Nature and Scope of Audit

INTER C.A.
– AUDIT
NATURE SCOPE AND

OBJECTIVES OF AUDIT
PART A - THEORY SECTION
Sr.No Particulars
1 Audit- Definition and meaning
1.1 Definition
As per the ICAI, “An audit is independent examination of financial information
of any entity, whether profit oriented or not, and irrespective of its size or legal
form, when such an examination is conducted with a view to expressing an opinion
thereon.”
1.2 Elaboration:
The person conducting this task should take care to ensure that financial
statements would not mislead anybody. This he can do honestly by
satisfying himself that:
1.2.1 the accounts have been drawn up with reference to entries in the books of
account
1.2.2 the entries in the books of account are adequately supported by sufficient
and appropriate evidence
1.2.3 none of the entries in the books of account has been omitted in the process
of compilation and nothing which is not in the books of account has found
place in the statements
1.2.4 the information conveyed by the statements is clear and unambiguous
1.2.5 the financial statement amounts are properly classified, described and
disclosed in conformity with accounting standards
1.2.6 the statement of accounts present a true and fair picture of the operational
results and of the assets and liabilities
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INTER C.A. – AUDIT
2 Objectives of Audit:
As per SA – 200 “Overall Objectives of the Independent Auditor”, in
conducting an audit of financial statements, the overall objectives of the
auditor are:
(a) To obtain reasonable assurance about whether the financial
statements as a whole are free from material misstatement, whether due
to fraud or error, thereby enabling the auditor to express an opinion on
whether the financial statements are prepared, in all material respects, in
accordance with an applicable financial reporting framework; and
(b) To report on the financial statements, and communicate as required
by the SAs, in accordance with the auditor’s findings.
3 Scope of Audit
Scope means areas and extent to be covered by an auditor while conducting
audit of financial statements. Scope of audit is governed by following
factors:
A. Applicable law and regulation
B. The ICAI Pronouncements E.g. Standards on Auditing issued by Auditing
and Assurance Standard Board.
C. The Terms of Engagement i.e. terms of contract between auditor and
the management.
Note : The terms of engagement cannot, however, restrict the scope of an audit in
relation to matters which are prescribed by legislation or by the pronouncements
of the Institute.
The following points merit consideration in regard to scope of audit:
3.1 The audit should be organized to cover adequately all aspects of the
enterprise.
3.2. The auditor should be reasonably satisfied as to whether the information
contained is reliable and sufficient so as to form the basis for the preparation
of the financial statements.S/he can assess the same by:
(a) making a study and evaluation of accounting systems and internal
controls and
(b) carrying out such other tests, enquiries and other verification
procedures as he considers appropriate.
3.3. The auditor should also decide whether the relevant information is properly
subject to statutory requirements.
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3.4. The auditor determines whether the relevant information is properly

disclosed in the financial statements by:
(a) comparing the financial statements with the underlying accounting
records and other source data; and
(b) considering the judgments that management has made in preparing
the financial statements ,the selection and consistent application of
accounting policies, the manner in which the information has been
classified, and the adequacy of disclosure.
3.5 The auditor is not expected to perform duties which fall outside the scope
of his competence.
3.6 Constraints on the scope of the audit of financial statements that impair the
auditor’s ability to express an unqualified opinion should be set out in his
report and a qualified opinion or disclaimer of opinion should be expressed
as appropriate.
3.7 The principal aspect to be covered in an audit concerning final statements of
account are the following:
3.7.1 An examination of the system of accounting and internal control to
ascertain whether it is appropriate for the business and helps in properly
recording all transactions.
3.7.2 Reviewing the system and procedures to find out whether they are adequate
3.7.3 Checking of the arithmetical accuracy of the books of account by the
verification of postings, balances, etc.
3.7.4 Verification of the authenticity and validity of transaction entered into by
making an examination of the entries in the books of accounts with the
relevant supporting documents.
3.7.5 Comparison of the balance sheet and profit and loss account or other
statements with the underlying record in order to see that they are in
accordance therewith.
3.7.6 Verification of the title, existence and value of the assets appearing in the
balance sheet.
3.7.7 Verification of the liabilities stated in the balance sheet.
3.7.8 Checking the result shown by the profit and loss and to see whether the
results shown are true and fair.
3.7.9 Confirming that the statutory requirements have been complied with.
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3.7.10 Reporting to the appropriate person/body whether the statements of

account examined do reveal a true and fair view of the state of affairs and
of the profit and loss of the organisation
4 Types of Audit
4.1 Statutory Audit- Audit required under law: The organisations which require
audit under law are the following:
(a) companies governed by the Companies Act, 2013;
(b) banking companies governed by the Banking Regulation Act, 1949;
(c) electricity supply companies governed by the Electricity Supply Act,
1948;
(d) co-operative societies registered under the Co-operative Societies Act,
1912;
(e) public and charitable trusts registered under various Religious and
Endowment Acts;
(f) Corporations set up under an Act of Parliament or State Legislature such
as the Life Insurance Corporation of India.
(g) Specified entities under various sections of the Income-tax Act, 1961
4.2 Voluntary Audit- In the voluntary category are the audits of the accounts
of proprietary entities, partnership firms, Hindu undivided families, etc. In
respect of such accounts, there is no basic legal requirement of audit.
5 Inherent Limitations of Auditing:
The process of auditing is such that it suffers from certain limitations,
i.e. The limitation which auditor cannot overcome irrespective of the nature and
extent of audit procedures. The limitations arise from:
5.1 The Nature of Financial Reporting: The preparation of financial statements
involves judgment by management in applying the requirements of
the entity’s applicable financial reporting framework to the facts and
circumstances of the entity.
In addition, many financial statement items involve subjective decisions
or assessments or a degree of uncertainty, and there may be a range of
acceptable interpretations or judgments that may be made.
5.2 The Nature of Audit Procedures: There are practical and legal limitations on
the auditor’s ability to obtain audit evidence. For example:
1. There is the possibility that management or others may not provide,
intentionally or unintentionally, the complete information that
is relevant to the preparation and presentation of the financial
statements or that has been requested by the auditor.
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2. Fraud may involve sophisticated and carefully organised schemes

designed to conceal it. Therefore, audit procedures used to gather
audit evidence may be ineffective for detecting an intentional
misstatement. The auditor is neither trained as nor expected to be an
expert in the authentication of documents.
3. An audit is not an official investigation into alleged wrongdoing.
5.3 Timeliness of Financial Reporting and the Balance between Benefit and Cost:
1. There is an expectation by users of financial statements that the
auditor will form an opinion on the financial statements within a
reasonable period of time and at a reasonable cost. However, it is
impracticable to address all information that may exist or to pursue
every matter exhaustively
2. However, the matter of difficulty, time, or cost involved is not in itself
a valid basis for the auditor to omit an audit procedure for which
there is no alternative.
3. The relevance of information, and thereby its value, tends to diminish
over time, and there is a balance to be struck between the reliability
of information and its cost.
5.4 Other Matters that Affect the Limitations of an Audit:
In case of certain subject matters, limitations on the auditor’s ability to
detect material misstatements are particularly significant.
Such assertions or subject matters include:
- Fraud, particularly fraud involving senior management or collusion.
- The existence and completeness of related party relationships and
transactions.
- The occurrence of non-compliance with laws and regulations.
- Future events or conditions that may cause an entity to cease to
continue as a going concern.
Due to the above inherent limitations, the auditor is not expected to, and cannot, reduce audit
risk to zero and cannot therefore obtain absolute assurance that the financial statements are
free from material misstatement due to fraud or error.
6 Advantages of Audit
6.1 It safeguards the financial interest of persons who are not associated with
the management of the entity, whether they are partners or shareholders.
6.2 It acts as a moral check on the employees from committing defalcations
or embezzlement.
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6.3 Audited statements of account are helpful in settling liability for taxes,
negotiating loans and for determining the purchase consideration for a
business.
6.4 These are also useful for settling trade disputes for higher wages or bonus
as well as claims in respect of damage suffered by property, by fire or some
other calamity.
6.5 An audit can also help in the detection of wastages and losses to show the
different ways by which these might be checked, especially those that occur
due to the absence or inadequacy of internal checks or internal control
measures.
6.6 Audit ascertains whether the necessary books of account and allied records
have been properly kept and helps the client in making good deficiencies or
inadequacies in this respect.
6.7 As an appraisal function, audit reviews the existence and operations of
various controls in the organisations and reports weaknesses, inadequacies,
etc., in them.
6.8 Audited accounts are of great help in the settlement of accounts at the
time of admission or death of partner.
6.9 Government may require audited and certified statement before it gives
assistance or issues a license for a particular trade
7 Relationship of Auditing with other discipline
7.1 Auditing and Accounting: It has been pointed out earlier that both accounting
and auditing are closely related with each other as auditing reviews the
financial statements which are nothing but a result of the overall accounting
process
7.2 Auditing and Law: The relationship between auditing and law is very close
one.
Auditing involves examination of various transactions from the view point
of whether or not
these have been properly entered into
7.3 Auditing and Economics: As, it is well known, accounting is concerned with
the accumulation and presentation of data relating to economic activity.
From the auditing view point, the auditors are more concerned with Micro
economics rather than with the Macro economics
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7.4 Auditing and Behavioural Science: The discipline of behavioural science is

