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Contemporary Issues in auditing.pptx


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Contemporary Issues in auditing.pptx

  2. 2. AUDIT OF BANKS Legislation Relevant to Annual Accounts of Banks Preparation of Annual Accounts Signature of Financial Statement Applicability of the Companies Act, 2013 Format of Balance Sheet
  3. 3. AUDIT OF BANKS Legislation Relevant to Audit of Bank  Reserve Bank of India Act,1934  Banking Regulation Act,1949  State Bank of India Act,1955  Companies Act, 2013  State Bank of India (Subsidiary Banks) Act, 1959  Banking Companies (Acquisition and Transfer of Undertakings) Act, 1970  Regional Rural Bank Act, 1976
  4. 4. AUDIT OF BANKS Legislation Relevant to Audit of Bank  Banking Companies (Acquisition and Transfer of Undertakings) Act, 1980  Information Technology Act, 2000  Prevention of Money Laundering Act, 2002  Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002  Credit Information Companies (Regulation) Act, 2005  Payment and Settlement System Act, 2007
  5. 5. Approach to Bank Audit Preliminary Work Evaluation of Internal Control System Substantive Testing Finalisation of Report
  6. 6. Procedure for Conducting Bank Audit  Evaluation of Internal Control System  Checking of Advances  Verify major Items of Assets i. Physical Verification of Cash Balances ii. Balance with Reserve Bank of India iii. Balances with other Banks iv. Money at Call and Short Notice v. Ownership of Investment and Valuation of Investment vi. Loans and Advances vii. Valuation of Fixed Assets
  7. 7. Procedure for Conducting Bank Audit  Checking of Liabilities i. Capital ii. Deposits iii. Borrowings iv. Accrued Interest v. Provisions vi. Other Liabilities vii. Contingent Liabilities  Verification of Profit and Loss Account  Making Audit Report
  8. 8. Non-Performing Assets Different Kinds of Credit Facilities Term Loans Cash Credits and Overdraft Bills Purchased and Discounted Securitisation Agricultural Advances Credit Card Accounts
  9. 9. Types of Non-Performing Assets  Sub- standard Assets A general provision of 15 % on the total outstanding should be made without making any allowance for ECGC guarantee cover and securities available. The ‘unsecured exposures’ which are identified as substandard would attract additional provision of 10%, i.e, a total of 25% on the outstanding balance
  10. 10. Types of Non-Performing Assets  Loss Assets Loss assets should be written off. If loss assets are permitted to remain in the books for any reason, 100 percent of the outstanding should be provided for.  Doubtful Assets 100% of the extent to which the advance is not covered by the realizable value of the security to which the bank has a valid recourse and the realizable value is estimated on a realistic basis
  11. 11. Long Form Audit Report of Banks Important aspects  Internal Control System  Accounting Policies  Profitability  Financial Position Contents  Capital  Liabilities  Assets  Profit & Loss Account  General
  12. 12. AUDIT OF INSURANCE COMPANIES Features of Accounting System of Insurance Companies  Applicability of Accounting Standards  Premium  Premium Deficiency  Acquisition Cost  Claims  Procedure to Determine the Value of Investments i. Real Estate Investment Property ii. Debt Securities iii. Equity Securities and Derivative Instruments that are traded in Active Markets  Loans
  13. 13. Legislation Relevant to Audit of General Insurance Company  Insurance Act, 1938  General Insurance Business Nationalisation Act, 1972  Insurance Regulatory and Development Authority Act, 1999 ( IRDAAct, 1999)  Companies Act, 2013
  14. 14. Review of Internal Control of Insurance Companies Underwriting Premium Commission Reinsurance Claims
  15. 15. Audit Procedure of Insurance Companies  Review of Internal Control  Receipts of Premium  Verification of Cancelled Policies  Accounting Treatment of Policies  Accounting Treatment of Claims  Payment of Commission  Income from Investment  Remuneration of Employees  Management Expenses
  16. 16. Audit Report of Insurance Companies (Matters as per IRDA)  Examination of Books of Accounts (i) Auditor should obtain all the information and explanations which, to the best of their knowledge and belief were necessary for the purposes of their audit and whether they have found them satisfactory. (ii) Auditor should check whether proper books of accounts have been maintained by the insurer so far as appears from an examination of those books. (iii) Auditor should examine whether proper returns, audited or unaudited, from branches and other offices have been received and whether they were adequate for the purpose of audit. (iv) Auditor should check whether the Balance Sheet, Revenue Account and Profit and loss Account dealt with by the report and Receipts and Payments Account are in agreement with the books of account and return. (v) Auditor should verify whether the actual valuation of liabilities is duly certified by the appointed actuary including to the effect that the assumption for such valuation are in accordance with the guidelines and norms, if any issued by the Authority, and/ or the Actual Society of India in concurrence with the authority.
