A

Auditing &
Insurance
(Study Material with MCQs)
For UPSC APFC Exam

By CA Rahul Kumar
(Economy & Commerce Faculty,
3 Times UPSC Interview appeared)

DIADEMY IAS
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AUDITING & INSURANCE (APFC Exam) by CA Rahul Kumar DIADEMY IAS 9811599537
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Auditing & Insurance– Study Material

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AUDITING INDEX
S. TOPICS PAGE.
No. No.
0. PRACTICE MCQS 8
1. AUDITING CONCEPTS 16
1.1 Nature and Objective of Audit
1.1.1 Definition
1.1.2 Objectives of Auditing
1.2 Inherent Limitation of Auditing
1.3 Qualities of an Auditor
1.4 Advantages of Audit
1.5 Types of Audits
1.6 Statutory v/s Non-Statutory
1.7 Scope of Audit
1.8 Auditor is a Watchdog and not a Bloodhound
1.9 Auditor’s Engagement
1.10 Audit Programme
1.11 Audit Documentation
1.12 Audit Evidence
1.13 Audit Notebook
1.14 Vouching
1.15 Verification
1.16 Auditing and Assurance Board
1.17 Audit Sampling
1.18 Analytical Procedure
1.19 Auditor’s Liabilities
1.20 Internal Audit
1.21 Special Audit
2. COMPANY AUDIT 41
2.1 Eligibility, Qualification and Disqualification of an Auditor
2.1.1 Qualification of Auditor
2.1.2 Disqualification of Company Auditor
2.2 Appointment of Auditor
2.3 Removal, Resignation of Auditor and Giving Special
Notices
2.3.1 Removal of Auditor
2.3.2 Resignation of Auditor
2.4 Remuneration of Auditor
2.5 Powers/Right and Duties of Auditor
2.6 Auditor not Render Certain Service
2.7 Signing of Audit Report
2.8 Auditor’s Right to Attend General Meeting
2.9 Punishment For Contravention
2.10 Audit Committee
2.11 Cost Audit

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3. AUDIT OF BANK 58
3.1 Types of Banking Institution
3.2 Procedure of Banking Audit
3.3 Treasury Operation – Foreign Exchange and Derivatives
3.4 Reports to be given by Bank Auditor
3.5 Non-Performing Assets
4. GOVERNMENT AUDIT 64
4.1 Objective of a Government Audit
4.2 Powers of C&AG
4.3 Duties of C&AG
4.4 Supplementary or Test Audit by the C&AG
5. AUDIT OF NGO 67
6. AUDIT OF CHARITABLE HOSTEL 70
7. AUDIT OF EDUCATIONAL INSTITUTION 72
8. AUDIT OF INSURANCE COMOPANY 74
8.1 Meaning of Indian Insurance Company
8.2 Insurance Audit
9. AUDIT OF TRUST 76
10. FORENSIC AUDIT 77
10.1 Concept of Forensic Accounting and Auditing
10.2 Forensic Accounting and Auditing Framework
10.3 Objectives of Forensic Accounting & Audit
10.4 Forensic Audit v/s Financial Audit
10.5 Forensic Audit Report
10.6 Techniques of Forensic Audit
10.7 Areas of Forensic Audit
11. AUDIT OF CHARITABLE INSTITUTION 80

INSURANCE INDEX
S No. TOPICS PAGE NO.

1. INSURANCE 82-113
1.1 Definition Of Insurance
1.2 History Of Insurance
1.3 Insurance And Risk
1.4 Insurance Terminologies
1.5 Insurance Intermediaries
1.6 Insurance Contract
1.6.1 Components Of An Insurance Contract
1.6.2 Basic Features Of Insurance Contracts
1.6.3 Differences Between Insurance Contracts And
Other Contracts
1.7 Kinds Of Insurance

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1.7.1 Life Insurance

1.7.2 General Insurance
1.8 Regulatory Framework Of Insurance Business In India
1.8.1 Acts/Regulations Governing Both Life &
General Insurance Business
1.8.2 Regulations Governing/Affecting Life Insurance
Business In India
1.8.3 Regulations Affecting General Insurance Business
In India
1.8.4 Insurance Regulatory And Development
Authority Of India
1.8.5 Life Insurance Council And General Insurance
Council
1.8.6 Insurance Ombudsmen Rules 2017
1.9 Insurance As A Social Security Tool
1.9.1 Government Sponsored Socially Oriented
Insurance Schemes
1.10 Pension
1.11 Current State Of Insurance In India
1.12 Emerging Concepts In Insurance Industry
1.13 Money Laundering
1.13.1 Prevention Of The Money Laundering Act, 2002
1.13.2 Pmla Amendment 2019
1.14 Practice MCQs (Multiple Choice Questions)

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0. PRACTICE MCQs
1. Which of the following is not an audit risk?
(A) Inherent Risk (B) Detection Risk
(C) Control Risk (D) Omission Risk

2. Proving the truth means vouching of ?

(A) Payment (B) Expenses
(C) Assets (D) Liabilities

3. An audit report is the product of audit.

(A) Main (B) Final
(C) Semi- final (D) None of the above

4. Authorization for Government Audit.

(A) BOD (B) Audit committee
(C) CAG (D) None of the above

5. Audit is conducted to draw overall opinion on

(A) Financial Statement (B) Cost Statement
(C) Income Statement (D) None of the above

6. An auditor should submit a Disclaimer of Opinion when

(A) he is satisfied with the truth and fairness of financial statements.
(B) he has certain reservations as to the presentation of truth and fairness in
financial statements.
(C) some material information is not available.
(D) the effect of any disagreement with the management is not so material.

7. Which of the following services cannot be rendered by an auditor as per

Companies Act 2013?
(A) Vouching (B) Verification of assets and
liabilities
(C) Issuing certificates on relevant matters (D) Providing investment
advisory services

8. A Cost Auditor submits his report to

(A) Board of Directors (B) Government
(C) Shareholders (D) Statutory Auditor

9. Declaration of dividend is covered under section-

(A) Section 122 (B) Section 123
(C) Section 124 (D) Section 125

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10. Remuneration of Auditors is covered under the following section of

Companies Act, 2013:
(A) Section 142 (B) Section 148
(C) Section 139 (D) Section 143

11. Which of the following statement is true about the limitations of audit?
(A) Test nature of the audit
(B) The audit evidence available to the auditor is persuasive rather than
conclusive in nature.
(C) Inherent limitations of internal control

12. What does professional scepticism mean?

(A) An approach that ensures that everything is correct
(B) An approach that ensures that if something is wrong it is detected
(C) An approach that ensures that management’s representations are reliable.

13. The statement “Auditor is a watchdog, not a bloodbound ” was made in which
case?
(A) Kingston Cotton Mills Co. (1896)
(B) Financial Reporting Council case (2021)
(C) Securities and Exchange Board of India (2009)

14. Form for maintenance of Cost Records by the Company is________

(A) CRA-1 (B) CRA-2
(C) CRA-3 (D) CRA-4

15. SA 210 stands for-

(A) Quality control for an audit of financial Statements
(B) Agreeing the terms of Audit engagements.
(C) Audit Documentation

(D) Responsibility of Joint Auditor

16. Internal Auditor is appointed by the
(A) Board (B) Audit committee
(C) Shareholder (D) None of the above
17. Section 146 of the Companies Act, 2013 deals with

(A) Auditor not to render certain services

(B) Auditor to sign Audit Reports

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(C) Auditor to attend general meeting

(D) Punishment for contravention
18. Remuneration of Auditors is covered under the following section of
Companies Act, 2013:
(A) Section 142 (B) Section 148

(C) Section 139 (D) Section 143

19. Which of the following is not a component of the general approach for
investigation under section 210 and 213 of the Companies Act 2013?
(A) Clarity of terms of reference
(B) Determination of scope of investigation

(C) Determination of period for investigation

(D) Determination of penalties for non- compliance
20. Cost Audit is covered under
(a) Section 204 (b) Section 148
(c) Section 144 (d) Section 17

[Link] refers to the examination of accuracy, authority, and authenticity of

transactions in the books of accounts with help of

(A) Audit Report (B) Balance Sheet

(C) Vouchers (D) Income Statement
23. Unpaid dividend standing at the credit of Unpaid Dividend A/C should be
transferred to Investor Education and Protection Fund after _______ years of its
remaining unpaid.
(A) six (B) eight
(C) seven (D) five
24. What is the purpose of SA-705?

(A) To determine the applicable financial reporting framework

(B) To express an unmodified opinion on the financial statements
(C) To provide guidance on modifying the auditor’s opinion
25. What is an unmodified opinion?

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(A) The auditor concludes that the financial statements are not prepared in
accordance with the applicable financial reporting framework
(B) The auditor concludes that the financial statements are prepared, in all
material respects, in accordance with the applicable financial reporting
framework.
(C) The auditor is unable to obtain sufficient appropriate audit evidence to
conclude that the financial statements as a whole are free from material
misstatement.
26. What is the primary focus of forensic accounting?
(A) Conducting financial audits for companies
(B) Investigating fraud and analysing financial information for legal
proceedings
(C) Preparing financial statements for public companies
(D) Providing tax advisory services to clients

27. An individual auditor who has completed his term shall not be eligible for
reappointment as auditor in the same company for:
(A) Next 3 Years (B) Next 5 Years
(C) Next 7 Years (D) Next 8 Years

28. The _________ shall act as the secretary of the Audit Committee.
(A) Employee (B) Auditor
(C) Company Secretary (D) Chairman

29. What is the provision required for Loss Assets/

(A) 15% (B) 25%+100%
(C) 40%+100 (D) 100%+100%

30. What is Non- Performing Assets (NPA)?

(A) An assets that generates income for the bank
(B) An assets that is overdue for a period of less than 90 days
(C) An assets that has ceased to generate income for the bank
(D) An assets that is out of order for a period of less than 90 days
31. Who can conduct a tax audit?
(A) Any practicing Chartered Accountants or firm of chartered
Accountants
(B) Only a Certified Public accountant (CPA)
(C) Only an auditor appointed by the government
(D) Any qualified financial professional

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32. What is the ceiling for the number of tax audit assignments an auditor can
accept?
(A) 60 (B) 80
(C) 50 (D) 90

33. What id Government Audit?

(A) An audit conducted by the government on private companies
(B) An audit conducted by the government on government departments
and departmental undertakings
(C) An audit conducted by private firms on the government
(D) An audit conducted by the public on government departments

34. Who heads the Accounts and Audit Department of the Government of India?
(A) The President of India
(B) The Comptroller and Auditor General of India
(C) The Prime Minister of India
(D) The Finance Minister of India

35. Internal Auditor is appointed by

(A) Audit Committee
(B) Shareholders in General Meeting
(C) Extraordinary General Meeting
(D) Board of Directors

36. Which of the following is not an external audit evidence?

(A) Quotations
(B) Confirmation from debtors
(C) Goods Received Note
(D) Confirmation from bankers

37. ‘Fraud’ deals with ___________ but, ‘error’, on the other hand, refers to
__________ in financial information.
(A) Unintentional mistake, misrepresentation
(B) Intentional misrepresentation, unintentional mistake
(C) Unintentional misrepresentation, intentional mistake.
(D) Misapplication, Misrepresentation.
38. Which of the following is not power of CAG
(A) To inspect any office of accounts under the control of the union or a
State Government

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(B) To require that any account, book, paper and other documents which
deal with or are otherwise relevant to the transaction under audit, be sent
to specified places
(C) To attend Parliament Session
(D) To put such questions or make such observations as he may consider
necessary to the person in charge.
39. What are the various forms of receipts that a charitable institution may
receive?
(A) Subscription (B) Income from Investment
(C) Grants (D) All of the above

40. Scope of financial audit is

(A) Financial information
(B) Non-financial information
(C) Both (a) and (b)
(D) None of these

41. Which of the following is responsibility of auditor

(A) To ensure that financial statement comply with applicable financial
reporting framework
(B) To express an opinion on true and fair view of the financial statements.
(C) To ensure compliance with laws and regulations applicable on the entity
(D) To design, implement and maintain system of internal control.

42. ADT-1 is filed with ROC within

(A) Within 15 days of appointment of auditor
(B) Within 30 days of appointment of auditor
(C) Within 1 month of appointment of auditor

(D) Within 60 days of appointment of auditor

43. _____________ refers to the record of audit procedures performed, relevant

audit evidence obtained, and conclusions the auditor reached.
(A) Audit Techniques

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(B) Audit Evidence

(C) Audit Documentation
(D) None of the above

44. CAG has a right to order conduct of supplementary audit within ____________
days from the date of receipt of audit report.
(A) 30
(B) 60
(C) 90
(D) 120

45. Dividend shall be payable----

(A) Only in cash
(B) In cash or in kind
(C) Either in cash or in electronic mode
(D) Option (c) or by issue of cheque

46. While conducting audit of financial statement auditor need to comply with
(A) Cost Audit Standards
(B) Secretarial standards
(C) Auditing Standards
(D) None of the above

47. CAATS stands for-

(A) Cornwall Air Ambulance Trust

(B) Children Air Ambulance Trust
(C) Centre for alternatives to Animal Testing
(D) Computer Assisted Auditing Technique

48. Dividend cannot be paid out of

(A) current year's profit after providing depreciation.
(B) undistributed profits for any previous financial year or years after providing
for depreciation.
(C) profit on revaluation of any fixed assets

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(D) money provided by the Central Government or a State Government.

49. An Audit Committee should have a minimum of_____ number of directors.
(A) 4 (B) 3

(C) 5 (D) 6
50. Special notice is requires when auditor is to be removed
(A) After expiry of term
(B) Before expiry of term
(C) By order of Tribunal

(D) All of the above

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1. AUDITING CONCEPT
1.1 NATURE AND OBJECTIVE OF AUDIT

1.1.1 DEFINITION:- An audit is an independent examination of financial information of

any entity , whether profit oriented or not and irrespective of its size or legal form, when
such an examination in conducted with a view to expressing an opinion thereon.
1.1.2 OBJECTIVES OF AUDITING

Primary The main objective of an audit is to determine whether the

Objective: financial statements present a ‘’ true & fair view’’ of the financial
position and financial performance of a business during the
period. The Balance Sheet shows the financial position on a
particular date (say, the last day of the financial year), and the
profit & loss Accounts shows the financial performance of the
business over that period (income and expenditure during the
whole financial year).
Secondary The auditor is also responsible for detecting frauds and errors in
Objective: the books of accounts and financial records of the client’s
business. Such detection of frauds and errors is called the
secondary objective of audit because the primary responsibility
for safeguarding the business assets rests with the management.
If the auditor suspects the presence of material misstatements
or defalcations in the records of the business, he is expected to
look into the matter with greater detail by applying various audit
procedures to satisfy himself about their existence or non-
existence.

an audit also attains certain social objectives as follows:

(i) To protect the shareholders’ interest of shareholders.
(ii) To stop evasion of taxes
(iii) To safeguard against capital erosion
(iv) To ensure fair return on investors
(iv) To ensure reasonable price to customers
(v) To ensure fair compensation to workers
(vii) Complying with polices regarding corporate social responsibilities

As per SA-200 “Overall Objectives of the Independent Auditor”, in conducting an

audit of
financial statements, the overall objectives of the auditor are:
(a) To obtain reasonable assurance about whether the financial statements as a
whole are
free from material misstatement ; and

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(b) To report on the financial statements, and communicate as required by the SAs,
in
accordance with the auditor’s findings.

1.2 Inherent Limitation of Auditing

1.) It means unavoidable limitation which makes

audit a reasonable assurance and not absolute
assurance.
a. Test nature of the audit;
b. The audit evidence available to the auditor is persuasive rather than conclusive in
nature;
c. Inherent limitations of internal control, e.g., certain levels of management may be
in a position to override controls.

2.) Professional Scepticism:- Professional scepticism means an approach that would

ensure that if something is wrong it is detected. This behaviour of auditor helps
him in identifying and evaluating (a) matters that increase the risk of material
misstatements resulting from fraud or error, (b) circumstances that make the
auditor to suspect material misstatements, (c) the question of reliability of
management’s representations. The auditor is entitled to accept the records and
documents as genuine unless there is some evidence to the contrary.
3.) Materiality is one of basic fundamental concepts in process of Auditing as well
as Accounting. Auditor has to constantly & continuously judge whether
transaction is material or not. It is used by him in his Audit Planning. Materiality
means important cost wise, profit wise, effect wise, value wise; which influences
economic decision of user. What is material in one circumstance, may not be
material in another circumstances. Therefore, changes need to be done
accordingly.
1.3 Qualities of an Auditor

1. Integrity, objectivity and independence: The auditor should be straight-forward,

honest, sincere and free form any influence on his audit work. He should maintain
impartiality and be free of any interest
2. Confidentiality: He should not disclose the client’s information to anybody
without the client’s permission or under any regulatory requirement .
3. Planning: The auditor should obtain the knowledge about client’s business to
determine the nature, timing and the extent of the audit procedures.

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4. Audit evidence: The auditor should obtain sufficient appropriate audit evidence
(iv) Audited accounts are considered more reliable by different cadres of
Government. For example, the tax audit report filed with the taxation
authorities.
(v) It facilitates detection of wastages and losses and helps in instituting corrective
actions.
(vi) Audited accounts are taken to be more reliable and useful during corporate
restructuring exercises, valuations etc.
(vii) Banks, Financial Institutions and Government require audited accounts before
granting any financial assistance to the enterprise.
(viii) Audited accounts are taken to be more helpful in the settlement of accounts
between the partners and thus avoiding any dispute amongst them.

through performing the compliance and substantive procedures .

1.4 Advantage of Audit

The advantages of audit are as follows:

(i) Audit is a tool, which different stakeholders can use to protect their
interests in the enterprise.
(ii) Audit is not only a corrective measure but has a deterrent effect. It serves
as a moral check on the employees from committing defalcations or
embezzlements.
(iii) The employees of the organisation remain alert and vigilant as regards the
updating of books of accounts and other records.

1.5 TYPES OF AUDITS

Audit is not mandatory for all forms of organisation. Depending on requirement s of
law the audits are classified into two types:
(i) Statutory Audit - Audit mandatory under a law
(ii) Non-Statutory Audit - Voluntary Audit
I) Statutory Audit-
a. The organisation which requires mandatory audit under law is known as
Statutory Audit
E.g. Company Audit u/s 139 of Companies Act 2013, Tax Audit u/s 44AB of
Income Tax Act 1960
b. The Auditor shall be independent in case of statutory audits
c. The rights and duties of the auditor are determined under the law terms
of

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engagement.

II) Non-Statutory Audit-

a. The appointment of auditor even though it is not mandatory under a law
is known as Non- Statutory Audit also called as voluntary audit. E.g Audit
of sole proprietary concern, audit of partnership firms.
b. The auditor need not to be independent. However, the audit process may
carry out independently.
c. The right and duties are determined as per the terms of engagement by
the appointing authority.
d. The audit is conducted due to various advantages associated with it.

1.6 STATUTORY v/s NON- STATUTORY AUDIT

BASIS STATUTORY AUDIT NON-STATUTORY AUDIT

Legal It is compulsory. It is voluntary
compulsion
Scope The relevant statute or law The employer or partners
determines the scope of work determine the scope of work.
Qualification of The academic or professional The auditor need not possess
auditor qualification is prescribed for the any academic or professional
auditor qualifications.
Powers, rights The statute dictates the powers, The agreement between an
and duties of an rights and duties of an auditor. auditor and firm decides these
auditor matters
Independence The auditor has independence in The auditor does not enjoy
status and in mental attitude such independence.
Auditor’s The auditor is liable for The auditor is liable for
liability negligence under the Common negligence only under the
Law and for misfeasance under Common Law.
the relevant statute governing
the audit.
Publication of The audit report is published for The audit report is made
audit report the public. known to the employers or
partners.

