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Auditing &
Insurance UPSC EPFO APFC/AO/EO Exam 2023

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BY: CA DHANANJAY OJHA (FOUNDER DHAN TAX & FELLOW MEMBER OF ICA)
1 UPSC INTERVIEW | 02 UPSC MAINS
CONSULTANT IN VARIOUS GOVERNMENT DEPARTMENT

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Index
Chapter: I ..................................................................................... 5 Inspection .........................................................................16
Auditing concept ................................................................... 5 Observation .....................................................................16
Audit ......................................................................................... 5 Inquiry ................................................................................16
Objectives ............................................................................... 5 Confirmation ...................................................................17
Limitation of audit .......................................................... 6 Recalculation ...................................................................17
Independence................................................................... 7 Re performance..............................................................17
Integrity .............................................................................. 7 Analytical Procedures ..................................................17
Objectivity .......................................................................... 8 Key features of an audit notebook .........................17
Ability to express and communicate ....................... 8 Objective of Vouching .....................................................18
Tactfulness ......................................................................... 8 Objective ...............................................................................19
Aware of the latest developments............................ 8 Types of sampling technique ........................................20
Common sense ................................................................ 8 Risk Associated with Sampling .....................................21
Statuary audit ........................................................................ 8 Stages in Audit Sampling................................................21
Non statuary audit .............................................................. 9 Types.......................................................................................22
Difference between statuary and non-statuary Purpose of Analytical Procedures ................................23
audit.......................................................................................... 9 Analytical Procedures in Audit Process .....................24
Preliminary Activities ................................................... 13 Civil Liability .........................................................................25
Planning Activities ........................................................ 13 Liability for Negligence ...............................................25
Execution Activities....................................................... 13 Liability for Misfeasance .............................................25
Completion Activities .................................................. 13 Liabilities under Companies Act ...................................26
Advantages and disadvantages of audit program 13 Liability for Misstatements in the Prospectus
Nature and extent of documentation ................... 14 [Sec.35] ..............................................................................26
Timing of documentation .......................................... 14 Criminal Liability under Indian Penal Code ..............27
Form and content of documentation .................... 14 Liability under Income Tax Act [Sec.278] ..................27
Safekeeping of documentation ............................... 15 Liability for Professional Misconduct .........................28
They serve several important purposes, Liability towards Third Parties .......................................28
including ........................................................................... 15 Liability for Negligence ...............................................28
Advantages and disadvantages ................................... 15 Liability for Frauds .........................................................28
Auditor’s Judgement while Obtaining Audit Objectives of Internal Audit ...........................................29
Evidence ................................................................................ 16
Advantages of Internal Audit ........................................29
Methods of Obtaining Audit Evidence ...................... 16
Compensation audit .....................................................31

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Compliance audit .......................................................... 32 Auditor not render certain services [section 144]..52
Construction audit ........................................................ 32 Signing of audit report [section 145] .........................52
Internal audit .................................................................. 32 Auditor’s right to attend general meeting [section
Cost audit ......................................................................... 32 146]..........................................................................................53

Fraud audit ...................................................................... 32 Applicability of Audit Committee ............................54

Information systems audit ......................................... 33 Composition ....................................................................54

Royalty audit ................................................................... 33 Reconstitution.................................................................54

Income Tax audit ........................................................... 33 Appointment of cost auditor .........................................55

GST audit .......................................................................... 33 Chapter III ..................................................................................63

Chapter: II .................................................................................. 41 Audit of bank .............................................................................63
Qualifications of an auditor [Section 141(1) & Bank audit .............................................................................63
(2)] ........................................................................................... 41 Types of bank in India ......................................................63
Disqualifications of auditors [Section 141(3)] ......... 41 Advances...........................................................................64
Ceiling on number of audit section 141(3) (g) ....... 42 Cash in hand....................................................................64
Subsequent disqualification after appointment: Balance with RBI.............................................................64
[section 141(4)] ................................................................... 42 Balance with other bank .............................................64
Appointment of the First Auditor [Sec. 139(6)] ...... 43 Fixed and other Assets ................................................64
Appointment of the First Auditor of Government Banking and Deposits Borrowings Deposits .......65
Company [Sec. 139(7)] ................................................ 43
Bills Payable .....................................................................65
Appointment of Subsequent
Bills for Collection .........................................................65
Auditor/Reappointment of Auditor ....................... 44
Out of Order ....................................................................66
Term & Rotation of Auditor ...................................... 46
Chapter IV..................................................................................68
Appointment of Subsequent Auditors ...................... 46
Government Audit ...............................................................68
In case of Government Company [Sec 139(5)] .. 46
Objectives of Government Audit .................................68
Section 139(9) – Re-Appointment of Retiring
Auditor .............................................................................. 47 Difference between Government Audit and
Commercial Audit ..............................................................68
Section 139(10) – No Auditors Appointed at
AGM ................................................................................... 47 General Powers ..............................................................70
Section 139(8) – Filling Up Casual Vacancy ........ 47 Direction by CAG to the auditor ..............................70
Rotation of Auditors {Section 139(2)} ........................ 48 Right of CAG to conduct the supplementary
audit or supplementary the audit report..............70
Removal of auditor ........................................................... 49
Audit Reports ..................................................................71
Resignation by auditor .................................................... 49
Chapter V ...................................................................................72
Removal of auditor by the tribunal ............................ 50
Audit of non-governmental organisation ...............72
Right of auditor section 143(1) .................................... 51
Verification of assets.........................................................73
Duties of auditor section 143(1) .................................. 51

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Verification of Liabilities .................................................. 73 Internal Risks........................................................................95

Verification of income and ............................................. 74 Policyholder .....................................................................96
Verification of expenditure ............................................ 74 Life assured ......................................................................96
Chapter VI ................................................................................. 75 Sum assured (coverage)..............................................96
Audit of charitable hostel ................................................ 75 Nominee ...........................................................................96
When conducting the audit of charitable Policy tenure....................................................................96
institutions the following points should be taken Maturity age ....................................................................97
care of................................................................................ 75
Premium............................................................................97
Know about contracts ................................................. 75
Premium payment term/mode/ frequency .........97
Chapter VI ................................................................................. 76
Riders .................................................................................97
Audit of educational institute ....................................... 76
Death Benefit ..................................................................97
Chapter VIII ............................................................................... 80
Survival/Maturity Benefit ............................................98
Audit of insurance companies....................................... 80
Free-look Period ............................................................98
The Auditor-General will apply the following
Grace Period ....................................................................98
procedures:...................................................................... 82
Surrender Value .............................................................98
Chapter IX ................................................................................. 83
Paid-up Value .................................................................98
Audit of trust ......................................................................... 83
Revival Period .................................................................98
Accounting and Physical Security Controls ............. 84
Underwriters ....................................................................99
Chapter X................................................................................... 86
Tax benefits......................................................................99
Forensic audit & accounting .......................................... 86
Exclusions .........................................................................99
Auditing Fraud Investigation Process.................... 87
Claim Process ..................................................................99
Conducting background checks and reviewing
public documents ......................................................... 88 Role .........................................................................................99
Interviewing in detail ................................................... 88 Types.......................................................................................99
Collecting information from reliable sources ..... 88 Other types of insurance intermediaries
include ............................................................................ 100
Analyzing the evidence collected ........................... 88
Insurable Interest ............................................................ 102
Performing surveillance .............................................. 88
Utmost Good Faith ......................................................... 102
Working undercover .................................................... 88
Principle of Indemnity ................................................... 103
Taking a closer look at the financial
statements ....................................................................... 88 Doctrine of Subrogation .............................................. 103
Chapter XI ................................................................................. 91 Essentials of Doctrine of Subrogation ................ 104
Audit of charitable institution ...................................... 91 Personal Insurance ......................................................... 104
Life Insurance ...................................................................... 93 Warranties ..................................................................... 104
General Insurance .............................................................. 94 Proximate Cause.............................................................. 104
External Risks....................................................................... 95 Assignment or Transfer of Interest........................... 105

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Return of Premium..........................................................105 Role of IRDAI .................................................................... 111

General Insurance ............................................................107 Working of IRDAI ............................................................ 112
Health Care Coverage ...............................................107 Life Insurance Council ................................................... 112
Automobile Insurance ...............................................107 Some of LI Council functions are.......................... 112
Homeowners' Insurance ...........................................108 Constitution of life insurance council ................. 112
Life Insurance ....................................................................108 General Insurance Council ........................................... 113
Term Insurance ............................................................108 Constitution of Offices of Ombudsman ................. 114
Whole Life Insurance .................................................109 Complaints to Ombudsman........................................ 114
Endowment Policy ......................................................109 Procedure for dealing with complaints .................. 115
Money Back Policy ......................................................109 Powers and Functions of Ombudsman .................. 115
Unit Linked Insurance Plans ....................................109 Award by Ombudsman ................................................. 116
Pension Plan..................................................................109 Jurisdiction of Ombudsman ........................................ 117
Child Plans .....................................................................109

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Chapter: I
Auditing concept
Introduction

Audit
Audit is the examination or inspection of various books of accounts by an auditor followed by physical
checking of inventory to make sure that all departments are following documented system of recording
transactions. It is done to ascertain the accuracy of financial statements provided by the organisation.

Audit can be done internally by employees or heads of a particular department and externally by an outside
firm or an independent auditor. The idea is to check and verify the accounts by an independent authority to
ensure that all books of accounts are done in a fair manner and there is no misrepresentation or fraud that
is being conducted.

All the public listed firms have to get their accounts audited by an independent auditor before they declare
their results for any quarter.

Objectives
 Express an opinion on financial statements: The primary objective of an audit is to express an
opinion on whether the financial statements are presented fairly, in all material respects, in
accordance with the applicable financial reporting framework, such as Generally Accepted
Accounting Principles (GAAP).
 Provide assurance: Auditors provide assurance to the users of financial statements that the
financial information presented in the statements is reliable, relevant, and useful for decision-
making.
 Evaluate internal controls: Auditors evaluate the effectiveness of internal controls that are
designed to prevent or detect material misstatements in the financial statements. This helps to
ensure the accuracy and completeness of the financial information presented.
 Identify errors and fraud: Auditors are responsible for identifying errors and fraud that may have
occurred in the financial statements. This helps to prevent and detect fraud, which can have a
significant impact on an organization's financial position.
 Provide recommendations: Auditors provide recommendations for improving internal controls,
financial reporting processes, and other areas identified during the audit. These recommendations
help organizations to improve their operations and financial reporting.
 Compliance with legal and regulatory requirements: Auditors ensure that financial statements
comply with legal and regulatory requirements, such as tax laws and accounting standards.

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 Enhance credibility: Audits enhance the credibility of financial statements by providing an

independent assessment of the financial information presented. This increases stakeholders'
confidence in the organization's financial reporting.

Inherent Limitation of Auditing

Inherent limitations are such features of audit that restrict the scope for an auditor to obtain absolute
assurance. It is because of inherent limitation of an audit the practitioner can't assure the user of f.s.t that
the f.s.t are absolutely free from material misstatement. As a result of these limitations auditor is expected
to provide reasonable assurance.

Due to inherent limitation of audit auditor is only able to get Persuasive evidence instead of Conclusive
evidence. But what’s the difference between Persuasive and Conclusive evidence.

 Persuasive evidence is evidence that has the power to influence or persuade someone to believe in
its truth. For example: Your job is to check the receivable account balance, to accomplish this you
send confirmation mail to the big clients and the sum of these clients is almost 75 % of the total
percentage, if all customer replies with positive responses then you have enough persuasive
evidence to issue an opinion on the accuracy of overall receivable account.
 Conclusive evidence is a solid evidence after which no further proof or inquiry is required &
evidence in itself is complete. Conclusive evidence would be if you sent confirmation letter to all
customer and pursued all customer until they respond.

Limitation of audit

The Nature of The Nature of Financial Reporting: The preparation of financial

Financial Reporting statements involves judgment by management in applying the
requirements of the entity's applicable financial reporting framework to
the facts and circumstances of the entity. In addition, many financial
statement items involve subjective decisions or assessments or a degree of
uncertainty, and there may be a range of acceptable interpretations or
judgments that may be made.

The Nature of Audit There are practical and legal limitations on the auditor's ability to obtain
Procedures audit evidence. For example:
 There is the possibility that management or others may not
provide, intentionally or unintentionally, the complete
information that is relevant to the preparation and presentation
of the financial statements or that has been requested by the
auditor.
 Fraud may involve sophisticated and carefully organised schemes
designed to conceal it.
Therefore, audit procedures used to gather audit evidence may be
ineffective for detecting an intentional misstatement that involves, for
example, collusion to falsify documentation which may cause the auditor
to believe that audit evidence is valid when it is not. The auditor is

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neither trained as nor expected to be an expert in the authentication of

documents.
 An audit is not an official investigation into alleged wrongdoing
.Accordingly, the auditor is not given specific legal powers.
Timeliness of Timeliness of Financial Reporting and the Balance between Benefit and
Financial Reporting Cost: The matter of difficulty, time, or cost involved is not in itself a valid
and the Balance basis for the auditor to omit an audit procedure for which there is no
between Benefit and alternative.
Cost:
Other Matters that In the case of certain subject matters limitation so the auditor’s ability to
affect the detect material misstatements are particularly significant. Such
Limitations of an assertions or subject matters include:
Audit:
 Fraud, particularly fraud involving senior management or
collusion.
 Dubios transaction with related party.
 The occurrence of non-compliance with laws and regulations.
 Future events or conditions that may cause an entity to cease to
continue as a going concern.

Qualities of an Auditor
Auditors, as we know, provide professional services to their clients.
To render these services properly, auditors not only must
possess the requisite skill and technical knowledge, but they
should also have certain personal attributes. Some
of these attributes or qualities of an auditor are given
below:

Independence
 Independence lays down the most
important aspect of any audit process.
 While performing a financial audit, an auditor
does not create new information but increases
the credibility of existing accounts and/or reports by
expressing his opinion thereon.
 His opinion is likely to enhance the reliability of such financial reports.
 Therefore, he must not be susceptible to any kind of pressure or influence from the client or a third
party.

Integrity
 “Integrity” means the degree to which an auditor is honest in his work.
 He should, in no circumstance, misrepresent any fact or authenticate any details under pressure.
 Also, he should maintain the confidentiality of any information that is sensitive and that he comes to
know during the performance of the audit.

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Objectivity
 An auditor should keep an impartial behaviour when it comes to reviewing different matters under
audit.
 In fact, the ability of an auditor to act with objectivity determines the level of his independence too.
 For example, the auditor of a company thinks that the value of work-in-progress inventory has not
been properly evaluated but still accepts a certificate from the management in this regard and
expresses his opinion based on that certificate.
 In this case, the auditor lacks objectivity as he should have examined the valuation of inventory in
detail as doubts sustained.

Ability to express and communicate

 It is essential that an auditor possesses good communication skills, both oral and written.
 This shall help him to translate the results of his examination into an audit report.
 He should be able to draft a report which is clear and unambiguous.
 Also, if he lags behind in communication skills, he might not be able to interact effectively and
obtain required information from the client and his staff.
 In addition, good communication is also needed for interacting with co-auditors and audit
assistants.

Tactfulness
 An auditor must be tactful enough to gather all the necessary information from the client’s staff as
well as outside parties.
 Unless he can obtain sufficient and appropriate audit evidence (both oral and written), he shall not
be able to form a reasonable basis for arriving at a conclusion concerned with his audit
engagement.

Aware of the latest developments

 An auditor should stay abreast with any latest developments that may impact his audit work such as
changes in laws, regulations, professional pronouncements, technological factors, etc.
 It is always desirable if he regularly reads profession-related journals, blogs, newspapers, etc.

Common sense
 It goes without saying that an auditor should possess a fair sense of evaluation.
 This is required to distinguish between material and non-material matters in the client’s set of
books.

Types of audits
 Statuary audit
 Non statuary audit

Statuary audit
A statutory audit is an engagement of a financial statement audit between an entity and an independent
audit firm that comply with the requirement of local laws in the sector that the organisation is operating.
The financial statement audit is required by law in most countries and the auditors need to comply with the

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principles of auditing when they are performing the audits. According to the requirement of law, entities
that operate in those countries need to submit their audited financial statements to the related authorities.
As an instance, the management of an insurance company needs to submit its company’s financial
statements to the relevant government department.

Among the examples of the related government bodies, the tax department is the best example in which
the entities have to submit their annual financial statements and audit report. This is for the authorities to
review and examine whether the organisations are paying their taxes properly.

The primary aim of the statutory audit is to allow the qualified auditors to assess the objectivity and
independence of the financial statements of the entities. Also, they need to identify whether there is any
material misstatements in the financial statements before expressing audit opinion on those statements.

Non statuary audit

A non-statutory audit refers to the financial statement audit, which is not a requirement of the laws. Some
entities are exempt from the requirement of laws, yet they still choose to engage an audit firm to have a
financial statement audit. This can be due to the demand from the board of director, shareholders,
management, or sometimes the parent company in some cases.

Usually, the small or newly set up company will request the auditors to review its financial statements,
although such an action is not required by law. The companies do not have to submit the reports to the
authorities or the government bodies. Instead, they will send the report to the shareholders or the board of
directors.

The primary aim of a non-statutory audit has no difference from the statutory audit that is to allow an
independent auditor to review and express their opinion on the financial statement of a company according
to the results of their audit work.

In this type of engagement, the auditors need to determine the audit objective, audit scope and the
responsibilities of both the company and the auditors. Besides, the auditors should state the audit fee,
reporting deadline and the engagement period in the engagement letter. Also, the auditors have to state
the audit approach that they will use when they perform the financial statement review.

Difference between statuary and non-statuary audit

Criteria Statutory Audit Non-Statutory Audit

Definition Audit required by law or regulation Audit that is not required by law or
regulation
Purpose To ensure compliance with legal To provide assurance on specific aspects
requirements and financial of an organization's operations, systems,
reporting standards or processes

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Type of Compulsory Voluntary

Engagement
Conducted By External auditors Internal or external auditors
Scope of Generally covers financial Scope can be customized based on the
Audit statements and related disclosures specific requirements of the
organization or client
Reporting Audit report issued to stakeholders, Report issued to the client or specific
including shareholders and stakeholders based on the engagement
regulators agreement

Frequency Annual or as required by As per client's requirement

law/regulation
Legal Liability The auditor can be held legally The auditor's liability is governed by the
liable for any misstatement or terms of the engagement agreement
omission in the financial statements
Examples Audit of a company's financial Audit of inventory management, audit
statements, audit of compliance of internal controls, audit of
with tax laws and regulations sustainability reporting

Scope of audit
 Within the audit mandate, the Comptroller and Auditor General is the sole authority to decide the
scope and extent of audit to be conducted by him or on his behalf. Such authority is not limited by
any considerations other than ensuring that the objectives of audit are achieved.
 In the exercise of the mandate, the Comptroller and Auditor General undertakes audits which are
broadly categorised as financial audit, compliance audit and performance audit, as elucidated in
Chapter 5, 6 and 7 respectively.
 The scope of audit includes the assessment of internal controls in the auditable entities. Such an
assessment may be undertaken either as an integral component of an audit or as a distinct audit
assignment.
 The Comptroller and Auditor General may, in addition, decide to undertake any other audit of a
transaction, programme or organisation in order to fulfill the mandate and to achieve the objectives
of audit.

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Auditor is a watchdog and not a bloodhound

 The duty of an auditor with regard to the detection and prevention of fraud and error has been a
matter of discussion for a long time. It has been laid down by several legal decisions and has been
considered in many professional pronouncements. In this blog, we are going to throw light on some
of these decisions and discuss the meaning of the famous quote “Auditor is a watchdog, not a
bloodhound”.
 The perception of auditor’s duty with regards to detection and prevention of frauds and errors was
initially based on the decision given in Kingston Cotton Mills Co. (1896) case.
 The judge summed up auditor’s duty by stating, “Auditor is a watchdog, not a bloodhound.”
 It was noted that the auditors were to be appointed by the shareholders, and were to report to them
directly, and not to or through the directors.
 The object was to ensure that the shareholders received “independent and reliable information
respecting the true financial position of the company at the time of the audit.”
 The duty of the auditor is to be honest i.e., he must not certify what he does not believe to be true,
and he must take reasonable care and skill before he believes that what he certifies is true.
 What is reasonable care in any particular case must depend upon the circumstances of that case.
 Where there is nothing to excite suspicion very little inquiry will be reasonably sufficient.
 Where suspicion is aroused more care is obviously necessary; but still an auditor is not bound to
exercise more than reasonable care and skill, even in a case of suspicion, and he is perfectly justified
in acting on the opinion of an expert where special knowledge is required.
 An auditor is not bound to be a detective, or, as was said, to approach his work with suspicion or
with a foregone conclusion that there is something wrong.
 He is a watchdog, but not a bloodhound. He is justified in believing tried servants of the company in
whom confidence is placed by the company.
 He is entitled to assume that they are honest, and to rely upon their representations, provided he
takes reasonable care.

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Auditor’s engagement
SA 210 deals with the key considerations that Independent Auditor needs to keep in mind on the terms of
the Audit engagement with Management or ‘Those charged with Governance’.

An audit engagement is an arrangement that an auditor has with a client to perform an audit of the client's
accounting records and financial statements. The term usually applies to the contractual arrangement
between the two parties, rather than the full set of auditing tasks that the auditor will perform.

To create an engagement, the two parties meet to discuss the services needed by the client. The parties
then agree on the services to be provided, along with a price and the period during which the audit will be
conducted. This information is stated in an engagement letter, which is prepared by the auditor and sent to
the client. If the client agrees with the terms of the letter, a person authorized to do so signs the letter and
returns a copy to the auditor. By doing so, the parties indicate that an audit engagement has been initiated.
This letter is useful for setting the expectations of both parties to the arrangement.

The term may also indicate all of the work performed by an auditor for a client under the terms of an
engagement letter. In this case, an audit engagement spans the full range of audit procedures that may be
used, including the examination of the client's financial statements and the preparation of an audit report.

Objective

Auditor’s Objective is to accept or continue an audit engagement only when the basis upon which it is to be
performed has been agreed, through

 Ensuring if the Preconditions for an audit are present

 Confirming if there is a common understanding between auditor and management.

Audit programme
SA 300, "Planning an Audit of Financial Statements," provides guidance on how to plan an audit
engagement of financial statements. An audit program is an important part of the planning process that

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outlines the procedures to be performed by the auditor to obtain sufficient appropriate audit evidence to
support the audit opinion. Here is an outline of the audit program for SA 300

Preliminary Activities
 Understand the entity and its environment, including its operations, industry, regulatory
environment, and internal control
 Identify and assess the risks of material misstatement
 Develop the audit strategy and audit plan
 Determine the materiality level for the audit
 Obtain an engagement letter and signed acceptance from the client

Planning Activities
 Develop a detailed audit plan that outlines the procedures to be performed, including substantive
procedures and tests of controls
 Assign audit team members to specific tasks and areas of the audit
 Obtain an understanding of the accounting and internal control systems
 Develop a preliminary analytical review of the financial statements
 Obtain and review the client's trial balance, general ledger, and other relevant documents
 Develop a preliminary assessment of the risk of material misstatement

Execution Activities
 Perform tests of controls and substantive procedures to obtain sufficient appropriate audit evidence
 Obtain and review the client's supporting documentation, such as invoices, bank statements, and
contracts
 Perform analytical procedures to identify any unusual transactions or relationships
 Perform substantive procedures for account balances and transactions
 Evaluate the results of the tests of controls and substantive procedures
 Assess the potential impact of any identified misstatements

Completion Activities
 Perform final analytical review of the financial statements
 Evaluate whether sufficient appropriate audit evidence has been obtained
 Evaluate any uncorrected misstatements
 Formulate the audit opinion based on the audit evidence obtained
 Issue the audit report and communicate the audit results to management and the audit committee

Advantages and disadvantages of audit program

Advantages Disadvantages
Provides a structured approach to the audit, Can be time-consuming to develop a
ensuring that all areas are covered and all audit comprehensive audit program that covers all
objectives are met. relevant areas.

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Helps ensure that audit procedures are May be difficult to revise or adapt the audit program
consistent and applied uniformly across all if unexpected issues arise during the audit process.
areas of the audit.
Enables the auditor to plan the audit in May create a false sense of security if the auditor
advance, allocate resources, and meet the audit relies too heavily on the audit program and does not
objectives efficiently. exercise professional judgment or adapt to changing
circumstances.

Helps ensure that all relevant audit evidence is May be too rigid or inflexible if the auditor does not
obtained, reducing the risk of material have the flexibility to modify or adapt the audit
misstatement in the financial statements. program to meet the specific circumstances of the
audit engagement.
Helps ensure that the audit is conducted in May not capture all relevant audit risks or issues if
accordance with professional standards and the auditor does not have a comprehensive
guidelines. understanding of the client's business or industry.

Provides a clear framework for communication May not be effective if the auditor does not have the
between the auditor, the client, and other necessary skills or expertise to develop a
stakeholders. comprehensive audit program or execute the audit
procedures effectively.

Audit documentation
SA 230, "Audit Documentation," outlines the requirements for documenting the audit process and the
results of the audit. Audit documentation serves as evidence of the auditor's compliance with professional
standards and provides support for the audit opinion issued.

Key requirements of SA 230 for audit documentation

Nature and extent of documentation

 Audit documentation should be sufficient in detail, clarity, and completeness to provide evidence of
the audit work performed and support the audit opinion issued.
 The auditor should document the planning, execution, and completion of the audit engagement,
including significant findings, issues, and judgments made during the audit process.

Timing of documentation
 Audit documentation should be prepared on a timely basis, with the timing of the documentation
reflecting the timing of the audit work performed.
 Audit documentation should be completed as soon as possible after the audit work has been
performed, but before the audit report is issued.

Form and content of documentation

 Audit documentation should be in the form of hard copy or electronic records, and should be
legible, permanent, and retrievable.
 Audit documentation should include the audit plan, working papers, and final audit report, as well as
any other documentation necessary to support the audit work performed.

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Safekeeping of documentation
 Audit documentation should be safeguarded and retained for a period of time sufficient to meet
legal and professional requirements.
 The auditor should maintain confidentiality and protect the integrity of the audit documentation.

Audit working papers, also known as audit documentation, are a crucial component of the audit process.

They serve several important purposes, including

 Supporting the audit opinion: Audit working papers provide evidence that the auditor performed
the necessary audit procedures and obtained sufficient audit evidence to support the audit opinion
issued. They also document any significant findings or issues identified during the audit process.
 Facilitating communication: Audit working papers serve as a tool for communication among the
audit team, and between the audit team and the client. They help ensure that all members of the
audit team have a clear understanding of the audit process, the work performed, and the results
obtained.
 Demonstrating compliance with professional standards: Audit working papers demonstrate that
the auditor complied with professional standards and guidelines, such as those issued by the
International Auditing and Assurance Standards Board (IAASB) and the International Ethics
Standards Board for Accountants (IESBA).
 Facilitating future audits: Audit working papers serve as a record of the audit work performed,
which can be useful for future audits of the same client. They can also help future auditors to
understand the client's business and any issues that were identified during previous audits.
 Providing a basis for quality control reviews: Audit working papers are reviewed as part of the
quality control process by the auditor's firm or by external regulators. They provide a basis for
assessing the quality of the audit work performed and identifying areas for improvement.

