagement agreement

at the start of the audit have left the entity, the auditor would request
those who are giving the representations to acknowledge their
responsibilities within the letter of representations.
❖ A management representation as to the amount required for a
particular provision is not a substitute for the audit procedures
regarding the provision that the auditor would expect to perform.
Periods covered by the letter: The auditor to obtain representations for all
financial statements and periods referred to in our auditor’s report. Auditor
would obtain a specific representation if a restatement is made to correct a
material misstatement in the prior period financial statements that affects
the comparative information in the financial statements. If current
management was not present during all periods covered by auditor’s report,
he still would obtain written representations from current management on
all such periods.
SA 210 requires the auditor to agree management’s responsibilities in an
engagement letter or other suitable form of written agreement.

Oversight of the financial reporting process: This section of the auditor’s

report shall also identify those responsible for the oversight of the financial
reporting process, when those responsible for such oversight are different from
Management. In this case, the heading of this section shall also refer to “Those
Charged with Governance”
8. Auditor’s Responsibilities for the Audit of the Financial Statements:

The auditor’s report shall include a section with the heading “Auditor’s
Responsibilities for the Audit of the Financial Statements.”
This section of the auditor’s report shall:
(a) State that the objectives of the auditor are to:
(i) Obtain reasonable assurance about whether the financial
statements as a whole are free from material misstatement, whether
due to fraud or error; and
(ii) Issue an auditor’s report that includes the auditor’s opinion.

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(b) State that reasonable assurance is a high level of assurance, but is not a
guarantee that an audit conducted in accordance with SAs will always
detect a material misstatement when it exists; and
(c) State that misstatements can arise from fraud or error, and either:
(i) Describe that they are considered material if, individually or in the
aggregate, they could reasonably be expected to influence the
economic decisions of users taken on the basis of these financial
statements; or
(ii) Provide a definition or description of materiality in accordance with
the applicable financial reporting framework.
The Auditor’s Responsibilities for the Audit of the Financial Statements
section of the auditor’s report shall further:
(a) State that, as part of an audit in accordance with SAs, the auditor exercises
professional judgment and maintains professional skepticism throughout
the audit; and
(b) Describe an audit by stating that the auditor’s responsibilities are:
(i) To identify and assess the risks of material misstatement of the
financial statements, whether due to fraud or error; to design and
perform audit procedures responsive to those risks; and to obtain
audit evidence that is sufficient and appropriate to provide a basis
for the auditor’s opinion. The risk of not detecting a material
misstatement resulting from fraud is higher than for one resulting
from error, as fraud may involve collusion, forgery, intentional
omissions, misrepresentations, or the override of internal control.
1. To identify and assess the risks of material misstatement of
the financial statements.
2. to design and perform audit procedures in response to those
risks
3. to obtain sufficient and appropriate audit evidence.
(ii) To obtain an understanding of internal control relevant to the audit
in order to design audit procedures that are appropriate in the
circumstances.

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(iii) To evaluate the appropriateness of accounting policies used and the

reasonableness of accounting estimates and related disclosures
made by management.
(iv) To conclude on the appropriateness of management’s use of the
going concern basis of accounting and, based on the audit evidence
obtained, whether a material uncertainty exists related to events or
conditions that may cast significant doubt on the entity’s ability to
continue as a going concern.
The Auditor’s Responsibilities for the Audit of the Financia l Statements
section of the auditor’s report also shall:
(a) State that the auditor communicates with those charged with
governance regarding, among other matters, the planned scope and
timing of the audit and significant audit findings, including any significant
deficiencies in internal control that the auditor identifies during the audit;
(b) For audits of financial statements of listed entities, state that the auditor
provides those charged with governance with a statement that the auditor
has complied with relevant ethical requirements regarding independence
and communicate with them all relationships and other matters that may
reasonably be thought to bear on the auditor’s independence, and where
applicable, related safeguards; and
(c) For audits of financial statements of listed entities and any other entities
for which key audit matters are communicated in accordance with SA 701,
state that, from the matters communicated with those charged with
governance, the auditor determines those matters that were of most
significance in the audit of the financial statements of the current period
and are therefore the key audit matters. The auditor describes these
matters in the auditor’s report unless law or regulation precludes public
disclosure.
9. Location of the description of the auditor’s responsibilities for the
audit of the financial statements: The description of the auditor’s
responsibilities for the audit of the financial statements shall be included:
(a) Within the body of the auditor’s report;
(b) Within an appendix to the auditor’s report, in which case the auditor’s
report shall include a reference to the location of the appendix; or

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(c) By a specific reference within the auditor’s report to the location of such
a description on a website of an appropriate authority, where law,
regulation or national auditing standards expressly permit the auditor to
do so.
ILLUSTRATION
The following is an illustration of how such a reference to an appendix could be
made in the auditor’s report:
Auditor’s Responsibilities for the Audit of the Financial Statements
Our objectives are to obtain reasonable assurance about whether the financial
statements as a whole are free from material misstatement, whether due to
fraud or error, and to issue an auditor’s report that includes our opinion.
Reasonable assurance is a high level of assurance, but is not a guarantee that
an audit conducted in accordance with SAs will always detect a material
misstatement when it exists. Misstatements can arise from fraud or error and
are considered material if, individually or in the aggregate, they could
reasonably be expected to influence the economic decisions of users taken on
the basis of these financial statements.
A further description of our responsibilities for the audit of the financial
statements is included in appendix X of this auditor’s report. This description,
which is located at [indicate page number or other specific reference to the
location of the description], forms part of our auditor’s report.
10. Other Reporting Responsibilities: If the auditor addresses other
reporting responsibilities in the auditor’s report on the financial statements that
are in addition to the auditor’s responsibilities under the SAs, these other
reporting responsibilities shall be addressed in a separate section in the
auditor’s report with a heading titled-
“Report on Other Legal and Regulatory Requirements” or otherwise as
appropriate to the content of the section, unless these other reporting
responsibilities address the same topics as those presented under the reporting
responsibilities required by the SAs in which case the other reporting
responsibilities may be presented in the same section as the related report
elements required by the SAs.
If other reporting responsibilities are presented in the same section as the
related report elements required by the SAs, the auditor’s report shall clearly
differentiate the other reporting responsibilities from the reporting that is

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required by the SAs.

If the auditor’s report contains a separate section that addresses other reporting
responsibilities, the requirements stated above shall be included under a
section with a heading “Report on the Audit of the Financial Statements.” The
“Report on Other Legal and Regulatory Requirements” shall follow the “Report
on the Audit of the Financial Statements.”
11. Signature of the Auditor: The auditor’s report shall be signed. The
report is signed by the auditor (i.e. the engagement partner) in his personal
name. Where the firm is appointed as the auditor, the report is signed in the
personal name of the auditor and in the name of the audit firm.
The partner/proprietor signing the audit report also needs to mention the
membership number assigned by the Institute of Chartered Accountants of
India. They also include the registration number of the firm, wherever
applicable, as allotted by ICAI, in the audit reports signed by them
12. Auditor’s Address: The auditor’s report shall name specific location,
which is ordinarily the city where the audit report is signed.
13. Date of the Auditor’s Report: The auditor’s report shall be dated no
earlier than the date on which the auditor has obtained sufficient appropriate
audit evidence on which to base the auditor’s opinion on the financial
statements, including evidence that:
(a) All the statements that comprise the financial statements, including the
related notes, have been prepared; and
(b) Those with the recognized authority have asserted that they have taken
responsibility for those financial statements.
The date of the auditor’s report informs the user of the auditor’s report that the
auditor has considered the effect of events and transactions of which the
auditor became aware and that occurred up to that date. The auditor’s
responsibility for events and transactions after the date of the auditor’s report
is addressed in SA 560.

18. MODIFICATIONS TO THE OPINION IN THE INDEPENDENT

AUDITOR’S REPORT
Standard on Auditing (SA) 705 “Modifications to the opinion in the Independent
Auditor’s Report” deals with the auditor’s responsibility to issue an appropriate

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report in circumstances when, in forming an opinion in accordance with SA 700

(Revised) “Forming An Opinion And Reporting On Financial Statements”,
the auditor concludes that a modification to the auditor’s opinion on the
financial statements is necessary.
This SA also deals with how the form and content of the auditor’s report is
affected when the auditor expresses a modified opinion.

Audit Report

Unmodified Report Modified report

Emphasis of Matter Modified Opinion

Other Matter Qualified Opinion

Adverse Opinion

Disclaimer of Opiniont

18.1 Circumstances When a Modification to the Auditor’s Opinion Is

Required
The auditor shall modify the opinion in the auditor’s report when:
(a) The auditor concludes that, based on the audit evidence obtained, the
financial statements as a whole are not free from material misstatement;
or

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(b) The auditor is unable to obtain sufficient appropriate audit evidence to

conclude that the financial statements as a whole are free from material
misstatement.
18.2 Objective of the auditor - to express clearly an appropriately
modified opinion
As per Standard on Auditing (SA) 705 “Modifications To The Opinion In The
Independent Auditor’s Report”, the objective of the auditor is to express
clearly an appropriately modified opinion on the financial statements that is
necessary when:
(a) The auditor concludes, based on the audit evidence obtained, that the
financial statements as a whole are not free from material misstatement;
or
(b) The auditor is unable to obtain sufficient appropriate audit evidence to
conclude that the financial statements as a whole are free from material
misstatement.
18.3 Types of Modified Opinions
There are three types of modified opinions, namely-
1. A qualified opinion
2. An adverse opinion
3. A disclaimer of opinion.

