10 Audit Case Studies in a Story Format
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
📊 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.
🛑 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.
👔 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.
🌐 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)
💡Auditing Standards
💡Inherent Risk
💡Control Risk
💡Fraud
💡Statutory Auditors
💡GST (Goods and Services Tax)
💡Consolidation
💡Travel Reimbursement
💡Corporate Governance
💡Minimum Wages Act
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.
Transcripts
one
so how are you all doing
just now see results were also about
final results
okay so let me share my screen and start
my webinar just a second
here it is
so as usual these are always the stories
formats which i share with you all
uh let's start with the story number
one
okay
external quality control reviewer okay
so
uh uh it's a new auditing standards
which has been introduced in
ici so let's start the story there was a
company which was based in gujarat and
they were doing quite good
so they were audited by an audit team
for the financial year ended 2020
so for the financially ended 2021
some issues happened with the audit team
and the auditor made some changes in
their audit team
so what they did the partner remained
the same
field in charge got changed because he
left the firm
even they uh their eqc our external
quality control reviewer also got
changed
new eqcr was appointed he was having
around 2.5 years of experience and he
was quite knowledgeable but he was yet
to clear his c exams
so now the question came that
was this appointment of eqcr correct
does he need to be a
ca or it's okay
so being the first story let me have in
this way i will be able to chat also
uh the people who think that it is
correct they can reply yes in the chat
box
and the
participants who think that it's not
correct they can reply as no in the chat
box so let's wait for 10 seconds and see
your replies
this will help us to interact that's it
i'm waiting for the replies
if you think it is correct say yes
if is you think it's not correct say no
so we have a reply from satya panda he's
saying yes
okay so let me take it further
see uh this is not correct
so there's a new auditing standard 220
according to which this eqcr should be a
qualified chartered accountant okay
so now what will happen that let me see
the chat box again
uh not got your question and randy
nishant said no
see uh my question is simple that there
is a uh eq nowadays who's there just a
second let me
uh story number one this chat box okay
so eqcr is external quality control
reviewer so maybe a lot of you may not
be aware of the same so just with this
particular slide
essay 220 just have in your mind this is
one of the important final questions
also okay so the participants or the in
later on the people who will see the
same in the youtube channel this essay
220 is there and we which says that
equals cr should be a qualified
chartered accountant
let's proceed further
with the next story which is
also an interesting story
there was a company in hyderabad and
they were involved in the retail
business
the statutory auditors were appointed
and the name was mrs divine company
now these auditors they did not have
much experience in retail sector
so it happens sometimes that auditor
doesn't have the experience in all the
fields
so what happened so this is quite
surprising so auditors said
since retail business process is known
to everyone
they will not do the assessment of the
inherent risk and they will focus on
only on the control risk
so uh if the participants are from c
enter and final they are aware of this
inherent in control risk and even if
they are
chartered accountants they are aware
so the question comes that can an
auditor do so can he leave the inherent
risk
see inherent risk is the risk which is
there
and control risk is that if you don't
have good control so i'll give you an
example of controlled risk
suppose you are having a go down where
you are having
lots of gold is there okay
and then you did not have any security
guard you did not had any lock-in key
yeah surprising but it is not there that
means the controls are very weak and the
chances of fraud or wrongdoing are very
high so this is the way control risk is
monitored so if suppose that particular
premises was having the lock
and it was having the security guard
also that means the controls are very
strong and the audit risk is very low
well let's come back to this case so are
the auditors correct can they reduce the
can they do this way they can ignore the
assessment risk so i know a lot of you
know the answer and the answer is that
auditors are
wrong they are not correct in this
so till now we had two stories
so one story was talking about eqcr why
i repeat so that
the students who are going to watch this
and they are going to give the exams so
they remember it so eqcr should be a
qualified chartered accountant essay 220
and you cannot ignore the inherent risk
so with this the two stories
are over story number three
okay let me see what it is talking about
there was a company
uh which was based in puna and they were
into manufacturing of clothes
and it was run by uh mr martin company
they were having very good design and
effective internal controls
but then they assumed that with good
design and effective internal controls
they are able to
find frauds and errors
so is it true or false
