Key Notes, Advanced audit – May 2019

Recent Decisions

1. A Chartered Accountant in practice CAN

• Can Act as mediator in Court, [Same as “arbitrator’, Permitted under Regulation 191] 
• Can be a settler of a Trust.
• Can Engage himself as Registration Authority for obtaining digital signatures for clients. 
• Can be Internal auditor of a company & statutory auditor of its employees PF Fund.

2. WITH CONDITION, A Chartered Accountant in practice CAN

• Can be equity research adviser, but cannot publish retail report as it be other business/occupation. 
• Can hold the credit card of a bank when he is auditor of that bank, provided o/s is not more than Rs. 10,000/- beyond credit period limit.
• Can be a Director Simplicitor (which is generally permitted as per ICAI norms), if he is non – executive director, required in the BM only + remuneration to attending BM only. (CA in service) 
• Can appear as tax representative before tax authorities on behalf of his employer, but not on behalf of other employees of the employer.

3. IF THIS THEN NOT THAT

• Cannot be the auditor of the a trust, If he is a member of that Trust. Cannot Accept audit of a bank in case he has taken loan against a FD held by him in that bank. 
• Statutory auditor of a bank cannot for the same FY accept stock audit of any of the branches of the same bank or sister concern of the bank.
• Internal auditor of a PF Trust by a Gov. company cannot be appointed as its Statutory Auditor. Cannot undertake GST Audit and Internal Auditor simultaneously.
• A concurrent auditor of a bank ‘X’ cannot be appointed as statutory auditor of bank ‘Y’, which is sponsored by ‘X’.
• Statutory auditor /tax auditor cannot be the valuer of unquoted equity shares of the same entity [Rule 11U of Income Tax, also check effect in “independent” if any law is silent about any restriction].

4. A Chartered Accountant in practice is CANNOT

• Cannot become Financial Advisors and receive fees/commission from Financial Institutions such as Mutual Funds, Insurance Companies, NBFCs etc.
• Cannot exercise lien over the client documents/records for nonpayment of his fees. Cannot print its vision and values behind the visiting cards, [Clause (6) of Part-I of First Schedule] 
• Cannot take agencies of UTI, GIC or NSDL.
• Cannot hold Customs Brokers Licence under section 146 of the Customs Act, 1962 
• Cannot appointed as auditor of a company after resignation from Directorship of that company, cooling period 2 years. [2011] Although no restriction in Section 141].

Disclaimer before you continue reading : Following is summarized for quick revision, please refer RTP and MTP by ICAI for detailed understanding and presentation of answer in exam.

Key Point and Notes RTP

1. Ratification of appointment at Every AGM is not required when auditor have appointed for 5 years.

[Amendment]



2. From 21st March 2018 following is enforced - The role of NFRA :-

a. make recommendations to the CG on the formulation and laying down of AS and SA

b. monitor and enforce the compliance with AS and SA ;

c. oversee the quality of service of professions and suggest measures required for improvement



3. Auditor resigned from co. à Within 30 Days à File ADT-3 + CAAG (For Gov. co. auditor) à Indicate reasons and facts à Failure to which à Fine minimum of 50k or Remuneration to 5 L.



4. Order of reopening of account cannot be beyond 8 years unless directions under 128(5) is for longer period.



5. Tax audit limit 1 Partner = 60 Tax Audits, 2 Partner = 120 Tax Audit for the firm (Count collectively).



6. Audit documentation should be maintained for 7 years.



7. If some inventory skipped valuation in previous year and found in current year, management should restate the previous financials to adjust the error, else auditor may modify opinion.



8. Z is joint venture of X (Co. based in US) and Y (Co. based in India), for reporting Z financial to X, Adjustments for changes the reporting package on the basis of Group accounting policies of X should be done.



9. TDS non compliance shall be considered reporting in main report along with CARO.



10. If a company has done ABC analysis of stock, so in given limited time, auditor shall Check physical inventory of “A” class items as much as possible, certain “B” class items and certain “C” class items on sample basis in value wise descending order, compare the physical stock with ERP system, and tabulate the result. The exercise should be continued till the end of allotted hours.



