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Audit Introduction

Substantive Compliance & RAP12

Audit

Audit Opinion

Audit evidence

Audit Procedures

VouchingVerification

Analysis of Keyfinancial ratios

Risk assessment Procedure

Internal Control

- Clear / unqualified / Clean / unmodified- Qualified- Adverse- Disclaimer of opinion

- Every Company OPC ; Pvt ; Pub ; - Every Year- Non Companies

Business Profession

T10>2 cr.(sale)

Gross receipts > 50 lacs

Audit may be defined as an independent examination of financial information of an entity whether profit oriented or not irrespective of its size and legal form and such an enamination is conducted with the view to express an opinion thereon (financial statement)

The primary objective of an Auditor is not to detect frauds & errors but; it is to comment and form an opinion whether the FS are showing true & fair view or Not.

Audit opinion

Compousarily Audit

Compliance

Modified

1.Definition

2. Objective

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a) Accounting policies selected and applied by the management must be proper.b) All AS should have been followed.c) Adequate Disclosure must be given in Notes to Accounts.

iv) Audit is a process Diagrametiacally Represented below :-

Audit

Audit opinion

Audit evidences

Audit procedures

Substantive Compliance & RAP(Risk Assessment Procedure)

Vouching &Verification

Analysis of keyfinancial Ratios

Evalution of Internal Controls

Vouching refers to checking of incomes & expenses but verification refers to checking of assets & liabilities. cp :- Purchase vouching ; cash verification

Analysis of key financial ratios helps the auditor to ascertain whether he has to check going concern assumption of client or not. ex:- if current ratio is 1:4 then auditor must check going concern assumption of client. Internal control refers to various departments and measures taken up by the client for smooth functioning of organisation.

At first auditor applies compliance & RAP in which he finds internal control to be strong /weak which means RMM (Risk of Material Mis-statement) will be less/more; which means auditor will have to apply less/more substantive procedures.

3. FS will exhibit true and fair view only if following conditions are satisfied :-

4. Audit a process

5. Vouching & Verification

6. Analysis of KFR

7. IC

8. RMM

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d) Disclaimer of opinion :-

b) Qualified Report :-

c) Adverse Report :-

9. Auditor forms his opinion by issuing anyone of the follow four audit reports :-

a) Clear/Clean/Unqualified report:- when there is no material misstatement and no material limitation on scope of audit.

There is either material mis-statment or material limitation or both. When material mistatement pervasive (huge). When material limitation is pervasive.

The above audit is conducted by qualified CA in practise. who must follow all the standards of auditing (SAs) otherwise he will be guilty under chartered Accountants Act; 1949;

38 SAs

100-199 200-299 300-499 500-599 600-699 700-799 800-899

Introductory Matters “0” Standards

General principles andresponsibilities

Risk Assessment & Response to Assessed

risk (6 SAs)

Audit avidences (11 SAs)

Using the work ofothers (3 SAs.)

Audit report(6 SAs) Specialied area

(3 SAs)

9 SAs.200;210;220;230;240,

250;260;265;299

Mod

ifoe

d Re

port

10. Auditor

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d.Audit evidences:-

b.Professional skepticism:-

i) Integrity:-

ii) objectivity:-

iii)Independence:-

iv) confidentiality:-

v) professional skill and competence:-

“Overall Objective of an independent Auditor and Conduct

1. The General Princples and responsibilities Governing an Audit are as follows:-

Auditor must satisfy the follow ethical requirements:-

An Auditor must maintain his integrity by having honest; sin-cere and straight forward.

He should maintain his objectivity forming an impartial opinion. An Auditor must be independent in his approch. and conduct Audit without following client’s directions.As per Guidance notes on independence issued ICAI; It is not possible to define independence if his judgement are not sub-order to anybodies wishes or directions who has engaged him and not even to his own self internet.

Any information acquired during the course of client’s Audit cant be disclosed at any cost without prior consent of client. An Auditor must conduct Audit carefully by excercising Due skill and care.

It may be defined as an attitude of having Questioning mind; being alert to the conditions that may indicate possible misstate ment and critical Assessment of Audit evidences. ex:- contradictory evidences ; missing evidences; possibility of fraud.

It may be defined as use of professional training; experience and knowledge for making Appropriate Decision during the course of an Audit. ex:- How much substantive procedure to be applied; Timing and extent of audit procedure.

Auditor must form his opinion on the basis of sufficient, Appropri-ate Audit evidences as per SA500.

S.A-200

a. Ethical Requirement:-

c.Professional Judgement:-

of Audit in accordance with standards of Auditing”

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5. Audit Risk:-

4. Reasonable assurance v/s absolute assurance:-

3. Objective of an auditor To Provide Reasonable Assurance :-

2. Accounting system and Internal control:-

e. Conduct of Audit in accordance with SAS mean;

1. Auditor must apply the Relevant S A. Relevant S A means there exist circumstances to apply the SA and that SA has been made effective.

2. If entire SA is not relevant; then only the portion of that SA which is relevant shall apply. 3. Auditor must perform procedure to achieve the objectives started in the SA.

4. If such objective cant be achieved auditor should modify his opinion; i.e. issue either qualified or adverse or disclaimer of opinion or withdraw from engagement(resign)

Both are the responsibility of management and those charge with governance (TCWG).Auditor is responsible not to create or maintain but only to check them.

The primary objective of an auditor is to comment and form an opinion whether financial statements are showing true and fair view or not. However; it doesn’t release management from their responbility of prepairing financial statements as per applible financial reporting framework (FRF).

The purpose of audit is to provide reasonable assurance regarding true and fair view of financial statement.

Reasonable assurance is an opinion which enhances the degree of confidence of users on financial statement.

Absolute assurance is a guarantee that there exist no material misstatements in financial statement.Auditor can never give absolute assurance beacuse of “Audit Risk”

It’s a risk that some material misstatement may remain undetected even though audit was properly planned and executedAuditor by applying audit procedures and collecting sufficient appropriate audit evidences can reduce the audit risk to an acceptable low level but cant make it zero because of inherent limitation of audit

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c) Limitation w.r.t time and cost:-

b) Nature of audit procedures:-

a) Nature of financial reporting:-

Auditor has to collect information from management and others which they may not give incomplete or inaccurate. The risk of not detecting material mis-statement arising out of fraud; is higher than that arising out of the error.

Auditor has to complete his audit within reasonable time and cost for which he has to do sampling i e- selective checking and not 100% checking.

Accounting involves lot of judgements made by management.ex:- Accounting estimates like PBDD, Depreciations for which

there cant be any conclusive Audit evidences.

6. Inherent Limitations of Audit:-

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The objective of this SA is to check whether pre-condition of audit exist or not.

If pre conditions of audit dont exist or if any limitation exists on scope of audit by which if audit is accepted will lead to disclaimer of opinion then auditor shouldn’t accept the audit unless otherwise required by law.

Before accepting the audit; auditor should sent to his client an engagement letter containing pre-conditions of audit as discussed below:-

a) Management should have prepared financial statements as per applicable financial reporting framework generally accepted accounting principles; accounting has his own responsibility.

b) Management should agree that accounting in its own responsibility.

c) Management should agree that preparation of internal control is its own responsibility.

d) Auditor will be given an unrestricted access to books of accounts and enquiry & confirmation from relevant person of entity.

e) Management agrees that auditor; responsibility is only to form an opinion on financial statements.

f) Auditor is not an employee of entity.

The above pre-conditions alongwith objective and scope of audit is signed and documented by both auditor and management.

Recurring audit means when same client’s financial statement are audited year after year.

S.A-210 “ Agreeing the terms of Audit Engagement”

1. Objective

2. Precondition

3. Letter of engagement

4. Documented

5. Recurring Audit

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b) When management changes.

c) When there is significant change in ownership.

d) When law requires.

e) As per any other reporting requirement.

Any change in terms of engagement is possible only after

mutual consent and if changes justifiable.

Justifiable changes are those which dont lead to lower level

of assurance. Its optional for auditor to agree to such change

ex: clients request to vouch all purchase bill.

unjustifiable changes are those which hamper the quality of

audit and provide lower level of assurance then the assurance

as per previous terms of engagement.Its compulsory for

auditor to disagree. ex:- clients request to not to vouch any

purchasebill.

If auditor has disagree to a change but still client changes

the terms of engagement and doesn’t allow the auditor to

continue the previous terms then; auditor must resign and

inform other directors and members of company.

Terms of audit engagement shall not be sent by auditor in case of recurring audit except in following cases:-

a) If auditor feels that entity has misunderstood or forgotten the terms of engagement.