Qualified Opinion Adverse Opinion Disclaimer of Opinion

• The auditor, having • The auditor shall express • The auditor shall disclaim
obtained sufficient an adverse opinion when an opinion when he is
appropriate audit the auditor, having unable to obtain sufficient
evidence, concludes that obtained sufficient appropriate audit
misstatements are appropriate audit evidence and he
material, but not evidence, concludes that concludes that the
pervasive misstatements, possible effects on the
individually or in the financial statements of
aggregate, are both undetected misstatements
material and pervasive could be both material
and pervasive.

Qualified Opinion
The auditor shall express a qualified opinion when:

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(a) The auditor, having obtained sufficient appropriate audit evidence,

concludes that misstatements, individually or in the aggregate, are
material, but not pervasive, to the financial statements; or
(b) The auditor is unable to obtain sufficient appropriate audit evidence on
which to base the opinion, but the auditor concludes that the possible
effects on the financial statements of undetected misstatements, if any,
could be material but not pervasive.
Adverse Opinion
The auditor shall express an adverse opinion when the auditor, having obtained
sufficient appropriate audit evidence, concludes that misstatements,
individually or in the aggregate, are both material and pervasive to the financial
statements.
Disclaimer of Opinion The auditor shall disclaim an opinion when the auditor
is unable to obtain sufficient appropriate audit evidence on which to base the
opinion, and the auditor concludes that the possible effects on the financ ial
statements of undetected misstatements, if any, could be both material and
pervasive.
The auditor shall disclaim an opinion when, in extremely rare circumstances
involving multiple uncertainties, the auditor concludes that, notwithstanding
having obtained sufficient appropriate audit evidence regarding each of the
individual uncertainties, it is not possible to form an opinion on the financial
statements due to the potential interaction of the uncertainties and their
possible cumulative effect on the financial statements.

Definition of Pervasive – A term used, in the context of misstatements, to

describe the effects on the financial statements of misstatements or the possible
effects on the financial statements of misstatements, if any, that are undetected
due to an inability to obtain sufficient appropriate audit evidence.
Pervasive effects on the financial statements are those that, in the auditor’s
judgment:
(i) Are not confined to specific elements, accounts or items of the financial
statements;
(ii) If so confined, represent or could represent a substantial proportion of the
financial statements; or

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(iii) In relation to disclosures, are fundamental to users’ understanding of the

financial statements.

18.4 Which type of opinion is appropriate?

The decision regarding which type of modified opinion is appropriate depends
upon:
(a) The nature of the matter giving rise to the modification, that is, whether
the financial statements are materially misstated or, in the case of an
inability to obtain sufficient appropriate audit evidence, may be materially
misstated; and
(b) The auditor’s judgment about the pervasiveness of the effects or possible
effects of the matter on the financial statements.
The table below illustrates how the auditor’s judgment about the nature of the
matter giving rise to the modification, and the pervasiveness of its effects or
possible effects on the financial statements, affects the type of opinion to be
expressed.
Nature of Matter Giving Auditor’s Judgment about the
Rise to the Modification Pervasiveness of the Effects or Possible
Effects on the Financial Statements
Material but Not Material and
Pervasive Pervasive
Financial statements are Qualified opinion Adverse opinion
materially misstated
Inability to obtain Qualified opinion Disclaimer of
sufficient appropriate opinion
audit evidence
18.5 Basis for Opinion
When the auditor modifies the opinion on the financial statements, the auditor
shall, in addition to the specific elements required by SA 700 (Revised)
(a) Amend the heading “Basis for Opinion” required by para of SA 700
(Revised) to “Basis for Qualified Opinion,” “Basis for Adverse Opinion,” or
“Basis for Disclaimer of Opinion,” as appropriate; and
(b) Within this section, include a description of the matter giving rise to the
modification.

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19. EMPHASIS OF MATTER PARAGRAPHS AND OTHER MATTER

PARAGRAPHS IN THE INDEPENDENT AUDITOR’S REPORT.
19.1 Objective of the Auditor as per SA 706
As per SA 706 (Revised) on “Emphasis of Matter Paragraphs and Other
Matter Paragraphs In The Independent Auditor’s Report”, the objective of
the auditor, having formed an opinion on the financial statements, is to draw
users’ attention, when in the auditor’s judgment it is necessary to do so, by way
of clear additional communication in the auditor’s report, to:
(a) A matter, although appropriately presented or disclosed in the financial
statements, that is of such importance that it is fundamental to users’
understanding of the financial statements; or
(b) As appropriate, any other matter that is relevant to users’ understanding
of the audit, the auditor’s responsibilities or the auditor’s report.

Definitions:
Emphasis of Matter paragraph – A paragraph included in the auditor’s report
that refers to a matter appropriately presented or disclosed in the financial
statements that, in the auditor’s judgment, is of such importance that it is
fundamental to users’ understanding of the financial statements.
Other Matter paragraph – A paragraph included in the auditor’s report that
refers to a matter other than those presented or disclosed in the financial
statements that, in the auditor’s judgment, is relevant to users’ understanding
of the audit, the auditor’s responsibilities or the auditor’s report.

19.2 Emphasis of Matter Paragraphs in the Auditor’s Report

If the auditor considers it necessary to draw users’ attention to a matter
presented or disclosed in the financial statements that, in the auditor’s
judgment, is of such importance that it is fundamental to users’ understanding
of the financial statements, the auditor shall include an Emphasis of Matter
paragraph in the auditor’s report provided:
(a) The auditor would not be required to modify the opinion in accordance
with SA 705 (Revised) as a result of the matter; and
(b) When SA 701 applies, the matter has not been determined to be a key
audit matter to be communicated in the auditor’s report.

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19.2.1 Separate section for Emphasis of Matter paragraph

When the auditor includes an Emphasis of Matter paragraph in the
auditor’s report, the auditor shall:
(a) Include the paragraph within a separate section of the auditor’s report
with an appropriate heading that includes the term “Emphasis of Matter”;
(b) Include in the paragraph a clear reference to the matter being emphasized
and to where relevant disclosures that fully describe the matter can be
found in the financial statements. The paragraph shall refer only to
information presented or disclosed in the financial statements; and
(c) Indicate that the auditor’s opinion is not modified in respect of the matter
emphasized.
19.3 Other Matter Paragraphs in the Auditor’s Report
If the auditor considers it necessary to communicate a matter other than those
that are presented or disclosed in the financial statements that, in the auditor’s
judgment, is relevant to users’ understanding of the audit, the auditor’s
responsibilities or the auditor’s report, the auditor shall include an Other Matter
paragraph in the auditor’s report, provided:
(a) This is not prohibited by law or regulation; and
(b) When SA 701 applies, the matter has not been determined to be a key
audit matter to be communicated in the auditor’s report.
19.3.1 Separate section for Other Matter paragraph
When the auditor includes an Other Matter paragraph in the auditor’s report,
the auditor shall include the paragraph within a separate section with the
heading “Other Matter,” or other appropriate heading.

20. COMMUNICATING KEY AUDIT MATTERS IN THE

INDEPENDENT AUDITOR’S REPORT
Definition of Key Audit Matters: Those matters that, in the auditor’s
professional judgment, were of most significance in the audit of the financial
statements of the current period. Key audit matters are selected from matters
communicated with those charged with governance.

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20.1 Purpose of communicating key audit matters

As per SA 701, “Communicating Key Audit Matters in the Auditor’s Report”, the
purpose of communicating key audit matters is to enhance the communicative
value of the auditor’s report by providing greater transparency about the audit
that was performed. Communicating key audit matters provides additional
information to intended users of the financial statements to assist them in
understanding those matters that, in the auditor’s professional judgment, were
of most significance in the audit of the financial statements of the current
period. Communicating key audit matters may also assist intended users in
understanding the entity and areas of significant management judgment in the
audited financial statements.
20.2 Objectives of the auditor regarding Key Audit Matters
As per SA 701, “Communicating Key Audit Matters in The Independent Auditor’s
Report”, the objectives of the auditor are to determine key audit matters and,
having formed an opinion on the financial statements, communicate those
matters by describing them in the auditor’s report.
20.3 Determining Key Audit Matters
The auditor shall determine, from the matters communicated with those
charged with governance, those matters that required significant auditor
attention in performing the audit.
In making this determination, the auditor shall take into account the following:
(a) Areas of higher assessed risk of material misstatement, or significant risks
identified in accordance with SA 315.
(b) Significant auditor judgments relating to areas in the financial statements
that involved significant management judgment, including accounting
estimates that have been identified as having high estimation uncertainty.
(c) The effect on the audit of significant events or transactions that occurred
during the period.

The auditor shall determine which of the matters determined in accordance with
above stated para were of most significance in the audit of the financial
statements of the current period and therefore are the key audit matters.

