CA FINAL AUDIT AMENDMENTS - VPJ · PDF fileca final audit amendments a compilation of...

CA FINAL AUDIT AMENDMENTS A COMPILATION OF AMENDMENTS APLLICABLE FROM NOV 2013 & NOV 2012 EXAMS ONWARDS AND THESE ARE APPLICABLE FOR MAY 2014 ALSO (THERE ARE NO NEW AMENDMENTS FOR MAY 2014)

CA FINAL ADVACED AUDITING By….

CA VINOD PARAKH JAIN

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Complied by: CA Vinod Parakh Jain: Classes at: VPJ Classes Hindi Bhawan (ITO) Delhi. Cnct :07503630594, 8130713615. website: www. vpjclasses.com

Dear Friends,

The study material of the ICAI is like a BIBLE running into 1100 Pages. We have tried to

cover comprehensively all the Topics .This book is not a substitute for study Material. This

book has been prepared to provide students a tool for systematic revision.

The salient features of the book are:

Questions and Answers from Practice Manual, Latest Revision Test Papers have been Incorporated in the Module.

Covering More then 100 Questions in Case of Professional Ethics, and 100 Questions in case of Engagement Standards.

Incorporation of FLOWCHARTS at appropriate place Tabular Presentation Coverage of Bank Audit as per Latest RBI Guidelines

The reason for Low score in Audit Subject is lack of coverage of all the topics by students,

we have tried to contain the same by covering all the topics of Study Module

comprehensively

I look forward for your valuable suggestions and criticism, if any.

Thanks and Warm Regards,

CA Vinod Parakh Jain

(vpjclasses.com)

WE HAVE COMPREHENSIVELY COVERED ICAI MODULE CONSISTING OF

MORE THAN 1100 PAGES

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Dear Students,

ICAI revised it’s Module in Jan 2012 and Jan 2013 and introduced number of New Topics which

we updated in our Material and we were very happy to find that two questions were asked from our

updated material in Nov 2013 exams .

Further we found that students were not reading some major topics which were revised in ICAI Module.

So we have incorporated the same also in our Revised Material.

The Audit Paper will now become More Typical. As all of you Know in the current Companies

Act- Auditing Standards have become Mandatory and audit subject will become more dynamic

as in the New Companies Act - the words" as may be Prescribed " is coming in almost 75% of the

Provisions which will lead to Radical Changes in the Audit Subject. Further NFRA coming into

Picture makes our audit Subject more dynamic.

Happy Reading

ALL THESE WERE APPLICABLE FOR NOV 2013 AND NOV 2012

EXAMS & ONWARD

ALL THESE AMENDMENTS ARE BASED ON AUDIT MODULE ISSUED

BY ICAI IN JAN 2013

These Updates can be downloaded at our facebook page – vpj

classes or our site vpjclasses.com

Lot of queries are being recd. W.r.t. Audit Updates. There are no such Updates. Panic is being created via showing very OLD UPDATES as Amendments. Further to create more tensions for the students these amendment (so claimed) are hardly of 8-10 pages have been jumbled up in a 50 page documents to create more confusions. Students are trying to search where the amendments are. In this Process some of the real amendments have been missed - which were applicable for Nov 2013 & Nov 2012 exams.

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TWO QUESTIONS FROM OUR UPDATED MODULE

FOUND PLACE IN EXAMS OF NOV 2013 WHEREAS

OTHERS ARE UPDATING NOW

ICAI SUGGESTED ANSWERS

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What the Answers Should have been (Updated on our Facebook page - Vpj

classes on September 11 2013). COVERED ONLY BY US

What the Student Wrote

because of reading wrong

Material

The Peer Review process shall apply to all the

assurance services provided by a Practice Unit.

1. Once a Practice Unit is selected for Review, its assurance engagement records pertaining to the Peer Review Period shall be subjected to Review. 2. The Review shall cover: (i) Compliance with Technical, Professional and Ethical Standards: (ii) Quality of reporting. (iii) Systems and procedures for carrying out assurance services. (iv) Training programmes for staff (including articled and audit assistants) concerned with assurance functions, including availability of appropriate infrastructure. (v) Compliance with directions and / or guidelines issued by the Council to the Members, including Fees to be charged, Number of audits undertaken, register for Assurance Engagements conducted during the year and such other related records. (vi) Compliance with directions and / or guidelines issued by the Council in relating to article assistants and / or audit assistants, including attendance register, work diaries, stipend payments, and such other related records.

The peer review process is directed at the attestation services of a practice unit: (1) Once a practice unit is selected for review, its attestation engagement records pertaining to the immediately preceding three completed financial years shall be subjected to review. (2) The Review shall focus on: (i) Compliance with Technical Standards (ii) Compliance with Ethical Standards. (iii) Compliance with Professional Standards. (iv) Quality of Reporting. (v) Office systems and procedures with regard to compliance of attestation services systems and procedures. (vi) Training Programs for staff (including Articled and Audit Assistants concerned with attestation functions, including appropriate infrastructure.

Question 3(d) on Professional Ethics in Nov 2013 Exams.

Similar Questions in Our Amendment

Module issued September 11 2013

C.A. Prabhu, is a leading income tax practitioner and consultant for derivative products. He resides in Mumbai near to the ABC commodity stock exchange and does trading in commodity derivatives. Every day, he invests nearly 50% of his time to settle the commodity transactions. Is C.A. Prabhu liable for professional misconduct ? (4 Marks)

Similar Question was there in our Amendment Module based on New Questions inserted on PE in Jan 2013 Module Edition issued by ICAI applicable for Nov 2013 Exams.

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WE WERE THE ONLY ONE WHO GAVE THESE AMENDMENTS ON

September 10 2013 APPLICABLE FOR NOV 2013 EXAMS Link…. https://skydrive.live.com/view.aspx?resid=636C986018151808%21108&cid=636c986018151808&app=WordPdf&wdo=2&authkey=%21ANTgcdrxf44Oar0

SIMILARLY WE WERE THE ONLY ONE WHO GAVE UPDATES IN FEB. 2012 WHICHWERE APPLICABLE FOR NOV 2012 EXAMS – Link…. UPLOADED ON CACLUB ON http://www.caclubindia.com/forum/ca-final-amendment-for-may-2012-by-ca-vinod-parakh-jain-sir-192751.asp#.UzcIXaiSw0I

SOME OF THESE TOPICS HAVE STILL NOT BEEN UPDATED IN MANY BOOKS. BECAUSE OF THESE NO/LATE UPDATES, MANY STUDENTS WOULD HAVE LOST MARKS AND MAY BE LOST THEIR ATTEMPT, THOSE WHO WERE ON BORDERLINE BY READING OUTDATED MATERIAL.

CONNECT WITH US FOR LATEST UPDATE ON IDT AND AUDIT………..

Connect with us at the Following Face book Page: vpj classes or our site vpjclasses.com

http://www.caclubindia.com/forum/ca-final-amendment-for-may-2012-by-ca-vinod-parakh-jain-sir-192751.asp#.UzcIXaiSw0I

http://www.caclubindia.com/forum/ca-final-amendment-for-may-2012-by-ca-vinod-parakh-jain-sir-192751.asp#.UzcIXaiSw0I

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AUDIT GENERALLY CONSIDERED AS A LOW SCORING SUBJECT, EVEN RANK HOLDERS NOT BEING ABLE TO SCORE……….., Our Students are Scoring More than the Rank Holders in The Audit Subject. Around 60% of Our Students are scoring more than 55% Marks in Audit Subject.

Mark Sheet of Our Student- TOP Bhadur Shahi

THE INSTITUTE OF CHARTERED ACCOUNTANTS OF INDIA Examination Results May 2012

Final Examination Results

ROLL Number 122250

FINANCIAL REPORTING 62

STRATEGIC FINANCIAL MANAGEMENT 46

ADVANCED AUDITING AND FINANCIAL MANAGEMENT 64 CORPORATE AND ALLIED LAWS 57

MAY 2012- 2nd Rank Holder’s Marksheet THE INSTITUTE OF CHARTERED ACCOUNTANTS OF INDIA

Examination Results May 2012


ROLL Number 111935 FINANCIAL REPORTING 66



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Mark Sheet of Our Student- Kamal Sharma

THE INSTITUTE OF CHARTERED ACCOUNTANTS OF INDIA Examination Results Nov 2012


ROLL Number 120668

FINANCIAL REPORTING 051 STRATEGIC FINANCIAL MANAGEMENT 063


NOV 2012 – 1st Rank Holder’s Marksheet THE INSTITUTE OF CHARTERED ACCOUNTANTS OF INDIA

Examination Results Nov 2012


ROLL Number 111935




Most of the Student know the answer , but do not know how to write , we help the student to realize their Potential by conducting such sessions When We started our Journey, It was a great challenge for us to Initially to Prove that Audit Subject can be completed in such a short span of 22 classes and not being a CRASH COURSE and subject to 100% Satisfaction. And the UTMOST delivering Results. We at VPJ classes have proved the same in such a short span of Time.

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Where the result was just 3% in Nov. 2013. Our No. of Students became CA in this tough time.

