VPJ CLASSESvpjclasses.com/study/Audit Amend Nov 2016.pdf4 For VPJ Classes – CA Vinod Parakh Jain, Ph/whatsapp:75036305943, website: Kapil 65 marks Sweety 65 marks Aditya 65 marks

1 For VPJ Classes – CA Vinod Parakh Jain, Ph/whatsapp:75036305943, website:www.vpjclasses.com

VPJ CLASSES

By: CA VINOD PARAKH JAIN

CA FINAL AUDIT AMENDMENTS

MODULE

Applicable for Nov. 2016 Exams


INDEX

S.No. PARTICULARS Page No.

1. Professional Ethics 7-14

2. Audit of PSUs 15-24

3. Bank Audit 25-37

4. Audit of General Insurance Companies 38-40

5. Cost Audit 41-46

6. Special Audit Assignments 47-48

7. Audit of NBFCs 49-52

8. Investigation and Due Diligence 53-54

9. Audit under Fiscal Laws 55-58

10. Audit Report 59-62


CA VINOD PARAKH JAIN

Ruchika

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Himanshu 73 marks

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Anubhav 71 marks

Nidhi 71 marks

Nitika 70 marks

Vishal 70 marks

Poonam 68 marks

Subrat 68 marks

Ambika

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Lalit Dutt 64 marks

Badal 64 marks

Topendra 64 marks

Yash 64 marks

Rahul 64 marks

Kuldeep 64 marks

DHANWAL 64 MARKS

AMIT 63 MARKS

AAMIR 63 MARKS

AANCHAL 63 MARKS

SHREYANS 63 MARKS

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Utsaha

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Chirag

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Kushna

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Vikas 60 marks

Abhishek 60 marks

AND MANY MORE………………………………

Mohit 60 marks

Monica 60 marks

Bhawna 60 marks

Akash –3rdrank in uttrakhand

May 2016 Attempt

Ambika Rathi -68 Marks

VPJ Sir PRESENTING LAPTOP TO MUKESH

FOR SCORING

ALL INDIA HIGHEST 73 MARKS

CA VINOD PARAKH JAIN PRESENTING LAPTOPTO HIS STUDENT MUKESH SETHIA FOR SECURING

ALL INDIA HIGHEST 73 MARKS IN AUDIT

mailto:[email protected]


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AMENDMENT NO.-1 Membership of the Institute

Earlier Definition New Definition

“Chartered Accountant” means a person who is a member of the Institute. As per Section 4, a person shall be entitled to have his name entered in the Register of Members if:

He has passed the Final Examination,

Completed the Articles/Audit Training and GMCS Course

Section 4 of the Chartered Accountants Act, 1949 provides the list of persons who are entitled to have their names registered in the Register. The list, read with the Chartered Accountants Regulations, 1988, also includes

a person who has passed final examination of the Chartered Accountancy Course and

completed practical training, for requisite period as an articled/audit assistant,

along with a course on General Management and Communication Skills or

any other course as may be specified by the Council.

Diagrammatic presentation showing requirement for entering name into Register of Member

According to Regulation 5 of the Chartered Accountants Regulations, 1988, the person who desires to have his name entered in the Register is required to submit

an application in the appropriate Form together with documentary evidence about his eligibility for membership along with the prescribed fee to the Secretary.

On acceptance of application by the Council, the applicant's name shall be entered in the Register and a certificate of membership in the appropriate Form shall be issued to the applicant. Particulars of the Register: Section 19 of the Act provides the particulars to be included in the Register about every member of the Institute, namely- (i) his full name, date of birth, domicile, residential and professional address; (ii) date on which his name is entered in the Register; (iii) his qualifications;

1: Professional Ethics


(iv) whether he holds a certificate of practice (COP); and (v) any other particulars which may be prescribed.

AMENDMENT NO.-2 Status of Member

Latest Insertion- For Nov 2016 Onwards Chartered Accountants in Practice Chartered Accountants in Service A practicing Chartered

Accountant is a person who is a member of the Institute and is holding Certificate of Practice; and

includes such members of the Institute who are deemed to be in Practice in accordance with the provisions of the Chartered Accountants Act, 1949.

In accordance with the definitions provided under the Code of Ethics, a Professional Accountant in Service or Chartered Accountant in Service means a : Professional accountant employed or Engaged in an executive or non-executive capacity in such areas as commerce, industry, service, the public

sector, education, the not for profit sector, regulatory bodies or professional bodies, or a professional accountant contracted by such entities.

AMENDMENT NO.-3 Members Deemed to be in Practice (Section 2(2))

Management Consultancy Services Pursuant to Section 2(2)(iv) above, the Council has resolved that “other services” include “Management consultancy and other services”. Management Consultancy and Other Services – Does not includes

Statutory or Periodical audit

Tax representation or advice on tax matters (Direct Tax or Indirect Tax)

Acting as liquidator, trustee, executor, administrator, arbitrator or receiver Management Consultancy and Other Services – Includes

1) Financial management planning and financial policy determination. 2) Capital structure planning and advice regarding raising finance. 3) Working capital management. 4) Preparing project reports and feasibility

studies……………………………………………………………………………………………………………………………………………….

LATEST INSERTION-For Nov 2016 Onwards

The above provisions need to be correlated with the provisions of section 144 of the Companies Act, 2013


which prohibits an auditor of the company from rendering certain services directly or indirectly to the company or its holding company or its subsidiary company.

AMENDMENT NO.-4 Cancellation and Restoration of Certificate of Practice

Cancellation [Regulation 10]

Certificate of Practice (COP) shall be liable for cancellation, if: (i) the name of the holder of the certificate is removed from the Register; or (ii) the Council is satisfied, after giving an opportunity of being heard to the person concerned, that such certificate was issued on the basis of incorrect, misleading or false information, or by mistake or inadvertence; or (iii) a member has ceased to practise; or (iv) a member has not paid annual fee for certificate of practice till 30th day of September of the relevant year. Where a COP is cancelled, the holder shall surrender the same to the Secretary.

Restoration of COP [Regulation 11]

On an application made in the approved Form and on payment of such fee, the Council may restore the COP with effect from the date on which it was cancelled, to a member whose certificate has been cancelled due to non-payment of the annual fee for the COP and whose application, complete in all respects, together with the fee, is received by the Secretary before the expiry of the relevant year.

AMENDMENT NO.-5 Removal of Name from the Register & Restoration of Membership

Removal of Name from the Register

As per section 20 of the Act, the Council may remove, from the Register, the name of any member of the Institute in the following cases- (i) who is dead; or (ii) from whom a request has been received to that effect; or (iii) who has not paid any prescribed fee required to be paid by him; or (iv) who is found to have been subject at the time when his name was entered in the Register, or who at any time thereafter has become subject, to any of the disabilities mentioned in Section 8, or who for any other reason has ceased to be entitled to have his name borne on the Register. The Council shall remove the name of any member from the Register in respect of whom an order has been passed under this Act removing him from membership of the Institute. If the name of any member has been removed from the Register for non-payment of prescribed fee as required to be paid by him, then, on receipt of an application, his name may be entered again in the Register on payment of the arrears of annual fee and entrance fee along with such additional fee, as may be determined by the Council.

Restoration of Membership

In addition to the provisions of the section 20 of the Chartered Accountants Act, 1949 (as discussed in above Para), Regulation 19 of the Chartered Accountants Regulations, 1988, as well states that the name of the member may be restored by the Council in the Register on an application, in the appropriate Form, received in this behalf whose name has been removed from the Register for non-payment of prescribed fee as required to be paid by him, if he is otherwise eligible to such membership, on his paying the arrears of annual membership fee, entrance fee and additional fee determined by the Council under the Act.

Effective date in case of restoration of cancelled

However, the effective date in case of restoration of cancelled membership, in different situations, shall be in the following manner:


membership

AMENDMENT NO.-6 Companies not to engage in accountancy (Section 25)

Section 25 of the Chartered Accountant Act

(1) No company, whether incorporated in India or elsewhere, shall practise as chartered accountants. Here, the term “company” shall include any limited liability partnership which has company as its partner for the purpose of this section. (2) If any company contravenes this provision then, without prejudice to any other proceedings which may be taken against the company, every director, manager, secretary and any other officer thereof who is knowingly a party to such contravention shall be punishable with fine which may extend on first conviction to ` 1,000 and on any subsequent conviction to ` 5,000.

Section 141(2) of the Companies Act, 2013

[LATEST INSERTION]

where a firm (including a limited liability partnership) is appointed as an auditor of a company, then, only the partners who are chartered accountants shall be authorised to act and sign on behalf of the firm.

Analysis [LATEST INSERTION]

On thoroughly studying the provisions of both the Acts, the LLPs, though allowed to be appointed as an auditor in accordance with the Companies Act, 2013, however, it can‟t be engaged into practice, if it has company as its partner, as per the Chartered Accountants Act, 1949. Therefore, in short, the LLP not having any company as its partner, can be engaged into practicing and thus take audit assignments.

AMENDMENT NO.-7 Definition of Professional Expanded in Clause (2)- MBA Now Included in SM Link: http://resource.cdn.icai.org/19378sm_aape_finalnew_cp22.pdf (Refer Page 22.19)

Clause (2) : A Chartered Accountant in practice is deemed to be guilty of professional misconduct if he:

Pays or allows or agrees to pay or allow,

Directly or indirectly,

Any share, commission or brokerage in the fees or profits of his professional business

To any person other than-(a) a member of the Institute or(b) a partner or (c) a retired partner or (d) the

http://resource.cdn.icai.org/19378sm_aape_finalnew_cp22.pdf


legal representative of a deceased partner, or (e) a member of any other professional body or (f) with such other persons having such qualification as may be prescribed, for the purpose of rendering such professional services from to time in or outside India Explanation - In this item, “partner” includes a person residing outside India with whom a CAIP has entered into partnership which is not in contravention of item (4) of this Part

Notified Professional Bodies Professionals Qualified in India

The Council has prescribed [Regulation 53A(1) of the Chartered Accountants Regulations, 1988] the professional bodies, which are as under:- (a) The Institute of Company Secretaries of India established under the Company Secretaries Act, 1980. (b) The Institute of Cost & Works Accountants of India established under the Cost & Works Accountants Act, 1959. (c) Bar Council of India established under the Advocates Act, 1961. (d) The Indian Institute of Architects established under the Architects Act, 1972.

(e) The Institute of Actuaries of India established under the Actuaries Act, 2006.

Further, the Council has also prescribed [Regulation 53A(3) of the Chartered Accountants Regulations, 1988] the persons qualified in India, which are as under: (i) Company Secretary within the meaning of the Company Secretaries Act, 1980; (ii) Cost Accountant within the meaning of the Cost and Works Accountants Act, 1959; (iii) Actuary within the meaning of the Actuaries Act, 2006; (iv) Bachelor in Engineering from a University established by law or an Institution recognised by law; (v) Bachelor in Technology from a University established by law or an institution recognised by law; (vi) Bachelor in Architecture from a University established by law or an institution recognised by law; (vii) Bachelor in Law from a University established by law or an institution recognised by law; (viii) Master in Business Administration from Universities established by law or technical institutions recognised by All India Council for Technical Education.

AMENDMENT NO.-8 Definition of Professional Bodies Expanded in Clause (4)- MBA Now Included in SM Link: http://resource.cdn.icai.org/19378sm_aape_finalnew_cp22.pdf (Refer Page 22.21)

Clause (4) -A Chartered Accountant in practice is deemed to be guilty of professional misconduct if he enters into partnership, in or outside India, with any person other than:

(a) a CAIP or (b) Member of any other professional body having prescribed qualifications (c) A person resident outside India who but for his residence abroad would be entitled to be registered as

a member u/s 4(1)(v) or (d) Whose qualifications are recognized by the CG/ Council for the purpose of permitting such

partnerships:

http://resource.cdn.icai.org/19378sm_aape_finalnew_cp22.pdf


Professionals notified for entering into partnership

Clause 4 of the Part 1 of the first schedule

The Council has prescribed Regulation 53A(3) (as discussed under clause (2) of this part) and Regulation 53B of the Chartered Accountants Regulations, 1988 for the persons qualified and the professional bodies. The Regulation 53B prescribes the membership of following professional bodies for entering into partnership: (a) Company Secretary, member, The Institute of Company Secretaries of India, established under the Company Secretaries Act, 1980; (b) Cost Accountant, member, The Institute of Cost and Works Accountants of India established under the Cost and Works Accountants Act, 1959; (c) Advocate, member, Bar Council of India established under the Advocates Act, 1961; (d) Engineer, member, The Institution of Engineers, or Engineering from a University established by law or an institution recognized by law. (e) Architect, member, The Indian Institute of Architects established under the Architects Act, 1972; (f) Actuary, member, The Institute of Actuaries of India, established under the Actuaries Act, 2006.

AMENDMENT NO.-9 Definition of Relative to be considered as Per AS-18 and not as Per Companies Act

Council General Guidelines

Opinion on FS when there is substantial interest

A member of shall not express his opinion on FS of any business or enterprise in which one or more persons who are his “relatives” within the meaning Section 6 of the Companies Act, 1956 (now Section 2(77) of the Companies Act, 2013) Accounting Standard (AS-18) (Insertion) have, either by themselves or in conjunction with such member, a substantial interest in the said business or enterprise Explanation: “substantial interest” shall have the same meaning as is assigned thereto under Appendix (9) to the Chartered Accountants Regulations, 1988

AMENDMENT NO.-10 Clarification on Limits for Tax Audit

Tax Audit assignments under Section 44 AB of the Income-tax Act, 1961

A member of the Institute in practice shall not accept, in a financial year, more than the 45 tax audit assignments in a Financial Year. Further additional points in this regards are:

Situations Limits

For Individuals CA’s or Proprietary firms 60 Tax Audits

For Partnership Firm 60 Tax Audits per partner of the Firm

When a CA is a partner in a number of a firms

60 Tax Audit on his account in all the firms taken together in which he is a partner or proprietor.

Where the partner of a Firm also holds office in his individual capacity

60 Tax Audits in his individual capacity and all Firms taken together.

*According to a clarification on Tax Audit Assignments by Committee on Ethical Standards (CES) of the Institute, if there are 10 partners in a firm of Chartered Accountants in practice, then all the partners of the firm can collectively sign 600 tax audit reports. This maximum limit of 600 tax audit assignments may be distributed between the partners in any manner whatsoever. For instance, 1 partner can individually sign 600 tax audit reports in case remaining 9 partners are not signing any tax audit report.(Insertion) Note: Audits conducted under Section 44AD, 44AE and 44AF of the Income Tax Act, 1961


shall not be taken into account for computing the specified limits of tax audit assignments

Tax Audit assignments in a FY includes tax audit assignments of both corporate & non corporate assesse

Each year’s audit would be taken as a separate assignment. Audit of the head office and branch offices of a concern shall be regarded as one tax

audit assignment. A CA in part time practice practicing as a partner of a firm shall not be taken into

account for computing the aforesaid limit. CAIP shall maintain a record of the tax audit assignments accepted by him for each FY.