  17. 17. Audit Report of Insurance Companies (Matters as per IRDA)  The auditor shall express their opinion on whether i. The Balance Sheet ii. The Revenue Account iii. The P&LAccount iv. The Receipts and Payments Account v. The Financial Statements vi. The Investments vii. The Accounting Policies  The auditor shall further certify that (i) Management report and Financial statements. (ii) Conditions of the registration
  18. 18. Audit Report of Insurance Companies (Matters as per IRDA)  A certificate signed by the auditors (i) They have verified the cash balances and the securities relating to the insurer’s loans, reversions and investments. (ii) To what extent, if any, they have verified the investments and transactions relating to any trusts undertaken by the insurer as trustee. (iii) No part of the assets of the policyholder’s fund has been directly or indirectly applied in contravention of the provisions of the Insurance Act, 1938 relating to the application and investments of the policyholder’s funds.
  19. 19. AUDIT OF CO-OPERATIVE SOCIETIES Procedures  Constitution  Share Capital  Cash Receipt  Loans to Members  Shares Transfer  Loan from non-members  Taxation  Maintenance of Reserve  Valuation of Assets and Liabilities  Investment  Maintenance of Books and Accounts  Preparation of Financial Statement  Disbursement of Loans
  20. 20. AUDIT OF MEMBERS OF STOCK EXCHANGE  As per the explanation of SEBI (security and exchange board of India) guideline active member means who has done business transaction in stock exchange in a single day or a single transaction.  No special provision but general rule of audit process for companies audit will apply.  Requires to maintain book for the period at least four years.
  21. 21. Details of audit report Members (i) We have obtained all information and explanation which are required for the process of audit and to the best of our knowledge and belief. (ii) In our opinion proper books of accounts are maintained as per requirement of Rule 15 of securities contract rules, and the same were provided to us for verification purpose. (iii) Auditee has complied with the requirement of the stock exchange so far as it relate to maintenance of books of accounts. The stock broker is regular in providing all required information to stock exchange regulatory body within the time limit frame for it. (iv) Statements of accounts, balance sheet and profit & loss account are reported with connection of books of accounts maintained. (v) As per the information and explanation provided to us and according to the best of our knowledge and belief given balance sheet and profit & loss account of stock broker give a true and fair view
  22. 22. Time limit to complete the work of Audit  Completion time period  Addressed to  Number of copy to be submitted.
  23. 23. AUDIT OF NBFC • Definition of NBFC Section 45 I(f) of Reserve Bank of India (Amendment) Act, 1997 defines a non- banking financial company as: a. A financial institution which is a company; b. A non banking institution; c. Such other non-banking institution or class of such institutions. • Difference between Banks and NBFC a. demand deposits b. payment and settlement system and cheques c. deposit insurance facility of Deposit Insurance and Credit Guarantee Corporation (DICGC)
  24. 24. AUDIT OF NBFC • Audit procedure 1. Ascertaining the Business of the Company 2. Evaluation of Internal Control System 3. Registration with the RBI 4. NBFC Public Deposit Directions a. Credit Rating Agencies b. Interest and brokerage payments c. Written application from depositors d. Deposits register e. Investment with scheduled commercial banks f. statement of accounts, auditor’s report & director’s report g. Annual returns h. NBFCs not accepting/holding public deposits i. Group Holding Investment Companies 5. NBFC Prudential Norms Directions a. income recognition, income from investments, accounting standards, accounting for investments, asset classification, provisioning for bad and doubtful debts, capital adequacy norms, prohibition on granting of loans, prohibition on loans and investments for failure to repay public deposits and norms for concentration of credit/investments. b. policy for the company c. assess of examinations d. Non-Performing Assets
  25. 25. AUDIT OF MUTUAL FUNDS • Regulatory Framework 1. Security Exchange Board of India (SEBI) 2. Securities and Exchange Board of India (Mutual Fund) Regulations, 1996 3. Indian Trusts Act, 1882. • Conduct of Audit of Mutual Funds 1. AMC 2. Verification records maintained for the Fund, the AMC and the Trustee Company/ board of trustees 3. Forward his report to the trustees a. A certificate- Balance Sheet and Revenue account in accordance with the Ninth Schedule b. The auditors opinion 4. Review of valuation policies and procedures 5. Internal Financial Controls
  26. 26. AUDIT OF MUTUAL FUNDS • Inspection 1. Regulation 61 of SEBI (Mutual Fund Regulations), 1996, SEBI may appoint one or more persons as inspecting officer. a. books of account; b. the provisions of the Act; c. the systems, procedures and safeguards; d. violation of the provisions of the Act or any rules or regulations e. investigation of complaints received f. conduct of affairs in the interest of the investors or the securities market. 2. Regulation 63, access to the premises and submit a report to the Board.
