Here is the transcript - provide a summary of this (218) Audit Revision | Audit Marathon | CA Inter Audit Revision | Sept 2025 Exams | 80 Marks | Time Stamps - YouTube
https://www.youtube.com/watch?v=eO4Kkpn3Aig
Transcript:
(00:01) Let's begin the CA inter auditing and ethics marathon which is applicable from September examination onward September January 26 or even if you're a mate 26 student absolutely you can watch this and rely upon this and what are we going to cover in this marathon I straight away tell you very simple 80 marks coverage 80 marks coverage remember in CA inter we totally have 11 chapters in CA inter audit we have totally 11 chapters we are going to cover all the chapters except three different types of entities risk assessment items of
(00:35) financials. These three topics I am going to take a separate video through my newly developed chart notes. Yes guys, I have developed a complete audit chart notes which is just 13 pages and for your information I think many of you know like your seniors or your friends would have told goat notes which is exactly 260 pages entire CA inter audit in 260 pages. Trust me guys this is the only book that you need to study.
(01:04) You don't have to touch any other book and I I challenge I bet study this book thoroughly. You listen to this marathon and get clarity on this marathon, this entire subject and get a command on this book. Go and write the exam. Mark my word. Mark my word. Not even a single question you will miss.
(01:30) Every question you will understand, every question answer you will be able to write such a kind of clarity that I will give you through this marathon and through this book. And along with this book if you are if if you are reading this 130 pages chart notes exactly 130 pages generally I hate the concept of chart notes.
(01:49) I personally hate the concept of chart notes but many students for a mind mapping purpose they are continuously asking me sir where is the chart notes? Where is the chart notes? We want chart notes also for a easy memory mapping mind mapping all that. That is why the goat nodes we even further simplified and then developed this chart notes where not even a single point from the goat notes not even a single point from the IC study material will be missed everything is covered 100%.
(02:15) Even if you read this chart notes, ignoring the goat nodes, you still get decent amount of clarity on this subject. But but but never chart book is never a substitute. That's why at the beginning itself I mentioned this point read along with goat notes. This is never a substitute for goat notes. This is for a quick revision for multiple revisions.
(02:40) Since it is in just 130 pages, you can easily do well. Now so that's about the goat notes and chart notes and these are the resources I'm going to use the next 12 hours which you're going to watch right eight chapters marathon what are the eight chapters marathon that I am going to cover in this particular 12 hours video you know almost everything first you will have fundamentals discussion then nature objective and scope ethics and terms of engagement in this itself quality control related discussion is there SQC and 220 standard they will be at the last of this video if you see the time stamp audit report entire 700
(03:11) series 570 299 so many completion and review chapter okay and documentation audit evidence different types of entities sorry sorry sorry sorry sorry sorry sorry sorry sorry sorry sorry sorry sorry sorry sorry sorry sorry sorry sorry sorry sorry audit evidence and audit strategy and planning audit of banks these are the topics I'm covering whereas these three chapters I will give a separate chart revision in August month probably or maybe by July end itself I will upload chart revision marathon as well on CA inter audit where
(03:35) chart revision marathon will be less than five hours entire subject will be less than five hours 100% coverage so That revision also I'll be uploading you will feel fantastic guys trust me the clarity that you get even on the chart notes is amazing but remember the chart note marathon you should watch after finishing this particular marathon and now further sir I want to order this particular book hard copy where can I get first of all if some of you want to take a print directly you don't want to order the book and want to take a print directly from PDF go to rest for cma
(04:05) website forcmma.com free resources you go here here you see p5 footnotes. Okay, here you can download the notes, you can download the question bank. Here itself, I will upload chart material as well. Further you want a colored notes, hard copy, you know, you just come to books, select CA and you know scroll down here you will find the books only notes you want you can order or question bank set also you can order. I will show you the highlight of question bank also.
(04:34) Question bank is also colored one. where keywords are highlighted. Even the keywords are highlighted in the question bank. Colored question bank keywords are highlighted. Fantastic and one of the best question bank you ever see in CA inter audit.
(04:54) Everything we are giving you, we are working so hard putting our complete heart and soul. It is now your turn to study sincerely. Use these resources and get me exemption in CA inter. Further some students often ask me sir can I get exemption just by watching this marathon I can promise you you will get a very good amount of clarity wherever you have taken coaching I don't bother but I'm telling you the kind of clarity that you get in audit after watching this marathon is something different the clarity that you will have is amazing you will only thank me in the video below by the way subscribe and like the video if you really love the marathon
(05:28) okay so because many students are watching this they're using the marathon like But they're not subscribing or liking the video. But if you like and subscribe, it'll be recommended to most students. It'll be helpful for many. Okay fine. Now some students ask me this question.
(05:44) Sir, can I get exemption in CA inter audit? Uh just by watching this marathon and reading from the good notes. It depends upon level of command you have already. See this is a revision class. This is a marathon. 100% discussion. We can't do 100% in the sense in-depth discussion. How in in exam how in-d depth the questions will be asked that that entire in-depth knowledge in-depth discussion may not be possible in the marathon right so if at all you want to get paka exemption sir I will you I will watch the marathon I will watch marathon but I want to score at any cost exemption forget about exemption target 75 plus 80 plus in audit you know if you want to you can
(06:17) directly enroll into our EVOS smart okay you can enroll into full group or you can also enroll subject wise is okay there is an audit proc course you can see here there is an audit pro course inside this I will give you 85 hours of content approximately where the go notes is completely thoroughly explained question bank 600 plus questions we solve in the classroom MCQ discussions case study discussions we do four tests will also be given four test papers will be given answers will be given scheme of validation will be given now tell me
(06:48) will marathon give you a guarantee exemption or will this course give you a guarantee exemption that is your choice definitely ely this course is five to not even five 10x powerful than the marathon no doubt about it this course is 10x powerful but but having said that you might have already invested in with some other faculty you might have already listened to the previous some audit classes like you don't want to enroll again it's okay no problem you watch the marathon 99% I'm sure you will have you will love the subject you will
(07:18) start loving the subject you watch the marathon use the goat notes use the chat notes use the question bank Go and write the September exam. Work hard. Get exemption. Reward me with your thanks message. That's enough for me. That's it. So clear. I think I explained regarding what I'm going to cover. What chatbook goat notes question bank everything.
(07:41) I'm going to very soon I'm going to publish these three put together one combo deadly combo we are naming it as. That's it. Have a nice time. All the very best. Continue watching the marathon of fundamentals then nature objective then ethics and terms of engagement. then audit report then documentation then completion and review then audit evidence then strategy then SQC then bank audit I think that is the order look at the time stamps below you will find it okay have a great day continue watching all the very best I will see you soon with exemption bye-bye let's begin the first topic that is
(08:12) fundamentals of auditing just one minute I'll store this file as a separate file yes let's begin fundamental topics first revision very simple What is definition of audit? We all know definition of audit means audit is an independent examination of financial information of any entity whether or not profit oriented irrespective of size or legal form when such an examination is conducted with a view to express an opinion there on correct now very simple why audit the question is simple today we are all investing cross border like across offshore entities we are buying
(08:53) at offshore entities shares like foreign company shares. Foreigners are buying our Indian company shares. We are buying just opening stock market some angel broking zerod the app and we are blindly buying shares of various companies. The the behind the logic is very simple. They are all audited.
(09:10) They are all certified by charted accountants saying that they are all genuine. The numbers are genuine. So if Reliance company published something called we made a profit of 20,000 cr for this quarter without any doubt we are believing that because auditors are there who certified that these profits are genuine.
(09:28) So by believing these audit reports all that we are blindly investing in those companies course of money entire public is investing cr of money yes or no. So what auditors are actually doing indirectly auditors are giving confidence to public yes or no people like you and me without knowing anything about what is happening inside the company doctrine of indur management we don't know nothing we don't know anything about the company yes or no we are still investing in those companies just by believing their numbers in the balance sheet numbers in the P&L which are certified by chartered accountants
(09:57) yes or no so what is that particular certification what is that process that process that process itself self is called as auditing. Audit yes or no. What happens in audit? Ultimately the auditors they verify this balance sheet because we don't go we don't go anywhere into the company. We don't know anything about the company.
(10:16) We don't know anything about their books of accounts how they're doing business. We know nothing but we appointed auditor he will go on behalf of us and he will verify each and everything in depth in the company whether balance sheet whether P&L the numbers 9 lakh cr 10 lak cr 5 lakh cr 3 lakh crata motors 3 lakh crver reliance close to 9 to 10 lakh cr whether these numbers whether these profits are they reliable or not these auditors will visit the company verify those numbers and finally give us a report called audit report and now how to give that audit Audit report. How to do this audit is what we are going to learn in this subject. Now look at the
(10:52) definition. The same is what highlighted here. Audit is an independent examination. What is independent examination? You might have already seen in the ethics ethics chapter. Independence has two perspective. One independence of mind. Another one independence of appearance. Here they said independent examination. What do you mean by independent examination? They're mainly talking about mind.
(11:15) Yes or no? Auditor must examine what you need to examine financial information of an entity. So what you need to examine financial information why you are examining with a view to express opinion there on what is the objective with a view to express an opinion there on.
(11:38) So opinion giving is what ultimate remember this opinion is two types like you might have seen in audit report chapter called unmodified opinion. Modified opinion simply positive opinion negative opinion yes or no very simple auditor went to the company he saw balance sheet pel he saw background accounting data real trans transactions are real or not balance sheet balance sheet items numbers are they real or not assets are they physically there or not he will go and see if at all they are not in reality what is shown on the paper what is there in the reality the both are not matching auditor will directly give
(12:12) negative opinion suppose What is shown in the company balance sheet and what is there in the reality if both are matching then auditor will come and give positive opinion. Tell me will this objective nothing but nothing but simply tell me what is the objective of the auditor to give opinion.
(12:31) What is the objective of auditor? To give opinion based on evidence obtained by him based on evidence obtained by him. How he will get evidence? He will go and verify financial statements. He will go and verify balance sheet. He will do something called verification and that verification is called as what examination and that verification is called as audit procedure.
(12:50) In our syllabus everywhere in the upcoming chapter there so many places where you will hear the word where you will see the word audit procedure. Audit procedure is nothing but examination. Audit procedure is nothing but verification. Why are you doing why are you verifying? Because I have to give opinion to the shareholders.
(13:09) They all send me to check whether the balance sheet and P&L is correct or not. So I have to give an opinion to them. So if I have to give them opinion first I should get the opinion. If I have to get the opinion I should verify. If I have to verify I should go and physically meet them, check the records all that.
(13:27) This process is called as audit procedure and whatever information I am getting right when I'm verifying I will get information from company, I will get information from records. That information which I am getting is called as audit evidence. Are you getting it? No. So audit audit is an independent examination of any entity. Okay. Whether or not profit oriented tell me is audit is it is audit necessary only for profit entities.
(13:51) For example, many religious trust, religious temples, religious mosques and all that and all were there. Charitable institutions were there. Nonprofit entities were there. They are also having they also dealing with money. They there is also possibility that what they show in income and expenditure what is there in the reality? there is a possibility of mismatch. So audit is necessary for every entity.
(14:13) It may be profit oriented, nonprofit oriented. Why are we doing audit at the end of the day? Whether the balance sheet, whether the P&L, are they right? Are they wrong? We are doing audit at the end of the day only for one thing. Whether the balance sheet and PNL are they right or are they wrong? Are they are they correctly showing the real picture or they window dressing? What is it called as window dressing? So are they manipulating? Are they showing a manipulated picture? So at the end of the day, auditor want to check whether balance sheet and P&L, whether balance sheet and income and expenditure,
(14:43) whether you call it as income and expenditure account, whether you call it as profit and loss account, whether it's a profit oriented company, whether it's a nonprofit oriented company, whether it is a small company, whether it is a partnership firm, whether it's an AOP, whether it's a society, it doesn't matter.
(15:02) Legal form doesn't matter, size doesn't matter, your business objective doesn't matter. At the end of the day as an auditor I will verify your financial information and I will tell to people whether that information is reliable or not correct or not I mean right or wrong that's only my duty my duty will not change my objective will not change because of your objective because of the size because of the form my objective remains same now what do I examine financial information this financial information is two types just a This financial information is two types. What are they? Books of accounts and financial statements. Correct?
(15:41) Just minute. So the financial information is broadly divided into books of accounts and financial statements. Now books of accounts means we know remember we have to give opinion on what? We have to give opinion on financial statements. Correct.
(16:06) Financial statements are what? Balance sheet, P&L, notes and cash flow statement and statement of changes in equity. These are the financial statements. And on this we should give opinion and our opinion is two types either positive or negative. Unmodified opinion or modified opinion. Correct? Now you know these financial statements are multiple types. These financial statements are two types.
(16:27) Generalpurpose financial statement. Special purpose financial statements. Special purpose financial statements are those which are prepared using special purpose framework. Generalpurpose financial statements are those which are prepared using generalpurpose framework.
(16:47) Our entire subject is from the context of generalpurpose financial statements audit. The entire CA into what we are learning audit is audit of generalpurpose financial statements. That is what we are actually learning. We do not have in our syllabus audit of special purpose financial statements. For that we have something called 800 series standards. Standard SEA 800 85 810 like that some series is there. So that is there only in CA final.
(17:12) We have in our syllabus standards on auditing from 200 to 720 sorry 710 only 720 also we don't have in our syllabus. We have in our syllabus standards from 200 to 700 series. And remember we totally have 35 standards on auditing. We totally have 35 standards on auditing. I'm talking about auditing standards. There are three more auditing standards which are 800 series which are dealing with special purpose framework related standards. Okay.
(17:45) So main standards 200 series to 700 series we have only 35 standards in our syllabus. And the following standards we don't have in our syllabus 240 250. In 200 series these two standards we do not have. Then in in a 400 series 42 we do not have. 42 we don't have. In 500 series 540 we do not have. In 600 series 600 and 620 we do not have. In 700 series 720 we do not have. Totally 2 3 4 5 6 and 7.
(18:13) Totally seven standards we do not have in our syllabus at all. But if you see audit report chapter 600 related one content is there 600 standard has so many but one point is covered in audit report chapter only to that extent 600 standard we have in our syllabus rest of the standards remaining 29 standards we have in our syllabus.
(18:38) Now often students ask me this question how many marks standards weightage literally speaking 80 plus marks standards only we have all the chapters are nothing but standards only these chapters what are they bank audit what is it bank audit items of financial statements different types of entities different types of entities only these three chapters are not called as standards out of 11 chapters Does only this three bank audit weightage 5 to 7 marks different types of entities 12 marks.
(19:14) This one 12 marks hardly 12 + 2 24 + 7 maximum 32 35 marks only remaining syllabus entire syllabus of 80 minimum 80 marks to 85 marks is standards only. Minimum 80 to 85 marks of the syllabus that we have is standards only from these 29 standards. For example, if you see the first chapter, nature, objective and scope of audit, it deals with 200 standard.
(19:41) Ethics and terms of engagement, it deals with SEA 210, SQC 220. Audit documentation one chapter is there 230. Audit evidence chapter eight standards. Completion review six standards. Audit report some seven standards we have. So every chapter that we are discussing for example there's a chapter called strategy which is nothing but 300. Risk assessment internal control chapter is there 300 sorry 315 320 330 standards are covered in risk assessment and internal control chapter. So literally speaking what we are discussing is standards only predominantly able to
(20:12) understand. Now enough so look at so financial statements are two types. What are they? General purpose financial statements special purpose financial statements. Special purpose financial statements or those financial statements which are prepared as per special purpose framework.
(20:32) You know whether it is a general purpose framework, whether it is a special purpose framework, they are dealing with financial reporting frameworks. They are talking about what? Financial reporting framework. You might have heard this word applicable financial reporting framework. What do you mean by applicable financial reporting framework? Remember uh a bank for example you take a bank they have to prepare financials insurance company has to prepare financials electricity company has to prepare financials but all of them they don't require they don't prepare financials in the same
(21:02) format a normal manufacturing trading company service industry software company they also prepare financials why to that extent schedule 3 itself you see it has three divisions division one deals with those those entities who are following accounting standards division two format deals with those entities who are following India. Division 3 deals with NBFCs.
(21:26) So, schedule 3 itself has three frameworks. Schedule 3 itself has division one framework, division two framework, division 3 framework. So, an entity has to prepare financial statements as per respective framework applicable to it. For example, NBFC will prepare financial statements as per schedule 3 division 3. Yes or no? Whereas a normal company, manufacturing company, listed company has to prepare financial statements as per division two, a bank has to prepare financial statements as per banking regulation act. So depending upon nature of the
(22:00) entity, depending upon nature of the entity and objective of the financial statements. Who will prepare financial statements in any organization? Management. Who will prepare? Management will prepare financial statements. Is it auditor's responsibility to prepare financials? Never. It is always the management responsibility to prepare the financial statements.
(22:25) Depending on the nature of entity, objective of the financial statements, whatever financial reporting framework, whatever financial reporting framework, depending upon nature of entity, objective of financial statements, depending upon this, whatever financial reporting framework management is adopting, whatever financial reporting framework they are following, that financial reporting framework is called as applicable financial reporting framework. Are you getting it? Now what do you mean by financial reporting framework? Financial
(22:56) reporting another word is framework. Framework refers to guidelines, rules and regulations, policies and procedures. Anyway you can call framework refers to guidelines. Yes or no? Financial reporting means what? These guidelines for what? These guidelines are for preparation and presentation of financial statements.
(23:20) These guidelines are for preparation and presentation of financial statements. So rules and regulations for preparation and presentation of financial statements is called as financial reporting framework. What is a special purpose framework? Special purpose framework is a financial reporting framework where financial statements are prepared in accordance with requirement of a specific user.
(23:46) for a specific user purpose. If at all I am preparing balance sheet P&L, we call them as special purpose financial statements. Look at any company in in reality whatever the financial statements balance sheet PN you in a day-to-day life you see they are not prepared for any one particular person objective.
(24:03) They are not prepared for any specific group of users or specific user purpose. These financials are prepared generally every year 31st March they prepare financial statements in India by every company. But what purpose they prepare? There is no specific purpose.
(24:21) Generally they prepare and those financial statements are called as generalpurpose financial statements. General purpose financial statements are those which are prepared using generalpurpose framework. What is generalpurpose framework? You know you can see here generalpurpose framework means what? General purpose framework is a financial reporting framework.
(24:40) Remember in entire auditing whenever the word framework comes we are only discussing about financial reporting frameworks. Yes or no? General purpose framework is what framework that is dealing with financial statements only. It's a financial reporting framework. How that framework is designed? It is designed to meet common needs of common financial information needs of wide range of users.
(25:03) Common financial information needs of wide range of users. Very simple. You see schedule three. Schedule three balance sheet format, P&L format, accounting standards, are they drafted? Is schedule three balance sheet P and accounting standards are they drafted for keeping in mind any particular section of the people? No.
(25:22) Whether you are a banker, whether you are a shareholder, whether you are an insurance company, whether you are a tax authority, whether you are a government, whether you are an employee, most of you, every one of you want to know how much turnover I'm making, how much exp what expenses I'm incurring, how much profit I am making, how much capital I invested in the business, where I invested in the business, what liabilities I entered into.
(25:42) This information is what everybody want to know from my business. Yes or no? This information is what everybody want to know from my business. Getting it? So I am giving that information like how much I invested in the business capital, how much savings I have reserves, where and all I invested assets, what all obligations I have liabilities, how much income I generated turnover, how what expenses I incurred, how much profit ultimately made, how much each shareholder is getting per share, common information which everybody is looking for. I am keeping
(26:12) in one set of financial statements and that financial statements are called as generalpurpose financial statements and that framework is called as generalpurpose framework. Are you clear? You know general purpose framework has these characteristics fundamental assumptions gap accounting standards they are the one which is prepared actually every year.
(26:36) So our entire audit subject we are discussing what audit we are discussing audit of financial statements. Which financial statements? General purpose financial statements. We are not discussing special purpose financial statements. We are only discussing generalpurpose financial statements. Clear all of you? Next. Now this financial reporting framework. No again two types. Compliance framework. Spare presentation framework. This framework is again two types.
(26:59) Compliance framework. Fair presentation framework. Don't worry I will slowly enter into the subject already this is this is these are all important questions MCQ purpose these are all will come getting it general purpose framework means what special purpose framework means what compliance framework means what fair presentation actually this entire discussion is there in the audit report 700 chapter in SA 700 this entire discussion is there in the introduction but without discussing this we can't start the subject getting it now
(27:24) compliance and fair presentation what is a compliance and fair presentation remember across the world general purpose financial statements follow fair presentation framework approach. They don't follow compliance framework approach. Compliance framework means what you know suppose there are some rules which are talking about preparation of financial statements.
(27:47) If the rules are drafted like this like you should prepare financial statements strictly as per the rules no deviation at all then that rules nature is called as what compliance framework fair presentation and compliance. This is talking about the framework nature. This is talking about the nature of the framework.
(28:06) If the if the rules and regulations are such that you cannot deviate from them, you should blindly follow them. Then that rules are called as compliance. Suppose if the framework nature is like you can deviate, you can deviate for achieving fair presentation to achieve fair presentation for better presentation. If at all rules are permitting you to deviate then those frameworks are called as fair presentation framework.
(28:31) For example, hypothetical scenario. Let us assume accounting standard says you can only follow SL method or WDV method. Hypothetical assumption. It's not reality. Accounting standard is very good. It's it is permitting deviations and all. But for a scenario for the purpose of example sake, let us assume accounting standard is saying either you can follow WDV method or you can follow SL. But I bought a machine which depreciates based on how it is used.
(28:57) Based on number of units produced only it will depreciate. First year I produce 10,000 units. Second year I'm producing 5,000 units. Third year I'm producing 20,000 units. Fourth year I'm producing 40,000 units. Fifth year again I'm producing 10,000 units.
(29:14) So my missionary useful life is directly decided by units produced. In such case what method is suitable for me? Units method production units method is suitable to me. But when I am calculating depreciation, my accounting standard is saying I should either follow SLM or WDB. But not units method if at all accounting standard says like this yes or no.
(29:33) Now my I am a company incorporated under companies act. My company's act is also saying you should prepare financials as per accounting standard only. They are saying like that only. For example, then the framework is compliance. Tell me in this case if I follow SLM or WDB will it reflect truly depreciation matching concept and all will it truly reflect the substance over form? No unfair equal depreciation is unfair because my missionary is not used equally every year unfair that method is. Are you getting it? Suppose if my accounting
(30:03) standard or companies act if at all they are saying you can achieve true and fair view. What is important is true and fair view is important. And if at all companies act is saying true and fair view is important. Luckily 129 subsection one company's act says true and fair view.
(30:21) What company success you know you should prepare financials as per schedule three as per schedule three as per accounting standard. And they should give true and fair view. Originally they are saying follow accounting standard. Originally they are saying follow schedule 3. But true and fair view is also important. Suppose if at all accounting standard what point what rule accounting standard is there there know what rule accounting standard says you know if at all the rule is not correct for you you can deviate you can deviate follow what is right according to you so that financial statements ultimately reflect true and fair position what is the difference between
(30:58) true and fair true means it's only fact fairness means genuinity able to understand very simple I sold goods to a customer for 100 cr I sold credit basis I sold in my balance sheet 100 cr I showed in the first year second year and third year customer became insolvent I can only recover 50% from him I can only recover how much 50% from him 100 cr is a sale value 100 cr is a liability how much I can recover only 50 cr I can recover but I am I am showing to the balance sheet I am showing to the public everybody I have 100 cr worth of asset
(31:35) tell me you have 100 cr worth of asset. It is true but can you show to the public that you are really having 100 cr worth of asset tell me how much you can recover only 50 you can you can get 100 cr you can't get only 50 you can get 50 cr if you show that's fair presentation are you getting it financial statements no they should not only show true number they should also show fair number getting it fairly tell me logically tell me reasonably tell me how much you can recover and that is called as fake able to understand. So true and fair. Now in a fair presentation framework, fairness
(32:12) will be given major importance than the truess able to understand. Now what is a fair presentation framework? It is a framework where financial statements are prepared according to the framework. You follow the framework guidelines only. But you can deviate from the requirement of the framework if at all fair presentation is to be achieved. If you want to achieve fair presentation, you can deviate from the framework.
(32:37) Getting it? Come, you know, you can also include disclosures beyond the framework. Suppose you know with respect to plant and missionary schedule 3 saying disclose five points useful life, residual value, you know, expert related who who estimated this registered value revaluation some information.
(32:56) If at all you felt there is one more important data relating to plant and missionary. Suppose some plant and missionary damage happened. Some damage happened. But schedule 3 is not asking you to disclose that. But plant and missionary got damaged. Yes or no? Without showing the damage people might misunderstand. Company has a so much of valuable plant and missionary.
(33:13) So disclose the damage related information also because that is what fair that is what genuine able to understand. Can I disclose additionally like this? This is a question. Suppose you want to disclose additionally. Can I disclose additionally? framework is silent on that framework is not prohibiting you.
(33:31) If at all framework is silent on additional disclosure, you can happily disclose. If that is the kind of framework that you are following, then that framework is called as what? Fair presentation. So when do we say a framework is a fair presentation. Point number one, it will give you permission to disclose additionally whatever you want. Two, it will give you flexibility to not follow that rule.
(33:51) Follow some other rule. At the end of the day ultimately fair presentation should come. Ultimately what you are showing must be true and fair. So the words true and fair view in the auditor's opinion you know right you might have seen the word opinion. Auditor has to give opinion whether financial statements are showing true and fair view or not that you should give opinion right whether true and fair view word that true and fair view word will appear only in this type of framework. In a compliance framework no in a compliance framework
(34:20) no we straight away give opinion that uh financials are prepared as per the law that's it are they prepared as per the law or not that's it in a compliance framework luckily we don't have in India compliance framework at all not only in India across the world the frameworks are fair presentation frameworks that's it next what is the objective of the auditor now let's enter into objective of the auditor in your first chapter nature objective and scope of audit for example you Nature, objective and scope of audit. This is in the first chapter.
(34:53) Yeah, I think fourth concept objective of the auditor is what? The auditor should obtain reasonable assurance that the financial statements are free from material misstatement. Whether due to fraud or error, you must obtain reasonable assurance whether the financial statements are free from material misstatements. I am appointed as an auditor of Tata Consultancy. I am appointed as an auditor of Tata Motors.
(35:18) I am appointed as an auditor of Reliance Industries Limited. My objective is very simple. Whether this balance sheet and P&L is it free from material misstatement or not? Like free from means what? Is it containing mistakes? Huh? Not containing mistakes.
(35:37) If at all they are not containing any mistakes, we say that free from material misstatement. Suppose if they are containing mistakes, then I will say that they are not free from material misstatements. So my objective is to obtain reasonable assurance whether the balance sheet is free from material misstatements. Okay.
(35:57) Once you got the assurance what you have to do the auditor has to report on the financial statements and communicate findings. You finally have to report on that fine. Now before I discuss about objective so misstatement what do you mean by misstatement? One topic once this misstatement definition discussion is over fundamentals topic will be over. Now what do you mean by misstatement? Observe the definition carefully.
(36:17) Only highlighted part you see. What is a misstatement? It's a difference between reported financial statement item and that is required under applicable financial reporting framework. Difference between what is reported. Difference between what is reported and what is required under framework. Getting it? Suppose a company prepared balance sheet. Company showed some fixed asset value.
(36:44) What is shown in the framework? What is required as per the framework? That value as per accounting standard that value. How much? How much you showed in the balance sheet value? Both are same. Then no misstatement. If there is a difference, then there is a misstatement. And you know the definition says misstatements in financial statements can happen in four ways. It may be in the form of amount. It may be in the form of classification.
(37:07) It may be in the form of presentation. It may be in the form of disclosure. Now you see definition of misstatement. A misstatement is a difference between amount classification presentation disclosure of a reported financial statement item and the amount classification presentation disclosure which is required under applicable financial reporting framework.
(37:32) Amount classification presentation disclosure required under framework what what amount classification presentation disclosure you should. If there is a difference then that's a mistake because what is there in the framework only you should follow able to understand whatever is there in the applicable framework only you should follow. If you're not following applicable framework then that is called as a misstatement.
(37:50) Now how a misstatement can happen in amount very simple inventory example you take lower of cost or NRV yes or no that is a valuation principle rise for example company cost of inventory 100 crV value is 70 cr only but company showed in the balance sheet 100 cr only yes or no what the framework says framework says amount 70 cr but company showed what price 100 cr now what you showed what you reported what is required to be reported Both are different then this is called as a misstatement. Tell me the misstatement.
(38:22) No auditor will react on this mistake only when it is material. Only when it is material. That's why the objective standard says what? Whether misstatements are free from whether the auditor has to obtain reasonable assurance whether financial statements are free from not simple misstatements material misstatements. Yes or no. The second mistake classification.
(38:47) Classification very simple. You know if you classify fixed assets as a current asset wrongly. See balance sheet total is same. Balance sheet total assets value is always correct. But what company did you know fixed assets they classified as current assets. Just they they shifted from non-current to current. That is it.
(39:10) Because of this what happened? You know company working capital position came positive. Company working capital position came positive. In reality company working capital was negative. It is a adverse situation. Company financial position liquidity position is adverse. As per liquidity analysis, company position is worst.
(39:31) But to show in order to you I mean but but to hide this picture. What company did you know they misclassified one big plant and missionary to current asset. They simply classified work in progress is there. Capital work in progress. What they did you know they they treated it as revenue inventory working in progress they classified by mclassifying you know a non-current item to current item what company's indirectly showing you know company has a very sound financial position liquidity position is very strong like that company showcasing so through classification they can do
(40:00) mistake through classification they can do mistake another misstatement they can do is presentation another mistake they can do is presentation how presentation mistake can be And detours example you can take. Remember dattors minus provision is equal to net dattors you must show in the asset side.
(40:24) Correct? So when you're showing dattors no you must always show you must always show provision provision liability side trade receivable left side liable like asset side. This is not the right way of presentation. What is the right way of presentation? Trade receivable how much provision here itself you should adjust and balance only you must show this is the right way of presentation. Correct.
(40:40) That's it. So misstatement can be done even in presentation. Fourth mistake. Misstatement can be in disclosure. Financial statement, balance sheet. People only think mistake means amount. No, mistake can be in the way amount or it can be in the form of classification. It can be in the form of presentation. It can be in the form of disclosure. Disclosure mistakes are two types.
(41:04) Partial disclosure is one way of you know misleading people. Nondisclosure. non-disclosure like you you're not at all disclosing that is also another way of statement again these disclosures no we can do mistake in narrative disclosures or we can do mistakes in quantitative disclosures quantitative disclosures means what very simple if you see schedule three employee benefit expenses is there total amount in the P&L now breakup you should give employee benefit expenses salary and wages how much welfare expenses how much provident fund retirement benefit how much breakup you should give that is just a disclosure requirement in the notes to
(41:40) accounts and that is called as quantitative disclosure. Are you getting it? Same way companies will also make some narrative disclosures. Narrative disclosures means what I will show you in audit report chapter notes to accounts. In notes to accounts they will so they will make they will make some statements. We follow acroal method.
(41:58) We follow percentage completion method. We are recognizing a liabilities like this. We are recognizing assets like this. Some narrative disclosure this they give. If that is wrongly stated, if statements are wrongly made in the notes to accounts, then that's a misstatement in narrative disclosure.
(42:16) Able to understand now why we should understand misstatement these many types because our opinion wordings, our audit reportings will vary. Our audit reportings will change depending upon the type of mistake. In the recent January exam also this is what tested able to understand. So with this misstatement term is also over. So now this mistake will arise because of two reasons.
(42:41) Intentionally these mistakes might happen in the balance sheet or unintentionally it might happen. If it is intentionally happened we call them as fraud. If it is unintentionally happened we call them as error. What is fraud? What is error not required for you? Are you clear? That's it. So with this fundamentals on auditing is completed able to understand? Now the next topic is nature objective and scope of audit. That's a 2 minutes. Okay, we'll start the next topic.
(43:08) But clarity reasonably, yes or no? Yes, let's begin the first chapter nature, objective and scope of audit. In this first I will directly discuss with respect to you know what is an engagement. There is a topic called what is an engagement? What are the benefits of external audit engagement? Many a times in exam from this segment only they will ask this is one segment in the first initial chapter this know nature objective and scope. There is another segment principal aspects to be covered in audit. Scope of audit includes what?
(43:42) Scope of audit excludes what? And inherent limitations you know in this chapter these are generally important topics. Scope of audit aspects to be covered in audit inherent limitations in audit and from seventh concept whatever I'm showing here completely important. Getting it? Now you know you know what is the subject that we are learning? Audit. Actual subject name is auditing and ethics.
(44:07) Though we don't have ethics related syllabus much we only have little bit in ethics chapter. Ethical principles only we have in our syllabus. So technically what we are learning is audit. But you know we as a chartered accountant can provide various types of services.
(44:25) We as a CA can provide various types of service in that one services audit. We are not only doing audit. One of the service that we render we call it as audit. Typically whatever works that we provide we call them as what you know whatever works we do it is called as engagement. In a business no it is called as a contract. In profession no that in our CA profession no we call them as what? Engagement.
(44:49) Engagement means what? Here they have given a meaning. Engagement refers to a formal agreement between the auditor and client. See at many places the word auditor is used. Just because the word auditor is used the work you are doing may not be audit. You are simply called as generally your popular name is what? Auditor. We are called as auditors.
(45:08) That doesn't mean we are doing auditor. The moment you are a CA you are generally referred as what? Auditor. But right now I'm doing teaching you getting it? Activity name is different. The person referred as is different. So in many standards no in at many places the word auditor will be used. Actually there you are not actually doing audit service.
(45:28) You are doing some other work but you are referred as what auditor just why why I'm discussing this and you will get it. So whatever work we do we we simply call them as what? Engagement. Engagement is what? A formal agreement between auditor and client you know what are all works we provide you know we what are all works that we do know they are broadly divided into two types. They are broadly divided into two types.
(45:49) Assurance engagement what is it? Assurance engagement. Another one is what? Nonsurance engagement. Assurance engagement and nonassurance engagement. Whatever work you do, these are the two ways. Getting it? For example, now tell me what we thought in our fundamentals or what you know about audit. Definition of audit. Audit means opinion.
(46:11) We will give. Audit means what? Opinion. Opinion. Why? Why are we giving opinion? So that our report, our opinion will be used by some third party and he will take some financial decision. Correct? So indirectly we are giving confidence to third parties.
(46:31) Yes or no? The people shareholders they invested thousands of crore money in the company and they are not allowed inside the company. They don't know what is happening inside the company. They are all tensed what is happening inside the company about their money. So we on behalf of them we went to the company verified everything top to bottom 100% we verified totally we verified and then we are coming back coming back and giving them opinion don't worry everything is good your money is safe indirectly we are giving that confidence to the users yes or no that confidence that we are giving right and that confidence is called as assurance that confidence is called as
(47:01) assurance you know so if at all you are appointing me or giving you assurance that work is called as assurance engagement. Suppose if I am taking some work for example we know right auditors do IT returns filing GST returns filing and all suppose you know a client came to me he just want me to file IT return nothing else he will give the data he will give his income details and all I will have to compute income tax as per income tax provisions tax computation and I will tell him how to pay the tax he will pay the tax then I will file the IT return is there any confidence I'm
(47:37) giving to anybody here nothing yes or no this is a nonissue Assurance engagement what is this called as a non assurance example I'm just telling you getting it now again you can give assurance on you can give assurance on historical financial information other than uh other than historical financial information.
(48:03) The auditor The auditor can give assurance on historical financial information other than historical financial. For example, you know, other than historical financial means what you know other than historical financial means nothing but prospective nothing but prospective financial information. In the recent JAN exam, this was only asked what is a prospective financial information where the focus is on in a pro in a prospective financial information where the focus is on what level of assurance generally will be there in the prospective financial
(48:34) information. This question is what asked in Jan 25 exam getting it? Fine. Anyhow, so we give assurance on historical financials other than historical financial. Now again, now again historical financial information, no we give two levels of assurance. We can give two levels of assurance. One assurance is called limited assurance.
(48:59) Another assurance is called reasonable assurance. Another assurance is called reasonable assurance. If you recolct just we have seen objective of audit. In the objective of audit what we understood the auditor obtains reasonable assurance whether the financial statements are free from material misstatement.
(49:19) Yes or no? Reasonable assurance engagement. What is it called as reasonable assurance? What is a reasonable assurance? High level of assurance. Reasonable assurance is a high level of assurance but not absolute assurance. Reasonable assurance is a high level but not absolute. You know what is the reasonable students engagement? Audit. This is what we are learning in our subject.
(49:43) We are only learning one type of engagement in our syllabus. We only have one type of engagement that is audit which is a reasonable assurance engagement where we are giving assurance on historical financial statements. Tell me we are giving audit report right. We will give audit opinion right. Are we giving opinion and report on future data? Past data.
(50:09) Past past already past completed transactions, events, policies, balances. Yes or no? On that we are giving report. Yes, that is reliable. No, they're not reliable. We are giving confidence to the people on the past financial data and that is called as historical financial information. Now on the historical you can not only give audit you also give review you also give some not only reasonable sometimes you may give only limited assurance limited assurance example is what you know review limited assurance example is review engagement we call it as what is it called as review engagement now
(50:47) example suppose I am appointed as an auditor for a listed company listed companies every quarter They need to file financial information with the SEBI quarterly financial results we call them as but I have not yet started the audit. How we know they're asking my report sir we want your audit report on the quarterly financial sir I am recently appointed just one month ago I'm appointed I have not yet started the audit how can I give audit reasonable assurance and all not possible then company told me sir sir no no don't give
(51:16) that little level of isurance just tell that nothing you found bad you know reasonable assurance is saying whether the financial statements are good or bad whereas review no I will simply say they are not bad in a review what I will say they are not bad getting it because I don't know whether they are good or not but I will briefly verify I will briefly verify I will logically see whether the balance sheet numbers P&L numbers and logically correct or not you know in a review we perform two types of procedures in a review we perform two types of procedures inquiry and
(51:50) analytical procedure I hope you have heard of this inquiry and analytical procedure you know it in audit evidence topic you might have seen already now whereas in audit no we do so many procedures inquiry reinspection, observation, recalculation, reperformance, external confirmation, analytical procedure.
(52:09) So many we do in audit. So many types we will verify the data. Whereas in a review, we only enquire whether the data is correct or not. We only logically see whether the data is correct or not. When I logically see the numbers, no. When I logically see a company compared to last year turnover increased, do expense increased to profit also increased.
(52:27) Everything is logical. I did not find anything suspicious. I will not go inside deep. I will briefly see analytically is it correct or not. If everything seems correct, no, I will give opinion. No sorry, sorry. I will give conclusion. What is it called as? I will express a conclusion. Nothing has come to my attention. How I will give? Nothing has come to my attention. To say that the quartal results are incorrect.
(52:52) Are they incorrect? To say they are incorrect? I did not have any evidence. I did not have any evidence to say that they are incorrect. Remember on audit you must obtain sufficient appropriate evidence. Even in review also you must obtain sufficient. In audit you must obtain sufficient appropriate for reasonable level.
(53:13) Whereas in review you shall get sufficient appropriate level for a basic confidence limited level of assurance. It is like something is better than nothing. Review is like something is better than nothing. Suppose if I saw a movie it is fantastic then I will say it is good to others.
(53:32) Suppose if it is not good suppose it's okay one time watch then I will say it's not bad able to understand limited assurance is like not bad able to understand so that is called as what review now for audit we have something called standards on auditing for review we have something called standards on review engagement then there is another assurance that I can provide what assurance other than historical financial information I can also provide Assurance on not only historical other than historical for example I can provide assurance on PFI prospective financial information or I can also give assurance on controls at
(54:11) the entity controls at the entity. If you recollect in fin one there is a service auditor report there is a wordings used called service auditor report when the inventory is with third party. Yes or no? obtain a service auditor report on internal control system implemented at third party relating to inventory that is nothing but assurance audit report that is nothing but assurance audit report don't worry if at all you're not aware of it we'll discuss in the SA 5.
(54:40) 1 standard clear so I can give assurance on PFI prospective or I can give assurance on control now let's talk about prospective financial information what is a prospective financial information prospective financial information is financial information which is prospective which is future oriented in future how much is my sale in future how much is my expense in future how much is my profit about future how can I calculate future accurately we can't future data is calculated based on assumptions in a pro in a PFI what auditor will give assurance you
(55:18) know he will not give assurance on the information he will give assurance on the assumptions In a prospective financial information engagement, the auditor will give assurance on assumptions used to prepare PFI. Whether these assumptions are reasonable or unreasonable. Whether these assumptions are reasonable.
(55:42) Company prepared future estimated financial statements. We call them as projections. We call them as forecast. The prospective financial information is called as a projection. It is either called as a forecast. The auditor will give assurance on assumptions used behind the forecast. Assumptions used behind the projection. Whether these assumptions are reasonable or not, whether these assumptions are unreasonable.
(56:07) But tell me there at the end of the day assumptions only. Can I give high level of assurance on that? I cannot give high level of assurance. High level of assurance means what? Reasonable assurance. I cannot give high level of assurance on future financial information. So but I am giving assurance right. Sorry.
(56:26) But I'm giving assurance right at the end of the day. Yes or no? On PFI only I'm giving assurance right. But I know that it is not a high level right. So what level of assurance it is? Moderate level. Moderate level MCQ it is important. The level of assurance that we give on prospective financial information is moderate. The level of assurance that we give on in case of review limited assurance.
(56:50) The level of assurance that I give in audit is reasonable which is a high level. But can I give 100% assurance in audit? Impossible. It is not at all possible because we are having so many inherent limitations. Yes or no? There are so many inherent limitations. We'll come back to it later.
(57:14) Now look at look at so you know simply whatever work that we are doing we call them as what assurance engagements yes or no so assurance engagements are various types yes or no assurance engagements are various types what is an assurance engagement in an assurance engagement practitioner nothing but we auditors yes or no we provide conclusion why are we giving conclusion or something like that to enhance confidence of users Yes or no? We are giving them confidence. How are we giving them the confidence? By giving some report. We are giving some
(57:46) conclusion. Conclusion includes opinion. How we will give? Through a report. Through a report. About what? About what? We give conclusion about evaluation of subject matter against criteria. Some subject matter is there. Some criteria is there. As per the criteria, subject matter prepared correctly or not.
(58:08) I will check and I will give my conclusion. Suppose in audit no in audit no auditor is there client is there financial statements are there whether these financial statements are true and fair or not I should give opinion correct I should give opinion on whether the financial statements are true and fair financial statements is subject matter how do I know whether financial statements are correctly prepared or not applicable financial reporting framework I will check that whether the financial statements are prepared in accordance with applicable financial. Look at the
(58:41) objective. Auditor has to obtain reasonable assurance whether the financial statements are free from material misstatements and are prepared in accordance with applicable financials. You should check financial statements are they prepared in accordance with applicable framework means this is called as criteria. What you have to verify financials that is called as subject matter.
(59:02) So in in an audit in an assurance simply in an assurance auditor will express a conclusion. Auditor will express a practitioner will express a conclusion or opinion to enhance the confidence of the uso by evaluating subject matter against criteria. Accordingly in an assurance engagement what elements are there? Totally five elements are there. One ultimately report we will give yes or no.
(59:30) Whatever we are giving confidence to the user. How do we give confidence to the user? By a report. That report will contains what? That report will contains the assurance. Nothing but conclusion. In case of audit, we give opinion. In case of review, we give conclusion. In case of assurance on PFI, we give conclusion.
(59:50) You able to understand? So the report will contain assurance. Yes or no. Ultimately the written report is there. Right? That is the outcome of the assurance engagement. Okay. In that report what I will how I will give this report based on my evidence based on my evidence I verified no subject matter against the criteria I verified balance sheet P&L books of accounts background data all that I spoke to the company management all that finally only I gave an opinion so I gathered something called evidence and that evidence is called as sufficient appropriate evidence in order to give assurance to third party first you must have that assurance first you must have
(1:00:25) you must get that confidence How will I get the confidence? Only when I have evidence in my hand, I can give opinion on that. Only when I have evidence in my hand, I can talk about whether they are right or wrong. Yes or no. The practitioner will obtain sufficient appropriate evidence to form conclusion to form opinion.
(1:00:44) Sufficiency is a quantity. Appropriateness is a quality. We have a chapter called audit evidence. There we will discuss about quantity, quality, all that. Getting it. Next you know how do next next in assurance engagement three parties will be there. Who are they? Practitioner first I am there. Now tell me I will do what? Audit of financials. In case of audit what I will do audit of financial where financials.
(1:01:08) Who will prepare the financials? Management. They are responsible right? We call them as responsible party. Now I prepare fin. Now management will prepare financials. I will do the audit. I will verify the financial statements. Then finally I will give written report. That report is used by users. They are the third party intended users.
(1:01:27) They are called as what? Intended users. They are nothing but they use this assurance report to make the decisions. And remember audit relates to historical financial information while practitioner can also offer assurance on non-historical. Tell me as I already told you we can give assurance not only on historical, we can also give assurance on other than historical. In audit we give assurance on historical.
(1:01:52) In other than audit we can give I mean we can also give assurance on other than. So as a practitioner as an auditor as a CA you can provide assurance on historical financials you can provide assurance on other than on historical financials you can provide reasonable assurance. Limited assurance reasonable assurance is called as audit.
(1:02:11) Limited assurance is called as review. Yes or no? Subject matter means what? Information which is examined by practitioner. That information which auditor verified ultimately yes or no that is called as subject matter. Now when you verify no you gather some evidences and all that is called as sufficient appropriate evidence.
(1:02:30) What you will verify? You will verify financial statements yes or no. For example in audit you verify financial information books accounts. So all that you verify with what? What you will compare? You will compare these financial statements with something called rules and regulations benchmarks. You will compare with benchmarks.
(1:02:48) You will compare the balance sheet with accounting standard. You will compare the balance sheet with schedule three. Whether they are prepared as per schedule three, they prepared as per accounting standard. Benchmark. So benchmarks are nothing but suitable criteria. Benchmarks are nothing but criteria which is used to evaluate the subject matter. Five more minutes. Okay.
(1:03:07) Then now I told you audit I mean now assurance. Now what is assurance engagement? What is element of assurance engagement? We over it is over. So what is the purpose of assurance engagement? You will give an opinion. Yes or no? where users and all will make confident decisions based on your opinion because they know very well the chance of incorrect incorrect information in the financials is reduced because you verified them.
(1:03:31) So in the balance sheet P&L is there any incorrect information the chance is reduced a lot yes or no. Now now I told right again assurance can be on you know historical financial other than historical on historical you can give two level of assurance reasonable limited reasonable assurance is called as audit limited assurance is called as review. Audit provides reasonable review provides limited which is a lower level.
(1:03:55) Review means what? Audit means what? In audit no in review no first of all only few procedures I will perform to obtain evidence few procedures means what? Inquiry analytical procedure only I will perform. I will not perform anything else very briefly I will check. Whereas in audit I will do detailed audit procedures.
(1:04:14) detailed procedures I will perform like in audit no we perform in audit inquiry inspection you know external confirmation recalculation reperformance analytical procedure observation physical verification so many I will do in audit now what is review 2400 series is the standard we have in CA final we don't have in CA intera we only have a discussion on meaning of review now what is the relationship both are dealing with historical only but audit provides reasonable assurance.
(1:04:47) Review provides limited assurance. Like what is the difference between reasonable and limited? Reasonable is a high level of assurance. Limited assurance is a lower level of assurance. Now whereas in audit we do elaborate and extensive procedure, inquiry, inspection, analytical, recalculation, reperformance, observation, you know all that. Whereas in review, we perform few procedures.
(1:05:07) when compared to reasonable students like inquiry analytical only we perform these examples not there in ISA that I gave you to make you understand clearly then you know in review sorry in audit we draw reasonable conclusion which is a highle clarity whereas in review we draw limited conclusions we also don't know in depth about balance sheet pend but based on whatever I saw nothing I found wrong that's what I simply tell to the people also example audit is an example of reasonable assurance engagement review is an example of limited assurance engagement that's it we
(1:05:39) completed PFI we completed audit we completed review you see how quick we are going able to understand that to without compromising any part of the explanation understood or not that's it we'll continue in the next session the rest of the topic yeah we'll continue the pending discussion in the nature objective and scope of audit fundamentals is completed no major part is also completed now we are going to discuss about prospective financial information right so I already told engagements for various types. Review engagement uh review is a limited
(1:06:10) assurance engagement. Audit is a reasonable assurance engagement. And the differences we already seen or no. Now let's look at PFI, prospective financial information. Prospective means what? It refers to financial information about future events and actions. Financial information about future events and actions based on assumptions.
(1:06:32) based on assumptions and that is called uh you know uh PFI prospective financial information which is two types either it can be a forecast or it can be a projection or a combination of both like one-ear forecast future upcoming prospective information one-year forecast four years projection like that companies do generally forecast is a best estimate assumption forecast is based on best estimate assumption projection we call it as hypo Hypothetical assumption. Projection is based on hypothetical assumption. Forecast is a best estimate. Forecast is
(1:07:08) more reliable than projection. Simple. But remember both are at the end of the day regarding future. Since at the end of the day both are regarding future. Can auditor give reasonable assurance on that? We can't. We can only give a moderate level of assurance.
(1:07:27) That I can give assurance on what? About the information about the assumption assumption. I can only give my opinion. Sorry, I can only give my conclusion. I can only give my conclusion on you know uh the assumptions used by the management are they not unreasonable? Are they not unreasonable? Negative form of basic level of assurance limited assurance able to understand instead of calling it as limited assurance we are calling here it as moderate assurance.
(1:07:53) The technical term for prospective financial information is moderate. Now what is the difference between historical? Historical reflects past events and circumstance whereas prospective is about future events and circumstances conditions based on assumptions. Historical is rooted in past. Prospective focuses on future.
(1:08:10) In prospective you know the practitioner ensures that management assumptions are not unreasonable. Nothing but we need to ensure management assumptions are reasonable. Information is properly presented based on assumptions. Whatever the information they show forecast, projection whatever is it based on assumptions correctly calculated or not we just check that.
(1:08:33) We never check on the information whether the information is right or not. Whether sales target achievable or not that and all we are not bothered yes or no. All material assumptions used by the management must be disclosed in the prospective financial information and remember future oriented. So that itself is a biggest limitation. Correct? So evidence may be there on the assumptions.
(1:08:55) Now assumptions reasonable you may have an evidence but the assumption itself is future oriented. Correct. Therefore you cannot confirm whether results will be actually achieved or not. So that's why how do we give opinion? How do we give conclusion? We give an we express a conclusion. Nothing has come to my attention to say that assumptions are not unreasonable.
(1:09:14) Are they unreasonable? I'm not saying they're reasonable. I am saying nothing has come to my attention to say that they are unreasonable. Are they wrong? To say that they're wrong. I don't have anything in my hand. Are you getting it? I did not see any data to say they're wrong. I'm not saying they're right.
(1:09:32) I am not saying they're good. I'm not saying they're reasonable. I am saying to say they are unreasonable, I don't have any information. So I absence of evidence against to it. Getting it? I'm not saying that they are wrong able to understand. That's why it's a negative form of assurance.
(1:09:51) It's a negative form of assurance. It's a limited assurance. But the technical word for prospective is moderate is insurance. Technically if someone askked you sir what is the difference between moderate is insurance and limited is insurance they both are same. Honestly speaking they both are same.
(1:10:09) Even you see in review nothing has come to my attention that causes us to believe that the financial statements are not true and fair. That's how the wordings in a review. So there the same phrasing here also same phrasing both are limited assurance only or both are moderate only. But to differentiate in review we use the word limited assurance in prospective we use the word moderate assurance that's it then there are something called qualities of auditor auditor must have certain qualities firmness discretion reliability auditor must have a high level of culture high integrity all the basic human qualities are required for the auditor you must
(1:10:38) having an expert knowledge on accounting technique all that yes or no that's it then remember the whatever types of works we You know we simply call them as what? Engagement. The engagements that we do are broadly two types. Assurance and non-assurance. Assurance is again two types. Historical financial information other than historical.
(1:10:58) On historical financial information what you give is reasonable and limited. Whereas other than historical prospective moderate level remaining services are called as nonassurance services. Non assurance engagement. Non- insurance engagement one of the standard applicable is SRS standards on related services you know totally four standards we have standards on auditing historical standards and review that is also historical both are historical financial assurance engagement on other than audit and review of historical this is nothing but
(1:11:31) what it's an assurance engagement but not audit but not review then what is it it is about PFI yes or no or agreed upon procedures compilation ation related services engagement. The auditor can even take up agreed upon compilation. What is agreed upon? Company will call us.
(1:11:52) Sir, can you just to do physical counting and then tell us reconcile with our record and then go? Nothing. Your duty is please come do physical verification. See records and books records physical stock matching or not just to give a report and then go. That's it. We don't want any assurance by the way. We are not going to use your report for any third party purpose. Nothing. Please come. We don't have employees.
(1:12:08) Okay? We are tight in employees. We have a go down in source location you go there do physical counting give a report on the physical count that's it we we are not going to use it for any third party purpose two sir please come us talk to all our dtors talk to all our creditors get a confirmation from them just agreed upon procedure you and me agree upon some procedure and that's called agreed upon two compilation what is a compilation services sir we don't know how to prepare financial statements our auditor is saying we are the responsible person to prepare financial statements as per applicable financial reporting framework
(1:12:38) But we don't know how to prepare. Please you come and prepare financial statements for us. Please you come compile balance sheet PNL for us. We will give this balance sheet PNL to our audited statutory auditor. Are you getting it? Can the same person do compilation and audit? No. Prohibited. You should not involve in preparation of books of accounts.
(1:12:56) You should not involve in preparation of financials. That's responsibility of management. They may take help of another chartered accountant. Yes or no? But he should not be the auditor of the company. That's compilation engagement. Both agreed upon procedure compilation engagement. Both are called as what? Related service engagement. Are you clear? Next.
(1:13:15) What is the purpose of engagement quality control standard? Why all these standards are very simple? I high quality standards. They provide guidance on audits, review, assurance, related services, yes or no. What are standards on auditing? They apply to audit of financial statements. They set high quality benchmarks for audit. Like these standards talks about so many issues.
(1:13:35) Remember we have already seen documentation standard is there. Audit strategy planning standard is there. 500 evidence standard is there. So many standards they talk about objectives. They talk about documentation. They talk about planning. They talk about risk assessment, sampling evidence. So many examples of standards on auditing.
(1:13:52) Four examples you write any whatever the examples you like. Then standards on review. They apply to review of financial statements. Yes or no? They provide limited assurance which is lower than audit. In review we only do few procedures. Although it's a limited assurance auditor still has to obtain sufficient appropriate. We have two standards 2400 2 410.
(1:14:15) Only two standards we have one engagements to review historical financial information. Another one review of interim financial information performed by independent. The second standard is applicable for listed entries mainly where listed company auditor. No along with annual audit report he should also give a review report on quarterly financial results.
(1:14:38) You see review of interim which is quarterly half yearly whatever by whom? Independent auditor same auditor only performing review also able to understand. Next both standards on auditing and standards on review they only apply to historical financial information. Then we have another set of standards called standards on assurance.
(1:15:02) This is applicable for what? This is dealing with subject matter other than historical information. They do not include audit and review. You know in PF I know we give assurance on non-financial matters such as internal controls also that is also there in you know in in a in in assurance other than historical in assurance other than historical we give assurance on one is prospective financial information we can also give assurance on other than financial information.
(1:15:28) Example for other than financial controls for example there's a standard called 340 examination of PFI 3420 examination of perform financial information included in prospectors 3420 there is another standard called 342 02 engage assurance report on controls at service organization assurance report on controls at service organization service auditor remember in 5.
(1:15:55) 1 at one place we have seen service auditor Yes or no? Assurance report that is 3402. We have a parallel auditing standard called 402 responsibilities of the auditor of an entity using service organization. Okay, we don't have both in our syllabus entirely. We don't have just example it is there. Are you clear? Then related what is related service? Related services.
(1:16:18) No, they apply to engagements which involve agreed upon procedures. They also apply to compilation. What is agreed upon procedure? It is an engagement. Some specific procedure will be performed by the practitioner. Yes or no? Accounts payable or receivable purchase related parties something which management will request you.
(1:16:35) You do that work. Compilation. Compilation means what? Preparation and presentation of historical information. For that what are you doing? You are assisting the management. You are helping the management in preparing and presenting financial statements without providing assurance. Remember it's a nonassurance engagement. You don't provide any type of assurance.
(1:17:01) The practitioner issues a report stating that no opinion is expressed easy or not. Yes or no? What are the examples? 440 1 standard 4410. Two standards. We have only two. One is engagement to perform agreed upon procedure regarding financial information. Then compilation engagement. Apart from that we have one more standard called quality control standard.
(1:17:28) Remember I told you in one of our regular class also we spoke 46 standards we have totally we have 46 standards. Okay. One is quality control standard. Remaining 45 are engagement standards. Yes or no? You know in that engage you know quality control. This standard is applicable for audit firms. Standard on quality control is applicable for firums. Guidance on a firm's responsibilities for quality control system.
(1:17:53) Quality control where any work you do what works I do I do audit I do review or I provide some assurance or I provide related service quality control for firms that are performing audit review of historical information other assurance and related services simple yes or no what SQC1 says firms has to establish quality control system remember I told quality control system also pizza Domino's pizza they need to establish policies and procedures You must have a standard operating practices on how do you work that anyhow once we start quality control revision that time no I will discuss SQC revision we have so that time I will discuss getting it what is the objective
(1:18:29) objective is very simple ensure quality control system within firm no whatever the firm we are running audit form no quality control system guarantees compliance with standards issuing our reports appropriate at the end of the day whatever work you do it must be as per law whatever report you are issuing It must be appropriate. Engagement risk must be low.
(1:18:54) What is it? Engagement risk must be low. What is engagement risk? I am giving a report. No, my report should not go wrong. My report should not go wrong because I give report based on sampling. My report should not be abruptly go wrong. So what is engagement risk? What is audit risk? That and all we will discuss in risk assessment topic later. Clear? That's it.
(1:19:16) Then this SQC apply for all services which are covered by engagement. So whatever 45 standards you're doing right in addition to that SQC is applicable. They ensure proper quality of services. Why standards? Okay, understood. You know whatever works we do we call it as engagement.
(1:19:35) The types of works we do is assurance, non assurance, assurance again historical, other than historical, review, audit, other assurance related all that we understood. Corresponding standards also be understood. What is the need of these standards? What is the need? Very simple.
(1:19:54) What is the need of this standard? They ensure audits are conducted against benchmarks along with global global practices. Quality of financial reporting. Improve quality. This is accounting standard objective. Quality of financial reporting here the question is normally standards benefit is what then they equip professional accountants with necessary because I am just a CA I don't know what to do in audit exactly yes or no standards will guide me what to do exactly how to do exactly they ensure audit quality so what is the duties of professional accountants like you and me with respect to these standards what is our duty we have to comply professional accountants
(1:20:28) must follow standards in their engage Engagement suppose no sometimes know some standard some procedure is there that may not be suitable for you at that time what you should do they must document how alternative procedure you perform would know that helped that that achieved the standard objective see at the end of the standards are saying you must obtain sufficient appropriate evidence whatever you do you must obtain evidence standard tells you some procedures also sometimes how to get the evidence if you feel that procedure is not suitable no you might have followed
(1:20:57) some other procedure right you should document How other procedure you followed that is not recommended in the standard how that achieved objective of the standard you must document clear reason for the departure also you must document remember just because you are giving disclosure in the audit report that I didn't follow so and so rule so and so procedure I didn't follow you're giving a disclosure does it mean the standard is exempt for you standard is still applicable exceptionally rare scenario sometimes Whatever the
(1:21:30) procedure given in the standard may not be usable for you. Clear? Next, we have few more topics in this chapter. Scope of audit, principal aspects to be covered in audit. Inherent limitations in the audit. Once we complete this, it'll be over. Correct. Next. Who appoints the auditor? By the way, for companies, no, auditor is appointed by member set AGM.
(1:21:53) For government companies, no CNG will appoint the auditor. For partnership firms, LLPs, partners will appoint for government authorities, the respective law, regulation will take care to whom the audit report is to be submitted, companies, no shareholders, firms, no partition. We'll be discussing in depth of how to prepare the audit report to whom the audit report has to be addressed, all that.
(1:22:17) Next is audit mandatory always. No, it's not mandatory for everybody. only for a company LLP respective act says audit is mandatory LLP also small LLP audit is not mandatory LLP whose turnover is less than 40 lakh whose capital contribution total is less than 25 lakh both of them are satisfied audit is not mandatory if any one of them are failed audit becomes mandatory for the LLP we call them as small LLP we call them as small actually in LLP they didn't define they didn't use the word small and all we simply
(1:22:50) call them as what small I mean We simply we are for the sake of convenience we call them as small LLP they're exempted but 40 lakhs start over cost mandatory company every company 1% company small company private lied public company every company audit is mandatory what about a sole proprietor there is no law what about partnership firm the law is silent on audit society society tax society's act says audit is compulsory multi-state corporate society the act says audit is compulsory state bank of India SBI act says audit is compulsory.
(1:23:22) Yes or no? Not every type of organization audit is compulsory but some entities know. Even though audit is not applicable to them, they voluntarily go for audit and that audit is called as voluntary audit. And remember 44 AB in the income tax 44 se 44 AB 35 A 35D 80 JJ A QQQB 80 RRB in all these sections no audit is compulsory.
(1:23:49) In all these sections audit is compulsory. If audit is compulsory under a law for that reason you're appointing auditor that is called statutory audit mandatory audit. You're voluntarily appointing even though there is no legal requirement that is called voluntary audit. Yes or no? That's it easy you take care of this.
(1:24:08) Then benefits of audit you read on your own. Nothing is there inside that. So what is an engagement? Engagement is nothing but a formal agreement between the auditor and client. It contains list of services to be provided. Now what the famous engagement is what? External audit engagement.
(1:24:25) What is external audit engagement purpose? To increase confidence of the users. Yes. For example, in India, companies are required to get audited by external auditor. Non-corporate entities may choose auditor for their own advantages. That's it. Next, we have limitations in audit. We have something called limitations. Remember objective.
(1:24:45) What is the objective of the auditor? The objective of the auditor is to obtain reasonable assurance. Whether financial statements are free from material misstatements. Reasonable assurance. Why reasonable? Why can't you get absolute assurance? Look balance sheet P&L. The financial statements are so big. Transactions are so big.
(1:25:06) Imagine a company like Reliance Industries Limited 10 lakh cr is the consolidated turnover. The consolidated turnover of the companies close to 8 to 10 lakh cr you know coming from multiple businesses coming from multiple stores retail stores petroleum so many is there revenue itself 100% if you want to verify it may take 20 years 100% of the revenue if you want to verify 20 when you will verify expenditure when you will verify payroll when you will verify in audit we don't do audit 100% we only do sampling basis That's why we cannot get absolute assurance that if absolute assurance is not there then why audit very simple something is better than nothing. Are
(1:25:47) you getting it? But we do audit very scientifically by using sampling scientific statistical technique. We randomly pick the sample in such a way if any frauds and errors are also there can be easily detected in such a way we do audit.
(1:26:08) But in spite of we do audit so scientifically in spite you do whatever the way there are still limitations you can't discover each and every fraud you can't discover each and every error the opinion you are giving right everything is true and fair suppose no suppose I'm giving on a company everything is true and fair I told everything is true and fair that may not be in reality yes or no your opinion might go wrong yes or no but at the end of the day we have seen in documentation chapter in the upcoming revision I will tell you with my documentation with my evidence which I collected if I am able to prove to the people that I did my audit journey only
(1:26:37) even though you did audit Jenny only if still some frauds were not discovered you will not be punishable yes or no fair fine why we can only give reasonable why can't we give absolute assurance inherent limitations so the audit process has some limitations correct now what are the limitations first limitation financial reporting itself is limitation see I have to opinion on the balance sheet P&L that itself has a limitation that itself is not 100% true why management will prepare financial statements yes or no they make so many judgments which are
(1:27:11) subjective which are having some degree of uncertaintity uncertaintity is they're not accurate yes or no for example companies know some purchase you know controls and all they might not follow properly yes or no so these are all limitations so management is responsible financial Financials management is responsible for internal controls and these controls itself might have some limitations.
(1:27:39) Company top management told people be careful in everything but they are doing frauds. What to do? Yes or no? They're doing frauds. They're hiding the frauds. Yes or no? So books of accounts, balance sheet, P&L itself has a limitation. They themselves are not 100% correct because they involve some judgments, assumptions, estimates which are subjective in nature.
(1:27:57) able to understand financial reporting itself is a limitation obviously for audit also it is a limitation for the auditor also. Second limitation nature of audit procedure. The way we do audit that itself have a limitation. You know in audit we the auditor know we generally what we do the auditor obtains evidence by audit procedures.
(1:28:17) Yes or no? We give opinion based on sample. But you know that's a practical limitation for us. Sampling itself is a practical. We cannot verify 100%. We can only give we can only verify financial statements based on sample and we will give our opinion based on sample. Why sample? Why can't you 100? Practically not possible. That's a practical limitation.
(1:28:40) In exam they will ask you what is a practical limit? You know nature of audit procedure is suffering from certain limitations. What are the two types of limitations? Give example for each practical limitation legal limitation. Another limitation is what management know they don't provide complete information to me. I cannot force them.
