Audit SA Chart by CA Sarishti Sethi

AUDITING STANDARDS, STATEMENTS AND GUIDANCE NOTES
Quality Control & Engagement Standard
Introduction ♦ In the simplest terms, auditing standards represent a codification of the best practices in the field
of auditing.
♦ Auditing Standards contain guidance for the professionals on how they should carry out their
professional engagements, enshrined as the basic principles and essential procedures to apply those
basic principles that relates to judgment or behaviour.
Auditing ♦ The auditing standards in India are formulated by the Auditing and Assurance Standards Board
Standard (AASB) of the Institute.
Setting ♦ The Standards formulated by the AASB are issued under the authority of the Council of the Institute
Process in and are mandatory in nature. This implies that while carrying out their attest functions, it will be the
India duty of the members of the Institute to comply with these Standards.
♦ If for any reason a member has not been able to perform an audit in accordance with the applicable
Standards; his report should draw attention to the material departures there from.
Procedures for Issuing SAs
AASB Identifies Project
Study group constituted
Draft submitted by study group
Draft sent to Chairman for approval
Draft hosted on AASB website for minimum 21 days
Draft considered at AASB meeting
Proposed Exposure Draft sent to Council members for minimum 10 days for comments.
Exposure Draft issued to members ; hosted on ICAI website for minimum 60 days
Comments received upto 10 days prior to AASB meeting & hosted on website .
Comments considered at AASB meeting & draft is finalized.
Proposed Standard placed before Council
Final Standard Issued
AUDIT SA CHART BY CA SARISHTI SETHI

MEMORY CRAFTERZ 9999214027
Objectives and Functions of AASB
Formulate Review the existing &

Revise, if necessary
Engagement Standards, Guidance General Technical
Statements on Auditing Notes Clarifications Guides, Practice Standards
Manuals, and Guidance
and Standards on Notes
Quality Control Studies and Statements
other papers on Auditing
Objectives  To review the existing and emerging auditing practices worldwide and identify areas in which
and Standards on Quality Control, Engagement Standards and Statements on Auditing need to be
Functions of developed.
AASB
 To formulate Engagement Standards, Statements on Auditing and Standards on Quality
Control so that these may be issued under the authority of the Council of the Institute.
 To review the existing Standards and Statements on Auditing to assess their relevance in the
changed conditions and to undertake their revision, if necessary.
 To develop Guidance Notes on issues arising out of any Standard, auditing issues pertaining to
any specific industry or on generic issues, so that those may be issued under the authority of the
Council of the Institute.
 To review the existing Guidance Notes to assess their relevance in the changed circumstances
and to undertake their revision, if necessary.
 To formulate General Clarifications, where necessary, on issues arising from Standards.
 To formulate and issue Technical Guides, Practice Manuals, Studies and other papers under its
own authority for guidance of professional accountants in the cases felt appropriate by the Board.
Engagement Standards formulated by the AASB are

issued under the authority of the Council of the Institute
Assurance Services Related Services
Audit & Review of Audit or Review of other Standards on

historical financial than historical Related
information financial information Services
(SRRs)
Standards Standards on Standards on
on Review Assurance
Auditing Engagements Engagements (SAEs)
(SAs) (SREs)
Revised ♦ The Auditing and Assurance Standards Board (AASB), as a top priority, has taken on the ambitious
Preface project of convergence with the International Standards issued by the International Auditing and
Assurance Standards Board.
♦ As a first step towards convergence, it had, after going through its rigorous due process, in July
2007 published the Revised Preface to Standards on Quality Control, Auditing, Review, Other
Assurance and Related Services, corresponding to its namesake issued by the IAASB in 2006.
♦ The Revised Preface, applicable from April 1,2008, has changed the face of the auditing literature,
introducing some more fundamental concepts to the existing ones.

Engagement Standards on Auditing (SAs) To be applied in the audit of historical financial information.
Standards Standards on Review
Engagements (SREs) To be applied in the review of historical financial information.
Standards on Assurance To be applied in assurance engagements, engagements dealing with
Engagements (SAEs) subject matter other than historical financial information.
To be applied to engagements involving application of agreed upon
Standards on Related procedures to information and other related services such as
Services (SRRs) compilation engagements.
♦ It also contains provisions for Standards, to be known as the Standards on Quality Control (SQCs), which would be
fundamental to all the services covered by the Engagement Standards.
Renumbering of Standards on Quality Control (SQC) 0-99
Standards Standards on Auditing (SA) 100-999
Standards on Review Engagements (SRE) 2000-2699
Standards on Assurance Engagements (SAE) 3000-3699
Related Services (SRS) 4000-4699
Classification of Introductory matters 100-199
SAs General Principles and Responsibilities 200-299
Risk Assessments and Response to Assessed Risk 300-499
Audit Evidence 500-599
Using work of Others 600-699
Audit conclusions and Reporting 700-799
Specialized Areas 800-899
The Council of the ICAI has issued following Quality Control and Engagement Standards
S.No No. of Title of the Standard Effective Date
Standard
1 SQC 1 Quality Control for Firms that Perform Audits and Reviews of Historical Financial April 1, 2009
Information, and Other Assurance and Related Services Engagements
2 SA 200 Overall Objectives of the Independent Auditor and the Conduct of an Audit in Accordance April 1, 2010
with Standards on Auditing
3 SA 210 Agreeing the Terms of Audit Engagements April 1, 2010
4 SA 220 Quality Control for an Audit of Financial Statements April 1, 2010
5 SA 230 Audit Documentation April 1, 2009
6 SA 240 The Auditor’s responsibilities Relating to Fraud in an Audit of Financial Statements April 1, 2009
7 SA 250 Consideration of Laws and Regulations in an Audit of Financial Statements April 1, 2009
8 SA 260 Communication with Those Charged With Governance April 1, 2017
9 SA 265 Communicating Deficiencies in Internal Control to Those Charged with Governance and April 1, 2010
Management
10 SA 299 Responsibility of Joint Auditors April 1, 1996
11 SA 300 Planning an Audit of Financial Statements April 1, 2008
12 SA 315 Identifying and Assessing the Risks of Material Misstatement through Understanding the April 1, 2008
Entity and its Environment
13 SA 320 Materiality in Planning and Performing an Audit April 1, 2010

14 SA 330 The Auditor’s Responses to Assessed Risks April 1, 2008
15 SA 402 Audit Considerations Relating to an Entity Using a Service Organization April 1, 2010
16 SA 450 Evaluation of Misstatements Identified During the Audits April 1, 2010
17 SA 500 Audit Evidence April 1, 2009
18 SA 501 Audit Evidence Selected Items - Specific Considerations For April 1, 2010
19 SA 505 External Confirmations April 1, 2010
20 SA 510 Initial Audit Engagements-Opening Balances April 1, 2010
21 SA 520 Analytical Procedures April 1, 2010
22 SA 530 Audit Sampling April 1, 2009
23 SA 540 Auditing Accounting Estimates, Including Fair Value Accounting Estimates, and Related April 1, 2009
24 SA 550 Disclosures
Related Parties April 1, 2010
25 SA 560 Subsequent Events April 1, 2009
26 SA 570 Going Concern April 1, 2017
27 SA 580 Written Representations April 1, 2009
28 SA 600 Using the Work of Another Auditor April 1, 2002
29 SA 610 Using the Work of Internal Auditors April 1, 2016
30 SA 620 Using the Work of an Auditor’s Expert April1, 2010
31 SA 700 Forming an Opinion and Reporting on Financial Statements April 1, 2017
32 SA 701 Communicating Key Audit Matters in the Independent Auditor’s Report April 1, 2017
33 SA 705 Modifications to the Opinion in the Independent Auditor’s Report April 1, 2017
34 SA 706 Emphasis of Matter Paragraphs and Other Matter Paragraphs in the Independent Auditor’s April 1, 2017
35 SA 710 Report
Comparative Information – Corresponding Figures and Comparative Financial Statements April 1, 2011
36 SA 720 The Auditor’s Responsibility in Relation to Other Information in Documents Containing April 1, 2010
Audited Financial Statements
37 SA 800 Special Considerations-Audits of Financial Statements Prepared in Accordance with Special April 1, 2011
Purpose Frameworks
38 SA 805 Special Considerations-Audits of Single Purpose Financial Statements and Specific April 1, 2011
Elements, Accounts or Items of a Financial Statement
39 SA 810 Engagements to Report on Summary Financial Statements April 1, 2011
40 SRE 2400 Engagements to Review Financial Statements April 1, 2016
41 SRE 2410 Review of Interim Financial Information Performed by the Independent Auditor of the April 1, 2010
42 SAE 3400 Entity Examination Information
The of Prospective Financial April 1, 2007
43 SAE 3402 Assurance Reports Organisation on Controls At a Service April 1, 2011
44 SAE 3420 Assurance Engagements to Report on the Compilation of Pro Forma Financial Information April 1, 2016
Included in a Prospectus
45 SRS 4400 Engagements to Perform Agreed Upon Procedures Regarding Financial Information April 1, 2004
46 SRS 4410 Engagements to Compile Financial Information April 1, 2016

Structure of SAs
Introduction
Section - I Objectives
Requirements Definitions
Structure section
of SAs Requirements - The Auditor "SHALL"
Section - II
Application & other Explanatory Material
Application Material
Introduction The 'Introduction' section deals the purpose and scope of the Standard, subject matter of the
Standard and effective date of the Standard.
Objectives The 'Objectives' section provides the reference in which the Requirements are elaborated in
the Standard.
The aim of the auditor is to achieve the Objectives as specified in all Standards of Auditing (SAs).
Definition 'Definitions' section deals with the meaning attributed to certain expressions for the purpose of
SAs. The aim is to assist the auditors to ensure consistent application of the Standards.
Requirements The fundamental principles of the Standard are contained in the Requirements section and
presented by use of "shall”
Application &  The ‘Application and Other Explanatory Material' contained in an SA is an integral part
other of the SA as it provides further explanation of, and guidance for carrying out, the
Explanatory requirements of an SA, along with the background information on the matters addressed
Material in the SA.
 It may include examples of procedures, some of which the auditor may judge to be
appropriate in the circumstances. Such guidance is, however, not intended to impose a
requirement
STATEMENTS AND GUIDANCE NOTES
Statements
Meaning - Issued with a view to Reporting Responsibility

securing compliance by members on
matters which in the opinion of the
Accounting Auditing
council of the institute are critical for
Matter Matter
the proper discharge of their
functions.
Complied Not Complied Not
Nature - Mandatory
Complied Complied
Examples - Statement on Reporting (Deviation) (Deviation)
u/s 227(1A) of the Companies Act,
1956. [Section 143(1) of Companies Ok Ok
Act, 2013] Disclosure Auditor report
in Audit should draw
Framework for the Preparation and Report attention to the
Presentation of Financial Statements. material departures

GUIDANCE NOTE
Meaning- Examples Reporting Responsibility

Designed to
provide guidance Accounting Matters - Auditing Matters- Accounting Auditing
to members on
Guidance Note on Guidance Note on Matters Matters
matters which
Accounting Treatment Independence of
may arise in the
for Excise Duty. Auditors.
course of their Examine whether Follow
professional work Guidance Note on Guidance Note on Guidance Note guidance note
and on which Accounting for Audit of Fixed followed or not except where
they may desire Depreciation in Assets. he is satisfied
assistance. Companies. Guidance Note on
Yes- If Not - View that the
Nature- Guidance Note on Audit u/s 44AB of circumstances circumstances
Ok
Compliance is Accounting Treatment the Income-tax of the case, a of the case, it
recommendatory for CENVAT. Act. disclosure in may not be
in nature Guidance Note on Guidance Note on his report is necessary to
Accounting for Audit of Abridged necessary do so
Corporate Dividend F.S.
Statements  Issued with a view to securing compliance by members on matters which in the opinion of the
council of the institute are critical for the proper discharge of their functions.
 Compliance is Mandatory in Nature
 Statement on Reporting u/s 227(1A) of the Companies Act, 1956. [Section
Examples 143(1) of Companies Act, 2013]
 Framework for the Preparation and Presentation of Financial Statements.
 To examine whether ‘Statements' relating to accounting matters are
complied with in the presentation of F.S.
 In the event of any deviation from such ‘Statements', to make adequate
disclosures in their audit reports so that the users of F.S. may be aware of
Reporting such deviations
Responsibilities  To ensure that the ‘Statements' relating to auditing matters, are followed in
the audit of financial information covered by their audit reports.
 If, for any reason, a member, has not been able to perform an audit in
accordance with such ‘Statements his report should draw attention to the
material departures there from.
Guidance Designed to provide guidance to members on matters which may arise in the course of their
Notes professional work and on which they may desire assistance.
♦ Compliance is recommendatory in nature
 Guidance Note on Accounting Treatment for Excise Duty.
 Guidance Note on Accounting for Depreciation in Companies.
 Guidance Note on Accounting Treatment for CENVAT.
Examples
 Guidance Note on Accounting for Corporate Dividend
Accounting

 Guidance Note on Independence of Auditors.
 Guidance Note on Audit of Fixed Assets.
Examples  Guidance Note on Audit u/s 44AB of the Income-tax Act.
Auditing  Guidance Note on Audit of Abridged Financial Statements.
 Examine whether the recommendations in a guidance note relating to an
accounting matter have been followed or not.
Duties of
Members  If the same have not been followed, consider whether keeping in view the
Accounting circumstances of the case, a disclosure in his report is necessary.
Duties of  Follow recommendations in a guidance note except where he is satisfied
Members that in the circumstances of the case, it may not be necessary to do so.
Auditing
Important Questions
1) Discuss the following: Standards collectively known as the Engagement Standards issued by
AASB under the authority of Council of ICAI.
2) What are the objectives and functions of Auditing and Assurance Standard Board (AASB) ?
3) Mention any ten title of Standards of Auditing and the date from which it comes.
4) Discuss the following: “Statements” and “Guidance Notes” of ICAI – Whether mandatory or
recommendatory?

SA-200(REVISED) OVERALL OBJECTIVES OF THE INDEPENDENT AUDITOR AND THE CONDUCT
OF AN AUDIT IN ACCORDANCE WITH STANDARDS ON AUDITING (on or after April 1, 2010)
Objective of Audit
To enhance the degree F.S. are prepared as F.S. gives true and Audit is conducted in accordance with
of confidence per FRF fair view. SAs and relevant ethical requirements.
SUMMARY of SA 200
SA - 200
(1) (3) (4) (5)

(2)
Overall Scope of Audit Management Inherent
Aspects to be / Other
Objectives of Responsibility Limitations for
considered by Information
the Auditor Audit
Auditor while
performing Audit Risk can't be
Audit/ Auditor reduced to zero
Responsibilities
To examine For the

To obtain whether the F.S. Nature of
preparation and
reasonable are prepared in Financial
presentation of
assurance about accordance with reporting:
the F.S, in
whether the F. S. as FRF. involves
Conduct of an accordance with
a whole are free judgment by
Audit in The auditor's the applicable FRF.
from material Mngt. based on
misstatement, accordance opinion does Design, facts and
whether due to with SAs not assure, the implementation & circumstances.
fraud or error, future viability maintenance of
Ethical Nature of audit
thereby enabling the of the entity nor internal control
Requirements Procedures:
auditor to express the efficiency or
including To provide the mgt do not
an opinion on effectiveness
Independence auditor with-All provide all
whether the F.S. are with which
Sufficient mngt. has information,Any information,
prepared, in all additional evidences are
material respects, in Appropriate conducted the
audit Evidence affairs information,Un- persuasive not
accordance with an restricted access conclusive
applicable FRF. and Audit Risk
In some cases, to those within
Professional the applicable the entity. Balance
To report on the F.S. between time
and communicate as Judgment laws may
require auditors Also includes to and cost: user
required by the SAs, Professional make accounting
to provide expectation to
in accordance with Skepticism estimates and
opinions on get AR within a
the auditor's selection and reasonable
findings. other specific
matters. application of period and at
appropriate reasonable
accounting polices cost, It results
into use of Test
checking

Definitions
FRF adopted by the management and TCWG
Financial Preparation and presentation of financial statements that is acceptable in view

Reporting
Nature of Entity .And Objective of F.S or Required by law
Framework
That management & TCWG have following responsibilities:
 For preparation and presentation of financial statements and implementation
of Internal Controls
 To provide the auditor with
Premises on a) All information
which audit is b) Any additional information that auditor may request
Conducted c) Unrestricted access to those within the entity
Reasonable Assurance A high But not absolute level of assurance
Requirement of Standard/Auditor Responsibilities
(6) Ethical Requirements
Code of Ethics/Fundamental Principles Independence
Confidentiality Professional Integrity Objectivity Professional competence and due care

behaviour
(7) Professional Skepticism
Meaning Reduces Risk of Being Alter to
Contradictory audit evidence.

An attitude that includes a Overlooking
questioning mind,being alert to Unusual Using Over
conditions which may indicate Circumstances inappropriate Generalising Questions on reliability of
possible misstatement due to assumptions documents
Audit
error or fraud, and a critical Audit observations.
assessment of audit evidence. procedures Conditions indicating possible
frauds
(8) Professional Judgment
Meaning Important Areas when deciding
The application of relevant knowledge, Evaluating Drawing Evaluating

Materiality NTE of audit conclusions mgt
training and experience, within the context SAAE
& Audit risk procedures based on judgment
provided by auditing, accounting and ethical
standards, in making informed decisions audit in applying
about the courses of action that are evidence. applicable
appropriate in the circumstances of the audit FRF.
engagement.

Sufficient & Appropriate Audit Evidence and Audit Risk
To obtain reasonable assurance, the auditor shall obtain SAAE Audit Risk
Risk that auditor expresses an

Sufficiency refers Appropriateness
inappropriate audit opinion when F.S.
to quantum refers to quality.
are materially misstated
Conduct of an Audit in Accordance with SAs
Compliance with SAs relevant Objectives stated in Complying with relevant

to the audit Individual SAs Requirements
Comply with all SAs relevant to To achieve overall objectives, the Auditor shall comply with each
audit. auditor shall use the objective stated requirement of SA unless:
An SA is relevant if - SA is in effect in relevant SAs, having regard to Entire SA is not relevant
and the circumstances of SA exist. interrelationship between SAs,
Requirement is not relevant
Auditor shall not represent Determine if any audit procedure in because it is conditional &
compliance with SAs in the addition is required by SAs in condition does not exist..
auditor's report unless the pursuance of objectives stated in
SAs. Departure from requirement in
auditor has complied with the
exceptional circumstances -
requirements of this SA and all Evaluate whether SAAE has been perform alternative procedures
other SAs relevant to the audit obtained. to achieve aim of requirement
Failure to Achieve an Objective
Prevents auditor from achieving the overall objectives of the auditor
Modify the Opinion OR Withdraw

IMPORTANT QUESTIONS
1. Explain the Overall Objectives of Independent auditor. Point (1) of Summary Chart
2. Comment on the following: “The Auditor shall comply with relevant ethical
requirements including independence”. Point(6) of Summary Chart
3. Discuss perquisites and fundamental principles to be possessed by an auditor.
4. SA 200 requires that the auditor shall and perform an audit with professional
skepticism. Explain the statement. Point(7) of Summary Chart
5. “The auditor shall exercise professional judgment in planning and performing an
audit of financial statements” Comment. Point(8) of Summary Chart
6. Discuss Inherent Limitations of audit. Point(5) of Summary Chart
7. Generally an audit is not concerned with the propriety of business conduct. Comment
“Audit of Financial Statement relieves Management of its responsibilities”. Comment .
True & Fair Report of the Auditor on the Financial Statements, ensures the future
viability of the enterprise. Comment. (RTP)
Answer: Objective + Management Responsibility + Scope of Audit /Other Information

8. ‘Doing a statutory audit Is full of risk'. Narrate factors which causes risk. REFER PM
Exercising The auditor’s work involves exercise of judgement, for example, in deciding the extent of
judgement on the audit procedures and in assessing the reasonableness of the judgements and estimates
part of the auditor made by management in preparing the financial statements.
Nature of audit Much of the evidence available to the auditor can enable him to draw only reasonable
evidence conclusions therefrom. The auditor normally relies upon persuasive evidence rather
than conclusive evidence. Even in circumstances where conclusive evidence is available,
the cost of obtaining such an evidence may far exceed the benefits.
Inherent Internal control can provide only reasonable, but not absolute, assurance on account of
limitations of several inherent limitations such as potential for human error, possibility of
internal control circumstances of control through collusion, etc.
Objective Type Questions

1 To maintain an adequate accounting system incorporating various controls is the responsibility of
Management*
♦ SA 200 specifically provides that the management and, where appropriate, TCWG have responsibility
for the preparation and presentation of the F.S. in accordance with the applicable FRF;
♦ This responsibility includes design, implementation and maintenance of internal control relevant to
preparation and presentation of F.S. that are free from material misstatement, whether due to fraud or
error.
2 Auditor is able to obtain only reasonable assurance due to inherent limitation of audit*
Answer: Statement is True, auditor is able to obtain reasonable assurance only due to following
limitations of audit:
♦ Use of Judgment
♦ Use of Test Checking
♦ Inherent Limitations of internal control
♦ Persuasive nature of audit evidence.
3 Auditor’s Opinion is an assurance as to the future viability of the enterprise or the efficiency or
effectiveness with which management has conducted the affairs of the enterprise.
♦ SA 200 specifically provides that the auditors opinion cannot be assumed as an assurance as to the
future viability of the enterprise or the efficiency or effectiveness with which management has conducted
the affairs of the enterprise.
♦ The objective of an audit of financial statements, prepared within a framework of recognized
accounting policies and practices and relevant statutory requirements, if any, is to enable an auditor to
express an opinion on such financial statements.
4 An unqualified opinion in audit report is a guarantee as to the future viability of the company.
Answer: Statement is false,
♦ SA 200 "Overall Objectives of an Independent Auditor and Conduct of an Audit in accordance with
Standards on Auditing” specifically provides that the auditors opinion cannot be assumed as an assurance
as to the future viability of the enterprise or the efficiency or effectiveness with which management has
conducted the affairs of the enterprise.
♦ An unqualified opinion implies that based on the audit evidence collected, auditor is reasonable
assured that financial statements are free from material misstatements.

AUDIT RISK
 Meaning - Audit risk is the risk that the auditor may give an inappropriate opinion
when the financial statements are materially misstated.
Audit risk is a function of the risks of material misstatement and detection risk.
Misstatement Not Detected by Control Not Detected by Auditor That becomes

Exists Control Risk Detection Risk Audit Risk
Audit risk is the risk that the auditor may give an inappropriate
opinion when the financial statements are materially misstated.
Risks of material misstatement- The risk that the financial Detection Risk -
statements are materially misstated prior to audit. Detection risk is the
Consists of two components risk that an auditor's
substantive
Inherent Risk (Risk Control Risk (Risk that client’s system procedures will not
that material errors of internal control will not prevent or detect a material
will occur) correct such errors) misstatement.
I. Inherent Risk
Inherent risk is the susceptibility of an account balance or class of transaction to a
material misstatement, assuming that there were no internal controls.
Inherent risk is generally considered to be higher where a high degree of judgment and
estimation is involved or where transactions of the entity are highly complex.
Evaluation of Inherent Risk
To assess inherent risk, the auditor should evaluate numerous factors, having regard to
his experience of the entity from previous audit engagements of the entity, controls
established by management to compensate for a high level of inherent risk, and his
knowledge of any significant changes which might have taken place since his last
assessment.
 The auditor uses his professional judgment to assess inherent risk by evaluating different
factor relating to the organization.
Factors evaluated to assess Inherent Risk
At the Level of Financial statements At the Level of Account Balances and Class of Transactions
a) Factors affecting the industry in a) The degree of judgment involved in determining account
which the entity operates balances.
b) The nature of the entity's business. b) The complexity of underlying transactions and other events
c) Unusual pressures on management. which might require using the work of an expert.
d) Management's experience and c) Susceptibility of assets to loss or misappropriation.
knowledge and changes in d) The completion of unusual and complex transactions,
management during the period. particularly at or near year end.
e) Integrity of management. e) Transactions not subjected to ordinary processing.
f) Financial statement of accounts likely to be susceptible to
mismanagement.

II. Control Risk –
Meaning - Control risk is the risk that material misstatements will not be prevented or
detected and corrected on a timely basis by the Internal Control System.
 Reasons of Control Risk are weakness or inherent limitation in Internal Control System.
 It is a function of the effectiveness of the design, implementation and maintenance of
internal control by management to address identified risks that threaten the achievement
of the entity’s objectives relevant to preparation of the entity’s financial statements.
 However, internal control, no matter how well designed and operated, can only reduce,
but not eliminate, risks of material misstatement in the financial statements, because of
the inherent limitations of internal control
III. Detection Risk
 The risk that the procedures performed by the auditor will not detect a misstatement that
exists and that could be material, either individually or when aggregated with other
misstatements.
 Detection risk relates to the nature, timing, and extent of the auditor’s procedures that are
determined by the auditor to reduce audit risk to an acceptably low level.
 It is therefore a function of effectiveness of audit procedures & its application by auditor.
Relationship between Components of Audit Risk

1. Inherent Risk and Control Risk
 The auditor should make a combined assessment of the inherent and control risks.
 Management often reacts to inherent risk situations by designing accounting and internal
control systems to prevent or detect and correct misstatements and therefore, in many
cases, inherent risk and control risk are highly interrelated.
 Even though inherent and control risks cannot be controlled by the auditor, the auditor
can assess them and design his substantive procedures to produce on acceptable level of
detection risk, thereby reducing audit risk to an acceptably low level.
2. Relationship between RMM and Detection Risk

 There is an inverse relationship between detection risk and combined level of inherent
and control risks.
 When inherent and control risks are high, acceptable detection risk should be low to
reduce the overall audit risk to an acceptably low level.
 If the auditor does not perform any substantive procedures, detection risk, that is, the
risk that the auditor will fail to detect a misstatement, will be high. The auditor reduces
detection risk by performing substantive procedures - the more extensive the
procedures performed, the lower the detection risk.
 However, the assessed levels of inherent and control risk cannot be sufficiently
low to eliminate the need to perform substantive procedures.

