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STANDARDS ON AUDITING

(SA)

by

CA Ismail B. Sonawalla
Topics to be covered

• Introduction to Auditing and Assurance


Standards Board - AASB & SAs

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Topics to be covered
• SA – 315 Identifying & Assessing the Risks of
Material Misstatements through
Understanding the Entity & its
Environment

• SA – 500 Audit Evidence

• SA – 520 Analytical Procedures

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Background
OBJECTIVES OF AASB
• Review existing and emerging auditing practices
worldwide and identify areas in which Standards on
Quality Control, Engagement Standards and Statements
on Auditing need to be developed.

• Review existing Standards and Statements on Auditing to


assess their relevance in the changed conditions and to
undertake their revision, if necessary.

• Formulate Engagement Standards, Standards on Quality


Control and Statements on Auditing

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Background
OBJECTIVES OF AASB
• Review existing Guidance Notes

• Develop Guidance Notes on issues arising out of any


Standard.

• Formulate Engagement Standards, Standards on Quality


Control and Statements on Auditing

• Formulate and issue Technical Guides, Practice Manuals,


Studies, etc.

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Background
• The Latest Standards on Auditing (formerly known as
Auditing Assurance Standards) issued by AASB of ICAI
have been issued under the Clarity Project

• Standards in conformity with International Standards


issued by the International Auditing and Assurance
Standards Board (IAASB) [established by
International Federation of Accountants (IFAC)]
under the Clarity Project

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Background
• IAASB has adopted new format for presentation of
International Standards on Auditing (ISAs). The
standards now being issued / revised by AASB are in
line with and also numbered similar to the ISAs.

• Effective April 1, 2008 ICAI has issued “Preface to the


Standards on Quality Control, Auditing, Review,
Other Assurance and Related Services”, which sets
out the authority of the “Standards on Auditing
(SAs)”.

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Background
• Standards issued by the AASB under the authority of the
ICAI collectively known as
Engagement Standards
– Standards on Auditing (SAs), - applied in the audit of historical
financial information.
– Standards on Review Engagements (SREs), - applied in the
review of historical financial information.
– Standards on Assurance Engagements (SAEs), - applied in
assurance engagements, dealing with subject matters other than
historical financial information.
– Standards on Related Services (SRSs), - applied to engagements
involving application of agreed-upon procedures to information,
compilation engagements, and other related services
engagements.
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Background
• All SAs interlinked - not to be implemented in
isolation, but as a cohesive set of guidelines

• Number given to SAs is similar to the


numbering system followed for ISAs and at
times the standards are also nearly similar.

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Audits & Reviews of Historical Financial Information
New / Revised Standards (Auditing, Review and Others) issued
under the Clarity Project
S.N. S.A.NO. PARTICULARS
SQC 1 Quality Control for Firms that Perform Audits and Reviews of Historical
Financial Information & Other Assurance Related Services Engagements
Announcement on Amendment to SQC 1 – Retention Period for
Engagement Documentation (Working Papers)
100 – 999 STANDARDS ON AUDITING (SAs)
100 – 199 Introductory Matters

200 - 299 General Principles and Responsibilities


1 200 (R) Overall Objectives of the Independent Auditor and the Conduct of
an Audit in Accordance with Standards on Auditing
2 210(R) Agreeing the Terms of Audit Engagement
3 220 (R) Quality Control for an Audit of Financial Statements
4 230 (R) Audit Documentation
5 240 (R) The Auditor’s Responsibilities Relating to Fraud in an Audit of
Financial Statements
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S.N. S.A.NO. PARTICULARS
6 250 (R) Consideration of Laws and Regulations in an Audit of Financial Statements
7 260 (R) Communication with Those Charged with Governance
8 265 Communicating Deficiencies in Internal Control to Those Charged with
Governance and Management
9 299 Responsibility of Joint Auditors

300 - 499 Risk Assessment and Response to Assessed Risks


10 300 (R) Planning an Audit of Financial Statements
11 315 Identifying and Assessing the Risks of Material Misstatement Through
Understanding the Entity and its Environment
12 320 (R) Materiality in Planning and Performing an Audit
13 330 The Auditor’s Responses to Assessed Risks
14 402 (R) Audit Considerations Relating to an Entity Using Service Organisation
15 450 Evaluation of Misstatements Identified during the Audit

500 - 599 Audit Evidence


16 500 (R) Audit Evidence
17 501 (R) Audit Evidence – Specific Considerations for Selected Items
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18 505 (R) External Confirmations
S.N. S.A.NO. PARTICULARS
19 510 (R) Initial Audit Engagements – Opening Balances
20 520 (R) Analytical Procedures
21 530 (R) Audit Sampling
22 540 (R) Auditing Accounting Estimates, Including Fair Value Accounting
Estimates and Related Disclosures
23 550 (R) Related Parties
24 560 (R) Subsequent Events
25 570 (R) Going Concern
26 580 (R) Written Representations

600 - 699 Using Work of Others


27 600 Using the Work of Another Auditor
28 610 (R) Using the Work of Internal Auditors
29 620 (R) Using the Work of an Auditor’s Expert

