Notes CA+Inter+Audit+May+24

CHAPTER 1
Nature Objective & Scope

of Audit
CA Inter with CA Himanshu

May 24
CA Himanshu
CA Inter with CA Himanshu Page No. 1

1. Meaning and Nature of Auditing 3
2. Purpose of Auditing 3
3. Auditor’s task that Financials should not mislead 3
4. Objective of SA 200 3
5. Scope of Audit - What it includes & won’t 4
6. Inherent Limitation of Audit (SA 200) 4
7. Advantages of Audit of Financial Statement 6
8. Audit Mandaory or Voluntary ? 6
9. What is Engagement 6
10. Meaning of Assurance Engagement 7
11. Audit Vs. Review 7

12. Reasonable Assurance vs Limited Assurance 8
13. Prospective vs Historical financial Information 8
14. Engagement and Quality control standards : An Overview 8
15. Why are Standards required ? 10
16. Duties in relation to Standards 10

1. Meaning and Nature of Auditing
1. An audit is independent examination of financial information of any entity
2. Whether profit oriented or not, and irrespective of its size or legal form
3. When such an examination is conducted with a view to express an opinion thereon.
2. Purpose of Auditing
1. The purpose of external audit engagements is to enhance the degree of confidence of
intended users of financial statements. Such engagements are also reasonable assurance
engagements.
2. This is done by an independent auditor expressing their opinion on whether the financial
statements present a true and fair view of the entity’s affairs.
3. Auditor’s task that Financials should not mislead

The person conducting this task should take care to ensure that financial statements would
not mislead anybody. This he can do by satisfying himself that:
1. Accounts have been drawn up with reference to entries in the books of account;
2. Entries in the books of account are adequately supported by sufficient and appropriate
evidence;
3. None of the entries in the books of account has been omitted in the process of compilation
and nothing which is not in the books of account has found place in the statements;
4. Information conveyed by the statements is clear and unambiguous;
5. Financial statement amounts are properly classified, described and disclosed in
conformity with accounting standards; and
6. Statement of accounts present a true and fair picture of the operational results and of the
assets and liabilities.
4. Objective of SA 200
As per SA-200 “Overall Objectives of the Independent Auditor”, in conducting an audit of
financial statements, the overall objectives of the auditor are:
a. To obtain reasonable assurance about whether the financial statements as a
whole are free from material misstatement; and
b. To report on the financial statements, and communicate as required by the SAs,
in accordance with the auditor’s findings.
Summary:
1. Obtaining a reasonable assurance that financial statements as a whole are free from
material misstatement due to fraud or error
2. Gaining a reasonable assurance leads to formation of opinion whether financial statements
are prepared, in all material respects, in accordance with applicable financial reporting

framework To report on the financial statements
3. To report on the financial statements
4. Reporting of opinion in accordance with audit findings
5. Communication of reporting
6. Reporting and communication in accordance with Standards on Auditing
“Reasonable assurance is to be distinguished from absolute assurance. Absolute assurance
is a complete assurance or a guarantee that financial statements are free from material
misstatements. However, reasonable assurance is not a complete guarantee. Although it is a
high-level of assurance but it is not complete assurance”
5. Scope of Audit - What it includes & won’t

1. Coverage of all aspects of entity relevant to the financial statements being audited.
2. Reliability and Sufficiency of financial information
3. Proper disclosure of financial information
4. Expression of an opinion on financial statements

5. No : Responsibility of preparation and presentation of financial statements
6. No : Duties outside scope of competence of auditor
7. No : Expertise in authentication of documents
8. No : Investigation
6. Inherent Limitation of Audit (SA 200)

As per SA 200, the auditor is not expected to, and cannot, reduce audit risk to zero and cannot
therefore obtain absolute assurance that the financial statements are free from material
misstatement due to fraud or error.
This is because there are inherent limitations of an audit, which result in most of the audit
evidence on which the auditor draws conclusions and bases the auditor’s opinion being

persuasive rather than conclusive.
These fundamental limitations arise due to the ollowing factors:

1. The Nature of financial reporting
2. The Nature of Audit procedures
3. Audit is not investigation
4. Timeliness of financial reporting and decrease in relevance of information over time
5. Future events
The Nature of Financial Reporting:

a. Preparation of financial statements involves making many judgments by
management.
b. These judgments may involve subjective decisions or a degree of uncertainty.

Therefore, auditor may not be able to obtain absolute assurance that financial
statements are free from material misstatements due to frauds or errors.
The Nature of Audit Procedures:

There are practical and legal limitations on the auditor’s ability to obtain audit evidence. For
example:
a. The auditor carries out his work by obtaining audit evidence through performance
of audit procedures. However, there are practical and legal limitations on ability
of auditor to obtain audit evidence. For example, an auditor does not test all
transactions and balances. He forms his opinion only by testing samples. It is an
example of practical limitation on auditor’s ability to obtain audit evidence.
b. Management may not provide complete information as requested by auditor.
There is no way by which auditor can force management to provide complete
information as may be requested by auditor. In case he is not provided with
required information, he can only report. It is an example of legal limitation on
auditor’s ability to obtain audit evidence.
c. The management may consist of dishonest and unscrupulous people and may
be, itself, involved in fraud. It may be engaged in concealing fraud by designing
sophisticated and carefully organized schemes which may be hard to detect by
the auditor.
d. An auditor is not an expert in authentication of documents. Therefore, he may be
led to accept invalid audit evidence on the basis of unauthentic documents.
Audit is not investigation

Audit is not an official investigation. Hence, auditor cannot obtain absolute assurance that
financial statements are free from material misstatements due to frauds or errors.
Timeliness of Financial Reporting and the Balance between Benefit and Cost:

The relevance of information decreases over time and auditor cannot verify each and every
matter. Therefore, a balance has to be struck between reliability of information and cost of
obtaining it.
Future events
Future events or conditions may affect an entity adversely. Adverse events may seriously
affect ability of an entity to continue its business. The business may cease to exist in future
due to change in market conditions, emergence of new business models or products or due to
onset of some adverse events. Therefore, it is in view of above factors, that an auditor cannot
provide a guarantee that financial statements are free from material misstatements due to
frauds or errors.
7. Advantages of Audit of Financial Statement

1. It protects the financial interests of people not involved in managing the entity, like
partners, shareholders, bankers, and the public.
2. It deters employees from committing theft or fraud.
3. Audited financial statements are useful for calculating taxes, securing loans, and
determining the value of a business in a sale.

4. They can also resolve disputes related to wages, bonuses, or property damage.
5. Audits find and suggest solutions for wastage and losses, especially those caused by
inadequate internal controls.
6. Audits check if records are maintained properly and help clients correct any deficiencies.
7. Audits review organizational controls, highlighting weaknesses or shortcomings.
8. Audited accounts simplify settling financial matters when a partner joins or leaves.The
government may require audited statements before granting assistance or licenses for
specific businesses
8. Audit Mandaory or Voluntary ?

Audit is not legally obligatory for all types of business organisations or institutions. On this
basis audits may be of two broad categories i.e., audit required under law and voluntary audits.
1. Audit required under law: The organisations which require audit under law are the
following: e.g., companies governed by the Companies Act; banking companies; other
statutory bodies required by their regulators or by specific Act.
2. Voluntary category are the audits of the accounts of proprietary entities, partnership
firms, Hindu undivided families, etc. In respect of such accounts, there is no basic legal
requirement of audit. Many of such enterprises as a matter of internal rules require audit.
9. What is Engagement
Engagement means an arrangement to do something. In the context of auditing, it means a
formal agreement between auditor and client under which auditor agrees to provide auditing
services. It takes the shape of engagement letter.

External audit engagements:
1. External audit engagements aim to boost the confidence of financial statement users.
2. These engagements provide reasonable assurance.
3. In India, companies must have their annual accounts audited by an external auditor.
4. Non-corporate entities can also opt for external audits due to their associated benefits.
To whom audit report is submitted by an auditor ?

1. The report is given to the person who appoints the auditor.
2. In companies, this is the shareholders, and in firms, it’s the partners.
10. Meaning of Assurance Engagement

1. Assurance engagement involves a practitioner providing a conclusion.
2. The conclusion aims to increase the confidence of users (other than responsible party) in
the evaluation or measurement of a subject matter against criteria.
3. The practitioner offers an opinion on specific information.
4. This helps information users make confident decisions with reduced risk of inaccuracies.
Elements of an Assurance Engagement:

1. Three Party relationship : An assurance engagement involves abovesaid three parties.
a. A practitioner is a person who provides the assurance. The term practitioner
is broader than auditor. Audit is related to historical information whereas
practitioner may provide assurance not necessarily related to historical financial
information.
b. A responsible party is the party responsible for preparation of subject matter
c. Intended users are the persons for whom an assurance report is prepared. These
persons may use the report in making decisions.
2. An appropriate subject matter
3. Suitable Criteria
4. Sufficient appropriate evidence
5. Written assurance report in appropriate form
11. Audit Vs. Review

1. Audit is a reasonable assurance engagement.
2. It offers reasonable assurance.
3. Review is a limited assurance engagement.
4. It provides less assurance compared to an audit.

5. Reviews involve fewer procedures and gather sufficient evidence for limited conclusions.
6. Both audit and review pertain to financial statements based on historical financial data.
12. Reasonable Assurance vs Limited Assurance
Reasonable assurance engagement Limited assurance engagement

Reasonable assurance engagement Limited assurance engagement provides
provides high level of assurance. lower level of assurance than reasonable
assurance engagement.
It performs elaborate and extensive It performs fewer procedures as
procedures to obtain sufficient ppropriate compared to reasonable assurance
evidence. engagement.
It draws reasonable conclusions on the It involves obtaining sufficient appropriate
basis of sufficient appropriate evidence. evidence to draw limited conclusions.
Example of reasonable assurance Example of limited assurance engagement
engagement is an audit engagement. is review engagement.
13. Prospective vs Historical financial Information

“Prospective financial information” means financial information based on assumptions about
events that may occur in the future and possible actions by an entity. It can be in the form of
a forecast or projection or combination of both.
Prospective financial information relates to future events. While evidence may be available
to support the assumptions on which the prospective financial information is based, such
evidence is itself generally future- oriented. The auditor is, therefore, not in a position to
express an opinion as to whether the results shown in the prospective financial information
will be achieved.
Hence, such type of assurance engagement provides only a “moderate” level of assurance.
“Historical financial information” means information expressed in financial terms in relation
to a particular entity, derived primarily from that entity’s accounting system, about economic
events occurring in past time periods or about economic conditions or circumstances at
points in time in the past.
14. Engagement and Quality control standards : An Overview

Standards on Auditing:
1. Standards on Auditing apply to independent audits of financial statements.
2. They specifically pertain to historical information.
3. These standards set high-quality benchmarks for auditors.
4. Auditors must follow these standards during financial statement audits.
5. Standards cover various auditing topics, including objectives, documentation, planning,
risk assessment, sampling, evidence, and reporting.
6. They encompass all key aspects of financial statement audits.
Some examples of Standards on Auditing are:
1. SA 230 Audit Documentation
2. SA 500 Audit Evidence
Standards on Review engagements:

1. Standards on review engagements apply to the review of financial statements.
2. A review is a limited assurance engagement and offers less assurance than an audit.
3. Reviews involve fewer procedures than audits.
4. Despite being a limited assurance engagement, reviews still require obtaining sufficient
appropriate evidence.
5. An example of a review is when an auditor reviews interim financial information for an
entity.
Examples of Standards on Review engagements are:
1. SRE 2400 (Revised) Engagements to Review Historical Financial Statements
2. SRE 2410 Review of Interim Financial Information Performed by the Independent Auditor
of the Entity
Standards on Assurance Engagements:

1. Apply to assurance engagements dealing with subjects other than historical financial
information.
2. These engagements do not involve auditing or reviewing historical financial data.
3. An example is an assurance engagement for examining prospective financial information.
4. These standards cover various assurance tasks, including those related to non-financial
matters like the design and operation of internal controls in an entity.
Examples of Standards on Assurance Engagements are:
1. SAE 3400 The Examination of Prospective Financial Information
2. SAE 3420 Assurance Engagements to Report on the Compilation of Pro Forma Financial

Information Included in a Prospectus
Standards on related services:

1. These standards apply to engagements where agreed-upon procedures are performed on
financial information.
2. For instance, such engagements might involve the auditor conducting specific procedures
on financial data like accounts payable, accounts receivable, related party purchases,
segment profits, or entire financial statements such as a balance sheet.
3. In some cases, the practitioner might help management prepare historical financial
information but doesn’t provide assurance on it.
4. These compilation engagements are related services, and the practitioner issues a report
stating that it’s not an assurance engagement, and no opinion is given.
Examples of Standards on related services are:
1. SRS 4400 Engagements to perform agreed-upon procedures regarding financial
information
2. SRS 4410 (Revised) Compilation engagements

Standards on Quality Control:
1. Standards on Quality Control (SQCs) are guidelines for firms to maintain quality control
in their audit, review, and assurance engagements.
2. SQC 1 is one of these standards and requires auditors/practitioners to establish a quality
control system.
3. The system ensures compliance with professional standards, legal requirements, and the
issuance of appropriate reports.
4. The main goal is to have a quality control system in firms to ensure compliance with
professional standards and legal requirements when providing services covered by
engagement standards.
15. Why are Standards required ?