QUESTIONS
1. Audit Risk and inter-relationship of its components. Or
Write short note on Audit Risk.
2. Explain the Inherent Risk with reference to the relevant Standards on Auditing. (SA-
315)
3. Write a short note "Audit risk at the account balance level and at the class of
transactions level".
4. There is a direct relationship between detection risk & combined level of inherent &
control risk.
5. Inherent & Control risk, detection risk have same meaning.
6. When Inherent & Control risk are low, an auditor can accept lower detection risk.
7. Components of Audit Risk does not include sampling risk.
8. Explain Control Risk.

SA - 210 (REVISED) AGREEING THE TERMS OF AUDIT ENGAGEMENT
SUMMARY of SA 210
Objective Preconditions Agreement on Audit Recurring

for an Audit Engagement Terms Audits
The objective of the auditor
is to accept or continue an
audit engagement only Auditor may
Determine The auditor shall agree
when the basis upon which decide not to send
whether the the terms of the audit
it is to be performed has New Engaggement
FRF to be engagement with mgt
been agreed, through: Letter during each
applied in the or TCWG, as
preparation of period
appropriate
the financial
statements is
acceptable
Preconditions Send New
for an audit Confirming that Engaggement Letter
are present there is a Agreement shall include: when circumstances
common (a) The responsibilities of require, to revise or
understanding Obtain the remind the existing
agreement of management;
between the terms
auditor and management (b)The responsibilities of
that it the auditor; Factors may make it
management appropriate to revise
and TCWG, of acknowledges (c) The objective and
and or to remind the
the terms of scope of the audit entity of existing
the audit understands
its (d)Identification of the terms:`
engagement applicable FRF for the
responsibility. A significant change
( As per SA preparation of the in ownership.
200) financial statements; and
A significant change
(e) Reference to the in nature or size of
expected form and the entity's business.
content of any reports to
be issued by the auditor A change in legal or
and a statement that regulatory
there may be requirements.
circumstances in which a Any revised or
report may differ. special terms
A recent change of
senior management.
The entity
misunderstands the
If law or regulation objective and scope
prescribes in sufficient of the audit
detail the terms of audit A change in other
engagement, the auditor reporting
need not record them in a requirements.
written agreement,
except for fact that such A change in the FRF
law or regulation applies adopted in the
& mgt acknowledges its preparation of the
responsibilities F.S.

SUMMARY OF SA 210
Prior to Audit During the course of Audit
Auditor shall not accept an audit engagement if: The auditor requested to change the terms that conveys
lower level of assurance, determine whether there is
Preconditions for reasonable justification for doing so.
Management/ TCWG
impose a Limitation an audit are not
on the Scope present The auditor shall not agree to change the terms where
there is no Reasonable Justification
Limitation will result Discuss matter If Auditor is unable to
If auditor & management
in auditor with agree with New Terms
agree on new terms
disclaiming an Management/
opinion on F.S., TCWG Management doesn't permit
unless required by Issue New original Engagement
law or regulation to Engagement
do so Letter Withdraw & Communicate
to the appropriate Authority
Additional Considerations in Engagement Acceptance
Financial Reporting Auditor's Report Prescribed FRF prescribed by law or

Standards Supplemented by Law or Regulation regulation would be unacceptable
by Law or Regulation
Law applicable to entity Auditor shall accept audit
prescribes layout of engagement only if following
Conflict exist b/w Financial auditor's report that are conditions are present
Reporting Standards (AS) different from
& Law or Regulation requirements of SAs It is recognised in terms
Management of audit engagement that
agrees to
Whether users might provide Auditor‟s report on F.S.
Discuss with Management misunderstand assurance will incorporate an EOM
nature of additional additional
obtained from audit of F.S. disclosures in
requirements and shall and, if so Unless auditor is
agree whether F.S. to avoid required by law to
being express opinion on F.S.
Whether additional misleading by using the phrases
The additional explanation in auditor's “give a true and fair
requirements can be report can mitigate possible view” in accordance with
met through additional misunderstanding applicable FRF, will not
disclosures in F.S. include such phrases.
Yes - Ok No - shall not accept
OR audit engagement,
The description of unless required by law If conditions are not present and
applicable FRF in F.S. required by law to undertake
audit , the auditor shall:
An audit conducted in
Yes - accordance with law does not Evaluate effect of misleading
No - Modify the
Ok comply with SAs. The auditor nature of F.S. on auditor‟s report;
Report
shall not include any reference and
in auditor's report to audit Include appropriate reference in
having been conducted in terms of the audit engagement.
accordance with SAs
Factors to be considered in determining the Acceptablity of FRF
Nature of Entity Objective of F.S. Law or Regulation prescribles FRF

Drafting the Engagement Letter
I Title: Engagement Letter for the Audit of X Ltd
II Addressee: To Proprietor/Partner/Board of Directors
III Introductory Para
Content of Introductory Para
Introductory Auditor Responsibility Management

lines Responsibility
Our audit will be conducted with the objective of our

We refer to expressing an opinion that F.S. give a true and fair view in Our audit will be conducted
the letter conformity with the applicable accounting principles on the basis that Mgt/TCWG
dated generally accepted in India. acknowledge and
informing us understand there
We will conduct our audit in accordance with the SAs,
about our responsibility:
appointment issued by ICAI. Those Standards require that we comply
with ethical requirements and plan and perform the audit For the preparation of F.S.
/ ratification as per applicable FRF.
as the to obtain reasonable assurance about whether F.S. are free
auditors of from material misstatements. To design, implement &
the Company. An audit involves performing procedures to obtain audit maintain internal control
You have evidence about the amounts and the disclosures in F.S. in relation to financial
requested reporting
The procedures selected depend on the auditor’s
that we audit judgment, including the assessment of RMM of F.S., To prepare F.S. as per AS.
F.S. of the whether due to fraud or error.
Company for Proper Selection of
F.Y. An audit also includes evaluating the appropriateness of accounting policies and
beginning the accounting policies used and the reasonableness of applying them consistently
April 1, 20XX accounting estimates made by the Management To safeguarding the assets
and ending The Auditor evaluates internal control in relation to of the Company
March 31, entity preparation of F.S. For preparation of F.S. on a
20YY2. going concern basis
There are inherent limitations of an audit, whereby
material misstatements due to fraud or error may not be To provide all information
detected & explanations.
Peer Review Para: Our audit process is subject to 'peer review' / ‘quality review’ under the
Chartered Accountants Act, 1949. The reviewer(s) may inspect, examine or take abstract of my
/ our working papers during the course of the peer review/quality review.
Fees: Other information, such as fee arrangements, billings and other specific terms, as
appropriate
Acknowledge Para: Please sign and return the attached copy of this letter to indicate your
acknowledgement of, and agreement with, the arrangements for my / our audit of the financial
statements including our respective responsibilities.
Yours faithfully,
(Signature)
(Name of the Member)
(Designation)
(Name of the Firm)
Membership Number
Date:
Place:

Form and  The form and content of the audit engagement letter may vary for each entity. In addition
Content of the to including the matters prescribed above, an audit engagement letter may make reference
Audit to followings:
Engagement  Elaboration of the scope of the audit, including reference to applicable legislation,
Letter regulations, SAs, and ethical and other pronouncements of professional bodies to which
the auditor adheres.
 The form of any other communication of results of the audit engagement.
 The fact that because of the inherent limitations of an audit, together with the
inherent limitations of internal control, there is an unavoidable risk that some material
misstatements may not be detected, even though the audit is properly planned and
performed in accordance with SAs.
 Arrangements regarding the planning and performance of the audit, including
the composition of the audit team.
 The expectation that management will provide written representations.
 The agreement of management to make available to the auditor draft F.S. and any
accompanying other information in time to allow the auditor to complete the audit in
accordance with the proposed timetable. The agreement of management to inform the
auditor of facts that may affect the F.S. of which management may become aware during
the period from the date of the auditor's report to the date the financial statements
are issued.
 The basis on which fees are computed and any billing arrangements.
 A request for management to acknowledge receipt of the audit engagement letter and
to agree to the terms of the engagement outlined therein.
 The fact that the audit process may be subjected to a peer review under the Chartered
Accountants Act, 1949.
IMPORTANT QUESTIONS
1) State the purpose of a letter of engagement.(Refer PM, Question 4 )
2) What is audit engagement letter? What are principal contents of audit engagement letter?
3) Write short note on: Preconditions of an audit.
4) X a Chartered Accountant was engaged by PQR & Co. Ltd. for auditing their accounts* He
sent his letter of engagement to the Board of Directors, which was accepted by the
Company. In the course of audit of the company, the auditor was unable to obtain
appropriate sufficient audit evidence regarding receivables* The client requested for a
change in the terms of engagement. Offer your comments in this regard. OR
"An auditor who before the completion of the engagement is requested to change the
engagement to one which provides a lower level of assurance should consider the
appropriateness of doing so*” Discuss*
5) R & M Co* a firm of CAs was appointed as statutory auditors of XYZ Co. Ltd. Draft an
engagement letter accepting the appointment as auditors.
6) Comment on the following; "It is not mandatory to send a new engagement letter In recurring
audit, but sometimes it becomes mandatory to send new letter.” Explain those situations
where new engagement letter is to be sent. OR
Indicate the factors which make it appropriate for an auditor to send a new engagement letter
for a recurring audit. OR
‘P’ auditor decides not to send new engagement letter to G Ltd. every year. Whether he is right
in his approach? State circumstances where new engagement letter, would be appropriate.

SA 220 (Revised) Quality control for an Audit of Financial Statements (on or
after April 1, 2010)
CHART -1 - Objective of SA
The auditor is to implement quality Complies with professional standards and regulatory and
control procedures at the engagement legal requirements
level that provide the auditor with
reasonable assurance Auditor’s report issued is appropriate in circumstances
CHART – 2 (REQUIREMENTS / AUDITOR RESPONSIBILITIES)

Leadership
Responsibilities •EP shall take responsibility for the overall quality on each audit engagement to
for Quality on which that partner is assigned.(Refer chart below)
Audits
•EP shall remain alert, for non-compliance with relevant ethical requirements by
Relevant Ethical members of the ET.
Requirements •If matters come to EP attention that indicate that members of ET have not complied
with relevant ethical requirements, EP, in consultation with others in firm, shall
determine the appropriate action.
•EP shall form a conclusion on compliance with independence requirements

•Obtain relevant information to identify circumstances and relationship that create
Independence threats to independence
•Evaluate information on identified breaches, of the firm's independence policies
and procedures
•Take appropriate action to eliminate such threats or reduce them to an acceptable
level or to withdraw from the audit engagement
Acceptance & •The EP shall be satisfied that appropriate procedures regarding the acceptance and
Continuance of continuance of client relationship and audit engagements have been followed.
Client
Relationships & •If EP obtains information that would have caused the firm to decline the audit
Audit engagement had that information been available earlier, EP shall communicate
Engagements promptly to firm, so that the firm & EP can take the necessary action.
•EP shall be satisfied that ET, and any auditor's experts who are not part of the ET,
Assignment of collectively have the appropriate competence and capabilities
ET •Perform the audit engagement in accordance with professional standards and
regulatory and legal requirements
•Enable an auditor's report that is appropriate in the circumstances to be issued
Engagement
•For Detail Refer another chart -3
Performance
•Monitoring Process is designed to provide the firm with reasonable assurance that
Monitoring its policies and procedures relating to quality control are adequate & operating
effectively. EP shall consider the result of the firms monitoring process.

CHART – 3 ENGAGEMENT PERFORMANCE
The direction, supervision and performance of the audit

Direction, engagement in compliance with professional standards and
Supervision regulatory and legal requirements
and
Performance
The auditor’s report being appropriate in the circumstances
Reviews being performed in accordance with the firm's

review policies and procedures.
Reviews On or before the date of the auditor's report, EP shall, be satisfied

that SAAE has been obtained to support the conclusions and the
auditors report
ET undertaking appropriate consultation of difficult matters
ET have undertaken consultation both within ET and between

Consultation the ET and others
The nature and scope of and conclusions resulting from, such
consultations are agreed with the party consulted;
Determine that conclusions resulting from such consultations
have been implemented
Engagement
Performance -
Determine that an EQCR has been appointed
EP shall take Engagement
responsibility EP shall
Quality Discuss significant matters with EQCR
for Control
Review- For Not date the auditor report until the
audits of completion of the ECQR
financial
statements of
listed entities, Discussion of significant matters with the EP
and those
other audit EQCR shall Review of F.S. and proposed auditors report
engagements, evaluate
if any, for Review of selected audit documentation
which the firm Conclusions reached in formulating the auditor's
has report and consideration of whether the proposed
determined auditor's report is appropriate
that an
engagement The ET evaluation of the firms independence
For audits of
quality control
financial
review is
statements of Whether appropriate consultations has taken
required
listed entities, place and conclusions arising from those
the EQCR shall consultations
also consider
Whether audit documentation selected for
reviews reflects the work performed and
supports the conclusions reached.
If differences of opinion arise within ET, with those consulted or, where
Differences of
applicable, between EP and EQCR, ET shall follow the firm’s policies and
Opinion
procedures for dealing with and resolving differences of opinion.

RELEVANT TOPIC
Leadership Acceptance Work performed by Supervision of Documentation

Responsibilities and each assistant needs Audit Work
for Quality on Continuance to be reviewed
of Client Issues identified with
Audits Tracking progress of respect to
Relationships
and Audit The work has been audit engagement. compliance with
Performing Engagements performed in Considering relevant ethical
work that accordance with competence and requirement and
complies with professional capabilities of how they were
The integrity of standards and resolved
professional individual members
principal owners, regulatory and legal
standards and of ET including Conclusions on
KMP and TCWG requirements;
regulatory and whether they have compliance with
legal Whether the ET is Significant matters sufficient time to independence
requirements; competent to have been raised carry out their requirements
perform the audit for further work,
Complying with Conclusions reached
engagement and consideration;
firm’s quality Whether they regarding acceptance
has the necessary
control policies Appropriate understand their and continuance of
capabilities,
and procedures consultations have instructions, and client relationships
including time
as applicable; taken place and whether the work is and audit
and resources;
Issuing resulting being carried out in engagements
Whether the firm conclusions have accordance with the
auditor’s The consultations
and ET can been documented planned approach
reports that are undertaken during
comply with and implemented; to audit
appropriate in the course of the
relevant ethical engagement.
circumstances; There is a need to audit engagement
requirements;
and revise NTE of work Addressing The EQCR shall
and
The ET ability to performed; significant matters document, for the
Significant arising during audit
raise concerns The work audit engagement
matters that have engagement,
without fear of performed supports reviewed that,
arisen during considering their
reprisals; and conclusions reached The procedures for
current or significance and
previous audit and is appropriately ECQR have been
modifying planned
engagement, and documented; performed
approach
their implications Obtained SAAE to appropriately. The EQCR has been
for continuing the support auditor's completed on or
Identifying matters
relationship. report; and before date of the
for consultation or
The objectives of consideration by auditors reports and
the engagement more experienced The reviewer is not
procedures have ET members during aware of any
been achieved. audit engagement. unresolved matters.
QUESTIONS
1. "The work performed by each assistant needs to be reviewed by personnel of at least equal
competence."
2. Mr. X, a partner in X & Co., a firm of a Chartered Accountants, died on 31-3-2010 after completing
routine audit work of XYZ Company Ltd. Mr. Y another partner of the firm of Chartered Accountants
signed the financial statements of XYZ Company Ltd., without reviewing the finalization work done
by the assistants.
3. Mention any four information which assists the auditor in accepting and continuing of relationship
with the client as per SA 220,
4. Write short note on: Engagement Quality Control review.

SA 230 (Revised) - AUDIT DOCUMENTATION (w.e.f. 1 April' 2009)
SUMMARY of SA 230
Meaning & Nature Purposes of Audit Form Content & Extent of Audit
Documentation Documentation
Audit Documentation: Enabling the The auditor shall prepare Factors effecting
Record of conduct of audit documentation that Form Content &
Audit procedures performed external is sufficient to enable an Extent
Relevant audit evidence inspections in experienced auditor to
understand: The nature and
obtained and accordance with extent of
Conclusions the auditor applicable The NTE of audit exceptions
reached. legal,regulatory or procedures identified.
Experienced auditor - An other
The results of the audit The size and
individual (whether internal requirements
procedures performed, complexity of
or external to firm) who has Enabling the and the audit evidence entity.
practical audit experience, & engagement team obtained; and
reasonable understanding of: to be accountable The significance of
Significant matters arising audit evidence
(i) Audit processes; for its work.
during the audit and'the obtained.
(ii) SAs and applicable legal Enabling the conclusions reached
conduct of quality The audit
and regulatory requirements; thereon.
control reviews methodology and
(iii) The business Auditor shall also record: tools used.
and inspections.
environment in which the The identifying The need to
entity operates; and Assisting members
characteristics of specific document a
of the engagement
(iv)Auditing and financial items or matters tested; conclusion or the
team responsible
reporting issues relevant to for supervision to Who performed the audit basis for a
the entity’s industry. direct and work and the date such conclusion not
supervise the work was completed; and readily
Nature & Purpose audit work. determinable from
Who reviewed the audit the documentation
Evidence of auditor’s basis for a Retaining a record work performed and the of the work
conclusion about the of matters of date and extent of such performed or audit
achievement of overall continuing review. evidence obtained.
objectives of auditor and significance to If auditor identified
future audits. The nature of the
Evidence that the audit was inconsistent information, audit procedures
planned and performed in Assisting the should document how he to be performed.
accordance with SAs and engagement team addressed the
applicable legal and regulatory to plan and inconsistency The identified
requirements. perform the audit. RMM
NOTE:
An auditor is not required to provide the clients or other auditors’ access to his working
papers. Main auditor of the company does not have right of access to the working papers of the
branch auditor.
In the case of a company, the main auditor has to consider the report of the branch auditor and
has a right to seek clarification and to visit the branch but cannot ask for the copy of working
paper and therefore, the branch auditor is under no compulsion to give photocopies of
his working paper to the principal auditor.

UTILITY, OWNERSHIP, CUSTODY AND RETENTION OF WORKING PAPERS
Utility Ownership Custody Retention
‘Audit Documentation’ Working papers Working papers should be retained, long

The auditor
help in planning and are the property enough, for a period of time sufficient to
should adopt
performance of the of auditor and meet the needs of his practice and satisfy
reasonable
audit, supervision and he may, at his any legal or professional requirement of
procedures for
review of the audit discretion, make record retention. SQC 1 requires firms to
safe custody
work and provide portions of or establish policies and procedures for the
and
evidence of the audit extracts from retention of engagement documentation.
confidentiality
work performed to his working The retention period for audit engagements
of his working
support the auditor’s papers to his ordinarily is no shorter than 7 years from
papers.
opinion. client. date of the auditor's report, or, if later, the
date of group auditor's report.
SUMMARY of SA 230
General Specific Document Requirement
Timely Assembly of Documents of Discussions-

Preparation Final Audit File The auditor shall document discussions of significant matters with
management,TCWG, and others,
Preparing The auditor shall The nature of the significant matters discussed
sufficient assemble the When and with whom the discussions took place
and audit
appropriate documentation in If the auditor identified inconsistent information, the auditor shall
audit an audit file and document how he addressed' the inconsistency.
documentati complete the
on on a administrative
timely basis process of Departure from a Relevant Requirement-
It helps to assembling the
final audit file on If, in exceptional circumstances, he departs from SA, the auditor shall
enhance the document reasons for departure and alternative procedures performed.
quality of -a timely basis
the audit after the date of
and the auditor's
facilitates report.(within 60 Matters Arising after the Date of the Auditor’s Report-
the effective days as perSQC -
If,. in exceptional circumstances, the auditor performs new or
review and 1)
additional audit procedures or draws new conclusions after the date
evaluation of After the of the auditor's report, the
the audit assembly, the
evidence (a) The circumstances encountered;
auditor shall not
obtained and delete audit (b) The new or additional audit procedures performed, audit
conclusions documentation evidence obtained, and conclusions reached, and their-effect on the
reached. before the end, auditor's report; and
of its retention (c) When and by whom the changes to audit documentation were
period. made and reviewed.

Important Questions
1. Explain in brief, the utility of Working Paper to an auditor.
2. M/s Health Zone, a partnership firm, running a nursing home have decided to discontinue
you as an auditor for the next year and requests you to handover all the relevant working
papers of the previous year.
3. What does SA 230 says about utility, ownership, custody and retention of working papers?
4. Write a short note on Audit Working Papers.
5. Factors affecting form, contents and extent of audit documentation.
6. Audit Working Papers to be kept at least for 3 (three) years.
7. Should branch auditor of a company comply with the request of the principal auditor of
the company to give photocopy of the working papers pertaining to the branch audit?
Explain.
8. R.K. & Company are the auditors of PQR Company Ltd. The Managing Director of the
Company demands copies of the working papers from the auditors. Are the auditors
bound to oblige the Managing Director?
9. Branch auditor of a company should give photocopies of his working papers on demand
by Company Auditor.
10. “Audit documentation serves a number of additional purposes.”
11. What are Audit working papers and why should they be carefully preserved by the
Auditor?

