In exercise of powers conferred by section 143 read with sub-sections (1) and (2) of section 469 of the Companies Act, 2013 (18 of 2013), the Central Government hereby inserted the clause “(d) whether the company had provided requisite disclosures in its financial statements as to holdings as well as dealings in Specified Bank Notes during the period from 8th November, 2016 to 30th December, 2016 and if so, whether these are in accordance with the books of accounts maintained by the company.”, after clause (c) in rule 11 of the Companies (Audit and Auditors) Rules, 2014. (Insertion in point no. (j) on page no. 6.29 of Module 1 of Study Material) For more details students may refer below mentioned link: http://www.mca.gov.in/Ministry/pdf/CompaniesAuditandAuditorsSecondAmendmentRules2017.pdf
Chapter 8 - Audit Report/ Series 700 - Engagement and Quality Control Standards:
In view of the decision taken by the appropriate authority and approved list of pronouncements applicable for November 2017 Examination, students are required to refer to erstwhile SA 700 series (SA 700, SA 705 and SA 706 published in January 2016 edition of Study Material and Auditing Pronouncements) instead of revised SA 700 series (SA 700, SA701, SA 705, SA 706 as given in January 2017 edition of the Study Material). For the same, students may refer below mentioned link:
SA 700 http://220.227.161.86/17874sa700annx1.pdf
SA 705 http://220.227.161.86/17875sa705annex2.pdf
SA 706 http://220.227.161.86/17876sa706annex3.pdf
As regards other topics are concerned, students are advised to read from January 2017 edition of the Study Material.
Chapter 14 - Audit of Non-Banking Financial Companies :
1. Compliance with NBFC Auditors Report - RBI Directions: Report to Board of Directors under RBI Directions as per Master Direction No. DNBS. PPD.03/66.15.001/2016-17 dated September 29, 2016
2. Auditors to submit additional Report to the Board of Directors: In addition to the Report made by the auditor under Section 143 of the Companies Act, 2013 or section 227 of the Companies Act, 1956 (Act 1 of 1956) on the accounts of a non-banking financial company examined for every financial year ending on any day on or after the commencement of these Directions, the auditor shall also make a separate report to the Board of Directors of the Company on the matters specified in paragraphs 3 and 4 below.
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3. Material to be included in the Auditor’s report to the Board of Directors: The auditor’s report on the accounts of a non-banking financial company shall include a statement on the following matters, namely - (A) In the case of all non-banking financial companies:
I. Conducting Non-Banking Financial Activity without a valid Certificate of Registration (CoR) granted by the Bank is an offence under chapter V of the RBI Act, 1934. Therefore, if the company is engaged in the business of non-banking financial institution as defined in section 45-I (a) of the RBI Act and meeting the Principal Business Criteria (Financial asset/income pattern) as laid down vide the Bank’s press release dated April 08, 1999, and directions issued by DNBR, auditor shall examine whether the company has obtained a Certificate of Registration (CoR) from the Bank.
II. In case of a company holding CoR issued by the Bank, whether that company is entitled to continue to hold such CoR in terms of its Principal Business Criteria (Financial asset/income pattern) as on March 31 of the applicable year.
III. Whether the non-banking financial company is meeting the required net owned fund requirement as laid down in Master Direction - Non-Banking Financial Company – Non-Systemically Important Non-Deposit taking Company (Reserve Bank) Directions, 2016 and Master Direction - Non-Banking Financial Company - Systemically Important Non-Deposit taking Company and Deposit taking Company (Reserve Bank) Directions, 2016.
Note: Every non-banking financial company shall submit a Certificate from its Statutory Auditor that it is engaged in the business of non-banking financial institution requiring it to hold a Certificate of Registration under Section 45-IA of the RBI Act and is eligible to hold it. A certificate from the Statutory Auditor in this regard with reference to the position of the company as at end of the financial year ended March 31 may be submitted to the Regional Office of the Department of Non-Banking Supervision under whose jurisdiction the non-banking financial company is registered, within one month from the date of finalization of the balance sheet and in any case not later than December 30th of that year. The format of Statutory Auditor’s Certificate (SAC) to be submitted by NBFCs has been issued vide DNBS. PPD.02/66.15.001/2016-17 Master Direction- Non-Banking Financial Company Returns (Reserve Bank) Directions, 2016.
(B) In the case of a non-banking financial companies accepting/holding public deposits: Apart from the matters enumerated in (A) above, the auditor shall include a statement on the following matters, namely- (i) Whether the public deposits accepted by the company together with other
(a) from public by issue of unsecured non-convertible debentures/bonds; (b) from its shareholders (if it is a public limited company); and (c) which are not excluded from the definition of ‘public deposit’ in the Non-
Banking Financial Companies Acceptance of Public Deposits (Reserve Bank) Directions, 2016, are within the limits admissible to the company as per the provisions of the Non-Banking Financial Companies Acceptance of Public Deposits (Reserve Bank) Directions, 2016;
(ii) Whether the public deposits held by the company in excess of the quantum of such deposits permissible to it under the provisions of Non-Banking Financial Companies Acceptance of Public Deposits (Reserve Bank) Directions, 2016 are regularised in the manner provided in the said Directions;
(iii) Whether the non banking financial company is accepting "public deposit” without minimum investment grade credit rating from an approved credit rating agency as per the provisions of Non-Banking Financial Companies Acceptance of Public Deposits (Reserve Bank) Directions, 2016;
(iv) Whether the capital adequacy ratio as disclosed in the return submitted to the Bank in terms of the Non-Banking Financial Company - Systemically Important Non-Deposit taking Company and Deposit taking Company (Reserve Bank) Directions, 2016 has been correctly determined and whether such ratio is in compliance with the minimum CRAR prescribed therein;
(v) In respect of non-banking financial companies referred to in clause (iii) above, (a) whether the credit rating, for each of the fixed deposits schemes that has
been assigned by one of the Credit Rating Agencies listed in Non-Banking Financial Companies Acceptance of Public Deposits (Reserve Bank) Directions, 2016 is in force; and
(b) whether the aggregate amount of deposits outstanding as at any point during the year has exceeded the limit specified by the such Credit Rating Agency;
(vi) Whether the company has violated any restriction on acceptance of public deposit as provided in Non-Banking Financial Companies Acceptance of Public Deposits (Reserve Bank) Directions, 2016;
(vii) Whether the company has defaulted in paying to its depositors the interest and /or principal amount of the deposits after such interest and/or principal became due;
(viii) Whether the company has complied with the prudential norms on income recognition, accounting standards, asset classification, provisioning for bad and doubtful debts, and concentration of credit/investments as specified in the Directions issued by the Bank in terms of the Master Direction - Non-Banking
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Financial Company - Systemically Important Non-Deposit taking Company and Deposit taking Company (Reserve Bank) Directions, 2016;
(ix) Whether the company has complied with the liquid assets requirement as prescribed by the Bank in exercise of powers under section 45-IB of the RBI Act and whether the details of the designated bank in which the approved securities are held is communicated to the office concerned of the Bank in terms of NBS 3; Non-Banking Financial Company Returns (Reserve Bank) Directions, 2016;
(x) Whether the company has furnished to the Bank within the stipulated period the return on deposits as specified in the NBS 1 to – Non- Banking Financial Company Returns (Reserve Bank) Directions, 2016;
(xi) Whether the company has furnished to the Bank within the stipulated period the quarterly return on prudential norms as specified in the Non-Banking Financial Company Returns (Reserve Bank) Directions, 2016;
(xii) Whether, in the case of opening of new branches or offices to collect deposits or in the case of closure of existing branches/offices or in the case of appointment of agent, the company has complied with the requirements contained in the Non-Banking Financial Companies Acceptance of Public Deposits (Reserve Bank) Directions, 2016.
(C) In the case of a non-banking financial company not accepting public deposits: Apart from the aspects enumerated in (A) above, the auditor shall include a statement on the following matters, namely: - (i) Whether the Board of Directors has passed a resolution for non- acceptance
of any public deposits; (ii) Whether the company has accepted any public deposits during the relevant
period/year; (iii) Whether the company has complied with the prudential norms relating to
income recognition, accounting standards, asset classification and provisioning for bad and doubtful debts as applicable to it in terms of Non-Banking Financial Company – Non-Systemically Important Non-Deposit taking Company (Reserve Bank) Directions, 2016 and Non-Banking Financial Company - Systemically Important Non-Deposit taking Company and Deposit taking Company (Reserve Bank) Directions, 2016;
(iv) In respect of Systemically Important Non-deposit taking NBFCs as defined in Non-Banking Financial Company - Systemically Important Non-Deposit taking Company and Deposit taking Company (Reserve Bank) Directions, 2016: (a) Whether the capital adequacy ratio as disclosed in the return submitted
to the Bank in form NBS- 7, has been correctly arrived at and whether such ratio is in compliance with the minimum CRAR prescribed by the Bank;
(b) Whether the company has furnished to the Bank the annual statement of capital funds, risk assets/exposures and risk asset ratio (NBS-7) within the stipulated period.
(v) whether the non banking financial company has been correctly classified as NBFC Micro Finance Institutions (MFI) as defined in the Non-Banking Financial Company – Non-Systemically Important Non-Deposit taking Company (Reserve Bank) Directions, 2016 and Non-Banking Financial Company - Systemically Important Non-Deposit taking Company and Deposit taking Company (Reserve Bank) Directions, 2016.
(D) In the case of a company engaged in the business of non-banking financial institution not required to hold CoR subject to certain conditions: Apart from the matters enumerated in (A)(I) above where a company has obtained a specific advice from the Bank that it is not required to hold CoR from the Bank, the auditor shall include a statement that the company is complying with the conditions stipulated as advised by the Bank.
4. Reasons to be stated for unfavourable or qualified statements Where, in the auditor’s report, the statement regarding any of the items referred to in paragraph 3 above is unfavourable or qualified, the auditor’s report shall also state the reasons for such unfavourable or qualified statement, as the case may be. Where the auditor is unable to express any opinion on any of the items referred to in paragraph 3 above, his report shall indicate such fact together with reasons therefor.
5. Obligation of auditor to submit an exception report to the Bank (I) Where, in the case of a non-banking financial company, the statement regarding any
of the items referred to in paragraph 3 above, is unfavorable or qualified, or in the opinion of the auditor the company has not complied with: (a) the provisions of Chapter III B of RBI Act (Act 2 of 1934); or (b) Non-Banking Financial Companies Acceptance of Public Deposits (Reserve
Bank) Directions, 2016; or (c) Non-Banking Financial Company – Non-Systemically Important Non-Deposit
taking Company (Reserve Bank) Directions, 2016 and Non-Banking Financial Company - Systemically Important Non-Deposit taking Company and Deposit taking Company (Reserve Bank) Directions, 2016.
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It shall be the obligation of the auditor to make a report containing the details of such unfavourable or qualified statements and/or about the non-compliance, as the case may be, in respect of the company to the concerned Regional Office of the Department of Non-Banking Supervision of the Bank under whose jurisdiction the registered office of the company is located as per first Schedule to the Non-Banking Financial Companies Acceptance of Public Deposits (Reserve Bank) Directions, 2016.
(II) The duty of the Auditor under sub-paragraph (I) shall be to report only the contraventions of the provisions of RBI Act, 1934, and Directions, Guidelines, instructions referred to in sub-paragraph (1) and such report shall not contain any statement with respect to compliance of any of those provisions.
Chapter 15 - Audit under Fiscal Laws:
Section 44AB of the Income Tax Act, 1961 relating to Audit of accounts of certain persons carrying on business or profession, the following may be noted: (1) Under clause (b), the gross receipts for person carrying on profession shall be read as exceeding fifty lakhs rupees in any previous year. (2) Under clause (d), the word “business” to be read as "profession" and "section 44AD" to be read as "section 44ADA" (3) After clause (d), a new clause (e) shall be inserted as follows: “(e) carrying on the business shall, if the provisions of sub-section (4) of section 44AD are applicable in his case and his income exceeds the maximum amount which is not chargeable to income-tax in any previous year” Note: (1) Sub-section (4) of section 44AD of the Income Tax Act, 1961 states that where an eligible
assessee declares profit for any Previous Year in accordance with the provisions of this section 44AD and he declares profit for any of the 5 Assessment Years relevant to the Previous Year succeeding such Previous Year not in accordance with the provisions of sub-section (1) of section 44AD, he shall not be eligible to claim the benefit of the provisions of this section for 5 Assessment Years subsequent to the Assessment Year relevant to the Previous Year in which the profit has not been declared in accordance with the provisions of sub-section (1) of section 44AD.]”
