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आशीवायद- Comprehensive Module For CA IPCC Auditing & Assurance C8

Chapter - 8
Government Audit
Government Audit-Meaning

1. Government audit means


the systematic and independent examination,
of financial,
administrative and
other operations of a public entity,
For evaluating and verifying them. (FAO - EV)

2. Its objective is to (Ensure accountability w.r.t PR & PE)


ensure the accountability
of the government entity
in respect of public revenue and expenditure.

3. Auditor presents a report containing audit findings along with recommendations for future
actions.

4. CAG has been entrusted for supervising the Government audits in India.

Comptroller & Auditor General (CAG) - Certain Provisions

1. Appointment
a. The President of India shall appoint CAG.

2. Removal or resignation

a. He can be removed from the office only on the ground of proven misbehavior or
incapacity.
b. Moreover, he can be removed from office only when each house of parliament decides to
do so by a majority of at least two third of members present and voting.
c. He can resign any time through a resignation letter addressed to the President of India.

3. Remuneration
a. He shall be paid a salary equivalent to that of a Judge of the Supreme Court.
b. The parliament is competent to make laws to determine salary and other conditions of
service.

4. Terms
a. He shall hold office for six years or up to age of 65 years, whichever is earlier.

5. Submission of Audit Report


a. Relating to the accounts of the Union-to the President

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आशीवायद- Comprehensive Module For CA IPCC Auditing & Assurance C8
b. Relating to the accounts of the States to the Governor and/or the President who shall cause
these reports to be laid before the legislature of the respective States

Duties of Comptroller & Auditor General

1. Compile and submit accounts


He shall compile the accounts of the Union/State/Union Territory and submit those accounts to the
President/Governor/Administrator respectively.

2. To audit receipts and expenditure of bodies substantially financed by Government Fund

He shall audit all receipts and expenditure of any body, which has been substantially financed from the
Consolidated Fund of India/State/Union Territory.

Note: A body or authority shall be treated as substantially financed if the amount of grant or loan
in one year is greater than;
(i) Rs. 25 lakhs, and ,
(ii) 75% of the total expenditure of that body or authority.

3. To audit grants and loans


He shall audit specific purpose loan or grant given to anybody other than a foreign state or international
organization, out of the Consolidated Fund of India/State/Union Territory.

The CAG shall scrutinize the procedures by which the sanctioning authority satisfies itself as to
fulfillment of the conditions of giving such grants or loans.

4. To audit receipts of union or states


He shall audit all receipts payable in to the Consolidated Fund of India/ State/Union Territory. He shall
satisfy himself that the rules and procedures are designed to secure an effective check on the
assessment, collection and proper allocation of revenue and are being duly observed.

5. To audit account of stores and stock


He shall audit the accounts of stores and stock kept in any office or department of the union or state.

6. To audit accounts of Government Companies and Corporations


CAG shall exercise powers and observe duties as per the provisions of the Companies Act, 2013 in
relation to the Government Companies or Corporations. (To be discussed in the chapter of Government
Audit)

7. To audit and report (Exp. Transaction. Trading/miring – P&L – BS – Subsidiary Accounts)


CAG shall audit and report:
All expenditure from Consolidated Fund of India/ State/Union Territory.
All transactions of Union State relating to the 'Contingency Funds and Public accounts.'
All Trading, Manufacturing, Profit and Loss account and Balance Sheet and other
subsidiary accounts kept in any department of the Union/ State.

Audit of various items

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आशीवायद- Comprehensive Module For CA IPCC Auditing & Assurance C8
Expenditure Audit
The auditor examines the fulfillment of conditions for incurring government expenditure. It involves
examination of following:—
(a) Audit of rules and orders
(b) Audit of sanctions
(c) Audit against provision of funds
(d) Propriety audit
(e) Performance audit

Audit of Rules and Orders/Audit of Regularity and Legality


(खचाय Constitution, law CAG और higher authority क़े हहसाब स़े होना चाहहए) Yeh check karney ke liye auditor
ko kuch chizo ki Sound knowledge honi chaiye
(1) Its objective is to ensure whether the expenditure is in accordance with:
(a) Relevant provisions of the Constitution and of the laws and rules.
(b) The rules, regulations issued by CAG.
(c) The orders of, or rules made by, any higher authority.

(2) In this connection, auditor should have sound knowledge of rules and orders w.r.t. following:
(a) The powers to incur and sanction expenditure from the Consolidated Fund/ contingency
fund of India / State;
(b) The mode of presentation of claims against government, withdrawing moneys from the
Consolidated Fund, Contingency Fund and the financial rules prescribing the procedure to be
followed by government; and (HOW CLAIMS ARE PRESENTED & HOW MONEY IS
WITHDRAWAN)
(c) Regulating the conditions of service, pay and allowances, and pensions of government
servants.

Audit of Sanctions (हर खचाय sanctioned होना चाहहए है , और sanction proper authority ऩे ककर्ा है )Its objective
is to ensure whether the expenditure is:
(a) Properly covered by a sanction, either general or special.
(b) Sanctioned by authority, which is authorized to do so.

Thus auditor should consider following


(a) He should have knowledge of the sanctioning powers of various authorities.
(b) He should examine whether all sanctions are adequately noted in the prescribed register.
(c) For petty expenditure, the signature of the competent authority on a bill can be regarded
as a sanction.

Audit against provision of funds


Its objective is to ensure whether the expenditure:
(a) Is made for the purpose for which the grant and appropriation has been provided.
(b) Does not exceed the appropriation made.

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आशीवायद- Comprehensive Module For CA IPCC Auditing & Assurance C8
Propriety Audit (M.imp)

1. According to propriety audit, the auditor examines the cases of improper or wasteful
expenditure even though the expenditure has been incurred as per the existing rules and
regulations.

2. A transaction may satisfy all the requirements of regular audit, but may still be highly
wasteful.

3. For e.g. a building may be constructed for running a school but may not be used for the same
purpose, resulting in wasteful expenditure.

4. Auditor should try to examine public financial morality by looking in to the


a. wisdom,
b. faithfulness and
c. Economy of transactions.

5. No hard and fast rules can be laid down regarding the standards of financial propriety.

6. Here, the auditor should examine that:—


(a) The authorities have made the expenditure
• With same degree of vigilance,
• as a person of ordinary prudence
• would exercise in respect of his own money.

(b) The expenditure is


• not
• prima facie more
• than the occasion demands.

(c) No authority
• exercises its power of sanctioning expenditure
• to pass an order, which will directly or indirectly accrue to its own advantage.

(d) Public money is not utilised for the benefit of a particular person /section of the
community.

Performance Audit/Full Scope Audit


1. Here, auditor tries to ensure that government programmes have achieved the desired
objectives at the lowest cost and given the intended benefits.
(Achieved Objectives, Lowest Cost, Intended Benefits)

2. Performance audit includes efficiency, economy and effectiveness audit.

3. It seeks to identify opportunities for greater economy and effectiveness.

4. Efficiency audit
It examines whether:
The various schemes/projects are executed, and

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आशीवायद- Comprehensive Module For CA IPCC Auditing & Assurance C8
Their operations are carried out in efficient manner, and

5. Economy audit
It examines whether:
The government has acquired the financial, human and physical resources in an economical
manner, and
The sanctioning and spending authority have observed economy.

6. Effectiveness audit
It examines whether:
Programmes and projects are performing well.
Overall targeted objectives are being achieved.

Audit of Stores and Stocks

1. Auditor should ascertain whether the internal controls over purchase, receipt, and issue of stores
are well designed and properly carried out during the year.
2. He should bring to the notice of the government any deficiencies in the system of control.
3. The audit of purchase of stores is conducted in the same manner as audit of expenditure.
4. The auditor has to ensure that the prices paid are reasonable.
5. Cases of uneconomical purchase of stores and losses due to defective or inferior quality of
stores are specifically examined.
6. The certificates of quality and quantity given by expert should be examined.
7. Any excess or idle stocks should be specifically mentioned in the report.
8. Auditor should ensure their existence by attending physical verification of stock.
9. The valuation of the stocks is also examined properly.

Audit of Receipts
The government audit also covers receipts payable in to the Consolidated Fund of India and of each
State/Union Territory. The auditor examines whether: —
1. Internal checks are imposed for prompt detection and investigation of irregularities. .
2. Internal procedures adequately ensure proper accounting of demands collection.
3. There is effective check on assessment, collection and proper allocation of revenue.
4. Such regulations and procedures are actually being carried out.
5. All revenues have been correctly assessed, realized and credited to the government account.
6. There is no leakage of revenue.

Audit of Commercial Accounts


Nature of Enterprise Audit Undertaken by
1. Departmental Enterprises engaged in Audit of these enterprises are undertaken by the
commercial and trading operations, which are CAG in the same manner as any other Government
subject to the same laws, financial and other Department.
regulations as other Government Departments
and Agencies.
2.Statutory Bodies, Corporations, created Audit of these bodies depends upon the nature and
by specific statutes mostly financed by type of governing statutes.
Government in the form of loans, grants etc.

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आशीवायद- Comprehensive Module For CA IPCC Auditing & Assurance C8
3.Government Companies set up under the Audit is conducted by Statutory Auditors appointed
Companies Act,2013 by the CAG.

Q1. Audit of expenditure in Government audit.


Audit of Expenditure in Government Audit: The various standards set for audit of expenditure are:
(i) Audit against Rules & Orders: The auditor has to see that the expenditure incurred conforms to the relevant
provisions of the statutory enactment and is in accordance with the financial rules and regulations framed
by the competent authority.

(ii) Audit of Sanctions: The auditor has to ensure that each item of expenditure is covered by a sanction, either
general or special, accorded by the competent authority, authorizing such expenditure.

(iii) Audit against Provision of Funds: It contemplates that there is a provision of funds out of which expenditure
can be incurred and the amount of such expenditure does not exceed the appropriations made.

(iv) Propriety Audit: It is required to be seen that the expenditure is incurred with due regard to broad and
general principles of financial propriety. The auditor aims to bring out cases of improper, avoidable, or
infructuous expenditure even though the expenditure has been incurred in conformity with the existing
rules and regulations.

(v) Performance Audit: This involves that the various programmes, schemes and projects where large financial
expenditure has been incurred are being run economically and are yielding results expected of them.

Q2. What are the focus points in doing propriety audits by C & AG as regards government expenditure? (8 Marks)

Focus points for doing Propriety Audits of Government Expenditure: The Propriety audit is to vet the expenditure
in the annals of financial wisdom and uprightness. It is to check to bring out the improper, avoidable, or in
fructuous expenditure even though such expenditure has been incurred in conformity with the existing rules and
regulations. A transaction may satisfy all the requirements of regularity audit in so far as the various formalities
regarding rules and regulations are concerned but may still be highly wasteful. It is not audit of sanction or against
norms. It is a qualitative, opinion-based expression of auditor's findings as regards the efficiency, effectiveness
and economy dimensions of expenditure.

In this regards, the following main points should be kept for consideration:
(i) The expenditure should not be prima facie more than what the occasion demands. Public money should
be spent by the officers, as of their own with utmost diligence and care.

(ii) No order for sanction of expenditure should be made by an authority which results in pecuniary gains
directly or indirectly.

(iii) Public moneys should not be utilised for the benefit of a particular person or section of the community
unless

(1) the amount of expenditure involved is insignificant; or


(2) a claim for the amount could be enforced in a Court of law; or
(3) the expenditure is in pursuance of a recognized policy or custom; and
(4) the amount of allowances, such as travelling allowances, granted to meet expenditure of a
particular type should be so regulated that the allowances are not, on the whole, sources of profit
to the recipients.

(iv) There should not be profiteering by the authority or anybody where the expenditure is in the nature of
compensating.

(v) Wastages are avoided in expenditure.


(vi) The cost of administering should not eat off the benefits of the expenditure.
(vii) The expenditure should percolate down the beneficiary without corruption.
(viii) The expenditure should bring out optimum, enduring benefits instead of mere frittering away the public
money on meeting day to day needs repeatedly.

Q3. What are the duties of Comptroller and Auditor General? (10 marks)

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आशीवायद- Comprehensive Module For CA IPCC Auditing & Assurance C8

Duties of Comptroller & Auditor General: The Comptroller & Auditor General's (Duties, Powers and Conditions of
Service) Act, 1971 lays down duties of the C&AG as under:

(i) Compile and submit Accounts of Union and States - The C&AG shall be responsible for compiling the
accounts of the Union and of each State from the initial and subsidiary accounts rendered to the audit
and accounts offices under his control by treasuries, offices or departments responsible for the keeping of
such account.

(ii) General Provisions Relating to Audit - It shall be the duty of the C&AG -
(a) to audit and report on all expenditure from the Consolidated Fund of India and of each State and
of each Union Territory having a Legislative Assembly and to ascertain whether the moneys shown
in the accounts as having been disbursed were legally available for and applicable to the service
or purpose to which they have been applied or charged and whether the expenditure conforms to
the authority which governs it;

(b) to audit and report all transactions of the Union and of the States relating to Contingency Funds
and Public Accounts;

(c) to audit and report on all trading, manufacturing profit and loss accounts and balance-sheets and
other subsidiary accounts kept in any department of the Union or of a State.

(iii) Audit of Receipts and Expenditure - Where anybody or authority is substantially financed by grants or loans
from the Consolidated Fund of India or of any State or of any Union Territory having a Legislative Assembly,
the Comptroller and Auditor General shall, subject to the provisions of any law for the time being in force
applicable to the body or authority, as the case may be, audit all receipts and expenditure of that body
or authority and to report on the receipts and expenditure audited by him.

(iv) Audit of Grants or Loans - Where any grant or loan is given for any specific purpose from the Consolidated
Fund of India or of any State or of any Union Territory having a Legislative Assembly to any authority or
body, not being a foreign State or international organisation, the Comptroller and Auditor General shall
scrutinize the procedures by which the sanctioning authority satisfies itself as to the fulfillment of the
conditions subject to which such grants or loans were given and shall for this purpose have right of access,
after giving reasonable previous notice, to the books and accounts of that authority or body.

(v) Audit of Receipts of Union or States - It shall be the duty of the Comptroller and Auditor General to audit
all receipts which are payable into the Consolidated Fund of India and of each State and of each Union
Territory having a Legislative Assembly and to satisfy himself that the rules and procedures in that behalf
are designed to secure an effective check on the assessment, collection and proper allocation of revenue
and are being duly observed and to make this purpose such examination of the accounts as he thinks fit
and report thereon.

(vi) Audit of Accounts of Stores and Stock - The Comptroller and Auditor General shall have authority to audit
and report on the accounts of stores and stock kept in any office or department of the Union or of a State.

(vii) Audit of Government Companies and Corporations - The duties and powers of the Comptroller and
Auditor General in relation to the audit of the accounts of government companies shall be performed and
exercised by him in accordance with the provisions of the Companies Act, 2013.

Q4. Basic standards set for audit of Government expenditure.

Basic standards set for audit of Government Expenditure: The audit of government expenditure is one of the major
components of government audit. The basic standards set for audit of expenditure are to ensure that there is
provision funds authorised by competent authority fixing the limits within which expenditure can be incurred.
These standards are :—

(i) that the expenditure incurred conforms to the relevant provisions of the statutory enactment and in
accordance with the Financial Rules and Regulations framed by the competent authority. Such an audit
is called as the audit against 'rules and orders'.

(ii) that there is sanction, either special or general, accorded by competent authority authorizing the
expenditure. Such an audit is called as the audit of sanctions.

(iii) that there is a provision of funds out of which expenditure can be incurred and the same has been
authorized by competent authority. Such an audit is called as audit against provision of funds.

(iv) that the expenditure is incurred with due regard to broad and general principles of financial propriety.
Such an audit is also called as propriety audit.

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आशीवायद- Comprehensive Module For CA IPCC Auditing & Assurance C8

(v) that the various programmes, schemes and projects where large financial expenditure has been incurred
are being run economically and are yielding results expected of them. Such an audit is termed as the
performance audit.

Q5. Power of Comptroller and Auditor General of India in performance of duties. (November 2014)

Powers of Comptroller and Auditor General of India in performance of duties: The Comptroller and Auditor
General's (Duties, Powers and Conditions of Service) Act, 1971 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.

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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आशीवायद- Comprehensive Module For CA IPCC Auditing & Assurance C13 – Special Audit
Auditing & Assurance- Past Year Questions & RTPS

Chap-13- Special Audit


May 2011 Exam

Q1. Mention any 8 special points which you as an auditor would look into while auditing the books of accounts of:
(a) Hospital (8 Marks)
(b) Cinema (8 Marks)

Answer
(a) Audit of Hospital:
The special steps involved in such an audit are as follows:
i. Vouch the Register of patients with copies of bills issued to them. Verify bills for a selected
period with the patients' attendance record to see that the bills have been correctly prepared. Also see
that bills have been issued to all patients from whom an amount was recoverable according to
the rules of the hospital.
ii. Check cash collections as entered in the Cash Book with the receipt, counterfoils and other
evidence for example, copies of patients bills, counterfoils of dividend and other interest warrants, copies of
rent bills, etc.
iii. See by reference to the Property and Investment Register that all income that should
have been received by way of rent on properties, dividends and interest on securities settled on the hospital
has been collected.
iv. Ascertain that legacies and donations received for a specific purpose have been applied in
the manner agreed upon.
v. Trace all collections of subscription and donations from the Cash Book to the

respective Registers. Reconcile that total subscriptions due (as shown by the
Subscription Register and the amount collected and that still outstanding).
vi. Vouch all purchases and expenses and verily that the capital expenditure was
incurred only with the prior sanction of the Trustees or the Managing Committee and

that appointments and increments to staff have been duly authorised.

vii. Verify that grants, if any, received from Government or local authority have been duly

accounted for. Also that refund in respect of taxes deducted at source has been claimed.
viii. Compare the totals of various items of expenditure and income with the amount budgeted for them and report
to the Trustees or the Managing Committee significant variations which have taken place.
ix. Examine the internal check as regards the receipts and issue of stores; medicines, lines,
apparatus, clothing, instruments, etc. so as to insure that purchases have been properly recorded in

the Stock Register and that issues have been made only against proper authorisation.

x. See that depreciation has been written off against all the assets at the appropriate rates.

xi. Inspect the bonds, share scripts, title deeds of properties and compare their particulars with
those entered in the Property and Investment Register.
xii. Obtain inventories, specially of stocks and stores as at the end of the year and check a percentage of
the items physically, also compare their total values with respective ledger balances.

(b) Audit of Cinema:


The special steps involved in its audit are as follows:-
(i) Verify
→ that entrance to the cinema hall during show is only through printed tickets;
→ that they are serially numbered and bound into books;

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आशीवायद- Comprehensive Module For CA IPCC Auditing & Assurance C13 – Special Audit
→ that for advance booking a separate series of tickets is issued; and

→ that the stock of tickets is kept in the custody of a responsible official.

(ii) end of show, a statement of tickets sold is prepared and cash


Confirm that at the

collected is agreed with it.

(iii) Verify that a record is kept of the 'free passes' and that these are issued under proper authority.
(iv) Reconcile the amount of Entertainment Tax collected with the total number of tickets issued for
each class.
(v) charges collected for advertisement slides by reference to the Register
Verify the

of Slides kept at the cinema as well with the agreements, entered into with advertisers in this
regard.
(vi) Vouch the expenditure incurred on advertisement, repairs and maintenance. No
part of such expenditure should be capitalised except the expenditure on extensive
redecoration, and that should be adjusted as deferred revenue expenditure.
(vii) Vouch payments on account of film hire with bills of distributors and in the process, the
agreements concerned should be referred to.
(viii) Examine unadjusted balance out of advance paid to the distributors against
film hire contracts to see that they are good and recoverable. If any film in respect of which an advance was
paid has already run, it should be enquire as to why the advance has not been adjusted. The management
should be asked to make a provision in respect of advances that are considered irrecoverable.
(ix) The arrangement for collection of the share in the restaurant income should be
enquired into either a fixed sum or a fixed percentage of the taking may be receivable annually. In case the
restaurant is run by the Cinema, its accounts should be checked. The audit should cover sale of
various items of foodstuffs, purchase of foodstuffs, cold drink, cigarettes, etc. as in the case of club.

