CA SHANKAR LAKHWANI # Audit Made Easy

CA FINAL AUDIT MAGIC CHARTS VOLUME 1

By CA SHANKAR LAKHWANI
(All Non-Standard Chapters & Professional Ethics)

HELLO CHAMPIONS!!!!!
Important Points to Keep in Mind before Referring Magic Charts

• Magic Charts are to be referred for 1st

Reading as well as subsequent Revisions
• These Charts contain ICAI Keywords
• Covers 100% Syllabus
• No need to refer ICAI Module
Yes, you can & you will definitely clear your CA Exams in
May 2025
YouTube & Telegram Channel – CA SHANKAR LAKHWANI

INDEX
Chapter Pg No.
Digital Audit 1
Group Audit 11
Bank Audit 15
NBFC Audit 22
PSU Audit 31
Internal Audit 37
Due Diligence 42
Investigation 44
Forensic Accounting 49
Emerging Areas (ESG & SDG Assurance) 52
Professional Ethics 57

Yes, I will definitely clear my CA Exams

CA SHANKAR LAKHWANI # Audit Made Easy
DIGITAL AUDITING & ASSURANCE

Q1) Meaning of Digital Audit

• Placing assurance on effectiveness of IT system of organization.

Q2) Features of Digital Audit

Standardized process Informed decisions More reliable audit report

Savings in time, cost & human effort End to end understanding Technology Advancement

Q3) Advantages of Digital Audit

Better Analytics Improved Risk Lower Costs Better Audit Enhanced effectiveness &
Assessment Quality efficiency

Q4) Challenges of Digital Audit

• Choosing right tool & automating right process

• Evaluating business benefits organization wants to achieve with automation
• Reluctance to change
• Challenges with data security & governance
• Ensuring standardization and correct configurations to avoid error & bias

Q5) Auditors will perform procedures to understand changes to company’s business, including
changes to IT Environment when they will understand management’s implementation of new
technology. What should be areas of focus for auditor?

Understanding-

• Changes in way entity’s systems developed & whether it results in new risks & controls.
• New activities/changes in existing process due to new technology (eg, new revenue streams).
• Impact of new technology on how organization obtain & use information to support internal
control functions.

Q6) Understanding IT Environment (IT Envt.)

(1) Stages

Understand Ways in which entity relies on IT & how IT Envt. supports business
Identify Controls on entity’s IT process
Assess Complexity of IT Environment to know whether to use IT experts for audit
(2) Auditor’s understanding of automated environment includes-

• Policies, procedures, processes followed

• Organization structure & governance
• Details of IT infrastructure components for each application
• Extent of IT integration, use of service organizations
• IT Risks & controls
• Applications used by company
Yes, I will definitely clear my CA Exams 1
CA SHANKAR LAKHWANI # Audit Made Easy
(3) Key Areas/Considerations for Auditor to understand IT Envt.-

• Identification of significant systems-

o Identify IT applications & infrastructure

o How CAD (class of transactions, A/c Balance & disclosures) flows into info system.
• Understand flow of transaction-

o Understand nature & no. of IT applications & other aspects of IT Envt.

o Processing of information in information system.
• Identification of manual & automated controls-

o Entity’s mix of manual & automated elements varies with nature of use of IT.
o It helps in identification & assessment of ROMM by auditor.
• Identification of technologies used-

o Understand technologies, their role, risks. Eg, AI, IOT, Robotics

• Assessing complexity of IT Envt.-Complexity is based on following factors-

Automation used Business model of entity Customization in Significant changes during

IT Applications year

Q7) Risks arising from use of IT

• Unauthorized changes to IT applications/other aspects of IT Envt.

• Inappropriate manual intervention
• Failure to make necessary update to IT Applications/other aspects of IT Envt.
• Risk of system downtime due to hardware failure/cyberattacks
• Possibility of IT Personnel gaining access privileges beyond necessary, breaking down
segregation of duties
• Data loss or data corruption

Q8) Scaling

Resources/hardware added to existing nodes to overcome performance issues of IT Systems.

Q9) IT Dependencies

Created when IT is used to initiate, authorize, record, process, report transactions.

(1) Importance of identifying & documenting IT Dependencies

Helps to-

• Identify entity’s reliance upon IT

• Identify IT risks
• Identify IT General controls
• Understand how IT is integrated into entity’s business model
• Develop effective & efficient audit approach

Yes, I will definitely clear my CA Exams 2

CA SHANKAR LAKHWANI # Audit Made Easy
(2) Types of IT Dependencies

• Automated Controls-Designed into IT Envt. to enforce business rules.

o Format checks (date), existence checks (Duplicate customer no.), reasonableness

checks (max payment amt)
• Interfaces-Programmed logic to transfer data from one IT System to another.

o From payroll sub ledger to general ledger

• Calculations-Accounting procedures performed by IT system instead of person.

o System will calculate depreciation by SLM

• Security- Includes segregation of duties. Helps to-

o Restrict access to information

o Determine separation of roles & responsibilities
• Reports-System generated reports by IT systems. Eg, Vendor master report. Uses are-

o Useful in entity’s execution of manual control

o Source of entity’s information when selecting items for testing
o Performing substantive Test of details (ToD) /Analytical procedures
(3) ITGCs

•Mgt implement ITGCs (Information Technology General Controls) to address risks of IT

Dependencies.
(4) Control objectives & controls for General IT Controls-

• DATA CENTRE & NETWORK OPERATIONS

• Objective - Ensure production systems are backed up to meet FR objectives

• Controls-
o Data is backed up & recoverable
o Policies & procedures for above maintained
• ACCESS SECURITY

• Objective-Ensure that access to programs is authenticated to meet FR objectives

• Controls-
o Access of terminated user is removed
o Security policies & procedures maintained
• PROGRAM CHANGE

Objective-Ensure modified systems continue to meet FR objectives

•
Controls-
•
o Changes are tracked & recorded
o Change management policies & procedures maintained
(Shortform-FR-Financial Reporting)

Q10) Meaning & types of Cyber Risk/Cyber Attack

Meaning & Types of cyber risk

• Unauthorized access to network with intent to damage/steal/destroy data.

• Types/Examples- malware, phishing, spoofing, DoS attack, Identity Based Attack, Insider
Threats, DNS Tunneling, IoT- Based attack

Yes, I will definitely clear my CA Exams 3

CA SHANKAR LAKHWANI # Audit Made Easy
1) Malware

• Program with intent to do harm to computer/network/server.

• Also called malicious software. Most common type of cyber attack.
• Types-
o Mobile Malware
▪ To target mobile devices
▪ Malicious downloads, phishing, unsecured Wi-Fi
o Ransomware
▪ Adversary encrypts victim’s data & provides decryption key for payment.
▪ Malicious links by phishing emails
o Fileless Malware
▪ Uses native, legitimate tools built into system for cyber attack.
▪ Doesn’t require attacker to install code on system. Thus difficult to detect.
o Trojan
▪ Appears legitimate software disguised as native OS program/free downloads.
▪ Installed by social engineering techniques like phishing/bait websites
2) Phishing

• Uses email, SMS, phone, social media, social engineering techniques to entice victim-
o To share sensitive information like password/account no.
o To download malicious file that will install viruses on system
• Types-
o Spear Phishing
▪ Targets specific individuals/organizations by malicious emails.
▪ To steal sensitive information like login details/infect device with malware.
o Smishing
▪ Sending text message pretending to be from reputable org.
▪ To induce people to reveal personal info-Password/credit card no.
o Vishing
▪ Voice phishing attack
▪ Fraudulent use of calls/voice msg. pretending to be from reputable org.
▪ To induce people to reveal personal info-Password/credit card no.
o Whaling
▪ Targets senior/C-level executive employees
▪ To steal money/info/access to computer to execute further cyberattacks.
3) Spoofing

• Cybercriminal disguised as known/trusted source

• To access system to steal info/extorting money/install malware
• Types-
o Domain spoofing
▪ Attacker impersonates known business with fake website/email to fool people.
▪ Domain appears legitimate at first, but closer look will reveal differences
o Email spoofing
▪ Targets business by emails with forged sender addresses.
▪ Recipient trusts sender & opens email-malicious link
4) Denial-of-Service (DoS) Attacks

• Floods network with false requests to disrupt business operations.

• Users unable to perform routine tasks like accessing emails, websites.

Yes, I will definitely clear my CA Exams 4

CA SHANKAR LAKHWANI # Audit Made Easy
• Generally, no data loss, no ransom but costs org. time & money to restore operations.
5) Identity Based Attacks

• User’s credentials compromised & adversary pretends to be that user.

• Eg, same user ID & password for multiple a/cs
• Possessing credentials of one will result in access of others.
6) Insider Threats

• Employees (current/past) have direct access to company network, sensitive data, policies
7) DNS Tunneling-

• Leverages domain name system (DNS) queries & responses to bypass security measures
• Hacker extract sensitive data by encoding it bit by bit in series of DNS responses.
8) IoT Based Attacks-

• Targets IoT (Internet of Things) device/network

• Hacker takes control of device & steal data.

Q11) Stages of Cyber Risk

Stage 1-Assessing Cyber Risk

• Every organization should consider common threats-

o Ransomware disabling their organization (including plants, mfg. facilities)
o Insiders committing malicious activities. Thus, unintended discourse of info & fraud
o Common criminals using email phishing & hacks for fraud & theft
Stage 2-Impact of Cyber Risk

• Varies from organization to organization & attack to attack. Some indicative areas-
o Ransomware
o Business interruptions causing operational challenge for organization
o Regulatory costs
o Data loss, reputational loss & litigation
o Fines & penalties
o Breach of privacy
Stage 3- Managing Cyber Risk

• Benefits-
o Understand accepted risks & documented compensating controls.
o Understand cyber risks, threats to org. & other financial institutions.
o Assess existing IT program & capabilities against regulatory requirements
o Align cybersecurity & IT transformation initiatives with strategic objectives & risks.

Q12) Cyber Security Framework

1) Identify Risk-

• Entity-
o Conduct periodic risk assessment & develop strategy to identify cybersecurity risks.
o Maintain & periodically reviews information assets- Asset Management (eg, patents)

Yes, I will definitely clear my CA Exams 5

CA SHANKAR LAKHWANI # Audit Made Easy
2) Protect risk-

• Entity monitors whether unauthorized access to electronic assets & impact on FR

• Formal training to make teams aware of risks of cyber attacks
• Entity implements controls for data security.
3) Detect risk-

• Entity should identify cybersecurity risks, its impact on business & significance
• Review entity’s process to monitor & detect security breaches.
• Mgt. implemented anti virus/firewall logs are monitored to detect repetitive tasks
4) Respond to risk

• In case of material cybersecurity, entity should have response planning to capture incident.
• Security incident response plan helps to analyse impact & severity of attack & take
appropriate actions.
5) Recover from risk

• Entity takes appropriate action to recover from attack & make sure business is running.
• Necessary improvements-patch upgrades, better controls, anti virus is implemented.

Q13) Control considerations for cyber risks/Internal controls-

1) Controls around vendor setup & modifications-

• Changes to vendor info by email phishing pretending to be from authorized vendor.

• Entity inappropriately dispersed funds & reduce liability owed to actual vendor.
• Thus, impacting financial statements.
• Check- (Shortcut-VMD-Vendor Master Data)
o Who is responsible to make change to VMD? Is process centralized/decentralized?
o What systems are used to initiate,authorize & process changes to VMD?
o Are authentication protocols defined to verify modifications to VMD?
2) Controls around electronic transfer of funds-

• Fraudulent request for wire t/f pretending from financial institutions.

o requesting disbursement from customer asset a/c
• Check-
o Are personnel responsible for wire t/f educated on threats/phishing scams/frauds?
o What systems are used to facilitate request,authorization & release of 0 wire t/f?
o Are authentication protocols defined to verify wire t/f requests?
3) Controls around patch management-

• Known security vulnerabilities caused by unapplied patches/upgrades

• Check-
o Does entity have patch mgt. program?
o Does entity runs periodic vulnerability scans to identify unapplied patches?
o How is entity notified of patches by external vendors? (Eg.- MS for Windows patch)

Q14) Meaning & Considerations for Remote Audit/Virtual Audit

• Auditor uses online/electronic means for audit. It can be partially/completely virtual.

Yes, I will definitely clear my CA Exams 6

CA SHANKAR LAKHWANI # Audit Made Easy
Considerations for Remote Audit

1) Feasibility & Planning-

• Agree on audit timeline, meeting platform(Zoom),data exchange mechanism,technology

• Execution phase involve video/tele conferencing with auditees
• Documentation for audit evidence t/f through document sharing platform(DSP)
2) Confidentiality, Security & Data Protection-

• Access to DSP restricted by encrypting data

• Info-reviewed by auditor is removed from platform & stored as per archiving standards
• Auditors consider agreements from both sides(eg, no recording, no screenshots by auditor
for audit evidence, unless authorized)
• In case of accessing auditee’s IT system,auditor should use VPN
3) Risk assessment

• Communication from auditor & auditee-clear & consistent

• Risks for achieving audit objectives-identified, assessed, managed
• Assessment if remote audit sufficient is done & documented for each audit

Q15) Advantages of Remote Audit

• Cost & time effective, no travel time & cost

• Comfort & flexibility to audit team since WFH( work from home)
• Auditor gets first hand evidence directly from IT system as direct access given
• Widens selection of auditors from global network of experts
• Time to gather evidence spread over weeks, instead of small period that takes personnel
from daily activities

Q16) Disadvantages of Remote Audit

• Interviews & meetings interrupted due to network issues

• Limited/no ability to visualize facility culture of org./body language of auditees
• Time zone issues can affect efficiency
• Opportunity of doctored docs/omitting info increases,thus additional audit procedure
• Security & confidentiality violation
• Remote access to sensitive IT Systems may not be allowed
• Cultural challenges for auditor. Lack of knowledge of local laws
• Audit procedures like physical ver. of assets/stock taking can’t be performed

Q17) Data Analytics

• Generating & preparing meaningful info from raw system data using processes, tools &
techniques is called Data Analytics.
• Audit Analytics/Audit data analytics involves-
o Analyzing large data for insights,trends,draw conclusions,informed decision making
• Audit analytics helps-
o To discover & analyze patterns
o Identifying anomalies
o Extract other useful information in data

Yes, I will definitely clear my CA Exams 7

CA SHANKAR LAKHWANI # Audit Made Easy
• Data analytics methods used in audit are called CAATs(Computer Assisted Auditing
Techniques)
• Popular tools used as part of CAATs/Examples of data analytics techniques-
o ACL (Audit Command Language)-
▪ Data extraction & analysis software for fraud detection, prevention & risk
mgt.
▪ Samples large data for pattern in transactions indicating fraud.
▪ Eg, Analyse data to perform trial balance reconciliation during audit.
o Alteryx-
▪ Consolidates financial/operational data to assess controls
▪ Audit trail is performed. No prior knowledge of coding/scripting needed
▪ Automates periodical procedures like reconciliations, consolidations.etc.
o Power BI-
▪ Business Intelligence (BI) platform providing nontechnical business users-
• tools for aggregating, analyzing, visualizing & sharing data
▪ Uses-
• To find outliers in population
• For reporting purpose (Audit report) in interactive dashboard to higher
mgt.
o CaseWare-
▪ Provide tools conducting audit & assurance quickly,accurately,consistently
▪ Better informed decisions
▪ Streamlines processes & eliminates routine tasks

Q18) Automated Tools in Audit

1) Internet of Things(IoT)

• Connecting any device (phone, washing machine) to internet

• Key components-data collection, analytics, connectivity, people & process
• Audit Implications-
o Auditors not able to rely on manual controls
o Audit firms train auditor to evaluate operating effectiveness of automated controls.
o Impact on flow of transaction & new risks for mgt. & auditors
• Risks-Device hijacking,data siphoning,denial of service attack,data breach,device theft
2) Artificial intelligence (AI)

• System that can think & learn

• Utilize data analysis/algorithm to make decision by predictive method/pattern learned
• Audit implications-
o Audits must focus on logical flow of processes
o Auditor assess effectiveness of algorithm & if output is properly reviewed/approved
o Impact on flow of transaction
o How risks (existing & new) addressed
• Risks-Security, inappropriate configuration, data privacy
3) Blockchain

• Based on decentralized & distributed ledger secured by encryption

• Each transaction validated by blockchain participants.
• All blocks sequenced so that modification of a block disqualifies information

Yes, I will definitely clear my CA Exams 8

CA SHANKAR LAKHWANI # Audit Made Easy
• Audit implications-
o Auditor consider governance,security since insecure APIs,data confidentiality issue
o Auditor consider issue of weak blockchain application development protocol
o Auditor consider data privacy law issues
• Risks-
o Need protocol,mgt.process,contingency plan as data can’t be accessed without key.
o Security-Cyberattack, data hacks
o Auditor ensure that org. has data mgt. process & complies with regulations
3.1) NFT (Non-Fungible Token)

• Token to represent ownership of unique items. Eg,digital assets (photo,video,artwork)

• Contains digital signature
• One official owner at a time.No one can change record of ownership or copy/paste it
• Key features-
o Digital asset with certificate created by blockchain, underlying cryptocurrency
o Unique-Can’t be forged/manipulated
o NFT Exchange takes place with cryptocurrencies like bitcoin on specialist sites
• Challenges-Ownership & copyright concern,security risk,market is not that wide,online
fraud,data privacy,cyber threat
4) Robotic Process Automation (RPA)

• Automation of repetitive process of user by emulating human action.

• RPA software bots interact with system same way people do
• Work round the clock,nonstop,much faster,100% reliability
• Audit implications-
o Auditor to understand process(data extraction,aggregation,sanitization,cleansing)
o To perform substantive testing,auditor to understand tools used in RPA
• Risks-
o Operational & execution risks-
▪ Buying wrong tool,making wrong assumption,compromising security
▪ How to reduce risk- Assigning proper responsibility,training
o Change management risks-
▪ Not following change mgt.implementation lifecycle,improper testing
o RPA Strategy risk-
▪ Wrong expectation,improper KPIs,unrealistic business goals

Q19) Control considerations/Objectives of Auditing Digitally

1) Control considerations to consider while assessing technology risk-

• Auditors should-
o Gain holistic understanding of changes in industry, IT Envt. to evaluate mgt.process
for initiating,processing,recording transactions & design audit procedures
o Consider risk from new technology & how it differs from those of traditional system
o Consider if digital upskilling/specialists needed to determine impact of new
technology, assist in risk assessment, understanding controls. Eg,IT Specialists.
2) Technology Risks of Digital system – Same as risks arising from use of IT
3) Key steps for Auditors in Changing Technology Environment

As auditors obtain understanding of impact of technology on business,internal control,financial

reporting, these are some reminders- (Shortcut-RA-Risk assessment)
Yes, I will definitely clear my CA Exams 9
CA SHANKAR LAKHWANI # Audit Made Easy
• Maintain professional skepticism when reviewing mgt’s RA for new system
• Understand direct/indirect effect of new technology,how its use impact auditor’s RA
• Assess appropriateness of mgt.’s process to select, develop, maintain controls
• Understand how technology impact flow of transaction

Q20) Next Generation Audit

• Human-led, tech-powered, data-driven. Based on combining emerging technologies to

redefine how audits are performed.
Examples-
1) Drone Technology [Unmanned Aerial Vehicle (UAV)]
• For stock count in remote locations
• Great payload capacity to carry sensor/camera.Thus can photograph FA/inventory
• Combined with alternative source-QR code reader,manual count,consolidate audit info
2) Augmented Reality(AR)-
• Users view real world envt. with augmented elements,generated by digital devices
• Eg, Pokemon Go
3) Virtual Reality(VR)-
• Replace realworld with simulated envt by digitally generated image,sound,touch, smell
• Eg,custom headset -simulated experience like flying/skydiving
4)Metaverse-
• Emerging 3D Digital space that uses VR,AR,other advanced internet technology
• Allows people to have lifelike personal & business experiences online
• Represent convergence of digital technology to combine use of AI, AR, VR, crypto.
• Potential application of metaverse in financial domain-
o Virtual Banking & transactions
o Virtual financial education & training
o Virtual meetings & conferences
o Digital asset mgt.
o Data visualization & analytics
Risks of Next Generation Audit Technologies-
• Public safety,cybersecurity,data privacy,data protection,lack of std,technical challenge
• Taxation,jurisdiction,customer protection
• Governance

Yes, I will definitely clear my CA Exams 10

CA SHANKAR LAKHWANI # Audit Made Easy
GROUP AUDIT

Q1) Mandatory as per Companies Act, 2013

• Co. subsidiaries, AC, JV

Own FS + CFS
• CFS Approved by BoD
Laid before AGM
• Co. attach with FS - statement of salient features of FS of subsidiary in Form AOC 1.
• CFS as per Schedule III of COA & AS.
• Co. not required to prepare CFS as per AS – sufficient – comply with CFS provisions in
Schedule III.