Advantages and disadvantages

The key advantages of complying with SA 230 are that audit documentation helps ensure that the audit is
performed in accordance with professional standards, provides evidence to support the audit opinion, helps
the auditor to manage the audit process effectively, and helps to minimize the risk of legal or professional
liability.

However, a disadvantage of complying with SA 230 is that it can be time-consuming to prepare and
maintain comprehensive audit documentation, and it may be difficult to balance the need for sufficient
documentation with the need for efficiency in the audit process. Additionally, if audit documentation is not
maintained properly, it may lead to legal or professional liability for the auditor.

Audit evidence
Audit evidence is the documentation collected by an auditor as part of his or her review of the financial
accounts, internal controls, and other matters needed to certify a client’s financial statements. The amount
and type of audit evidence collected varies by client, depending on the type of industry, the condition of
the client’s financial system, and the type of audit. The amount of evidence collected must provide a
reasonable basis for the auditor’s opinion. Once collected, the audit evidence is assembled into the
auditor’s working papers.

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Auditor’s Judgement while Obtaining Audit Evidence

The auditor should evaluate whether he has obtained sufficient appropriate audit evidence so that
reasonable conclusions can be drawn therefrom. It is to be noted that sufficiency and appropriateness are
interrelated and apply to evidence obtained from both substantive and compliance procedures. The
following factors influence auditor’s judgement while obtaining audit evidence.

 the nature of the item;

 the adequacy of internal controls;
 the nature and size of the business carried on by the entity;
 Situations which may exert an unusual influence on the management;
 The financial position of the entity;
 The materiality of the item;
 The experience gained during the previous audits;
 The results of auditing procedures, including fraud or error which may have been found;
 The type of information available;
 The trend indicated by accounting ratios and analysis.

Methods of Obtaining Audit Evidence

Inspection
 Inspection involves examining records or documents, whether internal or external, in paper form,
electronic form, or other media, or physically examining an asset.
 Inspection of records and documents provides audit evidence of varying degrees of reliability,
depending on their nature and source and, in the case of internal records and documents, on the
effectiveness of the controls over their production.
 An example of inspection used as a test of controls is inspection of records for evidence of
authorization.

Observation
 Observation consists of looking at a process or procedure being performed by others, e.g., the
auditor's observation of inventory counting by the company's personnel or the performance of
control activities.
 Observation can provide audit evidence about the performance of a process or procedure, but the
evidence is limited to the point in time at which the observation takes place and also is limited by
the fact that the act of being observed may affect how the process or procedure is performed

Inquiry
 Inquiry consists of seeking information from knowledgeable persons in financial or nonfinancial
roles within the company or outside the company.
 Inquiry may be performed throughout the audit in addition to other audit procedures. Inquiries may
range from formal written inquiries to informal oral inquiries.
 Evaluating responses to inquiries is an integral part of the inquiry process.

Note: Inquiry of company personnel, by itself, does not provide sufficient audit evidence to reduce audit
risk to an appropriately low level for a relevant assertion or to support a conclusion about the effectiveness
of a control.

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Confirmation
A confirmation response represents a particular form of audit evidence obtained by the auditor from a third
party in accordance with PCAOB standards.

Recalculation
Recalculation consists of checking the mathematical accuracy of documents or records. Recalculation may
be performed manually or electronically.

Re performance
Re performance involves the independent execution of procedures or controls that were originally
performed by company personnel.

Analytical Procedures
 Analytical procedures consist of evaluations of financial information made by a study of plausible
relationships among both financial and nonfinancial data.
 Analytical procedures also encompass the investigation of significant differences from expected
amounts.

Audit note book

An audit notebook, also known as an audit working paper notebook, is a physical or electronic notebook
used by the auditor to document their work during the audit process. It is an important tool for maintaining
a clear and comprehensive record of the audit procedures performed, the evidence obtained, and any
significant findings or issues identified.

Key features of an audit notebook

 Organization: The audit notebook should be well-organized, with clear headings and sections for
each area of the audit. This helps the auditor to quickly locate relevant information and ensures that
all necessary information is included.
 Detailed notes: The auditor should take detailed notes during the audit process, including the
nature, extent, and timing of the audit procedures performed, the evidence obtained, and any
significant findings or issues identified. These notes should be legible and clearly written, with
sufficient detail to provide a clear record of the audit work performed.
 Cross-referencing: The auditor should cross-reference their notes with other audit working papers,
such as financial statements, contracts, and invoices, to ensure that all relevant information is
included in the audit file.
 Timeliness: The auditor should update the audit notebook on a timely basis, preferably at the end
of each day or after completing a significant portion of the audit work. This helps to ensure that all
relevant information is captured while it is still fresh in the auditor's mind.
 Confidentiality: The auditor should take steps to ensure the confidentiality and security of the audit
notebook, particularly if it contains sensitive or confidential information.

Vouching
Accounting entries made in the books must be supported by documentary evidence and inspection of that
evidence is called vouching. The Auditor judges the authenticity, of the accounting entries using the

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technique of vouching. In case of unavailability of proper supporting documents, the Auditor may have all
reasons to doubt about errors or fraud or manipulation.

Thus, auditing is incomplete without vouching.

In auditing process, based on evidence, there are two main functions

 Collection of evidences − through observation, confirmation, inspection, inquiry.

 Evaluation of evidences − with relevance, adequacy and validity.

Objective of Vouching
 To check whether all the business transactions are properly recorded in the books of accounts or not
 To see whether recorded transactions are duly supported by documentary evidence or not.
 To verify that all the documentary evidence is authenticated and related to business transactions
only.
 To verify that transactions are free from errors or frauds.
 To verify whether voucher is processed through all the stages of Internal Check system properly.
 To verify and confirm that the entries are recorded according to the capital and the revenue nature
or not.
 To check the accuracy of accounting transactions.

Verification
Verification, in the context of auditing, refers to the process of checking the accuracy and completeness of
financial statements and other financial information. It involves obtaining and evaluating evidence to
support the amounts and disclosures presented in the financial statements.

The process of verification typically involves the following steps

 Obtaining evidence: The auditor obtains evidence to support the financial statements, including
documents such as bank statements, invoices, contracts, and other relevant records.
 Evaluating evidence: The auditor evaluates the evidence obtained to determine whether it is
sufficient, reliable, and relevant. This involves considering factors such as the source of the evidence,
the controls in place over the information, and the nature and extent of the procedures performed.
 Testing balances and transactions: The auditor tests individual balances and transactions to verify
their accuracy and completeness. This may involve procedures such as reconciling account balances,
verifying the existence and ownership of assets, and confirming transactions with third parties.
 Assessing internal controls: The auditor assesses the effectiveness of the client's internal controls
over financial reporting, including their design and implementation. This helps to identify any
weaknesses or deficiencies in the controls that could lead to material misstatements in the financial
statements.
 Forming an opinion: Based on the evidence obtained and the results of the testing and
assessment, the auditor forms an opinion on the accuracy and completeness of the financial
statements. This opinion is communicated in the auditor's report, which accompanies the financial
statements.

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Auditing and Assurance Standards Board (AASB)

The Institute of Chartered Accountants of India (ICAI) is a statutory body established by an Act of
Parliament, viz. The Chartered Accountants Act, 1949 (Act No.XXXVIII of 1949) for regulating the profession
of Chartered Accountancy in the country. The Institute, functions under the administrative control of the
Ministry of Corporate Affairs, Government of India. The ICAI is the second largest professional body of
Chartered Accountants in the world, with a strong tradition of service to the Indian economy in public
interest.

In July 2002, APC was converted into the Auditing and Assurance Standard Board (AASB). The composition
of the AASB is fairly broad- based and attempts to ensure participation of all interest groups in the standard
setting process. Apart from the elected members of the Council of The Institute of Chartered Accountant of
India, the Board includes members from profession, members from SEBI, RBI, IRDA, IIM, industry association
etc.

Objective
 To review the existing and emerging auditing practices worldwide and identify areas in which
Standards on Quality Control, Engagement Standards and Statements on Auditing need to be
developed.
 To formulate Engagement Standards, Standards on Quality Control and Statements on Auditing so
that these may be issued under the authority of the Council of the Institute.
 To review the existing Standards and Statements on Auditing to assess their relevance in the
changed conditions and to undertake their revision, if necessary.
 To develop Guidance Notes on issues arising out of any Standard, auditing issues pertaining to any
specific industry or on generic issues, so that those may be issued under the authority of the Council
of the Institute.
 To review the existing Guidance Notesa to assess their relevance in the changed circumstances and
to undertake their revision, if necessary.
 To formulate General Clarifications, where necessary, on issues arising from Standards.
 To formulate and issue Technical Guides, Practice Manuals, Studies and other papers under its own
authority for guidance of professional accountants in the cases felt appropriate by the Board.

Audit Sampling
Audit sampling is the use of an audit procedure on a selection of the items within an account balance or
class of transactions. The sampling method used should yield an equal probability that each unit in the
sample could be selected. The intent behind doing so is to evaluate some aspect of the information. Audit
sampling is needed when population sizes are large, since examining the entire population would be highly
inefficient.

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Types of sampling technique

 Block Sampling
Under block sampling, consecutive series of items are selected for review. Though this approach
may be efficient, there is a risk that a block of items will not reflect the characteristics of the entire
population.

 Haphazard Sampling
Under haphazard sampling, there is no structured approach to how items are selected. However, the
person doing the selections will probably skew the selections (even if inadvertently), so the
selections are not truly random.

 Personal Judgment
Under the personal judgment approach, the auditor uses her own judgment to select items, perhaps
favoring items that have larger monetary values or which appear to have a higher level of risk
associated with them.

 Random Sampling
Under random sampling, a random number generator is used to make selections. This approach is
the most theoretically correct, but can require more time to make selections.

 Stratified Sampling
Under stratified sampling, the auditor splits the population into different sections (such as high
value and low value) and then selects from each section.

 Systematic Sampling
Under systematic sampling, selections are taken from the population at fixed intervals, such as every
20th item. This tends to be a relatively efficient sampling technique.

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Risk Associated with Sampling

Sampling is a technique used by auditors to select a representative subset of data from a larger population
to gather evidence and draw conclusions about the entire population. While sampling can be an efficient
and effective way to perform audit procedures, there are also risks associated with this technique. Here are
some of the risks associated with sampling as outlined in SA 500:

 Sampling risk: Sampling risk is the risk that the sample selected is not representative of the entire
population, leading to incorrect conclusions. This risk can be mitigated by using appropriate
sampling techniques, ensuring the sample is sufficiently large, and testing additional items if
necessary.
 Non-sampling risk: Non-sampling risk is the risk of errors or biases in the auditor's judgment or
procedures, independent of the sampling technique used. This can include errors in the selection of
the sample, incorrect interpretation of the results, or failure to perform appropriate audit
procedures. Non-sampling risk can be minimized by following appropriate audit procedures and
maintaining professional skepticism.
 Detection risk: Detection risk is the risk that the auditor fails to detect material misstatements in the
financial statements. Sampling can reduce the risk of detection, but it cannot eliminate it completely.
This risk can be mitigated by using appropriate sampling techniques and performing additional
procedures as necessary.
 Inherent risk: Inherent risk is the risk that material misstatements exist in the financial statements
due to factors such as the nature of the business or industry. Sampling may not adequately address
inherent risk, so additional procedures may be necessary to reduce this risk.
 Confirmation bias: Confirmation bias is the risk that the auditor unconsciously selects or interprets
evidence that confirms their preconceived notions or expectations. This risk can be mitigated by
maintaining objectivity and using appropriate sampling techniques to avoid bias in the selection of
the sample.

Stages in Audit Sampling

Audit sampling is a technique used by auditors to select a representative subset of data from a larger
population to gather evidence and draw conclusions about the entire population. The following are the
stages involved in audit sampling:

 Planning: The first stage in audit sampling is planning. This involves identifying the objective of the
audit, determining the population to be sampled, and selecting an appropriate sampling method.
The auditor should also consider factors such as the level of materiality, the risk of misstatement,
and the desired level of assurance when planning the audit sample.
 Sample selection: The next stage in audit sampling is sample selection. The auditor selects a sample
of items from the population to be tested using the selected sampling method. The sample should
be representative of the population and should be selected without bias.
 Performing audit procedures: The third stage in audit sampling is performing audit procedures.
The auditor performs tests of controls or substantive procedures on the sample selected to gather
evidence about the population. The results of the procedures are evaluated to draw conclusions
about the population.

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 Evaluation of results: The fourth stage in audit sampling is the evaluation of results. The auditor
evaluates the results of the audit procedures performed on the sample to determine the overall
reliability of the population. The auditor also considers any errors or exceptions identified during the
testing and determines their impact on the financial statements.
 Documentation: The final stage in audit sampling is documentation. The auditor documents the
audit sampling procedures performed, the results obtained, and any conclusions reached. The
documentation should provide sufficient evidence to support the auditor's opinion in the audit
report.

Analytical procedure

Analytical procedures are formulas and processes that compare financial data to non-financial data in
order to determine relationships between the two. Examples of non-financial data that can affect an
organization's financial statements and taxes include contract compliance, energy consumption and the
percentage of women in leadership positions. Companies can benefit from tax breaks if they meet certain
qualifications regarding these issues, and they must follow specific protocols to maintain eligibility.

Analytical procedures also help auditors investigate variations in figures that have shown
consistency in the past or do not correlate with other values. If a long-term client, for instance, reports a
substantial change in income, the auditor may research the origin of the additional funding to make sure it
comes from a legitimate source and reflects valid information about the client's financial state. Auditors use
three types of analytical procedures, and each serves a different purpose. They include:

 Preliminary analytical review: Auditors conduct risk assessments, known as preliminary analytical
reviews, to plan and time their strategies for conducting an initial analysis.
 Substantive analytical procedures: Auditors use substantive analytical procedures to gather
information and determine if they need to conduct substantive testing. Sometimes, they can use
analytical methods alone to come to a conclusion.
 Final analytical review: Auditors use final analytical reviews at the end of the audit to review their
work and check for inaccuracies. If they find errors, they complete the risk assessment process again.

Types

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 Trend Analysis: Trend analysis involves comparing financial data from one period to another to
identify trends or changes over time. This can help auditors and analysts to identify areas of concern
or to assess the reasonableness of financial statement balances.
 Ratio Analysis: Ratio analysis involves the comparison of financial ratios to industry benchmarks,
prior year results, or other relevant factors. This can help auditors and analysts evaluate an
organization’s financial health and identify potential risk areas.
 Regression Analysis: Regression analysis involves using statistical techniques to identify
relationships between different financial variables. This can help auditors and analysts to identify
potential areas of concern or to develop predictive models.
 Variance Analysis: Variance analysis involves comparing actual financial results to budgeted or
expected results to identify areas of variance. This can help auditors and analysts identify areas of
concern or assess internal controls’ effectiveness.
 Reasonableness Analysis: Reasonableness analysis involves comparing financial information to
external data sources, such as industry averages or publicly available financial information. This can
help auditors and analysts to evaluate the reasonableness of financial statement balances and to
identify potential areas of risk.

Purpose of Analytical Procedures

 To use as risk assessment procedures to obtain an understanding of the client and the risks that the
client exposes to.
 To assess the risks of material misstatements that could occur on the financial statements at the
planning stage of the audit.
 To obtain audit evidence as substantive analytical procedures at the evidence-gathering stage of the
audit.
 To form an overall conclusion whether the financial statements are consistent with auditors’
understanding of the client at the end of the audit.

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Analytical Procedures in Audit Process

Auditor’s liabilities
A Chartered Accountant is associated with the valuable profession. His primary duty is to present a report
on the accounts and statements submitted by him to members of the company. He is responsible not only
to the members of the company but also to the third parties of the company, i.e., creditors, bankers etc.

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Normally the liability of auditor based on the work done by him as professional accountant and carry out
his work due care, caution and diligence.

Civil Liability

Liability for Negligence

 Negligence means breach of duty.
 An auditor is an agent of the shareholders.
 He has to perform his professional duties.
 He should take reasonable care and skill in the performance of his duties.
 If he fails to do so, liability for negligence arises.
 An auditor will be held liable if the client has suffered loss due to his negligence.
 It should be noted that an auditor will not be liable to compensate the loss or damage if his
negligence is not proved.

Liability for Misfeasance

 Misfeasance means breach of trust.

 If an auditor does something wrongfully in the performance of his duties resulting in a financial loss
to the company, he is guilty of misfeasance.
 In such a case, the company can recover damages from the auditor or from any officer for breach of
trust or misfeasance of the company.
 Misfeasance proceedings can be initiated against the auditor for any untrue statement in the
prospectus or in the event of winding up of the company.

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Liabilities under Companies Act

Liability for Misstatements in the Prospectus [Sec.35]

An auditor shall be held liable to compensate every person who subscribes for any shares or debentures of
a company on the faith of the prospectus containing an untrue statement made by him as an expert. The
auditor shall be liable to compensate him for any loss or damages sustained by him by reason of any untrue
statement included therein. The auditor may escape from liability if he proves that:

 The prospectus is issued without his knowledge or consent.

 He withdrew his consent, in writing before delivery of the prospectus for registration.
 He should have withdrawn his consent after issue of prospectus but before allotment of shares and
reasonable public notice has given by him regarding this.

Criminal Liability of Auditor under Companies Act

 Untrue statement in Prospectus [Sec.34]

The auditor is liable when he authorizes a false or untrue prospectus. When a prospectus includes
any untrue statement, every person who authorizes the issue of prospectus shall be imprisoned for a

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period of six months to ten years or with a fine, which may be three times the amount involved in
the fraud or with both.
 Noncompliance by auditor [Sec. 143 and 145]:
If the auditor does not comply regarding making his report or signing or authorization of any
document and makes willful neglect on his part he shall be punishable with imprisonment up to one
year or with fine not less than ₹. 25,000 extendable to ₹. 5, 00,000.
 Failure to assist investigation [Sec.217 (6)]
When Central Government appoints an Inspector to investigate the affairs of the company, it is the
duty of the auditor to produce all books, documents and to provide assistance to the inspectors. If
the auditor fails to do so he shall be punishable with imprisonment upto one year and with fine up
to ₹.1, 00,000.
 Failure to assist prosecution of guilty officers [Sec.224]
An auditor is required to assist prosecution when Central Government takes any action against the
report submitted by the Inspector. If he fails to do so, he is found guilty and is punishable.
 Failure to return property, books or papers [Sec.299]
When a company is wound up the auditor is supposed to be present and subject himself to a private
examination by the court and is also liable to return to the court any property, books or papers
relating to the company. If the auditor does not comply, he may be imprisoned.
 Penalty for falsification of books [Sec.336]
An auditor when destroys, mutilates, alters or falsifies or secrets any books of account or document
belonging to the company. He shall be punishable with imprisonment and also be liable to fine.
 Prosecution of auditor [Sec.342]
In the course of winding up of a company by the Tribunal, if it appears to the Tribunal that an
auditor of the company has been guilty of an offence, it shall be the duty of the auditor to give all
assistance in connection with the prosecution. If he fails to give assistance he shall be liable to fine
not less than ₹ 25,000 extendable upto ₹.1,00,000.
 Penalty for deliberate act of commission or omission [Sec.448]
If an auditor deliberately make a statement in any report, certificate, balance sheet, prospectus, etc
which is false or which contains omission of material facts, he shall be punishable with imprisonment
for a period of six months to ten years and fine not less than amount involved in fraud extendable to
three times of such amount.

Criminal Liability under Indian Penal Code

If any person issues or signs any certificate relating to any fact which such certificate is false, he is
punishable as if he gave false evidence. According to Sec.197 of the Indian Penal Code, the auditor is
similarly liable for falsification of any books, materials, papers that belongs to the company.

Liability under Income Tax Act [Sec.278]

 For tax evasion exceeds ₹.1,00,000, rigorous imprisonment of six months to seven years.
 A person who induces another person to make and deliver to the Income Tax authorities a false
account, statement or declaration relating to any income chargeable to tax which he knows to be

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false, he shall be liable to fine and imprisonment of three months to three years. An auditor may
also be charged in case of wrong certification of account.
 A Chartered Accountant can represent his clients before the Income Tax Authorities. However, if he
is guilty of misconduct he can be disqualified from practicing.
 An auditor can face imprisonment upto two years for furnishing false information.

Liability for Professional Misconduct

The Chartered Accountant Act, 1949 mentions number of acts and omissions that comprise professional
misconduct in relation to audit practice. The council of ICAI may remove the auditor’s name for five years or
more, if he finds guilty of professional misconduct.

Liability towards Third Parties

There are number of persons who rely upon the financial statements audited by the auditor and enter into
transactions with the company without further enquiry viz. creditors, bankers, tax authorities, prospective
shareholders, etc.

Liability for Negligence

It has been held in the court that auditor is not liable to third parties, as there is no contract between
auditor and third parties. He owes no duty towards them.

Liability for Frauds

The third parties can hold the auditor liable, if there is fraud on the part of auditor even if there is no
contractual relationship between auditor and third parties. In certain cases negligence of auditor may
amount to fraud for which he may be held liable to third parties. But it must be proved that auditor did not
act honestly and he knew about it.

Internal auditing
Internal auditing is an independent, objective assurance and consulting activity designed to add value and
improve an organization’s operations. It helps an organization accomplish its objectives by bringing a
systematic, disciplined approach to evaluate and improve the effectiveness of risk management, control,
and governance processes.

Performed by professionals with an in-depth understanding of the business culture, systems, and processes,
the internal audit activity provides assurance that internal controls in place are adequate to mitigate the
risks, governance processes are effective and efficient, and organizational goals and objectives are met.

Evaluating emerging technologies. Analyzing opportunities. Examining global issues. Assessing risks,
controls, ethics, quality, economy, and efficiency. Assuring that controls in place are adequate to mitigate
the risks. Communicating information and opinions with clarity and accuracy. Such diversity gives internal
auditors a broad perspective on the organization. And that, in turn, makes internal auditors a valuable
resource to executive management and boards of directors in accomplishing overall goals and objectives,
as well as in strengthening internal controls and organizational governance.

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Objectives of Internal Audit

The main purpose or objective of an Internal Audit comes as the provider of objective information to the
upper management, government bodies, etc. Such objective information includes that of the control over
the environment, risks for the organization, and much more. Each of the individuals who come for the
Internal Audit are known as Internal Auditors, who are themselves sent by their organization.

 Proper Control: To keep proper control over the organization is one of the main objectives of an
Internal Audit. The authenticity of the financial records and the efficiency of the firm have to be
maintained and the management needs proper assurance. The Internal Audit helps to establish
both.
 Perfect Accounting System: The accounting system of the organization is thoroughly checked by
an Internal Audit. From vouchers to the authority of transactions to accuracy in mathematics all
serve the purpose of Internal Audit. All entries are verified so that the chance of mistakes or frauds
can be reduced.
 Review of Business: The financial and operational aspects of a business is to be checked by the
Internal Audit. The Internal Audit process checks out the mistakes, strengths and weaknesses in the
business.
 Asset Protection: Internal Audit process performs the valuation and verification of an asset. In case
of any special transactions like purchase, sale or revaluation of assets, the authorization is audited
particularly by Internal Audit.
 Keep a Check on Errors: There will be mistakes in financial records and is checked at the end of a
financial year. But with Internal Audit, the mistakes are spotted and rectified immediately.
 Detection of Fraud: This is another main purpose of Internal Audit. In fact, Internal Audit is helpful
to the organization because due to its presence, an employee is less likely to do any fraudulent
activity. There will be no time in making fraud and how the Internal Audit process will run and so
this will end up committing less fraud in an organization.

Advantages of Internal Audit

Internal auditing is an independent, objective assurance and consulting activity designed to add value and
improve an organization's operations. Some of the advantages of internal auditing are:

 Improved internal controls: Internal auditing helps to identify weaknesses in the organization's
internal controls and recommend improvements to mitigate the risk of fraud, error, and non-
compliance.
 Increased efficiency and effectiveness: Internal auditing identifies areas where the organization
can improve its operations, increase efficiency, and reduce costs. This can lead to better resource
utilization and improved organizational performance.
 Risk management: Internal auditing helps to identify and evaluate the organization's risks, both
operational and strategic, and recommend measures to mitigate or manage these risks.
 Compliance: Internal auditing helps to ensure that the organization is complying with laws,
regulations, and internal policies and procedures. This can reduce the risk of penalties, fines, and
reputational damage associated with non-compliance.

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 Continuous improvement: Internal auditing helps to drive continuous improvement in the

organization by identifying areas for improvement and monitoring progress towards achieving
improvement objectives.
 Independent assurance: Internal auditing provides independent assurance to management and the
board of directors that the organization's internal controls and risk management processes are
functioning effectively.

Internal Control vs. Internal Check vs. Internal Audit

Aspect Internal Control Internal Check Internal Audit

Definition The process The review of The independent review by

implemented by transactions by auditors
management staff

Purpose To ensure that To detect and To provide assurance and

business objectives prevent errors consulting services to improve
are achieved by and frauds operations, manage risks and
managing risks ensure compliance

Scope Covers all business Focused on Covers all business processes

processes specific
transactions
Nature Ongoing process Ongoing process Periodic activity

Responsibility Management Staff Independent auditors

Reporting Reported to Reported to Reported to management and

management management stakeholders

Timing of Continuous Continuous Periodic

review

Type of Self-review and review Self-review Review by independent auditors

review by others

Traditional Internal Audit vs. Risk Based Internal Audit

Aspect Traditional Internal Audit Risk-Based Internal Audit

Definition A routine audit of financial An audit that identifies and assesses risks
statements and controls and adjusts audit procedures accordingly

Approach Comprehensive and systematic Focused on high-risk areas

Scope Broad scope, covering all areas Narrow scope, focusing on high-risk areas
of the organization

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Risk Assessment Limited risk assessment Comprehensive risk assessment

Planning Based on prior audit experience Based on risk assessment and audit plan
and audit plan

Testing Emphasis on testing controls and Emphasis on testing high-risk areas and
transactions related controls

Reporting Identifies control weaknesses Focuses on significant risks and their

and makes recommendations potential impact on the organization

Benefits Identifies control weaknesses Provides assurance that high-risk areas are
and recommends improvements effectively managed

Limitations May miss significant risks Requires a high level of expertise and
resources

Continuous Focuses on process Encourages continuous improvement in risk

Improvement improvement management and control

Special audit
An audit that has a narrow focus and only examines one particular aspect of an organization’s operations is
called a special audit. This kind of audit may be directed by a government body, but it may also be
authorized by any entity or even internally within an organization. In this blog, we discuss the meaning and
types of special audits.

