Auditing लेखापरीक्षण

Quick summary

Verification (सत्यापन) means confirming the existence, ownership, title, value and proper disclosure of assets and liabilities on the balance sheet date. Valuation (मूल्यांकन) means checking that each asset and liability is shown at a proper value according to accepted accounting principles. Vouching checks transactions; verification checks the final position.

Key points

• Objectives of verification: to confirm that assets exist, are owned by the business, are free from charge (or the charge is disclosed), are properly valued, and that all liabilities are recorded.
• The auditor is not a valuer; he relies on management, experts and accounting standards, but must use reasonable care (Kingston Cotton Mill case).
• Fixed assets are shown at cost less depreciation (or revalued amount if revalued).
• Inventory (stock) is valued at cost or net realisable value, whichever is lower (AS 2 / Ind AS 2).
• Investments: long-term at cost less permanent decline; current investments at lower of cost and fair value (AS 13).
• Trade receivables (debtors) are shown net of provision for doubtful debts; the auditor may send balance confirmation letters (SA 505).
• Cash in hand is counted physically on the balance sheet date; cash at bank is confirmed with a bank certificate and bank reconciliation statement.
• Liabilities: creditors (confirmation, cut-off), loans (agreements, charges registered with the Registrar of Companies), outstanding expenses, and contingent liabilities (disclosed in notes).
• Window dressing is checked by examining transactions just before and after the year end.

Important terms

• Existence – the asset is physically present or the right exists.
• Net realisable value (NRV) – estimated selling price less costs to complete and sell.
• Charge – a right of a lender over an asset as security (mortgage, hypothecation, pledge).
• Contingent liability – a possible obligation that depends on a future event, e.g. a pending court case.

Key facts

5 important questions

Q1. What is verification?

Verification is the process of confirming the existence, ownership, title, valuation and correct disclosure of assets and liabilities appearing in the balance sheet as on its date.

Q2. How is inventory valued?

At cost or net realisable value, whichever is lower, as per AS 2. Cost includes purchase cost, conversion cost and other costs of bringing the stock to its present place and condition.

Q3. Explain the auditor's duty regarding verification of inventory.

Outline: attend physical count (SA 501), test counts, check cut-off, examine stock sheets, compare with records, check valuation method and consistency, look for slow-moving and damaged stock, obtain management representation; Kingston Cotton Mill and McKesson & Robbins cases.

Q4. How will you verify (a) land and buildings (b) investments (c) debtors?

Outline: documents and procedures for each from the table; valuation basis; disclosure in the balance sheet.

Q5. Distinguish between vouching, verification and valuation.

Outline: meaning of each; object; time; evidence; who does it; how they connect – vouching proves the record, verification proves the existence, valuation proves the amount.

Exam tip

Remember the six words: existence, ownership, possession, charge, valuation and disclosure. Use them as a checklist for any "how will you verify" question.

Quick summary

Every company must have its accounts audited by a Chartered Accountant under the Companies Act, 2013. Sections 139 to 148 deal with the appointment, qualifications, disqualifications, removal, remuneration, rights and duties of the company auditor. These rules keep the auditor independent from the management he checks.

Key points

• First auditor (Sec 139(6)): appointed by the Board within 30 days of registration; if the Board fails, by members within 90 days at an EGM. Holds office till the end of the first AGM.
• Subsequent auditor (Sec 139(1)): appointed at the first AGM to hold office from the end of that meeting till the end of the sixth AGM (5 years).
• Government company: auditor appointed by the Comptroller and Auditor General (CAG) — first auditor within 60 days, later within 180 days of the start of the year.
• Rotation (Sec 139(2)) for listed and prescribed companies: an individual for one term of 5 years; an audit firm for two terms of 5 years; then a cooling-off period of 5 years.
• Casual vacancy (Sec 139(8)): filled by the Board within 30 days; if caused by resignation, the Board's appointment must be approved by members within 3 months.
• Qualification (Sec 141): a practising Chartered Accountant, or a firm where the majority of partners are CAs.
• Disqualifications: body corporate (except LLP), officer or employee of the company, partner or employee of such officer, person holding securities of the company, person indebted to the company above the prescribed limit, relative of a director, person auditing more than 20 companies, person convicted of fraud in the last 10 years.
• Removal before term (Sec 140(1)): by special resolution with prior approval of the Central Government, after giving the auditor a hearing.
• Resignation (Sec 140(2)): file Form ADT-3 within 30 days with the company and the Registrar.
• Remuneration (Sec 142): fixed by members in the general meeting (or as decided by them).

