Chapter 1 Nature, Objective and Scope of Audit - Scanner

Chapter 1 “Nature, Objective and Scope of Audit” ©www.altclasses.
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Chapter 1 “Nature, Objective and Scope of Audit” ©www.altclasses.in
Chapter 1
Nature, Objective and Scope of Audit
"Marks Distribution of Past Exams (New Syllabus)"

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1.1 – Meaning, Objectives and Scope of Audit
Q.1 “An audit is independent examination of financial information of any
entity, whether profit oriented or not, and irrespective of its size or legal
form, when such an examination is conducted with a view to expressing
an opinion thereon.”
Explain stating clearly how the person conducting this task should take
care to ensure that financial statements would not mislead anybody.
[MTP-Oct. 19]
Or

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The person conducting audit should take care to ensure that financial
statements would not mislead anybody. Explain stating clearly the
meaning of Auditing. [RTP-May 20]
Answer: Meaning of Audit:
“An audit is independent examination of financial information of any
entity, whether profit oriented or not, and irrespective of its size or
legal form, when such an examination is conducted with a view to
expressing an opinion thereon.” From this definition, following main
points emerge:
1. Audit is Independent examination of Financial information.
2. Audit may be carried out of all entities, may be profit oriented or
not and irrespective of its size or legal form. For example, listed
company engaged in business and Sec. 8 company which is a
non-profit organisation, both are required to get the accounts
audited under Companies Act, 2013.
3. The objective of the audit is to express an opinion on the
financial statements.
Points to be ensured that F.S. not misled anybody:
Auditor engaged to perform the task of performing audit need to
ensure the following:
(a) Ledger balances agree with the entries made in the book of
accounts.

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(b) Sufficient and Appropriate evidences are available for entries
made in books of account.
(c) All transactions are being recorded in books of account, i.e. there
is no omission.
(d) Information contained in the financial statements is clear and
unambiguous.
(e) Amounts shown in financial statements are properly classified,
described and disclosures are made in conformity with
applicable Accounting Standards.
(f) Financial statements reflect true and fair view of financial
results and financial position
Q.2 The objective of an audit of financial statements, prepared within a
framework of recognised accounting policies and practices and relevant
statutory requirements, if any, is to enable an auditor to express an
opinion on such financial statements.
Or
State the objectives of Audit according to SA 200. [RTP-May 20]
Answer: Objectives of Audit:
(a) The objective of an audit of financial statements, prepared

within a framework of recognised accounting policies and
practices and relevant statutory requirements, if any, is to
enable an auditor to express an opinion on such financial
statements.

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(b) The auditor’s opinion helps determination of the true and fair
view of the financial position and operating results of an
enterprise.
(c) The user, however, should not assume that the auditor’s opinion
is an assurance as to the future viability of the enterprise or the
efficiency or effectiveness with which management has
conducted the affairs of the enterprise.
(d) Auditor should review and assess the conclusions drawn from
the audit evidence obtained and from his knowledge of business
of the entity as the basis for the expression of his opinion on the
financial information.
Q.3 List the points that merit consideration in regard to scope of audit.
Answer: Points to be considered in determining Scope of Audit:
1. Audit should cover the examination of all aspects of an entity

relevant to financial statements.
2. Auditor should assess the sufficiency and appropriateness of the
information contained in the accounting records and other
source data. For this purpose, auditor should
(a) evaluate accounting systems and internal controls
(b) perform necessary tests, enquiries and other verification
procedure of accounting transactions and account balances.
3. To determine whether the information is properly disclosed in
the financial statements, audit may involve

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(a) comparing the financial statements with the underlying
records
(b) considering the judgements used by management in
preparing the financial statements.
4. Auditor is not expected to perform duties which fall outside the
scope of his competence.
5. Limitations, if any, on the scope of audit that impair the auditor’s
ability to express an unmodified opinion should be set out in his
report.
Q.4 State briefly six important aspects to be considered by an auditor while

conducting an audit.
or
State the matters which the statutory auditor should look into before
framing an opinion on accounts on finaliastion of audit of accounts.
Discuss overall audit approach.
or
State the principal aspects to be covered in an audit concerning financial
statement of account. [Nov. 15 (5 Marks)]
Or
GST & Co., a firm of Chartered Accountants has been appointed to audit
the accounts of XYZ Ltd. The partner wanted to cover principal aspects
while conducting its audit of financial statements. Advise those principal
aspects. [RTP-May 18]

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Or
SWM is proprietorship firm engaged in the manufacturing of different

kind of yarns. It sells its finished products both in the domestic as well as
in the international market. The company is making total turnover of Rs.
30 crores. It has also availed cash credit limit of ₹3 crores from Dena
Bank. In the year 2018-19. Proprietor of the firm is worried about the
financial position of the company and is under the impression that since
he is out of India, therefore firm might not run well. He approaches an
Internal Auditor about as to what would be covered in Audit. Advise
regarding principal aspects (any four) to be covered in getting accounts
audited. [MTP-March 19]
Answer: Aspects to be covered in Audit:
1. Examination of Accounting System & Internal Control

• To ascertain whether it is appropriate for the business and
helps in proper recording of all the transactions.
• To determine the Nature, Timing and Extent (NTE) of Audit
Procedures to be performed.
2. Reviewing the system & procedures
• To find out whether they are adequate and comprehensive.
3. Vouching of the transactions
• To ensure authenticity and validity of transactions.
• To check the arithmetical accuracy of the books of accounts.
• To ascertain proper distinction into capital and revenue

items.

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4. Verification of Assets & Liabilities

• To ensure existence and valuation of the assets and liabilities
appearing in the balance sheet.
5. Statutory Compliances
• In case of entities governed by some law, rules or regulations,
for example in case of audit of a company incorporated under
Companies Act 2013.
6. Expression of Opinion
• On true and fair view of state of Affairs as reflected by

Balance Sheet.
• On true and fair view of Financial Results as reflected by

Statement of Profit and Loss.
• On true and fair view of Cash Flows as reflected by Cash Flow

Statement.
7. Reporting on Other matters

• As required by the law governing the entity.
Q.5 The duties of the auditor are limited to verification of the arithmetical
accuracy of the books of the accounts. Comment.
Answer: Auditor’s Duties:
Statement that duties of the auditor are limited to verification of the

arithmetical accuracy of the books of the accounts is not correct, as
besides ensuring the arithmetical accuracy of the books of the
accounts, auditor is also supposed to cover a number of other
aspects in the audit.

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Aspects to be covered in the audit in addition to verification of

arithmetical accuracy:
Refer Q. No. 4
1.2 – Types of Audit
Q.6 Discuss the types of audits required under law. [Nov. 11 (5 Marks)]
Answer: Audit required under law:
(a) Companies governed by the Companies Act, 2013;
(b) Banking companies governed by the Banking Regulation Act,
1949;
(c) Electricity supply companies governed by the Electricity Supply
Act, 1948;
(d) Co-operative societies registered under the Co-operative
Societies Act, 1912;
(e) Public and charitable trusts registered under various Religious
and Endowment Acts;
(f) Corporations set up under an Act of Parliament or State
Legislature such as the LIC of India.
(g) Specified entities under various sections of the Income-tax Act,
1961.

