IMP Questions of Miscellaneous topic for CA Final Audit

AUDIT

Miscellaneous Topics

Issued By : Dr. Mahesh Gour

Chapter # 1                                                     Audit under CIS Environment

2009 - Nov [6] Answer the following:

(a)    The role of an auditor in collecting audit evidences under EDP system is more complex than under the manual system—Discuss.                                                                                                                                                          (8 marks)

Answer:

Collecting evidence on the reliability of an EDP system is more complex than collecting on the reliability of manual system. Auditors can be faced or confronted with and sometimes complex range of EDP systems depending upon technology did not exist in manual systems. For example, accurate and complete operation of required a set of hardware controls not used in a manual system. Similarly, development controls include procedures for testing programs that would not be found in the development of manual system. Auditors must understand these if they are to be able to collect evidence competently on the reliability of the controls.

Unfortunately, understanding the changing technology is not easy. Hardware and continue to evolve rapidly and although there is some time lag, the associated evolve rapidly also. Auditors must keep upto-date with the developments if they to be able to evaluate the reliability of accounting system.

The continuing evolution of computer technology also makes it more difficult for auditors to collect evidence on the reliability of controls. It may be impossible for auditors to obtain the evidence using manual means. Thus auditors need EDP systems themselves if they are to be able to collect the necessary evidence. The development of generalised audit software occurred, for example, because auditors needed access to data maintained on magnetic media. Similarly, new audit tools may be required, in due course, to evaluate the controls.

2010- May [3] (d) IT systems also pose specific risks to an entity's internal control? What are those risks?

                                                                                                                                                                                                             (4 marks)

Answer:

Specific Risk to an Entity’s internal Control: As per SA 315 “Identifying and Assessing the Risks of Material Misstatement through Understanding the Entity and its Environment”, IT system also poses specific risks to entity’s Internal Control. They are-

(i)            Reliance on systems or programs that are inaccurately processing data, processing inaccurate data or both.

(ii)          Unauthorised access to data that may result in destruction of data or improper changes to data, including ‘the recording of unauthorized or non-existent' transactions, or inaccurate recording of transactions. Particular risk may arise when multiple users access a common database.

(iii)         The possibility of IT personnel gaining access beyond those necessary to perform their assigned duties thereby breaking down segregation of duties.

(iv)        Unauthorised changes to data in Master files

(v)          Unauthorised changes to systems or programs.

(vi)        Failure to make necessary changes to systems or programs.

(vii)       In appropriate manual intervention

(viii)     Potential loss of data or inability to access data as required.

2010- Nov [3] (c) Different types of controls which operate over data/moving into, though and out of the computer. Auditor is required to review such controls. Comment.                                                                                               (8 marks)

Answer:

The review process for controls in a computerized information system (CIS) environment.

In a CIS environment there are different types of control which operate over data moving into, through and out of the computer. These are designed in such a way that the correct, complete and reliable processing and storage is ensured. It is necessary for the auditor to review such controls in order to get the correct result from the data entered. The review process can be laid down as follows:

1.       Organisation structure and control: The entity may have different functions under the CIS environment. There will be Data Administrator who will formulate data policies, plans the evaluation of the corporate data bases and maintain the data documentation. The data base administrator will be responsible for operational efficiency of the database, the system Analyst will manage the information requirements for new and existing applications, and designs the information system, the System programmer will maintain and enhance the Operating system software, application programmer will design the Programme to meet the information requirement, Operation Specialist plans and control day-to-day operations, monitors and improves operational efficiency along with capacity planning and Librarian maintains library of magnetic media and documentation. The auditor will see that the responsibilities of each job position are clear and that the person understands the duties, authority and responsibilities. The duties have to be separated to ensure the internal control is established.

2.       Documentation Control: The auditor has to see that there is proper and adequate documentation for approval of system flowcharts Programme flowcharts, Programme changes, operator’s instructions and programme description and the changes made in the above are also documented and approved by the authorized persons.

3.       Access Control: The auditor has to ensure the system prevents the persons who are authorized for access from accessing restricted data and programme and also prevents unauthorized persons gaining access to the system as a whole.

4.       Input controls: The control in respect of input has to be effective to ensure that only properly authorized and approved data goes in the input into the CIS system. For validation of input controls the auditor can apply some procedures like Check digit control, completeness totals control, reasonableness checks, field checks, record checks, file checks etc.

5.       Processing controls: These controls are must for integrity of data. Processing validation checks should be applied.

6.       Recording Controls: This is tor enabling the records to be kept free of errors.

7.       Storage Controls: The data is the heart of the CIS system. Backup and recovery facilities will ensure the proper data availability to the management.

8.       Output controls: The data processed must go to the authorized person in the manner it is required and for this purpose input controls are maintained. The auditor is interested to know whether the audit trail relating to output is provided.

2011 - Nov [6] (c) You are a member of an audit ream of B & C Associates, auditors of a Multinational Company YB Co. Ltd. The company is working in CIS environment. The partner in charge of B & C Associates asked you to draw out the audit plan for evaluating the reliability of controls.                                                                                                                              (5 marks)

Answer:

Audit Plan for Evaluating the Reliability of Controls in CIS Environment: In evaluating the effects of a control, the auditor needs to assess the reliability by considering the various attributes of a control. Some of the attributes for example are that the control is in place and is functioning as desired, generality versus specificity of the control with respect to the various types of errors and irregularities that might occur, general control inhibit the effect of a wide variety of errors and irregularities as they are more robust to change controls in the application sub-system which tend to be specific control because component in these sub-system execute activities having less variety, that whether the control acts to prevent, detect or correct errors etc.

The auditor focuses here on

1. Preventive controls: They stop errors or irregularities from occurring.

2. Detective controls: They identify errors and irregularities after they occur.

3. Corrective controls: They remove the effects of errors and irregularities after they have been identified.

The auditors are expected to see a higher density of preventive controls at the early stages of processing or conversely they expect to see more detective and corrective controls later in system processing.

Further, while evaluating the reliability of controls. The auditor should:

(i)      Ensure that authorized, correct and complete data is made available for processing;

(ii)    Provide for timely detection and correction of errors.

(iii)   Ensure that the case of interruption in the work of the CIS environment due to power, mechanical or processing failures, the system restarts without distorting the completion of the entries and records;

(iv)  Ensure that accuracy and completeness of output;

(v)    Provide adequate date security against fire and other calamities, wrong processing, frauds etc.

(vi)  Ensure that there is no unauthorized amendments to the program;

(vii) Provide for safe custody of source code of application software and data files.

2012-May [6] (a) in the audit of K Ltd. its auditor wants to use CAATs for performing various audit procedures. Guide him as to what procedures can be performed using CAATs.                                                                                                    (6 marks)

Answer:

Auditing procedures using CAATs: CAATs may be used in performing various auditing procedures, as following:

1.       Tests of details of transactions and balances, for example, the use of audit software for recalculating interest or the extraction of invoices over a certain value from computer records;

2.       Analytical procedures, for example, identifying inconsistencies or significant fluctuations;

3.       Tests of general controls, for example, testing the set-up or configuration of the operating system or access procedures to the program libraries or by using code comparison software to check that the version of the program in use is the version approved by management;

4.       Sampling programs to extract data for audit testing;

5.       Tests of application controls, for example, testing the functioning of a programmed control; and

6.       He-performing calculations performed by the entity’s accounting systems.

2011- May [4] (c) Z Ltd. has its entire operations including accounting computerized. As the audit partner you are concerned about inherent and control risk for material financial statement assertions. What could be the areas you look forward for deficiencies and risk identification?                                                                                                                                      (4 marks)

Answer:

The auditor in accordance with SA 315 “Identifying and Assessing the Risks of Material Misstatement through Understanding the Entity and its Environment”, should make an assessment of inherent and control risk for material financial statement assertions. In a CIS environment the risk of a Material financial statement ascertain being erroneously stated could arise from the deficiencies in the following case as

      (i)      Program Development and maintenance.

    (ii)      System Software supports.

   (iii)      Operations including processing of data.

  (iv)      Physical ClS security.

    (v)      Control over access to specialized utility program.

These deficiencies would tend to have a negative impact on all application systems that are processed through the computer.

2007- May [8] Write short notes on the following:

Factors to consider in determining the use of Computer Assisted Audit Techniques (CAATs).                    (4 marks)

Answer:

In determining whether to use CAATs, the auditor should consider the following factors:

1.       Availability of sufficient IT knowledge and expertise: It is essential that members of the audit team should possess sufficient knowledge and experience to plan, execute and use the results of CAAT. The audit team should have sufficient knowledge to plan; execute and use the results of the particular CAAT adopted.

2.       Availability of CAATs and Suitable Computer facilities and data in Suitable format: The auditor may plan to use other computer facilities when the use of CAATs on an entity’s computer is uneconomical or impractical for example, because of an incompatibility between the auditor‘s package programme and entity’s computer.

3.       lmpracticability of manual Tests due to lack of evidence: Some audit procedures may not be possible to perform manually because they rely on complex processing (for example, advanced statistical analysis) or involve, amounts of data that would overwhelem any manual procedure.

4.       Impact on effectiveness and Efficiency in extracting data: It includes selection of samples, applying analytical procedures, time involved in application of CAAT, etc.

5.       Time Constraints in certain data: Such as transaction details, are often kept for a short time and may not be available in machine-readable form by the time auditor wants them. Thus, the auditor will need to make arrangements for the retention of data required, or may need to alter the timing of the work that requires such data.

2000-Nov [3] (a) What is an Audit Trail? Briefly describe the special audit techniques sing the computer as an audit tool.                 (8 marks)

Answer:

Audit Trail: Audit trail refers to the facility to trace individual transactions through a system from source to completion. In the manual system of accounting, the audit trail is distinct and can be followed by the auditor through the distinct stages of accounting process. A proper audit trail ensures audit checking for proper processing and accumulation of data. However in computerized system audit trail is often missing or is sketchy. This is due to following reasons.

   (i)      Source documents once transcribed in machine readable form are not retained in a manner that permits subsequent access.

 (ii)      Master files may replace ledger summaries

(iii)      Transaction listing is often not provided.

(iv)      Reports may be only on exceptions.

Special Audit Techniques: In the absence of audit trail, the auditor needs the assurance that the programmes are functioning correctly in respect of specific items by using special audit techniques the absence of input documents or lack of visible audit trail may require the use of computer Assisted Audit techniques i.e using the computer as an Audit tool. The effectiveness and efficiency of auditing procedures may enhanced through the use of CAATs. Two common types of CAATs are in vogue, VlZ.. Test packs or test data and audit software or computer audit programmes. Normally special audit techniques may be used under the following circumstances.

(a) To ensure the correct functioning of important programme controls;

(b) To overcome losses of audit trail.

(c) To reduce audit costs or increase the efficiency of the audit.

The most common types of CAATs used for audit purposes are discussed as follows:

  (i)      Audit software: It consists of computer programs used by the auditor as a part of his audit procedures to process data of audit significance it may consists of:

(a)    Package Programs: These are generalised computer programs designed to perform data processing function which includes reading computer files, selecting information performing calculations, creating data files & printing reports in the format as specified by the auditor.

(b)   Purpose written programs: These are computer programs designed to perform audit tasks in specific circumstances.

(c)    Utility programs: These are used by the organisation to perform common data processing functions such as sorting creating and printing files.

(ii)      Test Data: Test data techniques are used in conducting audit procedures by entering ‘data into the computer system of the organization and comparing the results obtained with predetermined results when test data is processed with the  organisations normal processing the auditor should ensure that the test transactions are subsequently eliminated from accounting records of the organisations. 

2001- Nov [5] (b) "On-line real time processing system and batch processing system are their inherent strengths and weaknesses." Please comment.                                                                                                                                            (8 marks)

Answer:

On-line computer systems are computer systems that enable users to access data and programmes directly through terminal devices. Such systems may comprise mainframe computers, minicomputers or a network of connected PCs. When the entity uses an on-line computer system, the technology is likely to be complex and linked with the entity's strategic business plans. On-line computer systems may be classified according to how information is entered into the system, how it is processed and when the results are available to the user. In an on-line real-time processing system, individual transactions are entered atterminal devices, validated and used to update related computer files immediately. For example, application of cash receipts directly to customer’s accounts. The results of such processing are then available immediately for inquiries or reports. In an on-line real-time (OLRT) processing system, transactions are entered as they occur and are processed as they are entered. These systems form the heart of management information systems.

In a system with on-line Batch Processing, individual transactions are entered at a terminal device, subjected to certain validation checks and added to a transaction tile that contains other transactions entered during the period. Later, during a subsequent processing cycle, the transaction file may be validated further and then used to update the relevant master - file. For example journal entries may be entered and validated on-line and kept on a transaction file, with the general ledger master file being updated on monthly basics. Inquiries of or reports generated from, the master file will not include transactions entered after the last master - file update.

In a batch processing system which is not on-line, transactions are accumulated and processed in group sales orders for the day, invoices to be recorded and daily cash receipts might each be viewed as a “batch? Of transactions, to be processed as a group. Batch processing systems are distinguished by their relative simplicity and reliability. But they do not possess the potential for providing timely information concerning the tiles updated by transactions processing. Batch processing systems are rarely found in today’s systems environment.

OLRT systems are more complex than batch processing systems. Moreover, they ordinarily do not provide the extent of audit trail documentation produced by batch system and for this they are more difficult in terms of obtaining satisfaction concerning the existence of necessary controls, and of designing substantive testing procedures.

Conversely, in batch processing system, the transactions are accumulated and processed in batches or groups. Control totals, both monetary and documentary, are also available for review to ensure completeness and accuracy of data being processed the system is simple and ‘reliable. However, its deficiency lies in the MlS is not updated on a concurrent basis and-therefore, information is not available on a timely basis. Accordingly, It is a question of cost-benefit analysis as to which system will be-more preferable to an entity.

2002-May [7] Indicate the control procedures which the auditor should adopt in applying CAAT (Computer Assisted Audit Technique) in an audit under EDP environment.                                                                                                          (16 marks)

Answer:

Controlling the CAAT Application: The use of a CAAT should be controlled by the auditor to provide reasonable detailed specifications of the CAAT have been met and that the CAAT is not improperly manipulated by the entity staff. The specific procedures necessary to control the use of a CAAT will depend on the particular application in establishing audit control which require the auditor should consider the need to:

(a) Approve the technical specifications and carry out a technical review of the work involving the use of CAAT.

(b) Review the entity’s general IT controls which may contribute to the integrity of CAAT.

(c) Ensure appropriate integration of the output by the auditor into the audit process.

Procedures Carried out by the Auditor to Control Audit Software Application:

   (i)      Participating in the design and testing of the computer programmes.

 (ii)      Checking the coding of the programme to ensure that it conforms with detailed programme specifications.

(iii)      Requesting the entity’s Computer staff to review the operating system instructions to ensure that the software will run in the. entity’s computer installation.

(iv)      Obtaining evidence that the audit software functioned as planned, for e.g. returning output and control information.

 (v)      Running the audit software on small test files before running on the main data files.

(vi)      Ensuring that the correct files are used.

(vii)      Establishing appropriate security measures to safeguard against manipulations of the entity’s data files.

The presence of the auditor is not necessarily required at the computer facility during the running of a CAAT to ensure appropriate control procedures. However, it may provide practical advantages, such as being able to control distribution of the output and ensuring the timely corrections of errors.

Procedures carried out by the Auditor to control test Data Applications

   (i)      Controlling the Sequence of submissions of test data where it spans several processing cycles.

 (ii)      Predicting the results of the test data and comparing it with the actual test data output, for the individual transactions and in total.

(iii)      Performing test runs containing small amounts of test data before submitting the main audit test data.

(iv)      Confirming that the answered version of the programmes used to process the test data.

 (v)      Obtaining reasonable assurance that the programmes used to process the test data.

