4. INTRODUCTION TO AUDITING [DEFINITION OF AUDITING “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.” [OBIECTIVES AND SCOPE OF AUDIT, As per SA — 200 “Overall Objectives of the Independent Auditor and the Conduct of an audit in accordance with the Standards on Auditing’, in conducting an audit of financial statements, the overall objectives of the auditors are: (2) To obtain reasonable assurance about whether the financial statements as a whole are free from material misstatement; and {b) To report on the financial statements, and communicate as required by the SAs, in accordance with the auditor's findings. [PRINCIPLE ASPECTS TO BE COVERED IN/AN AUDIT / OVERALL AUDIT APPROACH ‘Accounting System & Internal Control System: ‘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 Systems & Procedures: Reviewing the system and procedures to find out whether they are adequate and comprehensive and incidentally whether materlal inadequacies and weaknesses exist to allow fraud and errors going unnoticed. Arithmetical Accuracy: Checking of the arithmetical accuracy of the books of account by the verification of postings, balances etc. Validity of Transactions: 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. Capital / Revenue Distinction: Ascertain that a proper distinction has been made between items of capital and of revenue nature and that the amount of various items of income and expenditure adjusted in the accounts correspond to the accounting period. ‘Comparison with Underlying Records: 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. Verification of assets: Verification of the title, existence and value of assets appearing in the Balance Sheet Verification of Liabilities: Verification of the liabilities stated in the Balance Sheet. True & Falr: Checking the state of affairs shown by the Balance Sheet and results shown by the Statement of Profit and Loss are true and fair. Scanned with CamScanner Stared ith ConcerGURUKUL FOR CA & CMA INTRODUCTION TO AUDITING Bll Statutory Requirements: Where audit is of a corporate body, conforming that statutory requirements have been complied with. Reporting: Reporting to the appropriate person / body whether the statements of accounts examined do reveal a true and fair view of the state of affairs and of the results of the orgasization REEESOR UOT Se Audit Is not legally obligatory for all types of business organizations or Institutions. On this basis audits may be of two broad categories l.e., audit required under law and voluntary audits. ‘AUDITS REQUIRED UNDER LAW The organizations which require audit under law are the following: () Companies governed by the Companies Act, 2013; (ii) Banking companies governed by the Banking Regulation Act, 1949; (li) Electricity supply companies governed by the Electricity Supply Act, 1948; (iv) Co-operative societies registered under the Co-operative Societies Act, 1912; (v) Public and charitable trusts registered under various Religious and Endowment Acts; (vi) Corporations set up ander an Act of Parliament or State Legislature such as the Life Insurance Corporation of India. (vii) Specified entities under various Sections of the Income —tax Act, 1961. (vill) Audit required under Sales — tax and VAT by various State Governments. VOLUNTARY AUDITS Inthe voluntary category are the audits of the accounts of () Proprietary entities, (i) Partnership firms, (iii) Hindu undivided families, ete. In respect of such accounts, there is no basic legal requirement of audit. Many of such enterprises as a matter of internal rules require audit. Some may be required to get thelr accounts audited on the directives of Government for various purposes like sanction of grants, loans, etc. [ADVANTAGES OF AUDIT OF FINANCIAL STATEMENTS Reliability of financial statements The Chief utility of audit lies in reliable financial statements on the basis of which the state of affairs may be easy to understand. Safeguards financial interests: It safeguards the financial interest of person who are not associated with the management of the entity, whether they are partners or shareholders, bankers, Fl’s, public at large etc. Moral check on employees: Itacts as a moral check on the employees from committing defalcations or embezzlement. Taxes and Loans: Audited statements of account are helpful in setting li determining the purchase consideration for a business. Settlement of trade disputes: 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. ty for taxes, negotiating loans and for Scanned with CamScanner Stared ith ConcerGURUKUL FOR CA & CMA INTRODUCTION TO AUDITING El Wastages and losses: ‘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. Books of account: 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. Review of operation: ‘As an appraisal function, audit reviews the existence and operations of various controls in the organizations and reports weaknesses, Inadequacies, etc,, in them. Settlement of Account Audited accounts are of great help in the settlement of accounts at the time of admission or death of partner. Government support: Government may require audited and certified statement before it gives assistance or Issues a license for a particular trade. [INHERENT LIMITATIONS OF AN AUDIT) ‘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 circursstances of the entity. ‘The Nature of Audit Procedures: There are prat For example: a) 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. b) Fraud may involve sophisticated and carefully organized schemes designed to conceal it. The auditor Is neither trained as nor expected to be an expert in the authentication of documents. ¢) 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. Ti of Financial Report Balance b Benefit & Cost: The matter of di | and legal limitations on the auditor's ability to obtain audit evidence. iculty, time, or cost involved is not in itself a valid basis for the auditor to omit an audit procedure for which there is no alternative. Appropriate planning assists in making sufficient time and resources available for the conduct of the audit. Notwithstanding this, the relevance of information, and thereby Its value, tends to diminish over time, and there is a balance to be struck between the reliability of information and its cost. Scanned with CamScanner Stared ith ConcerGURUKUL FOR CA & CMA INTRODUCTION TO AUDITING i4 | Other Matters that affect the Limitations of an Audi 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 senlor management or collusion. b) The existence and completeness of related party relationships and transactions. ©) The occurrence of non-compliance with laws and regulations. d) Future events or conditions that may cause an entity to cease to continue as a going concern, ‘No Guarantee of Fraud Detection Because of the limitations of an audit, there is an unavoidable risk that some material misstatements of the financial statements may rot be detected, even though the audit is properly planned and performed in accordance with SAs. TATCONSHIP OF AUDITING WITH OTHER DISCIPLINES ‘ACCOUNTING: * _Itls so said that auditing begins where accounting ends. ‘+ Auditing reviews the financial statements which are nothing bst a result of the overall accounting process. ‘©The auditor should have a thorough and sound knowledge of generally accepted principles of accounting before he can review the financial statements. In fact, auditing as a discipline is also closely related with various other disciplines as there Is lot of linkages in the work which is done by an auditor in his day — to - day activities. To begin with, it may be noted that the discipline of auciting itself is a logical construct and