AMENDMENT NO.-10 Specified no. of Audit Assignment

Specified number of audit assignments

A member of the Institute in practice shall not hold at any time appointment of more than the 30 audit assignments of Private and other “specified number of audit assignments ”Companies u/s 224 and/or Section 228 of the Companies Act, 1956 (now Section 139 and/or Section 143(8) read with Section 141(3)(g) of the Companies Act, 2013).

Situations Limits

For Individuals CA’s or Proprietary firms

30 Audits

For Partnership Firm 30 Audits per partner of the Firm

When a CA is a partner in a number of a firms

30 Audit on his account in all the firms taken together in which he is a partner or proprietor.

Where the partner of a Firm also holds office in his individual capacity

30 Audits in his individual capacity and all Firms taken together.

Provided that in the case of a firm of Chartered Accountants in practice, the “specified number of audit assignments” shall be construed as the specific number of audit assignments for every partner of the firm. Provided further that where any partner of the firm of Chartered Accountants in practice is also a partner of any other firm or firms of Chartered Accountants in practice, the number of audit assignments which may be taken for all the firms together in relation to such partner shall not exceed the “specified number of audit assignments” in the aggregate. Provided further where any partner of a firm or firms of Chartered Accountants in practice accepts one or more audit of Companies in his individual capacity, or in the name of his proprietary firm, the total number of such assignments which may be accepted by all firms in relation to such Chartered Accountant and by him shall not exceed the “specified number of audit assignments” in the aggregate.

Students may note that the limit for holding maximum number of assignments has been changed under the Companies Act, 2013. According to Section 141(3)(g) of the said Act, a person or a partner of a firm holding appointment as its auditor, shall not be eligible for appointment as an Auditor of a Company, if such person or partner is at the date of such appointment or reappointment holding appointment as auditor of more than 20 Companies other than one person companies, dormant companies, small

companies and private companies having paid-up share capital less than Rs.100 crore.


Note: In computing the “specified number of audit assignments”- The number of audit assignments of public Companies each of which has a paid-up share

capital of Rs. 25 lakhs or more, shall not exceed 10. the number of audit of such Companies, which he or any partner of his firm has

accepted whether singly or in combination with any other Chartered Accountant in practice or firm of such Chartered Accountants, shall be taken into account.

Audit of the head office and branch offices shall be regarded as one audit assignment Audit of one or more branches of the same Company shall be construed as one audit

assignment only. Number of partners of a firm on the date of acceptance of audit assignment shall be

taken into account A CA in part time practice practicing as a partner of a firm shall not be taken into account

for computing the aforesaid limit. A Chartered Accountant in practice, whether in full-time or part time employment

elsewhere, shall not be counted for the purpose of determination of “specified number of audit of Companies” by firms of Chartered Accountants.

CAIP/Firm shall maintain a record of the audit assignments accepted by him/them in the following format, as far as possible:

S. No.

Name of the Company

Registration Number

Date of appointment

Date of Acceptance

Date on which 23-B filed with Registrar of Companies

[Students may note that, presently, new Form ADT-1 is required to be filed with the Registrar as per the provisions and rules made under Companies Act, 2013 in place of 23-B.]


No. of New Topics has been added in the study Material in this Chapter. Some of the Topics Presentation has been Changed by us. Topics whose Presentation has been Changed or has

been amended or New Topics has been Introduced has been Specified Below

5.1. Introduction

5.2. Framework For Government Audit- Presentation Changed and one New Topic Introduced

1. Meaning -Government Company –[section 2(45) of the Companies Act, 2013]

"Government company" is a company in which not less than 51% of the paid-up share capital is held by the Central Government or by any State Government or Governments or partly by the Central Government and partly by one or more State Governments, and includes a company which is a subsidiary company of such a Government company.

2. CAG- Legal Framework

In India, government audit is performed by an independent constitutional authority, i .e. Comptroller and Audit General (C&AG) of India, through the Indian Audit and Accounts Department. The Constitution of India gives a special status to the C&AG and contains provisions to safeguard his independence.

CHAPTER : AUDIT OF PUBLIC SECTOR UNDERTAKINGS


Current CAG of India

Shashi Kant Sharma

Article 148

Appointment of C&AG by the President. • Special procedure for removal of C&AG, only on the ground of proven misbehaviors or incapacity. • Salary and other conditions of service to be determined by the Parliament.

Article 149

Perform such duties and exercise such powers in relation to the accounts of the Union and States and of any other authority or body as may be prescribed by or under any law made by the Parliament.

• The C&AG’s (Duties, Powers and Conditions of Service) Act, 1971 defines these functions and powers in detail.

Article 150

On the advice of the C&AG, President to prescribe such form in which accounts of the Union and States shall be kept.

Article 151

Audit reports of the C&AG relating to the accounts of the Central/ State Government should be submitted to the President/Governor of the State who shall cause them to be laid before Parliament/State Legislative.

The Comptroller and Audit General‟s (Duties, Power and Conditions of Services) Act, 1971, prescribes that the C&AG shall hold office for a term of six years or upto the age of 65 years, whichever is earlier. He can resign at any time through a resignation letter addressed to the President.

Powers & Duties

The C&AG shall perform such duties and exercise such powers in relation to the accounts of the union and of the state and of any other authority or body as may be prescribed Under C&AG (Duties, Power and Conditions of Services) Act, 1971.

Accounts Maintenance

The accounts of the union and of the states shall be kept in such form as the President may, on the advice of the C&AG, prescribe.

Submission of Accounts

The reports of C&AG relating to the accounts of the Union/State shall be submitted to the President/Governor who shall cause them to be laid before the house of the parliament/state legislature.

Organisations subject to the audit of C&AG

All the Union and State Government departments and offices including the Indian Railways and Posts and Telecommunications.

About 1200 public commercial enterprises controlled by the Union and State governments, i.e. government companies and corporations.

Around 400 non-commercial autonomous bodies and authorities owned or controlled by the Union or the States.

Over 4400 authorities and bodies substantially financed from Union or State revenues.

Action on Audit Reports – The scrutiny of the Annual Accounts and the Audit Reports thereon by the Parliament as a whole would be an arduous task, so Parliament and the State Legislatures have, for this purpose, constituted specialized Committees like the Public Accounts Committee (PAC) and the Committee on Public Undertakings (COPU), to which these audit Reports and Annual Accounts automatically stand referred.

Public Accounts Committee

The Public Accounts Committee satisfies itself that: a) Moneys (shown in accounts) were disbursed legally on the service or purpose to

which they were applied. b) Expenditure was authorised. c) Re-appropriation has been made in accordance with the provisions made (i.e.

distribution of funds).

http://en.wikipedia.org/wiki/Shashi_Kant_Sharma


It is also the duty of the PAC to examine the statement of accounts of autonomous and semiautonomous bodies, the audit of which is conducted by the Comptroller & Auditor General either under the directions of the President or by a Statute of Parliament.

Estimates Committee [New Topic Inserted for Nov 2016 onwards]

The Committee examines the estimates with a view to: (i) report that economies, improvements in organization, efficiency, consistent with the policy underlying the estimates may be effected; (ii) suggest alternative policies; (iii) examine whether the money is well laid out within the limit; and (iv) suggest the form in which the estimates shall be presented to Parliament. The Committee does not comment upon a policy approved by Parliament, but where there is evidence that a particular policy is not leading to the desired results, or is leading to waste, it is the duty of the Committee to bring it to the notice of the House.

Committee on Public Undertakings

The Committee on Public Undertakings exercises the financial control on the public sector undertakings. The functions of the Committee are To examine the reports and accounts of public undertakings. To examine the reports of the Comptroller & Auditor General on public

undertakings. To examine the efficiency of public undertakings and to see whether they are being

managed in accordance with sound business principles and prudent commercial practices.

to exercise such other functions vested in the PAC and the Committee on Estimates as are not covered above and as may be allotted by the Speaker from time to time.

5.3. Objective and Scope of Public Enterprises Audit-[New Topic Inserted for Nov 2016 onwards]

The C&AG‟s (Duties, Power and Conditions of Services) Act, 1971 specifies the entities that come under audit purview of C&AG at the Union and State level, however, the scope and extent of audit is determined by the C&AG itself.

1. Audit of PSUs not constrained to Financial & Compliance Audit:

It also extends also to performance (efficiency, economy and effectiveness) with which these operate and fulfill their objectives and goals.

2. Propriety Audit This audit is directed towards an examination of management decisions in sales, purchases, contracts, etc. to see whether these have been taken in the best interests of the undertaking and conform to accepted principles of financial propriety.

3. Comprehensive Audit

He conducts an appraisal or an efficiency-cum-performance audit. He sees whether the undertakings have fulfilled the objectives for which they have been established, whether value-for-money spent has been obtained, whether the targets have been achieved, etc. He locates the areas of weakness including review of the decisions taken by the management and a comprehensive appraisal of the performance of the


undertaking

4. Organisation’s Decision to be taken by Competent Authority

In examining the decisions of a management, the auditor examines that these were taken by the competent authority after examination of all aspects (economic, technological, public interest) on the basis of all the relevant information available at that time and taking into consideration the different alternatives available to management and that the decisions were consistent with the aims and objectives of the enterprise.

5. Helping Government:

Auditing besides being an instrument of accountability. help the Government and the enterprise Managements by bringing out financial and operational deficiencies, inadequacies or ineffectiveness of systems, shortfalls in performance, etc. and by analysing the causes of shortfall from acceptable standards of performance.

6. Highlighting Issues of Efficient and Economic Operations

7. Fiscal and Managerial Accountability

In the broader context, Government audit encompasses two main elements, viz., (a) Fiscal Accountability: It includes audit of provisions of funds, sanctions, compliances and propriety; and (b) Managerial Accountability: It includes audit of efficiency, economy and effectiveness (This is often referred to as efficiency –cum performance audit).

5.4. Audit of Government Companies (Commercial Audit)- SAME AS EARLIER. Refer to VPJ Module

5.4. Financial Audit [New Topic Inserted for Nov 2016 onwards]

Financial audit is primarily conducted to express an audit opinion on a set of financial statements. It includes: (i) examination and evaluation of financial records and expression of opinion on Financial Statements; (ii) audit of financial systems and transactions including an evaluation of compliance with applicable statutes and regulations which affect the accuracy and completeness of accounting records; and (iii) audit of internal control and internal audit functions that assist in safeguarding assets and resources and assure the accuracy and completeness of accounting records.

5.5. Compliance Audit [New Topic Inserted for Nov 2016 onwards]

Compliance audit is an independent verification process of evaluating audit evidence to determine whether specified compliance requirements are met. It examines the transactions relating to expenditure, receipts, assets and liabilities of Government for compliance with: (i) the provisions of the Constitution of India and the applicable laws; and (ii) the rules, regulations, orders and instructions issued by the competent authority either in pursuance of the provisions of the Constitution of India and the laws or by virtue of the powers formally delegated to it by a superior authority. Compliance audit also includes an examination of the rules, regulations, orders and instructions for their legality, adequacy, transparency, propriety, prudence and effectiveness, that is, whether these are: (i) intra vires of the provisions of the Constitution of India and the laws (Legality); (ii) sufficiently comprehensive and ensure effective control over Government receipts, expenditure, assets and liabilities with sufficient safeguards against loss due to wastage, misuse, mismanagement, errors, frauds and other irregularities (Adequacy);


(iii) clear and free from ambiguity and promote observance of probity in decision making (Transparency); (iv) effective and achieve the intended objectives and aims (Effectiveness).

5.5. Comprehensive Audit of Public Enterprises- SAME AS EARLIER

5.6. Propriety Audit

Relevant provisions in the Companies Act, 2013

Section 148 relating to Cost Records and Audit

Cost records and the provisions of cost audit are designed to inculcate cost consciousness in the management and to know whether productivity is of acceptable order and whether undue wastage or loss etc. has occurred. It would be useful to go into some of the specific requirement of cost audit report in this context.

Section 143(1) requiring enquiry into certain specified matters

This Involve Enquiry into 6 Matters. These have been Covered under the Chapter- Company Audit

Section 143(6) and 143(7) requiring a supplementary audit and test audit respectively in respect of the Government companies on matters specified.

Additional information in Part II of Schedule III.

Some of the matters in the additional information sought through the Statement of Profit and Loss (i.e., Part II of Schedule III) provide a basis for making more searching enquiries into such vital matters as consumption of raw materials under broad heads, goods purchased under broad heads, work in progress under broad heads, any item of income or expenditure which exceeds one percent of the

revenue from operations or ` 1,00,000, whichever is higher, etc.

Propriety elements under CARO, 2015

(a) If the company has granted loans, secured or unsecured, to companies, firms or other parties covered in the register maintained under section 189 of the Companies Act, whether the receipt of the principal amount and interest are regular (b) If the overdue amount of the loan given to companies, firms or other parties covered in the register maintained under section 189 of the Companies Act is

more than ` 1 lakh, what reasonable steps have been taken by the company for recovery of the principal and interest. (c) Is the company regular in depositing undisputed statutory dues including Provident Fund, Investor Education and Protection Fund, Employees’ State Insurance, Income-Tax, Sales Tax, Wealth Tax, Service Tax, Custom Duty, Excise Duty, Value Added Tax, 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. (d) If the company has defaulted in repayment of dues to a financial institution or bank or debenture holders, the period and amount of default to be reported by the auditor. (e) Whether the term loans were applied for the purpose for which the loans were


obtained. (f) If any fraud on or by the company has been noticed or reported during the year , the nature and the amount involved is to be indicated in the report.

FOR REST OF THE TOPIC REFER TO VPJ MODULE

5.7. Performance Audit [ Topic Totally Changed for Nov 2016 onwards]

According to the guidelines issued by the C&AG of India, Performance Audits usually address the issues of:

(i) Economy It is minimising the cost of resources used for an activity, having regard to appropriate quantity, quality and at the best price.

