Paper/Subject Code: 85503/Auditing - II

TYBBI SEM-6 :

Auditing-II

(Q.P. November 2023 with Solutions)

Instructions:

(a) All questions are compulsory subject to internal choice.

(b) Figure to the right indicates marks.

Q.1 a) Select the most appropriate option to complete the following sentences (Any Eight) 08

i) _________ is done for specific objectives

a) Joint Audit

b) Special audit

c) Branch Audit

d) Internal Audit

ii) The profits available for the distribution among the shareholders of a company as dividend are called _________

a) Capital Profit

b) Revenue Profit

c) Divisible profit

d) Regular profit

3) _________ is a distinguishable component of an enterprise that is engaged in providing an individual product or service or a group of related product or service.

a) Geographical segment

b) Business segment

c) Location Segment

d) Head Segment

4) _________ is a tool to judge organizations performance and effectiveness of Personnel Management

a) Cost Audit

b) Human Resource Audit

c) Operation Audit

d) Social Audit

v) _________ report is prepared by a bank auditor along with statutory audit report

a) Accounting report

b) Negative Report

c) Long Form Audit Report

d) Short Form Audit Report

6) The remuneration of a bank auditor is fixed according to Section _________ of Companies Act, 2013.

a) 141

b) 142

c) 143

d) 144

7) AS-3 deals with _________

a) Revenue Recognition

b) Inventory Control

c) Cash Flow Statements

d) Accounting for Investments

8) Every General Insurance Company required to create reserve.

a) Catastrophe

b) General

c) Claim

d) Premium.

9) _________ Approach is also known as "Auditing around the computer".

a) White box

b) Black Box

c) Green box

d) Red box

10) Part II of First Schedule deals with professional misconduct in relation to the members in

a) Service

b) Practice

c) General

d) Business.

QB. Match the following: [Any Seven] 07

Column A	Column B
a. Board of Directors	i. Social Audit
b. Adverse Report	ii. Insurance Company's Profit & Loss A/c
c. Cashier should not have	iii. Pervasive Misstatements
d. Dividend must be paid	Iv Prevents loss of data
e. An audit of CSR Activities	v. At registered office
f. Maintenance of Books of accounts	vi. Format of Profit & Loss A/c of Banks
g. Back up system	vii. In cash
h. Misfeasance	viii. Access to customer ledger
i. Form A-PL	ix. Breach of trust or duty
j. Form B	x. Can fix the remuneration of First Auditor

Ans:

Column A	Column B
a. Board of Directors	x. Can fix the remuneration of First Auditor
b. Adverse Report	iii. Pervasive Misstatements
c. Cashier should not have	viii. Access to customer ledger
d. Dividend must be paid	vii. In cash
e. An audit of CSR Activities	i. Social Audit
f. Maintenance of Books of accounts	ii. Insurance Company's Profit & Loss A/c
g. Back up system	iv Prevents loss of data
h. Misfeasance	ix. Breach of trust or duty
i. Form A-PL	vi. Format of Profit & Loss A/c of Banks
j. Form B	v. At registered office

Q.2 a) Discuss the rights and duties of company auditor. 08

The rights and duties of a company auditor are essential in ensuring transparency, accountability, and reliability in a company's financial statements. These are typically governed by laws and regulations such as the Companies Act in many countries, with some variations based on the jurisdiction. Here is an outline of the rights and duties of company auditors:

Rights of a Company Auditor

Access to Books and Records:
- The auditor has the right to access all books, records, and documents of the company, including financial statements and supporting documents, to perform the audit properly.
- This includes the right to inspect the company's accounts, vouchers, and other relevant documents.
Right to Obtain Information:
- The auditor has the right to request information and explanations from the company’s officers (directors, executives, employees) regarding any aspect of the financial records, transactions, or processes.
- This right extends to access information from other individuals or entities the auditor deems necessary to perform the audit.
Right to Attend General Meetings:
- The auditor has the right to attend the company’s general meetings, including the Annual General Meeting (AGM), and to be heard on any matter relating to the audit, especially when the accounts are discussed.
Right to Report Concerns:
- The auditor has the right to report any material misstatements, irregularities, fraud, or violations of laws and regulations found during the audit to the board or shareholders.
- In some jurisdictions, the auditor may also have the right to report directly to regulatory authorities or government agencies in cases of fraud or misconduct.
Right to Receive Remuneration:
- Auditors are entitled to receive payment for their services, as agreed upon in their appointment, whether it’s a fixed fee or based on time spent.
Right to Resign:
- If the auditor believes that their independence or ability to conduct an unbiased audit is compromised, they have the right to resign from their position. They must inform the company about their reasons for resignation.

Duties of a Company Auditor

Duty of Independence and Objectivity:
- The auditor must maintain objectivity and impartiality in conducting the audit. They should not have any personal interest in the company’s financial affairs or operations that could bias their judgment.
- They are expected to conduct the audit independently of the company’s management and report their findings honestly.
Duty to Examine the Financial Statements:
- The primary duty of an auditor is to examine the company’s financial statements and provide an opinion on their truthfulness, fairness, and compliance with accounting standards.
- The auditor should assess whether the financial statements reflect a true and fair view of the company's financial position, operations, and cash flow.
Duty to Follow Standards:
- The auditor must adhere to auditing standards, guidelines, and professional ethics, such as those prescribed by the International Auditing and Assurance Standards Board (IAASB) or local accounting and auditing bodies.
- They should use proper audit procedures, including gathering sufficient and appropriate audit evidence to form a basis for their opinion.
Duty to Detect Fraud and Irregularities:
- While the auditor is not responsible for detecting fraud or errors, they have a duty to exercise due professional care and skepticism to identify any signs of material misstatements due to fraud or irregularities.
- If fraud is suspected, the auditor must bring it to the attention of the board or shareholders, and in some cases, may need to report it to regulatory bodies.
Duty to Report:
- After completing the audit, the auditor must issue an audit report that clearly outlines their opinion on the financial statements.
- The report should express whether the financial statements are in compliance with relevant financial reporting frameworks (e.g., IFRS or GAAP) and provide insights into any material issues found during the audit.
- If there are reservations or issues, the auditor must disclose them in the audit report (e.g., qualifications or disclaimers).
Duty to Act in Good Faith:
- The auditor has a duty to act in the best interests of shareholders and the company as a whole. They should report their findings truthfully, even if it might not align with the interests of the company’s management.
Duty to Maintain Confidentiality:
- The auditor is expected to maintain confidentiality regarding any information obtained during the audit process. They should not disclose any such information without proper authorization, unless required by law or a regulatory authority.
Duty to Report to Regulators:
- In some circumstances, auditors have a duty to report their findings to regulatory authorities, particularly if they uncover evidence of illegal activities, fraud, or serious financial mismanagement that could affect stakeholders or the public.

Q.2 b) Explain in detail Qualification and Disqualification of Company Auditor under Section 141 of Companies Act, 2013. 07

Section 141 of the Companies Act, 2013 outlines the qualifications and disqualifications for being appointed as a company auditor in India. This section is critical in ensuring that auditors are competent and independent in their duties while maintaining transparency and trust in the financial reporting process.