A big congratulation to have prefix CA with their names

Jivesh Rahul Dason Arpit Narayan kadel Rishabh And Many More……………………….

Mark Sheet of Our Student- Shreyans Jain

THE INSTITUTE OF CHARTERED ACCOUNTANTS OF INDIA Examination Results Nov 2013


ROLL Number 16649

FINANCIAL REPORTING 049 STRATEGIC FINANCIAL MANAGEMENT 061


Nov 2013 -1st Rank Holder’s Marksheet THE INSTITUTE OF CHARTERED ACCOUNTANTS OF INDIA

Examination Results Nov 2013

Final Examination Results ROLL Number 111935




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FOR MAY 2014/NOV 2014

Batch Start Days Timing Fees

Date to be Announced – Starting from Mid May

Regular Batch 6:45 -10:30 AM 5,500

By

CA Vinod Parakh Jain {ACA, DISA, CVO, B.COM (H)

8 Years Practical Experience across leading MNC’s Key Features: Questions of RTP, Suggested Answers & Practice Manual are practiced in the class

Simple and effective way of teaching through concept building, class-room practice,

home-exercise and power point presentation.

Industry Relevant examples to explain SA ,SRE,SAE, SRS etc.

ONE TO ONE ATTENTION. HANDLING OF QUERIES IN THE CLASS ITSELF Short revisionary notes for quick revision Concept explained via Flow chart at appropriate places

LIVE BACK UP OF CLASSES

NOTE: Entire syllabus will be covered via 2 Modules

CLASSES AT ITO- HINDI BHAWAN. Log on to vpjclasses.com; Facebook Page-vpj classes For details contact: 7503630594, 8130713615

With 350+ Questions covered in Class Itself. 100% COVERAGE. NOT A FAST TRACK COURSE

Cover Your Entire Audit in JUST 70 Hours with our Expert Guidance and save AT LEAST 240+ Hours of Self Study with One’s Own Limitations

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PEER REVIEW

OBJECTIVES OF PEER REVIEW

Earlier Amended

The main objectives of peer review are as discussed below: (i) To ensure that members while performing

attestation services comply with technical standards, Ethical Standards and Professional Standards laid down by the Institute;

(ii) To ensure that such a member has in place proper system (including documentation system) for maintaining the quality of attestation services performed by him;

(iii) To ensure adherence to various statutory and other regulatory requirements; and

(iv) To enhance the reliance placed by the users of financial statements for economic decision making.

The main objective of Peer Review is to ensure that in carrying out the assurance service assignments, the members of the Institute a) comply with Technical, Professional and

Ethical Standards as applicable including other regulatory requirements thereto and

b) have in place proper systems including documentation thereof, to amply demonstrate the quality of the assurance services.

Topic 21.2- of Study Material (Page-21.1) Updated in SM in Year Jan 2013

Link:

http://220.227.161.86/19377sm_aape_finalnew_cp21.pdf

SCOPE OF PEER REVIEW

EARLIER AMENDED

The peer review process is directed at the attestation services of a practice unit: (1) Once a practice unit is selected for review, its attestation engagement records pertaining to the immediately preceding three completed financial years shall be subjected to review. (2) The Review shall focus on:

(i) Compliance with Technical Standards

(ii) Compliance with Ethical Standards. (iii) Compliance with Professional

Standards. (iv) Quality of Reporting. (v) Office systems and procedures with

regard to compliance of attestation

The Peer Review process shall apply to all the assurance services provided by a Practice Unit. 1. Once a Practice Unit is selected for Review, its assurance engagement records pertaining to the Peer Review Period shall be subjected to Review. 2. The Review shall cover: (i) Compliance with Technical, Professional and Ethical

Standards: (ii) Quality of reporting. (iii) Systems and procedures for carrying out assurance services. (iv) Training programmes for staff (including articled and audit

assistants) concerned with assurance functions, including availability of appropriate infrastructure.

(v) Compliance with directions and / or guidelines issued by the Council to the Members, including Fees to be charged, Number of audits undertaken, register for Assurance

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services systems and procedures. (vi) Training Programs for staff

(including Articled and Audit Assistants) concerned with attestation functions, including appropriate infrastructure.

Engagements conducted during the year and such other related records.

(vi) Compliance with directions and / or guidelines issued by the Council in relating to article assistants and / or audit assistants, including attendance register, work diaries, stipend payments, and such other related records.

Note: A Practice Unit means members in practice, whether practicing individually or a firm of Chartered Accountants.

Technical, Professional and Ethical Standards – means Assurance services shall not include:

(i) Accounting Standards (ii) Standards issued by ICAI including (a) Engagement standards (b) Statements (c) Guidance notes (d) Standards on Internal Audit (e) Statements on Quality Control (f) Notifications / Directions / Announcements / Guidelines / Pronouncements / Professional standards (iii) Framework for the Preparation and presentation of FS, framework of statements and SA’s, SAE’s. SQC and Guidance Notes and framework for assurance engagements; (iv) Provisions of the various relevant statutes and / or regulations applicable in the specific engagements

(i) Management Consultancy Engagements; (ii) Representation before various Authorities; (iii) Preparing tax returns or advising clients in taxation matters; (iv)Compilation of financial statements; (v) Assist the client in preparing, compiling or collating information other than financial statements; (vi) Testifying as an expert witness; (vii) Providing expert opinion on the basis of facts (viii) Engagement for Due diligence

Note: The phrase 'Assurance Services' is used interchangeably with Audit Services, Attestation Functions, and Audit Functions.


Link:


Applicability (New Norms)

Practice Units subject to Review 1. Every Practice Unit, based on their category as determined below will be subject to Peer Review in

accordance with this statement.

Level 1 Level II Level III

Periodicity of Review- Once in 3 years. Periodicity of Review- – Once in 4 years

Periodicity of Review- Once in 5 Years

A Practice Unit which has undertaken any of the under-mentioned assurance services in the period under review:

(i) A Practice Unit which has undertaken any of the under-mentioned

Any other Practice Unit providing

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(i) Central Statutory Audit of Public Sector Banks, Private Sector Banks, Foreign Banks, Cooperative Banks and Public Financial Institutions;

(ii) Central Statutory Audit of Central or State Public Sector Undertakings and Central Cooperative Societies based on criteria such as turnover or paid up capital etc. as may be decided by the Board;

(iii) Central Statutory Audit of Insurance Companies; (iv) Statutory Audit of asset management companies

or mutual funds; (v) Statutory Audit of enterprises whose equity or

debt securities are listed in India or abroad; (vi) Statutory Audit of Entities which have raised funds

from public or banks or financial institutions of over Rupees Fifty Crores during the period under Review;

(vii) Statutory Audit of Entities which have raised donations and / or contributions over Rupees Fifty Crores during the period under Review;

(viii) Statutory Audit of entities having Net Worth of more than Rupees Five Hundred Crores at any time during the period under Review;

(ix) Statutory Audit of entities which have been funded by Central and / or State Government(s) schemes of over Rupees Fifty Cores during the period under Review.

assurance services in the period under review:

(ii) Statutory / Internal / / Concurrent / Systems / Tax audit and / or Departmental Review of Branches / Offices of

(iii) Public Sector or Private Sector and / or Foreign Banks;

(iv) Insurance Companies; (v) Co-operative Banks

(vi) Statutory Audit of Regional Rural Banks,

(vii) Statutory Audit of Non – Banking Financial Companies (NBFCs)

(viii) Statutory Audit of entities having Net Worth of over Rs. Five Crores or an annual turnover of more than Rs. Fifty Crores during the period under Review.;

assurance services not covered in Level I and Level II here in above.

2. Any Practice Unit not selected for Peer Review, may suo moto apply to the Board for the conduct of

its Peer Review. The Board shall act upon the same within 30 days from the date of receipt of such request.

3. An Auditee (Client) may request the Board for the conduct of Peer Review of its auditor (Practice Unit). The Board shall act upon the same within 30 days from the date of receipt of such request.


Link:


Eligibility of Reviewer

EARLIER AMENDED

A Peer Review shall - a) a member of ICAI; b) possessing at least 10

years experience of audit; and

c) currently active in the

practice of attestation service engagements; and

d) be free from any obligation or conflict or

A Peer Review shall -

a) Be a member with at least 10 years of experience in practice;

b) Is in Practice as per the Chartered Accountants Act, 1949.

c) Should have undergone the requisite training as prescribed by the Board.

d) Should furnish a declaration as prescribed by the Board, at the time of acceptance of Peer Review appointment.

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interest in the reviewed firm or its partners or personnel.

e) Should have signed the Declaration of Confidentiality as prescribed by the Board.

f) Should have conducted audit of Level I Entities for at least 7 years to be eligible for conducting Peer Review of Level I Entities as referred to in Para II of this Statement.

For being a Reviewer a member should not have: -

a) Disciplinary action / proceedings pending against him b) been found guilty by the Council or the Disciplinary Board

or Committee at any time. c) been convicted by a Competent Court whether within or

outside India, of an offence involving moral turpitude and punishable with transportation or imprisonment.

d) any Obligation or conflict of interest in the Practice Unit or its Partners / Personnel.

A Reviewer shall not accept any professional assignment from the Practice

Unit for a period two years from the date of appointment.

