14

SPECIAL AUDIT ASSIGNMENTS

LEARNING OUTCOMES

After studying this chapter, you will be able to:

 Understand the Regulations of Stock Exchange and legal frame of SEBI.
 Know the accounting for Stock Exchange, Rolling Settlement, Derivatives,
types of markets, Margins, Circuit Filters or Circuit Breakers, role of auditor,
etc.
 Gain the knowledge of Audit of Mutual Fund, Depositories, etc.
 Understand the concept of Energy Audit, Environmental Auditing and Audit
of accounts of non-corporate borrower.
 Analyse the SEBI Checklist in respect of various aspects including Books
of Accounts and other records, contract note, regulatory requirements, etc.

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 14.2 ADVANCED AUDITING AND PROFESSIONAL ETHICS

CHAPTER OVERVIEW
UNIT 1: Environmental Auditing UNIT 2: Energy Audit
• Regulatory Framework • Overview of Energy Audit
• Scope and Objective • Functions of Energy Auditor
• Features, Tools & Techniques of • Preliminary Energy Audit
Environment Audit • Detailed Energy Audit and its steps
• Environment Audit Process • Audit Report
• Audit Report
• Summary Flowchart

UNIT 3: Audit of Accounts of Non- UNIT 4: Audit of Stock and

Corporate Borrowers Debtors/Unit Inspection
Overview • Overview
• Audit Procedures • Purpose of Unit Inspection
• Special Audit Report • Audit Process
• Finding of Inspection
• Audit Report

UNIT 5: Audit of Members of Stock

Exchange (SE) UNIT 6: Audit of Mutual Fund
• Functioning of SE • Regulatory Framework
• Rolling Settlement • Structure of Mutual Fund
• Derivatives • Risks involed in Mutual Fund
• Circuit Filters/Breakers Business
• Accounting for SE • Conduct of Audit
• Conduct of Audit • Audit Report
• Auditor's Report

UNIT 7: Audit of Depositories

• Regulatory Framework
• Inspection and Investigation
• Records and Documents to be SEBI Checklist for Auditors
maintained
• Inspection Report

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 SPECIAL AUDIT ASSIGNMENTS 14.3

UNIT 1 : ENVIRONMENTAL AUDITING

1. OVERVIEW
Environmental audits are becoming increasingly common in certain industries. The term
“environmental audit” has a wide variety of meanings. They can be performed by external or internal
experts (sometimes including internal auditors), at the
discretion of the entity’s management. In practice,
persons from various disciplines can qualify to perform
“environmental audits”. Often the work is performed by
a multi-disciplinary team. Normally, “environmental
audits” are performed at the request of management
and are for internal use.

2. REGULATORY FRAMEWORK
In Indian scenario, the Regulatory Authorities like Ministry of Environment and Forest (MOEF), State
Pollution Control Board (SPCB), State Department of Environment (SDOEn.) etc., have come into
play to clear the projects from environmental viewpoint before it’s commissioning. The Environmental
Impact Assessment (EAI) is a pre-requisite to start an industry. The EAI tries to forecast the expected
damage to be caused by the development of the industries to the environmental and the means
required to mitigate that damage, incorporating the same in the Project Report for compliance in due
course, keeping in view the serious threat to all the living beings in the universe by the rapid
industrialisation which is polluting the environmental on an irreparable exten t. The Indian Govt.
notified by GSR No.329E dated 13.02.1992 that “Every person carrying on an industry, operation or
process requiring consent under Section 25 of the Water (Prevention and Control of Pollution) Act,
1974 (6 of 1974) or under Section 21 of the Air (Prevention and Control of Pollution) Act, 1981 (4 of
1981) or both or authorisation under the Hazardous Waste (Management and Handling) Rules, 1989
issued under Environment Protection Act, 1986 (29 of 1986) shall submit an environment audit repor t
for the financial year ending the 31 st march in form V to the concerned State Pollution Control Board
on or before the 15 th day of May every year, beginning 1993”.

3. SCOPE AND OBJECTIVE OF ENVIRONMENT AUDIT

With a view to define the Environmental Audit, it may be stressed that it is a critical analysis of (i)
policies (ii) principles (iii) systems (iv) procedures (v) practices and (vi) performances of the aspect
which relates the environment.