When using a CAAT, the auditor may require the co-operation of the entity’s staff who have extensive knowledge of the computer installation. In such cases, auditor should have reasonable assurance that the entity’s staff did not improperly influence the results of the CAAT. Finally, the standard of working papers and retention procedures for a CAAT should be consistent with that on the audit as a whole, It may be convenient to keep the technical papers relating to the use of the CAAT separate from the other audit working papers. The working papers should contain sufficient documentation to describe CAAT application.

2002- Nov [5] Answer the following:

(b)   Discuss some problems that will be encountered in an EDP system in implementation of internal control.

                                                                                                                                                                                           (10 marks)

Answer:

The internal control over computer processing which help to achieve the overall objectives of internal control, include both manual procedures and procedures designed into computer programs. Such manual and computer control procedures comprise the overall controls affecting the EDP Environment and specific controls over the accounting applications (EDP application controls).

The following problems normally arise in implementation of internal control in an EDP system.

  (i)      Separation of duties: In a manual system. Separate individuals are responsible for initiating transactions, recording transactions and custody of assets. Due to automation in the system, such controls are not possible in computer system.

(ii)      Delegation of Authority and Responsibility: Due to use of resources by multiple users. It becomes difficult to delegate authority and responsibility in a precise manner. For example, as many users access the database, it may not be possible to trace the person making unauthorized changes in it.

(iii)      Competent and Trustworthy Persons: Organisation finds it difficult to find and retain competent and trustworthy personnel to take charge of their EDP setup. However, getting competent and trustworthy personal as well as trained and experienced people in this field is in short supply.

(iv)      System of Authorisation: As against the manual system automation of the authorization procedure is an important feature of EDP system. For example, the computer system may determine the price to be charged to customers. Thus the auditor has to verify the veracity of computer processing.

 (v)      Adequate documents & Records: In computer systems documents may not be used to support the initiation, execution, and recording of some transactions. Thus, no visible audit trail may be available. This absence of visible audit trail will not hinder the auditors work if systems are designed to maintain a record of all events and means of accessing these records.

(vi)      Physical control over assets and records: As the data processing assets and records are concentrated at a place, the risk of loss and unauthorized access is high. Hence it is important that a good EDP environment restricts access to the data processing assets and records.

(vii)      Adequate Management Supervision: In the computer system, data communication may be used to enable the employees to be closer to the computer service. Thus supervision of employees may have to be carried out remotely.

(viii)      Comparing records with Physical assets: Unlike in manual system, the records may be automatically reconciled with assets. Thus. Unauthorized modification to programs or data files that these programs use, may be difficult to detect. Therefore care must be taken that there is no unauthorized modifications to this programs or to any of the data files database programs use otherwise the irregularity may not be discovered.

2004 May [4] (a) State the important characteristics of an effective computer audit program system.   (8 marks)

Answer:

Characteristics of an Effective Computer Audit Program System: Computer audit program developed for general purposes shall have to customised according to the needs of the organisation. However an examination of following features is necessary to ensure that it is effective:

1.       Simplicity: The system should be simple to use and eliminate the need for remembering countless details normally required in writing or revising computer programs.

2.       Understandability: The system should be understandable by the members of the audit staff, even those with little computer expertise. The capabilities of the system should be known and it should be easy to use. Coding forms provided should not be difficult to understand.

3.       Adaptability: The system should be capable of writing computer audit programs for the various types of computers used in the company or expected to be acquired. Thus the package will be usable if the equipment is changed in the future.

4.       Vendor technical support: In considering the types of package to be acquired, it is important that the vendor provides adequate support. This includes assisting in the initial installation and providing adequate documentation, in addition, training provided for the audit staff is important.

5.       Statistical sampling Capability: Statistical sampling is an important Application in auditing; the package should be able to perform the various statistical routines. This should include the selection of items on a random basis, determination of sample size, and evaluation of results at different confidence levels.

6.       Acceptability: The system should be acceptable to both the auditors and to Computer centers. For the auditors the programs should be easily carried to the site and practical to use. For the computer centre the programs should be compatible with the system and capable of minimum interference with normal routines.

7.       Processing Capabilities: The package should be able to process many different types of application. For example, it should accept all common file media and process multiple file input. It should have the capability for extended data selection and stratification. It should have powerful, generalized audit commands.

8.       Report writing: The package should have a strong report writing function. This should include the ability to prepare multiple reports in a single program run and to generate flexible output report formats.

2004-Nov [5] Explain Tagging and Tracing.                                                                                                                          (4 Marks)

Answer:

Tagging and Tracing: It is a technique better than integrated Test Data Facility. It involves tagging the client’s input data in such a way that relevant information is displayed at key points. It uses the actual data, and so the question of elimination of ‘special entries’ test data designed under Integrated Test Data Facility does not arise. The hard copy, so produced is available only to the auditor and may describe such inputs as hours worked in a pay period in excess of 50; or sales orders processed in excess of Rs. 1,00,000. This enables the auditor to examine transactions at the intermediate steps in processing. The advantage of the tagging and tracing approach lies in the use of actual data and elimination of the need for reversing journal entries. The disadvantage is that the erroneous data wilt not necessary be tagged. An effective combination approach may be to use the lTF approach (integrated test facility) for a few hypothetical transactions and the tagging and tracing approach to follow line data through a complex system.

Chapter#2                                        Corporate Governance and Clause 49

CORPORATE GOVERNANCE-MEANING

·         Corporate governance is the system by which companies are directed and controlled by management in the best interest of shareholders and others.

·         The BOD are responsible for governance of their companies.

·         A number of reports and codes of corporate governance has been published internationally.

·         SEBI also has introduced clause 49 in the “Listing Agreement” entered between a stock exchange and a company who desires to list its securities on stock exchange.

·         As per this clause, if a company desires to list its securities on a stock exchange, then it has to agree and implement the code of corporate governance.

·         The company is also required to obtain a certificate from the auditor/ practicing company secretary as regard compliance of the conditions of corporate governance as given in this clause.

·         The various items of this clause are:

o   Composition of BOD

o   Setting up of audit committee

o   Remuneration of directors

o   Meeting of BOD, etc.

CONTENTS OF CLAUSE 49 OF LISTING AGREEMENT (Corporate Governance)

1. Board of Directors	(a)   The Board of Directors shall have an optimum combination of executive and non-executive directors with not less than fifty percent of the Board of Directors comprising of non-executive directors. (b)   At least half of the Board should comprise of independent directors. It is very much clear that the overall shift is on comprising the Board with independent person, who can take unbiased decisions for the welfare of the stakeholders.
	Who is an  Independent Director?	It shall mean a non-executive director of the company who-       (i)            apart from receiving director’s remuneration, does not have any material pecuniary relationship or transactions with the company, its promoters, its directors, its senior management or its holding company, its subsidiary/(s) and associates which may affect  independence of the director;     (ii)            is not related to promoters or persons occupying management  positions at the Board level or at one level below the Board;    (iii)            has not been an executive of the company in the immediately  preceding three financial year;   (iv)            is not a partner or an executive or was not partner or an executive during the preceding three years, of any of the following: ·      the statutory audit firm or the internal audit firm that is associated with the company, and ·      I the legal firm(s) and consulting firm(s) that have a material association with the company.     (v)            Is not a material supplier, service provider or customer or lesser/ lessee of company.   (vi)            Is not a substantial shareholder of the company, i.e. owing two percent or more of the block of voting shares.
2. Audit Committee	·      Minimum 3 members (any director) with 2/3 independent. ·      All members financially literate & at least one director having expertise in accounts/financial management. ·      Chairman should be an independent director. ·      Minimum number of meetings in a year is FOUR. One meeting should be held before finalisation of Accounts. Maximum gap between 2 meetings is FOUR months. ·      Quorum 2 members or 1/3 of members (whichever is higher) & out of which minimum 2 should be independent directors. ·      Company secretary of the company shall act as secretary of Audit committee. ·      Audit committee should invite financial executive of the company in its meeting. However, they can meet without his presence too. ·      Audit committee: Will maintain liaison with the company & auditor. It shall consider:           (a) Matters to be included in director’s responsibility statement.           (b) Functioning of whistle blower mechanism (if any).           (c) Performance of statutory / internal auditors. ·      Audit committee shall review on mandatory basis:           (a) Management discussion & analysis of financial statements.           (b) Statement of significant related party transaction.           (c) Management letter / letters of internal control weaknesses issued by                   statutory auditors.           (d) Internal audit reports relating to internal control weaknesses. ·      Appointment / Removal / Terms of remuneration of chief internal auditor.
3. Remuneration	(i)            Remuneration of non-ED is decided by BOD,‘ after obtaining prior approval of shareholders.     (ii)            However, sitting fee as per The Companies Act, paid to non-ED doesn’t require previous approval of shareholders.    (iii)            If stock option is given to non-ED, limit for maximum number to be granted to non-ED in one Financial Year & in aggregate is to be disclosed along with disclosure of elements of remuneration package, details of incentives & service contract in the annual report.
4. Board Procedures	(i)            Meeting shall be held at least 4 times in a year with maximum gap 4 months between two meetings.     (ii)            Code of conduct for Board / Senior management shall be laid by B(Z)D. It shall be posted on the website of the Company.    (iii)            A director not to be a member in more than l0 committees or chairman in more than 5 committees across all companies in which he is a director.(Committee for this purpose includes audit committee and shareholders redressing committee)
5. Regarding Shareholder	(i)            In case of Appointment / re-appointment of a director, shareholders must be provided with its brief resume, nature of his expertise & names of companies in which he holds directorship.     (ii)            Information like quarterly results to be put on companies web site or on site of Stock Exchange.    (iii)            Board committee under chairmanship of non-E.D to look into redressing of shareholders & investors complaints.   (iv)            To expedite the process of share transfer, this work is to be delegated to an officer or share transfer agent.
6. Subsidiary Company	(i)            At least one independent director of holding company shall be a director in material non-listed Indian subsidiary company (whose turnover / net worth exceeds 20% of consolidated turnover / net worth of holding and its subsidiary in immediately preceding accounting year).     (ii)            Audit committee of holding shall review the financial statement (particularly investment) by material non-listed Indian subsidiary company.    (iii)            Minutes of Board meeting of material non-listed Indian subsidiary company to be placed at board meeting of holding company.
7. CEO /CFO Certification	The CEO or the CFO or any other person heading the finance function discharging that function shall certify to the Board that: (a)   They have reviewed financial statements and the cash flow statement for the year and that to the best of their knowledge and belief: ·      These statements do not contain any materially untrue statement or omit any material fact. ·      These statements together present a true and fair view of the company’s affairs. (b)   There are no transactions entered that are fraudulent, illegal and violative of the company s code of conduct. (c)    They accept responsibility for establishing and maintaining internal controls w.r.t. financial reporting. (d)   They have indicated to the auditors and the Audit committee: ·      Significant changes in internal control during the year; ·      Significant changes in accounting policies during the year. ·      Instances of significant fraud.
8. Report on Corporate Governance	There shall be separate section on Corporate Governance in the Annual Reports of company with a detailed compliance report on Corporate Governance.
9. Compliance	The company shall obtain a certificate either from the auditors or practicing company secretaries regarding compliance of conditions of corporate governance.

Chapter#3                                                                                            Bank Audit

AUDIT OF COMPLIANCE WITH SLR REQUIREMENT

Meaning

·      Statutory Central Auditor to verify compliance with SLR requirements on l2 odd dates in different months of a financial year not being Fridays. ·      Report to Management and RBI. ·      Examination of 2 Aspects               (i)         Correctness of figures of DTL (Demand & Time Liabilities) on reporting Friday (last Friday of second preceding fortnight). and              (ii)         Maintenance of liquid asset on selected date.

Steps

·      See circulars of RBI regarding composition of DTL ·      Provision for Expenses and Liabilities not to be included in DTL ·      It is examination on test basis consolidation regarding DTL position already prepared by the Bank ·      Review Return from un-audited branches ·      Branch auditor to verify correctness of cash on 12 odd dates (Branch do not maintain assets / securities) ·      Verify computation of liquid Assets and following are treated as cash : (a)   Deposits with RBI by Banking Company incorporated outside India. (b)   Cash/Balance by Banking Companies with itself or with RBI. (c)    Balance maintained by Scheduled Bank with RBI in excess of balance required to be maintained. (d)   Net Balance in current account in India by Scheduled Bank. (e)   Balance by RRB with Sponsor Bank. ·      Price of gold shouldn’t exceed current market price. ·      Verify amount of unencumbered approved security. ·      Number of unaudited branch and reliance on returns, etc. to be disclosed by central

CONCURRENT AUDIT

“Audit or verification of transactions or activities of an organization concurrently as the transaction or activity takes place.” 1.       It is early warning system for timely detection of irregularities 2.       It is done on regular Basis. 3.       Mandatory for Banks to cover at least: - ·      50% of total deposits & ·      50% of total advances 4.       Following should be considered: ·      Large / very Large branches y ·      Special branches ·      Large problem branches ·      H.O. department dealing with treasury/funds management & handling Investment Portfolio ·      Any other branch/department at discretion of bank 5.       It can be undertaken by internal inspection staff or independent C.A.
Scope of Concurrent Audit	Cash	·      Any abnormal receipts and payments ·      Proper accounting of cash remittances ·      Proper accounting of cash receipts ·      Expenses by cash involving sizeable amount.
	Investment	·      Purchase and sale of securities within its delegated power. ·      Securities held in the books of the branch are physically held by it. ·      Investments are as per RBI’s guidelines. ·      Sale or purchase transactions are done at beneficial rates.
	Deposit	·      Check the transactions about deposits received and repaid. ·      Test check of interest paid on deposits. ·      Check new accounts opened.
	Advance	·      Ensure that loans and advances have been sanctioned properly. ·      Whether the sanctions are as per delegated authority. ·      Securities and documents have been received and properly charged. ·      Post disbursement supervision and follow-up is proper or not. ·      Whether the letters of credit issued by the branch are within the delegated power. ·      Check the bank guarantees issued. ·      Proper follow-up of overdue bills of exchange. ·      Verify classification of advances. ·      Verify that instances of exceeding ‘delegated powers have been promptly reported to controlling / Head Office.
	Foreign Exchange	·      Check foreign bills ·      Whether inward/outward remittance have been properly accounted for. ·      Check extension and cancellation of forward contracts for purchase and sale of foreign currency. ·      Ensure that balances in Nostro accounts in different foreign currencies are within the limit. ·      Ensure adherence to the guidelines issued by RBI. ·      Ensure verification/reconciliation of Nostro and Vostro account.
	Housekeeping	·      Ensure that the branch gives proper compliance to the internal inspection/audit reports. ·      Customer’s complaints are dealt with promptly. ·      Verification of statements, returns, statutory returns.
	Other Items	·      Ensure maintenance and balancing of accounts. ·      Carry out a test check of calculations of interest, discount, commission and exchange. ·      Check the transactions of staff accounts. ·      Detection and prevention of revenue leakage. ·      Check cheques returned/bills returned.
	Objective	Its objective is to see whether transactions or decisions are within the policy parameters laid down by H.O., they don’t violate instructions of RBI & they are within authority.
	Remuneration of auditor	It is fixed by bank.
	Irregularities	Minor irregularities to be rectified on the spot. Serious irregularities reported to H.O. /Z.O.
	Reporting	Proper reporting & at proper interval. Reported on 10th of next month/quarter but flash report can be submitted immediately. Normally, the audit report should be divided in three parts. The first part should deal with major irregularities. The second part should deal with minor irregularities which have not been attended during the course of audit. The last part should deal with compliance with earlier reports. Before submission of the report the auditor should discuss the important issues on which he wishes to report with the branch manager and concerned officers.

