Referencer for Quick

Revision
Intermediate Course Paper-6:
Auditing and Assurance
A compendium of subject-wise capsules published in the
monthly journal “The Chartered Accountant Student”

Board of Studies
(Academic)
ICAI
INDEX
Page Edition of Students’
Topics
No. Journal
1-3 January 2020 Nature, Objective and Scope of Audit
Audit Strategy, Planning and
3 January 2020
Programme
Audit Documentation and Audit
4-11 July 2021
Evidence
12-19 October 2020 Risk Assessment and Internal Control
20-25 January 2020 Audit Report
26-30 October 2020 Bank Audit
AUDITING & ASSURANCE
NATURE, OBJECTIVE AND SCOPE OF AUDIT
It has always been the endeavour of Board of Studies to provide quality academic inputs to the students of Chartered Accountancy
Course. Keeping in mind this objective, BoS has decided to come out with a Crisp & Concise Capsule on Paper 6: Auditing &
Assurance of Intermediate Course to facilitate students for quick revision before examination. It may be mentioned that this
capsule is a tool for quick revision of some significant areas of Auditing & Assurance & this should not be taken as a substitute
for the detailed study of the subject. Students are advised to refer to the relevant Study Material, Practice Manual and RTP for
comprehensive study & revision.

“An audit is an independent examination of financial

information of any entity, whether profit oriented or not, and Advantages of audit of financial statements
irrespective of its size or legal form, when such an examination
is conducted with a view to expressing an opinion thereon.” Safeguards the interest
of persons not associated
with the management
To ensure that the financial
To obtain reasonable statements as a whole are free
assurance from material misstatements Government may require
audited and certified Acts as a moral check on
statement the employees
Overall objective of
the auditor
Advantages
To report on the financial To communicate as
statements required by the SAs
Helps in the detection of Helpful in settling
wastages and losses liability for taxes
SCOPE OF AUDIT

To form an opinion, the auditor should be satisfied that

the accounting information is reliable and sufficient as Useful for settling trade
the basis for the preparation of the financial statements. disputes

All aspects of the enterprise to be covered in audit. Inherent limitations of audit

In forming his opinion, the auditor should also decide Inherent Limitations of Audit (SA 200 “Overall Objectives
of the Independent Auditor and the Conduct of an Audit in
whether the relevant information is properly disclosed Accordance with Standards on Auditing”): The auditor is not
in the financial statements. expected to, and cannot, reduce audit risk to zero because there
are inherent limitations of an audit. The inherent limitations of
The auditor is not expected to perform duties which an audit arise from:
fall outside the scope of his competence. The Nature of Financial Reporting: The preparation of financial
statements involves judgment by management.
Constraints on the scope of the audit that impair the The Nature of Audit Procedures: There are practical and legal
auditor’s ability to express an unqualified opinion limitations on the auditor’s ability to obtain audit evidence such as:
should be set out in his report. Possibility that Fraud may involve An audit is
management or others may sophisticated and not an official
not provide, intentionally carefully organised investigation
An examination of the or unintentionally, the schemes. into alleged
system of accounting and complete information wrongdoing.
internal control relevant for preparation
and presentation of FS.

Reporting to the Verification of the Timeliness of Financial Reporting and the Balance between
appropriate person/body authenticity and validity Benefit and Cost: Relevance of information, and thereby its
of transaction value, tends to diminish over time, and there is a balance to be
struck between the reliability of information and its cost.
Other Matters that Affect the Limitations of an Audit: Certain
Checking the result Aspects to Comparison of the Items assertions or subject matters are particularly significant, such
shown by the profit be covered of FS with the underlying assertions or subject matters include:
and loss in Audit record
♦ Fraud, particularly ♦ The occurrence of non-
involving senior compliance with laws and
management or collusion. regulations.
Verification of the title, ♦ The existence and ♦ Future events or conditions
Verification of the existence and value of completeness of related that may cause an entity to
liabilities the assets party relationships and cease to continue as a going
transactions. concern.

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 Relationship of auditing with other
International The IFAC Board has established
Auditing and the IAASB to develop and issue, disciplines
Assurance Standards in the public interest and under
Board (IAASB): its own authority, high quality Accounting
auditing standards for use around
the world. The IAASB functions as Production
an independent standard-setting Law
Auditing and body under the auspices of IFAC.
Assurance Standards In India, ICAI constitued the
Board: AASB for the same purpose.
Financial Economics
Management Auditing

AUDITING STANDARDS
Data Behavioural
– AN OVERVIEW Processing Science
Statistics &
Mathematics
Auditing and Assurance Structure of
Standard Board (AASB) – Pronouncement Issued
Scope/Objective by AASB
Auditing and Accounting: Auditing reviews the financial
statements which are nothing but a result of the overall accounting
process.
FRAMEWORK FOR AUDIT & ASSURANCE & OTHER
Auditing and Law: An auditor should have a good knowledge of
SERVICES ENGAGEMENTS – Scope/Objective/
business laws affecting the entity.
Definitions/Requirements
Auditing and Economics: Auditor is expected to be familiar with
the overall economic environment of the client.
Auditing and Behavioural Science: knowledge of human behaviour
Standard Standards Standards on Standards
is essential for an auditor to effectively discharge his duties
for Quality on Review Assurance on Related
Control Engagements Engagements Services SRS- Auditing and Statistics & Mathematics: auditor is also expected
(SQC 01-99) (SRE 2000- SAE (3000- 4000 & 4699 to have the knowledge of statistical sampling for meaningful
2699) 3699) conclusions and mathematics for verification of inventories.
Auditing and Data Processing: EDP auditing in itself is developing
as a discipline in itself.
Auditing and Financial Management : the auditor is expected to
Standards on Auditing (SA 100-999) aspects covered in have knowledge about various financial techniques such as working
series: capital management, funds flow, ratio analysis, capital budgeting etc.
Introductory Matters SA 100-199 Auditing and Production: good auditor is one who understands
General Principles and Responsibilities SA 200-299 the client and his business functions such as production, cost
Risk Assessment and Response to Assessed Risk SA 300-499 system, marketing etc.
Audit Evidence SA 500-599
Using Work of Others SA 600-699
Audit Conclusions and Reporting SA 700-799
Specialised Areas SA 800-899 Ethical Requirements Relating to Audit of Financial
Statements

Confidentiality;
Elements of a System of Quality Control :The firm’s system Objectivity; and
of quality control should include policies and procedures
addressing each of the following elements:
Integrity; Professional Professional
competence
and due care; behavior.
Leadership responsibilities for quality
within the firm.
The auditor should be independent of the entity subject to the audit.
The Code describes independence as comprising both
Ethical requirements. Independence of Mind +Independence in Appearance.

Acceptance and continuance of client Human Resources : The firm should establish policies and
relationships and specific engagements. procedures designed to address the following personnel
issues:

Human resources.
Recruitment; Competence; Compensation;
and
Engagement performance.
Capabilities; Promotion;

Monitoring. Career Estimation

Performance development; of personnel
evaluation; needs

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AUDITING & ASSURANCE

Monitoring: The purpose of monitoring compliance with quality control policies and procedures is to
provide an evaluation of:
Adherence to professional Whether the quality Whether the firm’s quality control Follow-up by appropriate firm
standards and regulatory control system has been policies and procedures have been personnel so that necessary
and legal requirements; appropriately designed and appropriately applied, so that modifications are promptly
effectively implemented; and reports that are issued by the firm or made to the quality control
engagement partners are appropriate policies and procedures.
in the circumstances.

AUDIT STRATEGY, PLANNING AND PROGRAMME

After establishment of the overall audit strategy, an audit plan can be developed to address the various matters identified in
the overall audit strategy, taking into account the need to achieve the audit objectives through the efficient use of the auditor’s
resources.

In establishing the overall audit strategy, the auditor shall:

Ascertain the Consideration of Ascertain the

Identify the Consider the
reporting significant factors nature, timing and
scope of the results of
objectives of the in directing the extent of resources
engagement; preliminary en-
engagement; engagement required for the
gagement
team’s efforts; engagement.
activities

Planning is not a discrete phase of an audit, but rather a continual and iterative process that often begins shortly after (or in
connection with) the completion of the previous audit and continues until the completion of the current audit engagement.

Development of an Overall Plan:

 The terms of his engagement and statutory responsibilities.  Possible rotation of emphasis on specific audit areas.
 Nature and timing of reports  The nature and extent of audit evidence to be obtained.
 Applicable legal or statutory requirements.  The work of internal auditors and the extent of their
 Accounting policies adopted by the client involvement
 Effect of new accounting or auditing pronouncements on the  The involvement of other auditors
audit.  The involvement of experts.
 Identification of significant audit areas.  The allocation of work between joint auditors
 Setting of materiality levels for audit purposes.  Establishing and coordinating staffing requirements.
 The degree of reliance on accounting system and internal
control
The auditor shall document (a) the overall audit strategy;(b) the audit plan; and (c) any significant changes made during the audit
engagement to the overall audit strategy or the audit plan, and the reasons for such changes.

AN AUDIT PROGRAMME is a detailed plan

and consists of a series of verification procedures Audit procedure Extent of
to be applied to the financial statements and Audit objective
to be applied check
accounts of a given company for the purpose
of obtaining sufficient evidence to enable the
auditor to express an informed opinion on such
statements. For framing an audit programme the
following points should be kept in view: Special instruc- Allocation of
tions based on work amongst Timing of
past experience of the team mem- check
the auditee bers

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AUDITING AND ASSURANCE
CA INTERMEDIATE (NEW) - PAPER 6 - AUDITING AND ASSURANCE
It has always been the endeavour of Board of Studies to provide quality academic inputs to the students of Chartered
Accountancy Course. Keeping in mind this objective, BoS has decided to come out with a Crisp & Concise Capsule of each
subject to facilitate students for quick revision before examination. This Capsule is on Paper 6: Auditing & Assurance
of Intermediate Course. It may be mentioned that this capsule is a tool for quick revision of some significant Topics of
Auditing and Assurance, and this should not be taken as a substitute for the detailed study of the subject. Students are
advised to refer to the relevant Study Material and RTP for comprehensive study & revision.

CHAPTER 3: AUDIT DOCUMENTATION AND AUDIT EVIDENCE

Overview PURPOSE OF AUDIT DOCUMENTATION
Audit Documentation Audit Evidence 1. Assisting the engagement team to plan and perform the audit.

2. Assisting engagement team to direct and supervise the audit

Property of
Sufficient Appropriate work.
the Auditor

3. Enabling the engagement team to be accountable for its work.

Audit Completion Written Consideration External
File Memorandum Represen- of Specific Confir-
tations items mations
4. Retaining a record of matters of continuing significance to
future audits.
SA 230- “AUDIT DOCUMENTATION”
SA 230 on “Audit Documentation”, deals with the auditor’s 5. Enabling the conduct of quality control reviews and
responsibility to prepare audit documentation for an audit of inspections.
financial statements. It is to be adapted as necessary in the
circumstances when applied to audits of other historical financial
information. Laws or regulations may establish additional
documentation requirements. 6. Enabling the conduct of external inspections.