6. Terms of Engagement in Recurring Audit

7. Changes

8. Justifiable

9. Unjustifiable

10. Resignation

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S.A-220

DON’T FORGET TOREFER MAIN

MAT

“Quality control for audit of financial statement:”-

-Refer Mat.Acronym:- CLEAR PARI

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1. Definition

Audit Documentation

a)Audit Procedures applied.

b)Audit Evidences collected.

c)Basis of Audit Opinion.

d)Date and name of persons who applied Audit Procedures.

e)Names of the person who recieved such procedures.

It is a collection of all the folders or any other storage media;

whether in physical or electronic file containing audit documenta-

tion/working papers of the relevant audit engagement.

a) Permanent audit file(PAF)

b) Current audit file(CAF)

PAF records those non-recurring Audit matters which generally

doesn’t change year after year.Examples of PAF are-

a)MOA

b)AOA

c)Significant Accounting Policies

d)Significant Audit Observations

e)Significant Ratios & Trends.

4. PAF

1. It may be defined as preparation and preservation of audit

2. Audit file:-

3. There are two types of Audit Files:-

S.A-230 working papers which shall contain:-

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6. Experience auditor:-

a) It establishes a basis of opinion

b) It acts as an evidence that Audit must properly planned SA’s

was applied and statute was complied.

c) Its other use is that it helps in future reference of articles

and assistants.

a) Results of ratios & trends.

b)Results of vouching.

c)Results of verification.

d)communication with experts.

e)communication with other auditor.

It is an auditor who has practical knowledge and experience of

audit and understanding of

a)Audit procedures

b)SAS & statute

c)Nature of FR and AP. (financial reporting & audit procedures)

The ownership of working paper lies with auditor and also

lies on him that responsibility to keep them in safe custody.

Working papers must be preserved for minimum 7years.

5. CFA

To ICAI

compulsory ;if ICAI wants

To client/other

auditor optional i;e

if auditor wants

To others

disallowed it will

leak client’s

confidentiality

7. Importance of documentation:-

10. Disclosure of working paper

8. Ownership :-

9. Preservation :-

CAF records recurring Audit Matters which generally

changes year after year examples are-

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S.A-240- Refer Chapter-5 Main Mat

The Auditor’s responsibilities Relating to Fraud in an Audit

S.A-300

- Refer Chapter-2 Main Mat

Planning an Audit of Financial Statements

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4.To ensure the compliance of laws & regulation is the duty of management for which an internal control containing following features measures must be established:-

2. If auditor discovers only Non- Compliance of law or regulation then he must check the following:-

S.A-250 Auditor should check whether client has followed all the applicable laws & regulation or not because Non- Compliance of them may attract penalties & disclosure.

a) Nature of Non-compliance ex:- what contravention has taken place; Gst not deposited; return not filled or co, act violated.

b) Circumstances of non compliance:-Whether intentional or non intentional.

c) Effect of non-compliance:-If client will have to pay penalties;then;auditor shall ask to make provision for penalties or if violation of law require disclosure then auditor will ask for such disclosure which if client fails to do then auditor shall issue either qualified or adverse report.

If auditor is precluded from collecting sufficient appropriate audit evidences then he shall issue either qualified or disclaimer of opinion.

a) Maintain a statutory register of all applicable laws.

b) Maintain seperate legal deptt as per size of organisation.

c) Establish a compliance procedure for applicable laws & regulation.

d)Train employees about applicable laws.

e)Regularly update them about changes in law.

5. Few examples which hints auditor about non compliance of laws.

a) Investigation by regulatory authorities.

b) Unusal relation or payment to related parties.

c) High amount of sales commision paid.

FraudError

“Consideration of Laws & Regulation in audit of financial statement”

1. Objective:-

3. Qualified / Disclaimer:-

5. Hints of non Compliances:-

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6. Audit procedures to be applied by auditor for checking compliance of laws:-

d) Investment in companies operating in taxhaven countries.

e) High amount of legal fees paid.

f) Adverse media report.

g) Payment made in other countries where goods are imported from some other country.

h) Foreign exchange documents not properly maintained.

i) Adequate records & books of accounts not properly maintained.

a) check the books of accounts.

b) Inspect the challans of various statutory fees and returns submitted by the client.

c)Discussion with management.

d)Inspecting the statutory register.

e) Doing independent check with various regulatory authority regaring compliance of laws.

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S.A-299 When financial statements of an entity are audited by more than one auditor; in order to issue an Audit Report; it is called Joint Audit.The Auditors are called Joint Auditors. Audit plan and strategy will have to be made jointly by engage- ment partner and key audit members of all the Joint Auditors. contents of Joint Audit plan will be

a) The common audit areas.

b) Divison of audit work.

c) Nature; Timing and extent of Audit Procedures to be performed.

d) The nature and timing of communication amongst the Joint Auditors.

e) The discussions about preliminary knowledge of client’s business.

If joint auditor have divided work amongst them then they are not required to check the work allocated to other joint auditor and also not required to check whether the other joint auditor has apply proper audit procedures or not. for ex :- if PWC & E & Y are the Joint Auditors and they are divided purchase vouching and sale vouching respectively between them then PWC is neither required to vouch any sale bill nor required to check whether E&Y has applied proper audit procedures or not.

Before finalizing the audit report it shall be the duty of a joint auditor to inform the other Joint Auditor about any misstatement observe during the course of audit. for ex:- if E&Y find any mis-statement in sales then it must inform PWC.

Joint auditors before starting the audit shall sent joint terms of audit engagement to client.

“Responsibility of joint Auditors”

1. Definition

2. Plan

3. Joint plan contents

4. Division of work

5. Duty

6. Joint Terms of engagement

Revised

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a) For common audit areas.

b) For those works which were not divided amongst them.

c) For determining nature; timing & extent of audit procedures.

d) For checking disclosures in notes to accounts.

e)To check that audit report complies with relevant SAs.

f) If one of joint auditors have deviated from the normal audit procedures and the other joint auditors has given consent to it.

same as point (vii) except (b).

Normally joint auditor have a common opinion for which they shall issue a joint audit report but if they have a different opinion then they shall issue different audit report but such audit report shall bear a reference to the other joint auditor’s report. ex- PWC wants to issue clear report but E&y any Deloitte qualified report then E&y and Deloitte will issue a common qualified report bearing a reference to PWC’s clear report; PWC shall issue a different clear report bearing a reference to E&y and Deloitte audit report.

a)The joint audit plan & strategy.

b)Agreed level of RMM.

c) The deviation from normal audit procedures if any.

d) Communication amongst the joint auditors.

7. What are the cases when Joint Auditors are jointly & severally liable???

8. What are the cases when joint auditors are jointly and severally liable inspite of the work being divided between them???

10.Matters to be documen- ted by joint auditors:-

9. Joint Report

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S.A-315 Identifying and Assessing the Risk of Material Misstate-ment through understanding the Entity and its Environment.

The auditor should identify and assess the risks of material mis-statement, whether due to fraud or error, at the financial state-ment and assertion levels. He should understand the entity and its environment, including the entity’s internal control. Thus, he can design and implement responses to the assessed risks of materialmisstatement. This will help the auditor to reduce the risk of mate-rial misstatement to an acceptably low level.

Representations by management, explicit or otherwise, embodied in the financial statements.

A risk resulting from significant conditions, events, circumstances, actions or inactions that couldadversely affect an entity’s ability to achieve its objectives.

The process designed, implemented and maintained by those charged with governance,management and other personnel. To provide reasonable assurance about the achievement of an entity’s objectives. With regard to reliability of financial reporting, effec-tiveness and efficiency of operations, safeguarding of assets, andcompliance with applicable laws and regulations.

The audit procedures performed to obtain an understanding of the entity and its environment, including the entity’s internal control, to identify and assess the risks of material misstatement at thefinancial statement and assertion levels.

An identified and assessed risk of material misstatement that re-quires special audit consideration.

A weakness in internal control that could have a material effect on the financial statements.

Risk assessment procedures by themselves, however,do not provide sufficient appropriate audit evidence on which to base the audit opinion. The risk assessment procedures shall include the following:

1. Objective:-

2. Definitions:-

3. Risk Assessment Proce dures and Related Activities :-

a) Assertions :-

b) Business risk :-

c) Internal control :-

d) Risk assessment procedures :-

e) Significant risk :-

f) Material Weakness :-

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(a) Inquiries of management, and of others within the entity

(b) Analytical procedures.

(c) Observation and inspection. The auditor shall consider whether information obtained from the auditor’s client acceptance or continuance process is relevant to identifying risks of material misstatement. Where engagement partner has performed other engagements for the entity, consider whether information obtained is relevant to identifying risks of material misstate- ment. If auditor uses his previous experience, consider if changes have occurred since the previous audit. The engagement partner and other key engagement team members shall discuss the susceptibility of the entity’s financial statements to material misstatement.