NORMS FOR INVESTMENT

Basics	·      Banks should frame suitable Investment policy. ·      Classification of Investment > Held to maturity > Available for Sale > Held for Trading ·      Disclosure in account is same as present 6 categories.
Held to Maturity	·      Intention Basis. ·      HTM  25% of Banks total Investment. ·      Following not to be ‘Covered /Counted for 25% > Re-capitalisation Bonds from govt. of India. > Investment in subsidiary & Joint Venture. >Investment in Debenture/Bonds if deemed to be in nature of advance i.e. o   If issued for project finance (3 Yrs. or more) Or o    If issued for working capital finance (less than l yr.) and o   Banks stake is 10% in issue. and o   Issue is part of private placement. ·      Profit on sale of such Investment is to be taken to P&L account & thereafter to Capital Reserve account. Loss to P & L account. ·      Carried at acquisition cost. If acquisition Cost is more than face value there amortise the premium. Recognise permanent diminution.
Held for trading	(i)            Transfer to IFR as appropriation to net Profit “below line” after statutory Reserve.     (ii)            Intention to trade for short term price/Interest rate gain to be sold within 90 Days    (iii)            Profit or loss on sale to P&L account   (iv)            Marked to Market at Monthly/Frequent intervals.
Available for sale	(i)            If not in above 2 categories.     (ii)            Profit or Loss on sale to P/L A/c.    (iii)            Valuation Individually script wise Marked to Market at quarterly/frequent interval.   (iv)            Fall in value to be provided (appreciation ignored for this purpose) Debit to P&L A/c & equivalent amount to be transferred from Investment Fluctuation Reserve account to P&L account.
Investment fluctuation reserve (IFR)	(i)            Banks are required to create IFR at minimum 5% of investment within 5 years (only w.r.t. held for trading and available for sale) and Maximum upto 10% of Portfolio(only w.r.t held for trading and available for sale)     (ii)            Transfer maximum amount of gains realised on sale of Investment in Securities to Investment Fluctuation Reserve(IFR).    (iii)            IFR is eligible for inclusion in Tier-2 Capital.   (iv)            Transfer to IFR as appropriation o net profit “below line” after statutory Reserve.
Shifting among categories of I	(i)            To/from HTM  Approval of BOD. Shifting can take place once a year at beginning of year.     (ii)            From AFS to HFT  with approval of BOD / ALCO/ Investment Committee.    (iii)            From HFT to AFS  Generally not allowed only in exceptional situation with permission of BOD / ALCO(asset liability committee) / Investment Committee.   (iv)            Transfer at acquisition Cost / Book value / Market value on date of Transfer (whichever is least).
Income Recognition on I	(i)            Accrual Basis on securities, if guaranteed by Central govt.     (ii)            Otherwise, if owners right is established.    (iii)            From mutual funds, on cash Basis.
Broken period Interest	Banks not to capitalize BPI paid to seller as part of cost but treat as expenses in P & L account.

SOME IMPORTANT MATTERS TO BE CONSIDERED BY AUDITOR

Draft paid without advice	·      Correctness and completeness of draft ·      Co-relate the drafts with advice subsequently received ·      Systems of sending reminders within reasonable time. ·      Record of names / address of payees.
Principal enactments governing Bank Audit	·      Banking Regulation Act. ·      Banking Company Act. ·      State Bank of India Act ·      SBI (Subsidiary) Act ·      Regional Rural Bank Act. ·      Companies Act ·      Co-operative Societies Act
Vostro and Nostro A/c.	·      Forex account maintained by Indian Bank at other overseas centers in NOSTRO. ·      VOSTRO is opposite of NOSTRO, i.e. foreign Bank in another country maintain Indian rupees with their Indian correspondent local banks. E.g. German Bank maintaining VOSTRO in rupees with Indian Bank. ·      Check the reconciliation. ·      Check Internal controls w.r.t. inward/outward messages ·      Balance confirmation certificate to be received, from such another bank.
Verification of Bills Purchased and Discounted	·      These are shown separately in the balance sheet as a part of ‘advances’. ·      Under the head ‘advances outside India’ in the balance sheet, bills purchased and discounted outside India have to be shown separately. ·      Auditor should examine bills purchased and discounted registers. ·      Check whether all the outstanding bills have been taken in the balance sheet ·      Check all the details of bills. ·      Whether the total of outstanding bills of each party is not in excess of the sanctioned limit ·      Ensure that bills purchased and discounted are in accordance with the agreements. ·      Check that the bills are not overdue. ·      The auditor should also examine bills collected subsequent to the year-end to obtain assurance regarding completeness and validity of the recorded bill amounts. ·      Check accounting treatment by bank in case of dishonored bills.
Credit Card Operations	·      There should be a system to examine creditworthiness of applicant. ·      Strict control over storage and issue of credit cards should be ensured. ·      The on line real time system should be properly installed, so that merchant confirms the unutilized balance of the customer With the bank before accepting payment. ·      There should be prompt reporting by the merchants of all settlements accepted by them through credit cards. L ·      Customer's account should be immediately debited with the reimbursements. ·      There should be adequate follow up of items overdue beyond a reasonable period. ·      In case of delayed payments, interest should be charged.
Inter-office operations	·      These are generally sub-divided into segments or specific areas, e.g. Demand Drafts Paid, Inter-branch Remittances. ·      Special attention should be paid to the origin and validity of old outstanding unmatched entries, particularly debit entries. ·      Examine any reversal entries indicating the possibility of irregular payments or frauds. ·      Examine any items in the nature of cash-in-transit remaining pending for more than a reasonable period. ·      Whether transactions other than those relating to inter-branch transactions have been included in inter-branch accounts. ·      Seek confirmation from the third party (other branch).
Non-Banking Assets acquired in Satisfaction of claims	·      It includes those immovable properties/tangible assets which the bank has acquired in satisfaction of debts due. ·      These items are held with the intention of being disposed of. ·      A banking company is prohibited from holding any immovable property, except such as is required for its own use, for any period exceeding seven years from the date of acquisition. ·      Auditor should verify relevant documentary evidence, e.g. terms of settlement with the party. ·      Verify whether ownership of the property has legally vested in the bank.

Contingent liabilities including Bills for collection	Presentation	·      Claims against the bank not acknowledged as debts. ·      Liability for partly paid investments. ·      Liability on account of outstanding forward exchange contracts ·      Guarantees given on behalf of constituents: > In India > Outside India ·      Acceptances, endorsements and other obligations. ·      Other items for which the bank is contingently liable. ·      Bills for Collection
	Audit procedures	Following should be considered: ·      Ascertain whether there are adequate internal controls. ·      Whether there are proper records regarding bills for collection. ·      Whether contingent liabilities are properly identified and recorded (take expert advice). ·      Establish the completeness of the recorded obligations. ·      Review the reasonableness of the l year-end amount of contingent liabilities. ·      Obtain MRL that all contingent liabilities have been disclosed. ·      Verify that the provisions of AS29 ‘Provisions, contingent liabilities and contingent assets have been complied with.

PRUDENTIAL NORMS-RECENT RBI CHANGES

Non-Performing Assets	Term Loan	A Term Loan where interest and/or installment of principal remain overdue for a period of more than 90 days will be treated as NPA. Thus an amount which falls due on 3lst December, 2012 will be 90 days old, if unpaid, as on 3lst March, 2013. The requirement is that the overdue period should be more than 90 days. Therefore, such an amount need not be classified as NPA. Any amount which had become payable before 3lst of December, 2012 will be NPA as at 3lst of March, 2013 if it remains unpaid.
	Overdraft/Cash Credit	An Overdraft/ Cash Credit will become NPA as at 31st March, 2013 under the following circumstances: (a)   If the outstanding balance remains continuously in excess of the sanctioned limit or the drawing power, or (b)   lf there are no credits continuously for 90 days as on the balance sheet date or the credits are not enough to cover the interest debited during the same period. The period from 1st January, 2013 to 31st March, 2013 is of 90 days. Hence, the above two requirements will have to be tested for this period of 90 days to determine whether the account becomes NPA or not as on 31st March, 2013.
	Bills Purchased and Discounted	If the bills remain overdue for a period of more than 90 days then such bills would be classified as NPA. As mentioned before, the bills purchased and discounted before 31st December, 2012, if unpaid as at 31st March, 20l3 will be treated as NPA.
	Agricultural Advance	(a)   With effect from September, 30, 2004 a loan granted for short duration crops will be treated as NPA, if the installment of principal or interest thereon remains overdue for two crop seasons. A loan granted for long duration crops will be treated as NPA. if the installments of principal or interest thereon remains overdue for one crop season. (b)   For the purpose of these guidelines, “Long duration” crops would be crops with crop season longer than one year and crops, which are not “long duration” crops, would be treated as “Short duration” crops.
	Any other credit facility	In case of any other credit facility, if the amount to be received remains overdue for a period of more than 90 days then such a facility will be classified as NPA. As discussed before, if such an amount was due before 31st of December, 2012, then it shall become NPA as at 31st  March, 2013. Any amount due to the bank under any credit facility is said to be overdue if it is not paid on the due date fixed by the bank.
Income Recognition	·       In case of a NPA, the interest is recognized when it is actually received and not merely on accrual basis. ·      The above general rule, however, does not apply in case of advances against term deposits. NSCs, IVPs, KVPs and Life Policies provided adequate margin is available. ·      If the Government guaranteed advances become NPA, the interest on such advances should not be taken to income account unless the interest they been realized. ·      An advance which becomes NPA during the financial year 2012-13, interest accrued and credited to income account has to be revised or provided for if the same is not realized. This applies to Government guaranteed accounts also. ·      The RBI has in recent past advised the banks to adopt an accounting principle and exercise the right of appropriation of recoveries in a uniform and consistent manner.
Asset Classification	The banks are required to classify non-performing assets further into the following three categories based on the period for which the asset has remained non-performing and the realizability of the dues: (a) Sub-standard Assets (b) Doubtful Assets (c) Loss Assets
	Sub-standard Assets	Substandard Asset would be one, which has remained NPA for a period less than or equal to l2 months.
	Doubtful Assets	If it remained in the sub-standard category for l2 months.
	Loss Assets	A loss assets is one where loss has been identified by the bank or internal or external auditors or the RBI inspection but the amount has not been written off wholly. In other words, such an asset is considered uncollectible and of such little value that its continuances as bankable assets is not warranted although there may be some salvage or recovery value.
	Accounts with temporary deficiency	(a)   The classification of an asset as NPA should be based on the record of recovery. An account need not be classified as NPA merely due to the existence of ‘some deficiencies which are temporary in nature such as non-availability of adequate drawing power based on the latest available stock statement, balance outstanding exceeding the limit temporarily, non submission of stock statements and non-renewal of the limits on due date etc. However, the outstanding in the account based on drawing power calculated from stock statements older than three months would be deemed as irregular. lf such irregular drawings are permitted in the account for a continuous period of 90 days will render the account NPA, even though the unit may be working or the borrowers financial position is satisfactory. (b)   Regular and ad hoc credit limits need to be reviewed/ regularized not later than three months from the due date / date of ad hoc sanction. In case of constraints such as non-availability of financial statements and other data from the borrowers. the auditor should verify whether the show that renewal/ review of credit limit is already on and would be completed soon. Delay beyond six months is not considered desirable as a matter of general discipline. Hence account where the regular/Ad hoc credit limit has not been reviewed/ renewed within l80 days from the due date/ date of ad hoc sanction will be treated as NP.

Provision Norms	In conformity with the prudential norms, provisions are required to be made on the non-performing assets on the basis of classification of assets into prescribed categories. Taking into account the time lag between an account becoming doubtful of recovery, its recognition as such, the realisation of the security and the erosion over time in the value of security charged to the bank, the banks have to make provision against substandard assets, doubtful assets and loss assets as below:
	Loss Assets	The entire asset has to be written off. If the assets are permitted to remain in the books for any reason, 100 percent of the outstanding need be provided for.
	Doubtful Assets	(i)            I00 percent of the asset to the extent to which the advance is not covered by the realizable value of the security to which the bank has a valid recourse and the realizable value is estimated on a realistic basis.     (ii)            In regard to the secured portion, provision may be made on the following basis, at the rates ranging from 20 percent to 100 percent of the secured portion depending upon the period for which the asset has remained doubtful:    (iii)            With a view to bringing down divergence arising out of difference in assessment of the value of security. in cases of NPAs with balance of Rs.5 crore and above stock audit at annual intervals by external agencies appointed as per the guidelines approved by the Board is mandatory in order to enhance the reliability on stock valuation. Collaterals such as immovable properties charged in favour of the bank have to be valued once in three years by valuers appointed as per the guidelines approved by the Board of Directors.
	Period for which the advance has                            Provision requirement (%) remained in ‘doubtful’ category Upto one year                                                                                   25 One to three years                                                                          40 More than three years                                                                  100
	Sub-standard Assets	A general provision of l5 percent on total outstanding required to be made without making any allowance for DICGC/ECGC guarantee cover and securities available. The ‘unsecured exposures’ which are identified as ‘substandard’ would attract additional provision of 10 percent, i.e. a total of 25 per cent on the outstanding balance.
Standard assets	From the year ending 31st March, 2006, the banks have to make a general provision of a minimum of 0.40 percent on standard assets (25% on SME and Agricultural sector).
Government guaranteed advances	·      Advances granted under rehabilitation packages approved by BIFR / term lending institutions.               (i)    In respect of advances under rehabilitation package approved by BIFR/term lending institutions, the provision should continue to be made in respect of dues to the bank on the existing credit facilities as per their classification as substandard or doubtful assets.              (ii)    As regards the additional facilities sanctioned as per package finalized by BlFR and /or term lending institutions, provision on additional facilities sanctioned need not be made for a period of one year from the date of disbursement. ·      Advances against term deposits, NSCS eligible for surrender, IVPs, KVPs, and life policies would attract provisioning requirements as applicable to their asset classification status. ·      Advances against gold ornaments, government’s securities and all other kinds of securities are not exempted from provisioning requirements. ·      Advances covered by ECGC / DICGC guarantee: In the case of advances guaranteed by DICGC/ECGC, provisions can be made only for the balance in excess of the amount guaranteed by these Corporations. Further, while arriving at the provision required to be made for doubtful assets, realisable value of the securities should first be deducted from the outstanding balance in respect of the amount guaranteed by these Corporations and then provision made. ·      Advances covered by CGTSI guarantee: In case the advances covered by CGTSI guarantee becomes non-performing, no provision need be made towards the guaranteed portion. The amount outstanding in excess of the guaranteed portion should be provided r as per the extend guidelines on provisioning for non-performing advances.

Question:

Your firm has been appointed as Central Statutory Auditors of a Nationalised Bank. The Bank follows financial year as accounting year. State your views on the following issues which were brought to your notice by your Audit Manager:

(a)    In computing the aggregate of funded and non-funded exposure of a constituent for purpose of assigning risk weight in regard to capital adequacy, the bank "Netted off‘the credit balance of Rs.10 lakhs in their Current Account against the total exposure of Rs.1 crore.                                                                                           (4 marks)

(b)   The bank has recognised on accrual basis income from dividends on securities and Units of Mutual Funds held by it as at the end of financial year. The dividends on securities and Units of Mutual Funds were declared after the end of financial year.                                                                                                                                                            (4 marks)

(c)    The bank is a consortium member of Cash Credit Facilities of Rs.50 crores to X Ltd Bank's own share is Rs.10 crores only. During the last two quarters against a debit of Rs.1.75 crores towards interest the credits in X Ltd's account are to the tune of Rs.1.25 crores only. Based on the certificate of lead bank, the bank has classified the account of X Ltd as performing.                                                                                                                                                               (4 marks)

(d)   In case of all such advances which have been classified as non-performing for the first time during tile current financial year, only the last date of the financial year has been reckoned as the date of account becoming non-performing.                                                                                                                                   (4 marks) (Final May 2000)

Answer:

(a)

·         The banks are required to adhere to certain capital adequacy norms to ensure that they have adequate capital in relation to the risks undertaken by them.

·         As per the circular issued by the RBI, while computing risk adjusted value of assets netting may be done only for advances collateralized by cash margins or deposits and in respect of assets where provision for doubtful debts have been made.

·         As per this circular, banks may "net off‘against the total outstanding exposure of he borrower, credit balance in current account which are free from any lien.

·         In view of the above, the treatment of netting off followed by the bank is in order.

(b)

·         The income from dividend on securities and units of mutual funds should be booked on cash basis.

·         It is not a prudent practice to treat dividend on units of mutual funds as income unless these are actually received.

