Chapter 9 of 10

90%

CMA Intermediate Auditing★ Chapter 8 of ICAI Paper 5 — roughly 10 marks. Applies every earlier chapter's framework to specific entity types, each with its own governing law and its own particular risk emphasis.

Audit of Different Types of Entities and Banks

How the audit framework built across every earlier chapter is applied to entities that are not ordinary companies — statutory audits under the Companies Act, non-corporate audits with no single governing statute, and bank audit's distinctive advances and NPA classification.

⏱ 28 min readModerate difficulty✓ Free · exam-pattern aligned

Timed practiceMCQs from this chapter with instant scoring

FlashcardsFormulas & traps on spaced repetition

CMA Intermediate PYQsSolved previous-year questions

By the end of this chapter you'll be able to…

1State what a company auditor's report under section 143 must additionally address beyond SA 700's requirements
2Explain the purpose and scope of CARO in outline
3Explain why non-corporate entities lack a comprehensive governing audit statute and how this shifts the source of the auditor's duties
4State the distinctive audit emphasis for trusts, co-operative societies and local bodies
5State the 90-day NPA threshold and apply it to classify an advance
6Distinguish sub-standard, doubtful and loss assets within the NPA category
7Explain why income is not recognised on an accrual basis for an NPA
8Explain why provisioning percentages increase with the duration and severity of non-performance
9State the auditor's specific bank-audit procedures concentrated around advances classification

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Why this chapter matters in CMA Intermediate

Every entity type in this chapter is approached the same way: identify what makes this entity's financial statements and risk profile distinctive, and adapt the general audit framework built across every earlier chapter to that distinctiveness. A bank's distinctiveness is concentrated almost entirely in one number — the 90-day threshold that separates a standard asset from a non-performing one — because income recognition, provisioning and the whole shape of bank audit procedures all hinge on which side of that line an advance falls. A non-corporate entity's distinctiveness is the absence of a comprehensive governing statute, which shifts the source of the auditor's authority from law to the engagement letter, a genuinely different foundation candidates must recognise rather than assume every audit rests on the same statutory footing a company audit does.

Before you start — revise these

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The Audit Report

Section 143's additional statutory reporting requirements sit on top of the SA 700 report structure developed there.

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CA Inter Corporate and Other Laws: Accounts of Companies, Audit and Auditors

Auditor appointment, removal and disqualification under sections 139-147 are covered there and assumed here without repetition.

Audit of Different Types of Entities and Banks

Weightage: Chapter 8 of ICAI's Paper 5 syllabus, roughly 10 marks. Applies every earlier chapter's framework to specific entity types, each with its own governing law and its own particular risk emphasis.

Company audit under the Companies Act, 2013

Appointment, removal, qualification, disqualification of auditors — this material is developed fully in Paper 2's Corporate and Other Laws chapter on accounts and audit, and this chapter builds on it rather than repeating it: the auditor's rights and duties under sections 143–147 (right of access to books and vouchers, right to receive information and explanations, duty to report on specified matters, the auditor's report contents required by the Act itself, over and above SA 700's own requirements).

The company auditor's report under section 143 must additionally state matters including: whether proper books of account have been kept; whether the balance sheet and profit and loss account are in agreement with the books; whether, in the auditor's opinion, the financial statements comply with the applicable Accounting Standards; whether any director is disqualified from being appointed a director; qualifications, reservations or adverse remarks relating to the maintenance of accounts; and, for specified companies, a statement on the adequacy and operating effectiveness of internal financial controls with reference to financial statements — this last item connects directly back to the internal control chapter, now examined specifically as a statutory reporting requirement rather than merely an audit planning input.

CARO (Companies Auditor's Report Order) requires the auditor to include a statement on specified additional matters (fixed asset records, inventory verification, compliance with deposit provisions, and others) for companies falling within its scope, with specified exemptions (for instance, for certain small, private, or specified categories of company) — the exact scope and exemptions are examinable in outline rather than in exhaustive statutory detail at this level.