(1:28:58) I I if not provided I can only report it to people. I can't force them. That's a legal limitation. Yes or no? Sometimes management might be dishonest. Frauds might be conducted by sophisticated schemes, fabricated documents. I may not discover that. Yes or no? Related party transactions. One more.
(1:29:20) One more thing is what related company can enter into paper transactions, dummy fitious transactions. Yes or no? The relationships and all the company relationships, related party transactions, we can't discover. We will discuss 550. There is a standard world 550 on related party. We will discuss there and remember odd what we are doing is audit.
(1:29:37) We are not doing investigation. So we can only obtain reasonable students. We cannot obtain absolute. In investigation we get evidence conclusive in nature. Remember there are totally three types of evidences based on the satisfaction level. Getting it? One primacy evidence. Persuasive what is it? Persuasive evidence. Conclusive evidence.
(1:29:59) In audit we get only persuasive in nature. Persuasive means what? Convincing. By looking at purchase document I will convince that purchase is true. By looking at a sale invoice delivery chalan e bill I convince that sale is there. But in reality they are all fabricated documents. Who knows? I convince based on the document.
(1:30:24) If the document is fabricated for you know completely fictitious it is impossible for me to discover able to understand. Next you know timeliness of information. The relevance of information decreases over time. Auditor cannot verify every matter in detail. Yes or no? So you must always get you you must always strike balance between reliability of information and cost of obtaining.
(1:30:49) For example, sometimes we may take last year data itself for the purpose of audit future events. Remember company prepared financial statements using going concern reception. Going concern means what about near future one year the company don't have any problem like that they said but I don't know in reality in the next month only company might shut down if something went wrong against the company yes or no so future events may adversely affect the entity's ability to continue some new business model unforeseen event all this causes the company business to seize operations these are all inherent limitations
(1:31:22) nature of financial reporting nature of audit procedure audit is not an investigation Relevance of information over time future events able to understand that's it. Then what are various aspects to be covered in audit where first we will see what is a scope of audit. Scope of audit mean scope means what? Scope means okay you see scope refers to range or reach of something. The purpose of audit is ultimately to increase the confidence of user.
(1:31:50) How we can increase the confidence of user by expressing opinion. How what we check whether financial reporting framework followed by the management is it acceptable or not? I will check yes or no. Scope includes first I will discuss scope excludes what we are not supposed to do. Remember something that requires competence beyond our capability.
(1:32:13) Something that requires competence beyond our capability we are not responsible to do. Remember auditor is not expected to perform tasks outside their competence. For example missionary physically there or not? I went and saw condition of the missionary I don't know for that I need to call expert only yes or no whether impairment happened or not in a missionary whether impairment happened or not in a building the value recoverable value realizable value I may not be the right person to decide I have to call expert I am not an expert in authentication of documents I don't know whether a document is genuinely original or duplicate you know what carbon
(1:32:45) testing they will do carbon dating something carbon dating or carbon testing something they do you know by look by doing a carbon testing. They can tell you which year it was actually manufactured approximately by just suppose you give this pen to them for example.
(1:33:03) Okay, they do a carbon testing on this and they will tell you when this was manufactured approximately almost with 90% accuracy. Getting it? You know like many stones and all they will be discovering some stones so archaeological they say 2,000 years old 5,000 years old how that's called carbon testing. able to understand that's it okay now audit is not an official tell me can auditor tell that can auditor suppose a company you know they purchased some missionary some archeological collection painting they purchased okay to display in their particular art gallery the company is running some art galleries so in the art gallery they purchased one painting they they purchased that painting by paying 5
(1:33:34) cr when I saw it was like a spit spitting on wall so that's how the painting looks like general most of the paintings like that only you saw no it It was a very abstract painting something they told for example. So they they stick it to the wall. Okay. And they're saying 5 cr is a paint cost.
(1:33:53) And then when I ask management what is this? Who painted this? It was painted by so and so popular painters. He who died 500 years ago. Who died 500 years ago? Okay. For example, so whether that painting is 500 years back or not, how do I know able to understand? Management might do fraud. No. In the name of this, who knows? So audit and investigation are different.
(1:34:13) Investigation involves what? Detailed examination yes or no. So objective of audit is very simple reasonable assurance whether financial statements are free from MMS. Many a times they will ask this question scope of audit. Write about scope of audit and what is not included in scope of audit.
(1:34:35) They will ask you meaning and they will ask you exclusions activities beyond competence of the auditor. Auditor cannot do authentication of documents. Audit is not an official investigation. Objective is to obtain reasonable assurance. Then what is included in scope of audit? We have to cover all aspects of the entity.
(1:34:52) What do you mean by all aspects of the entity? We will discuss in the we will discuss in the previous question. What are the principal aspects to be covered in audit? You see aspects to be covered. What are what do you mean by aspects? You should cover all aspects, right? What do you mean by aspects to be covered in audit? We should check whether financials are matching with books of accounts. Books of accounts means what? They are supported by journal entries.
(1:35:09) Whether journal entries are supported by bills, vouchers, proper evidence. See that no omissions are there, no duplications are there, no fictitious entries. You must ensure that there are no omissions, no duplications. Information presented must be clear and unambiguous.
(1:35:26) You must ensure that amounts classification, presentation, disclosure as per applicable financial reporting framework and financial statements are presenting true and fair view. So what you will do in audit if somebody ask you I'll do all these aspects I cover all these aspects I will ensure books of accounts are matching I mean books of accounts and financials are agreeing I ensure books of accounts are having supporting documents I ensure there are no duplications omissions and all I ensure information present is clear I ensure accounting standards are complied I ensure financial statements are true and fair all aspects I should
(1:35:56) cover yes or no next you see all aspects Another one I get information right about books, documents, bills and all. I need to ensure that they are reliable and I need to obtain sufficient evidence before I give opinion. So scope of audit include obtaining reliability of information, obtaining sufficient information.
(1:36:21) Sir, what is reliability? What is sufficiency? We will discuss in 500 revision. We have a chapter called six chapter audit evidence. Inside that first topic is 500 which talks about audit evidence. Inside that there is a depth discussion on in-depth discussion on uh reliability, relevance, sufficiency, appropriateness, so much is there.
(1:36:39) Leo all of you proper disclosure of financial. By the way, you know what? Yesterday results came um uh Jan 25. Okay. Many students failed in group two only because of audit. Many students failed in group two only because of audit. Getting it? In costing FM and all people got 70 80 easily. Getting it. But audit is a paper where many got uh you know failed getting it. Generally every attempt we get 80 plus so many marks.
(1:37:05) This time one or two only 68 only we got one of the student 60 plus only we got this time many because the paper was extreme tough. I told you in fact in our regular class we solved the entire paper. It was not so tough. Technically it is not tough. It is there every point is there in the IC book only. No question will be asked in the exam beyond beyond ICA book.
(1:37:23) you will not find a single question beyond ICA book. So whatever the book you are following you should ensure it is 100% ICA coverage or not and our book that what we are reading here is 100% ICA coverage. If you understand entire this conceptually 100% you can do really well and you know I even posted a video on the result like many students close to 150 students messaged getting it still there are so many hundred I need to just open and see okay so I made a video almost 70 to 80% of the students told about 3/4 strategy 3/4 strategy audit again they all qualified in audit I'm telling you 3/4th
(1:38:02) strategy is number one strategy I'm telling you What is 3/4th strategy? Come on. You're you're you're attempting 80 90 marks of the paper. Obviously, you'll qualify. Yes or no? 34th syllabus means is it small? Uh 3/4 means what? Again we have in C 11 chapters any two to three chapters pick up keep aside what I told you to pick up and keep it aside.
(1:38:27) 520 standard 530 standard risk assessment and internal control items of financial statements. Don't touch them. First finish rest of the chapters 100%. Become 100% confident. Any question comes from that you can you can answer well. Then in such a case whether paper is tough or difficult or easy that doesn't matter for you. See by default you are having 14 marks choice.
(1:38:49) Items of financial statements 14 marks that will never come in the compulsory question. For classes purpose you reason everything. Yes or no. For MCQ I mean MCQ purpose you reason everything. But for revision purpose you can take items of financial choice. Yes or no? 14 remaining 100 are there. So these two topics 530 520 risk assessment put together how many you'll get maximum 50 versus 20 80 marks of the paper is in your hand. Right? Yesterday one student messaged he wrote for 65 got 44 in audit he qualified. Perfection is important.
(1:39:21) Perfection is important. It's not there are there are many students who wrote one out of five 110 also got 11 12 marks. what how many marks you attempting is not the matter perfectly how many marks you're attempting is what important in every chapter C category questions will be there never do that analysis that's a dangerous approach in every chapter C category topic ignore A category B category I will cover never do that you will fail paka getting it success rate is very very low in that because what if Dan exam T category Category is what
(1:39:55) majorly tested What will happen if at all that is tested in every chapter? You're gone. Instead of that see C category how much syllabus they occupy you know 25%. Category syllabus occupies how much you know 25% out of 100. I am also ask you you want to reduce C you want to avoid C category questions because you can't cover 100% syllabus.
(1:40:19) For example, I'm also telling you 25% keep it aside but not in each and every chapter chapter itself. Will IC ask you on items of financials 40 marks 50 marks? Huh? They can't. These three topics small topics yes or no. These three topics hardly 25 to 30 marks. You keep them aside to become perfect in all other topics.
(1:40:44) Believe me, you can score exemptions. That's it. Clear all of you? Fine. And one more one more one more point that I need to cover in audit is what scope of audit also includes what I need to verify whether financial statements are disclosing properly whether disclosure of information is properly whether transactions are summarized properly transactions events and management judgments are they summarized properly? Whether management judgments are appropriate, accounting policies are appropriate, you know whether these selected accounting policies are applied consistently, yes or no. And the auditor has to understand
(1:41:21) that financials are based on historical nothing but based on past economics and events. So scope of audit includes what? Scope of audit you must cover all aspects. You must verify reliability and sufficiency. You must verify proper disclosure.
(1:41:39) Sometimes in exam only this itself can be asked as a four marks or five marks question. One of the important aspect the auditor is covering is disclosure. The directors of the company are opposing that it is not the auditor duty to verify disclosure. You should write disclosure point and you should link with the question which they are asking. Are you clear? That's it.
(1:41:56) So principal aspects to be covered in audit everything is over right. What is reasonable assurance? Reasonable assurance is a high level of assurance but not a complete guarantee. Yes or no? Audit of financial statements no is conducted by auditor. The auditor only gives reasonable assurance. You remember misstatements can arise from fraud or error.
(1:42:20) Ultimately what auditor do is he will give opinion as per standards on auditing he will do the audit and give opinion based on findings that's it this is objective of the auditor remember this entire chapter is nothing but first standard 200 this entire chapter is developed based on what 200 standard and preface to standards there is a pronouncement book in ICI okay pronouncement you don't have in the syllabus don't worry which talks about standards Before starting the first standard there is something called preface that preface and 200 standard based on these two this entire chapter is developed. So what is nature of
(1:42:56) auditing? Audit process contains independence. Yes sir. What is the nature of financial information? Nature of financial information may be profit oriented nonprofit oriented bigger or smaller doesn't matter. The purpose of objective of audit is what? To express opinion. Purpose is what? to enhance the confidence of the users.
(1:43:15) This is what we are already discussed. Yes or no? That's it. Nature, objective and scope of audit is over. What is the relationship between audit and other disciplines? You please read later. Advantages of audit you read later on your own. So some two or three small topics only kept depending rest all I completed in the revision. You see hardly one and a half hour. Fundamentals be completed.
(1:43:33) Nature, objective and scope of audit be completed with explanation. This weightage is 10 marks. 8 to 10 marks be completed within just one and a half hour. Can't you read this later? one more time in-depth preparation and revision later day before exam 45 minutes enough for you to read this because you don't have responsibility to explain. No, you just have to read it. 45 minutes is what it takes this chapter.
(1:43:56) Day before exam you have 20 hours time which is solid so much time sufficient for you to watch my marathon once again and then do a revision also. You clear that's it. So first chapter is completed just 5 minutes we'll begin ethics and terms of engagement. Are you clear everybody able to recollect everything? So let's continue the discussion of the second chapter revision.
(1:44:20) Ethics and terms of engagement actually in the IC book this is 11th chapter but ethics part and terms of engagement part we can we can discuss here right now. In this chapter total three parts were there. Part one is dealing with ethics. Part two is dealing with terms of engagement 210 standard. Yes 210.
(1:44:40) Part three is dealing with quality control to SQC SEA 220. Two standards are there in part three. Getting it? Part three we will discuss at last. Now part one ethics. So what is the need of the professional ethics in the recent Jan exam also they asked some principles fundamental principles. They gave one of the example and asked you to figure out and also they asked you to give meaning of it.
(1:45:01) Why marks question they gave so simple. It is okay. Like what is this? Ethics is all about you know u ethics means what? Moral principles. Yes or no? It is a branch of knowledge that deals with moral principles. What is the nature of ethics? It comes from an individual. Yes or no? Which is in which is inculcated into habit.
(1:45:26) So resist selfish motives. Getting it. What is right? What is dharma? We must do that. That is what ethics is all about. You must not do something that favors you and unfavoring others or society. Next, ethics is a state of mind, moral principle, science of morals in human conduct. Getting it one point I always tell this remember if you're ethical and moral you can grow in your life like anything.
(1:45:57) Don't listen to people around you who says honesty this is not the days nothing that's wrong. What is important for success in life is competence. People lack of competence they fail not lack of ethics. Getting it? Competence is what ultimately required for being successful. If you use that competence in good dimension you will grow or bad dimension what dimension you do that it doesn't matter you grow.
(1:46:24) Competence is what important further competence if morality and ethics is added your satisfaction and peace of mind is different level altogether. You will be happy, peaceful if you're earning well with ethics and morals rather than you're earning with dishonesty all that. Getting it? Yes. So need for professional ethics. Remember what we provide is assurance engagements. Yes or no? Which requires which where we are giving confidence to the users. We are dealing with public interest.
(1:46:49) Literally speaking we are dealing with public interest. Getting it. So professional ethics no they are mainly focused on what? Morality. Getting it. Next. Adherence. The respect and confidence on any profession. People respect on the people confidence increases when they follow ethical standards and they are selfdisiplined. And remember accountancy profession is one where we deal with public interest.
(1:47:15) We deal with we deal with listed companies. We audit them. We give them opinion which is relied upon by so many and they're honestly confidently investing in those companies thinking everything is true and fair. Yes or no? So ICI has issued some ethical standards. Ethical compliance is the core philosophy of our profession chartered accountancy.
(1:47:34) Further we chartered accountants were given by the institute something called code of ethics. What is code of ethics? In depth we are going to have a discussion in CF final. In CF final we have 19 chapters. 19th chapter is dealing with ethics. Almost that chapter no in ICO book is 170 pages.
(1:47:54) Getting it? But we made our book which is 45 pages completely everything is covered literally. Next if at all any member who is not complying with code of ethics he is liable for disciplinary action. You know if any CA with whom you are you are dealing with tomorrow.
(1:48:11) If at all you have really a trouble if at all you feel they did something dishonest they're troubling you like anything you can file a complaint in ICA. Getting it? There is a there is a there is a you you can simply type IC AI space D I S C. You will get disciplinary site website. You just open that. There is a e form e application can be made on whom you want to make a complaint.
(1:48:29) Give give your details what is the complaint to describe 2,500 plus GST some amount they will charge and if at all you win the case you will get the refund along with damages able to understand. So next so that is regarding the fundamentals. Remember ethics is something that can be enforced on a individual through rules.
(1:48:48) We can enforce we can enforce ethics on a particular individual through rules but rules alone cannot be exhausted. You must always understand the intention. Whatever service you're doing for that know some rules were there. For example in companies act we have something called disqualifications of auditor. Body corporate is disqualified.
(1:49:08) Relative of the auditor disqualified. Relative definition you see you know grandparents are not covered. Grandchildren not covered for example. Now that means if at all my grandfather is a managing director in a company since relative definition he is not covered can I accept the audit of the company literally if you interpret based on rules no you can be but understand the intention of the law principles of the ethics why disqualification is given to make sure you are independent if a grandfather is working there just because you show companies act as a reason relative definition does not include grandparent you show that reason
(1:49:45) and then You accepted the appointment of auditor where is your morality? So ethics must be seen in both principles as well as rules. Principlebased approach where you need to observe spirit of the ethics intention of the law. Yes or no professional judgment is required.
(1:50:05) Your knowledge, skill, expertise is required to evaluate and reach conclusions. Rules based is what? In a rules based approach. No wellestablished rules are there. For example, companies act as auditor must be independent. How disqualification should not apply? If at all you are not covered under disqualification, you are independent. But rules cannot be exhaustive.
(1:50:25) Rules cannot cover each and every scenario. Yes or no? This can be a narrow outlook and overlook spirit of the ethics. It is rigid, not suitable in every practical scenario that we handle. Yes or no? Disqualifications only says if your relative is a managing director or key manager, you should not be auditor. Relative definition does not include grandfather.
(1:50:47) So can I accept the audit of a company if you ask? Understand the spirit of the ethic. Spirit of the law. Yes or no? Next always you must observe spirit of the code. You know it is essential to follow spirit of the code rather just letter of the rules to apply. This itself can be asked as a question straight away in exam four marks question.
(1:51:05) Are you clear all of you? Next that's why ICA has given something called fundamental principles. There are five fundamental principles. Integrity, objectivity, professional competence and due care, confidentiality, professional behavior. Integrity. The chartered accountant when you are performing the work you must have, you must be straightforward.
(1:51:30) Chartered accountant must be straightforward, honest in all professional dealings and all. Integrity means weight. Integrity means what? Fair dealing. You know, uh morality, yes or no. Accountants you should never associate your name with something a false or misleading statement negligently provided data or if something you are signing a report which is containing omissions which is misleading some financial statements you are signing it is silent on contingent liability you are saying everything is true and fair you are risk you are at
(1:52:02) risk yes or no so you should not associate but remember if at all in all these cases if you are giving modified opinion Suppose when the financial statements are misleading or they're negligently prepared or omissions are there and there you are giving a modified opinion qualified ad something you are giving then not an issue.
(1:52:20) If you give a positive opinion on the misleading items and all if at all the law understood if at all the I mean if at all the reviewer quality control reviewer tomorrow NFA will do quality review of your audit if they found out that you did audit carelessly they will punish you able to understand.
(1:52:38) Next, very recently, yesterday or day before or maybe 2 days ago, NF has released they're going to increase the audit quality reviews. NFR going to increase audit quality reviews. I'll show you NF recent news. Ho ho ho ho. Yes. You see, you see NFA inspected so and so. This is on March. Uh I mean they're going to they're going to they put a deadline. Okay. So very recently an article came they they are aggressively going to increase the extent of review for more listed companies. Already listed companies are under the purview of NFA. That's it. So that is integrity. What is the second
(1:53:30) fundamental principle? Objectivity. Objectivity means what? Unbiased. You should not compromise your decision making power. Professional judgment means what? Decision making due to bias, conflict of interest and you influence. You should never take activities where you are having some relationships with the client or some circumstances are there in that client that affect your judgment making process.
(1:54:02) If my grandfather is a director in a company, even though he is not a relative as per company's act, if I accept the audit of the company, he can forcefully influence me not to disco even even if any frauds I discover, I will not report. He will influence me in such a way. If at all any such influence is there where you can't be independent, you can't do your work completely as per the law.
(1:54:19) Even though as per the letter of the law, you don't have any restriction, you should not accept that work. That is what we call them as what? Objectivity. Next professional competence and due care. You are having a moral responsibility to make yourself ultimately competent. Getting it? It is a moral responsibility.
(1:54:38) See fundamental principles of code of ethics. Code of ethics is its morality. Code of ethics means what? Morality. Being professionally competent is a moral responsibility. So don't see important questions. Getting it? You must study properly at least 80% of the syllabus in such a way. Getting it? If 20% one or two topics if you do not study also not an issue able to understand imagine a doctor who has not studied some surgery or some anesthesia related basics yes or no he start directly operating the patient without giving anesthesia yes or
(1:55:07) no you see the doctor can they have important questions suppose I'm only dealing with heart I only learn that heart you know that heart nearby radius of 10 cm only that I will learn rest of the body but unnecessary for me you need to understand no there are so many nerves which are connected So doctors cannot have that choice literally you know in doctors of medicine know they don't have important questions they literally have to study everything and their books are you know for example our CAD book is 260 pages in in medicine there is something called anatomy of subject is there that
(1:55:38) itself is 1,400 pages one subject I'm telling you they study fully but they never complain that we are working hard yes or no we complain so much with this book only we complain so much that we are studying hard basically our students know many narrow-minded they don't have exposure on other courses right fine so 1,400 pages one subject there total three or four subjects are there mainly where 1500500 4,000 to 6,000 pages are there our entire CA books itself put together uh 2,000 pages what the materials that you are studying they
(1:56:11) don't have any fast track materials chart books and all can they study chart book hard surgery yes or no step one uh cut step two you know squeeze it out take it out they can't study yes or No. So they need to have a process they everywhere. Yes or no? Yeah. Fine. So competence is your moral responsibility. Getting it. Making yourself competent is your moral responsibility.
(1:56:34) Not just see auditor must maintain professional knowledge skills based on current standard legislation latest laws and regulations applicable. You must also act due care. Another responsibility is what? Due care. You must act diligently, thoroughly, timely. Suppose a client approached you in the last minute to file IT return.
(1:56:53) You agreed I will file within the due date. Later tomorrow you are saying sorry sir you came in the last minute. How can I do? Then why you took the work? You said within the time no if at all you are not delivering on time the work that comes under timely delivery failure. Due care you failed it. Are you getting it? You are recklessly doing audit due care you are failing it.
(1:57:12) Next another important principle confidentiality. Confidentiality means what? Whatever the information the client is sharing with you, you must respect confidentiality. You must keep the information obtained in your professional relationship, in your business relationship from the client to confidential. Yes or no? Confidentiality ensures free flow of information between the client and the auditor, employer, employee.
(1:57:36) See, remember this code of ethics? No. Not only for practicing CS is applicable even for employee CS also is applicable. Suppose you know we have something called code of ethics. Schedule one, schedule two, part one, part two, part three. Part one is applicable for practicing people, part two is applicable for employees.
(1:57:57) Able to understand schedule two, part one, practicing people, part two. Generally for every member able to understand. So for employee chartered accountants also there are code of ethics. If at all you're working as an employee, tomorrow you leave the information of the company to some competitor, he can file a complaint with institute.
(1:58:15) Employee who is a chartered accountant breached what are you doing did you didn't you thought ethics they will question able to understand next so however it won't be it you know it should not be shared with anybody without client consent confidential information no you can disclose only in three circumstances required by law permitted in the law and authorized by client or you have a prof professional duty NF is coming and doing review you can't say confidentiality my client data I can't show you you have So show are you clear? Next another thing is what? Professional behavior. Getting
(1:58:48) it. Accountants should not engage in any activity that might harm the reputation of the professionals. Getting it. If at all you are transacting in Havala, you are supporting your client in Haval operations and all. You are you are bringing disrepute to the profession.
(1:59:04) Narendra Modi one of the international conference told the prime minister told you people are encouraging Havala and all. You people are supporting clients and all. So what what nation building are you doing? He indirectly questioned. Next accountants must comply with relevant laws and regulations in order to avoid actions that discredit the profession. Clear? Fundamental principles is over.
(1:59:27) Then one of the most important principle is what? Independence of the auditor. What is independence? So professional integrity and independence they are at most essential in accountancy. What is independence? Independence means you are taking a decision not influenced by another person. You are taking decisions based on the facts and circumstances based on the law regulation by using your professional judgment then correct.
(1:59:50) If at all you are taking a decision as per his likings as per sir likings or some your boss or client likings you are you are prohibited. You know in listed companies if at all I'm an auditor of listed company I have a disclosure requirement.
(2:00:09) I need to disclose to institute some information more than two years continuously if I'm getting fees from one company which is 40% of my firm turnover out of my firm gross receipts know 40% I'm getting from only one client I need to disclose it to the institute and institute will keep my firm in a hit list too much dependence on one client financial interest dependency on the client it's a self of self-interest threat getting it. So we will discuss independence related threats we will discuss next.
(2:00:42) So independence no is a state of mind as well as personal character. Do not do not confuse difference between legal and independence. No don't confuse with legal standards all that these standards will change but ethic spirit is always same. Independence is two types. Independence of mind independence of appearance.
(2:01:06) Independence of mind means what? It's a state of mind where you take a judgment unbiased. I may maybe the other person is my brother but I am very independent. Getting it? I take a decision irrespective of my relationship. All that that is a state of mind. Independence of mind talks about state of mind. Integrity, objectivity, skepticism all that I apply when I am taking decision.
(2:01:28) What is independence in appearance? In appearance means what you know if at all a third party sees us suppose you know I am acting as an auditor in a company where my grandfather is a you know my you know grandfather is actually a chairman or managing director and if I am accepting the audit of the company saying that anyhow he is not my relative.
(2:01:46) Yes or no? As for companies act also he's not covered in relative definition I put I used that loophole in the law and then accepted the audit. A third party came to know that we both are son I mean we both are grandson and granddaughter sorry grandson and grandfather getting they got to know that they both we both are very close relatives immediately they will stop believing my audit report appearance you are lost you lost independence related trust you lost in appearance.
(2:02:10) So what independence and appearance is as an auditor as an accountant you must avoid a situation which are so significant that an informed third party would conclude that integrity objectivity skepticism everything is compromised. They both are grand grandfather and grandson obviously how the hell he will do the audit properly.
(2:02:35) So an informed third party who has a basic understanding of this subject can immediately tell you will immediately tell you you don't have integrity able to understand. Next now independence no it must exist in fact means in mind and also in appearance the relationship between the auditor and client should satisfy the auditor about his own independence.
(2:02:55) Any unbiased person should conclude that your independence is not compromised. This ensures confidence to the users in the financial statements. And remember for listed companies, it is even more fundamental, even more crucial. You have to be very very careful as a stat auditor of listed company. You know, you will cease to perform any function if the person do not have faith on independence.
(2:03:19) If users do not have faith on you, being the auditor of listed company, the very purpose of your audit itself is ceased. It able to understand. Next. So the auditor is expected to be objective, unbiased, indep. Now remember subjectivity, independence depends on state of mind and character. One person may feel independent in certain circumstance.
(2:03:46) Another person may not feel the same in the same circumstance. So subjectivity, independence is subjective in nature. Yes or no? I am not independent of the company. If my grandfather is the director. If my grandfather left the company then I can be acting as an I can act as an auditor. Able to understand next. Now this independence is being affected by so many threats. This question also asked in the recent Jan 25.
(2:04:11) Right now I'm discussing independence topic from past 20 minutes. Only from this topic 10 marks question came. Only from this topic 10 marks question came in January exam. Getting it? But many students know they keep this as a last priority. That's the problem. They think independence is every attempt paka five marks every attempt because it's 11th chapter book.
(2:04:29) No. So they also study in last only. I keep it at beginning one. You need to learn this first before you learn other chapters. And this is most important from exam point of view also. Paka four to five marks question. Paka MCQ or test scriptto something paka will come. Clear all of you? Now international federation of accountants there is a there's an there is an there is an authority called IFAC they identified independence will will be affected by five sources five types of threats the threats are self-interest threat self-re threat advocacy threat familiarity threat and
(2:05:06) intimidation threat and if you remember uh I told you in the recent exam Jan 25 they gave you five examples and they simply asked you what is the threat Identify and define one or two lines. My marks question so easy able to understand Jan 25 people are saying Jan 25 paper tough because I I feel pity on them how how easy the paper is.
(2:05:31) Yes or no? In our regular class we clearly solved on that in our fast track whatever in our class we solved on that each and every question we solved and first we solved in our book we discussed in our book and then we solved it next. So self-interest threat what is self-interest threat? When this will occur if auditing forum partner the foreign and the partner forum or the partner having financial interest in client having financial interest in client like what direct financial interest or indirect financial interest or they took a loan or they gave a loan depending on the client fees majorly or
(2:06:04) depending on the client visa business relationship you're having potential employment client is offering you tomorrow so many other works also contingent fees these So what we call them as threats to independence first threat self-interest threat self-re what is self-re this will arise auditor know he's reviewing his own judgment from a previous audit work or non- audit work or something previously you only did that work now you are only checking that work maker and checker are same that is called self-re threat for example you
(2:06:36) know you are the auditor right now you were earlier a director in this company or you were earlier a senior officer of the company know that's why In ICA code of ethics no once you are a director in a company after coming out of the director position two years you should not accept audit that is not there in the company's act that is there only in the ICA getting it ICA code of ethics you you know you are performing services which are subject to audit some student asked me sir can auditor be providing
(2:07:01) compilation service as well as audit both no you are preparing financial statements to the company and how can you audit the same that's why 144 prohibited services you cannot be a bookkeeper you cannot be an internal auditor you cannot be investment Financial invest financial advisory you cannot perform banking services you cannot be management service you can't provide actual you can't provide yes or no next non- audit services means what management service internal audit investment advisory IT system and design
(2:07:27) whatever is there in 144 they all come under what they all come under non- audit services in US and allo they call them as non- audit service in European Union they all they call them as non- audit service under companies act we call them as prohibited services 144 Four able to understand. Next, advocacy.
(2:07:47) What is advocacy? You are promoting a client opinion. Okay. Nothing wrong if it is sufficiently backed by logic. Nothing wrong. You are promoting to a point where objectivity may be perceived as compromised. People think you are no more you are a puppet of the client.
(2:08:05) Yes or no? People think that you are a puppet of the client like the client is not at all you know giving a logical answering but you are you're suppose no auditor is acting as an mediator between the client and his competitor and in a dispute resolution some dispute resolution is going on auditor is acting as an arbiter where is independence why are you dealing with that is their affairs that is company operational affairs and all why are you involved you are the auditor or you are a mediator yes or no so when auditor deals with shares and securities of the company dealing with means trading for example Example or auditor is acting as a client
(2:08:35) advocate in a particular litigation or in a third party dispute where third parties will p will perceive they will feel that you are championing the client means you are supporting the client familiarity threat.
(2:08:53) What is familiarity? When auditor becomes too close to client they may end up being too sympathetic to client interest. For example, close family member know he's working in the senior position of the company. Former partner is a director in the company. my foreign partner no he's a director in the company suppose know if I am the director previously now audit a self with it I am actually my previously one of the one person is my partner previously now he's a director in the company that creates familiarity because my own partner until now now became a director we both are close earlier I am a director now I'm the
(2:09:22) auditor means what earlier I might have taken some decisions now I'm reviewing that's a self-re threat you understood the both yes or no that's it Then long-standing relationship between the auditor and the client. Me and client know from for that company know I am auditor from past 40 years. I know everything about him.
(2:09:40) He know everything about me. Where is independence? Yes or no? You trust him so much. He trust you so much. Where independence is lost? The basic skepticism is lost. Next client know you are accepting gifts and hospitality. That is also one of the threat to independence. Now in intimidation threat when it occurs when the auditor is deterred from acting objectively when auditor is prevented like threat client is blackmailing you that he will replace you he will remove you or he's he he's threatening you with a litigation or he's asking you to
(2:10:12) reduce the work reduce the fees also these are all the examples of what intimidation threats totally independence in first of all independence means what independence means judgment of a person shall not be subordinate to vicious and directions of another person who engaged you. You should take decisions with your knowledge, with your competence, with your concerns.
(2:10:35) Yes or no? Now this independence is affected by five types of threats. That's it. Easy. Now, now suppose there are threats. Suppose you are going to do some company auditor, assurance or some service. They approached you. You found that some threat is there. What you should do? Should you accept it or what? See can you put a safeguard or not? Suppose a company wanted to appoint me as an auditor.
(2:10:59) My wife is having shares in that company. How much? 90,000 face value. Then ask her to stop buying the shares of that company further. Getting it? Put a safeguard. You you put a safeguard. Yes. Now the ownership of your wife know spouse. No. Is it within the acceptable level? Yes. Then you accept the audit. Suppose you are unable to control her.
(2:11:17) Your wife told you who are you to tell me? Yes or no? She is buying shares more and more after I tell her not to buy. Yes or no? Then what can I do? I can't put adequate safeguards. Yes or no? So what should I do? I should not accept the audit. I should decline the engagement. That's it. Answer over. So write about safeguards to independence. Four marks question. Okay.
(2:11:36) Now what is safeguards? Auditor must always be independent. Should also appear independent. What are the key principles? Integrity, objectivity, skepticism, you know, they all are required in order for you to be independent. Now before accepting the work you must check whether there is a threat to the independence.
(2:11:58) If threats to independence exist either withdraw from the task or take precautions to eliminate. Suppose no if you cannot apply credible safeguards. You can't apply safeguards. Decline the work. Sir what if threat threat arises after accepting the audit? If at all 141 subsection 3 disqualification all attract you deed to be vacated to the office.
(2:12:21) Suppose some other threat arises to independence eliminate that or if not possible withdraw from the engagement. Next finally skepticism is one of the fundamental principle for you to say that you are independent. You will not be skeptical in a scenario where you in the influence of somebody able to understand when you're in the influence of somebody you can you will lose your skeptical mindset.
(2:12:46) That's why you see soal so-called intelligent scientists and all when they go to Babai G they lose everything they forget everything the science what they learn everything skepticism they lost there that's why babas are controlling of course there are so many genuine babas are also there non-genuine you know unauthentic babas are also there know but it's all people know they lose the moment in fact what you know in swami aams and all what they say you know before you come inside leave your not footwear doubts outside. Leave your doubts outside and come. It's some some astrologers case. No, leave
(2:13:16) your disbeliefs and all outside before coming inside. So indirectly what they tell you, stop skeptical thinking surren. So skepticism means what? Skepticism means an attitude of questioning mind. As an auditor especially, you should be having that questioning mind. You should not trust any document unless you get an evidence on it.
(2:13:41) Yes or no? Balance sheet. Reliance industry's balance sheet is there. 9 lakh cr is there turnover you cannot blindly say ah reliance company outside I'm hearing news from so long they're obviously genuine. No. See check for authenticity. Is that correct or not? Look at the records only then get a clarification only then confirm that they are genuine. Yes or no.
(2:14:00) Skepticism means what? Attitude of questioning mind. Alert to unusual situation. Critical assessment of audit evidence. Audit evidence means what? Information. Whatever information you are getting, don't listen and leave it. Process it. Yes or no? Then so professional skepticism means what? Being alert.
(2:14:24) Being alert to information which is contradicting with another information. Being alert to information that brings doubts on the reliability. Being alert to conditions indicating possible fraud. being alert to where circumstances require me to perform additional work. Okay, I'm not giving detailed detailed explanation on it. I hope you you already understood.
(2:14:49) Next, what is the benefit of skepticism? Skepticism reduces risk of overlooking, overgeneralizing, making wrong decisions. Yes or no? Auditor? No. They can accept documents as genuine unless some doubts are there. By default, you can accept documents as genuine unless you find something contrary, yes or no. However, always remember you should evaluate reliability of information.
(2:15:17) If at all there is a fraud is suspected, investigate further. By the way, you're working as an auditor for this company from past four years. You know that management is very honest all that. Does it mean you will switch off your skeptical mindset? You should always be skeptical. Auditor cannot ignore past experience of history. Yes or no? But still maintain skepticism.
(2:15:36) You may not ignore history of the management that their their very honest genuine in the house history like you can consider that in your mind but at the at the same time remain skeptical that's it ethics topic is over which is which is approximately pak of five marks 30 minutes over able to understand that's it almost I covered every point no yeah so 210 agreeing the terms of audit engagement let's revise the standard 210 In agreeing the terms of an audit engagement what is the standard is mainly talking about very simple see generally when we are doing a statutory audit statuto mandatory audit
(2:16:17) directors must know what are their duties and you being an auditor you know obviously what are your duties even if the directors misunderstood that you not only do audit but you will also file IT return you will also prepare books of accounts like you know obviously People don't understand. They think auditor means he will take care of entire books, documents, everything.
(2:16:40) But we know very well we are only here for audit. If a company appointed me as a statuto auditor, my duty is only audit. I should not do anything else. I should not do books of accounts all that. But they are not aware of it. So in order to avoid confusion and disputes at future date, we must give something called terms and conditions. nothing but contract, nothing but engagement letter.
(2:17:07) I told you one point in our class if you recolct seller or service provider is the one who should dictate terms and conditions. Yes or no? Only a seller of the goods only a provider of the service knows what are all the complex issues, what are all the issues that might arise in future. So in a in a in an audit service, you are the one doing audit.
(2:17:32) Remember all our standards that we are going to discuss they are all coming they are all applicable for audit of general purpose financial statements being an auditor you know what are all the issues and questions might arise tomorrow you have to issue terms and conditions to client the terms and conditions we call them as what agreeing the terms of what engagement so you have to agree terms of engagement with the client you should send an engagement letter to the client so that client will client misunderstand understanding regarding what are all that you do will be avoided. The misunderstandings of the
(2:18:05) client can be avoided to a great extent. Otherwise he might be thinking you will take care of IT return, you will take care of books of accounts, you only prepare financials, you only do audit. No, we should tell them that that and all your responsibility.
(2:18:21) Preparing financial statements as per applicable financial reporting framework is your responsibility. implementing internal control systems so that financial statements are free from MMS is your responsibility. Giving me the information, books of accounts, additional information. If I have a doubt, I can talk to each and every employee unrestricted access to employees is also your responsibility.
(2:18:39) Then what is my responsibility? My responsibility is to obtain reasonable assurance whether financial statements are free from material misstatements or not. Yes or no? Now what exactly is my responsibility? What exactly is the client responsibility? What he can expect from me? You can expect from me an audit report. That is what my duty.
(2:19:02) The format of audit report is going to be like this. Expect the content of the audit report is going to be like this. I should tell to the client how I am going to make the audit report. I may have know I mean you don't have to tell initially itself which opinion you should give. Which opinion you are going to give? You don't because you also don't know.
(2:19:20) But you tell them that if everything is good, I give unmodified. If something is wrong, I will give modified opinion. At the beginning of the audit itself, expected form and content of the audit report must also be informed to the client. Able to understand. You should inform him. What are his responsibilities? You should inform him. What are your responsibilities? You should inform them.
(2:19:41) What is your objective and scope? Yes or no. What is the objective of audit? What is the scope of audit? Tell the client that you are not an expert in everything. Yes or no? And what are your responsibilities? What are client responsibilities? What is the applicable financial reporting framework applicable? Tell them. Yes or no? And how the format of audit report is going to be? How the content of the report is going to be an idea you give him.
(2:20:05) He will go and see standard and audit. If at all he want to know hey what auditor is going to give me tomorrow at a future date. He said he will give me audit report. How audit report looks like. You know he will go and see the original standard. If at all he has a doubt you tell them that you are going to give audit report as for 700 able to understand that's it.
(2:20:22) Now there are some circumstances where engagement letter is not required. There are some circumstances in Jan 25 MTP they asked this question. What are the contents of engagement letter? Under what circumstances an engagement letter is not required? Certain terms are need not be included. When if the terms and conditions are already given in the law in detailed detailed terms and conditions are given in the law itself.
(2:20:46) What is auditor duty? What is client duty? Clearly law itself law itself then auditor need not include those terms in engagement letter except those terms remaining terms. If at all you want to tell no that you include what are the terms that need not be included in engagement letter.
(2:21:05) If law and regulation under which you are doing audit it is detailedly talks about the terms and conditions then accept that remaining you can tell in the engagement letter. Why? Law if at all is clearly containing client must know the law. Ignorance of law no excuse.
(2:21:23) So engagement letter is a document sent by auditor to client to up to to reduce misunderstandings about about what about scope of audit about object of audit about responsibilities of audit about management responsibilities about financial reporting framework about audit report yes or no engagement letter must be in writing to ensure that both the parties are clear on nature especially in non-stuto it is even more important People many hear students wrongly interpret in non-statuto audit only engagement letter is required in stat audit engagement letter not required that's wrong in non-statuto audit engagement letter is even most important
(2:21:59) because there is no law if tomorrow if if there is an issue comes between you and the auditor the client and the auditor client said sir I told you you have to do 10 branches audit but I heard that only you know two branches I thought only two branches I only completed two branches and I quoted fees for two branches Later client is telling me no sir I told you 10 branches for 10 branches put together only this piece dispute yes or no who will resolve this dispute because it's a matter of contract between you and the client if it put is if it is put it on
(2:22:28) paper clearly you can easily show look two at that time you agree two branches only I told you you signed it yes or no able to understand so you know the auditor must agree terms with whom you should agree the terms and conditions with obviously top management in entire our auditing subject top management referred Those charged with governance.
(2:22:48) Top management is referred as what? Those charged with governance. Those charged with governance. Governance means what? Governance means authority. Governance means accountability. A person in an organization who have both authority plus accountability. Then the person is called as those charged with governance. Yes or no? That's it. One of the important question.
(2:23:12) This itself they will ask is a four marks question. In IC book you know there's a format of engagement at if possible refer that what the format says you know you requested us to audit the financial statements of the company comprising balance sheet P&L cash flow all that yes or no we are pleased to confirm our acceptance and our understanding of this audit by these engagement letter so what we understand about audit you asked me to do audit right what is meant by audit I'm telling you through the engagement letter so don't think otherwise if you
(2:23:41) have some other meaning in your mind audit That means this only. I do this only. You have to do this only. Yes or no? You need to clearly tell the client through engagement letter. When engagement letter is to be issued at the beginning of the auditor or at the end of the auditor. Beginning of the audit.
(2:23:58) There is something else called representation letter. We should get that at the end of the audit. Before signing the audit report, we should obtain management representation letter. We will discuss that in 580 standard. We have a chapter called completion and review. In that chapter 580 standard is there. We will discuss clear all of you. Now, now look at it.
(2:24:18) You know there is something called preconditions for audit. Before you even give engagement letter, no see whether preconditions present or not. Preconditions to audit is also called as responsibilities of management. Responsibilities of management and those charged with governance. Preconditions to audit can also be referred as responsibilities of management.
(2:24:43) In SEA 200 the same is referred as premise to audit. The same is referred as premise. What should be the premise before you start the audit? What should be the scenario before you start the audit? Getting it? In 210 standard it is called as precondition. In SEA 200 is called as premise. In SEA 58 is called as management responsibilities.
(2:25:04) Able to understand? So all the three are same. Now you know precondition. What is the precondition to audit? No precondition to an audit before I start the audit one important condition whatever financial reporting framework company decided to follow no that must be acceptable and you should get an agreement you should get an acknowledgement from management that premise to audit will be fulfilled by them that they will accept their responsibilities yes or no that is why we obtain this agreement through what engagement letter so what is that
(2:25:37) uh audit what is the audit responsibility on precondition auditor must determine whether financial reporting framework is acceptable company's going to prepare financial statements books of accounts already they started preparing all that suppose no you found books of accounts are prepared on cash basis obviously financial statements will also be on cash is financial statements on cash basis acceptable in a company if you know that it is not acceptable yes or no if the financial reporting framework is not acceptable you should not accept the
(2:26:06) audit you should not accept accept the audit. So first the auditor has to determine whether financial reporting framework is acceptable. Then get management's agreement. Get the acknowledgement through engagement letter. What management is responsible for preparing financials. Management is responsible for designing and implementing necessary internal.
(2:26:29) Management is responsible to provide the auditor with access to all information additional information unrestricted access to persons within the entity. Suppose if preconditions are not present first discuss with them sir you are following cash basis of accounting sir okay that is not permitted that is not an acceptable framework management immediately said sir sir we will rectify everything please give us time they rectified then no problem you can continue doing audit or reject the audit engagement if preconditions are not present reject it you're getting it unless unless if the law regulation says you
(2:27:03) can't you can't reject you are already appointed you can't it's a statuto or government corporation audit you are already appointed you can only give report. Yes or no? In that case if the you know unless unless required okay when when you should reject the audit if financial reporting framework is unacceptable or management is not agreeing with their responsibilities regarding financial preparations internal controls access to information and people they're not agreeing with that then also reject yes or no. Suppose
(2:27:35) if management impose a limitation getting it the auditor shall not accept the audit at the beginning of the audit itself before you accept itself company's putting so many restrictions on you that you can't do the audit properly don't accept suppose if limitations are imposed after accepting the audit withdraw from the engagement limitation imposed on the auditor after accepting the audit what to do 75 standard we have there we will discuss clear next so object Objective and scope is very easy next sometimes no like change in terms I'll come back to it later fine so
(2:28:10) we understood what is precondition to audit we understood what is engagement letter why it is necessary what are the contents of engagement letter also we understood now is engagement letter to be sent in every audit recurring audit suppose no this company appointed me this is a non-government company they appointed me for five years of one term first year I sent should I send second year third year fourth year fifth year every year also should I tell them what are the terms and conditions not required
(2:28:34) But there are some scenarios. There are some circumstances where even though it's a recurring audit, you must send engagement. Generally auditor must issue engagement letter for a newly appointed auditor. Yes or no? Newly appointed. For recurring audit, no. For recurring audit, no.
(2:28:57) You must decide whether engagement is needed or not depending upon the circumstances and your common sense. Professional judgment generally. What is a recurring audit? Recurring audit means what? If previous year your auditor is reappointed in a five years engagement. No, last year you are the auditor. Now also you only be the auditor.
(2:29:15) Next, there are some circumstances where engagement letter has to be reissued. One company misunderstood the objective and scope of the audit. The top management know they misunderstood the terms and conditions which you originally gave. Give them one more letter with a detailed explanation so they will understand. Are changes in terms and conditions.
(2:29:32) Last year you were appointed only for doing five branches audit. Now company wants you to do 10 branches audit. Revise the terms. No give one more time new engagement letter. Change in law and regulation. The law under which you are going to do the audit. The law itself is changed. Now again give engagement letter. Change in financial reporting framework.
(2:29:50) Until now companies preparing financials using accounting standard division one. That is what you spoke in the engagement letter in the last year. Now this year companies preparing financials as per division 2 India in the world engage division one you are saying no now financial reporting framework change no so give one more letter saying division 2 is applicable now change in audit reporting recent change in top management significant change in size and nature of the entity in all these circumstances the auditor must issue engagement letter once again clear
(2:30:21) suppose I issued already engagement engagement letter I issued you know what company is asking me to change some terms especially how you know you know they're asking me to change terms before you decide before you agree or disagree they asked to do for some changes in terms first check is it practical possible or not if auditor is asked to change the audit engagement to one that provides lower level of assurance see whether it is a reasonable justification or not for example no in audit no I told you in audit we do many procedures
(2:30:54) inquiry external confirmation, reperformance, recalculation so much company asking sir external confirmation and all don't do sir just to do analytical review inquiry don't even verify books please documents kindly cooperate they're asking if I do like that it I can only give a lower level of assurance I cannot give a higher level of assurance you are asking me from audit to review kind of work client also said ah yes sir yes sir do limited work and then give me audit report no it's not possible before
(2:31:23) agreeing to change before agreeing to change you know an audit engagement to review or before before changing from audit to related service suppose client is coming and asking sir you're very strict sir no no let you know let us not continue as an auditor and you do one thing you just do review I will go and appoint some other auditor they said now they're asking you to change audit engagement to review engagement then auditor must yes assess is legally possible or not contractually possible or not because you are not the one who appointed me shareholders appointed me under law they appointed me look at the
(2:31:57) legal and contractual obligations before agreeing to change especially when the change is resulting from audit to review audit to related service are you clear yes or no now sometimes no some work you did no until the change is accepted suppose you're going to accept the change that work and all you can use it even in the upcoming proposed work we avoid confusion in reporting the report on the new engagement you are going to give a new new report right ultimately on the final engagement whatever you
(2:32:26) decided don't talk about original engagement and once you accept the change record new terms and conditions in a new engagement letter clear so indirectly what are they saying whenever a client is asking for change the auditor can accept it when there is a reasonable justification what do you mean by reasonable justification check legal and contractual obligations if at all legally it is permitted contractually it is permitted yes then it is reasonable if it is illegal is not permitted then you will not accept yes
(2:32:56) or no. Once you accept no agree and record new terms in a new letter to avoid confusion the report on the new engagement shall not include original nonacceptance of the change. The auditor shall not accept if there is no reasonable justification. Suppose client is asking you to change your rights and rights terms.
(2:33:15) No, you can't accept it. Client is not cooperating. you withdraw from the audit and also check whether your withdrawal has to be communicated to any parties. By the way, why a client will ask you to change? Simple circumstances change misunderstanding of original terms and conditions or a client to cannot cooperate you. They want to restrict your scope. That's it.
(2:33:37) For example, if auditor cannot obtain evidence, no on trade receivables, management is requesting auditor to change to a review. Sir, why external confirmation all that sir? You saw already records. No, that's enough. Don't go for external confirmation. Indirectly, they're asking me to do lower level of assurance.
(2:33:54) So, in order to avoid qualified or disclaimer opinion. So, the auditor must evaluate the situation carefully. What you will evaluate? Very simple. Is it reasonable? Reasonable when legally contractually it is permitted. Then it is reasonable. Yes or no. So, that's it. Completed. SA 210 is over. See how much time it took? Hardly 20 minutes. 18 minutes. Clear.
(2:34:15) Able to recollect everybody. That's it. This is another five marks topic. 10 marks we covered in less than 1 hour. Are you clear? Till now we completed 20 marks in the revision. See the amount of speed at which we are able to discuss. If you have a conceptual clarity next time you imagine when you're reading it one more time, two more times if you're reading.
(2:34:34) Imagine the kind of confidence you get. Scoring 80 plus, 70 plus is not at all a big deal in audit. It is just that you need to see the real concept, real understanding. Clear that intensity is also important at your part in learning. That's it. Confident. That's it. Ethics and terms of engagement over we'll begin audit report revision.
(2:34:58) Clear? So let's continue the next revision topic that is audit report. Remember this audit report weightage is going to be for minimum 50 into 20 marks. very big chapter because know along with audit report we are going to discuss one or two standards belonging to completion and review topic for example there's a standard called 570 in completion and review that also we'll be discussing in audit report topic okay now already completed fundamentals nature objective scope fully completed ethics and terms of engagement is also completed except quality control topic quality control topic I will cover at last okay now
(2:35:32) directly audit report so we have in audit report totally Just a minute. We have an audit report. Audit report chapter now is broadly divided into two parts. This chapter we will broadly divide into two parts. One reporting standards. Two reporting ah very good requirements. One is reporting standards. Another one reporting requirements.
(2:35:58) What are the reporting standards that we have in CAN into a audit report chapter? 700, 7.1, 75, 76, 299, 600 basics only were there. Okay. Basics only were there. 710. Yes or no? And then we have 700, 71, 75, 76, 29, 600, 710. Then we also have just a minute. Yeah. 570 which is something from other chapter. But we'll be discussing as part of this.
(2:36:30) Then we are also having reporting requirements. For example, everyone knows this car rate, caro 143 reporting requirement, fraud reporting requirement, all that. Okay, that's it. Now let's focus on one by one standards. Now see 700 what is that standard is dealing with forming of an opinion, reporting on financial statements.
(2:36:53) One forming of an opinion, reporting on financial statements. Okay. So what the standard is dealing with you know see first to know in this chapter the objective is for us to learn how to prepare audit report directly we'll start with that the process in this chapter is how to prepare audit report even in the recent Jan exam many questions were asked very pinpointedly okay I will discuss as we are discussing the concepts I will also discuss how the question was asked in Jan exam okay now so how to prepare audit report this is what we are going to learn the objective
(2:37:25) of this chapter is learning how to prepare audit report. That's it. If you understand audit report preparation process, that's it. You are you are commandable in this particular chapter. Now, how to prepare an audit report? Audit report will have something called title. Any letter if you see it will have some heading to it.
(2:37:44) So, this chapter name is audit report. Nothing but how to prepare audit report. First thing whenever we are giving audit report, it must have a heading, right? That heading is called as what? Title. And the title is called as independent auditors report. The title is called as independent. You see we have given below itself. Here we have given what are the contents of the audit report.
(2:38:04) Below we have given what are the elements of the audit report. Detailed explanation title. The title must be what? Independent auditors report. Title shall clearly indicate that the report is an independent auditors. Okay. So accordingly the title is what? Independent auditors report. For example, you see Tata Motors. There is an audit report. There is an audit report of Tata Motors.
(2:38:30) You see here, this is the first page in the audit report. I'll show you. This is the first page in the audit report of Tata Motors. So, what they're showing independent auditors report. Then the second element in audit report. The second element in audit report is what? Address C. Yes or no? Just a minute. One minute in this I need to be in this we need to discuss I think I think we we we actually I I took class notes. Yes.
(2:39:07) So the second element is what in the audit report title is over. We understood how to put a title. Correct? Now the second one is addressy. Address you see Tata Motors what they did to members of the company. Nothing but conceptually addressy means what? Conceptually addressy means conceptually the addressy means you see it is divided it is decided based on engagement terms or law or regulation two marks sub you know in a descriptive question you will have a four marks question inside that as a two mark sub question they can ask
(2:39:39) this or they may ask you as an MCQ also what is address is decided by terms of engagement law or regulation for example generally auditor reports to shareholder in case of a company or charged with governance depending upon the engagement terms law or regulation.
(2:40:01) Cleo the third element in the audit report remember we have seen in the first chapter nature objective and scope of audit. The objective of the auditor is to obtain reasonable assurance yes or no and to provide a report and audit definition is with a view to express an opinion there on ultimately we should give opinion on financial statements whether they are trustworthy or not whether they are reliable or not whether they are you know true and fair or not. Giving opinion is the ultimate objective without wasting any time.
(2:40:32) First section in the audit report in the audit report is what directly it is talking about opinion. That is what most important for the people also see first section in the audit report is called as opinion. But before discussing that let us look at briefly what are the elements of audit report. Audit report will have a title.
(2:40:49) It will have something called addressy opinion basis for opinion. Material uncertainity related to going concern key audit matter emphasis of matter other matter per suppose if you see ICI book these four points you will not find these four points you will not find in the SAS 700 format why these four are applicable only when the circumstance given under the standard is applicable if at all 570 material uncertaintity or circumstance arises only I70 will apply key audit matter. Key audit 7 not one circumstance if at all. See key audit matter no it is applicable only for
(2:41:31) certain entities where to whom it is applicable we'll discuss emphasis of matter other matter there are some conditions for them only then these four will come in the audit report format these four generally audit report format it will not have se 700 format will have only these elements understood these four elements will not be there in sea 700 format but what the format I am giving you here is a comprehensive format of audit report comprehensive format that's why I kept them in a act. So if at all they are applicable they
(2:42:00) will be added. If it is not applicable they will not be there in the audit report. Clear? Now the ultimate objective of the auditor is what? Obviously to give opinion. Opinion is of two types. Positive opinion, negative opinion. But in our audit subject we call these opinions as unmodified opinion, modified opinion. Correct? We either call it as unmodified and modified.
(2:42:25) There is a simple logic behind this terminology. unmodified modified very simple tell me what I need to do in the audit I already told you in the first chapter also we need to verify balance sheet PNL it's like company is the one who is responsible for preparing financial statements I have to check them and give my opinion they prepared financial statements I verify the financial statements I should tell the people I should tell the shareholders they are good they are trustworthy or not they are true and fair or not simple they right or wrong they are reliable or
(2:42:55) not that's it Are they reliable or not? I should tell. Suppose I verified the financial statements. I saw background books. I saw documents. I saw vouchers. Everything I verified. I found financials don't require any modification. They don't require any modification.
(2:43:14) What does it mean? They don't require any modification means are they having mistakes? Huh? No mistakes. No mistakes. Exactly. They don't require any modification means they don't have any mistake. I will also give my opinion without any modification. That is where we call it as unmodified opinion which is also called as clean opinion which is also called as unqualified opinion.
(2:43:36) This is also called as what? Clean opinion. Clean opinion of the auditor. For example, let us see illustrations in the you know audit report topic. For example, no this is our website rest of a CMA website in that no free resources you download here directly by default CA is there you see here audit and ethics new goat notes that topic is there here our world material is also there old world version middle folder you open inside that 700 illustrations you download okay 700 illustrations you download just for revision purpose
(2:44:07) remember in CA final and CA inter there is a culture called asking drafting questions they will ask you drafting questions also. So you have to be very clear on that. So briefly if at all we will see how they will be drafted. Briefly we will see how they will be drafted. Just a minute. Now look at it how briefly they will be drafted. So what is the title? Independent audit report.
(2:44:36) Yes or no? Illustration. This is illustrative format. 700 format. Audit report of listed company prepared in accordance with fair presentation framework. Yes or no? See independent audit report to the members. You see opinion. The first section in the audit report is what? Opinion. Which means what? Unqualified opinion. If at all you are giving unmodified, unqualified.
(2:44:59) Suppose you concluded financial statements are free from material misstatements. You concluded that you got evidence also. Everything is clear. Unmodified opinion you will give. How do you give unmodified opinion? You see first you know we mention that we have audited financial statements of so and so company you know yes or no we have audited so and so company balance sheet P and introduction we will give then we will straight away give what opinion in our opinion to the best of our information according to the explanation effort financials give information as
(2:45:30) per companies act and give true and fair review see without any objection clean opinion I gave yes or no that's why is also called as what clean opinion Look at Tata Motors also. They give what exact copy pasted whatever is there in the ICO book pronouncement illustration same copy pasted in our opinion do the best of information according to the information given to us the company financials are giving true and fair view same copypasted just that this is an audit report on consolidated financial statement. So the word consolidated will
(2:46:02) come at places. Okay. So remember if at all you're doing audit of a company which is preparing both standalone financials and consolidated financials you should give audit report on both standalone both consol I mean consolidation separate audit reports you must give that time no your audit report must have a heading like this again okay you are giving audit report in two audit reports are there this is dealing with standalone financials suppose if this is dealing with consolidated financials clear now in exam not like this not just
(2:46:32) this this is this is drafting Sometimes I'll ask you a drafting question like this. You know what is auditor's opinion? Just now we discussed how the opinion looks like we just now understood. By the way if at all you are feeling little speed decrease the speed you will understand much more better. Clear? Clear? No. Yes. That's it.
(2:46:49) If clarity is there speed increase or degree also not an issue. Okay. Fine. Next. Now tell me what is there in the opinion section? Just no visa. Real opinion par visa. What is there in the opinion section? What auditor is op in the opinion section? What is saying you know we audited financials of company balance sheet P&L cash flow notes yes or no you see what what is auditor is saying identify the entity first identify the entity being audited Tata Motors we have audited financials of Tata Motors identified entity or not
(2:47:22) next state that financial statements have been audited we have audited did they state it or not next remember we have audited is there Right? This wordings you should not use in case of disclaimer of opinion. If at all auditor is giving a disclaimer of opinion, disclaimer of opinion is a one sub type of modified opinion.
(2:47:46) If at all auditor is giving disclaimer of opinion, you cannot use the word we have audited. You will use the word we were engaged to audit. We were engaged to audit. That's it. So state that financials have been audited. Sorry, not this point. This point yes or no? Yes. This point we have audited that statement we cannot use in case of disclaimer. Next third one is what? Opinion paragraph. No.
(2:48:12) Include the heading with a side heading called opinion and also identify the entity. State that financials are audited. Identify the title. Identify the title of each financials. You see here yes or no. Balance sheet P and L. Yes or no. Summary of significant accounting policies. Cash flow. Yes or no? Title is identified. Next refers to no. Refer to notes. Yes or no.
(2:48:38) And specify the date and period for the period ended for the as on balance sheet date asset that is also referred. And not only that opinion pair also contains the actual opinion of the auditor that is also there. Now in exam they might ask you what are the contents of opinion par. They might ask you what are the contents of opinion par for marks question.
(2:49:02) They might ask you the auditor has to give an opinion what shall be what are all the auditor shall include in opinion section that they will ask you clear that's it now look at next concept okay slow unmodified opinion what is unmodified how it will be drafted what is to be included we understood now suppose no I saw the balance sheet P&L I found many mistakes I found many mistakes like what kind of mistakes I found for example Tata Motors itself is there simple example let us see Okay, remember if you recolct misstatement has a definition.
(2:49:32) Misstatement has a definition. Misstatement definition can be misstatement can be in where and all. It can be in amount, it can be classification, it can be presentation, it can be disclosure. Suppose no Tata Motors know they have wrongly valued inventory. 47,000 cr inventory worth of inventory is there. In this 47,000 cr worth of inventory, some 1 cr worth of inventory is materially stated.
(2:49:55) NRV value 50 lakhs only but company showed it cost 1 cr remaining inventory is correctly valued based on my sample everywhere correctly valued here alone I found a mistake 50 lakhs is a mistake but tell me out of 47,000 cr 50 lakh rupees mistake is it material you will ignore this which opinion I should give if at all this mistake is found I will still give unmodified opinion no problem at all but what if this mistake is approximately 50 cr what if this mistake is approxim imately 50 or else more clearly 500 cr. What if this mistake is a 500 cr value? Okay, first of all let
(2:50:31) us see profit of the company. Profit of the company is almost 31,000 cr is there. Yeah. Okay, we can take 500 cr measurement. Okay, no issue. So 500 cr mistake is there. Now tell me can I ignore this? Oh this is big mistake. But can I say rest of the balance sheet? No, correct. Rest of the P&L correct.
(2:50:50) Only inventory valuation 500 cr worth of mistake is there. cost is you know NRV is lower by 500 company did not consider that so overvaluation happened 500 cr worth of mistake is there now tell me can I say entire balance sheet is misrepresented don't invest in Tata Motors not at all reliable company can I say that entire financial statements are correct only true and fair except this so uh except 500 cr that only you should tell that is called qualified opinion qualified opinion means Fair financials are true and fair where except so and so
(2:51:26) matter except that matter rest of the financial statements are true and fair that is called as qualified opinion correct suppose suppose you know this mistake value no not 500 5,000 cr the inventory value of Tata Motors is actually NRV is 42,000 cr only but company valued at 48,000 cr approximately 6,000 cr over valuation cost only they valued By the way, Australia the valued NRV they ignored.
(2:51:58) For example, now tell me at what value I mean if if NRV is ignored. Tell me if 5,000 6,000 cr worth of mistake is there. Can I still say company financials are true and fair? Except I 5,000 cr mistake are 5,000 cr mistake. How come you say it is reliable? It's a very big mistake. Shareholder decision making will go wrong if this mistake is there pervasive. This mistake is called as what? Pervasive.
(2:52:23) Remember pervasive means see some generally you know generally you know what what everybody thinks is if so many mistakes are there in balance sheet so many mistakes are there in P&L multiple accounts mistreated then only people think it is pervasive not just that yeah that is pervasive that is one of the reason for pervasive there is another reason also there is another situation also mistake can be in only one place but that could be substantial see 500 cr is a significant mistake mistake, material mistake. But 5,000 cr is substantial,
(2:52:57) beyond material, beyond significant, substantial mistake. When you find a mistake which is substantial, you should give which opinion? Adverse opinion. You should give which opinion? Adverse opinion. And remember, tell me here in both the cases I have evidence. 500 cr NRV workings. I have NRV workings.
(2:53:19) I compared it. Evidence is there. I have proved to the company that it's wrong. In both the cases, I have evidence. Oppose. Let us look at another example. By the way, adverse opinion. You understood everybody. So, when do we give adverse opinion? If the financial statements are materially misstated and pervasively misstated, substantially misstated, then we should give which opinion? Adverse opinion we should give. Correct? No.
(2:53:46) No. You know Tata Motors? No. For example, same same numbers we will take. Same numbers we will take out of 47,000 cr no 500 cr worth of inventory is with third party is with whom third party Amazon warehouse they have some Amazon with Amazon warehouse or with some dealers with some automo dealers they have so many cars with them which are sold on credit or sale or return basis we gave for example so inventory of the Tata motors lying with third parties okay now auditor want confirmation from them whether that much inventory is liable that much inventory is there with the third party or not.
(2:54:20) Auditor is looking for confirmation. Third parties are not responding. Companies also refusing. No sir, don't do confirmation at all. It's not correct. Literally 500 cr worth of evidence I am not getting. I don't know whether 500 crores they are saying 47,700 cr except this 500 cr remaining any inventory I'm asking they're showing me this 500 cr they're not talking about it.
(2:54:44) Can I say this 500 cr is fake? If you say fake, a company will ask you, show me the reason that it is fake. You don't know because we didn't give you information. It is not fake. We didn't give you information. We don't give you that's it. But that 500 cr is there. Oh, 500 cr worth of inventory. They are not giving me information. I am not getting information from the company.
(2:55:04) Now tell me very simple. Except this 500 cr. Remaining all you verified. Yes. Remaining I verified. Except this 500 cr. But only you say in the audit report the Tata Motors financial statements are true and fair. except 500 cr for which mis for which evidence is not identified.
(2:55:26) We are unable to determine misstatement is there or not? We are unable to determine misstatement is there or not? We don't want 500 cr. That only you say which means again you should give which opinion? Qualified opinion. So qualified opinion is in two cases. One you found a material misstatement based on evidence you have. Two, for a material item evidence is not available for a material item evidence is not available.
(2:55:51) Then also you'll give which opinion qualified only adverse opinion when I will give material misstatement is there not only material that is substantial. Substantial technical word is what? Pervasive. The misstatement is not only material but also pervasive. Yes or no? That's it. Suppose no Tata Motors with the dealers 5,000 cr worth of cars were there with the dealer.
