Summary on NSA-540

Risk assessment procedure

Understanding on
 Requirement of fin. Reporting framework
 Management procedure
 Outcome of estimates of last year’s a/cing Estimates

Response to assessed risk

1. Auditor examines whether the accounting estimates have been
applied in a consistent manner across different years.
2. Auditor examines whether accounting estimates have been
recorded with proper internal controls in place, such as maker-
checker controls.
3. Auditor checks whether the recording of accounting estimates is
in line with relevant Financial Reporting Framework.
4. Auditor examines the likelihood of presence of management
bias and estimation uncertainty. If such biasness or uncertainty
is high, auditor will extend the Nature, timing and extent of
audit procedures.
5. Auditor will check the reasonableness of assumptions and
methods applied by the management while recording
accounting estimates.
6. Auditor will recalculate the value of accounting estimates by
applying reasonable assumptions. If the value so calculated by
the auditor differs from the value as recorded by management,
auditor will ask the management for reasons behind the
assumptions taken by management. If the financial statements
 are still not rectified by the management where rectification is
necessary, auditor will communicate it to TCWG and consider
modifying his opinion.

Response to significant risk

 Examine alternative assumption
 Examine reasonableness of assumption adopted by them
 Develop a range on the basis of audit evidence
 Check whether Estimation uncertainty has been disclosed by
mgmt.
 Check management bias
Written Representation
Assumption by management are reasonableness in their opinion

Working papers
Basis of conclusion whether [estimate is right/wrong]

Indicators of mgmt.’s bias

 Difference between Auditor’s range & estimate by
mgmt.

Ask mgmt. to adjust

Adjust adjust

Ok Q/A

(Summary of NSA-250)
Effect of law &Regulation

Direct effect on Do not have direct Heavily regulated Non –Compliance

Financial statement effect on Financial industries e.g. Banks
 DD

Fine Litigation Going

Responsibility Concern

Management Auditor

Compliance with Law Identify mis- stat due to

&Regulation Non – Compliance

Obtain detailed Audit Can obtain comparatively less

Evidence regarding detailed Evidence regarding laws
compliance with laws that do not directly affect Fin.
having direct effect on Fin. Stmt. mt&regulation
statements
Apply Audit procedure to
help identity Non –
Compliance

Inquiry of mgmt Inspecting /Check correspondence

With Authorities

Other Matters:-
 1.Auditor should report the misstatements to
TCWG or management, based on the
materiality and merit of the topic
2.Auditor should modify his opinion based on NSA
705 based on his evaluation of non-compliance.
3.Auditor should report the misstatements to
regulatory authorities, where so required,
under any Act.

Audit Activity

Two Steps

Planning: - Risk Assessment: - 1. High risk 2. Low Risk

Execution Stage :- Detailed audit procedures.

Accounting Estimates

Risk Based Auditing

 1. Preliminary Activity :- a. Whether to continue audit or not ?
b. Whether to accept audit or not ?

NSA 210 , 220-

2. If auditor decides to continue or accept the audit, he will sign the TOE
3. After signing the ToE, Auditor goes for planning his audit. While planning,
he applies RAP.
4. Further audit procedure: - 1. Compliance procedure 2. Substantive
procedures
5. Evidence
6. Opinion

1+2+3 :- Pre-execution

4 :- Execution stage

5 and 6 :- post execution stage

Related Party Transactions

FA

Inventory

Accounting estimate

1. RAP
Inquiry
Inspection
Observation
ARP
Stage 1 :- Pre-execution stage

Client -------------------- Data 1. Trial Balance 2. Day book 3. B/s, PL ----- Audit
Manager ------------

Stage 2 :- Execution Stage

Stage 3:- Post Execution Stage

Estimation uncertainty:-

ESOP

Management Bias :- Biasness – Lack of Neutrality

Bank – loan

115(3)

- 1. All information ?
- 2. Books of accounts ?
- 3. CFS, B/S………

A, b,……., d,e,f,g

All information

Books of accounts

B/s, PL……….Date………t/F

Employee – fraud/ Director Fraud

F – Fraud on accountancy

G - suggestions

Laws having direct impact on F.S.

1. Direct Tax
2. VAT
3. Labour

Laws that don’t have direct impact on F.S

1. Enviornmental protection – fine, penalty
Audit Ko Inherent Limitations :- Estimates and judgements

Estimate: - Precise value – identify nabhko situation,

approximate value consider garxau
Management Bias :- Management biased bhayako
situation, lack of neutrality :-

Co.---- Loan -----

Precisely measure ------ play garna sakidaina
Estimate garne thouma ------play garinxa
Provision for bad debt
Depreciation
Estimation Uncertainty
Estimate is uncertain. ----- estimate may be correct, may
be incorrect ------possibility
Estimation uncertainty ----- low, high
Employee stock option plan (ESOP)
A significant fraud involving a huge sum of money
was detected in an organization after the auditor
has issued his clean opinion for the affairs of the
fiscal year. what will be the consequences of the
detection of the fraud on auditor and his audit
opinion? (exam june 2021)
While auditing the Z ltd., you observe certain
material financial statement assertions have been
based on estimates made by the management. As
the auditor how do you minimize the risk of
material misstatements?

Audit Planning _ 315 _ IR/CR – RAP – estimate’s …..

risk ---- DR ---- NTE of CP and SP