C.A. IPCC / PCC – AUDITING (SEE NOTE IN THE LAST PAGE FOR PE-II)
IMPORTANT AREAS FOR MAY 2010 EXAM
(PREPARED BY S.GANAPATHY F.C.A.)
Note: Reclassification of AAS into Standards on Auditing has been made applicable for the exam and therefore it is necessary for you to study SAs but most of the principles and procedures laid down in AAS still hold good and therefore you can study and understand such principles and procedures with new SA numbers easily. In second volume of IPCC material there is Notes on renumbering and reclassification at the beginning of the material for about 14 pages. You should study these notes carefully. You should download the revised SAs from the Institute web site www.icai.org under the heading “Resources”. I have given the important standards for your study hereunder.
Important Revised Standards on Auditing
SA 200, 210, 220, 230, 240, 250, 260, 300, 320, 500, 505, 510, 520, 530, 550, 560, 570, 580, 610, 620
Important NEW Standards on Auditing
SA 265, 315 (Very important), 330(Very important), 450
Note: SA 315 and SA 330 newly issued standards are very important for the exam.
TOPICS IN INSTITUTE STUDY MATERIAL (LATEST)
Chapter- 1
Basic Principles Governing an Audit
Auditor’s Responsibility to consider Fraud and Error
Inherent Limitations of an Audit
Advantages of an Independent audit
Chapter- 2
Testing assertions regarding transactions and balances (Very important)
Reliability of Audit Evidence
Methods of obtaining Audit Evidence
Concept of Materiality
Disclosure of Accounting Policies- AS-1
Fundamental Accounting Assumptions
Chapter-3
Auditor’s Engagement
Permanent and Current Audit File- Ownership and Custody of Working Papers
Stratified random sampling, Advantages of statistical sampling
Audit Risk- Components of Audit Risk- Relationship between components of Audit Relationship between Materiality and Audit Risk
Quality control for Audit work
Certificates from Management -Management Representations
Chapter-4
Internal control- Objectives, Inherent Limitations
Review and Testing of Internal Control- Internal Control Questionnaire, Flow chart
Examination in depth / Auditing in depth (also known as Walk through Test)
Computer assisted audit techniques- Need and how it improves efficiency of audit procedures (bulleted points in the study material)
General CIS Controls and CIS Application controls
Approaches to EDP Audit- Audit around the Computer and Audit through the Computer
General considerations in framing a system of Internal Check
Statutory Audit and Internal Audit – CARO and Internal Audit
Chapter- 5
Vouching-Audit of Cash transactions
General considerations regarding vouching
Remuneration to Directors
Payment for Acquisition of assets
Payment of taxes
Customs and Excise duties
Assets acquired under Hire Purchase
Preliminary expenses
Advertisement expenses
Payment of dividends
Retirement Gratuity to Employees
Vouching-Audit of cash transactions
Rental Receipts
Insurance claims
Interests and Dividends received
Insurance claims
Sale of junk materials (sale of scrap)
Refund of general insurance premium paid
Audit of Trading Transactions
General considerations regarding audit of trading transactions
Factors increasing or decreasing Gross Profit
Purchase Return and Sales Return
Consignment sale
Cut-off Arrangement (also known as Cut-off Procedures) – Very important
Outstanding assets
Analytical Procedures- Extent of Reliance on Analytical Procedures
Chapter - 6
Verification of Assets
Depreciation (fully important)
Reserves and Provision-Capital Reserves and Specific reserves (very important)
General principles regarding verification
Auditor’s Duty under CARO regarding Audit of Fixed Assets
Know-how
Goodwill
Patents
Trademark & Copyright
Assets acquired under Hire-Purchase system
Debts due from subsidiary companies
Auditor’s Duty under CARO regarding Audit of Inventories
Attending Physical counting of inventories by Management (Attending Stock taking)
Verification of Liabilities
Loans on mortgage of property
Amount due to subsidiary companies
Verification of Debentures
AS-29, 4 and AS-5 (PRACTICAL QUESTIONS ON AS-4 & AS-5- END OF CHAPTER - 6)
Contingent Liabilities, Provisions
Events occurring after balance sheet date- Adjusting and Non-Adjusting Events
Prior Period items, Extra-Ordinary items, Changes in Accounting estimates, Changes in Accounting Policies (attempt practical questions on Accounting Standards in previous years question papers)
Chapter – 7 (Very important chapter for compulsory question in exam)
Disqualifications under section 226
Note:
- If a relative or partner of the auditor holds substantial interest in the business of the client, the auditor should not accept the appointment as per the latest amendment to the Code of Ethics. Before the amendment the auditor was required to disclose the substantial interest in his report. After the amendment the auditor cannot make such disclosure.
- If the auditor of a company is a relative of the director, then the appointment of the auditor requires special resolution under section 314 of the Companies Act, 1956
- Read the Notes under “Concept of Independence” in Chapter –2 in Institute study material.