everything done in auditing must be bound by the rules of logic. Ethical precepts are the foundations on which the foundation of the entire accounting profession rests. Auditing involves examination of various transactions from the view point of whether or rot these have been properly entered into. ‘* It necessitates that an auditor should have @ good knowledge of business laws affecting the entity. ‘© He should be familiar with the law of contracts, negotiable instruments, etc. ‘© The Knowledge of taxation laws is also inevitable as entity is reqaired to prepare their financial statements taking into account various provisions affected by various tax laws. ‘*_Inanalyzing the impact of various transactions particularly from the accounting aspect, an auditor ought to kave a good krowledge about the direct as well as indirect tax laws. ECONOMICS: + As, itis well known, accounting is concerned with the accumul relating to economic activi ‘* _Frors the auditing view point, the auditors are more concerned wit Micro economics rather than with the Macro economics. n and presentation of data Scanned with CamScanner Stared ith ConcerGURUKUL FOR CA & CMA INTRODUCTION TO AUDITING is | ‘© The knowledge of macro economics should include the nature of economic force that affect the firm, relationship of price, productivity and the role of Government and Government regulations. ‘* Auditor is expected to be familiar with the overall economic environment in whieh his client is operating, BEHAVIOURAL SCIENCE: ‘© While it may be sald 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 organization. ‘*Asagainst the financial auditor, the internal auditor or a management auditor Is expected to deal with human beings rather than financial figures. * One of the basic elements in designing the internal control system Is personnel, ‘© Howsoever, if a sound Internal control structure is designed, it cannot work until and unless the people who are working in the organization are competent and honest. * The knowledge of human behaviour is indeed very essential for an auditor so as to effectively discharge his duties. 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 artive at meaningful conclusions, ‘* The knowledge of mathematics is also required on the part of auditor particularly at the time of verification on inventories. ‘* The use of data analytics is advancing rapidly In auditing where many organizations are using continuous auditing and continuous monitoring of data to Identify risks as part of their system of internal control. DATA PROCESSING: © Today, orgarizations are witnessing revolution in the field of data processing of accounts. ‘Many organizations are carrying out thelr Snancial accounting activities with the help of computers which can document, record , collate, allocate and value accounting data and information in very large quantity at very high speed. * The dependence on the accuracy of the programmed instructions given today, the computer Is able to carry out each of these activities with complete accuracy. © With sach 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. © Infact, CIS auditing in itself is developing as a discipline in itself. FINANCIAL MANAGEMENT: ©The auditor is expected to have knowledge about various financial techniques such as working capital management, funds flow, ratio analysis, capital budgeting etc. Scanned with CamScanner Stared ith ConcerGURUKUL FOR CA & CMA INTRODUCTION TO AUDITING Gl ‘* The auditor Is also expected to have 2 fair knowledge of the institutions that comprise the market place. * The knowledge of various institutions and Government activities that influence the operations of the financial market are also required to be understood by an auditor. 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. ‘+ The knowledge of production process shall become more essential in case of an internal auditor. ‘©The auditor shall also require understanding the cost system in operation in the factory and assessing whether the same is adequate for the particular company. ‘* The understanding of the terminology of the production shall enable an auditor to communicate with production employees in connection with his work. (QUALITIES OF AN AUDITOR INTEGRITY, OBJECTIVITY & INDEPENDENCE: He must have the highest degree of integrity backed by adequate independence. In fact, Code of ethics mentions integrity, objectivity and Independence as one of the fundamental principles of professional ethics. KNOWLEDGE OF LAWS: 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. The Companies Act need special mention but mercantile law, especially the law relating to contracts, is no less important, Needless to say, where undertakings are governed by a special statute, its knowledge will be imperative; in addition, a sound knowledge of the law and practice of taxation is unavoidable. PROFESSIONAL TRAINING & EDUCATION: 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. Both practical training and theoretical education are equally necessary for the development of professional competence of an auditor for undertaking any kind of audit assignment. KNOWLEDGE OF CLIENT'S BUSINESS: 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 whole accounts are under audit. EXHAUSTIVE KNOWLEDGE OF ACCOUNTING: 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. An exhaustive knowledge of accounting in all its branches is the sine qua non of the practice of auditing. He must know thoroughly all accounting principles and techniques. Scanned with CamScanner Stared ith ConcerGURUKUL FOR CA & CMA INTRODUCTION TO AUDITING REASONALBLE CARE & SKILL: ‘An auditor must be honest that is, he must not certify what he does not believe to be true and ‘must take reasonable care and skill before he believes that what he certifies is true. INDEPENDENCE OF AUDITOR MEANING OF INDEPENDENCE: Independence implies that the Judament of a person is not subordinate to the wishes or direction of another person who might have engaged him. Independence is a condition of mind as well as personal character. It should not be confused with the superf'cial and visible standards of independence which are sometimes imposed by law. INDEPENDENCE OF MIND & IN APPEARANCE {a) Independence of mind - the state of mind that permits the provision of an opinion without being affected by influences allowing an Individual to act with integrity, and exercise objectivity and professional skepticism; and {b) Independence in appearance ~ the avoidance of facts and circumstances that are so significant that a third party would reasonably conclude an auditor's integrity, objectivity or professional skepticism had been compromised.” Independence of the auditor has not only to exist in fact, but also appear to so exist to all reasonable persons. THREATS TO INDEPENDENCE: The Code of Ethics for Professional Accountants, prepared by the International Federation of ‘Accountants (IFAC) identi¥es five types of threats. These are: 1. Self—interest threats: 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, (il) Loan or guarantee to or from the concerned client, (iil) Undue dependence on a client's fees and, hence, concerns about losing the engagement, {iv) Close business relationship with an audit client, (v)_ Potential employment with the client, and (vi) Contingent fees for the audit engagement. 2. Self ~ review threats: Self - review threats, which occur when during a review of any Judgment or conclusion reached In a previous audit or non audit engagement, or when a member of the audit team was previously a director or senior employee of the client. Instances where such threats come into play are (i) When an auditor having recently been a director or senior officer of the company, and (il), When auditors perform services that are themselves subject matters of audit. 