Qualification of a Company Auditor (Section 141(1))

Under Section 141(1) of the Companies Act, 2013, the qualifications for being appointed as an auditor of a company are as follows:

Chartered Accountant (CA) Qualification:
- A company auditor must be a Chartered Accountant (CA) who is a member of the Institute of Chartered Accountants of India (ICAI). This is the basic professional qualification required for an individual or firm to act as an auditor for a company.
Individual or Firm:
- The appointment of an auditor can be either of an individual or a firm of chartered accountants. Both individual chartered accountants and chartered accountant firms can be appointed as company auditors.
Independent Auditor:
- The auditor must be independent of the company. Independence means that the auditor should not have any personal interest in the company’s operations or financial affairs. The relationship between the auditor and the company should not lead to any bias or conflict of interest.

Disqualification of a Company Auditor (Section 141(3))

Section 141(3) of the Companies Act, 2013 specifies various disqualifications for auditors. A person or firm will be disqualified from being appointed as an auditor if any of the following conditions apply:

Person not a Chartered Accountant:
- If the individual or firm is not a member of the Institute of Chartered Accountants of India (ICAI), they are disqualified from being appointed as the auditor of the company.
Certain Relationships with the Company:
- Relative of a Director or Officer: If the auditor is a relative of a director, key managerial personnel (KMP), or other officers of the company, they cannot be appointed as the auditor. This is to ensure the independence of the auditor.
- Partner or Employee of a Director/Officer: If the auditor is a partner or an employee of the director, key managerial personnel, or other officers of the company, they are disqualified from being appointed as an auditor.
Inability to Audit Due to Other Interests:
- If the individual or firm is holding a substantial interest (more than 1% of the total shareholding) in the company, they are disqualified. Having a financial stake in the company can compromise the objectivity and independence of the audit process.
Auditor of More Than 20 Companies:
- A person or firm cannot be appointed as an auditor of more than 20 companies at any point in time. This restriction is intended to prevent auditors from becoming overloaded with too many audits, which could compromise their quality of work and attention to detail.
Director of the Company:
- A person cannot be appointed as an auditor if they are a director of the company or have been a director of the company in the past.
Insolvency or Default:
- If the individual or firm has been declared insolvent or has made an assignment for the benefit of creditors, they are disqualified from being appointed as an auditor of any company.
Conviction for an Offense:
- If the individual or firm has been convicted by a court of law for any offense related to fraud, misappropriation, or breach of trust, they are disqualified from being an auditor.
Disqualification Due to Non-Compliance:
- If the individual or firm has been disqualified by the regulatory body (such as ICAI), they are ineligible to be an auditor.
Firm with Partners Disqualified:
- A firm is disqualified if one or more of its partners are disqualified from being auditors under the provisions of the Companies Act. In such a case, the entire firm becomes ineligible to act as the auditor of a company.

Special Provisions for Auditors of Government Companies and Public Sector Undertakings (PSUs)

Under Section 141(4), there are special provisions for the appointment of auditors in government companies and PSUs:

The Comptroller and Auditor General of India (CAG) is the auditor of a government company or a government-owned corporation, or a company controlled, directly or indirectly, by the government. However, the CAG may appoint a chartered accountant in practice to act as an auditor in such cases.

Other Considerations

Resignation: If an auditor resigns before the completion of their term, they must provide a statement with reasons for resignation. If an auditor is removed from office before the completion of their term, the company must file a statement with reasons to the relevant authorities.
Rotation of Auditors: The Companies Act, 2013 also includes provisions on the rotation of auditors (Section 139), which apply particularly to listed companies, public companies, and certain other specified classes of companies. This aims to ensure the independence and objectivity of the audit process over time.

Q.2 c) Explain the appointment of first auditor and auditor during casual vacancies. 08

The appointment of the first auditor and the appointment of an auditor during casual vacancies are essential aspects of the auditor's role in a company, and both are governed by specific provisions under the Companies Act, 2013. These provisions ensure that a company has a qualified auditor to review its financial statements, even in situations like the formation of the company or the unexpected vacancy of an auditor.

1. Appointment of First Auditor (Section 139(6))

The first auditor of a company is the auditor who is appointed immediately after the incorporation of the company. Since the company is newly formed, there is no prior annual general meeting (AGM) where shareholders could appoint an auditor. Therefore, the process for the appointment of the first auditor is specified under the Companies Act, 2013.

Process for Appointment:

Board of Directors’ Role:
- In the case of a private company or public company, the first auditor must be appointed by the Board of Directors within 30 days from the date of incorporation of the company.
Tenure of First Auditor:
- The first auditor appointed by the board holds office only until the conclusion of the first annual general meeting (AGM) of the company.
- In other words, the first auditor's term ends when the shareholders, during the AGM, appoint an auditor for the company, and the auditor’s term is usually for the subsequent year.
If the Board Fails to Appoint:
- If the Board of Directors fails to appoint the first auditor within 30 days, the shareholders of the company can appoint the first auditor at a special general meeting (SGM).
- The shareholders will appoint the first auditor within the same 90-day period from the incorporation date.
First Auditor’s Remuneration:
- The first auditor's remuneration is decided by the Board of Directors. However, once the first auditor is replaced by a new auditor at the AGM, the remuneration of the new auditor will be determined by the shareholders.

2. Appointment of Auditor During Casual Vacancies (Section 139(8))

A casual vacancy occurs when the auditor’s position becomes vacant before the completion of their term, except in the case of resignation. Casual vacancies may occur due to death, disqualification, or any other reason. However, there are specific provisions on how the company should handle the appointment of an auditor during such situations.

Types of Casual Vacancy:

Resignation of Auditor: If an auditor resigns, this is considered a casual vacancy.
Disqualification or Removal: If an auditor is disqualified or removed from office (except through a special resolution), the vacancy is treated as a casual vacancy.

Process for Appointment of Auditor During Casual Vacancy:

Board’s Power to Appoint:
- The Board of Directors can appoint an auditor to fill the casual vacancy. However, the board can only do so if the vacancy is not due to the removal of the auditor (as per Section 140). If the auditor has been removed by shareholders, the appointment of a new auditor can only be made through a shareholders' resolution in a general meeting.
Time Frame for Appointment:
- The Board of Directors must appoint an auditor to fill the casual vacancy within 30 days from the date of the vacancy.
Shareholder Approval:
- If the appointment is made by the Board, the new auditor will hold office until the conclusion of the next AGM. However, if the vacancy is due to the removal of the auditor, the appointment must be ratified by the shareholders at the next general meeting.
Removal of an Auditor:
- If the casual vacancy occurs due to the removal of the auditor by the shareholders through a special resolution, the new auditor must be appointed at a general meeting (either ordinary or special).
- The shareholders must vote on the removal of the auditor and appointment of a new one during the meeting.
Procedure for Special Resolutions:
- If an auditor is being removed from office and replaced by a new one, the company needs to pass a special resolution. The procedure includes giving the auditor the right to respond to the removal, including whether they wish to present their views before the shareholders, and setting a date for the AGM to pass the resolution.
Remuneration of the New Auditor:
- The remuneration of the auditor appointed to fill a casual vacancy is decided by the Board of Directors. However, if the vacancy was due to the removal of the previous auditor, the new auditor’s remuneration is determined by the shareholders during the general meeting.

Key Points to Remember:

First Auditor:
- Appointed by the Board within 30 days of incorporation.
- Holds office until the AGM, where the shareholders appoint the regular auditor.
Casual Vacancy:
- The Board appoints an auditor to fill the vacancy within 30 days, unless the vacancy is due to the auditor’s removal, in which case the shareholders must approve the new appointment at a general meeting.
Vacancy Due to Resignation or Death:
- The company must fill the vacancy by appointing a new auditor, either by the Board or shareholders, depending on the circumstances.
Vacancy Due to Removal:
- A new auditor can only be appointed by the shareholders via a special resolution.