(2:56:16) 5,000 cr worth of cars were there with the dealer for enter 5,000 cr. I don't know whether they really with the dealer or not. Companies in there with the dealer but when I want to go and verify they are not permitting me 5,000 cr worth of information they are not letting me to verify. I don't know whether it is really there or not there. I don't know.
(2:56:36) I am not in a position to decide on 5,000 cr. But can I keep this 5,000 cr aside and can I give opinion on the remaining financials? No, no, no. I can't give like that. This is a major element. What if tomorrow is not there? It's inflated.
(2:56:54) What if tomorrow this is overstated inflated value? What if it is it is a fictitious item? Entire decision-making of the user will badly affect which is pervasive. It's a material substantial item for which I am not getting evidence for which I don't know what happened behind. In that case should I give opinion? I should not give opinion because I don't have substantial evidence substantial evidence. I'm not getting evidence.
(2:57:20) It is not at all advisable for me to give opinion. Auditor don't give opinion. Okay. What should you do without giving opinion? My duty is that one you know give audit report in that mention that you are not giving opinion and that situation is called as what disclaimer of opinion that situation is called as disclaimer of opinion.
(2:57:42) Disclaimer of opinion is when we will give when auditor is not obtained sufficient and appropriate evidence for material plus pervasive item. for material plus pervasive item. Look at this. You know 75 standard. We'll open 75. Inside that there's a table inside that there is a table. Here you see you know you can come to page number 37. So here circumstances of opinion.
(2:58:05) What are the circumstances? For example, no you got evidence. Whatever information you're asking you got evidence. You proved mistakes are there. You found mistakes are there but they are not material. Mistakes are there but they're not material. You will give unqualified, unqualified or unmodified.
(2:58:23) Suppose I know I found a material misstatement. I found material misstatement. But it is not pervasive. It is not substantial. It's material only. It will not drastically affect the decision making of everybody. Maybe one or two shareholders it will affect but not everybody. Material but not pervasive. I will give qualified opinion.
(2:58:47) Suppose if the mistake is material, mistake is material and also pervasive. Then we will give which opinion adverse opinion. Then we'll straight away give adverse opinion. Suppose no I did not get evidence. You are not getting evidence. When I am bothered only if it is material for a material item I am not getting evidence. Is it pervasive? No.
(2:59:12) That time you will give again qualified opinion. Suppose there's a m material item for which I am not getting evidence and moreover it is pervasive disclaimer. Now here you see yeah disclaimer of opinion. Now here you see that headings if you see how cleverly we have used a different headings is material misstatement exist question mark material item here because no when evidence is not obtained we don't know MMS is there or not.
(2:59:42) MMS is only a possibility yes or no really there or not we also don't know that's why when you see the qualified opinion definition you see types of opinions this is nothing but 75 standard it is below 7 not five standard types of modified opinion okay what are the various types of modified opinion qualified opinion adverse opinion disclaimer of opinion and you see the table qualified opinion is given twice at two scenarios Adverse opinion is given only in one scenario. Disclaimer one scenario unqualified one scenario. Qualified opinion is given in two scenarios. And
(3:00:18) that's why qualified opinion definition has two parts. So when a qualified opinion will be given the auditor based on sufficient appropriate evidence concluded that misstatement exist which are material but not pervasive. Suppose if the mistake are pervasive and pervasive then you will give straight away adverse opinion qualified opinion first part of the definition only same for adverse opinion only one word will change here end will come here but not will come that's the only difference suppose sir I'm not getting evidence sir and unable to
(3:00:53) obtain sufficient appropriate evidence sir but possibility is there for what misstatements on financials possibility of misstatements is there Have you detected? No, I didn't identify, sir. Why? I don't have evidence. Undetected misstatement. The possible effect on financial statements of undetected misstatement if any.
(3:01:17) Could be could be possibility. Could means what? Possibility material but not pervasive. Then also you'll give qualified sir. Material and pervasive. Then I will give which opinion? Ah disclaimer. And pervasive is straight away give disclaimer. Tell me is disclaimer of opinion is so frequent extreme rare scenarios multiple uncertaintities multiple uncertaintities you know only then auditor will give what you know disclaimer of opinion that's it yes or no one of the important criteria to decide whether should I give a qualified adversa disclaimer most important criteria is what pervasive what is the
(3:01:54) most important criteria pervasiveness of the effect or possible effect before I discuss pervasive meaning let us discuss audit reporting points on the same audit report see hardly 27 minutes we covered one of the major topic so no that's the power of real conceptual learning if you learn conceptually you can cut off effort you can understand every provision you can revise faster your ability to revise faster depends upon the amount of conceptual clarity you have if the commandable clarity you have revision becomes comes faster if at
(3:02:31) all the subject is slow for you in revision that means somewhere you do not have command on the subject that's a your command of the subject speed of the revision both are directly proportional okay next I hope you're able to follow everybody all the points able to recollect because you all attended regular class so you will be even others also can understand right now I think I'm able to cover clearly Yes.
(3:03:02) Yes. Because I'm I'm making sure that you have not attended my class. I am I took one assumption that you have not attended my class and that's why I'm I'm actually telling you because this is going to be watched by many. Yes. You see 75 illustrations in audit report. 75. Next you see 7.5 how how audit report will be changed when there is a modified opinion. For example, first we are giving qualified opinion.
(3:03:52) How audit report will change? You know in the recent exam they asked one question in the January exam what question they asked you know here here below it is there how basis for opinion section is modified in case of modified opinion inside that they asked in case of disclaimer of opinion how it will be modified this was asked for four marks four or five marks in January exam this point was tested so you can understand this point only when you see the real audit report without looking at a real audit report. You can't comprehend this point. You can't really understand the
(3:04:31) question yes or no. So these two points of very very peculiar but anyhow don't worry first let me show you. No 75 related standard this is below that some illustrations were there. So what are they saying here? You know the auditor concluded that material uncertainty okay not that uh here uh inventories are misstated misstatement is material but not pervasive qualified opinion is appropriate is what auditor decided you see how audit report will be drafted in case of qualified opinion heading is same title independent auditor report addressy to the members of the company as usual qualified opinions sideing you
(3:05:12) see how they modified qualified In case of unqualified opinion, the siding will be simply opinion. Tata motor siding is simply opinion. Yes or no? Now this point we have audited. In our opinion everything is same but in our opinion do the best of our information. The F4 said financial statements give information as per the act and give true and fair view.
(3:05:36) Positive opinion. He gave a positive opinion. Conditional positive opinion he gave. He has not given absolute positive opinion, conditional positive because in between he has not given a clean straight opinion. In between except he has used one exception except for effect of a matter.
(3:05:59) What is the matter? Inventory in this example except inventory effect. You know what effect? What happened? described in described in basis for qualified opinion section of our report. Oh, in the same report another section is there. Basis for qualified opinion like that another section is there. In this report some matter is described except the effect of the matter.
(3:06:26) In exams now sometimes MCQ subject to matter subject to you know provided that like that they were used except for which one is correct except for except is the word which is correct. Except for the effect of the matter. What matter? Inventory. Okay. Inventory. So in the basis for qualified opinion, the auditor gave a reason.
(3:06:49) Why? What happened? Why he gave a qualified opinion? What is the reason? He gave a reason. See, even if you look at the contents of audit report, no, if you look at the contents of audit report, for example, just a minute. So contents of audit report if you see the second below immediately after audit report what is there basis. Okay you gave opinion on what basis? What basis you give opinion? The basis is you see here one para is there.
(3:07:23) When you are giving unqualified opinion side heading is also basis for opinion. Simply yes or no. When you're giving an unqualified opinion basis for par is having only one para. Yes or no? Basis for opinion. What auditor is saying? What is the basis for opinion? We conducted audit. How as per standards on auditing specified under companies act okay we are independent of the company we fulfilled ethical responsibilities. Remember in ethics topic we discussed yes or no.
(3:07:53) We believe that evidence we obtained is sufficient and appropriate to provide a basis for the opinion. We obtain sufficient evidence and then only we are giving opinion. Don't worry you are asking me how did I give opinion I gave opinion as per my audit which is performed as per standards I am independent of the company I obtained evidence based on all this I gave the opinion okay you do audit as per standards no what you will do uh under standards no under those standards we have some responsibilities under many standards we have totally 35 auditing standards plus three special purpose standards 38 auditing standards you know I we have apart from that some
(3:08:30) seven more other standards we have assurance standard review standard related service standard plus one quality control total 46 standards we have if we do audit as per auditing standards 3 to 35 auditing standards applicable correct now so uh you know under those standards we have so many responsibilities okay what are they described under they are described in auditor responsibilities for audit Auditor of financial statements section of our report. In the same report below there is a section what section auditor
(3:09:08) responsibilities for audit of financial statement section below it is explained go and refer. Are you good? I mean are you getting it? Yes or no? So they are telling go audit responsibility section is there. There I have given completely about what are all my responsibilities. See I do audit as per standards.
(3:09:24) I have so many responsibilities. If you want go and read that I am independent of the company I obtained dividends this is the basis for my opinion are you clear suppose when you're giving a qualified opinion you should clearly tell what mistake happened in the financials also that's why you see right now whatever I told in 700 format we conducted our audit as per standards that par as it is is there but before that before that they even clearly mentioned what they mentioned inventories are mistated you know they are they have not followed accounting standard. The company records indicate that inventories are misstated.
(3:10:00) If at all you know had management you see had management stated if at all management correctly stated auditor has to clearly explain how what elements of balance sheet what elements of P&L would have affected. If this mistake is not there, how much would be the profit of the company? If this mistake is not there, how much is sales of the company, cost of sales of the company, tax liability of the company, reserves and surplus of the company? You should not only tell the mistake, you should also quantify the mistake. This is the how this is how you should modify the basis
(3:10:36) for opinion section. When you are giving a modified opinion, correct? Huh? Yes. So look at so when you're expressing a modified opinion you should clearly modify you see how you should modify in 795 standard we have this concept how basis for opinion parag gets modified in case of modified opinion here you can add how basis for opinion opinion section gets altered or gets modified in case of modified opinion suppose no just now we saw Material misstatement is in a specific amount. Company inventory valued at cost only. NRV they didn't mention amount to mis stated. What
(3:11:20) auditor has to do if material misstatement is related to specific amount the auditor shall include the description. Auditor told lawyer of cost or NRB whichever is the company did not follow that's a violation in accounting standard he described. Not only that quantification of the effect also you should mention quantify also you must to do unless impracticable here inventory only mistake no because of inventory what balance sheet item what P&L items affected I can easily figure out and I can give reasons clearly yes or no quantification is not if at all not possible I will not give
(3:11:55) if quantification is possible I will quantify unable suppose you are unable to quantify if quantification is not practicable audit shall mention that. For example, in 75 there is another illustration. Illustration number two adverse opinion. You're giving adverse opinion. Why? What happened here? The consolidated statements are materially mistated due to non-consolidation of subsidiary.
(3:12:22) A company this company has not consolidated a subsidiary company. That time adverse opinion report on audit of consolidated financials. What opinion? adverse opinion. So here no the company has not consolidated one subsidiary in consolidation every subsidiary must be consolidated.
(3:12:47) If you did not consolidate one subsidiary so many balance sheet items, so many P&L items, every line item will affect no if you do not consolidate one subsidiary is consolidated financial showing true and fair not at all. Straight away they are misleading because one substate itself is not consolidated. How come that is reliable? That is not family group picture.
(3:13:04) It's an adverse it's a material and also pervasive many items in the balance sheet P&L have affected you see adverse opinion you have audited in our opinion to the best of our information you see here it's not accept it's not except because what matter they use because of significance of matter because of significance of matter described in basis for adverse opinion section now you see basis for adverse opinion as usual again In unqualified opinion also we see this matter. We conducted our audit as per standards. Our responsibilities are further described in audit responsibility
(3:13:37) section. We are independent of the group. We complied with code of ethics. Evidence obtained by us is sufficient and appropriate. Everything they told normally. But why you gave adverse opinion? That reason also you should tell right? Uh that as explained in so and so note number the company the group know they did not consolidated.
(3:14:01) If at all company consolidated many elements will be affected. What is the effect? Quantification what is the quantification could not be determined. Why every item will affect? No. So how come auditor can quantify each and every item? Minorities interest reserves equity I mean fixed assets current assets current liabilities non-current liabilities P and revenue from operation expenses every item will affect. Aren't you able to quantify? Yes or no.
(3:14:27) So when you are unable to quantify auditor has to state that the auditor has to state that if if quantification is not practicable the auditor has to state so sometimes know this is see this is when material misstatement is related to a specific amount or amounts including quantitative disclosures.
(3:14:51) Quantitative disclosures means what? For example, if you recolct schedule three, trade receivable is there. Balance sheet trade receable 100 cr. You should show trade receivable break up below in the notes to accounts less than 6 months, more than 6 months, more than 1 year, more than 2 years. There's some number you did wrongly. That's a misstatement in quantitative disclosure. That time also you should quantify where it is exactly happened.
(3:15:09) Yes or no? Sometimes mistakes might happen in narrative disclosure. Narrative disclosure means what? For example, no Tata Motors has given so many narrative disclosures. What narrative here? No, they said they said narrative disclosures. You see, they said these financials are prepared as per Indas.
(3:15:28) Suppose actually company prepared using normal accounting standard. But here they are saying Indas in in whatever they're describing have they misstated or not? Statements theory related matter in the notes to accounts practical matter not theory matter is materially misstated. We will call it as narrative disclosure mistake.
(3:15:47) If narrative disclosure misstatement is there, what auditor has to do? Explain how the misstatement is made. Sometimes company itself did not disclose. It's not wrong disclosure. They didn't disclose itself. Then discuss with top management describe in the audit report in basis for opinion section.
(3:16:07) Is there right basis for qualified or basis for advers whatever nondisclosure is a material misstatement. Correct? Non-disclosure is the material. Describe what is omitted. Include the information if practicable. What information company omitted? No. Segment reporting they didn't give. Related party disclosure they didn't give. You include it here.
(3:16:29) If practicable, if not practicable, say that related party disclosures are not given. Nature of omitted information, related party transactions, segment information, trade receivable break up. What is not shown? MSME related details. What is not shown? Mention that nature clear. Sometimes you will give modified opinion because you are unable to obtain evidence.
(3:16:48) When you are unable to obtain evidence, you will again give two types of modified opinion there. Either qualified disclaimer. Just now we have seen yes or no. Now when you are unable to obtain evidence, you should also modify the opinion, right? You should describe the reasons for inability.
(3:17:08) Why? What happened? Why you could not obtain the evidence? You should clearly mention the reason in the recent January exam they asked this question. The auditor did not get trade receable something amount some big amount he did not receive evidence he did not get what auditor has to do you should tell that disclaimer opinion should be given. Okay. How basis for opinion section will be modified? How basis for opinion section will be modified? Yes or no? Here in the you know many students are taking it granted.
(3:17:36) They think that they're thinking it's a very straight question. You see you see here what is happening you know dattors constitute 60%age major item yes or no and outstanding amount is more than one lakh management resisted no external confirmation forum decided to disclaim the opinion 55 75 put together they asked yes or no seek your guidance on amendment to be made in the basis for opinion section what question they're asking right now I'm showing you right what amendment they should make in basis for opinion modified opinion in basis for opinion para in case of disclaimer of opinion
(3:18:15) what amendment you should make very simple you remember basis for opinion para what basis for opinion para will contain we conducted our audit as per standards our responsibilities are described in auditor responsibility section we are independent of the company we fulfilled ethics we obtained evidence these points we will state no when you are giving disclaimer you should not State them. That's it.
(3:18:39) When you are giving disclaimer, you should not state them. What a reference. You should not talk about reference to auditor responsibility. You should not talk about evidence obtained in basis for opinion nothing. But you see in 75 disclaimer of opinion section disclaimer of opinion related is there. You see basis for disclaimer of opinion.
(3:18:59) When you are giving disclaimer of opinion, citading will be disclaimer of opinion. Basis for disclaimer of opinion. Disclaimer of opinion. You see what they gave directly group joint venture 90% value. Auditors were not allowed. Auditors were not allowed access. Yes or no? Accordingly, the auditors don't know what to do here.
(3:19:20) They directly mentioned reason. Are they talking about we conduct our audit as per standards? Our responsibilities that is missing here. It is there in unqualified opinion, qualified opinion, adverse opinion but not there in disclaimer of opinion. Indirectly when you're giving disclaimer of opinion base section shall not contain those statements correct this is what they asked in exam at what at how many marks they have they have asked for five marks I guess so five or four marks four marks it was asked for clear that's it with this disclaimer of opinion is also covered see it's a revision class
(3:19:55) I'm not going too in depth also okay so we already discussed in our class much more elaboratedly like how all that reporting happens. getting it? I hope you are able to recollect. Yes, that's it. Next, any other matter because of which modified opinion is given that shall also be included in modified opinion able to understand? Same way when auditor is giving disclaimer of opinion, no auditor responsibility section also will be modified.
(3:20:22) First of all, auditor responsibility section, what will be there? First, let us look at that and when disclaimer of opinion is given, how it will be modified that also we will see first. Before that by the way we came up to here because of what? Pervasive definition. Correct.
(3:20:39) What is pervasive definition? Pervasive definition. Pervasive describes impact of misstatements or undetected misstatements. Pervasiveness is talking about impact of mistake or per undetected means possible mistake that are not confined to specific. They're not in single or sometimes in single item only but which represent substantial portion or pervasive may be in relation to disclosures that are fundamental to users understanding of financial statements.
(3:21:08) Pervasive is something either not specific or maybe specific but 90 but sub sub but substantial portion yes or no or maybe related to fundamental disclosures. If at all these types of mistakes there we will call it as pervasive nature. Pervasive is very important to determine which type of modified opinion to give.
(3:21:33) Now in exam four marks question they have asked many times. Which type of modified opinion auditor has to give is based upon what factors? Two factors. Nature of the matter because of which you want to modify. Nature of the matter giving rise to modification. Pervasiveness of the matter. Pervasiveness means nature of the matter means what? Is it because material mistake there? Huh? Material mistake there means what? You have evidence or you are unable to obtain evidence leading to possible material misstatement. Why are you modifying? I
(3:22:07) found a mistake. That is one reason. Two, I am unable to find any mistake because I don't have evidence. Either of these two reasons is what you decided to give modified. Now, which modified opinion qualified adversar? It depends on pervasiveness. Pervasiveness of the effect or plausible effect.
(3:22:30) Effect means what? When actual misstatement when actual misstatement is found possible is what? When undetected misstatement is there. Yes. Easy or not? That's it. So with this entire 75 standard is mainly over almost. Now finally one more small topic. Suppose no you are not getting evidence why management is not cooperating. If management is not cooperating no there is a limitation. No ask them to remove remove. Please remove the limitation. request them. Management refuses.
(3:22:57) They are not removing it. You communicate with top management. You try to perform audit with alternative sources if available. Suppose you are unable to obtain evidence even with alternatives. You are not able to obtain evidence even in alternative way. Then look at the possible effect.
(3:23:17) You are ultimately not getting evidence. Look at the possible effect of undetected misstatements. Sir, they are material but not pervasive. Then give audit report with a qualified opinion. Suppose if it is material and pervasive, withdraw withdraw from the audit. Resign.
(3:23:35) Suppose no management is not giving you data and the possible effect is going to be material and pervasive. Major evidence. They are not giving me substantial item. They not giving me evidence. I am not able to conclude on the substantial item. Don't disclaim the opinion directly. First resign if possible. If resigning is not possible, you should disclaim the opinion.
(3:23:54) When res when resigning is not possible for listed companies there is something called LODR regulations as per those regulations auditor cannot just like that withdraw there are some formalities the auditor has to go through which is covered in CA final that's it now you know before you withdraw you you might have done little bit of audit no you might have identified some mistakes no in this 10 days some audit you did before you decided to resign from the company.
(3:24:19) You might have identified some mistakes. No. Communicated to those charged with governance. Which mistakes? Material misstatements. Because of which you would have given modified opinion. Yes or no? Communicated. The same thing is given as a diagram.
(3:24:40) And whenever we are giving a modified opinion in the audit report, we saw side headings has to be changed. Qualified basis for qualified opinion. Adverse basis for adverse opinion. Disclaimer of opinion basis for disclaimer of opinion correct or not that's it entire 7.5 is majorly over one point alone is kept kept pending how auditor responsibility section will be modified here how basis for opinion section will be modified in case of disclaimer when we give disclaimer no basis for opinion basis for opinion section will not contain some statements same way auditor responsibility section will be will also be drastically
(3:25:13) modified first of all how auditor The responsibility section looks like that we will see now clear until now that's it 5 0 minutes till now the major standard we covered in our class we discussed almost 3 hours this topic to end of 3 hours we covered almost 3 hours easily but it was it was very detailed next now look at this so yes title addressy opinion Basis for opinion just now we covered. Now responsibilities of management.
(3:25:54) What are responsibilities of management? We already saw preconditions to audit. What are responsibilities of management? You see here responsibilities preparing financials as per applicable framework. Internal controls verifying going concern yes or no. These are the responsibilities of management. Once responsibilities of management is given next you should give auditor responsibilities.
(3:26:12) What you will give an auditor responsibilities? You will talk about you will talk about so many things. Auditor responsibility section. No. If you see Tata Motors auditor responsibility section which is nothing but ICA book copy paste only auditor responsibility section. If you see Tata Motors for example you see here this is the audit report.
(3:26:34) Auditor responsibility section. You see how lengthy? Yeah. You see this what is audit responsibility? getting reasonable assurance. Reasonable assurance is a high level of assurance. Misstatement can arise from fraud or error. And now apart from that we have to be judgmental. We have to be skeptical throughout the audit.
(3:26:57) Identifying risk you know identifying risk getting understanding of controls accounting policies going concern uncertaintity all that evaluation overall presentation yes or no. All this auditor has to do. Further auditor has to communicate with top management certain things with the top management independence you should communicate and you may select from communication some matters as key audit matters this and all you should draft where under auditor responsibility section you should mention all this the same thing is given in our book auditor responsibilities no you shall describe objectives of the auditor what is
(3:27:29) objective reasonable assurance and giving a report then you should explain what is reasonable assurance high level of assurance but not a guarantee. You shall also give the meaning of misstatement. Then in the same auditor responsibility you should also talk about additional responsibilities.
(3:27:47) What are additional responsibilities? You should exercise judgment and skepticism and you should also talk about audit process identify and assessing the risk responding it getting evidence understanding controls accounting policies going concern fair presentation overall presentation structure content of the financials. Yes, we saw yes or no.
(3:28:08) In case of group audit, division of responsibility, generally this division of responsibility we already give it in other matter para. What is other matter par? We will discuss since we are giving it on other matter paragraph. We generally don't give it in audit responsibility section. Again audit responsibility section has a third part communication.
(3:28:26) What are all communication responsibilities? We have a dedicated standard called 260 which is in the upcoming chapter there we will revise. Clear? That's it. What you need to communicate timing, scope and timing, significant findings, deficiencies in internal control.
(3:28:44) In case of listed entities, you should give a statement of compliance with independence, statement of compliance with independence. Key audit matters also possible that fact also you communicate here of course for key audit matter separate section is there. There you should talk Leo. That's it. So now location this audit responsibilities just now know I spoke right where it should be kept same within the audit report seemas within audit report only they gave no yes or no or you can give it as an extraure appendix or audit responsibilities no you type it on a website you type and keep it on a
(3:29:17) website that link you can give if it is permitted by law explicitly if law does not permit it don't keep it yeah all of you now you see auditor Auditor responsibility section so much is there under auditor responsibility part of the audit report so much you should talk suppose no when auditor is giving disclaimer of opinion when auditor is giving disclaimer of opinion auditor responsibility section how it is drafted you see our responsibility is to conduct audit however because of matter described in basis per disclaimer we were not able to obtain evidence
(3:29:54) accordingly we are by the we are independent of the company we fulfilled ethical requirement audit responsibility has three parts no nothing is mentioned here in case of disclaimer since you're not giving any opinion people are not bothered about your responsibilities they just want to know what is your main responsibility why you didn't give opinion are you independent of the company or not just tell me and go that's it so the same is given as a theory question in exam the same can be given as a theory suppose if auditor is giving
(3:30:25) disclaimer of opinion How auditor responsibility section will look like? When auditor is disclaiming the auditor shall responsibility section to include only the following. What you should include a statement that auditor is responsible to conduct an audit as per standards on auditing. A statement that basis for disclaimer of opinion because of the fact mentioned in basis for disclaimer of opinion.
(3:30:55) The auditor could not obtain sufficient appropriate evidence and a statement of independence and ethical. And remember most important when we are giving disclaimer of opinion key audit matter shall not be communicated. What is key audit matter? Why we shall not communicate? We'll discuss in the key audit matter standard. Clear or not? Yes. Let us finish. Let us conclude 700 standard briefly and then we will proceed further. Clear until now.
(3:31:18) So auditor responsibility section over then we have another section in the audit report other information remember other matter para is different other information para is different other information para we don't have in the syllabus then we should give we should give report on other legal and regulate requirement which we will discuss later signature of the auditor how auditor shall sign this itself can be asked as a three marks question three or four marks questions and signature generally report will be signed by personal name. I mean the personal name of the auditor when he is a individually practicing CA suppose I
(3:31:55) am a forum sole proprietor firum or a partnership firm then my forum name also shall be given not only my personal name my forum name shall also be given and not only that along with signature you should mention your membership number you should also mention your forum registration number once you sign the audit report you should also mention the place yes or no you should also mention the Place of signature ordinarily ordinarily which place the city where you are signing that city name you should put yes or no then you should also mention date of audit report. What
(3:32:30) is the date of audit report? The date of audit report shall be usually the date not earlier than you cannot put date earlier than approval of financial statements. Financial statements approval date is there right? You can't put the date earlier than that. Simple logic financials approval means what that balance sheet and P&L which is signed by management is given to public on that public related balance sheet PNL only you should give opinion then how come you give audit report before this date that's the logic that's why you see
(3:33:02) Tata Motors in all the companies no I even showed you date of audit report date of approval both are same yes or no then moreover not only approval you should not give the audit report before obtaining sufficient appropriate before getting evidence how can I give opinion how can I give report that's the logic then last one unique document identification number this is to prevent forgery we will have something called ICI portal it's an IC portal we will have a udin portal members will have in that portal no whenever I'm signing a document no what document I am signing document details I should give in the
(3:33:42) portal then it will give me unique number that number I will put on the document 16 character unique number I will be will allotted that number I will put third parties should rely this document only when the number is there not my sign my sign is no more valid only my document number is valid this is to prevent forgery and all documents actually it is not February you can put July you can directly put what July with effect from 1st July 2019 every document and certificate you are signing No must contain you didn't document clear easy
(3:34:20) then that's it so these are the contents of the audit report if you once again go back so date must be on or after approval and ud number correct now tell me basis for opinion para just we saw what are all should be there in basis for opinion state that audit is conducted as per standards state that you are independent of the company state that you obtain sufficient appropriate refer to the section that contains auditor respons responsibilities these statements you should not include when exactly when auditor is giving disclaimer of opinion these statements should not be included this is what
(3:34:56) asked in Jan 25 exam that is what shown in 75 also yes or no that's it 70075 majorly completed now let's look at one few more sections of the audit report material uncertaintity key audit matter emphasis of matter other matter era. Okay fine we'll take 5 minutes gap and then continue 1 hour exactly we finished this we we spent approx 3 hours no three three and a half hours no in our uh this one first rate yes clear everyone yes uh let's continue the remaining contents of the audit report now let's begin emphasis of matter paragraph other
(3:35:37) matter paragraph okay so what is an emphasis of matter paragraph see suppose if you look at Tata Motors audit report. If you look at Tata Motors audit report, it will have notes to accounts itself is 100, 120, 130 so many pages. Yes or no? But as an auditor, I should read full audit report.
(3:36:03) Correct? When I sorry full financial statements, I should read full financials, full notes, to everything I should read. When I am reading that balance sheet, P&L notes, no, I felt some note points very important. 38, note number 38 for example. I felt it is very important because know there company's facing one pending litigation in one of the factory related issue a very big pending litigation if at all that litigation becomes successful for the other party the company has to close the factory in that location which will affect major sales of the company temporarily for certain period environmental issue such important incident they honestly disclosed in the
(3:36:35) notes to accounts they disclosed everything honestly tell me when they disclose everything honestly when they are not misleading ing anything. Can I give a modified opinion? But that note number 38 in the financial statements is something very important. What shall I do? I want every shareholder to read this information.
(3:36:54) What shall I do? I will emphasize it. I will highlight it where in the audit report, emphasis of matter paragraph and other matter paragraph, in the independent auditor's report. What is an emphasis of matter para? Just know I told it's a paragraph in the audit report.
(3:37:18) It is referring to some matter where that matter is note number 38 nothing but what presented or disclosure in financial statements in auditor's judgment is important that it is fundamental to users understanding of financial statements. It is fundamental to users understanding of financials. Some matter which is very important for users understanding of fundamental to financials.
(3:37:44) If at all that is presented getting it in the financials some matter is presented which is very important for users auditor can refer about that in audit report in some para called emphasis of matter para. How emphasis of matter paragraph will be used? Emphasis of matter paragraph can be included in audit report in respect of a matter. By the way, tell me suppose company did some wrong disclosure there.
(3:38:11) They are not clearly disclosing the pending litigation. They are misleading people there. What should I do when they're misleading the matter? No. In the note statement, they're misleading modified opinion arisatement, disclosure, misstatement, modified opinion. I should not use it that time emphasis of matter.
(3:38:29) When it is materially misstated, I should give a modified opinion directly. When can I highlight a matter under emphasis of matter? Only when it is free from material misstatement. That's why in emphasis of matter there is one more word only when it is appropriately presented or disclosed.
(3:38:51) When a matter is appropriately presented appropriately disclosed in financial statements then only I should refer about emphasis of matter per correct then. So emphasis of matter paragraph is a parah which is is a m emphasis of matter paragraph is a para in the audit report that is referring that is referring to some matter which is appropriately presented or disclosure in financials in auditor's judgment is of that important for fundamental understanding of users yes or no then now how it how it will when it will be used it is not required to modify the auditor is not required to modify
(3:39:28) opinion on that matter Suppose if a matter is materially stated and where you shall you have to give a modified opinion you can't use that matter under emphasis prohibited you cannot use like that that matter must be free from material it must be appropriately presented then only you can highlight moreover it is not decided as a key audit matter what are the examples what matters generally auditor emphasize some uncertaintity about litigation just know I told major catastrophe happened that is disclosure in the financial statements that the company suffered so
(3:39:58) and So loss after 31st March some significant subsequent event early application of sub accounting company followed a new accounting standard much more early. So they highlighted that you know in the notes to accounts you can highlight that you can highlight that point in the audit report able to understand.
(3:40:21) Now how should I present emphasis of per how should I present India audit report. We will see how should I present emphasis of matter paragraph. Just a minute. Emphasis of matter paragraph. Emphasis of matter paragraph. How it shall be presented? It shall be presented in a separate sideing. Correct? In audit report separate sideing is there.
(3:40:45) You see here India opinion is there basis for opinion is there. Emphasis of matter is there. Separate side. Many students think sir if qualified opinion is given emphasis should not be given. No it's not about these two below here note number 29 is there for example on this if you are giving qualified opinion this cannot be given under emphasis that is what the meaning many students confuse between overall audit report opinion and emphasis no it's on that matter which matter if at all you want to highlight that under emphasis on that matter you should not give qualifier opinion sir
(3:41:18) sir note number 29 note number 2649 on these matters I don't have any qualified opinion Now can I use emphasis? Absolutely. Then why he gave qualified opinion sir? This is on some other matter in the notes not on the notepmber 26 29. Understood. Now emphasis put a separate section in the audit report sideing emphasis. Draw attention. Give reference to note point.
(3:41:42) Give reference to note point and at the end of the matter mention that our opinion is not modified. Our opinion is not modified at the end of the matter. You should give our opinion is not modified in respect of the above matter. Next, now look at this.
(3:42:06) How manner of presentation? You know in exam they'll ask you define emphasis of matter paragraph how to present it manner include the par in a separate section heading emphasis of matter express the matter reference also you should give you see we draw attention to number 26 correct term state that your opinion is not modified at the end of the par in the audit report our opinion is not modified on the above means we don't have any objection indirectly we are clarifying correct by the way can I give emphasis of matter paragraph as a substitute for a modified opinion. Never.
(3:42:37) When something is wrong, you should give modified opinion only. On that, you should not give emphasis. Emphasis of matter paragraph is not a substitute for modified opinion. Emphasis of matter paragraph is not a substitute for disclosures required under applicable framework.
(3:42:56) Emphasis of matter paragraph is not a substitute for 570 reporting where the entity will continue as a going concern. That's it clear all of you? Then in the same audit report there can also be some other matter that is called as other matter paragraph. What is other matter paragraph? Other matter paragraph is also paragraph that is also in the audit report only which is referring to a matter not presented not disclosed in financials because no see in the audit report no I want to refer about some matter presented or disclosed in financials I have emphasis if you want to talk about something else not presented not disclosed in financials
(3:43:33) but it is relevant for users for what for understanding about the audit for understanding Understanding about the auditor responsibilities for understanding about auditor's report to make the users understand not about financials to make the users understand about audit auditor responsibility auditor report that time I can use other matter paragraph just like emphasis other matter paragraph also shall be given in a separate section in the audit report with a siding called other matter. Same way other matter paragraph I can include only if two conditions are
(3:44:09) satisfied not prohibited by law in India nowhere it is prohibited that's why every company happily every auditor will use other matter per also it is not decided as a key audit matter suppose if a particular matter is decided as a key audit matter sir what is key audit matter we'll discuss in some time now so if a matter is decided as a key audit matter which is also one more element in the audit report why duplicate ation you can discuss it under key audit matter yes or no but remember key audit matter emphasis they are all different fine
(3:44:42) once I complete key audit matter then I will discuss about what is key audit what is emphasis what is other matter everything I discuss that I clear or not yes next communication with governance if emphasis of matter paragraph other matter paragraph is expected to be included the auditor shall communicate with those charged with governance including the wordings of the para.
(3:45:08) Okay. Whenever you decided to include emphasis of matter and other matter per you shall communicate with top management very simple whenever you want to include any matter emphasis other modified opinion key audit matter material uncertaintity related to going concern simply I told you at the beginning 700 format don't have those four points if at all you want to include any of them or you want to give a modified opinion draft audit report shall be given to management Because these are all additional reports, additional information in audit report. If you're giving unqualified
(3:45:44) opinion, you're not including emphasis, you're not including other matter, you straight away can give happily. You know audit report without giving to the management. But if at all you want to modify the audit report, you must communicate with top management.
(3:46:01) Now sir, what is the example of other matter par? Classic example, we can take simple classic example. For example, no in other matter paragraph generally what auditor will describe auditor will describe about definition you see about the audit about the responsibilities of the auditor about the audit report the audit auditor responsibilities auditor's report about these three issues you have to discuss yes or no no for example no you imagine there is a company called state bank of India limited it's a bank simple classic example simplest way state bank of India no they prepare both standalone financials and consolidated financials. Now stand standalone
(3:46:39) financials is nothing but you know head office plus branches all branches plus head office combined financials is called as standalone financials whereas state bank of India has appointed Mr. P. Mr. P who is a principal auditor nothing but he is a bank auditor for the entire state bank of India he is the auditor actually state bank of India has a joint auditors 12 joint auditors were there all 12 put together we can call them as what principal auditors let us name them as P are you getting it they're principal auditors now head office entire who should give audit report on
(3:47:19) standalone financial statements P should give because he is the auditor of the bank he should give audit report on standalone financial statements P correct but branches right 25,000 branches they have state bank of India have 25,000 branches you see the break up of the branch note 6,000 branches were only audited 19,000 branches were unodudited these are branches not audited you just have to give disclosure requirement in bank audit chapter also we have seen in The revision of bank audit chapter I will
(3:47:55) tell you the auditor has to disclose in other matter paragraph in the bank related audit report how many branches are unodudited regarding the audit you should give a disclosure how many were unodudited you should give a disclosure regarding audit because it is affecting your responsibility they were not audited now 6,000 branches were audited by branch auditors we can call them as B branch auditors now tell me you know these branch branch or it is almost 25,000 put together 90% of the financial operations these branches maybe 80% for example entire branches of
(3:48:34) state bank of India no 90% approximately will be 90% 90% of the entire finance activities are happening in branches but these branches are not audited by we who audited them branch auditors or they were not audited but who is giving giving audit report on entire standalone financials. Principal auditor but who audited actually branch auditor.
(3:49:01) Now how did principal auditor giving opinion on standalone financial statements? Based on branch auditor's report. Branch auditors will do audit and give a report to principal auditor and principal auditor using those reports he will give opinion on the overall balance sheet.
(3:49:25) PL sir how do he will take their reports and give opinion what if branch auditor gave a negative opinion what he should do that and all we have in CA final we have sea 600 there is a standard in-depth discussion is there in CA final there we will discuss clear until now everybody yes so on these branches so the principal auditor giving opinion on entire company based on depending on branch audit report. But tell me public thinks what he only verified everything.
(3:49:57) But in reality did he verify? He has not verified in reality. What if tomorrow some fraud is discovered in the branch? Every public person will go and blame principal auditor. You are the reason why you did not find a mistake. All that.
(3:50:16) That's why principal auditor should tell public in the audit report itself. what he should tell in other matter paragraph principal auditors should tell the public that look 6,000 branches are not audited by me they were audited by other auditors approximately this much amount they only audited but I am the one giving audit report I agree but my audit report is based on their audit reports they said everything is good so I am saying you everything is good how you believe my opinion I believed their opinion this is called division of responsibility statement.
(3:50:48) The principal auditor shall state division of responsibility when he is using the work of other auditor. When the principal auditor is using the work of other auditor, the principal auditor shall demonstrate responsibility of respon the principal auditor shall communicate the principal auditor shall describe other auditors you know I mean uh responsibilities in the other matter paragraph.
(3:51:18) Leo yes or no everybody same way when you're doing consolidated financial statements so see when a company's preparing consolidated financials same auditor should give audit report on that also but this consolidated financials is a consolidation of standalone financials of holding company nothing but state bank plus standalone financials of subsidy associate joint venture correct but you know these subsidiary associate joint venture are audited by subsidiary auditors but consolidated financials on that audit report is given by P but in that financials consolidated financials no
(3:51:56) subsidy data is also there right subst numbers are also there right but I didn't audit no but I'm giving it how I am giving opinion on the consolidated financials even though some of the information is audited by other auditor by using their reports so whatever in the consolidated financials I audited only holding company assets and liabilities. Incomes and expense. The assets and liability.
(3:52:20) Income and expense also includes subsidy company incomes and assets which is not audited by me. But I am only giving opinion on the total assets and total liabilities. But subsidy related assets and liabilities not audited by me. That is audited by subst auditors. But I gave opinion.
(3:52:38) I am giving opinion on consolidation based on their reports. This point also where you should highlight other matter paragraph. Leo other matter paragraph is used like this. For example, you see in Tata Motors they have not they have clearly mentioned you see you know you see here we did not audit. What are they saying? We did not audit. Okay. 58 subsidiaries. Two direct subsidiaries. 58 step down subsidiaries.
(3:53:08) Yes or no? Why? I mean what what happened for them they were whose financials you see here whose financials were what happened these financials were audited by other auditors and our reports in so far as you know amounts and disclosures relating to these subsidies our opinion is purely based on other auditors correct you know this our opinion we have audited all this conversion you see here Our our opinion on the consolidation is not modified by the way you know we relied upon other auditors work. What are the principal auditors are saying
(3:53:46) here to the extent of subsidy related data which is included in holding company consolidated financials data. My opinion is based on other auditors opinion indirectly he is stating about responsibilities of other auditors where he is stating other matter paragraph. That's it.
(3:54:08) Other matter paragraph over clear. Now remember State Bank of India is being audited under joint audit. They have 12 joint auditors. State Bank of India is having 12 joint auditors. Now what is the concept of joint audit? First we will cover that concept and then we'll we will go back and continue.
(3:54:27) Clear? What is a joint audit? Very simple. Appointing two or more than two auditors. Auditors can be individuals, firms, combination of individual and firums. That is called as what? Joint audit. The scope of work must be same. The year must be same. The act under which they were appointed must be same.
(3:54:47) Both of their duties and rights must be same. Scope must be same. Then only they're called as joint auditor. Suppose a company company has auditor for companies act one auditor is there. Income tax act another auditor is there. Can I call them joint audit? Both are under two different statue. I am having auditor for 23 24. Two auditors are there right now.
(3:55:05) Can I call them as joint auditor? No. Both are two different years they doing audit. Yes or no? That's it. Now, now when joint auditors were appointed, how they do the work? They divide the work and then do. When joint auditors are appointed, joint auditors divide the work and then do correct.
(3:55:29) So joint auditor they will have individual or separate responsibilities or joint responsibilities. Then the work is divided among joint auditor. Each joint auditor is responsible only for their allocated work which may be based on assets and liabilities income and expenditure geographical area identified unit period of financial statements.
(3:55:54) Getting it? Joint auditors when the work is divided each joint auditor is responsible only for work allocated to them. How the joint auditor responsibility? Assets and liabilities, income and expenditure. Geographical area, identified units. Any of these way work can be divided. Yes or no? Like you do assets, I will do liability. You do income, I will do expenditure. You do north, I will do south. You do four units, I will do four units.
(3:56:18) You do six months audit, I will do six months audit. Sometimes no. See when the work is divided like this each joint auditor is responsible for example state bank of India is having 12 auditors they 12 divided the work each one is responsible only for their work if other joint auditor is negligent in his work no I am not responsible getting it he is only answerable some cases combined responsibility all of them together will be responsible when work is not divided and performed collectively decisions taken collectively in all common areas are matter is brought to all attention
(3:56:52) and everyone agreed on that and whether financial statements are prepared as per applicable framework whether presentation and disclosure are as per applicable framework whether audit report issued is properly as per the 700 format or not all joint auditors are responsible sir why audit report why audit report all of them are combinedly responsible because in a joint audit audit report is given commonly by all of them one report only they will give for example you see state bank of India report for example state bank of India report if you see
(3:57:29) you see this is the auditor's report of state bank of India this is auditor's report ending you see all the joint auditors signed it 12 joint auditors signed the state bank of India report since all the auditors signing one audit report means how many audit reports they are giving one audit report look at the reporting by joint auditors look at reporting by joint auditors. Look at the reporting by joint auditors.
(3:57:54) What is this audit reporting? In case of joint audit, generally joint auditors issue common conclusions and a common opinion. A joint auditor is not bound by majority. If there is a difference of opinion, disagreeing auditor can issue separate opinion. Yes or no? Joint auditors are not bound by majority.
(3:58:19) If at all the auditor is if at all they have a difference of opinion then what happens? He can issue a separate report separate opinion yes or no. very simple sub State Bank of India 12 joint auditors but they're right generally they give commonly if one of them is saying sir actually state bank of India no you see they give unmodified opinion but one auditor no sir the area where I did know it's a substantial mistake he want to give adverse opinion remaining joint sir it's only material sir not pervasive you can give qualified opinion no sir I will give adverse opinion only then do one thing you give separate
(3:58:50) report sir is there any pound like is there any responsibility for one joint auditor to all a majority. No, a joint auditor is not bound by majority. Suppose if you're disagreeing, what will happen? You give another report. You give your own audit report, they will give 11 of them together. They give one audit report.
(3:59:08) Then two audit reports will come. If which one shareholders has to believe anything because no joint auditor who is giving adverse opinion? No. In basis for adverse opinion, he will tell the reason to the people. Shareholders will decide which one to believe that's their choice. Are you getting it? Now when when different audit reports are there in joint audit each audit report shall refer about other joint auditors report getting it? So cross referencing must be there.
(3:59:34) Clear? Then by the way joint auditors must coordinate with each other any matter if one joint auditor identifies some matter not belonging to me his issue I should communicate him. Same way he should also communicate me before audit report date also sir should I verify joint auditors work how he is performing no need he is also CIA along with you he's also cop he's also liable for standards on auditing he know everything you don't have to what if you do mistake because all of us are doing commonly and then giving opinion no what
(4:00:05) if because of that fraud is happened it's okay he is only answerable you are not answerable no work divided he is only answerable yes or no special considerations whenever you are appointed as a joint auditor you should specifically focus on certain things you know how audit will happen every partner from the firm State Bank of India 12 is there 12 forums are there right as a joint auditor from each firm partner important team member all of them should be involved in planning process all of them should be involved in planning
(4:00:37) process all of them should each joint auditor should do risk of MMS and communicate it to others each joint auditor shall do risk risk assessment and communicate to other joint auditors and all the joint auditors shall establish joint audit strategy. Once a strategy is established you all the joint auditors must develop joint audit plan before starting the audit addressing division of areas and common areas.
(4:01:12) Addressing reporting objectives, addressing significant factors among joint auditors, addressing preliminary engagement activities and resources allocation. Joint audit plan must be developed. What points they should address when we when they developing joint audit plan. This itself well can be given as a four marks question. Remember audit reporting four marks question possible responsibility. What are the areas where combined responsibilities there? Four marks question is possible.
(4:01:36) What are the responsibilities of joint auditor? This itself can be asked as a five marks question. Coordination between the joint auditor three marks question. Special considerations in joint auditor. Four or five marks question. Only main points you should write.
(4:01:54) Understood? Sometimes in depth what write about joint audit plan? What considerations joint auditor shall consider when they're developing plan? When you're preparing plan no identify division of areas and common areas. What are the reporting objectives? Remember reporting objectives are different from reporting requirements.
(4:02:13) And what are the important factors to be communicated? Preliminary engagement activities. How many resources are required? Preliminary engagement activities. Important factors. Reporting objectives, division, common area, resources required. Considering all these, they develop a joint audit plan. Next they will discuss and document what kind of audit procedures to be performed.
(4:02:38) Nature, timing, extent of common areas and specific areas. Nature, timing, extent of procedures for common areas, procedures for specific areas. Yes or no? They should discuss and proceed further. And further remember joint auditors must obtain common engagement letter and a common management representation letter regarding management responsibilities. We have seen already engagement letter.
(4:03:01) So you should give engagement letter. Obtain management technology commonly. Plus management representation. What is representation? Written representation 580. We have a separate standard we will discuss in the upcoming chapter. Getting it. Next. Finally once work allocation is done plan is developed engagement letter given now you have allocated work among everybody right document that not only document the work because tomorrow if some fraud happened who did that work everybody should able to answer not only documenting you should also communicate it to those charged with governance 299
(4:03:38) over Leo 700 75 76 299 four standards we covered Predominantly we covered predominantly in 700 only some two or three small concepts are there that's it clear all of you then now let us discuss 7.1 key audit matter let us discuss 7.1 key audit matter what is the 7.1 is talking about communicating key audit matter in the independent auditor's report communicating key audit matter in the independent audit what is a key audit matter. Let's look at how Tata Motors auditors are using key audit matter.
(4:04:20) Let us look at how Tata Motor see so many so many they're using Tata Motors they are giving key audit matters. You see they have given something called sided in key audit matters. You see what they wrote key audit matters. No they are the matters in professional judgment based on consideration of reports of audits whatever were of most significant. They were most significant in audit of current period.
(4:04:46) These matters were addressed in the context of audit. We do not provide separate opinion on these matters. Tata Motors are giving Tata Motors audits are giving. They're talking about key audit matter. What they are saying these matters were addressed in the current period and they're not providing any separate opinion on these matters.
(4:05:08) Now you see how they are giving the key audit matter communication. What they're explaining very simple you know they're explaining something Jaguar Land Rover they are the one who are having most amount of property plant and equipment. Okay here know what is the impairment happened impairment related issue impairment happened in this so that is selected as a key audit matter okay impairment happened by the way is there any material mistake in that no it's not material mistake key audit matter is not about mistakes related important matter
(4:05:39) key important audit matter I'm communicating why are communicating just you know whatever important no in audit I'm just communicating people so that they will understand what are all important areas in the audit they will understand that's it sir is there any mistake in that is there any fraud in that no no it's not about mistake see if mistake is there fraud is there I will modify the opinion why I will communicate in key audit matter then what is key audit matter important audit matter why are you communicating useful for the people that's it so key audit
(4:06:10) matter you see so what is the key audit matter they mentioned here then how the matter was addressed in our audit second what are they communicating How the matter was addressed in the audit. How the matter was addressed by the auditor in the audit. No, they verified that impairment they verified in audit.
(4:06:28) The auditors have verified impairment related discussion. Okay. How they verified? They verified accuracy. They verified some historical comparison. They verified know that auditors component industry expert help and all they took sensitivity analysis assumptions and all impairment loss computation involves assumptions and all. They did some valuation. They did some impairment reversals and all.
(4:06:52) They verified what are all auditor verified regarding impairment they are communicating indirectly what auditor is trying to tell what is the important issue that he faced and how he performed the audit nothing but audit procedure what is important audit area what audit procedure you performed briefly you're telling the people by the way are we highlighting any point mentioned in notes to accounts are we highlighting any we draw attention to so and so point in the balance sheet first of all whatever you're communicating key audit matter no that may be disclosed in financials may not be disclosed in
(4:07:28) financials key audit matter is not about something disclosed or not disclosed in financial then what is key audit matter I don't know I'm doing audit in the company getting it when I'm doing audit in the company I found something very important there I gave major amount of time what I did why I gave so much time I'm just communicating people that's it person company recently installed SAP system earlier until earlier they used to follow some ERP software now ERP software changed because of this 20 days
(4:08:00) I'm spending time only on that learning ERP software all that I can tell that as a key audit matter I can communicate that as a key audit matter why what happened in the company some accounting software changed and what what you did on that I can tell about my experience on that it is nowhere were disclosed in financial statements.
(4:08:24) I can talk on key audit matter section anything whether it is discussed in financial doesn't matter it occupied my time so much that I can talk about it's a significant point significant auditor's attention key audit matters are those which require significant auditor's attention that is what key audit matter that I can talk here clear all of you everybody yes so indirectly what is a key audit matter look at it what is a key audit Audit matter key audit matters are those matters in professional judgment yes or no in auditor's professional judgment were of most significant in audit of
(4:09:03) current period these matters are selected from matters with those charged with governance key audit matters are matters that are so important in auditor's judgment yes or no to users understanding yes I Obviously for users point of view only whatever I feel very important I will communicate it to users.
(4:09:27) Why are you communicating? What is the purpose? What is the purpose of communicating? It enhances value of the audit report. Audit report is not a boring document. It will give some information about insights about audit. How I am doing in the audit? It gives some insights. It also offer key audit matter is offering additional information so that users will understand how auditor will do what are the significant management judgments where and important issues are there.
(4:09:53) Users also will understand according to auditor what are the important issues in the company users will get to know according to auditor what are all auditor focused so much time he will also they will also get to know yes or no. By the way tell me how to decide key audit matter. Generally key audit matters are selected from various matters communicated with those charged with governance.
(4:10:17) If you remember there is a standard called 260 communication with those charged with governance. What are all you should communicate? Planned scope and time planned scope and timing of the audit. Responsibility of auditor significant matters. Significant matters means what? Key audit matters. By the way, every matter you tell to management, top management, will you will you communicate it in key audit matter? No.
(4:10:37) Whatever you feel to communicate that only you will communicate clear or not. Now how auditor will select them maybe you know three criterias the auditor considerations include when auditor is communicating key audit matter the auditor's consideration include what and all areas of higher risk involving significant management judgment or accounting estimates with high estimation uncertaintity.
(4:11:09) Getting it? Key audit matters are communicated from areas where high risk is involved or areas where significant judgment is involved. For example, right now we saw automotive impairment. Impairment is selected as a key audit matter because it involves significant judgment. It involves high estimation uncertaintity in exam.
(4:11:27) Half mark for this, half mark for this, half mark for this. That's how they will allocate and because of significant event significant transaction one mark or half mark for this then key audit matters are derived from matters communicated with those one mark for that that's how mark allocation will happen able to understand all of you by the way is suppose no company know they forgot some important disclosure in financials now they're requesting you sir we forgot a disclosure sir can you please disclose in the audit report under key audit No you when you did not disclose it's a non-disclosure it's a material
(4:12:02) misstatement I will give modified opinion yes or no key audit matter is not a substitute for disclosures in financial reporting framework sir mistake is there in the balance sheet sir can I discuss it under key audit matter prohibited when mistake is there in the balance sheet key audit matter is not a substitute for modified when mistake is there you should give a modified opinion Sir can I give a I mean is key audit matter are we giving any separate opinion key audit matter is not a separate opinion key audit matter is not a substitute for material uncertainity
(4:12:39) undergoing concern what is material answer we'll discuss later then what is key audit matter that's what I'm telling important matter in the audit I did 50 days audit 10 days I spent on three issues only important issues I can communicate them what he will communicate what is the issue I will tell how I resolved it in the audit I will tell that's it.
(4:13:05) What is emphasis of matter in the balance sheet PNL notes if important point is there every one of you if at all they need to read I can highlight that that is emphasis then what is other matter per responsibilities of auditor joint auditors referencing to other auditors report that and all will be there in other matter so key audit matter how I did audit I will explain with some examples emphasis of matter highlighting important points in the financial statements which are presented and disclosed other matter paragraph discussing about auditor responsibilities like division of
(4:13:34) responsibility other auditors report that and all I will discuss in other matter pair everybody that's it now key audit matter applicability most important it is applicable for listed entities compulsory for listed entities auditor must communicate key audit matter one or two at least communicate or second when key audit matter shall also We communicate listed. Okay.
(4:14:08) If law or regulation requires in India there is no law or if it is interest significant public interest that matter is important for public interest felt by auditor then also he can communicate and remember prohibited communicating key audit matter in the audit report. Key audit matter heading itself should not be there when you are giving disclaimer of opinion.
(4:14:28) When auditor disclaims opinion on the financial statements, you shall not include key audit matter. Very simple disclaimer means what? Majorly we didn't audit. We did not audit majorly everything. That is the reason we are giving disclaimer. When you did not audit everything, how do you know important audit? When you did every auditor, when you covered everything in the audit, you know which one is important.
(4:14:54) When you did not audit, how do you know which one is important? So communicating key audit matter is prohibited in case of disclaimer of opinion. Finally, how should you communicate? Manner of communication. This itself can be asked as a four marks question. Yes or no? This itself can be asked as a four marks.
(4:15:14) Purpose of communicating, definition of key audit matter, applicability of key audit matter, any way they can ask and all these questions were tested in past. How you should communicate introduction key audit matters. No, in a separate section of the audit report we will communicate introductory introductory language will be key audit matters are in auditors professionals were of most significant in current period and these matters were addressed in the context of audit and does not provide separate opinion.
(4:15:42) These matters were addressed in the context of audit and auditor will not provide any separate opinion like that you should write introduction language that is what is there in Tata Motors key audit matter introduction that is what is there in the state bank of India introduction matter Leo and whenever you are including key audit matter you shall always communicate to the top management okay the auditor shall communicate with top management about matters which are decided as key audit suppose no I'm doing listed company audit literally I don't have a key audit matter then Put a heading say that there are no key audit matter. If
(4:16:14) no key audit matters are determined the auditor's conclusion depending upon the facts. Okay. Suppose if key audit matters are not decided. If there is no key audit matter say the management that there are no key audit matter in the audit report put a cited in key audit matter mention that there are no key audit matter compulsory like this. You should mention clear that's it 7.
(4:16:33) 1 is completed clear. remember whether they can they may ask this as a descriptive question they may ask as an MCQ everywhere conceptually I clearly told you how an MCQ can come all that especially you know this question no sometimes they will ask you this question as under what circumstances key audit matter shall not be communicated every student will write applicability applicability they will write what you should write you know you should write applicability you should also write key audit matter is not communicated as a substitute for disclosure as a
(4:17:04) substitute for modified as a as a separate opinion or not a substitute for material uncertainity able to understand clear that's it you know even in the audit report no when we are discussing 700 75 formats no they will ask you tell me when we are giving unqualified opinion we have audited first para we will start with we have audited when we are giving qualified opinion we have audited even adverse opinion we have audited but in disclaimer I told you we were engaged two audit this can be asked as an MCQ careful same way when we are giving unqualified opinion opinion how
(4:17:40) it looks like in our opinion the efforts and financials are true and fair whereas in qualified opinion in our opinion do the best of information all that except for the effect of the matter the effort and financials are true and fair except for the effect of the matter except for the that will be tested as an MCQ be careful if it is adverse opinion because of the wordings will because of significance of matter described in basis per adverse opinion section of our report every point that we are discussing can be either asked as an MCQ or as a
(4:18:15) descriptive any way it can be asked Leo I think wherever possible I think I gave references to questions also right I hope everywhere maximum I give references fine that's it with this key audit matter is completed then Then now you see in this no we we completed key audit matter yes or no yes key audit matter emphasis of matter other matter per all the three completed now let's understand material uncertaintity related to going concern material uncertaintity related to going concern after finishing that we will discuss caro we will discuss caro caro
(4:18:59) 2020 we will discuss Okay. Report on other legal and regulatory requirements. Once we discuss this, this chapter will be over. Now going concern. Going concern is covered under which chapter? SEA 570 completion and review chapter in our book. That is actually fourth chapter. Okay. Let's go to the fourth chapter.
(4:19:24) What is the page number? Huh? Okay. Yes, got it. This alone we will finish and then wind up. Okay, then we'll continue the next some other session. Going concern you see. So going concern you know just a minute loading. Yeah. So I have given one diagram here. There are so many concepts that are discussed in 570. There are so many concepts which are discussed in I70. Going concern.
(4:20:02) What is going concern? Very simple. A company by default prepare financial statements using fundamental assumption called going concern. They prepare using fundamental assumption called going concern. You know what does it mean? Actually they are saying indirectly to people we will continue our business also in the future.
(4:20:22) We will continue our business in future. That's why we are following going concern assumption. That's why historical cost method they are following for non-current assets. Generally plant and missionary some value is there. Tata motors three lakh cr plant and missionary is there.
(4:20:43) If you sell them no 10,000 cr also they will not get but then why are they showing three lakh cr? Because they don't have intention to sell. Yes or no? So since they don't have intention to sell intention to sell is not there means what are you doing? You want to continue the business. That's why I'm choosing going concern. My question can you continue the business? My question here is what? Can you continue the business? See if you can continue the business successfully, use going concern, no problem.
(4:21:13) What if you cannot continue the business? What if you cannot continue the business? Suppose companies facing severe losses, employees are already on strike, company bank accounts are already freezed, regulatory proceedings are already going on, customers website and all stopped functioning, manufacturing stopped. Now tell me is the company actually continuing but they prepared financial statements using going concern basis.
(4:21:38) They prepared financial statements using going concern basis. In reality the company is the company continue actually already operations and all stopped. How come they use going concern assumption then you're not functioning already? You are now itself not continuing. Forget about future now itself you are not continuing.
(4:21:55) Then can the company use going concern assumption? They should not. Auditor has to check whether company can use going concern basis of accounting or not. Look at the objective of the standard. What is the objective of the standard? The objective of the standard is the auditor has to obtain evidence sufficient evidence on appropriateness of management's use of going concern basis in preparing financial statements. Management is preparing financials on going concern.
(4:22:26) Is it okay? Auditor has to get evidence when you're getting this evidence. No. When you're verifying company going concern, no. You may conclude sometimes material uncertaintity. What is material uncertainity that we are going to discuss clear? Now look at you know the entire process of SE 570 is given here.
(4:22:50) What is that? You need to verify going concern right? You know who has to verify whether company is a going concern or not? Primarily who should verify? Management. The auditor has to first ask management whether they did preliminary fundamental assessment of going concern.
(4:23:09) Preliminary they did did they have going concern assessment? Ask them sir they didn't do they didn't do assessment that's their responsibility which they didn't do ask them to do sir they're not doing sir give modified opinion give modified opinion sir they finally did sir management and yes they did that they did that evaluate it they did assessment right check that workings why are you checking the workings I want evidence whether going concern assumption can be used by the manager ment or not? Is it permitted for them or not? I want evidence on that.
(4:23:43) So you know get evidence on that assess we verify the workings. Suppose no management performed the assessment ultimately. Now have they performed? Yes. Performed. Take the assessment. Okay. Take you I took it. What should I do? Identify events and conditions. Identify events and conditions. The second step.
(4:24:07) What events and conditions? Events and conditions that affect going concern. Events and conditions that generally affect going concern. How the standard uses know here sentence if events and conditions that may cast significant doubt on the auditor's ability to continue as a going concern. That's how the standard uses the word events and conditions that may cast a significant doubt on the entity's ability to continue as a going concern.
(4:24:38) That's a sentence indirectly. What is shortcut? Events and conditions are they affecting going concern. What events? What conditions? Very simple. You know the events and conditions are broadly categorized into three types. The events and conditions are broadly categorized into three categories.
(4:25:01) Financial events, operating events, uh financial events, operating events, other events and conditions. For example, in exam they may ask you what are financial events and condition four marks. Give four examples of operating events, four marks. Give you examples of other events. Three marks question they might ask you.
(4:25:20) For example, other events the company's not complying with regulatory norms. PTM they did not comply KYC norm. RPA canceled their bank license. Suddenly PTM stopped working. The pen penalty against the company. Penal proceedings against the company. Changes in law regulation. If law has been changed, automatically company will stop. If at all a law has been brought where the company business has to be stopped immediately. Next catastrophe occurred.
(4:25:45) Entire factory was submerged in water. No insurance for the factory. Automatically company will cease. Yes or no? Sometimes some operating indicators will be there these in see by the way suppose if an event or condition is there these events are there does it mean paka compulsory company will close no you should check further if these events are there auditor has to do further investigation additional audit procedure okay what auditor has to do we'll discuss now what are operating indicator indicators management want to liquidate the company loss of important management person. He died very recently. Top managing director died in
(4:26:24) an accident. Loss of market, labor difficulties, shortage of raw material, important supplies shortage is there and emergence of highly successful competitor. Okay. If at all for example charg stock market came down suddenly getting it. These are operating indicators that will threaten company's future that affects company's going concern.
(4:26:55) Apart from this, financially also you will find some symptoms. Financially also you will find some events and conditions. For example, company has a net current liability position. Company has a borrowings where there is no renewal. Borrowings are approaching maturity. I need to pay them day after tomorrow. Debenture holders company don't have cash. short-term borrowings they are taking for long-term assets.
(4:27:18) That's why in caro we have to report in ninth clause whether long-term loans were applied for short-term purpose. One more reporting reporting is there whether loans obtained for one purpose used for some other purpose. Why you need to these are all some significant issues corporate governance issues.
(4:27:39) Understood? Then indication of withdrawal of support from creditors. creditors stopped supporting the company. Getting it? Then negative cash flows, adverse ratios, operating losses, inability to pay creditors on time, loan terms and conditions I am not able to do. I am converting from credit to cash on delivery. These are all going concern indicators. Okay. Indicators are there.
(4:28:01) What auditor has to do? If uh yes you see additional procedures if events or conditions are identified suppose no when you're when you are checking the company you found these indicators management did preliminary assessment inside the assessment workings when you're seeing you found all these indicators what auditor has to do additional procedure why to identify to determine whether a material uncertainity exist you should decide okay indicator Is it resulting into going concern threat? You should check. Going concern threat is primarily referred as what in the standard material uncertainity
(4:28:43) related to going concern. Sir, company has a loss. Sir, company lost major market. Sir, license was canceled. Sir, these items no may indicate material uncertaintity. How do you know material uncertaintity there or not? Additional audit procedures. You should suppose no company lost license.
(4:29:02) I went and told sir you can't continue business sir company immediately told sir sir we got another license we applied for it next year we will get that license nothing to worry the company told me like this then I will ask proof from the company what plan you have what action you are going to take how feasible it is and I asked the company sir do you have a cash flow forecast company prepared a cash flow forecast in the recent Jan exam this is what they asked you know they asked this first point as a three marks question
(4:29:31) The second point as a two marks totally five marks question they asked in Jan 25 exam they asked these two put together five marks question understood now what you know they gave one question in the exam what question they gave in the exam for example you see here you see here here itself you see we already discussed this in regular class okay what happened you know suppliers are demanding cash payment means they are not giving credit company profits No, they downwarded declined. Yes or no? So management had not taken any steps evening in view
(4:30:08) above fact. Answer the following. First question, what can be the purpose of the auditor in this above? Why auditor is checking all that? Very simple. He is trying to identify events and conditions that may cast a significant doubt on entity's ability to continue as a going concern.
(4:30:31) If events and conditions are identified, what should be the likely purpose? SA 570. The auditor has to obtain sufficient appropriate evidence whether the management's use of going concern assumption is appropriate or not. For that auditor has to verify preliminary assessment of the management to identify whether any events and conditions are there.
(4:30:54) If events and conditions are there, auditor has to determine material uncertaintity exist or not. Three marks answer for that. Then second part of the question what they're asking second part of the question you see auditor no man here here no the company gave here no the auditor has asked the auditor has asked for cash flow forecast for next 12 months from balance sheet at next 12 months projected cash flow they asked company gave state any two processes in relation to cash flow forecast exactly two points only there in the book also you need to write that. So why are you asking cash flow forecast? You know cash
(4:31:31) company showed a cash flow statement next 12 months cash flow forecast they see sir our position is very strong we will recover all that our cash flow is positive in the next year also why we have a problem on going concern they're trying to tell communicate the auditor that they don't have any problem on going concern what auditor has to verify in cash flow forecast if entity prepared a cash flow forecast evaluate reliability of underlying data whether adequate support are there for assumptions this is one of The procedure
(4:32:01) that you must do when when you identify events or conditions that may cast a doubt on going concern. If the auditor identifies some events, some conditions that may doubt that may cast a doubt on going concern, you should check whether it is affecting going concern or not.
