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Handbook on Standards of Auditing : By CA B S JOLLYCopyright Protected. All rights reserved. These notes are for personal use only. Copying or transmitting, selling or profiting in anyother manner from these notes is prohibited.

Standards on AuditingBasic Concepts ICAI develops and promulgates technical Standards and other professional literature. ICAI issues from time to time various documents on specific matters of importance to auditors and

accountants. The documents can be classified into 6 categories as follows:-1. Standards on Auditing2. Accounting Standards and Accounting Standards Interpretations3. Other Statements on accounting and auditing4. Guidance Notes (on various matters relating to accounting, audit, tax, law etc.)5. Opinion on specific queries6. Research Studies, monographs and other miscellaneous publications.

ICAI being one of the founder members of the International Federation of Accountants (IFAC), theStandards developed and promulgated by the Auditing and Assurance Standards Board (AASB) are inconformity with the corresponding International Standards issued by the International Auditing andAssurance Standards Board (IAASB), established by the IFAC.

Objective of an audit of financial statements is to enable the auditor to express an opinion whether thefinancial statements are prepared, in all material respects, in accordance with an applicable financialreporting framework. It is undertaken to enhance the degree of confidence of intended users in thefinancial statements.

In conducting an audit, the overall objective of the auditor is to obtain reasonable assurance aboutwhether the financial statements as a whole are free from material misstatement, whether due to fraudor error, and to report on the financial statements in accordance with the auditor’s findings.

The SAs deal with the general responsibilities of the auditor, as well as the auditor’s furtherconsiderations relevant to the application of those responsibilities to specific areas.

Requirements The auditor complies with the requirements of an SA in all cases where they are relevant in the

circumstances of the audit. A chartered accountant in practice shall be deemed to be guilty of professional misconduct, if he fails to

disclose a material fact known to him which is not disclosed in a financial statement, but disclosure ofwhich is necessary in making such financial statement where he is concerned with that financialstatement in a professional capacity. [Clause 5 – Part 1 – Schedule II of CA Act, 1949]

A chartered accountant in practice shall be deemed to be guilty of professional misconduct, if he doesnot exercise due diligence, or is grossly negligent in the conduct of his professional duties. [Clause 7 –Part 1 – Schedule II of CA Act, 1949]

A member is deemed to be guilty of professional misconduct if he fails to invite attention to any materialdeparture from the generally accepted procedures of audit applicable to the circumstances. [Clause 9 –Part 1 – Schedule II of CA Act, 1949]

Framework of Audit and Related Services Meaning of Assurance = Auditor's satisfaction as to the reliability of an assertion being made by one

party for use by another party. Method of providing Assurance = Auditor assesses the evidence collected as a result of procedures

conducted and expresses a conclusion.


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Nature of ServiceAuditing Related Services

Audit Review Agreed uponprocedures Compilation

Comparative levelof assuranceprovided by theauditor

High, but notabsolute assurance

Moderateassurance No Assurance No Assurance

Report Provided Positive assuranceon assertions

Negative assuranceon assertions

Factual findings ofprocedures

Identification ofinformationcompiled

Objective of an Audit – To enable the auditor to express an opinion whether the financial statementsare prepared, in all material respects, in accordance with an identified financial reporting framework"give a true and fair view".

Objective of a Review – To enable an auditor to state whether, on the basis of procedures which do notprovide all the evidence that would be required in an audit, anything has come to the auditor's attentionthat causes the auditor to believe that the financial statements are not prepared, in all material respects,in accordance with an identified financial reporting framework.

Objective of related engagement – To perform agreed-upon procedures and to carry out thoseprocedures of an audit nature to which the auditor and the entity and any appropriate third parties haveagreed and to report on factual findings.

Objective of a compilation engagement – To use accounting expertise as opposed to auditing expertiseto collect, classify, and summaries financial information.