Topic 21.5.1- of Study Material (Page-21.5) Updated in SM in Year Jan 2013

Link:


Peer Review Process (THIS PROCESS HAVE BEEN TOTALLY BEEN REVISED )

Process of Peer Review

Stage I – Planning Stage II - Execution Stage Stage III - Reporting stage in

Peer Review

1. Empanelment of Reviewers

The reviewer should be

member of ICAI having at least

10 years audit experience

(cumulative) & currently in

practice

2. Selection of PU

PUs is selected for Peer review on

a random basis as per

applicability.

3. Intimation to Practice Unit (PU)

PU is informed in writing of its

selection for peer review along

with a panel of 3 reviewers & a

copy of questionnaire.

4. Initial communication by PU

PU shall intimate its choice of

1. Initial Meeting

An initial meeting shall be held

between the reviewer and the

practice unit to confirm the accuracy

of responses to the questionnaire.

2. Compliance Review

The reviewers expected to carry out

the compliance review of the key

controls- independence, maintenance

of professional skills and standards,

consultation, staff selection &

supervision and office administration

to gain an understanding of the

working of the PU and specific control

procedures existing at the PU.

3. Selection of Attestation Service

Engagements It depend upon:

Number of practicing members

1.Preliminary Report of Reviewer

At the end of review a preliminary report is sent to the PU (before making any report to the Board) in case systems and procedures of the PU are found to be deficient or where noncompliance has been noticed.

The report does not contain name of any individual of the PU.

No preliminary report is required in case no deficiencies/ noncompliance are noticed.

The report is addressed to the PU. The report should also contain a

paragraph that discusses the scope of the review performed.

If the reviewer draws a conclusion that there existed a limitation on scope of review, the fact, along with such limitation on the scope of the

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reviewer to Board within 15 days

from receipt of information.

Within 1 Month of receipt of

intimation, PU should send

completed questionnaire along

with

complete list of client

5. Selection of sample Attestation

service Engagement

should be done by Reviewer on

Random basis.

6. Communication of Sample

selection

Reviewer sends a written

intimation to the PU about the

sample selected by him 2 weeks

in advance from the date the

reviewer intends to begin review.

7. Confirmation of Visit

Reviewer in consultation with PU

fix the dates for on site review to

complete the peer review

process in the four months of

receipt of initial intimation to PU.

involved, Degree of reliance to be placed on

general controls and the total number of engagements undertaken by the PU during the period under review.

4. Review of Records - Compliance and

Substantive Approach

The reviewer would conduct compliance procedures to gain evidence that those general controls on which he intends to rely upon, actually exists and functioning effectively throughout the period of reliance.

Based on the results of compliance procedures, the reviewer concludes either to rely or not to rely on the general controls.

In case he decides to rely on the general controls, he would also determine the extent of reliance to be placed on such controls.

In such case, the NTE of substantive procedures would be normally less extensive and vice-versa.

The substantive approach involves application of such review procedures that provide the reviewer with the evidence as to the appropriateness of the factors on which the review is required to be focused on.

review, should also be communicated to the PU.

The report on his letterhead. It should be dated, signed by reviewer and must have membership number and reviewer's code number allotted by the Board.

2. Reply to Preliminary Report

The PU has to send its representations,

in writing, to the reviewer within 21 days

from the receipt of the preliminary

report.

3. Interim Report of the Reviewer

If the reviewer is not satisfied with the

reply of the PU, then he has to submit an

interim report to the Board.

Then Board may then give

recommendations to the PU and instruct

the reviewer to carry out a further

review after minimum six months to

verify whether systems and procedures

have been modified appropriately

4. Final Report of the Reviewer

The reviewer shall submit his final report

to the Board. The final report should

incorporate the findings as discussed

with the PU

NEW PROCEDURE

Peer Review Process

The Peer Review process will include 1. Selection of Practice Unit and appointment of Reviewer, 2. Planning 3. Execution and 4. Reporting. 1 Selection of Practice Unit & appointment of Reviewer : a) Notification to the Practice Unit: A Practice Unit which has been selected for a Peer Review shall be

notified by the Board. b) Name of three Reviewers shall be recommended by the Board to the Practice Unit so selected. c) The Practice Unit shall select one out of the three Reviewers & intimate to the Board within seven

days of receipt of the names. d) The Board shall intimate the Reviewer so selected and seek his consent within seven days. 2 Planning : (i) Information to be furnished by Practice Unit On intimation by the Board, of the Reviewer’s consent, the Practice Unit shall within 15 days furnish the following information to the Reviewer:

Duly filled-in Questionnaire sent by the Board.

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Complete list of assurance service clients indicating the nature of service provided and the fees charged for the period under Review.

A note on the policies and procedures adopted by the Practice Unit in relation to Independence, Staff Supervision and Development, ‘Second Person’ Review and the process generally followed in carrying out

assurance services.

Details of any proceedings against the Practice Unit or any of its partners or qualified assistants taken by any regulatory, monitoring or enforcement bodies relating to investigation or allegation of deficiency in the conduct of Attest function by them during the period of three years preceding the period of Review or at any time thereafter i.e. till the date of submission of the duly filled-in Questionnaire.

(ii) Selection of Sample by the Reviewer:

a) The Reviewer shall within 15 days of receiving the information from the Practice Unit select a sample of the assurance services that he would like to Review and intimate the same to the Practice Unit.

b) The Reviewer may also seek further / additional clarification from the Practice Unit on the information furnished / not furnished.

c) The Reviewer shall plan for an on–site Review visit or initial meeting in consultation with the Practice Unit. The Reviewer shall give the Practice Unit at least fifteen days time to keep ready the necessary records of the selected assurance services.

d) The Reviewer and Practice Unit shall mutually cooperate and ensure that the entire Review process is completed within 90 days from the date of notifying the Practice Unit about its selection for Review.

3 Execution (i) Peer Review visits will be conducted at the Practice Unit's head office or /and branch(es) or any

other locations. This on-site Review should not extend beyond seven working days. (ii) Compliance Review-General Controls

a) The Reviewer is required to carry out a compliance Review of the following General Controls for evaluating the degree of reliance to be placed upon them for effective Review:

Independence

Maintenance of Professional Skills and Standards

Outside Consultation

Staff recruitment, Supervision and Development

Office Administration (iii) Selection of Assurance Service Engagements for Review

a) The number of assurance service engagements to be Reviewed shall depend upon:

Standard of quality controls generally prevailing;

The size and nature of assurance service engagements undertaken by the Practice Unit.

The methodology generally adopted by the Practice Unit in providing assurance services.

The number of partners / members involved in assurance service engagements in the Practice Unit;

The number of locations / branch offices of the practice Unit;

The Fees charged / received / service tax paid by the Practice unit.

b) From the initial sample selected at the planning stage, the Reviewer, in consultation with the Practice Unit, may reduce or enlarge the initial sample size of assurance service engagements for Review.

(iv) Review of Records The Reviewer is required to adopt a combination of compliance approach and substantive approach in the Review process.

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a) Compliance Approach – Assurance Service Engagements The compliance approach is to assess whether proper control procedures have been established / followed by the Practice Unit to ensure that assurance services are being performed in accordance with Technical, Professional and Ethical Standards. The following areas shall be considered:

Assurance services records for Administration

Review and Evaluation of System of Internal controls

Substantive Tests

Financial Statements Presentation and

Assurance Services Conclusions

Assurance Services Reporting

b) Substantive Approach - Assurance Service Engagements This approach requires a Review of the assurance working papers in order to establish the extent of compliance, whether the assurance work has been carried out as per the Technical, Ethical, and Professional Standards.

4 Reporting The Peer Review Report should state that the system of quality control for the assurance services of the Practice Unit for the period under Review has been designed so as to carry out the assurance services in a manner that ensures compliance with Technical, Professional and Ethical standards. The Peer Review Report shall address his report of compliance or otherwise on the following areas of controls: a) Independence b) Maintenance of Professional skills and standards. c) Outside Consultation d) Staff recruitment, Supervision and Development. e) Office Administration.

(i) Discussion/Communication of Findings a) After completing the on-site Review, the Reviewer, before making his Report to the Board, shall

communicate his findings in the Preliminary Report to the Practice Unit if in his opinion, the systems and procedures are deficient or non-compliant with reference to any matter that has been noticed by him or if there are other matters where he wants to seek clarification.

b) The Practice Unit shall within 15 days after the date of receipt of the findings, make any submissions or representations, in writing to the Reviewer. (i.e Response to the Preliminary Report).

(ii) Peer Review Report of Reviewer a) At the end of an on-site Review if the Reviewer is satisfied with the reply received from the

Practice Unit, he shall submit a Peer Review Report to the Board along with his initial findings, response by the Practice Unit and the manner in which the responses have been dealt with. A copy of the report shall also be forwarded to the Practice Unit.

b) In case the Reviewer is of the opinion that the response by the Practice Unit is not satisfactory, the Reviewer shall accordingly submit a modified Report to the Board incorporating his reasons for the same. The Reviewer shall also submit initial findings (i.e Preliminary Report), response by the Practice Unit (Response to Preliminary Report) and the manner in which the responses have been dealt with. A copy of the report shall also be forwarded to the Practice Unit.

c) In case of a modified report, The Board shall order for a “Follow On” Review after a period of one year from the date of issue of report as mentioned in (b) above. If the Board so decides, the period of one year may be reduced but shall not be less than six months from the date of issue of the report.

