CU-BCOM-SEM-III-Auditing Standards in India

conclusion of that meeting till the conclusion of its sixth annual general meeting and thereafter till the conclusion of every sixth meeting. The following points need to be noted in this regard- 1. Before such appointment is made, the written consent of the auditor to such appointment, and a certificate from him or it that the appointment, if made, shall be in accordance with the conditions as may be prescribed, shall be obtained from the auditor. 2. Under Rule 4 of The Companies (Audit and Auditors) Rules, 2014, the said certificate shall state the following:- (a) the individual or the firm, as the case may be, is eligible for appointment and is not disqualified for appointment under the Act, the Chartered Accountants Act, 1949 and the rules or regulations made thereunder; (b) the proposed appointment is as per the term provided under the Act; (c) the proposed appointment is within the limits laid down by or under the authority of the Act; (d) the list of proceedings against the auditor or audit firm or any partner of the audit firm pending with respect to professional matters of conduct, as disclosed in the certificate, is true and correct. 3.The company shall inform the auditor concerned of his or its appointment, and also file a notice of such appointment with the Registrar within 15 days of the meeting in which the auditor is appointed. Appointment of Subsequent Auditors in case of Government Companies As per section 139(5), in the case of a Government company or any other company owned or controlled, directly or indirectly, 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, the Comptroller and Auditor-General of India shall, in respect of a financial year, appoint an auditor duly qualified to be appointed as an auditor of companies under this Act, within a period of 180 days from the commencement of the financial year, who shall hold office till the conclusion of the annual general meeting. Therefore, it is to be clearly understood that in case of government companies or companies controlled by government, auditor is appointed by Comptroller and Auditor general of India in the manner provided in Section 139(5) and 139(7). It is to be remembered that Comptroller and auditor general of India is independent constitutional authority which audits all receipts and expenditure of Government of India and state governments including those of bodies, corporations financed by government. 6.3 FILLING OF A CASUAL VACANCY As per Section 139(8), any casual vacancy in the office of an auditor shall-  In the case of a company other than a company whose accounts are subject to audit by an auditor appointed by the Comptroller and Auditor General of India, be filled by the Board of Directors within 30 days. If such casual vacancy is as a result of the resignation of an 51 CU IDOL SELF LEARNING MATERIAL (SLM)

auditor, such appointment shall also be approved by the company at a general meeting convened within three months of the recommendation of the Board and he shall hold the office till the conclusion of the next annual general meeting.  In the case of a company whose accounts are subject to audit by an auditor appointed by the Comptroller and Auditor-General of India, be filled by the Comptroller and Auditor- General of India within 30 days. It may be noted that in case the Comptroller and Auditor-General of India does not fill the vacancy within the said period the Board of Directors shall fill the vacancy within next 30 days. Casual Vacancy by Resignation: As per section 140(2) of the Act, the auditor who has resigned from the company shall file within a period of 30 days from the date of resignation, a statement in the prescribed Form ADT–3 (as per Rule 8 of CAAR) with the company and the Registrar. In case of the companies referred to in section 139(5) i.e. Government company, the auditor shall also file such statement with the CAG along with the company and the Registrar. The auditor shall indicate the reasons and other facts as may be relevant with regard to his resignation. Figure 6.1 Filling of casual vacancy Source: Institute of Chartered Accountants of India In case of failure, the auditor shall be liable to a penalty of fifty thousand rupees or the remuneration of the auditor, whichever is less, and in case of continuing failure, with further penalty of five hundred rupees for each day after the first during which such failure continues, subject to a maximum of five lakh rupees as per section 140(3). Other Important Provisions Regarding Appointment of Auditors 1. A retiring auditor may be re-appointed at an annual general meeting, if- (a) he is not disqualified for re-appointment. 52 CU IDOL SELF LEARNING MATERIAL (SLM)

(b) he has not given the company a notice in writing of his unwillingness to be re - appointed; and (c) a special resolution has not been passed at that meeting appointing some other auditor or providing expressly that he shall not be re-appointed. 2. Where at any annual general meeting, no auditor is appointed or re-appointed, the existing auditor shall continue to be the auditor of the company. 6.4 APPLICABILITY OF SECTION 139(2) ROTATION OF AUDITOR: As per rules prescribed in Companies (Audit and Auditors) Rules, 2014, for applicability of section 139(2) the class of companies shall mean the following classes of companies excluding one person companies and small companies- 1. all unlisted public companies having paid up share capital of rupees ten crore or more; 2. all private limited companies having paid up share capital of rupees fifty crore or more; 3. all companies having paid up share capital of below threshold limit mentioned above, but having public borrowings from financial institutions, banks or public deposits of rupees fifty crores or more. As per section 139(2), no listed company or a company belonging to such class or classes of companies as mentioned above, shall appoint or re-appoint- (a) an individual as auditor for more than one term of five consecutive years; and (b) an audit firm as auditor for more than two terms of five consecutive years. Provided that (i)an individual auditor who has completed his term under clause (a) shall not be eligible for re- appointment as auditor in the same company for five years from the completion of his term; (ii) an audit firm which has completed its term under clause (b), shall not be eligible for re- appointment as auditor in the same company for five years from the completion of such term. Manner of Rotation of Auditors by the Companies on Expiry of their Term: Rule 6 of the Companies (Audit and Auditors) Rules, 2014 prescribes the manner of rotation of auditors on expiry of their term which is given below- (1) The Audit Committee shall recommend to the Board, the name of an individual auditor or of an audit firm who may replace the incumbent auditor on expiry of the term of such incumbent. (2) Where a company is required to constitute an Audit Committee, the Board shall consider the recommendation of such committee, and in other cases, the Board shall itself consider the matter of rotation of auditors and make its recommendation for appointment of the next auditor by the members in annual general meeting. (3) For the purpose of the rotation of auditors- (i) in case of an auditor (whether an individual or audit firm), the period for which the individual or the firm has held office as auditor prior to the commencement of the Act shall be taken into 53 CU IDOL SELF LEARNING MATERIAL (SLM)

account for calculating the period of five consecutive years or ten consecutive years, as the case may be; (ii) the incoming auditor or audit firm shall not be eligible if such auditor or audit firm is associated with the outgoing auditor or audit firm under the same network of audit firms. Explanation I - For the purposes of these rules the term “same network” includes the firms operating or functioning, hitherto or in future, under the same brand name, trade name or common control. Explanation II - For the purpose of rotation of auditors, (a) a break in the term for a continuous period of five years shall be considered as fulfilling the requirement of rotation. (b) if a partner, who is in charge of an audit firm and also certifies the financial statements of the company, retires from the said firm and joins another firm of chartered accountants, such other firm shall also be ineligible to be appointed for a period of five years. (4) Where a company has appointed two or more individuals or firms or a combination thereof as joint auditors, the company may follow the rotation of auditors in such a manner that both or all of the joint auditors, as the case may be, do not complete their term in the same year. 6.5 PROVISIONS RELATING TO AUDIT COMMITTEE Applicability of section 177 i.e. Constitution of Audit Committee: Where a company is required to constitute an Audit Committee under section 177, all appointments, including the filling of a casual vacancy of an auditor under this section shall be made after taking into account the recommendations of such committee. As per provisions of Section 177 of Companies Act, audit committee performs important functions including making recommendation for appointment, remuneration and terms of appointment of auditor of the company, reviewing and monitoring auditor’s independence and performance & effectiveness of audit process, examination of financial statements and auditor’s report thereon. It is to be remembered that audit committee consists of directors of the company. It consists of minimum 3 directors with independent directors forming majority. Besides, audit committee also performs other important functions. Audit committee helps in ensuring better standards of corporate governance. It is important to know that in addition to listed public companies, following classes of companies shall constitute an Audit Committee - (i) all public companies with a paid up capital of ten crore rupees or more; (ii) all public companies having turnover of one hundred crore rupees or more; (iii) all public companies, having in aggregate, outstanding loans or borrowings or debentures or deposits exceeding fifty crore rupees or more. Explanation: The paid up share capital or turnover or outstanding loans, or borrowings or debentures or deposits, as the case may 54 CU IDOL SELF LEARNING MATERIAL (SLM)

be, as existing on the date of last audited Financial Statements shall be taken into account for the purposes of this rule. Manner and procedure of selection and appointment of auditors Rule 3 of CAAR, 2014 prescribes the following manner and procedure of selection and appointment of auditors- (1) In case of a company that is required to constitute an Audit Committee under section 177, the committee, and, in cases where such a committee is not required to be constituted, the Board, shall take into consideration the qualifications and experience of the individual or the firm proposed to be considered for appointment as auditor and whether such qualifications and experience are commensurate with the size and requirements of the company. It may be noted that while considering the appointment, the Audit Committee or the Board, as the case may be, shall have regard to any order or pending proceeding relating to professional matters of conduct against the proposed auditor before the Institute of Chartered Accountants of India or any competent authority or any Court. (2) The Audit Committee or the Board, as the case may be, may call for such other information from the proposed auditor as it may deem fit. (3) Subject to the provisions of sub-rule (1), where a company is required to constitute the Audit Committee, the committee shall recommend the name of an individual or a firm as auditor to the Board for consideration and in other cases, the Board shall consider and recommend an individual or a firm as auditor to the members in the annual general meeting for appointment. (4) If the Board agrees with the recommendation of the Audit Committee, it shall further recommend the appointment of an individual or a firm as auditor to the members in the annual general meeting. (5) If the Board disagrees with the recommendation of the Audit Committee, it shall refer back the recommendation to the committee for reconsideration citing reasons for such disagreement. (6) If the Audit Committee, after considering the reasons given by the Board, decides not to reconsider its original recommendation, the Board shall record reasons for its disagreement with the committee and send its own recommendation for consideration of the members in the annual general meeting; and if the Board agrees with the recommendations of the Audit Committee, it shall place the matter for consideration by members in the annual general meeting. (7) The auditor appointed in the annual general meeting shall hold office from the conclusion of that meeting till the conclusion of the sixth annual general meeting, with the meeting wherein such appointment has been made being counted as the first meeting. 6.6 POWERS/RIGHTS OF AUDITORS 55 CU IDOL SELF LEARNING MATERIAL (SLM)