Compensation audit
Compensation audit allows for the yearly examination or audit of employee salary, bonus, incentive, and
stock option programs in order to assess their efficiency, competitiveness, and legal compliance.

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Compliance audit
 A compliance audit is a type of audit in which the purpose is to evaluate whether or not an
organization is following the terms of a contract or certain rules and regulations.
 Compliance audits may be used by regulatory agencies to determine if a business is in compliance
with the requirements of its operating license.
 The basic objective of a compliance audit is to evaluate an organization’s conformity to laws, norms,
internal bylaws, and codes of conduct.
 As far as Indian laws are concerned, an audit that checks compliance with the Companies Act is
termed a secretarial audit.

Construction audit
 A construction audit, as the name implies, is performed to assess the costs of any given construction
project.
 It deals with keeping track of various construction costs such as payments made to suppliers,
contractors, and so on.
 To determine the authenticity of construction expenses, the costs as recorded in the books are
compared to the actual papers.

Internal audit
 An internal audit can be used to evaluate an organization’s performance or the execution of a
process against a set of standards, policies, metrics, or guidelines.
 These audits may include an examination of a company’s internal controls in the areas of corporate
governance, accounting, financial reporting, and IT general controls.

Cost audit
 We all know that audit involves verification and examination.
 When this concept of auditing is applied to cost records, it becomes a more specific and specialized
form of audit activity. It is named cost audit.
 A cost audit is an audit of cost records on the utilization of materials, labor, overheads, and other
items of cost applicable to the production of goods.
 It checks whether the cost accounting system followed in the company serves as a correct basis for
ascertaining the cost of production.

Fraud audit
 It is a special form of investigation to identify whether or not there is any fraudulent activity in any
particular area of financial statements.
 Fraud can be done in a variety of ways, including falsifying accounting records, misusing assets, and
passing fictional journal entries to conceal fraudulent activities.
 As a result, if the entity finds that management or officials are involved in fraud, a special audit to
investigate such fraud can be undertaken.
 A fraud audit involves checking any specific area of finance that is likely to be affected.
 For example, if a cashier steals cash and escapes, a fraud audit will be conducted to determine how
much money was taken away by theft, to carry out a detailed analysis of cash records handled by
the cashier, and to investigate the tasks previously performed by the cashier, etc.

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Information systems audit

 An information systems audit is required to ensure that the information systems are running
properly and that there are no errors or malfunctions in the system.
 This particular audit is important for determining whether general controls connected to software
development are functioning properly or not.
 An information systems audit is also performed to assess various controls such as data processing,
software applications, IT infrastructure, access to information systems, and so on.

Royalty audit
A royalty audit is a financial verification that determines whether a licensee (user of a patent, license, or
franchise) is paying the licensor (owner of the patent, license, or franchise) the correct amount of fees that
have been agreed upon in the agreement they have in place for use of the patent, license, or franchise.

Income Tax audit

The verification of the books of accounts maintained by a taxpayer is referred to as a tax audit. The goal of
a tax audit is to validate the taxpayer’s income tax computation in the income tax return and to ensure
compliance with the relevant laws of Income Tax. The books of accounts must be audited by a professional
Chartered Accountant.

GST audit
 In terms of indirect tax regulations in India, the Assistant Commissioner of CGST/SGST can initiate a
Special Audit under GST [Section 66 of the CGST Act 2017], taking into account the nature and
complexity of the case as well as the interest of revenue.
 If the Assistant Commissioner believes that the value of the taxable supplies disclosed by the
registered person is erroneous or that the input tax credit has been improperly claimed, a special
audit can be undertaken at any stage of scrutiny/inquiry/investigation.

Questions

1. What is an audit?

a) A process that involves verifying an organization's financial records

b) A process of analyzing business operations to identify inefficiencies and improve overall performance

c) A process of reviewing an organization's marketing strategies

d) A process of evaluating an organization's human resources practices

2. What is the primary objective of an audit?

a) To detect fraud

b) To express an opinion on the financial statements

c) To provide consulting services to the organization

d) To prepare financial statements

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3. What is the difference between an internal audit and an external audit?

a) Internal audits are performed by employees of the organization, while external audits are performed by
independent auditors.

b) Internal audits are focused on financial statements, while external audits are focused on business
operations.

c) Internal audits are optional, while external audits are mandatory.

d) Internal audits are performed annually, while external audits are performed bi-annually.

4. Which of the following is not an example of an internal control?

a) Segregation of duties

b) Regular reconciliation of accounts

c) Hiring an external auditor

d) Authorization and approval procedures

5. What is the difference between a financial audit and a compliance audit?

a) A financial audit focuses on an organization's financial statements, while a compliance audit focuses on
whether the organization is complying with laws and regulations.

b) A financial audit is conducted by internal auditors, while a compliance audit is conducted by external
auditors.

c) A financial audit is focused on identifying fraud, while a compliance audit is focused on operational
inefficiencies.

d) A financial audit is conducted annually, while a compliance audit is conducted bi-annually.

6. What is the role of the auditor in an audit engagement?

a) To identify fraud and other illegal activities

b) To prepare financial statements

c) To express an opinion on the financial statements

d) To provide consulting services to the organization

7. What is a materiality threshold?

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a) The amount of money, or level of significance, used to determine if a misstatement in the financial
statements is significant enough to affect the decision-making of users of those financial statements.

b) The maximum amount of money that an auditor is willing to spend on an audit engagement.

c) The minimum level of education and experience required for an auditor to perform an audit engagement.

d) The percentage of the organization's total assets that must be audited each year.

8. What is the purpose of the audit planning process?

a) To determine the scope of the audit engagement

b) To identify potential risks and material misstatements in the financial statements

c) To develop an audit program that outlines the procedures to be performed during the audit

d) All of the above

9. What is the difference between a test of controls and a substantive test?

a) A test of controls evaluates the design and implementation of internal controls, while a substantive test
examines specific transactions and account balances for material misstatements.

b) A test of controls is performed during the planning stage of the audit, while a substantive test is
performed during the execution stage of the audit.

c) A test of controls is a more reliable way to detect fraud than a substantive test.

d) A test of controls and a substantive test are the same thing.

10. What is a walkthrough?

a) A test of controls that involves tracing a transaction through the organization's accounting system

b) An audit procedure that involves following a transaction from initiation to recording in the financial
statements

c) An evaluation of the design and implementation of internal controls

d) A review of the organization's financial statements by an external auditor

11. What is the purpose of a management representation letter?

a) To provide evidence of management's acknowledgement of its responsibility for the financial statements

b) To provide evidence of management's cooperation during the audit engagement

c) To confirm the accuracy of the financial statements

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d) All of the above

12. What is a significant deficiency in internal control?

a) A material misstatement in the financial statements that is not corrected by management

b) A weakness in internal control that is less severe than a material weakness

c) A fraud committed by an employee of the organization

d) A violation of a law or regulation by the organization

13. What is a material weakness in internal control?

a) A weakness in internal control that is less severe than a significant deficiency

b) A fraud committed by management

c) A deficiency in internal control that results in a material misstatement in the financial statements

d) A violation of a law or regulation by the organization

14. What is the purpose of an analytical review?

a) To test the accuracy of specific transactions and account balances

b) To evaluate the design and implementation of internal controls

c) To assess the reasonableness of financial statement amounts and ratios

d) To determine the likelihood of fraud occurring in the organization

15. What is the purpose of substantive procedures?

a) To evaluate the design and implementation of internal controls

b) To identify potential risks and material misstatements in the financial statements

c) To provide assurance that the financial statements are free from material misstatements

d) To detect fraud in the organization

16. What is the difference between a Type 1 and a Type 2 subsequent event?

a) A Type 1 subsequent event occurs after the balance sheet date but before the audit report date, while a
Type 2 subsequent event occurs after the audit report date.

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b) A Type 1 subsequent event is a known event that provides additional evidence about conditions that
existed at the balance sheet date, while a Type 2 subsequent event is a new event that occurred after the
balance sheet date.

c) A Type 1 subsequent event requires an adjustment to the financial statements, while a Type 2 subsequent
event requires only disclosure in the footnotes to the financial statements.

d) A Type 1 subsequent event is more significant than a Type 2 subsequent event.

17. Which of the following is a responsibility of management in relation to the audit of financial
statements?

a) Determining the scope of the audit

b) Providing assurance on the accuracy of the financial statements

c) Designing and implementing effective internal controls

d) Preparing the financial statements in accordance with generally accepted accounting principles

18. What is the purpose of a management representation letter?

a) To confirm the accuracy of the financial statements

b) To acknowledge the responsibility of management for the financial statements

c) To provide additional evidence to support the auditor's opinion

d) To identify potential fraud risks in the organization

19. Which of the following is an example of an inherent risk?

a) Inadequate internal controls over financial reporting

b) The use of estimates in the financial statements

c) Fraud committed by an employee of the organization

d) Changes in economic conditions that affect the organization's business

20. What is the purpose of a compliance audit?

a) To evaluate the design and implementation of internal controls

b) To provide assurance that the financial statements are free from material misstatements

c) To determine whether an organization is complying with laws, regulations, and contractual agreements

d) To detect fraud in the organization

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Answer Keys

1. Answer: a) A process that involves verifying an organization's financial records

Explanation: An audit is a systematic and independent examination of an organization's financial
records and activities to ensure that the financial statements are accurate and comply with relevant
laws and regulations.
2. Answer: b) To express an opinion on the financial statements
Explanation: The primary objective of an audit is to express an opinion on the financial statements
of an organization, based on an examination of its financial records and activities.
3. Answer: a) Internal audits are performed by employees of the organization, while external audits
are performed by independent auditors.
Explanation: Internal audits are conducted by employees of the organization to evaluate internal
controls and identify areas of improvement, while external audits are conducted by independent
auditors to express an opinion on the organization's financial statements.
4. Answer: c) Hiring an external auditor
Explanation: Hiring an external auditor is not an example of an internal control, but rather an
external control. Internal controls are processes and procedures implemented by an organization to
ensure that its operations are conducted in an efficient and effective manner, and to protect its
assets.
5. Answer: a) A financial audit focuses on an organization's financial statements, while a compliance
audit focuses on whether the organization is complying with laws and regulations.
Explanation: A financial audit examines an organization's financial records and activities to ensure
that its financial statements are accurate and comply with relevant laws and regulations. A
compliance audit, on the other hand, focuses on whether an organization is complying with laws
and regulations that are relevant to its operations.
6. Answer: c) To express an opinion on the financial statements
Explanation: The role of the auditor in an audit engagement is to express an opinion on the
financial statements of an organization, based on an examination of its financial records and
activities.
7. Answer: a) The amount of money, or level of significance, used to determine if a misstatement in
the financial statements is significant enough to affect the decision-making of users of those
financial statements.
Explanation: The materiality threshold is a key concept in auditing, as it helps auditors determine
the significance of any misstatements found in an organization's financial statements. It is typically
expressed as a percentage of a financial statement item, such as revenue or net income.
8. Answer: d) All of the above
Explanation: The audit planning process is a critical step in the audit engagement, as it helps
auditors determine the scope of the engagement, identify potential risks and material
misstatements in the financial statements, and develop an audit program that outlines the
procedures to be performed during the audit.

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9. Answer: a) A test of controls evaluates the design and implementation of internal controls, while a
substantive test examines specific transactions and account balances for material misstatements.
Explanation: A test of controls is performed to evaluate the design and implementation of internal
controls, while a substantive test examines specific transactions and account balances for material
misstatements. Both types of tests are necessary to provide reasonable assurance that the financial
statements are free from material misstatements.
10. Answer: b) An audit procedure that involves following a transaction from initiation to recording in
the financial statements
Explanation: A walkthrough is an audit procedure that involves following a transaction from
initiation to recording in the financial statements to gain an understanding of the organization's
accounting system and identify potential weaknesses in internal controls.
11. Answer: d) All of the above
Explanation: A management representation letter is a letter from management that confirms its
acknowledgement of its responsibility for the financial statements, provides evidence of its
cooperation during the audit engagement, and confirms the accuracy of the financial statements.
12. Answer: b) A weakness in internal control that is less severe than a material weakness
Explanation: A significant deficiency in internal control is a weakness in internal control that is less
severe than a material weakness, but still important enough to merit attention by management and
the auditor. It may increase the risk of material misstatements in the financial statements.
13. Answer: c) A deficiency in internal control that results in a material misstatement in the financial
statements
Explanation: A material weakness in internal control is a deficiency in internal control that results in
a material misstatement in the financial statements. It is a more severe weakness than a significant
deficiency and represents a significant risk to the organization's financial reporting.
14. Answer: c) To assess the reasonableness of financial statement amounts and ratios
Explanation: An analytical review is performed to assess the reasonableness of financial statement
amounts and ratios. It involves comparing current period financial information to prior period
information, industry benchmarks, and other relevant data to identify any unusual trends or
transactions that may indicate a risk of material misstatement.
15. Answer: c) To provide assurance that the financial statements are free from material misstatements
Explanation: Substantive procedures are performed to provide assurance that the financial
statements are free from material misstatements. These procedures involve testing specific
transactions and account balances for accuracy and completeness.
16. Answer: b) A Type 1 subsequent event is a known event that provides additional evidence about
conditions that existed at the balance sheet date, while a Type 2 subsequent event is a new event
that occurred after the balance sheet date.
Explanation: A Type 1 subsequent event is a known event that provides additional evidence about
conditions that existed at the balance sheet date, while a Type 2 subsequent event is a new event
that occurred after the balance sheet date. A Type 1 subsequent event requires an adjustment to the
financial statements if the event provides additional evidence about conditions that existed at the
balance sheet date and affects the estimates used in the financial statements. A Type 2 subsequent
event requires disclosure in the footnotes to the financial statements, but does not require an
adjustment to the financial statements.
17. Answer: c) Designing and implementing effective internal controls

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Explanation: It is the responsibility of management to design and implement effective internal

controls to ensure the accuracy and completeness of the financial statements. Management is also
responsible for preparing the financial statements in accordance with generally accepted accounting
principles, but it is the auditor's responsibility to provide assurance on the accuracy of the financial
statements.
18. Answer: b) To acknowledge the responsibility of management for the financial statements
Explanation: A management representation letter is a written communication from management to
the auditor that acknowledges management's responsibility for the financial statements and
provides other representations about matters relevant to the audit. It is not intended to confirm the
accuracy of the financial statements or provide additional evidence to support the auditor's opinion.
19. Answer: d) Changes in economic conditions that affect the organization's business
Explanation: Inherent risk is the risk of material misstatement in the financial statements that exists
independent of the effectiveness of internal controls. Examples of inherent risk include changes in
economic conditions that affect the organization's business, the complexity of the transactions
involved, and the nature of the organization's operations.
20. Answer: c) To determine whether an organization is complying with laws, regulations, and
contractual agreements
Explanation: A compliance audit is performed to determine whether an organization is complying
with laws, regulations, and contractual agreements. It is not focused on the financial statements, but
rather on the organization's adherence to specific requirements or standards. The auditor provides
an opinion on whether the organization is in compliance with the applicable requirements or not.

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Chapter: II
Company audit
Eligibility, qualification and disqualification of auditor [section141]

Qualifications of an auditor [Section 141(1) & (2)]

There are certain conditions that must be fulfilled with a view to successfully qualify to be appointed as an
Auditor in a company.

The conditions are

an individual shall be considered eligible to be appointed as company’s auditor if he mandatorily fulfils

certain conditions prescribed under the Chartered Accountants Act (or CA Act), 1949 and further possesses
a valid certificate of practice as-

 An individual, or
 In a partnership firm (a business entity of which majority of partners practicing in India are
considered qualified for such appointment), or
 In a limited liability partnership (where an LLP is being appointed as a company’s auditor, then only
the partners who are qualified chartered accountants (or abbreviated as CAs) shall be accredited
with acting and signing on firm’s behalf).

Disqualifications of auditors [Section 141(3)]

The following individuals shall not be considered qualified for appointment as a company’s auditor.

 Body corporate-A body corporate except LLP registered under LLP Act, 2008 shall not be considered
eligible for appointment as auditor.
 A body corporate, except Limited Liability Partnership.
 An officer or employee of the company;
 A person who is a partner of an officer or employee of the company.
 A person who is a relative or his partner of a company or holding or subsidiary company or
associate company is disqualified in the following circumstances:
 When he is holding any security, or
 When he is indebted in excess of Rs.5,00,000, or
 When he is given a guarantee or provided any security in connection with indebtedness in excess of
Rs.1, 00,000.
 A person or a firm has business relationship of such nature with a company or holding or subsidiary
company or associate company.
 A person whose relative is a director or is in employment of the company as director or key
managerial personnel.

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 A person holding more than 20 company audit (20 company audit shall exclude one person
company, small company, dormant company, private company with paid up capital less than Rs.100
Crore).
 A person who has been convicted by a court of an offence involving fraud and a period of 10 years
has not elapsed from the date of such conviction.
 Any person who is engaged in consulting and specialized services.

Ceiling on number of audit section 141(3) (g)

Company audit ceiling limit or restriction on number of audits that an auditor can conduct is prescribed in
Section 141(3) (g) of the Companies Act 2013. Following are the provisions for company audit ceiling limit
under section 141(3) (g)

 A person having full time employment elsewhere, or a person or a partner of a firm holding
appointment as its auditor, if such person or partner is at the date of such appointment or
reappointment holding appointment as auditor of more than 20 companies then such person shall
not be eligible for appointment or reappointment as an auditor of company.
 This means an auditor shall not accept audit of more than 20 companies.
 However, the MCA has exempted the Dormant Company and One Person Company from this ceiling
limit. Also, the small companies and Private Limited Companies with less than 100 crores paid up
share capital are excluded from the limit.

Hence, now the ceiling limit for company audit only includes Public Limited Company and Private Limited
Company with 100 crores or more paid up share capital. However, As per Section 44AB of Income Tax Act,
1961, In order to maintain the quality of Tax Audit to be conducted by CAs, ICAI prescribed the maximum
amount of audit that an auditor can undertake is 60 in a year.

Subsequent disqualification after appointment: [section 141(4)]

Where a person appointed as an auditor of a company incurs any of the disqualifications mentioned in sub-
section (3) after his appointment, he shall vacate his office as such auditor and such vacation shall be
deemed to be a casual vacancy in the office of the auditor.

Appointment of auditor [section 139]

The Companies Act, 2013 (the “Act”), has laid down specific and onerous obligations on the company
and its auditors with stringent penalties, including imprisonment for non-compliance with the relevant
provisions for appointment of auditors. At the same time, compliances have been made simple, yet
comprehensive, to meet the contemporary need for good corporate governance practices.

Section 139 of the Act provides, every company shall, at its 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 sixth annual general meeting and there after till the conclusion of every sixth meeting

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Section 139 also provides that before such appointment is made, the written consent of the auditor to
such appointment, and a certificate from the individual auditor or the firm that the appointment, if made,
shall be in accordance with the following conditions be obtained.

Appointment of the First Auditor [Sec. 139(6)]

 The first auditor of a company, other than a Government company, shall be appointed by the Board
of Directors (only by BOD) within 30 days from the date of registration (i.e., Date of Incorporation) of
the company.
 In the case of failure of the Board to appoint such auditor, it shall inform the members of the
company, who shall appoint within 90 days at an extraordinary general meeting (EGM).
 The first auditor shall hold office from the date of appointment to till the conclusion of the first
AGM.

Appointment of the First Auditor of Government Company [Sec. 139(7)]

For a government company; or

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 First auditor shall be appointed by the CAG within 60 days from the date of registration of the
company.
 In case the CAG does not appoint such auditor within the said period, the Board of Directors of the
company shall appoint such auditor within 30 days.
 In the case of failure of the Board to appoint such auditor, it shall inform the members of the
company within the next 30 days and who shall appoint such auditor within the 60 days at an EGM.
 The auditor so appointed shall hold office from the date of appointment till the conclusion of the
1st AGM.

Appointment of Subsequent Auditor/Reappointment of Auditor

[Section 139(1) & Rules 3 and 4 of Companies (Audit and Auditors) Rules, 2014]

(1) Every company shall, at the First AGM, appoint an individual or a firm (includes LLP) as an auditor of
the company.

 Every company means ALL the companies incorporated under the Act which includes one-person
company, Sec. 8 company, etc.;
 Ordinary resolution is sufficient to appoint an auditor.

(2) The auditor shall hold office from the conclusion of 1st AGM till the conclusion of its 6th AGM (i.e.,
for 5 years); Appointment takes place only for 5 years, it means – No company can appoint auditor for less
than 5 years. The AGM, in which he is appointed is counted as 1st AGM.

Manner and Procedure for Appointment

[Rule 3 of Companies (Audit and Auditor’s) Rules, 2014]

The competent authority to appoint auditor is Audit committee of the company (if the company has); If it
does not have audit committee, Board of directors are competent authority.

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 The entity should obtain written consent and a certificate before the appointment is made at
AGM. Auditor should certify that

(a) Individual/firm is eligible for appointment and is not disqualified for appointment under

a. the Companies Act, 2013(i.e., compliance of Sec. 141);

b. the Chartered Accountants Act, 1949; and
c. the Rules or Regulations made there under;

(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 provided list of proceedings relating to professional matters of conduct against the auditor or audit
firm or any partner of the audit firm pending with respect to is true and correct.

After this

Company appoints the auditor at AGM by passing ordinary resolution and thereafter, the company should

1. Give the information of appointment to the auditor i.e., it should write a letter to the auditor by
attaching “extract of resolution in the minutes of AGM”; and
2. File Form ADT-1 of such appointment with the Registrar within 15 days of the meeting in which the
auditor is appointed. Form ADT -1 will be filed by the company only once in 5 years.

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Term & Rotation of Auditor

Sec. 139(2) & Rule 5 of Companies (Audit and Auditors) Rules, 2014

Rotation of auditors is a new topic introduced in the Companies Act, 2013. As per the section, a company
should rotate auditors after specified time. It means, the same auditor cannot continue forever. Let us get
into the details of the section.

TERM

Rotation is applicable only to

(1) Listed companies;

(2) Other prescribed class of companies (except one person & small companies)

a) all unlisted public companies having paid up share capital ≥ ` 10 crore;

b) all private limited companies having paid up share capital ≥ ` 50 crore; or
c) All companies having public borrowings from financial institutions, banks or public deposits ≥ ` 50
crores.

The above companies shall not 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

Appointment of Subsequent Auditors

In case of Government Company [Sec 139(5)]
For a government company; or

Auditor shall be appointed by C&AG within 180 days from the commencement of the financial year;

Tenure of office: From the date of appointment till the conclusion of the next AGM;

It means there is no concept appointment of 5 years/10 years; Rotation is also NOT applicable for government
auditors.

As per section 2(45), a ‘Government Company’ means a company in which

a) Not less than 51% of the paid-up share capital is held by the CG or by any SG(s) or partly by the CG
and partly by one or more SG(s); and

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b) Includes a subsidiary company of a government company.

Section 139(9) – Re-Appointment of Retiring Auditor

A retiring auditor may be re-appointed at an AGM, if:

(a) he is not disqualified for re-appointment;

(b) he has not expressed unwillingness to be re-appointed; and
(c) a resolution has not been passed at that meeting appointing some other auditor or providing
expressly that he shall not be re-appointed. This is like unwillingness of members.

Section 139(10) – No Auditors Appointed at AGM

If at any AGM, an auditor is NOT appointed or re-appointed, the existing auditor shall continue to be the
auditor of the company.

This is an exception to the basic rule. This will not be considered as an appointment for five years as it is not
an appointment at AGM; So, the tenure will be till the conclusion of next AGM. If the auditor is not
interested to continue, he can resign and automatically power goes to the Board of directors u/s 139(8) as it
amounts to casual vacancy.

Section 139(8) – Filling Up Casual Vacancy

What is casual vacancy?

The word “Casual vacancy” has not been defined in the Act.

In the general sense, it means

(a) An Auditor is validly appointed as per the Act;

(b) Such appointment is accepted by the auditor; and
(c) Subsequently, the auditor vacated the office.

General reasons for such vacancy could be death, disqualification, resignation, etc.

Tenure of office: From the date of appointment to till the conclusion of next AGM

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In case of a company whose accounts are subject to audit by an auditor appointed by CAG

(a) Casual vacancy should be filled by CAG only within 30 days;

(b) In case of failure in appointing – BOD shall fill the vacancy within next 30 days.

We must note that

(1) When the auditor appointed to fill up a casual vacancy but if he refuses to accept the same – this
appointment is not fully complete. It shall be deemed that the casual vacancy continues and has not been
filled up. It means filling casual vacancy will be complete after auditor accepted the appointment.

Rotation of auditor

Rotation of Auditors {Section 139(2)}

Applicability: Rotation of auditors will be applicable on the below mentioned class of companies:

 Listed company
 The following classes of companies excluding one person companies and small companies:

(a) all unlisted public companies having paid up share capital of Rs. 10 crore or more
(b) all private limited companies having paid up share capital of Rs. 50 crore or more
(c) all companies having paid up share capital of below threshold limit mentioned in (a) and (b) above,
but having public borrowings from financial institutions, banks or public deposits of Rs. 50 crores or
more

Non-Applicability: Rotation of auditors will not be applicable on the below mentioned class of companies:

 One Person Companies (OPC)

 Small Companies

‘‘Small company’’ means a company, other than a public company-

 paid-up share capital of which does not exceed fifty lakh rupees or such higher amount as may be
prescribed which shall not be more than Rs. 5 crore; or
 turnover of which as per its last profit and loss account does not exceed Rs. 2 crore or such higher
amount as may be prescribed which shall not be more than Rs. 20 crore:

Provided that nothing in this clause shall apply to—

 a holding company or a subsidiary company;

 a company registered under section 8; or
 a company or body corporate governed by any special Act;

Terms of Rotation: The class of companies on which this section is applicable which is prescribed above shall
not appoint or re-appoint: –

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 an individual as auditor for more than one term of five consecutive years (i.e. 5 years)
 an audit firm as auditor for more than two terms of five consecutive years (i.e.10 years)

Removal, resignation of auditor and giving special notices [section 140]

Removal of auditor
Section 140(1) of many Companies Acts sets out the provisions for the removal of an auditor before the
expiry of their term of office. The exact wording and requirements of Section 140(1) can vary depending on
the jurisdiction, but in general, it outlines the following:

 A company may remove its auditor before the expiry of their term of office by passing a resolution
at a general meeting of the company.
 The resolution must be passed by a special majority of shareholders, which is typically two-thirds or
three-quarters of the votes cast.
 The auditor must be given notice of the resolution and the reasons for their proposed removal.
 The auditor is entitled to attend the general meeting at which the resolution is proposed and to
make representations.
 The auditor may also submit a written statement to the company, which must be circulated to all
shareholders.

