AUDITING AND CG

UNIT-II : AUDIT OF LIMITED COMPANIES

Unit-I - Auditing: Introduction
Unit-II - Audit of Limited Companies & Special Areas of Audit
Unit-III - Corporate Governance
Unit-IV - Corporate Social Responsibility (CSR)

Complied by:
Mr. Chiranjibi Bisoi, Lecturer in Commerce,
Prananath College (Autonomous), Khordha

Sponsored By:

BANIJYAM
(AN INSTITUTE FOR COMMERCE)
B-28, Ruchika Market, Baramunda, Bhubaneswar
Contact: 8599888110
 B.COM_CORE 13_AUIDITING AND CORPORATE GOVERNANCE_UNIT 1

AUDITING: INTRODUCTION, MEANING, OBJECTS

Introduction to Auditing
Auditing is an independent and systematic examination of financial records, transactions, and statements of an
organization. It ensures the accuracy, reliability, and compliance of financial information with applicable laws,
regulations, and accounting standards. Auditing plays a crucial role in enhancing transparency and building
stakeholders’ trust in financial reporting.
Meaning of Auditing
The term "audit" originates from the Latin word "audire," meaning "to hear." Historically, auditors used to listen
to oral accounts of transactions before verifying them. In modern accounting, auditing refers to the systematic review
and evaluation of financial statements and related records to determine their fairness and accuracy.
Definition by Different Authorities:
1. The Institute of Chartered Accountants of India (ICAI):
"An audit is an independent examination of financial information of any entity, whether profit-oriented or
not, irrespective of its size or legal form, when such an examination is conducted with a view to expressing
an opinion thereon."
2. A.W. Hanson:
"An audit is an examination of accounting records undertaken with a view to establishing whether they
correctly and completely reflect the transactions to which they relate."
Thus, auditing involves verifying, checking, and evaluating financial records to ensure they present a true and fair
view of the organization’s financial position.
Objectives of Auditing
Auditing has two primary objectives:
1. Main (Primary) Objective
2. Secondary Objectives
1. Main (Primary) Objective:
The main objective of auditing is to examine financial statements and express an independent opinion on whether
they are free from material misstatements. This ensures fairness and accuracy in financial reporting.
2. Secondary Objectives:
These objectives support the primary goal and include:
A. Detection and Prevention of Errors: Errors may be unintentional mistakes made in recording, classification, or
calculations in financial statements. Auditing helps detect and prevent:

• Clerical Errors: Mistakes in posting transactions, totaling, or recording.

• Errors of Principle: Transactions recorded in violation of accounting principles (e.g., treating capital
expenditure as revenue expenditure).
B. Detection and Prevention of Fraud: Fraud is an intentional misrepresentation or manipulation of financial
information for personal gain. Common types of fraud include:

• Misappropriation of Cash: Embezzlement or theft of cash by employees.

• Fictitious Transactions: Recording fake expenses or revenues.
• Window Dressing: Manipulating financial statements to present a better financial position than reality.

COMPILED BY: CHIRANJIBI BISOI, LECTURER, PRANANATH COLLEGE (AUTO.), KHORDHA

Sponsored By – BANIJYAM (AN INSTITUTE FOR COMMERCE), BHUBANESWAR. Mob-8599888110
 B.COM_CORE 13_AUIDITING AND CORPORATE GOVERNANCE_UNIT 1

C. Verification of Financial Statements: Auditors verify the accuracy of financial statements by checking
supporting documents, vouchers, ledgers, and records to ensure compliance with accounting standards.
D. Ensuring Compliance with Laws and Regulations: Auditors ensure that financial statements comply with:

• The Companies Act, 2013 (for Indian companies).

• Generally Accepted Accounting Principles (GAAP).
• International Financial Reporting Standards (IFRS).
E. Evaluation of Internal Controls: Auditors review the internal control system to identify weaknesses and suggest
improvements to prevent fraud and errors.
F. Assessment of Business Performance: Through financial analysis, auditors help stakeholders understand the
company’s financial health, profitability, liquidity, and efficiency.
Importance of Auditing

• Ensures Reliability of Financial Statements: Builds confidence among stakeholders.

• Protects Shareholders’ Interests: Helps investors make informed decisions.
• Prevents and Detects Fraud and Errors: Strengthens corporate governance.
• Facilitates Compliance with Laws: Avoids legal penalties.
• Improves Business Efficiency: Helps in cost control and risk management.
Conclusion
Auditing is an essential process in financial management that ensures accuracy, transparency, and compliance in
financial reporting. By verifying financial records, detecting errors and fraud, and assessing internal controls,
auditing helps maintain stakeholders’ confidence and strengthens corporate governance.

COMPILED BY: CHIRANJIBI BISOI, LECTURER, PRANANATH COLLEGE (AUTO.), KHORDHA

Sponsored By – BANIJYAM (AN INSTITUTE FOR COMMERCE), BHUBANESWAR. Mob-8599888110
 B.COM_CORE 13_AUIDITING AND CORPORATE GOVERNANCE_UNIT 1

BASIC PRINCIPLES AND TECHNIQUES OF AUDITING

Basic Principles of Auditing
The auditing process is guided by certain fundamental principles that ensure reliability, accuracy, and effectiveness.
These principles are outlined by the Institute of Chartered Accountants of India (ICAI) and other professional
bodies.
1. Integrity, Objectivity, and Independence
• The auditor must be honest, impartial, and free from bias while conducting the audit.
• Independence ensures that the audit opinion is based on facts and not influenced by personal interests.
2. Confidentiality
• Auditors should not disclose sensitive client information without proper authorization unless required
by law.
• They must maintain secrecy regarding financial and operational matters.
3. Skill and Competence
• Auditors must possess adequate knowledge, expertise, and professional competence in accounting,
taxation, and auditing standards.
• Continuous professional development is essential to keep up with changes in regulations and industry
practices.
4. Documentation and Evidence
• Audit conclusions must be based on sufficient and appropriate audit evidence collected through
vouching, verification, and analytical procedures.
• Working papers should be maintained to support findings and conclusions.
5. Planning and Supervision
• Auditors must plan their audit work systematically to cover all aspects efficiently.
• Supervision is necessary to ensure the audit team follows the prescribed audit procedures.
6. Internal Control and Risk Assessment
• Auditors should evaluate the internal control system of the organization to identify weaknesses and
assess risk levels.
• A strong internal control system reduces the risk of fraud and errors.
7. Accounting System and Policies
• Auditors must ensure that the accounting policies and procedures followed by the entity comply with
relevant accounting standards and legal requirements.
8. Audit Evidence and Reporting
• The auditor’s opinion must be based on credible evidence collected through various audit techniques.
• The final audit report should be clear, objective, and supported by findings.

Techniques of Auditing
Auditors use various techniques to examine financial records and transactions to ensure accuracy, completeness, and
compliance.
1. Vouching

• The process of examining documentary evidence (e.g., invoices, receipts, bank statements) to verify the
authenticity of transactions.
• Ensures that every transaction is properly recorded and authorized.

COMPILED BY: CHIRANJIBI BISOI, LECTURER, PRANANATH COLLEGE (AUTO.), KHORDHA

Sponsored By – BANIJYAM (AN INSTITUTE FOR COMMERCE), BHUBANESWAR. Mob-8599888110
 B.COM_CORE 13_AUIDITING AND CORPORATE GOVERNANCE_UNIT 1

2. Verification

• The process of checking assets and liabilities to confirm their existence, ownership, and valuation.
• Physical verification is done for tangible assets like cash, inventory, and machinery.
3. Valuation

• Ensuring that assets and liabilities are recorded at their correct values according to applicable
accounting standards.
• For example, depreciation on fixed assets should be calculated as per accounting policies.
4. Checking and Posting

• Reviewing entries in ledgers, journals, and trial balances to confirm accuracy.

• Ensuring that transactions are correctly classified and posted.
5. Internal Control Review

• Assessing the efficiency of internal controls to identify areas of improvement.

• Helps in preventing fraud and mismanagement.
6. Inquiry and Confirmation

• Auditors may ask questions to management, employees, and third parties to verify financial information.
• Third-party confirmations (e.g., bank confirmations, debtor confirmations) provide independent
verification.
7. Analytical Procedures

• Comparing financial data with previous years, industry averages, or expected trends to identify unusual
variations.
• Ratio analysis, trend analysis, and comparative financial statements are commonly used.
8. Test Checking and Sampling

• Instead of checking every transaction, auditors select a representative sample to verify.

• Reduces audit time while ensuring reliability.
9. Compliance Testing

• Ensuring that the organization complies with legal, regulatory, and internal policies.
• Example: Checking if tax returns are filed on time.
10. Substantive Testing

• Detailed checking of transactions and balances to confirm accuracy.

• Example: Verifying bank balances through direct confirmation from banks.
Conclusion
The effectiveness of an audit depends on the application of proper principles and techniques. By following ethical
standards, gathering sufficient audit evidence, and using systematic verification methods, auditors ensure that
financial statements present a true and fair view of an organization’s financial health.

COMPILED BY: CHIRANJIBI BISOI, LECTURER, PRANANATH COLLEGE (AUTO.), KHORDHA

Sponsored By – BANIJYAM (AN INSTITUTE FOR COMMERCE), BHUBANESWAR. Mob-8599888110
 B.COM_CORE 13_AUIDITING AND CORPORATE GOVERNANCE_UNIT 1

CLASSIFICATION OF AUDIT
Auditing can be classified based on different criteria such as purpose, conduct, scope, and nature of the
organization. The major types of audits are discussed below:
1. Classification Based on Purpose
A. Statutory Audit
• A compulsory audit required by law for certain entities like companies, banks, and cooperative
societies.
• Conducted as per the provisions of the Companies Act, 2013, Income Tax Act, 1961, or other relevant
laws.
• Example: The audit of a public limited company.
B. Private Audit (Voluntary Audit)
• Conducted voluntarily by individuals, sole proprietors, or firms to assess their financial records.
• Not required by law but helps in financial accuracy and business decision-making.
• Example: Audit of a small business or NGO.
C. Tax Audit
• Conducted to check whether an entity complies with tax laws and submits correct tax returns.
• Mandated under Section 44AB of the Income Tax Act, 1961 in India.
• Example: Businesses exceeding a certain turnover must get a tax audit done by a CA.
D. Internal Audit
• Conducted by an organization's own internal auditors to evaluate internal controls and processes.
• Helps management in risk assessment, fraud prevention, and operational efficiency.
• Example: A manufacturing company auditing its production process.
E. Government Audit
• Conducted by government-appointed auditors to ensure the proper use of public funds.
• In India, audits of government organizations are done by the Comptroller and Auditor General
(CAG).
• Example: Audit of government ministries, PSUs, or local government bodies.
F. Forensic Audit
• A specialized audit aimed at detecting fraud, embezzlement, or financial crimes.
• Used in legal proceedings and corporate investigations.
• Example: Investigating money laundering cases.
2. Classification Based on Conduct
A. Continuous Audit
• An audit conducted throughout the financial year at regular intervals.
• Suitable for large businesses with frequent transactions.
• Example: Banks and large corporations use continuous audits to maintain financial accuracy.
B. Periodic (Final) Audit
• Conducted at the end of the financial year after the accounts are finalized.
• More common in small and medium businesses.
• Example: Audit of a small retail business after year-end.
C. Interim Audit
• Conducted between two financial year-end audits to check interim financial performance.
• Helps in decision-making and dividend declaration.
• Example: A company conducting an audit at the half-yearly stage.
COMPILED BY: CHIRANJIBI BISOI, LECTURER, PRANANATH COLLEGE (AUTO.), KHORDHA
Sponsored By – BANIJYAM (AN INSTITUTE FOR COMMERCE), BHUBANESWAR. Mob-8599888110
 B.COM_CORE 13_AUIDITING AND CORPORATE GOVERNANCE_UNIT 1

D. Surprise Audit
• Conducted without prior notice to detect fraud or mismanagement.
• Useful in cash-intensive businesses like retail or banks.
• Example: Surprise cash audit in a retail store.
3. Classification Based on Scope
A. Financial Audit
• Focuses on verifying financial statements, books of accounts, and transactions to ensure accuracy and
compliance.
• Example: Audit of a company’s balance sheet and income statement.
B. Operational Audit
• Evaluates the efficiency and effectiveness of operational processes.
• Helps in improving productivity and reducing costs.
• Example: Audit of the supply chain process in a manufacturing firm.
C. Compliance Audit
• Ensures that an organization follows legal, regulatory, and internal policies.
• Example: Audit to check compliance with labor laws.
D. Performance Audit
• Assesses whether resources are used efficiently and objectives are met.
• Common in government and non-profit organizations.
• Example: Audit of a public welfare scheme to check its effectiveness.
E. Social Audit
• Examines an organization’s impact on society and environment.
• Example: Audit of a company’s Corporate Social Responsibility (CSR) activities.
4. Classification Based on the Nature of the Organization
A. Proprietorship Audit
• Conducted for a sole proprietorship business to ensure accurate financial records.
• Usually voluntary.
B. Partnership Audit
• Conducted for partnership firms based on the partnership deed and mutual agreement.
• Example: Audit of a law firm operating as a partnership.
C. Company Audit
• Mandatory for all registered companies under the Companies Act, 2013 in India.
• Conducted by a Chartered Accountant.
D. Trust Audit
• Conducted for non-profit organizations, charitable trusts, and religious institutions.
• Ensures proper utilization of funds.
E. Bank Audit
• Conducted for banks to ensure compliance with RBI guidelines and banking laws.
• Example: Audit of loans and advances in a commercial bank.
Conclusion: The classification of audits depends on the purpose, conduct, scope, and the nature of the
organization. Each type of audit serves a different role, from financial verification to fraud detection and operational
efficiency. Understanding these classifications helps organizations choose the right audit process to ensure accuracy,
transparency, and compliance.