(ii) Efficiency It is the input-output ratio. In the case of public spending, efficiency is achieved when the output is maximised at the minimum of inputs, or input is minimised for any given quantity and quality of output. Auditing efficiency embraces aspects such as whether: (a) sound procurement practices are followed; (b) resources are properly protected and maintained; (c) human, financial and other resources are efficiently used; (d) optimum amount of resources (staff, equipment, and facilities) are used in producing or delivering the appropriate quantity and quality of goods or services in a timely manner;

(i) Effectiveness It is the extent to which objectives are achieved and the relationship between the intended impact and the actual impact of an activity. In auditing effectiveness, performance audit may, for instance: (a) assess whether the objectives of and the means provided (legal, financial, etc.) for a new or ongoing public sector programme are proper, consistent, suitable or relevant to the policy (b) determine the extent to which a program achieves a desired level of program results; (c) identify factors inhibiting satisfactory performance or goal -fulfilment; (d) assess whether the programme complements, duplicates, overlaps or counteracts other related programmes;

Objectives of Performance Audit The objectives are evaluation of economy, efficiency, and effectiveness of policy, programmes, organization and management. It also promotes accountability by assisting those charged with governance and oversight


responsibilities to improve performance; and transparency by affording taxpayers, those targeted by government policies and other stakeholders an insight into the management and outcomes of different government activities.

Planning for Performance Audit

(A) Understanding the entity/programme

The auditor may use the following sources for understanding the entity: (i)Documents of the entity Like annual reports, budget documents, accounts, minutes of meetings, information on the website, internal audit reports, (ii) Legislative documents Like parliamentary questions and debates, reports of PAC/ Committee on Public Undertakings (iii) Policy documents: Documents of Planning Commission, Ministry of Finance etc. (iv) Academic or special research (v) Past audits (vi) Media coverage (vii) Special focus groups like reports of World Bank, Reserve Bank of India, reports by special interest groups, NGOs, etc.

(B) Defining the objectives and the scope of audit Needs

Setting audit objectives ensures good quality performance audits. Defining the scope constrict the audit to significant issues that relate to the audit objectives. It mainly focuses the extent, timing and nature of the audit.

(C) Determining audit criteria -

Audit criteria are the standards used to determine whether a program meets or exceeds expectations.

(D) Deciding audit approach

There is no uniform audit approach prescribed that can be applicable to all types of subjects of performance audits. Selection of approach also determine methods and means used for conducting the audit. Some of the methods which could be used in conducting performance audits include: (i) Analysis of procedures (ii) Case studies (iii) Use of existing data (iv) Surveys v) Analysis of results (vi) Quantitative analysis

(E) Developing audit questions

the audit team is required to prepare a list of questions to which they would seek answers.

(F) Assessing audit team skills and whether outside expertise required

It is essential that the performance auditors possess special aptitude and knowledge. The audit team needs to decide at the planning stage on which aspect expertise is required. Though, the Accountant General may use the work of an expert, he retains full responsibility for the expression of opinion in the auditor’s report.

(G) Preparing Audit Design Matrix (ADM) -

Audit team should prepare an Audit Design Matrix. It is a structured and highly focused approach to designing a performance audit study. It highlights the data collection and analysis method as well as the type and sources of evidence required to support audit opinion/findings. The specimen of ADM is given as under:

Audit Objective

Audit Questions

Audit Criteria

Evidence

Data Collection And Analysis


(1) (2) (3)

(4)

Method (5)

(H) Establishing time table and resources -

(I) Intimation of Audit programme to audit entities -

[Relevant for May 2016 Attempt only. Now Changed]

Meaning A performance audit is an objective and systematic examination of evidence for the purpose of providing

an independent assessment of the performance of a government organization, program, activity, or function.

It provide information to improve public accountability and facilitate decision-making by parties with responsibility to oversee or initiate corrective action

Type of Performance Audit

Economy and efficiency audits Program audits

Auditor shall determine: a) Whether the entity is acquiring, protecting, and

using its resources (such as personnel, property, and space) economically and efficiently,

b) What are the causes of inefficiencies or uneconomical practices, and

c) Whether the entity has complied with laws and regulations on matters of economy and efficiency.

Auditor shall determine: a) The extent to which the desired results or

benefits established by the legislature or other authorizing body are being achieved,

b) The effectiveness of organizations, programs, activities, or functions,

c) Whether the entity has complied with significant laws and regulations applicable to the program.

The Mandate and Objectives of Performance Audit Section 143(6) and Section 143(7) of the Companies Act, empowers Comptroller and Auditor General of India to conduct supplementary audit or test audit of Government companies. The CAG shall have right to conduct supplementary or test audit of the Government company’s accounts by such person or persons as he may authorize in his behalf; and for the purposes of such audit to require information or additional information to such person or persons and in such form as the Comptroller and/ Auditor General may, by general or special order, direct. Section 143(5) of Companies Act requires the statutory auditor (chartered accountant appointed by CAG under section 139(5) or 139(7) of the Act) to submit a copy of his audit report on the accounts of the Government company to C&AG as discussed before. Thus while section 143(6) and 143(7) of the Companies Act empowers C&AG to conduct supplementary audit and test audit respectively of annual accounts of a Government company. In so far as Statutory corporations are concerned the respective statutes provide for audit by CAG. The Scope includes conducting performance Audit of these corporations also though specially not stated so The objectives are evaluation of economy, efficiency, and effectiveness of policy, programmes, organization and management. a) Policy: an effort to achieve certain aims with certain resources and perhaps within a certain time.


b) Programme: a set of interrelated means-legal, financial, etc. to implement a given policy. c) Organisation: It is aggregate of people, structures and processes that have the aim of achieving particular

objectives. d) Management: It refers to a person or group person(s), like Board of Directors in a company, vested with

powers to take all decisions, actions and framing rules for the steering, accounting and development of human, financial and material resources.

Planning for Performance Audit

Work is to be adequately planned

Define the audit's objectives and the scope and methodology to achieve those objectives. While planning, auditor should:

a) Consider significance and the needs of potential users of the audit report. b) Obtain an understanding of the program to be audited. c) Consider legal and regulatory requirements. d) Consider management controls. e) Identify criteria needed to evaluate matters subject to audit. f) Identify significant findings and recommendations from previous audits g) Identify potential sources of data that could be used as audit evidence h) Provide sufficient staff and other resources to do the audit. i) Consider whether the work of other auditors and experts may be used j) Prepare a written audit plan.

Significance and User Needs

The significance of a matter is its relative importance to the audit objectives and potential users of the audit report. Qualitative, as well as quantitative, factors are important in determining significance.

An awareness of these potential users' interests and influence can help auditors understand why the program operates the way it does. This awareness can also help auditors judge whether possible findings could be significant to these other users.

Understanding the Program

a) Auditors should obtain an understanding of the program to be audited to help assess, among other matters, the significance of possible audit objectives and the feasibility of achieving them.

b) The auditors' understanding may come from i. knowledge they already have about the program; and

ii. knowledge they gain from inquiries and observations they make in planning the audit.

c) Following Aspect of the program should be covered:

Laws and regulations – L&R for Govt. Programs are more specific than private sector

Purpose & Goals – Use purpose & goal as criteria for assessing program performance.


Efforts - Efforts are the amount of resources (in terms of money, material, personnel, and so forth) that are put into a program.

Program operations - Program operations are the strategies, processes, and activities the auditee uses to convert efforts into outputs.

Outputs - Outputs are the quantity of goods and services provided.

Outcome - Outcomes are accomplishments or results that occur (at least partially) because of services provided.

Criteria a) Criteria are the standards used to determine whether a program meets or exceeds expectations. They provide a context for understanding the results of the audit.

b) The audit plan, where possible, should state the Government Auditing Standards criteria to be used.

c) In selecting criteria, auditors have a responsibility to use criteria that are reasonable, attainable, and relevant to the matters being audited.

Audit Follow-Up

a) Auditors should follow up on significant findings and recommendations from previous audits that could affect the audit objectives.

b) They should do this to determine whether timely and appropriate corrective actions have been taken by auditee officials.

c) The audit report should disclose the status of uncorrected significant findings and recommendations from prior audits that affect the audit objectives.

Considering Others' Work

If other auditor has done Performance audit or Financial audit, they may be useful source of information for planning and performing the Performance Audit – a) areas that warrant further study b) selection of methodology, as the auditors may be able to rely on that work to limit the

extent of their own testing


3.1. Investments

AMENDMENT NO.-1 Certain Points Deleted in The Investment Topic

1. Disclosure Requirement as per Third Schedule of Banking Regulation Act, 1949

Investment in India

a) Government securities b) Other approved securities c) Shares d) Debentures and Bonds e) Subsidiaries and/or joint ventures f) Others (to be specified)

Investment outside India

a) Government securities (including local authorities) b) Subsidiaries and/or joint ventures abroad c) Other investments (to be specified)

2. Common Terms used in Relation to Investment [NOT RELEVANT FOR NOV 2016 attempt onward]

Approved Securities

Section 5(a) of the Banking Regulation Act, 1949 defines –

Securities in which a trustee may invest money under clauses (a) to (d) and (f) of section 20 of the Indian Trusts Act, 1882.

Approved securities comprise primarily the securities issued or guaranteed by the Central or State Government, or any other security expressly authorised by the Central Government by notification in the official gazette.

Government Security

A government security is an instrument issued by the Central or a State Government, which is redeemable after a fixed period and carry a fixed interest rate.

Liquidity Adjustment Facility (LAF)

A monetary tool used by the RBI for injecting liquidity or absorption of the liquidity from the banking system.

The LAF is operationalised through Repo and Reverse Repo.

CHAPTER : BANK AUDIT


Portfolio Management Scheme (PMS)

In a portfolio management scheme, the bank administering the scheme makes investments on behalf of clients for a ‘management fee’. This is a fiduciary activity in which the profit or loss from the transactions belongs to the client.

A bank can perform the services of PMS only after approval of RBI and getting registered with SEBI.

Ready-forward Transactions or Repo

a) Ready-forward or Repo transactions are arrangements for current sale of securities and their simultaneous re-purchase at a future date at a price fixed at the time of sale.

b) Difference between two prices constitutes -

Financing cost of the bank that sells and agrees to repurchase the securities subsequently from the other party to the transaction.

Yield on the transaction from the view point of the other party.

3. Classification of Investments

Particulars Held to Maturity (HTM) Held for Trading (HFT) Available for Sale (AFS)

Meaning The securities acquired by the bank with the intention to hold them up to maturity will be classified under Held to Maturity. RBI Guidelines Refer Note 1 below

The securities acquired by the banks with the intention of trading by taking advantage of the short -term price/interest rate movements will be classified under Held For Trading RBI Guidelines These securities are to be sold within 90 days.

The securities which do not fall within Held to Maturity & Held for Trading categories will be classified under Available for Sale

Profit on sale of Investment -

Profit on sale of investment in HTM category should first be credited to Profit & Loss account and thereafter appropriated to ‘Capital Reserve Account’. Sum so appropriated shall be net of taxes and transfer to statutory reserves. Loss is to be charged to Profit & Loss Account.

Profit or loss on sale of investments in HFT category will be recognised in the Profit & Loss Account.

Profit or loss on sale of investments in AFS category will be recognised in the Profit & Loss Account.

Valuation -

Investment classified under HTM category need not be marked to market and will be carried at acquisition cost unless it is more than the face value, in which case the premium should be amortised over the period remaining to maturity.

The individual scrips in the held for trading category will be marked to market at monthly or at more frequent intervals as in the case of those in the Available for Sale category. The book value of the individual securities in this category would not undergo any change after marking to market.

The individual scrips in the AFS category will be marked to market at the quarterly or at more frequent intervals. While the net depreciation under each classification given above should be recognised and fully provided for, the net appreciation under each classification should be ignored. The book value of the individual securities would not


undergo any change after revaluation.

HTM Category-Broad Guidelines- [NOT RELEVANT FOR NOV 2016 attempt onward]

Note 1: RBI guidelines for HTM Category are as follows- 1) Investments should not exceed 25 per cent of the total investments of the bank, however, this limit can be

exceeded, provided- a) The excess comprises only SLR securities, and b) The total SLR securities held in the HTM category is not more than 25 per cent of their DTL as on the

last Friday of the second preceding fortnight. 2) Following are not counted for 25% limit

a) Re-capitalisation bonds received from the GOI towards their recapitalisation requirement and held in their investment portfolio.

b) Investment in subsidiaries and joint ventures c) The investments in debentures/bonds, which are deemed to be in the nature of advance (i.e. subject

to specified conditions) c) The investments in long-term bonds, issued by companies engaged in infrastructure activities. The minimum residual maturity of seven years should be at the time of investment in these bonds. Once invested, banks may continue to classify these investments under HTM category even if the residual maturity falls below seven years subsequently(New insertion)

3) Banks may hold the following securities under HTM category: a) SLR securities upto 25 per cent of DTL as on the last Friday of the second preceding fortnight. b) Non-SLR securities included under HTM as on September 2, 2004. No fresh non- SLR securities are

permitted to be included under HTM except:

Fresh re-capitalisation bonds received from the GOI towards their re-capitalisation requirement and held in investment portfolio.

Fresh investment in the equity of subsidiaries and joint ventures

RIDF/ SIDBI deposits.

INVESTMENT IN LONG-TERM BONDS (WITH A MINIMUM RESIDUAL MATURITY OF SEVEN YEARS) ISSUED BY COMPANIES ENGAGED IN INFRASTRUCTURE ACTIVITIES.(Latest Insertion)

Shifting Among Categories - [NOT RELEVANT FOR NOV 2016 attempt onward]

Shift investments to/from HTM category - with the approval of the BOD, Once in a year, only at the beginning of the accounting year.

Shift investments from AFS to HFT category - with the approval of their BOD/ALCO /Investment Committee. In case of exigencies, such shifting may be done with the approval of the Chief Executive of the bank/head of the ALCO, but should be ratified by the board of directors/ALCO.

Shift investments from HFT to AFS category- is not permitted except under exceptional circumstances only with the approval of board/ ALCO /Investment Committee.

Value at which shifting should be done Shifting of investments from one category to another should, under all circumstances, be done at the lowest of-

(i) acquisition cost; (ii) book value; and (iii) market value on the date of transfer.