The auditor shall obtain an understanding of the following: (a) Relevant industry, regulatory, and other external factors

(b) The nature of the entity, including:

(i) its operations; (ii) its ownership and governance structures; (iii) the types of investments; and (iv) the way that the entity is struc-tured and how it is financed;

(c) The entity’s selection and application of accounting policies, including the reasons for changes thereto.

(d) The entity’s objectives and strategies, and those related business risks that may result in risks of material misstate ment.

(e) The measurement and review of the entity’s financial performance.

The auditor shall obtain an understanding of internal control rele-vant to the audit. Although most controls relevant to the audit are likely to relate to financial reporting, not all controls that relate tofinancial reporting are relevant to the audit.

4. The Required Understanding of the Entity and Its Environ- ment, Including the Entity’s Internal Control

a) The Entity and Its Environment -

b) The Entity’s Internal Control -

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5. Division of Internal Control into components:-

a) The Control Environment –

b) The Entity’s Risk Assessment Process :-

(Component) Elements of the control environment that may be relevant when obtaining an understanding of the control environ-ment includes the following. :- (a) Communication & enforcement of integrity and ethical values –Auditor will evaluate that Mgmt &TCWG, has created & main tained a culture of honesty & ethical behavior.

(b) Commitment to competence – Matter’s such as management’s consideration of the competence level for particular jobs and how those levels translate into requisite skills & knowledge. (c) Participation by Tcwg – (i) Their independence from mgmt. (ii)Their experience & stature.

(d) Management Philosophy & operating styles- characteristics such as management’s. * Approach to taking and managing business risks. * Attitudes and actions towards financial reporting. (e) Organizational structure,Assignment of Authority & Responsibility.

Consider if entity has a process for:

(a) Identifying business risks relevant to financial reporting objectives;

(b) Estimating the significance of the risks;

(c) Assessing the likelihood of their occurrence; and

(d) Deciding about actions to address those risks. If the entity has established entity’s risk assessment process, the auditor shall obtain an understanding of it, and the results thereof. If the entity has not established such a process or has an ad hoc process, the auditor shall discuss with management whether business risks relevant to financial reporting objectives have been identified and how they have been addressed.

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including the related business processes, relevant to financial re-porting, and communication. (i) Initiate, record, process, and report entity transactions (as well as events and conditions) and to maintain accountability for the re-lated assets, liabilities, and equity.

(ii) Resolve incorrect processing of transaction for example, automated suspense files and procedures followed to clear suspense items out on a timely basis.

(iii) Process and account for system overrides or bypass to control.

(iv) Transfer information from transaction processing systems to the general ledger.

(v) The financial reporting process. (vi) Controls surrounding journal entries. The auditor shall obtain an understanding of:

(a) Communications between mgmt & TCWG.

(b) External communications, such as those with regulatory authorities

Control Activities are the policies & procedures that help ensure that mgmt directives are carried out. Examples of specific control Activities:- Authorization. · Performance Reviews. ·Information processing. Physical Controls. Segregation of duties. Control Activities relevant to the audit. · The Auditorshall obtain an understanding of control to assess the risks of ma-terial mis-statement at the assertion level & designfurther audit procedures. · In understanding the entity’s control activities the auditor shall obtain an understanding ofhow the entity has responded to risks arising from IT.

Is a process to assess the effectiveness of internal control perfor-mance over time. Obtain an understanding of the :

(a) activities that the entity uses to monitor internal control over financial reporting, and (b) sources of the information used in the entity’s monitoring activities and their reliability.

(3) The information system,

6. Control Activities (component)

7. Monitoring of Controls (Component):-

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S.A-320 There exists an inverse relationship between materiality and Audit Risk. As per SA-320 an Item said to be material if its misstatment (omission or wrong statement) COULD influence the economic decision of users of financial statement. On the other hand Audit Risk refers to Risk that Auditor will issue clear report inspite of financial statement being materially Misstated. The inverse Rela-tionship is explained with elements of Audit Risk.

Inherent Risk is a type of uncontrollable Audit Risk, Which de-pend on scope of Audit. Higher the scope of Audit higher will be Inherent Risk, but since scope of Audit can not be controllable, we cannot control Inherent Risk also. Here there exist no relationship between Materiality and Inherent Risk.

Control Risk arises because of reliance placed by Auditor on inter-nal control procedure. Higher the reliance on internal control higher will be the control Risk, and vice-versa. If an item is material, Audi-tor will place lesser Reliance on internal control and so control risk will be less i.e., higher the materiality lower the control risk and vice-versa.

Detection Risk arises because of lesser substantive procedure. If an Item is material, Auditor will apply more substantive procedure which means detection Risk will be less i.e., higher materiality lower will be the Detection Risk.

Thus from the Above discussion we conclude that higher the Mate-riality Inherent Risk remain constant, control & detection Risk will be lower i.e. , there exist inverse relationship between Materiality and Audit Risk.

The fact of this relationship is known to the client and so client will try to mistake non-material Items the Aggregate of which may be material and so as per ICAI auditor should also check non Material Items.

2) If an individual Item is material, any misstatement in it will be material misstatement which if client fails to adjust Auditor will Issue either Qualified or Adverse Report.

3) An individual Item may be non-material so any misstatement in it will be non-material misstatement but Aggregate of uncorrected non-material misstatement may reach materiality

Q.1) Explain the relationship between materiality and Audit Risk?

a) Relation between Materiality & Inherent Risk:

b) Relation between Materiality & control Risk:-

c) Relation between Materiality & Detection Risk:-

Materiality in Planning and Performing an Audit

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level which if client fails to adjust Auditor should Issue Qualified or Adverse Report.

a) Specific Misstatement identified by Auditor.

b) Estimated Misstatement.

Materiality level is fixed by Auditor which is based on his professional judgment and experience..

- Materiality level is = 5%

4) Aggregate of un-correct- ed non material misstate- ment comprise of:-

5. professional judgment

6) Example: -

7. SOLUTION:-

8. qualitative

A 20 1 Specific

B 20 2 Specific

Z 10 1 Specific

Debtors Amount (Lakhs) Misstatement Amount (Lakhs)

Aggregate of uncorrected non material misstatement

Specific Estimated 1+2+1= 4 lakhs 4/50*50= 4 lakhs

so that aggregate =4+4= 8 lakhs

Materiality level= 5% of 100 lakhs= 5 lakhs, Since aggregate has crossed the materiality level, client should adjust his financial statement i.e., correct the uncorrected non material misstatement failing which auditors should issue qualified or adverse report.

There can also a qualitative material misstatement. Example:- client is not a going concern & it has not been disclosed by him in notes on accounts.

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d) Internal control:-

a) Size of organisation-

S.A-500 Auditor must form his audit opinion on the basis of suffcient;

Appropriate audit evidences; which are collected by

performing RAP(Risk Assesment Procedures) and audit

procedures like substantive compliance.

Sufficiency refers to quantum; appropriateness refers to

relevance and reliability.

Following factors determine whether none audit evidences

are sufficient or less:-

If large size organisation then audit evidences required;but;if

small size organisation then less.

If item is complex then more audit evidences required but; if

simple then less.

If item is material mthen;more audit evidences required but if non

material then less.

If strong then less audit evidences required but if weak then

more.

will guide the auditor,wheather collected audit evidences are

suffiecient or not

Based on source internal-(collected within client’s

Audit Evidence

Types of Audit Evidences

Based on nature visual(form observation)

Documentary(from inspection)

oral(from inquiry)

Documentary is more reliable

External(outside clients org)ex:-bank;debtor;creditor etc.

b) Nature of item:-

c) materiality of item:-

e)Experience of auditor:-

4.

1. Objective

2. Sufficiency & Appropriateness

3. Factors

organisation) ex:-Books ofmanagement respon.

Int < Ext if ‗But

if IC Strong

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6. Six steps to Collect

Audit Evidences:-

If different types of audit evidences are consistent then

reliability will be more;but;if they are inconsistent then

auditor should collect further audit evidences are not available

then auditor should modify his opinion by issuing qualified or

disclaimer of opinion.

Of written records to collect visual evidences.

Of managements operations to collect visual evidences.

Enquiry is done from management and confirmation from

external parties.

To check arithmetical accuracy of books of accounts.

To analyse key financial ratios.