so answer is that it is true
okay
and
the second question is that abuse by
process owners
so with the design and effective
internal controls
can we identify the abuse by process
owners
give a thought
definitely not
so this is uh this was also from one of
the questions of
ca final
and it will be helpful in c enter also
and otherwise also see educate design
and effective internal controls means
again i'm going to that bold example
that you are having good security you
are having a qualified security guard
qualified in themselves not a ca but you
must be having his own experience but if
suppose the owner employer is shouting
on him and giving him uh some kind of
wrong language using that you won't be
able to ascertain from effective
internal controls that's quite quite
obvious
okay someone is requesting a remote
control of my screen
okay what should i do
remote control obviously i think uh
should i approve this
[Music]
okay sorry sorry for the introduction i
am sorry this some person was asking me
the remote control of my screen then how
will i speak then
okay story number four
okay let's move further
this is something in which there is no
story and it is uh particular about gst
which is one of the hot topic nowadays
and
you should know about this thing so
there was a registered person registered
with gst is having annual aggregate
turnover more than rupees five crore so
does he has to file which returns he has
to file is it gst or 9c is it gstr or is
it is it both
so what will happen that in this case i
could have made a story but that did not
make any sense but you should remember
that answer is both so if he is having
annual aggregate turnover more than
rupees five crores he has to file these
both returns so nowadays
nowadays started accountants and even
you students you are quite aware of gst
it was not there at our times but now we
are also going through the act and
various webinars
um let's go to the next story story
number five
so this uh let me tell you
uh there was a company which was based
in puna
and as you know the travel reimbursement
is one of the dicey issue in lots of
companies because
uh travel reimbursement you need to
submit your bills
travel means if suppose you are going
from puna to mumbai and then you have
got some bills you have to submit and
then you you can get your claim
and it it needs to be approved by the
senior authority so suppose if it is uh
if it is a manager then it should be
approved by senior manager but in this
company there was a big deficiency in
the approval process of the travel
reimbursement
auditor was again a message deep in
company they found this deficiency and
they reported
in the year ended 31st march 20 to the
management
with the report
but no action was taken by the
management so you got the story
then what happened see
in the next year 31st march 21 the
auditor said
he again found that deficiency again
there was not a proper system for
approval of travel reimbursements
lauderdale said that it was highlighted
in the previous year and no action was
taken so let's not highlight in the
current year
so auditor god but demotivated because
his observation was not taken care of in
a sense
and articles and auditors who are the
participants or who will watch it on the
youtube later on they know very well
that how difficult it is
to
convince the management to under make
them understand that they need to take
some actions
so now here is auditor correct
that he has highlighted in the previous
report
no one has taken any action so he is
thinking why should i highlight again in
the current year if he is correct please
say yes
and if he's not please say no
okay
so let me again wait for 10 seconds and
i know this time i will get correct
answers
dinesh kumar no
[Music]
please please please type answers no
no no no so i've got a very intellectual
audience which i was aware of always
so the correct answer is no and
logically also it is correct you see
just a second my cursor ventures away
so if management so thanks a lot for
your replies if the management doesn't
take any actions don't worry your job is
to highlight the observations again and
again and here with my 20 years of
corporate experience and i have attended
lots of board meetings i would like to
share with you that board is always
happy to listen audit observations which
i always say in all my presentations
uh but if we see
down the line managers senior managers
they may not be happy because it's like
a complaint on that behalf but
but the management top management is
always happy to listen so the cut short
the answer is that the auditor should
highlight the same
in every year
even if the action is not taken care of
even if the management is not doing
anything our job is to highlight it
every year if the deficiency is there
good going story number six okay
okay okay okay okay
so there was a company
and he was based out of london and
they're having a subsidiary in india and
two subsidiaries in russia and canada
so what happened the consolidation was
happening for all the companies but the
financials of canada could not be
obtained so as you all know that when
you are having holding in subsidiary
concept you need to
uh what i can say you need to uh combine
all the balance sheets and come out come
out with a combined balance sheet but
the auditors could not find the
financials of the canada so what do what
should they do
so should they modify the report or
