10 Audit Case Studies in a Story Format

Summary

The 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.