Audit of non-corporate entities

Where an entity is not a company, there is generally no single, comprehensive statute governing its audit the way the Companies Act governs a company — the auditor's rights and duties instead derive substantially from the terms of the specific engagement, together with whatever specific statute (if any) applies to that entity type. This is the conceptual point examined most: candidates must recognise that the source of an auditor's authority and duty shifts depending on entity type, from a comprehensive statute (company) to an engagement letter plus a narrower, entity-specific law (most others).

Sole proprietorship and partnership — no statutory audit requirement generally exists (subject to tax-law-triggered audit requirements under the Income-tax Act's specified turnover thresholds, developed in Paper 3); where an audit is performed, the auditor's rights and duties are governed entirely by the engagement letter agreed with the proprietor/partners, since no overarching audit statute applies.

Trusts — audited under the terms of the trust deed and applicable specific legislation (for a charitable or religious trust, relevant state Public Trusts Acts, or Income-tax Act provisions where exemption is claimed); the auditor verifies that trust funds have been applied in accordance with the objects of the trust as stated in the trust deed, which is the trust audit's most distinctive emphasis.

Co-operative societies — audited under the relevant Co-operative Societies Act, which prescribes specific matters the auditor must additionally report on, often including verification that the society's transactions are within the scope of its bye-laws and that statutory reserve requirements are met.

Local bodies — audited under specific municipal or local government legislation, generally with a strong emphasis on compliance with budgetary and statutory spending provisions, given the public-fund nature of the entity.

Bank audit

Banks are singled out for a dedicated section precisely because a bank's balance sheet is structured fundamentally differently from an ordinary trading or manufacturing company's, and this drives correspondingly different audit emphasis.

Advances are the largest and most significant asset for most banks (the equivalent of receivables/inventory combined, in terms of audit significance), and their classification is governed by RBI's prudential norms on Income Recognition and Asset Classification (IRAC).

Classification of advances:

Standard assets — advances that do not disclose any problem and do not carry more than normal risk attached to the business.

Non-performing assets (NPAs) — an advance where interest and/or instalment of principal remains overdue for a period of more than 90 days (the specific figure is examinable and precisely tested) — this single threshold is the hinge of the entire bank audit chapter, because everything about income recognition and provisioning for advances follows from whether an account has crossed it.

Within NPAs, further sub-classification: sub-standard assets (an asset that has remained NPA for a period less than or equal to 12 months); doubtful assets (an asset that has remained in the sub-standard category for a period of 12 months); loss assets (an asset where loss has been identified but the amount has not been written off wholly, considered uncollectible).

Income recognition on NPAs — once an account is classified NPA, income (interest) is not recognised on an accrual basis; it is recognised only when actually received — this is the single most consequential audit consequence of the 90-day crossing, since a bank continuing to accrue interest income on an account that has, in substance, stopped performing would overstate both income and the corresponding asset.

Provisioning — banks are required to make specified minimum provisions against advances according to their classification (higher provisioning percentages for doubtful and loss assets than for sub-standard, and progressively higher again the longer an asset has remained doubtful), reflecting the increasing likelihood of ultimate loss the longer non-performance persists.

The auditor's specific bank-audit procedures consequently concentrate heavily on: testing the 90-day ageing of advances to confirm correct classification; verifying that income has not been accrued on accounts that have crossed the NPA threshold; and testing the adequacy of provisions against the classification actually determined, rather than against whatever classification and provisioning the bank's own system may have generated, since a bank's own systems can themselves be a source of error or, in some documented cases historically, of deliberate evergreening (artificially keeping an account classified as standard by disguising non-payment) — connecting directly back to the professional scepticism principle from the opening chapter of this subject.

Other distinctive features of bank audit: branch audit structure (many banks are audited through a combination of a central statutory audit and separate branch-level audits, particularly for larger branches, with the results consolidated); and specific verification of contingent liabilities distinctive to banking (letters of credit, guarantees issued, bills for collection), which for a bank are typically far larger in scale relative to the balance sheet than for an ordinary company.

