SA 200 (Revised) “Overall Objectives of the Independent Auditor & Conduct of audit in accordance with SAs

(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.
(b) To report on the F.S. and communicate as required by the SAs, in accordance with the auditor’s findings.

Aspects to be considered by Auditor while performing Audit

Ethical Professional Professional Judgement Sufficient Appropriate Conduct of Audit in Other Explanation
Requirements Skepticism audit Evidence accordance with SAs
 Comprise Code of Attitude that includes a  The application of  Sufficiency refers to  The auditor shall Scope of Audit
Ethics issued by questioning mind, relevant training, quantum and comply with All SAs  to examine whether the F.S. are
being alert to knowledge and Appropriateness relevant to the audit. prepared in accordance with FRF.
ICAI including
conditions which may experience,  Compliance with SA  The auditor’s opinion does not assure,
independence. refers to quality.
 within the context is to be specified in the future viability of the entity nor
indicate possible  Purpose: to reduce
 The fundamental provided by auditing, Audit report only in the efficiency or effectiveness with
misstatement due to audit risk to an which mngt. has conducted the affairs.
principles are: accounting and ethical case of actual
error or fraud, and a acceptably low level
1. Integrity standards, compliance. Preparation of F.S.
critical assessment of
2. Objectivity  in making informed and thereby enable  To achieve overall  is the duty of Mngt./TCWG.
audit evidence.
3. Professional decisions about the the auditor to draw objectives of audit,  Duty of management also includes to
Alertness is required courses of action reasonable use the objective
competence & make accounting estimates and
w.r.t.  that are appropriate in conclusions on which stated in Individual
due care selection and application of
1. Contradictory audit the circumstances of the SAs.
to base the auditor’s appropriate accounting policies.
4. Confidentiality, evidence. audit engagement.  In case Entire SA is
opinion.
& 2. Reliability of It is required w.r.t.: not relevant due to Inherent Limitations for an audit
documents.  Audit Risk: Risk that
5. Professional  Materiality & audit risk. non existence of (a) Nature of Financial reporting:
3. Conditions the auditor expresses prescribed
behavior  NTE of audit procedures. involves judgment by Mngt. based
indicating possible  Evaluating sufficiency & an inappropriate audit conditions, comply
 Independence on facts and circumstances.
frauds. appropriateness of audit opinion when the F.S. with relevant
comprises both (b) Nature of audit Procedures:
4. Circumstances procedures. are materially requirements.
directed towards obtaining
independence of requiring audit  In case of failure to
 Evaluating mngt misstated. reasonable assurance.
mind and procedures in judgment in applying achieve an objective
 Audit Risk is a (c) Balance between benefit and
independence of addition to those applicable FRF. determine the need
function of the RMM cost: user expectation to get AR
suggested in SAs.  Drawing conclusions of modified opinion
appearance. and detection risk. within a reasonable period and at
based on audit evidence. or withdrawal.
reasonable cost.

Compiled by: CA. Pankaj Garg Page 1

 SA – 210 (Revised) – “Agreeing the Terms of Engagement”
Objective of Auditor: To accept or continue an audit engagement only when the basis upon which it is to be performed has been agreed with the client.

Agreeing the terms of audit Engagement

At the Beginning of Audit During the Course of Audit

Initial audit Engagement Recurring Audit Mngt. request for changes in terms

Limitations Imposed by mngt.
Do not accept unless required
by law
No Limitations Imposed by Mngt.
Ascertain existence of
Preconditions*
Determine its effect on Level of
Determine requirements w.r.t.:
Assurance & reasonable
(a) Revision of terms of Engagement; &
Justification
(b) Remind the entity of existing terms

Preconditions for an audit Exist Not Exist Required Not Required Auditor Satisfied Not Satisfied
1. Determine whether the FRF is
acceptable.
Accept Audit Discuss matter Send New No Further Duty Record New Do not
2. Obtain agreement of mngt that it Terms in
with mngt. Engagement Letter accept the
understands its responsibilities for: Engagement changes
(a) Preparation of F.S. Letter
(b) Exercising necessary Internal
Do not accept audit in case of: CIRCUMSTANCES REQUIRING REVISION IN TERMS Mngt. not
Controls to enable the
(a) Unacceptable FRF  Indications that the entity misunderstands the objective and permit the
preparation of F.S. that are free
scope of the audit. auditor to
from material misstatements. or continue
 Revised or special terms of engagement.
(c) To provide the auditor: (b) Mngt. does not agree with  Recent change of senior management.
 Access to all relevant info. responsibilities  Significant change in ownership.
 Additional info that auditor Withdraw &
 Significant change in nature or size of the entity’s business.
requests from mngt. Report to
 Change in legal or regulatory requirements.
Compiled by: CA. Pankaj Garg appropriate
 Unrestricted access to persons  Change in FRF adopted in the preparation of the F.S.
authority
within the entity.  A change in other reporting requirements.

Compiled by: CA. Pankaj Garg Page 2

 SA – 220 (revised) “Quality Control for an audit of F.S.”

Objective: Implement QC Policies that provide Reasonable Assurance that audit complies with professional standards and audit report issued is appropriate

Leadership Ethical Independence Acceptance / Continuance Assignment of Engagement Performance Monitoring

Responsibilities
Requirements of Client relationship Engagement
Team
EP should EP to remain alert  Be satisfied that EP to be satisfied 1. Direction, Supervision and Obtain reasonable
performance:
emphasize the for evidence of Form a conclusion on appropriate procedures that ET & assurance that
compliance with Auditor’s Expert  EP shall take the responsibility for
ET the following: non-compliance regarding client acceptance directions, supervision & performance firm’s policies /
applicable independence not part of ET
 Compliance with relevant ethical requirements
/ continuance have been of audit engagement in compliance with procedures relating
have appropriate standards & regulatory requirements, &.
with requirements by ET followed. to QC are relevant,
Obtain relevant competence &  to make an appropriate AR.
professional through:  Determine whether capabilities to: 2. Reviews: adequate, and
information from Firm
Standards and  Inquiry. conclusions reached are  Perform audit EP shall take the following responsibilities: operating
appropriate. engagement in a. Reviews are being performed in
legal  Observation. Identify & Evaluate effectively.
accordance with policies / procedures.
requirements. circumstances & accordance
b. Be Satisfied that SAAE has been obtained
If there is an with Consider:
 Compliance
Relationship that threatens If EP obtains information to support the conclusions reached and
indications of non- independence that would have caused firm professional AR to be issued through  Results of firm’s
with firm’s
compliance with to withdraw the engagement, standards and  Review of Audit Documentation. monitoring
Quality Evaluate information on communicate information regulatory or  Discussion with ET
relevant ethical process.
Control identified breaches. promptly to firm legal 3. Consultation:
requirements, EP EP shall undertake consultation  Whether
Policies. requirements,
should:  wherever required. deficiencies
 Issuance of Determine if these Examples of Information and  Ensure its implementation
 Consult others in threaten independence  Enable an AR noted may affect
appropriate 4. Engagement Quality Control Review:
the firm. 1. Integrity of Principal that is required in case of listed entities. the audit
audit report. Take appropriate action Owners, Mngt & TCWG
 Determine appropriate in Matters to be evaluated by EQCR engagement.
 Ability to raise to eliminate such threats 2. Competency of ET to
appropriate the
concerns perform engagement.  Discussion of significant matters with ET.
or circumstances.
action. 3. Availability of necessary
without fear.  Review of FS & proposed audit report.
Promptly report capabilities, including time &
 Quality is
inability to take resources.  Review of selected audit documentation
essential & appropriate action to 4. Compliance with relevant
indispensable ethical requirements. 5. Differences of Opinion: follow the firm’s
in engagement Compiled by: CA. Pankaj Garg 5. Significant matters that policies & procedures for dealing with and
arises during the current or resolving differences of opinion.
performance.
previous audit engagement.

Compiled by: CA. Pankaj Garg Page 3

 SA – 230 (Revised) – Audit Documentation

General concepts Form, Content & Extent of Specific Documentation Retention Ownership
Documentation Period
 Documentation is the
Meaning: Record of: Auditor shall prepare audit documentation
property of the Auditor.
 Audit procedures performed that is sufficient to enable an experienced 7 Years from  May at his discretion
 Relevant audit evidence
auditor to understand: date of Audit make portions of or
obtained, &
(a) NTE of the audit procedures; Report extracts from
 Conclusions reached Compiled by: CA.
(b) Results of audit procedures performed, documentation available
Pankaj Garg
Purpose: includes the following: & audit evidence obtained; to client.
 Assist in Planning and
(c) Significant matters arising during the
performance of Audit.
audit and the conclusions reached Documentation of Documentation of Documentation of
 Direction, supervision &
Review of work. thereon, significant professional Discussion Departure from a matters arising after the
 To fix accountability. judgments made in the reaching those relevant requirement Date of Auditor’s Report
 Record for future reference. conclusions.
 Quality control review and Factors affecting form, content & extent  Significant  Reasons for the  Circumstance
inspections Matters departure. encountered.
1. The size and complexity of the entity.
 Conduct of external Discussed with  Alternative  New or additional
inspections. 2. The nature of the audit procedures to be
Mngt. And procedures procedures
performed. TCWG. performed. performed, audit
Nature documentation must 3. Identified RMM.  When and with evidence obtained,
provide for: 4. Significance of audit evidence obtained. whom the conclusions reached,
 Sufficient and appropriate 5. Nature & extent of exceptions identified. discussion took and their effect on the
record of the basis for place. auditor’s report.
6. Need to document a conclusion or the
auditor’s report.  How the auditor  When and by whom
basis for a conclusion not readily
 Evidence that the audit was address the the changes to audit
determinable from the documentation of
planned and performed in inconsistency (if documentation were
the work performed or audit evidence any detected made and reviewed.
accordance with SAs & other
obtained. during
regulatory requirements.
7. The audit methodology and tools used. discussion)

Compiled by: CA. Pankaj Garg Page 4

 SA 240 (Revised) – The Auditor’s Responsibilities Relating to Fraud in an Audit of Financial Statements

Fraud Risk Factors / Management Duties Auditor’s Responsibilities

Meaning and Nature of Fraud
Characteristics of Fraud

Meaning: Intentional Act involving use of deception to
obtain an unjust or illegal advantage.
Auditor is concerned with Fraud that causes
Material Misstatement.
Misstatement may result from:
A Fraudulent Financial Reporting
1. Recording fictitious journal entries to
manipulate operating results.
2. Inappropriate assumptions.
3. Changing judgements to estimate account
balances.
4. Omitting, advancing or delaying recognition of
events and transactions occurred during the
year.
5. Concealing facts that affect the amount
recorded in F.S.
6. Engaging in Complex Transactions that are
structured to misrepresent the financial
position or financial performance.
7. Altering records relating to significant
transactions.
B Misappropriation of Assets
1. Embezzling receipts.
2. Stealing physical assets.
3. Causing an entity to pay for goods and services
not received.
4. Using entity assets for personal use.
 Incentive or pressure to Commit Fraud: Primary responsibility To obtain reasonable assurance
Arises when mngt is under pressure to for prevention & that F.S. as a whole are free from
achieve an unrealistic target. detection of fraud rests material Misstatements.
 Perceived opportunity to do so: with Mngt and TCWG
Arises when an individual believes that Maintain an attitude of
internal control can be overridden. To ensure prevention of Professional Skepticism
 Rationalization to do so: fraud Mngt. must have an
Arises when an individual possess an commitment to create an Circumstances indicate existence of
attitude or character that allows them material Misstatement
culture of honesty and
knowingly and intentionally to commit a
Ethical behavior.
dishonest act.
Consider whether such a
Risk associated for non detection of material misstatements misstatement is an indication of
Fraud. If Fraud identified
 Due to Inherent limitations there is always an unavoidable risk of material
misstatement in F.S. due to Fraud.
 Risk of non detecting a material misstatement resulting from fraud is Communicate to Mngt.
higher than the risk of non detecting one resulting from error. &TCWG (also to Regulatory &
 Risk of Material Misstatements due to Management Fraud is higher than Enforcement authorities, if
due to Employee Fraud. required by Law
Conditions or events which increases risk of fraud or error Auditor unable to complete the
1. Discrepancies in Accounting Records: arises due to improper recording, engagement.
unauthorised transactions, last minute adjustments.
2. Conflicting or missing evidences: missing documents, altered Consider the Possibility of
withdrawing.
documents, non availability of original documents, unexplained items etc.
3. Unusual relationship between auditor & mngt: undue time pressure,
unusual delay in providing info, unwillingness to address weaknesses in IC. If withdraw:
4. Others: Mngt not allowing auditor to meet with TCWG, varied accounting  Discuss with Mngt & TCWG, &
 Report to appropriate persons
policies, frequent changes in accounting estimates.

Compiled by: CA. Pankaj Garg Page 5

 SA 250 (Revised) “Consideration of Laws and Regulations in an Audit of F.S.”
Management Responsibilities Auditor’s Responsibilities

Basic Responsibilities Specific Auditor Reporting responsibilities Indicators considered by

Responsibilities w.r.t. Auditor
Procedure in
Obtain general
case any Non-
understanding of L& R having Other L& R that do not To TCWG Auditor Report Regularity &
direct effect on affect amount and Compliance is Enforcement Authorities
 Legal & Regulatory
Framework applicable determination disclosures in F.S. but identified /
 Compliance by Entity of material compliance with which Suspected Material Unable to If required by Law
with that Framework. amount and may be fundamental to Effect on Conclude
due to  Investigations by regulatory
disclosures in operating aspects. F.S.
Limitation bodies.
Compliance of L & R is duty of F.S.
Mngt & TCWG and may be imposed by  Payment of fines or penalties.
performed through:  Payments for unspecified
Q/A
1. Monitoring legal requirements  Obtain services to consultants, related
& ensuring that operating parties etc.
obtain SAAE Perform limited understanding of
procedures are designed to Mngt. Circumstances  Excessive Sales commissions or
procedures: the Act.
meet these requirements. agent’s fees.
2. Instituting & operating
 Inquiring of Mngt; &
 Circumstances in  Purchasing at prices
appropriate systems of IC.  Inspecting Q/D Consider the significantly above or below
which it is
3. Developing, publicising and Correspondence with Effect market price.
to ensure occurred.
following a code of conduct. relevant Licensing /  Unusual payments in cash.
4. Ensuring employees are compliance Regulatory authority  Evaluate possible
 Unusual payments towards legal
properly trained & understand effects on F.S. and retainership fees.
the code of conduct.  Matters involving non-
 Discuss with  Payments without proper
5. Monitoring compliance with to identify instances of compliance.
Mngt. & TCWG exchange control
code of conduct & take actions non compliance.  If TCWG is involved, documentation.
to discipline employees who  Obtain legal communicate to Higher Level,  Existence of an information
fail to comply with it. advice wherever if any system which fails, to provide
6. Engaging legal advisors to
required  Otherwise, obtain Legal Advice an adequate audit trail or
assist in monitoring legal
Obtain Written Representation that all sufficient evidence.
requirements.
instances of non-compliance or  Unauthorised transactions or
7. Maintaining a register of Compiled by: CA. Pankaj Garg
suspected non-compliance have been improperly recorded
significant L & R with which the
transactions.
entity has to comply. disclosed to auditor.
 Adverse media comment.

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 SA 260 (Revised) – “Communication with TCWG”

Meaning of Auditor’s Responsibilities Communication Process Factors affecting Mode of

Management & Communication
TCWG

TCWG: Persons with Determine the Matters to be communicated  Communication may be  Size, operating structure,
responsibility for appropriate Oral /written control environment, & legal
overseeing the (a) Auditor’s responsibility in relate to F.S. Audit. Detail/Summarised structure of entity.
person to whom
(b) Planned scope & timing of audit Structured /Unstructured  In the case of an audit of special
strategic directions & communication
(c) Significant findings from audit w.r.t.  Should be in writing purpose F.S., whether the
obligations related to is to be made.
 Accounting Policies auditor also audits the entity’s
Accountability. when oral
 Accounting Estimates general purpose F. S.
Management : Person communication is not
 F. S. Disclosures  Requirements of respective law
with executive adequate. specifying written
 Significant difficulties encountered
responsibility for during the audit.  Communication should communication with TCWG in a
conduct of entity’s Examples of Significant difficulties be on timely basis prescribed form.

1. Significant delay in providing info  Expectations of TCWG,

operation
2. Unnecessarily brief time to complete including arrangements made
Evaluate adequacy of for periodic meetings or
the audit.
3. Extensive unexpected effort to obtain communication for the communications with the
SAAE. purpose of the audit. auditor.
 Determine the need to communicate with 4. Unavailability of Expected  The amount of ongoing contact
Governing body, if communicates with information. and dialogue the auditor has
If not adequate, evaluate
5. Restriction imposed by management. with TCWG.
subgroup. its effect, on the auditor’s
6. Scope limitation imposed by
 If all of TCWG are involved in managing the  Significant changes in the
management assessment of the risks of
membership of a governing
entity, and the matter has been material misstatement.
 Material weakness in I.C. body.
communicated with persons having
 Matters discuss with Mngt.
managerial responsibility, the matters need
 Other significant Matters.
not be communicated again to the same Compiled by: CA. Pankaj Garg
(d) Statement w.r.t. compliance of ethical
persons in their governing role. requirements regarding independence.

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 SA-265 “Communicating Deficiencies in Internal Control to TCWG & Management

Meaning of Auditor’s Responsibilities

deficiency in internal
control

(a) Inability of I.C to prevent Identification of deficiencies in Communication of deficiencies in Internal Control
detect & correct misstatement ; Internal Control

or
Mode of communication Content of communication
(b) Absence of control necessary
Determine whether on the basis of
to prevent, detect & correct
work done any deficiency in In writing
misstatements internal control is identified

Determine whether individually or To TCWG To Mngt. (a) Description of deficiencies

in combination they constitute (b) Explanation of their potential
significant deficiencies effect
(c) Sufficient information to explain
Indicators of Significant Deficiencies Significant Significant  that purpose of the audit is to
deficiencies deficiencies express an opinion
1. Evidence of ineffective aspects of control environment.
and other  I. C. is evaluated to design
2. Entity’s Risk assessment process – Absent/ineffective. deficiencies further audit procedures
3. Ineffective response to identified significant Risks.
4. Correction of prior period misstatements arising due to fraud/error.
5. Management inability to oversee F.S. Preparation.
Compiled by: CA. Pankaj Garg
6. Misstatements detected by the auditor’s procedures were not
prevented, or detected and corrected by the entity I.C.

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 SA 299 “Responsibility of Joint Auditors”

Division of work Co-ordination Responsibilities of Joint Auditors Reporting

By Mutual discussion If one auditor comes  Generally – a Single Report

Separate Joint & several
to know a matter
 If joint auditors disagree -
relevant for other, he
On basis of identifiable units should communicate Separate Report
or specified areas it immediately in  No one is bound by Majority.
writing to other joint For work  for work not divided
auditor before allocated  for joint decision w.r.t. N,
If not possible – with submission of report. T, E of audit procedure.
respect to followings:  for matters brought to
 Assets/Liabilities; or knowledge of all by any
 Income/Expense; or one of them and on which
 Period they all agree.
 Disclosure requirements
in F.S.
Work should not be
divided for Imp. areas  Compliance of audit
report with statutory
requirement
Work so divided should be
documented and
communicated to the
entity.

Compiled by: CA. Pankaj Garg

Compiled by: CA. Pankaj Garg Page 9

 Chapter 2 - Audit Strategy, Planning and Programming
Audit Strategy Audit Planning Audit Programming
Meaning: Designing Audit Approaches to achieve necessary audit assurance  Developing an overall plan for the  Detailed plan of work

Meaning

Meaning
at the lowest cost. expected scope and conduct of the  comprises of techniques and
1. Obtaining knowledge of business: audit and procedures,
It provides a frame of reference within which the auditor exercises  Developing an audit programme
 may also contain objectives for
his professional judgement to assess risk, to plan audit, to evaluate showing NTE of Audit procedures
each audit step.
audit evidence and providing quality services.  Acquiring knowledge of client  Nature of business.

Aspects to be covered
2. Performing Analytical Procedures at Initial Stages: To assess accounting system, policies and  Overall Plan

Matters to be
the potential for material misstatement in the F.S. as a whole. internal control procedures.  System of internal control and

considered
3. Evaluating Inherent Risk:  Establishing the expected degree accounting procedures.
On the basis of prior audit experience, controls exercised by of reliance on internal control.  Size and structure of
management, significant changes since last assessment.  Determining the NTE of audit organization.
Steps involved in Audit Strategy

Factors to be evaluated to assess inherent risk procedures.  Information regarding the

At the level of F.S. At the level of A/c Balance  Coordinating the work to be organization.
 Integrity of Management.  Quality of Accounting System. performed.  Accounting policies followed.
 Management experience  Susceptibility to Misstatement  To devote attention to important areas  Draw a broad outline
 Changes in management / Misappropriation of assets.  Identify & resolve potential

First Time Audit

 Filled up the details on a

Importance of

Development of Audit programme

 Pressures on Management  Complexity of transactions. problems. consideration of

planning
 Nature of entity business.  Degree of judgement involved.  Organized and managed audit. deficiencies in internal
 Factors affecting industry.  Unusual transactions  Selection of suitable ET. control.
4. Evaluating Internal Control System:  Coordination of work done  Determine the special
By documenting the extent of computerization, preparing/updating  Direction and supervision of procedures needs to be
flowcharts to record the transactions. engagement team. applied.
5. Formulating Audit Strategy: Requires consideration of:  Terms of engagement Review earlier programme and
 Engagement objective  Nature & timing of reports modified on account of:

Factors to be
 Experience gained during the

Engagement
considered
 Legal or statutory requirements.

Subsequent
 Knowledge of clients business
 Accounting policies & changes therein. previous audit.
 Preliminary judgements as to materiality
 Effects of new accounting/auditing  Important changes in internal
 Identified inherent risks control system, accounting
pronouncements.
 Extent of compliance testing  Identification of significant audit areas. procedures etc.
 NTE of Substantive testing  Setting of materiality levels.  Evaluation of internal control
 Points relating to planning and controlling the audit.  Degree of reliance on internal control. for current year.
1. Employment of Qualitative Resources. Relationship - Audit Strategy & Audit Planning 1. Substantial increase in Volume of turnover.

Circumstances
2. Significant changes in accounting procedures.
Benefits

2. Allocation of appropriate quantity of resources.

3. Determining the timing of deployment of resources.
4. Better management of resources in terms of direction, supervision, timing
of team meetings etc.
requiring
changes
 Inter-related to each other because change in one would 3. Observation w.r.t. ineffective internal control.
result change in other. 4. Substantial increase in book debts or
 Audit strategy is prepared before the audit plan and provides inventory.
the guidelines for developing the audit plan. 5. Suspicion as to misappropriation of assets.