1.7 SCOPE OF AUDIT

1. The audit should be organized to cover adequately all aspects of the enterprise
relevant to the financial statements being audited.
2. In forming his opinion, the auditor should also decide whether the relevant
information is properly disclosed in the financial statements subject to statutory
requirements, where applicable.

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3. The auditor is not expected to perform duties which fall outside the scope of his
competence. For example, the professional skill required of an auditor does not
include that of a technical expert for determining physical condition of certain
assets.
4. Constraints on the scope of the audit of financial statements that impair the
auditor’s ability to express an unqualified opinion on such financial statement
should be set out in his report, and a qualified opinion or disclaimer of opinion
should be expressed as appropriate.
5. To form an opinion on the financial statements, the auditor should be reasonably
satisfied as to whether the information contained in the underlying accounting
records and other source data is reliable and sufficient as the basis for the
preparation of the financial statements.

1.8 Auditor is a watchdog and not a bloodhound

Audit regulator National Financial Reporting Authority (NFRA) has urged the audit
fraternity to refrain from taking shelter under the adulated description of the auditor
“being only a watchdog and 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.

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 He is entitled to assume that they are honest, and to rely upon their
representations, provided he takes reasonable care.

1.9 AUDITOR’S ENGAGEMENT: In case of a statutory audit the objective and scope of an
audit is clearly described in the relevant law. However, in a non-statutory audit it has to
be stated with absolute clarity so as to avoid any kind of ambiguity as to the objective
and scope of audit. Although the form and content of the engagement letter differs from
client to client but in general the following references should be made in audit
engagement letter:
 The objective and the scope of the engagement.
 Management’s responsibility for the financial statements.
 The existence of inherent limitations of audit and resulting material
misstatements that may remain undiscovered,
 The need for use of services of internal auditors and/ or other experts that may
arise during the course of the engagement.
 The requirement of management confirmation letter as regards representations
made by them concerning audit.
 Restriction of the auditor’s liability, if any.
 Basis for computation of audit fees and billing arrangements.
 The form of reports or other communication of results of the engagement.

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1.10 AUDIT PROGRAMME: An audit programme is written plan containing exact details
with regard to the conduct of a particular audit. It is a description or memorandum of the
work to be done during an audit. Audit programme serves as a guide in arranging and
distributing the audit work as well as checking against the possibility of the omissions.
As per SA 300, Planning an Audit of Financial Statements, the auditor should prepare a
written audit programme setting forth the procedures that are needed to be
implemented while carrying out the audit plan.
An audit programme may be classified into two categories:
(i) Programme common to all types of audits - For example, checking of books of
accounts; and
(ii) Special programme containing the work relating to a particular audit. For
example, the audit programme for a partnership firm would be different from
that of a company.

Advantages of  It serves as a ready check list of audit procedures to be

Audit performed.
Programme:  The audit work can be properly allocated to the audit
assistants or the article clerks.
 The auditor may easily know the extent of work done at
any point of time. Thus, the progress of work done can
be under the supervision and control of the auditor.
 Audit programme would not only be useful for the audit
assistants in carrying the audit work but for the principal
too as he would be in a position to account for the
individual responsibilities.
 A uniformity of the work can be attained as the same
programme would be followed from time to time

Disadvantages of  The auditor’s task becomes mechanical and the

Audit Programme auditors may lose interest and initiative.
 Drawing up of an audit programme may be
unnecessary for a small concern.
 Though audit programme helps in fixing
responsibilities but inefficient staff may defend
themselves by stating that the matter was not
contained in the audit programme.
 Rigid programmes cannot be laid down for each
type of business.

1.11 AUDIT DOCUMENTATION: As per SA-230, ‘Audit Documentation’, audit working

papers (also called audit documentation) refer to the record of audit procedures
performed, relevant audit evidences obtained and conclusions the auditor reached.

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Purpose of Audit Working Papers:

According to SA-230, ‘Audit Documentation’, audit working papers or audit
documentation serves a number of purposes as follows :

a. Providing evidence of auditor’s basis for a conclusion about the achievement of the
overall objectives of the auditor.
b. Providing evidence that audit was planned and performed in accordance with
Standards of Audit (SAs) and applicable legal and regulatory requirements.
c. Assisting the engagement team to plan and perform the audit.
d. Assisting members of the engagement team responsible for the supervision to
direct and supervise the audit work, and to discharge their review responsibilities in
accordance with SA220, ‘Quality Control for an Audit of Financial Statements’.
e. Enabling the engagement team to be accountable for its work

Contents of Audit Working Papers:

(i) The auditor shall prepare audit working papers on a timely basis. They
should be prepared while performing the task itself rather than after the
audit work is performed.
(ii) The auditor shall document discussions of significant matters with
management, those charged with governance and others, including the
nature of the significant matters discussed and when and with whom the
discussions took place.
(iii) The auditor shall prepare audit working papers that is sufficient to
enable an experienced auditor, having no previous connection with the
audit, to understand:
 the nature, timing and extent of audit procedures performed to comply with
the SAs and applicable legal and regulatory requirements;
 the results of the audit procedures performed and the audit evidence
obtained; and
 significant matters arising during the audit, the conclusion reached thereon
and significant professional judgments made in reaching those conclusions

1.12 AUDIT EVIDENCE: As per SA-500, ‘Audit Evidence’, the term ‘audit evidence’
includes information used by the auditor in arriving at the conclusions on which the
auditor’s opinion is based. Audit evidence includes both information contained in the
accounting records underlying the financial statements and other information. In short,
substantive evidence collected by an auditor from various sources to base his opinion on
the financial statements of the organisation is called audit evidence .
Auditor’s Judgement while Obtaining Audit Evidence:

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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 It consists of examining records, documents, or tangible

assets. Inspection of records and documents provides
evidence of varying degrees of reliability depending on their
nature, source and the effectiveness of internal controls over
their processing.
Observation It consists of witnessing a process or procedure being
performed by others.
Inquiry and Inquiry consists of seeking appropriate information from a
Confirmation knowledgeable person inside or outside the entity,
Confirmation consists of the response to an inquiry to
corroborate information contained in the accounting records.
Computation - It consists of checking the arithmetical accuracy of source
documents and accounting records or performing
independent calculations.
Analytical Review It consists of studying significant ratios and trends and
investigating unusual fluctuations and items

1.13 AUDIT NOTE BOOK: In order to avoid any chance of such issues being unanswered,
the audit staff generally records the same in a separate note book and raises the issue in
future. Such a record is known as Audit Note Book.

Contents of Audit a. Name of the business enterprise.

Note Book b. Organisation structure.
c. Important provisions of Memorandum of Association (MOA)
and Articles of Association (AOA).
d. Communication with the previous auditor, if any.

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e. Management representations and instructions.

f. List of books of accounts maintained by the enterprise.
g. Accounting methods, internal control systems followed by the
enterprise, applicable laws etc.
h. Key managerial personnel.
i. Errors and fraud discovered.
j. Matters requiring explanations or clarifications.
k. Special points that need attention in the audit report

1.14 VOUCHING: Vouching refers to the examination of accuracy, authority and

authenticity of transactions that appear in the books of accounts with the help of
vouchers of these transactions. Thus, vouching examines whether –
 all transactions undertaken by the entity have been recorded and nothing has
been purposefully left out.
 transactions recorded in the books of accounts are supported by documentary
evidence.
 no fraudulent transaction has been recorded in the books of accounts.
 transactions that have been recorded belong to the current accounting year (in
case of accrual basis of accounting).
 necessary vouchers relating to entries recorded in books are with the client.
 all transactions are properly authorised by the person responsible to do so.
 transactions have been recorded at the correct value and such values have been
calculated correctly.
 transactions recorded in the books of accounts are related to the organisation.
 proper accounting entries have been made against the transactions.

1.15 VERIFICATION: On the other hand, can be defined as a process of substantiation of

assets and liabilities recorded in the books of account, by means of physical inspection
and examination of legal and official documents, and then forming expert opinion as to
the existence, ownership, possession, classification and valuation of assets and liabilities
of an entity.

verification  Examination of existence

includes –  of the assets or liabilities on the reporting date.
 Examination of ownership and control of the asset or
liabilities on the reporting date.
 Examination of possession of the assets on the reporting
date.
 Examination of charges, if any, against the assets.
 Examination of accounting of assets or liabilities.
 Examination of correctness of valuation of assets or
liabilities.
 Examination of adequacy of disclosures as required by
the relevant regulation.

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1.16 Auditing and Assurance Standards Board (AASB): The Institute of Chartered
Accountant of India constituted the Auditing Practices Committee(APC) IN 1982 to
develop Statements on Standard Auditing Practices(SAP),. 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.
The following are the objectives and functions of Auditing and Assurance Standard
Board:
1. To review the existing and emerging auditing practices worldwide and identify
areas in which Standard on Quality Control, Engagement Standards and
Statements on Auditing need to be developed
2. To formulate Engagement Standard, Standards on Quality Control and
Statements on Auditing o that these may be issued under the authority of the
Council of the Institute.
3. To review the existing Standards and Statements on Auditing to assess their
relevance in the changed conditions and to undertake their revision, if necessary.
4. 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.
5. To review the Guidance Notes to assess their relevance in the changed
circumstances and to undertake their revision, if necessary
6. To formulate General Clarifications, where necessary, on issues arising from
Standard.
7. 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.
1.17AUDIT SAMPLING
Definition: According to SA- 530 Audit sampling is the application of audit procedures to
less than 100% of the total population and all the items in the population have the same
chance to be selected.
Audit sampling is really important because it doesn’t only help auditors to gather
sufficient and appropriate audit evidence to draw the audit’s opinion, but also plays a very
important part in the audit’s works’ efficiency and effectiveness. That mean auditor is not
required to check 100% of object or items to let them express their opinion .

To ensure that the selected items could represent the total population, the
selection process and methods should not involve too much from human
judgments and should be avoiding bias from auditors.

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They only perform their review and verification on the selected items and then
express their opinion on the entire population. In general, audit sampling can be
performed in two different types.

Approaches to sampling

1. Non- Under this technique, the sample size and its composition are
Statistical determined based on auditor’s own experience and
Sampling or knowledge and no statistical tool is applied to select the
Judgemental sample. The method is easy but subject to personal judgement
Sampling

2. Statistical This approach is more scientific and does not depend on

Sampling auditor’s personal judgement. The approach includes the
following methods:
a. Random Sampling : In this method of sampling each
item of the population or within a given group
(popularly known as stratum) has a known chance of
selection.
(i) Simple Random Sampling: Simple random
sampling (SRS) is a probability sampling
method where researchers randomly choose
participants from a population. All population
members have an equal probability of being
selected. This method tends to produce
representative, unbiased samples. Simple
random sampling helps ensure that
the sample mirrors the population. The process
proportionately samples from larger
subpopulations more frequently than smaller
subpopulations.
(ii) Stratified Sampling: In a stratified sample,
researchers divide a population into
homogeneous subpopulations
called strata (the plural of stratum) based on
specific characteristics (e.g., race, gender
identity, location, etc.). Every member of the
population studied should be in exactly one
stratum.
Researchers rely on stratified sampling when a
population’s characteristics are diverse and
they want to ensure that every characteristic is
properly represented in the sample. This helps
with the generalizability and validity of the
study, as well as avoiding research
biases like under coverage bias.

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.
3. Systematic/ This method requires selecting items using a constant interval
Interval between selections with the first selection being random.
Sampling

4. Monetary This method uses the monetary value of the transaction rather
Unit Sampling than the items as the basis for sample size determination and
item selection. It is also known as valued- based sampling or
value weighted sampling.

Risk Associated with Sampling:

According to SA-500, an auditor may use audit sampling in selecting items required to
conduct an effective test to provide appropriate audit evidence. However, it cannot be
denied that such a method will always involve some amount of risk. The risk associate
with sampling can broadly be divide into category:

1. Sampling Risk Since sample is only a selected part of population, it can never
reflect all characteristic of the population. Thus, there will
always be some amount of risk unavoidable in this process.
This sampling risk can again be two types as follows:
a. Sampling Risk associated with Compliance Procedure
(Test of control): Here, the auditor, based on sampling
procedure, may come to the conclusion that controls
are more effective while they are not.
b. Sampling Risk associated with Substantive Procedure
(Test of details): Here, the auditor, based on sampling
procedure, may come to the conclusion that the
financial statements are free from any material
misstatements while they are not.
2. Non- Non-sampling risk arises from factors that cause the
Sampling Risk auditor to reach an erroneous conclusion for any
reason not related to the sampling risk. For example,

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most audit evidence is persuasive rather than

conclusive, the auditor might use inappropriate
procedures, or the auditor might misinterpret evidence
and fail to recognize an error.

Stages in Audit Sampling

Audit sampling requires the following steps:

1. Sample Design Here, the auditor selects the appropriate method based on
the consideration of objectives of audit nature of population.
2. Sample Size Auditor decides the sample size to minimise the sampling risk.
Determination He generally applies statistical techniques to avoid
subjectivity.
3. Sample At this stage, using the selected methods, sample units are
Selection drawn from the population.
4. Performance Audit Procedure is then performed on the selected sample
of Audit units. If the procedure cannot be applied on the selected unit,
Procedure the same is replaced. Based on the results of the audit
procedure, the auditor forms his opinion.

1.18ANALYTICAL PROCEDURE
Definition: Analytical procedures are the processes of evaluating financial information
through trend, ratio or reasonableness of data in relation to other financial and non-
financial data. In this case, auditors perform data analysis to examine whether it is
consistent with other relevant information and whether the fluctuation is within their
expectation.

If the auditors identify any irregular fluctuation or find that data relationship is
inconsistent with their expectations or other information, they will investigate further on
the discrepancy that exists. In this case, the investigation might require them to perform
further substantive tests, such as inquiry management about the course of variance and
inspecting the supporting document on management’s explanation.
It is also useful to note that analytical procedures are also used in many other non-audit
and assurance engagements. For example, cost accountant usually uses analytical
procedures to identify the fluctuation of different types of costs or expenses and the
reasons behind those fluctuations.
Types of Analytical Procedures

1. Trend Trend analysis is the process of comparing the data from one
Analysis period to one or more comparable periods including both

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comparing to prior period data and comparing to the projections

based on the changing patterns in the history data.

Trend analysis may include comparing ratios from one period to

another or evaluate the relationship between data, both financial
and non-financial, from one period to another.

2. Ratio Ratio analysis is the process of examination of various ratios of the

Analysis company by comparing them to one or more comparable periods
or to other companies in the same industry.

Ratios are usually formed from two or more accounts or balances

in the financial statements. In this case, using ratios with trend
analysis can help auditors to identify unusual or unexpected
changes in relationships between accounts or balances.

Also, by comparing account balances to industry data, auditors

can be alerted to any significant difference that could lead to the
company’s issue.

In summary, analytical procedures may be used in the following forms:

 Comparing account balances in the current period to one or more

comparable periods
 Comparing account balances to the company’s budget and forecasts
 Comparing account balances of the company to other companies in the
same industry or comparing to the industry average.
 Evaluating the relationship of one account balances to other account
balances with the predictable pattern
 Evaluating the relationship of account balances to non-financial data

Purpose of Analytical Procedures

Auditors perform analytical procedures in various stages of the audit for three main
purposes:

 To use as risk assessment procedures to obtain an understanding of the

client and the risks that the client exposes to

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 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

1.18.1 Analytical Procedures in Audit Process

Auditors are required to perform analytical procedures at the planning stage of audit and
at the completion stage of audit to perform an overall review of the financial
statements before issuing the audit report.

Analytical Procedures in Audit Process

1. Analytical Auditors need to use analytical procedures as risk

Procedures assessment procedures at the planning stage to obtain an
at planning understanding of the client and its business environment. As a
stage result, they may identify the high-risk areas which they are not
aware of and assist them in determining the nature, timing, and
extent of the audit procedures to address the risks of material
misstatements.

Auditors may also evaluate the relationship between financial

information and non-financial information, such as the
relationship between sale amount and square footage of selling
space.

2. Analytical Auditors have responsibilities to design and perform substantive

Procedures procedures to gather sufficient appropriate audit evidence in
at Evidence order to form a basis of opinion on financial statements. In this
Gathering case, substantive procedures may include both the test of details
Stage and analytical procedures.
Analytical procedures in this stage of audit are usually referred
to as substantive analytical procedures.

Likewise, in performing substantive analytical procedures,

auditors need to consider a number of factors below:

 Suitability of analytical procedures, e.g. is

performing analytical procedures on sale amount
can assure the assertion of completeness,
accuracy, or cut-off? Also, analytical procedures
may not be suitable if the client’s internal controls
are weak.

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 Reliability of data used in developing the ratio or

expectation, e.g. is the data used from an internal
source or external source? Is data comparable,
e.g. with industry average? Is the data used
relevant?
 Whether the expectation can identify material
misstatements, e.g. the expected gross margin
from one period to another give better assurance
than the fluctuation of the research and
development expenses
 Whether the difference between the recorded
amount and expected value is acceptable, e.g.
how much difference in percentage can be
acceptable, 3%, 5%, or 10%? Usually, auditors will
reduce the acceptable level of difference in order
to increase the desired level of assurance if the
risk of material misstatement is high.

3. Analytical Auditors need to perform analytical procedures at the end of the

Procedures audit after obtaining sufficient appropriate audit evidence to
at form an overall conclusion whether the client’s financial
Completion statements are reasonable and consistent with their
Stage understanding.
As a result, auditors may identify the risk of material
misstatements that they overlooked. In this case, they may need
to revise their risk assessment at the planning stage and re-
evaluate the planned audit procedures.

1.19 AUDITOR’S LIABILITIES

Over the last two decades, the auditing profession has suffered from various scandals
such as Enron and other high-profile audit scam settlements. The involvement of PwC in
the Satyam scandal has brought it to its knees in an operational environment in the World.
Audit liability has increased many folds since the scam of Enron.

The liabilities have also enhanced the audit quality and reputation of the profession. This
has also created barriers to new entries within the core audit market in itself.
Auditors are required to show two major skills while carrying out activities as
independence and competence.

Auditors should have the required skills to carry out their job with due care and fairly. An
auditor is also expected to complete tasks in good faith and integrity.

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The auditor’s liability represents the legal liability that is assumed when the auditor is
performing professional duties.

 The auditor is liable for client accounting misstatements in the financial

statements. There is always the risk of fraud and material misstatement
in financial statements.

 This forces auditors to be professionally competent and employ all the auditing
and accounting standards carefully.

 The auditor who performs his duties negligibly can face suit from the company,
its shareholders, or even creditors who rely on auditors’ work.

 The auditor can be held responsible for financial disadvantage to the firm caused
by incorrect representation of the company’s books. This leads the auditors to
take out professional liability insurance.

Types Of Auditors’ Liability

Auditors are potentially liable for both criminal and civil offenses. Criminal liabilities occur
when the organization breaches the law or regulation.

On the other hand, disputes between individuals and/or organizations are tantamount to
civil liability

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Criminal offenses Auditors are bound by the laws and regulations of the state or
countries they operate in. They have also bound the ethics
applicable to them as issued by the auditing boards.

Auditors under criminal law can be prosecuted for acts such as

fraud and insider trading.

The audit is subject to legislation as per the Companies Act of the

country. This Act includes the sections on auditors’ qualifications,
how they can be appointed, and what would be their functions.

As per general law, the auditors can be prosecuted in criminal court

for either knowingly or recklessly issuing an inappropriate audit
opinion.

Civil offenses This relates to issues related to contract law and the law of tort. The
contract law seeks parties for breach of contractual obligations.

That would mean the company can seek remedy from auditors only
in terms of the engagement letter.

Therefore, the shareholders can sue the auditors directly in terms

of the letter of engagement for failing to handle work with due
care.