The auditor has the following powers/rights while conducting an audit: (a) Right of access to books, etc. – Section 143(1) of the Act provides that the auditor of a company, at all times, shall have a right of access to the books of account and vouchers of the company, whether kept at the registered office of the company or at any other place and he is entitled to require from the officers of the company such information and explanation as he may consider necessary for the performance of his duties as auditor. It may be noted that according to section 2(59) of the Act, the term ‘officer’ includes any director, manager or key managerial personnel or any person in accordance with whose directions or instructions the Board of Directors or any one or more of the directors is or are accustomed to act. The phrase ‘books, accounts and vouchers’ include all books which have any bearing or are likely to have any bearing on the accounts, whether these be the usual financial books or the statutory or statistical books; memoranda books, e.g., inventory books, costing records and the like may also be inspected by the auditor. Similarly, the term ‘voucher’ includes all or any of the correspondence which may in any way serve to vouch for the accuracy of the accounts. Thus, the right of access is not restricted to books of account alone and it is for the auditor to determine what record or document is necessary for the purpose of the audit. The right of access is not limited to those books and records maintained at the registered or head office so that in the case of a company with branches, the right also extends to the branch records, if the auditor considers it necessary to have access thereto as per Section143(8). (b) Right to obtain information and explanation from officers - This right of the auditor to obtain from the officers of the company such information and explanations as he may think necessary for the performance of his duties as auditor is a wide and important power. In the absence of such power, the auditor would not be able to obtain details of amount collected by the directors, etc. from any other company, firm or person as well as of any benefits in kind derived by the directors from the company, which may not be known from an examination of the books. It is for the auditor to decide the matters in respect of which information and explanations are required by him. When the auditor is not provided the information required by him or is denied access to books, etc., his only remedy would be to report to the members that he could not obtain all the information and explanations he had required or considered necessary for the performance of his duties as auditors (c) Right to receive notices and to attend general meeting – The auditors of a company are entitled to attend any general meeting of the company (the right is not restricted to those at which the accounts audited by them are to be discussed); also to receive all the notices and other 56 CU IDOL SELF LEARNING MATERIAL (SLM)

communications relating to the general meetings, which members are entitled to receive and to be heard at any general meeting in any part of the business of the meeting which concerns them as auditors. Section 146 of the Companies Act, 2013 discusses right as well as duty of the auditor. According to the section 146: “all notices of, and other communications relating to, any general meeting shall be forwarded to the auditor of the company, and the auditor shall, unless otherwise exempted by the company, attend either by himself or through his authorised representative, who shall also be qualified to be an auditor, any general meeting and shall have right to be heard at such meeting on any part of the business which concerns him as the auditor.” Thus, it is right of the auditor to receive notices and other communications relating to any general meeting and to be heard at such meeting, relating to the matter of his concern, however, it is duty of the auditor to attend the same or through his authorized representative unless otherwise exempted. (d) Right to report to the members of the company on the accounts examined by him – The auditor shall make a report to the members of the company on the accounts examined by him and on every financial statements which are required by or under this Act to be laid before the company in general meeting and the report shall after taking into account the provisions of this Act, the accounting and auditing standards and matters which are required to be included in the audit report under the provisions of this Act or any rules made there under or under any order made under this section and to the best of his information and knowledge, the said accounts, financial statements give a true and fair view of the state of the company’ s affairs as at the end of its financial year and profit or loss and cash flow for the year and such other matters as may be prescribed. (e) Right to Lien – In terms of the general principles of law, any person having the lawful possession of somebody else’s property, on which he has worked, may retain the property for non-payment of his dues on account of the work done on the property. On this premise, auditor can exercise lien on books and documents placed at his possession by the client for nonpayment of fees, for work done on the books and documents. The Institute of Chartered Accountants in England and Wales has expressed a similar view on the following conditions: (i) Documents retained must belong to the client who owes the money. (ii) Documents must have come into possession of the auditor on the authority of the client. They must not have been received through irregular or illegal means. In case of a company client, they must be received on the authority of the Board of Directors. (iii) The auditor can retain the documents only if he has done work on the documents assigned to him. (iv) Such of the documents can be retained which are connected with the work on which fees have not been paid. 57 CU IDOL SELF LEARNING MATERIAL (SLM)

DUTIES OF AUDITORS Sections 143 of the Companies Act, 2013 specifies the duties of an auditor of a company in a quite comprehensive manner. It is noteworthy that scope of duties of an auditor has generally been extending over all these years. (1) Duty of Auditor to Inquire on certain matters: Under provisions of section 143(1), it is the duty of auditor to inquire into the following matters- (a) whether loans and advances made by the company on the basis of security have been properly secured and whether the terms on which they have been made are prejudicial to the interests of the company or its members. (b) whether transactions of the company which are represented merely by book entries are prejudicial to the interests of the company. where the company not being an investment company or a banking company, whether so much of the assets of the company as consist of shares, debentures and other securities have been sold at a price less than that at which they were purchased by the company. (d) whether loans and advances made by the company have been shown as deposits. (e) whether personal expenses have been charged to revenue account; (f) where it is stated in the books and documents of the company that any shares have been allotted for cash, whether cash has actually been received in respect of such allotment, and if no cash has actually been so received, whether the position as stated in the account books and the balance sheet is correct, regular and not misleading. The opinion of the Research Committee of the Institute of Chartered Accountants of India on section 143(1) is reproduced below: “The auditor is not required to report on the matters specified in sub-section (1) unless he has any special comments to make on any of the items referred to therein. If he is satisfied as a result of the inquiries, he has no further duty to report that he is so satisfied. In such a case, the content of the Auditor’s Report will remain exactly the same as the auditor has to inquire and apply his mind to the information elicited by the enquiry, in deciding whether or not any reference needs to be made in his report. In our opinion, it is in this light that the auditor has to consider his duties under section 143(1).” Duty to report: Under provisions of Section 143(2), the auditor shall make a report to the members of the company on the accounts examined by him and on every financial statements which are required by or under this Act to be laid before the company in general meeting and the report shall after taking into account the provisions of this Act, the accounting and auditing standards and matters which are required to be included in the audit report under the provisions of this Act or any rules made thereunder or under any order made under subsection (11). Further, auditor has to report whether to best of his information and knowledge, the said accounts, financial statements give a true and fair view of the state of the company’s affairs as at 58 CU IDOL SELF LEARNING MATERIAL (SLM)

the end of its financial year and profit or loss and cash flow for the year and following matters as prescribed under relevant rules:- (a) whether the company has disclosed the impact, if any, of pending litigations on its financial position in its financial statement. (b) whether the company has made provision, as required under any law or accounting standards, for material foreseeable losses, if any, on long term contracts including derivative contracts; (c) whether there has been any delay in transferring amounts, required to be transferred, to the Investor Education and Protection Fund by the company. As per section 143(3), the auditor’s report shall also state– (a) whether he has sought and obtained all the information and explanations which to the best of his knowledge and belief were necessary for the purpose of his audit and if not, the details thereof and the effect of such information on the financial statements. (b) whether, in his opinion, proper books of account as required by law have been kept by the company so far as appears from his examination of those books and proper returns adequate for the purposes of his audit have been received from branches not visited by him. (c) whether the report on the accounts of any branch office of the company audited under sub- section (8) by a person other than the company’s auditors has been sent to him under the proviso to that sub-section and the manner in which he has dealt with it in preparing his report. (d) whether the company’s balance sheet and profit and loss account dealt with in the report are in agreement with the books of account and returns. (e) whether, in his opinion, the financial statements comply with the accounting standards. (f) the observations or comments of the auditors on financial transactions or matters which have any adverse effect on the functioning of the company. (g) whether any director is disqualified from being appointed as a director under sub- section (2) of the section 164; (h) any qualification, reservation or adverse remark relating to the maintenance of accounts and other matters connected therewith. (i) whether the company has adequate internal financial controls with reference to financial statements in place and the operating effectiveness of such controls; However, it may be noted that the reporting requirement on adequacy of internal financial controls (IFCs) with reference to financial statements shall not be applicable to a private company which is a– (i) One person company; or (ii) Small company; or (iii) Company having turnover less than ` 50 crore as per latest audited financial statement and having aggregate borrowings from banks or financial institutions or anybody corporate at any point of time during the financial year less than ` 25 crore. 59 CU IDOL SELF LEARNING MATERIAL (SLM)

(j) such other matters as may be prescribed. Rule 11 of the Companies (Audit and Auditors) Rules, 2014 prescribes the other matters to be included in auditor’s report. The auditor’s report shall also include their views and comments on the following matters, namely:- (i) whether the company has disclosed the impact, if any, of pending litigations on its financial position in its financial statement. (ii) whether the company has made provision, as required under any law or accounting standards, for material foreseeable losses, if any, on long term contracts including derivative contracts. (iii) whether there has been any delay in transferring amounts, required to be transferred, to the Investor Education and Protection Fund(IEPF) by the company. Further, in case of government companies and companies controlled by government, the Comptroller and auditor general of India shall direct the auditor of such companies the manner in which accounts of such companies are required to be audited. The copy of such report shall be submitted to the Comptroller and auditor general of India. It is to be further noted that Comptroller and auditor general of India has a right to conduct supplementary audit of financial statements of such companies within 60 days of receipt of audit report. Duty to Sign the Audit Report: As per section 145 of the Companies Act, 2013, the person appointed as an auditor of the company shall sign the auditor's report or sign or certify any other document of the company, in accordance with the provisions of section 141(2). Section 141(2) of the Companies Act, 2013 states that where a firm including a limited liability partnership is appointed as an auditor of a company, only the partners who are chartered accountants shall be authorized to act and sign on behalf of the firm. The qualifications, observations or comments on financial transactions or matters, which have any adverse effect on the functioning of the company mentioned in the auditor's report shall be read before the company in general meeting. Duty to comply with Auditing Standards: As per section 143(9) of the Companies Act, 2013, every auditor shall comply with the auditing standards. Further, as per section 143(10) of the Act, the Central Government may prescribe the standards of auditing as recommended by the Institute of Chartered Accountants of India, in consultation with and after examination of the recommendations made by the National Financial Reporting Authority. (5) Duty to report on frauds: A. Reporting to the Central Government- As per section 143(12) of the Companies Act, 2013 read with Rule 13 of the Companies (Audit and Auditors) Rules, 2014, 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, which involves or is expected to involve individually an amount of ` 1 crore or above, 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 prescribed 60 CU IDOL SELF LEARNING MATERIAL (SLM)

. B. Reporting to the Audit Committee or Board- 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 other cases within such time and in such manner as prescribed. C. Disclosure in the Board's Report: 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 prescribed. Sub-section (13) of section 143 of the Companies Act, 2013 safeguards the act of fraud reporting by the auditor if it is done in good faith. It states that no duty to which an auditor of a company may be subject to shall be regarded as having been contravened by reason of his reporting the matter above if it is done in good faith. It is very important to note that the provisions regarding fraud reporting shall also apply, mutatis mutandis, to a cost auditor and a secretarial auditor during the performance of his duties under section 148 and section 204 respectively. If any auditor, cost accountant or company secretary in practice do not comply with the provisions of sub-section (12) of section 143, he shall be punishable with fine which shall not be less than ` 1 lakh but which may extend to ` 25 lakh. Besides, auditor has also to report matters pertaining to fraud at point (xi) of paragraph 3 of CARO,2020 which is discussed subsequently. (6)Duty to report on any other matter specified by Central Government: The Central Government may, in consultation with the National Financial Reporting Authority (NFRA), by general or special order, direct, in respect of such class or description of companies, as may be specified in the order, that the auditor's report shall also include a statement on such matters as may be specified therein. However, as per the notification dated 29.03.2016, till the time NFRA is constituted, the Central Government may hold consultation required under this sub-section with the Committee chaired by an officer of the rank of Joint Secretary or equivalent in the MCA and the Committee shall have the representatives from the ICAI and Industry Chambers and also special invitees from the National Advisory Committee on Accounting Standards (NACAS) and the office of the C&AG. (7) Duties and powers of the company’s auditor with reference to the audit of the branch and the branch auditor are discussed separately in the chapter under heading 13 branch audit. (8) Duty to state the reason for qualification or negative report: As per section 143(4), where any of the matters required to be included in the audit report is answered in the negative or with a qualification, the report shall state the reasons there for 6.7 PUNISHMENT FOR NON-COMPLIANCE Section 147 of the Companies Act, 2013 prescribes following punishments for contravention: 61 CU IDOL SELF LEARNING MATERIAL (SLM)