Resignation by auditor
Section 140(2) of many Companies Acts sets out the provisions for the resignation of an auditor. The exact
wording and requirements of Section 140(2) can vary depending on the jurisdiction, but in general, it
outlines the following:

 An auditor may resign from their office by giving notice in writing to the company.
 The notice must be submitted to the company's board of directors or, if there is no board, to the
company's officers.
 The auditor must also provide a copy of the notice to the company's auditor oversight body or
other regulatory authority, if required by law.
 The auditor's resignation takes effect on the date specified in the notice, which must not be less
than 14 days from the date the notice is received by the company.
 If the auditor's resignation is due to a disagreement with the company or its management, the
auditor may be required to provide a written statement to the company's shareholders explaining
the reasons for their resignation.

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Removal of auditor by the tribunal

Section 140(5) of many Companies Acts allows for the removal of an auditor by the tribunal, also known as
the court, in certain circumstances. The exact wording and requirements of Section 140(5) can vary
depending on the jurisdiction, but in general, it outlines the following:

 The tribunal may remove an auditor from office if it is satisfied that the auditor is incapable of
performing their duties, has acted in a manner that is contrary to the public interest, or has
breached any provision of the Companies Act or any other law.
 The tribunal may also remove an auditor if it is satisfied that the auditor has been involved in any
fraud or misconduct in relation to the company or its affairs.
 The tribunal may initiate proceedings to remove an auditor on its own motion or upon the
application of the company, a shareholder, or any other person with a sufficient interest in the
matter.
 The auditor must be given notice of the proceedings and an opportunity to be heard.
 The tribunal may make any order it considers appropriate, including the removal of the auditor from
office and the disqualification of the auditor from being appointed as an auditor of any company for
a specified period.

Appointment of auditor other retiring auditor

 Section 140(4) of the Companies Act 2013, deals with the appointment of an auditor in place of a
retiring auditor. According to this section, if a retiring auditor is not reappointed, the company must
within 15 days of receiving a notice of the retirement, notify the Registrar of Companies (ROC) of the
retirement and the appointment of a new auditor.
 The new auditor should be appointed by the company's Board of Directors within 30 days of the
notice of retirement of the previous auditor. The newly appointed auditor must hold office until the
conclusion of the next annual general meeting of the company.
 The company should also obtain a written consent from the new auditor regarding their
appointment as an auditor of the company. The written consent should be obtained before the
appointment is made or within 7 days of the appointment.
 It is important to note that the new auditor appointed in place of the retiring auditor must be
eligible and qualified to act as an auditor of the company. The qualifications and eligibility criteria
for auditors are specified in the Companies Act 2013 and the rules made thereunder.

Remuneration of auditor [section 142]

Section 142 of the Companies Act 2013 deals with the remuneration of an auditor. The section specifies that
the remuneration payable to an auditor must be determined by the company in a general meeting.

The section further provides that the remuneration to be paid to the auditor should be fixed by taking into
consideration several factors such as:

 The size of the company

 The nature of its business
 The extent of its operations

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 The complexity of its accounts

 The quantum of profits of the company
 The remuneration paid to the other auditors, if any
 The prevailing market rates for similar services
 The experience and reputation of the auditor

The remuneration payable to the auditor may be fixed either by a resolution passed at a general meeting or
by the audit committee, subject to ratification by the shareholders at the next general meeting.

It is important to note that the remuneration paid to the auditor must be reasonable and should not be
excessive, considering the factors mentioned above. The remuneration paid to the auditor must also be
disclosed in the company's financial statements.

Powers/right and duties of auditor [section 143]

Right of auditor section 143(1)

 Section 143(1) of the Companies Act 2013 grants the right of access to the books of account and
vouchers of the company to the auditor.
 The sub-section states that every auditor of a company shall have the right of access at all times to
the books of account and vouchers of the company, whether kept at the registered office of the
company or at any other place.
 This means that the auditor has the right to access the books of accounts and vouchers of the
company during their tenure of office.
 The right of access granted to the auditor is not limited to the registered office of the company but
extends to any other place where the books of account and vouchers of the company are kept.
 The purpose of granting this right to the auditor is to enable them to examine the books of account
and vouchers of the company to ensure that they are accurate and complete.
 This helps the auditor in forming an opinion on the financial statements of the company and
providing an independent and objective report to the shareholders.

Duties of auditor section 143(1)

Section 143(1) of the Companies Act 2013 specifies the right of access of the auditor to the books of
account and vouchers of the company. However, the duties of the auditor are outlined in the subsequent
subsections of Section 143. Here are the key duties of the auditor under Section 143:

 Reporting on Financial Statements: Sub-section (2) of Section 143 requires the auditor to make a
report to the members of the company on the accounts examined by him and on every financial
statement which is required by or under this Act to be laid before the company in general meeting
during his tenure of office.
 Reporting on Other Matters: Sub-section (6) of Section 143 requires the auditor to report on such
other matters as may be prescribed.

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 Reporting on Compliance with Accounting Standards: Section 143(10) requires the auditor to
report on whether the company has complied with the Accounting Standards specified under
Section 133 of the Act.
 Reporting on Internal Financial Controls: Section 143(3)(i) requires the auditor to state in his
report whether the company has adequate internal financial controls in place and the operating
effectiveness of such controls.
 Reporting on Fraud: Section 143(12) requires the auditor to report to the central government if he
has reason to believe that an offence involving fraud is being or has been committed against the
company by its officers or employees.

Auditor not render certain services [section 144]

Section 144 of the Companies Act 2013 specifies that an auditor cannot render certain services to the
company, in order to maintain independence and objectivity in their role. Here are the key provisions of
Section 144:

 Prohibition on Non-Audit Services: The auditor of a company cannot provide any non-audit
services to the company. Non-audit services refer to any service other than audit or matters
incidental to the audit.
 Prohibition on Certain Services: The auditor of a company or its holding company or subsidiary
company cannot provide the following services to the company:
 Accounting and bookkeeping services;
 Internal audit services;
 Design and implementation of any financial information system;
 Actuarial services;
 Investment advisory services;
 Investment banking services;
 Rendering of outsourced financial services;
 Management services; and
 Any other kind of services as may be prescribed.

 Exemption for Certain Services: The Central Government may provide exemptions to certain
classes of companies or auditors from the prohibition on non-audit services or the prohibition on
certain services, if it is satisfied that such services do not impair the independence of the auditor.
The purpose of Section 144 is to ensure that the auditor maintains independence and objectivity in
their role. By prohibiting the auditor from providing certain services to the company, the Act aims to
prevent any conflicts of interest that may arise from such services. This helps to maintain the
integrity and credibility of the audit process and ensures that the financial statements of the
company provide a true and fair view of its affairs.

Signing of audit report [section 145]

Section 145 of the Companies Act 2013 deals with the signing of the audit report by the auditor. Here are
the key provisions of Section 145:

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1. Signing of Audit Report: The auditor of a company is required to sign the audit report or sign and
authenticate the same electronically.
2. Duty to Give Reasons for Reservations or Qualifications: If the auditor has any reservations or
qualifications in his report, he must provide reasons for the same.
3. Duty to State Certain Matters in the Report: The auditor is required to state the following matters
in his report:
 Whether he has obtained all the information and explanations which, to the best of his
knowledge and belief, were necessary for the purposes of his audit;
 Whether, in his opinion, proper books of account as required by law have been kept by the
company;
 Whether, in his opinion, the financial statements of the company are in agreement with the
books of account and returns;
 Whether, in his opinion, the financial statements comply with the accounting standards
specified under section 133; and
 Any other matter which he considers should be brought to the notice of the members.
4. Duty to Report on Related Party Transactions: The auditor is required to report on all
transactions with related parties in the financial statements of the company.

Auditor’s right to attend general meeting [section 146]

Section 146 of the Companies Act 2013 grants the auditor of a company the right to attend the company's
general meetings. Here are the key provisions of Section 146:

 Right to Attend General Meetings: The auditor of a company has the right to attend any general
meeting of the company, whether it is an annual general meeting or an extraordinary general
meeting.
 Right to Be Heard at Meetings: The auditor also has the right to be heard at any general meeting
which he attends on any part of the business which concerns him as the company's auditor.
 Notice of Attendance: The auditor must give a notice of his intention to attend the general
meeting to the company at least 14 days before the date of the meeting.
 Notice of Right to Attend: The Company must give notice to the auditor of his right to attend the
general meeting. The notice must be given not less than three days before the date of the meeting.

Punishment for contravention [section 147]

1. Default u/s 139-146 [Company & Officer]

 Co: ₹25k – ₹5 Lakh

 Officer: ₹10k – ₹1 Lakh

2. Default u/s 139, 144 & 145 [Auditor]

 Auditor: ₹25k –₹ 5L or 4 times remuneration whichever is lower

 If wilful default & intention to deceive then punishable with
 Fine ₹50k – ₹25 Lakh or 8 times remuneration whichever is lower + imprisonment up to 1 year

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3. Liable to refund remuneration & Pay for damages to Company/statutory bodies/ authorities/ members/
creditors of Company for their losses.

4. If Auditor is a firm

 proved that partner(s) involved in fraud à liability of concerned partners & firm (joint & several)

For criminal liability in respect of liability other than fine à partners who are involved in fraud only liable.

Audit committee [section 177]

Section 177 of the Companies Act, 2013 and Rule 6 and 7 of Companies (Meetings of Board and its Powers)
Rules, 2014 deals with the Audit Committee.

Applicability of Audit Committee

The Board of directors of every listed companies and the following classes of companies, as prescribed
under Rule 6 of Companies (Meetings of Board and its powers) Rules, 2014 shall constitute an Audit
Committee.

 all public companies with a paid up capital of Rs.10 Crores or more;

 all public companies having turnover of Rs.100 Crores or more;
 all public companies, having in aggregate, outstanding loans or borrowings or debentures or
deposits exceeding Rs.50 Crores or more.

Composition
The Audit Committee shall consist of a minimum of 3 directors with independent directors forming a
majority. The majority of members of Audit Committee including its Chairperson shall be persons with
ability to read and understand, the financial statement. The Board’s report under section 134(3) shall
disclose the composition of an Audit committee and where the Board had not accepted any
recommendation of the Audit Committee, the same shall be disclosed in such report along with the reasons
there for.

Reconstitution
Every Audit Committee of a company existing immediately before the commencement of this Act shall be
reconstituted within one year of such commencement.(i,e., on or before 31st March 2015) Functions of
Audit Committee: Every Audit Committee shall act in accordance with the terms of reference specified in
writing by the Board which shall, inter alia, include,—

 the recommendation for appointment, remuneration and terms of appointment of auditors of

the company;
 review and monitor the auditor’s independence and performance, and effectiveness of audit
process;
 examination of the financial statement and the auditors’ report thereon;
 approval or any subsequent modification of transactions of the company with related parties;
 scrutiny of inter-corporate loans and investments;
 valuation of undertakings or assets of the company, wherever it is necessary;
 evaluation of internal financial controls and risk management systems;
 monitoring the end use of funds raised through public offers and related matters.

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Cost audit [section 148]

 Section 148 (1) empowers the Central Government to direct the companies specified in the
production of goods or provisions of service to include particulars relating to utilization of material
or labour or other items of cost in the books of accounts of the company;
 List of specified companies, which needs to maintain the cost records, is provided under Table A
and Table B of rule 3 of the Companies (Cost Records and Audit) Rules, 2014;
 Section 148 (2) empowers the Central Government to direct, based on the net worth or turnover of
the company, audit of cost records of the specified class of companies;
 Rule 4 of the Companies (Cost Records and Audit) Rules, 2014 contains the provisions relating to
the companies which are liable to get their cost records audited;
 Cost audit shall be conducted by the cost accountant who is appointed by the Board;
 In case of any default on the part of the company, it shall be punishable with the fine of an amount
not less than INR 25,000, however, such fine cannot be more than INR 5 Lakhs. Further, every
officer, in default, of the company shall be punishable with imprisonment for a term up to 1 year or
with the fine not less than INR 10,000, however, the same cannot be more than INR 1,00,000;
 In case the cost auditor is in default, he shall be punishable in the manner as provided under
section 147 (2) to section 147 (4).

Appointment of cost auditor

Every company mentioned in Rule 3 and fulfilling the criteria in Rule 4 shall appoint a cost auditor within
180 days of commencement of every financial year. Following can act as cost auditors:

 A cost accountant in practice

 A firm of cost accountants or
 A limited liability partnership of cost accountants

Provided that statutory auditor cannot be appointed as cost auditor of the company.

Cost auditor will be appointed by the board and in case of such companies which has audit committee,
then the appointment and remuneration will be recommended by audit committee.

The remuneration of cost auditor is required to be ratified by the shareholders. Once the cost auditor is
appointed the company shall inform the Central Government by filing form CRA-2 within 30 days of passing
of board resolution or within 180 days of commencement of the financial year whichever is earlier. The cost
auditor so appointed for a financial year shall continue till 180 days from the closure of financial year or till
submission of cost audit report for that year.

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Difference between cost audit and financial audit

Basis of Cost Audit Financial Audit

Comparison

Definition A systematic examination of the cost A systematic examination of the financial

accounting records and verification of statements and records of an organization
the cost accounting systems of an to ensure that they provide a true and fair
organization to ensure that they are view of its financial position and
accurate and efficient. performance.

Objective To determine whether the cost To provide reasonable assurance that the
accounting systems are accurate, financial statements are free from material
reliable, and efficient, and to identify misstatements and are presented fairly in
areas where cost savings can be made. accordance with the applicable financial
reporting framework.

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Scope The scope of cost audit is limited to The scope of financial audit is wider and
the cost accounting records and includes the financial statements, books of
systems of an organization. accounts, and other financial records of an
organization.

Applicability Cost audit is mandatory for certain Financial audit is mandatory for all
industries as per the Companies Act, companies, irrespective of their size and
2013. nature of business.

Frequency Cost audit is conducted at least once a Financial audit is conducted annually.
year.

Report The cost auditor submits a report to The financial auditor submits an audit
the management of the organization, report to the shareholders or other
which includes observations and stakeholders of the organization, which
recommendations for improving the includes an opinion on the fairness of the
cost accounting systems. financial statements.

Auditor The cost audit can be conducted by a The financial audit can be conducted by a
qualified cost accountant or a firm of qualified chartered accountant or a firm of
cost accountants. chartered accountants.

Questions

1. What is the primary objective of an audit of a company's financial statements?

a) To detect fraud and errors

b) To provide assurance on the reliability of financial statements

c) To express an opinion on the company's management

d) To provide recommendations for improving company operations

2. Which of the following is not an example of an external user of a company's financial statements?

a) Employees

b) Shareholders

c) Regulators

d) Suppliers

3. Which of the following statements best describes an audit trail?

a) A record of all financial transactions in a company's accounting system

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b) A report on the effectiveness of a company's internal controls

c) A set of procedures designed to ensure that financial statements are accurate and complete

d) A document summarizing the findings of an audit of a company's financial statements

4. Which of the following is not an example of an audit procedure?

a) Analyzing financial ratios

b) Reviewing board minutes

c) Preparing financial statements

d) Testing internal controls

5. Which of the following is not a component of an audit report?

a) Management's discussion and analysis

b) Auditor's opinion

c) Basis for opinion

d) Scope paragraph

6. Which of the following types of audit opinions indicates that the auditor has identified a material
misstatement in the financial statements?

a) Unqualified

b) Qualified

c) Adverse

d) Disclaimer

7. Which of the following is not a type of audit report modification?

a) Qualified

b) Adverse

c) Disclaimer

d) Clean

8. Which of the following is not a common type of audit procedure?

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a) Analytical procedures

b) Confirmation of account balances

c) Physical inventory count

d) Social media monitoring

9. Which of the following is not an example of a material misstatement?

a) Recording a transaction twice

b) Failing to record a significant transaction

c) Recording a transaction in the wrong period

d) Recording a transaction for the wrong amount

10. Which of the following is not a key aspect of an auditor's independence?

a) Objectivity

b) Professional skepticism

c) Professional judgment

d) Confidentiality

11. Which of the following is not a category of audit evidence?

a) Physical

b) Analytical

c) Testimonial

d) Historical

12. Which of the following is not an example of an inherent risk in an audit engagement?

a) Complexity of the accounting system

b) Existence of related party transactions

c) Use of estimates in financial reporting

d) Inadequate internal controls

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13. Which of the following is not a limitation of an audit?

a) Use of estimates in financial reporting

b) Misstatements due to fraud

c) Inherent limitations of internal controls

d) Limited time and resources

14. Which of the following is not an example of a reportable finding in an audit?

a) Material misstatements in the financial statements

b) Significant deficiencies in internal controls

c) Minor errors in the financial statements

d) Fraudulent activity within the company

15. What is the purpose of an auditor's report?

a) To identify areas for improvement in the company's operations

b) To provide assurance on the reliability of the financial statements

c) To recommend changes to the company's management structure

d) To provide legal advice to the company

Answer Keys

1. Answer: b) To provide assurance on the reliability of financial statements

Explanation: The primary objective of an audit of a company's financial statements is to provide
assurance on the reliability of those statements to stakeholders such as investors, lenders, and
regulators. While fraud detection and error identification are important parts of the audit process,
they are not the primary objective.
2. Answer: a) Employees
Explanation: Employees are considered internal users of a company's financial statements, while
shareholders, regulators, and suppliers are external users. Internal users are those within the
company who use financial statements for decision-making purposes.
3. Answer: a) A record of all financial transactions in a company's accounting system
Explanation: An audit trail is a record of all financial transactions in a company's accounting system.
This record allows auditors to trace transactions from their source to their final recorded position in
the financial statements.
4. Answer: c) Preparing financial statements

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Explanation: Preparing financial statements is not an audit procedure. It is the responsibility of the
company's management to prepare the financial statements, while the auditor's role is to provide
assurance on the reliability of those statements.
5. Answer: a) Management's discussion and analysis
Explanation: Management's discussion and analysis is not a component of an audit report. It is a
section of the company's financial statements where management provides an overview of the
company's financial performance and future prospects.
6. Answer: b) Qualified
Explanation: A qualified audit opinion indicates that the auditor has identified a material
misstatement in the financial statements. An unqualified opinion indicates that the financial
statements are presented fairly in all material respects, while an adverse opinion indicates that the
financial statements are materially misstated and should not be relied upon. A disclaimer opinion
indicates that the auditor is unable to express an opinion on the financial statements due to a lack
of sufficient evidence.
7. Answer: d) Clean
Explanation: A clean audit report is an unqualified opinion indicating that the financial statements
are presented fairly in all material respects. The other options are all types of audit report
modifications that indicate that the auditor has identified issues with the financial statements.
8. Answer: d) Social media monitoring
Explanation: While social media monitoring can be a useful tool in certain types of audits, it is not a
common type of audit procedure. The other options are all commonly used procedures in auditing
financial statements.
9. Answer: c) Recording a transaction in the wrong period
Explanation: Recording a transaction in the wrong period may be a mistake, but it is not necessarily
a material misstatement unless it affects the financial statements in a significant way. The other
options are all examples of material misstatements that could have a significant impact on the
financial statements.
10. Answer: d) Confidentiality
Explanation: While confidentiality is an important aspect of an auditor's work, it is not a key aspect
of independence. The other options are all important aspects of an auditor's independence, as they
ensure that the auditor is able to maintain an unbiased perspective when conducting the audit.
11. Answer: d) Historical
Explanation: Historical is not a category of audit evidence. The other options are all common types
of audit evidence that auditors may use to support their findings.
12. Answer: d) Inadequate internal controls
Explanation: Inadequate internal controls are not an inherent risk in an audit engagement, as they
can be mitigated through the implementation of effective controls. The other options are all
examples of inherent risks that can affect the reliability of the financial statements.
13. Answer: a) Use of estimates in financial reporting
Explanation: The use of estimates in financial reporting is not a limitation of an audit, as auditors
can still assess the reasonableness of those estimates. The other options are all limitations that can
affect the auditor's ability to provide assurance on the reliability of the financial statements.
14. Answer: c) Minor errors in the financial statements

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Explanation: While auditors may identify minor errors in the financial statements, they are typically
not considered reportable findings unless they are indicative of a larger issue. The other options are
all examples of findings that auditors would report to management and/or the audit committee.
15. Answer: b) To provide assurance on the reliability of the financial statements
Explanation: An auditor's report is intended to provide assurance to users of the financial
statements that the statements are free from material misstatement and fairly represent the
company's financial position, results of operations, and cash flows. The other options are not
typically within the scope of an auditor's report.

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Chapter III
Audit of bank
Introduction
Bank audit
A bank audit is a regular activity that is performed to inspect the financial activities of institutions to make
sure that they are following the rules and regulations as prescribed by the statutes. An accounting expert,
who is also known as a bank auditor, is appointed for the audit of banking companies. Bank audits can be
either internal audits or external audits.

The emphasis on the audit of a banking company is based on compliance. The object of a bank audit is to
find out if the financial activities of the institution are fair, legal, and complete. The main aim of the bank
audit is to conduct an independent inspection of the bank’s performance, controls, and information
systems. Various examinations are carried out on the systems, the findings are generated as well and
auditors suggest some possible reformative actions that the bank should take.

Types of bank in India

 Central Bank
 Cooperative Banks
 Commercial Banks
 Regional Rural Banks (RRB)
 Local Area Banks (LAB)
 Specialized Banks
 Small Finance Banks
 Payments Banks

Procedure of bank audit

 Banking sector is a dynamically changing sector. Thus, it requires proper and effective audit
measures to understand the exact financial condition of the banks for which the following procedure
is adopted:
 RBI and Indian Institute of Chartered Accountants of India (ICAI) together scrutinise and appoint an
auditor or audit firm for the audit of the bank after obtaining indebtedness declaration from a
respective firm or an auditor.
 The audit firm or an auditor cannot assign with any other statutory audit in the year they are
appointed as a bank auditor.
 Before initialising the audit, the firm needs to establish the undertaking of engagement terms
describing the time period of audit term. However, as per ICAI Act, 1949 before getting engaged the
auditor need to communicate with the previous auditor of the bank in writing for taking his consent.

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 After that, the new auditor will review the initial opening balance, and if he founds any material
misstatement or errors affecting financial statement, he can assert his point of view in his audit
report by way of qualified or adverse report.
 Thereafter assessment of engagement risk is done, which is a difficult part of the audit procedure,
and then the engagement team gets established to manage the risks and complexities of bank
operations.
 Auditor then tries to understand the working environment and internal controls of the organisation
for deciding the basis of the audit.
 Thereafter, banks accounting process, risk management process and risk identification are made
along with control and monetary activities considered by the management.
 At last, after reviewing all the relevant elements, an auditor prepares an audit report defining his
opinion regarding the financial condition of the bank as well as if any loopholes found in following
the mentioned regulations under Act.

Advances
Ensure the internal control is in place in relation to advances made.

 To scrutinise the subsidiary, ledger, & control accounts

 To ensure the proper documentation of account.
 To scrutiny the overdue account and scheme for recovery of such amount.
 Cash balance with RBI and other bank and money at call and short Notice.
 Month wise details of credit & debit transactions in relation to CC/OD accounts.
 Non-performing Assets Statements
 Verify the transactions which are the indicator of irregular or fraud outstanding advance accounts.
 Classify the various advances according to prudential norms on income recognition & assets
classification norms also known as NPA norms.

Cash in hand
 Ensure that the internal control is in place.
 Visit the bank branch and inspects physical cash and ensure that it will tallies with the banks cash
book balance.
 To verity the amount of foreign currency held by bank and its translation at make rate on the date at
which financial statement is prepared.

Balance with RBI

Inspect the ledger balance in each account with (a) bank confirmation certificates from Reserve Bank of India and (b)
Reconciliation Statement.

Balance with other bank

 Inspection of reconciliation statement to ensure that no debit or credit for interest have been taken to
Revenue account to the year.
 To examines the large transition and balances with banks outside India.
 Ensure that they are converted at market rate as on financial statement preparation

Fixed and other Assets

 Accounting method of bank.
 Ownership document.

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 To examine with reference to schedule of fixed assets to find new assets acquired.
 To examine sale deed in relation to sale of assets by bank.
 To ensure appropriateness of basis of revaluation of fixed assets.
 Ensure compliance of section 9 of banking Regulation Act.

Banking and Deposits Borrowings Deposits

 To ensure that amount have been property disclosed for
 Barrowing in India farm RBI.
 Barrowing outside India.
 Ensure the rate of interest paid payable with duration of borrowing.
 Verity whether the barrowings of money at call and short notice are property authorized
 To ensure the interest accrued but not due on deposits is not under other liabilities and provision
 See whether there is any instances of window dressing reporting in LFAR.

Bills Payable
 Unused forms relating to drafts, traveller’s cheques, etc., should be kept under the custody of a
responsible officer.
 The bank should have a reliable private code known only to the responsible officers of its branches
coding and decoding of the telegrams should be done only by such officers.
 The signatures on a demand draft should be checked by an officer with the specimen signature
book.

Bills for Collection

 The auditor should examine whether the bills drawn on other branches of the bank are not included
in bills for collection.
 Inward bills are generally available with the bank on the closing day and the auditor may inspect
them at that time.
 The bank dispatches outward bills for collection soon after they are received.
 They are, therefore, not likely to be in hand at the date of the balance sheet.
 The auditor may verify them with reference to the register maintained for outward bills for
collection.
 The auditor should also examine collections made subsequent to the date of the balance sheet to
obtain further evidence about the existence and completeness of bills for collection.

Treasury Operation-Foreign Exchange and Derivatives

 In foreign exchange operations, treasury departments of banks and financial institutions buy and sell
currencies to make profits or manage risks associated with foreign currency transactions. This
involves monitoring exchange rate fluctuations, analyzing market trends, and executing foreign
exchange transactions to buy or sell currencies at the right time.
 Derivatives are financial instruments that derive their value from underlying assets such as stocks,
commodities, currencies, or interest rates. Treasury departments use derivatives such as forwards,
futures, options, and swaps to manage risks associated with financial transactions, hedge against
currency fluctuations, and generate profits through speculative trading.
 Treasury operations in foreign exchange and derivatives involve complex financial transactions that
require specialized knowledge, skills, and expertise. Banks and financial institutions have dedicated

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treasury departments that manage these operations and provide customized solutions to clients
based on their unique requirements and risk profiles.

Reports to be given by bank Auditors

Bank auditors are responsible for conducting audits of financial institutions to ensure compliance with
regulatory requirements and to identify any irregularities or deficiencies in the bank's operations.