Framework of StandardsStandards on Quality Control Master Standards to be applied for all services covered

by the Engagement Standards as belowSQC 1-99

Standards on Auditing (SAs) To be applied in the audit of historical financialinformation

SA 100-199

Standards on ReviewEngagements (SREs)

To be applied in the review of historical financialinformation

SRE 2000-2699

Standards on AssuranceEngagements (SAEs)

To be applied in assurance engagements, dealing withsubject matters other than historical financialinformation

SAE 3000-3699

Standards on Related Services(SRSs)

To be applied to engagements involving application ofagreed-upon procedures to information, compilationengagements, and other related services engagements,as may be specified by the ICAI

SRS 4000-4699

Seven Category of SAS.No. Particulars Standard Numbers

1 Introductory Matters 100-1992 General Principles and Responsibilities 200-2993 Risk Assessment and Response to Assessed Risks 300-4994 Audit Evidence 500-5995 Using Work of Others 600-6996 Audit Conclusions and Reporting 700-7997 Specialized Areas 800-899


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SA 100-199



SRE 2000-2699



SAE 3000-3699



SRS 4000-4699




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Standards IssuedSA # AAS# Title Effective Date*

1.4.2008 1.4.2009 1.4.2010 1.4.2011Standards on Quality Control (SQCs)SQC1

Quality Control for firms that perform auditsand reviews of historical financial information,and other assurance and related servicesengagements

100-199 Introductory Matters200-299 General Principles and Responsibilities200Rev.

1, 2 Overall objectives of the Independent Auditorand the conduct of an audit in accordance withStandards on Auditing

210 26 Agreeing the terms of Audit Engagements 220 17 Quality Control for an audit of Financial

Statements

230 3 Audit Documentation 240 4 The Auditor’s Responsibilities relating to fraud

in an audit of financial statements

250 21 The Auditor’s Responsibilities relating to lawsand regulation in an audit of financialstatements

260 27 Communication with those charged withGovernance

265 Communicating deficiencies in Internal Controlto those charged with Governance andManagement

299 12 Responsibility of Joint Auditors [1.4.1996] 300-499 Risk Assessment and Response to Assessed Risks300 8 Planning an audit of financial statements 315 20 Identifying and assessing the Risks of Material

Misstatement through understanding the entityand its environment

320 13 Materiality in planning and performing an audit 330 The Auditor’s responses to Assessed Risks 402 24 Audit considerations relating to an entity using

a Service Organization

450 Evaluation of Misstatements identified duringthe Audit

500–599 Audit Evidence500 5 Audit Evidence 501 34 Audit Evidence - Specific Considerations for

selected items

505 30 External Confirmations 510 22 Initial Audit Engagements—Opening Balances 520 14 Analytical Procedures 530 15 Audit Sampling


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SA # AAS# Title Effective Date*1.4.2008 1.4.2009 1.4.2010 1.4.2011

540 18 Auditing Accounting Estimates, including FairValue Accounting Estimates, and RelatedDisclosures

550 23 Related Parties 560 19 Subsequent Events 570 16 Going Concern 580 11 Written Representations 600-699 Using Work of Others600 10 Special Consideraons ― A udi ts o f G r oup

Financial Statements (Including the Work ofComponent Auditors) [1.4.2002]

610 7 Using the Work of Internal Auditors 620 9 Using the Work of an Auditor’s Expert 700-799 Audit Conclusions and Reporting700 28 Forming an Opinion and Reporting on Financial

Statements

705 25 Modifications to the Opinion in theIndependent Auditor’s Report

706 Emphasis of Matter Paragraphs and OtherMatter Paragraphs in the Independent Auditor’sReport

710 Comparative Information – CorrespondingFigures and Comparative Financial Statements

720 The Auditor’s Responsibility in Relation to OtherInformation in Documents Containing AuditedFinancial Statements

*Effective date means that the SA is effective for audits of the financial statements for periods beginning onor after the specified date


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SA200 – Overall objectives and Conduct ofan AuditSA200 – Overall Objectives of the Independent Auditor and the Conduct of anAudit in Accordance with Standards on Auditing [w.e.f. 1-4-2010]

An Audit of Financial Statements

Scope of Audit1. This SA establishes the independent auditor’s overall responsibilities when conducting an audit of

financial statements in accordance with other SAs.2. The purpose of an audit is to enhance the degree of confidence of intended users in the financial

statements.3. This is achieved by the expression of an opinion by the auditor on whether the financial statements are

prepared, in all material respects, in accordance with an applicable financial reporting framework.4. Auditor’s opinion does not assure, for example, the future viability of the entity nor the efficiency or

effectiveness with which management has conducted the affairs of the entity.5. Laws and regulations may require auditors to provide opinions on other specific matters, such as the

effectiveness of internal control, or the consistency of a separate management report with the financialstatements.