SA 240 (Revised) – The Auditor's Responsibilities relating to Fraud in an
Audit of Financial Statements
SA 240
Meaning & Management Risk associated with Auditor Responsibilities

General Points Responsibilities non detection of
material misstatement
For obtaining reasonable
Fraud - An The primary assurance that F.S. taken as a
intentional act by Due to inherent
responsibility limitations of an whole are free from material
one or more for prevention misstatement whether due to
individuals among audit, there is an
and detection unavoidable risk that fraud or error.
mgt, TCWG, of fraud.
employees, or some material
third parties, misstatements of F.S.
will not be detected, Maintaining an attitude of
involving use of professional skepticism
deception to It should place The risk of not throughout the audit
obtain an unjust or a strong detecting a material
illegal advantage. emphasis on misstatement
resulting from fraud is Perform Procedures when
fraud Circumstances Indicate existence
prevention higher than the risk of
not detecting one of material Misstatement
The auditor is
Commitment resulting from error. whether due to fraud or error
concerned with
to create a This is because fraud
fraud that causes a
culture of may involve carefully Evaluate whether such a
material
honesty and organized schemes misstatement is indicative of fraud.
misstatement in
ethical designed to conceal it Fraud or Suspected Fraud
F.S.
behavior.
It is difficult for
auditor to determine
Two types of Auditor should consider implication
whether
intentional to other aspects of Audit, the
misstatements in
misstatements are reliability of WR
judgment areas such
relevant to auditor’s as accounting
-Fraudulent estimates are caused
by fraud or error. Communicate at Appropriate Level of
financial reporting
management & to regulatory If required
-Misappropriation The risk of the auditor by law
of assets not detecting a
material
misstatement Able to Unable to Continue
Discussion resulting from Continue
among the management fraud is
Engagement greater than for Possibility of
Team employee fraud as Modify Withdrawing
management can Report
manipulate
Obtain WR accounting records Discuss with TCWG
Communicate
Documentation
Appointing Incoming Regulatory

Authuority Auditor Authority

Which types of intentional misstatements are relevant to auditor’s consideration of fraud ? or
What are the various forms of Fraud? Or Possible Sources of Fraudulent Financial Reporting.
Types of Fraud
Fraudulent Financial Reporting - It involves intentional misstatements Misappropriation of

including omissions of amounts or disclosures in F.S. to deceive F.S. users. Assets/Goods
Ways to commit:
Embezzling receipts
It may be Recording fictitious journal entries, particularly close to
accomplished by end of an accounting period, to manipulate operating Stealing physical
following: results or achieve other objectives. Assets or
intellectual property
Misrepresentation or Inappropriately adjusting assumptions and changing
Intentional omission judgments used to estimate account balances. Using assets for
personal purpose
Misapplication of Omitting, advancing or delaying recognition in F.S.of
Accounting Principles events and transactions that have occurred during the Causing to pay for
reporting period. goods & services
Manipulation,
not received.
Alteration of records Concealing, or not disclosing, facts that could affect the
or documents. amounts recorded in F.S..
Engaging in complex transactions that are structured to
misrepresent the financial position or financial
performance of the entity.
Altering records and terms related to significant and
unusual transactions.
What are Fraud Risk Factors?
Fraud Risk Factors
Incentives/Pressures Attitudes/Rationalizations
Opportunities
Incentive or pressure to commit Some individuals possess an attitude,
A perceived opportunity character or set of ethical values that
fraudulent financial reporting may exist
to commit fraud may allow them knowingly and intentionally
when management is under pressure,
exist when individual to commit a dishonest act. Even honest
from sources outside or inside the entity,
believes internal control individuals can commit fraud in an
to achieve an expected earnings target or
can be overridden environment that imposes sufficient
financial outcome
pressure on them.
List out some circumstances that indicate the possibility of fraud or
Conditions
Conflicting or Problematic or unusual Discrepancies Others

Missing relationships between in accounting
Evidence Accounting policy different from industry norms
the auditor and records
management Frequent changes in Accounting Estimates

1. Mention briefly the conditions or events, which increase the risk of fraud or error leading to
material misstatement in Financial Statements.
Conditions Examples
Weaknesses in the design of internal A single person is responsible for the receipt of all dak and marking it to the
control system and non-compliance relevant sections or two persons are responsible for receipt of dak but the same
with the laid down control procedures is not followed in actual practice, etc.
Doubts about the integrity or Domination by one person, high turnover rate of employees, and frequent change
competence of the management of legal counsels or auditors, significant and prolonged understaffing of the
accounts department, etc.
Unusual pressures within the entity Industry is doing well but the company is not performing accordingly, heavy
dependence on a single line of product, inadequate working capital, entity needs
raising share prices to support the market price in the wake of public offer, etc.
Unusual transactions such as Excessive payment for certain services to lawyers, etc.
transactions with related parties
Problems in obtaining sufficient and Inadequate documentation, significant differences between the figures as per the
appropriate audit evidence, accounting records and confirmation received from third parties, etc.
QUESTIONS
2. "If the books of account are not properly maintained and if the control system is weak, the
possibility of frauds and errors are enormous and the auditor, even with the best of his efforts,
may not be able to detect all of them. The fact is recognized by the Courts as is obvious from a
study of the various judgments." Discuss the tests applied by the courts to judicially view the
auditor's performance.
The auditor's performance is judicially viewed by applying the following tests:
Skill & Care whether the auditor has exercised reasonable care and skill in carrying out his work;
Ordinary course whether the errors and frauds were such as could have been detected in the ordinary course of
of checking checking without the aid of any special efforts;
Reason to doubt whether the auditor had any reason to suspect the existence of the errors and frauds; and
Normal Audit Whether the error or fraud was so deep laid that the same might not have been detected by the
Procedures application of normal audit procedures.
3. Detection of Fraud after Completion of Statutory Audit:

(Management Responsibilities + Overall Objective + Risk associated with non-detection of fraud )
 Adequate Procedures - The question of whether the auditor has adhered to the basic principles
governing an audit is determined by the adequacy of the procedures undertaken in the
circumstances and the suitability of the auditor’s report based on the results of these procedures.
 Can be held responsible - The liability of the auditor for failure to detect fraud exists only when such
failure is clearly due to not exercising reasonable care and skill.
 Cannot be held responsible - Thus, in the instant case after the completion of the statutory audit, if
a fraud has been detected, the same by itself cannot mean that the auditor did not perform his duty
properly. If the auditor can prove with the help of his papers (documentation) that he has followed
adequate procedures necessary for the proper conduct of an audit, he cannot be held responsible
for the same. If however, the same cannot be proved, he would be held responsible.

4. Auditor’s Responsibilities for Detection of Fraud and Error: As per SA 240 “The Auditor’s
Responsibilities relating to fraud in an audit of Financial Statements”,
Overall Objective + Risk associated with non-detection of fraud+ Auditor Responsibilities
Report to CG - Further, as per sub-section 12 of section 143 of the Companies Act, 2013, if an auditor of
a company, in the course of the performance of his duties as auditor, has reason to believe that an
offence involving fraud is being or has been committed against the company by officers or employees of
the company, he shall immediately report the matter to the Central Government within 60 days of his
knowledge and after following the prescribed procedure.
Audit Procedures
Risk Assessment Procedures

Responses
and Related Activities
Overall Assertion Responses to Risk

Enquiring Management and Other's within the Entity related to
Responses Level
- The auditor shall make inquiries of regarding Management
Mgt's assessment of risk Override of controls
Mgt's process for identifying & responding to risk
Assign proper
Mgt's communication to TCWG audit
The auditor
Mgt's communication to employee regarding its views personnel
shall design Mgt is in a unique
on business practices and ethical behaviour. Evaluate and-perform position to
The auditor can also make inquiries with the internal selection & further audit perpetrate fraud
audit function in this regard. application of procedures because of mgt
accounting whose NTE ability to
Enquiring TCWG – policies are manipulate
Obtain understanding of how those TCWG exercise Incorporate responsive to accounting records
oversight of management's process for identifying and unpredictabilit the assessed an prepare
responding to RMM due to fraud y in audit RMM due to fraudulent F.S. by
The auditor shall ask TCWG whether they have procedures fraud at the overriding controls.
knowledge of any fraud affecting the entity. assertion
Presume fraud It is a RMM due to
level.
Unusual or Unexpected Relationship - risk in revenue fraud and thus a
recognition significant risk.
The auditors should identify Unusual or unexpected
relationship while performing analytical procedure and and The auditor shall
evaluate them to assess RMM due to fraud. management determine whether
override of the auditor needs
Evaluation of Fraud Risk Factors - controls. to perform extra
The auditor may identify events or conditions that audit procedures.
indicate the existence of fraud risk factors, e.g.
ineffective control environment, the need to meet
expectations of third parties to obtain additional
financing etc.

SA 250 (Revised) CONSIDERATION OF LAWS AND REGULATIONS IN AN AUDIT OF FINANCIAL
STATEMENTS (w.e.f. 1st April'2009)
SUMMARY of SA 250
Auditor is not responsible for preventing non compliance and cannot Auditor Procedure
be expected to detect non-compliance with all laws and regulations in case any Non-
Auditor Cosideration Compliance
identified/
Basic Specific Responsibilities Suspected
Responsibilities
Law & Regulation Other Laws & Regulations that Obtain
Obtain general having a direct effect do not affect amount and understanding of
understanding of on determination of disclosures in F.S. but the Act &
material amount and compliance may be fundamental Circumstances in
Legal & Regulatory disclosures in F.S. to operating aspects which it is occurred.
Framework applicable To perform Specified audit
To obtain SAAE Evaluate possible
to the entity Procedures:
effects on F.S &
To ensure Inquiring of Mgt; & discuss with Mgt
How the entity Complies compliance Inspecting Correspondance & TCWG.
with that Framework with Regulatory authority
To identify instances of If no sufficient
non-compliance information
provided by Mgt/
Remain Alert throughout the audit TCWG consider the
need to obtain legal
Obtain WR that all known instances of advice
non-compliance or suspected non-
compliance with laws and regulations Evaluate the effect
have been disclosed to the auditor of the lack of SAAE
on auditor's opinion
Repotring Responsibilities
Identified or Suspected Non Complaince
To TCWG Auditor Report Regulatory

Authority
Non-compliance is
believed to be intentional Material Effect & has
not been adequately Unable to conclude due If required by
and material to limitation imposed by
reflected on F.S Law
If TCWG involved
Qualified/ adverse Mgt/ TCWG Circumstance
Communicate to Higher
Level, if any Otherwise, Qualified / disclaim Consider impact on
obtain Legal Advice AR

Indicators to be considered for verifying compliance with laws and regulations
 Investigation by regulatory organisations Government departments or payment of fines, additional
taxes or penalties.
 Payments for unspecified services or loans to consultants related parties, employees or government
employees.
 Sales commission or agents fees that appear excessive in relation to those ordinarily paid by the
entity or in its industry or to the services actually received.
 Purchases at prices significantly above or below market price.
 Unusual payments towards legal and retainer ship fees.
 Unusual transactions with companies registered in tax havens.
 Payments for goods or services made other than to the country from which the goods or services
originated.
 Payments without proper exchange control documentation.
 Existence of an information system which fails, whether by design or by accident, to provide an
adequate audit trail or sufficient evidence.
 Unauthorised transactions or improperly recorded transactions.
 Adverse media comment.
Management’s Responsibility for Compliance with Laws and Regulations:

According to SA 250 on “Consideration of Laws and Regulations in an Audit of Financial Statements”, it
is management’s responsibility, to ensure that the entity’s operations are conducted in accordance
with the provisions of laws and regulations. Laws and regulations may affect an entity’s financial
statements in different ways for example, most directly; they may affect specific disclosures required of
the entity in the financial statements. The following are the procedures an entity may implement to
assist in the prevention and detection of non-compliance with laws and regulations-
(i) Monitoring legal requirements and ensuring that operating procedures are designed to meet these
requirements.
(ii) Instituting and operating appropriate systems of internal control.
(iii) Developing and following a code of conduct.
(iv) Monitoring compliance with the code of conduct and acting appropriately to discipline employees
who fail to comply with it.
(v) Engaging legal advisors to assist in monitoring legal requirements.
(vi) Maintaining a register of significant laws and regulations with which the entity has to comply within
its particular industry and a record of complaints.
(vii) Ensuring employees are properly trained and understand the code of conduct.
QUESTIONS:
1. With reference of SA 250 give some examples or matters indicating to the auditor about non-
compliance of laws & regulations by management
2. "Management is responsible for compliance with laws and regulations."
3. State briefly the reporting requirements as per SA 250 on non-compliance with laws and regulations.
4. What are the roles and responsibilities of the statutory auditor in relation to compliance with the
laws and regulations by the entity.

SA 260 (REVISED) - COMMUNICATION WITH THOSE CHARGED WITH
GOVERNANCE (W.E.F. 01.04.2017)
SUMMARY OF SA 260
SUMMARY of SA 260
Role of Communication Objective

Scope
SA deals with auditor’s responsibility Effective two-way

to communicate with TCWG in an communication is important in Communicate clearly with TCWG
audit of F.S. assisting: responsibilities of auditor and
planned scope and timing of
Does not establish requirements The auditor and TCWG in
audit.
regarding auditor's communication understanding matters related to
with an entity's mgt or owners unless the audit in context, and in Obtain from TCWG information
they are also charged with governance developing a constructive relevant to audit.
role. working relationship. Provide TCWG with timely
SA is written in context of an audit of The auditor in obtaining from observation - significant and
F.S. , but may also be applicable, to TCWG information relevant to relevant in overseeing final
audits of other historical financial the audit. reporting process.
information TCWG in fulfilling their Provides effective two way
Does not preclude the auditor from responsibility to oversee the communication between auditor
communicating any other matters to financial reporting process, and TCWG.
TCWG. thereby reducing RMM of F.S.
SUMMARY of SA 260
Definitions Documentation
Determine the appropriate person to whom
communicate is made.
TCWG Mgt if
Communicated
Communication with a When All of TCWG Orally -when
Subgroup of TCWG involved in Managing The person The person(s) and to whom
Entity responsible for with executive they were
overseeing the responsibility for communicated
strategic direction the conduct of
When the auditor of the entity, and the entity's
The matters need operations.
communicates with a
not be obligations related If
subgroup of TCWG, for
communicated to the communicate
example, an audit For some
again with those accountability of d in writing -
committee, or an indi- entities,
same person(s) in the entity. retain a copy
vidual, the auditor shall management
their governance They may include
determine whether the may include
role. Management
auditor also needs to some or all of
communicate with the Personnel.
TCWG.
governing body.

SA 260
Matters to be communicated Significant Difficulties

Auditor’s Planned Scope Significant Findings Auditor
Responsibilities & Timing of Independence ♦ An unnecessarily brief
Audit time within which to
The auditor's views about
significant qualitative aspects In the case of complete the audit.
The auditor The auditor shall listed entities,
shall communicate of entity's accounting ♦ Significant delays in
practices, including accounting the auditor management providing
communicate with TCWG an shall
with TCWG overview of the policies, accounting estimates required information.
and F.S. disclosures. communicate
that: planned scope with TCWG: ♦ Restrictions imposed
The auditor is and timing of the on the auditor by mgt.
audit. It may A statement
responsible for Significant difficulties, if any,
include that the ♦Management’s
forming and encountered during audit;
engagement unwillingness to make or
expressing an How the auditor team has extend its assessment of
opinion on F.S.; proposes to Unless TCWG involved in complied with the entity’s ability to
and address the managing the entity: relevant continue as a going
The audit of significant RMM Significant matters ethical concern when requested.
F.S. does not How the auditor requirements
WR auditor is requesting ♦ Extensive unexpected
relieve plans to address regarding
effort required to obtain
management areas of higher independence;
Circumstances that effect form SAAE.
or TCWG of assessed RMM. and
their & content of Audit Report ♦ Unavailability of
Auditor's and
responsibilities. expected information.
approach to Other matters that in Related
internal control. auditor's professional safeguards to scope limitation that
judgment, are significant eliminate leads to a modification of
Application of
identified auditor’s opinion.
concept of
materiality. threats to
independence.

RELEVANT TOPICS
Establishing Form of Factors affecting mode Timings of Adequacy of the

Communication Communication of communication Communication Communication
Process Process
• Whether the matter
has been satisfactorily . The appropriate timing for
a) Various forms resolved. communication will vary
The auditor shall The auditor
of communication • Whether mgt has with significance and
communicate shall evaluate
may be classified previously nature of matter, action
with TCWG whether the
as: communicated matter. expected to be taken by
form, timing and two-way
• Oral or Written; TCWG. For Example:
expected general • The size, operating communication
content of • Detail or structure, control • Communications between the
communications Summarized; environment, legal regarding planning matters auditor and
structure of entity. may be made early in audit TCWG has
• Structured or engagement. been adequate
Unstructured. • In case of an audit of for the purpose
special purpose F.S., • Significant difficulty
b) The auditor encountered during audit of the audit.
shall communicate whether auditor also
audits the entity's as soon as practicable. If it has not,
in writing with the auditor
TCWG regarding general purpose F.S. • When SA 701 applies,
auditor may communicate shall evaluate
significant • Legal requirements. In the effect on
matters, from some jurisdictions, a preliminary views about
key audit matters when the auditor's
audit when, in written communication assessment of
auditor's with TCWG is required discussing planned scope
and timings of audit and RMM
professional in a prescribed form by
judgment, oral local law. may have frequent
communication communications to further
• The expectations of discuss such matters when
would not he TCWG, including
adequate. communicating about
arrangements made for significant audit findings.
c) The auditor periodic meetings or
shall communicate communications with • Communication
in writing with the auditor. regarding findings from
TCWG regarding audit, may be made as part
• The amount of of concluding discussions.
auditor ongoing contact and
independence. dialogue the auditor • Communication
has with TCWG. regarding independence
may be appropriate
• Whether there have whenever significant
been significant judgments are made about
changes in the threats to independence
membership of a and related safeguards
governing body
QUESTIONS
1. Explain the various matters that are required to be communicated by the auditor
2. Discuss with reference to SAs: The auditor shall communicate all significant findings with
TCWG.
3. State the significant difficulties encountered during audit with reference to SA
4. Write short note on: Factors governing modes of communication of auditor with TCWG.
5. "As per SA 260, auditor is required to communicate with TCWG various matters significant
to audit” In this reference explain various forms of communication and factors affecting
mode of communication.
6. Factors governing modes of communication of auditor with those charged with governance.

SA 265 - COMMUNICATING DEFICIENCIES IN INTERNAL CONTROL TO
THOSE CHARGED WITH GOVERNANCE & MANAGEMENT (W.E.F.
01.04.2010)
SCOPE OF SA
SA deals with auditor's responsibility to SA does not impose additional responsibilities

communicate appropriately to TCWG and on the auditor regarding obtaining an
management, deficiencies in internal understanding of internal control and designing
control that the auditor has identified and performing tests of controls over and
during the audit and that, in the auditor's above the requirements of SA315 and SA330.
judgment, are of sufficient importance.
Deficiency in internal control

A control is designed, implemented or operated in such a way that it is
unable to prevent, or detect and correct, misstatements in F.S. on
timely basis;
OR
A control necessary to prevent, or detect and correct,

misstatements in F.S. on a timely basis is missing.
Significant deficiency in internal control
Significant deficiency
Deficiency / combination of deficiencies in IC that, in the auditor's professional judgment, is of sufficient

importance to merit the attention of TCWG
Depends not only on Significant deficiencies may exist

even though the auditor has not Matters the auditor should consider in
occurrence of determining Significant Deficiencies:
misstatement, but also on identified misstatements during
the likelihood that a the auditor Likelihood that material misstatement could
misstatement could occur occur in future
Amounts in F.S. exposed to the deficiencies.
Susceptibility of fraud or loss of assets
Subjectivity & complexity of determining
estimated amounts

SUMMARY
SUMMARY of SA 265
Auditor shall determine whether, on the basis of the audit work performed, the auditor has identified one or more
deficiencies in internal control
If the auditor has identified one or more deficiencies in internal control
Consider whether individually or in combination, they constitute significant deficiencies
Yes No
Communicate in writing significant Communicate them to management, if relevant as per his

deficiencies to TCWG on timely basis professional judgment on timely basis
(Other deficiencies in internal control identified during the
Mgt on timely basis audit that have not been communicated to management by
other parties )
Unless it would be inappropriate to
communicate directly to
management in circumstances;
SOME OTHER POINTS

RELEVANT TOPICS
Contents of Communication Indicators of Significant

Deficiencies
Sufficient information to enable TCWG and management

Description of ♦ Evidence of ineffective aspects
deficiency & to understand the context of the communication
of control environment.
explanation of
their potential ♦ Entity's Risk assessment process
effects Communication is - Absent/ineffective.
Purpose of Consideration of IC
audit is to relevant to the limited to those ♦ Ineffective response to
express his preparation of F.S. deficiencies, identified significant Risks.
in order to design which are
opinion on
considered as ♦ Correction of prior period
F.S. audit procedures
significant by misstatements arising due to
that are appropriate
auditor fraud/error.
in the
circumstances, but ♦ Management inability to
not for the purpose oversee F.S. Preparation.
of expressing an
♦ Misstatements detected by the
opinion on the
auditor's procedures were not
effectiveness of I.C.
pre-vented, or detected and
corrected by the entity internal
control.
QUESTIONS
1. What do you mean by Deficiency in internal control? Explain various Indicators of Significant
Deficiencies

SA 299 - RESPONSIBILITY OF JOINT AUDITORS (W.E.F. 01.04.1996)
Concept of Joint Audit
Joint Auditors
When two or more practicing units are appointed to conduct audit of an entity are known as Joint Auditors
It is due to
Voluminous of work Complexity of Transactions
Division of Work
Division of Work
Joint auditors divide the audit work among themselves by Certain areas of The division of work
mutual discussion, work, owing to their among joint auditors
importance or owing as well as the areas of
Work can be devided among joint auditors to the nature of the work to be covered by
work involved, all of them should be
would often not be adequately
Based on Based on Based on divided and would documented and
identifiable units Nature of periods of be covered by all the preferably
or specified areas transactions time joint auditor communicated to the
entity
Eg - North Items of assets or Eg - First 6 months
Location & South liabilities or income or & Next 6 Months
Location expenditure
NOTE:
 JOINT AUDITOR CAN RELY ON OTHER JOINT AUDITOR, NO NEED TO REVIEW THE WORK
OF OTHER JOINT AUDITOR.
 IF HE COMES TO KNOW ANY INFORMATION RELATING TO OTHER JOINT AUDITOR AREA,
HE SHALL COMMUNICATE URGENTLY TO HIM ON TIMELY BASIS
Coordination
Coordination
Joint auditor comes across matters which are relevant to the areas of If any such matters are
responsibility of other Joint Auditor brought to the attention of the
entity or other joint auditors
by an auditor after the audit
Communicate the same to all the other joint auditor report has been submitted,
the other joint auditors would
not be responsible for those
In Writing Prior to the finalisation of the audit/ Audit Report matters

RESPONSIBILITY IN CASE OF NO COORDINATION
Eg: If Joint Auditor 'A' Come across the misstatement Related to the area of Joint Auditor B
Properly/Timely Coordination
Yes No
"A" will not be held responsible ultimate responsibility of "B" "A" will be held responsible
Responsibility of joint auditors

Responsibility of joint auditors
Audit work All the joint auditors are jointly and severally responsible
divided among
the joint auditors
Audit Decisions taken by Matters which are Comply with
all joint auditors brought to the the disclosure Audit report
work
Each joint auditor is concerning NTE of notice of the joint requirements complies with
which is
responsible only for the audit auditors by any one of the relevant requirements
not
the work allocated to procedures to be of them and on statute ( of the relevant
divided
him ( Audit Program, performed by any which there is an Presentation statute
Documentation, If any of the joint auditors agreement among & Disclosure)
branch allocated) the joint auditors
Reporting Responsibilities
Reporting Responsibilities
Joint auditors are able to Joint auditors are in disagreement with regard A joint auditor is not bound by the
arrive at an agreed report to any matters to be covered by the report views of the majority of the joint
auditors regarding matters to be
covered in the report and should
Issue Single Each one of them should express his own express his opinion in a separate
Report opinion through a separate report report in case of a disagreement

Advantages and disadvantages of Joint Audit
Advantages Disadvantages
(i) Pooling and sharing of expertise. (i) The fees being shared.
(ii) Advantage of mutual consultation. (ii) General superiority complexes
(iii) Lower work load. of some auditors.
(iv) Better quality of work performance. (iii) Problems of coordination of
the work.
(v) Improved service to the client.
(iv) Areas of work of common
(vi) Displacement of the auditor of the company taken over in a take-over often
concern being neglected.
obviated.
(v) Uncertainty about the liability
(vii) In respect of multinational companies, the work can be spread using the
for the work done.
expertise if the local firms which are in a better position to deal with detailed
work and the local laws and regulations. (vi) Lack of clear definition of
responsibility.
(viii) Lower staff development costs.
(ix) Lower costs to carry out the work.
(x) A sense of healthy competition towards a better performance.
QUESTIONS
1. 'A Joint Auditor is not bound by the views of the majority of the joint auditors regarding matters
to be covered in the report.' Justify this statement in the light of responsibilities of Joint
Auditors under SA 299.
If there is difference of opinion among the joint auditors with regard to any matter, majority joint
auditors opinion will prevail while reporting. Hint: False
2. Comment on the following: ABC & Co. and DEF & Co. Chartered Accountant firms were
appointed as joint auditors of Good Health Care Ltd. for 2009-10. A special audit was conducted
during March 2011 and observed gross understatement of Revenue. The revenue aspects were
looked after by DEF & Co, but there was no documentation for the division of work between the
joint auditors.
3. Explain the concept of joint audit. Discuss its advantages and disadvantages.
4. In Joint Audit, "each Joint Auditor is responsible only for the work allocated to him".
5. Write a short note on “Responsibilities of Joint auditors”.
6. A branch auditor is a joint auditor according to SA 299 and his relationship with the company
auditor is governed by the said Standard.

SA 300(Revised) - Planning an audit of financial statements (w.e.f.1st April 2008)
SUMMARY of SA 300
•It deals with the auditor’s responsibility to plan an audit of financial statements.
Scope •It is written in the context of recurring audits.
•Additional considerations in an initial audit engagement are separately identified.
•To devote appropriate attention to important areas.

Importance/ •Identify and resolve potential problems on timely basis.
Advantages/ •Properly organised and managed audit.
Need of •Assists selection of engagement team members with requisite capabilities & competence.
Planning •Coordination of work done by auditors of components and experts.
•Facilitating direction and supervision of Engagement team.
Requirements •Refer Chart Below
•Planning not a discrete phase of audit but rather a continuous process. it often begins
shortly after completion of previous audit and continues till the completion of audit
engagement.
•Planning, however includes consideration of timing of certain activities and audit
procedures that need to be completed prior to performance of further audit procedures.
Planning includes need to consider, prior to identification & assessment of RMM, such
Planning - A matters as:
Continuous
Process •The performance of other risk assessment process.
•Obtain general understanding of applicable legal and regulatory framework and its
compliance.
•The determination of materiality
•The involvement of Expert
•The analytical procedures to be applied as risk assessment procedures.
•Identification of significant audit areas.

•Involvement of other auditors in the audit of subsidiaries or branches of the client and
involvement of experts.
•Conditions requiring special attention.
•Accounting policies adopted by the clients and changes, if any, in those policies.
•Establishing and coordinating staffing requirements.
Factors/ •Allocation of works to be undertaken between joint auditors and the procedures for its
Matters to be control and review.
considered in •Possible rotation of emphasis on specific audit areas.
development of •Degree of reliance to be placed on the accounting system and internal control.
overall plan •Work of the internal auditors and the extent of reliance on their work, if any in the audit.
•Nature and timing of reports or other communications.
•The effects of new accounting and auditing pronouncement on the audit.
•Setting of materiality levels for the audit purpose.
•Nature and extent of audit evidence to be obtained.
•Terms of engagement and statutory responsibilities.
•Applicable Legal or Statutory requirements.