Disclaimers of liability: Auditors can be exposed to litigation from third-person

parties for whom they have not disclaimed liability. Hence, it is necessary to include a
disclaimer of liability in the workings of the audit reports. Disclaimers cannot be entirely
reduced. Further, the laws do not protect from threats from litigations under contract
law

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1.20 INTERNAL AUDIT

The term Internal Audit can be defined as “the independent appraisal activity within an
organization for the review of operations as a service to the organization”. The scope of
internal audit will vary from business to business as it will be decided by the directors of
each company. The function of Internal Audit can be carried out either by the employees
of the organization or an outside agency. The Internal audit is an integral part of internal
control.

Scope of Internal Audit

With regard to The following are the duties of the Internal Auditor
management
 Review & Appraisal of the system of internal check and
internal control.
 Review of the accounting systems and records.
 Ensuring that the information generated by the
accounting system is reliable To prevent and detect
frauds and errors.
 To protect the assets against losses of any kind through
Physical verification.
 To ensure that acquisition of assets and their disposal
are under proper authority
 To take up an investigation at the special request of the
management

With regard to  Review of Internal Control System.

statutory Auditor  Verification of repetitive transactions.
 Ensuring maintenance of proper accounting records.
 Ensuring that information generated from such
accounting records is reliable.
 Physical Verification of inventory and Fixed Assets.
 Preparation of schedules of debtors, creditors etc.
 Confirmation of balances of customers and suppliers

Scope and Objective of the Internal Audit

Monitoring of The internal audit function may be assigned specific responsibility

internal control for reviewing controls, monitoring their operation and
recommending improvements thereto

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To Evaluate The Risk Internal auditing is primarily focused on assessing how well a
Management Ability company manages its risks. To evaluate that, the internal auditor
will assess the quality of internal control systems, risk management
processes, and corporate governance. The risks assessed include
health and safety risks, market failure risks, supply chain risks,
cybersecurity risks and financial risks, to mention a few. The ability
to manage risks effectively or more effectively than rivals and as
effectively as stakeholders expect is critical to a company’s success.

Examination of The internal audit function may be assigned to review the means
financial and used to identify, measure, classify, and report financial and
operating operating information, and to make specific inquiry into
information individual items, including detailed testing of transaction,
balance and procedures.
Review of The internal audit function may be assigned to review
compliance with compliance with laws, regulations and other and other external
laws and requirements, and with management policies and directives and
regulations other internal requirements.

Advantages of Internal Audit

Internal audit offers a number of advantages as follows:
a. Assistance to Management: Internal audit helps management in
executing various plans and policies effectively and efficiently.
b. Detection Errors and Frauds: Through internal audit, frauds and errors
can be detected easily.
c. Prevention of Errors and Frauds: By ensuring continuous evaluation, it
contributes a lot in preventing the errors and frauds.
d. Reduction in Wastage: Internal audit identifies the weaknesses and
deficiencies of the organisation and thereby helps in reducing
wastages.
e. Safeguarding Assets: Internal audit ensures that proper measures are
in place to safeguard the assets.
f. Increased Efficiency: It helps in improving the effectiveness of the
internal control system and thereby improves the overall efficiency of
the entity

Applicability of Internal Audit

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Section 138 of the Companies Act, 2013 read with Rule 13 of Companies (Accounts)
Rules, 2014, specifies certain classes of companies which are required to appoint
Internal Auditors who shall either be a Chartered Accountant, Cost Accountant or such
other professional as may be decided by the Board to conduct internal audit of the
functions and activities of the company. The following class of companies shall be
required to appoint an internal auditor or a firm of internal auditors, namely
 every listed company;

 every unlisted public company having-

(i) paid up share capital of 50 crore rupees or more during the

preceding financial year; or
(ii) turnover of 200 crore rupees or more during the preceding
financial year; or
(iii) outstanding loans or borrowings from banks or public
financial institutions exceeding 100 crore rupees or more
at any point of time during the preceding financial year; or
(iv) outstanding deposits of 20 crore rupees or more at any
point of time during the preceding financial year; and

 every private company having-

(i) turnover of two hundred crore rupees or more during the preceding
financial year; or
outstanding loans or borrowings from banks or public financial institutions exceeding
one hundred crore rupees or more at any point of time during the preceding financial
year

Internal Control vs. Internal Check vs. Internal Audit

Point of Internal Audit Internal Control Internal Check

Distinction
Mode of In an int e rna l audit In internal controls It operates in
Checking system, each systems, work of one routine to doubly
component of work person is automatically check every part of
is checked checked by another. a transaction at the
time of occurrence
and recording of the
same
Objective Its objective is to Its objective is to ensure Its objective is to
evaluate the internal adherence to ensure that no one
control system and management employee has
to detect frauds and policies, safeguarding exclusive control over
errors of assets, prevention and any transaction or
detection of frauds and group of transactions
errors, accuracy and

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completeness ofand their recording

accounting records in the books
P o in t of In an internal audit In an internal control Methods of
Time system, work is system, checking is recording
checked after it is done simultaneously transactions are
done. with the conduct of devised where
work. Every transaction work of an
is checked as soon asit is
employee is
entered. checked
continuously by
correlating it with
the work of others.
Thrust of The thrust of internal The thrust of internal The thrust of
system system is to detect check system is to internal control lies
errors and frauds. prevent errors in fixing of
responsibility and
division of work to
avoidduplication.

Traditional Internal Audit vs. Risk Based Internal Audit

Traditional Internal Audit Risk Based Internal Audit

Audit plan is based on the audit cycle Audit plan is based on the results of the
business risk evaluation. Risky areas are
covered first and more frequently
Important risks might not be covered Provides assurance that important risks
during the audit plan are being managed properly
Focuses on deficiencies in controls and cases Focuses on risks that are not properly
of non-compliance with policies and controlled and overly-controlled
procedures
IA resources are spread over all business More efficient use of IA resources by
activities concentrating on risk areas
Disagreement with the business Facilitates consensus with line
managementover the action plans leading management on the needed action plans
to delays in implementation thus improving timely the implementation
of corrective measures

1.21 SPECIAL AUDIT

A special audit is a tightly-defined audit that only looks at a specific area of an

organization's activities. This type of audit may be initiated by a government agency, but
could be authorized by any entity, or even internally.

Types of special audit

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1. Compensation Compensation audit allows for the yearly examination or audit of

audit employee salary, bonus, incentive, and stock option programs in
order to assess their efficiency, competitiveness, and legal
compliance.
2. Compliance A compliance audit is a type of audit in which the purpose is to
audit 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.

3. Construction A construction audit, as the name implies, is performed to assess

audit 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.
4. 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.
5. 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.
6. 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

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the cashier, and to investigate the tasks previously performed by

the cashier, etc.
7. Information An information systems audit is required to ensure that the
systems audit 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.
8. 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.
9. Income Tax The verification of the books of accounts maintained by a taxpayer
audit 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.
10. 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.

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2 COMPANY AUDIT
SECTIONS COVERED UNDER THIS CHAPTER

 SECTION 139: APPOINTMENT OF AUDITORS

 SECTION140: REMOVAL, RESIGNATION OF AUDITOR & GIVING OF SPECIAL
NOTICE
 SECTION 141: ELIGIBLITY QUALIFICATION AND DISQUALIFICATION OF
AUDITORS
 SECTION 142: REMUNERATION OF AUDITORS
 SECTION 143: POWERS/ RIGHTS AND DUTIESSS OF AUDITORS
 SECTION 144: AUDITOR NOT TO RENDER CERTAIN SERVICES
 SECTION 145: SIGNING OF AUDIT REPORT
 SECTION 146: AUDITOR TO ATTEND GENERAL MEETING
 SECTION 147: PUNISHMENT FOR CONTRAVENTION
 SECTION 148: COST AUDIT

2.1 ELIGIBILITY, QUALIFICATION AND DISQUALIFICATION OF AUDITOR [SECTION141]

2.1.1 Qualification of a Company Auditor [Section 141(1)]
The provisions relating to eligibility, qualifications and disqualifications of an auditor are
governed by Section 141 of the Companies Act, 2013

1. Only a Chartered Accountant (CA) shall be appointed as auditor of a company.

2. In case of a firm where majority of partners practising in India are qualified for
appointment as aforesaid may be appointed by its firm name to be auditor of a
company.
3. Where a firm including a limited liability partnership is appointed as an auditor
of a company, only the partners who are chartered accountants shall be
authorised to act and sign on behalf of the firm.[Section 141(2)]

2.1.2 Disqualifications of Company Auditor[Section 141(3)]

1. A body corporate other than a limited liability partnership registered under the
Limited Liability Partnership Act, 2008.
2. An officer or employee of the company
3. A person who is a partner, or who is in the employment , of an officer or
employee of the company
4. A person who, or his relative or partner;

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I) Is holding security or interest in CASSH

(Company/Associate/Subsidiary/Holding/Subsidiary of such Holding
i.e. CASSH)

 Relative may hold security in the Co. of Face value 1 Lakh

 If relative (not auditor or partner) acquires interest > 1 lakh è then corrective
action to maintain limit within 60 Days of acquisition

II) Person/Relative/Partner indebted to CASSH > 5Lakh

III) Person/Relative/Partner given guarantee or security for indebtedness
of 3rd person to CASSH >1 Lakh
5. Person or firm has business relation with CASSH or associate Co. (Business
relation excludes services permitted under CA Act 1949 by auditor &
commercial transactions by Co. in ordinary course of business at Arm’s length
price)
6. A person whose relative is a director or is in the employment of the company
as a director or key managerial personnel
7. Convicted for Fraud by a Court & period of 10 years not elapsed from date of
conviction.
8. Full time employed OR person or partner of firm auditing > 20 companies
excluding OPC/Dormant/Small Cos./Pvt Cos. with paid up capital < 100 Cr (with
no default in filing F.S. or Annual Return)
 No. of partners on date on date of acceptance of audit assignment shall be
taken into account
 CA in full time employment elsewhere shall not be taken into account.

9. Renders service under Section 144 to Company or its holding or Subsidiary.

CEILING ON  As per this section that a Chartered Accountant in practice

NUMBER OF AUDIT cannot be appointed as an auditor of more than 20
SECTION 141(3) (g) companies other than One Person Company, Dormant
Companies, Small Companies and Private Companies
having paid-up share capital less than ₹100 crore.
 Ceiling on Tax Audit Assignments: The specified number of
tax audit assignments that an auditor, as an individual or
as a partner of a firm, can accept is 60 numbers. ICAI has
notified that a chartered accountant in practice shall be
deemed to be guilty of professional misconduct, if he
accepts in a financial year, more than the specified number
of tax audit assignments u/s 44AB

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SUBSIQUENT Where a person appointed as an auditor of a company incurs

DISQUALIFICATION any of the disqualifications mentioned in sub-section (3) after
AFTER his appointment, he shall vacate his office as such auditor and
APPOINTMENT: such vacation shall be deemed to be a casual vacancy in the
[SECTION 141(4)] office of the auditor

2.2 APPOINTMENT OF AUDITOR [SECTION 139]

A) APPOINTMENT IN NORMAL CASE

(I) PROVIOIN RELATING APPOINTMENT OF FIRST AUDITOR
(a) In case of a  The first auditor of a company, other than a Government
company company, shall be appointed by the Board of Directors
other than a within 30 days from the date of registration of the
Government company.
Company  In the case of failure of the Board to appoint such
[Section auditor, it shall inform the members of the company,
139(6)] who shall appoint such auditor within 90 days at an
extraordinary general meeting (EGM)
 The auditor, so appointed, shall hold office till the
conclusion of the 1st annual general meeting (AGM)
(b) In case of a  In the case of a Government company or any other
Government company owned or controlled, directly or indirectly, by
Company the Central Government, or by any State Government,
[Section or Governments, or partly by the Central Government
139(7)] and partly by one or more State Governments, the first
auditor shall be appointed by the Comptroller and
Auditor-General of India ( C&AG) within 60 days from
the date of registration of the company.
 In case the Comptroller and Auditor-General of India
does not appoint such auditor within the aforesaid
period, the Board of Directors of the company shall
appoint such auditor within the next 30 days.
 Further, in the case of failure of the Board to appoint
such auditor within the next 30 days, it shall inform the
members of the company who shall appoint such
auditor within 60 days at an extraordinary general
meeting (EGM).
 The auditor, so appointed, shall hold office till the
conclusion of the 1st annual general meeting (AGM)

(II) PROVISION RELATING APPOINTMENT OF SUBSEQUENT AUDITOR

(a) In case of a  Every company shall, at the first annual general meeting,
company appoint an individual or a firm as an auditor who shall hold
other than a office from the conclusion of that meeting till the conclusion
Government of its sixth annual general meeting and thereafter till the
conclusion of every 6th meeting.

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Company  Before such appointment is made, the written consent of the

[Section auditor to such appointment and a certificate from him or it
139(1), read that the appointment, if made, shall be in accordance with
with Rule 3 the conditions as prescribed, shall be obtained from the
auditor.
and 4 of
 The certificate shall also indicate whether the auditor
Company
satisfies the criteria provided in Section 141.
(Audit and  The company shall inform the auditor concerned of his or its
Auditors) appointment, and also file a notice of such appointment with
Rule 2014] the Registrar within fifteen days of the meeting in which the
auditor is appointed in Form ADT-1 [Rule 4(2)].
(b) In case of a  In the case of a Government company or any other
Government company owned or controlled, directly or indirectly, by
Company the Central Government, or by any State Government or
[Section Governments, or partly by the Central Government and
139(5)]
partly by one or more State Governments, the
Comptroller and Auditor General of India shall, in
respect of a financial year, appoint an auditor duly
qualified to be appointed as an auditor of companies
under this Act, within a period of 180 days from the
commencement of the financial year.
 The auditor, so appointed, shall hold office till the
conclusion of the annual general meeting (AGM)

B) APPOINTMENT IN CASE OF FILLING A CASUAL VACANCY[SECTION 139(8)]

(a) In case of a  Any casual vacancy will be filled by the Board of
company Directors within 30 days.
other than a  If such casual vacancy is as a result of the resignation of
company an auditor, such appointment shall also be approved by
whose the company at a general meeting convened within 3
accounts are months of the recommendation of the Board.
subject to  The auditor, so appointed, shall hold the office till the
audit by an conclusion of the next annual general meeting(AGM)
auditor
appointed
by the CAG
[Section
139(8)]
(b) In case of a  Any casual vacancy will be filled by the Comptroller and
company Auditor-General of India within 30 days.
whose
accounts are  In case the Comptroller and Auditor-General of India
subject to does not fill the vacancy within the aforesaid period, the
audit by an Board of Directors shall fill the vacancy within next 30
auditor days.
appointed
by the CAG

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[Section
139(8)]

Re-appointment of As per Section 139(9), a retiring auditor may be re-appointed at

a Company an annual general meeting, if:
Auditor [section  he is not disqualified for re-appointment;
139(9)  he has not given the company a notice in writing of his
unwillingness to be re-appointed; and
 a special resolution has not been passed at that meeting
appointing some other auditor or providing expressly that
he shall not be re-appointed.
Automatic Re- According to Section 139(10), where at any annual general
appointment of a meeting, no auditor is appointed or re-appointed, the existing
Company Auditor auditor shall continue to be the auditor of the company.
[section 139(10)]

NOTES : Role of Audit Committee’s Recommendation in Appointment of Auditors:

Where a company is required to constitute an Audit Committee under section 177, all
appointments, including the filling of a casual vacancy of an auditor under this section
shall be made after taking into account the recommendations of such committee

ROTATION OF AUDTIOR

Section 139(2) A. Eligible Companies

The provisions for rotation of auditors shall be applicable to
–
 Every listed company excluding one person
companies and small companies.
 Every unlisted public company having paid up share
capital of ₹10crore or more;
 Every private limited company having paid up share
capital of ₹50 crore or more;
 All other companies having public borrowings from
financial institutions, banks or public deposits of
₹50crore or more.
B. Maximum Term
 No individual shall be appointed or reappointed as
auditor for more than one term of five consecutive
years.
 No audit firm shall be appointed or reappointed as
auditor for more than two terms of five consecutive
years.
C. Additional Conditions for Rotation
 An individual auditor or an audit firm who/which has
completed his/its term shall not be eligible for re-

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appointment as auditor in the same company for five years

from the completion of such term.
 On the date of appointment, no audit firm having a common
partner or partners to the other audit firm, whose tenure
has expired in a company immediately preceding the
financial year, shall be appointed as auditor of the same
company for a period of five years:
 Every company, existing on or before the commencement of
this Act, which is required to comply with provisions of
Section 139(2), shall comply with requirements of this sub-
section within a period which not be later than the date of
the first AGM of the company held within the period
specified in Section 96(1), after 3 years from the date of
commencement of Companies Act.
 The above provisions shall not prejudice the right of the
company to remove an auditor or the right of the auditor to
resign from such office of the company

Rotation of According to Section 139(3), the members of a company may

Partners in the resolve to provide that –
Audit Firm  in the audit firm appointed by it, the auditing partner and
[Section 139(3)] his team shall be rotated at such intervals as may be
resolved by members; or
 the audit shall be conducted by more than one auditor
Section 139(4) Firm shall include a Limited Liability Partnership incorporated
under the Limited Liability Partnership Act, 2008

Section 139(5) In the case Government Company, CAG in respect of a financial

year, appoint an auditor duly qualified to be appointed as an
auditor of the company within a period of 180 days from the
commencement of the financial year who shall hold the office till
the conclusion of the AGM.

2.3 REMOVAL, RESIGNATION OF AUDITOR AND GIVING SPECIAL NOTICES [SECTION 140]
2.3.1 REMOVAL OF AUDITOR

 According to Section 140(1),Removal of auditor before expiry term, the auditor

appointed under section 139 may be removed from his office before the expiry
of his term only by a special resolution of the company, after obtaining the
previous approval of the Central Government in that behalf as per Rule 7 of
CAAR, 2014-

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 The application to CG for removal of auditor shall be made in Form ADT-2

and accompanied with fees provided under Companies (Registration Offices
and Fees) Rules, 2014.
 The application shall be made to CG within 30 days of Board Resolution.
 The Co. shall hold general meeting within 60 days of receipt of approval of
CG for passing special resolution.
It is important to note that before taking any action for removal before expiry of
terms, auditor shall be given reasonable opportunity of being heard

2.3.2 RESIGNATION BY AUDITOR

Section 140(2)  The auditor who has resigned from the company shall file
within a period of 30 days from the date of resignation, a
statement in the prescribed Form ADT–3 (as per Rule 8 of
CAAR) with the company and the Registrar.
 In case of the companies referred to in section 139(5) i.e.
Government company, the auditor shall also file such
statement with the CAG along with the company and the
Registrar. The auditor shall indicate the reasons and other
facts as may be relevant with regard to his resignation.
Note: In case of failure, the auditor shall be liable to a penalty of
₹50000 or the remuneration of the auditor, whichever is less, and in
case of continuing failure, with further penalty of ₹500 for each day
after the first during which such failure continues, subject to a
maximum of lakh rupees as per section 140(3)

REMOVAL OF AUDITOR BY THE TRIBUNAL

As per Section  The Tribunal either suo motu or on an application made to it

140(5), an by the Central Government or by any person concerned,
auditor can be may, by order, direct the company to change its auditor, if it
removed from is satisfied that the auditor has, whether directly or
his office by the indirectly, acted in a fraudulent manner or abetted or
Tribunal in the colluded in any fraud by, or in relation to, the company or its
following directors or officers.
manner:  If the application is made by the Central Government and the
Tribunal is satisfied that any change of the auditor is
required, it shall within 15 days of receipt of such application,
make an order to the removal of the auditor from his office.
 The Central Government may appoint another auditor in his
place.
 An auditor, whether individual or firm, against whom final
order has been passed by the Tribunal under this Section
shall not be eligible to be appointed as an auditor of any
company for a period of 5 years from the date of passing of

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the order and the auditor shall also be liable for action under
Section 447.

