ISA 500 Page 74

ISA 500

Sufficient Appropriate Audit Evidence (Ref: 6, A1-A25)

Sufficiency is the measure of the quantity of audit evidence.

Appropriateness is the measure of the quality of audit evidence. (Includes Relevance &
Reliability)

a) RELEVANCE
Logical connection with purpose of the audit procedure and the assertion under
consideration.

b) RELIABILITY
Reliability is influenced by its source and nature, and circumstances under which it is
obtained, including controls over its preparation and maintenance.

Generalizations about the reliability

1) Evidence from independent sources is more reliable than outside the entity.
2) Evidence generated internally is increased when related controls are effective.
3) Evidence obtained directly by auditor is more reliable than obtained indirectly.
4) Evidence in documentary form is more reliable than evidence obtained orally.
5) Evidence provided by original documents is more reliable than photocopies or
facsimiles etc

Information produced by entity and used for auditor's purposes(Ref: 7)

When using information produced by entity, auditor shall:
 Obtain audit evidence about accuracy & completeness
 Evaluate whether information is sufficiently precise and detailed for auditor's purposes.

Audit Procedures for Obtaining Audit Evidence (Ref: A10-A25)

 Risk assessment procedures; and

 Further audit procedures, which comprise:
 Tests of controls; and
 Substantive procedures including:
o Tests of details and
o Substantive analytical procedures.
ISA 500 Page 75

Inspection  Examining records or documents

 Physical examination of an asset.
Observation  Looking at a process or procedure being performed by others.
 It is limited to the point in time at which the observation takes place
 It may be affected by knowledge of the fact that it is being observed
External Direct written response to the auditor from a third party.
Confirmation (Account balances ,confirmation of the terms of agreements or
transactions)
Recalculation Checking the mathematical accuracy of documents or records.
Reperformance Independent execution of procedures or controls that were originally
performed as part of the entity's internal control.
Analytical Evaluations of financial information through analysis of probable
Procedures relationships among both financial & non-financial data.
Inquiry Seeking information of knowledgeable persons within entity or outside
entity. Inquiries may range from formal written inquiries to informal
oral inquiries.

Reliability of Information Produced by a Management's Expert (Ref: 8, A35-A52)

Management's expert
An individual or organization possessing expertise in a field other than accounting or auditing,
whose work in that field is used by the entity to assist the entity in preparing F/S.

(a) Evaluate competence, capabilities and objectivity of expert;

- Competence relates to nature and level of expertise.

- Capability relates the ability of expert to exercise that competence.
- Objectivity relates to possible effects that bias, conflict of interest or the influence of others
may have on the professional or business judgment of the expert.

Information regarding competence, capabilities and objectivity may come from:

 Personal experience with previous work of that expert.
 Discussions with that expert.
 Discussions with others who are familiar with that expert's work.
 Knowledge of expert's qualifications, membership of professional body, license to practice
etc.
 Published papers or books written by that expert.
 Auditor's expert used to assist auditor for management's expert.
ISA 500 Page 76

Matters relevant to such evaluation may include

 Whether expert's work is subject to technical standards or other industry requirements
 Relevance of competence, including any areas of specialty within that expert's field.
 Competence with respect to relevant accounting requirements
 Whether it may be necessary to reconsider the initial evaluation of competence,
capabilities and objectivity of the management's expert as the audit progresses.

(b) Obtain an understanding of the work of that expert; and

 Whether that expert's field has areas of specialty within it that are relevant to the audit.
 Whether any professional or other standards, and regulatory or legal requirements apply.
 What assumptions and methods are used by the management's expert, and whether they
are generally accepted within that expert's field and appropriate for financial reporting
purposes.
 The nature of internal and external data or information he uses.

Evaluating engagement letter etc between entity and that expert may assist auditor in
determining the appropriateness of:
 Nature, scope and objectives of that expert's work;
 Respective roles and responsibilities of management and expert
 Nature, timing and extent of communication between them.

(c) Evaluate appropriateness of expert work as audit evidence

 Relevance & reasonableness of expert's findings or conclusions, their consistency with

other audit evidence, and whether they have been appropriately reflected in F/S;
 Relevance & reasonableness of assumptions and methods used;
 Relevance, completeness, and accuracy of source data used.

Nature, timing and extent of audit procedures in relation to Part (a) – (c) may be
affected by

 Nature and complexity of the subject matter.

 Risks of material misstatement in the matter.
 Availability of alternative sources of audit evidence.
 Nature, scope and objectives of the management's expert's work.
 Whether management's expert is employed or is outsourced
 Extent to which management can exercise control or influence over work of that expert.
 Nature and extent of any controls within entity over management's expert's work.
 Auditor's knowledge and experience of expert's field of expertise
 Auditor's previous experience of the work of that expert.
ISA 500 Page 77

Selecting Items for Testing to Obtain Audit Evidence (Ref: 10, A53-A57)

1) Selecting all items (100% examination);

100% examination may be appropriate when:

 Population constitutes a small number of large value items

 There is a significant risk and other means do not provide sufficient appropriate audit
evidence
 Repetitive nature of a calculation or other process performed automatically by an
information system makes a 100% examination cost effective.

2) Selecting specific items; and

 High value or key items.

(e.g. items that are suspicious, unusual, particularly risk-prone or that have a history of
error)

 All items over a certain amount.

 Items to obtain information.

3) Audit sampling.
Conclusions to be drawn about an entire population on basis of testing a sample drawn
from it

Inconsistency in, or Doubts over Reliability of Audit Evidence (Ref: 11, A58)

 If audit evidence obtained from one source is inconsistent with that obtained from
another; or
 If auditor has doubts over the reliability of information to be used as audit evidence

Auditor shall determine what modifications or additions to audit procedures are necessary to
resolve the matter, and shall consider the effect of the matter on other aspects of the audit

Important Paragraphs 8, 11, A14-A25, A31, A36, A38, A40, A45, A46, A48, A53, A54
ISA 501 Page 78

ISA 501

INVENTORY (4-8, A1-A16)

If inventory is material to the F/S, the auditor shall obtain sufficient appropriate audit
evidence regarding the existence and condition of inventory by:
 Attendance at physical inventory counting (unless impracticable) to:
- Evaluate management's instructions and procedures for recording and controlling the
results of the entity's physical inventory counting
- Observe the performance of management's count procedures
- Inspect the inventory
- Perform test counts
 Performing audit procedures over the entity's final inventory records to determine
whether they accurately reflect actual inventory count results.

ATTENDANCE AT PHYSICAL INVENTORY COUNTING (Ref: 4, A1-A8)

Management ordinarily establishes procedures for physical count of inventory at least once a
year to serve as a basis for preparation of F/S and, to ascertain the reliability of entity's
perpetual inventory system (if applicable).

Attendance at physical inventory counting involves:

 Inspecting the inventory to ascertain its existence and evaluate its condition, and
performing test counts;
 Observing compliance with management's instructions and performance of procedures
for recording and controlling the results of the physical inventory count; and
 Obtaining audit evidence as to the reliability of management's count procedures.

Matters relevant in planning attendance at physical inventory counting include:

 Risks of material misstatement related to inventory.
 Nature of the internal control related to inventory.
 Whether adequate procedures are expected to be established and proper instructions
issued for inventory counting.
 The timing of physical inventory counting.
 Whether the entity maintains a perpetual inventory system.
 Whether the assistance of an auditor's expert is needed.(ISA 620)
 Locations at which inventory are held, including the materiality of the inventory and the
risks of material misstatement at different locations, for selecting locations for attendance.
ISA 501 Page 79

PHYSICAL INVENTORY COUNTING CONDUCTED OTHER THAN AT THE DATE OF THE F/S
(Ref: 5, A9-A11)
If physical inventory counting is conducted at a date other than date of F/S, auditor shall, in
addition to given procedures, perform audit procedures to obtain audit evidence about
whether changes in inventory between count date and date of F/S are properly recorded.
Relevant matters for consideration when designing such audit procedures include:
 Whether the perpetual inventory records are properly adjusted.
 Reliability of the entity's perpetual inventory records.
 Reasons for significant differences between the information obtained during the physical
count and the perpetual inventory records.

INABILITY OR IMPRACTICABILITY TO ATTEND PHYSICAL INVENTORY COUNTING

(Ref: 7, A12-A14)

If auditor is unable to attend physical inventory counting due to unforeseen circumstances,

auditor shall make or observe some physical counts on an alternative date, and perform
procedures on intervening transactions.
If attendance at physical inventory counting is impracticable, auditor shall perform
alternative audit procedures to obtain sufficient appropriate audit evidence regarding the
existence and condition of inventory.
(e.g. inspection of documentation of the subsequent sale of specific inventory items acquired
or purchased prior to the physical inventory counting)
If it is not possible to obtain sufficient appropriate audit evidence by performing alternative
audit procedures, auditor shall modify the opinion in accordance with ISA 705.