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1.3 – Advantages of Audit of Financial Statements
Q.7 What is the importance of having the accounts audited by independent
professional auditors? [May 01 (8 Marks)]
Or
What are the advantages of Independent audit. [May 12 (8 Marks)]
Or
Discuss the following: Advantages of Independent Auditor.
[May 15 (5 Marks)]
Or
RAG is proprietorship firm engaged in the manufacturing of textile and
handloom products. It sells its finished products both in the domestic as
well as in the international market. The company is making total
turnover of Rs. 30 crores. It has also availed cash credit limit of Rs. 5
crores from Canara Bank. In the year 2018-19, proprietor of the firm is
worried about the financial position of the company and is under the
impression that since he is out of India, therefore firm might run into
losses. He approaches a CA about advantages of getting his accounts
audited throughout the year so that he may not suffer due to accounting
weaknesses. Advise regarding advantages of getting accounts audited.
[MTP-March 18, Oct.18]
Or

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The chief utility of audit lies in reliable financial statements on the basis
of which the state of affairs may be easy to understand. Apart from this
obvious utility, there are other advantages of audit. Some or all of these
are of considerable value even to those enterprises and organisations
where audit is not compulsory. Explain. [RTP-Nov. 18]
Answer: Advantage of Audit of Financial Statement:
1. Protect the interest of fund providers: It safeguards the
financial interests of persons who are not associated with the
management of the organisation e.g. partners or shareholders.
2. Moral check on employees: It acts as a moral check on
employees from committing defalcations or embezzlement.
3. Settlement of Taxes, etc: Auditing statements of accounts are
helpful in settling of taxes, negotiating loans and for determining
the purchase consideration for a business.
4. Settlement of Trade Disputes: Audited statements are useful
for settling trade disputes for higher wages or bonus.
5. Detection of Wastages: Audited statements also help in
detection of wastages and losses and shows the different ways
by which these might be checked especially those that occurred
due to absence or inadequacy of internal checks or internal
control measures.
6. Proper maintenance of books of accounts: Independent audit
ascertains whether the necessary books of accounts and allied

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records have been properly kept and helps the client in making
good deficiencies or inadequacies in this respect.
7. Appraisal of controls: As an appraisal function, audit reviews
the existence and operations of various controls in the
organisations and reports weaknesses, inadequacies etc.
8. Admission/retirement of Partner: Audited accounts are of
great help in the settlement of accounts at the time of admission
or death of the partner.
9. Grant of License: Government may require audited and
certified statements before it gives assistance or issues the
license for a particular trade.
1.4 – Inherent Limitations of Audit
Q.8 Discuss Limitations of audit. [May 11 (8 Marks)]

Or
“The process of auditing is such that it suffers from certain
limitations”. Discuss.
Or
ABC Ltd. Requested the auditor to provide for absolute assurance in
respect of its ten branches scattered in Mumbai and confirm that
financial statements are free from material misstatements due to
fraud or error. Advise.
Or

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The auditor is not expected to, and cannot, reduce audit risk to zero
and cannot therefore obtain absolute assurance that the financial
statements are free from material misstatement due to fraud or error.
This is because there are inherent limitations of an audit. Explain.
[RTP-Nov. 18]
Answer: Inherent Limitations of Audit:
As per SA 200 “Overall Objectives of the Independent Auditor and
the Conduct of an Audit in accordance with Standards on Auditing”
the auditor is not expected to, and cannot, reduce audit risk to zero
and cannot therefore obtain absolute assurance that the financial
statements are free from material misstatement due to fraud or
error. This is because there are inherent limitations of an audit,
which result in most of the audit evidence on which the auditor
draws conclusions and bases the auditor’s opinion being
persuasive rather than conclusive. The inherent limitations of an
audit arise from:
1. The Nature of Financial Reporting
• The preparation of financial statements involves judgment
by management in applying the requirements of the entity’s
applicable FRF to the facts and circumstances of the entity.
Consequently, some financial statement items are subject to
an inherent level of variability which cannot be eliminated
by the application of additional auditing procedures.

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2. Nature of Audit Procedures
There are practical and legal limitations on the auditor’s ability

to obtain audit evidence. For example:
• Management & others do not provide complete information

intentionally / unintentionally.
• Audit procedures used to gather audit evidence may be

ineffective against fraud detection.
• Audit is not an official investigation into alleged

wrongdoings.
3. Timeliness of Financial Reporting & the Balance between

Benefit & Cost
• User expectation that the auditor will form an opinion on the

F. S. within a reasonable period of time and at a reasonable
cost.
• It results into use of Test checking and putting most of

efforts over the areas having risk of material misstatement
with corresponding less efforts in other areas.
4. Other Matters that Affect the Limitations of an Audit
In the case of certain assertions or subject matters, the

potential effects of the limitations on the auditor’s ability to
detect material misstatements are particularly significant. Such
assertions or subject matters include:

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(a) Fraud, particularly fraud involving senior management or

collusion.
(b) The existence and completeness of related party
relationships and transactions.
(c) The occurrence of non-compliance with laws and
regulations.
(d) Future events or conditions that may cause an entity to
cease to continue as a going concern.
Q.8A There are practical and legal limitations on the auditor’s ability to
obtain audit evidence. Explain with examples. [RTP-May 20]
Answer: Audit limitations as to the nature of audit procedures:
There are practical and legal limitations on the auditor’s ability to

obtain audit evidence. For example:
1. There is the possibility that management or others may not

provide, intentionally or unintentionally, the complete
information that is relevant to the preparation and
presentation of the financial statements or that has been
requested by the auditor.
2. Fraud may involve sophisticated and carefully organised
schemes designed to conceal it. Therefore, audit procedures
used to gather audit evidence may be ineffective for detecting
an intentional misstatement that involves, for example,
collusion to falsify documentation which may cause the auditor

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to believe that audit evidence is valid when it is not. The

auditor is neither trained as nor expected to be an expert in the
authentication of documents.
3. An audit is not an official investigation into alleged
wrongdoing. Accordingly, the auditor is not given specific legal
powers, such as the power of search, which may be necessary
for such an investigation.
Q.8B In case of certain subject matters, limitations on the auditor’s ability to
detect material misstatements are particularly significant. Explain
such assertions or subject matters. [RTP-May 20]
Answer: Other Matters that Affect the Limitations of an Audit
In the case of certain assertions or subject matters, the potential
effects of the limitations on the auditor’s ability to detect material
misstatements are particularly significant. Such assertions or
subject matters include:
(a) Fraud, particularly fraud involving senior management or
collusion.
(b) The existence and completeness of related party relationships
and transactions.
(c) The occurrence of non-compliance with laws and regulations.
(d) Future events or conditions that may cause an entity to cease
to continue as a going concern.

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Q.9 DEF & Co. Chartered Accountants successfully carried out the audit of
Shree Garments for the financial year 2018-2019. After the completion
of the audit, there were found material misstatements due to fraud in
the financial statements which were not noticed and reported by the
auditor. Management alleges that it is failure on the part of auditor.
Comment.
Answer: Management allegation as to auditor’s failure to detect
material misstatements:
the Conduct of an Audit in accordance with Standards on
Auditing” the auditor is not expected to, and cannot, reduce audit
risk to zero and cannot therefore obtain absolute assurance that
the financial statements are free from material misstatement due
to fraud or error. This is because there are inherent limitations of
an audit, which result in most of the audit evidence on which the
auditor draws conclusions and bases the auditor’s opinion being
persuasive rather than conclusive.
As per SA – 240, the responsibility for the prevention and
detection of fraud and error rests with management through the
implementation of an adequate system of internal control. Such a
system reduces but does not eliminate the possibility of fraud
and error. Auditor’s responsibility for failure to detect fraud and
error can arise only due to proven negligence.

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The relevant provisions in this regard are:
(a) In forming his opinion, the auditor carries out procedures

designed to obtain evidence that will provide reasonable
assurance that the financial information is properly stated in
all material respects.
(b) Due to the inherent limitations of an audit there is a

possibility that material misstatements of the financial
information resulting from fraud or error may not be
detected. An auditor cannot be charged for non-adherence of
basic principles in the following circumstances:
• subsequent discovery of material misstatement of the

financial information resulting from fraud or error;
• failure to disclose the affairs of the company kept out of

books and concealed from him.
unless it is proved that that procedures undertaken by

auditor in the circumstances are inadequate and improper.
Thus, if any misstatement has been detected after the

completion of the audit, the same by itself cannot mean that
the auditor did not perform his duty properly.
If the auditor can prove with the help of his papers

(documentation) that he has followed adequate procedures
necessary for the proper conduct of an audit, he cannot be
held responsible for the same.