1. Standards ensure carrying out of audit against established benchmarks at par with global
practices.
2. Standards improve quality of financial reporting thereby helping users to make diligent
decisions.
3. Standards promote uniformity as audit of financial statements is carried out following
these Standards.
4. Standards equip professional accountants with professional knowledge and skill.
5. Standards ensure audit quality.
16. Duties in relation to Standards

1. Professional accountants have a responsibility to follow accounting standards in their
work.
2. They must adhere to these standards in most cases, but there can be situations where
following a standard isn’t effective for a specific job.
3. In such cases, accountants should document the alternative procedures they used and
explain why they departed from the standard unless it’s obvious.
4. Their report should also highlight any departures from the standards.
5. Just disclosing a departure in the report doesn’t excuse the accountant from following the
standards.
Please Memorise and Do Scanner Questions. Because in Exams you

get Marks for Your Answers

CHAPTER 2
AUDIT STRATEGY, AUDIT PLANNING
AND AUDIT PROGRAMME

May 24
#Ab Nahi Darenge Audit Se
CA Himanshu
#Abhi Nahi toh Kabhi Nahi Page No. 1
Chapter 2
1. Introduction 3
2. Benefits of Planning 3
3. Planning is a CONTINUOUS process 3
4. Planning Process- Elements of Planning 4
5. Audit Plan 6
6. Audit Plan : Auditor’s Responsibility 7
7. Relation between Strategy and Plan 7
8. Changes to Planning during the course of Audit 7
9. Direction Supervision and Review work of Team members 7
10. Documentation 8
11. Meaning of Audit Programme 8
12. Constructing an Audit Programme 9

13. Advantages of Audit Programme 9
14. Disadvantage of Audit Programme 10

1. Introduction
SA 300- Planning an audit of financial statements deals with the auditor’s responsibility to plan
an audit of financial statements. It states that objective of the auditor is to plan the audit so
that it will be performed in an effective manner.
2. Benefits of Planning
Planning an audit involves establishing the overall audit strategy for the engagement and
developing an audit plan. Adequate planning benefits the audit of financial statements in
several ways, including the following:
1. Ensuring that appropriate attention is devoted to important areas;
2. Identifying and dealing with potential problem areas early;
3. Selecting the right people for the audit team in terms of the skills and experience mix;
4. Ensuring that work gets reviewed properly;
5. Involving third parties such as component auditors, internal auditors and experts.
6. Proper direction and supervision of engagement team and
7. Assist in organising audit in efficient and effective manner
3. Planning is a CONTINUOUS process

Planning is not a discrete phase of an audit, but rather a continual and iterative process that
often begins shortly after (or in connection with) the completion of the previous audit and
continues until the completion of the current audit engagement.
Planning, however, includes consideration of the timing of certain activities and audit
procedures that need to be completed prior to the performance of further audit procedures.
For example, planning includes the need to consider, prior to the auditor’s identification and
assessment of the risks of material misstatement, such matters as:
1. The analytical procedures to be applied as risk assessment procedures.
2. Obtaining a general understanding of the legal and regulatory framework applicable to
the entity and how the entity is complying with that framework.
3. The determination of materiality.
4. The involvement of experts.
5. The performance of other risk assessment procedures
Involvement of key engagement team members in planning audit

The involvement of the engagement partner and other key members of the engagement
team in planning the audit draws on their experience and insight, thereby enhancing the
effectiveness and efficiency of the planning process.
Discussion of elements of planning with entity’s management
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The overall audit strategy and the audit plan remain the auditor’s responsibility
The auditor may decide to discuss elements of planning with the entity’s management to
facilitate the conduct and management of the audit engagement.
When discussing matters included in the overall audit strategy or audit plan, care is required
in order not to compromise the effectiveness of the audit.
4. Planning Process- Elements of Planning

The elements of planning can be categorized as under: -
(I) Preliminary engagement activities
(II) Planning activities
Preliminary engagement activities:

The auditor considers whether relationship with client should be continued and whether
ethical requirements including independence continue to be complied with. It includes: -
1. Performing procedures regarding the continuance of the client relationship
A. Acceptance and Continuance of Client Relationships and Audit Engagements
a. Ensure that appropriate procedures regarding the acceptance and continuance

of client relationships and audit engagements have been followed and that
conclusions reached in this regard are appropriate.
b. Integrity of principal owners and key management
c. Competence of engagement team to perform the audit engagement
d. Implications of matters that have arisen during current and previous audit
engagement may need to be considered.
2. Evaluating compliance with ethical requirements, including independence
a. Auditor shall continuously evaluate compliance with ethical requirements
including independence
b. Engagement partner shall remain alert, for evidence of non-compliance with
relevant ethical requirements by members of the engagement team
c. If matters come to the engagement partner’s attention that indicate that members
of the engagement team have not complied with relevant ethical requirements,
the engagement partner, in consultation with others in the firm, shall determine
the appropriate action.
d. Obtain relevant information from the firm to identify and evaluate circumstances
and relationships that create threats to independence
e. Evaluate information on identified breaches, if any, of the firm’s independence
policies and procedures to determine whether they create a threat to independence
for the audit engagement and
f. Take appropriate action to eliminate such threats or reduce them to an acceptable

level by applying safeguards, or, if considered appropriate, to withdraw from the
audit engagement, where withdrawal is permitted by law or regulation.
g. The engagement partner shall promptly report to the firm any inability to resolve
the matter for appropriate action.
3. Establishing an understanding of terms of engagement
It is in the interests of both the entity and the auditor that the auditor sends an audit
engagement letter before the commencement of the audit to help avoid misunderstandings
with respect to the audit. It ensures that there is no confusion with the client regarding terms
of the engagement.
Planning activities involve:

(A) Establishing the overall audit strategy
(B) Developing an audit plan
Establishing the overall audit strategy:

The auditor shall establish an overall audit strategy that sets the scope, timing and direction
of the audit, and that guides the development of the audit plan.
In establishing the overall audit strategy, the auditor shall:
1. Identify the characteristics of the engagement that define its scope; example:
a. Applicable financial reporting framework applicable to the entity
b. Nature of business segments to be audited including the need for specialized
knowledge
c. Industry specific reporting requirements required by industry regulators
d. Expected use of audit evidence obtained in previous audits
e. Expected audit coverage
f. No. of locations to be included
g. Nature of business segment
h. Need of specialised knowledge
2. Ascertain the reporting objectives of the engagement to plan the timing of the audit and
the nature of the communications required. The cases by which auditor can ascertain the
reporting objective of the engagement are (example):
a. The entity’s timetable for reporting
b. Organization of meetings to discuss of nature, timing and extent of audit work
with management
c. Discussion with management regarding the expected type and timing of reports
to be issued including the auditor’s report
d. Discussion with management regarding the expected communications on the

status of audit work throughout the engagement.
e. Expected nature and timing of communications among engagement team
members, including the nature and timing of team meetings and timing of the
review of work performed.
3. Consider the factors that, in the auditor’s professional judgment, are significant in
directing the engagement team’s efforts; More energies need to be devoted to significant
matters to obtain desired outcomes. Few examples are listed as under
a. Volume of transactions which may determine whether it is more efficient for the
auditor to rely on internal control
b. Significant industry developments such as changes in industry regulations and
new reporting requirements.
c. Significant changes in the financial reporting framework, such as changes in
accounting standards.
d. Other significant relevant developments, such as changes in the legal environment
affecting the entity.
5. Consider the results of preliminary engagement activities and, where applicable, whether
knowledge gained on other engagements performed by the engagement partner for the
entity is relevant; and

6. Ascertain the nature, timing and extent of resources necessary to perform the engagement.
Audit Strategy - Assistance in Resource mobilisation

The process of establishing the overall audit strategy assists the auditor to determine, subject
to the completion of the auditor’s risk assessment procedures, such matters as:
1. The resources to deploy for specific audit areas, such as the use of appropriately
experienced team members for high risk areas or the involvement of experts on complex
matters;
2. The amount of resources to allocate to specific audit areas, such as the number of team
members assigned to observe the inventory count at material locations, the extent of
review of other auditors’ work in the case of group audits, or the audit budget in hours to
allocate to high risk areas;
3. When these resources are to be deployed, such as whether at an interim audit stage or at
key cut-off dates; and
4. How such resources are managed, directed and supervised, such as when team briefing
and debriefing meetings are expected to be held, how engagement partner and manager
reviews are expected to take place (for example, on-site or off-site), and whether to
complete engagement quality control reviews
5. Audit Plan
Once the overall audit strategy has been established, an audit plan can be developed to address
the various matters identified in the overall audit strategy, taking into account the need to
achieve the audit objectives through the efficient use of the auditor’s resources.

Understanding client’s business is one of the important principles in developing an audit
plan. In fact, without adequate knowledge of client’s business, a proper audit is not possible.
Gaining knowledge of client’s business is, therefore, one of the foremost requirements to
develop audit plan.
SA-300 states that auditor shall develop an audit plan that shall include description of :
1. The nature, timing and extent of planned risk assessment procedures
2. The nature, timing and extent of planned further audit procedures at assertion level
3. Other planned audit procedures that are required to be carried out so that the engagement
complies with SAs.
6. Audit Plan : Auditor’s Responsibility

The overall audit strategy and the audit plan remain the auditor’s responsibility. It is the auditor
who is responsible for establishing overall audit strategy and developing audit plan. However,
as discussed earlier, auditor may discuss elements of planning with entity’s management
without compromising effectiveness of audit.
7. Relation between Strategy and Plan

1. Audit strategy sets the broad overall approach to the audit whereas audit plan addresses
the various matters identified in the overall audit strategy
2. Audit strategy determines scope, timing and direction of audit.

3. Audit plan describes how strategy is going to be implemented.
4. The audit plan is more detailed than the overall audit strategy that includes the nature,
timing and extent of audit procedures to be performed by engagement team members
5. Once the overall audit strategy has been established, an audit plan can be developed to
address the various matters identified in the overall audit strategy.
6. The establishment of the overall audit strategy and the detailed audit plan are not
necessarily discrete or sequential processes, but are closely inter-related since changes
in one may result in consequential changes to the other.
8. Changes to Planning during the course of Audit

The auditor shall update and change the overall audit strategy and the audit plan as necessary
during the course of the audit as a result of:
a. Unexpected events
b. Change in conditions
c. Audit evidence obtained
The auditor may need to modify the overall audit strategy and audit plan and thereby the
resulting planned nature, timing and extent of further audit procedures, based on the revised
consideration of assessed risks.
9. Direction Supervision and Review work of Team members

The nature, timing and extent of the direction and supervision of engagement team members
and review of their work vary depending on many factors, including:
1. The size and complexity of the entity.
2. The area of the audit.
3. The assessed risks of material misstatement
4. Capability and competence of team members
10. Documentation
The auditor shall document:
1. The overall audit strategy;
2. The audit plan; and
3. Any significant changes made during the audit engagement to the overall audit strategy
or the audit plan, and the reasons for such changes.
The documentation of the overall audit strategy is a record of the key decisions considered
necessary to properly plan the audit and to communicate significant matters to the engagement
team.

The documentation of the audit plan is a record of the planned nature, timing and extent of
risk assessment procedures and further audit procedures at the assertion level in response to
the assessed risks.
The record of the significant changes as to explain why changes were made and the overall
strategy and audit plan finally followed.
11. Meaning of Audit Programme

1. An audit programme is a detailed plan of applying the audit procedures to obtain
sufficient evidence to enable the auditor to express an informed opinion on a company’s
financial statements and accounts.
2. It consists of a series of verification procedures to be applied in the given circumstances
with instructions for the appropriate techniques to be adopted.
3. The purpose of the audit programme is to accomplish the audit objectives.
General points about audit programme:

1. Evolving One Audit Programme – Not Practicable for All Businesses
a. Businesses vary in nature, size and composition; work which is suitable to one
business may not be suitable to others.
b. Existence and efficiency of internal controls and other factors vary from
assignment to assignment
c. On account of such variations, evolving one audit programme applicable to all
business under all circumstances is not practicable.