(1) If any of the provisions of sections 139 to 146 (both inclusive) is contravened, the company shall be punishable with fine which shall not be less than twenty five thousand rupees but which may extend to five lakh rupees and every officer of the company who is in default shall be punishable with imprisonment for a term which may extend to one year or with fine which shall not be less than ten thousand rupees but which may extend to one lakh rupees, or with both. (2) If an auditor of a company contravenes any of the provisions of section 139 section 143, section 144 or section 145, the auditor shall be punishable with fine which shall not be less than twenty-five thousand rupees but which may extend to five lakh rupees or four times the remuneration of the auditor, whichever is less. It may be noted that if an auditor has contravened such provisions knowingly or willfully with the intention to deceive the company or its shareholders or creditors or tax authorities, he shall be punishable with imprisonment for a term which may extend to one year and with fine which shall not be less than fifty thousand rupees but which may extend to twenty-five lakh rupees or eight times the remuneration of the auditor, whichever is less . (3) Where an auditor has been convicted under sub-section (2), he shall be liable to- (i) refund the remuneration received by him to the company; (ii) and pay for damages to the company statutory bodies or authorities or to members or creditors of the company for loss arising out of incorrect or misleading statements of particulars made in his audit report. (4) The Central Government shall, by notification, specify any statutory body or authority of an officer for ensuring prompt payment of damages to the company or the persons under clause (ii) of sub-section (3) and such body, authority or officer shall after payment of damages the such company or persons file a report with the Central Government in respect of making such damages in such manner as may be specified in the said notification. (5) Where, in case of audit of a company being conducted by an audit firm, it is proved that the partner or partners of the audit firm has or have acted in a fraudulent manner or abetted or colluded in an fraud by, or in relation to or by, the company or its directors or officers, the liability, whether civil or criminal as provided in this Act or in any other law for the time being in force, for such act shall be of the partner or partners concerned of the audit firm and of the firm jointly and severally. It may be noted that in case of criminal liability of an audit firm, in respect of liability other than fine, the concerned partner(s), who acted in a fraudulent manner or abetted or, as the case may be, colluded in any fraud shall only be liable. 6.8 SUMMARY 139(1) Every company shall, at the first annual general meeting, appoint an individual or a firm as an auditor who shall hold office from the conclusion of that meeting till the conclusion of its 6th annual general meeting and thereafter till the conclusion of every 6th meeting and 62 CU IDOL SELF LEARNING MATERIAL (SLM)

the manner and procedure of selection of auditors by the members of the company at such meeting shall be such as may be prescribed: Provided further that before such appointment is made, the written consent of the auditor to such appointment, and a certificate from him or it that the appointment, if made, shall be in accordance with the conditions as may be prescribed, shall be obtained from the auditor: Provided also that the certificate shall also indicate whether the auditor satisfies the criteria provided in section 141 Provided also that the company shall, inform the auditor concerned of his or its appointment, and also file a notice of such appointment with the Registrar within 15 days of the meeting in which the auditor is appointed. Explanation: For the purposes of this Chapter, “appointment” includes reappointment. (2) No listed company or a company belonging to such class or classes of companies as may be prescribed shall appoint or re-appoint: (a) an individual as auditor for more than one term of 5 consecutive years; and (b) an audit firm as auditor for more than two terms of 5 consecutive years: Provided that: (i) an individual auditor who has completed his term under 139(2)(a) shall not be eligible for re- appointment as auditor in the same company for 5 years from the completion of his term. (ii) an audit firm which has completed its term under 139(2)(b), shall not be eligible for re- appointment as auditor in the same company for 5 years from the completion of such term: Provided further that as on the date of appointment no audit firm having a common partner or partners to the other audit firm, whose tenure has expired in a company immediately preceding the financial year, shall be appointed as auditor of the same company for a period of 5 years: Provided also that every company, existing on or before the commencement of this Act which is required to comply with the provisions of this sub-section, shall comply with requirements of this section 139(2) within a period which shall not be later than the date of the first annual general meeting of the company held, within the period specified under section 139(1) of section 96, after 3 years from the date of commencement of this Act. Provided also that, nothing contained in this sub-section shall prejudice the right of the company to remove an auditor or the right of the auditor to resign from such office of the company (3) Subject to the provisions of this Act, members of a company may resolve to provide that: (a) in the audit firm appointed by it, the auditing partner and his team shall be rotated at such intervals as may be resolved by members; or 63 CU IDOL SELF LEARNING MATERIAL (SLM)

(b) the audit shall be conducted by more than one auditor. (4) The Central Government may, by rules, prescribe the manner in which the companies shall rotate their auditors in pursuance of section 139(2). Explanation: For the purposes of this Chapter, the word “firm” shall include a limited liability partnership incorporated under the Limited Liability Partnership Act, 2008. (5) Notwithstanding anything contained in section 139(1), in the case of a Government company or any other company owned or controlled, directly or indirectly, 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, the CAG of India shall, in respect of a financial year, appoint an auditor duly qualified to be appointed as an auditor of companies under this Act, within a period of 180 days from the commencement of the financial year, who shall hold office till the conclusion of the annual general meeting. (6) Notwithstanding anything contained in section 139(1), the first auditor of a company, other than a Government company, shall be appointed by the Board of Directors within 30 days from the date of registration of the company and in the case of failure of the Board to appoint such auditor, it shall inform the members of the company, who shall within 90 days at an extraordinary general meeting appoint such auditor and such auditor shall hold office till the conclusion of the first annual general meeting. (7) Notwithstanding anything contained in section 139(1) or (5), in the case of a Government company or any other company owned or controlled, directly or indirectly, 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, *the first auditor shall be appointed by the CAG of India within 60 days from the date of registration of the company and in case the CAG of India does not appoint such auditor within the said period, the Board of Directors of the company shall appoint such auditor within the next 30 days; and in the case of failure of the Board to appoint such auditor within the next 30 days, it shall inform the members of the company who shall appoint such auditor within the sixty days at an egm, who shall hold office till the conclusion of the 1st annual general meeting. (8) Any casual vacancy in the office of an auditor shall: (i) in the case of a company other than a company whose accounts are subject to audit by an auditor appointed by the CAG of India, be filled by the Board of Directors within 30 days, but if such casual vacancy is as a result of the resignation of an auditor, such appointment shall also be approved by the company at a general meeting convened within 3 months of the recommendation of the Board and he shall hold the office till the conclusion of the next annual general meeting. 64 CU IDOL SELF LEARNING MATERIAL (SLM)

(ii) in the case of a company whose accounts are subject to audit by an auditor appointed by the CAG of India, be filled by the CAG of India within 30 days: Provided that in case the CAG of India does not fill the vacancy within the said period, the Board of Directors shall fill the vacancy within next 30 days. (9) Subject to the provisions of section 139(1) and the rules made thereunder, a retiring auditor may be re-appointed at an annual general meeting, if: (a) he is not disqualified for re-appointment. (b) he has not given the company a notice in writing of his unwillingness to be re-appointed; and (c) a special resolution has not been passed at that meeting appointing some other auditor or providing expressly that he shall not be re-appointed. (10) Where at any annual general meeting, no auditor is appointed or re-appointed, the existing auditor shall continue to be the auditor of the company. (11) Where a company is required to constitute an Audit Committee under section 177, all appointments, including the filling of a casual vacancy of an auditor under this section shall be made after taking into account the recommendations of such committee. 6.9 KEYWORDS  CAG-Comptroller and Auditor General  IEPF-Investor Education and protection Fund  NFRA- National Financial Reporting Authority  EGM- Extraordinary general meeting 6.10 LEARNING ACTIVITIES 1.Can more than one Auditor or Audit Firm be appointed as Auditor of a company? ______________________________________________________________________________ ______________________________________________________________________________ 6.11 UNIT END QUESTIONS A. Descriptive Questions Short Questions 1.Mr.X who was the Auditor of X Ltd. resigns after 2 months owing to ill health , State how the new Auditor is to be appointed for XLtd 2.List out the Duties of Auditor as mentioned in companies Act 2013 3.Define the term “Government Company” as mentioned in Companies Act 2013 4.Describe the steps for Appointment of First Auditor in case of a Government Company 65 CU IDOL SELF LEARNING MATERIAL (SLM)

5. The First Auditor of XYZ ltd a Government company was appointed by board of directors. Comment Long Questions 1.Explain in detail about Appointment of an Auditor of a company 2.Explain the provisions of Sec 143(1) of Companies Act 2013 3.Explain in detail the rights of an Auditor as given in companies Act 2013 4.Explain about Auditor’s duty to report on Fraud B. Multiple Choice Questions 1.The Auditor is duty bound to report on fraud to Central Government if amount of fraud exceeds a. 1 crore b. 50 Lakhs c. 25 Lakhs d. None of these 2.An individual cannot be appointed as an Auditor for a period of more than ___________ a. 5 years b. 10 years c. 12 years d. None of these 3.Who appoints the Auditor of a Government company in case C&AG fails to appoint? a. Share Holders b. Central Government c. Board of Directors d. None of these 4.In case of resignation of existing Auditor who appoints the Auditor in case of a Government Company? a. Share Holder b. Board of Directors c. Central Government d. None of these 5.IEPF stands for 66 CU IDOL SELF LEARNING MATERIAL (SLM)

a. Investor Education and Protection Fund b. Internal Education and policy Fund c. Both a and b d. None of these Answers 1-a, 2-a, 3-c, 4-b, 5-a 6.12 REFERENCES Textbook:  T1 ArunaJha, Auditing, Taxmann’s Publications, University Edition  T2 Ravinder Kumar, Auditing: Principles and Practice :PHI Learning Pvt. Ltd Reference Books:  R1 N.D Kapoor, Auditing, Sultan Chand & Sons  R2 Gupta; Contemporary Auditing, Tata McGraw Hill 67 CU IDOL SELF LEARNING MATERIAL (SLM)