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Q.10 The matter of difficulty, time, or cost involved is not in itself a valid
basis for the auditor to omit an audit procedure for which there is no
alternative or to be satisfied with audit evidence that is less than
persuasive. Explain. [RTP-May 18]
Answer: Omission of Audit procedure due to difficulty, time or cost
constraint:
• The matter of difficulty, time, or cost involved is not in itself a
valid basis for the auditor to omit an audit procedure for which
there is no alternative or to be satisfied with audit evidence that
is less than persuasive.
• Appropriate planning assists in making sufficient time and
resources available for the conduct of the audit.
Notwithstanding this, the relevance of information, and thereby
its value, tends to diminish over time, and there is a balance to
be struck between the reliability of information and its cost.
• There is an expectation by users of financial statements that the
auditor will form an opinion on the financial statements within
a reasonable period of time and at a reasonable cost,
recognising that it is impracticable to address all information
that may exist or to pursue every matter exhaustively on the
assumption that information is in error or fraudulent until
proved otherwise.

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1.5 – Relationship of Auditing with other Disciplines
Q.11 The relationship between auditing and law is very close one. Discuss.
[MTP-Oct. 19]
Answer: Relationship of Auditing and Law:
• Auditing involves examination of various transactions from the
view point of whether or not these have been properly entered
into as per the requirements of law, in particular, when an entity
is governed by any law, for example companies.
• It necessitates that an auditor should have a good knowledge of
business and corporate laws affecting the entity. He should be
familiar with the law of contracts, negotiable instruments, etc.
• In analysing the impact of various transactions particularly from
the accounting aspect, an auditor ought to have a good
knowledge about the direct as well as indirect tax laws.
Q.12 Discuss the following: The discipline of behavioural science is closely
linked with the subject of auditing. [Nov. 13 (5 Marks)]
Answer: Relationship of Auditing with behavioural science:
The discipline of behavioural science is closely linked with the
subject of auditing. The knowledge of human behaviour is indeed
very essential for an auditor so as to effectively discharge his
duties, because of below mentioned aspects:

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• While performing audit, auditor is required to interact with a
lot of people in the organisation.
• Management auditor is expected to deal with human beings
rather than financial figures.
• One of the basic elements in designing the internal control
system is personnel.
• Internal control system in an organisation cannot work until
and unless the people who are working in the organisation are
competent and honest.
Q.13 “Discipline of Statistics and Mathematics has come closer quite to
auditing”. Explain.
Answer: Relationship of Auditing with Statistics and Mathematics:
• While performing audit, auditor examines the transaction on
test checking basis, wherein auditor is required to select the
samples.
• Discipline of statistics plays an important role as the auditor is
also expected to have the knowledge of statistical sampling so
as to arrive at meaningful conclusions.
• The knowledge of mathematics is also required on the part of
auditor particularly at the time of verification of inventories.

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1.6 – Quality Control and Engagement Standards
Q.14 The objective of the IAASB is to serve the public interest by setting high
quality auditing standards and by facilitating the convergence of
international and national standards, thereby enhancing the quality
and uniformity of practice throughout the world and strengthening
public confidence in the global auditing and assurance profession. State
how this objective is achieved. [MTP-March 18, March 19]
Or
The IAASB functions as an independent standard-setting body under
the auspices of IFAC. Explain stating the objective of IAASB and also
how it achieves those objectives. [RTP-May 19]
Answer: Role of International Auditing & Assurance Standard Board
(IAASB)
The IAASB functions as an independent standard-setting body
under the auspices of IFAC. The objective of the IAASB is to serve
the public interest by setting high quality auditing standards and
by facilitating the convergence of international and national
standards, thereby enhancing the quality and uniformity of
practice throughout the world and strengthening public
confidence in the global auditing and assurance profession. The
IAASB achieves this objective by:

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(a) Establishing high quality auditing standards and guidance for
financial statement audits that are generally accepted and
recognized by investors, auditors, governments, banking
regulators, securities regulators and other key stakeholders
across the world;
(b) Establishing high quality standards and guidance for other
types of assurance services on both financial and non-financial
matters;
(c) Establishing high quality standards and guidance for other
related services;
(d) Establishing high quality standards for quality control covering
the scope of services addressed by the IAASB; and
(e) Publishing other pronouncements on auditing and assurance
matters, thereby advancing public understanding of the roles
and responsibility of professional auditors and assurance
service providers.
Q.15 Explain the Auditing Standard setting process of AASB of ICAI.
Answer: Auditing Standards Setting Process:
The Auditing and Assurance Standards Board (AASB) of the
Institute formulates the auditing standards. The steps followed in
formulating auditing standards are:

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1. AASB identifies the areas where auditing standards need to be
formulated and the priority in regard to their selection.
2. In the preparation of the auditing standards, the Board is
normally, assisted by study groups comprising of a cross
section of members of the Institute.
3. On the basis of the work of the study groups, an Exposure Draft
of the proposed auditing standard is prepared by the Board
and issued for comments of the members.
4. After taking into the comments received, the draft of the
proposed auditing standard is finalised by the Board and
submitted to the Council of the Institute.
5. The Council considers the final draft of the proposed auditing
standard and, if necessary, modifies the same in consultation
with the Board. The auditing standard is then issued under the
authority of the Council.
6. While formulating the auditing standards, the Board also takes
into consideration the applicable laws, customs, usages and
business environment in the country.
Q.16 What are the objectives and functions of Auditing and Assurance
Standard Board (AASB)? Explain. [May 15 (6 Marks)]

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Answer: Objectives and Functions of AASB:
1. To review the existing and emerging auditing practices

worldwide and identify areas in which Standards on Quality
Control, Engagement Standards and Statements on Auditing
need to be developed.
2. To formulate Engagement Standards, Standards on Quality

Control and Statements on Auditing so that these may be
issued under the authority of the Council of the Institute.
3. To review the existing Standards and Statements on Auditing

to assess their relevance in the changed conditions and to
undertake their revision, if necessary.
4. To develop Guidance Notes on issues arising out of any

Standard, auditing issues pertaining to any specific industry or
on generic issues, so that those may be issued under the
authority of the Council of the Institute.
5. To review the existing Guidance Notes to assess their relevance

in the changed circumstances and to undertake their revision,
if necessary.
6. To formulate General Clarifications, where necessary, on issues

arising from Standards.
7. To formulate and issue Technical Guides, Practice Manuals,

Studies and other papers under its own authority for guidance
of professional accountants in the cases felt appropriate by the
Board.

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Q.17 Discuss the following: Standards collectively known as the Engagement
Standards issued by AASB under the authority of Council of ICAI.
[May 12 (5 Marks)]
Or
State the Standards issued by AASB which are collectively known as
engagement standards. [Nov. 15 (4 Marks)]
Answer: Engagement Standards issued by AASB:
Preface to Standards on Quality Control, Auditing, Review, Other
Assurance and Related Service categorises the Standards based on
the nature of service being provided by a member. It, therefore,
introduces an umbrella concept of Engagement Standards. The
term “Engagement Standards” comprises the following Standards:
1. Standards on Auditing (SAs): These standards are to be
applied in the audit of historical financial information.
2. Standards on Review Engagements (SREs): These standards
are to be applied in the review of historical financial
information.
3. Standards on Assurance Engagements (SAEs): These
standards are to be applied in assurance engagements,
engagements dealing with subject matter other than historical
financial information.

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4. Standards on Related Services (SRRs): These standards are
to be applied to engagements involving application of agreed
upon procedures to information and other related services such
as compilation engagements.
1.7 – List of Standards
Q.18 Mention any ten title of standards on auditing and the date from which
it comes into force.
Answer: Title of Standards of Auditing and their effective date:
S. Number of Name of Standard of Auditing Effective

No. Standards Date
1 SA 200 Overall Objectives of the 01.04.2010
(Revised) Independent Auditor and the
Conduct of an Audit in
Accordance with Standards on
Auditing
2 SA 210 Agreeing the Terms of Audit 01.04.2010
(Revised) Engagements
3 SA 220 Quality Control for an Audit of 01.04.2010
(Revised) Financial Statements
4 SA 230 Audit Documentation 01.04.2009
(Revised)
5 SA 240 The Auditor’s Responsibilities 01.04.2009
(Revised) Relating to Fraud in an Audit
of Financial Statements.