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 14.4 ADVANCED AUDITING AND PROFESSIONAL ETHICS

But a standard scope of Environmental Audit, as ought to be defined and adopted by standard
companies, should be as follows:
“A management tool comprising a systematic, documented, periodic and objective evaluation of how
well environmental organisation, management and equipment are performing with the aim of h elping
to safeguard the environment by:
(i) Facilitating management control of environmental Process.
(ii) Assessing compliance with company policies, which would include meeting regulatory
requirements”.
The objective of the Environmental Audit are to evaluate the efficacy of the utilisation of resources
of man, machines and materials, and to identify the areas of environmental risks and liabilities and
weakness(es) of management system and problems in compliance of the directives of the regulat ory
agencies and control the generation of pollutants and/or waste.
As the Environmental Audit, especially in India, is still in its infancy the information usually gathered
in the course of Environmental Audit is only what is required for the compliance o f the statutory
requirements, i.e., for Water Act, 1974, Air Act, 1981, etc., and for environmental clearance required
before establishing an industry.

4. FEATURES OF ENVIRONMENTAL AUDIT

The following are features of environmental audit:
(i) Management tool – Environmental audit is generally considered as one of the
management tool which is a part of internal control system and is mainly used to assess, evaluate
and manage environmental performance of a company.
(ii) Aim of environmental audit – A green audit may be conducted for many purposes, for
example, to comply with environmental laws or as a social responsibility measure or to meet
some certification requirements. But the main and ultimate aim of any environmental audit is to
evaluate and control the adverse impact of economic activities of an organization on the
environment.
(iii) Environmental audit should be distinguished from Environmental Impact
Assessment (EIA) – EIA is a tool used to predict, evaluate and analyze environmental impacts
mostly before a project commences. It assesses the potential environmental effects of a
proposed facility. The essential purpose of an environmental audit is the systematic scrutiny of
environmental performance throughout a company’s existing operations.
(iv) Systematic – Environmental audit is a systematic process that must be carefully planned,
structured and organized. As it is a part of a long-term process of evaluation and checking, it
needs to be a repeatable process so that over time, it can be easily used by different teams of

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 SPECIAL AUDIT ASSIGNMENTS 14.5

people in such a way that the results are comparable and can reflect change in both quantitative
and qualitative terms.
(v) Documented – Like any other audit, the base of any environmental auditing is that its
findings are supported by documents and verifiable information. The audit process is designed
in such away that it seeks to verify on a sample basis past actions, activities, events and
procedures with available evidences to ensure that they were carried out according to system’s
requirements and in a correct manner.
(vi) Periodic – Environmental audit is generally conducted at pre-defined intervals. It is a long-
term process.
(vii) Objective Evaluation – Though environmental auditing is conducted using pre-decided
policies, procedures and a proper documented system, there is always an element of subjectivity
in an audit, particularly if it is conducted internally. In addition to internal environmental audits,
having independent audit teams that have specialized skills and who come back periodically (say
annually) to repeat audits tends to increase objectivity in the system. Hence for the sake of
objectivity, external environmental audits are preferable. This is also required under many
certification guidelines (e.g. ISO 14001).
(viii) Environmental Performance – As mentioned before, the essence of any environmental
audit is to find out how well the environmental organization, environmental management and
environmental equipments are performing. The ultimate aim is to ensure that organization’s
environmental performance meets the goals set in its environmental policy and also to ensure
compliance with standards and regulatory requirements.

5. ENVIRONMENTAL AUDIT PROCESS

5.1 Pre-audit or Planning Stage (Stage 1):
Audit planning is vital to the success of the audit undertaken. During this stage of audit, generally
following steps are taken:
(i) Collect background information about the entity – Collect information about environmental
policy and goals of the organization, relevant environmental laws, regulations and standards
governing the entity, persons responsible for carrying environmental duties, environmental
budget, significant environmental matters like, material costs, risk areas, etc.
(ii) Define objectives of audit – What are the goals of the environmental audit?
(iii) Define scope –
What parts of a facility (operations) will be audited?
What programmes will be audited?
How far back will the audit examine?