2. The Assistant Engaged - Be Encouraged To Keep An Open Mind
a. As experience is gained on an assignment, the programme may be altered to take
care to take care of situations, which were missed out originally. So, any work
which beyond a doubt proves to be unnecessary or irrelevant may be dropped.
b. Assistant should be instructed to note and report significant matters coming to
his notice, to his seniors or to the partners or proprietor of the firm engaged for
doing the audit.
3. Periodic Review of The Audit Programme
a. There should be periodic review of the audit programme to assess whether the
same continues to be adequate for obtaining requisite knowledge and evidence
about the transactions.
b. Unless this is done, any change in the business policy of the client may not be
adequately known, and consequently, audit work may be carried out, on the basis
of an obsolete programme.
c. The utility of the audit programme can be retained and enhanced only by keeping
the programme as also the client’s operations and internal control under periodic
review so that inadequacies or redundancies of the programme may be removed.
12. Constructing an Audit Programme

The following points should be kept in mind:

1. Stay within the scope and limitation of the assignment.
2. Determine the evidence reasonably available and identify the best evidence for deriving
the necessary satisfaction.
3. Apply only those steps and procedures which are useful in accomplishing the verification
purpose in the specific situation.
4. Consider all possibilities of error.
5. Co-ordinate the procedures to be applied to related items.
13. Advantages of Audit Programme

1. Provides the assistant carrying out the audit with clear instructions of the work to be
done
2. Provide a total perspective of work to be performed
3. Selection of assistants for the jobs on the basis of capability becomes easier when the
work is rationally planned, defined and segregated
4. Prevents danger of ignoring or overlooking certain books and records
5. The assistants accept responsibility for the work carried out by them
6. Principal can control the progress of the various audits in hand by examining initiated
programmes

7. Serves as a guide for audits to be carried out in the succeeding year
8. Serves as evidence in the event of any charge of negligence being brought against the
auditor
14. Disadvantage of Audit Programme

1. Work may become mechanical
2. Parts of the programme may be carried out without understanding of the objective
3. Programme may become rigid and inflexible
4. Business may change, but the old programme may still be carried on
5. Changes in staff or internal control may require precaution in different points than
originally planned
6. Inefficient assistants may take shelter behind the programme
7. Hard and fast audit programme may kill initiative of efficient and enterprising assistants

Please do memorise content and practice questions from SCANNER

CHAPTER 3
RISK ASSESSMENT AND
INTERNAL CONTROL

May 24
CA Himanshu
Chapter 3
1. Audit Risk 5
2. Risk of Material Misstatement 5
3. Inherent Risk 5
4. Control Risk 6
5. Detection Risk 6
6. What is not Audit Risk ? 7
7. Combined assessment of ROMM 7
8. Significant Risk 7
9. Assessment of risks- A matter of professional Judgment 8

2. What is Risk Assessment Procedure? 9
3. How to do Risk Assessment Procedure? 9
4. What is included in Risk Assessment Procedure 9
5. Information obtained by performing RAP - Used as audit evidence 11
6. Understanding of Entity 11
7. Why understanding the entity and its environment is significant? 12
8. Understanding of the entity – a continuous process 12
9. Meaning of Internal Control 13
10. Limitation of Internal Control 13
11. Components Of Internal Control 14
12. Are all controls relevant to Audit ? 16
13. Nature and Extent of the Understanding of Relevant Controls 17
1. Evaluation of Internal Control– Methods 18

2. Benefits of evaluation of Internal controls 19
3. Formulate Audit Programme after understanding Internal control 19

1. What is Automated Environment 21

2. Key features of an Automated Environment 21
3. Understanding and documenting automated environment 21
4. Risks from the use of IT systems 22
5. Impact of IT risks on Substantive Audit, Controls and Reporting 23
6. Types of Controls in an Automated Environment 23
7. General IT Controls 23
8. Application Controls 25
9. IT dependent Controls 25
10. GITC vs App Controls 25
11. Testing Methods in an Automated Environment 25

12. Manual elements vs automated elements in entity’s internal control 26
13. Data Analytics for Audit 26
14. Digital Audit 27
15. Assess and Report Audit Findings 27
16. Documenting the Risk 27
17. Internal financial control as per Financial Reporting 28
18. Documenting the Risks 29
2. What is Test of Controls (ICAI Module Point 7) 30
3. Nature and extent of Test of Controls 31
4. Timing of Test of Controls 32
5. Using Audit Evidence Obtained in Previous Audits 32
6. Evaluating the Operating Effectiveness of Controls 32
7. Specific inquiries when deviations from controls are detected 32
8. What is Substantive Procedure 33
9. Nature and Extent of Substantive Procedures 33

10. Test of Details 33

11. Substantive analytical procedures 34
2. Materiality from Financal Perspective 35
3. What is materiality ? 35
4. Performance materiality 35
5. Benchmark 36
6. Other points related to materiality 36
7. Revision of materiality 37
8. Documentation of materiality 37

9. Materiality and Audit Risk 37

1. Audit Risk
Audit risk means the risk that the auditor gives an inappropriate audit opinion when the
financial statement are materially misstated. Thus, it is the risk that the auditor may fail to
express an appropriate opinion in an audit assignment.
Audit risk is a function of the risks of material misstatement and detection risk.
From the above, it is clear that –
Audit Risk (AR)= Risk of Material Misstatement (ROMM) x Detection Risk (DR)
2. Risk of Material Misstatement

Risk of material misstatement may be defined as the risk that the financial statements are
materially misstated prior to audit. It simply means that there is a probability of frauds or
errors in financial statements before audit.
This consists of Two components, described as follows at the assertion level:
1. Inherent risk (IR)
2. Control risk (CR)
The risks of material misstatement may exist at two levels:

1. The overall financial statement level- ROMM that relate pervasively to the financial
statements as a whole and potentially affect many assertions.
2. The assertion level for classes of transactions, account balances, and disclosures- ROMM
at the assertion level are assessed in order to determine the nature, timing, and extent of
further audit procedures necessary to obtain sufficient appropriate audit evidence.
(Misstatement refers to a difference between the amount, classification, presentation, or
disclosure of a reported financial statement item and the amount, classification, presentation,
or disclosure that is required for the item to be in accordance with the applicable financial
reporting framework. Misstatements can arise from error or fraud.)
Example
1. Charging of an item of capital expenditure to revenue or vice-versa
2. Difference in disclosure of a financial statement item vis-à-vis its requirement in
3. Applicable financial reporting framework
4. Selection or application of inappropriate accounting policies
5. Overstating or understating inventories
6. Overstating of receivables in financial statements by not writing off irrecoverable debts
3. Inherent Risk
The susceptibility of an assertion about a class of transaction, account balance or disclosure
to a misstatement that could be material, either individually or when aggregated with other
misstatements, before consideration of any related controls.

Inherent risk factors are considered while designing tests of controls and substantive
procedures.
Example:
1. An accounting standard provides guidance on some complex issue which might not be
understood by the management. Therefore, recording of this issue in financial statements
carries inherent risk of being misstated.
2. There are large number of business failures in an industry. Therefore, assertions in
financial statements of an entity operating in such an industry carry an inherent risk of
being misstated.
4. Control Risk
The risk that a misstatement that could occur in an assertion about a class of transaction,
account balance or disclosure that could be material, either individually or when aggregated
with other misstatements, will not be prevented, or detected and corrected, on a timely basis
by the entity’s internal control.

Control risk is a function of the:
1. Effectiveness of the design,
2. Implementation and
3. Maintenance of internal control by management.
However, internal control can only reduce but not eliminate risks of material misstatement
in the financial statements. This is because of the inherent limitations of internal control.
Example:
1. A company has devised control that cash and cheque books should be kept in a locked
safe and access is granted to authorized personnel only. There is risk that control is not
being followed.
2. An entity has devised a control that fire extinguishers and smoke detectors are in place and
are in working condition at all times to reduce the risk of damage to inventories caused by
fire. There is a risk that fire extinguishers in place are expired and are not being refilled.
Similarly, there is a possibility that smoke detectors are not working.
3. A company has devised a control relating to petty cash that items of expenditure of only
less than Rs. 10000 should be routed through imprest system of petty cash. There is a risk
that control is not being followed.
5. Detection Risk
The risk that the procedures performed by the auditor to reduce audit risk to an acceptably low
level will not detect a misstatement that exists and that could be material, either individually
or when aggregated with other misstatements.
Detection risk may be reduced by increasing area of checking, testing larger samples and
by including competent and experienced persons in the engagement team

Detection risk comprises sampling and non-sampling risk.

1. Sampling risk is the risk that the auditor’s conclusion based on a sample may be different
from the conclusion if the entire population were subjected to the same audit procedure.
It simply means that the sample was not representative of the population from which it
was chosen.
2. Non-sampling risk is the risk that the auditor reaches an erroneous conclusion for any
reason not related to sampling risk. Like an auditor may reach an erroneous conclusion
due to application to some inappropriate audit procedure.
Example:
1. Sizeable work-in-progress inventories are expected in financial statements of a company.
However, auditor of the company does not devote time to attending inventory count.
Instead, he chooses to rely upon alternative audit procedures.
2. The auditor of a company has audited revenue of a company by taking a sample. However,
there is a risk that sample of revenue is not representative of overall revenue.
6. What is not Audit Risk ?

1. Audit risk does not include the risk that the auditor might express an opinion that the
financial statements are materially misstated when they are not. This risk is ordinarily
insignificant.
2. Further, audit risk is a technical term related to the process of auditing; it does not refer to
the auditor’s business risks such as loss from litigation, adverse publicity, or other events
arising in connection with the audit of financial statements
7. Combined assessment of ROMM

The SAs do not ordinarily refer to inherent risk and control risk separately, but rather to a
combined assessment of the “risks of material misstatement”.
1. The auditor may make separate or combined assessments of inherent and control risk
depending on preferred audit techniques or methodologies and practical considerations.
2. The assessment of the ROMM may be expressed in quantitative terms, such as in
percentages, or in non-quantitative terms.
3. In any case, the need for the auditor to make appropriate risk assessments is more
important than the different approaches by which they may be made.
8. Significant Risk
The auditor shall consider at least the following:
1. Whether the risk is a risk of fraud
2. Risk is related to recent significant economic, accounting or other important development
3. Complexity of transactions
4. Risk involves significant transaction with related parties

5. Risk related to financial item where there is high degree of subjectivity in measurement
6. Risk related to significant transactions outside the normal course of business
Significant risks often relate to significant non- routine transactions or

judgmental matters:
Non-routine transactions are uncommon transactions that occur infrequently, either because
of their size or nature. Judgmental matters may include developing accounting estimates
with significant measurement uncertainty.
Risks of Material Misstatement– Greater for Significant Non-Routine

Transactions:
Risks of material misstatement may be greater for significant non-routine transactions arising
from matters such as the following:
1. Greater management intervention to specify the accounting treatment.
2. Greater manual intervention for data collection and processing.

3. Complex calculations or accounting principles.
4. The nature of non-routine transactions, which may make it difficult for the entity to
implement effective controls over the risks
Risks of material misstatement– Greater for Significant Judgmental Matters:

Risks of material misstatement may be greater for significant judgmental matters that require
the development of accounting estimates, arising from matters such as the following:
1. Accounting principles for accounting estimates or revenue recognition may be subject
to differing interpretation.
2. Required judgment may be subjective or complex, or require assumptions about the
effects of future events, for example, judgment about fair value.
9. Assessment of risks- A matter of professional Judgment

The assessment of risks is a matter of professional judgment, rather than a matter capable of
precise measurement. The distinguishing feature of the professional judgment expected of an
auditor is that it is exercised by an auditor whose training, knowledge and experience have
assisted in developing the necessary competencies to achieve reasonable judgments.

The objective of the auditor is to:
1. Identify and assess the risks of material misstatement,
2. Whether due to fraud or error,
3. At the financial statement and assertion levels,

4. Through understanding the entity and its environment, including the entity’s internal
control.
2. What is Risk Assessment Procedure?

The audit procedures performed to obtain:
1. An understanding of the entity and its environment,
2. Including the entity’s internal control,
3. To identify and assess the risks of material misstatement, whether due to fraud or error,
4. At the financial statement and assertion levels.
3. How to do Risk Assessment Procedure?

For the purpose of identifying and assessing the risks of material misstatement, the auditor
shall:
1. Identify risks throughout the process of obtaining an understanding of the entity and its
environment, including relevant controls that relate to the risks, and by considering the
classes of transactions, account balances, and disclosures in the financial statements
2. Assess the identified risks, and evaluate whether they relate more pervasively to the
financial statements as a whole and potentially affect many assertions
3. Relate the identified risks to what can go wrong at the assertion level, taking account of
relevant controls that the auditor intends to test and
4. Consider the likelihood of misstatement, including the possibility of multiple
misstatements, and whether the potential misstatement is of a magnitude that could
result in a material misstatement.
4. What is included in Risk Assessment Procedure

The risk assessment procedures shall include the following:
1. Inquiries of Management and Others Within the Entity
2. Analytical Procedures
3. Observation and inspection
Inquiries of Management and Others Within the Entity

1. The auditor obtains information about the entity and its environment through inquiry of

management, individuals responsible for financial reporting, and other personnel within
the entity.
2. Inquiries from other people within the entity may be useful in providing the auditor with
a perspective different from that of management and those responsible for financial
reporting.
3. Depending on the circumstances, the auditor might make inquiries of:
a. Inquiries directed toward TCWG (e.g., board of directors or audit committee).
b. Inquiries directed toward Internal audit personnel may provide information
about internal audit procedures performed during the year relating to the design
and effectiveness of the entity’s internal control
c. Inquiries directed toward Employees involved in accounting initiating,
authorizing, processing, or recording complex transactions.
d. Inquiries directed toward In-house legal counsel may provide information about
such matters as litigation, compliance with laws and regulations
e. Inquiries directed toward Production, marketing, sales, and other personnel

f. Inquiries directed to information systems personnel may provide information
about system changes, system or control failures, or other information system-
related risks.
Analytical Procedures
1. The auditing standards require the use of analytical procedures during the audit planning
phase.
2. By using preliminary analytical procedures, the auditor can gain insight into the entity
and its environment and identify areas that may pose significant risks relevant to the
audit.
3. Analytical procedures are effective in detecting unusual transactions or events, as well as
trends, ratios, and amounts that may affect the audit planning process.
4. While performing analytical procedures, the auditor create reasonable expectations
of the relationships that should exist based on their understanding of the entity and its
environment. However, the results of such high-level analytical procedures are only an
initial indication of whether there may be a significant misstatement.
Observation and inspection

Observation and inspection include audit procedures such as:
1. Observation of entity activities and operations.
2. Inspection of documents (e.g., business plans and strategies), records, and internal
control manuals.
3. Read reports prepared by management, those charged with governance, and internal
audit.
4. Visits to the entity’s premises and plant facilities.

