Lecture - 17

Chapter – 1
“Quality Control and Engagement Standards”
(23) SA – 330 “Responses to Assessed Risk”

- SA 330 requires the auditor to design and perform audit procedures which are

appropriate to assessed risk (as required to be determined by SA 315)

for the purpose of collection of sufficient and appropriate audit Evidences.

- Audit procedures can be classified in two categories:

(a) Tests of Controls (ToC) (b) Substantive Procedures

(Compliance procedures) (Tod and SAP)

(A) Tests of Controls (ToC):

Meaning: Procedures designed to evaluate operating effectiveness of controls, in

preventing, detecting, and correcting the material misstatements at

assertion level for transactions, account balances and disclosures.

Concept: Through ToC, auditor collect audit evidences as to:

(a) Application of controls

(b) Consistency of controls

(c) By whom and by what means such controls are applied.

- Audit Evidences collected by auditor indicates the existence

and effectiveness of internal controls. If I.C. exist and

effectively operated, auditor may design less extensive

substantive procedures and vice versa.

- In case of Non-existent / deficient I.C., auditor should

communicate the weaknesses to management / TCWG as per

requirements of SA 260 and 265.

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Special Considerations w.r.t. Internal Controls;

(A) Using audit evidence obtained during Interim period:

30.06.2020

01.04.2020 31.03.2021

(i) Auditor should obtain audit evidences for significant changes

subsequent to interim period.

(ii) Determine the additional procedures to be performed and additional

evidences to be obtained for the remaining period.

(B) Using audit evidences obtained during prior period:

(i) Establish continuing relevance of evidences obtained during audit of

prior periods by determining significant changes subsequent to prior

period.

(ii) If significant changes occur, auditor should perform ToC in current

period.

(iii) If no significant change occurs, perform ToC once in three years,

with few tests every year.

Factors warranting re-testing of controls:

1. Deficient control environment.

2. Deficient monitoring of controls.

3. Significant manual element to relevant controls.

4. Personnel changes that significantly affect the application of control.

5. Changing circumstances that indicate the need for changes in the

control.

6. Deficient general IT-controls.

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(B) Substantive Procedures:

Meaning: Procedures designed and performed to detect material misstatements

in financial statements and accounting records.

Substantive procedures comprise of

(a) Tests of details (Tod)

(b) Substantive Analytical Procedures (SAP)

Timing of Substantive procedures: If substantive procedures are performed for

interim period, auditor is required to cover the remaining period

by appropriate procedures.

Special considerations:

(i) Using EC requests as Substantive procedures:

Auditor may use EC requests as substantive procedures so as to obtain

sufficient appropriate audit evidences w.r.t. assertions being examined

through the requests.

While using EC requests, auditor should consider the following factors:

(i) Knowledge of the confirming party of the information to be confirmed.

(ii) Ability or willingness of the confirming party to respond or to provide

the requested information.

(iii) Objectivity of the confirming party.

(ii) Substantive procedures w.r.t. significant risks:

Auditor should design and perform appropriate procedures w.r.t. specific

risks, that are responsive in nature.

For Example: Risks related to fraud - Procedures prescribed by SA 240

are to be applied.

Risks related to Related - Procedures prescribed by SA 550

Party transactions are to be applied.

Risks related to subjectivity - Procedures prescribed by SA 540

in measurement of estimates are to be applied.

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(iii) Substantive Procedures as to closing Process:

- Reconcile the F.S. with underlying records:

For Example: Cash at Bank - to be reconciled with bank statements.

Inventory - to be reconciled with the stock

(Inventory) sheet prepared at the

time of Physical Verification.

- Examine significant journal entries and adjustments made during the

course of preparation of F.S. (For Ex.– Prepaid, Accrual, outstanding

etc.)

(c) Result of Responses (ToC + Tod + SAP):

- Auditor is required to ascertain whether on the basis of procedures

performed, sufficient appropriate audit evidences obtained or not.

- If obtained, draw conclusion and issue the opinion in form of audit report.

- If not obtained, perform additional procedures. If still audit evidences not

obtained, modify the audit opinion.

Do Practice – Questions on SA 330

(24) SA – 450 “Evaluation of Misstatements Identified during the audit”

(a) Meaning and Causes of Misstatement:

Meaning: Difference between:

(i) amount, classification, presentation or disclosure of a

reported financial statement item, and

(ii) amount, classification, presentation or disclosure that is

required for the item to be in accordance of FRF.

Causes:
(a) Inaccuracy in gathering or processing data from which the F.S. are prepared;
(b) Omission of an amount or disclosure;
(c) Incorrect accounting estimate arising from overlooking, or clear
misinterpretation of facts;
(d) Unreasonable judgments of management concerning accounting estimates.

(e) Inappropriate selection & application of accounting policies

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(b) Auditor’s procedures when misstatements identified:
Auditor identify the misstatements which are material in nature
and occurred not due to fraud (SA 240)

Determine whether any change Communicate to management with a

is required in audit strategy or request for necessary correction
audit plan
Management Corrections made
Yes Refuses
Perform additional
Follow the requirements of Understand the reasons procedures to
SA – 300 for not making determine whether

the Corrections misstatement

Audit Strategy and
remains
Audit Plan require
Re-assess the
revision if
Materiality Misstatement No

Nature of identified remains misstatement

misstatements and If reasons not (request mngt. remains

the circumstances of satisfactory and for correction)
their occurrence misstatement appears unmodified
indicate that other
to be material opinion
misstatements may
exist that could be
Communicate to TCWG
material;
or - Uncorrected Misstatement.

Aggregate of - Possible effect on audit opinion

misstatements - Request for correction
accumulated during
the audit approaches
Not Corrected
materiality
determined in
Modify the opinion AND Obtain WR from Mngt. &
accordance with SA
320 (Revised). TCWG as to their believing
that uncorrected mis-
statement is immaterial.
DO Practice – Questions on SA 450

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