Applicable Financial Reporting Framework The financial reporting framework adopted by management and, where appropriate, those charged with

governance in the preparation and presentation of the financial statements that is acceptable in view ofthe nature of the entity and the objective of the financial statements, or that is required by law orregulation.

Financial reporting frameworks can be:-(a) Fair presentation frameworks; or SA210(b) Compliance frameworksSA800

Management’s Responsibility An audit in accordance with SAs is conducted on the premise that management and, where appropriate,

those charged with governance have responsibilities that are fundamental to the conduct of the audit.The audit of the financial statements does not relieve management or those charged with governance ofthose responsibilities.

Management and those charged with governance have responsibility:-(a) For the preparation and presentation of the financial statements in accordance with the

applicable financial reporting framework.(b) For design, implementation and maintenance of internal control relevant to the preparation and

presentation of financial statements that are free from material misstatement, whether due tofraud or error.

(c) To provide auditor with information and explanations The financial statements prepared may be:-

(a) general purpose financial statements(b) special purpose financial statements


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SA240 – Fraud and ErrorsSA240 – Auditor’s Responsibilities Relating to Fraud [w.e.f. 1-4-2009]

Scope & Objective

Meaning of Fraud and Risk Factors Fraud - An intentional act by one or more individuals among management, those charged with

governance, employees, or third parties, involving the use of deception to obtain an unjust or illegaladvantage.

Fraud risk factors - Events or conditions that indicate an incentive or pressure to commit fraud orprovide an opportunity to commit fraud.

Characteristics of Fraud Although fraud is a broad legal concept, for the purposes of the SAs, the auditor is concerned with fraud

that causes a material misstatement in the financial statements. Two types of intentional misstatements are relevant to the auditor –

(i) Misstatements resulting from fraudulent financial reporting; and(ii) Misstatements resulting from misappropriation of assets

Primary Responsibility The primary responsibility for the prevention and detection of fraud rests with both;-

(i) those charged with governance of the entity and(ii) Management.

This involves a commitment to creating a culture of honesty and ethical behavior which can bereinforced by an active oversight by those charged with governance

Responsibilities of Auditor An auditor conducting an audit in accordance with SAs is responsible for obtaining reasonable assurance

that the financial statements taken as a whole are free from material misstatement, whether caused byfraud or error.

SA200 -Due to inherent limitations of an audit, there is an unavoidable risk that some materialmisstatements of the financial statements will not be detected, even though the audit is properlyplanned and performed in accordance with the SAs.

The risk of not detecting a material misstatement resulting from fraud is higher than the risk of notdetecting one resulting from error.

The risk of the auditor not detecting a material misstatement resulting from management fraud isgreater than for employee fraud, because management is frequently in a position to directly or indirectlymanipulate accounting records, present fraudulent financial information or override control proceduresdesigned to prevent similar frauds by other employees.

When obtaining reasonable assurance, the auditor is responsible for maintaining an attitude ofprofessional skepticism throughout the audit, considering the potential for management override ofcontrols and recognizing the fact that audit procedures that are effective for detecting error may not beeffective in detecting fraud.

Objectives of an Auditor(a) To identify and assess the risks of material misstatement in the financial statements due to fraud;


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(b) To obtain sufficient appropriate audit evidence about the assessed risks of material misstatement due tofraud, through designing and implementing appropriate responses; and

(c) To respond appropriately to identified or suspected fraud.

Requirements

Professional Skepticism The auditor shall maintain an attitude of professional skepticism throughout the audit, recognizing the

possibility that a material misstatement due to fraud could exist, notwithstanding the auditor’s pastexperience of the honesty and integrity of the entity’s management and those charged with governance.

Unless the auditor has reason to believe the contrary, the auditor may accept records and documents asgenuine.

Where responses to inquiries of management or those charged with governance are inconsistent, theauditor shall investigate the inconsistencies.

Discussion among Engagement Team SA 315 – Auditor should conduct a discussion among the engagement team members and a

determination by the engagement partner of matters which are to be communicated to those teammembers not involved in the discussion.

