hi guys much awaited audit revision Marathon for CA inter new ski so this Marathon I'm going to cover conduct for approximately 24 hours in three parts right now that you're watching is part one video which is of 11 hours but before I discuss this I just want to give certain instructions that you have to follow kindly listen to this introduction without failure please you already made so many mistakes to best of my knowledge at least when you're watching these videos okay do not repeat those mistakes one please watch this Marathon at standard speed only remember this is already a revision class where we are already discussing the topics at jet speed again if you're increasing the speed there is no point see the object when you're listening should be always to absorb the content maximum you should absorb the content you should not speed up you should not hurry up okay then with respect to standards on auditing with respect to standards on auditing do not follow summary notes why I recommend not to follow summary notes is compared to World scheme and new scheme some students are still in the same assumption sir World scheme auditing and Assurance new scheme the subject name is audit and ethics students are thinking just the subject name alone has been changed no the content has been changed a lot even in the in the old scheme we have have so many standards of course the same standards and auditing were there even in the new scheme but the way each and every standard has been discussed in the new scheme is completely different from old scheme in the new scheme most of the standards content is copied from pronouncement book if you recollect in the world scheme there is something called pronouncement book if at all you're watching if at all you're a direct new scheme student for the first timer no problem suppose if you're a repeater you who already gave a in Old scheme you know very well that there is something called pronouncement book now in the new scheme it is not there entire that pronouncements related standard content is kept in the book itself for example 560 there is a standard 260 580 550 510 55 51 610 for all these standards once upon a time there is so much of content in the pronouncement book but now that entire content is copied into the main book itself but you know in the market many summary notes that are being circulated what I have came across getting it most of the summary notes they were prepared from World scheme standards on auditing the same thing they are continuing in if it is a summary notes on standards on auditing no summary notes no it will not have much changes but the main standard text content has been changed a lot now now the standards the depth of discussion 570 55 51 610 510 710 550 almost almost all the standards the depth of discussion is completely different in the new scheme please be be aware of that then so read from Main material always whatever your main material is not summary notes if at all IA material you're following that's the best material in the market if at all you don't have yet decided the material you can download my material which I am using in this marathon and that material can be downloaded from our websit rest of cm.com so there you can download our material I'm sorry so that's it now so this Marathon I'm going to cover in three parts consisting of 24 hours approximately I am going to cover 90 marks weightage over three parts 90 marks of the syllabus out of 120 marks that you have so now part one right now that you're watching in this by the way please watch in the same order first watch part one video right now that you watching that in the same order don't directly skip to the time stamp of audit report or time stamp of 230 don't directly skip please learn from a structured way because initially I cover many important terminology audit report this and all is very important to understand these three chapters are based for the remaining entire other syllabus that we are going to discuss getting it now first I am covering fundamentals Topic in fundament I'll be discussing some fundamental terms and all that is what you're going to watch then I'm discussing nature objective and scope of audit which is drastically changed compared to Old scheme remember new scheme material has to be different it is different so if at all you still following old scheme material can we use the same for new scheme no don't use that at all then ethics and terms of Engagement ethics and terms of Engagement is the second topic that I'm going to discuss audit report is the third topic I'm going to discuss then I'm going to discuss fifth chapter in our book it is fifth chapter so I'm just using my book serial order only then in the part two I'm going to discuss sixth chapter as per my book okay audit evidence within this these standards I'm covering in the same sixth chapter we are also having we are also having SEF 500 SCF 530 sampling SEF 520 analytical procedure but that I'll be discussing as part of part three okay so in the in the part two in the part part two video which is going to be 9 hours these topics I'm going to discuss you know these topics in the same order I'm going to discuss items of financials part one pendl items I'm covering in the part three video items of financials balance sheet items I will cover s qc1 sea 220 risk assessment and internal control and I will also cover sixth chapter related SEF 530 sampling also I will cover so totally part three will be 5 hours totally some somewhere 24 to 25 hours is the total Marathon duration so the book which I'm going to use is this this is my auditing book so you can see here table of contents what is the syllabus that you are having remember in my book the order of chapter Arrangement is completely different from IC book if you learn in the ICA book order the order of learning is not proper in that way if you learn you will not understand the subject in a Master Level if you follow this order of learning but you need not even worry about that just to follow the marathon the video order is there right so multiple videos we merged into kept it as a 11 hours video right now that you're watching just in the same order just play and sit silently watch okay and immediately as soon as you finish one topic stop the video and revise the topic study the topic immediately again come back to this video and again listen to it finish it off revise and again come back so that's how you have to make use make best use of this Marathon so I'm typically approximately providing 24 hours so 11 hours in part one 9 hours in part two 5 hours in part three getting it so this is the order in which I'm going to discuss these are the topics I'm going to discuss and I hope I'm clear to you so please make use of this wisely don't hurry up yourself I tried my level best to give best clarity through this revision it is the rest is upon you you have to make use of this and then do well okay and I know previously also many of you are seeing years you know your friends whoever have given attempts earlier they have used this marathon and they got real good you know very good Clarity on command on the entire subject okay and I assure you you will get a tremendous command on the entire audit subject just by this Marathon okay just go ahead all the very best continue watching the fundamentals topic please do not skip fundamentals first you have to watch then the nature objective and scope terms of audit engagement as usual like in the same order getting it that's it okay take care all the very best have a nice time let's begin the audit revision with fundamentals on auditing like as I already told you fundamentals is an important chapter where you can understand the remaining part of the audit subject much more comfortably so don't directly skip to the nature objective or terms of Engagement or audit report don't directly skip the time stamp please watch fundamentals on auditing carefully so these fundamentals whatever I'm going to talk in the next half an hour 45 minutes is very important so only after listening to this fundamentals terminology then only watch the other other then only continue watching the remaining chapters don't think that you know everything please watch this fundamentals carefully okay let's proceed so now you see in this fundamentals know we are going to learn certain terms what is meant by applicable financial reporting framework what is general purpose framework what is special purpose framework what is fire presentation framework what is compliance framework what do you mean by mate m in audit what do you mean by fraud what do you mean by error so many we are going to understand so many terms we are going to understand first of all what is the objective of this audit we all know today business is happening at a global level we from India are investing in shares of abroad various other countries same way people who are residing outside India are also investing in shares in Indian companies we are blind ly without even evaluating their financial performance and financial position whether they are authentic whether they are genuine or not without even inquiring Background by just looking at those numbers performance numbers position numbers we are blindly investing the reason they were audited the reason why we are blindly investing is because they were all audited same way even foreigners are also investing in Indian companies based on the Indian company profit numbers asset numbers net worth numbers they're blindly investing because our financial statements were audited the audited financial statements audited information has so much relevance has so much significance that people blindly invest without even checking their genuinity now see audit is like a certification it is like a certification getting it in case of juary in case of juary if you buy if you you know if there is a Bismark or Hallmark you blindly buy that without even testing its Purity any silver article juary food item any product that you take for the matter some certifying Authority is there to certify its genuinity Purity quality all that for financial information what is the certification that is available nothing but audit so what do you mean by audit so what do you mean by audit they have given a definition I know many of you have already gone through this definition and most of you know this definition but I will decode this definition in such a way that you realize so much depth is there in this definition so what is an audit an audit is an independent examination of financial information sorry so an audit is an independent examination of financial information of any entity fine I'll come to audit independent examination the independent examination term later financial information what do you mean by financial information you know financial information broadly consists of books of accounts and financial statements both put together we can call it as financial information books of accounts means you know journals you know ledgers trial balance all that today entirely it is completely electronic today many companies are maintaining these books of accounts completely electronic then financial statements you know financial statements are two types general purpose financial statements special purpose financial statements what are they general purpose financial statements special purpose financial statements so now what do you mean by general purpose financials or special purpose special purpose financials are those if the financial statements are prepared using special purpose framework if the financial statements are prepared using special purpose framework then we call them as special purpose financial statements what do you mean by special purpose framework it's a financial reporting framework it's a financial reporting framework special purpose framework is a financial reporting framework which is designed which is designed keeping in mind keeping in mind requirement of specific user specific user remember if the financial statements are prep using special purpose framework then they are special purpose financials if the financial reporting framework understand the word used is financial reporting framework what do you mean by financial reporting framework financial reporting framework means first of all financial reporting means preparation and presentation of financial statements framework means rules and regulations financial reporting means preparation and presentation of financials framework means what rules and regulations now to prepare any entity financials like final accounts profit suppose you take a partnership form they are also preparing balance sheet P LLP is preparing balance sheet P Bank is preparing balance sheet p compan is preparing balance sheet p a sole proprietor is preparing balance sheet P obviously every one of them when they are preparing final financial statements final accounts they follow some rules right that rules are called as financial reporting framework those rules are called called as what financial reporting framework suppose by using which rules you are preparing the financials if those rules are designed keeping in mind requirement nothing but need need requirement of specific user suppose for a particular person purpose if the financial reporting framework is designed the format of balance sheet the format of pnl the rules and regulations behind preparation and presentation for example rules and regulation is what approval fifo Lio wdv slm these are all what principles of accounting rules of accounting if these rules are designed by a specific user as per his requirement if we prepare financial statements then we call them as special purpose financial statements and in CA inter we do not have audit of we do not have audit of special purpose financials in our syllabus we don't have have for this we have sea 800 series of Standards which we are going to discuss in CA final specifically now this is not that required now look at general purpose financials you know you and me very we know very well today we are seeing so many listed entities every listed entity every year they are publishing financial statements balance sheet pnl now tell me who are using that balance sheet p is it only by the existing shareholders no like you and me in order to invest in that company we are looking that balance sheet pnl some other companies are looking that balance sheet pnl to purchase this company yes or no some other banks are looking at these balance sheet pendl whether to give loans to this company or not insurance companies are looking at this balance sheet pendl in order to charge premium in order to you know give claim in order to release claim whatever employees of that company are also looking at this balance sheet pandle to know to know about the financial position of the company so that they can stay within the company without worrying so every year the companies which we discuss Reliance starta everybody they all prepare financial statements every year and those financial statements are being used by thousands of users now why this company is preparing this balance sheet p is there any specific purpose behind this no there are so so many who are using there are so many users of the financial statements and we call those financials as general purpose financial statements every year we prepare a company prepares every year is there any specific reason or specific person for whom these financials are prepared by this company definitely not so the now a company is preparing financial statements every year generally for various users General requirement now you see tell me what is the general purpose financials first of all okay fine let me let me decode the definition and then bring discussion on it what is general purpose financials general purpose financials are those if the financial statements are prepared if the financial statements are prepared using general purpose framework if the financial statements are prepared using general purpose framework we call them as general purpose financial statement what is general purpose framework this is also a financial reporting framework this framework first of all framework means what framework means rules and regulations framework means what rules and regulations general purpose framework is also a financial reporting here we are talking about financial reporting framework see the word framework can be used in multiple context legal framework engineering framework regulatory framework medical framework yes or no drug related framework the word framework can be used in any context framework means what set of rules and regulations suppose if it is relating to Law and Order then it's a Law and Order related framework suppose if it is relating to law an act legal framework suppose if it is relating to some financial statements then it is financial reporting framework now we are talking about which framework general purpose financial reporting framework what is a general purpose financial reporting framework sorry so general purpose financial reporting framework is a financial reporting framework this framework is designed which is designed which is designed keeping in view keeping in mind common you look at this word common financial information needs this is a very important word common financial information needs of wide range of users wide range of users if a particular financial reporting framework if particular rules and regulations are made keeping in mind common needs of wide range of users then that framework is called as general purpose framework now every year a company presents financial statements right a company presents financial statements right every year they present as on 30 March they give balance sheet they give pnl all that right that is prepared using general purpose framework and those financials are called as general purpose financial statements now what do you mean by Common financial information needs of wide range of users see as an employee of our company he wants to know whether this company is performing good or not whether this company is having a fair good position or not financial position or not they just want to know whether the company's making profits or not they just want to know whether the companies having reserves and surplus or not so so that the company can comfortably continue in the future so that the company need not worry about the future so that I need not worry about my job employees want to know about the company same way when we are when this company know is transacting with customers when the company is buying goods from somebody suppliers they want to know whether they can give credit to the company or not for that suppliers will see your financial performance and your financial position they want to know what is your turnover what is your expend expenditure what is your profit they want to know what are your assets and what are your liabilities and how much is your net worth reserves and surplus depending upon your position and performance they may give you credit facility they also looked at some information see as an employee of the company they also want to know what is your profit what is your net worth creditors also Al want to know generally what is your profit and what is your net worth even our customers also want to know whether our customers can depend on this company for long run so that they can satisfy their own needs getting it they may be looking at your position and performance our directors of the company they also want to know what is the performance of this company what is the profit of this company what is the net worth of this company everybody want to know how much Capital you brought how much Capital you invested what assets you purchased where you invested where and all you borrowed loans how much turnover you made how much expenditure you incurred how much is the profit tell me whatever questions I posed whatever questions I told right now are these common questions that we think of generally whenever we talk about business or not yes these information this financial information like what is the financial information everybody commonly want everybody want to know what is your turnover what is your expenditure what is your profit what is your result Surplus how much is the capital invested in the business how much fixed assets you have how much liabilities or borrowings you have how much current assets you have now everybody commonly want to know these details suppose if we design the balance sheet pnl in such a way that we design the rules and regulations for preparation of financials in such a way that the financial statements will give definitely all this information whoever whether you are an employee whether you're an insurance company whether you're a tax Authority whether you're government all of you have some financial information needs everybody want to know some financial data about my company so I will prepare my balance sheet and P keeping in mind all your financial information needs which means the balance sheet and pnl which I am going to release will give you information whatever you all need that financial statements are called as general purpose financial statements and the framework we call it as general purpose framework and you know general purpose framework is generally decided by law and regulation itself in India for companies schedule 3 is applicable Accounting Standards is applicable a company has to prepare financials as per schedule three and accounting standard and you know what accounting standards and schedule three if you follow the financial statements preparation using the schedule three and accounting standard most of the financial information what people want most of the people whatever financial data they want about a particular company you will get that data from schedule 3 and accounting standard so schedule three and accounting standard answers financial information needs of way wide range of users and that's a general purpose framework generally for general purpose financial statement the number of users are wide range so many users will be there you don't know how who will be using our competitor might be using a government might be using using tax authorities might be using it our uh industry experts might be using it our existing shareholders might be using it some prospective shareholders might be using it banks will be using it so who are general purpose financial statement users so many you see we have given here who are the users of financial statements we have given here this itself can be asked as a four marks question who are the users of the financial statements it can be asked as a four marks question fine anyhow so that's general purpose financial statements now tell me now now I hope you understood there are types of financial so first we started with financial audit means what audit is an independent examination of financial information financial information means what books of accounts financials financial statements are two types special purpose and general purpose and you know what financial statements depending upon depending upon the type depending upon the type you know depending upon presentation there again two types fair presentation framework there again two types compliance framework there again two types one is fair presentation framework compliance framework okay so first let me finish this and then go back to audit definition and we'll finish the audit definition once again now what is a fair presentation framework what is a compliance framework so you know compliance framework is a financial reporting framework it's a financial of course compliance framework also talks about preparation and presentation of financial statements preparation and presentation of financial statements so it's a financial reporting framework where the financial statement shall be prepared and presented where the financial statements shall be prepared and presented exactly as per requirement of such framework without deviation what is it without deviation by the way I have given that definition also here you see compliance framework means what it refers to it refers to a framework where financial statements are prepared and presented in accordance with the requirement of such framework you see here I have Ed additionally one word without deviation here also you can add one more word exactly you this this something which I highlight in Red Box the word which have added here exactly these are added by me to make you understand the intensity of this definition there is another for another framework I I'll show you that then we'll compare and discuss what is applicable for us what is a fair presentation framework fair presentation framework is also a framework it's a framework where financial statements are prepared and presented in accordance with requirement of such framework you see the definition is exactly whatever highlighted in yellow yellow color you see in compliance framework what whatever I highlighted in yellow the same thing is copy paste Studio that's why have I have used the word complaints framework in bracket and contains disclosures beyond the requirements of such framework contains disclosures beyond the requirements of such framework just a minute contains the disclosures beyond the requirements of such framework or are Med deviate from the requirement of the framework so as to achieve so as to achieve fair presentation so as to achieve fair presentation now you see the words true and Fair View appears only in this type of framework most of the general purpose financials are prepared using fire presentation framework like what is this first of all see you know if you look at if you look at company act if you look at company act remember this is a revision class okay so I'm not going very in-depth on everything I'm just giving you a brief idea there is a section called 129 subsection 1 what the section says you know every company shall prepare its financial statements as for as per schedule 3 as per accounting standard and should achieve should achieve should achieve true and Fair View this is the warnings which are there in the company act 129 subsection 1 every company financials must be prepared as for schedule three and accounting standard and should achieve true and Fair View suppose if the word true and Fair View is not there let us assume actually companies act has this word true and Fair View suppose for the time being true and Fair View is not there which means a company has to prepare financial statements using compliance freame workor a company has to prepare financial statements using compliance framework because true and fair is not necessary just a minute yes so just a minute yeah so every company shall prepare financials as for schedule three accounting standards and to achieve true and Fair View if at all the word true and Fair View is not there in the section it's called as compliance framework because the word true and Fair View is given important it became fair presentation framework in India we prepare financial statements which are general purpose financial statements using fair presentation framework using fair presentation framework now sir what is compliance framework what is fair presentation framework what is the impact of true and Fair View can you give an example yes yes first of all just a minute yeah so what is the difference between compliance framework and Fa representation framework let's let's uh discuss with an example first of all what is the difference between true and Fair View what is the difference between true and Fair View a simple example suppose I sold Goods to a customer at a credit for 100 CR to almost so many some 20 30 customers were there for our company we sold Goods on credit for 100 CR and uh out of which some 50 CR rupees we have collected already as on balance sheet date as on balance sheet date 31st March still 50 CR is outstanding so in the balance sheet balance sheet assets side trade receivables 50 CR we shot you know out of this 50 CR there is one customer who is about to become insolvent and from this customer we have to receive some 5 CR rupees worth of money but this customer is about to become insolvent but since since he is about to become insolvent there is a very much big doubt that we may not receive this oneone so generally what we do when there is a doubtful recoverable doubtful debt we create provision for bad and doubtful debts for five CR and we show 45 CR is only as net asset in the balance sheet correct or not this is what everybody knows you know this is a requirement of fair presentation this is a requirement of fair presentation honestly tell me truly speaking the company has to receive from customers how much truly 50 CR is spending from the customer but fairly speaking logically speaking reasonably speaking what is the value of the company De right now sir value wise it is only 45 because 5 crores company may not receive honestly technically 50 CR is receivable but logically in reality company value of datar is only 45 the value of datar company can realize is only 45 this is called Fair remember the balance sheet should not only be true it should also be fair when you say this is my asset that asset must have that much minimum value remember you are showing 50 CR detor but 50 CR real value is not there 45 only you can recover so true and Fair View means that that's the impact of true and Fair View suppose now now what is the difference between compliance framework and fair presentation framework suppose a company purchased a project suppose the compy whom you are doing audit is a very big movie theater suppose you you are auditor of PVR you are auditor of pbrr theaters PVR is having across India more than more than 3,000 screens so they might they will be having approximately you know 3,000 high definition projectors 4K projectors they having very high costly each projector somewhere will be costing 10 to 15 lakh or maybe sometimes it is 25 30 lakhs also getting it so let's us assume each projector is costing somewhere around 20 lakh now tell me 3,000 into 20 lakh 3,000 into 20 lakh approximately 200 CR approximately 200 CR worth of projectors they have purchased pbrr has purchased 200 CR worth of projector and what is the useful life of these projector the projector use life is approximately each projector useful life is 1,500 hours or else 3,000 hours or maybe for computation s 4,000 hours that is the life of each projector 4,000 hours now PVR know some screens know they will be using everyday four shows for some for some screens no every day there might be some three shows only for some screens know on a particular day there won't be any CA at all now tell me how PVR should depreciate this 200 CR worth of projector should they depreciate using slm method or wdb method which method is correct suppose if you see accounting standard 10 let us assume it only says slm or wdb I'm telling you assumption first of all suppose if the accounting standard says only slm or wdb and the life of the projector is 10 years 200 CR divided by 200 CR divided by 10 is equal to every year 20 CR projector 20 CR is a depreciation whether the projector is depreciated equally or not doesn't matter suppose if accounting standard says like this and you see companies act section 129 if at all the section says a company shall prepare financial statements using schedule 3 using accounting standard full stop now tell me I have to follow for sure slm method right here or WV method but tell me logically you tell me you know PV or no year one they have used you know not 4,000 hours year one they used only 100 hours year two they are using it for 300 hours year three they are using for 200 hours year four they are using for th000 hours year five they're using it for 50 hours year six no complete shutdown covid example zero year 7even some 500 hours they using it now this is how the usage pattern of projector by bvr now tell me if this is the usage pattern one one year they didn't they used only 100 one year they didn't use at all in year six technically depreciation should be zero where as here only for 100 hours we should calculate depreciation here 300 hours only we should calculate which method is suitable for p honestly tell me logically tell me logically you think and tell me yes W none of these methods number of ours method is suitable something similar to sum of units method something similar to sum of units method but you know Accounting Standards say either slm or wdv you cannot follow number of units sir but fairly this is the right depreciation this is how the depreciation can be calculated in a right manner if you depreciate every year whether we have used it or not that is not a fair accounting principle so this is how it should be used but Accounting Standards only saying two no only two methods slm WV sir companies act says true and fair also what does it mean if uh if uh if uh deviation is permitted if you know in order to achieve to achieve fair presentation to achieve fair presentation a company May deviate sir from the requirement of the framework a company May deviate from the requirement of the framework to achieve fair presentation for achieving fair presentation we can deviate sir actually the requirement of the framework is slmr wdb Sir but we can deviate sir for achieving fire presentation actually PV has to depreciate either slm or wdb but now we are deviating and now by deviating We are following number of units method or number of hours method Mission hours method We are following to depreciate to achieve fair presentation in a fair presentation framework you can deviate from the accounting standard see remember it's not violation you're not violating violating means different here you are violating standard but not with the intention to violate it to achieve Fair representation if you follow standard recommended method that will not give you proper depreciation figure that's why you're deviating and then following a different method or you know every accounting standard and every shed schedule three they will ask a company to disclose some information in the balance sheet p notes if you feel some additional information you want to disclose if it is permitted then also it's called as if if at all the financial statements contains disclosures beyond beyond the requirement of the framework beyond the requirement of the framework you can give disclosures and the framework and the accounting standard and the schedule three explicitly are silently allows it even the accounting standard most of the accounting standard in India explicitly allow you if accounting standard requirement is not possible in the scenario you can deviate and follow some other requirement in India all the standards allow that so explicitly if the standard is allowing you to deviate for preparing the financials from the requirement of the framework if they allowing you to deviate that's a par representation framework in that framework only we can use the word true and Fair View the auditor can use the word true and Fair View while expressing opinion only in a case of fair presentation framework you know in fair presentation framework in it refers to a framework where financials are prepared and presented in accordance with the framework first we try to follow the framework only we directly don't deviate first we try to follow accounting standard if accounting standard is not right in this scenario for example projector scenario slm WD is not then you can deviate and you may deviate from the requirement of the framework so as to achieve fair presentation if the financial reporting framework is fair presentation framework if the financial reporting framework is permitting you to deviate for achieving fire repr representation if the financial reporting framework is permitting you to give additional disclosures for achieving fire presentation that framework is called as fire presentation framework in India a company a company has to prepare financial statements as per accounting standard as per schedule 3 and Company act specifically highlights the word true and Fair since company act wants true and fair you first prepare financials as per accounting standard as per schedule three suppose if accounting standard and schedule 3 requirement if any of that requirement is not suitable for that company for true and fair what is suitable follow that companies act itself says that so now tell me companies that is it a compliance framework or fair presentation framework for financial statements fair presentation framework what is compliance framework it is a framework where financials are prepared in accordance with requirements of the framework without any deviation you don't deviate sir number of our SP that not possible it is right but not possible for me either or WB either STM or WTB only have to follow the other method is not possible then that's a compliance framework in India compliance framework is not there not only in India anywhere else in the world compliance framework is not popular fair presentation framework is only popular understood or not next now you see so what is a general purpose general purpose framework is a financial reporting framework it is designed to meet common financial information needs of wide range of users fundamental accounting assumption Gap Accounting Standards annual preparation everything and all generally are the characteristics of general purpose framework what is general purpose special purpose financials if the financial statements are prepared as per special if the financial statements are prepared in accordance with special purpose framework then it's a special purpose financials special purpose framework is nothing but if the financial statements are prepared as per requirement of a specific user suppose I took my general purpose balance sheet General purpose pandle to a bank for getting a loan or I took them to a private Equity Venture Capital fund or some investor sir I want funding he told me you prepare balance sheet PN on cash basis and then bring he told me now I went back and now prepared freshly my balance sheet in pnl using cash method of accounting now tell me here I'm using cash method of accounting for preparing the financials right are these financials for general public no they are for the inv purpose specific user these financials are called as special purpose financials special purpose financials are mostly and most of the times are confidential in nature they're confidential in nature they are not something public they're confidential where you prepare financials exactly as per requirement of user without deviation whatever user says you have to follow that you just have to comply with the user requirement whatever user rules and regulations were there you just have to comply it's a compliance framework special purpose financials are prepared exactly as per the requirement of the user no deviation sow something like a compliance framework that's what even compliance framework say says you have to prepare financials exactly as for the requirement of the framework here the framework is decided by user specific user specific user says cash method you just have to prepare financials as for cash method for that user something like compliance framework able to understand that's it that the difference between compliance framework fair presentation framework general purpose financials special purpose financials all that now you see now let us let's just just we continue so now until what we understood is only financial information we understood so an audit is an independent examination of financial information of any entity it may be any entity whether or not profit oriented look whether a non-charitable whether a charitable organization is preparing a financial statements a non-charitable trading organization profit oriented entity prepare financial statements doesn't matter at the end of the day our objective is with a view to express opinion we just have to give our opinion on the financials remember we are appointed as an auditor to just give our opinion whether they're right or wrong that's it today somebody from a us he's investing in an Indian Reliance company shares now before he's investing he's just looking at the balance sheet and pnl he was wow he felt wow what the like looking at the profit of the company looking at the performance and position of the company he felt very impressed but he was doubtful whether these numbers are right or wrong the company showing 70,000 CR profit profit and loss account of Reliance tataa Motors is showing 10,000 CR profit so and so a India is showing so and so profit of course now it is not profit making I'm just taking as an example so Reliance company is showing thousands of CR as profit that they earned is it true below auditor signed that it is true auditor gave a report that it is true now tell me as an auditor what is our objective somebody will prepare a company a partnership form an LLP somebody will prepare financial statements we just have to check that financial statements and give our opinion opinion or two types either positive opinion or negative opinion what is positive opinion or negative opinion we'll discuss as we go further so if at all if at all I went to Reliance company I verified every books background documents bills vouchers incomes expense assets everything I physically verified and everything is true company whatever number they showed in the balance sheet whatever number they showed in the P everything is true then I will say everything is Right suppose what they showed in the profit and loss account what they showed in the balance sheet is not matching with reality I will give negative opinion I will tell tell people don't believe this balance sheet pnl so if everything is fine whatever they showed in the balance sheet pnl if it's matching with the reality when I go to the company if it's matching everything reality suppose know Reliance company in the balance sheet some fixer said three lakh CR they showing what is the breakup of three lakh CR 10,000 missions they showed they took me to various go Downs they took me to various factories they took me to Refinery they showed all the missionaries bills vouchers everything now I convinced 3 lakh CR is correct getting it so then I'll come and give opinion same way talaan also appointed me as an auditor mosque has appointed me as an auditor church has appointed me as an auditor they all have prepared balance sheet pnl okay there we don't call it as pnl we call it as income and expenditure statement so they prepared balance sheet income and expenditure statement Now what is my objective there there also my objective is to give opinion whether the number is right or wrong wrong whether the balance sheet is right or wrong that is what my objective so whether the entity is profit oriented or not doesn't matter why why are they doing that activity why what is their role what is their objective of the entity is the entity objective is to get profits or to serve people doesn't matter at the end of the day they prepar balance sheet it has some assets it has some liabilities it has some values liabilities has some values whether the values are right or wrong that's it with a view to express her opinion so an audit is an independent examination of financial information of any entity whether or not profit oriented irrespective of its size or legal form even whether whether a company is 10 CR turnover company 10 lakhs of turnover company 10 lakh CR turnover company one lakh CR turnover company size of the company doesn't matter Suppose there is a small company it has a turnover of just 1 CR expenditure 1.2 CR they showed a loss of 20 lakh the loss is how much 20 lakh now they called me as an auditor what I have to do whether the 20 lakhs loss is correct or not I should comment my objective is what the turnover one CR correct 1.2 CR expenditure correct 20 lakhs is the ultimate loss is this correct number or not that is what I have to comment even if a Reliance company called me as an auditor they showed a turnover of some 9 lakh CR just a minute they showed a turnover of some 8 n lakh CR they showed some expenses of some 7 s and half lakh CR profit of some 50 60,000 CR what is my duty there I just have to comment whether those numbers are right or wrong this company where they have 20 lakh rupe loss there my objective is is this right or wrong Reliance company there my objective is is this right or wrong that's it my objective of audit is same irrespective of size or legal form what is legal form legal form mean see any every you know we can do business see first of all we can do business either alone I myself start a business and do or I can join some people as my partners and do a business now either I will do business as a single person we call him a proprietor or I can do business with multiple persons called Association of persons if that Association registers under companies act it's called as a company if the association registers under LLP act it's called as an LLP if the association registers under Partnership Act is a partnership form if the association registers under Society act it's a society if the association does not register anywhere it's simply called as aop it simply called as aop now tell me whether our business first of all we are doing a restaurant we are running a restaurant whether the restaurant is in the name of the company in the name of the partnership in the name of the LLP in the name of the society or the restaurant is owned by a single person doesn't matter it's a restaurant sales purchases profit assets liabilities balance sheet pnl whether they're right or wrong legal form also doesn't matter matter for the auditor so legal form see what is the objective of audit what is audit an audit is independent examination we are examining we are verifying what financial information you're verifying financial information of some entity why are you verifying why are you verifying when such an examination is conducted with a view to express an opinion why am I examining the examination is to give an opinion there on to give an opinion opinion are two posi negative on what there on means what on the financial information you are giving opinion on the financial information you are giving opinion so what is the financial information balance she p on that I'm giving opinion that's it what opinion whether they right or wrong that's it my objective is same whether that's a company legal form doesn't matter Size Doesn't Matter profit oriented or not doesn't matter my objective is to give opinion on the financial information how will you give opinion after verification after examination now you see an audit is an independent examination independent means what independent means what Independence is of two types independence of Mind independence of appearance independence of appearance I hope you have seen company audit there is a chapter called appointment of Auditors in company law right now in the new scheme we have appointment of Auditors in the new scheme company law has this chapter earlier in the old scheme we have company audit chapter in audit subject now it is not there there you might have learned disqualifications if at all you recollect you know a person who has shares in this company cannot be appointed relative is having shares in this company more than cannot be appointed his partner is have shares in this company cannot be appointed if they have business relationship they cannot be appointed if they employee of this entity they cannot be appointed why why these many because in a company audit the audit has to be independent he should not have any relationship with the company only when such a independent person gives opinion people will believe suppose if the person who is an auditor if if auditor is director's own brother he is saying that company balance sheet PN dollar Right company showing a profit of 10,000 CR my brother is saying that everything is Right will you believe hey is your brother no obviously so why should I believe auditor must to be independent in terms of appearance that's what companies act says that is independence in terms of appearance now there is another word independence in terms of mind what is independence of mind the way I do audit must be independent sometimes people are independent I don't have any relationship with the company but company's bribing me and I am giving false opinions I'm giving wrong opinions I am giving opinions in favorable to the company I am not working with Integrity I am not working with honesty independence of mind is compromised independence of mind is important independence of appearance both are important in most of the statutary audits independence of appearance is most important in most of the statutary audits independence of appearance is most important of course independence of Mind know nobody can prove it independence of mind is something that nobody can prove we we cannot hypnotize a person we are not psychist to identify whether a person is working honestly or not independence of mind is nothing but Integrity confidentiality honesty so auditor has to independently verify independently without any bias with Integrity with honesty verify the statements give opinion that's an audit definition almost we spent close to 45 minutes just to decode audit definition so from the definition we can understand what is the objective of the auditor actually objective of audit we are going to discuss in the next chapter that is nature objective and scope there we are going to learn what is objective once again in depth but you see what is the objective of the audit okay or else I'll directly go there and then show you what is the objective of the audit you see here just a minute so what is the objective of audit the objective of the auditor as per sea 200 overall objectives of an independent auditor and conduct of an audit as per standards on audit that is a standard heading the objective objectives of the auditor are to obtain reasonable Assurance whether the financial statements as a whole are free from Material misstatements whether due to fraud or and to report on the financials and communicate as required by as required based on audit's findings now you see whether due to frauder error thereby enabling the auditor to express an opinion whether the financials are prepared in accordance with applicable financial reporting framework so objetive of auditor whether the financial statements are free from Material misstatements whether the financial statements are prepared as per applicable framework and then report on the financial as for the standard we we generally report as per sa 700 we have a separate chapter called audit report as you continue you will get to know audit report all that so auditor objective is one you see that's what I have simplified in the beginning in the fundamentals know in a simple way I defined objective what is the objective of the auditor the objective of the auditor is whether the financi to express opinion the objective is to give opinion whether financials are free from Material misstatement whether Financial statements are prepared as per applicable financial reporting framework now again two more words now material misstatement material means we'll discuss later whether financial statements are free from misstatements whether financials are prepared as per applicable financial reporting framework what is applicable financial reporting framework I will discuss now you see the word they have used the word applicable applicable financial reporting framework financi reporting means as I already told you preparation and presentation of financial statements framework means rules and regulations now tell me the rules and regulations for Preparation and presentation of financials the rules and regulations that are applicable for company is schedule three for a bank it is banking regulation act for an insurance company irdf preparation of financial statements regulations for nbfc schedule three part three part three yes or no so the applicable financial reporting framework is different for different entities depending upon nature of the entity depending upon nature of the entity and why are they preparing financials objective of financials depending upon nature of entity objective of the financials the financial reporting framework the financial reporting framework adopted by adopted by management adopted by management we call that as applicable financial reporting framework you see they have we have given a definition here in view of in view of nature of entity and objective of the financials the framework the rules followed by management generally in every organization the concent management only follows right for Preparation and presentation of financials that concept is known as applicable financial report framework which can be general purpose for framework or special purpose framework which again can be compliance framework or fair presentation framework that's it I told you all this next now another objective of the audit is what to express opinion whether financials are as for applicable framework that is one objective whether financials are free from Material mistak free from mistake means what you need to tell whether they're right or wrong if you say financial statements are right they are free from mistakes mean there are no mistakes if the financial statements are not free from Material misstatements means what financials are containing mistakes you should give a negative opinion that so what do you mean by misstatement you know I will show you the definition of misstatement below you see this is a definition of misstatement a misstatement is a difference between amount classification presentation disclosure of a reported financial statement item and amount classification presentation disclosure that is required as per applicable financial reporting framework misstatements can arisee either from fraud or error now you see so okay this is a separate thing the fine we'll discuss later this is the first part the first paragraph is the right which are highlighted with brown color that's misstatement definition if you read like this you will not understand decode the same definition I will decode in multiple Parts what is the misstatements it's a difference between what and what amount classification presentation disclosure of reported financial statement item item and difference between this and and amount classification presentation disclosure that is required as per applicable financial reporting framework so different between what is a misstatement misstatement is a misstatement is a difference between this and this that's it suppose no like now mistakes misstatement can happen in four ways it can be in the form of amount or it can be in the form of classification it can be in the form of presentation or it can be in the form of disclosure so sea 200 defines this in Sea 200 this definition is given the standard says in a balance sheet and P mistakes can happen in four ways either it can be in the form of amount it can be in the form of classification or presentation or disclosure what is required as per framework applicable financial reporting framework what it says and what you reported what the company reported what the management reported what the board of directors while preparing financial statements they reported the item what amount they reported what classification they reported what presentation reported what disclosure they reported and what they are required as per framework if both are same no misstatement if there is a difference between what they reported and what is required that's a misstatement and if that statement is material in the point of view of auditor he has to give a modified opinion material means significant small small mistakes and all we don't bother 100 rupees difference is there mistake is there we don't bother if is not Material so material only we consider now mistakes can be in the form of amounts best classic example I will take suppose no company inventory is there raw material their cost is 100 CR and the NRV is 85 CR whichever is lower what is the amount we have to report as per framework 85 CR Accounting Standards say 85 but company know they reported 100 only nrb they ignored this is a misstatement in amount 15 crores materially misstated or classification suppose a company know they purchased a land a company purchased a land for Value appreciation company has some Surplus money they purchased a land for value Asset asset appreciation purpose not for business purpose as for investment related standard the land has to be classified as a long-term investment let's assume it's a long-term investment it has to be classified as an investment but company showed us fixed asset the company classified the land as what fixed asset intention of the management is investment whereas company showed it as what balance sheet is showing it as land classification mistake presentation how a mistake can happen in presentation suppose no just in our example trade rebles are 50 CR minus provision is how much 5 CR net is 45 this is how right Gap says generally accepted accounting principles how dears has to be shown in the balance sheet gross minus provision net this is what you need to show but the company know create receivable 50 5 CR provision they showed under liability site they didn't follow presentation as per the generally accepted accounting principle they didn't follow that presentation this is a mistake in presentation able to understand disclosure disclosure how a mistake can happen in disclosure disclosure mistakes can be two types one wrong disclosure or no disclosure they didn't disclose at all that is a misstatement wrong disclosing wrongly is also a misstatement or disclosing partially is also a misstatement like under every accounting standard under schedule 3 you need to show some extra data if you do not show that that's a disclosure related misstatement you know non-disclosure if it is material if the non-disclosure is material auditor has to qualify that okay how auditor will qualify how auditor will give modified opinion you will be learning in the audit report chapter getting it as you go further you will be learning there so that is misstatement now tell me now tell me how this mistat happened why this misstatement happened in financials company intentionally did that's called fraud no sometimes accidentally it happened error amount accidentally typed wrongly error so it can be fraud or it can be error so what do you mean by fraud what do you mean by error we have given so error means unintentional mistakes clerical errors error of commission error of commission error of duplication all this from audit point of view errors are two types self-revealing error non self-revealing error self-revealing non- self-revealing this and all is not there in the is study material not that required just for the sake of better Clarity I'm discussing fraud fraud is an intentional act by one or more individuals from management or top management employee third party whoever it is there are two types manipulation of accounting like fraudulent financial reporting it's called manipulation of Records manipulation of accounts assets manipulation theft of cash all that so that's misstatement all that legal form I told you yes or no and general purpose all this have told now what do you mean by financials companies ACC balance sheet pnl cash flows so statement of changes and notes this is financials but auditing standard has given a definition financial statements are nothing but it's a structured presentation of historical financial information past data to communicate yet entities our entities resources assets and incomes obligations liabilities and expenses at a point in time or changes there in for a period of time in accordance with a company prepares as per schedule three applicable financial reporting framework notes ordinarily comprise what accounting policies that are followed explanator information all that that's it books of accounts means what audit auditor means what auditor is nothing but the person who is conducting the audit we call him as what auditor generally know uh when we when when when when in reality when we are doing audit no audit firm will be there in that partner will be there tomorrow once you complete C enter you join for articleship right so you will be registered for as an article under some CA that CA might be a partner in that firm or a so proprietary firm getting it so we call him as engagement partner audit is a engagement understand audit is a type of Engagement whatever work we do as a ched accountant we call them as engagement in the next chapter as you continue further nature objective and scope of audit there I'm discussing now there will be audit manager paid assistant senior article Junior article any other this entire people together they will go and do the audit we call them as engagement team entire engagement team auditor refers to person or persons conducting the audit usually engagement partner and other members of the team or the f f is also the auditor for engagement team any member of the engagement Team all of them are called as Auditors but you know suppose if some regulat Authority is calling auditor which one who should go artical assistant will go off no no their engagement partner their engagement so when it comes to responsibility or accountability engagement Partners shall only be referred as what auditor that's it with this the basic terminology so that you can start learning the subject so that so that you can revise the remaining portion of of the subject the basic terminology we understood now this is what fundamentals of auditing is all about just proceed to the next chapter that is nature objective and scope remember this is very important fundamentals if at all you have skipped okay please I kindly request you to once again watch this entire fundamentals take care continue watching so let's begin uh the next chapter that is nature objective and scope of a so in this we are going to learn one important standard that is 200 the only standard that is covered in this particular chapter is only one standard that is 200 and one more thing that is discussed in this chapter is overview of standards that are issued by Institute you know the ICI like once we all qualify as a chartered accountant once we all qualify as a chartered accountant we have two options one either to do practice or we have we can even go for industry like employment or you can do your family businesses what so three options technically speaking so once you enter into practice whatever the work that you are doing whatever the work that you are doing we call it as engagement what do we call it as engagement so engagement refers to a a work which is carried upon by the practitioner or the professional or the accountant so so the word practitioner or the word professional or the word accountant any of these three can be interchangeably used in our entire subject at certain places they use the word practitioner at certain places they use the word uh you know accountant at some places they use the word auditor and all the three terms are exactly equal depending upon the context they use the word practitioner now whatever engagements that we provide right we call it as engagements right for these every engagement we have something called engagement standards what do we have we have engagement standards and along with this we are also having one standard called quality control standard we also have quality control standard so totally the the entire concept is referred as engagement and quality control standards engagement in quality control standards now as per this what whatever the work that we are providing is broadly classified into two categories whatever the works that we are providing is classified into two categories one Assurance engagements so the the work that we provide as a CA practitioner whatever work that we provide one variety is what Assurance engagements another one is non-assurance engagements non-assurance engagements how many of you are in articleship right now or already completed article ship or has worked in audit forms okay some 40% of the audience almost you know what is a non-assurance engagement non-assurance engagement means there we don't give any opinions and all we don't give any assurance and all you know suppose client just want to file GST return He just approached you because you know GST so they just approached you so so and so company or so and so partnership form so and so entity is there they have to file monthly GST or quarterly GST whatever because they don't know they approached you you are just filing GST on their we have you're just doing filing Services administrative work now here you're filing GST return right are you including any of your name in that return no we are not giving any Assurance to anybody here these works are called as what non-assurance engagements Roc filing like with company law Ministry of company Affairs R we file certain documents some companies take our help while filing the r documents income tax return filing all these works are called as administrative works we call them as what administrative Works getting it so all these comes under non-assurance engagements now for these non-assurance engagements you have to take certain precautions getting it like tell me when a client comes and ask you like you know some clients know they'll ask you sir can you file income tax return you agreed okay because client wants me to file income tax return you agreed yes sir I will F but subsequently upon when you're doing the work the client did not prepare books of accounts itself the client did not prepare balance sheet pnl itself he was thinking when I say to auditor file income tax return auditor will prepare everything he was in that assumption getting the point so how do client know that I am only doing so and so work you only doing your my responsibility is this your responsibility is this we should have a Clarity right now there must be some formal approach between the auditor and the client nothing but between the practitioner and the client there must be some formal approach should be some terms and conditions there must be some documentation all these things standard on related Services what is this standard on related services so this standard has been given by ICI which directs which gives guidance to practitioner dear practitioner whenever you are taking any type of engagements which do not involve Assurance be clear with the client what you are doing what you will not do what are all the activities that you perform what you will not perform as a part of the engagement so clearcut explain terms and conditions to the client in advance so like that some guidance and all is provided so that the practitioner will not have any legal issues later on after accepting the engagement he dear client I did not tell you this client will complain sir filing means everything is included I thought like that only so client will not again argue with you so standard on related Services the standards were brought the standard for these types of works the standards were brought to ensure to have a formal work culture getting the point then we have Assurance engagements again Assurance on what Assurance on historical financial information what is it Assurance on historical financial information assurance on other than historical financial information so we provide Assurance on either historical financial information or other than historical financial information some clients know they will bring next 5 years balance sheet projections next 5 years profit and loss account next five years cash flow so some clients bring next projected financial statements projected financial information and they want you to provide Assurance on that they want you to provide Assurance on that sir you please give assurance that our financial performance is going to be like this in the next 5 years position is going to be like this in the next 5 years so that you Insurance report I will show to the banker then Banker will trust this if I directly prepare the projected financial statement and give it to a banker he will not trust me but if you any independent person like an auditor competent person like a chartered accountant if he give an assurance report Banker will trust third parties will trust and then they will give us some loans they will give us some investment able to understand so now here what financial information I'm talking about am I talking on historical or other than historical other than hisorical that's called projected Financial for this we have SAA standard on Assurance engagements sa what is it we have S A we call it a standard on Assurance engagements you know related Services is 4,000 series whereas this is 3,000 series standards what is this 3,000 series standards now we don't have in syllabus related Services standard we do not have even Insurance engagement but we have all these definitions what is an insurance engagement what is the related Services all these definitions we have in the first chapter itself then suppose uh you know a client asked me sir it's not about future sir already year is completed so we have prepared financial statements based on the last Financial year 22 23 Financial year or quarter 1 quarter 2 quarter 3 quarter 4 of the financial year so we have compiled the client prepared the financial statements you please come check this data and give a reassurance on this now when the client is asking me to give Assurance on historical financial information when the client is asking me to give Assurance on historical Financial now here I need to ask him do you want a limited Assurance or do you want reasonable Assurance by the way absolute Assurance is not possible not just for me for nobody it is possible getting it in fact company itself director who involved in preparing the financials for himself absolute insurance is not possible getting the point see absolute Assurance means what whatever number shown in the balance sheet whatever number shown in the pnl is 100% correct if you sell that asset you will get that much but it is not such right in reality the assets how much if we start selling how much they will petch we also don't know so the company itself cannot provide absolute Insurance how come you expect an auditor to provide absolute Assurance absolute Assurance is impossible and there we have a question anyhow there once again I'll discuss the topic of abolute Assurance reasonable Assurance so as an auditor either I can give reasonable Assurance or I can give limited Assurance what is the other Assurance limited Assurance suppose if the client is just asking me limited Assurance if the client is asking me limited Assurance there Sr will apply what are they Sr standards on review engagements in case of limited Assurance engagements on historical financial information remember it is only in the context of of historical financial information if you ask me to give a limited Assurance then I will provide that work I will provide that service in accordance with SRE standard on review engagement so 2,400 2410 two standards we have suppose if the client is asking me to give reasonable Assurance if the client is asking me to give reasonable Assurance then a reasonable Assurance engagement is nothing but what is it audit reasonable Insurance engagement is nothing but audit getting it so reasonable insurance is audit for this we have yes yes what is it Yesa that's it standards on auditing and you know we have totally 38 standards on auditing out of this three standards deal with 800 series remaining 35 standards deal with 200 to 700 series able to understand in our syllabus we are having only these standards and we have one more stand standard call for quality control there's a standard called sqc standard on quality control so we have a standard on quality control and standards on auditing totally we have 35 out of this 35 some five standards I think so it is not there but when I come to audit report chapter I'll tell you what are the list of Standards exactly that we have able to understand let's look at this particular chapter in the last first chapter in the last it is there these can be asked as a direct question mark see so what is me what is the meaning of assurance engagement and what are the elements thereof this is something newly added content in the new scheme audit only earlier we do not have this so Assurance engagement means what Assurance engagement is an engagement in which a practitioner I told you we can either use the word AUD auditor practitioner or accountant the third word is accountant but remember you know uh when we are doing audit work only we are called as auditor able to understand when we are providing related Services no suppose for client no we are just providing GST returns we are just filing GST returns there is the audit is audit involved is Assurance involved so how he can refer me he can refer me simply as a practitioner auditor word is more accurate when it is a reasonable Assurance engagement correct suppose if it is a limited Assurance engagement audit is also not required audit word also need not be used now now before I further read the definition what is the difference between reasonable assurance and limited Assurance what exactly is the difference between reasonable assurance and limited Assurance let me show you one starta Motors suppose no uh you see fixed asset how much is the fixed asset value here 11733 property plant and Equipment only property plant and Equipment example for example one of the item is plant and missionary Furniture whatever getting it so it's a property planted equipment so let's assume this entire value is represented by plant and missionary now in audit know what we have to check in audit what we will have to check is first what is the breakup for 11733 cres first I will ask breakup how many assets were there what is the original cost of these assets what is the accumul depreciation what is the revaluation number what is the impairment loss what is the netbook value whatever shown in the balance sheet is Netbook value right correct H Netbook value gross Book value you know I hope you're aware of it so this is shown in the netbook value so for this break up breakup is what so the gross Book value might be somewhere around 20,000 CR minus revaluation is some 2,000 CR yes or no minus depreciation is some 7,000 CR so finally 11,000 CR is the netbook value now I need to ask for 20,000 what is the breakup the company showed me fixed asset register the company gave me fixed asset register I open the fixed asset register approximately 10,000 units of plant and missionary were there how many units 10,000 units of plant and Miss number of plant 10,000 missionaries all those missionaries put together Netbook Valu is right now 11,000 CR now I will ask management show me physically I will not verify all the 10,000 missionaries but I will randomly select some items I will physically go there give me Bills whatever physical missionary I saw related Bill also you give me now I will see in the bill whether the company name is there or somebody else name is there whether the 11,000 CR entirely wounded by this company or some Leed missionary also they are showing here I have to ensure this s or no whether company's owner for this entire 11,000 whether the compan is having right on this or not whether the 11,000 CR assets really physically present or not yes or no whether all the fixed assets accounted properly or not I need to check so many so I will inspect ownership document I will talk to the people management I will inquire them what are all the issues involved in this I will recalculate depreciation amount I will recalculate Revenue you know revaluation things all that I recompute everything I do check the controls you know so much I do in audit by doing all this can I get an assurance ah okay 11,000 crores are there 11,000 CR worth of see you know how I verified I went backward I didn't came in the from the I didn't take fixed asset registered and then verified 11,000 CR I took 11,000 CR as Benchmark then I asked them the break up they showed the breakup randomly I selected some 150 number of assets and I asked them to show me physically take me there show me physically and I related invoice then and there I verified whatever asset I showed and I pipped they giving me invoice document and they showing me valuation computation all that now by verifying 150 items of invoices physical verification all the computations I checked recalculation I Got Confidence H okay fine out of 11,000 CR though 10,000 were there 150 assets I physically verified which 150 not company selected I selected those 150 items randomly I selected by verifying these 150 I got confidence that yes whatever the value they showed is correct I know I have not verified 11 10,000 assets but reasonably can I get an insurance here can I give a reasonable Insurance yeah based on this sample I verified everything is matching so this is a reasonable Assurance engagement whereas in limited Assurance no I will not look for physical verification I will not go for you know documents inspection and all only two procedures I will do in audit inquiry analytical procedure what inquiry analytical procedure in a limited Assurance engagement we only do two procedures enquiry and analytical procedure like I I will talk people sir what is the breakup for this you know what is the gross Book value all that I'll just briefly check briefly check I will not are physically there I will not ask ownership documents I will not do recalculations and all nothing whereas in audit we do various procedures we do inquiry we do inspection we do analytical procedure we do observe we do recalculate so many things we do in audit but in in limited Assurance I will be doing only two works one inquiry two analytical procedure what is analytical procedure I'll come back later getting it analytical procedure means logically I will see is this value correct or not last year how much value 10,000 CR is there how much value 11,000 CR is there ah 10% increase is there business also increased 10% as a whole even turnover also increased by 30 40% sales also incre I mean purchase also increased by 30 40% employee cost also increased by 10% same way fixed assets also investment is increased by 10 to 15% everything logically appears fine logically we analyze the financial data we we