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6 SA 300 Planning an Audit of Financial 01.04.2008

(Revised) Statements
7 SA 315 Identifying & Assessing the 01.04.2008
Risk of material
Misstatements through
understating the Entity and Its
Environment
8 SA 500 Audit Evidence 01.04.2009
(Revised)
9 SA 501 Audit Evidence - Specific 01.04.2010
(Revised) Considerations for Selected
Items
10 SA 505 External Confirmations 01.04.2010
(Revised)
11 SA 510 Initial Audit Engagements – 01.04.2010
(Revised) Opening balances
12 SA 520 Analytical Procedures 01.04.2010
(Revised)
13 SA 610 Using the work of Internal 01.04.2016
(Revised) Auditors
14 SA 620 Using the Work of an 01.04.2010
(Revised) Auditor’s Expert
Note: Any 10 Standards and other standards may be
mentioned.

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1.8 – Statements and Guidance Notes
Q.19 Discuss the following: “Statements” and “Guidance Notes” of ICAI -
whether mandatory or recommendatory. [May 14 (5 Marks)]
Answer: Statement and Guidance Notes – Level of authority and degree
of compliance:
Statements Guidance Notes
Purpose Statements are issued Guidance Notes are

with a view to securing designed to provide
compliance by members guidance to members on
on matters which in the matters which may arise
opinion of the council of in the course of their
the institute are critical professional work and on
for the proper discharge of which they may desire
their functions. assistance.
Compliance Compliance is Mandatory Compliance is

in Nature recommendatory in
nature, however a few
guidance notes in case of
which the Council has
specifically stated that
they should be considered
as mandatory on members
while discharging their
attest function.

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Examples • Preface on Standards on • Guidance Note on Audit
Quality Control. of Inventories
Auditing, Review, Other • Guidance Note on Audit
Assurance and related of Investments

Services.
Level of 1. Examine whether 1. Examine whether the
Authority ‘Statements’ relating recommendations in a

/ Duties to accounting matters guidance note relating
of
are complied with in the to an accounting matter
Members
presentation of F.S. In have been followed or
the event of any not. If the same have not
deviation from such been followed, consider
‘Statements’, to make whether keeping in
adequate disclosures in view the circumstances
their audit reports so of the case, a disclosure

1.9 – Qualities of Auditor that the users of F.S. in his report is
may be aware of such necessary.

Q.20 State briefly the Qualities of Auditors. [Nov. 04 (4 Marks)]
deviations 2. Follow
Or
2. Ensure that the recommendations in a
Lord Justice Lindley in the course of the judgment in the famous
‘Statements’ relating guidance note relating
London & General Bank case had succinctly summed up the overall
to auditing matters, to auditing except
view of what an auditor should be as regards the personal qualities.
are followed in the where he is satisfied
Explain stating also the qualities of Auditor. [RTP-May 19]
audit of financial that in the
information covered by circumstances of the
their audit reports. If, case, it may not be

for any reason, a necessary to do so.
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member, has not been
Answer: Qualities of Auditors:
Lord Justice Lindley in the course of the judgment in the famous
London & General Bank case had succinctly summed up the overall
view of what an auditor should be as regards the personal
qualities. He said, “an auditor must be honest that is, he must not
certify what he does not believe to be true and must take
reasonable care and skill before he believes that what he certifies
is true”.
(A) Technical Qualities: Auditor must have sound knowledge of
followings:
1. Accountancy – its principles, procedures, techniques and
standards (AS).
2. Auditing – its principles, procedures, techniques and
standards (SA).
3. Direct and Indirect Taxation Laws.
4. General Principles of Law of contracts and partnership.
5. Corporate Laws;
6. Client Nature of Business;
(B) Personal Qualities: Apart from the technical qualities, the
auditor should also possess certain personal qualities
mentioned below:

Page31
1. Objectivity, Integrity and Independence.
2. Confidentiality of client information.
3. Effective Communication skills.
4. Tactful approach in dealing with clients.
5. Clear headedness and commonsense;
6. Reliability and trust.
1.10 – Elements of System of a Quality Control (SQC 1 & SA 220)
Q.21 The firm’s system of quality control should include policies and
procedures addressing each element. Explain.
[RTP-Nov. 18, MTP-Oct. 19]
Answer: Elements of a System of Quality Control:
As per SQC 1 “Quality Control for Firms that perform Audits and
Reviews of Historical Financial Information, and Other Assurance
and Related Services Engagements”, the firm’s system of quality
control should include policies and procedures addressing each of
the following elements:
(a) Leadership responsibilities for quality within the firm.
(b) Ethical requirements.
(c) Acceptance and continuance of client relationships and

specific engagements.

Page32
(d) Human resources.
(e) Engagement performance.
(f) Monitoring.
(g) The quality control policies and procedures should be
documented and communicated to the firm’s personnel.
Q.22 As per SA 220, the engagement partner shall take responsibility for
the overall quality on each audit engagement to which that partner is
assigned. While taking responsibility for the overall quality on each
audit engagement, analyse and explain the emphasis of the actions of
the engagement partner and appropriate messages to the other
members of the engagement team. Also define engagement partner.
[MTP-Aug. 18]
Or
The engagement partner shall take the responsibility for the overall
quality on each audit engagement to which that partner is assigned.
Discuss with reference to SA 220 “Quality Control for an audit of
financial statement”. [Nov. 19 (3 Marks)]
Answer: Leadership Responsibilities for Quality on Audits:
As per SA 220 “Quality Control for an Audit of Financial

Statements” the engagement partner shall take responsibility for
the overall quality on each audit engagement to which that
partner is assigned.

Page33
As a part of this responsibility Engagement Partner should

emphasizes the following to the engagement Team (ET):
• Compliance with professional Standards and legal

requirements.
• Compliance with firm’s Quality Control Policies and

procedures as applicable.
• Issuance of appropriate audit report.
• Ability to raise concerns without fear.
• Quality is essential & indispensable in engagement

performance.
Meaning of Engagement Partner:
The partner or other person in the firm who is a member of the

Institute of Chartered Accountants of India and is in full time
practice and is responsible for the engagement and its
performance, and for the report that is issued on behalf of the
firm, and who, where required, has the appropriate authority
from a professional, legal or regulatory body.
Q.23 Comment as an auditor on the following situations: Mr. X, a partner in

X & Co., a firm of a Chartered Accountants, died on 31-03-2019 after
completing routine audit work of XYZ Company Ltd. Mr. Y another
partner of the firm of Chartered Accountants signed the financial
statements of XYZ Company Ltd., without reviewing the finalization
work done by the assistants. [Nov. 10 (5 Marks)]

Page34
Answer: Review of Work performed by others:
• As per SA 220, “Quality Control for an Audit of Financial
Statements”, The engagement partner shall take responsibility
for reviews being performed in accordance with the firm’s
review policies and procedures. Review procedures consists of
the considerations, whether,
1. the work has been performed in accordance with
professional standards and regulatory and legal
requirements;
2. Significant matters have been raised for further
consideration;
3. appropriate consultations have taken place and the
resulting conclusions have been documented and
implemented;
4. the work performed supports the conclusions reached and
is appropriately documented;
5. the evidence obtained is sufficient and appropriate to
support the auditor’s report; and
6. the objectives of the engagement procedures have been
achieved.