Requirements of SA 300
Involvement Preliminary Planning Activities Changes Document Additional
of Key ET Engagement to --ation Consideration
Members Activities Planning in Initial Audit
Establishing Developing
Decisions (a) Engagements
Audit an audit
Strategy plan Overall
(a) Procedures audit
(a) required w.r.t. Update and
Participation (a) The auditor The audit strategy
continuous of change (a) Performing
in discussion shall establish plan shall overall audit (b)Audit
Client include a procedures
with audit an overall audit strategy and plan; and required by SA
relationship description
team. strategy that audit plan as 220 regarding
(SA-220) of: (c) Any
sets scope, necessary the acceptance
(b) To get significant
(b) Evaluate timing and The NTE of during course
benefit of changes of the client
compliance direction of planned risk of the audit
their in (a) & relationship
with Ethical audit, & guides assessment in cases:
experience (b) & and the specific
Requirements development procedures
and insight. As result of reasons audit
including of audit plan. (SA 315)
(c) To unexpected for same engagement;
independence (b) In
increase The NTE of events, and
(SA-220)
establishing planned changes in (b)
effectiveness (c) overall audit further conditions, Communicating
and efficiency Understanding strategy, audit or change in with the
of Planning. of terms of auditor shall: procedures evidences predecessor
Engagement i)Consider (SA 330) obtained auditor, where
(SA-210) results of from the
Other there has been
preliminary planned result of a change of
engagement audit Audit auditors, in
activities procedures procedure. compliance with
ii)Identify the that are Based on relevant ethical
characteristics required to revised requirements.
of engagement be carried consideration
out so that of assessed
iii) Ascertain risk, auditor
engagement
NTE of need to
complies
procedures modify the
with SAs.
necessary to NTE of
perform further audit
iv)Consider procedures.
significant This may be
factors to the case
direct information
engagement comes to
team’s efforts; attention
v)Ascertain the that differs
Update & when auditor
reporting change
objectives planned audit
overall audit procedures.
strategy &
audit plan as
necessary
1. What are the Factors to be considered in the development of overall audit plan.
2. Write short note on: Preliminary Engagement Activities
3. Comment on following: Auditor shall establish an overall strategy that sets the scope,
timing and direction of the audit, and that guides the development of the audit plan”.
4. Write short note on: Usefulness of careful and adequate audit planning.

SA 315 - IDENTIFYING AND ASSESSING THE RISK OF MATERIAL MISSTATEMENT
THROUGH UNDERSTANDING THE ENTITY AND ITS ENVIRONMENT
(W.E.F. APRIL 1, 2008)
SUMMARY of SA 315
Objective Requirements
Risk Assessment of RMM Material Documen

Identify
and assess Assessment Weakness in tation
RMM Procedures Required Risk Assessment Process: Internal
whether and Related Understanding The Auditor shall: Control
due to Activities of the Entity (a) Identify risks, The
fraud or and Its
error, at Environment, (b) Assess and evaluate the discussion
F.S. level Perform risk identified risks, among the
Including the The auditor
and assessment engagement
Entity’s (c) Relate the identified risks to shall evaluate
assertion procedures team;
Internal what can go wrong at the whether he
levels to provide a
Control assertion level, identified a Key elements
basis for the
identification (d) Consider the likelihood of material of
and misstatement. weakness in the understandin
Understand design, g obtained
the entity assessment Risks that Require Special Audit
of RMM Refer implementation regarding
and its Flow Consideration- or maintenance each of the
environment Charts of internal aspects of
, including In exercising judgment as
Auditor shall Provided control. entity and its
the entity's significant risks, auditor shall
consider below environment;
internal consider following: The auditor
whether
control information Whether the risk involves shall The identified
obtained from - significant transactions with communicate and assessed
client related parties; on timely basis RMM at F.S.
Design and acceptance or to management level and at
Whether the risk is related to at an
implement continuance the assertion
recent significant economic, appropriate
responses process , other level;
accounting, or other level of
to the engagements The risks
developments; responsibility,
assessed performed, identified,
RMM (SA - previous Whether the risk is a risk of and, as required and related
330) experience, fraud; by SA 260 controls
consider if The degree of subjectivity in the
changes have measurement of financial
occurred since information;
the previous Whether the risk involves
auditis relevant significant unusual
to identifying transactions.
RMM,
Discussion The complexity of
among team transactions;and
members When auditor determined that
significant risk exists, he shall
Risk assessment procedures do not provide obtain understanding of entity’s
SAAE on which to base audit opinion. controls, including control
activities, relevant to that risk.
Risks for Which Substantive Procedures Alone Do Not Provide SAAE - Such risk relate to inaccurate
or incomplete recording of transactions or account balance which often permit highly automated
processing with no manual intervention, in such cases entity contols are more relevant to audit.
Revision of Risk Assessment - The auditor assessment of RMM may change as additional evidence
obtained, shall revise the assessment & modify further planned procedures accordingly.

RISK ASSESSMENT PROCEDURES
Performed audit •Entity
procedures to obtain •Its environment,
an understanding •Its internal control,
To identify and assess RMM •Whether due to fraud or error,
At both •Financial statement level

levels. •Assertion levels.
•Inquiries of management, and of
others within the entity.
Components •Analytical procedures.
•Observation and inspection.
OBTAINING AN UNDERSTANDING OF THE ENTITY AND ITS ENVIRONMENT
OBTAINING AN UNDERSTANDING OF THE ENTITY AND ITS ENVIRONMENT
Relevant The Nature of the entity

Industry, Objectives and Selection and
Measurement
regulatory, and strategies, and application of
and review of
other external those related its ownership and accounting
the entity’s
factors including business risks governance structures; policies,
financial
applicable FRF that may result including the
performance
in RMM reasons for
changes thereto
its operations
the way that the entity is structured

and how it is financed
the types of investments that the

entity is making and plan to make
Write a short note on ‘Matters that the auditor may consider when obtaining an
understanding of the nature of the entity’.
Business operations Investments & Financing and Financial reporting
investment activities financing
activities
 Conduct of operations  Capital  Debt structure  Foreign currency
 Nature of revenue sources, investment and related assets, liabilities
products or services, and markets, activities. terms, and transactions.
including involvement in electronic  Planned or  Use of  Revenue
commerce such as internet sales recently executed derivative recognition
and marketing activities. acquisitions or financial practices..
 Transactions with related parties. divestitures. instruments.  Accounting for
 Research and development  Investments and  Beneficial unusual or
activities and expenditures. dispositions of owners and complex
transactions.

 Alliances, joint ventures, and securities and related  Accounting for
outsourcing activities. loans. parties. fair values
 Key customers and important  Investments in  Major  Accounting
suppliers of goods and services, non-consolidated subsidiaries principles and
employment arrangements. entities, including and associated industry - specific
 Geographic dispersion and partnerships, joint entities, practices,
industry segmentation. ventures. including including industry
 Location of production facilities, consolidated - specific
warehouses, and offices, and and non- significant
location and quantities of consolidated categories.
inventories. structures.
List the various sources through which information about the Clients Business shall
be obtained by the Auditor / Knowledge of the client business
 The previous year’s audit working papers, and other relevant files.
 The Clients Annual Reports to Shareholders.
 Internal Financial Management Reports for current and previous periods, including budgets,
if any.
 The Clients Policy and Procedures Manual.
 Consideration of the state of the economy and its effect on the Clients business.
 Visits of the Clients premises and plant facilities.
 Minutes of meeting of Shareholders, Board of Directors and important Committees.
 Discussion with the Clients on various business, operational, and other issues.
 Discussion with internal auditor.
 Discussion with other auditor.
 Discussion with knowledgeable people outside entity.
 Relevant publications of ICAI, Industry Publications, Trade Journals, Magazines, Newspapers
or Textbooks.
Assertion: These are declarations made by the Management that are embodied in the Financial
Statements. Classification of Assertions
Assertions in relation to Assertions about Account Balances Assertions about Presentation and
Transactions or events Disclosure
♦ Accuracy - transactions have ♦ Existence - assets and liabilities shown Classification and understandability
been recorded accurately. in the balance sheet exists. - financial information is appropriately
♦ Occurrence - transactions♦ Completeness - assets and liabilities presented and disclosures are clearly
that have been recorded have have been recorded completely.
occurred during the year. expressed.
Valuation and allocation - assets and
♦ Classification - transactions liabilities are included in the financial ♦ Accuracy and Valuation - financial
have been properly classified statements at appropriate amounts and other information are disclosed
into capital and revenue fairly and at appropriate amounts.
and any allocation adjustments are ♦ Occurrence and Rights and obliga-
♦ Completeness - transactions appropriately recorded. tions - disclosed transactions have oc-
have been recorded curred and belong to the entity.
completely. ♦ Rights and obligations - rights of the
♦ Cut-off - transactions have entity have been shown as assets and♦ Completeness - disclosures in the fi-
the obligations
been recorded in correct liabilities. have been shown as nancial statements are complete.
accounting period.

Understanding the Entity’s Internal Controls
The auditor shall obtain an understanding of internal control relevant to the audit.
Although most controls relevant to the audit are likely to relate to financial reporting, not all controls that relate
to financial reporting are relevant to the audit.
Nature and Extent of the Understanding of Relevant Controls

While obtaining understanding of controls that are relevant to the audit, the auditor should evaluate the design of
those controls and determine whether they have been implemented.
COMPONENTS OF INTERNAL CONTROL
Components of Internal Control
Control Risk Assessment Monitoring of Control Activities Information

Environment Process Controls relevant to Audit System
(a) Control Environment: The control environment includes the governance and management
functions and the attitudes, awareness, and actions of those charged with governance and
management concerning the entity’s internal control and its importance in the entity. The
control environment sets the tone of an organization, influencing the control consciousness
of its people.
(b) Risk Assessment Process: The entity’s risk assessment process forms the basis for how
management determines the risks to be managed. If that process is appropriate to the
circumstances, including the nature, size and complexity of the entity, it assists the auditor
in identifying risks of material misstatement. Whether the entity’s risk assessment process
is appropriate to the circumstances is a matter of judgment.
(c) Information System - Areas to be examined : The information system relevant to
financial reporting objectives, which includes the accounting system, consists of the
procedures and records designed and established to:
i. Initiate, record, process, and report entity transactions;
ii. Resolve incorrect processing of transactions;
iii. Transfer information from transaction processing systems to the general ledger;
iv. Capture information relevant to financial reporting for events and conditions other than
transactions, such as the depreciation and amortisation of assets; and
v. Ensure information required to be disclosed by the applicable FRF is accumulated,
vi. recorded, processed, summarized and appropriately reported in the F.S.
(d) Control Activities relevant to Audit: Control activities are the policies and procedures
that help ensure that management directives are carried out. Control activities, whether
within IT or manual systems, have various objectives and are applied at various
organisational and functional levels.
(e) Monitoring of Controls: Monitoring of controls is a process to assess the effectiveness of
internal control performance over time. It involves assessing the effectiveness of controls
on a timely basis and taking necessary corrective actions.

NOTE: For Topics - Areas to be examined for deficiencies & Risk identification in CIS
Environment, Risk to Internal Control imposed by IT (Refer Chapter – 5)
IMPORTANT QUESTIONS
1. What are the points to be remembered while evaluating the knowledge of the business
in the conduct of an audit?
2. Write short note on: Sources of obtaining knowledge of client's business.
3. Write short note on: Knowledge of Client's Business
4. Write short note on: Risk Assessment procedures
5. What is Internal Control. Explain various components of Internal Control
6. Write short note on: Assertion about balance at the end of the reporting period.
7. The auditor may exercise his judgment to identify which risks are significant risks.
Explain the above in the context of SA 315.
8. “Risk of material misstatement at the assertion level for classes of transactions, account
balances and disclosures need to be considered.” Explain stating the different categories
of assertions used by the auditor.
9. In performing an audit of financial statements, the auditor should have or obtain
knowledge of the business. Explain in the light of SA 315 “Identifying and Assessing the
Risks of Material Misstatement through Understanding the Entity and its Environment”.
10. Write a short note on ‘Matters that the auditor may consider when obtaining an
understanding of the nature of the entity’.

SA 320(REVISED) MATERIALITY IN PLANNING AND PERFORMING AN AUDIT
SA 320
Objective Concept of Materiality in Definition Requirement of SA/

the Context of an Audit Auditor Responsibilities
The auditor is If applicable FRF does not include Determining Docume

to apply the a discussion of the concept of Materiality & Revision as ntation
concept of materiality, the characteristics Performance Performance the Audit
materiality referred provide the auditor with materiality - Materiality Progresses
appropriately such a frame of reference: It means the when
in planning Misstatements, including amount or Planning the
and omissions, are material if amounts set Audit The auditor Materiality
performing influence the economic by the auditor shall revise for F.S. as a
the audit. decisions of users taken on the at less than materiality whole
basis of F.S. materiality for for F.S. as a (b) If
Judgments about materiality are F.S. as a whole whole in the applicable,
made in the light of surrounding When event of the
to reduce to establishing becoming
The auditor circumstances, and are affected an materiality
by the size or nature of the overall aware of level or
to assume appropriately information
that users: misstatement audit levels for
low level strategy, during the
• Judgments about matters are particular
Have a the the auditor audit that classes of
reasonable material to users of F.S. are based probability shall would have
on a consideration of the common transactions
knowledge that the determine caused the , account
of business financial information needs of aggregate of materiality auditor to
users as a group. The possible balances or
and uncorrected for F.S. as a have disclosures;
effect of misstatements on specific and whole. determined a
economic
individual users, whose needs may undetected different c)
activities vary widely, is not considered. The auditor
misstatement amount Performanc
Understand shall initially e.
s exceeds determine
F.S. are materiality for materiality;
prepared, performanc ♦If the and
The auditor’s determination of F.S. as a e auditor
presented materiality is a matter of whole. (d) Any
and audited materiality concludes
professional judgment, and is If applicable, for that a lower revision of
to levels of affected by the auditor’s (a)-(c) as
performance purposes of materiality
materiality; perception of F.S. for F.S. as a the audit
materiality assessing
Recognize The concept of materiality is also refers to RMM and whole than progressed
uncertainties applied by the auditor both in the amount or determinin that initially
inherent in planning and performing the amounts set g NTE of determined
amounts audit, and in evaluating the effect by the auditor further is
based on the of identified misstatements on the at less than audit appropriate,
use of audit and of uncorrected the procedures. the auditor
estimates, misstatements, if any, on the F.S. materiality shall
judgment and in forming the opinion in level or levels determine
and the the auditor’s report. for particular whether it is
consideratio classes of necessary to
In planning the audit, the auditor revise
transactions,
n of future makes judgments about the size performance
account
events; and of misstatements that will be materiality,
balances or
Make considered material. These and whether
disclosures
judgments provide a basis for: NTE of the
reasonable
economic (a) Determining NTE of risk further audit
decisions on assessment procedures; procedures
basis of F.S. (b) Identifying and assessing remain
RMM; and appropriate..
(c) Determining NTE of further
audit procedures.

1. Materiality and Audit Risk
 In conducting an audit of financial statements, the overall objectives of the auditor are to
obtain reasonable assurance about whether the financial statements as a whole are free from
material misstatement, whether due to fraud or error, thereby enabling the auditor to express
an opinion on whether the financial statements are prepared, in all material respects, in
accordance with an applicable financial reporting framework; and to report on the financial
statements, and communicate as required by the SAs, in accordance with the auditor’s findings.
 The auditor obtains reasonable assurance by obtaining sufficient appropriate audit
evidence to reduce audit risk to an acceptably low level.
 Audit risk is the risk that the auditor expresses an inappropriate audit opinion when the
financial statements are materially misstated.
 Audit risk is a function of the risks of material misstatement and detection risk.
Materiality and audit risk are considered throughout the audit, in particular, when:
(a) Identifying and assessing the risks of material misstatement;
(b) Determining the nature, timing and extent of further audit procedures; and
(c) Evaluating the effect of uncorrected misstatements, if any, on the financial statements and
in forming the opinion in the auditor’s report.
2. Relationship between Materiality and Audit Risk

Generally, management / employees don't commit fraud in high value items. Moreover, as a
general practice, auditor examines high value items in detail. Thus, it is less risky that high value
Fraud and Error may not be detected. Thus high materiality level leaves audit risk at lower degree.
Hence, inverse relation between Materiality and Audit Risk
3. Audit Planning & Materiality

 Materiality is an important consideration for an auditor to evaluate whether the financial
statements reflect a true or fair view or not. SA 320 on "Materiality in Planning and Performing
an Audit" requires that an auditor should consider materiality and its relationship with
audit risk while conducting an audit.
 When planning the audit, the auditor considers what would make the financial information
materially misstated. The auditor's preliminary assessment of materiality related to specific
account balances and classes of transactions helps the auditor decide such questions as what
items to examine and whether to use sampling and analytical procedures.
 This enables the auditor to select audit procedures that, in combination, can be expected to
support the audit opinion at an acceptably low degree of audit risk.
4. Benchmark materiality
Determining materiality involves the exercise of professional judgment. A percentage is often
applied to a chosen benchmark as a starting point in determining materiality for the financial
statements as a whole. For example, as per Part H of Schedule III to the Companies Act, 2013, any
expense exceeding one per cent of the total revenue of the company or Rs. 1,00,000 whichever is
higher, shall be disclosed as additional information and shall not be combined with any other item
under miscellaneous expenses.
Factors that may affect the identification of an appropriate benchmark include the following:
 The entity’s ownership structure and the way it is financed (for example, if an entity is
financed solely by debt rather than equity, users may put more emphasis on assets, and claims
on them, than on the entity’s earnings); and

 The elements of the financial statements (e.g., assets, liabilities, equity, revenue, expenses);
 The nature of the entity, where the entity is at in its life cycle, and the industry and economic
environment in which the entity operates;
 The relative volatility of the benchmark.
 Whether there are items on which the attention of the users of the particular entity’s financial
statements tends to be focused (for example, for the purpose of evaluating financial
performance users may tend to focus on profit, revenue or net assets);
5. Explain general considerations which may be useful in deciding

materiality./ Factors which act as guiding factors to materiality.
Quantitative as well as Materiality has both quantitative and qualitative dimensions. Example wrong
Qualitative description of accounting policy in notes to accounts.
Impact on future An item whose impact is insignificant at present, but in future it may be material item.
Special Circumstances Even insignificant items may be material in special circumstances.
A small inaccuracy is material if it converts a small loss into a profit or vice-versa, it
will be a material item.
Statutory Requirements The materiality depends on the regulatory or legal considerations.
e.g. excess payment of Rs 1000 to Directors as Remuneration.
Described by Law Sometimes the materiality of an item in terms of quantity is described in law itself. For
example, Schedule III requires disclosure of items of expenditures which are in excess of
one percent of the revenue from operations or ` 1,00,000, whichever is higher.
Individual and aggregate The item of materiality may be determined individually as well as aggregate.
6. List a few indicators of materiality/Factors influencing Materiality

Materiality depends upon the size and nature of the item judged in the particular circumstances of
its misstatements. It is also influenced by-
• Legal and regulatory requirements, non-compliance of which may have a significant
bearing on the financial information, and
• Considerations which may have a significant bearing on the financial information, and
• Considerations relating to individual account balances and relationships.
These factors may results in different levels of materiality depending on the matter being audited.
IMPORTANT QUESTIONS
1. Explain concept of materiality and factors which act as guiding factors to this concept.
2. Write short note on: Factors affecting the identification of an appropriate benchmark in
determining materiality. Or
With reference to SA 320 indicate the factors which may affect the identification of an appropriate
benchmark in determining materiality for F.S. as a whole.
3. Write short note on: Audit Planning and Materiality.
4. Write short note on: Materiality and Audit Risk.
5. Concept of Materiality.
6. Relationship between Materiality and Audit Risk

SA 330- THE AUDITOR'S RESPONSES TO ASSESSED RISKS
Some Relevant Concepts for SA – 330
RESPONSES TO ASSESSED RISK
Nature of audit procedures Timing of audit procedures Extent of audit procedures

Assessed
Assessed Assessed Assessed Risk
Risk is Assessed Assessed
Risk is High Risk is High is Low
Low Risk is High Risk is Low
Audit More transaction Less transaction will
Audit Full Year Part of Year will be taken for be taken for
Procedures
Procedures transaction transaction verification or verification or
will be
will be Less will be will be sample size will be sample size will be
More
covered covered bigger smaller
Test of Controls & application of substantive procedures
Identify the area
Whether internal control exists
Yes No
Whether IC Reliable More substantive procedures
Yes No
Less substantive procedures but performing

More substantive procedures
substantive procedures are must
Overall response to assess RMM at F.S. Level
Highlight Assigning Providing Incorporating Making general changes

audit team more more additional elements to NTE of audit
the need to experienced supervision of unpredictability in procedures, for example:
maintain staff or those the selection of modifying the nature of
Professional with special further audit audit procedures to
Skepticism skills or using procedures to be obtain more persuasive
experts. performed. audit evidence.
Nature & Extent of Substantive Procedures

Only Substantive Analytical Procedures Only test of Combination of Substantive Analytical
For eg where the auditor assessment of risk is details Procedures & Test of details, as these are
supported by audit evidence from test of controls most responsive to assessed risk.

SUMMARY OF SA - 330
Objective - To obtain SAAE about assessed RMM, through designing and implementing appropriate responses to those risks
Audit Procedures Responsive to Assessed RMM at Assertion Level Adequacy of Evaluating Docume
Presentation sufficiency and ntation
Substantive and appropriateness
Test of Controls
procedures Disclosure of Audit
Evidence
Auditor shall perform procedure designed Overall
to evaluate operating effectiveness of Auditor procedure responses
Auditor shall Unable to address
controls in preventing, or detecting and designed to detect Obtain
perform to assessed
correcting, material misstatements at material misstatements audit obtain RMM at
assertion level at assertion level. procedures No F.S. level
Substantive procedures to evaluate
Auditor shall design and perform tests of comprise: issue Modify Linkage of
whether the
controls for relevant controls when: (i) Tests of details (of overall procedures
opinion with
He expects controls are operating classes of transactions, presentation
effectively, or account balances, and of F.S., assessed
disclosures), and including risks at
Substantive procedures alone cannot assertion
related
provide SAAE (ii) Substantive level
disclosures,
analytical procedures.
is in Results of
Nature & Extent of Test of Controls :In accordance audit
designing and performing tests of controls, with procedures
Auditor shall consider
auditor shall: applicable
whether External conclusions
How the controls were applied at relevant Confirmation FRF
reached
times during audit. procedure are to be about
The consistency with which they are applied. performed as relying on
Substantive procedure such
By whom or by what means they were - Refer Below controls
applied.
Reconcile
Irrespective of assessed RMM , of F.S. with
Timing - Auditor shall test controls for
auditor shall design and perform underlying
particular period or throughout the period as
substantive procedures accounting
intends to rely on these controls
records
Related to Responsive
Auditor should consider
F.S. Closing to Significant
- Using audit evidence obtained during Process Risks
an interim period
Obtain audit evidence about significant (a) Agreeing
changes to those controls subsequent to or reconciling Auditor
the interim period; and F.S. with shall
Determine additional audit evidence to underlying perform
be obtained for remaining period accounting substantive
records; and procedures
- Using audit evidence obtained in that are
previous audits (b) Examining
specifically
material
If changes, auditor shall test the controls responsive
journal
in current audit to that risk
entries and
If no changes : at least once in every other
third audit adjustments
made during
Evaluating Operating Effectiveness of the course of
Controls preparing F.S.
Timing - When
If auditor identified material weakness in substantive procedures
operating effectiveness of controls are performed at an
interim date, auditor shall
Communication with TCWG cover remaining period

Factors warranting re-test of controls
In addition, the length of time between retesting such controls is also a matter of professional judgment.
Personnel changes A significant Changing circumstances Deficient Deficient

A deficient monitoring
that significantly manual element to control that indicate the need general IT-
affect application the relevant for changes in the controls. of controls.
environment
of the control. controls. control.
Factors to be considered to determine the Extent of Test of Controls
Frequency of Relevance & reliability of Extent to which audit

Length of time Expected rate
performance audit evidence to be evidence is obtained from
during the audit of deviation
of controls obtained other test of controls
Auditor shall consider whether External Confirmation procedure to be performed as Substantive procedure
Areas where external confirmation may be used Factors assisting the auditor in determining use of
external confirmation
External confirmation procedures frequently are relevant when The Confirming party's knowledge of subject matter:
addressing assertions associated with account balances and their responses may be more reliable if provided by a person
elements, but need not be restricted to these items at the confirming party who has the requisite
For example, auditor may request external confirmation of terms of knowledge about the information being confirmed.
agreements, contracts, or transactions between an entity and other
parties
Other situations where external confirmation procedures may provide The ability or willingness of intended confirming party
relevant audit evidence in responding to assessed RMM to respond
May not accept responsibility for responding to a
confirmation request;
Bank balances and other information relevant to banking relationships. May consider responding too costly or time consuming;
Accounts receivable balances and terms. May have concerns about the potential legal liability
resulting from responding;
Inventories held by third parties at bonded warehouses for processing or
on consignment. May account for transactions in different currencies; or
Property title deeds held by lawyers or financiers for safe custody or as May operate in an environment where responding to
security. confirmation requests is not a significant aspect of day-
to-day operations.
Investments held for safekeeping by third parties, or purchased from
stockbrokers but not delivered at the balance sheet date. In such situations, confirming parties may not respond,
may respond in a casual manner or may attempt to
Amounts due to lenders, including relevant terms of repayment and restrict the reliance placed on the response.
restrictive covenants.
Accounts payable balances and terms.
The objectivity of intended confirming party- if the
confirming party is a related party of the entity,
responses to confirmation requests may be less reliable.
QUESTIONS:
1. Write short note on: Tests of Controls and Substantive Procedures
2. Write short note on: Factors warranting re-testing of Internal controls.
3. External confirmation procedures frequently are relevant when addressing assertions
associated with account balances and their elements, but need not be restricted to these items.
4. State the Factors assisting the auditor in determining use of external confirmation
procedures are to be performed as substantive procedures.