Q2) No CFS

• WOS/POS of another company & all members (vote ) – written intimation + proof
of delivery - do not object.
• Co. - securities not listed / not in process of listing on stock exchange in India or outside
India.
• Ultimate / intermediate holding company files CFS with ROC.

Q3) Investment Entity- No CFS if it is required to measure all subsidiaries at FVTPL (Ind AS
110) Definition of Investment Entity –

• IE Investors

• Commits to investors - business purpose - invest funds - returns from capital appreciation or
investment income or both.
• Measures performance of substantially all investments on FV basis.
Parent of IE - Consolidate all entity it controls, including those controlled through IE subsidiary,
unless parent is IE.

Q4) Responsibility of parent - Responsibility of PPCFS is of parent. This includes-

1) identifying components and including financial information of components to be included in

CFS.
2) identifying reportable segments for segmental reporting.
3) identifying RP & RPT for reporting.
4) Obtaining accurate and complete FI from components.
5) Making appropriate consolidation adjustments.
6) Harmonisation of accounting policies and accounting framework.
7) GAAP Conversion, where applicable.

Q5) Responsibility of auditor of CFS / Auditor’s objective

1) To satisfy himself – CFS as per AFRF.

2) To enable himself to express opinion on T&F view of CFS.
3) To enquire into matters – 143 (1) of COA 2013.
4) To report on matters – 143 (3) of COA 2013.
5) To validate requirement of preparation of CFS as per AFRF

Yes, I will definitely clear my CA Exams 11

CA SHANKAR LAKHWANI # Audit Made Easy
Q6) Auditor’s Considerations for Materiality

SA 600 - Using the work of another auditor – Audit of SFS - materiality computation - component
wise on standalone basis.

Audit of CFS - consider following for materiality –

1) Auditor compute materiality for group as a whole to assess appropriateness of

consolidation adjustments made by management.
2) Parent auditor can also use materiality – group level – to determine whether compo’s FS are
material to group.
3) Principal auditor – compute materiality for each component & communicate to component
auditor if he believes – reqd. for T&F view on CFS.
4) Principal auditor obtain confirmation from component auditors like independence, code of
ethics, etc.
While considering observations (modification/EOM para) of compo auditor in his report on SFS –
consider SA 600.

Q7) Plan Before CFS Audit / Auditing Consolidation

1) Understanding group structure & group wide control including IT system.

2) Understanding a/cing policies of parent, components, consolidation process, including
translation of FS of foreign components.
3) Determining & programming NTE of AP based on ROMM.
4) Determining extent of use of other auditor’s work.
5) Coordinating work to be performed.

Q8) For Completeness of Info of Components, what Audit Procedures To Follow?

1) Review of WP of prior yrs for known components

2) Review parent’s procedures for identification of various components
3) Review joint ventures & joint arrangements.
4) Review investments of parent & components to determine shareholding in other entities.
5) Review other arrangements entered by parent, not included in CFS.
6) Review stat. records of parent eg, registers under COA.

Q9) Consolidation Adjustments – PCA & CPCA

1) Permanent Consolidation Adjustments (PCA)

• Made only on 1st occasion/subsequent occasions in which change in shareholding of
particular entity consolidated.
• Types-
o Determination of G/w or capital reserve as per AS.
o Determination of equity attributable to MI/NCI.
• Auditor verify above calculation – appropriately made.
a. Auditor – attention - Preacquisition reserves of compo & date of investment in compo
b. Auditor–preacq. reserves allocated appropriately b/w parent and MI/NCI.
c. Auditor – changes in PCA on a/c of subsequent acq of shares in compo, disposal of compo in
subsequent yrs.

Yes, I will definitely clear my CA Exams 12

CA SHANKAR LAKHWANI # Audit Made Easy
• One subsidiary – G/w, another – CR. Parent – net off if permitted by AFRF. Auditor verify –
Gross G/w & CR on acq of various subsidiaries disclosed in notes to CFS.

2) Current Period Consolidation Adjustments (CPCA)

• Made in a/cing period for which consolidation done.
• Examples-
a.
Intra-group interest paid, recd/mgt fees.
b.
Intra-group indebtedness.
c.
Unrealised intragroup profit on assets acquired from/tfd to other subsidiaries.
d.
Adjustments of harmonising diff a/cing policies of parent and compo.
e.
GAAP conversion, in case of foreign compo.
f.
Record deferred tax on unrealised inter co. profit elimination as per Ind AS 12.
g.
Adjustments to FS for subsequent events/trans. b/w B/S date & AR date.
h.
Adjustments for trans. b/w compo B/S date & date of AR on group’s CFS when FS of
compo not upto B/S date of parent.
i. Determination of movement in equity attributable to MI/NCI since date of acquisition of
subsidiary (Ind AS : NCI -ve balance if NW of subsidiary -ve)
j. Adj. of deferred tax on a/c of temporary diff due to elimination of intragroup P/L.
• FS of compo drawn upto same reporting date of parent.
• If not done – adj (h)
• Diff b/w reporting dates:max 6 mth – AS, max 3 mth – Ind AS.
• Verification- Review memorandum records +
a. Verify that intragroup transactions & a/c balances eliminated.
b. Verify - CFS prepared – uniform accounting policies.
c. Verify adj to harmonise diff a/cing policies incl. GAAP conversion.
d. Verify adj of deferred tax on a/c of temporary diff due to elimination of intergroup P&L.
e. Verify calculation of MI/NCI.
Q10) Info Disclosed in CFS Separately for Parent & Compo, including Foreign Compo

1) Amt of net assets & net assets as % of conso net assets.

2) Amt of share in P/L & % share in P/L as % of conso P/L.
3) Amt of OCI & % of OCI as % of conso OCI.

Q11) Info Given In Notes To SFS of Parent, Subsidiary, need not be included in CFS

1)
Source from which bonus shares issued eg, capitalisation of profit/ reserve/SP A/c.
2)
Disclosure of unutilised money from issue indicating form in which unutilised funds invested.
3)
Disclosure – MSMED Act, 2006.
4)
Exp in forex – royalty, knowhow, professional & consultation fee, interest.
5)
Earning in forex-
• Export of goods calculated on FOB basis
• Royalty, knowhow, professional & consultation fee
• Interest and dividend
• Other income, indicating nature
6) Value of imports on CIF basis-
• Raw materials
• Components & spare parts
• Capital goods
Q12) Mgt Representation / SA 580 -WR
Yes, I will definitely clear my CA Exams 13
CA SHANKAR LAKHWANI # Audit Made Easy
1) Completeness of compo in CFS.
2) Identification of reportable segment for segmental reporting.
3) Identification of RP & RPT for reporting.
4) Appropriateness & completeness of PCA & CPCA, incl. elimination of intragroup trans.
Q13) Reporting

1) When PA = Auditor of all components

Auditor report –

a) Procedures of PPCFS as per AS. Deviation – SA 705.

b) Auditor – audit report – opinion whether CFS – T&F view of SOA as on B/S date, T&F view
of conso P/L – conso P&L statement.
c) If cash flow statement, opinion – T&F view of cash flow statement in CFS.

2) When PA is not auditor of all components

a) Consider SA 600.
b) SA 706 – Auditor consider necessary to make reference to audit of other auditors – AR on
CFS – disclose magnitude of portion of FS audited by other auditor by stating ₹/% of total
asset/revenue/cash flow of compo not audited by PA.
c) Total asset/revenue/CF – before PCA & CPCA.
d) Reference that part audit by other auditor is not qualification of opinion but indication of
divided responsibility.

3) When component AR – A/cing framework different than parent (eg, foreign compo)
a) Parent’s mgt converts compo FS to parent’s framework. Conversion adj. audited by PA for
suitability & appropriateness.
b) Alternatively – Compo prepare FS on basis of parent’s a/cing policy, outlined in group
accounting manual (GAM). Local compo auditor – audit & issue AR on compo FS.

4) When compo AR – Auditing framework diff. than parent

a) Audit – Indian GAAS (Normally)
b) Compo FS audited under framework corresponding to Indian GAAS.

5) Components not audited

a) PA evaluate possible modification in AR on CFS.
b) Evaluation necessary because auditor not able to obtain SAAE for consolidated balances.
c) Auditor evaluate both qualitative and quantitative factors.
Q14) Conso of Subsidiaries as per Companies (Ind AS) Rules, 2015 – Accounting Treatment

1) FS of parent & subsidiaries combined on line by line basis by adding assets, liabilities,
income, expense, cash flows – Ind AS 110.
2) Goodwill/CR & NCI determined - Ind AS 103.
3) Business under common control – Pooling of interest method – Ind AS 103.
4) Elimination of intragroup transactions – Ind AS 110.
5) Investment in associates & JVs - equity method – Ind AS 28. Interest in assets, liabilities,
revenue, expense in joint operation accounted as part of separate FS – Ind AS 111.

Yes, I will definitely clear my CA Exams 14

CA SHANKAR LAKHWANI # Audit Made Easy
BANK & NBFC AUDIT

UNIT 1 – BANK AUDIT

Q1) Special audit considerations/peculiarities.

Nature of risk of Development of new products & services Effect of stat. & regulatory
trans. & banking practices requirements
Dependence on IT Scale of banking operations & significant exposure in short time period
Q2) Important points for preparation and audit of FS

1. Banking Regulation Act, 1949 – Third Schedule

Form A – Balance Sheet Form B – P/L A/c

2. Private bank - no mandatory branch audit.
3. Public sector/Private banks – Listed on RSE & SEBI LODR.
4. Nationalised/PSU banks – 4 or more firms of CA jointly act as Statutory Central Auditors
SCAs.
• Contents of appointment letter

Period of appointment Particulars of other SCAs Particulars of previous

auditors
Scope of assignment – special report Statement of division of work & review & reporting
by SCA in addition to main report responsibilities b/w joint auditors (Nationalised banks)
5. Authority appointing auditor-

Banking co. – AGM Nationalised bank - Bank appoints through board of directors.
RBI approval in both cases.

Q3) What info should bank share with auditors, considering importance of IT in PPFS?

Data integrity & data security MIS report generation & Business continuity plans &
periodicity disaster control plans
Data processing & data interface Overall IT policy, structure & envt of bank’s IT system

Q4) Key security control aspects that auditor needs to address while doing audit in
computerised bank.

1. Ensure that authorised and complete data is available for processing.

2. Ensure that system prevent unauthorised amendments to programmes.
3. Verify that changes in parameters are authenticated.
4. Verify that charges calculated manually are authorised.
5. Verify that A/c master & balance A/c cannot be modified except by authorised personnel.
Q5) Risk based internal audit is conducted based upon risk assessment of business & control
risk of branches. What are components of risk assessment process?

Identification of Assessment of Overall business risk Drawing risk matrix,

inherent business effectiveness of control and control risk. taking into a/c factors
risk (Business risk) systems (Control risk) like risk of branch.

Yes, I will definitely clear my CA Exams 15

CA SHANKAR LAKHWANI # Audit Made Easy
Q6) Internal control in diff. areas of bank.

Ans. (A) GENERAL

1. Staff shifted frequently/without prior notice.

2. Financial powers of officers of different grades – defined.
3. Work of one checked by other.
4. Arithmetical accuracy of books proved every day.
5. Signature book - access to authorised officers.
(B) CASH

1. Kept in joint custody of 2 responsible officers.

2. In addition to checking by chief cashier, test checked daily.
3. High value cash transactions verified by higher officer.
4. Payment made only after vouchers passed by authorised officer.
5. Cashier – no access to customer ledger a/cs & Day book.
(C) CLEARINGS-

1. Electronic image of cheque is transmitted through clearing house.

2. Branch either call or email customer for cheque received of 5 lakh & above for inward
clearing. Auditor – test check.
3. Auditor checks whether signature verified by staff.
4. Unpaid cheque in outward clearing sent to customer.
(D) LOANS & ADVANCES

1.
Necessary documents executed by parties.
2.
Operation reviewed at least once in a year.
3.
Satisfy as to creditworthiness of borrower.
4.
All securities – received & returned by responsible officer & kept in joint custody of 2
officers.
5. All a/cs kept in drawing power & sanctioned limit. Additional temporary limit – sanctioned
for max 20% of existing limit & 90 days max tenure.
(E) DEMAND DRAFT & INTER BRANCH A/CS

1. Check sign on DD with sign book.

2. DD issued by branch - confirmed by advice to paying branch.
3. If paying branch doesn’t receive confirmation - take steps to know reason.
(F) CREDIT CARD OPERATIONS

1. There should be effective screening of applications.

2. Strict control over storage and issue of cards.
3. System to monitor and follow up customer payments.
4. System to ensure statements are sent regularly to customers.
5. All reimbursement – immediately charged to customer a/c.
Q7) Compliance with CRR & SLR reqt.

Ans. SLR - Statutory Liquidity Ratio

• Liquid assets maintained like gold & cash.

• Verify compliance on 12 odd dates of different months, not Friday.
• Report sent to bank’s top mgt & RBI.
• Audit approach & procedures-

Yes, I will definitely clear my CA Exams 16

CA SHANKAR LAKHWANI # Audit Made Easy
o obtain understanding of RBI circular for DTL (Demand & Time Liabilities)
o Request branch auditor to send weekly T/B as on Friday to be consolidated at HO
o Examine consolidations of DTL, on test basis.
o Items excluded from DTL-
1. Paid up capital, reserve, cr. bal. of P/L A/c, loan from RBI, refinance from EXIM Bank,
SIDBI, NHB, NABARD.
2. Bill discounted by bank with eligible financial institution
3. Net income tax provision
4. Amount recd from DICGC for claims held by bank pending adjustments
5. Amount recd from ECGC by invoking guarantee
6. Amount recd from insurance company for ad hoc settlement of claim pending court
judgment.
7. Amount recd from court receiver
8. Net unrealised gain/loss from derivative transaction under trading portfolio
9. Income flows recd in advance like non refundable annual fees & other charges
10. Liabilities due to utilisation of limit under Bankers’ Acceptance Facility (BAF)
11. Part amt of recovery from borrowers for bad & doubtful debts.
12. Amount in INR against import bill & held in sundry deposit pending receipt of final rates.
13. Unadjusted deposit/bal. in Link branch for agency business like dividend/interest warrant,
refund of application money for shares/debentures to extent of payment by other branch,
not adjusted by link branch
14. Margins in sundry deposits for funded facility.
o Items included in DTL-
1. Net credit balance in branch adjustment a/c. Credit entries in branch adj a/c o/s for >5 yrs
taken at gross.
2. Reconciliation of nostro a/c with Nostro Mirror a/c.
3. Borrowings from abroad by Indian banks=liabilities to other(Take at gross)
4. Interest accrued on deposits-calculated on each reporting fortnight, whether or not
interest accounted in BOA so that bank’s liability reflected in total NDTL of same
fortnightly return. Cash collateral recd under collateralised derivative transaction as it is in
nature of ‘outside liabilities’.
o While examining DTL computation – Exempted categories of items –
1. Minimum eligible credit (EC) & o/s long-term bonds (LB) to finance infra loan & affordable
housing loan.
2. Eligible incremental FCNR(B) & NRE deposits of maturities of 3 yrs & above. Auditor verify
loans out of FCNR(B) deposits & inter-bank foreign currency (IBFC) deposits for reporting
in Form A return. Banks convert forex assets/liabilities (including borrowing) in USD, GBP,
JPY, Euro to INR at RBI reference rate. For other currency consider New York rate for
conversion to USD.
3. For conversion of forex assets/liabilities, reference rate from FBIL to be taken. If not
available-New York closing rate for conversion of currency to USD.
• Auditor to examine whether balance in branch adj a/c of foreign branch taken to a/c to
arrive at net balance in branch adj a/c.
• Auditor to examine correctness of data in Form A return for CRR & return in Form VIII
for SLR purpose on sample basis.
• Relevant info of branches in region consolidated at regional level. Auditor of region to
verify & report. Consolidated statement counter-signed by regional manager. Central

Yes, I will definitely clear my CA Exams 17

CA SHANKAR LAKHWANI # Audit Made Easy
auditor apply audit procedures to consolidation for bank as a whole. Where such procedure
is followed, SCA describe in certificate.

Q8) Audit procedures to verify balance with RBI.

Verify ledger balance Review following in reconciliation statement –

with bank • Unresponded cash transaction
confirmation • Revenue items requiring adjustments
certificate at yr end • Other Dr/Cr entries in RBI statement, unresponded for >15 days
Q9) Audit procedures to verify balance with other banks (other than RBI)
Examine

No dr. for charges / cr. for No cheque in clearing is Large transactions in inter-bank
interest is outstanding outstanding account
Q10) Audit procedures to verify money at call & short notice.

1. Call loans verified with certificates of borrowers.

2. Interest properly accounted on year end outstanding balance.
3. Repayment from borrowing bank (call loans made & recd can’t be net off)
Q11) Audit procedures to verify investments.

Physical verification Separation of investment functions Examination of –

Reconciliation, Documents, Valuation
Q12) Audit approach for NPA.

Both for sale/purchase of NPA

Policy by Only such NPA sold which remained NPA NPA sold on Asset sold/purchased
BoD in books of bank for atleast 2 years cash basis “w/o recourse” only
Bank hasn’t purchased NPA which it originally sold
Things to be ensured for sale of NPA-

On sale, NPA has been If sale price < Net book If sale price > NBV, excess provision - not
removed from books of a/c value (NBV), shortfall – reversed, but utilised to meet shortfall
of selling bank. Dr to P/L A/c. on a/c of sale of other NPA.

Things to be ensured for purchase of NPA-

NPA should be subjected to Any recovery of NPA purchased from For purpose of capital
provisioning relevant to other banks is first adjusted against adequacy, banks assigned
classification status in acq cost & only excess recovered amt 100% risk weights to NPAs
books of purchasing bank. = profit. purchased from other banks.
Q13) Read only-

1. A/cs with temporary deficiencies-

• Banks shouldn’t classify advance a/c as NPA merely due to temporary deficiency like non-
availability of drawing power based on latest available stock statement, balance o/s
exceeding limit temporarily & non-renewal of limits on due date.
• Stock statement relied upon by banks to determine drawing power should not be older than
3 months. Otherwise, it is considered irregular.
2. Accounts where regular/ad hoc limits are not reviewed within 180 days from due date are
NPA.
3. Asset classification = borrower wise & not facility wise.

Yes, I will definitely clear my CA Exams 18

CA SHANKAR LAKHWANI # Audit Made Easy
All facilities granted by bank = treated as NPA and not particular facility, which has become
•
irregular.
Q14) Government guaranteed advances.

1. If government guaranteed advance becomes NPA, then for income recognition purpose,
interest on such advance should not be taken to income unless interest is realised.
2. For asset classification purpose, credit facility backed by CG guarantee, though overdue,
can be treated as NPA only when CG repudiates guarantee, when invoked.
3. This exception is NA for SG guaranteed advance, where advance is to be considered as NPA
if it remains overdue for > 90 days.
4. In case bank has not invoked CG guarantee, though amount is overdue for long, reasoning
for the same should be taken and reported in LFAR.
Q15) Agricultural advances.

1. Ensure that NPA norms have been applied as per crop season determined by State Level
Bankers’ Committee in each state.
2. Depending on duration of crops (short/long-term), NPA norms would also be made applicable
to agricultural term loans.
3. Ensure these norms are applicable to all direct agricultural advances listed in master
circular on lending to priority sector.
4. For agricultural loans, other than circular, ensure that identification of NPAs has been done
on same basis as non-agricultural advances.
Q16) Restructured advances.