Note: For this purpose, the word ‘auditor’ shall include a firm of auditors. Moreover, in
case of a firm, the liability shall be of the firm and that of every partner or partners who
acted in a fraudulent manner or abetted or colluded in any fraud by, or in relation to, the
company or its directors or officers.
APPOINTMENT OF AUDITOR OTHER RETIRING AUDITOR

According to • Special notice required for resolution at AGM for appointing

Section 140(4) auditor
lays down  Person other than retiring auditor or
procedure to  Providing expressly that retiring auditor will not be
appoint an reappointed (except where rotation timeline
auditor other completed)
than retiring • On receipt of notice - Company shall forward to retiring auditor
auditor who • On receipt of notice if retiring auditor makes representation to
was removed Company in writing & request notification to members, then
Company shall:
 In notice of meeting to members state fact that
representation has been made &
 Send copy of representation to every member to whom
notice is sent
 If copy of representation couldn’t be sent - then Auditor may
require it to be read out at meeting + copy to be filed with
ROC
If Tribunal satisfied on application of Co. or any other aggrieved
person, rights conferred by Sec 140(4) are being abused by Auditor,
then, copy of representation may not be sent and representation
need not be read out at the meeting

2.4 REMUNERATION OF AUDITOR [SECTION 142]

Section 142 The remuneration of the auditor of a company shall be fixed in

its general meeting or in such a manner as may be determined
therein.
Provided that the board may fix remuneration of the first auditor
appointed by it.

Remuneration includes fees+ expenses reimbursed+ facility extended to him

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2.5 POWERS/RIGHT AND DUTIES OF AUDITOR [SECTION 143]

RIGHT OF A. RIGHT TO ACCESS TO BOOKS

AUDITOR  Right of access at all times to the books and
SECTION 143(1) accounts and vouchers of the company, whether
kept at the registered offices of the company or at
any other place.
 Right to access to other records namely minutes
board meeting . MIS report and any other books as
may required by the auditor.
 Further this right can be exercised during working
days and business hours
 Right to access to books of accounts of subsidiary
company and associate company in so far as they
related to consolidated financial statement.
B. RIGHT TO OBTAIN INFORMATION AND EXPLAINATION
 The auditor has right to obtain from the officers of
the company such information and explanation as
he may think necessary for the performance of his
duties as auditor.
 The information and explanation can be obtained
from either officer or employee of the company.
 The auditor can also obtain any additional
information if needed,. The management of the
company has duty to explain the auditor.
C. RIGHT TO RECEIVE NOTICES AND DUTY TO ATTEND
GENERAL MEETING [SECTION 146]
 The auditor of company are entitled to attend any
general meeting of the company; also to receive all
the notices to the general meeting which members
are entitled to receive.

DUTIES OF A. Duty to Inquire:

AUDITOR  whether loans and advances made by the company
SECTION 143(1) on the basis of security have been properly secured
and whether the terms on which they have been
made are prejudicial to the interests of the company
or its members;
 whether transactions of the company which are
represented merely by book entries are prejudicial to
the interests of the company;
 In case of a company other than an investment
company or a banking company, whether so much of
the assets of the company as consist of shares,

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debentures and other securities have been sold at a

price less than that at which they were purchased by
the company;
 whether loans and advances made by the company
have been shown as deposits;
 whether personal expenses have been charged to
revenue account;
 where it is stated in the books and documents of the
company that any shares have been allotted for cash,
whether cash has actually been received in respect of
such allotment, and if no cash has actually been so
received, whether the position as stated in the
account books and the balance sheet is correct,
regular and not misleading.

SECTION 143(2) B. Duty to Report on Financial Statements of the Company

The auditor shall make a report to the members of the company
on the accounts examined by him and on every financial
statements which are required by or under this Act after taking into
account the provisions of this Act, the accounting and auditing
standards etc. and matters which required under this Act or rules
made thereunder and under any order made u/s 143(11).

Rule 11 of Cos. a) whether Company has disclosed impact, of pending

(Audit and litigations on its financial position in its financial statement;
Auditors) Rules, b) whether Company has made provision, as required under
2014 other any law or accounting standards, for material foreseeable
matters to be losses, if any, on long term contracts including derivative
included in contracts;
auditor’s report c) whether there has been delay in transferring amt, to
namely:- Investor Education and Protection Fund by Company
d) i) Whether management has represented to best of
knowledge & belief, other than disclosed in notes, no funds
advanced, loaned or invested by Co. in any person or entity
including foreign entity with understanding that
Intermediary will lend or invest in another entity or provide
guarantee or security on behalf of Co. (Ultimate
Beneficiary)
ii) Whether management has represented to best of
knowledge & belief, other than disclosed in notes, no funds
received by Co. from any person or entity including foreign
entity(Funding Parties) with understanding that Co. will lend or
invest in another entity or provide guarantee or security on
behalf of Funding Party (Ultimate Beneficiary
iii) Auditor has found no material misstatement in above
representations

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e.) Whether company has complied section 123 of Companies

Act, 2013 declaration and payment of dividend
f.) In respect of FY commencing after 1.4.22 à Co. used
accounting software to maintain books of a/c having audit trail &
same operated throughout year & audit trail hasn’t been tampered
& preserved by Company for retention.

SECTION 143(3) C. Duty of auditor to report on following matters:-

 Whether all the information & explanation which according
to his knowledge were required for the purpose of audit has
been sought & obtained by him (auditor) or not
 Whether the books of accounts as required by the law have
been properly made by company or not.
 Whether Branch Audit report has been received for those
branches whose audit was conducted u/s 143(8) by person
other than co-auditor.
 whether the company’s balance sheet and profit and loss
account dealt with in the report are in agreement with the
books of account and returns;
 whether, in his opinion, the financial statements comply
with the accounting standards;
 the observations or comments of the auditors on financial
transactions or matters which have any adverse effect on
the functioning of the company;
 whether any director is disqualified from being appointed
as a director u/s 164(2)
 any qualification, reservation or adverse remark relating to
the maintenance of accounts and other matters connected
therewith;
 whether the company has adequate internal financial
controls with reference to financial statements in place and
the operating effectiveness of such controls;
 such other matters as may be prescribed
SECTION 143(4) D. Duty to Provide Reasons for any Negative
Remarks/Qualification: According to Section 143(4), where
any of the above-mentioned matters required to be
included in the audit report is answered in the negative or
with a qualification, the report shall state the reasons
therefor.
SECTION 143(5) E. Duty to Comply with the Directions of CAG
As per section 143(5), in the case of a Government company
or any other company owned or controlled, directly or
indirectly, by the Central Government, or by any State
Government or Governments, or partly by the Central
Government and partly by one or more State Governments,
the auditor shall, in his report, include

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 The directions, if any, issued by the Comptroller and

Auditor-General of India regarding the manner of
audit of accounts; and
 The action taken on such directions and its impact
on the accounts and financial statement of the
company.
SECTION 143(6) F. C&AG right to conduct supplementary audit , comment
upon or supplement such audit report.
SECTION 143(7) G. C&AG may, by an order, cause test audit.
SECTION H. Branch Auditor: Accounts of Branch office can be audited
143(8)& RULE 12 by-
1. The company’s auditor or,
2. Any other person, qualified to be and appointed as an
auditor as per the provision of the Act as branch auditor: or
In case of foreign branch, by the company’s auditor or by
an accountant or a competent person appointed in
accordance with the prevailing laws of the foreign country.
Section 143(9) & I. AUDITING STANDARDS: Every auditor must comply with
(10) the auditing standards. While the Central Government
prescribes the Auditing Standards or addendums thereto, is
shall consult with and take recommendation of the
Institute of Chartered Accountants of India (ICAI) AND THE
National Financial Reporting Authority (NFRA). Till such
time the auditing standards are notified by the Central
Government, the auditing standards specified by the ICAI
are deemed to be the auditing standards
Section 143(12) J. REPORTING OF FRAUDA BY AUDITOR:
{Read with rule In case the auditor has sufficient reason to believe that an
13 of CAAR, 2014 offence involving fraud, is being or has been committed
against the company by officers or employees of the
company, he shall report the matter to the Central
Government immediately but not later than 60 days of his
knowledge and after following the procedure indicated
herein below:
 Auditor shall forward his report to the Board or the Audit
Committee, as the case may be, immediately after he
comes to knowledge of the fraud, seeking their reply or
observation within 45 days;
 On receipt of such reply or observations the auditor shall
forward his report and the reply or observation of the Board
or the Audit Committee along with his comment to the
Central Government within 15 days or receipt of such reply
or observation;
 The report shall be in the form of a statement as specified
in Form ADT-4.
 The report shall be sent to the Secretary, Ministry of
Corporate Affairs(MCA) in sealed cover by Registered Post

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with Acknowledgement Due(RPAD) or by Speed Post

followed by E-mail in confirmation of the same.
 The repot shall be on the letter head of the Auditor
containing postal address, e-mail address and contact
number and be signed by the auditor with his seal and shall
indicate his Membership Number
 The provision of this rule shall also, Mutatis Mutandis, to a
Cost Auditor and a Secretarial Auditor during the
performance of his duties under section 148 and section
204 respectively.

2.6 AUDITOR NOT RENDER CERTAIN SERVICES [SECTION 144]

[SECTION 144]  accounting and book- keeping services;

 internal audit;
 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.

2.7 SIGNING OF AUDIT REPORT [SECTION 145]

SECTION 145  Firm including LLP :- Only Partners who are CAs :- act &
sign on behalf of firm
 Qualifications, observations or comments on financial
transactions which have adverse effect on functioning of
Company
Read before in GM & open for inspection by members of Company

2.8 AUDITOR’S RIGHT TO ATTEND GENERAL MEETING[SECTION 146]

SECTION 146 All notice of any general meeting shall be forwarded to the auditor
of the company and he must attend any general meeting either by
himself or through his authorized representative (qualified to be an
auditor) and shall have right to be heard at such meeting on any
part of the business which concerns him as the auditor.

2.9 PUNISHMENT FOR CONTRAVENTION[SECTION 147]

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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
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

2.10 AUDIT COMMITTEE [SECTION 177]

APPLICABILITY
• Listed Public Company
• Public Company
 Paid up Share Capital (PSC)>= 10 Cr or
 Turnover (T/o) >= 100 Cr or
 L/D/D(Loans/Debenture/Deposits) > 50 Cr

Audit  making recommendation for appointment,

committee  remuneration and terms of appointment of auditor of Co.,
performs  reviewing and monitoring auditor’s independence and
important  performance & effectiveness of audit process
functions  examination of F.S. and auditor’s report thereon
including:

NOTE: AUDIT COMMITTEE consists of directors of Co. Minimum 3 directors with

independent directors forming majority. Audit committee helps in
ensuring better standards of corporate governance

Manner & Audit Committee or Board shall consider Qualification & Experience along
procedure for with pending proceedings relating to professional conduct
selection of  Audit Committee shall recommend name to Board
Auditor [Rule  If board agrees à forward to AGM
 If board disagrees à refer back to AC citing reasons
3 of CAAR,
 If AC doesn’t reconsider, board will record reasons of disagreement
2014]
& forward own recommendation to AGM

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 Auditor will hold office till conclusion of 6th AGM

2.11 COST AUDIT [SECTION 148]

Cost Audit is an audit process for verifying the cost of manufacture or production of any
article, on the basis of accounts as regards utilisation of material or labour or other items
of costs, maintained by the company i.e. means auditing of costing records by a Cost
Accountant in Practice.

As per section 148 the Central Government may by order specify audit of items of cost in
respect of certain companies.
Sec 148 of Companies Act 2013 read with Companies (Cost Records & Audit) Rules 2014

Rule 3 Every company whether in regulated or unregulated sector shall

maintain costing records. If aggregate turnover of company in
immediately preceding
Financial year was minimum 35 crore.
Rule 5 Every Co. covered by Rule 3 maintain cost records in Form CRA-1

Note CARO Clause: As per Clause (vi) to Para 3 of CARO 2020, auditor has to
report whether maintenance of cost records has been specified by CG
u/s 148(1) of Companies Act, 2013 and whether such accounts and
records have been so made and maintained.

Rule 4 – Cost Audit applicability

Regulated Sectors Unregulated Sector

1. Aggregate Turnover >= 50 crore 1. Aggregate turnover >= 100 crore

Preceding financial year preceding financial year
And And
From individual product/ service is From individual product / services
Minimum 25 crore. minimum 35 corer

Regulated sector (type A) : Unregulated Sector (type B) : Other than

Telecommunication , Power, regulated sector.
Petroleum, Sugar, Fertilizer, Drugs.

2.11.1 APPOINTMENT OF COST AUDITOR

If Audit Committee exist :- Audit Committee will recommend, BOD will appoint.
If Audit Committee not exist :- BOD will appoint
Remuneration of Cost Auditor

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If Audit Committee exist :- Audit Committee will recommend, BOD will fix & share holder
(members) will approve.
If Audit Committee not exist:- BOD will fix & share holder will approve.

Non-Applicability  Revenue from exports in forex > 75% of total revenue or

 Operating from SEZ
 Engaged in generation of electricity for captive
consumption through captive generating plant

Rule 6 Appoint auditor within 180 days of commencement of Financial Year

 File notice of appointment with CG in form CRA-2 with fees
within 30 days of Board Meeting or 180 days of
commencement of FY, earlier
 Cost auditor shall continue till expiry of 180 days from closure
of FY or till submission of Audit report
 Audit report to be submitted in form CRA-3 within 180 days
of closure of FY & forward to BOD
 Co. within 30 days of receipt of copy of report furnish to
Central Government in Form CRA-4 in XBRL format +
explanation to every qualification or reservation
In case of any default of these rules:- Penalty u/s 147 for Company.,
officers & Cost auditor
DIFFERENCE BWTWEEN COST AUDIT AND FINANCIAL AUDIT

BASIS COST AUDIT FINANCIAL AUDIT

Meaning Cost audit is an independent Financial audit is a systematic
examination of the correctness unbiased examination of a
of the cost statements and company or institution's finance
accounts and its conformity with books and records, so as to express
the cost accounting plan. the opinion on it.
Audit Performed by a practicing Cost Performed by a practicing
Accountant. Chartered Accountant.
Appointment Board of Directors Shareholders
of auditor
Analysis Cost records, cost statements Financial Statement, Books of
and cost accounts. Accounts, Documents, Vouchers,
etc.
Emphasis Analysis of the efficiency of Compliance with the accounting
operations and propriety of standards and effectiveness of the
actions of the management. internal control system
Compulsion cost audit is mandatory for Financial Audit is compulsory for all
specific entities only and that companies, organizations and
too which are engaged in institutions
manufacturing and production
business.

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Report The cost auditor submits the The financial auditor submits the
Submission cost audit report to the Board of financial audit report to the
Directors at the Board Meeting, shareholders at the company’s
which is then submitted to the Annual General Meeting.
Central Government

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3. AUDIT OF BANK
Bank audit is a procedure performed by an auditor appointed by RBI and ICAI to verify
the financial statements of the banking institutions and to verify whether the banking
concerns are following the law and compliances or regulatory framework applicable on
them or not.

3.1 Type of Banking institutions prevailing in India:

 Commercial banks;
 Regional Rural banks;
 Co-operative banks;
 Development banks (more commonly known as ‘term-lending institutions’);
 Payment Banks; and
 Small Finance Banks

3.2 PROCEDURE OF BANK AUDIT

Banking sector is  RBI and Indian Institute of Chartered Accountants

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

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 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: In  Ensure the internal control is in place in relation to advances

relation made.
advances made  To scrutinise the subsidiary, ledger, & control accounts
by bank an  To ensure the proper documentation of account.
auditor need to  To scrutiny the overdue account and scheme for recovery of
review the such amount.
followings  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 withs 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 Inspect the ledger balance in each account with (a) bank
RBI: confirmation certificates from Reserve Bank of India and (b)
Reconciliation Statement
Balance with Inspection of reconciliation statement to ensure that no
other bank: 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

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Fixed and other  Accounting method of bank

Assets:  Ownership document
 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  To ensure that amount have been property disclosed for
Deposits  Barrowing in India farm RBI.
 Barrowing outside India.
Borrowings  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
Deposits
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.,

The auditor should be kept under the custody of a responsible officer.
should evaluate  The bank should have a reliable private code known only to
the existence, the responsible officers of its branches coding and decoding
effectiveness of the telegrams should be done only by such officers.
and continuity of  The signatures on a demand draft should be checked by an
internal controls officer with the specimen signature book
over bills payable
Bills for  The auditor should examine whether the bills drawn on
Collection 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.

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3.3Treasury Operation-Foreign Exchange and Derivatives

 While innovative products and ways of trading create new possibilities for
earnings for the bank, they also introduce novel and sometimes unfamiliar risks
that must be identified and managed. Failure to do so can result losses entailing
financial and reputational consequences that linger long after the loss has been
recognized in financial statements. Hence, auditor should assess controls as part
of audit work.
 It is imperative that an auditor obtains a complete overview of the treasury
operations of a bank before the commencement of the statutory audit. After
conducting appropriate risk assessment of the treasury processes, the audit
program needs to be designed in a manner that it dovetails into not just the
control assessments of the treasury process but there is an assurance that the
figures appearing in the financial statements as well as the disclosures are true
and reflect fairly the affairs of the bank treasury.

3.4 Reports to be given by bank Auditors:

 The Auditors’ Report should state whether the Balance Sheet, Profit and Loss
Account and Cash Flow Statement of the Bank, show a true and fair view of
the financial position / result of operations / cash flows respectively, for the
period under audit. This is applicable in respect of Nationalised Banks, as well
as Banking Companies.
 Unaudited Branches: Information relating to number of unaudited Branches
should be given. Also, information in respect of Advances, Deposits, Interest
Income and Interest Expense for such unaudited Branches should be collected
and disclosed in the Audit Report

Additional Matters

Sec.30 (3) of 1. Whether the Profit & Loss Account shows a true balance
Banking of Profit or Loss for the period covered by such account, &
Regulation Act 2. LFAR: Auditors of Public Sector Banks, Private Sector Banks
requires the & Foreign Banks (as well as their Branches), are required
Auditor to state to submit Long Form Audit Report (LFAR) on various
the following matters specified by RBI.
3. Certificates: In addition to Reports, the Auditors of Bank
Branches as well as Central Statutory Auditors of Banks,
have to furnish / issue various “Certificates” as required
by RBI and other Regulations.

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3.5 NON-PERFORMING ASSETS

Non-performing Assets: An asset becomes NPA when it ceases to generate income for
the Bank.

A non-performing asset (NPA) is a loan or an advance where -:

 interest and/ or instalment of principal remain overdue for a period of more

than 90 days in respect of a term loan;
 the account remains ‘out of order’ in respect of an Overdraft/Cash Credit
(OD/ CC);
 the bill remains overdue for a period of more than 90 days in the case of bills
purchased and discounted

Out of Order: An account should be treated as ‘out of order’ if:-

♦ the outstanding balance remains continuously in excess of the sanctioned

limit/drawing power or

♦ In cases where the outstanding balance in the principal operating account

is less than the sanctioned limit/drawing power, but there are no credits
continuously for 90 days as on the date of Balance Sheet ; or

♦ credits are there but are not enough to cover the interest debited during
the same period, these accounts should be treated as ‘out of order’

Overdue: Any amount due to the bank under any credit facility is ‘overdue’ if it is not
paid on the due date fixed by the bank.

Categories of Non-Performing Assets: Provision Required

Substandard Assets:

Would be one, which has remained NPA 15%

for a period less than or equal to 12
months

Doubtful Assets: Would be one, which has

remained in the substandard category for
a period of 12 months. (Secured+Unsecure)

Sub-categories: 25% +100%

Doubtful up to 1 Year (D1) 40%+100%

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Doubtful 1 to 3 Years (D2) 100%+100%

Doubtful more than 3 Years (D3)

Loss Assets: Would be one, where loss has 100%

been identified by the bank or internal or
external auditors or the RBI inspection but
the amount has not been written off
wholly

Impact of Non- Performing Assets on Balance Sheet

Profitability due to NPA Non- Performing Assets not only reduces the profit of the
Bank but also increases the Loss.