COMPILED BY: CHIRANJIBI BISOI, LECTURER, PRANANATH COLLEGE (AUTO.), KHORDHA

Sponsored By – BANIJYAM (AN INSTITUTE FOR COMMERCE), BHUBANESWAR. Mob-8599888110
 B.COM_CORE 13_AUIDITING AND CORPORATE GOVERNANCE_UNIT 1

AUDIT PLANNING, AUDIT PROGRAMME, AUDIT NOTEBOOK AND AUDIT WORKING PAPERS
1. Audit Planning
Meaning: Audit planning is the systematic process of determining the audit strategy, objectives, scope, and
procedures before the audit begins. It helps auditors perform an efficient, effective, and structured audit.
Objectives of Audit Planning
• To ensure that all audit activities are conducted smoothly.
• To allocate time and resources efficiently.
• To identify risk areas and potential fraud.
• To ensure compliance with legal and professional standards.
Steps in Audit Planning
1. Understanding the Client's Business – Analyzing the industry, financial statements, and key risks.
2. Assessing Internal Control System – Evaluating internal checks and control mechanisms.
3. Determining Audit Scope and Objectives – Defining areas to be audited and key focus points.
4. Developing an Audit Strategy – Deciding on audit techniques and sampling methods.
5. Allocating Work to Audit Team – Assigning responsibilities based on expertise.
6. Deciding the Audit Schedule – Setting timelines for completion.
7. Obtaining Client Approval – Finalizing the audit plan before execution.
Benefits of Audit Planning
• Ensures a systematic approach to auditing.
• Minimizes audit risk and errors.
• Helps in timely completion of the audit.
• Ensures compliance with accounting and auditing standards.

2. Audit Programme
Meaning: An audit programme is a detailed checklist or plan that outlines the procedures, techniques, and steps
to be followed in an audit. It serves as a guideline for auditors to ensure consistency and completeness.
Types of Audit Programme
1. Fixed Audit Programme – Predefined and standard procedures applied to every audit.
2. Flexible Audit Programme – Modified as per client-specific requirements.
Contents of an Audit Programme
• Audit objectives (e.g., verifying cash, inventory, liabilities).
• List of tasks to be performed.
• Audit techniques (e.g., vouching, verification).
• Responsibility assignment to audit team members.
• Timeline and deadlines for each task.
Advantages of an Audit Programme
• Ensures uniformity and consistency in auditing.
• Serves as a guideline for auditors.
• Helps in better coordination and supervision.
• Acts as evidence of work done.
Disadvantages of an Audit Programme
• May become rigid and lack flexibility.
• Over-reliance on the checklist can reduce analytical thinking.
• Not suitable for all businesses, especially those with unique operations.
COMPILED BY: CHIRANJIBI BISOI, LECTURER, PRANANATH COLLEGE (AUTO.), KHORDHA
Sponsored By – BANIJYAM (AN INSTITUTE FOR COMMERCE), BHUBANESWAR. Mob-8599888110
 B.COM_CORE 13_AUIDITING AND CORPORATE GOVERNANCE_UNIT 1

3. Audit Notebook
Meaning: An audit notebook is a record maintained by auditors to document key observations, queries, and
issues found during the audit. It acts as a reference for future audits and helps in resolving disputes.
Contents of an Audit Notebook
1. Audit Plan and Programme – Steps to be followed in the audit.
2. Observations and Findings – Errors, fraud, and discrepancies detected.
3. Clarifications from Management – Responses to audit queries.
4. Pending Issues – Unresolved matters needing further verification.
5. Weaknesses in Internal Control – Areas requiring improvement.
Purpose of an Audit Notebook
• Provides evidence of audit work performed.
• Helps in resolving disputes.
• Assists in preparing the final audit report.
• Useful for future audits and references.

4. Audit Working Papers

Meaning: Audit working papers are documents prepared by auditors during the audit process that contain
evidence, calculations, and observations. These papers support the audit opinion given in the audit report.
Types of Audit Working Papers
1. Permanent Audit Files – Documents that remain relevant for multiple years (e.g., incorporation
certificate, company policies, previous audit reports).
2. Current Audit Files – Documents specific to the current year’s audit (e.g., financial statements, bank
reconciliations).
Contents of Audit Working Papers
• Copies of financial statements.
• Trial balance and ledgers.
• Audit programme and procedures followed.
• Calculations and analytical reviews.
• Letters of confirmation from third parties (banks, creditors, debtors).
• Notes on discussions with management.
Importance of Audit Working Papers
• Provide evidence for the auditor’s opinion.
• Help in future audits and legal matters.
• Assist in internal reviews and quality control.
• Serve as a record of audit observations and decisions.

Conclusion
Audit planning, audit programmes, audit notebooks, and audit working papers are critical elements of the audit
process. They ensure that the audit is well-organized, systematic, and based on reliable evidence. Proper
documentation helps auditors provide an accurate and fair opinion on financial statements, ensuring transparency
and compliance with accounting and auditing standards.

COMPILED BY: CHIRANJIBI BISOI, LECTURER, PRANANATH COLLEGE (AUTO.), KHORDHA

Sponsored By – BANIJYAM (AN INSTITUTE FOR COMMERCE), BHUBANESWAR. Mob-8599888110
 B.COM_CORE 13_AUIDITING AND CORPORATE GOVERNANCE_UNIT 1

INTERNAL CONTROL – INTERNAL CHECK AND INTERNAL AUDIT

1. Internal Control
Meaning: Internal control refers to the systematic measures, policies, and procedures implemented by an
organization to ensure accuracy, efficiency, compliance, and security in financial and operational activities. It
helps in preventing fraud, detecting errors, and ensuring smooth business operations.
Objectives of Internal Control
• To safeguard assets from theft, fraud, and misuse.
• To ensure accuracy and reliability of financial records.
• To improve operational efficiency through process automation and monitoring.
• To ensure compliance with laws, regulations, and corporate policies.
• To prevent fraud and detect errors before they impact financial statements.
Elements of Internal Control
1. Control Environment – Management’s attitude, ethical values, and organizational culture.
2. Risk Assessment – Identifying and addressing financial and operational risks.
3. Control Activities – Policies and procedures to ensure compliance (e.g., approvals, authorizations).
4. Information & Communication – Effective reporting and communication within the organization.
5. Monitoring & Review – Ongoing assessment of internal controls through audits and reports.
Types of Internal Control
1. Preventive Controls – Designed to prevent errors and fraud (e.g., authorization procedures, access
controls).
2. Detective Controls – Identify problems after they occur (e.g., reconciliations, internal audits).
3. Corrective Controls – Address and fix detected problems (e.g., error rectification procedures).

2. Internal Check
Meaning: Internal check is a part of internal control where work is divided systematically among employees in
such a way that the work done by one person is automatically checked by another. It prevents fraud and errors by
ensuring that no individual has complete control over a transaction.
Objectives of Internal Check
• To minimize errors and fraud through division of work.
• To ensure continuous checking without additional supervision.
• To promote accuracy and efficiency in financial records.
• To reduce the need for detailed external audits.
Features of Internal Check
• Work is allocated systematically to prevent fraud.
• No single person handles a transaction from start to finish.
• Routine checking is embedded in operations.
• Responsibility is shared among multiple employees.
Examples of Internal Check
• Cash Handling: The person receiving cash should not be the one recording it.
• Purchasing Process: Ordering, receiving, and payment approval should be done by different employees.
• Stock Management: The person recording stock should not be the one issuing it.

Advantages of Internal Check

COMPILED BY: CHIRANJIBI BISOI, LECTURER, PRANANATH COLLEGE (AUTO.), KHORDHA
Sponsored By – BANIJYAM (AN INSTITUTE FOR COMMERCE), BHUBANESWAR. Mob-8599888110
 B.COM_CORE 13_AUIDITING AND CORPORATE GOVERNANCE_UNIT 1

• Reduces the risk of fraud and errors.

• Increases efficiency in business operations.
• Saves time and cost by minimizing the need for detailed auditing.
• Encourages accountability and responsibility among employees.
Disadvantages of Internal Check
• Not suitable for small businesses with fewer employees.
• Can be manipulated through collusion between employees.
• Requires continuous monitoring and updates.
3. Internal Audit
Meaning: Internal audit is a continuous and independent review of an organization’s financial and operational
activities to assess the effectiveness of internal controls, risk management, and governance processes. It is
conducted by an internal auditor appointed by the management.
Objectives of Internal Audit
• To ensure compliance with laws and regulations.
• To evaluate effectiveness of internal controls.
• To detect and prevent fraud, errors, and irregularities.
• To improve operational efficiency and risk management.
Key Features of Internal Audit
• Conducted by an internal team (not external auditors).
• Focuses on operational as well as financial controls.
• Provides recommendations for improvement.
• Reports directly to management or the audit committee.
Difference Between Internal Audit and External Audit
Feature Internal Audit External Audit
Conducted by Internal auditors (employees) Independent external auditors
Purpose Improves internal control & efficiency Provides assurance on financial statements
Focus Risk management, fraud detection, compliance Fair presentation of financial statements
Frequency Continuous or periodic Annual or statutory requirement
Reporting To Management Shareholders & regulatory bodies

Advantages of Internal Audit

• Helps in fraud prevention and risk management.
• Ensures regulatory compliance.
• Improves operational efficiency.
• Provides management with early warnings about financial issues.
Limitations of Internal Audit
• Not fully independent, as auditors are company employees.
• May be ignored by management if recommendations are not taken seriously.
• Can be costly for small businesses.
Conclusion: Internal control, internal check, and internal audit are interrelated mechanisms that help in ensuring
financial accuracy, compliance, and efficiency in an organization. Internal control sets the framework, internal
check acts as preventive monitoring, and internal audit evaluates and improves the system. Together, they form a
strong foundation for risk management and corporate governance.

COMPILED BY: CHIRANJIBI BISOI, LECTURER, PRANANATH COLLEGE (AUTO.), KHORDHA

Sponsored By – BANIJYAM (AN INSTITUTE FOR COMMERCE), BHUBANESWAR. Mob-8599888110
 B.COM_CORE 13_AUIDITING AND CORPORATE GOVERNANCE_UNIT 1

AUDIT PROCEDURE – VOUCHING AND VERIFICATION OF ASSETS & LIABILITIES

1. Audit Procedure
Audit procedure refers to the systematic steps and techniques used by auditors to examine financial records,
transactions, and internal controls to ensure accuracy, reliability, and compliance. The audit procedure consists of
two key elements:
1. Vouching – Examining the authenticity and correctness of transactions.
2. Verification – Confirming the existence, ownership, valuation, and disclosure of assets and liabilities.

2. Vouching
Meaning: Vouching is the process of checking and verifying documentary evidence (vouchers, invoices, receipts,
etc.) to ensure that transactions recorded in the books of accounts are genuine, authorized, and correctly classified.
It is the foundation of auditing.
Objectives of Vouching

• To verify the authenticity of transactions.

• To ensure transactions are recorded correctly.
• To detect errors and frauds.
• To confirm compliance with accounting principles.
Key Points in Vouching

• Proper authorization of transactions.

• Genuineness of vouchers (invoices, bills, receipts, etc.).
• Correct accounting treatment (classification under correct heads).
• Linking transactions to supporting documents (bank statements, agreements, etc.).
Types of Vouchers
1. Primary Voucher – Original documents like invoices, receipts, bills.
2. Collateral Voucher – Secondary documents like duplicate copies or copies of agreements.
Examples of Vouching

• Cash Receipts – Checking cash memos, bank statements, and entries.

• Credit Sales – Verifying invoices, sales orders, and customer acknowledgments.
• Purchases – Examining purchase orders, supplier invoices, and goods received notes.

3. Verification of Assets & Liabilities

Meaning: Verification is the process of checking and confirming the existence, ownership, valuation, and
proper disclosure of assets and liabilities in financial statements.
Objectives of Verification

• To confirm physical existence of assets and liabilities.

• To ensure proper valuation as per accounting standards.
• To verify ownership rights and legal obligations.
• To check adequate disclosure in financial statements.

COMPILED BY: CHIRANJIBI BISOI, LECTURER, PRANANATH COLLEGE (AUTO.), KHORDHA

Sponsored By – BANIJYAM (AN INSTITUTE FOR COMMERCE), BHUBANESWAR. Mob-8599888110
 B.COM_CORE 13_AUIDITING AND CORPORATE GOVERNANCE_UNIT 1

4. Verification of Assets
Types of Assets & Their Verification

Asset Type Verification Procedure

Fixed Assets (Land, Buildings, - Check ownership documents (title deeds, purchase invoices). - Inspect
Machinery, Vehicles) physical existence. - Ensure correct depreciation calculation.
- Verify investment certificates, bank statements. - Check valuation as per
Investments
market rates. - Confirm ownership and assess risks.
Inventory (Stock, Raw - Conduct physical stock verification. - Compare stock records with actual
Materials, Finished Goods) inventory. - Assess obsolescence and damage.
- Verify outstanding balances from ledger. - Confirm balances through direct
Accounts Receivable (Debtors)
correspondence. - Examine bad debt provisions.
- Check cash on hand and reconcile with books. - Verify bank statements,
Cash & Bank Balances
passbooks, and reconciliations. - Ensure no fictitious cash balances exist.

5. Verification of Liabilities
Types of Liabilities & Their Verification

Liability Type Verification Procedure

- Examine loan agreements, repayment schedules. - Verify interest
Loans & Borrowings
calculations and outstanding balances.
- Check supplier statements and outstanding invoices. - Confirm balances
Accounts Payable (Creditors)
through external confirmations.
Outstanding Expenses (Accrued - Review expense records and agreements. - Ensure all liabilities are
Liabilities) recorded in the correct period.
- Examine guarantees, pending lawsuits, tax claims. - Ensure proper
Contingent Liabilities
disclosure in financial statements.