closely linked with the subject of auditing. While it may be said that an
auditor, particularly the financial auditor, deals basically with the figures
contained in the financial statements but he shall be required to interact
with a lot of people in the organisation. The knowledge of human behaviour
is indeed very essential for an auditor so as to effectively discharge his
duties
7.5 Auditing and Statistics & Mathematics: With the passage of time, test check
procedures in auditing have become part of generally accepted auditing
procedures. With the emergence of test check procedure, discipline of
statistics has come quite close to auditing as the auditor is also expected
to have the knowledge of statistical sampling so as to arrive at meaningful
conclusions. The knowledge of mathematics is also required on the part of
auditor particularly at the time of verification of inventories.
7.6 Auditing and Data Processing: Today, organisations are witnessing revolution
in
the field of data processing of accounts. Many organisations are carrying
out their financial
accounting activities with the help of computers. With such a phenomenal
growth in the field of computer sciences, the auditor should have good
knowledge of the components, general capability of the system and the
related terms
7.7 Auditing and Financial Management: Auditing is also closely related with
other functional fields of business such as finance, production, marketing,
personnel and other general areas of business management. With the
overgrowing field of auditing, the financial services sector occupies a
dominant place in our system.
7.8 Auditing and Production: Regarding production function, it may be stated
that a good auditor is one who understands the client and his business.
While carrying out the audit activity, the auditor is required to evaluate
transactions from the accounting aspect in relation to the process through
which it has passed through as accounting for by-products; joint-products
may also require to be done.
8 Independence of Auditor
8.1 Independence cannot be defined as it is a state of mind.
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8.2 Independence means that auditor’s judgment should not be influenced in

any situation.
8.3 The ICAI has issued a guidance note on Independence of auditors.
According to the guidance note independence implies that judgment of a
person is not subordinate to wishes or directions of another person who
might have engaged him or to his own self-interest.
8.4 It is not only important to be independent but it is also important to appear
as independent i.e. independence of mind and independence of appearance
should co-exist. Independence of auditor must not only exist in fact, but
should also appear to exist to all reasonable persons
8.5 Threats to Independence:
→ There are various threats to independence such as financial interest
threat, familiarity threat and self-review threat where auditor’s
judgment may come under influence.
→ In order to secure independence of auditor there are safeguards in the
form of statutory provisions mentioned in Companies Act, 2013 and
Chartered Accountants Act, 1949
→ The Code of ethics for professional Accountants prepared by the
International federation of Accountants (IFAC) identifies five types of
threats. These are:
8.5.1 Self-interest threats, which occur when an auditing firm, its partner or
associate could benefit from a financial interest in an audit client. Examples
include (i) direct financial interest or materially significant indirect financial
interest in a client, (ii) loan or guarantee to or from the concerned client
etc.
8.5.2 Self-review threats, which occur when during a review of any judgement or
conclusion reached in a previous audit or non-audit engagement (Non
audit
services include any professional services provided to an entity by an
auditor, other than audit or review of the financial statements etc.
8.5.3 Advocacy threats, which occur when the auditor promotes, or is perceived
to promote, a client’s opinion to a point where people may believe that
objectivity is getting compromised, e.g. when an auditor deals with shares
or securities of the audited company, or becomes the client’s advocate in
litigation and third party disputes etc.
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8.5.4 Familiarity threats are self-evident, and occur when auditors form
relationships with the client where they end up being too sympathetic to
the client’s interests.
This can occur in many ways: (i) close relative of the audit team working in
a senior position in the client company, (ii) former partner of the audit firm
being a director or senior employee of the client etc.
8.5.5 Intimidation threats, which occur when auditors are deterred from acting
objectively with an adequate degree of professional skepticism.
Basically, these could happen because of threat of replacement over
disagreements with the application of accounting principles, or pressure to
disproportionately reduce work in response to reduced audit fees etc.
8.5.6 SAFEGUARDS OF INDEPENDENCE
The Chartered Accountant has a responsibility to remain independent
by taking into account the context in which they practice, the threats to
independence and the safeguards available to eliminate the threats.
The following are the guiding principles in this regard:-
1. For the public to have confidence in the quality of audit, it is essential
that auditors should always be and appears to be independent of the
entities that they are auditing.
2. In the case of audit, the key fundamental principles are integrity,
objectivity and professional scepticism, which necessarily require the
auditor to be independent.
3. Before taking on any work, an auditor must conscientiously consider
whether it involves threats to his independence.
4. When such threats exist, the auditor should either desist from the task
or put in place safeguards that eliminate them.
5. If the auditor is unable to fully implement credible and adequate
safeguards, then he must not accept the work.
9 SA 220- Elements of Firm’s system of Quality Control
(Memory Code: LEHEM)
The firm’s system of quality control should include policies and procedures
addressing each of the following elements:
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9.1 Leadership responsibilities for quality within the firm:

→ As per SA 220 “Quality Control for an Audit of Financial Statements”,
the engagement partner shall take responsibility for the overall
quality on each audit engagement to which that partner is assigned.
→ The actions of the engagement partner and appropriate messages to
the other members of the engagement team, in taking responsibility
for the overall quality on each audit engagement, emphasise:
(a) The importance to audit quality of:
(i) Performing work that complies with professional standards and
regulatory and legal requirements;
(ii) Complying with the firm’s quality control policies and procedures
as applicable;
(b) The fact that quality is essential in performing audit engagements
9.2 Ethical requirements:

→ The auditor shall comply with relevant ethical requirements, including
those pertaining to independence, relating to financial statement
audit engagements.
→ Relevant ethical requirements ordinarily comprise the Code of Ethics
for Professional Accountants (IESBA Code) related to an audit of
financial statements.
→ The Code establishes the following as the fundamental principles of
professional ethics relevant to the auditor when conducting an audit
of financial statements :
(a) Integrity;
(b) Objectivity;
(c) Professional competence and due care;
(d) Confidentiality; and
(e) Professional behavior.
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9.3 Human resources

→ The firm should establish policies and procedures designed to provide
it with reasonable assurance that it has sufficient personnel with the
capabilities, competence, and commitment to ethical principles.
→ Such policies and procedures shall address the following issues:
(a) Recruitment;
(b) Performance evaluation;
(c) Capabilities;
(d) Competence
(e) Career Development
9.4 Engagement performance.
Matters to be addressed for improving engagement performance include
the following:
9.4.1 How engagement teams are briefed on the engagement to obtain an
understanding of the objectives of their work
9.4.2 Processes for complying with applicable engagement standards
9.4.3 Processes of engagement supervision, staff training and coaching
9.4.4 Methods of reviewing the work performed, the significan’t judgments made
and the form of report being issued.
9.4.5 Appropriate documentation of the work performed and of the timing and
extent of the review.
9.4.6 Processes to keep all policies and procedures updated
9.5 Monitoring
Such policies and procedures should include an ongoing consideration
and evaluation of the firm’s system of quality control, including a periodic
inspection of a selection of completed engagements.
The purpose of monitoring compliance with quality control policies and
procedures is to provide an evaluation of:
(a) Adherence to professional standards and regulatory and legal
requirements;
(b) Whether the quality control system has been appropriately designed
and effectively implemented; and
(c) Whether the firm’s quality control policies and procedures have been
appropriately applied, so that reports that are issued by the firm or
engagement partners are appropriate in the circumstances.
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10 Acceptance and Continuance of Client Relationship