11. For Reporting in IFC, loan threshold shall be seen during the year, irrespective of the fact that loan was outstanding as at end or not.



12. Management auditor shall have Qualification and experience, courage to report the facts, clear understanding of the organisational structure and working environment, understanding the purpose for which the audit is being conducted, healthy relationship with staff of the department that’s functioning has to be audited and with the top management, and analytical skill.



13. As per bank norms the drawing power of borrower need to be determined on the basis of stock statement and if it was done more than three months old, then in the account will be deemed as irregular.



14. [SA 540] The auditor shall review the outcome of accounting estimates included in the prior period financial statements, or, where applicable, their subsequent re-estimation for the purpose of the current period. By performing risk assessment procedures to identify and understand the reasons for such differences in estimation, the auditor may obtain:

a. Information of effectiveness of management’s estimation process and impact in current estimate.

b. Audit evidence of estimation uncertainty, that may be required to be disclosed in the financial statements.



15. [SA 620] It is required that matters are agreed between the auditor and the auditor’s expert. The need for a detailed agreement in writing is required when the expert have confidential entity information, Highly complex work, not previously used work performed by that expert, and great significance of auditor’s expert work.



16. [SQC 1] Matters that the firm considers with regards to Integrity of a client:

a. The identity and business reputation of the client’s principal owners, KMP, RP and TCWG.

b. The nature of the client’s operations, including its business practices.

c. Indications of an inappropriate limitation in the scope of work.

d. Indications that the client might be involved in money laundering or other criminal activities.

e. The reasons for the proposed appointment of the firm and non-reappointment of the previous firm.





17. The auditor shall agree the terms of the audit engagement with management or TCWG, as appropriate. Terms shall be recorded in an audit engagement letter or other suitable form of written agreement and shall include:

a. The objective and scope of the audit of the financial statements;

b. The responsibilities of the auditor;

c. The responsibilities of management;

d. Identification of the applicable FRF for the preparation of the F.St.; and

e. Reference to the expected form and content of any reports to be issued by the auditor [SA 210]



18. Engagement Partner shall form a conclusion on compliance with independence requirements that apply to the audit engagement, and obtain relevant information from the firm to identify and evaluate relationships that create threat to independence, identify breaches and take appropriate action to eliminate threats. The independence assessment documentation should also be given to Engagement Quality Control Reviewer for his review. [SA 220]



19. [SA-200] Audit Risk is a risk that Auditor will issue an inappropriate opinion while Financial Statements are materially misstated.

· Audit Risk = Risk of material Misstatement X Detection Risk

· Risk of material Misstatement = Inherent risk X control risk



20. Risk based audit (RBA) is an approach to audit that analyzes audit risks, sets materiality thresholds based on audit risk analysis and develops audit programmes that allocate a larger portion of audit resources to high-risk areas. RBA consists of four main phases starting with the identification and prioritization of risks, to the determination of residual risk, reduction of residual risk to ac ceptable level and the reporting to auditee of audit results.



21. Audit procedure for audit of payment of dividends includes, checking of relevant rules and regulations for declaration and payment of dividend, Examine that depreciation has been provided before declaration, dividends have been declared or paid only out of distributable profit, in case of inadequacy or absence of profits in any financial years, rules related to such distribution has been complied, dividend recommended by the Board has been approved by the members at the AGM and dividend has been transferred to the separate scheduled bank account within 5 days from the declaration and paid within 30 days from the declaration, and check if not paid/claimed within 30 days, it is transferred to a special account and company has prepared a statement within a period of 90 days of making any transfer, names, their last known addresses have placed it on the website of the company, if any money transferred to Unpaid Dividend Account has remained unpaid or unclaimed for a period of 7 years from the date of such transfer then, company has transferred it to IEPF.



22. The branch auditor shall prepare a report on the accounts of the branch + reporting of fraud à send it to the auditor of the company à Co. auditor will deal as necessary. [Rule 12]. There is need for a clear understanding of the role of branch auditor and the company’s auditor and there is a great necessity for a proper rapport between these two auditors for the purpose of an effective audit. [SA 600] 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 + 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. For this, co-ordination of their efforts at the planning stage, areas requiring special consideration, procedures for the identification of inter-component transactions, advise the other auditor of the significant accounting, auditing and reporting requirements and obtain representation as to compliance with them.