3. Advotacy threats: 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. Scanned with CamScanner Stared ith ConcerGURUKUL FOR CA & CMA INTRODUCTION To auDITING [EA 4, Familiarity threats: 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, (il) Former partner of the audit firm being a director or senlor employee of the client, (ill) Long association between specifc auditors and thelr specific client counterparts, and (iv) Acceptance of significant gifts or hospitality from the client company, its directors or employees. 5. Intimidation threats: Intimidation, 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. GUIDING PRINCIPLES TO SAFEGUARD INDEPENDENCE: (1) For the public to have confidence in the quality of audit, itis essential that auditors should always be and appears to be independent of the entities that they are auditing. (2) _ Inthe case of audit, the key fundamental principles are integrity, objectivity and professional skepticism, which necessarlly 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. BACKGROUND OF AUDITING & ASSURANCE STANDARDS BOARD & QUALITY CONTROL & NeW LELLUL GL [Standard Auditing Practices ‘Auditing Practices Committee (APC) set up on September 17, 1985 to spearhead the new ing Practices (SAPs) and Guidance Notes (GNs) inter alia to replace various chapters of the old omnibus Statement on Auditing Practices issues in 1964, [Auditing And Assurance Standards ‘APC Converted to Auditing and Assurance Standards Board in July, 2002. The nomenclature of ‘Standard Auditing Practices (SAPs) had been changed to Auditing and Assurance Standards (ASS). (Objectives ‘And Functions Of The Auditing And Assurance Standards Board ‘To To review the existing and emerging auditing practices worldwide and identity areas in which Standards on Quality Control, Engagement Standards and Statements on Auditing need to be developed. (i) To formulate Engagement Standards, Standards on Quality Control and Statements of ‘Auditing so that these may be issued urder tte authority of the council of the Institute. (ii) To review the existing Standards and Statements on Auditing to assess their relevance in the ‘changed conditions and to undertake their revision, if necessary. framework of Statements on Standard Au: ‘Scanned with CamScanner Stared ith ConcerGURUKUL FOR CA & CMA INTRODUCTION TO AUDITING Ha (iv) To develop Guidance Notes on issues arising out of any Standard, auditing issues pertaining to any specific industry or on generic Issues, so that those may be issued under the authority of the Council of the Institute. (v) To review the existing Guidance Notes to assess thelr relevance in the changed circumstances and to undertake their revision, if necessary. (vi) To formulate General Clarifications, where necessary, on issues arising from Standards. (vil) To formulate and issue Technical Guides, Practice Manuals, Studies and other papers under its own authority for guidance of professional accountants in the cases felt appropriate by the Board. Warren aL nue a a on a [Statements > The ‘Statement’ have been 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. > ‘Statements’ therefore are mandatory. > Accordingly, while discharging their attest function, it will be the duty of the members of the Institute to ensure that statements are followed and complied with. Guidance Note: > ‘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 desire assistance in resolving issues which may pose difficulty. > Guidance Notes are recommendatory in nature. > Amember should ordinary follow recommendations in a guidance note relating to an auditing matter 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. > Ifthe same have not been followed, the member should consider whether keeping in view the circumstarces of the case, a disclosure in his report necessary. > There are, however a few guidance notes in case of which the Council has specifically stated that they should be considered as mandatory on members while discharging ther attest function. [Accounting Standards And Standards On Auditing > The ‘Accounting Standards’ and ‘Standards on Auditing’ establish standards which have to be complied with to ensure that financial statements are prepared in accordance with Generally Accepted Accounting Standards and that auditors carry out thelr audit in accordance with the generally accepted auditing practices. > They become mandatory on the dates specified in the respective document or notified by the Council. Scanned with CamScanner Stared ith ConcerGURUKUL FOR CA & CMA INTRODUCTION To AUDITING EA oy Ee Pa Oh ae AUDIT IN ACCORDANCE WITH STANDARDS ON AUDITING (REVISED)” (OVERALL OBIECTIVES OF THE AUDITOR 7 ‘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 materi respects, in accordance with an AFRF; and {b] To report on the financial statements, and communicate as required by the SAs, in accordance with the auditor's findings. [APPLICABLE FINANCIAL REPORTING FRAMEWORK (AFRF) The financial reporting framework adopted by management and, where appropriate, those charged with governance in the preparation and presentation of the financial statements that is acceptable in view of the nature of the entity and the objective of the financial statements, or that is required by law or regulation. The AFRF often encompasses financial reporting standards established by an authorized or recognized standard setting organization, or legislative or regulatory requirements. For example, in India the Snancial statements of the companies are prepared in accordance with the requirements of Schedule Ill to the Companies Act, 2013 and mandatory AS as notified by the 6. [REASONABLE ASSURANCE The audit of the financial statements does not relieve management or TCWG of those responsibilities. The auditor's opinion therefore does not assure, the future viability of the entity nor the efficiency or effectiveness with which management has conducted the affairs of the entity. Reasonable assurance is a high level of assurance. It is obtained when the auditor has obtained SAAE to reduce audit risk (L.e,, the risk that the auditor expresses an inappropriate opinion when the financial statements are materially misstated) to an acceptably low level. However, reasonable assurance is not an absolute level of assurance, 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 opixion being persuasive rather than conclusive. [ETHICAL REQUIREMENTS INCLUDING INDEPENDENCE ‘The auditor is subject to relevant ethical requirements, including those pertaining to Independence, relating to financial statement audit engagements. Relevant ethical requirements ordinarily comprise the Code of Ethics issued by the ICAI. The Code establishes the following as the fundamental principles of professional ethics relevant to the auditor when conducting an audit of financial statements and provides a conceptual framework for applying those pri (2) Integrity; (b) Objectivity; (c)__ Professional competence and due care; (d) Confidentiality; and {e) Professional behaviour Scanned with CamScanner Stared ith ConcerGURUKUL FOR CA & CMA INTRODUCTION TO AUDITING Ea In the case of an audit engagement which is in the public interest, the Code of Ethics requires the auditor to be independent of the entity subject to the audit. The Code describes independence as comprising both independence of mind and independence in appearance. The auditor's independence from the entity safeguards the auditor’s ability to form an audit opinion without being affected by influences that might compromise that opinion. Independence enhances the auditor's ability to act with Integrity, to be objective and to maintain an attitude of professional skepticism. [PROFESSIONAL Skt An attitude that includes Aquestioning mind Being alert to conditions which may Indicate possible misstatement due to error or fraud, and ACritical assessment of audit evidence 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 procedure: the SAs, Maintainir wofessional skepticism throughout the audit is necessary if the auditor is, for example , to reduce the risks of: Overlooking unusual circumstances. 