(4:32:26) Whether it is having a material uncertainity or not, whether it resulted into material uncertaintity or not, you should check. How do you check material uncertaintity is there or not? Ask management what plans they're having. Sir, you have negative cash flow. You have supplier. You you you lost one important supplier. You lost management. You lost license.
(4:32:46) What are you going to do? So that the company going concern will not affect. Company told sir we have some plans. Auditor evaluates likelihood of plans for future actions. What action they're going to take. Plan auditor will see and he will also see how far these plans works feasibility of the plan.
(4:33:09) Auditor will also see cash flow forecast and when he's checking cash flow forecast to know forecast means based on assumptions right he will see whether adequate support is there for assumptions. what data they use for forecast and you know management no they prepared this cash flow forecast 2 months back itself not when I'm asking they prepared two months back itself management plans and all 2 months back itself they drafted all that now is there any additional information is there any additional information from past to two months that also I should check finally I will ask a written
(4:33:42) declaration finally I will ask a written declaration management give me One declaration. What declaration? You told me these plans, right? You told me these actions, right? You told me about feasibility of the plans and all, right? Cash flow, everything, right? They are all genuine.
(4:34:02) You give me a declaration, written representations from management and top management regarding their plans, future actions, their feasibility. In exam, they can ask you like this what audit procedures auditor has to do. If auditor identifies events or conditions that may cast a significant doubt on entity's ability to continue as a going concern what additional procedures name any four they may ask you many times this question was asked getting it name any four already five points were there four we covered suppose no sir we asked information sir management did not prepare going assessment at all then ask them to do
(4:34:38) then get it are you clear suppose no sir management ment they are not doing going concern assessment sir they are not willing sir they are not doing going concern assessment management is unwilling to make assessment related to going concern what is its impact on the order to put check out express qualified or disclaimer generally we give disclaimer if at all sufficient appropriate evidence is not there then why standard also says qualified sir when qualified when disclaimer very simple it depends upon degree of uncertaintity
(4:35:11) if the Uncertaintity degree is very high. Disclaimer if uncertainty is very basic level qualified when uncertaintity is low when uncertainty is high when a real situation comes guidance notes will be there you follow that exam point of view this is enough clear next suppose just one minute you see when we are taking revision some students are relaxed some students are intensely focusing why only few are successful in This is the reason everybody sit for 10 hours. Everybody work for 8 hours. Everybody work for 9 hours. In that 8 9
(4:35:52) hours, how long you are carrying your intensity that defines your success. Getting it? Whether you grow in life or not, how long intensely you can work. Everybody works hard. People outside think, "Oh my god, students are 10 hours they're sitting in the class." Outside think you're doing hard work. But the intensity of work is different. Getting it.
(4:36:19) Only those who carry that intensity till the end they win the race. Winning race Olympics and all you see running running competition and all. Those who are intense from the very gunshot only they will win till the touching of flag. Yes. Till the finish line. Those who are intense till the finish line they are the gold medalist. Rest are the losers. Okay.
(4:36:45) So that intensity holding that intensity is not that easy. You have to be extremely determined. Extremely determined means it's not hard work. Again you have to be very focused, very determined at any cost that coming exam I should qualify. If not what will happen? You will sit another four months.
(4:37:03) Is it better to be productive one month or to be average for another one year? That you should decide. Getting it? If you're intense for next one and a half months, you will qualify. I'm telling you no, no doubt at all. Everybody whoever is intense will qualify paka will qualify paka. But law of nature, it will not let everybody to be intense. That's the nature. That's how the nature works.
(4:37:28) Your determination how long you're carrying against odds. That is what most important entire everything the nature try to disturb you like anything. You should not affect by that. Okay. That is when your willpower overshadow the nature then you will succeed in life. Nature try to disturb you.
(4:37:48) They try to give you pressure but you should not focus. My goal is May exam. My goal is that particular exam one and a half month daily 8 hours. No matter what I must intensely work that's it. If you blindly fix every day if you motivate yourself it works. Imagine I'm taking these many hours of class with the same level of intensity. In fact my intensity increases at the end.
(4:38:11) In fact only because only because one thing I want to give the best class ever that's it when I have my when my objective is clear you can see my throat when I started the class how it is. when when I'm completing how it is in fact I'll have a slight pain also in the chest you know like slight pain that energy drain will be there uh dehydration pain I I feel that sometimes getting it still it's okay let me proceed let me finish it off it's okay hardly another 20 days I work another one month I work then I can take a break again exams time I will back with the students I will again motivate them that's what the motivation
(4:38:46) for me Leo next fine so when auditor identifies first step is what auditor has to check preliminary assessment of the management. Why you should ask preliminary assessment to identify events and conditions there? If events and conditions there what you should do additional procedures.
(4:39:05) Why you do additional procedures? Material uncertaintity there or not. Why material uncertainty? You should check to know whether going concern is appropriate or inappropriate. Are you getting it now? Now look at so what are examples of additional procedures they have given. Please read this on your own. Sometimes in exam this also will be asked. You may have to do additional procedures.
(4:39:23) Give few examples of additional audit procedure. You should write this answer only. Clear? Next. No. Okay sir. I did I did additional procedure sir. Now okay. Now conclude. Now conclude uncertaintity. Now you did additional work. No. Now you will understand material uncertaintity there or not. There you will understand.
(4:39:42) Now sir material uncertaintity exist. Sir material uncertaintity exist. Then check out whether going concern is okay or not okay check out for example air India there is an air India what happened in air India you know very simple they have n you know 70,000 cr accumulated losses you see air India has used this para in the audit report what happened 70,000 cr accumulated losses 54,000 cr net current liability position current year 7,000 cr loss in spite height of this going concern they took appropriate but actually but actually they took appropriate they took it as appropriate but actually tell me
(4:40:26) here how can the company continue when I look at this position with without cash how can you run the business you don't have a cash in fact negative is there how can you run material uncertainty there or not what area India management told you know government of India is supporting that's why we are happily going on government of India is supporting technically when I see this position re your future is uncertain Certain your company future is uncertain when you will you know close the business who nobody knows sir don't worry government
(4:40:54) is supporting oh which means even though material uncertaintity is there company successfully continuing because of government support now now can I say there is no uncertaintity for a India h okay government supporting now no problem no how long government will support this is a question management also don't know So that's why what company did you know they openly told shareholders fact in the notes to accounts in the air India note number 53 this is 1920 financial year related audit report 1920 financial statements you download in Google open notes to
(4:41:32) accounts note number 53 standalone financial statements air India management clearly told this point the company has these many losses the company position is like this the company sufferings like this man government is supporting right now the moment government stop support we will not sell We will not realize balance sheet values just like that.
(4:41:50) Whatever balance sheet values are historical cost, they are not NRVs. NRVs are much lower. We may not realize the assets and liabilities in ordinary course of business if at all going concern is missing. But companies still chosen going concern assumption because of continued support from government of India.
(4:42:09) But still there is a material uncertaintity. Now there is no problem. Going concern is appropriate but material uncertaintity exist. Air India clearly told going concern is good sir right now but uncertainty is there within next one year by the way we said going concern standard right you should check whether company can continue can continue or not how long one year you should check one year from balance sheet date from balance sheet date next one year can the company continue check out yes sir company can continue for the next one year without any pro without any issue sir no problem sir within next one year only air India having
(4:42:46) uncertaintity sir how long Government supports also we don't know sir then see whether management disclosed it yes company disclosed honestly you know if management use of going concern is appropriate air India situation it's good however material uncertaintity exist then the auditor shall decide whether the financial statements are disclosing the events and conditions that cast a significant doubt auditor has to immediately check sir uncertainty is there management told sir In note number 53 we clearly demonstrated sir
(4:43:20) nothing to worry we are not misleading shareholders we are honestly disclosing then see whether they are clearly disclosing existence of material uncertaintity and fact that entity may not be able to realize its assets and liabilities in ordinary course of business here may be unable unable means what may not realize so did management told the fact in notes they clearly told the Suppose no suppose no sometimes no sometimes no when events and conditions there loss is there when I perform additional procedures no I concluded company future no problem at all they
(4:43:58) have very good name fame everything is good some financial symptoms are there operating loss is there that's part of business sometimes that is not a situation of going concern issue material uncertaintity not existing then auditor has to check symptoms you found right events and conditions you found Right. Check schedule three.
(4:44:18) Did schedule three asking the events to be disclosed? Check out. Yes. Suppose schedule 3 asking see whether company disclosed the symptoms. At least they disclosed. You give unmodified opinion. You give unmodified opinion in the diagram. I will go back and connect once. Finally reporting. How to do audit reporting.
(4:44:43) Remember after this rest of the provision is there still going concern standard is big very big standard. Okay. Only half we completed another half also will finish it off. Now audit reporting s company has I checked I I performed audit procedure and I found out that ultimately material uncertainty forget about metal uncertainty it is beyond that going concern is no more already manufacturing process stopped production stopped sales stopped employees vacated the company going concern is not appropriate sir okay see the balance sheet P&L did they mention that sir they prepared on going concern basis financials are prepared on going concern basis some Misstatement
(4:45:17) something fundamental to the user's disclosures. Misstatement is related to a disclosure which is fundamental to the financial statements. Yes or no? Pervasive level misstatement. If financial statements are prepared using going concern but in auditor's judgment it is inappropriate. The auditor shall express an adverse opinion.
(4:45:42) You clear? Suppose going concern is appropriate but material uncertaintity exist. Going concern is appropriate but material uncertainity exist. If the financial statements adequately disclose the material uncertainity suppose no metal uncertainty is there a India they disclose honestly note number 53 metal uncertainty is there. They disclose honestly. Express unmodified opinion.
(4:46:10) Express unmodified opinion in a separate section in the auditor report. Express unmod give unmodified opinion. No problem. But see when I give unmodified opinion and going concern. No people think everything is good. Actually note number 53 so much big point is there. Company going concern is to discussed.
(4:46:30) What should I do? I can actually highlight that note number 53 emphasis of matter para but sea 570 standard says don't use emphasis use a dedicated para dedicated sideing call material uncertaintity related to going concern use a dedicated sideing call material uncertaintity related to going concern use that sideing draw attention to the note point in the financial statements state that material uncertaintity exists list also state that your opinion is not modified.
(4:47:08) Air India auditors you see material uncertainty no see they they kept it as a separate section the company has incurred note number 53 drawing attention opinion is not modified see actually it is emphasis of matter pair only but heading should not be emphasis here what are you doing actually something presented in financials you are highlighting but it is not something you are highlighting it is going concern issue you are highlighting if it is a going concern material uncertaintity situation you are highlighting material uncertaintity related to going concern side reading you must use and use the para like this. So what is the
(4:47:41) reporting requirement to your state that first first you know give an unmodified opinion financials are honestly disclosing material uncertainity use of going concern is fine but material uncertaintity exist financials are adequately disclosing give unmodified opinion also include in separate section of the audit report material uncertaintity related to going concern and draw attention to Note number India auditors mentioned note number 53 state that material uncertaintity exists also state that auditor opinion is not modified. You see here auditor have
(4:48:21) mentioned auditor opinion is not modified clearly mentioned this is present this presentation is almost 100% same like emphasis of matter pa suppose no company is not disclosing such a severe issue companies not disclosing when something important they didn't disclose nondisclosure is a material misstatement you need to give a modified opinion If the financial statements do not adequately disclose material uncertaintity, the auditor shall express a qualified opinion, adverse opinion under 7.5 in the basis
(4:49:02) for qualified, basis for adverse state that material uncertainty exist and the financials are not disclosing properly this matter. That's why we are qualifying. Sir, financials are disclosing clearly sir. Then honestly they are disclosing unmodified. Highlight that once again under material uncertaintity era Leo this is a reporting on going concern.
(4:49:26) Now what is the audit procedure related to going concern? Write about assessment of going concern. First of all whose responsibility to assess going concern management. Okay. So the auditor shall check management assessment of going concern. Can auditor rectify lack of analysis by management? Suppose management did not analysis. The Auditor has to rectify that. No, no, no.
(4:49:51) Auditor is not responsible to rectify lack of analysis. Sometimes no. Management might not have done detailed analysis. That time auditor can conclude on going concern basis also. Even though detailed analysis is not there, auditor may still conclude going concern appropriate. For example, entity has a profitable operations ready access to funds. In these cases, no.
(4:50:13) Even though company did not perform detailed analysis, I can still accept. Yes, going concern is appropriate. Even though detailed analysis is not performed in these cases, auditor may conclude on appropriateness of going concern. You know, you know, sometimes in exam they will give this question.
(4:50:30) Auditor shall evaluate entities assessment of going concern. However, the management did not have detailed analysis. Under what circumstances lack of detailed analysis by the management can be accepted by the auditor and conclude as appropriateness of going concern. How can the auditor conclude like that? Repeat if at all you didn't understand.
(4:50:49) Okay, repeat the video. Now under what company has history of profitability operations, ready access to funds, banks and all ready to give loans. Getting it in these cases auditor can conclude that going concern is appropriate. Sir, company does not have a detailed history of profit. Company does not have anything.
(4:51:11) Then you have to do process followed by the management assumptions what they used. what plans they have. You know if at all management does not perform detailed assessment. Okay. You should ask them to do detailed assessment and look at the process how they assessed. Look at the assumptions they use.
(4:51:29) What are the future plans for the company? Every company will prepare budgets for next year. They are nothing but management plans for future. Next you have working capital management topic in financial management. There you will understand regarding budgeting concept, stock budgeting, cash budgeting like that. So many budgeting concepts are there. There you will understand. Okay.
(4:51:49) Next sir, how long management should assess? You know management I mean first of all auditor should check going concern right for how long? Management did for how many months after balance sheet check out for that many months you should do management will do for how many months as per framework. Framework says minimum 12 months.
(4:52:09) Suppose if management assessment is less than 12 months the auditor shall request minimum 12 months. Suppose management no going concern working did for 6 months only and I'm asking company please sir no no with 6 months and I can't accept you must do it for 12 months company's not doing it modified opinion if management is unwilling or unwilling to make assessment or unwilling to extend assessment to minimum 12 months from balance sheet date auditor will give modified opinion clear all of you just 10 more minutes we will finish clear 10 to 15 What is the risk assessment procedure related to going concern? This itself can be asked as a five marks question. Once it was asked risk assessment, what
(4:52:48) is risk assessment? Very simple. There is a standard called 315. What the standard says you know auditor has to consider whether events and conditions exist that may cast a significant doubt on going concern. What events are existing? What conditions are existing? That may cast a doubt on going concern.
(4:53:06) Okay. Auditor has to see for that. No, we will evaluate management's preliminary assessment. We will check first how management did preliminary. They performed it. If performed, management performed. Discuss them. Dis discuss with them. See whether events and conditions are there. Suppose events and conditions are there.
(4:53:26) What you should do? Additional audit procedures to identify material uncertaintity. If material uncertaintity is there, you should check appropriate or inappropriate disclosure not disclosure accordingly. reporting correct evaluate management plans. Now they are they have some symptoms know what plan management is having to deal with this.
(4:53:46) Identify sir management did not perform sir why they didn't perform ask and how did they choose going concern assumption without checking going concern ask them then inquire then inquire whether any events and conditions are identified and remember going concern assessment no is it only one time processor continuous processor continuous auditor shall remain alert throughout the audit for evidence of events or conditions that may cast a significant doubt on entity's ability to continue as Okay, going concern easy.
(4:54:18) Next, finally, what are the responsibilities of auditor under 570? This itself can be asked as a four marks or five marks question. What are the responsibilities of the auditor? Very simple. I should obtain evidence. What evidence regarding whether management's use of going concern is appropriate or not? Conclude whether material uncertainity exist about the entity.
(4:54:45) So get evidence whether company's going concern they are using going concern is it for is it okay get evidence when it is okay I will see prement assessment I will see whether any symptoms are there symptoms are there or symptoms are not at all there then I will assume that it is appropriate symptoms are there then I will see I will perform additional procedures to conclude uncertaintity if uncertaintity is there then I will ask then I will check whether is it appropriate or inappropriate accordingly I will report now tell me auditor should evaluate without going concern. Is this required when financial reporting framework is silent on this compulsory
(4:55:21) even if the applicable financial reporting framework does not explicitly require the management to yes going concern management itself don't have duty in the law management itself don't have duty in the accounting standard schedule 3 that they need to do preliminary actually I went for audit I asked the company sir prement assessment you did sir as per what we should do sir They said sir preliminary assessment about going concern you must do irrespective of loss sir you must do preliminary assessment that point you see here it will be there management
(4:55:53) must assess entities going concern even if there is even if the financial reporting framework does not explicitly talk first they spoke about responsibility for going concern of management responsibility of management towards going concern then they're talking about auditor responsibility whether financial reporting framework is explicitly saying or not at all saying doesn't matter management must do preliminary assessment auditor must evaluate management's assessment sir management does not assess ask them to
(4:56:25) do assessment yes or no by the way suppose audit report no gave unqualified opinion regarding going concern that siding material uncertainty nothing is there in the audit report regarding going concern auditor did not talk anything silent in audit report about going concern does it mean guarantee guarantee by the auditor on the company.
(4:56:49) No as per say 200 auditor's ability to detect material misstatement is dep you know is limited yes or no limitations inherent limitations if you see last point auditor's ability to obtain information about future events is limited yes or no auditor cannot predict future therefore absence of material uncertaintity in audit report suppose if auditor does not talk about company's material uncertaintity that cannot be considered as a guarantee to the going concern clearer Again at the end of the standard once I will revise so once I will show you the diagram we'll conclude and then we'll wind up okay now remember
(4:57:23) going concern assessment involves who will do assessment primarily management going concern assessment involves assumptions judgments yes or no these judgments are affected by some factors uncertaintity this assumption will have some uncertaintity some uncert see uncertainty sometimes will be high sometimes will be low. The uncertaintity increases regarding future outcomes.
(4:57:48) The far future if it is the more suppose next two months what will happen? I can little bit I can predict after 10 months what will happen? I can't predict that much. The uncertaintity about events and conditions at a future date the uncertaintity increases. Yes or no? Further you know size complexity you know all these also influence your judgment quality. By the way, whose judgment here? Management.
(4:58:16) Management has to judge about going concern. This management judgment no is affected by various factors. One, degree of uncertaintity. Two, entity specific factors like say entity size, complexity, condition of the business all that and remember management might have concluded going concern appropriate when they do assessment on 5th April.
(4:58:41) That time whatever management concluded they're correct but on 10th August that may go wrong because in between some subsequent event might happen big accident happened explosion happened in the factory. So judgments are always based on information available at the time when the judgment is made events occurred later may lead to an outcome that will affect your original judgment. Correct.
(4:59:06) Next you know management's assessment involves making judgments about uncertain future outcomes correct all of you finally sir entity is not a going concern what will happen sir very simple they should prepare financials on liquidation basis inventories assets everything shall be recognized on NRV if going concern basis or accounting is used no then assets and liabilities are recorded assuming normal realization fixed asset now normal realization means What we use the asset next 10 years you will recover that's why impairment loss
(4:59:38) and all you will see recoverable value is more than always NRV that's why fixed assets will be shown in the balance sheet at historical cost clear finally once we will come back to this now going concern what auditor has to check preliminary assessment of management yes they performed then you should discuss with them assessment verify what they did identify whether any events or conditions are there? Yes, events identified.
(5:00:11) You must do further audit or additional audit procedure to determine material uncertainty exist or not. Sir, I did additional work sir. Material uncertainty you see material uncertainty does not exist but symptoms are there. No sir symptoms common. No sometimes sometimes loss is possible in the company. Very temporary that loss sir company is already having sound financial position right now.
(5:00:29) So it is not an uncertaintity. Okay then fine. By the way, applicable framework is there, right? Applicable financial reporting. Is it requiring disclosure of the events and conditions? No sir, that framework is our schedule is actually silent. Sir, no need to disclose about that. Then you give unmodified sir.
(5:00:49) For example, no applicable framework says even though going concern issue is not there, symptoms are there now disclose it. Framework says that then see whether company disclosed or not. Yes sir, they disclosed it unmodified. They didn't disclose. Non-disclosure of information as per applicable framework modified opinion suppose sir when I investigated events and conditions no air India situations are uncertain material uncertaintity exist okay is this uncertaintity how level it is what is the level of uncertaintity sir it's worse sir company cannot continue the
(5:01:20) business they can't continue impossible is it disclosed in the financials no not disclosed which means financials are prepared on going concern basis yes they prepared Going concern basis. But what is your opinion on that? Going concern is inappropriate. Adverse opinion sir the disclosure in financials.
(5:01:39) Then you give unmodified opinion. Emphasis of matter para. Yes or no. This is not there anywhere in the ICI book. I told you in our regular class also this point. This was asked in CA final. This was asked in CA final in May 24. Question number 1B. Why? Because yesterday only I was telling in fast track CA final audit batch this question getting it.
(5:02:03) So in May 24 question number 1B shocking that was and what they asked you know drafting they asked actually five marks drafting question how opinion basis for opinion emphasis of matter paragraph drafting question they asked him very simple this situation not there in C don't worry you can ignore this if at all okay you can only remember this part clear but in regular we discussed very in depth this point also remember then sir material uncertainty is there sir actually a suffering So many losses, so uncertain but right now they are still okay. No problem because government of India is supporting. Okay.
(5:02:38) But still problem is a problem. Did they disclose in the financials? Sir, they didn't disclose. They did not disclose. Load load load. Yeah, they did not disclose. Financial statements are not disclosing. Auditor shall express either qualified or adverse opinion. Sir, financials are disclosing. Sir, financials are disclosing clearly, sir.
(5:03:02) Then when they're disclosing everything you can't object anything give unmodified opinion and remember material uncertaintity they're disclosing you should highlight that because very sensitive issue material uncertaintity related to going concern sideding you put in audit report where in the audit report where immediately after basis for opinion bar put a sideing draw attention to that point mention that your opinion is not modified on that matter once again watch going concern every even one of you but I hope everything I covered right clearly I packed all the logics in it everywhere yes or no so you see when
(5:03:38) I'm revising I went in a different way when you're reading no you can go in the standard way no problem at all for making people understand because in revision class it's not just about reading and no I also think of little explanation of that that's it clear all of you that's it now finally once I will go back to air India audit report and give one small clarification sir Material uncertaintity related to going concern.
(5:04:07) When this will be given when auditor give unmodified opinion on going concern issue but India no auditors give qualified opinion. No then why this came auditor gave qualified opinion on different matter not going concern matter. Are you getting it? Ongoing concern matter they don't have any problem. Company honestly disclosed. So since many confus here I'm clarifying it. First of all, many won't confuse because they won't understand much.
(5:04:32) Okay. Many students they won't understand much. Honest. I'm telling you openly. Okay. That's it. So confident going concern over just Yeah. 3 minutes. Okay. Let me go back to audit report and conclude one small point. Let me go back to audit report, you know. Let's go back to audit report.
(5:04:50) Contents of audit report. What's the page number? 30. Okay. Fine. Yes. Once again. and go back to contents of the auditor's report. Yes. Yes. Yes. Yes. Yes. Now we finished material uncertaintity related to going concern. Typically if you observe within 2 and 1/2 hours we finished we finished how to prepare audit report. We actually completed what are all standards you know 700 over 7.
(5:05:27) 1 over 75 76 299 570 570 is biggest among all this six standards we completed technically we still have 720 caro 143 reporting if that is over audit report is over and you know what till now we covered approximately 5 to 5 and 1/2 hours of revision where we completed 40 to 45 marks weightage 5 and 1/2 hours to 6 hours revision getting it maybe was 6 hours if caro 5 710 also we include no maximum five and up to 6 hours and we are completing 45 marks worth of revision clear very productively we did this time next that's because of the book effect earlier no the same topics I take seven seven and a half hours the same topics
(5:06:08) two and a half hours revision time we saved because of the book simplification able to understand then finally you know we are still pending with one topic what is the topic which is pending report on other legal and regulatory requirement plus 710 standard revision is pending this we need to discuss and then car and all we need to discuss once that is over this audit report chapter is over completion and review chapter also one major standard we covered that's it okay we'll continue in the next session the review confident yes yeah thank you
(5:06:42) thank you so we'll begin the I mean we'll continue the discussion on essay 7 uh 710. Okay, we are still pending with 710 and Caro. So once these two are completed, the entire audit report revision is also completed. Fine. So 710, what is 710? Comparative information. 710 is talking about comparative information, corresponding figures, comparative financial statements both it is talking about.
(5:07:14) So once 710 and caro is also completed maybe in 700 some two or three small concepts are there qualitative aspects of entities accounting practices like that some discussion is there that also we'll revise okay so this is 710. So what is 710 comparative information and uh comparative information corresponding figures and comparative financial statements like what is comparative information is about you know actual standard is comparative information.
(5:07:42) These two are about two methods of comparative information. This is the standard. Often students confuse between these words. They think comparative information corresponding figures are same. No, comparative information is the actual technical term.
(5:08:03) What is a comparative information? You see any balance sheet in P&L of any company along with current year figures, they also give you prior period figures. Correct? That prior period figures are called as what? Comparative information. That's it. That is what comparative information means. Now, how these prior prior period figures are given? What is the importance of these prior period figures? That is decided by approach.
(5:08:28) That is decided by approach. And the approach is one approach is corresponding figures approach. Another approach is comparative financial statements approach. In India financial reporting frameworks that we follow will only have they only follow corresponding figures approach. They do not follow comparative financial statements approach.
(5:08:49) In India for preparing general purpose financial statements we follow corresponding figures approach. Even in the recent Jan 25 exam you know the question that they have asked is this one. What if prior period financial statements were audited by predecessor auditor? Correctly in the recent Jan 25 exam.
(5:09:09) This one was asked even in our regular class we have seen what if prior period financial statements were audited by predecessor auditor. Fine. Anyhow let's discuss one by one what is comparative information all that for example you see any Tata motors for example balance sheet P&L simple this is called as comparative information what is this is called as you see here last year actually this is a balance sheet as on 31st March 2024 latest balance sheet of Tata Motors okay 2021 yet to be yet to complete in May 2025 month you will find this final audited report audit balance sheet all that now you see this is current year figure these are what
(5:09:41) this is What? Comparative information. As per SCS 710, this is actually called as what? Comparative information. And how this comparative information is given the approach corresponding figures approach. The comparative information is given under corresponding figures approach.
(5:10:03) From audit point of view, are they simply treated as corresponding figures or are they treated as comparative financial statements? See, basically they are comparative information. That's it. From auditor's point of view, what are they? From auditor point of view, this comparative information is classified into two types.
(5:10:21) Corresponding figures or comparative financial statement. What is the difference? In case if at all this is a corresponding figures approach, we do not give opinion on prior period. Our audit report on this balance sheet. We give opinion only on current. Our opinion do not cover prior period. Suppose if this is a comparative financial statements approach but remember whether it is corresponding we go comparative financial statements in both the cases. In both the cases this is called as comparative information only. This is comparative information
(5:10:57) basically. But if at all we are giving opinion on this. If at all we are giving opinion on corresponding sorry comparative information also. If at all we are giving opinion on comparative information also then the approach is called as comparative financial statements in India or anywhere in the world in general purpose frameworks nobody gives opinion on the comparative information look at how clearly I'm using the terminology you know in a comparative financial statement approach on comparative information nobody I mean
(5:11:35) sorry in the across Ross the world opinion will be given on comparative financial statements but this approach is not followed anywhere in the world because the kind of comparative information we give is called as corresponding figures approach. Now how comparative information is given. So look at this comparative information means what? What is a comparative information? They nothing but amounts and disclosures of one or more prior period. amounts and disclosures of one or more prior period included in
(5:12:04) financial statements as per financial reporting framework. For example in um in China IFRS they give three years figures totally current year last year that before year three years figures they will give you in India only one prior period figure is given in some countries two prior periods are given as a comparative information but across the world the auditor's opinion will only talk about current period figures in such a case the prior period comparative information is given right they are simply ly called as corresponding figures. They are not comparative financial statements. We are not we are
(5:12:43) not doing any comparative financial statements audit. We are only doing current year financial statements audit where comparative information is given only as a corresponding figure. That's it. You understood the meaning now much more better way the meaning we got clear.
(5:13:01) Now what is the audit procedure for comparative information? This it this itself can be asked as a four marks question. What is the audit procedure? Very simple. Auditor has to verify. Auditor has to verify whether financial statements includes comparative information and see it is properly classified. Now the comparative information last year information which you are showing in current year balance sheet. No current year P&L.
(5:13:26) No, it must agree to prior period balance sheet PNL will be there. Amounts and disclosures it should match. Very simple. Current year current year balance sheet last year figure must match with the last year balance sheet current year figure last year balance sheet inside the current year figure of that last year that should match current year balance sheet last year figure will be there right this should match with last year balance sheet current year figure that's it simple correct next and the auditor has to verify consistency of accounting policies see whether accounting policies whatever shown in the last year last
(5:13:59) financial statements are they regularly consistently followed If at all any changes are there, are they properly accounted? Are they properly disclosed? Suppose no. If a material misstatement is identified in comparative financial statements, if a material misstatement is identified in comparative determine whether that MMS is carry forwarded in current year simple when comparative information is given, what is auditor responsibility? Remember this this standard is this standard is in addition to the standard called fighter. Many
(5:14:31) students they don't understand 710 and 510 correctly. 710 talks about comparative information related responsibility. Python talks about opening balances responsibility. We'll discuss that opening balance division later. Clear? Now so what auditor has to do? He need to identify whether in the compared to any MMS is there. If so whether that MMS is impacting in the current period or not.
(5:14:55) Suppose if prior period financial statements were audited by same auditor and we found MMS in the last year then first I will try to apply 560 requirement and try to rectify the last year financials itself. Suppose if time limit is over for the last year. This year I identified I am the auditor of last year.
(5:15:16) I identified a material misstatement in the last year. when I identify this year by this time already financial shareholders meeting I mean AM is over everything is over already last year say now I will tell management to record it as a prior period item if at all time permits what I will do you know madam don't don't record in current year directly adjust in last year we will revise the financials and issue revised financials that procedure we can do as for 560 if possibility is there clear then further finally auditor has to get a written representation that all periods refer I mean all written
(5:15:50) representation for all periods referred to in auditor's opinion generally in a comparative information corresponding figures approach our opinion refers only to current period we need to get a representation that's it then also obtain a specific representation regarding prior period item disclosed in current year statement of P&L if at all any prior period item is accounted by the company you know in the current year get a specific representation for PPIs Every year whenever you're doing audit for prior period items you must get a
(5:16:20) specific representations. If what are all prior period items ask them list of it they will give representation. Suppose they said no prior period items get a representation that there are no prior period items. Cleo this is the audit procedure for comparative information.
(5:16:38) Now remember you know what is the nature of comparative information. The standard name itself is comparative information. But from auditor's point of view this comparative information can be in two approaches. Corresponding figures approach, comparative financial statements approach. Any of these approach can be there from auditor point of view. But the standard is dealing with what? Comparative information only. Clear? No.
(5:16:57) No. Now what is the nature of comparative information? The nature is very simple. There are two approaches to auditors reporting. Which means these approaches are specific for what? Auditors reporting point of view. They're mainly dealing with what? Auditors reporting point of view.
(5:17:15) Yes or no? on comparative like what are the from auditor's point of view comparative information I classify them into two types corresponding figures they are there only mere corresponding figures or are they also forming part of financial statements for comparative purpose for example if at all I have to give opinion on comparative information also as part of my audit current year financials I should give opinion on last year previous year figures also I should give opinion.
(5:17:45) Then the financial statements are set to be comparative financial statements. You must give opinion on current year, last year. You must do audit of the all the periods covered in financial statements. This is not at all popular anywhere in the world. Maybe some special purpose frameworks might have been there or in India some companies listed companies they present some financials called restated financial statements as per se requirement. erated financials are presented for some two or three years. So that time only probably the standard
(5:18:16) might come into picture second part of the standard generally in India last year figures are given as a corresponding figure. We don't have to give opinion on the last year figure which means cor the last year figures are merely mentioned as a corresponding figure. They are not mentioned as a comparative financial statement.
(5:18:37) Clear? Able to understand? That's why I always tell my regular students also never miss marathons because in marathon sometimes I'll give a different way of better explanation even able to understand sometimes sometimes not all points that we cover in regular class will be covered in marathon obviously but I just tell next time also when you're preparing please compulsory watch these marathons and then prepare once the marathon then don't go and prepare next now tell me which approach auditor has to follow sir should auditor give opinion only on the current period
(5:19:09) should auditor give opinion on the current year and last year that last year what what approach is specified by law regulation as well as terms of the engagement yes or no what is the difference what is the audit reporting difference I told corresponding figures compared to financial statements is only an audit reporting difference is only a difference in audit reporting both are at the end of the day comparative information only that is comparative information but the difference between audit approach is in corresponding
(5:19:34) figures we give only opinion on current period whereas In comparative financial statements the opinion refers to each period presented in financial statements. Now sir what if it is corresponding figures because this is what we follow in India and across the world all general purpose financial statements.
(5:19:56) If we see auditors report auditor's opinion only talks about current period numbers. It will not talk about comparative information. Then why comparative information is given? It is given only as a corresponding figure. In that case what is auditor reporting requirement? Very simple. You know what is a corresponding figures? Very simple. Corresponding figures
(5:20:16) is a comparative information. Corresponding figures. What is corresponding figure? Comparative information. That is a comparative information where prior period data is presented as part of current period financial statements and they shall be read only in relation to current period like like compared we are given right. How depth we will give details it is dictated by current period.
(5:20:35) If current period we are giving so in-depth data then prior period also will be given in the in-depth way. Breakup will be given accordingly. Then what is the auditor's opinion on the corresponding figures? You generally don't refer anything about corresponding figures. Why the hell I will talk about corresponding figures in the audit report.
(5:20:53) My objective is to give opinion on the current period financial statements. However, there are four circumstances. There are four circumstances where I will refer about corresponding figures. circumstance you know in reverse I will come sir prior period financial statements were not audited in that case in other matter paragraph in the other matter paragraph of the current year auditor's report in other matter paragraph of the current period audit report we need to mention that you know auditor state you know if the prior period finances are not audited state the same in other matter paragraph that corresponding figures are unodudited by the way this statement
(5:21:30) you're making right does it Mean are you exempted to verify accuracy of opening balances? No. This statement does not reduce your responsibility to obtain sufficient appropriate evidence. This is one circumstance where corresponding figures information I will refer in the audit report.
(5:21:52) Suppose another circumstance prior period financials no audited not by me somebody else have audited that time what I should refer if prior period financials were audited by predecessor auditor then the current auditor shall refer to predecessor auditor report what he need to refer in other matter paragraph mentioned that last year financials were audited by previous auditor what opinion he expressed if at all modified opinion is given that basis for opinion copy paste it date of the predecessor auditor report also You mentioned are you clear then? So generally corresponding figures
(5:22:23) do we talk about that in auditory? But generally no four circumstances two circumstances over another circumstance. Suppose no material misstatement is there in the prior period. If a material misstatement exists in prior period on which unmodified opinion is issued last year financials no unmodified opinion we gave either we have given or previous auditor might have been whatever the reason verify whether misstatement was corrected under current year or not check out corrected no problem happily proceed further and if not corrected in
(5:22:54) the current year also we should give a qualified or adverse opinion that's it further further in prior periods a modification is there. If prior period report includes a qualified or disclaimer advers and the matter remains unresolved current year also auditor has to modify in the basis for modified opinion per refer both corresponding figures and current year figures I know if unresolved matter is affecting materially current period figures sometimes no last year it is unresolved this year it don't have a material impact in other cases not material in current period in that case no explain
(5:23:31) the current period opinion is you will modify still current period. Why you know comparability is affected because you are comparing the right amount with wrong amount in the last year. So comparability is affected. For that reason also you will give once again modified on the current period.
(5:23:48) Simple last year some modified opinion is given by auditor. The reason why he gave modified was not resolved in the current year or last year. Both the cases yes or no. Suppose last year that unresolved mistake is there. No modified opinion. Unresolved mistake is there. Right? This year also not resolved. Right? This year modified the opinion. Suppose last year it was material.
(5:24:06) So auditor gave modified opinion. This year this year it was not material but last year figure was misstated. Right? Comparability point of view you will have a misunderstanding. Right? For that reason I will modify this. So now here sir here also unresolved mistake in the last year. Here also material misstatement in prior period.
(5:24:29) What is the difference between A and B? In both the cases they're talking about mistakes in the last year only. No in a last year already auditor gave a modified opinion whereas in B point mistake is there in the last year but last year auditor gave unmodified opinion. That's the difference between A point and B point. Able to understand.
(5:24:48) Now this unmodified opinion in the last year was either given by myself or some other auditor. If some other auditor has given the opinion you shall also give disclosure in the exam. I guess this one and this one B and D put together is what in the January 25 exam they have asked for example you see you see Jan 25 paper in corresponding figures approach I will show you the corresponding figures approach related not that um this is those charted with governance yes this Yes, you see here seven and five marks question. Oval enterprises is under legal obligation to represent it current year financial statements along with
(5:25:38) previous year financial statements. Okay, they need to present both current associates have been appointed as stat auditor for the year. Current notice that last year financial statements contains adverse opinion for the financials as a whole due to misstatement in the evaluation and disclosure of bettors. Okay.
(5:25:56) Legal obligation to represented current year statements along with previous year financial statements. Oh my god. Actually they didn't ask corresponding figures approach. They asked comparative financial statements approach actually in the Okay. Fine. Fine. I'll come back. So the question which they are asking is regarding comparative financial statements but the reporting reporting requirement is similar the reporting requirement is similar. Fine.
(5:26:22) So compared to now current associates they has been appointed a stat auditor for the year. Karan noticed that last year financials contain adverse opinion as a whole due to misstatement in evaluation guides EA Karan for his duty regarding treatment and addressing the issue while drafting his audit report.
(5:26:39) What disclosures is required to make corresponding figure? They they have asked the question on comparative financial statements not corresponding figures. But if you see if prior period financial statements no were audited by predecessor or auditor. Okay. Here in this question who has who has done the prior period financial statements audit? Who has done the financial current you know current associates have been appointed as for this year means last year somebody else have audited.
(5:27:02) So this point is applicable. Which point is applicable? If prior period financials were audited by predecessor auditor in other matter paragraph state that it was audited by predecessor. Type of opinion date of opinion date yes or no. Now if prior if a material misstatement exist in prior period on which predecessor auditor expressed unmodified opinion communicate with management and notify the predecessor auditor. This is one more important. This is one important point.
(5:27:28) So we should communicate with predecessor or auditor if at all we identify any material misstatement belonging belonging to prior period and if prior period financials no producer auditor sir sir wait still just little bit time only know I will amend the last year financials company will amend I will also give amended audit report like that it did subsequent event procedure then the predecessor auditor will issue a new audit report and at at that time no current auditor will report only on current period suppose if predecessor auditor has not given a revised audit report then I will give modified opinion
(5:27:58) on the current period because the same mistake is carried forward and kept in current period actually we thought of actually corresponding figures in the in the in in the question they gave very clearly it is a comparative financial statements in the bracket they gave very clearly in the bracket what they gave they gave very clearly I will also add a clarification video on that okay that's it in the bracket they very clearly mentioned that it is comparative financial statements approach confident all of you that's it with the 710
(5:28:25) standard is completed Generally compared to financial statements question 99.99% they won't ask but for the first time they asked in Jan 25 exam okay so originally we thought of corresponding figures you know I also did not observe this particular word okay but now I observed it immediately so it is actually what approach compared to financial statements approach that's it fine 710 is over confident this understanding is enough in 710 fine let's discuss the branch audit topic then immediately we'll go for uh
(5:28:55) 140 Three reporting requirements. Okay. Branch audit. First of all, a company is not required to maintain branch accounts separately. First understand that most of the companies that we see today in India, they maintain centralized accounting. They will not have a separate concept called branch accounts.
(5:29:13) Branch accounts is popular in insurance companies, public sector insurance companies, public sector banks only. Even now in very few private sector companies also they still maintain branch accounts concept. That's it. Generally branch accounts is not popular. So first of all branch accounts is not compulsory. Suppose if a company is maintaining branch accounts separately then should I mean should company appoint auditors separately for the branches not required. The same auditor can do audit of the branches also.
(5:29:36) So who can be appointed as a branch auditor? The company auditor himself will do or another CAD. Suppose if the B branch is at a foreign country then our main auditor he will go and do our company auditor we can do or we can send another charted accountant or another in that country some auditor would have been there right as per the law of that country we can also appoint him as a branch auditor remember audit process is same across the world so at the end of the day the auditor has to go to the foreign branch verify whether branch records are accurate or not and then give us then accordingly we will
(5:30:04) merge and then proceed further simple correct now branch auditor submits the report to company auditor who includes in the report as necessary and even reporting of fraud reporting on caro like that so many reporting requirements there right they were equally applicable to branch auditor as well this is regarding branch audit basic discussion now now remember when branch is being audited by some other auditor if you remember I given you one example in state bank of India you know state bank of India no state bank of India no they
(5:30:37) are preparing consolidated financials Standalone financials consolidated financial statements is nothing but standalone financials of State Bank of India plus standalone financials of other companies both put together when we combine no that is called as consolidated financials. What about standalone financials head office plus branches.
(5:30:59) Now from consolidated financials point of view subsidiary other companies are there at subsidiary joint venture they are called as components from standalone point of view all the branches are called as components at the end of the day branch subsidies joint venture they are all simply called as what components if component is audited by other auditor I told you other matter paragraph of the time discussion if component is audited by other auditor but on the entire consolidated ated financials and standalone financials. I am only giving audit report. I am only giving audit report. My report only is going to
(5:31:35) public. Public thing that I did entire audit 100% data audit public things I only did. No, no, no. I did not do components are audited by other auditors. In standalone financials, branches are components. Consolidated financials, subsidiary company, joint venture associate, they are components and all these components are audited by other auditors.
(5:32:00) to that extent I relied upon their report and I'm giving my opinion like that principal auditor has to give a disclosure in other matter paragraph 7 not six correct this is what we already understood now indirectly here principal auditor is using the reports of other auditor right we are we are taking the reports and then believing on that right we call that we call we got we call that incident scenario as principal auditor using the work of other auditor that time what are the formalities applicable SCS 600 Standard is applicable using the work of another auditor. Using the work of another auditor or using the work of
(5:32:30) other auditor anyway you can use able to understand. Now entire 600 we don't have in our syllabus. We only have a brief. Who is a principal auditor? He is responsible for entity financials. Yes or no? That financials includes what? Component information. That component is audited by other auditors.
(5:32:49) Who is other auditor? He is responsible for component financials which is included in financial information audited by principle. What is a component? Division and branch is called as a component from from standalone point of view. Consolidation point of view. Subsidy joint venture and other entity are treated as component. Yes or no? That's it. Now using the work of another auditor.
(5:33:13) If branch accounts are audited by another auditor, principal auditor and branch auditor should have a clear role of each other and understand and they should understand the roles and have a proper coordination. The say 600 standard no what it says you know principal auditor you can happily trust other auditor's work you are not responsible for his work even though his work is included in your overall audit report.
(5:33:37) Yes or no? If something goes wrong in component tomorrow he's only answerable. That is why you have to mention in division of you you have to mention division of responsibility in other matter paragraph. Correct. Now for that what are the processes you should do. What you can do you can inform other auditor how his work is going to be used.
(5:33:55) You can also inform what are the special consideration he should focus on. You can discuss what are the procedures he did at branches and all yes or no through a checklist or questionnaire or summary or you can perform additional works. We call them as supplementary audit procedures. Principal auditor can directly go to the component and do additional work.
(5:34:12) That is called as supplementary comp supplementary procedure. If necessary you can visit the other auditor and meet and decide accordingly. That's it. Branch audit concept is over. Easy clear. We discussed very clearly on this in our session.
(5:34:31) So in depth we discussed so we even discussed about coffee case scenario getting it that's it fine anyhow clear on this from revision point of view this is more than sufficient okay that's it so let's begin part two of audit report chapter that is reporting requirements okay part two of the audit reporting chapter like as I told you in this audit report we divide the entire chapter into two parts part one reporting standards which we completed right now what are the standards that we completed until now 700 7.
(5:35:02) 1 75 76 710 570 299 yes or no and even 600 whatever the basic discussion is that that also be completed almost 1 2 3 4 5 6 seven standards mainly we completed big standards all all are seven standards we completed yes or no now let us discuss reporting requirements what is this reporting requirement importance first of all you know in our SAS 700 format if you go in our SAS 700 format if you observe So you see contents of audit report if you observe we already covered all the contents correct now we are covering signature also over by the way report on other legal and regulatory requirements
(5:35:37) within the same audit report we should give other reporting requirements we should talk about other reporting requirements you know in audit report from opinion section is there right from opinion section till other information section from opinion section Till other information section. You see other information section we call them as report on financial statements.
(5:36:02) We call them as what? Report on financial statements. These are all reporting requirement as per standards on auditing. Whereas this 12th point is there right in our format. This is an other reporting requirement. This is an other reporting. This is not a requirement as per standard. This is not a requirement as per standard.
(5:36:21) Suppose if the auditor has to give reporting as per standards on the financial statements and also has to give some other reporting requirement as per law and regulation for example. Then other reporting requirements where it should come in the audit report. This is the question. Other reporting requirements comes after comes after report on financial statements.
(5:36:45) That is what mentioned in other reporting requirements sideheading. If you see other reporting responsibilities what they said the other reporting requirement shall be presented immediately after report on financials. What do you mean by report on financials? Just know I showed no part one of the audit report.
(5:37:02) If you see the real audit report also the audit report is broadly divided into two parts. Auditor's report up to other information section is part one that has a name that is given as a name called report on financials. What you report here? You will report as per standards on auditing. In this everything is because of a standard requirement.
(5:37:22) Now this one is what it's a reporting requirement as per law as per regulation. This is not a standard reporting requirement. Other reporting requirement when other reporting requirement and standard reporting requirement both are there. First standards related reporting you mention in the audit report then you mention other reporting requirements. That's what other reporting responsibilities discussion is about.
(5:37:45) Clear? And I even showed you in the illustration font size difference. Remember how part one and part two looks like. Okay fine this is enough. Now what is other reporting requirements? What is other reporting requirements? You other reporting requirements which is called as actually report on legal and regulatory requirement.
(5:38:04) What are the in companies act? We have 143 subsection one six inquiries we need to do. Then 143 we have another section 143 subsection 3 we should call. We should we should we should talk about 16 checklist items. Actually 10 were there. Clause number A to clause number J only 10 were there. Inside clause number J six items were there.
(5:38:27) So accordingly I classify them as 16 items. 16 matters. Then we have 143 subsection 11 which is actually dealing with the caro 2020 where 21 clauses were there. 21 matters were there. Apart from that we also have one more reporting requirement 143 subsection 12. Remember 143 section itself is what section you know duty of auditor.
(5:38:55) 143 section is talking about what duties of auditor. First of all there is a section called 143 subsection 2. What that section says you know you must give audit report. You must give audit report. 143 subsection 4 is there. It says what you know if you give any negative comment in the audit report you should give explanation. Then 1433 says what you know 14313 says you know you need to comment on some additional matters.
(5:39:20) 14311 what it says you know you should comment on caro central government notified matters central government notified caro 2020. This is the structure of 143 mainly again we have 14312. If you identify a fraud, you identified a fraud then depending upon the amount involved more than or equal to 1 cr you identified then report to central government within 60 days in which form 884 form you have to report.
(5:39:50) Suppose if the fraud amount you identified who identified auditor statuto auditor identified the fraud and if it is less than 1 cr then you just have to report to board of directors or audit committee as the case may be. If audit committee is there, report them. If if audit committee is not there in the company, report to board of directors. Yes or no? What you should report? Nature of fraud, parties involved, amount involved.
(5:40:11) Again, this board of directors, no this information as it is shall be mentioned in board report in the board of board of directors. In the board report, they should mention as it is information in board report plus one more matter also they should these three they should report.
(5:40:29) plus one more what actions they have taken this is the reporting requirement relating to fraud now now you know I'm not going to cover this in the revision I'm not going to cover this in the revision I am going to cover caro in the revision 143 subsection 11 in 143 also some two or three important points were there only that I will cover 143 subsection 11 like see if at all you want to have an in-depth understanding of three and all no you can refer my previous version marathon not an issue previous version for September attempt I did one marathon the same thing is re used for Jan attempt also Jan 25 attempt
(5:41:00) the same can be used no doubt at all no changes at all in this entire even in caro also no changes at all clear that's it now let's try to discuss caro 2020 let's try to discuss caro 2020 caro 2020 is what you know it's actually an order given by central government you know and with respect to the power they are having under companies act 143 subsection Sorry 11 with the power they have in 143 subsection 11 central government has a power to issue some order which order an order on which auditors have to give a
(5:41:38) comment there on you know just now I told 143 what are the requirements I told 143 subsection 1 143 subsection 3 143 subsection 11 this is what dealing with caro here 21 matters were there here 16 matters were There here six matters were there. Yes or no? You know on these six matters auditor shall report only when the answer is negative. If auditor is satisfied with them no need to report at all.
(5:42:07) You see Tata Motors you will not find 1431 reporting requirements in audit report. You see Reliance you will not find 1431 you know six inquiries. Auditor has to enquire them. If something negative is there she shall report. If no negative is there you can ignore.
(5:42:28) Whereas 1433 16 matters 143 subsection 11 caro 21 clauses total 21 matters on these no you must report whether your opinion is positive or negative both whether your whether your opinion is positive or negative you must report now let's discuss 143 subsection level nothing but company's auditor report order now to whom caro is applicable by the way caro reporting is not applicable for every auditor of every company. Caro is applicable only for certain companies.
(5:42:57) Like certain companies are excluded to which companies it is applicable. They did not give to which companies it is applicable. They told for which companies it is not applicable. Yes or no? Caro is applicable for all companies even a foreign company. However, it does not apply. It does not apply to banks, insurance companies, section 8 companies, 1% companies, small companies.
(5:43:21) By the way remember in this entire list NBFC is not covered which means CARO is applicable even for NBFCs non-banking finance companies also caro is applicable getting it banks it is not applicable bank can be commercial bank you know all that's whatever insurance section 8 company 1% company small company small company means what capital less than 4 crover less than 40 cr then that is called as a small company then there is another category called last one any other private limited company which satisfy following four conditions. If a private company satisfying four conditions, what are they? Not a
(5:44:00) subsidiary or holding. Here there is a big twist. Here there is a big twist. Be careful. Not a subsidiary or holding not a subsidiary or holding of a public company or aggregate paid up capital and reserves shall not exceed 1 cr on balance sheet debt. Aggregate borrowings from banks and fi shall not exceed 1 cr.
(5:44:19) At any time during the year at any time means what? In the entire 365 days, what is your total loan outstanding? Less than or equal to 1 cr always. Whose turnover does not exceed 10 cr. But you know, we know a private limited company whose turnover is whose turnover is less than 4 cr.
(5:44:45) Sorry, whose capital is less than 4 cr whose turnover is less than 40 cr. That private company directly becomes what? Small company. Now in such a case this clause this this exception number six don't have any validity at all. Now once upon a time this exception six private limited company caro does not apply right it has some validity but now it don't have any validity this exception number six is useless because every private company today will come under what small company whatever six section six is there right they all first satisfy small company definition sir small company means turnover
(5:45:18) turnover and capital you know what if borrowings are the more than 1 cr what about that it doesn't matter for small company A checking no if a private company has a turnover less than 40 cr if a private company has a capital less than 4 cr how much they're borrowing doesn't matter it's a small company and if it's a small company caro does not apply the auditor of such a private limited company they don't need to give caro report in exam if at all they give you a private limited company turnover details capital details all that you straight away apply 4 cr logic 40 cr
(5:45:48) logic that's it if at all 4 cr 40 cr logic does not satisfy then sideway arrow is applicable that's Leo sometimes in exam they'll ask you a theory question write about applicability of caro 2020 applicability they may ask you theory question they may ask you that time you should write about private limited company exception also clear we have seen in our regular class in caro guidance note there is a guidance note on caro inside that point number 12 if that actually clarified this provision right now whatever we
(5:46:18) have seen yes or no that's it now by the way is caro report applicable for consolidated financial statements? No. In car we have totally 21st clauses. First 20 clauses are applicable for standalone financials related audit report. The remaining 21st clause is there right that is applicable for consolidated financial statements audit report.
(5:46:44) 21st clause of caro is applicable only for the auditor's report on consolidated financials. First 20 clauses are applicable for the auditor's report on standalone financial statements. Correct or not? That's it. Next. Next. Now what are the matters to be included in caro report? What are the matters to be included in caro report? First and foremost matter you must talk about fixed asset. See how audit report is becoming more informative today.
(5:47:14) How informative the audit report is becoming. You see Tata Motors auditors have also given caro report. Tata Motors auditors they have given Caro report. This is consolidated financial statements. Okay. Now let us go to standalone financial statements. We will do a side-by-side comparison for few items at least.
(5:47:31) If not every item we will do at least for a few items. So we'll open consolidated financial standalone financial statements of Tata Motors. Yes, this is auditor's report. This is auditor's report on standalone financial statements. Inside this by the way we are discussing which section of the auditor's report report on other legal and regulated requirements inside that caro report what auditors gave they asked you to refer NXure A so NXure A they are giving caro report inside that you see caro NXure A NX A to the independent audit report what is this report on other legal requirements yes
(5:48:08) or no now you see first matter fixed assets you know second matter inventory they didn't mention the high headings That's it. We mentioned in our book headings. That's it. Even in the IC book, they don't have mentioned headings. We mention headings in our book. Clear? That's it.
(5:48:27) Now this point we will see simultaneously we will see reporting requirements here also. Briefly we will see not every point for some points we will see. Okay. Only important clauses I will cover in caro. Not every clause maximum I will see. I will see whatever is possible I will cover. Okay. Next. And I will also revise caro in just seven or 8 minutes entire all 21 clauses. Okay, we will revise within seven or 8 minutes all 21 clauses.
(5:48:55) Now look at or else maybe I already did one 8 minutes video that itself I'll merge it to you best. Fine. So first we will first we will discuss what is there. First and foremost matter auditor has to give a comment is what fixed assets. What auditor has to talk about fixed assets? Five different aspects you should talk in the car.
(5:49:15) Yes or no? Five aspects. First one fixed asset register. Auditor has to ask auditor has to check whether compan is maintaining a fixed asset register proper record which will contain details of all the fixed assets. How many were there? Where they were installed? Situation quantitative. That is first point you should check. Yeah.
(5:49:33) Company maintained a reported positively yes or no. Second point whether property, plant and equipment is physically verified. These fixed assets no must be verified physically by the management at reasonable interval. If any discrepancy is noticed no how they were dealt in the books also auditor has to check. So company see it's not audit responsibility to physically verify.
(5:49:55) Company has to do physically fix verification whether all the assets which they installed know are they in good condition? Are they present? Yes or no? or anything was stolen or company has to do physical verification at reasonable interval. You know Tata Motors know they are doing once in 3 years. The physical verification is done once in 3 years.
(5:50:15) You know what auditors of Tata Motor replied for the Tata Motors once in 3 years is reasonable no problem at all considering the size of the company considering the nature of the assets once in 3 years is it's okay. Then third reporting requirement title of immovable property whether title deeds nothing but registration deeds for immovable property are they in whose name they are asking are they in the name of the company? Are they in company name? If not you showed some immovable property land building land and building in balance sheet of the company but when you see the registration deeds know they
(5:50:48) are not in the name of the company they are in the name of a director. For example, if not in the name of the company, auditor has to disclose the following information. Remember, auditor has to disclose. And not only that, even the company has to disclose in schedule 3 under additional regulatory information.
(5:51:07) The company shall also disclose this under schedule 3 as a additional regulatory information. And this company will disclose it as an additional regulatory. We will once again discuss this point in items of financial statements revision. Okay. Fine. What the company has to disclose simple what is the point we are talking about fixed assets.
(5:51:24) Third point we are talking title deeds they are not in the name of the company but it is company owned only then they in whose name first of all description of the property for example factory building gross carrying value 1.5 cr hel held in the name of Ram who is he director period held since incorporation it is in the name of director only reasons explanation in the class I gave an explanation in the class already yes or no reason for example maybe company want to save registration cost or maybe recently company it was a sole proprietary firm converted into a company registration was kept pending.
(5:51:55) We will do registration within the next 3 to four months time. Clear? Next revaluation. Fourth aspect in fixed asset is whether property, plant and equipment were revalued. whether fixed assets are revalued check out see yes sir in the company where I'm doing what you know they revalued who did revaluation is it done by a registered value and if at all because of revaluation changes more than 10% in net carrying value of each class of planted missionary what is a net carrying value very simple you know if you see fixed asset schedule no PP schedule no you will have gross carrying
(5:52:32) value minus accumulated depreciation then what you will get is net carrying value in this Net carrying value in the net carrying value. If the difference is you know before revaluation identify net carrying value after revaluation identify net carrying value if at all the difference no is more than 10%.
(5:52:51) No it may be plus it may be minus doesn't matter difference is more than 10%. Auditor has to specify the amount of change specifically mention how much amount it changed. Now by the way net carrying value of all property plant and equipment or each class of PP each class of PPE. Uh what do you mean by each class of PPE? Suppose you see property plant and equipment class number one building.
(5:53:18) Clause number two plant and mystery class number three furniture class number four vehicles like that. Each class is there gross carrying value net carrying value is there before evaluation net carrying value. After evaluation each class you should see if the difference between them is more than 10% auditor has to report it yes or no.
(5:53:38) Next up, now fifth point, whether any proceedings under binami transaction act is initiated or pending against the company on the company any binami transaction proceedings going on. Check out if so whether company made proper disclosures in the financials. Auditor has to check whether the binami transaction proceedings are disclosed or not. You should check simple over five points.
(5:54:00) Fixed asset register, fiscal verification, title leads of immovable property, revaluation and the binami transaction. Anybody will remember all the side headings but what is tested in exam is not the side heading or the main heading. They will test you the matter inside. Some students what I notice is they remember all 21 clauses headings but that is not tested in exam.
(5:54:18) Yes or no? Write 21 classes. No they won't ask that. What they will ask write about fixed assets related reporting requirement in caro any three reporting requirements they'll ask and each one will have a one mark weightage. That is what they will ask you Leo. Then second reporting requirement. Second matter which auditor has to report is inventory. Second matter which auditor has to report is inventory.
(5:54:41) Only two aspects auditor has to verify. One physical verification of the inventory. Whether whether physical verification of inventory has been conducted at reasonable interval. Is the company doing physical verification of inventory checkout? Yes. Are they doing it reasonable interval? Yes, they're doing it reasonable. Then come and comment.
(5:55:00) Suppose no. If discrepancy is there by the way you see here physical verification is there right when company identified any difference know if reasonable and discrepancies here it is there right actually in the original law they use the word any material discrepancy what they use the word material discrepancy how they were dealt in the books if at all fixed assets are physical verified some shortage or excess be found how they dealt in the books they will record properly omissions they will record you know you
(5:55:28) know any any asset missing they will record it as deletion something they will record you just have to check management workings whether they did it properly or not here if discrepancy is 10% or more they specifically mentioned difference in physical verification recorded inventory physical inventory difference must be minimum how much 10% in aggregate of each class of inventory each class of inventory means what three inventories raw material work in progress finished goods so in each class if there is a difference between physical quantity and recorded quantity
(5:55:59) by more than minimum minimum 10% then how they were meant how they were recorded in books auditor has to check suppose you see Tata Motors they clearly mentioned they clearly mentioned yes or no they were frequently verified in our opinion the frequency of verification is reasonable no discrepancies were noticed the the Tata Motors auditors reported on the company that there is no difference at all everything is fair yes yes or no next working capital loan related to inventory Remember in bank audit you
(5:56:31) might have covered when when the company has borrowed any overdraft or cash credit they need to give stock statements to the bank and a stock statement which is older than 3 months then the bank will classify that loan account as irregular remember. Yeah. So a company has to periodically submit stock statements to the company. Stock statements they are submitting.
(5:56:57) No auditor has to check what you know whether returns quarterly returns quarterly statements filed with banks filed with the financial institutions are they matching with books in reality you know many companies what they do you know in books know stock value is different but when I'm reporting to when I'm reporting to bank no I will inflate the stock and then report to get more drawing power to get more drawing power sir what is drawing power what is the benefit of that we will discuss in bank audit revision clear that's said if not give the details. So for example,
(5:57:26) company filed a stock statement with the bank quarterly stock statement they filed. Okay. In that stock value book value as on the same date both are not matching. Auditor has to report it. This reporting applies. This stock statement reporting applies only when the working capital sanctioned limit is in excess of 5 cr. Only when the working capital limit sanctioned limit is more than 5 cr.
(5:57:52) Remember when you're computing the sanctioned limit you should take fund based credit facilities non-fund based credit facilities both fund based means what overdraft cash credit loan term loan that and all you should cover working capital loan non-f fund based means what letter of credit given guarantee given they are non- fund based for working capital company bank gave a letter of credit to the company it is not involving any amount transfer to the company but still for car applicability purpose Sorry, sorry. For second clause applicability purpose, second matter, second point applicability purpose,
(5:58:25) working capital limit 5 crore includes non-fund based credit facility also. Clear? All of you? Next. Then the third one, loans, advances, investments and guarantees. Loans, advances, investments and guarantees. Inside this we totally have six clauses. Inside it we totally have six clauses.
(5:58:47) You know A, B, C, D, E, F. Whereas point number A, point number E, they does not apply to a company whose principal business is to give loans indirectly NBFCs. In clause number three, matter number three, first of all for NBFC all 21 matters in caro applicable. But in the third matter, sub matter A, sub matter E, they don't apply to NBFCs.
(5:59:14) What are sub matter A? Sub matter E. First we will discuss in the order. Now first auditor has to ask auditor has to check whether company has invested in another company or gave a loan gave an advance in the nature of loan or given a guarantee provided security to some other entity.
(5:59:33) If so audit company has to the you know you need to get the data from the company and report what data you should report aggregate amount. What is the aggregate amount of What is the aggregate amount of loans advances guarantee security to to subsidiary associate joint venture? How much aggregate amount we gave during the year? Total loans gave given during the year.
(6:00:00) What is balance out you know and how to others? How much we gave? What is the aggregate amount of loan? What is the aggregate amount of loan given to subsidies? What is the aggregate amount of loan given to others? First give that information. Not only that as on 31st March no what is balance outstanding with the substerious associates how much with others how much you should give that very simple the company gave loans advances in the nature of loan investments guarantees or security to another entity please give the following information how much they gave to subsidy associate joint venture how much they gave to others plus you should also
(6:00:29) disclose how much is outstanding on some 31st months remember we are giving loans means it's a receivable for the company it's a rece receivable for the company. How much is outstanding on 31st March with respect to subsidies and with respect to others? How much is outstanding on 31st March? That breakup must be given.
(6:00:47) And remember this a point breakup details is not applicable to NVFC. They are not applicable to NVFC. Breakup details no need to be given. Then generally whenever we are giving loans no we generally give loans based on some terms and conditions. Right? Whether the terms and conditions are prejuditial are the reasonable or unreasonable auditor has to check.
(6:01:11) We we will see as per articles of association whether a company can give loan or not. We will see at what rate of interest they can give. We will see if at all in reality the loan is given not as per the articles some other terms they used. Then we classify that situation as not prejuditial to the company. Yes or no? Next. Now third point auditor has to check and report. Okay.
(6:01:31) You gave loan terms and conditions also good. Are the repaying regularly? Check out whether the repayment receipts are regular because you gave a loan. Your company gave a loan. Your company has to receive it. Say yes for the company. Yes or no? Suppose no. If there is amount is overdue. If not amount like some some default is there. You gave a loan.
(6:01:51) They are not repaying me on time. Overdue period cross at 90 days. What steps the company has taken to recover them? Auditor has to report. Clear then whether loans and advances which fall due in this year suppose no you gave loans right in this year some EMIs are due you gave a loan there are some loans which are repayable by the other parties to this company which are due in the current year they need to repay in the current year but what happened you know they didn't repay why the company extended them the company gave a fresh loan to them or the company rescheduled
(6:02:21) the loan terms and conditions if at all the company gave any loans extension rescheduling all that how much is the total amount Amount of that extended loans, grants, extended loans, ex refresh loans were given, recheduled loans. How much? Suppose in this year company gave 100 cr total loan. Out of 100 cr no 40 cr is rescheduled loan.
(6:02:40) 40 cr is a fresh loan given to existing borrowers to repay the old loan. How much of it? Mention what is this percentage to the aggregate loans given in the current year? 40% of the current year loans given were rescheduled loans. Mention that. Now remember the sixth point renewals, extensions, reschedule, fresh loan point is not applicable to NBFC is not applicable yes or no.
(6:03:04) Then finally whether the company gave any demand loan demand loan means what you know I give a loan to my subsidy. When they should repay whenever I ask whenever I ask they will repay it's called demand loan without specifying any terms of repayment.