Auditor will reperform some of the works done by internal

control to check that internal control was efficient or not

5. Consistency

a) Inspection-

b) Observation-

c) Enquiry & confirmation-

d) Recalculation-

e) Analytical review-

f) Reperformance-

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S.A-501 Audit Evidence — Specific Considerations For Selected ItemsThe objective of the auditor is to obtain sufficient appropriate audit evidence regarding the:(a) Existence and condition of inventory;

(b) Completeness of litigation and claims involving the entity; and

(c) Presentation and disclosure of segment information in accord- ance with the applicable financial reporting framework.

When inventory is material to the financial statements, the auditor shall obtain sufficient appropriate audit evidence regarding the existence and condition of inventory by:

(a) Attendance at physical inventory counting, unless impracticable, to:(i) Evaluate management’s instructions and procedures for recording and controlling the results of the entity’s physical inventory counting;

(ii) Observe the performance of management’s count procedures;

(iii) Inspect the inventory; and

(iv) Perform test counts.

(b) Performing audit procedures over the entity’s final inventory records to determine whether they accurately reflect actual inventory count results.

Attendance at Physical Inventory Counting Involves:(a) Inspecting the inventory to ascertain its existence and evaluate its condition, and performing test counts;

(b) Observing compliance with management’s instructions and the performance of procedures for recording and controlling the results of the physical inventory count; and

(c) Obtaining audit evidence as to the reliability of management’s count procedures. These procedures may serve as test of controls or substantive procedures depending on the auditor’s risk assessment, planned approach and the specific procedures carried out.

1. Objective :-

2. Inventory :-

3. Attendance at Physical Inventory Counting :-

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4. Matters Relevant in Planning Attendance at Physical Inventory Counting :-

5. Physical Inventory Counting Conducted Other than at the Date of the Financial Statements :-

6. If the Auditor is unable to Attend Physical Inventory Counting due to Unforeseen Circumstances :-

7. Attendance at Physical Inventory Counting Is Impracticable :-

Matters relevant in planning attendance at physical inventory count-ing include, for example:

(a) Nature of inventory.

(b) Stages of completion of work in progress.

(c) The risks of material misstatement related to inventory.

(d) The nature of the internal control related to inventory.

(e) Whether adequate procedures are expected to be established and proper instructions issued for physical inventory counting.

(f) The timing of physical inventory counting.

(g) Whether the entity maintains a perpetual inventory system.

(h) The locations at which inventory is held, including the materiality of the inventory and the risks of material misstate- ment at different locations, in deciding at which locations attendance is appropriate

(i) Whether the assistance of an auditor’s expert is needed.

If physical inventory counting is conducted at a date other than the date of the financial statements, the auditor shall, in addition to the procedures required above, perform audit procedures to obtain au-dit evidence about whether changes in inventory between the count date and the date of the financial statements are properly recorded.

If the auditor is unable to attend physical inventory counting due to unforeseen circumstances, the auditor shall make or observe some physical counts on an alternative date, and perform audit procedures on intervening transactions.

If attendance at physical inventory counting is impracticable, the au-ditor shall perform alternative audit procedures to obtain sufficient appropriate audit evidence regarding the existence and condition of inventory. If it is not possible to do so, the auditor shall modify the opinion in the auditor’s report in accordance with SA 705.

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In some cases, attendance at physical inventory counting may be impracticable. This may be due to factors such as the nature and location of the inventory, for example, where inventory is held in a location that may pose threats to the safety of the auditor.

The matter of general inconvenience to the auditor, however, is not sufficient to support a decision by the auditor that attend-ance is impracticable. Further, as explained in SA 200, the mat-ter of difficulty, time, or cost involved is not in itself a valid basis for the auditor to omit an audit procedure for which there is no alternative or to be satisfied with audit evidence that is less than persuasive.

In some cases where attendance is impracticable, alternative audit procedures, for example inspection of documentation of the subsequent sale of specific inventory items acquired or purchased prior to the physical inventory counting, may provide sufficient appropriate audit evidence about the existence and condition of inventory.

In other cases, however, it may not be possible to obtain suffi-cient appropriate audit evidence regarding the existence and con-dition of inventory by performing alternative audit procedures. In such cases, SA 705 requires the auditor to modify the opinion in the auditor’s report as a result of the scope limitation.

When inventory under the custody and control of a third party is material to the financial statements, the auditor shall obtain sufficient appropriate audit evidence regarding the existence and condition of that inventory by performing oneor both of the following:

(a) Request confirmation from the third party as to the quantities and condition of inventory held on behalf of the entity.

(b) Perform inspection or other audit procedures appropriate in the circumstances.

The auditor shall design and perform audit procedures in order to identify litigation and claims involving the entity which may give rise to a risk of material misstatement, including:

8. Litigation and Claims :-

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(a) Inquiry of management and, where applicable, others within the entity, including in-house legal counsel;

(b) Reviewing minutes of meetings of those charged with governance and correspondence between the entity and its external legal counsel; and

(c) Reviewing legal expense accounts.

If the auditor assesses a risk of material misstatement regarding litigation or claims that have been identified, or when audit procedures performed indicate that other material litigation or claims may exist, the auditor shall, in addition to the procedures required by other SAs, seek direct communication with the entity’s external legal counsel.

The auditor shall do so through a letter of inquiry requesting the entity’s external legal counsel to communicate directly with the auditor.

If law, regulation or the respective legal professional body prohib-its the entity’s external legal counsel from communicating directly with the auditor, the auditor shall perform alternative audit procedures.

In certain circumstances, the auditor also may judge it necessary to meet with the entity’s external legal counsel to discuss the likely outcome of the litigation or claims.

• This may be the case, for example, where:• The auditor determines that the matter is a signifi cant risk.• The matter is complex.• There is disagreement between management and the entity’s

external legal counsel. Ordinarily, such meetings• require management’s permission and are held with a represent-

ative of management in attendance.

9. If the Auditor Assesses a Risk of Material Misstatement regarding Litigation or Claims - Communication with the Entity’s External Legal Counsel :-

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1. Definition :-

a) Positive confirm- ation request:-

4. Negative confirmation request can be sent only when all the following conditions are satisfied-

3. Types of external confirmation:-

2. Examples of external confirmation are :-

S.A-505

i) It may be defined as a type of audit evidence which is a direct written response given by the external party to the auditor either in paper form or electronic form or in any other media.

a) Debtor confirmation

b) Creditor confirmation

c) Loan confirmation

d) Stock confirmation with consignee

e) Bank balance confirmation.

In it auditor asks the external party to reply in both cases i.e; even if the balance talies and even if it does not.

In it auditor asks the external party to reply only when the balance doesn’t tally.

a) Risk of material misstatement or risk of exception (chances of deviation between the balance appearing in client’s book and that appearing in external parties books) is less.

b) Client’s internal control is strong.

c) Amount of item is less.

d) Auditor doesn’t have any reason to believe that external party will ignore the negative confirmation request.

5. Positive:-

“External Confirmation”

b) Negative confirm- ation request :-

If any of the above condition is breach send positive confirmationrequest.

6. B/S Date:- Auditor should ask for external confirmation of the balance prevaling on balance sheet date, but ; if that isnot available then

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7. Refusal by external Party :-

9. steps of the external confirmation-

If external party refuses to give audit evidences than auditor should collect it from other sources of audit evidences beacuse external confirmation is only one of the many type of audit evidences.

If client refuses the auditor to do external confirmation and there is no genuine reason (examples of genuine reason are :- dispute with external party going on in court or external party committed a fraud) then ; it is a limitation on scope of audit for which auditor can modify his opinion i.e; issue qualified or disclaimer of opinion.

a) Select the item for which external confirmation is required.

b) Design the type of confirmation request to be send.

c) Send the confirmation request to external party.

d) Receive the reply.

e) Evaluate the reply.

adjustments to it to convert it into balance as an balance sheet date.

close to the balance sheet date and auditorshould make necessary

8. Refusal by Client

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2. In case of intial engage- ment auditor must check opening balances by applying following three audit procedure:-

S.A-510 Initial Engagement-opening Balances

This SA applies only when auditor audits a new client FS for the first

time. It is not necessarily clients first audit or auditors first audit.

a) Check that closing balances of previous F;Y has been correctly

brought forward as opening balances

b) check that accounting policies have been consistently followed.

c) check that opening balances should be free from material

mis statement.

If last financial years audit of client was conducted and was

given clear report (obviously by a different auditor) then; auditor

can assume opening balances to be free from material mis-statement.

If last years audit was conducted and modified report was issued

then;auditor will consider whether such modification still exists in

the current financial year and if still exist auditor can also issue

a modified report.