4 Over generalizing when drawing conclusions from audit observations. ‘Using inappropriate assumptions in determining the nature, timing, and extend of the audit procedures and evaluating the results thereof. (PROFESSIONAL JUDGEMENT The application of relevant Training, knowledge and experience, Within the context provided by auditing, accounting and ethical standards, In making informed decisions: About the courses of action that are appropriate in the circumstances of the audit engagement. Professional judgment is essential to the proper conduct of an audit. This Is because interpretation of relevant ethical requirements and the SAs and the informed decision required throughout the audit cannot be made without the application of relevant knowledge and experience to the facts and circumstances. Professional judgment is necessary In particular regarding decisions about: ‘~~ Materiality and audit risk. ‘The nature, timing, and extent of audit procedures used to meet the requirements of the ‘SAs and gather audit evidence, ‘Evaluating whether SAAE has been obtained , and whether more needs to be done to achieve the objectives of the SAs and thereby, the overall objectives of the auditor. The evaluation of management's judgments in applying the entity's AFRF. ‘~The drawing of conclusion based on the audit evidence obtained, for example, assessing the reasonableness of the estimated made by management in preparing the financial statements. iM addition to those required by Scanned with CamScanner Stared ith ConcerGURUKUL FOR CA & CMA INTRODUCTION TO AUDITING Professional judgment needs to be exercised throughout the audit. It also needs to be appropriately dacumented. In this regard, the auditor Is required to prepare audit documentation sufficient to enable an experienced auditor, having no previous connection with the audit, to understand the significant professional Judgments made In reaching conclusions on significant matters arising during the audit. Professional judgment Is not to be used as the justification for decisions that are not otherwise supported by the facts and circumstances of the engagement or SAAE. (CONDUCT OF AN AUDIT IN ACCORDANCE WITH SAS: i ‘© The auditor shall comply with all SAs relevant to the audit. An SA is relevant to the audit when the SA is in effect and the circursstances addressed by the SA exist. * The auditor shall comply with each requirement of an SA unless, in the circumstances of the audi {a) The entire SAls not relevant; or {b) The requirement is not relevant because it is con exist. ‘* The auditor shall have an understanding of the entire text of an SA, including its application and other explanatory material, to understand its objectives and to apply its requirements properly. ‘* The auditor shall not represent compliance with SAs In the auditor's report unless the auditor has complied with the requirements of this SA and all other SAs relevant to the audit. The practice of appointing more than one auditor to conduct the audit of large entitles Is in vogue these days. Such auditors, known as joint auditors, conduct the audit Jointly and report on the financial statements of the entity. This standard deals with the professional responsibilities which the auditors undertake in accepting such appointments as Joint auditors. The statement does not deal with branch auditor appointed under section 143 (8) of the Companies Act, 2013. [ADVANTAGES OF JOINT AUDIT ‘© Pooling and sharing of expertise © Advantage of mutual consuation. * Lower work load © Better quality of work performance. ‘© Improved service to the client. ‘+ Displacement of the auditor of the company in a take ~over often obviated. ‘+ _Insespect of multinational companies, the work can be spread using the expertise ifthe local firms whick are in a better position to deal with detailed work and the local laws and regul © Lower staff development costs. © Lower costs to carry out the work. © Asense of healthy competition towards a better performance. ns. Scanned with CamScanner Stared ith ConcerGURUKUL FOR CA & CMA INTRODUCTION TO AUDITING [DISADVANTAGES OF JOINT AUDIT, The fees being shared. Psychological problem where firms of different standing are associated In the Joint audit. General superiority complexes of some auditors. Problems of coordination of the work. ‘Areas of work of common concern being neglected. Uncertainty about the liability for the work done. Lack of clear definition of responsibility. [DIVISION OF WORK’ The Joint auditors should by MUTUAL DISCUSSION divide the total work of audit among themselves. Division of work may be based on — ‘© Branches / Regional Office © Plant wise © Asset wise / liability wise ‘© Income / expenditure wise. Certain area of work which is Important In nature, may not be divided and carried on by all the joint auditors. Documentation of division of work: Division of work among the joint auditors should be documented. Documentation of division of work means that the division of work between / among the auditors should be in writing and agreed by all the auditors and this division of work may also be communicated to client. Documentation of division of work will also facilitate the coordination of work among the auditors. [SHARING OF RESPONSIBILITY OF JOINT AUDITORS (a) (8) The work which is divide Each joint auditor is responsible for the work allocated to him. The work which is not divided and jointly carried on (i) Allthe joint auditors are jointly and severally responsible — (il) In respect of the audit work which is not divided among the joint auditors and ts carried out by all of them; (ill) 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 clarified that all the joint auditors are responsible only in respect of the appropriateness of the decisions concerning the nature, timing or extent of the audit procedures agreed upon among them; proper execution of these audit procedures is the separate and specific responsibility of the joint auditor concerned; (iv) 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 the joint auditors; (v) For examining that the financial statements of the entity comply with the disclosure requirements of the relevant statute; Scanned with CamScanner Stared ith ConcerGURUKUL FOR CA & CMA INTRODUCTION TO AUDITING jaa | (vi) For ensuring that the audit report complies with the requirements of the relevant statute; and (vii) The responsibility of obtaining and evaluating Information and explanation from the management is generally a joint responsibility of all the auditors. {C]_ The matter brought by one jaint auditor to the attention of another joint auditor, which f ‘i it If during the course of the audit, a joint auditor comes across matter which is relevant to the areas of responsibility of other joint auditor and which deserves his attention and this matter Is brought to the attention of the client or other joint auditors by an auditor after the audit report has been submitted, the other Joint auditors will not be responsible for that matter. However, other joint auditors will be responsible if an auditor sends