The reports given by bank auditors

 Audit report: This report provides an overview of the auditor's findings and conclusions about the
bank's financial statements, internal controls, and compliance with laws and regulations.
 Management letter: This report is addressed to the bank's management and highlights areas
where improvements can be made in the bank's operations, internal controls, and risk management
processes.
 Regulatory compliance report: This report assesses the bank's compliance with various regulatory
requirements and identifies any areas of non-compliance or weakness in the bank's systems and
controls.
 Special investigation report: This report is prepared when auditors identify any irregularities or
fraudulent activities in the bank's operations and provides recommendations for corrective actions.
 Internal control report: This report evaluates the effectiveness of the bank's internal control
systems in preventing and detecting errors and irregularities in financial reporting.

These reports are important tools for bank management, regulators, and investors to assess the bank's
financial health and to identify areas where improvements can be made to enhance efficiency, effectiveness,
and compliance with regulations.

Non-performing Assets
 A non-performing asset (NPA) is a loan or advance for which the principal or interest payment
remained overdue for a period of 90 days.
 In general, loans become NPAs when they are outstanding for 90 days or more, though some
lenders use a shorter window in considering a loan or advance past due.
 A loan is classified as a non-performing asset when it is not being repaid by the borrower. It results
in the asset no longer generating income for the lender or bank because the interest is not being
paid by the borrower. In such a case, the loan is considered “in arrears.”

Out of Order
 An "out of order" loan is considered a red flag for banks and financial institutions, as it indicates
the borrower's inability or unwillingness to repay the loan.
 Banks are required to monitor such loans closely and take corrective action to recover the
outstanding amount.
 The Reserve Bank of India (RBI) has set guidelines for the classification and management of NPAs by
banks and financial institutions.
 The RBI requires banks to classify loans as NPAs based on the number of days of default and to
make provisions for such loans based on their classification.
 In the case of an "out of order" loan, banks are required to classify the loan as an NPA and make
provisions for it accordingly.

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 Banks may also take legal action to recover the outstanding amount, such as initiating recovery
proceedings, attaching the borrower's assets, or seeking the assistance of debt recovery tribunals.

Classifications for Non-Performing Assets Criteria

Substandard assets These assets have remained NPA for a period
less than or equal to 12 months.
Doubtful assets These are assets that have remained in the
substandard category for a period of 12
months or more.
Loss assets These assets are considered uncollectible and
of very little value. Although these assets
could have some recovery value, they cannot
continue as a bankable asset.

Impact of Non- Performing Assets on Balance Sheet

The impact of Non-Performing Assets (NPAs) on a bank's balance sheet can be significant and can affect
various aspects of the bank's financial health.

 Asset quality: NPAs reflect the quality of the bank's loan portfolio and can indicate the bank's risk
exposure to credit defaults. As NPAs increase, the quality of the bank's assets decreases, which can
affect the bank's ability to generate income from interest and repayments.
 Profitability: NPAs can affect a bank's profitability, as interest income from NPAs is not realized and
provisions made for these loans can impact the bank's net profit. High levels of NPAs can also affect
the bank's ability to lend further and generate new business.
 Liquidity: NPAs can affect a bank's liquidity, as they tie up funds that could otherwise be used for
lending or investment purposes. Banks need to make provisions for NPAs and set aside funds to
cover potential losses, which can affect the availability of funds for other purposes.
 Capital adequacy: NPAs can affect a bank's capital adequacy, as provisions for these loans can
reduce the bank's capital base. Banks need to maintain a minimum capital adequacy ratio (CAR) to
meet regulatory requirements, and high levels of NPAs can reduce the CAR, leading to potential
regulatory action.
 Investor confidence: High levels of NPAs can also affect investor confidence in the bank's ability to
manage risks and generate returns. This can lead to a decrease in the bank's share price, affecting its
ability to raise funds from the capital markets.

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Chapter IV
Government Audit
Introduction
Government audit is applicable to Government departments and departmental undertakings. Government
of India maintains a separate department known as Accounts and Audit Department. Comptroller and
Auditor General of India heads this department.

In India the President appoints the Comptroller and Auditor General of India under Article 149 of the
Constitution, which gives the powers and rights and fixes his responsibility for the audit of Government
departments and institutions.

Government audit is divided into several branches like Defense, Railways, Posts and Telegraphs audit. It
works only for government offices and departments. This department cannot undertake audit of non-
government concerns. Its working is strictly according to government rules and regulations.

Objectives of Government Audit

 To make sure that the expenditure is incurred out of the fund, which the competent authority has
sanctioned.
 To verify that the expenditure of the government department is sanctioned as per the rules and
regulations of the department concerned.
 To see that the expenditure already sanctioned has been incurred by an officer who is authorized
to do so.
 To ensure that the payments have been made to the right persons and they are duly entered in
the books on the basis of receipts received from them.
 To see that the payments have been properly classified into capital and revenue.
 To check the existence of stock and stores and their proper valuation.
 To ensure that expenditures have been incurred in the interest of public.
 To ensure that stocktaking is done periodically and stock registers are maintained up-to-date.
 To ensure that whether money due from others has been regularly recovered while verifying the
receipts.

Difference between Government Audit and Commercial Audit

Bases Government Audit Commercial
Audit
In charge for the Auit and Accounts Department conducts the External auditor
Conduct of Audit audit of government department. appointed by the
employer shall

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conduct the audit

here.

Type of Audit Government audit always a type of continuous In commercial

audit because of the involvement of huge concerns, mostly
expenditure and large number of transactions. periodical audit is
conducted.

Nature of Auditors are government employees. They are not the

Appointment of employees of the
Auditors concerns whose
accounts they
audit.
Sanction of Audit In most of the government concerns before It is not necessary
Department payment for an expenditure is released the here.
sanction of audit department is a must.

Need for Preliminary Treasury officer always makes a preliminary Cashier has
Examination of Bills examination of bills be fore making a payment nothing to do with
on government account. audit or
preliminary
examination while
making a payment
of expenditure.
Rules & Regulations Government audit is subjected to the rules and It is not so in the
regulations of the concerned department. case of
commercial audits.

CAG – Constitutional Provision Highlights

 Article 148 broadly deals with the CAG appointment, oath and conditions of service.
 Article 149 deals with Duties and Powers of the Comptroller and Auditor-General of India.
 Article 150 states that the accounts of the Union and of the States shall be kept in such form as the
President may, on the advice of the CAG, prescribe.
 Article 151 says that the reports of the CAG of India relating to the accounts of the Union shall be
submitted to the president, who shall cause them to be laid before each House of Parliament.
 Article 279 deals with the Calculation of “net proceeds” is ascertained and certified by the
Comptroller and Auditor-General of India, whose certificate is final.
 Third Schedule – Section IV of the Third Schedule of the Constitution of India prescribes the form of
oath or affirmation be made by the Judges of the Supreme Court and the Comptroller and Auditor-
General of India at the time of assumption of office. Know more about the Judge of the Supreme
Court of India.
 According to the 6th Schedule the accounts of the District Council or Regional Council should be
kept in such form as CAG, with the approval of the President, prescribes. In addition, these bodies’

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accounts are audited in such a manner as CAG may think fit, and the reports relating to such
accounts shall be submitted to the Governor who shall cause them to be laid before the Council.

Powers of C&AG
General Powers
 He can examine any office of accounts under the control of the Union or State Government.
 He may require that any accounts, books, papers, and other documents relevant to the transactions
under audit be sent to the specified place.
 He can put such questions, as he may contemplate important, to the person in charge.
 He can call for such information as he may need for the composing of any account or report.

Direction by CAG to the auditor

 In the case of a Government Company, CAG shall direct the auditor, how the accounts of the
government company are essential to be audited.
 The auditor shall relent a copy of his report to CAG.
 The audit report shall, among other things, comprises the directions, if any, furnished by the
Comptroller and Auditor General, the action taken afterwards and its impact on the accounts and
financial statement of the company.

Right of CAG to conduct the supplementary audit or supplementary the audit report
Within 60 days from the date of receipt of the audit report, CAG shall have the following rights

Supplementary audit

 Comptroller and Auditor General may order the conduct of a supplementary audit of the financial
statement of the company
 The supplementary audit shall be conducted by such person as Comptroller and Auditor General
may authorise in this behalf

Supplementary /comment

 CAG may comment upon the audit report

 CAG may supplement the audit report
 The company shall send any such supplement or comments to every person entitled to copies of
audited financial statements of the company.
 Any such comments or supplements shall also be placed before the members in the Annual General
Meeting (AGM) simultaneously and in the same manner as the audit report.

Test audit

CAG may, by an order, cause a test audit to be conducted of the accounts of a Government company.

Duties of CAG
Articles 148, 149, 150 and 151 of the Constitution of India describe the functions and powers of this office.

 Article 149: Duties and Powers of the Comptroller and Auditor General: To perform such duties and
exercise such powers in relation to accounts of the Union of India and the states and of any other
bodies or authority, as may be prescribed by any law made by the Parliament.

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 Article 150: Form of Accounts of the Union of India and the States: To prescribe, with the approval of
the President, the form in which the account of the Union and of the States are to be kept.
 Article 151: CAG Reports: To report to the President or to the Governors of the States on the
accounts of the Union or State. The constitution has also provided in Article 279(i) that the CAG has
to ascertain and certify the net proceeds of any tax or duty mentioned in Chapter I of Part XII of the
Constitution. Besides these constitutional provisions and the Duties Powers and Conditions of
Service Act of 1971, is necessary to mention that, before 1976, the CAG had a two-dimensional role,
that accounting and auditing. Due to the separation of accounts and audit in 1976, the CAG’s duty is
the auditing of accounts. Since 1976, accounting is being done by the various departments
themselves with the help of the Indian Civil Accounts Service.

Audit Reports
 Reports in relation to the accounts of a Government Company or Corporation are submitted to the
Government by the C&AG under the provisions of Section 19-A, of the Comptroller and Auditor
General’s (Duties, Powers and Conditions of Service) Act, 1971.
 The Annual reports on the accounts of the Central Government Companies and Corporations are
issued by the C&AG of India to the Government.

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Chapter V
Audit of non-governmental organisation
 The non-governmental organization (NGO) is an organization which is established by a group of
people to render service to the nation and people.
 NGOs should make an audit of books of accounts every year.
 NGOs, in their own interest, should get their accounts audited regularly, even if there is a negligible
transaction, every year and file income tax return.

The audit is done as per the Trust Act, Societies Act, Companies Act or Income Tax Act.

Section 12A (b) of the Income Tax Act has made audit mandatory for an NGO in case the total income of
the NGO exceeds the maximum amount that is not chargeable to Income Tax in any previous year. The
receivables of an organisation are required to be mandatorily audited according to Section 12A (b) of the
Act.

What must an Auditor’s Report include in an NGO Audit?

The Auditor's report in must have included the Balance Sheet of Society Name, with the address as on 31st
March of the financial year. They must also attach the Income & Expenditure Account, and Receipts &
Payments Account for the year ended on that date. The format of the report must be as follows:

 The Auditor has received all the explanations and information which as per his knowledge is
necessary for the purpose of Audit.
 The books of accounts have been appropriately maintained as required by the law.
 The Balance Sheet and Income & Expenditure account dealt with this report are in agreement with
the books of accounts.
 According to his opinion and the best of his information, the accounts give a true and fair view:
(a) In the case of the Balance Sheet, the state of affairs of the particular NGO as of 31st March of
the particular year.
(b) In the case of Income & Expenditure Account, the surplus amount for the year ended on that
date.
(c) For receipts and payments account, payments of the society during the year ending date.

The audit programme should include

The audit programme should include

 Verification of assets
 Verification of Liabilities
 Verification of income and
 Verification of expenditure

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Verification of assets
 Understanding of Accounting Policies: The auditor should obtain an understanding of the
company's accounting policies related to assets, including the recognition, measurement, and
disclosure requirements. This helps to identify potential areas of risk and determine the scope of the
audit procedures.
 Internal Controls: The auditor should assess the internal controls in place to safeguard the
company's assets. This involves evaluating the design and implementation of controls, and testing
their effectiveness. The objective is to ensure that the assets are properly accounted for and
adequately protected against theft, damage, or loss.
 Verification of Property, Plant, and Equipment (PPE): The auditor should verify the existence,
ownership, and valuation of all PPE. This involves examining supporting documentation such as title
deeds, purchase agreements, and invoices, and performing physical inspections of the assets. The
auditor should also review depreciation schedules to ensure that the assets are being depreciated
correctly.
 Verification of Investments: The auditor should verify the existence, ownership, and valuation of all
investments. This involves examining supporting documentation such as purchase agreements and
statements from brokers. The auditor should also review the financial statements of the investee
companies to ensure that they are being properly accounted for.
 Verification of Inventory: The auditor should verify the existence and accuracy of the valuation of
inventory. This involves performing physical counts of inventory items and comparing them to the
inventory records. The auditor should also test the accuracy of any cost or valuation methods used
to determine the value of the inventory.
 Other Asset Verification: The auditor should also verify the existence, ownership, and valuation of
other assets, such as intangible assets, prepaid expenses, and deferred charges. This involves
examining supporting documentation and performing any necessary tests to ensure that these
assets are properly accounted for in the financial statements.

Verification of Liabilities
 Understanding of Accounting Policies: The auditor should obtain an understanding of the
company's accounting policies related to liabilities, including the recognition, measurement, and
disclosure requirements. This helps to identify potential areas of risk and determine the scope of the
audit procedures.
 Internal Controls: The auditor should assess the internal controls in place to ensure that liabilities
are properly recorded and disclosed in the financial statements. This involves evaluating the design
and implementation of controls, and testing their effectiveness.
 Verification of Accounts Payable: The auditor should verify the existence and accuracy of accounts
payable balances. This involves examining supporting documentation such as invoices, purchase
orders, and vendor statements, and confirming that the amounts owed are accurately recorded in
the financial statements.
 Verification of Loans and Borrowings: The auditor should verify the existence and accuracy of
loans and borrowings. This involves examining loan agreements, bank statements, and other

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documentation, and confirming that the amounts owed are accurately recorded in the financial
statements. The auditor should also review the terms and conditions of the loans and borrowings to
ensure that they are properly disclosed in the financial statements.
 Verification of Other Liabilities: The auditor should also verify the existence, accuracy, and
disclosure of other liabilities, such as accrued expenses, deferred revenue, and warranty obligations.
This involves examining supporting documentation and performing any necessary tests to ensure
that these liabilities are properly accounted for in the financial statements.
 Contingent Liabilities: The auditor should also evaluate any contingent liabilities, such as lawsuits
or insurance claims, and determine whether they should be disclosed in the financial statements.
This involves obtaining and reviewing documentation related to the contingent liabilities, and
assessing the likelihood and potential magnitude of any losses

Verification of income and

The receipt of income of NGO may be checked on the following lines;

(i)Contribution and Grants for projects and programmes:

 Check agreements with donors and grants letters to ensure that funds received have been
accounted for.
 Check that all foreign contribution receipts are deposited in the foreign contribution bank account
as notified under the Foreign Contribution (Regulation) Act, 1976.

Verification of expenditure
 Programme and Project Expenses: Verify agreement with donor/contributor (s) supporting the
particular programme or project to ascertain the conditions with respect to undertaking the
programme/project and accordingly, in the case of programmes/projects involving contracts, ensure
that income tax is deducted, deposited and returns filed and verify the terms of the contract.
 Establishment Expenses: Verify that provident fund, life insurance and their administrative charges
are deducted, contributed and deposited within the prescribed time. Also check other office and
administrative expenses such as postage, stationery, travelling, etc.”

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Chapter VI
Audit of charitable hostel
 The charitable institution may be private, public, or both of private and public or society.
 In India, there are many charitable institutions providing services to needy people without any
discrimination, the company’s or firms donate a large amount of money to these charitable
institutions.
 To ensure whether the money is used incorrect purpose, the conduction of the audit program in
these institutions is important.

When conducting the audit of charitable institutions the following points should be taken care of
 The auditor must study about the legal status of Charitable Institutions and gather complete
information about the constitution of Institution.
 The auditor must be aware of the laws of the state, Central government and other laws if any
applicable to the Charitable Institutions.
 The auditor should prepare all the documents, records before conducting an audit.
 To make the correct decision, the auditor should study the Minutes Book of Government rules and
regulations.

Know about contracts

 The auditor should make a list of regular donors to know the purpose of donation and make records
of the amount donated to Institutions.
 The donation from the counterfoils of receipts, member lists, cash book and the donation register of
the institution must be investigated to gather complete information. He must ensure whether the
donation money is used for the right purpose or not, the donation money fulfilled the purpose of
donation or not.
 The Indian government has given exemptions to charitable institutions for serving the people of the
nation. According to sub-section 15 of Section 2 of the Income Tax defines charitable purposes
include: Relief of the poor, education, and medical relief.
 The capital donation and revenue donation must be examined separately, the state code must be
studied properly to verify if any grant is applied to the institution. In the charitable institution, it
should be checked whether subscription for last year has been received or not, and the current year
subscription is received or not.
 The investments or donations should be checked physically in the investment register of an
institution. The documents of the land and building of institutions must be verified even the legacies
in the legacies register. The assets and liabilities on institutions should be verified on the date of the
balance sheet, the cash in hand or bank should be also verified.

Event Organization: The Charitable institutions organize events to get the donation, the auditor should
check the vouches of receipts and cheques given to the institution during events or for organizing events.

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Chapter VI
Audit of educational institute
A large number of educational institutions are registered under the India Society Registration Act, 1860. The
purpose behind the formation of educational institutions is to spread education and not just earn profits.
The following table lists out the sources for collection of amount and also the different types of expenses
incurred by the educational institutions −

Main Source of Collection

 Admission fees, tuition fees, examination fees, fines, etc.
 Securities from students.
 Donations from public
 Grants from Government for building, prizes, maintenance, etc.
 Types of Expenses / Payments
 Salary, allowances and provident fund contribution for teaching and non-teaching staff.

Examination expenses
 Stationery & printing expenses
 Distribution of scholarships and stipends
 Purchase and repair of furniture & fixture
 Prizes
 Expenses on sports and games
 Festival and function expenses
 Library books
 Newspaper and magazines
 Medical expenses
 Audit fees and audit expenses
 Electricity expenses
 Telephone expenses
 Laboratory running & maintenance
 Laboratory equipment
 Building Repair & maintenance

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Preliminary Audit of Educational Institutions

 Financial Statements: The auditor would review the educational institution's financial statements to
gain an understanding of the institution's financial position, results of operations, and cash flows.

 Internal Controls: The auditor would assess the institution's internal controls, including its policies
and procedures for financial reporting, compliance, and safeguarding of assets. This would involve
identifying potential areas of risk, such as fraud or misappropriation of assets, and determining the
effectiveness of the institution's internal controls in mitigating these risks.

 Regulatory Compliance: The auditor would assess the institution's compliance with applicable laws
and regulations, such as tax laws, student loan regulations, and grant requirements.

 Information Technology: The auditor would assess the institution's information technology
systems and controls, including its network security, data backup and recovery, and system access
controls.

 Communication with Management: The auditor would meet with the educational institution's
management to gain an understanding of their roles and responsibilities, and to discuss any
concerns or issues related to the audit.

Internal Control System

The Auditor should independently check the internal control system regarding authorization procedures,
record maintenance, safeguarding of assets, rotation and division of staff duty, etc. Following are some of
the important aspects that need to be considered by an Auditor to keep a check on the internal control
system −

 Whether internal control and internal check system is working, if yes, how effectively.
 Is there is any system to physically verify the fixed assets, stores and consumables at regular interval.
 An Auditor should verify the control system concerning proper authorization, obtaining quotations,
proper maintenance of accounts and record regarding purchase of fixed assets, purchase of
material, investment, etc.
 Whether bank reconciliation statement is prepared at regular intervals and what kind of action is
taken for uncleared cheque which were pending since long.
 Whether waiver of fees is properly sanctioned by appropriate authorities.
 The person who is collecting fees and the cashier should not be the same person.
 Class wise fees receivable and the actual fees received reconcile or not.
 Whether collected fees is deposited in bank on a daily basis.
 Fees collection register should be maintained on a daily basis.
 Whether approved list of supplier of sports material, stationery, lab items are readily available.
 Whether control system for payment is adequate or not.
 The system of letting out conference hall and class rooms, etc. for seminars and conventions.
 Whether fees structure is properly authorized along with change in fee structure if any.

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Audit of Assets and Liabilities

 Verification of Assets register should be done considering grants on purchase of assets, if any
received from State Government/ University Grant Commission (UGC).
 Verification of depreciation is very important; it should be according to useful life of assets or as per
the Companies Act, whichever is applicable.
 If educational institution is running under Indian Public Trust Act, it is must for an Auditor to check,
where investments have been made, because as per the Indian Public Trust Act, investment can be
made in specific securities only.
 If donation is received in the form of investment, an Auditor has to check all related correspondence
with the donor.
 All the applicable requirements of law should be fulfilled for the purchase of investments and fixed
assets.
 An Auditor should read and note down the state code and provisions relating to the conditions and
procedures of Grants. He should also verify the requirements of State/UGC which are to be fulfilled
by educational institutions for receiving Grants and also for continuations of Grants.

Audit of Income of Educational Institutions

 Tuition and Fees: The auditor would verify the accuracy and completeness of tuition and fees
charged to students. This would include examining enrollment records, tuition and fee schedules,
and any other supporting documentation.
 Government Grants and Contracts: If the educational institution receives grants or contracts from
government entities, the auditor would verify that the revenue from these sources is properly
recognized and accounted for in accordance with applicable accounting standards.
 Private Grants and Donations: The auditor would verify the accuracy and completeness of any
private grants or donations received by the educational institution. This would involve examining
supporting documentation, such as donor agreements, and ensuring that the revenue is recognized
in accordance with applicable accounting standards.
 Investment Income: The auditor would verify the accuracy and completeness of any investment
income earned by the educational institution. This would involve examining supporting
documentation, such as investment statements and interest income records, and ensuring that the
revenue is recognized in accordance with applicable accounting standards.
 Other Income Sources: The auditor would also verify the accuracy and completeness of any other
sources of income for the educational institution, such as rental income, merchandise sales, and
event revenues. This would involve examining supporting documentation and ensuring that the
revenue is recognized in accordance with applicable accounting standards.

Audit of Expenses of Educational Institutions

 Payroll Expenses: The auditor would verify the accuracy and completeness of the institute's payroll
expenses, including salaries, wages, and employee benefits. This would involve examining
supporting documentation such as time cards, payroll reports, and employee contracts.
 Purchases and Payments: The auditor would examine the institute's purchase and payment
processes to ensure that they are properly authorized and supported by appropriate
documentation. This would include reviewing vendor invoices, purchase orders, and payment
vouchers.

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 Travel and Entertainment Expenses: The auditor would verify the accuracy and completeness of
the institute's travel and entertainment expenses. This would involve examining supporting
documentation, such as travel receipts and entertainment invoices, and ensuring that these
expenses are properly authorized and supported by appropriate documentation.
 Capital Expenditures: The auditor would verify the accuracy and completeness of the institute's
capital expenditures, including land, buildings, furniture, and equipment. This would involve
examining supporting documentation such as purchase orders, invoices, and maintenance records.
 Other Expenses: The auditor would also verify the accuracy and completeness of any other
expenses incurred by the educational institution, such as insurance, rent, utilities, and maintenance
expenses. This would involve examining supporting documentation and ensuring that these
expenses are properly authorized and supported by appropriate documentation.

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Chapter VIII
Audit of insurance companies
Indian Insurance Company
The Companies Act, 2013 requires the registration of an Indian insurance company. A foreign company’s
overall holdings of equity shares, whether held directly or through subsidiary companies or nominees, shall
not exceed 26% of the insurance company’s paid-up equity capital. The major purpose of an Indian
Insurance Company is to do life insurance, general insurance, or reinsurance operations.

While conducting insurance audits, insurance auditors must evaluate policy and liability processes, tax
papers, risk appraisal, and other financial records of insurance. This is done to guarantee that suitable
insurance rates and premiums are imposed and that insurance businesses adhere to regulatory
requirements. Claims and commissions are two of the most important areas to verify during insurance
audits. Additionally, insurance auditors must maintain quality control between insurance companies and
policyholders.

Insurance Audit and Role of Insurance Auditor

Every insurer’s financial accounts must be yearly audited by an auditor as required by Section 12 of the
Insurance Act, 1938. By the regulations established by the IRDA after each financial year, every insurer is
required to prepare a balance sheet, a profit and loss account, a separate account of receipts and payments,
and a revenue account concerning the insurance business he transacts and the funds of his shareholders.

An insurance company’s central and branch auditors are chosen at the annual general meeting of the
business, with the consent of the C & AG needed before the appointment is made. The Insurance Act of
1938 and the Companies Act, 2013 have recently been amended, and the Insurance Regulatory and
Development Authority of India (IRDAI) has released updated recommendations requiring insurers to
adhere to the Companies Act, 2013 provisions regarding the appointment of auditors. In addition, insurers
must follow the rules outlined in these recommendations. The Board will designate the statutory auditors by
the Audit Committee’s proposal, subject to the approval of the shareholders at the annual meeting of an
Indian insurance company.

The statutory auditors to whom they are required to submit their report have the same rights and duties as
the branch auditors authorized to undertake the audit of the divisions. However, the branch auditors at the
divisional level attested that the financial statements of the branches within the divisions were properly
included in the division’s trial balance.

An insurer cannot remove its statutory auditor without the Authority’s prior consent. More than three
insurers (life, nonlife, health, and reinsurer) cannot have their audits accepted by the same auditing
company at once. If it is discovered that the insurers’ appointment of auditors does not follow the rules, the
appointment may be canceled.

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Meaning of an Insurance Audit

In terms of Section 12 of the Insurance Act, 1938, the financial statements of all insurers must be audited
annually by the auditor. As determined by IRDA, 1999, all insurers in respect of their insurance business and
shareholders’ funds must provide:

 Balance Sheet
 Profit and Loss Account
 Different Receipts Account
 Payments and Income Account

All of this must be done following IRDA rules at the end of each financial year.

An insurance audit is an independent audit of accounting records that reflects the expert’s opinion on its
accuracy.

Audit Testing
The auditor will spend time in the field of financial data testing to ensure the accuracy and completeness of
the financial statements. For example, this could include a CPA who collects a random sample of fifty
disbursements and then checks them to make sure checks are paid to the right seller and that they are
recorded at the right price. The main types of tests are:

Controlling Test: Related to the audit procedures performed based on the automated procedures and
hands that contribute to the completeness and accuracy of the financial statements. An example of such a
control is the monthly reconciliation of bank accounts. The auditor may inspect this control by examining a
reconciliation sample. The Auditor-General will assess the effectiveness of these controls and their ability to
prevent and reduce the risk of fraud.

Substantive Test: In addition to testing controls, the auditor will perform other procedures to gather valid
audit evidence. This may include inspecting or auditing assets, obtaining certificates from third parties that
conduct business with the company, or evaluating aspects of the financial statements and comparing them
with relevant external information.