November 2011 Exam

Q2. Mention 8 special points which you as an auditor would look into while auditing the accounts of a Recreation Club
with facilities for indoor games and in house eatery. (8 Marks)

(a) Audit of Accounts of Recreational Club


i. Examine the constitution, powers of governing body and relevant rules relating to
preparation and finalization of accounts.
ii. Vouch the receipt on account of entrance fees with member's applications,
counterfoils issued to them, and minutes of the Managing Committee.
iii. Vouch Members' subscription with the counterfoils of receipts issued to them. Trace
receipts for a selected period to the Register of members; reconcile the amount of
total subscription due with the amount collected and the outstanding. Check
totals of various columns of the Register of Members and tally them across. See the
Register of Members to ascertain the Member's dues which are in arrear and enquire whether
necessary steps have been taken for their recovery. The amount considered
irrecoverable, if any should be written off.
iv. Ensure that arrears of subscriptions for the previous year have been correctly brought over
and arrears for the year under audit and subscription received in advance have been correctly adjusted.
v. Verify the internal check as regards members being charged with the price of
foodstuffs and drinks provided to them and their guests as well as with the fees chargeable for the
special service rendered such as billiards, tennis, etc. Trace debits for a selected period from
subsidiary registers maintained in respect of supplies and services to members to confirm that the account
of every member has been debited with amounts recoverable from him.

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आशीवायद- Comprehensive Module For CA IPCC Auditing & Assurance C13 – Special Audit
vi. Vouch purchase of sports items, furniture, crockery, etc., and trace their entries into the
respective stock registers. Vouch purchases of food-stuffs, cigars, wines, etc. and test their sale
price so as to confirm that the normal rates of profit have been earned on their sales.
vii. The stock of unsold provisions and stores, at the end of the year should be verified
physically and its valuation checked. Check the stock of furniture, sports material and other
assets physically with the respective stock registers or inventories prepared at the end of the year.
viii. share scrips and bonds in respect of investments, check their current values
Inspect the
for disclosure in final accounts, also ascertain that the arrangements for their safe
custody are satisfactory, check the accrual of income there from and provision of income tax
thereon..

May 2012 Exam


Q3. Mention the eight important points which an auditor will consider while conducting the audit of educational
institutions. (8 Marks)
Answer- Audit of Educational Institutions
The important points which an auditor should consider while conducting the audit of education institutions are as
follows:

i. Examine the Trust Deed or Regulations, in the case of school or college and note all the
provisions affecting accounts. In the case of a university, refer to the Act of Legislature and
the Regulation framed thereunder.
ii. Read through the minutes of the meetings of the Managing Committee or Governing Body, noting
resolutions affecting accounts to see that these have been duly complied with, specially
the decisions as regards the operation of bank accounts and sanctioning of expenditure.
iii. Check names entered in the Students Fee Register for each month or term, with the respective
Class Registers, showing names of students on roils and test amount of fees charged;
and verify that there operates a system of internal check which ensures that demands against
the students are properly raised.
iv. Check fees received by comparing counterfoils of receipts granted with entries in the Cash Book and tracing
the collections in the Fee Register to confirm that the revenue from this source has been duly accounted for.
v. Total up the various columns of the Fees Register for each month or term to ascertain that fees paid in advance
have been carried forward and that the arrears that are irrecoverable have been written off under the sanction
of an appropriate authority.
vi. Check admission fees with admission slips signed by the head of the institution and confirm that the
amount has been credited to a Capital Fund, unless the Managing Committee has taken a decision to the
contrary.
vii. See that free studentship and concessions have been granted by a person authorised to do so, having regard
to the Rules prescribed by the Managing Committee.
viii. Confirm that fines for late payment or absence, etc. have been either collected or remitted
under proper authority.
ix. Confirm that hostel dues were recovered before student's accounts were closed and their deposits
of caution money refunded.
x. Verify rental income from rented property with the rent rolls, etc.
xi. Vouch income from endowments and legacies, as well as interest and dividends from
investment; also inspect the securities in respect of investments held.
xii. Verify any Government or local authority grant with the relevant paper of grant. If any expense
has been disallowed for purposes of grant, ascertain the reasons and compliance thereof.
xiii. Report any old heavy arrears on account of fees, dormitory rents, etc. to the Managing Committee.
xiv. Confirm that caution money and other deposits paid by students on admission, have been shown as liability in
the balance sheet not transferred to revenue, unless they are not refundable.
xv. See that the investments representing endowment funds for prizes are kept separate and any income in excess
of the prizes has been accumulated and invested along with the corpus.
xvi. Verify that the Provident Fund money of the staff has been invested in appropriate securities.

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आशीवायद- Comprehensive Module For CA IPCC Auditing & Assurance C13 – Special Audit
xvii. Vouch donations, if any with the list published with the annual report. If some donations were meant for any
specific purpose, see that the money was utilised for the purpose.
xviii. Vouch all capital expenditure in the usual way and verify the same with the sanction for the Committee as
contained in the minute book.
xix. Vouch, in the usual manner, all establishment expenses and enquire into any unduly heavy expenditure under
any head. If there was any annual budget prepared, see that any excess under any head over the amount
budget was duly sanctioned by the Managing Committee. If not, bring it to the Committee's notice in your
report.
xx. See that increase in the salaries of the staff have been sanctioned and minuted by the Committee.
xxi. Ascertain that the system ordering inspection on receipt and issue of provisions, foodstuffs, clothing and other
equipment is efficient and all bills are duly authorised and passed before payment.
xxii. Verify the inventories of furniture, stationery, clothing, provision and all equipment etc. These should be checked
by reference to Stock Register or corresponding inventories of the previous year and values applied to various
items should be test checked.
xxiii. Confirm that the refund of taxes deducted from the income from investment (interest on securities etc.)
has been claimed and recovered since the institutions are generally exempted from the payment of income-
tax.
xxiv. Finally, verify the annual statements of account and, while doing so see that separate statements of account
have been prepared as regards Poor Boys Fund, Games Fund, Hostel and Provident Fund of staff, etc.

November 2012 Exam

Q4. What are the eight audit points to be considered by the auditor during the audit of a Hospital (8 Marks)

May 2013 Exam

Q5. Mention important points which auditors will consider while conducting audit of accounts of a partnership firm. (8 Marks)

Answer- Important points which auditors will consider while conducting audit of accounts of a partnership firm are:

i. Confirming that the letter of appointment, signed by a partner, duly authorised, clearly states the
nature and scope of audit contemplated by the partners, specially the limitation, if any, under which the
auditor shall have to function.
ii. Studying the minute book, if any, maintained to record the policy decision taken by partners
specially the minutes relating to authorisation of extraordinary and capital expenditure,
raising of loans; purchase of assets extraordinary contracts entered into and other such matters as are not
of a routine nature.
iii. Verifying that the business in which the partnership is engaged is authorised by the partnership
agreement; or by any extension or modification thereof agreed to subsequently.
iv. Examining whether books of account appear to be reasonable and are considered
adequate in relation to the nature of the business of the partnership.
v. Verifying generally that the interest of no partner has suffered prejudicially by an activity engaged in by the
partnership which, it was not authorised to do under the partnership deed or by any violation of a provision in
the partnership agreements.
vi. Confirming that a provision for the firm's tax payable by the partnership has been made in the accounts before
arriving at the amount of profit divisible among the partners.
vii. Verifying that the profits and losses have been divided among the partners in their agreed profit-sharing ratio.

Q6. What are the points on which an auditor should concentrate while planning audit of an N.G.O. ? (8 Marks)

Answer- While planning the audit of an N.G.O, the auditor should concentrate on the following:

i. Knowledge of the NGO's work, its mission and vision, areas of operations and environment
in which it operate.
ii. Updating knowledge of relevant statutes especially with regard to recent amendments,

circulars, judicial decisions viz. Foreign Contribution (Regulation) Act 1976, Societies Registration Act,
1860, Income Tax Act 1961 etc. and the Rules related to the statutes.
iii. Reviewing the legal form of the Organisation and its Memorandum of Association, Articles of Association,
Rules and Regulations.

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आशीवायद- Comprehensive Module For CA IPCC Auditing & Assurance C13 – Special Audit
iv. Reviewing the NGO's Organisation chart, Financial and Administrative Manuals,
Project and Programme Guidelines, Funding Agencies Requirements and formats, budgetary policies if any.
v. Examination of minutes of the Board/Managing Committee/Governing Body/Management and Committees
thereof to ascertain the impact of any decisions on the financial records.
vi. Study the accounting system, procedures, internal controls and internal checks existing for the NGO and verify
their applicability.
vii. Setting of materiality levels for audit purposes.

viii. The nature and timing of reports or other communications.

ix. The involvement of experts and their reports.

x. Review the previous year's Audit Report.

November 2013 Exam

Q7. What procedure may be adopted by an auditor, while auditing leasing transactions entered into by the leasing
company? (8 Marks)

Answer-
In respect of leasing transaction entered into by the leasing company, the following procedures may be adopted by
the auditor.

i. The object clause of leasing company to see that the goods like capital goods, consumer durables etc. in
respect of which the company can undertake such activities. Further, to ensure that whether company can
undertake financing activities or not.
ii. Whether there exists a procedure to ascertain the credit analysis of lessee like lessee's ability to meet the
commitment under lease, past credit record, capital strength, availability of collateral security, etc.
iii. The lease agreement should be examined and the following points may be noted:
→ the description of the lessor, the lessee, the equipment and the location where the equipment is to be
installed. (The stipulation that the equipment shall not be removed from the described location except
for repairs. For the sake of identification, the lessor may also require plates or markings to be attached
to the equipment).
→ the amount of tenure of lease, dates of payment, late charges, deposits or advances etc. should be
noted.
→ whether the equipment shall be returned to the lessor on termination of the agreement and the cost
shall be borne by the lessee.
→ whether the agreement prohibits the lessee from assigning the subletting the equipment and authorises
the lessor to do so.

iv. Examine the lease proposal form submitted by the lessee requesting the lessor to provide him the equipment
on lease.
v. Ensure that the invoice is retained safely as the lease is a long-term contract.
vi. Examine the acceptance letter obtained from the lessee indicating that the equipment has been received in
order and is acceptable to the lessee.
vii. See the Board resolution authorising a particular director to execute the lease agreement has been passed by
the lessee.
viii. See that the copies of the insurance policies have been obtained by the lessor for his records.

Q8. Mention any eight important points which an auditor will consider while conducting audit of club? (8 Marks)

Answer- Audit of Club: A club Is usually constituted as a company limited by guarantee. Therefore, various provisions of
the Companies Act, 2013 relating to the audit of accounts of companies are also applicable to its audit. The special
steps involved in such an audit are stated below:
i. Vouch the receipt on account of entrance fees with members' applications, counterfoils issued to them, as well
as on a reference to minutes of the Managing Committee.
ii. Vouch members' subscriptions with the counterfoils of receipt issued to them, trace receipts for a selected
period to the Register of Members; also reconcile the amount of total subscriptions due with the amount
collected and that outstanding.
iii. Ensure that arrears of subscriptions for the previous year have been correctly brought over and arrears for the
year under audit and subscriptions received in advance have been correctly adjusted.
iv. Check totals of various columns of the Register of members and tally them across.
v. See the Register of Members to ascertain the Member's dues which are in arrear and enquire whether
necessary steps have been taken for their recovery; the amount considered irrecoverable should be
mentioned in the Audit Report.

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आशीवायद- Comprehensive Module For CA IPCC Auditing & Assurance C13 – Special Audit
vi. Verify the internal check as regards members being charged with the price of foodstuffs and drinks provided
to them and their guests, as well as, with the fees chargeable for the special services rendered, such as billiards,
tennis, etc.
vii. Trace debits for a selected period from subsidiary registers maintained in respect of supplies and services to
members to confirm that the account of every member has been debited with amounts recoverable from him.
viii. Vouch purchase of sports items, furniture, crockery, etc. and trace their entries into the respective stock
registers.
ix. Vouch purchases of foodstuffs, cigars, wines, etc., and test their sale price so as to confirm that the normal rates
of gross profit have been earned on their sales. The stock of unsold provisions and stores, at the end of year,
should be verified physically and its valuation checked.
x. Check the stock of furniture, sports material and other assets physically with the respective stock registers or
inventories prepared at the end of the year.
xi. Inspect the share scrips and bonds in respect of investments, check their current values for disclosure in final
accounts; also ascertain that the arrangements for their safe custody are satisfactory.
xii. Examine the financial powers of the secretary and, if these have been exceeded, report specific case for
confirmation by the Managing Committee.

RTP November 2013

Q9. M/s GRS & Co has been appointed to audit the accounts of a Hospital in Delhi. What special steps will you as an auditor
suggest to take into consideration in auditing the accounts of this hospital?

Answer-
Audit of Hospital
May 2014 Exam

Q10. State the background of 'Local Bodies". Draft an audit programme for audit of local bodies. (8 Marks)

Answer- Background of Local Bodies: A municipality can be defined as a unit of local self- government in an urban
area. By the term 'local self-government' is ordinarily understood the administration of a locality - a village, a town, a
city or any other area smaller than a state - by a body representing the local inhabitants, possessing fairly large
autonomy, raising at least a part of its revenue through local taxation and spending its income on services which are
regarded as local and, therefore, distinct from state and central services.
Municipal government in India covers five distinct types of urban local authorities, viz., the municipal corporations, the
municipal councils, the notified area committees, the town area committees and the cantonment committees.

Audit Programme for local bodies:

i. The Local Fund Audit Wing of the State Govt, is generally in charge of the audit of municipal accounts.
Sometimes bigger municipal corporations e.g. Delhi, Mumbai etc have power to appoint their own auditors for
regular external audit. So the auditor should ensure authenticity of his appointment.
ii. The auditor while auditing the local bodies should report on the fairness of the contents and presentation of
financial statements, the strengths and weaknesses of system of financial control, the adherence to legal
and/or administrative requirements; upon whether value is being fully received on money spent. His objective
should be to detect errors and fraud and misuse of resources.
iii. The auditor should ensure that the expenditure incurred conforms to the relevant provisions of the law and is in
accordance with the financial rules and regulations framed by the competent authority.
iv. He should ensure that all types of sanctions, either special or general, accorded by the competent authority.
v. He should ensure that there is a provision of funds and the expenditure is incurred from the provision and the
same has been authorized by the competent authority.
vi. The auditor should check that the different schemes, programmes and projects, where large financial
expenditure has been incurred, are running economically and getting the expected results.

Q11. Mention any eight important points which an auditor will consider while conducting the audit of hospital.

Answer- Audit of Hospital: The points to be considered by the auditor during the audit of a Hospital are stated below:-
i. Income from Services: Vouch the Register of patients with copies of bills issued to them. Verify bills for a selected
period with the patients' attendance record to see that the bills have been correctly prepared. Also see that
bills have been issued to all patients from whom an amount was recoverable according to the rules of the
hospital.
ii. Collection of cash: Check cash collections as entered in the Cash Book with the receipts, counterfoils and other
evidence for example, copies of patients bills, counterfoils of dividend and other interest warrants, copies of
rent bills.
iii. Income from Investments: See by reference to the property and Investment Regis¬ter that all income that
should have been received by way of rent on properties, dividends, and interest on securities settled on the
hospital, has been collected.
iv. Legacies and Donations: Ascertain that legacies and donations received for a specific purpose have been
applied in the manner agreed upon.

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आशीवायद- Comprehensive Module For CA IPCC Auditing & Assurance C13 – Special Audit
v. Reconciliation of Subscriptions: Trace all collections of subscription and donations from the Cash Book to the
respective Registers. Reconcile the total subscriptions due (as shown by the Subscription Register and the
amount collected and that still outstanding).
vi. Authorisation and Sanctions: Vouch all purchases and expenses and verify that the capital expenditure was
incurred only with the prior sanction of the Trustees or the Managing Committee and that appointments and
increments to staff have been duly authorised.
vii. Grants and TDS: Verify that grants, if any, received from Government or local authority has been duly
accounted for. Also, that refund in respect of taxes deducted at source has been claimed.
viii. Budgets: Compare the totals of various items of expenditure and income with the amount budgeted for them
and report to the Trustees or the Managing Committee significant variations which have taken place.
ix. Internal Check: Examine the internal check as regards the receipt and issue of stores; medicines, linen,
apparatus, clothing, instruments, etc. so as to ensure that purchases have been properly recorded in the Stock
Register and that issues have been made only against proper authorisation.
x. Depreciation: See that depreciation has been written off against all the assets at the appropriate rates.
xi. Registers: Inspect the bonds, share scrips, title deeds of properties and compare their particulars with those
entered in the property and Investment Registers.
xii. Inventories: Obtain inventories, especially of stocks and stores as at the end of the year and check a
percentage of the items physically; also compare their total values with respective ledger balances.
xiii. Management Representation and Certificate: Get proper Management Representation and Certificate with
respect to various aspects covered during the course of audit.

RTP May 2014


Q12. Describe the salient features of Financial Administration of Local Bodies
Answer
Salient Features of Financial Administration of Local Bodies
i. Budgetary Procedure: The objective of local bodies budgetary procedure are financial accountability, control
of expenditure, and to ensure that funds are raised and moneys are spent by the executive departments in
accordance with the rules and regulations and within the limits of sanction and authorisation by the legislature
or Council. Different aspects covered in budgeting are determining the level of taxation, fees, rates, and laying
down the ceiling on expenditure, under revenue and capital heads.

ii. Expenditure Control: At the State and Central level, there is a clear demarcation between the legislature and
executive. In the local body, legislative powers are vested in the Council whereas executive powers are
delegated to the officers, e.g., Commissioners. All matters of regular revenue and expenditures are generally
delegated to the executive wing. For special situations like, reduction in property taxes, refund of security
deposits, etc., sanction from the legislative wing is necessary.

iii. Accounting System: Municipal Accounting System has been conventionally prepared under the cash system.
In the recent past however, it is being changed to the accrual system of accounting. The accounting system
is characterized by (a) subsidiary and statistical registers for taxes, assets, cheques etc., (b) separate vouchers
for each type of transaction, (c) compulsory monthly bank reconciliation, (d) submission of summary reports
on periodical basis to different authorities at regional and state level.

Q13. Draft an audit programme for conducting audit of accounts of a Local Body
Answer
RTP November 2014

Q14. State any five special points which you, as an auditor, would look into while examining the income and collection of
fund by an NGO engaged in providing relief work for flood victims.

Answer-
Five special points to be looked into while examining the income and collection of funds by an NGO engaged in
providing relief work for flood victims are:-

i. Grant donations and contributions received from various Government, other NGO, industry and
public should be checked with reference to the grant letter, bank statements and ensured that
they are properly accounted and banked.
ii. Foreign contribution received should be checked with reference to the correspondence receipt
issued, bank statement, conversion into local currency. It should be ensured that all such contributions are
as per RBI guidelines and be kept in separate bank account.
iii. In the case of any fund raising cultural or sports program, verify the internal control
system, mode of receipt and the authority accountable. Ensure that all collections are duly receipted and
deposited in the bank promptly.

