Special Features of Audit of Different Type of Entities: formula sheet

Key formulas

Definition of government company

Government holding ≥ 51% of paid-up share capital (Central, State, or both)

A subsidiary of a government company is also a government company.

Appointment of auditor (section 139(5))

C&AG appoints the auditor, a chartered accountant from the C&AG's panel, within 180 days from the commencement of the financial year

Use this for the later financial years. The auditor appointed holds office until the conclusion of the annual general meeting.

Appointment of first auditor (section 139(7))

C&AG appoints within 60 days of registration; failing that, the Board within the next 30 days; if the Board also fails, it informs the members, who appoint within 60 days at an EGM

Use this for the first financial year only, not for later years. The first auditor holds office until the conclusion of the first AGM. The Board and member fallback applies only to the first auditor.

Directions by C&AG (section 143(5))

C&AG appoints the auditor and may direct the auditor on the manner of audit; auditor submits a copy of the audit report to the C&AG

The copy of the report covers the directions issued, the action taken on them and their impact on the accounts. The C&AG may then comment on or supplement the report under section 143(6).

Supplementary audit (section 143(6)(a))

C&AG may, within 60 days of receipt of the audit report, conduct a supplementary audit and comment upon or supplement the audit report

The 60 days run from the date the C&AG receives the audit report. It is a power, not a duty: the C&AG may use it.

Comments of C&AG (section 143(6)(b))

Comments are sent by the company to every person entitled to copies of the audited financial statements and placed before the AGM at the same time and in the same manner as the audit report

Test audit is a separate C&AG power under section 143(7). It is not part of section 143(6).

NPA basic test

Loan facility: NPA if interest and/or instalment of principal remains overdue for more than 90 days

Under RBI norms, a loan facility becomes non-performing when interest or an instalment of principal stays unpaid and overdue beyond the prescribed period. For loan facilities, more than 90 days overdue is the core test. Cash credit and overdraft accounts have their own test, given next. Check the bank's current RBI circulars for other facilities.

Cash credit / overdraft NPA test

NPA if the account is out of order for more than 90 days

Out of order means outstanding balance continuously exceeds the sanctioned limit or drawing power, or there are no credits or insufficient credits to cover interest charged during the period.

Asset classification

Standard → Sub-standard → Doubtful → Loss

A standard asset is not an NPA, but it still carries a general provision under RBI norms. An asset enters the NPA part of this ladder as sub-standard when it becomes NPA under the 90-day tests above. A sub-standard asset is an NPA for a period not exceeding 12 months. A doubtful asset is one that has remained in the sub-standard category for 12 months, that is, an NPA for more than 12 months. A loss asset is one where loss has been identified by the bank, internal or external auditors or RBI inspection, but the amount has not been written off, wholly or partly. Such an asset is considered uncollectible and of such little value that its continuance as a bankable asset is not warranted.

Income on NPAs

Interest on NPAs is not recognised as income on accrual; recognise only when actually received

Interest already accrued and unrealised on an account that turns NPA is reversed or provided for as per norms.

Division of audit responsibility

Central auditor: whole bank opinion and bank-level LFAR. Branch auditor: branch financial information and branch-level reporting

Branch auditors report on their branches. The central auditor considers those reports and findings in forming the overall opinion and in preparing the bank-level LFAR, which is an RBI-prescribed report.

Governing framework

Insurance Act, 1938 + IRDA Act, 1999 + IRDAI regulations + Companies Act, 2013 (to the extent not inconsistent)

Say this first in a theory answer. Financial statements follow IRDAI formats, not Schedule III.

Premium earned

Premium earned = Premium written (net of reinsurance) ± change in reserve for unexpired risks

Premium is recognised over the policy period. Check cut-off and the unexpired risk reserve.

Claims incurred

Claims incurred = Claims paid + closing outstanding claims (including IBNR) − opening outstanding claims

Net of reinsurance recoveries. A common source of understatement.

Use of actuary

Evaluate competence, capability, objectivity → understand work → assess appropriateness of output (SA 620)

The auditor relies on the actuary's valuation but keeps responsibility for the opinion.