Key Points examined during the audit of Insurance Companies

The following are the points that are needed to be considered during the Audit of Insurance Companies:

Premium Verification: In a separate bank account, premium collections are credited. No withdrawals are
usually allowed on that account for general expenses.

 As stated in the insurance company policy, the collection is forwarded to the Regional Office or
Head Office.
 In terms of Section 64VB of the Insurance Act, 1938, the insurer will not take the risk without
receiving a premium.
 The auditor needs to confirm the premium because the insurance premium is collected when the
policies are issued.
 It is a consideration to bear the risk of the insurance company.

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The Auditor-General will apply the following procedures:

 Before initiating the payment of revenue, the auditor must consider internal controls and
compliance rules, which are set for the collection and recording of premiums.
 Cover notes should be numbered sequentially.
 The auditor needs to check how the premium registers are maintained chronologically, providing
full details including the GST charged in terms of daily admission advice.
 The auditor must verify that he or she has received the amount stated in the register and those
indicated in the general record.
 The auditor shall also ensure that the installments payable on or before the date of receipt of the
balance are calculated as revenue for the year under review.

Claims Verification: The auditor of each division or branch should have access to information for all
categories of business. The Auditor-General shall determine the total number of documents to be
inspected, giving due consideration to high-value claims.

The claim account is deducted from all payments including repair costs, survey fees, photographic costs,
etc. The Auditor-General will:

 Check the provision of non-adjustable claims.

 Check whether the provision is made for those applications that the company is legally responsible
for.
 Check that the provision is not higher than the insured amount.
 Check out Co-insurance programs; the company has made provisions in respect of its expected
credit allocation.

Verification of Commission: The agent’s salary is determined by the commission. Remuneration is

calculated using the percentage of the proceeds collected by the agent.

The commission is paid to the agents of the purchased business and is deducted from the commission in
the Direct Business Account. Insurance agents usually ask for an insurance business. The Auditor-General
will verify:

 Vouchers’ entries in respect of payment vouchers and copies of commission bills and statements.
 Check that vouchers are authorized by law enforcement officers and that income tax is deducted at
the point of origin.
 Check the amount of commission allowed.
 Check commission calculation time.

Operating Cost verification: The auditor must assess the following operating costs:

Cost over Rs. 5 lakhs or 1% of the total amount payable, depending on the maximum. This should be shown
separately.

Costs that are not directly related to the insurance business should be shown separately, for example, costs
incurred by the investment department or bank charges, etc.

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Chapter IX
Audit of trust
Trusts are formed under the Indian Trusts Act for charitable and religious purposes. Trustee is a person who
manages trust property and executes the business of the trust. His duty is to work for the benefit of
beneficiary and distribute income of the trust to the beneficiaries. The operations of trusts are governed by
a Trust Deed. Very commonly it is found that beneficiaries are being defrauded by the trustee. Hence audit
of trust accounts helps to protect the beneficiaries against unscrupulous trustees. The provisions of the
Public Trust Act and Trust Deed provide that accounts of trusts should be audited by a qualified auditor.

It is the duty of the auditor to verify the transactions and books of accounts of trusts and certify the
truthness and fairness of the working of the trusts. When trusts are audited by a qualified auditor, it will
help both the trustees as well as the beneficiaries. Trustees will be benefited because there will be no
unnecessary criticisms against them. The beneficiaries will also be benefited because they will be assured
that the accounts have been properly maintained and that there has been no misappropriation of trust
money or fraud.

Responsibilities Of An Accountant In A Charitable Trust

 Apart from satisfying Assessing Officer about the genuineness of activities of trust in the claim for
exemption under section 11, he should also work diligently with all the requirements approved by
the law.
 The accountant has to check the balance sheet and the profit and loss and give an impression on
whether they exhibit an accurate and fair view.
 The accountant must note that the SA’s announced by the ICAI would introduce to the audit of
charitable trust under section 12A (1) (b) of the Income Tax Act 1961.
 In matters of professional responsibilities, the accountant should adhere with the “Code of Ethics”
published by the ICAI in managing the audit of charitable trust under section 12A(1)(b)

Scope of audit
Areas to be covered in the scope of the audit shall be approved by the board of directors using an analysis
of the risks associated with fiduciary products and services provided by each individual financial institution.
Such analysis should consider the effectivene ss of management, policies, procedures, information systems,
controls, and other relevant factors.

Audit report
The audit report shall be communicated to the board of directors.

The report shall:

 Identify the scope of the trust audit;

 describe the agreed-upon procedures performed;
 identify the number, type and dollar volume of accounts examined;

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 Indicate the results of the audit procedures performed with any exceptions noted; and
 Report on department internal control weaknesses identified, as the tests and procedures of the
audit are completed.

External and internal auditors shall retain a documented record of their work to substantiate procedures
followed, tests performed, information obtained, and conclusions reached in the audit report.

Procedure
The following items provide a list of audit procedures to be considered in determining the scope of the
audit to be performed. The uniqueness of each trust department or company should be taken into
consideration when determining whether procedures should be performed. It is not contemplated that the
audit procedures described below will be applied to all accounts or transactions, but rather to selected
accounts and transactions on a test basis. Items marked with an (*) asterisk indicate those functions to be
performed on a quarterly basis when the audit is completed internally. All other functions may be
performed annually.

Accounting and Physical Security Controls

 Verification of 33% of the account assets, including a confirmation from holders of assets retained
outside the bank or trust company.
 Determine that assets are adequately safeguarded and held separately from the assets of the bank
or trust company.*
 Determine that a written vault record of assets under joint custody is maintained.*
 Test that joint custody safekeeping receipts exist for securities pledged to the trust department of a
bank.*
 Test that there is prompt ledger control of assets received as original and subsequent deposits of
assets, including stock splits and dividends.
 Verify that department, company and fiduciary cash accounts are reconciled to demand deposit
statements.*
 Test that disbursements are supported by appropriate source documents.*
 Verify that periodic and timely reconciliations are performed of the department's statement of
condition, if appropriate, and the trust account subsidiary ledgers.*
 Test that suspense or operating accounts are reconciled at least monthly, contain only appropriate
items, and are cleared without delay.*
 Test the outstanding bonds for bond trusteeships by reconcilement or the verification of such
reconcilement by others, at least once each calendar year.
 Test the reconcilement of bond closing statements of new corporate trusteeships to trustee records.
 Reconcilement should include trustee records of bonds authenticated and issued, proceeds from
bond sales, and initial related accounts.
 Test payments from paying agency or dividend disbursing accounts by reconciling or verifying the
bank or trust company's reconciliation.

Account Activity Controls

 Test commissions and fees paid to the institution.

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 Test proceeds or payment from sales and purchases of assets to brokers' invoices, purchasers'
receipts, or other evidence of sale and purchase prices.
 Test accuracy of amounts and receipt of income from investments.*
 Test payments for services, such as brokerage fees, real estate management fees, maintenance
charges, and other similar disbursements to source documents.
 Test to determine that securities transactions are completed in a timely manner and that written
trade security confirmations or broker advices are received.*

Operational Compliance
 Test that cash receipts are promptly invested or distributed in compliance with the governing
document and applicable law.
 Test to determine that real estate is insured, is subject to periodic appraisals and inspections that are
documented, that property taxes are paid and that real estate loan documentation is sufficient.
 Test account transactions for accuracy to source documents.*
 Inquire and observe whether dual control over fiduciary assets and accounts is exercised.*
 Review closed accounts to ascertain that documentation such as discharges, releases, receipts and
accountings are obtained.

Administrative Compliance
 Test to determine that original or certified copies of the governing instrument are on file.
 Determine that a procedure is in place to create synoptic and account records, and test that such
records are maintained and updated periodically.*
 Determine the existence of an annual audit of any bank or trust company collective investment fund,
if applicable.
 Test that tax returns are prepared and filed by the appropriate filing dates.
 Review the department's or company's policies for avoiding and clearing, overdrafts and test
selected transactions for compliance therewith.*

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Chapter X
Forensic audit & accounting
Forensic Accounting and Audit
 Forensic accounting and audit are specialized fields that involve the application of accounting,
auditing, and investigative skills to legal matters.
 The term "forensic" means "related to or used in courts of law," and therefore, forensic accounting
and audit deal with the examination of financial information to detect and prevent fraud, identify
financial misconduct, and provide evidence for legal proceedings.
 Forensic accountants and auditors are trained to investigate and analyze financial transactions and
records in order to uncover any irregularities, inconsistencies, or discrepancies.
 They may be called upon to assist in a variety of legal matters, such as litigation, disputes,
investigations, or regulatory compliance.
 Their work may involve interviewing witnesses, analyzing financial statements and documents,
reviewing contracts and agreements, and providing expert testimony in court.
 Forensic accounting and audit are important tools in the fight against financial crimes and
misconduct.
 They can help organizations detect and prevent fraudulent activities, protect their assets, and
maintain financial integrity.
 Forensic accounting and audit also play a critical role in ensuring that justice is served in legal
proceedings by providing accurate and reliable financial evidence.

Forensic Accounting and Auditing Framework

Forensic accounting and auditing are two distinct but related fields that are commonly used to investigate
financial fraud, misconduct, or other white-collar crimes.

Forensic accounting is the process of using accounting, auditing, and investigative skills to detect, analyze,
and prevent financial fraud. This includes identifying fraudulent transactions, tracing funds, and analyzing
financial statements to determine if there has been any fraudulent activity. Forensic accountants may be
called upon to provide expert testimony in court cases, and they often work closely with law enforcement
and legal professionals.

Auditing, on the other hand, is a systematic process of examining financial statements and records to
determine their accuracy, completeness, and compliance with relevant laws and regulations. Auditors are
responsible for evaluating the internal controls of an organization and ensuring that financial statements
are free from material misstatements.

In a forensic accounting and auditing framework, the two fields work together to investigate financial fraud
and misconduct. The framework typically involves the following steps:

 Identify the fraud or misconduct: This involves gathering information about the suspected fraud,
including the nature of the fraud, the individuals involved, and the amount of money involved.

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 Preserve evidence: It is important to preserve all relevant evidence to support the investigation,
including financial records, documents, and electronic data.
 Analyze financial data: Forensic accountants and auditors will analyze financial data to identify
patterns or irregularities that may indicate fraud or misconduct.
 Investigate: The investigation may involve interviewing witnesses, reviewing contracts, and
conducting background checks on individuals involved.
 Report findings: Once the investigation is complete, the forensic accounting and auditing team will
provide a report outlining their findings and recommendations.
 Testify: If the case goes to court, forensic accountants may be called upon to provide expert
testimony and explain their findings to the judge and jury.

Objectives of Forensic Accounting & Audit

 Identify cases of fraud.
 Prevent and reduce cases of fraud through the implementation of recommendations and advice,
through internal control actions in the company.
 Participate in the design and creation of fraud prevention programs.
 Evaluation of internal control systems.
 Investigation and collection of evidence that will be placed in the hands of the judicial authority

Forensic Audit Reports

 Nature of business: Provides a brief description of the entity being audited, including the nature of
their business operations and any relevant industry or regulatory factors.
 Nature of subject: Specifies the subject or aspect of the entity being examined, such as financial
statements, internal controls, or specific transactions.
 Intended audience: Specifies the intended audience for the report, such as management, investors,
or regulators.
 Purpose of the report: Describes the purpose for which the report is prepared, such as to detect
and prevent fraud, to provide expert testimony, or to assess compliance with regulations.
 Management attitude: Describes management's attitude towards the audit process, including any
directives or needs they have communicated.
 Approach of the auditor: Describes the approach and caliber of the forensic auditor, including their
experience, expertise, and qualifications.
 Level of detail: Specifies the extent of detail required by management and the intended audience,
such as the level of analysis and explanation of financial transactions, and the amount of supporting
documentation included.

Techniques of Forensic Audit

Auditing Fraud Investigation Process

Various techniques can be employed to conduct a forensic audit of a business. Below are some generic yet
effective techniques. Most of these techniques can be applied to any business. They include:

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Conducting background checks and reviewing public documents

Public documents are carefully scrutinized since they are the easiest to obtain. In addition, extensive
background checks are conducted on a particular business to ascertain the company’s past performance.
These include any information accessible through the public database, corporate records, and legally
accessible information available via the internet.

Interviewing in detail
Interviewing is an integral part of generating valuable information from an unwilling person. This step aids
in gaining a complete understanding of the situation. To conduct an effective interview, one must
determine the gravity of the situation and prepare questions accordingly. The discussion should consider
every detail and consider the overall picture to determine the scope of the illegal activity and the
perpetrators.

Collecting information from reliable sources

A confidential and reliable source of information can prove invaluable in any situation. Suppose information
is gathered from a confidential source or an informant. In that case, all measures should be taken to conceal
the source’s identity. Forensic accountants should attempt to obtain as many confidential sources as
possible since they can virtually guarantee the accuracy of their conclusions.

Analyzing the evidence collected

An adequate analysis of the obtained evidence can identify the responsible party and assist in determining
the extent to which fraud was committed within the business. This analysis will also provide insight into the
level of security that the company has against financial scams and how various austerity measures can be
implemented to prevent similar situations in the future.

Performing surveillance
One of the conventional methods of uncovering fraud involves conducting physical or electronic checks.
One way of doing this is to monitor all official emails and messages.

Working undercover
A measure of this magnitude should be employed only when all other options are exhausted. Professionals
should investigate since they know how and where to conduct it. Even minor mistakes may alert the
offender that something is amiss and may disappear.

Taking a closer look at the financial statements

The purpose of this tool is to identify the fraud committed. Financial statements contain all the necessary
details. An analysis of these statements can assist a forensic accountant in determining whether a scam has
been perpetrated.

Economic conditions are becoming increasingly severe today, and each country’s government is enforcing
stricter laws to govern its businesses. As businesses’ sophistication increases, so do fraud. Consequently, it
has led to heightened sensitivity to fraud, resulting in a massive demand for forensic accounting services by
all businesses.

As a result, it can be understood that forensic auditing is a task best left to professional auditors who can
offer you solutions to business problems that are tailored to your requirements.

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Areas of Forensic Audit

 Financial statement fraud: This involves intentional misrepresentations or omissions of material

information in financial statements, such as overstatement of revenue or assets, understatement of
expenses or liabilities, or manipulation of accounting records.
 Misappropriation of assets: This refers to the theft or misuse of an entity's assets, such as cash,
inventory, or intellectual property, by an employee or other parties.
 Bribery and corruption: This involves offering or accepting bribes or kickbacks to gain an unfair
advantage or to influence business decisions improperly.
 Money laundering: This involves the process of disguising the proceeds of illegal activities as
legitimate funds through a series of transactions to avoid detection and prosecution.
 Insider trading: This refers to the buying or selling of securities based on confidential information
not available to the public, which can result in unfair advantages and significant financial gains.
 Intellectual property theft: This involves the unauthorized use, transfer, or disclosure of intellectual
property, such as patents, copyrights, trademarks, or trade secrets.
 Cybercrime and computer fraud: This involves the use of computers, networks, and the internet to
commit fraud, theft, or other criminal activities.
 Ponzi and pyramid schemes: These are fraudulent investment schemes that promise high returns
with little or no risk, but rely on the recruitment of new investors to pay returns to earlier investors.
 Embezzlement: This refers to the misappropriation of funds by an employee or other party
entrusted with the management of an entity's assets.
 Contract and procurement fraud: This involves the manipulation of contracts or procurement
processes to benefit individuals or companies at the expense of the entity.
 Insurance fraud: This involves the submission of false or exaggerated insurance claims to obtain
financial benefits or to conceal other fraudulent activities.
 Bankruptcy and liquidation: This involves the investigation of financial records and transactions
related to bankruptcy or liquidation proceedings, to detect fraudulent or improper activities.
 Regulatory compliance: This involves the assessment of an entity's compliance with applicable
laws, regulations, and standards.
 Asset tracing and recovery: This involves the identification and tracing of assets that have been
fraudulently obtained or misappropriated, and the recovery of such assets.
 Expert witness testimony: This involves the provision of expert opinions and testimony in legal
proceedings related to financial fraud, including criminal and civil cases.

Forensic Audit vs. Financial Audit

Aspect Forensic Audit Financial Audit

Objective Investigate fraud or other financial Express an opinion on the fairness

misconduct of financial statements

Scope Specific areas of concern related to Entire financial statements, including

fraud or misconduct notes and disclosures

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Methodology Sampling, testing, and analysis of Sampling, testing, and analysis of

specific transactions entire population of data

Timeframe Typically conducted after fraud or Conducted annually or periodically

misconduct is suspected

Reporting Report findings and recommendations Provide an opinion on financial

for corrective action statements

Legal Conducted to meet legal standards Conducted to meet accounting

standard and requirements standards and requirements

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Chapter XI
Audit of charitable institution
Audit of Charitable Institutions
An auditor may evaluate the internal control system in general, to ensure that the procedure is reliable. He
may study the nature of the constitution of the charitable institution, which may be a society, private or
public trust or a company limited by guarantee. He should ensure that the institution complies with all the
requirements of law under which it is set up. He should also verify the effectiveness of the internal checks
relating to receipts and payments and ensure that the amounts received are duly deposited into the bank.

Various forms of ‘Receipts’ of Charitable Institutions

The following are the various receipts that a charitable institution may receive:

 Subscriptions and Donations

 Income from Investments
 Grants
 Legacies
 Rent
 Special events, etc.

Role of an Auditor on Verification of Reports of Charitable Institutions

 In relation to subscriptions and donations, the auditor may evaluate the internal check relating to
the accounting of amount collected.
 He shall examine all the receipt books used during the period under audit and apply special care
while verifying the cancelled receipts.
 He may test check the counterfoils with cash book.
 He should also confirm that the total amount collected in the form of subscriptions and donations,
as shown by the statements, agrees with the books.
 He should ensure that the unused receipt books are under the custody of a responsible person.
 In the case of Legacies and grants, the auditor should examine the correspondence, minutes books
and other available information.
 While verifying the income from investment, the auditor may vouch all the receipts, and examine the
schedule of investments to confirm that all income &om the investments are duly accounted. While
verifying interest, the rates and calculation of interest are to be checked.
 The rent received account is to be vouched with the counterfoils of rent receipts and counter
checked with the entries in the cash book. The auditor should also examine the tenancy agreement
to find out the amount of rent to be collected and the due dates, on which the rents become due.
 The institution may organize special events, and generate income for charitable purposes. The
auditor should thoroughly vouch the receipts and payments relating to such events.

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Auditor should verify payments

The auditor should ensure that all payments made by the institution are only for the purpose for which the
institution is constituted and no person, who is administering the Trust. (i.e., the trustee, the managing
trustee or a member of the managing committee) is personally benefited therefrom. He should also verify
the existence of the movable and immovable assets and confirm the cash and bank balances.

An insurance is a legal agreement between an insurer (insurance company) and an insured (individual), in
which an insured receives financial protection from an insurer for the losses he may suffer under specific
circumstances.

Under an insurance policy, the insured needs to pay regular amount of premiums to the insurer. The insurer
pays a predetermined sum assured to the insured if an unfortunate event occurs, such as death of the life
insured, or damage to the insured or his property.

Insurance - Meaning and Definition

The literal meaning of insurance would be an assurance against unforeseen and unfortunate loss. This
means, that if you encounter a less than normal event in your normal course of life, and happen to incur a
financial loss because of it, you can be compensated.

For example, you met with an accident on your way to the office in your car and the car suffers damage.
Your insurer can reimburse the repair expenses in this case. However, the insurer will not reimburse normal
wear and tear like a headlamp stopped working.

Legally insurance has been defined as a contract where the insurer agrees to compensate the insured
against the losses incurred due to any unforeseen contingency. The contract also involves a consideration
which is called a premium. The maximum available benefit amount is called sum assured or sum insured.

According to George E. Rejda, "Insurance is the pooling of fortuitous losses by transfer of such
risks to insurers, who agree to indemnify insureds for such losses, to provide other pecuniary
benefits on their occurrence, or to render services connected with the risk."

William F. Bluhm defines insurance as "a social device providing financial compensation for the
effects of misfortunes, the payment being made from the accumulated contributions of all
parties participating in the scheme."

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In the words of Robert E. Hoyt and David B. Smith, "Insurance is the promise of compensation
for specific potential future losses in exchange for a periodic payment. Insurance is designed to
protect the financial well-being of an individual, company or other entity in the case of
unexpected loss."

According to Kenneth Black Jr. and Harold D. Skipper Jr., "Insurance is a mechanism for
transferring the financial consequences of risks from an individual or entity to a larger group or
entity in order to reduce the impact of the potential loss."

In the words of Michael A. Smith and John E. Trenerry, "Insurance is a risk management tool
that involves the transfer of financial risk from an individual or entity to an insurance company in
exchange for the payment of a premium."

Evolution of Insurance
 The first known insurance company in India was the Oriental Life Insurance Company, founded in
1818 in Kolkata by British traders.
 In 1870, the first Indian life insurance company, Bombay Mutual Life Assurance Society, was
established in Mumbai.
 The Indian Mercantile Insurance Ltd. was the first Indian general insurance company, founded in
1907 in Chennai.
 The Insurance Act of 1912 laid the foundation for the regulation of insurance companies in India.
 In 1956, the government of India nationalized the life insurance sector, creating the Life Insurance
Corporation (LIC) of India, which absorbed all existing life insurance companies in the country.
 In 1972, the general insurance sector was also nationalized, leading to the creation of four public
sector general insurance companies: National Insurance Company, New India Assurance Company,
Oriental Insurance Company, and United India Insurance Company.
 In 1999, the Insurance Regulatory and Development Authority (IRDA) was established as the
regulatory body for the insurance sector in India.
 In 2000, the government of India allowed private sector companies to enter the insurance market,
leading to the entry of several private players in both the life and general insurance sectors.
 Today, the insurance industry in India is a thriving sector, with a mix of public and private companies
offering a wide range of insurance products and services to individuals and businesses.

Life Insurance
 1818: The Oriental Life Insurance Company, the first life insurance company in India, was established
in Kolkata by British traders.
 1870: The Bombay Mutual Life Assurance Society, the first Indian life insurance company, was
established in Mumbai.
 1912: The Insurance Act of 1912 was passed, laying the foundation for the regulation of insurance
companies in India.

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 1938: The Insurance Act of 1938 was passed, which introduced comprehensive regulation of the
insurance industry, including licensing and solvency requirements for insurance companies.
 1956: The government of India nationalized the life insurance sector and established the Life
Insurance Corporation (LIC) of India, which absorbed all existing life insurance companies in the
country. The LIC Act was passed to govern the operations of the LIC.
 1991: The government of India initiated economic reforms, liberalizing the economy and allowing
for private sector participation in various industries, including insurance.
 1999: The Insurance Regulatory and Development Authority (IRDA) was established as the
regulatory body for the insurance sector in India.
 2000: The Insurance Regulatory and Development Authority Act of 2000 was passed, strengthening
the regulatory framework for the insurance industry and allowing private sector companies to enter
the market.
 2015: The Insurance Laws (Amendment) Act of 2015 was passed, increasing the foreign direct
investment limit in insurance companies from 26% to 49%, and introducing other reforms to
enhance the regulatory framework and improve consumer protection.

General Insurance
 1907: The Indian Mercantile Insurance Ltd. was the first Indian general insurance company, founded
in Chennai.
 1956: The general insurance sector was nationalized by the government of India, leading to the
creation of four public sector general insurance companies: National Insurance Company, New India
Assurance Company, Oriental Insurance Company, and United India Insurance Company.
 1972: The General Insurance Business (Nationalization) Act of 1972 was passed, which vested the
ownership and control of the four public sector general insurance companies in the government of
India. The act also allowed for the creation of the General Insurance Corporation of India (GIC),
which acted as the holding company for the four companies.
 1991: The government of India initiated economic reforms, liberalizing the economy and allowing
for private sector participation in various industries, including insurance.
 1999: The Insurance Regulatory and Development Authority (IRDA) was established as the
regulatory body for the insurance sector in India, covering both life and general insurance.
 2000: The Insurance Regulatory and Development Authority Act of 2000 was passed, strengthening
the regulatory framework for the insurance industry and allowing private sector companies to enter
the market.
 2015: The Insurance Laws (Amendment) Act of 2015 was passed, increasing the foreign direct
investment limit in insurance companies from 26% to 49%, and introducing other reforms to
enhance the regulatory framework and improve consumer protection.
 2017: The government of India merged the National Insurance Company, United India Insurance
Company, and Oriental Insurance Company into a single entity called the National Insurance
Company Limited (NICL), and the New India Assurance Company and GIC Re into a single entity
called the New India Assurance Company Limited (NIACL).

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Insurance and risk

Insurance and risk are closely related concepts. Risk refers to the probability of an event that may result in
financial loss or damage, while insurance is a means of mitigating or transferring that risk.

Insurance works by pooling together the risks of many individuals or organizations and charging premiums
to cover the potential losses. In the event of a covered loss, the insurance company pays out a claim to the
policyholder to help mitigate the financial impact of the loss.

For example, a homeowner may purchase home insurance to protect against the risk of damage to their
property from fire, theft, or other perils. By paying a premium, the homeowner transfers the risk of a
potential loss to the insurance company. If a covered event occurs, such as a fire damaging the home, the
insurance company will pay out a claim to help cover the costs of repairing or rebuilding the damaged
property.

Insurance can also help businesses manage their risks, by providing coverage for property damage, liability
claims, and other potential losses. In some cases, insurance may even be required by law, such as in the
case of auto insurance for drivers.

External and internal risks can have a significant impact on insurance firms, potentially leading to financial
losses, reputational damage, or other negative consequences. Here are some examples of external and
internal risks that may affect insurance firms:

External Risks
 Catastrophic events: Natural disasters such as hurricanes, earthquakes, and floods can lead to
significant insurance claims payouts, which may exceed the firm's capacity to pay and impact its
financial stability.
 Changes in regulatory environment: Changes in government regulations or legal requirements
can increase compliance costs or limit the firm's ability to offer certain types of insurance products.
 Competitive pressure: New competitors entering the market or existing competitors offering more
attractive products or pricing can impact the firm's market share and profitability.
 Economic conditions: Economic downturns, recessions, or fluctuations in interest rates or currency
exchange rates can affect the firm's investment portfolio and profitability.
 Cybersecurity threats: Cyberattacks, data breaches, or other cybersecurity threats can compromise
the confidentiality or integrity of the firm's data, leading to reputational damage or financial losses.

Internal Risks
 Fraud and embezzlement: Employees or agents committing fraud, embezzlement, or other illegal
activities can result in financial losses or reputational damage for the firm.
 Inadequate underwriting: Poor underwriting practices, such as failure to properly assess risk, can
lead to high claims payouts or underpricing of insurance products, impacting the firm's financial
stability.
 Poor investment decisions: Poor investment decisions or lack of diversification in the investment
portfolio can expose the firm to financial risks or losses.