Also, banks also providing 25 % to 30% additional provision

on Non-Performing Assets which directly impact the
Profitability of the Bank
Liability Management
Due to high Non-Performing Assets, Bank for forced for
lower the interest rates of the deposit and on advances likely
to pay Higher interest rates on advances.

This situation is a very difficult situation and also hamper

Public Confidence the banking business.

The poor performance of the Bank due to increases in Non-

Performing Assets not only lower the sentiments of the
investor but the bank also lose the faith of Public, this
directly affects the deposits into the bank.

Changes in Interest High Non-Performing Assets affects the economy as a

Rates whole.

Higher NPA reflects the reduction of interest rate on the

deposit into banks, only poor public directly impact the
consequences of Higher NPA’s of the bank.

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4 GOVERNMENT AUDIT
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.
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.

4.1 Objectives of Government Audit

1. To make sure that the expenditure is incurred out of the fund, which the competent
authority has sanctioned.

2. To verify that the expenditure of the government department is sanctioned as per the
rules and regulations of the department concerned.

3. To see that the expenditure already sanctioned has been incurred by an officer who is
authorized to do so.

4. 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.

5. To see that the payments have been properly classified into capital and revenue.

6. To check the existence of stock and stores and their proper valuation.

7. To ensure that expenditures have been incurred in the interest of public.

8. To ensure that stocktaking is done periodically and stock registers are maintained hi-
to-date.

9. To ensure that whether money due from others has been regularly recovered while
verifying the receipts.

4.2 POWERS OF C&AG:

1. To inspect any office of accounts under the control of the Union or of a State,
including treasuries and such offices responsible for the keeping of initial and
subsidiary accounts, and submit accounts to him;

2. To require any accounts, books papers and other document which are relevant to
the transactions as under audit, be sent to specified places

3. To put such question or make such observation as he may consider necessary to

the person in charge of the office and to call for such information as he may
require for preparation of any account or report, which is his duty to prepare

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4. To dispense with any part of detailed audit of any accounts or class of transactions
and to apply such limited checks in relation to such accounts or transaction as he
may determine .

4.3 DUTIES OF C&AG

Audit of Receipt Where anybody or authority is substantially financed by grants

and Expenditure or loan from the Consolidated Fund of India or of any State or
of any union Territory , the C&AG shall audit all receipt and
expenditure of that body or authority and to report .

General Provision  To audit and report on all expenses from the

Relating to Audit Consolidated Fund of India and of each State and of each
Union Territory.

 To audit and report all transaction of the union and of

the state relating to Contingency Fund and Public
Accounts.

 To audit and report on all trading, manufacturing profit

and loss accounts and balance sheet and other
subsidiary accounts kept in any department of the union
or of state

Audit of The duties and powers of C&AG in relation to the audit of the
Government Government Companies shall be performed and exercised by
Companies and him in accordance with the provision of The Companies Act,
Corporation 2013

Compile and Submit 1. The C&AG shall be responsible for compiling the
Accounts of Union accounts of the union and of each state and union
and State territory.

2. He is also responsible to provide such information as

may be required by the union Government, state
Government or the Government of Union Territories
which will enable them to compile the accounts

3. The accounts prepared should be submitted to:

 In the case of Union / Central Government, to The

President of the Country

 In the case of state, to the Governor of each State

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 In the case of Union Territory, to the Chief

Administrator.

4.4 Supplementary or Test Audit by the Comptroller & Auditor General .

Comptroller and Auditor General of India has the right to comment upon or supplement
the audit report of the Statutory auditors in such manner as he may think fit under Section
143(6)(b) of the Companies Act 2013. The supplementary or test audit, conducted by the
Comptroller and Auditor General on the audit report of the Statutory Auditors broadly
covers the following four aspects:

 Verification of the technical accuracy of the accounting records, books of account

and financial results with reference to the Accounting Standards;

 Detection or prevention of misstatements in and window dressing of the financial

statements; Whether mention of any important defects or irregularities has been
omitted, and;

 That the report does not reveal any important point that would need to be further
investigated.

4.5 Audit Report: 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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5 AUDIT OF NON-GOVERNMENTAL ORGANISATION

1. NGOs can be defined as non-profit making organisations which raise funds from
members, donors or contributors apart from receiving donation of time, energy
and skills for achieving their social objectives like imparting education.
2. Therefore, this definition of NGO would include religious organisations, voluntary
health and welfare agencies, charitable organisations, hospitals, old age homes,
research foundations etc.
3. Non-Governmental Organisations are generally incorporated as societies under
the Societies Registration Act, 1860 or as a trust under the India Trust Act, 1882,
or under any other law corresponding to these Laws enforced in any part of India.
NGOs can also be incorporated as a company under section 8 of the Companies
Act, 2013.

While planning  Knowledge of the NGO’s work, its mission and vision, areas
the audit, the of operations and environment in which it operates.
auditor may  Updating knowledge of relevant statutes especially with
concentrate on regard to recent amendments, circulars, judicial decisions
the following: viz. Foreign Contribution (Regulation) Act 1976, Societies
Registration Act, 1860, Income Tax Act 1961 etc. and the
Rules related to the statutes.
 Reviewing the legal form of the Organisation and its
Memorandum of Association, Articles of Association, Rules
and Regulations.
 Reviewing the NGO’s Organisation chart, then Financial and
Administrative Manuals, Project and Programme Guidelines,
Funding Agencies Requirements and formats, budgetary
policies if any.
 Examination of minutes of the Board/Managing
Committee/Governing Body/ Management and Committees
thereof to ascertain the impact of any decisions on the
financial records.
 Study the accounting system, procedures, internal controls
and internal checks existing for the NGO and verify their
applicability.
 Setting of materiality levels for audit purposes.
 The nature and timing of reports or other communications.
 The involvement of experts and their reports.
 Review the previous year’s Audit Report

The audit programme should include

 Verification of assets,
 Verification of Liabilities,

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 Verification of income and

 Verification of expenditure

VERIFICATION OF (i)Fixed Assets: Vouch all acquisitions/sale or disposal of assets

ASSETS including depreciation and the authorisations for the same. Also
check donor’s letters/agreements for the grants. For immovable
property, check title, etc.

(ii)Investments: Check Investment Register and the investments

physically ensuring that investments are in the name of the NGO.
Verify further investments and dis-investments for approval by the
appropriate authority and reference in the bank accounts for the
principal amount and interest.

(iii)Cash in Hand: Physically verify the cash in hand and imprest

balance, at the close of the year and whether it tallies with the
books of accounts.

(iv)Bank Balance: Check the bank reconciliation statements and

ascertain details for old outstanding and unadjusted amounts.

(v)Stock in Hand: Verify stock in hand and obtain certificate from

the management for the quantities and valuation of the same
VERIFICATION OF (i)Corpus fund: The contributions/grants received towards corpus
LIABILITIES be vouched with reference to the letters from the donor(s). The
interest income be checked with investment Register and physical
investments in hand.

(ii)Reserves: Vouch transfers from projects/programmes with

donors letters and board resolutions of NGO. Also check transfers
and adjustments made during the year.”

(iii)Ear-marked Funds: Check requirements of donors’ institutions,

board resolution of NGO, rules and regulations of the schemes of
the ear-marked funds.

(iv)Project/Agency Balances: Vouch disbursements and

expenditures as per agreements with donors for each of the
balances.

(v)Loans: Vouch loans with loan agreements receipt counter –foil

issued.”

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VERIFICATION OF The receipt of income of NGO may be checked on the following

INCOME 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  Programme and Project Expenses: Verify
EXPENDITURE 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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6 AUDIT OF CHARITABLE HOSTEL

1. General i)Study the constitution under which the charitable institution
has been set hi whether under the Society Registration Act,
as a trust or as a company limited by guarantee. Verify
whether it is managed as contemplated by the law and rules
and regulations made thereunder.

(ii)Examine the internal control structure particularly with

reference to admission to hostel, expenses incurred on
different kinds of activities.

(iii)Verify the broad nature of expenses likely to be incurred

with reference to the previous year’s annual audited accounts
2. Verification of (i)Check the amounts received on account of, monthly rentals,
the receipts etc., and receipts issued for the same.

(ii)Ascertain that there is adequate internal control over the

issue of official receipts, custody of unused receipt books,
printing of receipt books, etc.

(iii)Cross – tally the rent received along with the number of

students (from the student register) staying in the hostel
during the year.

(iv)Check the amounts received from additional services

rendered like guest fees, receipts for breakage, fines,
penalties, etc”
3. Verification of (i)Check the day-to-day administration expenses incurred
expenses along with the necessary vouchers, supporting for the same
like salary registers, repairs register, etc.;

(ii)Verify whether the expenses incurred are in conformity

with the budgets prepared internally or filed with the relevant
authorities.

(iii)Check the amount spent on provisions of hostel facilities

with reference to bills, etc.

(iv)See that whenever heavy expenditure has been incurred

on renovation of the hostel, computer centre, etc. the same is
accounted for properly.(if such facilities are being provided by
the hostel
4. “Verify investments made from surplus funds as well as
existing investments by physically verifying the same and that

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they are in the name of the institution and that there is no

charge/pledge against the same
5. Verify all capital expenditure and expenditure on repairs, etc.,
incurred with the vouchers and also whether proper tenders,
etc., were invited for the same. See that all furniture, glass,
cutlery, kitchen utensils, liner, etc. are adequately depreciated
6. Library Facilities: See that proper library register are
maintained. The system regarding issue and receipt of books
is in order. Late fee fines and money received on account of
lost book is accounted for properly. Obsolete books are
written off only after proper authorisation. Expenses incurred
on newspapers and weekly magazines as compared to
Journals and periodicals have been accounted for properly
7. Check the provision of other additional facilities like
computer facilities, etc. Ensure that proper registers are
maintained for charging fees, based on monthly or hourly
basis. In case such facility is extended to each room, whether
the charges are payable on lump-sum basis or on actual usage
basis. Also ensure that amounts spent has been allocated
properly
8. Verify whether the institution is eligible for income tax
exemption and if not, whether provision for taxation has been
made

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7 AUDIT OF EDUCATIONAL INSTITUTE

The special steps involved in the audit of an educational institution are the following:

i)Examine the Trust Deed, or Regulations in the case of school or college and note all
the provisions affecting accounts. In the case of a university, refer to the Act of
Legislature and the Regulations framed there under.

(ii)Read through the minutes of the meetings of the Managing Committee or

Governing Body, noting resolutions affecting accounts to see that these have been duly
complied with, especially the decisions as regards the operation of bank accounts and
sanctioning of expenditure.

(iii)Check names entered in the Students’ Fee Register for each month or term, with
the respective class registers, showing names of students on rolls and test amount of
fees charged; and verify that there operates a system of internal check which ensures
that demands against the students are properly raised.

(iv)Check fees received by comparing counterfoils of receipts granted with entries in

the cash book and tracing the collections in the Fee Register to confirm that the
revenue from this source has been duly accounted for.

(v)Total hi the various columns of the Fees Register for each month or term to ascertain
that fees paid in advance have been carried forward and the arrears that are
irrecoverable have been written off under the sanction of an appropriate authority.

(vi)Check admission fees with admission slips signed by the head of the institution and
confirm that the amount had been credited to a Capital Fund, unless the Managing
Committee has taken a decision to the contrary.

(vii)See that free studentship and concessions have been granted by a person
authorised to do so, having regard to the prescribed Rules.

(viii)Confirm that fines for late payment or absence, etc., have either been collected or
remitted under proper authority.

(ix)Confirm that hostel dues were recovered before students’ accounts were closed
and their deposits of caution money refunded.

(x)Verify rental income from landed property with the rent rolls, etc.

(xi)Vouch income from endowments and legacies, as well as interest and dividends
from investment; also inspect the securities in respect of investments held.

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(xii)Verify any Government or local authority grant with the relevant papers of grant. If
any expense has been disallowed for purposes of grant, ascertain the reasons and
compliance thereof.

(xiii)Report any old heavy arrears on account of fees, dormitory rents, etc, to the
Managing Committee.

(xiv)Confirm that caution money and other deposits paid by students on admission
have been shown as liability in the balance sheet and not transferred to revenue.

(xv)See that the investments representing endowment funds for prizes are kept
separate and any income in excess of the prizes has been accumulated and invested
along with the corpus.

(xvi)Verify that the Provident Fund money of the staff has been invested in appropriate
securities.

(xvii)Vouch donations, if any, with the list published with the annual report. If some
donations were meant for any specific purpose, see that the money was utilised for the
purpose.

(xviii)Vouch all capital expenditure in the usual way and verify the same with the
sanction for the Committee as contained in the minute book.

(xix)Vouch in the usual manner all establishment expenses and enquire into any unduly
heavy expenditure under any head.

(xx)See that increase in the salaries of the staff have been sanctioned and minute by
the Committee.

(xxi)Ascertain that the system ordering inspection on receipt and issue of provisions,
foodstuffs, clothing and other equipment is efficient and all bills are duly authorised
and passed before payment.

(xxii)Verify the inventories of furniture, stationery, clothing, provision and all

equipment, etc. These should be checked by reference to Stock Register and values
applied to various items should be test checked.

(xxiii)Confirm that the refund of taxes deducted from the income from investment
(interest on securities, etc.) has been claimed and recovered since the institutions are
generally exempted from the payment of income-tax.

(xxiv)Verify the annual statements of accounts and while doing so see that separate
statements of account have been prepared as regards Poor Boys Fund, Games Fund,
Hostel and Provident Fund of Staff, etc.”

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8. AUDIT OF INSURANCE COMPANIES

8.1 Meaning of Indian Insurance Company:- The Companies Act, 2013requires of an
Indian Insurance company. 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 .

8.2 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.

Premium In a separate bank account, premium collections are credited.

Verification: 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-  Before initiating the payment of revenue, the auditor

General will apply must consider internal controls and compliance rules,
the following which are set for the collection and recording of
procedures: 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 instalments payable on or
before the date of receipt of the balance are calculated as
revenue for the year under review.

Claims The auditor of each division or branch should have access to

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

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.

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9. AUDIT OF TRUST
1. Constitution: The auditor should study the constitution of the charitable
institution, for example, whether it is set hi under the
Societies Registration Act or as per section 8 of the
Companies Act or as a trust
2. Interest of : Obtain a list of members of the governing body. This will
members: help the auditor in identifying whether any of the members
of the governing body has any interest in the charitable
institution.
3. Budget: The auditor should obtain a copy of the budget sanctioned
or the financial statement. This would enable him to acquaint
himself with the different heads of income and expenditures
of incomes and expenditures of the institution
4. Internal Check: Examination of the system of internal check, especially as
regards the accounting of the amounts collected.
5. Collection & Deposit Check that the amounts received towards income have been
of income duly collected, received and deposited into the bank
regularly and promptly.
6. Subscription and These institutions receive subscriptions and donations which
donation: form the major part of their collections. Therefore the
auditor should check the following:
► The amount or the rate of the annual subscription.
► Any instructions given by the donors as to the specific
utilization of donation.
► Adequacy of internal controls existing as regards unused
receipt books, counter foils, etc.
► Where subscriptions are received in advance these should
be properly dealt with in the accounts.
7. Legacies received Verify the amounts of legacies received by reference to
correspondence with any figures and other available
information’s.
8. Income from Where the institution has made any investments or given
Investment: loans, the amount of dividend and interest should be
properly vouched with reference to the counterfoils or
dividend warrants received. It should be ensured that such
loans or grants are given under proper authorizations
9. Rent: If some property is given or taken on rent, then the auditor
should check the tenancy agreement, the rent slips and the
authorized person for the collection or payment, as the case
may be, of the rent.
10. Income/Expenditure Most of the organisations organize special functions such as
relating to concert: concert etc. The auditor should be careful in such cases. All
the gross receipts and outgoings are to be properly vouched
by him. It should be ensured that proper internal check was
maintained as regards the receipts and outgoings. For
example, the person responsible for collection and
disbursements should be separate persons
11. Physical verification: : The auditor should physically verify the cash in hand,
inventories and fixed assets.

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10. FORENSIC AUDIT & ACCOUNTING

10.1 Concept of Forensic Accounting and Audit

 'Forensic' means' suitable for use in a court of law'.

 Forensic accounting can be described as a specialized field of accountancy which
investigates fraud and analyse financial information to be used in legal proceedings.
Forensic accounting uses accounting, auditing, and investigative skills to conduct
investigations into theft and fraud. It encompasses both Litigation Support and
Investigative Accounting.
 Forensic audit can be defined as an examination of evidence regarding an assertion
to determine its correspondence to established criteria carried out in a manner
suitable to the court.
 Forensic accounting does involve elaborate inquiry and investigation into the
transactional typicality of the connected issues and events, the job of forensic audit is
to provide a double check on the consistency issues, questions that the counsel may
ask in the context of arguing in courts.

10.2 Forensic Accounting and Auditing Framework

Accounting  Looking beyond Numbers while examining Financial Reporting

and Business Information Systems.
 Compliance of GAAPs and IFRS/ Regional Standards.
 Reframing of Accounts Based on Legality and GAAPs.
Auditing &  Risk Assessment and Analytical Procedures.
Assurance  Designing and Performing Extended Audit Procedures
 Compliance of Standards of Auditing, where applicable.
 Introspective & Sceptical Mindset for Reviewing Transactions
and Deals.
Investigation  Fixation of Direction of Investigation on Realistic Basis.
 Gathering Evidences and clues through Scientific and Latest
Investigation Techniques.
 Analysis of Psychological Behaviour of Human.
 Evidence Documentation for Legal Proceedings.

 Litigation Consultancy- Jointly working with Lawyers and Clients engaged in litigation
to provide expert advice regarding evidence and strategic proceedings.
 Computer Forensic- Providing assistance in Electronic Data Recovery and Retrieval.
 Expert Witness- Providing Evidence and Preparation of Formal Reports for filing in
the Court of Law

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10.3 Objectives of Forensic Accounting & Audit:

1. To use the forensic accountant’s conclusions to facilitate a settlement, claim, or jury award by
reducing the financial component as an area of continuing debate

2. To avoid fraud and theft

3. To restore the downgraded public confidence

4. To formulate and establish a comprehensive corporate governance policy

5. To create a positive work environment

10.4 Forensic Audit vs. Financial Audit

BASIS FORENSIC AUDIT FINANCIAL AUDIT

Meaning Examination of evidence Examination of Financial Information
regarding an assertion to so as to express an opinion on true and
determine its fair view of state of affairs and financial
correspondence to results.
established criteria carried
out in a manner suitable to
the court
Objective To determine whether fraudTo express an opinion on true and fair
has taken place view.
Frequency No specific period. Generally carried out for a financial yea
Techniques Investigative and substantive
Risk based with the help of compliance
& substantive procedures
Extent In-depth checking Test Checking based
Verification Verification of suspected / All assets and liabilities are verified
of Asset and selected items is done where with the help of audit procedures or
liabilities misappropriation is management.
suspected. certificate/representation

10.5 Forensic Audit Reports:

1. Nature of business of the entity.
2. Nature of subject or aspect examined.
3. Persons for whom the report is intended.
4. Purpose for which the report is prepared

5. Management attitude, directives and needs.

6. Approach and calibre of Forensic auditor.
7. Extent of details required by management and persons for whom report is prepared.