·         In respect of income from government securities, where interest rates on these instruments are pre- determined, income could be booked on accrual basis, provided interest is received regularly and as such is not in arrears.

·         It is also clarified that banks may book income on accrual basis on securities of corporate bodies/public sector undertakings in respect of which the payment of interest and repayment of principal have been guaranteed by the central government or a state government.

·         Moreover, they can recognize dividend when their right is established.

·         In the instant case, the dividends on securities and Units of Mutual Funds were declared after the end of financial year.

·         Thus, the recognition of income by the bank is not in order.

(c)

·         The bank is a consortium member of cash credit facilities of Rs.50 crores to X Ltd. Bank's own share is Rs.10 crores only.

·         During the last two quarters against a debit of Rs.1.75 crores towards interest, the credits in X Ltd's account are to the tune of Rs.1.25 crores only.

·         In case of consortium, each bank may classify the advance given by it according to its own experience of recovery and other factors and not only on the basis of the certificate of lead bank that the account is performing.

·         Accordingly, the amount should be shown as non-performing asset.

·         Since in the last two quarters, the amount remains outstanding and, thus, interest amount should be reversed.

(d)

·         An amount should be considered as NPA when the amount due there from remains outstanding for specified period.

·         In case of terms loans, if interest or installment of principal is in arrears for more than 90 days, it should be classified as non-performing asset and from that date provision should be made.

·         As per RBI Circular, if the account of the borrowers have been regularised before the balance sheet date by repayment of overdue amounts through genuine sources and not by sanction of additional facilities, the account need not be treated as NPA. Bank should, however, ensure that the account remains in order subsequently.

·         NPA is to be seen throughout the year.

·         Thus, it is wrong to take only the Balance Sheet date for purposes of classification.

Chapter#4                                                         General Insurance Company

REQUIREMENT OF SCHEDULE B TO IRDA REGULATIONS 2002

Part 1	A/c principles for prep. of financial information I Applicability of AS to G.l. C. : Ø  3  As per Direct Method only. Ø  4 Not applicable w.r.t. liabilities arising out of l. Policies Ø  9 Not applicable w.r.t. incomes of insurance business. Ø  13 As per regulation, Apply AS — l3 where regulation is silent. Ø  17 Applicable in each case irrespective of its applicability clause. ·      Premium ·      Premium Deficiency. Recognised if expected claim cost > related reserve unexpired risk. ·      Acquisition cost. Expenses in the period in which incurred. ·      Claims. Liability for 0/s claim should be provided for ·      Valuation of Investment. Ø  Real Estate - investment property: Historical cost less accumulated depreciation less impairment loss. Residual value as zero. Ø  Debt Securities — as ‘held to maturity’ - Historical cost. Ø  Equity / Derivative in Active Market — F.V. at B/S date. Impairment as expenses. changes in F.V. in “Fair Value change A/c.” Ø  'Unlisted' and other — at H.C. provision made for diminution in value such provision may be reversed but increased carrying amount not to exceed its historical cost. ·      Loan. Measured at historical cost subject to impairment provision. ·      Catastrophe Disaster Reserve. To be created as per norms prescribed by authority.
Part 2	Disclosure
Part 3	General Instruction (Last year figures, national income provision/Reserve)
Part 4	Management Report ·      Confirmation for validity of registration ·      Confirmation that all statutory dues have been paid. ·      Confirmation that shareholding pattern is in accordance with law ·      Confirmation that solvency margin is maintained (NOTE: Solvency Margin ·      To maintain excess of assets over amount of its liabilities at all times, highest of following: ·      50 crores (100 cr. For reinsurer) ·      20% of net premium income. ·      30% of net incurred claims. If non-maintenance of S.M., insurer to submit a financial plan to authority indicating plan of action, else it shall deemed to be insolvent and wound up by court.) ·      Confirmation that valuation of Investment is as per norms. ·      Confirmation that management has not invested any money outside India. ·      Confirmation about overall risk exposure ·      Confirmation about operation in other countries ·      Confirmation about aging of claims ·      Confirmation about quality of asset & portfolio ·      Confirmation about payment to parties in which directors are interested ·      Responsibility statement

INVESTMENT NORMS

1.       Investment in other than approved investment if: (i) Such investment < 25% of total investment; and (ii) Consent of all Directors. 2.       Insurer not to invest in one insurance / investment company exceeding- (i) 10% of total asset of insurer; or (ii) 2% of share capital/debenture of company concerned. For other companies (other than insurance / investment company) 2% is replaced by 10% 3.       Funds of policy holders not to be invested outside India. 4.       Every insurer to keep at all times.
·      at least 20% of Assets ·      at least 30% (including (i) ·      at least 5% of total assets ·      at least 10% of total assets ·      upto 55%	Central Govt. Securities. State Govt. and other guaranteed securities Housing & loan to State Government In approved securities under infrastructure / social sector Other securities.
Guidelines	(i)      Proper Balance between infrastructure and social sector.  (ii)      Based on rating of assets. (iii)      Rating by independent agency (iv)      Should be at least “AA” grade. (v)      Investment in shares in actively traded/liquid investment.

REINSURANCE – At a glance

Ø  Facultative: Particular risk is ceded, thus consideration of each risk separately. Ø  Treaty: Within limits of treaty, covering all kinds of risks is ceded. Ø  Proportional Treaty Ø  Quota Share Fix % of all policies issued under defined scope of business. Ø  Surplus: Cedes amount which it doesn’t want to retain with itself. Ø  Auto-fac: After cession of its surplus treaties, if anything remains, then it is ceded as per auto-fac treaty Ø  Pools: Members cede to pool a portion of business directly written by them. Ø  Non-proportional: On basis of loss. Ø  XL treaty: XL on prevent: If more than one risk are affected, limit/loss is arrived at separately. Ø  XL on non-prevent: Losses considered on together basis. (Aggregate). Ø  Stop Loss: Protects the company from losing more than specified amount for given class of business.

SOME POINTS TO BE CONSIDERED IN CASE OF GIC

Premium	Ø Credited to separate Bank account. Ø No Risk Assumption without receipt of premium. Three types of premium — for direct business, for re-insurance business and share of co-insurance premium. Ø Some portion of premium is allocable to succeeding period, thus called unearned premium. Check Reserve for unexpired risk. (NOTE: Reserve for unexpired risk: Not all risk expire as on B/S date. Risk will be there in succeeding year w.r.t. premium received in this year, thus provide for-                 (i) 50% of all other types and                 (ii) 100% for marine Hull. g % is to be taken of net premium income i.e. premium received, net of reinsurance premium paid.) Ø Premium deficiency = expected claim cost — related unearned premium. Provision to be made. Ø Internal controls and procedures w.r.t. premium should be operating effectively. Ø Cover notes should be serially numbered. Ø Company should not assume any risk for uncollected premium, short premium, not collected in time, etc. Ø Reinsurance look for all its details. Ø Collection after B/S date, whether relating to year under audit. Ø Co-insurance, examine company’s share of premium. Ø Premium register should be kept chronologically i.e. in order of time of premium received. Ø Due date and date of collection should be reconciled. Ø Year end transactions should be taken care of. Ø Service tax is applicable on premium, thus ensure appropriateness of same. Ø Refund of premium (whether made in genuine cases only).
Verification of claims	·      Provision for all unsettled claims. ·      Only for those, company is legally liable. ·      Not to exceed insured amount. ·      Event after B/S date. ·      Average clause. ·      Co insurance, provision only for its share. ·      Reasons for long delays after claim lodged. ·      Under litigation, legal advice. ·      Provision net of salvage value. ·      No contingent liability w.r.t. claim intimated. ·      Intimation within reasonable time. ·      Claim paid duly sanctioned. ·      Claim paid for its share in co-insurance. ·      Claim paid after salvage accounted for. ·      Claim paid, discharge note from claimant.
Commission	·      Commission should be paid only to authorized agents ·      Examine internal controls over payment of commission. ·      Examine whether it has been paid as per appropriate rate. ·      Obtain confirmation from the agents. ·      Examine accounting treatment of outstanding commission, if any. ·      Obtain management representation that all commission has been appropriately adjusted in the accounts. ·      Correlate with this year’s business. ·      Check whether TDS has been properly deducted on payment of commission. ·      Verify that no commission is paid to agents for businesses directly procured by it.
Agent’s balance	·      Carefully examine the old balance, if any. ·      Obtain confirmation from agents. ·      Ensure that this head contains only balances w.r.t. agents accounts. ·      Obtain management representations w.r.t. appropriate accounting treatment of such accounts. ·      In case any amount due from them appears to be doubtful, examine whether provision has been created w.r.t. same. ·      Reconcile their balances with commission due to them.
Receipts and payments account	·      Every insurer should prepare at the end of each financial year, a Balance Sheet, a ·      Profit and Loss Account, account of receipts and payments and a Revenue Account. ·      Since receipts and payments account has been made a part of financial statements of an insurer it is also required to be audited. ·      Auditor of an insurance company should:   (i)      Report whether the receipts and payments account of the insurer is in agreement with the books of account and returns:  (ii)      Express an opinion as to whether the receipts and payments account has been prepared on accordance with the provisions of the relevant statutes; and (iii)      Express an opinion whether the receipts and payments account gives a true and fair view of the receipts and payments of the insures for the financial year Period under audit.
Co-insurance	·      In case of high business risks, these are shared among more than one insurance company. ·      In case of coinsurance, the leading insurer issues the documents. collects premiums and settles claims. . ·      The leader renders statements of Accounts to the co-insurers. ·      The auditor should check whether the premium account is credited on the basis of statements received from the leading insurer. ·      Auditor should obtain a written confirmation from management that all premium received from the leader has been accounted for. ·      The claims provisions and claims paid should also be verified. ·      It should be ensured that claim is paid only for its share in coinsurance. ·      For leader, the auditor should examine the relevant documents.
Reinsurance inwards	·      He should obtain evidences as to the effectiveness of the system of control over the reinsurance inwards. ·      The agreement should be as per guidelines prescribed in the Insurance Act, 1938 and IRDA Regulations. ·      The auditor should examine the arrangements with principal insurer. ·      The auditor should ensure the appropriateness of accounting treatment of reinsurance business received, premium received and payment of commission. ·      He should examine ‘whether intimation of loss has been received well in time. ·      It is also to be verified that claim has been paid as per the terms and conditions. ·      In case of principal insurer being in the foreign country, he should examine the foreign currency transactions considering the Accounting Standard (AS) 11. ·      The auditor should check whether provision has been made for all claims payable to principal insurer. ·      He should carefully examine any old outstanding. ·      Balance confirmation should also be obtained form principal insurer.
Reinsurance Outward	·      He should obtain evidences as to the effectiveness of the system‘ of control over the reinsurance outwards. ·      The agreement should be as per guidelines prescribed in the Insurance Act, 1938 and IRDA Regulations. ·      The auditor should examine the arrangements with re-insurers. ·      The auditor should ensure the appropriateness of accounting treatment of reinsurance business given, premium paid to reinsurer and receipt of commission. ·      He should examine whether intimation of loss has been given to them well in time. ·      It is also to be verified that claim has been received from reinsurer as per the terms and conditions. ·      In case of reinsurer being in the foreign country, he should examine the foreign currency transactions considering the Accounting Standard (AS) 11. ·      He should carefully examine any old outstanding. ·      Balance confirmation should also be obtained form reinsurer.

Chapter#5                                                    Audit of Co-operative Societies

MULTI STATE CO-OPERATIVE SOCIETIES ACT, 2002

1.       Books of A/c.	·      All sum of money received & expended & matters of receipt/expenses. ·      All sale & Purchase of goods. ·      All assets & liabilities. ·      For MSCOS engaged in production, processing & manufacturing, their utilization of materials or labour or other items of cost as may be specified in by-laws of society.
2.       Qualification of Auditors (Sec. 72)	A chartered accountant. Disqualification: ·      Body corporate. ·      Officer / Employee of MSCOS. ·      Partner / Employee of Officer / Employee of MSCOS. ·      lndebted / Guarantor for amount > 1000/-
3.       Appointment of auditors (Sec. 70)	·      First auditor by board within one month of registration date to hold office until conclusion of 1stAGM. If board fails to appoint, then in general meeting. ·      Subsequent auditor at each AGM. He shall hold office from conclusion of that meeting until conclusion of next AGM.
4.       Power & Duties of Auditors (Sec. 73)	Right to access at all times to books, Accounts & Vouchers, to require information & explanation from employee / officers, to attend GM, to send representation on removal. Following inquiries shall be made [73 (2)1 ·      Loans & advances made by MSCOS on basis of security, properly secured & whether terms aren’t prejudicial to interest of M SCOS / members. ·      Transaction of MSCOS represented merely by book entries are not prejudicial to interest of MSCOS. ·      Whether personal expenses have been charged to revenue. ·      In case it is stated in Books of MSCOS that any shares have been allotted for cash whether cash actually been received & if no cash has been so received, whether positions stated in books & B/s are correct & not misleading.
5.       Special Audit of MSCOS (Sec. 77)	(a)    In case, Central Government or State Government either alone or both hold 51%  more of paid-up share capital In such MSCOS. (b)   Central Government may direct either a C.A or MSCOS’s auditor to conducts special audit & make a report to it. (c)    If Central Government is of opinion that: ·      Affairs of MSCOS aren’t being managed in accordance with self help & Co-operative principles or sound business principles or: ·      MSCOS is managed in manner likely to cause serious injury I damage to interest of trade / industry or business to which it pertains or ·      The financial position of any MSCOS is such as to endanger its solvency. (d)   Auditor has same powers & duties as in Sec. 73. (e)   On receipt of report of special audit, Central Government may take such action as it considers necessary.
6.       Inquiry and inspection by Central Registrar (Sec. 78 and 79)	(a)    Central Registrar may on request from ·      Federal co-operative to which MSCOS is affiliated or ·      A creditor or ·      At least l/3 of member of board or ·      At least l/5 of total member of MSCOS, Hold an enquiry or direct some person to enquire into constitutions, working & financial condition of MSCOS. However, before inquiry, 15 days notice is to be given to MSCOS. (b)   Central Registrar or person authorised, shall have following powers: ·      Free access to books / A/c / Cash / Properties in custody of MSCOS in event of serious irregularity, take them into custody. Summon any person to produce the same at any place specified by him. ·      Require the officer to call GM by giving notice of at least 7 days or if officers fail / refuses, he may/call it himself. ·      Summon any person having knowledge to appear before him & examine him on oath. (c)    Central Registrar within 3 months of receipt of report communicates the report of enquiry to society, Financial Institution & to person at whose instance it is needed.