If last year audit was not conducted then;

a) For opening balances of current assests & current liabilities

current year audit procedures are sufficient. Example:-client

was showing Mr.x as its debtor having opening balance of

5000000. But during the current year only 2000000 was recieved

from and when auditor did external confirmation from it was

found that opening balance was only 2000000.Now auditor should

ask the client to rectify the opening balance of otherwise auditor

should modify his opinion i;e. issue either or adverse.

b) For checking opening balances of non current assets non-current

liab. ; shareholder; fund; auditor shall apply verification procedure.

1. Applicability :-

3. Last Fy audit Conducted:-

4. Modified report issued Last Fy:-

5. Not Conducted :-

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It may be defined Evaluation of financial information through analysis of plausible relationship between financial & nonfinancial data

5. Importance of analytical procedure:-

4. Whether the auditor should place more reliance or less reliance on the results of analytical procedures depend on the following factors :-

It is a type of substantive audit procedure.

Following are some of the methods of analytical procedure.

a) Comparison of clients business data with that of industry average.

b) Comparing current years figures with those of previous years.

c)Comparison with budgeted data.

d) Analysis of key financial ratios.

a) If item is material then auditor should place less reliance on its results of analytical procedures.

b)If item is complex then less reliance.

c)If internal control is strong then more reliance.

d)If expected result talies with the actual result of analytical procedure then more reliance. e)If other audit evidences are consistent then more reliance.

a) It helps in collecting audit evidences.

b)It helps to ascerting whether he has to check the going con-cern assumption of client or not.

S.A-520 Analytical Procedures

1. Definition :-

2. Type :-

3. Methods :-

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analysis of plausible relationship between financial & nonfinancial data

S.A-5301. Definition :-

2. Sample :-

3. Population :-

4. Stratification :-

5. Sample Size :-

6. Example:-

7. Sampling risk :-

8. Sampling risk may arise at 2 levels :-

Audit sampling is a technique which auditor applies audit procedure to less than 100% items of financial statement.

Item on which audit procedure are applied refers to sample.

Area from which sample is drawn refers to population.

Stratification is a process in which population is divided into sub population. Example:- Sub population of material items & non ma-terial items & then sample is drawn from material item also & non material item also.

Together all the sample make a sample size. Higher the sample size lower will be the sampling risk and vice- versa.

DEBTORS (Population)

High value debtors ( sub population) Low value debtors ( sub population)

A,B,Z ( Sample) M,N (Sample)

Sample size:- A+B+Z+M+N….. Sampling risk is a risk that sample result may not be same as pop-ulation result if the same audit procedures that have been applied on sample were also be applied on the population.

I) At compliance level:-

a) Risk of over reliance:- sample of internal control strong so audi-tor thought population also strong but population may be weak.

b) Risk of under reliance:- sample weak so population weak but pop-ulation may be strong.

II) At substantive level:-

a) Risk of incorrect acceptance:- Sample ok so population ok but population may not be ok.

Audit Sampling

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b) Risk of incorrect rejection:- Sample not ok so population not ok but population may be ok.

Risk of over reliance & risk of incorrect acceptance are more detrimental.

Tolerable error refuse to deviation between sample result and pop-ulation result which auditor is willing to accept & still conclude that sample result & population result are same.

Expected error is the deviation expected by auditor to remain between sample result & population result. Higher the sample size lowers the expected error and it should always lie within the arms of the tolerable error.

Expected error < tolerable error

9. Risk :-

10. Tolerable :-

11. Expected error :-

12.

12. 5 ways to draw sample:-

Expected error > tolerable error

Sampling objective achieved Sampling objective not yet achieved, so increase the sam-ple size to make E.E. < T.E.

a) Random selection :- ( using the random no. table of Monte Carlo)

b) Systematic selection :- ( After constant Intervals)

c) Haphazard selection:- (Kaise bhi karo)

d) Monetary Unit

e) Block

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2) Some of the accountive estimates are:-

3) Auditor shall apply following procedures for auditing accounting estimates:-

a) Provision for tax

b) PBDD

C) Depreciation

d) Provision for law suits

e) Provision for WIP

f) Provision for repair

g) Provision for warranty

h) Provision for Retirement Benefits

a) Auditor shall apply risk assessment procedure(RAP)

b) Auditor shall responce to the results of RAP.

These are the audit procedures by which auditor ascertain the risk

of material mis-statement and management accounting estimate. It

includes following procedures:-

a) Auditor shall check whether management has made accounting

estimates as per applicable financial reporting framewor

(i:e, accounting policies, accounting policies, accounting

standard, laws & regulations must have been followed)

b) Auditor will enquire the management the factors by which

management identified the transactions, conditions, events for

which provision was required

c) Auditor shall check management’s way of computing an accounting

S.A-540 “Auditing accouting Estimates including fair value accounting estimates & disclosures”

4) Risk assessment procedure (RAP):-

1. Definition :- Accounting estimates may be defined as approximation of those

items whose precise means of measurement are not available.

Although Removed but still required

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estimates by checking the following.

5. Auditors responce

to accessed risk:-

Source data used by management

Assumption made by management

Arithmetical accuracy

d) Auditor shall apply analytical procedure for example:- comparing

current years accoun-ting estimate with previous year

After applying RAP; if auditor finds the risk of

- material mis-statement in accounting estimates then he shall

- use an own independent estimate.

- Review subsequent events.

- Ask the client to give adequate disclosue in notes to

accounts.

vi) If after using independent estimate and reviewing subsequent

event; Auditor finds accounting estimates failing which he shall

issue either qualified or adverse report.

vii) If previous years estimate of management were correct then

auditor shall place more reliance on management estimates.

6. Qualified Adve :-

7. Pvs estimates :-

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1. Objective :-

2. Risk Assessment Proce- dures and Related Activities Understanding the Entity’s Related Party Relationships and Transactions :-

S.A-550The objectives of the auditor are:

(a) Irrespective of whether the applicable financial reporting framework establishes related party requirements, to obtain an understanding of related party relationships and transactions sufficient to be able:

(i) To recognise fraud risk factors, if any, arising from related party relationships and transactions that are relevant to the identification and assessment of the risks of material misstatement due to fraud; and

(ii) To conclude whether the financial statements, insofar as they are affected by those relationships and transactions: a. Achieve a true and fair presentation; or b. Are not misleading; and

(b) In addition, where the applicable financial reporting framework establishes related party requirements, to obtain sufficient appropriate audit evidence about whether related party relationships and transactions have been appropriately identified,, accounted for and disclosed in the financial statements in accordance with the framework.

The auditor shall inquire of management regarding:

(a) The identity of the entity’s related parties, including changes from the prior period; (b) The nature of the relationships between the entity and these related parties; and

(c) Whether the entity entered into any transactions with these related parties during the period and, if so, the type and purpose of the transactions. The auditor shall inquire of management and others within the entity, and perform other risk assessment procedures considered appropriate, to obtain an understanding of the controls, if any, that management has established to:

(a) Identify, account for, and disclose related party relationships and transactions in accordance with the applicable financial reporting framework;

Related Parties

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(b) Authorise and approve significant transactions and arrange ments with related parties; and

(c) Authorise and approve significant transactions and arrange- ments outside the normal course of business.

If the auditor identifies related parties or significant related party transactions that management has not previously identified or dis-closed to the auditor, the auditor shall:

(a) Promptly communicate the relevant information to the other members of the engagement team;

(b) Where the applicable financial reporting framework establishes related party requirements:

(i) Request management to identify all transactions with the newly identified related parties for the auditor’s further evaluation; and

(ii) Inquire as to why the entity’s controls over related party relationships and transactions failed to enable the identifica- tion or disclosure of the related party relationships or transactions;

(c) Perform appropriate substantive audit procedures relating to such newly identified related parties or significant related party transactions;

(d) Reconsider the risk that other related parties or significant related party transactions may exist that management has not previously identified or disclosed to the auditor, and perform additional audit procedures as necessary; and (e) If the non-disclosure by management appears intentional evaluate the implications for the audit.

For identified significant related party transactions outside the entity’s normal course of business, the auditor shall:

(a) Inspect the underlying contracts or agreements, if any, and evaluate whether:

(i) The business rationale (or lack thereof) of the transactions suggests that they may have been entered into to engage in fraudulent financial reporting or to conceal misappropriation of assets;

3. Responses to the Risks of Material Misstatement Associated with Related Party Relationships and Transactions Identifica- tion of Previously Uniden- tified or Undisclosed Related Parties or Significant Related Party Transactions :-

4. Identified Significant Related Party Transac- tions outside the Entity’s Normal Course of Business :-

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(ii) The terms of the transactions are consistent with management’s explanations; and

(iii) The transactions have been appropriately accounted for and disclosed in accordance with the applicable financial reporting framework; and

(b) Obtain audit evidence that the transactions have been appropriately authorised and approved.