(6:03:22) loan given without specifying any terms of repayment if so how much amount company gave like that what is this percentage of loan to the total loan current year we have 100 cr loan no 80% of the loans are demand loans given to subsidies associates joint ventures and out of this demand loan how much amount is given to promoters related parties that also you should give breakup Tata Motors given a disclosure on this please open Tata Motors report if at all you want to have a practical example on that Leo Then now remember in the third clause no we are giving loans investments advances all that right now what about companies act
(6:03:54) provision on the same that is addressed in fourth clause in the fourth matter in the caro they are asking us to check company's act provisions also third class extension only fourth clause technically speaking fourth clause is not a different matter fourth matter is an extension to third matter instead of giving it as a third matter part they gave a separate matter when you're giving loans no six matters you should check to whom it is given subster is a related part is how much to others how much outstanding amount how much has on 31st March that is a that's one of the reporting requirement second you know terms and conditions reasonable or not
(6:04:24) in the third class second point third class third point are they repaying regularly fourth point overdue is there any loan due in the current year which is rescheduled or extended or you know fresh loan is given what is the amount how what is its percentage to the total loan fifth point sixth point whether whether the company has given any demand loans to related parties yes or no whether the company has given demand loans checkout and if so how much is the demand loan given how much of it is given to promote checkout further loans and advances investments guarantee
(6:04:54) security right verify provisions of 185 186 in the company's act companies act provisions are also complied or not check out fifth matter company accepted public deposit company accepted public deposit if a company has accepted public deposits auditor has to check compliance with section 73 to 76 RBI directives company law board and in case of non-compliance auditor has to mention the non-compliance remember sometimes in MCQ you know they will give you all these points you know which point is not applicable they will give
(6:05:29) you or they will give you any two or three sub clauses from the third clause and they will ask you whether the company's liable for reporting in the case study they will mention the company's engaged in lending business and whether the following reporting applicable they'll give you if at all that is coming under E point and a point you should say company for the company it is not applicable because the company's engaged in lending business very carefully you should study the questions you know in in our classroom we solved all that yes or no it was asked not in inter it was asked in CAF
(6:05:58) final also I'm telling you CA final paper is not advanced paper nothing such that CA inter CA final the paper standard is same only if at all you both are having same syllabus caro is there in CA final for you also both of you same day they will ask questions in fact sometimes the paper is very tough in CN the topic in CA final that much tough question they will not ask clear next deposits they may ask you this itself for four marks question clear next cost records is the company liable to maintain cost records check out 148
(6:06:29) section is there which talks about costs if so are they made and maintaining that's it are they maintaining or not check out is the cost records enoughly maintained or sufficiently maintained in what condition they maintained are they accurate no need to check clear are they maintained or not check out That's prime of AC examination enough.
(6:06:48) Then statutory dues. Then what? Statuto dues. What is a statuto due? Very simple. Provident fund, ESI, taxes, income tax, advanced tax, GST, customs, profession tax, property tax, all these are what? Statuto dues. Dues payable under some law or regulation. We call them as what? Statuto dues. Getting it.
(6:07:13) What auditor has to check? Auditor you know the statutory due is broadly divided into two category undisputed disputed. Disputed means what you know company already filed a GST return or it return department sent a notice to the company to demand department sent a notice demanding additional tax. Now the company filed a case against the department at a higher level court at a tribunal level.
(6:07:41) company filed a case against the department like we don't have to pay they are unnecessarily asking for they passed a demand order on me I don't have to pay please you help me I went to tribunal now the court now the case is under you know dispute because you know department sent me demand notice did I accept it dispute started that is called what disputed statutory due paid amount no if dues are not deposited on account of dispute the auditor has to simply indic indicate how much amount is involved in the dispute where the dispute is pending.
(6:08:14) For example, you see Tata Motors, they have clearly given you know disputed dues according to the information getting it. So the following dues are pending on account of dispute income tax belonging to so many years this much amount yes or no where it is pending high court forum where it is pending what auditor has to talk about nature of the due where the amount is where the forum I mean forum where the dispute is pending amount involved you see how much detailed disclosure they are giving in caro in fact we should only talk about how much amount where the dispute is pending but to make people understand better what is the due income tax how much amount 4 cr where
(6:08:48) the it is spending high code which year it is belonging to 92 93 SS spend year like the Tata Motors is clearly showing auditors are showing yes or no suppose no you know very well we pay GST every month we pay TDS we discussed in TDS also yes or no current month the TDS we will pay by next month the 7th date to some provident fund current provident fund we will pay by next month 15th or 20 like every month we have to pay some taxes and dues to the statuto authorities do we pay them when they when they're sending notice or do we pay them voluntary
(6:09:18) Voluntarily we will pay every month yes or no. Now auditor has to check whether the company is regular in depositing undisputed statuto d. Is the company regularly depositing check out? If not indicate what is the area outstanding on balance sheet date which is outstanding for more than 6 months.
(6:09:42) Suppose as on 31st tomorrow no GST payable is there provident fund payable is there payable and all is there as on 31st Marth payables are there they belong to which one check out sir they they are not latest sir it's already 6 months back only they are liable to be paid sir 6 months back only they liable to be paid more than 6 months they're overdue even as on 31st March it is overdue that has to be reported by auditor able to understand next you know sometimes The company undisclosed income is discovered by department. You know some transactions no they are not recorded in
(6:10:16) books of the company and you know what it was discovered during the year in a tax assessment case in under income tax law. Some undisclosed incomes were disclosed. Now, now auditor has to check whether the same is properly recorded in books company black money discovered by department in the current year earlier they they didn't record now it is discovered now the same is accounted by the company or not also you should check how they will accounted treated as a prior period item Leo then default in repayment of loans then what default in repayment of loans what auditor has to
(6:10:54) check your whether the company default defaulted by the way here ninth point. No loans means which loans loans given a loans taken borrowings yes or no. Now whether company has defaulted by the way here default in repayment. No six points were there. You see totally six reporting requirements were there inside this.
(6:11:17) What are the default lender wise default you should give is the company declared as a willful default. Company got loans but diverted for some other purpose. Short-term loans are diverted. Loans taken for subsidy purposes. Loans against pledge of shares held in subsidies. Six aspects it is talking about.
(6:11:36) First one, what is the first one? Whether the company defaulted, whether the company defaulted in repayment of loans to any lender. Yes, company defaulted sir. If yes, indicate the following. Especially you know lender wise default. Lender wise in case if the lender is a bank in case the lender is a financial institution in case the lender is a government state government loan we took or we have taken a loan from bank and fi to which bank you defaulted for example you know what you need to do what auditor has to disclose in case of a default to lenders auditor has to disclose what is the borrowing sir working capital loan name of the lender IC bank how much amount not paid on due
(6:12:15) date 10 lakh 10,000 rupees whether Principal interest both it is 10 lakhs is principal 10 10,000 is interest how many days delay some 25 days 30 days delay is there remarks company's paying soon sir very soon they said they will pay but as on 31st month these are all the defaults lender wise you should give this breakup clear now further you know auditor has to check whether the company is declared as a willful defaulter by any lender for for that no company civil report you generate company have a pan number civil report you generate In the
(6:12:47) civil report you will find whether the company was defaulted, whether the company was treated as a willful defaulter by any lender. Third one, diversion of funds. Auditor has to report about diversion of funds. What is it? Suppose company bought term loans. You know company bought term loans. Whether term loans are applied for same purpose. Check out whether the term loans were applied for same purpose.
(6:13:11) If not right company borrowed building construction loan and now they are using it for salary repayments indicate the amount of loan diverted and purpose the company during the year bought a building loan diverted for salary repayment same way whether any short-term funds were diverted like for example whether short-term funds borrowed no are they used for long-term purpose very risk this is going concern indicator this is sometimes company will take funds For what purpose? Not for them to meet obligation of subsidiaries.
(6:13:47) Nothing but for children's purpose. Company has children. No. Subsidiary, associate, joint venture. The company took a loan not for the company's own reason. They have borrowed it for the purpose of subsidiary, associate, joint venture. If so, if the company borrowed any such loan, details thereof with transactions and amount.
(6:14:04) How much loan you borrowed? For whose purpose you borrowed, please report it. Now sometimes no. Company will borrow loan. Now tell me banker will give loan only when you give security. Company gave a security. What you know shares held in subsidiary companies. Company has shares in subsidiary companies. No Tata Motors. No they have shares in Jaguar company.
(6:14:23) That shares the company assigned to bank. The company kept to a bank as a security. Now they took a loan. Now what auditor has to report? First of all whether the company has raised any loans during the year. Did the company raise a loan during the year on pledge of securities held in subsidy associate joint? If so, give details.
(6:14:50) If at all also report whether the company has defaulted in repayment of these loans, whether these loans are defaulted, you know what will happen if you default these loans. In this loan, bank will become owner for those shares. You will lose holding company status. You will lose what? Holding company status.
(6:15:07) Because my shares in subsidiary company I kept with the banker and got a loan. If I default what will happen? The shares will be transferred in the name of the bank. I will not become holding company anymore. Yes or no? Next. This is regarding borrowings from banks, FIS, government, debenture holders all that.
(6:15:25) Sir, what if I raised money? One of the source of finance for me is not only borrowings. Another source of finance is public funds. Suppose no IPO, FPO company whether money raised by IPO whether money raised by further public offer are they utilized for the purpose they were raised suppose company during the year no they raised money from public share capital they issued shares and then bought money prospectors they will mention some purpose whatever money they raised no is it used for the same purpose mentioned in the prospectors or check out if not if not what is the
(6:16:00) default Default means what? Used for some other purpose. Delay. Delay means what? Borrowed money. You know they raised money to shareholders and all. They told what you know the prospect is within next 6 months we are starting project one year already gone. 31st March came. Company not yet started. Delay subsequent rectification.
(6:16:21) Now they started the project or originally they they raised money know from public they use it for some other purpose. Now again ultimately use it for prospectus mentioned purpose. Clear? If there is a delay, default, subsequent rectification, everything shall be reported. Yes or no? Same way sometimes company raises share capital money through preferential allotment also. See entire 10th clause is what? Company raising funds by issuing securities.
(6:16:44) IPO, FO, preferential allotment. Whether company made any preferential allotment or private placement if so check 42 section compliance, private placement compliance and also see for what purpose amount is right for what purpose it is used. If not provide the details, amount involved, how much, what is the non-compliance both has to be reported.
(6:17:03) Next, fraud reporting almost out of 21 10 major clauses completed. Now on very small small clauses 11 clause number 11, fraud reporting whether any fraud by the company or any fraud on the company. By the company means what? Generally management will do frauds on third parties. On the company means what? On company somebody's doing fraud.
(6:17:27) Who will do? Either management will do, employees will do or third parties will do on the company. Anybody can do by the company means management doing on third parties whether any frauds were made by the company or any frauds were identified on the company have been noticed or reported. Who noticed and reported? Management only not the auditor.
(6:17:46) So you ask management sir is there any frauds in this company during the year? If so if yes what is the nature of the fraud? What is the amount involved has to be indicated? Tata Motors in 2223 financial year audit report. No they mentioned that three employees have done a suppliers related fraud vendor related fraud for 15 cr they reported that next.
(6:18:06) Now you need to check you need to report one more point whether any report under 14312 just now we discussed at the beginning 14312 is what reporting of fraud to by the auditor to central government in ADT4 whether auditors file ADT4 form with the central government they're asking when I will file AD form with central government only when the fraud amount is more than or equal to 1 cr indirectly they're asking is there any fraud more than 1 cr then you know every company especially listed companies know they should maintain whistleblower complaint policy whistleblower mechanism they should
(6:18:40) maintain whether they're maintaining or not check out and the company would have received some whistleblower complaints right take them into consideration they are fraud risk factors they will be helpful for you in risk assessment so the the car is asking whether the auditor considered whistleblower complaints see you don't have to give a list of complaints here there is no requirement on giving a list of it they are just asking dear auditor you consider Vist bl complaints company rece one not five complaints this year you you saw the complaints in your audit you
(6:19:10) considered that's it next company what is it nidi company what is the nidi company compliance very simple nidi companies know they should maintain worn funds net funds they should maintain net funds of one rupee for every 20 rupees liability we discussed what is the liability here all that in the class you know did the company will accept deposits able to understand how much deposit that they can accept maximum 20 times of own funds of the Nidhi company. So that is what 1 is to 20 net owned funds to liability yes or no. Not only that Nidhi company has to
(6:19:44) maintain a liquidity just like a bank how they will maintain statuted liquidity ratio nidi company also has to maintain a liquidity reserve. How much reserve? 10% of the unencumbered term deposit. Nidi company is accepting some term deposit.
(6:20:02) I mean sorry Nidi company is accepting deposits from public I mean deposit from members no total deposits multiplied by 10%. They should maintain it as a fixed deposit. Whether Nidhi company is maintaining 10% unencumbered term deposit as per NI rules. Whether Nidi company has defaulted in payment of interest on deposits to members in pay in repayment of principle thereof.
(6:20:22) If so, details Nidhi company has to report the auditors of Nidhi company has to report whether Nidi company is paying interest to members on time. Check out whether Nidi company is paying principle also to members on time check out. If not details clear related party transactions two things you need to check compliance with companies act section 1778 188 you should check you should also see whether related party transactions are properly disclosed as per accounting standard or not you should check that's it internal audit system clause number 14 what are they saying whether company has internal audit system we have seen in 610
(6:20:52) standard also in our regular class we discuss in 610 so in 610 standard I will talk about what is internal audit system internal audit function all that I will discuss in uh 610 revision. Clear? Now whether the company has internal audit system commensurate with the size of the company look at the company size.
(6:21:10) How much how many internal audits they have check out? Are they okay at the size? Is that okay? Nothing but they indirectly asking internal auditor are the namesake. Are they really having a department reports of internal auditor? No. Internal auditors will give reports. As a stat auditor, you should compulsorily read them. You should read them.
(6:21:27) Have you read it? Have you considered it or not? Caro is asking you clear non-cash whether company has entered into any non-cash transactions with directors. Sometimes in exam they'll give you the company. So the company transferred land to director in exchange of car owned by the director. It's a non-cash transaction. They will ask you what is the reporting requirement by the auditor? It's a non-cash transaction comes under clause number 15.
(6:21:54) So if so you whether provisions of 192 whenever a company is doing non-cash transaction with directors section 192 says some conditions are they satisfied or not auditor has to check and then report in caro clear now NBFC related reporting you need to check you are doing audit of a company right you need to check whether the company is required to be registered under RBI NBFC law you know I told you in in our regular class also we covered principal business criteria if NBFC FC financial assets are more than 50% of total assets. NBFC financial incomes are
(6:22:29) more than 50% of total incomes. If both the conditions are satisfied, it must register under RBI 45 IIA as a NBFC you need to you need to check. Suppose I'm doing audit of Tata Motors I need to check total assets. If financial assets are more than 50%. And income of Tata Motors more than 50% is from financial activities then that should be registered as a NBFC.
(6:22:51) But luckily the the financial assets are very low. Sir, what are financial assets? Loans and advances investments. Loans and advances investments. They are treated as what? Financial assets. Next, as the company carried out any NBFC activity without registration, suppose NBFC company is in NBFC.
(6:23:09) Principal business criteria they're doing but they didn't register without registration. Are they doing business of NBFC? Comment. Is the company core investment company? Third point is what? Is the company core investment company? Core investment company means what you know in a company total balance sheet assets no 90% of the total balance sheet assets no minimum 90% or should be investments if 90% of the assets of the company are investments then that's a core investment company so check whether Tata Motors the company that we are doing audit 90% of the assets are investments are no Tata Motors is not a core investment company whether if at all
(6:23:45) it's a core investment company is it fulfilling 90% criteria check out In case companies exempted you know again core investment companies no they are classified as per NBFC guidelines we have NBFC audit in CF final there we will discuss getting it these core investment companies no some are liable for registration some are exempted if at all the company are doing audit is a core investment company but they're exempted see whether exemption criteria satisfied or not check out what is the exemption criteria you know for core
(6:24:10) investment companies total asset size 100 cr if the asset size is less than 100 cr for a core investment company that is exempted if asset size is more than 100 cr for a core investment company that is that that that has to restore. Then how many core investment companies are there in the group? Tata Motor said six companies were there in the core investment group.
(6:24:34) In the Tata Motor said in the Tata group, six core investment companies were there. Auditors have clearly mentioned that. Leo, next cash losses. Whether the company has incurred cash loss in the current year as well as in the preceding year. If so, how much is the cash loss? How to find out cash loss? Very simple.
(6:24:54) You do cash flow statement, right? In cash flow statement, you first start net profit as per P&L. Correct? Huh? Now, before working capital changes, you will find out cash flow, right? Cash flow before working capital changes. If that is negative, that's a cash loss. If that is negative, that's a cash loss. In cash flow statement, you start with net profit as per P&L. Suppose that is loss.
(6:25:15) You adjust non-cash items and all right before working capital changes you adjust all the P and non-cash items right that that figure you get right that's a cash loss if at all that is negative it's a cash loss as per P&L company may have a profit but in the cash flow statement cash flow before working capital changes if it is negative then they have a cash loss see cash loss is there sir in current year it is there sir but previous year it is profit only sir cash profit only cash loss is not there report about current year sir in current year there is no cash loss loss but previous year cash losses there sir then report about
(6:25:45) previous year sir both are cash losses then report both simple whether company has suffered any cash loss in the current year and previous year check out and report accordingly clear next resignation in the current year any auditor resigned if so if so the current auditor has to check current auditor has to take into account considerations of the issues objections concern The auditor said no why he resigned check out what reasons he mentioned consider and then accordingly you do your audit have you considered or not caro is asking you suppose I'm the
(6:26:24) auditor who was appointed under casual vacancy because of resignation of existing auditor I need to report on 18th clause specifically clear next you know 20th CSR compliance and then 21 first I will discuss these two then I will go for 19th material uncertaintity yes or no CSR very simple You know companies know they have to spend every year 2% of the average profits on CSR activities.
(6:26:49) Companies know how they can spend 2%. Suppose Reliance is there 50,000 cr profit. 2% means 1,000 cr they need to spend on CSR 1,000 cr. How CSR can be spent directly? You can spend in the you must spend within 31st March. If you do not spend within 31st March, you should transfer within 6 months from the end of the 31st March to schedule 7 fund.
(6:27:09) Correct? However, if company take up some project which is more than one year validity yes or no then the amount whatever allocated for project it must be kept in a separate bank account. This is briefly the CSR provision and we discussed in our class regularly very in depth about it. This understanding is enough.
(6:27:28) If you want to have a CSR clarity look at L revision getting it CSR related law revision will be there in our marathon YouTube. You just go ahead then you will understand this point much more better. Suppose no other than project means what company decided to spend some 200 cr within this year only but they could only spend 150 cr remaining 50 cr is unutilized not yet spent is this 50 cr allocated for any project no they have not allocated then what the company has to do they must transfer that amount within 6 months they must transfer that amount within 6 months to schedule 7 fund where any amount other than ongoing project you
(6:27:59) know company has transferred that unspent money to schedule 7 fund Sir amount is kept aside CSR money kept aside 800 cr we kept aside for project purpose sir as on 31st 150 cr used still 650 cr is there what about this it must be transferred to a special account nothing but a separate bank account auditor has to check whether project related money kept aside transferred to special account whether other than project related money which is unutilized as on 31st March it should be transferred to schedule 7 funds that's
(6:28:30) it whether company transferred or not check out and report under this particular clause. Clear? Clause number 21. This clause number 21 is applicable for audit report given on consolidated financials. This 21 is not applicable for audit reports on standalone financials. This 21 clause is applicable only for audit reports given on consolidated financial statements. Yes or no? No.
(6:28:54) What auditor has to report you? I'm giving audit report on consolidated financials. Inside that car report I should be only 21st I will talk. What I will talk you in consolidated financials no many companies are included right subsidies associates they're all included right these subsidies associates no they were audited by their auditors right they have given caro reports right inside the car reports no they might have given some qualifications adverse marks right summarize that and then give a list here summarize all the qualifications at one
(6:29:23) place and then give a list here so here shareholders will get what information holding company auditors In car report what qualifications they give? Subsidiary companies, auditors in carry reports what qualifications they give.
(6:29:40) The associate companies, auditors, audit reports in car reports what qualifications they give at one place they will see. Are you clear? So whether there have been any qualification adverse remark by respective auditors in car reports of companies which are included in consolidated financial statements. If yes indicate the details of companies and paragraph numbers in Tata Motors consolidated financials related audit report you go 21st clause directly auditor what is the you know Tata Motors subsidiary company clause number four clause number eight clause number 12 these are the clauses which are having qualifications Tata Motors passenger vehicle you know associate
(6:30:12) company or subsidiary company clause number two clause number 3 B clause number four C like that something like that they'll reply able to understand that's it by the way here in reporting in caro the reporting requirement must be whether positive or negative both you must report.
(6:30:30) If a point is not applicable say that it is not applicable finally 19th clause what is the 19th clause is asking you know this 19th clause is asking you have to check you have to check when you are giving audit report no suppose I'm giving audit report sir 31st March is the financial year sir I am giving audit report on 10th June sir on 10th June once again check once again check on 10th June what you should check as on 31st March company has so many current liabilities right as on 31st March company has so many current liabilities, right? Current liability means what? They're all current liabilities as on 31st March means they should be repayable within
(6:31:01) next 12 months. As on 10th June, you should check whatever liabilities company showed on 31st March. No. Can they repay within 1 year? Can they repay within next one year? From 31st March, can they repay within next one year? Do they have that repayment capacity? You should check this point. You should check this company pushability on audit report date.
(6:31:25) You should check the company ability on audit report date. Whether the auditor is of the opinion that no uncertainity exist as on audit report date that company's capable of meeting its liabilities existing on balance sheet date. Liabilities existing on balance sheet date not liabilities existing on audit report. Auditor has to check this company repayment capacity on which date? Audit report date.
(6:31:51) You should check which liabilities repayment capacity liabilities existing on balance sheet at MCQ might come clear. That's it. Caro is completed. Entire Caro is completed. Hardly less than 40 minutes we spent on Caro. Productively we discussed every point felt clear about it. That's it. Okay, that's it.
(6:32:13) We'll continue the next chapter revision in the next session. Yes, audit documentation. Remember whatever we do in audit we should document. Why? Why? First of all documentation you know I told in our regular class also how documentation looks like. Documentation is like soft copy electronic as well as it is a hard copy.
(6:32:39) Like when we are doing audit no see for a particular company when we are doing audit no we do verification of opening balances. We first go and try to understand the company yes or no. We will understand what is the company, what is their memorandum of association is saying, what articles of association is saying, we verify so many documents. We talk to so many people. We see purchase process how it is happening. We see sales how it is happening.
(6:32:56) First we do something called risk assessment. In risk assessment means what? You are understanding the company. You are understanding the environment. Yes or no? So get first an understanding of the company. Now relating to this understanding you will be reading so many documents, so many contracts, so many uh you know uh commitments which the company entered into so many agreements will be there. First get that copy of all that you get that document.
(6:33:22) Tomorrow if somebody asked you do you know about the company suppose now there are so many auditors who have signed audit report yet they don't understand what the company's doing. First question when the NFR is doing review all that they will ask you in inquiry what you know about the company you audited you should be able to tell what company is doing how their business practices how their business strategies all that yes or no understanding the company what to understand in the company we are going to discuss that in risk assessment chapter we are having a chapter called risk assessment inside that we'll be
(6:33:52) revising what to understand about the company so documented now you verified opening balances documented purchases you verified documented sales you verified document it. Whatever you're verifying, gather that and document it. Now, how can you document? Either electronically you can document or physical hard copy you can document.
(6:34:12) Today we are all doing audits digitally. In fact, that is concept we call it as remote audit. What is it? Concept is called as remote audit. Nothing but work from home. Many big four employees working from home. Many big four no big four no like suppose you you're joining in big four or some audit firm.
(6:34:30) You are doing audit of some foreign company sitting in India remotely you're doing audit working papers are maintained in soft copy that's it now what is that documentation what is that working paper is what we are going to revise in this chapter what is that audit documentation standard we are actually going to discuss we are actually discussing 230 standard what the standard says audit documentation refers to record of audit procedures performed relevant evidence obtained conclusions reached by the auditor it is also known as working papers send work papers. So audit
(6:35:02) documentation refers to audit procedures performed audit evidence obtained conclusions which auditor is reaching. So what are all processes you are verifying? So many purchases sales you are verifying whatever you are verifying record it whatever information you are getting record it.
(6:35:21) Whatever decisions you have taken on on purchases what is your call on sales what is your decision on inventory what is your decision record it. Now whatever the process of recording is there right we call it as audit documentation getting it this is also called as working papers and work papers. Now there is another definition called audit file. What is a file you you know whatever you are working know you need to document right that's called documentation right this documentation you will store know where you will store computer soft copy electronically or hard copy that is called as audit file.
(6:35:52) Audit file means medium of storing documentation. Audit file is one or more folders or storage medium containing a audit documentation for a specific engagement. MCQ might come for all engagements. Option A, B for audit engagements, option C for assurance engagement only, option D for a specific engagement specific engagement.
(6:36:15) Tell me we must maintain documentation for each client separately. We must maintain exclusive file for each year audit. Yes. So that's it. Now tell me what is the purpose of documentation? What is the nature of documentation? Nature is very simple. What is the documentation nature? It's an evidence. It's an evidence that you planned and performed the audit as per standards and auditing as per law and regulation.
(6:36:40) It's an evidence your for your auditor's conclusion. You gave unmodified opinion. Tomorrow NFR is asking question. How did you give unmodified? Sir, I have verified everything. I took a conclusion that it is everything is financial statements are true and fair. How did you to conclusion I verified purchases everything is true and fair.
(6:36:56) How did you know it is true and where? You must show the proof. Audit documentation evidence for the conclusions reached by the auditor. Evidence for audit was planned and performed as per law purpose. Audit documentation it helps you in so many ways. It helps you you know uh you know to plan and perform the audit in a better way. Yes or no? It will help you to do direct your team.
(6:37:18) Supervise your team. Review their work properly. Documentation team know when they're working know they gather documentation right. So they need to work carefully. If they did not work if they did not work carefully through documentation I can discover them. It will make them accountable. When when I say please document what you did they do carefully.
(6:37:35) If I say don't no need of documentation they do carelessly. Yes or no. That's it. Documentation you know record of important matters for future audit. It will help you for future audit. You are appointed as an auditor for five years. First year you did lot of work. Second year your audit forum some other articles and all were there.
(6:37:53) They don't have to stress much. They can look at the previous year documentation and easily can plan the next year audit. Yes or no? Documentation helps quality control reviews documentation helps external inspection by NFA quality review board like there are so many inspection authorities ROC inspection that and all it will help able to understand.
(6:38:14) Next manner how you should document what is the manner of documentation in exam they'll ask you what is what is the nature of documentation and purpose of documentation four marks or five marks question they'll ask you or what is audit documentation three marks meaning they'll ask you yes or no what is the manner of documentation the auditor must prepare documentation in such a way an experienced another auditor some other experienced auditor is there right he is not part of your team He is not part of your team. I told you entire audit is performed by our
(6:38:45) audit firm. One of the team that team is called as what? Engagement team. Documentation. Documentation who will prepare the team will prepare in how how they should prepare in what way they should prepare? Documentation shall be prepared in such a manner that an experienced auditor who do not have connection with the audit means he is not part of your team. Audit is not part of your team but he has a knowledge of auditing.
(6:39:10) He has a knowledge of financial reporting framework. He has a knowledge of accounting standard. He has a knowledge of auditing standard. He also knows about the client business. Experienced auditor is a person who has a reasonable knowledge of all this. By looking at your documentation, by reading your documentation, we'll understand what audit procedures you performed, nature, timing, extent, how you performed risk assessment, how you performed a further audit, what is the result of the procedure, what information you obtained, what significant matters you you reached,
(6:39:40) what significant matters you identified, what professional judgment you made on the significant matter. Sir, what is significant matter? What is professional judgment? Last concept in this chapter is that only in documentation last topic is that only able to understand next.
(6:39:58) What do you mean by documenting nature timing extent? I remember I showed you audit plan also. Documenting nature timing extent means what? Suppose inventory know I verified physically I went for physical verification. Nature of audit procedure is physical verification. timing I did at the year end extent I I went for 3 to four days and I observed complete management process nature timing extent you should document in documenting nature timing extent first you should I first what are all you should document first you should document what test you performed nothing
(6:40:29) but what identify characteristics of specific items tested I tested inventory existence and condition I tested who performed you know the engagement partner performed who reviewed Ed you know who reviewed another partner of the firm reviewed date on which they reviewed extent of the review full my work is reviewed yes or no document discussion of significant matters when I verify when I go for inventory no I got some doubts on third party inventory kept with third party significant I discuss significant issues what matters you discussed exactly with whom you discussed yes or no suppose if at all
(6:41:06) the information obtained by you know no is inconsistent you got some information that is not matching with some other information. Have you resolved that inconsistency? Have you addressed that inconsistency? That also you should document.
(6:41:26) When you are documenting audit procedures, auditor must also document what test he performed, who performed, who reviewed, what are the significant matters, with whom the matters were discussed and resolved, how the inconsistencies were resolved, everything you should document. Whatever work you're doing entire that work has to be documented clear. Next you know in what form you should document sir should I document electronically or physically? Yeah what content I should document? Suppose there are so many documents or purchase purchase vouchers 200 vouchers are there. Should I take a silox copy and then document? What should I do? What
(6:41:56) should what content I should document? How much I should document? How I should document? How what how much content? To what extent? It depends upon size and complexity of the entity. Nature of procedures performed. Suppose no I just did observation. Documentation may not be there.
(6:42:16) I inspected one memorandum of association. I take a photocopy and then document it. Depends upon risk. If at all in purchases risk is high. I will document entire purchase manual. Then if significance of the information obtained, I am getting so much of information from the client evidence from the client. If I feel that is significant I will take a photocopy of it. Yes or no? Exceptions identified.
(6:42:39) You know we will discuss what is this word exception in five not that time I will once again connect it here. Exception means what? Inconsistencies. Getting it. If at all inconsistencies or more I need to resolve right. You may have to document and audit methodology and tools used document. Leo what are the form extent content of documentation.
(6:42:59) It depends upon size of the entity, nature of the prisoner, risk involved, significance of the evidence obtained, exceptions identified, methodology. It also depends on audit tools and methodologies. Examples, I will document my program analysis. I will document memorandum issues. I will document significant matters. I'll document confirmation letters and representation letters I obtain.
(6:43:18) No, that I will document checklist. I will document you know I will be discussing WhatsApp mail and all with the client that I will document. Sometimes I will also include copies of entity records. Don't use the word entity record. I will document copy of entity record also.
(6:43:35) Sometimes I can document the auditor may also include copy of entity records as a part of documentation. Example, significant contracts and agreements. Memorandum of association articles of association company bylaws and all. Yes or no? Audit docu by the way just because you're keeping a copy of it. Company is thinking to discard them. Auditor is already having a copy of it.
(6:43:52) No. Why should I maintain company's thinking to discard? No, audit documentation is not a substitute for entity records. Yes or no? And next audit documentation do not include superseded drafts. You should not document. See sometimes no superseded means what? First you took one photocopy and that's a mistake is there again you took one more Xerox after typing properly after you took one more.
(6:44:15) Now this new Xerox or new print out the new printout which you took superseded the old print out. Should you retain old old print out also? No need. That's it. Yes, notes showing incomplete or preliminary thinking. For example, when I'm taking class, I'm writing like this. Some students, they will ask me this running notes also. I just randomly scribbled.
(6:44:34) What I scribble also I don't know. Yes or no? This is called preliminary thinking. You know sometimes when you're doing accounts costing problem, you'll do some numbers. No, that also you will document. You will revise that also later on. No need. Are you getting it? Yes.
(6:44:50) So auditors preliminary thinking that and all no need to document previous versions corrected for typing errors and all old version documents are there in that no now I did some typing correction and all and I I took new document old document don't duplicate copies why a multiple doc well multiple of the same copy why you take multiple prints only one is enough yes or no audit documentation do not include superseded documents this itself can be asked as a four marks question audit documentation also they will ask you what is meaning of documentation Give few examples of documentation. Can copy of entity account be documented and
(6:45:24) what is not included in documentation like this? I may ask you five marks question entire this content. Are you clear? Now what is audit file? Just now we covered. Now tell me when you should prepare this documentation after completing the audit while doing the auditor. Ah timely preparation. The auditor must prepare documentation on a timely basis.
(6:45:48) You know documentation prepared after work is completed is less accurate than the documentation when work you are doing. Correct? Ah now you you document what are all important data is that when you're verifying purchases you felt something important immediately document it later once you complete the audit. No neatly arrange them.
(6:46:06) Purchases related documents all at one place. Sales related documents all at one place. Inventory related workings at one place. Employee cost workings at one place. You sort it and document it, arrange it. That process is called as assembly. That process is called as what? Assembly. You know the audit file must be assembled and completed timely after date of audit report.
(6:46:29) So audit documentation must be assembled in a timely manner. Yes or no? And completed compulsory after the date of audit report. And there is a standard called standard on quality control. That standard says a partnership firm. You are the audit firm right? Establish rules for this in your firm.
(6:46:47) Rules established for talking assembly purpose. The rules must say for audit file no complete assembly process within 60 days from the date of audit report. Once you give audit report within 60 days assembly final audit file remaining sir I am also doing review work sir. I'm also doing assurance. I'm also doing related for them.
(6:47:04) What is the time limit that you decide for audits? 60 days. Are you clear? Then remember assembly of documentation like once audit is completed you're you're rearranging the papers computer soft copy folders and all you're organizing everything right that's an audit procedure or administrative process administrative that is not audit procedure audit process means verifying clients financial in statements all that you already completed that you gave audit report also what you will perform now administrative the final audit assembly
(6:47:32) audit assembly file assembly is an administrative process do not involve new procedures or conclusions. Changes can be made. Can we make changes to documentation? Yes, you can make which are administrative in nature. Already covered that point. What documentation do not include? That is nothing but administrative.
(6:47:55) What are they? Deleting, discarding, superseded, cross referencing, cross referencing, working papers, signing of checklist. I'm calling my articles and all. I'm asking them to sign on the papers. What are all they brought? Yes or no? Documenting evidence obtained. Discussions discuss to do discuss. I mean documenting the evidence obtained. discussed and agreed upon before audit reported what are all the documents important that and all we will keep it remaining unnecessary items and all we will throw it discard it are you clear so they will ask you in an exam write about assembly of documentation four marks or five marks question many times they ask now once you assemble it what you should do keep
(6:48:26) it store it retain it for how long standard on quality control says minimum no shorter than 7 years from the date of audit report or group audit report whichever is later. Yes or no? After the final audit file is assembled. The auditor shall not delete or discard the audit documentation before the retention period is completed. You should as it is keep it intact.
(6:48:52) You should not change anything later on. Once audit is completed once audit documentation is freezed you should not delete anything inside that. You should keep it as it is for 7 years. What about other engagements? Sir, I'm also having documentation for review. I also gather documentation for assurance and related.
(6:49:08) What about that forum will decide for what period you should but for audit seven years. Yes or no? Who is the owner for documentation? Whose property? Auditor as per SQC. The documentation is the property of the auditor. The auditor at his wish can share the extract of documentation to the client.
(6:49:31) third parties with the consent of the client provided it does not affect your independence, integrity, professional behavior, confidentiality, all that. Okay, that's it. Clear? Easy or not? Now then you should also document what you should document significant matters, professional judgment also you should document. Before that no, let me devise this one. Audit summary.
(6:49:49) There is also something called audit summary memorandum. What is audit summary memorandum? The auditor prepare a summary completion memorandum which is also called as generally it will help in large audits. Getting it for large and complex audits. No whatever works you did in the last 200 mandates. Okay. 200 mandates you worked almost.
(6:50:13) What are all works you did? What are all evidences you gathered? What are all decisions you have taken with whom and all you discussed? Keep a design as summary before you conclude on the audit. Develop a summary. Read the entire summary once then you take a conclusion then you express the opinion. Getting it? So a summary can help in effective and efficient review and inspection of audit documentation especially for larger and complex audit.
(6:50:34) It will help the auditor to address all the significant matters all the significant issues considered by me or not. He can easily check with summary yes or no. So audit summary memorandum what you should include in the summary significant matters which are identified in the audit.
(6:50:54) How these matters and all were dealt by you? Is it resolved, not resolved, all that you should document that is called as audit summary memorandum. Yes or no. This summary will help the auditor to evaluate whether standards and objectives are achieved. Whether overall objectives are achieved as a whole you got a reasonable assurance on the financials or not. Summary memorandum will help you.
(6:51:11) Remember significant matters and all you should document at one place. That summary memorandum is one of the best example where all the significant matters will be documented at one place. Clear? Next. Now what is a significant matter sir? Significant matter. Many a times we are getting this word.
(6:51:30) What is a significant matter? Whether a matter is a significant or not? Auditor has to do an objective analysis. Unbiased analysis of facts and circumstances. What is a significant? What when a matter is significant? Auditor's professional judgment. Objective auditor based on the facts and circumstances he will decide whether a matter is a significant or not yes or no. Example matters that give rise to significant risk.
(6:51:52) Suppose if at all something is giving me significant risk that's a significant matter. Circumstances causing significant difficulty in doing audit. You know I'm taking extreme difficulty in GST verification. Company does not maintain proper GST records. I'm unable to verify GST properly. That's a significant difficulty. That's a significant matter. I should raise that issue with the management. I should discuss with them and then resolve it.
(6:52:11) Then findings I found something in audit where my opinion gets modified or emphasis of matter paragraph might be included. If at all an issue is such a severe because of that I may have to modify the opinion or an emphasis of matter paragraph has to be used. We already discussed what is emphasis of matter paragraph in audit report. Yes or no? Important matters.
(6:52:37) If at all that is so important then that is also called as what? Significant matter. Yes or no? Or result. I got some result in audit. I verified something. I found one result. What? Financials are materially misstated. Or now I need to revise my risk assessment. I need to revise my risk assessment. Earlier I thought low risk in sales. In sales I thought low risk.
(6:52:58) Now I got to know that in the sales is high risk is there. So that time also I should document clear. Now not only matter what what judgment used there how do you decided that it is a significant matter that judgment process also you should document what is it situations the auditor must document use of professional judgment and you see later on you say everywhere sir that time I thought it is genuine sir that's why documented how you thought genuine that thought how you thought related related some information you might have gathered no documented yes or no rationality for conclusion document rationally when a requirement
(6:53:36) ask the auditor to consider information that is significant. So if at all some accounting standard and all is saying you you have to verify so and so you might have considered that as a very important point document it the document the basis for conclusion on a subject to judgment like accounting estimate document wherever some estimation issues are involved subject to judgment subject to means what here you took a call called here you took a decision that so and so yes useful life is 30 years 20 years on what basis you
(6:54:08) took 30 years is reasonable some information you have verified. No, documented. Yes or no? You document if at all you're having any concerns on documents or evidences. Some information company gave you some deeds, sale deeds and all they gave you. You got some doubts on that. Later you went for expert opinion and finally resolved. Document that.
(6:54:27) This is called documentation of professional judgment. Nothing at the time whenever you're doing work you you decided something. Have you decided that? Okay. Tomorrow if you think you will forget this. If tomorrow NF is coming sir on what basis you decided this is correct papers and all is there I'm unable to recollect what I did I will document my professional judgment. Are you getting it? That is called documentation of professional judgment.
(6:54:53) Are you clear? Documenting professional judgment explains auditor's conclusion and reinforce the quality of the conclusion. Earlier I decided something now today if they are asking information I'm unable to recollect. That's my document. If you document your professional judgment, you can once again prove on what basis you took some decision.
(6:55:12) Yes or no? That's it. With this entire documentation topic is completed which is five marks 25 less than 25 minutes. Clear all of you? Yes or no? Read it once again thoroughly you will get it. Okay. Yes. Perfect. So without any delay without any delay let's begin discussion of the next topic that is completion and review chapter in CAN in we have a chapter called completion and review. Let's revise that chapter. This chapter consists of totally six standards.
(6:55:49) By the way I actually scheduled this particular topic for live at 11:00 but I postponed it to 12:15 now because I have to go to a hospital. uh very nothing nothing nothing serious uh tomorrow morning uh my wife's uh you know we we are expecting second baby tomorrow morning so for that uh uh some uh formalities will be are there in the hospital to do some checkup basic checkup all that so tomorrow morning 6:00 to 7 around the time the surgery is going to happen and uh we are expecting second baby tomorrow morning fine
(6:56:20) tomorrow evening I'll tell you I'll post it on YouTube uh what what exactly uh I mean baby boy or baby girl I'm not I wish to be a girl child. I wish it should be a girl because I already have one son, two years old son I have. So that's it. Imagine in spite of this precious moments we are taking live class at this moment. It's okay.
(6:56:41) It is something that I promised long ago. Uh fine. So let's proceed discussion of this chapter completion and review. You know in this chapter we totally have six standards. We have six standards totally 260, 265, 450, 560, 570, 580. These are the six standards that are there in this chapter.
(6:57:05) Whereas 570 I have already covered it as part of audit report topic. If you see audit report related revision class, okay, which is I which I already covered in part one audit marathon which is of 7 hours video for example. So inside that 570 is already covered. So now now we are left with only remaining five standards fut within 60 minutes within 1 hour I will finish all these topics trust me guys you will get a clarity like never before on these five standards I will give you amazing clarity tomorrow whatever the question going to come in this chapter right now in this one itself I'm going to tell you what kind of questions will come definitely from the list of questions
(6:57:36) which I'm going to tell you right now from this list only you will find that okay fine now 450 first let's begin the chapter with SAF 450 you know uh evaluation of misstatements identified in an audit. Evaluation of misstatements identified in an audit. That is a standard heading evaluation of misstatements. You know in this 450 standard there are four topics which are predominant.
(6:58:00) What is meaning? First one that you need to understand is what is an uncorrected misstatement? The meaning you need to understand. Then we need to understand the concept of accumulation of misstatements. Then we need to understand communication of misstatements to the management and to the those charged with governance and documentation of the misstatements. Four issues are covered.
(6:58:19) Now let's decode one by one. 450 what is the standard talking about evaluation of misstatements identified during the audit like whatever once you completed the audit once when you're doing the audit you definitely come across certain misstatements like you will be identifying some misstatements.
(6:58:37) So how to evaluate them? You know in this no we need to understand a term called uncorrected misstatements. You know the word misstatement is used at so many places. Risk of material misstatement, uncorrected misstatement, undetected misstatement, projected misstatement, tolerable misstatement, expected misstatement, uh you know anomalous misstatement, non-anomous misstatement. So many so so many ways the word misstatement is used here.
(6:58:56) One term that is uncorrected misstatement. Uncorrected means what you know we identified mistake in audit. We identified it. We detected it. It's a real mistake and it is not yet rectified in the financial statements. That's it. That's called uncorrected misstatements.
(6:59:13) Uncorrected misstatements refers to misstatements that auditor has accumulated during the audit which have not been corrected yet. So the misstatements which are accumulated but not corrected. So before forming an opinion auditor has to identify evaluate effect of identified misstatement, effect of uncorrected. You see identified misstatements uncorrected. Identified misstatement is two type uncorrected corrected. Some misstatements from management will correct immediately.
(6:59:35) Some mistakes they will not correct it. Those mistakes which management have not corrected what is its impact on the financial statements? That is most important while forming an opinion on the financial statements. Now, now see that's uncorrected misstatement meaning. Now first of all accumulation.
(6:59:54) What do you mean by accumulation of misstatements? See whenever we are doing got it whenever we find any mistake we should accumulate it. Now here there are three levels of materiality. There are three levels of materiality in accumulation of statements. You know there is something called performance materiality. Overall materiality triviality level materiality.
(7:00:12) Any mistakes less than triviality level we will ignore directly. Any mistake about trivial level about trivial level whatever mistakes are there we will gather. We will accumulate. We will accumulate. If the accumulated misstatements total is reaching performance materiality level or is crossing performance materiality level then we conclude that financial statements are materially misstated and where we express a modified opinion.
(7:00:40) If at all they are crossing performance materiality level itself, we will conclude that accumulated misstatements if at all they're reaching performance materiality level itself. We assume that we conclude that the financial statements as a whole are not free from material misstatements.
(7:00:56) Accordingly we will give modified opinion here in sampling no tolerable misstatement overall materiality performance materiality like that some you know some points and all came some link and all is there right now that is not relevant this point alone you remember. So any misstatements which is above triviality level that alone we accumulate. Mistakes which are more than trivial in nature only those mistakes we will accumulate.
(7:01:14) Look at the auditor shall accumulate. Accumulate means what? Gather whatever mistakes your team members are identifying. No tell them that beyond this level beyond the trivial level please accumulate it. So accumulate mistake the audit accumulate misstatements identified except those that are clearly trivial.
(7:01:31) Suppose if a mistake is trivial in nature, less than trivial in nature, don't accumulate. Any mistake which is about trivial in nature, accumulate. You know in the recent CA final, an MCQ question has been asked on this. In CA final also we have 450 standard. In CA final, MCQ was asked on this made 25 exams.
(7:01:49) Now what are various examples of misstatements? Very simple. Omission of transactions, wrong capitalization of missionary missionary repair expenditure, overvaluation of stock, undervaluation of stock. Simple. There are so many ways a misstatements can happen.
(7:02:06) Now you know what whenever we identify mistakes generally what happens you know we will first interpret what mistake is it is this mistake repetitive in nature or non-repetitive in nature we evaluate the mistake nature is it due to fraud or is it due to error we will identify according to the type of misstatements after we evaluate the nature of the mistake sometimes what will happen you know we will change our audit strategy we will change our audit plan the auditor shall determine whether overall strategy plan needs any revision.
(7:02:28) So whether audit strategy plan does it require revision because of the nature of identified misstatements and circumstance of the of the occurrence and further auditor will change the strategy and plan if aggregate misstatements accumulated approach materiality just now I told which materiality performance materiality if the total of accumulated misstatements are reaching performance materiality level the total is reaching performance materiality level we generally change our audit strategy audit plan we will try to cover more samples and try to
(7:02:57) interpret the results once again. Then the auditor you know whenever auditor identified mistakes no whenever the auditor ident mistake no we generally tell the management dear management I found so mistake which are trivial which are beyond trivial in nature they are not trivial they're very bigger than trivial in nature so we tell the management we request them to review we will request management to review all the transactions and balances to understand why this mistake happened and we will also tell the management we will
(7:03:21) request management to form procedures to identify real mistake actual mistake in the population and if management identified and corrected misstatements as per the auditor's request. We will do additional verification to ensure that there are no there are no misstatements remain. That's it. So accumulation.
(7:03:40) So what is accumulation? First accumulate the mistakes which are not clearly trivial like which are beyond trivial. Accumulate. If they trivial and less than trivial ignore and mistakes mistakes example they give revision. If at all based on the nature of mistake and circumstance in which they occur or if the aggregate mistakes are approaching materiality the auditor shall revise the strategy and plan.
(7:03:58) You know they will tell you under what circumstances the audit strategy and plan has to be revised as per sea 450 they will ask you under what circumstance audit plan and strategy has to be revised in light of 450 they'll ask you many students will go and write 300 300 related revision of strategy and plan changes in circumstance changes in conditions identification of new matter that answer they'll write and come that's wrong that is 300 answer this is 450 answer so the auditor shall determine whether change to strategy plan is required in light of nature of the misstatement circumstance in which
(7:04:32) they occur as well as third scenario if aggregate misstatements accumulated is approaching materiality then also the auditor will revise the strategy okay you identified mistakes what you will do in that time we will request management to review all the transactions balances once again to identify total actual statement and if management identified and corrected I will once again check whether are there any mistakes that are there that's it this is what accumulation so this straight away this question itself straight away can be asked as Four marks question write about accumulation of his statements in the audit that itself can be asked as a side
(7:05:02) four marks question. Now okay you accumulated you identified what you need to do communicate why you need to communicate so that the mistakes has to be corrected. Yes or no you found a mistake tell the management communicate them and ask them to correct it.
(7:05:19) So the auditor communicate all the misstatements accumulated to the management and this communication enables the management to evaluate or disagree if necessary. Management will listen to you sir it's a mistake they will evaluate is it really a mistake or not mistake because auditor might think it's a mistake from management point of view this may not be a mistake so and auditor what they will do they will request management to correct it correction helps to maintain proper records sir management is refusing sir we are not correcting I told that there is a mistake management is telling no sir inventory valuation is correctly we did our our NRV calculation is like this
(7:05:48) only this is correct NRV calculation you auditor is doing wrong calculation so management is disagreeing with the auditor Understand what is the reason why management is refusing. Take that understanding in evaluating whether financials are free from MMS.
(7:06:04) So if management is refusing to correct misstatements communicated by the auditor ask them the reason why why they are refusing. Look at the reason which they are giving in light of audit what is its impact understand. Now reconform once again confirm whether materiality is still appropriate based on actual financial result prior to evaluating uncorrected.
(7:06:21) Before you decide about mistakes all that once again check whether materiality level and all is correct or not. So that you can proceed whether material misstatements are there or not. You know if at all uncorrected misstatements are material. Determine whether uncorrected misstatements are material considering size of the mistake. Nature of the mistake and circumstance in which they occurred.
(7:06:39) So what is the size of the amount? What is the nature fraud or error? Circumstance when it is occurred is it year and in between. So effect of prior period uncorrected misstatements. So if at all any misstatements are there in the prior period what is its impact on the current period that also take into account and you must communicate to top management.
(7:06:58) Generally when you identify mistake you communicate to the respective management respect like accountant or finance manager. If they are not responding if they are not agree agree to change then you will communicate to top management like audit committee directors. You know the auditor shall communicate with toast charge with governance uncorrected misstatements and what is their impact and request correction of uncorrected misstatements.
(7:07:16) Discuss what is the effect of prior period misstatements on the if at all any prior period mistakes also there discuss with top management what is its impact and get a written representation that uncorrected misstatements are immaterial like I communicated with top management first I communicated with management they refused and I asked them what is the reason all that then I felt that their answers are not correct then I communicated to top management top management rectified some mistakes some mistakes they didn't rectify now when I ask them why are you not rectifying some mistakes they are telling that they're immaterial sir they're immaterial sir so
(7:07:41) we don't have to rectify it Get a declaration that they believe that it is immaterial. Get a declaration that the uncorrected misstatements are immaterial. That is the reason why top management is not correcting them like that. Get a declaration and what is the summary of those misstatements which are not corrected and corrected.
(7:07:59) A list of mistakes communicated to the management and top management corrected how many uncorrected how many list of it also attach it as an extra to the written representation. So get a written get a representation from the management and top management that uncorrected misstatements are immaterial and a summary of these uncorrected misstatement shall be included or attached to representation. MCQ might be asked on this next.
(7:08:24) So next finally auditor has to document misstatements identified like what you need to document what is the triviality level. What is the trivity level you fixed? What is that triviality level? At triviality level you document the audit documentation must include amount below which misstatements are considered clearly trivial. Trivial means what? Negligible.
(7:08:42) Triviality level means negligible by remember immaterial is different. Trivial is different. Suppose if if a mistake is less than materiality level then that is immaterial. But that immaterial mistake may be more than trivial level. So remember many students misconfuse that immaterial and triviality both are same.
(7:08:59) No they both are different. Triviality means negligible. If it is less than trivial, it's negligible mistake. If it is more than trivial, it is to be considered. It is to be accumulated. And total mistakes identified, we will accumulate and compare it with the materiality. If the total mistake is less than performance materiality, then we assume that the mistakes are immaterial.
(7:09:16) But remember, they're more than trivial. So be careful. Now accumulated. So auditor has to document all mistakes accumulated during the audit and you need to mark whether the corrected are, uncorrected, all that. Suppose if some mistakes are uncorrected, what is your conclusion? And whether uncorrected misstatements are material or management told that they're immaterial.
(7:09:34) They gave representation that they're immaterial. But according to you, are they material or immaterial? You should also conclude. And what is the basis for your conclusion? You decided some material, immaterial, right? Some mistakes or uncorrected, right? Uncorrected misstatements total is are they material or immaterial that also you should decide.
(7:09:52) So documentation directly this itself can be asked as a four marks question. That's it. SA 450 is done. So documentation of misstatements, communication of misstatements, accumulation of misstatements and what is the meaning of the misstatement that's 450 is confident easy or not? So next let's proceed discussing 260 standard. 260 standard you know in the recent Jan 25 exam everybody most of you know that Jan 25 paper was one of the tough paper correct everybody told.
(7:10:18) So but the questions asked in Jan 25 paper and all we predicted in marathon itself. Many students who followed our EU whatever the classes or marathon thoroughly and followed the book they know that question paper is very much predictable. That is not at all a tough paper. But anyhow you see how the question was asked SA 260.
(7:10:39) Now before I go into SA 260 what are the points by the way SEA 450 what is the meaning of misstatement accumulation concept communication of misstatement documentation all the four elements we covered. Now 260 we have here four four points to discuss in 260 you know how you know what is actually SA 260 communication with those charged with governance.
(7:10:58) Communication with those charged with governance. The standard itself is saying the auditor has to communicate with top management. What to communicate, how to communicate, when to communicate, you know all that standard is answering. So what the standard implant telling dear auditor don't do audit blindly without talking to top management.
(7:11:18) You must talk to top management. You must communicate them some important matters. What are all you must communicate to top management. The standard is explaining and you know uh the standard talks about what is the benefit of two-way communication. The auditor and the top management of the company they must have a proper two-way communication and who are top management.
(7:11:36) Top management means those charged with the governance. Who are they? This is what they have asked in Jan 2025 exam. Who are those charged with governance? This is what they ask and what matters to be communicated and how to communicate communication process especially independence related communication in case of listed company. So each of it we will discuss now.
(7:11:56) Now let's first discuss you know who are those charged with the governance. This is what Jan 25 exam they have asked uh Jan 25 attempt again don't immediately say sir in Jan they ask now may attempt they won't ask this come on come on don't be foolish like that okay papers will not do set like that they may test this who knows.
(7:12:15) So who are those shajjit governors? They're very simple. Top management is either a person or an organization who oversees strategic direction who have accountability and who are responsible for financial reporting. They are responsible for directing the company. They are only accountable for the company. They are responsible even for financial reporting.
(7:12:34) A person who has all these responsibilities we call them as those charged with governance. In companies act they are nothing but key managerial persons. And in in some entities top management may include management also. Those charged with governance sometimes they also involve in management of affairs of the company. Depending on governance structure some entities know they have a supervisory board. Okay.
(7:12:57) In in some entities no both the functions are performed by single board. Governance roles can be part of the entity legal structure. For example in a company directors themselves are those charged with governance. In case of a partnership firm partners itself those charged with governance. In partnership firm partner himself is doing business part of management.
(7:13:14) He himself taking decisions also those charged with governance. He himself accountable if something goes wrong also. So the partner himself might be those charged with governance. The partner himself might be management. In some entities the people who are running the business people who are deciding the business both are different. In some entities they both are one and same.
(7:13:31) And in some cases top management and top management those charged with governance also manages the entity. Whereas in other entity they might be different you know ultimately governance governance means what authority accountability both authority the person must have authority and the person must also have accountability.
(7:13:50) So in governance is usually collective responsibility like a board of director supervisory board like audit committee all that in small entities governance may be resting with only one person in a sole proprietary concern those charged with governance means proper he himself is manager he himself is owner so that's it.
(7:14:08) So who has to decide top management ultimately sir who is those charging with governance sir you don't worry ask the person who appointed you. So the auditor may need to discuss and agree with the engaging party on relevant persons to communicate with as per 260. So the auditor understanding of the entity will helps to identify who are the right people.
(7:14:24) So that is why you need to understand the entity and its environment as 315 to know who are exactly the governance people who are governance man governance who is man who is management who is governance are they same or are they different? What is this organization all that you need to decide that's it so directly they may ask you a question like this who are those charged with governance depending upon governance structure this itself can be asked as a four marks question any four points in this you need to write and this fourth point also you should write
(7:14:49) that's it I hope you are clear 260 now you know what is the what are the matters to be communicated what auditor has to communicate first you should communicate your responsibility first you should communicate your responsibility you should also communicate Okay. The auditor first shall communicate what is his responsibility.
(7:15:08) You should clearly tell the management that look management I'm an auditor. I am responsible only to give opinion on the financial statements performing and expressing opinion and just because you appointed me. Your responsibilities will not change your responsibility will remain intact. So the audit does not really management or top management of their responsibilities.
(7:15:26) See those charger with governance means top management. Very simple. But when you're writing an answer now when you're writing in the in the answer she should know you should always write those charge with governance clearly. So the auditor must communicate his responsibilities related to audit including forming an expressing of an opinion and uh statement that audit does not reduce the responsibilities. So that is the first thing.
(7:15:48) So one of the most important thing auditor has to communicate is audit responsibility. How do we communicate terms of engagement? Engagement letter. Remember engagement sea 210 contents of engagement letter objective and scope management responsibility auditor responsibility.
(7:16:04) So auditor responsibilities we are communicating through engagement letter already. Second planned scope and timing of the audit. You know the auditor provides an overview of planned scope and timing of the audit including significant risks identified. There is one question on this. Auditor decided to do surprise check without informing anybody. He directly went and started surprise check. Management objected. Is it correct? Yes, they are correct.
(7:16:27) You didn't even tell the management that you will do surprise check. See, you need not tell them when you will do surprise check. If that is the case, that is not a surprise. But you should tell the fact to the management that you will be doing surprise check. Okay? So, you may do surprise check whenever you want. But tell the management that you might be doing you may be doing surprise check.
(7:16:45) Give a prior intimation to them that during during you know any like next 3 months or four months I may be doing a surprise visit. Give them an intubation so that they will make you uh you know they will they will they will make arrangements for all that you know planned scope and timing of the audit. Scope and timing of the audit you must communicate.
(7:17:02) Why you need to communicate scope and timing of the audit? So that they will make arrangement when you're going you your team member your articles so many of you are going. So they need to make certain arrangements. Accountant must be available to you. Some staff must be coordinating you. How do you visit the production center? So management has to plan certain things. So that's why you should communicate scope and timing of the audit and you should communicate most important you should communicate in independence compliance in case of listed companies straight away a four marks question might come okay auditor has to for listed entities auditor shall communicate for listed entities auditor
(7:17:33) shall communicate a statement conforming compliance with ethical requirements on independence by the firm by the team by the network firms. So when you're auditing listed companies no there are so many ethical requirements what are the ethical requirements when we are doing value of listed entity we have a discussion in CA final professional ethics chapter like fees how much we should charge other services can we provide like that or not network firms network guidelines so many rules and regulations were there which we will discuss in CA final so the man the
(7:18:02) auditor has to communicate to the management those charge with governance regarding how they complied with independence requirement yes sir I'm independent I complied with independent I need to give a statement of compliance to the management regarding independence.
(7:18:19) Further when I'm communicating regarding independence compliance to the top management of listed company you know I should also communicate the following what are the relationships and other matters that may impact independence including total fees that we are charging for audit and non- audit when I'm communicating to the top management I should tell them sir we the auditors are providing you audit services like this non- audit services also like this fees for audit is this much fees for non- audit this much our network firms are also providing you some services what are all relationships
(7:18:42) your firm your network firm your partner ers what are all relationships that you are having you must communicate with top management fees will be allocated into categories to help top management governance management assesses the impact on independence see sometimes no if auditor is depending too much on the client fee that's a self-interest to yes or no so you need to clearly communicate them how much fees you are getting for audit services attestation services how much you're getting for non- insurance
(7:19:07) engagement you should communicate so that they will decide whether are you independent are there any self-interest threat like that they will decide so auditor has to communicate further further fine definitely when you're communicating about independence related compliances definitely some threats would have been there and you might have implemented safeguards on it communicate explain safeguards applied to eliminate the threats or reduce the threats to acceptable level so what are the safeguards that you implemented so that threats will be uh controlled the
(7:19:34) threats will be eliminated or threats will be reduced to an acceptable level so stride question can come many times asked around 260 communication of independence in case of listed companies is most important when when the auditor is communicating to drop management.
(7:19:51) So communication of independence means what? First a statement auditor has to give a compliance statement. A statement that you know the firm the partners the engagement team the network forums they all complied with ethical requirements and details of relationships that the firm network firms has with the company and other matters that may impact independence.
(7:20:11) Details of relationships and other matters that also communicate them including total fees charged for audit and non- audit. Divide the fees must be allocated into assurance and non- insurance so that the top management will decide further what are the safeguards that you implemented to eliminate the threat or to reduce it to accept level that also you should communicate. So this is about communication of independence in case of listed entities straight away a four marks question might come be careful.
(7:20:30) Next you should communicate significant findings in the audit. So you will be doing audit right? So when you're doing the audit, you might have found, you might have came across, you might come across some significant findings. All the significant findings also you must communicate. The auditor must communicate the following significant findings.
(7:20:49) One significant findings about entities, accounting practices. What is your view? Auditor's view on significant qualitative aspects of accounting practices including accounting policies, estimates, disclosures. Explain why certain practices may not be most appropriate.
(7:21:09) So in management no their accounting policies, accounting estimates, their accounting practices abso okay and in that if some practice is not correct communicate them why it is not correct. So auditor's view on qualitative aspect of entities accounting practices generally first time when you're doing audit you may not communicate this because you don't have any idea on accounting practices because you didn't understand the practices their culture.
(7:21:29) Over a period of time when you're doing audit for 3 four years you will understand their practices. Next communicate significant difficulties encountered in audit are there any difficulties that you faced in audit communicate. For example management is not giving you data communicate them. Management is putting pressure on you communicate them.
(7:21:46) Management is putting limitations on you communicate them. These are all significant difficulties in audit you know and if top management and management if those charged with governance and management are different communicate significant matters discussed with the management written representations also you communicate.
(7:22:03) So you need to communicate generally significant matters whatever you discussed with the management. Whatever significant matters that you discussed with the management no what is the discussion take place with whom you discussed what they replied that entire discussion share it with the top management.
(7:22:18) Remember in this entire standard you know here we are discussing matters to be communicated to whom? Those charged with governance. All these matters are something that we need to communicate to those charged with governance and further circumstances affecting form and content of audit report.
(7:22:36) If at all you want to include emphasis of matter other matter or you want to give modified opinion or you want to use material uncertaintity related to going concern mcg you want to modify the audit report. Why are you modifying the audit report? Whether you are modifying opinion, whether you are including emphasis of para, other matter per other information parcifying the audit report, circumstances affecting the form and content of the audit report communicate the management what are the circumstances and any other significant any other matters which according to the auditor's professional judgment they require oversight of
(7:23:07) financial reporting, oversight of top management. That's it. These are the matters which auditor has to communicate. What are the auditor has to communicate? Audit responsibilities which he will communicate through engagement. Planned scope and timing of the audit. Significant findings like entity accounting practices.
(7:23:26) Significant difficulties significant matters whatever you discussed with the management modifications that are there in the audit report. Any other significant matter and in case of listed entity compliance with independence that statement you need to give and you should also discuss with management relationships all that you should also discuss with management how much fees you are charging for audit and non- audit. You must also discuss with management.
(7:23:42) You must also communicate to top management regarding safeguards that you implemented. That's it. And it is you, it is Mr. Auditor you who is responsible for establishing communication process. You should only establish communication process. The auditor must communicate form timing and general content.
(7:24:00) So you should tell the management in what format you will communicate when and all you will communicate what generally you communicate just give them an idea sir as as I'm going through the audit for the next 40 days next 50 days next 3 months or four months I will be giving you update on a weekly basis. Just tell them that the auditor shall communicate significant findings in writing.
(7:24:17) If oral communication is not sufficient if at all any significant matter is there you felt that orally it should not be communicated then you must communicate in writing and communication need not cover every matter. You don't have to tell yeah sir just today morning again just now I had a break was no need to communicate each and every issue communicate what you feel required and adequacy auditor has to evaluate whether two-way communication is adequate.
(7:24:36) Assess what is its impact on the risk. Determine its impact on the obtaining sufficient appropriate and take adequate action. Appropriate action. You must check whether communication between you and the top management is adequate. You know if top management and you there's a proper communication between you, proper rapo is there between you.
(7:24:51) They will give you information on time. They will give you information correctly. So you must establish a very cordial connection with the top management. And if any matters are communicated orally, please document what you communicated, when you communicated, to whom it is communicated, you know, all that you document.
(7:25:10) Suppose if mistake is commun if if if at all any communication is made in writing to top management, just keep a copy of it, keep a copy of it as a part of documentation, that's it. Now, so two-way communication process. So two-way communication process, an effective two-way communication process is important. Why? You know, it benefits auditor.
(7:25:30) How it benefits you know it benefits the auditor how it benefits the auditor he will get a benefit you know the auditor relies on top management for information about the entity including the audit evidence yes or no so you will get a better evidence if at all you are communicating with top management it will help top management also those charged with governance in fulfilling the role in overseeing financial reporting process and reducing the risk if you communicate with them if there's a proper communication between the auditor and top management it is helpful for the top management to identify the mistakes at earlier stage So that the financial statements are
(7:25:59) free from MMS. It will help both of them. The auditor and top management together can develop a constructive working relationship to support audit process while maintaining independence and objectivity. So an effective two-way communication is important for both auditor and top management as well as the auditor as well as the top management those charged with governance. That's it. 260 standard is over. See how easy the standard is.