Definition: Audit Documentation refers to

record of audit procedures performed EXAMPLES OF AUDIT DOCUMENTATION

relevant audit evidence obtained

Audit
conclusions the auditor reached programme
Correspondence
(including e-mail)
OBJECTIVE OF THE AUDITOR concerning Analyses
significant
matters
To prepare documentation that provides-
• (a) A sufficient and appropriate record of the basis for the Audit
auditor’s report; and Documentation
• (b) Evidence that the audit was planned and performed in includes
accordance with SAs and applicable legal and regulatory Issues
requirements. Checklists memoranda

NATURE OF AUDIT DOCUMENTATION

Letter of
Summary of
confirmation
♦ evidence of the auditor’s basis for a conclusion significant
and letter of
Audit about the achievement of the overall objectives matters
representation
documentation of the auditor; and
provides: ♦ evidence that the audit was planned and
performed in accordance with SAs.

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 AUDITING AND ASSURANCE
AUDIT FILE- DEFINITION Definition

Audit file may be defined as one or more folders or
other storage media, in physical or electronic form,
containing the records that comprise the audit
documentation for a specific engagement.
Audit evidence is Information used by the auditor
in arriving at the conclusions on which the auditor's
opinion is based

It includes both information contained in the accounting

IMPORTANT ASPECTS REGARDING AUDIT
FILE
An appropriate time limit within which to complete the
assembly of the final audit file is ordinarily not more than
60 days after the date of the auditor’s report.
Changes may be made to the audit documentation
during the final assembly process, if they are
administrative in nature.
The retention period for audit engagements ordinarily
is no shorter than seven years from the date of the
auditor’s report, or, if later, the date of the group
auditor’s report.
records underlying the financial statements and other
information
OBJECTIVE OF THE AUDITOR
To design and perform audit procedures in such a way as to enable
the auditor to obtain sufficient appropriate audit evidence to be
able to draw reasonable conclusions on which to base the auditor’s
opinion.
SUFFICIENT AND APPROPRIATE AUDIT
EVIDENCE

COMPLETION MEMORANDUM (Audit Sufficiency measure of quantity of audit evidence

Documentation Summary)
The auditor may consider it helpful to prepare and retain as part
of the audit documentation a summary that describes- Appropriateness measure of quality of audit evidence
• the significant matters identified during the audit and
• how they were addressed.
Such a summary may facilitate effective and efficient review and
inspection of the audit documentation.
FACTORS AFFECTING AUDITOR’S
JUDGEMENT AS TO SUFFICIENCY OF AUDIT
Further, the preparation of such a summary may assist auditor’s EVIDENCE
consideration of the significant matters.
It may also help the auditor to consider whether there is any Materiality
individual relevant SA objective that the auditor cannot achieve
that would prevent the auditor from achieving the overall
objectives of the auditor. Risk of Material
Misstatement

OWNERSHIP OF AUDIT DOCUMENTATION Size & characteristics

of the population

AUDIT PROCEDURES TO OBTAIN AUDIT

Standard on Quality EVIDENCE
Control (SQC) 1
provides that audit
documentation is He may at his discretion, Inspection
the property of the make portions of, or extracts
auditor. from, audit documentation Observation
available to clients.

External Confirmation

Recalculation
SA 500- “AUDIT EVIDENCE”
Reperformance
SA 500 – “Audit Evidence”, explains what constitutes audit
evidence in an audit of financial statements, and deals with the Analytical Procedures
auditor’s responsibility to design and perform audit procedures
to obtain sufficient appropriate audit evidence to be able to draw
reasonable conclusions on which to base the auditor’s opinion. Inquiry

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AUDITING AND ASSURANCE
The following chart illustrates different audit procedures: Assertions used by the auditor to consider the different types of
potential misstatements:
Audit Procedures
Classes of Presentation
Account
transactions and Disclosure
balances
and events
Risk Assessment Further Audit
Procedures Procedures
Occurence Existence Occurence
and rights and
Substantive obligations
Test of Controls Completeness Rights and
Procedures
obligations Completeness
Accuracy
Analytical Completeness Classification and
Test of Details Procedures understandability
Cut - Off
Valuation Accuracy and
Classification and allocation valuation
Test of Transactions Test of Balances
i.e. Vouching i.e. Verification

TYPES OF AUDIT EVIDENCE

Risk Assessment Procedures refer to the audit procedures Types of audit Evidence
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,
whether due to fraud or error, at the financial statement Depending upon nature Depending upon source
and assertion levels.

Visual Oral Documentary Internal External

Further Audit Procedures comprise of:

(i) Tests of controls, when required by the SAs or when
the auditor has chosen to do so; and
(ii) Substantive procedures, including tests of details and
substantive analytical procedures.
RELEVANCE AND RELIABILITY OF AUDIT
EVIDENCE
Relevance deals with the logical connection with the purpose of
the audit procedure and the assertion under consideration.
The reliability of information to be used as audit evidence is
influenced by its source and its nature, and the circumstances
under which it is obtained.

Test of Controls may be defined as an audit procedure Reliability of Audit Evidence

designed to evaluate the operating effectiveness of controls
in preventing, or detecting and correcting, material Increases when
misstatements at the assertion level.

Obtained Related Obtained Obtained in Provided

from Control directly documentary by
independent are by the form Original
sources effective auditor Documents
Substantive Procedure may be defined as an audit
procedure designed to detect material misstatements at
the assertion level.

SA 580- “WRITTEN REPRESENTATIONS”

Definition of Written Representation:
ASSERTION- DEFINITION
Representations by management
written provided to confirm to support
statement by to the certain other audit
that are embodied in the financial statements management auditor matters or evidence

to consider different types of potential misstatements

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 AUDITING AND ASSURANCE
OBJECTIVES OF THE AUDITOR REGARDING SA 501- “AUDIT EVIDENCE- SPECIFIC
WRITTEN REPRESENTATION CONSIDERATIONS FOR SELECTED ITEMS”
SA 501 deals with specific considerations by the auditor in
To obtain Written obtaining sufficient appropriate audit evidence with respect to
Representations certain aspects of inventory, litigation and claims involving the
entity, and segment information in an audit of financial statements.

OBJECTIVE OF THE AUDITOR

To support other To respond
evidence appropriately 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

Some IMPORTANT POINTS with respect to Written
accordance with the applicable financial reporting framework.
Representations:

Written representations do not provide sufficient appropriate

audit evidence on their own about any of the matters with which Inventory:
they deal.
When inventory is material to the financial statements, the
The auditor shall request written representations from auditor shall obtain sufficient appropriate audit evidence
management. regarding the existence and condition of inventory by:

The auditor shall request management to provide a written (a) Attendance at physical inventory counting,
representation that it has fulfilled its responsibility for the unless impracticable, to:
preparation of the financial statements. (i) Evaluate management’s (ii) Observe the (iii) (iv)
instructions and performance of Inspect Perform
Audit evidence obtained during the audit that management has procedures for recording management’s the test
fulfilled its responsibilities is not sufficient. Auditor has to obtain and controlling the results count inventory; counts.
confirmation from management about the same.. of the entity’s physical procedures; and
inventory counting;
The auditor shall request management to provide a written
representation that:
(a) It has provided the auditor with all relevant information and
access as agreed in the terms of the audit engagement, and
(b) All transactions have been recorded and are reflected in the (b) Performing audit procedures over the entity’s final inventory
financial statements. records to determine whether they accurately reflect actual
inventory count results.
The date of the written representations should not be after the date
of the auditor’s report on the financial statements.

The written representations shall be in the form of a representation

Attendance at Physical Inventory Counting
letter addressed to the auditor. It Involves:

If the auditor has concerns about the competence, integrity, ethical (a) Inspecting the inventory to ascertain its existence and
values or diligence of management, the auditor shall determine the evaluate its condition, and performing test counts;
effect of such concerns on the audit evidence.

If management does not provide one or more of the requested

written representations, the auditor shall: (b) Observing compliance with management’s instructions and
(a) Discuss the matter with management; the performance of procedures for physical inventory count; and
(b) Re-evaluate the integrity of management and evaluate the
effect that this may have on the reliability of representations
(oral or written) and audit evidence in general; and
(c) Take appropriate actions, including determining the possible (c) Obtaining audit evidence as to the reliability of
effect on the opinion in the auditor’s report in accordance management’s count procedures.
with SA 705.

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.

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AUDITING AND ASSURANCE
Matters Relevant in Planning Attendance SA 505- “EXTERNAL CONFIRMATIONS”
at Physical Inventory Counting:
It include, for example: SA 505- “External Confirmations”, deals with the auditor’s use
of external confirmation procedures to obtain audit evidence.
(a) Nature of inventory. SA 500 indicates that the reliability of audit evidence is
influenced by its source and by its nature, and is dependent on
the individual circumstances under which it is obtained.
(b) Stages of completion of work in progress.

OBJECTIVE OF THE AUDITOR

(c) The risks of material misstatement related to inventory.
The objective of the auditor, when using external confirmation
procedures, is to design and perform such procedures to obtain
(d) The nature of the internal control related to inventory. relevant and reliable audit evidence.

(e) Whether adequate procedures are expected to be established

and proper instructions issued for physical inventory counting. DEFINITION OF EXTERNAL CONFIRMATION

(f ) The timing of physical inventory counting. in paper

Audit as a direct to the from a form, or by
evidence written auditor third electronic
obtained response party or other
(g) Whether the entity maintains a perpetual inventory system. medium

(h) The locations at which inventory is held. Other Important Terms-

Positive confirmation request – A request that

(i) Whether the assistance of an auditor’s expert is needed. the confirming party respond directly to the auditor
indicating whether the confirming party agrees or
disagrees with the information in the request, or
Litigation and Claims: providing the requested information.

The auditor shall design and perform audit procedures in order to Negative confirmation request – A request that
the confirming party respond directly to the auditor
identify litigation and claims involving the entity which may give
only if the confirming party disagrees with the
rise to a risk of material misstatement, including: information provided in the request.
(a) Inquiry of (b) Reviewing minutes of (c) Reviewing
Non-response – A failure of the confirming
management and meetings of those charged legal expense
party to respond, or fully respond, to a positive
in-house legal with governance and accounts. confirmation request, or a confirmation request
counsel; correspondence between returned undelivered.
the entity and its external
legal counsel; and Exception – A response that indicates a difference
between information requested to be confirmed, or
contained in the entity’s records, and information
provided by the confirming party. The exception
Segment Information: needs to be assessed to the entire population after
analyzing the reason for difference.
The auditor shall obtain sufficient appropriate audit evidence
regarding the presentation and disclosure of segment
information in accordance with the applicable financial
reporting framework by: EXTERNAL CONFIRMATION PROCEDURES

(a) Obtaining an understanding of (b) Performing analytical

the methods used by management procedures or other audit Determining Selecting Designing the Sending the
in determining segment procedures appropriate the the confirmation requests,
information. Further, in the circumstances. information appropriate requests; and including
to be confirming follow-up
confirmed party; requests.
(i) Evaluating (ii) Where or
whether such appropriate, requested;
methods are likely to testing the
result in disclosure application
in accordance with of such
the applicable methods;
financial reporting and
framework; and

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 AUDITING AND ASSURANCE
MANAGEMENT’S REFUSAL TO ALLOW EVALUATING THE EVIDENCE OBTAINED
THE AUDITOR TO SEND A CONFIRMATION
REQUEST SA 510- “Initial Audit Engagements- Opening Balances”, deals
with the auditor’s responsibilities relating to opening balances
THE AUDITOR SHALL: when conducting an initial audit engagement. In addition to
financial statement amounts, opening balances include matters
Inquire as to Evaluate the P e r f o r m requiring disclosure that existed at the beginning of the period,
management’s implications of alternative audit such as contingencies and commitments.
reasons for the management’s refusal procedures
refusal, and seek on the auditor’s designed to
audit evidence assessment of the obtain relevant DEFINITION OF INITIAL AUDIT ENGAGEMENT
as to their relevant risks of and reliable audit
validity and material misstatement; evidence.
reasonableness; and
An engagement in which either:
(i) The financial statements for the prior period were not
If the auditor concludes that management’s refusal to allow audited; or
the auditor to send a confirmation request is unreasonable,
or the auditor is unable to obtain relevant and reliable (ii) The financial statements for the prior period were
audit evidence from alternative audit procedures audited by a predecessor auditor.