(2) Higher threshold for non-audit of accounts for assessees opting for presumptive taxation under section 44AD: Section 44AB makes it obligatory for every person carrying on business to get his accounts of any previous year audited if his total sales, turnover or gross receipts exceed ` 1 crore. However, if an eligible person opts for presumptive taxation scheme as per section 44AD(1), he shall not be required to get his accounts audited if the total turnover or gross receipts of the relevant previous year does not exceed ` 2 crore. The CBDT, has vide its Press Release dated 20th June, 2016, clarified that the higher threshold for non-audit of accounts has been given only to assessees opting for presumptive taxation scheme under section 44AD.
(3) Reduction in the existing rate of deemed profit under section 44AD in respect of amounts/receipts through banking channel/digital means [Press Release, dated 19-12-2016]1 Under the existing provisions of section 44AD of the Income-tax Act, 1961, in case of certain assessees (i.e. an individual, HUF or a partnership firm other than LLP) carrying on any business (other than transportation, agency, brokerage and commission) and having a turnover of Rs.2 crore or less, the profit is deemed to be 8% of the total turnover. In order to achieve the Government’s mission of moving towards a less cash economy and to incentivise small traders / businesses to proactively accept payments by digital means, with effect from A.Y. 2017-18 the existing rate of deemed profit of 8% under section 44AD of the Act has been reduced to 6% in respect of the amount of total turnover or gross receipts received through banking channel/digital means i.e., by an A/c payee cheque/bank draft or use of ECS through a bank A/c during the previous year or before the due specified in section 139(1) in respect of that previous year. However, the existing rate of deemed profit of 8% referred to in section 44AD of the Act, shall continue to apply in respect of total turnover or gross receipts received in cash.
Chapter 18 - Audit of Public Sector Undertakings
Elements of PSU Audits: Public sector auditing augments the confidence of the intended users by providing relevant information and independent and objective assessments concerning deviations from accepted standards or principles of good governance. Audit of all public-sector undertakings has the following basic elements:
(a) The Three parties - Auditor, Responsible party and Intended users.
1 The Finance Act, 2017 has, with effect from A.Y. 2017-18, inserted a proviso to section 44AD(1) to provide
for a presumptive rate of 6% (instead of 8%) in respect of the amount of total turnover or gross receipts received by an A/c payee cheque/bank draft or use of ECS through a bank account.
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Auditor: The role of auditor is fulfilled by Supreme Audit Institution (SAI), India and by its personnel delegated with the duty of conducting audits. Responsible party: The relevant responsibilities are determined by constitutional or legislative arrangement. Generally, auditable entities and those charged with governance of the auditable entities would be the responsible parties. The responsible parties may be responsible for the subject matter information, for managing the subject matter or for addressing recommendations. Intended users: Intended users are the individuals, organizations or classes thereof for whom the auditor prepares the audit report.
(b) Subject matter, criteria and subject matter information.
(c) Types of engagement - Attestation Engagements and Direct Reporting Engagement.
Subject matter • This refers to the information, condition or activity that is measured or evaluated against certain criteria.
Criteria • These are the benchmarks used to evaluate the subject matter.
Subject matter information
• This refers to the outcome of evaluating or measuring the subject matter against the criteria.
Attestation Engagements:
In attestation engagements, the responsible party measures the subject matter against the criteria and presents the subject matter information, on which the auditor then gathers sufficient and appropriate audit evidence to provide a reasonable basis for expressing a conclusion.
Direct Reporting Engagement:
In direct reporting engagements, it is the auditor who measures or evaluates the subject matter against the criteria.
Financial audits are always attestation engagements, as they are based on financial information presented by the responsible party. Performance audits and compliance audits are generally direct reporting engagements.
Principles of PSU Audits: The principles of PSU Audits constitute the general standards that apply to SAI India’s personnel as auditors and are fundamental to the conduct of all types of PSU Audits. The principles are categorized into two distinct groups as below: I. General Principles II. Principles related to the Audit Process
Principles related to the Audit Process
General Principles
Ethics & Indepen-
dence
Professional Judgement, due care and skepticism
Quality Control
Audit Team manage-ment &
SkillAudit Risk Materiality Documen-
tation Commun-
ication
Planning the Audit
• Establish the terms of the audit
• obtain understanding of the entity
• Conduct Risk assessment of problem analysis
• Identify risks of fraud• Develop an audit plan
Conducting the Audit
• Perfom the planned audit procedures to obtain audit evidence
• Evaluate audit evidence and draw conclusions
Reporting & Follow-up
• Prepare a report based on the conclusions reached
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Financial Audit: Financial audit is primarily conducted to:
express an audit opinion on the financial statements
enhance the degree of confidence of intended users in the financial statements. The C&AG shall express an opinion as to whether the financial statements are prepared, in all material respects, in accordance with the applicable financial reporting framework. In the case of financial statements prepared in accordance with a fair presentation financial reporting framework, whether the financial statements are presented fairly, in all material respects, or give a true and fair view, in accordance with that framework. Compliance Audit: Compliance audit is the independent assessment of whether a given subject matter is in compliance with the applicable authorities identified as criteria. This audit is carried out by assessing whether activities, financial transactions and information comply in all material respects, with the regulatory and other authorities which govern the audited entity. Compliance audit is concerned with: (a) Regularity- adherence of the subject matter to the formal criteria emanating from relevant
laws, regulations and agreements applicable to the entity. (b) Propriety- observance of the general principles governing sound financial management
and the ethical conduct of public officials. While regularity is emphasized in compliance auditing, propriety is equally pertinent in the public-sector context, in which there are certain expectations concerning financial management and the conduct of officials. Perspective of Compliance Audit: Compliance Audit is part of a combined audit that may also include other aspects. Compliance auditing is generally conducted either- (i) in relation with the audit of
financial statements, or (ii) separately as individual
compliance audits, or (iii) in combination with
performance auditing.
Note: Students are also advised to refer RTP of Paper 1 Financial Reporting (for AS, Ind AS and NBFCs updates) and Paper 4 Corporate and Allied Laws (for academic updates relating to Company Law).
Compliance Auditing is generally conducted
either:
(i) in relation with the audit of financial statements, or
(ii) separately as individual compliance audits, or
Standards on Auditing, Statements and Guidance Notes 1. (a) M/s Keti Projects Limited, a manufacturing company in the Steel industry was
allegedly involved in some irregularity relating to allotment of coal blocks for which a complaint was lodged against the company by the government. The financial institutions stopped additional working capital finance which caused a financial crisis resulting in stoppage of production. The company incurred a massive loss during the year 2016-17. There were delays in salary and other payments. Certain key managerial personnel including GM Finance and certain other employees left the company. The company has no sound action plan to mitigate these situations. Guide the statutory auditor on how he should deal with this situation.
(b) Pro forma financial information included in a prospectus as required by securities law has been compiled by the responsible party of Crisis Ltd. You have been appointed to report on whether the pro forma financial information has been compiled, in all material respects, by the responsible party on the basis of the applicable criteria. Before agreeing to accept such engagement, what agreement of the responsible party would you obtain?
(c) The practitioner’s consideration of engagement continuance, and relevant ethical requirements, including independence, occurs throughout the engagement, as conditions and changes in circumstances occur. With reference to Standard on Review Engagement (SRE) 2400, state the circumstances when the practitioner shall not accept a review engagement.
(d) While compiling the accounts of Courage Ltd., you observed that a few accounting standards have not been followed and there have been omission of some information which was required to be followed in the current situation. How would you deal with this?
2. (a) Mr. Rakshak was appointed as the auditor of M/s Jetgo Ltd. and intends to apply the concept of materiality for the financial statements as a whole. Please guide him as to the factors that may affect the identification of an appropriate benchmark for this purpose.
(b) As an auditor of BRK Ltd. Mr. Preet applied the concept of materiality for the financial statements as a whole. On the basis of obtaining additional information of significant contractual arrangements that draw attention to a particular aspect of a company's business, he wants to re-evaluate the materiality concept. Please guide him.
(c) The financial statements of APS & Co. have been prepared by management of an entity in accordance with the financial reporting provisions of a contract (that is, a special purpose framework) to comply with provisions of the contract. Based on the
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contract, management does not have a choice of financial reporting frameworks. As an auditor what considerations would be undertaken while planning and performing audit?
(d) In an initial audit engagement, the auditor will have to satisfy about the sufficiency and appropriateness of ‘Opening Balances' to ensure that they are free from misstatements, which may materially affect the current financial statements. Lay down the audit procedure, you will follow, when financial statements are audited for the first time. If, after performing the procedure, you are not satisfied about the correctness of 'Opening Balances', what approach will you adopt in drafting your audit report?
Audit Strategy Planning and Programming 3. (a) Roop Ltd. is a manufacturing company, provided following details of wastages of raw
materials in percentage, for various months. You have been asked to enquire into causes of abnormal wastage of raw materials. Draw out an audit plan.
Wastage percentage are July 2017 1.5% Aug 2017 1.7% Sep 2017 1.4% Oct 2017 4.1%
(b) As an auditor of garment manufacturing company for the last five years you have observed that new venture of online shopping has been added by the company during current year. As an auditor what factors would be considered by you in formulating the audit strategy of the company?
Risk Assessment and Internal Control 4. (a) New Life Hospital is a multi-speciality hospital which has been facing a lot of pilferage
and troubles regarding their inventory maintenance and control. On investigation into the matter it was found that the person in charge of inventory inflow and outflow from the store house is also responsible for purchases and maintaining inventory records. According to you, which basic system of control has been violated? Also list down the other general conditions pertaining to such system which needs to be maintained and checked by the management.
(b) State the key requirements of auditing standards of Public Company Accounting over sight board.
Audit under CIS Environment 5. In the audit of K Ltd, its auditor wants to use CAATs for performing various audit
(a) Guide him as to what procedures can be performed using CAATs. (b) Whether to use Computer Assisted Auditing Techniques (CAATs), what are the
factors that a statutory auditor has to consider? The Company Audit 6. (a) Gracious Ltd. has made a contribution of ` 7.8 lacs during the financial year ended
31.3.17 to Samaj Seva Party, a political party, for running a teaching institute situated in the rural area, where most of the workers of the company reside. It is admitted that the benefit of the institute is mostly for the children of the workers of the company. The average net profit of the company during the three immediately preceding financial years was ` 100 lakhs. Comment.
(b) Apple Ltd. is an unlisted public company. Its balance sheet shows paid up share capital of ` 5 crore and public deposits of ` 100 crore. The company appointed M/s Pear & Co., a chartered accountant firm, as the statutory auditor in its annual general meeting held at the end of September, 2016 for 11 years.
You are required to state the provisions related to rotation of auditor and cooling off period as per the section 139(2) of the Companies Act, 2013 in case of an individual auditor or an audit firm, both, and comment upon the facts of the case provided above with respect to aforesaid provisions.
(c) Malta Pvt. Ltd., a newly incorporated company dated 01.07.2017 is engaged in the manufacturing business of Cotton Shirts. On 30.07.2017, the Managing Director of Malta Pvt. Ltd. himself appointed CA. Rajnath, his daughter’s husband, as the first auditor of the company.
You are required to – (i) state the provisions of the Companies Act, 2013 relating to appointment of first
auditor. (ii) comment on the action of the Managing Director.
Audit Report 7. (a) If financial statements prepared in accordance with the requirements of a fair
presentation framework do not achieve fair presentation, the auditor shall discuss the matter with management and, depending on the requirements of the applicable financial reporting framework and how the matter is resolved, shall determine whether it is necessary to modify the opinion in the auditor’s report in accordance with SA 705.
Under SA 705, in what circumstances does the report of the statutory auditor require modifications? What are the types of modifications possible to the said report?
(b) Evolution Pvt. Ltd. borrowed a sum of ` 110 lakh from Banks and Financial Institutions, subsequently, the company defaulted in repayment of its loans, to the extent of 50%. The management of the company contends that that it being a private
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limited company, the Companies (Auditor’s Report) Order [CARO], 2016 is not applicable.
You are required to state the list of companies to which CARO is not applicable and state whether it will be applicable on Evolution Pvt. Ltd.
(c) In the case of companies carrying on the business of a non-banking financial institution, the auditor needs to report under CARO, 2016 whether the registration has been obtained under section 45-IA of the Reserve Bank of India Act, 1934, if required.
You are required to state in brief the audit procedure to be followed while reporting under above mentioned circumstances.
Audit Committee & Corporate Governance 8. (a) PSU Limited, a company incorporated in India has six members in its Audit
Committee. Due to recessionary conditions in India the revenue of the company is going down and there is slow down in other activities of the company. Therefore, it was expected that there would not be significant work for members of the Audit Committee. Considering the overall recession in the company and the economy, the members of the Committee decided unanimously to meet once in a year only on March 31, 2017. They reviewed monthly information system of the Company and found no errors. As an auditor of PSU Limited would you consider the decision taken by the Audit Committee is in line with the SEBI (Listing Obligations and Disclosure Requirements) Regulations, 2015?