call it as data analytics what is it called as actually data analytics analytical procedure is nothing but data analytics and that's a limited Assurance engagement so in a limited Assurance engagement we we get Assurance very limited we give that Assurance very limited so what Assurance I will get that is limited what assurance that I am also giving you that is also limited and you know what in audit know how we should give opinion suppose if everything is fine inquiry recalculation recomputation everything I did write once everything is fine how I give opinion you know in the opinion paragraph This is very important in exam anyhow in audit report I'll once again cover in our opinion to the best of our information and according to the explanation given to us the a fored financial statements give true and Fair View we positively tell them get the point whereas in limited Assurance engagement no we give opinion like this based on our review how we give the opinion per based on our review nothing has come to our attention that causes us to believe that the financial statements are not true and fair there is a saying no suppose you asked your your friends any review on a product is that product good or not keep if all he says it's a good super product you can buy that's a different Assurance if at all he replied ah it's okay not bad both are two different level of insurances yes or no review is a kind of second level not bad so we mention that H the financial statements are not bad yeah not no I did I did not get any information to say that they're not they're wrong I did not get any information to say that they're wrong in this way we give opinion in fact in review we don't we don't use the word opinion we use the word conclusion in review what we give we give a conclusion what is the objective of review to give conclusion now you see whether it is review whether it is audit both are Assurance engagements so Assurance engagement means an engagement in which practitioner expresses a conclusion if it is a if it is an audit the conclusion will be opinion if it is a review the conclusion is simply conclusion why am I giving opinion why am I giving this conclusion designed to enhance confidence of the users other than responsible party management is the one who prepared should I need to increase their confidence no need company only prepared this why am I giving opinion I am giving opinion not for company's purpose but third parties shareholders direct I mean uh creditors customers getting it so many government whatever about outcome of the evaluation of measurement of a subject matter against the criteria subject matter is nothing but financial information criteria is nothing but applicable financial reporting fre frw workk as an auditor what is our objective whether the financial statements are giving true and Fair View in accordance with applicable financial reporting framework yes or no we should in audit also so what is the subject matter that we should verify financials against what we should verify applicable financial reporting framework so the financials we verify in comparison with applicable framework and give us our opinion whether they as for applicable framework this is what even misstatement definition points out you remember misstatement definition what is reported in the balance sheet and what is applicable as per framework if both are matching no mistake if both are not matching there is a misstatement exactly so in an assurance engagements what are the elements three parties will be involved in assurance whether it's an audit or limited limited Assurance three parties involved one practitioner he is the one who gives conclusion on the Assurance two responsible party this is the one who prepares the financial statements correct three users who are going to use this financial statements and our report our practitioners report and the financials so both are being used by some third party and they take some economic decision so we call him as intended users so intended users are the persons from whom an assurance report is prepared these persons may use report in making economic decision this itself can be asked as a true or false statement this can be asked as a true or false statement they'll give you like this a responsible party they'll give a statement like this a responsible party is the one for whom Assurance engagement is prepared and these are the persons who use the report for making decisions wrong the statement is incorrect so intended users are the one for whom we are preparing Assurance report and they take decision based on the Assurance report remember you need to understand who is responsible for they are the one who responsible for preparation of subject matter in case of financial statements audit subject matter is financials who is is responsible to prepare financial statements management yes or no so responsible party means nothing but in audit who are the responsible party management is responsible party yes or no remember I told you this is a revision session I assume naturally that you already have Basics understanding of audit I assume you know what is meant by management I assume you know what is meant by auditor getting it so don't think again why sir is not explaining you know who is responsible by management no I hope I'm only thinking here everything whatever you already know I'm just sying that next no audit no generally related to historical financial information so where practitioner provide Assurance not necessarily related to historical in assurance no how Assurance is different from audit audit we give opinion on historical information whereas Assurance means what it's a broader subject Assurance we can give on historical as well as other than historical so you see this that's why so elements of an assurance engagement in that they're giving a conclusion audit is related to historical whereas practitioner May provide Assurance not necessarily related to historical he can provide you know Assurance on other than historical also so Assurance engagement word is very wide able to understand so in an assurance engagement three- party relationship this itself can be asked so write about three-party relationship in case of an insurance engagement four marks descriptive question they'll ask able to understand how a question can come don't expect the question paper to be very simple and plain question can be asked in any way like I'm showing you right now true or false statements all that any way they can test mcqs can be tested now in McQ know they'll give you three four statements they'll give which of the following statement is not true which of the following statement is not true they'll give you these three statements they'll give you these three statements and fourth statement they'll give you this one audit is related to historical financial and Assurance is also related to historical financials they'll give you fourth statement like this I'll give you three correct statements one wrong statement you need to pick the wrong statement that's a question which is actually asking unless you read and understand this terminology in the same way you cannot solve McQ paper it takes lots of time for you to understand the question itself that's why read from the original text always able to C are you have you understood next so what is subject matter subject matter is nothing but the information which we will examine information to be examined by practicer for example financial information in the financial statements that is the subject matter in an audit of financial statements able to understand so in an audit of financials subject matter is financial statements criteria what is criteria it is nothing but benchmarks used to evaluate the subject matter whether the financial statements are right or wrong we will evaluate it by comparing it with Benchmark what is the Benchmark applicable financial reporting framework like standards guidance law rules regulations these are all what financial reporting Frameworks these are all talking about what financial reporting Frameworks now in an insurance engagement we can give our conclusion we can give our opinion only when we examine it right without examining it without sufficiently checking it without appropriately checking it can I give an Evidence can I give an conclusion suppose you know if I if somebody's asking me give me your opinion on this phone yes or no this is the appropriate phone which I have to give an opinion if I use some other phone and give opinion it's not appropriate now suppose I gave this person the phone just he unlocked immediately I took back now tell me what is your opinion immediately what he'll say hey let me check no okay then you give just 2 minutes you open settings you know about all that is opening again I P I I I know I pull back let me use sufficient time yes or you're asking me whether the phone is performing well or not give me allow me some time to operate yes or no how much time sufficient time what is sufficient time for each person sufficiency differs somebody can just within 15 minutes say examine and then give whether the phone is good or not somebody like half a day some reviewers no YouTube reviewers no they use two days three days then they will give a review some reviewers use one month and then give a review so the level of sufficiency is a subject matter is a is a subjective matter agreed or not that's it so sufficient related to quality of evidence obtained by auditor appropriate refers to quality of evidence one evidence may be providing more Comfort to auditor than the other evidence obviously know so depends so for for some for somebody if I give them mobile phone to check they open camera and then see if camera is good mobile is good that's what they feel for somebody performance same way in financial statements no suppose if I have to verify purchase invoice I have to verify purchase some purchase suppose fix is there here for some Auditors know they just look at the bill and convince okay fixed is there really but somebody show me physically one evidence will give one level of comfort to one type of audit able to understand for somebody physical verification will only give them the comfort for somebody just to show me the bill that's enough for somebody show me asset register that's enough so what evidence will provide more Comfort to the auditor is a again subjective matter subjective means what in audit we use the word professional judgment what we use in in audit we use the word professional judgment so what evidence to be verified what are all how many evidences should be verified it's again a matter of professional judgment now more about evidence we have a dedicated chapter evidence chapter there I will discuss next finally one in an assurance engagement we understood what are the ingredients okay so there is a subject matter there's a criteria against the criteria the subject matter will be evaluated and we will finally give our conclusion how do we give conclusion through a written Assurance report in appropriate form tell me we have an audit report format right why audit report format uh you know why there is a format why there is a standard on the audit report because audit reports must be comparable yes or no suppose no if there is no standard on audit report no suppose you verified so some some of you suppose you you took you took up some audit you verified financial statements now we are asking you sir whether the financials are true and fair you gave a opinion the financial statements are excellent another another guy gave an opinion financial statements are marvelous another guy gave an opinion financial statements are okay another guy replied financial statements are good all these are like U no now tell me if if if any shareholder is comparing these Financial these audit reports you know whether good marvelous fabulous fantastic all these words are they comparable we can't for somebody good itself means fabulous for somebody fabulous is not even good so there must be some uniformity in the way we give opinion correct the standards are ensuring the uniformity look if everything is good give this opinion use this paragraph okay don't use your own paragraph don't put your your you know your creativity and all into audit report look your audit report is being used by lacks of users okay they may understand the language in a different way so the Institute has designed the language so if you want to give positive opinion what language to be used if you want to say negative opinion suppose you said financials are not true and fair suppose you felt financial statements are not right they're not rightly showing the information you give an adverse opinion yes or no we have four types of opinions broadly speaking actually unqualified opinion qualified opinion adverse opinion disclaimer of opinion disclaimer means not giving opinion simply speaking okay under what circumstances we give each of these types of opinion we'll discuss later we have an audit report chapter so that's a written Assurance report means now tell me what's the difference between audit and review yes or no audit is a reasonable Assurance limit review is a limited Insurance Limited insurance is a lower level of insurance than audit able to understand now easily next review involves few procedures Gathering sufficient appropriate evidence based on limited conclusions can be drawn however audit and review both are related to historical only correct have we seen it or not so now what is the difference between reasonable Assurance engagement and limited Assurance engagement same points they gave it in the form of a box reasonable Assurance is a high level of assurance but not absolute reasonable Assurance is a high level of insurance but not absolute whereas limited insurance is a lower level of insurance than reasonable oh no I have this doubt can an auditor accept an assurance engagement where the level of assurance that we get is less than limited Assurance the question is suppose one question can an auditor accept an assurance engagement on financial statements that is less than reasonable Insurance yes he can accept that is that is called limited Assurance engagement second question can an auditor accept an assurance engagement where the level of assurance is less than limited what less than limited limited Assurance itself itself is very subjective very very highly subjective that that insurance is that is only very that is only providing a very basic level of insurance Beyond even lesser than basic level of insurance is not acceptable at all so an auditor shall not accept an auditor shall not accept any Assurance engagement where the Assurance is not even limited Assurance able to understand next where in reasonable Insurance reasonable conclusions we will draw here we just do you know we just draw limited conclusions we will not have more conclusions whereas in reasonable we do extensive procedures whereas in limited Assurance we do few procedures few procedures means what we just to do inquiry and analytical whereas here extensive means what we do inquiry we do inspection we do recalculation we do analytical we do external confirmation we do physical verification so many we do in audit I hope you're able to understand these words what are types of audit procedures you have a question in evidence chapter what are various types of audit procedures inquiry inspection confirmation recalculation reperformance analytical procedure external confirmation physical verification observation yes or no have you remember yes so there are nothing but audit procedures there are various audit procedures whatever I do that that has been given a name right now I'm talking you're observing me you're listening to me you're again comparing with the book you're inspecting if at all you're getting it out you're inquiring me and if at all whether what I told is right or not you are conforming with your friend yes or no whatever activity you are doing for that it has been given a name for that we have given a name that's it so it is not that for purchases we should do inquiry for sales we should do inspection for fixed asset we should do analytical for S current asset we should no for same item suppose I have to verify purchase of commodity suppose I have to verify purchase of goods I will inquire first what are the purchase you know what are the purchase documents companies maintaining I'll inquire first then they gave me all the documents I'll inspect it then in the documents some totaling and all is there I will recalculate it getting the point then this purchase is from third party I will ask third party whether this purchase is genuine or not external confirmation the purchase is you know the purchase is recorded in Warehouse also in the stock register also I will go there physically and check the stock physically able to understand physical verification look there's only one transaction on the same transaction I'm doing all the audit procedures audit procedures will we will be doing all the audit processes or few audit processes on the same transaction or same account balance that's it so this itself can be asked as a direct question four marks question what is the difference between reasonable Insurance engagement and limited Insurance engagement if they give you this question they are expected you to write only this box you need not write anything else in exam also draw box only don't put first reasonable Insurance side eding Four Points then putting a side eding limited Insurance engagement again Four Points no don't do that and when you're writing in examiner you can fold the paper at paper alone where the box is required you can fold the paper how you have to fold the paper Okay suppose no if there is a margin suppose if there is a margin like this obviously there will be a margin right like this margin is there like this margin is there now this is the paper within this line Center you need to find here you should not sign complete page Center the page Center might be this but what you're writing you're only writing in this area right for this in the writing area Center you should find out able to understand and fold it and then write four points left side four points right side you need not even draw lines also if possible draw with the pencil okay with the pencil you can draw actually they only recommend to use black pen okay so preferably draw a line with the black Pen only and don't you know when you're when you're writing any points no don't put don't I mean don't draw the end line end line and all don't draw because the matter how much it will come you also don't know right when you're writing okay so sometimes you may expect two lines there you there will come three lines so once you write all the Four Points then you complet it able to understand suppose in exam no if the question is about what is the difference between review and audit they are asking you to write one two three points if the question is on what is the difference between audit and review then you have to write first three points if the question is on what is the difference between reasonable Insurance engagement and limited Insurance engagement you have to write the Box understood some students know if this question is asked they'll write the first three points and Institute will will not put the marks why the fellow who is valuing the paper doesn't know the alternative answer actually both are conveying same right observe what they are asking exactly observe whatever you know if you write you will not get the mark you will get the Mark only when you write relevant content what they exactly asking next so are there any Assurance engagements related to subject matter other than historical financial information yes we can provide Assurance not only on historical but on future also projected Financial information what is it called us projected financial information we can give Assurance on projected so Insurance can be given May related to prospective financials may not be related to historical able to understand for example Assurance not only related to prospective I can give Assurance other than his financial data itself I can give Assurance on financial data I can give Assurance on other than financial data also suppose YouTubers know they're giving reviews on product right on what they're assuring actually they're assuring they're giving Assurance on other than financial data some companies know they call us specifically to verify controls suppose Metro Rail Authority Chennai Metro Rail limited they called you they will call you there are assignments which Auditors are accepting today technical assignments we call them as what technical assignment they called you sir we have a uh you know a customer no when he when he enters the metro station first he should buy the ticket then we will be be given either some coin or some sort of authorization token only when the token is presented at so and so particular location the gates will open so that the customer can enter inside the metro station and go to the platform so then the train comes actually natural customer enters into then go to the destination again customers you know get downs and then while exiting he has to again there is an authorization control there also sir the customer has to drop the authorization whatever token then the gate will open so we can leave outside this is the controls we established sir now we want an assurance report from you whether the controls we established are operating effectively so we are asking you now here insurance is on what other than financial information okay suppose if it is Financial Insurance on financials now which financial past or future if it is on historical Financial we have audit and review if it is on future financials projected prospective then that engagement we call it as what simply Assurance engagement what is it we call it as Assurance Prospect to financial information means what it means financial information based on assumptions yes or no anything about future is always based on assumptions presented now yes or no so if financial information based on assumptions about events that may occur in future possible actions by entity you see everywhere they're using the word future oriented May possible assumption yes or no it can be in the form of a forecast or it can be in the form of a projection or it can be in the form of a combination of both now what is forecast what is projection that and all we not required now we will be discussing that in CA final 3400 standard is there there we will be discussing Inca final that and all that in depth is not required understood now tell me what is now we understood what is prospec of financial information now what is historical historical means information expressed in financial terms about economic events economic conditions economic circumstances occurred in past the later nothing but in this case historical relates to financial information based on assumptions and occurrence sorry okay here you see it is important to note the difference between historical and financial within the first line law later means Prospect first what they use historical what is the difference between historical financial information and prospective financial information within the sentence later what it is there second what we used Prospect so the later relates to assumptions about future events and possible actions therefore historical financials are rooted in past prospective financials related to future events this itself can be asked as a question because these are all newly added topics able to understand so they'll give a statement Assurance engagement means only about historical financial information comment no Assurance engagement can be either historical financials or other than historical financials or it can be other than financial information also it can be even other than financial information now no in case of assurance no Prospect to financial no what level of assurance we give sir historical we have two levels one is limited Assurance another one reasonable Insurance on Prospect to which level we use reasonable limited they have used a different word moderate Insurance what word have they have used moderate why are they using this kind of different word just to confuse us getting it because they have to make it complicated now so they are using another word called moderate level of insurance in dictionary now if You observe moderate one synonym is reasonable in the dictionary but reasonable in dictionary another synonymous moderate so moderate Assurance means reasonable Assurance only technically speaking but tell me about future how can I give reasonable Assurance how can I talk about future first of all we can't talk about future right how can I give Assurance on future generally in assurance about future no Assurance on prospective financials no in the no we mention assumptions we mention assumptions our Assurance on the prospective financial information is on assumptions given under the financial statements so we give we we escape very cleverly saying based on those assumptions this what suppose if that assumption do not succeed in the future suppose we thought next 5 years suppose no in India 2018 19 1920 is the year where so many restaurants were opened up and all of them collapsed Co issue yes or no nobody has expected now in 201920 when when a particular chain of Restaurant Group when they're availing Lo no they give Prospect to Sir our restaurant branding is like this we are going for expansion we have so and so name and fame here so next 5 years next three years you see our results are going to be like this suddenly one year closed yes or no so prospective information is based on assumptions Auditors should also give opinion sorry conclusion based on assumption only so in assurance report involving prospective the practitioner update evidence to the effect of assumptions where we get evidence we get evidence about assumptions we will not get evidence about the plant and missionary value we will not get evidence about the profit numbers in audit historical we get we get evidence on numbers whereas in Prospect numbers and all are imaginary now they are not real numbers the numbers are based on assumptions I will get evidence on assumption dear management you said next 5 years your business will grow by 30 30% what is the proof how do you conclude company showed me sir look sir look at the industry sir every business in this industry is going by 50% don't you think we can grow at least by 30 for the resources we have for the competence we have for the market presence we have they are giving me all the Logics and explanations you gather evidence of all that and then document it and then give Assurance able to understand so we should get assurance that the assumptions are not unreasonable what we should get insurance on in in respect of Assurance on prospective financials he should get evidence about assumptions what evidence you should get get an Evidence in such a way that assumptions are not unreasonable means assumptions which they used are reasonable means genuine assumptions for that you should get evidence so such type of assurance no they can only provide moderate level that is the reason why we are giving moderate level only because absolute is not possible because it is based upon assumptions so prospective financial information relates to Future evidence may be available to support the assumptions now see whatever assumptions that you taking now for that you asking evidence that evidence is also valid on the date only later on if the conditions changed the evidence and assumption which we used may not be relevant that statement while evidence may be available to support assumptions on which prospective is based such evidence itself is future oriented therefore not in a position to express opinion on as to whether results shown in prospective will be ached evidence itself is assumption based so finally therefore in such Assurance practitioner provide a report assuring that nothing has come to practitioner attention to suggest that assumptions do not provide here also we are choosing negative phrasing here we are not saying assumptions are right we are saying after we verified after management discussion after inquiring with the management I I will tell you that as far as my information and knowledge is concerned nothing has come to my knowledge that this assumption is wrong so which means what am I indirectly saying assumption is right only I'm saying but instead of saying that it is right I am saying that we did not get any contary information to say that this assumption is wrong not Clarity this is this is called negative phrasing what is this called as negative phrasing in a review engagement limited review engagement historical financial information and in assurance on prospec to financial information we use negative phrasing only while giving our conclusion we use negative phrasing we don't say straight away they're right we say they are not wrong able to understand you know you have mcqs right in mcqs know sometimes they'll give you these answers you know mcqs know how mcqs can be tested generally what we assume McQ means wrong wrong wrong true right okay El uh yeah wrong wrong wrong and right so in this answer in this McQ no you have to select what is Right some other mcqs right right right wrong getting the point you have to select which of the following is not correct nothing but you have to select which is wrong there are another McQ not wrong not wrong not wrong wrong or sorry right now what is not wrong it means right technically speaking but you know there is a there is a different level of in intensity here in CA inter paper F deals with auditing right only in CA inter paper five deals with auditing and ethics that is also right only now when these two options were there first one is not wrong second one is f understood the difference getting it so CA in new scheme P5 deals with auditing that's actually right look at another option CA inter paper five deals with auditing and ethics that's also right CA inpi deals with auditing and ethics but not Assurance they'll give you see all the four are correct only they give you four statements all the four are correct now in that case you need to pick the answer right that is challenging many students fail in these mcqs so when mcqs know three answers they all three are right only as a part of audit auditor has to conduct audit procedures namely inquiry analytical procedure inspection true option b same sentence extra added recalculation reconfirmation that is also true not wrong option C as a part of audit procedures auditor has to inquire inspection analytical procedure external confirmation recal recompetition reperformance option D none of the above example so among all these four which one is more accurate and more complete see in this way they'll ask sometimes they'll ask you wrong wrong wrong not wrong uh sorry not right no getting it or else or else no they'll give you sry not this uh not right not right not right and wrong they'll give you three statements which are actually not right one sentence corly wrong able to understand in any of these way McQ can be asked when you're solving McQ no when you feel like all the four options look similar there you should not confuse you should you should come into conclusion which of this combination is asked if you figure out this logic any McQ can solve even if it is confusing for others you able to understand so mcqs means three right statements one wrong statement or three wrong statements one right statement those days are gone now they asking you the Third combination and fourth combination models so this is when the students are feeling mcqs are difficult in order to solve these mcqs you must have absolute command of the terminology terminology sentences everywhere because those sentences are exactly copied and pasted in McQ lines you try to solve ICA online mcqs in ICA site know they enabled mcqs you can solve online directly you can attend there these questions only were there mostly next then so we we covered one important discussion in this topic in this particular chapter now now tell me who appoints an auditor and to whom the report is to be submitted generally in case of uh partnership forms llps sole propriatary concern aops the management will appoint in case of partnership from partners of the management LLP Partners aop managing committee they will appoint auditor also have to submit the report to do management only because in Partnership LLP all these cases no there is no specific legal requirement for audit only in LLP audit is compulsory in remaining all other forms of organization audit is not compulsory so there the audit type is what voluntary their partnership form is appointing auditor voluntarily now there are two types of audit depending upon its requirement is audit compulsory or not depending upon this question there are two types of audits one is statutory audit another one is non-statutory audit so once I'll go there what is statutary audit and non- statut audit first I'll cover this and then so is audit mandatory voluntarily it is not necessary always you know legally it's not necessary that audit is always mandatory there are entities like who are compulsorily required to get audit no for all entities it's not mandatory for some entities is always mandatory so for non-corporate entities non-corporate means what which are not companies which are not body corporates which are like partnership forms llps sorry LLP is also body corporate for them it is audit is compulsory so proprietor concern aop for them audit is not compulsory in in India every person is required to get audited if turnover cross a certain threshold liit under income tax that to many people who are non-c corporates they are getting audited because of tax audit requirement next it is possible that some entities know like schools may get their accounts audited for the purpose of getting Grant or assistance from the government or there the audit is being done because of the government requirement some governments know they give incentives to schools they they give incentives to some engineering colleges to promote so so thing government will give Grant and the government want audit report on the grant related it's a special purpose audit again next so audit is not always mandatory many entities get their accounts audited voluntarily because of benefits from the audit many such concerns concerns means What entity Enterprise organization establishment whatever the word have their internal rules uh for audit due to advantages from the audit so who appoints Auditor in case of mandatory audit the law will talk who will appoint the auditor whom audit report is to be given all that for example the popular thing that we know is company audit in a company that two companies are two types government entity non-government entity government company non-government company government companies are called as public sector entities what is it public sector entities non-government entities are called as private sector entities even today I'm getting these doubts sir what is the difference between private limited and public private sector what is the difference between private limited and private sector private sector means it's not owned by government it's not controlled by government so that's called private sector if some entity can be controlled by government in economic decisions in their invest business decisions then that's a public entity what is it called as public sector entity or public sector undertaking psus now Reliance industry limited is there it's a public limited company but but not public sector in Reliance Industries who are the major owner Amani and his family members so government is not the major owner of course government also have some 10 15% of ownership in Reliance through LC getting it so government is having some shares in Reliance but Reliance is not a government company Reliance is not a public sector company it's a public limited company you know again private limited public limited what's the difference private limited means our Company ownership is limited to private people only I me and my sh my partners only me and my other shareholders we only can decide who can be owner of this company it's private our affaires are private our company is privately limited public limited anybody can enter into ownership of this company it's public the Company ownership is open to public that's why it's called as public limited company suppose in this public limited company more than 51% ownership is held by either central government or state government or combination of Central and State government or another government company then we call it as Government company are you getting the point so now understood what is the difference between public limited and public sector private limited and private sector private sector means not owned by government mainly so it can be listed company unlisted company or a simple private limited company all these are private sector next now in case of government company who will appoint the auditor CN a CN AG today in new scheme in compan we have this chapter audit and auditors so CN will appoint Auditor in case of government companies whereas non-government companies shareholders will appoint the auditor and they will give the report to whom to the members of the company whether it's a government company or non-government company to the members in case of a partnership form they give report to Partners that's it so to whom the report is to be submitted the auditor the outcome of the audit is a written audit report in which auditor Express opinion the report is submitted to the person who is making the appointment in a government company the appointment is made by CN so the report is given to president of India government of India in case of central government owned companies or in case of state owned companies to the governor in case of non-government company the report the appointment is made by members so the report is also given to members that's it in case of a form Partners we will address in case of proprietor we will address to propri that's it so this itself can be asked as a question able to understand anything can be tested don't think this this will be ignored this will not be tested no don't be in that assumption benefits of audit I'm not reading okay I'm not covering it it's a very easy question right what are the advantages of audit hope you will understand so here no what is you know what is what is an engagement and what are the benefits of external audit engagement benefits I will not cover but what is meaning of Engagement mean meaning of external audit engagement I will cover so what is an engagement engagement means an arrangement to do something today I'm engaged in taking the class getting the point whatever I am engaged in that's called an engagement able to understand so in the context of audit what is engagement it means formal agreement between auditor and client under which auditor agree to provide auditing services so it takes the shape of engagement letter so in an audit audit agre with the client to audit the financial statements this is called as audit engagement if it is review engagement then it's a review engagement if it is Assurance Assurance engagement if it is some other services related Services engagement understood now what is external audit engagement external audit engagement is to enhance confidence of the users of the financials such as these engagements are reasonable Insurance engagement for example in India companies have to get their annual accounts audited by external auditor for non-c corporates they may choose their accounts audited by because of the benefits for corporates it is compulsory for non-c corporates if you want to get the benefits of audit Get It app Point benefits I'm not discussing it's very easy audit provides high quality information audit acts as a moral check audit gives credibility to the financial statements Banks and all we give loans based on the audited financials insurance companies and all in order to settle their claims they may look for audited latest audited financials and all there are so many benefits which I'm not going into okay next now what are the inherent limitations on audit very important question in this particular chapter just a minute just for one minute I'll take in the meantime go through the book now whatever we have covered just briefly go through have you studied all this earlier at least one reading also studed okay now by the way have you observed how I'm filtering the information now yes or no same way you have to do revision by the time we complete all this you will understand how to filter from the main book and that's the best way to do revision okay go ahead e oh yes let's continue so write a short note on inherent limitations of an audit so what are the inherent limitations of an audit so see you know very well that 100% we cannot cover in audit suppose you take uh this uh classic example of Avenue super Ms Avenue superm it's a DM nothing but is is it in Chennai dmart fine earlier it was not in okay so dmart you know they have across India Today more than 200 stores across India they're having 200 stores each dart on an average they do a business of one one and half CR in a day each Dem getting it in a day Dart turnover is somewhere around 250 to 300 CR in a year the turnover is somewhere around 1 1.2 lak CR maybe on a conservative estimate 95 to 1 lakh CR this is the turnover of the dmart suppose dmart appointed you as an auditor you are the auditor of the dmart Avenue Supermarket now I only spoke about sales about purchases of dmart what about employees of dmart dmart no in only one store one store they will have 250 employees so 200 stores into 250 50,000 employes approximately dmart will be having somewhere around 50 to 60,000 employees now what about the salaries paid to them now when we appointed as an auditor of dmart we should check sales of dmart we should check purchases we should check employ benefit expenses we should check fixed assets we should check inventory see the Quantum of inventory in one store itself look at the Quantum of inventory how do you verify inventory as part of our audit there is a standard called 51 as part of that you need to verify inventory physically 200 locations physically I should verify how long it takes yes or no so in audit we don't ify 100% so how how do we conduct audit see since the time available for doing audit is very limited you know we first do understand how dmart is functioning we first understand how dmart is functioning see generally uh who will take most amount of care in running a business auditor will take a or management will take a more than you about the safeguarding of the money companies more concerned they are more concerned because it's their money at the end of the day understand so you know we know that we are very concerned about their financial safety Beyond ourselves companies most concerned about their financial safety every business organization they're highly concerned about their assets safeguarding yes or no so the dmart has implemented so many controls so many so many cameras so many controls entry controls exit controls employee checkings employee you know employee cannot use phone you know de within within the D they can't use so in so many DMS no they have to surrender the phone the moment they enter inside only while going out they will and again while they enter and exit no they should not keep any money in their pocket also their own money any money whatever is there if employee carries for them lockers will be given so in that Locker they need to keep everything so while again going to the locker they need to you know come off the duty and then only go to the locker they need to sign out of the duty and then go to the locker so so many controls have implemented to ensure that no sort of theft happens so this is what this is this is just one or two examples of controls which dmart is having so when I'm doing audit of dmart I first understand how they're functioning what is their organization structure where mistakes can happen where frauds can happen I should do risk assessment what risk assessment I should do where things can go wrong how the sales they're accounting how sales are built how inventory is maintained how inventory records are maintained how inflow is captured how outflow is captured how closing stock is calculated is it automatic or B physically manually they're doing and whether the physical stock they're comparing with you know records at reasonable interval in car we have this point so I need to look at how controls are implemented at deart by doing this entire study of internal control by evaluating DM's internal control then I will get a conclusion ah fine dmart as a whole their function functioning effectively now I just have to do nominally I will select some samples and see whether the sample is rightly processed or not rightly transaction is recorded on I just select a sample So based on Sample I am giving my opinion on the entire population correct now tell me when an auditor verify sample what is his objective is he want to give opinion on the sample or opinion on the population ah we have to give opinion on the entire profit and loss account and balance sheet but we don't verify 100% of each and every transaction we only verify sample with a view to get a conclusion on population this is one reason why our Assurance is only reasonable Assurance able to understand see you may say Sir anyhow we are not verifying 100% now why even that 150 also something is better than nothing right on that logic we give reasonable Assurance you know in audit know even if you verify 1150 samples the way we select samples are very Dynamic we how to select a sample which contains material misstatement the art of selecting sampling getting it that decides whether you can find frauds or not you do analytical procedure we do observe the transactions every day we can easily identify exceptions fine I'll discuss slowly I'll disclose slowly this is called scrutiny Ledger scrutiny we call it as How We Do leder scrutiny I'll gradually cover so our audit procedures are very limited we only verify sample data based on that we are giving opion on the whole population definitely our opinion can go wrong correct because we verifi 100 items only out of 10,000 or one CR invoices out of one CR number of purchase transactions we verified 150 sample items within this 150 we did not find single mistake generally when we did not find single mistake in 150 what we assume everything is good so I give everything is good but in reality most of the transactions are fraudulently recorded getting it but unfortunately when you selected the sample you did not get that item which is actually fraudulent or you selected sample right in that also frauds were there but you did not find the fraud because the person who is committing the fraud will he commit a fraud in such a way to detect it easily or not detecting it easily ah getting it so person committing the fraud will ensure that the fraud cannot be discovered he manipulate every record getting the point right so the nature of audit procedure whatever the way we work know that itself has limitation that is one limitation in inherent limitations two another limitation financial reporting another limitation is what nature of financial right now what I have discussed is nature of audit procedure see auditor carries out his work by obtaining audit evidence because of practical legal limitations you know auditor cannot obtain 100% evidence he does not test all the transactions and balances he forms his opinion just based on Sample it is a pract iCal limitation on the auditor correct even if you want to verify 100% how how long you do audit dmart accounting records are prepared by a team of 500 people you are a single auditor and you are carrying your article article assistants and all 10 article assistants who are focusing on lunch time yes or no okay so you're carrying along with 10 article assistants and 10 senior paid assistants and many of them are thinking when Sunday will come so that we can roam honestly we cannot do 100% audit right it's not possible so based on Sample we do audit management know sometimes they may not give you complete information do you think management will come sir we all did non- complices like this sir we did we we we violated these laws sir we violated these laws do you think management will come and tell you no they always want to hide their mistakes if they do some mistake they always hide it management will not provide complete information no matter you try your level best that's why what we do you know here we get management representation we try to identify all mistakes which are performed by management which are done by management we try to identify all the mistakes in addition to that we will also get a Britain declaration management give me declaration that whatever mistakes you did you disclosed to me that none of the mistake you are hiding it from me if at all you're hiding any mistake from me probably you also don't know that mistake if that is the only case fine acceptable whatever non-compliances you have committed whatever misstatements you have committed you please disclose me honestly let us sit and rectify it no issue I'm okay I'm okay see it's it is part and partial of life to do mistakes you made so many mistakes in financials let's correct it I'm okay to correcting I'm allowing you to correct you prepare you take your time correct all the mistakes and finally give me the financials on that only I'll give opinion so if any mistakes are there no directly we will not come and give qualified opinion adward opinion first will tell them see these are the mistakes please Rectify if they don't Rectify they want to publish the balance sheet pendl as it is which is containing mistakes which is misleading then I will give qualified he look this balance sheet P looks contains mistakes these are the mistakes I'll give I will highlight them in the audit report I will talk about them in the audit report suppose if they rectified the mistakes and sent the revised balance sheet pnl to the shareholders will I have to talk about that no able to understand so management will not provide so complete information so in case they have not provided required information he can only he can only report that so you can't you can can you can you can you slap management and all you don't have that powers man you're only Watch Dog not biting auditor is a Watch Dog yes or no you can only watch and you can only you know comment whatever you have watched that's it you don't have biting Powers biting and all taken care by regulatory yes or no you report whatever you have watched that's why auditor is called as a watchdog next the management know sometimes they're dishonest un scrubless people Nothing But dishonest people and maybe involved in the fraud they have engaged in concealing the fraud by sophisticated organizing schemes they organize it they do frauds in such a way you can't even find fraud getting it suppose they have purchased so and so Goods what is the proof that they have purchased Goods they show invoice they show evay Bill GST Bill also they will show they will show transport copy they will show photos and all everything but that and all completely fraud how do you know so we depend upon on whatever information they prepared their information we use and then give our opinion next Remember by the way audit is no it's not investigation Again by the way are we liable to investigate each and every AFF suppose no some third party they purchased Goods some Goods they have purchased do you want to go to uh Chennai cyber crime department and see whether transportation of goods happened in the camera no need that that much and audit not required yes or no you just have to based on the documentation see whether it is genuine or not if that is genuine you give that it is genuine sir what if tomorrow it is really fake you not responsible look law is again there to protect you you as an auditor protected everybody knows that what you're doing is reasonable at least that reasonable verification you should do you should not come and say even if I verify 100 also there's no point right inherent limitation is already there you cannot sit and sit silently and give audit report blindly you can't do that we will see tomorrow if any fraud happened in the company we will check have you done your due diligence properly we will check the lawmaker will check you we'll check your documentation we'll see have you done the work properly reasonable efforts whatever you have to give have you give that efforts or not they will check if at all you have not given any efforts you are giving carelessly sir even if I verify 100 also what's going to come nothing right that's why I did not ver and gave a report directly can't you can't give these answers now so minimum you should do some work in spite of it beyond your control if some mistakes happen fine we cannot blame you if at all you do your work diligently carefully with the professional competence enough your dut is fulfilled whether after we performed the audit also still frauds were there you are not responsible you just have to prove sir I did my audit properly see I selected sample scientifically I verified each and everything I spoke to them I spoke to them I got evidences like this in spite of all this I could not find that this fraud is there how do I know how how can you blame me yes or no can you argue or not next timeliness of the financial reporting and decrease in relevance of the information this this is this is this is another limitation the relevance of information decreases over time and auditor cannot verify each and every matter therefore a balance has to be struck between reliability and cost for example an auditor who is conducting audit of company last two years he has sought detailed information from the management regarding various matter during his third itin he chooses to rely upon some information obtained as part of second year however it could be possible that something new has happened and that information is not relevant so the information being reled upon by the auditor is not timely in this for this no I can give an alternative example look tell me when are we doing audit generally uh once financial statements are being prepared year starts on April 1st ends on March 31st tell me when auditor is appointed will the auditor be appointed before April 1st or after 31st March during the year getting the point auditor will be appointed during the year in case of non-con company during the year he'll be appointed for five years at a time in case a government company they'll be appointed for this year and his appointment is valid up to conclusion of next AG getting the point so auditor is General appointed during the already year started just because you're appointed do you think you will do audit immediately man I'm practicing ched account I have 40 clients like this 40 companies I'm doing audit now don't say Sir seing limit 20 only now excluding seing limit I'm talking ignore that so 40 companies I'm doing audit so obviously not all 40 companies audit I can do immediately so for many companies I will go and do audit after 31st March only which means all the transactions are over all the transactions are accounted books are prepared everything is over now I'm going and doing audit on the past data now when I directly go and do audit in the month of August itself I may discover some extra important points which I will not get when I'm doing audit in April month after March year is completed when I go and do audit I will not get that much data that much Clarity when I'm doing the audit at the time when the trans action is happening if I Lively see the transaction I know what are all happened if I do not see in life the transaction how can I believe the transaction based on documentation only that is what they're trying to convey here and further future events May affect the entity regarding this future event no I will talk in sa 570 going concern for I'll talk there so what are the inherit limitations one is nature of financial reporting another one nature of audit procedure audit procedures is like I already told he do not test all the transactions all that so no nature of financial reporting by the way tell me in balance sheet no PN account sorry plant and missionary fixed assets is there do you think that is 100% accurate value no fixed assets no how are they valued based on fixed asset values after depreciation how the depreciation is calculated based on estimate one example of accounting estimate is what life of the asset when I say projector life is five years exactly after 5 years that will the bulb blast no yes or no so it is just an estimation it is just an estimation so the asset actually may work more than five years less than five years which means the depreciation amount that we are calculating is it 100% accurate that reflect reality no when the depreciation when the balance sheet when the balance sheet itself is not 100% accurate how come you and me give absolute assurance that it is 100% accurate yes or no balance sheet itself nature of financial reporting itself is not 100% you know perfect how come you as an auditor say it is 100% perfect so preparation of financials involves judgments by the management judgments means what assumptions and estimates they are subjective some uncertainty is there degree of uncertainty is there therefore auditor may not obtain absolute assurance that financials are free from mistakes due to fraud because financials by Nature themselves are not 100% true and fair they are not 100% accurate so on one of the premises for conducting audit is that management techn knowledges it responsibility oh this this we will discuss later M this we will get in terms of Engagement premise means nothing but responsibilities of management just first point alone is enough in exam no you just have to write first point what are inherent limitations of audit first point you have to write then nature of audit procedures first point along with example you write then audit is not an investigation this point you can write timeliness of financial reporting only first paragraph you can write that's it four marks question if it it asked sometimes no they may ask you one of the inherent limitations or else they'll give you nature of audit procedure is an inherent limitation to an audit briefly discuss then you just have to write entire B complete entire answer you have to write anywhere the question can come they can only ask only sub part of it or they may ask you a full question Leo see I'm make I'm giving all the observations so that after finishing entire this revision class you have to remember all these observations and study in different different ways okay that's it next so write about scope of audit and what is included in the scope of audit and what is excluded so as part of audit what we are not expected to do we are not expected to do technical item technical things auditor is not expected to perform duties which are outside the domain of his competence which is not where I'm not competent suppose whether so and so yes is in proper condition or not I may not check getting the point suppose no Quarry mining companies there now mining companies use big big missionary vehicles and all is so big whether the vehicle is in good condition will you check can you even drive that you don't have that expertise yes or no so physical condition of certain assets like sophisticated Advanced missionary their condition we can't determine so it is not expected from auditor suitability of like civil structures suppose can I see a building and tell whether the building is in good condition can it be used for 10 years or 20 years fitment certificates and all can I give it's not possible now how do you check company no they purchase recently one building they constructed recently one building or some old building they purchased for that no the useful life is kept as 20 years how do you prove that it is 20 years you will take help of an expert at some cases we take help of an expert same way whether the whether particular document is original or duplicate we can't so auditor is not an expert in authentication of document so the genu of documents cannot be authenticated by him because he's not expert in that field I have never done forensic analysis laboratory analysis all that yes or no next an audit is not an investigation into wrongdoing he does not have any specific poers of search you know just because I appointed as an auditor next day surprisingly I went to director's house I want to do raid hey show me open your locker and show me you're not investigator man yes or no you don't have all these poers sir your duty is very very limited look I told you you're a watch dog that's it okay next so audit is distinct from investigation whereas investigation Critical examination of accounts with a special purpose investigations we do specifically to to discover frauds the objective of audit on the other hand has already discussed is to obtain reasonable Assurance all that the scope of audit is general and Broad whereas scope of Investigation is specific and narrow this question can be asked what is not included in scope of audit four marks question you can get understanding everyone if at all you're thinking I'm speed I can't do anything because I have to cover hell lot of things yes or no we are only still covering just two chapters this chapter will be over uh just a minute how much time another 10 minutes I'll close then what is included in scope of audit ah I should cover all aspects I should cover purchases I should cover sales I should cover fixed assets I should cover inventory I should cover controls in the company I should cover director remuneration I should cover employe benefit expenses all aspects and I should also check how far information is reliable I should check reliability of information and I should get evidence sufficiently so what sufficiency of information and all we'll talk little in depth in evidence chapter okay and I should also check whether financial information in the financials are properly disclosed as per applicable framework as per applicable law and regulation is a disclosed properly or not also I should check so what is included in my scope is I should cover all aspects I should I should ensure that the information is reliable and I should get sufficient evidence and I should see that information is properly disclosed in financials and I am not expected to perform technical things in all next so what is the scope scope refers to reach of something the purpose of an audit is to enhance confidence of the users users who who are the users shareholders employees customers government regulatory whoever it is enhancing of confidence is achieved by expressing opinion by auditor whether the financials are prepared in accordance with applicable financial reporting framework so applicable financial reporting framework means what it's a framework adopted who is adopting Management in preparation and presentation of financials that is acceptable in the view of nature of entity if it's a company schedule three is acceptable if a listed company part one is acceptable unlisted company part two is acceptable for for nbfc part three is acceptable framework so in view of in view of nature of entity whatever ACC acceptable framework is followed then that is called as applicable financial reporting framework and what is the objective General purpos special purpose what is the objective getting it so that is called applicable financial reporting framework next so auditor can only give reasonable Insurance what is reasonable Insurance reasonable Insurance it is different from absolute absolute means 100% guarantee I guarantee that this information is correct if tomorrow if something go wrong come and blame me that's called guarantee getting it reasonable Assurance is not a guarantee of course it's a high level of insurance I verified now I verified the background data I verified samples I verified vouchers I verified third I spoke to third parties I got external confirmation I took legal opinions I verified it's a high level of assurance but not absolute Assurance remember we do audit with competence and skills as per standards on auditing we apply procedures in accordance with standards we get audit evidence and we evaluate it so based on that only we draw conclusions and opinion is formed so whatever we are doing no it is not just like that it is not something better than nothing we are doing some works as per standards we are trained for that we know how to discover frauds even with samples getting the point when I say based on the sample nothing is misstated 99% I'm sure it is not misstated able to understand exceptions might exist you see in India there are more than 5,000 listed companies in how many listed companies frauds are happening which are being reported outside no right so it always say that audit is working truly it is working audit is working though we are doing on a basis of sample it is still effective so misstatements know they can occur due to fraud or error or both so he has to see effect of misstatements on the financials as a whole in totality what is the effect of the mate effect of the misstatements we'll discuss in 450 standard we we'll discuss later obtaining Assurance uh this is common point this is normal point so opinion is reported and communicated as per findings so how to give this opinion how to report how to give audit report we have a next chapter that is audit report chapter and finally how audit is interrelated with other subjects whatever is given in the a that is also given in the B same points are covered in the B know they covered with the side reading in the a they did not use that see in order to do audit in order to do audit properly what are we auditing by the way in the entire subject in what context we are discussing we are discussing in the context of general purpose financial statements now these general purpose financial statements are prepared in accordance with Accounting Standards or schedule three in case of Bank some other accounting standard in case of nbfc part three schedule three yes or no IND now tell me are we do we need to have the knowledge of accounting or not if you don't understand accounting you can't you can't do audit properly you can understand audit subject but you can't do audit yes or no two uh you need to understand Accounting Standards you need to understand schedule three you need to understand laws and regulations applicable for the company you need to understand tax loss because compan is creating tax liability now whether the tax is calculated correctly or not you should have tax knowledge or not you should have knowledge of GST you should have knowledge of financial management because no in schedule three there's a requirement that every company should present key ratios there's a disclosure requirement every company should present key ratios in schedule three notes to accounts ratio analysis and all in which subjected is there financial management the auditor should have a knowledge of financial management you should have a knowledge of costing production normal loss abnormal loss to evaluate scrap value scrap sales and all how do you check only if you understand costing knowledge normal loss abnormal all these terms so in order to do an effective audit you must have a full whole dimensional knowledge multi-dimensional knowledge you must acquire yes or no next so what aspects we cover in audit so what is definition Independence we have already discussed nature of financial information have already discussed and we need to express opinion purpose also we have discussed we have discussed this all this in fundamentals itself so that first question is very basic I'm not covering okay what aspects I will cover I will verify whether financials are in Conformity with books or not I will first have to check what I have to check whether financials are matching with books of accounts or not trial balance balance sheet matching onor first I should check second books of accounts some entry is a general entry for that what is the proof supporting bills so supported by sufficient appropiate evidence nothing but what is the proof for purchase purchase invoice grn note delivery Chalan transport copy EV B and I should also check nothing is omitted and no duplications no fictitious duplication means what recording same transaction multiple times not twice getting it recording the same transaction multiple times is called as duplications so duplication we will not accept Omission we will not accept 50 Cent and all we will not accept and whether information conveyed by financials is clear un iges getting it is it clearly giving the information when we are reading the balance sheet pnl notes no there should not be any confusion next whatever amounts classification presentation disclosure no they are as per standards and financials are present in true and Fair View of operational results and assets and liabilities aspects in this any four points you have to write a four marks question can come what are the aspects to be covered in audit any four points you have to writeing it they'll ask you like this what is the definition of audit what are the various aspects to be covered in audit B Point write about nature of auditing this itself can be asked as a four marks question nature of audit what is the nature of audit audit is an independent examination all that you know an entity whose financials are verifying no it may not be profit oriented or it may be profit oriented our audit nature is like we give opinion on the financials why why audit the purpose is to give to enhance confidence of the users there are so many users I think it that's it then finally first question this is about history of auditing and all that's not required and finally what are the qualities of auditor the auditor should be having certain personal qualities like tact tactics you know tactics tact he should be careful he should be firm means he should be committed you should have good temper no short temper don't don't scroll the client and all he'll remove you next year Integrity discretion he must have the power to take decision on his own okay so he must have the knowledge of Industry he must take decisions in the right way Common Sense patience clear-headedness and most importantly Integrity reliability yes or no when you should not search for when a chance will come so that I will be having I will be alone with the cash balance and all okay you should not be having the thoughts to chield cash and all okay next in addition he must be he must have the shine of culture of attaining a great height means you must have an attitude to achieve Great Heights okay highest degree of Integrity backed by Independence whatever basic human qualities that are there that are required auditor also should have same human qualities don't think you're not a human being okay professional qualities apart from this he must have knowledge of Taxation he must have knowledge of accounting he must have knowledge of you know Accounting Standards knowledge of Frameworks knowledge of laws and regulations all that then we have engagement and quality control standards this is what I started now introduction whatever standards we have now we call them as what engagement and quality control standards so standards on auditing standards on review standards on insurance standards on related Services apart from this we also have one more standard called standards on quality control so what do you mean by standards on auditing so they gave here some matter standards and auditing apply in case of audit standards and review apply in case of review standards and Assurance will apply in case of other than historical financial information nothing but prospective or non non-financial information like controls and all standards on related Services there are two types agreed upon procedures compilation engagement what is agreed upon procedure compilation engagement I will cover in the next class okay just this alone I'm keeping it pending it take little time it takes little time then we finally have standard on quality control we have a exclusive standard on this we will be discussing this in the next chapter terms of engage we have a sqc full standard itself to discuss able to understand why standards are required um this is what initially I told why audit report if at all if at all we ask you to give opinion every one of you will give different different wordings in order to have uniformity correct H that's why we have standards why Accounting Standards same the reason same reasons are there for why auditing standards but anyhow let me not conclude like this let me discuss this little more briefly in the next session clear until now are you okay with this space 99% I will cover almost I will briefly tell you what is there in that particular thing if any important or any difficult point is that I will cover for sure okay that's it so take care uh tomorrow just a minute I'll just confirm you with the you know timing for the next next class so we'll resume uh in the previous session we were about to conclude nature objective and scope of audit right uh in that predominantly all the concepts majorly we have covered now at the end of the chapter we have something like engagement and quality control standards there I just have to talk about right now so as we know what are all the engagement quality control standards we have mainly four types of Engagement standards one is standards on auditing standards on review standards on Assurance standards on related Services standards on auditing and standards on review they both deal with historical financial information whereas whereas standards on Assurance it deals with prospective financial information actually don't say the word prospective it uses the word other than historical Financial other than historical financial information means it can be prospec to Financial statements or it can be not at all related to financial statements like Assurance on controls getting it like I I told you that example also Metro Rail division example and we have other standards that is standards on related Services now in exam they may ask you write briefly about standards on auditing they may ask you a question four marks question write briefly about standards on auditing then you have to write this content standards on auditing so standards on auditing they apply in the context of audit of financial statements by independent auditor it is important to remember that standards and auditing apply in historical financial information yes or no and the they establish high quality Benchmark see benchmarks means nothing but standard itself means what by definition Benchmark whenever we do any work we should follow a uniform procedures getting it we should follow some Benchmark approaches while we are doing the work so that the quality of audit can be preserved getting it like you you you imagine everywhere today standardization is being happening everywhere in every sector in every product in every food item that we are eating today standardization is happening whether you eat the Domino's Pizza in Chennai or in Bangalore or even in USA for the matter The Taste is same the varieties are same the process of making it is same the mixture ingredients everything is same because they made standards for making a pizza whether it is dominoes or pizza heart or KFC whoever it is all world world I mean worldwide chain of restaurants they are standardizing their procedures even in case of now it is coming to Banis also you know Ur Biryani it's being standardized now okay and even uh edum they are bringing standards in everywhere have you heard of this ramesar Cafe which is famous in Karnataka has been expanding now how to you know they opened recently in hyad they opened recently in they're opening in Chennai also very soon I don't know probably they're having so it's a a it's a restaurant where they offer all Tiff items breakfast related items and all they are making standardization so the same taste and quality that you get in Bangalore the same taste and quality you get in Chennai only because of Standards standards means Benchmark now while maintaining books of accounts while preparing our financial statements in our thing also we are having standards standards means what whether you prepare or I prepare somebody else prepare another company prepare a partnership form prepare listed company unlisted whoever it is getting it if we prepare financial statements every finan whatever the company financials irrespective of its geographical location th financial statements can be understandable by anyone and everyone and comparable so that is a purpose of standardization getting it now we have standardization in audit and that's what standards on auditing deals with we have standards on review engagements how to conduct a review like if you're appointed to conduct a review limited Assurance engagement we Al we also call it as what a limited Assurance engagement so what points you I mean how you have to cover how you have to do this review how you have to provide Assurance engagement how you have to execute that work and how you have to perform related procedures related services for all these cases standards were there now here you see standards so standards on auditing have been issued on wide spectrum of issues they'll give you a question like this standards on auditing have been issued on wide spectrum of issues in the field of auditing ranging from objectives till documentation comment they'll give you like this they pick two lines in this and then ask you now you what means which means these lines are exactly used in this context right the introduction so you should you're supposed to only these points able to understand now like like you say standards are Notting we have on so many issues right sea 210 for example it is talking about terms of Engagement sea 220 talking about quality control for audit 230 talks about documentation 51 talks about specific considerations for selected items 520 talks about analytical procedures how to do analytical procedures what is analytical