UNIT 7 – DIVISIBLE PROFITS AND DIVIDEND Structure 7.0 Learning Objectives 7.1 Introduction 7.2 Concept of Profit 7.3 Difficulties in determination of Profit 7.4 Difference between business profit and capital profit 7.5 Consequences of Incorrect determination of profit 7.6 Importance of proper ascertainment of profits 7.7 Concept of divisible profit 7.8 Dividend equalisation reserve 7.9 Auditors’ duties regarding divisible profit 7.10Difference between interim dividend and dividend 7.11Summary 7.12 Keywords 7.13 Learning activities 7.14 Unit end questions 7.15 References 7.0 LEARNING OBJECTIVES After studying this unit students will be able to  Explain meaning of the term profit  Analyse difficulty in determination of profit  Understand difference between business profit and capital profit  understand the term interim dividend 7.1 INTRODUCTION Meaning of Profit What do you mean by profit? It is known to all that, profit earning is the main objective of every business concern. The determination of profit is of great importance, because the true profits of a concern not only affect its properties but also the income tax authorities as well as the managers, directors, shareholders etc. who are to be paid a percentage of the net profit. However, what is profit? It is not so easy to answer this question. Because, different persons, authorities, justice 68 CU IDOL SELF LEARNING MATERIAL (SLM)

have defined profits in different ways: These are- Some writers say, “Generally speaking the profit of a business during a given period is the excess of income over expenditure for the period. “Others defined-, “It is the excess of the assets over liabilities and the capital between the two periods.” Another case decision, it was in 1892, Lord Herschel in Gresham. life Assurance society Vs styles, 1892. “Profits are ascertained by setting against the income earned, the cost of earning it.” In 1925, Union Bank of Allahabad -, “Profits means profits realized.” After above discussion, it is clear that, after deduction the total expenses from the total revenue which is exist, called profit. 7.2 THE CONCEPT OF THE PROFIT The question of the determination of the profit is of great importance. Its determination affects several people in different walks of life e.g. proprietors, income-tax- authorities, shareholders, directors etc. Consequently, it is a very important item in determining the correct profit of a concern. Authorities on the subject have defined the word “profit” in different ways. (1) Generally speaking, the profit of the business during a given period is the excess over the expenditure for the period . (2) It is the excess of assets over the liabilities and the capital between the two period. 7.3 DIFFICULTIES IN THE DETERMINATION OF PROFITS Some of the basic complications which lies in the determination of profits are listed below: (1) How to value the assets at the close of the period? (2) How should the liabilities be valued? (3) Whether the previous losses must be written off (4) Whether or not it necessary those reserves, special provisions for depreciation etc, be provided for? (5) The question of capital expenditure being treated as revenue expenditure and vice versa, is to be given a careful consideration. (6) A careful consideration should be given to those expenses the benefit of which may be derived in the subsequent accounting period. What is business profit or revenue profit? Business or revenue profit is a regular profit from day-to-day activities, that is after deduction the current expense and depreciation of the assets which exists is called business or revenue profit. On the other hand, capital profit is a irregular profit which we get from capital transactions like selling of capital assets, forfeiture of shares , redemption of debentures etc 69 CU IDOL SELF LEARNING MATERIAL (SLM)

7.4 DIFFERENCES BETWEEN BUSINESS PROFIT AND CAPITAL PROFIT:  Nature: Business profit is the profit earned from the normal activities of business. on the other hand, capital profit is the profit earned from the transaction in capital.  Distribution:- Business profit can be distributed among the shareholders as dividend. But, capital profit should not be distributed as dividend from the business view.  Usage: Business profit can be used as reserve in some cases. On the other hand, capital profit may be used for expansion of business and for meeting contingent liabilities.  Determination: Business profit is determined from the revenue concerned account or profit and loss account. But, capital profit is derived from different accounts.  Trading concern: Business profit is a trading profit. Contrast, capital profit is not trading profit.  Recurrence: Business profit occurs frequently. On the other hand, capital profit is not recurrent. 7.5 CONSEQUENCES OF INCORRECT DETERMINATION OF PROFIT If the profit, are not correctly arrived at, it may result as explained below: (1) Under-statement of profit will lead to the following disadvantages: (a) Lowering the value in the market. (b) Depriving the shareholders of dividends to which they are entitled. (c) Reducing the commission on profits payable to the manager. (2) Over-statement of profit will result as following : (a) Distribution of capital in the form of dividend. (b) Payment of managing agents as percentage of profit in excess of the entitlement. (3) Over-valuation or under-valuation of assets and liabilities would result in misrepresentation of the balance-sheet. 7.6 IMPORTANCE OF PROPER ASCERTAINMENT OF PROFITS In the case of business owned by individuals and partners, the proprietors may ascertain their profits in any way they like, because other parties are not interested therein. However, the position with regard to the limited companies is quite different. Apart from present shareholders of the company, there are other persons such as the prospective shareholders, debenture-holders, creditors, and employees etc, who are interested in this profit. Therefore, it is important that the profit of the company should properly ascertained, failing which the various parties would be affected as under: 70 CU IDOL SELF LEARNING MATERIAL (SLM)

(1) If profits are understated, they result in depriving the present shareholders of their dividends to which they are entitled. Further the market value of the shares also decline. (2) An over statement of the profits may result in an improper payment of dividends. (3) Dividends may be paid out through an overstatement of the profit. Thus dividends may be paid out of capital of the company and it may become insolvent and ultimately go into liquidation. (4) An overstatement of the profits may result in increased remuneration payable to managing agents, thereby causing a corresponding loss to the company. 7.7 CONCEPT OF DIVISIBLE PROFIT The term ‘divisible profit’ means all profits that can be legally distributed to the shareholders of the company. Under Section 123 (1) of the Companies Act, 2013, no dividend should be declared or paid by a company for any financial year except- (a) Out of the profits of the company for that financial year arrived at after providing for depreciation in accordance with the provisions of section 123(2), or (b) Out of the profits for any previous financial years arrived at after providing for depreciation in accordance with the provisions of that sub section and remaining undistributed; or (c) Out of both the above. (d) Out of the moneys provided by the Central Government or any State Government for the payment of dividend by the Company in pursuance of any guarantee given by that government Provided that no dividend should be declared or paid by a company from its reserves other than free reserves. For the purpose of second proviso to sub-section (1) of section 123, a company may declare dividend out of the accumulated profits earned by it in previous years and transferred by it to the reserves, in the event of inadequacy or absence of profits in any year, subject to the fulfillment of the following conditions as per Companies (Declaration and Payment of Dividend) Rules, 2014 (1) The rate of dividend declared should not exceed the average of the rates at which dividend was declared by it in the three years immediately preceding that year: provided that this sub-rule should not apply to a company, which has not declared any dividend in each of the three preceding financial year. (2) The total amount to be drawn from such accumulated profits should not exceed one-tenth of the sum of its paid-up share capital and free reserves as appearing in the latest audited financial statement. (3) The amount so drawn should first be utilized to set off the losses incurred in the financial year in which dividend is declared before any dividend in respect of equity shares is declared. 71 CU IDOL SELF LEARNING MATERIAL (SLM)

(4) The balance of reserves after such withdrawal should not fall below 15% of its paid up share capital as appearing in the latest audited financial statement. (5) No company should declare dividend unless carried over previous losses and depreciation not provided in previous year are set off against profit of the company of the current year the loss or depreciation, whichever is less, in previous years is set off against the profit of the company for the year for which dividend is declared or paid. Transfer to Reserves I The Board of Directors are free and can appropriate a part of the profits to the credit of a reserve or reserves as per section 123 (1)of the Companies Act, 2013. No dividends shall be declared or paid by a company for any financial year out of the profits of the company made from the sale or disposal of any immovable property or assets of a capital nature comprised in the undertaking or any of the undertaking of the company, unless the business of the company consists, whether wholly or partly, of selling and purchasing any such property or assets except after such profits are set off or adjusted against losses arising from the sale of any such immovable property or assets of a capital nature. The company law does not lay down the manner in which the profit of the company is to be ascertained. It also does not define as to what profit can be distributed for dividend purposes. The question then is: What are the guiding principles to be applied in determining whether a particular profit is available for distribution in the form of dividend or not? The following guiding principles must invariably be kept in mind: (1) In no circumstances a dividend can be paid out of the capital (2) In every case the requirements of the memorandum and articles of association of the company must be faithful, complied with. In the following cases dividends will be considered to have been paid out of the profits: (a) If any expenditure locatable to revenue is charged to capital with a view to swelling the profit of the company improperly. (b) If a company paid a dividend in spite of the fact that the profit and loss account indicates the loss and there are no other undistributed profits. If a company distributes the sale proceeds of one of its fixed assets. The reasons as to why the company Law prohibits the payment of dividend out of the capital are briefly narrated below: (i) The payment of dividend out of the capital amount to voluntary reduction of capital without the permission of the Court. (ii) If the payment of dividend out of capital is authorized by the memorandum or articles of association, it is illegal, as it is ultra quires the Ordinance. Important consideration in determining Divisible profit. While determining divisible profit some factors are to be considered. Transfer to Reserves 72 CU IDOL SELF LEARNING MATERIAL (SLM)

I The Board of Directors are free and can appropriate a part of the profits to the credit of a reserve or reserves as per section 123 (1)of the Companies Act, 2013. II Appropriation of a part of profit is sometimes made under law. (a) For example, under the Banking Regulation Act, a fixed percentage of the profit of a banking company must first be transferred to the General Reserve before any dividend can be distributed. (b) Transfer of a part of profit to a reserve is also necessary where the company has undertaken, at the time of raising of loan, that before any part of its profit is distributed, a specified percentage of the profit every year should be credited to a reserve for the repayment of the loan and until the time for repayment arrives, the amount should remain invested in a specified manner. (b) III Apart from appropriations aforementioned, it may also be necessary to provide for losses and arrears of depreciation and to exclude capital profit, as mentioned earlier, to arrive at the amount of divisible profit. Declaration of Dividend As per Section 123 of the Companies Act, 2013, Board of Directors of a company may declare dividend including interim dividend during any financial year out of the surplus in the profit and loss account and out of profits of the financial year in which such interim dividend is sought to be declared: Provided that in case the company has incurred loss during the current financial year up to the end of the quarter immediately preceding the date of declaration of interim dividend, such interim dividend should not be declared at a rate higher than the average dividends declared by the company during the immediately preceding three financial years. The amount of the dividend, including interim dividend, should be deposited in a scheduled bank in a separate account within five days from the date of declaration of such dividend. No dividend should be paid by a company in respect of any share therein except to the registered shareholder of such share or to his order or to his banker and should not be payable except in cash: Provided that nothing in Section 123 should be deemed to prohibit the capitalization of profits or reserves of a company for the purpose of issuing fully paid-up bonus shares or paying up any amount for the time being unpaid on any shares held by the members of the company: Provided further that any dividend payable in cash may be paid by cheque or warrant or in any electronic mode to the shareholder entitled to the payment of the dividend. Dividend on preference shares (a) Holders of preference shares are entitled to receive a dividend at a fixed rate before any dividend is declared on equity shares. (b) But such a right can be exercised subject to there being profits and the Directors recommending payment of the dividend 73 CU IDOL SELF LEARNING MATERIAL (SLM)