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आशीवायद- Comprehensive Module For CA IPCC Auditing & Assurance C13 – Special Audit
iv. Check the fee received from members with the register of members.
v. Check interest and dividend received from investments with investment held.

Q15. You are approached by a partnership firm to list out the advantages that will accrue to them, if the accounts are
audited. State five important advantages.

Answer-
Advantages of audit of accounts of a partnership firm: Advantages are as follows (any five):

i. Audited accounts provide a convenient and reliable means of settling accounts between the partners
and thereby possibility of dispute among them is mitigated.
ii. On the retirement/death of a partner, audited accounts constitutes a reliable evidence for computing the
amount due to the retiring partner or representative of deceased partner.
iii. Audited accounts are generally accepted by the Income tax authorities for computing the
assessable income.
iv. Audited accounts are relied upon by banks for advancing loan.
v. negotiation for sale or admission of a new partner.
Audited accounts can be helpful in the
vi. It is an effective safeguard against any undue advantage being taken by a working partner
as against the non working partners.

November 2014 Exam


Q16. Mention 8 important points which an auditor will consider while conducting the audit of a school.

Audit of School: The special steps involved in the audit of school are the following:
(i) Examine the Trust Deed or Regulations in the case of school or college and note all the provisions affecting
accounts. In the case of a university, refer to the Act of Legislature and the Regulations framed there under.

(ii) Read through the minutes of the meetings of the Managing Committee or Governing Body, noting resolutions
affecting accounts to see that these have been duly complied with, specially the decisions as regards the
operation of bank accounts and sanctioning of expenditure.

(iii) Check names entered in the Students' Fee Register for each month or term, with the respective class registers,
showing names of students on rolls and test amount of fees charged; and verify that there operates a system
of internal check which ensures that demands against the students are properly raised.

(iv) Check fees received by comparing counterfoils of receipts granted with entries in the cash book and tracing
the collections in the Fee Register to confirm that the revenue from this source has been duly accounted for.

(v) Total up the various columns of the Fees Register for each month or term to ascertain that fees paid in advance
have been carried forward and the arrears that are irrecoverable have been written off under the sanction of
an appropriate authority.

(vi) Check admission fees with admission slips signed by the head of the institution and confirm that the amount
had been credited to a Capital Fund, unless the Managing Committee has taken a decision to the contrary.

(vii) See that free studentship and concessions have been granted by a person authorized to do so, having regard
to the prescribed Rules.

(viii) Confirm that fines for late payment or absence, etc., have either been collected or remitted under proper
authority.

(ix) Confirm that hostel dues were recovered before students' accounts were closed and their deposits of caution
money refunded.

(x) Verify rental income from landed property with the rent rolls, etc.

(xi) Vouch income from endowments and legacies, as well as interest and dividends from investment; also inspect
the securities in respect of investments held.

(xii) Verify any Government or local authority grant with the relevant papers of grant. If any expense has been
disallowed for purposes of grant, ascertain the reasons and compliance thereof.

(xiii) Report any old heavy arrears on account of fees, dormitory rents, etc, to the Managing Committee.

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आशीवायद- Comprehensive Module For CA IPCC Auditing & Assurance C13 – Special Audit
(xiv) Confirm that caution money and other deposits paid by students on admission have been shown as liability in
the balance sheet and not transferred to revenue.

(xv) See that the investments representing endowment funds for prizes are kept separate and any income in excess
of the prizes has been accumulated and invested along with the corpus.

(xvi) Verify that the Provident Fund money of the staff has been invested in appropriate securities.

(xvii) Vouch donations, if any, with the list published with the annual report. If some donations were meant for any
specific purpose, see that the money was utilized for the purpose.

(xviii) Vouch all capital expenditure in the usual way and verify the same with the sanction for the Committee as
contained in the minute book.

(xix) Vouch in the usual manner all establishment expenses and enquire into any unduly heavy expenditure under
any head.

(xx) See that increase in the salaries of the staff have been sanctioned and minuted by the Committee.

(xxi) Ascertain that the system ordering inspection on receipt and issue of provisions, foodstuffs, clothing and other
equipment is efficient and all bills are duly authorized and passed before payment.

(xxii) Verify the inventories of furniture, stationery, clothing, provision and all equipment, etc. These should be
checked by reference to Stock Register and values applied to various items should be test checked.

(xxiii) Confirm that the refund of taxes deducted from the income from investment (interest on securities, etc.) has
been claimed and recovered since the institutions are generally exempted from the payment of income-tax.

(xxiv) Verify the annual statements of accounts and while doing so see that separate statements of account have
been prepared as regards Poor Boys Fund, Games Fund, Hostel and Provident Fund of Staff, etc.

Q17. Mention any ten special points to be examined by you in the audit of Income and Expenditure of a Charitable
Institution running a hospital.

Audit of Hospital: While auditing the Income and Expenditure Account of a charitable institution running a hospital,
following special points may be examined:

(i) Verify the register of patients with duplicate copy of bills and patients admission record to see that bills
have been properly and correctly prepared for all the services, tests and treatments.

(ii) Check cash collections from patients by tracing the receipt issued into cash book.

(iii) Check receipt of interest, rent, dividend etc., with receipt counterfoil into cash book and bank book
and ensure that all such income has been duly accounted for.

(iv) Check collection of subscription, donations from the receipt issued, correspondence etc., into cash
book.

(v) Verify that all grants from government and other bodies have been duly accounted for and have been
applied in the manner as specified.

(vi) Verify all recurring nature of revenue expenditure, with necessary evidence like bill, authority, period
etc.

(vii) Examine the internal check as regards the receipt and issue of stores, medicines, linen etc., to ensure
that these have been properly recorded and issued/consumed only on proper authorization.

(viii) See that depreciation has been written off in respect of all the assets at appropriate rate and method
as in the earlier year.

(ix) Verify the receipts from supply of food and canteen receipts and compare the same with previous
year as regards number of patients.

(x) Ensure that all outstanding liabilities have been adequately provided for and similarly all accrued
incomes and receipts have been duly accounted for.

(xi) Obtain inventory of stock and stores as at the end of the year and physically check a percentage of
items.

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आशीवायद- Comprehensive Module For CA IPCC Auditing & Assurance C13 – Special Audit
May 2015 Exam

Q18. What are the advantages of the audit of the accounts of a partnership firm? (6 Marks)
Q19. State the important objectives of local body's audit. (4 Marks)

Objectives of Audit of Local Bodies: The external control of municipal expenditure is exercised by the state
governments through the appointment of auditors to examine municipal accounts. The municipal corporations
of Delhi, Mumbai and a few others have powers to appoint their own auditors for regular external audit. The
important objectives of audit are-
• reporting on the fairness of the content and presentation of financial statements;
• reporting upon the strengths and weaknesses of systems of financial control;
• reporting on the adherence to legal and/or administrative requirements;
• reporting upon whether value is being fully received on money spent; and
• detection and prevention of error, fraud and misuse of resources

RTP – November 2015

Q20. What procedure may be adopted by an auditor while auditing leasing transactions entered into by the leasing
company?
Q21. What are the special steps involved in conducting the audit of a University?

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Special Audit - NGO 01

Meaning Include Incorporated as

NGOs can be defi ned as non- religious organisations, Society under the societies Trust under India Trust Act, section 8 of the companies act,
profit making organisations voluntary registration act, 1860 1882 2013
health and welfare agencies,
charitable organisations,
hospitals, old age homes,
research foundations etc.
which raise funds from Auditors are appointed by Auditors are appointed by
members, donors or management of society or trust Members of the company
contributors

apart from receiving donation


of time, energy and
skills

for achieving their social


objectives like imparting
education, providing medical
facilities, economic assistance
to poor, managing disasters
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02 Special Audit NGO 02

Planning the Audit

Knowledge Knowledge Legal Form Organisation chart Minutes Accounting System Materiality level Involvement of experts Previous year report

NGO Work updating knowledge LF OC Examination To ascertain Study Set for audit purpose Involvement of expert Review the previous year’s
audit report

Mission Vision Area of operation Environment SA 315 Relevant statutes MOA Financial and administrative of Minutes Impact of any decision on the the accounting system, and their reports
manual financial records procedures, internal controls
and internal checks
existing for the NGO and
verify their applicability.
Income tax act 1961 Foreign Contribution Others AOA Board Managing Comm Governing body SA 500
(Regulation), Act 1976 Project and programme
guidelines

RR

Budgetary policies etc


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03 Special Audit NGO


part 3

Audit Programme

The audit programme should Liabilities / Reserves etc Assets Expenses


include in a sequential order all
assets, liabilities, income
and expenditure ensuring that
no material item is omitted.
Corpus Fund Reserves Ear-Marked Fund Loans Fixed Assets Investments Cash in Hand Bank Balance Inventory Programme and Project Establishment Expense
Expenses

Vouch with special reference to Vouch transfers from Vouch loans with loan Vouch all acquisitions / sale or In the case of immovable Check Investment Register and Verify further investments and Physically verify the cash in Check the bank reconciliation Verify inventory in hand and Verify that provident fund, life Also check other office
letters of donors projects / programmes with agreements, counterfoil of disposal of assets including property check title, etc. the investments physically dis- hand and imprest balances, at statements and ascertain obtain certifi cate from the Verify agreement with donor/ insurance premium, and administrative expenses
donors letters and receipt issued. depreciation and the ensuring investments for approval by the the details for management contributor(s) employees state insurance and such as postage, stationery,
board resolutions of NGO. authorisations for the same. that investments are in the appropriate authority close of the year and whether old outstanding and unadjusted for the quantities and valuation supporting the particular their administrative charges travelling, etc.
name of the NGO. it tallies with the books of amounts of the same. programme or project to are deducted,
account. ascertain the conditions with contributed and deposited
Check interest income with
Check board resolution respect to undertaking the within the prescribed time.
Investment register
of NGO, rules and regulations programme/project
COMPLIANCE PROCEDURE
of the schemes of the ear-
RIGHTS and OBLIGATION
marked funds.
ASSERTION
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04 Special Audit NGO


part 4

Receipts

Contribution and grants for Receipts from fund raising Membership fees Subscription Interest and Dividend
projects and programmes programmes

Membership register Classification Reconcile Subscription register Receipts issued Reconcile subscription received Reconcile the interest and
Check agreements Check compliance with FCRA Verify IC in detail Person responsible Collection is with dividends received and
with donors and grants letters receivable
to ensure that funds received with investments held during
have been the year.
Check fees received with is made between entrance and fees received with fees to be received during
accounted for.
Collection of funds mode of receipt Accounted and deposited in Membership Register. annual fees and life the year. Printing and dispatch of
bank membership
fees.

Magzine circulars periodicals


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Special Audit - NGO 01

Meaning Include Incorporated as

NGOs can be defi ned as non- religious organisations, Society under the societies Trust under India Trust Act, section 8 of the companies act,
profit making organisations voluntary registration act, 1860 1882 2013
health and welfare agencies,
charitable organisations,
hospitals, old age homes,
research foundations etc.
which raise funds from Auditors are appointed by Auditors are appointed by
members, donors or management of society or trust Members of the company
contributors

apart from receiving donation


of time, energy and
skills

for achieving their social


objectives like imparting
education, providing medical
facilities, economic assistance
to poor, managing disasters
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02 Special Audit NGO 02

Planning the Audit

Knowledge Knowledge Legal Form Organisation chart Minutes Accounting System Materiality level Involvement of experts Previous year report

NGO Work updating knowledge LF OC Examination To ascertain Study Set for audit purpose Involvement of expert Review the previous year’s
audit report

Mission Vision Area of operation Environment SA 315 Relevant statutes MOA Financial and administrative of Minutes Impact of any decision on the the accounting system, and their reports
manual financial records procedures, internal controls
and internal checks
existing for the NGO and
verify their applicability.
Income tax act 1961 Foreign Contribution Others AOA Board Managing Comm Governing body SA 500
(Regulation), Act 1976 Project and programme
guidelines

RR

Budgetary policies etc


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03 Special Audit NGO


part 3

Audit Programme

The audit programme should Liabilities / Reserves etc Assets Expenses


include in a sequential order all
assets, liabilities, income
and expenditure ensuring that
no material item is omitted.
Corpus Fund Reserves Ear-Marked Fund Loans Fixed Assets Investments Cash in Hand Bank Balance Inventory Programme and Project Establishment Expense
Expenses

Vouch with special reference to Vouch transfers from Vouch loans with loan Vouch all acquisitions / sale or In the case of immovable Check Investment Register and Verify further investments and Physically verify the cash in Check the bank reconciliation Verify inventory in hand and Verify that provident fund, life Also check other office
letters of donors projects / programmes with agreements, counterfoil of disposal of assets including property check title, etc. the investments physically dis- hand and imprest balances, at statements and ascertain obtain certifi cate from the Verify agreement with donor/ insurance premium, and administrative expenses
donors letters and receipt issued. depreciation and the ensuring investments for approval by the the details for management contributor(s) employees state insurance and such as postage, stationery,
board resolutions of NGO. authorisations for the same. that investments are in the appropriate authority close of the year and whether old outstanding and unadjusted for the quantities and valuation supporting the particular their administrative charges travelling, etc.
name of the NGO. it tallies with the books of amounts of the same. programme or project to are deducted,
account. ascertain the conditions with contributed and deposited
Check interest income with
Check board resolution respect to undertaking the within the prescribed time.
Investment register
of NGO, rules and regulations programme/project
COMPLIANCE PROCEDURE
of the schemes of the ear-
RIGHTS and OBLIGATION
marked funds.
ASSERTION
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04 Special Audit NGO


part 4

Receipts

Contribution and grants for Receipts from fund raising Membership fees Subscription Interest and Dividend
projects and programmes programmes

Membership register Classification Reconcile Subscription register Receipts issued Reconcile subscription received Reconcile the interest and
Check agreements Check compliance with FCRA Verify IC in detail Person responsible Collection is with dividends received and
with donors and grants letters receivable
to ensure that funds received with investments held during
have been the year.
Check fees received with is made between entrance and fees received with fees to be received during
accounted for.
Collection of funds mode of receipt Accounted and deposited in Membership Register. annual fees and life the year. Printing and dispatch of
bank membership
fees.

Magzine circulars periodicals


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05 Special Audit LLP 01

Basics

Governing Law Books of Accounts Audit Return Power of registrar Documents available for
inspection by anyone

LLP Act 2008 LLP Rules 2009 annual accounts reflecting true “Statement of Accounts and Content Shall be in accordance with When audit is not required Annual Return Obtain Information Power to summon
and fair Solvency” in prescribed form Rule 24 of LLP, Rules 2009 Incorporation document Names of partners an changes statement of accounts and Annual return The fees for such inspection of
view of its state of affairs shall be filed by every LLP made therein, if any solvency an LLP is Rs 50/- and fees for
with the Registrar every year. certifi ed copy or extract
of any document shall Rs. 5/-
Highly inspired by Companies Sum of money Assets and Liabilities COGS etc Other turnover does not exceed, in However, if the partners of Every LLP would be required to The annual return will be as may be considered any designated partner,
per page
Act. any financial year, forty lakh such limited liability fi le annual return in Form 11 available for public inspection necessary partner or employee of the
How System rupees, or whose contribution partnership decide to get the with ROC within 60 days on LLP.
shall be filed within a period of Form 8 does not exceed twenty accounts of such LLP audited, of closer of financial year. payment of prescribed fees to
thirty days from the end of six five lakh rupees, is not required the Registrar.
Particulars of all sums of A record of the assets and Statements of costs of goods Any other particulars which
months the to get its accounts audited. accounts shall be audited only
money received and expended liabilities of the LLP, purchased, inventories, work- the partners may decide. from any designated partner,
financial year to which the in accordance with such rule.
Cash Accrual Double entry system by the LLP and the in-progress, fi nished partner or employee of the In case
Statement of Account and
matters in respect of which goods and costs of goods sold, LLP.
Solvency relates.
the receipt and expenditure
takes place,

the the Registrar is not satisfi ed


information has not been with
furnished to him or the information furnished to
him.
-

-
06 Special Audit LLP 02

Appointment of Auditor

By Time To fill Designated partner fails

Designated partner of LLP First FY Other than first FY Casual vacancy Casual Vacancy Other partners may appoint

At any time but before the at least 30 days prior to the in the office of the auditor Caused by removal of auditor
ends of the financial year end of each FY
06 Special Audit LLP 03

Advantage or purpose of Audit

Detecting error and frauds and Dispute settlement Banks and financial institution Improving the management Settling of accounts
verification of financial
statements

Disputes, if any between any Banks & fi nancial institutions Periodical visits & suggestions For settling accounts between
partners in the matter of lend money to the fi rms only by the auditor will be helpful partners at the time of
Auditing the accounts of a LLP accounts can be settled on the basis of audited in improving the admission, death, retirement,
helps in detecting errors & with the help of audited accounts. management of the LLP. insolvency, insanity, etc audited
frauds & verifi cation of accounts. accounts are accepted by those
fi nancial statements. concerned who
have dealings with the LLP.
08 Special Audit LLP 04

Auditor’s duty regarding Audit


of LLP

Definite Instructions Mention Read LLP agreement & note Minute book
the following

The auditor should get defi nite Records Obtain Restriction If partners maintain minute
instructions in writing as to the Name of business of LLP Borrowing powers of the LLP. book he shall refer it for any
work to be resolution passed
performed by him. regarding the accounts

Whether Whether Whether


Amount of capital contributed Rights & duties of partners.
by each partner.

records of the fi rm appear to Whether he was able to obtain any restriction was imposed
be correct & reliable. all information & explanation upon him. Method of settlement of
necessary for Interest – in respect of accounts between partners at
his work. additional capital contributed. the time of admission,
retirement, admission etc.

Duration of partnership.
Any loans advanced by the
partners.

Drawings allowed to the


partners.
Profi t sharing ratio

Salaries, commission etc


payable to partners.
आशीवायद- Comprehensive Module For CA IPCC Auditing & Assurance C12 – Vouching

Chapter – 12 VOUCHING
MEANING
• The act of examining vouchers is referred to as vouching.
• Vouching is an inspection by an auditor of documentary evidence supporting and substantiating transactions.

OBJECTIVE OF VOUCHING
• It is the practice in an audit with the objective of establishing the authenticity of the transaction recorded in the
primary books of account.
• It is through vouching that the auditor comes to know of the genuineness of transaction.

DOCUMENTARY EVIDENCE
It essentially consists of verifying a transaction recorded in the books of account with the
• relevant documentary evidence and
• the authority on the basis of which the entry has been made;
• also confirming that the amount mentioned in the voucher has been posted to an appropriate account which
would disclose the nature of the transaction on its inclusion in the final statements of account.

ON THESE CONSIDERATIONS, THE ESSENTIAL POINTS TO BE BORNE IN MIND WHILE EXAMINING A


VOUCHER ARE (Imp)

(i) That the date of the voucher falls within the accounting period; (Substantive Procedure - Measurement)
(ii) That the voucher is made out in the client’s name; (Substantive Procedure – Rights & Obligation)
(iii) That the voucher is duly authorised; (Proper internal control)
(iv) That the voucher comprised all the relevant documents which could be expected to have been received or
brought into existence on the transactions having been entered into; i.e., the voucher is complete in all
respects;(Substantive Procedure – Completeness)
(v) That the account in which the amount of the voucher is adjusted is the one that would clearly disclose the
character of the receipts or payments posted thereto on its inclusion in the final accounts. (Substantive Procedure
– Presentation and disclosure)

RUBBER STAMP/INITIALS
After the examination is over, each voucher should be either impressed with a rubber stamp or initialled so that it may not
be presented again in support of another entry.