  27. 27. AUDIT OF DEPOSITORIES • Regulatory Framework a. The Depositories Act, 1996 b. The SEBI (Depositories and Participants) Regulations, 1996 c. Bye-laws of Depository d. Business Rules of Depository. • Documents that required be maintained by Depositories a. records of securities dematerialised and rematerialised; b. the names of the transferor, transferee, and the dates of transfer of securities; c. a register and an index of beneficial owners; d. details of the holding of the securities of beneficial owners as at end of each year. e. records of instructions received from and sent to participants, issuers, issuers’ agents and beneficial owners; f. records of approval, notice, entry and cancellation or pledge or hypothecation; g. details of participants; h. details of securities declared to be eligible for dematerialisation in the depository; and i. such other records as may be specified by the Board for carrying on the activities as a depository.
  28. 28. AUDIT OF DEPOSITORIES • Board's right to Inspect (Regulation 59) 1. appoint one or more persons as inspecting officer 2. books of account 3. complaints 4. provisions of the Act, the Depositories, the bye-laws, agreements and regulations 5. systems, procedures and safeguards 6. conduct of affairs in the interest of the investors or the securities market. • Notice before Inspection and Investigation (Regulation 60) 1. give not less than 10 days notice 2. an order in writing 3. be bound to discharge his obligation as provided in regulation 61
  29. 29. AUDIT OF DEPOSITORIES • Obligations on Inspection by the Board (Regulation 61) 1. books, securities, accounts, records and other documents in its custody 2. reasonable access to the premises and copies of documents or other materials 3. examine or to record the statements of any director, officer or employee 4. all assistance • Auditors and its power 1. The SEBI has power to appoint an auditor to inspect or investigate 2. The same powers of the inspecting or investigating officer as stated in regulations 59, 60 and 61. • Return of deposits to be filed with the Registrar 1. Rule 16 of the Companies (Acceptance of Deposits) Rules, 2014 2. on or before the 30th day of June of every year, file with the Registrar 3. a return in the prescribed Form along with the specified fee and furnishing the information contained therein as on 31st day of March of that year • Inspection Report 1. Executive Summary 2. Observations 3. Checklist 4. Annexure
  30. 30. SOCIAL AUDIT • Definition ‘Social Auditing’ is a process that enables an organization to assess and demonstrate its social, economic, and environment benefits and limitations. • Differences between Financial Auditing, Operational Auditing and Social Auditing 1. Scope 2. Coverage 3. Objective 4. Deals with • Social Auditing in India 1. Government Scenario- CAG’s Audit and Social Audit 2. Corporate Scenario
  31. 31. COST AUDIT • Definition of Cost Audit (Institute of Cost and Management Accountants of England) 1. Verification of cost accounting records such as the accuracy of the cost accounts, cost reports, cost statement, cost data and costing techniques, and 2. Examination of these records to ensure that they adhere to the cost accounting principles, plans, procedure and objectives. • Difference between Financial Audit and Cost Audit 1. Meaning 2. Objective 3. Nature 4. Compulsion 5. Appointment 6. Qualification 7. Report 8. Principles
  32. 32. COST AUDIT • Legal Provisions regarding Cost Audit Section 148 of the Companies Act, 2013 1. Regulated Sectors 2. Non-regulated Sectors • Companies (Cost Records and Audit) Rules, 2014 a. Rule-1 Short title and commencement b. Rule-2 Definitions c. Rule-3 Application of Cost Records d. Rule-4 Applicability for Cost Audit e. Rule-5 Maintenance for Cost Records f. Rule-6 Cost Audit
  33. 33. COST AUDIT Applicability for maintenance of cost records Domestic or foreign company Listed in table of Rules 3 Engaged in production of goods or providing services Overall turnover from all of its products and services ≥ Rs. 35crore (preceding financial year) Regulated Non-regulated Rule-3 Maintenance of Cost Records
  34. 34. COST AUDIT Applicability of Cost Audit Regulatory sectors Non-regulatory sectors Overall annual turnover during immediately preceding financial year ≥ Rs 50 crore If revenue from export (foreign exchange) ≥ 75% of total revenue If operating from special economic zone (SEZ) Rule-4 shall not apply, only Rule-3 will apply Aggregate turnover of the individual product or products or service or services ≥ Rs. 25 crore Aggregate turnover of the individual product or products or service or services ≥ Rs. 35 crore Require cost audit under Rule-4 If revenue from export (foreign exchange) ≥ 75% of total revenue If operating from special economic zone (SEZ) Overall annual turnover during immediately preceding financial year ≥ Rs 50 crore Rule-4 Applicability of Cost Audit