Q.2 d) What do you mean by Audit report? Distinguish between auditor's report and auditor's certificate. 07

	Auditor's Report	Auditor's Certificate
Purpose	To express an opinion on the financial statements of a company.	To confirm or validate specific information, facts, or events.
Nature	Opinion-based document.	Certifying facts or compliance-based document.
Content	Includes the auditor’s opinion on the truth and fairness of the financial statements, along with audit procedures, key audit matters, etc.	Confirms a specific point, such as compliance with a regulation, fact, or event (e.g., financial ratios, compliance with tax laws).
Scope	Broad and relates to the financial health of the entire company, its financial statements, and accounting practices.	Narrow and focused on specific issues or compliance matters, rather than the overall financial statements.
Example	"We have audited the financial statements of XYZ Ltd for the year ended March 31, 2024..."	"We hereby certify that XYZ Ltd's revenue for the year 2024 complies with the applicable tax laws."
Legal Requirement	Required by law for most companies after completing their financial year.	Often required for specific legal or regulatory purposes, such as compliance with a loan agreement or tax audit.
Impact	Impacts the trust and credibility of the company’s financial information for stakeholders.	Often used for specific legal, regulatory, or contractual purposes and does not always reflect the company's overall financial health.

Q.3 a) How would the auditor vouch/verify items appearing in the financial statements of a bank? 08
i) Non-performing assets (NPAs)
ii) Advances

Auditing a bank's financial statements involves a thorough examination of the bank’s financial position and operations, with particular attention to high-risk and critical areas, including Non-Performing Assets (NPAs) and Advances. The auditor’s responsibility is to vouch and verify the accuracy, legitimacy, and presentation of these items in accordance with regulatory frameworks, accounting standards, and internal controls.

i) Non-Performing Assets (NPAs)

A Non-Performing Asset (NPA) refers to a loan or advance where the principal or interest remains overdue for a period of more than 90 days. NPAs are critical in banking, as they directly affect the bank’s profitability, asset quality, and capital adequacy.

Steps to Vouch/Verify NPAs:

Review of Bank’s Policies on NPAs:
- The auditor should first verify the bank’s internal policies and procedures for identifying and classifying NPAs. The bank is required to follow the Reserve Bank of India (RBI) guidelines on asset classification, which are based on the age of the overdue payments (e.g., Substandard, Doubtful, and Loss assets).
- Ensure that the bank has appropriate procedures to identify, classify, and report NPAs based on these criteria.
Review of Loan and Advance Ledger:
- The auditor should obtain the loan and advance ledger and trace the loans and advances to the bank’s internal records to identify which loans are classified as NPAs.
- Verify the date of the last payment or interest receipt to ensure the loan has been correctly classified as NPA after 90 days of non-payment.
Examine Aging of Overdue Payments:
- Verify the aging analysis of overdue payments. This involves reviewing the specific dates when payments became overdue and ensuring that any account that has not received repayment for 90 days or more is classified correctly as an NPA.
Review of Documentation:
- Inspect documentation such as loan agreements, disbursement schedules, and correspondence with borrowers to ensure that the classification of NPAs is accurate and substantiated.
Verification of Provisioning for NPAs:
- According to RBI guidelines, banks are required to make specific provisions for NPAs. The auditor should review the provisioning calculation and ensure the bank has made adequate provisions based on the classification of the NPAs (e.g., 25% for Substandard, 50% for Doubtful, etc.).
- Ensure the provision is in line with accounting standards and RBI norms for each category of NPA. Verify that the bank has made provisions for NPAs in its Profit and Loss Statement.
Confirmance with Regulatory Filings:
- The auditor should verify the disclosures related to NPAs in the financial statements by checking if the bank has disclosed the total amount of NPAs, provisions made for NPAs, and the movement in NPAs (e.g., additions, recoveries, and write-offs) in accordance with RBI guidelines and Indian Accounting Standards (Ind AS) or GAAP.
Review of Recovery Efforts:
- The auditor should review any recovery efforts made by the bank, including recovery proceedings through legal actions (e.g., through Debt Recovery Tribunals or SARFAESI Act). The bank should provide an update on the status of recovery and write-offs.
Verification of Write-Offs:
- Verify that any NPAs that have been written off in the books are done in compliance with RBI guidelines. The write-off must be backed by appropriate approvals and substantiated by documents evidencing the irrecoverability of the asset.

ii) Advances

Advances refer to loans or credit facilities extended by the bank to its customers. Advances form a significant part of a bank’s assets and can include personal loans, business loans, mortgages, and overdrafts. The auditor’s role is to ensure that the advances are accurately reported and adequately supported by proper documentation.

Steps to Vouch/Verify Advances:

Review of Loan/Advance Documentation:
- Verify the loan agreements and sanction letters to ensure that the bank’s advances are properly authorized and that the terms and conditions are consistent with the approved credit policy.
- Check whether the interest rates and repayment schedules comply with the agreed-upon terms.
Examine the Creditworthiness of Borrowers:
- The auditor should check whether the bank has conducted proper due diligence and credit assessments before sanctioning loans. This could include reviewing the credit score, financial statements, business plans (for business loans), and other supporting documents of borrowers.
Review of Disbursement of Advances:
- Verify the disbursement of funds for the loans, ensuring that the loans have been disbursed in accordance with the terms of the agreement and the amount is correctly recorded in the bank’s books.
- Check for disbursement schedules to confirm that the bank has disbursed the loan as per the agreed schedule, and any advances paid out are fully supported by documentation.
Examine the Loan Repayment Status:
- The auditor should analyze the loan repayment history to check if the advances are being repaid on time. Review the aged debt analysis to confirm timely repayments.
- Investigate any overdue payments and assess whether the advances should be classified as NPAs based on the payment status.
Review the Security and Collateral:
- For secured loans, the auditor must ensure that the security (e.g., property, machinery, or other assets) is properly documented, valued, and held by the bank as collateral for the advances.
- The auditor should verify that the loan-to-value (LTV) ratios are within the approved limits, and the collateral is adequate to cover the loan in case of default.
Verify the Interest Accrual:
- Verify the accrual of interest on advances in accordance with the loan agreement. Ensure that the interest has been recorded in the bank’s books accurately.
- Check if interest is being charged on overdue loans, as applicable, and that it is accounted for correctly.
Review of Loan Loss Provisions and Write-Offs:
- Ensure that the bank has made appropriate provisions for any potential losses arising from advances that are overdue or classified as NPAs.
- Check the provisioning for bad debts and verify the write-off procedures followed by the bank for loans considered irrecoverable.
Verification of Compliance with RBI Guidelines:
- Ensure that the advances are in compliance with RBI guidelines, including those related to priority sector lending, security and collateral norms, and other regulatory requirements.
- Review whether the bank has made disclosures related to advances as per RBI norms (such as the classification of loans under different sectors like agriculture, housing, etc.).
Confirmations from Borrowers:
- In some cases, auditors may request direct confirmations from significant borrowers to verify the existence, amounts, and terms of outstanding advances.

Q.3 b) What should be the contents of audit report of insurance company.