Acquisition Charges

Costs such as brokerage, fees, commission or taxes incurred at the time of acquisition of securities in the available-for-sale and held-to-maturity categories should be recognised immediately as expenses.

Broken-period Interest

Banks should not capitalise the Broken Period Interest paid to seller as part of cost, but treat it as an item of expenditure under Profit and Loss Account.

4. Audit Procedure on Verification of Investment

Internal Control Evaluation

Review the internal controls over investments whether the same are as per the guidelines of the RBI.

Separation of Investment Functions

Examine the compliance of RBI norms in respect to PMS account maintained separately for the investments made by it on their own Investment Account, on PMS clients’ account, and on behalf of other constituents (including brokers).

Examination of Reconciliation

Examine the reconciliation of the investment account, physically verify the securities on hand

Examination of Documents

a) Verify that the transactions for the purchase/sale of investments are supported by due authority and documentation.

b) Verify the acquisition/disposal of investments with reference to the broker’s contract note, bill of costs, receipts and other similar evidence.

c) Ascertain whether the investments have been purchased or sold cum-dividend/ex-dividend, cum-interest/ex-interest, cum-right/ex-right, or cum-bonus/ex-bonus.

Physical Verification

Verify the investment scrips physically at the close of business on the date of the balance sheet. If not at BS date – then at alternative date and consider adjustment for subsequent transactions.

Classification Classify them in to (i) securities held by the bank on behalf of others – held as security against Loans and Advances, and (ii) Own investments.

Income Recognition

a) Verify the portfolio of Bank’s investment to see whether there are any securities held beyond maturity dates.

b) Examine whether provision for loss on account of non-receipt of income/interest is required

Valuation a) Verify the valuation of Investments to confirm compliances with RBI guidelinesVerify whether adequate provisions has been provided, for any – (i) huge fall in value of permanent investment that endangers the solvency of the Bank, and (ii) losses in subsidiary in excess of its capital

Disclosure Ensure compliance with disclosure requirements as per III Schedule to the Banking Regulation Act


AMENDMENT NO.-2

Certain Points Deleted in The Topic- Prudential norms on Income Recognition, Asset Classification, Provisioning and Other Related Matters

Classification Norms relating to NPAs

Post Shipment Supplier’s Credit

Where the credit extended by banks are guaranteed by EXIM Bank, the extent to which payment has been received from EXIM bank on guarantee the advance may not be treated as NPA. [NOT RELEVANT FOR NOV 2016 attempt onward]

Takeout Finance

Under such an arrangement, the bank or financial institution financing the project transfers to another bank or financial institution, the outstanding of a project finance.

During the time-lag involved in the taking-over, the account may slip into NPA. In respect of such takeout finances, the taking over bank/institution should classify the account as NPA on the basis of the actual date of NPA with the previous institution/bank irrespective of the fact that the account was not in its books as on that date.

Similarly, the lending institution should also make provision against any asset turning into NPA pending its takeover by the takeover institution. As and when the asset is taken over by the taking over institution, the lending institution can reverse such provision.

[NOT RELEVANT FOR NOV 2016 attempt onward]

Export Project Finance

Where the actual importer has paid the dues to the bank abroad and the proceeds have not been made good to the bank granting finance due to any political reasons, such account need not be classified as NPA if the bank is able to establish through documentary evidence that the importer has cleared the dues in full. It will be considered NPA only after expiry of one year. [NOT RELEVANT FOR NOV 2016 attempt onward]

Project Finance Under Moratorium Period

Where moratorium period is available for payment of interest and/ or repayment of instalment, then interest/instalment becomes “due” only after the end of moratorium/gestation period. [NOT RELEVANT FOR NOV 2016 attempt onward]

3.13.Classification of Advances & Provisioning Norms [NOT RELEVANT FOR NOV 2016 attempt

onward. Topic Delted in SM 2016]

The guidelines require banks to classify their advances into four broad categories for the purpose of provisioning as follows. Standard assets

Meaning A standard asset is one which does not disclose any problems and which does not carry more than normal risk attached to the business. Such an asset is not a NPA.

Provision Norms

(i) The bank requires to make a general provision for standard assets at the following rates for the funded outstanding on global loan portfolio basis. The general provision towards standard assets as per Master circular is as follows:

1) direct advances to agricultural and Small and Micro Enterprises (SMEs) sectors at 0.25 per cent;

2) advances to Commercial Real Estate (CRE) Sector at 1.00 per cent; 3) Advances to Commercial Real Estate – Residential Housing Sector (CRE - RH) at


0.75 per cent; 4) Housing loans extended at teaser rates – 2.00%. The provisioning on these assets

would revert to 0.40 per cent after 1 year from the date on which the rates are reset at higher rates if the accounts remain ‘standard’;

5) Restructured accounts classified as standard advances will attract a higher provision (as prescribed from time to time) in the first two years from the date of restructuring. In cases of moratorium on payment of interest/principal after restructuring, such advances will attract the prescribed higher provision for the period covering moratorium and two years thereafter. Restructured accounts classified as non-performing advances, when upgraded to standard category will attract a higher provision (as prescribed from time to time) in the first year from the date of upgradation. The above-mentioned higher provision on restructured standard advances (2.75 per cent as prescribed vide circular dated November 26, 2012) would increase to 5 per cent in respect of new restructured standard accounts (flow) with effect from June 1, 2013 and increase in a phased manner for the stock of restructured standard accounts as on May 31, 2013 as under: 3.50 per cent - with effect from March 31, 2014 (spread over the fourquarters

of 2013-14) 4.25 per cent - with effect from March 31, 2015 (spread over the fourquarters

of 2014-15) 5.00 per cent - - with effect from March 31, 2016 (spread over the four

quarters of 2015-16) 6) All other loans and advances not included above - 0.40%

(ii) It is clarified that the Medium Enterprises will attract 0.40% standard asset provisioning. The definition of the terms Micro Enterprises, Small Enterprises, and Medium Enterprises shall be in terms of Master Circular on Lending to Micro, Small & Medium Enterprises (MSME) Sector. (iii) While the provisions on individual portfolios are required to be calculated at the rates applicable to them, the excess or shortfall in the provisioning, vis-avis the position as on any previous date, should be determined on an aggregate basis. (iv) The provisions on standard assets should not be reckoned for arriving at net NPAs. The provisions towards Standard Assets need not be netted from gross advances but included as 'Contingent Provisions against Standard Assets' under 'Other Liabilities and Provisions - Others' in Schedule 5 of the balance sheet.

Sub-Standard Assets

Meaning w.e.f. March 31, 2005, a sub-standard asset is one which has remained NPA for a period less than or equal to 12 months.

Provision Norms

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

(b) Excess Provision: The ‘unsecured exposures’ which are identified as ‘substandard’ would attract additional provision of 10 per cent, i.e., a total of 25 per cent on the outstanding balance.

(c) Infrastructure Loan A/c: However, in view of certain safeguards such as escrow accounts available in respect of infrastructure lending, infrastructure loan accounts which are classified as sub-standard will attract a provisioning of 20 per cent instead of


the aforesaid prescription of 25 per cent. To avail of this benefit of lower provisioning, the banks should have in place an appropriate mechanism to escrow the cash flows and also have a clear and legal first claim on these cash flows.

Unsecured exposure

Exposure where the realisable value of the security, as assessed by the bank/approved valuers/Reserve Bank’s inspecting officers, is not more than 10 percent, ab-initio, of the outstanding exposure.

Exposure’ shall include all funded and non-funded exposures (including underwriting and similar commitments).

Security It mean tangible security properly discharged to the bank and will not include intangible

Doubtful Assets

Meaning w.e.f. March 31, 2005, an asset is classified as doubtful if it has remained in the sub-standard category for a period of 12 months.

Provision Norms

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

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

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

In case the advance covered by CGTSI guarantee becomes non-performing, no provision need be made towards the guaranteed portion

Period - advance remain in doubtful category %

Up to one year 25

More than 1 up to 3 years 40

More than 3 years 100

Loss Asset

Meaning A loss asset is one where loss has been identified by: a) the bank; or b) the internal or external auditors; or c) 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 continuance as a bankable asset is not warranted although there may be some salvage or recovery value.

Provision Norms

The entire amount should be written off. If the assets are permitted to remain in the books for any reason, 100 percent of the

outstanding should be provided for.

Advance covered by guarantees of Credit Guarantee Fund Trust for Micro and Small Enterprises (CGTMSE) or Credit Risk Guarantee Fund Trust for Low Income Housing (CRGFTLIH):


In case the advance covered by CGTMSE or CRGFTLIH 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 for as per the extant guidelines on provisioning for non- performing advances. After statutory audit, RBI conducts annual financial inspection of banks .Auditors may go through the divergence reported by RBI, if any, in terms of classification as well as provisioning and whether the same divergence has been appropriately addressed /clarified, by Banks. Accordingly auditor would be well advised to consider these aspects while take final view on classification /provisioning of such accounts.

Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act (SRFAESI), 2002 Securitisation of Standard Assets: [NOT RELEVANT FOR NOV 2016 attempt onward] After the enactment of the Securitization and Reconstruction of Financial Asset and Enforcement of Security Interest Act, 2002, banks have got significant power to possess the securities of defaulting borrower. Banks can now take possession of the assets from borrower and convert the same in Security Receipts.

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

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

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

Acounting Treatment in the Book of subscribing

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


Bank

AMENDMENT NO.-3

Restructuring / Re-scheduling of Loans NOT RELEVANT FOR NOV 2016 ATTEMPT. Content of the Topic has been Changed

Eligibility Criteria

Banks may restructure the accounts classified under 'standard', 'sub-standard' and

'doubtful' categories.

Banks cannot reschedule / restructure / renegotiate borrowable accounts with

retrospective effect.

While a restructuring proposal is under consideration, the usual asset classification

norms would continue to apply.

Financial Viability

a) Account restructuring can be taken up by the banks when – (ii) the financial viability is established; and (iii) there is a reasonable certainty of repayment from the borrower, as per the terms

of restructuring package. b) The viability should be determined by the banks based on the acceptable viability

benchmarks determined by them, which may be applied on a case-by-case basis, depending on merits of each case. The parameters may include:

Return on Capital Employed

Debt Service Coverage Ratio

Assessing the viability of the project

Cash flow of the borrower c) BIFR cases are not eligible for restructuring without the express approval of the BIFR.

Asset Classification Norms

1) STAGES OF RESTRUCTURING The stages at which the restructuring/rescheduling/ renegotiation of the terms of loan agreement could take place are as under:

a) before commencement of commercial production/operation; b) after commencement of commercial production/operation but before the asset

has been classified as sub standard; and c) after commencement of commercial production/operation and after the asset has

been classified as sub standard or doubtful 2) Treatment of Restructured Standard/Sub-Standard Accounts:

a) The accounts classified as 'standard assets' should be immediately re-classified as 'substandard assets' upon restructuring

b) The non-performing assets, upon restructuring, would continue to have the same asset classification as prior to restructuring and slip into further lower asset classification categories as per extant asset classification norms with reference to the pre-restructuring repayment schedule

c) Any additional finance may be treated as ‘standard asset’, up to a period of one year after the first interest/principal payment, whichever is earlier, falls due under the approved restructuring package.

d) If the restructured asset does not qualify for up-gradation at the end of the above specified one year period, the additional finance shall be placed in the same asset classification category as the restructured debt.

Upgradation of Accounts

All restructured accounts which have been classified as NPA upon restructuring, would be eligible for up-gradation to the ‘standard’ category after observation of ‘satisfactory performance’ during the ‘specified period’.

Specified Period means a period of one year from the date when the first payment of


interest or instalment of principal falls due under the terms of restructuring package. If satisfactory is not evidenced, the asset classification of the restructured account

would be governed as per the applicable prudential norms with reference to the pre-restructuring payment schedule.

Income Recognition Norms

Interest income in respect of restructured accounts classified as 'standard assets' is to be recognised on accrual basis and that in respect of the accounts classified as 'non-performing assets' is to be recognised on cash basis.

Provisioning Norms

Normal Provisions Additional Provisions (Note 1)

As per the existing provisioning norms on all restructured advance

To recognise the decrease in value of asset, the difference between the "the present value of future cash flows (principal and interest) reckoned based on the current BPLR as on the date of restructuring plus the appropriate term premium and credit risk premium for the borrower category on the date of restructuring", and 'the present value of future cash flows' (principal and interest) based on rate charged as per the restructuring package).

Note 1 Reduction in the rate of interest and /or reschedulement of the repayment of principal amount, as part of the restructuring, will result in diminution in the fair value of the advance. Such diminution in value is an economic loss for the bank and will have impact on the bank's market value of equity. It is, therefore, necessary for banks to measure such diminution in the fair value of the advance and make provisions for it by debit to Profit & Loss Account. Such provision should be held in addition to the provisions as per existing provisioning norms as indicated above, and in an account distinct from that for normal provisions.

AMENDMENT NO.-4

Corporate Debt Restructuring NOT RELEVANT FOR NOV 2016 ATTEMPT. Content of the Topic has been Changed

5.1. Corporate Debt Restructuring-

Eligibility criteria a) CDR mechanism is a non-statutory, voluntary system based

on debtor-creditor arrangement or inter creditor arrangement.

b) For corporate debt of viable entities, outside the purview of BIFR, DRT and other Legal Proceedings

c) The CDR mechanism will cover only multiple banking accounts / syndication / consortium accounts of corporate borrowers with outstanding fund based and non-fund based exposure of Rs.10 crore and above banks and institutions.

d) Corporates indulging in frauds and malfeasance even in a single bank are ineligible for restructuring under CDR mechanism.

Categories The Category 1 CDR system will be applicable only to accounts classified as 'standard' and 'substandard'.

The Category 2 CDR system will be applicable only to “Doubtful account” “Stand-Still” clause (i.e. both parties commit themselves not to take recourse to any

legal action during 90/180 days period) would be applicable to all debtor-creditor arrangement.


Reference to CDR System

Reference to Corporate Debt Restructuring System could be triggered by: (i) any or more of the creditor who have minimum 20% share in either working capital or term finance, or by the concerned corporate, if supported by a bank or financial institution having stake of Rs. 100 crore and above. (ii) Though flexibility is available whereby the lenders could either consider restructuring outside the purview of the CDR system or even initiate legal proceedings where warranted, banks/FIs should review all eligible cases where the exposure of the financial system is more than Rs. 100 crore and decide about referring the case to CDR system or to proceed under the new SRFAESI Act, 2002 or to file a suite in DRT etc.