The auditor shall The auditor shall also determine

communicate with those the implications for the audit OBJECTIVE OF AUDITOR WITH RESPECT TO
charged with governance in and the auditor’s opinion in
accordance with SA 260. accordance with SA 705.
OPENING BALANCES – IN CONDUCTING AN
INITIAL AUDIT ENGAGEMENT
RESULTS OF THE EXTERNAL CONFIRMATION In conducting
PROCEDURES an initial audit (a) Opening balances contain misstatements
engagement, that materially affect the current period’s
the objective financial statements; and
Reliability of Responses to Confirmation Requests
of the auditor (b) Appropriate accounting policies reflected
with respect in the opening balances have been
to opening consistently applied in the current period’s
If the auditor identifies factors the auditor shall balances is to financial statements, or changes thereto
that give rise to doubts about obtain further audit obtain sufficient are properly accounted for and adequately
the reliability of the response evidence to resolve appropriate audit presented and disclosed in accordance
to a confirmation request, those doubts. evidence about with the applicable financial reporting
whether: framework.
If the auditor determines the auditor shall evaluate
that a response to a the implications on the
confirmation request is assessment of the relevant AUDIT PROCEDURES REGARDING OPENING
risks of material misstatement.
not reliable, BALANCES
The auditor shall read the most recent financial statements, if any,
NEGATIVE CONFIRMATIONS and the predecessor auditor’s report thereon, if any, for information
relevant to opening balances, including disclosures.
Negative confirmations provide less persuasive audit evidence
than positive confirmations.
The auditor shall obtain sufficient appropriate audit evidence
Accordingly, the auditor shall not use negative confirmation about whether the opening balances contain misstatements that
requests as the sole substantive audit procedure to address an materially affect the current period’s financial statements by:
assessed risk of material misstatement at the assertion level unless
all of the following are present:
Determining Determining Performing one or more of the
whether the whether following:
(a) The auditor has assessed the risk of material misstatement as low prior period’s the opening
and has obtained sufficient appropriate audit evidence regarding c l o s i n g balances (i) Where the prior year financial
the operating effectiveness of controls relevant to the assertion; balances reflect the statements were audited,
have been application perusing the copies of the
correctly o f audited financial statements;
(b) The population of items subject to negative confirmation brought appropriate
procedures comprises a large number of small, homogeneous, forward to accounting (ii)
Evaluating whether audit
account balances, transactions or conditions; the current policies; and procedures performed in
period; the current period provide
evidence relevant to the
(c) A very low exception rate is expected; and opening balances; or

Performing specific audit

(iii)
(d) The auditor is not aware of circumstances or conditions that procedures to obtain
would cause recipients of negative confirmation requests to evidence regarding the
disregard such requests. opening balances.

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AUDITING AND ASSURANCE
If the auditor obtains audit evidence that the opening balances
contain misstatements that could materially affect the current
RESPONSIBILITIES OF THE AUDITOR
period’s financial statements There are specific accounting and disclosure requirements for
related party relationships, transactions and balances to enable
users of the financial statements to understand their nature and
effects on the financial statements.
the auditor shall perform such additional audit procedures
as are appropriate in the circumstances to determine the The auditor has a responsibility to perform audit procedures to
effect on the current period’s financial statements. identify, assess and respond to the risks of material misstatement
arising from the entity’s failure to appropriately account for related
party relationships, transactions or balances.
If the auditor concludes that such misstatements exist in The auditor needs to obtain an understanding of the entity’s
the current period’s financial statements, the auditor shall related party relationships and transactions sufficient to be able
communicate the misstatements with the appropriate level to conclude whether the financial statements, insofar as they are
of management and those charged with governance in affected by those relationships and transactions:
accordance with SA 450. (a) Achieve a true and fair presentation; or
(b) Are not misleading (for compliance frameworks).
In addition, an understanding of the entity’s related party
SOME OTHER IMPORTANT POINTS relationships and transactions is relevant to the auditor’s
evaluation of whether fraud risk factors are present as required
by SA 240. This is because fraud may be more easily committed
through related parties.
Consistency Owing to the inherent limitations of an audit, there is an
Relevant
of Accounting unavoidable risk that some material misstatements of the financial
Information in statements may not be detected, even though the audit is properly
Policies relating
the Predecessor planned and performed in accordance with the SAs.
to opening
Auditor’s Report
balances In the context of related parties, the potential effects of inherent
limitations on the auditor’s ability to detect material misstatements
Audit are greater for such reasons as the following:
Conclusions Modification to • Management may be unaware of the existence of all related
and Reporting the Opinion in party relationships.
in relation to the Predecessor • Related party relationships may present a greater opportunity
Opening Balances Auditor’s Report for collusion, concealment or manipulation by management.
Planning and performing the audit with professional skepticism
as required by SA 200 is therefore particularly important in
this context, given the potential for undisclosed related party
relationships and transactions.
SA 550- “RELATED PARTIES”
The requirements in this SA are designed to assist the auditor
SA 550- “Related Parties”, deals with the auditor’s responsibilities in identifying and assessing the risks of material misstatement
associated with related party relationships and transactions, and
regarding related party relationships and transactions when
in designing audit procedures to respond to the assessed risks.
performing an audit of financial statements.

SA 560, “SUBSEQUENT EVENTS”

DEFINITION OF RELATED PARTY
SA 560, “Subsequent Events” deals with the auditor’s responsibilities
A party that is either: relating to subsequent events in an audit of financial statements.
(i) A related party as defined in the
applicable financial reporting Facts
framework; or Date of the Date of the become
Events
(ii)
Where the applicable financial
However, entities financial occuring auditor's known
reporting framework establishes statements between report after the
that are under
minimal or no related party Auditor's
common control Report
requirements:
by a state (i.e., a
(a) A person or other entity that has
national, regional or Some definitions:
control or significant influence,
local government)
directly or indirectly through one
are not considered Events occurring between the date of the
or more intermediaries, over the
related unless financial statements and the date of the
reporting entity;
they engage Subsequent auditor’s report, and facts that become
(b) Another entity over which the
in significant Events known to the auditor after the date of the
reporting entity has control or auditor’s report.
transactions or
significant influence, directly or
share resources to
indirectly through one or more
a significant extent
intermediaries; or Date of
with one another. The date of the end of the latest period
(c) Another entity that is under financial
common control with the covered by the financial statements.
statements
reporting entity through having:
 Common controlling
ownership;
 Owners who are close family Date of the The date the auditor dated the report on the
members; or auditor’s financial statements in accordance with SA
 Common key management. report 700.

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 AUDITING AND ASSURANCE
OBJECTIVES OF THE AUDITOR SOME OTHER IMPORTANT POINTS:

Risk Assessment Procedures and Related Activities

Obtain sufficient Respond
appropriate audit appropriately
evidence to facts Remaining Alert throughout the Audit for Audit
Evidence about Events or Conditions

AUDIT PROCEDURE REGARDING EVENTS Events or Conditions that may Cast Significant
OCCURRING BETWEEN THE DATE OF THE Doubt on the Entity’s Ability to Continue as a
FINANCIAL STATEMENTS AND THE DATE OF Going Concern
THE AUDITOR’S REPORT
Additional Audit Procedures when Events or
Audit Procedure Conditions are Identified

Obtaining an Inquiring of
understanding management Implications for the Auditor’s Report
of procedures

(A) Use of Going Concern Basis of Accounting is Inappropriate

Reading interim
Reading financial
minutes If the financial statements have been prepared using the going
statements concern basis of accounting but, in the auditor’s judgment,
management’s use of the going concern basis of accounting in
the preparation of the financial statements is inappropriate, the
WRITTEN REPRESENTATIONS WITH auditor shall express an adverse opinion.
RESPECT TO SUBSEQUENT EVENTS
(B) Use of the Going Concern Basis of Accounting is
The auditor shall request management and, where appropriate, Appropriate but a Material Uncertainty Exists
those charged with governance, to provide a written representation
The identification of a material uncertainty is a matter that is
in accordance with SA 580, “Written Representations” that all
important to users’ understanding of the financial statements.
events occurring subsequent to the date of the financial statements
The use of a separate section with a heading that includes
and for which the applicable financial reporting framework
reference to the fact that a material uncertainty related to going
requires adjustment or disclosure have been adjusted or disclosed.
concern exists alerts users to this circumstance.

AUDITOR’S OBLIGATIONS REGARDING

SUBSEQUENT EVENTS (1) Adequate Disclosure of a Material Uncertainty is Made in
the Financial Statements
Whether How
Discuss with financial management If adequate disclosure about the material uncertainty
management statements need intends to is made in the financial statements:
amendment address?

SA 570- “GOING CONCERN”
SA 570 on “Going concern” deals with:
(I) The auditor’s responsibilities in the
audit of financial statements relating to
going concern and
OBJECTIVES OF THE AUDITOR REGARDING
GOING CONCERN
Objectives
The auditor shall express an unmodified opinion and the auditor’s
report shall include a separate section under the heading
“Material Uncertainty Related to Going Concern.”
(II) The implications
for the auditor’s
report.
(2) Adequate Disclosure of a Material Uncertainty is
Not Made in the Financial Statements
If adequate disclosure about the material uncertainty is not made
in the financial statements, the auditor shall:

To obtain sufficient appropriate audit evidence regarding, (a) Express a qualified opinion or adverse opinion,
and conclude on, the appropriateness of management’s as appropriate, in accordance with SA 705 (Revised); and
use of the going concern basis of accounting in the
preparation of the financial statements;

To conclude, based on the audit evidence obtained,
whether a material uncertainty exists related to events or
conditions that may cast significant doubt on the entity’s
ability to continue as a going concern; and
To report in accordance with this SA.
(b) In the Basis for Qualified (Adverse) Opinion section of the
auditor’s report, state that a material uncertainty exists that
may cast significant doubt on the entity’s ability to continue
as a going concern and that the financial statements do not
adequately disclose this matter.

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11
AUDITING AND ASSURANCE
CA INTERMEDIATE (NEW) - PAPER 6 – AUDITING AND ASSURANCE
It has always been the endeavour of Board of Studies to provide quality academic inputs to the students of Chartered
Accountancy Course. Keeping in mind this objective, BoS has decided to come out with a Crisp & Concise Capsule of each
subject to facilitate students for quick revision before examination. This Capsule is on Paper 6: Auditing & Assurance of
Intermediate Course. It may be mentioned that this capsule is a tool for quick revision of some significant Topics of Auditing
and Assurance and this should not be taken as a substitute for the detailed study of the subject. Students are advised to refer
to the relevant Study Material, Practice Manual and RTP for comprehensive study & revision.