INVENTORY UNDER THE CUSTODY AND CONTROL OF A THIRD PARTY CONFIRMATION

(Ref: 8, A15-A16)

If such inventory is material to F/S, auditor shall obtain sufficient appropriate audit evidence
regarding existence and condition of that inventory by performing one or both of following:
 Request confirmation from the third party as to the quantities and condition of inventory
held on behalf of the entity. (as per ISA 505)
 Perform inspection or other audit procedures appropriate in the circumstances.
Examples of other audit procedures include:
 Attending, or arranging for another auditor to attend, the third party's physical counting
of inventory, if practicable.
 Obtaining another auditor's report, or a service auditor's report, on adequacy of third
party' s internal control for ensuring that inventory is properly counted and safeguarded.
 Inspecting documentation regarding inventory held by third parties, for example,
warehouse receipts.
 Requesting confirmation from other parties if inventory has been pledged as collateral.
ISA 501 Page 80

Litigation and Claims (9-12, A17-A25)

Auditor shall design and perform audit procedures in order to identify litigation and claims
involving the entity which may give rise to a risk of material misstatement, including:
a) Inquiry of management and, where applicable, others within the entity, including in-house
legal counsel;
b) Reviewing minutes of meetings of TCWG and correspondence between entity and its
external legal counsel;
c) Reviewing legal expense accounts.

Communication with the Entity's External Legal Counsel

If auditor assesses a risk of material misstatement regarding litigation or claims that have
been identified, or when audit procedures performed indicate that other material litigation or
claims may exist, auditor shall, in addition to procedures required by other ISAs, seek direct
communication with entity's external legal counsel.

Auditor shall do seek direct communication through letter of inquiry, prepared by

management and sent by him

In some cases, auditor may seek communication through a letter of general inquiry
requesting external legal counsel to inform the auditor of any litigation and claims that
counsel is aware of, together with an assessment of outcome of the litigation and claims etc

If it is considered unlikely that external legal counsel will respond appropriately to a letter of
general inquiry (e.g. if their professional body prohibits such response), auditor may seek
direct communication through a letter of specific inquiry including:
 A list of litigation and claims;
 Where available, management's assessment of outcome of each of the identified litigation
and claims and its estimate of the financial implications, including costs involved; and
 A request that entity's external legal counsel confirm the reasonableness of management's
assessments and provide auditor with further information if list is incomplete or incorrect

In certain circumstances, auditor also may judge it necessary to meet with the entity's
external legal counsel to discuss the likely outcome of the litigation or claims. This may be
the case, for example, where:
 The auditor determines that the matter is a significant risk.
 The matter is complex.
 There is disagreement between management and the entity's external legal counsel.

Ordinarily, such meetings require management's permission and are held in presence of a
representative of management
ISA 501 Page 81

Written Representations
Auditor shall request management and, where appropriate, TCWG to provide written
representations that all known actual or possible litigation and claims whose effects should be
considered when preparing F/S have been disclosed to auditor and accounted for in
accordance with applicable financial reporting framework.

Auditor’s Response

Auditor shall modify the opinion in the auditor's report in accordance with ISA 705 where:
 Management refuses to give the auditor permission to communicate or meet with the
entity's external legal counsel, or the entity's external legal counsel refuses to respond
appropriately to the letter of inquiry, or is prohibited from responding; and
 Auditor is unable to obtain sufficient appropriate audit evidence by performing
alternative audit procedures.

Segment Information (13, A26-A27)

Depending on the AFRF, entity may be required or permitted to disclose segment information
in F/S. Auditor's responsibility regarding presentation and disclosure of segment information
is in relation to F/S taken as a whole. Accordingly auditor is not required to perform audit
procedures to express an opinion on segment information presented on a standalone basis.

Auditor shall obtain sufficient appropriate audit evidence regarding presentation and
disclosure of segment information in accordance with the AFRF by:
 Obtaining an understanding of methods used by management in determining segment
information, and:
- Evaluating whether such methods are likely to result in the disclosure in accordance
with the AFRF; and
- Where appropriate, testing the application of such methods; and
 Performing analytical procedures or other appropriate audit procedures

Understanding of the Methods Used by Management

Examples of matters that may be relevant when obtaining such an understanding include:
 Sales, transfers and charges between segments, and elimination of inter-segment amounts
 Comparisons with budgets and other expected results
(e.g. operating profits as a percentage of sales)
 The allocation of assets and costs among segments.
 Consistency with prior periods, and adequacy of the disclosures with respect to
inconsistencies.

Important Paragraphs 4, 8 , 9 ,11 ,13, A3, A4, A11, A12, A16, A23, A24, A27
ISA 505 Page 82

ISA 505

External confirmation Audit evidence obtained as a direct written response to the auditor
from a third party (the confirming party), in paper form, or by electronic or other medium.

External Confirmation Procedures (Ref: 7, A1-A7)

Auditor shall maintain following control over confirmation requests

1. Determining the information to be confirmed or requested

(e.g. account balances ,confirm terms of agreements etc)
2. Selecting appropriate confirming party
Sent to confirming party who is knowledgeable about information to be confirmed
3. Designing confirmation requests
 Including valid addresses, method of reply to auditor etc
 It may directly affect confirmation response rate, reliability and nature of audit
evidence
Factors to consider when designing confirmation requests:
 Assertions being addressed.
 Risks of material misstatement.
 Layout and presentation of the confirmation request.
 Prior experience on audit or similar engagements.
 Method of communication
(e.g. in paper form/electronic/other medium).
 Management's authorization or encouragement to confirming parties to respond to
auditor
 Ability of confirming party to confirm information
4. Sending requests, including follow-up requests when applicable, to the confirming
party.
Auditor may after verification of original address, send an additional or follow-up request

Management's Refusal to Allow Auditor to Send a Request (Ref: 8-9, A8-A10)

 Inquire reasons for refusal, and seek audit evidence about their validity and
reasonableness;
 Evaluate implications of refusal on risk assessment and on nature, timing and extent of
other audit procedures
 Perform alternative audit procedures.
ISA 505 Page 83

If management's refusal is unreasonable, or auditor is unable to obtain audit evidence from

alternative audit procedures, auditor shall communicate with TCWG. Auditor Shall also
determine the implications in accordance with ISA 705.

Negative Confirmations (Ref: 15, A23)

Positive confirmation request

A request that the confirming party respond directly to the auditor indicating whether the
confirming party agrees or disagrees with the information in the request, or providing the
requested information.

Negative confirmation request

A request that the confirming party respond directly to auditor only if the confirming party
disagrees with the information provided in the request.

Auditor shall not use negative confirmation requests as sole substantive audit procedure
unless all of the following are present:
 Risk of material misstatement is low and auditor has obtained evidence regarding
operating effectiveness of controls
 Population consists of large number of small, similar items
 A very low exception rate is expected; and
 Auditor is not aware of any unusual circumstances.

Risks of using negative confirmations:

 Failure to receive a response does not indicate receipt by addressee or verification of
information.
 Provides significantly less persuasive audit evidence than positive confirmation request.
 Confirming parties may reply in case of unfavorable balance and may not reply in case of
favorable balance

Evaluating the Evidence Obtained (Ref: 16, A24-A25)

When evaluating results of confirmation requests, auditor may categorize such results as:
 Response indicating agreement of confirming party;
 A response deemed unreliable;
 A non-response; or
 A response indicating an exception.
ISA 505 Page 84

Results of the External Confirmation Procedures

UNRELIABLE RESPONSES
Auditor may conclude that it would be appropriate to revise risk assessment and modify
planned audit procedures.

NON-RESPONSES

Non-response
A failure of the confirming party to respond, or fully respond, to a positive confirmation
request, or a confirmation request returned undelivered.

Shall perform alternative audit procedures to obtain relevant and reliable audit evidence. E.g.

For accounts receivable Examining specific subsequent cash receipts, shipping

documentation, and sales near period end.
For accounts payable Examining subsequent cash disbursements or correspondence
from 3rd parties, and other records, such as goods received notes.

WHEN A RESPONSE TO A POSITIVE CONFIRMATION REQUEST IS NECESSARY

 Information available to corroborate management's assertion(s) is only available outside

entity.
 Specific fraud risk factors prevent auditor from relying on evidence from entity.
Alternative audit procedures will not provide assurance. If auditor does not obtain such
confirmation, he shall determine the implications for audit & opinion in accordance with ISA
705

EXCEPTIONS

Exception: A response that indicates a difference between information requested to be

confirmed, or contained in the entity's records, and information provided by the confirming
party. Some exceptions do not represents misstatement

 Investigate exceptions to determine whether or not they are indicative of misstatements.

 Exceptions may indicate misstatements or potential misstatements in F/S.
- When misstatement is identified, auditor shall evaluate whether it is indicative of
fraud.
- Exceptions may create suspect over responses from similar confirming parties or
accounts
- Exceptions also may indicate deficiencies in internal control over financial reporting.
ISA 505 Page 85

RELIABILITY OF RESPONSES TO CONFIRMATION REQUESTS

 Factors that may indicate doubts about reliability of a response include that:
- Response was received by the auditor indirectly; or
- Response appeared not to come from the originally intended confirming party.
 If auditor has doubts over reliability of response, he shall obtain further audit evidence to
resolve those doubts
 Auditor may determine whether to modify or add procedures to resolve such doubts
- May choose to verify source and contents of a response by contacting the confirming
party.
- If response has been returned to auditor indirectly, auditor may request confirming
party to respond directly to auditor

Responses received Involve risks as to reliability because proof of origin and

electronically
(e.g. Fax or email)
authority may be difficult to establish, and alterations may be
difficult to detect
 Process used by auditor & respondent creating a secure
environment for electronic responses may mitigate risks.
 If auditor is satisfied that process is secure and properly
controlled, reliability of related responses is enhanced.
 Process might incorporate various techniques for
validating identity of sender in electronic form e.g.
encryption, electronic signatures etc.