The audit report of an insurance company should be comprehensive, clear, and in compliance with relevant accounting and auditing standards. It provides an opinion on the financial statements of the insurance company, ensuring that they give a true and fair view of the company’s financial position and performance. The contents of an audit report for an insurance company typically include the following key sections:

1. Title of the Report

Example: "Independent Auditor’s Report"

This section should clearly identify that the report is prepared by an independent auditor.

2. Addressee

The report is usually addressed to the shareholders or Board of Directors of the insurance company.

Example: "To the Shareholders/Board of Directors of [Company Name]"

3. Introduction

This section provides an overview of the audit and what the auditor is reporting on. It typically includes:

Identity of the financial statements audited:
- Mention the specific financial statements that have been audited, including the balance sheet, profit and loss account, cash flow statement, and statement of changes in equity, along with any relevant schedules and notes.
- State the period of audit (e.g., for the financial year ended March 31, 2024).

Example:
"We have audited the accompanying financial statements of [Company Name], which comprise the balance sheet as at March 31, 2024, and the profit and loss account for the year then ended, and a summary of significant accounting policies and other explanatory information."

4. Management’s Responsibility

This section outlines the responsibility of the insurance company’s management in preparing the financial statements.

Example:
"Management is responsible for the preparation and fair presentation of these financial statements in accordance with the applicable financial reporting framework, and for such internal control as management determines is necessary to enable the preparation of financial statements that are free from material misstatement, whether due to fraud or error."

5. Auditor’s Responsibility

This section explains the auditor’s role in the audit and their responsibility for expressing an opinion on the financial statements.

Example:
"Our responsibility is to express an opinion on these financial statements based on our audit. We conducted our audit in accordance with the auditing standards generally accepted in [Country Name] and applicable standards set by regulatory bodies. These standards require that we comply with ethical requirements and plan and perform the audit to obtain reasonable assurance about whether the financial statements are free from material misstatement."

The auditor will also mention the scope of the audit, including:

The methods used to gather audit evidence (e.g., examining records, internal controls, third-party confirmations, etc.)
Any areas where the auditor faced limitations or challenges during the audit.

6. Opinion

This is the most critical part of the audit report where the auditor expresses their opinion on the financial statements.

Unqualified Opinion (Clean Report): If the financial statements are presented fairly in all material respects, in accordance with the applicable financial reporting framework, the auditor will issue an unqualified opinion.

Example:
"In our opinion, the financial statements give a true and fair view of the financial position of [Company Name] as at March 31, 2024, and of its financial performance and its cash flows for the year then ended in accordance with [Country's] Generally Accepted Accounting Principles (GAAP)/International Financial Reporting Standards (IFRS)."

Qualified Opinion: If there are specific issues that prevent the auditor from issuing a clean report but the financial statements are still fairly presented overall.
Adverse Opinion: If the financial statements do not present a true and fair view, the auditor will issue an adverse opinion.
Disclaimer of Opinion: If the auditor is unable to form an opinion due to significant limitations on the scope of the audit.

7. Key Audit Matters (KAMs)

This section is included in the audit report for large, complex companies like insurance firms, where the auditor highlights significant issues or areas that required significant judgment during the audit.

Examples of Key Audit Matters in an Insurance Company:

Estimation of claims reserves.
Valuation of insurance liabilities.
Revenue recognition of premiums.
Adequacy of reinsurance coverage.

The auditor may explain how these matters were addressed during the audit.

8. Emphasis of Matter

If there is something important that the auditor believes should be highlighted for clarity, but it does not affect the overall audit opinion, this section may be included.

Example:
"Without modifying our opinion, we draw attention to Note [X] in the financial statements, which describes the company’s contingent liabilities relating to pending litigation."

9. Other Legal and Regulatory Requirements

The auditor may include a statement regarding compliance with relevant regulations specific to the insurance industry. In many jurisdictions, insurance companies are subject to specific rules and regulations set by regulatory authorities (e.g., the Insurance Regulatory and Development Authority in India, or the Financial Conduct Authority in the UK).

Example:
"As required by the Insurance Act, [Country], we have also audited the solvency margin and the reserves as prescribed by the regulatory authorities. In our opinion, the company has maintained the prescribed solvency margin and reserves."

10. Signature

The audit report should be signed by the auditor or the audit firm conducting the audit, including the auditor's:

Name
Designation
Audit Firm Name (if applicable)
Date: The date of the audit report, which should be after the date of the financial statements but before the financial statements are filed or published.

Example:
"Signature of Auditor: [Auditor’s Name]
[Audit Firm Name]
Date: [Audit Report Date]"

11. Auditor’s Address

In some jurisdictions, the auditor is required to provide their address (typically the city where the audit firm is based).

Example:
"Address: [Audit Firm Address]"

Q.3 c) How would an auditor evaluate internal control system of a bank? 08

An auditor’s evaluation of the internal control system (ICS) of a bank involves assessing the effectiveness of policies, procedures, and practices designed to ensure the bank’s operations are efficient, accurate, and in compliance with laws and regulations. The primary goal is to safeguard the bank’s assets, ensure financial reporting reliability, and prevent fraud or mismanagement.

The evaluation process typically follows a structured approach, encompassing the five components of internal control outlined by the Committee of Sponsoring Organizations of the Treadway Commission (COSO) framework. These five components include the control environment, risk assessment, control activities, information and communication, and monitoring. Below is a detailed explanation of how auditors evaluate the ICS of a bank:

1. Understand the Control Environment

The control environment sets the tone for the entire internal control system. It encompasses the bank’s culture, ethical standards, and the attitude of management and employees toward internal controls.

Management Philosophy and Operating Style:
- Review how the bank’s leadership views internal controls and their commitment to ethical operations. The tone set by senior management has a significant impact on the entire control system.
Organizational Structure:
- Assess the design and clarity of the bank’s organizational structure. A well-defined structure ensures segregation of duties and clear lines of responsibility.
Human Resources Policies:
- Review the bank’s hiring, training, and performance management processes to ensure that employees understand their roles in upholding internal controls.
Integrity and Ethical Values:
- Evaluate the bank’s ethics policies, including codes of conduct, whistleblower mechanisms, and procedures for handling conflicts of interest.

2. Risk Assessment

Risk assessment is a crucial part of the internal control system, and auditors need to evaluate how the bank identifies and addresses potential risks to its operations.

Risk Identification:
- Review how the bank identifies and classifies financial, operational, compliance, and strategic risks. This includes both external risks (e.g., regulatory changes, economic conditions) and internal risks (e.g., operational inefficiencies, fraud risks).
Risk Analysis and Management:
- Assess how the bank evaluates the potential impact and likelihood of identified risks. Examine whether the bank has systems in place to manage and mitigate these risks.
Risk Mitigation Strategies:
- Evaluate how effectively the bank addresses identified risks. This includes reviewing disaster recovery plans, cybersecurity measures, and insurance coverage.

3. Control Activities

Control activities are the policies and procedures that ensure risk management processes are effectively implemented. The auditor evaluates various control mechanisms to verify that they function as intended.