CHAPTER 4: RISK ASSESSMENT AND INTERNAL CONTROL

Overview: Misstatement refers to a

Audit Risk

difference
between
Understanding Risk Identify & Assess
the Entity and Assessment & Risk of Material
its Environment Internal Control Misstatement
the amount, the amount, classification,
classification, presentation, or disclosure that
presentation, or is required for the item to be in
Risk
Assessment disclosure of a reported accordance with the applicable
Procedures financial statement item financial reporting framework

Audit Risk: Risks of Material Misstatement at Two

levels:
Audit risk means the risk that the auditor gives an (i) The overall financial statement level- Risks of material
misstatement at the overall financial statement level refer to risks
inappropriate audit opinion when the financial statement
of material misstatement that relate pervasively to the financial
are materially misstated statements as a whole and potentially affect many assertions.
(ii) The assertion level for classes of transactions, account
balances, and disclosures- Risks of material misstatement at the
assertion level are assessed in order to determine the nature, timing,
and extent of further audit procedures necessary to obtain sufficient
appropriate audit evidence.
Audit Risk = Risk of Material Misstatement x
Detection Risk
Components of Risk of Material
Misstatement:
The risks of material misstatement at the assertion level consist
Risk of material misstatement may be defined as
of two components:
the risk that the financial statements are materially
misstated prior to audit.
(i) Inherent risk and
(ii) Control risk.

Inherent risk Control risk Risk of Material Misstatement= Inherent Risk x Control Risk

• Inherent risk is higher for some

The susceptibility The risk that a transactions, account balances,
of an assertion to a misstatement that could
misstatement that could occur in an assertion and
be material before that could be material,
consideration of any will not be prevented, or
related controls. detected and corrected,
on a timely basis by the
entity’s internal control.
assertions and related classes of
and disclosures than for others.
Inherent Risk For example, it may be higher for
complex calculations.
• Inherent risk factors are considered
while designing tests of controls
and substantive procedures.

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• Control risk is a function of
the effectiveness of the design,
implementation and maintenance
Control Risk
of internal control by management.
• Auditor assesses control risk as
Rely or Not rely on Controls.
AUDITING AND ASSURANCE
What is included in Risk Assessment Procedures?
The risk assessment procedures shall include the following:
(a) Inquiries of management and of others within the entity.
(b) Analytical procedures.
(c) Observation and inspection.

The Required Understanding of the Entity

Combined Assessment of the Risk of and Its Environment, Including the Entity’s
Material Misstatement: Internal Control:
Audit Risk = Inherent Risk x Control Risk x Detection Risk Auditor to obtain understanding of:
The nature
Detection Risk Relevant of the entity, The entity’s
industry, including its The entity’s objectives
regulatory, operations, selection and and
The
The risk that and other ownership application strategies,
to reduce audit risk will not detect a measurement
the procedures external and of accounting and those
to an acceptably misstatement that and review
performed by the factors governance policies related
low level exists. of the entity’s
auditor including the structures business risks
financial
applicable that may
performance
financial result in risks
reporting of material
As per SA 315- “Identifying and Assessing the Risks of Material framework misstatement
Misstatement through understanding the entity and its
environment”

Objective of the auditor Internal Control:

To identify and at the through thereby
• As per SA-315, the internal control may be defined as
assess the risks financial understanding providing
of material statement the entity and a basis for • the process designed, implemented and maintained by
misstatements, and its environment, designing and those charged with governance, management and other
whether due to assertion including the implementing personnel
fraud or error levels entity's internal responses to • to provide reasonable assurance about the achievement of
control the assessed
risks of material an entity’s objectives,
misstatement • with regard to reliability of financial reporting,
effectiveness and efficiency of operations, safeguarding
of assets, and compliance with applicable laws and
Risk Assessment Procedures
regulations.
• The term “controls” refers to any aspects of one or more of
The audit procedures to identify and at the financial the components of internal control.
performed to obtain assess the risk statement and
an understanding of material assertions levels.
of the entity and its misstatement Objectives of Internal Control:
environment, including whether due to
the entity's internal fraud or error Transactions are executed in accordance with
control managements general or specific authorization

All transactions are promptly recorded in the correct

amount in the appropriate accounts and in the accounting
period in which executed
 Risk assessment procedure provides a basis for the
identification and assessment of risks of material misstatement
at the financial statement and assertion levels. Assets are safeguarded from unauthorised access, use or
 Information obtained by performing risk assessment disposition
procedures may be used as audit evidence.
 The risks to be assessed include both those due to error and
The recorded assets are compared with the existing assets
those due to fraud. at reasonable intervals.

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AUDITING AND ASSURANCE
(II) Controls Relevant to the Audit
The Entity’s Internal Control: The auditor shall obtain an
understanding of internal control relevant to the audit. Although There is a direct relationship between an entity’s objectives and
most controls relevant to the audit are likely to relate to financial the controls it implements to provide reasonable assurance about
reporting, not all controls that relate to financial reporting are
their achievement.
relevant to the audit. It is a matter of the auditor’s professional
judgment whether a control is relevant to the audit. Factors relevant to the auditor’s judgment about whether a
control, individually or in combination with others, is relevant
to the audit may include such matters as the following:
Benefits of Understanding of Internal Control: An understanding • Materiality.
of internal control assists the auditor in - • The significance of the related risk.
• The size of the entity.
• The nature of the entity’s business.
identifying types • The diversity and complexity of the entity’s operations.
of potential • Applicable legal and regulatory requirements.
misstatements • The circumstances and the applicable component of internal
control.
• The nature and complexity of the systems.
identifying factors • Whether, and how, a specific control, individually or in
that affect the designing the combination with others, prevents, or detects and corrects,
risks of material nature, timing, and material misstatement.
misstatement extent of further
audit procedures.
(III) Nature and Extent of the Understanding of Relevant Controls

(i) Evaluating the design of a control involves considering whether

Study of various aspects of Internal Control: the control is capable of effectively preventing, or detecting
and correcting, material misstatements.
(I) General (II) Controls (III) Nature and (IV) Implementation of a control means that the control exists and
Nature and Relevant Extent to the Components that the entity is using it.
Characteristics to the Audit. Understanding of Internal An improperly designed control may represent a significant
of Iternal of Relevant Control. deficiency in internal control.
Control Controls (ii) Risk assessment procedures to obtain audit evidence about the
design and implementation of relevant controls may include-
• Inquiring of entity personnel.
(I) General Nature and Characteristics of Internal Control • Observing the application of specific controls.
Purpose of Internal Control: • Inspecting documents and reports.
• Tracing transactions through the information system
Internal control addresses identified business relevant to financial reporting.
risks that threaten the achievement of any of (iii) Obtaining an understanding of an entity’s controls is not
the entity’s objectives that concern: sufficient to test their operating effectiveness.

The reliability of The effectiveness

the entity’s financial and efficiency of its
reporting operations (IV) Components of Internal Control

Its compliance with Components of Internal Control

Safeguarding of
applicable laws and
assets
regulations

Limitations of Internal Control The Control Entity's Risk Information Control Monitoring
Environment Assessment System Activities of Controls
Internal control can provide only reasonable assurance process

Human judgement in decision-making

A. Control Environment– Component of Internal Control

Lack of understanding the purpose The auditor shall obtain an understanding of the control
environment. As part of obtaining this understanding, the auditor
Collusion among People shall evaluate whether:
(i) Management has created and maintained a culture of honesty
and ethical behavior; and
Judgements by Management (ii) The strengths in the control environment elements collectively
provide an appropriate foundation for the other components
Limitations in case of Small Entities of internal control.

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Elements of the Control Environment
Communication and enforcement
of integrity and ethical values
Commitment to competence
Participation by those charged
with governance
Elements
Management’s philosophy and
of Control
operating style
Environment
AUDITING AND ASSURANCE
Communicating Financial Roles and Responsibilities–
Obtaining an Understanding by the Auditor: The auditor shall
obtain an understanding of how the entity communicates financial
reporting roles and responsibilities including:
(a) Communications between (b) External communications,
management and those such as those with
charged with governance; and regulatory authorities.
The following points need consideration in this regard:
(i) Understanding of Roles and Responsibilities
(ii) Understanding regarding Relation of Activities
(iii) Policy Manuals and Financial Reporting Manuals
(iv) Open Communication Channels
(v) Less structured and easier for Small Entities

Organisational structure D. Control Activities– Component of Internal Control

The auditor shall obtain an understanding of control activities

Assignment of authority relevant to the audit, which the auditor considers necessary
and responsibility to assess the risks of material misstatement. An audit requires
an understanding of only those control activities related
Human resource policies to significant class of transactions, account balance, and
and practices disclosure in the financial statements and the assertions which
the auditor finds relevant in his risk assessment process.
B. The Entity’s Risk Assessment Process– Component of Control
Environment
Control
The auditor shall obtain an understanding of whether the entity activities are management
that help ensure
has a process for: the policies and activities are
that
(a) Identifying business risks relevant to financial reporting procedures carried out
objectives;
(b) Estimating the significance of the risks;
(c) Assessing the likelihood of their occurrence; and Examples of specific control activities include those relating to
(d) Deciding about actions to address those risks. the following -

C. The information system, including the related business Authorization

processes, relevant to financial reporting and communication–
Component of Control Environment

The auditor shall obtain an understanding of the information Segregation of Performance

system, including the related business processes, relevant to Duties Reviews
financial reporting, including the following areas:

Information
(a) The classes of transactions in the entity’s operations that Physical Controls
Procressing
are significant to the financial statements;

(b) The procedures by which those transactions are initiated,
recorded, processed, corrected as necessary, transferred to the
general ledger and reported in the financial statements;
(c) Backup records
Control activities that are relevant to the audit are:
• Control activities that relate to significant risks and those that
relate to risks for which substantive procedures alone do not
provide sufficient appropriate audit evidence; or
• Those that are considered to be relevant in the judgment of
the auditor;
• As part of the risk assessment, the auditor shall determine
whether any of the risks identified are, in the auditor’s
judgment, a significant risk.

(d) How the information system captures events and conditions E. Monitoring of Controls – Component of Internal Control
that are significant to the financial statements; The auditor shall obtain an understanding of the major activities that
the entity uses to monitor internal control over financial reporting.

(e) The financial reporting process used to prepare the entity’s 1. Monitoring of Controls defined:
financial statements;
of internal
Monitoring of
to assess the control
Control is a
effectiveness performance
(f) Controls surrounding journal entries process
over time

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AUDITING AND ASSURANCE
(vi) how far and how adequately the management is discharging its
2. Helps in assessing the effectiveness of controls on a timely function in so far as correct recording of transactions is concerned;
basis
3. Management accomplishes monitoring of controls
through ongoing activities, separate evaluations, or a (vii) how reliable the reports, records and the certificates
combination of the two. to the management can be;
4. Management’s monitoring activities may include using
information from communications from external parties
such as customer complaints and regulator comments
that may indicate problems or highlight areas in need of (viii) the extent and the depth of the examination that he needs to
improvement. carry out in the different areas of accounting;
5. In case of Small Entities: Management’s monitoring of
control is often accomplished by management’s or the owner-
manager’s close involvement in operations. (ix) what would be appropriate audit technique and the audit
procedure in the given circumstances;

Monitoring of Controls– If the entity has an internal audit

function (x) what are the areas where control is weak and where it is
excessive; and
If the entity has an internal audit function, the auditor shall obtain
an understanding of the following :
(a) The internal audit function’s responsibilities and how the
internal audit function fits in the entity’s organisational (xi) whether some worthwhile suggestions can be given to
structure; and improve the control system.
(b) The activities performed, or to be performed, by the internal
audit function.
Evaluation of Internal Control– Methods

Evaluation of Internal Control by the Auditor: Evaluation of Iternal Control

with the help of

The auditor should gain an understanding of the accounting

system and related internal controls and should study and evaluate
the operations of these internal controls upon which he wishes to Narrative
rely in determining the nature, timing and extent of other audit Check List Questinnaire Flow Chart
Record
procedures.