Compiled by: Pankaj Garg Page 1

 CHAPTER 3 – RISK ASSESSMENT & INTERNAL CONTROL
1. AUDIT RISK 2. INTERNAL CONTROL
Meaning Risk that the auditor gives an inappropriate audit opinion when the financial The process designed, implemented and maintained, by TCWG and Management, to provide
statements are materially misstated. reasonable assurance about the achievement of an entity’s objectives with regard to reliability
Definition
Consideration Audit Risk need to be considered at Overall Level as well as at the level of of financial reporting, effectiveness and efficiency of operations, safeguarding of assets, and
Individual account balance or classes of transactions compliance with applicable laws and regulations.
Meaning Factors to be considered Control 1. Whether all transactions are recorded;
Inherent

Susceptibility of an account balance or  Experience on prior audits. Objectives 2. Whether recorded transactions are real;
of
class of transaction to a material  Controls established by Mngt. Accounting
3. Whether all recorded transactions are properly valued;
misstatement, assuming that there are  Significant changes from last Control 4. Whether all transactions are recorded timely; properly posted;
no internal controls. assessment. System 5. Whether all transactions are properly classified & disclosed; properly summarized.
Meaning Steps in Assessment of Control Risk Narrative Complete and exhaustive Flow Chart
Records description of system as found in  Graphic presentation of I.C. of various sections
Components

Risk that material misstatements will 1. Preliminary assessment of control Methods of the operation by the auditor in form of a diagram full with lines & Symbols.
Control

not be prevented or detected and risk. Collecting
corrected on a timely basis by the 2. Documentation of understanding info to
internal control system. & assessment of control risk. review I.C.
3. Performing Tests of Controls
4. Final Assessment of Control Risk.
 Risk that the substantive procedures performed by auditor fails to detect
Detection
Check List Series of instructions and/or
questions which a member of
auditing staff must follow.
IC Set of Questions designed to
Questionnaire provide a thorough view of state
of I.C.
 Useful method to determine whether errors
 Provide most concise and comprehensive way
to review I.C.
 Provide a neat visual picture of various
activities involving flow of documents through
various stages, authorizations required, filing of
documents, final disposal .
Letter of weakness

material misstatements. Surprise exist and where they exist  SA 260 - Weaknesses in I.C. identified during the
check in  ICAI Recommendation – Surprise checks should audit should be communicated to mngt & TCWG.
 Some detection risk would always be present even if an auditor was to form part of normal audit.
examine 100% of the account balance or class of transactions. Internal  Helps TCWG to improve the systems.
 Surprise check should be made at least once in
Control the course of an audit.  Must indicate that evaluation of I.C. is done to
determine NTE of further audit procedures.
 IR and CR are highly interrelated as in many cases management reacts to IR by 3. INTERNAL CHECK
IR & CR

designing accounting and internal control systems to prevent or detect and Checks on day to day transactions, which operate continuously as a part of routine system, whereby work
Relationships

correct misstatements. Meaning of one person is proved independently to work of another, the object being prevention and earlier
 As a result, auditor needs to make a combined assessment of IR & CR as RMM. detection of error or fraud.
 Inverse relationship between RMM and DR.  To detect fraud and error with ease.
RMM & R

 When RMM is high, DR needs to be low to reduce audit risk to an acceptable  Avoid & minimize possibility of occurrence of fraud & error.
low level. Objectives  Increase efficiency of staff.
 When RMM is low, auditor can accept a higher DR.  Protect integrity of business.
 Mathematically AR = IR X CR X DR  Prevent misappropriation of cash & falsification of accounts.
Meaning Stages  No single person should have an Independent Control.
An audit Approach that 1. Understanding the auditee  Duties of staff members should be changed from time to time.
1. Analyses Audit Risks,  Every member should be encouraged to go on leave atleast once.
Risk operations.
2. Set materiality thresholds based on 2. Determination of residual Risk Considerat  Persons having physical custody of assets must not be allowed access to books of accounts.
Based
audit risk analysis and 3. Manage residual Risk. ions  Implement Budgetary control procedures.
Audit  Judicious distribution of financial and administrative powers.
3. develop audit programmes that 4. Reporting to Auditee.
allocates a larger portion of  Procedures should be laid down for physical verification.
resources to high risk areas.  Accounting procedures should be reviewed periodically.

Compiled by: Pankaj Garg Page 1

 SA 500 “Audit Evidence”

Meaning and Nature of Auditor’s duties when an information to be used as audit evidence Audit Procedures & Methods
Audit Evidence (A.E.) for obtaining audit evidence

Meaning of A.E. Information prepared using Information Procedures to obtain A.E. Methods to obtain A.E.
Information used by auditor work of Management Expert Produced by entity (a) RAP 1. Inspection
(b) FAP (Responses): 2. Observation.
In arriving at the conclusion  Tests of Control (ToC), 3. External Confirmations
1 Evaluate Competence, Capability and Obtain A.E. about the
Objectivity of the Expert  Substantive 4. Recalculation
On which auditor’s opinion is Source of Information for evaluation: 1. Tests of Details (ToD) 5. Re-performance
Accuracy and
based.  Personal Experience with previous work. 2. Substantive Analytical 6. Analytical procedures
Completeness of info.
 Discussion with that expert.
Nature of A.E. Procedures (SAP) 7. Inquiry (Oral/Written)
 Discussion with others. Evaluate whether info
A.E. needs to be  Knowledge of expert’s qualification, is
memberships, other forms of recognitions.
 Published books or papers. Reliability of Audit Evidence
Sufficient Appropriate sufficiently precise
 Auditor’s expert.
Measure of Measure of and detailed for
2 Obtain an understating of expert work
quantity quality auditor’s purposes.
 Area of Specialty
Affected by Relevance &  Applicable professional standards.
 RMM & reliability in  Legal & Regulatory Requirements. (a) External Evidences are considered more reliable than internal evidences.
 Quality of providing  Assumptions and Methods used.
(b) The reliability of internal evidence is increased when the related controls, imposed
 Nature of Source Data used.
Audit support for by entity are effective.
3 Evaluate the appropriateness of Expert work
evidences conclusion. (c) Audit evidence obtained directly by the auditor is more reliable than audit
 Finding & Conclusion – Relevance,
Reasonableness & Consistency with other evidence obtained indirectly.
A.E. (d) Audit evidence in documentary form, is more reliable than evidence obtained
Compiled by:  Assumptions and Methods – Relevance
orally.
and Reasonableness.
CA. PANKAJ GARG (e) Audit evidence provided by original documents is more reliable than audit
 Source Data – Relevance, Completeness
and accuracy. evidence provided by photocopies.

Compiled by: CA. Pankaj Garg Page 1

 SA 501 “Audit Evidence – Specific Considerations for Selected Items”

Inventory – Litigation & Claims – Completeness

Compiled by: CA. Pankaj Garg
Existence & Condition
General Procedures
When inventory is material to the F.S.
the auditor shall obtain SAAE
Special Procedures
1 Inventory counting conducted at date other than
B/S date
Perform audit procedures to obtain audit evidence
Auditor is required to identify litigation and claims
by following procedures:
 Inquiry: of Mngt. & others within entity,
including in house legal counsel.
 Review – minutes of meetings of TCWG,
communication between entity & external legal
counsel.
 Review – legal expenses account.

If management refuses to permit auditor to

about whether changes in inventory between the count
regarding existence & condition by communicate with legal counsel / external legal
date and the date of the F.S. are properly recorded. counsel refuses / auditor unable to collect SAAE
2 Auditor unable to attend Inventory Count by performing alternate procedures
(a) Attendance at physical inventory
Make or observe some physical counts on an alternative
counting, unless impracticable, to: Modify Opinion in accordance with SA 705
date,
 Evaluate mngt. instructions &
procedures for recording & and perform audit procedures on intervening Segment Reporting –
controlling the results of the entity’s transactions Presentation & Disclosures
physical inventory counting; 3 Attendance at inventory count is impracticable
 Observe the performance of Perform alternative audit procedures to obtain S.A.A.E. Obtain SAAE regarding presentation & disclosure of segment
regarding existence and condition of inventory. information in accordance with the applicable FRF by:
management’s count procedures;
(a) Obtaining an understanding of the methods used by
 Inspect the inventory; management in determining segment information, and
If it is not possible to do so, modify the opinion in the
 Perform test counts; auditor’s report in accordance with SA 705.  Evaluate whether such methods are likely to result in
(b) Performing audit procedures over the disclosure in accordance with the applicable FRF; and
4 Inventory under custody and control of Third Party
 Where appropriate, testing the application of such
entity’s final inventory records to Obtain S.A.A.E by performing the following: methods; and
determine whether they accurately (a) Request confirmation from third party. (b) Performing analytical procedures or other audit
reflect actual inventory count results. (b) Perform Inspection/other audit procedure. procedures appropriate in the circumstances.

Compiled by: CA. Pankaj Garg Page 2

 SA – 505 “External Confirmation”
The objective of the auditor, when using external confirmation procedures, is to design and perform such procedures to obtain relevant and reliable audit
evidence.

Meaning & Type of E.C. External Confirmation Audit Procedures in Special Circumstances Limited use of –ve
Procedures Request
Mngt. refuses to allow the auditor to send request
Audit Evidence obtained as a direct written As it provides less
Determining the information to
response to auditor from 3rd Party in  Inquire the reasons persuasive evidence
be confirmed.
Paper/Electronic/Other form.  Evaluate the implications on RMM than the positive
Selecting the Appropriate Third  Perform Alternative Audit procedure. Confirmation request.
2 Types Party.  Refusal appears to  Communicate to
be unreasonable TCWG.
+ ve Request - ve request Designing the confirmation
Circumstances in
request.  Unable to collect  Determine its affect
Request that 3rd Party Request that 3rd Party
which negative
respond directly to respond directly to audit evidence on Opinion
Sending the request including request may be used
auditor auditor
follow up. Responses to E.C. request as sole substantive
indicating whether it only if it disagrees
agrees or disagrees  Creates Doubt Obtain Further procedure:
With the info in request with the information in Factors to be considered while Evidences
 Low RMM.
or the request designing E.C. request:  Not Reliable Consider its affect on
providing requested  Population consists
 Assertions being addressed. NTE of other procedures
info. of large no. of small,
 Specific identified RMM.  No Response Perform Alternative
homogenous
Areas where External Confirmation may be obtained:  Layout and presentation of procedure
(a) Bank balance & Other confirmation from account balances.
request.
 Unable to collect Determine its affect on
bankers  Expectation of low
 Prior Experience of audit.
(b) Account Receivable/Account Payable Balances evidence Opinion
 Method of Communication. exception rate.
(c) Stock Lying with Third Parties  Exception occurs Investigate to determine
 Management Authorization.  Auditor not aware
(d) Property Title Deed held by third parties
misstatement of circumstances
(e) Investments Purchased but delivery not taken.  Ability of confirming party to
(f) Loan from Lenders provide the requested that 3rd party
(g) Terms of agreement or Transaction with Third information Compiled by: CA. Pankaj Garg disregard request.
Parties

Compiled by: CA. Pankaj Garg Page 3

 SA – 510 “Initial Audit Engagements – Opening Balances”
Meaning of Initial Audit Engagement: An Engagement in which financial statements for prior period are not audited or were audited by predecessor auditor.
Meaning of Opening balance – A/c balance that exist at beginning of period & also includes disclosures exists at beginning of period.

Audit Procedures Audit Conclusion & Reporting

Opening Balance Consistency of Modification in Opening Balance Consistency of Modification in

Accounting Predecessor Accounting Predecessor Auditor’s
Auditor’s Report
Policies Policies
Report
Balance

 Read most recent F.S. and auditor Obtain SAAE Evaluate the Unable to Contain material Inconsistency Modification remains
report thereon. effect of obtain SAAE misstatements not exists relevant & material for
 Obtain S.A. audit evidence w.r.t. modification properly or Current Period F.S.
existence of any material accounted / Changes not

misstatement by disclosed in properly

 Determining correct b/f of prior current year F. S. accounted or

period closing balance. disclosed

 Determining application of
appropriate accounting policies. w.r.t.
Modify Current Year
 If any misstatement detected consistent
Qualified / Audit Report
perform additional procedures to application
Disclaimer Qualified / Adverse Report accordingly
determine their effect on current or
Period financial statements. Proper
 If misstatement exists in Current accounting & in assessing Compiled by: CA. Pankaj Garg
Period F.S. communicate to Mngt & disclosure for RMM in Current
TCWG. changes. period F.S.

Compiled by: CA. Pankaj Garg Page 4

 SA 520 “Analytical Procedures”

Meaning and Nature of Analytical Procedures Auditor’s Procedures

Evaluation of financial information 1 Determine the suitability of particular substantive analytical procedures (SAP)
Following factors requires consideration:
through analysis of relationships
1. SAPs more suitable to large volumes of transactions tending to be predictable over time.
2. But suitability of AP influenced by:
among both financial and non-financial data.
AND  Nature of assertion.
also encompass such investigation as is necessary of  Auditor’s assessment of APs effectiveness to identify material misstatement.
identified fluctuations or relationships that are 3. In some cases unsophisticated predictive models may be useful.
inconsistent with other relevant information or that 4. Different types of APs provide different levels of assurance.
differ from expected values by a significant amount. 5. Particular SAP may be considered suitable when ToD are performed on same assertion.
Analytical Procedures
2 Evaluate the reliability of data
Following factors affects the reliability:
Consideration of Consideration of
 Source of the information available.
Comparisons of relationships among
Financial Information  Comparability of the information available. Compiled by: CA. Pankaj Garg
with comparable Elements of financial  Nature and relevance of the information available, and
information for prior information  Controls over the preparation of the information
periods. or 3 Develop an expectation of recorded amounts or ratios and evaluate whether the expectation is
or Financial information sufficiently precise to identify material misstatement.
with anticipated results and relevant non-
4 Determine the amount of any difference of recorded amounts from expected values that is
of the entity financial information.
acceptable without further investigation.
or
Auditor’s expectations 5 Investigating Results of Analytical Procedures
or If auditor identified fluctuations or relationships that are inconsistent with other relevant information
Similar industry or differ from expected values by a significant amount, the auditor shall investigate such differences by:
information. (a) Inquiring of management; and
(b) Performing other audit procedures as necessary in the circumstances.

Compiled by: CA. Pankaj Garg Page 5

 SA – 530 (Revised) “AUDIT SAMPLING”

Meaning & Types of Audit Sampling Sampling risk Auditor’s Duties

Application of audit procedures to < Risk that auditor’s conclusion based on a sample may be different from 1 Sample design, size and selection of items
100 % of items within a population. the conclusion if the entire population were subjected to same audit (i) While designing, consider the purpose of
procedure. the audit procedure and the
Types of Sampling
characteristics of the population.
(a) Statistical Sampling: An
(ii) Sample size should be sufficient to
approach to sampling that has the
reduce sampling risk to an acceptably
following characteristics: Test of Tests of details Compiled by: low level.
 Random selection of the controls CA. Pankaj Garg (iii) Selection should be in such a way that
sample items; and each sampling unit in the population has
a chance of selection.
 The use of probability
Controls are Material Affects audit 2 Perform audit procedures
theory to evaluate sample
more effective misstatements does effectiveness and is (i) Perform audit procedures, appropriate
results, including
to the purpose, on each item selected.
than they not exist when in more likely to lead to
measurement of sampling (ii) If the audit procedure is not applicable
actually are fact it does. an inappropriate
risk. to selected item, perform the procedure
audit opinion. on a replacement item.
(b) Non Statistical Sampling: A
sampling approach that does not (iii) If the auditor is unable to apply designed
audit procedures/alternative procedure
have characteristics of random Controls are Material Affects audit to a selected item, consider that item as
selection and use of probability
less effective misstatement exists efficiency as it would a deviation.
theory is considered non-
than they when in fact it does lead to additional 3 Evaluation of results of audit sampling
statistical sampling. To determine whether the use of audit
actually are not work to establish
that initial sampling has provided a reasonable basis
for conclusions about the population that
conclusions were
has been tested.
incorrect.

Compiled by: CA. Pankaj Garg Page 6

 SA – 540 (Revised) “Auditing Accounting Estimates(AE), including Fair Value Accounting Estimates and Related Disclosures”

Objective of Auditor: To obtain SAAE whether (a) AE including Fair Value AE are reasonable; and (b) related disclosures in the F.S. are adequate.

Meaning & Nature of Auditor’s Duties

Accounting Estimates Compiled by: CA. Pankaj Garg

 Accounting estimate: Risk Assessment Procedures & Responses to Assessed Risks

“An approximation of a monetary Related Activities
amount in the absence of a Based on assessed RMM, auditor shall determine:
precise means of measurement”.  Whether management has appropriately applied the applicable FRF.
This term is used for an amount  Whether the methods are appropriate and have been applied consistently.
1. Obtain an understating of:
measured at fair value where
 Requirements of applicable FRF
there is estimation uncertainty.
 How management identifies
 Estimation Uncertainty: General Responses to Specific Responses to Significant Estimation
transactions, events and
The susceptibility of an Assessed RMM Uncertainties
conditions that give rise to need
accounting estimate & related 1. Determine whether events 1. Evaluate the following:
for accounting estimates.
disclosures to an inherent risk of occurring upto date of  How management has considered
 Estimation making process
precision in its measurement. auditor’s report provide alternative assumptions or outcomes,
adopted by mngt. and data on
 Examples of Accounting Estimates
which they are based. audit evidence regarding  How management has addressed
 Provision for Bad Debt,
Estimation making process AE. estimation uncertainty in making the
 Inventory loss,
 Methods/Model used in making 2. Test how management accounting estimate.
 Warranty Obligations,
Accounting estimates. made the accounting  Whether the significant assumptions
 Depreciation,
 Relevant Controls estimate and the data on used by management are reasonable.
 Provision against carrying
 Use of Management Expert. which it is based.  Management’s intent to carry out
amount of investments, etc.
 Changes in the methods from 3. Test the operating specific courses of action and its ability
 Examples of Fair Value A.E.
the prior period along with effectiveness of the to do so.
 Share Based Payments,
reasons. controls. 2. If in auditor’s judgement, management has
 Assets held for disposal,
 Assessment of effect of 4. Develop a point estimate not adequately addressed the effects of
 Financial Instruments,
estimation uncertainties. or a range to evaluate estimation uncertainty, the auditor shall
 Assets acquired in business develop a range with which to evaluate the
2. Review of outcome of accounting management’s point
combinations
estimates of prior period. estimate. reasonableness of the accounting estimates.

Compiled by: CA. Pankaj Garg Page 7


Meaning of Related Party
EITHER
Related party as defined in applicable FRF (AS
18).
OR
Where applicable FRF establishes minimal or
no RP requirements:
a. A person/entity having control/ significant
influence, over reporting entity;
b. Entity over which reporting entity has
control / significant influence, and
c. Entity under common control with
reporting entity, through:
• Common controlling ownership
• Owners who are close family members
• Common key Mngt.
Auditor’s responsibilities in relation to RP
Obtain an understanding of RP
Relation and Transactions:
a. To recognize Fraud Risk factors
General
b. To conclude whether F.S. in so far
as they are affected by those
relations and transactions achieve
• true and fair presentation and
• not misleading.
 Perform audit procedures to
Identify, Assess & Respond to RMM.
Specific (FRF established
 Evaluate whether Identified RP
accounting & Disclosure
relationships & Transactions have
requirements)
been appropriately accounted for &
disclosed as per FRF.
 Obtain WR from Mngt./TCWG w.r.t.
 Disclosure to auditor the
identity of RP of which they are
aware; and
 Appropriate accounting
disclosure as per FRF.
Compiled by: CA. Pankaj Garg
SA 550 “Related Parties” Compiled by: CA. Pankaj Garg
Auditor’s Duties
Risk Assessment procedures Responses to Assessed Risks
1 Understanding the Entity’s RP relationship and Transactions 1 Identification of unidentified /
undisclosed RP or RP transaction.
a. Auditor to inquire management regarding:
• Identity of entity’s RP, changes from prior period.  Communicate to other members of ET.
• Nature of relationships between entity and RP.  Request Mngt to identify the transactions
• Type & purpose of transactions with RP. with the newly identified RP.
b. Obtain understanding whether mngt has established controls to:  Inquire reasons for mngt failure to
 Identify, account for & disclose RP relationships & transactions. identify RP or disclose RP relationship
and transactions.
 Authorise & approve significant transactions with RP.
 Reconsider the risk that other
 Authorise & approve significant transactions outside normal course of business.
unidentified RP or undisclosed RP
2 Maintaining Alertness for RP Information when Reviewing
transactions may exist.
Records/Documents
 If non disclosure appears intentional,
 Auditor to remain alert when inspecting records w.r.t. info indicating existence of RP
relationships or transactions not previously identified or disclosed.
evaluate implications for audit.
 If auditor identifies significant transactions outside entity’s normal course of 2 Identified significant RP Transactions
outside Entity’s Normal course of
business, inquire of mngt about (a) Nature of these transactions, and (b)
Business.
Whether RP could be involved.
 Inspect underlying contracts to evaluate
Possible Sources for identification of RP Information:
business rationale.
1 Income Tax Returns 7 Shareholder’s Register
 Examine the terms on which transactions
2 Internal Audit Report 8 Life insurance Polcies
takes place.
3 Contracts with Mngt 9 Statement of conflict of interest
 Collect evidences w.r.t. approval and
4 Contracts outside normal 10 Information supplied to authorisation of transaction.
course of business regulatory authorities  Collect evidences for appropriate
5 Contracts re-negotiated 11 Specific Invoices from advisors accounting & disclosure in compliance of
6 Register of Investments 12 FRF.
3 Assertions that RP Transactions were
3 Identifying Fraud risk factors
conducted on arm Length price.
Domination of mgmt by a single person or small group without compensating
 Collect SAAE w.r.t. mngt assertion of
controls is a fraud risk factor.
Arm’s length transaction.
Indicators of dominant influence:
 Compare transaction prices with the
 RP has vetoed significant business decisions taken by mgmt or TCWG.
prices for identical transactions
 Significant transactions are referred to RP for final approval. prevailing in ordinary course of business.
&  No/ little debate among mgmt or TCWG regarding business proposal initiated by RP.
 Engage expert to determine market value.
 Transactions involving the RP are rarely independently reviewed / approved.
Page 8
 SA 560 “Subsequent Events”
Meaning – Events occurring between the date of F.S. and the date of Auditor’s Report AND Facts that become known to auditor after the date of Auditor’s report.

Auditor’s Duties Compiled by: CA. Pankaj Garg

Events occurring between the date of F.S. and the date of Auditor’s report Facts that become known to Auditor after date of Auditor’s report

(i) Perform procedures to obtain SAAE that all events which require adjustment / Before issue of F.S. After issue of F.S.
disclosure have been identified. 1. In general Auditor has no obligation. 1. In general Auditor has no obligation.
2. However, in case of significant 2. However, in case of significant
(ii) For the purpose of determining nature and timing of procedures, auditor may:
matter matter
(a) Obtain the understanding of procedures applied by mngt for identification of
 Discuss with Management  Discuss with Management
significant events.  Determine need to amend F.S.
 Determine need to amend F.S.
(b) Inquire the Management as to Occurrence of subsequent events which may  Inquire how mngt intends to
 Inquire how mngt intends to
affect the F.S. address the matter in F.S.
address the matter in F.S.
(c) Read the Minutes of Meetings that held after the B/S date. 3. If Mngt. amend the F.S. audior shall
3. If Mngt. amend the F.S. auditor shall
 Carry out procedures on
(d) Study the Interim Financial Statements, if any.  Extent procedures to date of new amended F.S.
(iii) If auditor identifies any event which require any adjustment/disclosure, he should report, and  Review the steps taken by mngt
ensure its appropriate treatment in F.S.  provide a new auditor report on to ensure that recipient of F.S.
(iv) Obtain a WR from the Mngt. that all known events have been appropriately amended F.S. are informed of the situation.
adjusted/disclosed, as the case may be. or  provide a new auditor report on
 Amend the audit report to amended F.S.
Specific Inquiries to be made from management include an additional date or
1. Whether new commitments, borrowings or guarantees have been entered into. restricted to that amendment  Amend the audit report to
and include an EOM/OMP. include an additional date
2. Whether sales or acquisitions of assets have occurred or are planned.
4. If mngt refuses to amend the F.S. restricted to that amendment
3. Whether there have been increases in capital or issuance of debt instruments.
 Modify the report if not yet and include an EOM/OMP.
4. Whether any assets have been appropriated by government or destroyed. 4. If mngt refuses to amend the F.S.
5. Whether there have been any developments regarding contingencies. provided to entity.
 Notify to mngt and TCWG, that
6. Whether any unusual accounting adjustments have been made.  If report already issued, notify to
the auditor will seek to prevent
7. Whether any events have occurred that will bring into question the appropriateness mngt and TCWG not to issue F.S. reliance on Auditor’s Report.
of accounting policies used in the F.S.. to third parties.  If mngt/TCWG does not take
8. Whether any events have occurred that are relevant to the measurement of  If mngt still issues F.S., take necessary steps, take appropriate
estimates or provisions made in the F.S. appropriate action to prevent action to prevent reliance on
9. Whether any events have occurred that are relevant to the recoverability of assets. reliance on auditor’s report. auditor’s report.

Compiled by: CA. Pankaj Garg Page 9

 SA – 570 (Revised) “Going Concern”

Mngt. Responsibilities Auditor’s Duties. Conditions that may case doubt

about G.C. Assumption
Responsibilities
 Asses the entity’s ability To obtain SAAE about the For this purpose auditor is required to A Financial Conditions
to continue as a going appropriateness of mngt use of a) Cover the same period as that used by mngt. 1. Net Liability position.
concern. going concern assumption 2. Non renewal of borrowings.
b) Consider whether mngt has considered all
 General purpose F.S. are 3. Withdrawal of Financial
relevant information of which auditor is aware. Support.
prepared on a going Determine whether mngt has
4. Adverse Financial Ratios.
concern basis unless already performed a preliminary  Request mngt to make its assessment of entity’s 5. Inability to pay creditors.
management intends to assessment of entity ability to ability to continue as going concern. 6. Substantial Losses.
liquidate the entity or to continue as going concern.
 Evaluate management plans for future. 7. Inability to arrange finances.
cease operation. 8. Negative Operating cash flow.
 Consider the reliability of cash flow forecast.
 In case F.S. are not Auditor identifies events that cast 9. Deterioration in value of assets.
prepared on going significant doubt on entity ability  Considering availability of additional facts or
10. Discontinuation of dividend.
concern basis, the fact to continue as going concern. information since the date of mngt assessment. B Operating Conditions
would need to be  Requesting WR from Mngt. regarding their plans 1. Management intention to
appropriately disclosed. Perform additional procedures for future action and the feasibility of these plans liquidate the entity.
2. Loss of KMP.
3. Loss of a major market, key
Going concern Mngt. unwilling to make its assessment customer, franchise etc.
Assumption Appropriate Going Concern Assumption 4. Labour Difficulties.
but Material Uncertainty Inappropriate 5. Shortage of Important Supplies.
exists 6. Emergence of successful
competitor.
C Others
Determine whether F.S. Adverse Opinion Consider the implications on Auditor’s Report
1. Non compliance of Statutory
makes relevant disclosure Requirements.
2. Pending legal proceedings
Yes No against the entity.
Compiled by: CA. Pankaj Garg 3. Uninsured or underinsured
EOM Q/A assets.

