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    Notes on AAS
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    Audit Notes


    The term Auditing refers to the process of examination of books and records together with the evidence relating to enterprises, whether profit - oriented or not and whether it is required by law or not, for the purpose of formation of opinion with regard to true and fair view disclosed by financial statements.

    Independent examination of financial information of any entity, whether profit oriented or not when such an examination is conducted with a view to express an opinion there on.

    Advantages of Auditing

    A. General

    1. Unbiased professional opinion
    2. Acts as a moral check on employees
    3. Highlighting of weakness in the internal control system
    4. Enables timely tax assessments and quick disposal of tax returns.
    5. Financial assistance made easier.
    6. Solutions to trade disputes and labour disputes
    7. Enables sanctioning of license by Govt.
    8. Enables early settlement of Insurance claims

    B. From the point of view of partnership Firms

    1. Mutual settlement of Accounts among the partners
    2. Protects the interest of minors and non-resident partners
    3. Determination of goodwill at the time of admission, retirement and death.
    4. Determination of purchase consideration at the time of Amalgamation,

    Limitation of Audit

    1. Excessive dependence in ICS which suffers from inherent weakness
    2. Application of test check makes it less reliable
    3. It only enables formation of overall opinion about state of health of entity and does not give assurance about the future viability of entity or the effectiveness of management by owners.
    4. Audit evidence is more persuasive in nature rather than conclusive in nature

    Qualities of a Good Auditor

    • Integrity, confidentiality, objectivity,
    • Independent in his approach
    • Posses technical skill in accounting and Auditing
    • Thorough knowledge of legal provisions and statutes
    • Common sense
    • Communication skill
    • Supervisory abilities
    • Inter personal skills

    Kinds of Audit

    1. Audit can be classified as
    a) Statutory Audit
    b) Non-Statutory Audit

    Statutory Audit:-

    This refers to audits which are mandatory in nature.

    Examples are

    i. Audit of companies under law provision of company act
    ii. Audit of insurance company
    iii. Audit of Banking company
    iv. Audit of co-operative societies
    Audit to be performed by CA’s and not by any other person

    Non-statutory Audit

    i. These are other than statutory audits
    ii. No statutory requirement for Audit
    E.g. Sole trader, partnership firm

    Object of Audit

    1. Meaning

    i) Refers to the purpose or the ultimate end audit
    ii) Knowledge of object relevant for audit
    iii) Common for both statutory and non statutory audit

    2. Classification

    Can be classified as

    i) Primary object
    ii) Secondary object

    Primary object is to form opinion on the true and fair view disclosed by financial statements. Financial statements include Balance Sheet, P & L accounts and cash flow statements.

    Secondary object is to detect fraud and error
    The auditor should ensure that the financial statements do not contain misstatement on a/c of fraud and error. Both objectives are interdependent and not independent.

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    Auditing And Assurance

    Revision Material


    Auditing, though a theory subject, requires a minimum practical exposure to understand and apply the principles and procedures in the examination. Mere bookish knowledge will only help to score the minimum marks, which will not contribute to the aggregate marks.

    Auditing is a combination of three subjects namely Accountancy, Law and Principles of Auditing and therefore requires expert knowledge and practical application of these subjects.

    Good handwriting, reasonable command over English language, simple and effective presentation of answers, ever present desire to ask questions and voracious reading of reference books, business magazines, financial newspapers and the Chartered Accountant magazine are the basic ingredients to update knowledge, increase practical exposure and improve the quality of the answers.

    Therefore the examination approach should be as follows:

    1. Read the Institute Study Material along with a basic book on Auditing to improve the basic knowledge.
    2. Answer the self-examinations questions given at the end of each Study Material (Topic-wise) and clear the doubts with a faculty on Auditing.
    3. Practice writing the previous examination questions in simulated examination conditions, time is the essence.
    4. Read the Statements on Auditing and Assurance Standards, Accounting Standards and Guidance Notes issued by ICAI and examine its practical applications.
    5. Clarity and practical knowledge is required in certain areas like vouching, verification, investigation, reporting, expression of opinion, rights and duties of auditor and auditee.
    6. Reading the question once and answering will prove dangerous since many questions are either specific or vague and understanding of the question may be different in the first reading.
    7. Identify the questions, which require point-wise or tabular-wise or paragraph-wise presentation like short notes, distinguish between, case type or discussion questions. Comment type questions require specific answers with decision and reasons for the decision.
    8. Do not choose compulsory questions at the beginning since they require in depth analysis and application of legal provisions or notifications, which is difficult due to psychological pressure of time and need to score marks.
    9. Answers should be specific, arranged in paragraphs with headings and important points underlined which will help easy valuation.
    10. Examples and Illustrations are necessary wherever required which will clearly bring out the understanding of the subject and improve the presentation of the answers.
    11. There is a wrong impression among some students that writing more numbers of pages in theory subjects will fetch more marks. Professional examinations requires answers to the point even if it is short since the marks are awarded only for the matter and not for the length of the answers.
    12. Maintaining proper notes for all the studies discussed above is essential and will be helpful for revision before the examination.
    13. Answers to questions should be commensurate with the marks allotted and time planning is crucial.