(b) Briefly explain the Content of Management Discussion and Analysis. Audit of Consolidated Financial Statements 9. (a) ALFA Ltd. holds the ownership of 10% of voting power and control over the
composition of Board of Directors of GAMA Ltd. While planning the statutory audit of ALFA Ltd., what factors would be considered by you for audit of financial statements?
(b) Describe the relevance of SA 600 while auditing consolidation of Financial Statements.
Audit of Banks 10. (a) Your firm has been appointed as Central Statutory Auditors of a Nationalised Bank.
The Bank follows financial year as accounting year. The bank is a consortium member of Cash Credit Facilities of ` 50 crores to Xalta Limited. Bank's own share is ` 10 crores only. During the last two quarters against a debit of ` 1.75 crores towards interest the credits in Xalta Ltd's account are to the tune of ` 1.25 crores only. Based on the certificate of lead bank, the bank has classified the account of X Ltd as performing. Comment.
(b) NAYASA Bank appointed your firm of Chartered Accountants as a branch auditor for the financial year 2016-17. Being head-in-charge of the assignment, while planning, you distributed the work among your team members and assigned Mr. Hary for verification of Balances in account of the bank situated in foreign country. However, Mr. Hary, being fresh to the bank audits, needs your guidance. Kindly guide.
Audit of Insurance Company 11. (a) You are appointed as an auditor of United India Insurance Company Limited. What
are the specific areas to which you will give your attention while examining “Claims Paid” by a General Insurance Company.
(b) “In an audit of an insurance company, the Receipts and Payments Account is also subjected to audit”. Comment on this statement in brief.
Audit of Co-operative Society 12. Mention the duties of Auditor of Co-operative Societies in regard to the following:
(i) Over-due interest. (ii) Compliance with provisions of Co-operative Act and Rules thereunder. (iii) Special Report to Registrar of Co-operative Societies.
Audit under Fiscal Laws 13. As a tax auditor, how would you report on the following situations?
(a) Mr. Deepesh, is a renowned criminal lawyer, practising in Meerut. During the previous year, he collected service tax of ` 25 lakhs but utilized it for his personal use. The Commissioner of Central Excise issued a show cause notice to him as to why the tax, collected by him, is not deposited to the government account. He appeared before the Commissioner and stated his inability to pay the sum due to financial crisis. The proceedings are still pending before the Commissioner.
(b) Beam Ltd., having principal place of business in Gujarat, is engaged in the generation, transmission, distribution and supply of electricity throughout the India. The management of the company came to know that the provisions related to maintenance of cost records and cost audit are applicable to the company. The company, therefore, appointed a cost auditor for the financial year 2016-17.
The cost auditor reported certain disqualifications in Form CRA-3 of the cost audit report to which the management of the company disagreed.
The management of Beam Ltd. ingeniously instructed its tax auditor not to reveal any of the disqualifications related to the cost audit while filling particulars to be furnished in Form No. 3CD contending that the disqualifications are not relevant and there is no correlation between tax audit and cost audit as well.
Audit of Public Sector Undertaking 16. (a) What is a comprehensive audit of public enterprises? Discuss some of the areas to
be examined therein. (b) ABG & Co., a Chartered Accountant firm has been appointed by C&AG for
performance audit of a XYZ Industry. What factors should be considered by ABG & Co., while planning a performance audit of XYZ Industry?
Internal Audit, Management and Operational Audit 17. The Managing Director of Beta Ltd is concerned about high employee attrition rate in
his company. As the internal auditor of the company he requests you to analyse the causes for the same. What factors would you consider in such analysis?
Investigation and Due Diligence 18. An Japanese Company engaged in the business of manufacturing and distribution of
industrial gases, is interested in acquiring a listed Indian Company having a market share of more than 65% of the industrial gas business in India, request you to conduct a “Due Diligence” of this Indian Company and submit your report. As a due diligence auditor: (a) indicate the key areas you will cover in your review. (b) list out the contents of your Due Diligence Review Report that you will submit to your
Japan based Client. Professional Ethics 19. Comment on the following with reference to the Chartered Accountants Act, 1949 and
schedules thereto: (a) Mr. Swapnil, a renowned practicing Chartered Accountant, decided to tie his knot with
Ms. Anjani. While giving order for marriage invitation cards, Mr. Swapnil instructed to add his designation “Chartered Accountant” with his name. Later, the cards were distributed to all his relatives, close friends and clients.
(b) Mr. 'Anuj' is a practicing Chartered Accountant working as proprietor of M/s A & Co. He went abroad for 3 months. He delegated the authority to Mr. 'Youth' a Chartered Accountant his employee for taking care of routine matters of his office. During his absence Mr. 'Youth' has issued the audit queries to client which were raised during the course of audit in the name of M/s A & Co.
(c) PK Foundation decided to review its historical financial statements. For this, it proposed a tender exclusively for Chartered Accountants to obtain assurance, primarily by performing inquiry and analytical procedures, about whether the financial statements as a whole are free from material misstatement. However, the foundation did not prescribe the minimum fee in the tender document. M/s Sodhi & Co., a Chartered Accountant firm, responded to such tender.
(d) A Chartered Accountant who was in practice since last 18 years died in a road accident. His widow sold the practice to another Chartered Accountant in practice for ` 30 lakhs. The price also included the right to use the firm name.
20. Write a short note on the following: (a) A, a practicing Chartered Accountant is appointed to conduct the peer review of
another practicing unit. What areas A should review in the assessment of independence of the practicing unit?
(b) Classification of frauds by NBFC. (c) Audit Risk. (d) Direction by Tribunal in case auditor acted in a fraudulent manner.
SUGGESTED ANSWERS/HINTS
1. (a) Inability to Continue as a Going Concern: As per SA 570 on “Going Concern”, it is the responsibility of the auditor to obtain sufficient appropriate audit evidence about the appropriateness of management’s use of the going concern assumption in the preparation and presentation of the financial statements and to conclude whether there is a material uncertainty about the entity’s ability to continue as a going concern. The auditor shall evaluate management’s assessment of the entity’s ability to continue as a going concern. In evaluating management’s assessment, the auditor shall consider whether management’s assessment includes all relevant information of which the auditor is aware as a result of the audit. In the instant case, M/s Keti Projects Limited has incurred massive loss during the year 2016-17 as the financial institutions have stopped financing additional working capital to
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the company because of a complaint which was lodged against the company by government for involvement in some irregularity relating to allotment of coal blocks. There were delays in salary and other payments. Besides this, certain key managerial personnel, GM Finance and certain other employees have also left the company. The company, in addition, has no sound action plan to mitigate these situations. Thus, there are clear indications that there is danger to entity’s ability to continue in future. Considering the fact that there is no sound plan of action to mitigate these factors, the going concern assumption does not seem appropriate.
Therefore, the auditor should ask the management for its adequate disclosure in the financial statements and include the same in his report. However, if the management fails to make adequate disclosure, the auditor should express a qualified opinion or adverse opinion, as appropriate, in accordance with SA 705. But, if the result of the appropriate assumption used in the preparation of financial statements is material and pervasive as to make the financial statements misleading, the auditor should express an adverse opinion and in the Basis for Qualified (Adverse) Opinion section of the auditor’s report, state that a material uncertainty exists that may cast significant doubt on the entity’s ability to continue as a going concern and that the financial statements do not adequately disclose the matter.
(b) Engagement to Report on Pro Forma Financial Information included in a Prospectus: As per SAE 3420 “Engagements to Report on the Compilation of Pro Forma Financial Information Included in a Prospectus”, before agreeing to accept an engagement to report on whether pro forma financial information included in a prospectus has been compiled, in all material respects, on the basis of the applicable criteria, the practitioner shall obtain the agreement of the responsible party that it acknowledges and understands its responsibility for- (i) Adequately disclosing and describing the applicable criteria to the intended
users if these are not publicly available; (ii) Compiling the pro forma financial information on the basis of the applicable
criteria; and (iii) Providing the practitioner with:
(1) Access to all information (including, when needed for purposes of the engagement, information of the acquiree(s) in a business combination), such as records, documentation and other material, relevant to evaluating whether the pro forma financial information has been compiled, in all material respects, on the basis of the applicable criteria;
(2) Additional information that the practitioner may request from the responsible party for the purpose of the engagement;
(3) Access to those within the entity and the entity’s advisors from whom the practitioner determines it necessary to obtain evidence relating to
evaluating whether the pro forma financial information has been compiled, in all material respects, on the basis of the applicable criteria; and
(4) When needed for purposes of the engagement, access to appropriate individuals within the acquiree(s) in a business combination.
(c) Factors Affecting Acceptance and Continuance of Client Relationships and Review Engagements: As per SRE 2400 “Engagements to Review Historical Financial Statements”, unless required by law or regulation, the practitioner shall not accept a review engagement if- (i) The practitioner is not satisfied:
(1) that there is a rational purpose for the engagement; or (2) that a review engagement would be appropriate in the circumstances;
(ii) The practitioner has reason to believe that relevant ethical requirements, including independence, will not be satisfied;
(iii) The practitioner’s preliminary understanding of the engagement circumstances indicate that information needed to perform the review engagement is likely to be unavailable or unreliable;
(iv) The practitioner has cause to doubt management’s integrity such that it is likely to affect proper performance of the review; or
(v) Management or those charged with governance impose a limitation on the scope of the practitioner’s work in the terms of a proposed review engagement such that the practitioner believes the limitation will result in the practitioner disclaiming a conclusion on the financial statements.
(d) Non-Compliance with the Accounting Standards: As per SRS 4410, “Compilation Engagements”, The financial information may be prepared in accordance with a financial reporting framework designed to meet the common financial information needs of a wide range of users (that is, a “general purpose financial reporting framework”); The requirements of the applicable financial reporting framework determine the form and content of the financial information. The financial reporting framework may, in some cases, be referred to as the “basis of accounting.”
Commonly used general purpose financial reporting frameworks includes Accounting Standards notified under the Companies (Accounting Standards) Rules, 2006, Indian Accounting Standards (Ind AS) issued by ICAI and Accounting Standards (AS) issued by ICAI etc.
Thus, for not following and omission of some information which was required to be followed in the current situation for Courage Ltd., we should bring this matter to the attention of the management for rectification and, if the same is not rectified by the
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management, we should include the same in the Notes to the Accounts and the compilation report of the accountant.
2. (a) SA 320 “Materiality in Planning and Performing an Audit” prescribes the use of Benchmarks in Determining Materiality for the Financial Statements as a Whole.
Determining materiality involves the exercise of professional judgment. A percentage is often applied to a chosen benchmark as a starting point in determining materiality for the financial statements as a whole. Factors that may affect the identification of an appropriate benchmark include the following: (i) The elements of the financial statements (for example, assets, liabilities, equity,
revenue, expenses); (ii) Whether there are items on which the attention of the users of the particular
entity’s financial statements tends to be focused (for example, for the purpose of evaluating financial performance users may tend to focus on profit, revenue or net assets);
(iii) The nature of the entity, where the entity is at in its life cycle, and the industry and economic environment in which the entity operates;
(iv) The entity’s ownership structure and the way it is financed (for example, if an entity is financed solely by debt rather than equity, users may put more emphasis on assets, and claims on them, than on the entity’s earnings); and
(v) The relative volatility of the benchmark. (b) Re-evaluation of the Materiality Concept: In the instant case, Mr. Preet, as an
auditor of BRK Ltd. has applied the concept of materiality for the financial statements as a whole. But he wants to re-evaluate the materiality concept on the basis of additional information of significant contractual arrangements which draws attention to a particular aspect of the company’s business.
As per SA 320 “Materiality in Planning and Performing an Audit”, while establishing the overall audit strategy, the auditor shall determine materiality for the financial statement as a whole. He should set the benchmark on the basis of which he performs his audit procedure. If, in the specific circumstances of the entity, there is one or more particular classes of transactions, account balances or disclosures for which misstatements of lesser amounts than the materiality for the financial statements as a whole could reasonably be expected to influence the economic decisions of users taken on the basis of the financial statements, the auditor shall also determine the materiality level or levels to be applied to those particular classes of transactions, account balances or disclosures.
The auditor shall revise materiality for the financial statements in the event of becoming aware of information during the audit that would have caused the auditor to have determined a different amount (or amounts) initially.
If the auditor concludes a lower materiality for the same, then he should consider the fact that whether it is necessary to revise performance materiality and whether the nature, timing and extent of the further audit procedures remain appropriate.
Thus, Mr. Preet can re-evaluate the materiality concepts after considering the necessity of such revision.