Page35
• When the auditor delegates work to assistants or uses work
performed by other auditors/experts he will continue to be
responsible for forming and expressing his opinion on the
financial statements. However, he will be entitled to rely on the
work performed by others, provided he exercises adequate
skill and care and is not aware of any reason to believe that he
should not have so relied.
• The auditor should carefully direct, supervise and review work
delegated to assistants. He should obtain reasonable assurance
that work performed by other auditors/experts and assistants
is adequate for his purpose.
• In the instant case, Mr. X, a partner of the firm had completed
routine audit work and died on 31 March, 2018. Mr. Y another
partner of the firm has signed the financial statement of XYZ
Company Ltd, without reviewing the finalization work done by
the assistants. Mr. Y will be fully responsible for negligence, he
cannot take the shelter that Mr. X had done the work.
Conclusion: Mr. Y has negligently performed his duties.
Q.24 Mention any four information which assists the auditor in accepting
and continuing of relationship with the client as per SA 220.
[May 15 (5 Marks)]
Or

Page36
As per SA 220, “Quality Control for an Audit of Financial Statements”
the auditor should obtain information considered necessary in the
circumstances before accepting an engagement with a new client,
when deciding whether to continue an existing engagement and when
considering acceptance of a new engagement with an existing client.
Explain. [RTP-May 18]
Or
CA Raj, an engagement partner wants to take decision, regarding
acceptance and continuance of an audit engagement. Which
information, he should obtain before accepting an engagement?
[May 19 (3 Marks)]
Answer: Information assisting auditor in accepting and continuing of
relationship with the client:
As per SA 220 “Quality Control for an Audit of F.S.” the
information which assists the auditor in accepting and continuing
of relationship with the client may include the following:
1. The Integrity of the principal owners, key management and
TCWG of the entity;
2. Competency of engagement team to perform the audit
engagement and availability of necessary capabilities,
including time and resources;

Page37
3. Compliance with relevant ethical requirements by firm and the
engagement team; and
4. Significant matters that have arisen during the current or
previous audit engagement, and their implications for
continuing the relationship.
Q.25 The firm should establish policies and procedures designed to provide
it with reasonable assurance that the policies and procedures relating
to the system of quality control are relevant, adequate, operating
effectively and complied with in practice. Such policies and
procedures should include an ongoing consideration and evaluation of
the firm’s system of quality control, including a periodic inspection of
a selection of completed engagements. Explain in the above context
the purpose of monitoring compliance with quality control policies
and procedures. [RTP-Nov. 19]
Answer: Purpose of monitoring compliance with quality control

policies and procedures
• As per SQC 1 “Quality Control for Firms that perform Audits

and Reviews of Historical Financial Information, and Other
Assurance and Related Services Engagements”, the firm should
establish policies and procedures designed to provide it with
reasonable assurance that the policies and procedures relating
to the system of quality control are relevant, adequate,
operating effectively and complied with in practice.

Page38
• Such policies and procedures should include an ongoing
consideration and evaluation of the firm’s system of quality
control, including a periodic inspection of a selection of
completed engagements.
• The purpose of monitoring compliance with quality control
policies and procedures is to provide an evaluation of:
(a) Adherence to professional standards and regulatory and
legal requirements;
(b) Whether the quality control system has been appropriately
designed and effectively implemented; and
(c) Whether the firm’s quality control policies and procedures
have been appropriately applied, so that reports that are
issued by the firm or engagement partners are appropriate
in the circumstances.
1.11 – Independence of Auditors
Q.26 “Independence of auditors must not only exist infact, but should also
appear to exist to all reasonable persons”. Discuss highlighting the
advantages of an independent audit.

Page39
Answer: Concept of Independent Audit:
As per Guidance Note of the ICAI on “Independence of Auditors”
independence implies that the judgement of a person is not
subordinate to the wishes or directions of another person who
might have engaged him. “Independence of auditors must not
only exist infact, but should also appear to exist to all reasonable
persons”. The auditor has to conduct himself in such a way that
no reasonable person, can doubt his objectivity and integrity.
lnfact, the word independent as a prefix in audit proposition in
itself enshrines the concept of independence of an auditor and it
is thus, considered fundamental concept in the theory of auditing.
The relationship between the auditor and the client should be
such that firstly, he himself is satisfied about his client and then it
is understood by others that the independence of the auditor is
not affected.
Advantages of Independent Audit: Refer Q. No. 7
Q.27 Write short note on: Auditor’s Independence. [May 07 (4 Marks)]
Answer: Refer Answer of Q. No. 26
Q.28 The Code of Ethics for Professional Accountants, prepared by the
International Federation of Accountants (IFAC) identifies five types of
threats.” Explain.
Or

Page40
The auditor should be straightforward, honest and sincere in his
approach to his professional work. He must be fair and must not allow
prejudice or bias to override his objectivity. He should maintain an
impartial attitude and both be and appear to be free of any interest
which might be regarded as being incompatible with integrity and
objectivity. Many different circumstances, or combination of
circumstances, may be relevant and accordingly it is impossible to
define every situation that creates threats to independence and specify
the appropriate mitigating action that should be taken.
In addition, the nature of assurance engagements may differ and
consequently different threats may exist requiring the application of
different safeguards.
Explain stating clearly the five types of threats as contained in Code of
Ethics for Professional Accountants, prepared by the International
Federation of Accountants (IFAC). [MTP-Oct. 18]
Answer: Threats to Independence:
1. Self-interest threats
It may occur as a result of the financial or other interests of a
professional accountant or of a relative. Examples are:
• Direct or indirect financial interest in a client,
• loan or guarantee to or from the concerned client,
• undue dependence on a client’s fees,

Page41
• close business relationship with an audit client,
• potential employment with the client, and
• contingent fees for the audit engagement.
2. Self-review threats
It may occur when a previous judgment needs to be re-
evaluated by the professional accountant responsible for that
judgment. Instances where suchthreats may arise are:
(a) when an auditor having recently been a director or senior
officer of the company, and
(b) when auditors perform services that are themselves subject
matters of audit.
3. Advocacy threats
It may occur when a professional accountant promotes a
position or opinion to the point that subsequent objectivity may
be compromised.
For example, an auditor dealing with shares or securities of the
audited company, or becomes the client’s advocate in litigation
and third-party disputes.
4. Familiarity threats
It may occur when, because of a relationship, a professional
accountant becomes too sympathetic to the interests of others.
This can occur in many ways:

Page42
1. close relative of the audit team working in a senior position
in the client company,
2. former partner of the audit fi rm being a director or senior
employee of the client,
3. long association between specific auditors and their specific
client counterparts, and
4. acceptance of significant gifts or hospitality from the client
company, its directors or employees.
5. Intimidation threats
• It may occur when a professional accountant may be
deterred from acting objectively by threats, actual or
perceived.
Q.29 Write a note on “Self-review threats”. [RTP-Nov. 19]
Answer: Self Review Threats: Refer Answer of Q. No. 28
Q.30 Familiarity threats are self-evident, and occur when auditors form
relationships with the client where they end up being too sympathetic
to the client’s interests. Explain. [MTP-April 19]
Answer: Familiarity Threats: Refer Answer of Q. No. 28
Q.31 The Chartered Accountant has a responsibility to remain independent

by taking into account the context in which they practice, the threats to
independence and the safeguards available to eliminate the threats.
State the guiding principles in this regard.

Page43
Answer: Safeguards to Independence
(a) Auditors should always be and appears to be independent of
the entities that they are auditing.
(b) Auditor should abide himself with the key fundamental
principles are integrity, objectivity and professional scepticism.
(c) Auditor should consider threats to independence before
accepting any audit assignment.
(d) In case of existence of any threats to independence, auditor
should not accept the engagement or put in place safeguards
that eliminate them.
(e) If necessary safeguards cannot be put in place due to
circumstances, auditor should withdraw.
1.12 – Overall Objectives of the Independent Auditor and Conduct of Audit in
accordance with SAs (SA 200)
Q.32 Explain the Overall Objectives of Independent auditor. [RTP-May 19]
Answer: Overall Objectives Independent Auditor:
SA 200 “Overall Objectives of the Independent Auditor and Conduct
of Audit in accordance with SAs” stats that in conducting an audit of
financial statements, the overall objectives of the auditor are:

Page44
(a) To obtain reasonable assurance about whether the F. S. as a
whole are free from material misstatement, whether due to
fraud or error, thereby enabling the auditor to express an
opinion on whether the F.S. are prepared, in all material
respects, in accordance with an applicable FRF, and
(b) To report on the F.S. and communicate as required by the SAs, in
accordance with the auditor’s findings.
(c) In all cases when reasonable assurance cannot be obtained and
a qualified opinion in the auditor’s report is insufficient, the SAs
require that the auditor disclaim an opinion or withdraw from
the engagement.
Q.33 Comment on the following: “The Auditor shall comply with relevant
ethical requirements including independence”.
or
Discuss prerequisites and fundamental principles to be possessed by an
auditor. [May 11 (8 Marks)]
Or
Relevant ethical requirements ordinarily comprise the Code of Ethics
for Professional Accountants related to an audit of financial statements.
Discuss with reference to those fundamental principles of professional
ethics. [RTP-May 19]

Page45
Answer: Compliance of Ethical requirements:
(a) As per SA 200 “Overall Objectives of the Independent Auditor
and Conduct of Audit in accordance with SAs” the auditor shall
comply with relevant ethical requirements, including
independence.
(b) Relevant ethical requirements ordinarily comprise the Code of
Ethics issued by the ICAI. The fundamental principles are:
• Integrity;
• Objectivity;
• Professional competence and due care;
• Confidentiality; and
• Professional behavior.
(c) Independence comprises both independence of mind and
independence of appearance.
(d) Independence enhances the auditor’s ability to act with
integrity to be objective and to maintain an attitude of
professional skepticism.
Q.34 SA 200 requires that the auditor shall and perform an audit with
professional skepticism. Explain the statement.

Page46
or
Discuss with reference to SAs: The auditor is responsible for

maintaining an attitude of professional skepticism throughout the
audit. Do you agree with the statement. [May 14 (6 Marks)]
Or
The auditor shall plan and perform an audit with professional

skepticism recognizing that circumstances may exist that cause the
financial statement to be materially misstated. Discuss any four
examples of professional skepticism. [Nov. 19 (4 Marks)]
Answer: Professional Skepticism:
(a) SA 200 “Overall Objectives of the Independent Auditor and

Conduct of Audit in accordance with SAs” requires that the
auditor shall plan and perform an audit with professional
skepticism.
(b) Meaning of Professional Skepticism: An attitude that

includes a questioning mind, being alert to conditions which
may indicate possible misstatement due to error or fraud, and a
critical assessment of audit evidence.
(c) Professional Skepticism Reduces risk of:
• Overlooking unusual circumstances.
• Over generalising when drawing conclusions from audit

observations.
• Using inappropriate assumptions in determining N, T, E of

audit procedures & evaluating the results thereof.

Page47
(d) Professional skepticism includes being alter to:
• Contradictory audit evidence.
• Questions on reliability of documents.
• Conditions indicating possible frauds.
• Circumstances suggesting need for audit procedures in
addition to those suggested in SAs.
Q.35 Comment on the following: “The auditor shall exercise professional
judgement in planning and performing an audit of financial statements.
Or
“Professional judgment is essential to the proper conduct of an audit.”
Discuss. [Nov. 18 (5 Marks)]
Answer: Professional Judgement:
(a) SA 200 “Overall Objectives of the Independent Auditor and
Conduct of Audit in accordance with SAs” requires that the
auditor shall exercise professional judgment in planning and
performing an audit of financial statements.
(b) Meaning of Professional Judgement: The application of
relevant training, knowledge and experience, within the
context provided by auditing, accounting and ethical standards,
in making informed decisions about the courses of action that
are appropriate in the circumstances of the audit engagement.

Page48
(c) Exercise of professional judgement depends on facts &
circumstances known to the auditor.
(d) Professional Judgement is to be exercised throughout the audit
and to be appropriately documented.
(e) Professional Judgement is important when deciding about:
• Materiality & audit risk.
• NTE of audit procedures.
• Evaluating sufficiency & appropriateness of audit
procedures.
• Evaluating management judgment in applying applicable
FRF.
• Drawing conclusions based on audit evidence.
Q.36 “Independence of mind and independence in appearance are
interlinked perspectives of Independence of auditors.” Explain.
[May 19 (3 Marks)]
Answer: Independence of Auditors:
• As per SA 200 “Overall Objectives of the Independent Auditor and

Conduct of Audit in accordance with SAs” the auditor shall
comply with relevant ethical requirements, including
independence.
• Independence comprises both independence of mind and
independence of appearance.

Page49
• In the case of an audit engagement it is in the public interest and,
therefore, required by the Code of Ethics, that the auditor be
independent of the entity subject to the audit. The Code describes
independence as comprising both independence of mind and
independence in appearance.
• The auditor’s independence from the entity safeguards the
auditor’s ability to form an audit opinion without being affected
by influences that might compromise that opinion.
• Independence enhances the auditor’s ability to act with integrity,
to be objective and to maintain an attitude of professional
skepticism.
1.13 – Agreeing the Terms of Audit Engagement (SA 220)
Q.37 What is an audit engagement letter? What are the principal contents of
audit engagement letter.
or
What is the purpose of a Letter of Engagement? What are the important
contents of a Letter of Engagement? [May 17 (6 Marks)]
Answer: Purposes of letter of engagement:
SA 210 “Agreeing the terms of Audit Engagement” deals with the

auditor’s responsibilities in agreeing the terms of the audit
engagement with management and TCWG.

Page50
The agreed terms of the audit engagement shall be recorded in an
audit engagement letter or other suitable form of written
agreement and shall include:
• The objective and scope of the audit of the F.S.;
• The responsibilities of the auditor;
• The responsibilities of management;
• Identification of the applicable FRF for the preparation of the
F.S.; and
• Reference to the expected form and content of any reports to be
issued by the auditor and a statement that there may be
circumstances in which a report may differ from its expected
form and content.
So the main purpose of letter of engagement is to ensure a common
understanding of the terms of audit engagement between the
auditor and management and TCWG.
Q.38 Write short note on: Preconditions of an audit.
Answer: Preconditions for an Audit:
As per SA 210 “Agreeing the terms of Audit Engagement” before
accepting an audit engagement auditor is required to ensure
existence of preconditions.
Accordingly, Pre-conditions to be examined are:

Page51
(a) Determine whether the financial reporting framework to be
applied in the preparation of the financial statements is
acceptable; and
(b) Obtain the agreement of management that it acknowledges and
understands its responsibilities for followings:
(i) the preparation of the F.S. in accordance with the
applicable FRF.
(ii) exercising necessary internal control to enable the
preparation of F.S. that are free from material
misstatement, whether due to fraud or error.
(iii) To provide the auditor with:
(a) Access to all relevant information such as records,
documentation and other matters;
(b) Additional information that the auditor may request
from management for the purpose of the audit; and
(c) Unrestricted access to persons within the entity from
whom the auditor determines it necessary to obtain
audit evidence.
Q.39 Comment on the following: “It is not mandatory to send a new
engagement letter in recurring audit, but sometimes it becomes
mandatory to send new letter.” Explain those situations where new
engagement letter is to be sent. [Nov. 11 (5 Marks)]

Page52
or
Indicate the factors which make it appropriate for an auditor to send a
new engagement letter for a recurring audit. [Nov. 14 (5 Marks)]
or
‘P’ an auditor decides not to send a new engagement letter to G Ltd.
every year. Whether he is right in his approach. State the circumstances
where sending new engagement letter, would be appropriate.
[Nov. 15 (5 Marks)]
Answer: Engagement Letter in case of Recurring Audit:
SA 210 “Agreeing the Terms of Audit Engagement” provides that in
case of recurring audits, the auditor shall assess whether
circumstances require revision in terms of the audit engagement
and whether there is a need to remind the entity of the existing
terms of the audit engagement.
The auditor may decide not to send a new audit engagement letter
or other written agreement each period. However, the following
factors may make it appropriate to revise the terms of the audit
engagement or to remind the entity of existing terms:
1. Any indication that the entity misunderstands the objective and
scope of the audit.
2. Any revised or special terms of the audit engagement.