→ The engagement partner shall be satisfied that appropriate procedures
regarding the acceptance and continuance of client relationships and
audit engagements have been followed.
→ SQC 1 requires the firm to obtain information before accepting an
engagement. Information such as the following assists the engagement
partner in determining whether the decisions regarding the acceptance
and continuance of audit engagements are appropriate:
10.1 The integrity of the principal owners, key management and those charged
with governance of the entity
10.2 Whether the engagement team is competent to perform the audit
engagement and has the necessary capabilities, including time and
resources
10.3 Whether the form and the engagement team can comply with relevant
ethical requirements
10.4 Significant matters that have arisen during the current or previous audit
engagement, and their implications for continuing the relationship
If the engagement partner obtains information that would have caused the firm
to decline the audit engagement had that information been available earlier, the
engagement partner shall communicate that information promptly to the firm, so that
the firm and the engagement partner can take the necessary action
11 SA 210- Agreeing to the terms of Audit Engagement
11.1 Pre-conditions
11.1.1 Determine whether the financial reporting framework to be applied in the
preparation of the financial statements is acceptable; and
11.1.2 Obtain the agreement of management that it acknowledges and
understands its responsibility:
(i) For the preparation of the financial statements in accordance with the
applicable financial reporting framework, including where relevant
their fair presentation
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(ii) For such internal control as management determines is necessary to

enable the preparation of financial statements that are free from
material misstatement, whether due to fraud or error
(iii) To provide the auditor with:
a. Access to all information of which management is aware that
is relevant to the preparation of the financial statements such
as records, documentation and other matters;
b. Additional information that the auditor may request from
management for the purpose of the audit; and
c. Unrestricted access to persons within the entity from whom the
auditor determines it necessary to obtain audit evidence
11.1.3 If the preconditions for an audit are not present, the auditor shall discuss
the matter with management. Unless required by law or regulation to do
so, the auditor shall not accept the proposed audit engagement.
11.2 Terms of Engagement
the agreed terms of the audit engagement shall be recorded in an audit
engagement letter or other suitable form of written agreement and shall include:
11.2.1 The objective and scope of the audit of the financial statements;
11.2.2 The responsibilities of the auditor;
11.2.3 The responsibilities of management;
11.2.4 Identification of the applicable financial reporting framework for the
preparation of the financial statements; and
11.2.5 Reference to the expected form and content of any reports to be issued by
the auditor and a statement that there may be circumstances in which a
report may differ from its expected form and content
11.2.6 Audit Remuneration and other matters as agreed between auditor and the
management.
11.3 Recurring Audit.
On recurring audits, the auditor shall assess whether circumstances require the
terms of the audit engagement to be revised and whether there is a need to
remind the entity of the existing terms of the audit engagement
11.3.1 Any indication that the entity misunderstands the objective and scope of
the audit
11.3.2 Any revised or special terms of the audit engagement.
11.3.3 A recent change of senior management.
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11.3.4 A significant change in ownership

11.3.5 A significant change in nature or size of the entity‟s business
11.3.6 A change in legal or regulatory requirements
11.3.7 A change in the financial reporting framework adopted in the preparation
of the financial statements
11.3.8 A change in other reporting requirements
11.4 Limitation on Scope prior to Audit Engagement
11.4.1 If management or those charged with governance impose a limitation on
the scope of the auditor’s work in the terms of a proposed audit engagement
then auditor shall evaluate the possible effect of such changes.
11.4.2 If the auditor believes the limitation will result in the auditor disclaiming
an opinion on the financial statements, the auditor shall not accept such
a limited engagement as an audit engagement, unless required by law or
regulation to do so.
11.5 Acceptance of a change in the terms of engagement
11.5.1 An auditor who, before the completion of the engagement, is requested to
change the engagement to one which provides a lower level of assurance,
s/he should consider the appropriateness of doing so. (Reasons could be a
change in circumstances, a misunderstanding as to the nature of an audit
or related service originally requested, a restriction on the scope of the
engagement)
11.5.2 If the auditor concludes that there is reasonable justification to change
the engagement and if the audit work performed complied with the
SAs applicable to the changed engagement, the report issued would
be appropriate for the revised terms of engagement. In order to avoid
confusion, the report would not include reference to:
(a) the original engagement; or
(b) any procedures that may have been performed in the original
engagement.
11.5.3 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:
(a) Withdraw from the audit engagement where possible under applicable
law or regulation; and
(b) Determine whether there is any obligation, either contractual or
otherwise, to report the circumstances to other parties, such as those
charged with governance, owners or regulators.
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12 Basic Principles Governing an Audit of Financial Statements.

The basic principles which govern the auditor’s professional responsibilities
and which should be complied with wherever an audit is carried are
described below:
12.1 Planning: The auditor should plan his work to enable him to conduct an
effective audit in an efficient and timely manner. Plans should be based
on knowledge of the client’s business.
12.2 Confidentiality: The auditor should respect the confidentiality of information
acquired in the course of his work and should not disclose any such
information to a third party without specific authority or unless there is
a legal or professional duty to disclose.
12.3 Work performed by others: When the auditor delegates work to assistants
or uses work performed by other auditors and experts, he continues to
be responsible for forming and expressing his opinion on the financial
information. However, he will be entitled to rely on 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.
12.4 Accounting system and Internal Control: The auditor should gain an
understanding of the accounting system and related controls and should
study and evaluate the operation of those internal controls upon which he
wishes to rely in determining the nature, timing and extent of other audit
procedures.
12.5 Audit evidence: The auditor should obtain sufficient appropriate audit
evidence through the performance of audit procedures to enable him to
draw reasonable conclusions there from on which to base his opinion
on the financial information.
12.6 Audit Conclusions and Reporting: The auditor should review and assess
the conclusions drawn from the audit evidence obtained and from his
knowledge of business of the entity as the basis for the expression of his
opinion on the financial information.
12.7 Documentation: The auditor should document matters which are important
in providing evidence that the audit was carried out in accordance with the
basic principles.
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12.8 Integrity, objectivity and independence: The auditor should be straight

forward, honest and sincere in his approach to his professional work. He
should maintain an impartial attitude and both be and appear to be
free of any interest which might be regarded, whatever is actual effect,
as being incompatible with integrity and objectivity.
12.9 Skills and Competence: The audit should be performed and the report
prepared with due professional care by persons who have adequate
training, experience and competence in auditing. The auditor requires
specialised skills and competence along with a continuing awareness of
developments on accounting and auditing matters, and relevant regulations
and statutory requirements.
13 Qualities of Auditor:
13.1  The qualities required are tact, caution, firmness, good temper,
integrity, discretion, industry, judgement, patience, clear headedness
and reliability. In addition, he must have the shine of culture for
attaining a great height.
 He must have the highest degree of integrity & objectivity backed by
adequate independence.
 He must have a thorough knowledge of the general principles of law
which govern matters with which he is likely to be in intimate contact.
 He must pursue an intensive programme of theoretical education
in subjects like financial and management accounting, general
management, business and corporate laws, computers and
information systems, taxation, economics, etc.
 The auditor should be equipped not only with a sufficient knowledge
of the way in which business generally is conducted but also with
an understanding of the special features peculiar to a particular
business.
 The auditor, who holds a position of trust, must have the basic human
qualities apart from the technical requirement of professional training
and education.
 He is called upon constantly to critically review financial statements
and it is obviously useless for him to attempt that task unless his own
knowledge is that of an expert.
 He must possess an exhaustive knowledge of accounting in all its
branches along with the practice of auditing.
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INTRODUCTION- AUDITING AND ASSURANCE STANDARD BOARD, AUTHORITY OF THE

DOCUMENTS, CLASSIFICATION OF STANDARDS ETC.
S.N Main Point Details/Sub-point
14 Standard • The IAASB(International Auditing and Assurance Standards
Setting Process Board) functions as an independent standard-setting body under
the auspices of IFAC(International Federation of Accountants).
• The IAASB achieves its various objectives by:
 Establishing high quality auditing standards and
guidance for financial statement audits that are
generally accepted and recognized by investors,
auditors, governments, banking regulators, securities
regulators and other key stakeholders across the
world;
 Establishing high quality standards and guidance for
other types of assurance services on both financial
and non-financial matters;
 Establishing high quality standards and guidance for
other related services;
 Establishing high quality standards for quality control
covering the scope of services addressed by the IAASB;
 Publishing other pronouncements on auditing
and assurance matters, thereby advancing public
understanding of the roles and responsibility of
professional auditors and assurance service providers.
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14.1 Framework of ICAI is a member of the IFAC and is committed to work towards
Standards the implementation of the guidelines issued by the IFAC.
Standard on quality 01-99 This standard applicable
controls(SQC) to all engagements.
Standards on auditing 100-999 Applied in the audit
(SA’s) of Historical financial
information.
Introductory Matters (Not 100-199
yet issued)
General Principles and 200-299
Responsibility
Risk Assessment and 300-499
Response to Assessed Risks
Audit Evidence 500-599
Using the Work of Others 600-699
Audit Conclusion and 700-799
Reporting
Specialized Area 800-899
Standard on Review 2000-2699 Applied in the review
engagements(SRE’s) of Historical financial
information.
Standard on Assurance 3000-3699 Applied to engagements
engagements(SAE’s) other than related to
Historical financial
information.
Standards on Related 4000-4699 Applied to engagements
services(SRS’s) to apply agreed
upon procedures to
information & other
related services such as
compilation.
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15 Scope and a) To review the existing auditing practices in India and to