The unifying lesson

Every entity type in this chapter is approached the same underlying way: identify what makes this entity's financial statements and risk profile distinctive, and adapt the general audit framework (risk assessment, evidence, materiality, all developed in earlier chapters) to that specific distinctiveness — a bank's distinctiveness is its advances and their classification; a trust's is verifying application of funds against its objects; a non-corporate entity's is the absence of a comprehensive governing statute, shifting the source of the auditor's authority to the engagement letter.

Key formulas & results

Everything to memorise for the exam hall, in one card. Screenshot this for revision.

Section 143 report additions: books properly kept, statements agree with books, AS compliance, director disqualification, qualifications/reservations, internal financial controls statement (specified companies)

NPA threshold: interest and/or principal instalment overdue for MORE THAN 90 days

Sub-standard asset: NPA for 12 months or less

Doubtful asset: remained sub-standard for 12 months

Loss asset: loss identified but not yet wholly written off, considered uncollectible

NPA income recognition: interest recognised ONLY on actual receipt, never on accrual, once the 90-day threshold is crossed

Provisioning percentages rise with classification severity and duration in doubtful status

CMA Intermediate test series

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Audit of Different Types of Entities and Banks shows up in every CMA Intermediate paper — sit a timed one and find out where you actually stand.

~6Marks

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Traps CMA Intermediate sets — and how to dodge them

These are the exact option-traps and misreads that cost marks under negative marking.

WATCH OUT

✗ Assuming every entity type has a comprehensive governing audit statute the way a company does under the Companies Act

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WATCH OUT

✗ Treating a sole proprietorship or partnership audit as governed by statute rather than by the engagement letter

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WATCH OUT

✗ Confusing the trust audit's distinctive emphasis (application of funds against the trust's objects) with an ordinary company audit's emphasis

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WATCH OUT

✗ Misstating the NPA threshold as 30, 60, or 180 days instead of more than 90 days

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WATCH OUT

✗ Confusing sub-standard (NPA for 12 months or less) with doubtful (remained sub-standard for 12 months) — the two definitions are sequential, not parallel

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WATCH OUT

✗ Believing interest can still be accrued on an NPA provided a provision is also made, when accrual stops entirely and recognition shifts to actual receipt only

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WATCH OUT

✗ Assuming provisioning percentages are flat regardless of classification, when they rise with severity and duration

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WATCH OUT

✗ Relying on the bank's own system-generated classification without independently testing the underlying 90-day ageing

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Exam-pattern practice

PYQ-style questions with full solutions. Work through them as a readiness check — mark yourself honestly and get your gap report at the end.

Readiness check

Are you exam-ready for Audit of Different Types of Entities and Banks?

15 problems from this chapter. Try each one, reveal the worked solution, mark yourself honestly — get your gap report at the end.

15 questions~11 min

5-minute revision

The whole chapter, distilled. Read this the night before the exam.

•Company audit: statute (Companies Act sections 143-147) plus SA 700 — section 143 adds specific statutory reporting requirements
•CARO adds further specified matters for companies within its scope, with exemptions for small/specified companies
•Non-corporate entities generally lack a comprehensive governing audit statute — the engagement letter becomes the primary source of the auditor's rights and duties
•Trust audit's distinctive emphasis: verifying application of funds against the trust deed's stated objects
•Co-operative societies and local bodies are governed by their own specific statutes with their own additional reporting matters
•NPA threshold: interest/principal overdue for MORE THAN 90 days
•Sub-standard: NPA for 12 months or less. Doubtful: remained sub-standard for 12 months. Loss: identified loss, not yet written off, uncollectible
•NPA income recognition: accrual STOPS; interest recognised only on actual receipt
•Provisioning rises with classification severity and duration, applying prudence to a progressively worsening probability of loss
•Bank audit procedures concentrate on testing 90-day ageing independently, verifying accrual has stopped, and testing provision adequacy — never simply relying on the bank's own system classification

CMA Intermediate question blueprint

How this topic is asked, tier by tier — so you can prep to the pattern.