VOUCHER - MEANING
A voucher is a documentary evidence in support of any transaction in books of account. Without vouchers,
vouching cannot be done. Vouchers are integral part of vouching. Voucher can originate within the organisation or
outside the organisation i.e. they can be internal or external

TYPES OF VOUCHERS
VOUCHERS ARE OF TWO TYPES:
a. Primary vouchers – All written evidence in original are primary vouchers e.g., a purchases invoice or cash memo etc.
b. Collateral Vouchers- Copies of original vouchers are called collateral vouchers, e.g., carbon copy of sales invoice, a
copy of resolution passed at Board Meeting etc.

GENERAL GUIDELINES FOR VOUCHING/VERIFICATION


1. General Expenses
Obtain a schedule form the client.
No personal expenses have been charged to revenue account.

CA Neeraj Arora Page 12.1


आशीवायद- Comprehensive Module For CA IPCC Auditing & Assurance C12 – Vouching
Outstanding/Prepaid expenses
If expenditure is in foreign currency, check permission of RBI if required.
Also consider Relevant AS

2. General Income
Fully Accounted for (Advance and outstanding point is very important)
Provision for bad & doubtful debts – Provision should be there if it was unrecoverable.
AS 9 COMPLIANCE
Discounts, if any
TDS (Gross up)

3. RENT/ COMMISSION/ ROYALTY/ INSURANCE/ HIRE PURCHASE


Examine agreement and the terms and conditions from the agreement.
Check whether the calculations have been done as per the terms mentioned in the agreement.

4. STATUTORY PAYMENTS
E-payment challan.
Compliance with the requirements of the statute.
Examine assessment orders and returns filed.
Check whether there is any dispute regarding the amount payable.
Check reporting requirements under of CARO.

5. LOANS
MOA/ AOA (if company)
Agreement & Terms & Conditions
Board meeting/ General meeting resolution
Purpose of loan and utilisation thereof
Securities offered
Disclosure

6. GENERAL WORDS TO BEGIN THE SENTENCES FOR VOUCHING/ VERIFICATION


Examine
Verify
Ensure
Test Check
Ascertain
Inspect
See
Obtain

7. LAST POINT GENERALLY


Check compliance with the respective Accounting Standards/ CARO/ Schedule III

8. STANDARDS ON AUDITING REFERENCE


SA 580 - Written Representations
SA 505 - External Confirmations
SA 520 - Analytical Procedures
SA 620-Auditor's Expert
SA 500 (Management expert), Audit techniques
SA 501 in case of Inventory, Litigation and Claims and Segment information
Others

CA Neeraj Arora Page 12.2


आशीवायद- Comprehensive Module For CA IPCC Auditing & Assurance C12 – Vouching

9. TRADING TRANSACTIONS- PURCHASES/ SALES/ INVENTORY


Cut-Off procedures

10. GENERAL POINTS


Internal Controls
Authorisation
Accounting Entry
Bank Statement
Vouchers are serially numbered
Minutes of meeting

11. FIXED ASSETS- TANGIBLE


Existence - Physical Verification
Ownership - Title Deed/ Purchase Deed
Incidental Expenses
Charges, if any
Purchase/ sale during the year
Valuation\ Revaluation
Disclosures
AS 6 & AS 10 Compliance

12. FIXED ASSETS- INTANGIBLE


Existence/ Ownership
Purchase/ Renewal/ Expiry
Amortisation
Registration
In house Development
AS 26 Compliance

13. LIABILITIES
Nature of the liability
Internal controls
Whether all liabilities accounted for
Properly valued
Properly classified
Properly disclosed
Obtain Written Representations
Contingent liabilities correctly disclosed

CUT - OFF PROCEDURES (Most important)

MEANING

• Accounting is a continuous process


• because the business never comes to halt.
• It is, therefore, necessary that transactions of one period
• would be separate from those in the upcoming period
• so that the results of the working of each period can be correctly ascertained.
• The arrangement that is made for the purpose is technically known as "Cut-off arrangement".

CA Neeraj Arora Page 12.3


आशीवायद- Comprehensive Module For CA IPCC Auditing & Assurance C12 – Vouching

TRADING TRANSACTIONS
Cut-off procedures are generally applied to trading transactions.

EXAMINATION BY AUDITOR
For this purpose, the auditor satisfies by examination and test checks that the cut-off procedures adequately
ensure that:

GOODS PURCHASED
(i) Goods purchased, property in which has passed to the client, have in fact been included in the
inventories and that the liability has been provided for in case of credit purchase; and

GOODS SOLD
(ii) Goods sold have been excluded from the inventories and credit has been taken for such sales. If the
value of sales is to be received, the concerned party has been debited.

SAMPLE OF DOCUMENTS
The auditor may examine a sample of documents evidencing the movement of stocks into and out of
stores, including documents pertaining to period shortly before and after the cut-off date and check whether
stocks represented by those documents were included or excluded, as appropriate, during stock taking
because this directly affects the profitability of the business.

Verification – Meaning

▪ Verification is a process to verify the


o Ownership,
o Valuation,
o Possession and
o Existence of a particular Asset or liability.
▪ Verification establishes the correspondence of actual facts or details with those represented in accounts.

Vouching Vs Verification

Basis Vouching Verification


1.Meaning Act of examining vouchers i.e. Process to verify the ownership,
documentary evidences in support of valuation, possession & existence
transactions of a particular asset or liability.
2.Scope Narrow Wide
3.Object Verify the authority, authenticity and Satisfy as to existence, ownership,
genuineness of transactions. possession, valuation and
disclosure of items.
4. Level of expertise Done by junior level assistants Done by senior assistants and auditor
himself.
5.Relationship with P&L A/C & some B/s items. Only B/S items
financial statements
6. Time period Throughout the year End of the year

Verification vs. Valuation

Basis Verification Valuation


1.Scope Includes valuation Is a part of verification
2.Object To verify existence, ownership, To ensure assets have been valued
possession and valuation according to generally accepted
accounting principles.
3.Responsibility Auditor Management

CA Neeraj Arora Page 12.4


आशीवायद- Comprehensive Module For CA IPCC Auditing & Assurance C12 – Vouching

Objectives of Verification of Assets

1. Cost To ascertain the cost of Asset to the entity.


2. Authorisation To ascertain that the transactions w.r.t. asset are authorised.
3. Valuation To find out the accuracy of valuation of Asset.
4. Existence To ensure that the particular Asset is actually in existence.
5. Charge To ascertain the charge, if any, created on that particular Asset.
6. Ownership To ascertain the actual ownership title of that particular Asset.
7. Disclosure To check appropriate disclosure of the Asset in the books of Accounts.
Vouching & Verification
November 2011 Exam
Q1. Vouching of payment of taxes. (5 Marks)
Answers- Vouching of Payment of Taxes:
(i) Obtain the computation of income prepared by the auditee and verify whether it is as per the Income-tax Act,
1961 and Rules made there under.
(ii) Review adjustments, expenses disallowed, special rebates etc. with particular reference to the last available
completed assessment.
(iii) Examine relevant records and documents pertaining to payment of advance tax, self-assessment tax and other
demands.
(iv) Payment on account of income-tax and other taxes consequent upon a regular assessment should be verified
by reference to the copy of the assessment order, assessment form, notice of demand and the receipted
challan.
(v) Payments or advance payments of income-tax should also be verified with the notice of demand and the
receipted challan acknowledging the amount paid.
(vi) The interest allowed on advance payments of income-tax should be included as income and penal interest
charged for non-payment should be debited to the interest account.
(vii) Ensure that the requirements of AS 22 on 'Accounting for Taxes on Income' have been appropriately followed
for the period under audit.

Q2. Audit of sale of Investments


Audit of Sale of Investments:
(i) See that sale of investment has been made on the proper authorization of Board or other competent authority.
(ii) Ascertain the method of selling investments. It may be either through broker, directly or through a bank. See the
broker's sold note.
(iii) See that the difference between the carrying amount and the sales proceeds, net of expenses, is recognized in the
Profit & Loss Account. Ensure that when only a part of the holding of an individual investment is sold, the carrying
amount is allocated on the basis of average carrying amount of the total holding of the investments.
(iv) See that proper disclosures as required by AS 13 are made as follows:
(1) Interest, dividends, rentals on investments are to be shown in P& L A/c at Gross Value and TDS as advance tax paid.
(2) Showing separately profit & Loss on disposal and changes in carrying amount of current and long term investments.

Q3. What procedure an auditor should adopt to test the authenticity of cash at bank. (5 Marks)

Answer-
Verification of Cash at Bank: While testing the authenticity of cash at bank, the following areas may be considered
by the auditor:

(i) Apart from comparing the entries in the cash book with those in the Pass Book the auditor should obtain a certificate
from the bank confirming the balance at the close of the year as shown in the Pass Book.

(ii) Examine the bank reconciliation statement prepared as on the last day of the year and see whether (a) cheques
issued by the entity but not presented for payment, and (b) cheques deposited for collection by the entity but not
credited in the bank account have been duly debited/credited in the subsequent period.

(iii) Pay special attention to those items in the reconciliation statements which are outstanding for an unduly long period.
The auditor should ascertain the reasons for such outstanding items from the management. He should also examine
whether any such items require an adjustment write-off.

(iv) Examine relevant certificates in respect of fixed deposits or any type of deposits with banks duly supported by bank
advices.

(v) The auditor should examine the possibility, that even though the balance in an apparently inoperative account may
have remained stagnant, transactions may have taken place in that account during the year.

CA Neeraj Arora Page 12.5


आशीवायद- Comprehensive Module For CA IPCC Auditing & Assurance C12 – Vouching
(vi) In relation to balances/deposits with specific charge on them, or those held under the requirements of any law, the
auditor should examine that suitable disclosures are made in the financial statements.

(vii) Remittances shown as being in transit should be examined with reference to their credit in the bank in the subsequent
period. Where the auditor finds that such remittances have not been credited in the subsequent period, he should
ascertain the reasons for the same. He should also examine whether the entity has reversed the relevant entries in
appropriate cases.

(viii) The auditor should examine that suitable adjustments are made in respect of cheques which have become stale as
at the close of the year.

(ix) Where material amounts are held in bank accounts which are blocked, e.g. in foreign banks with exchange control
restrictions or any banks which are under moratorium or liquidation, the auditor should examine whether the relevant
facts have been suitably disclosed in the financial statements. He should also examine whether suitable adjustments
on this account have been made in the financial statements in appropriate cases.

(x) Where the auditor finds that the number of bank accounts maintained by the entity is disproportionately large in
relation to its size, the auditor should exercise greater care in satisfying himself about the genuineness of banking
transactions and balances.

Q4. Disclosure requirements of debtors in the financial statements. (5 Marks)

Answer-
Disclosure Requirements of Debtors in Financial Statements:
1. Classification by Age
(i) Debtors outstanding for a period exceeding 6 months and
(ii) Other debts.
The amount of provision for doubtful debts shall be shown separately. This is called classification by Age.

2. Classification by nature:
(i) Debts considered good and in respect of which the company is fully secured.
(ii) Debts considered good for which the company holds no security other than the debtor's personal security and
(iii) Debts considered doubtful or bad.

3. Classification by party:
(i) Debts due by the Directors or other officers of the company, or any of them severally or jointly with any other person.
(The term "officer" includes any Director, Manager, or secretary but not auditor).
(ii) Debts due by Firms or private companies respectively in which any director is a partner or a director or a member, as
the case may be.
(iii) Debts due from other companies under the same management along with names of companies concerned.
The maximum amount due, by directors or other officers of the company at any time during the year to be shown by
way of a note.

4. Provisions: Provisions shown herein should not ensure the amount of the debts considered doubtful or bad-surplus
provided, if any shall be shown as revenue under the head "reserves and surplus" under the heading "Reserve for
Doubtful or bad debts".

5. Excluded items: The amounts to be shown under sundry debtors shall include the amounts due in respect of goods
sold or services rendered or in respect of other contractual obligations, but shall not include the amounts which are
in the nature of loans or advances.

Q5. Verification of assets acquired on lease.


Verification of Assets acquired on Lease:
(i) Examine the terms and conditions of the lease deed.
(ii) If a part of the leasehold property has been sublet, examine the tenant's agreement.
(iii) Verify relevant document to check the cost of property.
(iv) In case of acquisition of an asset is on operating lease, lease payment should be recognized as an expense in the
statement of profit and loss account on a straight line basis over the lease term.
(v) In case of acquisition of an asset is on finance lease, ensure all the substantial risks and rewards to ownership are
transferred, considering the indication as prescribed in AS-19, the lessee should recognize the lease as an asset and
as a liability. Such recognition should be at an amount equal to the fair value of the leased assets at the inception of
the lease. Ensure contingent rents are recognized as expense in the statement of profit & loss for the period in case
of Finance lease.

(vi) Ensure assets acquired under finance lease are segregated from the assets owned.
(vii) Ensure that the assets under lease have been properly disclosed as per requirement of Schedule VI

CA Neeraj Arora Page 12.6


आशीवायद- Comprehensive Module For CA IPCC Auditing & Assurance C12 – Vouching

May 2012 Exam


Q6. How will you verify/ vouch the retirement gratuity to employees? (6 Marks)

Answer-
Vouching /Verification of Retirement Gratuity to Employees
i. Examine the basis on which the gratuity payable to employees is worked out. The liability for gratuity may either be
worked out on actuarial rules or agreement or on the presumption that all employees retire on the balance sheet
date.
ii. Verify computation of liability of gratuity on the aggregate basis.
iii. Check the amount of gratuity paid to employees who retired during the year with reference to number of years of
service rendered by them.
iv. See that the annual premium has been charged to Profit and Loss account in case the concern has taken a policy
from LIC.
v. Ensure that the basis of computing gratuity is valid.
vi. Ensure that the accounting treatment is in accordance with AS 15, "Accounting for Retirement Benefits in the
Financial Statements".

November 2012 Exam

Q7. Explain, what are the factors to be considered while "Vouching of travelling expenses” (8 Marks)

Answer-
The following factors are to be considered while "Vouching of Travelling Expenses":
(i) Travelling expenses are normally payable to staff according to rules approved by directors or partners. Where no rules
exist, the auditor should recommend that these be framed for controlling the expenditure. In the absence of T.A.
Rules, the expenditure should be vouched on the basis of actual expenditure incurred. A voucher should be
demanded for all items of expenses incurred, except those which are capable of independent verification.
(ii) As regards travelling expenses claimed by directors the auditor should satisfy himself that these were incurred by them
in the interest of the business and that the directors were entitled to receive the amount from the business.
(iii) The voucher for travelling expenses should normally contain the under mentioned information:
→ Name and designation of the person claiming the amount.
→ Particulars of the journey.
→ Amount of railway or air fare.
→ Amount of boarding or lodging expenses or daily allowance alongwith the dates and times of arrival and
departure from each station.
→ Other expenses claimed
(iv) If the journey was undertaken by air, the counterfoil of the air ticket should be attached to the voucher; this should
be inspected. For travel by rail or road, the amount of the fare claimed should be checked from some independent
source.
(v) Particulars of boarding and lodging expenses and in the case of halting allowance the rates thereof should be
verified.
(vi) The evidence in regard to sundry expenses claimed is generally not attached to T.A. bills. So long as the amount
appears to be reasonable it is usually not questioned. All vouchers for travelling expenses should be authorised by
some responsible official. In the case of foreign travel or any extraordinary travel, the expenses, before being paid,
should be sanctioned by the Board.
(vii) The travelling advance taken, if any, should be settled on receipt of final bills. At the year end, the amount not settled
should be shown appropriately in the Balance Sheet.
(viii) Unless the articles specifically provide or their payment has been authorised by a resolution of shareholders, directors
are not entitled to charge travelling expenses for attending Board Meetings.

Q8. Audit of discounted bills receivable dishonoured.


Answer-
Audit of Discounted Bills Receivable Dishonoured
(i) Obtain the schedule of discounted bills receivable dishonoured.
(ii) Check the entry in bank statement regarding the amount of bills dishonoured and see that the bank has debited the
account of client.
(iii) Verify the bills receivable returned by the bank along with bank's advice.

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(iv) See that the dishonoured bills have been noted and protested by following the proper procedure and the account
of the drawee or the debtor is also debited.
(v) Check that bank commission, if any, charged by the bank has been recovered from the party.

May 2013 Exam

Q9. How will you vouch/verify the followings?


i. Purchase with invoice
ii. Patterns, dies, loose tools etc.
iii. Work-in-Progress

Answer-

i. Purchase with invoice: While vouching entries for purchases with the invoices, the following points should be specially
observed:

a. that the date of invoice falls within the accounting period;


b. that the invoice is made out in the name of the client;
c. that the supplier's account has been credited with the full amount of the invoice and that the deduction in the
amount of the invoice, if any, has been made on a proper basis;
d. that the goods purchased are those that are regularly dealt in by the concern or required for the process of
manufacture carried on by it and that the price payable has been correctly arrived at;
e. that the cost of purchases has been debited to an appropriate nominal account or accounts;
f. that the invoice is signed by the accountant to show that he has verified it as well as the store-keeper to indicate
that the delivery of goods have been taken by him. If the invoice relates to the purchase of a technical store
or a chemical, the price whereof is dependent on its quality, a copy of the report of a technical person showing
that the article purchased is of the specification for which the order has been placed; and
g. that the manager or some other official, competent to sanction payment, has authorized its payment.

ii. Patterns, Dies, Loose Tools, etc.: Several entities have large investments in such assets which have a relatively short
useful life and low unit cost. Evidently, it is a difficult matter, under the circumstances, to prepare a separate account
for each such asset although a careful control over such property is necessary.

On these considerations, some entities charge off small tools and other similar items to Production Account as and
when they are purchased and do not place any value on the unused stock on the Balance Sheet. Nevertheless, a
record of issues and receipts of tools to workmen is kept, as a check on the same being pilfered and a memorandum
stock account of dies and patterns is also maintained. In other concerns, the cost of tools, dies, etc. purchased is
debited to appropriate assets account, and an inventory of the unused items at the end of the year is prepared and
valued; the sum total of opening balance and purchase reduced by the value of closing stock, as disclosed by the
inventory, is charged off to Production Account in respect of such assets. On the other hand, some concerns carry
such assets at their book values at the end of the first year and charge off the cost of all the purchases in the
subsequent year to the Production Account on the plea that they represent cost of replacement.

The most satisfactory method, however, is that of preparing an inventory of serviceable articles, at the close of each
year, and revaluing the assets on this basis, the various articles included in the inventory being valued at cost. It should
be seen that the inventory does not include any worn out or defective articles the life of which has already run out.

iii. Work-in-Progress: The audit procedures regarding work-in-progress are similar to those used for raw materials and
finished goods. However, the auditor has to carefully assess the stage of completion of the work-in-progress for
assessing the appropriateness of its valuation. For this purpose, the auditor may examine the production/costing
records (i.e., cost sheets), hold discussions with the personnel concerned, and obtain expert opinion, where
necessary. The auditor may advise his client that where possible the work-in-progress should be reduced to the
minimum before the closing date. Cost sheets of work-in-progress should be verified as follows:

a. Ascertain that the cost sheets are duly attested by the works engineer and works manager.
b. Test the correctness of the cost as disclosed by the cost records by verification of quantities and cost of
materials, wages and other charges included in the cost sheets by reference to the records maintained in
respect thereof.
c. Compare the unit cost or job cost as shown by the cost sheet with the standard cost or the estimated cost
expected.
d. Ensure that the allocation of overhead expenses had been made on a rational basis.
e. Compare the cost sheet in detail with that of the previous year. If they vary materially, investigate the cause
thereof.
f. Ensure that the Work-in-Progress as at Balance Sheet date has been appropriately disclosed in Balance Sheet
as per the requirements of Part I of Revised Schedule VI (applicable w.e.f. 1.4.2011) to the Companies Act, 2013

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November 2013 Exam

Q10. How will you vouch and verify the following?