SA 402 - “AUDIT CONSIDERATIONS RELATING TO AN ENTITY USING
SERVICE ORGANISATIONS” (W.E.F. 01.04.2010)
SOME RELEVANT TERMS USED IN SA - 402
SO provides requisite services
Service Organisation (SO) - A third party

User Entity - An entity that
organization that provides services to user
uses SO and whose F.S.
entities that are part of those entities
are being audited.
information systems relevant to financial
reporting.
User Entity outsources

work to SO
User Auditor - An Auditor who Service Auditor - An Auditor

audits and reports on the who at the request of SO,
financial statements of a user provides an assurance report
entity (SA – 402) on the controls of SO
Explain the important requirements which should be kept in mind to establish or evaluate a
system of internal control for application process at Service Bureau?
Requirements of Internal Control System at a Service Bureau: Various requirements to establish or
evaluate a system of internal control for applications processed at a service bureau are stated
below-
 Liaison between bureau and user should be clearly defined. Senior member of the user’s
staff is appointed as liaison officer.
 Need for a system testing including all clerical procedures at the user company.
 Control over physical movement of data and in this respect whether a copy or microfilm of
documents sent to the service bureau is kept.
 Planning procedure so that error is identified by documents provided by the bureau. The
user must ensure that prompt correction and resubmission of rejection to meet the
bureau processing schedule.
 Establishing a system in the user company to ensure that all exceptional reports are
received from bureau.
 Establish clerical control to verify the accuracy of computer processing.
Normally, user has no physical control over the files; therefore, high control over the maintenance
of data on master files should be established

RELEVANT TOPICS
Objective Important Definitions Type 1 and

Type 2
Types of Report by SO Reports that
To obtain an Sub-Service Exclude the
Complementary
understanding Organisation - Services of a
User Entity Type 2 Report
of nature and A SO used by Type 1 Report Subservice
Controls - (Report on the
significance of another SO to (Report on Organisation
Controls that SO Description,
service assumes, in the perform some Description and
provided by SO of the Services Design, and
design of its Design of Operation
and their effect service, will be provided to Controls at SO) Effectiveness of If the user
on the user's implemented by User Entities
Controls at SO) auditor plans
entity IC User Entities, and that are part
to use a Type
relevant to the which, if of those User A Report given 1 or a Type 2
audit, sufficient necessary to Entities’ by Service A Report given by report that
to identify and achieve control information Auditor to User Service Auditor to User excludes the
assess RMM objectives, are systems Entity’s Auditor Entity’s Auditor that services
identified in the relevant to that comprises- comprises- provided by a
description of its financial
(a) A description, subservice
system. reporting (a) A description,
prepared by organisation
To design and prepared by
Management of and those
perform audit Management of SO, of
SO, of SO services are
procedures SO system, control
system, control relevant to
responsive to objectives and related
objectives and the audit of
those risks controls, their design
related controls the user
and implementation as
that have been entity's F.S.
at a specified date or
designed and the user
throughout a specified
implemented as auditor shall
period and, in some
at a specified apply the
cases, their operating
date, and requirements
effectiveness
of this SA
(b) A report by throughout a specified
with respect
the Service period, and
to the
Auditor, with the (b) A report by the services
objective of Service Auditor with provided by
conveying the objective of the
reasonable conveying reasonable subservice
assurance that assurance that organisation
includes the includes- also
Service Auditor
opinion on the • The Service Auditor’s
description of SO Opinion on the
system, control description of the SO
objectives and system, control
related controls, objectives and related
and the controls, the suitability
suitability of the of the design of the
design of the controls to achieve the
controls to specified controls
achieve the objectives, and the
specified operating
controls effectiveness of the
objectives controls, and
• A description of the
Service Auditor’s tests
of the controls and the
results thereof.

Auditor Responsibilities
Obtaining Unable to Tests of Reporting

Obtaining Responding Audit
understanding obtain Controls by User
understanding to Assessed Procedures
of services sufficient Auditor
of IC RMM in case of
provided by SO understanding
Fraud or
at user
User auditor Non-
User Auditor
User auditor shall obtain Compliance
User auditor shall modify
shall obtain an If user auditor Determine audit opinion if he
shall evaluate is unable to whether evidence
understanding is unable to
the design and obtain a SAAE w.r.t. about the
of how user obtain SAAE,
implementatio sufficient F.S. operating Inquire of
entity uses the regarding
n of relevant understanding assertions effectivenes User Entity
services of SO the services
controls of user from user are s of those Mgt whether
in the user provided by
entity that entity, user available controls SO has
entity SO relevant
relate to the auditor shall from from one or reported
operation, to audit of
services obtain that records more of the instances of
including: User Entity
provided by SO understanding held at following any Fraud, F.S
from one or User procedures: Non-
Nature of more of Entity. If compliance
service User auditor
shall following Not: with Law and The User
provided by procedures: Obtaining a Regulations or
SO and determine Auditor shall
Type 2 Uncorrected
significance of whether a not refer to
report, if Misstatement
those services sufficient Obtaining a Perform report of
available affecting F.S.
to user entity understandin Type 1 or Type further Service
g of nature audit of User Entity auditor
2 Report, if
and available procedures Performing unless
Nature and significance to obtain appropriate required by
materiality of of services SAAE; tests of Law &
Contacting Evaluate
transactions provided by controls at Regulation
SO, through OR impact on
processed or SO their SO
user entity, Use another NTE of
financial effect on the
to obtain the auditor to further audit
reporting user entity IC If reference to
sufficient perform procedures,
processes relevant to Using work of a
information those Including
affected by SO the audit has another service auditor
procedures Auditor's
been auditor to is relevant to
at SO Con-
obtained Visiting SO and perform an
The degree of elusions and
performing tests of understanding
interaction Audit report.
procedures controls at of a
between the SO on modification to
activities of SO behalf of user auditor's
and those of Using another the user opinion, user
the user entity auditor to perform auditor auditor's report
procedures that will shall indicate
provide the that such
The nature of
necessary reference does
relationship
information about not diminish
between user
the relevant user auditor's
entity and SO
controls at SO responsibility
for that
opinion.
1. “As per SA 402, the user auditor shall obtain an understanding of how user entity uses the services of a
service organization in the user entity operations” Explain the various matters of which understanding is
required.
2. In the course of audit of R Ltd. the audit manager of ABC & Co. observed that R Ltd has outsourced certain
activities to an outsourcing agency. As the engagement partner guide the audit manager in athe
assessment of services provided by the outsourcing agency in relation tos the audit.

SA 450 EVALUATION OF MISSTATEMENTS IDENTIFIED DURING THE AUDIT
Definition of Misstatement:
Difference in (the items of F.S. •amounts

regarding) •classification
•presentation, or disclosure
•reported F.S. item &
Between •required for the item to be in
accordance with the applicable FRF
•error or
can arise from
•fraud
Causes of Misstatement:
Causes of Misstatement
An An incorrect Judgement of Mgt

An inaccuracy in The selection &
omission accounting estimate concerning
gathering/ application of accounting
of an arising from accounting estimates
processing data policies that the auditor
amount or overlooking, or clear that Auditor
from which F.S. considers inappropriate.
disclosure, misinterpretation of considers
are prepared,
facts unreasonable
Summary
Auditor detects Misstatement
Accumulate misstatements identified during the audit, other than those that are clearly trivial
Auditor shall determine whether the overall audit strategy and audit plan need to be revised
Communicate with Mgt & request to Correct
Mgt Corrects Mgt Refuses
Obtain an understanding of management's reasons for not making corrections
Perform additional Reassess materiality determined in accordance with SA 320

audit procedures to Determine whether uncorrected misstatements are material ( by considering Size &
determine whether
Nature
misstatements
remain. Effect of uncorrected Misstatement of prior periods)
If Material, Communicate to TCWG uncorrected misstatements and effect on
the opinion in the auditor's report and
request that uncorrected misstatements be corrected
If not corrected consider the impact on Auditors Report
Obtain WR from Mgt/TCWG whether they believe the effects of

uncorrected misstatements are immaterial
1. Explain the various causes of misstatement.

SA 500 (REVISED) AUDIT EVIDENCE
SA 500
Definition Objective Information to be Inconsistency

used as Audit or doubt over
Evidence reliability of
Audit Evidence Design and
perform Audit
- Information evidence
used by the Audit
Procedur Information Information
auditor in prepared produced
arriving at the e to obtain
SAAE using the within the
conclusions on work of entity Determine
which the Management modification
auditor's expert s or
opinion is additions in
• Obtain Audit
based.
• Evaluate evidence Procedures
Management's Competence, about to resolve
expert — An Capability and Accuracy, the matter
individual or Objectivity of Completeness
organisation expert of Consider the
possessing information effect of
• matter on
expertise in a • Evaluate
Understanding other aspect
field other than
expert Work whether of Audit
accounting or
• Evaluate information
auditing, whose sufficiently
work in that Appropriatenes
s of work presised
field is used by
the entity to (For more detail
assist in refer chart
preparing F.S. below)
Reliability of audit evidence

Discuss the principles used in assessing the reliability of audit evidence
"The reliability of audit evidence is influenced by its source, nature and
circumstances under which it is obtained". Discuss.
Audit Evidence MORE Reliable when
Obtained Obtained from Provided by Obtained directly Related internal

Documentary form External Source original documents by Auditor controls are good
As per SA 500 on “Audit Evidence”, the reliability of information to be used as audit

evidence is influenced by its source and its nature, and circumstances under which it is
obtained, including the controls over its preparation and maintenance where relevant.
Therefore, the reliability of various kinds of audit evidence are subject to important
exceptions. Even when information to be used as audit evidence is obtained from sources
external to the entity, circumstances may exist that could affect its reliability. The following
generalisations about the reliability of audit evidence may be useful:

 Evidence provided by original documents is more reliable than those provided by
photocopies or digitized documents.
 Evidence obtained directly by auditor is more reliable than that obtained through client.
 Documentary form Evidence is more reliable than oral evidence
 External evidence is generally more reliable than internal evidence.
 Internal Evidence is reliable if related internal controls are good.
Audit Procedure to obtain Audit Evidence

What are the various audit procedures to obtain audit evidence? Mention in brief.
Mr. A was appointed as an auditor of X Ltd, he was not able to gather SAAE. Discuss
how he should proceed to gather more audit evidence.
Compliance & substantive procedures are performed by following methods:
 Inspection involves examining records or documents, whether internal or external, in paper
form, electronic form, or other media, or a physical examination of an asset.
 Inspection of records & documents provides audit evidence of varying degrees of reliability.
 An example of inspection used as a test of controls is inspection of records for evidence of
Inspection authorisation.
Recalculation consists of checking the arithmetical accuracy of records or performing
Recalculation independent calculations
 An external confirmation represents audit evidence obtained by the auditor as a direct
written response to the auditor from a third party, in paper form, or by electronic or other
medium.
 Following are examples of situations where external confirmations may be useful-
(i) Bank balances and other information from bankers
(ii) Account receivables balances
External (iii) Inventory held by third parties
Confirmation (iv)Account payable balances.
 Analytical procedures consist of evaluations of financial information made by a study of
relationships among both financial and non-financial data.
Analytical  Analytical review refers to studying significant ratios and trends and investigating unusual
review fluctuations
 Inquiry consists of seeking appropriate information from knowledgeable persons
inside or outside the entity.
 Inquiry is used extensively throughout the audit in addition to other audit procedures.
 Inquiries may range from formal written inquiries to informal oral inquiries.
 Evaluating responses to inquiries is an integral part of the inquiry process. Responses to
inquiries may provide the auditor with information not previously possessed or with
corroborative audit evidence. Alternatively, responses might provide information that differs
significantly from other information that the auditor has obtained, for example, information
regarding the possibility of management override of controls. In some cases, responses to
inquiries provide a basis for the auditor to modify or perform additional audit procedures.
 Although corroboration of evidence obtained through inquiry is often of particular
importance, in the case of inquiries about management intent, the information available to
support management’s intent may be limited. In these cases, understanding
management’s past history of carrying out its stated intentions, management’s stated reasons
for choosing a particular course of action, and management’s ability to pursue a specific
Inquiry course of action may provide relevant information to corroborate the evidence obtained

through inquiry. In respect of some matters, the auditor may consider it necessary to
obtain written representations from management and, where appropriate, those
charged with governance to confirm responses to oral inquiries.
Observation  Observation consists of looking at a process or procedure being performed by others.
 For example, the auditor may observe the counting of inventories being performed by client's
personnel.
Re  It means performing some work which had already been done by management. For Eg.-
Performance Preparing Bank Reconciliation statement.
Evaluation the work of Management expert
Evaluate Competence, Capability and Understanding Evaluate

Objectivity of expert expert Work Appropriateness of
work
Competence: relates to the nature and
level of expertise
Capability: relates the ability to exercise
that competence Areas of specialty
Objectivity: relates to the possible effects within field of expertise The relevance and
that bias, conflict of interest or the influence Applicable reasonableness of that
of others may have on the professional or professional or other expert’s findings or
business judgment of the management’s standards, and conclusions,
expert. regulatory or legal Consistency with
requirements. other audit evidence,
Assumptions and Whether they have
methods used and been appropriately
Sources of Information whether they are reflected in F.S.
Personal experience with previous work generally accepted Relevance and
within that expert’s reasonableness of
Discussions with that expert. field and appropriate those assumptions
Discussions with others who are familiar with for financial reporting and methods; and
that expert’s work. purposes.
Relevance,
Knowledge of that expert’s qualifications, Nature of internal and completeness, and
membership of a professional body or industry external data or accuracy of that
association, license to practice, or other forms information the source data.
of external recognition. auditor’s expert uses.
Published papers or books written by that
expert.
An auditor’s expert
IMPORTANT QUESTIONS
1. "The reliability of audit evidence is influenced by its source, nature and circumstances
under which it is obtained". Discuss. or (5 Marks, November, 2013)
Write a short note on Reliability of Audit Evidence.
2. "Inquiry is one of the audit procedure to obtain audit evidence". Discuss.
3. While conducting audit of a bank, you find that the bank has advanced loan for purchase of
machinery on the basis of valuation report prepared by a civil engineer. Will you approve
the action taken by bank? Justify the answer.
4. What are the various procedures of obtaining audit evidence? Mention the same in brief.

SA 501 (REVISED) - AUDIT EVIDENCE - SPECIFIC CONSIDERATIONS FOR SELECTED ITEMS
Auditor’s Objective
To Obtain Sufficient appropriate audit Evidence
Inventory Litigation and Claims Segment Information
Existence & Condition Completeness Presentation and disclosure as per applicable F.R.F
AUDIT PROCEDURES W. R. T. INVENTORY
SAAE w.r.t Existence Inventory Auditor Attendance at Inventory Under

& Condition counting unable to inventory custody and control
conducted at attend count is of Third Party
date other Inventory impracticable
than B/S Count
When inventory is date Obtain SAAE by
material to F.S., auditor Perform performing following:
shall obtain SAAE Make or alternative (a) Request
regarding existence & observe audit confirmation from third
condition of inventory Perform some procedures party
by: audit physical to obtain
procedures SAAE (b) Perform
Attendance at physical counts on Inspection/other audit
to obtain an regarding
inventory counting, existence & procedure.
unless impracticable, to: audit alternative
evidence date, and condition of
• Evaluate mgt. about perform inventory If doubt arises over
instructions & whether audit integrity/ Objectivity of
procedures for recording changes in procedures third party, perform
& controlling the results inventory on following:
of the entity's physical between the intervening If it is not
inventory counting; possible to (a) Attending/ arranging
count date transactions for another auditor to
•Observe the and date of do so,
modify the attend, the third party's
performance of mgt's F.S. are physical counting of
count procedures; properly opinion in
auditor's inventory, if practicable.
recorded.
• Inspect inventory; report in (b) Obtaining service
• Perform test counts; accordance auditor's report, on
with SA 705. adequacy of third
party's I.C. w.r.t. proper
count and safeguard of
Performing audit inventory.
procedures over the (c) Inspecting
entity's final inventory documentation,
records to determine
whether they accurately (d) Requesting
reflect actual inventory confirmation from other
count results parties when inventory
pledged as collateral.

AUDIT PROCEDURES W.R.T. LITIGATION AND CLAIMS
Identify litigations RMM w. r. t. If Mgt. does not Written

and claims existence of Litigation permit auditor to Representation
or Claim. communicate with
legal counsel
Auditor is required to From Mgt.
Seek Communication or and TCWG
identify litigations and
claims by following directly with Entity's Legal counsel
procedures: External legal Counsel. refuses to respond All known
Inquiry: of Mgt. & others actual/possible
within entity. If law/ regulation or Litigation & Claim
Auditor is unable
respective legal affecting FS have
Review - minutes of to obtain SAAE
professional body been disclosed to
meetings of TCWG,
prohibits entity's external the auditor; and
communication between Modify the Opinion
entity & external legal legal counsel from
communicating directly in accordance with
counsel. Appropriately
with the auditor, the SA 705
Review - legal expenses accounted for and
auditor shall perform disclosed in
account alternative audit accordance with
procedures the applicable FRF.
AUDIT PROCEDURES W.R.T. SEGMENT INFORMATION
Obtain SAAE regarding the presentation and disclosure of segment

information in accordance with applicable FRF by
Obtaining an understanding of the Performing analytical procedures

methods used by management in or other audit procedures
determining segment information appropriate in the circumstances
Evaluating whether such methods are likely to result in Where appropriate, testing the
disclosure in accordance with applicable FRF application of such methods
QUESTIONS
1. Explain the procedures to be performed by auditor to obtain sufficient and appropriate
audit evidence regarding the existence and condition of inventory.
2. Explain the auditor’s procedures w.r.t. determination of existence and condition of
inventory under the following circumstances:
(a) Inventory count conducted at a date other than balance sheet.
(b) To attend the inventory is impracticable.
3. Write a short note on “Physical attendance by auditor during inventory taking”.
4. Comment on the “Responsibility for properly determining the quantity and value of
inventories rests with the management of the entity”.

SA 505 (REVISED) EXTERNAL CONFIRMATION
SUMMARY OF SA 505
Meaning & Type of External Confirmation Evaluating

Evidence Obtained
Types
External confirmation –
Audit evidence obtained as a whether results of
direct written response to Positive confirmation Negative confirmation external confirmation
the auditor from a third request request procedures provide
party (the confirming party), relevant & reliable
in paper form, or by A request that confirming audit evidence, or
A request that confirming
electronic or other medium. party respond directly to party respond directly to
auditor indicating whether auditor only if the whether performing
confirming party agrees or confirming party disagrees further audit
disagrees with information with the information procedure is
in request, or providing the provided in the request necessary
requested information
Limited use of Negative Confirmation
Negative confirmation provide less persuasive audit evidence than positive confirmation Accordingly, the auditor
shall use negative confirmation requests only when all of the following conditions are present
Low RMM and auditor has Population consists of A very low exception Auditor not aware of
obtained SAAE regarding large no. of small, rate is expected. circumstances that 3rd
operating effectiveness of homogenous account
controls. party disregard request
balances.
Determining the Regarding

information to be Account balances & their elements.
confirmed or requested Terms of agreements/contracts/transactions.
Selecting the Responses to confirmation requests provide more relevant and

Appropriate reliable audit evidence when confirmation requests are sent to a
External Confirming Party confirming party the auditor believes is knowledgeable about
Confirmation the information to be confirmed.
Procedure It also includes:
Designing the determining that requests are properly addressed, And
confirmation requests contain return information for responses to be sent directly to
auditor.
Including follow-up requests when applicable, to confirming
Sending the Requests
party.

Management refuses to allow the auditor to send confirmation request
Inquire as to reasons and seek evidence as to their validity & reasonableness;

Evaluate the implications of refusal on the assessment of risks of material misstatement; and
Perform alternative audit procedures
Mgt refusal appears to be unreasonable Or

Auditor unable to obtain evidence from alternative audit procedure.
Communicate to TCWG in Implications for the Effect on Auditor's opinion in

accordance with SA 260. audit. accordance with SA 705.
If he has doubts about reliability of response, he shall obtain

Reliability of further evidences to resolve doubts
Response If response is found to be unreliable, it may indicate fraud risk
factor. He shall consider its effect on NTE of other procedures..
Non- In the case of each non-response, the auditor shall perform

Responses alternative audit procedures to obtain relevant and reliable audit
evidence.
Responses to
External It means failure of third party to respond or request returned
Confirmation Non — undelivered. In case of each non- response he shall perform
request response to alternate procedures.
positive However, if he determines that response is necessary & thus
Confirmation alternate procedures do not provide SAAE , he should determine
its effect on audit report.
Exception is an response that indicates a difference between

information requested to be confirmed, or contained in the
Exception entity's records, and information provided by confirming party
Investigate to determine whether or not they are indicative of
misstatements.

SOME RELEVANT TOPICS
Areas where External Factors to be considered while Factors that affect

Confirmation may be obtained designing External Confirmation reliability of
requests: confirmations
(a) Property Title Deed held by i. Mgt authorisation to confirming

third parties (a) The character of
parties to respond to auditor. respondents
(b) Bank balance and Other Confirming parties may only be
confirmation from bankers willing to respond to a confirmation (b) The control
request containing mgt authorisation. which the auditor
(c) Loan from Lenders exercises over
(d) Terms of agreement or ii. Specific identified RMM. confirmation
Transaction with Third Parties iii. Ability of Confirming Party to request and
provide/confirm requested responses; and
(e) Investments Purchased but
delivery not taken. information (c) Any restrictions
iv. Prior experience. included in the
(f) Stock Lying with Third Parties
v. Layout & presentation of request. response or
(g) Account Receivable/Account imposed by the
Payable Balances vi.Assertion being addressed. management
vii. Method of communication.
QUESTIONS
1. What is meant by external confirmation? Mention four situations where external confirmation
may be used by auditors.
2. Explain the process of External Confirmation. Give some examples where external confirmation
may be used as audit evidence. (NOV. 11 (8 MARKS)]
3. Point out any eight areas where external confirmation used as an audit evidence.
4. The auditor of H Ltd. wanted to obtain confirmation from its creditors. But the management
made a request to the auditor not to seek confirmation from certain creditors citing disputes.
Can the auditor of H Ltd. Accede to this request?
5. What are the factors to be considered while designing a confirmation request? [NOV. 12 (8
MARKS))
6. Write short note on: Reliability of external confirmations[Nov. 10(4 Marks)]
7. Comment on the following: Negative confirmation provides less persuasive audit evidence than
positive confirmation.

SA 510 “INITIAL AUDIT ENGAGEMENTS - OPENING BALANCES” (W.E.F. APRIL 1, 2010)
Initial audit Engagement
An engagement in which F.S. for the prior period are either
Unaudited Audited by a predecessor auditor
Objective
To obtain sufficient appropriate audit evidence whether
Appropriate accounting policies reflected in the opening balances

Opening balances contain
have been consistently applied
misstatements that materially
affect the current period's F.S
Changes in the accounting policies are properly accounted for and adequately
presented and disclosed in accordance with the applicable FRF
SUMMARY OF SA 510
Audit Procedures
Opening Balance Consistency of Modification

Accounting Policies in Predecessor
The auditor shall read the most recent F.S. and the predecessor auditor's Auditor's
report thereon, if any Obtain SAAE Report
Obtain SAAE w.r.t. existence of any material misstatement by Whether
a) Determining correct b/f of prior period closing balance. accounting policies Evaluate the
reflected in the effect of
b) Determining application of appropriate accounting policies. modification
opening balances
c) Performing one or more of the following: have been
Where the prior year FS. were audited, perusing copies of audited consistently In assessing
FS. applied RMM in
Evaluating whether audit procedures performed in current period Whether changes Current
provide evidence relevant to the opening balances; or in accounting period F.S.
policies have been
Performing specific audit procedures to obtain evidence regarding
properly accounted
opening balances.
for and adequately
If any misstatement detected perform additional procedures to determine presented and
their effect on current period F.S. disclosed in
If misstatement exists in Current Period F.S. communicate to Mgt & TCWG. accordance with
applicable FRF
Note : Ordinarily, the current auditor can place reliance on the closing balances
contained in the financial statements for the preceding period, except when during
the performance of audit procedures for the current period the possibility of
misstatements in opening balances is indicated.