5. Tracing transactions through the information system relevant to financial reporting,

which may be performed as part of a walkthrough.
5. Information obtained by performing RAP - Used as audit evidence

Information obtained by performing risk assessment procedures and related activities may
be used by the auditor as audit evidence to support assessments of the risks of material
misstatement.
6. Understanding of Entity
The auditor shall obtain an understanding of the following:
1. Understanding of industry: Relevant industry, regulatory, and other external factors
including the applicable financial reporting framework.
2. Understand the entity: The nature of the entity, including:
a. its operations;
b. its ownership and governance structures;
c. the types of investments that the entity is making and plans to make, including
investments in special-purpose entities; and
d. the way that the entity is structured and how it is financed; to enable the auditor
to understand the classes of transactions, account balances, and disclosures to be
expected in the financial statements.
Examples of matters that the auditor may consider while obtaining understanding of nature
of entity include:
a. Business operations such as nature of revenue sources, products or services,
conduct of operations, location of production facilities, key customers and
suppliers of goods and services
b. Investment and investment activities such as capital investment activities and
planned or recently executed acquisitions
c. Financing and financing activities such as major subsidiaries, debt structure etc.
d. Financial reporting such as accounting principles and revenue recognition
practices
3. Understanding of accounting system: The entity’s selection and application of accounting
policies, including the reasons for changes.
4. Understanding of financial reporting framework: The auditor shall evaluate whether
the entity’s accounting policies are appropriate for its business and consistent with the
applicable financial reporting framework and accounting policies used in the relevant
industry.
5. Understanding entity’s objective, strategies and business model: The entity’s objectives
and strategies, and those related business risks that may result in risks of material
misstatement.

Examples of matters that the auditor may consider when obtaining an understanding of the
entity’s objectives, strategies and related business risks
a. Industry developments (a potential related business risk might be, for example,
that the entity does not have the personnel or expertise to deal with the changes
in the industry).
b. New products and services (a potential related business risk might be, for example,
that there is increased product liability).
c. Expansion of the business (a potential related business risk might be, for example,
that the demand has not been accurately estimated).
6. The measurement and review of the entity’s financial performance: an understanding of
the entity’s performance measures assists the auditor in considering whether pressures
to achieve performance targets may result in management actions that increase the risks
of material misstatement, including those due to fraud. Examples:
a. Key performance indicators (financial and non-financial) and key ratios,
b. Trends and operating statistics.

c. Period-on-period financial performance analyses.
d. Budgets, forecasts, variance analyses, and departmental or other level performance
reports.
e. Credit rating agency reports
Examples for measuring and reviewing financial performance which may be used by an
auditor may include:
a. Key performance indicators (financial and non-financial) and key ratios,trends
and operating statistics.
b. Period-on-period financial performance analyses.
c. Budgets, forecasts, variance analyses, and departmental or other level performance
reports.
d. Credit rating agency reports
7. Why understanding the entity and its environment is significant?

Understanding the entity and the environment in which it operates is very significant. It helps
the auditor in planning the audit and in identifying areas requiring special attention. Gaining
knowledge about client’s business is one of the important principles in developing an overall
audit plan. In fact, without adequate knowledge of client’s business, a proper audit is not
possible.
8. Understanding of the entity – a continuous process

Obtaining an understanding of the entity and its environment, including the entity’s internal
control, is a continuous, dynamic process of gathering, updating and analysing information
throughout the audit.

Before conducting an audit, the auditor needs to have a clear understanding of the subject
matter. This helps them to plan the audit and make professional judgments throughout the
process.
1. Assessing risks of material misstatement of the financial statements
2. Determining materiality in accordance with SA 320;
3. Considering the appropriateness of the selection and application of accounting policies;
4. Identify areas that may need extra attention, such as transactions involving related
parties, checking if the management’s use of the going concern assumption is suitable, or
analyzing the purpose of business transactions.
5. Developing expectations for use when performing analytical procedures;
6. Evaluating the sufficiency and appropriateness of audit evidence obtained, such as the
appropriateness of assumptions and of management’s oral and written representations.
9. Meaning of Internal Control

As per SA-315, “Identifying and Assessing the Risk of Material Misstatement Through
Understanding the Entity and its Environment”, the internal control may be defined as the
process:
1. Designed,
2. Implemented and
3. Maintained
by those charged with governance, management and other personnel to provide reasonable
assurance about the achievement of an entity’s objectives with regard to:
1. Reliability of financial reporting,
2. Effectiveness and efficiency of operations,
3. Safeguarding of assets, and
4. Compliance with applicable laws and regulations.
Benefits of Understanding of Internal Control

An understanding of internal control assists the auditor in:
1. Identifying types of potential misstatements;
2. Identifying factors that affect the risks of material misstatement, and
3. Designing the nature, timing, and extent of further audit procedures.
10. Limitation of Internal Control

1. Internal control can provide only reasonable assurance: Internal control, no matter
how effective, can provide an entity with only reasonable assurance about achieving the
entity’s financial reporting objectives. The likelihood of their achievement is affected by

inherent limitations of internal control.

2. Human judgment in decision-making: Realities that human judgment in decision-making
can be faulty and that breakdowns in internal control can occur because of human error.
For example, there may be an error in the design of, or in the change to, a control.
3. Lack of understanding the purpose: Equally, the operation of a control may not be
effective, such as where information produced for the purposes of internal control (for
example, an exception report) is not effectively used because the individual responsible
for reviewing the information does not understand its purpose or fails to take appropriate
action.
4. Collusion among People: Additionally, controls can be circumvented by the collusion of
two or more people or inappropriate management override of internal control.
5. Judgements by Management: Further, in designing and implementing controls,
management may make judgments on the nature and extent of the controls it chooses to
implement, and the nature and extent of the risks it chooses to assume.
11. Components Of Internal Control

1. Control Environment:

2. The Entity’s Risk Assessment Process
3. Information system and communication
4. Control activities
5. Monitoring
A. CONTROL ENVIRONMENT:
The auditor shall obtain an understanding of the control environment. As part of obtaining
this understanding, the auditor shall evaluate whether:
1. Management has created and maintained a culture of honesty and ethical behaviour and
2. The strengths in the control environment elements collectively provide an appropriate
foundation for the other components of internal control.
The control environment includes:
1. The governance and management functions and
2. The attitudes, awareness, and actions of those charged with governance and management
3. The control environment sets the tone of an organization, influencing the control
consciousness of its people
Elements of the Control Environment:
1. Communication and enforcement of integrity and ethical values
2. Commitment to competence
3. Participation by those charged with governance
4. Management’s philosophy and operating style

5. Organisational structure
6. Assignment of authority and responsibility
7. Human resource policies and practices
Existence of a satisfactory control environment not an absolute deterrent to

fraud
The existence of a satisfactory control environment can be a positive factor when the auditor
assesses the risks of material misstatement.
However, although it may help reduce the risk of fraud, a satisfactory control environment is
not an absolute deterrent to fraud. Conversely, deficiencies in the control environment may
undermine the effectiveness of controls, in particular in relation to fraud.
The control environment in itself does not prevent, or detect and correct, a material
misstatement. It may, however, influence the auditor’s evaluation of the effectiveness of
other controls (for example, the monitoring of controls and the operation of specific control
activities) and thereby, the auditor’s assessment of the risks of material misstatement.
B. THE ENTITY’S RISK ASSESSMENT PROCESS
The entity’s risk assessment process forms the basis for the risks to be managed. If that process
is appropriate, it would assist the auditor in identifying risks of material misstatement.

The auditor shall obtain an understanding of whether the entity has a process for:
1. Identifying business risks relevant to financial reporting objectives;
2. Estimating the significance of the risks;
3. Assessing the likelihood of their occurrence; and
4. Deciding about actions to address those risks.
C. INFORMATION SYSTEM AND COMMUNICATION
The information system refers to all of the business processes relevant to financial reporting
and communication. It includes the procedures within both information technology and
manual systems.
The auditor shall obtain an understanding of the information system, including the related
business processes, relevant to financial reporting, including the following areas:
1. Identify Class of transactions significant to the financial statements
2. The procedure by which transaction initiated, recorded, processed, corrected as
necessary transferred to general ledger and financial statement.
3. Related accounting records, supporting information and specific accounts in the financial
statements that are used to initiate, record, process and report transactions.
4. How information systems captures information relevant to financial statements.
5. The process used to prepare financial statements
6. Controls around journal entries

D. CONTROL ACTIVITIES
Control Activities are the policies and procedures that help ensure management directives
are carried out. During an audit, the auditor assesses the risk and considers only the relevant
control activities related to a significant class of transactions, account balance, and disclosure.
Examples of specific control activities include those relating to audit are the following: [PAPSI]
1. Authorisation
2. Performance reviews
3. Information processing
4. Physical controls
5. Segregation of duties
E. MONITORING OF CONTROLS
The auditor shall obtain an understanding of the major activities that the entity uses to monitor
internal control over financial reporting.
1. Monitoring of controls is a process to assess the effectiveness of internal control

performance over time.
2. It helps in assessing the effectiveness of controls on a timely basis.
3. It involves assessing the effectiveness of controls on a timely basis and taking necessary
remedial actions.
4. It includes considering whether controls are operating as intended and that they are
modified as appropriate for change in conditions.
5. Management accomplishes monitoring of controls through ongoing activities, separate
evaluations, or a combination of the two.
6. Ongoing monitoring activities are often built into the normal recurring activities of an
entity and include regular management and supervisory activities.
7. Management’s monitoring activities may include using information from communications
from external parties such as customer complaints and regulator comments that may
indicate problems or highlight areas in need of improvement.
12. Are all controls relevant to Audit ?

Factors relevant to the auditor’s judgment about whether a control, individually or in
combination with others, is relevant to the audit may include such matters as the following:
1. Materiality.
2. The significance of the related risk.
3. The size of the entity.
4. The nature of the entity’s business, including its organisation and ownership characteristics.
5. The diversity and complexity of the entity’s operations.

6. Applicable legal and regulatory requirements.

7. The circumstances and the applicable component of internal control.
8. The nature and complexity of the systems that are part of the entity’s internal control,
including the use of service organisations.
9. Whether, and how, a specific control, individually or in combination with others, prevents,
or detects and corrects, material misstatement.
13. Nature and Extent of the Understanding of Relevant Controls

What is evaluation of Design:
Evaluating the design of a control involves considering whether the control, individually or
in combination with other controls, is capable of effectively preventing, or detecting and
correcting, material misstatements.
What is evaluation of Implementation:
Implementation of a control means that the control exists and that the entity is using it.
There is little point in assessing the implementation of a control that is not effective, and so
the design of a control is considered first.

An improperly designed control may represent a significant deficiency in internal control.
Risk assessment procedures to obtain audit evidence about the design and implementation of
relevant controls may include:
1. Inquiring of entity personnel.
2. Observing the application of specific controls.
3. Inspecting documents and reports.
4. Tracing transactions through the information system relevant to financial reporting.

1. Evaluation of Internal Control– Methods

Narrative Record
1. Narrative record: written description of a system found in operation by the auditor
2. Actual testing and observation needed before creating it
3. Recommended for small businesses with no formal control system
4. Disadvantages:
a. Difficult to comprehend the system in operation
b. Hard to identify weaknesses or gaps
c. Challenging to incorporate changes due to reshuffling of manpower, etc.
Checklist
1. This is a series of instructions and/or questions which a member of the auditing staff
must follow and/or answer.

2. When he completes instruction, he initials the space against the instruction.
3. Answers to the check list instructions are usually Yes, No or Not Applicable. This is again
an on-the-job requirement and instructions are framed having regard to the desirable
elements of control.
4. Few examples of Checklist instruction are:
a. Are tenders called before placing orders?
b. Are the purchases made on the basis of a written order?
c. Is the purchase order form standardised?
d. Are purchase order forms pre-numbered?
e. Are the inventory control accounts maintained by persons who have nothing to do
with custody of work, receipt of inventory, inspection of inventory andpurchase
of inventory?
Internal Control Questionnaire

1. Questionnaire: comprehensive questions for internal control evaluation
2. Most widely used method for collecting information
3. Less oversight/omission of control review procedures
4. Allows for all evaluation to be completed at one time or in sections
5. Provides orderly means of disclosing control defects
6. Review internal control system annually and record in detail
7. Yes = satisfactory, No = weakness (with explanation option)

8. Not Applicable for irrelevant questions

9. generally, issued to client for filling by concerned executives and employees
10. Inconsistencies or incongruities further discussed with client
11. Report of deficiencies and recommendations for improvement prepared
Flow Chart
1. Flowchart: graphic presentation of company’s internal control system
2. Most concise way of recording auditor’s review
3. Minimizes narrative explanation
4. Provides bird’s eye view of system and flow of transactions
5. Helps in spotting documentation gaps and suggesting improvements
6. Auditor must study significant features of business and nature of activities
7. Comprehensive study of manufacturing, trading, and administration processes needed
8. Helps in understanding and evaluating internal controls accurately
2. Benefits of evaluation of Internal controls

1. Adequacy of internal control system
2. Identify likelihood of errors and frauds
3. Effectiveness of internal auditing department
4. Administrative control impact on audit work
5. Safeguarding assets
6. Recording function discharge by management
7. Reliability of reports, records, and certificates
8. Extent and depth of examination
9. Appropriate audit technique and procedure
10. Weak or excessive control areas
11. Suggestions for improving control system
3. Formulate Audit Programme after understanding Internal control

1. The auditor must comprehend the internal control systems and how they work before
creating the audit plan.
2. If the auditor neglects this understanding, the audit plan might become too complex,
losing sight of the audit’s purpose amid the overwhelming volume of records.
3. It’s crucial for the auditor to verify if the system is actively functioning. Sometimes,

systems are installed but not properly monitored, leading the auditor to assume they
are operational when they might not be working fully. The auditor can formulate his
entire audit programme only after he has had a satisfactory understanding of the internal
control systems and their actual operation.