7.8 DIVIDEND EQUALIZATION RESERVE Sometimes the profits of the company fluctuate violently from year to year. In such a circumstance, it is desirable to monster a part of profits before declaring dividend to the dividend equalization reserve to maintain a uniformity in the declaration of dividends. 3. Cash Requirements:- If the working capital is just sufficient, it is not advisable to declare a dividend, if it is declared it will have to be paid to the shareholders within 42 days and thus the working capital will be reduced. . Past policy:- While declaring dividend the directors should follow a consistent policy. On account of fluctuation in the rate of dividend the value of the shares in the market will be very much affected. Preference shares:- Before declaring dividend to the equity shareholders, preference shareholders must be paid dividend. Legal decision:- The legal decisions have laid down the following principles for the distribution of profits:- (a) The shareholders capital cannot be used to pay dividends and (b) A dividend can only be paid out of bona fide surplus. 7.9 AUDITORS’ DUTIES REGARDING DIVISIBLE PROFIT. There are enough or sufficient duties of a company appointed auditor regarding company divisible profit at the time of determining divisible profit the directors have to follow the provisions of law and G.A.A.P. So in case of company divisible profit, the auditor has to justify or examine provisions of articles of association, provisions of law. Case law decisions etc. Auditors’ duties regarding divisible profit are discussed in below. 1. Verification of sources:- Received profit from normal function of company whether this profit is distributed to the shareholder as divisible profit or not, that must be examined. 2.Verification of divisible profit:- In case of calculation of divisible profit of company, whether the proper depreciation of depreciable assets is charged or not and proper principles and procedure are followed or not that must be verified by auditor. 3. Verification of legal decisions:- Generally if the case dividend from capital profit is declared whether different legal decisions are followed or not in this case that must be seen. 4. To Examine Capital:- In no case. the dividend will given from capital according to his own knowledge, capacity and experience. the auditor must be free from indebt or sure that capital is not damaged and there is no capital within divisible profit. 5. To examine reserve account: Before declaration dividend of the directors of company whether a specific portion from current profit of present year is transferred to reserve account or not that must be examined. 74 CU IDOL SELF LEARNING MATERIAL (SLM)

6. Verification of making past losses:- After past compensation whether the divisible profit is determined or not that must be examined. 7. Verification of Articles of Association:- Auditor should see that whether there is any provisions relating to divisible profit in articles of Association. 8. To Examine the decisions of the meeting:- How many decisions of meeting of shareholder and directors of the company are taken that must be justified. 9. Verification of Taxation:- whether the income tax and other tax on company divisible profit are managed efficiently or not that must be examined The auditor can be danger free after proper verification of above discussed contents. In this case, if the auditor shows negligence then the auditor will be liable for such negligence. DIVIDEND A Slice of profit which goes to the credit of the shareholders after meeting obligation to different parties is called dividend. Auditors’ duties and responsibilities regarding payment of dividend: • To consider articles of association. • To examine the section of the Act. • To examine the minutes book. • To examine the register and register book. • To examine the calculated dividend. • To examine the Bank Account. • Duties regarding payment of Dividend . • Duties regarding unclaimed dividend. • To examine bonus share issued . • To examine the paid up dividend and unclaimed dividend. What is Interim Dividend: Interim dividend is the most important motivating factor. When a company declared dividend before at the end of the accounting period, it is called interim dividend. If it is mentioned in the article of Association, then the board of directors can declared interim dividend after conforming about probable profit of the company before at the end of accounting period. Interim amount is prepared to determine interim profit before declaring interim dividend. Payment of interim dividend: The following work should be done by the auditor in respect of checking the payment of dividend. Interim accounts to be prepared: The profits made by the company must be carefully estimated. For this purpose, it is advisable to prepare interim accounts for the half year. Where however, the business is of such a nature that the percentage of gross profit on turnover is more or less constant year by year and there are no unusual factors during the current year which may affect the figure of profits, it may be possible to dispense with the taking of stock and the preparation of the interim accounts. 75 CU IDOL SELF LEARNING MATERIAL (SLM)

2. Remainder period conditions to be anticipated: A careful inquiry should be made into the conditions of trade and prospects for the remainder of the year, because it is quite possible that the profit earned during the first half year may be swallowed up by a loss in the second half year. 3. Cash Position to be watched: Cash position of the company should be examined since it would be inadvisable to pay an interim dividend, although there may be profits, if such payment may unduly deplete the working capital of the company. 4. Rate to be lower than final dividends: If it be decided to pay an interim dividend the rate fixed should preferably be lower than the estimated rate for the whole year, because it is better that the final dividend may be higher than the interim. The above task must be done by the auditor to check the payment of dividend. 7.10 DIFFERENCE BETWEEN INTERIM DIVIDEND AND DIVIDEND 1.Definifion: Interim dividend: When the dividend of a company is declared before at the end of the accounting period, it is called interim dividend. Dividend: The part of the profits of the company which is distributed to the shareholders at the end of period, it is called dividend. 2. Payment of time: Interim dividend: Interim dividend is paid in the meantime of the accounting period. Dividend: Dividend is paid at the end of the accounting period. 3. Amount: Interim dividend: The amount of interim dividend is lower than dividend. Dividend: The amount of dividend is higher than interim dividend. 4. Rate: Interim dividend: Generally, the rate of interim dividend is lower than dividend. Dividend: the rate of dividend is higher than interim dividend. These are the important difference between interim dividend and dividend. Profit prior to incorporation Legally the shareholders have no right to share such profits as were made by the company at a time where it had not come in to existence. Therefore, distribution of dividends out of profits prior to incorporation is illegal. However, profits prior to incorporation in the form of bonus shares. The balance of the profit earned prior to incorporation may be utilized in writing off goodwill or, If there be no good will, in writing off the fictitious e.g., preliminary expenses, lender writing commission. brokerage on shares, discount on share and debentures etc, or may be carried forward as capital Reserve not available for dividend. 7.11 SUMMARY  The term profit refers to excess of expenditure over income or Assets less Liabilities and opening capital  Determination of profits affects each stakeholder in a different way  Business profits are profits arising in the ordinary course of business and capital profits arise from capital transactions 76 CU IDOL SELF LEARNING MATERIAL (SLM)

 Business profits are available for distribution of dividend whereas capital profits are not available for distribution of dividend  In case of companies managerial remuneration determined based on section 197 and 198 of the Companies Act 2013  In case of companies dividend cannot be declared from other than profits and capital cannot be distributed as dividend  Companies must pay dividend distribution tax at the time of payment of dividend  Dividend equalization reserve is required for a constant pay out of dividend  Interim dividend refers to dividend paid between two annual general meeting 7.12 KEYWORDS  Managerial remuneration - Remuneration paid to key managerial personnel  DER- Dividend equalisation reserve 7.13 LEARNING ACTIVITIES a.Learn about the provisions relating to declaration and payment of dividend as per companies Act 2013 ______________________________________________________________________________ ______________________________________________________________________________ 7.14 UNIT END QUESTIONS A. Descriptive Questions Short Questions 1.Write a short note about dividend equalizer equalisation reserve 2.List out the difficulties in determination of profits 3.what is meant by the term interim dividend 4.what is the difference between business profit and capital profit 5.what is meant by the term divisible profit Long Questions 1.Explain in detail auditors duties regarding divisible profit 2.Explain the provisions given in Companies Act 2013 with regards to dividend B. Multiple Choice Questions 1.Treatment of revenue expenditure as capital expenditure leads to 77 CU IDOL SELF LEARNING MATERIAL (SLM)

a. understatement of profits b. overstatement of profits c. has no effect on profits d. None of these 2.Net profit and divisible profit are one and the same a. True b. False c. partly true d. None of these 3.Gain arising from forfeiture of shares is an example of a. capital profit b. revenue profit c. both a and b d. None of these Answers 1-b , 2-b , 3-a 7.15 REFERENCES Textbook:  T1 ArunaJha, Auditing, Taxmann’s Publications, University Edition  T2 Ravinder Kumar, Auditing: Principles and Practice :PHI Learning Pvt. Ltd Reference Books:  R1 N.D Kapoor, Auditing, Sultan Chand & Sons  R2 Gupta; Contemporary Auditing, Tata McGraw Hill 78 CU IDOL SELF LEARNING MATERIAL (SLM)

UNIT 8 – AUDITOR’S REPORT Structure 8.0 Learning Objective 8.1 Introduction 8.2 Forming an opinion 8.3 Auditor’s report 8.4 SA 705 8.5 Summary 8.6 Keywords 8.7 Learning Activities 8.8 Unit End Questions 8.9 References 8.0 LEARNING OBJECTIVES After studying this unit students will be able to  Outline the meaning of Audit report  Analyze the process of forming an opinion  Describe in detail about Auditor’s report  Learn about Modified opinion and its types 8.1 INTRODUCTION SA 200 “Basic Principals Governing an Audit” describes the basic principles which govern the auditor’s professional responsibilities, and which should be complied with wherever an audit is carried. As per the same, the last area of concern is audit conclusion and reporting. Based on the audit evidence collected during the audit, he has to express an opinion on the following:  As whether accounting policies have been consistently applied.  Whether financial information complies with regulations and statutory requirements; and  There is adequate disclosure of material matters relevant to the presentation of financial information subject to statutory requirements The auditor’s report should contain a clear written opinion on the financial information. A clean audit report indicates the auditor’s satisfaction in all respects and when a qualified, adverse or a disclaimer of opinion is to be given or reservation of opinion on any matter is to be made, the audit report should state the reasons thereof. SA 700 – FORMING AN OPINION AND REPORTING ON FINANCIAL STATEMENTS 79 CU IDOL SELF LEARNING MATERIAL (SLM)

This Standard on Auditing (SA) deals with the auditor’s responsibility to form an opinion on the financial statements. It also deals with the form and content of the auditor’s report issued as a result of an audit of financial statements. This SA applies to an audit of a complete set of general-purpose financial statements and is written in that context. SA 800 deals with special considerations when financial statements are prepared in accordance with a special purpose framework. SA 8055 deals with special considerations relevant to an audit of a single financial statement or of a specific element, account or item of a financial statement. This SA also applies to audits for which SA 800 or SA 805 apply. This SA is effective for audits of financial statements for periods beginning on or after April 1, 2018. OBJECTIVES The objectives of the auditor are:  To form an opinion on the financial statements based on an evaluation of the conclusions drawn from the audit evidence obtained; and  To express clearly that opinion through a written report. DEFINITIONS For purposes of the SAs, the following terms have the meanings attributed below:  General purpose financial statements – Financial statements prepared in accordance with a general-purpose framework.  General purpose framework – A financial reporting framework designed to meet the common financial information needs of a wide range of users. The financial reporting framework may be a fair presentation framework or a compliance framework  The term “fair presentation framework” is used to refer to a financial reporting framework that requires compliance with the requirements of the framework and: (i) Acknowledges explicitly or implicitly that, to achieve fair presentation of the financial statements, it may be necessary for management to provide disclosures beyond those specifically required by the framework; or (ii) Acknowledges explicitly that it may be necessary for management to depart from a requirement of the framework to achieve fair presentation of the financial statements. Such departures are expected to be necessary only in extremely rare circumstances.  The term “compliance framework” is used to refer to a financial reporting framework that requires compliance with the requirements of the framework, but does not contain the acknowledgements in (i) or (ii) above 80 CU IDOL SELF LEARNING MATERIAL (SLM)