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 14.6 ADVANCED AUDITING AND PROFESSIONAL ETHICS

(iv) Choose audit criteria – Against what will the facility be audited (e.g., for regulatory compliance
audits, against what regulations or standards will the facility be audited)?
(v) Select the audit team members – The audit team leader selects team members based on
appropriate knowledge and experience. The team both. If internal staff is going to be involved,
they should be chosen in a proper way so as to avoid conflict of interest. The facility
environmental manager, for example, should not be on the audit team.
(vi) Develop audit plan and protocols – Protocols are written guides for the auditors that outline
the activities to be undertaken in conducting a review of a given topic area during the
environmental audit. They often contain detailed information about audit criteria, such as,
applicable regulations. Computers are often used in creating audit protocols and in locating
and sharing information between team members during the audit (e.g., regulatory database s
are often utilized in creating audit protocols).
(vii) Inform the facility – Arrangements for on-site activities need to be made.
(viii) Desktop review.
5.2 On-site or Field Audit (Stage 2)
The following are steps involved in on-site or field audit:
(i) Opening conference – Communicate the objectives and methods of the audit of key facility
personnel and schedule necessary meetings and interviews.
(ii) Facility tour – Identify areas of concern for more detailed inspection, get a feel for the site and
modify the audit schedule accordingly.
(iii) Site/ facility inspection – Established protocols should guide the inspection. The team may also
wish to inspect areas of concern or interest that they have been identified in the facility tour. It
may not be possible to inspect the entire facility (comprehensive inspection), theref ore,
sampling techniques may be an important part of determining the parts of a site to be inspected.
(iv) Evidence – Collect sufficient, appropriate and reliable audit evidences to check the activities,
performance impacts and reports.
(v) Records/ document review – The audit protocols should give instructions as to the types of
records to request as well as what to look for when examining the documents.
(vi) Staff interviews – Interviews with key informants will yield the least reliable information, due to
the fallibility of human memory, but are important in the identification of potential problems and
in collecting information about facility operations.
(vii) Initial review of findings – Findings are the result of the evaluation of evidence collected against
audit criteria. It is Important at this stage to review where the facility does not meet the audit
criteria.
(viii) Closing/ exit conference – This is a chance for auditees to identify misunderstandings and to
be introduced to the findings of the audit team.

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 SPECIAL AUDIT ASSIGNMENTS 14.7

5.3 Post – Audit (Stage 3)

Steps involved in post – audit are as follows:
(i) Final evaluation of findings: Findings must be backed by evidence. It is important to note areas
of deficiency that were present during the previous audit, but are not yet corrected. Often finding
are labeled as major or minor depending on the level and types of risks posed and speed with
which the audit team feels they should be addressed.
(ii) Draft preliminary audit report
(iii) Get approval of the management
(iv) Hold exit conference
(v) Discuss recommendations, if any
(vi) Prepare and submit final report.
5.4 Follow up or Review Stage (Stage 4)
This is also called corrective action follow-up phase. While not technically part of the audit, the audit
manager or team leader may be involved in developing a corrective action plan for addressing audit
findings with the facility and reporting to senior management as to the progress of this plan.
Stage 1: Stage 2: Stage 3: Stage 4:
Pre-audit or On-site or Field Audit: Post – Audit : Follow up or
Planning Stage Review Stage
Collect Opening conference Final evaluation Verify the actions
Background Identify areas of of findings taken on audit
Information concern Submit findings or
Define Site/facility inspection preliminary recommendations
Objectives Records/document report
Define Scope review Get approval of
Select audit Staff interviews management
criteria Initial review of findings Hold exit
Select audit conference
Closing/exit
team members conference Submit final
Develop audit report
plan or use
protocol
Inform the
facility
Review the
background
information

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 14.8 ADVANCED AUDITING AND PROFESSIONAL ETHICS

6. TOOLS AND TECHNIQUES USED IN ENVIRONMENTAL

AUDITING
Some of the tools which can be used in environmental audits are:
(i) Checklists – Checklists are very useful tools used to ensure that different tasks or topics are
included during the audit. They are very useful in specialized cases where a complex range of
issues and questions need to be asked to ensure that nothing is missed.
(ii) Questionnaires – Audit protocols or audit questionnaires provide the basis and structuring for
most audits. They are based upon checklist questionnaires but are more complex and include
more detail and sometimes logistical information and data relating to the audit and the site
being audited.
(iii) Questioning – Questioning is one of the most crucial aspects of auditing yet from a training
and awareness point of view, it is often given the least attention. The purpose is information
gathering in nature and not an interrogation. The questioner must, therefore, be sensitive to
the perspective of the auditee and avoid making the questions accusatory, judgmental or
aggressive.
(iv) Observation – Observation is a vital component of an auditing exercise. Observation is a
disciplined activity which must be carried out in a very deliberate and controlled manner. The
idea of looking at something twice is important because it is part of the process that checks
that the observation is accurately noted, analyzed and recorded.
(v) Photographs – These are a very valuable aid in the audit process. However, in order to use
them, a number of important practical points must be borne in mind. The most important one is
formal approval before using this technique.
(vi) Research – It is useful to try and undertake some background research and investigation into
the site or company to be audited. Familiarization with the operations, products, raw materials
reports, press material and newspaper articles etc. all provides useful background information
to supplement questioning sessions and help understand the operational processes.