Confirming party uses Auditor may perform procedures to address the risks that:
a third party to  Response may not be from the proper source
coordinate and  Respondent may not be authorized to respond
provide responses  Integrity of transmission may have been compromised.

Oral response  Oral response does not meet definition of external

confirmation
 However auditor may, request confirming party to
respond in writing directly to auditor.
 If no such response is received, auditor seeks audit
evidence through alternate procedures.

Restrictive language in Such restrictions do not necessarily invalidate the reliability of

response response as audit evidence.
(As Its only valid for auditor)

Important Paragraphs 7, 8, 13, 15, A4, A8, A11, A13, A18, A20
ISA 510 Page 86

ISA 510

Initial audit engagement

An engagement in which either:
- F/S for prior period were not audited; or
- F/S for prior period were audited by a predecessor auditor

Opening balances
Those account balances that exist at the beginning of period. These are based upon closing
balances of prior period and reflect the effects of transactions and events of prior periods and
accounting policies applied in prior period. Opening balances also include matters requiring
disclosure that existed at beginning of period, such as contingencies & commitments.

Predecessor auditor
The auditor from a different audit firm, who audited F/S of an entity in the prior period and
who has been replaced by the current auditor

Audit Procedures (Ref: 5-9, A1-A7)

Opening Balances

Auditor shall read most recent F/S &predecessor auditor report

Auditor shall obtain sufficient appropriate audit evidence about whether opening balances
contain misstatements that materially affect current period’s F/S by:

 Determining whether prior period’s closing balances have been correctly brought forward
/ restated to current period
 Determining whether opening balances reflect application of appropriate accounting
policies; and

 Performing one or more of the following:

- Where prior year F/S were audited, reviewing predecessor auditor’s working papers
to obtain evidence regarding opening balances;
- Evaluating whether audit procedures performed in current period provide evidence
relevant to opening balances; or
- Performing specific audit procedures to obtain evidence regarding the opening
balances.
ISA 510 Page 87

Nature and extent of audit procedures necessary to obtain sufficient appropriate audit
evidence regarding opening balances depend on:
 Accounting policies followed by the entity.
 Nature of account balances, classes of transactions & disclosures and risks of material
misstatement in current period’s F/S.
 Significance of opening balances relative to current period’s F/S.
 Whether prior period’s F/Swere audited and, if so, whether the predecessor auditor’s
opinion was modified.

If prior period’s F/S were audited by a predecessor auditor, auditor may be able to obtain
sufficient appropriate audit evidence by reviewing his working papers.

If auditor obtains audit evidence that opening balances contain misstatements that could
materially affect current period’s F/S, auditor shall perform such additional audit procedures
appropriate to determine the effect on the current period’s F/S.

If auditor concludes that misstatements exist in current F/S, auditor shall communicate with
appropriate level of management &TCWG

Consistency of Accounting Policies

Auditor shall obtain sufficient appropriate audit evidence about

 Whether accounting policies reflected in opening balances have been consistently applied
in current period’s F/S; and
 Whether changes in accounting policies have been appropriately accounted for and
adequately disclosed in accordance with AFRF

Relevant Information in the Predecessor Auditor’s Report

If there was a modification in predecessor auditor’s report, auditor shall evaluate the effect of
matter giving rise to modification in assessing the risks of material misstatement in current
period’s F/S

Audit Conclusions and Reporting (Ref: 10-13, A8-A9)

Opening Balances

If auditor is unable to obtain sufficient appropriate audit evidence regarding opening

balances, auditor shall express a qualified opinion or disclaim an opinion

If auditor concludes that opening balances contain a misstatement that materially affects
current periodF/S and effect of misstatement is not appropriately accounted for or not
adequately disclosed, the auditor shall express a qualified opinion or an adverse opinion
AUDITING
ISA 510 Page 88

Consistency of Accounting Policies

If the auditor concludes that:

 Current period’s accounting policies are not consistently applied in relation to opening
balances in accordance with AFRF; or
 Change in accounting policies is not appropriately accounted for or not adequately
disclosed in accordance with AFRF

Auditor shall express a qualified opinion or an adverse opinion

Modification to the Opinion in the Predecessor Auditor’s Report

If the modification remains relevant and material to current period’s F/S, auditor shall
modify opinion on current period’s F/S in accordance with ISA 705 & ISA 710

In some cases modification may not be relevant and material to current period’s F/S. (e.g. scope
limitation in prior period has been resolved in current period)

Important Paragraphs 6, 7, 8, 12, 13, A3, A6, A8

ISA 520 Page 89

ISA 520

Analytical procedures means evaluations of financial information through analysis of probable

relationships among both financial and non-financial data. Analytical procedures also
encompass such investigation as is necessary of identified fluctuations or relationships that are
inconsistent with other relevant information or that differ from expected values by a significant
amount

Analytical procedures include consideration of comparisons of entity's financial information

with:
 Comparable information for prior periods.
 Anticipated results of entity (e.g. budgets or forecasts) or auditor expectations (e.g
depreciation)
 Similar industry information

Analytical procedures also include consideration of relationships, e.g :

 Among elements of financial information expected to conform to a predictable pattern
based on the entity's experience e.g. gross margin percentages.
 Between financial information and relevant non-financial information.

Substantive Analytical Procedures (Ref: 5, A4-A16)

May be tests of details, substantive analytical procedures, or a combination of both.

When designing and performing substantive analytical procedures, the auditor shall:

a) Determine suitability of particular substantive analytical procedures for given

assertions, taking account of risks of material misstatement and tests of details, if
any, for these assertions;

Some rules regarding suitability of substantive procedure are:

 More applicable to large volumes of transactions that tend to predictable over time
 Suitability of a particular analytical procedure will depend upon the auditor's
assessment of how effective it will be in detecting a misstatement.
 In some cases, even a straightforward predictive model may be effective.
 Different types of analytical procedures provide different levels of assurance.
 Determination of the suitability is influenced by the nature of the assertion and the
auditor's assessment of the risk of material misstatement.
 Particular substantive analytical procedures may also be considered suitable when
tests of details are performed on the same assertion.
ISA 520 Page 90

b) Evaluate reliability of data from which expectation of recorded amounts or ratios is

developed

Influenced by its source and nature and is dependent on the circumstances under which it
is obtained. Following are relevant when determining reliability of data for analytical
procedures:

 Source of the information available.

 Comparability of information available.
 Nature and relevance of the information available.
 Controls over the preparation of the information

c) Develop an expectation of recorded amounts or ratios and evaluate whether

expectation is sufficiently precise to identify a misstatement

 Accuracy with which expected results of substantive analytical procedures can be

predicted.
 Degree to which information can be disaggregated.
 Availability & reliability of information(financial & non-financial)

d) Determine amount of any difference of recorded amounts from expected values that
is acceptable without further investigation.

Influenced by materiality and the consistency with the desired level of assurance.

Analytical Procedures that Assist When Forming an Overall Conclusion (Ref: 6, A17-
A19)
Conclusions drawn from results of such analytical procedures are intended to corroborate
conclusions formed during audit of individual components or elements of F/S. These
analytical procedures may be similar to those that would be used as risk assessment
procedures.

Investigating Results of Analytical Procedures (Ref: 7, A20-A21)

If analytical procedures identify fluctuations or relationships that are inconsistent:

 Inquire management and obtaining appropriate audit evidence relevant to their
responses.
 Perform other audit procedures as necessary in the circumstances.

Important Paragraphs 5,7, A1, A12, A15

ISA 530 Page 91

ISA 530

Sample Design (Ref: 6, A4-A9)

When designing an audit sample, the auditor shall consider
 Specific purpose to be achieved and combination of audit procedures likely to best
achieve that purpose.
 Characteristics of the population
- Tests of controls
Auditor makes an assessment of expected rate of deviation.
- Tests of details
Auditor makes an assessment of expected misstatement.

Auditor may determine stratification or value-weighted selection as appropriate.

Stratification
- Objective is to reduce variability of items within each group
- Allow sample size to be reduced without increasing sampling risk.
- When performing tests of details, population is often stratified by monetary value.
- Misstatement is projected for each group separately.

Value-Weighted Selection
- Identify sampling unit as individual monetary units that make up the population.
- Auditor may examine particular items containing those monetary units
- May be used with “systematic selection” and is most efficient with random selection

Sample Size (Ref: 7, A10-A11)

 Sample size shall be sufficient to reduce sampling risk to an acceptably low level.
 Can be determined by application of statistically-based formula or through exercising
judgment
Test of Controls Test of Details
Factor influencing Sample Sample Factor influencing Sample Sample
Size Size Size Size

Increase in extent to which Increase Increase in auditor's Increase

auditor's risk assessment takes assessment of the risk of
into account relevant controls material misstatement
Increase in tolerable rate of Decrease Increase in tolerable Decrease
deviation misstatement
Increase in expected rate of Increase Increase in amount of Increase
deviation of the population to misstatement ,auditor
be tested expects in population
ISA 530 Page 92

Test of Controls Test of Details

Factor influencing Sample Sample Factor influencing Sample Sample
Size Size Size Size

Increase in expected rate of Increase Increase in amount of Increase

deviation of the population
to be tested
Increase in auditor's desired
level of assurance that the
tolerable rate of deviation is
not exceeded by actual rate
of deviation in population
No of sampling units in
population
misstatement ,auditor
expects in population
Increase Increase in the auditor’s Increase
desired level of assurance
that tolerable misstatement
is not exceeded by actual
misstatement in population
Negligible No of sampling units in Negligible
population
Increase in use of other Decrease
substantive procedures for
same assertion
Stratification of population Decrease

Selection of Items for Testing (Ref: 8, A12-A13)

Statistical sampling,
Sample items selected in a way that each sampling unit has a known probability of being
selected.