When management has made an assertion in the financial statements to the effect that a related party transaction was conducted on terms equivalent to those prevailing in an arm’s length transaction, the auditor shall obtain sufficient appropriate audit evidence about the assertion.

In forming an opinion on the financial statements the auditor shall evaluate:

(a) Whether the identified related party relationships and transactions have been appropriately accounted for and disclosed in accordance with the applicable financial reporting framework; and

(b) Whether the effects of the related party relationships and transactions:

(i) Prevent the financial statements from achieving true and fair presentation; or

(ii) Cause the financial statements to be misleading. Where the applicable financial reporting framework establishes related party requirements, the auditor shall obtain written representations from management and, where appropriate, those charged with governance that:

(a) They have disclosed to the auditor the identity of the entity’s related parties and all the related party relationships and transactions of which they are aware; and

(b) They have appropriately accounted for and disclosed such relationships and transactions in accordance with the requirements of the framework.

5. Assertion s That Related Party Transactions Were Conducted on Terms Equivalent to Those Prevailing in an Arm’s Length Transaction :-

6. Evaluation of the Accounting for and Disclosure of Identified Related Party Relationships and Transactions :-

7. Written Representations :-

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8. Communication with Those Charged with Governance:-

9. Documentation -

Unless all of those charged with governance are involved in managing the entity, the auditor shall communicate with those charged with governance significant matters arising during the audit in connection with the entity’s related parties.

In meeting the documentation requirements of SA 230 and oth-er SAs, the auditor shall include in the audit documentation the names of the identified related parties and the nature of the related party relationships.

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These are the events whether favourable or unfavourable

that occur after B/S date but before signing of financial

statements.

Subsequent events may be of two types-

a)Adjusting event

b)Non- adjusting event

Adjusting event are those types of subsequent event which

provides evidences and clarification related to transactions

that have occur prior to B/S date.

ex:- Provision for law suits 200 lack on 31|3|18 gets confirm

by courts judgements on 15|6|18 (Before signing on financial

statement) that the penalty is 100lacks & not 200 lacs.

Accounting is require to be adjusted failing which auditor

shall issue either qualified or adverse reports.

Non-adjusting events dont provide any evidence related to

any transaction prior to balance sheet date and so accounting

is not require to be adjusted.

If Non-Adjusting event is no material that its affects the

substraturm of organisation then; disclosure in directors report

shall be required.

Audit procedures to find out subsequent events:-

a) Discuss with management.

b) Review interim financial statements

c) Review pending litigation.

S.A-560Subsequent Events

1. Definition :-

2. Type :-

3. Adjusting :-

4. Non Adjusting :-

5. Substratum :-

6. Audit Procedurees :-

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Accounts adjusted

by management

ok

Accounts not

adjusted by

management

Qualified/Adverse.

Non-adjusting

Disclosed

okNot Disclosed

okbecause director report is not a

part of financial statement

Adjusting

If material then disclosure

in directors

report required

7.

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6) Operating Indicators:-

5) Financial Indicators:-

4) Whetherto check going concern assumption of client or not; auditor must check three types of indicating factor:-

Going concern is a Fundamental Accounting Assumption.As

per which client will carry on its operations for infinite period

of time and not adequate in near future.

If client is a going concern; no disclosure is required for that.

If client is not a going concern; it must be disclosed in its

notes to accounts. Failing which; it such a material and

pervasive misstatement that auditor must issue adverse report.

a) Financial Indicators

b) Operating Indicatiors

c) Other Indicators

i.) Negative Networth

ii.) Negative W.C.

iii.) Nagative cash flows

iv.) Substantial operating loses.

v.) Adverse key financial ratios.

vi.) Inability to pay dividend

vii.) Inability to pay creditors

viii.) Internal Reconstruction.

i.) Loss of key management without replacement.

ii.) Loss of major market.

iii.) Loss of major franchise.

S.A-570 Going-Concern

1. Definition :-

2. No disclosure :-

3. Disclosure :-

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8. If any of the above indicating factor negative; auditor shall check going concern assumption of client by applying following audit procedures:-

7. Others Indicator:-

9. Mitigating Factors

10. Not Resolved

11. Disclosure

iv.) Labour Difficulties.

v.)Shortage of raw materials.

i) Change in govt policy

ii) Pending litigation

a) Discuss with Mgmt.

b) Review interim F.S

c) Review events occuring after balance sheet date.

d) Review status of pending litigations.

e) Check financial position of that party who may financially

assess the client.

Those factors and evidences on the basis of which auditor

concludes the client to be a going concern are called

“mitigating factors” (M.F)

EX:-Huge order recieved by client.If auditor asks the client

to disclose m.f and client doesnt disclose then; auditor

may issue either qualified or adverse.

If going concern question is not satisfactory resolved

which means auditor is unable to conclude whether client

is a going concern or not because of limitation impose on scope

of audit then auditor may issue either qualified or disclaimer

and also asks the client to give following three disclosures:-

a) Negative Indicating factors

b)Reasonable uncertanity about going concern

c)B/S has been prepared at historical cost.

If above disclosure are not given then auditor will issue

either qualified or adverse report.

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5. Two modes of managment

representation:-

4. Management

representation is not a

substitute of other

audit evidences;

3. Examples of management representation are-

b) In response

specific queries:-

2. Two types of management

representation are:-

S.A-580 Written Representation

1. These are the assertions or statements or information or

facts or claims made by management to the auditor during

the course of audit.

When management makes representation on its own motion.

When management makes representation on being asked

by auditor.

a) Assertions given by management as to their

responsibility of preparing and presenting financial

statement and internal control.

b) Assertions given by management to support other

evidences and to solve auditors queries.

Rather it is just one of many audit evidences avaiable and so

whenever auditor receive management representation; he should

perform.following three audit procedures:-

a) Seek collaborative audit evidences

b) Compare them with management representation and if

management representation is found to be false the

re-evaluate other representation given by management and

place lesser reliance on them.

c) check whether management which made the representation

was himself well informed on the matter or not.

a)Oral

b)Written

a) Unsolicited-

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Auditor should always ask for written representation

Management gives written

representation

ok

management gives

oral representation

Auditor should write them

down & get it signed by

management.

Management signs

ok

Mgt doesn’t sign.

limitation on scope of

audit for which auditor

should modify his opinion

i.e; issue qualified/

disclaimer of

opinio.

No representation

limitation on scope

of audit for which

auditor should

modify his opinion

i;e issue qualified

disclaimer of opinion

6.

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This S.A is applicable on principal auditor of organisation having one or more components audited by other auditor. Principal auditor is statutory auditor of main organisation.

Other auditor is a statutory auditor of a component.

4. Component means a branch of subsidiary or Associate or joint venture of main organisation. If other auditor has given a qualified or adverse report but if principal auditor thinks material mis-statement of a component to be a non material for the organisation; he can still issue clear report.

If principal auditor finds a component and work of other auditor to be material then.

a) If other auditor has given a clear report then principle auditor shall also give clear report but mention in his audit report that he has relied on the work of other auditor. b)If other auditor has given qualified or adverse then principal auditor shall also give qualified or adverse. c) If other auditor has refused to co-operate then it being a material limitation on scope of audit he shall issue either qualified or disclaimer.

”There should exist liason (co-ordination) between principal and other auditor?? -correct; write entire SA-600.

S.A-600Using the work of other auditor

1. Applicability :-

2. PA :-

3. OA :-

4. Component :-

5. Material mis-st may be non- material :-

6. Audit Procedures :-

7. Liason :-

Although Removed but still required

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S.A-610 Using the work of Internal Auditors

1. Scope of this SA :-

3. Objectives:,-

4. Determining Whether and to What Extent to Use the Work of the Internal Auditors :-

2. Relationship between the Internal Audit Function and the External Auditor:-

This Standard on Auditing (SA) deals with the external auditor’s responsibilities regarding the work of internal auditors when the external auditor has determined, in accordance with SA 315, that the internal audit function is likely to be relevant to the audit. This SA does not deal with instances when individual internal auditorsprovide direct assistance to the external auditor in carrying out audit procedures or where, in terms of the applicable legal and regulatory framework, it is not permissible for the internal auditor to provide access to his working papers to the third parties.

The role and objectives of the internal audit function are deter-mined 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 theinternal audit function and the external auditor achieve their respective objectives may be similar. 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. 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.

The objectives of the external auditor, where the entity has an internal audit function that the external auditor has determined is likely to be relevant to the audit, are to determine:

(a) Whether, and to what extent, to use specific work of the internal auditors; and

(b) If so, whether such work is adequate for the purposes of the audit.

1. 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.