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10.6 Techniques of Forensic Audit:

Benchmarking Comparing one financial period with another or the

performance of one cost centre, or business unit, with another,
overall business performance with its standards defined.
Analytical Tools Trend Analysis and Ratio Analysis may be used to identify any
abnormal trends and changes.
Digital Techniques Digital investigations are complex techniques and require
support from trained digital investigators. Digital techniques
comprise of close scrutiny of relevant emails, accounting
records, phone logs etc. Before applying digital techniques like
obtaining data from email etc. the forensic auditor should take
appropriate legal advice so that it doesn’t amount to invasion of
privacy
CAATs CAATs known as Computer-assisted audit techniques are
computer programs that the auditors use as part of the audit
procedures to process data of audit significance contained in a
client’s information systems, without depending on him.
System analysis To examine the systems in place and identifying any
weaknesses that could be opportunities for the fraudsters
Common Software Common Software Tools like spreadsheets (MS Excel), RDBMS
Too (MS Access) and Report writers (Crystal reports) are widely
accepted due to their instant availability and lower costs
Data Mining It is a set of assisted techniques designed to automatically mine
Techniques large volumes of data for new, hidden or unexpected
information or patterns. Forensic Audit Reports Factors to be
considered.

10.7 Areas of Forensic Audit:

Fraud Detection Area of Fraud detection comprises of:

 Investigating and analysing financial evidence.
 Detecting financial frauds
 Tracing misappropriated funds
Fraud Prevention Area of fraud prevention comprises of:
 Reviewing internal controls to verify their adequacy
 Providing consultation in the development and
implementation of an internal control framework aligned to
an organization's risk profile
Computer Forensics Area of Computer forensics comprises of developing
computerized applications to assist in the recovery, analysis
and presentation of financial evidence
Expert Testimony Area of Expert testimony comprises of
 Assisting in legal proceedings,
 Testifying in court as an expert witness
 Preparing visual aids to support trial evidence

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11. AUDIT OF CHARITABLE INSTITUTION

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:

1 Subscription and Donation

2 Income from Investment
3 Grants
4 Legacies
5 Rent
6 Special event
Role of an Auditor on Verification of Reports of Charitable Institutions
1. In relation to subscriptions and donations, the auditor may evaluate the internal check
relating to the accounting of amount collected.
2. He shall examine all the receipt books used during the period under audit and apply
special care while verifying the cancelled receipts.

3. He may test check the counterfoils with cash book.

4. 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.

5. He should ensure that the unused receipt books are under the custody of a responsible
person.

6. In the case of Legacies and grants, the auditor should examine the correspondence,
minutes books and other available information.

7. 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.

8. 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

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tenancy agreement to find out the amount of rent to be collected and the due dates, on
which the rents become due.

9. 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.

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.

The above are the important aspects where the auditor should pay special attention.

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INSURANCE

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1.1 DEFINITION OF INSURANCE

Insurance is form of contract or an arrangement where one party agrees in return for a
consideration to pay an agreed amount of money to another party to make good the
loss, damage or injury to something of value in which the insured has an interest

Allen H. Willett Insurance is that social device for making accumulations to meet
uncertain losses which is carried out through the transfer of the
risks of many individuals to one person or to a group of persons.

Mowbray and Insurance is a social device for eliminating or reducing the cost to
Blan Chard society of certain type of risk.

Allen Z: Insurance is a device for the transfer to an insurer certain risks of

Mayerson economic loss that would otherwise come to the insured.

Insurance may be defined as a social device providing financial

[Link] compensation for the effects of misfortune, the payments being
made from the accumulated contribution of all parties
participating in the scheme.

Ghosh and Insurance is a cooperative form of distributing a certain risk over a

Agrawal group of persons who are exposed to it.

1.2 HISTORY OF INSURANCE

 India has a long history with insurance. Writings by Manu (Manusmrithi),
Yagnavalkya (Dharmasastra), and Kautilya (Arthasastra) all make reference to it.
 Life Insurance
1. The creation of the Oriental Life Insurance Company in Calcutta in 1818
marked the beginning of the life insurance industry in India. However,
this Corporation collapsed in 1834.
2. The Madras Equitable started conducting life insurance transactions in
the Madras Presidency in 1829.
3. The British Insurance Act was passed in 1870, and the Bombay Mutual
(1871), Oriental (1874), and Empire of India (1897) were all founded in
the Bombay Residency over the final three decades of the nineteenth
century.
4. The first statutory action to control the life insurance industry was the
Indian Life Insurance Companies Act of 1912.
5. The Indian Insurance Companies Act was passed in 1928 to give the
government access to statistical data on life and non-life insurance
transactions made in India by domestic and international insurers,
including provident insurance societies.
6. The Insurance Act of 1938, which included extensive provisions for
effective control over insurers' operations, combined and updated the
prior laws.

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7. Main Agencies were eliminated by the Insurance Amendment Act 1950 .

As a result, the Indian government chose to nationalise the insurance
industry.
8. The Life Insurance Corporation was established in 1956, the same year
that an Ordinance was adopted to nationalise the Life Insurance
industry.
9. The LIC absorbed 154 Indian, 16 non-Indian insurers as also 75 provident
societies—245 Indian and foreign insurers in all. The LIC had monopoly
till the late 90s when the Insurance sector was reopened to the private
sector.
 General Insurance
1. Indian general insurance dates back to the British creation of Triton
Insurance Company Ltd. in Calcutta in 1850.
2. The Indian Mercantile Insurance Ltd. was founded in 1907. This business
handled all general insurance business classes for the first time.
3. The General Insurance Council, a division of the Insurance Association of
India, was established in 1957. With the purpose of assuring ethical
behaviour and sound business procedures, the General Insurance Council
created a code of conduct.
4. The Insurance Act was modified in 1968 to create minimum solvency
buffers and restrict investments. At that time, the Tariff Advisory
Committee was also created.
5. The general insurance business was nationalised on January 1st, 1973 as
a result of the General Insurance Business (Nationalisation) Act, which
was passed in 1972.
6. Four companies—National Insurance Company Ltd., New India Assurance
Company Ltd., Oriental Insurance Company Ltd., and United India
Insurance Company Ltd.—were formed after the merger of 107
insurance providers.
7. The General Insurance Corporation of India was established as a business
in 1971, and on January 1st, 1973, it opened for business.
8. Current consolidation in Government-run general insurance businesses
has been made possible by the Central Government's proposal to
consolidate three Public Sector General Insurance Companies, with the
exception of New India Assurance Company Ltd.

1.3 INSURANCE AND RISK

External Risk
 Insurance firms assume the risk relating to their customers' assets. The premium
obtained for this service is then either invested in securities or lent to third
parties who require cash.
 Thus the insurance companies deal with the external environment in two ways.
1. If the investments an insurance firm made ended up being a bad
investment, it might not fulfil its duty.
2. The assets they have insured may also degrade in quality, leading to
more claims than the company had anticipated.

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 Insurance companies are exposed to two common problems namely moral

hazard and adverse selection.
1. Moral hazard is the tendency of an insured to take greater risk because
she/he is insured.
2. The adverse selection is the tendency of insuring the low quality asset
and not insuring high quality assets.
Internal Risk
 Insurance companies are impacted by the effectiveness in evaluating the
insurance proposal, just like financial services firms that engage in direct lending.
 The corporation will end up insuring bad assets if the internal procedure for
reviewing the insurance proposal is ineffective.
 Overexposure to one class of asset or significant exposure to one proposition
both have an impact on the performance of insurance firms.
 The evaluation of liabilities and the distribution of funds among various
investments while taking the anticipated liabilities into consideration are
additional significant internal factors.
 The performance of the company on the investment side depends on its
efficiency of treasury and investment division which needs to consider the
different sources of investment risk in managing the investment portfolio.

1.4 INSURANCE TERMINOLOGIES

 Proposal (or) Proposal form denotes the application for insurance contains
which solicits information from the Proposer to enable the Insurer to take a
decision on whether to accept the risk or not.

 Proposer is the person who submits Proposal form for insurance to the
insurance company and who is interested in taking an Insurance Policy.

 Underwriting is the process of assessment of risk on a proposal by the Insurance

company and arriving at the decision (to accept, reject, rate-up, postpone) and
the terms and conditions upon which an insurance contract may be accepted.

 Policyholder is the person who is issued an Insurance Policy document by the

Insurance Company consequent to underwriting and issuance of Insurance
Policy to cover the risk stated in the Proposal form.

 Insurance Policy document (or) Policy document (or) Policy constitutes the
contract between the Insurance company and the Policyholder, stating the
terms and conditions of the Insurance coverage provided by the Insurance
company to the Policyholder.

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 Subject matter of insurance is the Person or object upon whose loss or upon the
loss of which object the insurance company agrees to pay a specified sum as the
compensation to the Policyholder.

 Life insured (or) Life assured under a Life insurance Policy is the subject matter
of insurance on whose death a specified sum of money is paid by the Life
insurance company.

 Sum Assured (or) Sum Insured means the amount promised to be paid by the
Insurer upon the death of the Life insured.

 Nominee is the person appointed, only for Policies taken on one’s own Life, by
the Policyholder to receive the Sum Assured or any other policy benefit upon
death of the Life assured.

 Counter offer denotes the extra premium proposed by the Insurer upon
underwriting the proposal to accommodate for the extra risk taken by the
insurance company on a Proposal.

 Benefits illustration is the document provided to the Policyholder at the point of

sale giving the details of premiums payable by the Policyholder year-wise along
with the benefits payable at the end of each Policy year.

 Assignment is transfer of Insurance Policies to another person with or without

consideration

 Annuity is a series of regular and periodic payment payable in consideration of

usually a lump sum. For example, under Pension Policies, upon the attainment of
superannuation age, the corpus available is utilised to purchase a Single
premium (lump sum) Annuity Policy under which the Policyholder gets a periodic
payout on a monthly basis till his survival.

 Money Back Policy: Money back policies are low-risk policies that are not
market-linked. Over the policy period, they offer guaranteed returns at regular
intervals. A money-back insurance policy gives a sum assured and any applicable
incentives in addition to periodic returns that are guaranteed These plans are
made to be participating plans so that investors can receive bonuses. This
indicates that the insurance firm makes a market investment using some of the
premiums received.
The money-back insurance policy's bonus may take one of two forms:

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1. Revisionary bonus: Based on the company's profitability, this bonus is added

to the amount guaranteed at the end of each year. Depending on how the
company's investments are doing, it may fluctuate every year.
2. Terminal bonus: The investor receives this bonus as payment for timely
premium payments. By putting your premium payments to auto-pay, you can be
sure that you are qualified for this bonus. This is referred to as a persistency
benefit in some policies.

 A unit linked insurance plan (ULIP) is a multi-faceted product that offers both
insurance coverage and investment exposure in equities or bonds. Policyholders
must regularly pay premiums for this product. A portion of the premiums is used
to pay for insurance coverage, while the remainder is combined with the assets
of other policyholders and invested in either stocks, bonds, or a mix of both
equities and bonds.

1.5 INSURANCE INTERMEDIARIES

 Insurance intermediaries assist in managing the distribution of insurance. They
offer placement and purchase of insurance services to both the insurer and the
insured.
 They are required to be registered under the provisions of the Insurance Act
and the IRDA Regulations, 2000.
 Insurance intermediaries include:
A. Insurance agents
1. A licence granted under the terms of the Insurance Act permits the
bearer to represent any insurer as an insurance agent.
2. They often work under the terms of an agency agreement with the
insurer and represent the insurer in the insurance process.
B. Insurance Brokers
1. Insurance brokers usually work for the policyholder in the insurance
process and act independently in relation to insurers.
2. They obtain quotes from various insurers and guide clients in
determining the adequate policy from a range of products.
3. Many brokers sometimes act as an agent of the insurer and at other
times as brokers of the client in assisting a client with insuring its risk
exposures through an insurance contract.
C. Insurance Surveyors and Loss Assessors
1. Insurance surveyors as technical experts inspect the damage or loss of
an insurance company.
2. The insurer, based on the estimation of damage of the surveyor, decides
the amount of compensation payable to the insured.
D. Third Party Administrators
1. "One who has secured a licence from the Authority and is contracted for
a fee or remuneration, as stipulated in the agreement with the insurance
company, for the provision of health services" is referred to as a third
party administrator (TPA).

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2. A TPA is required to maintain the professional confidentiality of all

transactions.
3. The TPA is required to provide an annual report and any other return as
required by the IRDA to the insurance company and the IRDA.
4. The TPA cannot charge a separate fee from policyholders.

1.6 INSURANCE CONTRACT

A contract of insurance is an agreement whereby one party, called the insurer,
undertakes, in return for an agreed consideration, called the premium, to pay the other
party, namely the insured, a sum of money or its equivalent in kind, upon the
occurrence of a specified event resulting in a loss to him.

1 The Proposal: A proposal must be submitted to the insurer by the party seeking to
execute an insurance contract. You have the option of making your request verbally or
in writing. The proposal form consists of a number of questions, all of which must be
answered honestly. If the proposal is lacking or inaccurate, the insurer may reject it.
2 The Cover Notes: Sometimes the proposer may want to have instant coverage while
the proposal is being evaluated by the insurer. In this situation, the insurer may, upon
request, issue a cover note granting interim protection. So, the primary goal of the
cover note is to validate risk coverage prior to the insurer issuing the policy.
3 The Policy: The policy is a document which is an evidence of the contract of insurance
.
Having accepted a proposal, the insurer must issue the policy within one month of
receiving the first premium.

1.6.1 COMPONENTS OF AN INSURANCE CONTRACT

Basically all insurance contracts consist of the following five parts.

1. Declaration:
 This is the first part of any insurance contract.
 It contains the information relating to identity of the insured, the property, the
type(s) of coverage, term of the contract, insurance amount and the premium.
 The declaration covers most of the basic information needed by the insurer in
deciding whether to issue the contact and at what price.
2. Insuring Agreement:
 The insuring agreement is a formal statement detailing what the insurer
promises to do in return for the premium paid.
 The perils insured against and services promised are stated and defined in the
agreement.
 It contains the basic information about the nature of the risk transferred and
what may be recovered in the event of loss.
3. Exclusions and Limitations:
 Insurance contacts may be written on an all risk basis, where the contract
insures against all risks except those specifically excluded in the contract.
 The contract may be also on the named perils basis, where only losses resulting
from the perils named in the contract are covered.
4. Conditions:

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 The clauses are the conditions to be fulfilled by the insured to enforce his rights
under the contract.
 Most of these conditions refer to the type of information that must be supplied
by the insured in the event of loss or refer to the right of the insured if dispute
arises in regard to the loss.
5. Binders:
 The binder is a temporary insurance contract.
 The binder contains the essential facts about the transaction such as date,
amount, name of insured, and risk to be covered.

1.6.2 BASIC FEATURES OF INSURANCE CONTRACTS

1. Insurable interest:
 The person entering into the contract (buyer of insurance or policyholder)
should have valid interest in the item being insured. This is called ‘insurable
interest’.
 This implies that the policyholder should be able to establish that a loss incurred
in the item being insured would lead to direct monetary loss to the
policyholder.
 Any insurance contract without insurable interest is considered in the nature of
‘wagering contracts’. (In terms of Section 30 of the Indian Contracts Act, 1872,
all wagering contracts are ‘null and void’).
 Generally, one rule to establish insurable interest is through ownership of the
assets being insured.
 There are also certain classes of insurance that do not demand proving
insurable interest, such as accident insurance and certain life insurance
contracts.

2. Utmost good faith:

 Voluntary disclosure of all information pertinent to the contracts is expected of
both the insurer and the insured.
 Any material fact not disclosed at the time of entering into the contract, which is
relevant to the contract, can render the contract null and void.
 Since it may not be possible in practice to conduct a thorough due diligence on
every person or entity wishing to enter into an insurance contract, the
agreements contain express ‘warranties’ from the insured and ‘disclosures’ from
the insurer.

3. Indemnification:
 Under a contract of indemnity, the indemnifier provides assurance to save the
counterparty from loss, caused by the action of indemnifier or a third party.
Hence, every contract of insurance is a contract of indemnity.
 The party whose loss is being compensated should only seek damages for the
loss and should not try to profit from the damages.
4. Subrogation:
 This means that if the insured suffers a loss due to the action of a third party and
the insurance company has settled the insured’s claim, the insurance company

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can step into the shoes of the insured to recover the loss from the third party
that caused the loss.
 Subrogation therefore ensures that all rights in respect of the insured asset are
transferred to the insurance company once the loss in indemnified.
 However, if after subrogation, the insurance company is able to recover from
the third party more than the indemnified value, the excess amount will have to
be paid back to the insured.
 It is to be noted that both ‘indemnification’ and ‘subrogation’ are not applicable
to life insurance contracts.

5. Warranties:
 These are corollaries of ‘uberrimae fidae’, and are written as conditions in
insurance contracts.
 These are explicit or express warranties. There are also ‘implicit’ or ‘implied’
warranties, such as ‘affirmative’ or ‘promissory’ warranties.
 For example, in marine insurance, an express warranty may be that the ship is
seaworthy for a particular journey, or it would take a specified route to its
destination.

6. Proximate cause:
 This important feature of an insurance contract looks at the ‘immediate cause’
of the event that caused the loss.
 For example, if a machine is insured against floods and damage is caused due to
collapse of the factory building in which the machine was kept, the insurance
company is not liable to compensate even if the building collapse was due to
floods.

7. Assignment and nomination:

 Nomination refers to the procedure by which the nominee to receive the
proceeds of the policy without cumbersome legal documents.
 However, if an assignment is made, the assignor (the insured) ceases to be the
owner of the policy.
 Hence, once the purpose for which the policy has been assigned is achieved and
the insured becomes the owner of the policy once again, he would have to carry
out a fresh nomination procedure.

1.6.3 DIFFERENCES BETWEEN INSURANCE CONTRACTS AND OTHER CONTRACTS

1. Risk transfer: Insurance contracts are unique in that they involve the transfer of
risk from the policyholder to the insurer. In other types of contracts, both parties
usually assume some level of risk.
2. Indemnity principle: Insurance contracts are based on the principle of
indemnity, which means that the insurer agrees to compensate the policyholder
for any losses or damages that occur, up to the limits of the policy. This is
different from other types of contracts, which may not involve compensation in
the event of a loss.

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3. Premium payments: In an insurance contract, the policyholder pays a premium

to the insurer in exchange for coverage. This is different from other types of
contracts, which may not involve any payment or may involve a different type of
payment.
4. Adhesion contracts: Insurance contracts are often considered to be adhesion
contracts, which means that the terms of the contract are largely set by the
insurer and may not be negotiable by the policyholder. This is different from
other types of contracts, which may involve more negotiation and input from
both parties.
5. Government regulation: Insurance contracts are subject to government
regulation and oversight, which is not typically the case for other types of
contracts.

1.7 KINDS OF INSURANCE

1.7.1 LIFE INSURANCE
 Life insurance is a contract under which one person, in consideration of a
premium paid undertakes to pay to the person for whose benefit the
insurance is made, a certain sum of money either on the death of the
person whose life is insured or on the expiry of a specified period of time.
 Types of Life Policies:

Whole Life Policies  Under this policy, the sum assured is payable after the death
of the assured.
 The premiums on whole life policies may be payable
regularly or alternatively they may be payable for a period
only (say 20 or 30 years).
 If the premiums are paid throughout the life, it is called
'ordinary life policy'.
 In the other case when premiums are paid for a limited
period, it is called 'limited payment life policy'.

Endowment Life  Under this policy the insurer undertakes to pay the sum
Assurance assured either at the end of a specified period or on the
death of the assured, whichever is the earlier.
 The money insured is payable to the legal heirs or nominees
in the event that the assured passes away before the end of
the stipulated time (or before reaching the specified age).
 Endowment policies have a higher premium than whole life
policies.

Term Assurance  This is also called temporary assurance.

 Under this policy, the sum assured is paid when the assured
dies before the stipulated date.
 No payment is made if the assured survives to that date.

Joint Life Policy  This involves the insurance of two lives in the same policy.

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 The sum assured (policy money) is payable by the insurer

upon the death of any one of the assured to the surviving
person.

Group Insurance  A group of persons under the same employer are covered
under a single policy.
 Premium is paid by the employer alone or by the employer
and employee jointly.
 A group insurance policy may cover all the employees or a
particular section of the employee of the same organisation.