Segregation of Duties:
- Review whether key banking functions (e.g., authorizing transactions, recording transactions, and custody of assets) are appropriately segregated to prevent fraud or errors.
- For example, no single employee should have the ability to approve and process payments or access both the cash and the accounting system.
Authorization and Approval:
- Check if transactions and activities (such as loan approvals, fund transfers, or wire transfers) require appropriate authorization from designated individuals.
- The auditor should ensure that approval limits are set for different roles based on responsibility and the amount of risk involved.
Documentation and Record-Keeping:
- Verify that all banking transactions are supported by proper documentation (e.g., account opening forms, loan agreements, transaction receipts).
- The auditor should also check if the bank has systems to maintain and archive records securely, ensuring data integrity and availability for audits.
Reconciliation and Review:
- Evaluate the bank’s reconciliation processes, such as daily cash reconciliations, loan account reconciliations, and periodic asset valuations.
- Assess the adequacy of review processes to ensure that any discrepancies are promptly identified and resolved.
Physical Controls:
- Verify the bank’s physical security measures to protect assets, such as cash and securities. This includes reviewing access controls to vaults, safes, and other sensitive areas.
- Assess the use of surveillance systems, biometric access controls, and other physical security measures to deter fraud and theft.

4. Information and Communication

Information and communication ensure that necessary data is accurately and promptly communicated to relevant parties within and outside the bank. Auditors evaluate:

Timeliness and Accuracy of Financial Reporting:
- Review the accuracy, timeliness, and completeness of the bank’s financial reports. These reports should reflect all transactions and provide a clear view of the bank’s financial health.
Internal and External Communication:
- Evaluate the effectiveness of communication channels within the bank to ensure that employees, management, and auditors can exchange necessary information related to internal controls and risk management.
Management Reporting:
- Assess the adequacy of management reporting systems. Does management receive timely information on operational risks, compliance issues, and financial performance?
Communication of Policies and Procedures:
- Ensure that the bank’s internal controls, policies, and procedures are clearly communicated to all relevant staff through training, documentation, and regular updates.

5. Monitoring

Monitoring involves ongoing or periodic evaluations of the internal control system’s effectiveness. The auditor should evaluate how the bank:

Ongoing Monitoring Activities:
- Review whether the bank conducts regular monitoring, such as internal audits, continuous risk assessments, and compliance checks.
- Evaluate if there are periodic internal control reviews to ensure that they remain effective and that issues are identified and addressed.
Internal Audit Function:
- Assess the independence, scope, and effectiveness of the internal audit function. The internal audit team should be capable of performing risk-based audits, testing control effectiveness, and reporting findings to senior management and the audit committee.
Management Review:
- Check if management regularly reviews internal control systems and addresses weaknesses. This includes reviewing the results of internal and external audits and ensuring that corrective actions are taken.
Follow-Up on Issues:
- Ensure that issues identified through audits or monitoring processes are addressed, and corrective actions are taken promptly.

6. Fraud Detection and Prevention

Banks are prime targets for fraud due to the large number of transactions, the complexity of financial products, and the use of digital banking channels. The auditor must assess the bank's ability to detect and prevent fraud, which includes:

Fraud Prevention Controls:
- Evaluate the adequacy of fraud prevention measures such as transaction monitoring systems, fraud detection algorithms, and employee training programs on ethical conduct and fraud awareness.
Investigating Irregularities:
- Ensure that the bank has established processes for investigating any irregularities or suspicious activities, including reporting mechanisms for whistleblowers and proper follow-up procedures.

Q.3 d) How would the auditor verify commission in insurance company? 07

Verifying commission in an insurance company involves checking the accuracy, validity, and compliance of the commission expenses or income related to the sale of insurance policies. Commissions are a significant component of the costs for an insurance company, and auditors must ensure that these transactions are correctly recorded, appropriately calculated, and comply with regulatory guidelines and company policies.

The auditor’s verification of commissions in an insurance company typically includes the following steps:

1. Understanding Commission Policies and Procedures

The auditor must begin by gaining an understanding of the company's policies and procedures related to commission payments. This includes:

Commission structure: Understanding how commissions are structured (e.g., based on the premium amount, type of policy, duration of the policy, etc.).
Commission rates: Reviewing how commission rates are determined and whether they vary by product, agent, or region.
Terms and conditions: Reviewing terms related to commission payment, such as the timing of payments, conditions for commission eligibility, and adjustments for policy cancellations or refunds.

2. Reviewing Sales and Agency Records

To verify commissions, auditors must review the underlying records of policy sales and agency relationships. This includes:

Policy sales documentation: Verifying that policies sold during the period under review are properly documented and matched with the corresponding commission records.
Agency agreements: Reviewing contracts or agreements with agents, brokers, or sales teams to confirm commission terms, eligibility, and payment schedules.
Agent performance: Assessing agent performance to ensure that commissions are linked to actual sales and activities, not inflated or fictitious transactions.

3. Verifying Commission Calculation

The auditor checks the accuracy of commission calculations, ensuring that the commissions are calculated based on the agreed terms and rates. This includes:

Reconciliation of premiums and commissions:
- Ensuring that the commission payments correlate with the premiums received by the company.
- Recalculating the commissions based on the documented sales and checking for consistency with the company's commission structure.
Validation of commission splits:
- If commissions are shared among agents or brokers, the auditor verifies the correct split of commission among the parties involved.
- This ensures that there are no discrepancies in the allocation of the commission.

4. Reviewing Commission Adjustments

Commissions may be subject to adjustments for various reasons, such as policy cancellations, refunds, or adjustments to premiums. The auditor should:

Check for cancellations: Ensure that commission payments for policies that were later canceled are reversed or adjusted accordingly.
Commission clawbacks: Verify if any clawbacks (adjustments due to refunds, returns, or non-renewal of policies) have been properly accounted for and deducted from future commission payments.
Review of adjustments to commissions: Ensure that any changes to commissions based on policy modifications or renegotiations are correctly documented and approved.

5. Reviewing Accounting and Payment Records

Auditors should verify that commission expenses are properly recorded in the company’s financial statements. This includes:

General ledger verification: Ensuring that commission payments are correctly recorded in the general ledger under the appropriate expense or liability accounts.
Payment verification: Ensuring that payments made to agents or brokers are properly authorized and supported by invoices or receipts. The auditor may trace payments from the bank records to the commission statements.
Timeliness of payments: Ensuring that commission payments are made according to the company's agreed payment schedules.

6. Compliance with Regulatory Requirements

In many jurisdictions, insurance companies are required to comply with regulatory guidelines regarding commissions. The auditor should:

Review compliance with industry regulations: Verify that the commission structure complies with any applicable regulatory limits or guidelines set by insurance regulatory bodies.
Ensure proper reporting: Confirm that commissions are accurately reported in the financial statements, including disclosures about the nature of commissions paid and received.

7. Sampling and Testing

Since insurance companies handle large volumes of policies, auditors often use sampling techniques to test commission transactions:

Sample testing: Auditors can randomly select a sample of policies sold during the audit period and verify the corresponding commission payments.
Substantive testing: Auditors might test the transaction in-depth by recalculating the commission and verifying all supporting documentation.
Analytical review: Comparing commission expenses with premium income and historical trends to identify unusual fluctuations or outliers that may require further investigation.

8. Fraud Detection

Commission fraud is a risk in the insurance industry, where agents may manipulate sales or report fictitious policies to earn more commissions. The auditor should:

Investigate unusual transactions: Look for patterns of excessive or unusual commission payments that may indicate fraudulent activity (e.g., commissions paid for canceled policies).
Verify agent identity: Confirm that the agents or brokers receiving commissions are legitimate and properly authorized.
Check for dual payments: Ensure that no double commissions are paid to the same policy through duplicate entries.