1. What is Automated Environment

Automated environment basically refers to a business environment where the :
• Processes,
• Operations,
• Accounting and
• Even decisions
are carried out by using computer systems – also known as Information Systems (IS) or
Information Technology (IT) systems.
2. Key features of an Automated Environment

1. Automated environments aim to minimize manual intervention and rely on system-
driven processes for conducting business operations.
2. The level of automation in a business environment determines its complexity. Higher
automation leads to increased complexity, while lower automation results in a less
complex environment.
3. An example of increased complexity is when a company uses integrated software systems,
indicating higher automation. On the other hand, using off-the-shelf systems implies
lower automation and a less complex environment.
If a company uses an integrated enterprise resource planning system (ERP) viz., SAP, Oracle
etc., then it is considered more complex to audit. On the other hand, if a company is using an
off-the-shelf accounting software, then it is likely to be less automated and hence less complex
environment.
3. Understanding and documenting automated environment

Understanding the entity and its automated environment involves understanding of how IT
department is organised, IT activities, IT dependencies and relevant risks and controls.
The understanding of a company’s IT environment that is obtained should be documented.
Given below are some of the points that an auditor should consider to obtain an understanding
of the company’s automated environment:
1. Information systems being used (one or more application systems and what they are)
2. Their purpose (financial and non-financial)
3. Location of IT systems - local vs global.
4. Architecture (desktop based, client-server, web application, cloud based).
5. Version (functions and risks could vary in different versions of same application).
6. Interfaces within systems (in case multiple systems exist).
7. In-house vs Packaged.
8. Outsourced activities (IT maintenance and support).

9. Key persons (CIO, CISO, Administrators).
Key words: Systems-Purpose-Location-Architecture-Version-Interfaces-Inhouse-Outsourced-

KeyPersons
Trick: SPLAVIIOK” could be remembered as “Super People Love Amazing Varieties In
Information, Including In-house, Outsourced, and Key persons.”
4. Risks from the use of IT systems

1. Inaccurate processing of data, processing inaccurate data, or both.
2. Unauthorized access to data.
3. Direct data changes (backend changes).
4. Excessive access / Privileged access (super users).

5. Lack of adequate segregation of duties.

6. Unauthorized changes to systems or programs.
7. Failure to make necessary changes to systems or programs.
8. Loss of data.
5. Impact of IT risks on Substantive Audit, Controls and Reporting

The above risks have to be mitigated. If not mitigated, such risks, could have an impact on
audit in different ways discussed as under: -
Impact on substantive checking

Inability to address above discussed risks may lead to non-reliance of data obtained from
systems. In such a case, all information, data, and reports would have to be tested thoroughly
for their completeness and accuracy. It could lead to increased substantive checking i.e.,
detailed checking.
Impact on controls
It can lead to non-reliance on automated controls, system calculations and accounting

procedures built into applications. It may result in additional audit work.
Impact on reporting
Due to regulatory requirements in respect of internal financial controls (discussed in
subsequent paras) in case of companies, it may lead to modification of auditor’s report in
some instances.
6. Types of Controls in an Automated Environment

1. General IT Controls
2. Application Controls
3. IT-Dependent Controls
7. General IT Controls
“General IT controls are policies and procedures that relate to many applications and support
the effective functioning of application controls. They apply to mainframe, miniframe, and
end-user environments.
General IT-controls that maintain the integrity of information and security of data commonly
include controls over the following:
1. Data center and network operations
2. Program change
3. Access security
4. Application system acquisition, development, and maintenance (Business Applications)

These are IT controls generally implemented to mitigate the IT specific risks and applied
commonly across multiple IT systems, applications and business processes. Hence, General
IT controls are known as “pervasive” controls or “indirect” controls.
A. Data centre and network operations

Objective:
The objective of controls over Data centre and network operations is to ensure that production
systems are processed to meet financial reporting objectives.
Activities:
1. Overall Management of Computer Operations Activities
2. Batch jobs – preparing, scheduling and executing
3. Backups – monitoring, storage & retention
4. Performance Monitoring – operating system, database and networks
5. Recovery from Failures – Business continuity planning, Disaster recovery planning

B. Program Change
Objective:
The objective of program change controls is to ensure that modified systems continue to meet
financial reporting objectives.
Activities:
1. Change Management Process
2. Change Requests – record, manage, track
3. Making Changes and tracking change request
4. Testing changes
C. Access Security
Objective:
The objective of controls over access security is to ensure that access to programs and data is
authenticated and authorized to meet financial reporting objectives.
Activities:
1. & Security Organization & Management
2. Security Policies & Procedures
3. Application Security
4. Data Security

5. Operating System Security

6. Network & Physical Security
D. Application system acquisition, development and maintenance

Objective:
The objective of such controls is to ensure that systems are developed, configured and
implemented to meet financial reporting objectives.
Activities:
1. Overall Mgmt. of Development Activities
2. Project Initiation
3. Analysis & Design
4. Construction
5. Testing & Quality Assurance
8. Application Controls
Application controls include both automated or manual controls that operate at a business
process level. Automated Application controls are embedded into IT applications viz., ERPs
and help in ensuring the completeness, accuracy and integrity of data in those systems.
Examples of automated applications include edit checks and validation of input data, sequence
number checks, user limit checks, reasonableness checks, mandatory data fields.
9. IT dependent Controls
IT dependent controls are basically manual controls that make use of some form of data or
information or report produced from IT systems and applications.
In this case, even though the control is performed manually, the design and effectiveness of
such controls depends on the reliability of source data.
Due to the inherent dependency on IT, the effectiveness and reliability of automated application
controls and IT dependent controls require the General IT controls to be effective.
10. GITC vs App Controls

1. Application controls and General IT Controls are interrelated.
2. General IT Controls are necessary to support the functioning of application controls.
3. Both types of controls are required for accurate information processing through IT
systems.
11. Testing Methods in an Automated Environment

There are basically four types of audit tests that should be used. These are inquiry, observation,
inspection and reperformance.

Inquiry is the most efficient audit test but it also gives the least audit evidence.
Reperformance is most effective as an audit test and gives the best audit evidence.
When testing in an automated environment, some of the more common methods are as
follows:
1. Obtain an understanding of how an automated transaction is processed by doing a
walkthrough of one end-to-end transaction using a combination of inquiry, observation
and inspection.
2. Observe how a user processes transactions under different scenarios.
3. Inspect the configuration defined in an application.
4. Inspect technical manual / user manual of systems and applications.
5. Carry out a test check (negative testing) and observe the error message displayed by the
application
12. Manual elements vs automated elements in entity’s internal control

Manual elements in internal control may be more suitable where judgment and discretion
are required such as for the following circumstances:
1. Large, unusual or non-recurring transactions.
2. Circumstances where errors are difficult to define, anticipate or predict.
3. In changing circumstances that require a control response outside the scope of an existing
automated control.
4. In monitoring the effectiveness of automated controls.
Manual control elements may be less suitable for the following circumstances:
1. High volume or recurring transactions, or in situations where errors that can be anticipated
or predicted can be prevented, or detected and corrected, by control parameters that are
automated.
2. Control activities where the specific ways to perform the control can be adequately
designed and automated.
13. Data Analytics for Audit

The combination of processes, tools and techniques that are used to tap vast amounts of
electronic data to obtain meaningful information is called data analytics.
The tools and techniques that auditors use in applying the principles of data analytics are
known as Computer Assisted Auditing Techniques or CAATs.
Data analytics can be used in testing of electronic records and data residing in IT systems
using spreadsheets and specialised audit tools viz., IDEA and ACL to perform the following:
1. Check completeness of data and population that is used in either test of controls or
substantive audit tests.
2. Selection of audit samples – random sampling, systematic sampling.

3. Re-computation of balances – reconstruction of trial balance from transaction data.

4. Reperformance of mathematical calculations – depreciation, bank interest calculation.
5. Analysis of journal entries
6. Fraud investigation.
7. Evaluating impact of control deficiencies.
14. Digital Audit

1. Entities are adopting digitization to keep up with changing times and revamp their
business models through the use of new technologies.
2. Companies are restructuring their business models with technology at the forefront, and
automation plays a key role in the digitization process.
3. Auditors are integrating digital technology into their processes, from planning to providing
the final opinion on financial statements.
4. Auditors are incorporating artificial intelligence, data analytics, and other cutting-edge
technologies to gain a deeper understanding of business processes.
5. The use of digital tools enables auditors to conduct more effective audits, focusing on
areas that require greater attention and improving risk identification through technology.
15. Assess and Report Audit Findings

At the conclusion of each audit, it is possible that there will be certain findings or exceptions
in IT environment and IT controls of the company that need to be assessed and reported to
relevant stakeholders including management and those charged with governance:
Some points to consider are as follows:

1. Are there any weaknesses in IT controls?
2. What is the impact of these weaknesses on overall audit?
3. Report deficiencies to management – Internal controls memo or Management letter.
4. Communicate in writing any significant deficiencies to those Charged with governance.
The auditor needs to assess each finding or exception to determine impact on the audit and
evaluate if the exception results in a deficiency in internal control.
A deficiency in internal control exists if a control is designed, implemented or operated in
such a way that it is unable to prevent, or detect and correct, misstatements in the financial
statements on a timely basis; or the control is missing. Evaluation and assessment of audit
findings and control deficiencies involves applying professional judgement that include
considerations for quantitative and qualitative measures. Each finding should be looked at
individually and in the aggregate by combining with other findings/deficiencies.
16. Documenting the Risk

The auditor shall document:

1. The discussion among the engagement team and the significant decisions reached
2. Key elements of the understanding obtained regarding each of the aspects of the entity
and its environment and of each of the internal control components, the sources of
information from which the understanding was obtained; and the risk assessment
procedures performed
3. The identified and assessed risks of material misstatement at the financial statement
level and at the assertion level and
4. The risks identified, and related controls about which the auditor has obtained an
understanding.
17. Internal financial control as per Financial Reporting

The term Internal Financial Controls (IFC) basically refers to the policies and procedures put
in place by companies for ensuring:
1. Reliability of financial reporting
2. Effectiveness and efficiency of operations

3. Compliance with applicable laws and regulations
4. Safeguarding of assets
5. Prevention and detection of frauds
Relevant provision of Nature of Responsibility

Companies Act,2013
Section 134 (5)(e) In case of listed Companies, the Directors’ responsibility
statement shall state that the Directors had laid down Internal
financial controls to be followed by the company and that such
Internal financial controls are adequate and were operating
effectively.
Section 143(3)(i) of the The auditor’s report shall state whether the company has
Act adequate Internal financial controls system in place and also on
the operating effectiveness of such controls.
This requirement shall not apply to a private company which:
1. is One Person Company or a small company; or
2. has turnover less than ₹ 50 crore as per latest audited
Financial Statements; and which has aggregate
borrowings from banks or financial institutions or any
body corporate at any point of time during the financial
Year for less than ₹ 25 crore.
Section 177(4)(vii) of the Every audit Committee shall act in accordance with the terms
Act of reference specified in writing by the Board which shall, inter
alia, include - evaluation of internal financial controls and risk
management systems.

Relevant provision of Nature of Responsibility

Companies Act,2013
As per Section 149(8) of The company and independent directors shall abide by the
the Act provisions specified in Schedule IV which lays down the Code for
independent Directors. As per this code, the role and functions of
independent directors include that they shall satisfy themselves
on the integrity of financial information and that financial
controls and the systems of risk management are robust and
defensible.
18. Documenting the Risks

The Auditor shall document:
1. The discussion among the engagement team and the significant decisions reached
2. Key elements of the understanding obtained regarding each of the aspects of the entity
and its environment and of each of the internal control components, the sources of
information from which the understanding was obtained; and the risk assessment
procedures performed.
3. The identified and assessed risks of material misstatement at the financial statement level
and at the assertion level and
4. The risks identified, and related controls about which the auditor has obtained an
understanding.