Annuity Policies  This policy is suitable when people desire to have certain
income after the attainment of certain age.
 Premium may be paid in installments or in lump sum at the
beginning.
 After the assured attains certain age, insurer pays the
amount in instalments.

With Profit or  In the case of with profit policy, the assured is paid, in
Without Profit addition to the sum assured, a share in the profits earned by
Policies the insurer.
 Without profit policy is one under which the policy holder
does not get any share in the profits earned by the insurer.
 The premium on without profit policies are lower than those
on with profit policies.
 With profit and without profit policies are also known as
participating and non-participating policies respectively.

Childrens'  These policies are taken for the purpose of education of

Endowment children and marriage expenses of daughters.
Policies  Premium (annual or lump sum) is payable by the person
(father or guardian or other person) entering into the
contract.
 Policy matures when the child attains certain age.

1.7.2 GENERAL INSURANCE

In India, general insurance is primarily broken down into fire, marine, and other
concerns. In addition, it covers the reinsurance and aviation industries, as well as the
comprehensive crop insurance programme, personal accident insurance, and social
security programmes. It offers vulnerable groups in society insurance protection.

I. Property Insurance:
 Property loss exposures refer to the inherent risks to which the different
types of property are exposed.

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 The various types of property include: buildings; personal property;

money and securities; motor vehicles and trailer property in transit;
ships and cargo; boilers and machinery; etc.
 Property insurance defends a person's possessions from a list of specific
threats. Risks include the possibility of theft of products or property, sea
or fire hazards, and accidental property damage. Property insurance
includes home, business, and commercial insurance.

II. Marine Insurance

 Marine insurance is an arrangement by which the insurer undertakes to
compensate the owner of a ship or cargo for complete or partial loss at
sea.
 Marine insurance covers ship, cargo and freight.
 The marine policy must specify the following aspects
a. The names of the insured and the insurer
b. The subject matter insured and the risks insured against
c. The voyage or time period or both
d. The sum assured
e. The amount of premium
 Types of Marine insurance

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 Provides protection for a ship or cargo just for a specific journey,

from the port of departure to the port of arrival.
Voyage Policy  Except in cases of safety or human life, the insurer is not
responsible if the ship changes its destination or departs from
the predetermined course.

Time Policy  Covers risk during a stated period of time, regardless of number
of voyages made.
 Normally includes a continuation clause if the ship is still at sea
for up to 12 months.


Suitable for merchants making regular shipments.
 Policy taken for a round amount, with details declared at a later
Floating
time.
Policies
 With each shipment, insured makes declaration stating sum to
be insured, and total value of policy reduces by that amount.

Mixed Policy  Combines elements of a time policy and voyage policy. Covers
risk during a particular voyage for a specified period.

 Under valued policy, value of subject matter insured is specified

on policy. In full loss, insurer compensates amount specified. In
Valued and
partial loss, proportionate amount is paid.
Unvalued
 Under unvalued policy, value of subject matter not stated.
Policies
Compensation ascertained by assessment of loss, subject to limit
of sum insured.

III. Fire Insurance

 Fire policies cover the losses directly caused through fire.
 It is necessary that fire must happen by ignition.
 The fire insurance contract is an indemnity contract. Each contract
specifies the maximum amount that can be claimed by the insured in
case of loss.
 In order to cover a particular loss or damage under a fire policy, the
following three conditions should be fulfilled:
A. The loss or damage should relate to the subject matter of policy.
B. The loss or damage must be caused by ignition or fire.
C. The ignition must be either of goods insured or the premises where it is placed.
 Types of Fire Insurance Policy

Specific Policy The liability of the insurer is limited to a specified amount, which
is normally less than the actual value of the property insured.

Valued Policy The insurer agrees to pay a fixed amount in the event of loss,
irrespective of the actual loss suffered.

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Floating Policy The amount of the policy may vary from time to time.
This type of policy is useful in the case of goods in store where
quantity and value change from time to time.

Replacement The insurer has the option to replace the property/goods

Policy damaged by fire, instead of paying the loss by cash.

Loss of Profit The insured is protected against the loss of profit due to
Policy dislocation of business due to fire.
Under this policy, insurer compensates to the extent of the loss
in profits.

Comprehensive It provides cover against not only fire but also several other risks
Policy such as lightning, riot, earthquake, flood, storm, burglary, war,
etc.

IV. Motor Insurance

 Owners of motor vehicles (two or four wheelers) can take insurance
policies to cover different types of risks
(a) loss or damage to the vehicle,
(b) injuries to or death of any passenger, and
(c) damages payable to the third parties for accidents.
 A comprehensive motor insurance policy covers not only full third party
risks (property as well as persons including passengers), but also damage
to the insured vehicle, loss of rugs and other articles, and may also cover
the cost of hiring a substitute vehicle, if necessary.
 If no claims are made during the year, a discount or 'no-claim bonus' is
allowed at the time of renewal.

V. Social Insurance:
 Financially disadvantaged groups within society are unable to afford a
sufficient insurance premium. Social insurance offers protection to these
poorer groups of society in this circumstance.
 There are various types of social insurance including pension plans;
disability benefits; unemployment benefits; sickness insurance; and
industrial insurance.

VI. Miscellaneous Insurance

 Householder's Policies: Fire companies now provide a wide variety of
coverage options for the structures and possessions of private homes
under homeowners' or all-in policies.
In order for the insurer to be able to charge an acceptable premium
under these policies, it is typically required to insure buildings and
contents for their full worth.
 Engineering Insurance: It is a branch of insurance that has expanded
rapidly under recent legislation and especially under the Factories Acts,

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which prescribe compulsory inspection at regular intervals of certain

types of industrial equipment, such as boilers, electrical plant, cranes and
other lifting gear.
The inspection service, plant replacement or repair costs, as well as
personal injury and property damage are all covered by insurance
policies.
 Aviation Insurance: Under aviation insurance, cover is available for loss
of or damage to aircraft, personal accidents to passengers, third party
risks in respect of both person and property and for cargo sent by air.
However, accidents to staff who fly regularly are covered by group
insurance schemes.
 Fidelity Guarantee: Cashiers and others who handle money are
frequently required by their employers to provide security as protection
against their personal dishonesty.
In such cases, fidelity guarantee insurance policy may be taken by the
employer.
 Burglary, Theft and Robbery: Burglary insurance covers the loss caused
on account of burglary, house breaking or theft.

1.8 REGULATORY FRAMEWORK OF INSURANCE BUSINESS IN INDIA

 In 1993, the Government set up a committee under the chairmanship of RN
Malhotra to propose recommendations for reforms in the insurance sector.
 Following the recommendations of the Malhotra Committee report, in 1999, the
Insurance Regulatory and Development Authority (IRDA) was constituted as an
autonomous body to regulate and develop the insurance industry.
 The IRDA was incorporated as a statutory body in April, 2000.
 The key objectives of the IRDA include promotion of competition so as to
enhance customer satisfaction through increased consumer choice and lower
premiums, while ensuring the financial security of the insurance market.
 The IRDA opened up the market in August 2000 with the invitation for
application for registrations.
 Foreign companies were allowed ownership of upto 26%.
 In December, 2000, the subsidiaries of the General Insurance Corporation of
India were restructured as independent companies and at the same time GIC
was converted in to a national reinsurer.

1.8.1 ACTS/REGULATIONS GOVERNING BOTH LIFE & GENERAL INSURANCE BUSINESS

IN INDIA
1. Insurance Act, 1938
2. IRDA Act, 1999 & Regulations passed thereunder
3. Insurance Amendment Act, 2002
4. Exchange Control Regulations (FEMA)
5. Indian Stamp Act, 1899
6. Consumer Protection Act, 1986
7. Insurance Ombudsman Rules, 2017
8. Labour Law legislations

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1.8.2 REGULATIONS GOVERNING/AFFECTING LIFE INSURANCE BUSINESS IN INDIA

1. LIC Act, 1956
2. Amendments to LIC Act

1.8.3 REGULATIONS AFFECTING GENERAL INSURANCE BUSINESS IN INDIA

1. General Insurance Nationalization Act, 1972
2. Amendments to GIN Act, 1972
3. Multi-Modal Transportation Act, 1993
4. Motor Vehicles Act, 1988
5. Inland Steam Vessels Amendment Act, 1977
6. Marine Insurance Act, 1963
7. Carriage of Goods by Sea Act, 1925
8. Merchant Shipping Act, 1958
9. Bill of Lading Act, 1855
10. Indian Ports (Major Ports) Act, 1963
11. Indian Railways Act, 1989
12. Carriers Act, 1865
13. Indian Post Office Act, 1898
14. Carriage by Air Act, 1972
15. Public Liability Insurance Act, 1991
16. Employee State Insurance Act,1948
17. Aircraft Act, 1934.

1.8.4 INSURANCE REGULATORY AND DEVELOPMENT AUTHORITY OF INDIA (‘IRDAI’)

 The IRDAI Act, 1999, established the Insurance Regulatory and Development
Authority of India as a statutory regulator to regulate and promote the insurance
industry in India and to protect the interests of holders of insurance policies.
 The members of the IRDAI are appointed by the Central Government. The
Authority consists of a chairperson, not more than five whole-time members and
not more than four part-time members.
 Every Chairperson and member of IRDAI appointed shall hold office for a term of
five years. Chairperson shall not hold office once he or she attains 65 years while
whole time members shall not hold office beyond 62 years.

ROLE OF IRDAI AS REGULATOR

a. Issue of Certificate of Registration to insurance companies, renew, modify,
withdraw, suspend or cancel the certificate of registration.
b. Protection of interests of policy holders in matters concerning assignment of
policies, nomination, insurable interest, claim settlement, surrender value and other
terms and conditions of insurance contract.
c. Specification of requisite qualifications, practical training and code of conduct
for insurance agents and intermediaries.
d. Specification of code of conduct for surveyors and loss assessors.
e. Promoting efficiency in the conduct of insurance business.
f. Promoting and regulating professional organizations connected with insurance
and reinsurance business.
g. Levying fees and other charges for carrying out the purposes of the Act.

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h. Calling for information from or undertaking inspection of insurance companies,

intermediaries and other oganisations connected with insurance business.
i. Control and regulation of rates, advantages, terms and conditions that may be
offered by general insurance companies.
j. Specifying the form and manner in which books of account shall be maintained
by insurance companies and intermediaries.
k. Regulation of investments of funds by insurance companies.
l. Regulation of maintenance of margin of solvency.
m. Adjudication of disputes between insurers and insurance
intermediaries.
n. Supervising the functioning of the Tariff Advisory Committee.
o. Specifying the percentage of premium income of the insurer to
finance schemes for promoting and regulating professional
organizations.
p. Specifying the percentage of insurance business to be undertaken
by insurers in rural or social sectors.
q. Such other powers as may be prescribed.

1.8.5 LIFE INSURANCE COUNCIL AND GENERAL INSURANCE COUNCIL

CONSTITUTION OF LIFE INSURANCE COUNCIL

As per Section 64F(1) of the Insurance Act, 1938, an Executive Committee of the Life
Insurance Council shall be formed comprising of the following persons, namely: —
 Four representatives of members of the Life Insurance Council elected in their
individual capacity by the members in such manner as may be laid down in the
bye-laws of the Council. One of the four representatives shall be elected as the
Chairperson of the Executive Committee of Life Insurance Council;
 An eminent person not connected with insurance business, nominated by IRDAI;
 Three persons to represent Insurance agents, Intermediaries and Policyholders,
respectively, as may be nominated by the Authority; and
 One representative each from Self-help groups and Insurance Co-operative
Societies.

CONSTITUTION OF GENERAL INSURANCE COUNCIL

Similarly, as per Section 64F(2) of the Insurance Act, 1938, an Executive Committee of
the General Insurance Council shall consist of the following persons, namely:—
 Four representatives of members of the General Insurance Council elected in
their individual capacity by the members in such manner as may be laid down in
the bye-laws of the Council. One of the four representatives shall be elected as
the Chairperson of the Executive Committee of General Insurance Council;
 An eminent person not connected with insurance business, nominated by the
Authority; and
 Four persons to represent Insurance agents, Third party administrators,
Surveyors and Loss Assessors and Policyholders respectively, as may be
nominated by the Authority

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FUNCTIONS OF THE EXECUTIVE COMMITTEE OF LIFE AND GENERAL INSURANCE

COUNCILS
As per Section 64J, read with Section 64L of the Insurance Act, 1938, the following are
the functions of the Executive Committee of the Life and General Insurance Council:
 To aid, advise and assist insurers carrying on life/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 life insurance policies;
 To render advice to the Authority in the matter of controlling the expenses of
insurers in respect of their life/general insurance business in India, respectively;
in addition in respect of general insurers, Executive Committee of General
insurance council may also advise on Commission and other expenses;
 To bring to the notice of the Authority the case of any insurer acting in a manner
prejudicial to the interests of holders of life/general insurance policies,
respectively; and

POWERS OF LIFE & GENERAL INSURANCE COUNCILS

 Appoint such officers and servants as may be necessary and fix the conditions of
their service;
 Determine the manner in which any prescribed fee may be collected;
 Keep and maintain up-to-date, a copy of list of all insurers who are members of
the either Council;
 Make bye-laws for:
1. The holding of elections other than the first election
2. The summoning and holding of meetings, the conduct of business thereat and
the number of persons necessary to form a quorum
3. The submission by insurers to the Executive Committee of the Life Insurance
Council, or the General Insurance Council of such statements or information as
may be required of them and the submission of copies thereof by the insurers to
the Authority
4. The levy and collection of any fees
5. The regulation of any other matter which may be necessary for the purpose of
enabling it to carry out its duties under this Act

1.8.6 INSURANCE OMBUDSMEN RULES 2017

The Government of India established the Insurance Ombudsman Scheme to provide
private policyholders with a cost-effective, speedy, and impartial alternative to the
court system for resolving disputes.
 An Executive Council of Insurers shall be established under these Rules
comprising of the following representatives:
 Executive Council of Insurers shall comprise of 9 members including the
Chairperson Members of the Executive Council of Insurers shall comprise of:
a. 2 persons representing life insurers to be nominated by the Life
Insurance Council
b. 2 persons representing General insurers, other than stand-alone
health insurers, to be nominated by the General Insurance Council
c. 1 person representing stand-alone health insurers to be nominated by the
General Insurance Council

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d. 1 representative of the IRDAI; and

e. 1 representative of the Central Government in the Ministry of Finance from the
Department of Financial Services not below the rank of Director.
f. Chairman, Life Insurance Corporation of India (LIC of India)
established under the Life Insurance Corporation Act, 1956 (31 of 1956)
or the Chairman, General Insurers’ (Public Sector) Association of India
(GIPSA) established under the General Insurance Business
(Nationalisation) Act, 1972 (57 of 1972) provided they are not acting as
Chairperson of the Executive Council of Insurers.
 The Chairperson of the Executive Council of Insurers shall be either the
Chairman of the LIC of India or the Chairman of the GIPSA by rotation.
 The term of the Chairperson and members of the Executive Council of Insurers
shall be three years from the date of assumption of charge.
 A member of the Executive Council of Insurers shall not be eligible for re-
nomination for a period of three years from the date he ceases to be a member
(not applicable to IRDAI representative, Central Government representative, LIC
& GIPSA representatives)

FUNCTIONS OF THE EXECUTIVE COUNCIL OF INSURERS

 Issue guidelines relating to the procedure for the day to day administration,
secretariat staffing, secretariat administrative infrastructure, and such other
related aspects of functioning of insurance Ombudsman system
 In case any vacancy arises in any Insurance Ombudsman due to resignation or
retirement or death of the Ombudsman, the Executive Council of Insurers shall
direct an Ombudsman of such other territorial jurisdiction to hold additional
charge of the Insurance Ombudsman where such vacancy may arise
 The Executive Council of Insurers may constitute such committees and as and
when deemed necessary.

ESTABLISHMENT OF OMBUDSMEN OFFICES AND PROCESS OF SELECTION OF

INSURANCE OMBUDSMEN
 An Ombudsman shall be selected from amongst persons having experience of
the insurance industry, civil service, administrative service or judicial service.
 An Ombudsman shall be selected by a Selection Committee comprising of
a. Chairperson of the IRDAI, who shall be the Chairman of the Selection
Committee.
b. one representative each of the Life Insurance Council and the General Insurance
Council from the Executive Council of Insurers – members.
c. A representative of the Government of India not below the rank of a Joint
Secretary or equivalent, in the Ministry of Finance, from the Department of Financial
Services—member.
 Term of office of Insurance Ombudsmen
An Insurance Ombudsmen is appointed for a term of 3 years. However, no
person can continue as Insurance Ombudsman after he/she has attained 65
years of age
 Remuneration of Insurance Ombudsmen

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The Ombudsman shall be allowed a fixed pay of two lakh twenty-five thousand
rupees per month and any pension to which he is entitled from the Central
Government or a State Government shall be deducted from his salary. Other
allowances and perquisites as may be determined by the Executive Council of
Insurers with the prior approval of Central Government, shall also be payable to
the Ombudsman.
 Territorial jurisdiction of Ombudsmen
The office of the Insurance Ombudsman shall be located at such places and shall
have such territorial jurisdiction as may be specified by the Executive Council of
Insurers from time to time.
 Duties and functions of Insurance Ombudsman
The Ombudsman shall receive and consider complaints or disputes relating to:
a. delay in settlement of claims, beyond the time specified in the regulations,
framed under the Insurance Regulatory and Development Authority of India Act, 1999;
b. any partial or total repudiation of claims by the life insurer, General insurer or
the health insurer ;
c. disputes over premium paid or payable in terms of insurance policy;
d. misrepresentation of policy terms and conditions at any time in the policy
document or policy contract;
e. legal construction of insurance policies in so far as the dispute relates to claim;
f. policy servicing related grievances against insurers and their agents and
intermediaries;
g. issuance of life insurance policy, general insurance policy including health
insurance policy which is not in conformity with the proposal form submitted by the
proposer;
h. non-issuance of insurance policy after receipt of premium in life insurance and
general insurance including health insurance; and
i. any other matter resulting from the violation of provisions of the Insurance Act,
1938 or the regulations, circulars, guidelines or instructions issued by the IRDAI from
time to time or the terms and conditions of the policy contract
 Procedure before Ombudsmen
a. Any person who has a grievance against an insurer, may himself or through his
legal heirs, nominee or assignee, make a complaint in writing to the Insurance
Ombudsman within whose territorial jurisdiction the branch or office of the insurer
complained against or the residential address or place of residence of the complainant
is located.
b. No complaint to the Insurance Ombudsman shall lie unless:
(i) the complainant makes a written representation to the insurer named
in the complaint and
 either the insurer had rejected the complaint or
 the complainant had not received any reply within a period of one
month after the insurer received his representation or
 the complainant is not satisfied with the reply given to him by the
insurer;
(ii) the complaint is made within one year.
c. The Ombudsman is empowered to excuse delays in cases where he
deems it necessary. If the delay is excused, the date of the condonation

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shall be deemed to be the date the complaint was filed for purposes of
further proceedings under these rules.
 Prohibition of simultaneous remedies in multiple fora
No complaint before the Insurance Ombudsman shall be maintainable on the
same subject matter on which proceedings are pending before or disposed of by
any court or consumer forum or arbitrator.
 Proceedings before the Ombudsmen
During the course of proceedings before him, the Ombudsmen has the following
powers:
a. The Ombudsman shall have the power to ask the parties concerned for
additional documents in support of their respective contentions and wherever
considered necessary, collect factual information relating to the dispute available with
the insurer and may make available such information to the parties concerned.
b. The Ombudsman may obtain the opinion of professional experts, if the disposal
of a case warrants it.
c. The Ombudsman shall dispose of a complaint after giving the parties to the
dispute a reasonable opportunity of being heard.
 Recommendations made by the Insurance Ombudsman
a. Where a complaint is settled through mediation, the Ombudsman shall make a
recommendation which it thinks fair in the circumstances of the case, within one month
of the date of receipt of mutual written consent for such mediation and the copies of
the recommendation shall be sent to the complainant and the insurer concerned.
b. If the recommendation of the Ombudsman is acceptable to the complainant, he
shall send a communication in writing within fifteen days of receipt of the
recommendation, stating clearly that he accepts the settlement as full and final.
 Awards by Ombudsmen
a. Where the complaint is not settled by way of mediation under rule 16, the
Ombudsman shall pass an Award, based on the pleadings and evidence brought
b. The Award shall be in writing and shall state the reasons upon which the award
is based. Where the Award is in favour of the complainant, it shall state the amount of
compensation granted to the complainant after deducting the amount already paid, if
any, from the award.
c. The Ombudsman shall not award any compensation in excess of the loss
suffered by the complainant as a direct consequence of the cause of action or shall not
award compensation exceeding `30 lakhs (including relevant expenses, if any).
d. The Ombudsman shall finalize its findings and pass an award within a period of 3
months of the receipt of all requirements from the complainant.
e. A copy of the award shall be sent to the complainant and the insurer named on
record. the complaint.
f. The insurer shall comply with the award within 30 days of the receipt of the
award and intimate compliance of the same to the Ombudsman.
g. The complainant shall be entitled to such interest at a rate per annum as
specified in the regulations, framed under the Insurance Regulatory and Development
Authority of India Act, 1999, from the date the claim ought to have been settled under
the regulations, till the date of payment of the amount awarded by the Ombudsman.
h. The award of Insurance Ombudsman shall be binding on the insurers.