(7:26:22) So an effective so what we actually completed an effective two-way communication. How it is beneficial for both of them? How it is beneficial for auditor? How it is beneficial for top management? How it is beneficial? Who are top management? Those charged with governance. Who are they? What are the matters to be communicated? Especially independence in case of listed committees that also be discussed.
(7:26:40) What is the establishing communication process? That also completed one more standard over paka five marks question possibility on 260. Right now whatever I discussed in the last 15 minutes mark my word paka five marks question or maybe a two marks MCQ will be there. Whoever have watched this 15 minutes past 30 minutes right now you are securing close to 10 marks.
(7:26:58) Mark my word tomorrow after the paper you come back and see this video definitely the question which is tested in exam would have been covered in this paka that's it. Next SEA 265. What is SEA 265? In SEA 265, we have totally five issues to understand. Five issues mainly to understand. What is 265? Just one minute. I hope you you're enjoying you are getting some clarity on this revision.
(7:27:43) Next SA 265. What is 265? You know, communicating deficiencies in internal control to the management and those charged with governance. Communication to management and those charged with governance. Both of them you are communicating. What are you communicating? Deficiencies in internal control.
(7:28:02) You are communicating deficiencies in internal control. Communicating deficiencies in internal control to top management and management. Like here you are communicating to two people. Like first of all you know what are you communicating deficiency in internal control to whom you are communicating those charged with governance and you're also communicating to management.
(7:28:23) You know if it is a significant deficiency you will communicate it to top management. If it is a normal deficiency we the standard calls it as other deficiencies. The standard divides the standard no sea 262 divides deficiency into two types. You know significant deficiency other deficiency.
(7:28:43) Significant deficiency you communicate to those charged with governance. Other deficiency you will communicate simply to management. Remember sometimes management and those charged with governance will be one and six. That time you will just communicate to management. That itself is treated as communication to top management. If at all management and those charged with governance are one and same.
(7:29:01) Communication to management itself is equal to communication to those charged with governance. That's it. So now what is a deficiency? What is a deficiency? You know deficiency means what? Deficiency and significant deficiency means what? By the way before I discuss what are the points that we are going to discuss in this. First we are going to understand what is deficiency.
(7:29:22) What is significant deficiency? How do you decide whether deficiency is a significant deficiency or not? Uh somebody's asking smart notes who I'm following I'm following goat notes is also there which is also effective. Yeah goatnotes is very effective I'm telling you both are effective goat notes is now much more simpler and easy.
(7:29:40) Now how do you decide whether deficiency is a significant deficiency or not? What factors that decide significant deficiency? H will there be any indicators like significant deficiency? How do I find will there be any indicator? symptoms. Yes, symptoms will be there and how to communicate them and management letter. L is nothing but letter of weakness.
(7:29:58) How do you communicate? You communicate them in writing. How do you communicate them? Through a management letter or through a letter of witness. Remember management letter is different. Management representation letter is different. ML is essay five written representation. Management letter means 265 letter of weakness. Fine. Anyhow, one by one, let's discuss one by one.
(7:30:17) We will discuss deficiency and significant deficiency. A deficiency means what you know control is there but the control is ineffective means the control is existing but not operating effectively. It is not preventing fraud. It is not preventing error. It is not preventing or detecting misstatement.
(7:30:35) The control is there for names sake but it's not working effectively. That's a deficiency. Or control is missing. There must be a control to prevent an error, to prevent a fraud, to prevent a misstatement, to prevent some misstatements. No controls must be there. That control itself is missing. Both are deficiencies. A control is designed, implemented, operated where it fails to prevent, fails to detect, fails to correct a material misstatement. A control that is necessary to prevent misstatement, necessary to detect, necessary to
(7:31:05) correct, that is also missing. A control which is ineffective, which is failing or a control which is missing. Both constitute deficiency. Be careful. Now, significant deficiency. What is a significant deficiency? First of all, it's a deficiency.
(7:31:23) It's a deficiency in internal control or a combination of deficiencies in audit judgment is most important to merit the attention of top management. If if I feel some control weakness is here, somes are not working, some controls are missing and I want this information this point top management must know that is so important that this deficiency merit top management attention it merit does charge with governance attention then that deficiency is called as a significant deficiency.
(7:31:54) Very simple basically deficiency either ineffective control or control is missing. Absence of control or ineffective control both are deficiencies. And if I feel this deficiency knowledge top management should aware of they must know this such a kind of severity it is then the deficiency is called as significant deficiencies.
(7:32:14) You know how do you determine significance of a deficiency? What is the likelihood of the recurrence? If this if if control is weak or if the control is missing what is the possibility of occurrence of misstatements? What is the magnitude? How much mistake might happen? If the mistake is very high amount and possibility is very great then we classify the deficiency as significant deficiencies.
(7:32:37) Remember by the way significant deficiencies might exist even though the auditor has not identified any mistake. Just because some say for example a bank locker know the cashier does not put lock to the cash box. Just because he didn't put a lock can I say that paka cash theft happened but if cash theft happened I can say that lock system is weak correct exactly now how do you decide whether significant deficiency is there the matters which auditor may consider in determining whether deficiency or a combination of deficiencies constitute significant whether deficiencies are the significant or not how do I decide first
(7:33:10) likelihood of deficiencies leading to misstatement whether this deficiency lead to statement. What is the possibility? What is the chances? What how much susceptibility to loss or fraud related to an asset and liability? Subjectivity and complexity involved in determining accounting estimates.
(7:33:30) How much amount is exposed to the deficiency? Because of this deficiency, amount, how much is exposed? Volume of activity in that account or transactions which is affected because of this deficiency. How much mistake might happen? How much transaction is affected because of this? And what is the importance of controls to the financial you know in control? No control is ineffective or control is missing. Either the control is ineffective or the control is missing. That is what deficiency right.
(7:33:51) What is the importance of that control to financial reporting process to the financial statements preparation process? What is the impact of this control? Now especially significance of controls to financial including monitoring controls, management oversight, fraud prevention controls, controls over selection and application of accounting policies, controls over significant transactions with related parties, controls for transactions outside normal course of business, controls over period and financial reporting process such as
(7:34:15) non-recurring. You know these are all various controls. These are all various controls which are significant for financial reporting. You know they may ask you the sixth point itself for four marks question. You know uh the auditor has to decide whether a deficiency or a combination of deficiency constitute significant deficiency or not.
(7:34:32) Auditor has to decide. While deciding significant deficiency, one of the factor the auditor will consider is importance of control to financial reporting. Give few examples of those controls. What controls are relevant to financial reporting? Example general monitoring controls that is relevant to financial reporting.
(7:34:50) Controls over fraud prevention and detection. Fraud prevention detection related controls. Controls over accounting policies, controls over significant transactions with related parties, controls over transactions outside normal course of business, controls over period and financial reporting process like nonrecurring journal entries related controls.
(7:35:12) These are all various controls which will impact financial reporting and what is the importance of these controls. If that control is deficient, I may consider that as significant deficiency. Then frequency of exceptions arising. If this control is not working properly, two, what is the frequency of mistakes or exceptions possible? Just one minute. Yeah. Next. Interaction. How the deficiency interacts with other controls? Don't worry. Very simple.
(7:35:36) I'll simple this like anything. Now you know what are the factors? One this you remember this you may ask you straight away this main question itself for four marks question. This main question deficiency and significant deficiency straight away meaning of deficiency meaning of significant deficiency they may ask you or what are the factors that decide significant deficiency.
(7:35:59) So first point likelihood of deficiency is leading to mistake subjectivity and complexity involved especially in accounting estimates such as fair value accounting estimates amount exposed volume of activity and six that's it. So 1 3 4 5 6 these five points are enough. The importance of control to financial reporting these five points main points that's enough if at all the question is on matters matters that affect matters that decide whether deficiency is a significant deficiency or not.
(7:36:23) Now sometimes no in exam no examiner will go beyond importance of control to financial reporting is one of the one of the parameter right importance of controls to if the control is more important to financial reporting the deficiency in that control may call it as significant deficiency. What do you mean by significance of controls to financial reporting? Like which controls including example general monitoring controls such as oversight of the management, controls over fraud, controls over application of accounting policy, controls related to related
(7:36:47) parties, controls for transaction outside normal course of business, controls on period end financial reporting process such as non-recurring journal entries like outstanding entries, prepaid entries, all that. So these are all the various controls which are examples of controls related to financial reporting. So these are all various controls.
(7:37:08) These are all various examples, various factors which auditor takes into account to determine whether a deficiency is a significant deficiency or not. Next, will there be any indicators? Yes, mistake is there, fraud is there, that's an indicator that some significant deficiency is there. Ineffective control environment.
(7:37:26) One of the one of the indicator is ineffective control environment. Our auditor found out a mistake. Misstatements are found misstatements found during the auditor's process that were not prevented or detected by internal control. We found a mistake that itself is a proof that yes some significant deficiencies there material misstatements prior period material mistakes.
(7:37:44) Okay, some some mistakes were there in the current year statement of P&L which are prior period in nature. Therefore some deficiency paka is there management inability to oversee evidence of management inability to oversee. Management is not able to see the financial reporting process correctly carefully. That itself is an evidence that some deficiency will be there.
(7:38:01) Yes or no? And finally, ineffective control environment. The control environment is ineffective. Like evidence that control environment is ineffective. For example, management fraud is there. It may be material or not, doesn't matter. But top management fraud is there. That's an evidence that top management control environment is not proper.
(7:38:20) That's an evidence that significant deficiency is there. Management fails to implement remedial action like some you know you know previously we have reported some significant deficiencies. Management does not implement any remedial action for that lack of risk assessment process where it would be practically generally every company has to do risk assessment on their own. That risk assessment process itself is missing.
(7:38:39) If that risk assessment process missing means there will be a high possibility that employee will take it granted. Entity's risk assessment is entity is doing risk assessment but it is ineffective you know ineffective response to significant entity do risk assessment they identify significant risk but they're not doing any actions on them they're not taking any actions on the significant risk they identified and significant transactions involving management interest top management directors are having interest in some transactions some transactions are conducted with some partnership firms and LLPs where directors are having major interest so that itself is
(7:39:10) one more indicator that significant divisions might be there fraud might be there error might be So what are indicators of significant deficiency? Ineffective in ineffective control environment, auditor identified mistakes, prior period mistakes, management inability to oversee financial reporting process. These are all various indicators.
(7:39:28) Now in exam no, they might ask you this first point itself as a four marks. One of the indicator of significant efficiency is ineffective control environment. Give few examples. Evidence of aspect of control environment is ineffective. In this any four points you write absence of risk assessment, ineffective risk assessment, management fraud, no remedial actions for the significant deficiencies which they identify. Management fraud is there.
(7:39:51) Deficiencies which were we communicated previously but no action on them. Risk assessment process is not at all there or it is there but ineffective. These are all various points. Four points you should write straight away. A four marks question can come on this. Next. Next. Now communicating. So one see first we understood what is a deficiency what is a significant deficiency how do you decide whether a deficiency is significant or not factors then third one indicators of sign significant deficiency. Now communicating you know
(7:40:22) to whom you should communicate communicate in writing any significant deficiencies in internal control during the audit on a timely basis. You know communicate to management on a timely basis. in writing significant deficiencies you know communicated or to be communicated to top management.
(7:40:40) So tell the management that these are significant deficiencies which we want to communicate to top management that information also give to the management and other deficiencies you know you know but not you know which are important for management attention communicate them also getting it that's it. So the auditor must determine based on the work performed whether deficiencies internal control existing.
(7:41:01) If so auditor must check whether they are significant either individually or in combination. If they are significant tell the management that you are going to communicate them to top management. If there are other deficiencies communicate to management directly. Both you must communicate in writing. That's it. Now contents of written communication. Now you need to communicate them in writing.
(7:41:18) Right? That is called letter of weakness. Also called as management letter. It is called as both letter of weakness also it is called as management letter. So the written communication so description and potential effect a description of deficiency and explanation.
(7:41:34) So you should write sir in purchase in purchases no gr control is missing purchase order control is missing vendor vendor master is updated directly. So describe the deficiency and how it will impact how a fraud might come how an error might come impact and specific explanation the auditor must mention in letter of weakness clearly that the purpose of audit is to express opinion. See what is your objective is your objective to communicate all the deficiencies.
(7:41:56) No no no your objective is to give opinion on the financial statements and internal control was considered to design audit processes but not to express opinion on effective. Tell me are we responsible to give opinion on internal controls? Is it our duty? No, mention that also management I this is a letter of weakness to top management.
(7:42:16) In this letter I am listing out some deficiencies which I identified in the audit. But remember this is not my duty. My duty is to give opinion on the financial statements. But as a part of the audit I verify internal controls. When I'm verifying internal controls to plan my audit I came across some deficiencies.
(7:42:32) So these are the list and the you know the reported matters are limited to deficiencies identified during the audit. You know I need to clearly tell them that whatever I am communicating they are only those which I identified they are not exhaustive in the company so many weaknesses will be there in the control I don't know all the weaknesses whatever I found out they are limited to what we identified in audit that fact also you should communicate so directly this itself can be asked as a four marks question contents of written communication contents of written other it's a live ma okay it's a live premier you will find a tag called premier it's a live okay fine
(7:43:04) So contents of written communication. So description describe the deficiency what is the impact specific explanation mention your purpose of audit and mention that you consider internal control and also what are the what are the what are all the mistakes what are all deficiency you are communicating it is only you identified whatever you are communicating is only you identified whatever deficiencies you identified only you're communicating you are not communicating full length of all deficiencies in internal control that
(7:43:31) fact also you should tell them that's it. So another 15 minutes we completed this standard also. 265 is also over. I hope you are clear. Yes or no? So deficiencies in internal control may be identified by the auditor during risk assessment process or some other stage of audit. At any stage you may identify yes or no. So that's a 265 standard is also over.
(7:43:55) Now look at so we understood what is a deficiency what is a significant deficiency. We understood how to decide whether a deficiency is significant or not. Indicators of deficiencies, communication of deficiencies we understood. What is management letter? Letter of weakness. What are the contents of letter? What is the contents of written communication? So that you should that's it.
(7:44:13) 265 standard is over. You see how easy this chapter is? Then sea 260 580. If these two we finish this particular chapter will be over. Now sea 560 subsequent event. Generally many students will confuse subsequent event means those events that are uh subsequent events are those that occur after the balance sheet date but before the financial statements are approved that is accounting standard definition but in auditing standard the definition is much more you know many students don't know but right now I
(7:44:41) don't want to give all the enter backrop all that so I will directly enter into the matter I will directly enter into the matter just a minute just a minute Yes, you know directly. So what is subsequent event definition in audit? Events occurring after the date of financial statements.
(7:45:05) Date of financial statements means nothing but 31st March. Date of financial statements means the end date of the latest period covered. So events occurring after the date of financials but before auditor's report date. Generally audit report date and approval of financial statements date will be one and same. Financial statements approval date and audit report date both will be one and same.
(7:45:22) And most importantly fact came to the knowledge fact that became known to the auditor when after the date of audit report if at all auditor got to know subsequent event information after the audit reported what to do. So, so uh events occurring events occurring after the date of financial statements but before the date of the auditor report and that fact came to the auditor's knowledge after the date of auditor's report for example no for example no so 31st March 31st March is the date of financial statements you know 10th June 10th June is the date of audit report in
(7:45:58) between know 15 events happen 15 events happen you know 14 events are non-adjusting events Whereas one event is adjusting event and as an as a part of auditor before I give auditor report all the 15 events I verified I also found out that there are only 15 events. I also founded the only 15. Management also found 15. Directed everything is over.
(7:46:21) Accounting standard four responsibility fulfilled. But you know I gave audit report right somewhere on 15th June. Somewhere on 15th June I discovered 16th event. There is actually 16 events happened during this period between 31st March and 10th June. 16 events happened but I only know 15 events.
(7:46:49) But after I gave the audit report now on 15th June I got to know 16th event I got to know another event which is adjusting event or maybe non-adjusting but require disclosure material non-adjusting event I discovered now remember this event happened between 31st March and 10th June only but I discovered it on 15th June after audit report is prepared what should I do this is what SE 560 is talking about SE 560 is not talking about remaining 15 events which you already identified and rectified.
(7:47:19) They are talking about that event which you identified after audit report is given. Now the standard talks about two situations. The standard talks about two situations. Just a minute. So the standard talks about two situations. Case number one, case number two. One you identified after 10th June. 10th June in our example is what? Audit report date you identified after 10th June but before financial statements are issued. Financial statements issued means notice date. For example, notice date is 10th August in this company.
(7:47:53) Let us assume you identified before on or before 10th August. Case number one. Case number two, you identified after 10th August. What do you mean by after 10th August? Case number two, events identified. Events identified after financials are issued to the public. Case number one events identified before the financials are issued to the public.
(7:48:13) Case number two even identify after financials are issued to the public like what to do in case number one what to do in case number two that's what they're asking in one of the recent exam in Jan exam I guess itself in Jan 25 itself this case number one or case number two one of this case has been asked as a descriptive question for five marks be careful now case number one sir I identified event between this period sir like event happened before audit report date only event happened during May month only but I found out that event after 10th June but before financials are issued very simple auditor Auditor
(7:48:42) what what you have to do what you have to do first uh you know fact identified before the date financials are issued to the public if a fact came to the knowledge of auditor after the date of audit report but before financial statements are issued to the public first discuss the matter with the management see financials need amendment if if so how management is going to amend it ask them sir management is amending sir they're very humble they're amending sir if management is amending financials perform procedures on the amendment whether they whether they rectify financials correctly or not.
(7:49:13) Extend the audit project to the date of new audit report. Provide new audit report on the amended financials. Like financials are amended, right? Now give a new audit report. Ensure that new audit report is not dated earlier than the approval date. See that the audit report is not dated earlier than the revised date. Now you see originally financials approved on 10th June.
(7:49:31) Your audit report is also on 10th June. Now on 15th June or 16th June, you found out one more event. Now you communicated management. You they they amended financials. Now the financials are amended on 20th June again. Now you are giving audit report once again on 20th June. So you should now revised audit report date is 20th June. Be careful.
(7:49:49) So perform procedures up to 20th June. Once again whether the amendment is currently there or not check out ensure that new audit report is not earlier than the approval of the amended financial. So new audit report date you will give with the 20th June. Next suppose management is not amending the financials. If report is not yet provided, management does not amend.
(7:50:09) Sorry sir, financials are approved. You also give audit report. Why we will amend? They replied like this. The auditor modified the opinion. You take back the audit report. You have not yet given audit report. No to that give a modified opinion because you found out a subsequent event because of which adjustment is required in financials. Whereas the financials are not amended because management is not interested to amend.
(7:50:28) You modify you amend the audit report. If report is already given sir I already gave management the report. Notify, tell them, tell the management and top management those charged with governance like don't issue the financials and audit report until amendment is made.
(7:50:44) If if unmended financials un amended financials audit report is issued to the public directly without your consent they issued you must take appropriate action legal legal opinion we must take here. So this is case number one. Sometimes no you got to know about subsequent event. Remember subsequent event happened before 10th of June only.
(7:51:02) Here subsequent event happened before 10th of June only but after the financials are issued to the public. You got to know that event happened before 10th 10th June. You gave audit report on 10th June. Event is happened before 10th June but you found out that after 10th August 10th August is the date of financial statements issued in our example is 10th August.
(7:51:19) After 10th August you got to know this very simple. First again discuss the matter with management. See whether financials need amendment. Enquire how management is planning to address this issue. If management is amending, check the following. Perform necessary process on the amendment like they're amending the financials. They're revising the financials.
(7:51:38) Remember here already previous version financials and audit report is given to public. Review management steps to ensure recipients of previously issued financials and audit report are informed of the situation. Management know they sent a mail. Dear all shareholders, please ignore the previously issued balance sheet PNL audit report. We are sending revised one like that.
(7:51:55) They sent a mail then happy extend audit process to the date of new audit report. You know original audit report date is 10th June. Now the new audit report is 20th August. So up to 20th August you apply subsequent event procedure and provide a new audit report.
(7:52:13) And remember if management is not amending notify the management you know and top management that auditor will seek future if management does not take any necessary steps auditor will take appropriate action. That's it. Here amendment not restricted to subsequent event. This point is not there in India that is not required we will discuss in our actual class so full length this standard we will discuss much more in depth just here it's a revision brief revision I'm giving you a clarity that's it now now this you know case one or case two any of these can be asked this
(7:52:37) E point is case one this F point is case number two further this D what is the audit procedure for subsequent event obviously the auditor shall perform procedures to get an evidence that all events between financial statement 31st March and audit report aid which require adjustment which require disclosure or identified adjusted disclosed.
(7:53:00) The auditor is generally not required to perform procedures on matters that were already satisfactory. You know what is subsequent? First understand what management is doing for identifying subsequent events. Enquire with management and top management about any subsequent events which they identify. Read the minutes of the meetings held after the financial statements date. You know on this MCQ has been asked in the recent Jan 25 exam.
(7:53:19) You know here they mentioned before they mentioned before the word this is actually after. So read the minutes of the meeting after the balance sheet date and inquire whether any matters that were not recorded in the minutes. Read latest interim financials. Review accounting records budgets and other information after the balance sheet date.
(7:53:36) Any latest budgets all that latest minutes of the meetings. See whether are there any subsequent events, transactions, events that are happen. Check out and if auditor identifies any event. Yeah I identify 15 events I identified. See verify that the events requiring adjustment or events requiring disclosures are appropriately adjusted and disclosed and the auditor shall obtain written representation confirming that all subsequent events were properly accounted.
(7:53:59) Get a written representation get a written declaration from the management that all subsequent events are identified adjusted correctly over the standard is over. So what is adjusting event and what is non-adjusting event? This itself can be asked as a side question which is an accounting standard question. I hope you will read this on your own. Okay, that's it. That's it.
(7:54:20) So with this 560 standard is also main crux of the standard. I told guys I told main crux of the standard. So definitions and types of events we understood audit procedure for subsequent event case 1 and case2. All the four issues in 560 we understood within 1 hour we completed four standards.
(7:54:39) What are all we completed in completion and review 450, 260, 265, 560. Now we are left with in this chapter 570 580. 570 is already covered in order to put topic. It's covered as part of audit topic. Now 580 once 580 if it is covered we will be completing completion and review topic as well. That's it. Just one minute. I hope you are getting clarity like never before.
(7:54:58) I hope you're able to quickly revise what is there in this subject. Yeah. Now we'll proceed. So SA 580 written representation. The
(7:56:12) standard heading is written representation. Now in this standard we are going to discuss about almost some seven topics. What is written representation? Can it be used as an audit evidence? Written representation types on management responsibilities written represent other written representation. There are two types of representations.
(7:56:33) One is representation about management responsibilities and other representations. Okay. And what is the date of the representation and period conclusions and reporting and under few cases reconfirmation of representation is required. So what are the matters on which reconfirmation is obtained through written representation.
(7:56:49) Under what scenarios reconfirmation we will obtain through written representation. Okay, these are the matters which are important in 580. Technically speaking this is 90% content of the standard. So don't worry. Now let's look at 580. 580 just a minute. Yeah. So 580 guys what is a written representation? First of all definition written representation is a written statement.
(7:57:26) Representation mean statement given by management. What are they giving in that? What are they what are they giving through written representation? What are they mentioning in that? They are giving me information, additional information to support my audit evidence, written representations or written statements provided by management to confirm specific matters or to support other information which I already obtained. I got some information. I got some evidence to support this.
(7:57:50) They're giving additional data or they're confirming me something. They do not include financials assertions therein and supporting records. Books of accounts and financial statements are also in writing, right? They are not representation for books of accounts and financials inside that some content is relating to that management is giving me additional information that's written representation books of account is not a written representation balance sheet P&L is not a written representation but for balance sheet P&L a matter is there in books of accounts a matters are there on that additional
(7:58:19) data companies giving me management is giving me in writing that's a written representation now can written representation be used as an evidence of course it's an important source of evidence evidence audit evidence includes all information which auditor is using written representations or considers audit evidence.
(7:58:39) It is a necessary source of audit evidence and if management modifies or refuses if at all management is not ready to give it's a significant issue. It's a limitation on the auditor and remember written representation alone does not provide sufficient appropriate evidence. It is not a sufficient appropriate written representation is no doubt an evidence but they do not provide sufficient appropriate. Sir why written representation is necessary.
(7:59:02) Why? Why? Why in writing is necessary? If at all we ask them in writing it will prompt management to consider the matter more seriously. Since I'm asking in writing they will take it more seriously. They don't casually reply. They in writing they will reply very carefully and written representations do not provide sufficient appropriate on their own. Only written representation is not sufficient.
(7:59:19) You see subsequent event just know we saw we review latest interim financials. We review you know budgets and all happened later on. We enquire management about subsequent events which they identify. So many works we do and finally we will ask representation written representation is only confirmatory in nature finally substantive like it's only supporting in nature that is never a main audit evidence but that is also important evidence remember next next objective of the auditor the auditor has to obtain written representations okay confirming that management and those charged with governance fulfilled their
(7:59:49) responsibilities what are the responsibilities of management and those charged with governance preparing financial statements providing information to the auditor Two responsibilities. One, preparing financials and providing information to the auditor. Both they need to fulfill.
(8:00:02) They fulfilled or not? Ask them a representation. Yes sir, we fulfilled sir. We we prepared financial as per applicable framework. We provided the auditor with complete information. Get a representation. And the auditor shall also obtain other representations. Other representations means what? If determined by auditor. Auditor felt it is necessary.
(8:00:19) Some cases auditor want written confirmation from management. There you can obtain or required by other standards. For example, just now we saw in SEAF 560 560 standard is saying the auditor please obtain representation that all subsequent events are identified, adjusted, disclosed properly. So since 560 says I will get representation.
(8:00:38) So I will get written representation on fulfillment of responsibilities by management. I will get representation on completeness of information disclosure to the auditor. I will get representation wherever I require. I get a representation when other standards on auditing also requires it. four circumstances I will get written representation and okay you got representation what you will do I will respond to the whatever information they provided they gave me represent I asked for some information they gave me now I will respond I will see that and then accordingly I'll respond okay sir thank you something like that and if
(8:01:03) management does not provide there I will respond with my modified opinion if management is not giving me requested representation I will modify for example I will directly go to the you know conclusions and reporting the last section of the auditing standard 580 Suppose know I'm asking written statement written declaration I'm asking from the management they are not providing management fails to provide requested written represent ask them first to discuss with them re-evaluate the integrity impact take appropriate
(8:01:32) action including disclaimer of opinion see if representation they're not giving they're not giving me evidence absence of evidence means I'm unable to form the opinion so I may give disclaimer of opinion written representation not they gave but it is fake they are giving me completely wrong statements.
(8:01:50) If auditor has concerns about competence, integrity, you know, our written representations are not consistent with other audit evidence. I have a doubts on management's eligibility, competence. I have a doubts on their integrity. I have doubts on their ethical values. I have doubts on their carefulness. They carelessly give written statements.
(8:02:07) If I feel written representations are inconsistent with other information. If I feel management is not competent not with integrity not with ethical values then I will perform some processes to resolve the matter. If at all still not resolved I will I will once again check are they honest and competent and I will check reliability of other represent they gave all these some of the representations. No that reliability also I will check and I will take appropriate action including disclaimer of opinion.
(8:02:32) If representation provided by them is not reliable. Why are they not reliable? The person who gave this statement is incompetent. The person who gave this statement is unethical. The person who gave the statement is not matching with other information which I have. In all these cases, I will try to resolve the matter. If unresolved, I will try to assess that impact on the overall audit.
(8:02:49) I will try to assess management's integrity all that and I already they give so many representation states what is their validity? I will once again check and I finally give a disclaimer of opinion. If requested representation not provided or provided which is not reliable unreliable evidence or nonprovision of evidence in both the cases I may give a qualified opinion or worst case disclaimer of opinion because if representation is not available representation is not reliable both leads to absence of evidence. If evidence is not available I may give modified opinion.
(8:03:21) Next so that's about conclusion and reporting. What is the date and period covered by representation? Date of representation it must be near to audit report date. Written representations must be dated as near as possible to you know to the date of audit report as near as practicable to the date of audit report but not after that evidence and all you must obtain before audit report DTR.
(8:03:46) After audit report is given what is the point of getting representation. So since written representations are necessary evidence you cannot express opinion before receiving them. Therefore auditor has to receive representations before the audit report date for what period representation they'll give for which period in audit report what period I'm giving opinion you are giving opinion on one year era then for that related for that year related information so written representation must cover all periods in the audit report getting it sometimes no this question was asked in CA final ones for
(8:04:17) four marks or five marks question sometimes no you know I'm asking representation from CFO sir give me declaration that you gave me complete preparation CFO told me sir I just joined last month sir I am not there full year sir how can I give representation because I don't know he cannot argue that he is going to sign the financial statements right then he has to give representation if current management was not present during earlier period they may claim that they cannot provide representation for that time because they are not available this fact does not reduce their
(8:04:47) responsibility they must provide representations as a whole accordingly the auditor can request representation from the concerned management whoever is present right now. So that's the date and period of representation very important straight away a four marks question straight straight away conclusions and reporting a five marks question straight away might come further further written representations are two types broadly management responsibilities and others what is other representation you know you know other essays require the auditor to request like other representation means as per some other
(8:05:24) standard I may require or if nec necessary the auditor may request additional representation to support other matters. So written representations are two types brain one fulfillment of management responsibility that's one general representation two representation about other representations when some other standard is requiring or when auditor himself felt necessary for example these representations or supplementary representations these are supplementary these are supplementary presentation and do not form part of representation relating to management responsibility
(8:05:52) what are the examples of supplementary they may ask you directly in exam write about other than write about written representations other than management representation other than management responsibility. Write about written representations that are dealing with the matters other than management responsibilities.
(8:06:10) Example these representations or supplement representations. For example, auditor may ask representation on application of accounting policies. Auditor may ask representations regarding assets and liabilities and valuation. Auditor can ask representation on title title deeds, leans, encumbrances. Auditor may ask representation regarding companies with loss regulations.
(8:06:27) Auditor may ask representation on subsequent events. Auditor may ask representation on going cult matter. Auditor may ask representation on related party transactions. Any of these these are all supplementary representations. That's it. Next you know reconfirmation of responsibilities through written representation. Actually responsibilities management will accept through letter of engagement.
(8:06:51) Through letter of engagement management will accept responsibilities. But there are some cases where through a written representation we will once again get their reconfirmation. Sir please give me once again you are accepting all the responsibilities. Sir I already gave in engagement letter then that is okay.
(8:07:10) Suppose now those who signed engagement letter no longer hold the relevant responsibility. The person who signed engagement letter and now who is responsible for financial reporting both are different. Get from the latest person once again that sir you are accepting your responsibilities. Give me once again the terms of engagement were prepared in last year. Last year or that before year I prepared letter of engagement. This year I didn't prepare.
(8:07:28) So I can once again ask from the current management please once again give me a confirmation that you still remember your responsibilities. There is an indication that management misunderstood their responsibility. I somewhere felt when I'm doing audit they they misunderstood the responsibility. So once again through written representation I will ask them to confirm their responsibilities and circumstances have changed making reconirmation necessary. Straight away they may ask you very important question four marks or five marks question. So
(8:07:53) the auditor may ask management to reconfirm responsibilities to representation. See actually management will acknowledge management will confirm its responsibilities through engagement. But there are some cases where they will once again reconfirm their responsibilities that two through written representation.
(8:08:11) See management responsibilities they always confirm through engagement. But here they reconforming through representation. One, when those who signed the letter of engagement is no longer responsible, no longer existing, the terms of engagement are prepared in the previous years or there is an indication that management misunderstand its responsibilities or circumstances have been changed making reconfirmation necessary.
(8:08:31) Finally, the one part one written representation about management responsibilities. Management must represent that it has fulfilled its responsibility for preparing financials in accordance with framework. Management has to give a specific representation that yes they prepared financial statements as per applicable framework you know and the the auditor may request management to include representation uh to provide you know accurate representation management may seek input from others see when they are giving representations on management responsibilities know sometimes they may take help of others actuaries engineers
(8:09:07) all that so that's it uh sometimes know management may use qualifying language like to the best of knowledge and belief. You can accept this if at all the person who is giving representation is a knowledgeable person. A knowledgeable person only can use the word to the best of my knowledge and belief. Others cannot use it. That's it.
(8:09:24) And management shall also provide representation about completeness of information provided to the auditor. Management must give a statement that it has provided the auditor with all information and access as agreed to the terms of engagement. Management must represent that all transactions were recorded and reflected in the financials.
(8:09:41) So management has to give representation that they prepared financial statements as per applicable framework. Management has to give representation that they provided information completed to the auditor. Management has to give representation that all transactions were recorded correctly and management also shall give other representation supplementary in nature wherever auditor has requested.
(8:10:02) Next that's it with this 580 standard main theme is completed from whom you get the representation. The auditor shall request representation from management who have appropriate responsibilities for financial statements and having knowledge of that matter. Britain representation related to fulfillment of management responsibilities all that you know from whom where auditor believes they have knowledge of the matter who are responsible for financials generally from them only we will get the written representation that's it with this uh entire 580 standard is over actually
(8:10:31) there is a so much of in-depth discussion of the standard and all but since it's a revision class uh I need to save your time so the crux of the standard I told you I assume that you already know the subject okay that's the reason I'm not talking many logics here I'm only revising you in a simplest way so that you understand that's it okay with this the chapter completion and review is completed all the five standards I completed within 75 minutes 1 hour 15 minutes we completed that to be discussed each and every each and every concept we didn't skip any concept
(8:11:00) 90% of the concepts we covered I hope you're happy with the revision I'll be very happy if you share your feedback on you know through comments all that that's it all the very best we'll come with another revision okay uh for another topic audit evidence topic that's Uh uh hi guys. Uh I hope uh the live is very clear to you.
(8:11:30) Hi guys. Perfect. So we'll proceed. So guys now we are going to discuss we are going to revise another chapter called audit evidence. You know this audit evidence has totally these many concepts you know approximately we have eight standards and we also have two different concepts something like concept of assertion and concept of audit trial.
(8:11:57) So what I am going to discuss whatever I have ticked in green that we are going to revise it now. So we are going to revise approximately six topics like four standards we are going to revise and two different topics I'm going to revise three stand four standards I'm not at all touching in this revision 500 I'm not touching 520 530 610 they are equally important here but in a revision class I'm only covering these stand these topics these whatever I'm not highlighting know whatever I strike off know that I'm not covering in the revision session okay so actually I'm running very tight in terms
(8:12:28) of time but it's okay uh in the previous session Also I told you uh tomorrow uh we are expecting another a second baby. So but still but still in spite of that schedule since I promised a day before exam revision I'm taking it up. Uh already close to 4 hours I already gave uh you know yesterday I gave some 2 and a half hours revision and today morning also I gave 1 hour 15 minutes revision.
(8:12:51) Now this is another one 1 hour 15 minutes it's going to be. So already four and a half hours division including this again items of financial statements I will give guidance in respect of items of financial statements I will give guidance on that uh how to read in items of financial statements what to read exactly what many students miss in that chapter that also I'm going to cover now without any delay let's enter into the topic 5.
(8:13:15) 1 55 510 550 concept of assertion concept of auditorial these are the six topics that we are going to discuss now first one 5.1 one. See many students when they see 5.1 5.5 they think there are nothing there simple standards they're all nothing where nothing is there in that but when they see the question in the examination they will they will think of like where is it coming from so that's how the students generally like they will they will be shocked to see the kind of questions so don't take these standards as a simplest
(8:13:41) standard they are all very complex standards and let's decode that let's revise each and every complex part of it now in 5.1 what is 5.1 standard is talking about 5.1 talks about the heading is this audit evidence specific considerations for selected items. Audit evidence specific considerations for selected items.
(8:14:05) Now the standard has selected three items inventory litigations and claims segment information. The standard has selected three elements. One is inventory. Just a minute let me open that. So the standard has selected totally three elements. One you see I've highlighted with the black color here. Inventory, litigations and claims, segment information three were selected.
(8:14:24) Now what we need to consider because here the standard says specific considerations for selected items. Selected items we saw specific consideration what for inventory you need to get evidence on existence and condition. Whereas for litigations you need to get evidence on completeness of litigations and claims involving the entity.
(8:14:47) Whereas for segment information you need to consider presentation and disclosure. So for inventory existence and condition you need to get evidence for litigations completeness of disclosure of litigations and claims even for litigations and claims also they are mainly talking about disclosure. For segment information also they are talking about presentation and disclosure.
(8:15:10) So with respect to inventory we should get evidence on existence and condition of the inventory with respect to litigation and claim completeness of inventory. with respect to segment information presentation and disclosure. Now directly first let me go to segment information which is the simplest one segment information.
(8:15:29) So what auditor has to get evidence about what auditor has to get in the recent JAN exam also segment information I think this question understanding of management methods has been asked. Okay. Anyhow segment information we know um it refers to details about different products and services of a enterprise. So no where or and its operations in different geographical areas.
(8:15:50) So what is the audit evidence? The auditor shall obtain sufficient appropriate evidence regarding presentation and disclosure of segment information. So every company will present segment information. Right? How are they presented? How are they disclosed? Whether are they in accordance with financial reporting framework. That is what we need to obtain evidence. So we need to obtain evidence on segment information.
(8:16:08) Whether the segment information is presented and disclosed as per applicable framework. Suppose that the company index is applicable as per index segment information presented clearly or not. You need to get evidence. Now in order to get this evidence what you need to check see segment information I hope you might have understood there are some methods on identifying segments identifying reportable segments some methods were there.
(8:16:28) So understand management methods were determining segment information. So management would have followed some methods right management would have implemented some methods right to identify reportable segments. what methods they used whether whether uh test those methods like test management would have told some asset method profits method revenue method some method test them you also find out how many reportable segments came and see what what segments they reported what are reportable segments whether matching or not perform analytical and
(8:16:54) other procedures as necessary analytical process means last year how many segments were there this year how many segments were there if any segment was discontinued discontinuing operations requirement and all you should check the auditor is not required to give separate opinion.
(8:17:11) By the way, just because we are checking segment information, are we liable to give any separate opinion on segment reporting? No need. This is one of the selected item which the standards on auditing felt important. One of the important item they just asked us to get sufficient appropriate evidence on presentation and disclosure of segmented information.
(8:17:27) Now you need to understand methods which management used right when you're understanding the methods. No, there are some matters which are relevant when you're understanding the methods used by management. uh whatever methods management used testing methods we call it we call them as methods for identifying reportable segment okay whatever methods they're using know when you're checking those methods no keep in mind the following matters like sales transfers intersegment transactions and eliminations comparisons with budgets and expected results allocation of assets and cost among the segments consistency with prior period adequacy of disclosure this itself can be asked
(8:17:59) as a four marks question or write about audit evidence for segment information. This itself can be asked as a three or four marks question. That's it. So this is one segment. This is one part in fine automa. Now another important one litigations and claims.
(8:18:19) What is the audit procedure regarding litigations and claims? First what auditor has to do here? Auditor what what is the auditor's objective here? The auditor has to obtain sufficient appropriate evidence whether the impact of pending litigations and claims of the entity. Were they completely disclosed or not? Completeness they need to yes or no. So yes. Next. Audit procedures for litigations reg audit procedures regarding litigation and claims.
(8:18:45) Litigations and claims may materially affect financial statements and require disclosure or accounting. Okay. Uh fine. Audit procedure. What are the procedures to identify? Inquiry of management and in-house legal council. This is most important. Straight away they can ask as a four marks question. Audit procedures for litigations and claim.
(8:19:03) First know inquire management. Dear management, what are all the litigations were there? What are all the pending cases were there against the company? Not only management. Enquire in-house legal council. Some large companies and all they will have internal legal team. So ask them. Review minutes of top management. Review correspondence with external legal council.
(8:19:21) Review legal expenses account. Like here you see minutes of the top management meetings to identify are there any litigations which they covered. Look at correspondence with external lawyers. So through this correspondence the auditor might discover any other pending cases against the company. Review legal expenses account. Legal expenses means what? Ledger account will be there.
(8:19:39) For water all purpose legal expenses will include check out. Through that you may discover some pending cases against the company and use risk assessment insights. The company would have already performed risk assessment right. So get those insights. These audit procedures will may also provide evidence regarding valuation of measure valuation or measurement.
(8:19:57) When you're checking no when you're checking existence of litigations no you may also get evidence regarding valuation getting it that's it next sometimes direct confirmation is important direct communication is important with external legal council sometimes direct communication so when to seek direct communication you know you know actually this was asked for three marks question and procedure for direct communication like when to seek direct communication what is the process for direct communication these two together they might ask us a four marks
(8:20:28) question be careful you know when the auditor will get a this is this is one one item there is another context when meeting external council see one one point is direct communication with them like we don't meet you you send a direct communication let's say 55 you just send an external confirmation when to do that there are some cases where you want to meet them when to meet them for example in certain cases no the auditor may judge it necessary to meet external Legal council for example matter is a
(8:20:59) significant risk. So on the matter where auditor is checking no he felt that significant risk is involved and the case is being handled by external lawyer. So he may decide to meet them. Complex matter exist. Disagreement between management and council. Some issues going on between the management of the company and the legal council. Some issues going on between them.
(8:21:18) There's a conflict going on between the disagreement is there. I want to get a clear picture about what exactly the litigation is about. Then I will meet external legal council. In exam they will ask you under what they have asked once under what circumstances the the auditor may require to meet external legal counsel in certain circumstances in the following circumstances when there's a significant risk when the matter is complex when there is a disagreement between management and uh legal counsel. In all these cases the auditor may meet external but remember
(8:21:47) even if you want to go for these meetings management's permission and management representative attendance is must. You can't directly privately contact external council without management's authority. So you must tell specifically to the management get their permission and go and meet to the external lawyers and make sure that one of the representative of the management is also there along with you when you're meeting external legal council.
(8:22:09) This is meeting. Sometimes you you you want to send confirmation. When you will send direct confirmation when you will directly communicate with them when the risk of MMS is identified. If auditor felt that some MMS is possible in litigations and claims you felt that companies omitting some material litigations or audit procedure suggest some other litigation might exist.
(8:22:32) When I'm checking on case documents, I felt that this will have few more implications, few more cases also possible. Okay, you felt that. So you want to get a clearcut opinion of the lawyer. So that time also you can communicate with external legal council. Now suppose you want to do communication right? How you can do communication? Through general letter of inquiry or through specific letter of inquiry letter of general letter of inquiry letter of specific inquiry.
(8:22:58) What is general letter of inquiry? Very simple general letter of inquiry. How I will send you know you know I I will I will draft mail like this. Sir, we are the auditor of so and so company. So we understood that you are the lawyer of the company.
(8:23:12) kindly let me know what are all the cases that you're dealing with the company and give a list of it like that I'm generally asking him I I'm not mentioning him which case he's dealing at case names and all I'm not talking I simply mention I'm auditor of the company please give me list of cases that you're dealing that's a general of inquiry many lawyers they don't respond to a general inquiries like this now if a lawyer is prohibited from responding general inquiries like this then you will specifically ask them like specific inquiry in case general inquiry It is unlikely that external legal council responds like external legal council they don't respond for general
(8:23:42) inquiry. The auditor shall use a specific inquiry and in that letter mention the list of litigations and claims management's assessments of the outcomes. Sir, these are the list of litigations which which management told me that you are dealing. So dear Mr. Lawyer, you are dealing 10 cases about this company for this company. This is what management told me 10 cases. Five cases they said contingency in nature.
(8:24:04) Five cases provision is what they mentioned. So request then request them request the lawyer confirm management assessment. Like 10 cases you are dealing sir. Five cases like this this is the status. Five cases this is the status. This is what management told me. Please confirm me whether management assessment is correct or not.
(8:24:24) So specifically mentioning list of cases and then sending them and asking them to confirm. This is specific inquiry where many lawyers will be willing to respond. So request that external legal council confirms management assessment and provide further information to the auditor if the list is incomplete or incorrect. So I will tell them sir these are the 10 cases which you are dealing.
(8:24:42) This is what company management told me and status of these 10 cases are as below like this. This is what management told me. Please confirm whether these 10 cases information correct or not as per your records. Also tell me if any of these cases not there or if any other additional cases s please give me. This is a specific inquiry.
(8:25:00) General inquiry means what? Through a letter of inquiry, ask external council to directly communicate with the auditor. If direct communication with auditor is prohibited for the ELC external council, then perform alternative. What is the alternative procedure? If at all for a general inquiry, if legal council is not responding, then I will send a specific inquiry.
(8:25:23) Are you clear? So I hope now you I I don't know how many of you know this extent know this depth that is there in the standard SA 5.1 when they say nothing very simple standard inventory litigations this is the depth of the standard I hope now you're able to understand okay so in in exams no they once specifically asked about letter of specific inquiry one in one of the exam they asked in one of the exam they specifically asked about when meeting external legal counsel is required in one of the exam under what circumstances direct communication is required this is asked for two marks and this is asked for two marks like this also they might ask. So be careful.
(8:25:53) Don't take it granted. The subject auditing is very in-depth. You must know how depth the questions will come. This is the syllabus. This is what they in the IC book. Many students don't even know that this much depth is there. That is why they fail in audit.
(8:26:11) Many students fail in audit not because they are not able to understand the subject. They don't even know syllabus what it is. They don't even know what how much is there. How much depth is there in the standard. That's it. You know this was asked in one of the attempt. This was asked in one of the attempt. This was asked in one of the attempt. You can go and check in our question bank we gave. So be careful. Next.
(8:26:30) Next. Finally, now coming to inventory. So with respect to inventory, what auditor has to obtain? You must obtain sufficient appropriate evidence regarding existence of inventory and condition of the inventory. For example, here one point I will tell you you know uh company inventory is there in one godown. Auditor. No, he did not visit the godom.
(8:26:47) Instead of that he he he saw through he saw existence of inventory through CCTV camera. So through CCTV camera through photographs and all he saw inventory whether they existing or not. Is this a correct audit procedure as per final order? This is how a question has been asked in CA final. This is not correct.
(8:27:05) Through cameras and all you may get evidence on existence but you don't get evidence on condition. Sometimes MCQ will be asked you know when auditor is attending physical inventory counting he need to obtain evidence on what? Option A existence and condition. Option B valuation and condition. Option C valuation and existence.
(8:27:23) Option D existence condition of valuation. Option A only existence and condition of inventory. You know valuation of inventory whether correct or not accounting standard is already there and we verify accounting standard. So we are not bothered about valuation. We are bothered about existence of inventory.
(8:27:40) Is inventory there physically? First of all, if it is there in what condition it is there. Condition of inventory is important for valuation of inventory. If the inventory is in damaged or obsolete condition, then it is valued always at NRV. If the inventory is in good condition, then it is valued at cost or NRV whichever is lower. Remember this principle.
(8:27:56) So condition of inventory is most important. So if you want to know condition of inventory, how can you check condition through photograph? How can you check condition of inventory through CCTV camera? You can't. So that is not an adequate audit procedure for f not one purpose. So what 5.11 says you must obtain sufficient appropriate evidence regarding existence and condition of the inventory. For that what auditor has to do.
(8:28:17) What is the audit procedure for obtaining evidence on existence and condition of inventory. The audit procedure is very simple. Attend physical inventory counting. Simple auditor attendance at physical inventory count. What you will do by attending? Evaluate management's instructions and procedure for recording and controlling.
(8:28:36) Look at what management instructions are. Look at how how they're recording and controlling the counting like how are they counting it. What instructions management gave for counting. So whether are they are are the counting procedures correct or not? First look at inspect the inventory. Observe the count procedure.
(8:28:54) How are how are they counting? What management first look at the management instructions for counting. Okay. Management instructions and all seems logical. Two observe how they are counting. Are they counting as per management instruction? Check out three. You also inspect the inventory and you also perform test count like employees of the company will be counting and telling numbers and all.
(8:29:13) You also go to that rack and see whether that count is matching or not and reconcile with records. Physical counting is there. Right? That count matching with the records or not. Inventory records will be there. Verify whether entity final inventory records accurately reflect the physical count result.
(8:29:30) And now now when you're attending at physical inventory count you need to inspect inventory for existence and condition and perform test account observe compliance with management instruction obtain audit about reliability of management procedure. These procedures may be either a part of control checking or it may be part of substantive.
(8:29:47) So when you're attending physical inventory accounting the process of you're observing all this right this may be part of test of controls or this may be part of test of details anything it may be part of. Now matters relevant for attendance when you're when you're when you're when you're thinking to attend physical inventory account. Suppose you decided to attend physical inventory account. There are some points that you should keep in mind like what is the nature of inventory.
(8:30:05) Is it a gold I mean if it is a jewelry business it's a gold uh is it cotton or is it rice product or is it any industrial iron or oil what exactly? What is the stage of completion of work in progress? What is the risk involved? Internal control system whether proper procedures and instructions are given for counting timing when they're counting 31st March or some other data location of inventory materiality and risk at different locations need for an expert whether entity using perpetual inventory cards.
(8:30:29) So what are the matters relevant for attendance at inventory counting five points there are so many points were there any five points you write that's sufficient sometimes no company may not be doing inventory counting on 31st March they might be doing inventory counting on some other date what procedures extra you need to perform when inventory counting is at other than balance sheet date if physical inventory counting occurs on a date other than financial statements date then auditor has to perform additional procedures same the above procedures you will
(8:30:57) perform you will check management instructions You will check how they're counting. You will test check inventory. You will inspect the inventory. All that you will do in addition to that since inventory counting is conducted at April month or May month not on 31st March. Intervening between these dates what are all the transactions happen whether they are properly recorded you know auditor must perform additional procedures to ensure changes in inventory between count to date for example counting is on
(8:31:20) 15th April 15th April and balance sheet date 31st March are they properly recorded or not? I will check. So on 15th April if inventory physical physical inventory matching with records. Perfect. Now between 31st March and 15th 15th April what all inventory movement is recorded whether that is proper check out then automatically you will get an evidence on 31st March inventory.
(8:31:41) Next relevant matters auditor should consider to verify changes in inventory whether perpetual records are maintained. Reliability of perpetual inventory records. Reasons for differences between physical count results and perpetual records. So this itself can be asked as a straight question. Four marks question.
(8:31:59) What are the additional audit procedures? If inventory counting is performed at a date other than date of financial statements, the auditor has to perform additional procedure to see that changes in inventory between the count date 15th April and 31st March are properly recorded. And next second one additional procedures especially to verify changes in inventory.
(8:32:20) They said right to verify changes no additional changes in inventory has been currently recorded and how do you verify? How do you know changes are currently recorded? See whether perpetual inventory records are properly adjusted for 15 days whether perpetual records are adjusted correctly. Reliability of those records. How do I know perpetual records are reliable. I will see the actual transaction.
(8:32:38) Whenever an order is received first records are updated then goods are delivered like that. Reasons for difference if at all there between the physical count and perpetual records. Remember in a perpetual system physical inventory must match with records. There should not be any difference. If there's a difference why there's a difference auditor has to investigate. So this itself can be asked as a four marks question.
(8:32:56) Sometimes you know auditor may not be able to attend inventory. But before this let me let me talk about when inventory is in the control of third party. Let me talk about inventory under the control of third party. Inventory under the control of third party. If inventory is under custody and control of third party. For example inventory in transit.
(8:33:15) Inventory with a job worker, inventory with another company, goods sent on sale or return basis, you know, inventory lying with warehouse, Amazon warehouse. For example, many sellers know many manufacturers know their inventory will be lying with Amazon warehouse. Their inventory will be lying with Flipkart warehouse like that. Okay.
(8:33:33) So if at all inventory is with third party and is material to the financials, the auditor must obtain sufficient appropriate evidence regarding their existence and condition by following methods. One direct confirmation from third party about how much quantity he is having. What is the condition or or another process directly you go and inspect or perform other procedures? You inspect or perform other procedures appropriate.
(8:33:58) Sir, what are other procedures? Sir, what are other procedures or examples of other procedures? In one of the exam they asked this MCQ they asked in one of the MTP which of the following is not an example of other procedure. See when inventory is with third party auditor may perform either one of the following or both the following. One get a direct confirmation regarding quantity and condition. Two perform inspection.
(8:34:17) You go directly inspect or other audit procedures as appropriate. Other audit procedures means what? Four inspect documentation such as warehouse receipts regarding inventory help with third party like what is the proof that inventory is with third party. Request confirmation from other parties. Finas collateral attend or arrange another auditor to attend third party.
(8:34:39) Obtain a report from another auditor or service audit report on adequacy. So inspect documentation such as warehouse receipts. Request confirmation from other parties. Attend or arrange another auditor to attend third party account procedure. Obtain report from another auditor or service auditor report.
(8:34:55) Suppose if if the company inventory is kept in Amazon, Amazon will give an audit report. Service auditor report. There is a report called 3402. S1 report. SOC to report like that some reports and all were there which we will discuss in CA final. So when inventory is with other third party request confirmation directly go and do inspection or other procedures.
(8:35:13) Other procedure means what like check the documentation request confirmation from other parties. If inventory place is collateral attend attend third party physical count procedure. Third part is doing physical counting right go and attend or send somebody else or get a report from another auditor or service auditor on adequacy of third party internal controls over inventory.
(8:35:31) So get an evidence on counting inventory controls. Uh get an attend physical inventory counting done by third party. Inspect documentation or if the inventory is pledged as collateral get a confirmation from them. These are examples of other audit processes. In exam they will they will ask you specifically this question four marks.
(8:35:47) Our students will go and write some answer and come and thinking that that is right answer. But see how specific the standard is drafted that this is the kind of clarity that you require. See since it's a revision class I can't give more.
(8:36:05) I can't discuss more but still I'm almost from past 20 minutes I'm discussing this now finally sometimes no auditor may not be able to attend the inventory you know suppose no company's plan company's counting inventory on some other date and on that date you are unable to attend in such a case in such a case if auditor is unable to attend physical inventory counting due to some unforeseen circumstance then conductor observe you count on an alternative date and perform procedures on intervening transactions suppose if inventory accounting is impracticable impracticable means what you can't go there at all. Auditor there's a threat you know if attendance at physical
(8:36:34) element accounting is impracticable then the auditor has to obtain evidence on alternative procedures you know modify the opinion if alternative procedures are not possible impracticality may arise due to nature of the inventory or location of the inventory such as safety concerns at the site by the way what is not impracticality you know auditor is feeling difficult to go there auditor feel time waste auditor saying oh no inventory counting is costly this is not a reason impracticality. General inconvenience is
(8:37:03) not a valid reason. Now what are the alternative procedures? Look at the documentation of subsequent sale of inventory. Suppose you can't go to the location of inventory because inventory location is at some location where war is happening right now. So it is not at all advisable for the auditor to go there. So it's impractical.
(8:37:21) But how do you know inventory is there at that location? See April month payments some sales were there from the go down sales were there means in the go down inventory is physically there. Right? So that is called subsequent sale. Perform other valued procedures if practicable to verify existence. If evidence cannot be obtained sir alternative procedure also not possible sir then modify the opinion because there is a limitation on the scope.
(8:37:38) You are unable to obtain evidence regarding inventory lying inventory you're lying in the godong and you are unable to perform alternative procedure also. Therefore you will directly give the modified opinion. That's it. 5.1 is over. I hope you are confident on 5.1. You see how much is there in 5.1. Let me show you the similar thing in 55 also.
(8:37:57) Like the so many students have misconception 5 not very easy 5 minutes a 10 minutes a five not 5 very easy 5 minutes 10 minutes no they are all so many complex things were there this is how in exam the test even in 55 will tell you how they tested in the recent exams now that's it so with this 5.1 is complete I hope you are clear on 5.1 just a minute I hope you learned some new points Just a minute.
(8:38:48) Ma Next. Yeah. Safi not external confirmation. This is one standard where everybody thinks I know everything about the standard but I will show you so many points which you I think you might have neglected. Don't worry. External confirmation means what? Direct confirmation by auditor with the third party. Okay. Now you know what many students think is external confirmation is what a PCR will be there.
(8:39:11) Positive confirmation is that negative confirmation is that that's it. No, that is very minimal. That's a very basic element in the standard. There are many things which are tested in the past exams. Okay. Which many students fail to pay attention. Now look at external. What is an external confirmation? Audit evidence. Audit evidence which is obtained as a direct response to the auditor from a third party.
(8:39:34) From a third party auditor is getting direct response. Okay. to the auditor either in paper or electronic form whatever it is. So then that is called as an external confirmation. Okay. Like what is external confirmation? First what is the external confirmation procedure? Where and all I use external confirmation? You know external external confirmation procedures are generally used to confirm or to request information about some account balance and their elements. They can also be used to confirm terms of the agreement, contracts,
(8:40:05) transactions, absence of the conditions like side agreements. Are there any side agreements and all? Okay. So, external confirmation can be used for confirming or getting information about account balances, their elements, transactions, terms and conditions, anything. Now, what is the procedure? First identify the information.
(8:40:25) What is the external confirmation? First identify the information. For what information you want confirmation sir? Creditors sir I want information on creditors. I want I want information on detors. I want information on inventory line with third party sir. Okay. Identify the information. Now select the confirming party appropriate confirming party.
(8:40:43) I know third party organization is there. But inside that who should reply from whom to whom you should ask this confirmation? accountant, finance manager, CFO of that company who who has to so responses are more reliable when external confirmation request is sent to a party where auditor believes is knowledgeable about the information.
(8:41:05) So according to me he knows in that organization in that creditor organization data organization so and so manager accounts manager knows about the information which I want. So then identify that party you know then design the request design the request you know when you are designing the request there are some factors this itself was asked as a four marks question request the external confirmation request must be properly addressed and you must also include written information for direct response when you're sending a mail you should clearly tell to whom you they should reply reply mail id also you should clearly mention okay now the
(8:41:38) design of confirmation request affects the response rate and reliability. How you are designing that affects response rate and reliability you know see you need to make sure third party job simple when you are designing the request no you fill the amount you mention everything and tell them sir please whether you agree or disagree you just reply you know there are two types of designs there are two design there are two design formats external confirmations are broadly two types there are two methods positive confirmation request and negative
(8:42:08) confirmation request in a positive confirmation request First third party has to respond whether he agree or disagree with the information. Whereas in a negative confirmation the third party will respond only when he disagree. Now here no when you're designing the request no see it may be positive or it may be negative.
(8:42:27) When you're designing the request no in a positive no how will I design you know sir I'm the auditor of so and so company sir in our company your account is having a credit balance means he is a supplier our company has to pay him. So in our books of accounts we found out that we are liable to pay you 10 lakh rupee as on 31st March.
(8:42:46) Kindly reply whether in your books of accounts how much balance is there? I will ask him sir how much balance is there in your books of accounts. I will put a blank and then send him send. Some third parties know they will not respond. If you ask them to fill the amount if you ask them to fill the amount they will not respond. Suppose you asked them sir 10 lakhs is in our books of account sir. Will you agree? Yes sir no just send me.
(8:43:06) They may respond. This is a designing. See here also you see positive confirmation request no it can be with a blank or it can be with a number and where we may ask him yes or no both are positive only in in negative what happens you know sir in our books of accounts 10 lakhs is the outstanding balance as on 31st March please respond if the amount is not correct. Please respond if the amount is not correct.
(8:43:29) If you do not agree with this with the information see we are sending request right confirmation request right inside that some information we put right if with that information in the request if third party don't want to agree then only he should respond that is NCR format able to understand when NCR will be used that point we have there's a specific question asked in past examination under what circumstances negative confirmation request can be used that specifically we will discuss so look at so the design of the request
(8:43:57) affect the response response rate. If at all responding is made very easy, the third party has to simply yes reply yes or no they will respond very fast. If at all third party has to take some pressure they have to take some stress they need to open their books of accounts and fill the amount.
(8:44:14) If that is the way you are asking they may not respond. So the design of request effect response rate and reliability. So when you are designing no you should keep in mind the following points. What assertion you are addressing? Assertion means are you talking about existence of account balance or are you talking about valuation which assertion you are addressing accordingly you should design and identify the risk of MMS layout and presentation of the request past experience on civil audit method of communication management's authorization
(8:44:43) for confirmation parties ability of the confirming party to provide requested information some third parties know the person manager may not have the authority to respond so that is also important when you are designing the confirmation request see management author authorization method communication, paper, a mail, past experience, layout and presentation.
(8:45:00) You may use a positive format or negative format. Within the positive format, you may put a blank and then ask them to fill or you you mention the amount and ask them to respond yes or no. All these points you should keep in mind. See, if you're checking over statement, then there is a way to ask. If if you're checking understatement, you are worried about risk of understatement, then there is a way to design the request.
(8:45:19) So, there are so many elements you need to consider when you're designing the confirmation request. So these are the factors any four points four marks question they'll ask any four points you need to write straight question like this can be asked so okay you design the request now send it now send the request okay sir I sent sir send the request including follow-up request as and when needed generally follow-up request will be there in positive confirmation request format in a negative confirmation format follow-up request
(8:45:43) may not be there okay next ensure requests are properly addressed and validated addresses before sending In exam they might ask you write about sending the request. Use additional or follow-up request if repric are not received within reasonable time to enhance reliability. Use pass to confirm request that do not state the amount. You see you know don't mention amount in a pass to confirmation request.
(8:46:07) Tell the third party to fill the amount and send but you know if you do like this it might it may reduce response rate due to extra effort is involved. So generally the best way to send a confirmation request is sir we are the auditor. As on 31st March in our never books up accounts there is a liability for you that we need to pay some amount to you blank amount.
(8:46:25) Put a blank please fill the amount that we have to pay as per your records. Third parties may not respond for these kinds of request. This layout and presentation is not acceptable for third parties because they need to put the amount. Some third parties what they feel you know I if I put a wrong amount company will pay lesser amount to me like that they'll be having some fears.
(8:46:43) Next so what is the procedure? Very simple. First determine the information. Identify appropriate confirming party. Design the request. Send the request including follow-up request over. This is the external confirmation procedure. Standard is not yet over. My dear, there is one more definition. There is one more definition. Exception. There's a definition called exception.
(8:47:03) Many students don't know this exception definition is there. So that we will discuss now. Next. Next. Negative confirmation request. What is a negative confirmation request? In a negative confirmation request, no, I will send in I will send confirmation request to the third party. In that information I will mention like this sir in our books of accounts the account balance is like this please reply if you disagree ignore otherwise nonreceipt of reply within 3 days nonreceipt of reply within 3 days we assume that you agreed with this like that we will mention and then send now 3
(8:47:34) days over third party did not respond we assume that third party agreed but tell me the third party explicitly agreed no you see neg you you know See that's why some sometimes what happens you send a negative request. Third party has not at all seen the mail. Third party has not seen the mail at all. He didn't open at all. He was on a vacation.
(8:47:57) But actually our client books of accounts and third party books of accounts there is a lot of difference. And when you investigate you will know that our client books only wrong. But what happened? You know you sent a negative request third party did not reply. So what auditor felt you know everything is matching. Our client books of accounts are right.
(8:48:13) So that's why negative confirmation request is very dangerous. Negative confirmation request provide less persuasive evidence. It is less convincing than positive confirmation request. Auditor shall not use NCR. Negative confirmation request you are prohibited to use unless unless all the conditions below are satisfied. All the following conditions must be there.
(8:48:33) Then only in that scenario in that class of transaction in that account balance negative confirmation can be used. Yes, low risk of MMS and obtain evidence of control effectiveness in the in in our client. No controls are effective and on the data are circulators someh you know you got an evidence that low risk is there population includes small items they're all small items low exception rate is expected exception rate is low what is exception exception rate is low I agree what is exception generally exception means what you know see here you see exception means difference between
(8:49:05) exception means what difference between information requested by auditor or contained in entity records and information provided by third party. So I sent a confirmation request right inside that I mentioned some amount third party also replied he he said that amount is same no difference then there is no exception suppose no I mentioned amount 10 lakhs third party said no sir it is not 10 lakhs it is 11 lakhs now there is an exception information requested by the auditor and information provided by the third party if there is
(8:49:34) a difference between them then that's an exception generally what information I request third party whatever information is there as per our company records in our company books of accounts what amount is there that account only will request them to confirm so that's why information requested by the auditor are contained in entity records and difference between this this and this that's why you see difference between yellow and green letter which I highlighted here so whenever there's a difference no you must analyze and what is its impact on the enter population you should check sometimes know see
(8:50:08) remember you know in our books of accounts his balance is 10 lakhs he replied Ed saying 8 lakhs only. Can I straight away say our client books of accounts are wrong? No. See when you send a confirmation request third party replied disagreement that he he did not agree with this disagreement is an exception.
(8:50:26) That's not misstatement. Many students will think if third party replied with a different amount then our books of accounts are misstated. No no no wrong. You you need to investigate further why there's a difference between our records and third party records. Sometimes third party records might be wrong. So that's exception.
(8:50:45) Now if you think exception rate is low, if the exception possibility is very low, there also you can send NCR. Exception rate low means what? Last week only both of them conformed with each other. This week no transaction happened. So obviously the exception possibility is very low and no conditions exist that indicate that recipients will disregard the request.
(8:51:03) You know I know very well if I send a NCR he will definitely see that and if at all he ignore this means if at all I did not get reply within 3 days means I for sure know that he considered this so that's it if these four conditions are satisfied NCR can be used now suppose no you send a negative confirmation request you did not received any response you did not receive any response right non-reet of a response means generally what you assume you assume that everything is matching but do you know explicitly the third party agreed is No
(8:51:33) non-response to NCR does not explicitly confirm receipt by third party. You know in the recent CA final May 25 exam these were asked in MCQs. In the recent May 25 CA final these points were asked in MCQ so depth. Okay. And this point was there even in CA inter many you know in MTPs and all the tested ones nonresponse non-response to NCR provide significantly less persuasive evidence.