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Link:


Procedures of Reviewer- THIS TOPIC HAVE BEEN DELETED IN ICAI MODULE

Procedures of Reviewer

Off Site Procedures

The reviewer would start his review procedures as soon as the PU’s response to the questionnaire is received by him. He should examine PU response so as to:

Determine initial sample of the clients to whom attestation services have been rendered.

Obtain a basic understanding of quality control policies and procedures of the PU.

Develop an appropriate plan to conduct review in an effective, efficient and timely manner

On Site Procedures

To have a Initial Meeting with PU. Evaluation of PU’s policies and procedures: Compliance & Substantive Testing

Compliance Review Procedures

In this the reviewer should consider General Controls which comprises of five controls

Does the PU have

a policy to ensure independence, objectivity and integrity, on the part of partners and staff? Who is responsible for this policy?

Does the PU communicate these policies and the expected standards of professional behaviour to all staff?

Does the PU monitor compliance with

Does the PU have an established plan for personnel needs at all levels, based on current and anticipated clientele, business growth, impending retirements, etc.?

Does the PU have an established recruitment policy?

Are applicants and new personnel informed of the personnel policies and procedures relevant to them?

Does the PU have continuing education

Is there any policy for consulting experts (both internal and external)?

Has the PU built up a network of other accountants, solicitors and advocates, and technical consultants in industries in which its clients operate?

Does the PU have written guidelines on the responsibility at each level, and on the expected performance and qualifications necessary for advancement to the next level?

Does the PU have a system for gathering and evaluating information on the performance of personnel?

Does the PU have a system of assigning an audit to the most appropriate

Does the PU have established procedures for record retention, including security aspects?

Does the PU maintain a record containing particulars like client name, nature of engagement, particulars regarding date of commencement of audit, date of audit report, billing, etc?

Does the PU maintain staffs

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policies and procedures relating to independence? Does the PU periodically review its association with clients to ensure objectivity and independence?

programmes for partners and staff?

How easily are current and relevant professional literature, including accounting and auditing standards and pronouncements by professional bodies, available to partners and staff?

Does the PU conduct programmes for developing expertise in specialized areas and industries?

personnel? Are requirements of

specialized expertise and personnel skills given due consideration?

Does the PU have written guidelines for maintaining working papers (form and content)?

Does the PU have standardized forms, checklists, and questionnaires to assist conduct of audit?

register? Does the office

have a proper library containing relevant book and all publications of ICAI.

Review of Records - Compliance/Substantive Review Procedures

After evaluating general controls by performing compliance procedures, the reviewer should actually

review the records of the PU. Such review may either be conducted by compliance approach or

substantive approach or a combination of both. At the first stage, the records in respect of following key

controls are to be reviewed to ensure compliance with technical standards:

Audit Record Administration

Financial Statements Presentation

Review and Evaluation of System of Internal controls

Substantive Tests

Audit Conclusion

Audit Report

Compliances With Technical, Ethical and Professional Standards

The Reviewer has to see the compliances of the followings:

a) AS issued by ICAI & CG b) AAS (including General Clarifications thereof) issued by ICAI c) Engagement Standards issued by ICIA d) Framework for the Preparation and Presentation of Financial Statements, Framework of

Statements on Standard Auditing Practices and Guidance Notes on Related Services issued by the Institute of Chartered Accountants of India and Framework for Assurance Engagements;

e) Statements issued by the ICAI f) Guidance Notes issued by ICAI g) Notifications/Directions/Announcements issued by ICAI h) Provisions of the various relevant Statutes and/or Regulations which are applicable in the

context of the specific engagements being reviewed including instructions/guidelines/ notifications/directions issued by the regulatory bodies;

i) Ethical Standards/pronouncements issued by ICAI.

Confidentiality

Earlier Provisions New Provisions Strict confidentiality provisions shall apply to all those involved in the peer review process, namely, reviewers, members of the Board, the

Strict confidentiality shall be maintained by all those involved in the Peer Review process, namely, Reviewers, members of the Board, any Qualified

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Council, or any person who assists any of these parties. Those persons subject to the secrecy provision: 1) Shall at all times after his/ their appointment

preserve and aid in preserving secrecy with regard to any matter coming to his/ their knowledge in the performance or in assisting in the performance of any function, directly or indirectly related to the process and conduct of peer reviews;

2) Shall not at any time communicate any such matter to any other person; and

3) Shall not at any time permit any other person to have any access to any record, document or any other material in any form which is in his/their possession or under his/their control by virtue of his/their being or having been so appointed or his/their having performed or having assisted any other person in the performance of such a function.

Non-compliance with the secrecy provisions in the above clause shall amount to professional misconduct as defined under Section 22 of the Chartered Accountants Act, 1949. A statement of confidentiality shall be filled in by the persons who are responsible for the conduct of peer review i.e., reviewers, the members of the Board and others who assist them.

Assistants or Practice Unit. All persons governed by the secrecy provisions: a) shall at all times preserve and aid in preserving

secrecy with regard to any matter arising in the performance or in assisting in the performance of any function, directly or indirectly related to the process and conduct of Peer Reviews;

b) Reviewer shall not make use of or disclose the contents of Review report or any confidential information about the process of Review unless as required by the Board or the Council.

Non-compliance with the secrecy provisions in the above clause shall amount to professional misconduct as defined under Section 22 of the Chartered Accountants Act, 1949. A Declaration of Confidentiality shall be signed by the persons who are responsible for the conduct of Peer Review i.e., Reviewers, and his Qualified Assistants and be filed with the Board. All members of the Board shall also sign a declaration of Confidentiality in a manner as may be prescribed by the Board.


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NBFC

Meaning: NBFC is one whose principal business is that of receiving deposits or that of a financial institution, such as lending, investment in securities, hire purchase finance or equipment leasing.

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Definition of NBFCs

Definition of NBFC Section 45 I(f) of Reserve Bank of India (Amendment) Act, 1997 defines a non-banking financial company as: (i) A financial institution which is a company; (ii) A non banking institution which is a company with principal business of receiving of deposits, under

any scheme or arrangement or in any other manner, or lending in any manner; (iii) Such other non-banking institution or class of such institutions, as the Reserve Bank with the

previous approval of the Central Government may specify by notification in the Official Gazette. For purposes of RBI Directions relating to Acceptance of Public Deposits, non-banking financial company means only the non-banking institution which is a –¨Loan company, ¨Investment company, Hire purchase finance company, Equipment leasing company and Mutual benefit financial company”.

Registration and Regulation of NBFCs

Under Section 45–IA of the Reserve Bank of India (Amendment) Act, 1997, no nonbanking financial company is allowed to commence or carry on the business of a nonbanking financial institution without obtaining a certificate of registration issued by the Reserve Bank of India. A company incorporated under the Companies Act, 1956 and desirous of commencing business of non-banking financial institution as defined under Section 45–IA of the RBI Act, 1934 can apply to Reserve Bank of India in prescribed form along with necessary documents for registration. The RBI issues Certificate of Registration after satisfying itself that the conditions as enumerated in Section 45-IA of the RBI Act, 1934 are satisfied. However, to obviate dual regulation, certain categories of NBFCs which are regulated by other regulators are exempted from the requirement of registration with RBI viz. Venture Capital Fund/Merchant Banking companies/Stock broking companies registered with SEBI, Insurance Company holding a valid Certificate of Registration issued by IRDA, Nidhi companies as notified under Section 620A of the Companies Act, 1956, Chit companies as defined in clause (b) of Section 2 of the Chit Funds Act, 1982 or Housing Finance Companies regulated by National Housing Bank. The Reserve Bank of India has issued directions to non-banking financial companies on acceptance of public deposits, prudential norms like capital adequacy, income recognition, asset classification, provision for bad and doubtful debts, risk exposure norms and other measures to monitor the financial solvency and reporting by NBFCs. Directions were also issued to auditors to report non-compliance with the RBI Act and regulations to the Reserve Bank, Board of Directors and shareholders.

Type of NBFCs- Compliance and Regulatory Perspective

Currently, NBFCs registered with RBI are being classified as: 1) Asset Finance Company (AFC): The main activity of an AFC is financing of physical assets supporting

productive / economic activity. These may be in the areas such as automobiles, tractors, lathe machines, generator sets, earth moving and material handling equipments and general purpose industrial machines.

2) Investment Company (IC): which mainly deal in acquisition of shares and securities of other companies. A core investment company would be a company which acquires shares and securities of Group companies.

3) Loan Company (LC): Loan companies primarily provide finance (whether by making loans or advances or otherwise for any activity), other than its own activity.

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4) Infrastructure Finance Companies: This category of NBFCs deploys a minimum of three-fourths of their total assets in infrastructure loans. The net owned funds of this category of NBFCs are more than Rs. 300 crores and they should have a minimum credit rating of ‘A’ or equivalent and the Capital to Risk-Weighted Assets Ratio (CRAR) is 15% (with a minimum Tier I Capital of 10%).