• Restructuring is an act, in which lender, for economic/legal reasons wrt borrower’s financial
difficulty, grants concession to borrower.
• Eg, modification of terms, alteration of instalment/repayment period.
• Imp. Points –
Auditor has to verify compliance with RBI circular.
o
Banks may restructure a/cs classified under std, substd & doubtful.
o
Banks can’t restructure a/cs with retrospective effect.
o
If banks receive application for restructuring– implies that a/c is intrinsically weak.
o
Auditors need to consider whether provision reqd for a/cs for which pending
o
approval for restructuring.
o On restructuring, a/c will downgrade from std to substd. NPAs will remain in same
category.
Q17) Fixed assets and other assets.

• Verify opening balance – FA schedule.

• Check documents/title deed.
• Reconcile FA register with ledger.
• If premises under construction, show in separate heading “Premises under construction”
• For self constructed FA, check bills.
• Leased FA – AS 19/Ind AS 116 – Leases
Q18) Banking

• Keywords – Stress testing & Basel III Framework

• Tier I Capital-
o Share capital + disclosed reserves
o Bank’s highest quality capital because fully available to cover losses
• Tier II Capital-

Yes, I will definitely clear my CA Exams 19

CA SHANKAR LAKHWANI # Audit Made Easy
o Certain reserves + subordinated debt
• Loss absorption capacity of Tier II capital is lower than Tier I capital.
• Capital Risk Adequacy Ratio (CRAR)=Eligible total capital funds x 100
Risk weighted assets & off B/S items
• RBI requires banks to maintain minimum CRAR of 9% on ongoing basis.
Eg, for secured housing loans,
• upto 75 lakh – Risk weight is 50%
• > 75 lakh – 75%
• > 75 lakh – 100% (Loans to commercial real estate)
• For house loan of 60 lakh, risk weighted asset is 50% i.e. 30 lakh for denominator in CRAR
formula.
Q19) Examples of contingent liability.

Claims against bank, not Liability for partly Liability for o/s forward exchange &
acknowledged as debt paid investments derivative contracts
Guarantee given on Acceptance, endorsements & other obligations
behalf of constituents

Q20) Audit approach for contingent liability.

Ans. Auditor should obtain representation from management that-

1.All off B/S trans have been accounted in books as & when such trans has taken place.
2.All off B/S trans have been entered after due procedure.
3.All off B/S trans - supported by documents.
4.All yr end contingent liabilities – disclosed.
5.Disclosed CL do not include crystallised liabilities which are of nature of loss/expense &
requires creation of provision in FS.
Q21) Acceptance, endorsement & other obligations.

Evaluate adequacy of IC over Verify balance of LOC from Examine whether bank incurred
issuance of LOC. bank register. potential financial obligation.
Q22) Bills for collection - audit procedures.

Ensure that bills drawn on other Verify bills for collection wrt Examine procedure for crediting
branches of bank are not corresponding register. party on whose behalf bill
included in bills for collection. collected.
Q23) Audit report.

Ans. Nationalised bank Auditor gives report to CG

Content of audit report-

1. Whether B/S is full & fair, with necessary particulars & properly drawn to exhibit T&F view.
2. In case auditor had called explanation, whether given and satisfactory.
3. Whether or not transactions of bank are within powers.
4. Whether returns recd from offices and branches – adequate.
5. Whether P&L A/c shows T&F balance of P&L.
6. Other matters
Q24) LFAR – Long Form Audit Report

1. Given by statutory branch as well as statutory central auditors.

Yes, I will definitely clear my CA Exams 20

CA SHANKAR LAKHWANI # Audit Made Easy
2.Questionnaire form.
3.Observation on cash, bank balance, investments, advances, deposits.
4.Statutory branch auditor will submit to statutory central auditor.
5.Consolidation at head office.
6.Statutory central auditor submits to management.
7.Mgt submit to ACB, along with action taken to rectify irregularities.
8.Copy of LFAR & agenda note - submit to RBI within 60 days of submission of LFAR by stat
auditors.
Q25) Report and certificate content.

Ans. Statutory Central auditor provides report and certificate on-

LFAR Report on compliance Asset liability Certificate for custody of unused bank
with SLR requirements management receipt forms & utilisation.
Report on instances of adverse credit – deposit ratio in rural areas.
Q26) Concurrent audit

1. Verification of trans. concurrently as & when trans. takes place.

2. Done by internal staff, not involved in operations or external auditor.
3. Purpose – Deviation from laid down procedures noticed immediately & quick action can be
taken.
4. Scope of concurrent audit-
o Scope determined by Bank’s Central Inspection & Audit Dept in consultation with
ACB.
o Check high risk transactions with large financial implication.
o RBI guidelines to be followed.
o Areas/scope of concurrent audit – cash, deposits, advances, investments, foreign
exchange, housekeeping, other items.
5. Bank ki marzi – external auditor or internal staff.
6. If internal staff - independent of branch.
7. Tenure of external concurrent auditor with a bank– max 5 years on continuous basis.
Tenure with 1 branch – max 3 years.
8. If external auditor – serious omission/commission. Then, appointment cancelled & report to
RBI & ICAI.
9. Terms of appointment and remuneration – decided by ACB.
Q27) Concurrent audit reporting.

1. Every bank has structured format. Major deficiencies highlighted in special note & given to
bank’s controlling offices. Quarterly review placed before ACB.
2. Zone wise reporting of findings to ACB & annual report of audit system placed before ACB.
3. Auditor discuss issues with branch manager before submission of report.
4. Minor irregularities rectified timely. Serious irregularities–reported to HO.
5. Fraud – immediately report to Inspection & Audit Dept (HO), Chief Vigilance Officer,
Branch Manager, unless involved in fraud.
6. Follow up by inspection and audit department.
Q28) Steps in audit.

Ans. Stage I – Initial Considerations

Acceptance & Declaration of Internal assignment Terms of Audit Engagement

Continuance indebtedness by statutory
auditors

Yes, I will definitely clear my CA Exams 21

CA SHANKAR LAKHWANI # Audit Made Easy
Communication with Planning Establish engagement team
previous auditor
Stage II – Understanding

Bank & envt, including IC Bank’s a/cing process Risk mgt process
Stage III – Risk assessment

Identify & Assess risk of fraud, Assess Risk of outsourcing of activities

assess ROMM including money laundering specific risk
Stage IV – Execution

Eng. Team Response to Establish overall Audit Planning Audit Going Concern
Discussion assessed risk audit strategy Memorandum Materiality
Stage V – Reporting

Q29) Legal framework (Laws applicable to banks)

Banking Regulation Act, 1949 RBI Act, 1934 SBI Act, 1955
IT Act, 2000 COA, 2013
Q30) MCQ

Bank ka half yearly review (30/09 & 31/03) of investment portfolio.

Q31) Bonus Answer – Blank in exam – Internal control/ Audit Procedures/ Audit approach-

Auditor will verify amount, docs, compliance with RBI guidelines, signature, policy of BoD, books
Periodical inspection, Internal control

BONUS TIP : ASSERTION 1 LINE EXPLANATION TECHNIQUE-

For P/L Items - occurrence, completeness, accuracy, classification, cut-off.

For B/S Items - existence, completeness, valuation, presentation, rights, and obligation.

UNIT 2 - NBFC AUDIT

Q1) Definition.

As per RBI (Amendment) Act, 1997, Non Banking Financial Company-

Financial institution Non-banking institution which is co & principal Other non-banking

which is co. business is receiving deposits/ lending institution, notified in
Official Gazette
Q2) Principal Business Criteria (50% criteria or 50-50 test)

1. Co. is treated as NBFC when company’s financial assets constitute >50% of total assets
(net off by intangible assets) & income from financial assets is >50% of gross income.
o See figures of last audited balance sheet
o Co. fulfilling both criteria is NBFC & requires to be registered as NBFC by RBI.
2. Registration & regulation of NBFC - No NBFC is allowed to commence/carry on business
without
o Obtaining certificate of registration by RBI.
o Net owned fund of …… crore

Yes, I will definitely clear my CA Exams 22

CA SHANKAR LAKHWANI # Audit Made Easy
• 10 crore for NBFCs currently applying for registration-from 01/10/22 (2 crore for NBFC
P2P, AA & NBFCs with no public funds & no customer interface; 300 crore for NBFC-IFC &
IDF-NBFC)
• For existing NBFCs, NOF is 2 crore which is to be increased to 10 crore for certain
NBFCs in phased manner as follows –

Q3) Categories of NBFC.

Deposit accepting NBFCs Non deposit accepting NBFCs – BL,ML,UL,TL

Q4) Co. exempted from registration.

Housing finance institutions Merchant banking company Stock exchange

Stock broking/sub broking Venture capital fund company Nidhi company
company
Insurance company Chit company Micro finance company
Securitisation and Mutual benefit company Alternative investment fund
reconstruction company (AIF) company

Core investment company (CIC)

-CIC of asset less than 100 crore, & asset of 100 crore & above but not accessing public
funds are exempted.

Q5) Bank vs NBFC.

1. NBFC can’t accept demand deposit but some NBFC accept term deposits.
2. NBFC do not form part of payment & settlement system & cannot issue cheques drawn on
itself.
3. Deposit insurance facility of Deposit Insurance & Credit Guarantee Corporation (DICGC) is
not available to depositors of NBFC, unlike banks.
4. No minimum exposure to priority sector reqd. by NBFC.
Q6) Audit procedures.

1. Ascertaining business of co.

o MoA/AoA, minutes of Board meeting, discussion with mgt.
2. Evaluation of internal control system
o Maintenance of a/cing system + IC – Responsibility of mgt.
o Loopholes & fraud identification.
o Determine NTE of AP & whether IC – adequate.
3. Registration with RBI
o Check Ans. 2
4. NBFC Acceptance of Public Deposit Directions - NBFC Acceptance of Public Deposits
(Reserve Bank) Directions, 2016 – Check 6 things
o Check whether NBFC has filed returns timely.

Yes, I will definitely clear my CA Exams 23

CA SHANKAR LAKHWANI # Audit Made Easy
o For NBFC not accepting public deposit, check whether Board resolution passed that it
has neither accepted PD nor would it accept any PD.
o Test check interest calculation to ascertain that NBFC hasn’t paid excess interest.
o Check whether investment in liquid assets by NBFC accepting public deposit lodged in
safe custody with SCB.
o Verify deposit register & test check particulars in it for each depositor.
o Obtain copy of credit rating assigned to NBFC & check if PD held are as per credit
rating.
If upgrading/downgrading credit rating, NBFC will have to increase/reduce PD & inform in writing
to RBI.
-In downgrading below minimum grade, NBFC shall regularise excess deposit-
i. With immediate effect, stop accepting fresh deposit & renewing existing.
ii. All existing deposit shall run off to maturity.
iii. Report position within 15 working days to regional office of RBI.
-No matured PD shall be renewed w/o express & voluntary consent of depositor.
5. NBFC Prudential Norms
o Check compliance with prudential norms of income recognition, income from
investment, AS, asset classification, etc.
o Auditor should assess whether NBFC is complying with Prudential norms. Verify that
advances are classified as standard/ sub standard/doubtful/loss & proper provision is
made.
o For NPA, auditor has to check whether unrealised income hasn’t been taken to P/L
account on accrual basis. Income from NPA has to be accounted on realisation basis.
o Check whether all accounts classified as NPA in PY, continue to be shown as NPA in
CY. If not, examine whether it is regular and can be treated as performing.
Q7) Classification of fraud by NBFC.

1. Misappropriation and criminal breach of trust.

2. Irregularities in foreign exchange transactions.
3. Cheating and forgery.
4. Any other fraud.
5. Fraudulent encashment through forged instruments, manipulation of BoA.
6. Unauthorised credit facilities extended for reward.
7. Negligence and cash shortages.
Point 2 & 7-reported as fraud if intention is suspected/proved. But following cases where intention
is not suspected/proved are fraud –

Cash shortage >10,000 Cash shortage > 5,000

Detected by mgt/auditor/officer & not reported
Q8) Audit checklist/verification procedures for all NBFC. Eg NBFC – ICC

1. Test check bills recd from brokers wrt prices vis-à-vis stock market quotations on
respective dates.
2. Verify whether NBFC hasn’t advanced any loan against security of own shares.
3. Verify charges recd/paid in respect of securities lend/borrowed.
4. Obtain balance confirmation from concerned parties.
5. Obtain confirmation from approved intermediary regarding securities deposited/ borrowed
from it as on year end.
6. In respect of securities held through depository, obtain confirmation from depository as to
securities held by it on behalf of NBFC.
Q9) Ind AS applicability – All NBFCs

Yes, I will definitely clear my CA Exams 24

CA SHANKAR LAKHWANI # Audit Made Easy
Q10) Diff. b/w Div II (Ind AS-Other than NBFC) & Div III (Ind AS-NBFC) of Sch III.

1. NBFC are allowed to present items of B/S in liquidity order which is not allowed for Div II.

2. NBFC is required to separately disclose by way of note any item of ‘other income’ or ‘other
expenditure’ in excess of 1% of total income.
Div II requires disclosure for any item of income/exp. exceeding 1% of revenue from
operations or ₹10,00,000, whichever is higher.
3. NBFC are required to separately disclose under ‘receivables’, debts due from LLP in which its
director is partner/member.
4. NBFC are required to disclose items of ‘revenue from operations’ and ‘other comprehensive
income’ on face of statement of P/L instead of showing them as part of notes.
5. Separate disclosure of T/R, which have significant increase in credit risk & credit impaired.
6. Condition for distribution for statutory reserves have to be separately disclosed in notes.
Q11) Audit report to BoD/Auditor’s additional report to BoD/auditor’s duty to report/
auditor’s obligation-

Ans. (I) For all NBFCs-

Auditor has to Whether min NOF If obtained, ensure co. is entitled to continue hold
examine that CoR criteria is met certificate & whether Principal Business Criteria is
obtained from RBI fulfilled as on 31/03 of applicable year
NOTE-Every NBFC submit certificate from stat auditor that it is eligible to hold CoR to Regional
Office of Dept of Non-Banking Supervision under whose jurisdiction NBFC is regd, within 5
working days from date of signing AR, but not later than 31st December of same year.

(II) For NBFC accepting public deposit (PD)-

o Whether co. violated restriction on acceptance of PD.

o Whether co. defaulted in paying to depositors, interest/principal after it became due.
o Whether co. furnished to RBI, quarterly returns on Prudential norms.
o Whether co. furnished to RBI, return on deposits specified in DNBS 01.
o Whether PD are in excess of permissible limits.
o Whether NBFC is accepting PD w/o min. investment grade credit rating.

(III) For NBFC not accepting PD – Whether

Board has passed resolution for Company has Complied with Prudential norms for income
non-acceptance of public deposit accepted PD recognition, AS, asset classification, etc.

NBFC is correctly classified as Whether Capital adequacy ratio disclosed in form NBS-7 has
NBFC Micro Finance Institutions correctly arrived & whether it is in compliance with min CRAR.
(MFI)

(IV) NBFC which is not required to hold CoR – Auditor has to include statement that company is
complying with RBI directions.

IMP. POINTS-

1. If AR unfavourable/qualified statement is given - state reason.

Yes, I will definitely clear my CA Exams 25
CA SHANKAR LAKHWANI # Audit Made Easy
2. Obligation of auditor to submit exception report to RBI.
o In case of NBFC, statement as to any items above is unfavourable/qualified/non-complaint
with

RBI Act, 1934. NBFC Acceptance of Public Deposits (RBI) Directions, 2016
Master Direction – Reserve Bank of India (NBFC-Scale Based Regulation) Directions, 2023
o It shall be obligation of auditor to make report containing details of unfavourable/qualified
statements to Regional office of Dept of Non-Banking Supervision of RBI.
o It shall be duty of auditor to report only contraventions of RBI Act, 1934 & directions &
such report shall not contain any statement of compliance with any provisions.

Q12) Prudential Norms

(I) Capital Requirements- Every NBFC shall maintain capital ratio of min. 15% of risk weighted
assets of which Tier I capital of NBFC (except NBFC-MFI) shall be 10% min. If lending against
gold jewellery (loan comprising 50% or more of financial assets), Tier I capital min 12%

Tier 1 capital for NBFCs (except NBFC-BL) is sum of –

1. Owned fund as reduced by investment in shares of other NBFCs, shares, debentures, bonds,
o/s loans & advances, including hire purchase & lease finance made to & deposits with
subsidiaries & companies in same group exceeding, in aggregate, 10% of owned fund.
2. Perpetual debt instrument issued by non-deposit taking NBFCs in each year to extent it
doesn’t exceed 15% of aggregate Tier 1 capital of such company as on 31st March of previous
accounting year.
NOTE–NBFC–BL aren’t eligible to include perpetual debt instrument in Tier 1 capital.

Tier 2 capital for NBFCs (except NBFC-BL) is sum of –

1. Preference shares except those which are compulsory convertible into equity.
2. Revaluation reserve at discounted rate of 55%
3. General provisions (including that for standard assets) & loss reserves to extent these
aren’t attributable to actual diminution in value or identifiable potential loss in any specific
asset & are available to meet unexpected loss to extent of one & one fourth % of risk
weighted assets.
4. Hybrid debt capital instruments
5. Subordinated debt
6. Perpetual debt instrument issued by non-deposit taking NBFC in excess of what qualifies for
Tier 1 capital.
to extent aggregate doesn’t exceed Tier 1 capital.
NOTE–NBFC–BL aren’t eligible to include perpetual debt instrument in Tier 2 capital.

Yes, I will definitely clear my CA Exams 26

CA SHANKAR LAKHWANI # Audit Made Easy

Yes, I will definitely clear my CA Exams 27

CA SHANKAR LAKHWANI # Audit Made Easy

(II) Income Recognition/Asset classification (except NBFC-MFI)– Every NBFC classify loans and
advances into standard /substandard/doubtful/loss assets.

“Standard asset” means asset in respect of which no default in repayment of principal/ interest.

“Sub std asset” – Asset classified as NPA for not exceeding 18 mth – NBFC-BL

for not exceeding 12 mth – NBFC-ML & above

Asset where terms for interest/principal are renegotiated until expiry of 1 year of satisfactory
performance.

“Doubtful asset” – Asset which remains sub std for >18 mth – NBFC-BL

for >12 mth – NBFC-ML & above

“Loss asset”-Asset identified as loss asset by NBFC to the extent it isn’t w/off or non
recoverability due to erosion in value of security.

“NPA” means overdue for >180 days. Classification – Borrower wise & not facility wise except
lease & hire purchase.

Period of >180 days-adjusted as per Glide Path: NPA classification norm stands changed to overdue
period of >90 days for applicable NBFCs.

NPA Norms Timeline

st
>150 days overdue By 31 March, 2024
>120 days overdue By 31st March, 2025
>90 days overdue By 31st March, 2026
Glide path NA to NBFCs which are already required to follow 90 day NPA norm.

Q13) Provisioning requirements (except NBFC-MFI)

1. Loss assets – 100% of outstanding (o/s) provided for.

Yes, I will definitely clear my CA Exams 28

CA SHANKAR LAKHWANI # Audit Made Easy
2. Doubtful assets

Unsecured – 100% o/s provided for Secured

Period for which doubtful % of provision

Upto 1 year 20

1-3 years 30

>3 years 50

3. Substandard asset – 10% of total o/s

4. Standard asset – 0.25% for NBFC-BL & 0.40% for NBFC-ML. Provision for standard
assets–Don’t net from gross advances but shown separately as ‘Contingent provisions against
standard assets’ in B/S.

Q14) Types of NBFC (kind of activities)

Investment and credit company Infrastructure finance company Core investment company
(ICC) (IFC) (CIC)
Infrastructure debt fund NBFC NBFC – Micro Finance Institution NBFC – Factors
(IDF – NBFC) (NBFC – MFI)
NBFC – Non Operative Financial Asset finance co., Invst Co., Loan co., mortgage guarantee co.
Holding Co. (NOFHC)

Q15) CARO 2020 – Clause xvi

Report “whether co. is reqd to be regd u/s 45IA of RBI Act, 1934 & whether reg. obtained”
Check 50% criteria to know registration requirement and minimum NOF.
Eg, company with NOF 1.5 crore & not having reg. So report as per clause xvi.
PRO TIP -If question says about audit reporting & is confusing you, write any 5-6 points from
question 11.