(c) Considerations for Planning and Performing Audit in case of Special Purpose Framework: As per SA 800 “Special Considerations-Audits of Financial Statements Prepared in accordance with Special Purpose Frameworks”, financial statements prepared in accordance with a special purpose framework may be the only financial statements an entity prepares. In such circumstances, those financial statements may be used by users other than those for whom the financial reporting framework is designed.
While planning and performing audit of such special purpose framework based company, the auditor should consider below mentioned factors: (i) To obtain an understanding of the entity’s selection and application of
accounting policies. In the case of financial statements prepared in accordance with the provisions of a contract, the auditor shall obtain an understanding of any significant interpretations of the contract that management made in the preparation of those financial statements.
(ii) Compliance of all SAs relevant to audit, the auditor may judge it necessary to depart from a relevant requirement in an SA by performing alternative audit procedures to achieve the aim of that requirement.
(iii) Application of some of the requirements of the SAs in an audit of special purpose financial statements may require special consideration by the auditor. For example, in SA 320, judgments about matters that are material to users of the financial statements are based on a consideration of the common financial information needs of users as a group. In the case of an audit of special purpose financial statements, however, those judgments are based on a consideration of the financial information needs of the intended users.
(iv) In the case of special purpose financial statements, such as those prepared in accordance with the requirements of a contract, management may agree with the intended users on a threshold below which misstatements identified during the audit will not be corrected or otherwise adjusted. The existence of such a threshold does not relieve the auditor from the requirement to determine materiality in accordance with SA 320 for purposes of planning and performing the audit of the special purpose financial statements.
(v) Communication with those charged with governance in accordance with SAs is based on the relationship between those charged with governance and the financial statements subject to audit, in particular, whether those charged with
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governance are responsible for overseeing the preparation of those financial statements. In the case of special purpose financial statements, those charged with governance may not have such a responsibility.
(d) Audit Procedure for ensuring correctness of Opening Balances: As per SA 510 “Initial Audit Engagements-Opening Balances”, the auditor shall obtain sufficient appropriate audit evidence about whether the opening balances contain misstatements that materially affect the current period’s financial statements by - (i) Determining whether the prior period’s closing balances have been correctly
brought forward to the current period or, when appropriate, any adjustments have been disclosed as prior period items in the current year’s Statement of Profit and Loss;
(ii) Determining whether the opening balances reflect the application of appropriate accounting policies; and
(iii) By evaluating whether audit procedures performed in the current period provide evidence relevant to the opening balances; or performing specific audit procedures to obtain evidence regarding the opening balances.
If the auditor obtains audit evidence that the opening balances contain misstatements that could materially affect the current period’s financial statements, the auditor shall perform such additional audit procedures as are appropriate in the circumstances to determine the effect on the current period’s financial statements. If the auditor concludes that such misstatements exist in the current period’s financial statements, the auditor shall communicate the misstatements with the appropriate level of management and those charged with governance.
Approach for drafting Audit Report: If the auditor concludes that the opening balances contain a misstatement that materially affects the current period’s financial statements and the effect of the misstatement is not properly accounted for or not adequately presented or disclosed, the auditor shall express a qualified opinion or an adverse opinion, as appropriate, in accordance with SA 705 and in case where the auditor is unable to obtain sufficient appropriate audit evidence regarding the opening balances, the auditor shall express a qualified opinion or a disclaimer of opinion, as appropriate, in accordance with SA 705.
3. (a) Audit Plan to locate the Abnormal Wastage of Raw Material: To locate the reasons for the abnormal wastage, the auditor should first of all assess the general requirements as under: (i) Procure a list of raw materials, showing the names and detailed characteristics
of each raw material. (ii) Obtain the standard consumption figures, and ascertain the basis according to
which normal wastage figures have been worked out. Examine the break-up of a normal wastage into that in process, storage and handling stages. Also obtain
control reports, if any, in respect of manufacturing costs with reference to predetermined standards.
(iii) Examine the various records maintained for recording separately the various lots purchased and identification of each lot with actual material consumption and for ascertaining actual wastage figures therein.
(iv) Obtain reports of Preventive Maintenance Programme of machinery to ensure that the quality of goods manufacture is not of sub-standard nature or leads to high scrappage work.
(v) Assess whether personnel employed are properly trained and working efficiently.
(vi) See whether quality control techniques have been consistent or have undergone any change.
(vii) Examine inventory plans and procedures in report of transportation, storage, efficiency, deterioration, pilferage and whether the same are audited regularly.
(viii) Examine whether the basis adopted for calculating wastage for September is the same as was adopted for the other three months.
(ix) Obtain a statement showing break up of wastage figures in storage, handling and process for the four months under reference and compare the results of the analysis for each of the four months.
In addition, some specific reasons for abnormal wastage in process may be considered by the auditor are as under: (i) Examine laboratory reports and inspection reports to find out if raw materials
purchased were of a poor quality or were of sub-standard quality. This will be most useful if it is possible to identify the wastage out of each lot that has been purchased.
(ii) Machine breakdown, power failure, etc. may also result into loss of materials in process. Check the machine utilisation statements.
(iii) A high rate of rejections in the finished lots may also be responsible for abnormal wastage; therefore, examine the inspectors’ reports in respect of inspection carried out on the completion of each stage of work or process.
(iv) It is possible that the wastage may have occurred because the particular lot out of which issues were made was lying in the store for a long time, leading to deterioration in quality or because of a change in the weather which may have led to the deterioration. Compare the wastage figures.
(v) Abnormal wastage in storage and handling may arise due to the following reasons: (1) Write offs on account of reconciliation of physical and book inventories: In
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case of periodical physical inventory taking, such write offs will be reflected only in the month such reconciliation takes place.
(2) Accidental, theft or fire losses in storage: The auditor should examine the possibility of these for the purpose.
(vi) Examine whether any new production line was taken up during the month in respect of which standard input-output ratio is yet to be set-up.
(b) Formulation of Audit Strategy: While formulating the audit strategy for a company, following factors may be considered -
General Factors: (i) The engagement objectives. (ii) The results of the business review, including major developments in the client’s
business and industry, significant operating results and financial arrangements. (iii) Preliminary judgements as to materiality. (iv) Identified inherent risks. The team should also consider the risk of fraud and, in
particular, any evidence of a high level of risk to the firm. They should take into account the results of procedures for the acceptance and continuation of clients.
(v) The degree to which the team should carry out further assessment of controls as a means of reducing substantive tests.
(vi) The broad nature, extent and timing of substantive tests, or changes to the previous year’s strategy for substantive testing.
(vii) Main points relating to planning and controlling the audit or comments on the adequacy of the existing arrangements.
Specific Factors for Online Shopping: The auditor shall also obtain an understanding of the information system including
the related business processes due to new venture of online shopping in the following areas: (i) The classes of transactions in the entity’s operations that are significant to the
financial statements; (ii) The procedures, within both information technology (IT) and manual systems,
by which those transactions are initiated, recorded, processed, corrected as necessary, transferred to the general ledger and reported in the financial statements;
(iii) The related accounting records, supporting information and specific accounts in the financial statements that are used to initiate, record, process and report transactions; this includes the correction of incorrect information and how information is transferred to the general ledger. The records may be in either
manual or electronic form; (iv) How the information system captures events and conditions, other than
transactions, that are significant to the financial statements; (v) Controls surrounding journal entries, including non-standard journal entries
used to record non-recurring, unusual transactions or adjustments. 4. (a) Basic system of Control: Internal Checks and Internal Audit are important
constituents of Accounting Controls. Internal check system implies organization of the overall system of book-keeping and arrangement of staff duties in such a way that no one person can carry through a transaction and record every aspect thereof.
In the given case of New Life Hospital, the person-in-charge of inventory inflow and outflow from the store house is also responsible for purchases and maintaining inventory records. Thus, one of the basic system of control i.e. internal check which includes segregation of duties or maker and checker has been violated where transaction processing is allocated to different persons in such a manner that no one person can carry through the completion of a transaction from start to finish or the work of one person is made complimentary to the work of another person.
The general conditions pertaining to the internal check system may be summarized as under- (i) No single person should have complete control over any important aspect of
the business operation. Every employee’s action should come under the review of another person.
(ii) Staff duties should be rotated from time to time so that members do not perform the same function for a considerable length of time.
(iii) Every member of the staff should be encouraged to go on leave at least once a year.
(iv) Persons having physical custody of assets must not be permitted to have access to the books of accounts.
(v) There should exist an accounting control in respect of each class of assets, in addition, there should be periodical inspection so as to establish their physical condition.
(vi) Mechanical devices should be used, where ever practicable to prevent loss or misappropriation of cash.
(vii) Budgetary control should be exercised and wide deviations observed should be reconciled.
(viii) For inventory taking, at the close of the year, trading activities should, if possible be suspended, and it should be done by staff belonging to several sections of the organization.
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(ix) The financial and administrative powers should be distributed very judiciously among different officers and the manner in which those are actually exercised should be reviewed periodically.
(x) Procedures should be laid down for periodical verification and testing of different sections of accounting records to ensure that they are accurate.
(b) Auditing Standards of the Public Company Accounting Oversight Board (PCAOB) has the following key requirements: (i) The design of controls-relevant assertions that are related to all significant
accounts and disclosures in the financial statements; (ii) Information about how significant transactions are initiated, authorized,
supported, processed, and reported; (iii) Enough information about the flow of transactions to identify where material
misstatements due to error or fraud could occur; (iv) Controls designed to prevent or detect fraud, including who performs the
controls and the regulated segregation of duties; (v) Controls over the period-end financial reporting process; (vi) Controls over safeguarding of assets; (vii) The results of management's testing and evaluation.
5. (a) Auditing procedures using CAATs: CAATs may be used in performing various auditing procedures, including the following: (i) Tests of details of transactions and balances, for example, the use of audit
software for recalculating interest or the extraction of invoices over a certain value from computer records;
(ii) Analytical procedures, for example, identifying inconsistencies or significant fluctuations;
(iii) Tests of general controls, for example, testing the set-up or configuration of the operating system or access procedures to the program libraries or by using code comparison software to check that the version of the program in use is the version approved by management;
(iv) Sampling programs to extract data for audit testing; (v) Tests of application controls, for example, testing the functioning of a
programmed control; and (vi) Re-performing calculations performed by the entity’s accounting systems.
(b) Consideration of Factors in Use of CAATs: In determining whether to use CAATs, the auditor should consider the following factors:
(i) Availability of sufficient IT knowledge and expertise: It is essential that members of the audit team should possess sufficient knowledge and experience to plan, execute and use the results of CAAT. The audit team should have sufficient knowledge to plan, execute and use the results of the particular CAAT adopted.
(ii) Availability of CAATs and suitable computer facilities and data in suitable format: The auditor may plan to use other computer facilities when the use of CAATs on an entity’s computer is uneconomical or impractical, for example, because of an incompatibility between the auditor’s package programme and entity’s computer.
(iii) Impracticability of manual tests due to lack of evidence: Some audit procedures may not be possible to perform manually because they rely on complex processing (for example, advanced statistical analysis) or involve, amounts of data that would overwhelm any manual procedure.
(iv) Impact on effectiveness and efficiency in extracting a data: It includes selection of samples, applying analytical procedures, time involved in application of CAAT, etc.
(v) Time Constraints: In certain data, such as transaction details, are often kept for a short time and may not be available in machine-readable form by the time auditor wants them. Thus, the auditor will need to make arrangements for the retention of data required, or may need to alter the timing of the work that requires such data.
6. (a) Restrictions Regarding Political Contribution: Section 182 of the Companies Act, 2013 deals with prohibitions and restrictions regarding political contributions. According to this section, a government company or any other company which has been in existence for less than three financial years cannot contribute any amount directly or indirectly to any political party. In other cases, contribution can be done subject to compliance of the provisions given in section 182 of the Companies Act 2013.
In the given case, Gracious Ltd. has made a contribution of ` 7.8 lacs to Samaj Seva Party, a political party in which the children of its workers are benefited.
In the instant case, there is no violation of the provisions of Section 182 of the Companies Act, 2013 read with Finance Act, 2017 for contributing the amount of rupees 7.8 lakh. (Students may refer legislative amendments discussed in point no. 9 of Part I of RTP of Corporate and Allied Laws for more details).
(b) Rotation of Auditor & Cooling Off Period Provisions: The provisions related to Rotation of Auditor & Cooling Off Period are newly inserted by section 139(2) of the
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Companies Act, 2013 read with Rule 5 of the Companies (Audit & Auditors) Rules, 2014, which are discussed as under:
The provisions related to rotation of auditor are applicable to those companies which
are prescribed in Companies (Audit and Auditors) Rules, 2014, which prescribes the following classes of companies excluding one person companies and small companies, namely:- (i) all unlisted public companies having paid up share capital of ` 10 crore or more; (ii) all private limited companies having paid up share capital of ` 20 crore or more; (iii) all companies having paid up share capital of below threshold limit mentioned
above, but having public borrowings from financial institutions, banks or public deposits of ` 50 crores or more.