1. The auditor shall design and implement overall responses to address the assessed risks of
material misstatement at the financial statement level.
2. The auditor shall design and perform further audit procedures whose nature, timing and
extent are based on and are responsive to the assessed risks of material misstatement at
the assertion level.
In designing the further audit procedures to be performed, the auditor shall:

1. Consider the reasons for the assessment given to the risk of material misstatement at the
assertion level for each class of transactions, account balance, and disclosure, including:
a. The likelihood of material misstatement due to the particular characteristics of
the relevant class of transactions, account balance, or disclosure (i.e., the inherent
risk); and
b. Whether the risk assessment takes into account the relevant controls (i.e., the
control risk), thereby requiring the auditor to obtain audit evidence to determine
whether the controls are operating effectively (i.e., the auditor intends to rely

on the operating effectiveness of controls in determining the nature, timing and
extent of substantive procedures); and
2. Obtain more persuasive audit evidence the higher the auditor’s assessment of risk.
The auditor shall design and perform tests of controls to obtain sufficient
appropriate audit evidence as to the operating effectiveness of relevant controls
when:
1. The auditor’s assessment of risks of material misstatement at the assertion level includes
an expectation that the controls are operating effectively (i.e., the auditor intends to rely
on the operating effectiveness of controls in determining the nature, timing and extent of
substantive procedures); or
2. Substantive procedures alone cannot provide sufficient appropriate audit evidence at the
assertion level.
In designing and performing tests of controls, the auditor shall obtain more persuasive audit
evidence the greater the reliance the auditor places on the effectiveness of a control.
A higher level of assurance may be sought about the operating effectiveness of controls when
the approach adopted consists primarily of tests of controls, in particular, where it is not
possible or practicable to obtain sufficient appropriate audit evidence only from substantive
procedures.
2. What is Test of Controls (ICAI Module Point 7)

The test of controls is an audit procedure performed by auditors to evaluate the effectiveness
of a company’s internal controls in preventing, or detecting and correcting material
misstatements at the assertion level.
The auditor shall design and perform tests of controls to obtain sufficient appropriate audit
evidence as to the operating effectiveness of relevant controls when:

1. The auditor expects the controls to be operating effectively at the assertion level as part
of their assessment of Risk of Material Misstatement (ROMM) and plans to rely on them
to determine the nature, timing, and extent of substantive procedures.
2. Substantive procedures alone cannot provide enough suitable audit evidence at the
assertion level.
Test of controls may include:
1. Inspection of documents supporting transactions and other events to gain audit evidence
that internal controls have operated properly, for example, verifying that a transaction
has been authorised.
2. Inquiries about, and observation of, internal controls which leave no audit trail, for
example, determining who actually performs each function and not merely who is
supposed to perform it.
3. Re-performance involves the auditor’s independent execution of procedures or controls
that were originally performed as part of the entity’s internal control, for example,
reconciliation of bank accounts, to ensure they were correctly performed by the entity.
4. Testing of internal control operating on specific computerised applications or over the
overall information technology function, for example, access or program change controls.
3. Nature and extent of Test of Controls

In designing and performing test of controls, the auditor shall:
1. Perform other audit procedures in combination with inquiry to obtain audit evidence
about the operating effectiveness of the controls, including:
a. How the controls were applied at relevant times during the period under audit.
b. The consistency with which they were applied.
c. By whom or by what means they were applied.
2. Determine whether the controls to be tested depend upon other controls (indirect
controls), and if so, whether it is necessary to obtain audit evidence supporting the
effective operation of those indirect controls.
3. The auditor shall test controls for the particular time, or throughout the period, for which
the auditor intends to rely on those controls.
Inquiry alone is not sufficient to test the operating effectiveness of controls. Accordingly,
other audit procedures are performed in combination with inquiry. In this regard, inquiry
combined with inspection or reperformance may provide more assurance than inquiry and
observation, since an observation is pertinent only at the point in time at which it is made.
Matters the auditor may consider in determining the extent of test of controls
include the following:
1. The frequency of the performance of the control by the entity during the period.
2. The length of time during the audit period that the auditor is relying on the operating
effectiveness of the control.

3. The expected rate of deviation from a control.

4. The relevance and reliability of the audit evidence to be obtained regarding the operating
effectiveness of the control at the assertion level.
5. The extent to which audit evidence is obtained from tests of other controls related to the
assertion.
4. Timing of Test of Controls

The auditor shall test controls for the particular time, or throughout the period, for which
the auditor intends to rely on those controls in order to provide an appropriate basis for the
auditor’s intended reliance.
5. Using Audit Evidence Obtained in Previous Audits

To determining whether it is appropriate to use audit evidence about the operating effectiveness
of controls obtained in previous audit, the auditor shall consider the following:
1. The risks of material misstatement and the extent of reliance on the control.
2. The effectiveness of the entity’s risk assessment process the entity’s monitoring of controls

3. The effectiveness of general IT-controls;
4. The risks arising from the characteristics of the control, including whether it is manual
or automated;
5. Whether there have been personnel changes that significantly affect the application of
the control
6. Whether the lack of a change in a particular control that poses a risk due to changing
circumstances; and
6. Evaluating the Operating Effectiveness of Controls

When evaluating the operating effectiveness of relevant controls, the auditor shall evaluate
whether misstatements that have been detected by substantive procedures indicate that
controls are not operating effectively.
The absence of misstatements detected by substantive procedures, however, does not provide
audit evidence that controls related to the assertion being tested are effective.
7. Specific inquiries when deviations from controls are detected

The auditor shall make specific inquiries to understand these matters and their potential
consequences, and shall determine whether:
1. The test of controls that have been performed provide an appropriate basis for reliance
on the controls;
2. Additional test of controls are necessary; or
3. The potential risks of misstatement need to be addressed using substantive procedures

Irrespective of the assessed risks of material misstatement, the auditor

shall design and perform substantive procedures for each material class of
transactions, account balance, and disclosure.
This requirement reflects the facts that:
1. The auditor’s assessment of risk is judgmental and so may not identify all risks of material
misstatement and
2. There are inherent limitations to internal control, including management override.
8. What is Substantive Procedure

Substantive procedures are audit procedures designed to detect material misstatements at the
assertion level. Substantive procedures comprise:
(i) Tests of details (of classes of transactions, account balances, and disclosures), and
(ii) Substantive analytical procedures.
9. Nature and Extent of Substantive Procedures

Depending on the circumstances, the auditor may determine that:

1. Performing only substantive analytical procedures will be sufficient to reduce audit risk to
an acceptably low level. For example, where the auditor’s assessment of risk is supported
by audit evidence from tests of controls.
2. Only tests of details are appropriate.
3. A combination of substantive analytical procedures and tests of details are most responsive
to the assessed risks.
Because the assessment of the risk of material misstatement takes account

of internal control, the extent of substantive procedures may need to be
increased when the results from test of controls are unsatisfactory.
10. Test of Details

Tests of details are further classified into:
1. Tests of transactions i.e., vouching and
2. Tests of balances i.e., verification
Example:
Test of Transaction: A purchase transaction may be verified by examining the related purchase
invoice, goods received note, inward gate entry register.
Test of Balance: Verification of assets as well as liabilities like eeviewing entity’s plan
for performing physical verification of fixed assets and obtaining evidence for performance of
physical verification of fixed assets by management.

11. Substantive analytical procedures

Substantive analytical procedures refer to analytical procedures used as substantive procedures
by auditor.
The term “analytical procedures” means evaluations of financial information through analysis
of plausible 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.

The objective of the auditor is to apply the concept of materiality appropriately in planning
and performing the audit.
2. Materiality from Financal Perspective

Financial reporting frameworks often discuss the concept of materiality in the context of the
preparation and presentation of financial statements
What is material ?
1. Misstatements are material if expected to influence the economic decisions of users taken
on the basis of the financial statements:
2. Judgments about materiality are affected by the size or nature of a misstatement: For
example a small amount lost by fraudulent practices of certain employees can indicate a
serious flaw in the enterprise’s internal control system
3. Judgments about matters that are material are based on a consideration of the common
financial information needs of users as a group :.
3. What is materiality ?
The concept of materiality is applied by the auditor both in planning and performing the
audit, and in evaluating the effect of identified misstatement, uncorrected misstatement and
in forming the opinion in the auditor’s report.
1. Determining the nature, timing and extent of risk assessment process
2. Identifying and assessing the risk of material misstatement
3. Determining nature, timing and extent of further audit procedures
The auditor’s determination of materiality is a matter of professional judgment, and is
affected by the auditor’s perception of the financial information needs of users of the financial
statements.
In this context, it is reasonable for the auditor to assume that users:
1. Have a reasonable knowledge of business and economic activities and accounting and a
willingness to study the information in the financial statements with reasonable diligence;
2. Understand that financial statements are prepared, presented and audited to levels of
materiality;
3. Recognize the uncertainties inherent in the measurement of amounts based on the use of
estimates, judgment and the consideration of future events; and
4. Make reasonable economic decisions on the basis of the information in the financial
statements.
4. Performance materiality
An amount set at less than materiality for the FS as a whole, to reduce to an appropriately

low level the probability that the aggregate of uncorrected and undetected misstatements
exceeds materiality for the FS as a whole.
If applicable, performance materiality also refers to the amount or amounts set by the
auditor at less than the materiality level or levels for particular classes of transactions,
account balances or disclosures.
The auditor sets performance materiality at a value lower than overall materiality, and uses
this lower threshold when designing and performing audit procedures.
This reduces the risk that the auditor will fail to identify misstatements that are material when
added together
5. Benchmark
Determining materiality involves the exercise of professional judgment. A percentage is
often applied to a chosen benchmark as a starting point in determining materiality for the
financial statements as a whole.
Factors that may affect the identification of an appropriate benchmark include the following:

1. Elements of financial statements: Assets, liabilities, equity, revenue, expenses
2. Items on which attention of users focused: Profit, revenue, net assets
3. Nature of entity, life cycle, industry, economic environment
4. Ownership structure, financing: Debt/Equity emphasis
5. Volatility of benchmark
6. Commonly used benchmarks:
a. profit before tax,
b. total revenue,
c. gross profit and total expenses,
d. total equity or net asset value.
6. Other points related to materiality

Determining a percentage to be applied to a chosen benchmark involves the
exercise of Professional Judgement:
There is a relationship between the percentage and the chosen benchmark, such that a
percentage applied to profit before tax from continuing operations will normally be higher
than a percentage applied to total revenue.
Example:
The auditor may consider five percent of profit before tax from continuing operations to
be appropriate for a profit-oriented entity in a manufacturing industry, while the auditor
may consider one percent of total revenue or total expenses to be appropriate for a not-for-
profit entity. Higher or lower percentages, however, may be deemed appropriate in different
circumstances.

Materiality Level or Levels for Particular Classes of Transactions, Account

Balances or Disclosures:
Factors that may indicate the existence of one or more particular classes of transactions, account
balances or disclosures for which misstatements of lesser amounts than materiality for the
financial statements as a whole could reasonably be expected to influence the economic
decisions of users taken on the basis of the financial statements include the following:
1. Whether law, regulations or the applicable financial reporting framework affect users’
expectations regarding the measurement or disclosure of certain items. Example:
Related party transactions, and the remuneration of management and those charged with
governance.
2. The key disclosures in relation to the industry in which the entity operates. Example:
Research and development costs for a pharmaceutical company.
3. Whether attention is focused on a particular aspect of the entity’s business that is
separately disclosed in the financial statement.
7. Revision of materiality

1. May need to be revised as a result of a change in circumstances that occurred during the
audi, new information, or a change in the auditor’s understanding of the entity and its
operations as a result of performing further audit procedures.
2. If the auditor concludes that a lower materiality for the financial statements as a whole
than that initially determined is appropriate, the auditor shall determine whether it is
necessary to revise performance materiality, and whether the nature, timing and extent
of the further audit procedures remain appropriate
8. Documentation of materiality
The audit documentation shall include the following amounts and the factors considered in
their determination:
1. Materiality for the financial statements as a whole;
2. If applicable, the materiality level or levels for particular classes of transactions, account
balances or disclosures;
3. Performance materiality; and
4. Any revision of (a)-(c) as the audit progressed
9. Materiality and Audit Risk

The concept of materiality is applied by the auditor both in planning and performing the
audit, and in evaluating the effect of identified misstatements on the audit and of uncorrected
misstatements, if any, on the financial statements and in forming the opinion in the auditor’s
report. In conducting an audit of financial statements, the overall objectives of the auditor are
to obtain reasonable assurance about whether the financial statements as a whole are free
from material misstatement, whether due to fraud or error, thereby enabling the auditor to
express an opinion on whether the financial statements are prepared, in all material respects,
in accordance with an applicable financial reporting framework; and to report on the financial

statements, and communicate as required by the SAs, in accordance with the auditor’s findings.
The auditor obtains reasonable assurance by obtaining sufficient appropriate audit evidence
to reduce audit risk to an acceptably low level.
Audit risk is the risk that the auditor expresses an inappropriate audit opinion when the
financial statements are materially misstated. Audit risk is a function of the risks of material
misstatement and detection risk.
Materiality and Audit Risk are considered throughout the audit, in particular, when:
1. Identifying and assessing the risks of material misstatement;
2. Determining the nature, timing and extent of further audit procedures; and
3. Evaluating the effect of uncorrected misstatements, if any, on the financial statements
and in forming the opinion in the auditor’s report.