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20.4 Communicating Key Audit Matters

The auditor shall describe each key audit matter, using an appropriate
subheading, in a separate section of the auditor’s report under the heading “Key
Audit Matters”. The introductory language in this section of the auditor’s report
shall state that:
(a) Key audit matters are those matters that, in the auditor’s professional
judgment, were of most significance in the audit of the financial
statements [of the current period]; and
(b) These matters were addressed in the context of the audit of the financial
statements as a whole, and in forming the auditor’s opinion thereon, and
the auditor does not provide a separate opinion on these matters.
20.5 Communicating key audit matter- not a substitute for disclosure
in the financial statements etc.:
Communicating key audit matters in the auditor’s report is in the context of the
auditor having formed an opinion on the financial statements as a whole.
Communicating key audit matters in the auditor’s report is not:
(a) A substitute for disclosures in the financial statements that the applicable
financial reporting framework requires management to make, or that are
otherwise necessary to achieve fair presentation;
(b) A substitute for the auditor expressing a modified opinion when required
by the circumstances of a specific audit engagement in accordance with
SA 705 (Revised);
(c) A substitute for reporting in accordance with SA 570 when a material
uncertainty exists relating to events or conditions that may cast significant
doubt on an entity’s ability to continue as a going concern; or
(d) A separate opinion on individual matters
In Chapter 5-Vouching, the topic “Payments controlled by the Companies
Act, 2013” given at page no. 5.11 has been revised and given hereunder:
In the case of a company, payments or transactions, directly or indirectly, have
been controlled/restricted by the Companies Act, 2013 (hereinafter referred as
the Act). This may be understood with some of the provisions of the Act as
discussed below-

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(i) Only such expenses which are incurred related to the business of the
company are chargeable to statement of profit and loss. The auditor is,
therefore in terms of section 143(1)(e) of the Act, required to inquire whether
personal expenses have been charged to the revenue account. In case of any
special comments to the said inquiry, he is also required to report on the
same.
(ii) Section 180 of the Act specifically restricts the powers of the Board i.e. the
Board of Directors of a company can exercise the following powers but
only with the consent of the company by a special resolution, namely -
(a) sell, lease or otherwise dispose of the whole or substantially the
whole of the undertaking of the company or where the company
owns more than one undertaking, of the whole or substantially the
whole of any of such undertakings.
(b) invest otherwise in trust securities the amount of compensation
received by it as a result of any merger or amalgamation.
(c) borrow money, where the money to be borrowed, together with the
money already borrowed by the company will exceed aggregate of
its paid-up share capital and free reserves, apart from temporary
loans obtained from the company’s bankers in the ordinary course
of business.
It is provided that the acceptance by a banking company, in the
ordinary course of its business, of deposits of money from the
public, repayable on demand or otherwise, and withdrawable by
cheque, draft, order or otherwise, shall not be deemed to be a
borrowing of monies by the banking company within the meaning
of this clause.
(d) remit, or give time for the repayment of, any debt due from a
director.
(iii) Under section 181, the Board of Directors of a company can contribute to
the bonafide charitable and other funds any amount in any financial year.
However, prior permission of the company in general meeting is required
if the aggregate of such contribution exceeds 5% of its average net profits
for the three immediately preceding financial years.
(iv) Section 182 deals with prohibition and restriction regarding political
contributions. According to this section, a government company or any

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other company which has been in existence for less than three financial
years cannot contribute any amount directly or indirectly to any political
party. Notwithstanding anything contained in any other provision of this
Act, a Company, other than a Government Company and a company which
has been in existence for less than three financial years, may contribute
any amount directly or indirectly to any political party.
Every company shall disclose in its profit and loss account the total
amount contributed by it under this section during the financial year to
which the account relates.
The contribution under this section shall not be made except by an
account payee cheque drawn on a bank or an account payee bank draft
or use of electronic clearing system through a bank account.
(v) Section 183 permits the Board and other person to make contributions to
the National Defence Fund or any other Fund approved by the Central
Government for the purpose of National Defence to any extent as it thinks
fit.
In Chapter 8-“Company Audit II
1. At page no. 8.5-point (vii)(b)has been amended as under:
(b) If he managing director, the whole-time director in charge of
finance, the Chief Financial Officer or any other person of a company
charged by the Board contravenes such provisions, they shall be
punishable with fine which shall not be less than ` 50,000 but which
may extend to ` 5 lakh.
2. New Section 129A
The Central Government may, require such class or classes of unlisted
companies, as may be prescribed,—
(a) to prepare the financial results of the company on such periodical
basis and in such form as may be prescribed;
(b) to obtain approval of the Board of Directors and complete audit or
limited review of such periodical financial results in such manner as
may be prescribed; and
(c) file a copy with the Registrar within a period of thirty days of
completion of the relevant period with such fees as may be
prescribed.]

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3. At page no. 8.9-topic 8.2.4 –(ii)-Board’s Report-(q)-after point 3

(3a) a statement regarding opinion of the Board with regard to integrity,
expertise and experience (including the proficiency) of the independent
directors appointed during the year”.
Explanation.-For the purposes of this clause, the expression “proficiency”
means the proficiency of the independent director as ascertained from
the online proficiency self-assessment test conducted by the institute
notified under sub-section (1) of section 150.]
4. At page no. 8.9-topic 8.2.4 –(ii)-Board’s Report-(q)-after point 8
(9) a disclosure, as to whether maintenance of cost records as specified
by the Central Government under sub-section (1) of section
148 of the Companies Act, 2013, is required by the Company and
accordingly such accounts and records are made and maintained,
(10) a statement that the company has complied with provisions relating
to the constitution of Internal Complaints Committee under the
Sexual Harassment of Women at Workplace (Prevention, Prohibition
and Redressal) Act, 2013 [14 of 2013]
(11) the details of application made or any proceeding pending under
the Insolvency and Bankruptcy Code, 2016 (31 of 2016) during the
year alongwith their status as at the end of the financial year.
(12) the details of difference between amount of the valuation done at
the time of one time settlement and the valuation done while taking
loan from the Banks or Financial Institutions along with the reasons
thereof.]
5. At page no. 8.12-point (v) has been amended as under :
Section 134(8)
If a company is in default in complying with the provisions of this section,
the company shall be liable to a penalty of three lakh rupees and every
officer of the company who is in default shall be liable to a penalty of fifty
thousand rupees.
6. The topic “8.4.5 Shares Issued at a Discount” given at page no. 8.19 has
been revised and given hereunder:
Shares issued at a discount:

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According to Section 53 of the Companies Act, 2013, a company shall not

issue shares at a discount, except in the case of an issue of sweat equity
shares given under Section 54 of the Companies Act, 2013.
Any share issued by a company at a discounted price shall be void. Where
a company contravenes the provisions of this section, the company shall
be punishable with fine which may extend to an amount equal to the
amount raised through the issue of shares at a discount or five lakhs,
whichever is less. The company shall also be liable to refund all monies
received along with interest at the rate of 12%. p.a. from the date of issue
of such shares to the persons to whom such shares have been issued.
The topic “8.4.6 Issue of Sweat Equity Shares” given at page no. 8.20 has
been revised and given hereunder:
8.4.6 Issue of Sweat Equity Shares: As per section 54 of the Companies Act,
2013, the employees may be compensated in the form of ‘Sweat Equity Shares”.
“Sweat Equity Shares” means equity shares issued by the company to
employees or directors at a discount or for consideration other than cash for
providing know-how or making available right in the nature of intellectual
property rights or value additions, by whatever name called.
The auditor may see that the Sweat Equity Shares issued by the company are of
a class of shares already issued and following conditions are fulfilled:
(a) the issue is authorised by a special resolution passed by the company;
(b) the resolution specifies the number of shares, the current market price,
consideration, if any, and the class or classes of directors or employees to
whom such equity shares are to be issued; and
(c) where the equity shares of the company are listed on a recognised stock
exchange, the sweat equity shares are issued in accordance with the
regulations made by the Securities and Exchange Board in this behalf and
if they are not so listed, the sweat equity shares are issued in accordance
with such rules as may be prescribed.
(d) The rights, limitations, restrictions and provisions as are for the time being
applicable to equity shares shall be applicable to the sweat equity shares
issued under this section and the holders of such shares shall rank pari
passu with other equity shareholders.

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PART – II: QUESTIONS AND ANSWERS

PART – II A: Multiple Choice Questions based on Case Scenarios

Case Scenario - 1
Ms. Rhea was among the promoters who set up a public company by the name "Aksham Ltd".
The company appointed CA Rajendra as the auditor of Aksham Ltd. CA Rajendra is the brother
of one of the directors of Aksham Ltd. After setting up of company, the company had a dispute
with one customer of the company in year 2019-20 who took the company to court. There are
probable chances that company will have to shelve out `50 lakhs as compensation but the case
will likely to be finalised in year 2021-22.
CA Rajender considers the fact that Askham Ltd has a present obligation and it is probable that
an outflow of resources embodying economic benefits will be required to settle the obligation
and that a reliable estimate i.e. ` 50 Lakhs can be made of the amount of the obligation.
Aksham Ltd. declared dividend of ` 10 per equity share on 10 th April,2021. The financial
statements were approved on 30th June,2021. Askham Ltd took loan of ` 65 lakhs from
Saksham Bank for a period of 10 years; the loan amount was guaranteed by Mr. Pramod, one
of the directors of Aksham Ltd. The loan was completely secured against the fixed assets of the
company. Aksham Ltd drew designs of one of the products of the company and this product
constituted 90 % sales of the company. The designs of the product were such that the sale of
the company will increase every year for the next 5 years. Aksham Ltd booked the designs of
the company at a value of ` 1 crore in the books of account of the company as intangibles at its
cost.
Based on the above information, answer the following questions:
1. State whether appointment of CA Rajendra is correct in law.
(a) Yes, it is correct in law as per Companies Act, 2013
(b) It is incorrect in law as per Companies Act, 2013 as the relative of director is not
allowed to be appointed as an auditor of the company.
(c) It is correct in law as per Companies Act, 2013 because brother is not covered under
the definition of relative.
(d) It is correct as appointment of auditor is not governed by any law in India.
2. Advise company regarding the course of action Aksham Ltd will have to follow for the court
case for financial statements prepared for year ending 31st March 2021
(a) create provision
(b) create revenue reserve
(c) create capital reserve