Important terms

• AGM – Annual General Meeting of shareholders.
• Special resolution – passed by at least three times as many votes in favour as against.
• Cooling-off period – gap during which the rotated auditor cannot be reappointed.
• Branch auditor (Sec 143(8)) – auditor of a company's branch office.

Key facts

5 important questions

Q1. Who appoints the first auditor of a company?

The Board of Directors within 30 days of registration; if it fails, the members at an extraordinary general meeting within 90 days. For a government company, the CAG within 60 days.

Q2. What is rotation of auditors?

For listed and prescribed companies, an individual auditor cannot be appointed for more than one term of 5 years and a firm for more than two terms of 5 years; then a 5-year cooling-off follows.

Q3. Explain the provisions regarding the appointment of a company auditor.

Outline: first auditor, subsequent auditor at AGM for 5 years, consent and certificate of eligibility, intimation to ROC in ADT-1 within 15 days, government companies, rotation, casual vacancy.

Q4. Explain the qualifications and disqualifications of a company auditor.

Outline: Sec 141(1)–(2) qualifications; list of disqualifications under Sec 141(3) with short reasons (independence); consequence of becoming disqualified after appointment (vacates office).

Q5. Explain the rights and duties of a company auditor.

Outline: use the table above; add services an auditor cannot provide under Sec 144 (accounting, internal audit, design of information systems, actuarial, investment advisory, management services); punishments under Sec 147.

Exam tip

Learn the time limits as a set: 30 days (Board), 90 days (members), 60 days (CAG), 5 years (term), 20 companies (ceiling). Most short questions come from these numbers.

Quick summary

The audit report (लेखापरीक्षण अहवाल) is the final product of an audit. In it the auditor gives his opinion on whether the financial statements show a true and fair view. For companies it is made under Section 143 of the Companies Act, 2013, and in the form required by SA 700, SA 705 and SA 706. The opinion may be clean (unmodified) or modified.

Key points

• The report is addressed to the members (shareholders) of the company, not to the directors.
• SA 700 – forming an opinion and reporting; SA 705 – modified opinions; SA 706 – Emphasis of Matter and Other Matter paragraphs; SA 701 – Key Audit Matters (for listed companies).
• Unmodified (clean) opinion: the statements give a true and fair view in all material respects.
• Qualified opinion: true and fair "except for" a material, but not pervasive, misstatement or limitation.
• Adverse opinion: the statements do not give a true and fair view; misstatement is material and pervasive.
• Disclaimer of opinion: the auditor cannot form an opinion because he could not get sufficient evidence, and the possible effect is material and pervasive.
• Emphasis of Matter paragraph draws attention to an important matter already disclosed (e.g. uncertainty of a lawsuit) without modifying the opinion.
• Sec 143(3) matters: all information obtained, proper books kept, agreement with books, compliance with accounting standards, director disqualification, adequacy of internal financial controls, pending litigations, etc.
• CARO 2020 (Companies (Auditor's Report) Order) requires extra statements on fixed assets, inventory, loans, deposits, statutory dues, frauds, and more. It does not apply to banks, insurance companies, OPCs, small companies and certain private companies.
• The report must be signed by the auditor (Sec 145), with membership number, firm registration number, UDIN, place and date.

Important terms

• Material – large or important enough to change users' decisions.
• Pervasive – affecting many items or the statements as a whole.
• Key Audit Matters (KAM) – matters of most significance in the audit, reported for listed companies.
• UDIN – Unique Document Identification Number generated for every certificate signed by a CA.

Key facts

Contents of an auditor's report (SA 700): title; addressee; opinion section; basis for opinion; key audit matters (listed); other information; responsibilities of management; auditor's responsibilities; report on other legal and regulatory requirements; signature, place, date, UDIN.

5 important questions

Q1. What is a clean audit report?

A report with an unmodified opinion, stating that the financial statements give a true and fair view in all material respects without any reservation.