Q16) NBFC classification as per scale-based regulation (SBR)

NBFC–Base Layer NBFC-Middle Layer NBFC-Upper Layer NBFC-Top Layer

(NBFC-BL) (NBFC-ML) (NBFC-UL) (NBFC-TL)

1. NBFC – BL :
A. Non-deposit taking NBFC below asset size of 1000 crore.
B. NBFC with following activities

NBFC-Peer to Peer NBFC-Account Non Operative NBFC not availing public

Lending Platform Aggregator Financial Holding Co. funds & not having
(NBFC-P2P) (NBFC-AA) (NOFHC) customer interface

2. NBFC – ML :
A. All deposit taking NBFCs, irrespective of asset size (NBFC -D)
B. Non-deposit taking NBFCs with asset size of 1000 crore & above.

Yes, I will definitely clear my CA Exams 29

CA SHANKAR LAKHWANI # Audit Made Easy
C. NBFC with following activities-

Standalone Infrastructure Core investment Housing finance Infrastructure

Primary Dealers debt fund NBFCs Co. (CICs) co. (HFCs) finance co. (IFC)
(SPDs) (IDF-NBFCs)

3. NBFC -UL :
A. NBFC identified by RBI requiring enhanced regulatory requirement.
B. Top 10 eligible NBFCs in terms of asset size, irrespective of other factors.

4. NBFC – TL : Empty. Populated if RBI is of opinion that there is substantial increase in

potential systemic risk from specific NBFCs in Upper Layer. Move to TL from UL.

-Imp. Points – (Categorisation of NBFCs – specific activity)

SI-always in ML, CHI & NBFC-D:ML/UL, Govt owned NBFCs – BL/ML

IMM – Any Layer

NBFC-Invst & Credit Co. NBFC Micro Finance Institution NBFC Factors & Mortgage
(NBFC-ICC) (NBFC-MFI) Guarantee Co. (NBFC-MGC)

Yes, I will definitely clear my CA Exams 30

CA SHANKAR LAKHWANI # Audit Made Easy
PSU AUDIT

Q1) Framework for govt audit.

1. Performed by C&AG through IAAD.

2. Article 148-151 of Constitution – Role of C&AG.
o Article 148 –
i. Appointment of C&AG by President.
ii. Removal of C&AG - proven misbehaviour/incapacity.
iii. Salary / T&C – Parliament.
o Article 149 –
i. Functions & powers of C&AG as per C&AG’s (Duties, Powers & Conditions of
Service) Act, 1971.
o Article 150 –
i. President prescribe form of accounts.
o Article 151 –
i. Audit report of C&AG.
ii. CG submit President laid Parliament
iii. SG submit Governor laid Legislative Assembly
3. As per Act, C&AG hold office for 6 yrs or upto age of 65 years, whichever is earlier.
4. Resign to President.

Q2) Financial committees of Parliament.

1. Public Accounts Committee (PAC) – Duty to satisfy itself that –

o Money disbursed legally on purpose to which applied.
o Expenditure was authorised.
o Re- appropriation as per provisions.
o Examine C&AG report on a/cs of autonomous & semi autonomous bodies.

2. Estimates Committee (EC) -Examine estimates with view to -

o Report what economies, improvement in org., efficiency may be effected.
o Suggest alternative policies.
o Examine if money well laid out within limit.
o Suggest form in which estimates presented to Parliament.

3. Committee on Public Undertakings (COPU)

o To examine reports & accounts of PU.
o To examine reports of C&AG on PU.
o To examine autonomy & efficiency of PU & to see if they are managed as per sound business
principles & prudent commercial practices.
o To exercise other functions vested in PAC and EC, if allotted by speaker.

Q3) C&AG’s Role

Friend, philosopher, Guide of committees.

1. His reports are basis of committees’ working, although they are not precluded from
examining other issues.
Yes, I will definitely clear my CA Exams 31
CA SHANKAR LAKHWANI # Audit Made Easy
2. He scrutinises notes – ministries submit committees & helps committees to check
correctness & facts in draft report.
3. Financial Committees report & recommendations Parliament/SL
Dept of Govt Recommendation Committees
Inform action taken
Action taken report

Parliament/SL
4. For AR, which couldn’t be discussed in detail by committees, written ans. obtained from
dept & sometimes incorporated in report to Parliament/SL.

Q4) Audit by C&AG

Financial Compliance Performance

Government audit - 2 elements

Fiscal accountability Managerial accountability

Audit of provision of funds, Audit of economy, efficiency & effectiveness
sanctions, compliance, propriety

-Managerial accountability= efficiency-cum-performance audit.

Q5) Elements of PSU audit.

Three parties SM, criteria, SMI Types of engagement

A. 3 Parties-

Auditor Responsible party (RP) Intended users

SAI, India Auditable entities & its Individuals/org./classes for whom
TCWG auditor prepares AR.

C&AG & IAAD constitute

SAI
Senior functionaries of
SAI representing C&AG in
state are called
Accountants General.

B. SM, criteria, SMI-

o SM (Subject matter) – ICA measured against criteria.
o Criteria – benchmarks
o SMI (Subject Matter Info) – Outcome of measuring SM against criteria

C. Types of engagement

Attestation engagement Direct reporting engagement

RP measures SM against criteria & Auditor measures SM against criteria. Eg,
presents SMI. Auditor gathers SAAE to performance & compliance audit.

Yes, I will definitely clear my CA Exams 32

CA SHANKAR LAKHWANI # Audit Made Easy
provide reasonable basis for expressing
conclusion. Eg, financial audit.

Q6) Financial and compliance audit.

1. Financial Audit Conducted to express audit opinion on FS and

enhance confidence of intended users in FS.
2. Compliance audit Independent assessment of whether given SM is
in compliance with applicable criteria.
Compliance audit is concerned with –

A. Regularity – adherence of SM to formal criteria emanating from Laws/Reg./Agreements

B. Propriety – observance of general principles of sound FM & ethical conduct of public
officials.
Compliance audit is conducted–

i. with audit of FS.

ii. Separately as individual compliance audit.
iii. In combo with performance auditing.

Q7) Performance audit.

• Objective and systematic examination of evidence

• To provide independent assessment of performance of govt org/program /activity
• To provide info to improve public accountability & facilitate DM by parties with
responsibility to oversee corrective action.
• Performance audit address issues of economy, efficiency, & effectiveness

1. ECONOMY -Minimising cost of resources used – appropriate quantity, quality, best price.

2. EFFICIENCY – Input output ratio, min input – max output. Auditing efficiency embraces
aspects like whether –
o Sound procurement practices followed.
o Resources properly protected and maintained.
o Human/financial/other resources efficiently used.
o Optimum amount of resources used in producing appropriate quality/qty of G&S.
o Efficient operating procedures used.
o Objectives of public sector programmes met cost effectively.

3. EFFECTIVENESS -Extent to which objectives achieved and relation between intended

impact and actual impact of activity.
In auditing effectiveness, performance audit, may –
o Identify factors inhibiting satisfactory performance or goal fulfillment.
o Identify ways of making programmes work more effectively.
o Assess compliance with L/R applicable to program.
o Assess effectiveness of program and individual program components.
o Assess adequacy of mgt control system to measure, monitor & report programme’s
effectiveness.

Yes, I will definitely clear my CA Exams 33

CA SHANKAR LAKHWANI # Audit Made Easy
Q8) Planning for performance audit/factors considered/steps.

1) Understanding entity/programme.
2) Defining objectives and scope of audit.
3) Determining audit criteria.
4) Deciding audit approach.
5) Developing audit questions.
6) Assessing audit team skills and whether outside expertise required.
7) Preparing audit design matrix.
8) Establishing time table and resources.
9) Intimation of audit programme to audit entities.

Q9) Understanding Entity/Programme - Sources

a) Docs of entity - Policy files, annual report, accounts.

b) Legislative docs – Legislation, Parliamentary questions & debates, report of PAC, EC, COPU,
letters from MP.
c) Policy docs – Docs of planning commission, MoF.
d) Special focus groups – Report of World Bank, RBI, NGOs.
e) Academic/special research – Independent evaluation, academic research by other govt and
other SAIs.
f) Past audits – Past financial and performance audit.
g) Media coverage – Print/electronic media.

Q10) Determining audit criteria. - Sources

a) Procedure manuals of entity.

b) Policies, standards, directives, guidelines.
c) Criteria used by same/other entity in similar activity.
d) Independent expert opinion and know how.
e) New/established scientific knowledge/other info.
f) General management and SM literature and research papers.

Q11) Deciding audit approach.

a) Analysis of procedures – Review of systems for planning, conducting, checking, monitoring

activity.
b) Analysis of results – Auditor – output input analysis to determine efficiency of program.
c) Quantitative analysis – Examination of available data of financials like earning, revenue or
data of program implementation like details of beneficiary.
d) Case studies – Descriptive analysis of entity, scheme, program. Analysis of particular issue
within context of whole area.
e) Use of existing data – Audit staff investigates data held by entity mgt + other sources.
f) Surveys – Collecting info from members of population to assess interrelation of events &
conditions.
• Audit Design Matrix (ADM) includes audit objective, audit questions, audit criteria,
evidence, data collection & analysis method.

Yes, I will definitely clear my CA Exams 34

CA SHANKAR LAKHWANI # Audit Made Easy
Q12) Comprehensive audit.

C&AG conducts efficiency-cum-performance audit other than field already covered by IA of

individual concerns/professional auditors. He locates weak areas.

• Issues/matters in comprehensive audit to be examined –

1) Has planned rate of return been achieved?
2) Is there poor/inefficient project planning?
3) Are system of project formulation & execution sound? Are there inadequacies? What is
effect on capital cost?
4) If enterprise has adequate system of Repairs & Maintenance?
5) Are procedures effective & economical?
6) Does enterprise has R&D programmes? What is performance by adopting new process,
techno, profits & cost by technological progress?

Q13) Propriety audit.

1) Verification of trans. on tests of public interest, commonly accepted customs & std of
conduct.
2) Auditor bring out cases of improper, avoidable, infructuous exp., even if exp. is as per
rules.
-Principles of propriety audit –

1) Exp. is not prima facie more than occasion demands & every official exercise same degree
of vigilance for exp. as person of ordinary prudence would for own money.
2) Authority exercise power to sanction exp. to pass order – not directly/ indirectly accruing
to own advantage.
3) Funds not utilised for benefit of particular/group of persons.
4) Apart from agreed remuneration, no other avenue kept open to indirectly benefit mgt
personnel/employees/others.
-Functions of auditor in context of propriety audit-

1)
See that all exp. properly planned.
2)
See that size & channel of exp rightful & expected to give max results.
3)
See that substitute plan of action can bring improvement on current operation.
4)
Appraise whether exp. likely to give optimum result.
5)
Examine actions & decisions of mgt to see that they are conductive to public interests &
they meet std of conduct.
-Problems in propriety audit –

1) Distinct nature.
2) Formulation of auditing proposition.
3) Subjective – difficult to establish std of public interest, commonly accepted customs, std
for conduct. Solution – Norms of property laid by C&AG.
4) Auditor’s judgement – objective. Otherwise – Propriety audit – counterproductive.

Yes, I will definitely clear my CA Exams 35

CA SHANKAR LAKHWANI # Audit Made Easy
Q14) Audit report of C&AG

Presented to Parliament in several parts consisting –

1) Intro - General review of working results of govt co., deemed govt co. & Corporations.
2) Results of comprehensive appraisal of selected undertakings conducted by Audit Board.
3) Resume of co. auditors’ report submitted by them under directions of C&AG.
4) Significant results of audit of undertakings not taken up for appraisal by Audit Board.
-For certain states, C&AG submit separate audit report (commercial) to legislature, while for
other states/UTs with legislature, there is commercial chapter in main auditor report.

Q15) Principles of PSU audit.

1) General principles –
• Quality control
• Audit risk
• Materiality
• Documentation
• Communication
• Ethics and independence
• Audit team management and skill
• Professional judgement, due care and skepticism

2) Principles related to audit process –

• Planning audit-
i. Establish terms of audit.
ii. Obtain understanding of entity.
iii. Conduct Risk assessment of problem analysis.
iv. Identify risk of fraud.
v. Develop audit plan.
• Conducting audit-
i. Perform planned AP to obtain AE.
ii. Evaluate AE and draw conclusions.
• Reporting and follow up –
i. Prepare report based on conclusions.
ii. Follow up on reported matters.

Yes, I will definitely clear my CA Exams 36

CA SHANKAR LAKHWANI # Audit Made Easy
INTERNAL AUDIT

Q1) Meaning of Internal Audit (IA)

IA provides independent assurance on effectiveness of internal control & risk mgt process to
enhance governance & achieve organizational objectives.

Q2) Objectives & scope of IA Function as per SA 610-’Using the work of Internal Auditor’

1. Examination of financial & operating info-

o Eg,IA of sales record, sales commission to identify correctness of revenue
2. Monitoring of Internal control-
o Eg,3 way match-purchase order,material receipt,vendor invoice
3. Review of compliance with law & regulations-
o Eg,New Tax Regime
4. Review of operating activities-
o Eg,Review inventory mgt activity & handling
5. Risk Management-
o Eg,Evaluation of risk exposure for complex financial instrument trans.
6. Governance
o Eg,Governance in accomplishment of objectives on ethics/values

Q3) Applicability of IA-Sec 138 of Companies Act,2013-(Comply any 1)

• listed company
• unlisted public company-
o PUSC 50cr or more in last FY,or
o turnover 200cr or more in last FY,or
o o/s loan from bank/public FI >100cr at any point of time in last FY,or
o o/s deposit 25cr or more at any point of time in last FY
• pvt. company-
o Turnover 200cr or more in last FY,or
o o/s loan from bank/public FI >100cr at any point of time in last FY
Comply within 6 months of applicability

Q4) Who formulates objectives of IA?

• Sec 138 of Companies Act -AC/BoD, with mgt & Chief of IA

• Other org.-Those who appoint IAr

Q5) Eligibility of Internal Auditor-

• Individual/firm/body corporate
• CA/CMA(whether in practice or not)/Decided by Board
• May/may not employee of co.
• Part of mgt & not merely assistant

Yes, I will definitely clear my CA Exams 37

CA SHANKAR LAKHWANI # Audit Made Easy
Q6) Std on IA(SIA)210-Managing IA Function,IA Function does activities to achieve
objectives-

• Identify, source, engage & manage external expert & technical solution
• Define overall plan, scope & methodology of IA Function periodically
• Develop quality evaluation & improvement program
• Communicate & engage stakeholders about progress & objectives
• Monitor audit assignment, planning, execution, reporting of finding,closure of observation

Q7) Internal Auditor’s Responsibilities wrt accounting function & financial records-

• Internal auditor-independent status

• operate independently of a/cing staff & not divest with responsibility
• observe facts & report to authority
• Not perform executive function
• ascertain adequacy of internal control by exam. of a/cing procedures

Q8) Internal Audit Plan

Developed & documented by internal auditor, in consultation with TCWG, including AC.
Developed in way that all business processes of financial & operational activities are reviewed by
internal audit function within defined time & ensuring appropriate consideration made & balance
ensured to following-
• Risk underlying business process
• Risk appetite of organization
• Value that IA can provide to org.
• Effort involved to conduct IA for particular business process
• Coverage of all auditable areas within defined time range

Q9) Scope of Internal Auditor’s work-

• Review of Internal Control System & Procedures-

o Assessing design,operational efficiency & effectiveness of IC System
o Consider limitations of IC-cost benefit comparison,human error,collusion
• Review of Custodianship & safeguarding of Assets-
o Verify existence of asset
o Review segregation of duties is in place
o Ensure all assets accounted fully
o Review control system for intangible assets.Eg procedures related to credit control
• Review of Compliance with Policies,Plans,Procedures & Regulations-
o Examine system of periodical review of existing policies in case of change in method
& nature of operations.
o Point out specific weakness & suggest remedial action
• Review of Relevance & Reliability of Information-
o Review information system
o Examine if reporting by exception i.e.report highlight significant & distinctive
features
• Review of Organisation Structure-
o Review manner in which activities of enterprise grouped for managerial control

Yes, I will definitely clear my CA Exams 38

CA SHANKAR LAKHWANI # Audit Made Easy
o Examine reasonableness of span of control(no. of subordinates) of each executive
o Review SoD considered in org. structure
• Review of Utilisation of Resources-
o Check if proper operating std & norms established
o If wide divergence b/w actual & std performance, consider reason
• Review of Accomplishment of Goals & Objectives-
o Review objectives of enterprise to see if clearly stated & attainable
o Examine if objectives in precise quantifiable terms

Q10) Independence, Integrity & Objectivity of Internal Auditor-

• Free of undue influence/interference.Independence in mind+appearance

• Honest,truthful,high integrity,fair,avoid conflict of interest,no undue advantage
• Objective,No bias/prejudice

Q11) Qualities of Internal Auditor-

• Special expertise to evaluate mgt control system,specially financial & a/cing controls
• A/cing & financial expertise
• Knowledge of commerce,law,tax,cost a/cing,economics,quantitative method,EDP system
• Provide assurance to mgt that confidentiality of info maintained
• Understanding mgt principle, technique
• Understanding a/cing software,ERP system; knowldege of IT controls

Q12) Performing Internal Audit Engagement-

STEP 1-Obtain knowledge of business & Environment

• Meeting with stakeholders,BoD,KMP
• Understanding docs-SOPs,FS
STEP 2-Perform Audit Planning
• Plan audit engagement-SIA 310-Planning IA Assignment.Scope approved by AC/BoD
STEP 3-Gather required information
• Obtain info directly from source & check correctness & integrity
STEP 4-Perform audit checks
• Collate data & perform analytical procedures(AP) for key trends.AP as per SIA 6
• SIA 5-Sampling (to select samples)
• SIA 330-IA Documentation (for IA work papers)
STEP 5-Reporting of Internal Audit Issues
• Draft report of IA issues covering business process reviewed as per scope,audit coverage,
exclusions,gaps,etc
• Review mgt action against those agreed in previous audit & report follow up in report
• IA circulate Final report & findings to AC.

Q13) Internal Audit Report

• If Internal auditor identifies fraud(actual/suspected)/misappropriation of asset-

Immediately report to mgt
• SIA 370-Reporting results,reporting of IA result in 2 stages-

Yes, I will definitely clear my CA Exams 39

CA SHANKAR LAKHWANI # Audit Made Easy
o At end of assignment,IA Report covering area,function prepared by Internal auditor
highlighting key observation.Issued to auditee;copies shared to local/executive mgt
o Periodically,at close of plan period,comprehensive report of all IA activities covering
entity & plan period prepared by CIA (or EP in case of external service provider).
Reporting normally quarterly & submitted to generally AC.Some part of IA Reports
may form part of periodic(Eg,Quarterly) report shared with AC.
SIA 370 deals with Internal auditor’s responsibility to issue only 1st type of report.

Q14) Elements in IA Report-

• Overview of objectives,scope & approach of assignment

• Fact that IA conducted as per SIA
• Executive summary of key observation of imp aspects,specific to scope of assignment
• Summary of corrective action for each observation
• Nature of assurance derived from observation

Q15) Form & content of Report-

Decided by internal auditor based on judgement,in consultation with auditee.No IA report in final
form unless written draft previously shared with auditee.
Typical IA report includes-
• Audit scope
• Audit period
• Executive summary
• Summary of critical findings
• Detailed audit finding with elaboration on business impact & root cause of issues

Q16) Documentation-

• Copies of draft & final IA report,cross referenced to observations

• Mgt action plan counter signed by respective mgt personnel

Q17) Follow up-

• SIA 390-Monitoring & Reporting of Prior Audit Issues, CIA responsible for monitoring
closure of such issues by action plan.
• Responsibility to implement action plan is of mgt
• Internal auditor review if follow up by mgt on basis of report.If no action taken in
reasonable time-draw mgt attention.If mgt not implemented recommendations, internal
auditor ascertain reasons
• If mgt accepted recommendation, internal auditor periodically review manner & extent of
implementation & report to mgt which recommendation not implemented fully/partly

Q18) Relation between Internal (IAr) & External Auditors (EAr)-

• Scope & objective of IA depends on size & structure of entity & mgt requirement.Internal
auditor-areas like review of a/cing system & IC,exam. of financial & operating info.There is
overlap b/w work of IAr &EAr

Yes, I will definitely clear my CA Exams 40

CA SHANKAR LAKHWANI # Audit Made Easy
• Work of IAr has imp bearing on work of Ear.
• EAr-Examine scope & effectiveness of work of IAr.
• Independence of IAr & status in org. determine effectiveness of audit
• EAr evaluate IA function to determine NTE of compliance & substantive procedures.