Function of develop Statements on Standards on Auditing (SAs) so that
AASB these may be issued by the Council of the Institute
b) The SAs are issued under the authority of the Council of the
Institute
c) AASB also issues Guidance Notes on the issues arising from
the SAs wherever necessary
16 Auditing and Assurance Standards- Classification
16.1 SQC- Standards a) It prescribes General Quality Control Measures to be
on Quality implemented while providing assurance services
Control b) It contains extensive requirements in relation to
establishment and maintenance of a system of quality
control (QC) in the audit firms as well as even for sole
practitioners
c) Total Standards Under this Category- 1
16.2 Standards on a) It prescribed Standard audit practices for conducting audit
Auditing of financial statements
b) SAs apply whenever an independent audit is carried
out; that is, in the independent examination of financial
information of any entity, whether profit oriented or not,
and irrespective of its size, or legal form
c) Compliance of SAs is a mandatory requirement as per the
Companies Act, 2013 (refer Sec 143(9) and (10) of Companies
Act, 2013
d) A member who does not perform his audit in accordance
with these statements and fails to disclose the material
departures there from, becomes liable to the disciplinary
proceedings of the Institute under Clause (9) of Part I of the
Second Schedule to the Chartered Accountants Act, 1949.
e) Total Standards Under this Category- 38
f) (HIGHEST LEVEL OF ASSURANCE BUT NOT A GUARANTEE)
19
16.3 Standards a) It is prescribed for conducting review of financial statements

on Review b) Review means a moderate level of examination
Engagement c) Example, as per SEBI requirements auditor has to conduct
quarterly review (not an in depth examination) of interim
financial statements
d) Total Standards under this category- 2
(MODERATE LEVEL OF ASSURANCE)
16.4 Standards on a) Special Assurance Assignments other than audit/review of
Assurance financial statements
Engagement b) b) Total Standards under this category- 3
16.5 Standards a) It includes agreed-upon procedures and compilation
on Related engagement.
Services b) It is not an assurance service.
c) Example, certification of facts without expressing an
opinion, assist in preparation of summary or consolidated
financial statements etc.
(NO ASSURANCE ACTIVITY)
17 Authority Attached to the Documents issued by the Institute/MCA
17.1 Statements  issued with a view to securing compliance by members on
matters which, in the opinion of the Council, are critical for
the proper discharge of their functions.
 are mandatory.
 Accordingly, while discharging their attest function, it will
be the duty of the members of the Institute:
(a) to examine whether ‘Statements’ relating to accounting
matters are complied within the presentation of
financial statements covered by their audit. In the
event of any deviation from the ‘Statements’, it will
be their duty to make adequate disclosures in their audit
reports so that the users of financial statements may
be aware of such deviations; and
20
(b) to ensure that the ‘Statements’ relating to auditing

matters are followed in the audit of financial
information covered by their audit reports. If, for any
reason, a member has not been able to perform an
audit in accordance with such ‘Statements’, his report
should draw attention to the material departures,
therefrom.
17.2 Guidance Notes  are primarily designed to provide guidance to members on
matters which may arise in the course of their professional
work and on which they may rely in the course of their
professional work and on which they may desire assistance
in resolving issues which may pose difficulty.
 are recommendatory in nature. A member should ordinarily
follow the same except where he is satisfied that in the
circumstances of the case, it may not be necessary to do so.
 Similarly, while discharging his attest function, a member
should examine whether the recommendations in a
guidance note relating to an accounting matter have been
followed or not.
 If the same have not been followed, the member should
consider whether keeping in view the circumstances of the
case, a disclosure in his report is necessary.
17.3 Accounting They become mandatory on the dates specified in the respective
Standards and document or notified by the council. There can be situations in
Standards on which certain matters are covered both by a ‘Statement’ and
Auditing by an ‘Accounting Standard’/ ‘Standards on Auditing. In such
a situation, the ‘Statement’ prevails till the time the relevant
‘Accounting Standard’/ Standards on Auditing becomes
mandatory. Once an ‘Accounting Standard’/ ‘Standards on
Auditing’ becomes mandatory, the concerned ‘Statement’ or the
relevant part thereof automatically stands withdrawn.
21
PROFESSIONAL SKEPTICISM
Professional skepticism refers to an attitude that includes a questioning mind being alert
to conditions which may indicate possible misstatement due to error of fraud, and a
critical assessment of audit evidence.
The auditor shall plan and perform an audit with professional skepticism recognising
that circumstances may exist that cause the financial statements to materially
misstated.
Professional skepticism includes being alert to, for example:
 Audit evidence that contradicts other audit evidence obtained.
 Information that brings into question the reliability of documents and responses
to inquiries to be used as audit evidence.
 Conditions that may indicate possible fraud.
 Circumstances that suggest the need for audit procedures in addition to those
required by the SAs.
 Maintaining professional skepticism throughout the audit is necessary if the auditor
is to reduce the risks of:
 Overlooking unusual circumstances.
 Over generalising when drawing conclusions from audit observations.
 Using inappropriate assumptions in determining the nature, timing, and extent of
the audit procedures and evaluating the results thereof.
Professional skepticism is necessary to the critical assessment of audit evidence.

It also includes consideration of the sufficiency and appropriateness of audit evidence
obtained in the light of the circumstances, for example in the case where fraud risk
factors exist and a single document, of a nature that is susceptible to fraud, is the sold
supporting evidence for a material financial statement amount.
The auditor may accept records and documents as genuine unless the auditor has
reason to believe the contrary. Nevertheless, the auditor is required to consider the
reliability of information to be used as audit evidence. In cases of doubt about the
reliability of information or indications of possible fraud, the SAs require that the
auditor investigate further and determine what modifications or additions to audit
procedures are necessary to resolve the matter.
The auditor cannot be expected to disregard pas experience of the honesty and integrity
of the entity’s management and those charged with governance. Nevertheless, a belief
that management and those charged with governance are honest and have integrity
does not relieve that auditor of the need to maintain professional skepticism.
22
PART B - BRIEF ANSWERS – PRACTICE QUESTIONS
Q. No Question and Answer

1 Explain clearly meaning of Auditing. How would you as an auditor perform the
audit
Ans Topic 1.1 & 1.2
2 “The independent audit of an entity’s financial statements is a vital service to
investors, trade payables, and other participants in economic exchange.” Explain
Ans Topic 6
3 State the objectives of Audit according to SA 200
Ans Refer SA 200 from Annexure
4 “The Code of Ethics for Professional Accountants, prepared by the International
Federation of Accountants (IFAC) identifies five types of threats.” Explain
Ans Topic 8.5
5 Explain Inherent Limitations of Auditing
Ans Topic 5
6 Explain Scope of audit and Principal Aspects to be covered
Ans Topic 3
7 Mention the Contents of letter of Engagement
Ans Topic 11.2
8 During the course of audit management of X ltd is proposing some changes in the
terms of engagement. What will be your response.
Ans Topic 11.5
9 Explain the elements of system of quality control
Ans Topic 9
10. There are practical and legal limitations on the auditor’s ability to obtain audit
evidence. Explain with examples.
Ans. The Nature of Audit Procedures: There are practical and legal limitations
on the auditor’s ability to obtain audit evidence. For example:
1. There is the possibility that management or others may not provide,
intentionally or unintentionally, the complete information that
is relevant to the preparation and presentation of the financial
statements or that has been requested by the auditor.
23
2. Fraud may involve sophisticated and carefully organised schemes