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The Ombudsman shall prepare an annual report detailing the activities

undertaken during the previous financial year under their jurisdiction, statement
of accounts and any other relevant information and submit to the Executive
Council of Insurers with a copy to the IRDAI by the 30th June every year.
An Advisory Committee consisting of eminent persons not exceeding five and
including one Central Government nominee shall be constituted by the IRDAI to
review the performance of the Insurance Ombudsman from time to time.

1.9 INSURANCE AS A SOCIAL SECURITY TOOL

Insurance serves as a social security tool in addition to a tool for personal and
commercial security. Social insurance is helpful in addressing a variety of societal issues,
including unemployment, ageing, crime, disability, and elderly care.
The Government of India has also provided article 41 in Indian Constitution regarding
social security. Thus, insurance is not only a device of individual and business security
but also a device of social security.
It works as a social security tool as following.
1. Social Insurance : The LIC of India has set up Social Security Fund and provided
special insurance plans for the benefit of poor and the people having below
poverty line. It is also helpful to agriculturist and the persons engaged in
unorganized sector.
2. Protection to wealth : General Insurance Corporation of India and other private
insurance companies provides protection to properties of the society. Insurance
against loss of personal wealth is available. The society will be protected
financially from things like old age, death, destruction, and disappearance of its
material and human resources.
3. Economic growth of the nation: It helps to mobilise domestic savings. Insurance
generates a little quantity of premium and transforms collected cash into
profitable investments. Financial stability is made possible through insurance,
which also promotes trade and business.
4. Reduction in Inflation : Too much circulation of money can increase the inflation
in the economy. With premiums, insurance companies take money from society
as household savings, so reducing the flow of currency. Contrarily, insurance
offers funding for production, which reduces the inflation gap.
1.9.1 GOVERNMENT SPONSORED SOCIALLY ORIENTED INSURANCE SCHEMES
 Pradhan Mantri Jeevan Jyoti Bima Yojana(PMJJBY):
1. It is a one-year life insurance scheme renewable from year to year
offering coverage for death.
2. The scheme is administered through both public and private sector
insurance companies in tie-up with scheduled commercial banks,
regional rural banks and cooperative banks.
3. With the target to include the poor and the underprivileged section of
the society, this social security scheme was envisaged to foster the
spirit of inclusive growth tandem with the vision of ‘Sabke Saath Sab ka
Vikas’
 Pradhan Mantri Suraksha Bima Yojana(PMSBY):
1. The Scheme is available to people in the age group 18 to 70 years with
a bank account who give their consent to join / enable auto-debit on or

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before 31st May for the coverage period 1st June to 31st May on an
annual renewal basis.
2. Aadhar would be the primary KYC for the bank account. The risk
coverage under the scheme is Rs.2 lakh for accidental death and full
disability and Rs. 1 lakh for partial disability.
3. The premium of Rs. 20 per annum is to be deducted from the account
holder’s bank account through ‘auto-debit’ facility in one installment.
4. The scheme is being offered by Public Sector General Insurance
Companies or any other General Insurance Company.
 Life Cover under Pradhan Mantri Jan Dhan Yojana (PMJDY):
1. The Pradhan Mantri Jan DhanYojana (PMJDY) sets out to provide a
basic Bank account to every family who till now had no account.
2. The bank account comes with a RuPay debit card with a built-in
accidental insurance cover of Rs. 1 lakh.
3. It announced a life cover of Rs. 30,000/- for those subscribing to a bank
account with a RuPay debit card before 26th January, 2015 to
complement the Rs. 1 lakh accident insurance cover.
4. The scheme aims to provide security to families from economically
weaker sections who cannot afford direct purchase of such insurance.
The premium subscription for the life cover under PMJDY is borne by
the Government of India.
 Varishtha Pension Bima Yojana:
1. The scheme is administered through Life Insurance Corporation of
India (LIC). Under the Scheme the subscribers on payment of a lump
sum amount get pension at a guaranteed rate of 9% per annum
(payable monthly).
2. Any gap in the guaranteed return over the return generated by the LIC
on the fund is compensated by Government of India by way of subsidy
payment in the scheme.
 Pradhan Mantri Fasal Bima Yojana(PMFBY):
1. PMFBY provides a comprehensive insurance cover against failure of
the crop thus helping in stabilising the income of the farmers.
2. The Scheme covers all Food & Oilseeds crops and Annual
commercial/Horticultural Crops for which past yield data is available
and for which requisite number of Crop Cutting Experiments (CCEs) are
conducted being under General Crop Estimation Survey (GCES).
3. The scheme is implemented by empanelled general insurance
companies.
4. The scheme is compulsory for loanee farmers availing Crop Loan /KCC
account for notified crops and voluntary for other others. The scheme
is being administered by Ministry of Agriculture.
 Pradhan Mantri Vaya Vandana Yojana(PMVVY):
1. It is is being implemented through Life Insurance Corporation (LIC) of
India.
2. As per the scheme, on payment of an initial lump sum amount ranging
from a minimum purchase price of Rs. 1, 50,000/- for a minimum
pension of Rs 1000/- per month to a maximum purchase price of Rs. 7,

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50,000/- for maximum pension of Rs. 5,000/- per month, subscribers

will get an assured pension based on a guaranteed rate of return of 8%
per annum, payable monthly.

1.10 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."

TYPES OF PENSION PLANS

1. Defined-Contribution Plan: Employees contribute to retirement accounts that
are either explicit or implicit under a defined-contribution plan.
 the level and timing of contributions,
 the rate of return on the retirement accounts and
 the form in which benefits are realised, including annuitization,
programmed withdrawals and lumpsum distribution.
2. Pay-as-you-go System: Pension payments are made using the taxes gathered
from the younger taxpaying generation in a pay-as-you-go arrangement. The additional
taxes gathered are then used to fund their pension payments.
3. Funded System: In a Funded System, pension payments are invested in a variety
of financial assets. Funding provides an opportunity to capitalise from investment in
financial markets, where the rate of return is likely to be higher than the implicit rate of
return to contributions in a pay-as-you-go pension system. The benefits of funding can
be enhanced by investment diversification.
4. Participating Pension Plans: To reduce risks, IRDA (Insurance Regulatory
Development Authority) regulates investments in these schemes. Government of India
(GOI) securities should make up at least 20% of the investment, followed by GOI or GOI-
backed assets at 20%, and approved bonds and stocks, the majority of which have AAA
ratings, at 60%.

1.11 CURRENT STATE OF INSURANCE IN INDIA

 India is ranked 11th in Global Insurance business. In 2020, India's share of the
global insurance market was 1.72%, while the country's total volume of
insurance premiums climbed by 0.1%.
 With life insurance penetration at 3.2% and non-life insurance penetration at
1%, India's insurance penetration was estimated to be 4.2% in FY21 (up from
3.76% in 2019–20).
 Private sector businesses increased their market share in the non-life insurance
industry from 15% in FY2004 to 49.3% in FY2021.
 Government programmes and initiatives to promote financial inclusion should
have aided in accelerating uptake and penetration across all categories. Crop
insurance premium income has significantly increased as a result of the

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government's main programme, PMFBY, and it now covers more than 55 million
farmer applicants per year.
 The insurance regulator IRDAI has also taken a number of steps to increase
insurance penetration, including allowing insurers to conduct video-based Know
Your Customer (KYC) processes, introducing standardised insurance products,
and allowing insurers to encourage low-risk behaviour.
 The rise of online channels and digital issuance is anticipated to continue. Web
aggregators already account for 30–40% of the origination of digital insurance,
and their market share within it has been steadily growing.
 Important government initiatives, robust democratic elements, a supportive
regulatory framework, growing alliances, product innovations, and lively
distribution channels all contribute to the expansion of the insurance sector.
 The Union Budget's announcement to boost FDI in insurance from 49% to 74%
will help to further encourage improved penetration and coverage by opening
up new channels for the capital support needed to grow the Indian insurance
market.
 The recent pandemic has emphasized the importance of healthcare on the
economy, and health insurance would play a critical role in the effort to
strengthen the healthcare ecosystem.

GROWTH DRIVERS
 Favourable Demographics
In 2020, 55% of India's population (the working population) was under the age
of 60, and that percentage is expected to rise to 56% by 2025. The country has a
young population—68% of whom are under the age of 30. This indicate that
India has a young population that is insurable.
 Wide middle-class expansion
By 2030, India will add 140 Mn middle-income and 21 Mn high-income
households which will drive the demand and growth of Indian insurance sector.
 Digital behaviour patterns
Consumers are beginning to favour digital methods for their insurance
requirements: 73%/62% of clients chose GI/HI goods purchased online (2020).
The comfort level of agents using digital technologies has also increased; 63% of
agents feel at ease video-calling clients, and >50% are agreeable to online
renewals. The second-largest market for Internet users is India. 1 Bn people will
be online by 2026.
 Pandemic-related shift in demand patterns
Digital adoption has accelerated as a result of COVID, and according to 67% of
agents, clients are now more inclined to use portals and apps. Moreover, the
pandemic raised awareness of insurance, boosted insurance penetration, and
increased demand for protection products, particularly health insurance.
 Government Program
Government initiatives such as PM-JAY, PMFBY, PMJJBY, PMSBY etc. are
increasing insurance penetration

1.12 EMERGING CONCEPTS IN INSURANCE INDUSTRY

 Digitalisation

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A technology-driven shift in the way insurance is sold is the emerging trend in

the industry.
The insurers will concentrate more on marketing insurance products using tele-
medical procedures in conjunction with e-KYC procedures to complete the
customer verification process. By purchasing insurance through digital channels,
the procedure is simplified and customers have a wide range of options to
choose the best insurance plan for their needs.
 New Insurance Products
Since the start of the pandemic, awareness of the necessity for protection has
multiplied. Demand for insurance products for a wide range of hazards that
insurance firms typically did not cover has begun to pick up steam. These
insurance policies cover everything from pandemic protection to protection
against seasonal ailments like dengue.
 Rise in Demand for Standardised Products
By the introduction of standard insurance products across all major insurance
sectors – Health, Life and Travel – IRDAI is leaving no stone unturned to increase
the insurance penetration rate in the country. The standard features and
wordings of these products will make them the first choice of buyers who cannot
afford a comprehensive insurance policy.
 Personalisation and data
Usage-based insurance policies, for instance, tap into customer data in order to
charge users according to their specific needs and behaviors, putting the
consumer in charge of their own fees.
Such personalization and clever data-usage benefit both customers and insurers.
Along with improving user satisfaction, tailored products enable companies to
enjoy more accurate risk assessment, and stable margins.

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1.14 MULTIPLE CHOICE QUESTIONS

1. When was the Oriental Life Insurance Company established in Calcutta?
A) 1818
B) 1834
C) 1829
D) 1870

Answer: A) 1818.

Explanation: The Oriental Life Insurance Company was established in Calcutta in 1818,
marking the beginning of the life insurance industry in India.

2. Which act gave the government access to statistical data on life and non-life
insurance transactions made in India by domestic and international insurers?
A) Indian Insurance Companies Act
B) Insurance Amendment Act 1950
C) Insurance Act of 1938
D) Insurance Act of 1928

Answer: D) Insurance Act of 1928.

Explanation: The Indian Insurance Companies Act was passed in 1928 to give the government
access to statistical data on life and non-life insurance transactions made in India by domestic
and international insurers.

3. Which was the first Indian company to handle all general insurance business
classes?
A) Indian Mercantile Insurance Ltd.
B) Oriental Insurance Company Ltd.
C) United India Insurance Company Ltd.
D) New India Assurance Company Ltd.

Answer: A) Indian Mercantile Insurance Ltd.

Explanation: Indian Mercantile Insurance Ltd. was founded in 1907 and handled all general
insurance business classes for the first time.

4. When was the General Insurance Corporation of India established?

A) 1956
B) 1971

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C) 1928
D) 1973

Answer: B) 1971.

Explanation: The General Insurance Corporation of India was established as a business in

1971, and on January 1st, 1973, it opened for business.

5. What is the role of a third-party administrator (TPA)?

A. Representing the policyholder in the insurance process
B. Inspecting the damage or loss of an insurance company
C. Providing health services to policyholders
D. Obtaining quotes from various insurers

Answer: C

Explanation: TPAs are contracted for a fee or remuneration to provide health services to
policyholders and are required to maintain professional confidentiality.

6. What is an internal risk for insurance companies?

a. Overexposure to one class of asset
b. The tendency of an insured to take greater risk because she/he is insured
c. The tendency of insurance companies to invest in risky securities
d. The tendency of insuring the low quality asset and not insuring high quality
assets.

Answer: a. Overexposure to one class of asset.

Explanation: This is an internal risk because it is something that is within the control
of the insurance company, and can be mitigated by diversifying their portfolio.

7. The principle of insurable interest means that:

A) The insured must own the assets being insured
B) The insurance company must own the assets being insured
C) The insured must have a direct financial interest in the assets being insured
D) The insured must have a third-party interest in the assets being insured

Answer: C)

Explanation: The insured must have a direct financial interest in the assets being insured. This
means that a loss incurred in the item being insured would lead to direct monetary loss to the
policyholder.

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8. Which of the following is not applicable to life insurance contracts?

A) Subrogation
B) Warranties
C) Indemnification
D) Insurable interest

Answer: A) Subrogation.

Explanation: Both indemnification and subrogation are not applicable to life insurance
contracts.

9. Which of the following features of an insurance contract allows for the insured
to seek damages for the loss, but not try to profit from the damages?
A) Utmost good faith
B) Insurable interest
C) Indemnification
D) Warranties

Answer: C) Indemnification.

Explanation: Under a contract of indemnity, the party whose loss is being

compensated should only seek damages for the loss and should not try to profit from
the damages

10. Which policy pays the sum assured only when the assured dies before a
stipulated date?
a) Whole Life Policy
b) Endowment Life Assurance
c) Term Assurance
d) Joint Life Policy

Answer: c) Term Assurance.

Explanation: Term Assurance is a policy in which the sum assured is payable only if
the assured dies before a stipulated date.

11. Which committee was set up by the Indian government in 1993 to propose
recommendations for reforms in the insurance sector?
A) Insurance Regulatory and Development Authority (IRDA)

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B) General Insurance Corporation of India

C) Exchange Control Regulations (FEMA)
D) RN Malhotra Committee

Answer: D) RN Malhotra Committee

Explanation: In 1993, the Indian government set up a committee under the

chairmanship of RN Malhotra to propose recommendations for reforms in the
insurance sector.

12. When was the Insurance Regulatory and Development Authority (IRDA)
incorporated as a statutory body?
A) 1999
B) 2000
C) 2002
D) 2005

Answer: B) 2000

Explanation: The Insurance Regulatory and Development Authority (IRDA) was incorporated
as a statutory body in April 2000.

13. Which act established the Insurance Regulatory and Development Authority of
India (IRDAI)?
a. IRDAI Act, 2000
b. IRDAI Act, 1999
c. IRDAI Act, 1998
d. IRDAI Act, 2001

Answer: b. IRDAI Act, 1999

Explanation: The IRDAI Act, 1999, established the Insurance Regulatory and
Development Authority of India as a statutory regulator to regulate and promote the
insurance industry in India and to protect the interests of holders of insurance
policies.

14. How many part-time members can the IRDAI have?

a. 3
b. 4
c. 5
d. 6

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Answer: b. 4

Explanation: The Authority consists of a chairperson, not more than five whole-time
members and not more than four part-time members.

15. Who can nominate members to the Executive Council of Insurers under the
Insurance Ombudsman Scheme?
a) The Life Insurance Council
b) The General Insurance Council
c) The IRDAI
d) All of the above

Answer: d) All of the above

Explanation: The Executive Council of Insurers is comprised of representatives nominated by

the Life Insurance Council, General Insurance Council, IRDAI, and the Central Government.

16. Who appoints the Insurance Ombudsman?

a) The Life Insurance Council
b) The General Insurance Council
c) The IRDAI
d) The Selection Committee

Answer: d) The Selection Committee

Explanation: The Insurance Ombudsman is selected by a Selection Committee comprising of

the Chairperson of the IRDAI, one representative each of the Life Insurance Council and the
General Insurance Council from the Executive Council of Insurers, and a representative of the
Government of India not below the rank of a Joint Secretary or equivalent, in the Ministry of
Finance, from the Department of Financial Services.

17. What is the main objective of the Prevention of Money Laundering Act
(PMLA)?
A. To seize illicit profits and assets related to money laundering
B. To create agencies and methods to combat money laundering
C. To deal with any other issue relating to money laundering in India
D. All of the above

Answer: D. All of the above.

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Explanation: The main objective of the PMLA is to combat money laundering and associated
activities, including the seizure of illicit profits and assets, the creation of agencies and
methods to combat it, and dealing with any other issue relating to money laundering in India.

18. Which government agency administers the Varishtha Pension Bima Yojana?
A. Reserve Bank of India
B. Life Insurance Corporation of India (LIC)
C. Pension Fund Regulatory and Development Authority (PFRDA)
D. Insurance Regulatory and Development Authority of India (IRDAI)

Answer: B. Life Insurance Corporation of India (LIC)

Explanation: The Varishtha Pension Bima Yojana is administered through Life Insurance
Corporation of India (LIC).

19. Which crops are covered under the Pradhan Mantri Fasal Bima Yojana?
A. Only food crops
B. Only oilseeds crops
C. Only commercial crops
D. All food & oilseeds crops and Annual commercial/Horticultural Crops for
which past yield data is available

Answer: D. All food & oilseeds crops and Annual commercial/Horticultural Crops for which
past yield data is available

Explanation: The Pradhan Mantri Fasal Bima Yojana covers all Food & Oilseeds crops and
Annual commercial/Horticultural Crops for which past yield data is available and for which
requisite number of Crop Cutting Experiments (CCEs) are conducted being under General
Crop Estimation Survey (GCES).

20. Which of the following is not covered under marine insurance?

a) Ship
b) Cargo
c) Freight
d) Loss due to fire on the ship

Answer: d) Loss due to fire on the ship

Explanation: Marine insurance covers the loss or damage of ships, cargo, and freight due to
various reasons such as accidents, natural disasters, piracy, etc. But fire insurance is a
separate type of insurance that covers losses due to fire.

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