procedure 530 talks about sampling audit sampling 540 talks about some accounting estimates on various issues standards were issued more in depth I will discuss the difference exactly between a standard and an accounting standard in sa 560 discussion when I'm discussing subsequent even standard there I will exactly point out why we have a standard separately for certain accounting items generally auditing standards apply for whom auditor are they applicable to management of the entity is company or management who are preparing financial statements are they liable to comply with standards and auditing no standards and auditing is for auditor who is conducting the audit Accounting Standards is for the entity who is preparing financial statements we have to check as a part of our audit we have to check whether the entity is complying with the standards on accounting yes or no now in India we have Accounting Standards we have indas internationally we have International Accounting Standards IFRS getting the point some countries they ly follow IFRS suppose European Union entire Europe related countries um uh Europe as well as certain certain parts of other countries mainly Europe All European Union countries which are there approximately some 20 plus countries were there in the European Union they all follow IFRS getting it even uh United States they also follow I think IFRS they also follow IFRS in India we have adopted IFRS modified according to our Indian circumstances and we are calling them we are calling them as indas most of the indas content is similar to IFRS able to understand and IFRS is I mean indas is applicable in India only to listed companies that's we know and remaining unlisted companies private private limited companies for all of them normal of accounting standards which are issued in 2006 okay they apply that's what as1 to as32 that we have able to understand next so so so auditing you know the the standards were issued on wide range of spectrums like documentation Financial identifying assessing risk of MMS audit sampling audit evidence various aspects of financial statements audit okay they have given just a few four or five examples of various standard numbers and then headings so you can give any other number here getting it no problem any other number need not be the same examples you can use any other examples getting it then what is standards on review they apply in the context of review we have understood that review is a limited Assurance engagement it provides lower Assurance than audit even in review we obtain evidence right yes or no we obtain sufficient appropriate evidence whether the items are free from Material misstatements yes or no in audit audit also we obtain evidence but in review the procedure we do through which we obtain evidence is inquiry and analytical whereas in audit we do all other procedures all types of audit procedures whatever is possible we try to get evidence in best possible Manner and we have two standards on review 24 and 2410 engagements to review historical financial statements another engagement you see here review of what is the word used interim financial information performed by independent auditor this is very famous in case of listed entities this standard is very famous you know listed entity you know they announce quarterly results in company law there was an amendment they have added one new section called 129 9 a which talks about periodical results interim periodical results interim periodical financial statements getting it normally only for listed entities the quarterly results is mandatory as per seevi guidelines but now company law has brought 129 year section and saying certain class of companies which is not yet active the section is not yet fully active they just introduced to the section class of companies the MCA has to notify yet okay sudden class of companies unlisted public company or big private companies big private limited companies they may have to file with registar periodical results getting the point periodical results have to be filed now while filing periodical results quarterly financials and all like without audit we are filing it right at least get them reviewed get them reviewed reviewed by whom by the way a separate auditor no you already have independent auditor right who has been appointed for full year give him the same work pay extra fee and get him get get that you know periodical results reviewed by him and give a review report able to understand that's it so remember both standards on auditing standards on review both deals with historical financial information then standards on insurance these are the standards they apply where the subject matter is other than historical financial information such Assurance no they neither audit nor review these standards are called as assurance engagements for example Assurance related to prospective financial information not only that Assurance may be regarding non-financial matters like operation of internal controls all that now we have two standards actually three there is a standard called 342 also there is another standard 342 in in auditing we have a standard 402 SCF 402 for that parallel standard that was given in assurance is 3402 actually 34 is called as s so audit it's very it's very famous systems and controls audit what is it called as systems and controls audit s audit worldwide is a very popular audit getting it today we once we qualify as a chartered accountant we have to we should not simply think like blindly going into some big four or uh you know some company attending campus no many there is a lots of vacuum in the forms in CA forms they are dying because they're not finding adequate staff qualified staff they are not finding everybody is just blindly going to Big Four or probably to some corporate getting it so today many many Enterprises many entities are wanted to delegate s audits to many mediumsized audit firms the problem is mediumsized audit firms are not getting Manpower they're unable to do these audits in the next 10 15 years I'm telling you the growth is so high in India so be aspirational you will have a very good future guess that dedicate yourself to to this because you have chosen this route for Success yes or no so dedicate yourself on this fine so sa 3402 is another standard anyhow these numbers are not important for you SAA 3400 examination of prospect to financial information SE 3420 3420 is different 342 is different getting it Assurance engagements to report on perform of financial information included in Prospectors I don't know how many of you have seen Prospectors of any company that is coming for public issue you see prospectus so small letters they use very small and that prospectus size is close to 300 400 Pages normally if at all we keep that prospectus in a normal readable material format it will come to 1,200 pages when a company is coming and asking for money from public they are giving 12200 pages of information about themselves to make you confident in that uh financial information will be given by the company last 10 years what is our financial data all that so profile a financial information what is it called as performa Financial they don't give full fullest financial statements they give maybe latest audited financials or last year audited financials or last three years audited financials as it as they may give but before that some information will be provided in a brief manner in the prospectus now in the prospectus financial information you are including right for that we will give Assurance we will provide an assurance report it's not auditor review we provide an assurance report on the financial information which is taken from audited financials already able to understand there is something called summary financial statements there is something called summary financial statements audit of summary financial statements sea 810 there is a standard okay which you don't have in syllabus we'll discuss it in final able to understand next finally standards on related services so standards on related Services there are two types agreed upon procedures compilation engagement one is what agreed upon procedure another one is compilation engagement for example what is an agreed upon procedure Suppose there is a big company uh they are having stat audit going on some stat audit is going on now this company know this is having registration I mean Sor this company is operating in 15 states this company is having branches across 15 states now in all these 15 states now tell me when they having 15 states they operating branches tell me GST registration they need to take statewise yes or no they are supposed to take registration statewise now which means this company will have how many GST numbers 15 now each each of these entity each of these GST registration we let us let us call it as a separate entity from GST point of view they're DM a distinct person yes or no so now they have to file every month two returns outward Supply return summary return in in Supply return also they have to file gstr to we call it as but in that place it is automated it is autop populated so we technically find two returns only one what sales we made Supply we made and 3B two returns they file for how many months they file 12 months approximately you see 360 returns yes or no approximately how many 360 returns they have to file in a year for all these branches one single company understand okay now as a part of our audit if you recollect Caro in that one point is we need to verify as an auditor suppose I'm the auditor of the entity we have to verify whether the company is regular in payment of statutory dues whether the company is regular in payment of statutory dues to respective authorities regular means what are they paying within due date are they filing returns within due date this is what I have to verify which means for all these 360 months approximately for 15 entities multiplied by 12 means approximately 360 returns they filed all these 360 returns I should verify right tell me as an auditor within the limited time I have with the limited resources I have how can I verify all this 360 what I I I mentioned this company sir this is a very big significant difficulty you know this is something you should have already completed sir dear management you should have already completed this work and you give me the workings I'll I'll verify whether the workings are right or not but now you did not do anything and I have to from the scratch I have to do GST reconciliation all together which will take 10 to 15 mandes extra do one thing give me extra mandes company is not ready sir we have to file quarter you know annual results with SE sir within 60 days of end of the financial year we need to announce we need to release the annual report we have to call for AGM all this is going you have to finish the audit as soon as possible you are not doing this work and you are compelling me to fast you know how it is possible so let's do one thing you appoint another CA okay tell him to do this now the appointed another s like you and me and they told him please sir please agree upon this procedure getting it what procedure you just to do GST reconciliation so whatever procedure they agree upon that procedures are called as what agreed upon procedures in any context agreed upon procedure means the company will give you one work you just have to complete that work and give them back able to understand suppose if the work given to you is for preparation of financial statement suppose you know many companies know small and mediumsized companies they will not have a full-time chared accountant full-time secretary and all yes or no they don't know how to prepare financial statements as per schedule three we have learned or not who responsibility to prepare financials management they have to prepare the financials now tell me management board of directors none of them they don't know anything about Commerce and finance they don't know real account means what personal account means what basics of accounting also they don't know how do you think they'll prepare financials so they have to take somebody's assistant right to prepare financials now tell me b mcom yes or no those graduates can they prepare financial statements they may prepare final accounts but they may not prepare financial statements as per schedule 3 indas all that so obviously who has the knowledge of indas and all this only Chartered Accountants and cost accountants have this knowledge so a company will appoint them okay what is their Duty there compilation what is their Duty compilation compilation of financial information as per applicable Financial reporting framework if it is general purpose Financial general purpose framework if it is special purpose special purpose compilation engagement means we prepare the financial statement and then give the company able to understand it may be historical or it may be prospective but my duty is what I compile the financial statement compiling means what will I prepare the information or will I just compile from the information compile from the information who should give the information exactly so an engagement in which a practitioner may be called upon to assist management with preparation and presentation of historical Financial or it may be prospective also here it is not covered getting it without obtaining Assurance of the information obviously now why should I want whether the information is correct or not and my duty in compilation is what you give me information I'll prepare and then give it to you so such type of compilation engagement falls under related service and practitioner after he compil the financials after he assist the company in compiling the financials he will give a report stating that it is not an insurance and no opinion is given in this regard we will clearly give a report compilation report we will give just like audit report we give now in audit in a review we give review report in an assurance we give Assurance report in compilation we give a compilation report in that report we clearly mention look we have not audited we were only involved in assisting the company assisting the management in preparation of financial information these services are called as related agreed upon procedures means what they may require auditor to perform certain procedures example trade payables related some work trade receivables related some work purchases from related parties some work sales related segment reporting work or I told you GST reconciliation work whatever so company will give some work to you you just have to complete that work and then give it back that's it that is what your scope of Engagement understood in both both these cases Assurance is not involved audit is not involved opinion is not involved review is not involved clear that's it now standard on quality control standard on quality control I'll come I'll discuss uh this introduction is anyhow we are covering in sqc specifically so there I'll cover right now we are not in a position to understand sqc at this moment next why standards are needed just now I told at the beginning itself why standards are required Domino's example all that now standards ensure carrying out audit against criteria with global practices they improve quality of financial reporting quality of financial reporting means here they're talking about accounting standards remember this is not about auditing standards they generally we use the word standards why standards are important which standard they they talking about irrespective of everything they are talking in the context of Finance in the context of Finance standards means what standards on auditing standards on uh you know uh accounting accounting standards and auditing standards standards promote uniformity as audit of financials is carried out following standards standards equip professional accountants with knowledge and skill so by reading standards we understand how to do audit we understand what what are all the procedures that we need to follow that is what we are learning in this entire subject corre and standards ensure quality why quality very simple you you just go to you know dominoes any P you you test is it the same quality or not at some other location hardly some 2 to 3% variation only so whether so and so person newly appointed or the chef is newly recruited it doesn't matter whoever is making the pizza they just have to follow certain guidelines so naturally it ensures quality if you standardize the procedures it ensures quality Sops we call it a standard operating procedures getting it then now what is the duty of the professional duty of the chartered accountant in relation to Quality Control standards engagement and quality so with respect to all the standards that are issued what is our duty our duty know we have to follow getting it standards are to be followed in all the engagements undertaken by them ordinarily these to be followed by professional accountants sometimes no a situation may arise when a particular procedure given in the standard would be ineffective what standard says may not be possible in the particular scenario example SAA 510 when the inventory when the inventory is physically with third party what sa 51 says you know get external confirmation let us assume the standard ends there itself actually it extends beyond that but let us assume for the convenience it say external confirmation you get over but I felt getting external confirmation from third party is not sufficient I am having doubts about really whether the inventory is there in the third party premises or not I'm having a doubt when I interact with the company I got to know that some suspiciousness is happening I want to visit physically there I don't want to get confirmation what actually standard says get confirmation now I don't want to follow that why I felt getting confirmation is ineffective in that context so can I do visit you know third party premises directly ignoring what standard says yes you can but mention in the audit report the same point mention in the audit report in other matter paragraph okay that as per SF 51 getting confirmation from third party we did not because it is ineffective because it is ineffective getting it having considering in the scenario we went physically to the third party premises and confirmed by observing the inventory and the related records whether inventory is present in the third party or not so when you have there may be a situation when a specific procedure as required in standard is ineffective in a particular in such case how alternative procedure performed achieve the purpose getting the point what is purpose of 51 get evidence on existence of inventory whether inventory is there or not get evidence how to get evidence external confirmation that is not possible reason for the departure why you deviated from the standard reason also you document understood Remember by the way here no this flexibility is given right this is given in preface itself preface to standards before standards topic starts starts now there will be a preface to the standards in the pref face itself they mention look any procedure any requirement given in a standard if that is not suitable in the scenario you can perform alternative procedure how alternative procedure you performed right how is it achieving the objective of the standard see at the end of the objective of the standard is very simple get evidence get conclusion without evidence you should not conclude now to get the evidence how you should get the evidence they have given certain procedures if that procedure is not suitable you performed an alternative procedure how alternative procedure is effective according to you you should give reason able to understand then his report should draw so in the report now we should draw attention to these departures how we should draw attention one is emphasis of matter paragraph that is for financials another way to draw attention here we we want to talk about audit related deviations we can talk about audit related issues in which paragraph other matter paragraph I'll discuss immediately after after this engagement related terms of Engagement after that audit report today only we will start that session also okay in this only fine remember it is to be noted that this is a very important for true or false statement it is to be noted that it is to be noted that a mere disclosure in the report does not absolve a professional accountant from complying with applicable standard just because you are mentioning in the report so and so I'm not following so and so I'm not following can you take such an option as an excuse for not complying with standards and auditing no no no in a very exceptional circumstances only these kind of situation will arisee normally the situation will not arisee C all of you we do solve mcqs now you see which of the following is not an advantage of audit it provides high quality financial information true it acts as a moral check on employees it's correct it enhances risk of management byas let's hold on that it helps in safeguarding interest of shareholders all these three are correct but it increases the risk of management by us that is not the advantage of audit sorry sorry yeah that is not advantage of audit correct it enhances risk of management by us that is not an advantage how audit FX management decision making technically yes or no management bias means management they will be having this partiality attitude like when they're making accounting records They may do mistakes when because of audit is it true no which of the following is not true about Assurance it relates to providing Assurance about historical financial information only they have used the word only ah this is not true let's look at other options also the practitioner obtain sufficient appropriate evidence yeah that is true there is some information to be examined by practitioner of course he has to verify something a written report is also given yes all the three are true so the first statement Assurance engagement Deals Only with historical information that is wrong so answer is a able to understand next which of the following statement is true about engagement standard engagement standards ensure proper rights to practitioner in the course of their duties fine engagement standard endure preparation and presentation of financials in standardized manner no why engagement standards to perform Audits and reviews effectively yes or no we are not preparing the financials even in compilation we help management to prepare financials there we don't ad hogly take the entire work getting it fine let's see third engagement standard ensures uniformity in their duties engagement ensures Savings in resources of Cs this is even wrong see actually now the conflict is between B and C sorry B and D yes or no engagement standard ures preparation and presentation of financials in a standardized manner probably they may use this word in the context of compilation engagement let us understand they may use it in the context of compilation engagement standard ensues saving resources of clients is not correct right are we saving any resources for client because of engagement engagement standards are for our practitioners it's not related to Cent so which of the following statement is true okay okay sorry they're asking true statement ah then option is C sorry sorry I was confused C the answer is C if it is true the answer is C absolutely true true statement they're asking engagement standard ensure uniformity in performance of the duties engagement standard ensures rights to practitioners and duties no no they they're talking about how you should do the work rights and Duties are given in the terms of Engagement rights and Duties are given in the law getting the point next consider the following statement in relation to limited Assurance it involves obtaining sufficient appropriate to draw reasonable conclusion even in limited Assurance also we get sufficient appropriate evidence review of interim financial information of a company is an example of a limited Assurance engagement both are true just a minute consider the following it involves obtaining sufficient evidence to draw a conclusion review of interim financial information of company is an example of assurance actually know here in which context they give statement to do I'm not understanding suppose are they exactly testing the original heading suppose if they use the word review of historical financial information by independent auditor then it comes exactly 2410 standard name are are you getting are you getting it getting it so uh so technically speaking when I feel both the statements are appearing to me it is correct both the statement one and two are for me ah sorry sorry limited conclusion ah limited conclusion sorry limited so which means only statement two is correct which means option D right yeah we have to be very technical right yes so to draw reasonable conclusion it's a limited conclusion which of the following statement is true about standards on auditing they deal with wallant responsibilities no they deal with mainly mandatory of course standards are mandatory yes or no engagement standards and quality control standards are mandatory for every professional the sole purpose is to help government know these deal with carrying out audit according to law of course that is also important but mainly talks about mandatory responsibilities able to understand B is the right option then we have in case study some mcqs what kind of assurance does audit provide reasonable level right reasonable level of assurance is also means high level of assurance it provides reasonable Assurance correct option C the auditor can force an employee of a company to provide him required information can you force anybody you can't yes or no he can only request for providing him necessary information but it cannot be forced by him if at all in spite of requesting they are not giving you will give disclaimer of opinion so Alli had listened in one of the class that audit covers all aspect of the entity concluded that each and every transaction is verified by auditor wrong no we do we verify each and every transaction G is also seem to be in agreement with him but she was of the view that it also meant that audit should be organized to cover all areas what she said is correct so she has to cover all the areas that is correct all aspects to be covered in audit right what are the aspects cover all areas one of the important Point whereas each and every transaction Alli argument is not correct so getting it actually gor you know what she did is she even agreed with Ali regarding we should cover each and every transaction all aspects technically speaking both are wrong yes or no yes so views of both Ali and gor both are incorrect now we able to decode the mcqs now okay you should read carefully every time whenever you're reading McQ you should simultaneously recollect the topic also all of them discussed about benefits of auditing which of the following is not a benefit of audit not a benefit errors and frauds may be discovered that's a benefit government authorities can make use of audited accounts for various purpose it's a benefit it can help bringing out deficiencies in internal control yeah internal controls we will find some weaknesses definitely when we are doing audit what flaws are there in the system we can point out since auditing is connected to Future auditing is connected to past correct historical financial information gorti told her friends that she had had read a news report about how a company had mislead its auditor by providing some fabricated documents which of the following is correct we we have seen this scope of audit excludes auditor is not an expert in authentication of document so if a company provided us any duplicate which are not original we don't know we relied upon the information all that so is auditor responsible if the company provided fabricated documents and mislead the auditor is auditor responsible so we are only responsible to the ex ENT of skepticism we should be skeptical when they gave a document we should do the due diligence is it original duplicate yes or no but we need not send it to forensic laboratory and send able to understand suppose a director he he gave a written statement some written statement when this statement is written exactly what is the date ink how much it DED that and all not required yes or no it was wrong on the part of the auditor that's wrong all that it was wrong on the part of the auditor wrong both are wrong auditor has to conduct audit by exercising skill but he is not an expert in discovering genuiness of document hence management consisting of dishonest person may lead him to rely on the fabricated documents I think C option is some somewhat feasible let's see management cannot mislead the auditor due to their high level and expertise at that end all we only imagine okay the above is fine so answer is are you getting it look when you're doing a literally you don't know anything about the business about their Affairs so we are having very very very very basic level knowledge about the entity and the company is the one who knows the management is the one who knows each and every Affair of the company so we should regularly interact with them when you're doing audit getting it directly going to the system taking the vouchers ticking the vouchers no not that that's it with this uh nature objective and scope of audit is completed confident on this yes yes we'll begin the next chapter that is ethics and terms of audit engagement this chapter is broadly divided into three parts okay one is talking about ethics like this is what many confused about that newly added topic nothing it's there already earlier also we have this just that the way it is discussed has been changed and little in-depth discussion has been added actually students thought in CA final we have ethics right CA final what is the audit subject name Advanced auditing and professional ethics earlier everyone thought final syllabus is added no nothing same inter syllabus only final syllabus ethics is discussed at final itself okay so because of this chapter they have changed the uh you know the entire subject name itself fine see there is something called code of ethics there is something called code of ethics which is issued by ICI by the way three parts right I told you part one is ethics part two is regarding essay 210 terms of Engagement part three is talking about sqc and sa220 part three I will discuss later okay fine so code of ethics fine part one code of ethics so icii has issued code of ethics to be followed by our professionals once they qualify what ethical principles they have to follow look not just in CA in every profession ethics is common in every profession code code of ethics will be given for lawyers Bar Council of India has prescribed certain ethical guidelines for doctors they have prescribed certain ethical guidelines for practitioners like us CS Institute has prescribed certain ethical guidelines the regulatory body the respective regulatory body has authority to prescribe Code of Ethics in in in for our ched accountants there is an act called chartered accountant act there's an act called chartered accountant act in that act they have given rules based approach to ethics what is it rules based approach to ethics like we have schedules schedule one schedule two in this schedule part one part two part three part four whereas part one part two part three in schedule two schedule one three part four parts schedule two three parts in each part in each part they have given certain Clauses they have given certain Clauses suppose schedule one part one contains 12 Clauses schedule two part part one contain 10 Clauses getting it so each Clause talks about one Clause is saying how you cannot use how you cannot use charted accountant word as a designation when you can use the word charted accountant when you cannot use the word charted accountant one Clause is specifically talking on that Clause number seven part number one schedule number one suppose you you see part number one schedule number two Clause number one it talks about confidentiality it talks about confidentiality if you breach confidentiality what is the punishment if client information you leak to others what is the punishment like that ethics is like implemented through these rules which are compulsive in nature yes or no but tell me can 100% of the ethics can it be rule based can I inculate 100% ethics and all in a person's mind only through rules and regulations obviously there are certain occasions where rules cannot give the answer your consigns should decide your conserns like you should decide your principles should decide your judgment should decide so ethics is a subject which we discuss in two context one principle based approach one approach is principle based approach another approach is Rule based approach able to understand whatever it is it is necessary that spirit is followed look at the underlying intention Spirit of the ethics to be followed for example there is a you know in company law we have disqualification remember a relative of an auditor can hold Securities up to one lakh face well there's an exception now some students ask me sir auditor best friend is director of a company sir in company law disqualification is not talking about best friend now friendship cannot be defined right that's why it's so beautiful okay so uh friendship cannot be defined so disqualifications of the company law does it says best friend of an auditor you cannot if a person who is a close friend or best friend to an auditor how to define it it's not possible right if there is a relation blood relation or step relation if some relationship is I can Define that is not valid friend how it's a hypothetical word right so now tell me your friend is the director of a company there is no restriction in company law but you know you can't do independently the audit the moment you act independently he'll shut you down yes or no so you can't do audit independently for sure now tell me can you accept that audit rules are silent on this ethics should morality you should able to understand so principle based approach is principle based approach of Ethics is it requires compliance with Spirit of the ethics it requires accountants to exercise Prof profal judgment whenever they say professional judgment they're indirectly saying you use common sense getting the point in every situation based upon their knowledge their skill their expertise so professionals should use judgment to evaluate every situation to arrive at conclusion whereas rules based approach you strictly follow the rules company law says a relative of a person a a person who is a relative to key managerial person is disqualified rule based approach that is able to understand it may lead to narrower Outlook correctly in company law disqualification some 10 points only there it clearly says relative of an auditor only cannot be appointed so ethics are Incorporated through certain Provisions in the law but they're very narrow Spirit of the ethics may be overlooked while strictly following the rules sometimes while following the rules Spirit of the law we forget so rules based approach is somewhat rigid as it may not be possible to deal with the every practical situation that it may you know occur it might you know it might occur this question directly they may ask you as a four marks question write about principle based approach versus rules based approach to ethics the first question is not that relevant first question is not that relevant probably in this first question what is the need for professional ethics need they may ask you that what is the need for Ethics in our profession getting it remember whether it is law medicine whatever it is getting it every every professional body is having ethics auditing is also no exception to it we also have certain in fact in fact I'm tell you ethics in auditing is Paramount very important why third par is involved here getting it the assurance that we provide is being used by hundreds thousands lacks of users getting it so in auditing ethics is atmost important for sure next the purpose of assurance is to enhance confidence professional ethics are based on morality getting it therefore a person who who who as an individual and as a class willing to place good public getting it personal gain enjoyed respect nothing if at all if at all whoever keep ethics as highest they always have that reputation and enjoyment of this respect and all so professional ethics seek to protect interest of the profession as a whole in this know you just remember any Four Points you just write any four points if at all they asking you a question write about need of professional ethics any four points if you write in a four marks question getting it I'm just searching for uh easy points so in the spirit of the things ICI requires its members to comply with principles of Ethics while performing their duties so the ethics for ched accountant is codified means they have brought some law schedule one schedule two all that whether you are in practice whether you are in service you have to comply with the code of ethics for people who are in service IA has given separate guidelines for people who are in public practice IA has given separate guidelines any deviation from the responsibilities brings the disciplinary mechanism into the action getting it if at all be violate ethics we violate any rules if at all tomorrow some inspection happened in our firm it can can be discovered and IC will take a disciplinary IC will punish us getting it we have something called disciplinary Committee in ICA we have something called disciplinary Committee in ICI and they will punish us you see I'll show you once uh you know the committee and all once just for a brief idea so in the subsequent discussion uh when we get that word we will not get confused so ICI website this is so if You observe here you see on the top there is something called committees yes or no you able to see this committees you see this Committee in IA they're having standing committee non-standing committee director and secret there are four standing committees one is disciplinary committee executive committee finance committee examination committee like you have examination board rate who will announce exam dates valuation that and all will be in the in the scope of examination now we have another committee we have non-standing committees you see these are the non-standing Committees have you heard of Accounting Standards Board auditing Standards Board these are all non-standing Committees of ICA what are they non standing committees accounting standard board audit committee auditing and Assurance standard board by the way audit Committee of I say this is in companies we should have audit committee section 177 there is a section in companies also we should have audit committee not this this and that is not say that is for every entity will have their own audit committee this is IC audit committee getting it you know Board of studies you know so many committees were there a ethical standards board ethical standards board is the one which is giving the entire code of ethics chapter whatever content that we are reading no this is actually developed by whom ethical standards board has given this content able to understand that's it next so what are the principles of fundament what are the fundamental principles of Ethics you know to my shock this one asked us five marks question in CF final May 23 Exam May 23 exam this was asked for five marks question nobody has expected this fundamental principles so what are the fundamental principles Integrity I'm not reading inside dep because we have lot to discuss tough points and all I'll cover these are easy points yes or no integrity means what straightforwardness yes or no we have to be honest we should not uh you know like uh dilute our uh you know like discipline and all for the sake of any sort of Pleasures or pressures which company is providing us objectivity we should work unbiased our work approach should be unbiased he belongs to my city he belongs to my religion he belongs to my cast he belongs to my my no nothing that kind of bias should not be there when we are working yes or no and most important maintaining your competence is your fundamental moral responsibility you have to be highly competent you must be knowledgeable yes or no and competence is a moral responsibility for every profession can a doctor say I did not study that chapter obviously now able to understand so it's your moral responsibility to be competent in all all the areas that you are dealing with you care you have to exercise care yes or no you have to be very careful while you have to be very diligent careful you know so you have to exercise that that is your fundamental responsibility remember these fundamental principles are common in every profession not just at accountancy in every profession all these five points you can apply to even doctors also you can apply to even lawyers also confidentiality you know there was a time even now so same same fir is acting as auditor for big big companies of same industry why are they appointing Auditors so confidently even though they're Auditors for our big competitor they know Auditors maintain confidentiality getting it doctor has to maintain confidentiality lawyers has to maintain confidentiality everywhere so professional Behavior our Behavior with the clients customers patients it should be very professional getting it we should not behave in such a way that bring disrepute to the profession able to understand then another important ethical rule is what Independence Independence is another important ethical principle Independence means what independence of Mind independence of appearance independence of mind that is nothing but talking about state of mind that permits provision of an opinion without affected by influences without others influence you should give your opinion you should provide the opinion provision of opinion means what providing the opinion allowing an individual to act with Integrity exercise unbiasedly and maintain that carefulness alertness getting it skepticism skepticism isans nothing but alert being alert the moment you say something something suspicious you have to immediately point out Independence in appearance the avoidance of facts and circumstances that are so significant that a reasonable and informed third party would reasonably concludes forums or members team Integrity had been compromised nothing but when a third person sees us when a third person who do not have any interaction with us by by providing the information given by us if at all he feels that my Independence is compromised then independence of appearance is not there for example suppose I am the auditor of a company or my soulle proprietary cons Soul proprietary for audit example so there is a soul proprietor so he wants his books of accounts to be audited I gave an audit report and that fellow took the audit report financials to a bank bank asked sir audit and all completed yes sir sir look at this audit report who who is this auditor sir sir he is my own brother now tell me a third party informed third party they use it word informed means the third party has l knowledge getting it sir if your brother and all audited how can we rely upon this is what the reply yes or no so informed third party who has knowledge of these things getting it if at all he feels that no sir this report I I will not believe why because the third party feels in his mind Independence of the auditor has compromised because of the relationship that he has with the client yes or no next independen is not only exist in fact yes okay you are not related but should also exist in all reasonable persons it should be existing inside the person also so it's not just a fact we both are not related that doesn't mean I may act independently there's no necessity right client can client can bribe me intimidation threat yes or no all he he he say me like this if you do not work like this I will not I'll not reappoint you as an auditor for next year and I'm a new beginner for the industry I'm a new practicing professional fees is very important to me to survive because of these reasons many CS are compromising on Independence and that is why it sort of bringing disrepute to the profession next as a statutory auditor of listed entity ched accountants should would cease to perform any usual function if at all any persons who rely upon the accounts do not have any faith in the independence and integrity of the chartered accountant so if at all the auditor of a company no if at all people do not have trust on the independence and integrity the purpose the very basic purpose of audit itself is gone Independence is dependent on state of mind and character as well and it is very subjective matter one person might be independent in some circumstance in another different circumstance he may not act independently therefore every chartered accountant has to decide whether he can act independently in the given circumstances of a case only then accept the work if at all a client approaches you to do some audit or review or some other work and their independence is utmost important in that work to perform if you know that in this particular client I cannot do the work independently I cannot exercise the rules and regulations as per the guidelines given to me don't accept that work if at all you can Safeguard it you can protect from these threats if at all you can establish safeguards so that your Independence will not be affected much then you can accept the work again so what are the threats okay fine Independence affected Independence affected we are discussing how Independence affect Independence is affected broadly by five reasons one self-interest threat because I'm having ownership in the company because I'm having ownership in the company example I am having interest in the entity through that I'm getting threat to my Independence I will be hesitant to comment anything negatively on the company because it affects my owners ship valuation able to understand so that's a self-interest threat it occurs when auditing firm or a partner is benefiting from a financial interest in client like direct financial interest or we have given a loan to the client or we have dependent on the fees given by the client so much close business relationship potential employment opportunity client promised me tomorrow or next year he will give me from few more Works where I will get few more fees contingent fees you know a c is prohibited to accept fees on contingent basis can I accept audit fees as a percentage of turnover prohibited it's a violation Clause number nine getting it of professional ethics 9 or 11 or some Clauses there okay part one Clause number 9 or 11 of schedule one self revie threat this is another threat self- review means what suppose no very recently I resigned from a company example okay in that company I'm a finance director I am the one who designed all the financial controls and all I am the one who has designed and choose an accounting policies I decided the accounting estimates I have given all the guidelines to prepare books of accounts and financial statements now I resigned I took up cop again I'm a chartered accountant actually and I took up cop again the same compan is asking why can't you come you know very well about this company you can do better audit you're anyhow independent you're anyhow unrelated to this company in any way but I am the one who designed all this I am the one who involved in preparation of financial statements how can I come and do verify maker and Checker should be different yes or no that's called self review threat so which occurs when in a review of any judgment reached in a previous audit or non- audit Engagement review of any judgment reached in previous non-audit engagement earlier I am the one who chosen that accounting estimates that judgment is taken by me now you are coming and asking me to review it now you are coming and asking me to audit it able to understand so recently you are a director or senior officer of the company and you are now coming as an auditor and an auditor perform services that are themselves subject matter of audit suppose company is asking me to do GST reconciliation through a compilation work agreed upon procedure I did that as per the Bas of the company information now they're asking me to audit also not possible Right self review non audit engagement means what here they have used the word non- audit engagement right so what is a non- audit engagement this itself can be asked as a you know true or false statement true or false statement they may give you like this uh what is a non-audit engagement and write about self-review threat write about a self-review threat and also Define non audit engagement you have to write this entire this B Point non audit engagement means what any Professional Services to an entity other than audit other than review these includes Management Services internal audit investment advisory design and implementation of financials you know 144 section Services all they are all non- audit Services we call them as what non- audit Services whereas in companies act we call them as prohibited Services remember yes now there is another threat advocacy threat suppose I'm acting as an auditor of The Entity the same entity is giving me a court case because I'm also having you know LLB okay or my partner is a lawyer practicing lawyer let us assume getting it the firm gave me that work like the company for whom where I'm acting as an auditor they gave me a case to defend against the company actually company is only fault but we have to defend the company in the court of law now you see am I supporting my client's opinion yes or no where there is no validity so indirectly my ethics my Independence might also be compromised when you are promoting a client's opinion to a point where people believe objectivity is compromised whatever client says you are acknowledging you are accepting when Auditors deals with shares of the audited entity or you are coming you are coming to know that you you are becoming the client advocate in litigation or third party disputes you're only becoming the client's Advocate actually you're the auditor you're only becoming Advocate that's called advocacy threat next familiarity familiarity threat comes there are some companies very recently my one of my friend have told he he went to us for CP he for pursuing CPA so in one cpf form no that firm is auditor for one US company for more than 45 years more than 45 years in Chennai itself I know certain forms who are auditor for more than 25 years for the same company that to private limited company private limited company means what three directors will be there out of them only one director will be doing the business he himself is a sh remaining two directors are his wife and mother who will not do business at all why three shareholders astrologer told them yes or no so this fellow is the only one who actually do the entire he entire business everything and now that director is my friend example or maybe not friend we become very close friends because of the 25 years of association yes or no so they appointed me every day he'll call me every day he'll talk to me at least for 10 to 15 times getting it everything every move whatever the move he's going today intimate me example now tell me have we developed certain bonding or not one year itself is enough to develop such a bonding yes or no now 25 years we are the Auditors you know all my relatives and friends I know all his relatives and friends tell me tomorrow if at all if something went wrong in the company if I have to qualify if I have to give an adverse opinion obviously can I give will I be in a position to give an adverse opinion because of the bonding that I have because of the sympathy that has been created between us no you see these are self-evident and occur when Auditors form relationship with the client where they end up being too sympathetic to the client's interest getting it so whatever client's interest is it that becomes matter for you that is called familiarity thread because of the familiarity that you have with him the threat has been created example one of the examples close relative of an audit team working in the senior position of the company suppose I'm carrying my audit team now in that my manager is who is a CA getting he is his relative is director of the company former partner of the audit form is a director now or else my earlier partner himself is a director because we are already having familiarity familiarity means having familiarity with the management who are having familiarity with the management either you or team member next long association between Auditors and the client long Association from so long you both are acting see that is why to overcome familiarity threat only rotation of Auditors has been introduced tell the Point rotation of Auditors is very specific in India it's not popular in the world it's very specific in India so rotation of Auditors what what is said in case of non-government company an individual cannot act as an auditor for more than one term of five consecutive years partnership fir cannot act as more than two terms of five consecutive years then after they must have a break of five years why familiarity threat protection then intimidation threat remember any of these can be asked as a question don't think write about five types of threats no they will not ask like this they'll ask a specific thre they'll ask you they expect from you to give examples sometimes know they give examples and they'll ask you they'll give this first line example close relative of an audit team working in a senior position of a company what threat is this self-interest threat no I don't have any interest in the company self- review threat no it is not talking about the work which I'm doing advocacy no is it talking about intimidation intimidation means what either benefit or getting it so intimidation blackmailing or bribing that is intimidation here they're saying okay my relative is working so what is this threat we both are having close connection so my Independence might affect because of the close connection means familiarity H you need to you need to select the answer familiarity threat they'll give an example they'll ask you which threat it is or they'll give you which of the following is an example of advocacy threat they'll give you which of the following is not an example of self-interest threat able to understand how many ways they can ask next intimidation intimidation means Auditors are deterred from acting objectively so you are you are you will not be cooperated well by the client so so that you can act unbiased because of threat of replacement so some some Auditors know because if at all they disagree with the client they will be replaced so for that reason they will not disagree with the client's judgments even though the judgment is not correct in that particular circumstance client has chosen some lower accounting estimate for an asset where depreciation amount calculated is very high getting it or he has chosen a higher accounting estimate where depreciation was calculated very low actually right amount of depreciation is not that depreciation is understated profit is overstated but I cannot disagree with the client because he'll replace me if I disagree with him then such threats attempts to intimidate the auditor to deter them from acting objectively able to understand understand then so we have to safeguard so we have threats right in order to avoid these threats in order to overcome these threats we have to put safeguards so safeguards means what like if at all uh generally safeguards means suppose no if you know in one of my audit engagement team in one of my audit engagement team actually engagement team means for for a particular client me my manager my senior article and Junior article some of us as a team we will go and perform the audit right the entire team is called as what engagement team for this entire team who is mainly responsible engagement partner we call him as what engagement partner suppose I know that one of my team members relative is a director in the company familiarity threat is there what should I do I should remove him from the engagement this is a safeguard what is this activi is called as Safeguard or if suppose no if removing from removing that fellow from the team is not possible are already team is completely occupied every other team now changing the team is not possible then give him Works in such a way that where which are not connected with the finance director able to understand so these kinds of safeguards I should Implement to reduce the independence threat to reduce the threat to an acceptable level suppose if safeguards cannot be implemented you know that the threat will exist for sure you cannot implement the Safeguard you cannot over over come that issue withdraw from the engagement what is it withdraw from the engagement if if auditor is unable to fully Implement proper safeguards credible and adequate safeguards he must not accept the work you know before we accept the work itself we have to check all this you know we have a question in Sea 220 accepting and continuation of client relationship acceptance and continuation of client relationship in in that one of the point which auditor has to consider is ethical requirements including Independence that two in case of listed company you need to specifically focus on Independence whether Independence is affected or not then only give your acceptance able to understand we have that essay 220 later there I will discuss more then what is skepticism skepticism is an attitude understand it is not something that we consciously do getting it suppose know if you went for audit you went for audit you you are observing the things you're observing the things in the warehouse no there are no CCTV cameras nothing immediately you should be alert why CCTV cameras were not there getting almost today in every business organization cameras are very important that to the compan is dealing with Goods of such nature which can be easily stolen and you're not implementing CCTV cameras it's a control weakness it's a very big threat for the theft possibility getting the point High theft possibility is there now if you're not alert if you're carelessly looking at the warehouse will you identify this so you have to be alert whenever you are going and working you should be alert in that context getting it so skepticism means skepticism means being alert professional skepticism means alert to the falling like alerted to what conditions that indicate possible fraud conditions that indicate get possible fraud example right now I told you theft theft is a misappropriation of asset fraud means fraud is of two types in the context of audit fraudulent financial reporting misappropriation of a two types of frauds we have one accounting fraud two asset related fraud when do we find circumstances of fraud only when we are alert only when we are careful only when we are skeptical questioning mind able to understand and requirement of additional proed so you should always be alert whether any additional work you have to do yes or no so that you can find some mistakes and all information that brings into the question reliability of documents and responses when when you ask any question no they will reply will you just listen and leave it or you have to interpret the reply you have to interpret the reply and then take appropriate action that is called skepticism and evidence that contradicts with other audit evidence suppose director gave me an information that sir we are having approximately 1 CR worth of inventory in the goone when I went to the goone and when I'm interacting with the storekeeper when I when I looked at the inventory record I came to know that the inventory value is just 45 lakhs now what director told me what is there in the inventory both the eviden is contradicting each other when there is a contradiction like that will you ignore or will you be alert will you become more alert you will do additional procedure yes or no which is correct direct told 1 this year is 45 which is correct we should you must investigate for the right that's it so skepticism is necessary to reduce overlooking to reduce over generalizing to reduce inappropriate decision making understood or not you will take decisions rightly if you're alert that's it now by the way tell me can you sus can you suspect the client rights from the day one and then do audit with that objective no no we never we believe the client in fact they are the one who prepared entire books and financials we have to trust them we don't have another alternative but if something suspicious you found alert that is what skepticism says don't doubt getting the point don't do the work with a doubt in your mind able to understand by the way they're using the word professional skepticism right use it in the context of profession only supp director is introducing his family member she's my wife don't be skeptical there okay yes next so clear all of you ethics related part mostly I covered wherever trickiest portion is there I have covered fine so just two minutes we'll take and then continue terms of Engagement we'll finish that and then take a break okay just relax 2 minutes yes let's continue the part two discussion so here in this we are discussing about 210 standard actually SE 210 heading is agreeing the terms of audit engagement okay now see this standard mainly deals with these situations when you can accept an audit okay if what conditions present you can accept an audit two before accepting the audit have Clarity regarding the terms of the engagement and having Clarity alone is not sufficient make it documented getting it make it in the form of written agreement getting it so that's called engagement letter so get an acknowledgement from the management of the entity that they accept their responsibilities regarding that mainly the standard is dealing with now like why the standard is so important of course in exams it is important and even in reality it is important many fors are not doing this many firms they are not doing all this you know standards I'll show you one uh there is a quality review board report I'll show you one quality review board report qrb what is this qrb and all I'll briefly give you an idea here so this is the latest report available which is given on 9th November 2023 okay so this quality review board is nothing but they are the one like you become once a CA you practice right your firm will be selected by quality review board they will check how qualitatively you are doing the audit getting it are you doing the audit properly are you complying with standards and auditing or not they will do all that checking and all so this report will be in both the languages so he highlights 15 15 page earlier we have in CA final quality review chapter now it is not there but just I'm showing you how many firms have uh you know violated many things you see when they reviewed right when they reviewed right some clients they reviewed and related audit workings also they reviewed related audit workings also they reviewed you see here yes is this visible out of the fs no they reviewed whatever FS they selected whatever specific audit assignments they selected right 30% of the firms they are not following sqc 1 see 30% of the FMS are not following sqc 1 4% of the FMS are not following se210 documentation is not proper for 16% of the firms which are reviewed by the quality review board getting it 14% of the firms they are not doing external confirmation okay like this they do this analysis on every standard how many percentage of audit firms are not complying with respective standards okay once you qualify once you started a practice once you sign the audit report don't think your duty ends there their review Duty starts Fe review is there quality review is there NFR review is there getting it three reviews were there NF will do for listed entity audits NF will give annual reports like this this is quality review board annual report NF also gives annual report in that they clearly mention what actions they have taken on various CS every year they'll mention that getting it so be careful in uh you know whenever you're doing practice be careful understand first the problem with many when when they're doing in practice is they also like they never studied audit only now actually we are discussing audit in true sense okay once upon a time when we were studying we don't have nobody will teach us audit properly they just plainly read turn the pages and proceed further they also don't know we also don't know okay but at least you are happy that I'm there to teach you very clearly things and all getting it earlier we don't have earlier audit enough five days we study go right exam will qualify now it is not it is not possible now it is 10 days required at least at least 10 full days for audit only at least 10 full days if you study audit there is a chance that you will secure 55 plus for sure so what is this terms of engage mainly why this this is very important see company the client let's assume the client or company whatever they are very good in only business they don't know about all the finance Commerce formalities and all when they when they appoint auditor they think that auditor only prepare books of accounts auditor only prepare financials auditor only you know file it return auditor only will file R return auditor only will pay income tax the clients will think like this so you need to tell them right hey man look you are asking me to do audit that to under companies Act is a stat audit and as per companies act stat audit my duty is only to do audit of the financials prepared by you and I need to give a report whether the financials prepared by you is it as for so and so applicable financial reporting framework or not that is what my duty so applicable financial reporting framework means in the view of the nature of entity object of the financials whatever rules and regulations for preparing financials they follow is applicable financial reporting framework so a company is a listed company or so a company is a private limited company they have for them schedule 3 is applicable normal accounting standards are applicable they have to prepare financial statements as per schedule three and accounting standards should be true and Fair View this is whose responsibility management I am only responsible for conducting audit of these financial statements and supporting books of accounts and give an opinion through a report I should clearly communicate them what is my responsibility what is there what is included in scope of audit and you know some clients know they think auditor we appointed he will discover each and every fraud look I am not responsible to detect a fraud my duty is not a duty of a detective or investigation I do audit as part of audit I no doubt do risk assessment I do try to identify where things can go wrong I will do that but there is no guarantee that all frauds will will be discovered by us all errors will be discovered by us even after we have conducted the audit still some material misstatements might exist correct which are not detected by us undetected misstatements we should tell the all these things at the beginning itself to the client right otherwise client will misunderstand that everything you are discovering everything you will find you will set right everything look I'm not here for seating everything I'm here to give my opinion that's it you how do you commun communicate all this through engagement letter how do you communicate through engagement letter just a minute so let's come to engagement letter once and we'll see the engagement letter so 73 page so there is an engagement letter which I have which I have given here so engagement letter now tell me who will give engagement letter to whom auditor will give to the client see this is very common sense point in any industry in any industry who will dictate terms and conditions seller or service provider contrarily buyer or service receiver who will dictate the terms and conditions obviously seller yes or no what are the terms and conditions to be followed when you are traveling in metro rail will you decide or Metro Authority will decide Metro Authority will decide yes or no so same in the bus also whether you when you are doing an on online transaction they're asking agree terms and conditions who are asking are you designing and then giving them or they are designing and giving you ah service providers are the one who will Design see as a service receiver or a customer you don't know what are all possible things that can happen service provider know because he's dealing with various customers he know what each and every customer thinks of so what they are providing exactly what you are getting exactly who should tell you service provider in an audit who is service provider auditor or the client so who should give the engagement letter terms and conditions auditor that's it okay so engagement letter is one which is given by auditor and sent to the client what client has to do he has to read agree to everything sign it and then send back it to the auditor and what you have to do document it save it able to understand so what we will give an engagement letter so what we will mention in the engagement letter look you have have requested that we audit we never beg no yes or no client requested us to do audit reality forget but you requested us to do audit getting it of what balance sheet BNL cash flow all that we are pleased to confirm our acceptance and our understanding of this audit what is meant by audit by means of this letter through this letter I'm able I'm explaining you what is audit look uh the responsibilities we will do audit as per standards indirectly if at all client ask sir what will you do in audit we will do audit as per standards what are standards attend my audit class yes or no so in that we do identify risk we obtain controls we we we check accounting policies we check uh you know going concern basis we evaluate presentation structure content of the financial so much we will do yes or no and also we are informing because of inherent limitations some mistakes we may not identify able to understand you're able to see that in the books okay so and now you see here our audit here our audit will be conducted on the basis that on the basis that mean premise assumption I do audit on an assumption that management understand that they have the following responsibility management should have the knowledge of the following what for preparation of financials that give true and fair for internal controls man man agement decide so that financials are free from misstatements not only that who should give information to us about everything about the company management only to provide us access at all times to information additional information we ask for unrestricted access to people within the entity if I want to talk to production manager you should allow me if I want to talk to so and so person you should allow me why you want to talk to production sir you're dealing with accounts only now look as part of risk assessment I want to know what what is happening in the company how the business is being managed how the FES are managed so I have right to talk to anybody in fact under 143 companies act rights of auditor one right is access to information another right is access to any person so that I can talk to them and get information whatever I want yes or no so whatever our rights are their right they management duties their management responsibilities this is what you will get in preconditions to audit this entire information is what preconditions to audit precondition means what if this condition is accepted by you before the audit then only I will start the audit able to understand now let's go back to this engagement letter discussion by the way right now you saw engagement letter right one second once again just uh now you saw engagement letter right finally our fees how much is our fees see engagement letter no it is not compulsory to mention fees fees can be without you need not mention in the engagement most of the Auditors how they will mention no fees as we discussed over phone conversation or as we discussed in the meeting otherwise now fees details and all engagement and all articles will have access now immediately he'll be start calculating how much my partner is getting how much he's giving me yes or no yes reporting finally so how we will report also we have to inform the client look we give audit report as per so and so standard if everything seems fine we give unmodified opinion if at all anything contrary appears we have to modify our opinion how we will modify our opinion as per so standard we just briefly mention that finally we will send please sign and return the attached copy of this letter to indicate your acknowledgement and agreement with arrangements for our audit of financials so our farm name signature everything and uh actually yeah sorry so our farm name and signature here below here here director director will sign it the respective person I think below I think that point is missing okay so here director will sign and send it back okay acknowledged for and on behalf of directors board of directors somebody will sign it and then send it back to us at the beginning of the audit we should get this engagement letter then there is another letter called Britain representation what is it written representation sea 580 there once again I will connect with this engagement letter in engagement letter we will ask management you are responsible for this accept your responsibility whereas in written representation we ask a letter that you fulfilled the responsibility here in engagement letter we will ask acknowledgement for accepting the responsibility whereas in written representation we will get a letter where management will have to say they fulfilled their responsibility able to understand now we have just a minute now we have seen the engagement letter right uh so what are the contents of engagement letter right now based on the letter that we have seen in the engagement letter what we have mentioned just a minute I'll show you directly the content what are the contents of engagement letter we first told what is our objective of audit and scope of audit yes or no we also spoke about responsibilities of auditor correct we showed we just saw we we spoke about responsibilities of management in that we spoke about applicable financial reporting framework then we spoke about expected form and content of any report to be issued by the auditor and a statement that there may be circumstances the report May differ from original form and content if at all I have to give modified opinion the form will be different so these are the contents of engagement letter they'll give you a question what is an engagement letter what are the contents of engagement letter four marks question they'll give you able to understand next obviously engagement letter must be in writing it must be reduced to writing and should exactly specify the scope of work we clearly mentioned you have requested us to do audit of financial statements comprising balance sheet pnl cash flow notes w why we are mentioning so clearly we could have just mentioned audit of financials now why why are mentioning cash flow statement everything clearly so that no confusion getting it I am not here to review your annual report I am not doing your board of directors report I am not here to check your management analysis report audit committee report I'm only here to report on balance sheet pendl cash flow statement of changes and Equity notes to accounts clear next and tell me where it is most important engagement of stat auditor non-stat auditor we think like stat audit generally nonstatutory audit is most important in stat audit no company law itself clearly gave management is responsible for preparation of books management is responsible for so and so auditor is responsible only to audit he should not do prepare books of accounts companies act clearly mentioned so even if management is not aware of it tomorrow if they blame you you can show open the company's act section and show in stat audit ignorance of law not excuse whereas a non-stat audit sole proprietor voluntarily appointed me partnership from volunt appointed me they should not they will not have the knowledge right if at all tomorrow they blame me how will I prove them there is no statute to support me yes or no so in nonstatutory audit very very important is engagement letter course now whenever we do any we whenever we accept any engagement in reality we of course give engagement letter in every context even if at all you are accepting compilation engagement even when you're accepting agreed upon procedure engagement even if a client approaches you just for filing it return prepare engagement letter and give tell him these are the terms and conditions do work in corporate style yes or no do every activity in a particular style client I sir first give me documents file the no don't do that get it so have formal approach with each and every client even if the client is paying thousand rupees fees only still have a formal approach with the client able to understand you see when I announce this class no in the class itself I'll clearly mention video itself I'll upload it on YouTube and all yes or no so that tomorrow if I directly take this and then upload no you will you will ask me definitely sir we paid fees and then came you uploaded free of cost on the YouTube yes or no will you or not obviously some of you at least will question me if I tell at the beginning itself everything how much I'll cover what I'll not cover what I will do after this I will do recording everything clearly you accepted all that and then only came this yes or no so we have to be very clear tomorrow if any student I'll share this video directly okay look at I confirmed preconditions to this class already exist next so audit engagement letter is a letter sent by auditor to client it is interest of the both parties to reduce possibility