  35. 35. COST AUDIT • Appointment and Remuneration of Cost Auditor 1. Audit Committee is required a. The Board shall appoint an individual, a cost accountant b. The remunerations recommended by the Audit Committee approved by the BoD and ratified by shareholders. 2. Audit Committee is not required. • Qualification, Disqualification, Rights, Duties and Obligations of Cost Auditor 1. cost auditor appointed under Section 148 2. all assistance and facilities 3. report
  36. 36. COST AUDIT • Penal Provision in Case of Default • Submission of Cost Audit Report within 30 days The company and every officer of the company Sub-section (1) of Section 147 The cost auditor of the company Sub-section (2) to (4) of Section 147 Company Central Government Form CRA-4 Companies Rules, 2014
  37. 37. PEER REVIEW SYSTEM • Peer Review System (PRS) is a mechanism of evaluating the professional/audit and assurance activities/services carried out by a Firm by peers by looking into the systems and procedures adopted and records maintained while carrying out professional/audit and assurance activities with the objective to evaluate and suggest improvements of systems, procedures and quality of reporting. Peer Review PU Reviewe r
  38. 38. • Objective (a) comply with Technical, Professional and Ethical Standards as applicable including compliance of other regulatory provisions and requirements thereto and (b) have in place proper systems including documentation thereof, to adequately exhibit the quality of the professional/audit and assurance activities/services. • Definitions Peer Review Board – – Means a Board established by the Council in terms of Guidelines to conduct peer review. Peer Review Period – – Means 3 years preceding the year in which the Firm is selected or such other period or any period as may be prescribed by the Peer Review Board for conducting a Peer Review Conti….
  39. 39. Practice Unit – – Means a sole practitioner, partnership including LLP or any other entity of professional Chartered/Cost Accountants, whether practicing individually or a firm of Chartered/ Cost Accountants. Regulator – – Means Government or any regulatory body constituted by the Parliament or State Legislature who is/are empowered to regulate the acts which include various professional/audit services which the Council may, from time to time, prescribe to cover as professional/audit services for the purpose of peer review Conti….
  40. 40. • Authority of the Peer Review System Conti….
  41. 41. Powers of the Council – To constitute and empower the Board and to fill in the vacancies arising in the Board from time to time. – Consideration, review and approval of the overall Peer Review System, including its budget. – To authorize the Board to formulate and suggest the amendment in the Peer Review System and mechanisms of Peer Review System and the procedures framed there under including the power of the board and/ or Reviewer, for approval of the President and submitted to the Council for ratification. – To seek information from the Board regarding the peer review status and the details relating Firm as well as Reviewer. – To refer such matters to the Board relating to a Firm as the Council may deem fit. Conti….
  42. 42. Peer Review Board A Peer Review Board shall be formed and empowered by the Council which will formulate, implement and oversee the Peer Review System under the overall supervision of the Council. Duties and power of the Board • To call for information from a Firm in such form as it deem fit. • To maintain a panel of Reviewers. • To define the terms of appointment of the Reviewers. • To examine the aspects of basis of selection of records pertaining to the professional / audit and assurance services in terms of the appropriate Technical, professional and ethical Standards. • To arrange for such training programs for reviewers as may be deemed appropriate. • To guide the members on best practices on peer review. Conti….
  43. 43. The mechanism of Peer Review System • Selection of Practicing Member to be Peer Reviewed • Selection and appointment of Reviewer: • Planning the Review: • Board --> List of Documents to be submitted • Executing the Review: • Adherence to Standards and qualitative aspect • Reporting: • Interim and final report • Issue of Peer Review Certificate: Conti….