(a) Remuneration paid to directors.
(b) Assets acquired on hire purchase.
(c) Profit or loss arising on sale of plots held by real estate dealer.
(d) Advertisement expenses.

Answer-
a. Remuneration paid to Directors
i. Refer to General Meeting or Board meeting resolution for the appointment and terms of appointment of the
director.
ii. Examine Articles of Association and general meeting resolution to determine the mode of payment-monthly,
quarterly, or by way of commission.
iii. Check agreement with the director.
iv. Verify director's attendance in the board meetings.
v. Ensure compliance with the provisions of Sections 198, 309, 349 and 350 and Schedule XIII of the Companies
Act, 2013, where appropriate.
vi. Check computation of the net profits and the commission payable to directors in terms of Revised Schedule VI
to the Companies Act, 2013.
vii. Computation of net profit under section 349 with details of the commission payable as percentage of profits to
the directors including Managing Directors/Manager (if any) should be stated by way of note.

b. Assets acquired on Hire purchase


i. Examine the Board's minutes book approving the purchase on Hire Purchase terms
ii. Examine the Hire Purchase Agreement carefully & note the description of the machinery and cost of machinery,
Hire Purchase charges, terms of payment and rate of purchase
iii. Assets acquired under Hire Purchase system should be recorded at full cash value with corresponding liability
of the same amount. In case cash value is not readily available, it should be calculated presuming an
appropriate rate of interest
iv. Hire Purchased assets are shown in Balance Sheet with appropriate narration to indicate that the enterprise
does not have full ownership thereof. The interest payable along with each installment, whether separately or
included therein, should be debited to the interest account, and not to the asset account.

c. Profit or loss arising on sale of plots held 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. Profit or loss arising on sale of plots of land by Real
Estate 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 respect 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 verified 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.

d. Advertisement Expenses: The following steps may be taken by the auditor tovouch/verify the different items:
i. Ascertaining the value of advertisement expenses to ensure that the said expense has been properly allocated.
ii. Examining that such expenses relate to the client's business.

iii. Review and examination of the complete list of media of advertisement indicating the dates, location, timing,
etc., along with the amounts paid in respect of each category.

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iv. Examination of the receipts for amounts paid.
v. Reviewing the contracts with the different agencies and ensuring that the billing conforms to the term and
conditions specified therein.
vi. Ensuring that all such outstanding expenses have been properly accounted for.

RTP November 2013

Q11. Leam Well School, an educational institute deposits all of its collection/receipt in separate collection account of bank.
Being an auditor mention any six points to be considered by you, while verifying the correctness of bank balance.
Answer-
For verifying the balances lying with bank in collection account, the auditor should adopt following procedure:

a. Examine and compare the pay-in-slips with the entries in the ledger account of the educational institute.
b. Check the casting, carry forwards and balancing of ledger account.
c. Compare the entries in the ledger account with the bank statement.
d. Review the bank reconciliation statement for its correctness.
e. Scrutiny the subsequent period bank statement to ensure that items of reconciliation are subsequently cleared.
f. Verify the balance confirmation certificate, (b) Ledger Keeper & Frauds

Q12. List out some examples of fraud that can be done by ledger keeper in Bought ledger and sales ledger
Answer-
Examples of frauds that can be done by ledger keeper in bought ledger:
a. Crediting the account of a supplier on the basis of a fictitious invoice, showing that certain supplies have been
received from the firm, whereas in fact no goods have been received or on the basis of duplicate invoice from
a supplier, the original amount whereof has already been adjusted to the credit of the supplier in the Bought
Ledger, and subsequently misappropriating the payment made against the credit in the supplier's accounts.
b. Suppressing a credit note issued by a supplier in respect of return or an allowance and misappropriating an
amount equivalent thereto out of the payment made to him. For if a credit note issued by a supplier either in
respect of goods returned to him or for an allowance granted by him, is not debited to his account, the balance
in his account in the Bought Ledger would be larger than the amount actually due to him. The ledger-keeper
thus will be able to misappropriate the excess amount standing to the supplier's credit.
c. Crediting an amount due to a supplier not in his account but under a fictitious name and misappropriating the
amount paid against the credit balance.

Examples of frauds that can be done in sales ledger:


a. Teeming and Lading: Amount received from a customer being misappropriated; also to prevent its detection
the money received from another customer subsequently being credited to the account of the customer who
has paid earlier. Similarly, moneys received from the customer who has paid thereafter being credited to the
account of the second customer and such a practice is continued so that no one account is outstanding for
payment for any length of time, which may lead the management to either send out a statement of account
to him or communicate with him.
b. Adjusting an unauthorised credit or fictitious rebate, allowance, discount, etc. in the account with a view to
reduce the balance and when payment is received from the debtor, misappropriating an amount equivalent
to the credit.
c. Writing off the amount receivable from a customer's bad debt account and misappropriating the amount
received in payment of the debt.

Q13. How would you vouch/verily the following?


(a) Rental Receipts.
(b) Assets acquired on Hire-purchase.
(c) Cash Sales.
(d) Sale of Investments.
Answer-
a. Rental Receipts
i. Check copies of bills or rent receipt issued to the tenant with reference to tenancy agreement and bills of
charges paid by the landlord on behalf of tenants.
ii. The entries in the rental register in respect of rent accrued should be traced with reference to copies of rental
bills.
iii. Scrutinize the account of collecting agent when the rent is collected by such agent.
iv. Vouch the entries for rent received in advance and ensure proper adjustment is made.
v. Investigate into abnormal rent outstanding.
vi. Reconcile the outstanding rent and see that proper provision is made if unrecoverable.

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vii. If rent is received net of TDS, see that rent income is shown at gross and TDS is shown in Balance Sheet as
advance Tax.

(b) Assets acquired on Hire purchase


i. Inspect the hire purchase agreement to ascertain the terms and condition, the installment and amount of
interest included in the installment.
ii. Ensure that these are treated as assets acquired under finance lease as per AS-19.
iii. Verify that initial recognition of lease should be as an asset and a liability at equal amounts.
iv. If it is reasonably certain that lessee will get ownership at the end of the term, see that asset is depreciated over
its useful life. Otherwise confirm that asset is depreciated over the shorter of its useful life and the lease term.
v. Ensure that it is shown separately in the Balance Sheet.

(c) Cash Sales


i. Examine the system of internal check to ascertain any loopholes therein.
ii. Ascertain the practice followed in the matter of issuing cash memos and trace the memos into cash sale
summary.
iii. Ensure that the date of cash memos tally with the entry in the cash book/summary.
iv. Verify that prices of goods sold have been correctly recorded and check the calculation.
v. Verify the entry in the goods outward book with the sales summary.
vi. See that the cancelled cash memos are not removed from the receipt book.

(d) Sale of Investments


i. See that sale of investment has been made on the proper authorisation of Board or other competent authority.
ii. Ascertain the method of selling investments. It may be either through broker, directly or through a bank. See
the broker's sold note.
iii. See that the difference between the carrying amount and the sales proceeds, net of expenses, is recognised
in the Profit & Loss Account. Ensure that when only a part of the holding of an individual investment is sold, the
carrying amount is allocated on the basis of average carrying amount of the total holding of the investments.
iv. See that proper disclosures as required by AS 13 are made as follows:
v. Interest, dividends, rentals on investments are to be shown in P& L A/c at Gross Value and TDS as advance tax
paid.
vi. Showing separately profit & Loss on disposal and changes in carrying amount of current and long term
investments.

May 2014 Exam

Q14. As an auditor what are the essential points to be borne in mind while examining a voucher? (5 Marks)
Answer-
Examining a Voucher: The essential points to be borne in mind while examining a voucher are:
i. that the date of the voucher falls within the accounting period;
ii. that the voucher is made out in the client's name;
iii. that the voucher is duly authorised;
iv. that the voucher comprised all the relevant documents which could be expected to have been received or
brought into existence on the transactions having been entered into, i.e., the voucher is complete in all
respects; and
v. that the account in which the amount of the voucher is adjusted is the one that would clearly disclose the
character of the receipts or payments posted thereto on its inclusion in the final accounts.
After the examination is over, each voucher should be either impressed with a rubber stamp or initialed so that it may
not be presented again in support of another entry.

Q15. How will you vouch/verify the following?


(a) Preliminary expenses
(b) Building
(c) Recovery of bad debts written off
(d) Cut-off arrangement/procedures. (4x4= 16 Marks)

Answer
(a) Preliminary Expenses: The auditor takes following steps to vouch/verify preliminary expenses:

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i. Expenditure incidental to creation and floating of a company includes stamp duties, registration fees,
legal costs, accountant's fees, cost of printing, etc. All such kind of expenses should be related to the
formation of the enterprise.
ii. Contracts relating to preliminary expenses should be examined with all preliminary expenses, relevant
supporting documents should be there.

iii. He should examine company's minute's book to determine the pattern of writing off of the preliminary
expenses over the period.
iv. He must check that if such kinds of expenses are incurred by the promoters or they have been
reimbursed to the promoters, it is as per the instructions of the BOD and the powers in AOA.
v. He should make a cross check of the amount of preliminary expenses with that of amount mentioned
in the prospectus, statutory report and balance sheet. Any amount in excess should be approved by
the shareholders.

(b) Buildings:
i. Examine the title deeds of buildings to see whether the client holds the title on the balance sheet date.
If the property has been mortgaged, the title deeds will be in the possession of the mortgagee, from
whom a certificate should be obtained to that effect.
ii. Verify the original cost of buildings by reference to the deed of conveyance. If the building is
constructed by the client, verify the original cost by reference to the cost as recorded in the books of
account of the year in which the construction was completed.
iii. Verify that appropriate depreciation has been provided against the buildings. In case no depreciation
is provided on the buildings, a note to this effect should be given in the profit and loss account.
iv. See the appropriate lease deed, if the building is leasehold, to ascertain the cost, amortisation, etc.
Also ensure that all the covenants in the lease deed have been fulfilled by the client.
v. See that the buildings have been valued at cost less depreciation. If any revaluation has taken place,
see the basis of revaluation and ensure that the disclosure of the same has been made. In case of a
company, the requirements of Schedule VI to the Companies Act, 2013, have been complied with.
vi. See that the relevant particulars of buildings have been entered in the fixed assets record maintained
by the client.

(c) Recovery of Bad Debts written off:


i. Check all correspondence and proper authorization of bad debts written off earlier and ensure that
the decision of writing off of bad debts was recorded properly.
ii. Ascertain total bad debts and see whether all recovery of bad debts is recorded properly in the books
of account and deposited into bank.
iii. Check all notifications from Court or bankruptcy trustee and all correspondence from debtors and
collecting agencies.
iv. Check Credit Manager's files for amount recovered and confirm acknowledgement receipts issued to
trustee/debtors.
v. Vouch acknowledgement receipts issued to debtors or trustees.

(d) Cut-off arrangement: Accounting is a continuous process because the business nevercomes to halt. It is,
therefore, necessary that transactions of one period would beseparated from those in the ensuing period so that
the results of the working of eachperiod can be correctly ascertained. The arrangement that is made for this
purpose is technically known as "cut-off arrangement". It essentially forms part of the internal control system of
the organisation. Accounts, other than sales, purchase and stock are not usually affected by the continuity of
the business and therefore, this arrangement is generally applied only to sales, purchase and stock. The auditor
satisfies by examination and test-checks that the cut-off procedures are adequately followed and ensure that:

i. Goods purchased, property in which passed on to the client, have in fact been included in the
inventories and that the liability has been provided for in case credit purchase.
ii. Goods sold have been excluded from the inventories and credit has been taken for the sales. If the
value of sales is to be received, the concerned party has been debited.

The auditor may examine a sample of documents, evidencing the movement of stock into and out of
stores, including documents pertaining to period shortly before and after the cut-off date and check
whether stocks represented by those documents were included or excluded as appropriate during stock
taking for perfect and correct presentation in the financial statements.

Q16. Describe "Analytical Review Procedures" in Audit. Briefly discuss analytical procedures for verification of debtors.

Answer-
Analytical Review Procedure: As per SA 520, Analytical Procedure means analysis of financial information through
analysis of relationship among financial and non-financial data. It includes comparison of the entity's financial
information with comparable information with prior period, anticipated results of the entity like budgets etc or
expectations of auditor and similar industry information.

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Therefore, an analytical review procedure assists the auditor in planning the nature, timing and extent of other audit
procedures. It is an auditing procedure based on ratios among accounts and tries to identify significant changes.
Analytical review procedures can be used in the consideration of risks and/or as direct tests of balances. When deciding
whether to incorporate analytical review procedures into the examination program as substantive tests of balances,
the examiner should consider the extent to which the underlying data should be tested.

Analytical Procedures in case of debtors: Following are the analytical review procedures which may often be helpful
as a means of obtaining audit evidence regarding the various assertions relating to debtors:

(i) comparison of closing balances of debtors with the corresponding figures for the previous year;
(ii) comparison of the relationship between current year debtor balances and the current year sales with the
corresponding budgeted figures, if available;
(iii) comparison of actual closing balances of debtors with the corresponding budgeted figures, if available;
(iv) comparison of current year's ageing schedule with the corresponding figures for the previous year;
(v) comparison of significant ratios relating to debtors with similar ratios for other firms in the same industry, if
available;
(vi) comparison of significant ratios relating to debtors with the industry norms, if available.
(vii) Check whether there is any change in credit policy of the organization.
(viii) Check the percentage of bad debts of previous years and current year.
(ix) Find the reasons of major variations in the estimated values and actual values.

These are only an illustrative list of analytical review procedures which an auditor may employ in carrying out an audit
of debtors. The exact nature of analytical review procedures to be applied in specific situation is a matter of professional
judgment of the auditor.

RTP May 2014

Q17. Explain clearly the meaning of vouching. Also discuss the essential points to be borne in mind while examining a
voucher.

Answer- The act of examining vouchers is referred to as vouching. It is the practice followed in an audit with the
objective of establishing the authenticity of the transactions recorded in the primary books of account. It essentially
consists of verifying a transaction recorded in the books of account with the relevant documentary evidence and the
authority on the basis of which the entry has been made; also confirming that the amount mentioned in the voucher
has been posted to an appropriate account which would disclose the nature of the transaction on its inclusion in the
final statements of account. On these considerations, the essential points to be borne in mind while examining a
voucher are:

i. that the date of the voucher falls within the accounting period;
ii. that the voucher is made out in the client's name;
iii. that the voucher is duly authorised;
iv. that the voucher comprised all the relevant documents which could be expected to have been received or
brought into existence on the transactions having been entered into, i.e., the voucher is complete in all
respects; and
v. that the account in which the amount of the voucher is adjusted is the one that would clearly disclose the
character of the receipts or payments posted thereto on its inclusion in the final accounts.

Q18. How will you verify/vouch the following?


(a) Stock lying with Third Party.
(b) Purchase of Motor Car.
(c) Sales Commission Expenditure.
(d) Sales Return.
Answer-
(a) Stock lying with third party
i. Obtain confirmations from the third party including the time period and reasons thereof.
ii. Evaluate condition of goods and see whether adequate provision has been made.
iii. Check whether subsequently the goods lying with third party were sold or received back after the
expiry of stipulated time period.
iv. Ensure that the goods have been included in the closing stock though lying with third party.
(b) Purchase of Motor Car
i. Ascertain whether the purchase of car has been properly authenticated.
ii. Check invoice of the car dealer to confirm purchase price.

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iii. Examine registration with Transport Authorities to verify the ownership.
iv. Ensure that all expenses relating to purchase of car have been properly capitalized and the same
have been disclosed properly in the balance sheet.

(c) Sales Commission Expenditure


i. Ascertain agreement, if any, in respect of sales transaction actually occurred during the year
carried out by authorized parties on its behalf. If yes the commission should be in accordance with
the terms and conditions as specified.
ii. Check evidence of services rendered by the party to whom commission is paid with reference to
correspondence etc.
iii. Ensure that the sales in fact have taken place and the same has been charged to profit and loss
account.
iv. Compare the amount incurred in previous years with reference to total turnover.

(d) Sales Return


(i) Examine the accounting basis for such transactions with reference to corresponding Debit Note
to Debit Note. The relevant correspondence may also be examined.

(i) Verify by reference to relevant corresponding record in good inward book or the stores records.
Further, the figures in these documentary evidencesshould be compared with the original
invoices for rates and other charges and calculation should also be checked.
(ii) Examine in depth to eliminate the possibility of fictitious sales returns for covering bogus sales
recorded eariier when such returns outwards are in substantial figure either at the start or end of
the accounting year.

(iii) Cross-check with reference to original invoices any rebates in price or allowances if any given
by buyers on strength of their Debit Notes.

RTP November 2014

Q19. How will you verify/vouch the following:


(d) Sale proceeds of Scrap Material.
(e) Trade Marks and Copyrights.
(f) Machinery acquired under Hire-purchase system.
(g) Work-in-progress.

Answer-

a. 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.
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.
viii. Make an overall assessment of the value of the realisation from the sale of scrap materials as to its
reasonableness.

b. Trade Marks and Copyrights


i. Obtain schedule of Trade Marks and Copyrights duly signed by the responsible officer and scrutinise
the same and confirm that all of them are shown in the Balance Sheet.
ii. Examine the written agreement in case of assignment of Copyrights and Assignment Deed in case of
transfer of trade marks. Also ensure that trademarks and copyrights have been duly registered.

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iii. Verify existence of copyright by reference to contract between the author and the entity and check
the payment of royalty made to author.
iv. See that the value has been determined properly and the costs incurred for the purpose of obtaining
the trademarks and copyrights have been capitalised.
v. Ascertain that the legal life of the trademarks and copyrights have not expired.
vi. Ensure that amount paid for both the intangible assets is properly amortised having regard to
appropriate legal and commercial considerations, as per the principles enunciated under AS 26 on
Intangible Assets.

c. Machinery acquired under Hire-purchase system


i. Examine the Board's Minute Book approving the purchase on hire-purchase terms.
ii. Examine the hire-purchase agreement carefully and note the description of the machinery, cost of the
machinery, hire purchase charges, and terms of payment and rate of purchase.
iii. Assets acquired under Hire Purchase System should be recorded at the full cash value with
corresponding liability of the same amount. In case cash value is not readily available, it should be
calculated presuming an appropriate rate of interest.
iv. Hire purchased assets are shown in the balance sheet with an appropriate narration to indicate that
the enterprise does not have full ownership thereof. The interest payable along with each installments,
whether separately or included therein should be debited to the interest account and not to the asset
account.

d. Work-in-Progress: The audit procedures regarding work-in-progress are similar to those used for raw materials
and finished goods. However, the auditor has to carefully assess the stage of completion of the work-in-progress
for assessing the appropriateness of its valuation. For this purpose, the auditor may examine the
production/costing records (i.e., cost sheets), hold discussions with the personnel concerned, and obtain expert
opinion, where necessary. The auditor may advise his client that where possible the work-in-progress should be
reduced to the minimum before the closing date. Cost sheets of work-in-progress should be verified as follows:

i. Ascertain that the cost sheets are duly attested by the works engineer and works manager.
ii. Test the correctness of the cost as disclosed by the cost records by verification of quantities and cost
of materials, wages and other charges included in the cost sheets by reference to the records
maintained in respect thereof.
iii. Compare the unit cost or job cost as shown by the cost sheet with the standard cost or the estimated
cost expected.
iv. Ensure that the allocation of overhead expenses had been made on a rational basis.
v. Compare the cost sheet in detail with that of the previous year. If they vary materially, investigate the
cause thereof.
vi. Ensure that the Work-in-Progress as at Balance Sheet date has been appropriately disclosed in Balance
Sheet as per the requirements of Part I of Schedule VI of the Companies Act

Q20. What procedure an auditor should adopt to test the authenticity of cash at bank?
Answer-
Verification of Cash at Bank: While testing the authenticity of cash at bank, the following areas may be considered
by the auditor:

i. Apart from comparing the entries in the cash book with those in the Pass Book the auditor should obtain a
certificate from the bank confirming the balance at the close of the year as shown in the Pass Book.

ii. Examine the bank reconciliation statement prepared as on the last day of the year and see whether (a)
cheques issued by the entity but not presented for payment, and (b) cheques deposited for collection by the
entity but not credited in the bank account have been duly debited/credited in the subsequent period.

iii. Pay special attention to those items in the reconciliation statements which are outstanding for an unduly long
period. The auditor should ascertain the reasons for such outstanding items from the management. He should
also examine whether any such items require an adjustment write-off.

iv. Examine relevant certificates in respect of fixed deposits or any type of deposits with banks duly supported by
bank advices.

v. The auditor should examine the possibility, that even though the balance in an apparently inoperative account
may have remained stagnant, transactions may have taken place in that account during the year.