 Unmodified opinion – The opinion expressed by the auditor when the auditor concludes that the financial statements are prepared, in all material respects, in accordance with the applicable financial reporting framework  Reference to “financial statements” in this SA means “a complete set of general purpose financial statements, including the related notes”.  Reference to “Accounting Standards” in this SA includes The Accounting Standards issued by the ICAI (or) The Standards of Accounting notified by the Central Government in pursuance of section 133 of the Companies Act, 2013 and the Rules thereunder (or) The International Financial Reporting Standards (IFRSs) (or) The International Public Sector Accounting Standards (IPSASs) issued by the International Public Sector Accounting Standards Board; as may be applicable to the entity. 8.2 FORMING AN OPINION The auditor shall form an opinion on whether the financial statements are prepared, in all material respects, in accordance with the applicable financial reporting framework In order to form that opinion, the auditor shall conclude as to whether the auditor has obtained reasonable assurance about whether the financial statements as a whole are free from material misstatement, whether due to fraud or error. That conclusion shall take into account:  The auditor’s conclusion, in accordance with SA 330, whether sufficient appropriate audit evidence has been obtained;  The auditor’s conclusion, in accordance with SA 450, whether uncorrected misstatements are material, individually or in aggregate; The auditor shall evaluate whether the financial statements are prepared, in all material respects, in accordance with the requirements of the applicable financial reporting framework. This evaluation shall include consideration of the qualitative aspects of the entity’s accounting practices, including indicators of possible bias in management’s judgments In particular, the auditor shall evaluate whether, in view of the requirements of the applicable financial reporting framework:  The financial statements adequately disclose the significant accounting policies selected and applied.  The accounting policies selected and applied are consistent with the applicable financial reporting framework and are appropriate.  The accounting estimates made by management are reasonable. 81 CU IDOL SELF LEARNING MATERIAL (SLM)

 The information presented in the financial statements is relevant, reliable, comparable, and understandable.  The financial statements provide adequate disclosures to enable the intended users to understand the effect of material transactions and events on the information conveyed in the financial statements; and  The terminology used in the financial statements, including the title of each financial statement, is appropriate. The auditor shall express an unmodified opinion when the auditor concludes that the financial statements are prepared, in all material respects, in accordance with the applicable financial reporting framework. If the auditor: (a) concludes that, based on the audit evidence obtained, the financial statements as a whole are not free from material misstatement; or (b) is unable to obtain sufficient appropriate audit evidence to conclude that the financial statements as a whole are free from material misstatement, the auditor shall modify the opinion in the auditor’s report in accordance with SA 705 (Revised). 8.3 AUDITOR’S REPORT Title: The auditor’s report shall have a title that clearly indicates that it is the report of an independent auditor. Addressee: The auditor’s report shall be addressed, as appropriate, based on the circumstances of the engagement. Opinion: The first section of the auditor’s report shall include the auditor’s opinion and shall have the heading “Opinion.” The Opinion section of the auditor’s report shall also:  Identify the entity whose financial statements have been audited.  State that the financial statements have been audited.  Identify the title of each statement comprising the financial statements.  Refer to the notes, including the summary of significant accounting policies; and  Specify the date of, or period covered by, each financial statement comprising the financial statements. Management’s Responsibility for the Financial Statements: (a) This section of the auditor’s report describes the responsibilities of those in the organization that are responsible for the preparation of the financial statements. The auditor’s report need not refer specifically to “management”, but shall use the term that is appropriate in the context of the 82 CU IDOL SELF LEARNING MATERIAL (SLM)

legal and/or regulatory framework applicable to the entity. In case of some entities, the appropriate reference may be to those charged with governance. (b) The auditor’s report shall include a section with the heading “Management’s [or other appropriate term] Responsibility for the Financial Statements”. (c) The auditor’s report shall describe management’s responsibility for the preparation of the financial statements in the manner in which that responsibility is described in the terms of the audit engagement. The description shall include an explanation that management is responsible for the preparation of the financial statements in accordance with the applicable financial reporting framework; this responsibility includes the design, implementation and maintenance of internal control relevant to the preparation of financial statements that are free from material misstatement, whether due to fraud or error. (d) Where the financial statements are prepared in accordance with a fair presentation framework, the explanation of management’s responsibility for the financial statements in the auditor’s report shall refer to “the preparation and fair presentation of these financial statements” or “the preparation of financial statements that give a true and fair view”, as appropriate in the circumstances. Auditor’s Responsibility: The auditor’s report shall include a section with the heading “Auditor’s Responsibility”. The auditor’s report shall state that the responsibility of the auditor is to express an opinion on the financial statements based on the audit. The auditor’s report shall state that the audit was conducted in accordance with Standards on Auditing issued by the Institute of Chartered Accountants of India. The auditor’s report shall also explain that those Standards require that the auditor comply with ethical requirements and that the auditor plan and perform the audit to obtain reasonable assurance about whether the financial statements are free from material misstatement. The auditor’s report shall describe an audit by stating that: (a) An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the financial statements. (b) The procedures selected depend on the auditor’s judgment, including the assessment of the risks of material misstatement of the financial statements, whether due to fraud or error. In making those risk assessments, the auditor considers internal control relevant to the entity’s preparation of the financial statements in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the entity’s internal control. In circumstances when the auditor also has a responsibility to express an opinion on the effectiveness of internal control in conjunction with the audit of the financial statements, the auditor shall omit the phrase that the auditor’s consideration of internal control is not for the purpose of expressing an opinion on the effectiveness of internal control; and 83 CU IDOL SELF LEARNING MATERIAL (SLM)

(c) An audit also includes evaluating the appropriateness of the accounting policies used and the reasonableness of accounting estimates made by management, as well as the overall presentation of the financial statements. Where the financial statements are prepared in accordance with a fair presentation framework, the description of the audit in the auditor’s report shall refer to “the entity’s preparation and fair presentation of the financial statements” or “the entity’s preparation of financial statements that give a true and fair view”, as appropriate in the circumstances. Auditor’s Opinion: The auditor’s report shall include a section with the heading “Opinion”. [I] When expressing an unmodified opinion on financial statements prepared in accordance with a fair presentation framework, the auditor’s opinion shall, unless otherwise required by law or regulation, use one of the following phrases, which are regarded as being equivalent: (a) The financial statements present fairly, in all material respects, in accordance with [the applicable financial reporting framework]; or (b) The financial statements give a true and fair view of in accordance with [the applicable financial reporting framework]. [II] When expressing an unmodified opinion on financial statements prepared in accordance with a compliance framework, the auditor’s opinion shall be that the financial statements are prepared, in all material respects, in accordance with [the applicable financial reporting framework]. If the reference to the applicable financial reporting framework, in the auditor’s opinion, is not to the Accounting Standards promulgated by the Accounting Standards Board (ASB) of the Institute of Chartered Accountants of India (ICAI) or Accounting Standards, notified by the Central Government by publishing the same as the Companies (Accounting Standards) Rules, 2006, or the Accounting Standards for Local Bodies promulgated by the Committee on Accounting Standards for Local Bodies (CASLB) of the Institute of Chartered Accountants of India, as may be applicable, the auditor’s opinion shall identify the jurisdiction of origin of the framework. Other Reporting Responsibilities: If the auditor addresses other reporting responsibilities in the auditor’s report on the financial statements that are in addition to the auditor’s responsibility under the SAs to report on the financial statements, these other reporting responsibilities shall be addressed in a separate section in the auditor’s report that shall be sub-titled “Report on Other Legal and Regulatory Requirements,” or otherwise as appropriate to the content of the section. If the auditor’s report contains a separate section on other reporting responsibilities, the headings, statements and explanations shall be under the sub-title “Report on the Financial Statements.” The “Report on Other Legal and Regulatory Requirements” shall follow the “Report on the Financial Statements.” Signature of the Auditor: The auditor’s report shall be signed. 84 CU IDOL SELF LEARNING MATERIAL (SLM)

Date of the Auditor’s Report: The auditor’s report shall be dated no earlier than the date on which the auditor has obtained sufficient appropriate audit evidence on which to base the auditor’s opinion on the financial statements, including evidence that- (a) All the statements that comprise the financial statements, including the related notes, have been prepared; and (b) Those with the recognized authority have asserted that they have taken responsibility for those financial statements. Place of Signature: The auditor’s report shall name specific location, which is ordinarily the city where the audit report is signed. SA 705 deals with the auditor’s responsibility to issue an appropriate report in circumstances when, in forming an opinion in accordance with SA 700 (Revised), the auditor concludes that a modification to the auditor’s opinion on the financial statements is necessary. The succinct requirements of this SA 705 are given below: Types of Modified Opinions: This SA establishes three types of modified opinions, namely:  a qualified opinion,  an adverse opinion, and  a disclaimer of opinion. The decision regarding which type of modified opinion is appropriate depends upon: (a) The nature of the matter giving rise to the modification, that is, whether the financial statements are materially misstated or, in the case of an inability to obtain sufficient appropriate audit evidence, may be materially misstated; and (b) The auditor’s judgment about the pervasiveness of the effects or possible effects of the matter on the financial statements. Unqualified Report: An unqualified opinion should be expressed when the auditor concludes that the financial statements give a true and fair view in accordance with the financial reporting framework used for the preparation and presentation of the financial statements. An unqualified opinion indicates, implicitly, that any changes in the accounting principles or in the method of their application, and the effects thereof, have been properly determined and disclosed in the financial statements. An unqualified opinion also indicates that: (a) the financial statements have been prepared using the generally accepted accounting principles, which have been consistently applied; (b) the financial statements comply with relevant statutory requirements and regulations; and (c) there is adequate disclosure of all material matters relevant to the proper presentation of the financial information, subject to statutory requirements, where applicable. Basis for opinion: The auditor’s report shall include a section, directly following the Opinion section, with the heading “Basis for Opinion” 85 CU IDOL SELF LEARNING MATERIAL (SLM)

Key audit matters: For audits of complete sets of general-purpose financial statements of listed entities, the auditor shall communicate key audit matters in the auditor’s report in accordance with SA 701. 8.4 SA 705 - MODIFICATION TO THE OPINION IN THE INDEPENDENT AUDITOR'S REPORT This Standard on Auditing (SA) deals with the auditor’s responsibility to issue an appropriate report in circumstances when, in forming an opinion in accordance with SA 700 (Revised), the auditor concludes that a modification to the auditor’s opinion on the financial statements is necessary. This SA also deals with how the form and content of the auditor’s report is affected when the auditor expresses a modified opinion. This SA is effective for audits of financial statements for periods beginning on or after April 1, 2018. Types of Modified opinions: This SA establishes three types of modified opinions, namely, a qualified opinion, an adverse opinion, and a disclaimer of opinion. The decision regarding which type of modified opinion is appropriate depends upon  The nature of the matter giving rise to the modification, that is, whether the financial statements are materially misstated or, in the case of an inability to obtain sufficient appropriate audit evidence, may be materially misstated; and  The auditor’s judgment about the pervasiveness of the effects or possible effects of the matter on the financial statements. A Qualified Opinion: The auditor shall express a qualified opinion when: (i) The auditor, having obtained sufficient appropriate audit evidence, concludes that misstatements, individually or in the aggregate, are material, but not pervasive, to the financial statements; or (ii) The auditor is unable to obtain sufficient appropriate audit evidence on which to base the opinion, but the auditor concludes that the possible effects on the financial statements of undetected misstatements, if any, could be material but not pervasive. A Disclaimer of Opinion: The auditor shall disclaim an opinion when the auditor is unable to obtain sufficient appropriate audit evidence on which to base the opinion, and the auditor concludes that the possible effects on the financial statements of undetected misstatements, if any, could be both material and pervasive. The auditor shall disclaim an opinion when, in extremely rare circumstances involving multiple uncertainties, the auditor concludes that, notwithstanding having obtained sufficient appropriate audit evidence regarding each of the individual uncertainties, it is not possible to form an opinion on the financial statements due to 86 CU IDOL SELF LEARNING MATERIAL (SLM)