Q.4 a) What are the Internal Controls in Computerized system? 08

Internal controls in a computerized system are measures and procedures designed to safeguard assets, ensure data integrity, promote operational efficiency, and ensure compliance with policies, laws, and regulations in an environment driven by information technology (IT).

These controls address the risks associated with automated processes, data handling, and IT infrastructure, ensuring that computerized systems function reliably and securely.

Types of Internal Controls in a Computerized System

1. General IT Controls (GITCs)

General controls apply to the entire IT environment and ensure the proper operation of computerized systems.

Access Controls:
- Prevent unauthorized access to systems and data.
- Examples:
  - Password policies.
  - Multi-factor authentication.
  - Role-based access control.
Change Management Controls:
- Ensure changes to software, systems, or processes are authorized, tested, and documented.
- Examples:
  - Version control.
  - Approval workflows for updates or patches.
Backup and Recovery Controls:
- Safeguard data through regular backups and facilitate recovery in case of data loss or system failure.
- Examples:
  - Scheduled automated backups.
  - Disaster recovery plans.
IT Infrastructure Security:
- Protect the physical and virtual IT environment from threats.
- Examples:
  - Firewalls and antivirus software.
  - Security patches and updates.
  - Physical security measures like restricted server room access.

2. Application Controls

Application controls are specific to software applications and ensure accurate data processing and output.

Input Controls:
- Ensure accuracy and completeness of data entered into the system.
- Examples:
  - Data validation checks (e.g., numeric or date formats).
  - Mandatory field completion.
Processing Controls:
- Verify that data is processed correctly within the system.
- Examples:
  - Error detection algorithms.
  - Reconciliation checks.
Output Controls:
- Ensure the accuracy and completeness of reports and other outputs.
- Examples:
  - Review of system-generated reports.
  - Access controls for sensitive outputs.

3. Operational Controls

Operational controls focus on day-to-day IT operations and their alignment with organizational policies.

Segregation of Duties (SoD):
- Prevent conflicts of interest by segregating responsibilities in IT operations.
- Example:
  - Separate roles for system development, operations, and testing.
Job Scheduling Controls:
- Automate and monitor scheduled tasks such as data processing or report generation.
- Example:
  - Job monitoring tools to track execution and errors.
Incident Management:
- Define procedures for identifying, reporting, and resolving system issues.
- Example:
  - Incident logs and escalation protocols.

4. Logical and Physical Controls

These controls ensure the security of both data and IT assets.

Logical Controls:
- Protect data and systems through encryption, secure coding practices, and user authentication.
- Example:
  - Encrypting sensitive customer data.
Physical Controls:
- Protect IT infrastructure from physical threats.
- Example:
  - Surveillance systems and biometric locks for data centers.

5. Monitoring and Audit Controls

These controls ensure ongoing compliance and operational efficiency.

Audit Trails:
- Record user activities and system changes for accountability and traceability.
- Example:
  - Logs of login attempts and system modifications.
Performance Monitoring:
- Track system performance and uptime.
- Example:
  - Real-time dashboards for server utilization.
Periodic Reviews:
- Regularly review controls and policies to identify and mitigate emerging risks.
- Example:
  - Annual IT risk assessments.

Benefits of Internal Controls in a Computerized System

Data Integrity:
- Ensure data is accurate, complete, and free from unauthorized modifications.
Operational Efficiency:
- Streamline processes, reduce errors, and enhance productivity.
Risk Mitigation:
- Minimize risks such as fraud, cyberattacks, and data breaches.
Compliance:
- Ensure adherence to legal, regulatory, and organizational requirements.
Continuity:
- Facilitate business continuity through robust backup and recovery procedures.

Q.4 b) Write detailed note on Cost Audit. 07

Cost Audit is a systematic examination of cost records, accounts, and practices to verify the accuracy and compliance of cost accounting standards and regulatory requirements. It helps organizations control costs, improve efficiency, and ensure accurate reporting. Cost audits are conducted under the framework provided by the Companies Act, 2013, and the Cost and Works Accountants Act, 1959 in India.

Objectives of Cost Audit

Verification of Cost Records:
- To ensure the cost accounting records are maintained accurately and comply with prescribed standards.
Cost Control:
- Identify areas of inefficiency and suggest measures to reduce wastage and control costs.
Ensuring Compliance:
- Verify adherence to statutory requirements, including compliance with Cost Accounting Standards (CAS) issued by the Institute of Cost Accountants of India.
Facilitating Decision-Making:
- Provide management with reliable cost data for strategic decision-making.
Transparency for Stakeholders:
- Assure shareholders, regulatory bodies, and other stakeholders of fair pricing and efficient use of resources.

Scope of Cost Audit

The scope of cost audit varies depending on the nature of the organization, industry, and statutory requirements. It typically includes:

Verification of Cost Records:
- Examines cost ledgers, allocation methods, and recording practices.
Cost Control Measures:
- Evaluates the effectiveness of cost control mechanisms and cost reduction strategies.
Analysis of Cost Statements:
- Analyzes cost sheets, cost of production, cost of sales, and profitability reports.
Operational Efficiency:
- Reviews processes and systems to identify inefficiencies in production or service delivery.
Compliance with Regulations:
- Ensures compliance with statutory provisions, including rules specified under the Companies Act and industry-specific regulations.
Pricing Policies:
- Assesses pricing mechanisms and their alignment with cost structures and government guidelines.

Legal Provisions Governing Cost Audit (India)

Companies Act, 2013:
- Section 148 governs cost audits in India.
- Certain classes of companies engaged in specified industries (e.g., cement, sugar, steel, pharmaceuticals) are mandated to conduct cost audits.
- The Central Government issues orders specifying the applicability of cost audits.
Role of Cost Auditor:
- The cost auditor must be a qualified cost accountant registered with the Institute of Cost Accountants of India.
- The cost auditor submits a detailed cost audit report in prescribed formats to the Board of Directors and the Central Government.
Cost Audit Rules:
- The Companies (Cost Records and Audit) Rules, 2014 specify the industries and thresholds for maintaining cost records and conducting cost audits.

Advantages of Cost Audit

Cost Efficiency:
- Identifies inefficiencies, wasteful practices, and unproductive costs.
Informed Decision-Making:
- Provides management with reliable data for planning, budgeting, and pricing.
Compliance Assurance:
- Ensures adherence to cost accounting standards and statutory provisions.
Transparency and Accountability:
- Promotes fair pricing and responsible resource utilization, boosting stakeholder confidence.
Improved Profitability:
- Highlights areas for cost reduction and operational improvements, leading to better profit margins.
Government and Regulatory Benefits:
- Helps the government monitor pricing practices, subsidies, and taxation in regulated industries.

Disadvantages or Limitations of Cost Audit

Time-Consuming:
- Preparing detailed cost records and conducting audits can be time-intensive.
High Costs:
- The process can be expensive, especially for small or medium-sized enterprises.
Complexity:
- Requires specialized knowledge, and complexities may arise in industries with diverse cost structures.
Resistance to Change:
- Employees and management may resist adopting recommendations from the cost audit.

Cost Audit Report

The cost audit report includes detailed findings of the cost auditor and is typically divided into the following sections:

General Information:
- Company details, industry classification, and regulatory framework.
Cost Accounting Policies:
- Summary of cost accounting methods and principles adopted.
Operational Performance:
- Analysis of production, efficiency, and profitability.
Cost of Production and Sales:
- Breakdowns of costs incurred during the production process.
Observations and Recommendations:
- Key findings, inefficiencies, and suggestions for improvement.
Compliance Statement:
- Declaration of adherence to cost accounting standards and statutory rules.