Ceiling on audit-Code of Ethics Council notification No. 53 / 2001 on ceiling
Filling up of a casual vacancy
Appointment of auditor by special resolution
Re-appointment of Auditors
Notes given regarding sections 8 and 20 of C.A. Act, 1949
Appointment of auditor of a government company
Note: Auditor appointed in AGM failing or refusing to accept appointment. Who can appoint another auditor? Answer: In such case only members can appoint another auditor and not the Central Government since 224(3) is not attracted in such case.
Auditor’s remuneration
Removal of Auditor
Notes (Points 1 and 2) after removal of auditor and before powers of auditors
Inquiry under section 227(1A)
Matters to be reported – Section 227(3) – except clauses (e) and (g)- clause (f) regarding disqualification of directors under section 274(1)(g) is very important.
Auditor’s Report on Financial Statements
Basic elements of an Auditor’s Report
Opening or Introductory paragraph
Scope paragraph
Emphasis of Matter
Opinion paragraph - Types of Opinions
Branch Audit (Exemption) Rules, 1961
Special audit under section 233A
CARO, 2003- (LATEST AMENDMENTS IN NOV 2004)
Applicability and Exemption (Conditions for exemption of a Private Ltd Co.)
Explanation of certain terms – Paid-up capital and Reserves, Loan outstanding, Turnover (in the Institute study material)
CARO Reporting requirements- clauses i, ii, iv, vi, vii, ix, x, xii, xiv, xv, xvi, xvii, xix, xxi – Study these clauses from the CARO Order
Chapter- 8
Sections 209, 211, 217 (VERY IMPORTANT)
Shares issued for consideration other than cash (Newton Vs Burmingham case very important for Terms of an Engagement cannot restrict the scope of an audit when the auditor’s duties are determined by statute or by pronouncements of the Institute)
Option on share capital
Sweat Equity shares
Buy-back
Audit of Debentures (only points regarding verification of issue of debentures)
Audit of Dividend and Interim dividends (very important)
Requirements of Schedule VI – Part-I, Part-II and Part-III
Chapter- 9
Duties of C&AG
Audit against Rules and Orders
Propriety audit
Performance audit
Audit of Government Companies- Powers of C&AG u/s 619(3) & (4)
Section 217(3) requirements- Practical question can be asked
SPECIAL AUDITS
Audit of Non-Governmental Organisations- Provisions relating to Audit
Audit of a Partnership Firm- Special Steps -7 points)
Audit of Charitable Institutions
Audit of Educational Institutions
Audit of Hospital
Audit of Club
Note: Question in the exam- combination of two special audits- eg. Canteen in a hostel or hospital or charitable institution running a educational institution or a dispensary- in such questions you should combine the points from both the special audits.
APPENDIX – CASE LAWS
Kingston Cotton Mills case – Decision paragraphs are very important for auditor’s responsibility to consider fraud and error
ACCOUNTING STANDARDS
AS 1, 4, 5, 9, 10, 12, 13, 16, 18, 26, 29 (VERY IMPORTANT)
IMPORTANT SHORT NOTES QUESTIONS
Audit Risk, Inherent Risk, Control Risk, Detection Risk
Materiality and Audit Risk
Reliability of Audit Evidence
Disclosure of Accounting Policies
Fundamental Accounting Assumptions
Stratified Random sampling, Systematic sampling, Tolerable error, Expected error
Management Representations
Review and Testing of Internal Control
Examination in depth / Auditing in depth
Cut-off Arrangement / Cut-off Procedures
Outstanding assets
Extent of reliance on Analytical Procedures
Purposes of providing Depreciation
Provision and Reserve
Capital Reserve
Events Occurring After Balance Sheet Date
Prior Period Items, Extra-ordinary Items, Changes in Accounting Policies
Qualified Opinion, Adverse Opinion, Disclaimer of Opinion
Sweat Equity shares
Buy-back
Interim Dividend
Propriety audit
Performance audit
External confirmations
General Notes:
- Do not answer question 1 (practical questions) at the beginning of the exam. (VERY IMPORTANT) – Answer the question only after first hour.
- Present the answers point-wise and avoid paragraph-wise presentation
- The Code of Ethics provisions in Company Audit- I at the end of Removal of Auditor are very important (2 points just before Powers of Auditors)
- Foot Note under Ceiling on Audits- Chapter-7- Wrong Note- Do not study
- Decisions in important case laws in Chapter- I should be quoted wherever applicable
- Answer the practical questions on Accounting standards in previous year exams
- Regarding Ceiling on audits under section 224(1B) the company auditor should comply with both 224(1B) and the Council Notification simultaneously.
NOTE:
THE DIFFERENCE BETWEEN IPCC / PCC AUDITING EXAM AND PE-II AUDITING EXAM IS THAT THERE IS NO CHOICE FOR IPCC / PCC WHEREAS THERE IS CHOICE FOR PE-II EXAM IN THE EXAM QUESTION PAPER. OTHER THAN THIS THERE IS NO DIFFERENCE IN THE SYLLABUS OR THE IMPORTANT AREAS IN AUDITING. ALL WHAT IS GIVEN ABOVE AS IMPORTANT IS EQUALLY IMPORTANT FOR PE-II ALSO.
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