the potential interaction of the uncertainties and their possible cumulative effect on the financial statements. An Adverse Opinion: The auditor shall express an adverse opinion when the auditor, having obtained sufficient appropriate audit evidence, concludes that misstatements, individually or in the aggregate, are both material and pervasive to the financial statements. Whenever the auditor expresses an opinion that is other than unqualified, a clear description of all the substantive reasons should be included in the report and, unless impracticable, a quantification of the possible effect(s), individually and in aggregate, on the financial statements should be mentioned in the auditor’s report. In circumstances where it is not practicable to quantify the effect of modifications made in the audit report accurately, the auditor may do so, on the basis of estimates made by the management after carrying out such audit tests as are possible and clearly indicate the fact that the figures are based on management estimates. Ordinarily, this information would be set out in a separate paragraph preceding the opinion or disclaimer of opinion and may include a reference to a more extensive discussion, if any, in a note to the financial statements. Disclosure in the Auditor’s Report The following paragraphs deal with the manner of qualification and the manner of disclosure, if any, to be made in the auditor’s report. AS-1 – Disclosure of Accounting Policies In the case of a company, members should quality their audit reports in case – (a) accounting policies required to be disclosed under Revised Schedule VI or any other provisions of the Companies Act, 1956 (now Schedule III of the Companies Act, 2013) have not been disclosed, or (b) accounts have not been prepared on accrual basis, or (c) the fundamental accounting assumption of going concern has not been followed and this fact has not been disclosed in the financial statements, or (d) proper disclosures regarding changes in the accounting policies have not been made. Where a company has been given a specific exemption regarding any of the matters stated above but the fact of such exemption has not been adequately disclosed in the accounts, the member should mention the fact of exemption in his audit report without necessarily making it a subject matter of audit qualification. In view of the above, the auditor will have to consider different circumstances whether the audit report has to be qualified or only disclosures have to be given. In the case of enterprises not governed by the Companies Act, the member should examine the relevant statute and make suitable qualification in his audit report in case adequate disclosures regarding accounting policies have not been made as per the statutory requirements. Similarly, the member should examine if the fundamental accounting assumptions have been followed in preparing the financial statements or not. In appropriate cases, he should consider whether, keeping in view the requirements of the applicable laws, a qualification in his report is 87 CU IDOL SELF LEARNING MATERIAL (SLM)

necessary. In the event of non-compliance by enterprises not governed by the Companies Act, in situations where the relevant statute does not require such disclosures to be made, the member should make adequate disclosure in his audit report without necessarily making it a subject matter of audit qualification. In making a qualification / disclosure in the audit report, the auditor should consider the materiality of the relevant item. Thus, the auditor need not make qualification / disclosure in respect of items which, in his judgement, are not material. A disclosure, which is not a subject matter of audit qualification, should be made in the auditor’s report in a manner that it is clear to the reader that the disclosure does not constitute an audit qualification. The paragraph containing the auditor’s opinion on true and fair view should not include a reference to the paragraph containing the aforesaid disclosure. 8.5 SUMMARY As per SA 700 forming an opinion and reporting on financial statements Auditor’s report contains the following- Title, Introductory paragraph, Management’s responsibility on financial statements , Auditor’s responsibility, Auditor’s opinion, other reporting responsibilities, signature of the auditor, date of the Audit report ,place of signature. Unqualified opinion The Auditor expresses an unqualified opinion when  The financial statements have been prepared using the generally accepted accounting principles  The financial statements comply with relevant statutory requirements and regulations  All material matters relevant to proper presentation of financial statements subject to statutory requirement if applicable have been adequately disclosed Qualified opinion The Auditor expresses qualified opinion when  The auditor having obtained sufficient appropriate audit evidence concludes that misstatements individually or in the aggregate are material but not pervasive  The auditor is unable to obtain sufficient appropriate audit evidence on which to base the opinion, but the auditor concludes that possible effects on financial statements of undetected misstatements if any could be material but not pervasive Adverse opinion The auditor shall express an adverse opinion when the auditor having obtained sufficient appropriate audit evidence conclude that misstatements individually or in aggregate are both material and pervasive to financial statements Disclaimer of opinion 88 CU IDOL SELF LEARNING MATERIAL (SLM)

The auditor shall disclaimer opinion when the auditor is unable to obtain sufficient appropriate audit evidence on which to base the opinion and the auditor concludes that the possible effects on financial statements of undetected misstatements if any could be both material and pervasive 8.6 KEYWORDS  Fundamental Accounting assumptions - Going concern, Consistency, Accrual  ASB- Accounting Standards Board 8.7 LEARNING ACTIVITIES 1.Go through the Audit report of any listed Level-1 company _____________________________________________________________________________ _____________________________________________________________________________ 8.8 UNIT END QUESTIONS A. Descriptive Questions Long Questions 1.Explain in detail about qualified opinion in Auditor’s report 2.Explain in detail the contents of Auditors report Short Questions 1.when does an auditor issue unqualified opinion and what does it include ? 2.Explain briefly about adverse opinion in Auditor’s report 3.Discuss briefly about managements responsibility with regards to preparation of financial statements in Auditor’s report 4.Discuss briefly about Auditor’s responsibility in Auditor’s report B. Multiple choice Questions 1.An auditor expresses_________ opinion in his report ,having obtained sufficient appropriate audit evidence concludes that the misstatements in the financial statements are material but not pervasive a. Qualified opinion b. Unqualified opinion c. Unmodified opinion d. Disclaimer of opinion 89 CU IDOL SELF LEARNING MATERIAL (SLM)

2.It is the responsibility of the auditor to prepare financial statements as per Generally accepted Accounting principles a. True b. False c. Partly True d. None of these 3.All accounting policies followed must be disclosed in the financial statements and thereby fundamental accounting assumptions followed in the preparation of financial statements must be disclosed a. True b. False c. Partly True d. None of these Answers 1-a 2-b 3-b 8.9 REFERENCES Textbook:  T1 ArunaJha, Auditing, Taxmann’s Publications, University Edition  T2 Ravinder Kumar, Auditing: Principles and Practice :PHI Learning Pvt. Ltd Reference Books:  R1 N.D Kapoor, Auditing, Sultan Chand & Sons  R2 Gupta; Contemporary Auditing, Tata McGraw Hill 90 CU IDOL SELF LEARNING MATERIAL (SLM)

UNIT 9 – INTERNATIONAL RESOURCES TO AUDITING NEEDS Structure 9.0 Learning Objectives 9.1 Introduction 9.2 IAASB 9.3 History 9.4 Objectives of ISA 9.5 Structure of international standards on auditing 9.6 Auditing pronouncements of IAASB 9.7India's response to auditing needs 9.8 NFRA 9.9 Summary 9.10 keywords 9.11 Learning activities 9.12 Unit End questions 9.13 References 9.0 LEARNING OBJECTIVES After studying this unit students will be able to :  Explain the international auditing and assurance standard board  Learn objectives of international standards on auditing  Outline auditing pronouncements of IAASB  Describe India's response to auditing needs 9.1 INTRODUCTION International standards on auditing refers to professional standards dealing with responsibilities of independent auditor while conducting the financial audit of financial information .The standards are issued by International Federation of accountants ,auditing and assurance Standards Board. The international standards on auditing include requirements and objectives and along with application other explanatory material the auditor is obligatory to have knowledge about the whole text of international standards on auditing counting its application other explanatory material to be aware of the objectives and to apply the requirements aptly 91 CU IDOL SELF LEARNING MATERIAL (SLM)

9.2 IAASB The International Auditing and Assurance Standards Board (IAASB) is an independent standard- setting body that serves the public interest by setting high-quality international standards for auditing, quality control, review, other assurance, and related services, and by facilitating the convergence of international and national standards. In doing so, the IAASB enhances the quality and uniformity of practice throughout the world and strengthens public confidence in the global auditing and assurance profession. The IAASB follows a rigorous due process in developing its pronouncements. Input is obtained from a wide range of stakeholders including the IAASB's Consultative Advisory Group national auditing standard setters, IFAC member bodies and their members, regulatory and oversight bodies, firms, governmental agencies, investors, preparers, and the general public. Exposure Drafts of proposed pronouncements are posted on the website and comments are invited; final pronouncements are accompanied by a Basis for Conclusions with respect to comments received. The Public Interest Oversight Board (PIOB) oversees the work of the IAASB and its CAG to ensure that the activities of the IAASB follow due process and are responsive to the public interest. 9.3 HISTORY OF IAASB The International Auditing and Assurance Standards Board (IAASB) was founded in March 1978. It was previously known as the International Auditing Practices Committee (IAPC). The IAPC’s initial work focused on three areas: object and scope of audits of financial statements, engagement letters, and general auditing guidelines. In 1991, the IAPC’s guidelines were recodified as International Standards on Auditing (ISAs). In 2001, a comprehensive review of the IAPC was undertaken, and in 2002, the IAPC was reconstituted as the International Auditing and Assurance Standards Board (IAASB). In 2003, IFAC approved a series of reforms designed, among other things, to further strengthen its standard-setting processes, including those of the IAASB, so that they are responsive to the public interest. In 2004, the IAASB began the Clarity Project, a comprehensive program to enhance the clarity of its ISAs. This program involved the application of new conventions to all ISAs, either as part of a substantive revision or through a limited redrafting to reflect the new conventions and matters of clarity generally. 9.4 OBJECTIVES OF THE ISA 92 CU IDOL SELF LEARNING MATERIAL (SLM)

The ISA objectives are two-fold& • Analysing the comparability of national accounting as well as auditing standards with international standards ,determine the degree with which applicable auditing and accounting standards are compiled and analyse strengths and weaknesses of the institutional framework in sustaining high-quality financial reporting. • Assist the country in developing and implementing a country action plan for improvement of institutional capacity with a \"view of strengthening the corporate financial reporting system of the country 9.5 STRUCTURE OF INTERNATIONAL STANDARDS ON AUDITING Every international standard on auditing is structured in individual sections as Introduction Introduction consists of purpose,scope,subject matter of ISA as well as the responsibilities of Auditor and others in context in which ISA is established Objective Every ISA consists of a clear statement about the objective of the Auditor in the Audit Area addressed by that ISA Definitions Important terms are clearly defined in each ISA Requirements Every objective is supported clearly by stated requirements, requirements are expressed by the phrase “the Auditor shall” Application and other explanatory material It clearly explains what’s the requirement and includes examples to cover the procedures that can be appropriate as per the circumstances. 9.6 AUDITING PRONOUNCEMENTS OF IAASB IAASB develops and issues the following International Standards:  International Standards on Auditing (ISAs) and International Standards on Review Engagements (ISREs) to be applied in audit and review engagements on historical financial information.  International Standards on Assurance Engagements (ISAEs) to be applied in assurance engagements other than audits or reviews of historical financial information.  International Standards on Related Services (ISRSs) to be applied in related services engagements. 93 CU IDOL SELF LEARNING MATERIAL (SLM)