Compiled by: CA. Pankaj Garg Page 10

 SA 580 “Written Representation”

Meaning and Nature of WR Requirements of SA 580

A written statement by Matters for which WR may be obtained Auditor Responses in different Situations
Management

Management refuses to Reliability of WR is doubtful

provided to auditor
provide WR
(a) Preparation and
presentation of Financial
to confirm certain matters
Statements:  Discuss the matter with  In case of having concerns

Management responsibilities
or
In accordance with applicable management about competence and
to support other audit evidence. FRF.  Re-evaluate the reliability integrity of mngt, determine
 WR recognized as audit evidence (b) Information provided to and integrity of management. their effect in reliability of
as a response to inquiries. 1 Auditor:  Determine possible effect on WR and other audit
 WR do not provide SAAE as agreed in terms of the opinion. evidence in general.
 WR should be in the form of a engagement  Issue disclaimer of opinion.  IF WR inconsistent with
representation letter addressed (c) Description of management other evidences, perform
to Auditor. Responsibilities: additional procedures.
 WR shall be obtained for all In the manner as described in  If conclude that WR is not
Compiled by:
financial statements and terms of engagement reliable, determine possible
period(s) referred in Auditor’s As required by other SA CA. Pankaj Garg
effect on audit opinion.
Report. Or  In case of sufficient doubt
Others

 Date of WR shall be as near as 2 Where auditor determines that it over integrity of

practicable to the date of the is necessary to obtain one or more management, issue a
Auditor’s report. WR. disclaimer of opinion.

Compiled by: CA. Pankaj Garg Page 11

 SA – 600 “Using the Work of Another Auditor”
Applicability: In situation where an auditor (principal auditor - PA), reporting on the financial information of an entity, uses the work of another auditor (other auditor - OA) w.r.t.
to the financial information of one/more components (Division, Branch subsidiary, J. V. etc.), included in the financial information of the entity.
Non applicability: (a) Joint auditors (b) Auditor’s relationship with a predecessor auditor.

Principal Auditor’s Procedures Documentation Coordination Reporting

1. Consider the professional competence of Other 1. Components whose FS are 1. Sufficient liaison/co- 1. Express a qualified /
Auditor, if Other Auditor is not a member of ICAI. audited by Other Auditor ordination between Principal disclaimer of opinion

2. Visit component and examine books of account, if and Other auditor. because of scope
and their significance to
limitation:
essential. the financial information
2. Principal auditor may require
 If Principal Auditor
3. Obtain sufficient appropriate evidence, that work of Other Auditor to answer a
of the entity as a whole. concludes that he
Other Auditor is adequate for Principal Auditor's detailed questionnaire.
2. Names of the other cannot use the work of
purposes. 3. Other Auditor should
auditors. Other Auditor;
4. Discuss audit procedures applied by Other Auditor. coordinate with Principal
3. Any conclusions reached  PA unable to perform
5. Review a written summary of Other Auditor’s Auditor:
sufficient additional
that individual  Adhering to time-table.
procedures and findings through
procedures regarding
questionnaires/checklist. components are not  Bringing to the attention of
FI of the component
6. Consider significant findings of Other Auditor: material. PA any significant finding.
audited by OA.
 Discuss audit findings with OA and Mgt. of 4. Procedures performed  Compliance with relevant
2. Report should state
component. regarding components. statutory requirements.
clearly division of
 Perform supplemental tests if necessary. 5. Conclusions reached.  Respond to detailed
responsibility
questionnaire.
7. In case Other Auditor is not a professionally qualified 6. Manner of dealing with between PA and OA.
auditor - for instance, where a component is situated in Modified Report of Other
foreign country: Auditor while finalising
 Procedures mentioned above assume added Compiled by: CA. Pankaj Garg
Principal Auditor’s Report.
importance.

Compiled by: CA. Pankaj Garg Page 1

 SA 610 (Revised) “Using the Work of Internal Auditors”

Meaning & scope of Relationship External Auditor’s Procedures w.r.t. Evaluation of Internal Audit Documentatio
Internal Audit Function between Internal
Audit Function &  Conclusions regarding the
Meaning Determine evaluation & adequacy of
External Auditor
 An appraisal activity. work.

 Established/ provided.  Audit procedures performed

 Role & objectives of
 As a service to entity.
internal audit function
Also include
determined by Mngt/
 examining,
TCWG.
 evaluating &
 Notwithstanding
 monitoring
Degree of autonomy /
adequacy / effectiveness of
objectivity, internal
Internal Control.
audit function is not
Adequacy of Internal Audit If Adequate, consider
on internal auditor work.
Work for External Auditor’s its effect on N, T, E of
Purpose External auditor’s Using Specific Work
Procedures.
of Internal auditor
By evaluating the following
 Objec ti vi ty of the Evaluate the following:
i nter na l a udi t f u nc ti on;  Specific work was performed by
 Tec hni c a l c ompete nc y Internal Auditors having adequate

independent of entity. of i nte rna l a udi t ors;  Nature of specific technical training & proficiency.

 External auditor has  Prof essi ona l c a re w i th work performed by  Work was properly supervised,
Scope of Internal Audit:
sole responsibility for w hi c h the i nte rna l Internal Auditor. reviewed & documented.
 Monitoring of I. C.
audit opinion, and a udi tors w orks; a nd  Assessed RMM.  Adequate audit evidence obtained
 Examination of financial
 that responsibility not  C ommuni c a ti on  Degree of subjectivity by Internal auditor.
& operating information.
reduced by use of betw ee n i nte rna l in evaluation of audit  Conclusions reached are
 Review of operating
work of internal a udi tors & e xte rna l evidence by internal appropriate & reports prepared by
activities.
auditors. a udi tor. auditor. internal auditors are consistent
 Review of compliance
with the results of work performed.
with laws & regulations.
 Exceptions / unusual matters
 Risk management. Compiled by: CA. Pankaj Garg disclosed by Internal Auditor are
 Governance.
properly resolved.

Compiled by: CA. Pankaj Garg Page 2

 SA 620 “Using the Work of Auditor’s Expert”

Meaning of Auditor’s Expert Procedures to be followed while using the work of auditor’s expert

 An individual or organisation
 possessing expertise in field
other than accounting/auditing,
 whose work is used by the
auditor
 to assist the auditor in obtaining
SAAE.
Areas where work of AE can be
used
 Valuation of complex financial
instruments, L & B, P & M, jewelry,
works of art, antiques, intangible
assets, assets acquired and
liabilities assumed in business
combinations and assets that may
have been impaired.
 Actuarial calculation of liabilities
associated with insurance contracts
or employee benefit plans.
 Estimation of oil and gas reserves.
 Valuation of environmental
liabilities, and site clean-up costs.
1 Determining need for an Auditor’s Expert
An auditor’s expert may be needed to assist the auditor for the
followings:
 Obtaining an understanding of entity & its environment, including IC.
 Identifying and assessing the risks of material misstatement.
 Determining & implementing overall responses to assessed risks.
 Designing and performing further audit procedures to respond to
assessed risks.
 Evaluating the sufficiency and appropriateness of audit evidence
obtained.
2 Evaluate Competence, Capability and Objectivity of the Expert
Source of Information for evaluation:
 Personal Experience with previous work.
 Discussion with that expert.
 Discussion with other Auditors.
 Knowledge of expert’s qualification, memberships, other forms of
recognitions.
 Published books or papers.
 Auditor’s firm Q. C. Policies and Procedures.
3 Obtain an understating of expert work
 To enable the auditor to determine the nature, scope and
objectives of that expert’s work for auditor’s purposes.
 Evaluate the adequacy of that work for the auditor’s
purposes.
Reference to the Auditor’s Expert in the Auditor’s Report
4 Agreement with Auditor’s Expert
Need to be in writing and cover the followings:
 Nature, scope and Objectives of Auditor’s Expert
work.
 Respective Role and Responsibilities of Auditor
and auditor’s Expert.
 NTE of Communication including form of report.
 Confidentiality requirements to be observed by
Auditor’s Expert.
5 Evaluate appropriateness of Expert work
 Finding & Conclusion – Relevance,
Reasonableness & Consistency with other A.E.
 Assumptions and Methods – Relevance and
Reasonableness.
 Source Data – Relevance, Completeness and
accuracy.
6 Expert work not adequate for audit purposes
 If Auditor concludes that work of auditor’s expert is
not adequate for the auditor’s purposes and
 auditor cannot resolve the matter through the
additional audit procedures,
 it may be necessary to express a modified opinion.

 Interpretation of contracts, laws
and regulations.
 Analysis of complex or unusual tax
compliance issues.
Compiled by:  No reference required in case of unmodified Audit Report unless required by L & R.
 In case of modified reports, it may be appropriate to refer to the auditor’s expert, to
CA. PANKAJ GARG
explain the nature of the modification. In such case, auditor may need the permission of
the auditor’s expert before making such a reference..

Compiled by: CA. Pankaj Garg Page 3

 SA 800 – “Special Considerations – Audit of F.S. prepared in accordance with SPF”

Scope of SA 800: SA 800 deals with Special considerations in application of SAs in audit of F.S. (Complete set) prepared in accordance with SPF.
Objective of Auditor: to address appropriately special considerations w.r.t. (a) Engagement Acceptance (b) Planning & performance (c) Opinion & Reporting.

Meaning & Nature of Compiled by: Auditor’s Considerations

Special Purpose CA. Pankaj Garg
Framework (SPF)
Engagement Acceptance Planning & Performing an Audit Engagement Forming an Opinion &
Reporting
Acceptance
Meaning of SPF 1. Determine acceptability of FRF as per SA 210. 1. Determine whether application of SAs requires special
FRF designed to meet 2. Obtain understanding of: consideration in the circumstances of engagement. For example, in
Apply requirements of
financial information  Purpose for which FS are prepared. SA 320, judgments about matters that are material need to be based
SA 700 (Revised).
need of specific users.  Intended users on a consideration of financial information needs of intended users.
Auditor’s Report to
Nature of SPF  Steps taken by Mngt. to determine 2. Auditor is required to consider the following:
include:
acceptability of applicable FRF.  Requirement of SA 200 on applicability of SAs and absence of
It may be Fair
(a) Purpose for which
3. Consider financial information needs of users in conditions requiring applicability of an SA.
presentation or
F.S. are prepared &
determining acceptability of FRF.  Requirement of SA 315 regarding understanding of selection &
Compliance.
Intended users.
4. Applicable FRF may encompass financial application of accounting policies. In case accounts are prepared
Examples of SPF
on the basis of provisions of a contract, auditor is required to (b) Mngt.
reporting standards established by an
 Cash receipts and responsibility
organization that is authorized to promulgate obtain understanding of significant interpretations of contract.
disbursements basis w.r.t. F.S. and
standards for SPFS. 3. In the case of SPFS prepared in accordance with the requirements of
of accounting selection of FRF.
5. In case any conflict exists in between financial a contract, mngt. may agree with the intended users on a threshold
 Financial reporting below which misstatements identified during the audit will not be (c) EOM Para to alert
reporting standards and legislative
provisions established requirements, auditor need to take action as corrected. The existence of such a threshold does not relieve the users w.r.t.
by a regulator to meet prescribed in SA 210. auditor from the requirement to determine materiality in allocation of
the requirements of 6. In case FRF encompass financial reporting accordance with SA 320. Special purpose
that regulator. provisions of a contract, acceptability of FRF is 4. In the case of SPFS, TCWG may not have a responsibility of F.S. and as such
 Financial reporting determined by considering whether framework overseeing the preparation of F.S. prepared as per requirements of F.S. may not be
provisions of a exhibits attributes normally exhibited by SPF. In such cases, requirements of SA 260 may not be relevant to suitable for
contract. acceptable FRF as described in SA 210. the audit of the SPFS. another purpose.

Compiled by: CA. Pankaj Garg Page 1

 SA 805 “Special Considerations – Audits of Single F.S. and Specific Elements, Accounts or Items of a F.S.”
Scope of SA 805: SA 805 deals with Special considerations in application of SAs in audit of Single F.S. or Single Element/Account or Item of F.S.
Objective of Auditor: to address appropriately special considerations w.r.t. (a) Engagement Acceptance (b) Planning & performance (c) Opinion & Reporting.

Compiled by: Auditor’s Considerations

Single Financial
Statement/ Element of CA. Pankaj Garg
Audited F.S.

Engagement Acceptance Planning & Performing an Audit Engagement Forming an Opinion & Reporting
Meaning of Element Acceptance
Element means an element,
Application of SA (a) Adapt all SAs as necessary in the audit of SFS:  Apply SA 700, as necessary.
account or item of a F.S.
 SA 200 requires compliance with all SAs relevant (b) Careful consideration of relevance of each SA is  If also engaged to report on full FS,
Single financial statement necessary. SAs such as SA 240, SA 550 and SA 570 are, issue separate reports.
to audit.
(for example, a CFS) or a in principle, relevant. This is because the element could  If audited SFS published with audited
 This applies to audit of Single F.S. even if the
specific element of a F.S. (for auditor also audits the complete F.S. be misstated as a result of fraud, the effect of related full FS, presentation of SFS should be
example, cash and bank differentiated from full FS.
 If auditor not also engaged to audit the complete party transactions, or the incorrect application of the
 Do not issue audit report on SFS
balances) includes the FS, consider the practicability of audit of Single going concern assumption under the applicable FRF.
until satisfied with differentiation.
related notes. F.S./Specific Element in accordance with SAs. (c) SAs are written in the context of an audit of F.S.; they
Acceptability of FRF are to be adapted as necessary in the circumstances Modified Opinion/EMP/OMP Para
Examples of Elements
when applied to the audit of a single F.S. or a specific on Full FS
1. Determine the acceptability of the FRF applied in
 Accounts receivable, (a) Determine effect on Single F.S.
the preparation of Single F.S. element. For example, WR from mngt. about the
 Allowance for doubtful (b) If appropriate, modify opinion on
2. Determine whether application of FRF will result complete set of F.S. would be replaced by WR about
accounts receivable, SFS/include EMP, OMP.
in presentation that provides adequate single F.S. or element in accordance with the applicable
 Inventory, (c) If necessary to issue adverse/
disclosures to enable users to understand FRF.
disclaimer opinion on full FS,
 Schedule of externally information conveyed in Single FS or element. (d) When auditing Single F.S. in conjunction with Full F.S.,
unmodified opinion on SFS cannot
managed assets Form of Opinion audit evidence obtained as part of audit of full F.S. may
be expressed.
 Schedule of net tangible  Expected form of opinion depends upon be useful but auditor needs to plan & perform audit of
(d) However for separate audit of
assets applicable FRF & applicable L&R. Single F.S. to obtain SAAE.
specific element, an unmodified
 SA 210 requires that agreed terms of engagement (e) Some items from Complete FS may be interrelated with
 Schedule of disbursement opinion can be expressed if:
include the expected form of report to be issued. element of F.S., auditor need to perform procedures on
in relation to a lease  Not prohibited by L& R;
 Consider whether expected form of opinion is interrelated items.
property,  AR on element is not published
appropriate in the circumstances. (f) Materialities determined for a Single F.S. or for a
 Schedule of profit together with AR on full FS; &
 Auditor’s decision as to the expected form of specific element may be lower that materiality for full
 Element does not constitute a
participation or employee opinion is a matter of professional judgment. F.S., this will affects NTE of audit procedures and the
major portion of full F.S.
bonuses. evaluation of uncorrected misstatements.

Compiled by: CA. Pankaj Garg Page 2

 SA 810 “Engagements to Report on Summary Financial Statements (SFS)”
 Scope of SA 810: deals with auditor’s responsibilities, when engaged to report, on SFS, derived from FS audited in accordance with SA, by that same auditor.
 Objective of Auditor: to determine appropriateness of accepting the engagement & form opinion based on evaluation of Conclusions drawn from evidence obtained.
 Meaning of Summary Financial Statements (SFS): Historical financial info that is derived from FS, but contains less detail than FS, while still providing a structured
representation consistent with that provided by entity’s F.S.

Engagement Acceptance Nature of Procedures Form of Opinion

(a) Accept engagement only when also 1 EVALUATE Unmodified opinion shall be expressed on Summary F.S. if
engaged to audit, those F.S., from which SFS (a) Whether SFS adequately disclose
have been derived. their summarised nature & identify SFS are consistent, in all material respects, with audited FS, in accordance
(b) Before accepting Engagement, auditor audited FS. with applied criteria.
shall: (b) If SFS are not accompanied by
1. Determine acceptability of applied Special Considerations
audited FS, whether they clearly
criteria. Qualified 1. State that audit report on FS contains qualified
describe from whom or where
2. Obtain agreement of mngt that Opinion/EO opinion/EOM/OM para AND
audited FS are available;
acknowledges & understands its M/OM Para 2. Describe:
(c) Whether SFS adequately disclose
responsibilities: in Report on • Basis for qualified opinion on audited FS, and that
the applied criteria.
• For preparation of SFS in accordance Audited FS qualified opinion; or EOM/OM para; and
(d) Whether SFS are prepared in
with applied criteria; • Effect thereof on SFS, if any.
accordance with applied criteria.
• To make audited FS available to Adverse Report on SFS is required to include the following:
(e) Whether SFS contain necessary
intended users of SFS without undue Opinion/ 1. Statement that audit report contains
info & are appropriately
difficulty; and Disclaimer of adverse/disclaimer of opinion;
aggregated.
• To include auditor’s report on SFS in Opinion on 2. Description of basis of such opinion; and
(f) Whether audited F.S. are available
any document that contains SFS and Audited FS 3. Statement that as a result of adverse/disclaimer of
to intended users without undue
that indicates that auditor has opinion it is inappropriate to express an opinion on
difficulty.
reported on them.
2 COMPARE SFS.
(c) Agree with the management the form of
SFS with related information in Modified Express adverse opinion
opinion to be expressed on the SFS.
audited F.S. to determine whether SFS Opinion on
(d) Do not accept engagement if:
agree with or can be re-calculated SFS if SFS are not consistent in all material respects with or
• Criteria are not acceptable; or
from related information in audited are not a fair summary of audited FS in accordance with
• unable to obtain management
F.S. applied criteria.
agreement.

Compiled by: CA. Pankaj Garg Page 3

 SA 700 - The Auditor’s Report on Financial Statements
Introduction & Objective Forming an Opinion on FS
This SA deals with the form and content The auditor shall form an opinion on
of the auditor‟s report (only clean report). whether FS are prepared in accordance
with AFRF.
Objectives For forming an opinion, auditor
considers:
The objectives of the auditor are to:
a) Whether sufficient appropriate
a) Form an opinion on FS based on an audit evidence has been obtained;
evaluation of the conclusions drawn
from the audit evidence obtained; and b) Whether uncorrected
misstatements are material,
b) Express clearly that opinion through a individually or in aggregate; and
written report and also describes the
basis for the opinion. c) The auditor shall evaluate
whether:
- The FS adequately disclose
This report is on general purpose financial the significant accounting
statements which are prepared in policies selected and applied;
accordance with a general purpose
- The accounting policies
framework. It may be a fair presentation
selected and applied are
framework or a compliance framework.
consistent with AFRF;
Under fair presentation framework, the
word true and fair is used. - The accounting estimates
made by management are
Compliance framework just states that FS
are prepared as per Laws & Regulations.
reasonable;
- The information presented in
the FS is relevant, reliable,
comparable and understandable;
- The FS provide adequate
disclosures; and
- The terminology used in FS,
including the title of each
financial statement, is
appropriate.
d) In fair presentation framework, the
auditor‟s evaluation as to whether
FS achieve fair presentation.
Auditor’s Report (Clean Report)
Title: Independent Auditor‟s Report
Addressee: Appropriate. For
Companies, it is Shareholders.
Introductory Paragraph:
a) Identify the entity;
b) State that FS;
c) Specify the date or period covered
by each FS.
d) Identify the title of each FS; and
e) Refer to the summary of significant
accounting policies;
Management’s Responsibility:
Preparation of FS and design,
implementation and maintenance of
internal control relevant to preparation of
FS.
Auditor’s Responsibility:
 To express an opinion on FS based
 on the audit. 
 Audit in accordance with SA‟s
issued by ICAI. 
 Describe audit procedure. 
 Also, state that auditor believes that
the audit evidence obtained provides
a basis for the auditor‟s opinion. 
Auditor’s Opinion:
Other Reporting Responsibilities:
Signature of the Auditor:
Date of the Auditor’s Report:
Place of Signature:
Auditor’s Report Prescribed by Law
or Regulation: Use that format
 SA 705 – Modifications to the Opinion in Independent Auditor’s Report

Introduction and Type of Opinion Reporting

This SA establishes three types of modified opinions, namely, a
qualified opinion, an adverse opinion, and a disclaimer of
opinion.
Objective
To express clearly an appropriately modified opinion on FS
that is necessary when:
a) The auditor concludes, based on the audit evidence
obtained, that FS as a whole are not free from material
misstatement; or
b) The auditor is unable to obtain sufficient appropriate
audit evidence.
Basis for Modification Paragraph - before the opinion
paragraph
Auditor Responsibility - Audit evidence obtained is sufficient
and appropriate to provide a basis for the auditor‟s modified
audit opinion. (for qualified and adverse opinion)
Qualified Opinion:
except for the effects (possible effect, if unable to obtain
sufficient appropriate audit evidence) of the matter(s)
described in the Basis for Qualified Opinion paragraph, the
financial statements…….

Type of Opinion to be Expressed: Adverse Opinion:

Nature of Matter Auditor’s Judgment about the For Fair Presentation Framework:
Giving Rise to the Pervasiveness of the Effects or The financial statements do not present fairly (or give a true
Modification Possible Effects on FS and fair view) in accordance with AFRF.
Material but Not Material and For Compliance Framework:
Pervasive Pervasive The financial statements have not been prepared, in all
material respects, in accordance with AFRF
FS are Qualified opinion Adverse opinion
materially misstated
Disclaims an Opinion:
Inability to obtain Qualified opinion Disclaimer of
Auditor shall amend the description of the auditor’s
sufficient appropriate opinion
responsibility and the description of the scope of the audit
audit evidence
to state only the following: “Our responsibility is to express an
Pervasive effects on FS are those that, in auditor‟s judgment: opinion on FS based on conducting the audit in accordance with
SAs issued by ICAI. Because of the matter(s) described in the
a) Are not confined to specific elements, accounts or items of
FS; Basis for Disclaimer of Opinion paragraph, however, we were
not able to obtain sufficient appropriate audit evidence to
b) If so confined, represent or could represent a substantial provide a basis for an audit opinion”
proportion of FS; or
c) In relation to disclosures, are fundamental to users‟
understanding of FS.
 SA 706 – EoM Para & OM Para in Independent Auditor’s Report

Definitions Objective Requirements

1) EoM Para: To draw user‟s attention, when in 1) EoM Para:
A Para included in auditor‟s report that auditor‟s judgment is necessary to do a) After Opinion Para.
refers to matter appropriately so, by way of clear additional b) Clearly gives reference.
presented or disclosed in FS that, in communication. c) Indicate that Auditor‟s opinion is
auditor‟s judgment is of such NOT modified for this aspect.
importance that is fundamental to
user‟s understanding of FS.
2) OM Para:
Eg. Material Uncertainty about Going
Concern Issue After Opinion & EoM Para.