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(d) to be disclosed as contingent liability

3. What is the action which Aksham Ltd is supposed to take with regard to treatment of
dividend declared while preparing and finalizing financial statements for year ending 31st
March,2021?
(a) recognise dividends as a liability
(b) disclose the amount of dividend
(c) both a and b
(d) none of the above.
4. State the disclosures Aksham Ltd is required to make with respect to the long-term
borrowings taken from Saksham Bank.
I. Secured loan from Saksham Bank.
II. The fixed assets are secured against the loan
III. The loan of ` 65 lakhs is guaranteed by director.
IV. Repayment terms of the loan
(a) I, II, III and IV
(b) I, II
(c) I, II, III
(d) II, III
5. State which of the following statement is true with respect to recording an intangible in the
books of the company.
(a) Intangible is correctly booked by the company.
(b) Intangible is wrongly booked by the company as an intangible cannot be booked as
per the accounting standard of India.
(c) Intangible is wrongly booked by the company as an intangible cannot be booked as
per the auditing standards of India.
(d) Intangible is wrongly booked by the company as an intangible cannot be booked as
per the Companies Act, 2013.
Case Scenario - 2
Rajveer & Co, a firm of Chartered Accountants is having three partners: Mr Raj, Mr Veer and
Mr Rajveer. Rajveer & Co is offered letter of appointment from Britannia Inc. & Co Ltd. as
auditor of the company. Mr Bharat, the son of Mr Raj has invested in Gauri & Co ltd to the extent
of ` 1,20,000/-, the market value of which is ` 2,50,000/-. Britannia Inc. & Co Ltd has 10% equity
stake in Gauri & Co Ltd.

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Rajveer & Co also received an offer for appointment of auditor from Haresh Kedia Ltd. Mr Raj’s
sister has invested ` 80000(Face value) as equity in Haresh Kedia Ltd; the market value of
which is ` 250000. On 1st July, 2020, Rajveer & Co was appointed the auditor of Haresh Kedia
Ltd. On 2 nd July 2020, Haresh Kedia Ltd. offered following works to Rajveer & Co
design and implementation of financial information system.
to provide the actuarial services for valuation of gratuity payable to employees.
for conducting internal audit of Haresh Kedia Ltd
Haresh Kedia Ltd. had agreed to pay a consideration of ` 20 lakhs to Rajveer & Co for the
aforesaid services. On 15 th July, 2020, Mr Raj’s sister bought shares of ` 50000 of Haresh Kedia
Ltd, the market value of which was ` 85000. Thus, as on 15th July, 2020, Mr Raj’s sister was
holding shares of ` 130000(face value), market value of which was ` 335000.
Haresh Kedia Ltd also seeks the advice of Rajveer & Co on the appointment of auditor of a new
company which is registered by one of the directors of Haresh Kedia Ltd. A new company by
the name “Jameshwar Ltd” is to be incorporated by three subscribers to the memorandum Mr
A, Mr B and Mr C. Mr C is a Chartered Accountant by profession. He is also the Managing
Director of Jameshwar Ltd. Mr C himself wants to appoint him as first auditor of the company.
Further, advice is also sought on the amount of remuneration to be given to the auditor and who
can fix the same.
Multiple Choice Questions:
1. Whether Rajveer & Co can accept the audit of Britannia Inc. & Co Ltd.?
(a) It cannot accept as Mr. Bharat has invested in the shares of Gauri & Co Ltd. whose
market value has exceeded the prescribed limit.
(b) It cannot accept as Mr. Bharat has invested in the shares of Gauri & Co Ltd. whose
face value has exceeded the prescribed limit.
(c) It can accept the appointment as an auditor as the same is in accordance with
provisions of Companies Act, 2013
(d) It can accept the appointment as an auditor as Mr. Bharat is not defined as a relative
whose investment in the company shall impact the appointment of Rajveer & Co as
auditor.
2. Kindly state which of the below statement is correct with regards to Haresh Kedia Ltd. and
the auditor.
(a) The auditor will have to ask Mr. Raj’s sister to maintain the limit of investment in
shares in Haresh Kedia Ltd within 30 days.
(b) The auditor will have to ask Mr. Raj’s sister to maintain the limit of investment in
shares in Haresh Kedia Ltd within 60 days.
(c) The auditor’s appointment is valid and can be continued on.

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(d) The auditor is immediately disqualified on further purchase of shares on 15 th July,

2020 by Mr. Raj’s sister.
3. In addition to audit of Haresh Kedia Ltd, which of the services can be performed by Rajveer
& Co?
(a) design and implementation of financial information system.
(b) to provide the actuarial services for valuation of gratuity payable to employees.
(c) for conducting internal audit of Haresh Kedia Ltd.
(d) None of the above.
4. Which of the following option is correct in Law regarding appointment of first auditor of
Jameshwar Ltd?
(a) Yes, he can appoint himself as the first auditor of Jameshwar Ltd.
(b) He cannot appoint himself as the first auditor of Jameshwar Ltd.as he is the Managing
Director of the Company.
(c) He cannot appoint himself as the first auditor of Jameshwar Ltd. as he is the
Subscriber to the Memorandum.
(d) He cannot appoint himself as the first auditor of Jameshwar Ltd as the first auditor is
to be appointed by the Board of Directors of the Company.
5. Kindly guide Jameshwar Ltd on the amount of remuneration and who can fix the
remuneration of first auditor of Jameshwar Ltd?
(a) Anyone can fix the remuneration of auditor and there is no limit on the amount of
remuneration.
(b) The remuneration of the auditor of a company shall be fixed in its general meetin g
without any limit.
(c) The Board of Directors may fix remuneration of the first auditor appointed by it. There
is no limit on the same.
(d) The Board of Directors may fix remuneration of the first auditor appointed by it. There
is a limit of 5 % of the net profit of the company.
General MCQs
1. To jointly audit books of accounts of WZ Limited for the financial year 2020-21 two different
firms of Chartered Accountants namely MH and Associates and NR and Associates were
appointed. MH and Associates and NR and Associates can together be called as:
(a) Principal Auditors of WZ Limited.
(b) Branch Auditors of WZ Limited.
(c) Individual Auditors of WZ Limited.

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(d) Joint Auditors of WZ Limited.

2. Mr. H and his team members carefully watched the whole process of counting of finished
wooden doors by employees of Bottom Limited. This is an example of which audit
procedure:
(a) External Confirmation.
(b) Observation.
(c) Inquiry.
(d) Inspection.
3. ____________refers to a difference between the amount, classification, presentation, or
disclosure of a reported financial statement item and the amount, classification,
presentation, or disclosure that is required for the item to be in accordance with the
applicable financial reporting framework.
(a) Misstatement
(b) Error
(c) fraud
(d) Misappropriation
4. Auditor Compares Gross Profit Ratio with that of Previous year and it is discovered that
there has been a fall in the ratio. This is an example of :
(a) Analytical Procedure
(b) Test of Controls
(c) Walk Through Test
(d) Audit Sampling
5. The persons with responsibility for overseeing the strategic direction of the entity and
obligations related to the accountability of the entity are :
(a) management
(b) those charged with governance
(c) audit committee
(d) board of directors
PART II B – DESCRIPTIVE QUESTIONS
1. State with reason (in short) whether the following statements are true or false:
(i) One of the objectives of the written representation is to support other audit evidence
relevant to the financial statements

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(ii) computer software which is the integral part of the related hardware should be treated
as fixed asset/tangible asset.
(iii) The auditor appointed under section 139 may be removed from his office before the
expiry of his term by Board resolution only.
(iv) The matter of difficulty, time, or cost involved is in itself a valid basis for the auditor
to omit an audit procedure for which there is no alternative.
(v) The auditor must include in audit documentation superseded drafts of working papers
and financial statements, notes that reflect incomplete or preliminary thinking etc.
(vi) If the auditor assesses a risk of material misstatement regarding litigation or claims
that have been identified, the auditor need not seek direct communication with the
entity’s external legal counsel.
(vii) Few members of the Board of Directors oppose the appointment of Mr. N, an
employee of the company, as an Internal Auditor, stating that Mr. N is not a chartered
accountant and further he is an employee of the company.
(viii) The statutory auditor of ABC Ltd. is of the opinion that communicating key audit
matters in the auditor's report constitutes a substitute for disclosure in the financial
statements.
Chapter 1- Nature of Auditing
2. (a) Principal aspects to be considered by an auditor while conducting an audit of final
statements of accounts.
(b) The knowledge of human behaviour is indeed very essential for an auditor so as to
effectively discharge his duties. Explain.
3. Detection of manipulation of accounts with a view to presenting a false state of a ffairs is a
task requiring great tact and intelligence because generally manage ment personnel in
higher management cadre are associated with this type of fraud and this is perpetrated in
methodical way. Explain why such frauds are committed.
4. Misappropriation of assets involves the theft of an entity’s assets and is often perpetra ted
by employees in relatively small and immaterial amounts. However, it can also involve
management who are usually more able to disguise or conceal misappropriations in ways
that are difficult to detect.
Misappropriation of assets can be accomplished in a variety of ways. Explain those
particular ways.
Chapter 2- Basic Concepts in Auditing
5. Audit evidence is influenced by its source, nature, and the circumstances under which it is
obtained. Elucidate the guiding principles which are useful in assessing the reliability of
audit evidence.