- Random selection
Applied through random number generators, e.g. tables, softwares

- Systematic selection
Number of sampling units in population is divided by sample size

Non-statistical sampling
Judgment is used to select sample items.

- Haphazard selection
Auditor selects sample without following a structured technique.

- Block selection
Block(s) of adjacent items from the population.

Monetary Unit Sampling is a type of value-weighted selection in which sample size, selection
and evaluation results in a conclusion in monetary amounts
ISA 530 Page 93

Performing Audit Procedures (Ref: 9-11, A14-A16)

 Auditor shall perform audit procedures, appropriate to the purpose, on each item
selected.
 If audit procedure is not applicable to selected item, he shall perform procedure on a
replacement item.
 If auditor is unable to apply designed audit procedures or alternate procedures to a
selected item, he shall
- Treat that item as a deviation from prescribed control
(for test of controls)
- Treat that item as a misstatement (for tests of details)

Nature and Cause of Deviations and Misstatements (Ref: 12-13, A17)

 Auditor shall investigate nature and cause of any deviations or misstatements identified,
and evaluate their possible effect on the purpose of audit procedure and on other areas of
audit.
 Auditor may observe that many deviations and misstatements have a common feature
like type of transaction, location, product line or time period etc.
- Auditor may decide to identify all items in population that possess this common
feature, and extend audit procedures to those items.
- These items may also be intentional, and may indicate possibility of fraud. (Risk exists)
 In extremely rare circumstances, auditor may consider a misstatement or deviation in a
sample to be an anomaly
- Obtain high degree of certainty that such misstatement or deviation is not
representative of the population by performing additional audit procedures.

Projecting Misstatements (Ref: 14, A18-A20)

Tests of controls
Projection of deviations is not necessary as sample deviation rate is also the projected
deviation rate for the population as a whole.

Test of details:
Projected Misstatement in Population = Misstatement in Sample x Projection Rate

For Anomaly:
Projected Misstatement = [ (Misstatement in Sample – Anomaly) x Projection Rate ] + Anomaly
ISA 530 Page 94

Evaluating Results of Audit Sampling (Ref: 15, A21-A23)

Tests of controls: Unexpectedly high sample deviation rate may lead to an increase in the
assessed risk of material misstatement.

Tests of details: Unexpectedly high misstatement amount in sample may cause auditor to
believe that population is materially misstated.

Projected misstatement is the auditor's best estimate of misstatement in population.

 If it exceeds tolerable misstatement; sample does not provide a reasonable basis for
conclusions
 The closer the projection is to tolerable misstatement, the more likely that actual
misstatement in the population may exceed tolerable misstatement.
 If projected misstatement is greater than auditor's expected misstatement, auditor may
conclude that there is an unacceptable sampling risk.

Where sampling has not provided a reasonable basis for conclusions about population

 Request management to
- Investigate misstatements that have been identified; and
- Investigate the potential for further misstatements; and
- Make any necessary adjustments; or
 Tailor the nature, timing and extent of those procedures to best achieve the required
assurance.

Important Paragraphs 5C, 5 I, 5J , A3, A12, A23, APPENDIX 1, APPENDIX 4

ISA 540 (Revised) Page 95

ISA 540 REVISED – AUDITING ACCOUNTING ESTIMATES & RELATED DISCLOSURES (CORE PARAS ONLY)

Accounting estimate
A monetary amount for which the measurement, in accordance with the requirements of the
AFRF, is subject to estimation uncertainty.

Estimation uncertainty
Susceptibility to an inherent lack of precision in measurement.

Management’s point estimate

Amount selected by management for recognition or disclosure in F/S as an accounting estimate

Management bias
A lack of neutrality by management in the preparation of information.

Auditor’s point estimate or auditor’s range

An amount, or range of amounts, respectively, developed by the auditor in evaluating
management’s point estimate.

Outcome of an accounting estimate

The actual monetary amount that results from the resolution of the transaction(s), event(s) or
condition(s) addressed by an accounting estimate.

 Accounting estimates are required when monetary amounts cannot be directly observed.
 Measurement of these is subject to estimation uncertainty
(which reflects inherent limitations in knowledge or data)
 These limitations give rise to subjectivity and variation in measurement outcomes.
 Process of making accounting estimates involves selecting and applying a method using
assumptions and data, requiring judgment by management and can give rise to complexity
 This process affect accounting estimates’ susceptibility to misstatement. (Ref: Para 2)

Risk Assessment Procedures and Related Activities (Ref: 13-15)

Auditor shall obtain an understanding of following matters related to accounting estimates:

The Entity and Its Environment

 Transactions and events etc that may give rise to need for accounting estimates
 Requirements of AFRF related to accounting estimates; and how they apply in context of
this entity and its environment (including inherent risk factors)
 Regulatory factors & frameworks relevant to entity’s accounting estimates
 Nature of accounting estimates and related disclosures that auditor expects in entity’s F/S
ISA 540 (Revised) Page 96

The Entity’s Internal Control

 Nature and extent of oversight and governance that entity has in place over management’s
financial reporting process relevant to accounting estimates.
 How management identifies need for, and applies, specialized knowledge related to
accounting estimates, including the use of a management’s expert
 How entity’s risk assessment process identifies and addresses risks relating to estimates.
 Entity’s information system as it relates to accounting estimates, including:
(i) Classes of transactions etc , events and conditions, significant to F/S, that give rise to
the need for, or changes in, accounting estimates and related disclosures; and
(ii) For such accounting estimates and related disclosures, how management:
- Identifies the relevant methods, assumptions or sources of data, appropriate in the
context of AFRF, including how management:
a. Selects or designs, and applies, methods used, including the use of models;
b. Selects the assumptions to be used, including consideration of alternatives;
c. Selects the data to be used;
- Understands the degree of estimation uncertainty, including the range of possible
measurement outcomes; and
- Addresses estimation uncertainty, including selecting a point estimate
 Control activities relevant to audit over management’s process for making estimates
 How management reviews the outcome(s) of previous accounting estimates and responds
to the results of that review.

Auditor shall also review the outcome of previous accounting estimates, or their subsequent
re-estimation to assist in assessing risks of material misstatement in current period.
 Shall take into account the characteristics of accounting estimates
 Purpose is not to call into question judgments about previous period accounting estimates
that were appropriate based on information available at that time
 Auditor shall determine whether engagement team requires specialized knowledge to
perform procedures in accordance with ISA 540 (revised)

Identifying and Assessing the Risks of Material Misstatement (Ref: 16-17)

Auditor shall take following into account in identifying the inherent risks:
 Degree to which accounting estimate is subject to estimation uncertainty; and
 Degree to which following are affected by complexity, subjectivity, or other inherent risk:
- Selection and application of method, assumptions and data in making estimate; or
- Selection of management’s point estimate and disclosures for inclusion in the F/S.

Auditor shall determine whether any of risks identified and assessed (as above) are a
significant risk; If so, auditor shall obtain an understanding of the entity’s controls, including
control activities, relevant to that risk
ISA 540 (Revised) Page 97

Responses to the Assessed Risks of Material Misstatement (Ref: 18-30)

Auditor’s further audit procedures shall include one or more of the following approaches:

1) Obtaining audit evidence from events occurring up to the date of the auditor’s report
Auditor shall take into account that changes in circumstances and other relevant conditions
between event and measurement date may affect relevance of such audit evidence
2) Testing how management made the accounting estimate; or
Methods
 Whether method selected (and relevant changes) are appropriate in context of AFRF
 Whether selecting method give rise to indicators of possible management bias;
 Whether calculations are applied in accordance with method and are accurate;
 When method involves complex modeling, whether judgments have been applied
consistently and whether, when applicable:
- Design of model meets the measurement objective of AFRF
- Adjustments to output of the model are consistent with measurement objective of
the AFRF and are appropriate in the circumstances;
 Whether integrity of significant assumptions and data has been maintained in applying
the method.
Significant Assumptions
 Whether significant assumptions (and changes) are appropriate in context of AFRF
 Whether judgments made in selecting significant assumptions give rise to indicators of
possible management bias;
 Whether significant assumptions are consistent with each other and with those used in
other accounting estimates, or with related assumptions used in other areas of F/S
 When applicable, whether management has intent to carry out specific courses of
action and has the ability to do so.
Data
 Whether data (and changes) is appropriate in the context of AFRF;
 Whether judgments made in selecting data give rise to indicators of management bias;
 Whether data is relevant and reliable in the circumstances;
 Whether data has been appropriately understood or interpreted by management,
including with respect to contractual terms.
Management’s Selection of Point Estimate and Disclosures about Estimation Uncertainty
Whether management has taken appropriate steps to:
 Understand estimation uncertainty; and
 Address estimation uncertainty by selecting an appropriate point estimate and by
[
developing related disclosures about estimation uncertainty.
If management has not taken appropriate steps, as such, auditor shall:
 Request management to do so, and then evaluate management’s response(s);
 If their response is not sufficient, develop an auditor’s point estimate or range; and
 Evaluate whether a deficiency in internal control exists; if so, communicate it to TCWG.
ISA 540 (Revised) Page 98