2) OM Para: 3) Communication with TCWG

A Para included in auditor‟s report that
refers to matter NOT in FS that in
auditor‟s judgment is relevant to user‟s
understanding of Audit, Auditor‟s
Responsibilities or Auditor‟s Report.
Eg. Number of Branches Audited by
Other Auditors

Introduction
1) This SA deals with Auditor‟s
responsibility regarding Comparative
Information in audit of FS.
2) The nature of Comparative Information
that is presented depends on AFRF.
3) Two approaches:
a) Corresponding Figures:
Comparative Information where
amounts or other disclosure for
prior period are included as an
integral part of current period FS.
The Auditor‟s opinion refers to
current period only, which included
comparative information.
b) Comparative FS:
Comparative Information where
amounts and other disclosure for
prior period are included for
comparison with FS of current
period but if audited are referred to
in Auditor‟s opinion.
SA 710 – Comparatives
Audit Procedure
1) The auditor shall determine whether
the FS include the comparative
information as required by AFRF.
2) The auditor shall evaluate whether:
a) The comparative information
agrees with amounts
disclosure in prior period.
b) Accounting policies
consistently followed.
3) If auditor becomes aware of possible
material misstatement in
comparative information, the auditor
shall perform such additional
procedure as appropriate.
4) Auditor shall request written
representation for all periods.
Reporting
Corresponding Figures:
1) The auditor shall not refer to
corresponding figures.
2) If previous audit report modified &
matter not resolved:
or a) CY FS Modified for both, if
affecting CY‟s figures.
are b) If NOT affecting CY‟s figures,
then also CY‟s FS Modified with
respect to corresponding figures.
the 3) Material misstatement in prior period
FS on which unmodified opinion is
given, auditor shall verify whether
the misstatement has been dealt
with & if NOT, CY‟s FS should be
modified w.r.t. corresponding
figures.
Comparative FS:
1) The auditor‟s opinion shall refer to
each period reported.
2) When reporting on prior period
FS, if the auditor’s opinion on
such prior period FS differs from
the opinion the auditor previously
expressed, auditor shall disclose
reasons in Other Matter paragraph.
Common:
Prior period FS audited by
predecessor auditor: State in Other
Matter Paragraph that they are audited
by other auditor, type of opinion
expressed and date of that report.
Prior period FS NOT audited: State
the same in Other Matter Paragraph.
 SA 720 – Auditor’s Responsibility in relation to Other Information in Document Containing FS

Introduction Requirements
1) Document containing Audited FS refers to Annual Report 1) Reading other information: To identify material
containing Audited FS & Other Information (OI). inconsistencies.
2) In absence of any separate requirement of engagement, 2) If material inconsistency found: Whether FS or OI need
the auditor‟s opinion does not cover other information & he revision.
has no responsibility for the same. However, the auditor 3) Material inconsistency identified prior to date of auditor‟s
reads the other information because the credibility of report:
Audited FS may be undermined by material inconsistencies a) FS needs revision & Mgmt. refuses: Modify Report.
between audited FS & OI. b) OI needs revision & Mgmt. refuses: Include in other
3) Objective: matter para.
Respond appropriately when document containing audited 4) Material inconsistency identified after date of auditor‟s report:
FS & the auditor‟s report includes OI that could undermine a) FS needs revision: Follow requirements of SA 560.
the credibility of FS & Auditor‟s Report. b) OI needs revision:
  Mgmt. agrees: Carry out procedures necessary. 
 Mgmt. refuses: Notify TCWG & take appropriate
 action. 
5) Material misstatement of fact:
Material misstatement is a misstatement in OI that is NOT a
part of FS.
Discuss with mgmt., if they don‟t agree tell them to consult
qualified third party & notify TCWG.
 SRE 2400 – Engagement to Review Financial Statements
Introduction
1) This SRE provides PRACTITIONER‟s
professional responsibilities, when
practitioner, who is NOT auditor of an
entity, undertakes engagement to
review FS.
2) A practitioner who is the auditor of an
entity, engaged to perform review of
Interim Financial Information shall
perform such a review as per SRE
2410.
3) Objective:
a) To enable the practitioner to state
whether on the basis of procedures
which do not provide all evidence
as audit.
b) Anything has come to practitioner‟s
attention.
c) That causes the practitioner to
believe the FS are not prepared as
per AFRF (Negative Assurance)
General Principles Procedure & Evidence
1) Comply with Code of Ethics 1) Practitioner should apply judgment
including independence. in determining NTE of review
2) Maintain professional skeptism. procedure.
3) Obtaining sufficient appropriate audit 2) The auditor sufficient appropriate
evidence primarily through inquiry & audit evidence primarily through
analytical procedures. inquiry & analytical procedures. This
4) Scope of review based on: includes:
a) SRE; a) Obtaining understanding of
b) Requirement of Statute; entity‟s business & industry.
c) Terms of Engagement. b) Inquiry about entity‟s accounting
5) Review provides a moderate level principles, policies, procedure for
of assurance. accounting & preparation of FS.
6) Agreeing the term of engagement. c) Analytical procedures
(additionally, it should be written that comparison with prior periods,
an audit is not performed & so audit budgets & industry standards.
opinion is not expressed). 3) Inquire about subsequent events.
7) Plan the work. 4) Additional or more extensive
8) When using work performed by procedures when auditor believes
others, he should be satisfied that that information is materially
such work is adequate for purpose. misstated.
9) Document important matters.
Conclusion & Reporting:
1) Negative assurance;
2) Describe the scope of engagement
& make it clear that audit was not
performed and so audit opinion is
NOT expressed.
3) Introductory Para to have
responsibility of management &
practitioner.
4) Scope Paragraph separately.
 SRE 2410 – Review of Interim Financial Information performed by Independent Auditor.

Introduction General Principles & Procedure for Conclusion & Reporting

Review
1) This SRE provides guidance on 1) Same as SRE 2400 1) Title:
AUDITOR‟s professional responsibility Review Report.
when auditor undertaken an 2) Addressee:
engagement to Review Interim FI. For Company‟s BOD.
2) Interim FI is FI that is prepared for a 3) Introductory Para:
period that is shorter than entity‟s F.Y. Identify the Interim FI reviewed &
3) AS – 25 deals with preparation & responsibility of management &
presentation of Interim FI. auditor.
4) As per Clause 41 of Listing 4) Scope Para:
Agreement, the listing company shall a) Review conducted as per SRE
submit quarterly unaudited reviewed b) Limited to inquiry & analytical
financial result to Stock Exchange & procedures.
also shall publish the same in c) Audit has NOT been performed
newspaper. & so audit opinion is not
5) Objective: expressed.
a) To provide Negative Assurance. 5) Opinion:
By Negative Assurance.
6) Signature.
7) Place.
8) Date.

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 SRE 3400 – The Examination of Prospective Financial Information

Introduction Responsibility Audit Procedures Reporting

1) PFI means FI based on 1) Mgmt. is preparation of 1) The auditor should obtain 1) By way of Negative
assumptions about the PFI including: sufficient appropriate Assurance on
events that may occur in a) Identification & audit evidence whether: assumptions.
future & possible action Disclosure of PFI. a) Mgmt. best estimate 2) Whether PFI is properly
by management. b) Basis of Forecasts. assumptions are NOT prepared based on
2) They may be of 2 types: c) Underlying unreasonable & assumptions.
a) Forecast: Based assumptions. hypothetical 3) Include a caution
upon assumptions 2) Auditor may be asked to assumptions are NOT statement, that actual
that management examine & report on PFI to unrealistic. figures are likely to be
expects to take place enhance its credibility. b) PFI is properly different.
i.e. Best Estimate 3) PFI relates to events & prepared based on 4) If presentation &
Assumptions. actions that have yet not assumptions. disclosure NOT
b) Projection: Based occurred & might not c) Properly presented adequate – Qualified or
on hypothetical occur. including disclosure of Adverse or Resign.
assumptions which 4) Auditor is therefore, not in assumptions. 5) If significant assumption
are not necessarily a position to express d) Prepared on do NOT provide
expected to take opinion as to whether the consistent basis with reasonable basis –
place or mix of BE & results shown in PFI will Historical FS. Adverse or Resign.
Hyp. Assumptions. be achieved. 2) The auditor should NOT 6) NOT allowed to perform
3) PFI may be prepared for: 5) Auditor reports on accept or withdraw: procedures – Disclaimer
a) Internal Mgmt. Tool reasonableness of mgmt. If assumptions are of Opinion or Resign.
like Capital assumptions & that too unrealistic or when he
Budgeting Decision. gives only moderate believes that PFI is
b) Distribution to third assurance. inappropriate for intended
party: use.
 Prospectus 3) The auditor shall consider
 Annual Report the period of time covered
 Bank, etc. by PFI, since assumption
becomes more
speculative as length of
period increases.
4) Obtain representations
from mgmt. & document
important matters.

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 SAE 3402 – Assurance Report on Controls at a Service Organisation (SO)

Introduction and Objective Definitions Requirements Requirements

This SAE deals with Carve-out method: Comply with relevant ethical 3) OE of Controls
assurance engagements Whereby SO‟s description of requirements. For Type 2 report, the
undertaken by a SO’s its system includes nature of Determine the appropriate service auditor shall test
Auditor to provide a report services provided by a Sub- person(s) within SO's Mgmt. those controls. For this
for use by user entities and SO, but Sub-SO‟s relevant with whom to interact. SO‟s Auditor shall:
their auditors on the controls control objectives and related a) Perform other
at a SO. Assess the suitability of the
controls are excluded from criteria procedures in
It complements SA 402. the SO‟s description. combination with inquiry
Obtaining Evidence to obtain evidence
Inclusive method: Regarding: about:
Objectives Whereby SO‟s description of its 1) Description (i) How the control was
a) To obtain reasonable system includes the nature of applied;
the services provided by a Sub- Obtain and read SO's
assurance about description and evaluate (ii) The consistency with
whether: SO, and that Sub-SO‟s which the control was
whether:
i) The SO‟s description relevant control objectives and applied; and
related controls are also a) Control objectives stated
of its system fairly are reasonable; (iii) By whom or by what
presents the system included in SO‟s description. means the control was
as designed and b) Controls identified in that
Complimentary User Entity applied;
implemented; Controls: description were
implemented; b) Determine whether
ii) The controls related Controls that SO assumes, in controls to be tested
c) Services performed by a
to the control design of its service, will be depend upon other
Sub-SO are adequately
objectives stated in implemented by User Entity. controls (indirect
described including the
the SO‟s description controls); and
of its system were Type A – Report on method used.
Description and Design of c) Determine means of
suitably designed; d) Complimentary User
Controls at a SO (this report Entity Controls are selecting items for testing
iii) Where included in is for specified date) adequately described. that are effective in
the scope, the meeting the objectives of
Type B – Report on 2) Design of Controls
controls operated the procedure.
effectively throughout Description, Design, and Service auditor shall
the specified period. Operating Effectiveness of determine which controls
b) To report on the matters Controls at a SO (this report at SO are necessary to SO’s Auditor shall
in (a) above in is for throughout the specified achieve the control Obtaining an
period) objectives and shall Understanding of the
accordance with the
assess whether those Internal Audit Function
service auditor‟s
findings. controls were suitably
designed.

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 SRS 4400 – Engagement to perform Agreed upon Procedures (AUP)
Introduction
1) Because of extensive knowledge
auditor is able to perform various
agreed upon procedures in addition to
statutory audit.
2) Under agreed upon procedure the
auditor is engaged to issue a report on
factual findings, so no assurance is
given.
E.g.: Bank may ask the auditor to just
verify and give the monthly stock
figures.
3) Objective:
a) For Auditor:
 To carry out procedures of an
Audit Nature to which the
Auditor, Entity & any third party
has agreed, and
 To report on Factual Findings
b) No assurance is provided.
c) Report is restricted.
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General Principles Reporting
1) Ethical requirements, but 1) Report should describe the purpose
independence is optional. If NOT and AUP performed to unable the
independent, state in report. reader to understand the nature &
2) Terms of engagement. extent of work performed.
3) Plan the work. 2) Clearly mention NO audit or review
4) Document important matter. has been performed.
5) Auditor should carry out AUP & use 3) Identify Financial or Non-Financial
the evidence as basis for fact finding Information to which AUP have been
report. This procedures include: applied.
a) Inquiry; 4) Performed as per SRE 4400.
b) Observation; 5) Purpose & Listing of Procedures
c) Inspection; performed.
d) Confirmation; 6) Description of factual findings.
e) Computation. 7) Statement regarding restriction on
use.
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 SRS 4410 – Engagement to Compile Financial Information

Introduction General Procedures Evidences Reporting

1) This SRS deals with 1) Ethical requirements, but 1) If accountant becomes 1) Accountant‟s Report on
professional independence is optional. If aware of material non- unaudited FS.
responsibility of NOT independent then compliance with AS or 2) As per SRE 4410.
accountant, when mention the same in report. any material 3) Statement when
engagement to compile 2) Terms of engagement: misstatement, tell to accountant is NOT
FS or other FI is Specifically mention that mgmt. If mgmt. do not independent.
undertaken. engagement can‟t be relied rectify, it should be 4) Neither Audit nor review
2) Accountant means CA, upon to disclose frauds but included the same in is done, so no assurance.
who may or may not be if accountant comes across Notes to Accounts & 5) Para, when necessary,
in practice. any such matter, he will Compilation Report of stating departure from
3) This SRS deals with inform mgmt. about the accountant. AFRF.
preparation of compiled same. 2) If information provided by
FI & NOT audit of it. 3) Plan the work. mgmt. is incomplete,
4) Objective: 4) Document important incorrect or unsatisfactory,
a) For an accountant matters. tell mgmt. to provide
to use accounting 5) Obtain general business & additional information. If
expertise, to collect, entity, its accounting mgmt. refuses, withdraw
classify & policies, form & content of from engagement.
summarise FI. FS etc. 3) The accountant should
b) The procedures 6) Request Management ensure that FS or other FI
employed are not Representation Letter. should comply with AFRF.
designed & do not If not complied then
enable the include it in Notes to
accountant to Accounts & Accountant‟s
express any Report.
assurance. 4) If NO AFRF, then basis for
compilation to be stated in
Notes to Accounts &
Accountant‟s Report.
CA Final – Advanced Auditing & Professional Ethics Q & A – Quality Control & Engagement Standards

Chapter 7 Quality Control and Engagement Standards

SA 210 “Agreeing the Terms of Engagement”
1 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.
Or
R & Co., a firm of Chartered Accountants have not revised the terms of engagements and obtained
confirmation from the clients, for last 5 years despite changes in business and professional
development. Please elucidate the circumstances that may warrant the revision in terms of
engagement. [May 13 (4 Marks)]
Answer: Situations in which new engagement letter is required in case of recurring audit:
 SA 210 “Agreeing the Terms of Engagement” deals with the auditor’s responsibilities in agreeing
the terms of the audit engagement with management. As per SA 210, 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.
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.
2 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.
Answer: Acceptance of changes in Terms of Engagement:
 SA 210 “Agreeing the Terms of Engagement” deals with the auditor’s responsibilities in agreeing
the terms of the audit engagement with management. As per SA 210, 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.
 The auditor shall not agree to a change in the terms of the audit engagement where there is no
reasonable justification for doing so.
 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.
 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:
1. Withdraw from the audit engagement where possible under applicable law or regulation; and
2. Determine whether there is any obligation, either contractual or otherwise, to report the
circumstances to other parties, such as TCWG, owners or regulators.

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CA Final – Advanced Auditing & Professional Ethics Q & A – Quality Control & Engagement Standards

SA 220 “Quality control for an audit of Financial Statements”

3 Comment as an auditor on the following situations: Mr. X, a partner in X & Co., a firm of a Chartered
Accountants, died on 31-3-2015 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.
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.
 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, 2015. 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.
4 Mention any four information which assists the auditor in accepting and continuing of relationship
with the client as per SA 220.
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:
 The Integrity of the principal owners, key management and TCWG of the entity;
 Competency of engagement team to perform the audit engagement and availability of necessary
capabilities, including time and resources;
 Compliance with relevant ethical requirements by firm and the engagement team; and
 Significant matters that have arisen during the current or previous audit engagement, and their
implications for continuing the relationship.

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CA Final – Advanced Auditing & Professional Ethics Q & A – Quality Control & Engagement Standards

SA 230 “Audit Documentation”

5 Discuss the Auditor’s responsibilities to provide access to his audit working papers to Regulators and
the third parties. [Nov. 14 (3 Marks)]
Answer: Access to Working papers to Regulators and Third Parties:
 Clause (1) of Part I of Second Schedule to the Chartered Accountants Act, 1949 states that a CA in
practice shall be deemed to be guilty of professional misconduct if he discloses information
acquired in the course of his professional engagement to any person other than his client, without
the consent of his client or otherwise than as required by law for the time being in force.
 SA 200 on “Overall Objectives of the Independent Auditor and the conduct of an audit in
accordance with Standards on Auditing” also reiterates that, “the auditor should respect the
confidentiality of the information obtained and should not disclose any such information to any
third party without specific authority or unless there is a legal or professional duty to disclose”. If
there is a request to provide access by the regulator based on the legal requirement, the same has
to be complied with after informing the client about the same.
 SQC–1, “Quality Control for Firms that Perform Audits and Reviews of Historical Financial
Information, and Other Assurance and Related Services Engagements”, provides that, unless
otherwise specified by law or regulation, audit documentation is the property of the auditor. He
may at his discretion, make portions of, or extracts from, audit documentation available to clients,
provided such disclosure does not undermine the validity of the work performed, or, in the case of
assurance engagements, the independence of the auditor or of his personnel.
 As per SA 230, Audit documentation serves a number of additional purposes, including the
enabling the conduct of external inspections in accordance with applicable legal, regulatory or
other requirements.
Conclusion: It is auditor’s responsibility to provide access to his audit working papers to Regulators
when required by law whereas auditor is under no obligation to provide access to working papers to
third parties.
6 As an auditor, how would you deal with the following: The statutory auditor of the Holding Company
demands for the working papers of the auditors of the subsidiary company, of which you are the
auditor.
Answer: Access to working papers:
 As per SA 230, “Audit Documentation” working papers are the property of the auditor. The auditor
may, at his discretion, make portion of or extracts of his working papers available to his client.
 SA 600 “Using the Work of Another Auditors” also states that an auditor should respect the
confidentiality of information acquired during the course of his audit work and should not
disclose such information unless there is a legal or professional duty to disclose.
 As per ICAI Guidelines, statutory auditor of an enterprise do not have right of access to the audit
working papers of the branch auditor. An auditor can rely on the work of another auditor, without
having any right of access to the audit working papers of other auditor.
Conclusion: Statutory auditor of Holding company can not have access to audit working papers of
the subsidiary company’s auditor. He can however, ask the auditor to answer certain questions about
the manner in which the audit is conducted and certain other clarifications regarding audit.

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CA Final – Advanced Auditing & Professional Ethics Q & A – Quality Control & Engagement Standards

SA 240 “The Auditor’s Responsibilities relating to Fraud in an Audit of Financial Statements”

7 In the course of audit A Ltd you suspect the management has indulged in fraudulent financial
reporting? State the possible source of such fraudulent financial reporting. [May 12 (6 Marks)]
Answer: Possible Sources of Fraudulent Financial Reporting:
SA 240, “The Auditor’s responsibilities relating to Fraud in an Audit of Financial Statements”, deals
with auditor’s responsibilities in relation to fraud while performing the audit. Auditor is primarily
concerned with those frauds that causes material misstatement in financial statements.
Possible sources of fraudulent financial reporting as stated in SA 240 are:
1. Recording fictitious journal entries, particularly close to the end of an accounting period, to
manipulate operating results or achieve other objectives.
2. Inappropriately adjusting assumptions and changing judgments used to estimate account
balances.
3. Omitting, advancing or delaying recognition in the financial statements of events and
transactions that have occurred during the reporting period.
4. Concealing, or not disclosing, facts that could affect the amounts recorded in the financial
statements.
5. Engaging in complex transactions that are structured to misrepresent the financial position or
financial performance of the entity.
6. Altering records and terms related to significant and unusual transactions.
8 Explain briefly duties and responsibilities of an auditor in case of material misstatements resulting
from management fraud. [Nov. 09 (6 Marks)]
Answer: Auditor’s duties in case of material misstatement resulting from management fraud:
(a) SA 240 “Auditor’s Responsibilities relating to fraud in an audit of financial statements” requires
that the auditor is responsible for obtaining reasonable assurance that the F.S. taken as a whole
are free from material misstatement, whether caused by fraud or error.
(b) Management is in a unique position to perpetrate fraud because of management’s ability to
manipulate accounting records and prepare fraudulent financial statements by overriding
controls.
(c) When obtaining reasonable assurance, the auditor is responsible for maintaining an attitude of
professional skepticism throughout the audit.
(d) The auditor should recognize the possibility that a material misstatement due to fraud could exist,
notwithstanding his past experience of the honesty and integrity of the entity’s management and
those charged with governance
(e) If conditions cause the auditor to believe that a document may not be authentic or that terms in a
document have been modified, the auditor shall investigate further.
(f) Where responses to inquiries of management or TCWG are inconsistent, the auditor shall
investigate the inconsistencies.
(g) Further, Sec. 143(12) of Companies Act 2013 requires that if the auditor in course of the
performance of his duties as an auditor, has reason to believe that an offence involving fraud is
being or has been committed against the company by officers or employees of the company, he
shall immediately report the matter to the Central Government within 60 days of his knowledge
and after following the prescribed procedure.

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CA Final – Advanced Auditing & Professional Ethics Q & A – Quality Control & Engagement Standards

9 You notice a misstatement resulting from fraud or suspected fraud during the audit and conclude that
it is not possible to continue the performance of audit. As a Statutory Auditor, how would you deal?
Answer: Auditor’s unable to complete the engagement:
SA 240, “The Auditor’s responsibilities relating to Fraud in an Audit of Financial Statements”, deals
with auditor’s responsibilities in relation to fraud while performing the audit. Accordingly if the
auditor conclude that it is not possible to continue performing the auditas a result of misstatement
resulting from fraud or suspected fraud, the auditor should:
(a) Consider the professional and legal responsibilities applicable in the circumstances, including
whether there is a requirement for the auditor to report to the person or persons who made
the audit appointment or, in some cases, to regulatory authorities;
(b) Consider the possibility of withdrawing from the engagement; and
(c) If the auditor withdraws:
 Discuss with the appropriate level of management and TCWG, the auditor’s withdrawal
from the engagement and the reasons for the withdrawal; and
 Determine whether there is a professional or legal requirement to report to the person or
persons who made the audit appointment or, in some cases, to regulatory authorities, the
auditor’s withdrawal from the engagement and the reasons for the withdrawal.
Further, as per section 140(2) of the Companies Act, 2013, the auditor who has resigned from the
company shall file within a period of 30 days from the date of resignation, a statement in the Form
ADT-3 with the company and the Registrar.
Sec. 143(12) of Companies Act 2013 also requires that if an auditor of a company, in the course of the
performance of his duties as auditor, has reason to believe that an offence involving fraud is being or
has been committed against the company by officers or employees of the company, he shall
immediately report the matter to the Central Government within 60 days of his knowledge and after
following the prescribed procedure.
10 The Managing Director of the Company has committed a “Teeming and Lading” Fraud. The amount
involved has been however subsequently after the year end deposited in the company. As a Statutory
Auditor, how would you deal?
Answer: Fraud Committed by Managing Director:
 SA 240 “Auditor’s Responsibilities relating to fraud in an audit of financial statements” requires
that the auditor is responsible for obtaining reasonable assurance that the F.S. taken as a whole
are free from material misstatement, whether caused by fraud or error.
 Management is in a unique position to perpetrate fraud because of management’s ability to
manipulate accounting records and prepare fraudulent financial statements by overriding
controls.
 In the instant case, Managing Director of the company has committed a “Teeming and Lading”
fraud. The fact that the amount involved has been subsequently deposited after the year end is
not important because the auditor is required to perform his responsibilities as laid down in SA
240 as stated below:
(a) Consider the impact of fraud on financial statements and its disclosure in the audit report.
(b) Communicate the matter to the Chairman and Board of Directors.
(c) Consider the reliability of audit evidence previously obtained as the fraud has been
conducted at a higher level of management which raises a genuine doubt about
representations of management.
 Further, as per section 143(12) of the Companies Act, 2013, if an auditor of a company, in the
course of the performance of his duties as auditor, has reason to believe that an offence involving
fraud is being or has been committed against the company by officers or employees of the
company, he shall immediately report the matter to the Central Government within 60 days of his
knowledge and after following the prescribed procedure.