CHAPTER 4

May 24
CA Himanshu
Chapter 4
SA 500 6
1. Meaning of Audit Evidence 6
2. Types of audit evidence 6
3. Sufficient and appropriate audit evidence 7
4. Relevance and reliability of audit evidence 8
5. Auditor’s procedure for audit evidence 8
6. Type of audit procedures 9
7. Information to be used as Audit Evidence 10
8. Selecting Items for Testing to Obtain Audit Evidence 12
9. Inconsistency in or Doubts over Reliability of Audit Evidence 13

SA 501 14
2. Purpose of physical verification of inventory 14
3. Inventory 14
4. Auditor’s procedure for physical verification 14
5. Matters relevant in Planning Physical Verification 15
5. Physical Verification Counting at Other Dates 15
6. Auditor’s procedure for litigation & claims 16
7. Communication with External Legal Counsel 16
8. Segment Information 17
9. Obtaining sufficient appropriate audit evidence 18
10. Auditor’s Responsibility 18
11. Understanding of the Methods Used by Management 18
SA 505 19
1. Meaning of External Confirmation 19

2. Important Terms 19
3. Audit procedures for External Confirmations 19
4. Design of Confirmation Requests 19
5. Management Refusal to send confirmation requests 20
6. Negative Confirmations 21
7. Evaluating the Evidence Obtained 21
SA 510 22
1. Meaning of Initial audit engagement 22
3. Audit procedures for Opening balances 22
4. Misstatement in Opening Balances 22

5. Procedures adopted to Obtain Audit Evidence 23
6. Audit reporting 24
SA 520 25
1. Meaning of Analytical Procedures 25
3. Timing of Analytical Procedure 25
4. Factors to be considered for Analytical Procedures 26
5. Types of Analytical Procedure 27
6. Analytical Procedures as Substantive test 28
7. Suitability of particular analytical procedures for given assertions 29
8. Extent of Reliance on Analytical Procedures 29
9. The reliability of DATA 29
10. Evaluation whether expectationis sufficiently Precise 30
11. Amount of Acceptable Difference 30
12. Investigating results of Analytical Procedures 31

SA 530 32
1. Meaning of Audit Sampling 32
3. Meaning of Population 32
4. Characteristics of Population 32
5. Approaches to Sampling 32
6. Advantage of Statistical Sampling 33
7. Disadvantage with Non- Statistical Sampling 34
8. Sampling Risk 34
9. Non-Sampling Risk 34
10. Extent on checking on Sampling Plan 34
11. Stratification 34

12. Sampling Process 35
15. Selection of items for testing 37
16. Methods of Sample Selection 38
17. Random Sampling 38
18. Interval Sampling or Systematic Sampling 38
19. Monetary Unit Sampling 39
20. Haphazard Sampling 39
21. Block Sampling 39
22. Nature and causes of Deviation and misstatements 40
23. Projecting Misstatements 40
24. Evaluating Results from Audit Sampling 40
25. Important Terms 40
SA 550 42
1. Meaning of Related Parties 42
2. Nature of Related Party Transactions 42

3. Understanding of Related Party Relationships & Transaction 42
SA 610 44
1. Definition of Internal Audit Function 44
2. Ways in which the external auditor may make use for audit 44
3. Scope of SA 610 45
4. External Auditor’s Responsibility for the audit 45
5. Objectives of external auditor : Entity has internal audit function 45
6. Evaluating the Internal Audit Function 45
6. Objectivity and its evaluation 46
7. Competence and its evaluation 46

8. Application of a Systematic and Disciplined Approach 47
9. Circumstances :Work of the Internal Audit function Can’t Be Used 47
10. Determining the Nature and Extent of Work of the Internal Audit Function
that Can Be Used 47
11. Circumstances in which the external auditor shall plan to use less of the work
of the Internal audit function and perform more of the work directly 48
12. Using the Work of the Internal Audit Function 48
13. Determining Whether, in Which Areas, and to What Extent Internal Auditors
Can Be Used to Provide Direct Assistance 49
14. Basics of Internal Financial Control and Reporting Requirements 50

SA 500
1. Meaning of Audit Evidence

Audit evidence may be defined as the information used by the auditor in arriving at the
conclusions on which the auditor’s opinion is based.
Audit evidence includes both:
1. Information contained in the accounting records underlying the financial statements and
2. Other information.
Accounting records include:

1. Records of initial accounting entries and supporting records, such as checks and records
of electronic fund transfers;
2. Invoices;
3. Contracts;
4. General and subsidiary ledgers

5. Journal entries and other adjustments to the financial statements that are not reflected in
journal entries; and
6. Records such as work sheets and spreadsheets supporting cost allocations, computations,
reconciliations and disclosures.
Other information
Information that authenticates the accounting records and also supports the auditor’s rationale
behind the opinion, for example:
a. Minutes of the meetings,
b. Written confirmations from trade receivables and trade payables,
c. Manuals containing details of internal control etc
2. Types of audit evidence

1. Depending upon nature:
a. Visual
b. Oral
c. Documentary
2. Depending upon source:
a. Internal : Evidence which originates within the organisation being audited is
internal evidence. Example: Sales invoice, Copies of sales challan and forwarding

notes, goods received note, inspection report, copies of cash memo, debit and
credit notes, etc.
b. External: The evidence that originates outside the client’s organization is external
evidence. Example: Purchase invoice, supplier’s challan and forwarding note,
debit notes and credit notes coming from parties, quotations, confirmations, etc.
The external evidence is generally considered to be more reliable as they come from third
parties who are not normally interested in manipulation of the accounting information of
others.
However, if the auditor has any reason to doubt the independence of any third party who has
provided any material evidence e.g. an invoice of an associated concern, he should exercise
greater vigilance in that matter.
3. Sufficient and appropriate audit evidence

Sufficiency is the measure of the quantity of audit evidence.
The Quantity of audit evidence needed. The quantity is affected by the auditor’s assessment
of the risks of misstatement (the higher the assessed risks, the more audit evidence is likely

to be required) and also by the quality of such audit evidence (the higher the quality, the less
may be required).
Auditor’s judgment as to sufficiency may be affected by the factors such as:
1. Materiality
2. Risk of material misstatement
3. Size and characteristics of the population
Materiality
Significance of classes of transactions, account balances and presentation and disclosures to
the users of the financial statements.
Less evidence would be required in case assertions are less material to users of the financial
statements. But on the other hand, if assertions are more material to the users of the financial
statements, more evidence would be required.
Risk of material misstatement

This may be defined as the risk that the financial statements are materially misstated prior to
audit. This consists of two components : Inherent risk and control risk at the assertion level.
Less evidence would be required in case assertions that have a lower risk of material
misstatement. But on the other hand, if assertions have a higher risk of material misstatement,
more evidence would be required.
Size and characteristics of the population

Less evidence would be required in case of smaller, more homogeneous population but on
the other hand in case of larger, more heterogeneous populations, more evidence would be

required.
Appropriateness of Audit Evidence

Appropriateness is the measure of the quality of audit evidence; that is, its relevance and its
reliability in providing support for the conclusions on which the auditor’s opinion is based.
The reliability of evidence is influenced by its source and by its nature, and is dependent on
the individual circumstances under which it is obtained.
4. Relevance and reliability of audit evidence

Relevance
Relevance means the evidence relates to the financial statement assertions being tested.
Relevance deals with the logical connection or relation with the purpose of audit procedure.
For example, when attending an inventory count, the auditor will:
1. Select a sample of items from physical inventory and trace them to inventory records to
confirm the completeness of accounting records
2. Select a sample of items from inventory records and trace them to physical inventories to
confirm the existence of inventory assets
Whilst the procedures are similar in nature, their purpose (and relevance) is to test different
assertions regarding inventory balances.
Reliability
Auditors should always attempt to obtain evidence from the most trustworthy and dependable
source possible.
The reliability of evidence is influenced by its nature, source, circumstance in which its
obtained and controls over its preparation:
1. Evidence obtained from an independent external source is more reliable than client
generated evidence.
2. Evidence obtained directly by the auditor is more reliable than evidence obtained
indirectly.
3. Written evidence is more reliable than oral evidence as oral representations can be
withdrawn or challenged.
4. Original documents are more reliable than copies or documents transformed into
electronic form as it may be difficult to see if these have been tampered with.
5. The reliability of audit evidence generated internally is increased when the related
controls, including those over its accuracy and completeness, imposed by the entity are
effective.
5. Auditor’s procedure for audit evidence

1. Risk assessment procedures; and
2. Further audit procedures, which comprise

a. Test of controls, when required by the SAs or when the auditor has chosen to do
so; and
b. Substantive procedures, including tests of details and substantive analytical
procedures.
6. Type of audit procedures

1. Inspection
2. Observation
3. External Confirmation
4. Recalculation
5. Reperformance
6. Analytical Procedures
7. Inquiry

1. Inspection involves examining:
a. Records or documents,
b. Internal or external,
c. In paper form, electronic form, or other media, or
d. Physical examination of an asset
Inspection of records and documents provides audit evidence of varying degrees of reliability,
depending on their nature and source and effectiveness of internal controls over their
production.
2. Observation: looking at a process or procedure being performed by others.
a. May provide evidence that a control is being operated, e.g., segregation of duties
or a cheque signatory.
b. Only provides evidence that the control was operating properly at the time of the
observation.
c. Observation of a one-off event, e.g. an inventory count, may give good evidence
that the procedure was carried out effectively.
3. External Confirmation: obtaining a direct response (usually written) from an external,
third party. Examples include:
a. Confirmation of receivables
b. Confirmation of payables
c. Confirmation of bank balances in a bank letter
d. Confirmation of actual/potential penalties from legal advisers

e. Confirmation of inventories held by third parties.

f. May provide good evidence of existence (receivables confirmation) or valuation
(customers may confirm receivable amounts but, ultimately, be unable to pay in
the future)
4. Recalculation: manually or electronically checking the arithmetical accuracy of
documents, records, or the client’s calculations, e.g. recalculation of the translation of a
foreign currency transaction or recalculation of depreciation.
5. Reperformance: the auditor’s independent execution of procedures or controls that were
originally performed as part of the entity’s internal control system, e.g. reperformance of
a bank reconciliation, re-performing the aging of accounts receivable.
6. Analytical procedures: analysis of plausible relationships between both financial and
non-financial data. Analytical procedures also encompass the investigation of identified
fluctuations and relationships that are inconsistent with other relevant information or
deviate significantly from predicted amounts.
7. Inquiry: seeking information from knowledgeable persons, both financial and non-
financial, within the entity or outside.
a. used extensively throughout the audit in addition to other audit procedures.
b. may range from formal written inquiries to informal oral inquiries

c. may provide information not previously available with auditor
d. may provide corroborative audit evidence
e. Whilst a major source of evidence, the results of enquiries will usually need to
be corroborated in some way through other audit procedures. This is because
responses generated by the audit client are considered to be of a low quality due
to their inherent bias.
f. In respect of some matters, auditor may consider it necessary to obtain written
representations from management and where appropriate TCWG to confirm oral
queries.
2. Identifying factors that affect the risks of material misstatement, and
3. Designing the nature, timing, and extent of further audit procedures.
7. Information to be used as Audit Evidence

1. Consider the relevance and reliability of audit evidence including information received
from external source
2. When information to be used as audit evidence has been prepared using the work of
a management’s expert, the auditor shall, to the extent necessary, having regard to the
significance of that expert’s work for the auditor’s purposes :
a. Evaluate competence, capability and objectivity of expert
b. Obtain understanding of work of expert
c. Evaluate appropriateness of the expert’s work as audit evidence

Who is management’s expert?
An individual or organisation 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 the financial statements.
When information to be used as audit evidence has been prepared using

the work of a management’s expert, the nature, timing and extent of audit
procedures may be affected by such matters:
1. The nature and complexity of the matter to which the management’s expert relates.
2. The risks of material misstatement in the matter.
3. The availability of alternative sources of audit evidence.
4. The nature, scope and objectives of the management’s expert’s work.
5. Whether the management’s expert is employed by the entity, or is a party engaged by it to
provide relevant services.
6. The extent to which management can exercise control or influence over the work of the

management’s expert.
7. Whether the management’s expert is subject to technical performance standards or other
professional or industry requirements.
8. The nature and extent of any controls within the entity over the management’s expert’s
work.
9. The auditor’s knowledge and experience of the management’s expert’s field of expertise.
10. The auditor’s previous experience of the work of that expert.
When using information produced by the entity, the auditor shall evaluate
whether the information is sufficiently reliable for the auditor’s purposes,
including as necessary in the circumstances:
1. Obtaining audit evidence about the accuracy and completeness of the information;
2. Evaluating whether the information is sufficiently precise and detailed for the auditor’s
purposes.
Relying on the work on a Management’s Expert

If the entity has employed or engaged experts, the auditor may rely on the works of experts,
provided he is satisfied that sufficient and appropriate audit evidence is obtained with
reasonable assurance to form an opinion on the financial statements.
When information to be used as audit evidence has been prepared using the work of a
management’s expert, the auditor shall, to the extent necessary, having regard to the
significance of that expert’s work for the auditor’s purposes ;
1. Evaluate the competence, capabilities and objectivity of that expert;

2. Obtain an understanding of the work of that expert; and

3. Evaluate the appropriateness of that expert’s work as audit evidence for the relevant
assertion.
8. Selecting Items for Testing to Obtain Audit Evidence

When designing tests of controls and tests of details, the auditor shall determine means of
selecting items for testing that are effective in meeting the purpose of the audit procedure.
The means available to the auditor for selecting items for testing are:
1. Selecting all items (100% examination);
2. Selecting specific items; and
3. Audit sampling
Selecting All Items:

The auditor may decide that it will be most appropriate to examine the entire population
of items that make up a class of transactions or account balance (or a stratum within that
population).
100% examination may be appropriate when:

1. The population constitutes a small number of large value items;
2. There is a significant risk and other means do not provide sufficient appropriate audit
evidence; or
3. The repetitive nature of a calculation or other process performed automatically by an
information system makes a 100% examination cost effective.
Selecting Specific Items:

The auditor may decide to select specific items from a population.
In making this decision, factors that may be relevant include
a. the auditor’s understanding of the entity,
b. the assessed risks of material misstatement, and
c. the characteristics of the population being tested.
Specific items selected may include:
High value or key items : The auditor may decide to select specific items within a population
because they are of high value, or exhibit some other characteristic.
All items over a certain amount : The auditor may decide to examine items whose recorded
values exceed a certain amount so as to verify a large proportion of the total amount of a class
of transactions or account balance.
Items to obtain information: The auditor may examine items to obtain information about
matters such as the nature of the entity or the nature of transactions.