SUMMARY OF SA 510
Audit Conclusions and Reporting
Opening Balance Consistency of Accounting Policies Modification in

Predecessor Auditor's
Auditor concludes that Report
Unable to obtain The current period's accounting
SAAE regarding opening balances contain a policies are not consistently applied in
the opening misstatement and the effect relation to opening balances in
of the misstatement is not Modification remains
balances accordance with applicable FRF; or relevant and material to
properly accounted for or not
adequately presented or Change in accounting policies is not the current period's F.S
disclosed properly accounted for or not
Qualified/ adequately presented or disclosed in
disclaimer of accordance with applicable FRF. Modify the auditor's
opinion Qualified / adverse opinion opinion on the current
period's F.S. accordingly
Qualified /adverse opinion
QUESTIONS
1. Write short note on: Initial audit Engagement. (Hint: Meaning + Objective of SA)
2. What are the audit procedures to be followed by a statutory auditor in the audit of opening
balances if the financial statements for the preceding year were audited by another auditor.
3. It is no part of subsequent auditor's duty to verify opening balances of Ledger accounts of
current years, on the basis of Balance Sheet audited by Previous Auditor.
4. Mr. T. a Chartered Accountant, was first time appointed the Auditor of XYZ Ltd. Mr. T. carried
the audit procedure for verifying the opening balances only, but not the previous year’s
accounting policies as it is not needed.
5. Auditors of M/s Fortune India (P) Ltd. were changed for the accounting year 2004-05. The
closing stock of the company as on 31.3.2004 amounting to ` 100 lacs continued as it is and
became closing stock as on 31.3.2005. The auditors of the company propose to exclude from
their audit programme the audit of closing stock of ` 100 lacs on the understanding that it
pertains to the preceding year which was audited by another auditor. Comment.
6. The Auditor shall express an unqualified opinion if the Auditor is unable to obtain sufficient
audit evidence regarding the opening balances.

SA 520 (REVISED) “ANALYTICAL PROCEDURES”
Meaning
Analytical Procedures means

evaluations of Financial information
through analysis of plausible relationships
among both financial and non-financial data.
It also encompass such investigation as is necessary identified fluctuations or relationships that are
inconsistent with other relevant information or that differ from expected values by a significant amount
Nature/ Methods of Analytical Procedures
Include the consideration of Include consideration of relationships, among

comparisons of the entity’s
financial information with
Ratio Between Fin Reasonableness Tests:
analysis- information to review the
Comparison Comparison of C.Y. Comparison ex., and relevant
Financial relationship of certain
of C.Y. with similar debtor’s non-Fin.
Information with account balances to
Financial industry turnover Info. e.g.
Anticipated results other balances for
Information information ratio,GP , Payroll Costs
of Entity, e.g. reasonableness of
with prior etc. to Number amounts. For ex.,-
periods (i.e., budgets or of
forecasts or interest expense against
trend Employees. loans, RM consumed to
Analysis) exceptions of the
Auditor, production, etc
RELEVANT TOPICS OF SA - 520
Purpose for using analytical procedures AP Are Helpful in Audit / Auditor's Objectives
1. To assist auditor in planning NTE of (a) To obtain relevant (b) To design and perform analytical procedures
audit procedures. & reliable audit near the end of the audit that assist the auditor
evidence when using when forming an overall conclusion as to
2. As a substantive procedures when their substantive analytical whether the F.S. are consistent with auditor’s
use can be more effective or efficient than procedures; & understanding of the entity.
tests of details in reducing detection risk
for specific F.S. assertions; and
3. As an overall review of the F.S. in the
final review, stage of the audit.

Auditor Responsibilities/ Requirements SA - 520
Substantive Analytical Procedures (SAP)/ Considerations to be Investigating

kept in mind while performing analytical procedures Analytical
Procedures Results of
that Assist Analytical
When Procedures
Determine suitability Evaluate
reliability of Develop an Determine Forming an
data expectation of the amount Overall
recorded of any Conclusion If APs
Following factors amounts or difference of performed in
requires ratios and recorded accordance
consideration: ♦ Source of evaluate amounts with this SA
1. SAPs more suitable information whether the from identify
to large volumes of available. expectation is expected The auditor fluctuations or
transactions tending sufficiently values that is shall design relationships
♦ and perform
to be predictable Comparability precise to acceptable that are
over time. identify without analytical inconsistent
of information procedures
2. But suitability of AP available. material further with other
misstatement investigation near the end relevant
influenced by:
♦ Nature & of the audit information or
♦ Nature of relevance of that assist the that differ from
assertion. information auditor when expected values
available forming an
♦ Auditor’s overall
by a significant
assessment of APs ♦ Controls over amount, the
conclusions to auditor shall
effectiveness to preparation of whether the
identify material information investigate such
financial differences by:
misstatement. that are statements
3. In some cases designed to are consistent (a) Inquiring of
unsophisticated ensure with the management
predictive models completeness, auditor's and obtaining
may be useful. accuracy & understanding appropriate
validity of the entity audit evidence
4. Different types of relevant to
APs provide different mgt's
levels of assurance. responses; and
5. Particular SAP may (b) Performing
be considered other audit
suitable when ToD procedures as
are performed on necessary in the
same assertion. circumstances.
Extent of reliance on analytical procedures
Accuracy with Other audit The auditor will need to consider testing the Assessment
procedures Materiality controls, if any, over preparation of of inherent
which
directed of the information used in applying analytical and control
expected
toward the items procedures. When such controls are effective, risks.
results of
same audit involved. the auditor will have greater confidence in the
analytical
procedures can objectives. reliability of the information and, therefore, in
be predicted the results of analytical procedures

TOPICS OF SA - 520
Sources of Info
Matters to be considered in
evaluation of whether Auditor’s
Interim Financial Info Expectation is sufficiently precise
Mgt Accounts
Non-Financial Info
Bank and Cash Records Accuracy with which the results of AP can
Discussion or correspon-dence with Client at year end be predicted
Budgets Degree to which information can be
disaggregated
VAT Returns
Availability & Reliability of information
Board Minutes
QUESTIONS:
1. Write a short note on “Analytical review”. (Hint: Meaning + Nature + Purpose)
2. Explain what do you mean by Analytical procedures. How such procedures are helpful
in auditing. (Hint: Meaning + Nature + Objective)
3. Describe “Analytical Review Procedures” in Audit. Briefly discuss analytical procedures
for verification of debtors. [MAY 14 (8 MARKS)]
4. What are the considerations to be kept in mind while performing analytical
procedures on data prepared by the client.[Hint – SAP (Audit Procedures)]
5. What are the factors that determine the extent of reliance that the auditor places on
results of analytical procedures? Explain with reference to SA 520 on Analytical
procedures.
6. Extent of Reliance on Analytical Procedures.

SA 530 (REVISED) AUDIT SAMPLING (W.E.F. 1ST APRIL, 2009)
SUMMARY of SA 530
Scope Objective Definitions
It deals with Audit sampling - The application of audit procedures to less than 100% of
auditor's items within a population such that all sampling units have a chance of
use of The selection in order to draw conclusions about the entire population.
statistical objective
of auditor Population - The entire set of data from which a sample is selected and
and non-
when using about which the auditor wishes to draw conclusions.
statistical
sampling audit Sampling unit - The individual items constituting a population.
when sampling is
to provide Anomaly - A misstatement or deviation that is demonstrably not
designing representative of misstatements or deviations in a population.
and reasonable
selecting the basis for Statistical sampling - An approach to sampling that has the following
audit auditor to characteristics:
sample, draw Random selection of the sample items; and
performing conclusion The use of probability theory to evaluate sample results, including
tests of s about the measurement of sampling risk.
controls and population A sampling approach that does not have characteristics (i) or (ii) is
tests of . considered non-statistical sampling.
details, and Stratification - The process of dividing a population into sub-populations,
evaluating each of which is a group of sampling units which have similar
the results characteristics (often monetary value).
from the
Tolerable misstatement - A monetary amount set by the auditor in
sample.
respect of which the auditor seeks to obtain an appropriate level of
assurance that amount set by the auditor is not exceeded by the actual
misstatement in the population.
Tolerable rate of deviation - A rate of deviation from prescribed internal
control procedures set by the auditor in respect of which auditor seeks to
obtain an appropriate level of assurance that rate of deviation set by the
auditor is not exceeded by the actual rate of deviation in the population.
Sampling Risk: The risk that the Auditor’s conclusion based on a sample may be different
from the conclusion if the entire population were audited.
Sampling Risk can be lead to 2 types of erroneous conclusion-
Error In the case of a Test of In the case of a Test of Details Effect of this erroneous
Controls conclusion
Type I That controls are more That a material misstatement This affects audit
effective than they actually does not exist when in fact it effectiveness and is more
are(i.e., Risk of over reliance) does(i.e., Risk of incorrect likely to lead to an
acceptance) inappropriate audit opinion.
Type II That controls are less effective That a material misstatement This affects audit efficiency as
than they actually are(i.e., Risk exists when in fact it does not it would usually lead to
of under reliance) (i.e., Risk of incorrect rejection ) additional work to establish
that initial conclusions were
incorrect.

Duties of Auditor/Responsibilities of Auditor/Requirements of SA
Sample Design - Auditor shall consider the purpose of the audit
Sample procedure and the characteristics of the population.
Design, Size Sample Size - A sample size sufficient to reduce sampling risk to an
and Selection acceptably low level.
of Items for
Testing Selection of Items - Select items for the sample in such a way that each
sampling unit in the population has a chance of selection
Duties of Auditor/Responsibilities of
Audit procedures, appropriate to the purpose

Auditor/Requirements of SA
Performing If audit procedure is not applicable to selected item, auditor shall perform
Audit procedure on replacement item
Procedures
If unable to apply designed audit procedures, or suitable alternative procedures,
to a selected item, auditor shall treat that item as a deviation or a misstatement.
Investigate the nature and cause of any deviations or misstatements

identified,and evaluate their possible effect
Nature and Cause
of Deviations and Considers a misstatement o deviation to be an anomaly, shall obtain a high
Misstatements degree of certainty that such misstatement or deviation is not representative of
population.
Projecting Misstatements
Evaluating The results of the sample

Results of Audit Whether the use of sampling has provided a reasonable basis for
Sampling conclusions about the population that has been tested
Methods of Sampling/ Sample Selection Methods
Methods of Sampling
Random Sampling Interval / Systematic sampling Monetary Haphazard

Unit Selection
Simple random Stratified random Block Cluster Selection
Random  It may involve use of random number table.

selection  It can be of two types i.e. simple random or stratified random
Sample Selection Methods Stratified Random Sampling
i. This method of sampling ensures that all items i. This method involves dividing the
within a population stand an equal chance of whole population to be tested into
selection by the use of random number tables or few groups called strata and taking
random number generators. a sample from each of them.
ii. The sampling units could be physical items, such ii. Each stratum is treated as if it were
as sales invoices or monetary units. a separate population and
iii. This method is considered appropriate provided proportionate items are selected
the population to be sampled consists of from each of the stratum.
reasonably similar units and false within a iii. The groups into which the whole
reasonable range. population is divided is determined
iv. It can be chosen by by the auditor judgment,

- Use of random number table. iv. The reasoning behind stratified
- help of computer. sampling is that for a highly
- Picking up number in a random way diversified population, weights
should be allocated to reflect these
differences. This is achieved by
selecting different proportions from
each strata.
Systematic  The number of sampling units in the population is divided by the sample size to give a
selection sampling interval, for example 50, and having determined a starting point within the first 50,
each 50th sampling unit thereafter is selected.
 Although the starting point may be determined haphazardly, the sample is more likely to be
truly random if it is determined by use of a computerized random number generator or
random number tables.
 It can be of two types - block & cluster.
Block Sampling Cluster Sampling
i. It involves selection of a block(s) of contiguous i. Population is divided into groups
items from within the population. called Cluster.
ii. Block selection cannot ordinarily be used in ii. A number of clusters are selected
audit sampling because most populations are on random basis.
structured such that items in a sequence can be For Eg. :- 1000 sales invoices are
expected to have similar characteristics to each divided into 10 clusters having 100
other, but different characteristics from items items each, then 3rd,6th & 9th
elsewhere in the population. clusters are chosen.
iii. In some circumstances it may be an appropriate
audit procedure to examine a block of items, it
would rarely be an appropriate sample
selection technique when the auditor intends to
draw valid inferences about the entire
population based on the sample.
Monetary It is a type of value-weighted selection in which sample size, selection and evaluation results in a
Unit conclusion in monetary amounts
Sampling
Haphazard  Samples are selected without following a structured technique.
selection  Although no structured technique is used, the auditor would nonetheless avoid any
conscious bias or predictability (for example, avoiding difficult to locate items, or always
choosing or avoiding the first or last entries on a page) and thus attempt to ensure that all
items in the population have a chance of selection.
 Haphazard selection is not appropriate when using statistical sampling.
3.1 Factors influencing Sample size

Tolerable Error  Maximum Error in population that auditor is ready to accept for a given sample size.
 If smaller tolerable error, big sample size is needed.
Expected Error  If auditor expects possibility of error in population, larger sample size is required.
 If population is expected to be free of misstatement, smaller sample size is need
Sampling Risk Explained Above

Factors affecting the sample size while performing Test of Controls:
1. Extent of reliance on Internal Controls: If the Auditor places greater reliance on the
operating effectiveness of controls, the extent of his tests of controls (& therefore, the
Sample Size) will be higher.
2. Tolerable rate of deviation: If the tolerable rate of deviation is lower, the sample size
needs to be larger, and vice versa.
3. Expected rate of deviation: If the expected rate of deviation is higher, the sample size
should be larger, so that the Auditor is in a position to make a reasonable estimate of the
actual rate of deviation.
4. Number of sampling units: Number of sampling units has negligible effect on the size of
sample.
Factors affecting the sample size while performing Test of Details:

1. Size or number of units in the population Number of sampling units has negligible effect
on the size of sample.
2. Past Experience of the Auditor.
3. Internal Controls, if found effective, then the sample size will be lower.
4. Nature –for verification of material Financial Statement Items, higher sample size will be
selected.
5. Tolerable Error-The lower the tolerable misstatement, the larger the sample size needs
to be.
6. Expected Error- If the Auditor requires a greater level of assurance that the results of the
sample are in fact indicative of the actual amount of misstatement in the population, the
sample size needs to be larger.
7. Reliance in Alternative Procedures- If the Auditor relies more on other substantive
procedures (Tests of Details or Substantive Analytical Procedures) to reduce to an
acceptable level the detection risk regarding a particular population, the Auditor will
require less assurance from sampling and, therefore, the sample size can be smaller.
Important Questions
1. What is the meaning of Sampling? Also discuss the methods of Sampling. Explain in the light
of the SA 530, Audit Sampling?
2. Write short note on the following:-Stratified sampling.
3. Write short note on the following:-Random sampling.
4. Write short note on the following:- Simple Random sampling.
5. While auditing the accounts of a company, it is obligatory that the auditor must adopt
sampling technique.
6. What are the meaning and purposes of sampling? Explain in the light of SA 530 “Audit
Sampling”.
7. “The auditor is faced with sampling risk in both tests of control and substantive
procedures”. Comment on this statement with reference to SA 530 on Audit Sampling.
8. Discuss the following: As per SA 530, meaning of audit sampling, sample design, sample size
and selection of items for testing.

SA 540 “AUDITING ACCOUNTING ESTIMATES, INCLUDING FAIR VALUE
ACCOUNTING ESTIMATES AND RELATED DISCLOSURES” (W.E.F. 01.04.2009)
IMPORTANT TOPICS
Meaning & Nature Examples of AE Objective High Low

Estimation Estimation
Uncertainty Uncertainty
AE may be defined Fair value AE Other than and and Low
as "An Fair Value AE Significant Risks
To obtain
approximation of a SAAE Risks
monetary amount in ♦ Complex ♦ Allowance whether:
•AE arising in
the absence of a financial entities that
for doubtful AE highly
precise means of instruments, AE , engage in
accounts. dependent upon
measurement”. This which are not including business
term is used for an traded in an ♦ Inventory fair value judgment eg activities that
amount measured at active and open obsolescence AE are pending litigation are not
fair value where market. . reasonable Fair value AE for complex.
there is estimation ; and derivative
♦ Share-based ♦ Warranty • Fair value
uncertainty, as well obligations. related financial AE where the
payments.
as for other amounts disclosures instruments not method of
that require ♦ Property or ♦ in the FS publicly traded measuremen
estimation. equipment held Depreciation are t prescribed
method or AE that are not
for disposal. adequate. calculated using by the
asset useful
The degree of ♦ Transactions life. recognized applicable
involving the measurement FRF is simple
estimation ♦ Provision and applied
exchange of techniques.
uncertainty affects against the easily
the risks of material assets or AE where the
liabilities carrying AE that are
misstatement of AE results of the
between amount of an frequently
auditor’s review
independent investment. made and
of similar
parties without ♦ Outcome accounting updated
A difference between monetary of long term estimates made in because they
the outcome of an AE consideration. contracts. the prior period relate to
and the amount ♦ Certain assets F.S.indicate a routine
♦ Financial transactions
originally recognized in or liabilities substantial
Obligations/
FS does not necessarily acquired in a difference
Costs arising
represent a business between the
from
misstatement of FS. combination, original
litigation
This is particularly the including accounting
settlements
case for fair value AE goodwill and estimate and the
and
intangible assets. actual outcome
judgments.
Factors that may influence the degree of estimation uncertainty associated with an AE
1)The extent to which the accounting estimate is based on observable or unobservable inputs.
2)The sensitivity of the accounting estimate or changes in assumptions.
3)The existence of recognized measurement techniques that may mitigate the estimation uncertainty
though the subjectivity of assumptions used as inputs may nevertheless give rise to estimation
uncertainty)
4)The length of forecast period, and relevance of data drawn from past events to forecast future events.
5)The availability of reliable data from external sources.
The degree of estimation uncertainty associated with an accounting estimate may influence the
estimate's susceptibility.

SUMMARY OF SA 540
Requirements of applicable FRF
How Auditor shall make inquiries of

management management about changes in
identifies the circumstances that may give rise to new,
need for AE or the need to revise existing, AE
Auditor shall
obtain an
Risk understanding Method/ model used in making AE
Assessment in order to
Procedures identify and Relevant controls
and Related assess the risks Estimation Management has used an
Activities of material making process expert
misstatement adopted by the
for AE management Change in the methods from the
prior period for AE and if so why
Whether management has
assessed the effect of
estimation uncertainty
Review the outcome of AE included in the prior period FS
Responses to FRF Appropriately applied

the Assessed
Risks - Auditor Appropriate
shall Methods
Audit determine consistent
Procedures How mgt has considered
Response to If in Auditor's judgment, mgt has
of SA - 540 Significant Risks alternative assumptions or not adequately addressed the
Estimation outcomes effects of estimation uncertainty,
Uncertainty- Whether the significant the auditor shall, develop a range
Auditor shall assumptions used by mgt are with which to evaluate the
evaluate reasonable. reasonableness of AE
Auditor shall obtain SAAE about whether AE & their disclosure in

Measurement and the FS is appropriate
Disclosures Related to
Accounting Estimates For AE that give rise to significant risks, the auditor shall check
adequacy of the disclosure of their estimation uncertainty in FS
Indicators of
Possible Auditor shall review the judgments and decisions made by mgt
Management Bias
Obtain WR by Mgt ,whether mgt believes significant
Obtain written representations
assumptions used by it in making AE are reasonable.
Basis for the auditor's conclusions about the reasonableness of AE
and their disclosure that give rise to significant risks
Documentation
Indicators of possible mgt bias
QUESTIONS
1. What are accounting estimates according to SA 540? Give Examples.
Hint: (Meaning & Nature + Examples)
2. While auditing X Ltd. you observe certain material financial statement assertions have been based
on estimates made by the management. As an auditor how do you identify and assess risk of
material misstatement?
3. Write short note on Accounting Estimates.

SA 550 (REVISED) “RELATED PARTIES” (W.E.F. 01.04.2010)
RELATED PARTY as per AS – 18
(a) Holding companies, subsidiaries and fellow subsidiaries
(b) Associates and Joint ventures

Control or
RELATED (c) Individuals & their relatives owning, directly or indirectly, an interest
in the voting power of the reporting enterprise that gives them Significant
PARTY as per
influence
AS - 18 (d) KMP and their relatives
(e) Enterprises over which any person Enterprises owned by directors or major
described in (c) or (d) is able to shareholders of the reporting enterprise
exercise significant influence. This Enterprises that have a member of key management
Includes in common with the reporting enterprise
RELATED PARTY as Per SA 550
RELATED PATRY
As Defined in FRF OR Where FRF establishes minimal or no RP

requirements
A person or other entity that Reporting entity Another entity that is under common control with
has control or significant the reporting entity through having
influence, directly or
indirectly through one or Has control or significant
Common Owners Common key
more intermediaries influence, directly or
controlling who are management
indirectly through one or
ownership close family
more intermediaries on
Reporting Entity another entity members
NOTE: However, entities that are under common control by a state (i.e., a national, regional or local
government) are not considered related unless they engage in significant transactions or share
resources to a significant extent with one another.
ARM LENGTH TRANSACTIONS
Arm Length Transactions
Transaction conducted on such terms and conditions as between
Willing buyer Willing seller
Who Are
Unrelated Acting independently In best interests

Objective of Auditor
Obtain an understanding of related party •To recognise fraud risk factors
relationships and transactions •Identify & assess the RMM
Conclude whether F.S., insofar as they are •Achieve a true and fair presentation
affected by those relationships and transactions •Are not misleading
•Obtain SAAE
Where the applicable FRF establishes •RP relationships and transactions
related party requirements, •appropriately identified, accounted for
and disclosed in F.S.
AUDIT PROCEDURES
SA 550
Risk Assessment Procedures
Understanding the Entity’s Maintaining Alertness for Sharing RP Identification and Assessment
RP Relationships and RP Information When Information of RMM Associated with RP
Transactions Reviewing Records or with ET Relationships and Transactions
Documents
The auditor shall inquire of Identifies
mgt regarding: Remain Alert for arrangements Identifies Fraud Risk
or other information that may Significant
The identity of the entity’s Risk Factors
indicate the existence of RP
RP, including changes from relationships or transactions In making this If the auditor identifies
the prior period that management has not determination fraud risk factors
Nature of the relationships previously identified or , the auditor (including
disclosed to the auditor shall treat circumstances relating
Transactions with RP, if so, to the existence of a
the type and purpose of identified
significant RP related party with
the transactions Indications of the existence of RP dominant influence
transactions
relationships or transactions that outside the Indicators of dominant
Obtain an understanding management has not previously entity’s influence:
of the controls, if any, identified or disclosed to the normal course
that mgt has established auditor of business as ♦ RP has vetoed
to: giving rise to significant business
Bank, legal and third party decisions taken by mgt
Identify, account for, and confirmations obtained as part of significant
risks. or TCWG.
disclose related party the auditor’s procedures;
relationships and ♦ Significant
Minutes of meetings; and
transactions in transactions are
accordance with FRF Such other records or documents referred to RP for final
as the auditor considers necessary approval.
Authorise and approve in the circumstances of the entity.
significant transactions ♦ No/little debate
and arrangements with among mgt or TCWG
RP If the auditor identifies regarding business
significant transactions outside proposal initiated by RP.
Authorise and approve
significant transactions the entity’s normal course of ♦ Transactions involving
and arrangements business when performing the the RP are rarely
outside the normal audit procedures, he shall inquire independently
course of business. of management about reviewed/ approved.
Nature of these transactions
Whether RP could be involved

RESPONSES TO ASSESSED RISK
SA 550
RESPONSES TO ASSESSED RISK Evaluation of the

Accounting for and
Disclosure of Identified
In case of identification In case of identification of Assertions That RP Relationships and
of unidentified/ significant RP transaction RP Transactions Transactions
undisclosed RP or RP outside the entity normal Were Conducted
transaction course of business on Terms
Equivalent to
Those Prevailing Whether the identified
in an ALT RP relationships and
Promptly communicate the (a) Inspect underlying transactions have been
relevant information to ET contracts / agreements and appropriately
Where FRF establishes RP evaluate whether: accounted for and
requirements: ♦ Business rationale (or lack The auditor
disclosed in accordance
thereof) suggests with FRF
♦ Request mgt to identify shall obtain
all transactions with newly transactions entered to SAAE about
identified RP for further engage in fraudulent that the assertion.
evaluation. financial reporting or to Whether the effects of the
conceal misappropriation of RP relationships and
♦ Inquire reason for failure assets.
of entity's controls to transactions
identify/disclose RP ♦ Terms of transactions Prevent F.S. from achieving
relationships & consistent with true and fair presentation
transactions. management's
explanations. Cause F.S. to be
Perform appropriate misleading
substantive audit ♦ Transactions
procedures relating to appropriately accounted
newly identified RP or for/ disclosed in Obtain WR
significant RP transactions. accordance with FRF.
Reconsider risk that other (b) Obtain evidence that
RP or significant RP transactions appropriately Communicate to TCWG -
transactions may exist that authorised & approved. Significant Matters arised
mgt has not previously w.r.t RP
identified/ disclosed.
If non-disclosure by mgt
appears intentional, Documentation
evaluate implications for Name
audit. Nature of Relationship
HOW TO ANSWER IF QUESTION PROVIDES THAT TRNSACTION HAS TAKEN PLACE

In case RP Relation is Absolutely Clear
Auditor must examine
Disclosure requirements as laid down in AS 18, Ensure compliance of the Companies Act 2013 requirements
“Related Party Disclosures” has been followed transaction required to be entered into the Register pursuant
to section 189 of the Companies Act, 2013

DISCLOSURE REQUIREMENT as per AS - 18
Related Party Disclosures Reuirement (Relation due to )
Control Otherwise
Transaction with RP No Transaction Transaction with RP No

with RP Transaction
Name of RP Name of RP with RP
Name of RP
Nature of Relationship Nature of Relationship
Nature of No
Description of Transaction ( Relationship Description of Transaction (
Amount, Outstanding Amount, Any Amount, Outstanding Amount, Disclosure
Any Debt written off, Provision for Required
Debt written off, Provision for
Doubtful debt) Doubtful debt)
Possible sources for identification of related party information/ Procedures applied by

auditor to verify the existence of RP
1) Entity income tax returns.
2) Information supplied by the entity to regulator authorities.
3) Shareholder registers to identify the entity's principal shareholders.
4) Statements of conflicts of interest from management and TCWG.
5) Records of the entity's investments and those of its pension plans.
6) Contracts and agreements with key management or TCWG.
7) Significant contracts and agreements not in the entity's ordinary course of business.
8) Specific invoices and correspondence from the entity's professional advisors.
9) Life insurance policies acquired by the entity.
10) Significant contracts re-negotiated by the entity during the period.
11) Internal auditors' reports.
12) Documents associated with the entity's filings with a securities regulator (for example,
prospectuses)
QUESTIONS
1. AAS Ltd. is procuring the packing materials from M/s XY and Co., a partnership firm consisting
of Mr. X and Mr. Y. Mr. Y is the Managing Director of AAS Ltd. The total value of purchases made
from XY and Co. by AAS Ltd. during the year 2003-04 had been ` 38 lakhs.
2. Write a short note on Identification of significant related party transaction outside business.
3. Define Arm Length Transactions.
4. Mr. D is a director of X Ltd. and Y Ltd. On 30th June, 2013, Mr. D resigned from directorship of
Y Ltd. X Ltd. sold goods to Y Ltd., during the entire year at the same price and conditions as to
any other customer. X Ltd. discloses only the sales for the first quarter ending 30th June, 2013
as related party transactions.
5. Strong Ltd. holding 60% of the equity shares in Weak Ltd. purchased goods worth ` 50 Lakhs
from Weak Ltd. during the financial year 2013-14. The Managing Director of Strong Ltd. is of
the opinion that it is normal business activity and there is no need to disclose the same in the
final accounts of the Company. Comment.