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CA Final – Advanced Auditing & Professional Ethics Q & A – Quality Control & Engagement Standards

11 As a Statutory Auditor, how would you deal with the following cases: In the books of accounts of M/s
OPQ Ltd. huge differences are noticed between the control accounts and subsidiary records. The Chief
Accountant informs that this is common due to huge volume of business done by the company during
the year.
Answer: Difference between Control Accounts and Subsidiary Records:
 The huge differences found between control accounts and subsidiary records in the books of M/s
OPQ Ltd. indicate that there may be material misstatements requiring detailed examination by the
auditor to ascertain the cause.
 The contention of Chief Accountant cannot be accepted simply because the company has done huge
volume of business. Such a phenomenon indicates that recording of transactions is not being done
properly or the accounting system fails to capture all transactions in time.
 Having regard to all these circumstances, it appears from the facts of the case that these differences
indicate the possibility of some kind of material misstatements.
 According to SA 240 “The Auditors responsibilities relating to Fraud in an audit of F.S.”, when the
auditor comes across such circumstances indicating the possible misstatements resulting from
entity’s procedure, the auditor shall evaluate whether such a misstatement is indicative of fraud.
 In this case, the circumstances indicate the possibility of material misstatements (that might be due
to fraud) and accordingly, the auditor must investigate further to consider effect on F.S.
12 Comment on the following: While conducting statutory Audit of ABC Ltd., you come across IOUs
amounting to Rs. 2 crores as against a cash balance shown in books of Rs. 2.10 crores. You also observe
that despite similar high balances throughout the year, small amounts of Rs. 50,000 are withdrawn
from the bank to meet day-to-day expenses. [May 09 (5 Marks)]
Answer: Auditor’s duties in case of suspected fraud:
 SA 240 “Auditor’s Responsibilities relating to fraud in an audit of financial statements” requires
that the auditor is responsible for obtaining reasonable assurance that the F.S. taken as a whole are
free from material misstatement, whether caused by fraud or error.
 When obtaining reasonable assurance, the auditor is responsible for maintaining an attitude of
professional skepticism throughout the audit.
 The auditor should recognize the possibility that a material misstatement due to fraud could exist.
 When the auditor comes across such circumstances indicating the possible misstatements resulting
from entity’s procedure, the auditor shall evaluate whether such a misstatement is indicative of
fraud.
 In the present case, the circumstances indicate the possibility of fraud and accordingly, the auditor
must investigate further to consider effect on financial statements.
 The Guidance Note on Audit of Cash and Bank balances also mentions that if the entity is
maintaining an unduly large balance of cash, he should carry out surprise verification of cash more
frequently to ascertain whether it agrees. If cash in hand is not in agreement with the book balance,
he should seek explanations and if the same are not satisfactory, he should state this fact
appropriately in his Audit Report.
13 M/s Honest Limited has entered into a transaction on 5th March, 2015, near year-end, whereby it has
agreed to pay Rs. 5 lakhs per month to Mr. Y as annual retainer-ship fee for "engineering consultation".
No amount was actually paid, but Rs. 60 lakhs is provided in books of account as on March 31, 2015.
Your inquiry elicits a response that need-based consultation was obtained round the year, but there is
no documentary or other evidence of receipt of the service. As the auditor of M/s Honest Limited, what
would be your approach?

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CA Final – Advanced Auditing & Professional Ethics Q & A – Quality Control & Engagement Standards

Answer: Auditor’s duties in case of suspected fraud:

 SA 240 “Auditor’s Responsibilities relating to fraud in an audit of financial statements” requires
that the auditor is responsible for obtaining reasonable assurance that the F.S. taken as a whole are
free from material misstatement, whether caused by fraud or error.
 When obtaining reasonable assurance, the auditor is responsible for maintaining an attitude of
professional skepticism throughout the audit.
 The auditor should recognize the possibility that a material misstatement due to fraud could exist,
notwithstanding his past experience of the honesty and integrity of the entity’s management and
those charged with governance.
 If conditions cause the auditor to believe that a document may not be authentic or that terms in a
document have been modified, the auditor shall investigate further. Where responses to inquiries
of management or TCWG are inconsistent, the auditor shall investigate the inconsistencies.
 In the present case, it appears that Company has passed fictitious journal entries near year end to
manipulate the operating results. Also Auditor’s enquiry elicited a response that need-based
consultation was obtained round the year, but there is no documentary or other evidence of receipt
of the service, is not acceptable.
Conclusion: under the circumstance, auditor should perform the following procedures:
(a) Consider the impact of fraud on financial statements and its disclosure in the audit report.
(b) Communicate the matter to the Chairman and Board of Directors.
(c) Consider the reliability of audit evidence previously obtained as the fraud has been conducted at a
higher level of management which raises a genuine doubt about representations of management.
Further, Sec. 143(12) of Companies Act 2013 requires that if the auditor in course of the performance
of his duties as an auditor, has reason to believe that an offence involving fraud is being or has been
committed against the company by officers or employees of the company, he shall immediately report
the matter to the Central Government within 60 days of his knowledge and after following the
prescribed procedure.

SA 250 “Considerations of Laws and Regulations in an Audit of Financial Statements”

14 Comment on the following: Management is responsible for compliance with Laws and regulations.
Answer: Management Responsibility for compliance with laws and regulation:
SA 250 “Consideration of Laws and Regulations in an audit of Financial Statements” states that it is the
responsibility of management, with the oversight of TCWG, to ensure that the entity’s operations are
conducted in accordance with the provisions of laws and regulations.
For this purpose management may apply the following procedures:
1. Monitoring legal requirements and ensuring that operating procedures are designed to meet
these requirements.
2. Instituting and operating appropriate systems of internal control.
3. Developing, publicising and following a code of conduct.
4. Ensuring employees are properly trained and understand the code of conduct.
5. Monitoring compliance with the code of conduct and acting appropriately to discipline employees
who fail to comply with it.
6. Engaging legal advisors to assist in monitoring legal requirements.
7. Maintaining a register of significant laws and regulations with which the entity has to comply
within its particular industry and a record of complaints.

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CA Final – Advanced Auditing & Professional Ethics Q & A – Quality Control & Engagement Standards

15 What are the roles and responsibilities of the statutory auditor in relation to compliance with the laws
and regulations by the entity. [Nov. 14 (5 Marks)]
Answer: Role & Responsibilities of Statutory auditor in relation to compliance of Laws and Regulations:
 The auditor shall obtain a general understanding of:
(a) The legal and regulatory framework applicable to the entity and the industry or sector in which
the entity operates; and
(b) How the entity is complying with that framework.
 The auditor shall obtain sufficient appropriate audit evidence regarding compliance with the
provisions of those laws and regulations generally recognized to have a direct effect on the
determination of material amounts and disclosures in the financial statements.
 The auditor shall perform the following audit procedures to identify instances of noncompliance
with other laws and regulations that may have a material effect on the financial statements:
(a) Inquiring of management; and
(b) Inspecting correspondence, if any, with the relevant licensing or regulatory authorities.
 During the audit, the auditor shall remain alert to the possibility that other audit procedures
applied may bring instances of non-compliance or suspected non-compliance with laws and
regulations to the auditor’s attention.
 Obtain written representation that all known instances of non-compliance or suspected
noncompliance with laws and regulations have been disclosed to the auditor.
16 As a statutory auditor of a company, comment on the following: While verifying the employee records in
a company, it was found that a major portion of the labour employed was child labour. On questioning
the management, the auditor was told that it was outside his scope of the financial audit to look into the
compliance with other laws. [Nov. 12 (5 Marks)]
Answer: Auditor’s Responsibility for consideration of other Laws:
 SA 250 “Consideration of laws and regulations in an Audit of Financial statements” requires the
auditor to obtain sufficient appropriate audit evidence regarding the compliance with the
provisions of those laws and regulations generally recognized to have a direct impact on the
determination of material amounts and disclosures in the financial statements including tax and
labour laws.
 For the other laws, the auditor’s responsibility is limited to undertake specified audit procedures
to help identify non-compliance with those laws and regulations that may have a material effect on
the financial statements.
 Non –compliance with other laws and regulations may result in fines, litigation or other
consequences for the entity, the costs of which may need to be provided for.
 In the instant case, major portion of the labour employed was child labour.
Conclusion: Auditor should ensure the disclosure of above fact and provision of the cost of fines,
litigation or other consequences. In case auditor concludes that non-compliance may have a material
effect on financial statements., he should modify his opinion accordingly.
17 As an auditor, what are the indicators you would consider while verifying compliance with Laws and
Regulations?
Answer: Indicators to be considered for verifying compliance with laws and regulations:
SA 250 “Consideration of Laws and Regulations in an audit of Financial Statements” deals with the
auditor’s responsibilities to consider laws and regulations when performing an audit.
To verify the compliance of laws and regulations, auditor is required to consider the following

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indicators:
1. Investigation by regulatory organisations Government departments or payment of fines,
additional taxes or penalties.
2. Payments for unspecified services or loans to consultants related parties or employees.
3. Sales commission or agents fees that appear excessive in relation to those ordinarily paid by the
entity or in its industry or to the services actually received.
4. Purchases at prices significantly above or below market price.
5. Unusual payments in cash.
6. Unusual payments towards legal and retainership fees.
7. Unusual transactions with companies registered in tax havens.
8. Payments for goods or services made other than to the country from which the goods or services
originated.
9. Payments without proper exchange control documentation.
10. Existence of an information system which fails to provide an adequate audit trail.
11. Unauthorised transactions or improperly recorded transactions.
12. Adverse media comment.
18 State briefly the Communication/Reporting requirements as per SA 250 on Non- Compliance of laws and
regulations in an audit of financial statement:
(a) To the management and TCWG
(b) To the users of the auditor's report on the financial statements.
(c) To the regulatory and enforcement authorities.
Answer: Reporting requirements as per SA 250 on Non-Compliance with Laws and regulations:
(a) Reporting to Management & TCWG:
 The auditor shall communicate with TCWG matters involving non compliance with laws and
regulations that come to the auditor’s attention.
 If, in the auditor’s judgment, the non-compliance is believed to be intentional and material, the
auditor shall communicate the matter to TCWG as soon as practicable.
 If the auditor suspects that management or TCWG are involved in noncompliance, the auditor
shall communicate the matter to the next higher level of authority at the entity, if it exists,
such as an audit committee or supervisory board. Where no higher authority exists the
auditor shall consider the need to obtain legal advice.
(b) Reporting in Auditor’s Report:
 If the auditor concludes that the non-compliance has a material effect on the financial
statements, and has not been adequately reflected in the financial statements, the auditor
shall, express a qualified or adverse opinion on the financial statements.
 If the auditor is precluded by management or TCWG from obtaining sufficient appropriate
audit evidence, the auditor shall express a qualified opinion or disclaim an opinion.
 If the auditor is unable to determine whether non-compliance has occurred because of
limitations imposed by the circumstances rather than by management or TCWG, the auditor
shall evaluate the effect on the auditor’s opinion.
(c) Reporting to regulatory and Enforcement Authorities:
If the auditor has identified or suspects non-compliance with laws and regulations, the auditor
shall determine whether the auditor has a responsibility to report the identified or suspected
non-compliance to parties outside the entity.

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SA 260 “Communication with Those Charged with Governance”

19 Discuss with reference to SAs: The auditor shall communicate all significant findings with those charged
with Governance.
Or
“The auditors should communicate audit matters of governance interest arising from the audit of
financial statements with those charged with the governance of an entity”. Briefly state the matters to be
included in such Communication.
Answer: Communicating Significant Finding to TCWG:
SA 260 “Communication with Those charged with Governance” deals with auditor’s responsibilities to
communicate with TCWG in an audit of financial statements.
As per SA 260, auditor should communicate all significant findings with the TCWG, stated as below:
1. The auditor’s views about significant qualitative aspects of the entity’s accounting practices,
including accounting policies, accounting estimates and financial statement disclosures.
2. Significant difficulties, if any, encountered during the audit;
3. Unless all of those charged with governance are involved in managing the entity:
 Material weaknesses, if any, in the design, implementation or operating effectiveness of internal
control that have been communicated to management;
 Significant matters, arising from the audit that were discussed, or subject to correspondence
with management; and
 Written representations the auditor is requesting; and
4. Other matters, if any, arising from the audit that, in the auditor’s professional judgment, are
significant to the oversight of the financial reporting process.
20 State the Significant Difficulties encountered during audit with reference to SA 260.
Answer: Significant Difficulties encountered during audit:
SA 260 “Communication with Those charged with Governance” deals with auditor’s responsibilities to
communicate with TCWG in an audit of financial statements.
As per SA 260 among other things auditor should communicate significant difficulties to the TCWG.
Examples of significant difficulties to be communicated are:
1. Significant delays in management providing required information.
2. An unnecessarily brief time within which to complete the audit.
3. Extensive unexpected effort required to obtain SAAE.
4. Unavailability of expected information.
5. Restrictions imposed on the auditor by management.
6. Scope limitation that leads to modification of auditor’s opinion.
21 Write short note on: Factors governing modes of communication of auditor with those charged with
governance.
Answer: Factors affecting mode of Communication:
SA 260 “Communication with Those charged with Governance” deals with auditor’s responsibilities to
communicate with TCWG in an audit of financial statements. As per SA 260 the various factors affecting
mode of communication are:
1. Whether the matter has been satisfactorily resolved.
2. Whether management has previously communicated the matter.
3. The size, operating structure, control environment, and legal structure of the entity.

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4. In the case of an audit of special purpose F.S., whether the auditor also audits the entity’s general
purpose F.S..
5. Legal requirements. In some jurisdictions, a written communication with TCWG is required in a
prescribed form by local law.
6. The expectations of TCWG, including arrangements made for periodic meetings or communications
with the auditor.
7. The amount of ongoing contact and dialogue the auditor has with TCWG.
8. Whether there have been significant changes in the membership of a governing body.
22 Compare and explain the following: Reporting to Shareholders vs. reporting to TCWG.
[Nov. 14 (3 Marks)]
Answer: Reporting to Shareholders vs. Reporting to those Charged with Governance:
Reporting to Shareholders Reporting to TCWG
1. SA 700, 705 & 706 and Section 143 of the 1. SA 260 deals with the provisions relating to
Companies Act, 2013 deals with the reporting to those Charged with Governance.
provisions relating to reporting to
Shareholders.
2. Reporting to shareholder generally focuses 2. Reporting to TCWG generally includes
on true and fair view of financial statements. auditor’s responsibilities, planned scope and
timing of audit, significant findings from the
audit and independence.
3. Reporting to shareholders is an external 3. Reporting to TCWG is an internal report and
report and issued in public domain. not issued in public domain.

SA 265 “Communicating Deficiencies in Internal Control to Those Charged with Governance”

23 What do you mean by deficiencies in Internal Control. Explain various indicators of Significant
deficiencies.
Answer: Deficiencies in Internal Control:
SA 265 “Communicating Deficiencies in Internal Control to Those Charged with Governance and
Management” states that deficiency in internal control exists when:
(a) A control is designed, implemented or operated in such a way that it is unable to prevent, or
detect and correct, misstatements in the financial statements on a timely basis; or
(b) A control necessary to prevent, or detect and correct, misstatements in the financial statements
on a timely basis is missing.
Indicators of Significant Deficiencies:
1. Evidence of ineffective aspects of control environment.
2. Entity’s Risk assessment process – Absent/ineffective.
3. Ineffective response to identified significant Risks.
4. Correction of prior period misstatements arising due to fraud/error.
5. Management inability to oversee F.S. Preparation.
6. Misstatements detected by the auditor’s procedures were not prevented, or detected and
corrected by the entity internal control.

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SA 299 “Responsibility of Joint auditor”

24 KRP Ltd., at its annual general meeting, appointed Mr. X, Mr. Y and Mr. Z as joint auditors to conduct
auditing for the financial year 2013-14. For the valuation of gratuity scheme of the company, Mr. X, Mr.
Y and Mr. Z wanted to refer their own known Actuaries. Due to difference of opinion, all the joint
auditors consulted their respective Actuaries. Subsequently, major difference was found in the actuary
reports. However, Mr. X agreed to Mr. Y’s actuary report, though, Mr. Z did not. Mr. X contends that Mr.
Y’s actuary report shall be considered in audit report due to majority of votes. Now, Mr. Z is in dilemma.
(i) You are required to briefly explain the responsibilities of auditors when they are jointly and
severally responsible in respect of audit conducted by them and also guide Mr. Z in such situation.
(ii) Explain the responsibility of auditors, in case, report made by Mr. Y’s actuary, later on, found
faulty.
Answer: Responsibilities of Joint auditors:
SA 299 “Responsibility of Joint Auditors” deals with the responsibilities of joint auditors. In respect of
audit work divided among the joint auditors, each joint auditor is responsible only for the work
allocated to him, whether or not he has prepared a separate report on the work performed by him.
On the other hand, all the joint auditors are jointly and severally responsible -
(a) in respect of the audit work which is not divided among the joint auditors and is carried out by
all of them;
(b) in respect of decisions taken by all the joint auditors concerning the nature, timing or extent of
the audit procedures to be performed by any of the joint auditors.
It may, however, be noted that proper execution of these audit procedures is the separate and
specific responsibility of the joint auditor concerned;
(c) in respect of matters which are brought to the notice of the joint auditors by any one of them and
on which there is an agreement among the joint auditors
(d) for examining that the F.S. of the entity comply with the disclosure requirements of the relevant
statute; and
(e) for ensuring that the audit report complies with the requirements of the relevant statute.
Each joint auditor is entitled to assume that the other joint auditors have carried out their part of
work in accordance with the generally accepted audit procedures and therefore it would not be
necessary for joint auditor to review the work performed by other joint auditors.
Reporting Responsibilities in case of differences of opinion:
Normally, the joint auditors are able to arrive at an agreed report. However, where the joint auditors
are in disagreement with regard to any matters to be covered by the report, each one of them should
express his own opinion through a separate report. A joint auditor is not bound by the views of the
majority of the joint auditors regarding matters to be covered in the report and should express his
opinion in a separate report in case of a disagreement.
In the present case, Mr. Z does not agree with the opinion of Mr. X and Mr. Y, therefore he needs to
issue a separate report.
25 ABC & Co. and DEF & Co. Chartered Accountant firms were appointed as joint auditors of Good Health
Care Ltd. for 2014-15. An investigation was conducted under Companies Act 2013 during March 2016
and observed gross understatement of Revenue. The revenue aspects were looked after by DEF & Co,
but there was no documentation for the division of work between the joint auditors.

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Answer: : Responsibilities of Joint Auditor:

 As per SA 299 “Responsibilities of Joint Auditor” where joint auditors are appointed, they should,
by mutual discussion, divide the work among themselves.
 Further the work so divided should be adequately documented and preferable communicated to
the entity.
 In respect of audit work divided among the joint auditors, each joint auditor is responsible only
for the work allocated to him, whether or not he has prepared a separate report on the work
performed by him.
 However for the work not divided, all the joint auditor are jointly and severally responsible.
 In the present case, though the revenue aspects were looked after by DEF & Co., but as there is
no documentation for division of the work between them, both the joint auditors will be held
responsible for it.
Conclusion: Both Joint auditors are jointly and severally responsible.

SA 300 “Planning an Audit of Financial Statements”

26 Comment on the following: Auditor shall establish an overall strategy that sets the scope, timing and
direction of the audit, and that guides the development of the audit plan”.
Answer: Establishment of Audit Strategy:
(a) SA 300 “Planning an Audit of Financial Statements” requires that the auditor shall establish an
overall audit strategy that sets the scope, timing and direction of the audit, and that guides the
development of the audit plan.
(b) In establishing the overall audit strategy, the auditor shall:
 Identify the characteristics of the engagement that define its scope;
 Ascertain the reporting objectives of the engagement to plan the timing of the audit and the
nature of the communications required;
 Consider the factors that are significant in directing the engagement team’s efforts;
 Consider the results of preliminary engagement activities and, where applicable, whether
knowledge gained on other engagements performed by the engagement partner for the
entity is relevant; and
 Ascertain the NTE of procedures necessary to perform.

SA 315 “Identifying and assessing the Risk of Material Misstatements through Understanding the Entity and
its Environment”
27 What are the points to be remembered while evaluating the knowledge of the business in the conduct
of an audit? [May 09 (8 Marks)]
or
What are the broad matters to be considered while obtaining knowledge of business for a new audit
engagement of a manufacturing concern? [May 10 (4 marks)]
Answer: Obtaining an understanding of the entity and its environment:
As per SA 315 “Identifying and Assessing the Risk of Material Misstatements through understanding
the entity and its environment” auditor is required to obtain an understating of following as a part of
risk assessment procedures:

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(a) Industry, regulatory, and other external factors including applicable financial reporting
framework.
(b) The nature of the entity, including:
 its operations;
 its ownership and governance structures;
 the types of investments that the entity is making and plan to make; &
 the way that the entity is structured and how it is financed;
(c) The entity’s selection and application of accounting policies, including the reasons for changes
thereto.
(d) The entity’s objectives and strategies, and those related business risks that may result in risks of
material misstatement.
(e) The measurement and review of the entity’s financial performance.
The auditor shall also obtain an understanding of internal controls relevant for an audit.
28 Z Ltd. has its entire operations including accounting computerised. As the audit partner you are
concerned about inherent and control risk for material financial statement assertions. What could be
the areas you look forward for deficiencies and risk identification. [May 11 (4 Marks)]
Answer: Risk Assessment in CIS Environment:
SA 315 “Identifying and Assessing the Risks of Material Misstatement through Understanding the
Entity and its Environment”, requires the auditor to make an assessment of inherent and control risk
for material financial statement assertions. In a CIS environment, auditor should look into below
mentioned area for risk identification:
(i) Program Development and maintenance.
(ii) System software support.
(iii) Operations including processing of data.
(iv) Physical CIS security.
(v) Control over access to specialized utility program.
29 IT systems also pose specific risks to an entity's internal control? What are those risks?
[May 10 (4 Marks)]
Answer: Risk to Internal Control imposed by IT System:
As per SA 315 “Identifying and Assessing the Risks of Material Misstatement through Understanding
the Entity and its Environment”, IT system also poses specific risks to an entity’s Internal Control.
These risks are:
(a) Reliance on systems or programs that are inaccurately processing data, processing inaccurate
data or both.
(b) Unauthorised access to data that may result in destruction of data or improper changes to data,
including the recording of unauthorized or non existent transactions, or inaccurate recording of
transactions. Particular risk may arise when multiple users access a common database.
(c) The possibility of IT personnel gaining access beyond those necessary to perform their assigned
duties thereby breaking down segregation of duties.
(d) Unauthorised changes to data in Master files
(e) Unauthorised changes to systems or programs.
(f) Failure to make necessary changes to systems or programs.
(g) In appropriate manual intervention
(h) Potential loss of data or inability to access data as required.

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SA 320 “Materiality in Planning and Performing an Audit”

30 Mr. X was appointed as the auditor of M/s Easygo Ltd. and intends to apply the concept of materiality
for the financial statements as a whole. Please guide him as to the factors that may affect the
identification of an appropriate benchmark for this purpose. [Nov. 13 (4 Marks)]
Answer: Use of benchmark in determining Materiality:
SA 320 “Materiality in Planning and Performing an Audit” prescribes the use of Benchmarks in
Determining Materiality for the Financial Statements as a Whole. Accordingly determining
materiality involves the exercise of professional judgment. A percentage is often applied to a chosen
benchmark as a starting point in determining materiality for the financial statements as a whole.
Factors that may affect the identification of an appropriate benchmark include the following:
(i) The elements of the financial statements (for example, assets, liabilities, equity, revenue,
expenses);
(ii) Whether there are items on which the attention of the users of the particular entity’s financial
statements tends to be focused (for example, for the purpose of evaluating financial
performance users may tend to focus on profit, revenue or net assets);
(iii) The nature of the entity, where the entity is at in its life cycle, and the industry and economic
environment in which the entity operates;
(iv) The entity’s ownership structure and the way it is financed (for example, if an entity is financed
solely by debt rather than equity, users may put more emphasis on assets, and claims on them,
than on the entity’s earnings); and
(v) The relative volatility of the benchmark.
31 As an auditor of RST Ltd. Mr. P applied the concept of materiality for the financial statements as a
whole. On the basis of obtaining additional information of significant contractual arrangements that
draw attention to a particular aspect of a company’s business, he wants to re-evaluate the materiality
concept. Please guide him. [May 15 (5 Marks)]
Answer: Re-evaluation of the Materiality Concept:
 SA 320 “Materiality in Planning and Performing an Audit”, requires the auditor to determine
materiality for the financial statement as a whole, while establishing the overall audit strategy.
 If, in the specific circumstances of the entity, there is one or more particular classes of transactions,
account balances or disclosures for which misstatements of lesser amounts than the materiality for
the financial statements as a whole could reasonably be expected to influence the economic
decisions of users taken on the basis of the financial statements, the auditor shall also determine
the materiality level or levels to be applied to those particular classes of transactions, account
balances or disclosures.
 The auditor shall revise materiality for the financial statements as a whole and if applicable the
materiality levels for particular classes of transactions, account balances or disclosures, in the
event of becoming aware of information during the audit that would have caused the auditor to
have determined a different amount (or amounts) initially.
 If the auditor concludes a lower materiality for the same, then he should consider the fact that
whether it is necessary to revise performance materiality and whether the nature, timing and
extent of the further audit procedures remain appropriate.
 In the instant case, Mr. P, auditor of RST Ltd. has applied the concept of materiality for the financial
statements as a whole. But he wants to re-evaluate the materiality concept, on the basis of
additional information of significant contractual arrangements which draws attention to a
particular aspect of the company’s business.
Conclusion: Mr. P can re-evaluate the materiality concepts after considering the necessity of such
revision.