Q19) Diff. b/w Internal & External Audit

BASIS INTERNAL AUDIT EXTERNAL AUDIT

Independent IA Function within org/external

Performed by Independent body,not part of org
body

Status of
Can be employee Not employee
auditor

Appointment IAr appointed by AC/BoD EAr appointed by members

Users of
Top mgt & referred by EAr Stakeholders
report

IAr examine adequacy of operational controls EAr examine accuracy & validity
Examination
of org of FS

Period Continuously throughout yr Once in yr

IA report-IC weakness & effectiveness of Opinion on truthfulness & fairness

Reporting
operational activities of FS

Q20) Audit Trail (Edit Log)

Visible trail of evidence to trace info in report back to original input source.It is chronological
record of changes(creating new,updating,deleting data) to data
Records maintained as audit trail include following info-
• when changes made i.e., date & time
• who made change i.e, user ID
• what data was changed i.e., data/transaction reference
ICs to be implemented/IT Controls-
• Controls to ensure audit trail feature not disabled
• Controls to ensure User ID given to each individual/not shared
• Controls to ensure change to configuration of audit trail authorized & log maintained
• Controls to ensure periodic backup of audit trails taken+archived
• Controls to ensure access to audit trail disabled & access log maintained

Yes, I will definitely clear my CA Exams 41

CA SHANKAR LAKHWANI # Audit Made Easy
DUE DILIGENCE

Q1) Audit vs DD

Audit DD
Independent -examination of potential investment to confirm material facts of prospective
examination of business opportunity.
FS to express -Review of financial and non-financial records.
opinion. -Take care reasonable person would before entering into trans. with other party.

Q2) Importance of DD

To confirm that To identify potential To gain useful info for asset To verify that trans.
business is what ‘deal killer’ defects in valuation, defining complies with
it appears to be. target co. & avoid bad representation, warranties & invst/acq. criteria.
business transaction. negotiating price concession

Q3) Classification of DD

1) Personnel DD – Personnel policies in line & changed with restructuring.

2) Information systems DD – Computer system.
3) Commercial/Operational DD – Done by acquire enterprise. SOC evaluation (Strategic,
operational, commercial) Eg, whether merger will create operational synergy.
4) Legal DD – Legal aspects.
5) Environmental DD – Entity’s envt, flexibility & adaptiveness to acquirer entity.
6) Financial DD – Analysis of BoA & other fin. matters. Its performed after commercial DD.
7) Tax DD – Separate DD exercise but since its integral component of financial status of co.,
generally included in FDD.Tax effect of M&A.

Q4) Mr. A wants to sell business. B ltd. wants to buy business. You are doing DD audit to
decide whether its worthwhile to buy business. What procedures to follow before advice? Or
DD process includes some objectives for verification areas. What are they?

Brief description of history of business Accounting policies & practices Mgt info system
Background and standing of promoters Trading results of both past A&L of latest B/S
and recent past
-SCOPE OF FINANCIAL DD-

A/cing policies Review of FS Financial projection Cash flow Taxation

Q5) DD for hidden liabilities

Co. may not show SCN which have not matured into demands as contingent liabilities – material &
imp.

Tax liability of DT/IDT.

Tax Long pending sales tax assessment.
Pending final assessment of custom duty where only provisional
assessment completed

Yes, I will definitely clear my CA Exams 42

CA SHANKAR LAKHWANI # Audit Made Easy
Unresolved labour litigation.
Labour Unfunded gratuity/superannuation/leave salary liability.
Huge labour claims under negotiation since labour wage agreement
expired.

Q6) DD for over valued assets

Uncollected receivables Litigated assets and property Intangible assets of no value

Investment carried at cost Investment with very low Deferrred revenue expenditure
though realisable value is rate of return
much lower

Q7) DD for cash flow

1) Is co. able to honor commitments to T/P, banks, government, etc.?

2) How well is company able to turn its T/R and inventories?
3) How well does it deploy funds?
4) Are there idle funds lying/Is co. able to take max benefits out of available funds?
5) What is investment pattern of company and are they easily realisable?

Q8) Work approach to DD

Reviewing & reporting Assessing business Working through DD Helping prepare offer
on financials of target first hand by site Process with based on completion
co. visit. acquisitioning co. by of DD.
defining key areas.

Q9) How to conduct DD?

1) Start with open mind. Don’t assume that wrong will be found. Identify trouble spots & ask
for explanation.
2) Make best team - Internal/external experts – check experience
3) To get 360° view – get help in all areas like finance, tax, law.
4) Talk to suppliers, customers, employees, business partners.
5) Take risk management approach.
6) Prepare comprehensive report – compliance and substantive risk.

Q10) Contents of DD report/DD review report

EI Executive summary, Introduction

BOT Background of target co., objective of DD, Terms of reference & scope of verification
BSO Brief history of co., shareholding pattern, observations on review
AAA Assessment of mgt structure, financial liabilities & valuation of assets
Q11) Can non CA perform DD? – DD can be done by any person.

Q12) Areas where DD can be done?

Public offerings Venture capital financing Corporate restructuring Disinvestment

Note – SWOT analysis is part of DD.

Yes, I will definitely clear my CA Exams 43

CA SHANKAR LAKHWANI # Audit Made Easy
Q13) Mr X – credit manager of SBI. A ltd. wants 10 cr loan from SBI. Mr X checks past
history of A Ltd, background of promoters, shareholding pattern, nature of business, past
and future financial analysis, SWOT analysis, net worth of directors, CIBIL score,
creditworthiness of company and promoters. Identify activity done by Mr. X and discuss its
nature.

DD – Due Diligence. Prudence activity. Ans. 1 DD Part.

INVESTIGATION

Q1) Audit versus investigation.

Basis Investigation Audit

Objective -Establishing fact Whether FS gives T&F view of state of
-Assessing particular situation. affairs & working results .
Reporting Outcome reported to person on whose Outcome reported to owners of business
behalf investigation done. entity.
Evidence Conclusive evidence Prima-facie evidence
Appointing Even 3rd party can appoint investigator . Owners/shareholders of co. appoint
Agency auditor .
Inherent
limitations
Periodicity No rigid time frame. May take even year Quarterly/half yearly/ yearly

Q2) Steps in investigation.

1) Determination of objectives and establishment of scope of investigation.

2) Formulation of investigation programme – Investigation programme should be drawn up
having regard to –
• Nature of business.
• Instructions of client embodying objectives and scope of work.
• Necessity to extend investigation into books of others.
• Scope and depth of investigation.
• Structure of business organisation.
3) Collection of evidence
4) Analysis and interpretation of findings
5) Reporting of findings – Nature of report depends on client’s instructions & investigator’s
findings

Q3) Imp. issues to be kept in mind by investigator while preparing report.

Every word/expression should be Report should not Relevant facts should be linked
properly considered so that possibility contain anything which with evidence.
of different meaning is low. is not relevant.
Investigator’s opinion should appear in Report nature, objective, scope, limitations of
final para of report assignment

Yes, I will definitely clear my CA Exams 44

CA SHANKAR LAKHWANI # Audit Made Easy
Q4) Special issues in investigation

• Whether investigator reqd to undertake 100% verification approach or he can adopt

selective verification - Depends on circumstances of case. If cash defalcated by cashier,
examine all cash vouchers. In case of arriving at profitability, verify on selective basis.
• Whether investigator can put reliance on already audited statement of a/c - Entitled to
put reliance on audited FS unless he finds that audit done very casually. But if investigation
launched due to doubt in audited FS, no question of reliance arises.
• Whether investigator requires assistance of expert-Investigator may obtain views &
opinion of experts after obtaining written consent of client.
• Whether to retain working papers or not – Retain full notes of work & all working papers

Q5) What points to consider for studying economic & financial position of business?

What will be Whether business is Whether profit which Adequacy or otherwise

trend of sales & operating at 100% capacity/ business expected to of fixed & working
profit in future? improvements can be made? maintain in future would capital. Are these
yield adequate ROCE? sufficient for growth
of business?

Q6) How will you evaluate T/R as investigator?

1) Whether proper PFBD have been made in years in which relevant sales took place instead of
in the year in which they have been w/off.
2) Length of credit period allowed OR Excessive discounts allowed throughout period under
investigation.
3) Debtors should be classified as per age.
4) Determine debtors to sales ratio.

Q7) What factors you will take into a/c as investigator in assessing turnover?

1) Political & economic considerations - Are govt policies likely to promote extension of
market for goods to other countries?
2) Marketability – Is it possible to extend sales into new markets OR they have been fully
exploited?
3) Trend – Whether in past, sales have been increasing consistently OR fluctuating?
4) Competition – What is likely effect on business if other manufacturers enter same field OR
if products sell in competition are placed on market at cheaper price?

Q8) How will you evaluate working capital requirement as investigator?

1) Has ratio of inventory to turnover been increasing & if so, is it continuing or temporary
trend?
2) Are trade payables paid promptly or backlog?
3) What will be effect on inventory, T/R, T/P if turnover is increased OR if new products are
introduced?

Q9) Investigation on behalf of incoming partner.

Yes, I will definitely clear my CA Exams 45

CA SHANKAR LAKHWANI # Audit Made Easy
1) Ascertainment of history of inception and growth of firm.
2) Ascertain manner of g/w computation on admission/retirement.
3) Special clause in P/s deed to allow admission in future of new partner on concessional terms.
4) Position of orders at hand & range & quality of clientele of firm.
5) Composition & quality of key personnel of firm & likelihood of their leaving org. in near
future.
6) Firsthand knowledge of specialisation of firm in any activities.

Q10) Investigation for valuation of shares in pvt. Co.

Equity shares – 2 methods of valuation –

1st method - Value on basis of networth of co.

NW is divided by no. of shares comprising equity capital to arrive at value of 1 share. G/w & non
trading assets (like investment) based on estimated future maintainable profit is included among
assets to arrive at NW.
2nd method – Avg. profit of business of past 5 –7 years is computed.

Assuming that same will continue, value of business calculated by capitalising it at reasonable rate
of interest. If rate - high, value of business – smaller. If rate – low, value of business – high.
Provision of risk factor & restriction on t/f in value of shares made by varying rate of interest
applied.

Rate of return that investor expects to earn in business of type in which co. engaged is
ascertained from price of shares of co. engaged in similar business quoted on stock exchange.

Q11) Investigation on behalf of bank/FI proposing to give advance/loan to co.

1) Purpose of loan & manner in which borrower proposes to invest loan amt.
2) Financial standing & reputation for business integrity of directors /officers of co.
3) History of growth & development of co. & performance in past 5 years.
4) If loan application to other bank/FI was made & if yes, reason of rejection.
5) If company authorised by MoA/AoA to borrow money for purpose for which loan will be
used.
To investigate profitability of business for judging accuracy of repayment schedule furnished
by borrower, as well as value of security in form of assets of business already possessed and
those which will be created out of loan, investigating accountant shall take following steps –

• Prepare condensed income statement from P&L for past 5 years.

• Compute ratios separately – sales to avg inventories held, sales to fixed assets, equity to
fixed assets, current ratio, quick ratio, equity to long-term loans, sales to book debts &
return on capital employed.
• Enter breakup of annual sales product wise to show trend.

Q12) Investigation on behalf of individual/firm proposing to buy business.

-In case of proprietary concern/partnership-

1) Unexpired period of patent owned by vendors.

2) Reason of sale of business and effect on turnover and profit.

Yes, I will definitely clear my CA Exams 46

CA SHANKAR LAKHWANI # Audit Made Easy
3) Length of lease under which premises held.
4) Age of staff and prospects of continuing.
5) Valuation of goodwill.
-If business belongs to ltd co.

1) Authorised & issued capital of company.

2) If there is uncalled liability on shares.
3) If capital divided into class of shares – rights of each class.
4) Particulars of dividend paid in past & arrear amt (on cum. pref. shares)
5) Mortgage/charge on assets – search in Register of charges.

Q13) Investigation in connection with review of profit/financial forecasts

There are many investigations involving examination of future profits like-

• Profit reports reqd as part of general investigation into purchase of business.

• By banks and FIs wrt project cash flow & profitability statements for appraisal of loan
applications submitted by intending borrowers.

Q14) Fraud diamond/4 elements of fraud/4 categories of indicators of fraud.

1) Incentive – I want to/have need to commit fraud.

2) Opportunity – There is weakness in system that right person could exploit. Fraud is possible.
3) Rationalisation – I have convinced myself that this fraudulent behaviour is worth risks.
4) Capability – I have necessary abilities to be right person to pull it off. I have recognised
fraud opportunity & can turn it into reality.

Q15) Indicators of fraud/possible frauds-

1) Discrepancies in a/cing records including incorrect/delayed recording of amount.

2) Conflicting/missing evidence including altered documents.
3) Unacceptable mgt response like denial of access to records, unusual delay in providing info.
4) Other indications like frequent change in a/cing estimates.

Q16) Factors affecting auditor’s ability to detect fraud

1) Skillfulness of perpetrator
2) Frequency and extent of manipulation
3) Degree of collusion
4) Relative size of individual amounts manipulated
5) Seniority of individuals involved

Q17) Investigation for cash receipts.

1) Showing larger cash discount than actually allowed.

2) Undercasting receipt side of cashbook/overcasting pyt. site.
3) Adjusting cash sale as credit sale & raising debit in a/c of customer.
4) Adjusting fictitious credit in a/c of customer for value of goods returned by him.
5) Writing of good debt as bad to cover up amt collected which has been misappropriated.

Yes, I will definitely clear my CA Exams 47

CA SHANKAR LAKHWANI # Audit Made Easy
Verification of cash receipts/audit procedures –

1) Carbon copies of receipts marked ‘duplicate’ should be scrutinised to confirm that they are
copies of receipts issued earlier.
2) Cash sales vouched in detail.
3) All withdrawals from Bank checked wrt entries in bank passbook.
4) Recovery from customer checked with receipts issued to them.
5) Evidence of income from diff sources scrutinised.Eg, sales summary.

Q18) Investigation for cash payments.

1) Making double payment of invoice/paying false invoice.

2) Paying personal exp from business by false details.Eg showing betting loss as adv exp.
3) Withdrawing unclaimed cr. balance of customer or amt falsely credited in a/cs of parties.
4) Falsely adjusting refund in a/c of customer & withdrawing cr. balance.
5) Wrong totalling of wage sheet & misappropriating excess amt withdrawn from bank for pyt
of wages.
Verification of cash payment/audit procedures –

1) Evidence of cash payment – scrutinised.

2) Payment by bearer cheques – examined.
3) Petty cash book vouched & totalled.
4) Special attention – wage payment. Obtain confirmation of mgt that pyt. to actual persons.
5) Obtain confirmation from partners/directors for amt shown as paid to them.

Q19) Fraud through suppliers’ ledger.

1) Suppressing cr. notes issued by suppliers & withdrawing corresponding amt. not claimed by
them.
2) Withdrawing amt unclaimed by suppliers for any reason by showing that it has been paid to
them.
3) Accepting purchase invoice at price higher than market price & collecting excess amt paid in
cash from suppliers.
4) Adjusting fictitious invoice as purchase in a/cs of suppliers & subsequently misappropriating
amt when payment made to suppliers for invoice.
Verification of balance in suppliers’ ledger/audit procedures

1) Purchase journal vouched wrt entries in goods inward book.

2) All suppliers – furnish statements of a/cs.
3) Examine internal control system for purchase order issued & identify possibility of collusion
with suppliers.
4) Allowances and rebates - evaluated.

Q20) Fraud through customers’ ledger.

1) Teeming & lading.

2) Misappropriating amt collected from customer & adjusting his a/c by crediting amt on a/c of
allowance/rebate for excess price charged.
3) Crediting amt recd from customer to a/c of another customer & subsequently withdrawing
amt wrongly credited.

Yes, I will definitely clear my CA Exams 48

CA SHANKAR LAKHWANI # Audit Made Easy
Verification of balance in customers’ ledger/audit procedures–

1) Special attention – allowance adjusted on a/c of goods returned/diff. in price.

2) Obtain confirmation of customer for amt standing in a/cs.
3) To confirm that a/cs of customers have been dr. for goods supplied to them.Entries in order
book cross checked with those in sales day book.
4) Those with no balance in a/cs – requested to confirm statement of a/c for ascertaining that
entries shown were genuine.

Q21) Inventory frauds.

Employees remove goods from premises. Theft of goods – concealed by w/off as damaged goods.
Stock actually dispatched but not Inflating qty issued for production.
entered in sales a/c.
Inventory records manipulated by employees who committed theft so that book qty tally with
actual qty .
Verification for defalcation of inventory / Audit procedures

Entire system of receipt, storage, dispatch of Physical quantity in inventory & those shown by
goods reviewed to localise weakness. inventory books – reconciled
Take guidance from past records showing extent Check per hr capacity of m/c & time it took to
of wastage in production. complete 1 cycle of production.
FORENSIC ACCOUNTING

Q1) Definitions

Forensic A/cing Red Flag

Application of a/cing methods to tracking & • Indicator of danger/inappropriate
collection of forensic evidence for investigation behaviour.
& prosecution of criminal acts. • Not necessarily indicate fraud – but
caution.
• FP red flag, a/cing system red flag,
operational red flag, behavioral red
flag.
-Statutory audit : only by CA. Forensic : non-CAs permitted.

Q2) Difference between other audits and forensic accounting

Other audit Forensic a/cing

Objective Opinion – T&F If fraud actually in books.
Techniques Substantive and compliance. Sample Investigative, substantive, in depth
based checking.
Period Particular a/cing period No limitation
off B/S items Used to vouch arithmetic accuracy Regulatory & propriety of trans.
(contracts) & compliance with procedures. examined.
Adverse findings -ve/qualified opinion with/ without Legal determination of fraud impact &
quantification. identification of perpetrators.
Verification of Relies on mgt certificate/ Independent/verification of suspected
stock, estimation representation. items where misappropriation suspected.
realisable value

Yes, I will definitely clear my CA Exams 49

CA SHANKAR LAKHWANI # Audit Made Easy
of assets,
provision, liability

Q3) Forensic Accountant Professional

1) Analyse, interpret, summarise & present complex financial & business issues.
2) Engaged in public practice/employed by insurance co, bank, police, govt agency.
3) Forensic accounting services –

FS manipulations Fund diversion/asset tracing Anti Money laundering

License fee/dues/tax evasion RPT/valuations Suspicious trans under IBC
4) Forensic Accountant Professional involved in –

Fraud detection Investigating financial evidence, detecting financial fraud.

Computer forensics Developing computerised application to assist in analysis & presentation of
financial evidence.
Fraud prevention Either reviewing IC to verify adequacy/ providing consultation in
development & implementation of IC framework.
Providing expert Assisting in legal proceedings, including testifying in court as expert
testimony witness & preparing visual aids.

Q4) Process of forensic a/cing

Step 1 - Initialization -Meet client to understand imp facts & issues

-Conflict check
-Preliminary investigation before detail plan
Step 2 – Develop Plan -Objectives & methodology by considering knowledge from
client meeting & initial investigation
Step 3 – Obtain Relevant Evidence -Locating docs, economic info, person/proof
-Gather detailed evidence – investigator understand type
of fraud & how committed.
-Investigator – alert – docs falsified, damaged by suspect.
Step 4 – Perform Analysis -calculating economic damages.
-performing tracing of assets.
-Summarising large number of transactions
-Regression/sensitivity analysis.
-Utilising charts & graphics to explain analysis.
-Performing PV calc. – disc. rate.
-Utilising computerised appl. – spreadsheet.
Step 5 – Reporting -Issue report.
-Client expect – findings of inv, summary of evidence, concl.
– loss & perpetrator.
-Report – nature & scope of investigation, approach,
limitation, findings, controls circumvent.
-Investigative team - recommend improvement – future
fraud
Step 6 – Court Proceedings -Investigation – legal proceedings.
-Evidence – presented in court & team called to court
describe evidence & how suspect identified.