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vi. In relation to balances/deposits with specific charge on them, or those held under the requirements of any law,
the auditor should examine that suitable disclosures are made in the financial statements.

vii. Remittances shown as being in transit should be examined with reference to their credit in the bank in the
subsequent period. Where the auditor finds that such remittances have not been credited in the subsequent
period, he should ascertain the reasons for the same. He should also examine whether the entity has reversed
the relevant entries in appropriate cases.

viii. The auditor should examine that suitable adjustments are made in respect of cheques which have become
stale as at the close of the year.

ix. Where material amounts are held in bank accounts which are blocked, e.g. in foreign banks with exchange
control restrictions or any banks which are under moratorium or liquidation, the auditor should examine whether
the relevant facts have been suitably disclosed in the financial statements. He should also examine whether
suitable adjustments on this account have been made in the financial statements in appropriate cases.

x. Where the auditor finds that the number of bank accounts maintained by the entity is disproportionately large
in relation to its size, the auditor should exercise greater care in satisfying himself about the genuineness of
banking transactions and balances.
`

November 2014 Exam

How you will vouch/verify the following?


(a) Assets acquired on lease.
(b) Investment in the shares and debentures of subsidiary.
(c) Provision for income tax.
(d) Retirement gratuity to employees.
(4x4 = 16 Marks)
Answer
(a) Verification of Assets acquired on Lease:
(i) Examine the terms and conditions of the lease deed.
(ii) If a part of the leasehold property has been sublet, examine the tenant's agreement.
(iii) Verify relevant document to check the cost of property.
(1) In case of acquisition of an asset is on operating lease, lease payment should be recognized
as an expense in the statement of profit and loss account on a straight line basis over the lease
term, in case of operating lease;

(2) In case of acquisition of an asset is on finance lease, ensure all the substantial risks and rewards
to ownership are transferred, considering the indication as prescribed in AS-19, the lessee
should recognize the lease as an asset and as a liability. Such recognition should be at an
amount equal to the fair value of the leased assets at the inception of the lease. Ensure
contingent rents are recognized as expense in the statement of profit & loss for the period in
case of Finance lease.

(iv) Ensure assets acquired under finance lease are segregated from the assets owned.
(v) Ensure that the assets under lease have been properly disclosed as per requirement of Schedule III.

(b) Investment in the Shares and Debentures of Subsidiary:


(i) The auditor should obtain a complete schedule of all such investments held, showing particulars as
regards the name of the subsidiary company, class of shares or debenture, date of purchase, number
of units and denoting numbers, book value, dividend received etc.
(ii) All the particulars entered in the schedule should be verified with the relevant account in the General
Ledger.

(iii) The auditor should, at the same time, examine all the investments by inspection of the securities, share
scrips or certificates, debenture bonds, etc. If any of the securities are held by bankers, he should verify
them with their certificate which should disclose the charge, if they are subject to any such charge.

(iv) The provisions contained in Part III, Schedule III to the Companies Act, 2013 requires that the shares held
in a subsidiary should be shown separately.

(v) The shares or debentures of a subsidiary are valued at cost.

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(vi) If the subsidiary has suffered a loss, then a provision for the proportionate part of the loss should be
made in the accounts of the holding company.

(c) Provision for Income Tax:


(i) Obtain the computation of income prepared by the auditee and verify whether it is as per the Income-
tax Act, 1961 and Rules made thereunder.
(ii) Review adjustments, expenses, disallowed special rebates, etc. with particular reference to the last
available completed assessment.
(iii) Examine relevant records and documents pertaining to advance tax, self-assessment tax and other
demands.
(iv) Compute tax payable as per the latest applicable rates in the Finance Act.
(v) Ensure that overall provisions on the date of the balance sheet is adequate having regard to current
year provision, advance tax paid, assessment orders, etc.
(vi) Ensure that the requirements of AS 22 on Accounting for Taxes on Income have been appropriately
followed for the period under audit.

(d) Retirement Gratuity to Employees:


(i) Examine the basis on which the gratuity payable to employees is worked out. The liability for gratuity
may either be worked out on actuarial rules or agreement or on the presumption that all employees
retire on the balance sheet date.
(ii) Verify computation of liability of gratuity on the aggregate basis.
(iii) Check the amount of gratuity paid to employees who retired during the year with reference to number
of years of service rendered by them.
(iv) See that the annual premium has been charged to Profit and Loss account, in case if the concern has
taken a policy.
(v) Ensure that the accounting treatment is in accordance with AS 15, "Employee Benefits"

May 2015 Exam

How mil you vouch/verify the following?


(a) Rental Receipts
(b) Repair to assets
(c) Work-in-progress
(d) Insurance claims. (4x4 = 16 Marks)

Answer
(a) Rental Receipts:
• Check copies of bills or rent receipts issued to the tenant with reference to tenancy agreement and
bills of charges paid by the landlord on behalf of tenants.
• The entries in the rental register in respect of rent accrued should be traced with reference to copies
of rental bills.
• Scrutinize the account of collecting agent when the rent is collected by such agent.
• Vouch the entries for rent received in advance and ensure proper adjustment is made.
• Investigate abnormal rent outstanding, if any.
• Reconcile the outstanding rent and check that proper provision is made if unrecoverable.
• If rent is received net of TDS, check that the rental income is shown at gross amount and TDS is shown
in Balance Sheet as per Schedule III to the Companies Act, 2013.

(b) Repair to Assets:


• Since the line demarcating repairs from renewals is slender, usually it is not a simple matter to determine
the amount of the expenditure, if any, included as charges for repairs, which should be considered as
that incurred for renewal of an asset and added to its cost.
• It may sometimes be possible to determine this on a consideration of the nature of repairs carried out.
The proportion of the charges which had the effect of increasing the value of an asset or enhancing
its capacity or life should be treated as capital expenditure.
• Where, however, it is not possible to form an opinion accurately on the basis of evidence as regards
the nature of repairs, a certificate from the engineer under whose supervision the repairs were carried
out, confirming the classification of expenditure should be obtained.
• It should be ensured that Repairs to 'Certain Assets' like Building and Machinery have been separately
disclosed as per the requirements of Schedule III to the Companies Act, 2013.

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(c) Work in Progress:


• Involve a technical expert in verification and valuation of WIP, if necessary.
• Ensure that cost sheets are duly attested by the works manager.
• Test the correctness of the cost as disclosed by the cost records by verification of quantities and cost
of materials, wages and other charges included in the cost- sheets by reference to the records
maintained in respect of issues of materials, payment of wages and its classification and original
evidence in respect of all expenditure included in the cost-sheets.
• Verify stage of completion with component of cost involved with underlying records.
• Compare the unit cost as shown by the cost sheet with standard cost for any large variations.
• Ensure that the allocation of overhead expenses has been made on reasonable basis and is same as
used in earlier period.
• Compare the cost sheet with that of the previous year and if there is any large variation, investigate
the reason thereof.

(d) Insurance Claims: While vouching the receipts of insurance claims, following points may be considered-
• 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.
• 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.
• The copy of certificate/report containing full particulars of the amount of loss should also be verified.
• 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 profit and loss
account 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 profit and loss
account should be appropriately described.

MAY 2015 RTP


How will you verify/vouch the following:
(a) Contingent Liabilities
(b) Excise Duty
(c) Recovery of Bad-debts written off
(d) Endowment Policies.

(a) Contingent liabilities: Accounting Standard (AS) 29 on 'Provisions, Contingent Liabilities and Contingent
Assets', defines 'Contingent Liability' as a possible obligation that arises from past events and the
existence of which will be confirmed only by the occurrence or non-occurrence of one or more
uncertain future events not wholly within the control of the enterprise; or as a present obligation that
arises from past events but is not recognized because it is not probable that an outflow of resources
embodying economic benefits will be required to settle the obligation, or a reliable estimate of the
amount of the obligation cannot be made.

The auditor may take following steps to vouch or verify the contingent liabilities:
(i) Inspect the minute books of the company to ascertain all contingent liabilities known to the
company.
(ii) Examine the contracts entered into by the company and the likelihood of contingent liabilities
emanating there from.
(iii) Scrutinize the lawyer's bills to track unreported contingent liabilities.
(iv) Examine bank letters in respect of bills discounted and not matured.
(v) Examine bank letters to ascertain guarantees on behalf of other companies or individuals.
(vi) Discuss with various functional officers of the company about the possibility of contingent liability
existing in their respective field.
(vii) Obtain a certificate from the management that all known contingent liabilities have been
included in the accounts and they have been properly disclosed.
(viii) Ensure that proper disclosure has been made as per Schedule III to the Companies Act, 2013 and
AS 29, "Provisions, Contingent Liabilities and Contingent Assets".

(b) Excise Duty: Excise duty is levied on manufacture. The liability for duty arises only at the point of time at
which manufacturing is complete. The point of time at which duty is collected may be determined by
consideration of administrative convenience.

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आशीवायद- Comprehensive Module For CA IPCC Auditing & Assurance C12 – Vouching

Normally excise duty is paid before the issue of excisable goods from the factory. For this, the auditor
should take into consideration:

(i) Ensure that excise duty is paid at the time of issue of excisable goods from the godown at
factory of the producer. The duplicate copy of the challan as issued by the bank is forwarded
for the purpose of issue of the excisable goods.

(ii) Verify the amount of duty paid with the corresponding value of the goods issued from the
inventory register of the producer by applying test check. In case where the client maintains
an advance deposit with Excise Department, the auditor should see that the permits are issued
for delivery of the goods against the advance deposit and corresponding adjustment.

(iii) Ascertain the rates of excise duty and apply it to the total sales and see that the amount
actually paid does not exceed the amount thus calculated.

(iv) Ascertain that in case of dispute about the amount of duty payable, a provisional amount
may be paid in lieu of final amount. In such cases, the final amount determined as payable
should be verified. If the provisional payment was more than the actual amount, the refund of
such excess amount should be vouched.

(v) The auditor may also physically verify RG 1 with actual and see reconciliation of financial
records with sales tax records.

(c) Recovery of Bad Debts written off:


(i) Check all correspondence and proper authorization of bad debts written off earlier and
ensure that the decision of writing off of bad debts was recorded properly.

(ii) Ascertain total bad debts and see whether all recovery of bad recorded properly in the books
of account and deposited into bank.

(iii) Check all notifications from Court or bankruptcy trustee correspondence from trade
receivables and collecting agencies.

(iv) Check Credit Manager's files for amount recovered and acknowledgement receipts issued to
trustee/trade receivables.

(d) Endowment Policies:


(i) Ascertain the specific purpose for which the endowment policy is taken, e.g., Sinking Fund
policies for redemption of debentures, redemption of leases or policies taken for other similar
purposes, etc. debts is and all confirm

(ii) Verify the terms and conditions of policies and ensure that all such conditions are in force and
being followed.

(iii) Check that premium has been deposited in time and the policy is in force.
(iv) Examine that proper disclosures have been made in the financial statements in respect of
items for which the policy has been taken.

MAY 2015 RTP - General Points to Be Considered in Scrutiny of General Ledger


(i) The General Ledger contains all the balances which are ultimately included in the Profit and Loss Account
and the Balance Sheet. Its examination therefore is undertaken last of all.

(ii) The scrutiny of General Ledger should be carried out with due care in as much as it is the final review of
balances which, on inclusion in Final Accounts, cumulatively reflect the financial position of the concern.

(iii) Entries in the General Ledger usually are posted in a summary form from the books of original entries such as
Cash Book, Journal, Sales Book, Purchase Book and other subsidiary books. Therefore, it should be confirmed
that all the postings on various accounts have been verified, totals, etc. checked.

(iv) It should also be ascertained that balances in all the income and expense accounts have been adjusted:
(1) according to standard accounting practices (i.e., all unpaid, prepaid expenses have been adjusted and
accrued Income and pre-recorded income is properly adjusted); and (2) on a consideration of the legal
provisions which are applicable to the concern.

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आशीवायद- Comprehensive Module For CA IPCC Auditing & Assurance C12 – Vouching
(v) The balances in the General Ledger should be traced to the trial balance and from the trial balance to the
final accounts.

NOVEMBER 2015 RTP

(a) Verification of the Credit Sales: The credit sales should be verified by reference to copies of invoices issued
to customers and, in the process, attention should be paid to the following matters-

(i) that each item of sales relates to the period of account under audit;
(ii) that the goods are those that are normally dealt in by the concern;
(iii) that the sale price has been correctly arrived at and the copy of the requisition slip issued by the Sales
Department and the copy of the Despatch Note showing the date and mode of despatch of goods are
attached with the invoice;
(iv) that the amount of the invoice has been adjusted in an appropriate account; and
(v) that the sale has been authorized by a responsible official and in token thereof he has initialed the invoice;
also that any alteration in the invoice has been attested by the same person.

(b) Bank Overdraft


(i) The auditor should ensure that the facility of overdraft is authorized by the Board's resolution/partner's
resolution.
(ii) Pursue the agreement with the bank and see whether the overdraft is clean or against hypothecation or
pledge of company's property.
(iii) Verify the register of charges and ensure that the charge has been registered with Registrar of Companies.
(iv) Verify the rate of interest and other terms and conditions from the agreement.
(v) Verify the amount of overdraft from the books of accounts and compare it with the passbook.
(vi) If the overdraft is against hypothecation of assets like inventories, a certificate from the bank should be
obtained.
(vii) If the overdraft is against hypothecation of assets or pledge of company's property, see that overdraft is
properly shown under 'secured loans' and nature of security has been properly disclosed.

(b) Goods lying with Third Party


(i) The auditor should check that the materiality of the item under this caption included in inventories.
(ii) He should obtain confirmation of the amount of goods lying with them. The confirmation may be directly
obtained by auditor or be produced by client depending upon the situation.
(iii) He should inquire into the necessity of sub-contractor retaining the inventory. He should ensure the process
that they do are related to the business requirement and there is no ground for suspicion on this score.
(iv) The goods lying with them for the very long period would merit auditor's special attention for making
provision.
(v) The records, voucher/slips for the regulating the movement of inventory into and out of entity for sub-
contracting work be reviewed by vouching for few transactions for ensuring existence and working of
internal control system for them.
(vi) The excise gate pass, entry in such records, information in returns, be also cross-verified.
(vii) The valuation of inventories should be correctly made for including material cost on appropriate inventory
valuation formulae and also for inclusion of proportionate processing charges for the work in process with
the contractors.
(viii) The provision should be created for work done, billed for processing and also for incidence of any
applicable levy like service tax payable.

(c) Goods Sent Out on Sale or Return Basis


(i) Check whether a separate memoranda record of goods sent out on sale or return basis is maintained. The
party accounts are debited only after the goods have been sold and the sales account is credited.
(ii) See that price of such goods is unloaded from the sales account and the trade receivable^ record. Refer
to the memoranda record to confirm that on the receipt of acceptance from each party, his account has
been debited and the sales account correspondingly credited.
(iii) Ensure that the goods in respect of which the period of approval has expired at the close of the year either
have been received back subsequently or customers' accounts have been debited.
(iv) Confirm that the inventory of goods sent out on approval, the period of approval in respect of which had
not expired till the close of the year lying with the party, has been included in the closing inventory.

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आशीवायद- Comprehensive Module For CA IPCC Auditing & Assurance AASB & Other Topics

Chapter 17 AASB & Other Topics


What are Standards on Auditing (SAs)?
SAs are Auditing Standards, which prescribe the way the auditing should be conducted.

Procedure for issuing SAs


Generally following procedure is followed for issuing the SAs :
Auditing and Assurance Standard Board (AASB) of the Institute of Chartered Accountants of
India (ICAI) determines the specific area in which the SAs need to be formulated.

In preparation of SAs—
AASB is assisted by study groups constituted to consider specific subjects.

An exposure draft of the proposed SA is finalized by the AASB' of ICAI on the basis of work of the
study group.

The exposure draft of the proposed SA is published for comments by the members of the Institute
(ICAI).

AASB finalizes the draft of the proposed SA after considering the comments received and submit
to the Council of the Institute (ICAI).

The Council considers the draft of the proposed SA and if necessary, modifies the same in
consultation with AASB. The SA is then issued under the authority of the Council of the Institute of
Chartered Accountants of India.

AASB of ICAI tries to integrate/harmonize the SAs to the extent possible in the light of the condition
and practices prevailing in India with ISAs (International Standards For Auditing) issued by IAASB
(International Auditing and Assurance Standards Board) of IFAC.

ICAI re-classified the existing auditing and assurance standards in 2008. The objective of re-classification is to converge
our existing auditing and assurance standards with International Standard on Auditing (ISA) issued by the International
Federation of Accountants (IFAC).

Question
Standards collectively known as the Engagements Standards issued by AASB under the authority of the council of ICAI - Discuss

The following Standards issued by the Auditing and Assurance Standards Board under the authority of the Council are
collectively known as the Engagement Standards:

Standards on Auditing (SAs), to be applied in the audit of historical financial information.

Standards on Review Engagement (SREs), to be applied in the review of historical financial


information.

Standards on Assurance Engagements (SAEs), to be applied in assurance engagements, dealing


with subject-matters other than historical financial information.

Standards on Related Services (SRSs), to be applied to engagements involving application of


agreed upon procedures to information, compilation engagements, and other related services
engagements as may be specified by the ICAI.

Standards on Quality Control (SQCs) issued by the AASB under the authority of the Council, are to
be applied for all services covered by the Engagement Standards as described above.

A diagram containing the structure of the Standards issued by the Auditing and Assurance Standards Board under the
authority of the Council is given as under.

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आशीवायद- Comprehensive Module For CA IPCC Auditing & Assurance AASB & Other Topics
Structure of Standards issued by the Auditing and Assurance Standards Board under the Authority of the Council of
ICAI

The Chartered Accountants Act, 1949, Code of Ethics and other relevant pronouncements of the ICAI

Standard on Quality Controls (SQCs)

Service covered by the pronuncemnet of the Auditing and


assurance board under the authority of the council of the ICAI

Assurance
Related Service
Services

Audit and Review of Assurance Engagements Framework for


historical financial other than audits or Assurance
information reviews of historical Engagement
financial informaiton
Standards on Standard on
Standard on Standards on
Auditing (SAs) Review
Assurance Related Services
100-999 Engagements
Engagement (SRSs) 4000-
(SREs) 2000- 4699
(SAEs) 3000-
2699
3699

Note: Only SAs from 200 to 720 are in CA Intermediate (IPC) syllabus, other SAs 800 to 810, SREs, SAEs and SRSs are not in
syllabus.