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SA 330 “The Auditor’s Responses to Assessed Risks”

32 In the course of audit of Z Ltd, its auditor wants to rely on audit evidence obtained in previous audit in
respect of effectiveness of internal controls instead of retesting the same during the current audit. As
an advisor to the auditor kindly caution him about the factors that may warrant a re-test of controls.
[May 13 (4 Marks)]
Answer: Factors warranting re-test of controls:
As per SA 330 on “The Auditor’s Responses to Assessed Risks”, if the auditor plans to use audit
evidence from a previous audit about the operating effectiveness of specific controls, he shall
establish the continuing relevance of that evidence by obtaining audit evidence about whether
significant changes in those controls have occurred subsequent to the previous audit.
The auditor’s decision on whether to rely on audit evidence obtained in previous audits for control is
a matter of professional judgment.
Factors that may warrant a re-test of controls are-
1. A deficient control environment.
2. Deficient monitoring of controls.
3. A significant manual element to the relevant controls.
4. Personnel changes that significantly affect the application of the control.
5. Changing circumstances that indicate the need for changes in the control.
6. Deficient general IT-controls.
33 While carrying out the statutory audit of a large entity, what are the substantive procedures to be
performed to assess the risk of material misstatement? [Nov. 12 (8 Marks)]
Answer: Substantive Procedures to be performed to assess the risk of material misstatement:
 SA 330, “The Auditor’s Response to Assessed Risk”, defines substantive procedures as an audit
procedure designed to detect material misstatements at the assertion level. They comprise tests
of details and substantive analytical procedures.
 Test of Details: Irrespective of the assessed risks of material misstatement, the auditor shall
design and perform substantive procedures for each material class of transactions, account
balance, and disclosure. This requirement reflects the facts that: (i) the auditor’s assessment of
risk is judgmental and so may not identify all risks of material misstatement; and (ii) there are
inherent limitations to internal control, including management override.
 Substantive Analytical Procedure: Substantive analytical procedures are generally more
applicable to large volumes of transactions that tend to be predictable over time. SA 520,
“Analytical Procedures” establishes requirements and provides guidance on the application of
analytical procedures during an audit.
 Depending on the circumstances, the auditor may determine that:
1. Performing only substantive analytical procedures will be sufficient to reduce audit risk to an
acceptably low level. For example, where the auditor’s assessment of risk is supported by
audit evidence from tests of controls.
2. Only tests of details are appropriate.
3. A combination of substantive analytical procedures and tests of details are most responsive to
the assessed risks.

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34 As a Statutory Auditor, how would you deal with the following: While commencing the statutory audit
of B Company Limited, the auditor undertook the risk assessment and found that the detection risk
relating to certain class of transactions cannot be reduced to acceptance level.
Answer: Assessment of Risk and Acceptable Level:
 SA 315 “Identifying and Assessing the Risk of Material Misstatement Through Understanding the
Entity and its Environment” and SA 330 “The Auditor’s Responses to Assessed Risks” establishes
standards on the procedures to be followed to obtain an understanding of the accounting and
internal control systems and on audit risk and its components.
 SA 315 and SA 330 require that the auditor should use professional judgement to assess risk of
material misstatement and to design audit procedures to ensure that it is reduced to an acceptably
low level.
 Risk of Material Misstatements comprises of Inherent risk and Control Risk. “Detection risk” is the
risk that an auditor’s substantive procedures will not detect a misstatement that exists in an
account balance or class of transactions that could be material.
 The higher the risk of material misstatement, the more audit evidence the auditor should obtain
from the performance of substantive procedures. When both inherent and control risks are
assessed as high, the auditor needs to consider whether substantive procedures can provide
sufficient appropriate audit evidence to reduce detection risk, and therefore audit risk, to an
acceptably low level.
 The auditor should use his professional judgement to assess audit risk and to design audit
procedures to ensure that it is reduced to an acceptably low level. If it cannot be reduced to an
acceptable level, the auditor should express a qualified opinion or a disclaimer of opinion as may
be appropriate.
35 While commencing the statutory audit of ABC Company Limited, what should be the considerations of
the auditor to assess Risk of Material Misstatement and his response to such risks? [Nov. 14 (4 Marks)]
Answer: Considerations of Auditor for Assessing the Risk of Material Misstatement:
SA 315 “Identifying and Assessing the Risk of Material Misstatement through understanding the
Entity and its Environment”, requires the auditor to identify and assess the risks of material
misstatement at the financial statement level; and the assertion level for classes of transactions,
account balances, and disclosures to provide a basis for designing and performing further audit
procedures. For this purpose, the auditor shall:
(i) Identify risks throughout the process of obtaining an understanding of the entity and its
environment, including relevant controls;
(ii) Assess and evaluate the identified risks;
(iii) Relate the identified risks to what can go wrong at the assertion level; and
(iv) Consider the likelihood of misstatement.
Auditor’s Responses to the Assessed Risk of Material Misstatement:
As per SA 330 “The Auditor’s Responses to Assessed Risks”, the auditor shall design and implement
overall responses to address the assessed risks of material misstatement. In designing the audit
procedures to be performed, the auditor shall:
(i) Consider the reasons for the assessment given to the risk of material misstatement at the
assertion level for each class of transactions, account balance, and disclosure; and
(ii) Obtain more persuasive audit evidence for the auditor’s assessment of risk.

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SA 402 “Audit Considerations in an entity using Service Organisation”

36 “As per SA 402, the user auditor shall obtain an understanding of how user entity uses the services of a
service organization in the user entity operations” Explain the various matters of which understanding
is required.
or
A Company outsourced the activity of accounting data maintenance to the Service Organisation to
achieve cost reduction. As a Statutory Auditor of such company, what are the precautions/checks that
you would consider for conducting the audit?
or
In the course of the audit of R Ltd., the audit manager of ABC & Co. observed that R Ltd. has outsourced
certain activities to an outsourcing agency. As the engagement partner guide the audit manager in the
assessment of services provided by the outsourcing agency in relation to the audit.
[May 11 (4 Marks)]
or
G Ltd. is a mobile phone operating company. Barring the marketing function it had outsourced the
entire operations like maintenance of mobile infrastructure, customer billing, payroll, accounting
functions, etc. Assist the auditor of G Ltd. as to how he can obtain an understanding of how G Ltd. uses
the services of the outsourced agency in its operations. [Nov. 13 (5 Marks)]
Answer: Matters of which understanding is required by user auditor w.r.t. services of a services
organization:
A client may use a service organisation such as one that executes transactions and maintains related
accounts or records transactions and processes related data. If a client uses a service organisation,
certain policies, procedures and records maintained by the service organisation might be relevant to
the audit of the financial statements of the client. Consequently, the auditor would consider the
nature and extent of activities undertaken by service organisations so as to determine whether those
activities are relevant to the audit and, if so, to assess their effect on audit risk.
SA 402 on “Audit Considerations relating to an Entity Using a Service Organisation” deals with the
user auditor’s responsibility to obtain sufficient appropriate audit evidence when a user entity uses
the services of one or more service organisations. Accordingly, the user auditor is required to shall
obtain an understanding of how user entity uses the services of a service organization in the user
entity operation, including:
1. Nature of service provided by the service organization and the significance of those services to the
user entity.
2. The nature and materiality of the transactions processed or financial reporting processes affected
by service organizations.
3. The degree of interaction between activities of service organizations and those of the user entity.
4. The nature of relationship between user entity and the service organization.
37 When a sub-service organization performs services for a service organization, there are two
alternative methods of presenting the description of controls. The service organization determines
which method will be used. As a user auditor what information would you obtain about controls at a
sub-service organization? [May 15 (5 Marks)]

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Answer: Information to be obtained w.r.t. controls at a sub-service organisation:

 SA 402 on “Audit Considerations relating to an Entity Using a Service Organisation” deals with the
user auditor’s responsibility to obtain sufficient appropriate audit evidence when a user entity
uses the services of one or more service organisations, which in turn may use a sub-service
organisation to provide some of the services provided to a user entity that are part of the user
entity’s information system relevant to financial reporting.
 If a service organisation uses a subservice organisation, the service auditor’s report may either
include or exclude the subservice organisation’s relevant control objectives and related controls in
the service organisation’s description of its system and in the scope of the service auditor’s
engagement. These two methods of reporting are known as the inclusive method and the carve-
out method, respectively.
 If the Type 1 or Type 2 report excludes the controls at a subservice organisation, and the services
provided by the subservice organisation are relevant to the audit of the user entity’s financial
statements, the user auditor is required to apply the requirements of this SA in respect of the
subservice organisation and accordingly obtain an understanding of the following:
1. Nature of service provided by the sub-service organization and the significance of those
services to the user entity.
2. The nature and materiality of the transactions processed or financial reporting processes
affected by sub-service organizations.
3. The degree of interaction between activities of sub-service organizations and those of the user
entity.
4. The nature of relationship between user entity and the sub-service organization.
 The nature and extent of work to be performed by the user auditor regarding the services
provided by a subservice organisation depend on the nature and significance of those services to
the user entity and the relevance of those services to the audit.

SA 450 “Evaluation of Misstatements Identified During The Audit”

38 In the course of audit of T Ltd., the audit team is not sure of the possible source of misstatements in the
financial statements. As the audit manager identify the sources of misstatements. [May 11 (4 Marks)]
or
In audit plan for T Ltd, as the audit partner you want to highlight the sources of misstatements, arising
from other than fraud, to your audit team and caution them. Identify the sources of misstatements.
[May 13 (4 Marks)]
Answer: Sources of Misstatement:
SA 450 “Evaluation of Misstatements identified during the Audit”, defines the term misstatement as a
difference between the amounts, classification, presentation, or disclosure of a reported financial
statement item and the amount, classification, presentation, or disclosure that is required for the item
to be in accordance with the applicable financial reporting framework. Accordingly miststament may
caused due to following:
(i) An inaccuracy in gathering or processing data from which the financial statements are
prepared;
(ii) An omission of an amount or disclosure;
(iii) An incorrect accounting estimate arising from overlooking, or clear misinterpretation of facts;
and
(iv) Judgments of management concerning accounting estimates that the auditor considers
unreasonable or the selection and application of accounting policies that the auditor considers
inappropriate.

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39 Discuss the impact of uncorrected misstatements identified during the audit and the auditor’s
response to the same. [Nov. 14 (4 Marks)]
Answer: Impact of uncorrected misstatements identified during the audit:
 SA 450 “Evaluation of Misstatements identified during the audit” deals with the auditor’s
responsibility to evaluate the effect of identified misstatements on the audit and of uncorrected
misstatements, if any, on the financial statements.
 In accordance with SA 450, the auditor shall determine whether uncorrected misstatements are
material, individually or in aggregate. In making this determination, the auditor shall consider the
size and nature of the misstatements, both in relation to particular classes of transactions, account
balances or disclosures and the financial statements as a whole.
 The auditor shall request the management that uncorrected misstatements be corrected. If
management refuses to correct some or all of the misstatements communicated by the auditor, the
auditor shall obtain an understanding of management’s reasons for not making the corrections.
 Prior to evaluating the effect of uncorrected misstatements, the auditor shall reassess materiality
determined in accordance with SA 320, to confirm whether it remains appropriate in the context of
the entity’s actual financial results.
 The auditor shall communicate with TCWG, uncorrected misstatements and the effect that they,
individually or in aggregate, may have on the opinion in the auditor’s report.
 The auditor shall request a written representation from management and, where appropriate,
those charged with governance whether they believe the effects of uncorrected misstatements are
immaterial, individually and in aggregate, to the financial statements as a whole.
40 While auditing accounts of a public limited company for the year ended 31st March 2014, an auditor
found out an error in the valuation of inventory, which affects the financial statement materially –
Comment as per standards on auditing.
Answer: Errors in Valuation of Inventories and Auditor’s Responsibilities:
 SA 450 “Evaluation of Misstatements identified during the audit” deals with the auditor’s
responsibility to evaluate the effect of identified misstatements on the audit and of uncorrected
misstatements, if any, on the financial statements.
 In accordance with SA 450 auditor should consider requesting the management to adjust the
financial information or consider extending his audit procedures. If the management refuses to
adjust the financial information and the results of extended audit procedures do not enable the
auditor to conclude that the aggregate of uncorrected misstatements is not material, the auditor
should express a qualified or adverse opinion, as appropriate.
Conclusion: In the instant case, the auditor has detected the material errors affecting the financial
statements; the auditor should communicate his findings to the management on a timely basis,
consider the implications on true and fair view and also ensure that appropriate disclosures have been
made.

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SA 500 “Audit Evidence”

41 Comment on the following: Z Ltd. had appointed an outside expert to assess accrued gratuity liability of
the company. Based on the said report, the company provides Rs. 80 lakhs as gratuity in the financial
statements. [May 09 (4 Marks)]
or
What are the procedures to be followed by a statutory auditor for verifying the provision for accrued
liability for retirement benefits which is based on a certificate of an reputed actuary?
[May 10 (8 marks)]
or
Y Ltd. Engaged an actuary to ascertain its employee cost, gratuity and leave encashment liabilities. As
the auditor of Y Ltd. You would like to use the report of actuary as an audit evidence. How do you
evaluate the work of actuary. [May 11 (8 Marks)]
Answer: Evaluating the work of Management Expert:
As per SA 500 “Audit Evidence” when information to be used as audit evidence has been prepared
using the work of a management’s expert, the auditor shall perform the following:
(i) Evaluate the competence, capabilities and objectivity of that expert: For this purpose,
auditor may consider his qualification, membership of a professional body or industrial
association license to practice etc.
(ii) Obtain an understanding of the work of that expert: it may include areas of specialty,
applicable professional standards and other legal requirements.
(iii) Evaluate the appropriateness of that expert’s work: with respect to following:
(a) Relevance and reasonableness of that expert findings and conclusion.
(b) Relevance and reasonableness of assumptions and methods used; and
(c) Relevance, completeness and accuracy of source data.
42 As a Statutory Auditor, how would you deal with the following case: M/s LNK’s group gratuity scheme’s
valuation by actuary shows wide variation compared to the previous year’s figures.
Answer: Using the work of Management Expert as an audit evidence:
 SA 500 (Revised), “Audit Evidence” states that the auditor has to evaluate the work of
management expert, say, actuary, before adopting the same.
 The work of management expert is required to be evaluated in terms of following:
(i) Relevance and reasonableness of that expert findings and conclusion.
(ii) Relevance and reasonableness of assumptions and methods used; and
(iii) Relevance, completeness and accuracy of source data.
 This becomes more crucial since M/s LNK’s group gratuity scheme’s valuation by actuary shows
wide variation compared to Important figures. There is no doubt that appropriateness,
reasonableness of assumptions and methods used are the responsibility of the expert, but the
auditor has to determine whether they are reasonable based on the auditor’s knowledge of the
client’s business and result of his audit procedures.
 In the present case, the auditor must verify the reasonableness of assumptions made and methods
adopted by the actuary in the evaluation particularly with reference to factors such as rate of
return on investments, retirement age, number and salary of employees, etc.
Conclusion: in view of provisions of SA 500 as discussed above, the auditor has to satisfy himself
whether valuation done by the actuary can be adopted, otherwise he may report on his findings for
wide variation.

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43 The auditor of SS Ltd. accepted the gratuity liability valuation based on the certificate issued by a
qualified actuary. However, the auditor noticed that the retirement age adopted is 65 years as against
the existing retirement age of 60 years. The company is considering a proposal to increase the
retirement age. Comment.
Or
For determining the liability for Gratuity, Actuary’s Report is produced to the auditor. On examination
auditor notices a serious wrong assumption in the report. Auditor challenges the Actuary’s report –
Comment.
Answer: Using the work of Management Expert as an audit evidence:
 SA 500 (Revised), “Audit Evidence” states that the auditor has to evaluate the work of
management expert, say, actuary, before adopting the same.
 The work of management expert is required to be evaluated in terms of following:
(i) Relevance and reasonableness of that expert findings and conclusion.
(ii) Relevance and reasonableness of assumptions and methods used; and
(iii) Relevance, completeness and accuracy of source data.
 There is no doubt that appropriateness, reasonableness of assumptions and methods used are the
responsibility of the expert, but the auditor has to determine whether they are reasonable based
on the auditor’s knowledge of the client’s business and result of his audit procedures.
 In the instant case, a qualified actuary has issued a certificate for gratuity liability valuation, for
which retirement age adopted is 65 years against the existing retirement age of 60 years;
however, the company is considering a proposal to increase the retirement age.
Conclusion: In view of provisions of SA 500 as discussed above, the assumption made by actuary has
no relevance and reasonableness as presently retiring age is of 60 years. Hence the auditor is
required to bring out the facts to the notice of management and advice the modification accordingly.
In case of failure of compliance of the same the auditor may qualify the report.
44 Write short note on: Inquiry. [Nov. 10 (4 marks)]
Answer: Inquiry:
 As per SA 500 “Audit Evidence” , inquiry is one of the methods to obtain audit evidences. Inquiry
consists of seeking information of knowledgeable persons, both financial and non- financial,
within the entity or outside the entity.
 Inquiry is used extensively throughout the audit in addition to other audit procedures.
 Inquiries may range from formal written inquiries to informal oral inquiries. However in case
oral inquiries, the auditor may consider it necessary to obtain written representations from
management and, where appropriate, TCWG to confirm responses to such inquiries.
 Evaluating responses to inquiries is an integral part of the inquiry process.
 Responses to inquiries may provide the auditor with information not previously possessed or
with corroborative audit evidence. Alternatively, responses might provide information that
differs significantly from other information that the auditor has obtained. In some cases,
responses to inquiries provide a basis for the auditor to modify or perform additional audit
procedures.

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45 Write short note on: Assessing the reliability of Audit Evidence. [May 09 (4 Marks)]
Answer: Assessing the reliability of audit evidence:
As per SA 500 “Audit Evidence” the reliability of information to be used as audit evidence, and
therefore of the audit evidence itself, is influenced by its source and its nature, and the circumstances
under which it is obtained. While recognising that exceptions may exist, the following generalisations
about the reliability of audit evidence may be useful:
(a) The reliability of audit evidence is increased when it is obtained from independent sources
outside the entity.
(b) The reliability of audit evidence that is generated internally is increased when the related
controls, imposed by the entity are effective.
(c) Audit evidence obtained directly by the auditor is more reliable than audit evidence obtained
indirectly.
(d) Audit evidence in documentary form, whether paper, electronic, or other medium, is more
reliable than evidence obtained orally.
(e) Audit evidence provided by original documents is more reliable than audit evidence provided
by photocopies, or documents that have been filmed, digitised or otherwise transformed into
electronic form, the reliability of which may depend on the controls over their preparation and
maintenance.

SA 501 “Audit Evidence – Specific Considerations for Selected items”

46 You are the auditor of Easy Communications Ltd. for the year 2015–16. The inventory as at the end of
the year i.e. 31.3.16 was Rs. 2.25 crores. Due to unavoideable circumstances, you could not be present
at the time of annual physical verification. Under the above circumstances how would you ensure that
the physical verification conducted by the management was in order? [Nov. 08 (5 Marks)]
Answer: Auditor’s duties in case of non-attendance of inventory count:
 SA 501 “Audit Evidence – Additional Considerations for Specific Items”, requires from the auditor
that when inventory is material to the financial statements, he shall obtain sufficient appropriate
audit evidence regarding the existence and condition of inventory by attendance at physical
inventory counting, unless impracticable, to:
(i) Evaluate management’s instructions and procedures for recording and controlling the
results of the entity’s physical inventory counting;
(ii) Observe the performance of management’s count procedures;
(iii) Inspect the inventory; and
(iv) Perform test counts;
 SA 501 further provides that if the auditor is unable to be present at the physical inventory count
on the date planned due to unforeseen circumstances, the auditor should take or observe some
physical counts on an alternative date and perform audit procedures on intervening transactions
to assess whether the changes in inventory between the date of physical count and the period end
date are correctly recorded.
 The auditor may also seek management’s written representation on (a) the completeness of
information provided regarding the inventory, and (b) assurance with regard to adherence to laid
down procedures for physical inventory count.

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SA 505 “External Confirmation”

47 Write short note on: External Confirmations in audit. [Nov. 09 (4 Marks)]
Answer: External Confirmations:
 As per SA 505 external confirmation may be defined as Audit evidence obtained as a direct written
response to the auditor from a third party (the confirming party), in paper form, or by electronic
or other medium.
 External confirmations are of two types:
(a) Positive confirmation request – A request that the confirming party respond directly to the
auditor indicating whether the confirming party agrees or disagrees with the information in
the request, or providing the requested information.
(b) Negative confirmation request – A request that the confirming party respond directly to the
auditor only if the confirming party disagrees with the information provided in the request.
 External confirmation procedures frequently are relevant when addressing assertions associated
with account balances and their elements, but need not be restricted to these items. For example,
the auditor may request external confirmation of the terms of agreements, contracts, or
transactions between an entity and other parties.
48 Write short notes on Situations where external confirmations can be used.
Answer: Situations where external confirmations can be used:
External confirmation procedures frequently are relevant when addressing assertions associated
with account balances and their elements, but need not be restricted to these items. For example, the
auditor may request external confirmation of the terms of agreements, contracts, or transactions
between an entity and other parties.
Other situations where external confirmation procedures may provide relevant audit evidence
include:
(i) Bank balances and other information relevant to banking relationships.
(ii) Accounts receivable balances and terms.
(iii) Inventories held by third parties at bonded warehouses for processing or on consignment.
(iv) Property title deeds held by lawyers or financiers for safe custody or as security.
(v) Investments held for safekeeping by third parties, or purchased from stockbrokers but not
delivered at the balance sheet date.
(vi) Amounts due to lenders, including relevant terms of repayment.
(vii) Accounts payable balances and terms.
49 The management of S Ltd. Request you not to seek confirmation from its debtors. As the auditor of S
Ltd., what can be an appropriate response? [May 11 (6 Marks)]
or
The auditor of H Ltd. wanted to obtain confirmation from its creditors. But the management made a
request to the auditor not to seek confirmation from certain creditors citing disputes. Can the auditor
of H Ltd. Accede to this request? [May 13 (4 Marks)]

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Answer: Management refusal to allow auditor to send confirmation request:

 SA 505, “External Confirmations”, establishes standards on the auditor’s use of external
confirmation as a means of obtaining audit evidence. It requires that the auditor should employ
external confirmation procedures in consultation with the management.
 The auditor may come across certain situations in which the management may request him not to
seek external confirmation from certain parties because of some reasons, for example, due to a
dispute with the particular creditor or debtor.
 If the management refuses to allow the auditor to a send a confirmation request, the auditor shall:
a. Inquire as to Management’s reasons for the refusal, and seek audit evidence as to their
validity and reasonableness,
b. Evaluate the implications of management’s refusal on the auditor’s assessment of the relevant
risks of material misstatement, including the risk of fraud, and on the nature, timing and
extent of other audit procedures, and
c. Perform alternative audit procedures designed to obtain relevant and reliable audit evidence.
If the auditor concludes that management’s refusal to allow the auditor to send a confirmation
request is unreasonable or the auditor is unable to obtain relevant and reliable audit evidence from
alternative audit procedures, the auditor shall communicate with TCWG and also determine its
implication for the audit and his opinion.
50 Moon Limited replaced its statutory auditor for the Financial year 2015-16. During the course of audit,
the new auditor found a credit item of Rs. 5 lakhs. On enquiry, the company explained him that it is, a
very old credit balance. The creditor had neither approached for the payment nor he is traceable.
Under the circumstances, no confirmation of the credit balance is available. [Nov. 09 (5 Marks)]
Answer: Auditor’s duties in case of non availability of External Confirmation:
 SA 505 “External Confirmations” provides that if the auditor has determined that a response to a
positive confirmation request is necessary to obtain sufficient appropriate audit evidence, and
alternative audit procedures will not provide the audit evidence the auditor requires, he should
determine the implications for the audit and the auditor’s opinion in accordance with SA 705.
 In the present case the identities of trade payables are not traceable to confirm the credit balance
as appearing in the financial statement of the company. It is also not a case of pending litigation.
It might be a case that an income of Rs. 5 lakhs had been hidden in previous year/s.
 The statutory auditor should examine the validity of the credit balance as appeared in the
company’s financial statements. He should obtain sufficient evidence in support of the balance.
He should apply alternative audit procedures to get documentary proof for the transaction/s and
should not rely entirely on the management representation. Finally, he should include the matter
by way of a qualification in his audit report to the members.
51 As an auditor how would you deal with the following: When the audit team visited the client to perform
substantive audit of debtor, the client produced ledger account of customers and confirmations for the
top 10 customers. One of the debtors was more than 5 years old, but it had confirmed his balance.
[May 10 (5 Marks)]

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Answer: Auditor’s duties in case of doubt over reliability of external confirmations:

 SA 505 “External Confirmations” deals with the auditor’s use of external confirmation procedures
to obtain audit evidence. External confirmation is the process of obtaining and evaluating audit
evidence through a direct communication from a third party in response to a request for
information about a particular item affecting assertions made by the management in the financial
statements.
 As per SA 505, the auditor is required to maintain a control over the process of selecting those to
whom a request will be sent out, the preparation and sending of confirmation requests and
responses to those requests. This is because there have been several cases of clients presenting
forged confirmation to auditors when such control was absent.
 In the present case, one of the debtors of more than 5 years old had confirmed his balance. The
auditor should enquire into the debtor whose dues are outstanding for 5 years or more about his
financial abilities and why he has not paid, reasons behind the same, and if found adverse, the
client should be advised to provide for “Provision for bad debts’ and also to confirm that it is not a
forged confirmation.
52 During the course of audit of Star Limited the auditor received some of the confirmation of the
balances of trade payables outstanding in the balance sheet through external confirmation by negative
confirmation request. In the list of trade payables, there are number of trade payables of small
balances except one, old outstanding of Rs. 15 Lacs, of whom, no confirmation on the credit balance
received. Comment with respect to Standard of Auditing.
Answer: Response to Negative Confirmation Request:
 As per SA 505, “External Confirmation”, Negative Confirmation is a request that the confirming
party respond directly to the auditor only if the confirming party disagrees with the information
provided in the request.
 Negative confirmations provide less persuasive audit evidence than positive confirmations. In
case of negative confirmation request, confirming parties may be more likely to respond
indicating their disagreement with a confirmation request when the information in the request is
not in their favor, and less likely to respond otherwise.
 In the instant case, the auditor sent the negative confirmation requesting the trade payables
having outstanding balances in the balance sheet while doing audit of Star Limited. One of the old
outstanding of rupees 15 lacs has not sent the confirmation on the credit balance.
 Non response for negative confirmation request does not means that there is some misstatement
as negative confirmation request itself is to respond to the auditor only if the confirming party
disagrees with the information provided in the request.
 In the present case, considering the materiality of the account balance, the auditor may examine
subsequent cash disbursements or correspondence from third parties, and other records, such as
goods received notes.