When indicators of management bias are identified, auditor shall evaluate the implications
for audit including consideration regarding fraud as per ISA 240 (Ref: Para 32)

3) Developing an auditor’s point estimate or range

Regardless of whether auditor uses management’s or auditor’s own methods, assumptions
or data auditor shall evaluate whether these are appropriate in context of the AFRF

If auditor develops an auditor’s range, he shall:

 Determine that range includes amounts that are supported by sufficient appropriate
audit evidence and have been evaluated by auditor to be reasonable in context of AFRF
 Design and perform further procedures to obtain sufficient appropriate audit evidence
regarding assessed risks about disclosures in F/S describing estimation uncertainty

Test of Controls

As per ISA 330, auditor shall design and perform tests of controls, if:
 Assessment of risks includes expectation that controls are operating effectively; or
 Substantive procedures alone cannot provide sufficient appropriate audit evidence.
Such test of controls shall be responsive to reasons for assessment given to the risks of material
misstatement. Auditor shall obtain more persuasive audit evidence the greater the reliance the
auditor places on the effectiveness of a control

Disclosures Related to Accounting Estimates (Ref: 31)

Auditor shall design and perform further audit procedures to obtain sufficient appropriate
audit evidence regarding related disclosures, other than related to estimation uncertainty

Overall Evaluation Based on Audit Procedures Performed (Ref: 33-36)

Auditor shall evaluate, whether:

 Assessments of risks of material misstatement at assertion level remain appropriate,
including when indicators of possible management bias have been identified;
 Management’s decisions relating to recognition, measurement, presentation & disclosure
of these accounting estimates in F/S are in accordance with AFRF; and
 Sufficient appropriate audit evidence has been obtained.
In doing so, auditor shall take into account all relevant audit evidence obtained, whether
corroborative or contradictory.
If auditor is unable to obtain sufficient appropriate audit evidence, auditor shall evaluate the
implications for the audit or auditor’s opinion in accordance with ISA 705 (Revised).
ISA 540 (Revised) Page 99

In relation to accounting estimates, the auditor shall evaluate:

 For fair presentation framework, whether management has included disclosures, beyond
those specifically required by AFRF, that are necessary to achieve fair presentation; or
 For compliance framework, whether disclosures are those that are necessary for the F/S
not to be misleading.

Written Representations (Ref: 37)

 Auditor shall request written representations from management and, when appropriate,
TCWG about whether the methods, significant assumptions and data used in making
estimates and related disclosures are appropriate and is in accordance with the AFRF.
 Auditor shall also consider the need to obtain representations about specific accounting
estimates, including in relation to the methods, assumptions, or data used.

Communication with TCWG, Management, or Other Relevant Parties (Ref: 38)

 Auditor shall consider the matters, if any, to communicate regarding accounting estimates
and take into account whether the reasons given to the risks of material misstatement
relate to estimation uncertainty, or the effects of complexity, subjectivity or other inherent
risk factors in making accounting estimates and related disclosures.
 In certain circumstances, auditor is also required by law or regulation to communicate
about certain matters with other relevant parties e.g. regulators or prudential supervisors.

Documentation (Ref: 39)

The auditor shall include in the audit documentation:

 Key elements of understanding of entity, its environment, including internal control;
 Linkage of further audit procedures with assessed risks of material misstatement, taking
into account reasons (inherent risk or control risk) given to the assessment of those risks;
 Auditor’s response(s) when management has not taken appropriate steps to understand
and address estimation uncertainty;
 Indicators of possible management bias related to accounting estimates, if any, and the
auditor’s evaluation of the implications for the audit; and
 Significant judgments relating to auditor's determination of whether accounting estimates
and related disclosures are reasonable in the context of the AFRF, or are misstated.

Important 13, 16, 18, 23-27, 29, 33, 36

Paragraphs A1, A5, A25, A26, A29, A33, A39, A40, A43, A48, A49, A52, A55, A61,
A72, A86, A94, A97, A105, A110, A118, A121, A128, A134, A145,
ISA 550 Page 100

ISA 550

Arm's length transaction

A transaction conducted on such terms and conditions as between a willing buyer and a willing seller
who are unrelated and are acting independently of each other and pursuing their own best interests.

Related party
1. A related party as defined in the applicable financial reporting framework; or
2. Where the applicable financial reporting framework establishes minimal or no related party
requirements:
a) A person or other entity that has control or significant influence, directly or indirectly
through one or more intermediaries, over the reporting entity;
b) Another entity over which the reporting entity has control or significant influence, directly
or indirectly through one or more intermediaries; or
c) Another entity that is under common control with the reporting entity through having:
i. Common controlling ownership;
ii. Owners who are close family members; or
iii. Common key management.

Responsibilities of the Auditor (3-7)

Because related parties are not independent of each other, many FRF establish specific
accounting and disclosure requirements for related party relationships, transactions and
balances to enable users of the financial statements to understand their nature and actual or
potential effects on F/S.
Where the AFRF establishes such requirements,
Auditor has a responsibility to perform audit procedures to identify, assess and respond
to the risks of material misstatement arising from entity's failure to appropriately account
for or disclose these.
Even if AFRF establishes minimal or no related party requirements,
Auditor still needs to obtain an understanding of related party relationships and
transactions sufficient to be able to conclude whether F/S, insofar as they are affected by
those relationships and transactions:
 Achieve fair presentation (for fair presentation frameworks); or
 Are not misleading (for compliance frameworks).

In addition, an understanding of related party is relevant to the auditor's evaluation of

whether one or more fraud risk factors are present, because fraud may be more easily
committed through related parties.

Planning and performing the audit with professional skepticism is therefore particularly
important in this context, given the potential for undisclosed related party relationships and
transactions.
ISA 550 Page 101

Risk Assessment Procedures and Related Activities (11-14, A9, A17-A18)

Auditor shall perform audit procedures and related activities to obtain information relevant to
identifying risks of material misstatement attached with related parties.

Discussion among the Engagement Team

It shall include specific consideration of susceptibility of F/S to material misstatement due to

fraud or error that could result from entity's related party relationships and transactions.

Matters that may be addressed in the discussion among the engagement team include:
 Nature and extent of the entity's relationships and transactions with related parties.
 An emphasis on the importance of maintaining professional skepticism throughout the
audit regarding the potential for material misstatement associated with related party
relationships and transactions.
 Circumstances or conditions of the entity that may indicate the existence of related party
relationships or transactions that management has not identified or disclosed to the
auditor (e.g. a complex organizational structure, use of special-purpose entities for off-
balance sheet transactions, or an inadequate information system).
 The records or documents that may indicate the existence of related party relationships or
transactions.
 Importance that management and TCWG attach to identification, appropriate accounting
for, and disclosure of related party relationships and transactions, and related risk of
management override of controls.

Understanding the entity

The auditor shall inquire management regarding:

 The identity of the entity's related parties, including changes from the prior period;
 The nature of the relationships between the entity and these related parties; and
 Whether the entity entered into any transactions with these related parties during the
period and, if so, the type and purpose of the transactions.

Understanding of the controls over related party relationships and transactions

Auditor shall inquire management and others within entity, and perform other risk
assessment procedures considered appropriate, to obtain an understanding of the controls, if
any, that management has established to:
 Identify, account for, and disclose related party relationships and transactions in
accordance with the applicable financial reporting framework;
 Authorize & approve significant transactions and arrangements with related parties; and
 Authorize and approve significant transactions and arrangements outside the normal
course of business.
ISA 550 Page 102

Auditor may consider features of the control environment relevant to mitigating risks of
material misstatement associated with related party relationships and transactions, such as:
 Internal ethical codes, appropriately communicated to entity's personnel and enforced,
governing the circumstances in which the entity may enter into specific types of related
party transactions.
 Policies and procedures for open and timely disclosure of the interests that management
and TCWG have.
 Assignment of responsibilities within entity for identifying, recording, summarizing, and
disclosing these.
 Timely disclosure and discussion between management and TCWG of significant related
party transactions outside the entity's normal course of business, including whether
TCWG have appropriately challenged the business rationale of such transactions (e.g. by
seeking advice from external professional advisors).
 Clear guidelines for approval of related party transactions involving actual or perceived
conflicts of interest, such as approval by a subcommittee of TCWG comprising individuals
independent of management.
 Periodic reviews by internal auditors, where applicable.
 Proactive action taken by management to resolve related party disclosure issues.
 The existence of whistle-blowing policies and procedures, where applicable.

Maintaining Alertness for Related Party Information When Reviewing Records or

Documents (15-16, A22-A25)

Examples of Records or Documents Records or Documents That the Auditor May Inspect
 Third-party confirmations obtained by auditor (in addition to bank and legal confirmations).
 Entity income tax returns.
 Information supplied by the entity to regulatory authorities.
 Shareholder registers to identify the entity's principal shareholders.
 Statements of conflicts of interest from management and TCWG.
 Records of the entity's investments and those of its pension plans.
 Contracts and agreements with key management or TCWG.
 Significant contracts and agreements not in the entity's ordinary course of business.
 Specific invoices and correspondence from the entity's professional advisors.
 Life insurance policies acquired by the entity.
 Significant contracts re-negotiated by the entity during the period.
 Internal auditors' reports.
 Documents associated with the entity's filings with a securities regulator (for example,
prospectuses).