As per Section 139(2) of the Companies Act, 2013, no listed company or a company belonging to such class or classes of companies as mentioned above, shall appoint or re-appoint- (a) an individual as auditor for more than one term of 5 consecutive years; and (b) an audit firm as auditor for more than two terms of 5 consecutive years.
In the given case, Apple Ltd. is an unlisted public company having paid up share capital of ` 5 crore and public deposits of ` 100 crore. The company has appointed M/s Pear & Co., a chartered accountant firm, as the statutory auditor in its AGM held at the end of September, 2016 for 11 years.
The provisions relating to rotation of auditor will be applicable as the public deposits exceeds ` 50 crore. Therefore, Apple Ltd. can appoint M/s Pear & Co. as an auditor
Class of Companies for Rotation of Auditor↓
including Listed Companies +
excluding OPC (One Person Company) and Small Companies
All unlisted public companies having
paid up share capital ≥ ` 10 crore
All private limited companies having
paid up share capital ≥` 20 crore
All companies having paid up share capital of below threshold
limit mentioned, but
having public borrowings from financial institutions, banks or public deposits ≥ ` 50 crore
of the company for not more than one term of five consecutive years twice i.e. M/s Pear & Co. shall hold office from the conclusion of this meeting upto conclusion of sixth AGM to be held in the year 2021 and thereafter can be re-appointed as auditor for one more term of five years i.e. upto year 2026. The appointment shall be subject to ratification by members at every annual general meeting of the company. As a result, the appointment of M/s Pear & Co. made by Apple Ltd. for 11 years is void.
(c) (i) Appointment of First Auditor: Provisions of the Companies Act, 2013 relating to appointment of first auditor are stated below- (1) Appointment of First Auditor in the case of a company, other than a
Government Company- As per Section 139(6), the first auditor of a company, other than a Government company, shall be appointed by the Board of Directors within 30 days from the date of registration of the company.
In the case of failure of the Board to appoint the auditor, it shall inform the members of the company.
The members of the company shall within 90 days at an extraordinary general meeting appoint the auditor. Appointed auditor shall hold office till the conclusion of the first annual general meeting.
(2) Appointment of First Auditor in the case of Government Company- Section 139(7) provides that in the case of a Government company or any other company owned or controlled, directly or indirectly, by the Central Government, or by any State Government, or Governments, or partly by the Central Government and partly by one or more State Governments, the first auditor shall be appointed by the Comptroller and Auditor-General of India within 60 days from the date of registration of the company.
In case the Comptroller and Auditor-General of India does not appoint such auditor within the above said period, the Board of Directors of the company shall appoint such auditor within the next 30 days. Further, in the case of failure of the Board to appoint such auditor within next 30 days, it shall inform the members of the company who shall appoint such auditor within 60 days at an extraordinary general meeting. Auditors shall hold office till the conclusion of the first annual general meeting.
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(ii) Appointment of First Auditor by the Managing Director: Apparently, there
are two issues arising out of the situation given in the question, viz., first one relates to appointment of first auditor by the Managing Director; and second pertains to relation of such an auditor with the Managing Director. Regarding the first issue relating to appointment of auditor, particularly, in this case relating to appointment of first auditor, it may be noted that as per the provisions of section 139(6) of the Companies Act, 2013, the first auditor of a company shall be appointed by the Board of Directors within 30 days from the date of registration of the company.
As per the facts given in the case, the appointment of CA Rajnath as first auditor by the Managing Director of Malta Pvt. Ltd. by himself is in violation of section 139(6) of the Companies Act, 2013, which authorizes the Board of Directors to appoint the first auditor of the company within one month of registration of the company.
Thus, the appointment of CA Rajnath is not valid. Under the circumstances, the second issue relating to relationship of auditor with Managing Director becomes redundant.
Appointment of First Auditor
Other than Government Company
[Section 139(6)]
Appointment by BOD -within 30 days from DOR
in case of failure:Members in EGM within
90 days.
Hold the office till the conclusion of
the first AGM
Goverment Company defined u/s 2 (45) [Section 139(7)]
7. (a) Modifications in Audit Report: As per SA 705, “Modifications to the Opinion in the Independent Auditor’s Report”, the auditor may modify the opinion in the auditor’s report in the following circumstances: (i) If the auditor concludes that, based on the audit evidence obtained, the financial
statements as a whole are not free from material misstatement; or (ii) If the auditor is unable to obtain sufficient appropriate audit evidence to conclude
that the financial statements as a whole are free from material misstatement. Types of Modification to the Auditor’s Opinion: As per SA 705, “Modifications to
the Opinion in the Independent Auditor’s Report”, modified opinion may be defined as a qualified opinion, an adverse opinion or a disclaimer of opinion.
Types of modifications possible to the said report are mentioned below: (i) Qualified Opinion: The auditor shall express a qualified opinion when the
auditor, having obtained sufficient appropriate audit evidence, concludes that misstatements, individually or in the aggregate, are material, but not pervasive, to the financial statements; or the auditor is unable to obtain sufficient appropriate audit evidence on which to base the opinion, but the auditor concludes that the possible effects on the financial statements of undetected misstatements, if any, could be material but not pervasive.
(ii) Adverse Opinion: The auditor shall express an adverse opinion when the auditor, having obtained sufficient appropriate audit evidence, concludes that misstatements, individually or in the aggregate, are both material and pervasive to the financial statements.
(iii) Disclaimer of Opinion: The auditor shall disclaim an opinion when the auditor is unable to obtain sufficient appropriate audit evidence on which to base the opinion, and the auditor concludes that the possible effects on the financial statements of undetected misstatements, if any, could be both material and pervasive.
(b) Applicability of Companies (Auditor’s Report) Order [CARO], 2016: The CARO, 2016 is an additional reporting requirement Order which has been issued by the Central Government in consultation with the Institute of Chartered Accountants of India under section 143(11) of the Companies Act, 2013.
The order applies to every company including a foreign company as defined in clause (42) of section 2 of the Companies Act, 2013. However, the Order specifically exempts the following class of companies- (i) a banking company as defined in clause (c) of section 5 of the Banking
Regulation Act, 1949 (10 of 1949); (ii) an insurance company as defined under the Insurance Act,1938 (4 of 1938);
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(iii) a company licensed to operate under section 8 of the Companies Act; (iv) a One Person Company as defined under clause (62) of section 2 of the
Companies Act and a small company as defined under clause (85) of section 2 of the Companies Act; and
(v) a private limited company, not being a subsidiary or holding company of a public company, having a paid up capital and reserves and surplus not more than rupees one crore as on the balance sheet date and which does not have total borrowings exceeding rupees one crore from any bank or financial institution at any point of time during the financial year and which does not have a total revenue as disclosed in Scheduled III to the Companies Act, 2013 (including revenue from discontinuing operations) exceeding rupees ten crore during the financial year as per the financial statements.
In the given case, Evolution Pvt. Ltd. has outstanding loan of rupees 110 lakhs from Banks and Financial Institutions together, which is exceeding the limit prescribed under Order for applicability of exemption. Therefore, CARO, 2016 will be applicable on Evolution Pvt. Ltd.
(c) Reporting under CARO, 2016 for Registration under RBI Act, 1934: As per Clause (xvi) of paragraph 3 of the CARO, 2016, the auditor is required to report whether the company is required to be registered under section 45-IA of the Reserve Bank of India Act, 1934. If so, whether the registration has been obtained.
Audit Procedures and Reporting- (i) The auditor should examine the transactions of the company with relation to the
activities covered under the RBI Act and directions related to the Non-Banking Financial Companies.
(ii) The financial statements should be examined to ascertain whether company’s financial assets constitute more than 50 per cent of the total assets and income from financial assets constitute more than 50 per cent of the gross income.
(iii) Whether the company has net owned funds as required for the registration as NBFC.
(iv) Whether the company has obtained the registration as NBFC, if not, the reasons should be sought from the management and documented.
8. (a) Audit Committee Meetings: One of the following additional requirement as stipulated under SEBI (Listing Obligations and Disclosure Requirements) Regulations, 2015 (“LODR Regulations”) on which Section 177 of the Companies Act, 2013 (relating to audit committee) is silent is – The Audit Committee should meet at least four times in a year and not more than one hundred and twenty days shall elapse between two meetings. The quorum shall be either two members or one third of the members of the audit committee whichever is greater, but there should be a minimum of two
independent directors present. Besides, there is a mandatory review requirement and to review only monthly
information system is not sufficient. Here the audit committee members reviewed only monthly information system of the company and the same is not sufficient as per LODR Regulations.
The Audit Committee shall mandatorily review the following information as per LODR Regulations: (i) Management discussion and analysis of financial condition and results of
operations; (ii) Statement of significant related party transactions (as defined by the Audit
Committee), submitted by management; (iii) Management letters / letters of internal control weaknesses issued by the
statutory auditors; (iv) Internal audit reports relating to internal control weaknesses; (v) The appointment, removal and terms of remuneration of the Chief internal
auditor shall be subject to review by the Audit Committee; and (vi) Statement of deviations: (a) quarterly statement of deviations including report of
monitoring agency if applicable and (b) annual statement of funds utilized for purposes other than those stated in the offer document/ prospectus/ notice.
Applying the above, the decision taken by the audit committee is not in line with the LODR Regulations.
(b) Content of Management Discussion and Analysis: As part of the directors’ report or as an addition thereto, a Management Discussion and Analysis report should form part of the Annual Report to the shareholders. This Management Discussion & Analysis should include discussion on the following matters within the limits set by the company’s competitive position: (i) Industry structure and developments. (ii) Opportunities and Threats. (iii) Segment–wise or product-wise performance. (iv) Outlook. (v) Risks and concerns. (vi) Internal control systems and their adequacy. (vii) Discussion on financial performance with respect to operational performance. (viii) Material developments in Human Resources/Industrial Relations front, including
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9. (a) Voting Power and Control over the composition of Board of Directors: In this case, A Ltd. holds only 10 percent of the voting power and control over the composition of the Board of Directors of B Ltd. In such a case, A Ltd. would be considered as a parent of B Ltd. and, therefore, it would consolidate B Ltd. in the consolidated financial statements as subsidiary.
The auditor should verify whether the parent controls the composition of the Board of Directors or corresponding governing body of any entity. There would be various means by which such kind of control can be obtained.
In this regard, the auditor may verify the Board’s minutes, shareholder agreements entered into by the parent, agreements with the entities to which the parent might have provided any technology or know how, enforcement of statute, as the case may be, etc.
The auditor should verify that the adjustments warranted by the relevant accounting standards have been made wherever required and have been properly authorised by the management of the parent. The preparation of consolidated financial statements gives rise to permanent consolidation adjustments and current period consolidation adjustments. The auditor should make plans, among other things, for the understanding of accounting policies of the parent, subsidiaries, associates and joint ventures and determining and programming the nature, timing, and extent of the audit procedures to be performed etc.
Further, the duties of an auditor with regard to reporting of transactions with related parties as required by Accounting Standard 18 are given in SA 550 on Related Parties. As per SA 550 on “Related Parties”, the auditor should review information provided by the management of the entity identifying the names of all known related parties. A person or other entity that has control or significant influence, directly or indirectly through one or more intermediaries, over the reporting entity are considered as Related Party.
In forming an opinion on the financial statements the auditor shall evaluate whether the identified related party relationships and transactions have been appropriately accounted for and disclosed in accordance with the applicable financial reporting framework and whether the effects of the related party relationships and transactions prevent the financial statements from achieving true and fair presentation (for fair presentation frameworks) or cause the financial statements to be misleading (for compliance frameworks).
(b) Relevance of SA 600 While Auditing Consolidation of Financial Statements: Standard on Auditing (SA) 600, ‘Using the Work of Another Auditor’ establishes standards when an auditor, reporting on the financial statements of an entity (the group—in the case of consolidated financial statements), uses the work of another auditor on the financial information of one or more components included in the financial statements of the entity.
The principal auditor, if he decides to use the work of another auditor in relation to the audit of consolidated financial statements, should comply with the requirements of SA 600.
In carrying out the audit of the standalone financial statements, the computation of materiality for the purpose of issuing an opinion on the standalone financial statements of each component would be done component-wise on a standalone basis. However, with regard to determination of materiality during the audit of consolidated financial statements (CFS), the auditor should consider the following: ♦ The auditor is required to compute the materiality for the group as a whole. This
materiality should be used to assess the appropriateness of the consolidation adjustments (i.e. permanent consolidation adjustments and current period consolidation adjustments) that are made by the management in the preparation of CFS.
