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[Advanced Auditing And Professional Ethics] NAME: ___________________________ CONTACT NO.:_____________________ ADVANCED AUDITING AND PROFESSIONAL ETHICS C.A. FINAL EDITION - 2 CA NITESH KUMAR MORE Published By: SHIVAM PUBLICATIONS 11A, Radha Bazar Lane Kolkata - 700001 [email protected] 033-32562967 Email Your Queries and Suggestions on: [email protected] Register Us On www.shivampublications.webs.com CA NITESH KUMAR MORE [Advanced Auditing And Professional Ethics] This Book is dedicated to: (cid:1) MAA; who gave me darshan after SHAKTI PEETH PUJA at PANCHMUKHEE BALAJI DARBAR & PANCHMUKHEE BALAJI. (cid:1) My Gurus Sri Ramesh Chachan and Sri Sanjay Agarwal (cid:1) My Parents and All Family Members © With the authors Printing and Publishing right with the Author Price: ` 290 Edition: Second June, 2013 Edition Published by: Computer Typeset: Nidhi Kumari Shivam Publications Shivam Publications 11A, Radha Bazar Lane 11A, Radha Bazar Lane Kolkata - 700001 Kolkata –700001 [email protected] [email protected] 033-32562967 033-32562967 CA NITESH KUMAR MORE [Advanced Auditing And Professional Ethics] FOREWORD – 2nd Edition I was surprised to receive a request from Mr. Nitesh Kumar More to script a ‘Foreword’ for his book ‘Advanced Auditing and Professional Ethics – C.A. Final’, because I have been away from active participation in professional work for more than fifteen years and, in the process, I seem to have lost touch with the student community aspiring to be future Chartered Accountants, I had, therefore had to go through the manuscript quite in detail for an appropriate evaluation of the book. On an overall basis, it would appear that Mr. More has done an excellent job in covering all aspects of a wide spectrum on ‘Advanced Auditing and Ethical Standards’. Since mid nineties, the auditing profession has been under severe criticism following the collapse of Enron and three other big US multinationals, because of their failure to report true financial status. The episode was so serious in nature that one of the largest audit firms, Arthur Andersen, had to give up their audit business and concentrate on consultancy services. In view of this, the Regulators and the Professional Institutes made intensive efforts to find out a mutually satisfactory solution to the problems confronting the profession. However, before these could take final shape, the global economy recovered to reach great highs with unprecedented growth in business volumes, increasing profit trends, favorable liquidity position, the likes of which have never been seen before. As a natural concomitant, businesses became highly complex, competitive and challenging. The development of financial market and services added further luster to the growth leading to varied practices and use of complicated business models and instruments. The above back drop of economy and social environments will make the students aware of the risks and responsibilities under which the auditors have to function in the future. Mr. More’s book is a Compendium which covers most of the aspects outlined here-above, besides dealing in detail with the latest audit techniques and processes. I am sure that the students will find this book not only interesting for their use and purposes, but also deserving of careful consideration, preliminary to appearing for the examination. This Compendium can also be used as reference book by the members of the profession who are already in practice. I wish to congratulate Mr. More for bringing out such a good book for the students. A. C. Chakrabortti Past President (1984-85), The ICAI CA NITESH KUMAR MORE [Advanced Auditing And Professional Ethics] SUNIL H. TALATI 2nd & 3rd Floor, Ambica Chambers Former President of Nr. Old High Court, Navrangpura The ICAI – 2007-08 Ahmedabad-380009 FOREWORD – 1st Edition CA. NITESH KUMAR MORE has been quite well-known in the Eastern region having contributed several papers and articles in various magazines and publications. Having gained the experience and conveying his valuable thoughts in various areas particularly on Auditing and Ethical Standards for Chartered Accountants it is very important that he has penned down all these in a comprehensive book Advanced Auditing and Professional Ethics. The present publication on this subject is not just another book for C.A. Final students but it is aimed at presenting the “Source Book” dealing with most essential aspect of auditing, which is fundamental to every Chartered Accountant. More than that the topics embodied and various issues covered on the subject of Professional Ethics are very applaudable. The requirement of adherence to professional ethics is the demand of the day. Our noble profession of Chartered Accountants has been well respected in the Society and very route and the