The discussion shall place particular emphasis on how and where the entity’s financial statements maybe susceptible to material misstatement due to fraud, including how fraud might occur.

The discussion shall occur notwithstanding the engagement team members’ beliefs that managementand those charged with governance are honest and have integrity.

Risk Assessment Procedures and Related Activities to be performed by Auditor

Enquiry with Management and others within the entity The auditor shall make inquiries of management regarding:

(a) Management’s assessment of the risk of material misstatements including the nature, extent andfrequency of such assessments

(b) Management’s process for identifying and responding to such risks(c) Management’s communication to those charged with governance and to its employees regarding its

views on business practices and ethical behavior. The auditor shall make inquiries of management and others within the entity including Internal Audit to

determine whether they have knowledge of any actual, suspected or alleged fraud affecting the entity.

Enquiry with those charged with governance The auditor shall obtain an understanding of how those charged with governance exercise oversight of

management’s processes for identifying and responding to the risks of fraud in the entity and theinternal control that management has established to mitigate these risks.

The auditor shall make inquiries to determine whether they have knowledge of any actual, suspected oralleged fraud affecting the entity.


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SA265 – Deficiencies in Internal ControlSA265 – Communicating deficiencies in Internal Control [w.e.f. 1-4-2010]

Scope & Objective This SA deals with the auditor’s responsibility to communicate appropriately to those charged with

governance and management deficiencies in internal control that the auditor has identified in an auditof financial statements.

The auditor is required to obtain an understanding of internal control relevant to the audit whenidentifying and assessing the risks of material misstatement.

The objective of the auditor is to communicate appropriately to those charged with governance andmanagement deficiencies in internal control that the auditor has indentified during the audit and that, inthe auditor’s professional judgment, are of sufficient importance to merit their respective attentions.

Definitions Deficiency in internal control - This exists when:

(i) A control is designed, implemented or operated in such a way that it is unable to prevent, or detectand correct, misstatements in the financial statements on a timely basis; or

(ii) A control necessary to prevent, or detect and correct, misstatements in the financial statements on atimely basis is missing.

Significant deficiency in internal control - A deficiency or combination of deficiencies in internal controlthat, in the auditor’s professional judgment, is of sufficient importance to merit the attention of thosecharged with governance.

Requirements The auditor shall determine whether, on the basis of the audit work performed, the auditor has

identified one or more deficiencies in internal control. If auditor has identified one or more deficiencies in internal control, the auditor shall determine, on the

basis of the audit work performed, whether, individually or in combination, they constitute significantdeficiencies.

The auditor shall communicate in writing significant deficiencies in internal control identified during theaudit to those charged with governance on a timely basis.

The auditor shall also communicate to management at an appropriate level of responsibility on a timelybasis.

The auditor shall include in the written communication of significant deficiencies in internal control:(a) A description of the deficiencies and an explanation of their potential effects; and(b) Sufficient information to enable those charged with governance and management to understand the

context of the communication. In particular, the auditor shall explain that:

(i) The purpose of the audit was for the auditor to express an opinion on the financial statements;(ii) The audit included consideration of internal control relevant to the preparation of the financial

statements in order to design audit procedures that are appropriate in the circumstances, but notfor the purpose of expressing an opinion of the effectiveness of internal control; andSA450 – Misstatements Identified


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SA450 – Evaluation of Misstatements identified during the Audit [w.e.f. 1-4-2010]

Scope & Objective This SA deals with the auditor’s responsibility to evaluate the effect of identified misstatements on the

audit and of uncorrected misstatements, if any, on the financial statements. The objective of the auditor is to evaluate:

(a) The effect of identified misstatements on the audit; and(b) The effect of uncorrected misstatements, if any, on the financial statements.

Definitions Misstatement - A difference between the amount, classification, presentation, or disclosure of a

reported financial statement item and the amount, classification, presentation, or disclosure that isrequired for the item to be in accordance with the applicable financial reporting framework.

Misstatements can arise from error or fraud. When the auditor expresses an opinion on whether thefinancial statements give a true and fair view or are presented fairly, in all material respects,misstatements also include those adjustments of amounts, classification, presentation, or disclosurethat, in the auditor’s judgment, are necessary for the financial statements to give a true and fair view orpresent fairly, in all material respects.