5) Core Investment Company (CIC): These are NBFCs which carry on the business of acquisition of shares and securities in group companies and satisfies four conditions stated in the regulatory framework for Core Investment Companies issued by RBI.

6) Infrastructure Debt Fund- Non- Banking Financial Company (IDF-NBFC): Infrastructure Debt Funds (IDFs) are funds set up to facilitate the flow of long-term debt into infrastructure projects. The IDF will be set up either as a trust or as a company. A trust based IDF would normally be a Mutual Fund (MF) while a company based IDF would normally be a NBFC.

7) Non-Banking Financial Company - Micro Finance Institution (NBFC-MFI): An NBFC-MFI is defined as a non-deposit taking NBFC(other than a company licensed under Section 25 of the Indian Companies Act, 1956) that fulfils certain conditions.

8) Core Investment Companies, Infrastructure Debt Fund NBFC and NBFC – Micro Finance Institution (other than Companies Act, 1956 - Section 25 companies) are non deposit holding Companies.

The above type of companies may be further classified into those accepting deposits or those not accepting deposits

Infrastructure Debt Fund- Non- Banking Financial Company (IDF-NBFC)

Non-Banking Financial Company - Micro Finance Institution (NBFC-MFI)

(RBI notification dt. Nov. 21, 2011) Infrastructure Debt Funds (IDFs), to facilitate the flow of long-term debt into infrastructure projects. IDF- NBFC would raise resources through issue of either Rupee or Dollar denominated bonds of minimum 5 year maturity. The investors would be primarily domestic and off-shore institutional investors, especially insurance and pension funds which would have long term resources. IDF-NBFC would be regulated by the Reserve Bank. Besides the above class of NBFCs the Residuary Non-Banking Companies are also registered as NBFC with the

(RBI notification dated December 02, 2011) RBI having considered it necessary in the public interest and being satisfied that for the purpose of enabling the Bank to regulate the credit system to the advantage of the country, gave the directions for the Non-Banking Financial Company -Micro Finance Institutions (Reserve Bank) Directions, 2011. An NBFC-MFI is defined as a non-deposit taking NBFC (other than a company licensed under Section 25 of the Indian Companies Act, 1956) that fulfils the following conditions:

Asset Finance

Company

Loan Company Investment

Company

Infrastructure Finance

Company

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Bank. (i) Minimum Net Owned Funds of Rs.5 crore. (For NBFC-MFIs registered in the North Eastern Region of the country, the minimum NOF requirement shall stand at Rs. 2 crore).

(ii) Not less than 85% of its net assets are in the nature of “qualifying assets.”

(iii) Further the income an NBFC-MFI derives from the remaining 15 percent of assets shall be in accordance with the regulations specified in that behalf.

(iv) An NBFC which does not qualify as an NBFC-MFI shall not extend loans to micro finance sector, which in aggregate exceed 10% of its total assets.

In case of Non-Banking Financial Company - Micro Finance Institution (NBFC-MFI) - For the purpose of ii. above, “Net assets” are defined as total assets other than cash and bank balances and money market instruments. “Qualifying asset” shall mean a loan which satisfies the following criteria:- a) loan disbursed by an NBFC-MFI to a borrower with a rural household annual income not exceeding

Rs. 60,000 or urban and semi-urban household income not exceeding Rs. 1,20,000; b) loan amount does not exceed Rs. 35,000 in the first cycle and Rs. 50,000 in subsequent cycles; c) total indebtedness of the borrower does not exceed Rs. 50,000; d) tenure of the loan not to be less than 24 months for loan amount in excess of 15,000 with

prepayment without penalty; e) loan to be extended without collateral; f) aggregate amount of loans, given for income generation, is not less than 75 per cent of the total

loans given by the MFIs;

Updated in SM in Year Jan 2013

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COMPANY AUDIT

Non-provision of proposed dividend The Revised Schedule VI which is applicable from 01.04.2011 requires disclosure of the amount of dividends proposed to be distributed to equity and preference shareholders for the period and the related amount per share to be disclosed separately. It also requires separate disclosure of the arrears of fixed cumulative dividends on preference shares. The Old Schedule VI specifically required proposed dividend to be disclosed under the head “Provisions.” In the Revised Schedule VI, this needs to be disclosed in the notes. Hence, a question that arises is as to whether this means that proposed dividend is not required to be provided for when applying the Revised Schedule VI. Further, as per AS-4 “Contingencies and Events Occurring After the Balance Sheet Date”, there are events which, although take place after the balance sheet date are sometimes reflected in the financial statement because of Statutory requirement or because of their special nature and such item includes the amount of dividend proposed or declared by the enterprise after the balance sheet date in respect of theperiod covered in the financial statements. Keeping this in view and the fact that earlier the disclosure of provision for proposed dividend was

statutory requirement as per Old Schedule VI, hence it was adjusting event as per AS 4 and was provided

for. However, this statutory requirement has been changed to disclosure by way of notes as per Revised

Schedule VI. Therefore, provision for proposed dividend is non-adjusting event


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MANAGEMENT AND OPERATIONAL AUDIT

Internal Audit, Management and Operational Audit

Integrity, Objectivity and Independence of Internal Auditor As per Standard on Internal Audit (SIA) 2, Basic Principles Governing Internal Audit, issued by the Council of the Institute of Chartered Accountants of India, The internal auditor should be straightforward, honest and sincere in his approach to his professional work. He must be fair and must not allow prejudice or bias to override his objectivity. He should maintain an impartial attitude. He should not only be independent in fact but also appear to be independent. The internal auditor should not, therefore, to the extent possible, undertake activities, which are or might appear to be incompatible with his independence and objectivity. For example, to avoid any conflict of interest, the internal auditor should not review an activity for which he was previously responsible. It is also expected from the management to take steps necessary for providing an environment conducive to enable the internal auditor to discharge his responsibilities independently and also report his findings without any management interference. For example, in case of a listed company, the internal auditor may be required to report directly to those charged with governance, such as the Audit Committee instead of the Chief Executive Officer or the Chief Financial Officer. The internal auditor should immediately bring any actual or apparent conflict of interest to the attention of the appropriate level of management so that necessary corrective action may be taken.


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Internal Audit Report

As per Standard on Internal Audit (SIA) 2, Basic Principles Governing Internal Audit, issued by the Council of the Institute of Chartered Accountants of India, the internal auditor should carefully review and assess the conclusions drawn from the audit evidence obtained, as the basis for his findings contained in his report and suggest remedial action. However, in case the internal auditor comes across any actual or suspected fraud or any other


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misappropriation of assets, it would be more appropriate for him to bring the same immediately to the attention of the management. Basic Elements of the Internal Audit Report: Basic elements of the internal audit report as per Standard on Internal Audit (SIA) 4, on Reporting issued by ICAI. The internal auditor’s report includes the following basic elements, ordinarily, in the following layout: (a) Title; (b) Addressee; (c) Report Distribution List; (d) Period of coverage of the Report; (e) Opening or introductory paragraph;

(i) identification of the processes/functions and items of financial statements audited; and (ii) a statement of the responsibility of the entity’s management and the responsibility of the

internal auditor; (f) Objectives paragraph - statement of the objectives and scope of the internal audit engagement; (g) Scope paragraph (describing the nature of an internal audit):

(i) a reference to the generally accepted audit procedures in India, as applicable; (ii) a description of the engagement background and the methodology of the internal audit

together with procedures performed by the internal auditor; and (iii) a description of the population and the sampling technique used.

(h) Executive Summary, highlighting the key material issues, observations, control weaknesses and exceptions; (i) Observations, findings and recommendations made by the internal auditor; (j) Comments from the local management; (k) Action Taken Report – Action taken/ not taken pursuant to the observations made in the previous internal audit reports; (l) Date of the report; (m) Place of signature; and (n) Internal auditor’s signature with Membership Number. A measure of uniformity in the form and content of the internal auditor’s report is desirable because it helps to promote the reader’s understanding of the internal auditor’s report and to identify unusual circumstances when they occur.

(1) Title: The internal auditor’s report should have an appropriate title expressing the nature of the Report.

(2) Addressee: The internal auditor’s report should be appropriately addressed as required by the circumstances of the engagement. Ordinarily, the internal auditor’s report is addressed to the appointing authority or such other person as directed.

(3) Report Distribution List, Coverage and Opening or Introductory Paragraph:

There should be a mention of the recipients of the report in the section on Report Distribution List. The internal auditor’s report should identify the systems, processes, functional lines or other items of the entity that have been audited, including the date of and period covered. The report should include a statement that the operation of systems, procedures and controls are the responsibility of the entity’s management and a statement that the responsibility of the internal auditor is to express an opinion on the weaknesses in internal controls, risk management and governance (entity level controls) framework, highlighting any exceptions and cases of noncompliance and suggest or recommend improvements in the design and operations of controls based on the internal audit.