SA 560 (REVISED) SUBSEQUENT EVENTS(w.e.f. 1st april,2009)
Oblective & Definitions
Objective Definitions
Obtain SAAE about whether events Date of the financial statements - The date of end of the latest period covered by F.S.
occurring between date of F.S. and Date of approval of the financial statements - The date on which the financial statements
date of auditor’s report that have been prepared and those with the recognized authority have asserted that they have
require adjustment of, or taken responsibility for those financial statements.
disclosure in, F.S. are appropriately
reflected in F.S. and Date of the auditor's report - The date the auditor dates the report on the F.S.
Respond appropriately to facts that Date the financial statements are issued - The date that the auditor's report and audited
become known to auditor after financial statements are made available to third parties.
date of the auditor’s report, that, Subsequent events - Events occurring between the date of the financial statements and the
had they been known to auditor at date of the auditor's report, and facts that become known to the auditor after the date of the
that date, may have caused the auditor's report.
auditor to amend the auditor’s Note: In case of audit of components, such as branch or division, the subsequent events are
report. events after the balance sheet date and before the date of audit report of that component.
Types of Subsequent Events
Adjusting Events Non Adjusting Events
Those events which provide further evidence of conditions Those events which are indicative of conditions
that existed at the balance sheet date that arose subsequent to the balance sheet date
May Require Disclosure to

Adjust the F.S.
keep F.S. from misleading
Period of
01.04.2015 -
F.S. Covered
31.03.2016
for Audit
Date of F.S. 31.03.2016
Date of Events occurring

Approval of 31.04.2016 between the Date of
F.S. F.S & Date of Subsequent
Auditor's Report Event - 1
Date of
Auditor's 30.05.2016
Report Facts which become
known to the Auditor
Subsequent
after the Date of Auditor's
Subsequent Events
Date of F.S. Report but before the
Event - 2
are issued 30.06.2016 Date of F.S. are issued
to third
party
Facts which become
30.07.2016 known to the Auditor Subsequent
after the Date of F.S. Event - 3
are issued.

SUMAMRY
Events Occurring After Issue of Audit Report
Between the Date of
the F.S. and the Date of Generally no obligation to perform procedures after A.R
the Auditor's Report
Fact becomes known to the auditor that, had it been known to
the auditor at the date of the auditor's report, may have
The auditor shall obtain caused the auditor to amend the auditor's report
SAAE that all events
occurring between date The Auditor shall:
of F.S. and date of
auditor's report that (a) Discuss the matter with mgt and TCWG
require adjustment of, (b) Determine whether the F.S. need amendment and, if so,
or disclosure in, F.S. (c) Inquire how mgt intends to address the matter in F.S.
have been identified.
Facts which become known to the Auditor Facts which become
after the Date of Auditor's Report but known to the
The auditor shall : before the Date of F.S. are issued Auditor after Date
(a) Obtain an of F.S. are issued
If Mgt & TCWG If Mgt & TCWG Refuses
understanding of any Amends F.S. to Amends F.S.
procedures mgt has If mgt & TCWG
established to ensure Extend audit informs about
that subsequent events If If
procedures auditor's auditor's the situation to
are identified. referred to date every one in
report report
(b) Inquiring of mgt and of new auditor's not provided receipt of
TCWG. report provided to entity previously
(c) Read minutes, if any, to entity issued F.S.. &
If law, regulation amends F.S.
of the meetings, that or FRF does not Notify Mgt
have been held after Modify
prohibit any and TCWG
date of F.S. opinion Yes No
amendment of not to issue
(SA -
(d) Read entity's latest F,.S. related to F.S. before
705) Carry out
subsequent interim F.S. , subsequent amendment Take
to third audit appropriate
if any. events
party procedures actionto
Issues New necessary in prevent
Audit Report circumstances reliance on
Auditor identifies Still issued,
take auditor
events the auditor
Provide a new or appropriate New Audit report
shall determine Amend amended auditor's action, to Report
whether each such auditor's report report that includes a seek to
event is appropriately to include an statement in an prevent
reflected in F.S. additional date Amended
'"EOM" para "OMP" reliance on
restricted to auditor's
that conveys that auditor
Request mgt. to that report an
auditor's procedures report
provide WR that all amendment ( EOM
on subsequent
events occurring Dual Dating) paragraph
events are
subsequent to date referring to a
restricted solely to
of F.S. and for which note to the
the amendment of
the applicable FRF F.S. that
F.S. as described in
requires adjustment discussed the
the relevant note to
or disclosure have reason of
F.S
been adjusted or amendment
disclosed. in F.S., should
be included

** Specific Inquiries to be made from Management & TCWG by Auditor
1) Whether any assets have been appropriated by government or destroyed, for example, by
fire or flood.
2) Whether there have been increases in capital or issuance of debt instruments, such as the
issue of new shares or debentures, or an agreement to merge or liquidate has been made or is
planned.
3) Whether new commitments, borrowings or guarantees have been entered into.
4) Whether any events have occurred that are relevant to the measurement of estimates or
provisions made in the financial statements.
5) Whether sales or acquisitions of assets have occurred or are planned
6) Whether there have been any developments regarding contingencies.
7) Whether any events have occurred or are likely to occur that will bring into question the
appropriateness of accounting policies used in the financial statements, as would be the case,
for example, if such events call into question the validity of the going concern assumption.
8) Whether any events have occurred that are relevant to the recoverability of assets.
9) Whether any unusual accounting adjustments have been made or are contemplated.
Questions
1. A Limited Company has filed a suit against debtor from whom ` 25 lakhs are receivable. A
judgement is received from court in favour of the company after the date of Balance Sheet.
Discuss auditor’s duty in this regard.
Hint: Meaning + Event + Audit Procedures
2. You are Auditor of a Manufacturing Company, whose year ends on 31st March. An event
occurred after year ended, but before you complete the audit. The audit report issued by you is
dated 20th July. The Sales Ledger balance at 31st March was ` 95,000. By 20th July ` 65,000 only
had been received against this amount as full and final payment.
3. Inquiry from Management is helpful for Auditor to evaluate subsequent events. Discuss specific
enquiries in reference of SA 560, which might have effect on F.S.
4. Explain the meaning of the term “subsequent events” as used in the SA 560.
5. Should all type of subsequent events be considered by the auditor in his attest function?
6. Indicate briefly the procedures to identify subsequent events requiring adjustment of or
disclosure in the financial statements.
7. “The auditors should consider the effect of subsequent events on the financial statement and on
auditor’s report” according to SA 560 – Comment.
8. On 31.3.2014 inventory taking by Identity Ltd. revealed an inventory of ` 50 crores at its
godown. Due to a fire on 1st April, 2014, inventory worth ` 30 crores was destroyed. The
salvage value and insurance claim were estimated at ` 25 crores before the commencement of
audit. No provision was made in the books of company for year ended 31.3.2014 for ` 5 crores.
9. Explain the meaning of term "Subsequent Events" as used in the SA 560. Should all types of
subsequent events be considered by the auditor in his attest functions?
10. You are a Principal Auditor of Sri Company Limited which has three branches the accounts of
which are subject to audit by qualified branch auditors. One of the branch auditors qualified
his report for non-provision of doubtful debts which he considered to be material for the
company as a whole. Subsequent to their reporting, but before you could sign the audit report
on the accounts of the company as a whole, the management informed you that the debt under
the subject-matter of qualification in Branch Auditor’s report had been fully recovered.

SA 570 (REVISED) “GOING CONCERN” (W.E.F. 01.04.2017)
Objective
(a) To obtain SAAE about appropriateness of mgt use of the GC assumption in preparation and presentation of F.S.
(b) To conclude, based on the audit evidence obtained, whether a material uncertainty exists related to events or
conditions that may cast significant doubt on the entity’s ability to continue as a GC; and
(c) To determine the implications for the auditor’s report.
RELEVANT CONCEPTS
Concept of GC Assumption Responsibilities of Management Responsibilities of Auditor
• It is management’s responsibility to • To obtain SAAE regarding, and

• Under GC basis of accounting, F.S.
assess entity’s ability to continue as GC conclude on, appropriateness of
are prepared on assumption that
even if FRF do not include an explicit management’s use of GC basis of
entity is GC and will continue its
requirement to do. accounting in preparation of F.S.
operations for foreseeable future.
• Management’s assessment of entity’s • To conclude, based on audit
• General purpose F.S. are ability to continue as GC involves making evidence obtained, whether a
prepared using GC basis of
a judgment, at a particular point in time, material uncertainty exists about
accounting, unless management
about inherently uncertain future entity’s ability to continue as GC.
either intends to liquidate entity or outcomes of events or conditions.
to cease operations, or has no • These responsibilities exist
realistic alternative but to do so. • The following factors are relevant to even if FRF used in preparation
that judgment: of F.S. does not include an
• Special purpose F.S. may or may
The degree of uncertainty associated explicit requirement for
not be prepared in accordance with
with outcome of an event or condition management to make a specific
FRF for which GC basis of
assessment of entity’s ability to
accounting is relevant The size and complexity of entity, nature continue as GC.
• When use of GC basis of and condition of its business and degree
to which it is affected by external factors • The absence of any reference
accounting is appropriate, assets
to a material uncertainty about
and liabilities are recorded on the Information available at time at which the entity’s ability to continue as
basis that the entity will be able to the judgment is made. Subsequent events a GC in an auditor’s report
realize its assets and discharge its may result in outcomes that are cannot be viewed as a guarantee
liabilities in normal course of inconsistent with judgments that were as to entity’s ability to continue
business reasonable at time they were made. as GC.
Events or Conditions that may cast doubt about Going Concern Assumption/ Indicators
which may show that the going concern may not be appropriate/
Financial Operating Others
 Fixed-term borrowings approaching maturity without  Management  Non-compliance
realistic prospects of renewal or repayment; or excessive intentions to with capital or
reliance on short-term borrowings to finance long-term liquidate Entity or to other statutory
assets. cease operations. requirements.
 Negative Operating Cash Flows indicated by historical or  Loss of Key  Pending legal or
prospective Financial Statements. Management without regulatory
 Substantial Operating Losses or significant deterioration replacement. proceedings.
in value of assets used to generate Cash Flows.  Labor difficulties.  Changes in law or
 Net Liability or Net Current Liability position.  Emergence of a highly regulation or
 Adverse key Financial Ratios. successful Government
 Inability to comply with the terms of loan agreements. competitor. policy.
 Inability to pay creditors on due dates.

 Indications of withdrawal of financial support by  Loss of a major  Uninsured or
Creditors. market, key underinsured
 Inability to obtain financing for essential new product customer(s), catastrophes when
development or other essential investments. franchise, license, or they occur.
 Change from credit to cash-on-delivery transactions with principal Supplier(s).
suppliers.  Shortages of
 Arrears or discontinuance of dividends. important supplies.
The significance of such events or conditions often can be mitigated by other factors. For example, the loss of a
principal supplier may be mitigated by the availability of a suitable alternative source of supply.
AUDIT PROCEDURES
Risk Assessment Procedures and Evaluating Additional Audit Significant

Management's Communication
Related Activities Procedures When Delay in
Assessment Events or Approval of
Conditions Are F.S.
Auditor shall consider whether (a) Whether the
Identified
there are events or conditions that events or
In evaluating conditions When the
may cast significant doubt on the mgt assessment
entity's ability to continue as GC. constitute a auditor
of the entity's (a) Request mgt to material believes that
ability to make its assessment uncertainty; the delay in
continue as GC , of the entity's ability
(b) Whether the the approval
In so doing, auditor shall determine the auditor shall to continue as GC
use of the GC of F.S. could
whether management has already cover the same (b) Evaluating mgt be related to
period as that assumption is
performed a preliminary plans for future appropriate in events or
assessment of entity's ability to used by mgt.If actions. conditions
mgt assessment the preparation
continue as a GC (c) When the entity and relating to the
covers less than GC
If such an assessment has been twelve months , has prepared a cash presentation of
performed, auditor shall discuss flow forecast, then theF.S. ; and assessment,
the auditor shall
assessment with management and request mgt to consider its (c) The the auditor
determine whether management extend its reliability. adequacy of shall inquire
has identified events or conditions assessment (d) Considering related as to the
that, may cast significant doubt on period to at whether any disclosures in reasons for
the entity’s ability to continue as least twelve additional facts or F.S. the delay.
GC and, if so, management’s plans months from information have the auditor
to address them or that date. become available shall perform
If such an assessment has not yet In evaluating since the date on additional
been performed, the auditor shall mgt assessment, which mgt made its audit
discuss with management the basis the auditor assessment. procedures
for the intended use of GC basis of shall consider (e) Requesting WR necessary
accounting, and inquire of whether mgt regarding their plans
management whether events or has considered for future action and
conditions exist that may cast all relevant the feasibility of
significant doubt on the entity’s information of these plans
ability to continue as GC which the
auditor is aware.
The auditor shall remain alert

throughout the audit for audit
evidence of events or conditions that
may cast significant doubt on the
entity's ability to continue as a GC.

AUDIT CONCLUSIONS
The auditor shall evaluate whether SAAE has been obtained regarding, and shall conclude on, the appropriateness
of management’s use of GC basis of accounting in the preparation of F.S.
Based on audit evidence obtained, auditor shall conclude whether, in auditor’s judgment, a material uncertainty
exists related to events or conditions that, may cast significant doubt on entity’s ability to continue as a GC.
A material uncertainty exists when the magnitude of its potential impact and likelihood of occurrence is such that,
in the auditor’s judgment, appropriate disclosure of the nature and implications of the uncertainty is necessary for:
In the case of a fair presentation FRF , the fair presentation of F.S. , or
In the case of a compliance framework, the F.S. not to be misleading.
Adequacy of Disclosures When

Adequacy of Disclosures When Events or Conditions Have Been
Events or Conditions Have Been
Identified and a Material Uncertainty Exists Identified but No Material
Uncertainty Exists
If the auditor concludes that management’s use of GC basis of accounting
is appropriate in the circumstances but a material uncertainty exists, the If events or conditions have been
auditor shall determine whether F.S. : identified that may cast significant doubt
on the entity’s ability to continue as a
Adequately disclose the principal events or conditions that may cast GC but, based on the audit evidence
significant doubt on the entity’s ability to continue as a going concern and obtained the auditor concludes that no
management’s plans to deal with these events or conditions; and material uncertainty exists, the auditor
Disclose clearly that there is a material uncertainty related to events or shall evaluate whether, in view of the
conditions that may cast significant doubt on the entity’s ability to requirements of the applicable FRF , the
continue as a GC and, therefore, that it may be unable to realize its assets F.S. provide adequate disclosures about
and discharge its liabilities in the normal course of business. these events or conditions.
Auditor Reporting
Use of Going Concern Basis of Accounting Is GC Assumption Management

Appropriate but a Material Uncertainty Exists is Inappropriate Unwilling to
Make or
Adequate Disclosure of a Material Uncertainty Is Made in F.S. Extend Its
F.S. prepared
Yes No on GC basis Assessment
Express an The Audit Report shall In the Basis for Consider the
Express a Auditor
Unmodified include a separate section Qualified implications
qualified opinion Concludes GC
Opinion under the heading “Material (Adverse) Opinion for the
or adverse Assumption is
Uncertainty Related to Going section of the auditor’s
opinion, as Inappropriate
Concern” auditor’s report, report
appropriate (SA
Draw attention to the note in 705) state that a
Adverse
F.S. that discloses the material
Opinion
matters and uncertainty exists
that may cast
State that these events or significant doubt
conditions indicate that a on the entity’s
material uncertainty exists ability to
that may cast significant continue as GC
doubt on the entity’s ability and that F.S. do
to continue as a GC and that not adequately
auditor’s opinion is not disclose this
modified in respect of matter.
matter.

Audit procedures that are relevant to the requirement include the following/ If an Auditor
doubts the future sustainability of the Entity, he shall perform the following :
(i) Performing audit procedures regarding subsequent events to identify those that either mitigate
or otherwise affect the entity’s ability to continue as a going concern.
(ii) Confirming the existence, terms and adequacy of borrowing facilities.
(iii) Reading minutes of the meetings of shareholders, those charged with governance and relevant
committees for reference to financing difficulties.
(iv) Determining the adequacy of support for any planned disposals of assets.
(v) Analysing and discussing the entity’s latest available interim financial statements.
(vi) Confirming the existence, legality and enforceability of arrangements to provide or maintain
financial support with related and third parties and assessing the financial ability of such
parties to provide additional funds.
(vii) Analysing and discussing cash flow, profit and other relevant forecasts with management.
(viii) Evaluating the entity’s plans to deal with unfilled customer orders.
(ix) Reading the terms of debentures and loan agreements and determining whether any have
been breached.
(x) Inquiring of the entity’s legal counsel regarding the existence of litigation and claims and the
reasonableness of management’s assessments of their outcome and the estimate of their
financial implications.
(xi) Obtaining and reviewing reports of regulatory actions.
Questions
1. What are the financial indicators to be considered by an auditor for evolution of the going
concern assumption.
2. If the auditor believes that the concern will not continue as going concern, he should issue
disclaimer of opinion.
3. Procedures to be performed by the auditor in expressing opinion on 'going concern'
assumption.
4. TT Ltd. has suffered recurring losses due to steep fall in production and has negative net
worth. It's production head, an expert, have also left the company. Reply of the management
is inadequate to these developments and there is no sound action plan to mitigate these
situations.
5. Explain with reference to the relevant Standard on Auditing Appropriateness of going
concern assumption?

SA 580 (REVISED) WRITTEN REPRESENTATIONS- (W.E.F. 1 ST APRIL, 2009)
WRITTEN REPRESENTATIONS
Meaning Short Note
Written statement by management “WR ” deals with auditor’s responsibility to obtain

WR from Mgt/TCWG
Provided to auditor
WR are necessary information that auditor requires
in connection with audit of F.S.
To confirm certain To support other audit
matters evidence Accordingly, similar to responses to inquiries, WR are
audit evidence.
But Does not Include F.S., Assertions In certain instances such as where knowledge of facts
therein or Supporting Books & is confined to mgt or where matter is principally of
Documents intention, WR may be the only audit evidence which
can reasonably be expected to be available
SUMMARY OF SA
Objectives Management Date & Period Form of WR

from Whom WR Required
Covered by WR
WR
To obtain WR Requested
that mgt W.r.t Mgt Addressed
Other Near as
believes that it Responsibilities to auditor
Mgt with WR practicable
has fulfilled to the date
fundamental appropriate
responsibilities Preparation Other SAs of auditor's
responsibilities require the report If law or
for F.S. & and regulation
knowledge of Presentation of auditor to It should
request WR requires mgt to
To support other the matters the F.S.- not be after make written
audit evidence by concerned Applicable FRF the date of public
means of WR, if If, in addition auditor's
auditor statements
determined report about its
necessary by the All relevant Information has determines
been Provided to the that it is responsibilities,
auditor or required
Auditor & All transactions necessary to It shall be relevant matters
by other SAs; and
has been recorded obtain one or for all F.S. covered by such
more WR , the and statements need
To respond auditor shall period(s) not be included
appropriately to WR Responsibilities are in representation
request such referred to
provided by mgt or described in terms of letter
audit engagement other WR in auditor's
absence thereof report
WR - FROM MGT / TCWG
Audit evidence WR is not a WR does not

IMPORTANT NOTE- affect the nature
substitute for
WR should not be other audit or extent of other
But not SAAE taken as standalone evidence audit evidence
It corroborates means evidence that the auditor
on their own strenghthen other evidence obtains

Doubt as to the Reliability of WR and Requested WR Not Provided
Reliability of WR doubtful When Requested WR not provided
If WR are inconsistent with other audit evidence

Discuss the matter with management
Auditor shall perform audit procedures

to resolve the matter Reevaluate the reliability and integrity
of management
Concludes WR Sufficient doubt about
Take Appropriiate action & Determining
are not reliable integrity of management
the possible effect on the opinion
Determining
possible effect on Issue a disclaimer of Issue a disclaimer of opinion
the opinion opinion
Auditor comes across various matters in respect of which he is not able to obtain SAAE
He may rely on submission by mgt (obtain WR) WR is not a substitute for other audit evidence
Seek corroborative audit evidence from

sources inside or outside the entity
Auditor should seek and apply normal
Evaluate the representation made by Mgt audit procedure
Mere possession of a certificate does not absolve the auditor from

his liability.
Conclusion : WR is an additional evidence.If auditor rely only on WR
& do not perform audit procedures to collect other audit evidence .
He shall be held liable for negligence and professional misjudgment.
QUESTIONS
1. What do you mean by "Written Representations"? As an auditor, how you will deal if
management does not provide requested written representations?
2. Briefly Explain Management Representation
3. The management of Ankita Limited suggested for quick completion of the statutory audit
that it would give its representation about the receivables in terms of their recoverability.
The management also acknowledged to the auditors that the management would give their
representation after scrutinizing all accounts diligently and they own responsibility for any
errors in these respects. It wanted auditors to complete the audit checking all other
important areas except receivables. The auditor certified the account clearly indicating in
his report the fact of reliance he placed on representation of the management. Comment.
4. Auditor of AAS Ltd. was unable to confirm the existence and valuation of imported goods
lying with the transporter and accepted a certificate from the management without
obtaining other audit evidence.
5. Management Certificate obtained by the Auditor is enough for verification of Inventories.

SA - 600 “USING THE WORK OF ANOTHER AUDITOR”
Applicability
This SA to be applied in situations where an auditor (referred to Not Applicable:

herein as the ‘principal auditor’), reporting on the financial Joint auditors
information of an entity, uses the work of another auditor (referred
to herein as the ‘other auditor’) with respect to the financial Predecessor auditor
information of one or more components included in the financial Principal auditor concludes that tfinancial
information of the entity. information of a component is immaterial
Definition
PA "Principal auditor" means the auditor with responsibility for reporting on the financial information of an entity when that
financial information includes the financial information of one or more components audited by another auditor.
(OA Other auditor" means an auditor, other than the principal auditor, with responsibility for reporting on the financial
information of a component which is included in the financial information audited by the principal auditor)
"Component" means a division, branch, subsidiary, joint venture, associated enterprises or other entity whose financial
information is included in the financial information audited by the principal auditor.
The Principal Auditor’s Procedures
PA is entitled to rely upon another auditor, provided he exercised due skill and care and there is nothing to doubt.
Principal Auditor’s perform Procedures to understand & access the impact of work of OA.
PA should obtain sufficient audit evidence, that the work of the other auditor is adequate for the PA purpose
Consider the professional competence of OA, if OA is not a member of ICAI.
Advice OA if PA decides to use his work & ensure coordination & Advise OA of the significant accounting, auditing and
reporting requirements and obtain representation as to compliance with them.
Review a written summary of OA procedures and findings through questionnaires /checklist.
The principal auditor should consider the significant findings of the other auditor.
Discuss audit findings with OA and Mgt of component & Perform supplemental tests if necessary.
Principal auditor should document significant findings of component whose F.S.was audited by the other auditor, name of
the auditor, conclusions reached that the individual component is not material, performed procedures and conclusions
reached, how he deals with the qualifications or adverse remarks contained in the other auditor’s report.
PA would not be responsible in respect of the work entrusted to the OA, except in circumstances which should have aroused
his suspicion about the reliability of the work performed by the OA.