Uncorrected misstatements - Misstatements that the auditor has accumulated during the audit and thathave not been corrected.

Requirements The auditor shall accumulate misstatements identified during the audit, other than those that are clearly

trivial. The auditor shall determine whether the overall audit strategy and audit plan need to be revised if :-

(a) The nature of identified misstatements and the circumstances of their occurrence indicate thatother misstatements may exist that, when aggregated with misstatements accumulated during theaudit, could be material; or

(b) The aggregate of misstatements accumulated during the audit approaches materiality determined inaccordance with SA 320.

At the auditor’s request, if management has examined a class of transactions, account balance ordisclosure and corrected misstatements that were detected, the auditor shall perform additional auditprocedures to determine whether misstatements remain.

Communication and Correction The auditor shall communicate on a timely basis all misstatements accumulated during the audit with

the appropriate level of management, unless prohibited by law or regulation. The auditor shall requestmanagement to correct those misstatements.

If management refuses to correct some or all of the misstatements communicated by the auditor, theauditor shall obtain an understanding of management’s reasons for not making the corrections and shalltake that understanding into account when evaluating whether the financial statements as a whole arefree from material misstatement.

Evaluating the effect of uncorrected Misstatements The auditor shall determine whether uncorrected misstatements are material, individually or in

aggregate. In making this determination, the auditor shall consider :-


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(a) The size and nature of the misstatements, both in relation to particular classes of transactions,account balances or disclosures and the financial statements as a whole, and the particularcircumstances of their occurrence; and

(b) The effect of uncorrected misstatements related to prior periods on the relevant classes oftransactions, account balances or disclosures, and the financial statements as a whole.

The auditor shall communicate with those charged with governance uncorrected misstatements and theeffect that they, individually or in aggregate, may have on the opinion in the auditor’s report, unlessprohibited by law regulation. The auditor’s communication shall identify material uncorrectedmisstatements individually. The auditor shall request that uncorrected misstatements be corrected.

Written RepresentationThe auditor shall request a written representation from management and, where appropriate, those chargedwith governance whether they believe the effects of uncorrected misstatements are immaterial, individuallyand in aggregate, to the financial statements as a whole. A summary of such items shall be included in orattached to the written representation.

DocumentationThe audit documentation shall include:-

(a) The amount below which misstatements would be regarded as clearly trivial;(b) All misstatements accumulated during the audit and whether they have been corrected; and(c) The auditor’s conclusion as to whether uncorrected misstatements are material, individually or in

aggregate and the basis for that conclusion.


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SA510 – Opening BalancesSA510 – Initial Audit Engagements – Opening Balances [w.e.f. 1-4-2010]

Scope & Objective This SA deals with the auditor’s responsibilities relating to opening balances when conducting an initial

audit engagement. In addition to financial statement amounts, opening balances include mattersrequiring disclosure that existed at the beginning of the period, such as contingencies and commitments.

In conducting an initial audit engagement, the objective of the auditor with respect to opening balancesis to obtain sufficient appropriate audit evidence about whether:(a) Opening balances contain misstatements that materially affect the current period’s financial

statements; and(b) Appropriate accounting policies reflected in the opening balances have been consistently applied in

the current period’s financial statements, or changes thereto are properly accounted for andadequately presented and disclosed in accordance with the applicable financial reportingframework.

Definitions Initial audit engagement - An engagement in which either;

(i) the financial statements for the period were not audited or(ii) the financial statements for the prior period were audited by a predecessor auditor.

Opening balances-Those account balances that exist at the beginning of the period. Opening balancesare based upon the closing balances of the prior period and reflect the effects of transactions and eventsof prior periods and accounting policies applied in the prior period. Opening balances also includematters requiring disclosure that existed at the beginning of the period, such as contingencies andcommitments.

Predecessor auditor - The auditor from a different audit firm, who audited the financial statements of anentity in the prior period and who has been replaced by the current auditor.