Asset Classification

During pendency of the case with CDR system, the usual asset classification norms would continue to apply.

If the approved restructuring package is implemented within 4 months from the date of its approval, the asset classification status may be restored to its position which existed when the reference was made to the CDR cell.

Prudential and Accounting Issues

1) Restructuring of corporate debts under CDR system could take place in the following stages: a) before commencement of commercial production; b) after commencement of commercial production but before the asset has been

classified as ‘substandard’; 2) After commencement of commercial production and the asset has been classified

as ‘substandard’ or ‘doubtful’. Accounts restructured under CDR system, including accounts classified as 'doubtful' under Category 2 CDR, would be eligible for regulatory concession in asset classification and provisioning only if : a) Restructuring under CDR mechanism is done for the first time, b) The unit becomes viable in 7 years and the repayment period for the restructured

debts does not exceed 10 years, c) Promoters’ sacrifice and additional funds brought by them should be a minimum of

15% of creditors’ sacrifice, and d) Personal guarantee is offered by the promoter except when the unit is affected by

external factors pertaining to the economy and industry.

Auditor’s Duties

a) Study / Review the credit appraisal made at the time of sanction of the advance, and latest renewal / review report of the Borrower Account, to gain knowledge on the history of the account and its present position.

b) Review the operations in the account, and examine whether periodic statements like stock statements, Balance Sheet, Audit Reports, etc. are received promptly

c) Review the latest position of the Borrower Account based on individual credit facilities sanctioned and the outstanding in the accounts.

d) Review the present classification of the Borrower Account, and ascertain whether the account has slipped in to NPA category nor not. Irrespective of whether the lender bank has classified the account as NPA or not.

e) Study the rehabilitation program approved by the CDR Cell and its effect on rehabilitation, revised payment schedule, sacrifices made by the Bank, etc. Review the asset classification in the light of the above

f) See whether the Bank has disclosed details of CDR in its Notes on Accounts.

Sacrifice on NPAs for which CDR has been undertaken


Computation of Sacrifice Auditors’ Duties

In case of rescheduling of accounts under CDR mechanism, the element of interest is to be computed in Present Value (PV) Terms.

The Sacrifice is computed as the difference between – a) PV of future Interest Income reckoned based

on current BPLR as on the date of restructuring plus the appropriate term premium and the credit risk premium for the Borrower Category on the date of restructuring,

b) Interest charged as per the instructing package discounted by the current BPLR as on the date of restructuring plus appropriate term premium and credit risk premium as on the date of restructuring.

Check the appropriate credit risk premium for the specific Borrower Category for all restructured accounts.

Ascertain appropriate rate of discount Check the computation of PV of interest and

the sacrifice amount See that the entire amount has been written

off or provided for, in case sacrifice is positive. Verify provisions of adequate security

coverage of loan in case of restructuring of principal amounts.

AMENDMENT NO.-5 Restructuring of cases Topic Totally Changed for Nov 2016 attempt onwards RBI has given revised the guidelines for treatment of restructured accounts by its circular. The auditor should verify compliance with the requirements of the circular issued in this regard. Once the bank receives an application/proposal in respect of an account for restructuring, it implies that the account is intrinsically weak. Thereby during the time the account remains pending for restructuring, the auditors need to take a view whether provision needs to be made in respect of such accounts pending approval for restructuring .

Upgradation of Account:

The auditor should examine all the accounts upgraded during the year to ensure that the upgrading of each account is strictly in terms of RBI guidelines. Auditor has to ensure that any upgrading of accounts classified as „Sub -Standard‟ or „Doubtful‟ category wherein restructuring / rephasement of principal or interest has taken place should be upgraded to the „Standard Asset‟ category only after a period of one year after the date when first payment of interest or of principal, whichever is earlier, falls due under the rescheduled terms, subject to satisfactory performance during the period. The total amount becoming due during this period of one year should be recovered and there should be no overdues to make it eligible for upgradation. If the amount which has become due during this one year period is on a lower side vis a vis total amount outstanding, the other aspects of the account, viz financial performance, availability of security, operations in account, etc., should be reviewed in detail and only if found satisfactory, the account should be upgraded.

Audit Procedure for Accounts falling under CDR (Corporate Debt Restructuring)

Programme: Following audit procedures are to be carried out to assess / gain an understanding about the borrower account- (a) Review the present classification of the account under IRAC norms adopted by the bank and corresponding provision made in the books of accounts, if any. If the account is already treated as NPA in the books of the bank, the same cannot be upgraded only because of the CDR package. (b) Review the Debtor- Creditor Agreement (DCA) and Inter Creditor Agreement (ICA) with respect to availability of such agreements and necessary provisions in the agreement for reference to CDR cell in case of necessity, penal clauses, stand-still clause, to abide by the various elements of CDR system etc., (DCA may be entered into at the time of original sanction of loan or at the time of reference to CDR). (c) Auditor has to ascertain the terms of rehabilitation along with the sacrifices, if any,


assumed in the rehabilitation program to verify whether such sacrifices have been accounted in the books of accounts of the lender. Ascertain whether any additional financing / conversion of loan into equity have been envisaged in the rehabilitation / restructuring program. Auditor should also ascertain whether account has been referred to BIFR, as such cases are not eligible for restructuring under CDR system. Large value BIFR cases may be eligible for restructuring under CDR if specifically recommended by CDR core group. Auditor has to verify the necessary approvals / recommendations by CDR core group if auditor comes across any BIFR cases. Auditor has to ensure that accounts wherein recovery suits have been filed, the initiative to resolve under CDR system is taken by at least by 75% of the creditors by value and 60% in number provided the account meets the basic criteria for becoming eligible under CDR mechanism.

Treatment of accounts restructured under CDR program: Classification and Provisioning:

The criteria for classification of accounts will be on the basis of record of recovery as per the existing prudential norms. The asset classification will be as per the lender bank‟s record of recovery and will be bank specific. The auditor should ensure that the lender has applied the usual asset classific ation norms pending outcome of the account with the CDR Cell. The asset classification status should be restored to the position, which existed at the time of reference to the cell if the restructuring under the CDR system takes place. The auditor should also ensure that in case a standard asset has been restructured second or more time, it has been downgraded to “sub-standard” asset. The auditor should also ensure that proper disclosure in the Notes to Accounts in respect of CDR of SME undertaken by the bank during the year, as prescribed in the RBI‟s circular, has been made.


AMENDMENT NO.-1

Conceptual Understanding Pertaining to Insurance Industry Certain Points Deleted and certain Point Amended]

Insurer Section 2(9) of the Insurance Act, 1938 -Latest Amendments

Insurer means: (a) an Indian Insurance Company, or (b) a statutory body established by an Act of Parliament to carry on insurance business, or (c) an insurance co-operative society, or (d) a foreign company engaged in re-insurance business through a branch established in India. It may be noted that a "foreign company" shall mean a company or body established or incorporated under a law of any country outside India and includes Lloyd's established under the Lloyd's Act, 1871 (United Kingdom) or any of its Members.

Meaning of Indian Insurance Company[section 2(7A) of the Insurance Act, 1938 ]- LATEST AMENDMENTS

“Indian insurance company” means any insurer, being a company which is limited by shares, and,- (a) which is formed and registered under the Companies Act, 2013 as a public company or is converted into such a company within one year of the commencement of the Insurance Laws (Amendment) Act, 2015. (b) in which the aggregate holdings of equity shares by foreign investors, including portfolio investors, does not exceed 49% of the paid up equity capital of such Indian Insurance company, which is Indian owned and controlled, in such manner as may be prescribed. Here, the expression „control‟ shall include the right to appoint a majority of the directors or to control the management or policy decisions including by virtue of their shareholding or management rights or shareholders agreements or voting agreements. (c) whose sole purpose is to carry on life insurance business or general insurance business or re-insurance business or health insurance business. Registration of Indian Insurance Companies - Section 3 of the Insurance Act, 1938 requires every insurer to obtain a certificate of registration before commencement of insurance business in India

CHAPTER : AUDIT OF GENERAL INSURANCE COMPANIES


Prohibition of Insurance Business by Certain Person

Prior to the IRDA Act coming into force the insurance business could be transacted by

a public company,

a co-operative society or

anybody corporate. Third proviso to section 2C(1) of the Insurance Act 1938 (inserted by the IRDA Act,

1999) prohibits persons other than an Indian insurance company to transact the insurance business .

Thus, the enterprises that were engaged in the insurance business prior to the commencement of the IRDA Act, 1999 continue to exist but a new insurance industry entrant can only be an Indian insurance company.

Licensing of Insurance Agents

Section 42 of the Insurance Act, 1938 requires that a person desirous of becoming an insurance agent should possess the following requisite qualifications and practical training for a period not exceeding 12 months, as may be specified in IRDA (Licensing of Insurance Agents) Regulations, 2000. - [NOT RELEVANT FOR NOV 2016 attempt onward]

Obligations of Insurance Companies to the Rural and Social Sectors

Section 32B empowers the Authority to prescribe the percentages of life insurance business, and general insurance business in the rural or social sector.

Section 32C makes it mandatory for every insurer to discharge his obligations mentioned under section 32B of the Act.

According to the Regulations, during the first five financial years, an insurance company is required to ensure that the total gross premium income pertaining to the rural sector (including insurance for crops) should be at least 2% in the first financial year, 3% in the second financial year and 5% thereafter of the total gross premium income written directly in that year. - [NOT RELEVANT FOR NOV 2016 attempt onward]

Minimum Paid-up Capital [Latest Amendments]

The minimum paid-up equity share capital of an Indian insurance company carrying on general insurance business should be ` 100 crores excluding preliminary expenses incurred in the formation and registration of company. The insurer may enhance the same in accordance with the provisions of the Companies Act, 2013, SEBI Act, 1992 and the rules, regulations or directions issued thereunder or any other law for the time being in force.

Deposits (Section 7 of the Insurance Act, 1938)

It requires every insurer, carrying a general insurance business, to deposit and keep deposited with RBI a sum equivalent to three percent (3%) of total gross premium written in India in any financial year.

The maximum limit of deposit under this section is Rs. 10 crores. The deposit is to on behalf of the Government of India. The deposit can be made either

by way of cash or investment in approved securities. The amount of deposit required in the case of reinsurance business is Rs. 20 crores. Where the business done is marine insurance business or relates exclusively to country

craft or its cargo or both, the amount of deposit required in such cases is Rs. 1 lakhs only.

- [NOT RELEVANT FOR NOV 2016 attempt onward]

AMENDMENT NO.-2 Unexpired Risk Reserve- Certain New Points Inserted]

4.6.5. Unexpired Risk Reserve-

Meaning Unexpired Risk Reserve is created for the policies that do not expire on balance sheet date. Since there is unexpired liability under various policies which may occur during the remaining term of the policy beyond the year end and risk continues in the following years, hence this reserve is created.


Provisions- Latest Insertion

As per section 64V of the Insurance Act, 1938, for the purpose of compliance with the provisions of maintaining control level of solvency margin, a proper value of every item of liability of the insurer shall be placed in the manner as may be specified by the regulations made in this behalf. It may be mentioned that the profit and gain of insurance companies are governed by the provisions of section 44 of the Income Tax Act, 1961. In this regard, Rule 5 of the First Schedule to the Income Tax Act-Computation of Profit & Loss of General Insurance Business provides for creation of a reserve for unexpired risks as prescribed under Rule 6E of the Income Tax Rules, 1962. According to this Rule, the insurance companies are allowed a deduction of 50 per cent of net premium income in respect of Fire and Miscellaneous Business and 100 per cent of the net premium income relating to Marine Insurance business.

Audit Procedure

Verify the amount of unexpired risk reserve is created as per % specified under Insurance Act

If it is not created as per specified %, auditor may qualify his report.

AMENDMENT NO.-2 Solvency Margin Certain New Points Inserted]

4.6.8. Solvency Margin

Meaning Every insurer should maintain an excess of the value of its assets over the amount of its liabilities at all times. The excess is known as ‘Solvency Margin’.

Solvency Margin Latest Insertion

the solvency margin shall not be less than 50% of the amount of minimum capital as stated under section 6 (requirement as to capital) of the Act and arrived at in the manner specified by the regulations. The Authority, by way of regulation, shall specify a level of solvency margin known as control level of solvency‟. However, in certain special circumstances, the authority may direct application of this provision with some modifications provided this shall not result in the control level of solvency being less than what is stipulated in above para.

Submission of Plan

If, at any time, an insurer or re-insurer does not maintain the required control level of solvency margin, he is required to submit a financial plan to the Authority indicating the plan of action to correct the deficiency. If, on consideration of the plan, the Authority finds it inadequate, the insurer has to modify the financial plan.

In case of default

Maintenance of solvency margin has a great importance for an insurance company considering their size and nature of business and also involvement of public money. Section 64VA(2) states that if an insurer or re-insurer fails to comply with the prescribed requirement of maintaining excess of value of assets over amount of liabilities, it shall deemed to be insolvent and may be wound up by the Court on an application made by the authority.


AMENDMENT NO.-1 COMPANIES (COST RECORDS AND AUDIT) RULES, 2014 - AS AMENDED

6.1 Cost Audit Under Companies Act

COMPANIES (COST RECORDS AND AUDIT) RULES, 2014 - AS AMENDED

Application of Cost records - Rule 3

Rule 3 of the Companies (Cost Records and Audit) Rules, 2014 provides the classes of companies, engaged in the production of goods or providing services having an overall turnover from all its products and services of`35 crore or more during the immediately preceding financial year, required to include cost records in their books of account

These companies include Foreign Companies defined in Section 2(42) of the Act, but exclude a company classified as a Micro enterprise or a Small enterprise including as per the turnover criteria provided under Micro, Small and Medium Enterprises Development Act, 2006.

The said rule has divided the list of companies into regulated sectors and non-regulated sectors.

Regulated Sector Industries Non-Regulated Sectors

(i) Telecommunication services made available to users by means of any transmission or reception of signs, signals, images etc. (other than broadcasting services) and regulated by the Telecom Regulatory Authority of India. (ii) Generation, transmission, distribution and supply of electricity regulated by the relevant regulatory body or authority under the Electricity Act, 2003, other than for captive generation. (iii) Petroleum products regulated by the Petroleum and Natural Gas Regulatory Board. (iv) Drugs and Pharmaceutical. (v) Fertilisers. (v) Sugar and industrial alcohol.