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SA 510 “Initial Audit Engagements – Opening Balances”

53 What are Initial Audit Engagement
Answer: Initial Audit Engagements:
As per SA 510 “Initial Audit Engagements - Opening Balances”, initial audit engagement is an
engagement in which either:
(i) The financial statements for the prior period were not audited; or
(ii) The financial statements for the prior period were audited by a predecessor auditor.
54 Comment on the following: You have been appointed as the auditor of Good Health Ltd. for 2015-16
which was audited by CA Trustworthy in 2014-15. As the Auditor of the company state the steps you
would take to ensure that the Closing Balances of 2014-15 have been brought to account in 2015-16 as
Opening Balances and the Opening Balances do not contain misstatements. [Nov. 08 (5 Marks)]
Or
What are the procedures to be followed by a Statutory Auditor in the audit of opening balances if the financial
statements for the preceding year were audited by another auditor?
Answer: Audit procedures for verification of opening balances in case of initial audit engagement:
As per SA 510 “Initial Audit Engagements- Opening Balances”, the objective of the Auditor while
conducting an initial audit engagement with respect to opening balances is to obtain sufficient
appropriate audit evidence so that the-
(i) opening balances of the preceding period have been correctly brought forward to the current
period;
(ii) opening balances do not contain any misstatement that materially affect the current period’s
financial statements; and
(iii) appropriate accounting policies reflected in the opening balances have been consistently applied
in the current period’s financial statements, or changes thereto are properly accounted for and
adequately presented and disclosed in accordance with the applicable financial reporting
framework.
If the prior period’s financial statements were audited by a predecessor auditor, the auditor may be
able to obtain sufficient appropriate audit evidence regarding the opening balances by perusing the
copies of the audited financial statements including the other relevant documents relating to the prior
period financial statements such as supporting schedules to the audited financial statements.
Ordinarily, the current auditor can place reliance on the closing balances contained in the financial
statements for the preceding period, except when during the performance of audit procedures for the
current period the possibility of misstatements in opening balances is indicated.
55 In an initial audit engagement the auditor will have to satisfy about the sufficiency and
appropriateness of ‘Opening balances’ to ensure that they are free from instatements, which may
materially affect the current financial statements. Lay down the audit procedure, you will follow, when
financial statements are audited for the first time. If, after performing the procedure, you are not
satisfied about the correctness of ‘Opening Balances’, what approach you will adopt in drafting your
audit report? [May 15 (5 Marks)]
Answer: Audit procedures for verification of opening balances in case of initial audit engagement:
As per SA 510 “Initial Audit Engagements-Opening Balances”, the objective of the Auditor while
conducting an initial audit engagement with respect to opening balances is to obtain sufficient
appropriate audit evidence so that the-

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(i) opening balances of the preceding period have been correctly brought forward to the current
period;
(ii) opening balances do not contain any misstatement that materially affect the current period’s
financial statements; and
(iii) appropriate accounting policies reflected in the opening balances have been consistently applied
in the current period’s financial statements, or changes thereto are properly accounted for and
adequately presented and disclosed in accordance with the applicable financial reporting
framework.
When the audit of financial statements is being conducted for the first time, the auditor has to perform
auditing procedures to obtain sufficient appropriate audit evidence. Since opening balances represent
effect of transaction and events of the preceding period and accounting policies applied in the
preceding period, the auditor need to obtain evidence having regard to nature of opening balances,
materiality of the opening balances and accounting policies. Since it will not be possible for auditor to
perform certain procedures, e.g., observing physical verification of inventories, etc. the auditor may
obtain confirmation, etc. and perform suitable procedures in respect of fixed assets, investments, etc.
The auditor can also obtain management representation with regards to the opening balances.
Considerations while drafting Report:
If the auditor is unable to obtain sufficient appropriate audit evidence regarding the opening balances,
the auditor shall express a qualified opinion or a disclaimer of opinion, as appropriate. Further, If the
auditor concludes that the opening balances contain a misstatement that materially affects the current
period’s financial statements, and the effect of the misstatement is not properly accounted for or not
adequately presented or disclosed, the auditor shall express a qualified opinion or an adverse opinion.

SA 520 “Analytical Procedures”

56 What are the considerations to be kept in mind while performing analytical procedures on data
prepared by the client. [May 09 (6 Marks)]
Answer: Auditor’s considerations while performing analytical procedures:
SA 520 “Analytical Procedures” deals with the auditor’s use of analytical procedures as substantive
procedures and as procedures near the end of the audit that assist the auditor when forming an
overall conclusion on the financial statements.
Accordingly, when the auditor intends to perform analytical procedures on data prepared by the
client, he should consider the following:
1. Determine the suitability of particular substantive analytical procedures for given assertions,
taking account of the assessed risks of material misstatement and tests of details, if any, for these
assertions;
2. Evaluate the reliability of data from which the auditor’s expectation of recorded amounts or ratios
is developed, taking account of source, comparability, and nature and relevance of information
available, and controls over preparation;
3. Develop an expectation of recorded amounts or ratios and evaluate whether the expectation is
sufficiently precise to identify a misstatement that, individually or when aggregated with other
misstatements, may cause the financial statements to be materially misstated; and
4. Determine the amount of any difference of recorded amounts from expected values that is
acceptable without further investigation.

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57 In the audit of Hotel Great Hay Limited its auditor wants to use the analytical procedure as substantive
procedure in respect of room rental income as well as pay roll costs, guide him as to how it can be
done. [Nov. 13 (4 Marks)]
Answer: Applying analytical procedures as substantive procedures:
 SA 520 “Analytical Procedures” deals with the auditor’s use of analytical procedures as
substantive procedures and as procedures near the end of the audit that assist the auditor when
forming an overall conclusion on the financial statements.
 Accordingly, in some cases, predictive model may be effective as an analytical procedure.
 In case of Payroll cost - Where an entity has a known number of employees at fixed rates of pay
throughout the period, it may be possible for the auditor to use this data to estimate the total
payroll costs for the period with a high degree of accuracy, thereby providing audit evidence for a
significant item in the financial statements and reducing the need to perform tests of details on
the payroll.
 In case of Room Rental Income of Hotel, different types of analytical procedures provide different
levels of assurance. Analytical procedures involving the prediction of total rental income in case
of hotel taking the room tariff rates, the number of rooms and vacancy rates into consideration,
can provide persuasive evidence and may eliminate the need for further verification by means of
tests of details, provided the elements are appropriately verified.

SA 530 “Audit Sampling”

58 Write short note on: Sampling Risk.

or
While planning the audit of S Ltd. you want to apply sampling techniques. What are the risk factors you
should keep in mind? [May 10 (4 marks)]
Answer: Risk Factors while Sampling technique:
 SA 530 deals with the auditor’s use of statistical and non-statistical sampling when designing and
selecting the audit sample, performing tests of controls and tests of details, and evaluating the
results from the sample.
 While using sampling technique, auditor’s conclusion based on a sample may be different from
the conclusion if the entire population were subjected to the same audit procedure. This is
known as sampling risk.
 Sampling risk can lead to two types of erroneous conclusions:
1. In the case of a test of controls, that controls are more effective than they actually are, or in
the case of a test of details, that a material misstatement does not exist when in fact it does.
The auditor is primarily concerned with this type of erroneous conclusion because it affects
audit effectiveness and is more likely to lead to an inappropriate audit opinion.
2. In the case of a test of controls, that controls are less effective than they actually are, or in the
case of a test of details, that a material misstatement exists when in fact it does not.
This type of erroneous conclusion affects audit efficiency as it would usually lead to additional
work to establish that initial conclusions were incorrect.

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SA 540 “Auditing Accounting Estimates, including Fair Value Accounting Estimates and Related Disclosures
59 While auditing Z Ltd., you observe certain material financial statement assertions have been based on
estimates made by the management. As the auditor how do you minimize the risk of material
misstatements? [May 11 (6 Marks)]
Answer: Evaluation of financial statement assertions based on management estimates:
As per SA 540 “Auditing Accounting Estimates, including Fair Value Accounting Estimates” auditor
shall obtain an understanding of the following in order to identify and assess the risks of material
misstatement for accounting estimates:
(a) The requirements of the applicable FRF relevant to accounting estimates.
(b) How management identifies those transactions, events and conditions that may give rise to
the need for accounting estimates.
In obtaining this understanding, the auditor shall make inquiries of management about
changes in circumstances that may give rise to new, or the need to revise existing accounting
estimates.
(c) The estimation making process adopted by the management including:
(a) The method, including where applicable the model used in making the accounting
estimates.
(b) Relevant controls
(c) Whether management has used an expert.
(d) Assumptions underlying the accounting estimates.
(e) Whether there has been or ought to have been a change from the prior period in the
methods for making the accounting estimates, and if so why.
(f) Whether and if so, how the management has assessed the effect of estimation uncertainty.
(d) The auditor shall review the outcome of accounting estimates included in the prior period
financial statements.

SA 550 “Related Parties”

60 Elaborate how the statutory auditor can verify the existence of related parties for the purpose of
reporting under AS 18.
or
As a statutory auditor how do you verify the existence of related parties and disclosures of related
party transactions. [Nov. 09(8 Marks)]
or
In the course of audit of Q Ltd, its statutory auditor wants to be sure of the adequacy of related party
disclosures? Kindly guide the auditor in identifying the possible source of related party information.
[May 12 (8 Marks)]
Or
As an Auditor, how will you verify the existence of related parties. [Nov. 12 (8 Marks)]

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Answer: Possible sources of related Party Information:

As per SA 550 “Related Parties” the auditor shall remain alert, when inspecting records or documents
with respect to arrangements or information indicating the existence of related party relationships or
transactions, not previously identified or disclosed to the auditor.
During the audit, the auditor may inspect records or documents that may provide information about
related party relationships and transactions, for example:
1. Entity income tax returns.
2. Information supplied by the entity to regulatory authorities.
3. Shareholder registers to identify the entity’s principal shareholders.
4. Statements of conflicts of interest from management and TCWG.
5. Records of the entity’s investments and those of its pension plans.
6. Contracts and agreements with key management or TCWG.
7. Significant contracts and agreements not in the entity’s ordinary course of business.
8. Specific invoices and correspondence from the entity’s professional advisors.
9. Life insurance policies acquired by the entity.
10. Significant contracts re-negotiated by the entity during the period.
11. Internal auditors’ reports.
12. Documents associated with the entity’s filings with a securities regulator (for example,
prospectuses)
61 A statutory auditor is required to follow the procedures so as to identify the risk of material
misstatement associated with related parties. What are the auditor’s duties when he identifies related
parties or related party transactions that management not previously disclosed to him.
Answer: Verification of existence of related parties:
SA 550 “Related Parties” requires the auditor to perform procedures so as to identify the risk of
material misstatement associated with related parties. Accordingly auditor should perform the
following:
(a) Inquire the management regarding
 Identity of entity’s Related Party, changes from prior period.
 Nature of relationships between entity and Related Party.
 Type & purpose of transactions with Related Party during the period.
(b) The auditor shall remain alert, when inspecting records or documents, for arrangements or other
information that may indicate the existence of related party relationships or transactions that
management has not previously identified or disclosed to the auditor.
(c) If the auditor identifies related parties or significant related party transactions that management
has not previously identified or disclosed to the auditor, the auditor shall:
(i) Promptly communicate the relevant information to the other members of the engagement
team;
(ii) Where the applicable FRF establishes related party requirements:

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 Request management to identify all transactions with the newly identified related
parties for the auditor’s further evaluation; and
 Inquire as to why the entity’s controls over related party relationships and transactions
failed to enable the identification or disclosure of the related party relationships or
transactions;
(iii) Perform appropriate substantive audit procedures relating to such newly identified related
parties or significant related party transactions;
(iv) Reconsider the risk that other related parties or significant related party transactions may
exist that management has not previously identified or disclosed to the auditor, and
perform additional audit procedures as necessary; and
(v) If the non-disclosure by management appears intentional (and therefore indicative of a risk
of material misstatement due to fraud), evaluate the implications for the audit.
62 In the course of your audit you have come across a related party transaction which prima facie appears
to be biased. How would you deal with this? [Nov. 14 (4 marks)]
Answer: Related Parties:
As per SA 550 on, “Related Parties”, the auditor should review information provided by the
management of the entity identifying the names of all known related parties and for this purpose, he
may inspect records or documents that may provide information about related party relationships
and transactions.
In this case, the auditor is finding a related party transaction which prima facie appears to be biased.
So the auditor is required to confirm the same. For identified significant related party transactions
outside the entity’s normal course of business, the auditor shall inspect the underlying contracts or
agreements, if any, and evaluate whether:
(i) The business rationale (or lack thereof) of the transactions suggests that they may have been
entered into to engage in fraudulent financial reporting or to conceal misappropriation of assets,
(ii) The terms of the transactions are consistent with management’s explanations; and
(iii) The transactions have been appropriately accounted for and disclosed in accordance with the
applicable financial reporting framework.
The auditor should also obtain audit evidence that the transactions have been appropriately
authorised and approved.
Conclusion: If the auditor concludes that the related party transaction is biased, he should report
that the related party relationships and transactions prevent the financial statements from achieving
true and fair presentation.

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SA 560 “Subsequent Events”

63 Briefly Explain: Audit procedures on subsequent events. [Nov. 09 (4 Marks)]
Or
Briefly describe auditor’s responsibility regarding subsequent events.
Answer: Audit Procedures on subsequent Events:
 SA 560 “Subsequent Events” deals with the auditor’s responsibilities relating to subsequent
events in an audit of financial statements.
 As per SA 560 the term, Subsequent Events may be defined as the events occurring between the
dates of balance sheet and audit report and the facts that become known to the auditor after the
date of the auditor’s report.
 The auditor shall perform audit procedures designed to obtain sufficient appropriate audit
evidence that all events occurring between the date of the financial statements and the date of
the auditor’s report that require adjustment of, or disclosure in, the financial statements have
been identified.
 The auditor’s procedures on subsequent events shall include the following:
(a) Obtaining an understanding of the procedures through which management has identified
subsequent events.
(b) Inquiring of management and, TCWG as to occurrence of subsequent events which might
affect the financial statements.
(c) Reading minutes of management & TCWG meetings that have been held after the date of the
financial statements.
(d) Reading the entity’s latest subsequent interim financial statements, if any.
 When, as a result of the procedures performed as required the auditor identifies events that
require adjustment of, or disclosure in, the financial statements, the auditor shall determine
whether each such event is appropriately reflected in those financial statements.
64 Comment on the following: A Co. Ltd. has not included in the Balance Sheet as on 31-03-2015 a sum of
Rs. 1.50 crores being amount in the arrears of salaries and wages payable to the staff for the last 2
years as a result of successful negotiations which were going on during the last 18 months and
concluded on 30-04-2015. The auditor wants to sign the said Balance Sheet and give the audit report
on 31-05-2015. The auditor came to know the result of the negotiations on 15-05-2015.
[Nov. 10 (5 Marks)]
Answer: Treatment of subsequent Events:
 SA 560 “Subsequent Events” requires that in respect of events occurring between the date of F.S.
and date of the Audit Report, the auditor shall perform audit procedures to obtain sufficient &
appropriate audit evidence to ensure that events which require adjustments or disclosure in the
F.S. have been identified.
 If auditor identifies events that require adjustment or disclosure in the F.S., the auditor should
determined whether each such event is appropriately reflected in the F.S.
 The auditor shall request the management to provide a “Written Representation” that all events
occurring subsequent to the date of the F.S. and requires adjustment or disclosure have been
adjusted or disclosed.

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 In the instant case, the amount of Rs. 1.50 crores is a material amount and it is the result of an
event, which has occurred after the Balance Sheet date. As per the provisions of AS-4 and AS-29,
the obligation requires provision for outstanding expenses.
Conclusion: The facts of the case indicates the event as of adjusting nature as per AS–4 “Contingencies
and Events Occurring after the Balance Sheet date” and requires adjustment in assets and liabilities,
which has not been made by the management. Auditor should request management to adjust the sum
of Rs. 1.50 crores by making provision for expenses. If the management does not accept the request
the auditor should qualify the Audit Report.
65 As a statutory auditor of a company, comment on the following: A fire broke out on 15th May, 2015, in
which material worth Rs. 50 lakhs which was lying in inventory since 1st March, 2015 was totally
destroyed. The financial statements of the company have not been adopted till the date of fire. The
management of the company argues that since the loss occurred in the year, 2015-16, no provision for
the loss needs to be made in the financial statements for 2014-15. [Nov. 12 (5 Marks)]
Answer: Event Occurring after the Balance Sheet Date:
 As per AS- 4 on 'Contingencies and Events Occurring After the Balance Sheet Date', assets and
liabilities should be adjusted for events occurring after the balance sheet date that provide
additional evidence to assist the estimation of amounts relating to conditions existing at the
balance sheet date or that indicate that the fundamental accounting assumption of going concern is
not appropriate.
 AS – 4 also requires disclosure of the non-adjusting event, in the report of approving authority.
 Further as per SA 560 “Subsequent Events” the auditor should ensure that all events occurring
subsequent to the date of financial statements and for which applicable financial reporting
framework requires adjustment or disclosure have been adjusted or disclosed.
 In the instant case, fire took place after the close of the accounting year and does not relate to
conditions existing at the balance sheet date.
Conclusion: The event will have no impact on items appearing at the Balance Sheet date and hence
not required any adjustment, subject to satisfaction in respect of non-violation of going concern
concept. Hence management is correct by not providing provision. However, auditor is required to
ensure the proper disclosure in report of approving authority.

SA 570 “Going Concern”

66 ABC Company files a law suit against Unlucky Company for Rs. 5 crores. The Attorney of Unlucky
Company feels that the suit is without merit, so Unlucky Company merely discloses the existence of the
law suit in the notes accompanying its financial statements. As an auditor of Unlucky Company, how
will you deal with the situation?
Answer: Evaluating appropriateness of going concern assumption:
 AS 29 "Provisions, Contingent liabilities and Contingent Assets", requires that if any future event
may cause a possible obligation, a provision should be made in the accounts to recognize the
obligation where there is sufficient evidence that the event will occur.

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 SA 570 “Going Concern” requires that the auditor shall consider whether there are events or
conditions that may cast significant doubt on the entity’s ability to continue as a going concern.
Pending legal or regulatory proceedings against the entity that may, if successful, result in claims
that the entity is unlikely to be able to satisfy is one of the example of such event.
 When the auditor concludes that the use of the going concern assumption is appropriate in the
circumstances but a material uncertainty exists, the auditor shall determine whether the financial
statements adequately describe the principal events or conditions that may cast significant doubt
on the entity’s ability to continue as a going concern and management’s plans to deal with these
events or conditions.
 In the instant case, ABC Company has filed a law suit against Unlucky Company for Rs. 5 crores. The
attorney of Unlucky Company feels that the suit is without merit, so the company merely discloses
the existence of law suit in the notes accompanying its financial statements.
Conclusion: Auditor should evaluate the source data on which basis the opinion is formed and
evaluate the appropriateness of use of going concern assumption. If the auditor finds the uncertainty,
he may request the management to adjust the sum of Rs. 5 crore by making provision for expenses as
per AS 29. If the management does not accept the request the auditor should qualify the audit report.
67 A Company's net worth is eroded and creditors are unpaid due to liquidity constraints. The
management represents to the statutory auditor that the promoter's wife is expected to give an
unsecured loan to meet the liquidity constraints and that negotiations are underway to secure large
export orders. [May 09 (4 Marks)]
Answer: Appropriateness of Going Concern Assumption :
 SA 570 “Going Concern” requires that the auditor shall consider whether there are events or
conditions that may cast significant doubt on the entity’s ability to continue as a going concern.
Eroded net worth and nonpayment to creditors are one of the examples of such event.
 As per SA 570, when events or conditions have been identified that may cast significant doubt on
the entity’s ability to continue as a going concern, the auditor shall obtain sufficient appropriate
audit evidence to determine whether or not a material uncertainty exists through performing
additional audit procedures, including consideration of mitigating factors.
 In the present case, it is subjective, but prima-facie a mere expectation of future cash flows from the
promoter’s wife without any firm commitment and the possibility of an export order being
negotiated, may not that be sufficient appropriate audit evidence of mitigating factors for resolving
the going concerns question under SA 570 “Going Concern”.
Conclusion: Based on the results of evaluation of appropriateness of going concern assumption,
auditor is required to modify the opinion.
68 R & Co. is the statutory auditor of S Ltd. for the financial year ended on 31st March 2015, S Ltd had
disclosed in the notes (Note No. X) “The state pollution control board had ordered the closure of the
company’s only manufacturing plant on the ground that it is environmentally damaging, which the
company had challenged in a law suit. Pending the outcome of the law suit the financial statements are
prepared on a going concern basis”. Further the financial statements prepared by the management of S
Ltd include financial statements of certain branches which are audited by other auditors. What are the
reporting responsibilities of R & Co? [May 12 (10 Marks)]

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Answer: Reporting responsibilities of Auditor:

(A) Evaluation of appropriateness of Going concern Assumption:
 As per SA 570 “Going Concern” auditor is required to obtain sufficient appropriate audit
evidence about the appropriateness of management use of going concern assumption in the
preparation and presentation of financial statements and to conclude whether there is a
material uncertainty about the entity’s ability to continue as a going concern.
 When the auditor concludes that the use of the going concern assumption is appropriate in
the circumstances but a material uncertainty exists, the auditor shall determine whether the
financial statements:
(a) Adequately describe the principal events that may cast significant doubt on the entity’s
ability to continue as a going concern and management’s plans to deal with these events
or conditions; and
(b) Disclose clearly that there is a material uncertainty related to going concern and,
therefore, that it may be unable to realize its assets and discharge its liabilities in the
normal course of business.
 If adequate disclosure is made in the financial statements, the auditor shall include an
Emphasis of Matter paragraph in the auditor’s report.
Conclusion: In the present case, as disclosure is given in financial statements, R & Co. should
include an Emphasis of Matter paragraph in the Auditor’s Report.
(B) Reporting of Branches audited by other auditors:
 As per SA 600 “Using the work of Another Auditor”, when the principal auditor has to base his
opinion on the financial information of an entity as a whole relying upon the statements and
reports of the other auditors, his report should state clearly the division of responsibility for
the financial information of the entity by indicating the extent to which the financial
information of components audited by the other auditors have been included in the financial
information of the entity.
Conclusion: R & Co. should include an “Other Matter” paragraph in the audit report on this
matter.
69 While examining the going concern assumption of an entity, what important indications should be
evaluated and examined?
or
What are the Financial indications to be considered by an auditor for evolution of the going Concern
assumption? [Nov. 08 (4 Marks)]
Answer: Indications to be considered while evaluating Going Concern Assumption:
SA 570 “Going Concern”, requires that auditor should obtain sufficient appropriate audit evidence
about the appropriateness of management’s use of the going concern assumption in the preparation
and presentation of the financial statements. Accordingly, when performing risk assessment
procedures as required by SA 315, the auditor shall consider whether there are events or conditions
that may cast significant doubt on the entity’s ability to continue as a going concern. Examples of such
events or conditions are:

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Financial Indications
1. Net liability or net current liability position.
2. Fixed-term borrowings approaching maturity without realistic prospects of renewal or
repayment; or excessive reliance on short-term borrowings to finance long-term assets.
3. Indications of withdrawal of financial support by trade payables.
4. Negative operating cash flows indicated by historical or prospective financial statements.
5. Adverse key financial ratios.
6. Substantial operating losses or significant deterioration in the value of assets used to generate
cash flows.
7. Arrears or discontinuance of dividends.
8. Inability to pay trade payables on due dates.
9. Inability to comply with the terms of loan agreements.
10. Change from credit to cash-on-delivery transactions with suppliers.
11. Inability to obtain financing for essential new product development or other essential
investments.
Operating Indications
1. Management intentions to liquidate the entity or to cease operations.
2. Loss of key management without replacement.
3. Loss of a major market, key customer(s), franchise, license, or principal supplier(s).
4. Labour difficulties.
5. Shortages of important supplies.
6. Emergence of a highly successful competitor.
Other Indications
1. Non-compliance with capital or other statutory requirements.
2. Pending legal or regulatory proceedings against the entity that may, if successful, result in claims
that the entity is unlikely to be able to satisfy.
3. Changes in law or regulation or government policy expected to adversely affect the entity.
4. Uninsured or underinsured catastrophes when they occur.