Chapter#6                                                                                   Special Aspects

NON-BANKING FINANCIAL COMPANY

Classification of NBFC (Refer to appendix also)	NBFC	NBFC is one whose principal business is that of receiving deposits or that of financial institution. 1. Equipment Leasing Company. 2.Hire Purchase Finance Company. 3. Investment Company. 4. Loan Company. 5. RNBC i.e. Residuary non-banking co. that receives deposits under any scheme.
	MBFC (Mutual benefit Financial Co.)	i.e. Nidhi Co. notified by Central Government u/s 620 A of Companies Act.
	MBC (Mutual Benefit Company)	i.e. Potential Nidhi co. working on lines of Nidhi co. but not so notified by Sec. 620A of Companies Act and Central Government. (Company having minimum net owned fund and preference share capital of 10 lacs. )
	MNBC (Miscellaneous Non-banking co.)	i.e. Chit Fund company. Where a company enters into an agreement with specified number of subscribers to subscribe a certain sum and everyone of them be entitled to a prize amount. (may be by lot).
Audit Procedure	General Procedure	1.    Ascertaining the business of the Company. 2.    Evaluation of I.C. System. 3.    Registration with RBI which is compulsory for companies having minimum net owned funds of Rs.2 crores. Also ascertain whether it has submitted quarterly return with RBI about liquid Assets within 15 days in specified form. Moreover, it must transfer at least 20% of its net profit to reserve fund before any dividend is declared.
	NBFC Public Deposit Directions	·      Public deposit should be in accordance with the credit rating assigned to it. ·      Interest calculations should be proper. ·      NBFC should have accepted public deposit or renewed it only after written application is received by the depositor in a specified form. ·      Public deposits should be accepted only after advertisement or statement in lieu of advertisement has been filed with RBI. ·      Check deposit register (payment on due date). ·      Investment in approved liquid assets and it should be kept in safe custody. ·      Audited statements to be submitted within 15 days of Holding AGM to RBI. ·      Annual Return to be submitted to RBI within 6 months from close of year. ·      If it is not accepting deposits, see Board resolution in this behalf. ·      For Group holding Investment Company, see board resolution to identify the group.
	NBFC Prudential norms Directions	(i) Compliance with income recognition and Accounting Standards, etc. (ii) Classification as Standard / Sub-standard / Doubtful / Loss Asset. (iii) Income from NPA - on realization basis. (iv) Previous year’s NPA account- continue or not.
Check-list for NBFC	Equipment Leasing Finance Company	·      Check whether proposals for equipment Leasing are accepted only after proper credit appraisal. ·      The auditor should verify the adequacy of system in place for ensuring installation of assets and their periodical physical verification. ·      The auditor should check the system to monitor whether Asset is adequately insured and properly maintained. ·      Verify the lease agreement. ·      The auditor should ensure that leasing transactions are classified and accounted as per AS-19 “Lease”. ·      Ensure that the provisions relating to asset classification, provisioning and income recognition are observed.
	Hire Purchase Finance Company	·      The auditor should ascertain whether there is an adequate appraisal system for extending hire-purchase finance. ·      The auditor should verify the assets are property charged in the name of the NBFC. ·      The auditor should examine the internal controls to ensure installation of the asset and their periodic physical verification. ·      If the finance is against vehicles, the registration certificate should contain an endorsement in favour of the NBFC. ·      Auditor should verify the system to ensure that hirer have not sold the assets or encumbered them. ·      Whether hire-purchase installments are received regularly. ·      The auditor should verify that hire purchase assets are adequately insured. ·      Check the valuation of goods repossessed. ·      Examine the method of accounting followed for appropriation of finance charges over the period of hire purchase contract. ·      Ensure that the provisions relating to asset classification, provisioning
	Loan Company	·      Ascertain whether there is proper credit appraisal of applicant and sanction of loans. ·      Verify the terms & conditions of loan agreement ·      Examine the adequacy of security obtained. ·      Check whether adequate records are maintained as regards the bill discounting facilities. ·      Check whether the loans are within the limits. ·      No loans should be given on the security of own shares. ·      He should examine compliance with norms for asset classification, provisioning and income recognition have been adhered to. ·      The auditor should obtain balance confirmation from the borrowers as per SA 505.
	Investment Company	·      The Auditor should physically verify the investment certificate. For shares/Securities held through depository, obtain confirmation from D.P. ·      Verify whether investments made by the NBFC are within limits. Lend Same is the case with investment. Lending + Investment ·      He should ensure that income in the form of interest, dividend and capital gains is properly recognized. ·      Examine the bills/contract notes received from brokers ·      Verify the authorization of purchase and sale of investments. ·      Check compliance with AS 13 “Accounting for Investments”. ·      Ascertain that investments in unquoted debentures and bonds have not been classified as investments but as term loans.

Chapter#7                                                                   Audit under Fiscal Laws

2008 - Nov[8]

(d)   State whether a Tax audit report can be revised and if so state those circumstances.                    (4 marks)

Answer:

Normally, the report of the tax" Auditor cannot be revised later. However, when the accounts are revised in the following circumstances, the tax Auditor may have to revise his Tax Audit Report also.

1. Revision of accounts of a company after it adoption in the annual general meeting.

2. Change in law with retrospective effect.

3. Change in interpretation of law (e.g.) CBDT Circular, Notifications, judgments, etc.

The Tax Auditor should state it is a revised Report, clearly specifying the reasons for such revision with a reference to the earlier report.

2009 - May [6] Answer the following:

(b)   Draft an Audit Programme for conducting the audit of a Public Trust registered under section 12A of the income Tax Act, 1961.                                                                                                                                                                         (8 marks)

Answer:

An auditor should conduct routine checking during the course of audit of a public trust, in the following manner:

1.       Check the books of account and other records having regard to the system of accounting and internal control.

2.       Vouch the transactions of the trust to satisfy that:

                           (i)            the transaction falls within the ambit of the trust

                         (ii)            the transaction is properly authorized by the trustees or other delegated authority as may be permissible in law;

                        (iii)            all incomes due to the trust have been properly accounted for on the basis of the system of accounting followed by the trust;

                       (iv)            all expenses and outgoings appertaining to the trust have been recorded on the basis of the system of accounting followed by the trust;

                         (v)            amounts shown as applied towards the object of the trust are covered by the objects of trust as specified in the document governing the trust.

3.        Obtain trial balance on the closing date certified by the trustees duty certified by the trustee;

4.       Obtain Balance Sheet and Profit & Loss Account of the trust authenticated by the trustees and check the same with the trial balance with which they should agree.

2009 - May [7] Answer the following:

(b)   As the tax auditor of a non-corporate entity u/s 44 AB of the Income Tax Act, 1961, how would you ensure compliance of section 145 of the income Tax Act, 1961?                                                                              (8 marks)

Answer:

Income under the head Profit & Gains of business or profession or income from other sources has to be computed under mercantile or case system of accounting as regularly maintained by the assessee.

The Central Government may notify in the official Gazette from time to time the accounting standards to be followed by any class or assesses or in respect of any class; of income, The following Accounting Standards have been notified.

(i) AS (IT)-1: Disclosure of accounting policies.

(ii) AS (IT)-2: Disclosure of prior period and extra_ ordinary items and disclosure of accounting policies.

The above AS are corresponding to AS-1 and AS-5 respectively if the ICAI u/s 145(3) the Assessing Officer may make a best judgment assessment under section 144 in the following assessment under section 144 in the following situation.

(a)    Where the Assessing Officer is not satisfied about the correctness or completeness of the accounts of the assessee.

(b)   Where the method of accounting has not been regularly followed by the assessee.

(c)    Where as the AS notified u/s 145(2) have not been regularly followed by the assessee.

The auditor has to therefore ensure that:

(a)    the entity follows either the cash or accrual method of accounting

(b)   Accounting Policies are required by AS (IT)-1 has been disclosed separately.

(c)    Other provisions of AS 1 (IT)-2 have been complied with.

2011 - Nov [5] (a) As a Lax auditor how would you deal and report the following:

(i)         An assessee has borrowed Rs.50 lakhs from various persons. Some of them by way of cash and some of them by way of Account payee cheque / Draft.                                                                                                                  (3 marks)

(ii)       An assessee has paid Rent to his brother Rs.2,50,000/- and paid interest to his sister Rs. 4,00,000/-.

                                                                                                                                                                                               (2 marks)

(iii)      An assessee has incurred payment to clubs.                                                                                                       (2 marks)

Answer:

Tax Audit Report

(i)         Borrowed of Rs. 50 lakhs: As per Clause 24 of Form 3CD the particulars of each loan or deposit taken or accepted during the previous year have to be stated in the Tax Audit Report.

Also, Clause 24 (a) requires reporting in case if the loan or deposit was taken or accepted otherwise than by an account payee cheque or and account payee bank draft".

Further, as per Clause 24 (c) the tax auditor has to state whether a certificate has been obtained from the assessee regarding taking or accepting loan or deposit, through an account payee cheque or an account payee bank draft. The mere obtaining of such certificate does not reduce the responsibility of the tax auditor to verify the compliance with the provisions of Section 26988 and 269T of "the Income Tax Act.

Hence, in the given case, where the assessee has borrowed Rs. 50 Lakhs by way of cash and some of them by way of Account payee cheque/draft, needs to be verified and to be reported in compliance with Clause 24 of Form 3CD.

(ii)       Payment of Rent and Interest: A tax auditor has to report under Clause 18 of Form 3CD which deals with the particulars of payments made to persons specified under‘ Section 40A (2) (b). The specified persons include Husband, Wife, Brother, Sister or any other Lineal Ascendant or Descendant.

In the present case, an assessee has paid rent to his brother of Rs.2,50,000 and interest to his sister of Rs. 4,00,000 may be disallowed if, in the opinion of the AO, such expenditure is excessive or unreasonable having regard to:

1. fair market value of the goods, services or facilities for which the payment is made: or

2. for the legitimate needs of business or profession of the assessee; or

3. the benefit derived by or accruing to the assessee from such expenditure.

Hence this fact needs to be reported in the Tax Audit Report accordingly.

(iii)      Payment to Club: As per Clause 17 (d) of Form 3CD the amount of payments made to clubs by the assessee during the year should be indicated. The payments can be for entrance fees as well as membership subscribution and for catering and other services by the club, both in respect of directors and other employees in case of companies and for partners or proprietors in other cases. The tact whether such expenses are incurred in the course of business or whether they are of personal nature should be ascertained. If they are personal in nature, they should be shown separately under Clause 17(b).

Therefore, the tax auditor has to report the payments to clubs under Clause 17 (d) of Form 3CD.

2007 - May [8] Write short notes on the following:

(c)    Method of accounting in Form No. 3 CD of Tax Audit.                                                                                   (4 marks)

Answer:

Clause 11 of Form No. 3CD of the Tax Audit requires to state

(i) Method of accounting employed in the previous year.

(ii) Change in method of accounting vis-a-vis the proceeding year

Specially in case of change in method of accounting, details of change and the effect on profit and loss are to be stated details of deviations thereof, from Accounting Standard prescribed u/s 145 and the effect thereof on the profit and loss are stated.

2007- Nov [6] (b) What are the steps for the Audit under the State level ‘Value Added Tax’ (VAT)?        (8 marks)

Answer:

VAT is a tax on the value added to the commodity at each stage in the production and distribution chain. VAT is an indirect Tax on consumption. It is a tax on the value at the retail point of sale which is collected at each stage of sale.

The essence of VAT is that it provides credit set off for input tax i.e. tax paid on purchases against the output tax i.e. tax payable on sales.

(i)            A Knowledge of Business: The Auditor should study the VAT Law particularly definitions, procedures to be adopted, provision regarding issues of invoices, claiming of input tax credit etc.

(ii)          Knowledge about VAT Law and Allied Laws: The Auditor should study the VAT Law particularly definitions, procedures to be adopted, provision regarding issues of invoices, claiming of input tax credit etc.

(iii)         Major Accounting Policies: The Auditor should ascertainable major accounting policies with regard to sales purchases and valuation of inventory.

(iv)        Accounting Records maintained by Auditee: The auditor should obtain a complete list ct all the accounting records relating to sales/purchase ct goods, stock, various registers ledgers etc, maintained in which the transactions are recorded.

(v)          Evaluation of Internal control: The Auditor should evaluate the internal controls prevalent in the entity with respect to sales, Purchases, Production and Accounting. He must examine the adequacy and effectiveness of the controls in orders in order to plan the nature and timing of his audit procedures.

The following provisions of VAT need to understood:

·         Credit tor inputs/supplies (and its accounting)

·         Credit in case of capital goods.

·         Utilising VAT credit for set off.

·         Valuation of inventories/capital goods.

·         Credit for goods lying in stock at inception of VAT scheme.

·         VAT on sales.

Chapter#8                                                                                             Cost Audit

ADVANTAGE OF COST AUDIT

To Management	To Society	To Shareholder	To Government
·      Reliable data ·      Check on wastage ·      lnefficiency is identified and corrective action can be taken ·      It facilitates MBE(management by exception) ·      Valuation of closing stock ·      Detection of error and fraud	·      Fixation of Price ·      Justification of price increase by increase in cost of production	It ensures that proper records are kept for material, wages etc.	·      Cost plus contract ·      Fixation of Ceiling price ·      Identification of Inefficient unit ·      Protection to certain industries ·      Settlement of Trade Dispute ·      Promoting healthy competition among units in industry.

PROGRAMME OF COST AUDIT

1.    Review of Cost Accounting Records

This will include: (a)    Method of costing in use- batch, process or unit. (b)   Method of accounting for raw materials; stores and -spares, wastages, spoilage, defectives, etc. (c)    System of recording wages, salaries, overtime etc. (d)   Basis of allocation of overheads to cost centers and of absorption by products and apportionment of service department’s expenses. (e)   Treatment of interest, recording of royalties, research and development expenses, etc. (f)     Method of accounting of depreciation. (g)    Method of stock-taking and its valuation including inventory policies. (h)   System of budgetary control. (i)      System of internal auditing.

2.    Verification of cost statements and other data.

·      Licensed, installed and utilized capacities. ·      Financial ratios. ·      Production data. ·      Cost of raw material consumed, wages and salaries, stores, power and fuel, overheads, provision for depreciation, etc. ·      Sales realization. ·      Abnormal, non-recurring and special costs. ·      Cost statements. ·      Reconciliation with financial books.

TRUE AND FAIR COST OF PRODUCTION

(i) The cost auditor is required to express his opinion on true and fair cost. (ii) The cost is said to be true and fair if: ·      Accepted Cost Accounting Principles have been applied while arriving at the cost ·      Costing principles are applied on a consistent basis. ·      Costing system appropriate to product is used. ·      All Material items are considered while arriving at the cost. ·      Cost sheet is prepared in Prescribed form. ·      There is elimination of prior period adjustments in cost sheet. ·      Abnormal losses are ignored in determination of cost.

Question

For what purposes the Cost Auditor refers to financial records while conducting Cost Audit of an entity?

(8 marks) (Final May 2002)

Answer:

·         A cost auditor expresses an opinion as to whether the company has maintained proper cost accounting records so as to give a true and fair view of cost of production, etc.

·         He is required to ascertain the cost of raw materials consumed, cost of power, cost of stock, employer costs, provision for depreciation, fuel etc.

·         Annexure to the cost audit reports require detailed information in respect of financial position including capital employed, net worth, profit, net rates, operating profit, total wages and salaries, etc.

·         Thus, cost audit cannot be done without reference to financial books.

·         Moreover, there is a statutory requirement to have a statement of reconciliation with financial accounts as part of cost audit report.

·         Further the cost statements also contain a summary of all expenditure incurred by the company.

·         Naturally this can be done only with reference to financial ledger.

·         Material discrepancy between financial records and cost records will be highlighted in the reconciliation statement requiring the cost auditor to examine deviation before reporting on the same.

·         Thus it is clear that the cost auditor needs to refer to financial records for conducting the cost audit.

Chapter#9                                                               Special Audit Assignment

2008 - Nov [7] Write short notes own the following:

(a)    Circuit filters/Circuit breakers.                                                                                                                                 (4 marks)

(b)   Purposes of appointing inspecting officer of a Depository.                                                                         (4 marks)

Answer:

(a)    Circuit Filters/Circuit Breakers:

                        (i)            This is the price band that set the upper and lower limit within which a stock can fluctuate on any particular day.

                      (ii)            A price bank for a day is a function of the previous days closing price.

                     (iii)            According to SEBI directions circuit filter is applied on scrips traded in rolling settlement, if their price fluctuate more than 10% of the closing price of scrip on the previous day.

                    (iv)            Thus circuit filters restrict extreme price movement and resist price manipulation.

                      (v)            This also protects investor from extreme fluctuations.

(b)   SEBI appoints inspecting officers to investigate or inspect the affairs of a depository for any of the following purposes:

                       (1)           To ensure that the books of accounts are maintained in the names specified in the regulations.

                       (2)           To look into the complaints received from depositor’s participant, beneficial owners or other persons.

                       (3)           To ascertain whether the provisions of the Act, bye-laws agreements and these regulations are being complied.

                       (4)           To ascertain whether the systems, procedures and safeguards are being followed in the interests and to secure the market.

                       (5)           To ensure that the affairs are being conducted in the interest of the Investors/Securities markets.