6. Difference Between Vouching & Verification

Basis Vouching Verification

Checking authenticity of transactions with Confirming physical existence, ownership, and
Definition
supporting documents. valuation of assets & liabilities.
Ensuring accuracy & genuineness of Ensuring correct valuation & presentation in
Purpose
transactions. financial statements.
Covers individual transactions (sales, Covers entire assets and liabilities of the
Scope
purchases, expenses). organization.
Documents Ownership records, physical inspection,
Invoices, bills, receipts, cash memos.
Used confirmations.
Time of
Done throughout the year. Done at the end of the financial year.
Conduct

Conclusion: Vouching and verification are crucial steps in the audit process. Vouching ensures that transactions
are recorded accurately, while verification confirms the existence, ownership, and valuation of assets and
liabilities. Together, these processes help in detecting fraud, ensuring transparency, and maintaining financial
accuracy in an organization.

COMPILED BY: CHIRANJIBI BISOI, LECTURER, PRANANATH COLLEGE (AUTO.), KHORDHA

Sponsored By – BANIJYAM (AN INSTITUTE FOR COMMERCE), BHUBANESWAR. Mob-8599888110
 B.COM_CORE 13_AUIDITING AND CORPORATE GOVERNANCE_UNIT 2

AUDIT OF LIMITED COMPANIES:

The audit of limited companies is a systematic examination of their financial records, transactions, and statements
to ensure accuracy, compliance with legal requirements, and fair presentation of financial performance. Limited
companies, whether private or public, are required to undergo audits as per the Companies Act and relevant financial
regulations.
Key Aspects of Audit for Limited Companies
1. Legal Framework

• Companies Act, 2013 (India): Specifies audit requirements for limited companies.
• International Standards on Auditing (ISA): Used for global auditing practices.
• IFRS and Indian GAAP: Ensures compliance with relevant accounting standards.
2. Types of Audits

• Statutory Audit: Mandatory for all companies to ensure compliance with financial regulations.
• Internal Audit: Conducted to review internal controls and risk management processes.
• Tax Audit: Ensures proper tax compliance under the Income Tax Act.
• Forensic Audit: Investigates fraud, financial irregularities, or misconduct.
• Cost Audit: Evaluates cost records in industries where cost audits are prescribed.
3. Appointment of Auditors

• Appointed by shareholders in the Annual General Meeting (AGM).

• Auditor must be a Chartered Accountant (CA) and independent of company management.
• Tenure for individual auditors: 5 years, extendable up to 10 years for audit firms.
4. Audit Process
1. Planning: Understanding the company’s business, risks, and internal controls.
2. Testing Controls: Assessing the effectiveness of financial controls.
3. Substantive Testing: Examining financial records, invoices, and bank statements.
4. Verification of Assets & Liabilities: Ensuring their accuracy in financial statements.
5. Final Audit Report: Providing an opinion on whether the financial statements are fair and compliant.
5. Auditor’s Report

• Unqualified Report: Financials are accurate and fairly presented.

• Qualified Report: Some discrepancies, but overall financials are fair.
• Adverse Report: Financial statements are misleading or incorrect.
• Disclaimer of Opinion: Auditor unable to express an opinion due to lack of information.
6. Challenges in Auditing Limited Companies

• Compliance with evolving regulations.

• Risk of fraud and financial misstatements.
• Complex business structures and global operations.
• Technological advancements impacting financial processes.

COMPILED BY: CHIRANJIBI BISOI, LECTURER, PRANANATH COLLEGE (AUTO.), KHORDHA

Sponsored By – BANIJYAM (AN INSTITUTE FOR COMMERCE), BHUBANESWAR. Mob-8599888110
 B.COM_CORE 13_AUIDITING AND CORPORATE GOVERNANCE_UNIT 2

COMPANY AUDITOR- QUALIFICATIONS AND DISQUALIFICATIONS

A Company Auditor is an independent professional responsible for examining a company’s financial records and
statements to ensure transparency, accuracy, and compliance with regulations. The Companies Act, 2013 (in India)
and similar laws in other jurisdictions specify the qualifications and disqualifications for auditors.

1. Qualifications of a Company Auditor

As per Section 141(1) & (2) of the Companies Act, 2013, the following qualifications are required:
a) Professional Qualification

• The auditor must be a Chartered Accountant (CA) and a member of the Institute of Chartered
Accountants of India (ICAI) (or equivalent body in other countries).
• A firm can be appointed as an auditor if the majority of its partners practicing in India are qualified CAs.
b) Certification Requirement

• The auditor must hold a Certificate of Practice (COP) issued by ICAI.

c) Additional Criteria for Certain Companies

• For listed companies and large public companies, the auditor may need additional certifications and
experience in auditing large corporations.

2. Disqualifications of a Company Auditor

Under Section 141(3) of the Companies Act, 2013, certain individuals or firms are disqualified from being
appointed as an auditor of a company:
a) Employment or Business Interest
1. Officer or Employee of the Company
a. A person who is currently an officer or employee of the company cannot be appointed as an auditor.
2. Business Relationship with the Company
a. If a person or their relative/partner is holding securities or interest in the company or its
subsidiaries, they are disqualified.
b. A person whose relative holds more than ₹1 lakh worth of securities or interest in the company is
also disqualified.
3. Indebted to the Company
a. If the auditor owes more than ₹5 lakh to the company, its subsidiary, or associate company, they
cannot be appointed.
4. Guarantor for Company’s Loan
a. If the auditor has given a guarantee or security of more than ₹1 lakh for a company’s loan, they are
disqualified.
b) Conflict of Interest
1. Business Partner of a Key Managerial Person (KMP)
a. If an auditor is in partnership with or is employed by a director or key managerial person of the
company, they are disqualified.
2. Providing Non-Audit Services
a. As per Section 144 of the Companies Act, 2013, an auditor cannot provide consultancy,
investment advisory, or management services to the company they audit.

COMPILED BY: CHIRANJIBI BISOI, LECTURER, PRANANATH COLLEGE (AUTO.), KHORDHA

Sponsored By – BANIJYAM (AN INSTITUTE FOR COMMERCE), BHUBANESWAR. Mob-8599888110
 B.COM_CORE 13_AUIDITING AND CORPORATE GOVERNANCE_UNIT 2

c) Criminal or Professional Misconduct

1. Convicted of Fraud
a. If a person is convicted of fraud and five years have not passed since their conviction, they cannot
be appointed.
2. Previously Removed for Misconduct
a. If an auditor has been removed from office due to professional misconduct, they are disqualified.
d) Firm-Level Disqualifications
1. Firm with Disqualified Partner
a. If any partner of an audit firm is disqualified under the above points, the entire firm is disqualified
from being appointed as the company’s auditor.
Conclusion
A company auditor must be a qualified and independent Chartered Accountant with no financial or personal
conflicts of interest with the company. Disqualifications are put in place to ensure the integrity, objectivity, and
transparency of the auditing process.

COMPANY AUDITOR: APPOINTMENT, ROTATION, REMOVAL, REMUNERATION, RIGHTS &

DUTIES
The Companies Act, 2013 and relevant auditing standards define the appointment, rotation, removal, remuneration,
rights, and duties of company auditors to ensure transparency, accountability, and ethical conduct.
1. Appointment of Auditor
As per Section 139 of the Companies Act, 2013
The appointment process varies based on the type of company:
a) First Auditor

• For Companies (Other than Government Companies):

o Appointed by the Board of Directors (BOD) within 30 days of incorporation.
o If BOD fails, shareholders appoint the auditor within 90 days at an Extraordinary General
Meeting (EGM).
o Holds office until the conclusion of the first AGM.
• For Government Companies:
o Appointed by the Comptroller and Auditor General (CAG) within 60 days of incorporation.
b) Subsequent Auditors

• Appointed at the first AGM by shareholders.

• Holds office for 5 years until the conclusion of the sixth AGM.
• Appointment must be ratified every year in the AGM (though Companies Amendment Act, 2017
removed mandatory ratification).
c) Appointment of Auditor in Case of Casual Vacancy

• If the vacancy arises due to resignation, the Board appoints an auditor within 30 days, subject to
shareholder approval within 3 months.
• If the vacancy arises due to reasons other than resignation, the Board can fill the vacancy without
shareholder approval.

COMPILED BY: CHIRANJIBI BISOI, LECTURER, PRANANATH COLLEGE (AUTO.), KHORDHA

Sponsored By – BANIJYAM (AN INSTITUTE FOR COMMERCE), BHUBANESWAR. Mob-8599888110
 B.COM_CORE 13_AUIDITING AND CORPORATE GOVERNANCE_UNIT 2

2. Rotation of Auditors
As per Section 139(2) of the Companies Act, 2013
• Mandatory rotation applies to listed and certain large public companies.
• For an individual auditor: Maximum term of 5 years.
• For an audit firm: Maximum of two consecutive terms of 5 years (total 10 years).
• After completing the tenure, the auditor cannot be reappointed for 5 years.

3. Removal of Auditor
As per Section 140 of the Companies Act, 2013
• Before Term Expiry:
o Requires approval by Board of Directors and special resolution by shareholders in a General
Meeting.
o Approval of the Central Government is needed.
o The auditor must be given an opportunity to be heard.
• After Term Expiry:
o No special approval is required.
• Removal by Tribunal:
o The National Company Law Tribunal (NCLT) can remove an auditor if they are found guilty of
fraud, misconduct, or professional negligence.
• Resignation by Auditor:
o The auditor must file a statement of reasons for resignation with the company and the Registrar
of Companies (ROC) within 30 days.

4. Remuneration of Auditor
As per Section 142 of the Companies Act, 2013
• Fixed by Shareholders at the AGM.
• In the case of the first auditor, remuneration is fixed by the Board of Directors.
• Includes audit fees, reimbursement of expenses, and additional service charges (if applicable).

5. Rights of an Auditor
Auditors are granted several rights under the Companies Act to ensure independence and effective auditing:
1. Right to Access Books & Records: Can examine all books of accounts, vouchers, financial statements,
and records.
2. Right to Seek Information: Can ask for explanations from the company’s directors and employees.
3. Right to Visit Branches: Can visit any branch office and conduct an audit and Can rely on reports from
branch auditors.
4. Right to Receive Notices & Attend Meetings: Entitled to receive notices of shareholder meetings. Can
attend and express opinions at AGMs and EGMs.
5. Right to Report to Shareholders: Presents the audit report to shareholders at the AGM.
6. Right to Report Fraud: If fraud exceeding ₹1 crore is detected, the auditor must report it to the Central
Government. If fraud is below ₹1 crore, it must be reported to the Audit Committee/Board of Directors.

COMPILED BY: CHIRANJIBI BISOI, LECTURER, PRANANATH COLLEGE (AUTO.), KHORDHA

Sponsored By – BANIJYAM (AN INSTITUTE FOR COMMERCE), BHUBANESWAR. Mob-8599888110
 B.COM_CORE 13_AUIDITING AND CORPORATE GOVERNANCE_UNIT 2

6. Duties of an Auditor
An auditor has several key duties under Sections 143 & 144 of the Companies Act, 2013:
A) Primary Duties
1. Ensure True & Fair View of Financial Statements: Verify the accuracy of financial records and ensure
fair presentation.
2. Check Compliance with Accounting Standards: Ensure financial statements comply with Indian
Accounting Standards (Ind AS), IFRS, and GAAP.
3. Examine Internal Controls: Assess the effectiveness of the company’s internal financial controls.
4. Detect and Prevent Fraud: If fraud is found, report it to the Board or Central Government as per legal
requirements.
5. Prepare the Audit Report: Provide an opinion on financial statements, stating whether they are free from
material misstatements.
6. Certify Statutory Compliance: Ensure compliance with Companies Act, Tax Laws, and SEBI
regulations (for listed companies).
B) Restrictions on Services
As per Section 144 of the Companies Act, 2013, an auditor cannot provide the following non-audit services to the
company:

• Accounting & Bookkeeping

• Internal Audit
• Management Consulting
• Investment Advisory
• Actuarial & Legal Services
Conclusion
The Company Auditor plays a crucial role in ensuring financial transparency, corporate governance, and regulatory
compliance. Their appointment, remuneration, and removal are carefully regulated to maintain independence and
accountability.

AUDITOR’S REPORT: CONTENTS AND TYPES

The Auditor’s Report is an official statement issued by an auditor after examining a company's financial statements.
It provides an independent opinion on whether the financial statements give a true and fair view of the company's
financial position, as per accounting standards and legal regulations.
1. Contents of an Auditor’s Report: The Companies Act, 2013 (India) and International Standards on Auditing
(ISA) prescribe the structure and key elements of an auditor’s report.
A) Basic Contents of the Auditor’s Report
1. Title: "Independent Auditor’s Report" to distinguish it from other reports.
2. Addressee: Usually addressed to the shareholders or Board of Directors.
3. Opinion Section: States whether the financial statements present a true and fair view. Includes reference
to the balance sheet, profit & loss account, and cash flow statement.
4. Basis for Opinion: Specifies the auditing standards followed (e.g., ICAI standards, IFRS, or GAAP).
Declares the auditor’s independence and compliance with ethical requirements.
5. Key Audit Matters (KAMs) (For Listed Companies): Discusses significant risks, accounting
judgments, or financial reporting issues.