the note inviting attention before finalizing the report. IST NECESSARY TO REVIEW THE WORK OF OTHERIOINT AUDITOR? NO, it is not necessary for joint auditor to review the work performed by other joint auditors. Each auditor can assume that other joint auditor has carried his work as per the accepted audit procedures. [DIFFERENCE OF OPINION AMONG JOINT AUDITORS ‘As the audit report is jointly submitted and signed by all the joint auditors, all the joist auditors generally agree on a report to be submitted. However, In case of difference of opinion among the Joint auditors, the Joint auditors having different view may report separately and in any case, are not bound by the views of the majority of Joint auditors. ‘SA 210 AGREEING THE TERMS OF AUDIT ENGAGEMENT (REVISED) (OBIECTIVE OFTHE STANDARD (2) _ Establishing whether the preconditions for an audit are present: and (b) Conforming that there is a common understanding between the auditor and management and, where appropriate, TCWG of the terms of the audit engagement. [PRECONDITIONS FoR AN AUDIT = The use by management of an acceptable financial reporting framework in the preparation of the FS and the agreement of management and, where appropriate, TCWG to the premise on wich an audit is conducted. In order to establish whether the preconditions for an audit are present, the auditor shall: {a]_ Determine whether the financial reporting framework to be applied in the preparation of the FS is acceptable; and {b) Obtain the agreement of management that it acknowledges and understands Its responsibi (i) For the preparation of the FS in accordance with the AFRF, including where relevant thelr fair presentation; (i) For such internal control as management determines Is necessary to enable the preparation of FS that are free from material misstatement, whether due to fraud or error; and Scanned with CamScanner Stared ith ConcerGURUKUL FOR CA & CMA INTRODUCTION TO AUDITING jas | (ili) To provide the auditor with: a) Access to all information of which management Is aware that Is relevant to the preparation of the FS such as records, documentation and other matters; b) Additional information that the auditor may request from management for the purpose of the audit; and ©) Unrestricted access to persons within the entity from whom the auditor determines it necessary to obtain audit evidence. [PRINCIPLE CONTENTS OF AUDIT ENGAGEMENT LETTER The auditor shall agree the terms of the audit engagement with management or TCWG, as appropriate. 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: a) The objective and scope of the audit of the FS; b) The responsibilities of the auditor; c) The responsibilities of management; 4d) Identification of the AFRF for the preparation of the FS; and e) Reference to the expected form and concept of any reports to be issued by the auditor anda statement that there may be circumstances In which a report may differ from its expected form and content. IN’ADDITION TO INCLUDING THE MATTERS REQUIRED ABOVE, AN AUDIT ENGAGEMENT LETTER] \Y MAKE REFERENCE TO, FOR EXAMPLE il Elaboration of the scope of the audit, incleding reference to applicable legislation, regulations, SAs, and ethical and other pronouncements of professional bodies to which the auditor adheres. 2. The form of any other communication of results of the audit engagement. 3. The fact that because of the Inherent limitations of an audit, together with the inherent limitations of internal control, there is an unavoidable risk that some material misstatements may not be detected, even though the audit is properly planned and performed in accordance with SAs. 4. Arrangements regarding the planning and performance of the audit, Including the ‘composition of the audit team, 5. The expectation that management will provide WR 6. The agreement of management to make available to the auditor draft FS and any accompanying other information in time to allow the auditor to complete the audit in accordance with the proposed timetable. 7. The agreemert of managemest to inform the auditor of facts that may affect the FS, of which management may become aware during the period from the date of the auditor's report to the date the FS are issued. 8. The basis on which fees are computed and any billing arrangements. 9. Arequest for rranagement to acknowledge receipt of the audit engagement letter and to agree to the terms of the engagement outlined therein. 10. The fact that the audit process may be subjected to a peer review under the Chartered Accountants Act, 1949, Scanned with CamScanner Stared ith ConcerGURUKUL FOR CA & CMA INTRODUCTION TO AUDITING jis | 11. Arrangements concerning the involvement of other auditors and experts in some aspects of the audit. 12. Arrangements conceming the involvement of Internal auditors and other staff of the entity. 13. Arrangements to be made with the predecessor auditor, if any, In the case of an initial audit. 14. Any restriction of the auditor's liability when such possibility exists. 15. Areference to any further agreements between the auditor and the entity. 16. Any obligations to provide audit working papers to other parties. [HIMITATION ON SCOPE PRIOR TO AUDIT ENGAGEMENT ACCEPTANCE If management or TCWG impose a limitation on the scope of the auditor's work in the terms of a proposed audit engagement such that the auditor believes the limitation will result in the auditor disclaiming an opinion on the FS, the auditor shall not accept such a limited engagement as an audit engagement, unless required by law or regulation to do so. [ACCEPTANCE OF A CHANGE IN ENGAGEMENT a When a client requests the auditor to change the terms of engagement which were agreed to earlier before completion of audit and the auditor considers that the proposed changed terms of engagement will provide a lower level of assurance by the auditor, the auditor should consider the following: ‘© Reason for the request for change In engagement ‘* Circumstances which necessitated the change If a change relates to Information that is Incorrect or otherwise unsatisfactory, the auditor should not agree to change the terms of exgagement. If auditor is unable to agree to change of the engagement and is not permitted to continue the original engagement, the auditor should withdraw from the engagement and also consider the need / obligation to report the circurrstances, which compelled him to withdraw, to board of directors or shareholders or related regulatory authority. [RECURRING AUDITS On recurring audits, the auditor shall assess whether circumstances require the terrts 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. The standard prescribes that auditor may decide not to send a new ‘engagement letter for each period. However, in following circumstances, the auditor may think it appropriate to send a new engagement letter to client. ‘* Any indication that the entity misunderstands the objective and scope of the adit. Any revised or special terms of the audit engagement. Arecent change of senlor management. A significant change in ownership. A significant change in nature or size of the entity's business, ‘A change in legal or regulatory requirements. ‘A change in the nancial reporting framework adopted in the preparation of the FS. Achange in other reporting requirements, Scanned with CamScanner Stared ith ConcerGURUKUL FOR CA & CMA INTRODUCTION TO AUDITING [AUDIT OF COMPONENTS (E.G. SUBSIDIARY, BRANCH, DIVISION, ETC) ‘When the auditor of parent company Is also the auditor of its subsidiary, branch or division, e should consider certain factors like legal requirements, independence of management, degree of ‘ownership by parent, extent of work performed