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2. In determining whether the work of the internal auditors is likely to be adequate for purposes of the audit, 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; and

(d) Whether there is likely to be effective communication between the internal auditors and the external auditor. 3. In determining the planned effect of the work of the internal auditors on the nature, timing or extent of the external auditor’s procedures, the external auditor shall consider:

(a) The nature and scope of specific work performed, or to be performed, by the internal auditors;

(b) The assessed risks of material misstatement at the assertion level for particular classes of transactions, account balances, and disclosures; and

(c) The degree of subjectivity involved in the evaluation of the audit evidence gathered by the internal auditors in support of the relevant assertions.

1. In order for the external auditor to use specific work of the internal auditors, the external auditor shall evaluate and perform audit procedures on that work to determine its adequacy for the external auditor’s purposes.

2. To determine the adequacy of specific work performed by the internal auditors for the external auditor’s purposes, the external auditor shall evaluate whether:

(a) The work was performed by internal auditors having adequate technical training and proficiency;

(b) The work was properly supervised, reviewed and documented;

5. Using Specific Work of the Internal Auditors :-

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6. Documentation :-

(c) Adequate audit evidence has been obtained to enable the internal auditors to draw reasonable conclusions;

(d) Conclusions reached are appropriate in the circumstances and any reports prepared by the internal auditors are consistent with the results of the work performed; and

(e) Any exceptions or unusual matters disclosed by the internal auditors are properly resolved.

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

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4. (Basis of opinion):-

2. (Address).

3. Opinion:-

1. (Title).

Drafs an audit report as per SA-700 (revised)

Independent Audit Report.

To the members of MA ltd.

We have audited the stand alone or consolidated (as given)

financial statements of MA LTD.The financial statements compri-

se of balance sheet as on 31st march 2019, statement of profit

& loss and cash flow statement for the year ended 31st March, 2019

(statement of change in equity, if applicable). We have also

audited notes on the aforesaid financial statement including

Summary of Accounting Policies used.

In our opinion and to the best of our information and according

to the explanation given to us,the aforesaid financial statement give the

information required by the act and also gives the true and fair view; in

accordance with the accounting principles which have generally accepted

in india of the state of affairs as at 31st mar 2019 and of the profit and

loss and cash flows for the year ended 31st mar 2019.

We have formed our audit opinion by following all the standards on

auditing as per section 143(10) of companies act 2013. Our

responsibilities relating to the financial statement has been mentioned

in the paragraph below.We have conducted the audit be remaining inde-

pendent of the entity and by complying the code of profesional ethics

laid down by institute of chartered accountants of india;1949 and other

applicable laws.We have formed our opinion on the basis of sufficient;

appropriate audit evidences collected by us.

S.A-700(Revised) Forming an opinion and Reporting on financial statements

Ans

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8. Auditors responsibility for the audit of financial statements:-

7. Managements responsi- bility relating to financial statement:-

5. Going concern:-

6. Key Audit Matters:-

Reporting will be done as per SA-570

The companies Board of Directors is responsible for the matters

stated in section 134(5) of the companies act 2013 relating to

preparation of these financial statement by complying all the

applicable accounting standards selecting and applying such acount-

ing policies and making prudent estimates to enable the financial

statements showing true and fair view.They are also responsible to

maintain adequate accounting records for safeguarding the assets

of company and preventing and detecting the frauds & errors.

In preparing the financial statements management is responsible

for accessing the ability of company to continue as going concern

and to ensure that it operate smoothly.It is also their responsibili-

ty to ensure that proper controls exist to comply all the applicable

statutory laws & regulation.

Our objective is to obtain a reasonable assurance that financial state-

ment taken as a whole are free from material statement due to fraud

error.The term reasonable assurance means high level of assurance but

not a guarantee that an audit conducted in according with S/A will al-

ways detect material mis statement when its exists.Material mis-state-

ment means any mis statement whether due to fraud & error which

could use economic decision of users of financial statement. Emphasis

on matters paragraph and other matter; Reporting will be done as per

S.A-706

Key audit matters:-Reporting will be done as per SA-701.

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9. Report on other legal

and regulatory Require

ment:- 143(1), (3), (11)

For xyz& co chartered Accountant

(firms reg no)

Signature of member

(Name & Designation)

(membership no)

11. Auditor city

12. Date

10. Auditors Sign

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S.A-701 Communicating Key Audit Matters In The Independent Auditor’s Report

1. Definition of Key Audit Matters :-

2. Purpose of Communicat- ing Key Audit Matters:-

3. Objectives of the Auditor regarding Key Audit Matters:-

4. Determining Key Audit Matters:-

Those matters that, in the auditor’s professional judgment, were of most significance in the audit of the financial statements of the current period. Key audit matters are selected from matterscommunicated with those charged with governance.

As per SA 701, “Communicating Key Audit Matters in the Auditor’s Report”, the purpose of communicating key audit matters is to enhance the communicative value of the auditor’s report by pro-viding greater transparency about the audit that was performed. Communicating key audit matters provides additional information to intended users of the financial statements to assist them in un-derstanding those matters that, in the auditor’s professional judg-ment, were of most significance in the audit of the financial state-ments of the current period. Communicating key audit matters mayalso assist intended users in understanding the entity and areas of significant management judgment in the audited financial statements.

As per SA 701, “Communicating Key Audit Matters in The Inde-pendent Auditor’s Report”, the objectives of the auditorare to determine key audit matters and, having formed an opinion on the financial statements, communicate thosematters by describing them in the auditor’s report.

The auditor shall determine, from the matters communicated with those charged with governance, those matters that required significant auditor attention in performing the audit.

In making this determination, the auditor shall take into account the following:

(a) Areas of higher assessed risk of material misstatement, or significant risks identified in accordance with SA 315.

(b) Significant auditor judgments relating to areas in the financial statements that involved significant management judgment, including accounting estimates that have been identified as having high estimation uncertainty.

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(c) The effect on the audit of significant events or transactions that occurred during the period.The auditor shall determine which of the matters determined in accordance with above stated para were of most significance in the audit of the financial statements of the current period and therefore are the key audit matters.

The auditor shall describe each key audit matter, using an appro-priate subheading, in a separate section of the auditor’s report under the heading “Key Audit Matters”. The introductory language in this section of the auditor’s report shall state that:

(a) Key audit matters are those matters that, in the auditor’s professional judgment, were of most significance in the audit of the financial statements [of the current period]; and

(b) These matters were addressed in the context of the audit of the financial statements as a whole, and in forming the auditor’s opinion thereon, and the auditor does not provide a separate opinion on these matters.

Communicating key audit matters in the auditor’s report is in the context of the auditor having formed an opinion onthe financial statements as a whole. Communicating key audit mat-ters in the auditor’s report is not:

(a) A substitute for disclosures in the financial statements that the applicable financial reporting framework requires management to make, or that are otherwise necessary to achieve fair presentation; (b) A substitute for the auditor expressing a modified opinion when required by the circumstances of a specific audit engagement in accordance with SA 705 (Revised);

(c) A substitute for reporting in accordance with SA 570 when a material uncertainty exists relating to events or conditions that may cast significant doubt on an entity’s ability to continue as a going concern; or

(d) A separate opinion on individual matters.

5. Communicating Key Audit Matters:-

6. Communicating Key Audit Matters- not a substi- tute for disclosure in the Financial Statements etc

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S.A-705 1.Modifications To The Opinion In The Independent Audi-tor’s Report

1. Circumstances When a Modification to the Auditor’s Opinion Is Required

The auditor shall modify the opinion in the auditor’s report when:

(a) The auditor concludes that, based on the audit evidence obtained, the financial statements as a whole are not free from material misstatement; or

(b) The auditor is unable to obtain sufficient appropriate audit evidence to conclude that the financial statements as a whole are free from material misstatement.

2. Qualified Opinion

3. Adverse Opinion

The auditor shall express a qualified opinion when:

(a) The auditor, having obtained sufficient appropriate audit evidence, concludes that misstatements, individually or in the aggregate, are material, but not pervasive, to the financial statements; or (b) The auditor is unable to obtain sufficient appropriate audit evidence on which to base the opinion, but the auditor concludes that the possible effects on the financial statements of undetected misstatements, if any, could be material but not pervasive.

The auditor shall express an adverse opinion when the auditor, having obtained sufficient appropriate audit evidence, concludes that misstatements, individually or in the aggregate, are both material and pervasive to the financial statements.

The auditor shall disclaim an opinion when the auditor is unable to obtain sufficient appropriate audit evidence on which to base the

a) Disclaimer of Opinion:-

The auditor, having obtained sufficient appropriate audit

evidence, concludes that misstatements

are material,but not pervasive.