designed to conceal it. Therefore, audit procedures used to gather audit
evidence may be ineffective for detecting an intentional misstatement
that involves, for example, collusion to falsify documentation which
may cause the auditor to believe that audit evidence is valid when it
is not. The auditor is neither trained as nor expected to be an expert
in the authentication of documents.
3. An audit is not an official investigation into alleged wrongdoing.
Accordingly, the auditor is not given specific legal powers, such as the
power of search, which may be necessary for such an investigation.
11. In case of certain subject matters, limitations on the auditor’s ability to detect
material misstatements are particularly significant. Explain such assertions or
subject matters.
Ans. In the case of certain subject matters, limitations on the auditor’s ability to
detect material misstatements are particularly significant. Such assertions
or subject matters include:
- Fraud, particularly fraud involving senior management or collusion.
- The existence and completeness of related party relationships and
transactions.
- The occurrence of non-compliance with laws and regulations.
- Future events or conditions that may cause an entity to cease to
continue as a going concern.
12. As per SA 220, “Quality Control for an Audit of Financial Statements” the auditor
should obtain information considered necessary in the circumstances before
accepting an engagement with a new client, when deciding whether to continue
an existing engagement and when considering acceptance of a new engagement
with an existing client. Explain
Ans. Information which assist the Auditor in accepting and continuing of
relationship with Client: As per SA 220, “Quality Control for an Audit of
Financial Statements” the auditor should obtain information considered
necessary in the circumstances before accepting an engagement with a
new client, when deciding whether to continue an existing engagement
and when considering acceptance of a new engagement with an existing
client. The following information would assist the auditor in accepting and
continuing of relationship with the client:
24
(i) The integrity of the principal owners, key management and those
charged with governance of the entity;
(ii) Whether the engagement team is competent to perform the audit
engagement and has the necessary capabilities, including time and
resources;
(iii) Whether the firm and the engagement team can comply with relevant
ethical requirements; and
(iv) Significant matters that have arisen during the current or previous audit
engagement, and their implications for continuing the relationship.
25
PART C : MULTIPLE CHOICE QUESTIONS
1. __________is an independent examination of financial information of any entity,

whether profit oriented or not, and irrespective of its size or legal structure, where
such as examination is conducted with a view to express an opinion.
a) Auditing b) Investigation
c) Verification d) Checking
2. The main objective of financial audit is

a) Expression of opinion
b) Detection and prevention of fraud and error
c) Designing internal control system
d) All of these
3. To ensure the financial statements as a whole are free from material misstatements
is the
a) Scope of audit
b) Aspects to be covered under the audit
c) Objective of audit
d) All of the above
4. The audit should be organized to cover adequately all aspects of the enterprise
relevant to the financial statements being audited, is one of the merit consideration
is regard to
a) Scope of audit
b) Aspects to be covered under the audit
c) Objectives of audit
d) None
5. Auditor gives regarding the financial statements

a) Correct and fair view b) Correct view
c) Fair view d) Completely correct
26
6. Auditing begins where ___________ends.

a) Selling b) Inventory valuation
c) Accounting d) Purchase
7. Which type of organizations use auditing services?

a) Non-profit-organizations
b) Business
c) Governments
d) All of the above
8. Auditing should be
a) Independent b) Compulsory
c) On the request of government d) None of the above
9. Users of financial statements includes

a) Management, Shareholders, Employees
b) Financial Institution, Suppliers, Customers
c) Government
d) All of the above
10. An audit which is governed by law is called as

a) Government Audit b) Internal Audit
c) Statutory Audit d) Cost Audit
11. The scope of work of the audit is specified by the management for
a) External Auditor b) Branch Auditor
c) Joint Auditor d) Internal Auditor
12. Who is responsible to express opinion on the correct and fair view of the financial
statements
a) External Auditor b) Joint Auditor
c) Internal Auditor d) Both (a) and (b)
27
13. State which of the following statement is not correct with reference to the scope of
audit
a) To form an opinion, the auditor should be satisfied that accounting information is reliable
and sufficient as the basis for the preparation of the financial statements
b) All aspects of the enterprise to be covered in audit
c) The professional skill required of an auditor includes that of a technical expert for
determining physical condition of certain assets
d) None
14. The principal aspects to be covered in an audit concerning final statements of

account are
i. An examination of the system of accounting and internal control
ii. Reviewing the system and procedures
iii. Checking of the arithmetical accuracy of the books of account
iv. The audit should be organized to cover adequately all aspects of the enterprise
relevant to the financial statements being audited
a) Only (iv)
b) Both (iii) and (iv)
c) Except (iv)
15. The chief utility of audit lies in reliable financial statements on the basis of which
the state of affairs may be easy to understand. Apart from this obvious utility, other
advantages of audit are
a) It safeguards the financial interest of persons who are not associated with the management
b) Audit ascertains whether the necessary books of accounts and allied records have been
properly kept.
c) Government may require audited and certified statement before it gives assistance or
issues a license for a particular trade
d) All of the above
16. It naturally calls on the part of the auditor to have a through and sound knowledge
of generally accepted principles of accounting before he can review the financial
statements.
Which of the following discipline matches the above statement?
28
a) Auditing and Financial Management

b) Auditing and Statistics & Mathematics
c) Auditing and Accounting
d) All of the above
17. ________along with other discipline such as accounting and law, equips you with
all knowledge that is required to enter into auditing as a profession.
a) Auditing b) Taxation
c) Finance d) Taxation and Finance both
18. Independence comprises

a) Independence of mind b) Independence in appearance
c) Both (a) and (b) d) None of these
19. Chartered Accountants have an important role in

a) Entity b) Society
c) Audit Firm d) Audit Committee
20. Which of the following categories of people use the work of Chartered Accountnat
a) Investors b) Government
c) The public at large d) All of the above
21. The term financial statement shall exclude

a) Notes to accounts b) Annexure
c) Both (a) and (b) d) None of the above
22. Which of the following companies will be exempted from complying with Schedule
III of the Companies Act, 2013
a) Banking Companies
b) Unlisted Companies
c) Private Limited Companies having turnover less than Rs. 10 Crore
d) All of the above
29
23. Which of the following requires that the auditor should examine the accounts with a
view to verify that all assets, liabilities, income and expenses are stated as amounts
which are in accordance with accounting principles and policies which are relevant
and no material amount, item or transaction has been omitted
a) Going Concern b) Consistency
c) The Concept of correct and fair d) Auditor’s Independence
24. What constitute a ‘correct and fair’ view is a matter of auditor’s judgement in the
particular circumstances of a case. In more specific terms, to ensure correct and fair
view, an auditor has to see
a) Accounting policies have been followed consistently
b) The charge, if any, on assets are disclosed
c) Material liabilities should not be omitted
d) All of the above
25. Which of the following helps in better understanding of accounting information and
meaningful comparison?
a) Accrual b) Going Concern
c) Assertions d) Consistency
26. The auditor shall report on the accounts examined by him

a) To the shareholders b) To the general public
c) To CAG d) To CG
27. If auditor maintains high degree of independence, it will result in

a) Attention of media b) Reward by CG
c) Enhanced reliability on financial statements
d) Good relationship with the entity.
28. Which of following is the responsibilities of management

a) Preparation and presentation of the financial statement in accordance with applicable
financial reporting
b) Design, implement and maintain of internal control
c) Safeguard of the assets
d) All of the above
30
29. Which of the following involves detailed examination of some specific areas?
a) Auditing b) Vouching
c) Investigation d) Verification
30. Auditor should have knowledge of

a) Accounting b) Auditing
c) Law applicable on the entity d) All of these
31. Auditor should have communication skills in following areas:

a) Oral skills b) Written skills
c) Both (a) and (b)
d) He does not require any communication skills
32. Function of audit is to

a) Detect errors b) Detect fraud
c) Safeguard the interest of stakeholders
d) All the above
33. Which is NOT the function of an auditor?

a) To give a correct and fair view
b) To take care of all the statutory acts applicable
c) To do arithmetic checking
d) To prepare accounts
34. The basic requirement which is absent is auditing is

a) Exact accounts
b) Certainty in financial statements
c) Conclusive evidence
d) All of the above
35. Which of the following statement is not correct

a) The auditor shall express an opinion on financial statements
b) Auditor’s opinion is not guarantee to future viability of business
c) Auditor is responsible for prevention and detection of fraud and error in financial statements
d) Auditor should examine whether recognized accounting principles have been followed
31
36. Auditor should be done by

a) A professional accountant b) A certified management accountant
c) A competent and independent person
d) A chartered accountant
37. Which of the following is least likely to be required in an audit?