Page53
3. A recent change of senior management.
4. A significant change in ownership.
5. A significant change in nature or size of the entity’s business.
6. A change in legal or regulatory requirements.
7. A change in the financial reporting framework adopted in the
preparation of the F.S.
8. A change in other reporting requirements.
Q.40 X, a Chartered Accountant was engaged by PQR & Co. Ltd. for auditing
their accounts. He sent his letter of engagement to the Board of
Directors, which was accepted by the Company. In the course of audit of
the company, the auditor was unable to obtain appropriate sufficient
audit evidence regarding receivables. The client requested for a change
in the terms of engagement. Offer your comments in this regard.
[Nov. 09 (5 Marks)]
or
“An auditor who before the completion of the engagement is requested

to change the engagement to one which provides a lower level of
assurance should consider the appropriateness of doing so.” Discuss.
Answer: Acceptance of Changes in terms of engagement:

engagement with management and TCWG.

Page54
(a) The auditor shall not agree to a change in the terms of the audit
engagement where there is no reasonable justification for doing
so.
(b) If, prior to completing the audit engagement, the auditor is

requested to change the audit engagement to an engagement
that conveys a lower level of assurance, the auditor shall
determine whether there is reasonable justification for doing so.
(c) If the terms of the audit engagement are changed, the auditor
and management shall agree on and record the new terms of the
engagement in an engagement letter or other suitable form of
written agreement.
(d) If the auditor is unable to agree to a change of the terms of the

audit engagement and is not permitted by management to
continue the original audit engagement, the auditor shall:
• Withdraw from the audit engagement where possible under

applicable law or regulation; and
• Determine whether there is any obligation, either contractual

or otherwise, to report the circumstances to other parties,
such as TCWG, owners or regulators.
Q.41 An auditor who, before the completion of the engagement, is requested

to change the engagement to one which provides a lower level of
assurance, should consider the appropriateness of doing so. Explain
stating the factors based on which client can request the auditor to
change the engagement. [RTP-Nov. 19]

Page55
Answer: Factors based on which client can request the auditor to
change the engagement:
engagement with management and TCWG. Accordingly.
• A request from the entity for the auditor to change the terms of
the audit engagement may result from
(a) a change in circumstances affecting the need for the service,
(b) a misunderstanding as to the nature of an audit as originally
requested or
(c) a restriction on the scope of the audit engagement, whether
imposed by management or caused by other circumstances.
• The auditor, considers the justification given for the request,
particularly the implications of a restriction on the scope of the
audit engagement.
• If the auditor concludes that there is reasonable justification to
change the audit engagement to a review or a related service, the
audit work performed to the date of change may be relevant to
the changed engagement; however, the work required to be
performed and the report to be issued would be those
appropriate to the revised engagement.

Page56
Objective Type Questions (True/False, Correct/Incorrect)
1 Auditing implies systematic, critical and special examination of the
records of a business for a specific purpose.
Answer: Statement is False.
• Auditing involves examination of financial information contained
in financial statements to express an opinion on their true and fair
view.
• Systematic, Critical and Special examination of the records of a
business for a specific purpose is termed as investigation.
2 The purpose of an audit is to enhance the degree of confidence of
intended users in the financial statements.
Answer: Statement is correct.
the Conduct of an Audit in Accordance with Standards on
Auditing”, the purpose of an audit is to enhance the degree of
confidence of intended users in the financial statements.
• This is achieved by the expression of an opinion by the auditor on
whether the financial statements are prepared, in all material
respects, in accordance with an applicable financial reporting
framework.

Page57
3 Auditing is legally obligatory for all types of business organisations.
• Auditing is not legally obligatory for all types of business
organisations.
• Examples of such organisations are Proprietorship entities,
Partnership Firms, HUF.
4 Auditor's Opinion is an assurance as to the future viability of the
enterprise or the efficiency or effectiveness with which management has
conducted the affairs of the enterprise.
• SA 200 "Overall Objectives of an Independent Auditor and
Conduct of an Audit in accordance with Standards on Auditing”
specifically provides that the auditors opinion can not be assumed
as an assurance as to the future viability of the enterprise or the
efficiecny or effectiveness with which management has conducted
the affairs of the enterprise.
• The objective of an audit of financial statements, prepared within
a framework of recognised accounting policies and practices and
relevant statutory requirements, if any, is to enable an auditor to
express an opinion on such financial statements.

Page58
5 To maintain an adequate accounting system incorporating various
controls is the responsibility of Management.
Answer: Statement is True.
specifically provides that the management and, where
appropriate, TCWG have responsibility for the preparation and
presentation of the F.S. in accordance with the applicable FRF;
• This responsibility includes the design, implementation and
maintenance of internal control relevant to the preparation and
presentation of F.S. that are free from material misstatement,
whether due to fraud or error.
6 The term independence implies that the auditor should respect the
confidentiality of client information.
• To respect the confidentiality of client information is one of the
ethical requirements an auditor must possess in terms of SA 200.
• The term independence implies that the auditor must be and
appear to be free of any interest which is incompatible with his
integrity.

Page59
7 Auditor is able to obtain only reasonable assurance due to inherent
limitation of audit.
Answer: Statement is True, auditor is able to obtain reasonable assurance
only due to following limitations of audit:
• Use of Judgment
• Use of Test Checking
• Inherent Limitations of internal control
• Persuasive nature of audit evidence.
8 An unqualified opinion in audit report is a guarantee as to the future
viability of the company.
Answer: Statement is false,
specifically provides that the auditors opinion cannot be assumed
as an assurance as to the future viability of the enterprise or the
efficiency or effectiveness with which management has conducted
the affairs of the enterprise.
• An unqualified opinion implies that based on the audit evidence
collected, auditor is reasonable assured that financial statements
are free from material misstatements.

Page60
9 The audit engagement letter is sent by the client to auditor.
Answer: Statement is incorrect.
• As per SA 210 “Agreeing the Terms of Audit Engagements”, the
Audit engagement letter is sent by the auditor to his client.
10 Guidance Notes are mandatory in Nature.
• Guidance notes are designed to provide guidance to members on
matters which may arise in the course of their professional work
and on which they may desire assistance.
• Guidance Notes are recommendatory in nature.
11 The auditor is not expected to, and cannot, reduce audit risk to zero and
cannot therefore obtain absolute assurance that the financial
statements are free from material misstatement due to fraud or error.
Answer: Statement isCorrect,
the Conduct of an Audit in Accordance with Standards on
Auditing”, the auditor is not expected to, and cannot, reduce audit
risk to zero and cannot therefore obtain absolute assurance that
the financial statements are free from material misstatement due
to fraud or error.

Page61
• This is because there are inherent limitations of an audit, which
result in most of the audit evidence on which the auditor draws
conclusions and bases the auditor’s opinion being persuasive
rather than conclusive.
12 The Auditor compares the entries in the books of accounts with
vouchers and if two agrees, his work is done. [May 10 (2 Marks)]
Auditor responsibility is not restricted to comparing the books of
accounts with vouchers only, but also to determine reliability of
annual statement of accounts along with the truth and fairness.
13 The primary objective of an audit is to detect fraud and error in the
financial statements. [Nov. 14 (2 Marks)]
• Primary objective of an audit is to express an opinion on true and
fair view of financial statements.
• Prevention and detection of fraud is primarily the responsibility
of the management.
14 The basic objective of audit does not change with reference to nature,
size or form of the entity. [May 15, Nov. 17 (2 Marks)]

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Answer: Statement is Correct.
• Basic objective of auditing is to express an opinion on true and
fair view of financial statements.
• Any change in the nature, size or form of an entity does not
change the basic objective of the audit.
15 An auditor has nothing to do with prudence or profitability of a
company. [May 16 (2 marks)]
Answer: Statement is correct.
Conduct of Audit in accordance with SAs” the auditor’s opinion does
not assure, the future viability of the entity nor the efficiency or
effectiveness with which management has conducted the affairs of
the entity.
16 Engagement letter need not be entered for each year of the period of
auditor’s appointment. [Nov. 17 (2Marks)]
• As per SA 210 “Agreeing the Terms of Audit Engagement” in case
of recurring audits, the auditor shall assess whether circumstances
require revision in terms of the audit engagement and whether
there is a need to remind the entity of the existing terms of the
audit engagement.