Q.4 c) What are the special aspects in Computerized Audit Environment? 08

Auditing in a computerized environment introduces unique challenges and considerations compared to traditional manual audits. The widespread use of information technology (IT) in business processes necessitates that auditors adapt their procedures to effectively evaluate IT systems, data, and controls.

1. Dependence on IT Systems

Automation of Transactions:
- Business processes and records are heavily dependent on automated systems, requiring auditors to assess the reliability of these systems.
Electronic Records:
- Traditional physical records are replaced by digital records, which may require specialized tools to access and analyze.

2. Internal Control Assessment

IT General Controls (ITGCs):
- Assess controls related to system access, data backup, software development, and change management to ensure the IT environment is secure.
Application Controls:
- Evaluate controls embedded within specific software applications, such as validation checks, error logs, and authorization mechanisms.

3. Risks in IT Systems

System Vulnerabilities:
- Risks such as data breaches, hacking, or system failures require additional scrutiny of cybersecurity measures.
Unauthorized Access:
- Auditors must check access controls to prevent unauthorized transactions or data modifications.
Data Integrity Risks:
- Data processing errors or manipulation can affect the accuracy of financial reports.

4. Use of Computer-Assisted Audit Techniques (CAATs)

Data Analysis Tools:
- Auditors use CAATs to analyze large volumes of data efficiently (e.g., sampling, trend analysis).
Exception Reporting:
- Automated tools help identify outliers, unusual transactions, or deviations from controls.
Audit Trail Analysis:
- Ensures that sufficient audit trails exist in the computerized systems to trace transactions.

5. Audit Evidence

Electronic Audit Evidence:
- Auditors need to validate the authenticity and reliability of electronic evidence.
Data Encryption and Security:
- Audit evidence may be encrypted, necessitating decryption tools or access rights.

6. Skill Requirements

Technical Expertise:
- Auditors require knowledge of IT systems, databases, and audit tools to perform effective audits.
Collaboration with IT Specialists:
- In complex environments, auditors may need to collaborate with IT experts to understand the systems and controls.

7. Real-Time Auditing

Continuous Auditing:
- In a computerized environment, real-time monitoring and auditing are possible, enabling timely identification of issues.
Dynamic Risk Assessment:
- The audit approach may need to adapt dynamically as systems and risks evolve.

8. Regulatory and Compliance Requirements

Data Privacy Laws:
- Auditors must ensure compliance with data protection regulations (e.g., GDPR, HIPAA).
IT Governance Standards:
- Auditors assess adherence to IT governance frameworks like COBIT, ISO 27001, or ITIL.

Q.4 d) What is a Management Audit? Mention its scope & objectives. 07

A Management Audit is a systematic evaluation of the processes, policies, and performance of an organization's management to ensure efficiency, effectiveness, and alignment with organizational objectives. Unlike financial audits, which focus on the accuracy of financial statements, management audits emphasize organizational practices, decision-making, and resource utilization.

Scope of Management Audit

The scope of a management audit can be broad and includes the following aspects:

Organizational Structure:
- Evaluates the appropriateness and efficiency of the organization's hierarchy, roles, and responsibilities.
Planning and Decision-Making:
- Assesses the effectiveness of strategic and operational planning processes and decision-making frameworks.
Performance Measurement:
- Reviews systems for tracking and measuring the performance of departments, teams, and individuals.
Utilization of Resources:
- Examines the optimal use of human, financial, and physical resources.
Internal Controls and Risk Management:
- Reviews the adequacy of internal controls and the effectiveness of risk management practices.
Compliance and Governance:
- Ensures adherence to legal, regulatory, and ethical standards.

Objectives of Management Audit

Enhancing Efficiency:
- Identify inefficiencies in processes and recommend improvements to enhance operational effectiveness.
Improving Decision-Making:
- Provide insights to strengthen managerial decision-making and strategic planning.
Resource Optimization:
- Ensure that organizational resources are used efficiently and effectively to achieve objectives.
Risk Identification:
- Highlight potential risks and recommend measures to mitigate them.
Ensuring Accountability:
- Evaluate whether managers are fulfilling their roles and responsibilities effectively.
Strategic Alignment:
- Ensure that all management functions align with the organization’s goals and objectives.
Building Organizational Strength:
- Identify areas of improvement and suggest steps to enhance overall organizational health.

Q. 5 a) What do you mean by professional misconduct? Enumerate any five instances of Part I of Schedule I of Chartered Accountant Act, 1949. 08

Professional misconduct refers to actions or omissions by a Chartered Accountant (CA) that violate the ethical and professional standards outlined in the Chartered Accountants Act, 1949, and its Schedules. Such misconduct undermines the integrity and reputation of the profession.

The First Schedule of the Act specifically deals with less severe violations (classified under Part I for members in practice), while the Second Schedule addresses more serious infractions.

Instances of Professional Misconduct under Part I of Schedule I:

The following are five examples of professional misconduct listed in Part I of Schedule I:

Advertising and Solicitation:
- Engages in advertising, solicits clients, or uses means like circulars, personal communication, or testimonials to procure professional work.
- Exceptions exist for permitted forms of professional announcements.
Accepting Work Outside Guidelines:
- Accepts or agrees to perform audit work for remuneration lower than the minimum prescribed fee without considering the cost and nature of services.
Sharing of Fees:
- Shares fees from professional work with a person who is not a CA unless permitted under regulations.
Engaging in Other Businesses:
- Engages in any business or occupation other than the profession of accountancy unless the Council permits it.
Failure to Disclose Conflict of Interest:
- Accepts an assignment for professional work where a conflict of interest exists, such as auditing financial statements while being an interested party.

Importance of Ethical Conduct

The provisions aim to uphold professionalism, ensure fairness, and protect the public interest. Violations lead to disciplinary actions, ranging from reprimands to the removal of the CA from the register.

Q.5 b) Explain the procedure of enquiring into charges of misconduct of Chartered Accountant. 07

The procedure for enquiring into charges of misconduct of a Chartered Accountant (CA) in India is outlined in the Chartered Accountants Act, 1949, and the accompanying Chartered Accountants (Procedure of Investigations of Professional and Other Misconduct and Conduct of Cases) Rules, 2007. The process is designed to ensure a fair and impartial investigation and is administered by the Institute of Chartered Accountants of India (ICAI).

Steps in the Procedure:

1. Filing of Complaint:

A complaint can be filed by:
- Any person, client, or regulatory authority.
- Suo motu by the ICAI.
The complaint must be submitted in writing, supported by necessary evidence, and accompanied by a fee.

2. Prima Facie Opinion by the Director (Disciplinary Directorate):

The complaint is reviewed by the Director of Discipline to determine whether there is a prima facie case of misconduct.
The Director may seek additional information or clarification from the complainant or the CA.

3. Referral to Committees:

Based on the prima facie opinion:

No Prima Facie Case: The case is dismissed, and the complainant is informed.
Prima Facie Case Found: The case is referred to one of the following:
- Board of Discipline (BoD): For minor cases of "other misconduct."
- Disciplinary Committee (DC): For more serious cases involving "professional misconduct."

4. Inquiry by the Relevant Committee:

The BoD or DC conducts an inquiry, which includes:
- Summoning the CA to provide an explanation or defense.
- Examining evidence and allowing cross-examination of witnesses.
- Ensuring principles of natural justice are followed.