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6. Discuss the various points which auditor needs to consider in determining whether it is
appropriate to use audit evidence about operating effectiveness of controls obtained in
previous audit, and if so, the length of the time period that may elapse before retesting.
Chapter 3- Preparation for an Audit
7. (a) The nature, timing and extent of the direction and supervision of engagement team
members and review of their work vary depending on many factors. Explain those
factors.
(b) Planning an audit involves establishing the overall audit strategy for the engagement
and developing an audit plan. Adequate planning benefits the audit of financial
statements in several ways. Explain clearly those ways.
8. What could be considered material for all situations cannot be defined precisely and an
amount or transaction material in one situation may not be material in other situation.
Explain
9. When designing an audit sample, the auditor shall consider the purpose of the audit
procedure and the characteristics of the population from which the sample will be drawn.
Explain in detail
10. In considering the characteristics of the population from which the sample will be drawn,
the auditor may determine that stratification or value-weighted selection technique is
appropriate. Guide the auditor on the use of stratification and value -weighted sampling
techniques.
Chapter 4- Risk Assessment and Internal Control
11. (a) Significant risks often relate to significant non- routine transactions or judgmental
matters. Non-routine transactions are transactions that are unusual, due to either size
or nature, and that therefore occur infrequently. Judgmental matters may include the
development of accounting estimates for which there is significant measurement
uncertainty.
In context of significant risk, explain the factors to be considered by the auditor in
exercising judgment as to which risks are significant risks.
(b) Risks of material misstatement may be greater for significant non-routine transactions
arising from matters such as complex calculations. Also, risks of material
misstatement may be greater for significant judgmental matters that require the
development of accounting estimates, arising from matters such as accounting
principles for accounting estimates may be subject to differing interpretation etc.
Explain in detail.
12. (a) Explain clearly the difference between Internal Financial Control and Internal Controls
over financial reporting.

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(b) Auditor’s reporting on internal financial controls is a requirement specified in the Act
and, therefore, will apply only in case of reporting on financial statements prepared
under the Act and reported under Section 143. Explain in detail quoting specifically
the Law in the above context covering each and every aspect.
Chapter 5 and 6- Vouching and Verification of Assets and Liabilities
13. Explain how you will verify the items given while conducting an audit of an entity :
(a) Recovery of Bad debts written off
(b) Receipt of Insurance claims
(c) Payment of Taxes
(d) Sale proceeds of scrap material
14. APQ Ltd. deals in real estate and classifies all of its land holding under current assets as
inventory. The same is, therefore valued at cost or market value whichever is l ess. How
would you verify profit or loss arising on sale of plots of land by such a dealer ?
15. Write the audit procedures to be performed as an auditor for valuation (assertion) of
following:
(i) Loans and Advances and other current assets.
(ii) Finished goods and goods for resale.
Chapter 7 and 8 - The Company Audit -1 and 2
16. Under the provisions of Section 141(3) of Companies Act, 2013 along with relevant rules,
a person or a firm who has “business relationship” with a company is not eligible to be
appointed as an auditor of that company. In this context, discuss meaning of term
“business relationship”.
17. Discuss significance of a company auditor’s right/power to obtain information and
explanation from officers of the company.
18. Explain the Reporting requirements the auditor should ensure under CARO 2016 related
to fixed assets.
19. As an auditor of listed company, what are the matters that the auditor should keep in mind
while determining "Key Audit Matters".
20. Delightful Ltd. is a company engaged in the production of smiley balls. During the FY 2020 -
21 the company transferred its accounts to computerised system (SAP) from manual
system of accounts. Since the employees of the company were not well versed with the
SAP system, there were many errors in the accounting during the transition period. As
such the statutory auditors of the company were not able to extract correct data and reports
from the system. Such data was not available manually also. Further, the employees and
the management of the company were not supportive in providing the requisite information

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to the audit team. The auditor believes that the possible effects on the financial statements
of undetected misstatements could be both material and pervasive.
Explain the kind of audit report that the statutory auditor of the company should issue in
this case.
21 A Company is prohibited to buy-back its own shares or other specified securities under
certain circumstances. Discuss.
Chapter 9- Audit of Different Types of Entities
22 Discuss the power of C & AG in Government audit
23. State important advantages of audit of accounts of a Partnership firm.

SUGGESTED ANSWERS

ANSWERS - MULTIPLE CHOICE QUESTIONS- Case Scenario-1

1. (b)
2. (a)
3. (b)
4. (a)
5. (a)
ANSWERS - MULTIPLE CHOICE QUESTIONS- Case Scenario-2
1. (c)
2. (b)
3. (d)
4. (d)
5. (c)
General MCQ’s
1 (d)
2 (b)
3 (a)
4 (a)
5 (b)

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Descriptive Answers
1. (i) Correct: One of the objectives of the written representation is to support other audit
evidence relevant to the financial statements or specific assertions in the financial
statements by means of written representation. Written representations cannot be a
substitute for other evidence that the auditor could expect to be reasonably available.
(ii) Correct: As per AS-26 on Intangible Assets, computer software for a computer
controlled machine tool that cannot operate without that specific software is an
integral part of the related hardware and it is treated as a fixed asset. Therefore,
computer software which is the integral part of the related hardware should be treated
as fixed asset/tangible asset.
(iii) Incorrect: According to Section 140(1), the auditor appointed under section 139 may
be removed from his office before the expiry of his term only by a special resolution
of the company, after obtaining the previous approval of the Central Government in
that behalf as per Rule 7 of CAAR, 2014.
(iv) Incorrect: The matter of difficulty, time, or cost involved is not in itself a valid basis
for the auditor to omit an audit procedure for which there is no alternative.
Appropriate planning assists in making sufficient time and resources available for the
conduct of the audit. Notwithstanding this, the relevance of information, and thereby
its value, tends to diminish over time, and there is a balance to be struck between the
reliability of information and its cost.
(v) Incorrect: The auditor need not include in audit documentation superseded drafts of
working papers and financial statements, notes that reflect incomplete or preliminary
thinking, previous copies of documents corrected for typographical or other errors,
and duplicates of documents.
(vi) Incorrect: If the auditor assesses a risk of material misstatement regarding litigation
or claims that have been identified, or when audit procedures performed indicate that
other material litigation or claims may exist, the auditor shall, in addition to the
procedures required by other SAs, seek direct communication with the entity’s
external legal counsel.
(vii) Incorrect: As per section 138, the internal auditor shall either be a chartered
accountant or a cost accountant (whether engaged in practice or not), or such other
professional as may be decided by the Board to conduct internal audit of the functions
and activities of the companies. The internal auditor may or may not be an employee
of the company.
(viii) Incorrect: Communicating key audit matters in the auditor’s report is not a substitute
for disclosures in the financial statements that the applicable Financial reporting
framework requires management to make, or that are otherwise necessary to achieve
fair presentation.

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2. (a) Aspects to be covered in an audit: The principal aspects to be covered in an audit

concerning final statements of account are the following:
(i) An examination of the system of accounting and internal control to ascertain
whether it is appropriate for the business and helps in properly recording all
transactions.
(ii) Reviewing the system and procedures to find out whether they are adequate
and comprehensive and incidentally whether material inadequacies and
weaknesses exist to allow frauds and errors going unnoticed.
(iii) Checking of the arithmetical accuracy of the books of account by the verification
of postings, balances, etc.
(iv) Verification of the authenticity and validity of transaction entered into by making
an examination of the entries in the books of accounts with the relevant
supporting documents.
(v) Ascertaining that a proper distinction has been made between items of capital
and of revenue nature and that the amounts of various items of incom e and
expenditure adjusted in the accounts corresponding to the accounting period.
(vi) Comparison of the balance sheet and profit and loss account or other statements
with the underlying record in order to see that they are in accordance therewith.
(vii) Verification of the title, existence and value of the assets appearing in the
balance sheet.
(viii) Verification of the liabilities stated in the balance sheet.
(ix) Checking the result shown by the profit and loss and to see whether the results
shown are true and fair.
(x) Where audit is of a corporate body, confirming that the statutory requirements
have been complied with.
(xi) Reporting to the appropriate person/body whether the statements of account
examined do reveal a true and fair view of the state of affairs and of the profit
and loss of the organisation.
(b) The field of auditing as a discipline involves review of various assertions, both in
financial as well as in non-financial terms, with a view to prove the veracity of such
assertions and expression of opinion by auditor on the same. Thus, it is quite logical
and natural that the function of audit can be performed if and only if the person also
possesses a good knowledge about the fields in respect of which he is conducting
such a review.
The discipline of behavioural science is closely linked with the subject of auditing.
While it may be said that an auditor, particularly the financial auditor, deals basically
with the figures contained in the financial statements but he shall be required to

