10 Audit Case Studies in a Story Format

CAclubindia

18 Sept 202120:10

Summary

TLDRThe webinar transcript covers various auditing scenarios, emphasizing the importance of qualified external quality control reviewers, the necessity to assess inherent risks, and the responsibilities of auditors in detecting fraud. It also addresses the challenges in travel reimbursement approval processes, the requirement for companies with high turnovers to file specific GST returns, and the auditor's role in highlighting deficiencies annually. Additionally, it discusses the impact of not obtaining financials for subsidiaries on audit reports, the separation of PMS accounts, corporate governance compliance, and the statutory auditor's duty to report fraud and non-compliance with minimum wage acts.

Takeaways

📝 A new auditing standard (SA 220) requires an external quality control reviewer (EQCR) to be a qualified Chartered Accountant (CA), not just experienced.
📊 Auditors must assess both inherent risk and control risk; ignoring inherent risk is incorrect.
🔍 Even with strong internal controls, abuse by process owners can’t always be detected, highlighting a limitation of relying solely on controls.
💼 GST registered persons with an annual turnover exceeding ₹5 crore must file both GSTR-9 and GSTR-9C returns.
🚫 Auditors must continue to highlight deficiencies in reports even if management takes no action from previous years.
🌍 If financial statements from a subsidiary (e.g., in another country) are missing, auditors must modify their report to reflect this.
💰 Portfolio Management Services (PMS) must keep their own investments separate from clients' funds and get a report from an external auditor.
📋 Listed companies must comply with Regulation 27 of SEBI for corporate governance, submitting a quarterly report within 15 days of quarter-end.
⚖️ If a fraud exceeding ₹2 crore is detected, statutory auditors are required to report it to the central government under Section 143(12).
👨‍⚖️ Non-compliance with the Minimum Wages Act should be reported in the audit report, along with management’s comments, regardless of future corrective promises.

Q & A

What is EQCR, and why is it important in auditing?
-EQCR stands for External Quality Control Reviewer. It's an important role in auditing to ensure the quality and compliance of the audit process. According to SA 220, an EQCR must be a qualified Chartered Accountant (CA). The EQCR reviews the audit team's work to provide an additional layer of scrutiny.
Can an individual without a CA qualification be appointed as an EQCR?
-No, according to SA 220, an EQCR must be a qualified Chartered Accountant. In the script, the appointment of an EQCR with only 2.5 years of experience but not qualified as a CA was deemed incorrect.
Is it acceptable for auditors to ignore inherent risk in an audit and focus only on control risk?
-No, auditors cannot ignore inherent risk. Inherent risk is a natural risk present in the financial reporting of an entity, and ignoring it would leave gaps in the audit. Both inherent risk and control risk must be assessed to ensure a comprehensive audit.
Can strong internal controls alone prevent fraud and errors?
-No, while strong internal controls can help in preventing fraud and errors, they are not foolproof. Abuse by process owners or manipulation by higher-level employees may not be detected solely through internal controls.
What should an auditor do if management does not take action on a reported deficiency?
-If management does not act on a reported deficiency, the auditor must continue to report the issue every year until it is resolved. The auditor's responsibility is to highlight deficiencies, regardless of whether management addresses them.
What action should an auditor take if they are unable to obtain financial statements from a subsidiary during consolidation?
-If an auditor cannot obtain the financial statements of a subsidiary, they must modify their audit report. This reflects the fact that the consolidation could not be completed accurately due to missing financial information.
How should an auditor handle a company mixing its own investments with portfolio management services (PMS) funds?
-The auditor should ask the company to separate its own investments from PMS funds and obtain an external auditor's report on the PMS accounts. This ensures compliance with regulations and transparency.
What is Regulation 27 and Schedule 2 in the context of corporate governance compliance?
-Regulation 27 and Schedule 2 require listed companies to submit a quarterly compliance report on corporate governance within 15 days of the close of each quarter. This report must be signed by either the compliance officer or the CEO.
When should an auditor report a fraud to the central government?
-Under Section 143(12) of the Companies Act, 2013, an auditor must report any fraud to the central government if the fraud exceeds a specified threshold (e.g., Rs. 1 crore or more). This must also be mentioned in the audit report.
What should an auditor do if a company fails to comply with the Minimum Wages Act?
-If a company fails to comply with the Minimum Wages Act, the auditor must report this in the audit report, including the management's comments on the matter. The management’s promises to rectify the issue in future years should not stop the auditor from reporting it.