COMPILED BY: CHIRANJIBI BISOI, LECTURER, PRANANATH COLLEGE (AUTO.), KHORDHA

Sponsored By – BANIJYAM (AN INSTITUTE FOR COMMERCE), BHUBANESWAR. Mob-8599888110
 B.COM_CORE 13_AUIDITING AND CORPORATE GOVERNANCE_UNIT 2

6. Responsibilities of Management & Those Charged with Governance: Explains the management's
responsibility for preparing financial statements. Highlights the role of Board of Directors and Audit
Committee.
7. Auditor’s Responsibilities: Describes the auditor’s duty to examine financial statements using auditing
standards.
8. Other Reporting Responsibilities: Includes additional legal or regulatory requirements (e.g., reporting
fraud to the government).
9. Signature & Date: Signed by the auditor, along with their name, designation, and registration number.
Includes the date and place of the audit report issuance.
2. Types of Auditor’s Reports: The auditor’s opinion depends on the company’s financial transparency and
compliance. There are four types of audit reports:
1. Unqualified (Clean) Report

• Issued when the financial statements are free from material misstatements and comply with all
regulations.
• Indicates that the company's financial statements present a true and fair view.
• Preferred by companies as it enhances their credibility.
Example Statement: "In our opinion, the financial statements give a true and fair view of the financial position of
the company in accordance with Indian Accounting Standards (Ind AS) and Companies Act, 2013."
2. Qualified Report

• Issued when financial statements are generally fair, but there are minor misstatements or deviations
from accounting standards.
• The misstatements are not severe enough to affect the overall financial picture.
Example Statement: "Except for the effects of the matter described in the Basis for Qualified Opinion section, the
financial statements present a true and fair view."
Common Reasons: Non-compliance with an accounting standard; Minor discrepancies in disclosures or valuations.
3. Adverse Report

• Issued when the financial statements contain major misstatements that mislead stakeholders.
• Suggests that the company’s financial records do not reflect reality.
Example Statement: "The financial statements do not give a true and fair view of the company's financial position
as per accounting standards."
Common Reasons: Fraudulent financial reporting; Major violation of accounting principles.
4. Disclaimer of Opinion

• Issued when the auditor is unable to express an opinion due to lack of sufficient audit evidence.
• Indicates serious concerns about the company’s financial transparency.
Example Statement: "Due to the lack of sufficient audit evidence, we are unable to express an opinion on the
financial statements."
Common Reasons: Lack of cooperation from management; Loss or destruction of key financial records; Legal
restrictions preventing full audit access.
Conclusion: The Auditor’s Report is crucial for stakeholders to assess a company’s financial health,
transparency, and compliance. A clean report is a positive sign, while qualified, adverse, or disclaimer reports
indicate risks or potential financial mismanagement.

COMPILED BY: CHIRANJIBI BISOI, LECTURER, PRANANATH COLLEGE (AUTO.), KHORDHA

Sponsored By – BANIJYAM (AN INSTITUTE FOR COMMERCE), BHUBANESWAR. Mob-8599888110
 B.COM_CORE 13_AUIDITING AND CORPORATE GOVERNANCE_UNIT 2

LIABILITIES OF STATUTORY AUDITORS UNDER THE COMPANIES ACT, 2013

Statutory Auditors play a critical role in ensuring transparency, compliance, and accountability in financial
reporting. The Companies Act, 2013 imposes several liabilities on auditors for any negligence, misconduct, or
fraudulent activities in their professional duties.
1. Types of Liabilities of Statutory Auditors
A. Civil Liabilities: Statutory auditors can be held civilly liable if their negligence or misconduct causes financial
losses to shareholders, creditors, or other stakeholders.

• Key Sections: ✔Section 147(2): If an auditor is found guilty of non-compliance with auditing standards or
negligence, they are liable to pay damages to the company, shareholders, or creditors. ✔Section 245: Allows
shareholders to file a class action suit against auditors if their actions have caused losses to investors.
• Possible Consequences: ✔ Compensation to affected parties. ✔ Disqualification from future audits.

B. Criminal Liabilities: If an auditor is involved in fraud, false reporting, or deliberate misstatements, they can
face criminal prosecution under the Companies Act, 2013.

• Key Sections: ✔Section 143(12): If an auditor detects fraud worth ₹1 crore or more, they must report it
to the Central Government. Failure to do so can result in imprisonment (up to 3 years) and a fine (₹1
lakh – ₹25 lakh). ✔Section 147(4): If an auditor is involved in fraud, they can be imprisoned for up to
10 years and fined up to three times the amount of fraud. ✔Section 147(5): If an audit firm is involved,
all partners can be held liable.
• Possible Consequences: ✔ Heavy fines and penalties. ✔ Imprisonment for serious offenses. ✔ Blacklisting
of audit firms.
C. Professional Liabilities (Disciplinary Actions): The Institute of Chartered Accountants of India (ICAI) has
a Code of Ethics that auditors must follow. If they violate professional ethics, they can face disciplinary action.

• Key Sections: ICAI Code of Conduct: Auditors must follow professional standards. ✔Section 132: The
National Financial Reporting Authority (NFRA) can investigate auditors and take disciplinary actions.
✔Section 140(5): The Tribunal (NCLT) can remove an auditor for misconduct.
• Possible Consequences: ✔ Suspension of audit license. ✔ Ban from auditing for a specific period.
✔ Cancellation of ICAI membership.

2. Case Study: Satyam Scam (2009) – Auditor Liability Example

• The Satyam scandal was one of India's biggest accounting frauds, where auditors from PwC were
accused of failing to detect financial fraud.
• The auditors were banned, fined, and faced legal action under Indian corporate laws.
3. How Can Auditors Protect Themselves?
Follow auditing standards (SA, Ind AS, IFRS, GAAP) strictly.
Conduct independent and unbiased audits.
Report frauds immediately as per Section 143(12).
Maintain proper documentation of audit procedures.
Avoid conflicts of interest and ensure ethical conduct.
Conclusion: The Companies Act, 2013 has significantly strengthened auditor liability to prevent fraud, negligence,
and corporate mismanagement. Auditors must exercise due diligence, adhere to ethical standards, and report
frauds to avoid severe penalties.

COMPILED BY: CHIRANJIBI BISOI, LECTURER, PRANANATH COLLEGE (AUTO.), KHORDHA

Sponsored By – BANIJYAM (AN INSTITUTE FOR COMMERCE), BHUBANESWAR. Mob-8599888110
 B.COM_CORE 13_AUIDITING AND CORPORATE GOVERNANCE_UNIT 2

SPECIAL AREAS OF AUDIT

A special audit refers to an audit conducted for a specific purpose, focusing on particular aspects of a business,
rather than the overall financial statements. It helps in ensuring compliance, fraud detection, risk assessment,
and efficiency improvements in key areas.
1. Types of Special Audits
A) Cost Audit

• Objective: To verify whether the cost accounts are maintained correctly and comply with cost accounting
standards.
• Applicable to: Manufacturing companies, industries with high production costs.
• Relevant Law: Section 148 of Companies Act, 2013 mandates cost audits for specific industries (e.g.,
cement, pharma, telecom).
B) Management Audit

• Objective: To evaluate efficiency, effectiveness, and decision-making of management.

• Focus Areas: Planning, staffing, policies, corporate strategy.
• Benefits: Identifies weaknesses in decision-making and suggests improvements.
C) Tax Audit

• Objective: To verify tax compliance and prevent tax evasion.

• Applicable to: Businesses with a turnover of ₹1 crore or more (as per Sec 44AB of IT Act, 1961).
• Conducted by: Chartered Accountants.
• Key Aspects: GST compliance, direct & indirect taxes, deductions, and allowances.
D) Forensic Audit

• Objective: To detect fraud, corruption, financial misconduct, or legal violations.

• Common Uses: Investigating fraud, corporate scandals, money laundering cases.
• Conducted by: Forensic accountants and auditors.
• Example: The Satyam Scam (2009) where forensic audit revealed financial misstatements.
E) Secretarial Audit

• Objective: To ensure compliance with corporate laws, SEBI regulations, and CG norms.
• Applicable to: Listed companies and large corporations (as per Section 204 of Companies Act, 2013).
• Conducted by: Company Secretaries (CS).
• Focus Areas: Board meetings, shareholders' rights, statutory records.
F) Social Audit

• Objective: To assess the impact of corporate activities on society, environment, and stakeholders.
• Applicable to: Government projects, NGOs, and large corporations with CSR activities.
• Benefits: Ensures sustainable business practices and ethical operations.
G) Environmental Audit

• Objective: To check compliance with environmental laws and sustainability goals.

• Focus Areas: Pollution control, waste management, carbon footprint.
• Applicable to: Industries like mining, chemical, automobile, and energy sectors.
• Example: Green audits conducted for ISO 14001 certification.

COMPILED BY: CHIRANJIBI BISOI, LECTURER, PRANANATH COLLEGE (AUTO.), KHORDHA

Sponsored By – BANIJYAM (AN INSTITUTE FOR COMMERCE), BHUBANESWAR. Mob-8599888110
 B.COM_CORE 13_AUIDITING AND CORPORATE GOVERNANCE_UNIT 2

H) Due Diligence Audit

• Objective: To verify financial, legal, and operational aspects before mergers, acquisitions, or investments.
• Conducted by: Investors, financial advisors, and auditors.
• Focus Areas: Financial health, liabilities, risk factors, legal compliance.
• Example: Before acquiring a company, investors conduct due diligence to check financial stability.
I) Operational Audit

• Objective: To evaluate the efficiency and effectiveness of business processes.

• Focus Areas: Supply chain, inventory, procurement, human resources.
• Applicable to: Large organizations aiming for performance improvement.
• Benefits: Identifies cost-saving opportunities and process optimization.
J) Information System Audit (IT Audit)

• Objective: To check the security, integrity, and efficiency of IT systems.

• Applicable to: Banks, e-commerce, fintech, government agencies.
• Focus Areas: Cybersecurity, data privacy, ERP systems, fraud prevention.
• Example: IT audits in banks to prevent cyber fraud.
Conclusion
Special audits are crucial for targeted risk assessment, fraud detection, and regulatory compliance in different
business areas. Each type of audit has specific legal provisions and objectives, ensuring businesses operate efficiently
and ethically.

SPECIAL FEATURES OF COST AUDIT, TAX AUDIT, AND MANAGEMENT AUDIT

Each type of audit serves a unique purpose in assessing different aspects of a business. Below are the special features
of Cost Audit, Tax Audit, and Management Audit:
1. Cost Audit

• Definition: A cost audit examines whether cost records are maintained correctly and in compliance with
cost accounting standards (CAS).
• Applicable Law: Section 148 of Companies Act, 2013 mandates cost audits for specific industries (e.g.,
cement, pharma, telecom, power).
• Conducted by: A Cost Accountant (CMA).
Special Features of Cost Audit

• Industry-Specific Requirement – Mandatory for certain industries with high production costs.
• Verification of Cost Records – Ensures accurate cost allocation in manufacturing & service sectors.
• Efficiency & Waste Reduction – Helps identify unnecessary costs and improve cost control.
• Compliance with Cost Accounting Standards (CAS) – Ensures standard costing methods are followed.
• Pricing & Decision Making – Assists management in pricing strategies and budgeting.
• Government Regulation – Used by regulatory authorities to monitor pricing and fair competition.
• Fraud Detection – Helps in identifying cost manipulation and fraudulent cost inflation.
2. Tax Audit

• Definition: A tax audit is an examination of a business's tax records to ensure compliance with tax laws
and prevent tax evasion.
• Applicable Law: Section 44AB of Income Tax Act, 1961 mandates tax audits for businesses with:

COMPILED BY: CHIRANJIBI BISOI, LECTURER, PRANANATH COLLEGE (AUTO.), KHORDHA

Sponsored By – BANIJYAM (AN INSTITUTE FOR COMMERCE), BHUBANESWAR. Mob-8599888110
 B.COM_CORE 13_AUIDITING AND CORPORATE GOVERNANCE_UNIT 2

o Turnover exceeding ₹1 crore (for businesses). Gross receipts exceeding ₹50 lakhs (for
professionals).
• Conducted by: A Chartered Accountant (CA).
Special Features of Tax Audit

• Ensures Tax Compliance – Verifies correct tax calculations and filings.

• Prevention of Tax Evasion – Detects any intentional or unintentional tax avoidance.
• Mandatory for Large Businesses – Required for entities exceeding prescribed turnover limits.
• Verification of Income & Deductions – Ensures correct application of deductions, exemptions, and tax
benefits.
• Submission of Form 3CA/3CB & 3CD – Mandatory reporting to the Income Tax Department.
• Helps in Reducing Litigation – Ensures proper tax compliance, reducing chances of legal disputes.
• GST and Indirect Tax Compliance – Ensures proper classification of taxable income under GST laws.
3. Management Audit

• Definition: A management audit evaluates the efficiency, effectiveness, and decision-making process of
the management.
• Not Mandatory: a voluntary audit conducted by companies to improve overall management performance.
• Conducted by: Internal or external auditors specializing in business management.
Special Features of Management Audit

• Focus on Managerial Efficiency – Evaluates how well management utilizes resources.

• Improves Decision-Making – Helps top management make strategic improvements.
• Examines Organizational Structure – Assesses hierarchy, workflow, and team effectiveness.
• Identifies Weaknesses – Highlights inefficiencies, delays, or mismanagement.
• Covers All Business Areas – Reviews finance, HR, production, and marketing.
• Performance Appraisal Tool – Helps in evaluating and improving employee performance.
• Future-Oriented – Focuses on long-term improvements rather than past financial results.
Comparison Table

Feature Cost Audit Tax Audit Management Audit

Verify cost records &
Objective Ensure tax compliance Improve managerial efficiency
control costs
Applicable Section 148, Companies Section 44AB, Income Tax
No specific law, voluntary
Law Act, 2013 Act, 1961
Internal or external management
Conducted by Cost Accountant (CMA) Chartered Accountant (CA)
auditor
Yes, for businesses
Mandatory? Yes, for notified industries No, voluntary
exceeding limits
Cost control & cost Tax compliance & Management effectiveness &
Focus Area
efficiency reporting decision-making
Helps reduce costs & Ensures correct tax Enhances overall business
Outcome
improve pricing payments performance

Conclusion: Each type of audit serves a different purpose:

• Cost Audit ensures cost efficiency and cost control.