Narrative Record
The review of internal controls will enable the auditor to know: Narrative record
of the system as
is a complete
found in by the auditor
and exhaustive
operation
description
(i) whether errors and frauds are likely to be located in the
ordinary course of operations of the business;
Check List
Check list is a
which a member
(ii) whether an adequate internal control system is in use and series of must follow
of the auditing
operating as planned by the management; instructions and/or and/or answer
staff
questions

(iii) whether an effective internal auditing department is Internal Control Questionnaire

operating;
This is a comprehensive series of questions concerning internal
control. This is the most widely used form for collecting
information about the existence, operation and efficiency of
(iv) whether any administrative control has a bearing internal control in an organisation.
on his work;

Flow Chart

(v) whether the controls adequately safeguard the assets; Flow Chart
of each part company's system
is a graphic
of the of internal control
representation

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Testing of Internal Control:
Test of controls are performed to obtain audit evidence about the
effectiveness of the:
(a) design of the accounting (b) operation of the internal
and internal control system, controls throughout the
and; period.
Test of controls may include:
Inspection of documents supporting transactions and other
events to gain audit evidence that internal controls have operated
properly.
 Inquiries about, and observation of, internal controls which
leave no audit trail.
 Re-performance involves the auditor’s independent execution of
procedures or controls that were originally performed as part of
the entity’s internal control.
 Testing of internal control operating on specific computerised
applications or over the overall information technology function.
For example, the procedure for sales requires the following:
1. Before acceptance of any order the position of
inventory of the relevant article should be known to
ascertain whether the order can be executed in time.
2. An advice under the authorisation of the sales
manager should be sent to the party placing
the order, internal reference number, and the
acceptance of the order. This advice should be
prepared on a standardised form and copy thereof
should be forwarded to inventory section to enable
it to prepare for the execution of the order in time.
3. The credit period allowed to the party should
be the normal credit period. For any special credit
period a special authorisation of the sales manager
would be necessary.
4. The rate at which the order has been accepted
and other terms about transport, insurance, etc.,
should be clearly specified.
5. Before deciding upon the credit period, a reference
should be made to the credit section to know the
creditworthiness of the party and particularly whether
the party has honoured its commitments in the past.
AUDITING AND ASSURANCE
Internal Control and IT Environment:
An entity’s system of internal control contains manual elements
and often contains automated elements. The characteristics
of manual or automated elements relevant to the auditor’s
risk assessment and further audit procedures are explained
hereunder-
(i) Controls in Manual and IT System: The use of manual or
automated elements in internal control affects the manner
in which transactions are initiated, recorded, processed, and
reported:
(1) Controls in a manual system may include such procedures
as approvals and reviews of transactions, and reconciliations
and follow-up of reconciling items. Alternatively, an entity
may use automated procedures to initiate, record, process,
and report transactions, in which case records in electronic
format replace paper documents.
(2) Controls in IT systems consist of a combination of
automated controls
(for example, controls embedded in computer programs
and manual controls.)
(ii) Use of IT: An entity’s mix of manual and automated elements
in internal control varies with the nature and complexity of the
entity’s use of IT.
(iii) Generally, IT benefits an entity’s internal control by
enabling an entity to:
Processing of large volumes of transactions or data becomes
simple:
Enhance the timeliness, availability, and acuracy of
information;
Facilitate the additional analysis of information;
Enhance the ability to monitor the performance of the entity's
activities and its policies and procedures;
Reduce the risk that controls will be circumvented; and
Effective segregation of duties through security controls.
(iv) IT also poses specific risks to an entity’s internal control,
including, for example:
• Reliance on systems or programs that are inaccurately
processing data, processing inaccurate data, or both.
• Unauthorised access to data that may result in destruction of
data or improper changes to data.
• The possibility of IT personnel gaining access privileges beyond
those necessary to perform their assigned duties thereby
breaking down segregation of duties.
• Unauthorised changes to data in master files.
• Unauthorised changes to systems or programs.
• Failure to make necessary changes to systems or programs.
• Inappropriate manual intervention.
• Potential loss of data or inability to access data as required.
(v) Suitability: Manual elements in internal control may be more
suitable where judgment and discretion are required.
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AUDITING AND ASSURANCE
(vi) Reliability: Manual elements in internal control may be less Internal Audit:
reliable than automated elements because they can be more
easily bypassed, ignored, or overridden. An independent management function
(vii)Nature of Entity’s Information System: The extent and
nature of the risks to internal control vary depending on the
nature and characteristics of the entity’s information system. which involves a continuous and critical appraisal
The entity responds to the risks arising from the use of IT or
from use of manual elements in internal control by establishing
effective controls in light of the characteristics of the entity’s
information system. of the functioning of an entity with a view to suggest
improvements thereto

and add value to and strengthen the overall governance

Materiality and Audit Risk: mechanism of the entity

Audit risk is the risk that the auditor expresses an inappropriate including the entity’s strategic risk management and
audit opinion when the financial statements are materially internal control system
misstated.

Applicability of Provisions of Internal Audit

As per section 138 of the Companies Act, 2013 the following

 Audit risk is a function of the risks of material misstatement class of companies (prescribed in rule 13 of Companies
and detection risk. (Accounts) Rules, 2014) shall be required to appoint an internal
auditor or a firm of internal auditors, namely-

(a) every listed company;

Materiality and audit risk are considered throughout the
audit, in particular, when:
(a)Identifying (b) Determining the (c) Evaluating the (b) every unlisted public company having-
and assessing the nature, timing and effect of uncorrected
(i) paid up (ii) turnover (iii) outstanding (iv) outstanding
risks of material extent of further misstatements, if
share capital of two loans or deposits of
misstatement; audit procedures; any, on the financial
of fifty crore hundred borrowings twenty five
and statements and in
rupees crore rupees from banks or crore rupees
forming the opinion in
or more or more public financial or more at
the auditor’s report.
during the during the institutions any point of
preceding preceding exceeding one time during
financial financial year; hundred crore the preceding
year; or or rupees or more financial year;
Documenting the Risk: at any point and
of time during
the preceding
The auditor shall document: financial year; or
(a) The (b) Key (c) The (d) The risks
discussion elements of the identified and identified,
among the understanding assessed risks and related (c) every private company having-
engagement obtained of material controls about
team and the regarding misstatement which the (i) turnover of two hundred (ii) outstanding loans or
significant each of the at the financial auditor has crore rupees or more during the borrowings from banks or public
decisions aspects of the statement level obtained an preceding financial year; or financial institutions exceeding
reached; entity and its and at the understanding. one hundred crore rupees or
environment assertion level; more at any point of time during
and of each of and the preceding financial year.
the internal
control
components;
It is provided that an existing company covered under any of
the above criteria shall comply with the requirements within six
months of commencement of such section.

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 AUDITING AND ASSURANCE
Who can be appointed as Internal Auditor? Auditors’ Responsibility for Reporting on Internal Financial
Controls over Financial Reporting in India
As per section 138, the internal auditor shall either be a chartered
accountant or a cost accountant (whether engaged in practice or Clause (i) of Sub-section 3 of Section 143 of the Act requires the
not), or such other professional as may be decided by the Board auditors’ report to state whether the company has adequate internal
to conduct internal audit of the functions and activities of the financial controls system in place and the operating effectiveness of
companies. The internal auditor may or may not be an employee such controls.
of the company.
Objective of an auditor in an audit of internal financial
controls over financial reporting is to express an opinion on the
The objectives and scope of internal audit function effectiveness of the company’s internal financial controls over
financial reporting. It is carried out along with an audit of the
As per SA-610, “Using the Work of an Internal Auditor”, the financial statements.
objectives of internal audit functions vary widely and depend
Rule 8(5)(viii) of the Companies (Accounts) Rules, 2014
on the size and structure of the entity and the requirements of
requires the board report of all companies to state the details in
management and, where applicable, those charged with governance.
respect of adequacy of internal financial controls with reference to
The objectives and scope of internal audit functions typically the financial statements.
include assurance and consulting activities designed to evaluate
and improve the effectiveness of the entity’s governance processes,
risk management and internal control such as the following:
Difference between Internal Financial
Control and Internal Control over Financial
Activities relating to
Governance
Reporting:
Evaluation of Internal
Internal Audit

Control
Function

Activities relating to
Risk Management
Examination of
Financial and Operating
Information
Activities relating to Internal Financial Control
Internal Control as per Section 134(5)(e),
Review of Operating
Activities “the policies and procedures
Internal controls over
adopted by the company
financial reporting-is
for ensuring the orderly
required where auditors
and efficient conduct of
Review of Compliance are required to express an
its business, including
with Laws & Regulations opinion on the effectiveness
adherence to company’s
of an entity’s internal
policies, the safeguarding
controls over financial
of its assets, the prevention
reporting, such opinion is
and detection of frauds
in addition to and distinct
and errors, the accuracy
from the opinion expressed
Basics of Internal Financial Control and Re- and completeness of the
by the auditor on the
porting Requirements: accounting records, and
the timely preparation
financial statements.
Clause (e) of Sub-section 5 of Section 134 explains the meaning of reliable financial
of internal financial controls as, information.

the policies and procedures adopted by the company for ensuring

the orderly and efficient conduct of its business

including adherence to company’s policies, the safeguarding of

its assets

the prevention and detection of frauds and errors

The best executive is one who has sense enough to

the accuracy and completeness of the accounting records pick good people to do what he wants done, and self-
restraint enough to keep from meddling
with them while they do it
and the timely preparation of reliable financial — Theodore Roosevelt
information