a) Test appropriateness of journal entries and adjustment
b) Review accounting estimates for biases
c) Evaluate the business rationale for significant, unusual transactions
d) Make a legal determination of whether fraud has occurred
38. It is not uncommon in auditing

a) Giving the satisfaction to the owner regarding the profits made
b) Protecting the rights of shareholders
c) Helping to give correct and fair profits of the organization
d) All of the above
39. Auditing has all features except

a) Done every financial year b) Based on conclusive evidence
c) Mandatory for companies d) None of the above
40. The primary objective of the ordinary examination of financial statement by an

auditor is the expression of an opinion on
a) The competence of management in accounting matters which is implied by whether the
opinion is qualified or not
b) The conformity of the statements with the book of account
c) The conformity of the financial statements with generally accepted auditing standards
applied on a basis consistent with that of the prior year
d) The fairness with which the financial statements present cash flows and results of operations
41. The principal objective of an audit is the examination of financial statements of an

enterprise with a view for the auditor to form and express an independent opinion on the
truth and fairness for the benefit of which one of the following?
a) The members b) Corporate Governance
c) The Corporate Affairs Commission
d) Government authorities
32
42. Apart from the technical qualities, the auditor should also possess which of the
following personal qualities
a) Confidentiality of client information b) Reliability and trust
c) Effective communication skills d) All of the above
43. The factor which distinguishes an error from fraud and other irregularity is
a) Whether it is a dollar amount or a process
b) Intent
c) Materiality
d) Whether it is caused by the auditor or the client
44. Which of the following statement is CORRECT?

a) An external auditor is required for all types of entity
b) External auditors are appointed by an entity’s management
c) Staff auditors make a report for the baseline employees
d) Staff auditors work is to identify potential risk areas for a company
45. Pick the odd one

a) Those Charged with Governance b) Management
c) Employees d) Auditor

a) Preparation of financial statements
b) Designing, implementation and maintenance of internal control system
c) Reporting on correct and fair view of financial statements
d) Compliance with the applicable law and regulation

a) Balance sheet b) Audit Report
c) Profit & Loss Account d) Cash Flow Statement
48. When the auditor is an employee of the organization being audited (Auditee), the
audit is classified as
a) Internal audit b) External audit
33
49. Professional skepticism requires the auditor assume that management is

a) Reasonably honest b) Neither honest nor dishonest
c) Not necessarily honest d) Dishonest unless proved otherwise
50. Professional skepticism requires that the auditor should be___________

indicating
a) Ignorant, Possible misstatements
b) Alert, Possible misstatements
c) Alert, Management bias
d) Ignorant, Possible misstatements.
51. Professional skepticism includes being alert to, for example

a) Audit evidence that contradicts other audit evidence obtained
b) Overlooking unusual circumstances
c) Conditions that may indicate possible fraud
d) All of above
52. Holding financial interest in a client and close business relationship with him give
rise to
a) Self- review threat b) Advocacy threat
c) Familiarity threat d) Self-interest threat
53. If the professional becomes a witness where the part to litigation is his client, it will
result in
54. If the auditor is having long association with client it will give rise to
55. If the professional who is preparing the books of accounts is also auditing the
financial statements, it shall give rise to
a) Self-review threat b) Advocacy threat
34
56. If the auditor is facing threat from the client to be dismissed if he refuses to act as
per their wishes, it shall give rise to
a) Familiarity threat b) Intimidation threat
c) Advocacy threat d) Self-review threat
57. Auditor should have communication skills in following areas:

a) Oral Skills b) Written Skills

a) Auditing and Accounting
b) Auditing and Law
c) Auditing and Financial Management
d) Auditing and History
59. The auditor shall obtain ______________assurance in an audit of financial

statements whether financial statements are free from material misstatements
whether due to fraud or error.
a) Absolute b) Reasonable
c) (a) or (b) d) None of these
60. Which of the following is not a limitation of audit

a) Auditor’s Objectivity
b) Test Checking
c) Persuasiveness of audit evidence
d) Inherent limitation of internal control system
61. Standards on Auditing are applicable on

a) Auditing Engagement b) Review Engagement
c) Assurance Engagement d) Related Service Engagement
62. Standards on Auditing are issued by

a) Accounting Standard Board
b) Quality Review Board
c) Auditing & Assurance Standard Board
d) Board of Studies
35
63. In the financial audit, the auditor expresses opinion on

a) Correct and Fair view of financial statements
b) Correct and Correct view of financial statements
c) Effective operation of internal control system
d) Business operation of the entity
64. Which of the following is not component of financial statement

a) Profit and Loss Account b) Balance Sheet
c) Notes to Accounts d) Board’s Report

a) Checking the vouchers b) Preparation of vouchers
c) Evaluation of internal control d) None of the above
66. The Institute of Chartered Accountants of India constitutes the to review the
existing auditing practices in India to develop Engagement and Quality Control
Standards
a) AASB b) IFAC
c) IAASB d) None
67. ___________is a member of the IFAC and is committed to work towards the
implementation of the guidelines issued by the IFAC
a) The Institute of the Chartered Accountants of India
b) Auditing Practices Committee
c) Auditing and Assurance Standards Board
d) All of the above
68. Auditing Practices Committee has been converted into

a) IFAC b) ICSI
c) AASB d) IAASB
69. Which of the following is not type of engagement standard

a) Standards on Auditing
b) Standard on Quality Control
c) Standards on Review Engagement
d) Standards on Assurance Engagement
36
70. In which of the following engagement opinion is not expressed

a) Related Services Engagement
b) Auditing Engagement
c) Review Engagement
d) Assurance Engagement
71. In which of the following engagement an opinion is expressed on a subject matter

other than the historical financial information
a) Auditing Engagement b) Review Engagement
c) Assurance Engagement d) Related Services Engagement
72. Which of the following is not code of ethics

a) Objectivity b) Integrity
c) Communication skills d) Professional competence and due care

a) Standards on Auditing
b) Standard on Quality Control
c) Standards on Review Engagement
d) Standards on Assurance Engagement
74. How many Standards on Auditing have been issued

a) 32 b) 34
c) 36 d) 38
75. Standards on Auditing are

a) Mandatory b) Optional
c) Discretionary d) All of these
76. General purpose financial statements are prepared as per

a) General purpose financial reporting framework
b) Special purpose financial reporting framework
c) Both (a) and (b)
d) None of these
37
77. Designing, implementation and maintenance of internal control system are the
responsibilities of
a) Management of entity b) External Auditor of entity
c) Both (a) and (b) d) Internal Auditor of entity
78. Auditing engagement can be performed w.r.t.

a) Profit making entity b) Non-profit making entity
c) Corporate entity only d) Any entity
ANSWERS
1 A 2 A 3 C 4 A 5 A
6 C 7 D 8 A 9 D 10 C
11 D 12 D 13 C 14 C 15 D
16 C 17 D 18 C 19 B 20 D
21 D 22 A 23 C 24 D 25 D
26 A 27 C 28 D 29 C 30 D
31 C 32 D 33 D 34 D 35 C
36 C 37 D 38 D 39 B 40 D
41 A 42 D 43 B 44 A 45 D
46 C 47 B 48 A 49 A 50 B
51 C 52 D 53 B 54 C 55 A
56 B 57 C 58 D 59 B 60 D
61 A 62 C 63 A 64 D 65 B
66 A 67 A 68 C 69 B 70 A
71 C 72 C 73 B 74 D 75 A
76 A 77 A 78 D
38
STANDARDS
SA 200 (SA COVERED IN CHAPTER 1)
1. As per SA 200, which level of assurance the auditor shall obtain that financial
statements are free from material misstatements
a) Reasonable Assurance b) Absolute Assurance
c) Moderate Assurance d) None of these
2. Reasonable assurance is level of assurance but it is not assurance.

a) High, Absolute b) Absolute, Guaranteed
c) Moderate, Absolute d) None of these
3. The inherent limitations of an audit arise from

a) Involvement of judgement b) Test Checking
c) Time Limitation d) All of above
4. In the case of certain assertions or subject matters, the potential effects of the
limitations on the auditor’s ability to detect material misstatements are particularly
significant. Such assertions or subject matters include:
a) Fraud, particularly fraud involving senior management or collusion
b) The occurrence of non-compliance with laws and regulations
c) The existence and completeness of related part relationship and transaction
d) All of the above
5. Which of the following statement is INCORRECT

a) Sampling is a major inherent limitation of audit.
b) Auditor is not an insurer
c) Auditor’s primary responsibility is to detect errors and frauds in financial statements
d) Auditor needs to be independent
6. Which of the following is responsibility of auditor

a) To ensure that financial statement comply with applicable financial reporting framework
b) To express an opinion on correct and fair view of the financial statements.
c) To ensure compliance with laws and regulations applicable on the entity
d) To design, implement and maintain system of internal control.
39
ANSWERS
1 a 2 a 3 d 4 d 5 c 6 b
SA 210 (SA Covered in Chapter 1)
1. Which of the following SAs deals with auditor’s responsibilities in agreeing the terms
of audit engagement
a) SA 210 b) SA 220
c) SA 230 d) SA 240
2. The auditor shall establish existence of preconditions for an audit of financial