of misunderstanding about terms and conditions next what are preconditions to audit the auditor know he shall he shall decide whether financial reporting framework is act acceptable you know whatever the company suppose a company appointed you as an auditor and they are not preparing financials as per schedule 3 when I ask them sir are you following schedule 3 no sir we are not following We are following something else schedule 3 we are not following getting it how far the other framework which they are following is acceptable suppose a company specifically appointed me for auditing on January 1st to December 31 financials special purpose financials there and they are prepared as per IFRS why the they prepared as for IFRS they have to give it to foreign holding company there is a foreign holding company which is there outside India foreign holding company has to do consolidation for consolidation purpose this is Indian subsidary they have to prepare financials from JN to December actually they prepare from April to March so this company prepared against separate financials JN to December special purpose now now for this special purpose financials appointed me as an auditor now whether the special purpose financials framework they followed right IFRS is it valid look at the holding company requirement why why they are preparing the financials because of the holding company requirement holding company requires the subsid company to give financials for JN to December based on IFRS and here the company followed the same the financial reporting framework which they are following is acceptable in the circumstance able to understand and obtain the agreement of management obtain agreement of the management get their consent get their written acknowledgement for preparation of financials for internal control so that Financial are free from mistakes to provide auditor with access to all information additional information unrestricted access to persons within the entity from whom auditor can get valuable information get their acknowledgement only if management agree to all this yes or no then only start doing the audit they should give all information relevant for audit they should give you know we will get a written representation also at the end of the audit once we are completing the audit before I sign the audit report I will get a written Information Management I am innocent you provided me every information that I want in audit please acknowledge it tomorrow if some fraud happened if everybody's asking me sir have you why have you not verified I asked management sir but they did not give management they went and asked sir did auditor sir he never contacted he never consulted us sir he'll come and do audit blindly give audit report and went suppose if you have a written representation see sir I already got this written representation management specifically told me that they gave me all the information on this Reliance of course I did my due deligence all that I carefully try to retrieve all the data wherever possible I got evidences wherever possible in spite of this management is hiding some information what can I do and they misleaded me with the written declaration also you can be safeguarded yes or no suppose if preconditions are not present if management is not ready to accept the accept the responsibility getting it what auditor will do discuss with them discuss with them and unless required by law you should not accept the engagement if free conditions are not there don't accept the engagement unless it is mandatory to accept in India there is no such law that mandates okay if the auditor decides that financial reporting framework is unacceptable don't accept that audit or if agreement of management is not obtained regarding the responsibility on Preparation providing access to information or restrict unrestricted access to persons if management is not agreeing don't accept they'll ask you this itself this itself as a four marks question only third Point itself as a four marks question getting it they'll give you a question like this you were requested to do audit of so and entity as part of the audit you are establishing terms of the engagement management financial reporting framework what they followed is unacceptable what what is your decision in this regard you need to write if preconditions to audit is not present that is if the financial reporting framework is unacceptable or if management is not agreeing to preparation of Financial State as per applicable framework or uh designing and implementing controls so that the financials are free for misstatements or to provide information to the auditor or unrestricted access to the persons if management is not agreeing I will not accept that engagement unless mandatory under law easy or not now in the given case so and so situation so and so company Financial recoring framework is not acceptable therefore auditor shall discuss with the management and accordingly do not accept the engagement suppose initially they gave agreement they agreed everything they gave pre preconditions to audit and all they showed as if everything is present they accepted everything after accepting the audit there is a limitation now what will you do after you accept the audit now they're putting restrictions on evidences and all now they're limiting your work now they're not providing information what will you do then request them to remove the limitation if management is not removing the limitation communicate it with those charged with governance audit committee top management if they're also not supporting properly you understood that management is no more cooperating you withdraw from the engagement you have a right of resignation right resign some sometimes no resignation is not possible sometimes like in case of listed companies auditor just like that cannot resign getting it you cannot resign just like that you have to resign after certain number of days they have given some criteria listing obligation disclosure requirement what is it called as listing obligation disclosure lodr regulations we call them as what are They Se lodr regulations as per that you can't withdraw just like that there are some formalities that you have to fulfill suppose no if you give three quarters review report if you have given three quarters review report you have to give fourth quarter review report you have to give annual audit report you can't withdraw suppose I can't with management is not giving me information how can I do audit don't do audit mention that disclaim the opinion you can give audit report and disclaim if disclaimer of opinion situation arise now don't directly first withdraw if possibility is there resign don't give disclaimer if with the trial is not possible then give disclaimer of opinion able to understand next suppose before you accept audit itself management is talking about so many limitations sir you should not talk to our lawyers sir you should not talk to S of people sir only if you are okay with this please continue the audit limitation prior to accepting the the engagement if at all before accepting the engagement management is limiting my work and I feel these limitations will make me to give disclaimer of opinion don't accept that engagement don't accept it that's what this entire matter clear next then first point first question is very simple that you see now in exam no what are the responsibilities of management the answer is I told you for preparation of financials for internal controls to provide information what is premise to same answer what are preconditions to a it same answer getting it now let's look at this engagement letter should we send engagement letter in every year like suppose non-government company they appointed me for five years okay first year I gave engagement letter every year should I give engagement letter in reality know we are giving every year just to avoid confusion okay but technically as per the standard is it compulsory in case of recurring audit every year engagement is not required engagement letter unless there are change in terms and conditions getting it unless there is a change in terms revised terms or change in the law suppose if the law says you have to give every year then or a change in applicable framework in the engagement letter I will mention about schedule three part two and all now this company is listed now this year last year was unlisted part two applicable now this company is listed part one in Old engagement letter I mentioned that manage agement is responsible for preparing Financial s for schedule 3 part two now I should revise now so I should give engagement letter newly then there is a change in audit reporting requirement until Financial year 1718 until Financial year 1718 audit report format is different from Financial year 1819 onwards audit report format is different so when Financial year 1819 started now all the Auditors have given once again engagement letter because auditing standards have been revised then then changes in top management last time when I gave engagement letter so and so directors were there now entire directors have been changed they are new to the complete this profession they don't know anything I will give and when there is a change in nature of the business size of the business in generally whenever business has been changed enough we don't give much unless company name changes if company name changes in the old letter we included old name so in the new letter we should include new name that's it now suppose I gave engagement letter suppose I gave an engagement letter uh now the company know certain terms and conditions they want to change like suppose in that no one of the point what I told management is responsible to provide me unrestricted access to persons within the entity I told them you should give me access to all the people I should I can talk to anybody management no without signing first they called me sir there is a condition that you have access to fine sir we are okay but we have external legal council there are some cases which they are dealing against the company in Supreme Court they are quite busy sir they will not cooperate getting it so to that extent I will modify the engagement letter sir now what suppose if management requested me to change the term like this first what I will do I will I will just inquire why are you asking like have you did the specifically informed you I'll ask them they showed the mail also the lawyers external lawyers they gave a mail we will not interact unless on the case matter with anybody only on the case matter that to with so and so CEO only we will interact with nobody else we will interact they sent a specific mail to the company also because the senior lawyers in supreme court they'll be very busy getting it if you want to get a confirmation from them and all they can't sit and Zoo fine is it acceptable practice in Industry I will see in every company also senior lawyers will not communicate with anybody that's an acceptable practice now here management is asking me to modify the term to this extent right is this genuine or not in this case justification is there or not yes then I will accept changes in terms suppose if this is not practicable in reality if this is not accepted practice anywhere for this company why the special condition maybe company only asked them to send a mail like this to the company again to the lawyers so that Auditors will not interfere with the lawyer so that auditor will not get to know about pending litigations and claims against the company if I find any MiFi intention if the changes in terms requested is not justifiable I will not accept suppose no I am not accepting to change terms management is not ready to change the terms I mean management is not ready to accept the original terms they are not cooperating me to do audit I got to know what should I do with draw from the engagement what withdraw from the engagement able to understand that's s so why a changes in terms might arise because circumstances might change or management or auditor misunderstood the original terms a restriction on the scope of engagement by management or by circumstances getting it see restriction on scope by manage in this case lawyers no suppose lawyers sent management is not restricting me lawyer only saying circumstances restricting me getting it now if there is a reasonable justification auditor will accept it when auditor accept new terms now shall we modify the old engagement letter or shall we give a new letter which is better let us give new letter so so the report would be appropriate auditor whatever with the modified CH modified revised terms he will give a new letter in the new letter can we talk about old letter again no need so the new report would not include reference to original getting it further they should record record everything on new engagement letter even in the audit report can I talk about this engagement letter issue and all no need suppose if there is no reasonable justification you should not accept the change suppose if you are not permitted to continue with original terms and you felt changing the terms is not correct you shall withdraw getting it and if you withdraw check whether you have any obligation either with the client contactually or otherwise under law whether your withdrawal has to be reported to anybody whenever you resign from the company you have to report to R ad3 form you have to fight getting it that's it so what auditor should consider before agreeing to change the terms before agreeing to change so suppose if a client ask you to change you know what points you will consider generally if the auditor is requested to change the agreement that conveys a lower level of assurance he must have reasonable justification there must be some reasonable justification so before agreeing to change auditor has to assess whether any legal implications because of this if the auditor concludes that there is a reasonable justification the work can be performed up to the date of change work required this is actually not required reasonable justification up to that is enough getting it if if the auditor concludes that there is a reasonable justification to change the audit engagement to review are related nothing but suppose if at all compan is asking me to reduce the work whatever I work I'm doing right I planned to do right they're asking me to reduce the worker in such a case if audit is not suitable I will suggest them sir let me do one thing I will not do audit I will do review because with the kind of terms and conditions you are keeping on audit is not possible because audit requires reasonable Assurance for for your requirements review is a correct engagement so I will recommend the client whether review or related service is suitable so in order to avoid the confusion to the reader the report on related Services suppose if at all we accepted related Services finally originally they came for audit they understood that I will not ready for them so finally sir at least you do one thing sir you sit and prepare financials and give so finally an audit engagement proposal turned into related service in that case I will give a engagement letter related to related Services where I will not talk about audit engagement any audit procedures I perform no because from audit I withdraw because it was not justifiable with the company withdrawn from audit and I accepted related services so can I talk about audit procedures and all which I performed in the related Services engagement letter no need even in the related Services final report or engagement letter I will not talk about the original engagement that's it entire part two is also over clear all of you there are so many new points remember I'm only covering 50 to 60% of each topic you have to sit and read again each and everything you said I am giving you a brief outline so that you can study in depth each and every point every line is important any line can be tested as true or false statement or McQ or any line can be directly picked and asked as a descriptive question don't deviate from this terminology or wordings getting it if you deviate from this material which is exactly of IC material standard you will it will be difficult for you to interpret the question paper getting it many students write answers though the answer is correct it is not for the question which is asked for getting it you writing correct answer but not for the question which is asked so you have to be very careful so you have to figure out exactly what they're asking only when you master in this terminology you can do the exam really well in preparation struggle a lot exam you write easy or two things easy the preparation struggle exam struggle qualifying able to understand I don't know how many of you are learning new points now getting it are you are learning new points listening properly especially the last yes okay take care so we'll take a break and get back so let's begin the next chapter that is audit report so in this audit report we are broadly discussing this in two parts though the weightage what they mention is 8 to 12 percentage there is a chance that 15 to 20 months will come from this chapter in the form of mcqs as well as true or false and descriptive all put together only from Caro four marks question is for sure only from Caro getting it so F anyhow all that we are going to discuss now including car all that uh we are going to discuss now uh so what what we are going to cover in this audit report what we are going to learn this chapter no audit report we are going to divide it into two parts part one we are going to discuss reporting standards reporting standards whereas part two we are going to discuss about reporting requirements what is it reporting requirements both are different reporting standards means nothing but we are going to discuss about auditing standards audit reporting standards technically speaking so where we are covering 700 701 705 76 710 and 570 and 299 these standards we are going to cover and whereas in reporting requirements we are going to cover Caro 143 subsection 3 143 subsection 1 all these reporting requirements apart from this we are also having Branch accounts and Branch audit discussion briefly it's not in-depth but we are having briefly the branch accounts and Branch audit discussion that's a this is is the syllabus that we have in audit report chapter now see what are the like audit report no it is of two types in the recently in the recent uh latest new skem material they brought a New Concept called types of audit reports actually opinions types we know but audit report itself is two types so they defined like this unmodified report audit report is of two types one is unmodified report another one is modified report another one is modified report unmodified report is a report which which is exactly matches with sea 700 format which is exactly matches with sa 700 like what is sa 700 instead standard heing forming an opinion and Reporting on financial statements that's actual standard heading now inside that audit report for format is given what are the contents of audit report so title addressing like that there is a format we will look into it if as it is the same format you give getting it where you are indirectly actually where you are expressing unqualified opinion that format is called as unmodified report format where you are actually expressing unmodified opinion which is also called as unqualified opinion look I am using the word unmodified report which is different from unmodified opinion suppose in Sea 700 format we are not following I mean I mean we are following but in addition to the elements of the audit report in sa 700 audit report has multiple Parts like title will be there opinion will be there basis for opinion like that some elements are there I will show you okay if at all we want to include some additional paragraphs in the audit report which means we are modifying ing the format given under sa 700 right whatever original sa 700 format we are not as it is giving it we are adding some additional points inside that audit report then since we are for modifying the format of audit report they are calling it as modified report but within this modified report your opinion can be again unmodified opinion only your opinion can be unmodified then why are you modifying the report when you are giving unmodified opinion because the original format of sea 700 do not talk about key audit sorry emphasis of matter per other matter PA all that don't worry I will slowly introduce water all that if at all you are giving unmodified opinion plus emphasis of matter paragraph or other matter paragraph getting it which is not there these two were not there in the original format of audit report now you added these two right which means original format is modified right so modified report but still your opinion is unmodified opinion only or if at all you giving modified opinion even then you since you are modifying the opinion that is also modified report only if at all you giving modified opinion that is also modified report for example either you give qualified opinion adverse opinion disclaimer of opinion or you are including going concern issue you are including going concern related paragraph material uncertainty related to going concern if you're adding the paragraph then also we call it as what audit report is modified able to understand so modified audit report doesn't mean modified opinion please be please make sure that modified audit report doesn't mean modified opinion like I'll show you that you know you know they have given here don't worry at the 75 introduction we gave this we gave the diagram this is newly added diagram actually you see here audit report audit report unmodified report means nothing but unmodified opinion no emphasis of matter no other matter nothing as it is same original audit report format is there right same as it is we showed to the client same unqualified opinion suppose you're adding emphasis of matter or other matter paragraph or even going concern paragraph then you are modifying the original format of audit report right so the report is modified modified audit report but still you are you might be giving which opinion unmodified opinion or you are giving modified opinion then also you are you are modifying the report so either qualified adverse or disclaimer whatever opin then also it's called as modified opinion and modified report understood these two new terms which were not there earlier actually there's no change in the original standard just that little more clearly they explained it earlier it was there as part of standard but it is specifically uh silent on this so standard is not explicitly talking about this point but they just gave little more clarity now are you clear now like like why this point I'll tell you if auditor is modifying the audit report format under sa700 he shall communicate with those charged with the governance we have seen this point actually earlier also we have in sa 76 when you want to include emphasis of matter paragraph you have to communicate with those charged with governance you want to include other matter paragraph communicate with TCW you want to include going concern communicate with tcwg whenever you want to modify the audit report format which is discussed under 700 you have to communicate with top management so whenever you are giving a modified report which contains unmodified or modified whatever opinion it might be but when you're not following the original format of 700 we call it as modified report communication with those charged with governance is compulsory remember it is communication not not permission getting it don't think that permission has to be obtain no we have to communicate sir we are modifying the report this is how we are going to modify these is the wordings that we are going to use tell me if you have any objection on these wordings if at all maybe from my point of view the wordings appears very good but from your point of view these wordings appears objective getting it so just give me your opinion if at all amicably we can resolve we can proceed further getting it that's what this modified modified report means clear now let's look at audit report contains first of all how to prepare this audit report in fact we are learning the subject entirely for why to prepare audit report correct the objective of learning the subject itself is completely to prepare audit report to give opinion okay now what are various types of opinions on what occasions we give various types of opinions straight away I will enter into now obviously any report that we are giving it must have a title the title must be since this is audit report that to whose auditor report stat auditor independent auditor so the title must be very clearly mentioning that independent auditor report in exam know they'll ask you write about title and addressy of audit report four marks question they'll ask you getting the point below we have given so what is title you need to write this matter addressy means you need to write this matter Define address in the audit report three marks question they'll ask you getting it so title independent Auditors report in case of review independent practice review report or independent Auditors review report getting it in case of agreed upon procedure independent sorry practitioners agreed upon procedures report getting it actually in compilation 44 engagement I told right related Services it's a non-assurance right is Independence required in case of non-insurance not that required why because we are not giving any Assurance now Assurance means what our report will be used by some third party and takes a decision based on on our opinion and conclusion there is non-assurance where are we giving opinion we are just preparing data and then giving so just a compilation so their independence may not be that required getting it fine so title so title of the audit report must be very clear independent Auditors report the title is same across all the countries getting it you can see here there is a Tesla Tesla is know this is United States report of independent registered public accounting form what they said report of registered independent public accounting form you know CPR right certified public accountant in India it is CA in us it is CPA parallel course certified public accountant we call them as registered public accounting form see first of all understand once we started practice right once you take up the practice like once you qualify you you apply for membership to the IC remember membership of I is not voluntary process once you qualify you have to you have to complete article ship form all that and then have to give it to the ICI you know all the requisite details so that you will get membership allotment membership number having that doesn't mean you are eligible to Pro practice you must again apply separately for cop certificate of practice only if certificate of practice is a practice means p c c not SE getting the point practice so C practice is nothing but a license it's nothing but a license to provide attestation services from the regulatory body called IC getting it so now you will apply cop now you applied cop in your name right now how do how can you represent yourself to the society by the way as a chartered accountant now will you work will you represent to the society individually on your name or as a partnership fir that's your choice suppose you know like in audit no FM means what f means partnership for no f means Enterprise f means establishment con entity organization form dictionary meaning means entity understand partnership form means the form is partnership are you getting the point even company is also called as a firm because it's an entity Right company is an entity Soul proprietary form have you seen this word have you heard this word Soul propriatary form means what it's an entity having only single proprietor single owner so it's a so proprietary form now once we practice when you're practicing no suppose you want to practice without any partnership as an individual you want to practice example you can practice in your membership with your membership number directly that's enough you can practice in your individual name you can sign in your name give membership number that's enough or you can get F registration number also you can get F registration number also GP kapadia and Co Chartered Accountants GP kardia is the first chartered accountant who founded the Institute getting the point who recommended to government of India and made an made a separate body for us GP capar and Co actually when he started his only single person propritor GP capar and Co is his far name is business name suppose myself Ramer CN cm is my entity both of us same it's my FM name I'm the owner for it able to understand GP kapar Eno is a FM name and he's the owner for it are you getting it now in that firm if another owner also join then it becomes partnership form able to understand so F can be either sole proprietary form partnership form or LLP able to understand so that is what f means so in India uh always once you qualify if at all you want to practice my sincere advice is immediately incorporate a firm apply to ICI for registration number whenever you are doing attestation no sign in the name of the form sign in the name of the form on behalf of the form you sign with membership number don't sign without firm name if you do not talk about F name don't sign it so have a f name so that your F will have experience if you directly practice on your name now what will happen you know if you directly practice on your name or if somebody some senior says practicing any name directly no for name he died his Goodwill also died suppose GP caparo he is no more but still the FM name is continued now you can sell that an Nash Goodwill to another ched accountant you can sell your farm name f name if you establish it will have experience getting it so whether the partner is having experience on it doesn't matter forgetting Central statutory audits of public sector Banks F experience is most important senior partner experience is also most important but F experience if it is not there you will not get main big big audits of big listed companies and all able to understand next so same The Heading will be similar to our Indian headings and there's another company called shell so okay fine I'll discuss later so this is the types of opinion now title title you understood right now addressing to whom we have to address generally it shall be addressed based on the circumstance if law regulation specifies then to them you address in company law they specified auditor 143 subsection 2 it talks about audit report auditor shall give audit report it should be addressed to shareholders of the entity they clearly mentioned it so when we are giving audit report for a company address is to members so normally it is addressed to whom the report is prepared either shareholders or top management of the entity in case of company it is addressed to shareholders three marks question they'll ask you like write about addressy in the context of audit report three marks question then then finally what we need to give you see without wasting shareholders time we are straight away entering into opinion section yeah straight away entering into opinion section what is our opinion that is what primarily our audit report is looked upon yes or no so what is our opinion and we all know that opinion is of two types opinion is of two types so auditor opinion is of two types now sading no we should keep like a opinion in the audit report actual audit report now we should keep sading like opinion I'll show you T Motors audit report this is the audit report you see title what they used independent Auditors report to address it to the members of the tataa motors now here they have added one more seding what is this report on audit of Standalone financials H see the entity whom you're auditing The Entity whom you are auditing the company where you auditing if that company has subsidiary companies we all know that that company has to prepare another set of financials that is Consolidated financials correct so an entity which has subsidiaries it has to prepare two sets of financials in that case one its own financials that's called Standalone financials or separate financials in across worldwide it is very popular what separate financial statements whereas in India we use the word Standalone financials along with this they should also give group picture Consolidated financials getting it individually tataa Motors is super profit entity but it has Jaguar Land Rover Range over subsidiary which is loss making now when my subsidiary when my children is loss making who will compensate the loss parent getting the point now as a parent individual I'm making profit as an investor if you only look at me you will be tempted to invest in me but look my entire profit whatever I'm getting no my child is eating away because of his losses so look at my Consolidated position we are actually loss making able to understand stand alone I am profit making but Consolidated loss making so for taking economic decisions for shareholders Consolidated picture is also very important where the funds the compan is profited profit oriented but where the funds are getting diverted that is very important so Consolidated financials give that family picture get the point we don't only look at the groom or bride we look at the family also right as it is so investing in a company is like a marriage getting it so you have to think longterm shortterm marriage and Company investment both will fail that's why Always Traders and all suffer loss because they're short-term oriented getting it next so when when now now when a company prepare two sets of financials now you should also give two audit reports right one audit report on Standalone financials another audit report on Consolidated financials now in this tataa motor annual report the report which I'm showing is annual report in this two audit reports were there which audit report is dealing with what so they highlighted this is a report on Standalone financials in Consolidated financials related audit report they mention report on Consolidated financials then straight away first thing is what opinion you know here simply they have used the word opinion they didn't mention anything which means unqualified opinion what does it mean unqualified opinion the Auditors of tataa motors have expressed unqualified opinion so now types of opinion unmodified opinion we know modified opinion now what is unmodified modified look we are doing what we are doing audit of financial statements who prepared them management prepared them as per what applicable financial reporting framework they have to prepare getting it suppose no I verified I checked the background data I checked bills documents supporting evidences everything all that I verified I felt the balance sheet pnl which company prepared is completely true and F fair by the way what is the difference between true and fair what the difference between true and fair very simple true talks about actual fact Fair talks about possibility of the fact able to understand for example I sold Goods to a customer for 100 crores some 15 20 customers I have to all of them together I sold for 100 crores credit sale so what is a fact I sold goods for 100 CR credit sale that's a truth that's a truth it's a fact getting it now I want to show in the balance sheet my asset as on 31st March is 100 CR you know what out of these 100 CR approximately some 10 CR worth of deos they were about to become insolvent there I will not collect the 10 CR money where I will not collect 10 CR fairly how much I can receive 90 CR yes or no now tell me in balance sheet if I only talk about true position people do not understand fairly how much in reality I realize yes or no moreover remember it's a current asset it is something that I immediately receive it in future yes or no so if I only talk about Tru truth in the balance sheet the purpose of fairness will be lost getting it you fairly tell people how much you have to receive it must be true and it must also be fair the fact of fair cannot be more than true generally in terms of monitary getting it so that's why you see dors true amount 1000 CR minus provision 10 CR fairly we can receive only 90 CR reasonably our position is 90 CR only not 100 CR 100 CR is truth but fairly logically technically how much I can collect 90 CR that's called true and Fair View able to understand so this definition you can apply in every context now so if the financial statements are presented true and fair everything everything has been followed accounting stands everything is followed does the financial statements require modification in the scenario suppose I verified everything everything is followed Accounting Standards everything fairly everything has been presented do they require any modification no when they don't require any modification I will also not modify my opinion that's why I'll give unmodified opinion able to understand when I say unmodified opinion indirectly I'm saying financials don't require modification financials don't require modification means what ah they are showing true and fair so that's it suppose so and so accounting standard company did not satisfy and because of that either in amount classification presentation disclosure some mistake is there in the balance sheet pendl notes which they are releasing to the public I politely requested management management there is a mistake in the balance sheet there's a mistake in the pnl there's a mistake in so and so notes kindly modify management agreed and they modified it they made sure that sir whatever you said we will do that and we want our balance sheet pnl to be true and fair they modified everything now after they modified everything do they require any modification again which opinion we will give unmodified only getting it suppose management is not ready sir it's already done Board of director andal approved the financials they all left for vacation now no more possibility we can't modify the financials and our in our history itself we never did that so okay you don't modify financials do one thing I'll modify my report able to understand so if financial statements requires modification but requires modification means what indirectly what are we saying they are containing misstatements correct if the financial statements requires modification but company is not modifying I will give which opinion modified opinion fine then I'll modify my report I will talk about that mistake in my report if you do not Rectify I will talk about that in my report there I will give modified opinion able to understand now modified opinion how when modified opinion arises here I'll tell you so how a question can come in exam here so so types of not this so under what circumstances a modification to the opinion is required this itself can be asked as a straight question in essay 75 91st page it is there generally I don't talk about page number because know the same book I will sometimes modify and then give where page numbers might change but the content is exactly same so that's why I not refer 75 under 75 part to be you see under what circumstances a modified opinion is required they'll ask you a stride four marks question when modification is required right now I told when the financial statements contains material misstatement not just normal mistake material normal if the immaterial mistake suppose a motar is having 65,000 CR turnover 11,000 CR fixed assets getting it now 65,000 CR turnover I found some one lakh worth of mistake is it material in that should I have to discuss about it no need getting the point so if there are no material if there are material mistakes then I will have to modify my opinion not only that like I I'll I'll give you some circumstances now suppose no tataa Motors tataa Motors you take here itself getting it everything is in CR so simple numbers I'll take okay simple numbers some thousand CR you know Revenue other income some you know 100 CR some expenses direct expenses and all 500 CR indirect expenses and all some 200 CR profit is some 300 CR getting it so maybe uh 400 CR getting it so balance sheet got Ted everything is fine obviously balance sheet tally because it's a double entry system double entry system means whatever you entry whatever entry you rate it will always tally okay because debit and credit amount equals right that's it so balance sheet talway means there's a question Once Upon a Time it used to be ask very frequently in CA inter audit balance sheet is stalled does it mean auditor need not do anything we have this in very old scheme before 2017 16 and all these kinds of questions used to come more Technical and logical questions will come financial statements everything are telling so auditor is saying since everything is Ted my duty is no more your duty is not to verify balance sheet valid or not arithmetical accuracy is not your duty alone of course arithmetical accuracy is important beyond that what is your duty genuinity of the transaction whether the information shown in the balance sheet is true and fair or not that is what your duty is fine now here there are no material misstatement everything is honestly presented clearly Revenue expense everything is clearly done no misstatement is there no modification is required which opinion I'll give unqualified opinion are you getting the point suppose you know there is a balance sheet there is a balance sheet some fixed asset is some 500 CR investment is some 200 CR current asset is some 300 CR th000 right side liability some liabilities as ignore that now in investment No 5 CR worth of land they purchased P worth of land a company has purchased this is actually purchased for con constructing a factory but when when it is construct when when a land is purchased for constructing Factory what it is supposed to be fixed asset but the company showed right now as investment that to they showed as long-term investment that to how they showed long-term investment they classified it us now tell me is this a mistake or not are they misleading by wrongly classifying or not now now rest everything fixed assets remaining 195 CR worth of investment remaining 300 CR worth of current assets amount classification everything is proper everything else is proper only this mistake is there tell me 5 CR in, CR no doubt a material item able to understand for a, CR company 5 CR is material but for a company which is of one lakh CR 5 CR may not be material remember you might have learned this materiality is a relative term what is material for one entity may not be material for other entity so 5 is no doubt a material misstatement in the form of classification they made a mistake in the form of classification now tell me which opinion you'll give I will say balance sheet is not true and fair don't believe don't invest in this company get cheated no right it's material but not pervasive but not pervasive pervasive means what ah significant impact on the company if there is a significant impact on the company then we call it as pervasive as a whole you getting misrepresentation as a whole the balance sheet is misleading or prandle is misleading then we call it as what pervasive let's look at the definition of pervasive at first and then we'll go further what is a pervasive it's a term used in the context of misstatements to describe effect on the financials of the misstatement what is the effect of misstatement on the financials as a whole so to describe that we use the word pervasive or pervasive can be in a case of possible effect when there are no misstatement because of when when there is when we are unable to obtain evidence sometimes no suppose no same example You Take 5 CR 5 CR worth of land is there getting it so I'm inquiring for ownership documents they are saying sir ownership documents we have to yet to receive from the register sir because that day closing time we went and signed all the documents but print out and all were not given printer is not working in the register office you know right how government works so all that reasons and all compan is telling okay March 31st print out is not working you can go on April 1st which is also working and collect so that time register on leave sir if now today the date is June 10th man I'm doing audit on June 10th year is over 3 now what about what is the reason then I want to go to the register office and then inquire the company is not letting me 5 CR worth of related land documents were not there ownership documents were not there now can I say company is gambling land is not owned by the company can I say that I don't know I don't know whether it's really owned by the company or not if you show me document I will say I will confirm that you owned by The Entity you did not show me the document how can I confirm whether it's wed by you or not I am not getting evidence here I am not getting evidence here absence of evidence for a material item in the financial statement yes or no now tell me since I don't have five CR worth of land related ownership document can I directly say entire balance sheet un trustworthy don't believe it no this is no doubt material but it is not pervasive able to understand but there is a possible effect right tomorrow what if this five CR is not really wounded by The Entity 5 CR worth of the land is actually a Leed land but company showed it as W land getting the point possibility of misstatement is there right possibility of misstatement but is this misstatement have we identified it did do we identify this mistake first of all first of all mistake or not we don't know because we don't have evidence so I am talking not about misstatement I'm talking about possibility of undetected misstatement understood possibility of undetected misstatement so what is undetected mistat mistake might be there but not detected you're saying mistake is there not detected are you really saying there's a mistake no no no possibility I'm saying getting it since evidence is not there there is a possibility that some mistake might arise in future which is material but not pervasive which opinion I'll give there also I'll give qualified opinion I will give indirectly qualified opinion means what you know dear dear I mean in our opinion to the best of our information all that we will say our afor said financials are true and fair except accept these matters except so land ownership document is not provided to us to this extent we cannot talk about the ownership or we will say that land is wrongly classified as an investment if there is a misstatement we call it as misstatement able to understand when can I talk about misstatement and all when there is an Evidence if I do not have evidence can I talk about misstatement you don't know if information is not there how can I say it is right or wrong when I say something is misstated you must must have proof now sir show me the proof that you're saying mistake here I don't have evidence able to understand so qualified opinion is given in two circumstances one you have got evidence you have a proof that land is used for fixed asset Factor Construction Construction is also going on it should be classified as either fixed asset or Capital work in progress you phys physically went there clicked photographs and all documented everything three in the balance sheet it is shown as investment you have evidence everywhere that it is a mistake which company did you can prove it getting it now you can give qualified opinion in the scenario whether the land is owned by the company in the fixed assets no or in the investment register land is appearing but ownership documents are not with the company they are claiming that regist registration and all completed sir but register is alone register has to given you know the give us the document which is not yet received by us how far I how far I believe this statement I cannot say that this is wrong also because I don't know what is the real fact I don't know getting it possibility of misstatement which is not discovered by me getting the point the possibility is material so then also I will give qualified opinion I will not take risk on this I will give opinion on the rest of the financials as true I will put this under exception able to understand suppose if this value land know the amount the value of this land is 50 CR the amount of the land is how much 50 CR and it's a classification mistake what is it it's a class classification mistake 50 CR worth of land classification mistake I have a proof that the land is a fixed res but company showed it as investment intentionally and when I ask when I interact with the management I I clearly understood they want to manipulate fixed asset turnover ratio they want to manipulate people saying our fixed assets are productively used see our fixed assets are 100 CR and we are generating 500 CR turnover which means we are using five times the fixed assets in a year able to understand they're manipulating actually if I put this 50 CR this if this 50 is also added no the fixed as a turnover ratio would be two and half or three time only which is industry average so company want to wrongly classify fixed asset into investment and claiming we are better than industry but actually they're doing classification mistake and misleading the public now tell me by classifying 50 CR worth of amount in, CR 5% value in the total balance sheet if it is wrongly classified which is a significant pervasive or not which opinion I should give since it is misleading the company position Al together company key ratios and all alt together misleading I should give which opinion adverse opinion dear shareholder do not the financial statements are not showing true and fair suppose second example we have seen a qualified opinion suppose 50 CR worth of land we don't have evidence let us assume 50 CR worth of land we do not have evidence and they classified under investment and it is not used for factory purpose okay classified under investment it's actually right classification as per management intention it is right classification but the point is is where are the ownership documents and when I see company bank statement there is no movement also 50 CR you purchase now there should be outflow 50 CR rate to so and so party that is also not reflected if I ask company sir we purchased it on credit sir we will pay third party next year when I see registration document that is also not there how come you show able to understand so something is fishy okay and I and I don't want to take risk what should I do it's a material item and moreover significant moreover significant uh I think uh ah yes in the bank statement also there is no outflow for 50 CR worth of transaction getting it so uh I found finally it's a material item and it's a very significant item pervasive item for which there is no evidence so let me stay away from giving the opinion I know reminding are right but 50 CR worth of element no I don't know right how can I comment when a 50 CR worth of element in the balance sheet 50 CR worth of element you know you know this itself is a very big significant transaction getting the point we don't have evidence I cannot talk about position if this 50 CR is fake no company position is actually very bad if this 50 CR is removed in the asset if this 50 CR asset is kept no company na is positive if this 50 CR is removed now Company Net asset value is negative actually and I don't know whether I don't have any evidence to substantiate whether this 50 CR is right or wrong getting the point now tell me in that case I will not take risk I will not give the opinion disclaimer of opinion now you see if evidence is not there if evidence is not there for a material item but not pervasive I give which opinion if evidence is not there for material and persuasive also then I give which opinion I will not give opinion that is called disclaimer of opinion suppose evidence is there I have evidence I have a proof I have all the documentation and I I can prove that it's a material misstatement I can prove it and there is and it is not pervasive which opinion qualified opinion evidence is there it's material misstatement what the company did and it's pervasively impacting the company as a whole which opinion simple all of you yes or no now now suppose if uh you know Tata Motors know the company had a huge loss which opinion you'll give you should immediately think sir okay fine let it be so what whether it is loss or profit why are we bothered whether the loss is rightly shown or not is what important to us some students know if the compan is having profit unqualified opinion compan is having loss we will modified opinion hey okay so it's not profit or loss whatever they showed is it right or not that is important for us getting the point that's why you see objective of the entity is not relevant getting it whether they are profit oriented or nonprofit oriented whether they are profit making or nonprofit making that is also not relevant for us the numbers no what is that number is not that is important for us whether that number is right or not is important for us ble numbers right or not balance sheet numbers right or not that is important for us getting the point suppose if the tataa M they having actually super profits but to avoid payment of taxes they are reducing the profits and showing they are understating the profits and showing are they misleading or not are they misrepresenting or not we should give modified opinion now which modified opinion qualified adversa depending upon pervasiveness now what do you mean by pervasive now what do you mean by pervasive so pervasive means what so here I have given pervasive definition pervasive effect means pervasive effect on the financials are those pervasive effect on financials are those in Auditor's judgment they are not confined to specific element not confined to specific account not confined to a specific item mtic is not in one item or element multiple items affected then also it is called as pervasive or if so confined okay let let us assume it is only related to a specific element in our example we have seen the second scenario example mistake happened only in one item land but it is representing substantial portion of the financials it is representing substantial portion suppose no in our example let us modify in fix it ass 10 CR mistake in current asset 10 CR mistake in investment 5 CR mistake in creditors 5 CR mistake in equity some 15 CR mistake can I say the above financials are true and fair except current assets except fixed assets except Equity except reserves except creditors can you say like that ah if if mistakes are in mistakes are not confined to not confined to means what if the misstatements are if if if the effect is relating to multiple items then also it is pervasive if the effect is not related to multiple only single item speci spefic item which could represent substantial portion of the financials then also we call it as pervasive or if the mistake or if the effect if the effect which auditor is talking about effect or possible effect effect when when when we can use the word simple effect misstatement evidence is there if evidence is not there we don't talk about effect we talk about possible effect because evidence is not there means how can you say how can you concretely conclude on one thing getting the point so PA possible effect when evidence is not there we bring the word possibility there getting the point if the effect or possible effect is related to disclosures which are fundamental to users in fundamental disclosures if at all you made misleading picture then also we call it as what perv suppose for a company going concern is not appropriate okay the company going conern is not at all appropriate the company cannot continue at all but still they prepared Financial statements using going concern bis and they proudly declared in the notes to accounts The Entity is a going concern which is a fundamental accounting assumption where companies misleading it's also called as what perv what Clarity all of you so now if tomorrow pervasive question comes can you answer yes sir so now now tell me so under what circumstances I will modify if I conclude based on evidence financials are not free from Mater IAL misstatements not free from misstatements means financials containing misstatements how I conclude it based on evidence I have evidence or if auditor is unable to obtain sufficient appropriate evidence to conclude that the financials are free from mistakes in order to say financials are not having mistakes I am not able to conclude because I am not able to get sufficient appropriate in these two circumstances you will modify the opinion depending upon the pervasive you decide final opinion so under what circumstances auditor will modify one based on evidence you concluded financials are not free from misstatements or you are unable to get evidence to conclude that they right able to understand next St so that is this is one important question now uh let let us let us discuss this uh you know opinion wordings and all opinion wordings like I like I I hope now you are clear right let me show you one diagram also suppose you know how we will give opinions I have given as a box okay in Institute material this much depth is not given in the box but I'm showing now tell me I have obtained evidence everything evidence everything enti have obtained there is no circumstance where whatever information I asked management delayed there is no circumstance everywhere then and then they gave me documents everywhere I have got and you know what there are no material misstatements no material misstatements when there is no material misstatement will the concept of pervasive applicable not applicable that's why I have clever used the word n getting the point it is not no because pervas of thing itself do not apply which opinion I'll give unqualified suppose I have got evidence I can prove it okay you wrongly classified the land which you are using it for construction of factory which is supposed to be fixed as said you are showing it as investment I have a clear-cut documentation is material misstatement exist yes in the form of classification but is it pervasive no which opinion I'll give qualified opinion suppose no compan is not giving me documents ownership documents sufficient appropriate evidence not obtain now is the land value material yes you see here I'm not using the word MMS observed MMS word I'm not using when I can say there is a mistake if I have evidence so but here evidence itself is not there document itself is not there getting the point how can I say about Mist statement how can I talk about mistake in that evidence itself is not there but for what item material item it is not there however is the effect possible effect per no which opinion again qualified so qualified opinion definition will have two parts qualified opinion definition will have two parts of the you see qualified opinion is given in two parts are you getting the point so qualified opinion auditor obtained sufficient appropriate evidence based on that he concluded mistakes are material but not pervasive or unable to obtain sufficient appropriate evidence and concluded that because I did not get evidence now I am concluding possible effect on the financials of undetected misstatements you see the word possible effect of what mistakes which mistakes you identified no no no I did not identify that's why I'm talking about probability getting the point the possible effect of undetected misstatements could be everywhere you see future tense oriented able to understand because evidence is not there I cannot talk about present accuracy yes or no could be material but not pervasive are you getting the point so if evidence is not there no we always think like this okay we always think like um if evidence is not there what if this is wrong and that wrong item is material but not Puris that's what they mentioned here the same aspect they mentioned here evidence is not there can you ignore that and give unqualified opinion no no no what if tomorrow it go wrong and that is material and pervasive or that is material but not pervasive that's what exactly what if the possible effect on the financials on the tomorrow when the fraud is discovered the impact could be material but not pervasive but that impact we could not detect now undetected misstatement on the financial statements of the possible effect clear now if this definition no first part of the definition is there right in that definition suppose no here instead of but not I mentioned yend suppose I have evidence there is a material misstatement it's material and pervasive which opinion first part of the qualified opinion definition just one word if you change adverse opinion definition comes second part of the qualified opinion definition here here there is again but not right is it visible yes or no if I if I replace it with end disclaimer that's it that's what adverse opinion definition and disclaimer of opinion definition can you read on on your own all of you yes next tell me can we just like the disclaim easily disclaimer of opinion is something extremely rare circumstance getting the point it's not that easy it's a very rare circumstance only we will give disclaimer multiple uncertainities multiple uncertainities or it may be a single uncertainty but that could be substantial portion getting it not withstanding having obtained evidence regarding each individual uncertainty like what is here suppose know in our example if you recollect land 50 CR value but remaining items I have evidence right but remaining current assets for remaining fixed assets for remaining Equity liability for all that I have obtained evidence only for land worth of 50 I did not get but then still even though I have evidence for other items why I have chosen disclaimer if I give unqualified opinion or qualified opinion with exception that will not be sufficient that will not give the impact of the opinion look this is a 50 CR item if this went wrong there is no point of gathering evidence for other things first of all company position itself will turn around if this 50 CR went wrong so I want to quantify see I I want to I want to convey the impact of this 50 CR that's why I give disclaimer of opinion able to understand so so whatever evidences you obtained know on the other items of the financials when you giving disclaimer will you consider that again no when you decided to give disclaimer more because the evidence that you could not obtain is pervasive in nature getting the point Again by the way the word pervasive is different from persuasive there is another word called persuasive auditor will obtain persuasive evidence not persuasive evidence able to understand pervasive means when we talk about impact on the financials persuasive means convincing getting the point we generally get what kind of evidence convincing evidence based on documentation we convinced that it is true and fair suppose whether purchase right now in our example if they showed us the registration document we will C right why all this discussion unnecessary yes or no now are we liable to check the document originality all that no no they that much skill and all we don't have getting the point so the nature of evidence that we get in audit is generally persuasive in nature are you getting the point that's why our is is reasonable Assurance we don't get absolute Assurance because we don't look at conclusive evidence we look at convincing evidence able to understand if it convinces me enough a building is there I will go and see yeah it is there convincing able to understand so ownership document is there ownership document is there convincing that it is owned by the company getting it value is how much shown ah it is convincing but in reality all are fake I don't know that I'm not bothered getting the point what I'm bothered is proper documentation is there or not genuinity there or not I will try within my scale of skill set getting it if I do that exercise if I do that due care diligence and all that's enough I can protect myself able to understand you know in audit giving unmodified opinion is very risky giving adverse opinion is zero risk adverse opinion means what hey don't believe that tomorrow somebody invested in spite of this and lost money they are coming hey what yeah I told man already don't believe yes or no there is no risk for me if I give adverse opinion zero risk now immediately sir every auditor can try to give adverse opinion discover mistakes and give you discover mistakes man and give you you want to give aders opinion you should discover mistakes right you should prove it is persuasive right you must have documentation right without proving that if you say sir I will give the adverse opinion will client agree why are you giving adverse sir show me proof no no I don't want approve I want to reduce my risk to zero can I give can I give adverse opinion you can do on try another clients or not on us yes or no you want to give qualified opinion adverse opinion you have you you should find a misstatement first of all in order to find a misstatement you should not think about lunch time dinner time getting it next easy or not now you know in the in the new scheme know they have added even this also how material wordings will be there illustration they have added I removed it here I removed it here I directly discuss it in the this one announcement book I'm discussing you need not M you just observe it and leave it you have already in the IC book illustrations were given in the end of this audit chapters illustrations were given at the end of the chapter also illustrations were given so if that illustrations you follow that's enough now you see another one one and half hour it will conclude okay by another one we we'll finish in this session enter audit report chapter maximum it will be over maybe in car some four five points or maybe maybe car part alone will be pending but anyhow we'll continue in the next session okay are you all okay interested connected need to think obviously so so fine so let's look at uh you know tataa Motors annual report audit report so you see you know in tataa Motors the Auditors have given which opinion unqualified opinion why they give unqualified opinion because they could not find any mistakes we give unqualified opinion because we can't do anything else getting it so you see how the wordings we have audited the Standalone financials of tataa Motors comprising so and so getting it in our opinion to the best of our information according to the explanations given to us this is some protection PA to us getting it based on information I got based on explanation I got what information explanation you got come I'll show you my documentation able to understand documentation is the proof based B on my documentation based on the information explanation given to us based on consideration of other auditor on that's okay ignore it okay the the eff forced Standalone financial statement give information required by act in the manner so required and give a true and Fair View in conform it with accounting principles generally accepted Accounting Standards schedule three all that so here they did not use any exception negative nothing plainly they spoke about their faake so it's an unqualified opinion now suppose if the qualified opinion actually a Air India audit report iser once upon a time it has qualified opinion but it's okay I'll show you the illustration directly so here no here inventories are misstated inventories are misstated the misstatement is material but not perv probably inventory misstatement no cost is 100 CR NRV is 70 CR company valued at Cost where they are supposed to value at 70 let us assume the company is a multi turnover company so 30 CR mistake is it's just a material but not fine now you see what opinion they gave qualified opinion you see side heading itself is reflecting now so people know we are making people's job easy which op an auditor they need not even read even if they don't understand anyhow that's a secondary question students understand okay so what opinion we give qualified opinion so sading so first PA is say we have audited all that first we introduce ourself what we did then in our opinion to the best of our information according to the explanation given to us according to the explanation given to us the afor said financials give true and Fair View positive then but with an exception you see in between except for the effect of the matter described in basis for qualified opinion section of our report in our report opinion section is what we are reading right now we have another section after opinion there is another section what section they are calling it as basis for qualified opinion section in that section section means nothing but par in order but first first par is called as opinion section second par is called as basis for opinion section like that so what we are saying in our opinion to the best of our information according to the explanation given to us except remember the word is except not subject to getting it not with the below explanation no only the word we have supposed to use is except same word you should also use you should not use an alternative word so except for the effect of the matter described in basis for qualified opinion section nothing but see whenever whenever we give opinion now on what basis you give opinion you should tell that also in the audit report in audit report one of the content is First Title then addressing then opinion then basis for opinion basis for opinion what is the basis a basis is I do audit getting I did audit how you did audit as per standards what standards say that's what I'm going to talk getting it so in audit report first typ then addressy opinion basis for opinion is a fourth section in the audit report now whenever you are giving qualified opinion adverse opinion disclaimer of opinion side headings has to be changed accordingly getting the point suppose if it's a normal opinion unqualified opinion basis for opinion suppose if it is qualified opinion qualified opinion basis for qualified opinion adverse opinion basis for adverse opinion disclaimer of opinion basis for disclaimer of opinion got it getting it now so what are they mentioning here except for the effect of matter when they say effect they are not using the word possible effect they're using the word effect which means they have evidence they have proven misstatement except for the effect of matter which matter described in where basis for qualified opinion section of our report except that the efor said Financial source showing true and fair understood how the wordings are used now let us look at basis for qualified opinion section now see basis for qualified opinion what are we saying actually the company now first know I will show you for unqualified opinion first I will show you for unqualified how basis for opinion paragraph will come tataa Motors I'll show you now you see tataa Motors gave unqualified opinion right for that what is the basis see if I give a qualified opinion now you ask me what basis I will tell you what mistake exactly happened I give unqualified again you're asking what reasons I have thousand reasons to give unqualified opinion what will I say what is the basis for unqualified opin see if I say something is wrong you ask me what is wrong I'll tell you everything is right what is that you're asking me again how can I describe it so cleverly they described look what is the basis H we conducted our audit that itself is a basis getting it how we conducted audit as per standards on auditing getting it and standards on auditing okay now our response responsibilities under those standards are further described in like we do audit as per standards what will you do in standards uh as per standards no we have some responsibilities yes each standard talks about our requirements rate responsibilities rate our responsibilities under those standards now we describe not here below another section is there what section respon Auditors responsibilities Auditors responsibilities for audit of Standalone financial statements of our report like where below some responsibility you so you auditor responsibility section is there management responsibility here and then below ah you see here so here in the tataa motors there is another section what section auditor responsibility for audit of financial statement section below I will tell you what are all my responsibilities under various standards so in the basis for opinion section we are mentioning we do audit as per standard we also mention that as per the standards we have responsibilities our responsibilities you want to know go to the next per what per what section auditor responsibilities related to audit of financial statements section of our report inside that what are our responsibilities and standards we described getting it that point we are communicating where in the basis for opinion section we are communicating understand now we are independent of the company as per code of ethics issued and now in a opinion section no what we mentioned in the opinion section in our opinion to the best of our information and according to the explanation given based on information I got explanation I got this is the opinion have you got sufficient information by the way that I am not answering in opinion so in basis for opinion at the end we believe that the evidence obtained along with the evidence obtained is sufficient and appropriate to provide a basis for the opinion we gave opinion right what evidence we have got no that is sufficient that is appropriate to provide a basis for the opinion so in the above I'm saying based on information I'm giving this opinion have you got sufficient information yes I got sufficient information see look at basis for opinion section last line we believe that the evidence obtained by us is sufficient and appropriate got it now you see in in in exam in exam they'll give you like this question wait let me cover little more also then I will come back and then discuss how in exam these questions whatever I'm discussing will be asked about now again now suppose here in this example T they un qualified they gave single line single pa basis also they just mentioned we did audit as per standards and auditing as for the standards we have so many responsibilities you want to know the responsibilities look at the responsibility section okay and we are independent of the company we complied with code of ethics whatever whatever evidence we have got is sufficient and appropriate based on that only we provide we we we concluded we arrived a opinion we are mentioning that basis for opinion so you're asking basis for opinion hey don't think that I I just give opinion casually I did audit as per standards as for the standards have responsibilities and I'm independent of the company I complied with ethics whatever evence I got is sufficient for the opinion so this is the basis for the opinion am I replying or not sure short reply yes or no now basis for qualified opinion here in this case here also you see common that whatever unqualified opinion basis for per as it is copy based here also we conducted our audit as per standards on auditing our responsibilities are further described in audit responsibility section we we are independent of the company we compli with ethics we believe that the audit evidence obtained is sufficient appropriate to provide a basis for our opinion same par in addition to that you have qualified opinion you should clearly tell specific reason also right you cannot give General reason for unqualified opinion you gave a general reason like you audit as per standards that's why you gave this opinion yes or no now here you have qualified opinion qualified means what you saying that misstatement is there what mistake is there the company's inventories are carried in the balance sheet at 100 CR 100 CR cost management has not management has not stated inventory at lower of 100 CR or 70 CR but stated them at a cost which is 100 CR which is a departure from accounting standard so applicable framework they did not follow in valuation of inventory the company records indicate that had management had had management stated the inventories at lower of cost or nrb if at all management stated in the as per framework an amount of 30 CR would be required to write down the inventory to their NRV 30 CR will be required to write down the inventory accordingly cost of sales will increase by 30 CR income tax will increase by six CR net net net net worth and all will be effect increased or decreased by this much now you see then we are qualifying no we are not just saying misstatement is there we are also quantifying the misstatement yes or no if mistake is not there how does it affect if mistake is not there what would be the numbers are we quantifying or not this is a responsibility as per 75 under 75 if there is a qualification related to material m statement auditor must quantify suppose if you cannot quantify suppose if you cannot quantify if quantification is not possible then say that quantification is not possible the company did so and so mistake the effect of the mistake is in multiple areas which we are unable to quantify because of impracticability what is that impracticability you mentioned there that's enough you know suppose I'll show you the next illustration where they give adverse opinion where they give adverse opinion here they gave adverse opinion due to material misstatement of in the consolid here here the financials are Consolidated what is the mistake the Consolidated financials are materially mated due to nonc consolidation of subsidiary one subsidiary they didn't consolidate tell me if a particular company if one subsidiary company if I don't consolidate if I do not consolidate a subsidiary company which item of balance sheet which item of pnl will affect you must know consolidation answer this every item in the pendl account every item in the balance sheet every fixed asset item every current asset item liability pendl Revenue expense every line in the item of pendl balance sheet cash flow every line will affect right if you ignore one subsidiary because if you add that subsidiary line by line branch accounts you know everyone