Typical weightage: 10

Exam-hall strategy

Battle-tested tips from mentors and toppers for this topic under the sectional clock.

State which source of authority (comprehensive statute, or engagement letter plus narrower entity-specific law) governs the entity type in a question before describing the auditor's duties
Cite section 143 explicitly for company audit reporting questions, distinguishing its requirements from SA 700's own
For trust questions, lead with the application-of-funds-against-objects emphasis before any other point
Quote the 90-day NPA threshold precisely, and apply the sub-standard/doubtful/loss definitions sequentially rather than as three independent time bands
State explicitly that income recognition shifts to cash basis on NPA classification, and compute the specific reversal where a scenario requires it
Connect any bank-audit scepticism scenario back to the professional scepticism principle from the opening chapter of this subject

Beyond the exam

Where this skill shows up in the job you're competing for — and in life.

CARO compliance is a routine

CARO compliance is a routine, substantial part of every statutory company audit's reporting deliverable in India

The engagement letter for a non-corporate audit is a care…

The engagement letter for a non-corporate audit is a carefully negotiated, foundational document precisely because it is the sole source of the auditor's rights absent any governing statute

Bank NPA classification and provisioning is one of the mo…

Bank NPA classification and provisioning is one of the most closely regulator-scrutinised areas of Indian banking, with RBI conducting its own supervisory reviews specifically checking bank and auditor classification accuracy

Evergreening detection has been a major real-world focus …

Evergreening detection has been a major real-world focus of Indian banking regulation and enforcement following several high-profile cases where banks were found to have disguised the true extent of their non-performing assets

Where else this topic is tested

Prepare once, score in every exam that asks it.

CA Final Paper 3 — Advanced Auditing, Assurance and Professional Ethics, where bank audit and specialised entity audits are developed in far greater depth

CS Executive — Secretarial Audit, Compliance Management and Due Diligence

CMA Intermediate — Cost and Management Audit

RBI's own certification and departmental examinations, where IRAC norms are core content

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Questions aspirants ask

Pulled from the Q&A community and mentor sessions.

Because banks represent the largest, most systemically significant, and most heavily regulated category of financial entity a CA is likely to encounter early in practice, and the IRAC norms governing advances classification are a well-developed, specific, and heavily examined regulatory framework unique to banking that has no direct equivalent elsewhere; other financial institutions such as insurance companies or non-banking financial companies have their own distinctive regulatory frameworks that are typically covered in more depth at the Final level or in specialised study, while bank audit's advances classification framework is considered foundational enough, and common enough as a practical engagement a newly qualified CA might encounter, to be introduced at the Intermediate level.

The general 90-day principle is the foundational rule examined at this level, but in practice RBI's detailed guidelines do contain some variations and specific provisions for particular categories of facility, such as cash credit and overdraft accounts, agricultural advances with seasonal repayment patterns, and certain other specialised lending categories, each with its own precise trigger conditions consistent with the underlying 90-day principle but adapted to the particular repayment structure of that facility type. At the Intermediate level, the core, general 90-day rule and its application to a straightforward term loan or similar advance is the primary examinable content, with the specific variations for more specialised facility types generally reserved for more advanced study.

Not necessarily; the rigour of the audit depends on the terms agreed in the engagement letter and on the auditor's own professional standards, including the Standards on Auditing, which continue to apply to the conduct of the audit itself regardless of what kind of entity is being audited, since SA 200 and the whole body of Standards this paper covers are not confined to company audits. What differs is the source of the auditor's specific rights, such as rights of access to records and information, and the source of any additional, entity-specific reporting obligations, both of which come from statute for a company and from the engagement letter, supplemented by any entity-specific law that does apply, for most other entity types; the underlying quality and rigour of the audit work itself, properly conducted, need not differ at all based on this distinction.