2011- [7] Write short notes on the following:

(a)    Contract notes in case of audit of member of Stock Exchange.                                                                 (4 marks)

Answer:

Contract Notes in case of Audit of Member of Stock Exchange: Contract note is a document through which a contractual obligation is established between a member and a client. Every member of the stock-exchange has to issue contract notes to his clients for the trades executed on their behalf. The contract notes should be issued to the client within 24 hours of execution of the trades. Members are also required to preserve counter-toils or duplicates of the copies of contract notes issued to clients. The member is also required to maintain written consent of clients for the contracts entered into as Principal. Contract notes should show the brokerage separately. The total brokerage charged by the member should not exceed the specified value of the-trade.

It may be noted that the brokerage percentage is prescribed from time to time. The Contract Notes should be signed by the member or his constituted attorney. When a sole proprietor or partnership firm wishes to authorise another person to sign the contract notes, then the member is required to submit a power of attorney to the Exchange. In case of corporate membership, a board resolution is required to authorize a person including Directors to sign the contract notes.

The member thereafter prepares a Contract Note in the prescribed form after adding the brokerage and sends the original Contract Note to the client. The auditor should evaluate the internal control procedures instituted by the stock broker for proper maintenance and issuance of contract notes. He should verity that the transactions done by a member are recorded in the sauda book. It should also be examined that contract notes are issued for all the business conduct on behalf of the clients. The auditor should verify the trades executed with the bills raised.

2011-Nov [3] (b) State the functions of Energy Auditor.                                                                                              (5 marks)

Answer:

Functions of Energy Auditor: Energy auditing is as an activity that serves the purpose of assessing energy use pattern of a factory or energy consuming equipment and “identifying energy saving opportunities. In that context, energy management involves the basis approaches reducing avoidable losses, improving the effectiveness of energy use, and increasing energy use efficiency. The function of an energy auditor can be compared with that of a financial auditor. The energy auditor is usually expected to give recommendations on efficiency improvements leading to monetary benefits and also advise on energy management issues. Generally, energy auditor for the industry is an external party. The following are some of the key functions of the energy auditor.

   (i)         Quantity energy costs and quantities

 (ii)         Correlate trends of production or activity to energy costs

(iii)         Devise energy database formats to ensure they depict the correct picture— by product, department, consumer, etc.

(iv)         Advise and check the comptiance of the organisation for policy and regulation aspects.

 (v)         Highlight areas that need attention for detailed investigations

(vi)         Conduct preliminary and detailed energy audits which should include the following:

(a)    Data collection and analysis.

(b)   Measurements, mass and energy balances.

(c)    Reviewing energy procurement practices

(d)   Identification of energy efficiency projects and techno-economic evaluation

(e)   Establishing action plan including energy saving targets, staffing requirements, implementation time requirements, procurement issues, details and cost estimates.

(f)     Recommendations on goal setting for energy saving, record keeping, reporting and energy accounting, organisation requirements, communications and public relations.

1998- Nov [8] Write short notes on the following:

(b)    "Margins" or Deposits with Stock Exchanges.                                                                                                  (4 marks)

Answer:

‘Margins’ or ‘Deposits’ with Stock Exchange

The exchanges witness wide fluctuations in prices of securities over a period of time. in order to restrict excessive speculations and safeguard the interest of the investors, members are- required to maintain certain deposits with the exchange. The members are required to collect margins from their clients and deposit it with clearing house.

There are three types of margins:

   (i)         Mark to market margin: The objective of this margin is to cover a loss that a member may incur in case the transaction is closed out at the closing price of the trading day, which is different from the price at which the transaction has been entered into.

 (ii)         Volatility Margin: The volatility margin is imposed to curb excessive volatility in the market and to prevent building up of excessive outstanding positions.

(iii)         Gross Exposure Margin: Gross exposure margin is the percentage of net cumulative outstanding positions (purchases or sales) in each security that the member should keep with the exchange.

2000-May [8] Write short notes on Rolling Settlements.                                                                                              (4 marks)

Answer:

Rolling Settlements: A rolling settlement is one in which trades outstanding at the end of the day have to be settled (payments made for purchases or deliveries in the case of sale of securities)

Rolling settlement was first introduced at the over the counter exchange of India (OTCEI) on a T+3 basis. The specified business days are expressed as T+No. of days from the transaction date (T= Transaction date) for example, under “T+2” Rolling settlement, a transaction entered into a Monday should be settled on immediate Wednesday, when the pay-in or payout takes place.

Trades on each single day are settled separately from the trades done earlier or subsequent trade days. The netting of trades is done only for the day and not for multiple days. Under this scheme the pay- in and pay-out of funds are effected on same day.

For rolling settlement to be successful three essential prerequisites are:

1. Electronic trading of shares.

2. Equity derivatives.

3. Stock lending and borrowing schemes.

While rolling settlement is technically possible with physical certificates the infrastructure required is not forthcoming. At the stock exchange level, rolling settlement with physical certificates would involve daily pay-in, pay-out, withdrawal, daily auction and deposits of scrips. The introduction of rolling settlement would most, probably result in the demise of the badla system.

In case, a member fails to deliver the shares sold in rolling settlement, the stock exchange conducts an auction session on T+6, the meet the short fall created by non- delivery of shares. in this auction session, offers are invited from other members to deliver the shares sold by originally selling member since delivery has to be made to the buying member. In case no shares are received in auction, the sale transaction is closed-out at a close- out- price, determined by higher of the following:

Higher price recorded in the scrip from the settlement in which the transaction book place upto a day prior to the auction.  

or 20% above the closing price on a day prior to the auction.

In this case, the auction price/close-out and difference between sale price, if positive is payable by the seller. Who failed to deliver the scrips, in case, auction/ close out price is less than sale price, the difference is not given to seller but is credited to investor protection fund.

2002- May [8] Write short notes on Hit or take orders                                                                                                  (4 marks)

Answer:

Hit or take orders occur in screen-based trading in stock exchange, this is a variation of market orders. it allows for faster order execution without cluttering up the limit order book. This method converts the key strokes or mouse clicks of the broker into a limit order at the touch line price for particular scrip, without his having to place a limit order. Further all unexecuted orders of this type are automatically killed and are therefore not stored in the order book.

A broker interested in particular scrip would ask the system to display the touch line of that scrip. He would then operate certain predefined keys or mouse clicks which would be different for buy and sell orders. The system would ask the broker to identify the client and to quantify the order. The system, would then convert his buy or sell order for the quantity specified into a limit order and attach the touch line offer price for a buy order or a touch line bid price for a sell order. This order will be matched against jobber quotes and the order book for the quantity can be executed. The unexecuted quantity if, any will be killed and removed from the system.

2006 - Nov [8] Write short notes on the following:

(e)   Types of market under NEAT (National Exchange Automated Trading)                                                 (4 marks)

Answer:

Types of Market Under NEAT:

Broadly, there are four types of market under national exchange automated trading.

1.       Normal Market: All orders which are of the regular lot size or multiples thereof are traded in Normal Market.

2.       Odd Lot Market: An order is called, an odd lot order if the order size is less than the regular lot size, such orders have different settlement periods vis-a-vis normal orders.

3.       Spot Market: in all respects spot orders are similar to the normal market orders except that spot orders have different settlement periods vis-a-vis normal orders.

4.       Auction Market: Stock exchanges on behalf of their members initiate auctions to purchase from the market, the number of shares short deposited by the members. In this way, they complete the settlement process.

2002 - Nov [8] Environmental Audit.                                                                                                                                     (4 marks)

Answer:

Environmental Audit is an Assessment of the Nature and extent of any harm or detriment or any possible harm or detriment, which may be inflicted on any aspect of the environment by any activity process development programme, or any product chemical, or waste substance.

Audits may be designed to:

1.       Verity or other wise comply with environmental requirements

2.       evaluate the effectiveness of existing environmental management systems.

3.       assess risks generally; or

4.       assist in planning for future improvements in environment protection and pollution control.

The aspects to be considered while conducting an environmental audit are:

1.       Layout and design.

2.       Management of Resources.

3.       Pollution control systems.

4.       Emergent Safety system.

5.       Medical and Health care facilities.

6.       industrial hygiene.

7.       Occupational health.

8.       Information Assimilation and reporting system

9.       Compliance to the Regulatory mechanism.

10.   Concern for the Society.

2006 - Nov [4] (a) Enumerate the main areas to be covered by the auditor in the case of environment audit of an industrial unit.       (8 marks)

Answer:

Main Areas to be Covered in Environment Audit of industrial Unit:

1.       Layout and Design: The layout should be designed to allow adequate provisions for installing pollution control devices. it should also accommodate up gradation of pollution control measures.

2.       Resource Management:  Resources include air, water, land, energy, raw materials and human resources etc. Use of all are interlinked and the best- use in a harmonized manner results in, the best output and minimum waste.

3.       Pollution Control System: An effective system of pollution control should be in existence. The efficacy of the pollution control measure system should be ascertained.

4.       Emergency safety Arrangement: Safety arrangements should remain ale|1 all the time. Staff equipped with requisite awareness and alertness should be engaged to meet contingency.

5.       Medical & Healthcare & Industrial Hygiene: Adequate medical facilities should be maintained. A proper system should be established to eliminate industrial unhygienic state.

6.       Information Assimilation and Reporting System: information System should be strengthened to generate and its reporting system should be proper. A report of compliance of all statutory environmental law should be put to Board at regular intervals. .

7.       Regulatory Mechanism: Persons who are directly working with the system are generally unaware of the latest developments and requirements for the compliance of stipulations and standards prescribed by the various regulatory authorities.

8.       Environmental Impact Assessment: The system should be designed to accommodate deviations in predictions from the actual happening.

9.       Concern for the Society: This aspect should be considered to make a balance between its own development and the society concern

10.   Occupational Health: Safeguards against occupational Health hazards should be made available for all the workers.

2007 - May [8] (d) Contents of Audit report of Mutual Fund.                                                                                      (4marks)

Answer:

Contents of Audit Report of Mutual Fund

The auditor’s report shall comprise the following:

1.       Whether he has obtained all information explanations which, to the best of his knowledge and belief, were necessary for the purpose of the audit.

2.       Whether the balance sheet and revenue account give a fair and true view of the scheme, state of affairs and surplus or deficit in the fund for the accounting period to which the Balance sheet or, as the case may be the Revenue account relates.

3.       Whether the statement of account has been prepared in accordance with accounting policies and the standards as specified in Ninth Schedule.

Chapter#10                                          Audit of Public Sector Undertaking

PROPERTY AUDIT

Meaning	·      “Propriety Audit stands for verification of transactions on the test of public interest, commonly accepted customs & standards of conduct”. ·      Propriety is that which meets the tests of public interest, commonly accepted customs; and standards of conduct and particularly as applied to professional performance, requirement of law. Government regulations and professional codes” — E.L. Kohler. ·      If shifts the emphasis to substance of transaction. It requires transactions (mainly expenses) to conform to certain general principles: 1.       Expense is not prima facie more than the occasion demands and same degree of vigilance is exercised as should be exercised in respect of his own money. 2.       Authority exercises its power of sanctioning expenses to pass an order which will not accrue to its own advantage. 3.       Funds not utilized for benefit of a particular person /group. 4.       Apart from agreed remuneration, no other avenue is kept open to benefit management personnel, employees and others.
Problems in property audit	·      It is a moral term. ·      Auditing requires verifiable propositions, establishment of which is very difficult for propriety audit. ·      It has inherent element of subjectivity. ·      However, CAG has developed norms of propriety for expenses of public funds but may not apply to transactions of private sector. ·      If management formulates norms of propriety for the entity, the element of subjectivity will get reduced. ·      For example- Travel by air (It may be judged as wasteful. However, it becomes feasible due to time saving). ·      The judgment of auditor shouldn’t be subjective as far as possible.
Property element u/s 227 (1A)	·      Whether terms on which secured loans and secured advances have been made are not prejudicial to the interests of the company or its members. Conditions like security, interest, repayment period and other business considerations. ·      Whether transactions of company which are represented merely by book entries are not prejudicial to the interest of company, i.e. effects of book-entries, unsupported by transactions, etc. ·      Whether investment of company (other than Banking/Investment company) in form of share, debenture and other securities have been sold at a price lower than its cost, i. e. to see reasonableness of decision to sell at loss. ·      Whether personal expenses have been charged to revenue.
Property element under cost audit report	·      Matters appearing clearly wrong in principle or apparently wrong. ·      Cases where company’s funds have been used in negligent/inefficient manner. ·      Factors which could have been controlled but haven’t been, thus, resulting in increase in cost of production.
Property elements in CARO, 2003	Has the company granted any loans, secured or unsecured to companies, firms or other parties covered in the register maintained under Section 301 of the Act. lf so, give the number of parties and amount involved in the transactions. [Paragraph 4 (iii) (a)] Whether the rate of interest and other terms and conditions of loans given by the company, secured or unsecured, are prima-facie prejudicial to the interest of the company. {Paragraph 4 (iii) (b)] Whether the receipt of the principal amount and interest are also regular. [Paragraph 4 (iii) (c)] If overdue amount is more than one lakh, whether reasonable steps have been taken by the company for recover of the principal and interest. [Paragraph 4 (iii) (d)]
	Whether the particulars or arrangements referred to in Section 301 of the Act have been entered in the register required to be maintained under that section. [Paragraph 4 (v) (a)] Whether transactions made in pursuance of such contracts or arrangements have been made at prices which are reasonable having regard to the prevailing market prices at the relevant time. [Paragraph 4 (v) (b)] [This information is required only in case of transactions exceeding the value of five lakh rupees in respect of any party and in any one financial year.]
	Is the company regular in depositing undisputed statutory dues including Provident fund, Investor Education and Protection Fund, Employees’ State insurance, Income-Tax, Sales-tax, VAT, Service tax, Wealth tax, Custom Duty, Excise Duty, Cess and any other statutory dues with the appropriate authorities and if not, the extent of the arrears of outstanding statutory dues as at the last day of the financial year concerned for a period of more than six months from the date they became payable, shall be indicated by the auditor. [Paragraph 4(ix) (a)]
	In case dues of Income Tax/ Sales Tax/ Wealth Tax/ Service Tax/ Custom Tax Excise Duty/ Cess have not been deposited on account of any dispute, the amounts involved and the forum where dispute is pending shall be mentioned. [Paragraph 4 (ix) (b)]
	Whether adequate documents and records are maintained in cases where the company has granted loans and advances on the basis of security by way of pledge of shares, debentures and other securities; if not, the deficiencies to be pointed out. [Paragraph 4 (xii)]
	Whether the company has given any guarantee for loans taken by others from bank or financial institutions, the terms and conditions whereof are prejudicial to the interest of the company [Paragraph 4(xv)]
	Whether the company has made any preferential allotment of shares to parties and companies covered in the Register maintained under Section 301 of the Act, and if so whether the price at which shares have been issued is prejudicial to the interest of the company. [Paragraph 4 (xviii)]

Question:

State the salient features of the directions to the auditors of Government companies issued by the Comptroller and Auditor General of India u/s 619(3) of the Companies Act, 1956 in relation to:

(i) Assets and Investments, and

(ii) Inventory and Contracting                                                                                                                 (8 Marks)(Final Nov 2006)

Answer:

(i) Assets and Investments:

      (i)            Whether the property and assets registers are posted upto date and are reconciled with the financial books?

    (ii)            Have the dates of installation and commissioning of plant and Machinery been clearly fixed by the competent authority?

   (iii)            Examine whether the company has a system of monitoring the timely recovery of outstanding dues? Highlight the significant instances of failure of the system, if any.

  (iv)            State whether the cash and imprest balances were physically verified during the year on a regular basis by an authorized office? Highlight the inadequacies in this regard, if any.

    (v)            Indicate whether the company has laid down an investment policy? If yes, please indicate the salient features thereof.

  (vi)            Whether the deposits with Banks/ financial Institutions and others have been in accordance with laws. rules, regulations etc.? Further state whether these were properly authorized by the competent authorities.

(ii) Inventory and contracting:

      (i)            Examine whether the company has prescribed the following in regard to the stores:

a. Maximum and minimum limits of stores and spares.

b. Economic order quantity for procurement of stores.