Consolidated financials how many of you have learned at least Consolidated hey you must know right line by line consolidation method we follow yes or no I'll tell you what happens in consolidation I'll tell you briefly if at all those of you who don't know suppose this is a holding company this is subsided company when a holding company when a company becomes holding company for another company it has invested investment by holding company 100 CR yes or no so sorry investment in subsidiary company how much 100 CR Equity 100 CR there are no Outsiders let us assume it's 100% subsidiary company now the subsidary company know using this amount 50 CR fixed assets they purchase investment 20 current asset 30 now that's it no more assets and liabilities or else some some invent let's assume this investment is 30 some liabilities is 10 CR total subsided company balance sheet 110 this is 110 holding company it has its own fixed asset 300 its own current assets from 00 its own Equity some 500 and liabilities some 100 so this is the holding company 600 600 this these are Standalone balance sheets of holding and subsidary separate separate balance sheets now holding company has to prepare Consolidated balance sheet correct how are they doing consolidation line by line add fixed assets fixed assets how much 350 add current assets current assets how much 230 230 Investments here investment is it this investment I will add these both will cancel now inter company yes or no so how much investment 30 liability these both how much it is 110 Equity don't add these both this we we knocked off now this side asset that side liability we knocked off so how much it is 500 you see the total how much 610 and here also 610 matching or not understood or not this is what exactly happens in consolidation now if I do not consolidate one subsidiary you know as per consolidation one 29 subsection 3 company s a holding company shall consolidate all its subsidiaries if one subsidary you didn't consolidate tell me which item in the balance sheet in the Consolidated balance sheet affect every item every P item will affect now tell me multiple items when the when the effect is not related to not confined to specific element is it pervasive or not multiple items are affected yes or no now which opinion we should give adverse opinion so that's what in the illustration where what they give adverse opinion only they give in our opinion to the best of our information according to the explanation getting it the accompanying Consolidated financials do not give true and Fair View we are mentioning straight away do not give true and Fair View now here you see we are not using except it's not just one or two exceptions it's complete financials itself is wrong because they use the word because of significant of matter because of significance of matter discussed in basis for adverse opinion section of our report the ffor financials are not R Fair below you see as explained the group has not Consolidated subsidary this investment is therefore accounted on so and so basis add XY Consolidated if at all that subsidary is Consolidated many elements in the Consolidated financials would have been affected the effect on the consolidated financials of the failure to consolidate could not be determined is not determined why how many see inventory one mistake I will show these these items will affect because of this mistake consolidation how many items you will list in the pnl it's not even POS will you sit and prepare Consolidated financials and then post it here no right you will say that they have not they have not Consolidated one Subs stud every item in the financial will affect so the mistake is not Quantified understood now same here also we conduct our audit as per standards we comply with ethics we believe that our opinion is we believe that the evidence obtained by us is sufficient and all that is common as usual are you C next disclaimer of opinion disclaimer of opinion L see illustration four disclaimer of opinion due to auditor inability to obtain sufficient appropriate evidence about a single element of the Consol single item only but that single item could represent substantial portion getting it you see here the auditor was unable to obtain evidence about a single element of the financials that is investment related one investment related one joint venture 90% of the assets when investment is there in joint venture that investment value is how much 90% of the total assets that 90% value you did not get evidence tell me is it material and pervasive yes which opinion we should give disclaimer obviously now we did not get evidence here here we did not get evidence here getting it we were unable to obtain sufficient appropriate evidence regarding a joint venture related investment we did not get evidence they're saying now evidence is not there which opinion you'll give disclaimer now tell me have you audited here if evidence is there I will I would have audited at the time of planning itself we will know all these issues at the time of planning itself I came to know that while planning the audit itself I will not get evidence for 90% item so we audited no you see here we were engaged to audit what is the introduction line we were engaged to audit whereas if you see adverse opinion qualified opinion unqualified opinion first line is we have audited getting the point whereas when when we are giving disclaimer why are we giving disclaimer because we could not verify we could not verify means what we didn't audit audit means what verification examination yeah next so we were engaged to audit and straight away in our opinion we don't have opinion can you say like that we do not express an opinion straight away we do not express an opinion you see that wording in our opinion to the best of our information according to the explanation given to us we don't have opinion not possible right so we do not express an opinion why what is the reason because because of significance of matter there is a matter it is so significant because of the significance of matter which matter it is described in basis for disclaimer of opinion opan section of our report getting it we have not been able to obtain sufficient appropriate evidence to provide a basis for the opinion we could not obtain evidence to provide a basis for the opinion so we are not giving opinion now basis basis for disclaimer now you see when you're not giving opinion first of all what is the sing original sing is what actually basis for opinion when you give a opinion there is a basis when you're not giving an opinion is there a basis getting Point what is the basis for not giving opinion I did not get evidence so that's why basis for disclaimer of opinion in that no standard content is an original content we have audited we conducted our audit as per standards on auditing that and all not come when you give disclaimer of opinion you need not talk about standards on auditing you need not talk about ethical requirements and all you need not talk about that belief that you obtain sufficient appropriate evidence you see straight away we will mention the reason and leave the group investment in joint venture which represent 90% the group related informations were not provided to us accordingly we are not able to give opinion on the financial statements are you getting the point you straight away mention the reason that we are giving disclaimer of opinion now auditor responsibility section what is IT Auditor responsibility section when we have given disclaimer of opinion will change a lot generally auditor responsibility section I will show you tataa Motors I will show you for parallel comparison generally auditor responsibility section no we will clearly talk our responsibility to obtain reasonable Assurance reasonable Assurance is a high level of assurance but not a guarantee misstatements will still arise even though after we do audit properly we do risk assessment we obtain internal controls understanding we check accounting policies we check all this all this nonsense people listen when you give opinion you have not given opinion why will I why what should I do by knowing your responsibility your responsibility primarily to give opinion that itself you're not giving correct H so in that case can we talk about our responsibility so detailed in responsib section of the audit report which contains disclaimer of opinion ah so accordingly you see here our responsibility is to conduct the audit okay uh and uh give a opinion on the financials however because of the matter described in basis for disclaimer we were not able to obtain evidence to provide a basis so by the way we are independent of the group we have fulfilled all our ethical responsibilities and all we are ethical we are ready the problem is compan is not ready so we simply concluded you see how responsibility is simply concluded this can be asked as a question getting it write resp audit what are the points to be included in Auditor's responsibility section for financial statements in a circumstance where auditor disclaims his opinion four marks question it has been asked in C a final and C a inter also we have a question I'll show you directly in the book first I'm showing all the Practical things then if you go to the book it very easy for us to sync okay next are you clear on all the opinions that's it now it's St right away we'll go back to the book now tell me how basis for opinion paragraph will modify in case of modified opinion in case of material misstatement in financials please qualify not just qualify it is quantify what is it quantification is important quantify getting it obviously now if there is a material misstatement quantify that so if there is a material misstatement that relat to specific amounts by the way I'm reading in 96th page whatever okay the auditor shall include in basis of opinion section description of the qualification quantification of the effect of the misstatement unless impracticable if it is not possible to quantify don't quantify suppose no you are unable to quantify if it is not practicable to quantify the auditor shall state in the section we have seen adverse opinion given yes or no adverse is also type of modified opinion their consolidation subsidaries missed so unable to quantify the impact auditor clearly mentioned now if there is a material misstatement relates to narrative disclosure actually uh this is something a separate point up to here only second point from here it is third Point make it as a third point from here see in the second Point full stop is an First full stop it is not practicable to quantify State then after if there is a material misstatement related to narrative disclosure like that is that you call it as a separate Point that's a separate point now suppose no in a disclosure company made a m statement company gave a wrong disclosure they gave a wrong disclosure how do you qualify you will mention that the disclosure is wrong and you should also give what is the right disclosure if possible in your audit report what is the right to disclosure you should talk getting the point next suppose if the company non-disclosed even non-disclosure is also misstatement right suppose company you know have not disclosed an important information which is a material misstatement now you will qualify the opinion rate OB L you will modify the report you will modify the opinion right now in the basis for qualified aders or whatever how will you talk about the non-disclosure if possible discuss the non-disclosure with stop management what is its nature how pervasive it is if possible if practicable to do so include the disclosure in the audit report in the basis for adverse opinion or basis for qualified opinion section whatever they miss now include it if it is practicable to do so suppose no company has violated segment information standard they didn't disclose segment reporting you know segment reporting company did not disclose segment information segment information will come five pages will you give in the audit report five pages people will not read audit report yes or no if it is not practicable to include a disclosure say that it is not practicable to include a disclosure all this I'll ask you they'll ask you this question this third Point itself they can ask you as a straight four marks question if there is a material misstatement by way of non-disclosure what auditor shall do if material misstatement is by way of nondisclosure what auditor shall do are you getting the point so what Auditors shall do in the what is the reporting requirement three marks or four marks question they'll ask have you identified all this when you're reading no sir I just want chat book understood now why chats I don't recommend the question paper is at this standard the way the content is discussed is at this standard and people complain they they just read blindly they don't understand anything audit is like that only yes it is like that for those who cannot understand for those who don't even try to understand able to understand chart books color notes and all is not a way getting it you see how I'm filtering the information have you noticed how I'm covering almost each and every topic in fact I'm not just reading I'm I'm explaining by the way within the same time can you read actually entire this content actually you can read right if you already know this content now tell me day before exam we are having 20 hours time more than 20 our entire 5ay session itself is coming to 20 hours yes or no we are with this revision session itself 20 hours 80% that two I'm explaining man I'm not just reading I'm explaining and connecting with the book also that two may not 100% I'm connecting with each and every line but I'm con connecting predominantly right predominant portion I'm covering right within 20 hours I'm doing explanation and connecting making you understand and reading and looking at practical examples all that and showing and making you understand the things directly now can't you read just after understanding after having knowledge on this reading does it take 20 hours provided you already done revision so day before exam students know they ask me sir how to revise this book day before exam just like this you already know this just that we are so our our brain is you know we are brainwashed like short notes must be there before exam only then you revise otherwise you can't revise man when I'm revising no I know suppose the moment I say this suppose if I am revising in your place suppose if I have to write exam tomorrow I will say description of basis for opinion para MMS I know this content I'll just move to the another content this is how I revise yes or no uh this is description of auditor responsibility in case auditor is disclaiming ah this is something I don't know let me read once I'll plainly read then next one communication with the this I know already point this is what revision means right yes or no technically speaking this is what revision revision means what whatever you don't know you have to read whatever you think you have to read you have to revise that each and every point you need not revise getting it what we are doing this entire matter which is there in 50 pages you are compressing it in five pages drone charts and all and you're revising from that going examination looking at the paragraph and you're not understanding you're only staring at the fan yes or no who why why they not cleaning the fan and all you're getting all the questions and you come out and say ca is a tough course primary work that you are supposed to do you have not done able to understand look at in the revision itself I'm covering at this level means what would should be what should be then the regular which is 120 hours 100 hours approximately not promoting my regular course I'm just telling you getting it if at all you have taken anybody's regular course and still you are not getting Clarity means you have taken wrong you have taken wrong decision getting the point if you're not understanding if you're not connecting with the subject auditing is a boring subject it is boring if you don't understand see how interesting it is I'll show you this in the same till the end of the subject getting it everywhere practically we are discussing not mugging up a qualified opinion means that this oral drilling no not that you need to understand right next suppose suppose if you are unable to obtain evidence if we are unable to obtain evidence because of that we want to modify the opinion qualified or if if it is evidence is not there which opinions I'll give qualified or disclaimer evidence is not there modifications results from inability the auditor shall include in basis for reasons for inability why you are not getting evidence mention that when auditor disclaims an opinion the auditor shall not include the auditor shall not include a reference to section that talks about responsibilities a statement that sufficient appropriate evidence is obtained I showed you generally basis for opinion per what we mention we believe that I mean sorry we have conducted our audit as for standards our responsibilities under those standards are further described in basis for op sorry our responsibilities under those standards are further described in auditor responsibility section of all that we will talk when when we give a proper opinion when we when we do not give opinion can we refer about them that's what they're saying auditor when auditor is disclaiming the opinion auditor need not refers to all these points able to understand all few okay now this question this J point this itself can be asked as a four marks question how description of auditor responsibilities for auditor financials when auditor disclaims the opinion how auditor responsibility section in audit report in audit report there's a section audit responsibility how we will talk how we will report it when we give disclaimer of opinion when we give disclaimer of opinion no we just mention a statement that we are responsible to do the audit and issue a report first we will mention we are responsible to do audit and we issue a report because of the matters given in disclaimer of opinion we were not able to obtain evidence and the statement and we also talk about independence and ethics that's it generally auditor responsibility section will be so vast okay where we talk about what is audit what is reasonable what is high level of insurance what are all we do as per various standards briefly we come we cover entire syllabus in some you know seven eight paragraphs in the original audit report but when we are giving disclaimer shareholders doesn't need all this when we give disclaimer shareholder doesn't require all this obviously which opinion I mean obviously in that paragraph We need not talk about all that that's it and whenever you want to modify the opinion whenever you want to modify the opinion auditor shall communicate with tcwg why under what circumstances you are giving modified opinion and what is the wordings of the modified opinion now if you communicate this no management will sir sir don't give modified opinion I will give you the information I will provide the information they try their best in spite of it if still they are not giving information they are not rectifying the misstatement then you can finally give the modified opinion indirectly this point is saying first don't prepare final audit report prepare a draft audit report prepare a draft give it to the management if they give consent to it then finally prepare a final audit report with the modified opinion are you getting the point next suppose no generally why we give disclaimer of opinion because we are unable to obtain sufficient appropriate evidence why are you unable to obtain sufficient appropriate evidence suppose if the inability if we are unable to obtain because management imposed a limitation management management themselves are restricting me the from providing evidence politely ask management request them to remove management removes proceed with the audit suppose if management is not removing commun communicate with top management perform alternative procedures and try to obtain evidence if still you are not getting evidence even alternatively only management has to provide which they are not providing then if the effect is material but not pervasive qualified if the effect is material and persuasive first withdraw is possible if withdraw is not possible no other option don't give opinion by giving a disclaimer of opinion are you clear by the way one more thing it's it's I'm repeating but I didn't highlight it this disclaimer of opinion it's not disclaimer opinion understood disclaimer of opinion that is what here they have given okay consequences write about consequences of inability to obtain sufficient appropriate evidence due to management imposed limitation suppose no here we are unable to obtain evidence not because management imposed limitation but because of some other circumstances management is very much ready to provide but external lawyers are not reacting they are not providing they are not removing the limitation they are creating a limitation management is also pressuring them but they are not responding and it is relating to a very big pending limitation where 50,000 CR penalty proceeding getting the point now circumstances created now what should we do if at all by alternative procedures also we are not getting evidence ultimately we did not get evidence we will withdraw from the engagement if possible or we give disclaimer of opinion same answer only getting it next now they'll ask you this question once again which type of modified opinion is appropriate the decision regarding which type of modified opinion is appropriate depends on the following what is the nature of the matter giving rise to modification you see the same wording have nature of the matter evidence obtained misstatement found that is one evidence not obtained and it's a material item the nature of the matter is whether financials or material mate or you are enable to obtain sufficient appropriate evence what is the reason nature of the matter that give rise to why you want to modify is it because of a material misstatement or is it because you're not getting evidence what is the nature of matter first identify and what is your decision on the pervasiveness of the effect or possible effect of the matter so whatever the nature of matter what is its effect or possible effect of the pervasiveness then decide what type of opinion you want to give so which type of modified opinion to be given depends upon nature of matter that gives reason for modification the nature of matter can be material misstatement is there or in inability to obtain evidence for a material item and its possible effect or effect getting it from the auditor's point of view of its pervasiveness the pervasiveness of the effect or possible effect of that matter getting it accordingly we give we decide the modified opinion and that entirely is summarized in the form of a table clear almost s 75 predominant part we have covered now come back to sa 700 again now they'll ask you you know so they'll give you one illustration as a part of audit as a part of audit auditor has to express opinion that is his objective so auditor has prepared an audit report what are the points to be written what are the points to be covered in opinion section of the audit report this is the answer this is the question what points you will cover in opinion section what points were there in the opinion section we have audited the financial statements of so and so company comprising balance sheet pnl cash flow significant accounting policies yes or no identify the entity BC limited state that financials are audited we have audited title balance sheet pnl cash flow all that refers to notes so including notes to accounts that contain significant disclosures all that date and period balance sheet for theay for the date P account for the period ended yes or no so whatever introduction per is there they have given it as a points here then basis for opinion per what is basis for opinion section will contain we conducted our audit as per standards on auditing our responsibilities under those standards are further described in basis for uh I mean our responsibilities are further contained in auditor responsibility section of our auditor report we are independent of the company we comply with code of ethics we believe that the evidence obtained that is what actual per same points state that audit was as per standards refer to refer to responsibilities section in the audit report include a statement that you are independent and you f fulfilled the responsibilities State whether you believe that evidence obtained by you is sufficient and appropriate simple this is what there in the basis for opinion right they'll give you a straight question like this what are the contents of basis for opinion section like this they may ask you or they may ask you give a draft basis for opinion section give a draft for basis for opinion section you have to draft actual original para that is given that we have seen in the illustration I don't think drafting question and all they not they will not give but this they may ask you able to understand then we have something called going concern fine I'll go back once again to the contents of audit report we understood title we understood addressy we understood opinion we understood basis for opinion the next PA in the audit report is management responsibilities nothing but in preconditions engagement letter management respons responsib there same as it is we copy paste here management is responsible for preparation of financials management is responsible for uh internal controls management is responsible to give us the information management is responsible to select and apply accounting policies management is responsible for to accounting estimates and all all that management responsibilities we will mention what are auditor responsibilities auditor responsibilities you see here responsibilities of uh you know responsibilities of auditor primary obtain reasonable Insurance whether financials or free and issue a report this we need to mention in audit report then reasonable Assurance is a high level of assurance but not a guarantee I showed in audit report also same wordings so that will be there and we should also mention that misstatements can arisee either from fraud or error and we will also talk about we excise skepticism we exercise judgment we do risk assessment we do understand internal control we also verify accounting policies we verify management going concern and we also check overall presentation structure of the financials if it is a fair presentation framework how the financial statements overall presentation looks like structure looks like getting the point that's it now in this not they will ask you a specific question just a minute I'm checking whether that specific question was discussed or not that also actually very important hm this point at the beginning itself is there in the 700 the 700 at the beginning fifth Point evaluations to be made by auditor C Point C inside that fifth point this this has been asked in final ones remember in CA final and CA inter questions are similar in CA final the this discussion would be little more in-depth getting the point so in C enter we discuss 60% in C final we discuss 100% that's the depth level getting it in CA final they'll ask with examples also so getting it fine so evaluation in case of PIR presentation framework you are appointed as an auditor you are forming an opinion and Reporting on the financials what are the evaluations the auditor has to make with respect to fair presentation framework if the financials are prepared in accordance with fair presentation what additionally auditor shall evaluate auditor shall evaluate how overall presentation structure and content of the financials how overall the financials are they only talking about true or they talking about Fair whether financial statements represent underlying transactions and events so that fair presentation is achieved are they showing genu of the transaction also like you show debtors 10 CR 100 CR but provision is at 20 CR minus 80 only actually company can receive yes or no so underlying transactions and events intention should be correctly portrayed so that is called fair presentation able to so when Financial State are prepared as per fair presentation the evaluation shall also include whether financials achieved fair presentation achieved fair presentation means the financials whatever they are showing no it is not only true they're also Fair they also reflecting reasonable position and performance of the company not just True Performance and true position reasonable position are you getting it that's it then then we have what are specific evaluations by auditor they'll ask you this question write about specific evaluations by the auditor before forming an opinion what are the specific evaluations very simple whether Financial disclose all the accounting policies whether accounting policies selected and applied are consistently done whether accounting estimates are reasonable we all evaluate we evaluate this whether information presented in financials is relevant reliable comparable understandable whether financial statement provide disclosures that are important to the users and all whether the terminal user is appropriate specific evaluation six points are there any four you have to write getting it then one more important question write about qualitative aspects of entities accounting practices write about qualitative aspects of entities auditor has to evaluate how accounting practices of the Enterprise how qualitative they are like when they are choosing an accounting estimate for example for a life of an asset or some inventory valuation accounting estimate when they are choosing how are they choosing the accounting estimate are they biased or are they choosing right estimate is management neutral whether the performance is profit or loss in terms of presentation while presenting the financials how are they neutral getting it are they tilted towards profit oriented presentation profit presentation or are they neutral so you need to understand their qualitative aspect you need to check their you need to interact with them and observe their mindset getting it so management makes a number of judgments about various amounts so while considering qualitative aspects of accounting you may come across management bias getting it management bias you may find management bias means what they are tilted to show high profits like suppose no you are you are identifying some mistakes when you're doing audit you found some 10 to 15 mistakes you went management corrected then and there seven mistakes some seven mistakes they didn't correct okay fine we don't know maybe they'll correct later again after five days iPhone another five mistakes they I went there they kept on hold again I went with another five mistakes after again one week they corrected them immediately what about past five and original Seven some total 12 mistakes they didn't yet correct when I observe the pattern no whatever mistake if Rectify profit increases they are correcting whatever mistakes if they Rectify profit decreases they are not correcting now tell me by this interaction by this analysis can I understand can I conclude that management is biased toward showing higher profit selective correction of misstatement brought to management astion so management is doing selective correction of the misstatements and management is making accounting estimates with bias they are not making proper estimates rightly you know by the way just because management bias is there can it constitute misstatement can I straight away say management is biased can i s say there are mistakes mistakes you have to find out POS management bias does not indicate mistakes you need to investigate further to discover what are the mistakes that are there bias means it's an attitude management attitude you understood just because management is having that attitude can you say there are so many mistakes in the financials so and so mistakes are there can you conclude you cannot so now if there is a management bias now if there's a management bias or management is not neutral this will give you this will affect auditor evaluation whether the financials as a whole are free from material so it will affect your audit procedures you will understand as a whole financials are free from misstatements or you will have some doubts you will get some doubts extra forming of an opinion these are all not required M these are all just you read later on you can understand it then definitions once again general purpose Financial general purpose framework fair presentation framework complaints framework all that were given here I have covered it in the introduction class itself getting it so what is general purpose financials if the financials are prepared using general purpose framework what is general purpose framework I told you general purpose framework keeps in mind common information needs of wide range of users wide range of users look whenever I say I'm doing business generally whoever it is if I share with them that I'm doing business what questions they'll ask what business you're doing what is the turnover what is the profit that you are getting how much you have invested in this business where is the location what assets you purchased these are the basic information which everybody ask yes or no even if you go for a bank for a loan what what they'll ask what business you're doing what are the assets what is the bank statements what is the bank balance what is the ass how much Capital you invested how much turnover you made what are the expenses what is the profit corrector anybody to whom I share about my business generally they ask these questions maybe one person might ask 12 questions another might ask 15 questions another might ask 20 but commonly there will be some 15 20 questions which everybody want to know yes or no general purpose framework addresses that common needs getting it so what is general purpose framework you see here it's a financial reporting framework designed to meet common financial information needs of wide range of users getting it then now types of opinions unmodified the auditor will give unmodified opinion when auditor concludes that financials are prepared in accordance with applicable framework here you did you got evidences whatever you want modified when we will get modified based on evidence Financial not free from mistakes or I unable to get evidence to say that they are free from mistakes in two circumstances I give modified opinion getting it and the auditor shall modify opinion in the above circumstance that's what now how unmodified opinion wordings will look like I have showed you directly in the illustrations clear so almost predominantly have covered 70075 predominantly now now you see here if you look at this is the contents of audit report as per sa 700 format contents of audit report what are the elements now if You observe I'll highlight here with a box red color box actually if you look at the original standard sa 700 whatever highlighted in red box is not there getting the point as per 76 as per 76 standard we will add these two paragraph if there is a requirement as per 570 we will add this section in the audit if there is a requirement suppose whatever I have showed in red box right if these are not there in audit report that format is called as unmodified report if these three boxes are also added in the audit report then we call it as modified report but modified report does it mean modified opinion no that's it so okay now let's discuss what is emphasis of matter other matter key matter I mean key audit matter and material uncertainty related to going concern so when these paragraphs will come in the audit report generally if you want to give unqualified opinion standard no nothing you give normal s 700 format without these paragraphs if these paragraphs are also there this is the order in which you should give this is the order so I gave you a comprehensive audit report format in the book in the IC book you will not find a comprehensive format are you getting it so that's why you see applicable as per relevant standard exension right side so these lines will come when there is a requirement under respective standard now just a minute I'll do one thing I'll take two minutes Gap and then I'll cover so let's continue with uh emphasis of matter paragraph and other matter paragraph so so we have to discuss regarding this on SCA 76 actually the 76 is a standard which is dealing with emphasis of matter paragraph and other matter paragraph in the independent auditor report that's a side heading that's a heading of the standard so emphasis of matter para and other matter paragraph in the independent auditor report like what is an emphasis of matter par and other matter paragraph simple example I'll show you see tataa Motors audit report see tataa Motors I'll show you straight away the index itself You observe the financial statements suppose Standalone financial statements of tataa motor starts at 232nd page it goes up to 330 pages so close to 100 Pages financial statements and audit report together let us assume audit report Carrow all together probably will be 10 pages and some Bal I mean audit report car balance sheet pnl cash flow single single page they're all all together 10 only notes to accounts is 90 Pages notes to account is how many 90 again Consolidated UC see approximately 120 Pages out of which 10 pages might be audit report 100 pages is purely notes to accounts so technically speaking any shareholder or any investor or anybody third party do you think they read entire 100% of the balance sheet pnl notes maybe balance sheet pnl they may have patience and then read and understand primarily but notes to accounts they no chance yes or no they don't read 100% they don't read so but as an auditor by the way you are signing the audit report right you are signing the balance sheet PN notes right or will you read full notes to accounts 100% man you have to read hey how how will you sign without reading it for shareholders and all it's an excuse for you you should read at least yes or no so as an auditor you should read 100% of the financial statements for sure that is important now when you're reading the financial statements in the notes especially this 90 Pages notes definitely there will be certain points where you felt very important not everything may not be but some five six points you felt they're very important look I'm not saying there are mistakes you felt it very important no I I know very well okay in my interaction with people they never read the notes to accounts they don't even think notes to accounts is a part of financial statements obviously notes to accounts is an extension it's not it's like an additional shet getting it for balance sheet item pnl item breakup and all is explained where notes accounting policy information is given where notes so I know very well people don't read but there are some four or five items in the notes segment reporting related party transactions pending cases against the company contingent liabilities very very important points were there and I want everybody and I know very well that the percentage of people who read my audit report are definitely higher those whether those who those who do not read notes I know very well majority of them read my audit report now I want them to read some important points in the notes okay don't read 90 Pages notes but these Five Points note 35 note number 38 note number 49 these three note points I want everybody to read what should I do ah highlight it we should highlight it where in the notes to account we should highlight with highlight ah you should highlight it in the audit report how will you highlight emphasis the name itself says emphasis means what highlight emphasis of matter paragraph is a paragraph used in the audit report that refers to an item presented or disclosed in financial statements actual definition contains one more word appropriately presented or disclosed getting it so emphasis of matter paragraph is a paragraph in the audit report you see the definition emphasis of matter paragraph is a paragraph in the auditor's report that refers to a matter that refers to a matter appropriately presented or disclosed in the financials in Auditors judgment in my point of view is of such important that it is fundamental for users understanding of financial statements company is facing some contingent liability pending case issue which they spoke very clearly in the notes to accounts if a tall company lose the case they may have to pay some 2,000 CR material penalty but as on 31st March it is contingent they disclosed that information of course company going concern all no chance the company is very big thousand they may have to pay the penalty they have to pay profit of the next year or the current year might affect so this they mentioned in the notes I want everybody to consider this I want everybody to see this point they presented honestly remember they disclosed everything appropriately honestly no material misstatement nothing now tell me can I qualify this this can I give a qualified opinion on this are you getting my question so can I give a qualified opinion on a contingent liability which is appropriately presented or disclosed in the financial statements I cannot but that's an important point for the shareholders how should I highlight it ah in audit report you have another side heading right emphasis of matter paragraph there draw your attention we draw your attention to note number 49 which talks about effect of a contingent liability if the company loses the case that they have to pay so and so refer note number 49 indirectly there detailed information is there are you getting the point so emphasis of matter paragraph can be used to highlight a matter where that matter is presented or disclosed in the financial statements by the way suppose no contingent liability compan is facing right they have to disclose it as per accounting standard 4 because it's a material non-adjusting event material non-adjusting event they have to disclose in the notes and they have to disclose certain points only then people understand better but they did not disclose it properly they did not disclose information required as per applicable framework they did not disclose fully now tell me what should I do can I emphasize it can I can I highlight it under emphasis no emphasis of matter paragraph is not a substitute for modified opinion when a company has to disclose something which they did not disclose properly then they did not disclose properly the auditor has to qualify it look at the impact of it pervasiveness of it accordingly give a modified opinion if there is a partial disclosure or non-disclosure you should not emphasize it you should modify your opinion when we modify indirectly we are highlighting that issue anyhow we are talking about that in basis for qualified in that way it is highlighted already are you getting it when we can highlight under emphasis of matter per only when the matter you want to highlight is free from Material misstatement you have evidence for that getting it the only reason why you are highlighting in your judgment it is important for understanding financial statements in a better way for that reason you're highlighting because it's an important point look at that important Point by the way did company presented it wrongly no they appropriately presented you see the definition itself says the word appropriate getting it something which the company appropriately presented or disclosed that only you can highlight suppose if the company inappropriately presented a matter inappropriately they disclosed a matter which is a material misstatement can you is it satisfying the definition of emphasis of matter per no it will not come under emphasis so in such a case if it is a material misstatement what we will do modified opinion we will give are you clear next now so that is emphasis of matter now how do we emphasize how do we emphasize what is the manner of presentation of emphasis of matter per the manner of presentation is just a minute I will take Air India audit report Air India audit report you see emphasis of matter how are they presenting they are using a seding call emphasis of matter then they are using the word we draw attention to what note number 29 note number 26 note number 49 note number 46 all that at the end of the per once all they are highlighted once all they have highlighted at the last know they are mentioning something else our opinion is not modified in respect of the above like we are confirming them look I'm highlighting so many points right don't think they're wrong don't think that I'm having any objectory view on that getting objective view on that getting it so my view on that is not modified my view on that is they're correctly presented they're rightly presented then why are you highlighting because it is important for you because I know you don't read the entire notes to account able to understand so we are highlighting the emphasis of we are using emphasis to highlight important matters that are presented or disclosed in financial statements the manner of presentation now look at this manner of presentation this itself can be asked as a straight question manner of presentation this has asked many times in past also four marks question or six marks question so how will you present this emphasis include the paragraph in a separate section of the audit report with an heading that includes the term emphasis now here they may give you a true or false statement which was given in the last attempt or that before attempt okay when auditor is using emphasis of matter paragraph it need not be included in a separate section it need not be included in a separate section false emphasis of matter per other matter per key audit matter going concern all these paragraphs we should mention as a separate section in the audit report how for opinion you are giving sading and keeping as a section how basis for opinion side reading and all you gave same the emphasis of matter also it should be covered as a separate section within the audit report now Express the matter being emphasized express it give reference to such matter Air India we draw your attention to note number 29 also state that your opinion is not modified in respect of the matter emphasized a India they have given at the end of the matters our opinion is not modified s or no and remember emphasis of matter paragraph is not a substitute for mod ified opinion not a substitute for disclosures in financials as per framework suppose if a company has to disclose something in the financials as per framework if they do not disclose you have to give a qualified opinion or adverse opinion don't say that I will disclose it in emphasis of matter paragraph company Miss no I'll disclose it no getting it reporting as per 570 when material uncertainty is there so if if any material uncertainty is there as per 570 that you need to report separately as per 570 emphasis is not a substit for 570 reporting so what is 570 reporting we'll discuss later okay now so that's emphasis of matter paragraph now when I can use when I can use this emphasis of matter paragraph you can use only when you are not required to modify the opinion on that matter on that matter you don't have to modify the opinion you don't have to modify the opinion on that matter means that matter is appropriately presented and disclosed getting the point that matter is presented and dis closed appropriately and it is not decided as a e audit matter if at all you are already discussing it under keit matter fine why should once again emphasize it duplication right yes or no if at all you are already covering it as a key AIT matter why you why you are emphasizing anyhow you are covering in key audit matter anyhow you refer once again anyhow about that point don't refer duplication we should be avoiding so that is a purpose getting it now examples they'll give you like this question write about usage of emphasis of matter paragraph and give you examples you have to write only these examples don't write your own examples okay because remember person who is valuing your paper is dumb he doesn't know anything obviously no he don't know anything okay so he just compares the answer and value your paper most of them are retired people are also there so uncertainty related to litigation major catastrophe that occurred which have an effect on the financial position some subsequent event that occur between the date of financials and date of audit report early application of some new accounting actually we are not liable our compan is not liable for some IND but we are applying IND to us getting it examples only these examples any two examples you have to quote these examples only you quote don't quote some other example then what is other matter paragraph understood all of you emphasis of matter then what is other matter paragraph look at the definition clearly other matter paragraph is a paragraph included in Auditor's report that refers to a matter other than those presented or disclosed in financials other matter paragraph is not talking about those presented or disclosed in financials those presented or disclosed in financials is already addressed by emphasis of matter paragraph other matter paragraph is not talking about that in Auditor's judgment Rel relevant to users understanding of audit see if I have to make the users understand the financials better emphasis I will highlight important points if I have to make the users understand about audit audit report auditor responsibilities if I have to make them understand about audit audit report auditor responsibilities then where I can talk about my audit audit report and audit responsibilities other matter paragraph example so and so auditing standard 51 in case of inventory lying with third party in case of inventory lying with third party I should get an external confirmation but I did not get external confirmation I deviated from standard why I deviated from standard how I achieved the objective of that standard about this audit getting it I can talk in other matter paragraph in other matter paragraph I will tell as per sa 51 when the inventory is in custody of third party we are supposed to get evidence like this but we did not get like this we went through another alternative way why we went through alternative way all that I described other matter paragraph you can use there are you getting the point two I can talk about in other matter paragraph about auditor report what is IT Auditor report for example you take Joint audit you take Joint audit I'll cover joint audit standard briefly because it's an easy standard okay only one topic I will read in joint audit what is a joint audit an audit is performed by two or more than two Auditors not two or more than two partners getting it when I say auditor means the firm itself completely when two or more than two different audit firms were appointed these different firms might be one might be a soul propior another might be a partnership form so or both of them are partnership firm or both of them are soul Proprietors so two Firs different firms having different F registration numbers getting it when two are more than two firms were appointed to conduct audit of the entity or audit of a component getting the point whether the entity or Branch whatever but for that scope two or more than two Auditors were appointed same scope of work getting the point for the entity financial statements me and another auditor and another auditor three Auditors were appointed so we all have to do audit of the entire financials and give an audit report so this is called us joint audit when joint audit is there how joint Auditors will perform the audit will I mean like first joint auditor one will go and do audit all that and come back and give audit report then joint auditor will to go and he will also do enter audit and come back and give report joint auditor three will go and he will also do audit come back and give report no not this all three joint Auditors together have to do audit when joint Auditors were appointed they have to do audits they understand why joint Auditors first of all is it compulsory in any law that joint audit is compulsory for banks Alan RBI guidelines says if a bank asset sizes 15,000 CR and above minimum four joint ERS must be appointed minimum four joint Auditors must be appointed and maximum joint Auditors for a bank cannot exceed 12 what 12 State Bank of India you see getting it State Bank of India is a company registered under SBA act itself getting it so State Bank of India limited you see it has 12 joint Auditors it has 12 joint Auditors Punjab National Bank has five joint Auditors Reliance Industries limited has two joint Auditors getting the point now why joint Auditors when the volume of audit work is so high one audit firm cannot fulfill the duty properly if the company FS that feels that then they will appoint multiple Auditors same scope same balance sheet same pel all of you have to audit now when multiple Auditors were appointed because we were appointed because the work is high so what we should do we should split the work and do how we should do in case of joint audit the work joint Auditors have to split the work and do getting it like now what is the responsibility of the joint auditor this is one major question in the joint audit which is important now joint Auditors generally divide the work and then do getting it how they divide the work either based on geographical locations suppose if a company is having across India branches so you do North Branch I do South branches so one one one two based on time frame you do first six months audit I do next six months audit based on items of financials you do revenue and assets I do expense and life liability audit based on identifiable units another one is what based on identif you do Branch a branch B Branch C or you do division a division B division C audit I will do division D division E division F audit are you getting the point any other suitable parameter The Joint Auditors they divide the work among themselves and then two now suppose no I have I am doing revenue and asset audit you are doing expense and liability audit whether you did your audit properly or not whether I did my audit properly or not do we need to cross verify each other no a joint the standard clearly says a stand standard says each joint auditor can rely upon other joint Auditors work come on they are also ched accountants you also chartered accountant if they do not do the I mean if they do not deliver their Duty properly they are punishable later okay they are punishable later if it is found guilty getting it you do your duty properly you need not verify the work of other auditor but the point is there are some Works which we cannot divide which we cannot divide suppose balance sheet P notes before signing we should read right all of you hey you read note number first notes first page to 45th page I will read 46th page to 90 page can I do like this because entire notes to accounts balance sheet PN connected every point is connected to every Point here division is not possible reading the financial statements whether the financials are as per applicable financial reporting framework to verify this Auditors cannot divide the work two you know in joint audit do we give separate audit reports no joint Auditors all of them together give a single audit report SBI 12 Auditors signed a single audit report single audit report all 12 Auditors signed on that I will show you SBA audit report you see this this is SBA audit report 12 Auditors they're having how many they're having 12 Auditors from different forms getting it they have 12 Auditors 12 of them signed this single audit report so what is the reporting requirements in case of joint audit joint Auditors generally arrive common conclusion I will show you the matter directly I think better yes so reporting you see joint Auditors arrive common conclusions and express common opinion through a single audit report join Auditors are not bound by majority's opinion suppose in the area of work what I did I found misstatements which are pervasive and I want to give adverse opinion because the mistakes as a whole in the financials are persuasive and you are doing audit you found no mistakes in your area and there are 11 Auditors who are who wanted to give unqualified opinion whereas I wanted to give aders opinion okay and we disagreed with each other what we should do you are saying single audit report in case of exceptional circumstance stances where disagreement is there between joint Auditors where when joint auditor want to give adverse opinion whereas remaining want to give other than adverse opinion then joint auditor can give joint auditor can give a separate report by expressing his own opinion now compan is getting two audit reports on the same financials one audit reports talks about unqualified opinion or qualified another audit report says adverse opinion now shareholders should believe which report that's their Choice like when when this auditor who gave adverse opinion why he gave adverse opinion he will mention the reason right in the basis for adverse opinion section they will read the reason if for them if the reason appears pervasive and material they will agree with him those of a okay like not at all required this reason and all idiot why he highlighted all this I will go with 11 Auditors if at all he felt that you know materiality and pervasiveness are both are relative understand what I feel pervasive is different what you feel pervasive is different what I feel material is different what you feel material is different agreed or not so if shareholders felt the person who gave ad superan is so adamant so conservative you know Auditors are also various types right some Auditors are aggressive in decision making some are conservative some are mediocres getting it somebody five mistake and all why to qualify unqualified somebody hey V gr miss it adverse opinion yes or no it depends upon the risk appetite risk percep ception able to understand so so anyhow whatever opinion you give you give reason that reason people read and they will decide which opinion they you need not take that headache next now now multiple reports are there right suppose what if shareholder opened only one report he don't know about other report also so that's why in other matter paragraph in other matter paragraph We should cross reference other Auditors report dear shareholder one of the Auditors of the 12 joint Auditors have given a separate audit report with a separate opinion kindly read that audit report also like this cross referencing should be there in both the audit reports so in such a case each joint auditor shall refer about other joint auditor report in their audit report where they will refer other matter paragraph by the way the standard itself says each joint auditor can rely upon the work of other auditor they need not review the work of other auditor tell me once you qualify CA will you will you you see IC that's it how much you know how much I know that all irrelevant will you argue like this or not generally H next now so I told you division of responsibility how they will do and some areas where they will have common responsibilities this itself can be asked as a four marks question what are the areas where joint Auditors generally have a combined responsibility where the work is not divided on any particular area opening balance verification the work is not divided all of them have to verify then opening balance if some mistake happen happen tomorrow all of them are answerable to that mistake and decisions taken by all of them on a particular matter or matter brought to the notice of all joint some situation is there some issue is there everybody knows that and proof is also there that everybody knows that in spite office none of them reacted everyone is responsible and for verifying financials whether they are as per applicable statue or not everyone is responsible verifying presentation as per applicable framework everyone is responsible and all of them are giving common audit report right whether the audit report is as per the format recommended by sa700 or not who are responsible all of them are responsible for ensuring that audit report comply with relevant auditing standard and statue all of them are responsible understood or not now in joint audit what are special considerations special considerations nothing generally if I'm doing if I'm the only auditor while developing while planning the audit no me and my office team members if at all visit enough but it's a joint audit all engagement part from all forms all engagement team members important team members from all forms all of them should discuss and develop the plan yes or no because they need to divide the area right they need to discuss mutually and divide the works now can they divide aboly like without consulting other joint auditor no all joint Auditors the engagement partner and engagement team of each each one should be involved in planning they should establish jointly overall audit strategy getting it now they should before commencing all joint Auditors should develop a joint audit plan they may ask you only this third question on four marks point four marks question so joint auditor should develop a joint audit plan what points they will consider in that division of areas what common areas what what is reporting objectives what are the important factors what are preliminary engagement activities what is the nature timing and extent of resources necessary you know this this discussion mainly prelimary engagement activity means what reporting objectives means what these terms are related to audit strategy chapter there we will be discussing in depth I know we are not planned this initially but if it all time permits I will discuss okay next each joint auditor shall do risk assessment everyone shall do risk assessment and everyone should document plans audit plans for common areas audit plan for specific areas and they should give common engagement letter get a common representation letter all of them will give a common engagement letter to the company and get a common representation letter from the company what is representation letter 580 standard I will discuss getting it work allocation between joint Auditors the work allocation entire completely allocation is there right take a print out every joint auditor should sign and how many printouts you will take n plus one getting it joint Auditors 12 right 13 print outs you take one give it to the company tomorrow if company got investigation some investigation is going on they called so and so auditor which auditor they will call Sir whoever have done purchases work they have to purchase work as per the plan so auditor has done so company directly will call them so a plan allocation work work allocation plan should also be given to the entity so they should be documented and signed by auditor and shall be communicated to those charged with governance work allocation should also be communicated to the top management clear go over joint audit so simple right next now other matter paragraph now other matter paragraph is used for what purpose so other than information presented or disclosed in financials if you want to talk about that in the audit report like audit audit responsibility you know audit audit responsibility or audit report three terms for there regarding audit I told standards deviation regarding audit report joint auditor tool auditor responsibility you know briefly I'll give you this example SBA example brief example I'll give such a beautiful example okay SBI know quickly I'll conclude this topic okay SBI limited I think probably after this we will be left with key audit matter discussion going concern discussion and Reporting requirements Carrow that's it so probably after this another one and half hour we'll be finishing this standard now SBA limited no it has one subsidary company called SBI life insurance SBI Life Insurance Limited SBI limited is having one subsidiary call SBA Life Insurance Limited now SBI since it has subsidary they have to prepare Standalone financials cons Consolidated financials now SBI limited is having an auditor yes or no let us call him as Mr H he's a holding company auditor so let's let's name it as H SBA limited is a subsidary company of SBA right SBI limited is having a you know an auditor called Mr yes getting it now SBA limited no it is having more than 25,000 branches across India or maybe 23 24,000 I don't know exact number but more than 20,000 branches they have across India how many branches 20 ,000 branches out of that 16,000 branches were not audited were not audited 5,000 branches approximately were audited within this 5,000 branches in Chennai mil Laur there is a State Bank of India limited one branch is there this is being audited by Mr B who is only Branch auditor Mr B is who Branch auditor of SBI getting it now you know like Mr B for SBI how many Branch Auditors they have some 5,000 Branch Auditors they have Branch auditor responsibility is what doing Branch audit financials audit of Branch financials and given audit report on the branch financial statements now all these Branch related audit financial statements Branch Auditors report and all will be given to whom main Auditors whom main auditor we call him as principal auditor we call him as what principal auditor who is the principal Auditor in our example Mr hedg holding compan company auditor nothing but by the way from Branch point of view it's a head office from subsidary point of view it's a holding company able to understand from whose point of view it's a head office branch point of view now Branch financials head office financials together we consolidate right that financials are called as what ah very good Standalone financials Standalone financials are nothing but head office plus branches all put together Consolidated financials are what you are you doing Standalone right that Standalone financials of holding plus Standalone financials of subsidiaries Standalone financials of associate and Joint venes if you consol that's a Consolidated Consolidated financials or financials consolidation of different entities Standalone financials are consolidation of within the entity different divisions and branches understood or not now auditor Mr H SBA limited he should give opinion on what he should give opinion on Standalone financials of SBI Consolidated financials of both he should give opinion correct H but Mr hit he only did audit of head office he didn't do audit of branches Branch financial information he also don't know whether it is right or wrong but Mr H is saying stand alone financials are true and fair why Branch Auditors said they are true and fair now my audit report you are trusting right same way Branch Auditors report also I am trusting so Branch Auditors they have audited all the branches and they said true and fair unqualified opinion so at the whole company point of view also I am giving unqualified opinion suppose Branch auditor give adverse opinion on one branch should I give adverse opinion on the overall company also maybe at Branch level that is pervasive same mistake I will evaluate from Total company point of view if overall company point of view also that mistake is material and pervasive then will also give adwards opinion but I felt overall company point of view Branch Auditors some of them gave adwards opinion qualified opinion all that but they are all negligible as a whole entity point of view they're negligible so I ignore that I give which opinion unqualified opinion now tomorrow ultimately you see State Bank of India you saw right now report only 12 joint Auditors names were only written on that but tell me entire audit of State Bank of India is it performed by only these 12 joint Auditors no there are Uniden IED unknown 15,000 sorry 5,000 Branch Auditors were also there whose reports were taken by principal Auditors and they used these audit reports and gave their opinion on the overall financials correct tomorrow if something went wrong in so and so Branch people immediately comes and questions us hey what are you doing Branch audit I need to clarify hello I am not Branch auditor I am principal auditor I gave my opinion based on Branch auditor opinion he said everything is true and fair and so I am taking his opinion and I'm giving true and fair opinion why are you blaming me I I liable to verify Branch Auditors every financials also if at all I have to verify why Branch auditor then are you getting it Branch Auditors are also Chartered Accountants holding cop they are equally competent like me they for them also auditing standards apply for me how what are all rules and regulations apply for them also everything applies just to that since a single as a person I cannot cover everything we have a branch auditor separately are you clear so now there is a division of responsibility on the financial information which we certified correct whatever financials of entire SBI that we attested that we signed we are IND we have to tell people yes I am only signed but I signed this entire balance sheet pendl which includes financial information of 20,000 components which are AED by other Auditors getting the point to that extent to that number to that extent of numbers my opinion is purely based on their opinion correct or not my opinion is purely based on their opinion as a whole whatever they told that only I Consolidated and applied my judgment and I gave my opinion if something went wrong in the branch tomorrow you can question me I will reply but don't blame me because I am not responsible ible now I should talk about this responsibility right I should tell this situation right such a severe situation State Bank of India auditor told the same in other matter paragraph see other matter paragraph what they have mentioned is look shareholders we did not audit 5753 branches whose total asset value 21 lakh CR whose turnover is 1.3 lakh CR okay you didn't audit then how come you give opinion wait these financial statements have been audited by Branch Auditors whose reports have been given to us and our opinion as far as related to these amounts are purely based on solely on the based of Branch audit report by the way I'm not complaining here anything my opinion is not modified I'm not complaining anything here I'm just bringing you the fact that 21 lakh CR worth of assets see balance sheet no I signed 30 lakh CR is a total asset value 21 lakh cor worth of assets I didn't audit somebody else have audited I'm mentioning that in my main audit report because Branch audit report is not publicly distributed only main audit report is publicly distributed able to understand got Clarity or not that's it so that is other matter paragraph reporting requirement now here we have newly added content related to Branch Branch audit I will just open that and discuss I will just open that and discuss audit of Branch accounts see audit of Branch accounts by the way same way same way one more thing I will give audit report on Consolidated financials right Consolidated financials is a result of holding company plus subsidary you know Tata Sun there is a company called tataa sun or let's take Reliance itself Reliance Industries limited it is opened I'll show you right now I'll show Reliance Industries limited consolidation you will be solving consolidation problems right so so tough right R annual report I'm downloading okay or else I I'll tell you the M impact itself I'll tell you you know in r no in Reliance Industries no in Consolidated financial statements auditor will give AIT report right in that audit report no auditor will mention by the way Consolidated financials they consolidation of the main company and all subsidary companies together but subsidary companies were audited may not be by this auditor right subsidary companies are audited by different different Auditors Reliance main Auditors in the audit report given on Consolidated financials inside that other matter paragraph what they mentioned you know we did not audit 285 subsidary companies 170 associate companies 65 joint ventures they mentioned that these companies were audited by other Auditors whose report is given to us and our opinion on the above Consolidated financial statement is Solly based upon the opinion given by these component Auditors understood or not now you see the definition of component here you see here they have given sea 600 contents slightly gave who is principal auditor who is other auditor what is a component you know generally from standalone finan statements point of view what is a component division or branch is a component for Standalone financials for Consolidated financials what is component subsidiary joint venture Associated Enterprise so component means a division Branch subsidary joint venture Associated or other entity whose financial information is included in financial information audited by principal auditor if principal auditor is auditing financial statements right in that other end other component financials are included right so that is called as what we are including is called as component now they're using five words component means all these five now out of them these two are talking about Standalone financials whereas these three are talking about Consolidated financials perspective I don't know how many of you have read this point and understood the difference here getting it so component can be a branch or division for Standalone financials component can be a subsidiary company associate or joint venture any other entity for Consolidated these financial information is included in financial information audited by principal auditor able to understand now who is a other auditor other auditor is an auditor other than principal auditor who has responsibility to report on component whose information is included in financial information audited by principal principal auditor is an auditor responsibility for reporting of an entity you see princip auditor means entity auditor not component auditor getting it when financial information includes principal Auditors auditing balance sheet right that includes balance sheets data of components audited by other auditor so because of sa 600 requirement in other matter paragraph We should clearly mention that to the extent of components included in Standalone financials to the extent of comp components included in Consolidated financials the audit was performed by other Auditors their reports are given to us as a whole considering all that report and my audit of these main entity my opinion is given like this you are mentioning in other matter paragraph got it understood you have to read later on then by the way who can be appointed as a branch auditor I'll just finish this Branch auditor can be appointed by the auditor appointed Branch by The Who can do Branch audit of a company main auditor himself can do or we can appoint another qualified person suppose if the branch is outside India main auditor only we can send him to do audit or we can send another chartered accountant or if the branch is outside India there are also some certified public accountants competent people will be there now so by any other person duly qualified to act as an auditor of the accounts as per the law of that country remember audit is a universal subject audit is a universal subject auditing stand that we are following are internationally same getting it so at the end of the day whether I am auditor of a US company whether I'm an auditor of Europe company every company prepare financials as for S of framework I have to verify whether they prepared as for S of framework and give an opinion that's it clear now Branch accounts related discussion is also there but let me not hurry up so we'll we we'll discuss this in the next session and then finish it up okay are you comfortable until now so what else we are having pending is 710 comparatives one thing is pending pending uh 71 key audit matter is pending and Branch accounts discussion is slightly pending then finally I will discuss with car over this chapter will be over another one one and half hour probably will be over clear in car also I'll not discuss each and every Clause important clauses I will be covering okay that's it so let's resume with the uh next session uh in the previous session like uh we have been discussing the branch accounts and Branch audit topics I first of all understand Branch audit is not compulsory Branch accounts is also not compuls technically speaking if you look at the companies act also even there is no uh there is no compulsion that branch has to be audited by a separate auditor first of all an organization is not necessarily required to establish a branch are you getting the point so suppose you you take aenue superm Mar Dart itself you take they have stores across India but their accounting is happening centralized at at their corporate office only they don't have Accounts at branches separately getting it but contrary you take Banks Banks they have especially public sector Banks not even private sector for public sector Banks accounts are maintained at branches separately again now in case of banks Branch audit is popular only for public sector Banks like HDFC ICI these are all private sector right there Branch audit concept is not there because in ic HDFC all this private Banks the accounting happens centralized whereas in public sector Banks accounting happens at then and there at Branch level itself if a branch is maintaining separate books of accounts it's for its own operations then only the concept of Branch audit arises if at all entire accounting records are maintained at single like head office itself corporate office itself there is no need of separate Branch auditor again Consolidated accounts are available at head office itself so first of all having a branch itself is not compulsory for law from law point of view for business convenience point of view we've open branches but legally is there any requirement that we have to open the branches no same way okay if I open a branch should I maintain separate books