Yes, I will definitely clear my CA Exams 50

CA SHANKAR LAKHWANI # Audit Made Easy
Q5) Forensic Accounting & Investigation report

FAIS 510 Professional report stakeholders

at conclusion of assignment
1 engagement - many assignments. Since many reports –1 for 1.
Report – written, addressed to primary stakeholders & shared with other SH.
Format not fixed – key elements

Q6) Key elements of report

1) Title, addressee, distribution list (if any)

2) Scope & objectives of assignment
3) Approach & broad work procedures
4) Executive summary of results – important aspects & findings
5) Reference to use of expert, if applicable
6) Fact – assignment – FAIS/material departure
7) List of finding supported by key evidence & source of evidence
8) Assumptions, limitations & disclaimer of assignment
9) Conclusion
Discussion of draft report -If discussion of finding with subject party, their response included in
report.

Assumptions and limitations –

• List down assumptions and limitations.Eg of limitation -lack of mgt support, denied access to
records.
• Report won’t give opinion/judgement on guilt/innocence.
• Reporting timelines – reasonable, interim – standard

Q7) Framework Governing Forensic Accounting & Investigation -FAI (the Framework)

-Objectives –

1) Provide overall understanding of FAI & key components.

2) Outline manner in which components come together in interrelated cohesive manner.
3) Maintain & improve quality of FAI services.
-Key components/pillars of Framework –

Basic principles of FAI Key concepts Std on FAI Guidance

-All components mandatory but guidance recommended.

-Code of ethics – Foundation of Framework

-FAIS provide

1) Professionals with minimum std for FAI assignment.

2) Users of FAI services – indication – expected quality.
3) Regulator/govt agency – appreciation – what expected.
4) Everyone – guidance – matters of implementation + practical issues.
-If member depart from FAIS/conflict b/w FAIS & other mandate – FAI report draws attention
to material departure + explanation.

Yes, I will definitely clear my CA Exams 51

CA SHANKAR LAKHWANI # Audit Made Easy
EMERGING AREAS

Q1) What is sustainable development and its pillars of sustainability?

It addresses needs of present moment without compromising current & future generations to
meet sustainable lifestyles.
3 pillars of sustainability – Environment(E), Social (S), Governance(G) – ESG Reporting:

Environment(E) Climate policies, energy, waste, pollution, natural resources like electricity, water
Social(S) Relations with people & institutions like labour relations & value chain.
Governance(G) Internal practices to govern, make investment decisions & comply with law.
ESG reporting is about disclosure of information & can be quantitative & qualitative.

Q2) Name 17 SDGs –

United Nations members states adopted sustainable development to provide blueprint which
mentioned Sustainable Development Goals (SDGs). Corporates contribute to SDGs due to their
capacity to provide solutions necessary to meet SDGs. Companies lead in innovation and contribute
to achievement of SDGs.

C • Clean water and sanitisation

• Affordable and clean energy
• Sustainable cities and communities
• Responsible consumption and production
• Climate action
E • Quality education
• Gender equality
• Decent work and economic growth
P • No poverty
• Peace, justice and strong institutions
• Partnership for the Goals
H • Zero hunger
• Good health and well-being
I • Industry innovation & infrastructure.
• Reduced inequalities
L • Life below water
• Life on land

Q3) Global trends in sustainable reporting.

Most widely used framework in world is Global Reporting Initiative (GRI) Sustainability Reporting
Standards having 93% of world’s largest 250 corporations. It is used in over 100 countries & is
based in Amsterdam, Netherlands.

(I)Global Reporting Initiative (GRI) Helps org. to report on economic, environmental

& social impacts.
(II)Carbon Disclosure Project (CDP) GHG emissions, water, forest, supply chain

(III)International Integrated Reporting Principles to produce integrated reports.

Framework (IIRC) Governance structure, business model, risks &
opportunities, strategy.

Yes, I will definitely clear my CA Exams 52

CA SHANKAR LAKHWANI # Audit Made Easy
Q4) 6Cs of Integrated Reporting / 6 Capitals of Integrated Reporting

I) Financial capital • Pool of funds for use in production of G&S.

• Debt, equity
II) Manufactured capital • Human created equipment and tools.
• Available for use in production of G&S.
III) Natural capital • Input for production of G&S.
• Water, land, forest.
IV) Human capital • People’s skills and experience.
• Alignment with human rights.
• Ability to implement strategy
• Loyalties and motivation.
V) Social capital • Relations between each community.
• Values
• Social license
VI) Intellectual capital • Future earning potential
• Investment in R&D, innovation, human resources.
-Asia Pacific region – 60% companies reported in 2022. Integrated reporting is strong in Middle
East.

Q5) Global scenario in various countries.

(I) UNITED STATES- In March 2022, US Securities & Exchange Commission (SEC) proposed
climate risk disclosure requirements. Reporting includes-

Co’s climate risk mgt

How risks identified How risks are Scenario analysis, transition
processes impact financial managed & plans & publicly announced
performance mitigated climate goals.
(II) UNITED KINGDOM – UK ESG Disclosures is COA 2006. Rules apply to large companies that
are either listed, exceed £500 million in annual turnover or have more than 500 employees.
Matters covered-

Envt (incl. co’s Co’s employees Social matters Respect for Anti-corruption &
impact on envt) human rights anti-bribery

Q6) Integrated Reporting & BRSR.

(I) SEBI recommended Integrated Reporting for top 500 listed companies (voluntary)

(II) BUSINESS RESPONSIBILITY & SUSTAINABILITY REPORT (BRSR)

-SEBI – Top 1000 listed co. by market capitalization.

-Reporting under BRSR is mandatory from FY 2022-23. It was voluntary in FY 2021-22. 3 Sections

Yes, I will definitely clear my CA Exams 53

CA SHANKAR LAKHWANI # Audit Made Easy
Section A – General Disclosures -Details of listed companies, products, services,
operations, employees.
-Holding, subsidiary, associate companies.
Section B – Mgt Process & Disclosures -Policy & management processes.
-Governance, leadership, oversight.
Section C – Principle-wise Performance 2 categories of KPIs
Disclosures

Essential indicators (Mandatory disclosures) Leadership indicators (Optional disclosures)

Data on training programs, environmental data Life cycle assessments, conflict mgt policy,
on energy, emissions, water, waste mgt. additional data on biodiversity, energy
consumption, supply chain mgt.
9 Principles of BRSR –

Principle 1 – Ethics, Transparency & Accountability

-Business decisions - open to disclosure & accessible to interested parties.

1) Entities’ governing structure develop policies for offices ensuring-ethics not compromised.
2) Info wrt policies along with performance – made available to stakeholders.
3) In case of adverse effects, more care to be taken for transparent disclosures.
4) Entities in value chain – encouraged to adopt these principles.
5) Entities - proactively respond to outside entities that violate 9 principles of BRSR, Eg,
suppliers, distributors.
Principle 2 – Safe & Sustainable Goods & Service

-Entities - make sure that G&S result in better life for consumers.

1) Production method – devised to minimise resource usage to make it sustainable.

2) Educate & make aware consumers about their rights.
3) Measures to reduce over exploitation of natural resources – reduce, reuse, recycle.
Principle 3 - Promote well-being of all employees incl. those in value chain

1) Compliance with regulatory requirements.

2) Respect dignity of employee & shouldn’t restrict freedom of unions for collective bargaining
of rights & redressal of issues.
3) Prevent child labour, bonded labour, involuntary labour.
4) System in which work-life balance not compromised.
5) Timely payment of wages.
6) Payment of wages as per living wages that can take care of basic needs.
7) Safe, hygienic & comfortable work environment.
8) Skill development, career development, training.
9) Workplace free of harassment and violence.
Principle 4 – Respect for stakeholders’ interests & responsiveness

1) Transparent & communicate with stakeholders about impact of operations on people &
nature.
2) Determine context of operation & identify interested parties.
3) Fairly share benefits to stakeholders.
Principle 5 – Respect & promote human rights

Yes, I will definitely clear my CA Exams 54

CA SHANKAR LAKHWANI # Audit Made Easy
1) Understanding of human rights & ways by which human rights can be violated – Constitution,
laws, international bill of human rights.
2) Integrate human rights element into policies.
3) Respect human rights of all stakeholders.
Principle 6 – Protection & restoration of Environment

1) Policies to assess & rectify impacts to envt.

2) Use of natural & manmade resources in optimum manner to ensure sustainability.
3) Measure performance wrt prevention of pollution, destruction of forest, waste etc.
4) Contribute towards climate change resilience .
5) Comparison with industry best practices to reduce, reuse, recycle.
6) Look for avenues by which improve performance towards envt responsibilities.
Principle 7 – Influence on Public & Regulatory Policy

1) Core elements of BRSR are to have met when org. go ahead with contributions to policy
formulation & policy advocacy.
2) Trade groups & industry chambers utilised when moving ahead with policy advocacy &
formulation.
3) Role in policy advocacy in such a way that encourages fair competition & prevents human
rights abuses.
Principle 8 – Promote Inclusive Growth & equitable development

1) Identify & address impact of activities on social, cultural & economic aspects of people.
2) Track adverse impacts of activities on society & make plans to mitigate them.
3) Bring up creative products, techno. that help marginalised communities to have well-being.
4) When designing CSR activities – review local development priorities to help marginalised
groups.
5) Ensure relocation of communities doesn’t happen & in unavoidable cases, make sure fair
compensation provided.
6) Intellectual property & traditional knowledge get respect & benefits derived from
knowledge shared equitably.
Principle 9 – Provide value to consumers in a responsible manner

1) Reduce -ve impact of G&S on consumers & nature.

2) Shouldn’t prevent freedom of choice and fair competition.
3) Disclose adverse impacts to user from products.
4) Right to privacy of customer data.
5) Inform customers – ways of reduce, reduce, recycle & eliminate overconsumption.
6) No misleading & confusing info. in advertisement.
7) Grievance redressal & feedback management system.
8) Essential goods & services – universal access.

Q7) SSAE 3000.

Standard on Sustainability Assurance Engagements (SSAE) 3000 “Assurance Engagements on

Sustainability Information“- date of application –

• Voluntary -period ending on 31/03/23.

• Mandatory – period ending on or after 31/03/24.

Yes, I will definitely clear my CA Exams 55

CA SHANKAR LAKHWANI # Audit Made Easy
Q8) Methodology to provide assurance on BRSR.

Q9) Role of auditor – consideration of climate related risks in audit of FS.

1) Obtain RA – FS as whole free of MM – fraud or error, to enable auditor to report whether

FS as per AFRF.
2) Auditor include consideration of climate related risks and how are they relevant to audit.
3) Investors seek info from AR about how climate related risks addressed in audit.
4) Auditor’s responsibilities & matters of most significance in audit and how addressed.
5) EOM Para to draw attention to disclosures that are of fundamental importance to users’
understanding of FS.
6) Auditor determine whether entity appropriately disclosed climate related info in FS as per
AFRF.
7) Auditor read other information for consistency with FS (SA 720).

Yes, I will definitely clear my CA Exams 56

CA SHANKAR LAKHWANI # Audit Made Easy
PROFESSIONAL ETHICS

Q1) Code of ethics vs Law = Law prevails

Q2) Fundamental principles discussed in code of ethics of ICAI

Integrity Objectivity Confidentiality

Professional behaviour Professional competence & due care

-Accountant – straightforward & honest

Integrity -Not Knowingly associated with info containing materially
false/misleading statement.
Objectivity Accountant – not to compromise judgement because of bias,
conflict of interest, undue influence of others.
Professional competence & due care -Professional knowledge and skill .
-Act diligently as per technical & prof. std.
Professional behaviour Comply with L/R & avoid conduct discrediting profession.
Confidentiality – Respect confidentiality of info acquired as result of professional relations. But
following are circumstances where accountant reqd to disclose confidential info –

1) Disclosure required by law.

2) Disclosure permitted by law and authorised by client.
3) There is professional duty/right to disclose, when not prohibited by law :
a. To comply with requirement of Peer review or quality review of ICAI.
b. To respond to inquiry/investigation by professional body.
c. To protect professional interest of accountant in legal proceedings.
d. To comply with Technical & prof. std.
-In deciding whether to disclose confidential info, accountant should consider following –

• Whether interest of 3rd party – harmed.

• Whether all relevant info is known & substantiated.
• Type of communication and to whom it is addressed.
• Whether parties to whom communication is addressed are appropriate recipients.

Q3) Threats & safeguards.

Self – interest threat Financial or other interest – influence accountant’s judgement.

Self – review threat Accountant not appropriately evaluate result of judgement made/activity
performed by accountant.
Advocacy threat Promote client’s position to the point that accountant’s objectivity
compromised.
Familiarity threat Long/close relation with client – accountant too sympathetic to their
interests.
Intimidation threat Accountant deterred from acting objectively due to pressure.
Examples of threats

Self – interest threat -Accountant:direct financial interest in client.

-Accountant having close business relation with client.
-Accountant receive loan/guarantee from employer.
Self – review threat -Accountant issuing report on effectiveness of financial system after
implementing it.
Yes, I will definitely clear my CA Exams 57
CA SHANKAR LAKHWANI # Audit Made Easy
-Accountant determining a/cing treatment for business combo after
performing feasibility study of purchase decision.
Advocacy threat -Accountant promoting interest of/shares in client.
-Accountant acting as advocate on behalf of client.
-Accountant lobbying in favour of legislation on behalf of client.
-Accountant manipulate info in prospectus to obtain favourable financing.
Familiarity threat -Accountant having close family member who is director/officer of client.
-Audit team member having long association with client.
-Accountant having long association with individuals influencing business
decisions.
Intimidation threat -Accountant threatened with dismissal/ replacement due to
disagreement.
-Accountant pressured to agree with judgment of client as client has
more expertise.
-Accountant: No promotion unless he agrees with wrong a/cing treatment.
-Accountant accepted gift from client & threatened that it will be made
public.
Safeguards to eliminate/reduce threats-

1) Assigning additional time & qualified personnel to tasks.

2) Having appropriate reviewer, who was not team member.
3) Using different partners & engagement teams for provision of non-assurance services to
assurance client.
4) Involving another firm to perform/reperform part of engagement.
5) Separating teams when dealing with confidential matters.

Q4) Non-Compliance with Laws & Regulations (NOCLAR)

• Omission/commission, intentional/unintentional, contrary to L/R committed by

client/employing organisation or mgt/TCWG of client/employing organisation or other
individuals working under direction of client/employing organisation.
• Doesn’t address personal misconduct & non-compliance by other parties.
Examples of NOCLAR-

Imp. Facts –

1) NOCLAR applicable if accountant encounters NC in course of service. Not required to

investigate, nor responsible to ensure complete compliance.
2) Accountant expected to exercise professional judgement. Not expected to have knowledge
of L/R greater than required.
3) Matters that are inconsequential/personal misconduct not covered.

Yes, I will definitely clear my CA Exams 58

CA SHANKAR LAKHWANI # Audit Made Easy
4) Disclosure of matter to authority – precluded, if contrary to L/R.
Applicability of NOCLAR in India:

Professional accountant Applicable to Senior professional accountants (KMP) in service, being

in service employees of listed entities.
Professional accountant Audit of entities, shares of which are listed on RSE in India & have
in public practice NW of 250 crores or more.
NOCLAR vs SA 250 –

1) SA 250-applicable only on audit & not on other assurance engagements. But NOCLAR
applicable on professional accountants in service & practice.
2) SA 250 – auditor’s responsibilities for law – direct effect & no direct effect. NOCLAR
takes into a/c NC that causes substantial harm resulting in serious consequences in
financial/non-financial terms.
3) SA 250 doesn’t define stakeholders. NOCLAR is related to affect of NC on investors,
creditors, employees, public.
4) NOCLAR– imminent breach of L/R – disclose matter immediately to authority to prevent
consequences. No such provision in SA 250.
Steps to be taken for responding to NOCLAR:

i)Obtaining understanding of matter ii)Addressing the matter iii)Seeking advice

iv)Determining whether further v)Imminent Breach vi)Determining whether to
action is needed disclose matter to
appropriate authority
vii) Documentation
Documentation requirements in NOCLAR:

• How mgt/TCWG have responded to matter.

• Course of action accountant considered.
• Public interest has been fulfilled.
Q5) Disabilities for purpose of membership.

Not 21 years Unsound Mind Undischarged insolvent Misconduct

Discharged insolvent, not obtained from court, certificate that insolvency caused by
misfortune without misconduct.
Convicted by court, within or o/s India for moral turpitude & imprisonment unless granted
pardon or on application made by him, CG removed a disability.
Failure to disclose that he suffers from disabilities – professional misconduct.

Q6) Types of members of ICAI.

1) Associate member – A.C.A after name.

2) Fellow member – F.C.A after name
a. Associate member – Continuous practice in India for at least 5 yrs.
b. Associate member – Qualification & experience = to 5 yrs continuous practice.
Q7) Removal of name from register & restoration.

Member –

Dead Request received to that effect Not paid prescribed fee Disabilities
rd
Restoration of membership only in 3 case – Appl. + arrears. Effective date of restoration of
cancelled membership-

Yes, I will definitely clear my CA Exams 59

CA SHANKAR LAKHWANI # Audit Made Easy
Application & fees within same year of removal Restoration with effect from date on which it
was removed from register.
Removal of name under orders of board of Restoration as per orders.
discipline, disciplinary committee, appellate
Authority, High Court
Other cases Restoration with effect from date on which
application & fee received .

Q8) Penalty for falsely claiming to be member.

CA Act, 1949 – Any person who –

i. Not member of ICAI

a. Represents that he is member or
b. Uses designation chartered accountant.
ii. Being member, but not having COP represents that he is in practice.

1st conviction Fine upto ₹1000

Subsequent conviction Imprisonment upto 6 mth or fine upto ₹5000 or both

Q9) CA in practice

-Member not in practice precluded to render services of type prescribed for CA, even though he
doesn’t require special qualifications.
-Once person becomes member of Institute, he is bound by CA Act. If he appears before income
tax tribunal, he could appear only in his capacity as CA. He couldn’t set them at naught by
contending that even though he continues to be member of Institute & has been punished by
suspension from practice, he would be entitled to practice in other capacity.
-Member of Institute can have no other capacity in which he can take up such practice.
Summary – CA’s name removed from membership – During period of removal, won’t appear before
tax authorities.
Q10) Cancellation & restoration of COP

Name of COP holder COP issued on basis of Member ceased to Member not paid
removed from incorrect info/by practice. annual fee for COP
register. mistake. till 30/09.
• When COP is cancelled, holder surrender the same to Secretary.
• Appln + Fee = Restore COP with effect from date on which cancelled provided application
before expiry of year.

Q11) Members deemed to be in practice

Individually/partnership, for remuneration –

engages in Offers to perform/perform Assistance – financial Other services

practice of audit or verification of facts/data
accountancy financial trans
-Member: salaried employee of CA in practice -deemed in practice for purpose of training
articles.