 International Standards on Quality Control (ISQCs) to be applied for all services falling within the Engagement Standards of the IAASB. List of International Standards on Auditing: Currently, International Standards on Auditing have 36 and 1 Quality Control Standard: ISA 200: Overall Objectives of the Independent Auditor and the Conduct of an Audit in Accordance with International Standards on Auditing ISA 210: Agreeing the Terms of Audit Engagements ISA 220: Quality Control for an Audit of Financial Statements ISA 230: Audit Documentation ISA 240: The Auditor’s Responsibilities Relating to Fraud in an Audit of Financial Statements ISA 250: Consideration of Laws and Regulations in an Audit of Financial Statements ISA 260: Communication with Those Charged with Governance ISA 265: Communicating Deficiencies in Internal Control to Those Charged with Governance and Management ISA 300: Planning an Audit of Financial Statements ISA 315: Identifying and Assessing the Risks of Material Misstatement through Understanding the Entity and Its Environment ISA 320: Materiality in Planning and Performing an Audit ISA 330: The Auditor’s Responses to Assessed Risks ISA 402: Audit Considerations Relating to an Entity Using a Service Organization ISA 450: Evaluation of Misstatements Identified during the Audit ISA 500: Audit Evidence ISA 501: Audit Evidence-Specific Considerations for Selected Items ISA 505: External Confirmations ISA 510: Initial Audit Engagements-Opening Balances ISA 520: Analytical Procedures ISA 530: Audit Sampling ISA 540: Auditing Accounting Estimates, Including Fair Value Accounting Estimates, and Related Disclosures ISA 550: Related Parties ISA 560: Subsequent Events ISA 570: Going Concern ISA 580: Written Representations ISA 600: Special Considerations-Audits of Group Financial Statements (Including the Work of Component Auditors) ISA 610: Using the Work of Internal Auditors 94 CU IDOL SELF LEARNING MATERIAL (SLM)

ISA 620: Using the Work of an Auditor’s Expert ISA 700: Forming an Opinion and Reporting on Financial Statements ISA 705: Modifications to the Opinion in the Independent Auditor’s Report ISA 706 Emphasis of Matter Paragraphs and Other Matter Paragraphs in the Independent Auditor’s Report ISA 710: Comparative Information-Corresponding Figures and Comparative Financial Statements ISA 720: The Auditor’s Responsibilities Relating to Other Information in Documents Containing Audited Financial Statements ISA 800: Special Considerations-Audits of Financial Statements Prepared in Accordance with Special Purpose Frameworks ISA 805: Special Considerations-Audits of Single Financial Statements and Specific Elements, Accounts or Items of a Financial Statement ISA 810: Engagements to Report on Summary Financial Statements International Standard on Quality Control (ISQC) 1, Quality Controls for Firms that Perform Audits and Reviews of Financial Statements, and Other Assurance and Related Services Engagements 9.7 INDIA’S RESPONSE TO AUDITING NEEDS In India the Ministry of Corporate Affairs (MCA) along with the policymakers have engaged in considerable rule to bring in necessary changes to strengthen the scope of Audit. Some of the notable changes include mandatory auditor rotation, internal financial controls over financial reporting, fraud reporting, alignment of Indian Accounting Standards (Ind AS) to IFRS, stricter norms for independence of auditors, limits on number of audits for an auditor, etc. The underlying theme of all such changes is to enhance audit independence, make financial reporting more robust and reliable, enhance corporate governance and investor confidence. 9.8 NFRA The National Financial Reporting Authority (NFRA) is a body constituted under the provisions of Section 132 of the Companies Act, 2013. The constitution of this authority is effective from 1st October 2018. The aim of the Central Government in this regard appears to be: Setting up of a separate and independent regulatory body to assist in the framing and enforcement of legislation relating to accounting & auditing and Improving investor and public confidence in the financial reporting of an entity. Supposedly, the need for this authority arose as a response to various corporate scams in recent times. 95 CU IDOL SELF LEARNING MATERIAL (SLM)

Composition of the NFRA The Companies Act requires the NFRA to have a chairperson who will be appointed by the Central Government and a maximum of 15 members. The appointment of such chairperson and members are subject to the following qualifications: They should be having an expertise in accountancy, auditing, finance or law. They are required to make a declaration to the Central Government that there is no conflict of interest or lack of independence in their appointment. All the members including the chairperson who are in full-time employment should not be associated with any audit firm (including related consultancy firms) during their term of office and 2 years after their term. The terms and conditions relating to the appointment of the chairperson and members have not yet been prescribed. However, the draft NFRA rules outline the following composition of the authority: Chairperson is a Chartered Accountant and a person of eminence having expertise in accountancy, auditing, finance or law. Member – Accounting. Member – Auditing. Member – Enforcement. One representative of the MCA not below the rank of Joint Secretary or equivalent (ex-officio) One representative of RBI, being a member of the RBI Board is to be nominated by the RBI; One representative of SEBI, being the Chairman of SEBI or whole-time member of SEBI is to be nominated by SEBI. A retired chief justice of high court or a person who has been the judge of a high court for more than 5 years is to be nominated by the Central Government, President of the Institute of Chartered Accountants of India (ex-officio) The Chairman may also invite any other person to the meeting to give their expert opinion. Role of the NFRA The NFRA has the following responsibilities: Make recommendations on the foundation and laying down of accounting and auditing policies and standards. Monitor and enforce the compliance of the accounting standards and auditing standards: Oversee the quality of service of the professionals (such as auditors, CFOs, etc) and suggest measures required for improvement in the quality of service; Perform such other functions related to the above. Prior to the constitution of this authority, the Central Government would prescribe accounting standards on the recommendation of ICAI. The ICAI would prescribe the same only after consulting with the National Advisory Committee on Accounting Standards who will provide their recommendations. The ICAI will now have to consult with the NFRA and examine its 96 CU IDOL SELF LEARNING MATERIAL (SLM)

recommendations in this regard. Thus the National Advisory Committee on Accounting Standards is effectively replaced by the NFRA. Powers of the NFRA The NFRA shall have the following powers: To investigate the matters of professional or other misconduct committed by a prescribed class of CA firms or CAs. No other authority can initiate or continue proceedings where the NFRA has initiated an investigation. Such an investigation can be initiated either suo moto (by itself) or on a reference made by the Central Government. The same powers as a Civil Court under the Code of Criminal Procedure, 1908, in respect of a suit involving the following matters. Discovery and production of books of account and other documents, at such place and time as may be specified by the NFRA Summoning and enforcing the attendance of persons and examining them under oath Inspection of any books, registers, and other documents of any person at any place Issuing commissions for the examination of witnesses or documents Where professional or other misconduct is proved, it shall have the power to impose the following punishment: Penalty: For individuals a fine between Rs. 1,00,000 to 5 times the fees received; For firms a fine Between Rs. 5,00,000 to 10 times the fees received; Debarring the member/firm from practice as a member of ICAI between 6 months to 10 years as may be decided Any person who is not satisfied with the order of the NFRA can then make an appeal to the Appellate Authority. Scope of the NFRA As discussed earlier, the NFRA has the power to investigate and also conduct quality reviews for a certain prescribed class of companies. While the draft NFRA Rules have not been prescribed yet, they would include the following class of companies if implemented as it is: Companies listed in India Unlisted Companies whose: Net worth ≥ Rs. 500 crore; or Paid up Capital ≥ Rs. 500 crore; or Annual turnover ≥ Rs. 1000 crore (As on 31st March of the preceding financial year); OR Companies whose securities are listed outside India 97 CU IDOL SELF LEARNING MATERIAL (SLM)

The NFRA also holds the power of investigation of a certain class of bodies corporate or persons (auditors) in relation to matters of professional or other misconduct by a member or firm of Chartered Accountants or auditors. In this regard, as per the draft NFRA rules, the auditors or audit firms which conduct the audit of the following category of companies or their branches (including through the network/brand to which it belongs) whether directly or indirectly, are covered: Audit of ≥ 200 companies in a year; Audit of ≥ 20 listed companies; Company or companies (whether listed or not), having: Net Worth ≥ Rs. 500 crores; or Paid up Capital ≥ Rs. 500 crores; or Annual turnover ≥ Rs. 1000 crores;(As on 31st March of the immediately preceding financial year); OR Company or Companies listed outside India Note: The above restriction of companies will not apply where : A reference is made by the Central Government or any regulator to the NFRA to conduct such an investigation; or The NFRA by itself decides to conduct an investigation in public interest. Conclusion Thus, it can be concluded that the ICAI will continue to retain its regulatory powers in respect of private companies and unlisted public companies below the above-prescribed threshold. The Quality Review Board will also continue conducting quality audits in respect of private limited companies, unlisted public companies and such other audit of companies that are delegated by the NFRA. 9.9 SUMMARY  International standards on auditing are issued by International Federation of accountants and international auditing and assurance Standards Board  International auditing and assurance Standards Board is an independent body that sets high quality international standards for auditing assurance and other related services and facilitates the convergence of international national standards  IAASB develops international standards on review engagements ,International standards on assurance engagements, International standards on related services  Currently there are 36 international standards on auditing and one quality control standard  India auditing standards are issued by auditing and assurance standard board constituted by Institute of Chartered Accountants of India 98 CU IDOL SELF LEARNING MATERIAL (SLM)

9.10 KEYWORDS  ICAI-Institute of Chartered Accountants of India  IFAC – International Federation of Accountants  NFRA- National Financial Reporting Authority  IAASB-International auditing and assurance Standards Board 9.11 LEARNING ACTIVITIES 1. Learn about the Auditing standards issued by AASB in India , how many standards are issued under the clarity project. ______________________________________________________________________________ ______________________________________________________________________________ 9.12 UNIT END QUESTIONS A. Descriptive Questions Short Questions 1.Write a short note about the structure of international standards on auditing 2.Explain briefly about the objectives of international standards on auditing 3.Discuss about international auditing and assurance Standards Board 4. Write a short note about auditing pronouncements of IAASB Long Questions 1.Discuss in detail about auditing pronouncements of international auditing assurance standard board 2.Elaborate about structure and objectives of international standards on auditing B. Multiple choice Questions 1._____________ is a body constituted under section 132 of Companies Act 2013 a. AASB b. NFRA c. IFAC d. None of these 2.The term ISRE stands for a. International standards on review engagements b. International standards on related engagements 99 CU IDOL SELF LEARNING MATERIAL (SLM)

c. Both a and b d. None of these 3.International standards on auditing are issued by __________ a. International auditing and assurance Standards Board b. International Federation of accountants c. Auditing assurance Standards Board d. None of these Answers 3-b 1-b 2-a 9.13 REFERENCES Textbook:  T1 ArunaJha, Auditing, Taxmann’s Publications, University Edition  T2 Ravinder Kumar, Auditing: Principles and Practice :PHI Learning Pvt. Ltd Reference Books:  R1 N.D Kapoor, Auditing, Sultan Chand & Sons  R2 Gupta; Contemporary Auditing, Tata McGraw Hill 100 CU IDOL SELF LEARNING MATERIAL (SLM)