• Tax Audit ensures compliance with tax laws and prevents fraud.
• Management Audit improves decision-making and managerial performance.
COMPILED BY: CHIRANJIBI BISOI, LECTURER, PRANANATH COLLEGE (AUTO.), KHORDHA
Sponsored By – BANIJYAM (AN INSTITUTE FOR COMMERCE), BHUBANESWAR. Mob-8599888110
 B.COM_CORE 13_AUIDITING AND CORPORATE GOVERNANCE_UNIT 2

RECENT TRENDS IN AUDITING

Auditing is evolving rapidly due to technological advancements, regulatory changes, and increasing corporate
governance requirements. Modern audits focus on automation, data analytics, risk assessment, and fraud
detection to enhance transparency and efficiency.
1. Use of Artificial Intelligence (AI) and Machine Learning
AI-powered tools analyze large volumes of financial data quickly.
AI helps in fraud detection by identifying unusual patterns.
Reduces manual errors and improves audit accuracy.
Example: AI-based audit tools like MindBridge AI and KPMG Clara.
2. Data Analytics in Auditing
Auditors use Big Data analytics to examine 100% of transactions, rather than sampling.
Helps in trend analysis, fraud detection, and risk assessment.
Improves real-time audit monitoring.
Example: Tableau, ACL Analytics, and Power BI in audits.
3. Cloud-Based Auditing
Remote auditing is possible with cloud-based audit software.
Ensures real-time collaboration between auditors and clients.
Secure storage and easy retrieval of audit records.
Example: PwC’s Aura, EY Canvas, and Deloitte’s Omnia.
4. Robotic Process Automation (RPA) in Audits
Automates repetitive audit tasks like data entry, invoice verification, and reconciliations.
Reduces errors and saves time for auditors.
Example: Deloitte and EY use RPA in auditing processes.
5. Blockchain in Auditing
Provides tamper-proof financial records using distributed ledger technology.
Enhances transparency and prevents fraud in transactions.
Example: PwC and EY are integrating blockchain for audit trails.
6. Environmental, Social, and Governance (ESG) Audits
Increasing focus on sustainability, ethical business practices, and corporate governance.
Companies are required to report carbon footprint, social impact, and corporate ethics.
Example: SEBI mandates ESG disclosures for listed companies in India.
7. Cybersecurity Audits
Focus on assessing data privacy, IT security, and protection against cyber threats.
Ensures compliance with GDPR, ISO 27001, and IT Act, 2000.
Example: Banks and fintech companies conduct cybersecurity audits regularly.
8. Forensic Audits for Fraud Detection
Increasing corporate frauds have led to more forensic audits.
Detects money laundering, embezzlement, and financial misstatements.
Example: The Yes Bank fraud case and the IL&FS scam led to forensic audits.
9. Integrated Auditing (Combining Financial, Compliance & Operational Audits)
Combines financial, compliance, and operational audits into a single audit framework.
Enhances efficiency and reduces audit duplication.
Example: SOX Compliance requires integrated auditing.

COMPILED BY: CHIRANJIBI BISOI, LECTURER, PRANANATH COLLEGE (AUTO.), KHORDHA

Sponsored By – BANIJYAM (AN INSTITUTE FOR COMMERCE), BHUBANESWAR. Mob-8599888110
 B.COM_CORE 13_AUIDITING AND CORPORATE GOVERNANCE_UNIT 2

10. RegTech (Regulatory Technology) in Auditing

Automates compliance with SEBI, RBI, and tax regulations.
Uses AI and analytics for real-time regulatory reporting.
Example: Banks use RegTech for automated compliance with RBI norms.

Conclusion: The future of auditing is technology-driven, focusing on automation, AI, blockchain, and real-time
data analysis. These trends help auditors provide more accurate, efficient, and fraud-resistant audits.
BASIC CONSIDERATIONS OF AUDIT IN AN EDP ENVIRONMENT
With the increasing use of computers and digital systems in financial and business operations, auditing in an EDP
(Electronic Data Processing) environment has become essential. Unlike traditional manual audits, EDP audits
require auditors to assess IT controls, data security, system reliability, and automated processes.
1. Understanding the EDP System
Auditors must understand the organization's IT infrastructure, accounting software, databases, and
digital records.
Identify automated vs. manual processes to determine audit risks.
Example: Auditing SAP, Oracle, Tally, or QuickBooks used in financial reporting.
2. Internal Controls in an EDP System
Evaluate General Controls – Security policies, data access controls, and software updates.
Assess Application Controls – Input validation, processing accuracy, and output integrity.
Example: Ensuring restricted access to financial data to prevent fraud.
3. Audit Trail in EDP Systems
Digital transactions leave an audit trail, which auditors must review for inconsistencies.
Verify whether logs and reports are tamper-proof.
Example: Checking log files of online banking transactions.
4. Data Security & Cybersecurity Risks
Auditors should assess firewalls, encryption, and antivirus protection.
Verify compliance with ISO 27001, GDPR, and IT Act, 2000 for data security.
Example: Auditing cloud storage security in financial firms.
5. Risk of Data Manipulation & Fraud
Ensure no unauthorized changes are made to records.
Identify red flags like unusual transactions, duplicate entries, or unapproved access.
Example: Preventing alteration of supplier invoices in an ERP system.
6. Continuous & Automated Auditing Tools
Use Computer-Assisted Audit Techniques (CAATs) to analyze large volumes of data.
Perform real-time audits with AI-based audit tools.
Example: Using ACL Analytics, IDEA, or Power BI to detect anomalies.
7. Backup & Disaster Recovery Measures
Check if proper data backup policies exist to prevent data loss.
Verify availability of disaster recovery plans in case of system failures.
Example: Ensuring banks have backup systems for online transactions.
8. Compliance with IT Regulations
Ensure the organization follows legal and regulatory frameworks for IT systems.
Example: RBI guidelines on IT security for financial institutions.

Conclusion: Auditing in an EDP environment requires IT knowledge, cybersecurity awareness, and data
analysis skills. Auditors must ensure system security, accuracy, and reliability of financial data in a digital
setup.

COMPILED BY: CHIRANJIBI BISOI, LECTURER, PRANANATH COLLEGE (AUTO.), KHORDHA

Sponsored By – BANIJYAM (AN INSTITUTE FOR COMMERCE), BHUBANESWAR. Mob-8599888110
 B.COM_CORE 13_AUIDITING AND CORPORATE GOVERNANCE_UNIT 2

STANDARDS ON AUDITING (SAs)

Standards on Auditing (SAs) are guidelines that establish the responsibilities and procedures for auditors when
conducting an audit of financial statements, ensuring consistency and quality in the audit process. [1, 2, 3]
Here's a more detailed explanation of SAs: [2]
• Purpose: SAs are formulated to ensure that professional accountants comply with critical matters for the
proper discharge of their functions, particularly in auditing financial statements. [2]
• Scope: SAs apply to audits of financial statements, regardless of the size or legal form of the entity, unless
specified otherwise. [4]
• Key Elements: [3]
o Overall Objectives: SAs establish the overall objectives of the independent auditor and explain the
nature and scope of an audit designed to meet those objectives. [3]
o Audit Evidence: SAs explain what constitutes audit evidence and the auditor's responsibility to
design and perform audit procedures to obtain sufficient and appropriate evidence. [5]
o Forming an Opinion: SAs deal with the auditor's responsibility to form an opinion on the financial
statements and the form and content of the auditor's report. [1]
o Key Audit Matters: SAs address the auditor's responsibility to communicate key audit matters in
the auditor's report. [6]
o Other Information: SAs address the auditor's responsibility in relation to other information in
documents containing audited financial statements. [7, 8]
o Using the Work of Internal Auditors: SAs address the external auditor's responsibilities when
using the work of internal auditors. [9]
o Audit Documentation: SAs prescribe the minimum period of retention of engagement
documentation. [10]
Classification of Standards on Auditing (SAs) in India
SAs are categorized into different groups based on various stages of the audit process:
SA
Category Description
Numbers
General Principles & Covers the basic principles and ethics of
SA 200-299
Responsibilities auditing.
Deals with audit planning, risk identification,
Risk Assessment & Response SA 300-499
and materiality.
Provides guidance on obtaining and evaluating
Audit Evidence SA 500-599
audit evidence.
Covers audits involving other auditors, experts,
Using Work of Others SA 600-699
and group audits.
Audit Conclusions & Provides guidelines on audit reports, opinions,
SA 700-799
Reporting and modifications.
Specialized Areas SA 800-899 Covers special purpose audits and reporting.

• Importance: SAs promote consistency and credibility in the global marketplace by making audits conducted
in accordance with globally recognized standards more readily identifiable. [1]

COMPILED BY: CHIRANJIBI BISOI, LECTURER, PRANANATH COLLEGE (AUTO.), KHORDHA

Sponsored By – BANIJYAM (AN INSTITUTE FOR COMMERCE), BHUBANESWAR. Mob-8599888110
 B.COM_CORE 13_AUIDITING AND CORPORATE GOVERNANCE_UNIT 2

Some case studies and practical problems related to auditing and Standards on Auditing (SAs):
Case Study 1: Failure to Detect Fraud (SA 240 – Fraud in Audit)
Scenario: ABC Ltd. appointed an auditor to review its financial statements. The auditor relied only on management
representations and did not verify supporting documents. Later, it was discovered that the company’s sales figures
were inflated to show higher profits.
Issues Identified:

The auditor did not apply professional skepticism (as required under SA 200).
Lack of proper risk assessment procedures (as per SA 315).
Non-compliance with SA 500 (Audit Evidence), as no external confirmation was obtained.

Key Learnings:

✔ Auditors should independently verify financial data.

✔ External confirmations should be used to validate revenue figures.
✔ Fraud risk assessment is mandatory under SA 240.

Case Study 2: Auditor’s Liability in Negligence (SA 250 – Compliance with Laws and Regulations)
Scenario: XYZ Ltd. faced a legal penalty for non-compliance with environmental laws. The auditors had not
reported this issue in their audit report. The company later argued that the auditors failed in their duties.
Issues Identified:

Non-compliance with SA 250, which requires auditors to consider legal & regulatory frameworks.
Failure to include an Emphasis of Matter (EOM) paragraph in the audit report (as per SA 706).
The auditor may face penal actions under the Companies Act, 2013.

Key Learnings:

✔ Auditors must identify and report non-compliance with laws.

✔ Any material impact must be disclosed in the audit report.
✔ Professional due diligence is essential to avoid legal liability.

Case Study 3: Auditor’s Opinion Modification (SA 705 – Modified Audit Opinion)
Scenario: A company’s inventory records were incomplete, and the auditor could not verify stock valuation. The
auditor had to decide whether to issue a Qualified Opinion or an Adverse Opinion.
Key Considerations:

If the misstatement is material but not pervasive → Qualified Opinion.

If the misstatement is both material and pervasive → Adverse Opinion.
The auditor must clearly explain reasons in the audit report under SA 705.

Key Learnings:

✔ Auditors must modify their opinion when there is uncertainty.

✔ SA 705 provides guidelines for issuing modified opinions.
✔ Proper documentation is necessary to justify the opinion.

COMPILED BY: CHIRANJIBI BISOI, LECTURER, PRANANATH COLLEGE (AUTO.), KHORDHA

Sponsored By – BANIJYAM (AN INSTITUTE FOR COMMERCE), BHUBANESWAR. Mob-8599888110
 B.COM_CORE 13_AUIDITING AND CORPORATE GOVERNANCE_UNIT 2

Case Study 4: Going Concern Assumption (SA 570 – Going Concern)

Scenario: A company suffered huge losses for three consecutive years and had significant loan defaults. The
auditor suspected that the company might not continue its operations but did not disclose it in the audit report.
Later, the company declared bankruptcy, and the auditor was questioned.
Issues Identified:

The auditor failed to perform Going Concern Evaluation (as per SA 570).
There was no mention of material uncertainty in the audit report.
The auditor did not consult with management on future plans.

Key Learnings:

✔ Auditors must assess whether a company can continue as a going concern.

✔ If uncertainty exists, the auditor should include a disclosure in the audit report.
✔ Non-disclosure can result in legal and reputational consequences.

Practical Problems for Discussion

1. Risk Assessment & Audit Planning:
o How should an auditor assess risks and plan an audit for a newly established company? (SA 300,
SA 315)
2. Audit Evidence Collection:
o What are the best techniques for collecting audit evidence for verifying cash transactions? (SA
500)
3. Group Audit Issues:
o If a multinational company has subsidiaries in different countries, how should the auditor
coordinate with other auditors? (SA 600)
4. Forensic Audit Cases:
o In a forensic audit, how should an auditor detect and investigate financial fraud using IT tools?

Conclusion
These case studies highlight common audit failures, SA compliance issues, and auditor responsibilities. Auditors
must follow ethical practices, apply professional skepticism, and adhere to SAs to avoid legal and financial risks.