Examples of Arrangements that may indicate such existence

 Participation in unincorporated partnerships with other parties.
 Agreements for the provision of services to certain parties under terms and conditions that are
outside the entity's normal course of business.
 Guarantees and guarantor relationships.
ISA 550 Page 103

In particular, the auditor shall inspect the following for indications of the existence:
 Bank and legal confirmations obtained as part of the auditor's procedures;
 Minutes of meetings of shareholders and of TCWG; and
 Such other records or documents as the auditor considers necessary in the
circumstances of the entity.

Identification of Significant Transactions outside the Normal Course of Business

If auditor identifies significant transactions outside entity's normal course of business, the
auditor shall inquire management about:
a) The nature of these transactions; and
b) Whether related parties could be involved.

Identification and Assessment of the Risks of Material Misstatement Associated with

Related Party Relationships and Transactions (18-19, A29-A30)
Auditor shall identify and assess the risks of material misstatement associated with related
party relationships and transactions and determine whether any of those risks are significant.

In making this determination, auditor shall treat identified significant related party
transactions outside the entity's normal course of business as giving rise to significant risks.

Responses to Risks of Material Misstatement Associated with Related Party

Relationships and Transactions (20-22, A31-A33, A36)

Auditor designs and performs further audit procedures to obtain sufficient appropriate
audit evidence about the assessed risks of material misstatement associated with related
party relationships and transactions.

Management has not appropriately accounted for or disclosed specific related party
relationship/transactions

The nature, timing and extent of the further audit procedures that the auditor may select to
respond to the assessed risks of material misstatement associated with related party
relationships and transactions depend upon the nature of those risks and the circumstances of
the entity.

Identification of Previously Unidentified or Undisclosed Related Parties or Related

Party Transactions

If auditor identifies arrangements or information that suggests existence of related party

relationships or transactions that management has not previously identified or disclosed,
auditor shall determine whether the given circumstances confirm the existence of those
relationships or transactions.
ISA 550 Page 104

If the auditor identifies related parties or significant related party transactions that
management has not previously identified or disclosed, auditor shall:
a) Promptly communicate the relevant information to other members of engagement team;
b) Where AFRF establishes related party requirements:
 Request management to identify all transactions with the newly identified related
parties;
 Inquire why entity's controls failed to identify or disclosure such relationship or
transaction;
c) Reconsider risk of existence of other related parties/transactions and perform additional
audit procedures
d) If non-disclosure by management appears intentional, evaluate implications for the audit.
e) Perform appropriate substantive audit procedures;

Identified Related Party Transactions outside Normal Course of Business (23-24, A38)

Auditor shall:

a) Inspect the underlying contracts or agreements, if any, and evaluate whether:

(i) The business rationale of the transactions suggests that they may have been entered
into to engage in fraudulent financial reporting or to conceal misappropriation of
assets;
In evaluating the business rationale of such related party transaction, auditor may
consider following:
 Whether the transaction:
- Is overly complex (e.g. it may involve multiple related parties within a
consolidated group).
- Has unusual trade terms e.g. unusual prices, interest rates, guarantees and
repayment terms.
- Lacks an apparent logical business reason for its occurrence.
- Involves previously unidentified related parties.
- Is processed in an unusual manner.
 Whether management has discussed nature of, and accounting for, such
transaction with TCWG.
 Whether management is placing more emphasis on a particular accounting
treatment rather than giving due regard to the underlying economics of the
transaction.
If management's explanations are materially inconsistent with the terms of related
party transaction, auditor is required to consider reliability of management's
explanations and representations on other significant matters. (ISA 500)
ISA 550 Page 105

(ii) The terms of the transactions are consistent with management's explanations; and

(iii) The transactions have been appropriately accounted for and disclosed in accordance
with the applicable financial reporting framework

b) Obtain audit evidence that the transactions have been appropriately authorized and
approved.

Assertions That Related Party Transactions Were Conducted on Terms Equivalent to

Arm's Length Transaction

If management has made an assertion in F/S that a related party transaction was conducted
on terms equivalent to arm's length transaction, auditor shall obtain sufficient appropriate
audit evidence about the assertion.

Evaluation of Accounting for and Disclosure of Identified Related Party Relationships &
Transactions (25, A47)
In forming an opinion in accordance with ISA 700, the auditor shall evaluate:

a) Whether the identified related party relationships and transactions have been
appropriately accounted for and disclosed in accordance with the applicable financial
reporting framework; and

b) Whether the effects of the related party relationships and transactions:

i. Prevent the F/S from achieving fair presentation (for fair presentation
frameworks); or
ii. Cause the F/S to be misleading (for compliance frameworks).

Written Representations (26)

Where the applicable financial reporting framework establishes related party requirements,
the auditor shall obtain written representations from management and, where appropriate,
TCWG that they have:

a) Disclosed to the auditor the identity of the entity's related parties and all the related party
relationships and transactions of which they are aware; and
b) Appropriately accounted for and disclosed such relationships and transactions in
accordance with the requirements of the framework.
 ISA 550 Page 106

Related Party Checklist - Extracts from ICAP Audit Practice Manual…….

System Evaluation
1. Inquire of management regarding:
Tutor’s  The identity of the entity’s related parties, including changes from the prior period
 The nature of relationships between the entity and these related parties
Note
 Whether the entity entered into any transactions with these related parties during the
period and, if so, the type and purpose of the transactions
2. Inquire of management and others within the entity such as TCWG, internal auditors, legal
counsel and those dealing with significant transactions outside of normal course of business, to
obtain an understanding of the controls, if any that management has established to:
 Identify, account for, and disclose related party relationships and transactions in
accordance with the applicable reporting framework
 Authorise and approve significant transactions and arrangements with related parties
 Authorise and approve significant transactions and arrangements outside normal course
of business

Related Parties
3. Obtain from management personnel (or prepare) a list of all related parties (detailing the name
of related party, relationship with each party) and compare with the previous year’s list and the
shareholder’s records. Distribute the list of related parties to all staff assigned to the
engagement for their consideration while performing various audit tests, and attach copy to this
checklist.
4. If secondary auditors, consider obtaining representation from parent company management as
to the existence of related parties, consider enquiring of predecessor auditors, or other firms
involved in the audit, as to their knowledge of RPTs.
5. Document any affiliations directors or senior management have with other entities.

Related Party Transactions

6. Inquire of appropriate management personnel whether there were any transactions with
related parties (including significant transactions that occurred but were not given accounting
recognition).
7. Perform procedures to identify additional related parties and significant (over ____), unusual, or
nonrecurring transactions or balances involving related parties. Such procedures could include:
 identifying major customers, suppliers, borrowers, and lenders, and significant changes to
these relationships.
 review of lawyer billings
 review of bank guarantees
 review of contract awards
 review of overdue receivables or payables
 review of investment transactions
 transactions at, or near, the year end
 review of transactions with unusual terms of trade
 consider where RPTs may have occurred but not changed
8. Where RPTs have been identified prepare (or obtain) a schedule, or a summary where
appropriate of these and obtain an understanding of the business purpose of the transaction(s).
ISA 550 Page 107

 examine invoices, agreements etc.

 examine approval for the transaction both by management and local shareholders
 obtain confirmation of any outstanding balances
 obtain information as to the financial standing of the related parties regarding out
 indicate whether disclosure is required or not
 agree with management
9. Where it is uncertain if the transaction is a RPT or not consider:
 obtaining confirmation of significant information directly from third parties
 obtaining further information and references on supplies or customers that appearing
Transactions outside the Entity's Normal Course of Business
10. For identified significant related party transactions outside the entity’s normal course of
business:
 Inspect the underlying contracts or agreements, if any, and evaluate whether:
i. The business rationale (or lack thereof) of the transactions suggests that
they may have been entered into to engage in fraudulent financial reporting
or conceal misappropriation of assets.
ii. The terms of the transactions are consistent with management’s
explanations.
iii. The transactions have been appropriately accounted for and disclosed in
accordance with the applicable financial reporting framework.
 Obtain evidence that transactions have been appropriately authorised & approved.

Arm's Length Assertion

11. If management has made an assertion in the financial statements to the effect that a related
party transaction was conducted on terms equivalent to those prevailing in an arm’s length
transaction, obtain sufficient appropriate audit evidence about the assertion by performing
procedures such as:
 Comparing the terms to those with unrelated parties.
 Engaging an external expert to determine market value and verify market terms and
conditions.
 Comparing the terms to known market terms for similar transactions.
Consider impact on the audit report
12. In forming an opinion, evaluate:
 Whether the identified related party relationships or transactions have been appropriately
accounted for and disclosed in accordance with the AFRF.
 Whether the effects of the related party relationships and transactions prevent the
financial statements from achieving fair presentation.

Communication with those charged with governance

Unless all of TCWG are involved in managing the entity, communicate with those charged with
governance significant matters arising during the audit in connection with the entity’s related parties

Important Paragraphs 13,14, 15, 22, 23, 25, 26, A5, A9, A17, A18, A22, A23, A36,
A38, A50
ISA 560 Page 108

ISA 560

Events Occurring between Date of F/S and Date of Auditor's Report (Ref: 6-9, A6-A10)

Auditor shall perform additional audit procedures to identify all subsequent events
occurring between date of F/S and date of auditor's report.