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• The auditor may decide not to send a new audit engagement letter
or other written agreement each period. However, certain factors
like change in law, nature of business of client, management etc.
may make it appropriate to revise the terms of the audit
engagement or to remind the entity of existing terms.
17 The objective of audit is to obtain absolute assurance and to report on
the financial statements. [RTP-May 18]
Answer: Statement is incorrect,
Objective of audit is to express an opinion on true and fair view of the
financial statements. In this reference. SA-200 “Overall Objectives of
the Independent Auditor and conduct of audit in accordance with
Standards on Auditing” provides that in conducting an audit of
financial statements, the overall objectives of the auditor are:
(a) To obtain reasonable assurance about whether the financial
statements as a whole are free from material misstatement; and
(b) To report on the financial statements, and communicate as
required by the SAs, in accordance with the auditor’s findings.
19 The preparation of financial statements does not involve judgment by
management in applying the requirements of the entity’s applicable
financial reporting framework to the facts and circumstances of the
entity. [RTP-Nov. 18]

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• The preparation of financial statements involves judgment by
management in applying the requirements of the entity’s
applicable financial reporting framework to the facts and
circumstances of the entity.
• In addition, many financial statement items involve subjective
decisions or assessments or a degree of uncertainty, and there
may be a range of acceptable interpretations or judgments that
may be made.
20 Audit procedures used to gather audit evidence may be effective for
detecting an intentional misstatement. [RTP-Nov. 18]
• Fraud may involve sophisticated and carefully organised schemes
designed to conceal it. Therefore, audit procedures used to gather
audit evidence may be ineffective for detecting an intentional
misstatement that involves, for example, collusion to falsify
documentation which may cause the auditor to believe that audit
evidence is valid when it is not.
• The auditor is neither trained as nor expected to be an expert in
the authentication of documents.
21 An audit is an official investigation into alleged wrongdoing.
[RTP-Nov. 18]

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• An audit is not an official investigation into alleged wrongdoing.
• Accordingly, the auditor is not given specific legal powers, such as
the power of search, which may be necessary for such an
investigation.
22 The matter of difficulty, time, or cost involved is in itself a valid basis for
the auditor to omit an audit procedure for which there is no alternative.
[RTP-Nov. 18]
• The matter of difficulty, time, or cost involved is not in itself a
valid basis for the auditor to omit an audit procedure for which
there is no alternative.
• Appropriate planning assists in making sufficient time and
resources available for the conduct of the audit. Notwithstanding
this, the relevance of information, and thereby its value, tends to
diminish over time, and there is a balance to be struck between
the reliability of information and its cost.
23 Judgemental matters are transactions that are unusual due to either its
size or nature and that therefore occur infrequently. [Nov. 18 (2 Marks)]

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• Judgement in the context of audit is the application of relevant

training, knowledge and experience, within the context provided
by auditing, accounting and ethical standards, in making informed
decisions about the courses of action that are appropriate in the
circumstances of the audit engagement.
• Judgement is to be exercised throughout the audit and is
important in particular when deciding about:
1. Materiality & audit risk.
2. NTE of audit procedures.
3. Evaluating sufficiency & appropriateness of audit procedures.
4. Evaluating management judgment in applying applicable FRF.
5. Drawing conclusions based on audit evidence.
24 Management of the organisation is solely responsible for the compliance

of auditing standards while preparing financial statements.
[Nov. 18 (2 Marks)]
• Responsibility for the compliance of Auditing Standards is of

Auditor. While carrying out the audit, auditor is required to
ensure that audit is been performed in accordance with Standards
on Auditing and appropriate Report is issued.
• Management is responsible for the compliance of Accounting
Standards.

Page67
25 Engagement partner refers to the partner or other person in the firm
who is responsible for the audit engagement. [MTP-April 19]
Answer: Statement is Correct.
• As per SA 220 “Quality control for an Audit of Financial
Statements”, Engagement partner refers to the partner or other
person in the firm who is responsible for the audit engagement
and its performance, and for the auditor’s report that is issued on
behalf of the firm, and who, where required, has the appropriate
authority from a professional, legal or regulatory body.
26 There is no need to put the nature of engagement to writing.
[MTP-April 19]
Answer: Statement is Incorrect.
• As required by SA 210, terms of audit engagement need to be
recorded in writing.
• It is important, both for the auditor and client, that each party
should be clear about the nature of the engagement. It must be
reduced to writing and should exactly specify the scope of the
work.
27 Preconditions for an audit have not been defined in SA 210 “Agreeing
the Terms of Audit Engagements.” [RTP-Nov. 19]

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• As per SA 210 “Agreeing the Terms of Audit Engagements”,
preconditions for an audit may be defined as the use by
management of an acceptable financial reporting framework in
the preparation of the financial statements and the agreement of
management and, where appropriate, those charged with
governance to the premise on which an audit is conducted.
28 SA 210 does not require the auditor to agree management’s
responsibilities in an engagement letter or other suitable form of
written agreement. [RTP-May 20]
• SA 210 requires the auditor to agree management’s
responsibilities in an engagement letter or other suitable form of
written agreement.

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Chapter 1 “Nature, Objective and Scope of Audit” ©www.altclasses.

Compiled by: Pankaj Garg

Nature, Objective and Scope of Audit

"Marks Distribution of Past Exams (New Syllabus)"

1.1 – Meaning, Objectives and Scope of Audit

Q.1 “An audit is independent examination of financial information of any

form, when such an examination is conducted with a view to expressing

care to ensure that financial statements would not mislead anybody.

Compiled by: Pankaj Garg

statements would not mislead anybody. Explain stating clearly the

meaning of Auditing. [RTP-May 20]

Answer: Meaning of Audit:

“An audit is independent examination of financial information of any

entity, whether profit oriented or not, and irrespective of its size or

legal form, when such an examination is conducted with a view to

expressing an opinion thereon.” From this definition, following main

1. Audit is Independent examination of Financial information.

2. Audit may be carried out of all entities, may be profit oriented or

company engaged in business and Sec. 8 company which is a

non-profit organisation, both are required to get the accounts

audited under Companies Act, 2013.

3. The objective of the audit is to express an opinion on the

Points to be ensured that F.S. not misled anybody:

Auditor engaged to perform the task of performing audit need to

ensure the following:

Compiled by: Pankaj Garg

(b) Sufficient and Appropriate evidences are available for entries

made in books of account.

(d) Information contained in the financial statements is clear and

(e) Amounts shown in financial statements are properly classified,

described and disclosures are made in conformity with

applicable Accounting Standards.

(f) Financial statements reflect true and fair view of financial

results and financial position

Q.2 The objective of an audit of financial statements, prepared within a

framework of recognised accounting policies and practices and relevant

statutory requirements, if any, is to enable an auditor to express an

opinion on such financial statements.

State the objectives of Audit according to SA 200. [RTP-May 20]

Answer: Objectives of Audit:

(a) The objective of an audit of financial statements, prepared

Compiled by: Pankaj Garg

view of the financial position and operating results of an

is an assurance as to the future viability of the enterprise or the

efficiency or effectiveness with which management has

conducted the affairs of the enterprise.

the audit evidence obtained and from his knowledge of business

Answer: Points to be considered in determining Scope of Audit:

1. Audit should cover the examination of all aspects of an entity

Compiled by: Pankaj Garg

(a) comparing the financial statements with the underlying

(b) considering the judgements used by management in

preparing the financial statements.

4. Auditor is not expected to perform duties which fall outside the

scope of his competence.

5. Limitations, if any, on the scope of audit that impair the auditor’s

ability to express an unmodified opinion should be set out in his

Q.4 State briefly six important aspects to be considered by an auditor while

framing an opinion on accounts on finaliastion of audit of accounts.

Discuss overall audit approach.

State the principal aspects to be covered in an audit concerning financial

statement of account. [Nov. 15 (5 Marks)]

while conducting its audit of financial statements. Advise those principal

aspects. [RTP-May 18]