COMPILED BY: CHIRANJIBI BISOI, LECTURER, PRANANATH COLLEGE (AUTO.), KHORDHA

Sponsored By – BANIJYAM (AN INSTITUTE FOR COMMERCE), BHUBANESWAR. Mob-8599888110
 B.COM_CORE 13_AUIDITING AND CORPORATE GOVERNANCE_UNIT 3

CONCEPTUAL FRAMEWORK OF CORPORATE GOVERNANCE

Introduction
Corporate Governance refers to the system of rules, practices, and processes by which a company is directed and
controlled. It ensures accountability, fairness, and transparency in a company's relationship with its stakeholders,
including shareholders, management, employees, customers, suppliers, and the community.
1. Meaning and Definition
Corporate Governance can be defined as:
• OECD (Organization for Economic Co-operation and Development): "Corporate Governance
involves a set of relationships between a company’s management, its board, its shareholders, and other
stakeholders. It provides the structure through which corporate objectives are set and attained, and
performance is monitored."
• Cadbury Committee (1992, UK): "Corporate Governance is the system by which companies are
directed and controlled."
2. Objectives of Corporate Governance
• Protecting the interests of shareholders and stakeholders
• Ensuring ethical business conduct
• Enhancing corporate performance and accountability
• Preventing corporate fraud and financial mismanagement
• Promoting transparency and disclosure
3. Principles of Corporate Governance
• Transparency: Clear and timely disclosure of financial and operational information
• Accountability: Responsibility of the management and board to shareholders
• Fairness: Equal treatment of all shareholders, including minority shareholders
• Responsibility: Ethical behavior and corporate social responsibility (CSR)
• Independence: Independent directors and decision-making free from undue influence
4. Corporate Governance Models
• Anglo-American Model (Shareholder Model): Focuses on maximizing shareholder value (e.g., USA,
UK).
• German Model (Stakeholder Model): Includes stakeholders like employees and creditors in decision-
making (e.g., Germany, Japan).
• Indian Model: A mix of the Anglo-American and German models, emphasizing regulatory compliance,
CSR, and the role of independent directors.
5. Regulatory Framework of Corporate Governance in India
• Companies Act, 2013: Includes provisions for independent directors, board committees, and disclosure
requirements.
• SEBI (Listing Obligations and Disclosure Requirements - LODR) Regulations, 2015: Mandates
corporate governance norms for listed companies.
• Clause 49 of Listing Agreement: Introduced by SEBI to ensure governance in listed companies (now
integrated into LODR).
• Corporate Governance Guidelines by RBI, IRDAI, and PFRDA: Applicable to banks, insurance
companies, and pension funds.
6. Role of Key Stakeholders in Corporate Governance
• Board of Directors: Strategic oversight, ethical governance, and financial reporting.
• Management: Execution of corporate strategy, internal controls, and compliance.
• Shareholders: Exercise voting rights, monitor performance, and engage in corporate decisions.
• Regulatory Bodies: Ensure compliance with laws and governance standards.

COMPILED BY: CHIRANJIBI BISOI, LECTURER, PRANANATH COLLEGE (AUTO.), KHORDHA

Sponsored By – BANIJYAM (AN INSTITUTE FOR COMMERCE), BHUBANESWAR. Mob-8599888110
 B.COM_CORE 13_AUIDITING AND CORPORATE GOVERNANCE_UNIT 3

7. Challenges in Corporate Governance

• Lack of transparency and disclosure
• Conflict of interest between stakeholders
• Insider trading and financial fraud
• Inadequate role of independent directors
• Weak enforcement of corporate governance norms
Conclusion
Corporate Governance is essential for building investor confidence, enhancing economic efficiency, and ensuring
sustainable business growth. Effective corporate governance practices lead to improved decision-making, risk
management, and long-term value creation for all stakeholders.

CORPORATE GOVERNANCE REFORMS

Corporate Governance reforms are introduced to improve transparency, accountability, and ethical business practices
in corporate entities. These reforms aim to enhance investor confidence, protect stakeholders' interests, and ensure
sustainable corporate growth.
1. Need for Corporate Governance Reforms
• To prevent corporate scandals and fraud (e.g., Satyam, Enron, IL&FS).
• To improve investor confidence and attract foreign investments.
• To align with global best practices and international standards (OECD, IFRS).
• To ensure ethical corporate conduct and social responsibility.
• To strengthen regulatory frameworks and compliance mechanisms.
2. Key Corporate Governance Reforms in India
A. Companies Act, 2013
• Introduced mandatory corporate governance norms for companies.
• Defined the role and responsibilities of independent directors.
• Made provisions for board committees like the Audit Committee and Nomination & Remuneration
Committee.
• Mandated Corporate Social Responsibility (CSR) for companies meeting specific criteria.
• Strengthened disclosure requirements and investor protection mechanisms.
B. SEBI (LODR) Regulations, 2015
• Replaced Clause 49 of the Listing Agreement with new governance norms.
• Strengthened norms for board independence and director responsibilities.
• Enhanced disclosure requirements related to financial reporting and risk management.
• Improved regulations on Related Party Transactions (RPTs).
C. Kotak Committee Recommendations (2017)
• Increased the number of independent directors on boards.
• Required separation of roles between Chairman and MD/CEO.
• Enhanced disclosure norms for related-party transactions.
• Mandated higher transparency in board evaluations.
• Improved the role of auditors and audit committees.
D. RBI Guidelines for Corporate Governance in Banks
• Strengthened the fit and proper criteria for directors and senior management.
• Mandated risk-based internal audits and strong risk management frameworks.
• Established norms for compensation and performance-linked incentives for executives.

COMPILED BY: CHIRANJIBI BISOI, LECTURER, PRANANATH COLLEGE (AUTO.), KHORDHA

Sponsored By – BANIJYAM (AN INSTITUTE FOR COMMERCE), BHUBANESWAR. Mob-8599888110
 B.COM_CORE 13_AUIDITING AND CORPORATE GOVERNANCE_UNIT 3

E. Insolvency and Bankruptcy Code (IBC), 2016

• Provided a structured framework for resolving corporate insolvency.
• Shifted control from defaulting promoters to creditors.
• Encouraged corporate restructuring and revival through resolution professionals.
F. Corporate Social Responsibility (CSR) Reform
• Companies meeting specific financial thresholds must spend 2% of net profits on CSR.
• Strengthened monitoring and compliance for CSR spending.
G. Whistleblower Protection and Insider Trading Regulations
• Strengthened SEBI’s Prohibition of Insider Trading (PIT) Regulations.
• Encouraged companies to establish whistleblower mechanisms.

3. Global Corporate Governance Reforms

• Sarbanes-Oxley Act (2002, USA): Strengthened corporate accountability post-Enron scandal.
• Cadbury Report (1992, UK): Defined key principles of corporate governance.
• OECD Principles of Corporate Governance (1999, updated 2015): Established global governance
benchmarks.
• Dodd-Frank Act (2010, USA): Improved financial regulation and executive compensation norms.
4. Challenges in Implementing Corporate Governance Reforms
• Resistance from corporate promoters and management.
• Lack of awareness and compliance among small and medium enterprises.
• Weak enforcement and regulatory loopholes.
• Complexities in related-party transactions and financial disclosures.
Conclusion
Corporate governance reforms are essential for maintaining a transparent and accountable corporate environment.
While significant progress has been made in India and globally, continuous monitoring, stricter enforcement, and
evolving regulatory frameworks are necessary to ensure good governance practices in the corporate sector.

MAJOR CORPORATE SCANDALS IN INDIA AND ABROAD

Corporate scandals often expose unethical practices, financial fraud, and governance failures, leading to significant
losses for investors and stakeholders. These scandals highlight the importance of corporate governance reforms,
regulatory oversight, and ethical leadership.
1. Major Corporate Scandals in India
A. Satyam Scam (2009)
• Company: Satyam Computer Services Ltd.
• Nature of Fraud: Financial statement manipulation, overstating profits by ₹7,000 crores.
• Key Issue: CEO Ramalinga Raju admitted to falsifying company accounts.
• Impact: Led to the company’s collapse, investor losses, and enhanced CG regulations in India.
• Reforms Post-Scandal: SEBI tightened disclosure norms; Companies Act, 2013, was strengthened.
B. IL&FS Crisis (2018)
• Company: Infrastructure Leasing & Financial Services (IL&FS).
• Nature of Fraud: Mismanagement, financial misreporting, and high debt burden (~₹91,000 crores).
• Key Issue: Defaults in debt repayment, leading to a liquidity crisis.
• Impact: Triggered a financial sector crisis affecting NBFCs.
• Reforms Post-Scandal: Stricter RBI regulations on NBFC governance.
COMPILED BY: CHIRANJIBI BISOI, LECTURER, PRANANATH COLLEGE (AUTO.), KHORDHA
Sponsored By – BANIJYAM (AN INSTITUTE FOR COMMERCE), BHUBANESWAR. Mob-8599888110
 B.COM_CORE 13_AUIDITING AND CORPORATE GOVERNANCE_UNIT 3

C. Punjab National Bank (PNB) Scam (2018)

• Company: Punjab National Bank.
• Nature of Fraud: ₹11,400 crore loan fraud using fake Letters of Undertaking (LoUs).
• Key Issue: Nirav Modi and Mehul Choksi used fraudulent LoUs to secure loans from overseas banks.
• Impact: Losses for PNB, weakening trust in Indian banking.
• Reforms Post-Scandal: RBI tightened banking regulations, improved fraud detection mechanisms.
D. Yes Bank Crisis (2020)
• Company: Yes Bank.
• Nature of Fraud: Mismanagement, fraudulent loans, and financial misreporting.
• Key Issue: CEO Rana Kapoor sanctioned bad loans in exchange for personal gains.
• Impact: Led to a financial crisis, requiring RBI intervention and restructuring.
• Reforms Post-Scandal: Improved RBI oversight on private banks.
E. DHFL Scam (2019)
• Company: Dewan Housing Finance Corporation Ltd. (DHFL).
• Nature of Fraud: ₹34,000 crore loan fraud, financial misreporting.
• Key Issue: Misuse of public deposits, siphoning funds to shell companies.
• Impact: Led to DHFL bankruptcy and CBI investigation.
• Reforms Post-Scandal: RBI took stronger control of NBFC regulations.

2. Major Corporate Scandals Abroad

A. Enron Scandal (2001, USA)
• Company: Enron Corporation.
• Nature of Fraud: Accounting fraud, hiding debt through off-balance-sheet entities.
• Key Issue: Auditors (Arthur Andersen) helped manipulate financial statements.
• Impact: $60 billion company bankruptcy, loss of investor confidence.
• Reforms Post-Scandal: Sarbanes-Oxley Act, 2002, introduced in the USA to prevent corporate fraud.
B. Lehman Brothers Collapse (2008, USA)
• Company: Lehman Brothers (Investment Bank).
• Nature of Fraud: Risky mortgage-backed securities, excessive debt.
• Key Issue: Failure to manage financial risks and lack of regulation.
• Impact: Triggered the 2008 Global Financial Crisis.
• Reforms Post-Scandal: Dodd-Frank Act, 2010, improved financial regulations.
C. Volkswagen Emissions Scandal (2015, Germany)
• Company: Volkswagen Group.
• Nature of Fraud: Falsified emissions data in diesel cars.
• Key Issue: Installed software to cheat emissions tests.
• Impact: Billions in fines, loss of brand reputation.
• Reforms Post-Scandal: Stricter environmental regulations worldwide.
D. Wirecard Fraud (2020, Germany)
• Company: Wirecard AG (Fintech Company).
• Nature of Fraud: €1.9 billion missing from company accounts.
• Key Issue: Fake revenue and falsified bank balances.
• Impact: Led to bankruptcy, arrest of executives.
• Reforms Post-Scandal: Strengthened EU financial oversight.

COMPILED BY: CHIRANJIBI BISOI, LECTURER, PRANANATH COLLEGE (AUTO.), KHORDHA

Sponsored By – BANIJYAM (AN INSTITUTE FOR COMMERCE), BHUBANESWAR. Mob-8599888110
 B.COM_CORE 13_AUIDITING AND CORPORATE GOVERNANCE_UNIT 3

E. Toshiba Accounting Scandal (2015, Japan)

• Company: Toshiba Corporation.
• Nature of Fraud: Overstating profits by $1.2 billion over seven years.
• Key Issue: Senior management manipulated accounts.
• Impact: Loss of investor trust, CEO resignation.
• Reforms Post-Scandal: Stricter corporate governance laws in Japan.
3. Lessons Learned from Corporate Scandals

• Importance of Transparency & Accountability: Stronger disclosure norms prevent financial

misrepresentation.
• Need for Stronger Regulatory Oversight: Independent audits and regulatory checks help detect fraud
early.
• Role of Whistleblowers: Encouraging internal reporting mechanisms can help expose fraud.
• Ethical Corporate Culture: Companies should prioritize ethics over short-term profits.
• Investor Awareness: Shareholders must actively monitor corporate governance practices.
Conclusion
Corporate scandals have significant economic and reputational consequences. Strengthening governance
frameworks, improving regulatory enforcement, and promoting ethical leadership are crucial to preventing such
financial frauds in the future.

COMMON GOVERNANCE PROBLEMS NOTICED IN VARIOUS CORPORATE FAILURES

Corporate failures across the world have highlighted significant weaknesses in corporate governance structures.
These failures often stem from poor ethical practices, financial mismanagement, and weak regulatory oversight.
Below are some of the most common governance problems that have been observed in major corporate collapses.
1. Lack of Transparency and Financial Misreporting
• Companies often manipulate financial statements to show inflated profits or hide losses.
• Example: Satyam Scam (India, 2009) – Falsified accounts overstating profits by ₹7,000 crores.
• Impact: Misleads investors, inflates stock prices, and leads to loss of investor confidence.
2. Weak Board Oversight and Lack of Independence
• Boards often fail to question or challenge management decisions.
• Lack of independent directors results in biased decision-making.
• Example: Enron (USA, 2001) – Board members failed to monitor the fraudulent off-balance-sheet
transactions.
• Impact: Management abuses power, leading to financial mismanagement and fraud.
3. Conflict of Interest and Insider Trading
• Promoters and executives may use their position for personal financial gain.
• Unethical practices such as insider trading and preferential treatment to related parties.
• Example: PNB Scam (India, 2018) – Nirav Modi obtained fraudulent loans using fake guarantees.
• Impact: Losses for public institutions and investors, leading to regulatory scrutiny.
4. Poor Risk Management and Excessive Leverage
• Companies often take high-risk investments without proper risk assessment.
• Example: Lehman Brothers (USA, 2008) – Engaged in risky mortgage-backed securities, leading to the
financial crisis.
• Impact: Leads to financial instability and collapse in crisis situations.