♦ The parent auditor can also use the materiality computed on the group level to determine whether the component's financial statements are material to the group to determine whether they should scope in additional components, and consider using the work of other auditors as applicable.
However, while considering the observations (for instance modification and /or emphasis of matter in accordance with SA 705/706) of the component auditor in his report on the standalone financial statements, the concept of materiality would not be considered. Thus, the component auditor's observations, if any, on the component’s financial statements, irrespective of whether the auditors of the component are also the auditors of the CFS or not, are required to be included in the parent auditor's report on the CFS, regardless of materiality.
10. (a) Non-Performing Asset: The bank is a consortium member of cash credit facilities of ` 50 crores to Xalta Limited. Bank's own share is ` 10 crores only. During the last two quarters against a debit of ` 1.75 crores towards interest, the credits in Xalta Ltd's account are to the tune of ` 1.25 crores only. Sometimes, several banks form a group (the 'consortium') under the leadership of a 'lead bank' to make advance to a large customer on same conditions and security with proportionate rights. In such cases, each bank may classify the advance given by it according to its own experience of recovery and other factors. Since in the last two quarters, the amount remains outstanding and, thus, interest amount should be reversed. This is despite the certificate of lead bank to classify that the account as performing. Accordingly, the amount should be shown as non-performing asset.
(b) Balances in Account of a Bank situated in a Foreign Country: The following procedure may be followed while verifying balances in account of a bank situated in a foreign country- (i) Verify the ledger balances in each account with reference to the bank
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confirmation certificates and reconciliation statements as at the year-end. (ii) Review the reconciliation statements and pay particular attention to the
following. (1) Examine that no debit for charges or credit for interest is outstanding and
all the items which ought to have been taken to revenue for the year have been so taken. This should be particularly observed when the bills collected, etc., are credited with net amount and entries for commission, etc. are not made separately in the statement of account.
(2) Examine that no cheque sent or received in clearing is outstanding. As per the practice prevalent among banks, any cheques returned unpaid are accounted for on the same day on which they were sent in clearing or on the following day.
(3) Examine that all bills or outstanding cheques sent for collection and outstanding as on the closing date have been credited subsequently.
(iii) Examine the large transactions in inter-bank accounts, particularly towards the year-end, to ensure that no transactions have been put through for window-dressing.
(iv) Check original deposit receipts in respect of balances in deposit accounts in addition to confirmation certificates obtained from banks in respect of outstanding deposits.
(v) Check whether these balances are converted into the Indian currency at the exchange rates prevailing on the balance sheet date and ensure compliance with relevant Accounting Standard.
11. (a) Examination of Claims Paid in Respect of a General Insurance Company: The auditor may determine the extent of checking of claims paid on the same line as suggested for outstanding claims. Other aspects in respect of claims paid to be examined by the auditors are as follows- (i) that in case of co-insurance arrangements, claims paid have been booked only
in respect of company’s share and the balance has been debited to other insurance companies;
(ii) that in case of claims paid on the basis of advices from other insurance companies (where the company is not the leader in co-insurance arrangements), whether share of premium was also received by the company. Such claims which have been communicated after the year-end for losses which occurred prior to the year end must be accounted for in the year of audit;
(iii) that the claims payments have been duly sanctioned by the authority concerned and the payments of the amounts are duly acknowledged by the claimants;
(iv) that the salvage recovered has been duly accounted for in accordance with the procedure applicable to the company and a letter of subrogation has been obtained in accordance with the laid down procedure;
(v) that the amounts of the nature of pure advances/deposits with Courts, etc., in matters under litigation/arbitration have not been treated as claims paid but are held as assets till final disposal of such claims. In such cases, full provision should be made for outstanding claims;
(vi) that payment made against claims partially settled have been duly vouched. In such cases, the sanctioning authority should be the same as the one which has powers in respect of the total claimed amount;
(vii) that in case of final settlement of claims, the claimant has given an unqualified discharge note, not involving the company in any further liability in respect of the claim; and
(viii) that the figures of claims, wherever communicated for the year by the Division to the Head Office for purposes of reinsurance claims, have been reconciled with the trial balance-figure.
(b) Audit of Receipts and Payments Account: Section 11 of the Insurance Act, 1938 provides that every insurer, on or after the date of the commencement of the Insurance Laws (Amendment) Act, 2015, in respect of insurance business transacted by him and in respect of his shareholders' funds, shall, at the expiration of each financial year, prepare with reference to that year, balance sheet, a profit and loss account, a separate account of receipts and payments, a revenue account in accordance with the regulations as may be specified. Since receipts and payments account has been made a part of financial statements of an insurer, it is implied that the receipts and payments account is also required to be audited.
The IRDA (Preparation of Financial Statements and Auditor’s Report of Insurance Companies) Regulations, 2002 require that the auditor of an insurance company should: (i) report whether the receipts and payments account of the insurer is in agreement
with the books of account and returns; (ii) express an opinion as to whether the receipts and payments account has been
prepared in accordance with the provisions of the relevant statutes; and (iii) express an opinion whether the receipts and payments account give a true and
fair view of the receipts and payments of the insurer for the financial year/period under audit.
It may hence be said that auditor is required to audit the Receipts and Payments Account of the insurer and also express an opinion on the same.
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12. (i) Overdue interest: Overdue interest should be excluded from interest outstanding and accrued due while calculating profit. Overdue interest is interest accrued or accruing in accounts, the amount of which the principal is overdue. In practice an overdue interest reserve is created and the credit of overdue interest credited to interest account is reduced.
(ii) Compliance with provisions of the Co-operative Act and Rules thereunder: An auditor of a co-operative society is required to point out the infringement with the provisions of the relevant Co-operative Act Rules and bye-laws. The auditor of a co-operative society is also required to point out various irregularities, improprieties, and departure from the provision of the Act, rules framed thereunder and the bye-laws of the society. The financial implications of such infringements should be properly assessed and quantified by the auditor and they should be reported. Some of the State laws contain restrictions on the payment of dividends, which should be noted by the auditor and if dividend is declared in excess of the prescribed percentage, the fact should be reported by the auditor. Auditor should also ensure that various provisions in the Co-operative Societies Act, such as, restriction on borrowings, investment of funds, contribution to education funds, restriction on loans, etc. are also complied with.
(iii) Special Report to the Registrar of Co-operative Societies: The auditors are required to report on number of matters as prescribed in various states. In addition to the main report, the auditors are also required to submit by way of schedules/audit memorandum information on the working of the company as well. During the course of audit, if the auditor notices that there are some serious irregularities in the working of the society he may report these special matters to the Registrar, drawing his specific attention to the points. The Registrar on receipt of such a special report may take necessary action against the society. In the following cases, for instance a special report may become necessary: (a) Personal profiteering by members of managing committee in transactions of the
society, which are ultimately detrimental to the interest of the society. (b) Detection of fraud relating to expenses, purchases, property and stores of the
society. (c) Specific examples of mis-management. Decisions of management against co-
operative principles. (d) In the case of urban co-operative banks, disproportionate advances to vested
interest groups, such as relatives of management, and deliberate negligence about the recovery thereof. Cases of reckless advancing, where the management is negligent about taking adequate security and proper safeguards for judging the credit worthiness of the party.
13. (a) Reporting Requirement Under Clause (4) of Form 3CD: Mr. Deepesh has defaulted in payment of service tax for the previous year. Consequently, the Commissioner of Central Excise issued a show cause notice for such non-payment of tax. The arguments are still going on between the department and assessee. He also restrained his tax auditor from disclosing service tax registration details in tax audit report.
A tax auditor is required to report under Clause (4) of Form 3CD, which requires him to mention the registration number or any other identification number, if any, allotted, in case the assessee is liable to pay indirect taxes like excise duty, service tax, sales tax, customs duty, etc.
Part A of Form No. 3CD generally requires the auditor to give the factual details of the assessee. Thus, the auditor is primarily required to furnish the details of registration numbers as provided to him by the assessee.
The reporting is however, to be done in the manner or format specified by the e-filing utility in this context. The information may be obtained and maintained in the following format:- Sr. No Relevant Indirect tax
Law which requires registration
Place of Business / profession / service unit for which registration is in place / or has been applied for:-
Registration/ Identification number
1 2 3 4
Furthermore, the auditor has to keep in mind the provisions of Standard on Auditing 580 “Written Representation”. In case the auditor prima facie is of the opinion that any indirect tax laws is applicable on the business or profession of the assessee but the assessee is not registered under the said law, the auditor should report the same appropriately.
Therefore, the tax auditor of Mr. Deepesh is required to furnish service tax registration number under Clause (4) of the Form 3CD. Thus, contention of Mr. Deepesh not to disclose the service tax details is not tenable.
(b) Reporting Requirement for Disqualifications in Cost Audit Report: A tax auditor is required to ascertain under Clause (37) of Form 3CD whether cost audit was carried out and if yes, provide the details of disqualification or disagreement on any matter/item/value/quantity as may be reported/identified by the cost auditor.
The tax auditor should obtain the copy of cost audit from the assessee. Even though the tax auditor is not required to make any detailed study of such report, he has to take note of the details of disqualification or disagreement on any matter/item/value/quantity as may be reported/identified by the cost auditor. The tax auditor need not express any opinion in a case where such audit has been ordered but the same has not been carried out.
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In the given case, the cost auditor of Beam Ltd. has reported certain disqualifications in Form CRA-3 of the cost audit report.
Therefore, the tax auditor of Beam Ltd. is required to provide the details of disqualifications reported by the cost auditor under Clause (37) of the Form 3CD. Thus, the contention of the management of Beam Ltd. not to reveal any of the disqualifications related to the cost audit on the belief that there is no correlation between tax audit and cost audit is not acceptable.
14. (a) Matters to be included in Cost Audit Programme: It is a true statement that like any other audit a systematic planning for cost audit is also necessary. Therefore, the cost audit programme should include all the usual broad steps that a financial auditor includes in his audit programme. This would require that the various aspects like what to be done, when to be done and by whom to be done are adequately takes care of. However, looking to the basic difference in cost audit and financial audit as allocation and apportionment of expenses, statutory requirement etc. should require special consideration. Cost audit, in order to be effective, should be completed at one time as far as practicable. Based on above factors a set of procedures and instructions are evolved which may be termed the cost audit programme. Matters to be included in the Cost Audit Programme may be divided into following two stages: (1) Review of Cost accounting record: This will include:
(i) Method of costing in use - batch, process or unit. (ii) Method of accounting for raw materials; stores and spares, wastages,
spoilage defectives, etc. (iii) System of recording wages, salaries, overtime and spares, wastages, etc. (iv) Basis of allocation of overheads to cost centres and of absorption by
products and apportionment of service department’s expenses. (v) Treatment of interest, recording of royalties, research and development
expenses, etc. (vi) Method of accounting of depreciation. (vii) Method of inventory-taking and its valuation including inventory policies. (viii) System of budgetary control. (ix) System of internal auditing.
(2) Verification of cost statement and other data: This will mainly cover: (i) Licensed, installed and utilised capacities. (ii) Financial ratios. (iii) Production data.
(iv) Cost of raw material consumed, wages and salaries, stores, power and fuel, overheads provision for depreciation etc.
(v) Sales realisation. (vi) Abnormal non-recurring and special costs. (vii) Cost statements. (viii) Reconciliation with financial books.
Some other factors which need to be brought into cost audit programme includes system of cost accounting, range of products, areas to be covered etc. indicating allocation of manpower and the time to be taken for computing the audit.
(b) Cost Audit will be advantageous to the stockholders in the following manner: To Management -
(i) Management will get reliable data for its day-to-day operations like price fixing, control, decision-making, etc.
(ii) A close and continuous check on all wastages will be kept through a proper system of reporting to management.
(iii) Inefficiencies in the working of the company will be brought to light to facilitate corrective action.
(iv) Management by exception becomes possible through allocation of responsibilities to individual managers.
(v) The system of budgetary control and standard costing will be greatly facilitated. (vi) A reliable check on the valuation of closing inventory and work-in-progress can
be established. (vii) It helps in the detection of errors and fraud.
To Society - (i) Cost audit is often introduced for the purpose of fixation of prices. The prices so
fixed are based on the correct costing data and so the consumers are saved from exploitation.
(ii) Since price increase by some industries is not allowed without proper justification as to increase in cost of production, inflation through price hikes can be controlled and consumers can maintain their standard of living.
To Shareholder - Cost audit ensures that proper records are kept as to purchases and utilisation of materials and expenses incurred on wages, etc. It also makes sure that the valuation of closing inventories and work- in-progress is on a fair basis. Thus the shareholders are assured of a fair return on their investment.