of accounts for branches is there any compulsion no that is also no compulsion suppose if an entity has opened a branch and uh has maintaining separate books of accounts that Branch books of accounts audit can be conducted by whom main auditor himself if in in the absence of any specific appointment for branches the company auditor himself can do the audit of Branch or if you want to have a separate auditor for branch another chartered accountant having C can be appointed suppose if the branch is outside India any of them either the company auditor principal auditor can do the audit or uh Branch auditor we can send a separate chartered accountant another chared accountant to do the audit or we can appoint an auditor as per the loss of that Nation getting it so any of them can be appointed as a branch aitor now when a branch auditor has been appointed when a branch auditor has been appointed the principal auditor the main auditor of the company has to use the work of Branch auditor we call him as we have a standard called SCS 600 using the work of other auditor we don't have in-depth discussion on that we only have a brief discussion on that so what it says when accounts of the branch are audited by a person other than company auditor there is a need for there is a need for Clear understanding of role of the other auditor so you need to understand what is the role of the other auditor role means what is his scope getting it now what are the reporting requirements for branch auditor first of all if you ask me same reporting requirements what main auditor of the company has same reporting requirements but on a branch level like for example we all know car reporting requirements suppose if car is applicable for the company public company naturally for the branch also car is applicable so the branch auditor should also comment on those 21 Clauses getting it but those Clauses he will check from perspective of the branch able to understand so he will not be checking it from the perspective of the company so that's the only the difference only the scope of coverage is different but the rights and duties of Branch auditor and Main auditor the powers the formalities engagement letter representation documentation evidence collection everything reporting everything will be same for both of them but when a company auditor is considering materiality right main auditor he will consider materiality from whole company point of view entity point of view whole complete point of view but as a branch level auditor he considered materiality at a branch level only getting it suppose if a branch turnover is 10,000 CR and the company turnover is 10 lakh CR getting it now Branch auditor will decide materiality based on 10,000 cre whereas company total turnover including all branches put together is 10 lakh the company auditor will decide materiality based on 10 lakh understood so so therefore there is a great necessity for proper rapo between the main auditor and Branch auditor so when using the work of other auditor the principal auditor should ordinarily perform the following procedures this itself it can be asked as a four marks question so how principal auditor can use the work of other auditor what are the audit procedures the principal auditor will do what audit procedures the principal auditor will cover while using the work of Branch auditor so here what work like we need to you know whenever we were appointed as a main auditor and when we know that for branches of the entity for components of the entity separate Auditors were appointed at the end of the conclusion of my audit I have to give opinion on the overall financials which includes Branch financial information which is audited by Branch Auditors so in if that is the scenario if that is a situation principal auditor should advise the other auditor how his work is going to be used make sufficient arrangement for coordinate at the planning stage itself so at the planning stage of audit itself you should you should advise you should have an interaction with all the branch Auditors of course we will not have a direct Zoom or Google meet interaction at all we will send them sudden checklist you know as a principal auditor as part of my audit procesor with respect to branches I will send certain checklist items questioners I will be sending to Branch Auditors look only if you finish the audit I can finish my audit getting it if at all Branch auditor has not given the audit report can I give my audit report is it possible obviously not so I need to advise him you know I need to advise him the timetable for completion of audit so I need to advise him at the first like what is the timetable within which we have to finish the audit look this company is this company is a listed company they have to file with sebi by May 31st itself all the financial statements everything audited so we have to complete everything by May 10th at least so if I have to complete audit by May 10 you have to complete by April 30 so I need to advise them okay and principal auditor should shall also advise Branch Auditors see this is a bank loans given is a very special area where so many NPS were there getting it I need to tell the bank you know I do risk assessment right as a main auditor I do risk assessment even as a branch auditor you also do some risk assessment and as a main auditor of the entity I found certain risks at the entity level at a overall company level I found certain risks especially in the loans and advances given to various customers there are so many special mention accounts there are so many special mention accounts which are not turned into NPA special mention accounts means just a default started 90 days is not yet completed generally when when a loan is given when a loan is treated as NPA if the amount on that is overdue by more than 90 days then we call it as what NPA but the amount is just overdue 90 days end all not yet arrived we call them a special special dition accounts so when I interact in my risk assessment process when I spoke to the people management I found there are so many defaults from the customer I need to tell all the branch Auditors look NPA is a special focus in this area in this in this particular entity there are so many high level of NPS that are there for this particular entity so we all have to be very very careful so I need to advise the other auditor what special considerations and I should also tell him what are the significant accounting areas that Branch auditor should focus on what are the significant auditing and reporting requirements I should focus on they should focus on and also I will get a I will also obtain representation as to compliance with them nothing but I will tell them look for this company where we are doing audit car is applicable you should also you should all all Branch Auditors also should give me car report for this company 143 subsection 3 checklist is also applicable you should also you should all do this 143 subsection 3 for this company if at all any fraud is identified less than one CR we should report to board of directors audit committee if it is more than one CR we should report to central government I should inform all the branch Auditors all these reporting requirements also I should communicate to Branch Auditors because Branch Auditors may not aware of what are all the reporting requirements that are applicable for the entity they may not aware of that's it now for not only that principle auditor might discuss with other auditor or review a written summary of other auditor procedures whatever Branch auditor has performed right if possible I can review his workings but remember generally we don't do SCA 600 clearly says there is a there is a clear division of responsibility between principal auditor and Branch auditor for the branch operations for the branch audit related responsibility the complete responsibility is with the branch auditor only you know when when when any reg investigation went on further they will only see one point as principal auditor communicated with other auditor as per standard on auditing 600 or not they'll check they will check whether you have a proper coordination between You Are Not Alone they will CH if possible the principal auditor may also wish to visit other auditor getting it if at all he want to directly interact with any significant branch of the entity he can visit directly other auditor and by the way how much like the nature timing extent of procedures will depend upon circumstances of the engagement and Auditor's knowledge of competence of the other aitor like how whether I will visit there whether how much I will focus on Branch auditor work how how much I review their work it all depends upon my understanding of their skill set if at all I feel the branch auditor is a very competent guy yes or no if at all he knows everything good very good in my interaction I was I got very confidence that he'll do very well the work I may not visit also getting the point so I will directly take his report and then conclude my audit what they have covered in entire this Branch accounts and audit question getting it now you can read you read it you will understand later on here they just kept about kept about I mean they just spoke about books of accounts all that books of accounts of branches also must be kept at registered office but if it is not possible if the books are maintained at Branch periodically yes or no the branch has to at least send a summary data of books of accounts to head office so that is what they just mentioned every company has to maintain books of accounts on acal basis all that is what they spoke here C so now we understood other matter paragraph where we understood SE 299 and we understood Branch audit responsibility where in the other matter paragraph auditor can talk about Auditor's responsibility cor that's it so by the way other matter paragraph will be included when it is not prohibited by law of course there should not be any Prohibition in law in India there is no such prohibition there is no such Prohibition in India on the other matter paragraph or emphasis of matter paragraph or any other paragraph SCA 71 if at all you decided it as a key audit matter then also no need to communicate it under other matter paragraph able to understand now I'll come back to this one I'll come back to Q AIT matter now or going concern point I'll cover going concern point I'll cover then I will discuss about key audit matter now you see if you I hope you're all clear on these things right now so one is emphasis of matter paragraph we understood clearly other matter paragraph we understood responsibilities of management already we have seen that is nothing but preconditions toward it nothing but now now let's look at Material uncertainty related to going concern it is actually there as part of uh fourth chapter so we have a fourth chapter right in that 570 standard is there we'll go there see in the audit report in the audit report the paragraph is what material un certainty related to going concern this is one standard very important every time a question is coming on this either an McQ or a true or false or a descrip okay so see going concern is a very important assumption which every company chooses of course see what is our responsibility simply whether the financial statements that are prepared by The Entity whether they are true and fair or not yes or no this is what our responsibility we should obtain reasonable assurance whether the financial statements are true and fail now in that financials management has chosen one assumption that the financial statements are prepared based on going consern now I should check as part of my audit whether the Assumption used by the management is fair or not when I when a management can use going con assumption only when they can continue the business successfully only when they can only when they can continue the business without any interruptions only then only if they have that ability they can use the going concern assumption you know there was a news yesterday or day before vone is going for extra funding 45,000 CR funding they're going for extra getting a vone already vone we know how struggling it is vone and idea in spite of their mer their merger still they're not able to perform they're not able to compete with Gio and a getting it now they're going for extra funding so that they can acquire more market share in 4G and 5G Spectrum get think it so they're going for it now before again a India also if you see before Tata acquires a India a India was struggling a lot they are having accumulated losses of 70,000 CR accumulated losses of how much 70,000 CR net worth if you see it's actually negative net worth is how much negative that is what accumulated losses is nothing but see if a company is getting profits realized profits that to realized profit means what you sold Goods on credit and you recovered the money also suppose you sold Goods on credit you purchased for 10,000 I sold Goods on 20 for 20,000 on credit completely 10,000 rupees profit I have but I have not realized it many companies are having unrealized profits getting it what is realized profit is very important for going concern the most important principle that we check here is liquidity the most important principle that we check is liquidity so whether the entity has ability to continue as a going concern that we need to check whether the organization whom we are doing audit right do they have the ability to continue as a going concern can they continue the business that we need to check they will say sir we will continue the business we can continue the business we don't have any issues they will claim all that we should check whether they whether their claim is correct or not whether their ability is correct or not is it possible or not we should check getting it so for that know what we will see is first of all tell me who responsibility primarily to check going concern assumption management they are responsible for going concern assessment management is responsible so at as on 31st March nothing but reporting date at every reporting date the organizations management should assess themselves can can our business sustain in this competition in this so much of risk can can I mean can we continue our business or not so what are the problems that we are having you know in companies know they will have a committee listed companies especially risk management committee they the committee only duty is what you know they try to identify the risks what are the risks that the entity is facing business risks and all getting it so they try to do continuous risk assessment or risk assessment is not something only auditor do risk assessment is something management also do our risk assessment objective is different their risk assessment objective is different their risk assessment objective is to continue the business whereas our risk assessment objective is to identify the areas where mistakes can happen in the financial statements ours is in the context of financial statements audit there in the context of continuity of the business getting it so man management has to do they have to specifically assess they have to specifically assess risk so the preparation of financial statements requires management to assess entity ability even if the financial reporting framework does not include an explicit I mean assessment to do so nothing but see some financial reporting Frameworks suppose you you see schedule 3 schedule 3 silent on going concern checking even accounting standards are also silent whether accounting standard one says we must use going con resumption for preparing financials if we do not use specifically we have to disclose beyond that it is not talking you see our financial reporting framework it is silent on management has to check going concern ability that point is not in the financial framework just because there is no explicit requirement can we skip this no whether there is an explicit requirement or not in the financial reporting framework management has a moral responsibility to check whether going concern is possible remember if going concern assumption is not possible we have to show entire balance sheet values at net realizable value we have to prepare balance sheet on liquidation basis when you prepare balance sheet on a liquidated basis it will not balance it will not tally getting the point in a double entry system amounts will be equal debit and credits total of debits equal to total of credits in a double entry system whereas once you start preparing fin financials on liquidation basis getting it you will either end up with the net result positive or net result which is negative you either end up with these two when you prepare financial statements on liquidation basis so see that this is the fact this is the fact why we show fixed assets at historical cost why Ford Motors India they showed fixed assets at cost basis even though they making losses because they don't want to close the business so whatever amount they have invested some 15,000 CR 10,000 CR they have invested in plant and missionaries factories so they're depreciating on the 10,000 CR some 500 CR they depreciated again 500 CR they're depreciating every year some book value carrying value of that plant and missionary Factory somewhere around 7,000 or 7,500 CR carrying value but its net realizable value is not even 700 CR not even 10% the carrying value getting the point then why are we showing at 7,000 CR when when in the real Market if you sell this why are it not even F 10% of the value then why are we showing at 7,000 CR who the hell are selling I am not selling it no you are not selling the factory means what are you trying to do I want to continue the factory I want to run the business I want to manufacture cars and sell the cars and recover more than 7,000 crores correct you all have impairment L standard this is what in impairment they tell right what is impairment loss carrying value minus recoverable value yes or no if recoverable value is more than carrying value no impairment if recoverable value is less than carrying value then there is an impairment yes or no by using the fixed assets I should be able to generate more than carrying value you see in my balance sheet fixed asset value 7,000 if I today sell it 700 only but I'm not selling it right if I have if I have to sell it I am concerned about how much I will realize but I don't have the intention to sell it so what is important by using this asset how much cash flows I can generate in the near future in the next 10 years or next 7 years that I will discount it to the present getting it and see the recoverable value present value of discounted cash flow this is a technique you use in impairment so impairment is not there now you know Ford has reached in such a stage that they're not able to sell at least 100 cars in a month where other companies you see other companies they are selling at least 5,000 cars 10,000 cars maruk is telling every year every month 10 to 15 lak cars they're selling sorry one to one and half lak Cars every every month they are selling one one and half lak Cars maruki whereas for is not able to sell at least 200 300 cars also how how will you pay salary so it clearly shows you cannot generate money by using these assets you cannot generate money by using these assets you should not show them at historical cost your going concern is a management has to do this assessment every year they have to do the assessment now by the way going concern means obviously assessment is about past or future obviously future how long for future means for how many years from the report date at least one year is Enough from the balance sheet date next one year you check from the balance sheet date with the next one year nothing but from balance sheet did exactly 12 months okay whether within this 12 months whatever company liabilities were there right can the company repay just we have to check that if at all company can repay if the company can repay yes company going concern is good this is what we assume suppose if the company cannot repay you assume that going concern is inappropriate you assume that going concern is inappropriate within the next 12 months the obligations which the company has they cannot repay how you are repaying I don't bother whether you will take extra loan whether you will raise funding from shareholders whether you get some foreign funding that and all I don't bother next 12 months you have 100 CR liability can you repay it or not I will see whether you borrow from so so party whether you borrow from your relative whether you you borrow from holding company whether you borrow from subsidary company whether you borrow from Bank how will you bring the money and repay I am not thinking about that I'm only concerned about can you repay or not the moment you start defaulting like people may you know file a case against the Company insolvency bankruptcy code and all comes into picture insolvency proceedings will start where will you do the business if you default you will stop doing the business yes or no so management you know management assessment about going conern involves inherent uncertain future outcomes they have to assess the future outcomes getting it so they need to consider what is the degree of associated outcome of an event like what is the possibility that the company will fail what is the size and complexity of the company nature and condition of the business condition of the business is what is the status of the business any judgment about future is based on information available at time when the judgment is made obviously see to today when I say going concern is possible I am telling it today because based on the information available today I'm saying future it is going is possible this this information might change later on so this question can be asked you know the second point iser right this itself can be asked as a straight question Management's assessment about entity's ability to continue as a going concern involves making judgments at a particular point in time about inh ently uncertain Futures what are the factors that are relevant regarding these judgments what factors are relevant so management considers uncertainty degree of uncertainty of the future outcomes size and complexity of the entity actually this itself can be taken a separate Point nature and condition of the business and the degree to which it is affected by external factors and remember any judgment about future is based on information at the time when the judgment is made and objective is not required so what is auditor responsibility we have to obtain evidence regarding appropriateness of Management's use of going concern basis so every company will prepare financials based on going concern as an auditor we should get evidence on whether this assumption used by management is it appropriate or not only to that extent our objective is to get evidence whether they used going C resumption rate it is it fine is it possible is fine you should have documentation if you do not have documentation you can't how will you prove that going concern is possible so you should have documentation what you will document you know what audit procedures we will do right I I'll show you you know we will try to see indicators we will try to check indicators whether the company is having any of these symptoms going concern is affected suppose if a company going concern is affected how going concern is affected symptoms you will find see remember indicators does it mean company will shut down the clothes shut down the business no indicators will only give you an idea that company's ability is affected okay so the following are the factors that cast significant doubt on entity's ability to continue as a going concern remember the sentence events or conditions that cast significant doubt on entity's ability to continue as a going concern getting it so the the factors are various it may be due to financial issues it may be due to operational issues or it may be due to other issues for example non-compliance with capital non- compliance with regulatory requirements such as solvency or liquidity requirements for financial institutions PTM has been failed to comply with RBI requirements RBI is regulatory for PM so PM failed to comply with RBI requirements and that's why the PM's Banks PM Banks which is a separate entity the license has been cancelled getting the point so if you fail to comply with regulat requirements it affects your business it suddenly stops your business regulator suddenly cancels your business look at s bank 3 4 years ago what happened with s bank look at with Punjab National Bank getting it of course Punjab National Bank is of a different issue again that's not a regulatory related issue that's a fraud Punjab National Bank it's a fraud happened getting it pending legal proceedings against the entity if successful the company cannot pay you know vone they still have to pay 50 ,000 CR worth of amount to Telecom regulatory authority of India 50,000 CR worth of amount suddenly Telecom regulator says I will not give installment you have to payone have to I mean they have to in they have to like they have to sell their complete company to somebody and then get the money and then pay change in law regulation or government policy that adversely affects the business sudden changes in government policy suppose if the government comes up with you know certain notifications regarding some educ institutes getting it so suddenly some universities and all may have to stop functioning uninsured or underinsured catastrophe suppose if some catastrophe happened and you don't have proper insurance for the missionary getting it that is another reason why your going concern might affect next operating conditions so some operating indicators will also be there like if an an entity is going concern is affected and entity is going concern why company cannot continue the business because management itself want to CL CL the business managements intends to liquidate or loss of Key Management without replacement generally in stock markets if you see suddenly if a listed company owner he di shares and all you know clung like anything like they just fall down of course they recover again later but if at all the company could not find a proper replacement for the main whoever the CEO very difficult for the company to surine loss of Major Market loss of key customer loss of franchise loss of life license loss of supplier right now vone is not able to compete with others because they don't have 5G license loss of license that's nothing but loss of suppliers loss of I mean lack of suppliers one more one more important thing is lack of suppliers today cars waiting period mobiles waiting period yes on manufacturing and all affected badly because of semiconductor shortage getting it and that's why India want to promote semiconductor manufacturing labor difficulties labor strikes shortage of important supplies highly successful competitor suddenly Emer our company going conern is affected back Financial indicators net liability position borrowings are approaching maturity without any prospects of renewal or repayment like I'm I have to pay next month I have to pay some loan but I don't have money in my bank getting it growing concern might affect withdrawal of financial support by creditors adverse key ratios discontin of dividends because of lack of funds a company stopped paying dividend because of funds issue inability to pay creditors on due date inability to obtain Finance for the new product or development of any other investment suppose I want to launch a new product but I'm not able to find any you know funding many startups know they died in the initial stage itself because of lack of funding even though they have a very Innovative product that's why today sharks you know show is popular popular yes or no they give funding and they're also advertising both so these are the condition s that will give that will cast a significant doubt on going concern now you see write about risk assessment procedure now I I showed the list right there the question can be asked in the way what are the what are the financial indicators getting it regarding entity's ability to continue as a going concern what are the operating indicators anywh they can ask a descriptive or they can ask an McQ which of the following is not a financial indicator which of the following is not an operating indicator like that they ask mcqs getting it now auditor should also do risk assessment procedure related to going concern first no auditor has to check whether management has already performed whether management because it is primarily whose responsibility management management has to do going concern risk assessment they must have a formal system in listed companies it will be there in listed companies risk management committee will be there they do all this so whether management has a formal system to continue their ability to to verify to evaluate their ability to continue as a going concern if such an assessment is performed just discuss the assessment with management see ask them sir have you identified any events have you identified any condition that may cost significant doubt on entity's ability to continue as a going concern if so if at all management identified some symptoms how management is addressing them how management is answering how the management is resolving them suppose if management has not performed if management has not performed that assessment but still they are using going concern basis on what basis you using see if you do an assessment whether I can continue the business or not if you do the assessment and based upon that you got a positive result and then you are continuing the business fine it is correct but if you have not done the assessment at all without doing the assessment how come you choose and going con assumption ask them the auditor also shall remain alert throughout the audit through the audit be alert to identify any event to identify any condition to identify any symptom indicator that may cast a significant doubt on the entity's ability to continue as a going concern this itself can be asked as a straight question what are the right about risk assessment procedure related to going concern the last now management they have to do a detailed analysis of going concern generally they have to do a detailed analysis of going concern suppose look at goo Reliance company they are having super profits they turnover is super they're consistently getting you know Revenue no marketing nothing they're also not doing much of marketing getting they don't they don't put any advertisements and all so it's just Word of Mouth the the compan able to sell so many products so many services just based on Word of Mouth getting it now you see suppose when there's a history of profitable operations ready access to financial resources management makes its assessment without detailed analysis in such a case evaluation may be made without detailed procedures if Auditors other procedures enable the auditor to conclude Management's going concern use is appropriate like Reliance if all I'm doing audit of Reliance example Reliance has a very ready made readily available so much of profit just like that they'll get loans if at all they want going concern issue itself is not there so management did not perform detail analysis I will also not perform detailed procedure because it is ready completely if at all based on my understanding of the overall entity if I got to know that company is very stable I may assume that company's going con assumption is proper getting it whereas in other circumstances other circumstance means what here if at all compan is not having profits if the company is not having ready accessibility to finance suddenly if they want 5,000 CR they can't get getting it evaluate management assessment may include an evaluation of process followed to make its assessment assumptions on which assessment is based whether management plans are feasible all these you have to check how management assessed what information they considered now finally what decision they they have taken going concern appropriate or not appropriate what they have what they have taken all that now for how much period we have to do assessment we have to cover at least at least 12 months from reporting date 12 months from reporting suppose if the management has prepared for less than 12 months from 31st March cash flow forecast what is it cash flow forecast if the cash flow forecast is made only for less than 12 months from balance sheet date we will ask Company please prepare budgeted cash flow statement budgeted cash flow forecast for at least 12 months minimum 12 months they should prepare so March 31st 2020 23 suppose if that is a balance sheet date up to 31st March 2024 next one year whatever liabilities you have including your monthly employee cost including your all monthly fixed cost and all getting it including that including liabilities that are maturing in the next year like some debentures were maturing in the next year some preference capital is maturing some loan emis and all you have to pay all that outflows how much right now what is the business how much it is happening every month how much on an average how much business we are making assuming the same business is happening in the next one year provided no exceptions exist in the market getting it so next 12 months can the company repay without any difficulty if at all anywhere negative is coming anywhere deficit is coming whether company has v facility available whether company has a cash credit facility loan facility available we need to check like you know once upon a time this going concern know many Auditors they don't check properly they simply say they simply say uh we did not find any events or condition I condition and they escape from the standard the standard also says what you have to do further audit procedure when as per the standard when you find any events or conditions when you find any events or conditions that cast a out on goinging concern you have to do further investigation getting it so that is what what are the additional audit procedures when events or conditions are identified if you identify any events or conditions what Additionally you will perform what additional procedures you will perform if you identify any events or conditions if at all I did not identify any event or condition I am not supposed to do additional procedure I will simply do risk assessment procedure risk assessment procedure means what I will ask management have you performed the GOC assessment if so have you found any events or conditions like this if not give me the documentation I will just briefly check and then close my audit for 570 if at all management identified events what events they identify and what extra work you did so that you can resolve these events and conditions tomorrow if it comes so I will document all that now if at all I identify any event and condition beyond what management identify additional procedures I will do what what additional procedures what is the Management's plans for future action entity whether the entity prepared a cash flow forecast based on reliable data and generally about the future they assume right they they like they estimate future cash flow based on assumptions right how far assumptions are having supporting information whether any additional information is available since the management performed this assessment management they identified some events or conditions they did all this future cash flow all that forecast this and all happened in April month whereas I'm doing audit in June month within this two months whether any additional information we got that we need to check and written representation I need to get a written representation from the management regarding their future plans and feasibility of those plans management has to give a declaration sir yes we have some symptoms of we have some issues related to going concern but it is not that a major issue we can resolve by these products okay we are now going for digital marketing so we will increase our marketing marketing cost and all and till that we have never do any any marketing so now if at all we spend on marketing we'll be getting to know to more people now we will be there will be so many who will buy our products and all getting it so this is a future plan of action sir how far this is feasible the look sir we have taken Market experts opinions also they are saying all these plans are feasible like that they will give a declaration to us Britain declaration that's called as what Britain representation so they'll ask you this question additional procedures they'll ask you this question straight away you have to write what are the additional procedures this you this you have to write sometimes they'll ask you give examples of audit procedures they'll ask you a question give examples of audit procedures when events or conditions were identified what are the audit procedures that you perform when you identify events or conditions that may cost significant doubt on entity's ability to continue as a going concern so give give you examples the last directly examples means you have to wrate from the below any Four Points like what I will do I will analyze cash flow I will look at latest interim statements if at all available I will read debentures and loan terms agreements and all I will read the minutes of the shareholders minutes of the meetings of board of directors all that I will talk to the lawyers whether any pending cases pending against the company I will check whether any arrangements for finance is there whether any financial support related party support and all is there and how entities dealing with unfulfilled customer orders means customers have paid at once they ordered the goods with the company but company have not yet started manufacturing because of the lack of funds whatever customer gave atance that is PID to suppliers pending dues and subsequent events if at all there adequacy of borrowing facilities reports of regulatory action and whether any sale of assets and all has been planned by The Entity all these I will check again examples any four points or any Five Points getting it so what are the additional procedures you do and what are the examples of audit procedures you do technically so this both are different both are different questions getting it anything can be tested in exam next have you not studied this standard earlier have you this much is not there right finally what auditor will conclude finally what auditor will conclude see suppose no I I'll tell you about Air India situation what happened in a Air India in their audit report in their audit report they mentioned like this here you see here they have mentioned like this material uncertainty related to going concern this is a side heading which they mention below they have given the matter what they mentioned you see the company has incurred a net loss of 7,000 CR they have given in millions I'm just turning into crores okay 7,765 CR during the year ended March 2020 this was 1920 year and the company's current liabilities exceed its current assets by 54,000 CR means net current liability position and the accumulated losses are 70,000 CR approximately the Air India accumulated losses are 70,000 CR see look at this fundamental financial analysis how can I have excess of liability over asset that to current liability over current asset how it is possible if I have money in my bank account that's a current ass and uh I can suppose if I have 10,000 rupees in my bank I can only pay 10,000 right if I pay 30,000 then I have a negative current liability able to understand a negative negative asset balance I have so if I have 10,000 I only pay 10 not 30 how I paid 30,000 to a creditor by borrowing 20,000 rupees funding by borrowing 20,000 rupees from Bank extra now I have 10,000 in my balance sheet asset I have 30,000 liability 10,000 I paid another 20,000 I borrowed from bank and then paid Bank also gave me because I'm having turnover though I'm having losses though I'm having all that but I'm having turnover and business some somehow it will turn around and they'll repay me so I borrowed some 20,000 from bank and then paid it now my position is negative 20,000 this is what happened with a India in every organization how liabilities how liabilities and more I mean how current liability exceed current asset by how working capital comes negative by overdrafts loans borrowings able to understand so technically now tell me I have to pay them right at any cost current liability means I have to pay within the next 12 months and this position is continued from more than 7 years actually 78 years before it this has been started now how come they're paying now how are banks are giving money to these Air India when they're having negative balances because government of India is supporting because government so they they'll mention here in spite they'll mention here you see in spite of these events or conditions in spite of this financial condition in spite of this worst condition which may cast a doubt on the ability of company to continue as a going concern in spite of these events where there is a doubt on going concern the management is of the opinion the management is of the opinion that going concern basis is fine in view of support from government of India government of India is releasing funds every time as long as they support us we can continue our business even with negative profits even with negative cash flows so we don't have any problem tomorrow suddenly when creditor is coming and asking me demanding money no problem I'll call government of India they just just transfer the money I'll pay them so I will record I have to pay to government of India government of India record in their books of accounts receivable from India over able to understand just a general entry fund transfer settlement over but I have to pay rate how long government of India supports what if Government withdraw the support tomorrow is there any guarantee that government will support this a India continuously material uncertainty exist fine whatever B when I interacted with a India Board of director example okay they told very clearly sir we don't have problem sir okay law and let it be there we have government backing okay we have so much of fund access so government whenever we have to pay some credit or government will interfere and pay him okay so we don't have problem all the 70,000 CR loss 50 you know 7 lakh CR 70,000 CR loss 50,000 CR loss 77,000 CR all this negative and all just numbers only okay we have support from government I asked them do you know government of India supports next one year uh no sir already we are in talks the government is continuously keeping meetings with us every week okay so they wanted to privatize this a India they want to sell to somebody luckily next year Tata is ready to BU getting it so if at all no no buyer is coming we may have to shut down the operations possibility is there or not so government may not support in future continuously so fine as of now you have not defaulted anybody because government have supported you have not defaulted anybody but what about next 12 month uncertainty what is it uncertainty is there that's called material uncertainty related to going concern what is it called as material uncertainty can I say as an auditor hey your going concern is not there can I say can I say you cannot prepare financials on going concern basis sir how come you say government is supporting us right right now have you ever defaulted to anybody you can't say that going concern is inappropriate for us we are running no it's been more than 7 years that we are in minus okay still we are running right as long as Government supports going concern is appropriate fine I agree going concern is appropriate but the material uncertainty exists are you getting the point fine so what we have to do then management ask so what we have to do simple disclose that in the financial statement disclose the same in financials disclose in the balance sheet pel disclosing notes to accounts clearly that Air India is facing a severe crisis all these days we are meeting our liabilities because of the support received from govern government of India Tomorrow there's an uncertainty that government might stop funding us may start selling us so suddenly Air India might have to Halt their operations possibility there or not so Air India has disclosed the same in note number 53 of their notes to accounts they honestly disclosed what is the tough time that they're facing they honestly disclosed in notes to accounts now tell me material uncertainty they're facing they disclosed the same adequately in the financial statements can I modify my opinion on that can I give a modified opinion on that I will still give which opinion unqualified opinion because they honestly disclose but the point is this is a very important Point yes or no which every shareholder should read Air India notes to account is also 100 pages in that somewhere in the 53rd point you mentioned about going concern issue company companies content survival issue related thing you mentioned how many of the shareholders will definitely read this not number 53 I am not sure what should I do what should I do with this 53 Point emphasize it what should we do we should highlight it under emphasis of matter paragraph technically but emphasis of matter paragraph a India is already highlighting so many other points a India is already highlighting so many other points under emphasis which are important for finan users but this is something survival issue this is something companies you know like you know like Do or Die getting it that's the kind of situation this is not just like an important matter like anything else of course this is important this is very you know deadly issue yes or no so important issue so I will not highlight it under emphasis of matter of course that's a that's a paragraph where I can highlight the issue but I will dedicatedly keep another paragraph what paragraph material uncertainty related to going concern separate paragraph because this is a going concern issue since this is a going concern issue I will highlight this under a separate par material uncertainty related to going concern and here I will draw attention to going concern Point here we will draw attention to going concern Point by the way by drawing attention are we objecting on this point by the way we are not objective we are just highlighting this point so material uncertainty related to going concern is also a highlighter par but there which matter you can highlight only going concern issue you can highlight that to when you can highlight here by the way then the going concern issue is clearly discussed in no to accounts suppose a India is facing the severe crisis material uncertainty and all is there but company know sir let us not disclose this in the financials why unnecessarily bring questions into the shareholders Minds people are market price and all share market price and singing like anything very good company people are thinking company will revive in the next 2 3 years fine the matter is between us okay nobody else knows our position exactly getting it I will not discuss it in the notes to accounts now tell me are they misleading or Not by not disclosing material uncertainty situation they are facing and which they are not disclosing in the notes to accounts is the financials misleading or not if in this scenario now tell me which opinion you'll give ah qualifi opinion if it is material but not pervasive suppose if it is pervasive adverse opinion you will St give adverse at that time will again this material uncertainty paragraph will come no material uncertainty paragraph is something like emphasis only then the material uncertainity is discussed in financials I can highlight it in this example they didn't mention it in financials itself how can you highl it in the financial statements material uncertainty point they did not cover itself that's why I'm qualifying that's why I'm giving adverse opinion so I will give adver opinion or qualified opinion and reason I will clearly mention in basis for aders or basis for qualified opinion here misstatement is done by Air India by way of non-disclosure here misstatement is what non-disclosure when there is a non-disclosure I should qualify I should give adverse opinion all of you so now tell me with respect to going concern with respect to going concern that to material uncertainty if the material uncertainty is honestly disclosed in financial statement I will give which opinion unqualified and since that's a very important Point covered in notes to accounts which everybody should read I will highlight that in material uncertainty related to going concern parent suppose if the company do not disclose it properly or they didn't disclose at all then what should I do I should modify the opinion give a qualified opinion or adverse opinion and mention the reason and basis for qualified opinion basis for ads opinion in that case will material uncertainty per comes no remember material uncertainty related to going concern per in the audit report it arises only when on the going concern issue we have given unqualified opinion with respect to going concern what opinion we have given unqualified opinion then only material uncertainty issue will come in the audit report suppose you see here a Auditors they have given which opinion qualified opinion but the qualification is related to some accounts receivable all that not related to going concern qualification they give with respect to what other issues not related to going concern did auditor give qualified opinion on going concern issue on any of these points no which means going concern issue they clearly showed with respect to going concern I don't have any opinion but since it's a severe issue I have to highlight it able to understand suppose know if Air India they did not present the situation in the financials then this par itself will not come directly here in the qualified opinion or adverse opinion par I will directly talk about this basis for qualified opinion I will directly disclose that point whatever management has to disclose right I will disclose it here in in the previous session we have covered if material misstatement is by of non-disclosure the auditor has to disclose it in the auditor report wherever it is practicable that's it next till we have we'll just conclude it that is what your entire point question number nine question number question number nine and 10 is of that only this this point we have covered just now this point only we have covered suppose no it's not about uncertainty and all it's already done going concern is no more forget about Metal certain government of India publicly announced Air India that we will not support Air India anymore nobody gives credit to Air India all fuel companies they stopped supplying fuel to Air India on on credit they only want to supply on cash basis and almost 90% of the Air India flights are not on board getting the point they're not operating almost labers employees and all are striking still a India is using Financial State still Air India is preparing financials are going concern Bas in spite of all this now tell me is it is is it about uncertainty or it is clear it is clear that going concern is inappropriate you cannot continue the business it's already stopped already getting the point by the time I am doing the audit it's already stopped forget about 12 months not even two months completed from balance sheet date it's already halted the operations 90% operations have halted able to only the 10% also what you know government flights only they're running or government executiv will use right only those flights are running flights were not operating for customers I'm not telling real situation example only okay yeah again go Google it and then don't ask me right so if going concern is clearly inappropriate but still company you know they are issuing the financial statements using going concern basis now tell me are the financial statements absolutely misleading or not when the going concern assumption is inappropriate and the financial statements are prepared and the financial statements have been prepared using going concern basis in the auditor judgment it is inappropriate auditor shall straight away give which opinion adverse opinion they're misleading they're not R and fair able to understand suppose no primarily tell me who should do the assessment of going concern management for how many months they should do 12 months from balance sheet date they should do the assessment if management has not at all performed the assessment or they performed the assessment for less than 12 months they requested them to extend the assessment up to at least 12 months months which management dened either management has not performed the assessment or has not extending its assessment up to 12 months what auditor shall do see if management is unwilling to make or unwilling to extend the assessment the auditor shall consider the implications for audit report in such a situation since going concern assessment is not performed whether going concern is possible or not how do we know yes or no we cannot say either yes or we cannot say no so we will issue either a qualified opinion or disclaimer of opinion as may be appropriate because it is not possible for you to get sufficient appropriate evidence are you clear so in this going concern I'll tell you a structure how to read this getting it first going concern first question is actually talking about going concern issue accounting issue and all they're talking second they're talking about uh auditor assessment assessment about going concern management has to do this assessment if management has not done request them to do they have to if they did not do no inspite you request directly come to the opinion section getting the point directly give a modified opinion if they don't do the assessment if they have done the assessment ask them you found any symptoms about going concern if there are any symptoms what are you going to do to resolve this if at all management has not done the assessment why you didn't do the assessment if at all management has already done the assessment you also do risk assessment along with management so whatever works and all whatever workings they did know their workings will be having no their discussions will be having no evaluate it getting the point look at the cash flow forecast companies will have next to one year budget and on will be there read them look at the latest financials look at pending litigations the company is facing look at the you know B facilities cash credit facilities Financial Arrangements the company readily having what is the company's capacity to raise money right now look at all this monetary aspects getting the point finally you will also get a conclusion whether going concern is fine or not if at all going concern is appr and management also used going concern basis happy unqualified opinion suppose going concern is fine today material uncertainty is there ask the company to disclose it in the financial if they disclose it honestly you give unqualified opinion highlight that in the audit report if management has not disclosed the uncertainty give a qualified opinion or adverse opinion reasons mentioned in the basis for qualified or basis for adverse po going concern itself is inappropriate and management has still used going conern basis of accounting getting it you should give that's okay now you have to read carefully from the beginning to end okay this going concern is also complete so with this we have completed going con also we still have key audit matter and directly we'll go to reporting requirements car with that we will finish the talk okay just a minute hi guys before I proceed discussing key audit matter like you'll be watching audit matter entire discussion I just want to add one point to that you can make a note here you know I hope you're already going through this book here there's a space right so you can add a note prohibition prohibition on key audit matter so sea 705 sea 705 prohibits prohibits the auditor please make a right please note this the auditor sa 705 prohibits the auditor from communicating communicating he audit matter when auditor expresses disclaimer of opinion replay this video once again and write the sentence here prohibition on key audit matter SCS 75 prohibits the auditor from communicating key audit matter when auditor expresses disclaimer of opinion remember it is disclaimer of opinion so when auditor expresses disclaimer of opinion key audit matter cannot be tell me what is the logic behind disclaimer of opinion disclaimer of opinion means we haven't we didn't audit even if you recollect the opinion sections and all when when I'm showing you the audit reports we have audited we have audited we have audited this is what we use when we have given unqualified qualified adver but when we are giving disclaimer of opinion we use the sentence we were engaged to audit where we don't use the word we have audited because the moment we are expressing disclaimer itself means we have not conducted audit properly when we have not conducted audit properly because there are no evidence is available because there is no evidence available when there is no audit itself properly conducted where is the question of important audit matter I have not conducted audit properly predominantly many areas we didn't do audit now in that case when all the areas are not covered by me since evidence is not available how can I select key audit matter just to remember this come back to this particular uh you know this 2 3 minutes whatever covering just continue watching qit matter now just keep this in mind just remember this and keep this in mind and then continue watching qit matter then proceed further now after discussing keit matter come back to this 2 minutes one second if possible so that you will get more strong connection to this that's it so this is a Prohibition on key audit matter which is not given in the IC book so we have specifically added Even in our book also we have not given I'm specifically adding in the classroom okay take care continue watching the key audit matter discussion this uh next we'll proceed to key audit matter discussion key audit matter discussion so 71 is the respective standard that is dealing with key audit matters now you see the definition of key audit matter first let us before going to the definition I'll talk about applicability so key audit matter communicating key audit matters in the independent Auditors report communicating the audit matters in the independent Auditors report it is mandatory for listed entities for all listed entities it is mandatory or when key audit matter is required to be communicated when there is a law regulation which says that e audit matter communication is compulsory then we should communicate or if auditor decided at public interest if auditor decided otherwise to communicate key audit matter not because of law regulation not because it's a listed company we just voluntarily want to communicate key AIT matter then you can communicate now what is a key audit matter so you see the definition you read this you will not understand anything okay key audit matters are those in auditor professional judgment were of most significance in audit of financial statements of current period the audit matters are selected from matters communic communicated with those charged with governance let's decode the term itself e audit matter important audit matter significant audit matter the audit matter that caught Auditor's attention yes or no where auditor has given his more attention that's a key audit matter now I will first show you what key audit matters they're communicating how they're communicating I'll show you and then I will I will discuss how tataa Motors Auditors have communicated key audit matter I'll show you you see this is a key audit matter same definition copy pasted here also so key audit matters are those matters in our professional judgment were of most significant in our audit of financial statement of the current period same definition what is the definition in the book also you see key audit matters are those in key audit matters are those matters which in the professional Judgment of the auditor were of most significant in the current period financial statements audit and these are selected from the matters which are communicated with those charged with governance you see these matters now here what are they saying these matters were addressed in the context of our audit by the way whatever I'm showing you as a key audit matter we solved in audit we verified in audit We performed audit on that getting it then why are you communicating just for your public interest Now You See since it's a listed company mandatory otherwise it's a public interest whatever they communicating AIT matter right what they communicating I will tell you I will see I will show you during the year during the year the company has transferred the company has transferred its passenger vehicle undertaking to a step down subsidiary tataa Motors passenger vehicle limited so they they recently Dem merged it's actually like a Dem merger getting it so they create some a company called tataa motar passenger vehicle limited separated company until until this Dem merger happened only tataa Motors is dealing with passenger vehicles commercial vehicles everything now data motor passenger vehicle deal with passenger vehicles getting it so formerly known as T Motors limited business analytics whatever getting it so for this n approval has been AR I mean has been obtained in a scheme of arrangement all that the company has accounted this transfer in accordance with gap net assets transferred amounting to 1960 CR the transfer of PV has a significant measurement and disclosure impact on so and so we have identified transfer as a key audit matter given in given the significance complexity unusual transaction which is material in the financial statements so we decided why we decided this is key AIT matter they're telling now right side you see what they're telling how what we addressed like you see how the matter was addressed in our audit so this this transfer of assets happened right to tataa motor passenger vehicle from tataa motor getting it how this issue we verified in our audit they telling so what they verified we we evaluated design and tested operating effectiveness of controls over assets and liabilities relating to passenger what assets and liabilities are exactly related to passenger vehicle segment we verified we we checked operating effectiveness of key control for identification of amounts disclosed in discontinued operation so tataa motor is now discontinuing passenger vehicle segment right so relating to that what amounts and all were that they checked we read the minutes of the board of directors we read the NT order we performed necessary procedure to determine completeness and accuracy of assets and liabilities identified getting it whether the assets of PV passenger vehicles all the assets are identified not they checked we evaluated appropriateness of accounting treatment we perform necessary procedures to identify all this we ourselves are not able to understand how do you think shareholders understand have you understood anything right now whatever I read that is why key audit matter getting it one stupid matter this is one stupid discussion key audit matter in the audit report you tell me opinion paragraph what are you saying in our opinion to the best of our information according to the explanation given to us the above thefor said financial statements are true and fair but see as an a as a shareholder what I want is you are an expert you are a competent person who studied CA final who studied important India andal left some a okay okay fine whatever it is you know all this you just tell me is it fine or not getting it suppose I went to hospital okay I have a throat issue doctor repli you alter microscopic what is it getting it you have a throat issue tell me that now getting it so you tell me that why are you using your all technical terminology and thought correct so as a shareholder tell me what see you you are saying so and so division transfer to so passenger vehicle happen you just tell me that that I understand how you verified and all how do I know see what they they're doing exactly the same right what is key audit matter left side they're mentioning during the year tataa motors have transferred passenger vehicles entire assets and related liabilities to a separate IND called T motor passenger vehicle limited because of the amounts involved because of the assets involved because of the transaction size because of the unusual nature we selected it as a key audit matter good right side you telling me how you did audit have you verified that is it is it relevant to a shareholder normally speaking even Market analyst also it's not required yes or I want to invest in a company tell me how this how this particular transaction is see if at all you use this in emphasis of matter paragraph now you highlighted this point in the notes to accounts they mentioned about this particular discontinued business operation which because why the discontinued they transferred to another entity so you explained in notes you highlight in emphasis okay you're highlighting I understand have you verified how far it is relevant for me as a shareholder or as an investor or as a creditor as a customer technically this is this is like U uh you know over enthusiasm and let us give more information to People by giving more information you're unne confusing what a shareholder normally thinks key AIT matter what auditor is trying to tell key audit some important audit key audit matter what they'll think some some issue is going on that's what people think yes or no we know that key audit matter is not a modified opinion we know that we know that our opinion is not modified in this matter means it is not there is no problem in that auditor is just giving additional information we know that how do a normal person understands that are you getting the point key audit matter is such that but still we have to study because we have an exam they will be asking us they'll be asking this in exam so what they're doing in key matter is nothing auditor when he's doing audit now and he's doing see he'll be covering so many areas he'll be verifying sales he'll be verifying purchases he'll be verifying assets he'll be verifying liabilities so as part of that he has verified some transfer of assets happened to so and so he felt this is an important matter to be communicated are you getting it so what he communicated what happened and right side is communicating how he verified that that's what you know how we how the matter was addressed in our audit this is what they communicating right so he communicated how the matters addressed in audit so that's it this is what key audit matter and you see by the way in the in the top no he clearly mentioned look we do not provide separate opinion on these matters we are not providing any opinion on these matters I'm just sharing you for your understanding for public interest there is no public interest here public itself don't understand this clear that's a key audit matter now let's see but in for us it is important for us it is important so key audit matters now have you understood the difference between the audit matter and emphasis and other matter paragraph emphasis matter paragraph in financial some not point is important I want everybody to read that what should I do highlight it in emphasis of matter paragraph We Draw your attention to note number 49 note number 44 note number 55 our opinion is not modified on the Note matter whatever I highlighted no no problem on that other matter paragraph there we talk about audit there we talk about audit report there we talk about our division of responsibility and all and there also we discuss everything and we will say by the way I don't have any objection on the point matter this is an important issue this is how we addressed this is how we audited so in key audit matter what are we explaining we are just presenting our skills how we do audit all that correct so and we do not we do not provide any separate opinion on this matter indirectly they're saying I don't have any objection on this understood the difference material uncertainty related to going concern that is also highlighting par only that is also a par to highlight but only going concern material uncertainty related issue correct with this key audit matter is over now you see purpose of key AIT matter what is the purpose of key audit matter to enhance communicative value of to enhance communicative value of audit report by providing greater transparency about audit that was performed the audit matter provides additional information for users of the financials to to assist them in understanding entity and areas of significant management ments so whever big big decisions are involved so to make the people understand where and all big decisions happen key audit matter is one platform where auditor can share by the way suppose know entity forgot to disclose something in you know financials can we disclose it in kodic matter if they forgot to disclose you have to qualify yes or no they forgot to disclose something which is important what you have to do you have to qualify the opinion or you have to give an adverse opinion so key audit matter is not a substitute for closure in financials that applicable framework requires the management to make management is asking you to make some disclosures which you forgot and key audit matter don't use it as a substitute for that key audit matter is not a substitute for modified opinion suppose if there is a material misstatement you have to modify the audit matter is not a separate opinion this point also they have covered in the introduction the audit matter is not a substitute for 570 material uncertainty related to going concern same point we have seen emphasis emphasis of matter paragraph is not a substitute for disclosure emphasis of matter paragraph is not a substitute for modified opinion emphasis of matter paragraph is not a substitute for material uncertainty related to going concern disclosure yes or no understood that now that's it now okay how auditor decides key audit matter how will how will I select a key audit matter very simple if the risk involved in that is very high in a particular transaction risk is very high that I will select it as a key audit matter I and I will explain how I solve that in audit or if the matter is relating to area in the financials where significant management judgment is involved where significant management suppose company know they have reached they have changed estimated useful life of plant and missionary whose value is three LH CR the plant and missionary worth of three lakh CR estimated useful life has been revised from 30 years to 50 years this happened in Reliance last year or two years before so the original plant and life was 30 years they have revised it to 50 years oil refinery getting it so the revised life of Miss life of I mean the revised life of this plantary Revis it to 50 now it's a significant estimate rate significant change in accounting estimate rate auditor selected it as a c obviously when when three lakh CR worth of planed missionary life is changed see impact how much depreciation will affect how much profit of the company will affect no doubt it's an important audit aspect which we will definitely give more time to it when we are doing actually audit or a significant event or transaction so key audit matter can be related to areas of significant risk key audit matter can be selected from area where significant judgment is involved key audit matter can be selected from significant event or transaction happened during the year now tataa Motors right now whatever I showed the key audit matter is because of a significant transaction happened are you getting it it's a big transaction sale of assets and liabilities of passenger vehicle to a separate entity it's a significant event significant transaction and how auditor should communicate what is the manner of communicating this can be asked as a separate question they'll ask you define what is key audit matter what is the manner of communicating key audit matter four marks question or they'll ask you what is a key audit matter determining key audit matter how auditor determine key audit matter what factors auditor will consider while determining key audit matter so that can be asked separate question auditor has to communicate the introduction to the audit report in the audit report no key audit M section you will put a separate heading you see the auditor shall descrip each key AIT matter using appropriate subheading in a separate section you see here kotas separate section is there now key audit matter and appropriate subheading is also there now here transfer of passenger vehicles you see this is a subing inside the key audit matter separate section you see here like so the auditor the audit shall describe each key audit matter using appropriate subheading in a separate section of audit report with the heading key audit matter that's what exactly that about yes or no the introductory language how introduction key audit matters are those in auditor judgment were most significant in the audit of financials these matters were addressed in the context of audit as a whole and in forming opinion thereon the auditor does not provide separate opinion thereon exactly no you see exactly happened okay so you see key audit matters of those in professional judgment all that these matters for address we do not provide separate opinion exactly given or not I'll show you Tesla also in in America in us us no it is called as critical audit matter it's called as what critical audit matter so they gave a separate section critical audit matter critical audit matter communicated below is a matter erasing from current period audit and that was communicated to audit committee nothing but key audit matters are selected from which matters those matters communicated with the those charged with governance getting these matters you see here these matters does not alter in any way our opinion on the financials indirectly what are we saying on the key audit matter I'm not giving any separate opinion so you see here and we are not we are not providing a separate opinion on critical audit matter they clearly mentioned able to understand so key audit matter concept is also prevailing across across the world getting it we use the word key audit matter they use the word critical audit matter that's it next obviously whatever the matters you want to communicate as a key audit matter first you should communicate matters to what are the matters you decided as key audit matter communicate to top management if applicable suppose you know you decided there are no key audit matters but it's a listed company mandatory but you decided there is nothing such key audit matter which requires attention of shareholders or attention of myself first of all getting it then you introduce introduction language as usual key matter means what you discre and say that there are no key audit matter getting it depending upon the facts the auditor determination that there are no key audit matters to be communicated if there are no key audit matters mention that there are no key audit matter able to understand see here except for the matter described in basis for qualified opinion or material uncertain Rel to going concern we have determined that there are no key audit matters in our report see very simple if at all we have given qualified opinion why we would have given qualified opinion because there's a material m statement why would have given adverse opinion because there is a material statement or why we have given qualified opinion because I'm unable to obtain sufficient appropriate evid on a particular matter they are also important issues right they are also important issues right but why I am not talking about them in the key AIT matter section I already covered there somehow it was highlighted right so when I either qualify on a particular aspect or when I emphasize on a particular aspect or when I communicate it under going concern IND ly I'm highlighting those issues right indirectly by pointing out them I'm highlighting them indirectly yes or no so that's why if you don't have any keit matter you communicate introduction like this except the matter described in qual basis for qualified except them there are no other key AIT matters which are to be communicated under this par that's what they're communicating able to understand this key AIT matter you know this uh this definition this is also Over thetic Matter discussion is also over have you studied this keit matter and are you clear now whether what the difference between key audit matter and all that so key audit matter is also over now other information per 720 we do not have in CA inter 720 standard we don't have then signature of the auditor place of signature date of auditor first I will finish these three then I will go to the car okay signature of the auditor you know sometimes in exam they'll ask you key audit matter what is a key audit matter here six point is the rate in the 700 below also we have given qit matter little briefer that is nothing but applicability of qit matter that is nothing but applicability of qit matter which is actually given in 71 remember for audit of complete set of general purpose financials of listed entities auditor shall communicate key audit matter or if there is a legal regulat requirement if the law regulation requires we we have to communicate if auditor otherwise decided to communicate he can communicate the signature of the auditor this has been asked as a two marks question many times in you know true or false statement so how auditor should sign the report shall be signed the report is signed by the auditor in his personal name getting it where the f is appointed as auditor by the way f means what soulle proprietary form partnership form LLP you see I covered all the three in the bracket if