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interact with a lot of people in the organisation. As against the financial auditor, the
internal auditor or a management auditor is expected to deal with human beings rather
than financial figures. One of the basic elements in designing the internal control
system is personnel. Howsoever, if a sound internal control structure is designed, it
cannot work until and unless the people who are working in the organisation are
competent and honest. The knowledge of human behaviour is indeed very essential
for an auditor so as to effectively discharge his duties.
3. Detection of manipulation of accounts with a view to presenting a false state of affairs
is a task requiring great tact and intelligence because generally management personnel in
higher management cadre are associated with this type of fraud and this is perpetrated in
methodical way. This type of fraud is generally committed:
(a) to avoid incidence of income-tax or other taxes;
(b) for declaring a dividend when there are insufficient profits;
(c) to withhold declaration of dividend even when there is adequate profit (this is often
done to manipulate the value of shares in stock market to make it possible for selected
persons to acquire shares at a lower cost); and
(d) for receiving higher remuneration where managerial remuneration is payable by
reference to profits.
4. Misappropriation of assets involves the theft of an entity’s assets and is often
perpetrated by employees in relatively small and immaterial amounts. However, it can also
involve management who are usually more able to disguise or conceal misappropriations
in ways that are difficult to detect. Misappropriation of assets can be accomplished in a
variety of ways including:
➢ Embezzling receipts (for example, misappropriating collections on accounts
receivable or diverting receipts in respect of written-off accounts to personal bank
accounts).
➢ Stealing physical assets or intellectual property (for example, stealing inventory for
personal use or for sale, stealing scrap for resale, colluding with a competitor by
disclosing technological data in return for payment).
➢ Causing an entity to pay for goods and services not received (for example, payments
to fictitious vendors, kickbacks paid by vendors to the entity’s purchasing agents in
return for inflating prices, payments to fictitious employees).
➢ Using an entity’s assets for personal use (for example, using the entity’s assets as
collateral for a personal loan or a loan to a related party).
Misappropriation of assets is often accompanied by false or misleading records or
documents in order to conceal the fact that the assets are missing or have been pledged
without proper authorization.

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5. Reliability of Audit Evidence: As per SA 500 on “Audit Evidence”, the reliability of

information to be used as audit evidence, and therefore of the audit evidence itself, is
influenced by its source and its nature, and the circumstances under which it is obtained,
including the controls over its preparation and maintenance where relevant. Therefore,
generalisations about the reliability of various kinds of audit evidence are subject to
important exceptions.
While recognising that exceptions may exist, the following guiding principles about the
reliability of audit evidence may be useful:
(i) The reliability of audit evidence is increased when it is obtained from independent
sources outside the entity.
(ii) The reliability of audit evidence that is generated internally is increased when the
related controls, including those over its preparation and maintenance, imposed by
the entity are effective.
(iii) Audit evidence obtained directly by the auditor (for example, observation of the
application of a control) is more reliable than audit evidence obtained indirec tly or by
inference (for example, inquiry about the application of a control).
(iv) Audit evidence in documentary form, whether paper, electronic, or other medium, is
more reliable than evidence obtained orally (for example, a contemporaneously
written record of a meeting is more reliable than a subsequent oral representation of
the matters discussed).
(v) Audit evidence provided by original documents is more reliable than audit evidence
provided by photocopies or facsimiles, or documents that have been filmed, digitized
or otherwise transformed into electronic form, the reliability of which may depend on
the controls over their preparation and maintenance.
6. In determining whether it is appropriate to use audit evidence about the operating
effectiveness of controls obtained in previous audits, and, if so, the length of the time
period that may elapse before retesting a control, the auditor shall consider the following:
i. The effectiveness of other elements of internal control, including the control
environment, the entity's monitoring of controls, and the entity's risk assessment
process;
ii. The risks arising from the characteristics of the control, including whether it is
manual or automated;
iii. The effectiveness of general IT-controls;
iv. The effectiveness of the control and its application by the entity, including the nature
and extent of deviations in the application of the control noted in previous audits,
and whether there have been personnel changes that significantly affects the
application of the control;

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v. Whether the lack of a change in a particular control poses a risk due to changing
circumstances; and
vi. The risks of material misstatement and the extent of reliance on the co ntrol.
7. (a) The nature, timing and extent of the direction and supervision of engagement
team members and review of their work vary depending on many factors, including:
1. The size and complexity of the entity.
2. The area of the audit.
3. The assessed risks of material misstatement (for example, an increase in the
assessed risk of material misstatement for a given area of the audit ordinarily
requires a corresponding increase in the extent and timeliness of direction and
supervision of engagement team members, and a more detailed review of their
work).
4. The capabilities and competence of the individual team members performing the
audit work.
(b) Planning an audit involves establishing the overall audit strategy for the
engagement and developing an audit plan. Adequate planning benefits the audit of
financial statements in several ways, including the following:
• Helping the auditor to devote appropriate attention to important areas of the
audit.
• Helping the auditor identify and resolve potential problems on a timely basis.
• Helping the auditor properly organize and manage the audit engagement so that
it is performed in an effective and efficient manner.
• Assisting in the selection of engagement team members with appropriate levels
of capabilities and competence to respond to anticipated risks, and the proper
assignment of work to them.
• Facilitating the direction and supervision of engagement team members and the
review of their work.
• Assisting, where applicable, in coordination of work done by auditors of
components and experts.
8. Materiality is an important consideration for an auditor to evaluate whether the financial
statements reflect a true and fair view or not. SA 320 on “Materiality in Planning and
Performing an Audit” requires that an auditor should consider materiality and its
relationship with audit risk while conducting an audit. When planning the audit, the auditor
considers what would make the financial information materially misstated. The auditor’s
preliminary assessment of materiality related to specific account balances and classes of
transactions helps the auditor decide such questions as what items to examine and
whether to use sampling and analytical procedures. This enables the auditor to select audit

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procedures that, in combination, can be expected to support the audit opinion at an

acceptably low degree of audit risk. It may be noted that the auditor’s assessment of
materiality and audit risk may be different at the time of initially planning of the audit as
against at the time of evaluating the results of audit procedures.
At the planning stage, the auditor needs to consider the materiality for the financial
statements as a whole. The auditor has to carry out a preliminary identification of significant
components and material classes of transactions, account balances and disclosure which
he plans to examine. What could be considered material for all situations cannot be defined
precisely and an amount or transaction material in one situation may not be material in
other situation. For example, ` 5,000 may be material for a small entity, but even ` 100,000
may not be material for a large entity.
9. Audit sampling enables the auditor to obtain and evaluate audit evidence about some
characteristic of the items selected in order to form or assist in forming a conclusion
concerning the population from which the sample is drawn. Audit sampling can be applied
using either non-statistical or statistical sampling approaches.
When designing an audit sample, the auditor’s consideration includes the specific purpose
to be achieved and the combination of audit procedures that is likely to best achieve that
purpose. Consideration of the nature of the audit evidence sought and possible deviation
or misstatement conditions or other characteristics relating to that audit evidence will assist
the auditor in defining what constitutes a deviation or misstatement and what population to
use for sampling. In fulfilling the requirement of relevant portion (paragraph 8) of SA 500,
when performing audit sampling, the auditor performs audit procedures to obtain evidence
that the population from which the audit sample is drawn is complete.
The auditor’s consideration of the purpose of the audit procedure includes a clear
understanding of what constitutes a deviation or misstatement so that all, and only, those
conditions that are relevant to the purpose of the audit procedure are included in the
evaluation of deviations or projection of misstatements. For example, in a test of details
relating to the existence of accounts receivable, such as confirmation, payments made by
the customer before the confirmation date but received shortly after that date by the client,
are not considered a misstatement. Also, a misposting between customer accounts does
not affect the total accounts receivable balance. Therefore, it may not be appropriate to
consider this a misstatement in evaluating the sample results of this particular audit
procedure, even though it may have an important effect on other areas of the audit, such
as the assessment of the risk of fraud or the adequacy of the allowance for doubtful
accounts.
In considering the characteristics of a population, for tests of controls, the auditor makes
an assessment of the expected rate of deviation based on the auditor’s understanding of
the relevant controls or on the examination of a small number of items from the population.
This assessment is made in order to design an audit sample and to determine sample size.
For example, if the expected rate of deviation is unacceptably high, the auditor will normally

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decide not to perform tests of controls. Similarly, for tests of details, the auditor makes an
assessment of the expected misstatement in the population. If the expected misstatement
is high, 100% examination or use of a large sample size may be appropriate when
performing tests of details.
In considering the characteristics of the population from which the sample will be drawn,
the auditor may determine that stratification or value-weighted selection is appropriate.
The decision whether to use a statistical or non-statistical sampling approach is a matter
for the auditor’s judgment; however, sample size is not a valid criterion to distinguish
between statistical and non-statistical approaches.
10. In considering the characteristics of the population from which the sample will be
drawn, the auditor may determine that stratification or value-weighted selection technique
is appropriate. SA 530 provides guidance to the auditor on the use of stratification and
value-weighted sampling techniques.
Stratification: Audit efficiency may be improved if the auditor stratifies a population by
dividing it into discrete sub-populations which have an identifying characteristic.
The objective of stratification is to reduce the variability of items within each stratum and
therefore allow sample size to be reduced without increasing sampling risk.
When performing tests of details, the population is often stratified by monetary value. This
allows greater audit effort to be directed to the larger value items, as these items may
contain the greatest potential misstatement in terms of overstatement.
Similarly, a population may be stratified according to a particular characteristic that
indicates a higher risk of misstatement, for example, when testing the allowance for
doubtful accounts in the valuation of accounts receivable, balances may be stratified by
age.
Dividing a population into discrete sub population which have identifying characteristics is
called as Stratification. Each Sub population is called as Stratum and units under those
sub population are referred to as Strata.
The results of audit procedures applied to a sample of items within a stratum can only be
projected to the items that make up that stratum. To draw a conclusion on the entire
population, the auditor will need to consider the risk of material misstatement in relation to
whatever other strata make up the entire population.
The results of samples from the units drawn under each sub population are pro jected to
that respective stratum. In order to draw an opinion on the overall population, the auditor
needs to combine the results of all the stratum to check for possible deviation or risk of
material misstatement.
Projected misstatements of each stratum will be combined together to consider the
possible effect of misstatement in the account balances and class of transactions.