Outlines

00:00

📊 Auditing Standards and EQCR Qualifications

The paragraph discusses the auditing standards introduced by ICI and focuses on the role of an External Quality Control Reviewer (EQCR). A company based in Gujarat underwent an audit for the financial years ending 2020 and 2021. The audit team experienced changes, including the EQCR, who had 2.5 years of experience but was not yet a qualified chartered accountant. The presenter questions whether this appointment was correct according to the new auditing standard 220, which requires the EQCR to be a qualified chartered accountant. The audience is asked to vote on the correctness of the appointment via chat, with a discussion on the implications of the new standard.

05:01

🛑 Inherent vs. Control Risk in Retail Auditing

This section of the script covers a story about a company in Hyderabad involved in retail business, which appointed statutory auditors from Mrs Divine Company. The auditors, lacking experience in the retail sector, decided not to assess inherent risk and focused solely on control risk. The presenter explains the concepts of inherent and control risk using the example of a gold storage facility with varying levels of security. The audience is prompted to consider whether auditors can ignore inherent risk, with the presenter clarifying that this is incorrect and auditors must consider both types of risk.

10:02

👔 The Fallacy of Fraud Detection by Design and Controls

The script continues with a story about a clothing manufacturing company in Pune that believed having good design and effective internal controls would enable them to detect frauds and errors. The presenter challenges this notion, explaining that while good controls can prevent fraud, they cannot identify abuse by process owners. The example given is of a security guard who might be qualified but could be coerced by an employer to overlook fraud. The presenter emphasizes the importance of this concept for CA final examinations and other accounting professionals.

15:02

🌐 Compliance with Corporate Governance Regulations

The fourth paragraph discusses a company listed on a stock exchange that must comply with regulation 27 and schedule 2 for corporate governance. The presenter highlights the need for companies to submit quarterly compliance reports on corporate governance within 15 days of the end of each quarter. These reports must be signed by either the compliance officer or the CEO. The importance of this regulation is emphasized for students preparing for CA final exams and for practicing accountants.

🚨 Reporting Fraud as a Statutory Auditor

In this segment, the presenter talks about a company based in Bangalore where a fraud amounting to 2 crore rupees was committed by employees. As statutory auditors, they must follow Section 143 of the Companies Act, which outlines actions to be taken in case of fraud. The presenter stresses the importance of reporting the fraud to the central government and including it in the auditor's report, regardless of the management's explanations or future promises to comply.

🧳 Travel Reimbursement Deficiency and Auditor's Response

The script describes a company with a deficient approval process for travel reimbursements. The auditors identified this issue and reported it to the management, but no action was taken. In the following year, the auditors found the deficiency still existed and debated whether to report it again. The audience is asked to vote on the auditor's correct course of action, with the presenter clarifying that the auditor should continue to highlight the deficiency each year until it is resolved.

📑 Financial Reporting Challenges with Missing Subsidiary Data

This paragraph presents a scenario where a company with subsidiaries in India, Russia, and Canada faces challenges in consolidating financial reports due to missing financial data from Canada. The presenter discusses the auditor's obligation to modify the report when not all subsidiary financials are available, emphasizing the importance of this process for students preparing for exams and professionals in the field.

🏦 Separation of PMS and Company Accounts

The script touches on portfolio management services (PMS) provided by a company, which combined its own investments with those of its PMS clients in a single bank account. The presenter advises that as an auditor, one must request the company to separate PMS accounts and obtain an external audit report before proceeding with the audit. This ensures compliance with statutory auditing standards.

📈 Compliance with GST Filing Requirements

A brief discussion on the requirements for a registered GST entity with an annual aggregate turnover exceeding five crore rupees. The presenter clarifies that such an entity must file both GSTR and annual returns, highlighting the importance of understanding GST regulations for accountants and students.

📉 Minimum Wages Act Compliance by a Statutory Auditor

The final paragraph of the script addresses a situation where a company is not following the Minimum Wages Act requirements. The presenter explains that as a statutory auditor, one must report this non-compliance in the audit report along with the management's comments, even if the management provides reasons or promises to comply in the future.

Mindmap

Keywords

💡External Quality Control Reviewer (EQCR)

An EQCR is an independent reviewer responsible for evaluating the quality of an audit. In the context of the video, the EQCR's role is discussed in relation to auditing standards. The video mentions a scenario where an EQCR with 2.5 years of experience was appointed, raising the question of whether they need to be a qualified Chartered Accountant (CA). This ties into the narrative by highlighting the importance of qualifications in audit roles.

💡Auditing Standards

Auditing standards are a set of rules and guidelines that auditors must follow when conducting audits. The video references new auditing standards, specifically Standard 220, which stipulates that the EQCR must be a qualified CA. This standard is central to the discussion in the video, emphasizing the need for adherence to professional qualifications in audit quality control.