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(4) Scope Paragraph:

The internal auditor’s report should describe the scope of the internal audit by stating that the internal audit was conducted in accordance with generally accepted audit procedures as applicable. The management needs this as an assurance that the audit has been carried out in accordance with established Standards. “Scope” refers to the internal auditor’s ability to perform internal audit procedures deemed necessary in the circumstances. The report should include a statement that the internal audit was planned and performed to obtain reasonable assurance whether the systems, processes and controls operate efficiently and effectively and financial information is free of material misstatement. The internal auditor’s report, in line with the terms of the engagement, should describe the internal audit as including:

(i) examining, on a test basis, evidence to support the amounts and disclosures in financial statements;

(ii) assessing the strength, design and operating effectiveness of internal controls at process level and identifying areas of control weakness, business risks and vulnerability in the system and procedures adopted by the entity

(iii) assessing the accounting principles and estimates used in the preparation of the financial statements; and

(iv) evaluating the overall entity-wide risk management and governance framework. The Report should include a description of the engagement background, internal audit methodology used and procedures performed by the internal auditor mentioning further that the internal audit provides a reasonable basis for his comments.

(5) Executive Summary Paragraph:

The Executive Summary paragraph of the internal auditor’s report should clearly indicate the highlights of the internal audit findings, key issues and observations of concern, significant controls lapses, failures or weaknesses in the systems or processes.

(6) Observations (Main Report) Paragraph:

The Observations paragraph should clearly mention the process name, significant observations, findings, analysis and comments of the internal auditor.

(7) Comments from Local Management:

The Comments from Local Management Paragraph should contain the observations and comments from the local management of the entity provided after giving due cognizance to the internal auditor’s comments. This should also include local management’s action plan for resolution of the issues and compliance to the internal auditor’s recommendations and suggestions on the areas of process and control weakness/ deficiency. The management action plan, should contain, inter alia:

(i) the timeframe for taking appropriate corrective action; (ii) the person responsible; and (iii) resource requirements, if any, for ensuring such compliance. Further comments

from the internal auditor, in response to the auditee feedback, are to be clearly mentioned. This paragraph should also contain the internal auditor’s suggestions and recommendations to mitigate risks, strengthen controls and streamline processes with respect to each of the observations and comments made.

(8) Action Taken Report Paragraph:

The Action Taken Report paragraph should be appended after the observations and findings and should include:

(i) Status of compliance / corrective action already taken / being taken by the auditee with respect to previous internal audit observations;

(ii) Status of compliance / corrective action not taken by the auditee with respect to previous internal audit observations and the reasons for non-compliance thereof; and

(iii) Revised timelines for compliance of all open items in (b) above and fixation of the

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responsibility of the concerned process owner.

(9) Date The date of an internal auditor’s report is the date on which the internal auditor signs the report expressing his comments and observations.

10) Place of Signature:

The report should name the specific location, which is ordinarily the city where the internal audit report is signed.

(11) Internal Auditor’s Signature:

The report should be signed by the internal auditor in his personal name. The internal auditor should also mention the membership number assigned by the Institute of Chartered Accountants of India in the report so issued by him. Further, the internal auditor should exercise due professional care to ensure that the internal audit report, inter alia, is:

(i) clear (ii) factual – presents all significant matters with disclosure of material facts (iii) specific (iv) concise (v) unambiguous (vi) timely (vii) complies with generally accepted audit procedures in India, as applicable.


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Management Audit Questionnaire A management audit questionnaire is an important tool for conducting the management audit. It is through these questionnaires that the auditors make an inquiry into important facts by measuring current performance. Such questionnaires aim at a comprehensive and constructive examination of an organisation’s management and its assigned tasks. Overall it is concerned with the appraisal of management actions in accomplishing the organisation’s objectives. Its primary objective is to highlight weaknesses and deficiencies of the organisation. It includes a review of how well or badly the management functions of planning, organising, directing and controlling are being performed. In addition it evaluates how effective the decision-making process is accomplishing the stated organisation objectives. Within this framework, the questionnaire provides a means for evaluating an organisation’s ongoing operations by examining its major functional areas. There are three possible answers to the management audit questions: “Yes”, “No” and “N.A.”, (not applicable). A “Yes” answer indicates that the specific area, function, or aspect under study is functioning in an acceptable manner; no written explanation is needed in that case. On the other hand, a “no” answer indicates unacceptable performance and should be explained in writing. Questionnaire comments on negative answers not only provide documentation for future reference, but, more important, provide background information for undertaking remedial action. Those questions that are not applicable and should be ignored in the audit are checked in the “N.A.” column. The management audit questionnaire does not give answers, but simply asks questions. If all questions are answered with a ‘yes’, operations are proceeding as desired. On the other hand, if there are one or more ‘no’ answers, difficulties are being experienced and must be explained in writing. If the question does not apply, the N.A. (not applicable) column is checked. Thus, management audit questionnaire for this part of the audit not only serves as a management tool to analyse the current situation; more importantly, it enables the management auditors to synthesis those elements that are causing organisational difficulties and deficiencies.


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Standards on Internal Audit The following Standards on Internal Audit are recommendatory in nature. The Standards shall become mandatory from such date as notified by the council: SIA 1 : Planning an Internal Audit SIA 2 : Basic Principles Governing Internal Audit SIA 3 : Documentation. SIA 4 : Reporting SIA 5 : Sampling SIA 6 : Analytical Procedures SIA 7 : Quality Assurance in Internal Audit SIA 8 : Terms of Internal Audit Engagement. SIA 9 : Communication with Management SIA 10 : Internal Audit Evidence SIA 11 : Consideration of Fraud in an Internal Audit. SIA 12 : Internal Control Evaluation SIA 13 : Enterprise Risk Management SIA 14 : Internal Audit in an Information Technology Environment SIA 15 : Knowledge of the Entity and its Environment. SIA 16 : Using the Work of an Expert. SIA 17 : Consideration of Laws and Regulations in an Internal Audit.


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THESE TOPICS HAVE BEEN DELETED IN ICAI MODULE

Requirements of Schedule B to the IRDA (Preparation of FS and AR of Insurance Companies) Regulations, 2002

Part I- Accounting Principles for Preparation of Financial Statements

1) Applicability of Accounting Standards - issued by the ICAI, to extent applicable to the insurers carrying on general insurance business, except that:

i. AS 3 – Cash Flow Statements - prepared only under the Direct Method. ii. AS 4 – Not applicable w.r.t liabilities arising out Insurance policies. iii. AS 9 – Not applicable w.r.t income of Insurance business. iv. AS 13 – Apply the regulations. v. AS 17 - Segment Reporting – shall apply to all insurers

2) Premium- Premium shall be recognised as income over the contract period or the period of risk, whichever is appropriate.

3) Premium Deficiency -Recognised if the sum of expected claim costs, related expenses and maintenance costs exceeds related reserve for unexpired risks.


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4) Acquisition Costs-If any, shall be expensed in the period in which they are incurred. 5) Claims--The components of the ultimate cost of claims to an insurer comprise the claims under

policies and specific claims settlement costs. 6) Investments : valuation in the following manner:-

a) Real Estate – Investment Property- measured at historical cost less accumulated depreciation and impairment loss, residual value being considered zero and no revaluation being permissible.

b) Debt Securities-Debt securities including G-Sec and redeemable preference shares shall be considered as “held to maturity” securities and measured at historical cost subject to amortisation.

c) Equity Securities and Derivative Instruments that are traded in active markets- Measured at fair value as at BS date.

d) Unlisted and other than actively traded Equity Securities and Derivative Instruments- measured at historical costs. Provision shall be made for diminution in value of such investments.

7) Loans - Loans shall be measured at historical cost subject to impairment provisions. 8) Catastrophe Reserve – as per norms prescribed by the Authority.

Part II Disclosures forming part of Financial Statements

a) by way of notes to the Balance Sheet - b) Accounting policies shall form an integral part of the financial statements

Part III General Instructions for Preparation of Financial Statements

Part IV Contents of Management Report:

a) Confirmation regarding the continued validity of the registration granted by the Authority; b) Certification that all the dues payable to the statutory authorities have been duly paid; c) Confirmation to the effect that the shareholding pattern and any transfer of shares during the

year are in accordance with the statutory or regulatory requirements; d) Declaration that the management has not directly or indirectly invested outside India the

funds of the holders of policies issued in India; e) Confirmation that the required solvency margins have been maintained; f) Certification to the effect that the values of all the assets have been reviewed on the date of

the Balance Sheet g) Disclosure with regard to the overall risk exposure and strategy adopted to mitigate the same; h) Operations in other countries, if any, i) Ageing of claims indicating the trends in average claim settlement time j) Review of asset quality and performance of investment in terms of portfolios k) A responsibility statement l) A schedule of payments, in which Directors of the insurer are interested.

Part V Preparation of Financial Statements

(1) An insurer shall prepare the Revenue Account, Profit and Loss Account [Shareholders’ Account] and the Balance Sheet in Form B-RA, Form B-PL, and Form B-BS, or as near thereto as the circumstances permit. Provided that an insurer shall prepare Revenue Accounts separately for fire, marine, and

Miscellaneous insurance business and separate schedules shall be prepared for Marine Cargo,

Marine – Other than Marine Cargo and the following classes of miscellaneous insurance

business under miscellaneous insurance and accordingly application of AS 17 – Segment

Reporting - shall stand modified.