23. Using computer in continuous for 24 hours, still does not fall in continuous process plant category. Computers are included as NESD in Part 2 of Schedule II, which is category of assets in respect of which no extra shift depreciation is permitted and categorizing as continuous process plant would be misleading resulting into material misstatement and hence impacting true and fair view. The auditor, should discuss with the management to make necessary changes in respect of same and if not agreed to, the auditor may qualify the report accordingly.



24. Para 3(xiii) of CARO 2016 - Report, “whether all transactions with the related parties are in compliance with sections 177 and 188 and the details have been disclosed, as required by AS”. Receipt of long term borrowing from Parent Company which qualifies as a transaction with the related party.



25. Para 3 (c)(i) of of CARO 2016 - Report, “whether the title deeds of immovable properties are held in the name of the company. If not, provide the details thereof.”



a. total number of cases

b. whether leasehold / freehold

c. gross block and net block, (as at Balance Sheet date), and

d. remarks, if any.



26. Para 3(c)(x) CARO 2016, Report, “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.”



27. Information regarding Defalcation emanated from weaknesses noticed by the statutory auditor à Pass on to the management à Properly and adequately extended the audit programme of the previous year having regard to the weaknesses noticed. [SA 265] The auditor shall determine whether, on the basis of the audit work performed, the auditor has identified one or more deficiencies in internal control. If the auditor has identified one or more deficiencies in internal control, the auditor shall determine, on the basis of the audit work performed, whether, individually or in combination, they constitute significant deficiencies. The auditor shall communicate in writing significant deficiencies in internal control identified during the audit to those charged with governance on a timely basis. As long as the auditor took due care in performing the audit work, he cannot be held liable. [Case Kingston Cotton Mills Ltd. and S.P. Catterson & Sons Ltd.]



28. If legal opinion of advocate is inconsistent with legal position with regard to certain items, the auditor should have rejected the opinion and insisted upon making proper provision.



29. Verification of Advances as a Concurrent Auditor à Proper sanctioning à by delegated authority à securities and documents have been received and properly charged/ registered. à Proper post disbursement supervision and follow-up is proper, such as receipt of stock statements, instalments, à Instances with any misutilisation of the loans à letters of credit issued by the branch are within the delegated power à proper follow-up of overdue bills of exchange. à Classification of advances has been done as per RBI guidelines.



30. Reversal of Income: If any advance, including bills purchased and discounted, becomes NPA as at the close of any year, the entire interest accrued and credited to income account in the past periods, should be reversed or provided for if the same is not realised. This will apply to Government guaranteed accounts also.



31. Adjustment in GSTR 9C for turnover of 1st April 2017 to 30th June 2017.



a. Goods cleared on sale or approval basis on 1.06.2017 not approved and returned back on 25.12.2017 à i.e. returned after the stipulated period of 6 months, the value of the said supplies would not be included in turnover in the audited financial statements of April 2017 to June 2017. Goods were returned after 6 months from appointed date (i.e. 1.6.2017), GST would be payable for the tax period December 2017. Reflect such adjustment under “Adjustments in turnover due to reasons not listed above” as addition

b. Goods manufactured and cleaned from Factory in Banglore 30.04.2017 à Sold from show room in Hyderabad on 30.08.2017 à liable to excise duty à Goods would not form part of turnover as per the financial statements since it is a branch transfer. If audit is being conducted for Bangalore GSTIN and supply has occurred from Hyderabad GSTIN, it would not be necessary to make adjustments for the period April 2017 to June 2017.

c. Continuous supply of telecommunication for June 2017 à Billed on 3.07.2017 à Payable on 21.07.2017 à the point of taxation is date on which bill has been raised i.e. 3.7.2017. Though invoice has been raised in the GST regime, service tax is payable and charge u/s 66B for the period June 2017, since if a transaction is liable for service tax, then tax would not be payable under the GST Laws. Hence the said amount should be deducted as turnover for the period April 2017 to June 2017.