  44. 44. FORENSIC AUDIT • Forensic means “suitable for use in the court of law.” Bologna said that it is the application of financial skills and investigative mentality to unresolved issues, conducted within the context of the rules of evidence. • Significance of Forensic Audit
  45. 45. • Techniques and tools of forensic audit • Benchmarking • Ratio analysis • System analysis • Specialist software- like audit tools for data matching analysis • Exception reporting –Generating automatic unchangeable reports that to find out deviation from the norms.
  46. 46. DIFFERENCE BETWEEN FINANCIAL AUDIT AND FORENSIC AUDIT Objective Techniques Accounting period Dependency on Management Reports Adverse findings Conti….
  47. 47. INVESTIGATION MECHANISM • Step 1 – Accepting the Investigation – A forensic audit is always assigned to an independent firm/group of investigators in order to conduct an unbiased and truthful audit and investigation. – whether or not they have the necessary tools, skills and expertise to go forward with such an investigation. • Step 2 – Planning the Investigation Before planning the investigation, they should be clear on the final categories of the report, which are as follows- • Identifying the type of fraud that has been operating, how long it has been operating for, and how the fraud has been concealed. • Identifying the fraudster(s) involved. • Quantifying the financial loss suffered by the client. • Gathering evidence to be used in court proceedings. • Providing advice to prevent the recurrence of the fraud. Conti….
  48. 48. • Step 3 – Gathering Evidence – Testing controls to gather evidence which identifies the weaknesses, which allowed the fraud to be perpetrated – Using analytical procedures to compare trends over time or to provide comparatives between different segments of the business – Applying computer-assisted audit techniques, for example, to identify the timing and location of relevant details being altered in the computer system – Discussions and interviews with employees – Substantive techniques such as reconciliations, cash counts and reviews of documentation. Forensic Data Analysis (FDA) – The process by which evidence is gathered, summarized and compared with existing different sets of data. – Three kinds of expertise • Data analyst • Team member with extensive experience • A forensic scientist Conti….
  49. 49. • Step 4 – Reporting • Step 5 – Court Proceedings The auditors are called to Court, and also included in the advocacy process. Conti….
  50. 50. MANAGEMENT AUDIT Meaning Independent and systematic evaluation of the management activities Scope of Management Audit • Evaluate the Efficiency of the Management • Implementation of Principles and Policies of the Management. • Find variances • Analyze the reasons for variances • Recommend Suggestions for Improvement
  51. 51. Need and Objectives of Management Audit • Verifying the efficiency • Gives Suggestion for increase in efficiency • Asses the effectiveness of planning and policies • Helps to increase profitability • Gives valuable advice Conti….
  52. 52. ADVANTAGES OR IMPORTANCE OF MANAGEMENT AUDIT • Evaluates efficiency of the management • Scrutiny of the plans, policies and procedure • Helps for correction of plans, policies and procedure (change) • Aids for decision-making • Helps to get loan • Helps to get subsidy • Helps to increase profitability: Conti….
  53. 53. LIMITATIONS OF MANAGEMENT AUDIT: • The management audit is audit of the management, by the management and for the management - may or may not be able to handle the job assigned to them • The personal aspects cannot be overlooked in such audits. • May not probe into depth to investigate the matter any further. • Time and cost constraints may limit the scope, operation and extent of such audits . • Conflicting interests, attitude and inclination may jeopardize the entire objective of the audit. . Conti….
  54. 54. PROFESSIONAL ETHICS AND CODE OF CONDUCT Meaning The purpose of the Code is to promote an ethical culture in the profession. Conti….
  55. 55. FUNDAMENTAL PRINCIPLES AS PER CODE OF ETHICS • Integrity • Objectivity • Professional Competence and Due Care - Maintain professional knowledge and skill • Confidentiality • Professional behavior - Comply with relevant laws and regulations Conti….
  56. 56. Threats Self-interest threats financial or other interests Self-review threats previous judgment needs to be re-evaluated Advocacy threats promotes a position or opinion Familiarity threats Too sympathetic to the interests of others Intimidation threats Deferred from acting objectively by threats, actual or perceived. Conti….
  57. 57. PROFESSIONAL ACCOUNTANTS IN PUBLIC PRACTICE • Fees and Other Types of Remuneration there may be threats to compliance with the fundamental principles arising from the level of fees quoted • Marketing Professional Services should not: Make exaggerated claims for services offers, qualifications possessed or Make disparaging references to unsubstantiated comparisons to the work of another. • Custody of Client Assets Should not assume custody of client money or other assets unless permitted to do so by law • Non-assurance service Conti….
  58. 58. CONCLUSION