1. Motor, 2. Workmen’s Compensation/Employers’ Liability, 3. Public/Product Liability, 4.

Engineering, 5. Aviation, 6. Personal Accident, 7. Health Insurance, 8. Others

(2) An insurer shall prepare separate Receipts and Payments Account in accordance with the Direct Method prescribed in AS 3 – “Cash Flow Statement” issued by the ICAI.

Investment norms for General Insurance Companies In exercise of the power conferred by the Insurance Act, 1938, the Authority, in consultation with the Insurance Advisory Committee, has made the Insurance Regulatory and Development Authority

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(Investment) Regulations are subject to revision by the Authority from time to time. Regulation 4 of the amended Regulations on investments prescribes that every insurer carrying on the business of general insurance should invest and at all times keep invested its total assets in the following manner:

(i) Government Securities Not less than 20% of Investment Assets

(ii) Government Securities and other approved securities

Not less than 30% of Investment Assets (including (i) above)

(iii) (a) Approved investments and other investments (out of (iiia) other investments shall not exceed 25% of Investment Assets)

Not exceeding 55%

(b) Housing and Loans to State Government

Not less than 5%

(c) Investment in infrastructure Not less than 10%

It may be mentioned here that with regard to (iv) above, subscription/purchase of bonds or debentures issued by HUDCO, National Housing Insurance Company or House Building Institutions duly accredited by National Housing Banks, for house building activities, duly guaranteed by Government or carrying current fating of not less than ‘AA’ by an independent, reputed and recognized agencies also qualify to be included in the limits [under clause (iv)] above.

Topic 12.8.1- of Study Material (Page-12.22)


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Trade Credit Insurance

MEANING

Trade Credit Insurance business

It means the business of effecting contracts of insurance in respect of trade credit insurance transactions.

Trade credit insurance

It means insurance of suppliers against the risk of non-payment of goods or services by their buyers who may be situated in the same country as the supplier (domestic risk) or a buyer situated in another country (export risk) against non-payment as a result of insolvency of the buyer or non-payment after an agreed number of months after duedate (protracted default) or non-payment following an event outside the control of the buyer or the seller (political risk cover). Political risk cover is available only in case of buyers outside India and in countries agreed upon at the proposal stage.

Trade Credit Insurance transaction

It means a transaction between two persons for supply of goods or services on open and agreed terms.

Trade Credit insurance policy

It is a conditional insurance contract between two parties (insurer and seller) that cannot be traded and is always directly related to an underlying trade transaction, which is either the delivery of goods or of services. The correct fulfilment of this trade transaction and satisfaction of the contract terms which is essential for credit cover to exist

Basic Requirements of a Trade Credit Insurance Product An insurer shall offer trade credit insurance product only if all requirements mentioned below are met:

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1) Policyholder's loss is non-receipt of trade receivable arising out of a trade of goods or services. 2) Policyholder is a supplier of goods or services in consideration for a fair market value. 3) Policyholder's trade receivable does not arise out of factoring or reverse factoring arrangement or

any other similar arrangement. 4) Policyholder has a customer (i.e. Buyer) who is liable to pay a trade receivable to the policyholder in

return for the goods and services received by him from the policyholder, in accordance with a policy document filed with the insurer.

5) Policyholder undertakes to pay premium for the entire Policy Period. 6) Any other requirement that may be specified by the Authority from time to time.

Topic 12.12- of Study

Material (Page-12.36) Updated in SM in Year Jan 2012

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PROFESSIONAL ETHICS

NEW Case Study Introduced in ICAI Module OF JAN 2013 APPLICABLE FOR NOV 2013 EXAMS ONWARDS Whether the CA Will be Guilty of Professional Misconduct in the Following Case

1. CA Sanjeev was appointed as the Auditor of SHREE Ltd. for 2007-08. Since he declined to accept the appointment, the Board of Directors appointed CA Mohan as the auditor in the place of CA Sanjeev, which was also accepted by CA Mohan as the auditor in the place of CA Sanjeev, which was also accepted by CA Mohan. Ans: Board can appoint the auditor in the case of casual vacancy under Sections 224 (5) & 6(a) of the Companies Act, 1956.The non-acceptance of appointment by CA. Sanjeev does not constitute a casual vacancy to be filled by the Board. In this case, it will be deemed that no auditor was appointed in the AGM. Hence the appointment of auditor can be made only by the Central Government and the Board appointment is defective in law. Clause 9 of Part-I of First Schedule states that a chartered accountant is deemed to be guilty of professional misconduct if he “Accepts an appointment as auditor of a company without first ascertaining from it whether the requirements of section 225 of the Companies Act, 1956 in respect of such appointment have been fully complied with”.

2. CA Deepak, a Chartered Accountant prepared a project report for one of his clients to obtain bank finance (long-term) of Rs. 50 lakhs from a Commercial Bank. Consequent to the sanction of the loan by the bank CA Deepak raised a bill for his services @ 2% of the loan sanctioned. Ans: Clause 10 of part I to First Schedule to the Chartered Accountants Act prohibits a Chartered Accountant in practice to charge, to offer, to accept or accept fees which are based on a percentage of profits or which are contingent upon the findings or results of such work done by him. However, this restriction is not applicable where such payment is permitted by the Chartered Accountants Act, 1949, the Council of the Institute has framed regulation 192 which exempts certain professional services from the operation of clause 10.

3. CA Ram who is a leading Income Tax Practitioner and consultant in Jaipur is also trading in derivatives. Ans: As per clause 11 of Part-I of First Schedule of CA Act, 1949, a Chartered Accountant is

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deemed to be guilty of professional misconduct if he “engages in any business or occupation other than the profession of Chartered Accountant unless permitted by the Council so to engage”. However, the Council has granted general permission to the members to engage in certain specific occupation. In respect of all other occupations specific permission of the Institute is necessary.

4. CA Chiranjiv who conducted ABC audit of a Haryana daily ‘New Era’ certified the circulation figures based on Management Information System Report (M.I.S Report) without examining the books of Account. Ans: According to clause 7 of Part-I of Second Schedule of Chartered Accountants Act, 1949, a Chartered Accountant in practice is deemed to be guilty of professional misconduct if he “does not exercise due diligence or is grossly negligent in the conduct of his professional duties”.

AUDIT OF BANKS

Powers and

Duties of

Auditors

The auditor of a banking company or of a nationalised bank, State Bank of India, a

subsidiary of State Bank of India, or a regional rural bank has the same powers as those

of a company auditor in the matter of access to the books, accounts, documents and

vouchers. except with following modifications:-

The auditor of SBI and a nationalized bank may employ accountants or other persons at the expense of the bank to assist him in audit of accounts.

Branches of other banking companies will be audited as per section 228 of the Companies Act, 1956.

Regional Rural Banks Act, 1976, does not contain any provisions relating to audit of branches.

Accordingly, in the case of such banks, audit of branches is also carried out by the auditors appointed for the bank as a whole.

Initial consideration by the statutory auditor Declaration of Indebtedness: (i)The RBI has advised that the banks, before appointing their statutory central/circle/ branch auditors, should obtain a declaration of indebtedness. In addition to this, the RBI has further advised the banks that no credit facility (including guaranteeing any facilities availed of by third party) should be availed of by the proprietor/ any of the partners of the audit firm/members of his/their families or by firm/ company in which he/they are partners/directors

Appointment of Auditor:

Type of Bank How Auditor is appointed How Remuneration to be fixed

State Bank of India To be appointed by RBI Comptroller and Auditor General of India in consultation with the CG

To be fixed by RBI of India in consultation with the CG

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Format of Audit Report The auditors, central as well as branch, should also ensure that the audit report issued by them complies with the requirements of Revised SA 700, “Forming an Opinion and Reporting on Financial Statements”, SA 705, “Modifications to the Opinion in the Independent Auditor’s Report” and SA 706, “Emphasis of Matter Paragraphs and Other Matter Paragraphs in the Independent Auditor’s Report”. The auditor should ensure that not only information relating to number of unaudited branches is given but quantification of advances, deposits, interest income and interest expense for such unaudited branches has also been disclosed in the audit report. Such disclosure in the audit report is not only in accordance with the best international trends but also provides useful information to users of financial statements, for example, though the absolute number of unaudited branches might be quite large but in relation to overall operations of the bank such unaudited branches are quite miniscule and thus, not material. Therefore, the auditor should ensure that the complete information in respect of unaudited branches is collected and disclosed in the audit report.

Topic 11.5- of Study Material (Page-11.5)


Link:


Classification Norms relating to NPAs

Advances to “on-Lending Arrangement”

In respect of Loans/credit facilities granted under “on-lending” arrangement to Primary

Agricultural Credit Societies (PACSs)/Farmers Service Societies (FSSs), only the particular

credit facility granted to PACs/FSS which is in default should be classified as NPA. Other

credit facilities granted to the PACS/FSS will not be treated as NPA. This exemption does

not extend to credit facilities granted outside the “on-lending” system.

Classification of Advances & Provisioning Norms Doubtful Assets

Provision Norms

For Unsecured Portion Full provision TO THE EXTENT of the UNSECURD PORTION should be made. In doing

so, the realisable value of the security available, to which the bank has a valid recourse, should be determined on a realistic basis.