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Example
20% of the items in a population may make up 90% of the value of an account balance .
The auditor may decide to examine a sample of these items. The auditor evaluates the
results of this sample and reaches a conclusion on the 90% of value separately from the
remaining 10% (on which a further sample or other means of gathering audit eviden ce will
be used, or which may be considered immaterial).
Value-Weighted Selection: When performing tests of details it may be efficient to identify
the sampling unit as the individual monetary units that make up the population. Having
selected specific monetary units from within the population, for example, the accounts
receivable balance, the auditor may then examine the particular items, for example,
individual balances, that contain those monetary units.
One benefit of this approach to defining the sampling unit is that audit effort is directed to
the larger value items because they have a greater chance of selection, and can result in
smaller sample sizes.
This approach may be used in conjunction with the systematic method of sample selection
and is most efficient when selecting items using random selection.
In value weighted selection, the sample size, its selection and evaluation will result in a
conclusion in monetary amounts.
11. (a) As part of the risk assessment, the auditor shall determine whether any of the risks
identified are, in the auditor’s judgment, a significant risk. In exercising this judgment,
the auditor shall exclude the effects of identified controls related to the risk.
In exercising judgment as to which risks are significant risks, the auditor shall consider
at least the following:
(a) Whether the risk is a risk of fraud;
(b) Whether the risk is related to recent significant economic, accounting, or other
developments like changes in regulatory environment, etc., and, therefore,
requires specific attention;
(c) The complexity of transactions;
(d) Whether the risk involves significant transactions with related parties;
(e) The degree of subjectivity in the measurement of financial information related to
the risk, especially those measurements involving a wide range of measurement
uncertainty; and
(f) Whether the risk involves significant transactions that are outside the normal
course of business for the entity, or that otherwise appear to be unusual.

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(b) Risks of Material Misstatement– Greater for Significant Non-Routine

Transactions
Risks of material misstatement may be greater for significant non-routine transactions
arising from matters such as the following:
 Greater management intervention to specify the accounting treatment.
 Greater manual intervention for data collection and processing.
 Complex calculations or accounting principles.
 The nature of non-routine transactions, which may make it difficult for the entity
to implement effective controls over the risks.
Risks of material misstatement– Greater for Significant Judgmental Matters
Risks of material misstatement may be greater for significant judgmental matters that
require the development of accounting estimates, arising from matters such a s the
following:
 Accounting principles for accounting estimates or revenue recognition may be
subject to differing interpretation.
 Required judgment may be subjective or complex, or require assumptions about
the effects of future events, for example, judgment about fair value.
12. (a) Internal Financial Control as per Section 134(5)(e), “the policies and procedures
adopted by the company for ensuring the orderly and efficient conduct of its business,
including adherence to company’s policies, the safeguarding of its assets, the
prevention and detection of frauds and errors, the accuracy and completeness of the
accounting records, and the timely preparation of reliable financial information.”
On the other hand, Internal controls over financial reporting-is required where auditors
are required to express an opinion on the effectiveness of an entity’s internal controls
over financial reporting, such opinion is in addition to and distinct from the opinion
expressed by the auditor on the financial statements.
(b) Auditor’s reporting on internal financial controls is a requirement specified in the
Act and, therefore, will apply only in case of reporting on financial statements
prepared under the Act and reported under Section 143.
Accordingly, reporting on internal financial controls will not be applicable with respect
to interim financial statements, such as quarterly or half-yearly financial statements,
unless such reporting is required under any other law or regulation.
Objectives of an auditor in an audit of internal financial controls over financial
reporting: The auditor’s objective in an audit of internal financial controls over
financial reporting is, “to express an opinion on the effectiveness of the company’s
internal financial controls over financial reporting.” It is carried out along with an audit
of the financial statements.

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Reporting under Section 143(3)(i) is dependent on the underlying criteria for internal
financial controls over financial reporting adopted by the management. However, any
system of internal controls provides only a reasonable assurance on achievement of
the objectives for which it has been established. Also, the auditor shall use the
concept of materiality in determining the extent of testing such controls.
Rule 8(5)(viii) of the Companies (Accounts) Rules, 2014 requires the board report of
all companies to state the details in respect of adequacy of internal financial controls
with reference to the financial statements.
The inclusion of the matters relating to internal financial controls in the directors
responsibility statement is in addition to the requirement of the directors stating that
they have taken proper and sufficient care for the maintenance of adequate
accounting records in accordance with the provisions of the 2013 Act for safeguarding
the assets of the company and for preventing and detecting fraud and other
irregularities.
13. (a) Recovery of Bad Debts written off: Recovery of bad debts written off is verified with
reference to relevant correspondence and proper authorisation.
(i) Ascertain the total amount lying as bad debts and verify the relevant
correspondence with the trade receivables whose accounts were written off as
bad debt.
(ii) Ensure that all recoveries of bad debts have been properly recorded in the books
of account.
(iii) Examine notification from the Court or from bankruptcy trustee. Letters from
collecting agencies or from account receivables should also be seen.
(iv) Check Credit Manager’s file for the amount received and see that the said
amount has been deposited into the bank promptly.
(v) Vouch acknowledgement receipts issued to account receivables or trustees.
(vi) Review the internal control system regarding writing off and recovery of bad
debts
(b) Receipt of Insurance Claims: Insurance claims may be in respect of fixed assets or
current assets. While vouching the receipts of insurance claims-
(i) The auditor should examine a copy of the insurance claim lodged with the
insurance company correspondence with the insurance company and with the
insurance agent should also be seen. Counterfoils of the receipts issued to the
insurance company should also be seen.
(ii) The auditor should also determine the adjustment of the amount received in
excess or short of the value of the actual loss as per the insurance policy.
(iii) The copy of certificate/report containing full particulars of the amount of loss

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should also be verified.

(iv) The accounting treatment of the amount received should be seen particularly to
ensure that revenue is credited with the appropriate amount and that in respect
of claim against asset, the Statement of Profit and Loss is debited with the short
fall of the claim admitted against book value, if the claim was lodged in the
previous year but no entries were passed, entries in the Statement of Profit and
Loss should be appropriately described.
(c) Payment of Taxes:
(i) Obtain the computation of taxes prepared by the auditee and verify whether it is
as per the Income Tax Act/GST Act/ Rules/ Notifications/ Circulars etc.
(ii) Examine relevant records and documents pertaining to payment of advance
income tax and self assessment tax.
(iii) Payment on account of income-tax and other taxes like GST consequent upon
a regular assessment should be verified by reference to the copy of the
assessment order, notice of demand and the receipted challan acknowledging
the amount paid.
(iv) The penal interest charged for non-payment should be debited to the interest
account.
(v) Nowadays, electronic payment of taxes is also in trend. Such electronic payment
of taxes by way of internet banking facility or credit or debit cards shall also be
verified.
(vi) The assessee can make electronic payment of taxes also from the account of
any other person. Therefore, it should be verified that the challan for making
such payment is clearly indicating the PAN No./TAN No./TIN No./GSTIN etc. of
the assessee on whose behalf the payment is made.
(d) Sale Proceeds of Scrap Material:
(i) Review the internal control on scrap materials, as regards its generation, storage
and disposal and see whether it was properly followed at every stage.
(ii) Ascertain whether the organisation is maintaining reasonable records for the
sale and disposal of scrap materials.
(iii) Review the production and cost records for determination of the extent of scrap
materials that may arise in a given period.
(iv) Compare the income from the sale of scrap materials with the corresponding
figures of the preceding three years.
(v) Check the rates at which different types of scrap materials have been sold and
compare the same with the rates that prevailed in the preceding year.