Requirements

Audit Procedures The auditor shall read the most recent financial statements, if any, and the predecessor auditor’s report

thereon, if any, for information relevant to opening balances, including disclosures. The auditor shall obtain sufficient appropriate audit evidence about whether the opening balances

contain misstatements that materially affect the current period’s financial statements by:-(a) Determining whether the prior period’s closing balances have been correctly brought forward to the

current period or, when appropriate, any adjustments have been disclosed as prior period items inthe current items in the current year’s statement of profit and loss; and

(b) Determining whether the opening balances reflect the application of appropriate accountingpolicies.

(c) Where the prior year financial statements were audited, perusing the copies of the audited financialstatements including the other relevant documents relating to the prior period financial statements;

(d) Evaluating whether audit procedures performed in the current period provide evidence relevant tothe opening balances; or

(e) Performing specific audit procedures to obtain evidence regarding the opening balances.


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If the auditor obtains audit evidence that the opening balances contain misstatements that couldmaterially affect the current period’s financial statements, the auditor shall perform such additionalaudit procedures as are appropriate in the circumstances to determine the effect on the current period’sfinancial statements. If the auditor concludes that such misstatements exist in the current period’sfinancial statements, the auditor shall communicate the misstatements with the appropriate level ofmanagement and those charged with governance in accordance with SA 450.

Consistency of Accounting PoliciesThe auditor shall obtain sufficient appropriate audit evidence about whether the accounting policiesreflected in the opening balances have been consistently applied in the current period’s financialstatements, and whether changes in the accounting policies have been properly accounted for andadequately presented and disclosed in accordance with the applicable financial reporting framework

Relevant Information in the Predecessor Auditor’s ReportIf the prior period’s financial statements were audited by a predecessor auditor and there was amodification to the opinion, the auditor shall evaluate the effect of the matter giving rise to the modificationin assessing the risks of material misstatement in the current period’s financial statements.

Audit Conclusions and Reporting

Opening Balances If the auditor is unable to obtain sufficient appropriate audit evidence regarding the opening balances,

the auditor shall express a qualified opinion or a disclaimer of opinion, as appropriate. If the auditor concludes that the opening balances contain a misstatement that materially affects the

current period’s financial statements, and the effect of the misstatement is not properly accounted foror not adequately presented or disclosed, the auditor shall express a qualified opinion or an adverseopinion, as appropriate.

Consistency of Accounting PoliciesIf the auditor concludes that :-

(a) The current period’s accounting policies are not consistently applied in relation to opening balancesin accordance with the applicable financial reporting framework; or

(b) A change in accounting policies is not properly accounted for or not adequately presented ordisclosed in accordance with the applicable financial reporting framework,

the auditor shall express a qualified opinion or an adverse opinion as appropriate.

Modification to the Opinion in the Predecessor Auditor’s ReportIf the predecessor auditor’s opinion regarding the prior period’s financial statements included a modificationto the auditor’s opinion that remains relevant and material to the current period’s financial statements, theauditor shall modify the auditor’s opinion on the current period’s financial statements in accordance withSA705 and SA710.


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SA610 – Using work of an Internal AuditorSA610 – Relying on the work of an Internal Auditor [w.e.f. 1-4-1989]

Scope & Objective The purpose of this SA is to provide guidance as to the procedures which should be applied by the

external auditor in assessing the work of the internal auditor for the purpose of placing reliance uponthat work.

The external auditor shall determine :-(a) Whether the work of the internal auditors is likely to be adequate for purposes of the audit; and(b) If so, the planned effect of the work of the internal auditors on the nature, timing or extent of

the external auditor’s procedures.

Definitions Internal audit function – An appraisal activity established or provided as a service to the entity. Its

functions include, amongst other things, examining, evaluating and monitoring the adequacy andeffectiveness of internal control.

Internal auditors - Those individuals who perform the activities of the internal audit function. Internalauditors may belong to an internal audit department or equivalent function.

Objectives of Internal Audit1. Review of accounting system and related internal controls2. Examination for management of financial and operating information3. Examination of the economy, efficiency and effectiveness of operations including non-financial controls

of an organization4. Physical examination and verification of assets

Relationship between Internal and External Auditors Though the objectives and approach of an external audit differ from that of an internal audit, some of

the means of achieving their respective objectives are often similar and, thus, much of the work of theinternal auditor may be useful to the external auditor in determining the nature, timing and extent of hisprocedures.