statements
a) Before confirming common understanding between the auditor and management of the
terms of audit engagement.
b) After confirming common understanding between the auditor and management of the
terms of audit engagement.
c) Before appointment of auditor
d) After the date of auditor’s report.
3. Terms of auditing engagement are discussed through

a) Letter of appointment b) Letter of acceptance
c) Engagement letter d) Letter of weakness
4. Engagement letter is provided by

a) Management to auditor
b) Auditor to Management/TCWG
c) Internal auditor to External Auditor
d) CG to Auditor
5. Engagement letter is
a) Always required when auditor is appointed
b) Always required when auditor is reappointed
c) Not always required when auditor is reappointed but except for certain exceptions
d) (a) and (C)
40
6. Which of the following reduce the possibility of misunderstanding to a great extent

a) Statements issued by the ICAI b) Guidance notes issued by the ICAI
c) Engagement Letter d) All of the above
7. Which of the following is not a term of engagement letter

a) Object and Scope of audit
b) Responsibilities of management and TCWG of the entity
c) Fact that audit process may be subject to peer review under Chartered Accountants Act,
1949
d) Audit Planning
8. The audit engagement letter generally should include to each of the following
except
a) Limitation of auditing
b) Responsibilities of management with respect to audit work
c) Expectation of receiving a written representation letter
d) A description of the auditor’s method of sample selection.
9. In which of the following circumstances a new engagement letter is required in

recurring audit engagement
a) Any change in the senior management of the entity
b) Any change in the nature of business of the entity
c) Any change in legal requirement
d) All of the above
10. If auditor is requested by management to change the audit engagement to an

engagement that conveys a lower level of assurance, then the auditor shall
a) Reject the management’s request
b) Accept the management’s request
c) Determine that there is a reasonable justification for doing so
d) Shall not entertain any such request
11. If auditor is unable to agree to change of the terms of the audit engagement and
it is not permitted by management to continue the original audit engagement, the
auditor shall
41
a) Withdraw from the audit engagement where possible under applicable law or regulation.
b) Determine whether there is any obligation, either contractual or otherwise, to report
the circumstances to other parties, such as those charged with governance, owners or
regulators
c) Combination of both (a) and (b)
d) Either (a) or (b)
12. As per SA 210, when at management’s request auditor determines to change any
term of auditing engagement, the revised terms of auditing engagement
a) Shall be recorded in the engagement letter
b) Need not be recorded in written agreement
c) Other suitable form of written agreement
d) Either (a) or (c)
13. The use of an audit engagement letter is the best method of assuring the audit will
have
a) Auditor will obtain sufficient appropriate audit evidence
b) Management representative letter
c) Access to all books, accounts and vouchers required for audit purpose
d) Cooperation from other auditors
14. In order to establish whether the preconditions for an audit of financial statements
are present, the auditor shall
a) Determine whether the financial reporting framework is acceptable
b) Obtain the agreement of management that it acknowledges and understands its
responsibilities its responsibility for the preparation of the financial statements in
accordance with the applicable FRF
c) To provide the auditor with access to all information such as records, documents and other
matters.
d) All of the above
ANSWERS
1 a 2 a 3 c 4 b 5 d
6 c 7 d 8 d 9 d 10 c
11 c 12 d 13 c 14 d
42
SA 220 (SA covered in Chapter 1)
1. Which of the following SAs deals with responsibilities of auditor regarding quality
control procedures for an audit of financial statements
a) SA 200 b) SA 210
c) SA 220 d) SA 260
2. The objective of SA 220 is to implement quality control procedures at the engagement

level that provide the auditor with reasonable assurance that
a) The audit complies with professional standards and regulatory requirements
b) The auditor’s report issued is appropriate in the circumstances
3. The partner who is responsible for the auditing engagement and its performance
and for the report that is issued on behalf of the firm is called as:
a) Active partner b) Performing partner
c) Engagement Partner d) Working Partner
4. Which of the following is not a function of engagement partner?

a) Designing and implementing internal control
b) Compliance with professional standards
c) Whether to accept the client or not
d) Monitoring of quality control system of firm
5. SQC-1 sets out

a) The responsibilities of the firm for establishing policies and procedures regarding compliance
with relevant ethical requirements
b) The engagement partner’s responsibilities with respect to relevant ethical requirements
c) Both (a) and (b)
d) None
6. Safeguards the auditor’s ability to form an audit opinion without being affected by
any influences.
a) The engagement partner’s responsibilities
b) The auditor’s independence
c) Both (a) and (b) d) None
43
7. Which of the following partner can act as engagement partner

a) Any Partner
b) Any CA Partner
c) Any CA Partner in full time or part time practice
d) Any CA Partner in full time practice
8. Who will take responsibility for overall quality in an audit of financial statements
a) All the partners of firm
b) All CA partners of firm
c) Engagement partner
d) Engagement team
9. Which of the following information assist the auditor in accepting and continuing of
client relationship
a) The integrity of the principal owners, key management and TCWG of the entity
b) Whether the firm and the engagement partner can comply with the relevant ethical
requirements
c) Whether the engagement team is competent to perform the audit engagement and has the
necessary capabilities, including time and resources
d) All of these
10. Appointment of engagement quality control reviewer is mandatory in case of audit

of financial statements of
a) Any entity
b) Any entity except One Person Company and Small Company
c) Listed Entity
d) None of these
11. Which of the following in not element of quality control in an audit of financial
statements
a) Leadership Responsibilities
b) Assignment of Engagement Team
c) Acceptance and Continuance of Client Relationship and Audit Engagements
d) Signing on Audit Report
44
12. If any difference of opinion arise within engagement team or between engagement
partner and quality control reviewer, the engagement team follow
a) Engagement partner
b) Engagement quality control reviewer
c) Firm’s policies and procedures
d) Majority of members of engagement team
13. Auditing firms should establish quality control policies and procedures for personnel
management in order to provide reasonable assurance that
a) Employees promoted possess the appropriate characteristics to perform competently
b) Personnel will have the knowledge required to fulfill responsibilities assigned
c) The extent of supervision and review in a given instance will be appropriate
d) All of the above are reasons
14. The least important element in the evaluation of an audit firm’s system of quality
control would relate to
a) Assignment of audit assistants
b) Consultation with experts
c) System for determining audit fees
d) Confidentiality of client’s information
15. The engagement partner may identify a threat to independence regarding the
audit engagement that safeguards may not be able to eliminate or reduce to an
acceptable level. In that case
a) The engagement partner reports to the relevant person(s) within the firm to determine
appropriate action.
b) Withdraw from audit engagement, where withdrawal is legally permitted.
c) Where applicable law or regulation does not permit withdrawal of the auditor from the
engagement, disclose through a public report.
d) All of the above
45
16. In pursuing its quality control objectives with respect to independence, an auditing
firm may use policies and procedures such as
a) Emphasizing independence of mental attitude in firm training programs and in supervision
and review of work
b) Prohibiting employees from owning stock of public companies
c) Suggesting that employees conduct their banking transactions with banks that do not
maintain accounts with client firms
d) Assigning employees who may lack independence to research positions that do not require
participation in field audit work
17. Policies and procedures w.r.t human resources address which of the following issues
a)
Recruitment b. Capabilities
c) Competence d. All of above
18. Throughout the audit engagement, the engagement partner shall remain alert for
evidence of non- compliance with relevant ethical requirements by engagement
team through
a)
Inquiry b) Observation
c) (a) and (b) d) Review of audit documentation
19. As per SQC-1, the firms’ system of quality control should include policies and
procedures addressing which of the following element
a) Leadership responsibilities for quality
b) Audit planning
c) Auditor’s judgement
d) All of the above
20. The engagement quality control reviewer shall perform an object evaluation of the
significant judgements made by the engagement team, and the conclusions reached
in formulating the auditor’s report. This evaluation shall involve
a) Discussion of significant matters with engagement team.
b) Review of the financial statements and the proposed auditor’s report
c) Review of selected audit documentation relating to the significant judgements and the
engagement team made and the conclusions it reached
d) All of the above
46
21. Duties of Engagement Quality Control Reviewer

a) Whether to accept the client or not
b) Discuss significant matters with engagement partner
c) To resolve issues of engagement team
d) All of the above
22. Which of the following is not function of engagement partner