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 Inefficient operations: Inefficient or outdated processes, systems, or technology can impact the
firm's ability to deliver products or services efficiently, leading to higher costs or loss of customers.
 Talent management: Failure to attract or retain talented employees or agents can impact the firm's
ability to innovate, deliver quality services, or compete effectively in the market.

Insurance terminologies
Policyholder
The policyholder is the one who proposes the purchase of the life insurance policy and pays the premium.
The policyholder is the owner of the policy and s/he may or may not be the life assured

Life assured
 Life assured is the insured person. Life assured is the one for whom the life insurance plan is
purchased to cover the risk of untimely death. Primarily, the breadwinner of the family is the life
assured.
 Life assured may or may not be the policyholder. For instance, a husband buys a life insurance plan
for his wife. As the wife is a homemaker, husband pays the premium, thus the husband is the
policyholder, and wife is the life assured.

Sum assured (coverage)

 Life insurance is meant to provide a life cover to the insured.
 The financial loss that may arise due to the passing away of the life assured is generally chosen as a
life cover when buying a life insurance plan. In technical terms, ‘Sum Assured’ is the term used for an
amount that the insurer agrees to pay on death of the insured person or occurrence of any other
insured event.
 You may come across the term ‘sum assured’ at the time of comparing policies online, when buying
life insurance plan, and in the policy document. The sum assured is the amount that the life
insurance company will pay if the insured person dies during the policy tenure.
 The sum assured is chosen by the policyholder at the time of purchase. To know more and to
choose the right coverage, read this.

Nominee
The ‘nominee’ is the person (legal heir) nominated by the policyholder to whom the sum assured and other
benefits will be paid by the life insurance company in case of an unfortunate eventuality. The nominee
could be the wife, child, parents, etc. of the policyholder. The nominee needs to claim life insurance, if the
life assured dies during the policy tenure.

Policy tenure
 The ‘policy tenure’ is the duration for which the policy provides life insurance coverage. The policy
tenure can be any period ranging from 1 year to 100 years or whole life, depending on the types of
life insurance plan and its terms and conditions. Many a times, it is also referred to as policy term or
policy duration.
 The policy tenure decides for how long the company is providing the risk coverage. However, in the
case of whole life insurance plans, the life coverage is till the time life assured is alive.

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Maturity age
Maturity age is the age of the life assured at which the policy ends or terminates. This is similar to policy
tenure, but a different way to say how long the plan will be in force. Basically, the life insurance company
declares up front the maximum age till which the life insurance coverage will be provided to the life insured.
For instance, you are 30 years old, you opt for a term plan with a maturity age of 65 years. That means the
policy will have a coverage till you are 65 years old, which also means, the maximum policy tenure for a 30-
year-old is 35 years.

Premium
 The premium is the amount you pay to keep the life insurance plan active and enjoy continued
coverage. If you are unable to pay the premium before the payment due date and even during the
grace period, the policy terminates.
 There are various options on how you can pay the premium – regular payment, limited payment
term, single payment.

Premium payment term/mode/ frequency

 You can pay the life insurance premium as per your convenience.
 Regular Premium Payment - You can pay premium regularly throughout the policy term either –
monthly, quarterly, half-yearly or yearly. Limited Premium Payment – You can choose to pay the
premiums for a limited amount of time. In this option, you do not pay till the end of the policy term,
but for a certain pre-fixed number of years. For example, 10 years, 15 years, 20 years, and so on.
 Single Premium Payment – You can also choose to pay the premium for the entire duration of the
plan as a lumpsum in one single go.

Riders
 Riders are an additional paid-up feature to widen up the scope of the base life insurance policy.
Riders are bought at the time of purchase or on policy anniversary. There are different types of
riders that can be bought along with the base plan. However, number and type of riders will differ
from insurer to insurer.
 Plus, the terms and conditions may differ from one insurance to another. However, here’s the list of
some well-known riders offered by life insurance companies.
 Accidental Death Benefit Rider
 Accidental Total and Permanent Disability Benefit Rider
 Critical illness Cover
 Hospital Cash
 Waiver of Premiums
 For more in-depth guide read – life insurance riders and how to choose one.

Death Benefit
 You will come across ‘Death Benefit’ quite frequently whenever you are either planning to buy a life
insurance plan or comparing different insurance plans online.
 The ‘Death Benefit’ is what life insurance company pays to the nominee in case the life assured dies
during the policy tenure. If you are thinking whether the sum assured and death benefit are one and
the same, then do not be confused. Because the death benefit can be sum assured or even higher
than that, which may include rider benefit (if any), and/or other benefits. Except in the case of term
insurance – where there is no accrued bonus or guaranteed additions.

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Survival/Maturity Benefit
 Maturity benefit is the amount that the life insurance company pays when the life assured outlives
the policy tenure. Survival benefit is paid when the life assured completes the pre-defined number
of years under the policy.
 There is no survival or maturity benefit in term plans. However, in other life insurance policies you
may find survival benefit or the maturity benefit paid under the plan.

Free-look Period
 It is applicable to all new life insurance policies purchased. Free-look period is a time frame during
which one may choose to return the purchased policy.
 If you are not comfortable with the terms and conditions, you can return the policy within the Free-
look period. The insurance company after deducting the expenses incurred on medical examination,
stamp duty charges and other charges will refund the remaining premium. IRDA specifies free-look
period in life insurance is 15 or 30 days after receiving the policy document.

Grace Period
 If you couldn’t pay the renewal premium for your policy on time, life insurance company gives you
an extension in the number of days after the premium payment due date. A ‘Grace Period’ can be
period of 15 days in case of monthly premium payment mode, and 30 days in case of annual
premium payment mode.
 If the policyholder does not pay the premiums even before the end of grace period, the policy gets
lapsed.

Surrender Value
 If the policyholder decides to discontinue the plan before the maturity age, the life insurance
company pays an amount to the policyholder, this is called Surrender Value.
 But you must clearly read the terms and conditions whether a plan offers any surrender value or not.
And if there is a surrender value, how much it will be. Not all life insurance plans have surrender
value.

Paid-up Value
In case the policyholder discontinues to pay the premium after a specified period of time, Insurance
companies will offer the policyholder an option to convert his policy into a reduced paid-up policy. Under
this option the sum insured is reduced in proportion to the number of premiums paid. If other benefits
related to the sum insured are payable, these benefits will now be related to the reduced sum insured,
which is the paid-up value.

Revival Period
 If the policyholder does not pay the premium even during the grace period, the policy lapses.
 However, if the policyholder still wants to continue, the insurance company provides an option of
re-activating the lapsed policy. This must be done within a specific period of time after the grace
period ends. This specified period is known as a revival period. To reinstate the lapsed policy, the life
insurance company will put forward the request to the team of Underwriters for approval.

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Underwriters
 Underwriters evaluate the risk involved in insurance. The process of risk evaluation starts before the
issuance of insurance policy, and ends with settlement of the claim
 Only with the approval of Underwriters, policy is issued to the policyholder. And only after clearance
from the Underwriter, the company pays the claim benefit to the nominee.

Tax benefits
 All the premiums paid towards the life insurance plan are eligible for deductions under Section 80
(C) of Income Tax Act, 1961. The maximum amount that one can claim as deductible is Rs.1.5 lakh.
 The benefits paid to the policyholder/nominee are tax-free under Section 10 (10D) of Income Tax
Act, 1961.

Exclusions
 Before you buy any life insurance, read ‘Exclusions’ carefully. These are things that are not covered
under a life insurance policy, and against which if claimed, insurance company wouldn’t pay any
benefit.
 For instance, Suicide, is an exclusion in any life insurance plan.

Claim Process
 In case, the life assured passes away during the policy tenure, the nominee needs to lodge a claim to
receive the death benefit as mentioned in the policy.

Insurance intermediaries
Insurance intermediaries facilitate the placement and purchase of insurance, and provide services to
insurance companies and consumers that complement the insurance placement process.

Traditionally, insurance intermediaries have been categorized as either insurance agents or insurance
brokers. The distinction between the two relates to the manner in which they function in the marketplace.

Role
As players with both broad knowledge of the insurance marketplace, including products, prices and
providers, and an acute sense of the needs of insurance purchasers, intermediaries have a unique role –
indeed many roles – to play in the insurance markets in particular and, more generally, in the functioning of
national and international economies.

Intermediary activity benefits the overall economy at both the national and international levels: The role of
insurance in the overall health of the economy is well-understood.

Types
Insurance intermediaries can be classified into two main categories: insurance agents and insurance brokers.

Insurance agents are individuals or entities that are appointed by an insurance company to sell and service
insurance policies. They are typically paid on a commission basis, and their main role is to act on behalf of
the insurer.

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Insurance brokers, on the other hand, are independent intermediaries who work for the policyholder. They
provide advice and consultation to help the policyholder choose the right insurance policy, and they
negotiate with insurance companies to get the best terms and prices for the policyholder. Insurance brokers
are paid on a commission basis, and they have a fiduciary duty to act in the best interests of their clients.

Other types of insurance intermediaries include

 Insurance consultants - professionals who provide expert advice and guidance on insurance-
related matters.
 Managing general agents (MGAs) - entities that manage underwriting and policy administration
on behalf of insurers.
 Third-party administrators (TPAs) - entities that provide claims processing and other
administrative services to insurers.
 Insurance aggregators - online platforms that allow consumers to compare and purchase
insurance policies from multiple insurers.

Insurance contract
Many uncertain events can occur in a person’s life causing damage to his life and property. This incites a
need to protect oneself from the losses incurred from such events. This is what the concept of insurance is
based on.

Section 2(8) of the Insurance Act, 1938, defines an “Insurance Company’ as any company, association or
partnership that can be wound up under the Companies Act, 1956, or the Indian Partnership Act, 1932.
Section 2(9) of the Act defines an ‘insurer’ as any individual, body of individuals or any corporated body that
carries on an insurance business.

A proposal, cover note, and policy are all important documents used in the insurance industry.

A proposal is a detailed document that outlines the terms and conditions of an insurance policy. It provides
information on the type of coverage being offered, the premium amount, and any exclusions or limitations.
A proposal is typically presented to a prospective client as a way to outline the terms of the insurance
coverage being offered and to provide a basis for negotiation.

A cover note is a document that accompanies a proposal and provides a brief summary of its main points.
It serves as an introduction to the proposal and helps to set the tone for the rest of the document. The
cover note should be concise and persuasive, highlighting the key benefits of the proposal and encouraging
the recipient to read on.

Once a proposal and cover note have been accepted by the recipient, a policy can be issued. An insurance
policy is a formal agreement between the insurer and the insured, outlining the terms and conditions of the
insurance coverage being provided. The policy will typically include the following information:

 The name and contact information of the insurance company and the insured.
 The type of insurance coverage being provided, including any exclusions or limitations.
 The premium amount and payment terms.
 The policy period, or the length of time the policy will be in effect.
 The deductible amount, or the amount that the insured must pay out of pocket before the insurance
coverage kicks in.

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 The scope of coverage, including any specific conditions or restrictions.

 The claims process and how to file a claim.
 The terms and conditions of the policy, including any legal or regulatory requirements.

Component of insurance contract

 Proposal form: This is the document that the insured fills out when applying for insurance. It
includes personal and financial information that helps the insurer determine the appropriate
premium amount and coverage.
 Premium: This is the amount paid by the insured to the insurer in exchange for the coverage
provided. The premium amount is determined based on factors such as the insured's age, health,
and lifestyle habits.
 Policy document: This is the formal agreement between the insurer and the insured, outlining the
terms and conditions of the insurance coverage being provided.
 Insured value: This is the amount that the insurer will pay out in the event of a covered loss or
damage. The insured value is typically based on the current market value of the insured item or the
cost of replacing it.
 Exclusions and limitations: These are specific conditions or circumstances that are not covered by
the insurance policy. For example, a health insurance policy may not cover pre-existing medical
conditions.
 Renewal terms: This outlines the process for renewing the insurance policy, including any changes
to the premium amount or coverage.
 Claims process: This outlines the steps that the insured must follow in order to file a claim in the
event of a covered loss or damage.

Basic features of insurance contracts

This Act says that all agreements are the contract if they are made by the free consent of the parties,
competent to contract, for a lawful consideration and with a lawful object and which are not at this moment
declared to be void”.

The insurance contract involves—(A) the elements of the general contract, and (B) the element of special
contract relating to insurance.

The special contract of insurance involves principles

 Insurable Interest.
 Utmost Good Faith.
 Indemnity.
 Subrogation.
 Warranties.
 Proximate Cause.
 Assignment and Nomination.
 Return of Premium.

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Insurable Interest
For an insurance contract to be valid, the insured must possess an insurable interest in the subject matter of
insurance.

The insurable interest is the pecuniary interest whereby the policy-holder is benefited by the existence of
the subject-matter and is prejudiced death or damage of the subject- matter. The essentials of a valid
insurable interest are the following:

 There must be a subject-matter to be insured.

 The policy-holder should have a monetary relationship with the subject-matter.
 The relationship between the policy-holders and the subject-matter should be recognized by law. In
other words, there should not be any illegal relationship between the policy-holder and the subject-
matter to be insured.
 The financial relationship between the policy-holder and subject-matter should be such that the
policy-holder is economically benefited by the survival or existence of the subject-matter and or will
suffer economic loss at the death or existence of the subject matter.
 The subject-matter is life in the life insurance, property, and goods in property insurance, liability,
and adventure in general insurance.

Insurable interest is essentially a pecuniary interest, i.e., the loss caused by fire happening of the insured risk
must be capable of financial valuation.

No emotional or sentimental loss, as an expectation or anxiety, would be the ground of the insurable
interest. The event insured should be one that if it happens, the party suffers financially and if it does not
happen, the party is benefited by the existence.

But a mere hope or expectation, which may be frustrated by the happening to some extent, is not an
insurable interest.

Utmost Good Faith

 The doctrine of disclosing all material facts is embodied in the important principle ‘utmost good
faith’ which applies to all forms of insurance.
 Both parties to the insurance contract must agree (ad idem) at the time of the contract. There
should not be any misrepresentation, non-disclosure or fraud concerning the material.
 In case of insurance contract the legal maxim ‘Caveat Emptor” (let the buyer beware) docs not
prevail, where it is the regard of the buyer to satisfy himself of the genuineness of the subject-
matter and the seller is under no obligation to supply information about it.
 But in the insurance contract, the seller, i.e., the insurer will also have to disclose all the material
facts.
 An insurance contract is a contract of uherrimae fidei, i.e., of absolute good faith both parties to the
contract must disclose all the material facts and fully.

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Principle of Indemnity
 As a rule, all insurance contracts except personal insurance are contracts of indemnity.
 According to this principle, the insurer undertakes to put the insured, in the event of loss, in the
same position that he occupied immediately before the happening of the event insured against, in a
certain form of insurance, the principle of indemnity is modified to apply.
 For example, in marine or fire insurance, sometimes, a certain profit margin which would have
earned in the absence of the event, is also included in the loss. In a true sense of the indemnity, the
insured is not entitled to make a profit from his loss.
 To discourse over insurance the principle of indemnifying it an essential feature of an insurance
contract, in the absence of which this industry would have the hue of gambling, and the insured
would tend to affect over-insurance and then intentionally cause a loss to occur so that a financial
gain could be achieved. So, to avoid this international loss, only the actual loss becomes payable
and not the assured sum (which is higher in over-insurance). If the property is under-insured, i.e., the
insured amount is less than the actual value of the property insured, the insured is regarded his
insurer for the amount if under insurance and in case of loss one shall share the loss himself.
 To avoid an Anti-social Act; if the assured is allowed to gain more than the actual loss, which is
against the principle of indemnity, he will be tempted to gain by the destruction of his property after
getting it insured against risk. He will be under constant temptation to destroy the property. Thus,
the whole society will be doing only anti-social acts, i.e., the persons would be interested in gaining
after the destruction of the property. So, the principle of indemnity has been applied where only the
cash-value of his loss and nothing more than this, though he might have insured for a greater
amount, will be compensated.
 To maintain the Premium at Low-level; if the principle of indemnity is not applied, the larger amount
will be paid for a smaller loss, and this will increase the cost of insurance, and the premium of
insurance will have to be raised. If the premium is raised two things may happen first, persons may
not be inclined to ensure and second, unscrupulous persons would get insurance to destroy the
property to gain from such an act. Both things would defeat the purpose of insurance. So, a
principle of indemnity is here to help them because such temptation’ is eliminated when only actual
loss and not more than the actual financial loss is compensated provided there is insurance up to
that amount.

Doctrine of Subrogation
 The doctrine of subrogation refers to the right of the insurer to stand in the place of the insured,
after the settlement of a claim, in so far as the insured’s right of recovery from an alternative source
is involved.
 If the insured is in a position to recover the loss in full or in part from a third party due to whose
negligence the loss may have been precipitated, his right of recovery is subrogated to the insurer on
the settlement of the claim.
 The insurers, after that, recover the claim from the third party. The right of subrogation may be
exercised by the insurer before payment of loss.

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Essentials of Doctrine of Subrogation

 A corollary to the Principle of Indemnity
 The doctrine of subrogation is the supplementary principle of indemnity.

Personal Insurance
The doctrine of subrogation does riot apply to personal insurance because the doctrine of indemnity does
not apply to such insurance. The insurers have no right of action against the third party in respect of the
damage.

For example, if an insured dies due to. the negligence of a third party his dependent has the right to recover
the amount of the loss from the third party along with the policy amount No amount of the policy would be
subrogated by the insurer.

Warranties
 There are certain conditions and promises in the insurance contract which are called warranties.
 According to Marine Insurance Act, “A warranty is that by which the assured undertakes that some
particular thing shall or shall not be done, or that some conditions shall be fulfilled, or whereby he
affirms or negatives the existence of a particular state of facts.”
 Warranties that are mentioned in the policy are called express warranties. Certain warranties are not
mentioned in the policy.
 These warranties are called implied warranties. Warranties which are answers to the question arc
called affirmative warranties. The warranties fulfilling certain conditions or promises are called
promissory warranties.
 Warranty is a very important condition in the insurance contract which is to be fulfilled by the
insured. On the breach of warranty, the insurer becomes free from his liability.
 Therefore insured must have to fulfill the conditions and promises of the insurance contract whether
it is important or not in connection with the risk. The contract can continue only when warranties are
fulfilled.
 If warranties are riot followed, the contract may be canceled by the other party whether the risk has
occurred or not or the loss has occurred due to other reasons than the waiving of warranties.
 However, when the warrant is declared illegal, and there is no reverse effect on the contract, the
warranty can be waived.

Proximate Cause
 The rule; is that immediate and not the remote cause is to be regarded. The maxim is “sed causa
proximo non-remold-spectator”; see the proximate cause and not, the distant cause.
 The real cause must be seen while payment of the loss. If the real cause of loss is insured, the insurer
is liable to compensate for the loss; otherwise, the insurer may not be responsible for a loss.
 Proximate cause is not a device to avoid the trouble of discovering the real ease or the common
sense cause.

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 Proximate cause means the actual efficient cause that sets in motion a train of events which brings
about result, without the intervention of any force started and worked actively from a new and
independent source.
 The determination of real cause depends upon the working and practice of insurance and
circumstances to losses. A loss may not be occasioned merely by one event.
 There may be concurrent causes or chain of causes. They may occur in a sequence or broken chain.
Sometimes, certain causes arc excepted by (the insurance contract and the insurer is not liable for
the accepted peril.
 The efficient cause of a loss is called the proximate cause of the loss.
 For the policy to cover the loss must have an insured peril as the proximate cause of the loss or also
the insured peril must occur in the chain of causation that links the proximate cause with the loss.
 The proximate cause is not necessarily, the cause that was nearest to the damage either in time or
place but is rather the cause that was responsible for the loss.

Assignment or Transfer of Interest

 It is necessary to distinguish between the assignment of (a) the subject-matter of insurance, (b) the
policy, and (c) the policy money when payable.
 Marine and life policies can be freely assigned but assignments under fire and accident policies, are
not valid without the prior consent of the insurers—except changes of interest by will or operation
of law.
 Moreover, assignments under fire and accident policies must be made before tine insured parts with
his, interest. Once he has lost interest, the policy is void and cannot be assigned.
 The life policies can be assigned whether the assignee has an insurable interest or not.
 Life policies are frequently charged, assigned or otherwise dealt with, for they are valuable securities.
The marine policy is freely assignable unless it contains terms expressly prohibiting assignment.
 It assigned either before or after a loss. A marine policy may be assigned by endorsement thereon
or in another customary manner.
 In practice, a marine cargo policy is frequently endorsed in blank and becomes in effect a quasi-
negotiable instrument.
 Thus, it will be appreciated, adds considerably to the convenience of mercantile transactions as the
policy can be negotiated through a bank along with other documents of title.
 Assignment in fire insurance cannot be recognized without the prior consent of the insurer, change
of interest in fire policies (unless by will or operation of law) are not valid unless and until the
consent of the insurer has been given.
 The fire policies are not like an assignment nor intended to be assigned from one person to another
without the consent of the insurer. Assignment in fire insurance constitutes a new contract.

Return of Premium
Ordinarily, the premium once paid cannot be refunded. However, in the following cases, the refund is
allowed.

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Differences between insurance contracts and other contracts

 Conditional nature: Insurance contracts are conditional in nature, meaning that the insurer is only
obligated to pay out if certain conditions are met, such as the occurrence of a covered loss or
damage. Other types of contracts are typically unconditional, meaning that the parties are obligated
to perform regardless of any specific conditions.
 Insurable interest: Insurance contracts require the insured to have an insurable interest in the item
or event being insured. This means that the insured must have a financial stake in the item or event,
and would suffer a financial loss if it were to be damaged or lost. Other types of contracts do not
typically require an insurable interest.
 Adhesion contracts: Insurance contracts are often considered adhesion contracts, which means that
the terms and conditions are set by the insurer and the insured has limited ability to negotiate or
change the terms. Other types of contracts are typically negotiated by both parties and the terms
are agreed upon before the contract is signed.
 Indemnification: Insurance contracts are designed to provide indemnification to the insured,
meaning that the insurer agrees to pay for covered losses or damages up to the insured value. Other
types of contracts may not provide for indemnification.
 Regulatory oversight: Insurance contracts are subject to regulatory oversight by government
agencies to ensure that they are fair and equitable for both parties. Other types of contracts may not
be subject to similar regulatory oversight.

Types of Insurance

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General Insurance
General insurance plans are one of the types of policies that provide coverage in the form of sum assured
against damages besides the policyholder's demise. In general, general insurance refers to a variety of
insurance plans that provide financial protection against losses caused as a result of liabilities such as a bike,
automobile, house, or health. The following are examples of several types of general insurance policies :

Health Care Coverage

Health insurance is a form of insurance policy that covers the costs of medical treatment. Health insurance
policies either cover or repay the cost of treatment for any included disease or injury. Various forms of
health insurance cover a wide range of medical bills.

It typically provides defence against

 Inpatient care
 Critical illness treatment
 post-hospitalization medical bills
 Procedures for day-care

A few types of health insurance policies also cover resident care and pre-hospitalization costs. The following
are some of the several types of health insurance policies available in India

1) Individual Health Insurance

Provides coverage to a single person.

2) Family Floater Insurance

This type of insurance allows your complete family to be covered under one policy, which often includes the
husband, wife, and two children.

3) Critical Illness Coverage

A sort of health insurance that covers a variety of life-threatening illnesses such as stroke, heart attack, renal
failure, cancer, and other comparable conditions. When a policyholder is diagnosed with a serious illness,
they get a lump sum payment.

4) Senior Citizen Health Insurance:

These insurance policies are designed for people over the age of 60.

5) Group Health Insurance

This is a type of insurance that a business provides to its employees.

Automobile Insurance
Motor insurances are forms of insurance that provide financial help in the event that your automobile is
involved in a crash. In India, there are several types of motor insurance coverage available, including :

1) Car Insurance

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This plan covers privately owned four-wheelers. There are two kinds of automobile insurance plans: third-
party insurance and extended coverage policies.

2) Bike Insurance

These are forms of automobile insurance that protect privately-owned two-wheelers in the event of an
accident.

3) Commercial Vehicle Insurance :

A sort of automobile insurance that covers any vehicle utilized for commercial purposes.

Homeowners' Insurance
A homeowner’s insurance, as the name implies, provides full coverage for the belongings and infrastructure
of your property against physical destruction or damage. In other words, house insurance protects you from
both natural and man-made disasters such as fire, earthquake, tornado, burglary, and robbery.

The following are examples of several types of house insurance policies :

1) Home Building Insurance

Serves to protect the house's foundation from destruction in the event of a disaster.

2) Public Liability Coverage

Protects the insured residential property from any harm caused by a visitor or third-party while on the
premises.

3) Standard Fire and Special Perils Policy

Protection against fires, natural disasters (e.g., earthquakes, landslides, and storms, and floods), and anti-
social human-caused activities (e.g., strikes, and riots)

Life Insurance
Life Insurance provides financial coverage for the most uncertain part of human life: Life itself! Thus, it offers
financial protection to the Life Assured's family in case of unfortunate events like the death or disability of
the policyholder. In addition to the life coverage, some policies also provide a savings component and can
be used as a prudent investment option.

Term Insurance
 Term Insurance is the most basic type of Life Insurance that provides Life Cover for a predetermined
period called the 'term' of the policy.
 Since they do not offer any cash value, they are generally available at a much lower premium than
other products for the same amount of coverage. If the Life Assured dies during the policy term, the
nominee receives the Sum Assured, and there is no maturity value if the Life Assured survives the
policy term. However, certain Term Plans offer the option of Return of Premium which is paid to the
policyholder if Life Assured survives the policy term.

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Whole Life Insurance

 Also known as Traditional Life Insurance, Whole Life Insurance provides coverage for the
policyholder's entire life. Besides this life cover, they also have a savings component and accrue
periodic bonuses.
 Generally, the Whole Life Insurance Plans have a maturity period of 100 years, and if a policyholder
survives this term; they are paid a maturity amount.

Endowment Policy
 A perfect mix of Investment and Insurance, Endowment Plans provide Life Coverage and help build a
corpus for major life goals.
 A portion of the premium goes towards Sum Assured while the other portion is invested in certain
low-risk investments. In case of the policyholder's demise during the policy term, the Sum Assured is
paid to the nominee. However, if the policyholder survives the term, they receive a maturity amount
along with the accrued bonuses.
 Thus, Endowment Plans serve the dual purpose of Insurance and Investment.

Money Back Policy

 Money Back Policies are essentially the Endowment Plans only with the additional feature of
payments at certain pre-defined intervals during the policy term. Additionally, on maturity, the
maturity benefits are paid along with accrued bonuses.
 In case of the policyholder’s demise during the term, Sum Assured is paid to the nominee regardless
of the survival benefits already paid.