basis of the same is strict adherence of the ethical standards. Various provisions of Chartered Accountants Act and Regulations are covered in interesting manner as applicable to members in practice as well as members in services. Both the topics are of great importance not only from the preparation for the final exams but also to equip students after they clear C.A. Final and are introduced in the Society as a fresh young Chartered Accountant. In India as well as in all other countries, the ethical standards and ethical values had played a very vital role and the author has covered all the issues and questions & answers in a most practical manner, which will prove to be a significant value addition to the students. It has always been my conviction that it is upon an individual to create opportunity for himself or herself. Opportunity & Hurdle are two sides of the same coin. A situation that seems to be a hurdle to someone will be seen as an opportunity by someone else. Our attitude is what that matters. Life is an opportunity for our evolution. Every moment is an opportunity to learn. Even an obstacle teaches us many useful lessons. What is required is our learning attitude. I am sure this book will develop attitude to learn more to all the readers & users. The biggest and brightest opportunity that the Almighty has given us is to be part of the CA fraternity, the enlightened lot of people who are always admired for their cerebral powers. Let us utilize our talents and our powers for our overall holistic development. This book will certainly prove to be handy for such students who are going to be Future Chartered Accountants. My hearty compliments once again to Nitesh Kumar More. Ahmedabad 29th August, 2012 Sunil Talati CA NITESH KUMAR MORE [Advanced Auditing And Professional Ethics] CCCCAAAA.... UUUUttttttttaaaammmm PPPPrrrraaaakkkkaaaasssshhhh AAAAggggaaaarrrrwwwwaaaallll B.Com, FCA, ICA (Australia), CPA (Australia) Past President (2009-10) – The Institute of Chartered Accountants of India Founder – Uttam Prakash Agarwal Shiksha Pariwar Senior Partner – Uttam Abuwala & Co. Chairman – Uttam Agarwal Corporate Advisory Private Limited Message I am glad to note that CA. Nitesh Kumar More, a young and dynamic Chartered Accountant, has authored this book for benefit of student’s community and appreciate his efforts to repay the debt of the profession. I have gone through this book and found this to be very well presented with number of examples and illustrations. I think this will change the way my CA students study. This book is going to make studying a simpler and enjoyable process. I have always worked for the benefit of our students and now I embrace the efforts of CA. Nitesh Kumar More in putting his valuable time and energy in this book. I hope this book would serve as an asset for every CA student. My best wishes to him for all his present and future endeavours. CA. Uttam Prakash Agarwal 29th August 2012 CA NITESH KUMAR MORE [Advanced Auditing And Professional Ethics] L B Jha & Co 8, N. S. Road Chartered Accountants Kolkata - 700001 Message Dear Mr. More, Your book on auditing is well written in language easy to understand. It takes a structured and systematic view of the subject and builds up the knowledge of students step by step. I think this will be a good addition to the text books available for students on auditing. Please continue writing as you are making an immense contribution in disseminating knowledge. With best wishes, Yours Sincerely, Dipankar Chatterji August 28, 2012 CA NITESH KUMAR MORE [Advanced Auditing And Professional Ethics] Preface to the FIRST Edition Dear Friends, The study material of the ICAI is like a bible. This book is not a substitute for study material. This book has been prepared to provide students a tool for systematic revision. The salient features of the book are: (cid:1) Questions and Answers from Latest Revision Test Papers (RTP). (cid:1) Case Studies – More than 180. (cid:1) Tabular Presentation – More than 40. (cid:1) Point wise Presentation (For Quick Revision Before Exams) (cid:1) Important Words – Bold (For Quick Revision Before Exams) (cid:1) Past Exam Questions with Marks and Years. (cid:1) Question Papers of Last 4 Terms. (cid:1) Latest RBI Guidelines (July 2012) & Latest Court’s Decision. My Special Thanks To Abhishek Bathwal (A CA Final Student), For Providing Valuable Support For The Publication. I look forward for your valuable suggestions and criticism, if any. Thanks and Warm Regards, Dated: 29th July 2012 CA Nitesh Kumar More Place: Kolkata [email protected] CA NITESH KUMAR MORE [Advanced Auditing And Professional Ethics] About The Author: CA NITESH KUMAR MORE (cid:1) Author of 4 Books: Handbook on Professional Ethics, Handbook on SA, Handbook on Bank Audit, Advanced Auditing And Professional Ethics. (cid:1) Is a Co-opted