💡Inherent Risk

Inherent risk is the susceptibility of a business to errors or fraud due to its nature and complexity, independent of controls. The video uses the example of a retail business to discuss how auditors cannot ignore inherent risk, even if they are inexperienced in a particular sector. This concept is crucial for understanding the auditor's role in assessing risk.

💡Control Risk

Control risk refers to the possibility that a company's internal controls may not prevent or detect errors or fraud. The video gives an example of a gold storage facility with weak security to illustrate control risk. Understanding control risk is essential for auditors when evaluating a company's financial processes and systems.

💡Fraud

Fraud is the intentional use of deception for personal gain or to cause loss to another party. The video discusses a case where a fraud amounting to 2 crores was committed by employees, emphasizing the auditor's responsibility to report such instances. Fraud is a significant theme in the video, highlighting the auditor's role in detecting and reporting fraudulent activities.

💡Statutory Auditors

Statutory auditors are appointed to audit a company's financial statements in accordance with legal requirements. The video mentions statutory auditors appointed for a company in Hyderabad, emphasizing their role in assessing risk and compliance. This term is key to understanding the legal obligations and responsibilities of auditors.

💡GST (Goods and Services Tax)

GST is a value-added tax levied on most goods and services sold for domestic consumption. The video discusses the filing requirements for GST returns for businesses with an annual turnover exceeding a certain amount. This keyword is relevant as it ties into the broader discussion on tax compliance and financial reporting.

💡Consolidation

Consolidation in the context of financial reporting refers to the process of combining the financial statements of a parent company and its subsidiaries. The video mentions a scenario where consolidation could not be completed due to missing financials from a subsidiary in Canada, illustrating the importance of complete financial data for accurate reporting.

💡Travel Reimbursement

Travel reimbursement refers to the process by which employees are reimbursed for business-related travel expenses. The video discusses a deficiency in the approval process for travel reimbursements, highlighting the need for proper internal controls and audit observations. This term is used to illustrate the practical application of audit procedures in real-world scenarios.

💡Corporate Governance

Corporate governance refers to the system of rules, practices, and processes by which a company is directed and controlled. The video mentions Regulation 27 and Schedule 2, which are related to corporate governance compliance. This keyword is significant as it underscores the importance of adhering to governance standards in listed companies.

💡Minimum Wages Act

The Minimum Wages Act is a law that sets the minimum amount of pay that employers must pay their workers. The video discusses a scenario where a company did not follow the Minimum Wages Act requirements, emphasizing the auditor's responsibility to report such non-compliance in the audit report. This term is relevant to the discussion on legal compliance and ethical business practices.

Highlights

Introduction of new auditing standards in ICAI.

Story about a Gujarat-based company and changes in their audit team.

Discussion on the appointment of an EQCR (External Quality Control Reviewer) and whether they need to be a CA.

Revelation that according to new auditing standard 220, EQCR should be a qualified chartered accountant.

Story about a Hyderabad-based retail company and the auditor's lack of experience in the retail sector.

Auditor's decision to not assess inherent risk and focus only on control risk.

Explanation of inherent risk versus control risk with an example.

Incorrectness of an auditor ignoring the assessment of inherent risk.

Story about a manufacturing company in Pune with good design and effective internal controls.

Question on whether good design and effective internal controls can find frauds and errors.

Discussion on the inability to identify abuse by process owners with just good design and controls.

A question about a registered person with GST and the type of returns they need to file.

Requirement for a company with annual turnover over five crores to file both GSTR and 9C returns.

Story about a company in Pune with deficiencies in the approval process of travel reimbursements.

Auditor's dilemma of reporting the same deficiency for the second year when no action was taken by management.

Correct approach for an auditor to continue highlighting deficiencies even if management does not take action.

Story about a company with subsidiaries in India, Russia, and Canada facing issues with financial consolidation.

Necessity for auditors to modify their report when financials of a subsidiary are not available.

Discussion on Portfolio Management Services (PMS) and the legal requirement for an external auditor's report.

Story about a listed company required to comply with regulation 27 and schedule 2 for corporate governance.

Requirement for a company to submit a quarterly compliance report on corporate governance within 15 days from the close of the quarter.

Story about Mehta & Company appointed as statutory auditors of AB Limited and discovery of a fraud.

Statutory auditor's responsibility to report fraud under section 143(12) of the Companies Act.

Final story about a company not following minimum wages act requirements and the auditor's role.

Conclusion and announcement of the question-answer session.