The auditor shall expressan adverse opinion when the auditor, having obtained sufficient ap-

propriate audit evidence, concludes that misstate-ments, individually or in the aggregate, are both material and pervasive

The auditor shall disclaim an opinion when he is unable to obtain sufficient appro-priate audit evidence and

he concludes that the possi-ble effects on the financial statements of undetected

misstatements could be both material and pervasive

Qualified Opinion Adverse Opinion Disclaimer of Opinion

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c) Pervasive effects on the financial statements are those that, in the auditor’s judgment:-

opinion, and the auditor concludes that the possible effects on the financial statements of undetected misstatements, if any, could be both material and pervasive.

The auditor shall disclaim an opinion when, in extremely rare cir-cumstances involving multiple uncertainties, the auditor concludes that, notwithstanding having obtained sufficient appropriate audit evidence regarding each of the individual uncertainties, it is not possible to form an opinion on the financial statements due to the potential interaction of the uncertainties and their possible cumula-tive effect on the financial statements.

A term used, in the context of misstatements, to describe the ef-fects on the financial statements of misstatements or the possible effects on the financial statements of misstatements, if any, that are undetected due to an inability to obtain sufficient appropriate audit evidence.

(i) Are not confined to specific elements, accounts or items of the financial statements;

(ii) If so confined, represent or could represent a substantial proportion of the financial statements; or

(iii) In relation to disclosures, are fundamental to users’ understanding of the financial statements.

b) Definition of Pervasive:-

Nature of Matter Giving Rise to the Modification

Auditor’s Judgment about the Pervasiveness of the Effects or Possible Effects on the Financial Statments

Material but Not Pervasive Material and Pervasive

Financial statements are mate-rially misstated

Qualified opinion

Qualified opinion

Adverse opinion

Disclaimer of opinionInability to obtain sufficientappropriate audit evidence

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S.A-706 Emphasis Of Matter Paragraphs And Other Matter Para-graphs In The Independent Auditor’s Report.

1. Objective of the Auditor as per SA 706

2. Definitions

3. Emphasis of Matter Paragraphs in the Auditor’s Report

As per SA 706 (Revised) on “Emphasis of Matter Paragraphs and Other Matter Paragraphs In The Independent Auditor’s Report”, the objective of the auditor, having formed an opinion on the finan-cial statements, is to draw users’ attention, when in the auditor’s judgment it is necessary to do so, by way of clear additional com-munication in the auditor’s report, to:

(a) A matter, although appropriately presented or disclosed in the financial statements, that is of such importance that it is fundamental to users’ understanding of the financial statements; or (b) As appropriate, any other matter that is relevant to users’ understanding of the audit, the auditor’s responsibilities or the auditor’s report.

A paragraph included in the auditor’s report that refers to a mat-ter appropriately presented or disclosed in the financial statements that, in the auditor’s judgment, is of such importance that it isfundamental to users’ understanding of the financial statements.

A paragraph included in the auditor’s report that refers to a mat-ter other than those presented or disclosed in the financial state-ments that, in the auditor’s judgment, is relevant to users’ under-standing of the audit, the auditor’s responsibilities or the auditor’s report.

If the auditor considers it necessary to draw users’ attention to a matter presented or disclosed in the financial statements that, in the auditor’s judgment, is of such importance that it is fundamen-tal to users’ understanding of the financial statements, the audi-tor shall include an Emphasis of Matter paragraph in the auditor’s report provided:

(a) The auditor would not be required to modify the opinion in accordance with SA 705 (Revised) as a result of the matter; and

(b) When SA 701 applies, the matter has not been determined to be a key audit matter to be communicated in the auditor’s report.

a) Emphasis of Matter paragraph:-

b) Other Matter paragraph:–

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4. Separate section for Emphasis of Matter paragraph

When the auditor includes an Emphasis of Matter paragraph in the auditor’s report, the auditor shall:

(a) Include the paragraph within a separate section of the auditor’s report with an appropriate heading that includes the term “Emphasis of Matter”;

(b) Include in the paragraph a clear reference to the matter being emphasized and to where relevant disclosures that fully describe the matter can be found in the financial statements. The paragraph shall refer only to information presented or disclosed in the financial statements; and (c) Indicate that the auditor’s opinion is not modified in respect of the matter emphasized.

If the auditor considers it necessary to communicate a matter oth-er than those that are presented or disclosed in the financial state-ments that, in the auditor’s judgment, is relevant to users’ under-standing of the audit, the auditor’s responsibilities or the auditor’s report, the auditor shall include an Other Matter paragraph in the auditor’s report, provided:

(a) This is not prohibited by law or regulation; and

(b) When SA 701 applies, the matter has not been determined to be a key audit matter to be communicated in the auditor’s report.

When the auditor includes an Other Matter paragraph in the audi-tor’s report, the auditor shall include the paragraph within a separate section with the heading “Other Matter,” or other appro-priate heading.

5. Other Matter Paragraphs in the Auditor’s Report

6. Separate section for Other Matter paragraph

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S.A-710 Standard On Auditing-710, “Comparative Information-Cor-responding Figures And Comparative Financial Statements”

1. The Nature of the Comparative Information-

2. Audit Procedures regarding comparative information

The nature of the comparative information that is presented in an entity’s financial statements depends on the requirements of the applicable financial reporting framework. There are two differ-ent broad approaches to the auditor’s reporting responsibilities in respect of such comparative information: corresponding figures and comparative financial statements. The approach to be adopted is often specified by law or regulation but may also be specifi ed inthe terms of engagement.

The essential audit reporting differences between the approaches are:

(a) For corresponding figures, the auditor’s opinion on the financial statements refers to the current period only;whereas

(b) For comparative financial statements, the auditor’s opinion refers to each period for which financial statements are presented.

The amounts and disclosures included in the financial statements in respect of one or more prior periods in accordance with the appli-cable financial reporting framework.

The auditor shall determine whether the financial statements in-clude the comparative information required by the applicable financial reporting framework and whether such information is appropriately classified. For this purpose, the auditor shall evaluate whether:

(a) The comparative information agrees with the amounts and other disclosures presented in the prior period; and

(b) The accounting policies reflected in the comparative informa tion are consistent with those applied in the current period or, if there have been changes in accounting policies, whether those changes have been properly accounted for and adequately presented and disclosed.

a) Definition of Compar- ative information :–

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3. Audit Reporting regarding Corresponding Figures

4. When corresponding figures are presented, the auditor’s opinion shall not refer to the corre- sponding fi gures except in the following circumstances:-

Definition of 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 be read only in relation to the amounts and other disclo-sures relating to the current period (referred to as “current period figures”). The level of detail presented in the corresponding amounts and disclosures is dictated primarily by its relevance to thecurrent period figures.

and the matter which gave rise to the modification is unresolved, the auditor shall modify theauditor’s opinion on the current period’s financial statements. In the Basis for Modification paragraph in the auditor’sreport, the auditor shall either:

(a) Refer to both the current period’s figures and the corresponding figures in the description of the matter giving rise to the modification when the effects or possible effects of the matter on the current period’s figures are material; or (b) In other cases, explain that the audit opinion has been modified because of the effects or possible effects of the unresolved matter on the comparability of the current period’s figures and the corresponding figures.

on which an unmodified opinion has been previously issued, the audi-tor shall verify whether the misstatement has beendealt with as required under the applicable financial reporting framework and, if that is not the case, the auditor shallexpress a qualified opinion or an adverse opinion in the auditor’s re-port on the current period financial statements, ed.

a) If the auditor’s report on the prior period, as previously issued, included a qualified opin- ion, a disclaimer of opin- ion,or an adverse opinion

b) If the auditor obtains audit evidence that a material misstatement exists in the prior pe- riod financial statements

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c) Prior Period Financial Statements Not Audited -

If the prior period financial statements were not audited, the audi-tor shall state in an Other Matter paragraph in the auditor’s report that the corresponding figures are unaudited. Such a statement does not, however, relieve the auditor of the requirement to obtain sufficient appropriate audit evidence that the opening balances do not contain misstatements that materially affect the current peri-od’s financial statements.

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

When comparative financial statements are presented, the auditor’s opinion shall refer to each period for which financial statements are presented and on which an audit opinion is expressed.

if the auditor’s opinion on such prior period financial statements differs from the opinion the auditor previously expressed, the audi-tor shall disclose the substantive reasons for the different opinion in an Other Matter paragraph in accordance with SA 706.

5. Comparative Financial Statements

a) Definition:-

b) Auditor’s opinion- to refer each period:-

c) When reporting on prior period financial statements in connec- tion with the current period’s audit,