Q2. What is a disclaimer of opinion?

A report in which the auditor states that he does not express an opinion because he could not obtain sufficient appropriate evidence, and the possible effects are material and pervasive.

Q3. Explain the different types of audit reports.

Outline: unmodified, qualified, adverse, disclaimer – meaning, circumstances, wording ("except for", "do not give", "we do not express"); include the matrix above; Emphasis of Matter paragraph.

Q4. Explain the contents of the auditor's report under SA 700 and Section 143.

Outline: list the elements in order with one line each; Sec 143(3) matters; reference to CARO 2020 annexure and internal financial controls annexure.

Q5. Distinguish between an audit report and an audit certificate.

Outline: report is an opinion, certificate confirms exact facts; report used for financial statements, certificate for specific figures (e.g. export turnover); report covers judgement, certificate covers verified facts; liability differs.

Exam tip

Draw the 2 × 2 table of opinions. It answers most questions on modified reports in one glance and shows clear understanding.

Quick summary

A tax audit under Section 44AB of the Income-tax Act, 1961 is a compulsory audit of the accounts of businesses and professionals whose turnover or receipts cross a limit. It helps the tax department check that income is correctly reported. Audit in a computerised environment (CIS / IT audit) is auditing when accounts are kept in software such as Tally or ERP systems.

Key points

• Tax audit applies to: a business with turnover above ₹1 crore, raised to ₹10 crore if cash receipts and cash payments are each not more than 5%; a profession with gross receipts above ₹50 lakh; persons under presumptive schemes (44AD, 44ADA etc.) who declare lower profit than prescribed and whose income exceeds the basic exemption limit.
• Done by a Chartered Accountant in practice.
• Form 3CA – when accounts are already audited under another law (e.g. a company). Form 3CB – when no other audit is required (e.g. a sole trader or firm). Form 3CD – statement of particulars attached to both (about 44 clauses).
• Due date for furnishing the tax audit report: generally 30 September of the assessment year (one month before the return due date).
• Penalty (Sec 271B): 0.5% of turnover or ₹1,50,000, whichever is less, for not getting the audit done.
• A CA can sign a limited number of tax audit reports in a year (ICAI limit of 60).
• Computerised accounting brings speed and accuracy, but also new risks: loss of audit trail, unauthorised access, data corruption, virus, program errors.
• The auditor may audit around the computer (check input and output only) or through the computer (test the programs and controls), or with the computer using CAATs.
• CAATs (Computer-Assisted Audit Techniques): test data, generalised audit software, embedded audit modules, data analytics for sampling and finding unusual entries.
• Audit trail: since 1 April 2023, companies must use accounting software that records an edit log of every change that cannot be disabled.

Important terms

• Turnover – total sales or gross receipts of the business in the year.
• Audit trail (edit log) – record showing who changed which entry and when.
• General IT controls – controls over access, data backup, program changes and operations.
• Application controls – input, processing and output controls within a particular software.

Key facts

5 important questions

Q1. Who must get a tax audit done?

A business with turnover above ₹1 crore (₹10 crore if cash transactions are within 5%), a professional with receipts above ₹50 lakh, and certain presumptive-scheme taxpayers who declare lower profits. Check the current year's figures.

Q2. What are CAATs?

Computer-Assisted Audit Techniques: the use of software, such as audit software and test data, by the auditor to test records and controls in a computerised system.

Q3. Explain the provisions of tax audit under Section 44AB.

Outline: objective, applicability limits, who can conduct, Forms 3CA, 3CB and 3CD, due date, penalty under 271B and reasonable cause (Sec 273B), limit on number of audits.

Q4. Explain the special problems of auditing in a computerised environment and how the auditor deals with them.

Outline: problems – loss of visible trail, concentration of duties, unauthorised access, errors repeated in all transactions, data loss; approach – understand IT controls, test general and application controls, use CAATs, check backups and access logs, rely on edit log.

Q5. Distinguish between auditing around the computer and auditing through the computer.

Outline: use the table above; add the third approach (auditing with the computer using CAATs); conclusion that modern audits need "through" and "with" approaches.

Exam tip

Learn the three forms: 3CA (already audited), 3CB (not audited), 3CD (particulars). This is a common 2-mark question.