Audit evidence on investments

Existence (custody, confirmation) + ownership + valuation + classification + income

Investments are held to match policy liabilities and follow IRDAI investment norms.

Standard asset (broad rule)

Asset not overdue beyond the NPA threshold = Standard asset

A standard asset carries a general provision. For an NBFC that follows Accounting Standards, the rate depends on the category of NBFC, and some categories have rates other than 0.40%. NBFCs that follow Ind AS do not use a fixed rate. They compute expected credit loss (ECL). Use the rate given in the question.

Non-performing asset (NPA)

Asset with principal or interest overdue for more than 90 days = NPA

Under the current RBI directions, overdue of more than 90 days makes an asset an NPA; use the days stated in the question.

Classification of NPAs

Sub-standard → Doubtful → Loss

Sub-standard: NPA for up to 12 months. Doubtful: sub-standard for more than 12 months. Loss: an asset identified as a loss by the NBFC, its internal or external auditor or the RBI, to the extent not written off.

Income recognition

Income on NPA = recognised only when actually received

Interest and other income on an NPA is not taken to profit on accrual. Interest accrued earlier but not collected is reversed or provided for.

Provision for loss assets

Provision for loss assets = 100% of outstanding

Apply this where the asset is a loss asset, to the extent not written off.

Provision for doubtful assets

Provision = 100% of unsecured portion + a percentage of secured portion by age

The secured-portion percentage depends on how long the asset has been doubtful. Use the rates in the question.

Provision for sub-standard assets

Provision = 10% × total outstanding (RBI prescribed rate for sub-standard assets of NBFCs)

RBI prescribes 10% of the total outstanding for sub-standard assets of NBFCs. The rate given in the question prevails. NBFCs that follow Ind AS apply ECL instead. Any shortfall of ECL below the regulatory provision is transferred to an impairment reserve.

Net NPA

Net NPA = Gross NPA − provisions held for NPAs

This is a simplified measure. Use it with the definition given in the question.

Surplus or deficit

Surplus or deficit = Income of the period − Expenditure of the period

Both on accrual basis. A balance of income over expenditure is a surplus. It is not called profit.

Receipts and Payments Account basis

Opening cash and bank + Receipts − Payments = Closing cash and bank

Cash basis. It includes capital and revenue items and has no non-cash items like depreciation.

Subscription income for the year

Subscription received − Opening arrears received + Closing arrears (due) − Advance received at close + Opening advance

Use this to move from cash received to income of the year. Arrears of earlier years are not this year's income. Advance for next year is not this year's income.

Consumption of stock (stationery, medicines)

Opening stock + Purchases − Closing stock = Consumption

Consumption is the expense in the Income and Expenditure Account.

Key difference test

Receipts and Payments = cash basis, all items; Income and Expenditure = accrual basis, revenue items only

Learn this one line for theory questions.

Section 8 company rule

Profits and income applied to objects; no dividend to members

State this in plain words. It is the main feature that separates it from other companies.

Primary source for firm audit

Partnership deed → then Partnership Act, 1932 (if deed is silent)

Always check the deed first. Default Act rules apply only where the deed says nothing.

Primary source for LLP audit

LLP agreement → then First Schedule to LLP Act, 2008 (if agreement is silent)

The same logic as a firm, but under the LLP Act.

LLP audit applicability

Audit needed if turnover > ₹40 lakh in any financial year or contribution > ₹25 lakh

Crossing either limit triggers the audit. Exactly ₹40 lakh turnover or ₹25 lakh contribution does not, because the test is 'exceeds'.

LLP auditor

Accounts audited by a chartered accountant under Section 34 of the LLP Act, 2008 read with the LLP Rules

The auditor is a chartered accountant within the meaning of the Chartered Accountants Act, 1949. The Statement of Account and Solvency is filed every year, even when no audit is required.

Default rules (Partnership Act, Section 13)

No salary to partners (13(a)); profits shared equally (13(b)); no interest on capital unless agreed, and if agreed, payable only out of profits (13(c))

Apply only if the deed is silent.