5. Findings and Recommendations:

After the inquiry:
- The BoD can impose minor penalties such as reprimands or a fine up to ₹1 lakh.
- The DC submits its findings to the Council of ICAI for approval, recommending penalties for professional misconduct.

6. Action by the Council of ICAI:

The Council considers the recommendations of the Disciplinary Committee.
Penalties may include:
- Reprimand or removal of the CA’s name from the register for a specified period.
- Permanent removal from the register.
- Imposition of monetary penalties.

7. Appeal:

The CA or complainant can appeal against the decision of the Council to the Appellate Authority formed under the Act.

Principles:

Natural Justice: The CA is given a fair chance to respond to allegations and present their case.
Confidentiality: The proceedings are confidential unless otherwise directed.
Time-Bound: The process aims to resolve cases efficiently to avoid undue delays.

Q.5) Write short notes on the following (Any THREE) 15

i. Related party Disclosure

Related Party Disclosure is a requirement under Accounting Standard 18 (AS-18) and other global accounting frameworks (e.g., IFRS, US GAAP), which mandates the reporting of transactions and relationships between an entity and its related parties. This ensures transparency and helps users of financial statements identify potential conflicts of interest or the influence of related parties on financial results.

Features of Related Party Disclosure:

Definition of Related Parties:
- Related parties include:
  - Parent companies, subsidiaries, associates, and joint ventures.
  - Key managerial personnel (KMP) and their relatives.
  - Entities controlled or significantly influenced by the reporting entity or its KMP.
Disclosable Transactions:
- Types of transactions to disclose include:
  - Purchases or sales of goods and services.
  - Loans, guarantees, and advances.
  - Rent, dividends, or remuneration.
  - Transfer of assets or liabilities.
Purpose:
- Provides insights into transactions not conducted at arm’s length.
- Ensures users understand the financial impact of related party relationships.
Disclosure Requirements:
- Nature and description of related party relationships.
- Description and value of transactions with related parties.
- Outstanding balances and terms, including guarantees or commitments.

ii. AS-9

Accounting Standard 9 (AS-9), issued by the Institute of Chartered Accountants of India (ICAI), provides guidelines for the recognition of revenue in financial statements. It ensures consistency and comparability in revenue reporting, contributing to transparent financial practices.

Features of AS-9:

Scope:
- AS-9 applies to the recognition of revenue from:
  - Sale of goods.
  - Rendering of services.
  - Interest, royalties, and dividends.
- It excludes revenue arising from construction contracts (covered under AS-7), leases, and government grants.
Revenue Recognition Criteria:
- Revenue is recognized when:
  - For Sale of Goods: The seller has transferred significant risks and rewards of ownership to the buyer.
  - For Services Rendered: Revenue is recognized as services are performed.
  - For Interest, Royalties, and Dividends:
    - Interest: On a time proportion basis.
    - Royalties: On an accrual basis.
    - Dividends: When the right to receive payment is established.
Exclusions:
- Revenue recognition is deferred when there is significant uncertainty about its realization.
Disclosure:
- Unusual or uncertain revenue recognition circumstances must be disclosed in the financial statements.

AS-9 plays a crucial role in ensuring that revenue is recognized in a timely and systematic manner, reflecting the true financial position of an entity.

iii. Audit Ceiling

Audit Ceiling refers to the maximum number of audits a Chartered Accountant (CA) or a firm of CAs can undertake in a financial year. This limit is prescribed to ensure that auditors maintain the quality of audits and dedicate sufficient time and resources to each engagement.

Aspects of Audit Ceiling:

Regulatory Framework:
- The Institute of Chartered Accountants of India (ICAI) has established guidelines for audit ceilings to uphold the profession's ethical and professional standards.
- The limit is defined under Section 141(3)(g) of the Companies Act, 2013, and ICAI notifications.
Applicability:
- The ceiling applies to audits of companies, specifically statutory audits.
- It excludes other types of audits like internal audits, tax audits, or consultancy assignments.
Current Limit:
- An individual CA can undertake a maximum of 30 statutory audits of companies in a financial year.
- For a firm, the limit is calculated based on the number of partners, with each partner allowed up to 30 audits.
Purpose:
- Ensures that auditors do not overextend their capacity.
- Maintains audit quality and reduces the risk of errors or oversight due to excessive workload.

By enforcing the audit ceiling, regulatory authorities aim to safeguard the interests of stakeholders and enhance the credibility of financial reporting.

iv. Operational Audit

An Operational Audit is a systematic review of an organization's operations, processes, and practices to evaluate their efficiency, effectiveness, and compliance with established goals and standards. Unlike financial audits that primarily focus on financial statements, an operational audit examines the effectiveness of operational procedures and performance in achieving the organization's objectives.

Objectives of Operational Audit:

Efficiency Evaluation: Assessing whether resources (time, money, and manpower) are being used optimally to achieve organizational goals.

Effectiveness Assessment: Determining how well the operations align with the company's strategic objectives and deliver the expected outcomes.

Cost Control: Identifying areas where costs can be minimized without affecting quality and productivity.

Risk Management: Identifying operational risks and suggesting ways to mitigate them.

Compliance and Internal Controls: Ensuring that internal controls are functioning effectively and in compliance with relevant regulations and policies.

Scope of Operational Audit:

Process Efficiency: Reviewing core business processes such as production, inventory management, procurement, and customer service to identify bottlenecks and inefficiencies.

Performance Metrics: Analyzing key performance indicators (KPIs) to assess the performance of various departments or functions.

Internal Controls: Reviewing the adequacy and effectiveness of the organization’s internal control systems related to operations.

Cost Management: Assessing cost control mechanisms and identifying areas where expenses can be reduced.

Risk Assessment: Identifying potential operational risks and suggesting measures to mitigate them.

Benefits of Operational Audit:

Improved Operational Efficiency: Helps streamline processes and optimize resource usage.

Better Decision-Making: Provides management with data-driven insights to make informed decisions.

Cost Reduction: Identifies cost-saving opportunities, leading to better financial performance.

Risk Mitigation: Helps in identifying risks and implementing preventive measures.

v. LFAR

Long Form Audit Report (LFAR) is a detailed report prepared by statutory auditors, primarily for banks and financial institutions, as part of their annual audit. It is submitted to the bank's management and provides a comprehensive evaluation of various operational and financial aspects. LFAR aims to highlight areas requiring improvement, control lapses, and compliance with regulatory guidelines.

Features of LFAR:

Detailed Examination:
- Focuses on the bank's internal controls, risk management, and compliance systems.
- Evaluates areas such as advances, deposits, cash management, and off-balance sheet items.
Regulatory Importance:
- Helps regulatory bodies like the Reserve Bank of India (RBI) in assessing the financial health and operational efficiency of banks.
- Assists in monitoring adherence to RBI guidelines.
Scope:
- Includes evaluation of NPA (Non-Performing Assets) management, frauds, provisioning, and asset classification.
- Comments on inter-branch reconciliation, ATM operations, and cyber security measures.
Objective:
- To identify weaknesses in operational areas.
- To assist in strengthening governance and minimizing risks.

Auditors use LFAR to provide constructive feedback, making it a critical tool for enhancing the robustness of banking operations.

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TYBBI SEM-6 : Auditing-II (Q.P. November 2023 with Solutions)