SA 580 “Written Representations”

70 Explain what is meant by “Written Representations” and indicate to what extent an auditor can place
reliance on such representations.
Answer: Meaning of Written Representation:
 As per SA 580 “Written Representations” it is a written statement by management provided to the
auditor to confirm certain matters or to support other audit evidence. Written representations in
this context do not include financial statements, the assertions therein, or supporting books and
records.
 Written representations are necessary information that the auditor requires in connection with
the audit, hence they are recognized as audit evidence as a response to inquiries.
 Although written representations provide necessary audit evidence, they do not provide sufficient
appropriate audit evidence on their own about any of the matters with which they deal.
 The written representations shall be in the form of a representation letter addressed to the

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auditor.
Extent of Reliance:
 If the auditor has concerns about the competence, integrity, ethical values or diligence of
management, the auditor shall determine their effect on the reliability of representations (oral or
written) and audit evidence in general.
 In particular, if written representations are inconsistent with other audit evidence, the auditor
shall perform audit procedures to attempt to resolve the matter.
 If the auditor concludes that the written representations are not reliable, the auditor shall take
appropriate actions, including determining the possible effect on the opinion
 If he claims that there is sufficient doubt about integrity of management, he shall issue a
disclaimer of opinion.
71 State briefly the basic elements of Management Representation Letter.
Answer: Basic Elements of a Management Representation Letter:
As per SA 580 “Written Representations”, some of the basic elements of a Management Representation
letter are-
(1) It is a written statement by management provided to the auditor to confirm certain matters or to
support other audit evidence.
(2) It does not include financial statements, the assertions therein, or supporting books and records.
(3) The auditor shall request management to provide a written representation that it has fulfilled its
responsibility for the preparation of the financial statements in accordance with the applicable
financial reporting framework, including where relevant their fair presentation, as set out in the
terms of the audit engagement.
(4) The written representations shall be for all financial statements and period(s) referred to in the
auditor’s report.
(5) The written representations shall be in the form of a representation letter addressed to the
auditor.
72 In the course of audit of ABC Ltd. its management refuses to provide written representations. As an
auditor what is your duty? [May 10 (4 Marks)]
Answer: Duty of an Auditor if management refuses to provide written representations:
As per SA 580 “Written Representations”, if the management does not provide one or more of the
requested written representations, the auditor shall:
(i) Discuss the matter with management,
(ii) Re-evaluate the Integrity of the management and evaluate the effect that this may have on the
reliability of representations (oral or written) and audit evidence in general, and
(iii) Take appropriate actions, including determining the possible effect on the opinion in the auditor’s
report.
(iv) Disclaim an opinion on the financial statements in accordance with SA 705 “Modifications to the
Opinion in the Independent Auditor’s Report”.

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73 An auditor of Mohan Ltd. was not able to get the confirmation about the existence and value of certain
machineries. However, the management gave him a certificate to prove the existence and value of the
machinery as appearing in the books of account. The auditor accepted the same without any further
procedure and signed the audit report. Is he right in his approach?
Or
The Auditor of PQR Pvt. Ltd. having turnover of Rs. 12 crore, was not able to get the confirmation about
the existence and value of certain stock. However, a certificate from the management has been
obtained regarding the existence and value of the stock at the year end. The auditor relied on the same
and without any further procedure, signed the Audit Report. Is he right in his approach?
[Nov. 14 (5 Marks)]
Answer: Validity of Management Representation:
 The physical verification of fixed assets (Inventory) is the primary responsibility of the
management. The auditor, however, is required to examine the verification programme adopted
by the management. He must satisfy himself about the existence, ownership and valuation of fixed
assets (inventory).
 In the case of Mohan Ltd., the auditor has not been able to verify the existence and value of some
machinery (inventory) despite the verification procedure followed in routine audit. He accepted
the certificate given to him by the management without making any further enquiry.
 As per SA 580 “Written Representation” the representations received from management are
recognised as audit evidence, but they do not constitutes Sufficient and appropriateness.
 Auditor is required to seek corroborative audit evidence from other sources inside or outside the
entity, to evaluate whether such representations are reasonable and consistent with other
evidences. Representation received from Management cannot be a substitute for other audit
evidence that the auditor could reasonably expect to be available.
 If the auditor is unable to obtain sufficient appropriate audit evidence that he believes would be
available regarding a matter, which has or may have a material effect on the financial information,
this will constitute a limitation on the scope of his examination even if he has obtained a
representation from management on the matter.
Conclusion: The approach adopted by the auditor is not right.
74 In the course of audit of K Ltd., its auditor Mr. 'N' observed that there was a special audit conducted at
the instance of the management on a possible suspicion of a fraud and requested for a copy of the
report to enable him to report on the fraud aspects. Despite many reminders it was not provided. In
absence of the special audit report, Mr. 'N' insisted that he be provided with at least a written
representation in respect of fraud on/by the company. For this request also, the management
remained silent. Please guide Mr. 'N'.
Answer: Auditors Responsibilities Relating to Fraud:
 As per SA 240, “The Auditor’s Responsibilities relating to Fraud in an Audit of Financial
Statements”, the primary responsibility for the prevention and detection of fraud rests with both
those charged with governance of the entity and management. In addition an auditor conducting
an audit in accordance with SAs is responsible for obtaining reasonable assurance that the
financial statements taken as a whole are free from material misstatement, whether caused by
fraud or error.

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 As per SA 580, “Written Representations”, if management does not provide the requested written
representations, the auditor shall discuss the matter with management; 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 take appropriate actions, including
determining the possible effect on the opinion in the auditor’s report.
 The auditor shall disclaim an opinion on the financial statements if the auditor concludes that
there is sufficient doubt about the integrity of management such that the written representations
are not reliable; or management does not provide the written representations.
 In the instant case, in the course of audit of K Ltd., its auditor Mr. N observed that there was a
special audit conducted at the instance of the management on a possible suspicion of fraud.
Therefore, the auditor requested for special audit report, which was not provided by the
management despite of many reminders. Mr. N also insisted for written representation in respect
of fraud on/by the company. For this request also management remained silent.
Conclusion: Auditor is required to state the facts in his report and he should also disclaim an opinion
on the financial statements.

SA 620 “Using the work of Auditor’s Expert”

75 While doing audit, Ram, the Auditor requires reports from experts for the purpose of audit evidence.
What types of reports/opinions he can obtain and to what extent he can rely upon the same?
[Nov. 10 (4 Marks)]
Answer: Types of Reports / Opinion:
As per SA 620, “Using the work of an Auditor’s Expert”, the auditor can obtain the following types of
reports, or opinions or statements of an expert for the purpose of audit evidence:
1. The valuation of complex financial instruments, land and buildings, plant and machinery,
jewellery, works of art, antiques, intangible assets, assets acquired and liabilities assumed in
business combinations and assets that may have been impaired.
2. The actuarial calculation of liabilities associated with insurance contracts or employee benefit
plans.
3. The estimation of oil and gas reserves.
4. The valuation of environmental liabilities, and site clean-up costs.
5. The interpretation of contracts, laws and regulations.
6. The analysis of complex or unusual tax compliance issues.
Extent to which Expert work can be relied upon:
When the auditor intends to use the work of an expert, he shall evaluate the adequacy of the auditor’s
expert’s work, w.r.t. the following:
1. Findings and Conclusions: To ensure the evaluate the relevance and reasonableness of that
expert’s findings or conclusions, and their consistency with other audit evidence;
2. Significant Assumptions and Methods: If the expert’s work involves use of significant
assumptions and methods, the relevance and reasonableness of those assumptions and methods
should be evaluated.
3. Source Data used: Auditor is required to evaluate the relevance, completeness, and accuracy of
that source data.
If the auditor determines that the work of the auditor’s expert is not adequate for the auditor’s
purposes, he shall agree with that expert on the nature and extent of further work to be performed by
that expert; or perform further audit procedures appropriate to the circumstances.

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SA 710 “Comparative Information – Corresponding Figures and Comparative Financial Statements”

76 The audit report of P Ltd. for the year 2013-14 contained a qualification regarding non-provision of
doubtful debts. As the statutory auditor of the company for the year 2014-15, how would you report, if:
(a) The company does not make provision for doubtful debts in 2014-15?
(b) The company makes adequate provision for doubtful debts in 2014-15? [May 09 (8 Marks)]
Answer: Auditor’s responsibilities w.r.t. Corresponding figures:
 As per SA 710, “Comparative Information – Corresponding Figures and Comparative Financial
Statements” When the auditor’s report on the prior period, as previously issued, included a
modified opinion and the matter which gave rise to the modified opinion is resolved and properly
accounted for or disclosed in the financial statements in accordance with the applicable FRF, the
auditor’s opinion on the current period need not refer to the previous modification.
 SA 710 further states that if the auditor’s report on the prior period, as previously issued, included
a modified opinion and the matter which gave rise to the modification is unresolved, the auditor
shall modify the auditor’s opinion on the current period’s financial statements.
 In the Basis for Modification paragraph in the auditor’s report, the auditor shall either:
(i) Refer to both the current period’s figures and the corresponding figures in the description of
the matter giving rise to the modification when the effects or possible effects of the matter on
the current period’s figures are material; or
(ii) In other cases, explain that the audit opinion has been modified because of the effects or
possible effects of the unresolved matter on the comparability of the current period’s figures
and the corresponding figures.
Conclusion:
(a) If P Ltd. does not make provision for doubtful debts the auditor will have to modify his report for
both current and previous year’s figures as mentioned above.
(b) If however, the provision is made, the auditor need not refer to the earlier year’s modification.

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SRE, SAE, SRS

77 The directors of C Ltd. are concerned about the reliability and usefulness of the monthly financial
management information that they receive. As a result, the company’s auditors have been engaged to
review the system and the information it generates, and to report their conclusions. What an ordinary
procedure includes for the review of financial statements?
or
You are engaged to review the system and the information generated from financial statements.
Discuss the procedures that may be performed by you as company auditor for review of financial
statements.
Answer: Procedures for Review of Financial Statements: As per SRE 2400 “Engagements to Review
Financial Statements”, procedures for the review of financial statements will ordinarily include:
1. Obtaining an understanding of the entity’s business and the industry in which it operates.
2. Inquiries concerning the entity’s accounting principles and practices.
3. Inquiries concerning the entity’s procedures for recording, classifying and summarising
transactions, accumulating information for disclosure and preparation of F.S.
4. Inquiries concerning all material assertions in the financial statements.
5. Analytical procedures designed to identify relationships and individual items that appear
unusual. Such procedures would include:
 Comparison of the financial statements with statements for prior periods.
 Comparison of the financial statements with anticipated results and financial position.
 Study of the relationships of the elements of the F.S. that would be expected to conform to a
predictable pattern based on the entity’s experience or industry norm.
6. Inquiries concerning actions taken at meetings of shareholders, the board of directors,
committees of the board of directors and other meetings that may affect the financial statements.
7. Reading the F.S. to consider, on the basis of information coming to the practitioner’s attention,
whether the F.S. appear to conform with the basis of accounting indicated.
8. Obtaining reports from other practitioners, if any.
9. Inquiries of persons having responsibility for financial and accounting matters concerning, for
example:
 Whether all transactions have been recorded.
 Whether the financial statements have been prepared in accordance with the basis of
accounting indicated.
 Changes in the entity’s business activities and accounting principles and practices.
 Matters as to which questions have arisen in the course of applying the foregoing procedures.
 Obtaining written representations from management when considered appropriate.
78 Contrast this assignment with the statutory audit of the company’s financial statements with regard to
the scope of the assignment and to the report issued.
Answer: SCOPE
Review Assignment Statutory Audit
Scope of Review assignments generally falls in Scope of Statutory audit should be in
agreement between parties. accordance with the Companies Act, 2013 or in
accordance with other statute.
Scope of Review assignments are restricted to Scope of Statutory audit should be in
instructions. accordance with Audit Regulations and Norms.
Review assignment should be done in Statutory audit should be conducted in
accordance with SREs. accordance with SAs, Statements and Guidance
Notes.

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REPORT
Review Assignment Statutory Audit
Report of Review Assignment is addressed to Statutory Audit Report is Addressed to the
the board. members.
Format of Report of Review Assignment is Statutory Audit Report is on true and fair view
wholly discretionary. and as per prescribed Format.
Report of Review Assignment is private report Statutory Audit Reports are in public domain.
79 T & Co. wants to issue a prospectus, to provide potential investors with information about future
expectations of the Company. You are hired by T & Co. to examine the projected financial statements
and give report thereon. What things you will consider before accepting the audit engagement and
what audit evidence will be obtained for reporting on projected financial statements?
Answer: Acceptance of Engagement
As per SAE 3400, “The Examination of Prospective Financial Information”, before accepting an
engagement to examine prospective financial information, the auditor would consider, amongst other
things:
(1) the intended use of the information;
(2) whether the information will be for general or limited distribution;
(3) the nature of the assumptions, that is, whether they are best-estimates or hypothetical
assumptions;
(4) the elements to be included in the information; and
(5) the period covered by the information.
Further, the auditor should not accept, or should withdraw from, an engagement when the
assumptions are clearly unrealistic or when the auditor believes that the prospective financial
information will be inappropriate for its intended use.
In accordance with SA 210, “Terms of Audit Engagement”, it is necessary that the auditor and the
client should agree on the terms of the engagement.
80 C & Co. hired Mr. A, Chartered Accountant, to compile its financial statements for the interim period
ending on 31st Dec. 2014. Kindly assist Mr. A in drafting scope of engagement letter with specific focus
on C & Co. responsibility. [Nov. 13 (4 Marks)]
Answer: Scope of engagement letter w.r.t. Management Responsibilities:
As per SRS 4410 “Engagement to Compile Financial Information” an accountant is required to send an
engagement letter to the management listing therein the key terms of appointments so as to avoid any
misunderstanding. In particular, the engagement letter should provide for the management
responsibility with respect to followings:
 Ensuring correctness, completeness and reliability of financial information generated in the entity.
 Maintaining Accounting Records and Internal Controls
 Selecting and applying appropriate accounting policies.
 Establishing controls for safeguarding the assets and detecting frauds.
 Ensuring compliance with laws and regulation
 Complete disclosure of all material and relevant information to the accountant.
A compilation engagement carried out by the accountant does not relieve the management of these
responsibilities. The accountant should, accordingly, obtain an acknowledgement from the
management of its responsibility for the appropriate preparation and presentation of the financial
statements or other information.

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81 While compiling the financial statements of Discrepancy Ltd., you observed that the information
supplied by the company is incomplete, incorrect and few of the Accounting Standards have not been
followed. Describe, in brief, the procedure you will follow in the above situation.
Answer: Compilation of Financial Information:
As per SRS 4410 “Engagement to Compile Financial Information”, if in the course of compilation of
financial statements, it is observed that the information supplied by the entity is incorrect, incomplete
or otherwise unsatisfactory, the accountant should perform following procedures:
(i) Make any enquiries of management to assess the reliability and completeness of the information
provided;
(ii) Assess internal controls prevailing in the entity; and
(iii) Verify any matters or explanations.
(iv) Obtaining additional information: Accountant is required to request management to provide
additional information. This may be asked in the form of management representation letter
covering significant information or explanations given orally on which he considers
representations are required.
If the management refuses to provide additional information, the accountant should withdraw
from the engagement, informing the entity of the reasons for such withdrawal.
(v) Non compliance of Accounting Standard: If one or more accounting standards are not
complied with, the same should be brought to the notice of the management and if the same is
not rectified by the management, the accountant should include the same in notes to the
accounts and the compilation report to the management.
(vi) The accountant should read the compiled information and consider whether it appears to be
appropriate in form and free from obvious material misstatements.
(vii) The identified financial reporting framework and any known departures therefrom should be
disclosed within the financial information, though their effects need not be quantified.
82 Comment on the following: You are appointed to compile financial statements of Y & Co. for tax
purposes. During the course of work, you learn that the inventory is grossly understated. On pointing
the same, the partners of Y & Co. tell you that since you are not conducting an audit, the said figures duly
certified by the firm should be accepted. [May 09 (5 Marks)]
Answer: Misstatements identified during compilation of financial statements:
 As per SRS 4410 “Engagement to Compile Financial Information if an accountant becomes aware of
material misstatements, the accountant should persuade the management to carry out necessary
amendments in the Financial Statements or other compiled financial information.
 If such amendments are not made and the financial statements are still considered to be misleading
the accountant should withdraw from the engagement.
 As per guidance note on Tax Audit u/s 44AB of the Income Tax Act, 1961, the tax auditor should
study the procedure followed by the assessee in taking the inventory of closing stock at the end of
the year and the valuation thereof. The tax auditor should also examine the basis adopted for
ascertaining the cost and ensure that this basis is consistently followed. It is very necessary for an
auditor to ensure that the method followed for valuation of stock results in disclosure of correct
profit and gains.

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 In the instant case, AB & Co, Chartered Accountants was appointed to compile financial statements
for tax audit purpose of Y & Co, a firm. It is the duty of AB & Co, to ensure that the method followed
for valuation of stock results in disclosure of correct profit and gains. In this case, the stock
valuation was grossly understated. Consequently, the disclosure of profit is also not correct.
Conclusion: The contention of the management of Y & Co, that AB & Co are not the auditors, so they
need not be concerned about valuation of stock is not correct. Hence, the accountant may withdraw
from the engagement if the management insists on their stand.
83 Write a short note on Reporting on a compilation engagements.
Answer: Reporting on a compilation engagements:
As per SA 4410 “Engagements to Compile Financial Information”, the report on compilation
engagements should, ordinarily, be in the following layout:
(a) Title: The title of the report should be “Accountant’s Report on Compilation of Unaudited Financial
Statements” (and not “Auditor’s Report”);
(b) Addressee: The report should ordinarily be addressed to the appointing authority;
(c) Identification of the financial information also noting that it is based on the information provided
by the management;
(d) When relevant, a statement that the accountant is not independent of the entity;
(e) A statement that the management is responsible for:
 completeness and accuracy of the underlying data and complete disclosure of all material and
relevant information to the accountant;
 maintaining adequate accounting and other records and internal controls and selecting and
applying appropriate accounting policies;
 preparation and presentation of financial statements or other financial information in
accordance with the applicable laws and regulations, if any;
 establishing controls to safeguard the assets of the entity and preventing and detecting frauds
or other irregularities;
 establishing controls for ensuring that the activities of the entity are carried out in accordance
with the applicable laws and regulations and preventing and detecting any non-compliance;
(f) A statement that the engagement was performed in accordance with this Standard on Related
Services;
(g) A statement that neither an audit nor a review has been carried out and that accordingly no
assurance is expressed on the financial information;
(h) A paragraph, when considered necessary, drawing attention to the disclosure of material
departures from the identified financial reporting framework;
(i) Date of the report;
(j) Place of signature; and
(k) Accountant’s signature.
The financial statements or other financial information compiled by the accountant should contain a
reference such as “Unaudited,” “Compiled without Audit or Review” and also “Refer to Compilation
Report” on each page of the financial information or on the front of the complete set of financial
statements.

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84 You have been asked by a company to compile financial statements for the purpose of obtaining loan
from a Bank. Draft a report to be given to the Management for the same. (8 Marks)
Answer:
ACCOUNTANT’S REPORT ON COMPILATION OF UNAUDITED FINANCIAL STATEMENTS
To…….
On the basis of the accounting records and other information and explanations provided to us by the
management, we have compiled, the unaudited balance sheet of ………………..(name of the entity) as at
March 31, XXXX and the related profit and loss account and the cash flow statement for the period
then ended.
The management of the _________ (name of the entity) is responsible for:
(a) Completeness and accuracy of the underlying data and complete disclosure of all material and
relevant information to the accountant.
(b) Maintaining adequate accounting and other records and internal controls and selecting and
applying appropriate accounting policies;
(c) Preparation and presentation of financial statements in accordance with the applicable laws and
regulations, if any.
(d) Establishing controls to safeguard the assets of the entity and preventing and detecting frauds or
other irregularities.
(e) Establishing controls for ensuring that the activities of the entity are carried out in accordance
with the applicable laws and regulations and preventing and detecting any non compliance.
The compilation engagement was carried out by us in accordance with the Standard on Related
Services (SRS) 4410 , “Engagements to Compile Financial Information”, issued by the ICAI.
The balance sheet and the profit and loss account are in agreement with the books of account. We
have not audited or reviewed these financial statements and accordingly express no opinion thereon.

For ABC & Co.

Chartered Accountants
…………………………...
Signature
(Name of the accountant and membership number)
Designation
Date:
Place:
85 Draft an illustrative engagement letter for an engagement to compile financial statements of DEF Ltd.
(8 Marks)
Answer:
To the Board of Directors (or other appropriate representatives of senior management):
You have, vide your letter dated ________ requested that we compile the balance sheet of
__________(name of the company) as at ______________(date) and the related profit and loss account and
the (cash flow statement) for the year ended on that date. We are pleased to confirm our acceptance
and understanding of the engagement by means of this letter. As no audit or review engagement
procedures would be carried out, no opinion on the financial statements will be expressed. Further,

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our engagement cannot be relied upon to disclose whether frauds or defalcations, or illegal acts exist.
However, we will inform you of any such matters which might come to our attention in the course of
the engagement.
As management, you are responsible for:
(a) the accuracy and completeness of the information supplied to us, including maintenance of
adequate accounting records and internal controls and selection and application of appropriate
accounting policies.
(b) preparation and presentation of the financial statements of the entity, in accordance with the
applicable laws and regulations, if any.
(c) safeguarding the assets of the entity and also establishing appropriate controls designed to
prevent and detect fraud and other irregularities.
(d) ensuring that the activities of the entity are carried in accordance with applicable laws and
regulations and that it institutes appropriate controls to prevent and detect any non-compliance.
You will confirm that events and transactions are recorded in accordance with the applicable
Accounting Standard(s), issued by the Institute of Chartered Accountants of India and other
recognised accounting principles and practices and inform us of any departures therefrom.
As part of our normal procedures, we may request you to provide written confirmations of any
information or explanations given to us orally during the course of our work.
We understand that the intended use and distribution of the information we have compiled is
_________________ (specify).
We look forward to full cooperation with your staff and we trust that they will make available
to us whatever records, documentation and other information requested in connection with our
engagement.
Our fees will be billed as the work progresses.
Please sign and return the attached copy of this letter to indicate that it is in accordance with your
understanding of the arrangements for our compilation of your financial statements.
XYZ & Co.
Chartered Accountants
……………………………
Signature
(Name of the Member)
Designation
Date:________
For ABC & Co.
Acknowledged on behalf of ______________(name of the company)
----------------
Signature
Name and Designation
Date
Address

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