Unit Linked Insurance Plans

 ULIPs provide Life Coverage and capital-building opportunities by investing in various market-
related instruments and funds of varying risks.
 ULIPs have some underlying funds related to different asset classes like Equity, Hybrid and Debt
funds where a certain portion of the premium is invested as per the policyholder's risk appetite.
While this portion of the premium helps generate returns, the other portion goes to the Life
Coverage part.
 ULIPs are flexible to a certain extent. They allow partial withdrawal after a lock-in period of 5 years
and the switching of funds that can help you customize your investment as per your financial goal
and life stage.

Pension Plan
 Also known as Retirement Plan, Pension Plan helps to accumulate wealth for the golden years of
one's life and helps you deal with the financial uncertainties of the post-retirement phase.
 Thus, a pension plan allows you to contribute a specific portion of your income as a premium during
your earning years. Subsequently, in your retirement phase, this accumulated amount is paid back to
you in the form of an annuity or pension at regular intervals.

Child Plans
 These are specially designed endowment plans meant to financially secure a child's future in case
any mishap occurs with their parents or, more importantly, the sole earning parent.

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 In the event of the policyholder's death, the child receives a certain sum assured. However, the
policy does not end there. Future premiums are waived off/paid by the insurer, and the child also
keeps receiving some amount at regular intervals. This plan ensures the demise of the earning
parent does not impact the child's education.

Regulatory framework of insurance business in India

 Licensing: The IRDAI is responsible for issuing licenses to insurance companies and intermediaries,
such as brokers and agents, who wish to operate in India. These licenses are subject to certain
conditions and requirements.
 Solvency requirements: Insurance companies in India are required to maintain minimum levels of
solvency in order to ensure that they have sufficient capital to meet their obligations to
policyholders. The IRDAI sets these solvency requirements and monitors compliance.
 Product approval: Insurance companies must obtain approval from the IRDAI for their insurance
products before they can be sold to customers. The IRDAI reviews these products to ensure that
they are fair, transparent, and meet the needs of customers.
 Consumer protection: The IRDAI has established guidelines and regulations to protect the interests
of policyholders and ensure that insurance companies operate fairly and transparently. These
guidelines cover areas such as policy terms and conditions, claims handling, and customer service.
 Market conduct: The IRDAI monitors the conduct of insurance companies and intermediaries to
ensure that they operate in a manner that is fair, transparent, and compliant with regulations. This
includes monitoring advertising and sales practices, as well as investigating and enforcing penalties
for violations of regulations.

Acts/regulations governing both life & general insurance business in India

 Insurance Act, 1938
 IRDA Act, 1999 & Regulations passed thereunder
 Insurance Amendment Act, 2002
 Exchange Control Regulations (FEMA)
 Indian Stamp Act, 1899
 Consumer Protection Act, 1986
 Insurance Ombudsman Rules, 2017
 Labour Law legislations

Regulations governing/affecting life insurance business in India

 LIC Act, 1956
 Amendments to LIC Act

Regulations affecting general insurance business in India

 General Insurance Nationalization Act, 1972
 Amendments to GIN Act, 1972
 Multi-Modal Transportation Act, 1993
 Motor Vehicles Act, 1988
 Inland Steam Vessels Amendment Act, 1977
 Marine Insurance Act, 1963

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 Carriage of Goods by Sea Act, 1925

 Merchant Shipping Act, 1958
 Bill of Lading Act, 1855
 Indian Ports (Major Ports) Act, 1963
 Indian Railways Act, 1989
 Carriers Act, 1865
 Indian Post Office Act, 1898
 Carriage by Air Act, 1972
 Public Liability Insurance Act, 1991
 Employee State Insurance Act,1948
 Aircraft Act, 1934.

Insurance regulatory and development authority of India (‘IRDAI’)

 The Insurance Regulatory and Development Authority of India (IRDAI) is the regulatory body
governing the insurance industry in India. Its main objective is to protect the interests of
policyholders and ensure the orderly growth of the insurance industry in India.
 Established in 1999 under the IRDAI Act, the authority is responsible for issuing licenses to insurance
companies, regulating insurance agents, and setting standards for insurance policies and contracts.
The IRDAI also ensures that insurance companies comply with all regulatory requirements and
investigates complaints from policyholders.
 The IRDAI also plays a significant role in promoting insurance awareness and education among the
general public. It has introduced various initiatives to increase insurance penetration in the country,
particularly in rural areas. The authority has also launched various programs to educate
policyholders about their rights and obligations under their insurance policies.

Role of IRDAI
The insurance industry in India dates back to the early 1800s and has grown over the years with better
transparency and focus on protecting the interest of the policyholder. The IRDA plays an integral role in
emphasizing the importance of policyholders and their interest while framing rules and regulations. Here
are the important roles of the IRDA:

 To protect the policyholder’s interests.

 To help speed up the growth of the insurance industry in an orderly fashion, for the benefit of the
common man.
 To provide long-term funds to speed up the nation’s economy.
 To promote, set, enforce and monitor high standards of integrity, fair dealing, financial soundness
and competence of the insurance providers.
 To ensure genuine claims are settled faster and efficiently.
 To prevent malpractices and fraud, the IRDA has set up a grievance redress forum to ensure the
policyholder is protected.
 To promote transparency, fairness and systematic conduct of insurance in the financial markets.
 To build a dependable management system to make sure high standards of financial stability are
followed by insurers.

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 To take adequate action where such high standards are not maintained.
 To ensure the optimum amount of self-regulation of the industry.

Working of IRDAI
 Issues certificate of registration to new insurance companies.
 Sets rules and regulations to ensure the interests of the policyholder are taken care of.
 Monitors all claims are settled in all fairness and that no insurer will deny any claim on their own free
will.
 Regulates the code of conduct of the insurance companies, insurance intermediaries, and others
associated with the insurance industry.
 Provides solutions in case of disputes through the IRDA ombudsman
 Controls and regulates the rates of insurance to prevent unwanted price hikes in the insurance
premium.
 The apex body is responsible for setting the minimum percentage limit of insurance companies for
General and Life Insurance, thereby developing both urban and rural sectors.

Life Insurance Council & General Insurance Council

Life Insurance Council

It is a forum that connects the various stakeholders of the Life Insurance sector. It develops and coordinates
all discussions between the Government, Regulatory Board and the Public. Constituted under Sec.64C of
Insurance Act 1938, the Life insurance Council functions through several sub-committees and includes all 24
life insurance companies in India.

Some of LI Council functions are

 Creating a positive image of the industry and enhancing consumer confidence.
 Maintaining high standards of ethics and governance.
 Promoting awareness of the role and benefits of life insurance.
 Organizing structured and proactive discussions with Government, lawmakers and regulators.
 Conducting research in life insurance, publish monographs and contribute to development of the
sector.
 Acting as forum of interaction with other organizations of the financial services sector.
 Playing a leading role in insurance education, research, training and conferences.
 Providing help and guidance to members when necessary.
 Be an active link between the Indian life insurance industry and the global markets.

Constitution of life insurance council

The Constitutional members of the Life Insurance Council in India are the Chairman and the Vice Chairman,
who are elected by the Council from among its members. The Chairman and the Vice Chairman hold office
for a term of two years and can be re-elected for a second term.

In addition to the Chairman and Vice Chairman, the Council also has several other members who are
elected or nominated from the life insurance industry, including representatives from the Life Insurance

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Corporation of India, private life insurance companies, and other stakeholders. These members play a
crucial role in shaping the policies and initiatives of the Council, and in representing the interests of the life
insurance industry in India.

General Insurance Council

The General Insurance Council (GI Council) is a representative body of general insurers including Stand-
alone Health Insurers, Specialized Insurers, Reinsurers, Foreign Reinsurer Branches (FRBs) and Lloyd’s India,
registered with IRDAI. As per Section 64C of the Insurance Act, 1938 (and amended in January 2015) all
general insurers, health insurers and reinsurers granted registration and licence by IRDAI to carry out
business in India are members of the General Insurance Council. After the passage of the Insurance Laws
(Amendment) Act in April 2015, GI Council is a Self-Regulatory Organization for the non-life insurance
industry’s market conduct and practices.

As per Section 64L (1) of the Insurance Act, 1938 the GI Council has the following functions:

 To aid and advise insurers, carrying on general insurance business, in the matter of setting up
standards of conduct and sound practice and in the matter of rendering efficient service to holders
of policies of general insurance
 To render advise to IRDAI in the matter of controlling the expenses of such insurers carrying on
business in India in the matter of commission and other expenses
 To bring to the notice of IRDAI the case of any such insurer acting in a manner prejudicial to the
interests of holders of general insurance policies.

Powers of life & general insurance councils

The Life Insurance Council and the General Insurance Council are the two representative bodies of the
insurance industry in India. These councils have been established under the provisions of the Insurance Act,
1938 and the IRDAI Act, 1999.

The powers of these councils include

 Formulating and implementing policies related to the insurance industry in India.

 Representing the interests of the insurance industry before the government and other stakeholders.
 Promoting the growth and development of the insurance industry in India.
 Setting standards and guidelines for the conduct of business by insurance companies.
 Resolving disputes and grievances between insurance companies and their customers.
 Undertaking research and analysis to identify emerging trends and challenges in the insurance
industry.
 Collaborating with other national and international organizations to promote best practices in the
insurance industry.
 Providing training and education to insurance professionals to enhance their skills and knowledge.

Insurance ombudsmen rules 2017

This section defines the scope, applicability, and definitions of the Insurance Ombudsman Rules 2017.

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Constitution of Offices of Ombudsman

The Constitution of Offices of Ombudsman is a section of the Insurance Ombudsman Rules 2017, which
outlines the procedure for the establishment of the offices of Insurance Ombudsman in various regions of
India.

As per the rules, the Central Government may establish one or more offices of the Insurance Ombudsman in
each state, or such other regions as it deems necessary. The Ombudsman may be appointed by the Central
Government, in consultation with the Insurance Regulatory and Development Authority of India (IRDAI), and
should have the following qualifications:

 He/she should have held a judicial or legal post not below the rank of District Judge, or should have
been a member of the Indian Legal Service.
 He/she should have experience in the insurance sector or in consumer affairs.
 He/she should not have any financial interest in any insurance company or brokerage firm.

The Ombudsman should also be a person of integrity and impartiality, and should not hold any other office
of profit or engage in any other profession or vocation while serving as an Ombudsman.

Once appointed, the Ombudsman should assume office for a term of three years, and may be re-appointed
for another term. The Central Government may also remove an Ombudsman from office for reasons such as
misconduct, incapacity, or violation of rules or guidelines.

Complaints to Ombudsman
The section "Complaints to Ombudsman" in the Insurance Ombudsman Rules 2017 describes the types of
complaints that can be filed with the Insurance Ombudsman and the procedure for filing a complaint.

As per the rules, a complaint can be filed with the Ombudsman by any person who has an insurance policy
or has a claim arising out of an insurance policy, including the legal heirs or representatives of such persons.
The complaint should be filed in writing, either by post or by email, and should include the following
details:

 The name and address of the complainant

 The name and address of the insurance company against which the complaint is being made
 The policy number and the type of policy
 The details of the complaint, including the grounds on which it is being made
 The relief or compensation sought by the complainant

The complaint should be filed within one year from the date of rejection of the claim by the insurance
company or the date of settlement of the claim, whichever is later. The complaint should also be filed after
the complainant has exhausted all the remedies available with the insurance company, such as internal
grievance redressal mechanisms.

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Once a complaint is received by the Ombudsman, he/she may require the complainant to provide
additional information or documents, and may also seek the response of the insurance company. The
Ombudsman may also hold hearings or call for an inspection of documents as part of the investigation.

The Ombudsman is required to dispose of the complaint within three months from the date of receipt of
the complaint, unless an extension is granted by the complainant. The decision of the Ombudsman is
binding on the insurance company, but the complainant has the option to approach a court of law if he/she
is not satisfied with the decision.

Procedure for dealing with complaints

The procedure for dealing with complaints is an important aspect of the Insurance Ombudsman Rules 2017,
which sets out the steps to be followed by the Ombudsman in resolving complaints.

The procedure for dealing with complaints is as follows

 Receipt of complaint: The Ombudsman receives the complaint in writing, either by post or email,
along with all the necessary documents and information.
 Examination of complaint: The Ombudsman examines the complaint and may seek additional
information or documents from the complainant or the insurance company.
 Mediation: The Ombudsman may attempt to resolve the complaint through mediation, where
he/she acts as a neutral third party to facilitate a settlement between the complainant and the
insurance company.
 Investigation: If mediation fails, the Ombudsman may conduct an investigation by calling for
documents or evidence from the insurance company, conducting hearings, and examining
witnesses.
 Decision: Based on the findings of the investigation, the Ombudsman makes a decision on the
complaint, which is binding on the insurance company. The Ombudsman may direct the insurance
company to pay compensation or take other remedial action.
 Communication of decision: The Ombudsman communicates the decision to the complainant and
the insurance company, and may also publish the decision on the website of the Ombudsman's
office.
 Implementation of decision: The insurance company is required to implement the decision of the
Ombudsman within 15 days of receiving the communication of the decision.

Powers and Functions of Ombudsman

The Insurance Ombudsman is an important institution that is responsible for the resolution of disputes and
grievances related to insurance policies. The Ombudsman has been given a wide range of powers and
functions under the Insurance Ombudsman Rules 2017, which are outlined below:

 Receive and investigate complaints: The Ombudsman is authorized to receive and investigate
complaints from policyholders, claimants, or their legal representatives, relating to disputes arising
out of insurance contracts.

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 Mediation and conciliation: The Ombudsman may attempt to resolve disputes through mediation
or conciliation, by acting as a neutral third party to facilitate a settlement between the parties.
 Issuing directions: The Ombudsman has the power to issue directions to the insurance company to
pay compensation or take other remedial action as deemed necessary.
 Summoning and examining witnesses: The Ombudsman has the power to summon and examine
witnesses, and to require the production of documents or other evidence relevant to the dispute.
 Making recommendations: The Ombudsman may make recommendations to the insurance
company regarding changes to its policies or practices to avoid similar disputes in the future.
 Conducting inspections: The Ombudsman may conduct inspections of the premises of the
insurance company or its agents, and examine its books and records, if necessary.
 Communicating decisions: The Ombudsman is required to communicate his/her decisions to the
complainant and the insurance company, and may also publish the decisions on the website of the
Ombudsman's office.
 Enforcing decisions: The decisions of the Ombudsman are binding on the insurance company, and
the company is required to implement the decisions within 15 days of receiving the communication
of the decision.

Award by Ombudsman
 An award by the Insurance Ombudsman is a binding decision issued by the Ombudsman to resolve
disputes between policyholders and insurance companies. The award may direct the insurance
company to pay compensation, take other remedial action, or make recommendations for changes
in its policies or practices. The award is binding on the insurance company and is required to be
implemented within 15 days of receiving the communication of the decision.
 The award by the Ombudsman is based on the findings of an investigation conducted by the
Ombudsman, which may involve calling for documents or evidence from the insurance company,
conducting hearings, and examining witnesses. The Ombudsman may also attempt to resolve the
dispute through mediation or conciliation.
 The award by the Ombudsman is communicated to the complainant and the insurance company in
writing, and may also be published on the website of the Ombudsman's office. The award sets out
the decision of the Ombudsman, the reasons for the decision, and any directions or
recommendations issued to the insurance company.
 The award by the Ombudsman is a quick and efficient mechanism for resolving disputes, and helps
to enhance public trust and confidence in the insurance sector. It provides policyholders with a level
of protection and ensures that they are treated fairly and transparently by insurance companies.
 In case the complainant is not satisfied with the award by the Ombudsman, he/she may approach a
civil court or consumer forum for further redressal. However, the insurance company is bound to
implement the decision of the Ombudsman, regardless of whether the complainant decides to
pursue further legal action.
 It is important to note that the award by the Ombudsman is not a substitute for legal proceedings,
and does not preclude the complainant from pursuing legal action against the insurance company.
However, the award by the Ombudsman is a quick and cost-effective alternative to litigation, and
helps to reduce the burden on the courts.

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 The Insurance Ombudsman Rules 2017 provide for the constitution of an appellate authority, to
which an appeal may be made against the award of the Ombudsman. The appellate authority is
headed by a retired judge of the High Court, and its decision is final and binding on the parties.

Jurisdiction of Ombudsman
The Insurance Ombudsman has a specific jurisdiction over the complaints related to insurance policies, and
has the power to investigate and resolve disputes between policyholders and insurance companies. The
jurisdiction of the Ombudsman is determined by the territorial limits of the office of the Ombudsman, and
extends to the following:

 Complaints related to life insurance policies, including group policies and annuities.
 Complaints related to general insurance policies, including motor, health, travel, fire, marine, and
other types of policies.
 Complaints related to the services provided by insurance companies, including delays in claim
settlement, non-issuance of policy documents, and other grievances related to the functioning of
insurance companies.

However, there are certain limitations to the jurisdiction of the Ombudsman. The Ombudsman cannot
investigate complaints related to the following:

 Complaints that are already pending before a court or consumer forum.

 Complaints related to reinsurance policies, which are contracts between insurance companies.
 Complaints related to policies issued by foreign insurers, unless the insurer has a branch or office in
India.
 Complaints related to policies issued by specialized insurers, such as Export Credit Guarantee
Corporation, Agriculture Insurance Company, etc.
 Complaints related to policies issued by insurance companies that are not members of the Insurance
Council.

It is important to note that the jurisdiction of the Ombudsman is limited to the settlement of disputes
between policyholders and insurance companies, and does not extend to regulatory functions or policy
formulation. The Ombudsman is an independent body that works towards the resolution of disputes in a
fair, transparent, and impartial manner, and helps to promote public trust and confidence in the insurance
sector.

Insurance as a social security tool

 Typically, an individual has only three resources to fall back upon when a calamity strikes: savings,
charity and insurance.
 Saving money can be a slow and tedious process. On average, one saves only 10% of one’s earnings.
Also, the exact amount that will be required to take care of sudden emergencies is extremely
unpredictable, making savings insufficient at most critical junctures.
 For some people, it may take a life time to accumulate a substantial sum of money that can come in
handy during a crisis. This list could include those who didn’t invest in avenues such as Fixed
Deposits and Mutual Funds.

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 Charity, on the other hand, could be a demeaning and unreliable resource since you are completely
at the mercy of the provider. Thus, insurance remains the only viable option to fall back upon
whenever crisis strikes.
 Life Insurance is one of the most effective social security tools in use across the globe. It is especially
important in India where social security is offered in the form of Employee Provident Fund and
Public Provident Fund, which are available only to the working classes.
 Unlike any socialist or developed capitalist society, where states are responsible for the deprived and
destitute, India is unfortunately not yet equipped to handle social security for such a large populace.
 In the absence of a bread winner in a family, there is little that the government or other social
agencies can do to look after the welfare of those left behind. Thus, in order to ensure that a family
continues to enjoy the same financial status as before, insurance is probably the best social security
tool that can help in case of unforeseen eventualities.
 It not only provides peace of mind, but also helps secure the future of the entire family. The
government is also encouraging people to take up Life Insurance policies by giving policyholders tax
benefits under Section 80C of the Income Tax Act.
 The concept of Life Insurance has come a long way from its inception and today provides a smart
avenue for investment where policyholders can not only secure themselves against unforeseen
contingencies but are also able to create wealth over a period of time by allowing the money paid
towards insurance to be invested in market oriented instruments.

Government sponsored socially oriented insurance schemes

Pradhan Mantri Jeevan Jyoti Bima Yojana (PMJJBY): This scheme provides life insurance coverage of Rs.
2 lakhs (approximately USD 2,700) to individuals between the ages of 18 and 50 years at a premium of Rs.
330 (approximately USD 4.50) per annum. The scheme is administered by the Life Insurance Corporation of
India (LIC) and is available to all Indian citizens, including those from economically weaker sections.

Pradhan Mantri Suraksha Bima Yojana (PMSBY): This scheme provides accidental death and disability
insurance coverage of Rs. 2 lakhs (approximately USD 2,700) at a premium of Rs. 12 (approximately USD
0.16) per annum. The scheme is available to individuals between the ages of 18 and 70 years and is also
administered by the LIC.

Rashtriya Swasthya Bima Yojana (RSBY): This scheme provides health insurance coverage of up to Rs.
30,000 (approximately USD 400) per annum to below-poverty-line families and other vulnerable groups,
such as unorganized workers, street vendors, and domestic workers. The scheme is funded by the central
and state governments and is implemented through public and private insurance companies.

Ayushman Bharat Pradhan Mantri Jan Arogya Yojana (AB-PMJAY): This scheme, also known as the
National Health Protection Scheme, provides health insurance coverage of up to Rs. 5 lakhs (approximately
USD 6,700) per family per annum to over 10 crore (100 million) families, covering around 50 crore (500
million) individuals. The scheme covers secondary and tertiary hospitalization expenses and is available to
eligible families identified through the Socio-Economic Caste Census.

Pradhan Mantri Fasal Bima Yojana (PMFBY): This scheme provides crop insurance coverage to farmers
against yield losses due to natural calamities, pests, and diseases. The scheme is implemented by public and

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private insurance companies and is available to all farmers, with a premium subsidy ranging from 50% to
90% depending on the type of crop and region.

Atal Pension Yojana (APY): This scheme is aimed at providing a guaranteed monthly pension of Rs. 1,000
to Rs. 5,000 (approximately USD 13 to USD 67) to individuals in the unorganized sector who are not
covered by any other social security scheme. The scheme is available to individuals between the ages of 18
and 40 years and offers different pension amounts based on the contribution amount and the age at which
the individual joins the scheme.

National Social Assistance Programme (NSAP): This scheme provides financial assistance to destitute,
elderly, and disabled individuals in the form of a monthly pension ranging from Rs. 300 to Rs. 500
(approximately USD 4 to USD 7) depending on the age and category of the beneficiary. The scheme is
implemented through the Ministry of Rural Development and is available to individuals aged 60 years or
above and belonging to below-poverty-line households.

National Crop Insurance Programme (NCIP): This scheme is aimed at providing crop insurance coverage
to farmers against crop losses due to natural calamities, pests, and diseases. The scheme is implemented by
the Ministry of Agriculture and Farmers' Welfare and provides coverage for both kharif and rabi crops. The
premium subsidy under the scheme ranges from 50% to 80%, depending on the type of crop and region.

Aam Aadmi Bima Yojana (AABY): This scheme provides life insurance coverage of Rs. 30,000
(approximately USD 400) to the family of the insured in case of the insured's death due to natural or
accidental causes. The scheme is available to individuals between the ages of 18 and 59 years and
belonging to below-poverty-line households. The premium under the scheme is subsidized by the
government and is Rs. 200 (approximately USD 2.70) per annum.

Pension
“Pension” is a payment made by an employer to his retired or ex-employee in consideration of the services
rendered by him in the past during his employment with the employer or in his organization.

Webster's new international Dictionary defines pension as "a stated allowance or stipend made in
consideration of past services."

Employee's Provident Fund (EPF): EPF is a government-sponsored pension scheme that is available to all
salaried employees in India. Under this scheme, a portion of the employee's salary is deducted and
deposited in a retirement account, which earns interest. The employer also contributes to the employee's
retirement account. On retirement, the employee can withdraw the accumulated amount as a lump sum or
receive a monthly pension.

National Pension System (NPS): NPS is a government-sponsored pension scheme that is available to all
Indian citizens between the ages of 18 and 65 years. Under this scheme, individuals can open a retirement
account and contribute towards it on a regular basis. The contributions are invested in various financial
instruments and earn interest. On retirement, the individual can withdraw a portion of the accumulated
amount as a lump sum and receive the remaining amount as a monthly pension.

Atal Pension Yojana (APY): APY is a government-sponsored pension scheme that is aimed at providing a
guaranteed monthly pension to individuals in the unorganized sector who are not covered by any other
social security scheme. Under this scheme, individuals can contribute towards a retirement account and

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receive a fixed pension amount after they retire. The pension amount depends on the contribution amount
and the age at which the individual joins the scheme.

Indira Gandhi National Old Age Pension Scheme (IGNOAPS): IGNOAPS is a government-sponsored
pension scheme that is aimed at providing financial assistance to individuals in their old age. Under this
scheme, eligible individuals aged 60 years or above receive a monthly pension amount ranging from Rs.
300 to Rs. 500 (approximately USD 4 to USD 7) depending on their age and category.

Current state of insurance in India

 As of March 2021, there were 24 life insurance companies and 34 non-life insurance companies
operating in India.
 The total gross premium collected by the Indian insurance industry in the fiscal year 2020-21 was Rs.
7.32 lakh crore (approximately USD 99 billion).
 The life insurance segment accounted for 76.96% of the total premium collected, while the non-life
insurance segment accounted for the remaining 23.04%.
 The penetration of insurance in India, measured as the percentage of insurance premium to the
GDP, was 3.76% in 2020.
 The density of insurance in India, measured as the premium per capita, was Rs. 11,295
(approximately USD 152) in 2020.
 The insurance industry in India employed over 2.8 million people in 2020.
 The digitalization of the insurance industry in India has been on the rise, with many insurance
companies offering online policies and digital insurance services. As of March 2021, over 45 million
policies had been issued through the digital platform of the Insurance Regulatory and Development
Authority of India (IRDAI).
 The COVID-19 pandemic has had a significant impact on the insurance industry in India, with
insurers seeing a surge in demand for health and life insurance policies. The industry also faced
challenges in claims settlement and loss assessment due to the lockdowns and restrictions imposed
during the pandemic.

Emerging concepts in insurance industry

Usage-based insurance (UBI): UBI is a type of auto insurance where the premium is based on the actual
usage of the vehicle. This is typically tracked through telematics devices installed in the vehicle, which
record information such as distance traveled, time of day, and driving behavior. UBI offers more
personalized pricing and can incentivize safer driving habits.

Parametric insurance: Parametric insurance is a type of insurance where the payout is triggered by
predefined parameters, such as a specific weather event or a certain level of seismic activity. This type of
insurance is useful for covering losses that are difficult to quantify, such as crop damage due to a drought.

Cyber insurance: Cyber insurance is a type of insurance that provides coverage against losses or damages
resulting from cyber attacks, such as data breaches, hacking, or ransomware attacks. With the increasing
reliance on technology and the growing threat of cyber attacks, cyber insurance is becoming more
important for businesses and individuals.

Microinsurance: Microinsurance is a type of insurance that provides coverage to low-income individuals or

those in underserved areas who may not have access to traditional insurance products. Microinsurance

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typically offers low premiums and simplified coverage options, such as health or life insurance for a specific
period.

Peer-to-peer insurance: Peer-to-peer insurance is a model where individuals pool their premiums together
to cover each other's losses. This type of insurance offers lower premiums and greater transparency
compared to traditional insurance models, but also involves greater risk sharing among the members of the
pool.

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