a) Design and implementing internal control
b) Compliance with professional standards
c) Whether to accept the client or not
d) Monitoring of quality control system of firm
23. The firm should establish policies and procedures designed to provide it with
reasonable assurance that the policies and procedures relating to the system of
quality control are relevant, adequate, operating effectively and complied with in
practice, which refers to
a) Engagement Performance
b) Human Resources
c) Monitoring
d) Firm’s Quality Control Policies.
ANSWERS
1 c 2 c 3 c 4 a 5 a 6 b
7 d 8 c 9 d 10 c 11 d 12 c
13 b 14 c 15 d 16 a 17 d 18 c
19 a 20 d 21 b 22 a 23 c
47
PART D : CORRECT / INCORRECT QUESTIONS
COMMENT ALONGWITH REASONS WHETHER FOLLOWING ARE CORRECT OR INCORRECT.
1. Financial statements include P&L Account and Balance Sheet but not notes to
accounts.
2. Audit is independent examination of operations conducted by management.
3. Auditor’s opinion is on Correct & Fair view of financial statements.
4. Auditor needs to be independent.
5. Audited financial statements help the lenders.
6. Auditor does not need communication skills, as he is concerned only with financial
information.
7. Auditor must maintain confidentiality subject to certain exceptions.
8. Auditor does not need knowledge of accounting.
9. Auditor should have knowledge of CIS.
10. Audit doesn’t require knowledge of business operations on part of auditor.
11. Documentation is required to be kept by auditor.
12. Financial statements are responsibility of management.
13. Disclosure of accounting policy, which is adopted in preparation of financial
statements, is not required.
14. As per AS -1 disclosure of fundamental accounting assumptions is needed whether
these are followed or not.
15. The basic objective of audit does not change with reference to nature, size or form
of an entity
16. The purpose of an audit is to enhance the degree of confidence of intended users in
the financial statements.
17. The auditor is not expected to, and cannot, reduce audit risk to zero and cannot
therefore obtain absolute assurance that the financial statements are free from
material misstatement due to fraud or error.
18. Specific disclosure is required of the fundamental accounting assumptions followed
in the financial statements
19. The audit engagement letter is sent by the client to auditor.
48
PART E : CORRECT / INCORRECT ANSWERS
1. INCORRECT --Financial statements mean whole set of accounts including P&L

account, Balance sheet and disclosure i.e., notes to accounts.
2. INCORRECT --Audit is independent examination of financial statements of an entity
to express opinion thereon. It is thus examining financial information, not operations
of entity.
3. CORRECT => For reporting on correct & fair view, it is seen whether acceptable
policies are consistently applied, regulations have been observed & appropriate
disclosures have been made in financial statements.
4. CORRECT => Independence means that judgement of a person is not subordinate to
wishes of any person. Independent audit enhances credibility of financial statements
of client.
5. CORRECT =>Lenders can rely on audited financial statements while making decision
about credit worthiness of loan applicant & later on, they can judge recoverability
of their funds.
6. INCORRECT => During conduct of audit, he has to interact with various officers and
staff of client & third parties, which requires good written & oral communication
skills.
7. CORRECT => He (Auditor) should not disclose any confidential information relating
to client. However, he can disclose if it is permitted by client or required by law.
8. INCORRECT => Auditor expresses opinion on financial statements. If he does not have
expert knowledge on accounting, he cannot check whether financial statements
prepared by entity’s management are correct & fair or not.
9. CORRECT => Now a days, most of the client maintain their accounts in computer
information system. Thus, working knowledge on computer is required for auditors
to conduct audit in an effective way.
10. INCORRECT => In financial statements of client, results of various operations/
functions are shown. Unless auditor has knowledge about basic business operations,
he can’t judge their financial results in effective way.
11. CORRECT => He should document matters relating to the audit (maintain working
papers).Working papers are maintained to demonstrate that the audit was carried
out accordance with the basic principles.
12. CORRECT => The management is responsible for maintaining an up to date and
proper accounting of various transactions entered into during the course of the year.
49
13. INCORRECT => The profit or loss can be significantly affected by adopting different
accounting policies. Thus disclosure of accounting policies followed becomes
necessary, so that readers of financial statements can properly understand the view
presented.
14. INCORRECT => If all three fundamental accounting assumptions are being followed in
preparation & presentation of financial statements, specific disclosure is not needed.
Thus, disclosure is needed only in case of non- compliance with the fundamental
accounting assumption.
15. CORRECT: An audit is an independent examination of financial information of any
entity, whether profit oriented or not, and irrespective of its size or legal form, when
such an examination is conducted with a view to expressing an opinion thereon. It
is clear that the basic objective of auditing, i.e., expression of opinion on financial
statements does not change with reference to nature, size or form of an entity.
16. CORRECT: As per SA 200 “Overall Objectives of the Independent Auditor and the
Conduct of an Audit in Accordance with Standards on Auditing”, the purpose of
an audit is to enhance the degree of confidence of intended users in the financial
statements. This is achieved by the expression of an opinion by the auditor on whether
the financial statements are prepared, in all material respects, in accordance with
an applicable financial reporting framework.
17. CORRECT: As per SA 200 “Overall Objectives of the Independent Auditor and the
Conduct of an Audit in Accordance with Standards on Auditing”, the auditor is not
expected to, and cannot, reduce audit risk to zero and cannot therefore obtain absolute
assurance that the financial statements are free from material misstatement due to
fraud or error. This is because there are inherent limitations of an audit, which result
in most of the audit evidence on which the auditor draws conclusions and bases the
auditor’s opinion being persuasive rather than conclusive.
18. INCORRECT, as per AS 1, “Disclosure of Accounting Policies”, specific disclosure of
the fundamental accounting assumption is required if they are not followed in
statements.
19. Incorrect: As per SA 210 “Agreeing the Terms of Audit Engagements”, the Audit
engagement letter is sent by the auditor to his client.
50

Nature and Scope of Audit

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Nature and Scope of Audit

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INTER C.A.

NATURE SCOPE AND

PART A - THEORY SECTION

3.4. The auditor determines whether the relevant information is properly

3.7.10 Reporting to the appropriate person/body whether the statements of

2. Fraud may involve sophisticated and carefully organised schemes

7.4 Auditing and Behavioural Science: The discipline of behavioural science is

8.2 Independence means that auditor’s judgment should not be influenced in

9.1 Leadership responsibilities for quality within the firm:

9.2 Ethical requirements:

9.3 Human resources

10 Acceptance and Continuance of Client Relationship

(ii) For such internal control as management determines is necessary to

11.3.4 A significant change in ownership

12 Basic Principles Governing an Audit of Financial Statements.

12.8 Integrity, objectivity and independence: The auditor should be straight

INTRODUCTION- AUDITING AND ASSURANCE STANDARD BOARD, AUTHORITY OF THE

15 Scope and a) To review the existing auditing practices in India and to

16.3 Standards a) It is prescribed for conducting review of financial statements

(b) to ensure that the ‘Statements’ relating to auditing

Professional skepticism is necessary to the critical assessment of audit evidence.

PART B - BRIEF ANSWERS – PRACTICE QUESTIONS

Q. No Question and Answer

2. Fraud may involve sophisticated and carefully organised schemes

PART C : MULTIPLE CHOICE QUESTIONS

1. __________is an independent examination of financial information of any entity,

2. The main objective of financial audit is

5. Auditor gives regarding the financial statements

6. Auditing begins where ___________ends.

7. Which type of organizations use auditing services?

9. Users of financial statements includes

10. An audit which is governed by law is called as

14. The principal aspects to be covered in an audit concerning final statements of

a) Auditing and Financial Management

18. Independence comprises

19. Chartered Accountants have an important role in

21. The term financial statement shall exclude

26. The auditor shall report on the accounts examined by him

27. If auditor maintains high degree of independence, it will result in

28. Which of following is the responsibilities of management

30. Auditor should have knowledge of

31. Auditor should have communication skills in following areas:

32. Function of audit is to

33. Which is NOT the function of an auditor?

34. The basic requirement which is absent is auditing is

35. Which of the following statement is not correct

36. Auditor should be done by

37. Which of the following is least likely to be required in an audit?

38. It is not uncommon in auditing

39. Auditing has all features except

40. The primary objective of the ordinary examination of financial statement by an

41. The principal objective of an audit is the examination of financial statements of an

44. Which of the following statement is CORRECT?

45. Pick the odd one

46. Pick the odd one

47. Pick the odd one

49. Professional skepticism requires the auditor assume that management is

50. Professional skepticism requires that the auditor should be___________

51. Professional skepticism includes being alert to, for example

57. Auditor should have communication skills in following areas:

58. Pick the odd one

59. The auditor shall obtain ______________assurance in an audit of financial

60. Which of the following is not a limitation of audit