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To Government - (i) Where the Government enters into a cost-plus contract, cost audit helps
government to fix the price of the contract at a reasonable level. (ii) Cost audit helps in the fixation of ceiling prices of essential commodities and
thus undue profiteering is checked. (iii) Cost audit enables the government to focus its attention on inefficient units. (iv) Cost audit enables the government to decide in favour of giving protection to
certain industries. (v) Cost audit facilitates settlement of trade disputes brought to the government. (vi) Cost audit and consequent management action can create a healthy competition
among the various units in an industry. This imposes an automatic check on inflation.
15. (a) Contract Notes: Contract note is a document through which a contractual obligation is established between a member and a client. Every member of the stock-exchange has to issue contract notes to his clients for the trades executed on their behalf. The contract notes are required to be issued to the Client within 24 hours of execution of the trades. Members are also required to preserve counter-foils or duplicates of the copies of contract notes issued to clients. The member is also required to maintain written consent of clients for the contracts entered into as Principal. Contract notes issued to clients should show the brokerage separately. The total brokerage charged by the member should not exceed the specified value of the trade. It may be noted that the brokerage percentage is prescribed from time to time. The Contract Notes are required to be signed either by the member himself or his constituted attorney. In case of a sole proprietor / partnership firm wishes to authorise another person to sign the contract notes, then the member is required to submit a power of attorney to the Exchange. In case of corporate membership, a board resolution is required to authorise a person including Directors to sign the contract notes.
The member then prepares a Contract Note in the prescribed form after adding the brokerage and sends the original Contract Note to the client. The auditor should evaluate the internal control procedures instituted by the stock broker for proper maintenance and issuance of contract notes. The auditor should verify that the transactions done by a member are recorded in the sauda book. It should also be examined that contract notes are issued for all the business conducted on behalf of the clients. The auditor should verify the list of trades executed with the bills raised. The auditor should apply appropriate audit procedures to satisfy himself that - (i) Contract notes have been serially numbered. (ii) No serial number has been left blank. (iii) Format of the Contract Note is as prescribed by the Regulations of the Exchange.
(iv) Duplicate copies / counterfoils of contract notes are maintained. (v) Brokerage charged in contract notes is within the permissible limits and is
indicated separately including service tax. (vi) Contract notes have been signed by an authorised person. (vii) Contract notes have been issued in respect of all transactions. (viii) Transaction Identification, Trade Identification and Trade Execution time has
been printed on the contract note issued. (ix) SEBI Registration number, Settlement number, Settlement dates have been
mentioned. (x) PAN number of the member and client has been mentioned on Contract Note
where if required. (xi) All clauses specified by the Exchange have been printed on the reverse of the
contract notes. (b) Sauda Book: All members are required to maintain a ‘Sauda Book’, which contains
details of all deals transacted by them on a day to day basis. This is a basic record, which each member is required to maintain regularly on day-to-day basis. It contains the details regarding the name of the code of the client on whose behalf the deals have been done, rate and quantity of bought or sold. These details are maintained date wise. This register contains all the transactions, which may be of any of the kind mentioned below: (i) member’s own business on the Exchange; (ii) member’s business on the Exchange on behalf of clients; (iii) member’s business with the clients on principal-to-principal basis; (iv) member’s business with the members of other Stock Exchanges; (v) member’s business on behalf of his clients with the members of other Stock
Exchanges; (vi) Spot transactions, etc.
(c) Margins: Margin refers to deposit made by members with the stock exchange authorities. There can be wide fluctuations at the time of settlement in the prices of securities since the closing rate of the earlier settlement. In order to restrict excessive speculation and also to safeguard the interests of the investors, members are required to keep certain deposits with the stock exchange authorities. These deposits are termed ‘margins’. The members are required to collect the margin from their clients, wherever applicable, and deposit the amount collected with the Clearing House. Margin is intended to protect the members by providing them with funds to cover anticipated fluctuations in prices of securities, particularly, if the client delays
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in paying the amount or is unable to meet his commitments. Margins also help prevent excessive speculation as clients would be required to invest some funds and not indulge in speculation without adequate resources. A member is required to pay or deposit different margins such as Gross Exposure Margin, Mark to Market (MTM) Margin, Volatility Margin (VM), Additional Volatility Margin (AVM), Special Margin and Adhoc Margin. The members are required to compute margin payable for all securities traded by them and make the margin payments on the due date to the Stock Exchange authorities. Different types of margins are payable at stipulated time, as decided by the Exchange or Clearing House of the Exchange.
(d) Type of Markets under NEAT: The NEAT system has four main types of market. They are:
Normal Market: All orders which are of regular lot size or multiples thereof are traded
in the normal market. For shares which are traded in the compulsory dematerialised mode the market lot of these shares is one. Normal market consists of various book types wherein orders are segregated as regular lot orders, special term orders, negotiated trade orders and stop loss orders, depending on their order attributes.
Odd Lot Market: An order is called an odd lot order if the order size is less than regular lot size; such orders are traded in the odd-lot market. These orders do not have any special terms or attributes attached to them. In an odd-lot market, both the price and quantity of both the orders (buy and sell) should exactly match for the trade to take place.
Spot Market: Spot orders are similar to the normal market orders except that spot orders have different settlement periods vis-à-vis normal market. These orders do not have any special terms or attributes attached to them.
Auction Market: In the auction market, auctions are initiated by the Exchange on behalf of trading members for completing the settlement process.
16. (a) Comprehensive Audit of Public Enterprises and Areas to be examined: The scope and extent of audit of public sector enterprises is determined by the Comptroller and Auditor General of India. Audit of public enterprises in India is not restricted to financial and compliance audit; it extends also to efficiency, economy and effectiveness with which these operate and fulfil their objectives and goals. Another aspect of such audit relates to questions of propriety; this audit is directed towards an examination of management decisions in sales, purchases, contracts, etc. to see
Types of Market under NEAT System
Normal Market Odd Lot Market Spot Market Auction Market
whether these have been taken in the best interests of the undertaking and conform to accepted principles of financial propriety.
Comprehensive audit involves assessing efficiency and effectiveness of public enterprises in its entirety to be conducted on the basis of certain standards and criterion. Public enterprises have been set-up with socio-objectives. An objective assessment with reference to such objectives’ fulfillment would require comprehensive audit.
The starting point of a comprehensive audit of a public enterprise, which covers aspects of economy, efficiency and effectiveness, is the preparation of an audit programme based on the study of decisions relating to the setting up of the enterprise, its objectives, the areas of operation, organisation, financial and operational details available in the annual reports and accounts, capital and operational budgets, deliberations of the board of directors, material in the earlier audit inspection reports on the enterprise and other relevant available papers. These audit programmes (or guidelines) identify the areas/aspects which require further detailed audit analysis and criteria, the data required for such analysis and the sources of such data, the extent of the audit analysis including the test checks to be applied and the instructions to the audit parties assigned to the work.
The areas covered by comprehensive audit are those of investment decisions, project formulation and management, organisation, delegation of powers and management information systems, organisational effectiveness, capacity utilisation, management of equipment, plant and machinery, production performance, use of materials, productivity of labour, idle capacity, costs and prices, development of complementary ancillary small scale industries, materials management, sales and credit control, budgetary and internal control systems, etc. The areas covered in comprehensive audit will naturally vary from enterprise to enterprise depending on the nature of the enterprise, its objectives and operations.
Some of the broad areas are listed below: ♦ Comparison of overall capital cost of the project with the approved planned
costs. ♦ Production or operational outputs vis-a-vis under-utilisation of the installed
capacity. ♦ Systems of project formulation and implementation. ♦ Planned rate of return. ♦ Cost control measures. ♦ Research and development programmes. ♦ System of repairs and maintenance.
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♦ adequate purchase policies. ♦ Effective and economical procedures. ♦ Project planning. ♦ Undue waste, unproductive time for men and machines, wasteful utilisation or
even non-utilisation of resources. (b) Factors to be considered while planning the Performance Audit: While planning
a performance audit of an Industry, the auditors should take care of certain factors which are listed below: (i) to consider significance and the needs of potential users of the audit report. (ii) to obtain an understanding of the program to be audited. (iii) to consider legal and regulatory requirements. (iv) to consider management controls. (v) to identify criteria needed to evaluate matters subject to audit. (vi) to identify significant findings and recommendations from previous audits that
could affect the current audit objectives. Auditors should determine if management has corrected the conditions causing those findings and implemented those recommendations.
(vii) to identify potential sources of data that could be used as audit evidence and consider the validity and reliability of these data, including data collected by the audited entity, data generated by the auditors, or data provided by third parties.
(viii) to consider whether the work of other auditors and experts may be used to satisfy some of the auditors' objectives.
(ix) to provide sufficient staff and other resources to do the audit. (x) to prepare a written audit plan.
17. The factors responsible for high employee attrition rate are as under: (i) Job Stress & work life imbalance (ii) Wrong policies of the Management (iii) Unbearable behaviour of Senior Staff (iv) Safety factors (v) Limited opportunities for promotion (vi) Low monetary benefits (vii) Lack of labour welfare schemes
(viii) Whether the organization has properly qualified and experienced personnel for the various levels of works?
(ix) Is the number of people employed at various work centres excessive or inadequate? (x) Does the organization provide facilities for staff training so that employees and
workers keep themselves abreast of current techniques and practices? 18. (a) Due Diligence – Key Areas: The Japanese company engaged in the business of
manufacturing and distribution of industrial gases wishing to acquire a listed Indian company has commissioned the Due Diligence Audit to assess the strengths and weaknesses of this company. It is quite important for the acquirer to assess the proposal from different angles and specifically as per terms of the assignment and also see whether proposed merger would create operational synergies. On the other hand, financial due diligence review would be performed after the commercial valuation. Accordingly, while a preliminary review might be performed during initial stages of the restructuring exercise and may in fact, be performed simultaneously with the commercial evaluation, at a later stage, financial due diligence may be performed on the books of account and other information directly pertaining to the financial matters of the entity. In addition, a legal due diligence may be required where legal aspects of functioning of the entities are reviewed; for example, the legal aspects of property owned by the entity or compliance with various statutory requirements under various laws. Like other due diligence exercises, environmental and personnel due diligence are also carried out in order to establish whether various propositions with regard to environment and personnel of the enterprise under review are appropriate. In any case, it is quite important to look behind the veil of initial information provided by the company and to assess the benefits and costs of the proposed acquisition/merger by inquiring into all relevant aspects of the past, present and future of the business to be acquired. Some of the significant key areas which shall be covered under the review are as under: (1) Historical Background: The accountant should begin the financial due
diligence review by looking into the history of the company and the background of the promoters. The details of how the company was set up and who were the original promoters have to be gone into, before verification of financial data in detail. An eye into the history of the company may reveal its turning points, survival strategies adopted from time to time, the market share enjoyed by and changes therein, product life cycle and adequacy of resources. It could also help the accountant in determining whether, in the past, any regulatory requirements have had an impact on the business of the said company. This could, inter alia, include the nature of business(es), location of production facilities, warehouses, offices, products or services and markets.
(2) Significant Accounting Policies: The accounting policies being followed by the company and the appropriateness thereof is another key area. The impact
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of the recent changes in the accounting policies in the recent past keeping in view its intention of offering itself for sale. The accountant has to look at the main effect of accounting policies on the overall profitability and their correctness. It is also quite important to ascertain significant accounting policies used by the company, that changes that have been made to the accounting policies in the recent past, the areas in which accounting policies followed by the company are different from those adopted by the acquiring enterprise and the effect of such differences. Finally, examine whether the financial statements of the company have been prepared in accordance with the governing statutory requirements.
(3) Review of Financial Statements: An evaluation of the profit reported by the company would be largely based upon its operating results. Any extraordinary item of income or expense that might have affected the operating results would require close examination. It is advisable to compare the actual figures with the budgeted figures for the period under review and those of the previous accounting period. It is important that the trading results for the past four to five years are compared and the trend of normal operating profit arrived at. The normal operating profits should further be benchmarked against other similar companies. Besides the above, and based on the trend of operating results, the accountant has to advise the acquiring enterprise, through due diligence report, on the indicative valuation of the business. The exercise to evaluate the balance sheet of the company has to take into consideration the basis upon which assets have been valued and liabilities have been recognised. The net worth of the business has to be arrived at by taking into account the impact of over/under valuation of assets and liabilities.