Sec 2(2)(iv) of Act -permits practicing CA to render ‘management consultancy services’

Yes, I will definitely clear my CA Exams 60

CA SHANKAR LAKHWANI # Audit Made Easy
MCS excludes statutory/periodical audit, DT/IDT, representation/advice for tax matters or acting
as liquidator, trustee, executor, administrator, arbitrator, receiver, but includes-
• Financial mgt planning & financial policy determination.
• Capital structure planning & advice regarding raising finance.
• Working capital mgt.
• Preparing project reports & feasibility studies.
• Cash budget,cash flow statement,profitability statement,statement of source & application
of funds.
• Budgeting – capital & revenue budget.
• Inventory mgt, material handling and storage.
• Market research and demand studies.
• Price fixation & mgt decision making.
• Management accounting system, cost control, value analysis.
• Control methods, management information & reporting.
• Personnel recruitment and selection.
• Setting up executive incentive plan, wage incentive plan.
• Management and operational audit.
• Valuation of shares & business & advice regarding amalgamation, merger, acquisition.
Acting as regd valuer for securities/financial assets, not for plant & m/c.
• Business policy, corporate planning, org. development, growth & diversification.
• Org. structure & behaviour, development of HR, training program, work study, job
description, job evaluation, workload evaluation.
• System analysis/design & computer services, hardware, software, EDP.
• Acting as advisor/consultant to issue, including matters like-
o Drafting of prospectus, memorandum, listing agreement, completing formalities with
SEBI, ROC.
o Preparation of publicity budget, advice for selection of – ad-media, centres for
holding conferences of brokers & investors, bankers to issue, collection centres,
brokers to issue, underwriters & underwriting agreement, distribution of publicity &
issue material like application form, prospectus, brochure, deciding quantum of issue
material.
o Advice for selection of agencies. Eg, Registrars to issue, printer, ad – agencies.
o Advice on post issue activities like listing of instruments & dispatch of certificate &
refund.
IMP – PUB (Portfolio mgt,Underwriting,Broking) not permitted.
• Investment counselling for securities.
• Registrar to issue for transfer of securities.
• Quality audit.
• Environment audit.
• Energy audit.
• Recovery consultant in banking sector.
• Insurance Financial Advisory Services & insurance brokerage (IRDA)
• Insolvency professional (IBC)
• Administrative services – Assisting client with routine/mechanical task like word processing,
preparing & submitting admin form, monitoring filing dates & advising client of dates,
functions of GST practitioner.
-Member deemed in practice if he in professional capacity acts as liquidator, trustee, executor,
administrator, arbitrator, receiver, advisor, representative for costing/ financial/tax matters
or renders service with armed forces or take up appointment by CG/SG/court or act as secretary,
unless his employment is on salary-cum-full-time basis

Yes, I will definitely clear my CA Exams 61

CA SHANKAR LAKHWANI # Audit Made Easy
-Not only when engaged in practice of accountancy but also when he offers, even though no client
served.
-Section 144 of COA 2013 -Services not to be rendered by auditor, directly/indirectly to
co./holding co./subsidiary co. –

A/cing & bookkeeping service Rendering of outsourced Design & implementation of fin.
financial services info system.
Actuarial services Internal audit Mgt services
Investment advisory service Investment banking service Any other services
Q12) Companies not to engage in accountancy.

1) No co. can practice as CA. Co. includes LLP, which has co. as its partner.
2) If co. contravene-every Director/officer knowingly a party – fine -

1st conviction – upto ₹1,000 Subsequent conv. – upto ₹5,000

Firm/LLP – auditor of co. - only CA partners act & sign on behalf of firm.

Q13) Maintenance of branch offices.

CA Firm > 1 office in India – each office in separate charge Failure – professional misconduct
of member of ICAI.
• Exemption to members practicing in hill areas. 5 conditions:
1) Firm allowed to open temporary offices in city in plains for period upto 3 months in a yr.
2) Regular office not closed during this period & correspondence made there.
3) Name board in temporary office not displayed at other times.
4) Temporary office not mentioned in letterhead/visiting card as place of business.
5) Before commencement of every winter, inform Institute that it is opening temporary office
from particular date & after office closed, intimation sent to Institute by regd post.
• CA in charge : partner/whole time employee

Member actively associated with office – Name board:No bar on putting in residence of
resides in place where office situated/ attends member with designation Chartered Accountant
office for atleast 182 days in yr. but NB of member & not firm.
• Exemption: 2nd office w/o separate charge of ICAI member – 2nd office in

same premises same city 50km from municipal limits of city in which 1st office
Declare main office.

Q14) KYC Norms for CA in Practice

Mandatory & all assignments & attestation functions.

Client – Proprietor
• General Info- Name & address, PAN/Aadhar, Business description, copy of last audited FS
• Engagement Info- Type of engagement

Client – Corporate Entity

• General Info-Same + Name of parent co. in case of subsidiary
• Engagement Info- Type of engagement
• Regulatory Info- co. PAN, CIN,DIN, Directors’ Names & addresses

Client - Non-corporate entity

Yes, I will definitely clear my CA Exams 62

CA SHANKAR LAKHWANI # Audit Made Easy
• General info- Same + Partners’ Names & addresses (with PAN/Aadhar Card)
• Engagement Info-Type of engagement
Q15) Schedules to the act.

FIRST SCHEDULE –

PART 1 – Professional Misconduct + CA in practice

Common line - CA in practice is deemed to be guilty of PM if he: Partner

Cl 1: Allows anyone to practice in his name except practice Employee

Cl 12: Practice

Allows to sign – person not Partner on BS/P&L/Report/FS

• Power to sign routine docs – delegated in these cases-

Issue of audit queries during audit. Issue of memorandum of cash verification &
physical verification/recording results in books
of clients.
Asking for information or issue of questionnaire. Issuing acknowledgements for records produced.
Letter forwarding draft observations/FS. Raising of bills and issuing acknowledgements for
money receipts.
Yes, I will definitely clear my CA Exams 63
CA SHANKAR LAKHWANI # Audit Made Easy
Initiating and stamping of vouchers & schedules Attending to routine matters in tax practice
prepared for audit. (Income tax Act)
Acknowledging and carrying on routine Office administration and routine work.
correspondence with clients.
-SPECIAL POINTS -

Authority delegated. Fact that not signed is not CA – reqd to disclose name-should disclose name.
defence. No reqt – sign in name of firm.

Cl 2 : Pay/agrees to pay – B/C/S in profit – except CA/partner/retired partner

Directly/indirectly LR of deceased partner

member

B/C/S – Brokerage/commission/share prof.body prescribed qual.

• Regulation 53A of CA Regulations, 1988

Related to CA – CS,CMA, lawyer, Science–engineering, AA–actuary, architect.

advocate, MBA BTech

Audit of state co-operative society- Nomenclature of office % of fees to poor article –

Audit fee to State treasury (SG) allowance – PM Not allowed

Cl 3: Accept/Agrees to accept – part of profit of prof. work from non CA.

Yes, I will definitely clear my CA Exams 64

CA SHANKAR LAKHWANI # Audit Made Easy
• Reg. 53A allowed
• Referral fees amongst members: Allowed

Cl 4: Enters into p/s India except CA in Practice

Outside India member…….

NR entitled to register as CA

Recognised – CG & Council

Reg 53B : Allowed (Reg 53A – MBA) Members can’t form multi disciplinary
partnerships till Regulators permit.
Cl 5: Secures professional business from non employee/non partner/means not open.

CA wrote letter to officer of Army canteen giving details of experience & audit fees. Guilty – Cl 5 &
6.
Cl 6:Solicits prof work-CA PIA:Circular,Ad,Personal communication,Interview,any other means

Directly/Indirectly

• Nothing construed as prohibiting-

CA from securing work from practicing CA Member from responding to tenders/enquiries

• Services -

CA with min. Fee (audit/attestation) All (land revenue computerization)

1) Advertisement and note in the press -

Not permitted – letters to possible clients. Personal canvassing/canvassing for clients of previous
employer through help of employees – not permitted.
Exceptions-
• Request another practicing CA for work.
• Advertise changes in P/s/Dissolution/change in address/telephone no. Facts, area of
distribution, number of insertions.
• Classified Ad in journal/newsletter of ICAI for sharing professional work on assignment
basis/seeking p/s/employment of accountancy nature, provided it only contains name,
address, number, fax number, email, social networking site of member. Experience &
specialisation – permissible.
2) Application for empanelment for allotment of work-
• Free to write to place name on panel. Not proper – roving enquiries. Quote fees on
enquiries.
3) Responding to tenders, advertisement and circulars-
• refer above chart.
• EMD/security deposit – allowed to pay.
• Cost sheet maintained.
4) Publication of books, articles, presentation –
• Not permissible – professional attainment.
• Permissible – Designation “Chartered Accountant” & Name of firm.

Yes, I will definitely clear my CA Exams 65

CA SHANKAR LAKHWANI # Audit Made Easy
5) Issue of greeting cards/invitation –
• Not approve greeting cards/personal invitation, indicating professional designation, status,
qualification.
• Designation “Chartered accountant” & name of firm can be used in greeting cards,
Invitation for Marriage, religious ceremony, inauguration of office, change in premises,
change in no. provided it’s sent only to clients, relatives, friends.
6) Advertisement for Silver, golden, platinum, Centenary celebrations-
• Not permitted to advertise events organised by firm but ad for silver, golden, diamond,
platinum, Centenary celebrations published in newspaper/newsletter.
7) Sponsoring activities-
• Not permitted to sponsor event but can sponsor event conducted by PoU of ICAI, provided
it has approval of CPE Directorate of ICAI.
• Members sponsoring activities related to CSR can mention their name with prefix CA but
firm name or CA logo not permitted.
8) Ad for teaching/coaching activities by members–Indirect solicitation/violative.
• Can put outside coaching premises, sign board mentioning name of Institute, contact details,
subjects. Sign board – Council guidelines.
9) Sharing firm profile with prospective client – not permitted, unless query.
10) Television/movie credits – Not differently.
11) Soliciting work by roving enquiries – Not permissible-letters,emails,circulars.
12) Seeking work from prof. Colleagues - letter to CA – pioneer in liaisoning with govt
department, expertise for getting clearance – not allowed.
13) Scope of representation-COA 2013-Not soliciting for continuance. Letter-acting
independently & willingness to continue.
14) Acceptance of original work by member emanating from client introduced to him by
another member-Not accept. Duty to ask client to come through other member.
15) Public interviews-Not publicity/professional attainments. Give response to question &
factual nature.
16) Advertisement under box number of newspaper – prohibited.
17) Educational videos-No reference to firm, contact, website.

Cl 7:

Advertise prof attainments/services uses designation other than CA on

Prof docs/visiting cards/letter heads

unless university degree (law)

Recognised by CG/Council

• Advertise through write up – allowed.

• CA prefix – allowed whether practice or not.
• Practice cannot use designation, other than chartered accountant, but not in practice and
doesn’t use the designation ‘Chartered Accountant’ may use other description.
• Merchant banker/Advisor to issue – Name & address of CA indicated under caption
“Advisor/Consultant to issue” but it shouldn’t appear prominently.
• Directors of companies, members of political parties, position in clubs-not permitted to
mention.
• CA+ CMA– Though member can’t designate himself as cost accountant, he can use letters
A.C.M.A / F.C.M.A after his name.

Yes, I will definitely clear my CA Exams 66

CA SHANKAR LAKHWANI # Audit Made Easy
• Permitted to mention membership of foreign Institute – MoU
• Improper to state on professional docs that he is income tax consultant, CMA, CS, Cost
consultant, management consultant.
• Not entitled to use designation “corporate lawyer”
• Not permitted to use initials “CPA” on visiting cards.
• CA in practice can also practice as CS/CMA. Not use designations simultaneously.
• Not use designation, “Member of Parliament”, “Municipal Councilor”
• Can mention ‘Insolvency professional’/‘Regd valuer’ on visiting card & letterhead.
• Date of setting up practice on letterhead/professional docs shouldn’t be mentioned.
Website allowed.
• CA in practice can practice as advocate – not use designation “chartered accountant” for
matters involving practice as advocate. Not use designation “Chartered Accountant” &
“Advocate” simultaneously..
• COP of Sister Institute/Bar Council – treated as in full-time practice
• Not proper to use designation “chartered accountant” except on professional docs, visiting
cards, letterhead, sign board, Cl 6. Can use prefix CA.
• Notice in press for success in exam–Name of principal, firm, town – published.
• Report & certificate – Extent & manner of publication ltd. Use letterhead to issue R&C.
• Appearance on electronic media & Internet-Can give name & describe as CA. Special
qualifications/knowledge of subject matter can be given. Firm name can be mentioned but
exaggerated claim/comparison not permissible. Not promotional.
• Organising training courses, seminars-Can invite own staff + Staff of other CA + Clients.
Prominence shouldn’t be given to name of CA in booklet.
• Writing articles/letters to press-Can give name & description “Chartered Accountant”
• Glow sign/lights on large sized boards - not permissible.
• Prospectus/public announcements with CA as directors- Cl 6 & 7. Don’t advertise
professional attainments. Expression “Chartered Accountant” is permissible. Expertise,
specialisation, knowledge not published. Directorships held in other companies can be given
but name of CA firm shouldn’t be given.
• Logo unconnected with first letter/logo of any kind - not permitted.
• QR code on visiting card allowed if it contains visiting card info.
Cl 8: Accept position as auditor w/o communicating in writing with previous auditor

• Valid reasons – change of venue, retires, dies, clash.

• Reasons for not accepting audit –
o Non-compliance of section 139 and 140 of COA 2013.
o Non-payment of undisputed audit fee other than in case of Sick Units
o Issuance of qualified report.
1 2 cases -Auditor who accepts - guilty of PM but in last case, he can accept if satisfied that
st

attitude of retiring auditor wasn’t proper. If retiring auditor had valid reasons, he should refuse
to accept.
• Previous auditor not available for accepting payment – client to purchase demand draft &
duty of incoming auditor to ensure payment.
• Objective of incoming auditor – circumstances not to accept appointment.
• Previous auditor hurt – Auditor can act after waiting for reasonable time.

Yes, I will definitely clear my CA Exams 67

CA SHANKAR LAKHWANI # Audit Made Easy
• Mere posting of letter “under certificate of posting” isn’t sufficient. Positive evidence of
delivery needed –
o Communication by letter sent through “Registered acknowledgement due “
o By hand against written acknowledgement.
o Acknowledgement of communication from retiring auditor’s email address, registered
with ICAI/last known official email address
o UDIN generated on UDIN Portal.
• Premises found locked – Deemed delivered.
• Firm not found at regd. Address – Address same as regd with ICAI on date of dispatch –
Deemed delivered unless retiring auditor proves that it wasn’t served & he wasn’t
responsible for non service.
• Joint auditor - Applicable
• Healthy practice if tax auditor communicates with statutory auditor.
• Applicable to all types of audit.
• Healthy practice if retiring auditor is not a CA.
• No communication for parallel positions. Eg SA & IA. Applies only for replacement.
• Lack of time in acceptance of audit of government co./bank-No time to wait for reply from
outgoing auditor. Conditional acceptance & commence work subject to objections from
previous auditor. Incoming auditor decides about final acceptance after taking into a/c info
from previous auditor.
Cl 9: Accept position as auditor of co. w/o ascertaining reqt complied
of Sec 139 & 140 of COA 2013

• Not sufficient to accept certificate of compliance from mgt.

• Necessary to verify records. If co. – not willing, auditor shouldn’t accept.
• Appointment of auditor for 1st time after incorporation of co.–Appointment by BoD within 30
days of registration of co.
• If BoD not appointed – Appointment by members in GM.
• If appointment to fill casual vacancy (CV) – BoD fill casual vacancy.
• If vacancy by resignation of auditor – members in GM.
• If vacancy due to removal of auditor before expiry of term – special resolution passed at GM
+ approval of CG.
• Applicable to joint auditor.
• AGM adjourned-Retiring auditor continue till adjourned meeting. New auditor assumes office
after adjourned meeting.
• AGM adjourned w/o appointing auditor – Special notice given to co. at least 14 days before
original meeting.
Board Guidelines for removal of auditors – All cases (govt + non govt)

• Auditor resigns – written communication to BoD + ICAI with reasons. It’s obligatory for
incoming auditor to obtain communication from BoD.
• Auditor willing for reappointment but not reappointed – File with ICAI statement & sent to
mgt. It’s obligatory for incoming auditor to obtain communication from co.
• ESB can call further info.
Cl 10: Charges/offer to charge for prof. employment fees based on % of profit/contingent
upon findings or results.

Exception: Reg 192 –

• Receiver/liquidator – Fees on % of realisation/disbursement of assets.

Yes, I will definitely clear my CA Exams 68

CA SHANKAR LAKHWANI # Audit Made Easy
• Auditor of cooperative Society – Fees on % of paid up capital/working capital/ gross or net
income/profit.
• Valuer for direct tax/duties – Fees on % of property valued.
• Mgt consultancy service – Fees on % basis contingent on findings/results.
• Fund raising services – Fees on % of fund raised (Getting loan sanctioned is not fundraising)
• Debt recovery services – Fees on % of debt recovered.
• Cost optimisation service - Fees on % of benefit.
• Insolvency professional, non-assurance services to non-audit clients.

Cl 11: Engages in business/occupation other than CA prof. unless permitted by Council.

Nothing disentitle CA from being director of co.(Not MD/WTD) unless he/partners is
interested in such co. as auditor.

• Reg 190A -General Resolution – No specific permission from Council:

Employment under Practicing Pvt. tutorship Authorship of books & articles

CA
Holding of life insurance Attending classes & appearing Holding of public elective office
agency license for limited for exam like MP, MLA, MLC
purpose of getting renewal
commission
Honorary office leadership of Notary Public, Justice of Part Time tutorship under
charitable, educational/non- peace, special executive coaching Org. of ICAI,
commercial org. magistrate
Valuation of paper, paper, Editorship of professional Surveyor & loss assessor
setter, head examiner, journals
moderator of exam
Recovery consultant in banking Owning agricultural land & Trading in equity/currency
sector carrying agri. activity derivatives
• Specific resolution – Specific approval of council

Employment in business concern Employment in non-business MD/WTD provided that

provided that member/relative concern member/relative don’t hold
don’t hold substantial interest substantial interest
Interest in family business Interest in educational Part Time/full Time lectureship
provided no active part institution for other than ICAI courses
Part Time/full Time tutorship Editorship of journals, other Other business
under institution other than than professional journals
coaching org. of ICAI
Receiving royalty from sale of Trading in commodity derivatives
domain name/website

• Relative – husband, wife, brother, sister, lineal ascendant/descendant.

• Substantial interest = 20%
• Director Simplicitor -Simple director, not MD/WTD. Required only in BM & not paid
remuneration except sitting fees.
• Auditor of subsidiary company can’t be director of holding company.
• No bar for member to be promoter/signatory to MOA/AOA. No bar for promoter/signatory
to be director simplicitor.
• Give evidence that interest in family business due to inheritance and not actively engaged.
Yes, I will definitely clear my CA Exams 69
CA SHANKAR LAKHWANI # Audit Made Easy
• Karta of HUF- Makes investments from funds of HUF only.
• Teaching hrs shouldn’t exceed 25 hrs a week.

PART 2 – Professional Misconduct + Service (whole time/part time/COP with employment)

Common line - CA in service deemed to be guilty of PM if he being employee of co./firm/person:

Cl 1 : Pays/agrees to pay any share in emoluments of employment

Directly/indirectly

• Doesn’t restrict sharing among relatives, dependents, friends + not for job procurement/
retainership.

Cl 2 : Accept/agrees to accept F/P/G (Fees/ profit/ gains)

from ABC2L of co. Agent By commission/gratification

Broker

Customer/CA

Lawyer

PART 3 : Professional Misconduct + General

Common Line – CA in practice/not deemed to be guilty of PM if he –

Cl 1 : Not a fellow, act as fellow of Institute.

Cl 2 :

doesn’t supply info called for doesn’t comply reqt asked for

ICC, Discipline – 3, QRB, AA

Institute, Council, Committee, Director (Discipline), Board of Discipline, Disciplinary

Committee, Quality Review Board, Appellate Authority

• Not disclosed to ICAI- proprietor of non CA Firm.

• Not disclosed that director of co. despite letters of ICAI which remained unreplied.
• Continued to Train article though name removed from membership & failed to reply to ICAI
as to how he was training.
Cl 3: Inviting prof. work another CA

Tenders/write up gives info knowing it to be

Cl 6 & 7 of Sch I Part I false

PART 4 – Other Misconduct + General

Common line – CA in practice or not deemed to be guilty of OM if he –

Cl 1: guilty – civil/criminal court- offence: imprisonment – upto 6 mth.

Yes, I will definitely clear my CA Exams 70

CA SHANKAR LAKHWANI # Audit Made Easy
Cl 2: in opinion of Council, disrepute – profession/Institute, whether/not related to prof.
work

SECOND SCHEDULE –

Part 1 – Professional Misconduct + Practice

Common line: CA in practice deemed to be guilty of PM if he –

Cl 1: Discloses info acquired in prof. eng. to anyone other than client, except

Consent of client Law

• SA 200 – Auditor respect confidentiality of info.