The external auditor should, as part of his audit, evaluate the internal audit function to the extent heconsiders that it will be relevant in determining the nature, timing and extent of his compliance andsubstantive procedures. Depending upon such evaluation, the external auditor may be able to adopt lessextensive procedures than would otherwise be required.

By its very nature, the internal audit function cannot be expected to have the same degree ofindependence as is essential when the external auditor expresses his opinion on the financialinformation.

The report of the external auditor is his sole responsibility, and that responsibility is not by any meansreduced because of the reliance he places on the internal auditor’s work.

General Evaluation of Internal Audit Function The external auditor should evaluate the internal audit function and document his conclusions in this

respect. The important aspects to be considered in this context are:


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(a) Organizational Status(b) Scope of Function(c) Technical competence(d) Due Professional Care

In determining whether the work of the internal auditors is likely to be adequate for purposes of theaudit, the external auditor shall evaluate :-(a) The objectivity of the internal audit function;(b) The technical competence of the internal auditors;(c) Whether the work of the internal auditors is likely to be carried out with due professional care;(d) Whether there is likely to be effective communication between the internal auditors and the

external auditor.(e) The nature and scope of specific work performed, or to be performed, by the internal auditors.(f) The assessed risks of material misstatement at the assertion level for particular classes of

transactions, account balances, and disclosures;(g) The degree of subjectivity involved in the evaluation of the audit evidence gathered by the internal

auditors in support of the relevant assertions.(h) The work performed by internal auditors having adequate technical training and proficiency;(i) The work properly supervised, reviewed and documented;(j) Adequate audit evidence has been obtained to enable the internal auditors to draw reasonable

conclusions:(k) Conclusions reached appropriate in the circumstances and any reports prepared by the internal

auditors are consistent with the results of the work performed; and(l) Any exceptions or unusual matters disclosed by the internal auditors are properly resolved.

Coordination If the external auditor intends to rely upon the work of the internal auditor, it is desirable that the

external auditor ascertains the internal auditor’s tentative plan for the year and discusses it with him atas early a stage as possible to determine areas where he considers that he could rely upon the internalauditor’s work.

The timing of such work, the extent of audit coverage, test levels and proposed methods of sampleselection, documentation of the work performed, and review and reporting procedures etc. should beplanned in advance.

Coordination with the internal auditor is usually more effective when meetings between External andInternal Auditors are held at appropriate intervals during the year.

Any significant matter that comes to the internal auditor’s attention and which he believes may affectthe work of the external auditor should be informed promptly and vice-versa.

Evaluating Specific Internal Audit Work The external auditor should document his conclusions in respect of the specific work which he has

reviewed. When the external auditor uses specific work of the internal auditors, the external auditor shall

document conclusions regarding the evaluation of the adequacy of the work of the internal auditors, andthe audit procedures performed by the external auditor on that work.

The external auditor should also test the work of the internal auditor on which he intends to rely.


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SA710 – ComparativesSA-710 Comparative Information - Corresponding Figures and ComparativeFinancial Statements [w.e.f. 1-4-2011]

Scope & Objective This SA deals with the auditor’s responsibilities regarding comparative information in an audit of

financial statements. When the financial statements of the prior period have been audited by a predecessor auditor or were

not audited, the requirements and guidance in SA 510 regarding opening balances also apply. There are two different broad approaches to the auditor’s reporting responsibilities in respect of

comparative information, i.e., corresponding figures and comparative financial statements. The objectives of the auditor are :-

(a) To obtain sufficient appropriate audit evidence about whether the comparative informationincluded in the financial statements has been presented, in all material respects, in accordance withthe requirements for comparative information in the applicable financial reporting framework; and

(b) To report in accordance with the auditor’s reporting responsibilities.

Definitions Comparative information - The amounts and disclosures included in the financial statements in respect

of one or more prior periods in accordance with the applicable financial reporting framework. Corresponding figures - Comparative information where amounts and other disclosures for the prior

period are included as an integral part of the current period financial statements, and are intended to beread only in relation to the amounts and other disclosures relating to the current period (referred to as“current period figures”). The level of details presented in the corresponding amounts and disclosures isdictated primarily by its relevance to the current period figures.