an individual is practicing in his own name directly without any fir name I told you it can be it is possible yes or no then you just mention your name membership number that's enough you having cop that's enough but sometimes no you participate in firm name you if you want to sign on behalf of the firm then the where the FM is appointed the report is signed in the personal name of the auditor and in the name of the audit firm like ramara and Co Chartered Accountants partner so and so signing getting it the partner or the proprietor who is signing the audit report shall also mention membership number which is given by ICI they also include registration number of the firm that's called FN getting it which is alloted by ICI are you clear not only that below the signature below the signature you should also mention Udin number unique document identification number the purpose of Udin is very simple suppose I'll show you my signature is very simple anybody can copy okay the strike and all may not match that's it this is my signature I don't want to make complicated if you sign 500 pages on a single day you will understand how simple how simple signature will help you getting the point once no Once Upon a Time tax audit report s up we have to send manually okay that time suppose if 15 clients were there example each tax report will have some 70 Pages total all n exf all put together 15 into 70 how many I need to sign suppose if I sign like this no sign like this getting it imagine 500 pages I have to sign in a single day I have to go to hospital correct so I made my simple I I made consciously my signature simple now today anybody sign this my membership number also I'll give 23 9714 okay do whatever you want getting it you can't do anything because today if you go and submit any document with my signature with my membership number the document may not be valid if you do not have Udin number if there is no document identification number generated from my IA login portal in my you have SSP portal right same way I will have a Udin portal in that I will have a Udin number Udin account for me like a Google account I have a Udin account get it in that account whenever I sign a document I should I should give document details information on which I'm signing in the document if I mention any amount that amounts I should mention getting it briefly I will tell about the document which I'm signing and I will generate Udin there I will click generate button Udin number will come 16 or 18 characters some Udin number will come that number I will paste on the document now you know I'll show you right now how this exactly Works suppose you see here tataa Motors your auditor have signed this audit report right the tataa motors know they happily used this auditor name BSR en this nothing but KPMG nothing but KPMG form getting it so KPMG have signed this audit audit report you see so so person have signed there is no signature also here by the way but UD number is enough this itself is enough getting it I will check this whether this uh whether this is really signed by him or not I will check this I'll see what is the date of the AUD rep by the way here 12th May 2022 ICI Udin I'll go to Udin verify Udin so who is the verifier are you a bank or regulatory others name of the verifier so mobile number hey lady Dy number 5 963 endp now I will click verify you now you see document details I'm getting this is the document verification number so aiz wasani he's the one who signed it's an audit function it's a stat audit it's a date of document signing is 12th May Financial year 1 April 2021 to 31st March pan number of the SSE means tataa motor pan number gross turnover reported in the document what he signed whatever document he signed no in that gross turnover reported how much they're reporting gross turnover how much they have reported 47263 something is there you see here 47264 just the round of shareholder funds this is in the balance sheet you will find 19,000 CR so now you see okay so here balance is signed by the auditor right here so he signed his UN number is given like this his unit number is given so what balance sheet what PN exactly he signed some numbers he has given for verification purpose profit he has given turnover he has given net worth He has been given all that getting it so I'm just crosschecking so okay fine so if somebody bring data motor balance sheet that it is signed to balance sheet by so and so you number I verify whether the same person mentioned this or not UD in details no who gave that UD in details the person only gave personally getting the point so Udin is like a digital signature which cannot be forged so even if you forge my signature nothing it is not useful anywhere getting it tomorrow if somebody forged my signature and try to you know involve me in some f getting it I will simply where is a Udin without uding my document is not valid that I didn't sign so I need not even say that I need not I didn't sign where is Udin first question I'll ask to defend myself clear so that's uden so can you read this on on your own they'll give you a two marks question or three marks question if possible on that then place of signature which is ordinar the city where the report is sign wherever you sign in wherever the locality you sit and sign the report that City you you can mention it can be either your audit office City your office City or it can be the client place where the client has been getting it if the city is very popular popular name like chenai Chennai Mumbai Bangalore Kolkata Pune you know there are some cities which people can easily recognize if the city name is not easily recognizable then add state name also that's it date of audit report can I date the audit report earlier than the date on which I obtained the evidence so date of audit report shall be not earlier than obtaining sufficient and appropriate audit evidence shall not be earlier than approval of the financials see financials has to be approved now company has to approve the financials only when the financials are approved it can be released to the public getting it so only after they were released to the public s only the financials which are approved will be released to the public so on the approved Financial I should give audit report rate management decided yes this is a balance sheet this is a pnl we are going to issue to the public so on that I should give audit report which means my date of audit report should not be earlier than the approval date can it be later than the approval date yes but 99.99% of the cases date of audit report equals to date of approval of the financials I will talk about that in 560 standard clear all of you so we are just pending we are just you know we we have I mean uh one more thing that is pending is report on legal and regulatory requirements so UD is also completed so only this is pending so we'll take a break and come back come back yes fine so let's continue see one doubt uh which uh one student has asked is like uh see we give opinion on the financial statements as a whole right suppose I found a material misstatement in fixed suppose plant and missioner and I found misstatement in inventory and I also found a misstatement in trade payable and a misstatement in revenue from operations I found totally four misstatements what is the impact of these misstatements on the overall position and overall performance also I evaluate it getting it for example fixed assets were overstated by 10 crew inventory is understated by 10 crew as a whole assets are neither overstated nor understated overall impact is this but not every time we only consider overall impact what we need to consider is individually because see balance sheet total is not a decision making criteria what is the total balance total of assets that is not the criteria for decision making the criteria for decision making is each and every element of the financial statement now fixed asss is overstated by 10 CR which is a material misstatement current assets is understated by 10 CR which is also medal mate what is the total misstatement 20 20 CR for a misstatement there is no sign positive or negative there is no such discussion for misstatement it is overstated by 10 CR this is understated by 10 CR the fact that they both are setting off with each other is ignored you should not consider that total misstatement how much there it is 10 CR here it is 10 CR total misstatement 20 now suppose uh and revenue from operations also some 5 CR mistake total misstatement 25 now whether this total misstatement is pervasive or not you should check for qualified opinion individual misstatement we will consider whether we should give a qualified opinion or adverse opinion we consider individual misstatement getting it qualified for adverse perv overall effect we should consider able to understand now suppose no uh the actual doubt was suppose on plant and missionary I want to give qualified opinion for for invent I want to give adverse no that is not possible as a whole you check what is the total impact as a whole because of so and so misstatement is it giving a misleading picture as a whole financial position if so give adverse opinion as a whole mention why you give adverse opinion reason in the basis for adverse opinion section over got it next report on legal and regulatory requirements uh don't worry as I go further in the next CL next session probably I will talk about presentation also how to present all the answers see whereever possible I'm telling you how a question can come in exam getting it relatively the audit syllabus has been increased though they have removed some one or two chapters but the existing chapters content has been expanded like anything entire pronouncement content is added once you know earlier going con standard is used to be two pages now is seven pages approx six to seven pages approx going concern you saw the content that I showed right getting it so almost each and every standard which they discussed now they discussed it very indepth earlier the standard is used to be discussed in a brief manner but now it was discussed completely in dep so report on legal and regulatory requirements so in that I will directly discuss with uh arrow in that only important points I will cover so reporting requirements under companies act now if you see we still have 710 standard which is pending comparative information yes or no so comparative corresponding figures and comparative financial statements that I will cover once I finish this maybe I will cover that along with 510 if possible along with 510 I will cover that or else let's do one thing I will cover along with 510 and now let's look at reporting requirements under the law so in audit report under report on other legal and regulatory requirements we should talk about 143 subsection 1 143 subsection 3 143 subsection 1431 is talking about Caro which talks about auditor has to report on 21 aspects auditor has to report on 21 aspects 1433 is some 17 aspects were covered some 16 17 items were covered on 17 issues auditor has to talk 1431 there are six inquiries so auditor has to inquire into these matters and then reported in the audit report if the answer is negative 1431 auditor has to report only when when auditor want to talk negatively if auditor do not have any negative opinion on that if auditor auditor has a positive opinion on these 14316 items no need to talk in the audit report you will not find 1431 in Tata Motors because auditor may not have any negativity on that whereas 1433 1431 car 21 plus D7 whether your opinion on these Clauses is positive or negative or even not applicable you should clearly mention that fact are you getting the point so 143 subsection 3 you should clearly mention that fact 143 subsection 11 21 Clauses you should clearly mention that fact now so first I will talk about Caro directly 143 subsection 11 uh so under 143 subsection 11 companies act has given a power to the central government that central government May notify by an order on what what aspects of the company the Auditors has to additionally report on in addition to the reporting requirements under standards on auditing in addition to standards reporting requirements what other aspects the auditor has to report on central government can make an order accordingly central government has issued an order called companies Auditors report order 2020 in that they have specified 21 variety of issues okay so this car is applicable for all entities all companies it is applicable for banks it is not applicable for insurance company it is not applicable Section 8 company one person company small company and a private limited company getting it for the following companies car is not applicable for Banking Company Insurance company section8 company 1% company small company private limited and we all know one small company means paid Capital four crores and turnover is 40 CR if a small company which satisfy these conditions then then it's actually treated as what a small company and private limited company which satisfy the small company definition were also treated as small company only if a private limited company satisfying the definition of small company then also it is treated as a small company accordingly Caro do not apply for the private limited company this criteria given for private limited company in Caro right they have not updated this criteria is something given in 2004 which they didn't revise it getting the point so these are the mistakes that happen in lawmaking process always in law making there is no intention there is only mistake getting it there is no intention behind the law so when they made an amendment in small company corresponding amendments they should make in every other private company limits a discussion so that corresponding Amendment amendment was not made here right now there is no point of discussing private limited company four conditions because a private limited company if their paid up capital is less than or equal to 4 CR or if the turnover is less than or equal to 40 CR car I mean Caro do not apply because it can be treated as what a small company are you clear suppose in exam they asked you ignore small company definition whether car is applicable for private limited company or not ignoring small company definition let us assume the companies don't want to Avil small company status so whether car applicable four conditions if satisfied Caro do not apply not a subsidiary or holding of a public limited company two paid up capital and reserve some Surplus does not exceed one CR on the date of balance sheet three total aggregate borrowings for banks and financial institutions shall not exceed one CR at any point of time during the year in the entire 365 days on any day my my outstanding amount is nowhere Crossing one group and the turnover including discontinued operations related turnover put together not exceeding 10 CR as per schedule 3 then know the these four conditions are satisfied for such private limited company car do not apply I'm not discussing much in depth on this getting it next now whether car is applicable for holding subsidiary companies are first of all holding company subsidary company both are two different entities the relationship between them is holding and subsid the holding and subsid is about relationship you and your father both are two different persons yes or no from the government point of view but the relationship is father and child holding and Subs is a relationship study at the end of the day they both are two different companies have their own pan numbers have their own corporate identification numbers correct so now when when for holding company subsidary company whether car is applicable or not how do you apply the above limits respective company holding company their own turnover we will calculate their own Capital we will calculate subsidary company their own turn over their own their own you know Capital able to understand so we consider limit separately by the way arrow is applicable car reporting is applicable only if at all we are giving audit report on Standalone financials suppose if we suppose for for a particular company we are giving audit report on Consolidated financials also in that audit report car report need not be added remember car will come where as part of audit report AR is part of audit report in the audit report when per is there right report on legal and regulat requirements under that pair car will come car is not a separate report car is part of the audit report that we are discussing getting it next now when you are giving audit report on Consolidated financials right on Consolidated financials audit report car will not apply right however 21st Clause can be applied 21st clause in the Caro will be applied when I am giving an audit report on Consolidated financial statements inside that audit report will have sded in report on other legal and regulat requirements under that 21st Clause point I will talk which audit report audit report on Consolidated financial statement now what about companies having branches and branch is audited by another auditor what about them when Branch auditor has to comply with car yes of course if car is applicable for company as a whole branch is also liable for car report accordingly Branch auditor should also report on Caro in the branch auditor report at Branch level operations able to understand so now when you're considering car is applicable or not you should total all branches turnover and then calculate you should total all branches capital and then calculate of course Capital will be only in the corporate office books of accounts share Capital will not be reflected in branches right how branches operate they take loan from head office and then operate getting it see what is important in car is so if every student know they learn 21 Clauses how to remember 21 Clauses all that they fine the point in exam what they ask is the inside okay regarding fixed assets what is the reporting requirement regarding inventory what is the reporting requirement regarding loans and at once as what is the reporting requirement only the inside content of a clause is what the test getting it of course remembering Clause number is very good because when you're writing the answer if you refer to Clause number that will also add an advantage getting the point now so fixed assets what auditor has to report on auditor has to report on five issues related to fixed assets auditor has to report on five issues one whether company is maintaining fixed asset register whether the company is maintaining fixed asset register is the company maintaining asset register which contains details of quantity of property plant and equipment and intangibles situation of property plant and equipment so where the property plant and equipment where the fixed assets are situated how many fixed assets we have description of the fixed asset when it was purchased when it was installed how much amount we paid for it what are the installation expenses how much is a capitalized amount how much is the depreciation like that the company has to maintain asset register now there are electronic softwares asset register related softwares were there in the software they have to maintain asset register whether the company's maintaining that or not you have to tell see as a part of audit you have to verify all this for sure whether car is there or not you have to verify whether fixed asset controls were proper or not as part of audit we have to verify here explicitly you should tell people whether the company is maintaining register or not next whether the company is doing physical verification at reasonable interval next question which car is asking is whether the fixed assets are physically verified by management at reasonable interval reasonable interval means what you know tataa Motors they do verify their fixed assets once in 3 years physically they'll go and check all premises once in 3 years infosis do check their fixed assets once in three years getting it they don't verify every year they don't verify go and verify and confirm whether fixed asset is there or not a specific audit will not be conducted generally internal Auditors will do physical verification internal auditor also part of management internal Auditors are also part of management getting it so internal Auditors of tataa motor specifically their only work off their only agenda they will take a asset register they will go and try to check whether physically existing or not in the respective location or not across India they may have some two three factories across India they may have multiple own showrooms own showrooms in every showroom some furniture will be there some air conditioners will be there so many missions will be there in every showroom yes or no so across India the internal audit team they have to travel everywhere and physically go and check okay this asset we purchased it is there as per record physically also there or not that's called physical verification able to understand so physically they have to verify at reasonable interval and we have to check whether management is doing so or not then suppose no on physical verification no companies sometimes find differences generally for the kind of internal control which a company has most of the companies know for the kind of controls they have there won't be discrepancy very rare discrepancies will there even if discrepancy is there even suppose physically 10 assets should be there 10 table should be there in one particular Warehouse they went there tables are only nine one one one table is not there so there is a shortage of table but is this a material shortage as a whole that you need to check if that is not a material shortage you need not comment on this point getting it now third one with respect to fixed assets immovable property related Point whether title of immovable properties whether title of the immovable properties ownership of the immovable properties registration deeds in the IM properties are they in the name of the company check out suppose if they're not in the name of of the company why description what property it is what is the actual carrying value whose name it was held what is the reason why it was not held in the name of the company this is very popular clause for so propriety concerns converting into companies many Soul priors they convert themselves into companies so all the removable properties which they own in their name for business purpose they don't convert into company name immediately maybe they later on they may convert so in these cases uh the so proprietary concern where the operator converted his business into company name so properties and all he will register as company own property in the company fixed asset register he will record but the ownership is in whose name director name shareholder name getting the point why you have not converted into company name you should mention the reason that's it then fourth fourth point in revalue fourth point in fixed asss we need to check as an auditor we should check whether revaluation is done by a registered reval if at all whether the company has revalued its PB or intangibles whether company did evaluation check out if so if revaluation is done the company went for revaluation of its assets who did this revaluation is it by is it by registered value or not check out okay registered value only valued if the change because of the revaluation is 10% or more in the aggregate of the net each class of pp if the change is 10% or more in the aggregate of net carrying value of each class of pp suppose property plant if you look at the breakup plant and missionary equipment F uh electronic fittings and vehicles these are each class these are each class getting it now each class aggregate value will be there Vehicles aggregate value how much before revaluation 10 CR after revaluation how much 12 CR now the percentage of changes how much 10 CR to it went to 12 CR what is the percentage base is what 10 CR original value is a base revalued revalued value is the target what is that percentage 20% variation in the vehicles revaluation since Vehicles were revalued for more than 10% change since in the vehicles aggregate value 10% or more change is there because of the revaluation auditor has to specify the amount of change so you will give a table here so Vehicles were revalued before revaluation 10 CR after revaluation 12 CR amount of revaluation because of the revaluation 2 CR the percentage is 20% nothing but they're indirectly asking because of revaluation how much assets have been decreased or increased remember revaluation effect we will not consider in cash flow statement yes or no revaluation effect we will not consider generally if you see last year last year fixed asset value 10 CR current year fixed asset value 12 CR people immediately think that what company purchased assets no it's revalued the assets that's why there is an increase in the fixed ass value there is no cash outflow able to understand so cash flow statement gives us that picture I think it next whether any proceedings have been initiated or pending against the company under bami transaction act and rules made there under suppose no under bami transaction act law whether any case has been opened against to the company where we are doing audit if so whether the company has disclosed the information in financials as per shedule 3 today getting it you have to disclose all this MCA has given a notification that every company shall disclose in their financial statements notes to accounts certain extra disclosures that are in addition to accounting standard requirement that are in addition to original schedule three requirement in addition to that a company has to disclose certain extra information one such point is if company has been selected for bami transactions proceeding that proceedings details the company has to disclose in the notes to accounts auditor has to check whether the disclosure is made or not and under car we should report yes company has been liable for bami proceedings they have disclosed in the financials so here we are uh just we will give positive opinion in G yes the bami proceedings initiated against the company were disclosed in the financial statements we will be positive are you C next you see tataa Motors audit report so they have clearly G they have clearly explained all this they have clearly explained all this so this is the Carrow report first I'll show you its reference in the auditor report so you see here this is audit report only report on other legal and regular requirement under that only car is given but instead of talking 21 Clauses directly here they gave it as NX refer NX they are saying getting it remember in exam additional answer sheet is also part of answer sheet only yes or no same so NX means it's not a separate document it's part of the audit report so look at this NX yeah this is the NX NX NX year to Independent Auditors report and you see what the company has maintained records it's a positive opinion the company has maintained proper records it's a positive opinion second aspect B physical according to the information and explanation company has a regular program of physical verification of BP over a period of 3 years and considering the size of the company considering having regard to size of the company nature of the assets the the phys the periodicity the periodicity of physical verification is reasonable yes or no looking at the size of the company physical verification is reasonable if the so proprietor concern no only one table one chair one fan is there every day he can check physically look at a company like infosis look at a company like TCS yes or no where look at deoe you know Deo is having their corporate office in hyad one lakh employees are there in that building in the two buildings they'll be having one lakh employees were there so one lakh employees related chairs one lakh employees related tables one lakh employees related laptops one lak employees related fixed asset infrastructure air conditioners imagine how many assets were there yes or no so they need to physically verify now obviously whether all the of course you cannot take anything inside that building or you cannot take anything outside the building from the building controls were very strict but still for a confirmation sake at least one time you should see right so they might have been verifying once in 3 years so once we will verify de Hyderabad office then we'll verify deit Bangalore office then we'll verify Deo Delhi Mumbai and then Chennai Again by the time I complete all this it will take three years then again I'll go to Hyderabad office again able to understand so there will be a dedicated team their only work is physical verification their only work is what physical verification that's it then here you see according to the information all the title Deeds are immovable properties they are in the name of the company money except Finance Leed properties you know very well if any property has been taken on finance Le accounting standard substance over form you should show it as a fixed asset yes or no but even though you're showing it as a fixed asset in your books of accounts have you really wanted it is it in your name as per the registration documents no so that's why they said other than other than immovable properties which the company acquired as a let's see getting the point where the lease Agreements are in the favor of the company let's see able to understand they clearly mention so here the company has not revalued accordingly this Clause is not applicable finally according to the information there are no proceedings initiated against the company accordingly this sub Clause is not applicable over easy or not next then inventory inventory auditor has to verify two aspects one physical verification aspect he has to verify working capital loan aspect he has to verify in May 23 or November 22 examle working capital related was asked for five marks question getting it working capital related was asked for five marks question they gave an illustration okay the company has borrowed you know cash credit working capital loan for more than five crores the company was sanctioned for more than five crores they got a limit and uh see this this this information the company has to disclose it in schedule three notes to accounts whenever a company was sanctioned for more than working capital Lo loan of more than 5 CR sanctioned limit the company has to disclose in the schedule 3 what they need to disclose what quarterly statements you filed with bank see like uh uh in Bank AIT no we will be discussing one point working Capital Loans generally cash credit and overdraft the cash credit and overdraft generally these facilities we will take by by giving them security of our current assets by giving them security of our current assets that to hypothecation mode which means the assets will will be in our Goen only we will be selling them buying them selling them buying them they are floating assets able to understand they are not fixed assets they're floating assets so by hypothecating our inventory and tradeables we will get working Capital Loans many banks know many companies what they're doing you know they hypothecate they hypothecate their current assets with the bank they need to file statements with the bank have you heard of drawing power huh so how like I'll tell you suppose no company has a average current asset value in the throughout the average means throughout their average one day maybe 10 CR one day maybe five CR one day maybe 10 CR asset current assets average value is some seven gr so company gave current assets average figures to Banker in the last one quarter average current asset is this much like that company filed a statement based on the statement based on some verification by the bank stock audit by the bank they sanctioned loan amount of file Crow and since company gave a security entire drawing power also given entire five the company can withdraw also but actually if you see the quarterly statement if if you see the actual books of accounts the stock value is not 7 gr the stock value is 5 CR only but the company whatever statement they filed with bank now it shows 7 CR so this is a regular practice in reality now in the schedule three the company voluntarily honestly should disclose how much is the stock value nothing but how much is the current asset value in your books of accounts as on so and so date on the same date you filed with the bank stock statement right how much you showed in the stock statement company has to disclose that in the financial statements we will see this point in items of financials auditor also should check whether company did like this in books of accounts the value is this much whereas in the stock statement they filed with the bank the value is this much whether any such differences were there auditor has to specifically highlight here you see tataa Motors I'll show you they have point out like see uh according to the information and explanation given the company has been sanctioned working capital limit in excess of 5 CR in aggregate from all banks and F together on the basis of current asset in our opinion the quarterly statements in our opinion the quarterly statements filed by the company with the such Banks or FIS are in agreement with books of accounts except state filed for 30 June 30 September 31st December all the quarters covered okay with State Bank of India Bank of America City Bank HDFC Bank IC Bank standard chter quak Mahindra Union Bank bank of Vera where differences were noted between the books and reported to the bank as for the statement so there were differences they covered all quarters they covered all the banks in India yes or no and they mentioned the differences were 689 CR that are 490 CR something 758 CR somewhere so all this for every creditors also has a difference getting it inventory also might have some difference what they said you see actually they are supposed to give adverse opinion here they need to give a opinion like the stock statements filed with the banks are not matching with books of accounts this is actually but cleverly what they gave stock statements filed with the banks are matching except the following Banks all banks they listed out all the quarters they listed out able to understand now finally you see these statements these statements were sub sequently rectified after year in 31st March and submitted to the respective Banks already you give statement enjoyed the loan consumed the loan now you are giving revised statement earlier you give sir I have 10 CR worth of asset and you got 8 CR loan at the 31st month I have only 5 CR worth of Lo sorry and you're giving statement are you getting the point so that's it so see they can't do anything because start mot no they don't agree for giving modified opinion they don't agree for giving ads opinion sir give qualified opinion okay say that everything under exception who will observe are you getting it so that is the problem now so physical verification here also the same whether the company whether the management is conducting physical inventory counting at reasonable interval so here inventory reasonable interval is different from fixed asset reasonable interval fixed assets there won't be any movement every day fixed assets will go out coming no so fixed asset generally we purchase hold it for certain number of years and after that once the lifetime is over we will dispose it whereas inventory is not like that IE movement every time in and out in and out in and out yes or no so as per Caro guidance note on car inventory has to be physically verified by management at least once in a year compulsory even under sa51 remember we as an auditor has to check physically the inventory whether the inventory is in existence and condition of the inventory also we should check as per 51 compuls we should check so tataa Motors they clearly mentioned inventory has been physic verified by the management at reasonable interval here you see if at all they verified physically right have they found any discrepancies of 10% or more in aggregate of each class of inventory each class of inventory means what raw materials how much working progress how much finisher Goods how much so in raw material physical verification you found a difference if the difference is 10% or more shortage or excess whatever auditor has to report it here by the way who did this physical inventory counting management only and management only conducted you will see their documentation you will find whether differences were there or not you will understand by looking at their documentation if management is hiding everything we can't do anything okay next investment guarantees that is not an important Point that's not an important thing maybe inside that not they may ask you andf andf might be somewhat important andf so like what is this whether any loan or advance in the nature of loan granted that Fallen due during the year has been renewed has been extended or fresh loans were granted to settle the overdue loans to the same parties if so what is the amount of dues that are renewed and extended what is the percentage of percentage of the aggregate to the loans and advance in the nature of loans granted during the year nothing but every company know intercorporate loans nothing but these companies they will give loans to their subsidaries their partnership forms their employees like to related parties and unrelated parties they will be giving loans to related parties and unrelated Parties by the way this point will not apply for finance companies investment companies and banking companies this one of course Bank AR itself is not applicable nbfc this point is not applicable so they will give they'll give you this point this point is not applicable this is not applicable to companies whose principal business is to give loans for which companies the business itself is giving loans nbfcs non-banking Finance supp mut Finance their business is what giving loan go loan so no baj Finance what is the business giving vehicle loans giving car loans giving housing loans like that but then this point is not applicable now other than this companies it's normal manufacturing trading and service companies if they are giving loans now whatever the loans they rescheduled means loan is given long back now we are rescheduling the loan we are rescheduling or we are renewing or we are extending the due date period due date we are extending like they have to pay so and so amount by so and so date the due date we are extending how much amount of loans how much amount worth of loan that you rescheduled the terms and conditions or you renewed the terms and conditions or you extended the credit period again getting the point how much amount and this year you have given so many loans right as a percentage of total loans given this year how much of the loan was rescheduled suppose this year I gave approximately 1,000 CR loans my company has given total loans how much thousand and out of this 100 CR worth of loans were rescheduled loans they not freshly given they rescheduled loans means loans were given long back but I wrote off and then gave it as a fresh loan again getting the point 10% of the 10% of the total loans were rescheduled loans 10% of the total loans was renewed loans 10% of the total loans were extended loans so you need to give this breakup clearly next demand demand loans without repayment period nothing but whether the company has given any demand loans to anybody demand loan means repay you know loan on call so the moment a company call for repayment they have to repay whether any such amount how much amount is given as a demand loan what is the percentage of demand loan of total loans granted suppose company give 50 CR loan to a director getting the point 50 loan 50 CR worth of loan to a director actually the company has given, CR loans during the year to anybody employee loan loans of it it may be employee loans it may be direct loan it may be subsidi company whatever 5% of the total loans were demand loans given by the company and how much of the loans demand loans were given to promoters related parties specifically how much of the demand loans were given to promoters and all that total demand loan how much uh 50 CR to direct and all how much you give some five CR you have given example so that you need to mention clear see uh the time within which we have we need to discuss all this so don't think that I'm going little speed I hope you have already gone through this getting it next deposits easy Point cost to C easy Point statutary use I'm only covering that's why little tough points statutary dues statutory dues we have we are dividing them into two parts Undisputed dues disputed dues one one is Undisputed due another one is disputed due now Undisputed due see what is first of all Undisputed and disputed disputed you suppose no a company has received a income tax demand notice company has received a income tax demand notice that company has to pay so and so 100 CR tax amount pertaining to so and so assessment year demand notice is received suppose if company accepted it without filing any counter appeal without filing any counter appeal company has accepted as on 31st March no appeal has been filed as on the date what is that due Undisputed as on that date what is the due Undisputed I haven't I didn't went for dispute that I will not pay this tax and all so company has showed it as a liability in the balance sheet also income tax liability income tax notice demanded du 100 they showed this is Undisputed suppose if a company filed a counter appeal company went to tribunal getting it so the order came is from appeal appeal appeal Commission of income tax appeals from them they have got the order now why should I pay my accounting everything is correct you're only calculator wrongly you're only assuming wrongly you not considering my data fine I will go and argue in the tribunal not before you so company filed a tribunal income tax appeal tribunal get they filed a case against the CIT appeals in the idat now the 100 CR in the dispute right that's called dispute are you getting the point next now every month the company will have to pay GST right every month they have to pay GST whatever GST they are collecting from customer they have to pay every month company has to pay Provident fund and all right like they will collect from employee their contribution company also will add its own contribution employer contribution both together they need to deposit with the Provident fund authorities ESI contribution DST Municipal Taxes property taxes local taxes customs duty yes or no statutory due statutory dues means what statutary dues means any liability that a entity has to pay because of a levy under a law because of a compulsion under a particular enactment or act get that's called as a statutary du now that is divided into two parts Undisputed and disputed now what is Undisputed what is disputed we understood so if any due company has to voluntarily pay every month by calculating that's an Undisputed due disputed due means I told you just now getting the point now what auditor has to comment regarding these dues suppose if there is a disputed due auditor has to disclose the following in case dues have not been deposited because I didn't deposit the company I just only paid you know like what uh stake money I mean that's called actually deposit money what is it deposit money getting it so we generally keep certain deposit to go for a tribunal suppose if I have to go for a tribunal I have to pay some 20% of the demand just as a deposit money getting the point so deposit I'll keep and go so remaining 80% I didn't deposit now companies now they don't even deposit 10% they don't even deposit 5% so in case any dues which are under dispute not deposited because there is a dispute the auditor shall indicate how much amount is involved in the dispute and where the dispute is spending look at how T Motors is showing this so look at this so they are showing like this name of the statue Income Tax Act nature of the due income tax 2 CR is pending paid under protest protest means as a deposit paid under protest means as a deposit so related to which period Forum in high court the case is spending we just have to give disclosure we just have to we take this information from company disclose it in your car report getting the point so how much amount is spending and where it is spending under which law it is spending to which year it pertains to getting the point all that you see they have given service tax Finance act 2014 getting it so some 1086 CR relating to 4 five some some amount is spending at high court some amount is spending at CEST tribunal getting the point so we just to show that information what about Undisputed due Undisputed due is what in that no what auditor has to is two parameters auditor has to check regarding Undisputed dues we have to check two points is a company regular in depositing Undisputed statut dues is the company regular in depositing Undisputed statutary dues regular Undisputed means what regularly depositing regular means what within due date within due date if the company is paying every month GS liability by next month 20 every month they are paying onor before 20 the company is regular getting the point suppose if the company's defaulting every month they are paying later or three to four months they paid later now in the Caro report what we should say the company is not regular in paying Undisputed dues to GST Department the following is the list of default April month so and so State registration so and so default May month so and so State registrations so and so default we should give a list of defaults able to understand all of you further suppose if there is a default if there is a if the company is not regular what is the extent of outstanding what is the areas that are outstanding that to for a period more than 6 months from the date they become payable shall be indicated by the auditor nothing but suppose the company has to pay some GST liability to Department the company has to pay some GST liability to Department as on 31st March some 10 CR liability still pending now from when this 10 CR has to pay out of this one CR belong to March 1 CR belong to February 1 CR belong to January some three CR belong to December some two CR belong to October some 2 CR belong to September due September related due is there not 2 CR that has to be paid by actually September 20 but it is not paid on September 20 March 3 also came from the date it became due it is outstanding for more than 6 months the GST amount belonging to September month is outstanding for more than 6 months that 2 CR auditor has to report what about October due November due December January February of course they are also outstanding I'm not I didn't pay but they were not outstanding for more than 6 months as on 31st March how much of the statutory due is outstanding which is of course there is no dispute still govern department has not issued me any notice and all there is no dispute this is something volunt have to compute and then pay every month we compute voluntarily GST and then pay every month we pay not because GST officer is coming and demanding voluntarily we have to comply with law if you don't comply voluntarily with the law tomorrow if scrutiny or assessment happens there be penalties interest and all corre so Undisputed dues two questions is the company regular if not as on 31st March how much of the outstanding due is there which is outstanding for more than 6 months from the date they become originally payable so 31st March should be more than 6 months from the original due date that amount you have to disclose mcqs will be asked on this be able to understand whereas disputed you what we need to show how much amount is spending in the dispute where it is spending just information we should show disputed whereas Undisputed we should give our opinion also what opinion is a company regular that opinion we should we should give further we should disclose about more than 6 months outstanding now they have given a note point a mere representation to a department is not a dispute see suppose know they gave a demand notice we just went to the income tax department and we want to meet the concerned appeal assessing officer or the you know commissioner sir what is it regarding can you just explain you have raised a demand notice I just want to know because we have not yet filed a case against them this is just a representation that we are going that you can't call it as a dispute are you getting the point dispute means what you have filed a case against team in another Forum upper higher higher authority you have filed a case that is called dispute eighth Point discovery of undisclosed income discovery of undisclosed income you see whe whether any transactions not recorded in books of accounts have been surrendered or disclosed as income during the year in the tax assessments under Income Tax Act if so whether the previously unrecorded income has been recorded in the books of accounts during the year this is a prior period item getting it may be treated as a prior period at nothing but you know Department know because of the powers they have search and raid income tax raid they raid at the company they suddenly found some excess cash for which company is not giving explanation where is the source of the cash because for company all the sales are you know on online only every amount is received only through bank now suddenly where is this cash compan is doing some cash transactions which they are not not showing in the pnl account getting the point now these transactions are pertaining to previous years also getting the point now finally after this rate company agreed surrendered to the income tax department and paid tax all that whether such an incident happened in the company where we are doing audit whether such an incident happened or not we should just report are you clear and we should also see whether previously unrecorded income this is something unrecorded right in the previous years is it now recorded in the books of accounts also we should check how the company records this as a prior period a next next default in repayment of dues remember the questions I'm telling you this is how they ask the questions they don't ask you what is eth class in car getting the point they'll ask you inside the content so they'll ask you uh what are the reporting requirements in relation to working capital Loan in case of the Caro reporting so under car regarding working capital auditor has to report on certain matters what is the reporting requirement this is how they'll ask you regarding statut reduse what is the reporting requirements this is how the questions will ask questions will be asked so you need to write the content inside you need to understand it first and then write it thoroughly next so Now default the company know they're paying loans loans and advances they have taken from various Banks they're repaying it now when they're repaying there are some default there are some default you see whether the company has defaulted in repayment of loans to financi institution Bank debenture holders or government whether the company has defaulted in repayment of dues so is there a default when the company is repaying default means what after du if you it's a default on or before due date if you repay the installment or interest expenditure so it's a it's a honoring the know contract if you pay after the due dat it's default of course you paid later you paid it the fact that you paid has to be ignored when you paid after due dat that's it that's a default it will be reflected in the Cil report getting it you know auditor can find all this data in Cil report so generate Cil report for the company you will find all the loans when the amounts were paid what are the amounts that were paid late okay where and all they Dishonored getting the point with the with the commitments entered into the banks and financial institutions you will find remember here only banks and financial institutions are mainly covered getting it now look at if so suppose if there's a default what is the period of default how much amount of default how much is the amount of default and for how long the default continued lender wise lender wise you should give like name of the nature of the borrowing working capital loan name nature of the borrowing working capital loan name of the lender um IC Bank amount not paid on due date 10 CR whether principle or interest or both it's an Emi it's an installment delay in number of days April month Emi 5 days May month Emi 10 days it was pay delay belatedly you know March month uh some some June month Emi some two days delay some February month some 15 days delay like that you need to mention of course company paid later on if at all company do not pay then you will mention up to 31st March it is delayed you will mention that as on 31st March not at paid getting it remarks if if at all you want to add any comment mment on it you just you you can add it suppose whether the company is declared as a willful defaulter by any lender so whether any lender classified this company as a willful defaulter willful defaulter means you have cash but you're not paying getting it they are called as what willful defaulter or you have taken loan for one purpose you diverted the funds to some other purpose and defaulted this loan primarily you diverted the purpose of the loan right you violated the promise given to the bank that you will use it for so and so purpose then also you called as what willful default so in the Civil report it will appear whether the company is declared as a willful default in the Cil report it will be appearing getting it next now for what purpose the terms loan were obtained for what purpose the term loans was used Term Loan means you long-term loan getting the point or it may be a short-term loan also getting it so whether the term loans taken by the company generally Term Loan means for a particular purpose they will give what is the purpose you should mention and then take the loan getting the point if at all you're using the loan for some other purpose other than the designated purpose able to understand then the auditor has to comment here so diversion of funds is a very big important thing diversion of funds should not happen so suppose if a company raised money from through by issuing Prospectors from public for what purpose you stated in the Prospectors for the same purpose you should use the money you should not use it temporarily also for some other purpose suppose whether funds raised on short-term basis if they have been utilized for long-term purpose indicate what is the nature and amount what is the nature and amount to be indicated like for what purpose it is invested ultimately so a shortterm loan over draft cash credit uh short-term loans working Capital Loans all these are what short-term loans you should use it only for short-term purposes but suppose if the overdraft amount know you withdrawn and invested in a land getting the point shortterm loan is invested in long-term asset you have to indicate these are all symptoms of defaults these are all what symptoms of default suppose I took W from One Bank repaid another W which is coming due in another bank if I have to pay this V tomorrow I will withdraw from that V and then rep to this bank so there is a flexibility of adjustment but if I invest in land tomorrow due date comes the company is not generating any Revenue how should the company repay suppose if the amount of loan is kept in shortterm purpose only getting the point if they kept in working capital rotation only it will the company will get back the money very soon so if at all see if at all these incident happens if we report in Caro and all people get to know a company is not managing the funds properly at any time they will default if at all any short-term loans were invested in long-term purpose it will be it will be an event or condition that may cost a significant doubt on entity's ability to continue as a going concern further some companies know they take loans to meet subsidiary company needs to meet subsidiary company needs whether the company has taken any funds from any entity or any person not necessarily bank or fi getting the point on account of or to meet the obligation of its Subs Associates joint ventures if so what is the nature of transactions and amount so whether your company have you taken any loan for what purpose not for your purpose but for your subsidary subsidiary company associate company joint venture companies for their purpose you have taken the loan so how much you have taken all that you need to indicate same way whether the company has raised any loan during the year on pledge of Securities held in subsidary Associates if so give details off also report if there is a default in those loans nothing but I have I have shares in one company my company has shares in another company that to we have 51% shareholding naturally our company becomes what holding company but I have shares in another company that shares have a market value right so what I did is I went to I went to a bank I kept these shares as security I kept with bank these shares as security and got a loan and if I default what happens bank will exercise Its Right naturally I will lose the ownership if I lose ownership on the subsided company bank will become the holding company getting the point I will lose the control on my subsidary company look at the impact of this transaction so they asking dear company have you taken any loan where the property security that you have given is what you know shares that you are holding in subsidary companies joint ventures Associates that you kept as a that you gave as a security and then got a loan have you defaulted this so we need to check so this will give information about losing of Interest losing of control on the subsidaries because if you default bank will exercise their right they will sell the shares to somebody you will naturally lose ownership able to understand next it feels like you have not seen all these points you have seen it all of you next further so that is regarding default you know in this know they'll ask you uh they will ask you regarding loans taken for subsidary company needs what are the reporting requirements in relation to loans taken for subsidary company needs or loans taken by pledging a Securities held in subsidiary company so like this they may ask you like this they may ask you getting it or they may talk about write about reporting requirements in case of default in repayment of dues to Banks and FIS get it they may ask you that next end use of funds raised here it is regarding IPO fpo preferential allotment nothing but by issuing shares by issuing shares and securities you are raising the money you are raising money by issuing shares and securities now how you are issuing shares and sec Securities maybe through public offer or maybe through preferential allotment or private placement maybe through preferential allotment or private placement or public offer whatever it is whether you're raising money from public offer or preferential allotment or private placement you are issuing shares essentially and you're raising the money when you're issuing shares and raising the money you would have told some purpose right for what purpose you're raising the money did the company used the money for the same purpose or not did the company uses the money for same purpose like vone is going for 45,000 CR fundraising so they are coming for further public offer now what they mentioning in the Prospectors and all we want 45,000 CR worth of capital for our expansion in 5G Network now once they get the money are they using it only for 5G Network expansion or are they using it to pay salaries to employee you need to check if if not if not utilized if the company for what purpose they raised fund from shareholders remember in the ninth class it is talking about fund raised from Banks loans and borrowings here it is fundraising activity through shares allotment of shares suppose if the money is raised from IPO or fpo if the money is raised from IPO or fpo if they were utilized for purpose for which whether the money raised for the same purpose if not if not what is the default vone raised money and used to pay, crores of the money, CR of the out of Total Money they used it to repay creditors another 2,000 CR they use it to repay salaries areas of salaries another 3,000 CR they us it to buy fixed asset which is not related to 5G expansion another 5,000 CR they used it for renovation of all their warehouses sorry all their stores getting it so if there is a default you indicate suppose no generally in the public offer no we will mention in the offer letter in the bank terms and conditions within what time you should spend the money also when we when we are raising money we we should also tell the people right for what purpose when are you investing you should tell when suppose if there's a delay in utilization delay you should mention suppose no I I told 45,000 CR money I raised 2,000 CR salaries I paid actually so which is a default I subsequently rectified it I got collection from my customer that money again I rooted to P expansion so I rectified it subsequently temporarily only I defaulted and I rectified it even if you subsequently Rectify it has to be reported tell me is this information available on the face of the balance Shee to shareholders no since you are the auditor you see entire funds flow analysis you see entire cash flow analysis you understand from where the compan is getting funds where the company's moving the funds able to understand how do you do this funds FL analysis very simple company bank account they'll get money 45,000 CR credit is there getting it suppose already some 10,000 CR credit already their balance total 55,000 CR 5,000 CR salary PID I will assume that from the old out old balance available they paid another 7,000 CR they paid for salaries 5,000 CR old balance is still there 2,000 CR balance now from where it got actually 45,000 CR credit is there from that they utilized the 2,000 I will conclude like this able to understand fif B will match okay then preferential allotment same if a company has went for any preferential allotment or private placement getting it verify compliance with 42 section if they go for private placement whether company at 42 section has been complied or not and whatever the amount raised no is it used for the same purpose if there is a non-compliance how much is the amount involved and how much is the what is the mistake they did which with with what condition they failed indirectly non complaints when I mention non- complaints What non- complaints they did indirectly I am talking about what punishment company will get reporting of frauds uh reporting of frauds is like whether any fraud by the company or any fraud on the company getting it on the company who can do the fraud either officers or employees or anybody you see I intentionally added this office rward and strike through it getting it because originally Once Upon a Time this was there now it is removed in K 2020 so I intentionally kept like this okay so whether any fraud by the company company committed a fraud on third parties it has to be reported somebody committed a fraud on the company because of which company has suffered some Financial loss it has to be reported if yes what is the nature of the fraud and amount involved is to be indicated in tataa Motors they mentioned that they mentioned some theft point you see during the course of our examination records of the company explanation given to us no material frauds by the company or on the company has been noticed or reported except that we have been informed about three incidents estimate to 15 CR involving three employees who in collusion with certain vendors processed payments with inadequate documentation and benefited from them the services of these employees were terminated so some employee have done a fraud on vendors getting it vendor related fraud they have committed so auditor is reporting that that's what in car also car also says right if any fraud has been committed on the company here employees committed a fraud on the company 15 CR worth of vendor management fraud so they reported are you clear this is something not we discovered company already discovered this getting it you see the first point whether frauds committed you know whether any frauds by the company on the company has been noticed or reported during the year getting the point if you notice reported or if they were reported already to the company reported both have to be reported if you identify any fraud you report here if management has already identified any fraud you you reported now you may say Sir what if management do not disclose the information that's why we get written representation if we get a written representation that all the frauds identified by the company has been disclosed to the auditor nothing has nothing is omitted from Auditor's knowledge by the company directors CEO has to sign this tomorrow if company did not disclose me later it was discovered that I will show sir see management I discussed with them they said no so they're lying me they're cheating me able to understand next 14312 there's a section called 14312 where if we identify if we identify any fraud for more than one CR getting the point if we identify any fraud for more than one CR in each transaction in a particular transaction the fraud amount is more than one that transaction we should report we should report to you know central government by filing ad4 form we should report to central government so they're asking here whether any report under ad4 is filed or not auditor have you filed ad4 report so tataa motor auditor said no T motor auditor said no no report was filed which means 15 CR worth of fraud they told right who discovered that actually company only discovered auditor not discovered 143 subsection 12 no reporting of RS by Auditors no that is about auditor identified the fraud if auditor identified the fraud which company did not identify earlier that auditor has to specifically report to central government central government will inquire the company why you did not identify the fraud auditor who who is doing on a sample basis himself identified fraud you are doing your know you're having knowledge of entire Affairs you are not finding the fraud you are not reporting somebody's doing something wrong in your company so government will put an investigation there able to understand further visle blower complaints whether auditor has considered visil blower complaints if any received during the year by the company so companies know visle blower policy will be there there is something called visle blower policy getting it visil blower means what see night time and all guras and all will be there so if they find something suspicious what they do they blow the visle getting it that's called visz blower policy so like that in a company they have to establish a visle blower mechanism they should educate each and every employee look employees there is a box available there visle blower complaint box complaint box is available if you find something wrong in this company in any F in whatever the issue please drop your complaint you need not even mention your name like that company may do or the company May mention that you mention your employee ID code all that what is the fraud that you are noticing please file that your information will be kept confidentially getting it that Assurance company has to give them so that a kind of mechanism company has to create and explain it to the employees so come some employees they they they filed complaints there getting the point actually today it's not kind of box today it's completely online forms getting it that to the online form should not be editable in such a way it control should also be employed so now company have received approximately some 500 600 compl complaints from various employees regarding various complaints audit has to go through all of them that will help him in risk assessment right while watching by by reading all these complaints I will understand where things are going wrong that will help me to do audit much more better right in Caro they asking dear auditor have you considered the visil BL complaints during the audit of the company which are received by the year which are received by the company during the year so whether the auditor considered the visil blower complt they just asking have you considered if you considered enough no problem if you do not consider you are missing potential in information company not required not required for you related party transactions also not required see when I'm saying not required not that from exam point of view now I'm not teaching getting it if I sit on teaching that when will I cover next topic next nidi company is nothing but a you know nbfc it is also a type of nbfc I'll briefly cover n nii company know for every one rupe of net owned funds nidi cannot accept 20 rupees of deposits what happens in nidi companies let us assume n nidi company shall not have more than 200 members or minimum number is 200 members something like that is there okay nidi companies so nidi rules were there under company law for nidi companies there are separate rules separate provision separate forms nidi forms and all will be separate okay so it's something similar to chit fund company so what nidi companies will do now they will take loan from each and every member suppose 200 members joined in a company one scheme is there there all the members will give a deposit with the company company will be paying interest to them company will be paying some interest to them now the amount which have taken from 200 members no I will give to the members who want loan whoever wanting the loan I will give the transfer the money to the members now how much amount of loan I can give 90% of the amount of deposit I collected maximum loan how much I can give 90% you see here whether nid company maintaining 10% unencumbered Tom deposits so out of total deposits have accepted 10% should not be given as loan 10% I should always maintain liquidity suppose some depositor may come and ask back his money so I should give them getting it and in order to do this business no whatever liability is there right suppose I'm accepting from 200 members 200 CR I'm accepting I must at least have 5% 5 CR own Capital the owner who is running the ni company must have at least 5 CR Capital if a n company is accepting 200 CR deposit that's a liability for the nidi company Capital should be minimum how much 5 CR actually the numbers which I told is only for basic level understanding this is not 100% true there are so many calculations that are involved for nidi company you know net worth calculation Capital requirement calculations and all which are not important for us now I just explain you understanding you to understand this point whether there has been any default in repayment of Interest or deposit if so what are the details whether the near company they have to pay interest to to deposit holders right is there any default auditor has to report so if at all you auditor of nidi company you have to report related party transactions very simple related party transactions know whether 177 audit committee have to give approval for related party transactions 188 which is exclusively talking about related party transactions getting it so whether the conditions are comped or not two whether the related party transactions are disclosed in financial statements as per applicable accounting standard two points we should check whether the related party transactions are conducted as per law two whether the related party transactions are disclosed as per applicable framework or not we have accounting standard 18 related party so as per accounting standard 18 we have to disclose in notes to account certain related party transactions whether the disclosure is proper or not auditor has to check internal audit system I will talk about this in sa 1610 we have an sa 610 in the audit chapter there I will discuss non-cast transactions that's not required nbfc this is little bit uh in-depth nbfc I'll briefly cover see if a business if if an entity whose principal business whose principal business is from finance activities then that company that entity must register as nbfc suppose out of total assets in the balance sheet more than 50% assets are Financial assets or in the total income in the pnl more than 50% income is from the financial assets the income is from the financial assets means predominantly your income is generated from finance activities you are not doing any business operation you are doing Finance business nothing but you are supposed to be a finance company of course you're not a Banking Company where you're not accepting deposits getting it so you are an nbfc liable for registration now look at the company where you doing audit tataa Motors look at their other income look at their Finance income is it more than 50% of the total income in tataa Motors no the finance income is one or 2% only for the tataa motors okay look at the financial assets Investments cash balance datos loans and advances given not dors loans and advances given cash balance deposits fixed deposits Investments so these items total you see is it more than 50% of the total assets of the tataa no it is somewhere around 5 to 10% so tataa Motors is not satisfying principal business criteria therefore tataa motor is not liable to be registered with RBA as an nbfc first question whether the compan is required to be registered under nbfc whether the company is required to be registered as an nbfc as per section 45 IIA if so if there's a requirement whether the company got registration no getting it so tataa Motors the principal business criteria not satisfied therefore they are not liable for registration accordingly they did not get registration now you need to also specifically tell whether company has conducted any nbfc activity without registration suppose if the company is liable for registration but not registered and are still doing happily nbfc activity report it further whether the company is a core Investment Company whether the company is a core Investment Company whether the company you're doing audit is a core Investment Company what is a core Investment Company tataa Sun private limited there's a company called Tata Sun Tata Sun private private what they do they don't do any business their only business is investment in various other companies tataa Motors tataa consultency Services tataa steel tataa passenger vehicle limited Tata aages limited Tata Communications limited Tata Tata steel yes or no Tata power all these approximately some 30 companies were there Tata group all these 30 companies were subsidiary companies of tataa sun private limited what tataa Sun private limited do they just invest in companies they just keep on investing in companies more than 90% of their total assets more than 90% of their total assets are represented by investment in multiple companies that company is called as core Investment Company what is their Core Business investment are you getting it that's called as a core Investment Company so whether the company is a core Investment Company check out suppose if I'm doing audit of Tata Suns yes Tata Suns is a core Investment Company whether it continue to fulfill cic criteria is it still fulfilling cic criteria yes even today total Investments value out of total assets of Tata Suns private limited is more than 90% still it satisfy core Investment Company definition you know core investment companies know they are supposed to register with RBA as nbfc if the asset size is 100 CR in if the asset size is more than 100 CR they have to register with RBA otherwise they're Exempted suppose is the company which are doing is it an unregistered cic if it is unregistered core Investment Company unregistered means what not registered with RBA as nbfc why exemption is there whether the exemption continue to apply whether they are fulfilling the exemption criteria auditor has to check now Tata group no it has only one core Investment Company actually six were there I think so six were there so whether Tata group has more than one core Investment Company if yes indicate the number of core investment companies as part of the Tata group so in tata group I know one core investment company that is Tata uh Suns private limited there might be some two or three core investment companies might be there just indicate the number and names that's it I don't think they'll ask this next cash losses cash losses because in C interal you don't have nbfc I think in accounts you have nbfc accounts in group one now new scheme is it there I don't know I'm just asking if at all any of you are rating new group one if at all you have seen Advanced accounting just tell me is nbfc audit nbfc accounts there for you no then fine earlier it was there okay fine now we have in CF final nbfc audit we have a very advanced level discussion fine cash losses whether the company has incurred cash losses in the financial year and in the immediately preceding Financial year if so amount of cash loss has to be indicated nothing but what is a cash loss look just one minute okay yes let's continue you know auditing is not a scoring sub what very many claim that cor the reason why it is not scoring is you will not give the same amount of attention that you give for costing or financial management for a comparison s I'll tell you financial management total number of hours classes in a regular is auditing also and financial management weight right now in the new scheme is 50 the same 100 hours in auditing is 100 marks and for for a paper like FM and SM put together student will spend 15 hours on coaching and since it's a FM is a practical subject they solve on it they revise they spend another 100 hours they spend 250 hours and they get 60 or 65 if at all they spent all 250 hours whereas in audit he wants to finish in 50 hours coaching and he wants to revise in 20 hours and he will complain that I will not get even I will not even get 40 you're spending 250 hours there and getting 60 and you're trying to spend less than 100 or 150 as a whole and expecting 