32. Reporting of Fraud by Cost/Statutory auditor [143(12)] + Rule 13 à if an auditor (Cost or statutory) of a company, in the course of the performance of his duties has reason to believe that an offence of fraud, which involves/expected to involve individually an amount of Rs. 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 CG.



33. Advantages of Cost Audit to Government: à a cost-plus contract à fix the price of the contract at a reasonable level à fixation of ceiling prices of essential commodities à focus its attention on inefficient units à Settlement of trade disputes brought to the government.



34. Energy Audit à “the verification, monitoring and analysis of use of energy à submission of technical report à Recommending for improving energy efficiency with cost benefit analysis + action plan to reduce energy consumption. Steps à Quantify energy costs à Correlate trends of production or activity to energy costs. à Check the compliance of the organisation for policy and regulation aspects. à Highlight areas that need attention for detailed investigations à Data collection and analysis. à Measurements, mass and energy balances. à Reviewing energy procurement practices à Establishing action plan including energy saving targets, staffing requirements, implementation time requirements, procurement issues, details and cost estimates.



35. Margins: In order to restrict excessive speculation and also to safeguard the interests of the investors, members are required to keep certain deposits with the stock exchange authorities. The members are required to collect the margin from their clients and deposit the amount collected with the Clearing House. If the client delays in paying the amount or is unable to meet his commitments. Margins also help prevent excessive speculation Gross Exposure Margin, Mark to Market (MTM) Margin, Volatility Margin (VM), Additional Volatility Margin (AVM), Special Margin and Adhoc Margin are its type.



36. Four Types of markets under NEAT à Normal Market: All orders which are of regular lot size or multiples thereof are traded in the normal market. Normal market consists of various book types wherein orders are segregated as regular lot orders, special term orders, negotiated trade orders and stop loss orders, depending on their order attributes. à Odd Lot Market: An order is called an odd lot order if the order size is less than regular lot size; such orders are traded in the odd-lot market. These orders do not have any special terms or attributes attached to them. In an odd-lot market, both the price and quantity of both the orders (buy and sell) should exactly match for the trade to take place. à Spot Market: Spot orders are similar to the normal market orders except that spot orders have different settlement periods vis-à-vis normal market. These orders do not have any special terms or attributes attached to them. à Auction Market: In the auction market, auctions are initiated by the Exchange on behalf of trading members for completing the settlement process.



37. Operational audit, (functional audit)as it is the audit for the management and involves verifying the effectiveness, efficiency and economy of operations, Personal qualities of operational auditor In areas beyond accounting and finance, his knowledge ordinarily would be rather insufficient and this is a reason which should make him even more curious. à He should ask the who, why, how of everything à He should be persistent and should possess an attitude of skepticism. à He should not give up or feel satisfied easily à Efforts are to help attaining an improved operation and not merely fault finding.



38. If the auditor succeeds in giving a feeling of help and assistance through constructive criticism, he will be able to obtain co-operation of the persons who are involved in the operations. This will itself be a tremendous achievement of the operational auditor. He should try to develop a team comprised of people of different backgrounds. Involvement of technical people in operational auditing is generally helpful.



39. [SA 610] Statutory Auditor shall not use internal auditors to provide direct assistance to perform procedures that Involve making significant judgments à Relate to higher assessed risks of material misstatement à work with which the internal auditors have been involved and report to management/TCWG as part of audit function. E.g. valuation of accounts receivable is an area of higher risk.



40. Inventory frauds à misappropriation of goods and their concealment.



a. Removing goods from premises à writing them off as damaged goods à Manipulation of Inventory records to committed theft à If not detected, loss may be high in long term. à usually done through collusion among a number of persons à For their detection, the entire system of receipts, storage and dispatch of all goods, etc. should be reviewed to localise the weakness in the system including availability of sufficient data from which such a record can be constructed.

b. Reconciliation with inventory movement register and finalize closing stock



41. Circulating Information Contained in Own Website: Clause (6) of Part I of the First Schedule, Chartered Accountant in practice should not solicits clients or professional work either directly or indirectly by circular, advertisement, personal communication or interview or by any other means. There is permit creation of own website + no standard format or restriction on colours is there. + information contained in the website be circulated on a specific “Pull” request. + members are not required to intimate the Website address to the Institute.