(i) Machinery and mechanical appliances used in defence, space and atomic energy sectors excluding any ancillary item or items. (ii) Turbo jets and turbo propellers. (iii) Tyres and Tubes. (iv) Steel (v) Cement. (vi) Production, import and supply or trading of following medical devices, such as heart valves; orthopaedic implants; pacemaker (temporary and permanent), etc. The rule excludes the foreign companies having only liaison offices.

Applicability for Cost Audit - Rule 4

Regulated Sector Non-Regulated Sectors

♦ Cost records are required to be audited if the overall annual turnover of the company from all its products and services during the immediately preceding financial year is Rs. 50 Cr. or more AND

♦ Cost records are required to be audited if the overall annual turnover of the company from all its products and services during the immediately preceding financial year is Rs. 100 Cr. or more AND

♦ The aggregate turnover of the individual product

CHAPTER : COST AUDIT


♦ The aggregate turnover of the individual product or products or service or services for which cost records are required to be maintained under rule 3 is Rs. 25 Cr. or more.

or products or service or services for which cost records are required to be maintained under rule 3 is Rs. 35 Cr. or more.

Maintenance of Records - Rule 5

Every company under these rules including all units and branches thereof, shall, in respect of each of its financial year commencing on or after the 1st day of April, 2014, is required to maintain cost records in form CRA-1.

The cost records shall be maintained on regular basis in such manner as to facilitate calculation of per unit cost of production or cost of operations, cost of sales and margin for each of its products and activities for every financial year on monthly or quarterly or half-yearly or annual basis.

Additionally, as per clause (vi) to Paragraph 3 of the CARO, 2015, where maintenance of cost records has been specified by the Government under section 148(1) of the Companies Act, 2013, the auditor has to report whether such accounts and records have been made and maintained.

Cost Audit - Rule 6

Appointment of Cost Auditor

Companies required to get the cost records audited, shall within 180 Days of the commencement of every financial year, appoint a cost auditor.

Intimation to Cost auditor and CG

Company shall inform the cost auditor of his or its appointment as such and file a notice of such appointment with the Central Government within a period of 30 days of the Board meeting in which such appointment is made or within a period of 180 days of the commencement of the financial year, whichever is earlier, through electronic mode, in form CRA-2, along with the specified fee.

Tenure of Cost Auditor

Every cost auditor appointed as such shall continue in such capacity till the expiry of 180 days from the closure of the financial year or till he submits the cost audit report, for the financial year for which he has been appointed.

Filling of Casual Vacancy

Any casual vacancy in the office of a cost auditor, whether due to resignation, death or removal, shall be filled by the BOD within 30 days of occurrence of such vacancy and

The company shall inform the Central Government in Form CRA-2 within thirty days of such appointment of cost auditor.

Submission of Cost Audit report

Every cost auditor, who conducts an audit of the cost records of a company, shall submit the cost audit report along with his or its reservations or qualifications or observations or suggestions, if any, in form CRA-3.

Every cost auditor shall forward his report to the Board of Directors of the company within a period of 180 days from the closure of the financial year to which the report relates and the Board of Directors shall consider and examine such report particularly any reservation or qualification contained therein.

Duty to report on fraud:

The provisions of Section 143(12) of the Companies Act, 2013 and the relevant rules on duty to report on fraud shall apply mutatis mutandis to a cost auditor during performance of his functions under section 148 of the Act and these rules.

Furnishing of info. By the Company

Every company covered under these rules shall, within a period of thirty days from the date of receipt of a copy of the cost audit report, furnish the Central Government with such report along with full information and explanation on every reservation or qualification contained therein, in form CRA-4 along with specified fees.


Cost Audit Rules not to apply in certain cases:

The requirement for cost audit under these rules shall not apply to a company which is covered in rule 3; and (i) whose revenue from exports, in foreign exchange, exceeds seventy five per cent of

its total revenue; or (ii) which is operating from a special economic zone

Action by CG If, after considering the cost audit report referred to under this section and the, information and explanation furnished by the company as above, the Central Government is of the opinion, that any further information or explanation is necessary, it may call for such further information and explanation and the company shall furnish the same within such time as may be specified by that Government.

AMENDMENT NO.-2 Steps in Cost Audit- Presentation of Topic has been Changed

Broadly, cost audit is comprised of three steps i.e., review, verification and reporting. Step 1- Review

Collection and assimilation of all the relevant information and technicalities about the industryis an essential prerequisite of cost audit. The review should cover the following aspects: 1. Nature of the industry - priority industry, export-oriented industry etc. 2. Production method/process. 3. Important raw materials and their sources. 4. Licenced capacity and installed capacity. 5. Method of costing in use. 6. Method of accounting of raw materials, stores and production. 7. Method of accounting of wastages, spoilages and rejections. 8. Records relating to jigs and dies. 9. System of wages, salaries & overtime payment including incentive schemes, if any. 10. Basis of allocation of overheads to cost centres and of absorption to products. 11. Method of allocation of service department expenses. 12. Treatment of interest on borrowings. 13. Method of accounting of depreciation. 14. Accounting for sales and purchase - treatment with regard to sales tax, excise duty, etc. 15. System of year-end stock-taking. 16. Method of determination of work in progress. 17. Inventory valuation policy and method. 18. System of budgetary control. 19. System of internal audit. 20. State of internal control over cost accounts and cost accounting records. 21. Cost accounting manual, if any. cost auditor should also thoroughly review the costing system in vogue in relation to the production process and method, and should have a detailed knowledge of the flow of the production process and the documents that arise or are received in that course A detailed audit programme should thereafter be prepared. cost auditor should plan his test checking on the basis of strict rules of statistical sampling so that he knows how much risk he takes in adopting test checks and how reliable would be the opinion that he will express

Verification of cost

The examination of the cost statements and other records by the cost auditor will generally cover the following:


statements and other data

(i) Licensed capacity, installed and utilised capacities; (ii) Financial ratios; (iii) Production data; (iv) Cost of raw materials consumed; (v) Cost of power and fuel; (vi) Employee costs; (vii) Cost of stores etc. consumed; (viii) Provision for depreciation; (ix) Overheads and their allocation; (x) Royalty and technical aid payments; (xi) Sales relationships, local & export; (xii) Abnormal, non-recurring and special cost; (xiii) Cost statements; (xiv) Reconciliation with financial books. Necessity to refer to financial records- cost audit under the Companies Act cannot be performed without reference to financial books and records.

Reporting After completion of audit of costing and other relevant records the cost auditor is to submit his report.

A company shall within thirty days from the date of receipt of a copy of the cost audit report prepared (in pursuance of a direction issued by Central Government) furnish the Central Government with such report along with full information and explanation on every reservation or qualification contained therein

If, after considering the cost audit report furnished by the company as above, the Central Government is of the opinion, that any further information or explanation is necessary, it may call for such further information and explanation and the company shall furnish the same within such time as may be specified by that Government.

AMENDMENT NO.-3 GENERAL FEATURES OF COST AUDIT REPORT

The general features of the cost records to be maintained in the books of accounts as per Form CRA-1 pursuant to rule 5(1) of the Companies (Cost Records and Audit) Rules, 2014 have been amended by the Central Government vide notification dated 31st December, 2014. The Form CRA-1 prescribes the form in which cost records shall be maintained. The form categorises the requirement of maintaining proper details under 30 headings. The Main headings has been specified Below: (1) Material Cost, (2) Employee Cost, (3) Utilities, (4) Direct Expenses, (5) Repair and Maintenance, (6) Fixed Assets and Depreciation, (7) Overheads, (8) Administrative Overheads, (9) Transportation Cost, (10) Royalty and Technical Know-how, (11) Research and Development expenses, (12) Quality Control Expenses, (13) Pollution Control Expenses, (14) Service Department Expenses, (15) Packing Expenses, (16) Interest and Financing Charges, (17) Any other item of Cost, (18) Capacity Determination, (19) Work-in-progress and finished stock, (20) Captive Consumption, (21) By-Products and Joint Products, (22) Adjustment of Cost Variances, (23) Reconciliation of Cost and Financial Accounts, (24) Related Party Transactions, (25) Expenses or Incentives on Exports, (26) Production records, (27) Sales records, (28) Cost Statements, (29) Statistical Records, (30) Records of Physical Verification. Details of the some of the Elements have been specified below. If the Student want to go into Details in respect of each of the 30 elements , they can refer RTP

(i) Material Costs

Proper records shall be maintained showing separately all receipts, issues and balances both in quantities and cost of each item of raw material required for the production of goods or rendering of services under reference.


The material receipt shall be valued at purchase price including duties and taxes, freight inwards, insurance, and other expenditure directly attributable to procurement (net of trade discounts, rebates, taxes and duties refundable or to be credited by the taxing authorities) that can be quantified with reasonable accuracy at the time of acquisition. Finance costs incurred in connection with the acquisition of Material shall not form part of material cost. Spares which are specific to an item of equipment shall not be taken to inventory, but shall be capitalized with the cost of the specific equipment. Cost of capital spares or insurance spares, whether procured with the equipment or subsequently, shall be amortised over a period, not exceeding the useful life of the equipment. Normal loss or spoilage of material prior to reaching the factory or at places where the services are provided shall be absorbed in the cost of balance materials net of amounts recoverable from suppliers, insurers, carriers or recoveries from disposal. Where materials are accounted at standard cost, the price variances related to materials shall be treated as part of material cost. The material cost of normal scrap or defectives which are rejects shall be included in the material cost of goods manufactured. The material cost of actual scrap or defectives, not exceeding the normal shall be adjusted in the material cost of good production. Material Cost of abnormal scrap or objectives shall not be included in material cost but treated as loss after giving credit to the realisable value of such scrap or defectives.

(ii) Employee Cost

Proper records shall be maintained in respect of employee costs in whole such a manner as to enable the company to book these expenses cost centre wise or department wise with reference to goods or services under reference and to furnish necessary particulars. Where the employees work in such a manner that it is not possible to identify them with any specific cost centre or service centre or department, the employees cost shall be apportioned to the cost centre or service centres or departments on equitable and reasonable basis and applied consistently. Employee cost shall be ascertained taking into account the gross pay including all allowances payable along with the cost to the employer of all the benefits. Bonus whether payable as a statutory minimum or on a sharing of surplus shall be treated as part of employee cost. Ex-gratia payable in lieu of or in addition to bonus shall also be treated as part of the employee cost. Remuneration payable to Managerial Personnel including Executive Directors on the Board and other officers of a corporate body under a statute shall be considered as part of the employee cost of the year under reference whether the whole or part of the remuneration is computed as a percentage of profits. Remuneration paid to nonexecutive directors shall not form part of employee cost but shall form part of administrative overheads.

(xxi) By-Products and Joint Products

Proper records shall be maintained for each item of by-product, if any, produced showing the receipt, issues and balances, both in quantity and value. The basis adopted for valuation of by-product for giving credit to the respective process shall be equitable and consistent and shall be indicated in cost records. Records showing the expenses incurred on further processing, if any, and actual sales realisation of by-product shall be maintained. The proper records shall be maintained in respect of credits or recoveries from the disposal of by-products. Proper records shall be maintained the cost up to the point of separation of products or services shall be apportioned to joint products or services on reasonable and equitable basis and shall be applied consistently. The basis on which such joint costs are apportioned to different products or services arising from the process shall be indicated in the cost records. Proper records shall be maintained in respect credits or recoveries from the disposal of joint products or services.

(xxii) Adjustment of cost variances

Where the company maintains cost records on any basis other than actual such as standard costing, the records shall indicate the procedure followed by the company in working out the cost of the goods or services under such system. The cost variances shall be shown against


separate heads and analyzed into material, labour, overheads and further segregated into quantity, price and efficiency variances. The method followed for adjusting the cost variances in determining the actual cost of the goods or services shall be indicated clearly in the cost records. The reasons for the variances shall be duly explained in the cost records and statements.

(xxiii) Reconciliation of cost and financial accounts-

The cost statements shall be reconciled with the financial statements for the financial year specifically indicating the expenses or incomes not considered in the cost records or statements so as to ensure accuracy and to adjust the profit of the goods or services under reference with the overall profit of the Company. The variations, if any, shall be clearly indicated and explained.

(xxiv) Related party transactions

Related Party means related party as defined under clause (76) of section 2 of the Companies Act 2013. ‘Normal’ price means price charged for comparable and similar products in the ordinary course of trade and commerce where the price charged in the sole consideration of sale and such sale is not made to a related party. Normal price can be construed to be a price at which two unrelated and non-desperate parties would agree to a transaction and where such transaction is not clouded due to the proximity of the parties to the transaction and free from influence though the parties may have shared interest. In respect of related party transactions or supplies made or services rendered by a company to a company termed ‘related party relationship’ and vice -a-versa, records shall be maintained showing contracts entered into, agreements or understanding reached in respect of- (I) purchase and sale of raw materials, finished goods, rendering of services, process materials and rejected goods including scraps and other related materials; (II) utilisation of plant facilities and technical know-how; (III) supply of utilities and any other services; (IV) administrative, technical, managerial or any other consultancy services; (V) purchase and sale of capital goods including plant and machinery; and (VI) any other payment related to the production of goods or rendering of services under reference.

(xxviii) Cost statements

Cost statements (monthly, quarterly and annually) showing quantitative information in respect of each good or service under reference shall be prepared showing details of available capacity, actual production, production as per excise records, capacity utilization (in-house), stock purchased for trading, stock and other adjustments, quantity available for sale, wastage and actual sale during current financial year and previous year. Such statements shall also include details in respect of all major items of costs constituting cost of production of goods or services, cost of sales of goods or services and margin in total as well as per unit of the goods or services. The goods or services emerging from a process, which forms raw material or an input material or service for a subsequent process, shall be valued at the cost of production or cost of service up to the previous stage. Cost Statements in respect of reconciliation of indirect taxes showing details of total clearances of goods or services, assessable value, duties or taxes paid, CENVAT or VAT or Service Tax credit utilized, duties or taxes recovered and interest or penalty paid. If the company is operating more than one plant, factory or service centre, separate cost statements as specified above shall be prepared in respect of each plant, factory or service centre.