60 what is possible you spend same amount of time on audit I'll bet 70 plus you will get it's all about you see always the result is always in proportion to the efforts we give right or no accounting is a scoring subject yes it is scoring because you spend 300 hours on accounting on coaching practice everything 300 hours you spend same 300 you spend an audit in accounts whether you get exemption or not I'm not sure but in audit you'll get exemption if you spend the same amount of money able to understand so what is important is spending time how much time we are dedicating so we should always look in that perspective in every attempt he will spend only 50 50 hours in audit and every attempt he'll fail in audit and he'll come and say Sir always I'm failing in audit only sir how many hours you you spent on auditing sir I studied for 10 days how many hours you studied account 25 days obviously that's the reason you take five days there and study here 5 days extra you will qualify now so he's getting 55 58 59 and all the three subjects earlier in audit around 35 and he failed just another 5 Mar if at all he got he would have qualified why he didn't get that five marks because he want to finish in 20 hours audit how it is possible complete that to text only here it is no numbers complete theory yes or no you need to understand it right some students they come and say sir I'm unable to remember the terminology you are unable to understand when first you recognize that forget about remembering you didn't understand first first you should understand the terminology right in order to remember it without understanding it how should you remember how will you remember number obviously not possible right so understanding is most important understanding means not sentence word word understanding the context how it impacts getting it that is what understanding really means so try in this way you will definitely find that Improvement you will definitely find so give time for audit okay you give time and then see the result okay how you are treating other subjects same way you should treat audit also the point is audit becomes a secondary subject for many AUD we take care of auditing at last no issue day before exam two days Marathon chat book over you will go and write chart only getting it so examiner know he'll give question for 100 100 you know the mark like how you'll write if the question standard is at 100 what you understood is 60 and what you're reading from chat book contains only 30 what you're rating is 20 what you get is one the problem this is how the marks are reducing correct so read thoroughly from the main material I could have made a color notes in auditing this time consciously I delayed it no let me not do if I make a color notes I will use by mistake color notes only okay simplified notes no no let me not do that McQ s see now I don't know some students are coming and showing me mcqs from online IA portal senten are so big yes or no if you read from shortcut material now how will you understand are you clear now you see here no uh somewhere in IPO and fpo so sometimes no we we do record class one and half hour full energetic recording is not on the kind of s dissatis the kind of disappointment I get know the time from then know I made a habit whenever I record once or twice I'll check the recording is it on or not and then only I'll proceed forther two times it happened with me and again that level of interest will not come right once once we are recording that that mood and will not come now tell me first class fundamentals and I told something inspite I'm not healthy but now if I have to take that 1 hour big challenge for me a very big challenge now you see here IPO fpo right here You observe this question no if at all they test it as an McQ options how they'll give no how they'll give you this McQ I don't know I don't think this much already they're testing this style also they're testing this time whether funds whether money raised by IPO fpo were utilized for the same purpose if not option A if not the details of default to be reported option a option b if not the details of delay default has to be reported option C if not the subsequent rectification has to be reported like they'll give you three options sometimes getting the point fourth option they'll give something else so you need to figure out which is is correct if you never observed these words when you're reading if you didn't observe this how will you how will you identify which is the correct answer now tell me in order to observe that you cannot read from short notes short notes is what they what they'll read whether company raed IP funds if yes if any default report it this you also study happy yes or no you'll feel like a very simple short notes share to all the friends they will also they will also read the same all of you together fa this is what happening right the easiest route to success is the hard work hard work doesn't mean you have to sweat out right process so usually following right process is easiest way to succeed I'm telling you we are unnecessarily complicating things by choosing shortcuts because we are choosing shortcuts we are complicating ourselves getting it definitely there will be some 10 15 students in this who have attended more than five six times crash courses in audit definitely I've seen I've seen a student he messaged me 17th attemp there is a YouTube video I made in YouTube also you'll find getting it my interview with 17th 10th student he qualified in 18th 17 ATT failed I told him only one thing sir what should I do will you do whatever I say I just asked him I don't tell you something very you know to go stand on one leg and then do prayer no okay I'll just tell one thing start from scratch hey ignore all your old books ignore all your old learning assume that you're a fresher start from SC and he did that and he qualified the success easiest to is doing the right process correctly from the beginning once again what where I am now know ah cash losses cash losses so what is a cash loss see I told this example already suppose I sold goods for credit 200 CR worth of goods I sold for credit and my purchases my expenses depreciation all that I debited and I have a profit of 5 CR now when you see the PN account like this company has a profit a grow but you know uh sorry uh it's actually let the company has a loss of 10 CR let us assume in spite of sales minus purchases the company is having a loss of 10 CR but actually this entire to this extent of loss there is no outflow of cash for me the P know I debited some non-cash expenditure I debited some Provisions where there is no outflow for that loss no you add back those expenses suppose if it turning into profit if the loss is turning into profit by adding back non-cash expenditure by adding back future expenses provisions and all if at all the loss is turning into positive there is no cash flow there is no cash flow suppose my pnl my pnl losses let us assume 10 CR minus I added back depreciation one CR I added back provision two CR that's it my still there is a loss of 7 CR this is considered as cash law this is considered as cash loss cash loss means the loss exactly incured by the company by other than non-cash expend by other than future Provisions understand so if there is a cash loss that is something considerable getting it in spite of adding cash losses and in spite of adding non cash expenditure and all if still compan is having some cash loss that is something we have to consider you know in income tax the same thing this is actually called as business loss getting the point whereas this one which we added back is called as unabsorbed depreciation loss this is something similar to income tax calculation only unabsorbed depreciation loss how we calculate from business loss how we calculate similar logic only getting it of course in income tax provisions and all not allowed as deduction so there is no question of adding back okay I don't want to confuse again so simple understood cash loss that's it so whether the company has incurred any cash loss during the financial year if if not in the current Financial or have they Inc in the immediately preceding year also check out so this year cash loss is zero last year GH loss something is reported in both the years cash loss is a reported last year it was not there but this year it is a reported are you getting the point so by reporting cash loss we are indirectly telling the people that see why cash loss will come all if there are bad debts if there are bad Debs mainly you will get cash loss or if the company expenditure is more than the income then there will be a cash loss I think it next another Point hey yeah resignation of Auditors getting it resignation of Auditors whether there has been any resignation of auditor during the year so in this year did auditor resign now you'll get a if audit resign why you repot another auditor man the auditor resign know I was appointed in his place now I am finalizing the audit I'm giving the audit report I need to report if at all during this year any auditor resign if so whether the auditor has taken into consideration what are the issues raised by resigned auditor what are the objections raised by reigned auditor what are the concerns raised by outgoing auditor whoever have resigned and left the company know what issues concerns objections he raised getting it you please report it here generally when we are accepting any appointment in a company who is the previous auditor we should communicate with him we should get nooc from him no objection from him only then we can accept the audit very recently there was an amendment also of course this amendment was there long ago but recently it was highlighted again if at all previous auditor did not get FEA who should not accept you accept tomorrow you will also not get the fees logically yes or no then material uncertainty this is something related to going concern this point I think while explaining uh going concern I actually ruc but I forgot to teach see in going conern if any events or condition identified we do additional procedure we do investigate and we finally decide whether material uncertainty there or not or no now many Auditors they're escaping saying we did not find any event we did not find any condition because we have something called reasonable Assurance Clause because we have something called inherent limitation we are showing all those reasons and escaping from these reporting of going concern issues in many cases this is what happening regulatory has woken up now like they woke up so the MCA suggested government to include this point now you need to check this you see how powerful this point is on the basis of financial ratios on the basis of aging and on the basis of expected date of realizing Financial assets and on the basis of payment of liabilities and other information in the financials and on the basis of Auditors knowledge of directors and their management plans whether the AUD aor is in the opinion whether whether the auditor of the opinion that no material uncertainty exist on the date of audit report whether no material uncertainty exist on the date of audit report that the company is capable of meeting its liabilities existing on the date of balance sheet when they fall due within a period of one year from the date of balance sheet what is this point so see as on 31st March no the company has a liability of 100 CR getting it at the same time company has current assets company has investment company has given loans and Advan so so many amounts and we do cash flow forecast right we do check cash flow forecast company future cash flow statement and all future cash budget we will check in working capital you learn cash budgets yes or no so cash budgets and all we will check right we have the data now I am finalizing my audit report on 10th June on 10th June I should check one point before I sign my report as on 10th June whatever liabilities they showed on 31st March and whatever receivables they shown on 31st March will the company still can pay because as on 31st March as on the day company can pay but within this 31st March and 10th June some incidents might have happened their company may turn into a default so then you are signing the audit report that date you check you have seen what are the assets available in the company as on 10th June you know what is the bank balance of the company as on 10,000 you know what are the commitments companies having already still do you feel whatever liabilities that are shown in the balance sheet do you still feel that company can honor they're asking you once again think on 10th June and then report it in the car able to understand so you should have a proper documentation for this as on 10th June when you're signing the audit report date you should have a proper documentation that yes companies still have surplus funds the company has some balance in the banks and all they can repay whatever amount comes to Due they have to suppose no if you do not document like this proper if you do not verify like this tomorrow company went for default you cannot claim under reasonable Insurance Clause you cannot claim inherent look in Caro there's a requirement in fact you reported in Caro that nothing has come to your attention that company can default you gave a positive statement in car you see auditor no they said a positive statement according to the information and explanation given to us nothing has come to our attention which causes us to believe that any material uncertainty exist where the company is not capable of meeting they are giving actually limited Insurance they're actually giving what limited Insurance in limited insurance only nothing has come to our attention that wording we will use in a review engagement we use that wording here also you just have to basically review and then check that's enough as on 10th June when you're signing the report do you still believe company can honor all the payments because you have seen company FES company bank statements you know company Bank balances you know company funds you know so whether all the liabilities can they repay or not will you still believe T motor said yes I believe that company can repay nothing has come to my attention that company can default based on the information given to me I still feel that company can honor the payment suppose if tomorrow t mot default the default is because company do not have surplus funds that to the surplus funds are not there right from 31st March itself auditor comment whatever you given is a wrong statement so regulator can check the auditor investigate the auditor why you have given like this where is the documentation that you have came to this conclusion if auditor could not prove it is treated as guilty of professional misconduct getting it schedule to punishable offense able to understand in CA act it's a punishable offense your name will be presented on the every notice board you will become very popular finally CSR corporate social responsibility very simple every company has to spend some percentage of net profit on the CSR activity any unspent amount is there in that year either it has to be transferred to schedule 7 fund or if at all you have kept it for particular project you have to transfer that money to a separate bank account if at all the money has been kept for some project project purpose whether that project purpose money kept in separate bank account whether unspent money if at all there where there is no project have you transferred it to schedule seven fund is it done or not you have to check that's it that is what you have to report here then this is 21st Clause is applicable for uh consolidated financials this 21st Clause is mainly applicable for what Consolidated financial statements audit report mainly getting it even in Standalone financial statements also we will talk getting it so when I'm giving audit report on Standalone financials if this company has any subsidiary company associate company joint V those companies will be included in this subsidary company right those companies will be included in this subsid I mean this suppose T Motors is having some subsidiaries or joint VES like that now for all the subsid joint ventur associates they have their own Auditors and they have given their own audit rep and in their audit reports also caros were there in those car reports also they have given some qualifications under various Clauses you see here whether there have been any qualification or adverse remark by respective Auditor in car of the companies in car report of companies included in Consolidated financials if yes indicate details of the companies paragraph numbers of the car report containing qualification or aders here indirectly what are we saying is you are giving audit report on the Consolidated financials inside that audit report 10 to 15 subsidary companies 10 to 15 associate companies there their information is also there and those companies were audited by different Auditors they gave different audit reports and different car reports on them in the car reports and different Clauses for each company some qualifications were there now shareholder no he can't open each and every company subsidary company car report in check right so what car is saying for us you are the auditor of holding company right this company is preparing Consolidated Financial right now in that consolidation whatever companies were included their audit reports in that car reports in what are all the Clauses qualifications were there you give the car report in your particular uh holding company related audit report so look at the STA Motors what they did very simple if you see this you will understand in our opinion and according to the information explanation given to us following joint operation companies getting it which are included in Standalone financials have unfavorable remark it is regarding in the stand and financials and Joint operations is included that's why there if you see T of Consolidated financial statements on the to if you see only 21st Clause will be there entire car report will not be there only 21st Clause will be there once I will just open the directly many don't understand this point so this is Consolidated financials and inside that audit report yeah this is NX to audit report on consolidation actually on Consolidated financial statements do car applicable no look at this report on legal and regulat requirement also I think they might have mentioned they might have mentioned as required by Caro order issued by government we given we have given an exture a getting it on the matter specified to the extent applicable whatever in the car is applicable for Consolidated financial statements related audit report that is given only 21st Clause you see here so here they have given NX to Independent now in Consolidated financials of tataa motors which companies are included tataa Motors is included tataa Motors finance all these companies in fact not more than this might be included but in these companies under under these Clause of Auditors have given qualification under these claes Auditors have given qualification if you want I have given corporate identification number go to MCA enter that number download their financials download their audit report go to respective Clause you will find what qualification they give I just giving you here list of qualifications on audit report on Consolidated financials of tataa Motors in tataa Motors consolidation various other companies are also included and those companies are audited by another a and they have given audit report inside that audit report Caro report was given inside that Carrow so and so Clauses contains qualified opinion that entire list I'm giving it in this audit report easy or not making the job of the shareholders easier or not this uh audit chapter is completed okay actually actually 143 subsection 3 is there 143 subsection 3 in that no Ty of funds concept and all there that I will discuss when I'm explaining items of financial getting it and uh okay that's it I'll conclude this so the next topic is audit documentation where we are actually discussing SE 230 standard so until now if You observe nature objective and scope of audit we have covered 200 is actually mainly the content is taken from 200 terms of Engagement we have discussed 210 and ethics no that is also covered as part of 200 and IC Code of Ethics then we have seen in audit report some standards 700 701 705 76 and 570 299 600 Basics we have covered yes or no Branch audit so we have covered somewhere approximately some 10 to 12 standards 10 standards maybe so this is another standard which we are covering that is 230 audit documentation what is documentation you see in reality the audit documentation is completely electronic once upon a time we have both electronic form and physical nowadays in Big Four entities entire documentation is only electronic no physical documentation there is no physical paper but today even in mediumsized forms and small forms getting small and medium practitioners there they have uh physical documentation is also there and electronic is also both the documentations for there I'll show you how electronic documentation looks like the layout in software may be slightly different getting it but how the folders will be arranged so in a computer the documentation will be like this suppose no if you open any Auditor Office server any Auditors Office server no if you open so generally in in when we are going when we doing articles or when we working in an audit form so we will be having one system separately through that system we can connected to server of the form okay so as for the server if you open now they'll have some files there is something called clients data okay and something called others data now you open the clients inside the clients a for might be having different categories of clients like company clients know forms the company might have a f clients know partnership forms and all the companies may have so Proprietors the companies may have Cooperative societies like that now you open company clients the companies having so many clients like tataa Motors limited Reliance Industries limited you know like adani adani ports limited like that different different companies for them you open tataa Motors this company's auditor from Financial year 1920 Financial year 2021 Financial year 2122 Financial year 2223 getting it you open 2223 folder I'm showing you how documentation will be there in an auditor office getting it that is what we are discussing actually the 20 to 23 folder you see inside this if you open so first one risk assessment and preliminary engagement activities one folder is there risk assessment and preliminary engagement activities some fold is there then there is another folder called further audit procedures there is another folder called further audit procedures then there's a folder called review and conclusion then final folder called reporting there are four folders which were there one is risk assessment and preliminary engagement activity another further audit procedures review and uh uh re review and conclusions review and conclusions and finally reporting now you open further audit procedures inside this inside this pnl items balance sheet items another folder is two folders for there you open pnl items inside this again revenue from operations purchases inventory employee benefit expenses operating expenses other expenses like this multiple folders were there you open purchases you open purchases folder inside this purchases folder what are there purchase register that's but this is the raw data generated from the software purchases raw data that is generated from the software on this we applied sampling techniques we applied sampling nothing but purchases data will be there so many transactions some 10,000 purchase transactions were there each purchase transaction value is ranging from 10,000 rupees to 10 CR rup each transaction is either from 10,000 or 10 gr getting it so we selected 200 samples we selected 200 transactions these 200 transactions know we selected in such a way that large value items were there medium value items were there small value items are also there all categories we covered so our sampling is a you know is a stratified sampling what we applied stratified sampling which is also called as monetary unit sampling we applied which technique monetary unit or stratified sampling Technique we applied so we divided entire 10,000 transactions into three parts all purchase transactions whose value is more than 50 lakh whose value is more than 50 lakh only 30 invoices were there only 30 entire 30 be selected getting it all transactions between 10 lakh to 50 lakh some 100 invoices were there we selected some 70 in that and remaining transactions some 9,000 approximate were there from that we selected some 100 totally we selected as a whole 200 invoices getting the point now you see he selected all high value items he selected predominant medium value items he selected sample very less low value items able to understand we selected very less low value items re remember this example getting it we will discuss this in sampling topic also when we are discussing sampling topic there I will once again connect with this example getting it so 200 samples we selected uh total 10,000 transactions purchases no only 30 bills were having more than 50h and above value okay another 100 bills were having 10 to 50 lakh Bill value remaining 9,850 or 9,870 bills were there right they're all less than 10 lakh rupe value each and every Bill value is less than now these 30 bills whose each bill value is more than or equal to 50 lakh we selected entire 13 hours getting it and whose Bill value is 10 lakh to 50 lakh 100 bills were there we selected 70 bills of them getting the point and remaining bills are 9,870 out of them we just selected 100 getting the point so this is the sample composition getting it now now this is a sample composition okay so we selected this sample and uh we verified purchase process how purchases is happening in this entity how purchases are being processed in this entity we so there is some vendor mechanism vendor Master is there company has a vendor list only from these list company can place an order whenever they want to purchase Goods so if the company want to purchase Goods suddenly there is a stock out company personal management they cannot just like that go to somebody and then purchase they can only purchase electronically only from company server order should be placed get in order to place the order from the company server you should select only predefined vendor only with that vendor you should place your order like that in the computers there are restrictions we call them as ID controls what do we call them as it controls we call them so such a kind of robust it controls andol were implemented so that persons cannot do frauds they can't do frauds so they can place an order so once purchase order is placed it will not be directly going to the third party supplier first the order has to be approved now depending upon the order value if the purchase order value is more more than 10 lakh approval mechanism is different if the purchase value order value is less than 10 lakh the approval mechanism is different the purchase order value is more than 10 lakh coo shall approve CFO shall approve Finance director shall approve purchase manager shall approve four people has to approve it only then that order can be placed getting the point once order is placed the other person will deliver the goods right yes or no after certain period of time they deliver the goods we will not directly take acceptance how many we ordered 10,000 units we ordered now other person delivered 10,500 units our system will not accept them now at the warehouse at the warehouse no when they whenever they get Goods no from the outside of Warehouse staff keeper is the warehouse keeper will be there they don't know that we ordered this you know when when Goods coming no so the seller will be sending invoice in that invoice our order number will be given so this Warehouse keeper he will enter the order number immediately he'll get the order data what we ordered 10,000 units of s of material 5,000 units of s of material be like this now when they unloading no unload report will be given unloading report will be given shipment report will be given in that shipment no Unit A we order 10,000 they send 10,500 we will reject 500 even if at all he want to accept 10,500 now system will not accept suppose tell me if we order 10,000 goods and the supplier send 10,500 Goods do you think supplier build 10,000 units or do you think supplier build 10,500 he will build 10,500 only he sent invoice also for 10,500 for extra items he sent and building me extra now if at all he build 10,500 we should pay how much payment 10,500 only we should pay but our system is not accepting more than 10,000 our system will accept only for 10,000 units the predetermined rate now in our system we we can only record purchase transaction for 10,000 units automatically over acceptance of goods is restricted such a kind of control they will Implement getting it technically they can't do they can't accept more than what so only 10,000 he will accept remaining 500 he will remove he will he will reject it so 10,000 Goods accepted whether they are in good condition or not inspection department will come and check so if they're in good condition they will give approval okay that approval also given in online once approval is happened then the goods will be taken into the goam getting it now grn give a bill purchase invoice purchase order everything is included right this entire set will be forwarded to accountant of the company accountant no he will verify all these documents whether authorization approval everything is there proper or not once ensuring everything he will prepare a voucher he will prepare a voucher called purchase voucher purchase voucher is internal document for the company so it is in the name of the company so our company name will be there on the 10 10 CR or 10 lakhs some value will be there purchase from so and so accountant prepared the voucher he will sign it this voucher has to be approved by finance manager voucher has to be approved by once again CFO if the voucher value is more than 10 lakh see how many controls now CFO it will go to the voucher 10 lakhs this order who placed somebody placed my signature is not there in the order immediately he find find out the signature should be there in order right first of all without that order will not be will not be going so but dual authentication is there once again you see coo is checking two times so while ordering his his approval should be there while Accounting in the records also I mean his approval should be there so he approved it then we recorded in the accounts then only the transaction will reflect for finance te Finance team will will have reflection of that transaction suppose in the meantime supplier called Finance team sir we delivered Goods release the payment sir in our system it is not visible sir in my system it is not visible what visible sir I delivered sir wait it will take two to three days time first accountant has to pass the entry then only it will be visible in my system for payment if it is only visible only I can check electronic check I can generate if I if there is no amount visible how can I generate electronic check there is no manual check we are drafting we are not writing any manual check and all ours is completely electronic clearing system getting it only when I approve it will go to again coo for approval then CFO will approve it then the bank will process the payment electronically getting it first it should reflect in my system now such a kind of it control they kept this understanding of internal control I should document so that and all is there in the purchase related control b2p we call it as procurement to payment entire that risk analysis we should document okay I studied the system now whether the system whatever they explained me are they really following or not how should I check I selected 200 samples getting the point for samples for bills whose value is less than 10 lakh whose value is more than 10 lakh controls are different authorizations are different so I want to check whether small items small transactions are the following controls large transactions anyhow they follow small transactions are the following or not that's why what I did randomly I selected 100 invoices from small transactions 70% of invoices from medium transaction 100% invoices from large transaction high value transactions now I will check in each and every transaction whatever the predetermined system are the following or not I will check so this is what I do in test of transaction are you getting it I I don't know how many of you did vouching in vouching you should check all this gener what our students think vouching tick amount ticking date ticking party name ticking all this this is what they think so vouching is not just ticking getting the point you do audit like this yes or no this is what atic actually so in vouching no before you vouch the transaction first you should understand how the transaction can be executed in this company able to understand that's it so sampling now the s the purchase related conclusions whatever mistakes we are finding in purchases a voucher no authorization is missing system process the transaction without authorization it deficiency what is it called as deficiency in internal control is this deficiency significant it's a purchase transaction related high value transaction it's a significant deficiency I will communicate to those charged with governance as per sa 265 are you getting it what is sa 265 standard heading communicating significant deficiencies in internal control to those charged with governance so I will record all that conclusions in this like this in expense audit I will Design like this audit in employee benefit expenses I will have documentation like this in other expenses I will have documentation like this in electricity expense I'll have documentation like this getting it entire records you see I'm saving it getting it I'm saving on my system everything like this not only this we verified some manual copies I will have a folder audit folder will be there getting it there will be audit folder uh work hard like a box file kind of thing will be there so in that folder also I have documented so many proofs and all now this entire process is called as what audit documentation audit documentation is audit documentation refers to record of audit procedures performed relevant evidence obtained and conclusions auditor reached I showed you or not able to understand so whatever procedure I am doing I will document whatever evidence I've have collected I will document whatever conclusions I got based on my audit procedure verification procedure I will document these documentation is also called as working papers or work papers getting it now parall we have another definition called audit file audit file what is audit file audit file is nothing but one or more folders right now I should folders folders yes or no or other storage media that is in physical or electronic form that contains records that comprise audit documentation for a specific engagement tell me we have to maintain audit folders each client wise right I showed you right now open our company clients tataa Motors like for each client there's a separate folder right yes or no so for a specific engagement that for each Financial year remember tataa Motors 1920 is one engagement 2021 is another engagement 2122 all these are different different engagements right able understand for a specific engagement whatever documentation that you are gathering right you are keeping it in folders right that folders are called as audit file documentation is nothing but the concept name how are you documenting through folders that's called audit file don't confuse between these two definitions in true or false they will test they will give you this definition and say name it as audit documentation false this is audit file definition audit file is nothing but one or more folders in physical or electronic manner that contains documentation for a specific engagement for a specific engagement whatever documentation is there now that we will keep it in electronic storage either in folders or physical storage that's called audit F able to understand what is documentation documentation is nothing but a process of recording the trans procedures performed evidences we gathered conclusions we reach the recording process is the right that's documentation documentation talks about process file is nothing but the end result of documentation understood next what is the objective why documentation how will you defend yourself tomorrow that you did audit properly getting it if any regulatory Authority came for investigation how will you defend yourself so the objective of auditor is that it's a sufficient record appropriate record for the auditor's report whatever the report you give that's a record for it an evidence that audit was performed as per standards and legal requirements of course you do audit as per standards you did audit as per law but if you don't document how will you defend yourself that you did audit as per standards you did audit as per law and regulation that's it this itself can be asked as a question concept and objective of documentation understood so what is the nature of documentation nature is very simple it is an evidence for Auditor's basis it's an evidence that if it's an evidence for the auditor's conclusion about overall objective of the auditor overall objective is to give opinion whatever I give opinion for that evidence is documentation evidence that audit was planned and performed as per standards and law and Authority law and regulation so you you definitely do audit as per standards you definitely do audit as per law and regulation how will you prove people that you did as per law documentation why documentation it will help team to properly plan and perform the audit so through if I if I give documentation if I tell everybody if you if you don't have documentation I will assume that you didn't work so to my all article assistants know who are trying to escape from their from their work I will tell them whatever work you complete on the day related documentation if you so documentation helps me to plan and perform the audit and it will help team members to direct and supervise the work getting it so whether my article whether they performed work properly or not how will I check by documentation so it will help me to supervise how they are working to review how they worked so it will make the team accountable for the work so on every documentation so whatever paper My article has documented no he will write his name getting the point so indirectly he will be very alert because is writing his name and all he'll be he'll become very alert and retaining a record of matters of continuing significance for future audit so current documentation will help in next year audit also yes or no specially purchase process no the process is same in the next year also that will help in next year documentation helps us to conduct quality control review as per sqc one what is engagement quality control review what is this called as engagement quality control review eqc which is performed by engagement quality control reviewer getting it what is this engagement quality control review quality control reviewer we will discuss in sqc 220 later able to understand so audit documentation helps in quality control review nothing but once audit is complete report is given our firms know they will be little free in February month March month April month generally that time it is not that much audit again April Pleasures will start work will start during John month no whatever audits they completed last last year right they will open and check whether we did audit as per standards or not whether we complied with all the law and regulation or not whether do we have enough documentation we gave unqualified opinion with our documentation can we prove people that our unqualified opinion is proper so like that they will evaluate themselves that's called review quality control review how far we are doing audit qualitatively that's it and not only that not only for your internal quality control even if some external inspection happened from NF external inspection happened from quality review board this will help able to understand purpose so they'll ask you in exam write about what is audit documentation meaning and purpose of documentation so when they write like when they ask you like that question any Four Points here any Four Points remember whenever the points are more than four any four is enough if you write any four that's enough for a four marks question next now what is the form content and extent so how what are all I should document in which format I should document how much I should document so how will I decide by the way manner of document how should I document you should document in such a way an unknown person no sorry an experienced auditor who an experienced auditor who is not having connection with your audit he didn't audit he didn't audit along with you the client Tata Motas 2223 Financial you and your team audited and you called me sir how is our documentation I did not involve in the audit but by looking at your documentation I should tell I should understand what nature of audit procedures you did physical verification observ inquiry when you did the audit how many samples you did the audit extent of audit procedure I should understand by looking at your documentation I should understand nature timing extent I should understand the result of the procedures what you got the result significant matters arising during the audit and conclusions reached there on what are the big issues that happened in the audit and what conclusions you have taken significant profess judgments made in those conclusions when you're deciding something what assumptions you have taken what conclusions what judgments you have us significant professional judgments so your documentation shall be in such a way that an experienced auditor having no previous connection with the client or the audit with that audit I don't have any connection but by looking at your files by looking at your software by looking at your physical folder I should understand have you performed the audit how you took the decision how what important issues there is and what decision you have taken what important judgments you have taken I should understand all that which means your documentation must be self-explanatory able to understand in such a way your documentation if you understand that is not sufficient your documentation should be understood by others others means not everybody experience aitor who is experienced auditor he is having a knowledge of applicable framework he has the knowledge of standards he has the knowledge of auditing standards he can understand the client business so he is not normal you know not belonging to finance or Commerce he is our CA background only getting it but for him if at all he himself is not understanding your documentation how do you think external Authority can inspect it understand so documentation shall be in that way form a documentation of n just a minute before that what are the factors that affect form content and extent of documentation so in which format I should do electronic physical depending upon the client what and all I should document depending upon the client getting it the the form content and extent the format of documentation what content you should document how much you should document getting it it depends upon size and complexity of the entity suppose in a small concerns no purchase register fully I will take in a medium siiz entities also purchase register I will take but Dem I'm doing audit sales register itself is so big one CR invoices two CR invoices for there why should I document sales register anyhow company maintains that record for 8 years tomorrow if any inspection comes I will go to the company and ask the information why should I take register I will only document samples there what sample I verify no only that I will document so which one you will document is a matter of professional judgment you have to think which one to be documented simple you need to document that I mean according to you it is enough for you to prove it is enough for you to defend yourself so whatever is enough for you according to you to defend you know before somebody get that you did proper audit you document all that now which one so what factors I should consider in order to do this size and complexity nature of procedures perform generally know if you go for physical verification we we cannot document physical ver how will document maybe do one thing do video capturing that is one two risk of MMS generally High risky areas will document if that there is no risk and employee benefit expenses proper controls everything is superb I just verified randomly some samples over no need to document significance of the evidence obtained significance whatever evidence you got no what is it significance suppose external confirmation is more significant external confirmation is more significant than the vouer the document external confirmation exceptions identified suppose no when you're verifying no you found some mistakes exceptions means what exceptions means see remember exception is different from misstatement both are not same the statement means they did wrongly exception means what you know suppose purchase invoice it is showing 10,000 rupees but gr and no it is showing 9,000 rupees value there is this is an exception this is called as what exception actually both should match they're not matching which is unusual which is exceptional generally they both should match so exceptionally they don't match why they did not match getting it so you investigated further you documented getting it now what is the need to document a conclusion or basis for conclusion not readily determinable from the documentation of the work sometimes know you might have taken some decision getting it so what is the need for taking such a decision in a particular scenario suppose know uh you you you you have like you have seen grn 9,000 is there but there is another Goods received not for th000 units two grn were there because inventory is received in two installments inventory is received in two installment so again it's the same invoice two times goods were received so when you when you when you found one exception in ially you know very well that there is another grn you know very well so document that kind of con wherever you took conclusions without any valid basis document that and why you have documented like that also you have to document and audit methodology used audit tools that you have using audit methodology inquiry inspection uh you know recalculation or audit methodology electronically you did verification or some softwares and tools you have used C tools and all you have used document able to understand any four points any Four Points next nature documentation of Nature and timing and extent this is nothing but audit plan this is nothing but audit plan you document here audit plan you document what audit plan plan means what in audit plan we clearly mention what area we did audit opening balances who did this audit senior partner okay how many days he did audit one day he took how much is the extent of coverage 100% he covered like that there will be a audit plan will be there we will plan an audit getting it in the plan though plan and all when we will develop at the beginning of the audit we've developed audit plan we develop when at the beginning of the audit like how the plan looks looks like so name of the client some tataa Motors limited name of the client some tataa Motors limited you know opening balance verification Mr so or El CAA getting it 100% verification trial balance opening comparison with comparison with last year audited closing financial statements so we just compare these two and then verify whether trial opening balances are correct or not this is a procedure required under sa python then purchases who auditor you know article assistant you know B is a senior article sales who audited article assistant C okay how much you have audited on a sample basis 10% of the value we have covered total sample size is how much out of total sales value 10% value we audited purchases 5% of total value we audited employee benefit expenses getting it so Mr uh Mr D has audited and he has covered 20% of total employee cost so total employee cost 20% he covered in sampling getting it so we just cover all we just write who who did the work what they did who reviewed his work article assistant work somebody should review right who responsibility if something went wrong in a engagement partner 220 standards clearly says engagement partner is responsible for everything in the audit tomorrow you cannot say My article I trusted him so he cheated me you can't what you are doing client gave you the audit you have taken their help getting the point they are not responsible unless they involve in fraud that again comes under separate criminal Cod procedure and all that and all comes under Indian penal CT that's again different issue okay suppose if client put a case against you that you didn't do audit properly you can file a case against the article that he didn't do audit properly that's a different issue but for the client primarily who is answerable engagement partner next so we have to document what are the test that we performed so characteristics of items tested we should document who performed the work date on which it was performed we should document who verified the work and date and extent of when they reviewed and any significant matters came nature of the sign significant matter in one one of the major invoice whose value is 15 CR there Goods received note value is not matching with that's a significant matter the company we are doing GST reconciliation but company has not prepared GST issues and all they have not prepared we have to prepare the GST reconation all together so that's a significant difficulty which is a significant matter and with whom the discussion took place when the significant issues are there with whom you took the discussion and their representations also you document generally we discuss with man management next suppose if auditor identified information that is inconsistent with final conclusion regarding a significant matter document how you solved that inconsistency best example right now in purchases one value invoice value is not matching with grn that it's a very big value significant matter have you resolved it later on you will you will document there another grn was there sir upon inquiry we found another grn was there where the inventory was received at the year end getting it in January month we received inventory one installment another installment is received in year end that inventory document that was accounted separately so that's why initially there was an inconsistency but later after getting explanation discussion with the management it was resolved you should document entire process of audit whatever you did know you should document you understand tomorrow you will leave this form and then go to another form how do this particular issue has been resolved how do they know subsequent if you document this they will understand getting it what are the examples of documents we will document audit plan we will document analysis we will document issue memorandum issue memorandum me like we will have some issues right when we are doing audit we'll have some queries right that queries and all we will we will send to management for for their replies through mail we will send just take a print out of that and documented summary of significant matters letters of external confirmations letters of management representations checklist correspondence mail WhatsApp screenshots all that these are all examples of documentations understand they'll give you this question what is meaning of documentation give any four examples four marks question getting it next can auditor take accounting records also as part of documentation yeah he can that is his choice the auditor may include copies of client records entity records getting it but remember audit documentation is not a substitute for entity records now since you documented accounting records now company said sir now we will we will remove accounting we'll delete sir 8 years and all we don't maintain audit documentation is not a substitute for entity records entity has to maintain their own records as usual what audit documentation does not include what audit documentation what auditor need not include as a part of documentation suppose know you you writing some letter manually something mistake happened you sted off everything should you document that don't you you you you finally wrote some revised letter now that you documented say so that is called superseded draft superseded drafts of working papers in incomplete or preliminary thinking something you was thinking you communicating all that yes or no then previous copies of documents corrected for typographical error so some you know first I took one audit report draft print in that so many mistakes is there my partners scolded me okay I remove that and then drafted a new audit report with the new terms a new proper without any type of mistakes and all so this you have to document the old one ignore duplicate documents why multiple documents one enough zero notot required so the question they you know they may ask you this also what auditor what are the examples of documentation and what auditor need not document this also they can ask common sense or not when you think with an example it looks very common sense Basics Next now audit file we understood Shel me tell me uh when we are doing audit no is it better for us to document everything at the end of the audit or while doing the things itself ah we should document Timely getting it because no 50 days 60 days we are doing audit day two day three whatever we did we don't know in day 16 so it is always better to document then and there so you see here the auditor shall prepare documentation on a timely basis preparing documentation on a timely basis helps to enhance quality of evidence and it also facilitates review and evaluation of audit obtained conclusions reached before the report is finalized so it will give you effective effective reviewal should be done immediately once sir I completed purchases Junior article came and told me sir I completed purchase a okay fine show me the workings I'll verify immediately getting it whether he did work properly or not I should not wait until audit reported it okay documentation prepared after the audit is performed is less accurate than documentation prepared at the time when the work is performed technical right when you're listening to the class itself if you want to write writing notes you have to write immediately not after the class by the way I never recommend writing notes okay just examples like I'm telling you next they'll give you write about timely documentation they'll give you a question write about timely preparation of audit documentation straight question might come what is an audit file write about timely preparation of documentation now not only that assembly assembly of audit file assembly means nothing but remember assembly is talking about retrieval assembly is talking about how easy you can retrieve suppose now client is giving some papers and all every day you're doing 6 a is giving some papers you're just opening the file keeping the paper there you're not arranging it properly suppose no tell me if I if you have to take a note in any class will you directly randomly close your eyes and pick any book and start reading or will you pick that book related to this subject ah exactly right see you need to assemble the documentation clearly like you see this folder the folder arrangement I showed right you see how how technically this is is the structured folder Arrangement or not even the person who created this folder tomorrow is not there he went to another he left and joined another form I am there for review I can simply open companies tataa motor suppose somebody asked me uh like can you can you just take purchase a sample print out of tataa Motors relating to 22 23 Financial year he asked me this oh okay I'll just open t mots open 2223 I'll open this further audit procedes folders I'll open purchase folder inside sample name is there purchase sample I'll open that take a print simple or not if the documentation is assembled like this neatly retrieval becomes easy are you getting the point the process is called as assembly process what is it called as assembly process even physical folder will be there right we will assemble it in particular order first opening balance workings will be there bottom then purchase workings will be there then sales working will be there then uh uh employ benefit expenses working will be there then expense workings will be there then asset workings will be there on every workings in between color sheets and all I will add getting it so that I can easily I can easily pick whatever I want I will do indexing I will do referencing able to understand so that process is called as what assembly so now you see the auditor shall assemble the documentation on a timely basis getting it and complete administrative process of assembling after the date of audit report it is always better to assemble before getting the point but standard permits you can assemble the file later see you already completed audit report is also given now you have to save this is working paper for how many years 7 years you see here retention I mean the retention period for audit engagements ordinarily no no shorter than 7 years from the date of audit report or date of group audit report whichever is later if later date of group audit report group audit report is nothing but suppose no I am the auditor of tataa Motors tataa Motors is a subsidiary company of tataa sun Tas auditor gave audit report on 20 June T Motors auditor gave audit report on 10th may now I should retain Tata Motors audit documentation for 7even years from 10th May or 20 June whichever is later why holding company also important because this subsidary company data is included in consolidation but if consolidation tomorrow issue comes they will ask subsidary Auditors also questions now that reason suppose I a branch auditor not subsidary company auditor I give Branch audit report on 10th April for tataa Motors but main auditor of tataa Motors gave audit report on 10th may now as a branch auditor I should also rate documentation rate for seven years from which date whichever is later Branch audit report date or company audit report dat whichever is later group means group auditor means in case of Consolidated financials holding company audit report in case of stand alone financials in case of Standalone financials the Standalone financials head office nothing but getting the point Main company audit reported date understood or not retention period is no less than 7 years remember only for audit engagement standard give retention period for review engagement for Assurance engagement for related Services there is no time limit discussed in the quality control standard quality control standard is the one which is talking about the retention period are you all connected next so retention of documentation after the assembly of final audit file once you assembl the file neatly the auditor shall not delete shall not discard don't delete or don't throw anything away okay don't delete the Excel files all that getting it before the end of its retention period sqc one requires the firms to have a policy for documentation you know many firms before and all once audit is freezed once files and all everything is you know settled they will put locks for that files nobody can delete the file nobody can alter it they'll put locks inside ID control locks getting it now you see so assembly file is there right assembly is there right the assembly shall be completed within 60 days after the date of audit report suddenly if somebody comes for inspection yes or no they asked you sir you recently signed one audit report as for UD in Portal you have signed audit report so as for you show me audit documentation Institute has a power to conduct sudden inspection NF has a right to conduct sudden inspection sir sorry sir wait not yet arranged papers and all in jig ja you know manner they're not properly arranged you have to finish within 60 days after the date of audit report fine I understand during the audit you couldn't do but this you should have done after the date of audit report right that within how many days you have to assemble 60 days remember assembly of audit F assembly means papers jig jaag I mean whatever the papers are in jig jaag we are arranging in an order we are neatly naming the files we are neatly codifying the names and all is this an audit procedure or is it an administrative process exactly so the completion of assembly of audit file after the date of audit report is it is an administrative process does not involve new audit procedures or drawing new conclusions correctly we are just arranging the papers that is not audit procedure audit procedure means what evaluating evidence inquiring client interacting with client you know uh physical verification observations these are all audit procedures where we are we do audit procedure we do verification procedure to get evidence where is do assembly of documentation is just a administrative process so what we do in this administrative we will delete useless files we will discuss a superseded documents we will sort it collate it cross referencing working papers to audit plan signing off on completion checklist all my articles they'll come and sign on these papers whatever they collected and documented they will sign documenting evidence that auditor has obtained discussed agreed with the members of Engagement te before the date of audit report so very simple documentation nothing but getting it like whatever evidences that we are gathering we are arranging it that is an administrative process so they'll give you true or false statement they gave in fact for two mons assembly of audit file involves new audit procedures it's an incorrect statement assembly of audit file is an administrative process which is done after completion of audit within 60 days it does not involve any new procedures and all clear all of you next by the way who owns the audit documentation company is saying sir you have used our printer our ink our paper and you've taken print out that's our property paper if you want I'll buy ink if you want I'll buy the content is mine yes or no audit documentation is ownership of the auditor whatever work I perform no that is my own property getting it client know sir you did really GST consideration very good sir you have used a very good format and all can you give us so so that in the next year audit know we will do ourselves in the same format if you want you can give if you don't want to give you need not give there is no compulsion for you to share your working papers to client client also you need not share third party you should never share yes or no without the permission of C you should never share to third party sqc provides that unless required by law audit documentation is property of the auditor he may at his discretion make portions of extract from do documentation available to client provided the disclosure does not undermine the validity so the disclosure it is not affecting your work quality then you can disclose provided Independence of the audit results are not affected next next now write about documentation of significant matters write about documentation of significant uh documentation of significant matters is one and documentation related to professional judgment both are two different things which are important questions are also important question just two continue so documentation of significant matters and documentation of profession judgment this two I'll come back little while later first let me finish summary memorandum question what is audit summary memorandum you know in big big company audits no uh there will be some 20 30 team members who is involving in doing the audit and each member is doing some five to six varieties of Works each of them will be having in each category of work some issues getting it now tell me is it better that all 20 team members sit with the client and each of them is raising their own issues or let us sit and prepare for a summary of all the issues and then discuss with the client ah summary of all the issues let us put and then discuss with the client getting it so the summary memorandum is nothing but that see it auditor may consider to prepare and retain as a part of documentation a summary which describes significant issues identified significant matters and how they were addressed getting it so audit summary memorandum mainly documents what are the significant matters that are arising and how it was resolved so for large and complex audit for large and big audits the summary will facilitate effective and efficient review and inspection of documentation so whether we did proper review of the important matters or not Through summary we can simply identify so preparation of such a summary will assist the auditor's consideration of significant matters so by preparing summary of all significant matters we will have a Clarity that yes whether we concluded all the summary matters I mean whether we concluded all significant matters properly or not it also helps the auditor to consider whether any individual standard cannot be achieved that would prevent the auditor from achieving overall objective by documenting significant matters no whether any standard we have not complained is there any standard requirement that we have not complained suppose no in our audit we found out some pending litigation we found some big pending litigation with the client so there's a litigation which is pending where the amount involved is 100 crores which client did not disclose I found out through my inquiry I saw professional fees account legal fees account in that one amount is a huge amount paid to lawyer when I investigate further this is paid for some pending litigation in particular Forum when I investigate further sir sorry sir we missed this to inform you getting it we were also not aware of this but it is there but we forgot to document this now it's a significant matter right I addressed this right now regarding this spending litigation I have to get a external confirmation as per sa 51 any but external lawyer is not responding so as per 51 I should document whenever I could not get a as per 51 whenever I could not communicate with external lawyer why you could not communicate you should document getting the point so anyhow when I'm discussing 51 you will understand better this example okay so it will help the auditor to consider whether any individual essay objective is not achieved means as per essay 51 you have to communicate with external counsil if there is a pending litigation which is newly discovered by you getting the point you should discuss but external lawyers are not responding do you have alternative procedure so that overall objective of audit is not Disturbed that is what you should talk getting it next significant Matters by the way whether a matter significant or not it's an objective analysis yes or no depending upon facts and circumstances so in the circumstance given facts whether it's a significant or not auditor has to do an independent unbiased analysis objective analysis means what unbiased analysis examples any matters that give rise to significant risk company know recently recently Incorporated ated new software for collections from datas so new softwares for collections now whatever company total Trad are the r which the compan is recording in another software they need to transfer entire that software that entire content to new software so they transferred while trans while transfer is happening some mistakes happen while the data is transferring from old software to new software some points and all were missing some company know in the old software they they they just kept some flags and all getting some important points and all they noted out that and all were missing now auditor also know old software is company deleted already now new software is only there so any matters that give rise to significant risk some important observations which the company recorded were missing now which company is not disclosing me so what is it a significant risk or not generally when when this kind of issue is there what we will do we will investigate further it's a significant matter the financial statements could be materially misstated some areas know we found misstatements we found some accounting related misstatements accounting estimates related misstatements we found or based on my understanding I felt a need to revise auditor previous assessment of risk and Auditors as respond to those risk actually you know there is a standard called 330 and there is a standard called 315 there are two standards 315 talks about risk assessment procedure 330 talks about further audit procedure your further audit procedures depends on risk assessment procedure if risk assessment has been changed response to your audit resp response to the audit overall that also changes further audit process also changes sa 330 heading is response to the risk assessed response to the SS risk what is the standard name response to SS risk SS risk is discussed under what 315 so if any change in risk assessment procedure happened responds us to audit SS risk also changes means your audit plan also changes that also you should document getting it generally once we do risk assessment generally we don't change that whatever risk you know we will conclude so and so risk some risk is there high or medium or low suppose later no you felt originally you concluded that it is low risk employee benefit expenses low risk but later you discovered that there are large number of employees were added in the March month suddenly huge employee recruitment happened now the risk is very high out of them there may be dummy employees getting the point or circumstances that cause circumstances that cause auditor significant difficulty in applying necessary procedure so when you're applying some necessary procedure you felt significant difficulty reconation company did not do significant difficulty document that because that's a significant matter findings that could result in modification of the opinion or inclusion of an emphasis of matter paragraph you found something in the financial statements or you found some mistakes because of which you are ending up giving modified opinion or either you are highlighting it in emphasis of matter paragraph or other matter because of the importance that is also significant you should document all the significance matter they'll give you a stride four marks question write about documentation of significant matter write about documentation of significant matters documentation is a very small chapter but damn sure five marks question will okay now what will you document relating to professional judgment you see here this third Point itself directly will be asked in the following cases in the following cases the auditor shall document is use of professional judgment if the judgment is related to matters or decisions related to significant matters significant matter related decisions what you have taken for example what is the rational for Auditors conclusion when a requirement provides that the auditor shall consider certain information or factors and that consideration is significant in the context of particular engagement don't worry I've given an example here suppose no Reliance company during the financial 1819 3 and half lakh worth of plant and Miss useful life has been rised no doubt that's a significant matter yes or no relating to that what is the Judgment now they revised it from 30 years to 50 years right I also verified the workings and I felt 50 years is correct this is what my judgment there now how do you felt 50 50 years useful life correct what information you considered so that the revised judgment is correct what information for significant judgment you reached getting the point in respect of sign that information you should document so generally so what is the rational how do you considered what is the logic behind 50 years correct expert report is there getting the point industry industry in Industry most of the industries have revised Telecom Industries and all they revised useful life of cell phone towers all that originally they planned for 10 years or 20 years useful life but now it can be increased to 40 years next what is the basis for auditors inclusion and reasonableness of areas of subjective judgments I know this these missionaries know it may come either 35 years or 40 years or 50 years this is subjective de ultimately so on what basis you concluded some expert report all that you will document the basis for Auditor's conclusion about authenticity of the document suppose originally they showed some expert report I felt it is not authentic getting it but later on after further investigation I got to know that this is authentic what further investigation you did that you should document able to understand so professional judgment means you took some conclusion right you took some conclusion on what basis you took a decision suppose know on what basis you buy some faculty class based on some points yes or no based on your so whatever the due diligence you did right you document document means what your friends conversations WhatsApp conversations telegram group replies and all all that you doc that is what they're saying here so when you take a decision behind the decision what and all you did document that with respect to which decision significant professional judgment significant decisions taken by you in which matters significant matters significant matter means what very big getting it that affects mod that affects my opinion that affects my decision about emphasis of matter par other matter paragraph or there is a significant risk involved in that able to understand that's it documentation is also over documentation is also over confident until now hey you need to read first okay so I don't know how many of you are doing this after going home just read slowly thoroughly in class I can't read slowly and explain getting it so you have to read slowly thoroughly this is how the standard is going to be don't think audit will be easy that to new new scheme Institute is very very Dynamic to test in very advanced level okay so you please work people know they compare CA course and all with other courses and say that we are working 5 years where you're working 5 years honestly check yourself 3 months before exam you start preparation correct CA Foundation 3 months before exam you started preparation CA inter three months before exam you start preparation CA final also four five months before exam you start preparation technically how much time you dedicate yourself for Preparation coaching and all if you see it is not more than one and half to two years yes or no 5 years of hard work 25 statues 500 sections he saying water all he don't know getting it when I see those kinds of post okay he's he's highlighting water all he don't know getting it these are all only fancy Instagram post and looks very fancy but that's not reality medical students you see getting it they work s years 8 years regular college that to regular College go so much of pressure iits and all in the past recent 6 months more than 20 students committed suicide getting the point able to understand because that's a kind of pressure in IIT that's a kind of pressure in nit I IM they regularly go to college they will be given assignments they have to work on their own throughout the night hardly they sleep four five hours how many days you slept four five hours honestly tell me yes so three months before exam we are doing hard work technically speaking so don't compare with other courses relatively we are working very less compared to an BBS student compare to you know Engineers don't compare with normal engineering colleges where they don't study engineering so you compare with normal engineering College where they don't you should compare see the problem is we compare with bcom and then comment ourselves in bcom you do you need not study 80% syllabus 20% syllabus or past three exam papers you study you will qualify same questions only comes now so because we are asking you to study 70% syllabus you calling it as stuff otherwise you will not call all call it a stuff right so this is a level at which paper is coming and you will write at what level you know so if you start just two to three months before exam preparation this is how it is going to be you need to at least have six months for both groups full-fledged coaching and full fledged preparation for both the group requires eight months getting it very simple if you want to get an all- India rank eight six to eight months you have to only focus on revision studies if you just want to qualify 3 months enough 3 months enough for both the groups getting it just a revision point of view if you want to qualify single group one and half month is enough just for revision for coaching to put together three to three and half months for single group to understand it's all about number of efforts how how many hours you are putting efforts how many days you are spending how many months you are spending that decides your result okay so I think uh we have completed documentation chapter completely done in the next session I will start audit evidence chapter where we are discussing various other standards in the next session I will complete audit evidence and completion and review and that next session I will cover Bank audit and items of financials with that our objective will be finished fulfilled getting it