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AUDITING & ASSURANCE
AUDIT REPORT
The Auditor’s Report on
Financial Statements
The SA 700 series is purely
dedicated to the auditor
report to be issued by
the auditor. Here, we are
discussing SA 700, SA 701,
SA 705 and SA 706
SA-700 Forming an Opinion and Reporting on
Financial Statements
Objective • Forming opinion on the financial statements.
• Form and content of the audit report.
Basic Elements of the Auditor’s Report: The auditor’s
report includes the following basic elements, which ordinarily
includes in case of Auditors’ Report for Audits Conducted in
Accordance with Standards on Auditing:
1. Title
2. Addressee shall be addressed as required by the
circumstances of the engagement
3. Auditor’s The first section of the auditor’s report
Opinion: shall include the auditor’s opinion, and
shall have the heading “Opinion.”
The Opinion section of the auditor’s
report shall also:
(a) Identify the entity whose financial
statements have been audited;
(b) State that the financial statements
have been audited;
(c) Identify the title of each statement
comprising the financial statements;
(d) Refer to the notes, including the
summary of significant accounting
policies; and
(e) Specify the date of, or period
covered by, each financial
statement comprising the financial
statements.
If the reference to the applicable financial
reporting framework in the auditor’s
opinion is not to Accounting Standards,
the auditor’s opinion shall identify the
origin of such other framework.
4. Basis for The auditor’s report shall include a section,
Opinion: directly following the Opinion section,
with the heading “Basis for Opinion”, that:
(a) States that the audit was conducted
in accordance with Standards on
Auditing;
(b) Refers to the section of the auditor’s
report that describes the auditor’s
responsibilities under the SAs;
(c) Includes a statement that the
auditor is independent of the
entity in accordance with the
relevant ethical requirements
relating to the audit, and has
fulfilled the auditor’s other ethical
responsibilities in accordance with
these requirements. The statement
shall refer to the Code of Ethics
issued by ICAI
24 January 2020 The Chartered Accountant Student
20
(d) States whether the auditor believes
that the audit evidence the auditor
has obtained is sufficient and
appropriate to provide a basis for
the auditor’s opinion. ;
5. Going Where applicable, the auditor shall report
Concern: in accordance with SA 570.
6. Key Audit For audits of complete sets of general
Matters purpose financial statements of listed
entities, the auditor shall communicate
key audit matters in the auditor’s report in
accordance with SA 701.
7. Responsibilities for the Financial Statements:
This section of the auditor’s report shall
describe management’s responsibility for:
(a) Preparing the (b) Assessing the entity’s
financial statements in ability to continue as a
accordance with the going concern and whether
applicable financial the use of the going
reporting framework, concern basis of accounting
and for such internal is appropriate as well as
control as management disclosing, if applicable,
determines is necessary matters relating to going
to enable the preparation concern. The explanation
of financial statements of management’s
that are free from responsibility for this
material misstatement, assessment shall include
whether due to fraud or a description of when the
error; and use of the going concern
basis of accounting is
appropriate.
8. Auditor’s Responsibilities for the Audit of the Financial
Statements: The auditors report shall include a section
with the heading “Auditor’s Responsibilities for the Audit
of the Financial Statements.”
(I) This section of the auditor’s report shall:
(a) State that the objectives of the auditor are to:
(i) Obtain reasonable assurance about whether the
financial statements as a whole are free from
material misstatement, whether due to fraud or
error; and
(ii) Issue an auditor’s report that includes the auditor’s
opinion.
(b) State that reasonable assurance is a high level
of assurance, but is not a guarantee that an audit
conducted in accordance with SAs will always
detect a material misstatement when it exists; and
(c) State that misstatements can arise from fraud or
error, and either:
(i) Describe that they are considered material if,
individually or in the aggregate, they could reasonably
be expected to influence the economic decisions of
users taken on the basis of these financial statements;
or
(ii) Provide a definition or description of materiality in
accordance with the applicable financial reporting
framework.
 AUDITING & ASSURANCE
(II) The Auditor’s Responsibilities for the Audit of the Financial In accordance with the requirements of SA 701,
Statements section of the auditor’s report shall further: the auditor describes these matters in the auditor’s
report unless law or regulation precludes public
To exercises professional judgment and disclosure about the matter or when, in extremely rare
maintains professional skepticism throughout
the audit as per SAs; circumstances, the auditor determines that a matter
should not be communicated in the auditor’s report
because the adverse consequences of doing so would
To identify and
reasonably be expected to outweigh the public interest
assess the risks
of material benefits of such communication.
misstatement accounting
To describe of the FS 9. Location of the description of the auditor’s
policies responsibilities for the audit of the financial statements:
an audit by used
The description of the auditor’s responsibilities for the
Auditor’s Responsibilities for the Audit of the Financial Statements

stating that
the auditor’s To obtain an audit of the financial statements required by this SA shall
responsibilities understanding be included:
are: of internal reasonable-
control relevant ness of
for audit to accounting
design audit estimates (c) By a specific
procedures
reference within
To describe
the auditor’s related (b) Within an the auditor’s
responsibilities To evaluate the disclosures appendix to the report to the
appropriateness made by (a) Within
in a group audit auditor’s report, location of such
engagement as of: manage- the body of
in which case the a description
per SA 600. ment. the auditor’s
auditor’s report on a website of
To conclude report;
on the shall include a an appropriate
appropriateness reference to the authority, where
of location of the law, regulation
management’s appendix; or or the auditing
use of the going standards
concern basis
expressly permit
the auditor to
to evaluate do so.
the overall
presentation,
structure and
content of
the financial When the auditor refers to a description of the auditor’s
statements responsibilities on a website of an appropriate authority, the
auditor shall determine that such description addresses, and is
(III) The Auditor’s Responsibilities for the Audit of the Financial not inconsistent with, the requirements of this SA.
Statements section of the auditor’s report also shall: 10. O ther Reporting Responsibilities:
(a) State that the auditor communicates with those 11. Signature of the Auditor: The auditor’s report shall be
charged with governance regarding, among other signed.
matters: ♦ The report is signed by the auditor (i.e. the engagement
♦ the planned scope and timing of the audit and partner) in his personal name.
♦ significant audit findings,
♦ Where the firm is appointed as the auditor, the report is
♦ including any significant deficiencies in internal
control that the auditor identifies during the audit; signed in the personal name of the auditor and in the
(b) State that the auditor provides those charged with name of the audit firm.
governance with a statement that the auditor has: ♦ The partner/proprietor signing the audit report also needs
♦ complied with relevant ethical requirements regarding to mention the membership number assigned by the
independence and Institute of Chartered Accountants of India. They also
♦ communicate with them all relationships and include the registration number of the firm, wherever
♦ other matters that may reasonably be thought to bear applicable, as allotted by ICAI, in the audit reports signed
on the auditor’s independence, and where applicable,
by them.
related safeguards; and
12. Place of Signature: The auditor’s report shall name
(c) For audits of financial statements of all such entities
for which key audit matters are communicated in specific location where the audit report is signed.
accordance with SA 701, state that, from the matters 13. D ate of the Auditor’s Report: The auditor’s report shall
communicated with those charged with governance, be dated no earlier than the date on which the auditor has
the auditor determines those matters that were of most obtained sufficient appropriate audit evidence on which
significance in the audit of the financial statements of the to base the auditor’s opinion on the financial statements,
current period and are therefore the key audit matters. including evidence that:

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21
AUDITING & ASSURANCE
may refer to Standards on Auditing in addition to the
(a) All the statements that comprise the International Standards on Auditing or auditing standards of
financial statements, including the related such other jurisdiction, but the auditor shall do so only if:
notes, have been prepared; and
(a) There is no conflict between the requirements in the ISAs
or such auditing standards of other jurisdiction and those
(a) Those with the recognized authority in SAs that would lead the auditor:
have asserted that they have taken (i) to form a different opinion, or
responsibility for those financial (ii) not to include an Emphasis of Matter paragraph or Other
statements. Matter paragraph that,
in the particular circumstances, is required by SAs; and
(b) The auditor’s report includes, at a minimum, each of the
Auditor’s Report Prescribed by Law or Regulation: If the elements set out in Auditor’s Report Prescribed by Law
auditor is required by law or regulation applicable to the entity
or Regulation discussed above when the auditor uses the
to use a specific layout, or wording of the auditor’s report, the
auditor’s report shall refer to Standards on Auditing only if the layout or wording specified by the Standards on Auditing.
auditor’s report includes, at a minimum, each of the following However, reference to “law or regulation” in above
elements paragraph shall be read as reference to the Standards on
(1) A title. Auditing. The auditor’s report shall thereby identify such
(2) An addressee, as required by the circumstances of the Standards on Auditing.
engagement. When the auditor’s report refers to both the ISAs or the
(3) An Opinion section containing an expression of opinion on auditing standards of a specific jurisdiction and the Standards
the financial statements and a reference to the applicable on Auditing issued by ICAI, the auditor’s report shall clearly
financial reporting framework used to prepare the financial identify the same including the jurisdiction of origin of the
statements. other auditing standards.
(4) An identification of the entity’s financial statements that have Supplementary Information Presented with the Financial
been audited. Statements:
(5) A statement that the auditor is independent of the entity in If supplementary information that is not required by the
accordance with the relevant ethical requirements relating applicable financial reporting framework is presented with
to the audit, and has fulfilled the auditor’s other ethical the audited financial statements, the auditor shall evaluate:
responsibilities in accordance with these requirements. The ♦ whether, in the ♦ whether such supplementary
statement shall refer to the Code of Ethics issued by ICAI. auditor’s professional information is presented in a
(6) Where applicable, a section that addresses, and is not j u d g m e n t , way that sufficiently and clearly
inconsistent with, the reporting requirements of SA 570. supplementary
differentiates it from the audited
information is
(7) Where applicable, a Basis for Qualified (or Adverse) Opinion nevertheless an financial statements. If this is not
section that addresses, and is not inconsistent with, the integral part of the the case, then the auditor shall
reporting requirements of SA 570 (Revised). financial statements ask management to change how
(8) Where applicable, a section that includes the information due to its nature or the unaudited supplementary
required by SA 701, or additional information about the audit how it is presented. information is presented. If
When it is an management refuses to do so, the
that is prescribed by law or regulation and that addresses, and integral part of the
is not inconsistent with, the reporting requirements in that financial statements, auditor shall identify the unaudited
SA 701. the supplementary supplementary information and
(9) A description of management’s responsibilities for the information shall explain in the auditor’s report that
preparation of the financial statements and an identification be covered by the such supplementary information
auditor’s opinion. has not been audited.
of those responsible for the oversight of the financial
reporting process that addresses, and is not inconsistent with,
the requirements. SA-701 Communicating Key Audit Matters in
(10) A reference to Standards on Auditing and the law or the Independent Auditor’s Report
regulation, and a description of the auditor’s responsibilities
Objective • To enhance the communicative value
for an audit of the financial statements that addresses, and is
of the auditor’s report by providing
not inconsistent with, the requirements.
greater transparency about the audit
(11) The auditor’s signature. that was performed.
(12) The Place of signature • To assist the user in understanding
(13) The date of the auditor’s report. those matters that, in the auditor’s
Auditor’s Report for Audits Conducted in Accordance professional judgment, were of most
with Both Standards on Auditing Issued by ICAI and significance in the audit of the financial
International Standards on Auditing or Auditing Standards statements of the current period.
of Any Other Jurisdiction. In this case, the auditor’s report

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 AUDITING & ASSURANCE
Definition Key Audit matter are those matters that, Communicating The introductory language in this section
of Key Audit in the auditor’s professional judgment, Key Audit of the auditor’s report shall state that:
Matters were of most significance in the audit of Matters:
the financial statements of the current (a) Key audit matters are those matters
that, in the auditor’s professional
period. Key audit matters are selected from judgment, were of most significance in
matters communicated with those charged the audit of the financial statements [of
with governance. the current period]; and.
Scope: (b) These matters were addressed in
Communicating a substitute
for the auditor the context of the audit of the financial
key audit statements as a whole, and in forming
expressing a
matters in the the auditor’s opinion thereon, and the
modified opinion
auditor’s report a substitute for auditor does not provide a separate
when required by
is not: disclosures in opinion on these matters.
the circumstances
the financial
of a specific audit
statements;
engagement in
accordance with SA-705 Modifications to the Opinion in the
SA 705; Independent Auditor’s Report
Scope: ♦ This SA deals with the auditor’s
a substitute for a separate responsibility to issue an appropriate
reporting in opinion on report in circumstances when, in
accordance with individual forming an opinion in accordance
SA 570 or matters. with SA 700 (Revised), the auditor
concludes that a modification to the
Applicability of ♦ It is intended to address both the auditor’s opinion on the financial
SA 701 auditor’s judgment as to what to statements is necessary.
communicate in the auditor’s report ♦ This SA also deals with how the form
and the form and content of such and content of the auditor’s report is
communication affected when the auditor expresses a
♦ This SA applies to audits of complete modified opinion.
sets of general purpose financial
statements of : Objective The objective of the auditor is to express
 listed entities and clearly an appropriately modified opinion
 circumstances when the auditor on the financial statement that is necessary
otherwise decides to communicate when:
key audit matters in the auditor’s (a) The auditor concludes, based on the
report and audit evidence obtained, that the
 required by law or regulation to financial statements as a whole are not
communicate key audit matters in free from material misstatement; or
the auditor’s report (b) The auditor is unable to obtain
However, SA 705 (Revised) prohibits the sufficient appropriate audit evidence
auditor from communicating key audit to conclude that the financial
matters when the auditor disclaims an statements as a whole are free from
opinion on the financial statements, material misstatement.
unless such reporting is required by law or
regulation Types of Types of (i) Qualified Opinion
Modified Modified
Determining Key Audit Matters: The auditor shall (ii) Adverse Opinion
Opinion Opinions as
determine, from the matters communicated with those per SA 705: (iii) Disclaimer of Opinion
charged with governance, those matters that required
The decision regarding which type
significant auditor attention in performing the audit. In
of modified opinion is appropriate
making this determination, the auditor shall take into account
depends upon:
the following:
(a) The nature of the matter giving rise
to the modification, that is, whether
(a)Areas (b) Significant auditor (c) The effect the financial statements are materially
of higher judgments relating to on the audit
assessed risk areas in the financial of significant misstated or, in the case of an inability
of material statements that events or to obtain sufficient appropriate audit
misstatement, transactions
involved significant evidence, may be materially misstated;
or significant that occurred
risks identified management judgment, during the and
in accordance including accounting period. (b) The auditor’s judgment about the
with SA 315 estimates that have been
identified as having high pervasiveness of the effects or possible
estimation uncertainty. effects of the matter on the financial
statements.