Comparative financial statements - Comparative information where amounts and other disclosures forthe prior period are included for comparison with the financial statements of the current period but, ifaudited, are referred to in the auditor’s opinion. The level of information included in those comparativefinancial statements is comparable with that of the financial statements of the current period.

Requirements

Auditor’s Responsibilities The auditor should obtain sufficient appropriate audit evidence that the corresponding figures meet the

requirements of the relevant financial reporting framework. The extent of audit procedures performed on the corresponding figures is significantly less than that for

the audit of the current period figures and is ordinarily limited to ensuring that the corresponding figureshave been correctly reported and are appropriately classified.

This involves the auditor assessing whether:(a) accounting policies used for the corresponding figures are consistent with those of the current

period or whether appropriate adjustments and/or disclosures have been made; and(b) corresponding figures agree with the amounts and other disclosures presented in the prior period or

whether appropriate adjustments and/or disclosures have been made. The incoming auditor should assess compliance with SA 510, "Initial Engagements-Opening Balances".


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If the auditor becomes aware of a possible material misstatement in the comparative information whileperforming the current period audit, the auditor shall perform such additional audit procedures as arenecessary in the circumstances to obtain sufficient appropriate audit evidence to determine whether amaterial misstatement exists.

If the auditor had audited the prior period’s financial statements, the auditor shall also follow therelevant requirements of SA 560.

As required by SA 580, the auditor shall request written representations for all periods referred to in theauditor’s opinion. The auditor shall also obtain a specific written representation regarding any priorperiod item that is separately disclosed in the current year’s statement of profit and loss.

Reporting When the comparatives are presented as corresponding figures, the auditor's report should not

specifically identify comparatives because the auditor’s opinion is on the current period financialstatements as a whole, including the corresponding figures.

If the auditor’s report on the prior period, as previously issued, included a qualified opinion, a disclaimerof opinion, or an adverse opinion and the matter which gave rise to the modification is unresolved, theauditor shall modify the auditor’s opinion on the current period’s financial statements.

If the auditor’s report on the prior period, as previously issued, included a qualified opinion, disclaimerof opinion, or adverse opinion and the matter which gave rise to the modification is resolved andproperly dealt with in the financial statements, the current report does not ordinarily refer to theprevious modification. However, if the matter is material to the current period, the auditor may includean emphasis of matter paragraph dealing with the situation.

If the financial statements of the prior period were audited by a predecessor auditor and the auditor ispermitted by law or regulation to refer to the predecessor auditor’s report on the corresponding figuresand decides to do so, the auditor shall state in an Other Matter paragraph in the auditor’s report:(a) That the financial statements of the prior period were audited by the predecessor auditor;(b) The type of opinion expressed by the predecessor auditor and, if the opinion was modified, the

reasons therefore; and(c) The date of that report.

If the prior period financial statements were not audited, the auditor shall state in the auditor’s reportthat the corresponding figures are unaudited. Such a statement does not, however, relieve the auditorof the requirement to obtain sufficient appropriate audit evidence that the opening balances do notcontain misstatements that materially affect the current period’s financial statements.


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This is a sample document only. You can purchase full notes athttp://coursemateonline.com

This is a sample document only. You can purchase full notes at http://coursemateonline.comThis is a sample document only. You can purchase full notes at http://coursemateonline.com. This is asample document only. You can purchase full notes at http://coursemateonline.com. This is a sampledocument only. You can purchase full notes at http://coursemateonline.com. This is a sample documentonly. You can purchase full notes at http://coursemateonline.com. This is a sample document only. You canpurchase full notes at http://coursemateonline.com. This is a sample document only. You can purchase fullnotes at http://coursemateonline.com. This is a sample document only. You can purchase full notes athttp://coursemateonline.com. This is a sample document only. You can purchase full notes athttp://coursemateonline.com.




This is a sample document only. You can purchase full notes at http://coursemateonline.comThis is a sample document only. You can purchase full notes at http://coursemateonline.com. This is asample document only. You can purchase full notes at http://coursemateonline.com. This is a sampledocument only. You can purchase full notes at http://coursemateonline.com. This is a sample documentonly. You can purchase full notes at http://coursemateonline.com. This is a sample document only. You can


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