by other auditors, ete. in deciding whether to issue separate engagement letters. FINANCIAL REPORTING FRAMEWORK PRESCRIBED BY LAW OR REGULATION - OTHER MATTERS] |aFFECTING ACCEPTANCE - If the auditor has determined that the financial reporting framework to be applied in the preparation of the FS is unacceptable but for the fact that itis prescribed by law or regulation, that auditor shall accept the audit engagement only if the following conditions are present: (2) Management agrees to provide additional disclosures in the FS require to avold the FS being misleading; and (b) [tis recognized in the terms of the audit engagement that: (i) The auditor's report on the FS will incorporate an Emphasis of Matter paragraph, drawing user’s attention to the additional disclosures, in accordance with SA 706 (Revised); and (il) Unless the auditor is required by law or regulation to express the auditor's opinion on the FS by using the phrases ‘present fairly, in all material respects”, or “glve a true and fair view” in accordance with the AFRF, the auditor’s opinion on the FS will not include such phrases. [MEANING OF FRAUD) ] ‘The Standard on Auditing (SA) 240 “The Auditor's Responsibilities Relating to Fraud in an Audit of Financial Statements” defines the term ‘fraud’ as — “An intentional act by one or more individuals among management, those charged with governance, employees, or third parties, involving the use of deception to obtain an unjust or illegal advantage”. ‘Two types of intentional misstatements are relevant to the auditor — © Misstatements resulting from fraudulent financial reporting and ‘© Misstatements resulting from misappropriation of assets. Although the auditor may suspect or, in rare cases, idestify the occurrence of fraud, the auditor does not make legal determinations of whether fraud has actually occurred. Misstatements in the financial statements can arise from either fraud or error. The distinguishing factor between fraud and error is whether the underlying action that results in the misstatement of the financial statements is intentional or unintentional. [RPESOF FRAUD FRAUDULENT FINANCIAL REPORTING It means intentional misstatements or omissions of ariounts or disclosures in financial statement to deceive financial statement users. Like — ‘© Manipulating, falsification (including forgery), or alteration of accounting records or supporting documentation form which the financial statements are prepared. Scanned with CamScanner Stared ith ConcerGURUKUL FOR CA & CMA INTRODUCTION TO AUDITING jie | ‘© Misrepresentation in or intentional omission from, the finan transactions or other significant information. * Intentional misapplication of accounting principles relating to amounts classification, manner of presentation, or disclosure. ‘* Recording fictitious Journal entries, particularly close to the end of an accounting period, to manipulate operating results or achieve other objectives. ‘+ Inappropriately adjusting assumptions and changing judgments used to estimate account balances, ‘© Omitting, advancing or delaying recognition in the financial statements of events and transactions that have occurred during the reporting period. ‘+ Concealing, or not disclosing, facts that could affect the amounts recorded in the financial staterrents. ‘* Engaging in complex transactions that are structured to misrepresent the financial position or financial performance of the entity. © Altering records and terms related to significant and unuszal transactions. MISAPPROPRIATION OF ASSETS It involves the theft of an entity's assets and is often perpetrated by employees in relatively small and immaterial amounts. However, it can also involve management who are usually more able to disguise or conceal misappropriations in ways that are difficult to detect. Misappropriation of assets can be accomplished in a variety of ways Including: ‘* Embezzling receipts (for example, misappropriating collection on accounts receivable or diverting receipts in respect of written ~ off accounts to personal bank accounts). ‘© Stealing physical assets or intellectual property (for example, stealing Inventory for personal use or for sale, stealing scrap for resale, colluding with a competitor by disclosing technological data in return for payment), ‘© Causing an entity to pay for goods and services not received (for example, payments to fictitious vendors, kickbacks paid by vendors to the entity’s purchasing agents in return for inflating prices, payments to fictitious employees). ‘* Using an entity's assets for personal use (for example, using the entity’s assets as collateral for a personal loan or a loan to a related party). [MISAPPROPRIATION OF GOODS i Fraud in the form of misappropriation of goods Is still more difficult to detect; for this management has to rely on various measures. The auditor can check: ‘© Record keeping about the physical quantities and thelr periodic checks, * Rules and procedures for allowing persons inside the area where goods are kept ‘+ External security arrangements to see that no goods are taken out without proper authority + Ratio analysis IEFALCATION OF CASH Examples of Inflation of payments: * Making payments against fictitious vouchers. ‘* Making payments against vouchers, the amounts whereof have been inflated. statements of events, Scanned with CamScanner Stared ith ConcerGURUKUL FOR CA & CMA INTRODUCTION TO AUDITING fio | ‘© Manipulating totals of wage rolls either by including therein names of dummy workers or by inflating them in any other manner. ‘© Casting a larger totals for petty cash expenditure and adjusting the excess In the totals of the detalled columns so that cross totals show agreement. Few Techniques of how receipts are suppressed are: ‘© Teeming and Landing: Amount received from a customer belng misappropriated; also to prevent its detection the money received from another customer subsequently being credited to the account of the customer who has pad earlier. Similarly, moneys recelved from the customer who has paid earlier. has pald thereafter being credited to the account of the second customer and sxch a practice Is continued so that no one account is outstanding for payment for any length of tine, which may lead the managerrent to either send out a statement of account to him or communicate with him. llarly, moneys received from the customer wko ‘© Adjusting unauthorized or fictitious rebates, allowances, discounts, etc. to customer's accounts and misappropriating amount paid by them. ‘© Writing off as debts in respect of such balances against which cash has already been received but has been misappropriated. © Not accounting for cash sales fully. ‘* Not accounting for miscellaneous receipts, eg., sale of scrap, quarters allotted to the employees, etc. ‘© Writing down asset values in entirety, selling them subsequently and misappropriating the proceeds. ‘© Bycasting wrong totals in the cash book [DETECITON OF FRAUD AND ERROR=DUTY OF ANAUDITOR' ‘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. It Is Important that management, with the oversight of those charged with governance, place a strong emphasis on fraud prevention, which may reduce opportunities for fraxd to take place, and fraud deterrence, which could persuade Individuals not to commit fraud because of the likelihood of detection and punishment. This involves a corsmitment to creating a culture of honesty and ettical behaviour which can be reinforced by an active oversight by those charged with governance. Reasonable Assurance and Unavaidable Risk ‘* An auditor conducting an audit in accordance with SAs is responsible for obtaining. reasonable assurance that