AMENDMENT NO.-1 Settlement System at Stock Exchange Certain Points Deleted

8.1.1. Settlement System at Stock Exchange

Rolling Settlement

a) A rolling settlement is one in which a transaction outstanding at the end of the day have to be settled within X number of business days from the transaction date.

b) If a transaction is entered on Monday on T+2 rolling settlement, it will be settled on Wednesday when pay in or payout take place.

c) SEBI has mandated most of the scrips to be settled exclusively on rolling settlement basis. d) Value at Risk (VaR) based margin approach has been adopted for transactions done in

Compulsory Rolling Settlement. e) In the VaR system of margin, historical volatilities of scrips and overall market volatility is

considered to arrive at a VaR margin percentage for a scrip. If a member fails to deliver the shares sold in rolling settlement, the exchange conducts an auction session to meet the shortfall credited by non-delivery of shares. 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 the seller but is credited to Investor Protection Fund.

Account Period Settlement TOPIC DELETED

a) Here the trades are accumulated over a trading cycle. At the end of the cycle, the trades are clubbed together, positions are netted and the balance is required to be settled.

b) Transactions are not settled immediately, but settled after a period of about 7 to 14 days from the date of transaction.

c) The members realize the sale proceeds/securities in accordance with the pay-in/pay-out schedules notified by the respective exchange.

d) Now this system in not operational in India.

AMENDMENT NO.-2 Circuit Filters or Circuit Breakers Certain Points Deleted

10.1.1. Circuit Filters or Circuit Breakers

Market Wide Circuit Breakers (MWCB)

Market wide circuit breakers do the same job for the entire market what circuit filters do for individual scrips. MWCB has been introduced to control excessive market movements in BSE sensex and Nifty. SEBI has introduced MWCB at 10-15-20% of the movements in these indices. The stock exchange on a daily basis shall translate the 10%, 15% and 20% circuit breaker limits of marketwide index variation based on the previous day's closing level of the index. These breakers provide the time to participants to react to the movement by way of the trading halt. Additionally, a 15 minutes pre-opening session post each trading halt has been introduced vide SEBI Circular No.CIR/MRD/DP/25/2013 dated September 3, 2013. The trigger limits and the respective halt duration is given below:

CHAPTER : SPECIAL AUDIT ASSIGNMENTS


Trigger Limit Trigger Time Trading halt duration Pre-opening session duration post each halt

10% Before 1 P.M. 45 Minutes 15 Minutes On or After 1 P.M. to 2.30 P.M.

15 Minutes 15 Minutes

On or after 2.30 P.M. No Trading Halt

15% Before 1 P.M. 1 Hour 45 minutes 15 Minutes On or after 1 P.M. before 2 P.M.

45 Minutes 15 Minutes

On or after 2 P.M. Trading halt for the remaining period of the day.

-

20% Any time of the day Trading halt for the remaining period of the day.

-

Basis for calculating percentages for MWCB: These percentages are not calculated on a dayto- day basis rather they are fixed for a quarter. These are fixed in absolute points of index variation on the basis of the closing of index on the last trading day of previous quarter and are reported in advance to the market participants at the beginning of the relevant quarter.


AMENDMENT NO.-1 Type of NBFCs- Compliance and Regulatory Perspective Certain Points Deleted

9.1. Type of NBFCs- Compliance and Regulatory Perspective

REST OF THIS TOPIC IS NOT RELVANT FOR NOV 2016 ATTEMPT Currently, NBFCs registered with RBI are being classified as: 1) Asset Finance Company (AFC): The main activity of an AFC is financing of physical assets supporting

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

2) Investment Company (IC): which mainly deal in acquisition of shares and securities of other companies. A

core investment company would be a company which acquires shares and securities of Group companies. 3) Loan Company (LC): Loan companies primarily provide finance (whether by making loans or advances or

otherwise for any activity), other than its own activity. 4) Infrastructure Finance Companies: This category of NBFCs deploys a minimum of three-fourths of their

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

CHAPTER: AUDIT OF NON BANKING FINANCIAL COMPANIES


5) Core Investment Company (CIC): These are NBFCs which carry on the business of acquisition of shares and

securities in group companies and satisfies four conditions stated in the regulatory framework for Core Investment Companies issued by RBI.

6) Infrastructure Debt Fund- Non- Banking Financial Company (IDF-NBFC): Infrastructure Debt Funds (IDFs)

are funds set up to facilitate the flow of long-term debt into infrastructure projects. The IDF will be set up either as a trust or as a company. A trust based IDF would normally be a Mutual Fund (MF) while a company based IDF would normally be a NBFC.

7) Non-Banking Financial Company - Micro Finance Institution (NBFC-MFI): An NBFC-MFI is defined as a

non-deposit taking NBFC(other than a company licensed under Section 25 of the Indian Companies Act, 1956) that fulfils certain conditions.

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

8) Core Investment Companies, Infrastructure Debt Fund NBFC and NBFC – Micro Finance Institution (other

than Companies Act, 1956 - Section 25 companies) are non deposit holding Companies.

Details of Above Point no. 4,5,6 &7

4) Infrastructure Finance Company [IFC] 5) Core Investment Companies [CICs]

(RBI Circular dated February 12, 2010) An IFC is defined as non deposit taking NBFC that fulfils the criteria mentioned below: i. a minimum of 75 per cent of its total assets

should be deployed in infrastructure loans as defined in Para 2(viii) of the Non Banking Financial (Non Deposit Accepting or Holding) Companies Prudential Norms (Reserve Bank) Directions, 2007;

ii. Net owned funds of Rs.300 crore or above; iii. Minimum credit rating 'A' or equivalent of CRISIL,

(RBI Circular August 12, 2010) Core Investment Company means a NBFC carrying on the business of acquisition of shares and securities which satisfies the following conditions:

It holds not less than 90% of its Total Assets in the form of investment in equity shares, preference shares, debt or loans in group companies;

its investments in the equity shares (including instruments compulsorily convertible into equity shares within a period not exceeding 10 years from the date of issue) in group companies constitutes not less than

Asset Finance Company

Loan Company Investment Company

Infrastructure Finance

Company


FITCH, CARE, ICRA or equivalent rating by any other accrediting rating agencies;

iv. Capital to Risk Asset Ratio (CRAR) of 15 percent (with a minimum Tier I capital of 10 percent).

60% of its Total Assets;

It does not trade in its investments in shares, debt or loans in group companies except through block sale for the purpose of dilution or disinvestment;

It does not carry on any other financial activity referred to in section 45-I(c) and 45-I(f) of the RBI Act, 1934 except investment in bank deposits, money market instruments, government securities, loans and investments in debt issuances of group companies or guarantees issued on behalf of group companies.

CIC with an asset size of less than 100 crores

CIC with an asset size of 100 crores or more, will be regarded as Systemically Important Core Investment Companies

Not required to register with RBI.

Register with RBI

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

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

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

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

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

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

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

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

In case of Non-Banking Financial Company - Micro Finance Institution (NBFC-MFI) - For the purpose of ii. above,


“Net assets” are defined as total assets other than cash and bank balances and money market instruments. “Qualifying asset” shall mean a loan which satisfies the following criteria:- a) loan disbursed by an NBFC-MFI to a borrower with a rural household annual income not exceeding Rs.

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

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

given by the MFIs; g) loan is repayable on weekly, fortnightly or monthly instalments at the choice of the borrower

Other NBFCs

1. Housing Finance Companies 2. Mortgage Guarantee Company

National Housing Board set up by the Govt. of India is the Apex authority regulating the housing finance companies. The Housing Finance Companies (NHB) Directions, 2010 deals with matters relating to acceptance of deposits by housing finance companies, prudential norms for income recognition, accounting standards, asset classification, provision for bad and doubtful assets, capital adequacy and concentration of credit/ investments to be observed by the housing finance companies and matters to be included in the auditors report by the auditors of such housing finance companies and matters ancillary and incidental thereto and amended the said directions from time to time.

As per RBI Notification dated January 15, 2008, a mortgage guarantee company would be treated as NBFC. ‘Mortgage guarantee’ means a guarantee

provided by a mortgage guarantee company for the repayment of an outstanding housing loan and interest accrued thereon upto the guaranteed amount to a creditor institution, on the occurrence of a trigger event;

‘Mortgage guarantee company’ means a company which primarily transacts he business of providing mortgage guarantee;

“Mortgage guarantee contract” means a tri-partite contract among the borrower, the creditor institution and the mortgage guarantee company, which provided the mortgage guarantee;


AMENDMENT NO.-1 Classification of Frauds [New Topic Inserted]

12.1. Investigation of Frauds [Relevant from Nov 2016 onwards]

Meaning As Per SA 240-“The Auditor‟s responsibilities Relating to Fraud in an Audit of Financial Statements” as „an intentional act by one or more individuals among management, those charged with governance, employees, or third parties, involving the use of deception to obtain an unjust or illegal advantage. Section 447 of the Act has explained the term „fraud‟ as “fraud in relation to affairs of a company or any body corporate, includes any act, omission, concealment of fact or abuse of position committed by any person or any other person with the connivance in any manner, with intent to deceive, to gain undue advantage from, or to injure the interests of, the company or its shareholders or its creditors or any other person, whether or not there is any wrongful gain or wrongful loss.

Classifications of Fraud: Frauds may be classified as defalcations involving misappropriation, either of money or that of goods, and manipulation of accounts not involving a defalcation. a brief description of Fraud at different level is given below.

1. Fraud for Personal Gain

Bribery: Money, gift or other favours offered to procure (often illegal or dishonest) action or decision in favour of the giver. These are also relatable to contract fraud or procurement fraud and are, generally, out of books transactions.

2. Corporate Frauds/ Irregularities

(i) Advance Billing Advance billing is a situation where the company officials indulge in booking fictitious sales in anticipation of actual sales. This results in misrepresentation of revenue in the books

(ii) Shell/ Dummy Company Schemes:

Generally, represents a fictitious company or a paper company‟ to transfer profits or funds from the main company.

(iii) Money Laundering Activities

The person indulging in money laundering looks for avenues with weak banking controls for converting illegal money into the banking system. Any excess credit in the bank accounts that does not belong to the customer or is parked for a temporary period should raise suspicion of such activities. This person indulging in money laundering activity looks for avenues to enter into „benami‟ (could be called `proxy‟ name lending) transactions.

3. Fraud at Operational Level Employees

(i) Tampering of Cheques/Drafts/ On-linepayments/ receipts:

Tampering of cheques, payee name being altered, or preparation of cheques without issue of the cheques to payee, etc., are methods that may also lead to falsification of accounts

(ii) Off Book Frauds In this the fraud perpetrator misappropriates the cash before these are recorded in the books or before the sale is recorded in the books. These frauds are difficult to unearth

CHAPTER 12: INVESTIGATION AND DUE DILIGENCE


as the cash or collection is taken off before the accounting entries are made in the books. The above fraudulent schemes can be established based on circumstantial evidence or validation through external sources such as, customer balance confirmations

(iii) Cash Misappropriation:

Cash is misappropriated after the accounting entries are already passed in the books. These are identified through surprise checks and through shortages in cash balances.

(iv) Teeming and Lading:

This is also achieved through cash deposits or cheques collected from customers being overlapped with the collections from subsequent customers and the amount collected is diverted to personal account. The ageing of receivables is not a constant, and, therefore, this makes the task of identifying the leakage of collections unless all the customer accounts are reconciled at a single point of time.

(v) Fraudulent Disbursements:

Fraudulent disbursements ake place either by issuing or submission of false bills, or personal expense bills being converted into official expenses bills.

(vi) Payroll Fraud: payroll fraud could include payment to non-existent employees or in a contractual arrangement inflating of the manpower resources than those actually deployed while billing the client. It may also include showing higher pay than actual disbursement to employees/ workers, etc.

(vii) Commission Schemes:

The salesman exaggerates the sales through fictitious billings to earn higher commission or alter the sales prices of the products sold from those stipulated by the company or share the sales volumes achieved with other employees to share higher commission.

Procedure for Investigation of Fraud: the investigating accountant should ascertain the exact duties of the person concerned who is suspected to have committed a fraud; his relationship to the general routine of the office, and the circumstances in which any known instances of defalcation have come to light Greater the authority of the individual suspected of a fraud, wider would be the field which would have to be covered by the investigation.


AMENDMENT NO.-1 Methods of Accounting & Accounting Standards (Sec. 145) Section 145 of the Income Tax Act, 1961 deals with the method of accounting.

Sec. 145 (1) Income chargeable under the head ‘PGBP or ‘Other sources’ shall, be computed in accordance with either cash or mercantile system of accounting regularly employed by the assessee.

Sec. 145 (2) The C.G. may notify in the Official Gazette from time to time income computation and disclosure standards to be followed by any class of assessees or in respect of any class of income. Accordingly CG has notified ten income computation and disclosure standards (ICDSs) to be followed by all assessees, following the mercantile system of accounting, for the purposes of computation of income chargeable to income-tax under the head “Profit and gains of business or profession” or “ Income from other sources”. This notification shall come into force with effect from 1st April, 2015, and shall accordingly apply to the A.Y. 2016-17 and subsequent assessment years.

In the case of conflict between the provisions of the Income‐ tax Act, 1961 and the notified ICDSs, the provisions of the Act shall prevail to that extent. CG has prescribed 10 ICDSs as under: A. ICDS I relating to Accounting Policies. B. ICDS II relating to Valuation of Inventories. C. ICDS III relating to Construction Contracts. D. ICDS IV relating to Revenue Recognition. E. ICDS V relating to Tangible Fixed Assets. F. ICDS VI relating to the Effects of Changes in Foreign Exchange Rates. G. ICDS VII relating to Government Grants. H. ICDS VIII relating to Securities. I. ICDS IX relating to Borrowing Costs. J. ICDS X relating to Provisions, Contingent Liabilities and Contingent Assets. The above ICDSs are to be followed by all assessee following mercantile system of accounting. Therefore, it is clear that those assessees who are following cash system of accounting need not follow the ICDSs notified above.

Sec. 145(3) Where the A.O. is not satisfied about the correctness or completeness of the accounts of the assessee, or where method of accounting provided u/s 145(1) or AS as notified u/s 145(2) have not been regularly followed by the assessee, the A.O. may make an assessment in a manner provided in Sec. 144 of the Income Tax Act. The Central Government has prescribed the following AS:

AS I Disclosure of accounting policies.

AS II Disclosure of Prior Period and Extraordinary Items and Changes in Accounting Policies.