7. ENVIRONMENTAL AUDIT REPORT

The end product of environmental audit is environmental audit report (EA Report) which contains
findings or results of environmental audit and recommendations for improvement, if any (mainly
required in environmental performance audit where objective is to improve performance of the
organization). EA report should be concise and informative with information displayed in a format
that is easy to interpret and understand. The environmental auditor must ensure that EA report
should provide an accurate record of soundly based observations and of logical deductions. The
report must be signed by environmental auditor.

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 SPECIAL AUDIT ASSIGNMENTS 14.9

The Audit report should be complete, precise, accurate and balanced. It should contain constructive
and precise recommendations. It must be persuasive and instrumental in inspiring the managements
of entities to take corrective actions. The violations and omissions should also be effectively
mentioned in the report. Last but not the least, the contents of green audit report should be easy to
understand and free from vagueness or ambiguity, include information which is supported by
complete and relevant audit evidence and be independent, objective fair and constructive.
Contents of Report: It is to be noted that length and detail of environmental audit report may vary
according to nature and type of organization audited and also on the basis of scope and object of
audit. However, usually it is expected that the report should include following contents:
I Executive summary
II. Table of contents
(i) Background:
nature and type of auditee organization,
main business, facility description, EMS, etc.
(ii) Audit objective:
to review compliance status of the organization, to check reporting of non-compliance
or to verify the mechanisms for rectifying non-compliance.
(iii) Audit scope: whether it is initial audit, audit of only one site, facility or process or audit
of whole organization, etc.
(iv) Audit criteria: National law, Supra-national law, International agreements, Applicable
standards, Industry guidelines, or corporate policy.
(v) Audit team
(vi) Audit schedule
(vii) Audit methodology:
- Document review
- Checklist
- Interviews, etc.
(viii) Audit findings:
-Compliance status: compliance with environmental laws, specific regulation, certification
requirement or company’s own environmental policy.
- Violation information: e.g. failure to have required clearance, permit or approval, failure
to have required plan or failure to report to authorities.

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 14.10 ADVANCED AUDITING AND PROFESSIONAL ETHICS

- Mention the relevant law or regulation to which the violation relates like, air, water or
hazardous waste Acts.
- Significant consequences of non-compliance. e.g., penalty
- Areas where non-compliance was found and corrected during audit period and areas
where it is yet to be corrected.
(ix) Audit conclusions and recommendations
- If audit findings indicate commendable level of compliance and no non-compliance was
identified, still some opportunities for improvement can be identified and listed.
- If non-compliance was found, recommendations can be made for developing some
mechanism so that in future, it is not repeated. Indicate the time until the correction is to be
completed and person responsible for making corrections.
(x) Annexes
- Environment policy and action plan of organization
-List of applicable laws and regulations
-Checklists

(xi) Signature of auditor with date and place

8. EMERGING OPPORTUNITIES FOR CHARTERED

ACCOUNTANTS IN ENVIRONMENT AUDIT
CA’s Role in Compliance and Certification Audits: Compliance audits are conducted to verify an
entity’s compliance with environmental laws, regulations, standards, industry guidelines or
company’s own policy. It is felt that CAs can very efficiently conduct compliance audits if they gain
knowledge of relevant environmental laws and regulations. They can also conduct certification
audits. Such arguments, generally, centre on the requirements outlined in ISO 14012 Guidelines for
environmental auditing issued in 1996. CAs already have first set of required skills. After obtaining
knowledge about environmental laws, EMS and relevant terms, they can very efficiently conduct
environmental audits, particularly certifications audits. These audits may include monitoring of
environmental management system of the unit, checking the status of consent orders, compliance
of consent orders, water cess, other legal requirements, industrial data collection regarding product
process, electric consumption, water consumption, raw materials and energy balance, etc.
In the same way, CAs can play important role in non-financial auditing or carbon audits.
CA and Environmental Information Audit: The main role of financial auditor is to express opinion
on truth and fairness of assertions made in financial statements. This role can be very well extended
to include environmental information audit where all types of environmental information reported by
a concern through various mediums is verified with the help of all available evidences.

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 SPECIAL AUDIT ASSIGNMENTS 14.11

Why do so What does Who should And after the

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mishaps

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