    (ii)            Examine whether the company usually makes advance payments to suppliers contractors? If so indicate whether the company has an efficient system for monitoring and adjusting such advances?

Chapter#11                      Internal Management and Operational Audit

2011- May [7] Attempt the following:

(d)   General objectives of an operational audit.

Answer:

General objectives of operational audit are as follows:

     (i)            Appraisal of controls: Operations and the results in which management is interested are largely a matter of control. If controls are effective in design and are faithfully adhered to the result that can be attained then they will be subject to the other limiting constraints in the organization.

   (ii)            Evaluation of performance: The operational auditor cannot be expected to possess technical background in so many diverse technical fields obtaining even in one enterprise. Even when examining of appraising performance or reports of performance the operational auditor’….. is invariably fixed on control aspects.

 (iii)            Appraisal of objectives and plans: In performance appraisal, the operational auditor is basically concerned with effectiveness, efficiency and economy with which operations are being carried on and not so much with how well technically the operation are going on.

  (iv)            Appraisal of organizational structure: In evaluating organizational structure, the operational auditor should consider whether the structure is in conformity with the management objectives and it is drawn up on the basis of matching of responsibility and authority. He should also analyse whether line of responsibility has been fixed whether delegation of responsibility or authority is clear and there is not overlapping area.

2008- May [4] Answer the following:

What are the major differences between Financial and Operational Auditing?                                                (8 marks)

Answer:

The major differences between financial and operational auditing can be described as follows:

    (v)            Purpose: The financial auditing is basically concerned with the opinions that whether the historical information recorded is correct or not, whereas the operational auditing emphasizes on effectiveness and efficiency of operations for future performance.

  (vi)            Area: Financial audits are restricted to the matters directly affecting the appropriateness of the presented financial statements whereas the operational audit covers all the activities that are related to efficiency and effectiveness of operations directed towards accomplishment of objectives of organisation.

 (vii)            Reporting: The financial audit report is sent to all stock holders, bankers and other persons having interest in the organisation. However, the operational audit report is primarily for the management.

The main objective of operational auditing is to verify the fulfillment of plans, and sound business requirements. Operational auditing is considered as specialized management information tool. Operational auditing is essentially a function of internal auditing staff. Operational auditing is a systematic process of evaluating an organisation’s, effectiveness, efficiency and economy of operations under management control and reporting to appropriate persons, the result on the evaluation along with recommendations for improvements. Operational audit concentrates on effectiveness, efficiency and economy of operations and therefore it is future oriented. It does not end with the reporting or the findings but also recommends the steps for improvements in future. Operational auditing is not different from internal auditing, it is merely an extension of internal auditing into operational areas.

While in financial auditing, the concentration is more in the financial and accounting areas to ensure that possibilities of loss, wastage and fraud are minimized or removed. In financial auditing, an auditor is called upon to review the financial statements of an enterprise to ascertain whether they reflect true and fair view of its state of affairs and of its working results. He may analyses the operations of an enterprise to appraise their cost effectiveness and also he may seek evidence to review the managerial performances.

1998-Nov [7] (a) Mention the nature and causes of behavioural problems livery to be faced by Management auditor.    (8 marks)

Answer:

Behavioural aspects encountered in a Management Audit

Financial auditors deal mainly with figures. Management auditors deal mainly with people. There are many causes for behavioural problems arising in the review function of management audit. i Particularly, when management auditors performs comprehensive audit of operations, they cannot be as well informed about such

operations as a financial auditor in a financial department. Operating processes may be unfamiliar and complex. The operating people may be speaking a language and using terms that are foreign to the auditor's experience. The nature and causes of behavioural problems that the management auditor is likely to face in the discharge of the review function that is expected of him and possible solutions to overcome these problems are discussed below:

1. Staff/Line conflict: Management auditors are staff people while the members of other departments are line people. Management auditors tend to discount the difficulties the line staff may face, if called on to act on the ideas of management auditors. Management auditors are specialists in their field and they may think their approach and solutions are the only answers.

2. Control: The management auditor is expected to evaluate the effectiveness of controls, there is an instinctive reaction from the auditee that the report of the auditor may affect them. There is a fear that the action taken based on the management audit report will affect the line people. it breeds antagonism. The causes are as under:

      (i)            Fear of criticism stemming from adverse audit findings.

    (ii)            Fear of change in day to day working habits because of changes resulting from audit recommendations.

   (iii)            Punitive action by superior prompted by reported deficiencies.

  (iv)            Insensitive audit practices.

    (v)            Hostile audit style.

Solution to behavioural problems: The following steps may be taken to overcome the aforesaid problems:

      (i)            To demonstrate that audit is part of an overall programme of review for protective and constructive benefit.

    (ii)            To demonstrate the objective of review is to provide maximum service in all feasible managerial dimensions.

   (iii)            To demonstrate the review will be with minimum interference with regular operation.

  (iv)            The responsible officers will be involved in the process of review of the findings and recommendations before the audit report is formally released.

    (v)            it is essential to create an atmosphere of trust and friendliness so that audit reports will be understood in their proper perspective.

Finally, it needs hardly any emphasis that there should be right management culture, enlightened, auditees and auditors of the right calibre. May be to expect a combination at all times of all the three is asking for the impossible. But, a concerted effort by the management, auditors and auditees to achieve a more acceptable climate would go a long way to achieve the goal.

2007- May [7] (b) K Ltd., requires you to organize a Management audit program. Briefly ate a plan of action.

                                                                                                                                                                                                             (8 marks)

Answer:

Organizing a Management Audit for K Ltd.: The key requirement for a successful Management audit program would be the approval and support of the top management to initiate. Accordingly the following shall be the matters that should be considered while organizing the Management Audit of K. Ltd.

     (i)            Devising a statement of policy: in consultation with the top Management, a policy statement on Management should be issued. The policy should ideally cover the scope, objective, the authority of the management audit function. In short the policy should be drafted to become a charter of Management Audit.

   (ii)            Location of audit function within the organization: The hierarchical status of the Management auditor and his team should be clearly defined.

 (iii)            Allocation of personnel: The Management audit team should comprise of personnel who have adequate experience on all the facets of the organization, ideally it should comprise of technical audit team.

  (iv)            Staff Training: In order to maintain qualitative standards, adequate and continuous training should be offered to the Management audit team.

    (v)            Time and other aspects: While planning management audit adequate consideration should be given to time & cost involved in conducting the audit.

  (vi)            Frequency of audit: Depending on the pace of change that happens in that industry, the frequency of the Management audit should be determined. This can be fixed in consultation with the top Management.

Chapter#12                                                                                     Investigation

STEPS IN INVESTIGATION

Determine scope/objectives of Investigation

Formulate Investigation programme.

Examine/ Study various records

Analysis, Interpretation of finding.

Preparation of report.

INVESTIGATION ON BEHALF OF INCOMING PARTNER

Main Purpose

·      Sometimes, the incoming partner appoints the investigator to examine the affairs of the partnership firm. ·      Here the incoming partner is interested in judging whether the terms and conditions offered to him are reasonable. ·      On the basis of investigation, he wants to decide whether it is feasible and desirable for him to join the said firm.

Considerations by investigator

(i)            First of all, he should ascertain the reasons for offer of admission to a new partner.     (ii)            Then he should study the history and growth pattern of the firm.    (iii)            He should study financial statements of previous 3-5 years to determine its profitability in past years.   (iv)            Compare the rate of return in the said firm with the common rate of return in the said field.     (v)            He should also examine assets and liability position of the firm.   (vi)            He should pay proper attention to any hidden liability or overvalued asset.  (vii)            Investigator should carefully study the provisions of the partnership deed. (viii)            Special attention should be given to some specific points w.r.t. partnerships, such as profit sharing ratio, interest on capital etc.   (ix)            Manner of computation of goodwill on admission and retirement of a partner should be ascertained.     (x)            The reputation of the firm as well as that of partners should be properly ascertained.   (xi)            He should study the quality i.e. skill and competence of key management personnel.  (xii)            He should study the important contracts etc. For example, any lease contract.

INVESTIGATION ON BEHALF OF BANK PROPOSING TO ADVANCE LOAD TO ACOMPANY

1.    Main Purpose	Whenever a prospective borrower approaches the bank for loan, the bank is primarily interested in knowing ·      the purpose for which a loan is required. ·      the source from which it would be repaid; and ·      the security offered by the borrower
2.       Investigator should obtain knowledge on	·      The loan proposal submitted by borrower. ·      The purpose for which the loan is required and its repayment schedule. ·      The creditworthiness and reputation of the board of directors. ·      The Memorandum or the Articles of Association of the company to assure that it is in fact empowered to borrow money. ·      The historical background and growth trend of the company during the past years. ·      Other loan obligations of the company, if any to check whether the company is regular in paying instalments thereon. ·      The growth and profit prospects of the company considering present economic scenario.
3.       Examination of Profitability and stage of affairs.	·      The investigating accountant should prepare a condensed income statement from the P&L account for the previous five years so that it can be ascertained whether the company has strong past as far as profitability is concerned. ·      Moreover, he should compute profitability and financial ratios such as Debt equity and current ratios so that overall position of the company can be judged. ·      The investigator should also study the cash flow statements of the company to decide whether there has been consistent cash flow from the operating activities. ·      He should study various items of balance sheet. Assets are examined to ensure their existence, ownership and proper valuation. Special attention should be given to possibility of their overvaluation in the financial statements ·      intentionally to show strong financial position. It should also be ascertained that various assets are properly insured. ·      Liabilities should be ascertained to ensure the company’s present and future obligations. It should also be examined whether all liabilities have been included by the management. ·      Moreover, he can devise projected statements so that recoverability of loan can be judged. ·      These will help the bank to decide whether to grant loan to the applicant or not.

Investigation of Frauds

1.    Cash Receipts	(i)            First of all different sources from which income is generated, should be ascertained.     (ii)            Sometimes the management/A Employees do not account for income from some source at all. Thus, it should be ascertained whether income from all sources is accounted or not.    (iii)            Income from small or negligible source like sale of old newspaper should be carefully examined as chances of manipulation in such accounts are high.   (iv)            Copies of receipts should be carefully checked.     (v)            Receipts from customers should also be properly examined.   (vi)            Unreasonable cash discounts shown in the books should be properly enquired into.  (vii)            It should also be ensured that receipts are serially numbered and all receipts have been accounted for. (viii)            In case of any cancelled receipt, its original copy should be properly scrutinized.
2.    Cash Payments	(i)            Internal Controls on cash payment should be carefully examined to ensure that all payments are properly authorized by competent authority.     (ii)            Acknowledgement for payment should be matched against the bill raised by the relevant party.    (iii)            Payments by bearer cheque can be manipulated, thus such payments should be carefully examined.   (iv)            Small payments such as patty cash expenditure should be thoroughly examined.     (v)            Any unusual payment such as exceptional rise in traveling expenses as compared to that of previous year should be further inquired into.   (vi)            Possibility of fake payment to dummy workmen is particularly high in some industries such as construction houses. Thus investigator should carefully examine internal controls over this area such as biometric entry.  (vii)            Alterations made in payment records should also be carefully examined. (viii)            Payments to related parties should be specially enquired as possibility of manipulations is high therein.
3.    Balance in Customers Ledger	(i)            Trace the entries in order book with the corresponding record in sales daybook.     (ii)            Examine customer’s account to ensure that they have been properly debited at appropriate amount.    (iii)            The amounts written off as bad debt should be carefully examined.   (iv)            Any unusual discounts given to them should be thoroughly enquired into and written representation should be obtained from appropriate authority in this connection.     (v)            Attention should be given to the teeming and lading frauds in such accounts.   (vi)            Balance confirmation from customers should be obtained.
4.    Balance in Suppliers Ledger	(i)            Goods inwards book should be examined w.r.t. entries made in supplier’s account.     (ii)            Examine that credits have been raised in respect of actual goods received.    (iii)            Carefully examine whether rebates given by them have been appropriately adjusted or not.   (iv)            Special attention should be given to such accounts where supplier is a related party.     (v)            Balance confirmation from them should be obtained to confirm amount due to them.
5.    Stock Defalcation	(i)            Confirm whether there is strict internal controls over receipt, issue & storage of stock.     (ii)            There should be stringent controls w.r.t. high value stock.    (iii)            The honesty and ethical values of persons in charge of stores should be inquired into because generally fraud in stores is possible through collusion among employees.   (iv)            Investigator should carefully go through the various records relating to inventories.     (v)            He should physically check the quantities and reconcile them with those shown in records.   (vi)            Any shortages observed therein should be further investigated.  (vii)            Small items of inventories should also be examined to rule out the possibility of pilferages.

DUE DILIGENCE

1.    Meaning

·      This term is used in relation to corporate restructuring. ·      Corporate restructuring includes internal reconstruction, amalgamations, mergers, joint ventures, etc. ·      However, Corporate restructuring involving more than one party should be planned properly. Thus, in such cases, due diligence is conducted. ·      Thus, due diligence review is performed to check whether it is feasible and desirable to acquire/ merge the unit.

2.    Components of D.D.

Discipline-wise it can be classified as follows: ·      Commercial / Operational Due Diligence: i.e. to check whether the target is commercially feasible. ·      Financial Due Diligence: To check the financial feasibility of the target by examining the financial statement and devising their profit trends. ·      Tax Due Diligence (Direct and Indirect): Whether the target is paying appropriate taxes on a regular basis. Moreover, ascertain what the tax benefits available to target are. ·      Information System Due Diligence: Whether information system of target is providing right information to the right management at the right time in the right quantity. ·      Legal Due Diligence: Whether the target is complying with all the applicable laws and regulations. ·      Environmental Due Diligence: To check the compliance of target with environmentally related rules and regulations. ·      Personnel Due Diligence: To ascertain whether the employees of target company are competent and efficient.

FINANCIAL DUE DILIGENCE

Relation with other D.D.	Sometimes, the financial due diligence is interpreted as Complete Due diligence, since it is supposed to ascertain the financial implication of all other Due Diligence. This is however not appropriate. It is less than over all Due Diligence review.
Coverage	Brief History of Target and Background of its Promoters	The author should begin the financial due diligence by looking into the history of the company and background of its promoters. The following points should be considered by the auditor: ·      How the company was set-up and who were the promoters; ·      Market share enjoyed by the target in past and change therein; ·      Any regulatory requirement in past that may have impact on the business of the target. ·      Relevant inquiry about the history of target’s business, product, expenses, suppliers, markets, etc.
	Accounting Policies	The auditor should consider the following points in relation to Accounting Policies: ·      What Accounting Policies are followed by the target. ·      Whether Accounting Policies followed by the target are appropriate. ·      Consider the effects of the recent changes in Accounting Policies. ·      Whether target has not changed its Accounting Policies recently with an intention to sell itself. ·      The areas in which Accounting Policies followed by the target and the acquiring enterprises are different and impact of such difference.
	Review of Financial Statement	The following points should be considered: ·      Whether the financial statement is prepared in accordance with relevant financial reporting framework required for preparation and presentation of financial statements. ·      Review the operating result of the target in detail, as the price of the target is largely based upon its operating results. ·      Consider the presence of any extra-ordinary item of income or expenses that might have affect the operating results. ·      Compare the actual figures with the budgeted figures. ·      Consider the basis upon which assets have been valued and liabilities have been recognized. ·      Check whether the net worth of the business has been arrived by taking into account the impact of over / under valuation of assets and liabilities. ·      Pay particular attention to the valuation of Intangible assets. ·      Look specifically for any hidden liabilities or overvalued assets.
	Taxation	He should consider the following points in relation to taxation: ·      Whether company is regular in paying various taxes to the Government. ·      Whether the registration of the enterprises has been made under the various tax law. ·      Consider the tax effects of the merger or acquisition. ·      Verify whether any tax holiday is available to the target.
	Cash Flow	He should review the cash generating abilities of the target company by considering the following points: ·      Whether the company is able to meet its cash requirement through internal sources or it has to seek external help. ·      Whether the company is able to honor its commitments with its creditors, bank, Government, Stake-holders, etc. ·      lf the company is able to generate cash from its debtors on a timely basis. ·      Whether any fund lying idle with the company. ·      Whether company is reaping more benefits out of the available funds.
	Financial Projections	The following points should be considered: ·      The auditor should obtain the projection of next 5 years from the target company. ·      Auditor should ask them to give projections on optimistic, pessimistic and most likely basis. ·      Evaluate the assumptions used in preparation of financial projection. ·      Mention in the report if auditor feels that the projections provided by the target are not achievable or aggressive.
	Management and Employees	In his regard, he should consider the following points: ·      Check whether all the Employee benefits like P.F., ESI, Gratuity leave encashment, etc. have been properly paid or provided. ·      The auditor should consider whether the assumption regarding increase in salaries etc. are reasonable. ·      Consider whether all the eligible employees have been covered for PF, ESI, etc ·      Check whether the pay packages of the key employees are appropriate or need to be revised in near future. ·      Identify those key employees who will not continue after the acquisition.
	Statutory Compliance	This is the aspect that the auditor should investigate in detail: ·      Make a list of the various laws that are applicable to the entity. ·      Check whether company is liable for any Punitive charges for non-compliance of such laws.