CHAPTER 16: AUDIT UNDER FISCAL LAWS


The above ASs are to be followed by all assessee following mercantile system of accounting. Therefore, it is clear that those assessees who are following cash system of accounting need not follow the ASs notified above.

Auditor’s Duties

To ensure compliance of section 145, the auditor has to ensure the following:

the entity follows either the Cash or Accrual method of Accounting.

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

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

Auditor’s Duties

AMENDMENT NO.-2 Audit under Excise Law – Excise Audit, 2000 This Topic has been deleted under SM issued in 2016 and not relevant for Nov 2016 attempt Onward

For Central Excise, purposes, Audit means scrutiny of the records of the assessee and ther verification of the actual process of receipt, storage, production and clearance of goods with a view to check whether the assessee is paying the Central Excise Duty correctly and is following the Central Excise Procedures.

Frequency of Audit

For Central Excise Audits:

S.No. Payment of Duty (In Cash + Through CCR)

Frequency of Audit

1 More than 3 Crores Every Year

2 Between 1 Crore to 3 Crores Once in 2 years

3 Between 50 Lacs to 1 Crore Once in 5 years

4 Less than 50 Lacs 10% of total number of such units to be audited every year.

For Service Tax Audits:

S.No. Payment of Duty (In Cash + Through CCR)

Frequency of Audit

1 More than 3 Crores Every Year

2 Between 1 Crore to 3 Crores Once in 2 years

3 Between 25 Lacs to 1 Crore Once in 5 years

4 Less than 25 Lacs 2% of total number of such units to be audited every year.

As regards Export Oriented Units (EOU), the Central Board of Excise & Customs has decided that about 500 EOUs should be audited mandatorily all over the country. The selection of these units would be made as per the criteria circulated by Director-General (Audit). EOUs manufacturing non-excisable goods (such as primary produce or software) need not be audited mandatorily.

Procedure of Excise Audit, 2000

Selection of Assessee

Units are selected based on risk factors like

record of duty evasion,

major audit objection etc. This means that the assesee who have a bad track record are given priority for conducting


audit over those who have a clean track record.

Desk Review In this stage, the auditors are required to gather as much information about the assessee as possible. Information may be gathered from:

departmental records,

published statements like annual reports and

other market enquiries.

Since this can be done without interacting with the assessee, it is called desk review Documenting information

In this stage, the auditor obtains the required information from the assessee about the areas which need a closer examination identified during desk review.

Touring of the Premises

The auditor visits the unit of the assesee to take a general overview about the procedure adopted by the assesee and the possible loopholes of revenue leakage.

Audit Plan Under this step, the auditor prepares an audit plan and lists those vulnerable areas that require particular attention from the revenue viewpoint. This audit plan should be dynamic and not rigid. A well thought audit plan generally increases the success of audit results manifold.

Verification Verification is conducted to ensure that no amount which as per Central Excise Law is chargeable to duty, escapes taxation. The process of verification is generally carried out in the presence of the assesee so that necessary clarifications can be obtained from him.

Audit objection and Audit para

After completion of verification, if any short payment or non compliance of excise procedures has been observed, the auditor should discuss the same with the assessee. On the basis of explanations received, the auditor should record the same as “Audit Objection” or “Audit Para” of the draft audit report.

Audit Report All the audit objections/audit paras compiled in the “draft audit report” are submitted to the reviewing officer for finalization. In case the disputed amounts have not already been paid by the assesee at the spot, demand notices are issued by the department for their recoveries.

AMENDMENT NO.-3 Audit of Indirect Taxes This Topic has been deleted under SM issued in 2016 and not relevant for Nov 2016 attempt Onward

This Topic has been deleted under SM issued in 2016 and not relevant for Nov 2016 attempt onward

1) The components of central indirect tax which form a part of the materials cost could be basic customs duty,

additional duty of customs, special additional duty, excise duty (Cenvat), special excise duty, additional duties of excise, etc.

2) The various components have a relationship with each other and also with central and local sales tax. The audits of in this area are redirected to the audit under sections 14A and 14AA of the Central Excise act, 1944.

3) All these audits are conducted by or on behalf of the Government. The steps involved in conducting indirect tax audit are as under :

Evaluate the internal control systems

Obtains information about the company and the industry

Formulating an audit programme

Prepare a report on the indirect tax audit


AMENDMENT NO.-4 Areas of concern in Audit of Indirect Taxes or Scope of Indirect Tax Audit This Topic has been deleted under SM issued in 2016 and not relevant for Nov 2016 attempt Onward

Some areas of concern in an audit of indirect taxes would be: a) Non availment or short / excess availment of control or expert incentives. b) Goods imported duty free or payment at concessional rates without properly complying with

conditions. c) Valuation Issues – valuation not in line with customs rules. d) Applicability of the relevant control excise exemptions. e) Valuation of goods not removed in normal course using valuation methods not in line with Central

Excise Valuation Rules. f) Ignoring Liability under Service Tax on services provided or availed. g) Procedural non-compliance. h) Passing on of duty suffered on imported goods and of locally manufactured goods in excess of

actual


CARO 2016- Companies (Auditor’s Report) Order, 2016

1. Short title, application and commencement

1) This order may be called the Companies (Auditor's Report) Order, 2016. (2) It shall apply to every company including a foreign company as defined in section 2(42) of the Companies Act, 2013 [hereinafter referred to as the Companies Act], except —

(i) a banking company as defined in section 5(c ) of the Banking Regulation Acl, 1949 ; (ii) an insurance company as defined in Section2(11) of the Insurance Act,1938 ; (iii) a company licensed to operate under section 8 of the Companies Act; (iv) a One Person Company as defined under section 2(62) of the Companies Act and a small company as defined under section 2(85) of the Companies Act; and (v) a private limited company, not being a subsidiary or holding company of a public company, having a paid up capital and reserves and surplus not more than rupees one crore

AS ON THE BALANCE SHEET DATE and which does not have total borrowings exceeding rupees one crore from any bank

or financial institution at any point of time during the financial year and which does not have a total revenue as disclosed in Scheduled III to the Companies

Act, 2013 (including revenue from discontinuing operations) exceeding rupees ten crore during the financial year as per the financial statements.

2. Auditor's report to contain matters specified in paragraphs 3 and 4

Every report made by the auditor under section 143 of the Companies Act, on the accounts of every company examined by him to which this Order applies for the financial year commencing on or after 1st April, 2015, shall contain the matters specified in paragraphs 3 and 4.

3. Matters to be included in the auditor's report

The auditor's report on the account of a company to which this Order applies shall include a statement on the following matters, namely:— (i) (a) whether the company is maintaining proper records showing full particulars,

including quantitative details and situation of fixed assets; (b) whether these fixed assets have been physically verified by the management at

reasonable intervals; whether any material discrepancies were noticed on such verification and if so, whether the same have been properly dealt with in the books of account;

(c) whether the title deeds of immovable properties are held in the name of the company. If not, provide the details thereof;

(ii) whether physical verification of inventory has been conducted at reasonable intervals by the management and whether any material discrepancies were noticed and if so, whether they have been properly dealt with in the books of account;

(iii) whether the company has granted any loans, secured or unsecured to companies, firms, Limited Liability Partnerships or other parties covered in the register maintained under section 189 of the Companies Act, 2013. If so,

(a) whether the terms and conditions of the grant of such loans are not prejudicial to the company’s interest;

(b) whether the schedule of repayment of principal and payment of interest has been stipulated and whether the repayments or receipts are regular;

CHAPTER 17: AUDIT REPORT


(c) if the amount is overdue, state the total amount overdue for more than ninety days, and whether reasonable steps have been taken by the company for recovery of the principal and interest;

(iv) In respect of loans, investments, guarantees, and security whether provisions of section 185 and 186 of the Companies Act, 2013 have been complied with. If not, provide the details thereof.

(v) In case, the company has accepted deposits, whether the directives issued by the Reserve Bank of India and the provisions of sections 73 to 76 or any other relevant provisions of the Companies Act, 2013 and the rules framed there under, where applicable, have been complied with?

---If not, the nature of such contraventions be stated; ---If an order has been passed by Company Law Board or National Company Law

Tribunal or Reserve Bank of India or any court or any other tribunal, whether the same has been complied with or not?

(vi) whether maintenance of cost records has been specified by the Central Government under section 148(1) of the Companies Act, 2013 and whether such accounts and records have been so made and maintained.

(vii) (a) whether the company is regular in depositing undisputed statutory dues including provident fund, employees' state insurance, income-tax, salestax, service tax, duty of customs, duty of excise, value added tax, cess and any other statutory dues to the appropriate authorities and if not, the extent of the arrears of outstanding statutory dues as on 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;

(b) where dues of income tax or sales tax or service tax or duty of customs or duty of excise or value added tax have not been deposited on account of any dispute, then the amounts involved and the forum where dispute is pending shall be mentioned. (A mere representation to the concerned Department shall not be treated as a dispute).

(viii) whether the company has defaulted in repayment of loans or borrowing to a financial institution, bank, Government or dues to debenture holders? If yes, the period and the amount of default to be reported (in case of defaults to banks, financial institutions, and Government, lender wise details to be provided).

(ix) whether moneys raised by way of initial public offer or further public offer (including debt instruments) and term loans were applied for the purposes for which those are raised. If not, the details together with delays or default and subsequent rectification, if any, as may be applicable, be reported;

(x) whether any fraud by the company or any fraud on the Company by its officers or employees has been noticed or reported during the year; If yes, the nature and the amount involved is to be indicated;

(xi) whether managerial remuneration has been paid or provided in accordance with the requisite approvals mandated by the provisions of section 197 read with Schedule V to the Companies Act? If not, state the amount involved and steps taken by the company for securing refund of the same;

(xii) whether the Nidhi Company has complied with the Net Owned Funds to Deposits in the ratio of 1: 20 to meet out the liability and whether the Nidhi Company is maintaining ten per cent unencumbered term deposits as specified in the Nidhi Rules, 2014 to meet out the liability;

(xiii) whether all transactions with the related parties are in compliance with sections 177 and 188 of Companies Act, 2013 where applicable and the details have been disclosed in the Financial Statements etc., as required by the applicable accounting standards;

(xiv) whether the company has made any preferential allotment or private placement of shares or fully or partly convertible debentures during the year under review and if so,


as to whether the requirement of section 42 of the Companies Act, 2013 have been complied with and the amount raised have been used for the purposes for which the funds were raised. If not, provide the details in respect of the amount involved and nature of non-compliance;

(xv) whether the company has entered into any non-cash transactions with directors or persons connected with him and if so, whether the provisions of section 192 of Companies Act, 2013 have been complied with;

(xvi) whether the company is required to be registered under section 45-IA of the Reserve Bank of India Act, 1934 and if so, whether the registration has been obtained.

4. Reasons to be stated for unfavourable or qualified answers.-

(1) Where, in the auditor's report, the answer to any of the questions referred to in paragraph 3 is unfavourable or qualified, the auditor's report shall also state the reasons for such unfavourable or qualified answer, as the case may be. (2) Where the auditor is unable to express any opinion in answer to a particular question, his report shall indicate such fact together with the reasons why it is not possible for him to give an answer to such question.

Duty to report on frauds: I. Reporting to the Central Government

As per Section 143(12) of the Companies Act, 2013, if an auditor of a company in the course of the performance of his duties as auditor, has reason to believe that an offence of fraud involving such amount or amounts as may be prescribed, is being or has been committed in the company by its officers or employees, the auditor shall report the matter to the Central Government within such time and in such manner as may be prescribed. Rule 13(1) of the Companies (Audit and Auditors) Rules, 2014 states that if an auditor of a company, in the course of the performance of his duties as statutory auditor, has reason to believe that an offence of fraud, which involves or is expected to involve individually an amount of ` 1 crore or above, is being or has been committed against the company by its officers or employees, the auditor shall report the matter to the Central Government. The manner of reporting the matter to the Central Government is as follows: (a) the auditor shall report the matter to the Board or the Audit Committee, as the case may be, immediately but not later than 2 days of his knowledge of the fraud, seeking their reply or observations within 45 days; (b) on receipt of such reply or observations, the auditor shall forward his report and the reply or observations of the Board or the Audit Committee along with his comments (on such reply or observations of the Board or the Audit Committee) to the Central Government within 15 days from the date of receipt of such reply or observations; (c) in case the auditor fails to get any reply or observations from the Board or the Audit Committee within the stipulated period of 45 days, he shall forward his report to the Central Government along with a note containing the details of his report that was earlier forwarded to the Board or the Audit Committee for which he has not received any reply or observations; (d) the report shall be sent to the Secretary, Ministry of Corporate Affairs in a sealed cover by Registered Post with Acknowledgement Due or by Speed Post followed by an e-mail in confirmation of the same; (e) the report shall be on the letter-head of the auditor containing postal address, e-mail address and contact telephone number or mobile number and be signed by the auditor with his seal and shall indicate his Membership Number; and (f) the report shall be in the form of a statement as specified in Form ADT-4.

II. Reporting to the Audit Committee or

Section 143(12) of the Companies Act, 2013 further prescribes that in case of a fraud involving lesser than the specified amount [i.e. less than Rs. 1 crore], the auditor shall report the matter to the audit committee constituted under section 177 or to the Board in


Board - other cases within such time and in such manner as may be prescribed. In this regard, Rule 13(3) of the Companies (Audit and Auditors) Rules, 2014 states that in case of a fraud involving lesser than the amount specified in sub-rule (1) [i.e. less than ` 1 crore], the auditor shall report the matter to Audit Committee constituted under section 177 or to the Board immediately but not later than 2 days of his knowledge of the fraud and he shall report the matter specifying the following: (a) Nature of Fraud with description; (b) Approximate amount involved; and (c) Parties involved.

III. Disclosure in the Board's Report:

Section 143(12) of the Companies Act, 2013 furthermore prescribes that the companies, whose auditors have reported frauds under this sub-section (12) to the audit committee or the Board, but not reported to the Central Government, shall disclose the details about such frauds in the Board's report in such manner as may be prescribed. In this regard, Rule 13(4) of the Companies (Audit and Auditors) Rules, 2014 states that the auditor is also required to disclose in the Board’s Report the following details of each of the fraud reported to the Audit Committee or the Board under sub-rule(3) during the year: (a) Nature of Fraud with description; (b) Approximate Amount involved; (c) Parties involved, if remedial action not taken; and (d) Remedial actions taken.

Duty to report on frauds [Section 143(12)]:

New Reporting Norms