Auditor shall determine whether each such event is appropriately reflected in F/S in
accordance with applicable financial reporting framework.

Auditor shall take into account risk assessment in determining the nature and extent of such
audit procedures including following:
 Obtaining an understanding of procedures established by management to identify events
 Inquiring management (and TCWG) about any subsequent events which might affect F/S
 Inquiring the current status of items that were accounted for on the basis of preliminary
or incomplete data and may make specific inquiries about whether
- New commitments, borrowings or guarantees have been entered into.
- Sales or acquisitions of assets have occurred or are planned.
- There have been increases in capital or issuance of debt instruments or agreement to
merge or liquidate planned
- Any assets have been appropriated by government or destroyed (e.g. by fire or flood)
- There have been any developments regarding contingencies.
- Any unusual accounting adjustments have been made.
- Any events have occurred or are likely to occur that will bring into question
appropriateness of accounting policies used in F/S (e.g. validity of going concern
assumption)
- Any events have occurred that are relevant to measurement of estimates or provisions
made in F/S.
- Any events have occurred that are relevant to recoverability of assets.
 Reading minutes of meetings of owners, management and TCWG held after date of F/S
and inquiring about matters discussed at any such meetings for which minutes are not yet
available
 Reading the entity's latest subsequent interim F/S (if any)

In addition to the above mentioned audit procedures:

 Read entity's latest available budgets, cash flow forecasts etc for periods after date of F/S;
 Inquire from entity legal counsel concerning litigations & claims
 Consider whether written representations may be necessary to support other audit
evidence
ISA 560 Page 109

Written Representations
Request management (or TCWG), to provide a written representation that all events occurring
subsequent to date of F/S requiring adjustment or disclosure have been adjusted or disclosed

Date of the F/S

The date of the end of the latest period covered by the F/S.

Date of approval of the F/S

The date on which all the statements that comprise F/S, including the related notes, have been
prepared and those with the recognized authority have asserted that they have taken
responsibility for those F/S.

Date of the auditor's report

The date the auditor dates the report on F/S in accordance with ISA 700.

Date the F/S are issued

The date that the auditor's report and audited F/S are made available to third parties.

Subsequent events
Events occurring between the date of F/S and the date of the auditor's report, and facts that
become known to the auditor after the date of the auditor's report.

Facts Become Known after Date of Auditor Report and before Date of issuance of F/S
(Ref: 10-13, A11-A17)

 No obligation to perform any audit procedures regarding F/S after date of auditor's report
 If after date of auditor’s report but before issuance of F/S, auditor comes to know a fact
requiring amendment of auditor’s report, the auditor shall:
- Discuss the matter with management (and where appropriate TCWG)
- Determine whether F/S needs amendment; if so, Inquire how they intends to address
the matter in F/S.

Where Management Amends F/S, auditor shall

 Carry out the audit procedures necessary in the circumstances on the amendment.
 Extend the audit procedures referred in previous section to the date of new auditor's
report
(Unless restricted by law, regulation etc)
 Provide a new auditor's report on amended F/S.
(Not be dated earlier than date of approval of amended F/S)
ISA 560 Page 110

Auditor is permitted to apply audit procedures on subsequent events to that amendment

where:
 Law, regulation or FRF does not prohibit management (i.e. allows) from amending the F/S
to the effects of subsequent event; and
 Those responsible for approving F/S are not prohibited from approving that amendment

In such cases, the auditor shall either:

 Amend report to include an additional date restricted to that amendment indicating that
auditor's procedures are restricted solely to amendment of F/S; or
 Provide a new or amended report that including an Emphasis of Matter paragraph or
Other Matter paragraph highlighting that auditor's procedures are restricted solely to
amendment.
Illustration of additional date (Dual Dating)
“August 14, 2012, except as to Note 37.1, which is as of September 06, 2012.”

No Amendment of F/S by Management

In some jurisdictions law, regulation or FRF may require management not to issue amended
F/S (Often when issuance of F/S for the next period are forthcoming) and, accordingly auditor
need not to provide an amended or new auditor's report.

Where management does not amend F/S that auditor believes to be amended, then:
 If auditor's report has not been provided to entity, auditor shall modify the opinion before
providing report
 If auditor's report has already been provided to the entity, auditor shall notify
management and TCWG, not to issue F/S to third parties before necessary amendments.

If F/S are subsequently issued without necessary amendments, auditor shall take appropriate
action to seek to prevent reliance on auditor's report. (Depending upon auditor's legal rights
and obligations). Auditor may consider seeking legal advice

Facts Which Become Known to the Auditor after the F/S have Been Issued
(Ref: 14-17, A18-A20)

 No obligation to perform any audit procedures regarding F/S after date of auditor's report
 If after the issuance of F/S, auditor comes to know a fact requiring amendment of
auditor’s report, the auditor shall:
- Discuss the matter with management (and where appropriate TCWG)
- Determine whether F/S needs amendment; if so, Inquire how they intends to address
the matter in F/S.
ISA 560 Page 111

Where Management Amends F/S, auditor shall

 Carry out the audit procedures necessary in the circumstances on the amendment.
 Review steps taken by management to inform, all parties to whom F/S are issued, the
situation
 Extend audit procedures referred in previous section to the date of new auditor's report
(Unless restricted by law, regulation etc)
 Provide a new auditor's report on amended F/S.
(Not be dated earlier than date of approval of amended F/S)
 Include in new or amended auditor's report an Emphasis of Matter paragraph or Other
Matter paragraph referring to a note of F/S that extensively discusses reason for such
amendment

Auditor Action to Seek to Prevent Reliance on Auditor's Report

If management does not take necessary steps to ensure that anyone in receipt of the
previously issued F/S is informed of the situation and does not amend F/S:
 Auditor shall notify management and TCWG that auditor will seek to prevent future
reliance on auditor's report.
 If they do not take these necessary steps, auditor shall take appropriate action to seek to
prevent reliance on the report.
 Auditor's course of action depends upon auditor's legal rights & obligations (may consider
legal advice)

Important Paragraphs 7, 10 -15, A8, A9, A12, A18

ISA 570 (Revised) Page 112

ISA 570 (Revised)

Risk Assessment Procedures and Related Activities (Ref: 10-11, A3-A7)

Auditor shall consider whether events or conditions exist that may cast significant doubt on
entity’s ability to continue as going concern.
Examples of such events or conditions

Financial

 Net liability or net current liability position.

 Fixed-term borrowings approaching maturity without realistic prospects of renewal or
repayment or excessive reliance on short-term borrowings to finance long-term assets.
 Indications of withdrawal of financial support by creditors.
 Negative operating cash flows (historical or prospective F/S)
 Adverse key financial ratios.
 Substantial operating losses or deterioration in value of assets used to generate cash
flows.
 Arrears or discontinuance of dividends.
 Inability to pay creditors on due dates.
 Inability to comply with the terms of loan agreements.
 Change from credit to cash transactions with suppliers.
 Inability to obtain financing for essential new product development or other essential
investments.

Operating

 Management intentions to liquidate entity or to cease operations

 Loss of key management without replacement.
 Loss of a major market, key customer(s), franchise, license, or principal supplier(s).
 Labor difficulties.
 Shortages of important supplies.
 Emergence of a highly successful competitor.

Other

 Non-compliance with capital or other statutory requirements,

 Pending legal or regulatory proceedings against entity that may result in claims that entity
is unlikely to be able to satisfy.
 Changes in law or regulation or government policy expected to adversely affect the entity.
 Uninsured or underinsured disasters when they occur.
ISA 570 (Revised) Page 113

Auditor shall also determine whether management has already performed a preliminary
assessment of continuance as going concern
 If such assessment has been performed, auditor shall discuss with management and
determine whether management has identified such events or conditions and (if so) what
are the plans to address them
 If such assessment has not yet been performed, auditor shall discuss with management
basis for the intended use of the going concern basis of accounting, and inquire whether
events or conditions exist that may cast significant doubt on going concern

Evaluating Management’s Assessment(Ref: 12-14, A8-A13)

 Auditor shall evaluate management’s assessment
 Auditor shall cover the same period as that used by management to make its assessment
as required by AFRF or law/regulation (if it specifies a longer period)
 If assessment covers less than 12 months from date of F/S, auditor shall request
management to extend its assessment period to at least 12 months from that date
 Auditor shall consider whether assessment includes all relevant information of which the
auditor is aware as a result of audit.

Period beyond Management’s Assessment (Ref: 15, A14-A15)

Auditor shall inquire management as to its knowledge of events or conditions beyond the
period of management’s assessment that may cast significant doubt on ability to continue as
going concern

Additional Procedures When Events or Conditions are Identified (Ref: 16, A16-A20)

Auditor shall obtain sufficient appropriate audit evidence to determine whether or not a
material uncertainty exists related to events or conditions that may cast significant doubt on
going concern through additional audit procedures, including following factors

 Analyzing and discussing cash flow, profit and other relevant forecasts with management.
 Analyzing and discussing latest available interim F/S
 Reading the terms of debentures and loan agreements
 Reading minutes of the meetings of shareholders, TCWG and relevant committees for
reference to financing difficulties.
 Inquiring entity’s legal counsel regarding existence of litigation and claims and
reasonableness of management’s assessments of their outcome and estimate of their
financial implications.
 Evaluating entity’s plans to deal with unfilled customer orders.
 Performing audit procedures regarding subsequent events
 Confirming existence, terms and adequacy of borrowing facilities
 Obtaining and reviewing reports of regulatory actions.
ISA 570 (Revised) Page 114

Where management has not yet performed an assessment of going concern; request
management to make its assessment.