(8:52:03) So to an NC if you don't receive any response what does it mean agreed or third party has not seen what does it mean we don't know so there is no explicit confirmation here he didn't respond so explicitly we don't know whether he agreed or disagreed we don't know recipients generally will respond if the information is not in their favor and less likely to respond otherwise they will respond when when they want to disagree which is favoring with them suppose if information what we sent is not in their favor then they will immediately respond suppose if the information as per our records is
(8:52:32) favoring them. They may not respond. So, NCR you did not receive any response. There are so many interpretations on it. That's it. So, nonresponse to negative confirmation request. How should auditor interpret? This itself can be asked as a four marks question. This itself can be asked as a four marks question.
(8:52:49) And under what circumstances NCR can be used this itself can be asked as a four marks question. Finally, evaluating evidence obtained through external confirmation. You know what the second point is there right? Again there is an MCQ in CA final in the recent May 25. In CA final they have asked this R CA inter standard they tested in final. So there's a high possibility that in C also they will test they tested it already.
(8:53:13) So now now whenever you are performing external confirmation you might have got some result. The third party would have replied or not replied something would have been there. Please evaluate the results. Okay. Whether the external confirmation have given you reliable evidence and relevant evidence. check out see whether any further procedures are necessary.
(8:53:29) When you're evaluating individual confirmation request like each confirmation request when you're evaluating you can you can categorize the external confirmation result into four categories. The results is categorized into four parts. Response by third party indicating agreement third party responded everything is matching or a response third party responded where you felt that is not a right response you felt unreliable or non-response. Third party did not respond exception.
(8:53:52) Third party responded but difference is there in the information like he gave some other information which is not matching with your records. So the result of external confirmation can be four categories. Four categories. One agreement by third party. Disagreement by third party. Three third party reply is not reliable. Four he didn't reply at all. That's it. Next.
(8:54:12) So the auditor's evaluation combined with other process helps in determining whether so after looking at these result you may have to decide whether further audit process may be required or not you need to check out that's it 55 is over. Now finally one more point sometimes management refuse to send external confirmation to one or two parties.
(8:54:31) Okay, they may say sir some some issue is going on now if you send external confirmation again so the client m client might misunderstand let's not okay so the auditor inquiry if management is refusing inquire the reasons about management's reasons for refusal and see whether that is valid and reasonable look at the evidence reasons for refusal may include some legal dispute going on or some negotiation that going on so the auditor must seek evidence to validate the reasons how the refusal impact the risk modify the nature timing of procedures and get alternative you want to Get evidence to be external where external
(8:55:00) is not possible. So try to perform alternative procedure. So perform alternative procedure and if management refusal is unreasonable communicate with the top management those charged with the governance. Further such a refusal sometimes may indicate fraud risk factor and what is its impact of refusal on auditor's report.
(8:55:18) Check out sometimes you may have to give a qualified opinion or disclaimer of opinion if the refusal is unreasonable. That's it. Five out of five is over. Tell me honestly how many of you found out many new points in this imagine in a 15 minutes revision you know I showed you so many new points remember this is not something I'm discussing out of the box this is there in the IC book cross check right now open IC book and cross check so many students they were missy misguided by showing all the standard simple nothing don't believe be clear
(8:55:49) this is the depth of the standard mark my word tomorrow exam you will find many advanced questions where students feel some students might feel that is not there but don't worry you all followed this you all listened to this you will not feel surprised if a question comes from in-depth corners of the standard that's it I hope you understood thoroughly 55 next next 510 510 initial audit engagement opening balances so now by the way once uh just let me open so 5.1 uh inventory completed litigations and claim segment
(8:56:23) 5.5 important definitions we understood Confirmation procedure factors for designing confirmation request management refusal NCR can we use a negative confirmation as audit to four conditions evaluation of all these points we understood now correct now we will discuss F10 in Fighton Fighten standard heading is what you know initial audit engagement opening balances initial audit engagements hyphen opening balances initial audit engagements opening balances so this is the heading of the standard 550 related parties that's it no more related party
(8:56:54) disclosures no related related parties that's it what is related party standard we'll discuss later okay fight first we need to understand opening balance definition and there is a definition for initial audit engagement first we need to understand the definition then we need to understand what is the audit procedure for opening balance then we need to understand how to conclude in report and to what extent audit procedures has to be performed for opening balances what is the nature and extent of audit procedure for opening
(8:57:18) balances that all these four points we need to cover okay in fighter so that's it just 2 minutes be online uh I will be I will be continuing. Just be online 2 minutes. Yeah. Yeah. Somebody saying uh uh the book which they're following many points are missing. Yeah. That's a problem. Many
(8:58:29) students were misguided with u improper books. They say 100% ICA syllabus is covered but not many uh I should not say this many faculties some concepts which they can't explain they remove it from the book. So that is something uh very serious sin. Fine. I'll go with fit. Now fighten. What is fighten? Initial audit engagement and opening balance.
(8:58:57) What is initial audit engagement? You know first time I'm doing audit of this entity. That's an initial audit engagement and uh I mean initial audit engagement. Uh first time I'm doing audit for a particular client. That's an initial audit engagement or previously there is no auditor at all.
(8:59:15) Simple simple there are two cases. Previously the financial statements of the client were not at all audited and I'm the one who appointed right now for the first time. Two previously some other auditor was there nobody replaced him. Both these engagements are called as initial audit engagement.
(8:59:31) And when you're performing an initial audit engagement you must obtain evidence about opening balances. That's very severe. Now initial audit engagement an engagement where prior repeated financials are not at all audited or they were audited by previous auditor predecessor auditor that is called as an initial audit engagement.
(8:59:49) Opening balance means what? Opening balance means what? Account balances which are existing at the beginning of the accounting period which are based on the prior period closing balances last year closing balances carry forward that itself is opening balance. Not only that opening balances reflect prior period transactions, events and accounting policies.
(9:00:06) Opening balance also includes matters which are just disclosed in the last year. Balance sheet P&L notes to accounts and discloses were there like contingencies, commitment discloses, they will also be treated as opening balance. Remember the definitions are important for MCQ purpose. Next. So what is the objective? Very simple.
(9:00:24) In in an initial audit engagement, the objective is you know you have to obtain sufficient appropriate evidence about whether opening balances contain misstatements which might affect the current period financials. Accounting policies are they consistently applied and if there are any changes to the accounting policies whether the changes are correctly reflected.
(9:00:40) So, so first let us look at accounting policies point directly auditors conclusions and reporting I will see okay reporting on accounting policies very simple see we we have to get an evidence that last year whatever accounting policies were there whether the same is followed sometimes changes will happen okay changes let it be whether the changes in accounting policies were properly accounted and disclosed if at all they were not properly accounted or not properly disclosed then we should give a modified opinion qualified or adverse opinion if the auditor conclude Current
(9:01:09) period accounting policies are not consistently applied or changes in accounting policies are not properly accounted for or not adequately disclosed. The auditor must express a qualified opinion or adverse opinion. You have an evidence here accounting policies are not consistent or there were there are some changes which are not properly accounted.
(9:01:26) Therefore we must give adverse opinion or qualified opinion as a case may be sometimes you know reporting on opening balance directly. First let me talk about reporting on opening balance then I will talk about audit process. quoting on opening balance. If you are unable to obtain evidence regarding opening balance, you are not getting evidence on opening balance.
(9:01:45) The auditor will express the auditor sorry the auditor will express a qualified opinion, a qualified opinion or disclaimer of opinion. Suppose opening balance or materially stated which is affecting current period financial statements and they are not properly accounted for or not adequately disclosed. The auditor must express a qualified opinion or adverse opinion as the case may be. See if you are unable to obtain evidence disclaimer of opinion.
(9:02:05) You have an evidence that they are materially mistated in the current period. Adverse opinion. Worst scenario. Either qualified or adverse. Qualified disclaimer. Qualified adverse. You see part one revision audit reporting. I told where qualified opinion will come, where adverse opinion will come, where disclaimer will come. I clearly told. Next.
(9:02:23) Next. Now what is the audit procedure for opening balance? Verify that prior period closing balances are correctly brought forwarded or disclosed as a prior period item. See whether last year closing balances were they correctly brought forwarded. How do I know? How do I check? Perform one or more of the following procedure.
(9:02:40) Review audited financial statements of the prior period. Last year audited balance sheet is there. Check that with the current year opening trial balance like evaluate whether current period processes provide evidence. Current period no some payment made to data. Opening date in April and May some payments were made to data. They were belonging to last year balances. See how much amount is paid.
(9:02:57) Oh, this much amount paid in the current year means last year outstanding amount is correct. Right? Conduct specific procedures for opening balance. Specific procedure for opening balance means what? Opening trial balance we will match with last year audited balance sheet assets and all debits side of the trial balance liabilities and all credits in the trial balance like that we will tick we will match like this that's it next suppose no if auditor obtains evidence for misstatements and opening balance which will materially affect the current period then perform additional
(9:03:23) procedures do go in depth verify further to know what is its impact if auditor concluded MMS exist the auditor shall communicate to the management and top management ask them to rectify the financial statements ask them to show it as a prior period item. If they rectified and showed it as priority period item correctly, they accounted then no problem. I will give unqualified opinion.
(9:03:43) Now what is the nature? So what procedure we need to perform? They understood. We understood now. So what is the procedure for opening balance? Four marks. Conclusions and reporting straight away they can ask it as a four marks question. Now we are discussing about nature and extent of procedures. To what extent I will perform opening balance? The nature and extent is dependent upon accounting policies followed. Nature of account balance and transaction. Risk of MMS involved.
(9:04:07) Significance of opening balance to current period. Suppose last year only we started business. No much of business happened in the last year. So in the current year opening balances may not be significant. So we just to briefly verify whether predecessor auditor's opinion was modified. One more important thing last year auditor gave a modified opinion.
(9:04:24) So then opening balances might play very major role in the current year. So that also you should see. So factors affecting nature and extent of audit procedure. Four marks questions. straight away. What are the factors that affect nature and extent of audit procedures for opening balance? What accounting process they're following? What is the nature of accounting balance? Significance of opening balance. Whether prior period auditor has given modified opinion.
(9:04:46) Suppose no last year financials were audited by previous auditor. The auditor conductance can obtain sufficient appropriate evidence by reviewing audited financial statements of the last year. review supporting schedules and all and reliance on ordinarily you you happily trust last year closing balances unless current period processes indicate some misstatements generally you are eligible to trust last year closing balances because last year somebody has audited so you don't have to doubt them by default you can trust that they are free from MMS but in the current period you found some mistakes
(9:05:15) might be there in the opening balance then only you will not trust it for current assets and liabilities evidence for current asset liability may obtained during the current audit like how in the current audit evidence we get regarding current assets and liabilities for trade receivables and payables. No, in the current year collections might be there or pay amounts might have been paid.
(9:05:33) That itself is an evidence for existence. Inventory current year procedures may not provide sufficient evidence regarding opening inventory value. Therefore, additional procedures are necessary with respect to inventory. Know generally in the current period currentier purchases and sales if you're checking you may not get evidence regarding opening stock.
(9:05:49) So for opening stock if you want to get evidence you need to perform additional procedure first do inventory counting and reconcile till opening balance perform process on valuation of opening item test gross profit and cut off. So for inventory you may not get evidence by performing current procedures. You may not get evidence regarding opening balance in the current period.
(9:06:07) You may have to perform additional do first physical accounting trace back to opening balance on the transactions and do valuation of valuation and perform cut off processes. That's so you can get evidence on opening value of inventory for non-current assets. No okay uh the evidence can be obtained in current period examining accounting records and underlying information using confirmation with third parties and additional I think this non-current point is not that important but this inventory point is very important MCQ it might be important so MCQ it might be
(9:06:33) important that's it fight and standard is over who is a predecessor auditor predecessor auditor is auditor from another firm who audited the last year financials and is now replaced with you you are the current auditor so since you replaced the previous auditor for you it is a first time audit that's why it's called initial audit engagement but we apply the standard even if it is a recurring engagement not just in initial audit engagement we apply the standard we follow the standard even if it is a recurring audit engagement that's it 510 standard is over next 550
(9:07:05) I don't know whether I'm giving you additional points all that I don't know but I hope I'm giving you I I hope I'm giving you crystal clear clarity in the shortest time you see 50 minutes hardly we covered almost u uh three standards that to big big standards 5.
(9:07:23) 1 55 550 many of you whoever think they're nothing small easy standards now you might have understood how lengthy these standards are how much content is inside the standards that's it just 2 minutes we'll continue 550 uh I'll be happy if you reply me whether you are understanding or not whether you're able to revise quickly or not Yeah. Now, so look at this. 510 is over. Now 550. There are totally five concepts that we need to understand in related parties.
(9:08:19) Now, first we need to understand definition of related party. Many, many do not pay attention to the definition. Definition of related party is very important. Okay. Then what kind of related party relationships? You know here there's a word called RPRT. Related party relationships and transactions. Related party relationships and transaction. Nature of related party relationships and transaction that we need to understand.
(9:08:43) Then we need to understanding of entities related party relationships and transactions. Existence of related parties small entities how related party relationships and all will be there. Next up now meaning of related parties. You know actually many students think that related parties means we need to check disclosure requirement. Wrong.
(9:09:04) Here the standard mainly deals with audit responsibilities relating related parties. Specifically it applies in relation to risk of MMS due to fraud. Most important fraud risk factors in relation to related parties. That is what the primary focus primary focus of the standard.
(9:09:25) Now what do you mean by related party? The standard first what it says you know follow applicable financial reporting framework definition. Suppose if accounting standard defines related party followed accounting standard definition. If NDS defines related party follow the definition. Suppose if the framework is silent. Suppose if accounting standard there is no related party requirement or if NDS does not talk about related party actually in reality they're talking.
(9:09:45) So auditing standard related party definition is useless basically. But in exams MCQs they might ask MCQ in one of the MCQ they ask this note point in one of the MCQs they ask this note point. Okay. So now related party means what if at all financial reporting framework is silent.
(9:10:04) So you know who are related parties? Very simple. A person or entity that has control or influence over reporting entity. Reporting entity means the entity where we are reporting means our client on our client. Did somebody has control? Did somebody has influence their related party? Okay. Another entity over which reporting entity has control.
(9:10:21) Another company is there on that company. Our client has a control. Our client has an influence. They are related party. Another entity under common control. There is another company. Along with this company, there is another company. We both are under common control. Through common ownership, close family member common like these are nothing but sister concerns.
(9:10:40) These are nothing but sister concerns. They are also related parties. means the company which is controlling me or influencing me or the company which I am controlling or I'm influencing or another country another company where me and that company were controlled commonly by somebody means sister companies these are all related parties now there is one exception here entities under common control of a state means what you know here it's not state government central government not that state means government that's it entities which are under common control of a government they are not treated as related parties unless they involve in
(9:11:12) significant transactions and sharing of resources. So, companies which are under common control of a government, they are not treated as related parties. Okay. However, if they engage in significant transactions with each other, then they will again be treated as related parties.
(9:11:28) So, just because government is having common ownership in many companies, you can't say each company is related party to each other. No, that's it. Now, control means what? Govern the entity and operating policies. You know, significant influence means what? If you can participate, if you are having power to govern, then that's control. If you have a right to participate, then it's influence.
(9:11:48) Now, how do you how do you know that there is a control or influence other equity holdings we have in that entity? We have equity ownership, financial interest is there, holdings of other financial interest, being part of top management or being a close family member of top management, significant business relationship with key management.
(9:12:05) So, in all these way, we can have control. They may ask you as a four marks question. What are the factors? You know they may ask you define control and significant influence and what are the indicators of control and indicators of significant influence. They may ask you this entire segment as a four marks question. Next some related parties will be there with the dominant influence.
(9:12:27) Related parties sometimes can exert can exercise dominant influence over the our company. This is relevant in assessing risk of MS due to fraud. Is there any related party who is dominant in the company and I need to know what kind of transactions happen with them. Are there any fraud risk factors in that? Now uh this SP points relevant special purpose entity point irrelevant not required.
(9:12:49) Now nature of related party relationships and transaction many related party transactions no most of the related party transaction they will happen just like a normal unrelated party transaction most of the related party transactions occurs in normal course of business and may not pose any higher risk. Okay compared to unrelated parties. What kind of risk is there in unrelated party transaction? the same level of risk with any related party.
(9:13:08) Generally, most of the related party transactions are just neutral normal like unrelated party transaction. The nature of related party relationship can sometimes result in higher risk of MMS. Some related party transaction may give higher risk. For example, related parties may have extensive complex structure like some related parties.
(9:13:27) No, they are not direct related parties. You know, a complex structure is there. Information systems may fail to identify or summarize transactions and outstanding balances. Non some related party transactions may not follow market terms and conditions. In all these cases, high risk will be there.
(9:13:45) Most of the related party relationships and transactions may carry no special risk. They'll be ordinary. But in some cases, related party the nature of relations and the nature of transaction can sometimes result in higher risk. Example complex relation ineffective information systems like our computers.
(9:14:03) Our systems are not capturing related party data or related party transactions are happening at non-market terms. In all these cases, the related party relationships and transactions carry higher risk. They may ask you in exam you know generally related party transactions may not carry higher risk compared to unrelated party.
(9:14:20) But there are some circumstances where related party relationships and transactions may carry higher risk. Explain. You need to write this entire point B. They're indirectly asking you nature of related party relationships. Nature of related party transaction. this question they're asking next. So that's why you need to understand who are all the related parties of the entity, what transactions happened with them.
(9:14:40) So the you know identify the the auditor shall inquire who are the entities related parties. Are there any changes compared to last year? What is the relationship between the entity and related party? Are the holding are the associate or the joint venture? What exactly? Whether entity entered into any transaction if so what is the type of transaction? purchase a sale loan, what is it? And what is the purpose of the transaction? So the auditor shall inquire who are the parties, are there any changes compared to last year? Are there any
(9:15:05) transactions? What kind of relationships we had? Are there any transactions with them? If so, what kind of transaction? How much amount involved? What's the purpose? The auditor shall do risk assessment procedure. Obtain an understanding of controls established to identify and disclosure of related party.
(9:15:22) So they may ask you write about risk assessment procedure for related party. Four marks question. They might ask you or they might ask you this itself as a five marks question. Write about understanding of entities related party relationships and transaction. This is they can ask you as a P mark question.
(9:15:38) Next SS controls for authorizing and approving significant transaction. C in the company what kind of controls implemented to approve related party transaction. Evaluate controls for authorizing and approving significant transaction. C are there any outside the normal course of business any transaction? What controls the comp company has implemented? How they are authorizing that check out and verify existence of related party.
(9:16:03) How do I know whether there are related party transactions in the company? First I will ask company how do I verify existence of related party? I will look at income tax returns. I will look at information filed with regulatories. I will look at shareholder records. I will look at agreements with top management. I will look at significant contracts and agreements. I will see invoices and correspondence. I will see life insurance policy and see who is the nominee and on and what people they have taken.
(9:16:21) I will see the I will see the I will see just a minute. I will see internal auditors report. I will see the filings with regulators. I will see shareholder register. So any five points what are the records and documents you will inspect to identify related party relationships and transactions. Any five points you can write.
(9:16:41) The auditor has to be alert for related party information while reviewing records and documents. So you have to be you have to be very alert throughout the audit. Next. Next. So consideration specific to smaller entities. In smaller entities, no you know the control environment uh you know smaller entities often have a different control environment like governance roles may not include outside members. Same person is management, same person is top management.
(9:17:06) In some cases governance is handled directly by the owner himself. Control activities in smaller entities are typically not formal. They're less formal. So there may not be documented no documentation will be there. So who are related parties? What transactions happened with them? There won't be any records also.
(9:17:23) The owner may either mitigate by full active overseeing or potential increase through involvement of related party transaction. So what is the audit approach in smaller entities for these smaller entities? Auditor may obtain understanding of related parties by enquiring management observing management oversight and re activities inspecting relevant documents.
(9:17:40) So in smaller entities auditor have to ask direct management who are the related parties observe how they are having control on the financial reporting inspect relevant documentation in straight away this itself can be asked as a five marks question that's it okay so uh that's it with this related party 550 standard is also over so that's it major chapter is completed in audit evidence see we are not covering four standards I told 500 520 530 610 I'm not covering and I told you I will cover two more topics topics also one assertions topic I'm covering two audit trail topic
(9:18:10) I'm covering yes or no like uh as I already told at the beginning so now I will cover 5.1 over 5.1 over okay 55 over 510 is over 5 550 is also over now concept of assertion concept of audit I will cover now let's let's go let's proceed So in this note we have something called assertion.
(9:18:54) Assertion means what? Yeah. Assertion using concept of assertion. Assertion means what? Very simple. Assertions are nothing but representations by management. They may be explicit assertions or they may be implicit assertion which are mentioned in financial statements which are verified by the auditor to identify potential misstatement.
(9:19:11) You know for example you know here there is an example. For example, see I found in balance sheet under current assets like cash in hand 8,000 rupees. Like in balance sheet of one company cash in hand 8,000 is there. What is it asserting? What management is asserting there what management is trying to tell through that balance sheet item what management is saying indirectly management is indirectly saying the company forum means company here entity forum organization concern anything is same the firm had 8,000 in hand in notes
(9:19:38) and coins indirectly that's what they're saying that the cash was free and available for expenditure the books of account also show identical amount at the end of the day so when I see balance sheet 8,000 cash in hand this is what management is asserting suppose another example plant and missionary 2 lakh Tax is the original cost depreciation of and accumulated how that much current depreciation this much total accumulated 83 and net return on value 1 lakh 70.
(9:20:02) So they mention depreciation you know schedule like this what is it asserting indirectly they're saying the firm have owned plant and missionary historical cost is 2 lakhs plant and missionary is physically there asset is being utilized for business purpose total depreciation is 83,000 till the date 13,000 is belonging to current year and the amount of depreciation has been calculated based on some method of you know depreciation.
(9:20:26) So by mentioning this information by giving this information management is trying to tell indirectly so many things. See you know impliedly they are saying they're owner of the plant and missary that's an implied assertion yes or no and we are indirectly telling physically planted missionary is existing these are all various assertions so broadly assertions are divided into these categories assertions related to transactions and events you know what auditor has to verify these assertions we need to verify whether transactions events really occurred we need to verify
(9:20:55) whether all transactions that should all been recorded that should have been recorded or recorded whether they are all complete completely recorded whether transactions occurred occurrence means what you know when I want to check over statement I will check occurrence whether really transaction occurred if it is really occurred then recording is correct accuracy transactions events are recorded appropriately with correct amount whether the amount at which they recorded are they correct that's called accuracy assertion transactions and events are recorded in correct
(9:21:18) accounting period are a sale is recorded in 31st March see whether the sale really happened transactions and events are recorded in proper account that is called classification so with respect to transactions I generally check five types of assertion With respect to balance sheet items, I will check existence. I will check rights and obligation.
(9:21:35) I will check completeness of assets and liabilities. Accounting I will say valuation and I will see allocation. Whereas for presentation and disclosure items, I will check occurrence and rights, completeness, classification, accuracy and valuation. And remember these assertions I may combine sometimes like you see here auditors may combine assertions across transactions and balances provided all aspects are verified.
(9:21:59) Now further you know nature of assertions generally assertions are not specifically stated but are implied in nature. For example here no plant and missionary two lakhs worth of amounts is showed indirectly how what we are concluding what planted missionary is owned by the company. We are indirectly concluding that it is owner owned company own missionary balance sheet does not say own plant and missionary.
(9:22:16) They simply say planted missionary ownership we are assuming that's an implied assertion. Okay explicit some explicit explicit assertions are made when specific details are needed to give a complete picture. For example, secured loans four lakhs name of the lender nature of the security interest rate payable if at all we are mentioning them specifically then that's an explicit negative sometimes assertions are negative in nature like negative means what for example negative assertion means for example no implied negative
(9:22:41) assertion I'll tell you suppose no in the balance sheet there's no building like fixed asset schedule is given asset schedule is given depreciation schedule is given but building point is not at all there the word building itself is not there impliedly we are saying that there is no building okay next explicit negative assertion Explicit negative assertion means what I am showing I am showing buildings and I'm mentioning that zero not existing the explicitly I'm saying that there is no building that's a term so auditor the financial
(9:23:09) statements contains an overall representation in in relation so the auditor has to verify you know if each uh I mean uh yeah fine this one this one you see the auditor's opinion is based on overall representation to form the opinion auditor will verify all the assertions whether they are explicit assertions or implicit assertions both positive and negative assertions. Individual judgments leads to conclusion whether financial statements as a whole are free from material misstatements.
(9:23:33) So you need to verify all the assertions. So when you're reading balance sheet now try to figure out what are all it is trying to tell. Verify all those elements. That's what assertion concept is saying. That's it. That's what assertion concept is saying. Actually much more in depth can be discussed in this. Uh but that's okay.
(9:23:50) From revision point of view this is more than sufficient. Then audit trail concept. Audit trial concept. So what is an audit trial? You know in calculator no when you're totaling some calculations no plus minus or plus or minus some total you did you can do check right like what are all items you added what are items you reduce you can check right that's actually audit trail that's actually a example of audit trail. Okay.
(9:24:14) So in companies know uh there will be so many people involved. So accountant is there finance manager is there purchase manager is there production manager is there you know storekeeper is there many of them will participate in accounting indirectly. So whenever somebody update any record their name will be recorded when they recorded at what time they recorded this transaction how much amount they recorded later how the transaction is modified is the narration modified ledger account modified everything will be recorded in the computer that is called audit trial. So
(9:24:40) audit trial is a documented means recording flow of transaction that helps trace how a source document leads to a journal entry and ultimately reflected in financial statements. So purchases 10 lakh cr purchases some 1 lakh cr is there break up 10,000 purchase transactions are there one transaction you take the transaction no originally the transaction initiated through purchase order 7 days back purchase order is there then goods received on the second day then they were entered in the inventory records on some third day
(9:25:09) then it is voucher is prepared on fourth day then finally entered in the books of accounts on fifth day and that is how it is reflected in the financial statements entire flow of transaction I can see that is called audit trial. Audit trail is used as audit evidence to establish authenticity and integrity of a transaction.
(9:25:27) It is a stepbystep record where we can trace accounting trade financial data into its source. Originally what happened? See today purchase is reflected in balance P&L account this much value. But before it is reflected here it is reflected in so many places where originally it started. So I am tracing back to its source that's called audit trial.
(9:25:43) Audit trial documents. Audit trials document evidence of events to reduce frauds. But maintaining audit trail is very storage cost is very high. Database cost is very high. So system expenditure time is required to analyze the data. Some automated tools and all will be there. Okay. Benefits of audit trail. Audit trail stands you know this itself. Benefits of audit trial.
(9:26:02) A four marks question can be asked. Meaning of audit a four marks question can be asked. Any of any of these can be asked as an exam. Benefits audit trial strengthens. Audit trial strengthens you know uh it it makes internal control strong. Improve data security by fixing responsibility of user activities.
(9:26:20) Rebuilding events when problem occur. If some if some transactions modify later, some fraud happened, I will rebuild what all happened previously. Okay. Who entered this transaction? When they entered this transaction, everything will be recorded. You know, tracking user activity to identify responsible person. Audit trail analysis helps identify reason for problem. Ensure that system operates as intended.
(9:26:39) Systems with auditorial features build confidence in auditors by verifying whether management controls were operating effectively. Audit trail helps to verify whether a transaction performed by right person authorized person or not. They enhance data security and increase reliability of audit evidence obtained during the audit. That's it. This is audit benefit.
(9:26:58) Yes or no? That's it. So, so with this uh this audit evidence topic is mainly over. Four standards are predominantly covered. Yeah, four standards are predominantly covered. Auditorial concept is covered and I also covered uh assertions topic. That's it. Okay. So uh you know internal audit now I will just SC external I will just give you a brief idea SC10 using the work of internal auditor you know you can use in two ways the work of internal auditor type one using the work which is performed by them type two using them directly that's
(9:27:29) called direct assistance you know type one when you can use type one using the evaluation of inter audit function type one when I can use three points I will check you know uh organization status objectivity I will check you know IIAF organization status whether do they support objectivity whether internal audit function is having objectivity or not that I will check first point second point I will check their competence third point do they have a systematic and disciplined approach I will check in all these three cases if the answer is yes then I will use their work now you
(9:28:00) know competence when you're checking you know directly in exam competence itself can be asked as a form marks question or objectivity and its evaluation this itself can be asked as a form marks question be careful anyway this can be asked so see I'm here I'm just telling you how a question can come you know here if work shall not be used type and work don't use in the following three cases objectivity is not adequate lack of you know lacks competence does not systematic disciplined approach including quality control in all these three cases don't use internal audit work okay next nature and extent of work
(9:28:32) so type one work if I decided to use to what extent I can use what nature of work I will use generally we use in a work for testing operating effectiveness inventory accounting performing substantive processes involving limited judgment ment if there is a high judgment we don't use their work tracing transactions to information system testing complaints with regulate requirement okay next circumstance where internal audit function work has to be used less where we shall perform more of the work directly more judgment is required in planning and performing more
(9:28:59) judgment is involved in evaluating evidence if the assessed risk of MMS at assertion level is high you know that time also you have to perform the work directly in auditor is lacking objectivity inter auditor is lacking competence high risk is there more judge agement is involved.
(9:29:16) In all these four circumstances, you have to perform the work directly depend less on the internal auditor. Okay. Then then external auditor usage of IIF staff for direct assistance. Direct assistance means what? Under my you know the internal audit department some two or three members will come into my team members and we will work along with them.
(9:29:40) So prohibition if you know if there are if there are threats to objectivity and if they're lacking competence I will not use them for direct assistance you know so okay suppose I decided to take them into my team but I will not give the following four kinds of perks areas involving significant judgment I will not allocate to direct assistance people or area related to high risk of MMS I will not allocate to them there it is it is related to work which they already perform that area I will not reallocate them or decisions I need to take under this standard under 16 standard I need to some decisions that decision-m power I will not allocate to them you know
(9:30:08) before I use internal auditor for direct assistance I will have to enter into agreement with two people one the persons whom you are taking direct assistance with them you need to enter into agreement management with management that management will allow their internal auditors to work under my direction and from internal auditor written agreement like that they will maintain confidentiality of whatever I am instructing and any threats to their objective they should immediately tell me like that I will enter into agreement with internal auditor That's it. So this is 610 overview. I am not briefly I I
(9:30:38) just briefly discuss 610 remain like remaining four standards I'm not covering this in depth. Okay. I'm briefly discussing just a idea I'm giving you that's it with this audit evidence topic is over. Okay that's it. So I hope you thoroughly enjoyed with this revision.
(9:30:57) So audit evidence topic four standards I covered six I briefly told you assertion topic I briefly told you auditorial topic briefly told you but four standards I covered little better. Okay. So I covered I I I properly revised it and I also told you at every standard how a different question can come in exam. That's it. Okay. Take care guys. All the very best. The video clarity audio quality everything is proper.
(9:31:21) So let's discuss bank audit of banks. Just hardly 40 minutes. This topic will be over 40 45 minutes. I will tell you the main theme of this particular topic. Hope everything is clear. Kindly just confirm me once. Yeah, perfect. Perfect. So let's directly proceed discussing this bank audit topic.
(9:31:58) So audit of banks you know in this I figured out eight concepts which are very important. One, various reports which a central statutory auditor or statutory central auditor has to give. What are the various reports? How to appoint the auditor of a bank? What are the various contents of audit report in case of a bank and how to do audit of advances given by the bank? NPOMS drawing power calculation.
(9:32:25) Sanction limit means what drawing power means what? How to calculate drawing power and how to do audit of income and reversal of income. How to do audit of expenditure. If these points if you're clear bank audit is over hardly we will be spending another 40 45 minutes on this ch on this particular topic. See the kind of clarity that you are going to get amazing clarity I'll give you in this particular topic.
(9:32:43) Now audit of banks okay inside this you know uh mainly I will discuss uh important points what are the additional reports by statutory central auditor. Those of you I have already taken something called SBI example 12 joint to will be there you know uh 6,000 branches audit were done in SBI when I'm discussing other matter paragraph in audit report topic I discussed so banks will have something called central auditors principal auditors and branch auditors principal auditors are called as statutory central auditors branch
(9:33:16) auditors are called as simply statutory auditor in a bank and insurance company sea means statutory auditor means generally branch auditor sea statutory center auditor means principal auditors of a bank so that's what the main meaning now so what are various reports see first of course they will give audit report apart from audit report what are various reports which a bank auditors will give I report on adequacy and operating effectiveness of internal controls okay so this is an exit to the main audit report so a report on if coffer
(9:33:51) internal financial controls over financial reporting and their operating effectiveness. That is one report. Long form audit report. Bank auditors will also give one more report called long form audit report. SLR, statutory liquidity ratio. Banks have to maintain two reserve ratios. Cash reserve ratio, stat liquidity ratio.
(9:34:08) So whether they're complying with those ratios or not, the auditor has to give a report on that. The auditor has to give a report on IRA norms. IC income recognition assert classification norms. Whether the bank has complied with IRA or not, the auditor has to give a report. The auditor shall also give report on adverse credit deposit ratio.
(9:34:26) One time they have asked one MCQ here they removed the word deposit and they put the word credit. Adverse credit lending ratio they mentioned lending. Lending is wrong. Deposit ratio. Credit means lending. Deposit means bank accepting deposit lending. So lending to deposit ratio that is right word. Be clear. So that's it.
(9:34:45) So these five points you write in exam. They may ask you what are various other reports which a central statutory auditor of a bank shall give. These are the various reports the statute statutory auditor has to give. Apart from that Goss committee report, Gilani committee report is there. Gossch committee report is dealing with frauds and malpractices.
(9:35:02) Gilani committee report is dealing with controls and inspection, internal controls and inspection of systems. That's it. Then you know there are various types of banks. Non-computerized banks right now nothing is there in India like that is there right now. What are all the banks that we see in and around in India are fully computerized banks.
(9:35:20) Fully computerized banks know they use something called core banking system where all the branches are interconnected so that customers can access services from any branch of the bank. So auditor must ensure that RBI norms are incorporated in the computer system so that proper classification provisioning everything will be done.
(9:35:39) Auditor should exercise judgment, professional skepticism and prudence to validate system generate time to process higher productivity lower productivity. Simple. Okay. Now audit plan and what points the auditor has to consider. Just one minute. Yeah, I think proper it is proper. Yes, it is proper now. Yes. Look at now audit plan and points to be considered.
(9:36:16) What are the points to be considered in a bank? So when you're developing an audit plan in a bank, you should consider the nature and level of operation. You should consider what are the adverse features. You should also compare what is the level of compliance based on previous reports. Evaluate risks identified due to IFC and breaches and all that.
(9:36:33) So this is a very basic point control environment in a bank. What are what are the control environment in a bank? Control environment segregation of duties. This itself can be directly asked as a four marks question. Write about control environment in a bank. They may ask you this itself as a straight question. Segregation of duties like front office and back office.
(9:36:55) Accurate measurement and reporting of positions like cash balances. All that proper verification and approval of transactions. Regular reconciliation of positions and results. Setting appropriate limits for activities. Timely reporting and approval of exceptions. You know in this any four points control environment any four points.
(9:37:13) Physical security and contingency planning. This this point is not relevant. Procedure for conducting bank call is also not relevant. It's not that important at all. Then here here no reliance on others reports. Eighth point very important for four marks question. One time it was asked you know when we are conducting bank audit no the auditor will review other reports for identifying adverse comments whether anybody else have made adverse comments on the bank. For that reason various others report and all the auditor stat auditor wants for example
(9:37:46) internal audit report concurrent audit report manager change report manager charge when a manager is taking a charge that report handing over report and RPA inspection report internal reports previous auditor's report security verification reports various reports the auditor will go through in order to when he's planning the audit now he will go through other people's reports like this to identify whether they made any adverse comments like that.
(9:38:14) So this itself was asked as a four marks question once. So be careful. Next appointment by the auditor. So companies act qualifications disqualifications everything is as per companies act only. Further who will appoint the auditor? Normally for regional rural banks board of directors will appoint after taking approval from central government.
(9:38:35) For state bank of India COG will appoint CNG will appoint. Okay. Subsidiary auditors are appointed directly by state bank of India itself. SBA has some subsidiaries. Their auditors will be appointed directly by SBA. Remaining nationalized banks other than SBA remaining nationalized banks directors of the bank will appoint with RBI approval.
(9:38:54) Then all other banking companies means these here all private banks and all covered for them auditor will be appointed by shareholders at AGM with RBI approval. So first this you should read then you should read this then you should read this at last you should read this banks. So RRBs, SBI, other nationalized banks, remaining banks means private banks and all shareholders will appoint in the AGM provided again the auditor who will which auditor will be recommended in the AGM, RP will approve the auditor that auditor will be recommended in the AGM.
(9:39:22) Next remation it is fixed under companies act only 142 section in a general meeting. In case of nationalized banks and state bank and RRB central government and RBI will together fix the remation the powers of the auditors are same like company auditors under companies act reporting.
(9:39:42) So to whom auditor has to reporting to central government for nationalized banks auditors has to report to central government in that audit report in other report on legal and regulatory requirements. There is a pair in audit report. There is a section in audit report. Report on other legal and regular requirements. Under that the statuto auditor has to comment on true and fair view.
(9:40:02) Whether the balance sheet and PNL are they present in true and fair view. He need to give report whether uh explanations information. So the stat auditor will be asking so much of information whether he is getting proper information or not. Ensure the transactions are within the powers of the bank and verify branch returns.
(9:40:18) Are they adequate for the purpose of audit? You need to comment on all this and format of audit report same sea 700 format only the audit report will be there and in the audit report no quantification of advances deposits interest income interest expenditure for unodudited branches must be given in other matter paragraph I already showed this when I'm discussing quantification so the auditor has to tell how many branches are unodudited some five some 20,000 branches are unodudited okay 20,000 branches are audited what is the quantification 30% these 20,000 branch branches will occupy 30% of interest
(9:40:51) income, 25% of interest expenditure, 40% of advances, 35% of deposits. Like this you should give a specific quantification. Okay. Then report must comply with 143 and caro is not applicable for a banking company. Be careful. So format of audit report this itself can be asked as a four marks question. Be careful. Long form audit report.
(9:41:17) Further for banks know the auditor shall give ination to a normal audit report. The auditor shall also give something called long form audit report. So yes everybody I recommend you to watch at normal speed normal speed or reduce the playback speed. Since it's revision I'll be discussing little faster. So you either watch at normal speed or reduce the speed.
(9:41:34) Why are you hurrying? I'm already covering it in a super fast. So you please watch at normal speed or watch at a lesser speed. Long form audit report. You know for all banks public banker, private bank or foreign banker doesn't matter the auditor must submit something called long form audit report. This is something like a car only. Okay. Matters for long form audit report.
(9:41:53) What are the matters in the long form audit report? What points will be there? RB will decide long form audit report must be submitted by 30th June annually. So for example financial year 2425 March 2025 is the closing date. 30th June 2025. Next proper planning.
(9:42:12) So even for LF also you must do a proper planning so that you can submit on a timely basis. Executive summary for LF. Can you give a summary of LF? Yes, you can give but that is optional but recommended for key observations. So an executive summary LF is optional. It's not mandatory. For MCQ it might be important.
(9:42:29) And finally auditor must report fraudulent activities or suspicious transactions to RBI. Very important. And further if auditor identified any fraud which is more than 1 cr automatically 143 subsection 12 is applicable. In addition to reporting to RBI, auditors appointed under 139 mean stat auditors.
(9:42:49) They should also report to central government if at all they identify any fraud where the amount involved is 1 cr and above 143 subsection 12. That's it. So this is regarding reporting of frauds. Then now finally the most important now you see what are the points that we covered. Various reports stat or has to give completed audits appointment be completed. Audit report content be completed. Now we are going to discuss about audit of advances.
(9:43:06) What are various advances? Advances is the one which is major asset in a bank. What are the major assets of a bank? Advances. Major liabilities of a bank deposits. Okay. So, examination of advance most important large advance 100% you should verify remaining advances on a sample basis. Sir, what is a large advance? An advance is considered as a large advance. If the year end balance is more than 10 cr.
(9:43:30) If the year end balance of the advance is more than 10 cr automatically it is considered as a large advance or it is it is 10 cr that is vulnerable. Sir advance amount is less than 10 cr. Can I straight away call it a small advance? No, no, no, no, no. Compare with another number.
(9:43:49) Is it minimum 10% of the aggregate year and advance of the branch? Check out suppose know sir I have there is one branch sir for example Chennai State Bank of India one branch is there sir in this branch you know total advances as on 31st March from all customers total advances from all the customers 31st March let us assume that is 100 cr no not even 100 cr sorry 20 cr only 20 cr only now in 20 cr right so what is the large advance total outstanding balance with one customer is 10 cr Or it is more than 10% of the branch outstanding branch outstanding 20 into 10% oh 2 cr if one of the housing
(9:44:28) loan customer is there 3 cr outstanding amount is there in this branch total advance value itself is 20 cr into 10% 2 housing loan customer three even though it is less than 10 cr for that branch it's a large advance so whether an advance is a large advance or not one limit is 10 cr limit if the amount is not exceeding 10 cr is less than 10 cr then compare with the 10% of the branch Outstanding total outstanding if it is suppose if a particular loan to a particular customer an outstanding loan from a particular customer an advance from a particular customer is more than
(9:44:59) 10% of the total branch outstanding as on 31st March then that is also treated as a large advance so that's it whichever is less that's why either 10 cr or 10% of the total branch outstanding as on 31st March whichever is less that itself is treated as what large advance large advances we do verify 100% in our audit whereas remaining advances we verify be verify on a sampling basis and again advances are two types in a bank funded advances non-funded for example I give a guarantee bank gave a guarantee on to a customer on to third
(9:45:31) party on behalf of one of their customer there is no fund transferred so that's a nonfunded okay no actual fund transfer like letter of credit bank guarantees all that funded means what term loan cash credit OD all these are funded means funds transfer will be there in a loan agreement if a fund is transferred that's a funded loan remember you have caro right in Caro working capital limit point is there clause number two second clause inventory inside the working capital point is there sanctioned limit 5 cr is there right there funded non-funded both you must consider for
(9:46:02) checking whether whether total advances is 2 cr crossed or not and remember advances can comprise term loans all this you know bank has to disclose advances in the following way bills purchased and discounted how much cash credit OD how How much? Term loans how much? Further loans and advances given by banks is again subclassified into secured covered by guarantee.
(9:46:27) Unsecured how much? Again loans given is categorized into two parts. Outside India how much? Inside India how much? Inside India, priority sector, public sector, banks, others too. Break up you should give like that advances outside India due from banks due from others how much like that. So you know this disclosure requirement might be important for MCQ purpose.
(9:46:45) Remember this disclosure requirement might be relevant for MCQ purpose. Be careful. Next then classification of advances based on security. You know bank will accept two types of security. Nature of security two types. Primary security collateral security. Primary security is the principal security offered by the borrower. Suppose I'm buying a housing loan. I want to buy a house.
(9:47:07) For that I want to get a loan. The house itself is given as a loan. That's a primary security. Banker told me sir this house alone is not sufficient. Sir I want extra security also tomorrow if this house value is declined suddenly I want extra security then the then the person gave his car as a security as a second collateral that's additional security provided by the borrower on collateral security bank will not have any right initially if primary security fails then only collateral security bank will exercise then what are various common securities which a bank will accept goods gold or immovable property
(9:47:37) plantation lic life insurance policies stock exchange securities any of this can be given as a Security again how to create a security mode of creating the security one is mortgage. If immovable property is given as a security to a bank that's called as a mortgage. Mortgage is two types uh registered mortgage equitable mortgage.
(9:47:56) Equitable mortgage is there in the informal lending sector like where ownership documents will be given to the bank and then that's how uh uh mortgage is created. I I will just give ownership documents to the bank. In a registered mortgage, it will go to register office and register the mortgage deed with the banker.
(9:48:14) So that's a registered registered mortgage is powerful remember. So in a in equitable mortgage title dates will be given to him and he will give a loan but keeping the title deeds with him that's not secure. Okay registered created using a registered instrument which is signed by mortgage or mig both pledge gold alone is best example for pledge bailment or delivery of goods will happen. Ownership remains with the pledger.
(9:48:40) Hypothecation ownership and possession remain with the borrower who acts like a for example house vehicle loans. Bike loan, car loan, SRO here. No, bike loan you're getting car loan you're getting. Car will be with you. No, that's called hypotheation. Okay, pledge and hypotheation both are on mobile items. In pledge no goods will be given to the banker.
(9:49:00) In hypotheation, goods will be with you. Wii, overdraft, cash, credit, inventory loans, these are all working capital loans generally in the form of hypothecation. Okay. And in hypothecation borrower will submit periodically statements assets and li assets stock statement det statement to determine drawing power.
(9:49:18) So what is drawing power? We will discuss that later. Assignment LIC policy. Suppose now I want to get a loan from a bank. I have an insurance policy. It has a surrender value of 2 cr. If I surrender the policy right now, I 2 cr which means have 2 cr worth of asset right now. I gave this policy to a banker and I got 1 and a2 cr loan. The policy I will assign it to the banker.
(9:49:36) So that's called assignment. So transfer existing or future debt. My receivable, my right, I will transfer to bank. Only actionable claims are accepted by banks. Set off is not a popular method. Very rare. Generally for example, I want to get a credit card. I don't have a credit score at all. I'm not I'm my credit score and all is not banker is not trusting me at all. So I did one thing.
(9:49:57) I give one lakh fixed deposit. Then I got 75,000 rupees worth of credit limit credit card. Tomorrow if I don't pay this credit card liability will be set up with that FD. So set off is actually setup off is not a security basically but you know here no in set of no in set of technique no it will enable bank to combine two accounts okay deposit account and loan account I have a credit card which is a loan account I also have a FD with a banker so accounts must be in the same name and same capacity right
(9:50:21) of set off applies to time bar debts also all branches will be treated as one for the purpose of set off that's it lean is not at all a mode of creating security I don't believe it that's not correct at all okay fine next so Now we completed one more uh one more point audit of ad advances point to be completed.
(9:50:41) Now let us now discuss about credential norms especially NPA norms. So classification of advances as per credential you know uh there are something there is something called RPA credential norms. As per RPA credential norms the loans and advances are broadly classified into two types. Standard loans NBA loans. Standard loans are nothing but standard regular.
(9:50:59) Regular means what? These are the assets where there is no stress signal at all. No stress signal. The standard accounts are again classified into another type. SM special mention account. SMA0, SMA 1, SMA2, SMA1 accounts where some stress signal is there. SMA1 sir I gave a loan sir customer defaulted. EMA due date he defaulted.
(9:51:23) Is the default more than 90 days? Now is overdue more than 90 days? No, no, no, no. Overdue is just between 30 days to 60 days. Overdue is between 60 days to 90 days. Then SMA 2 that is called as what? that is called as what SMA 2 you see SMA so SMA 1 over between 30 days to 60 days SMA 2 over between 60 days to 90 days or if an account is showing some stress we can straight away classify it as SMA zero now so that's it these are all special mention accounts standard accounts these are all standard loans suppose if if there is a default if there is a default
(9:52:00) and the default is more than 90 case straight away that loan will be classified under NPA category. NPA category is again subclassified into three types. Substandard doubtful loss. NPS are again classified into three types. Substandard doubtful loss. Now let's look at what is an NPA. Exactly. When an asset when a loan is treated as an NPA. Just one minute. Yeah, it's okay. Just one minute.
(9:52:28) Yeah. So when a loan is treated as an NPA, an asset becomes NPA when it stops generating income. Performing asset performing means what it is giving me income. Non-performing is what it is, it is not generating income. That's it. An asset which stops generating income is called as NPA.
(9:52:45) So how to decide whether a loan is an NPA for term loans? No. Interest amount or principal amount or both installment amount overdue for more than 90 days. If if a term loan is overdue for more than 90 days, it's an NPA. bills if a bill is overdue for more than 90 days then also it's an NPA whereas for cash credit and OD the account is out of order if the account is in out of order in a cash credit and overdraft then that's straight away treated as NB out of order means what many a times it was asked what do you mean by out of order an OD account or cash credit account is treated as out of order if if
(9:53:24) outstanding balance in the account outstanding balance in the cash credit account is exceeding sanctioned limit or exceeding drawing power continuously. What what is this? What is this outstanding balance exceeding sanction limit drawing power? What exactly that means? You know there is something called sanction limit drawing power. Sanction limit is given. Sanction limit is decided based on repayment capacity of borrower.
(9:53:54) Whereas drawing power is decided based on value of security given by borrower. You know a bank will give loan based on two criterias. One whether a customer has a repayment capacity that is the most important. Okay, this is the most important. Two, okay, he has a repayment capacity. What sh I'm getting what security I'm getting? That is also important. Suppose no customer can repay 10 cr in within one year.
(9:54:17) Suppose the customer have a repayment capacity of 10 cr then the bank will sanction 10 cr loan but they will not release 10 cr money. Okay 10 cr you can take but I will give 10 cr loan you can take no problem but if I have to give 10 cr worth of loan give me give me 20% extra security for example 12 cr you give me 12 cr worth of land 12 cr worth of jewelry 12 cr worth of asset security then I will release 10 cr fund customer know what he did you worth of asset only security value is 8 cr only he gave oh he gave 8 crores only 20% I will eliminate balance approximately some 6.5
(9:54:54) 5 cr only this much I will release money only this much I will allow the customer to withdraw 20% margin I will maintain example I'm just telling you getting it so if you want to draw 10 cr you give me 12 cr worth of security if you want to draw 8 cr give me 9.6 6 cr worth of security.
(9:55:13) So this is what the condition I put. So if a customer is giving 8 cr worth of security, I will elevate 20% balance amount only I will give him for withdrawal purpose. So that is drawing power. So drawing power is decided based on the value of security given by the customer. Sanction limit is decided based on the repayment capacity.
(9:55:32) A vood account, a cash credit account is treated as NPA if it remains if it is out of order. First point in out of order outstanding amount in the Wii account and cash credit is crossing drawing power. Technically should not cross but if it is crossing drawing power if it is crossing sanction limit straight away that word account is treated as out of order or sir outstanding balance is less than sanction limit is less than drawing power but you know no credits for 90 days continuously. Sometimes in exam they will give you balance sheet. They'll give you balance sheet dates. In
(9:56:07) exam they'll give you sometimes just a minute they'll give you sometimes a balance sheet and dates okay so customer is withdrawing only debits are there he is not repaying at all credits not there so the withdrawals were there no credits at all no credits means what bank is not receiving any payment if no credits are there for more than 90 days if no repayment is there for more than 90 days automatically you see if no repayments are there for more than 90 days then also the word account is treated as out of order sir Credits are there sir,
(9:56:38) repayment is there but insufficient to cover the interest amount debited. We debited interest. Customer repaid but interest amount also not recovered. More than 90 days interest amount fully is not paid. Then also that is treated as an out of order. Then so here they have gi here we have given some example. Okay. So what is overdue? Very simple.
(9:56:57) If an amount is not paid on due date that's an overdue amount. That's it. So that's about out of order. And remember NPA classification is always based on record of recovery. Sometimes in exam they'll confuse you. They say C bank customer gave 100 cr worth of property asset. He failed to repay the loan 90 days crossed.
(9:57:16) But remember 100 cr worth of asset is there out loan loan amount is just 10 cr. He didn't repay for more than 90 days but 100 cr worth of asset is there with the bank. Doesn't matter. NPA classification is based on recovery. If recovery is not there for more than 90 days, security is there sir, customer is good, sir, customer is honest, sir, that and all doesn't matter.
(9:57:33) We will classify it as an NPA. That's it. And if the moment you classify it as as as an NPA, you need to you need to create provision. So NPA classification is based on record of recovery, not based on security, not based on guarantee, not based on net worth of the borrower.
(9:57:51) And remember once a particular loan of a borrower is classified as NPA, remaining loans of the borrower with the same bank will also be classified as an NPA. Suppose I mine is a state bank of India. I gave five loans to a customer. Housing loan became NPA. Remaining four loans also becomes NPA. Sir, he has a loan with ICC bank also. For IC the bank is repaying everything on time that will that will also become NPA.
(9:58:13) No, with the same bank where one of the loan became NPA, remaining loans became NPA with other bank it will not affect with other. See every bank has to reset NB on their own. That's it. That's it. Next further the moment the moment a loan became an NPA it has to be classified under substandard doubtful loss substandard means what it is NPA for less than 12 months up to 12 months no once 90 days cross it's an NPA 90st day onwards that is service is first day again so up to 12 months it is treated as substand on a substandard set provision has to be created on outstanding amount 15% provision is
(9:58:49) required secured unsecured portion doesn't all doesn't matter straight away 15% provision doubtful asset assets which are in substandard suppose already NB over 12 months over after NBA 12 months over then it will go into doubtful category the moment it goes to doubtful category unsecured portion of the loan 100% advance secured portion we will classify into D1 D2 D3 first one year after substandard category after substandard after 1 year D1 25% secured 1 to2 years 1 to 3 years 40% % beyond 3 years 100%. Suppose if
(9:59:24) the asset is treated as loss asset okay and not fully written off in the bank then 100% provision you can maintain that's it a loss asset no they either they can create 100% provision or they will write off completely any of it can be done just that's just that's it 1 minute yeah that's it I hope everything is clear next now this is one standard NPM that is normal NPM normal NPM is what term load more than 90 days overdue, bills purchased more than 90 days, credit cash credit and overdraft uh out of order. These are the cases. Apart from this, there are some special NPOMS. What are
(0:00:03) the special NPOMS? Accounts regularized at the balance sheet date near balance sheet date. Means actually during the year it became NPA but again customer repaid by 31st March. Now again became it became NPA. If at all you know what happens you know in some banks no customer will repay before 31st March again after March he will withdraw money.
(0:00:24) Oh, just to remove NPA logic, just to make sure there is no NPS on 31st March, customer repay temporarily again he withdrawn it. If at all you think it is something a bank manipulation, you will treat it as NPA even though there is a repayment. So these are the accounts where credits were there just before balance sheet date.
(0:00:43) You know these accounts classif asset classification of these kind of accounts be handled with care. If data indicates weakness, the account is treated as NPA and the auditor shall check sample transactions before and after closing of the year and if credits are reversed during the first few days after closing.
(0:01:00) So after 30 31st March it became regular again later on the payments are reversed. It's an inherent weakness straight away we'll classified as NPA. Government guaranteed advances government guaranteed advances are two types. Central government guaranteed advance, state government guaranteed advance. State government guaranteed advance straight away NPA.
(0:01:19) If there is a overdue for more than 90 days straight away NPA principal amount to NPA interest and all we will not recognize. See what is the consequence of NPA? Suppose if a loan is given a loan is treated as NPA. What is the consequence of treating a loan as an NPA? Very simple. We will create a provision on the outstanding amount that is one consequence. Two interest on that amount interest on that loan bank will not recognize on approval basis.
(0:01:39) Once the loan become NPA on that loan interest income is not recognized on acroval. You know banks will recognize approval. Banks follow acroal basis for income recognition, expense recognition, all that. Acroval means what? The moment month over they will recognize the income. The moment 31st March comes full year interest they will recognize whether you repay or not that is called approval.
(0:01:59) But if the loan is NPA and NPA interest amount they cannot recognize on approval unless customer repays. Now central government guaranteed advance. So that is state government normal treatment for central government guaranteed advance. No advanc treated as standard set sir actually there is a default more than 90 days is there default is there more than 90 days gone more than 90 days is there default is there still it is treated as a standard asset only if the guarantee is not repudiated not revoked means not invoked or not repudiated means not canceled very simple however for income
(0:02:33) recognition it is treated as NPA central government guaranted advance principal outstanding it is treated A standard asset no provision whereas for interest recognition point of view it is treated as NPA means we will not recognize interest income whereas state government guarantee no it is straight away NPA for principal purpose interest so principal amount state government guaranted ad once if at all it became NPA provision has to be created at 15% 25 40 as a case may be interest also we will not recognize whereas central government guaranted ad once we will not create a provision even though the loan became NPA we will not create a
(0:03:05) provision because central government guarantee is there however in both the cases Interest will not be recognized on approval basis. That's it. Next advances under consortium. Consortium means what you know multiple banks together giving a loan single loan to a customer. Okay. Generally big infrastructure projects and all consortium loans will be there in infrastructure projects.
(0:03:29) So loans given by two or more banks jointly by forming a group that's called consortium. Now the bank which is giving high amount of loan will lead that group that's called lead bank. You know in in consortium loans also each bank will get loan recovery from the borrower.
(0:03:48) So each bank will classify the borrower account based on respective bank recovery. That's it. If borrower remit funds to the lead bank but lead bank is not transferring to remaining banks. Remaining bank will treat the customer account as NP automatically. So lead bank will compute drawing power and allocate to member banks.
(0:04:06) borrower may require may may request lead bank to adjust the drawing power between the banks all that. Now here they have given computation of drawing power in the IC book. This method this this format is wrong. IC has given a wrong format. How to compute drawing power? You know I will I will tell you you know very important this even in the recent CA final exam also they have asked drawing power calculation MCQ.
(0:04:23) They have asked MCQ in CA final May 25 exam they have asked in inter also many times they asked how to calculate drawing power. In exam they will give you stock value. They'll give you dattors value. Okay. They will also give you credits value. Creditor loss value. Now stock sometimes in the stock no like total stock value 100 cr.
(0:04:40) Now they will give you 10 cr worth of stock is absolute absolute or damage something they'll give you which means you should consider only 90 cr. Then they will give you something called dtors. Total dtors is 20 cr. In this more than 90 days outstanding deter or some 5 cr. So you should only consider 15 cr. Okay.
(0:04:58) So inventory only 90 cr worth of inventory excluding damaged inventory absolute that has to be considered datas excluding long outstanding more than 90 days overdue datas bank will not consider so remaining 15 cr fine so credits let us assume 30 critor is there now how to compute the drawing power stock is how much 90 crus how much 30 so credits means what see when you're considering stock no when you're calculating drawing power when you're considering stock no only one stock has to Consider 90 cr is a total stock value considerable stock value
(0:05:31) minus 30 cr outstanding 60 this is inventory this is stock datas 15 cr 15 cr minus inventory bank bank is creating 30% margin means they will not give you full value of inventory as alone 30% margin on dattors no some 40% margin is there so balance 42 is equal to 18 is equal to 15 4 are 6 Okay, that's it. So 9 cr. So total drawing power is 51 cr.
(0:06:03) Like this you need to compute. So very simple stock value they will give you from that credit of value reduce letter of credit value reduce. You will get paid stock value out of the paid stock. This is paid stock value. So paid means my own stock. In this my own stock eliminate the margin balance amount you can draw the money. Det also eliminate ineligible dattors.
(0:06:22) Then out of that eliminate margin. then you will get you know considerable dats ultimately. So this much you can withdraw in the form of an OD or cash credit from a you know uh from the bank. So this is how drawing power has to be calculated. Remember this particular format. Okay. Next accounts with erosion in security value.
(0:06:43) Remember one of the point why a bank will give is based on the security and you know what happened no if realizable value of the security is less than 10% of the outstanding amount directly the bank will classify that loan as a loss asset and write off actually no customer is repaying regularly customer is repaying regularly in spite is repaying regularly bank will treat that loan as a loss asset straight away when you know very simple you know uh outstanding amount 100 cr reserve security customer gave a security long back the value is 200 cr earlier But right now the security value is 5 cr. Realizable value
(0:07:13) of the security is 5 cr which is less than 10% of the outstanding loan. Are a customer is repaying on time that doesn't matter. Straight away classify that as a loss assert and write off fully doubtful. So you know erosion refers to destruction in value of the security. The customer gave some security that security value itself is gone. That's called erosion.
(0:07:32) That time how to treat it as loss asset. You will treat that loan as a loss asset if the value of the security is less than 10% of the outstanding loan. Suppose the value of the security is less than 50% of the previous valuation. Last time we did valued some 6 months before that time what value is there? Now we did again value the current value is less than 50% of the last time valuation.
(0:07:54) Then the loan amount is treated as doubtful and provisioning will be made as per doubtful assets. Next advanc is against term deposit nse KVP. Generally if a customer account is if a customer is not repaying if more than 90 days he is not repaying straight away we will treat as NPA correct based on record of recovery we will apply.
(0:08:11) But if the customer gave a security and that security is a term deposit and the security is a national saving certificate or kisanikasra indraaspatra that patrasi gave a security then we will not classify the loan as NPA sir 90 days cross sir due overdue cross more than 90 days we will not treat it as npa so long the asset is so long the loan is secured by them until adequate margin is available so which means principle is treated as standard asset interest also recognized on acroval basis is both remember central government guaranted ad once. If there is a more than 9 days overdue principle we will not classify as an NPA no provision but interest we
(0:08:48) will stop but if it is if it is a term deposit n KVP IBP security even interest is recognized on approval basis loan is treated as standard so long margin is adequate we will classify it as standard interest also recognized on approval basis next agricultural advances there are agricultural advances broadly classified into two types long duration crop loan Short duration crop loan. Okay.
(0:09:18) So what is a long duration crop? Crop with a crop season more than one year. If a crop has a season for more than one year, that's a longer duration crop. For example, mango, you know, mango is a longduration crop. Tobacco is a long duration crop. There are many longduration crops. Short duration crop. Vegetables short duration crops generally. Now crop season. Crop season means the period up to which harvesting of crops are raised.
(0:09:39) You know this crop season is determined by state level bankers committee in each state. In each state the banker state level bankers committee will decide crop season. If the crop season is more than one year it's a long duration crop. Remaining crops are simply short duration crop. Now you gave an agriculture loan. Sir duration crop loan I gave sir to a farmer who is who is who is planting short duration crop.
(0:10:01) For him I gave a loan. What is a NPA? No loan. It is treated as NPA. If installment is overdue for two crop seasons in a short duration crop the agricultural advance is treated as NPA. If the in if the installment is overdue for two crop season whereas a long duration crop it is treated as NPA if the installment is remaining overdue for one crop season that's special NBNs mostly over okay next computation of drawing power.
(0:10:28) What is drawing power? I already told drawing power is the limit up to which a firm can withdraw from the working capital loan given. Sanction limit is the limit the total exposure a bank can take for a particular client. DP is calculated based on security value whereas sanction limit is based on repayment capacity which is the maximum loan a bank can give.
(0:10:51) Rules for DP accounts know the loan accounts must be less than with less than drawing power and sanction limit. If any account outstanding balance is exceeding drawing power sanction limit, it must be brought to the top management. Drawing power in the working capital account must be covered by proper security. DP must be calculated based on the latest stock statement. That stock statement shall not be older than 3 months.
(0:11:08) If there is an outstanding loan where stock statement is older than 3 months, then the account is treated as irregular. Irregular means what you know NPA. So DPA drawing power comparation must follow guidelines of the bank. Special focus must be given on sunundry creditors.
(0:11:27) I told you identify paid stock from the paid stock eliminate margin then only the balance amount is considered for drawing power. So what are the auditors concerns in drawing power and sanction limit verify stock statements quarter returns and other borrowers data compare monthly stock statements all that stock audit.
(0:11:45) Stock audit is required where loan accounts are having final exposure more than 5 crore. Auditors can request stock audit in other cases also review stock audit reports during the audit focusing on valuation of security and calculation of drawing power all that in case of consortium lending stock audit reports shall be obtained from lead banker because lead banker will do stock audit audit of advances in audit of advances no controls you need to verify efficacy of advances efficacy of controls controls means what see that see that advances are made only after verifying borrower creditworthiness see whether the bank has a creditworthiness process or
(0:12:16) See necessary documents are executed before dispersing the loan. Compliance with the terms of the sanction. See whether the bank is checking end use of the funds. See whether the bank is maintaining margin. See whether bank is creating a security or not. See that drawing power registered is updated on a monthly basis.
(0:12:34) Accounts should stay within the drawing power. Irregular account shall be irregular account shall be reported to controlling authorities. Review each advance account once in a year or more frequently in case of large advances. Substantive. The auditor can obtain sufficient appropriate process by verifying recorded loan amount, checking loan documentation, review account operation, ensure security valuation, all that.
(0:12:57) Then finally we have something called audit of incomes. You know in audit of incomes no uh you see here we have completed now what are all the points we have completed already in bank audit audit of advance audit reports all that is completed NPMS special NPs completed DP calculation I have completed now audit of income reversal of income and expenditure audit.
(0:13:15) So if this is completed bank audit is over five marks is yours. Next you know generally what you know audit of income bank recognize income on acroval basis unless collection is uncertain. Whereas on NPA no income is recognized on NPA until it is realized. However, for newly classified NPA, if at all any if at all any loan is recently classified as NPA, if any interest is recognized on approval but not yet recovered shall be reversed once an account is turning into NPA, unrealized interest is reversed and recorded in some dummy account called memorandum account. Remember interest on term deposit, interest on loans against
(0:13:55) term deposits, interest on loans against term deposit, that's a right word. Okay. uh can be recognized on due date e as long as adequate margin is existing. Bills purchased and discounted for any outstanding bills which are purchased which is outstanding as on 31st March.