the financial statements taken as a whole are fees from material misstatement, whether caused by fraud or error. ° As described in SA 200, owing to the inherent limitations of an audit, there is an unavoidable risk that some material misstatements of the financial statements will not be detected, even though the audit is properly planned and performed In accordance with the SAs. Scanned with CamScanner Stared ith ConcerGURUKUL FOR CA & CMA INTRODUCTION TO AUDITING Em Fraud Difficult To Detect Than Error ‘© The risk of not detecting a material misstatement resulting from fraxd Is higher than the risk of not detecting one resulting from error. ‘*Thisis because fraud may involve sophisticated and carefully organized schemes designed to conceal it, such as forgery, deliberate failure to record transactions, or intentional misrepresentations being made to the auditor. Such attempts at concealment may be even more difficult to detect when accompanied by collusion. Collusion may cause the auditor to believe that evidence is persuasive when It is, In fact, false. Management Fraud Difficult To Detect Than Employee Fraud ‘© Furtherrrore, the risk of the auditor not detecting a material misstatement resulting from management fraud is greater than for employee fraud, because management is frequently in a position to directly or indirectly manipulate accounting records, present fraudulent financial information or override control procedures designed to prevent similar frauds by other employees. Attitude of Professional Skepticism * When obtaining reasonable assurance, the auditor Is responsible for maintaining an attitude of professional skepticism throughout the audit, considering the potential for management override of controls and recognizing the fact that audit procedures that are effective for detecting error may not be effective in detecting fraud. ‘* The requirements in this SA are designed to assist the auditor in identifying and assessing the risks of material misstatement due to fraud and ix designing procedures to detect such misstatement. [FRAUD RISK FACTORS AND POSSIBILITY OF FRAUD Fraud Risk Factors may be defired as events or conditions that indicate an incentive or pressure to commit fraud or provide ax opportunity to commit fraud. FRAUD RISK FACTORS FRAUDULENT FINANCIAL REPORTING MISAPPROPRIATION OF ASSETS Incentives / Pressures Opportunities Attitudes / Rationalizations ISK FACTORS RELATING TO MISSTATEMENTS ARISING FROM FRADULENT FINANCIAL] EPORTING Incentives / Presst © High degree of competition or market saturation, accompanied by declining margins. ‘* High vulnerability to rapid changes, suck as changes in tecknology, product obsolescexce, or interest rates. ‘* Significant declines in customer demand and increasing business failures in either the industry or overall economy. © Operating losses making the threat of bankruptcy, foreclosure, or hostile takeover imminent. ‘© Recurring negative cash flows from operations or an inability to generate cash flows from operations while reporting earnings and earnings growth. © New accounting, statutory, or regulatory requirements. Scanned with CamScanner Stared ith ConcerGURUKUL FOR CA & CMA INTRODUCTION TO AUDITING Em Opportunities ‘© Significant related — party transactions not in the ordinary course of business or with related entitles not audited or audited by another firm. © Asstrong financial presence or ability to dominate a certain industry sector that allows the entity to dictate terms or conditions to suppliers or customers that may result in inappropriate or non — arm's length transactions. * Assets, llabllities, revenues, or expenses based on significant estimates that involve subjective judgments or uncertainties that are difficult to corroborate. ‘* Significant, unusual, or highly complex transactions, especially those close to period end that pose difficult “substance over form” questions. ‘© Significant bank accounts or subsidiary or branch operations in tax — haven jurisdictions for which there appears to be no clear business justification. Attitudes / Rationalization: ‘* Known history of violations of securities laws or other laws and regulations. © Excessive interest by management in maintaining or increasing the entity's inventory price or earnings trend. ‘* Management failing to remedy known significant deficiencies in internal control on a timely basis. ‘* An interest by management in employing inappropriate means to minimize reported ‘earnings for tax ~ motivated reasons. ‘* The owner manger makes no distinction between personal and business transactions. ‘* The relationship between management and the current or predecessor auditor Is strained, as exhibited by the following: ‘+ Frequent disputes with the current or predecessor auditor an accounting, auditing, or reporting matters. ‘* Unreasonable demands on the auditor, such as unrealistic time constraints regarding the completion of the audit or the issuance of the auditor's report. ‘© Restrictions on the auditor that inappropriately limit access to people or information or the ability to communicate effectively with those charged with governance. ‘© Domineering management behavior in dealing with the auditor, especially involving attempts to influence the scope of the auditor’s work or the selection or continuance of personal assigned to or consulted on the audit engagement. = FACTORS ARISING FROM) MISSTATEMENTS ARISING FROM MISAPPROPRIATION, OF |assetss: Incentives / Pressures: - — * Known or anticipated future employee layoffs. ‘* Recent or anticipated changes to employee compensation or benefit plans. ‘© Promotions, compensation , or other rewards inconsistent with expectations. o Jpportunities: ¢ Large amounts of cash on hand or processed. ‘* Inventory items that are small in size, of high value, or in high demand. ‘* Easily convertible assets, such as bearer bonds, diamonds, or computer chips. Scanned with CamScanner Stared ith ConcerGURUKUL FOR CA & CMA INTRODUCTION TO AUDITING . Fixed assets which are small in size, marketable, or lacking observable identification of ownership. Inadequate internal control over assets may Increase the susceptibility of misappropriation of those assets. For example, misappropriation of assets may accur because there is the following: Inadequate segregation of dutles or independent checks. Inadequate oversight of senlor management expenditures, such as travel and other reimbursements, Inadequate record keeping with respect to assets. Inadequate system of authorization and approval of trarsactions (for example, in purchasing) Inadequate physical safeguards over cash, investments, Inventory, or fixed assets. Lack of complete and timely reconciliations of assets. Lack of timely and appropriate documentation of transactions, for example, credits for merchandise returns. Lack of mandatory vacations for employees performing key control functions. Inadequate management understanding of Information technology, which enables information technology employees to perpetrate a misappropriation. Inadequate access controls over automated records, including controls over and review of computer systems event logs. Disregard for internal control over misappropriation of assets by overriding existing controls or by falling to take appropriate remedial action on known deficiencies in internal control. Behavior indicating displeasure or dissatisfaction with the entity or its treatment of the ‘employee. Change in behaviour or lifestyle that may indicate assets have been misappropriated. Tolerance of petty theft. {GIRCUMSTANCES RELATING TO POSSIBILITY OF FRAUD) DISCREPANCIES IN ACCOUNTING RECORDS Transactions that are not