CONTENTS OF DUE DILIGENCE REPORT

Ø  Summary Ø  History of Target Ø  History of Promoters Ø  Review of Operational D.D. Ø  Review of Financial D.D. Ø  Review of Tax D.D. Ø  Review of Information System D.D. Ø  Review of Legal D.D. Ø  Review of Environmental D.D. Ø  Review of Personnel D.D. Ø  SWOT Analysis. Ø  Suggestion.

Question:

Your client is contemplating taking over a manufacturing concern and desires that in the course of due diligence review, you should look specifically for any hidden liabilities and overvalued assets.

State (in brief) the major areas you would examine for the above. (8 Marks)(Final Nov 2005)

(Final Nov 2010)

Answer:

Due diligence is undertaken to review all important aspects like financial, legal, commercial, etc. before taking any final decision in the matter. As far as any hidden liabilities or overvalued assets are concerned, this shall form part of such a review. Normally, cases of hidden liabilities and overvalued assets are not apparent from books of accounts and financial statements.

Hidden liabilities

v  Product and warranty liabilities, product returns & discounts, liquidated damages, etc.

v  Contingent liabilities not shown in books

v  Any show cause notice, which have not matured into demands but may be material and important.

v  Letters of comforts given to banks and financial institutions

v  Tax liability under direct and indirect taxes.

v  Long pending sales tax assessment.

v  Cases of custom duty where only provisional assessment has been made and final assessment is yet to completed.

v  Claims against the company including third party claims.

v  Future lease liabilities.

v  Agreement to buy back shares at a stated price.

v  Labour claims under negotiations.

v  Unfunded retirement benefit of employees.

Overvalued assets: The auditor shall have to specifically examine the following areas:

v  Obsolete, slow and non-moving inventories and inventories valued above net realizable value, if any.

v  Obsolete and unused plant and machinery and their spares.

v  Investment shown at cost whose market value is much lower.

v  Assets shown in books above market value due to capitalization of revenue expenditure.

v  Intangibles of no value.

v  Uncollectable receivables.

v  Investment carrying very low rate of return.

v  Assets under litigation.

Chapter#13                                                                                      Peer Review

INTRODUCTION

Ø  The concept of Peer review first came into existence in March 2002.

Ø  Peer review is conducted to assure that profession is conscious of its responsibilities and strive its best to ensure that highest standards are observed by all practicing members rendering audit and attestation services to the society.

Ø  It involves examination of the systems and procedures of the PU (Practice Unit).

Ø  To ensure that in professional assignments, the member of ICAI,

(a) Comply with technical standard, and

(b) Have proper system to maintain quality of work.

PEER REVIEW PROCESS

Stage I: Planning	Empanelment of Reviewers	A panel of reviewers is maintained by the Peer Review Board. He should be: (a)   a member of ICAI; (b)   possessing at least 10 years experience of audit; and (c)    currently active in the practice; and (d)   free from any obligation or conflict or interest in the reviewed firm or its partners or personnel.
	Selection of the Practice Unit	PU’s are selected for Peer Review on a random basis, as per applicability.
	Intimation to the Practice Unit	An Intimation in writing is sent by the Board to the practice unit informing of its selection for peer review. The following documents shall also be sent to the practice unit. (i) A copy of the statement on Peer Review. (ii) A panel of three reviewers. (iii) A copy of the questionnaire.
	Initial Communications by the Practice Unit	·      The practice unit is required to communicate to the Board, its choice of the reviewer within a period of 15 days from the receipt of intimation. ·      The practice unit is also required to complete and send the questionnaire to the reviewer within one month of the receipt of the intimation, along with a complete list of its attestation service engagement clients. ·      The reviewer is entitled to seek such other information also as the reviewer considers necessary.
	Selection of Sample Attestation Service Engagements	·      The reviewer also selects a sample of attestation service engagements on random basis for review. ·      The reviewer is required to select a sample that is representative of the practice unit’s client portfolio.
	Communication of sample selection	·      The reviewer sends a written intimation to the practice unit about the sample selected by the reviewer, two weeks in advance, from the date the reviewer intends to begin the review. ·      The intimation also contains a request for ready availability of that relevant records.
	Confirmation of visit	·      The reviewer, in consultation with the practice unit, is required to fix the date(s), for on-site review. ·      Date(s) are to be fixed in a manner so that the peer review process is completed within four months of the receipt of intimation by the practice unit.
Stage II: Execution	·      Such visits will be conducted at the practice unit's head office. ·      The reviewer may not visit a branch (outside the city/ town limits from head office) of practice unit unless the turnover of attestation functions of that branch is more than one million rupees. ·      In such a case, he may instruct the practice unit to get relevant records to the head office.
	Initial Meeting	·      An initial meeting should be held between the reviewer and the partner (designated by the practice unit for the purpose) or the sole proprietor of the practice unit. ·      The purpose of the meeting is to confirm the accuracy of responses to the questionnaire. ·      The reviewer should have a full understanding of the systems and procedures at the conclusion of the meeting.
	Compliance Review	·      The reviewer should carry out the compliance review of the five general controls, i.e., independence, maintenance of professional skills and standards, outside consultation, staff supervision and development and office administration. ·      The reviewer should review these general controls to gain an understanding of the working of the practice unit and specific control procedures existing at the practice unit. ·      Apart from making inquiries with the personnel concerned, the reviewer may adopt other procedures to establish the fairness of the responses by the practice unit to the questions. Selection of other procedures or techniques is a matter of the reviewer's judgment.
	Selection of Attestation Service Engagements	·      The number of attestation service engagements to be reviewed depends upon the number of practicing members involved, degree of reliance to be placed on general controls and the total number of engagements undertaken by the practice unit during the period under review. ·      The reviewer may modify the initial sample selected for review in consultation with the practice unit at the execution stage.
	Review of Records- Compliance and substantive Approach	·      The reviewer may adopt the compliance approach in determining the nature, timing and extent of the substantive review procedures to be applied in review. ·      The reviewer should conduct adequate compliance procedures to gain an evidence that those general controls on which the reviewer intends to rely operate effectively. ·      Based on the results of compliance procedures, the reviewer concludes either to rely or not to rely on the general controls. ·      The compliance approach may not be warranted if the size of the firm is small or medium. In such a case, the reviewer may adopt only substantive approach for conduct of review. ·      Review of working papers helps in deciding as to whether the attestation services have been undertaken in accordance with the prescribed technical standards.
	Obligations of the Practice Unit	·      The Statement requires the practice unit to produce to the reviewer or afford him access to, any record or document which contains information relevant to the peer review. ·      The practice unit is also expected to provide all assistance to reviewer. ·      Reviewer may take the abstracts of the documents maintained by the practice unit, but in order to ensure the confidentiality of client's file with the practice unit, the reviewer shall not carry extracts of the client's files or records acquired by him while conducting peer review, as part of his working papers.
Stage III: Reporting	Preliminary Report of Reviewer	·      At the end of the on-site review, the reviewer is required to send a preliminary report to the practice unit before making any report to the Board on the areas in case systems and procedures of the practice unit reviewed have been found to be deficient or where non-compliance has been noticed by the reviewer. ·      The reviewer has to take care that the report does not contain name of any individual of the practice unit. However, no preliminary report is required in case no deficiencies or non- compliance are noticed by the reviewer. ·      The preliminary report is addressed to the practice unit. ·      If the reviewer draws a conclusion that there existed a limitation on scope of review, the fact, should also be communicated to the practice unit through the preliminary report. ·      The reviewer should prepare the report on his letterhead. ·      The report should be dated and also contain the reviewer's signature and membership number and reviewer's code number allotted by the Board.
	Reply to Preliminary Report	·      The practice unit has to send its representations, in writing, to the reviewer, on the areas mentioned in the preliminary report. ·      The reply to the preliminary report should be sent by the practice unit within a period of 21 days from the receipt of the preliminary report from the reviewer.
	Qualified Report of the Reviewer	·      If the reviewer is not satisfied with the reply of the practice unit, the reviewer has to submit a qualified report to the Board. ·      The report so submitted should clearly indicate that it is a "qualified report". ·      The Board may then order after twelve months for follow up review. ·      He is then required to submit the follow up report to the Board for consideration.
	Final report of the Reviewer	·      If the reviewer is satisfied with the reply of the practice unit, the reviewer shall submit his final report to the Board. ·      The final report should incorporate the findings as discussed with the practice unit.

Chapter#14                                                      The Sarbanes-Oxley Act 2002

INTRODUCTION

Enron scandal	·      Enron was an American energy Company, mainly engaged in Production of Energy, gas and Pulp and Paper. ·      7th Fortunes I00 best American Companies of U.S. ·      It claimed revenue of 111 Billion. ·      Assets and Profits inflated. ·      Profits and Revenue generated due to transactions with related parties. ·      Understatement of Liabilities. ·      Insider Trading. ·      Sherron Watkins (Whistle blower). ·      ‘Knneth Lay’ (CEO) and ‘skilling’ were mainly charged for fraud. ·      Artthur Anderson (Name of firm) was their Auditor and Consultant both. They were charged for negligence in performing Professional duties. ·      Price of share of Enron dropped from $90 to $50. Bankrupt in late 2001. ·      Arthur Anderson facing many Civil and Criminal cases against them.
Worldcom scandal	·      US Second largest long distance Phone Company. ·      It showed false financial growth and Profitability to raise its share price. ·      Expenditure of $7 billion had been capitalized. ·      Its revenue was inflated by $2 billion. ·      Assets were inflated by $ 11 Million. ·      Security Exchange Commission started Investigation in 2002. ·      As a result, Major frauds were revealed and finally in 2004. it was declared Bankrupt.
Effect	·      These scandals resulted in decline of public trust in accounting and reporting practices. ·      The Sarbanes-Oxley Act of 2002, also known as the Public Company Accounting reform and Investor Protection Act of 2002 and commonly called SGX or Sarbox is a United States federal law passed in response to a number of major corporate and accounting scandals including those affecting Enron and Worldcom. ·      The Act establishes a new quasi-public authority, the Public Company Accounting Oversight Board for overseeing, regulating, inspecting and disciplining accounting firms in their roles as auditors of public companies. ·      The Act covers issues such as auditor independence, corporate governance and enhanced financial disclosure.
Major provisions of SOX	The Sarbanes-Oxley Act’s major provisions include the following: ·      Creation of the Public Company Accounting Oversight Board (PCAQB); ·      A requirement that public companies evaluate and disclose the effectiveness of their internal controls, as they relate to financial reporting and that independent auditors for such companies “attest” to such disclosure. ·      Certification of financial reports by chief executive officers and chief financial officers; ·      Auditor Independence; ·      A requirement that companies listed on stock exchanges have fully independent audit committees; ·      Ban on most personal loans to any executive officer or director; ·      Accelerated reporting of insider trading; ·      Prohibition on insider trades during pension fund blackout periods; ·      Additional disclosure; ·      Enhanced criminal and civil penalties for violation of securities law. ·      Significantly longer maximum jail sentences and larger fines for corporate executives who knowingly and willfully misstate financial statements; ·      Employee protections allowing those corporate frauds whistle blowers who file complaints with OSHA within 90 days.

SOX 404 REQUIREMENT

Client Management Must	·      Document and test the Internal Control over financial Reporting. ·      Issue an annual assertion on the effectiveness of Internal Control over Financial Reporting.
External Auditor must	·      Determine nature, timing and extent of testing. ·      Review work performed by Management. ·      Perform some Independent tests of control. ·      Attest and report on: Ø  Management 404 assertion process. Ø  Design and effectiveness of Internal Controls.
Assertions	In order to make the assertion, the client must: ·      Document and evaluate the design of controls. ·      Evaluate the operating effectiveness of significant control. ·      Document the result of the evaluation. ·      Identify significant deficiencies or Material weakness. ·      Communicate the findings (Material Weaknesses) to Independent Auditors.

INFORMATION TECHNOLOGY AND SOX 404

Relation	·      The financial reporting processes of most organizations are driven by IT systems. ·      Few companies manage their data manually and most companies rely on electronic management of data, documents and key operational processes. ·      Chief information officers are responsible for the security, accuracy and the reliability of the systems. ·      ERP (Enterprise Resource Planning) are deeply integrated in the initializing, authorizing processing and reporting of financial data.
COSO framework	The COSO framework defines five areas. The objectives of COSO Framework aim at:  1. Operational Effectiveness.  2. Financial Reporting (Better and in timely manner).  3. Compliance with Regulatory Requirements.
	Components of internal Control Framework as defined by COSO are as follows:
	Control Environment	As per the Requirements of COSO framework, the control environment in the organization should be such that the top Management should assume ‘its full responsibility for entire Internal Control structure.
	Risk Assessment	The Management should undertake the Risk Assessment Procedure. It means that they should evaluate Internal and External factors that may have an Impact on the organization.
	Control Activities	The Control Activities are specific Policies and Procedures which are undertaken to ensure correctness of some specific assertions. It helps the management to reduce the risk to an acceptably low level.
	Information and Communication	The management should ensure that relevant information is identified and communicated in a timely manner to the Responsible Officer.
	Monitoring	Monitoring refers to the process undertaken by Management to determine whether I.C. System is adequate or not.
Information Technology & SOX 404 SUMMARY	Section 404: Requirement 1.       I.C. Report by Management.                                                 Attested by Auditor                                                       Filed in SEC 2.       Now-a-days most of the Companies maintain their accounts in CIS. 3.       Those Internal Controls are different from those in Manual System. 4.       I.C.                 General I.C.                 Application I.C. 5.       Thus management should evaluate whether their I.C. relating to financial Reporting in CIS are adequate. 6.       In CIS 5 factor as per COSO framework to be ensured.

IMPLEMENTATION OF DISCLOSURE CONTROLS AND PROCEDURES

·      Disclosure Controls and Procedures are meant to ensure that all the information required by law to be included in the periodic reports filed with the SEC is made available to those responsible for preparing them in a complete and timely fashion.

·      The Disclosure Controls and Procedures should be crafted in such a way that they are easy to follow and practical to implement.

·      They should be in writing and should be customized to reflect the operations of the company and its particular risk profile.

·      A list of suggestions is given below:

Disclosure Committee	A disclosure committee may be established charged with assisting the CEO and CFO in developing, writing and overseeing Disclosure Controls and Procedures.
Inventory of Current Procedures	To take an inventory of the company’s existing practices and weaknesses with regard to: ·      preparing annual reports; ·      the handling of whistle blowers complaints with respect to the company’s disclosure; ·      the review of any matters raised by the company’s independent auditors ,and ·      the retention of relevant documents.
Identification of Personnel	The disclosure committee should identify persons both inside and outside the company whose input is critical to the disclosure process.
Preparation of Controls and Procedures Timetable and Check list	The disclosure committee should disseminate internally a Control and Procedures check list which fills in any gaps and fixes any weaknesses discovered by the inventory.
Backup certifications	Companies may wish to consider obtaining “backup” support certifications from certain officers that confirm the certifications of the CEO and CFO.