42. Issuing Certificate without having Certificate of Practice: Clause (1) of Part II of Second Schedule à contravenes the provisions of Act or the regulations made thereunder or any guidelines issued by the Council.



43. Partnership with an Advocate: Clause (4) of Part I of the First Schedule à Not be guilty of professional misconduct as per Clause (4) of Part I of First Schedule read with Regulation 53B.



44. Technical, Ethical and Professional Standards as per Statement on Peer Review:



a. AS issued by ICAI and notified by CG.

b. SA issued by ICAI + Guidance notes + Standards on Internal Audit + Notifications / Directions / Announcements

c. FRF

d. Provisions of the various relevant statutes and / or regulations which are applicable



45. The areas covered in comprehensive audit will naturally vary from enterprise to enterprise depending on the nature of the enterprise, its objectives and operations. à Comparison of overall capital cost of the project with the approved planned costs. à Production or operational outputs vis-a-vis under-utilisation of the installed capacity. à Planned rate of return. à adequate purchase policies. à Project planning.



46. The main features of a qualified and independent audit committee to be set up under SEBI (LODR) 2015 à minimum 3 directors as members à 2/3rd IDs à All members financially literate + 1 member shall have accounting or related financial management expertise; à Chairperson of the Audit Committee shall be present at AGM to answer shareholder queries; à Meeting with HOD Finance, Internal auditor, Statutory auditor.



47. Powers and duties of an auditor of a Multi -state Cooperative Society: [Section 73] à right of access at all times to the books, accounts and vouchers à right to information and explanation as the auditor may think necessary à Whether loans and advances are properly secured and whether the terms on which they have been made are not prejudicial to the interests;à Whether Personal expenses have been charged to revenue account; à Any shares have been allotted for cash, whether cash has actually been received.

MTP

1. Comments on matter provided in CARO is applicable if revenue exceed Rs. 10 Crore for the year.

2. If during course of internal audit, auditor find any deviation from standard operating proceedure, he should report in internal audit report and check the compliance in next cycle.

3. The auditor should verify the composition of Board and examine its impact on compliance throughout the reporting period as a part of certifying compliance with the requirements of corporate governance.

4.GSTR 9C:Should be by the taxpayers whose annual turnover exceeds Rs. 2 Crores during the
financial year.

5. Deemed Profits and gains u/s 32AC in clause 24 of 3CD.

6. When an insurance company approaches another insurance company to cover some portion of risk, it is called as reinsurance.

7. 3 years is the Maximum number of years in the peer review cycle.

8. In Case of PSU, Direct Reporting Engagement does not include Financial audit.

9. Deposit insurance facility of Deposit Insurance and Credit Guarantee Corporation (DICGC) is Not available to depositors of NBFCs.

10. As per Government notification issued in 1984 a member of the stock exchange is considered active for the purpose of audit if he has conducted the business in securities even for a single day in the year and shall get its accounts audited if it is required by SEBI.

11. Ceiling of 20 company audits doesn’t include audit of private company having paid up capital less than Rs. 100 crores.

12. There can be different methods of calculation of depreciation for its assets for the group companies.

13. Management auditor should first understand Policies of the company. Then verify all the authorisation struction.

14. CA Partner/Firm shall give audit programme to the audit assistants to follow and can also make responsible to make audit documentations and breifing of work done.

15. Policy/ procedure to be implemented to assist in the prevention and detection of non-compliance with laws and regulations in accordance with SA 250
(a) Monitoring legal requirements and ensuring that operating procedures are designed to meet these requirements.
(b) Developing, publicising and following a code of conduct.
(c) Instituting and operating appropriate systems of internal control.

16. Providing actuarial valuation service to client in which same firm is statutory auditor is a self-review threat, as the valuation of the amount recognised would be recorded in the financial statements. The audit partner should decline the work of valuation service.

17. Audit evidence reliability chart -- 1. Proofs and supporting -- 2. Recalculations -- 3. Written confirmation -- 4. Verbal confirmation.

18. Include samples for transactions near end of year.