International Auditing and Assurance Standards Board (IASB)

(a) In 1977, the International Federation of Accountants (IFAC) was set up with a view to bring in harmony in the
profession of accounting on an international scale.
(b) In pursuing this mission, the IFAC Board has established the International Auditing and Assurance
Standards Board (IAASB) to develop and issue, high quality Auditing and Assurance Standards for use around
the world.
(c) The IAASB's pronouncement govern Audit, Review, Other Assurance and Related Services
Engagements that are conducted in accordance with International Standards. However, they do not override
the local laws or regulations that govern the audit of Historical Financial Statements, required to be
followed in accordance with that country's National Standards.
(d) The IAASB functions as an independent standard-setting body, which serves the objective of setting high
quality Auditing and Assurance Standards and by facilitating the convergence of International and National
Standards, thereby enhancing the quality & uniformity of practice throughout the world. IASSB achieves
this objective by -
Establishing high quality Auditing Standards and Guidance for Financial Statement audits, other
types of Assurance Services, Other Related Services, Quality Control areas,
Publishing Other pronouncements on Auditing and Assurance matters.

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आशीवायद- Comprehensive Module For CA IPCC Auditing & Assurance AASB & Other Topics
Auditing and Assurance Standards Board (AASB)

(a) ICAI is a member of IFAC and is committed to work towards the implementation of the guidelines issued by IFAC.
(b) ICAI constituted the Auditing Practices Committee (APC) in 1982. The main function of the APC is to review the existing
auditing practices in India and to develop Statements on Standard Auditing Practices (SAPs) so that these may be
issued by the Council of the Institute.
(c) While formulating the SAP's in India, the APC gives due consideration to the International Auditing Guidelines
issued by the IAPC and then tries to integrate them to the extent possible in the light of the conditions and practices
prevailing in India. While formulating the SAPs, the APC takes into consideration the applicable laws, customs,
usages and business environment in India.
(d) In July 2002, the APC has been converted into an Auditing and Assurance Standards Board (AASB) by the
Council of ICAI, to be in line with the international trend. The nomenclature of SAPs had also been changed to Auditing
and Assurance Standards (AASs).
(e) In 2007, the AASB issued several revised / new Standards pursuant to the IAASB Clarity Project, and henceforth
all the standards have been collectively called as "Standards on Auditing".

Objectives and Functions of the Auditing and Assurance


Standards Board
The following are the objectives and functions of the Auditing and Assurance Standards Board

(i) To review the existing and emerging auditing practices worldwide and identify areas in which Standards on Quality
Control, Engagement Standards and Statements on Auditing need to be developed.
(ii) To formulate Engagement Standards, Standards on Quality Control and Statements on Auditing so that these may
be issued under the authority of the Council of the Institute.
(iii) To review the existing Standards and Statements on Auditing to assess their relevance in the changed conditions
and to undertake their revision, if necessary.
(iv) To develop Guidance Notes on issues arising out of any Standard, auditing issues pertaining to any specific industry or on
generic issues, so that those may be issued under the authority of the Council of the Institute.
(v) To review the existing Guidance Notes to assess their relevance in the changed circumstances and to undertake their
revision, if necessary.
(vi) To formulate General Clarifications, where necessary, on issues arising from Standards.
(vii) To formulate and issue Technical Guides, Practice Manuals, Studies and other papers under its own authority for
guidance of professional accountants in the cases felt appropriate by the Board.

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आशीवायद- Comprehensive Module For CA IPCC Auditing & Assurance C6

Chapter 6
INTERNAL CONTROLS IN EDP
ENVIRONMENT
Difference between conventional accounting system & Computer based accounting system
Particulars Conventional Accounting System Computer Based Accounting System
1. Input Document Transactions are recorded from source Data is entered “Live” in an online system at the
/ input documents, e.g. bills, invoices, time of transaction itself. Hence on input
receipts vouchers, etc. documents are used.
2. Design Easy to design. More time-consuming to design.
3. Effect on Accounting and book-keeping functions The activities and responsibilities may be
organisation are centralized in the Finances centralized in the EDP department, unless all
structure Department. departments are fully computerized and linked by
network. (e.g. LAN)
4. Complexity Less complex relationships between sub- More complex and high-degree of inter-
systems, e.g. Purchased, Stores, relationships between different sub-systems.
Accounts, Production, etc.
5. Reliability Possibility of collusion in order to Due to effectiveness of controls, it is considered
overtime the system cannot be more reliable.
discounted. Hence less reliable.
2. Audit Trail Fully visible – all ends of the Due to absence of input documents and storage of
transactions can be neatly and clearly information inside the system, audit trail is less
traced. visible.

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आशीवायद- Comprehensive Module For CA IPCC Auditing & Assurance C6

CIS

Meaning Nature of risks and the internal control


characteristics in CIS environments

CIS Lack of Uniform Lack of Errors and Automatic Potential


Dependen Potential
environme transactio processing segregatio irregulariti Initiation for use of
ce of other for
nt is one ns trails of n of es in or CAAT
controls increased
where one transactio functions developm execution over managem
or more Some CIS ns ent, of Due to
computer ent
computers may maintenan transactio peculiariti
The extent processing supervisio
are provide ce and n es of some
Uniform of n
involved in complete execution transactio
the transactio processing segregatio of CIS n and
processing n trail, of n of CIS may Manual systems,
of however transactio functions initiate control If auditor
present in The certain procedure managem
accounts some may n can potential may be
of client. not eliminate manual transactio may also ent uses required
systems for human ns be used all the
provide it clerical error in to apply
(OLRT). If errors may not automatic while technologi CAAT.
be there in developm ally. The implement es & tools
computers there is which are
CIS ent, authorizati ing CIS. to review
may be absence of there with
environme maintenan on of &!
operated trail, the manual
nt. Thus, ce and these supervise
by the risk will be processing
entity or an execution transactio the CIS
high. . However, of CIS may
by a third programm individual ns may not departme
party. performin be greater be nt of
ing errors than in
may occur. g many document entity, the
computer manual ed risk will be
related system reduced.
works may (due to
be in a technical
position to incompete
perform nce).
incompati
ble
function.

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आशीवायद- Comprehensive Module For CA IPCC Auditing & Assurance C6

AUDIT TRAIL IN CIS ENVIRONMENT

Meaning Availability in CS
How to compensate loss of audit
trail

Audit trail means tracing a Audit trail is generally not available


transaction from starting to end in EDP environment Because of
and vice versa. following factors CAAT

In Audit Trail Auditor trace the


transaction from the source Non-existence of input document. Arranging for special printouts
doucment to summarsied total in INCREASE in processing speed. NO containing additional information.
accounting reports or vice versa OUTPUT reports. OLRT Systems.
PRINTOUTS contain summary only

Evaluating the
reliability of CIS

Output Others
Input Processing

Data recovery
Output is correct &
Simple. Provided to Data Security against
Authorise complete & Detection of errors on authorised personnel
correct timely basis fire and other
calamities, wrong
processing and fraud,
etc.

amendments to the
program are properly
authorised.

safe custody of the


application software
and the data files.

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आशीवायद- Comprehensive Module For CA IPCC Auditing & Assurance C6

Audit Around the


Computer

The auditor concentrates can use audit around the Advantages Disadvantage
on input & output and computer
ignore data processing
Simple Costly : In Terms of
Printing Cost.
audit trail is available
auditor carries out the
audit more-or-less in the Low Cost in terms of
same manner as in performacnce o audit Cannot be used in org
manual system Organisation uses having complex CIS
generalized well-tested
software
except that instead of No Technical knowledge
hand-written books of Req. Time Consuming
account, he examines
computer printouts.

Ignores computer's
potential

Audit THROUGH the


Computer

The Auditor uses the can use audit THROUGH Advantages Disadvantage
computer to carry out the computer
Compliance &
Substantive Procedure
Time Saving Costly : In Terms of
Complex Accounting applying .
system
He focuses on all phases Low Cost in terms of
of CIS Activities - I/P/O Print out cost Complex to understand
Huge Volume of
transaction

The auditor reviews and Uses computer potential.


test Internal control Time Consuming
(General & Application)
& Decides NTE of SP

Technical knowledge
Req.

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आशीवायद- Comprehensive Module For CA IPCC Auditing & Assurance C6
CAAT/Audit software program

• CAAT are Computer program,


• that auditor uses
• as a part of the audit procedure
• To process data of audit significance, contained in organization’s information system.
• In CIS Environment use of CAAT is required to increase the efficiency & Effectiveness’ of the Audit
procedures.
• Some of the commonly used audit software are

1. Package Programs/Generalized Audit Software


These are generalised Computer Programs, that perform data processing functions like selecting
information and performing calculations etc& reporting as per the auditor’s requirement.

2. Purpose Written Programs


For performance of some specific audit task.
This software may be developed by auditor, the entitiy being audited or by a outside programmer.
These cannot be used for every client therefore cost effectiveness have to be kept in mind

3. Utility Program
These are programs for performing common data processing functions like sorting, creating and printing
files.
These are not designed specifically for audit purpose therefore there are no specific features for
auditing purpose but they can be helpful in audit.

Some of the audit Techniques for auditing in CIS Environment

1. Test Data (Test Pack)


• Auditor prepares test data and process the same in the entity’s system under his control.
• If results of processing match with the pre-determined output, this indicates that all
application and general control are functioning
• Test data can be used individually for every control
• Advantage: Reliable, easy to use, Economical
• Disadvantage: Increase in workload, Difficult to design, Time consuming

2. Integrated test facility


• The auditor creates a dummy unit within the client’s actual system.
• Hypothetical data in entered into the client’s actual system.
• Subsequently dummy units and its related data is deleted.

Advantages of Using CAAT


1. Time saving
The auditor can check voluminous data in less time by using CAAT.
2. Sampling
Generally, audit software has embedded sampling routines. Thus, it is easy for the auditor to choose
appropriate sample as per stated criteria.

3. Detailed examination

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आशीवायद- Comprehensive Module For CA IPCC Auditing & Assurance C6
Exhaustive examination of client's system is possible by using these advanced | techniques.

4. Testing internal controls


Various internal controls embedded within the system can be checked with help of CAAT. Manual audit
procedures are not effective for this.

5. Analytical review procedures


CAAT's are very effective in performing ARP because the software can easily trace unusual fluctuations
and hard copy can be generated for auditor's ready reference.

6. Compensate for loss of audit trail


Due to loss of audit trail in mostly EDP systems, manual audit procedures become impractical, making
use of CAAT indispensable.

7. For OLRT systems


In case, client is using On Line Real Time systems, there is need to check systems itself. This is possible
through ITF.

INTERNAL CONTROLS IN EDP ENVIRONMENT

In CIS Environment Internal control is divided in 2 parts general Controls and application control.
Internal control are embedded in the computer system itself. These IC cannot be checked manually.

Types of I.C.
A. Overall controls affecting EDP environment (General EDP controls).
B. Specific controls over specific applications (EDP Application Controls).

General EDP Controls

a. Organization and Management Controls: —


▪ Designing policies and procedures relating to control functions.
▪ Segregation of incompatible functions.
b. System Software Controls: —
▪ Restricted access of software to authorized personnel only.
▪ Authorization, approval, testing and implementation of new systems software.

c. Application System Development and Maintenance Controls: —


▪ Restricted Access to system documentation.
▪ Changes to application systems should be authorized.
▪ Acquisition of application systems from third parties should be carefully planned.
▪ Testing and implementation of new systems in a proper way.

d. Computer Operation Controls: —


▪ Use of only authorized programs on computers.
▪ Only authorized personnel should use computer.
▪ Systems should be used for authorized purpose.
▪ Processing errors are detected and corrected on a timely basis.

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आशीवायद- Comprehensive Module For CA IPCC Auditing & Assurance C6

e. Data Entry and Program Controls:—


▪ Restricted access to data and programs to authorized personnel only.
▪ Input should go through an authorization process.

EDP Application Controls

(a) Controls over Input: — to check whether:


▪ Input is duly authorized.
▪ Data input is accurate.
▪ Transactions are not lost or altered.
▪ Incorrect transactions are rejected or submitted after correction.

(b) Controls over Processing and computer data files: — to check whether:
▪ Processing errors are detected and corrected on a timely basis.
▪ Transactions are properly processed by the computers.

(c) Controls over Output: - to check whether:


▪ Results of processing are accurate.
▪ Access to output is restricted to authorized personnel.
▪ Output is provided to appropriate authorized personal on a timely basis

QUESTION BANK ON EDP/CIS Environment Audit

Q1. What are CAATS? Why are CAAT required in computerized information system (CIS) environment? (8 Marks)

Computer Aided Audit Techniques (CAATs): The use of computers may result in the design of systems that provide
less visible evidence than those using manual procedures. Computer Aided Audit Techniques (CAATs) are such
techniques applied through the computer which are used in the verifying the data being processed by it.

System characteristics resulting from the Computerized Information System (CIS) Environment that demand the
use of Computer Aided Audit Techniques (CAAT) are:

(i) Absence of input documents: Data may be entered directly into the computer systems without supporting
documents. In on-line transaction systems, written evidence of individual data entry authorization, e.g.,
credit limit approval may not be available.

(ii) Lack of visible transaction trail: Certain data may be maintained on computer files only. In a manual
system, it is normally possible to follow a transaction through the system by examining source documents,
books of account, records, files and reports. In CIS environment, however, the transaction trail may be
partly in machine-readable form, and it may exist only for a limited period of time.

(iii) Lack of visible output: In a manual system, it is normally possible to examine visually the results of processing.
In CIS environment, the results of processing may not be printed or only a summary data may be printed.
Thus, lack of visible output may result in the need to access data retained on machine readable files.

(iv) Ease of Access to data and computer programmes: Data and computer programmes may be altered at
the computer or through the use of computer equipment at remote locations. Therefore, in the absence
of appropriate controls, there is an increased potential for unauthorized access to, and allocation of, data
and programmes by persons inside or outside the entity.

(v) Audit effectiveness: The effectiveness and efficiency of auditing procedures will be improved through the
use of CAAT in obtaining and evaluating audit evidence, for example -

(1) Some transactions may be tested more effectively for a similar level of cost by using the computer.

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आशीवायद- Comprehensive Module For CA IPCC Auditing & Assurance C6
(2) In applying analytical review procedures, transactions or balance details of unusual items may be
reviewed and reports got printed more efficiently by using the computer.

(vi) Savings in time: The auditor can save time by reviewing the CIS controls using CAAT than through other
audit procedures.

(vii) Effective test checking and examination in depth: CAAT permits effective examination in depth of selected
transactions since the auditor constructs the lost audit trail.

Q2. To prepare an audit plan in CIS environment an auditor should gather information. Mention any four-such
important information which he has to collect.

The auditor should gather information about the CIS environment that is relevant to the audit plan, including
information as to

1. How the CIS function is organized and the extent of concentration or distribution of computer processing
throughout the entity.

2. The computer hardware and software used by the entity.

3. Each significant application processed by the computer, the nature of the processing (e.g. batch, on-
line), and data retention policies.

4. Planned implementation of new applications or revisions to existing applications.

5. When considering his overall plan the auditor should consider matters, such as:
(i) Determining the degree of reliance, if any, he expects to be able to place on the CIS controls in his
overall evaluation of internal control.

(ii) Planning how, where and when the CIS function will be reviewed including scheduling the works of
CIS experts, as applicable.

(iii) Planning auditing procedures using computer-assisted audit techniques.

Q3. "The overall objective and scope of an audit does not change in an EDP environment". Comment

The principal objective of an audit of financial statements, prepared within a framework of recognised
accounting policies and practices and relevant statutory requirements, if any, is to ensure that the financial
statements reflect a true and fair view.

The scope of an audit of financial statements is determined by the auditor having regard to the terms of the
engagement, the requirements of relevant legislation and the pronouncements of the Institute.

This would involve assessment of reliability and sufficiency of the information contained in the accounting
records and other source data by study and evaluation of accounting system and internal controls in operation.

The overall objective and scope of an audit does not change in an EDP environment but the use of a computer
changes the processing and storage of financial information and may affect the organisation and procedures
employed by the entity to achieve adequate internal control.

Accordingly, the procedures followed by the auditor in his study and evaluation of the accounting system and
related internal controls and nature, timing and extent of his other audit procedures may be affected by an EDP
environment.

The computerisation of accounts would also have an impact on the increase in fraud and errors.

Thus when auditing in an EDP environment, the auditor should have sufficient understanding of computer
hardware, software and processing systems to plan the engagement and to understand how EDP affects the

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आशीवायद- Comprehensive Module For CA IPCC Auditing & Assurance C6
study and evaluation of internal control and application of auditing procedures including computer-assisted
audit techniques.

The auditor should also have sufficient knowledge of EDP to implement the auditing procedures, depending on
the particular audit approach adopted.

Thus, it is clear from the above that overall objective and scope of audit does not change irrespective of fact
that whether the accounting information is generated manually or through EDP.

Q4. 'Doing an audit in an EDP environment is simpler since the trial balance always tallies' Analyse critically?

Audit in EDP environment: Though it is true that in EDP environment the trial balance always tallies, the same
cannot imply that the job of an auditor becomes simpler. There can still be some accounting errors like omission
of certain entries, compensating errors, duplication of entries, errors of commission in the form of wrong A/c head
is posted., possibility of "Window Dressing" and/or "Creation of Secret Reserves" where the trial balance tallied . .
At present, due to complex business environment the importance of trial balance cannot be judged only upto
the arithmetical accuracy but the nature of transactions recorded in the books and appear in the trial balance
should be focused.

The emergence of new forms of financial instruments like options and futures, derivatives, off balance sheet
financing etc have given rise to further complexities in recording and disclosure of transactions. In an audit,
besides the tallying of a trial balance, there are also other issue like estimation of provision for depreciation,
valuation of inventories , obtaining audit evidence, ensuring compliance procedure and carrying out substantive
procedure, verification of assets & liabilities their valuation etc. which still requires judgement to be exercised by
the auditor.

Responsibility of expressing an audit opinion and objectives of an audit are not changed in the audit in EDP
environment. Therefore, it can be said that simply because of EDP environment and the trial balance has tallied
it does not mean that the audit would become simpler.

Q5. What is an Audit Trail? Briefly state the special audit techniques using the computer as an audit tool.

Audit Trail: 'Audit trail' refers to a situation where it is possible to relate, on a "one - to -one" basis, the original input
with the final output. In a manual accounting system, it is possible to relate the recording of a transaction of
each successive stage enabling an auditor to locate and identify all documents from beginning to end for the
purposes of examining documents, totalling and cross - referencing. In first and early second generation
computer systems, a complete audit trail was generally available. However, with the advent of modern
machines, the EDP environment has become more complex. This led to use of exception reporting by the
management which effectively eliminated the audit trail between input and output. The lack of visible evidence
may occur at different stages in the accounting process, for example:

(i) Input documents may be non-existent where sales orders are entered online. In addition,
accounting transactions such as discounts and interest calculations may be generated by
computer programmes with no visible authorization of individual transactions.

(ii) The system may not produce a visible audit trail of transactions processed through the computer.
Delivery notes and suppliers invoices may be matched by a computer programme. In addition,
programmed control procedures such as checking customer credit limits, may provide visible
evidence only on an exception basis. In such cases, there may be no visible evidence that all
transactions have been processed.

(iii) Output reports may not be produced by system or a printed report may only contain summary
totals while supporting details are retained in computer files.

Special audit Techniques: In the absence of audit trail, the auditor needs the assurance that the programmes
are functioning correctly in respect of specific items by using special audit techniques. The absence of input
documents or the lack of visible audit trail may require the use of Computer Assisted Audit Techniques (CAATs)
i.e. using the computer as an audit tool. The auditor can use the computer to test:

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आशीवायद- Comprehensive Module For CA IPCC Auditing & Assurance C6
➢ the logic and controls existing within the system, and
➢ the records produced by the system.