recorded in a complete or timely manner or are Improperly recorded as to amount, accounting period, classification, or entity policy. Unsupported or unauthorized balances or transactions. Last - minute adjustments that significantly affect financial results. Evidence of employee's access to systems and records inconsistent with that necessary to perform their authorized duties. Tips or complaints to the auditor about alleged fraud. CONFLICTING OR MISSING EVIDENCE Missing documents. Documents that appear to have been altered. Significant unexplained items on reconciliations Unusual discrepancies between the entity's records and confirmation replies. Large numbers of credit entries and other adjustments made to accounts receivable records. Scanned with CamScanner Stared ith ConcerGURUKUL FOR CA & CMA INTRODUCTION TO AUDITING Ell ‘© Missing or non — existent cancelled cheques in circumstances where cancelled cheques are ordinarily returned to the entity with the bank statements. ‘© Missing inventory or physical assets of significant magnitude. ‘* Unavailable or missing electronic evidence, Inconsistent with the entity's record retention practices or policies, PROBLEMATIC OR UNUSUAL RELATIONSHIPS BETWEEN AUDITOR AND MANAGEMENT '* Denial access to records, facil whom audit evidence might be sought. * Undue time pressures imposed by management to resolve complex or contentious isses. ies, certain employees, customers, vendors, or others from ‘* Unusual delays by the entity in providing requested information. ‘+ Unwillingness to facilitate auditor access to key electronic files for testing through the use of, computer —assisted audit techniques. ‘© Denial of access to key IT operations staff and facilities, including security, operations, and systems development personnel. ‘* Anunwillingness to add or revise disclosures in the financial statements to make them more complete and understandable. ‘+ Anunwillingness to address identified deficiencies in Internal control on a timely basis. OTHERS ‘© Unwillingness by management to permit the auditor to meet privately with those charged with governance. ‘* Accounting policies that appear to be at variance with indastry norms. © Frequent changes in accounting estimates that do not appear to result from changed circumstances. ‘© Tolerance of violations of the entity's Code of Conduct. [FRAUD REPORTING REPORTING TO THE CENTRAL GOVERNMENT ‘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 of fraud involving such amount or amounts as may be prescribed, Is being or has been committed in the company by its officers or employees, the auditor shall report the matter to the Central Government within such time and in such manner as may be prescribed. REPORTING UNDER CARO, 2016: The auditor is also required to report under clause (x) of paragraph 3 of Companies (euditor’s Report) Order, 2016, whether any fraud by the company or any fraud on the Company by Its officers or employees has been noticed or reported during the year. If yes, the nature and the amount involved is to be Indicated. AUDITOR UNABLE TO CONTINUE THE ENGAGEMENT If, as a result of a misstatement resulting from fraud or suspected fraud, the auditor encounters exceptional circumstances that bring into question the auditor's ability to continue performing the audit, the auditor shall: Scanned with CamScanner Stared ith ConcerGURUKUL FOR CA & CMA INTRODUCTION To AUDITING ELA (2) Determine 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 whether i is appropriate to withdraw from the engagement, where withdrawal Is possible under applicable law or regulation; and (c)__ If the auditor withdraws: (i) Discuss with the appropriate level of management and those charged with governance the auditor's withdrawal from the engagement and the reasons for the withdrawal; and (il) 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. ‘©The risk that the auditor expresses an inappropriate audit opinion when the financial statements are materially misstated. © Audit risks a function of the risks of material misstatement and detection risk. ‘+ For purposes of the SAs, audit risk does not include the risk that the auditor might express an opinion that the Sinancial statements are materially misstated when they are not. This risk is ordinarily insignificant. ‘© Further, audit risk is a tecknical term related to the process of auditing; it does not refer to the auditor's business risks such as loss from litigation, adverse publicity, or other events arising in connection with the audit of financial statements. [INTER= RELATIONSHIP OF COMPONENTS OF AUDIT RISK — a ‘© The inherent and control risks are functions of the entity's business and its environment and the nature of the account balances or classes of transactions, regardless of whether an audit, Is conducted. ‘* Even though inherent and control risks cannot be controlled by the auditor, the auditor can assess them and design his substantive procedures to produce on acceptable level of detectiox risk, thereby reducing audit risk to an acceptably low level. ‘* As per SA 200, for a given level of audit risk, the acceptable level of detection risk bears an inverse relationship to the assessed risks of material misstatement at the assertion level. For example, the greater the risks of material misstatement the auditor believes exists, the less the detection risk that can be accepted and, accordingly, the more persuasive the audit evidence required by the auditor. [MISSTATEMENT ‘Misstatement may be defined as difference between the amount, 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. Misstatements can arise from error or fraud. [INHERENTRISK — - The susceptibility of an assertion about a class of transaction, account balance or disclosure to a misstatement that could be material, either individually or when aggregated with other misstatements, before consideration of any related controls. Scanned with CamScanner Stared ith ConcerGURUKUL FOR CA & CMA INTRODUCTION TO AUDITING Ell For example, + Complex calculations or for accounts consisting of amounts derived from accounting estimates Technological developments might make a particular product obsolete Lack of sufficient working capital to continue operations Declining industry characterized by a large number of business failures. (CONTORERISK _s 7 Zs The risk that a misstatement that could occur in an assertion about a class of transaction, account balance or disclosure and that could be material, either individually or when aggregated with other misstatements, will not be prevented, or detected and corrected, on a timely basis by the entity's internal control. [DETECTON RISK The risk that the procedures performed by the auditor to reduce audit risk to an acceptably low level will not detect a misstatement that exists and that could be material, either individually or when aggregated with other rrisstatements Detection risk relates to the nature, timing, and extent of the auditor’s procedures that are determined by the auditor to reduce audit risk to an acceptably low level. It is therefore a function of the effectiveness of an audit procedure and of its application by the auditor. Matters such as: * oe ‘© Adequate planning; ‘© Proper assignment of personnel to the engagement team; ‘© The application of professional skepticism; and ‘* Supervision and review of the audit wark performed assist to enhance the effectiveness of an audit procedure and of its application and reduce the possibility that an auditor might select an inappropriate audit procedure, misapply an appropriate audit procedure, or misinterpret the audit results. 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