COMPILED BY: CHIRANJIBI BISOI, LECTURER, PRANANATH COLLEGE (AUTO.), KHORDHA

Sponsored By – BANIJYAM (AN INSTITUTE FOR COMMERCE), BHUBANESWAR. Mob-8599888110
 B.COM_CORE 13_AUIDITING AND CORPORATE GOVERNANCE_UNIT 3

5. Fraudulent Related Party Transactions (RPTs)

• Directors and executives may engage in unethical related-party transactions to divert funds.
• Example: IL&FS (India, 2018) – Financial mismanagement and lending to related entities without due
diligence.
• Impact: Creates financial instability and loss of trust in corporate governance.
6. Weak Internal Controls and Audit Failures
• Auditors fail to detect financial frauds due to negligence or corruption.
• Example: Wirecard (Germany, 2020) – Auditors failed to detect missing €1.9 billion from company
accounts.
• Impact: Delayed detection of fraud, resulting in massive financial losses.
7. Unethical Leadership and CEO Dominance
• CEOs may have excessive power, leading to authoritarian decision-making.
• Example: Yes Bank Crisis (India, 2020) – CEO Rana Kapoor sanctioned risky loans for personal benefit.
• Impact: Poor governance decisions and financial collapse.
8. Regulatory Non-Compliance and Legal Violations
• Companies may bypass regulations to gain an unfair advantage.
• Example: Volkswagen Emissions Scandal (Germany, 2015) – Manipulated emission tests to pass
regulatory checks.
• Impact: Legal penalties, reputational damage, and consumer trust loss.
9. Poor Shareholder Rights and Protection
• Companies fail to protect minority shareholders’ interests.
• Example: Toshiba (Japan, 2015) – Accounting fraud led to shareholder losses.
• Impact: Reduces investor confidence and stock market stability.
10. Lack of Corporate Social Responsibility (CSR) and Ethical Governance
• Companies may prioritize short-term profits over social and environmental responsibilities.
• Example: Bhopal Gas Tragedy (Union Carbide, India, 1984) – Lack of safety measures led to one of
the worst industrial disasters.
• Impact: Legal liabilities, reputational damage, and loss of consumer trust.
Conclusion
Corporate governance failures highlight the importance of strong oversight, transparency, ethical leadership, and
regulatory compliance. Addressing these common problems through effective governance reforms can help prevent
future corporate collapses.

CODES & STANDARDS ON CORPORATE GOVERNANCE

Corporate governance codes and standards establish best practices for companies to ensure transparency,
accountability, and ethical business conduct. These frameworks help protect stakeholder interests, enhance investor
confidence, and reduce corporate fraud.
1. International Codes & Standards on Corporate Governance
A. OECD Principles of Corporate Governance (1999, Revised 2015)
• Developed by the Organisation for Economic Co-operation and Development (OECD).
• Sets global benchmarks for corporate governance.
• Key principles:
o Protection of shareholder rights.
o Fair treatment of all stakeholders.
COMPILED BY: CHIRANJIBI BISOI, LECTURER, PRANANATH COLLEGE (AUTO.), KHORDHA
Sponsored By – BANIJYAM (AN INSTITUTE FOR COMMERCE), BHUBANESWAR. Mob-8599888110
 B.COM_CORE 13_AUIDITING AND CORPORATE GOVERNANCE_UNIT 3

o Transparency in financial disclosures.

o Effective board responsibilities and independence.
B. Sarbanes-Oxley Act (SOX), 2002 (USA)
• Enacted after the Enron & WorldCom scandals.
• Strengthened financial reporting and internal controls.
• Key provisions:
o CEO & CFO certification of financial statements.
o Establishment of independent audit committees.
o Protection for whistleblowers.

C. UK Corporate Governance Code (1992, Revised 2018)

• Based on the Cadbury Report (1992).
• Applies to publicly listed companies in the UK.
• Key principles:
o Separation of CEO & Chairman roles.
o Board independence with non-executive directors.
o Strong risk management & internal controls.

D. Dodd-Frank Act, 2010 (USA)

• Introduced after the 2008 Global Financial Crisis.
• Focuses on financial stability & executive accountability.
• Key aspects:
o Increased regulations for banks & financial institutions.
o Limits on executive compensation.
o Improved risk management mechanisms.

E. Basel Corporate Governance Principles (Banking Sector)

• Issued by the Bank for International Settlements (BIS).
• Strengthens governance in financial institutions.
• Focus on:
o Risk management in banking.
o Board & senior management accountability.
o Stronger internal controls and audits.

F. G20/OECD Corporate Governance Principles (2015)

• A globally recognized standard for corporate governance.
• Focuses on:
o Shareholder rights & transparency.
o Institutional investor responsibilities.
o Fair & efficient capital markets.

2. Corporate Governance Codes in India

A. Companies Act, 2013
• The primary legal framework for corporate governance in India.
• Key provisions:
o Mandatory appointment of independent directors.
o Establishment of audit, nomination & remuneration committees.
o Corporate Social Responsibility (CSR) obligations.
o Whistleblower mechanism to report corporate fraud.

COMPILED BY: CHIRANJIBI BISOI, LECTURER, PRANANATH COLLEGE (AUTO.), KHORDHA

Sponsored By – BANIJYAM (AN INSTITUTE FOR COMMERCE), BHUBANESWAR. Mob-8599888110
 B.COM_CORE 13_AUIDITING AND CORPORATE GOVERNANCE_UNIT 3

B. SEBI (LODR) Regulations, 2015

• Issued by Securities and Exchange Board of India (SEBI).
• Applies to listed companies in India.
• Key guidelines:
o Board composition & independence norms.
o Disclosure of related-party transactions.
o Enhanced risk management & internal control requirements.

C. Kotak Committee Report (2017)

• Suggested reforms to improve corporate governance in India.
• Major recommendations:
o At least 50% independent directors on the board.
o Separation of CEO & Chairman roles.
o Enhanced disclosures on financial transactions.

D. National Guidelines on Responsible Business Conduct (NGRBC), 2019

• Developed by Ministry of Corporate Affairs (MCA).
• Encourages companies to follow ethical & sustainable business practices.
• Covers:
o Environmental, Social & Governance (ESG) factors.
o Stakeholder engagement and corporate responsibility.

E. Indian Banks’ Association (IBA) Corporate Governance Guidelines

• Governance framework for Indian banks & financial institutions.
• Emphasizes:
o Risk management & internal controls.
o Ethical banking practices.
o Strengthening board oversight.

3. Sector-Specific Governance Codes

Code/Standard Sector Key Focus

OECD Principles General Transparency & shareholder rights
Sarbanes-Oxley Act (SOX) Corporate Financial disclosures & internal controls
Dodd-Frank Act Financial Risk management & executive accountability
Basel Principles Banking Banking risk governance
SEBI LODR Regulations Stock Market Listed company disclosures & board independence
Kotak Committee Recommendations Corporate Board reforms & transparency

Conclusion
Corporate governance codes and standards play a vital role in ensuring ethical business conduct, transparency,
and investor protection. Strengthening corporate governance frameworks worldwide helps prevent fraud, enhances
financial stability, and builds long-term stakeholder trust.

COMPILED BY: CHIRANJIBI BISOI, LECTURER, PRANANATH COLLEGE (AUTO.), KHORDHA

Sponsored By – BANIJYAM (AN INSTITUTE FOR COMMERCE), BHUBANESWAR. Mob-8599888110
 B.COM_CORE 13_AUIDITING AND CORPORATE GOVERNANCE_UNIT 4

CORPORATE SOCIAL RESPONSIBILITY (CSR)

Corporate Social Responsibility (CSR) refers to a company's commitment to operating in an economically, socially,
and environmentally sustainable manner while balancing the interests of various stakeholders, including employees,
customers, investors, communities, and the environment.
Key Aspects of CSR:
1. Economic Responsibility – Ensuring profitability while maintaining ethical business practices.
2. Legal Responsibility – Complying with laws and regulations.
3. Ethical Responsibility – Conducting business with fairness, integrity, and transparency.
4. Philanthropic Responsibility – Contributing to social causes, such as education, healthcare, and
community development.
5. Environmental Responsibility – Reducing the carbon footprint, sustainable resource usage, and
promoting eco-friendly practices.

STRATEGIC PLANNING AND CORPORATE SOCIAL RESPONSIBILITY (CSR)

Strategic Planning and Corporate Social Responsibility (CSR) are interconnected, as businesses integrate social,
environmental, and ethical concerns into their long-term goals and decision-making processes. A well-aligned CSR
strategy can enhance a company's reputation, stakeholder trust, and long-term sustainability.
1. Integrating CSR into Strategic Planning: Companies incorporate CSR into their strategic planning by aligning
their business objectives with social and environmental responsibilities. This includes:
a) Mission, Vision, and Values
• Defining CSR in the company’s core mission and vision.
• Establishing ethical business practices and sustainability as key values.
b) Stakeholder Engagement
• Identifying key stakeholders (employees, customers, investors, suppliers, communities, and
governments).
• Addressing stakeholder expectations and societal needs through CSR initiatives.
c) CSR as a Competitive Advantage
• Using CSR to differentiate from competitors (e.g., sustainable products, fair trade policies).
• Enhancing brand loyalty through ethical and responsible business practices.
d) Resource Allocation and Implementation
• Allocating financial, human, and technological resources for CSR initiatives.
• Integrating CSR into business operations, supply chains, and corporate culture.
2. CSR Strategies in Business Operations: CSR should be embedded across different business functions:
a) Environmental Sustainability
• Reducing carbon footprint, waste management, and promoting renewable energy.
• Implementing sustainable supply chain management.
b) Ethical Labor Practices
• Ensuring fair wages, diversity, equal opportunity, and employee well-being.
• Encouraging employee participation in social initiatives.
c) Community Engagement & Philanthropy
• Supporting education, healthcare, and skill development programs.
• Partnering with NGOs and government agencies for social impact.
d) Governance and Compliance
• Following ethical governance practices and regulatory compliance.
• Establishing CSR policies in alignment with legal requirements (e.g., Companies Act 2013 in India).
COMPILED BY: CHIRANJIBI BISOI, LECTURER, PRANANATH COLLEGE (AUTO.), KHORDHA
Sponsored By – BANIJYAM (AN INSTITUTE FOR COMMERCE), BHUBANESWAR. Mob-8599888110
 B.COM_CORE 13_AUIDITING AND CORPORATE GOVERNANCE_UNIT 4

3. Benefits of CSR in Strategic Planning

• Enhances Corporate Reputation – Builds trust among stakeholders.

• Improves Financial Performance – Companies with strong CSR policies often achieve higher profits.
• Attracts and Retains Talent – Employees prefer working for socially responsible organizations.
• Strengthens Customer Loyalty – Ethical business practices attract conscious consumers.
• Reduces Business Risks – Compliance with legal and environmental regulations mitigates risks.
Conclusion
Strategic planning ensures that CSR is not just a one-time philanthropic activity but an integral part of business
growth. By embedding CSR into core strategies, companies can create long-term value for both society and their
business.
CORPORATE PHILANTHROPY: AN OVERVIEW
Corporate Philanthropy refers to a company's voluntary efforts to contribute to social, environmental, and
economic causes through financial donations, community engagement, and other charitable initiatives. It is a key
aspect of Corporate Social Responsibility (CSR), focusing on giving back to society beyond business operations.
1. Forms of Corporate Philanthropy: Companies engage in philanthropy through various means, including:
a) Direct Financial Contributions

• Donations to NGOs, charities, educational institutions, and healthcare initiatives.

• Funding disaster relief efforts and social welfare programs.
b) Employee Volunteerism & Giving Programs

• Encouraging employees to participate in community service.

• Matching employee donations to charitable organizations.
c) In-Kind Donations

• Donating products, services, or expertise to non-profits.

• Providing free educational resources, medical supplies, or technology.
d) Corporate Foundations

• Establishing a foundation dedicated to social causes (e.g., Tata Trusts, Infosys Foundation).
• Long-term funding for healthcare, education, and rural development.
e) Cause-Related Marketing (CRM)

• Partnering with social causes where a percentage of sales goes to charity (e.g., TOMS’ One for One shoe
program).
• Running campaigns to raise awareness and funds for social issues.
2. Benefits of Corporate Philanthropy
For Businesses:

• Enhances Brand Reputation – Builds goodwill and strengthens customer trust.

• Improves Employee Engagement – Employees feel more motivated working for a socially responsible
company.
• Attracts Investors – Investors prefer businesses with strong ESG (Environmental, Social, Governance)
policies.
• Strengthens Community Relations – Positive relationships with local communities lead to better business
opportunities.
COMPILED BY: CHIRANJIBI BISOI, LECTURER, PRANANATH COLLEGE (AUTO.), KHORDHA
Sponsored By – BANIJYAM (AN INSTITUTE FOR COMMERCE), BHUBANESWAR. Mob-8599888110
 B.COM_CORE 13_AUIDITING AND CORPORATE GOVERNANCE_UNIT 4

For Society:

• Supports Underserved Communities – Improves access to education, healthcare, and basic needs.
• Promotes Economic Growth – Investments in skill development and entrepreneurship help communities
prosper.
• Addresses Social Issues – Contributes to sustainability, equality, and social justice.
3. Corporate Philanthropy vs. CSR
While corporate philanthropy is a part of CSR, it focuses primarily on charitable giving, whereas CSR is broader,
covering sustainability, ethics, and responsible business practices.