DICGC/ECGC cover is also taken into account For Secured Portion

In case the advance covered by CGTSI guarantee becomes non-performing, no

provision need be made towards the guaranteed portion

Period - advance remain in doubtful category %

Up to one year 20 25 (Changed)

More than 1 up to 3 years 40

More than 3 years 100

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Sub-Standard Assets

Provision Norms

General Provision: A general provision of 15% percent on total outstanding (changed from 10%) should be made without making any allowance for ECGC guarantee cover and securities available.

Topic Provisioning of Loans and Advances- of Study Material (Page-11.53) Updated in SM in Year Jan 2013

Link:


Assess the Risk of Fraud including Money Laundering As per SA 240 (Revised), “The Auditor’s Responsibilities Relating to Fraud in an Audit of Financial Statements”, the auditor’s objective are to identify and assess the risks of material misstatement in the financial statements due to fraud, to obtain sufficient appropriate audit evidence on those identified misstatements and to respond appropriately. The attitude of professional skepticism should be maintained by the auditor so as to recognise the possibility of misstatements due to fraud.

Deposit Taking Dealing Lending

Management

and employee

frauds

Camouflage of depositors by hiding their identity in connection with funds transfer or money laundering.

Unrecorded deposits.

Theft of customer deposits particularly, from dormant accounts.

Off market / related party deals whereby no checks are carried out on the prices at which deals are transacted or there are unusual activity levels with certain counterparties.

High level of business with particular brokers, including payment of abnormal commission.

False deals represented by unusual number of cancelled deals or unusually high number of unsettled transactions.

Delayed deal allocations

represented by no time stamping of deals or alterations or overwriting on deals sheets.

Exploiting weaknesses in matching procedures due to absence of proper guidelines.

Loans to fictitious borrowers.

Transactions with connected companies.

Kick backs and inducements.

Selling recovered collateral at below market prices.

Bribes to obtain release of security or to reduce the amount claimed.

Theft or misuse of collateral held as security.

External

Frauds

Money Laundering.

Fraudulent instructions.

Counterfeit currency.

Fraudulent custodial sales.

False information or documents regarding counterparties.

Impersonation and false information on loan applications.

Fraudulent valuations.

Misappropriation of loan funds by agents /customers

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Due to the nature of their business, banks are ready for targeting those who are engaged in the money laundering activities by which the proceeds of illegal acts are converted into proceeds from the legal acts. The RBI has framed specific guidelines that deal with prevention of money laundering and “Know Your Customer (KYC)” norms. The RBI has from time to time issued guidelines (“Know Your Customer Guidelines – Anti Money Laundering Standards”), requiring banks to establish policies, procedures and controls to deter and to recognise and report money laundering activities.

(Page-11.13) Updated in SM in Year Jan 2013

Link:


Sale/ Purchase of NPAs: In case of a sale/ purchase of NPAs by the bank, the auditor should examine the policy laid

down by the Board of Directors in this regard relating to procedures, valuation and delegation of powers. The auditor should also examine that: (i) only such NPA has been sold which has remained NPA in the books of the bank for at least 2 years. (ii) the assets have been sold/ purchased “without recourse’ only. (iii) subsequent to the sale of the NPA, the bank does not assume any legal, operational or any other type of risk relating to the sold NPAs. (iv) the NPA has been sold at cash basis only. (v) the bank has not purchased an NPA which it had originally sold.

Sale of NPA’s Purchase of NPA’s

In case of sale of an NPA, the auditor should also ensure that:

(i) on the sale of the NPA, the same has been removed from the books of the account.

(ii) the short fall in the net book value has been charged to the profit and loss account.

(iii) where the sale is for a value higher than the NBV, no profit is recognised and the excess provision has not been reversed but retained to meet the shortfall/ loss on account of sale of other non-performing financial assets.

Similarly, in case of purchase of NPAs, the auditor should verify that:

(i) the NPA purchased has been subjected to the provisioning requirements appropriate to the classification status in the books of the purchasing bank.

(ii) any recovery in respect of an NPA purchased from other banks is first adjusted against its acquisition cost and only the recovered amount in excess of the acquisition cost has been recognised as profit.

(iii) for the purpose of capital adequacy, banks has assigned 100% risk weights to the NPAs purchased from other banks.

(Page-11.95) Updated in SM in Year Jan 2013

Link:


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Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act (SRFAESI), 2002 Securitisation of Standard Assets: After the enactment of the Securitization and Reconstruction of Financial Asset and Enforcement of Security Interest Act, 2002, banks have got significant power to possess the securities of defaulting borrower. Banks can now take possession of the assets from borrower and convert the same in Security Receipts.

Process In the process of securitisation, assets are sold to a bankruptcy remote special purpose vehicle (SPV) in return for an immediate cash payment. The cash flow from the underlying pool of assets is used to service the securities issued by the SPV.

Stages Securitisation follows a twostage process. In the first stage, there is sale of single asset or pooling and sale of pool of assets to a 'bankruptcy remote' special purpose vehicle (SPV) in return for an immediate cash payment and in the second stage repackaging and selling the security interests representing claims on incoming cash flows from the asset or pool of assets to third party investors by issuance of tradable debt securities. Thus, the non-performing asset of the banker is taken out of the balance sheet of the bank and converted into Security Receipts.

Accounting Securitised asset should be derecognised in the books of the bank, if the bank loses control of the contractual rights that comprise the securitised asset. The bank loses such control if it surrenders the rights to benefits specified in the contract. For enabling the transferred assets to be removed from the balance sheet of the originator in a securitisation structure, the isolation of assets or ‘true sale’ from the originator to the SPV is an essential prerequisite. In case the assets are transferred to the SPV by the originator in full compliance with all the conditions of true sale, the transfer would be treated as a 'true sale' and originator will not be required to maintain any capital against the value of assets so transferred from the date of such transfer. The effective date of such transfer should be expressly indicated in the subsisting agreement. In the event of the transferred assets not meeting the "true-sale" criteria the assets would be deemed to be on the balance sheet of the originator and accordingly the originator would be required to maintain capital for those assets. Profit & Loss on Such Sale When a bank sells the non-performing assets to securitising company, if the sale value of assets is less than the Net book Value, i.e., books value of advances less provisions, the shortfall needs to be debited to Profit & Loss Account. However, in case the sale value being higher, excess provision cannot be reversed and is kept to meet the shortfall/ loss on account of other non-performing assets

Acounting Treatment in the Book of subscribing Bank

These Security Receipts are treated as non-SLR security (Investment) in the books of subscribing bank as per RBI guidelines. In the absence of ready market for the Security Receipts, the subscribing bank needs to value Security Receipts on the basis of Net Asset Value to be declared by Securitising Company on a quarterly basis.

(Page-11.64) of SM Updated in SM in Year Jan 2012

Link:


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Agricultural Debt Waiver and Debt Relief Scheme 2008 (This topic was already there in Study module since no. of years and not so Important)

Prudential Norms for the Borrowal Accounts Covered under the Agricultural Debt Waiver and Debt Relief Scheme, 2008

While the entire 'eligible amount' shall be waived in the case of a small or marginal farmer, in the case of 'other farmers', there will be a one time settlement scheme (OTS) under which the farmer will be given a rebate of 25 per cent of the 'eligible amount' subject to the condition that the farmer repays the balance of 75 per cent of the 'eligibl e amount'

Norms for the Accounts subjected to Debt Waiver:

As regards the small and marginal farmers eligible for debt waiver, the amount eligible for waiver, pending receipt from the Government of India, may be transferred by the banks to a separate account named "Amount receivable from Government of India under Agricultural Debt Waiver Scheme 2008"

The balance in this account may be treated by the banks as a "performing" asset, provided adequate provision is made for the loss in Present Value (PV) terms, computed under the assumption that such payments would be received from Government of India in the instalments.

However, the provision required under the current norms for standard assets, need not be provided for in respect of the balance in this account.

Asset Classification: Where the farmers covered under the Debt Relief Scheme have given the undertaking, agreeing to pay their share under the OTS, their relevant accounts may be treated by banks as "standard" / "performing" provided : (a) adequate provision is made by the banks for the loss in PV terms for all the receivables due from the borrowers as well as the Government; and (b) such farmers pay their share of the settlement within one month of the due dates

Provisioning in case of down-gradation of accounts:

In case the payments are delayed by the farmers beyond one month of the respective due dates, the outstanding amount in the relevant accounts of such farmers shall be treated as NPA. The asset classification of such accounts shall be determined with reference to the original date of NPA

KINDLY NOTE THAT: SUCH TOPICS WERE ALREADY THERE IN ICAI STUDY MODULE. THERE ARE NUMEROUS TOPICS WHICH ARE PART OF VPJ CLASSES MODULE AND HAVE NOT BEEN INCORPORATED HERE. SOME OF THESE TOPICS ARE BEING SHOWN AS AMENDMENT. FURTHER THERE ARE VARIOUS OTHER TOPICS WHICH HAVE BEEN MISSED BY THE OTHER AUTHORS. STUDENT CAN REFER TO OUR MODULE FOR DETAILS. CONTACT- 8130713615,7503630594

P a g e | 38


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