• Duty continues even after completion of assignment.
• Disclosure allowed if professional duty.Eg, submitting info to exchange control authority.
• In other cases, consent of client given by competent person. Eg, sole proprietor-
proprietor/attorney. P/s-Any partner. Co. – MD if BoD powers delegated & if not delegated-
BoD Resolution.
• Diff. b/w sharing of working paper & info. Info can be provided to client/regulatory body
after obtaining consent of client.
• Report to CG within 60 days – Sec 143 (12) of COA 2013: Allowed
Cl 2 : Certifies report on examination of FS in his name/firm’s name unless examined by :

Himself partner employee Another CA in practice

Cl 3 : Permits his name to be used

firm’s name

with estimate of earnings contingent on manner – belief – he vouches

future trans. for accuracy of forecast

• SAE 3400 - CA can participate in preparation of profit/financial forecast & can review
them, provided he indicates source of info, basis of forecast, assumptions in arriving at
forecast & doesn’t vouch for accuracy of forecast.

Cl 4 : Express opinion on FS of enterprise in which he/firm/partner has substantial interest

(20%)

• FS includes report & certificate.

• Not to permit employee CA to certify FS of employer/concern under same mgt. Not accept
o Auditorship of college if part time lecturer in college
o Auditorship of trust if his partner is employee/trustee of trust.
• All audit/attest functions but NA to MCS like evaluating cost of product mfd.
• Other than co. – Substantial interest
• Member/partner/relative is DEO (Director/Employee/Officer) of co.
• Member/partner have security/interest in co.,H/S/A/subsidiary of holding co.
• Relative – Security of FV upto 1 lac allowed.
• Not permissible to undertake assignment if client is relative.
• Statutory auditor not to be internal auditor.

Yes, I will definitely clear my CA Exams 71

CA SHANKAR LAKHWANI # Audit Made Easy
• Internal auditor not to be tax auditor.
• Internal auditor not to be GST auditor.
• Member shouldn’t accept audit of co. for 2 yrs from completion of tenure/resignation as
director (Cooling period of 2 yrs)
Cl 5 : Fails to disclose material fact known to him Not disclosed in FS

Disclosure necessary in FS

He is concerned with FS in prof. capacity.

• SA 320
• Co. taken loan from EPF. Not reflected in BoA. Auditor ignored info.
• No disclosure of charge against guarantee in favour of group co.
Cl 6 : Fails to report material MST known to him in FS he is concerned in prof. capacity

• Represent co. before tax authorities & false info – No PM – Cl 5 & 6.

Cl 7 : Doesn’t exercise due diligence/grossly negligent in prof. duties

• Includes non submission on due dates.

Cl 8: Fails to obtain sufficient info OR Exceptions are sufficiently

necessary to express opinion material to negate opinion

• CA issued certi of circulation of periodical w/o going into details – Cl 7 & 8

• CA didn’t state limitations/assumptions in certificate – Cl 7 & 8
• Trans. B/w firm & developers entered in books of construction co. – Cl 6,7,8
• Issue certificate for exports w/o verifying docs – Cl 2,7,8
• Year 2 – Investment in B/S 12 lac. Same amt as yr 1. Later actual Invst = 25000 but value
inflated to obtain loan -Cl 2,7,8
Cl 9 : Fails to invite attention to material departure from generally accepted procedure of
audit

• Membership no., FRN in all reports & certificates

• Failure to perform duty not excused by qualification in AR. Eg, give reasons why failed to
verify cash.
Cl 10 : Fails to keep money of client in separate bank a/c OR

Use for intended purpose within reasonable time

Except Fees/remuneration

Money meant to be expended

• Advance recd by CA = Fees = Cl 10 NA

• Money meant to be expended eg, pyt of fees, stamp paper intended to be spent within
reasonably short time not to put in separate bank a/c.
• Money meant to be expended not intended to spent in reasonably short time put in separate
bank a/c.
• Money recd by CA in his capacity as trustee, executor, liquidator put in separate bank a/c.
Part II – Professional Misconduct + General

Common line – CA in practice or not deemed to be guilty of PM if he –

Yes, I will definitely clear my CA Exams 72

CA SHANKAR LAKHWANI # Audit Made Easy
Cl 1 : Contravenes provisions Act

Regulations issued by Council

Guidelines

• Council General Guidelines, 2008

• Engagement/Registration/termination/premium from/stipend to articled assistant
• Articled assistant not to engage in any other occupation
• Complaint against employer (from articled assistant)
• CA not to engage in any other business/occupation
• Restriction on fees
• Failed to generate UDIN
• Audit of listed company without peer review certificate
• Issued certificate/report w/o COP (eg, raw material consumption)

Cl 2: Being employee of Co. discloses conf. info acquired in employment

Firm

Person

Except employer & law

• Whole time/part time employee or employee with COP

Cl 3 : Includes in info/form/return/statement particulars submitted to ICC,
D3,QRB,AA knowing to be false

• Manager of CA Firm applied for fellow stating he is partner.

• Empanelment application for bank to ICAI – Gives name of CA who isn’t partner as partner
though he became partner after date of application. (Check as on date of application)
Cl 4 : Defalcates/embezzle money recd in prof. capacity

• SA 240

Part III – Other Misconduct + General

Common line – CA in practice or not deemed to be guilty of OM if he –

Cl 1: guilty – civil/criminal court – offence: imprisonment > 6 mth.

Q16) Council General Guidelines, 2008

Chapter V - Maintenance of books of accounts

• Practicing CA – keep proper BOA – Cash book & Ledger

Chapter VI – Tax audit assignments u/s 44AB of Income Tax Act, 1961

• Practicing CA shall not accept > than 60 tax audits in FY.

• CA Firm – 60 tax audits for each partner.
• 1 CA is partner of 2 firms/sole proprietor = Together shouldn’t exceed 60.
• Audits under 44AD/44ADA/44AE not taken into a/c.
• 10 partners. 10x60=600.Distribution in any manner.

Yes, I will definitely clear my CA Exams 73

CA SHANKAR LAKHWANI # Audit Made Easy
• Applicable to joint tax audit also.
• Audit of HO & branch = 1 tax audit
• Audit of 1 or more branch = 1 tax audit
• CA being part time practicing partner of firm not taken to a/c.
Chapter VII - Appointment of auditor in case of non-payment of undisputed fees

• Practicing CA not accept appointment as auditor of entity if undisputed audit fee of

another CA not paid.
• In case of sick unit, above prohibition doesn’t apply.
• Provision for audit fee – signed by both auditor & auditee = undisputed audit fee
• Sick unit = unit regd for not less than 5 years, accumulated losses equal to or exceeding
net worth.
Chapter VIII -specified number of audit assignments

• Practicing CA shall not hold at any time >30 audit assignments.

• CA Firm = 30 tax audits for each partner
• 1 CA is partner of 2 firms/sole proprietor = Together shouldn’t exceed 30.
• Pvt /other companies with exception of OPC & dormant companies.
• Also applicable on Joint audits.
• Audit of HO & branch = 1 audit assignment
• Audit of 1 or more branches = 1 audit assignment
• Number of partners of firm on date of acceptance are taken into a/c
• CA in practice in full time/part time employment – not counted.
• Part time Practicing partner not taken to a/c.
Chapter IX – Appointment as statutory auditor

• Practicing CA not to accept statutory audit of

o Public sector undertakings/government co./listed co.
o Public company with turnover of ₹ 50 crores or more in a year
Where he accepts other work for same undertaking/co. on remuneration exceeding statutory
audit fees.
• Applies to fees for “other work” payable to statutory auditors & associate concerns put
together.
• Other work means MCS but not includes CAR–
o Certification work done by statutory auditors,
o Audit under any other statute,
o Representation before Authority .
• Associate concern means corporate body/p.s firm rendering MCS where proprietor/partner
of statutory audit firm/their relatives are directors/partners & hold substantial interest in
corporate body/partnership.
Chapter X - Appointment of auditor when he is indebted to concern

• Practicing CA /partner/relative not to accept appointment while indebted/given guarantee

/provided security for limits fixed in statute & in other cases for > ₹1,00,000/-
• COA 2013 – Indebtedness >5 lac, Guarantee & security>1 lac.
• Progressive fees – No indebtedness
Chapter XI – Directions in Case of unjustified removal of auditors

• Incoming auditor not to accept

Chapter XIV - Unique Document Identification Number (UDIN) guidelines

Yes, I will definitely clear my CA Exams 74

CA SHANKAR LAKHWANI # Audit Made Easy
• Practicing CA for all certificates, GST & tax audit reports, audit/assurance & attestation
functions.
Chapter XV – Guidelines for Networking

• Firms form larger structures & share common brand name, quality control system,
resources, common ownership/control/mgt, business strategy, profit/cost.
• Professional resources = Common system, staff, dept, audit methodology, training courses.
Forms of network -

• Network constituted as mutual entity (Network won’t carry out professional practice )
• Network constituted as partnership firm (max 20 Partners)
• Network Constituted as LLP.
• Network constituted as Company (Mgt consultancy services co.)
• Network firms consist of proprietor, partnership.
• Firm is allowed to join only one network.
• Firms having common partners shall join only one network.

• “& Affiliates” after name & not “& Co./ & Associates”
o If network is mutual entity/p.s firm – AB & Affiliates
o If network is LLP – AB Affiliates LLP
o If network is ltd. Company – AB Affiliates P.Ltd / Limited
• Institute approve/reject name of network & intimate to Network within 30 days from
receipt of Form.
• Change in constitution due to entry/exit – Network communicate to Institute within 30
days from change.
Registration of network with entities in India –

• After name of network approved, Institute reserve for 3 mth.

• Network get regd within 3 months. Failing – name cancelled.
• Registration of network with Institute is mandatory.
Listing of network with entities outside India –

• Authorised representative of Indian firm file declaration with Institute within 30 days
from entering into network.
Ethical compliance –

• If one firm = Stat auditor, associate not to accept Sec 144 services.
• Guidelines of ceiling on non audit fees –
o Firm = stat auditor: Same
o Other firms collectively: 3 times stat audit fees
• Rotation of firms – no member firm can accept.
• Follow Advertisement guidelines.
• Permitted to use words “Network Firms” on prof. stationery.
Framework of Internal Byelaws of network – Clauses on which affiliates – written agreement:

• Appointment of managing committee/Engagement partner/technical director

• Administration of network
• Contribution of membership fees to meet administration cost
• Dispute settlement by arbitration and conciliation
• Development of training materials, Software, database
• Issue of newsletters

Yes, I will definitely clear my CA Exams 75

CA SHANKAR LAKHWANI # Audit Made Easy
• Library
• Determining methodology for drawing resources/compensation for resources drawn
• Peer review of member firms.
Chapter XVI -Logo Guidelines –

• Letter ‘CA’ (in blue) with tri colour tick mark (upside down) & white background.
• ‘India’ added in logo.
• Use logo as it is. Don’t change font, spacing, dimensions, design, colours, background.
• Refrain from rotating/tilting. Don’t shrink/distort.
• Transition time - 1 year
Chapter XVII – Guidelines for Corporate Form of Practice –

• Practicing CA holds office of MD/WTD/Manager of body corporate provided body

corporate is engaged exclusively in rendering MCS.
• Member can retain full Time COP.
• No restriction on equity holding of members, either individually/along with relatives in co.
• Can do attest function & train articled assistants.
• Name of mgt consultancy co. – approved by Institute & Co. regd with Institute.
Ethical compliance –

• If CA is stat auditor of entity, then management consultancy company shouldn’t accept Sec
144 services.
• Ceiling on non audit fees is applicable wrt Mgt consultancy company.
• Mgt consultancy co. comply with Cl 6 & 7 of Part I of First Schedule.
Q17) Council Guidelines for Advertisement, 2008

Write up shall comply with following conditions-

• Honest and truthful

• No exaggerated claims
• No disparaging references
• Shouldn’t bring disrepute to profession
• Not contain testimonial/endorsement about members/name of client/fees
• Not contain info of awards (except given by CG/SG/regulatory bodies)
• Monogram not permissible
• Membership number/FRN is mandatory
• Font size not exceeding 14
• Not violative of CA Act, 1949
Website of CA Firms –

• No standard format
• “Pull” model. Not “Push” model.
• No info in website be circulated on their own/email except on pull request.
• No Circular/ad to solicit people to visit website.
• Permitted to mention website in professional stationery & email.
• Info that can be displayed on website –
o Member/firm name
o Year of establishment
o Address, telephone number, fax number, email ID
o Nature of services (specific pull request)
o Partners’/Employees’ details (Area of experience on pull request)
o Job vacancies for CA & articles
Yes, I will definitely clear my CA Exams 76
CA SHANKAR LAKHWANI # Audit Made Easy
o No. Of articled assistants (pull request)
o Nature of assignment (pull request). Name of client & fee can’t be given but
Permissible if reqd by regulator-only to extent of reqt. Mention on website below disclosure that
“This disclosure is in terms of reqt of regulator having jurisdiction in”
• Passport photo allowed. Framed photo not allowed.
• Articles, educational videos are permissible.
• Chat rooms for CA & b/w firms & client permitted but confidentiality ensured. Document
mgt facility to client to access docs.
• Link of page on social networking site. Member shouldn’t solicit to visit/like.
• Online advice to client on request (free/paid)
• Secrecy of client data ensured
• No ad
• Befitting CA profession
• Link to website of ICAI, its regional council, branches & govt website.
• Website address as near as possible to firm name.
• Website should mention info, not at material variance from ICAI’s records.
Online third party platforms –

• No other service besides consultancy & advice. Contact address/prof. achievements/name

of firm not provided. Just statement that they are CA.
Publication of firm name in telephone/other directory –

• Entry shouldn’t appear in other section, except that of CA.

• Firm should belong to city in respect of which directory is being published.
• Order of entries – alphabetical
• Entry shouldn’t be made in prominent manner
• Entry – open to all CA
• Trade/social directory is also allowed
Application based service provider aggregator - Not permissible

Specialised directories for limited circulation-

• Entries alphabetically. Can mention directorships. Not mention client names.

Exemptions –

Press ad provided that ad isn’t prominent –

• Ad for recruiting staff/article in member’s own office.

o Avoid “well known firm”. No mention that services are superior to others.
• Ad for client requiring staff/wishing to acquire or dispose business/property.
• Ad for sale of business/property by member acting in prof. capacity as trustee, liquidator,
receiver.

Q18) Recommended Self – Regulatory Measures

Branch audit Branch audit of co. shouldn’t be conducted by stat auditors having 10
or more members but should be conducted by local CA firm having less
than 10 members. This restriction is NA –
• A/cing records of branches maintained at HO of co.
• Significant operations of co. are carried out at branch.
Joint audit Large co. – CA firm with less than 5 members

Yes, I will definitely clear my CA Exams 77

CA SHANKAR LAKHWANI # Audit Made Easy
Ratio b/w qualified & Atleast 1 member for 5 unqualified members of staff, excluding
unqualified staff articled & audit assistant, typist, peon, other persons not engaged
directly in prof. work
Disclosure of interest by Disclosure of payment received for other services through medium of
auditors in other firms different firm.
Recommended min. Scale For non-public interest entities (PIE) -Disclosure needed where for 2
of fees consecutive years, gross annual prof. fees from audit Client is more
than 40% of total fees of firm.

For public interest entities – Disclosure needed where for 2

consecutive years, gross annual prof. fees from audit client is more
than 20% of total fees of firm.

Exemption –
• total fees received by firm doesn’t exceed ₹20 lac.

• Audit of govt co., public undertakings, nationalised banks, public

financial institutions, regulators or where appointments of
auditors are made by govt.
-Excessive/low fees - Not misconduct

Q19) Recent decisions of ethical standards Board.

1. Not permissible for practicing CA being stat auditor to prepare BRSR study to audit clients
but can provide advisory services on same. Permissible to be “assurance provider of BRSR
core” for same client.
2. Stat auditor not permitted to engage in compilation eng (SRS 4410).
3. Permissible for practicing CA – Services assessment/performance audit of centres of skill
development council of Govt of India (MCS).
4. Permissible for practicing CA to accept Mystery audit.
5. Permissible for practicing CA to mention position as promoter/director on portal of co but
can’t mention prof. attainment/name of firm – No violation of Cl 6 & 7 Part I First Sch.
6. Permissible for practicing CA to become prof. director in Board of mgt of Co-operative
bank.
7. Permissible for CA to set up practice in IFSC/GIFT city.
8. Permissible for CA to render prof. service to IFSC units from offices o/s IFSC.
9. Not permitted to publish vision/mission statement on letterhead/visiting card/stationery.
It may be printed on firm profile & provided on request.
10. Not permissible for CA being stat auditor of bank to accept ASM of customer of same
bank simultaneously. He can accept either of assignments at one time.
11. Practicing CA can’t become internal auditor & procurement officer simultaneously.
12. Permissible for practicing CA to charge fee on % of utilization amt of education institute
to certify amt (utilization) spent by institute out of grant.
13. Practicing CA can be non-executive/independent director in cooperative bank provided he
isn’t involved in daily activity of org., nor he/partner are auditor.
14. Permissible for practicing CA to become member of ‘Board of Mgt’ in primary (urban)
cooperative bank. Role similar to Director simplicitor.
15. Practicing CA can’t act as trademark/patent attorney. But prof. advice wrt intellectual
property rights (IPR) is permissible.

Yes, I will definitely clear my CA Exams 78

CA SHANKAR LAKHWANI # Audit Made Easy
16. Not permissible to accept stat audit of society where immediate family member
(spouse/dependent) hold honorary position of managing committee of institute governed by
Society.
17. CA firm can register on Udyog Aadhar.
18. No prohibition for internal auditor of co. to purchase shares of co.
19. Not permissible for CA to send messages to make people aware of practice.
20. Practicing CA being director simplicitor in a co. can’t sign ROC forms of co.
21. Practicing CA can act as authorised representative of foreign co. provided he is not auditor
of the said co.
22. Permissible for practising CAs collectively to have joint training session on GST & share
fees.
23. Practicing CA can provide services through kiosk – only prof. activities.
24. CA in service can take e-return registration but can’t certify return.
25. If Practicing CA is non-executive director in a co., he shouldn’t accept appointment as stat
auditor of co., which is JV of original co.
26. Practicing CA may be equity research advisor but can’t publish retail report as it amounts
to other business.
27. Member of trust can’t become its auditor.
28. Practicing CA engage himself as registration authority (RA) to obtain digital sign for client.
29. CA can hold credit card of bank when he is auditor of bank, provided o/s balance doesn’t
exceed ₹1 lakh.
30. Practicing CA can act as mediator/arbitrator.
31. Practicing CA not permitted to accept audit of bank in which he has taken loan against FD.
32. Practicing CA can’t become financial advisor & receive fees/commission from financial
institutions like mutual funds, insurance, companies, NBFC.
33. CA can’t exercise lien over client docs for non payment of fee.
34. Not permissible to print vision & values behind visiting cards – solicitation as per Clause 6
of Part I of First Schedule.
35. Not permissible for practicing CA to take agencies of UTI, GIC, NSDL.
36. Can become settlor of trust.
37. Can’t hold Customs Brokers Licence.
38. CA in service can appear as tax representative on behalf of employer, not on behalf of
other employees of employer.
39. CA who is stat auditor of bank can’t accept stock/inspection audit of any branch of same
bank/sister concern of bank.
40. CA firm – internal auditor of PF trust can’t be appointed as a stat auditor.
41. Concurrent auditor of bank X can’t be appointed as stat auditor of bank Y, sponsored by
X.
42. CA can act as internal auditor of co. & stat auditor of EPF.
43. Director – COA 2013 – Reside in India for min 182 days (director simplicitor).
44. Law (Income tax) prohibits: stat/tax auditor can’t be valuer of unquoted eq shares of same
entity. If law doesn’t prohibit: Permissible.

Yes, I will definitely clear my CA Exams 79

CA SHANKAR LAKHWANI # Audit Made Easy
Q20) Disciplinary procedure

Disciplinary Directorate (DD) received against CA – complaint + fee

GUILTY

1st Schedule 2nd Schedule / Both

Board of Discipline Disciplinary Committee

Guilty Non guilty Guilty Non guilty

Reprimand Matter close Reprimand Matter close

Remove name upto 3 months Remove name permanently

Fine upto 1 lakh Fine upto 5 lakh

NON GUILTY – Board of Discipline

Accept Reject

Matter close

Advice DD for investigation Proceed (1st sch) Refer to DC

(2nd Sch/both)

• Member/Director (Discipline) aggrieved by Board/DC order

Appeal to Appellate Authority within 90 days

Yes, I will definitely clear my CA Exams 80