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(vi) See that scrap materials sold have been billed and check the calculations on the
invoices.
(vii) Ensure that there exists a proper procedure to identify the scrap material and
good quality material is not mixed up with it and sold as scrap
(viii) Make an overall assessment of the value of the realisation from the sale of scrap
materials as to its reasonableness.
14. Verification of Profit & Loss Arising on sale of Plots by real estate dealer: The land
holding in the case of real estate dealer will be a current asset and not a fixed asset. The
same should, therefore, be valued at cost or market value whichever is less. The amount
of profit or loss arising on sale of plots of land by such a dealer should be verified as
follows:
(i) Each property account should be examined from the beginning of the development
with special reference to the nature of charges so as to find out that only the
appropriate cost and charges have been debited to the account and the total cost of
the property has been set off against the price realised for it.
(ii) This basis of distribution of the common charges between different plots of land
developed during the period, and basis for allocation of cost to individual properties
comprised in a particular piece of land should be scrutinised.
(iii) If land price lists are available, these should be compared with actual selling prices
obtained. And it should be verified that contracts entered into in resp ect of sale have
been duly sanctioned by appropriate authorities.
(iv) Where part of the sale price is intended to reimburse taxes or expenses, suitable
provisions should be maintained for the purpose.
(v) The prices obtained for various plots of land sold should be checked with the plan
map of the entire tract and any discrepancy or unreasonable price variations should
be inquired into. The sale price of different plots of land should be veri fied on a
reference to certified copies of sale deeds executed.
(vi) Out of the sale proceeds, provision should be made for the expenditure incurred on
improvement of land, which so far has been accounted for.
15. (i) Audit procedure for valuation of Loans and Advances and other current assets
▪ Assess the allowance for doubtful accounts. Review the process followed by the
Company to derive an allowance for doubtful accounts. This will include a
consistency comparison with the method used in the last year, and a
determination of whether the method is appropriate for the underlying business
environment.
▪ Obtain the ageing report of loans and advances, split between not currently due,
30 days old, 30-60 days old, 60- 180 days old, 180- 365 days old and more than

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365 days old. Also, obtain the list of loans and advances under litigation and
compare with previous year.
▪ Scrutinize the analysis and identify those loans and advances that appear
doubtful; Discuss with management their reasons, if any of these loans/
advances are not included in the provision for bad recoverable; Perform further
testing where any disputes exist; Reach a final conclusion regarding the
adequacy of the bad and doubtful loans/ advances provision.
▪ Assess bad loans/ advances write-offs. Prepare schedule of movements on Bad
loans/ advances – Provision Accounts and loans/ advances written off.
▪ Check that write-offs or other reductions in the recoverable balances have been
approved by an appropriate and authorised member of senior management, for
example the financial controller or finance director.
▪ Check that the restatement of foreign currency loans and advances/ other
current assets has been done properly.
(ii) Audit procedure for valuation of finished goods and goods for resale
- Enquire into what costs are included, how these have been established and
ensure that the overheads included have been determined based on normal
costs and appear reasonable in relation to the information disclosed in the draft
financial statements.
- Ensure that inventories are valued at net realizable value if they are likely to
fetch a value lower than their cost. For any such items, also verify if the relevant
semi/ partly processed inventories (work in progress) and raw materials have
also been written down.
- Follow up for items that are obsolete, damaged, slow moving and ascertain t he
possible realizable value of such items. For the purpose, request the client to
provide inventory ageing split between less than 30 days, 30-60 days old,
60- 90 days old, 90- 180 days old, 180- 385 days old and more than 365 days
old (refer screenshot below)
- Follow up any inventories which at time of observance of physical counting were
noted as being damaged or obsolete.
- Compare recorded costs with replacement costs. Examine vendor price lists to
determine if recorded cost is less than current prices.
- Calculate inventory turnover ratio. Obsolete inventory may be revealed if ratio
is significantly lower.

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- In manufacturing environments, test overhead allocation rates and ensure that

only direct labor, direct material and overhead have been included.
- Verify the correct application of lower-of-cost-or-net realizable value principles.
16. Under provisions of section 141(3) of Companies Act, 2013, a person or a firm who,
whether directly or indirectly has business relationship with the Company, or its Subsidiary,
or its Holding or Associate Company or Subsidiary of such holding company or associate
company, of such nature as may be prescribed is not eligible to be appointed as auditor of
the company.
The term “business relationship” shall be construed as any transaction entered into for a
commercial purpose, except –
(i) commercial transactions which are in the nature of professional services permitted to
be rendered by an auditor or audit firm under the Act and the Chartered Accountants
Act, 1949 and the rules or the regulations made under those Acts;
(ii) commercial transactions which are in the ordinary course of business of the company
at arm’s length price - like sale of products or services to the auditor, as customer, in
the ordinary course of business, by companies engaged in the business of
telecommunications, airlines, hospitals, hotels and such other similar businesses.
17. The right of the auditor to obtain from the officers of the company such information and
explanations as he may think necessary for the performance of his duties as auditor is a
wide and important power. In the absence of such power, the auditor would not be able to
obtain details of amount collected by the directors, etc. from any other company, firm or
person as well as of any benefits in kind derived by the directors from the company, which
may not be known from an examination of the books. It is for the auditor to decide the
matters in respect of which information and explanations are required by him.
Therefore, such a right/power is quite significant for discharge of duty of an auditor of a
company to report to the members of the company on accounts examined by him.
18. Reporting for Fixed Assets - Clause (i) of Para 3 of CARO ,2016, requires the auditor to
include a statement in the auditor’s report on the following matters, namely -
(i) whether the company is maintaining proper records showing full particulars, including
quantitative details and situation of fixed assets;
(ii) whether these fixed 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 books of
account;

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 166 INTERMEDIATE (IPC) EXAMINATION: NOVEMBER, 2021

(iii) whether the title deeds of immovable properties are held in the name of the company.
If not, provide the details thereof;
19. Determining Key Audit Matters: As per SA 701, “Communicating Key Audit Matters in
the Independent Auditor’s Report”, the auditor shall determine, from the matters
communicated with those charged with governance, those matters that required significant
auditor attention in performing the audit. In making this determination, the auditor shall
take into account the following:
(i) Areas of higher assessed risk of material misstatement, or significant risks identified
in accordance with SA 315, Identifying and Assessing the Risks of Material
Misstatement through Understanding the Entity and Its Environment.
(ii) Significant auditor judgments relating to areas in the financial statements that
involved significant management judgment, including accounting estimates that have
been identified as having high estimation uncertainty.
(iii) The effect on the audit of significant events or transactions that occurred during the
period.
The auditor shall determine which of the matters determined in accordance with above
were of most significance in the audit of the financial statements of the current period and
therefore are the key audit matters.
20. The auditor shall disclaim an opinion when the auditor is unable to obtain sufficient
appropriate audit evidence on which to base the opinion, and the auditor concludes that
the possible effects on the financial statements of undetected misstatements, if any, could
be both material and pervasive.
The auditor shall disclaim an opinion when, in extremely rare circumstances involving
multiple uncertainties, the auditor concludes that, notwithstanding having obtained
sufficient appropriate audit evidence regarding each of the individual uncertainties, it is
not possible to form an opinion on the financial statements due to the potential interaction
of the uncertainties and their possible cumulative effect on the financial statements.
In the present case Delightful Ltd, the statutory auditor of the company is unable to extract
correct data and reports from the SAP system for conduct of audit. Also, such data and
reports are not available manually. Moreover, the auditor believes that the possible effects
on the financial statements of undetected misstatements could be both material and
pervasive.
As such, the statutory auditor of Delightful Ltd. should give a disclaimer of opinion.

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21. Prohibition for buy back in certain circumstances: As per provisions of Section 70 of
the Companies Act 2013-
(i) No company shall directly or indirectly purchase its own shares or other specified
securities—
(a) through any subsidiary company including its own subsidiary companies; or
(b) through any investment company or group of investment companies; or
(c) if a default, by the company, in repayment of deposit or interest payable thereon,
redemption of debentures or preference shares or payment of dividend to any
shareholder or repayment of any term loan or interest payable thereon to any
financial institutions or bank, is subsisting. Provided that the buy – back is not
prohibited if the default is remedied and a period of three years has elapsed
since the cessation of the default.
(ii) No company shall directly or indirectly purchase its own shares or other specified
securities in case such company has not complied with provisions of Sections 92,123,
127 and 129. Section 92 relates to the filing of Annual Return, Section 123 and 127
to declaration and payment of dividend and Section 129 to the financial statement of
the company.
22. Powers of C&AG
The C&AG Act gives the following powers to the C&AG in connection with the performance
of his duties-
i. To inspect any office of accounts under the control of the Union or a State
Government including office responsible for the creation of the initial or subsidiary
accounts.
ii. To require that any accounts, books, papers and other documents which deal with or
are otherwise relevant to the transactions under audit, be sent to specified places.
iii. To put such questions or make such observations as he may consider necessary to
the person in charge of the office and to call for such information as he may require
for the preparation of any account or report which is his duty to prepare.
iv. In carrying out the audit, the C&AG has the power to dispense with any part of detailed
audit of any accounts or class of transactions and to apply such limited checks in
relation to such accounts or transactions as he may determine.

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 168 INTERMEDIATE (IPC) EXAMINATION: NOVEMBER, 2021

23. Advantages of Audit of Accounts of a Partnership: On broad considerations, the

advantages of audit of accounts of a partnership could be stated as follows:
(1) Audited accounts provide a convenient and reliable means of settling accounts
between the partners and, thereby, the possibility of occurrence of a dispute among
them is mitigated. On this consideration, it is usually provided in and accepted by the
partners, shall be binding upon them, unless some manifest error is brought to light
within a specified period subsequent to the accounts having been signed.
(2) On the retirement or death of a partner, audited accounts, which have been accepted
by the partners, constitute a reliable evidence for computing the amounts due to the
retiring partner or to the representative of the deceased partner in respect of his share
of capital, profits and goodwill.
(3) The accounts of a partnership, which have been audited, are generally accepted by
the Income Tax Department as the basis for computing the assessable income of the
partners.
(4) Audited statement of accounts are relied upon by the banks when advancing loans,
as well as by prospective purchasers of the business, as evidence of the profitability
of the concern and its financial position.
(5) Audited statements of account can be helpful in the negotiations to admit a person as
a partner, especially when they are available for a number of past years.
(6) An audit is an effective safeguard against any undue advantage being taken by a
working partner or partners especially in the case of those partners who are not
actively associated with the working of the firm.

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