should they leave it as it is
so let's see what the answer is
auditors need to modify his report means
there is no other alternative with them
so
actually you should have the financials
for all the subsidies with you but if it
is not there then you need to modify
your report
and i'm again and again saying that
participants who are going to give exams
definitely they will help from this
and
who are chartered accountants or other
field they will also be benefited with
this particular stories
i'm on story number seven
portfolio management services so let me
give a brief idea i have done the audit
of pms of franklin templeton also in avn
ambrose
portfolio management services as a very
uh
very lucrative
job also and what they do they manage
the portfolio of
celebrities and people who are having
lot of money only they can have a big
portfolio
so there is a company who was engaged in
providing pms services to its clients
with the approval of rbi that's fine
that's a legal procedure
but what the company did his own
investments and the pms money investment
they put everything in one bank only so
here i've written the answer itself as
an auditor
you need to ask the company to separate
pms accounts and get a report from an
external auditor
so you must be a statutory auditor there
so as we all know that there are various
kinds of audits so you must be a
statutory auditor there so you can ask
the company that you separate your pms
and get a report from an external
auditor
and then only they will proceed with the
audit
so with this we completed our seven
stories and this is
eighth story which is also very short
story but uh important
so here you need to remember
some somewhere your logic will work and
somewhere you have to remember certain
sections and details
so this was a company which was listed
on a stock exchange
and uh it has been asked to comply with
the regulation 27 and schedule 2
for corporate governance compliance what
this particular regulation talks about
that is what is being highlighted here
so lodr is listing obligations and
disclosure requirements savvy guidelines
one of the important chapter
in ca final which is there even it is in
c enter also and it includes a lot of uh
what i can say
a lot of things which needs to be
remembered
so one of that is highlighted here so
what you have to do you have to submit a
quarterly compliance report
on corporate governance within 15 days
from the close of the quarter so a
quarter is april may june
on july august september active one of
the summer jan 5 march so every
april may june 15th july july september
15th october october move december 15
jan and jan feb march 15th of the next
the report shall be signed by either by
the compliance officer or by the chief
executive officer of the company
so that is what this particular
regulation talks about
let's go to the next story story number
nine
okay
this is quite interesting
so mehta and company were appointed as
the statutory auditors of ab limited
based out of bangalore so company was
doing very good and having good revenue
and good profit
uh good employee size also
but what happened and while doing
auditor audit the auditors came to know
that there is a
fraud amounting to rupees 2 crore was
done by the employees
so it's a big fraud
so now as a statutory auditor there is a
section 143
which talks about various actions to be
taken in the fraud only
so here since 1 43 12.
so whomsoever who are watching this
particular
video or live session or who will see
later on now you should not forget
section 143 12 12 okay 12 we will add
but 143 is about fraud and
unfortunately the frauds
are have increased recently i'm not
saying they were not there before but
now they get more more of a media
attention also
so as a statutory auditor you need to
report the fraud to the central
government and in the auditor's report
so now why this central government thing
i am highlighting here
because there is a particular turnover
in which it is uh stated that we need to
report the fraud to the central
government and the two peru is crossing
that particular limit
so with this we go to our last story of
the day and i think next time i have to
have more stories because stories are
getting completed very fast
uh last story a short
story um
yeah above one group ran it is correct
so he was talking about the previous
slide oh just a second let me go back
yeah so this is above one corona you
have to report to the central government
a company is not following minimum wages
act requirement
what needs to be done by a statutory
auditor
report the same in the audit report with
the management commands
so what happens that when you give an
audit report you get the management
replies also
so what you have to do you have to
report the same in order to put with the
management requires why i am
highlighting this that this particular
auditor was thinking not to report the
same because the management gave him lot
of stories and explanations that why he
could not follow the minimum wage exact
and even follow the same in the coming
years
that's fine you will follow the same in
the coming years that we will see in the
coming years but at present it needs to
be reported with the management comments
so with this i think the 10 stories are
coming completed and
next time i need to come with the more
stories
and ashna i think we can open the
question answer session now
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