Aspect Corporate Philanthropy Corporate Social Responsibility (CSR)

Voluntary charitable donations and

Definition Ethical and sustainable business practices
initiatives

Environment, governance, employee well-being,

Scope Donations, sponsorships, volunteerism
philanthropy

Impact Short-term social benefits Long-term business and social impact

4. Examples of Corporate Philanthropy

• Tata Group – Tata Trusts funds healthcare, education, and rural development.
• Infosys Foundation – Supports literacy, public health, and disaster relief.
• Google.org – Funds global education, technology for social good, and climate change solutions.
• Microsoft Philanthropies – Provides free software, digital skills training, and humanitarian aid.
Conclusion
Corporate philanthropy is a vital way for businesses to contribute to societal well-being. While it enhances a
company’s reputation, it also plays a crucial role in addressing global challenges and fostering sustainable
development.

COMPILED BY: CHIRANJIBI BISOI, LECTURER, PRANANATH COLLEGE (AUTO.), KHORDHA

Sponsored By – BANIJYAM (AN INSTITUTE FOR COMMERCE), BHUBANESWAR. Mob-8599888110
 B.COM_CORE 13_AUIDITING AND CORPORATE GOVERNANCE_UNIT 4

CSR VS. CR, CSR VS. CORPORATE SUSTAINABILITY, CSR VS. BUSINESS ETHICS, CSR VS.
CORPORATE GOVERNANCE
Corporate Social Responsibility (CSR) is often compared with Corporate Responsibility (CR), Corporate
Sustainability, Business Ethics, and Corporate Governance. While they are interconnected, each has a distinct
meaning and focus.

1. CSR vs. Corporate Responsibility (CR)

• CSR (Corporate Social Responsibility) refers to a company’s voluntary initiatives to contribute to society,
the environment, and ethical business practices.
• CR (Corporate Responsibility) is a broader term that includes CSR but also focuses on corporate
governance, ethics, and financial responsibility.

Aspect CSR CR

Social, environmental, and ethical Includes CSR, governance, risk management, and
Scope
initiatives. compliance.

Voluntary actions benefiting Overall responsibility in decision-making and business

Focus
stakeholders. practices.

A company donating to education

Example A company ensuring compliance with ethical labor laws.
programs.

Key Difference: CSR is a subset of CR, focusing on social and environmental aspects, while CR covers all
aspects of corporate responsibility, including governance and ethics.

2. CSR vs. Corporate Sustainability

• CSR is about businesses giving back to society through philanthropy and ethical operations.
• Corporate Sustainability focuses on long-term business growth while considering environmental, social,
and economic factors.

Aspect CSR Corporate Sustainability

Voluntary activities benefiting A strategy for long-term environmental, social, and

Definition
society. economic stability.

Reactive – Companies give back to Proactive – Sustainability is built into business

Approach
society. operations.

Timeframe Short- to medium-term impact. Long-term business viability.

A company planting trees as a CSR A company using 100% renewable energy to ensure
Example
initiative. sustainability.

Key Difference: CSR is about responsibility and giving back, while corporate sustainability is about
embedding sustainability in business models for long-term growth.

COMPILED BY: CHIRANJIBI BISOI, LECTURER, PRANANATH COLLEGE (AUTO.), KHORDHA

Sponsored By – BANIJYAM (AN INSTITUTE FOR COMMERCE), BHUBANESWAR. Mob-8599888110
 B.COM_CORE 13_AUIDITING AND CORPORATE GOVERNANCE_UNIT 4

3. CSR vs. Business Ethics

• CSR refers to how companies contribute to social and environmental causes.

• Business Ethics refers to the moral principles that guide corporate decision-making.

Aspect CSR Business Ethics

Definition Voluntary actions benefiting society. Moral principles guiding corporate behavior.

Internal decision-making, honesty, integrity, and

Scope Social and environmental responsibility.
fairness.

Enhancing social impact and corporate

Objective Ensuring ethical conduct in business.
reputation.

Example A company donating to an NGO. A company refusing to engage in bribery.

Key Difference: CSR focuses on external social responsibility, while business ethics focuses on internal
corporate behavior and moral conduct.

4. CSR vs. Corporate Governance

• CSR is about a company’s responsibility to society.

• Corporate Governance focuses on how a company is controlled and managed to ensure accountability,
fairness, and transparency.

Aspect CSR Corporate Governance

Voluntary efforts to improve social and Systems, policies, and procedures that guide
Definition
environmental well-being. corporate leadership and accountability.

Focus Society and stakeholders. Shareholders, leadership, and compliance.

Ensuring transparency, accountability, and ethical

Objective Enhancing social impact and sustainability.
business practices.

A company running rural education A company having an independent board for ethical
Example
programs. decision-making.

Key Difference: CSR focuses on a company’s external impact on society, while corporate governance ensures
internal accountability and leadership integrity.
Conclusion

• CSR vs. CR – CSR is a part of CR, which includes governance, ethics, and risk management
• CSR vs. Corporate Sustainability – CSR is about responsibility; sustainability is about long-term business
strategy.
• CSR vs. Business Ethics – CSR is about external social impact; business ethics is about internal corporate
behavior.
• CSR vs. Corporate Governance – CSR focuses on societal contributions; corporate governance ensures
leadership accountability.

COMPILED BY: CHIRANJIBI BISOI, LECTURER, PRANANATH COLLEGE (AUTO.), KHORDHA

Sponsored By – BANIJYAM (AN INSTITUTE FOR COMMERCE), BHUBANESWAR. Mob-8599888110
 B.COM_CORE 13_AUIDITING AND CORPORATE GOVERNANCE_UNIT 4

ENVIRONMENTAL ASPECT OF CSR

The environmental aspect of Corporate Social Responsibility (CSR) focuses on how businesses can operate
sustainably while minimizing their negative impact on the environment. Companies integrate eco-friendly practices
into their operations to address global challenges like climate change, pollution, and resource depletion.
1. Key Areas of Environmental CSR
a) Sustainable Resource Management

• Using renewable energy sources (solar, wind, hydro).

• Implementing energy-efficient processes in production.
• Reducing water consumption and promoting water conservation.
b) Waste Management & Recycling

• Reducing waste generation through better production techniques.

• Implementing recycling programs for paper, plastic, and e-waste.
• Encouraging customers to use sustainable packaging.
c) Carbon Footprint Reduction

• Lowering greenhouse gas (GHG) emissions.

• Investing in carbon offset programs like reforestation.
• Using electric or hybrid vehicles in logistics and operations.
d) Pollution Control

• Reducing air, water, and soil pollution from industrial activities.

• Treating wastewater before discharging it into the environment.
• Implementing green manufacturing techniques.
e) Biodiversity Conservation

• Protecting forests and wildlife by following sustainable sourcing practices.

• Partnering with environmental organizations for conservation projects.
• Restoring degraded ecosystems through tree plantation drives.
2. Benefits of Environmental CSR

• Regulatory Compliance – Helps businesses meet environmental laws and sustainability regulations.
• Cost Savings – Energy-efficient processes and waste reduction lower operational costs.
• Brand Reputation – Consumers prefer eco-friendly brands.
• Risk Mitigation – Reduces legal and reputational risks associated with environmental damage.
• Long-term Business Sustainability – Ensures resources are available for future operations.
3. Examples of Companies Practicing Environmental CSR

• Tesla – Focuses on clean energy with electric vehicles and solar power solutions.
• IKEA – Uses sustainable materials and aims for 100% renewable energy.
• Unilever – Committed to reducing plastic waste and carbon emissions.
• Google – Runs carbon-neutral data centers and invests in renewable energy projects.
Conclusion
The environmental aspect of CSR ensures that businesses operate responsibly, protecting the planet while
maintaining profitability. By adopting sustainable practices, companies not only comply with regulations but also
contribute to global environmental well-being.

COMPILED BY: CHIRANJIBI BISOI, LECTURER, PRANANATH COLLEGE (AUTO.), KHORDHA

Sponsored By – BANIJYAM (AN INSTITUTE FOR COMMERCE), BHUBANESWAR. Mob-8599888110
 B.COM_CORE 13_AUIDITING AND CORPORATE GOVERNANCE_UNIT 4

CSR PROVISIONS UNDER THE COMPANIES ACT, 2013 (INDIA)

The Companies Act, 2013 introduced a legal framework for Corporate Social Responsibility (CSR) in India,
making it mandatory for certain companies to contribute to social and environmental causes. Section 135 of the Act
governs CSR activities, specifying eligibility criteria, compliance requirements, and penalties for non-compliance.

1. Applicability of CSR (Section 135(1))

As per the Companies Act, 2013, CSR applies to companies that meet any one of the following criteria in a financial
year:

✔ Net Worth ≥ ₹500 crore OR

✔ Turnover ≥ ₹1000 crore OR
✔ Net Profit ≥ ₹5 crore

This applies to private, public, and foreign companies operating in India.

2. CSR Spending Requirement (Section 135(5))

Eligible companies must spend at least 2% of their average net profit (from the last 3 financial years) on CSR
activities.

• If a company fails to spend the required amount, it must provide reasons in its Board Report.
• Unspent CSR funds (except for ongoing projects) must be transferred to a government-specified fund
within 6 months.

3. CSR Committee (Section 135(2))

Eligible companies must form a CSR Committee, consisting of:
• Three or more directors, with at least one independent director (not required for private companies with
only two directors).
• The committee is responsible for:
Drafting the CSR Policy
Approving CSR projects and budget
Monitoring CSR implementation

4. Approved CSR Activities (Schedule VII of the Act)

CSR funds must be used for projects related to:

✔ Eradicating hunger & poverty (food distribution programs).

✔ Education & skill development (scholarships, vocational training).
✔ Health & sanitation (hospitals, clean drinking water).
✔ Gender equality & women empowerment (support for self-help groups).
✔ Environmental sustainability (afforestation, renewable energy).
✔ Rural development projects (infrastructure, electrification).
✔ Promotion of sports & culture (funding training programs).
✔ Disaster relief & COVID-19 support (medical aid, oxygen supplies).
COMPILED BY: CHIRANJIBI BISOI, LECTURER, PRANANATH COLLEGE (AUTO.), KHORDHA
Sponsored By – BANIJYAM (AN INSTITUTE FOR COMMERCE), BHUBANESWAR. Mob-8599888110
 B.COM_CORE 13_AUIDITING AND CORPORATE GOVERNANCE_UNIT 4

CSR funds cannot be used for:

Employee welfare projects.
Political party donations.
Activities benefiting only company employees.

5. Recent Amendments & Key Updates

Companies (CSR Policy) Amendment Rules, 2021:

• Mandatory impact assessment for CSR projects exceeding ₹1 crore.

• Unspent CSR funds must be transferred to a separate CSR account for future spending.
• Companies can engage in CSR through implementing agencies (registered NGOs, trusts, societies).

Penalties for Non-Compliance:

• If a company fails to spend the required CSR amount, it may face fines:
o Company Fine: ₹50,000 to ₹25 lakh
o Officer-in-Default Fine: Up to ₹2 lakh

6. Examples of CSR in Action

• ✔ Tata Group – Education & rural development.

✔ Infosys Foundation – Digital literacy & healthcare.
✔ Reliance Foundation – Women empowerment & sports.
✔ ITC Limited – Sustainable agriculture & afforestation.

Conclusion
The Companies Act, 2013 made CSR a legal obligation for large businesses, ensuring they contribute to India’s
social and environmental development. Companies must carefully plan their CSR initiatives to comply with
regulations while maximizing positive impact.

CSR COMMITTEES UNDER THE COMPANIES ACT, 2013

Under Section 135 of the Companies Act, 2013, companies meeting the CSR criteria must form a CSR Committee
to oversee the planning, execution, and monitoring of CSR activities.

1. Composition of the CSR Committee

The CSR Committee must include:

• Public & Private Companies – Minimum three directors, with at least one independent director (if
applicable).
• Private Companies (without independent directors) – At least two directors.
• Foreign Companies – At least two persons, including one resident in India.

COMPILED BY: CHIRANJIBI BISOI, LECTURER, PRANANATH COLLEGE (AUTO.), KHORDHA

Sponsored By – BANIJYAM (AN INSTITUTE FOR COMMERCE), BHUBANESWAR. Mob-8599888110
 B.COM_CORE 13_AUIDITING AND CORPORATE GOVERNANCE_UNIT 4

2. Responsibilities of the CSR Committee

The CSR Committee plays a crucial role in ensuring compliance with CSR laws and effective implementation of
CSR initiatives.
Key Functions:

Formulating the CSR Policy – Identifying focus areas (education, healthcare, environment, etc.).
Recommending CSR Projects & Budgets – Approving funds and project execution plans.
Monitoring CSR Activities – Ensuring compliance and measuring impact.
Ensuring Compliance with Legal Provisions – Adhering to the Companies Act, 2013 and amendments.
Reporting CSR Activities – Submitting annual CSR reports in the company’s Board Report.

3. Recent Amendments & CSR Committee Exemptions

CSR Committee Not Required If:

• The company's CSR spending requirement is less than ₹50 lakh annually.
• In such cases, the Board of Directors takes over the CSR responsibilities.

Companies (CSR Policy) Amendment Rules, 2021:

• Mandatory impact assessment for projects exceeding ₹1 crore.

• Unspent CSR funds to be transferred to a separate CSR account or a government fund.

4. Importance of the CSR Committee

Ensures effective governance and legal compliance.

Helps in strategic planning of CSR initiatives for maximum social impact.
Prevents misuse or misallocation of CSR funds.
Enhances corporate reputation and stakeholder trust.

Conclusion
The CSR Committee ensures that companies fulfill their social responsibilities effectively, aligning business goals
with sustainable development. A well-functioning CSR Committee leads to impactful corporate philanthropy and
long-term benefits for both the company and society.
Would you like a sample CSR Committee report or a CSR policy framework for better understanding?

COMPILED BY: CHIRANJIBI BISOI, LECTURER, PRANANATH COLLEGE (AUTO.), KHORDHA

Sponsored By – BANIJYAM (AN INSTITUTE FOR COMMERCE), BHUBANESWAR. Mob-8599888110