Summary
Documentation Coordination Reporting Responsibility Division of responsibility
• Components • Sufficient The PA would not be responsible in

Express a qualified/
audited by OA liaison/co- respect of work entrusted to OA ,
disclaimer of opinion
• Audit ordination because of scope limitation: except in circumstances which should
Procedures between PA & have aroused his suspicion about the
performed and OA. reliability of the work performed by
results thereof • For this OA.
If PA PA unable to When PA has to base his opinion on
• Any purpose PA
concludes perform the financial information of entity as
conclusions may find it
that he sufficient a whole relying upon statements and
reached that necessary to
cannot use additional reports of OA , his report should state
individual issue written
the work of procedures clearly the division of responsibility
components communication
OA regarding FI for the financial information of the
immaterial. to OA
of the entity by indicating the extent to
•Manner of • OA knowing component
the context in which the financial information of
dealing with audited by
which his work components audited by the OA have
Modified OA
to be used by been included in the financial
Report of OA
PA should information of the entity,
while finalising
Principal coordinate e.g., the number of
Auditor's with PA' divisions/branches/subsidiaries or
Report other components audited by OA
IN CASE OF BRANCH AUDITOR

Branch Auditor
PA can act as Branch Auditor Any CA in practice
This SA not The Branch Auditor shall prepare a Report on the a/c of the Branch Office examined
Applicable by him & submit his report to the PA .
PA shall deal with Branch Auditor report in the manner required to finalize his
Audit Report.
PA will be responsible for his opinion
If something goes wrong If something goes wrong If something goes wrong at

at Branch level, than at Head Office level, than Branchlevel, where PA is aware of
the Branch Auditor will the PA will be responsible the situation, then the both PA and
be responsible. branch auditor will be responsible.
IMPORTANT QUESTIONS
1. Explain the audit procedures when Principal Auditor is using the work of another
Auditor.
2. A branch auditor is a joint auditor according to SA 299 and his relationship with the
company auditor is governed by the said Standard.
3. There should be a sufficient liaison between a principal auditor and other auditors”.
Discuss the above statement and state in this context the reporting consideration,
when the auditor uses the professional work performed by other auditor.

SA 610 (Revised) Using the Work of Internal Auditors
SA 610
Scope Non Applicability
SA deals with external auditor's The entity The entity has an IAF , The external In some cases,
responsibilities if using work of does not SA relating to using the auditor does the external
internal auditors have an work of that function not plan to auditor may be
IAF do not apply if use internal prohibited, or
Using internal auditors to restricted to
Using The responsibilities The external auditor some extent, by
auditors to provide DA.
work of and activities of does not expect to law or regulation
IAF in provide DA under
the direction, function are not use work of function from using the
obtaining relevant to audit; in obtaining audit work of IAF or
audit supervision and
review of the evidence. using internal
evidence auditors to
external auditor.
provide DA
SA 610
Relationship between SA 315 and SA 610 The External Auditor’s Objective

Responsibility for the Audit
To determine
SA 315 addresses how knowledge and The external auditor has sole whether the work of
experience of IAF can inform the external responsibility for audit opinion the IAF or DA from
auditor’s understanding of the entity and its expressed, and that responsibility is internal auditors can
environment and identification and assessment not reduced by the external auditor’s be used, and if so, in
of RMM. use of the work of the IAF or internal which areas and to
The external auditor’s responsibilities when, auditors to provide DA. what extent;
based on the external auditor’s preliminary Although they may perform audit
understanding of the IAF obtained as a result of procedures similar to those If using the work of
procedures performed under SA 315, the performed by the external auditor, IAF , to determine
external auditor expects to use the work of the neither the IAF nor the internal whether that work is
IAF as part of the audit evidence obtained. auditors are independent of the adequate for
Such use of that work modifies NTE of audit entity as is required of external purposes of audit; and
procedures to be performed directly by external auditor in an audit of F.S. in
auditor. accordance with SA 200. If using internal
This SA also addresses the external auditor’s This SA, therefore, defines the auditors to provide
responsibilities if considering using internal conditions that are necessary for the DA, to appropriately
auditors to provide DA under direction, external auditor to be able to use the direct, supervise and
supervision and review of external auditor. work of internal auditors. review their work.
Internal audit function Direct assistance
A Function of an entity that performs

The use of internal
auditors to perform
Assurance and consulting activities audit procedures under
the direction,
supervision and review
Designed to evaluate and improve the effectiveness of the entity’s of external auditor.
Governance Risk management Internal control processes

REQUIREMENT OF SA 610 WITH REGARD TO IAF
Determining Whether, in Which Areas, and to Using the Work of IAF

What Extent the Work of IAF Can Be Used
• If external auditor plans to use work

of IAF, shall discuss planned use of its
Evaluating IAF Determining the Nature work with function as a basis for
and Extent of Work of IAF coordinating their respective activities.
that Can Be Used • The external auditor shall perform
The external auditor sufficient audit procedures on body of
shall determine work of IAF as a whole that external
whether work of IAF auditor plans to use to determine its
can be used by adequacy for purposes of audit,
• The external auditor shall consider including evaluating whether:
evaluating following:
nature and scope of work
The extent to which (a) The work of function had been
performed by IAF and its relevance
IAF organizational properly planned, performed,
to external auditor’s overall audit
status and relevant supervised, reviewed and documented;
strategy and audit plan.
policies and (b) Sufficient appropriate evidence had
• The external auditor shall also
procedures support been obtained to enable function to
evaluate whether using work of IAF
the objectivity of draw reasonable conclusions; and
to extent planned would still result
internal auditors; (c) Conclusions reached are
in external auditor being sufficiently
The level of involved in audit, given external appropriate in circumstances and
competence; and auditor’s sole responsibility for reports prepared by function are
Whether IAF applies audit opinion expressed. consistent with results of work
systematic and performed.
• The external auditor shall make all
disciplined significant judgments in audit • The nature and extent of external
approach, including engagement and, to prevent undue auditor’s audit procedures shall be
quality control. use of the work of IAF, shall plan to responsive to external auditor’s
use less work of function and evaluation of:
perform more of the work directly: (a) The amount of judgment involved;
(i) The more judgment is involved (b) The assessed RMM;
- Planning and performing relevant
The external auditor audit procedures; and (c) The extent to which IAF
shall not use work of organizational status and relevant
IAF if : - Evaluating the audit evidence policies and procedures support
gathered; objectivity of internal auditors; and
The function’s
organizational status (ii) The higher assessed RMM (d) The level of competence of function;
and relevant policies (iii) The less IAF organizational and shall include reperformance of
and procedures do status and relevant policies and some of work.
not adequately procedures adequately support • The external auditor shall read reports
support objectivity objectivity of internal auditors; and of IAF relating to work of function that
of internal auditors; (iv) The lower the level of external auditor plans to use to obtain
The function lacks competence of IAF an understanding of the nature and
sufficient extent of audit procedures it performed
• The external auditor shall, in
competence; and related findings.
communicating with TCWG an
The function does overview of planned scope and • The external auditor shall also
not apply a timing of audit accordance with evaluate whether external auditor’s
systematic and SA 260, communicate how external conclusions regarding IAF and the
disciplined auditor has planned to use work of determination of nature and extent of
approach, including IAF use of work of function for purposes of
quality control. audit remain appropriate.

REQUIREMENT OF SA 610 WITH REGARD TO DIRECT ASSISTANCE
Determining Whether, in Which Areas, and to What Using Internal

Extent Internal Auditors Can Be Used to Provide DA Auditors to Provide DA
Prior to using internal

Determining Determining the Nature and Extent auditors to provide DA
Whether Internal of Work that Can Be Assigned to for purposes of audit,
Auditors Can Be Internal Auditors Providing DA the external auditor
shall:
Used to Provide DA
Purposes of Audit • Obtain written
agreement from an
• In determining the nature and extent of work
authorized
that may be assigned to internal auditors and
representative of entity
The external auditor NTE of direction, supervision and review that is
that internal auditors
may be prohibited by appropriate in circumstances, external auditor
will be allowed to follow
law or regulation shall consider:
the external auditor’s
from obtaining DA (i) The amount of judgment involved in: instructions, and that
from internal entity will not intervene
auditors. - Planning and performing relevant audit
procedures; and in work the internal
If using internal auditor performs for the
auditors to provide - Evaluating the audit evidence gathered; external auditor; and
DA is not prohibited (ii) The assessed RMM; and • Obtain written
by law or regulation, (iii) The external auditor’s evaluation of agreement from the
and the external existence and significance of threats to internal auditors that
auditor plans to use objectivity and level of competence of the they will keep
internal auditors to internal auditors who will be providing such confidential specific
provide DA on audit, assistance. matters as instructed by
the external auditor the external auditor and
shall evaluate • The external auditor shall not use internal
inform the external
existence and auditors to provide DA to perform procedures
auditor of any threat to
significance of threats that:
their objectivity.
to objectivity and (i) Involve making significant judgments in
level of competence • In directing,
audit;
of the internal supervising and
(ii) Relate to higher assessed RMM reviewing the work
auditors who will be
providing such (iii) Relate to work with which the internal performed by internal
assistance. auditors have been involved; or auditors, the external
auditor shall remain
(iv) Relate to decisions the external auditor alert for indications that
makes in accordance with this SA regarding IAF the external auditor’s
and use of its work or DA evaluations are no
The external auditor
shall not use an • Having appropriately evaluated whether and, longer appropriate.
internal auditor to if so, to what extent internal auditors can be • The external auditor
provide DA if: used to provide DA on audit, the external shall direct, supervise
auditor shall, in communicating with TCWG an and review the work
There are significant overview of planned scope and timing of audit
threats to objectivity performed by internal
accordance with SA 260, communicate the auditors on engagement
of internal auditor; or nature and extent of the planned use of internal in accordance with SA
The internal auditor auditors to provide DA so as to reach a mutual 220.
lacks sufficient understanding that such use is not excessive in
competence to the circumstances of engagement.
perform proposed
work.
Documentation
A. If the external auditor uses the work of B. If the external auditor uses internal auditors to
the internal audit function, the external provide direct assistance on the audit, the external
auditor shall include in the audit auditor shall include in the audit documentation:
documentation:
a) The evaluation of: a) The evaluation of the existence and significance of
(i) Whether the function’s organizational threats to the objectivity of the internal auditors, and
status and relevant policies and the level of competence of the internal auditors used to
procedures adequately support the provide direct assistance;
objectivity of the internal auditors; b) The basis for the decision regarding the nature and
(ii) The level of competence of the function; extent of the work performed by the internal auditors;
and c) Who reviewed the work performed and the date and
(iii) Whether the function applies a extent of that review in accordance with SA 230;
systematic and disciplined approach, d) The written agreements obtained from an authorized
including quality control; representative of the entity and the internal auditors;
b) The nature and extent of the work used and and
the basis for that decision; and e) The working papers prepared by the internal auditors
c) The audit procedures performed by the who provided direct assistance on the audit
external auditor to evaluate the adequacy of engagement.
the work used.
Scope of IAF
Activities Activities Activities Relating to Internal Control

Relating to Relating to
Governance Risk
Management Evaluation of Examination of
financial and Review of Review of
internal operating compliance
control- The operating
IAF may assess IAF may activities- with laws and
IAF may be information- The
the governance assist the The IAF may regulations-
assigned IAF may be
process in its entity by be assigned The IAF may
specific assigned to review
accomplishment identifying to review be assigned to
responsibility the means used to
of objectives on and the review
for reviewing identify, recognize,
ethics and evaluating economy, compliance
values, controls, measure, classify
significant and report efficiency with laws,
performance exposures to evaluating and regulations
their operation financial and
management risk and effectiveness and other
and operating
and contributing of operating external
recommending information, and to
accountability, to the activities, requirements,
improvements make specific
communicating improvement including and with
thereto. inquiry into
risk and control of risk non- management
individual items,
information to management financial policies and
including detailed
appropriate and internal activities of directives and
testing of
areas of control an entity. other internal
transactions,
organization. requirements.
balances and
procedures.

Relationship between the Internal Audit Function and the External Auditor
 The function of an internal auditor is an integral part of the system of internal control. It is
statutory requirement too as per section 138 of the Companies Act, 2013 where the
Audit Committee of the company or the Board shall, in consultation with the Internal
Auditor, formulate the scope, functioning, periodicity and methodology for conducting the
internal audit. However, it is obligatory for a statutory auditor to examine the scope and
effectiveness of the work carried out by the internal auditor.
 The role and objectives of internal audit function are determined by management and,
where applicable, those charged with governance. While the objectives of the internal
audit function and the external auditor are different, some of the ways in which the internal
audit function and the external auditor achieve their respective objectives may be similar.
 Thus, much of the work of the internal auditor may be useful to the statutory auditor
in determining nature, timing and extent of his audit procedures. Depending upon
such evaluation, the statutory auditor may be able to adopt less extensive procedures.
 Irrespective of the degree of autonomy and objectivity of the internal audit function, such
function is not independent of the entity as is required of the external auditor when
expressing an opinion on financial statements.
 Therefore, the external auditor has sole responsibility for the audit opinion expressed,
and that responsibility is not reduced by the external auditor's use of the work of the
internal auditors.
Evaluating Internal Auditor Function:

Objectivity – It refers to the ability to perform those tasks without allowing bias, conflict of
interest or undue influence of others to override professional judgments. Factors that may
affect the external auditor's evaluation include the following:
 Whether the organizational status of the internal audit function, including the function's
authority and accountability, supports the ability of the function to be free from bias,
conflict of interest or undue influence of others to override professional judgments.
 Whether the internal audit function is free of any conflicting responsibilities.
 Whether there are any constraints or restrictions placed on the internal audit function
by management or those charged with governance,
 Whether the internal auditors are members of relevant professional bodies and their
memberships obligate their compliance with relevant professional standards relating to
objectivity, or whether their internal policies achieve the same objectives.
Competence – It refers to the attainment and maintenance of knowledge and skills of the
function as a whole at the level required to enable assigned tasks to be performed diligently
and in accordance with applicable professional standards. Factors that may affect the external
auditor's determination include the following:
 Whether the internal audit function is adequately and appropriately resourced relative to
the size of the entity and the nature of its operations.
 Whether there are established policies for hiring, training and assigning internal
auditors to internal audit engagements.

 Whether the internal auditors have adequate technical training and proficiency in
auditing.
 Whether the internal auditors possess the required knowledge relating to the entity's
financial reporting and the applicable financial reporting framework and whether
the internal audit function possesses the necessary skills to perform work related to the
entity's financial statements.
 Whether the internal auditors are members of relevant professional bodies that
oblige them to comply with the relevant professional standards including continuing
professional development requirements.
Application of a Systematic and Disciplined Approach

The application of a systematic and disciplined approach to planning, performing, supervising,
reviewing and documenting its activities distinguishes the activities of the internal audit
function from other monitoring control activities that may be performed within the entity.
Factors that may affect the external auditor's determination of whether the internal audit
function applies a systematic and disciplined approach include the following:
 The existence, adequacy and use of documented internal audit procedures or guidance
covering such areas as risk assessments, work programs, documentation and reporting, the
nature and extent of which is commensurate with the size and circumstances of an entity.
 Whether the internal audit function has appropriate quality control policies and
procedures, or quality control requirements in standards set by the relevant professional
bodies for internal auditors. Such bodies may also establish other appropriate
requirements such as conducting periodic external quality assessments.
Important Questions
1. Explain in brief the relationship between Statutory Auditor and Internal Auditor.
2. Can the statutory auditor rely upon the work of an internal auditor?
3. You have been appointed auditor of a large Industrial Company which has an
established Internal Audit Department. You are required to state the main aspects
that would be considered to find out effectiveness of the department.
4. PP Ltd., a garment exporter, asked their internal auditor, a practicing chartered
accountant, to conduct physical verification of the year end inventory and report of
such verification was handed over to the statutory auditor for their view and use.
Can statutory auditor rely on such report?

SA 620 (REVISED) - USING THE WORK OF AN AUDITOR’S EXPERT
Expert
In field other than accounting or auditing
Either Engaged or Employed
By Auditor By Management
To assist in obtaining SAAE For Preparation of F.S.
Auditor’s expert Management’s expert
Auditor’s expert – An individual or organisation possessing expertise in a field other than

accounting or auditing, whose work in that field is used by the auditor to assist the auditor in
obtaining sufficient appropriate audit evidence. An auditor’s expert may be either an auditor’s
internal expert (who is a partner or staff, including temporary staff, of the auditor’s firm or a
network firm), or an auditor’s external expert.
SUMMARY OF SA 620
Matters where Audior can use Expert work NTE of Audit Procedures
Objective
The valuation of complex financial instruments, While determining the NTE of the
land and buildings, plant and machinery, jewelry, procedures to be performed w.r.t. the
works of art, antiques, intangible assets, assets requirements of this SA, the auditor
Auditor is to acquired and liabilities assumed in business shall consider matters including:
determine : combinations and assets that may have been a) The nature of the matter to which
whether to use impaired. that expert's work relates;
the work of an The actuarial calculation of liabilities associated b) The RMM in the matter to which that
auditor’s expert; with insurance contracts or employee benefit expert's work relates;
and plans.
c) The significance of that expert's work
whether that The estimation of oil and gas reserves. in the context of the audit;
work is adequate
for the auditor's The valuation of environmental liabilities, and d) The auditor's knowledge of and
purposes. site clean-up costs. experience with previous work
The interpretation of contracts, laws and performed by that expert; and
regulations. e) Whether that expert is subject to the
The analysis of complex or unusual tax auditor's firm's quality control policies
compliance issues. and procedures.
Note: Auditor’s responsibility is not reduced by the auditor’s use of the work of an auditor’s
expert He remains sole responsible for the opinion expressed.

Procedures to be performed while using the work of Auditor Expert
Determining Evaluate Obtaining an Agreement Evaluating Auditor’s

the Need for Competence, understanding with adequacy Expert
an Auditor’s Capability and of the field of auditor’s Auditor’s work not
Expert Objectivity of expertise of Expert Expert adequate
expert the Auditor’s Work for audit
Competence: relates Expert In writing, on purposes
If expertise in
a field other to the nature and the following
level of expertise matters : Agree with
than
accounting or Capability: relates To enable Nature, scope Findings and Auditor's
auditing is the ability to exercise the auditor & objectives of Conclusion: expert on
necessary to that competence to : Auditor's Relevance, nature &
Expert work reasonablenes extent of
obtain SAAE , Objectivity: relates Determine
s and
the auditor to the possible effects the nature, Respective further
consistency work to be
shall that bias, conflict of scope and roles & with other done by
determine interest or the objectives responsibilitie audit Auditor
whether to influence of others of that s of auditors & Evidence. expert.
use the work may have on the expert's Auditor
of an professional or work for Expert. Significant Perform
auditor’s business judgment the Assumptions further
NTE of and Methods
expert. auditor's audit
communicatio used:
purposes. procedures
Sources of n, including Relevance and
Evaluate form of report. appropriate
Information reasonablenes in
the
Personal experience Need for s in the circumstanc
adequacy of
with previous work Auditor Expert circumstance. es.
that work
to observe Source data Including
Discussions with that for the
confidentiality used: engagement
expert. auditor's
requirements Relevance, of another
purposes.
Discussions with under ethical completeness, expert.
others who are familiar requirements and accuracy.
with that expert’s work. or Law and If above
regulation. cannot
Knowledge of that resolve
expert’s Note: inadequacy,
qualifications, Agreement is Inquiring MODIFIED
membership of a often in the Auditor opinion
professional body or form of an Expert may be
industry association, engagement Review Work required.
license to practice, or letter.
Papers and
other forms of external report
recognition.
Discussion
Published papers or
books written by that with other
expert. Expert'
The auditor's firm's Discussion of
quality control policies Auditor
and procedures. expert report
with
management

Factors should be considered for evaluating adequateness of Auditors Experts work/ work
of an expert should be evaluated before accepting the same as an Audit evidence
Findings and Conclusion Significant Assumptions Source data used

and Methods used
Relevance & Relevance and Relevance, Completeness,

Consistency with
Reasonableness Reasonableness and Accuracy
other audit Evidence
The Auditor should check, if the work of auditor's expert is relevant for purpose of his audit.
Ultimately auditor is responsible for his opinion on the financial statement
If the auditor determines that the work of the auditor’s expert is not adequate for the auditor’s purposes,
the auditor shall:
(i) Agree with that expert on the nature and extent of further work to be performed by that expert; or
(ii)Perform further audit procedures appropriate to the circumstances.
Reference to Auditor’s Expert in Auditor’s Report
Modified Audit Report Unmodified Audit Report
Refer to work of auditor's expert if it is necessary for understanding No reference unless required by Law and
the nature of modification. Regulation.
He shall indicate that such reference does not reduce auditor's If it is required by law or regulation, the
responsibility for the audit opinion auditor shall indicate in the auditor’s report
In such circumstances, the auditor may need the permission of the that the reference does not reduce the
auditor’s expert before making such a reference. auditor’s responsibility for the audit opinion
QUESTIONS
1. How the work of an expert should be evaluated before accepting the same as an Audit
evidence?
2. State your views on reference to an expert in the Auditor’s report.
3. List the matters in respect of which auditor’s can use the work of auditor’s expert.
4. State your views on reference to an expert in the Auditor’s report.
5. State with reasons whether the following statement is True or False: The auditor, in the
interest of the users, while explaining the nature of Ms reservation, can describe the
work of the expert with Ms name, in the audit report without obtaining prior consent of
the expert.[NOV. 09(2 MARKS)]
Hint: False: As per SA 620, “Using the Work of an Auditor’s Expert”, if the auditor, in the interest of
the users includes the name of the expert in his audit report, he can do so only after obtaining the
prior permission of the auditor’s expert.
6. An Auditor's external expert is not subjected to quality control policies and procedures
of an audit firm.
Hint: Correct: As per SA 620 "Using the Work of an Auditor's Expert", an auditor's external expert is
not a member of the engagement team and is not, therefore, subject to quality control policies and
procedures of the audit firm.


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AUDITING STANDARDS, STATEMENTS AND GUIDANCE NOTES

Quality Control & Engagement Standard

Study group constituted

Draft submitted by study group

Draft sent to Chairman for approval

Draft hosted on AASB website for minimum 21 days

Draft considered at AASB meeting

Comments considered at AASB meeting & draft is finalized.

Proposed Standard placed before Council

Final Standard Issued

AUDIT SA CHART BY CA SARISHTI SETHI

Formulate Review the existing &

Engagement Standards formulated by the AASB are

Assurance Services Related Services

Audit & Review of Audit or Review of other Standards on

AUDIT SA CHART BY CA SARISHTI SETHI

AUDIT SA CHART BY CA SARISHTI SETHI

AUDIT SA CHART BY CA SARISHTI SETHI

STATEMENTS AND GUIDANCE NOTES

Meaning - Issued with a view to Reporting Responsibility

AUDIT SA CHART BY CA SARISHTI SETHI

Meaning- Examples Reporting Responsibility

AUDIT SA CHART BY CA SARISHTI SETHI

AUDIT SA CHART BY CA SARISHTI SETHI

(1) (3) (4) (5)

To examine For the

AUDIT SA CHART BY CA SARISHTI SETHI

Financial Preparation and presentation of financial statements that is acceptable in view

(6) Ethical Requirements

Code of Ethics/Fundamental Principles Independence

Confidentiality Professional Integrity Objectivity Professional competence and due care

(7) Professional Skepticism

Meaning Reduces Risk of Being Alter to

Contradictory audit evidence.

(8) Professional Judgment

Meaning Important Areas when deciding

The application of relevant knowledge, Evaluating Drawing Evaluating

AUDIT SA CHART BY CA SARISHTI SETHI

Risk that auditor expresses an

Conduct of an Audit in Accordance with SAs

Compliance with SAs relevant Objectives stated in Complying with relevant

Failure to Achieve an Objective

Prevents auditor from achieving the overall objectives of the auditor

Modify the Opinion OR Withdraw

AUDIT SA CHART BY CA SARISHTI SETHI

Objective Type Questions

AUDIT SA CHART BY CA SARISHTI SETHI

Misstatement Not Detected by Control Not Detected by Auditor That becomes

AUDIT SA CHART BY CA SARISHTI SETHI

Relationship between Components of Audit Risk

2. Relationship between RMM and Detection Risk

AUDIT SA CHART BY CA SARISHTI SETHI

AUDIT SA CHART BY CA SARISHTI SETHI

Objective Preconditions Agreement on Audit Recurring

AUDIT SA CHART BY CA SARISHTI SETHI

Additional Considerations in Engagement Acceptance

Financial Reporting Auditor's Report Prescribed FRF prescribed by law or

Factors to be considered in determining the Acceptablity of FRF

Nature of Entity Objective of F.S. Law or Regulation prescribles FRF

AUDIT SA CHART BY CA SARISHTI SETHI

Content of Introductory Para

Introductory Auditor Responsibility Management

Our audit will be conducted with the objective of our

AUDIT SA CHART BY CA SARISHTI SETHI