700 - 799 Audit Conclusions and Reporting


30 700 (R) Forming an Opinion and Reporting on Financial Statements
31 705 Modifications to the Opinion in the Independent Auditor’s Report
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S.N. S.A.NO. PARTICULARS
32 706 Emphasis of Matter Paragraphs and Other Matter Paragraphs in
the Independent Auditor’s Report
33 710 (R) Comparative Information – Corresponding Figures and
Comparative Financial Statements
34 720 The Auditor’s Responsibility in Relation to Other Information in
Documents Containing Audited Financial Statements

800 - 899 Specialized Areas


35 800 Audits of Financial Statements Prepared in Accordance with
Special Purpose Frameworks
36 805 Special Considerations – Audits of Single Purpose Financial
Statements and Specific Elements, Accounts or Items of a
Financial Statement
37 810 Engagements to Report on Summary Financial Statements

2000 - 2699 Standards on Review Engagements (SREs)


1 2400 (R) Engagements to Review Financial Statements
2 2410 Review of Interim Financial Information Performed by the
Independent Auditor of the Entity

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S.N. S.A.NO. PARTICULARS

Assurance Engagements Other Than Audits or Reviews of


Historical Financial Statements
3000 - 3699 Standards on Assurance Engagements (SAEs)
3000 - 3399 Applicable to All Assurance Engagements
3400 - 3699 Subject Specific Standards
1 3400 The Examination of Prospective Financial Information

Related Services
4000 - 4699 Standards on Related Services (SRSs)
1 4400 Engagements to Perform Agreed-upon Procedures Regarding
Financial Information
4410 Engagements to Compile Financial Information

General Clarifications Issued


General Clarifications Issued
1 General Clarification (GC) on SA 210
2 General Clarification (GC) on SA 620
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S A – 315

Identifying & Assessing the Risks of Material


Misstatements through Understanding the Entity &
its Environment

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• Effective for audits of financial statements
for periods beginning on or after April 1,
2008

• Objective – help Auditor reduce the risk of


material misstatements to an acceptably
low level

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Requirements

• Identify the Risk

• Assess the Risk

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Types of Risk

• Business Risk

• Control Risk

• Audit Risk

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Business Risk
• Management’ s ethics
• Type of business – speculation, forward
trading, volatile commodity (cotton)
• Competition – Overseas / Local - Eagle Flask
• Legal Issues – 2G spectrum
• Quality of Service – Kingfisher
• Inadequacy of capital / overtrading
• Disasters – natural / man made
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Control Risk
• Internal control – systems and its
compliance
• Frauds
• Inadequately trained staff – staff turnover
– leading to errors
• Ethical issues

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Audit Risk
• Test check – detection issues
• Compliance issues
• Quality of work
• Reporting issues

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Requirements
Risk Assessment Procedures & Related
Activities
• Identify the Risk
• Assess its materiality / significance – high,
medium, low
• Determine its frequency – occasional /
regular
• Corrective actions 22
Procedure
Understanding of the Entity & its
Environment

• Relevant industry, regulatory & other


external factors, financial reporting
framework

• Its operations, ownership, governance


structures, types of investments done or
planned
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Entity & its Environment
• Accounting policies & changes –
appropriate to the business and industry

• Objective & Strategies related to business


risk that may result in risks of material
misstatement

• Measurement & review of financial


performance

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Entity’s Internal Control
• Internal controls relevant to audit

• Implementation of those controls

• Culture of honesty & ethical behavior

• Risk Assessment Process – is it a established


process or an adhoc process

• Classes of transactions & its process


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Identify & Assess Risks of Material
Misstatements – at TWO levels –

Financial Statement Level


• Deficient internal controls relevant to audit
• Frauds
• Management integrity

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Identify & Assess Risks of Material
Misstatements – at TWO levels –

Assertion Level

• Transactions
• Account Balances
• Presentation & Disclosures

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Outcome

Risk that requires modification in Audit


Planning

Risk that requires Special Audit Consideration

Documentation

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SA – 500
Audit Evidence (Revised)
formerly AAS 5 – Audit Evidence

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• Generally on the lines of ISA 500

• Effective for audits of financial


statements for periods beginning
on or after April 1, 2009

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• Objective – to design & perform audit
procedures to enable the auditor to

obtain sufficient & appropriate audit


evidence
 draw reasonable conclusions

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Requirements of Audit Evidence
Should be -
• Sufficient - quantity

• Appropriate - quality

• Complete

• Reliable

• Precise, yet detailed


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Select items for testing
• All items
• Specific items – audit sampling

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Inconsistency
• Unreliable sources
• Creates a doubt
• Repeat audit procedures
• Obtain more evidence
• Arrive at conclusion

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SA – 520 (R)

Analytical Procedures(Revised)

formerly AAS 14

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• Effective for audits of financial
statements for periods beginning
on or after April 1, 2010

• Objective – obtain relevant &


reliable audit evidence and design
and perform analytical procedures

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Analytical Procedures

• Evaluation of financial information


through analysis of plausible
relationships amongst the data

• Further analysis of data that is


inconsistent
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Nature of Analytical Procedures
• Comparisons
• Relationships
• Various methods

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Comparisons with –
Internal -
• Budgets / forecast
• Previous years

External -
• Industry
• Competitors

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Relationships between –
• Gross profit / Net profit and Sales

• Raw material consumption to


Production

• Various cost like wastage,


discounts, interest cost, staff cost,
etc. and Sales

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Methods
• Simple Ratios
• Complex calculations
• Statistical analysis

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THANK YOU

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