    In short, an all round approach is required in the subject of Auditing to be successful in the examination.

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    Company Audit Crash Course Notes

    Crash Course Notes - 1
    Crash Course Notes - 2

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    Last edited by anand; 04-11-2011 at 05:41 PM.

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    Company Audit

    Important Notes

    • Regulation 191 of the chartered Accountants Regulations 1988 allows the Chartered Accountant to act as a liquidator but the Institute of Chartered Accountants of India in order to establish a healthy competition, recommended that where the chartered accountant act as a liquidator, the statement of accounts to be filled u/s 551(1) of the companies act 1956 should be audited by a qualified chartered accountant other than the chartered accountant who is the liquidator of the company.
    • U/s 228(4) of the company’s act 1956, the central govt. has formulated Companies (Branch Audit Exemption) Rule. 1961. These Rules require that, if during the said financial year, the average quantum of activity of the branch does not exceed Rs. 200000/- or 2% of the average of total turnover and the earning from the other sources of the company as the whole, which ever is higher, the said branch is exempted.
    • Section 226(3) of the company’s act 1956 specifies that a person shall be disqualified to act as an auditor if he is indebted to the company for the amount exceeding Rs. 1000/- no matter what the case in the advance was taken.
    • Section 231 of the Companies Act 1956 empowers the auditors of the company to attend any general meeting of the company; to receive all the notices and other communications relating to the general meeting, which member are entitled to receive and to be heard at any general meeting in any part of the business of the meeting which concern them as auditors. The discovery of a fact after the issuance of the financial statement that existed at the date of the audit report which would have cost the revision of the audit report requires that the auditor brings this to the notice of shareholders.
    • The provisions of the Companies Act 1956 applicable to the appointment of an auditor I place of a retiring auditor due to disqualification, death, resignation etc would be instant cases are given below:-

    Section 225(1): Special notice shall be required for a resolution at an annual general meeting appointing as auditor other than retiring auditor.
    Section 190(2): Special notice id to be given to all the members of the company at least 7 days before the date of AGM
    Section 225(2): On the receipt of notice of such a resolution, the company shall forthwith send a copy thereof to the retiring auditor.
    Section 225(3): Representation if any, received from the retiring auditor should be sent to the members of the company.
    Section 224A: Special resolution as required under this section should be duly passed
    Section 224(1B): Before any appointment or reappointment of auditor is made at an AGM, a written certificate is to be obtained from the auditor proposed to be appointed that his appointment will be in accordance with the limits specified in section 224(1B).

    The incoming auditor should also satisfy himself that the notice provided for under Section 224 and225 has been effectively served on the outgoing auditor