Evaluating management’s plans for future actions in relation to its going concern assessment,
whether outcome of these plans is likely to improve situation and whether plans are feasible
(e.g. plans to liquidate assets , borrow money or restructure debt)

Where entity has prepared a cash flow forecast

 Evaluating reliability of underlying data to prepare forecast
 Determining whether there is adequate support for assumptions underlying the forecast.
(auditor may consider requesting written confirmations from 3 rd parties and may obtain
evidence of their ability to provide such support)
Considering whether any additional facts or information have become available since the date
on which management made its assessment.

Requesting written representations from management and TCWG regarding their plans for
future actions and feasibility of these plans.

Implications for the Auditor’sReport(Ref: 17-24, A21-A35)

Scenario Implication on Report

Going Concern Basis is Inappropriate Adverse opinion

Going Concern Basis Is Appropriate but a Material Unmodified opinion with a separate
Uncertainty Exists section in Report “Material
- Adequate Disclosure is made in F/S Uncertainty Related to Going
Concern” (ISA 700)

Going Concern Basis Is Appropriate but a Material Qualified or Adverse Opinion

Uncertainty Exists
- Adequate Disclosure not given in F/S

Management Unwilling to Make or Extend Its Qualified or Disclaimer

Assessment
ISA 570 (Revised) Page 115

Communication with TCWG(Ref: 25)

Auditor shall communicate with TCWG events or conditions identified that may cast
significant doubt on the entity’s ability to continue as a going concern including:
 Whether events or conditions constitute a material uncertainty;
 Whether management’s use of going concern basis of accounting is appropriate in the
preparation of F/S;
 Adequacy of related disclosures in F/S; and
 Where applicable, the implications for the auditor’sreport.

Significant Delay in the Approval of F/S (Ref: 26)

If there is significant delay in approval of F/S by management or TCWG after the date of F/S
 Auditor shall inquire as to the reasons for the delay.
 If auditor believes that delay could be related to events or conditions relating to going
concern assessment, auditor shall perform necessary additional audit procedures

Auditor shall also consider the effect on the auditor’s conclusion regarding the existence of a
material uncertainty

Important Paragraphs 5, 10, 13, 16, 18, 22, 23, 25, 26, A3, A14, A16, A35
ISA 580 Page 116

ISA 580

Management from whom Written Representations Requested (Ref: 9, A2-A6)

Management with appropriate responsibilities for the preparation of F/S and having
knowledge of the matters concerned.
 Management would be expected to have sufficient knowledge of the process followed in
preparing F/S and the assertions therein.
 Management may decide to make inquiries of others who participate in preparing and
presenting F/S, including individuals who have specialized knowledge relating to subject
matter (e.g. actuary, engineer, legal advisor or other experts)
 Auditor may accept qualifying wording in representations, if the auditor is satisfied that
representations are being made by relevant management personal.
 Auditor may request that management include confirmation in the written
representations that it has made appropriate inquiries before making the requested
written representations.

Written Representations about Management's Responsibilities (Ref: 10-12, A7-A9)

Shall be described in written representations in the same manner as described in the terms of
the audit engagement.

The auditor shall request management to provide a written representation that

Preparation of the F/S - Para 10 –

It has fulfilled its responsibility for preparation of F/S in accordance with AFRF, including,
where relevant, their fair presentation, as set out in terms of the audit engagement.

Information Provided & Completeness of Transactions-Para11

a) It has provided the auditor with all relevant information and access as agreed
b) All transactions have been recorded and are reflected in F/S.

Auditor may also ask management to reconfirm its acknowledgement and understanding. It
is common in certain jurisdictions however may be particularly appropriate when:
 Those who signed the terms of audit engagement no longer have the relevant
responsibilities;
 Terms of audit engagement were prepared in a previous year;
 There is any indication that management misunderstands those responsibilities; or
 Changes in circumstances make it appropriate to do so.
ISA 580 Page 117

Communication with TCWG

Auditor shall communicate with TCWG the written representations which the auditor has
requested from management.

Additional / Other Written Representations (Ref: 13, A10-A13)

About the F/S

In addition to Para 10, auditor may consider necessary to request representation about
following:
 Whether selection and application of accounting policies are appropriate; and
 Whether following or similar matters, where relevant under AFRF, have been recognized,
measured, presented or disclosed in accordance with that framework:
- Plans or intentions that may affect carrying value or classification of assets & liabilities;
- Liabilities, both actual and contingent;
- Title to, or control over, assets, liens or encumbrances on assets, and assets pledged;
and
- Aspects/Non-compliance of laws, regulations & agreements that may affect F/S

About Information Provided to the Auditor

In addition to Para 11, auditor may request management to provide a written representation
that it has communicated to auditor all deficiencies in internal control (which they knows)
Written Representations about Specific Assertions
When obtaining evidence or evaluating, judgments & intentions, auditor may consider
following:
 Entity's past history in carrying out its stated intentions.
 Entity's reasons for choosing a particular course of action.
 Entity's ability to pursue a specific course of action.
 Existence or lack of any other information that might have been obtained during audit
that may be inconsistent with management's judgment or intent.

Date of and Period Covered by Written Representations (Ref: 14, A15-A18)

Date :
Shall be as near as practicable to, but not after, date of auditor report

Period :
Shall be for all F/S and period(s) referred to in auditor report.

Sometimes auditor may obtain a written representation about a specific assertion in F/S during
the course of the audit. In this case, it may be necessary to request an updated written
representation.
ISA 580 Page 118

Form of Written Representations (Ref: 15, A19-A21)

Shall be in form of a representation letter addressed to auditor.

In some jurisdictions management may be required by law or regulation to make a written

public statement about responsibilities.
 If auditor determines that such statements provide some or all representations required
by this ISA, relevant matters covered by such statements need not be included in
representation letter.
 Factors that may affect the auditor's determination include:
- Whether statement includes confirmation of responsibilities of Para 10 & 11.
- Whether statement has been given or approved by relevant management personnel.
- Whether a copy of statement is provided to auditor as near as practicable to, but not
after, the date of auditor's report.
Formal statement of compliance with law/regulation or approval of F/S would not be a
substitute.

Doubt as to the Reliability and Requested Written Representations Not Provided (Ref:
16-20)

Doubt as to the Reliability of Written Representations

 If auditor has concerns about competence, integrity, ethical values or diligence of
management, auditor shall determine the effect of it on the reliability of representations.
 If written representations are inconsistent with other audit evidence, auditor shall
perform audit procedures to resolve the matter.
 If matter remains unresolved, auditor shall reconsider the assessment of the competence,
integrity etc.

Requested Written Representations Not Provided

 Discuss the matter with management;
 Re-evaluate the integrity of management and evaluate the effect that this may have on the
reliability of representations (oral or written) and audit evidence in general; and
 Take appropriate actions, including determining the possible effect on opinion (ISA 705)

Written Representations about Management's Responsibilities

The auditor shall disclaim an opinion in accordance with ISA 705 if:
 Auditor concludes that there is sufficient doubt about integrity of management; or
 Management does not provide written representations required by paragraphs 10 and 11.

Note: A modified written representation (with qualifying language) does not necessarily mean
that management did not provide written representation. Accordingly disclaimer is not
appropriate. However reason for such modification may affect the opinion in auditor's report
(ISA 705)
ISA 580 Page 119

Appendix 2 - Illustrative Representation Letter

(Entity Letterhead)
(To Auditor)(Date)
This representation letter is provided in connection with your audit of the financial
statements of ABC Company for the year ended December 31, 20XX2 for the purpose of
expressing an opinion as to whether the financial statements are presented fairly, in all
material respects, (or give a true and fair view) in accordance with International Financial
Reporting Standards.

We confirm that(, to the best of our knowledge and belief, having made such inquiries as we
considered necessary for the purpose of appropriately informing ourselves):

Financial Statements

 We have fulfilled our responsibilities, as set out in the terms of the audit engagement dated
[insert date], for the preparation of the financial statements in accordance with
International Financial Reporting Standards; in particular the financial statements are
fairly presented (or give a true and fair view) in accordance therewith.
 Significant assumptions used by us in making accounting estimates, including those
measured at fair value, are reasonable. (ISA 540)
 Related party relationships and transactions have been appropriately accounted for and
disclosed in accordance with the requirements of International Financial Reporting
Standards. (ISA 550)
 All events subsequent to the date of the financial statements and for which International
Financial Reporting Standards require adjustment or disclosure have been adjusted or
disclosed. (ISA 560)
 The effects of uncorrected misstatements are immaterial, both individually and in the
aggregate, to the financial statements as a whole. A list of the uncorrected misstatements is
attached to the representation letter. (ISA 450)
 [Any other matters that the auditor may consider appropriate (see paragraph A10 of this
ISA).]

Information Provided

 We have provided you with:

 Access to all information of which we are aware that is relevant to the preparation of
the financial statements, such as records, documentation and other matters;
 Additional information that you have requested from us for the purpose of the audit;
and o
 Unrestricted access to persons within the entity from whom you determined it