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AUDITING & ASSURANCE
Requirements (b) If the auditor concludes that the possible effects on
Circumstances When a Modification to the Auditor’s the financial statements of undetected misstatements,
Opinion is Required: if any, could be both material and pervasive so that a
The auditor shall modify the opinion in the auditor’s report qualification of the opinion would be inadequate to
when: communicate the gravity of the situation, the auditor
The auditor concludes that, The auditor is unable to shall:
based on the audit evidence obtain sufficient appropriate (i) Withdraw from the audit, where practicable and
obtained, the financial audit evidence to conclude possible under applicable law or regulation; or
statements as a whole are that the financial statements (ii) If withdrawal from the audit before issuing the auditor’s
not free from material as a whole are free from report is not practicable or possible, disclaim an opinion
misstatement; or material misstatement. on the financial statements.

Determining the Type of Modification to the Auditor’s If the auditor decides to withdraw: When the auditor
Opinion: decides to withdraw before withdrawing, the auditor shall
Qualified Opinion: The auditor shall express a qualified communicate to those charged with governance any matters
opinion when: regarding misstatements identified during the audit that
(a) The auditor, having obtained sufficient appropriate audit would have given rise to a modification of the opinion.
evidence, concludes that misstatements, individually or Other Considerations Relating to an Adverse Opinion
in the aggregate, are material, but not pervasive, to the or Disclaimer of Opinion: When the auditor considers it
financial statements; or necessary to express an adverse opinion or disclaim an opinion
(b) The auditor is unable to obtain sufficient appropriate on the financial statements as a whole, the auditor’s report
audit evidence on which to base the opinion, but the shall not also include an unmodified opinion with respect to
auditor concludes that the possible effects on the financial the same financial reporting framework on a single financial
statements of undetected misstatements, if any, could be statement or one or more specific elements, accounts or
material but not pervasive. items of a financial statement. To include such an unmodified
Adverse Opinion: The auditor shall express an adverse opinion opinion in the same report in these circumstances would
when the auditor, having obtained sufficient appropriate audit contradict the auditor’s adverse opinion or disclaimer of
evidence, concludes that misstatements, individually or in the opinion on the financial statements as a whole.
aggregate, are both material and pervasive to the financial Unless required by law or regulation, when the auditor
statements. disclaims an opinion on the financial statements, the auditor’s
Disclaimer of Opinion: The auditor shall disclaim an opinion report shall not include a Key Audit Matters section in
when the auditor is unable to obtain sufficient appropriate accordance with SA 701.
audit evidence on which to base the opinion, and the auditor
concludes that the possible effects on the financial statements Communication with Those Charged with Governance:
of undetected misstatements, if any, could be both material When the auditor expects to modify the opinion in the
and pervasive auditor’s report, the auditor shall communicate with those
Consequence of an Inability to Obtain Sufficient charged with governance the circumstances that led to the
Appropriate Audit Evidence Due to a Management- expected modification and the wording of the modification.
Imposed Limitation after the Auditor Has Accepted the
Nature of Matter Auditor’s judgment about the
Engagement Giving Rise to the Pervasiveness of the Effects or
The auditor need to express a qualified opinion or to disclaim Modification: Possible Effects on the Financial
an opinion on the financial statements and auditor shall Statements
request that management remove the limitation.
Material but Material and
If management refuses to remove the limitation, the auditor
not pervasive pervasive
shall communicate the matter to those charged with
governance, unless all of those charged with governance are Financial Qualified Adverse Opinion
involved in managing the entity, and determine whether it is Statements Opinion
possible to perform alternative procedures to obtain sufficient are materially
appropriate audit evidence. misstated
If the auditor is unable to obtain sufficient appropriate audit Inability to Qualified Disclaimer of
evidence, the auditor shall determine the implications as obtain Sufficient Opinion Opinion
follows: appropriate audit
evidence
(a) If 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 qualify the opinion;
or

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 AUDITING & ASSURANCE
SA-706
Emphasis of Matter Paragraphs and Other Matter Paragraphs in
the Independent Auditor’s Report

Scope
♦ This SA deals with additional communication in the auditor’s report when the auditor considers it necessary to draw
users’ attention to a matter or matters
♦ (a) presented or disclosed in the financial statements that are of such importance that they are fundamental to users’
understanding of the financial statements; or
♦ (b) other than those presented or disclosed in the financial statements that are relevant to users’ understanding of the
audit, the auditor’s responsibilities or the auditor’s report.

Objectives
♦ The objective of the auditor, having formed an opinion on the financial statements, is to draw users’ attention, when in
the auditor’s judgment it is necessary to do so, by way of clear additional communication 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.

Definitions
♦ Emphasis of Matter paragraph : A paragraph included in the auditor’s report that refers to a matter appropriately
presented or disclosed in the financial statements that, in the auditor’s judgment, is of such importance that it is
fundamental to users understanding of the financial statements.
♦ Other Matter paragraph: A paragraph included in the auditor’s report that refers to a matter other than those
presented or disclosed in the financial statements that, in the auditor’s judgment, is relevant to users’ understanding
of the audit, the auditor’s responsibilities or the auditor’s report.

Requirements
♦ Emphasis of Matter Paragraphs in the Auditor’s Report
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.
♦ Other Matter Paragraphs in the Auditor’s Report
If the auditor considers it necessary to communicate a matter other than those that are presented or disclosed in
the financial statements that, in the auditor’s judgment, is relevant to users’ understanding 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.
The auditor shall include the paragraph within a separate section with the heading “Other Matter,” or other
appropriate heading.
♦ Communication with Those Charged with Governance
If the auditor expects to include an Emphasis of Matter or an Other Matter paragraph in the auditor’s report, the
auditor shall communicate with those charged with governance regarding this expectation and the wording of this
paragraph.

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AUDITING AND ASSURANCE
CHAPTER 12: BANK AUDIT
Types of banks in India: ♦ Report on compliance with SLR requirements
c
Commercial Banks. Regional Rural Banks.
Co-operative Banks. Payment Banks.
♦ Report on whether the treasury operations of the
Development Banks (more commonly Small Finance Banks. bank have been conducted in accordance with the
known as ‘Term-Lending Institutions’). d instructions issued by the RBI from time to time.

♦ Report on whether the income recognition, asset

Major Functions of Bank: classification and provisioning have been made as per
e the guidelines issued by the RBI from time to time.

♦ Report on whether any serious irregularity was

noticed in the working of the bank which requires
f immediate attention.

Granting
Advances ♦ Report on status of the compliance by the bank with
regard to the implementation of recommendations
Accepting
g of the Ghosh Committee relating to frauds and
Deposits Two major functions malpractices and of the recommendations of Jilani
of bank Committee on internal control and inspection/
credit system.

♦ Report on instances of adverse credit-deposit ratio in

the rural areas.
Regulatory Framework: h

Banking Regulation Act, 1949. State Bank of India Act, 1955.

Companies Act, 2013.
Banking Companies (Acquisition and Transfer of Undertakings)
Act, 1970.
Regional Rural Banks Act, 1976.
Banking Companies (Acquisition and Transfer of Undertakings)
Act, 1980.
Information Technology Act, Prevention of Money
2000. Laundering Act, 2002.
Securitisation and Reconstruction of Financial Assets and
Enforcement of Security Interest Act, 2002.
Credit Information Companies Regulation Act, 2005.
Payment and Settlement Systems Act, 2007.
Types of Audit Reports to be issued (generally):
Presently, the Statutory Central Auditors (SCAs) have to furnish
the following reports in addition to their main audit report:
♦ Report on adequacy and operating effectiveness of
a Internal Controls over Financial Reporting in case
of banks which are registered as companies under
the Companies Act in terms of Section 143(3)(i) of
the Companies Act, 2013.
♦ Long Form Audit Report
b • What is the time frame for resolving the
Performing Control Activities:
Nature of Questions to be considered / answered
Questions
Who • Who performs the control?
• Does the above person have requisite knowledge
and authority to perform the control?
What • What evidence is available to demonstrate /
prove that the control is performed?
When • When and with what frequency is the control
performed?
• Is the frequency enough to prevent, detect and
correct risk of material misstatements?
Where • Where is the evidence of performance of the
control retained?
• For how long is the evidence retained?
• Is the evidence accessible/ available for audit?
Why • Why is the control being performed?
• What type of errors are prevented or detected
through the performance of the control?
How • How is the control performed?
• What are the control activities?
• Can these activities be bypassed?
• Can the bypass, if any, be detected?
• How are exceptions/deviations resolved on
identification?
exceptions?

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 AUDITING AND ASSURANCE
The Bank Auditor: 8. Develop the Audit Plan

• ELIGIBILITY, QUALIFICATIONS AND 9. Audit Planning Memorandum

1. DISQUALIFICATIONS OF AUDITOR
• Section 141 of the Companies Act, 2013
10. Determine Audit Materiality
• APPOINTMENT OF AUDITOR
2. • The auditor of a banking company is to be appointed
at the Annual General Meeting of the shareholders, 11.Consider Going Concern
whereas the auditor of a nationalised bank is to be
appointed by the bank concerned acting through its
Board of Directors. 12. Assess the Risk of Fraud including Money Laundering

• REMUNERATION OF AUDITOR
• The remuneration of auditor of a banking company 13. Assess Specific Risks
3.
is to be fixed in accordance with the provisions of
Section 142 of the Companies Act, 2013
14. Risk Associated with Outsourcing of Activities
• POWERS OF AUDITOR
4. • The auditor of a banking company, nationalised bank,
State Bank of India, subsidiary of State Bank of India 15. Response to the Assessed Risks
or regional rural bank has the same powers as those
of a company’s auditor in the matter of access to the
16. Stress Testing
books, accounts, documents and vouchers

• CONDUCTING A BANK AUDIT 17. BASEL III Framework

5.