Interest on partners' loans or advances (Partnership Act, Section 13(d))

Interest at 6% p.a. on a partner's payment or advance beyond the agreed capital

This is separate from the profit-sharing defaults. It applies to loans or advances, not to capital.

Quick revision

• Always begin an answer by naming the entity and the framework that governs it.
• For government companies, remember that appointment of the auditor is linked to the CAG and that the CAG has supplementary audit powers.
• Banks are audited under a regulatory framework, so expect extra reporting to the regulator beyond the usual audit report.
• For banks, advances and their classification and provisioning are a key risk area.
• Insurance audit focuses on premiums, claims, reserves and the actuary's work, which the auditor relies on as an expert input.
• NBFC audit looks at registration, regulatory compliance, asset classification and provisioning.
• For not-for-profit organisations, check the governing document first, as it sets the rules for funds and spending.
• Receipts and payments account, income and expenditure account and balance sheet are the typical statements of a not-for-profit organisation.
• For partnership firms, the partnership deed is the starting point for checking capital, profit sharing, interest and remuneration.
• LLP audit depends on the LLP Act and the LLP agreement, and the audit requirement depends on the thresholds set by law.
• In MCQs, read all four options, as most wrong options are true statements about a different entity.
• Write short, numbered points in descriptive answers so each point can earn a mark.

Common mistakes

• Saying the members appoint the auditor of a government company at the AGM. Fix: Remember that the C&AG appoints the auditor of a government company. The Board and then the members step in only for the first auditor, and only if the C&AG and then the Board fail to appoint in time.
• Defining a government company as one with 50% government holding. Fix: Write the exact test: not less than 51% of paid-up share capital. Also add that a subsidiary of a government company counts.
• Saying the branch auditor gives the opinion on the bank's financial statements. Fix: Write that the central auditor forms and signs the overall opinion, using branch auditors' reports for branches they audited.
• Treating LFAR as the same as the audit report. Fix: Remember LFAR is a separate, detailed report on operations and controls, issued in addition to the audit report on the financial statements and addressed to the Board.
• Saying the insurance company's statements are prepared under Schedule III of the Companies Act. Fix: State that IRDAI regulations and prescribed formats apply, with the Companies Act applying to the extent not inconsistent.
• Writing that the auditor values policy liabilities. Fix: Say the actuary values the liabilities and the auditor evaluates the actuary's competence, understands the work and assesses the output under SA 620.
• Treating an NBFC like a bank and using bank NPA rules without checking the framework. Fix: Open the answer by naming the entity as an NBFC and the RBI directions applicable to NBFCs. Keep bank audit notes separate.
• Recognising interest on an NPA on accrual basis. Fix: Write: income on NPA is recognised only when received. Reverse accrued unrecovered income.
• Calling the excess of income over expenditure 'profit'. Fix: Use 'surplus' and 'deficit' for NPOs. Say that the surplus is applied to the objects.
• Treating all donations as income of the year. Fix: Read the terms first. Specific-purpose or corpus donations go to the relevant fund. General donations are revenue income.

Exam tips

• Learn the 51% test and the subsidiary rule word for word. They are a common one-mark MCQ.
• In the written paper, name the section number only for the ones you are sure of (139(5), 143(5), 143(6)) and state others in plain words.
• Use the provision-facts-conclusion format. Examiners give marks for linking the facts, such as 40% + 15% = 55%, to the rule.
• For comparison questions with private companies, draw two columns in your answer: who appoints, who can direct, who can supplement the audit, and where the comments are placed.
• Remember that the Board and members appear only as fallbacks for the first auditor, so do not write them as the normal appointing authority.
• Write in the provision-facts-conclusion format. Examiners give step marks for stating the RBI rule before applying it.
• In MCQs, link keywords to roles. 'Consolidates', 'overall opinion' means central auditor. 'Branch level', 'reports to central auditor' means branch auditor.
• For advances questions, always mention security, drawing power and account behaviour, not just the overdue period.