(0:14:14) The discount received shall be a portion between two years. The unexpired discount must be shown under other liabilities. Interest on discounted bills should not be netted off from the discount earned. These are all important for MCQs. Bills collection collection bills per collection.
(0:14:32) Suppose if a customer submitted me bills, I will ask him you want me to discount or you want me to just collect a collect? He told me then the bill income will be recognized only after actual collection. Branch commission is due and recognized only after the bill is actually collected. Partial recoveries in NPA. In absence of clarity, bank must adopt a consistent policy. Recognize income only when certainity attaches.
(0:14:49) Ensure that interest is not in the not from any fresh loan given. Reversal. Reversal of interest on NPK. What is this reversal? If an advance becomes NPA, the entire acred interest must be reversed. If at all already recognized on acural basis and not yet recovered, reverse it. Even for government guaranted advances, interest has to be reversed. Fees commission everything has to be reversed.
(0:15:12) For wrongly recognized income, reverse the amount provide equal or may make a provision and remaining take out finance. This itself can be asked as a three mark question. What is take out finance? Originally, one bank will give a loan. Now that loan will be taken over by another bank means the customer will transfer that loan from previous bank to this bank.
(0:15:30) That is called takeout finance. A takeout finance replaces an initial loan with a long-term financing. This is generally used in property developments, infrastructure projects that is also classified as NPA. Income should be recognized only when the only when realized from borrower.
(0:15:49) So what is the objective of takeover finance? Address security, sectoral gap, boost availability of long-term firms, all that. That's a very simple thing. Audit of audit of expenses in expense audit interest expenditure is most important interest expenditure on deposits FD savings deposit all that will be there right so that is the interest expenditure for the bank get a quarterly analysis of deposits and compute weighted average interest compare average interest rate with previous years obtain general breakup of interest perform monthly or quarterly cost analysis and document various reasons sometimes they'll ask you analytical procedures on interest audit
(0:16:19) 1 2 4 these three points only they'll ask you and further Auditor has to test check calculations. This itself they can ask you for a four marks question. So interest calculations test check has to be test check I mean the auditor has to perform test check of calculation of interest. What see that interest is provided on all FDs up to balance sheet.
(0:16:36) Rates comply with bank regulations RB directives. Interest on savings accounts follow as per the bank rules. Interest on inter branch is provided and also see interest rate changes as per the rate card and recomputee the interest acroval by considering various parameters. Audit of provisions and contingencies is one of the exam they have asked this.
(0:16:56) Uh that's it. I think this is not a big deal. Uh provisions means what? See understand banks provisioning process for standard assets and non-performing. Verify loan classification correctly done or not. Reconcile loan classification with various general ledger audit tax provisions also review for provision for various other expenses. All that see that provision is calculated as per regular requirements and as per RB circulars.
(0:17:19) All that that's it actually up to NPNC that is only critical part so that we have understood with a very clear discussion that's it 46 minutes bank audit is over I hope you have thoroughly you know recollected everything in the bank audit apart from this is there any other important question one question is there I I'll show you one more question risk management process in a bank risk management in a process This is also important once in one of the atom it was asked in W scheme.
(0:17:54) So bank must have you know in top management must involve bank must identify the risk. Bank must implement various control activities like segregation of duty all that banks must regularly check their monitoring activities. Bank shall maintain reliable information system. You know these are all part of risk management process.
(0:18:12) These are nothing but five control you know five elements of control system. Internal control system has five components right that only here they named it in a different way that's it okay this itself was asked once in once as a four marks question previously long ago that's it there is no other question which is important in bank audit everything is covered everything is covered that's it so I hope you thoroughly enjoyed with the bank audit session uh okay yeah we'll continue tomorrow the remaining uh uh live sessions that's it take care
(0:18:41) I think uh the audio video everything is perfect Guys, perfect. Perfect. So now let's begin. Let's continue the discussion of audit strategy planning and program. Okay. So this particular chapter will have a weightage of minimum 9 to 12 marks. And you know what this chapter is just 10 pages only 10 pages. Five papers both the sides 10 pages. That's it.
(0:19:08) Very small chapter. But the weightage is close to minimum 9 marks to 12 marks. Why? Even though it's a smallest chapter, the weightage is very high. Like um uh why it is so it's not the pages which is important. It's the complexity of the content which is most important. You know in this chapter the content is very complex and in fact most of the times I generally I till date I never uploaded this topic as a revision on the YouTube.
(0:19:38) Till date I never uploaded because uh I feel uh one of the very very you know patent it's like I have a patent on this chapter because I decoded this chapter like anything but for the first time you know yeah after the live is completed also the video will be remaining much don't worry at all okay so fine so but for the first time I'm doing this revision to make I mean to to make sure everyone benefited from this so in this chapter there are three terms what are the three terms that are there strategy planning and program, audit strategy, audit planning and audit program. Yes, audit program is
(0:20:10) very important. Every topic in this chapter is equally important. Audit 10 pages, chapter, any question can come from this. Any topic can be tested from this. Now, so audit strategy planning and program. Basically, this chapter is nothing but SEA 300 standard.
(0:20:28) What is SEA 300 standard? You can you can see here SA 300 planning and audit of financial statement. You see the word used is planning. Planning an audit of financial statements. Whereas the chapter heading is what? Strategy, planning and program. Okay? Planning of an audit of financial statements. What do you mean by planning? Planning includes three terms.
(0:20:52) Strategy, plan, program, audit strategy, audit plan, audit program. All the three we will call it as planning. So this is most important thing. Now you know first the most important thing what are the elements of planning? What are the elements of planning? There are two elements in planning. Just a minute. Yeah there are two elements in planning. One preliminary engagement activity. One is preliminary engagement activity.
(0:21:16) One of the element of planning. Remember I'm I'm not talking about planning activity. Planning activity is another element of planning. There are two elements of planning. One preliminary engagement activity. Two planning activities. Planning activities includes two more. One is establishing strategy. Another one development of an audit plan.
(0:21:38) So strategy establishment, development of an audit plan. Both are together we call it as planning activities. Preliminary engagement activity is one of the planning activity. Now what are preliminary engagement activities? Here I'm going to cover.
(0:21:56) What are preliminary engagement activities? Here I'm going to cover now. So this this understanding is very important. Now what is the difference between strategy plan and program? Even though the chapter heading is planning okay I actually call it as plan. Audit plan. Audit strategy, audit plan, audit program. Audit strategy is never visible in the form of a document.
(0:22:16) Audit strategy is nothing but the in the mindset of the auditor in the mind of the auditor. What is he thinking about? how he is going to do the audit as a whole. That is strategy. Whereas audit plan, audit program, they both will be in a documented format. Audit plan will be documented. Audit program will also be documented.
(0:22:38) Generally strategy you will not find any documentation. Strategy is like a preliminary thinking of the auditor. Whatever the auditor is thinking about how to do this audit, what to do in this audit, that is preliminary thinking. Now this entire process whether you call it as strategy, whether you call it as plan, whether you call it as program, this entire process is called as audit planning. This entire process is called as audit planning.
(0:23:01) Now many times in exam they have asked this question. What are the benefits of planning? Four marks question, five marks question. Benefits of planning means what? Many students here what they think you know benefits of audit plan. That's wrong. Plan is different, strategy is different, program is different, planning is different.
(0:23:17) Planning means everything you know designing a strategy, development of a strategy, development of a plan, development of a program, all are elements of planning, they're all part of the planning. Now look at benefits of planning activities.
(0:23:35) What are planning activities? You know planning is important so that you will do timely execution SRO and it ensures compliance with standards. Enhances the audit engagement. Whatever the audit you are conducting, the quality will be enhanced. Planning ensures you comply with various auditing standards. Planning will help you to effectively and efficiently do a timely execution. So that is what importance benefits what it help you to focus on important areas.
(0:23:58) Audit planning planning benefits the auditor to focus on important areas. You know most important question this is planning will help you to identify and resolve potential problems. So all potential problems you can resolve and it will help you to organize and manage the audit for efficiency and effectiveness.
(0:24:17) It will help you in assisting the team members with appropriate competence. It facilitates direction supervision review of team members. It will help you to coordinate you know uh branch auditors experts all that internal auditors branch auditors experts. Coordination is a benefit of planning.
(0:24:35) It it helps you to facilitate it helps you to direct, supervise and review team members work. It helps you to select team members with right competences. It helps you to organize and manage the audit so that you can do an efficient and effective audit. It helps you to identify potential problems in timely manner. Remember this is planning benefits.
(0:24:54) Planning means what? Entire strategy, audit plan, audit program, whatever thing you take, they are all part of planning process. Generally planning benefits are what? That's why here many students confuse sir suppose we have another another topic called advantages of program we have another question called advantages of overall audit strategy you know we have two more two more topics uh how overall audit strategy assist the auditor how strategy benefits the auditor two how program benefits the auditor in those two also some of these points will be repeated that is where many students confuse sir in audit
(0:25:26) strategy chapter many points are confusing why in planning some points are repeated there. How to remember? No need to worry. Planning is a overall whereas audit strategy is a very normal term. Audit program is a very narrow term. These two are narrow. Planning is a wider term. Planning includes everything. That's all. This is the main difference. Okay. Next.
(0:25:48) So if at all you're doing a proper planning, if at all you're making, if if at all you're planning the audit in an efficient manner, you can reduce the audit risk to an acceptable low level. You can reduce the risk to low level. Okay. That's it. Now, now again coming back. So what are the elements of planning two? One is enga preliminary engagement activity and another one is planning activity include you know overall audit strategy establishment plan establishment.
(0:26:14) Now preliminary engagement activity three activities are mainly called as preliminary engagement. One acceptance and continuation of client relationship. This is there in 220. This this point is explaining 220. What do you mean by acceptance and continuation of client relationship? You know the firm know the audit firm whoever is doing audit getting it? Before they accept a client before they accept an engagement with an existing client. See there are two things new client or existing client.
(0:26:38) From a new client you are accepting new engagement. New engagement from new client or before accepting new engagement from existing client. Suppose existing client I have who is for whom I'm already doing company audit. The existing client is asking me to do income tax audit also.
(0:26:59) Means I am I am going to accept new engagement from existing client or existing client. Now I completed five years audit. The existing client is asking me sir can you accept for next five years also appointment then continuation of an existing engagement with existing client. So one new engagement from new client two new engagement from existing client three continuation of existing engagement with existing client.
(0:27:26) If any of these three proposals came to you what a firm has to consider. So those points are covered under acceptance and continuation of client relationship. So before accepting or before continuing the engagement four points you need to get integrity of the owners get integrity. Look at their integrity.
(0:27:44) How are they like are they honest people? What is the reputation? You know how far they are uh you know they are honoring accounting standards you know what is their business practices? How is their treatment with the auditors? Discussing with previous auditors. All that comes under what? Integrity of the principal owners.
(0:28:02) Are there any rights going on? Are there any issues going on? So get that information. Integrity of the owners, competence of the team members to perform. See you know before I accept first is he good guy? Is the client a honest guy? Second thing he's asking me to do some work right. Can I do that work? Suppose if a bank is asking me to do a bank audit, I had I don't have experience at all in bank audit.
(0:28:20) I will not do. So second important thing before I accept a client what should I check is competence of my team members whether do I have competence you know competence of the engagement team. Third one any matters arising during current or previous engagement.
(0:28:39) Suppose if my existing client is asking me to take a new work or my existing client is asking me to continue the work getting it? So I will I will look into matters which are there in the current and previous and for initial audit engagement previous auditor also I need to communicate first time they're asking me then I will also communicate with the previous auditor. So preliminary engagement activities. One of the one of the basic thing that you need to do at a beginning stage of the audit before you accept the audit is first one acceptance and continuation. Second one compliance with ethical requirements. Third one establishing
(0:29:02) terms. First one do procedures as per 210. Sorry 220. First do process as per 220. Then check ethical requirements. Then do procedures as per se essay 210. Sir what is SA 210? I already covered it in part one audit marathon. Establishing understanding of the terms of engagement. Now, now establishing terms.
(0:29:21) Send an engagement letter before starting the audit to avoid misunderstanding and see that there is no there is no confusion with the client regarding the terms. What are terms of engagement? Terms of engagement are what? Objective and scope of audit, management responsibility, auditor responsibility, financial reporting framework, audit reporting.
(0:29:38) These are all various contents of the engagement letter. Right? So, get an acknowledgement on these elements. Then ethical requirements. Auditor has to in fact there is a chapter ethics and terms of engagement aware chapter in ICA it is 11th chapter whereas in our go notes it is second chapter continuously evaluate compliance with ethical requirements including independence the engagement partner engagement partner means what the one who is going to sign the audit report but ultimately the engagement partner shall remain alert for evidence of non-compliance with ethical
(0:30:07) requirements in case of non-compliance please take appropriate action you know engagement partners shall form conclusion on compliance of independence. This is very important topic. One of the important in requirement in uh in a planning activity is relevant ethical requirements.
(0:30:26) Compliance with relevant ethical requirements. They may ask you this itself as a five marks question. You know continuously you should evaluate compliance with ethical requirements. In case of non-compliance uh engagement partner shall be remain alert to see whether there is any non-compliance. If there is any non-compliance with you know with ethical requirements take appropriate.
(0:30:42) For example, non-compliance with ethical requirement means for example I accepted one company audit in that company I have my relative has shareholding more than my lakh what should I do so these are all non-comp what should I do so that's it now engagement partner shall form conclusion on compliance so how will you conclude whether whether the firm is complying with independence or not whether an audit firm whether the team members are they complying with independence or not how do you conclude first obtain information to identify threats I will ask all the partners my team members
(0:31:09) whether do they have any shares in the like that I will evaluate identified breaches of the firm independent policies. Our firm will have SQC, SQC policies will be there. You know quality control manuals will be there. Say quality control system will be there. Independence related policies will be there. Ethical requirement policies will be there with the with those policies and rules.
(0:31:28) I will check take appropriate action to eliminate the threat. Suppose if any threat is there, I will I will try to eliminate the threat or I will reduce it to acceptable level or and I will report to the forum in case of unresolved matters. Even after applying resolution if at all I'm unable to resolve some threats I will report it to the firm's main CEO firum's managing partner will be there to him I will be reporting sir what is fum's managing partner forum CEO all that we have never seen this words it is there in SQ is there in SQ that's it so this is
(0:31:56) preliminary engagement activity so sometimes in exam this itself they'll ask you as a P marks question what are preliminary engagement activity you need to write the headings and two points write the settings two points write the heading two points sometimes In exams only relevant ethical requirements they will ask.
(0:32:15) Sometimes in exam only acceptance and continuation of time relationship point alone they will be asking. So be careful. These are planning. What do you mean by planning? I I I told you what is the benefit of planning? What are the elements of planning? What are the planning activities? You know what are preliminary engagement? This is one of the element of planning.
(0:32:31) Right? Now now tell me planning is is it is a continuous process. This is not a one time process. like you know I will plan audit at the beginning as I proceed further if at all I find some changes are required I will change it so planning is not a one time it's a continuous process planning is not a discrete it is not a separate phase in audit it's there throughout the audit it's a continuous and repetitive iterative process so generally planning begins after completion of previous audit and continue until completion of the current audit once I complete
(0:33:02) previous audit in the same company I will immediately start working about the next year audit Then the audit plan should be reviewed periodically to ensure that any newly identified areas will not be missed. Now what are the considerations in planning? What you will consider when you're planning? Obviously considerations in planning.
(0:33:20) Again here no you will find another question. What points you will consider while developing audit strategy? What points you will consider while developing audit plan? What points you will consider while developing a program? Like this you will find three more questions. This is considerations in planning.
(0:33:40) Considerations in strategy, considerations in program, considerations in plan, there are three more ways. That is why even though the chapter is less than 10 pages, even though the high weightage is very high, there are high chances that if this question is asked, a student might write some other answer. That is the reason why this chapter is very complex.
(0:33:58) Even though you read number of times, you will not understand. So this is one of the very severe chapter, very very tough chapter in the CI introdit. I can say in C and audit there are two toughest chapters. One is strategy topic which is very toughest. Another one risk assessment. But risk assessment is very lengthy chapter. That's the reason I always tell students to leave it. Don't even touch that.
(0:34:18) Especially in risk assessment no internal control part is there. That is very tough. Leave it. Okay. Fine. Planning. Anyhow any know this planning chapter I'm revising you now thoroughly where I'm giving you crystal clear clarity what exactly the terms are. Now so what are the considerations? So when you're planning no whether you're developing strategia, planner, programmer, leave it aside.
(0:34:37) You want to plan an audit of a client, you want to conduct an audit of a particular company. What are all you should consider when you're planning the audit? Understand the legal environment, regulatory environment applicable to the entity. What is the legal and regulatory framework applicable? Okay. See whether any analytical process is going to be applied or not. Determine materiality for that particular client.
(0:34:57) You know, see whether any expert assistance is required or not. Especially when we are doing audit of insurance companies, when we are doing audit of you know um uh electricity companies, when we do audit of any you know some oil companies, we generally take the help of experts you know uh perform risk assessment to identify risk.
(0:35:15) So these are all the points you these are all the things that you need to consider when you're planning an audit of financial statements. Then tell me when you're planning no will auditor engage see engagement partner is the one who will sign the auditor report ultimately will he only plan the entire audit or will he involve some team members also will he discuss the will will he discuss with somebody else yes obviously you can't discuss you can't develop plan isolatedly you have to discuss with management you have to discuss with your team members like your team is not going to do the audit so see ultimate
(0:35:46) responsibility for planning is with the engagement partner no doubt partner partner is only ultimately responsible because the the client appointed the firm and the partner has to sign the audit report. So partner is only ultimately responsible for planning sole responsibility but even though you have 100% responsibility you should discuss certain points when you are planning the audit whether it's a strategy forming plan development program development when you are developing the plan program strategy all that when you're doing the
(0:36:14) audit you should consult various people so what are they involvement of the engagement team first I will involve my team members like why the engagement partner and key Team members in important team members must be involved in planning the audit and discussions must be there among the team members.
(0:36:33) Their involvement increases effectiveness and efficiency of audit you know through their experience and insight. So when I involve my team members I will know whether they can be able to work on particular matter or not accordingly I can allocate the work according to their competences experience all that. That's why I should not develop the plan without discussing with my team members.
(0:36:50) My team members must be there when I'm planning the order. Remember only partner is not doing the audit. Entire team members as well as partner together they're doing the audit. Then not only that I should also discuss with management of the client.
(0:37:07) Client management also I should disclo discuss you know I should discuss with them when I'm developing my plan everything I should discuss with them also when I'm planning the audit I should discuss why you should tell the client when are you going to come for audit what are all the points that you are going to verify briefly. Remember you don't have to discuss in depth. The auditor may discuss planning elements with company's management to facilitate. They can facilitate you then only.
(0:37:25) Suddenly overnight you decided tomorrow you went for audit. The corresponding accountant is absent in the company. What you will do? So ensure the discussions do not compromise effectiveness of audit. Do not compromise. See how are you going to verify purchases? How are you going to verify sales? How are you going to verify? Inventory.
(0:37:44) How are you going to verify? Don't tell them how are you going to do the work? Tell them that I want to do the work on so and so date so and so time what you will verify inside that no need to tell them matters related to surprise checks matters related to surprise checks should not be included in the discussion obviously when you're discussing with the client you should not now see you are involving your team member you're involving client management just because you're involving them will they also be responsible for planning not at all they are not responsible for planning who is responsible for planning the auditor is
(0:38:14) ultimately responsible for strategy, plan everything. The auditor may discuss elements of planning with the management. However, make sure that audit is not compromised. That's it. So, one of the main segment in this topic is covered. Planning means what we understood. Now, planning includes three elements. Sorry, planning includes three three parts. Strategy making, plan development, program development.
(0:38:40) Now, what do you mean by strategy? Look at this. You know what do I mean by audit strategy? First of all, audit strategy is something that sets scope of the audit, timing of the audit, direction of the audit and guides development of an audit plan. Generally, strategy is in the mind of the auditor. Generally, strategy will not be visible.
(0:38:59) Strategy will be like a descriptive. Okay. Audit strategy is audit strategy covers so many things. So, strategy sets scope of the audit. Okay. So look look we are bank branch auditors for for a particular bank for a particular some five or six branches only we are the auditor scope five branches you know timing we need to finish this audit by April 10th for example you know the client appointed us in somewhere in September October so we need to finish audit and then give the report by April 10th so some 20 days time only we have direction of the audit we need to do
(0:39:30) audit in the context of statutory audit as per RBI guidelines like that overall audit strategy assist the auditor in various ways like how strategy will help the auditor. Strategy will help me to identify resources to deploy, use of experienced team members, involvement of experts on complex matter, assigning resources to specific audit areas. Just a minute. Yeah.
(0:39:54) You know, review of other auditors work, allocating audit budget, deciding when the resources are to be deployed. Resources means what? Manpower. Manpower. In audit, no. For auditors, what is the resources? manpower and interim stage key cut off stage all that management of resources generally no in the initial stages of audit no I may do audit with eight or nine members for example but at the cut off date as on 31st March because I need to finalize the audit I want 15 team members so timing of resources initially quarterly we are going we first initially we will
(0:40:27) do quarterly audits that time only five six members are required but at the time of completion of audit finalization everybody every team member 50 members has to come like that management you know see these are all various benefits ma these are all various benefits of strategy strategy means what briefly what should I do okay okay the the stat I'm I I mean I need to do audit as per company stat audit I need to comply with accounting standards I need to verify whether the financials are prepared as per accounting standard my objective is to give an opinion okay briefly I require some 30 40 days of time and uh
(0:41:00) this overall view this overall view is called as what strategy then manage management of resources actually in our in our in our normal class now we discuss more in depth with various examples all that okay but here it's a revision class since you know I can't discuss at that level now so management so how strategy benefits strategy benefits auditor in identifying the resources in allocating the resources in timing deciding the timing of resources and management of resources resources to deploy what resources are required where
(0:41:32) to deploy allocation when to deploy and as a whole management of resources. Okay. So like uh scheduuling meetings, team briefing and debriefing meetings, team meetings will be there determining how reviews by partners and managers will occur.
(0:41:53) So like you know our team will be working in the client premises, right? When should I review the work and whether to complete quality control reviews or not? In excuse you know in excuse you know for listed companies audit engagements review quality control reviews compulsory. So when this should happen all these points I will get to know only when I'm developing a strategy. So strategy making helps the auditor in these many ways any four sub points.
(0:42:12) These are all various sub points. These are all various sub points any four or five. Okay. So they may ask you many times they have asked what are the how overall audit strategy assist the auditor? How overall audit strategy assist? How it will be beneficial to the auditor? Remember benefits of planning that is different.
(0:42:31) Benefits of audit strategy. The answer is different. Be careful. There is a high possibility that student might write a diff you know same answer. Again we have another question advantages of program. Later we have another concept called program. Audit program. There also we have a discussion called advantage of program. So be careful. Next.
(0:42:49) So when I'm developing a strategy what factors I should consider? There are five factors that we consider. One one characteristics of the engagement that define the scum. So when I'm developing the strategy first I should see the characteristics of the engagement is it a stat auditor internal auditor stat audit for example it's a stat audit is it a normal company banker insurance these are all we call it as characteristics of the engagement reporting objectives reporting objectives reporting objective is different reporting requirement is different reporting standards are different
(0:43:20) reporting objectives this is nothing but communication objectives this is nothing but communication objectives Here SEA 260 standard will help you then you know where significant factors in directing. So in every audit no my team will be focusing on certain areas where where there are some risks.
(0:43:40) So significant factors in directing team efforts in the recent uh in the recent Jan 25 on this one question came five marks question telecommunication company digital database like that one question came in Jan 25 on this only they asked the question is so practical so depth like only students who understand this topic conceptually can figure out can figure out the answer fine anyhow I'll come back and results of preliminary engagement what is preliminary engagement activity I told Acceptance and continuence of client relationship,
(0:44:11) establishing terms of engagement, compliance with relevant ethical requirements. These are all preliminary. The preliminary engagement active when you're performing know in a client. Now you will get to know some information that also you should consider while developing your audit strategy. So when you're developing an audit strategy, you should consider preliminary engagement activities.
(0:44:29) You should consider you know uh you should you should identify where your team efforts has to be directed and you should also consider reporting objectives. You should consider characteristics of the engagement. Finally you should consider what is the nature of resources, timing of resources, extent of resources required for the audit.
(0:44:47) So nature, timing, extent of resources required for audit that also you should consider. Now now look at so characteristics of the engagement that define its scope. Characteristics of the engagement means what? What is a financial reporting framework applicable for banks? Financial reporting framework is different.
(0:45:03) Insurance company financial reporting framework is different like that and specialized knowledge. See the nature of business. What business client is involved in? Whether do you require to have a specialized knowledge? What are the industry specific reporting requirements? Whether can you use evidence obtained from previous audits or not? Reporting engagements. Reporting sorry reporting objectives.
(0:45:21) What is reporting objectives? Plan timing of procedures and communication when you should for example know physical verification of inventory. You should generally plan on 31st March. Okay. Timing of procedures and communications. You should frequently update the client. What is the status of the audit? So what is the entities reporting timetable for example for a listed company if I'm auditor know I should give quarterly review reports then I should give annually one audit report. So entities reporting time table get it and organize meetings for discussing nature and
(0:45:45) timing extent of audit work with management discussing with discussions with management on type of the reports and timing of the reports. For example, if you're doing a bank audit in bank audit also you have one question what are various reports a bank auditor will give various reports ask the management communications with management about status of the work nature timing nature and timing of communication among team members my team is performing work right audit right I should check their work rate when should I check how should I
(0:46:09) check nature and timing of communication among the team members including meetings and reviews these are all called as reporting objectives further I will identify mcot escort or MCO. Significant class of transaction ECOT, MCOT. Material class of transactions, both are same. Material class of transaction, ABS, account balances and disclosures. Identify what are all the material transactions in this company.
(0:46:35) Material balances and material disclosures and direct team efforts to significant matters. Those significant transactions, significant balance are there, right? Give your team attention to those matters. You know like uh like what are significant class of transaction? Look at the transaction volume. Look at the transaction volume affecting reliance on internal control.
(0:46:54) Significant industry development. Changes in financial reporting framework. Changes in legal environment. Significant industry development. Sign changes in legal environment. This is what they tested in the Jan 2025 as a practical question.
(0:47:10) Some te telecom regulatory has given some instructions to telecom companies where they need to maintain digital database of some customers or something like that. They gave a question. So practical question. That's it. Next preliminary you know results of past audit emphasis of the team all that this is this is a normal thing. So in this no these three points are very important. First three this itself can be asked as a four marks question.
(0:47:32) This itself can be asked as a four marks question or this third point itself can be asked as a four marks question. Anyway they can ask be careful. Next next once once you develop a strategy you know what what do you mean by planning we understood what is the strategy we understood. How to develop the strategy we understood. What are the advantage of uh strategy? We understood now plan.
(0:47:50) Now you need to develop the plan. You know what is a plan? you know I'll tell you how a plan looks like okay generally I use charge all that in the class but here I don't have time so plan plan means what serial number audit area audit area okay for example risk assessment procedure team member Mr.
(0:48:11) A you know who is an engagement partner you know timing some 2 days required instructions you know extent you know uh nature nature timing extent like this no we will list out opening balance verification purchases sales fixed assets depreciation like that we will list out we will allocate the work like this we will develop some some document this document is called as an audit plan okay audit so sea 300 what 300 standard says you know the audit plan should include risk assessment assment procedure. The audit plan should include further audit procedure. So, not only risk assessment,
(0:48:42) further audit. Just a minute. Uh yeah, I think uh yeah, it is smooth. Perfect. Yeah, no problem. So, nature, timing and extent of risk assessment. Nature, timing, extent of further audit procedure at assertion level. Other planned procedures. Okay. To ensure compliance with standards on auditing and plans for type, timing, scope of audit, including sampling and work allocation, everything has to be considered.
(0:49:16) Audit plan should include description of this itself four marks question. The audit plan must contain description of the following. What are the audit? What audit plan should contain? What description audit plan should contain? Audit audit plan should contain risk assessment. Audit plan should contain further audit. Audit plan should contain any other planned procedures.
(0:49:34) And you know not only that you should you should plan type timing scope of audit what type of audit procedure you need to do when you should do scope including whether it should be done on a sampling basis how work allocation must be done everything will be covered here that's it I think I hope everyone it's cool it's smooth I hope yeah perfect so the audit plan is more detailed than strategy remember MCQs is important focusing on specific procedures to be performed by team members in audit plan No specifically what we need to do that only will be major point. Planning
(0:50:05) planning occurs over the course of audit with specific stages. In planning no first we do risk assessment then we do further audit procedures. Sometimes no further audit procedures we'll do immediately for some transactions. Whereas for some other transactions planning only we will do.
(0:50:21) So simultaneously we will do actual audit for some transaction. For some class of transaction we will not even start the audit. For them planning might be going on simultaneously. Next, what is the relationship between overall audit strategy and audit plan? Audit strategy sets broad overall approach to audit. What exactly overall we need to do? Whereas plan talks about specific matters, specific issues.
(0:50:40) How to do audit of purchases, how to do audit of sales, how to do audit of that. So that is what planning. Audit strategy determines the scope of audit timing of the audit direction. Whereas audit plan describes how strategy is implemented. You know there is another word called program. Program is even more detailed. For example, you know in strategy I understood that I should cover purchase.
(0:50:58) When should I cover purchase? On purchases I should do risk assessment. Further audit all that is plan. In purchases what points I should verify each and every point I will list it out. That is program. Next audit plan is more detailed than strategy which includes nature, timing, extent of procedures. Development of an audit plan.
(0:51:18) Planning of an audit occurs throughout the audit. As plan develops and adapts to the engagement. Obviously planning itself is a continuous activity. Therefore, plan development is also continuous. Plan is not developed overnight. Once audit strategy is established, audit plan is developed. Establishing audit strategy and development of audit plan are not separate but are interrelated process where changes in one will automatically affect the changes in others. So audit strategy and plan no may not be a separate process. They can be one and same. That's why in
(0:51:43) reality you don't find strategy separately. Plan itself is a strategy document. Plan itself is a plan. That's it. Changes to planning. Obviously the auditor shall update and change overall audit strategy audit plan as and when necessary. Why you need to change unexpected events suddenly know the when we go to the client to warehouse we found some new inventory that new inventory we don't have in our plan so we will have to add it changes in changes in condition new information discovered changes in strategy and plan ensures that audit remains effective and revised. Audit plan should be dynamic
(0:52:16) and flexible. Therefore modifications can be made. Example, audit evidence from detail checking may contract evidence from testing internal control prompting changes to the plan. So when I'm doing transaction actual checking or substantive procedure, I may find so many mistakes. Originally I thought internal controls are very effective.
(0:52:33) Now when I find so many transactions where controls are failed, so I may have to change my control assumptions. Uh okay fine uh let me not discuss so in depth again here. Fine. Now planning, supervision, review of work of team members. Remember you know audit strategy plan planning activities been spot how to do this audit when to do this audit when to so and so process when to perform all that right how to allocate resources all that right now not I should plan I should not only plan how to do the work I should also plan yeah so I should I should also plan to review my team members work also my team
(0:53:07) members will be working right in audit I should also plan when should I review this suppose you have you might have remembered engagement quality Control review QCR engagement quality control review when that review should should happen that also should plan.
(0:53:24) Yes, the auditor shall plan the auditor shall plan nature timing extent of direction supervision and review of the team members to what extent to what extent direction supervision and review will happen. It depends upon size and complexity of the entity. It depends upon what audit area. It depends upon excess risk. It depends upon capability of the team members.
(0:53:43) If my team members are very capable and competent, I rarely review. I will review at the end of the audit. If my team members are new, they don't have any idea. I will review them very frequently. So nature, direction, supervision, review of the engagement partner, the direction by the partner, supervision by the partner, review by the partner depends upon these factors.
(0:53:57) This itself can be asked as a four marks question. Be careful. And most important documentation. In the recent exam, this also they have asked for five marks question. Documentation part. In Jan 25 exam, they have asked this. You know why you need to document? It's a record of key decisions regarding planning.
(0:54:14) Facilitates communication with the team member on important issues. Records planned nature, timing, extent of risk assessment and and here it is further here it is further audit procedure. Then documentation includes overall strategy audit plan and changes changes to the plan and remember it's a record of significant changes.
(0:54:35) Explains why changes were made like why what is the reason originally you thought of 10 days right? Why you increased to 15 days reflects the final strategy plan adopted. Oh you know you know changes and all you record right so automatically the audit plan whatever you're documenting is the final version shows appropriate response to changes during the audit. So originally how we planned later how we changed it.
(0:54:53) So all that information will be there. That's it. So this is documentation of the audit plan. This itself has been asked as a prim marks question. Remember I need to cover in a revision class. I need to cover in a shortest time. So I can't give so many logics and all.
(0:55:10) Okay, in our actual class now we'll be discussing very in depth this particular chapter you know where we'll discuss so many issues. We will be re repeating all this but consider remember that this is a revision video. So if any of you feel like you're not able to understand some points remember that this is a revision video. I'm trying my level best. It's very stressful for me to compress the entire content in shortest amount of time so that your time will be saved so that you will focus on reading it again and again. Then then the next topic in this chapter is program. What is an
(0:55:33) audit program? Audit program is a detailed plan. Plan is a detailed strategy. Program is a detailed plan. Simple. And all these three are called as planning activities. No. So audit program is a detailed plan comp comprising series of verification steps to be applied. Okay.
(0:55:51) To gather sufficient appropriate evidence so that you can form an opinion. So audit plan it gives you program will give you instructions purchases verify purchase order verify GRN verify so and so verify receipt verify vendor master like that. So many points you need to verify each team member that's a program. Okay.
(0:56:10) Now can one program be there for all the clients for all the businesses? Not possible because every business has different different processes. So you know evolving one audit program is not practicable for all businesses. Nature, size and composition of business vary. Obviously every business size will vary, nature will vary. Yes or no? Internal controls are different in every business.
(0:56:29) Nature of services rendered by auditors varies from one assignment to another assignment. So so necessary of tailored program. So for each business you need to have a tailored you need to customize the program. You can have one standard program but you need to customize it as per the requirements of each client.
(0:56:47) So tailored program will prevent time wastage on irrelevant matters. So tailored program means what for each client specific program has to be developed. Address special situations. Ensure audit program is aligned to specific circumstance. So you should align the program as per the specific circumstance of the client. So assistance I should tell my team members my articles and all keep an open mind program I told you 10 points to verifying purchase suppose when you're verifying purchases no you found some 11th point immediately please come and tell me so the auditor frames a standard
(0:57:12) program considering nature of the company size of the company composition of the business and dependability of the inter so after studying a particular company for that company I will develop one program so that my team member will follow the program so that quality of work can be enhanced at the same time I should tell my team member don't only blindly follow the program if you find Some changes are required. Please immediately come back and tell me. This program gives you a minimum work only. Audit program is only giving a minimum
(0:57:35) guidance that is not exhaustive alterations. As experience is gained, the program may be altered. Some work which may be irrelevant may be deleted. So assistance must be encouraged to keep an open mind beyond the given program. Note and report significant matters to seniors and partners of the firm.
(0:57:54) So reprogram has to be reviewed periodically. Audit program should undergo regular review to ensure that it is adequate. You know changes in the client business policy may render sometimes know originally at the at the beginning of the audit at the beginning of the audit I might have thinking the client is so and so but as we started the audit the client would have changed some businesses he would have added some new products so program also shall be changed accordingly.
(0:58:17) So an absolute program lead to negligent audit work and lead to legal consequences. Yeah. and uh contents of the program. Besides listing tasks to be performed, the program shall include instructions. What is the extent of checking sampling plan all that until officially updated by principal the team members under strictly has to follow the program you know concerns about rigidity or not? Obviously since program know what are all you need to do each and every step will be listed in program. Obviously people will feel that it is rigid. Rigidity will be there but periodic
(0:58:47) review will be conducted to ensure that it is up to date. So keeping the program up to date ensures it is flexibility and relevance. So when you're developing a program, what points you should keep in mind? So what points you should keep in mind when you're developing the program? Audit planning starts after previous audit. We already saw this point.
(0:59:05) Audit plan will be reviewed and modified during the audit based on the internal controls, preliminary valuation, compliance with the compliance and substantive internal controls and substantive procedure. Timing and coordination. When you're developing a program, no timing of the process, you should consider coordination of client assistance. See whether assistance are available.
(0:59:24) See experts requirement is there other audit requirement is there on certain processes auditor do not have discretion on timing for example on certain procedure no you don't have discretion for example physical verification of inventory you generally will do on 31st March only so what are the key points in program construction three marks stay within the scope of the assignment don't check something which is not relevant in your audit prepare a written audit program to implement the plan I best evidence reasonably available include any one relevant step for example identify best evidence For debtors and creditors, best evidence is third party confirmation. For bank loans and balances, best
(0:59:55) evidence is banker confirmation. So, identify for each audit procedure what is the best evidence. That's it. And specify the audit objectives and detail instructions for assistance. Try to identify what kind of errors are possible accordingly. Develop the program. Coordinate procedures for various interrelated items.
(1:00:15) And what are various broad types of evidences available? Documentary evidence physically you will get an evidence arithmetical calculations is one way of getting an evidence internal controls and checks minutes books is one way of evidence you know uh statements from third parties is one way of evidence explanations from management's officials this is what we call it as written representations as per 580 that's it cash in hand what is the best evidence physical count investments pledged with the bank what is the best evidence
(1:00:43) banker certificate dattors what is the best evidence there are so Client's ledger, invoice, credit note, all that balance confirmation, many evidences are possible. Then advantages of the program. Here you will find some benefits of planning. Same benefits of planning points. You will find a clear set of instructions. You know program will give you clear set of instructions.
(1:01:07) It gives a total perspective for major audit. Selection of assistance based on capabilities becomes easier. Reduces risk of ignoring records reduces. You know assistance accept responsibility by signing the program and monitoring progress. You know assist the auditor in monitoring the audit. It will help you to audit subsequent years.
(1:01:26) It acts as an evidence of due diligence. Okay. In case auditor was complained that client complained on the auditor that auditor did not perform the work carefully. So auditor can prove see this is a program this will be worked like that. Then disadvantages since program is rigid. No inefficient people like for example you know work may become mechanical program sometimes may become rigid and inflexible continued use of outdated program may overlook changes in the business so program has to be updated that is the reason we have to update the program especially inefficient articles no they might defend their work deficiencies
(1:01:58) they will say I will ask my article why you did not verify so and so point he will say that is not covered in program no so like that so rigid program kill the initiative among the team members So that's why you need to take certain precautions supervise the work to ensure that they understand the program objectives and avoid blind following foster receptive environment encourage assistants to observe objectively and report. So that's why you need to tell the team look this is a program for purchases you have to do exactly audit as per this program at the same time I
(1:02:27) should also tell him also see whether in reality in the client do you find any 11th or 12th point if so please report me now extract of sample audit program pertaining to sales of an entity. So vouch of few sales invoices you know see this is how sales how to extent of check what is the sample who has done the work who will review all that you know this is a program example this is how a program looks like now in in exceptional questions we have some questions on program chapter so let me go to the program chapter exceptional questions so audit strategy program uh I think uh
(1:03:00) yeah yeah yeah I think I think in this there are no exceptional questions I think all were covered as part of this in this chapter there is no exceptional questions as such that's In Jan 25 two questions were there both are exceptional questions in Jan 25 that alone you read okay that's it actually not required here itself I already covered this is more than sufficient so I hope I have given you a detail at least a decent clarity through this 45 minutes revision in in our actual class we'll be discussing this chapter for two and up to three hours where it'll be much more exhaustive so but since considering it's a revision class I
(1:03:29) can't give much in depth because I have to save your time with the the very reason why many students watch revision is come up with another chapter later that's it I hope you are clear with audit strategy plan and program I think that the main clarity you got right at the beginning itself I gave you clarity planning means everything planning activity means everything so in this chapter planning means what strategy means what plan means what program means what that four parts the chapter is divided mainly that's it okay I hope you
(1:03:53) thoroughly got a decent clarity on this chapter something that you don't have earlier I hope you have got clarity now on this particular topic that's it okay now you understood even though the chapter is very small why the weightage is very high it's very small but it's very tough. It's not that easy chapter at all. Very tough.
(1:04:09) But if you continuously read thoroughly, revise thoroughly with a proper clarity, there is a high possibility that you will write very right answer. That's it. That's it. Okay. Take care guys. Thank you. Yes. Uh just guys just check out once. some issue. Ha. Yeah, got it. It's solved. Yes, perfect. Perfect.
(1:05:08) Perfect. Yes, I'm proceeding now. So, uh let's let's discuss now about uh SQC and 220. There are two standards standard on quality control and 220. So, both let let us discuss now both. Uh this is actually part of quality control topic. This is actually part of quality control topic.
(1:05:34) I hope every one of you are aware of quality control topic which is there in your ICA book as a part of 11th chapter. 11th chapter is ethics and terms of engagement inside that ethics discussion is there. Terms of engagement which is nothing but sea 210 discussion is there. Then SQC and 220 two standards were discussed. This is third part nothing but quality control part in that chapter.
(1:05:53) Now this ethics and terms of engagement is already covered you know uh immediately after nature objective and scope of audit discussion ethics and terms of engagement then only we discussed audit report topic which is already covered as part of part one audit marathon. Now this SQC and 220 now we will discuss now. So what are the two standards? Both are dealing with quality control.
(1:06:13) Both are dealing with quality control. SQC is also a quality control standard. SA220 is also a quality control standard. SQC is applicable for firms. Audit firms. It is not applicable for audit or no it is not dependent upon engagement. It is applicable for the firm. The where the firm is providing audit services, assurance, related services, review, anything.
(1:06:34) The firm might be providing audit, review, other assurance and related doesn't matter. It is applicable for the firms. So, SQ is applicable for all types of engagements. Whereas 220 is only applicable for audit engagements. We know very well even in the nature, objective and scope of audit revision.
(1:06:52) I clearly spoke about you know whatever works that we provide are broadly classified into two types. You know, uh assurance engagement, non-assurance engagement. We provide again assurance on historical financial information other than historical financial information. On historical financial information we provide reasonable assurance limited assurance.
(1:07:10) Reasonable assurance if at all we are providing on historical then that is addressed by standards on auditing. Whereas limited assurance is addressed by standards on review other than historical financial information is addressed by standards on assurance engagement and nonissurance is nothing but related services. standards on related services.
(1:07:28) Remember at CA interle we only have discussion about standards on auditing. We don't have standards on review. We don't have standards on issuance. We don't have standards on related services. Just one minute. Yeah. So we don't have standards on related services in our syllabus. Get it? We only have standards on auditing that within standards on auditing some six to seven standards.
(1:07:50) We don't have syllabus at all in CAN into we only have it in CA final. So anyhow at final level we'll be discussing the pending standards. Now what is this SQC? SQC is applicable for entire firm. SEA 220 is applicable for a specific audit engagement. So I'm performing audit of one company for a particular financial year. Statutory audit general purpose financial statements audit.
(1:08:09) SEA 220 is applicable for that. Actually SQC talks about firm shall establish policies and procedures. SQC talks about every firm every CA firm whether it's a proprietary concern partnership firm whether it's an LLP okay so whether a CA is practicing individually or practicing as a partnership firm doesn't matter they both are considered as partner they both are considered as firms audit firms audit firms must have quality control policies and procedures audit firms must have system of quality control so that rule is prescribed under SQC 220 says
(1:08:43) whatever quality control system is developed right the firm will the firm shall develop quality control system right the firm shall develop the quality control system that fact is mentioned under SQC the firm should implement it in audit the firm should implement quality control system in audit implementation part is covered under 220 that's the basic difference between SQC and 220 sq talks about establishing the policies and procedures establishing the quality control system whereas 220 talks about implementing that quality control system in the audit engagement. That's
(1:09:16) the basic difference between SQC and 220. I hope you are clear now. Now what do you mean by quality control? You see the heading of SQC. SQC is what? Quality control for firms. What the firm is doing? It is performing audit review of historical financial information and other assurance they are providing and they are also providing related services engagement.
(1:09:39) So the firm is providing audit, the firm is providing review, the firm is providing other assurance service and the firm is also providing related services. So whether the firm is providing any of this doesn't matter. Quality control standard is applicable. Now what the what SQC is saying you know SQC simply says one thing establish quality control system.
(1:09:56) And what is exactly a quality control system? Very simple. You remember Domino's, you remember KFC, you remember any McDonald's, you see Domino's pizza whether you have it in India, whether you have it outside India, everywhere the menu is same. Everywhere the pizza is same, everywhere the making process is same. So that is why wherever you go and have a Domino's pizza, the taste is same.
(1:10:16) Why? That's a quality control because Domino's has standardized the way how to make a pizza. Pizza making process is standardized. Why the standardized to give same taste same experience to the customer at any place in the world yet whenever you come and buy the pizza it'll taste exactly the same 95% accuracy that's a quality control nothing but same way we chartered accountants whenever we are performing audit whenever we perform the audit wherever we perform the audit whatever the client doesn't matter we must achieve quality in the audit so the
(1:10:48) audit that we are performing must be qualitative for that reason We have to establish certain policies and procedures. Standard operating practices, standard operating policies, system of quality control we should establish. Okay. Where and all we should establish system of quality control. The standard identify totally six areas.
(1:11:06) The standard identifies totally six areas where quality control policies has to be established. Leadership responsibility one element of quality control. Ethical requirements. Another element of quality control. Acceptance and continuation of client relationship. Human resources. performing the engagement. You see they're not using the word audit.
(1:11:24) They're using the word engagement. In entire SQC they don't use the word audit, review like that. They use only the word engagement mostly and monitoring. So there are totally six elements of quality control. One, leadership. The firm top management should accept the responsibility for overall audit. Two um you know the ethical requirements.
(1:11:42) The firm shall establish policies so that the firm and the team members will comply with ethics. Whatever work they're doing, they should comply with ethics, acceptance and continuation. You know how to accept a client, which client should be accepted, which client should not be accepted.
(1:11:58) There must be a policy on which client will be accepted, which client will not be accepted. The firm should establish policies and procedures and human resources. How many staff the firm shall have all that engagement performance monitoring? Let's discuss one by one. Let's discuss one by one. So, what is the object of the standard? Very simple. The objective is very simple. The firm shall establish a quality control system.
(1:12:17) Quality control system is also called as policies and procedures. Why? Why you need to establish? So that to ensure that compliance with the standards, compliance with law and regulation and reports that the firm issuing is appropriate. Where engagement risk is low.
(1:12:35) The reports issued by the firm for various kinds of works which they accepting the the reports given must be right. The reports given must be appropriate. Which means engagement risk must be low. The quality control system. Yeah. The quality control system consists of policies and procedures to achieve these objectives.
(1:12:53) So automatically the policies and procedures nothing but consist of these what are all rules and regulations the firm and the staff everybody shall follow to achieve these objectives. That's it. Next one minute. Yeah. Perfect. See if at all any of you who are follow who are watching this in the live if at all in between if some issue comes don't worry just refresh it it'll work okay that's it now and remember these quality control systems policies must be documented and it must be communicated by the firm to all its staff partners articles paid assistants to everybody now now now let's discuss each and every element now let us discuss each and
(1:13:36) every element what are the elements of quality control mostant Important element in quality control is acceptance and continuation of client relationship. You know this point you will once again see in audit engagement uh you know audit strategy, audit planning, audit program topic. Just a minute. Uh I think everything is proper. Just one minute be online.
(1:14:05) streaming bit rate is proper. Everything is proper. Yeah. Yeah. I think I think it is good. It's proper, right? Just one minute. Let can somebody confirm me whether you're able you're able to I mean is it smooth? Okay. Fine. as a whole. Yeah. So very occasionally in the live you know very rare it lag but again it will set immediately.
(1:14:57) So kindly just follow that. Fine. Okay. So the one most important element most important element in quality control is acceptance and continuation of client relationship. So when a client comes new client what points the firm shall consider. Suppose if main partner is not there another partner has to confirm the client whether the client is accepted or not.
(1:15:15) So what points they should check? This point is once again covered as part of preliminary engagement activities. This point is once again covered in preliminary engagement activity in one of the chapter audit strategy planning program.
(1:15:32) So acceptance and preliminary engagement activities will consist of one of the activity that is nothing but this acceptance. So what forum has to do before accepting a client or before you continue an existing client the firum must gather important information. What what information first one integrity of the client. So check whether the client is honest or not. What do you mean by integrity? Integrity of the client.
(1:15:51) What matters to be considered in integrity? This itself can be asked as a four marks question straight away. Integrity of the client matters to be considered like integrity of client principal owners you know key management top management those charged with the governance client business practices and operations how are they what is the attitude of the client towards accounting standard are there any pressures on the firm to reduce the fee is there any scope limitation involvement in moneyaundering activities why are they changing the auditor why previous auditor is not reappointed these are all points you
(1:16:20) should consider you should ask the client you should get that information before you accept him or before you give consent for continuation. Remember acceptance and continuation of client relationship means what? Acceptance means what? Acceptance means new client. Continuation means we are talking about existing client. That's it.
(1:16:39) Now, so integrity of the client, you need to consider. Second one, you should consider your competence. See the many clients will approach you tomorrow but you can't accept them just for the sake of money. You should know whether you can do that work or not. Also, you must check your competence levels, your capability, your time and resources.
(1:16:56) Do you have time enough time so that you can deliver that work? Do you have enough staff members so to perform the engagement and compliance with ethical requirements before you accept whether are you ethically fit or not? Because for example a company client want to appoint you as a statuto auditor see whether are you eligible qualified and not disqualified or not.
(1:17:12) You should only check and what are all various ethical requirements we will discuss in CA final. We have something called professional ethics in CA final. There is something called CA act is there there we will be discussing and the farm shall document how these issues are resolved while accepting or continuing a client relationship.
(1:17:29) So when you're accepting and continuing when you're doing this entire you're gathering information about the client you are checking competence capability if any issues arises in this okay how did you resolve it that also firum has to document then now remember if any conflict is there between the firm and client suppose no my my relative has some shares in the company that's a conflict it must be resolved before accepting the engagement if gets any information after accepting the engagement I accepted no we started audit now we got to know some information that could have affected the decision regarding acceptance. If at all
(1:17:58) I know this information earlier itself, I would have declared this work. Then what the firm has to do? The firm should the firm should assess legal and professional responsibilities including reporting to relevant authorities and possibility of withdrawal from the engagement or from the client relationship.
(1:18:16) So if at all forum no we we gave acceptance to the client. Yes sir, we are ready. Now we started auditing also. Now we got to know that one of the partner has shares in the company. If at all we know this information earlier, we will have not accepted this client itself. Now what forum has to do? Consider legal obligations right now. Consider professional obligations right now. See whether you have to report it to anybody or not.
(1:18:34) See whether withdrawal is is withdrawal required or not. Is it from the engagement you withdraw or from client itself you withdraw? Check out. So this itself was asked for three or four marks question many a times. Okay. So that's it. Integrity of the client. This itself can be asked acceptance and continuation of client relationship. This itself can be asked as a four marks question. Very important.
(1:18:51) Then then human resources. So what is human resources? Every firum tomorrow you're opening practice you have to establish policies and procedures so that you will have a reasonable assurance that firum has sufficient persons with the capability competence ethical principles to perform engagements in accordance with standard.
(1:19:08) You must establish policies and procedures in your organization in such a way that you have staff member who are competent who are capable so that whatever works your firm is accepting no they can perform it competently and you must develop an HR policy.
(1:19:27) The HR policy shall address recruitment, how to recruit articles, how to compensate them, how to train them, how to develop their career, how and performance evaluation, how to evaluate their performance. You must have HR policies like that and you must focus the firm policies and procedures relating to HR must focus on continuous development of the personal like some firms know they have a policy every Saturday full day seminars will be conducted, updates will be discussed like that. So one day they will dedicate for training of their staff like that. So that's a policy for them.
(1:19:51) So the firm shall establish policies and process for HR. HR policy shall address three issues like this. That's it. I hope you are clear. And engagement performance performance of the work like you accepted audit, you accepted review, you accepted some related service.
(1:20:08) Whatever the work you have accepted to perform that work you must have some policies and procedures. So you remember consistency in engagement can be achieved by briefing the teams on objectives. What are the standards applicable? supervising them, training them and performance review methods like whenever your team member is working no you need to review them how are they working all that consultation must take place remember whenever we are working know like team member a team member is working in a firm in a firm some so many teams will be there I am I am part of one of the team member and I'm I I was I was given some audit work in one of the client so when I'm doing this audit I
(1:20:39) got some doubts whom should I consult I should consult either a senior I should consult partner if at all even still my doubt is not resolved I should consult somebody within the firm Even if my doubt is not resolved, I should consult externally somebody. Such a kind of consultation facilities must be there.
(1:20:58) So consultation must take place for resolving difficult or complex matters with individuals inside the firm or outside the firm. External consultation may be required from others other firms professional bodies for advisory services. So when you're performing the work no policies and processes must be implemented in such a way that you know uh policies and process must address various issues like briefing the team members engagement standard supervision training all that and consultation must take place on difficult matters all that external consultation may be sought for any complex matters and all and remember engagement quality control review this
(1:21:29) is most important in this in engagement performance most important point is this eth engagement quality control review what is engagement quality control review See whenever we are doing any works no significant judgments will be there.
(1:21:47) If wherever in any work that you are doing especially in audit if any significant assumptions significant judgments have been taken by the partners by the by the auditor the significant judgments must be reviewed by a quality control reviewer. Okay before issuing the report remember quality control review engagement quality control review must happen before the report is issued.
(1:22:06) Now to what extent reviewer will review it depends upon complexity involved risk involved in that engagement in that audit engagement or in that engagement what is the complexity what is the risk depending upon that the review will be happening if the risk is very low complexity is very low review might be happen within two days if the risk is high complexity review might increase next now remember if the the review does not reduce partner's responsibility remember I'm the one who is signing the audit to it ultimately just because a reviewer is coming and reviewing my
(1:22:30) responsibility will not reduce this is just like Hey uh you know a precaution before I give my report I will ask reviewer. What is engagement quality control review in audit? I will tell you very simple. I am the partner and I have some team members. We have conducted some audit of a company for 40 days over. I concluded that unqualified opinion shall be given.
(1:22:48) But before I give my report no, I will ask my another partner of the firm. I have partnered another partner is there. He is not my team member. He's just another partner. I I appointed for my audit as a quality control reviewer. I appointed him as a quality control reviewer. What he need to do? He will check my documentation working paper. He will go through entire work what I'm doing.
(1:23:05) He will check whether anywhere I'm taking wrong decision and all. He will verify all my important decisions and all and he will also see he will ask me hersa what you decided. I told I tell him sir I I I decided to give unqualified opinion then he will also check my working papers and tell me whether my my opinion of unqualified which I concluded is it correct or not.
(1:23:24) He will discuss and then tell me he will just review and then tell me once he gives okay Harsha you can proceed your your your conclusions your work your everything your report everything is proper he he told me then I will proceed and give unqualified opinion. So before I give a report to a client and third party my entire work will be reviewed by somebody. So this is for a better quality control.
(1:23:42) Now and remember engagement quality control review is mandatory for audit of listed entities. Which engagement audit that for which clients? Listed clients for listed clients. If a firm is doing audit then the partner shall not issue audit report without completing engagement quality control review. So EQCR is must for all audits of listed entities.
(1:24:02) For other engagements sir non-listed company audit sir sir it's a review engagement sir not audit sir for them whether quality control review is there it will be firm's choice firm will develop the quality control review criteria now sir now okay sir the partner quality control reviewer came sir he reviewed entire work sir the quality control reviewer told my audit report is not correct I should not give unqualified opinion whereas I am feeling unqualified sir he saying qualified opinion now there is a
(1:24:26) difference between us what to do any disagreement between the team members between the reviewer and partner it should be it shall be resolved before issuing the report. Suppose if reviewer he recommending qualified opinion for me whereas I decide an unqualified is correct.
(1:24:44) If his recommendations are not accepted by partner as a partner I'm not okay with this recommendation then the matter shall be resolved by policies and procedures by consulting another practitioner or by consulting another firm or professional body. So see if there's a conflict between the partner and review. If there is a conflict who whose decision will prevail both of you will not fight.
(1:25:02) Firm quality control policies will be there inside that what they are saying what rule is there follow the rule that's it then most important documentation the firm must establish policies for documentation also remember. So the firum must establish policies and procedures for timely assembly of final engagement file.
(1:25:21) You see here they they're not using the word audit in audit documentation chapter you will see the word final audit file. Here you will see the word final engagement file. This engagement may be audit. This engagement may review. This engagement may be related service. Anything correct? Especially assembly of audit file for audit cases.
(1:25:38) Assembly must be completed within 60 days after issuing the audit report. Sir, what is assembly? I already covered in audit documentation revision. And remember the firm must establish policies for maintaining the working papers, documentation, confidentiality, integrity, accessibility, retrievability and ownership.
(1:25:57) Remember the engagement documentation is property of the firm because they are the one who is working upon. So the documentation whatever they are gathering is property of the firm. The firm if they want at their discretion may disclose documentation to clients provided that disclosure does not affect confidentiality validity of the work performed all that and not only that the documentation you work so many you gave you provided so many engagements right you worked on some audit review all that right? So some documentation is there right? How long you should retain it? You should retain it for such a period which is important. The document should be retained long
(1:26:28) enough to perform monitoring. What is monitoring? Monitoring means I'll tell you very simple. We complete our work. Right? Once all the works are completed in this year at the end of the year generally what happens you know this partner will check all the other partners works. Other partner will check my works. So this is called monitoring.
(1:26:45) So until monitoring is completed documentation must be written. For audits the retention must be for seven years. For audit engagements typically audit documentation for audit engagements the documentation must be written minimum for seven years from the date of auditor's report or if later group auditors report.
(1:27:02) So either the audit report date or group audit report date. Group audit report means consolidated financial statements will be there right from that audit report date whichever is later. Monitoring you know the firm shall establish policies and procedures for monitoring.
(1:27:19) So why why we need to monitor? Monitoring is important to evaluate whether quality control policies are relevant, adequate and operating effectively. For how do we monitor? By doing periodic inspection. Perform inspections of completed engagements. Already some completed works are there. Right. Go back. Open the works. Open the documentation. See whether the work is properly performed or not. See the report issued is properly or not. Once again check it.
(1:27:38) See inspection is nothing but you know for listed companies inspection will happen indirectly through engagement quality control review. Once audit report is also given after that once again they will open and check that is called inspection as part of monitoring after the report if it is if at all review is happening review of audit documentation is conducted after the report is issued as a part of monitoring then it's a monitoring if review of audit report review of audit documentation is happening before audit report is issued that's an engagement quality control review that's it so
(1:28:06) perform inspections of completed works to check whether the work is in compli work is in compliance with quality control system or not and finally the First element leadership responsibility and ethical requirements. Ethical requirements. Ethical requirements.
(1:28:24) First I will finish the firm shall establish policies and procedures so that the firm will comply with code of ethics. What is code of ethics? Integrity, objectivity, competence, confidentiality, behavior, independence, all that. Now the firm shall establish policies so that the firm will maintain independence wherever required. So the policy and procedure shall ensure that independent you know the firm shall communicate independence requirement to personal.
(1:28:44) So the firm shall have a procedures where they are communicating independence requirements to people and the firm shall identify and address threats to independence. Withdraw the threats cannot be eliminated. So then there must be a policy on how to address the threat. There must be policy on how to withdraw. For withdrawal also some procedures will be there that and all in depth will be discussed in CF final.
(1:29:00) Then engagement partners should report any threats of independence to to the firm promptly. So who should do this ethical requirements check everywhere? Engagement partner shall check mainly. So he is the one that he should check whether any ethical requirements are conflicting. If there is a conflict he he must immediately report you to the firm.
(1:29:17) He must check quality control policies and decide whether to accept or not. Then prompt notification of breaches. If any ethical requirement of breach immediately the concerned partner of the concern members should report to the top management of the firm and obtain written confirmation of compliance with independent policies from all personnel.
(1:29:33) Every forum shall take a declaration they engaged in. They complied with ethical requirements annually. Once they should get a written confirmation of compliance with the firm's policies and procedures with independence it's independence policies with with respect to independence policies annually one letter has to be obtained remember very important for MCQs and all then leadership SQC1 requires policies and procedures to promote a culture that values high quality the CEO of the firm the top partner managing partner he must
(1:30:03) take ultimate responsibility for the quality control system leadership should set An example that promotes highquality audit work. The persons responsible for operational quality control must have experience. You know what is meant by operational quality control.
(1:30:20) The people inside the firm know one or two partners will be given this responsibility of developing policy policies and procure. Developing policies and procedures responsibility will be given for some people. Some partners those people are called as operations personnel. Those people are called as the firms persons responsible for operational quality control.
(1:30:36) They must have sufficient experience, sufficient ability, sufficient authority so that there they can develop policies and procedures by in light of various standards and auditing all that. That's it. So this is also with advanced standard. It's not that easy because uh this requires a discussion of so in depth basically but since it's a revision we can't cover all that basically whatever is required I covered. Now 220 quality control for an audit of financial statements.
(1:31:02) Quality control for an audit of financial statements. So what is the scope and objective? 220 says what you know engagement partner is responsible for quality control processes at audit engagement level to comply with the firm's SQC. You see here they're using the word to comply with SQC.
(1:31:20) So the partner has to ensure that whatever the audit work he is taking responsibility he must ensure that that is complied as per SQ. So what is the objective of 220 implementation? SQC objective establish SEA 220 objective implementation implement quality control policies at engagement level to ensure that audit complies as per standards audit reporting is appropriate.
(1:31:41) So what are the responsibilities of partner? SA220 outlines responsibilities of the partner. What are the responsibilities? Leadership for quality. What is that? The engagement partner must take responsibility for overall quality MCQ. The actions of engagement partner in taking responsibility shall emphasize this itself was asked as four marks question many times.
(1:32:06) The actions of engagement partner when taking responsibility for quality shall emphasize you know engagement partner should behave in such a way where he will demonstrate performing the work that comply with the standards comply with the firm's quality control policies ensure that report is appropriate encourage the team to raise concerns as a partner I should tell my team members please raise any queries and all freely without any fear of reprimand all that getting it then then ethical requirements you You know partner is responsible to identify threats to independence whether are
(1:32:34) there any threats in this audit independence related threats and you know the partner has to eliminate them if they cannot be eliminated or if safeguards cannot be implemented the partner has to report it. Reporting by partner to appropriate firm for appropriate actions.
(1:32:51) What appropriate action either eliminate the threat or withdraw from the engagement. Partner is responsible before accepting a client. Audit client ensure the partner has to check whether information we obtained regarding integrity competence ethical requirements significant issues from previous audit and performance of the work.
(1:33:11) The engagement partner is the one who will direct the team who will supervise the team and he will ensure that the work the audit complies with the standards. The partner is responsible for performance of an audit as per standards all that review. Review of documentation. What is this review of documentation? You know there is one question actually for example one forum is there one part who he's completed entire work he has to sign the audit report but while he's coming to office no next day to sign the audit report only audit report signing his pending he decided to sign on the next day because it's a good day for example he died another partner no since this partner
(1:33:39) has already completed the work he signed the audit report and gave is there anything wrong yes you know before you sign the audit report the one whoever is signing the audit report right he must review documentation before you sign review documentation why why you should review documentation Ensure that sufficient appropriate evidence has been obtained to support conclusions so that you can issue the audit report.
(1:34:02) So before audit report is issued I must review once again entire documentation we gathered. See whether the documentation gathered. See sufficient sufficient appropriate evidence is there. Conclusions are the appropriate everything once again you should ensure and then only you sign the audit report and see that consultation takes place on difficult issues within the firm or outside the firm.
(1:34:19) And for audit of listed entries, engagement partner shall ensure that engagement quality control reviewer is appointed and the partner shall discuss all significant matters with him not to date the audit report until the review is completed. If difference of opinion arises with between the team members I mean among the team members between the team members and consulted people between the partners and reviewer they shall be resolved as per policies and procedures documentation.
(1:34:46) The engagement partner should document ethical issues identified. What are the ethical issues did I mean did I mean if any ethical issues are identified how did how are they resolved independence related conclusions conclusions reached on acceptance and continuation consultation related details including scope of consultation all that these are all various things that you should document they may ask you this itself as a four marks question essay 220 okay documentation requirement as per 220 that's it they can ask write about engagement performance a five marks
(1:35:11) question they might ask okay under 220 acceptance and continuation generally they will ask is as part of SQC in SQC matter is there same matter that they will ask generally that's it so this second point in this leadership responsibility actions of engagement partner this itself can be asked as a four marks question very important see this this matter this SQC topic quality control topic seems very simple but this is very complex it's not that easy to comprehend okay so but since it's a revision session I tried my level best to bring it in a shortest time where
(1:35:43) every point is covered in depth that's Okay. So, uh I'm not giving too much of expression because I assume that you already have already been aware of it. So, that is the reason initially I took an example of Domino's pizza all that. That's it. So, with this quality control topic is completed guys.
(1:35:59) Paka I'm telling you five marks possibility is there. Paka five marks five marks possibility is there. Right now whatever I discussed in the last half an hour paka mark my word five marks possibility is there. That's it. Once I'm doing paper analysis video I will once again connect to this particular video. That's it. Okay. So uh continue with this quality control topic is over.