18. Reliance on / review of other reports

Conducting an Audit:
1. Initial consideration by the statutory auditor:

Internal
Advances:
Declaration of Assignments in
Planning Term loans
Indebtness Banks by Statutory
Auditors
Cash credits, Overdrafts,
Communication Demand Loans
Terms of Audit Initial
with Previous
Auditor
Engagement Engagements Bills Discounted
and Purchased
Advances
comprise of Balances in Deposit Accounts
Understanding
Assessment of Establishment of
the Bank & Its
Engagement Risk Engagement Team
Environment
Participation on Risk
Sharing basis

2. Identifying and Assessing the Risks of Material Misstatements

Interest-bearing Staff Loans

3. Understanding the Bank and its Environment including

Internal Control Legal requirements of Disclosure in the Balance Sheet:

A. B.
4. Understanding the Bank’s Accounting Process (i) Bills purchased and (i) Secured by tangible
discounted assets
(ii) Cash credits, Overdrafts (ii) Covered by Bank/
5. Understanding the Risk Management Process and loans repayable on Government guarantees
(a) Oversight and involvement in the control process by those demand (iii) Unsecured
charged with governance (iii) Term Loans
(b) Identification, measurement and monitoring of risks
(c) Control activities
(d) Monitoring activities C.I. Advances in India: C.II. Advances outside India
(e) Reliable information systems
(i) Priority sectors (i) Due from Banks
(ii) Public sector (ii) Due from Others:
6. Engagement Team Discussions (iii) Banks (a) Bills Purchased and discounted
(iv) Others (b) Syndicated loans
7. Establish the Overall Audit Strategy - SA 300 “Planning an (c) Others
Audit of financial Statements’’

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AUDITING AND ASSURANCE
Provisioning of NPA
Classification of Advances:
Categories of Non-Performing Assets: Provision required
Priority • Substandard Assets:
Would be one, which has remained
Sector wise 15%
NPA for a period less than or equal to
Internal Auditor Function

Non Priority 12 months.

• Doubtful Assets:
Would be one, which has remained in
Secured the substandard category for a period
Security wise of 12 months.
Unsecured Sub-categories: (Secured + Unsecured)
Doubtful up to 1 Year (D1) 25% + 100%
Doubtful 1 to 3 Years (D2) 40% + 100%
Standard Doubtful more than 3 Years (D3) 100% + 100%
Prudential Norms • Loss Assets:
NPAs Would be one, where loss has been
identified by the bank or internal or 100%
external auditors or the RBI inspection
Classification of Advances as per RBI Prudential Norms but the amount has not been written off
wholly.
Classification of Advances as per
Prudential Norms
Drawing Power:
Meaning :- Drawing Power generally addressed as “DP” is an
important concept for Cash Credit (CC) facility availed from
banks and financial institutions. Drawing power is the limit up
Standard Loans NPA Loans to which a firm or company can withdraw from the working
capital limit sanctioned.

Standard SMA - Special Sub-Standard Different from Sanction Limit:- The Sanctioned limit is
Regular Mention Accounts the total exposure that a bank can take on a particular client
for facilities like cash credit, overdraft, export packing credit,
SMA 0 (Accounts Doubtful non-funded exposures etc. On the other hand, Drawing Power
showing stress signals) [D1/D2/D3] refers to the amount calculated based on primary security less
margin as on a particular date.
SMA 1 (Overdue Loss
between 31 to 60 days)
Considerations:- All accounts should be kept within both
the drawing power and the sanctioned limit at all times. The
SMA 2 (Overdue accounts which exceed the sanctioned limit or drawing power
between 61 to 90 days) or are against unapproved securities or are otherwise irregular
should be brought to the notice of the Management/Head
Office regularly.
Non-Performing Asset (NPA):
A non-performing asset (NPA) is a loan or an advance where :-
Bank’s Duties:- Banks should ensure that drawings in the
• interest and / or installment of principal remain overdue for a working capital account are covered by the adequacy of the
period of more than 90 days in respect of a term loan; current assets. Drawing power is required to be arrived at
• the account remains 'out of order' in respect of an Overdraft / based on current stock statement which should not be older
Cash Credit (OD / CC); than three months otherwise it is deemed as irregular.
• the bill remains overdue for a period of more than 90 days in the
case of bills purchased and discounted.
Auditor’s Concern:- The stock statements, quarterly returns
and other statements submitted by the borrower to the bank
Income Recognition :- Income from non- should be scrutinized in detail. The audited Annual Report
performing assets (NPA) is not recognized on submitted by the borrower should be scrutinized properly. The
accrual basis but is booked as income only when monthly stock statement of the month for which the audited
it is actually received. accounts are prepared and submitted should be compared and
the reasons for deviations, if any, should be ascertained.

Borrower Wise :- Asset classification would Stock Audit:- The stock audit should be carried out by the
be borrower-wise and not facility-wise. All bank for all accounts having funded exposure of more than R5
facilities including investments in securities crores. Auditors can also advise for stock audit in other cases if
would be termed as NPA. the situation warrants the same.

Record of Recovery :- Classification as NPA
should be based on the record of recovery.
Availability of security or net worth of
borrower/guarantor is not to be taken into
account for purpose of treating an advance as
NPA or otherwise.
Computation of DP:- DP needs to be calculated as per the
extant guidelines formulated by the Board of Directors of the
respective bank and agreed upon by the concerned Statutory
auditors. Special consideration should be given to proper
reporting of sundry creditors for the purposes of calculating
drawing power.

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 AUDITING AND ASSURANCE
Audit of Advances:

Evaluation of internal controls over

In carrying out The auditor can
advances
audit of advances, the auditor is obtain sufficient
primarily concerned with obtaining appropriate audit
evidence about the following: evidence about In general, the internal controls over advances
advances by: should include the following:
a) Amounts included in balance sheet in
respect of advances which are outstanding a) The bank should make an advance only after
at the date of the balance sheet. a) examining the satisfying itself as to the creditworthiness of
validity of the recorded the borrower and after obtaining proper
b) Advances represent amount due to the
amounts; sanctions.
bank.
examining loan (b) All the necessary documents should be
c) Amounts due to the bank are
documentation; executed.
appropriately supported by loan
documents and other documents as b) reviewing the (c) The compliance with the terms of sanction
applicable to the nature of advances. operation of the and end use of funds should be ensured.
d) There are no unrecorded advances. accounts; (d) Sufficient margin as specified in the
c) examining the sanction letter should be kept.
e) The stated basis of valuation of
advances is appropriate and properly existence, enforceability (e) If the securities are in the nature of shares,
applied and therecoverability of advances and valuation of the debentures, etc., the ownership of the same
is recognised in their valuation. security; should be transferred in the name of the bank.
f ) The advances are disclosed, classified d) checking compliance (f ) Drawing power register should be updated
and described in accordance with with RBI norms every month.
recognised accounting policies and including appropriate (g) The accounts should be kept within both
practices and relevant statutory and classification and the drawing power and the sanctioned limit.
regulatory requirements. provisioning; and (h) All the accounts which exceed the
g) Appropriate provisions towards e) carrying out sanctioned limit or drawing power should be
advances have been made as per the appropriate analytical brought to the notice of controlling authority.
RBI norms, Accounting Standards and procedures. (i) The operation of each advance account
generally accepted accounting practices. should be reviewed at least once a year.

Audit of Revenue Items:

Audit Approach and Procedures Interest on advances against Term Deposits, National Savings
Certificates (NSCs), Indira Vikas Patras (IVPs), Kisan Vikas Patras
(KVPs) and Life policies may be taken to income account on the
due date, provided adequate margin is available in the accounts.
In carrying out audit of income, the auditor is primarily
concerned with obtaining reasonable assurance that the recorded
income arose from transactions, which took place during the
relevant period and pertained to the bank, there is no unrecorded
income and the income is recorded at appropriate amount. In the case of bills purchased outstanding at the close of the year
the discount received thereon should be properly apportioned
between the two years. Interest (discount) component paid
by Bank/Branch on rediscount of bills from other financial
institutions, is not to be netted off from the discount earned on
RBI has advised that in respect of any income which exceeds one bills discounted.
percent of the total income of the bank if the income is reckoned
on a gross basis or one percent of the net profit before taxes if
the income is reckoned net of costs, should be considered on
accrual as per relevant Accounting Standard.
In the case of bills for collection, the auditor should also examine
the procedure for crediting the party on whose behalf the bill has
been collected.
If any item of income is not considered to be material as per
the above norms, it may be recognised when received and the
auditors need not qualify their report in that situation.

Fees and commissions earned by the banks as a result of re-

negotiations or rescheduling of outstanding debts should be
recognised on an accrual basis over the period of time covered by
Banks recognise income (such as interest, fees and commission) the re-negotiated or rescheduled extension of credit.
on accrual basis, i.e., as it is earned. It is an essential condition
for accrual of income that it should not be unreasonable to
expect its ultimate collection.

Test check the fees and commissions earned by the banks made
for commission on bills for collection, letters of credit and
In view of the significant uncertainty regarding ultimate bank guarantees.
collection of income arising in respect of non-performing
assets, the guidelines require that banks should not recognize
income on non-performing assets until it is actually realised.

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AUDITING AND ASSURANCE
Audit of Expenses: Audit Approach and Procedures for Operating Expenses

Broad categories of Expenditure

For audit of operating expenses, the auditor should study and

evaluate the system of internal control relating to expenses,
Interest Operating Provisions and including authorization procedures in order to determine the
Expense Expenses Contingencies nature, timing and extent of his other audit procedures.

• Interest on • Payments to and • Provisions made

Deposits Provisions for in respect of the
Employees Non-performing The auditor should examine whether there are any divergent
Interest on assets. trends in respect of major items of expenses.
Reserve Bank Rent, Taxes
of India/ and Lighting
Provisions for
Inter–Bank Taxation
Borrowings • Printing and
Stationery The auditor should perform substantive analytical procedures
Provisions for in respect of these expenses. eg. assess the reasonableness
Others Diminution of expenses by working out their ratio to total operating
Advertisement
and Publicity in the value of expenses and comparing it with the corresponding figures
investments for previous years.
Depreciation on
Bank’s Property Provisions for
contingencies
Directors’ Fees, The auditor should also verify expenses with reference to
Allowances and supporting documents and check the calculations
Expenses wherever required.
Auditors’ Fees
and Expenses

Legal expenses Audit Approach and Procedures for Provisions and

contingencies
Postage,
Telegrams,
Telephones, etc.

Repairs and For audit of Provisions and contingencies, the auditor

Maintenance should ensure that the compliances for various regulatory
requirements for provisioning as contained in the various
circulars have been fulfilled.
Insurance

Marketing
Expenses
The auditor should obtain an understanding as to how the
Other
bank computes provision on standard assets and
Expenses non-performing assets.

Audit Approach and Procedures for Interest Expenses

The auditor may verify the loan classification on a
sample basis.

In carrying out an audit of interest expense, the auditor is

primarily concerned with assessing the overall reasonableness
of the amount on interest expenses by analysing ratios of
interest paid on different types of deposits and borrowings to
average quantum of the respective liabilities during the year.
The auditor should obtain the detailed break up of standard
loans, non-performing loans and agree the outstanding
balances with the general ledger.

The auditor should obtain from the bank an analysis of various

types of deposits outstanding at the end of each quarter.
The auditor should also compare the average rate of interest
paid on the relevant deposits with the corresponding figures
for the previous years and anlyse any material differences.
The auditor should obtain the tax provision computation from
the bank’s management and verify the nature of items debited
and credited to profit and loss account to ascertain that the
same are appropriately considered in the tax
provision computation.

The auditor should obtain general ledger break-up for the

interest expense incurred on deposits and borrowings each
month/ quarter.

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