Depending upon the complexity of the application system being audited, the approach may be fairly simple
or require extensive technical competence on the part of the auditor. The effectiveness and efficiency of
auditing procedure may be enhanced through the use of CAATs. Properly, two common types of CAATs are in
vogue, viz., test pack or test data and audit software or computer audit programmes.

Q6. Your firm of Chartered Accountants has been allotted Information Systems Audit of branches of Oriental Bank of
Commerce. How would you assess the reliability of internal control system in computerized information system?

Reliability of Internal Control System in CIS: For evaluating the reliability of internal control system in CIS, the
auditor would consider the followings:-

(iii) That authorized, correct and complete data is made available for processing.
(iv) That it provides for timely detection and corrections of errors.
(v) That in case of interruption due to mechanical, power or processing failures, the system restarts
without distorting the completion of entries and records.
(vi) That it ensures the accuracy and completeness of output.
(vii) That it provides security to application software’s & data files against fraud etc.
(viii) That it prevents unauthorized amendments to programs.

Q7. Auditing through the computer.

'Auditing through the computer approach': Following are several circumstances where auditing through the
computer approach must be used:
(i) The application system processes large volumes of input and produces large volumes of output that
make extensive direct examination of the validity of input and output difficult.

(ii) Significant parts of the internal control system are embodied in the computer system. For example, in
an online banking system a computer program may batch transactions for individual tellers to provide
control totals for reconciliation at the end of the day's processing.

(iii) The logic of the system is complex and there are large portions that facilitate use of the system for
efficient processing.

(iv) Because of cost-benefit considerations, there are substantial gaps in the visible audit trail.

The primary advantage is that the auditor has increased power to effectively test a computer system. The range
and capability of tests that can be performed increases and the auditor acquires greater confidence that
data processing is correct. By examining the system's processing the auditor also can assess the system's ability
to cope with environment change.

The primary disadvantage of the approach are the high costs sometimes involved and the need for extensive
technical expertise when system are complex. However, these disadvantages are really spurious if auditing
through computer is the only viable method of carrying out the audit.

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आशीवायद- Comprehensive Module For CA IPCC Auditing & Assurance C9 - SAs

SA 220 –Quality Control for an Audit of


Financial Statement
Key Terms
1. Engagement Partner (EP)
→ Partner/ other person in firm (CA Full time in practice)
→ Responsible for engagement & report thereon

2. Engagement Quality Control Review (EQCR)


Process to evaluate judgment & conclusion of ET (Engagement Team) before report is issued.

3. EQC Reviewer (EQCRr)


→ Partner or
→ Other person
→ External person
→ Or a Firm
→ To conduct review

4. Network Firm - Entity under common control ownership or management with firm
(Nationally/Internationally)

Leadership REQ
Leadership responsibilities for quality on Audits- is of EP (Engagement Partner)

Ethical REQ
→ EP shall remain alert for non-compliance of ethical requirement by ET member
→ In case of non-compliance determine appropriate action after consultation

Independence
→ EP form conclusion with independent requirement
→ Identify circumstances of threat to independence
→ Take appropriate action to eliminate such threats

Acceptance & continuance of client engagement & relationship


• All procedure for acceptance followed
• Got information that would have caused the firm to decline the AE (Audit Engagement) had that
information have been available earlier
• Communicate information to firm for prompt action

Assignment of engagement team


→ Competent or capable team
→ Performance as per professional/ legal requirements
→ Appropriate audit report

Performance
• Direction, supervision.

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आशीवायद- Comprehensive Module For CA IPCC Auditing & Assurance C9 - SAs
o Of audit engagement in compliance with professional standards and regulatory & legal
requirements, and
o Appropriateness of audit report
• Reviews
o In accordance with the firm’s review policy
o Review on or before the date of audit report
▪ Audit Documentation & Discussion with the engagement team.
▪ Be Satisfied that Sufficient and appropriate evidence has been obtained to support
conclusions on which audit report will be based

Consultation-
→ ET should take proper consultation on difficult matters
→ It may be within the team or outside team
→ EP shall ensure- consultation are agreed with person consulted
→ Check conclusion have been implemented or not

EQCR
→ EP shall ensure EQCRr has been appointed
→ Discuss matters with EQCRr
→ Audit Report shall be dated after EQCR is complete.

EQCRr shall evaluate the following-


→ Significant matters discussed with EP
→ FS + Proposed AR
→ Selected Audit doc
→ Conclusion for AR
→ Independence
→ Consultation

Difference of opinion
→ ET- Parties consulted
→ EP- EQCR
→ Follow firm policy for dealing and resolving matter

ICAI May 2015 CA IPCC


Mention any four information which assists the auditor in accepting and continuing of relationship with the client as per SA 220.

Information which assist the Auditor in accepting and continuing of relationship with Client: As per SA 220, "Quality Control for an Audit of
Financial Statements" the auditor should obtain information considered necessary in the circumstances before accepting an engagement with
a new client, when deciding whether to continue an existing engagement and when considering acceptance of a new engagement with an
existing client. The following information would assist the auditor in accepting and continuing of relationship with the client:
• The integrity of the principal owners, key management and those charged with governance of the entity;
• Whether the engagement team is competent to perform the audit engagement and has the necessary
capabilities, including time and resources;
• Whether the firm and the engagement team can comply with relevant ethical requirements; and
• Significant matters that have arisen during the current or previous audit engagement, and their
implications for continuing the relationship.

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आशीवायद- Comprehensive Module For CA IPCC Auditing & Assurance C9 - SAs

SA 540
AUDITING ACCOUNTING ESTIMATES,
INCLUDING FAIR VALUE ACCOUNTING
ESTIMATES, AND RELATED DISCLOSURES
Nature of Accounting
▪ Some financial statement items cannot be measured precisely, but can only be estimated.
▪ For purposes of this SA, such financial statement items are referred to as accounting estimates.
▪ The degree of estimation uncertainty affects the risks of material misstatement of accounting
estimates.
▪ A difference between the outcome of an accounting estimate and the amount originally
recognized in the financial statements does not necessarily represent a misstatement of the financial
statements. This is particularly the case for fair value accounting-estimates.

Objective of auditor
To obtain sufficient appropriate audit evidence whether:
(a) accounting estimates, including fair value accounting estimates are reasonable; and
(b) Related disclosures in the financial statements are adequate.

Risk Assessment Procedures and Related Activities


Auditor shall obtain an understanding of the following in order to identify and assess the risks of material
misstatement for accounting estimates:

(a) The requirements of the applicable financial reporting framework. (FRF की req. क्र्ा है for AE)
(b) How management identifies those transactions, events and conditions that may give rise to the
need for accounting estimates. (कैस़े पता चलता है क़े इसमें AE चाहहए)
(c) How management makes accounting estimates (methods, assumptions, use of expert etc.),
(Mgt. AE कैस़े बनती है )
(d) The auditor shall review the outcome of accounting estimates included in the prior period
financial statements. (पपछल़े वालो का क्र्ा हुआ)

Reponses to the Assessed Risks


Based on the assessed risks of material misstatement, the auditor shall determine:
(a) Whether management has appropriately applied the applicable financial reporting framework
(b) Whether the methods are appropriate and have been applied consistently,

Measurement and Disclosures Related to Accounting Estimates


▪ S&A E Whether the accounting estimate and their disclosure in the financial statements is
appropriate.
▪ For accounting estimates that give rise to significant risks, the auditor shall check adequacy of the
disclosure of their estimation uncertainty in the financial Statements

Indicators of Possible Management Bias


The auditor shall review the judgments and decisions made by management.

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आशीवायद- Comprehensive Module For CA IPCC Auditing & Assurance C9 - SAs
Written Representations
The auditor shall obtain written representations from management whether management believes
significant assumptions used by it in making accounting estimates pre reasonable.

Documentation
The audit documentation shall include

(a) Conclusion का Basis - The basis for the auditor's conclusions about the reasonableness of
accounting estimates and their disclosure that give rise to significant risks; and
(b) Indicators of possible management bias, if any.

CA Neeraj Arora Page 9.41


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QUESTION 
Mention any four information which assists the auditor in accepting and continuing of relationship with the client as per SA 220.  
 
Answer 
Information which assist the Auditor in accepting and continuing of relationship with Client: 
As per SA 220, “Quality Control for an Audit of Financial Statements”  
● the auditor should obtain information considered necessary  
● in the circumstances  
■ before accepting an engagement with a new client, 
■ when deciding whether to continue an existing engagement and  
■ when considering acceptance of a new engagement with an existing client.  
● The following information would assist the auditor in accepting and continuing of relationship with the client 
 
1. The integrity of the principal owners, key management and those charged with governance of the entity; 
2. Whether the engagement team is competent to perform the audit engagement and has the necessary capabilities, 
including time and resources;  
3. Whether the firm and the engagement team can comply with relevant ethical requirements; and  
4. Significant matters that have arisen during the current or previous audit engagement, and their implications for 
continuing the relationship.  
 
Question 
Write a short note on“Quality control for audit work at firm level”. 
 
Quality Control for Audit Work at Firm Level: SA 220 on Quality Control for an Audit of Financial Statements deals with the 
specific responsibilities of the auditor regarding quality control procedures for an audit of financial statements. Quality control 
systems, policies and procedures are the responsibility of the audit firm. Within the context of the firm’s system of quality 
control, engagement teams have a responsibility to implement quality control procedures that are applicable to the audit 
engagement and provide the firm with relevant information to enable the functioning of that part of the firm’s system of quality 
control relating to independence.  
 
The requirements are- 
 
1. Leadership Responsibilities for Quality on Audits: The engagement partner shall take responsibility for the overall 
quality on each audit engagement to which that partner is assigned.  
 
2. Relevant Ethical Requirements: Throughout the audit engagement, the engagement partner shall remain alert, 
through observation and making inquiries as necessary, for evidence of non-compliance with relevant ethical 
requirements by members of the engagement team. The engagement partner shall form a conclusion on compliance 
with independence requirements that apply to the audit engagement.  
 
3. Acceptance and Continuance of Client Relationships and Audit Engagements: The engagement partner shall be 
satisfied that appropriate procedures regarding the acceptance and continuance of client relationships and audit 
engagements have been followed, and shall determine that conclusions reached in this regard are appropriate 
 
4. Assignment of Engagement Teams: The engagement partner shall be satisfied that the engagement team, and any 
auditor’s experts who are not part of the engagement team, collectively have the appropriate competence and 
capabilities to perform the audit engagement in accordance with professional standards and regulatory and legal 
requirements and enable an auditor’s report that is appropriate in the circumstances to be issued.  
 

 
 
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5. Engagement Performance: The engagement partner shall take responsibility for the direction, supervision and 
performance of the audit engagement. He shall take responsibility for reviews being performed in accordance with the 
firm’s review policies and procedures and shall take responsibility for the engagement team undertaking appropriate 
consultation on difficult or contentious matters. For audits of financial statements of listed entities, and those other 
audit engagements, if any, for which the firm has determined that an engagement quality control review is required, 
the engagement partner shall determine that an engagement quality control reviewer has been appointed. Further, if 
differences of opinion arise within the engagement team, with those consulted or, where applicable, between the 
engagement partner and the engagement quality control reviewer, the engagement team shall follow the firm’s 
policies and procedures for dealing with and resolving differences of opinion.  
 
6. Monitoring: The engagement partner shall consider the results of the firm’s monitoring process as evidenced in the 
latest information circulated by the firm and, if applicable, other network firms and whether deficiencies noted in that 
information may affect the audit engagement. 
 

 
 
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Short note on accounting estimates with examples. 

According to the SA 540, “Auditing Accounting Estimates, Including Fair Value Accounting Estimates, and Related Disclosure”, 
accounting estimate means an approximation of a monetary amount in the absence of a precise means of measurement.  
 
This term is used for an amount measured at fair value where there is estimation uncertainty, as well as for other amounts that 
require estimation.  
 
Because of the uncertainties inherent in business activities, some financial statement items can only be estimated. Further, the 
specific characteristics of an asset, liability or component of equity, or the basis of or method of measurement prescribed by 
the financial reporting framework, may give rise to the need to estimate a financial statement item.  
 
Some financial reporting frameworks prescribe specific methods of measurement and the disclosures that are required to be 
made in the financial statements, while other financial reporting frameworks are less specific.   
 
Some accounting estimates involve relatively low estimation uncertainty and may give rise to lower risks of material 
misstatements, for example: 

● Accounting estimates arising in entities that engage in business activities that are not complex.  
● Accounting estimates that are frequently made and updated because they relate to routine transactions.  
 
For some accounting estimates, however, there may be relatively high estimation uncertainty, particularly where they are 
based on significant assumptions, for example:. 
● Accounting estimates relating to the outcome of litigation.. 
● Fair value accounting estimates for derivative financial instruments not publicly traded.  
 
Additional examples of accounting estimates are:  

● Allowance for doubtful accounts.  


● Inventory obsolescence.  
● Warranty obligations.  
● Depreciation method or asset useful life.  
● Provision against the carrying amount of an investment where there is uncertainty regarding its recoverability. 
● Outcome of long term contracts.  
● Financial Obligations / Costs arising from litigation settlements and judgments.  
 
  
 
 
 

 
 
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SA 560 SUBSEQUENT EVENTS


SUBSEQUENT EVENTS
Events occurring between the date of the financial statements and the date of the auditor's report, and facts that
become known to the auditor after the date of the auditor's report.

OBJECTIVE
- Obtain Sufficient And Appropriate Evidence about whether events occurring between the date of the financial
statements and the date of the auditor's report that require adjustment of, or disclosure in, the financial
statements are appropriately reflected in those financial statements; and
- Respond appropriately to facts that become known to the auditor after the date of the auditor's report, that,
had they been known to the auditor at that date, may have caused the auditor to amend the auditor's report.

TYPES OF SUBSEQUENT EVENTS


A. Type I
Those events that provide additional evidence with respect to conditions that existed on the date of balance
sheet and effect the estimation made in the preparation of the financial statements. The statement should be
adjusted for any change in estimates resulting from the use of evidence of subsequent events.

For example-
Debtors as on balance sheet date are declared insolvent after the balance sheet date but before
auditor's report
Settlement of legal disputes before audit report date, which arose before balance sheet date

B. Type II
Those events which provide evidence with respect to conditions that did not exist on the date of the balance
sheet being reported on but arose subsequent to the date. These events should not result in adjustments of the
financial statements. Some of these events however may be of such a nature that disclosure of them is required
to keep the financial statements from not being misleading.

For example-
Purchase of business
Sale of shares and debentures
Settlement of legal disputes when the event giving rise to the claim took place subsequent to balance
sheet date
Loss of plant or inventory as a result of fire

AUDIT PROCEDURES FOR SUBSEQUENT EVENTS


This standard requires that auditor should perform procedures designed to obtain sufficient and appropriate audit
evidence that all the events up to date of the auditor’s report that may require adjustment of (type-l events) or
disclosure (type- ll event’s) the financial statements have been identified.

The following procedures may be followed to identify the subsequent events:-


Review the procedures that management followed to identify the subsequent events.
Inquiring of management and, where appropriate, those charged with governance as to whether any
subsequent events have occurred which might affect the financial statements.
Read the minutes of meeting of board of directors, executive committee, meeting of shareholders held after
balance sheet date
Read latest interim financial statements
Inquire, read about and the latest position of legal cases
Management representation that all subsequent events are identified

INQUIRIES OF MANAGEMENT REGARDING SUBSEQUENT


EVENTS The auditor may inquire as to the current status of items that were accounted for on the basis of preliminary or
inconclusive data and may make specific inquiries about the following matters:
Whether new commitments, borrowings or guarantees have been entered into.
Whether sales or acquisitions of assets have occurred or are planned.
Whether there have been increases in capital or issuance of debt instruments such as the issue of new shares
or debentures, or an agreement to merge or liquidate has been made or is planned.
Whether any assets have been appropriated by government or destroyed, fc example, by fire or flood.
Whether there have been any developments regarding contingencies.
Whether any unusual accounting adjustments have been made or are contemplated.
Whether any events have occurred or are likely to occur that will bring in question the appropriateness of
accounting policies used in the finance statements, as would be the case, for example, if such events call ir
question the validity of the going concern assumption.
Whether any events have occurred that are relevant to the measurement estimates or provisions made in the
financial statements.
Whether any events have occurred that are relevant to the recoverability assets.

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आशीवायद- Comprehensive Module For CA IPCC Auditing & Assurance C9 - SAs

SUBSEQUENT EVENTS AND BRANCH AUDITOR'S REPORT


If branch auditor has already audited the branch and submitted the report to principal auditor, the principal auditor
would follow audit procedures in respect events occurring between the date of signing of the audit report of the auditor
of branch and the date of signing of his (principal) report.

FACTS WHICH BECOME KNOWN TO THE AUDITOR AFTER THE DATE OF THE AUDITOR'S REPORT BUT BEFORE THE DATE THE
FINANCIAL STATEMENTS ARE ISSUED
The auditor has no obligation to perform any audit procedures regarding the financial statements after the
date of the auditor's report. However, when, after the date of the auditor's report but before the date the
financial statements are issued, a fact becomes known to the auditor that, had it been known to the auditor
at the date of the auditor's report, may have caused the auditor to amend the auditor's report, the auditor
shall:
(a) Discuss the matter with management and, where appropriate, TCWG.
(b) Determine whether the financial statements need amendment and, if so,
(c) Inquire how management intends to address the matter in the financial statements.
If management amends the financial statements, the auditor shall:
(a) Carry out the audit procedures necessary in the circumstances on the amendment.
(b) Extend the audit procedures referred to the date of the new auditor's report; and
(c) Provide a new auditor's report on the amended financial statements.
However, when management does not amend the financial statements in circumstances where the auditor
believes they need to be amended, then:
(a) If the auditor's report has not yet been provided to the entity, the auditor shall modify the opinion as
required by SA 705 and then provide the auditor's report; or
(b) If the auditor's report has already been provided to the entity, the auditor shall notify management
and, unless all of those charged with governance are involved in managing the entity, those charged
with governance, not to issue the financial statements to third parties before the necessary
amendments have been made. If the financial statements are nevertheless subsequently issued
without the necessary amendments, the auditor shall take appropriate action, to seek to prevent
reliance on the auditor's report.

DUAL DATING
The following is an illustration of such an additional date:
"(Date of auditor's report), except as to Note Y, which is as of (date of completion of audit procedures restricted to
amendment described in Note Y)".
FACTS WHICH BECOME KNOWN
After the financial statements have been issued, the auditor has no obligation to perform any audit procedures
regarding such financial statements.

TO THE AUDITOR AFTER THE FINANCIAL STATEMENTS HAVE BEEN ISSUED


However, when, after the financial statements have been issued, a fact becomes known to the auditor that,
had it been known to the auditor at the date of the auditor's report, may have caused the auditor to amend
the auditor's report, the auditor shall:
(a) Discuss the matter with management and, where appropriate, those charged with governance.
(b) Determine whether the financial statements need amendment and, if so,
(c) Inquire how management intends to address the matter in the financial statements.
If the management amends the financial statements, the auditor shall:
(a) Carry out the audit procedures necessary in the circumstances on the amendment.
(b) Review the steps taken by management to ensure that any one in receipt of the previously issued
financial statements together with the auditor's report thereon is informed of the situation.
If management does not take the necessary steps to ensure that anyone in receipt of the previously issued
financial statements is informed of the situation, the auditor will seek to prevent future reliance on the auditor's
report.

CA Neeraj Arora Page 9.33