(4) Cash Flow: A review of historical cash flows and their pattern would reflect the cash generating abilities of the company and should highlight the major trends. It is important to know if the company is able to meet its cash requirements through internal accruals or does it have to seek external help from time to time. It is necessary to check: (a) Whether the company is able to honour its commitments to its trade
payables, to the banks, to government and other stakeholders; (b) How well is the company able to turn its trade receivables and inventories; (c) How well does it deploy its funds; and (d) Whether any funds are lying idle or is the company able to reap maximum
benefits out of the available funds. (5) Financial Projections: The projections for the next five years with detailed
assumptions and workings and the appropriateness of assumption used in the preparation and presentation of financial projections. If the accountant is of the
opinion that as assumption used by the company are unrealistic, the accountant should consider its impact on the overall valuation of the company.
(6) Human Resources: In the Indian context, the status of work force, staff and employees is a complex problem. It is important to work out how much of the labour force has to be retained. It is also important to judge the job profile of the administrative and managerial staff to gauge which of these match the requirements of the new incumbents. The aspects whether all employee benefits like PF, Gratuity, ESI and superannuation have been properly paid/funded. The pay packages of the key employees will be thoroughly reviewed since this can be a crucial factor in future employee costs.
(7) Statutory Compliance: This is one area that has to be examined in detail. It is important to make a list of laws that are applicable to the entity as well as to make a checklist of compliance required from the company under those laws. If the company has not been regular in its legal compliance, it could lead to punitive charges under the law. The impact on such violations be quantified and assessed in respect of entity; financial status and even on its governing concern status.
(b) Contents of a Due Diligence Report: Briefly, the contents of a due diligence report can be discussed under: ♦ Terms of reference and scope of verification. ♦ Objective of due diligence. ♦ Brief history of the company including shareholding pattern. ♦ Assessment of management structure. ♦ Assessment of financial liabilities with special emphasis on Interlocking
investments and financial obligations with group/associates companies, amounts receivables subject to litigation, any other likely liability which is not provided for in the books of account.
♦ Assessment of valuation of assets including comments on properties, terms of leases, lien and encumbrances including status of charges, liens, mortgages, assets and properties of the company.
♦ Assessment of operating results. ♦ Assessment of taxation and statutory liabilities. ♦ Assessment of possible liabilities on account of litigation and legal proceedings
against the company and suggestion on ways and means including affidavits, indemnities, to be executed to cover unforeseen and undetected contingent liabilities.
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♦ Suggestions on various aspects to be taken care of before and after the proposed merger / acquisition.
♦ Status of franchises, license and patents. Finally, an executive summary may be prepared highlighting the significant areas.
19. (a) Printing of Designation “Chartered Accountant” on Marriage Invitations: As per Clause (6) of Part I of the First Schedule to the Chartered Accountants Act, 1949, a Chartered Accountant in practice shall be deemed to be guilty of professional misconduct if he solicits clients or professional work either directly or indirectly by circular, advertisement, personal communication or interview or by any other means.
However, the Council of the ICAI is of the view that the designation “Chartered Accountant” as well as the name of the firm may be used in greeting cards, invitations for marriages and religious ceremonies and any other specified matters, provided that such greeting cards or invitations etc. are sent only to clients, relatives and close friends of the members concerned.
In the given case, Mr. Swapnil instructed to write designation “Chartered Accountant” on his marriage invitation cards and distributed the same to all his relatives, close friends and clients.
In this context, it may be noted that the Council has allowed using designation “Chartered Accountant” in invitations for marriages, provided these are sent only to clients, relatives and close friends of the members concerned. Therefore, Mr. Swapnil would not be held guilty of professional misconduct under Clause (6) of Part I of the First Schedule to the Chartered Accountants Act, 1949.
(b) Delegation of Authority to the Employee: As per Clause (12) of Part I of the First Schedule of the Chartered Accountants Act, 1949, a Chartered Accountant in practice is deemed to be guilty of professional misconduct “if he allows a person not being a member of the Institute in practice or a member not being his partner to sign on his behalf or on behalf of his firm, any balance sheet, profit and loss account, report or financial statements”. In this case CA. ‘Anuj’ proprietor of M/s A & Co., went abroad and delegated the authority to another Chartered Accountant Mr. Youth, his employee, for taking care of routine matters of his office who is not a partner but a member of the Institute of Chartered Accountants
The Council has clarified that the power to sign routine documents on which a professional opinion or authentication is not required to be expressed may be delegated and such delegation will not attract provisions of this clause like issue of audit queries during the course of audit, asking for information or issue of questionnaire, attending to routing matters in tax practice, subject to provisions of Section 288 of Income Tax Act etc.
In the given case, Mr. ‘Youth’, a chartered accountant being employee of M/s A & Co. had issued audit queries which were raised during the course of audit. Here “Youth” is right in issuing the query since the same falls under routine work which can be delegated by the auditor.
Therefore, there is no misconduct in this case as per Clause (12) of Part I of First schedule to the Act.
(c) Responding to Tenders: Clause (6) of Part I of the First Schedule to the Chartered Accountants Act, 1949 lays down guidelines for responding to tenders, etc. It states that a member may respond to tenders or enquiries issued by various users of professional services or organizations from time to time and secure professional work as a consequence.
However, a member of the Institute in practice shall not respond to any tender issued by an organization or user of professional services in areas of services which are exclusively reserved for Chartered Accountants, such as audit and attestation services. Though, such restriction shall not be applicable where minimum fee of the assignment is prescribed in the tender document itself or where the areas are open to other professionals along with the Chartered Accountants.
In the instant case, M/s Sodhi & Co., responded to a tender relating to review of historical financial statements of PK Foundation which is exclusively reserved for Chartered Accountants even where no minimum fee was prescribed in the tender document.
Therefore, M/s Sodhi & Co. shall be held guilty of professional misconduct for responding to such tender in view of above mentioned guideline.
(d) Sale of Goodwill: With reference to Clause (2) of Part I to the First Schedule to Chartered Accountants Act, 1949 the Council of the Institute of Chartered Accountants of India had an occasion to consider whether the goodwill of a proprietary concern of chartered accountant can be sold to another member who is otherwise eligible, after the death of the proprietor.
The Council resolved that the sale/transfer of goodwill in the case of a proprietary firm of chartered accountant to another eligible member of the Institute shall be permitted. It further laid down that in cases where the death of proprietor occurs after 30.08.1998, the goodwill of the deceased member’s practice can be sold to another member and permission of the Institute has to be obtained within a year of the death of the proprietor concerned. It is even laid down that in such cases the name of the proprietary firm concerned would not be removed up to a period of one year from the death of the proprietor.
Thus, in the instant case, when the widow of the chartered accountant sold the practice to another member, it is nothing but goodwill sold to another member. The sale of the practice and the right to use the name is also allowed in terms of the above
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decision of the Council. Therefore, the above act of the widow of the Chartered Accountant is permissible.
20. (a) Review in the Assessment of Independence of the Practicing Unit: The reviewer should carry out the compliance review of the five general controls, i.e., independence, maintenance of professional skills and standards, outside consultation, staff supervision and development and office administration and evaluate the degree of reliance to be placed upon them. The degree of reliance will, ultimately, affect the attestation service engagements to be reviewed.
A, a practicing Chartered Accountant should review following controls in respect of assessment of independence of the practicing unit:
(i) Does the practice unit have a policy to ensure independence, objectivity and integrity, on the part of partners and staff? Who is responsible for this policy?
(ii) Does the practice unit communicate these policies and the expected standards of professional behaviour to all staff?
(iii) Does the practice unit monitor compliance with policies and procedures relating to independence?
(iv) Does the practice unit periodically review the practice unit's association with clients to ensure objectivity and independence?
(b) Classification of Frauds by NBFC: In order to have uniformity in reporting, frauds have been classified as under -
(i) Misappropriation and criminal breach of trust.
(ii) Fraudulent encashment through forged instruments, manipulation of books of account or through fictitious accounts and conversion of property.
(iii) Unauthorised credit facilities extended for reward or for illegal gratification.
(iv) Negligence and cash shortages.
(v) Cheating and forgery.
(vi) Irregularities in foreign exchange transactions.
(vii) Any other type of fraud not coming under the specific heads as above.
Cases of ‘negligence and cash shortages’ and ‘irregularities in foreign exchange transactions’ referred to in items (iv) and (v) above are to be reported as fraud if the intention to cheat/ defraud is suspected/ proved. However, the following cases where fraudulent intention is not suspected/ proved, at the time of detection, will be treated as fraud and reported accordingly:
(i) cases of cash shortages more than ` 10,000/- and
(ii) cases of cash shortages more than ̀ 5000/- if detected by management/ auditor/ inspecting officer and not reported on the occurrence by the persons handling cash.
NBFCs having overseas branches/offices should report all frauds perpetrated at such branches/offices also to the Reserve Bank as per the prescribed format and procedures.
(c) Audit Risks: As per SA 200 “Overall Objectives of the Independent Auditor and the Conduct of an Audit in Accordance with Standards on Auditing”, audit risk is a function of the risks of material misstatement and detection risk. The assessment of risks is based on audit procedures to obtain information necessary for that purpose and evidence obtained throughout the audit. The assessment of risks is a matter of professional judgment, rather than a matter capable of precise measurement.
For purposes of the SAs, audit risk does not include the risk that the auditor might express an opinion that the financial statements are materially misstated when they are not. This risk is ordinarily insignificant. Further, audit risk is a technical term related to the process of auditing; it does not refer to the auditor’s business risks such as loss from litigation, adverse publicity, or other events arising in connection with the audit of financial statements.
Three components of audit risk are:
♦ Inherent risk (risk that material errors will occur);
♦ Control risk (risk that the client’s system of internal control will not prevent or correct such errors); and
♦ Detection risk (risk that any remaining material errors will not be detected by the auditor).
The nature of each of these types of risk and their interrelationship is discussed below:
Inherent risk - Inherent risk is higher for some assertions and related classes of transactions, account balances, and disclosures than for others. For example, it may be higher for complex calculations or for accounts consisting of amounts derived from accounting estimates that are subject to significant estimation uncertainty. External circumstances giving rise to business risks may also influence inherent risk. For example, technological developments might make a particular product obsolete, thereby causing inventory to be more susceptible to overstatement. Factors in the entity and its environment that relate to several or all of the classes of transactions,
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account balances, or disclosures may also influence the inherent risk related to a specific assertion. Such factors may include, for example, a lack of sufficient working capital to continue operations or a declining industry characterised by a large number of business failures.
Control risk - Control risk is a function of the effectiveness of the design, implementation and maintenance of internal control by management to address identified risks that threaten the achievement of the entity’s objectives relevant to preparation of the entity’s financial statements. However, internal control, no matter how well designed and operated, can only reduce, but not eliminate, risks of material misstatement in the financial statements, because of the inherent limitations of internal control. These include, for example, the possibility of human errors or mistakes, or of controls being circumvented by collusion or inappropriate management override. Accordingly, some control risk will always exist. The SAs provide the conditions under which the auditor is required to, or may choose to, test the operating effectiveness of controls in determining the nature, timing and extent of substantive procedures to be performed.
Detection risk - For a given level of audit risk, the acceptable level of detection risk bears an inverse relationship to the assessed risks of material misstatement at the assertion level. For example, the greater the risks of material misstatement the auditor believes exists, the less the detection risk that can be accepted and, accordingly, the more persuasive the audit evidence required by the auditor.
Detection risk relates to the nature, timing, and extent of the auditor’s procedures that are determined by the auditor to reduce audit risk to an acceptably low level. It is therefore a function of the effectiveness of an audit procedure and of its application by the auditor. Matters such as:
♦ adequate planning;
♦ proper assignment of personnel to the engagement team;
♦ the application of professional skepticism; and
♦ supervision and review of the audit work performed,
assist to enhance the effectiveness of an audit procedure and of its application and reduce the possibility that an auditor might select an inappropriate audit procedure, misapply an appropriate audit procedure, or misinterpret the audit results.
(d) Direction by Tribunal in case Auditor Acted in a Fraudulent Manner: As per sub-section (5) of the section 140, the Tribunal either suo motu or on an application made to it by the Central Government or by any person concerned, if it is satisfied that the
auditor of a company has, whether directly or indirectly, acted in a fraudulent manner or abetted or colluded in any fraud by, or in relation to, the company or its directors or officers, it may, by order, direct the company to change its auditors.
However, if the application is made by the Central Government and the Tribunal is satisfied that any change of the auditor is required, it shall within fifteen days of receipt of such application, make an order that he shall not function as an auditor and the Central Government may appoint another auditor in his place.
It may be noted that an auditor, whether individual or firm, against whom final order has been passed by the Tribunal under this section shall not be eligible to be appointed as an auditor of any company for a period of five years from the date of passing of the order and the auditor shall also be liable for action under section 447.
It is hereby clarified that the case of a firm, the liability shall be of the firm and that of every partner or partners who acted in a fraudulent manner or abetted or colluded in any fraud by, or in relation to, the company or its director or officers.