    • Section (3) (c) of the Companies Act 1956 prescribes that any person who is a partner or in employment of an officer or employee of the co will be disqualified to act as an auditor of a company. Sub-section (5) of section 226 provides that an auditor who becomes the subject, after his appointment, to any of the disqualifications specified in sub-section (3) and (4)
    • Section 224 (7) of the Companies Act 1956 provides that an auditor may be removed from the office before the expiry of his term, by the company only in a general meeting after obtaining the prior approval of the Central Government in that behalf. An exception to this rule this that no such approval is required for the removal of the FIRST AUDITOR appointed by the board of directors u/s 224(5) of the Companies Act 1956.
    • There is no concept of full or part audit u/s 227 of the Companies Act 1956. And the remuneration is a matter of agreement between the auditor and the shareholders. Section 224(8) specifies the remuneration of an auditor, shall be fixed by the company in general meeting or in such a as the company in general meeting may determine.
    • Section 227 of the Companies Act 1956 grants power to the auditor that every auditor has a right to access, at the time to the books of accounts including all statutory records such as minute books, fixed assets register, etc of the company for conducting the audit.
    • Section 224(3) of the Companies Act 1956, empowers the Central Government to fill up a vacancy in case no auditors are appointed or r-appointed at an AGM (it is also opined that that the appointment of an auditor has been made by shareholders, sub- section (3) cannot be invoked. Thus the auditor can only be appointed at general meeting by shareholders). Thus the Board of Director is not authorized to fill up the vacancy in case the existing auditor (s) appointed at the AGM refuse to accept the appointment.
    • As per section 224(6) of the Companies Act 1956, casual vacancy can be filled by the Board of Directors, provided that such vacancy has been caused by the resignation of the auditor.
    • Section 226(3) (e), a person holding any security of the company after a period of 1 year from the date of commencement of the Companies (Amendment ) Act 2000 w.e.f. 13 December 2001 is not qualified for appointment as the auditor if the company. For the purpose of this section, “Security “means an instrument which carries voting rights. A firm would also be disqualified to be appointed as an auditor even when 1 partner is disqualified u/s 226(3) (e).
    • Section 229 of the Companies Act 1956 requires a person that only a person appointed as the auditor of the company or where a firm is so appointed, a partner in the firm practicing in India, may sign the auditor’s report or sign or authenticate any other document of the company required by law to be signed or authenticated by the auditor.
    • Section 224 (5) of the Companies Act 1956 lays down that “ the first auditor of a company shall be appointed by the Board of Directors within one month of the date of registration of the company. But in case of a Government company the appointment or reappointment of the auditor is governed by provision of section 619 of the Companies Act 1956 and shall be appointed by the Comptroller and Auditor General of India.
    • Section 224(1A) of the act deals with the duties of an auditors requiring auditor to make an enquiry in respect of specified matters. Since the law requires the auditor to make an enquiry, the institute opined that the auditor is not required to report on the matter specified in sub-section (1A) unless he has any special comments to make on any of the terms referred to therein.
    • Section 227 of the Companies Act 1956 lays down that the power and duties of the auditor. As per the provision of the law, it is no part of the auditor’s duty to send the copy of his report to member of the company. The auditor’s duty concludes once he forwards his report to the company. It is the responsibility of the company to send the report to every member of the company.
    • Section 227(1) (g) of the Companies Act 1956, the auditor has to ensure that the written representation has been obtained by the board from the each director that one is not hit by section 274 (1) (g).
    • Under the Chartered Accountants Act 1949 only a chartered accountant holding the certificate of practice can engage in public practice. Chartered accountant of any other country can’t be appointed as the auditor of a public company of India. Under Chartered Accountant Act 1949 an auditor of public limited company of India must hold the certificated of Practice from the Institute of Chartered Accountant of India.
    • Companies (Audit Report) Order 2003 applies to all the Companies including a foreign company as defined u/s 591 of the Companies Act 1956.the Order specially exempt banking Companies, insurance companies and the companies which has been licensed to operate u/s 25 of the Act. The order also exempts from its application a private company which fulfils certain conditions.
    • Section 209 of the Companies Act 1956 states that every company shall keep at its registered office proper books of accounts with respect to all sums of money received and spent, all purchase and sell of goods all assets and liabilities of the company and the required cost records. However if the company requires to keep the books of accounts at any place in India as the Board pf Directors may decide, then within seven days of the decision it should be file with the registrar a notice in From 23 AA in writing giving the full address of the place.
    • Section 231 of the Companies Act 1956 confers the right on the auditor to attend the general meeting. The section does not cast any duty on the auditor to attend the annual general meeting. The law only confers right on the auditor to receive notices and also attend the general meeting if he so desires.
    • Section 233A of the Companies Act 1956, under the circumstances as specified in the section, empowers the Central Government that it may issue direction to the effect that a special audit of the company’s account for the specified period shall be conducted. No matter whether the member of ICA has the certificate of practice.
    • Section 274(1)(g), if the director is already holding a directorship of a “public company” which has not filled the annual account and annual returns for the continuous three financial years shall not be eligible to be appointed as the director of any other public company.
    • As per para 4(vii) of CARO 2003, statutory auditor is required to comment on whether the auditee company has an internal audit system commensurate with its size and nature of its business. The clause has a mandatory application in respect of listed companies. For other company it is applicable if either of the following conditions is satisfied.

    i. The company has a paid up capital and reserve exceeding Rs. 50lac at the commencement of the financial year.
    ii. The company has an average annual turnover of Rs. 5cr or more for a period of 3 years proceeding the current financial year.

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