Member of Company Law Committee of ICAI (EIRC) (cid:1) Has been a Co-opted Member of Permanent Research Committee of ICAI (EIRC). (cid:1) Had been a Co-opted Member of Research Committee of ICAI (EIRC) (cid:1) Has been a Co-opted Member of Internal Audit Committee of ICAI (EIRC) (cid:1) Is a moderator of India’s 1st Google Group with Expert Panels On Various Subjects (Member Strength of more than 20,000 Professionals) (cid:1) Is An Editor of Newsletter "Professional Updates" (cid:1) Is a Advisory Board Member of HiRise Business Solutions Private Limited (cid:1) Provided Live Updates of EIRC, ICAI Elections 2012, Railway Budget, Union Budget To Members Jointly with www.shivampublications.webs.com (cid:1) Has Contributed/Written more than 35 Write-ups/ Article in various magazines such as the Management Accountant, Suchitra Times, EIRC Newsletter, EIRC Members Ready Referencer, EIRC Conference, DTPA Conference etc. (cid:1) Executive Committee Member of Panchmukhi Balajee Darbar, Siliguri (cid:1) He is Providing Services to Many Corporate and Other Clients. (cid:1) Presented a Paper on Recent Changes in Direct Tax at CA Student Conference held at Kolkata. (cid:1) Stood 1st in Quiz Contest held at ICAI (Kolkata). (cid:1) Winner of ‘Essay Writing Contest’ organized by ICAI (EIRC). CA NITESH KUMAR MORE [Advanced Auditing And Professional Ethics] LIST OF ABBREVATIONS USED IN THIS BOOK AGM Annual General Meeting JA Joint Auditors AS Accounting Standard JV Joint Ventures BOD Board Of Directors MD Managing Director CAAT Computer Assisted Audit Techniques MIS Management Information System CAG Comptroller & Auditor General Of India MRL Management Representation Letter CG Central Government NPA Non Performing Assets CIS Computer Information System NTE Nature Timing And Extent CLB Company Law Board PAC Public Account Committee CR Control Risk PFI Prospective Financial Information DD Due Diligence PRB Peer Review Board DR Detection Risk PSU Public Sector Unit DSS Decision Support System PU Practice Unit DSS Electronic Data Interchange QC Quality Control EP Engagement Partner RAP Risk Assessment Procedures ESB Ethical Standard Board SA Standard On Auditing FRF Financial Reporting Framework SG State Government FS Financial Statements SQC Standard On Quality Control FY Financial Year SR Special Resolution GAAP Generally Accepted Accounting Principles TCWG Those Charged With Governance GIC General Insurance Company W.E.F With Effect From GM General Meeting W.R.T With Regard To IC Internal Control WTD Whole Time Director CA NITESH KUMAR MORE [Advanced Auditing And Professional Ethics] INDEX OF CHAPTERS IN BOOK S. No. Chapter Name Page 1. Professional Ethics 1-36 2. Standards On Auditing 37-121 3. Audit Strategy, Planning And Programming 122-127 4. Risk Assessment And Internal Control 128-136 5. Audit Under Computerised Information System (CIS) Environment 137-149 6. The Company Audit 150-173 7. Liabilities Of Auditor 174-176 8. Audit Report 177-198 9. Audit Committee And Corporate Governance 199-204 10. Audit Of Consolidated Financial Statements 205-207 11. Audit Of Banks 208-231 12. Audit Of General Insurance Companies 232-243 13. Audit Of Co-Operative Societies 244-248 14. Audit Of Non Banking Financial Companies 249-252 15. Audit Under Fiscal Laws 253-260 16. Cost Audit 261-268 17. Special Audit Assignments 269-278 18. Audit Of Public Sector Undertakings 279-281 19. Internal Audit, Management And Operational Audit 282-287 20. Investigations And Due Diligence 288-298 21. Peer Review 299-305 22. Special Audit Techniques 306-308 INDEX OF STANDARDS ON AUDITING (SA) 100-199 Introductory Matters 200-299 General Principles and Responsibilities SA 200 Overall Objectives of the Independent Auditor and the Conduct of an 37-38 Audit in Accordance with Standards on Auditing SA 210 Agreeing the Terms of Audit Engagements 38-41 SA 220 Quality Control for an Audit of Financial Statements 41-42 SA 230 Audit Documentation 42-43 SA 240 The Auditor’s Responsibilities Relating to Fraud in an Audit of FS 44-47 SA 250 Consideration of Laws and Regulations in an Audit of FS 47-48 SA 260 Communication with Those Charged with Governance 49-50 SA 265 Communicating Deficiencies in IC to TCWG and Management 50-51 SA 299 Responsibility of Joint Auditors 51-52 300-499 Risk Assessment and Response to Assessed Risks SA 300 Planning an Audit of Financial Statements 52-54 SA 315 Identifying and Assessing the Risks of Material Misstatement through 54-56 Understanding the Entity and Its Environment SA 320 Materiality in Planning and Performing an Audit 56-57 SA 330 The Auditor’s Responses to Assessed Risks 58-59 SA 402 Audit Considerations Relating to an Entity Using Service Organisation 59-61 SA 450 Evaluation of Misstatements Identified During the Audit 62-63 500-599 Audit Evidence SA 500 Audit Evidence 63-64 CA NITESH KUMAR MORE