9. Inconsistency in or Doubts over Reliability of Audit Evidence

If:
1. audit evidence obtained from one source is inconsistent with that obtained from another;
or
2. the auditor has doubts over the reliability of information to be used as audit evidence,
The auditor shall determine what modifications or additions to audit procedures are necessary
to resolve the matter, and shall consider the effect of the matter, if any, on other aspects of the
audit.

SA 501
The auditor should obtain sufficient appropriate evidence regarding:
1. Existence and condition of inventory
2. Completeness of litigation and claims involving the entity
3. Presentation and disclosure of segment information
2. Purpose of physical verification of inventory

1. Attend the physical inventory count, if inventory is material to the financial statements,
then obtain sufficient and appropriate evidence regarding existence and condition of
inventory by:
a. Attending physical inventory count (unless impracticable) to:
- Evaluate management’s instructions and procedures for the inventory count.
- Observe the performance of the count.
- Inspect the inventory.

- Perform test counts.
b. Perform procedures on the final inventory records to determine whether they
accurately reflect the count results
3. Inventory
When inventory is material to the financial statements, the auditor shall obtain sufficient
appropriate audit evidence regarding the existence and condition of inventory by:
1. Attendance at physical inventory counting, unless impracticable, to:
a. Evaluate management’s instructions and procedures for recording and controlling
the results of the entity’s physical inventory counting
b. Observe the performance of management’s count procedures;
c. Inspect the inventory; and
d. Perform test counts
2. Performing audit procedures over the entity’s final inventory records to determine
whether they accurately reflect actual inventory count results.
4. Auditor’s procedure for physical verification

Attendance at Physical Inventory Counting Involves:
1. Inspecting the inventory to ascertain its existence and evaluate its condition, and
performing test counts;

2. Observing compliance with management’s instructions and the performance of

procedures for recording and controlling the results of the physical inventory count; and
3. Obtaining audit evidence as to the reliability of management’s count procedures.
5. Matters relevant in Planning Physical Verification

Matters relevant in planning attendance at physical inventory counting include, for example:
1. Nature of inventory.
2. Stages of completion of work in progress.
3. The timing of physical inventory counting.
4. The nature of the internal control related to inventory.
5. The risks of material misstatement related to inventory.
6. The locations at which inventory is held, including the materiality of the inventory and
the risks of material misstatement at different locations, in deciding at which locations
attendance is appropriate
7. Whether adequate procedures are expected to be established and proper instructions

issued for physical inventory counting.
8. Whether the entity maintains a perpetual inventory system.
9. Whether the assistance of an auditor’s expert is needed.
5. Physical Verification Counting at Other Dates

Conducted Other than at the Date of the Financial Statements
The auditor shall, in addition to the procedures required above, perform audit procedures to
obtain audit evidence about whether changes in inventory between the count date and the
date of the financial statements are properly recorded.
Relevant matters to be considered:
1. Whether the perpetual inventory records are properly adjusted.
2. Reliability of the entity’s perpetual inventory records.
3. Reasons for significant differences between the information obtained during the physical
count and the perpetual inventory records.
Auditor is unable to Attend due to Unforeseen Circumstances

The auditor shall make or observe some physical counts on an alternative date, and perform
audit procedures on intervening transactions.
Attendance at Is Impracticable
The auditor shall perform alternative audit procedures to obtain sufficient appropriate audit
evidence regarding the existence and condition of inventory. If it is not possible to do so, the

auditor shall modify the opinion in the auditor’s report in accordance with SA 705.
The matter of general inconvenience to the auditor, however, is not sufficient to support a
decision by the auditor that attendance is impracticable.
Further, as explained in SA 200, the matter of difficulty, time, or cost involved is not in itself a
valid basis for the auditor to omit an audit procedure for which there is noalternative or to be
satisfied with audit evidence that is less than persuasive.
Example of Alternate procedures:
Inspection of documentation of the subsequent sale of specific inventory items acquired or
purchased prior to the physical inventory counting
Inventory under custody or control of third party location:

When inventory under the custody and control of a third party is material to the financial
statements, the auditor shall obtain sufficient appropriate audit evidence regarding the
existence and condition of that inventory by performing one or both of the following:
1. Request confirmation from the third party as to the quantities and condition of inventory
held on behalf of the entity.
2. Perform inspection or other audit procedures appropriate in the circumstances

Other Audit Procedures may include:

a. Inspecting documentation regarding inventory held by third parties, for example,
warehouse receipts.
b. Requesting confirmation from other parties when inventory has been pledged as
collateral.
c. Attending, or arranging for another auditor to attend, the third party’s physical
counting of inventory, if practicable
d. Obtaining another auditor’s report, or a service auditor’s report, on the adequacy
of the third party’s internal control for ensuring that inventory is properly counted
and adequately safeguarded.
6. Auditor’s procedure for litigation & claims

The 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:
1. Inquiry of management and, where applicable, others within the entity, including in-
house legal counsel;
2. Reviewing minutes of meetings of those charged with governance and correspondence
between the entity and its external legal counsel; and
3. Reviewing legal expense accounts
7. Communication with External Legal Counsel

If the 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:
1. the auditor shall, in addition to the procedures required by other SAs, seek direct
communication with the entity’s external legal counsel.
2. The auditor shall do so through a letter of inquiry requesting the entity’s external legal
counsel to communicate directly with the auditor.
3. If law and regulation prohibit such direct communication, perform alternate procedures.
If it is considered unlikely that the entity’s external legal counsel will respond
to a letter of general inquiry the auditor may seek direct communication
through a letter of specific inquiry
A letter of specific inquiry includes:
1. A list of litigation and claims;
2. Where available, management’s assessment of the outcome of each of the identified
litigation and claims and its estimate of the financial implications, including costs involved
3. A request that the entity’s external legal counsel confirm the reasonableness of

management’s assessments and provide the auditor with further information if the list is
considered by the entity’s external legal counsel to be incomplete or incorrect.
Meeting with legal counsel:

In certain circumstances, the 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:
1. The auditor determines that the matter is a significant risk.
2. The matter is complex.
3. There is disagreement between management and the entity’s external legal counsel.
Ordinarily, such meetings require management’s permission and are held with a
representative of management in attendance.
Further if:
1. 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
2. The auditor is unable to obtain sufficient appropriate audit evidence by performing
alternative audit procedures, the auditor shall modify the opinion in the auditor’s report
in accordance with SA 705.
8. Segment Information
Segment Information refers to information about different types of products and services of
an enterprise and its operations in different geographical areas.

9. Obtaining sufficient appropriate audit evidence

The auditor shall obtain sufficient appropriate audit evidence regarding the presentation
and disclosure of segment information in accordance with the applicable financial reporting
framework by:
1. Obtaining an understanding of the methods used by management in determining segment
information. Further,
a. Evaluating whether such methods are likely to result in disclosure in accordance
with the applicable financial reporting framework; and
b. Where appropriate, testing the application of such methods; and
2. Performing analytical procedures or other audit procedures appropriate in the
circumstances
10. Auditor’s Responsibility

The auditor’s responsibility regarding the presentation and disclosure of segment information
is in relation to the financial statements taken as a whole. Accordingly, the auditor is not
required to perform audit procedures that would be necessary to express an opinion on
the segment information presented on a stand alone basis.
11. Understanding of the Methods Used by Management

Depending on the circumstances, example of matters that may be relevant when obtaining
an understanding of the methods used by management in determining segment information
and whether such methods are likely to result in disclosure in accordance with the applicable
financial reporting framework include:
1. Sales, transfers and charges between segments, and elimination of intersegment amounts
2. Comparisons with budgets and other expected results, for example, operating profits as
a percentage of sales.
3. The allocation of assets and costs among segments.
4. Consistency with prior periods, and the adequacy of the disclosures with respect to
inconsistencies

SA 505
1. Meaning of External Confirmation
External confirmation may be defined as audit evidence obtained as a direct written response
to the auditor from a third party (the confirming party), in paper form, or by electronic or
other medium.
2. Important Terms
1. 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.
2. Negative confirmation request – A request that the confirming party respond directly to
the auditor only if the confirming party disagrees with the information provided in the
request.
3. Non-response – A failure of the confirming party to respond, or fully respond, to a positive
confirmation request, or a confirmation request returned undelivered.
4. 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. The exception need to be assessed to the entire population after
analysing the reason for difference.
3. Audit procedures for External Confirmations

When using external confirmation procedures, the auditor shall maintain control over
external confirmation requests, including:
1. Determining the information to be confirmed or requested;
2. Selecting the appropriate confirming party;
3. Designing the confirmation requests, including determining that requests are properly
addressed and contain return information for responses to be sent directly to the auditor;
and
4. Sending the requests, including follow-up requests when applicable, to the confirming
party.
4. Design of Confirmation Requests

A. Design of a Confirmation Request: The design of a confirmation request may directly
affect the confirmation response rate, and the reliability and the nature of the audit evidence
obtained from responses.
B. Factors to consider when designing confirmation requests include:
1. Assertions being addressed.
2. Risks of material misstatement (ROMM), including fraud risks.
3. Layout and presentation of the confirmation request.

4. Prior experience on the audit or similar engagements.

5. Method of communication [for example, in paper form, or by electronic mode (like
e-mail) or other medium].
6. Management’s authorisation or encouragement to the confirming parties to respond to
the auditor. Confirming parties may only be willing to respond to a confirmation request
containing management’s authorisation.
7. The ability of the intended confirming party to confirm or provide the requested
information (for example, individual invoice amount versus total balance).
C. Determination of properly addressed requests: Determining that requests are properly
addressed before they are sent out.
D. Follow-Up on Confirmation Requests: The auditor may send an additional confirmation
request when a reply to a previous request has not been received within a reasonable time.
5. Management Refusal to send confirmation requests

If management refuses to allow the auditor to send a confirmation request, the auditor shall:
1. Inquire as to management’s reasons for the refusal, and seek audit evidence as to their
validity and reasonableness;
2. Evaluate the implications of management’s refusal on the auditor’s assessment of the

relevant risks of material misstatement, including the risk of fraud, and on the nature,
timing and extent of other audit procedures; and
3. Perform alternative audit procedures designed to obtain relevant and reliable audit
evidence
If management refusal is unreasonable or auditor is unable to obtain relevant and reliable
audit evidence from alternate procedure:
1. Communicate with those charged with governance
2. Determine implication for the audit and auditor’s report as per SA 705
A refusal by management to allow the auditor to send a confirmation request is a limitation on
the audit evidence the auditor may wish to obtain. The auditor is therefore required to inquire
as to the reasons for the limitation.
The auditor is required to seek audit evidence as to the validity and reasonableness of the
reasons because of the risk that management may be attempting to deny the auditor access to
audit evidence that may reveal fraud or error.
Alternative Audit Procedures

Examples of alternative audit procedures the auditor may perform include:
1. For accounts receivable balances – examining specific subsequent cash receipts, shipping
documentation, and sales near the period-end.
2. For accounts payable balances – examining subsequent cash disbursements or
correspondence from third parties, and other records, such as goods received notes.

6. Negative Confirmations
Negative confirmations provide less persuasive audit evidence than positive confirmations.
Accordingly, the auditor shall not use negative confirmation requests as the sole substantive
audit procedure to address an assessed risk of material misstatement at the assertion level
unless all of the following are present:
1. The auditor has assessed the risk of material misstatement as low and has obtained
sufficient appropriate audit evidence regarding the operating effectiveness of controls
relevant to the assertion;
2. The population of items subject to negative confirmation procedures comprises a large
number of small, homogeneous, account balances, transactions or conditions;
3. A very low exception rate is expected; and
4. The auditor is not aware of circumstances or conditions that would cause recipients of
negative confirmation requests to disregard such requests.
A failure of a confirming party to respond to a negative confirmation request provides
significantly less persuasive audit evidence than does a response to a positive confirmation
request.

7. Evaluating the Evidence Obtained
The auditor shall evaluate whether the results of the external confirmation procedures
provide relevant and reliable audit evidence, or whether performing further audit procedures
is necessar.
When evaluating the results of individual external confirmation requests, the auditor may
categorise such results as follows:
1. A response by the appropriate confirming party indicating agreement with the
information provided in the confirmation request, or providing requested information
without exception;
2. A response deemed unreliable;
3. A non-response; or
4. A response indicating an exception.

SA 510
1. Meaning of Initial audit engagement
Initial audit engagement is an engagement in which either:
1. The financial statements for the prior period were not audited; or
2. The financial statements for the prior period were audited by a predecessor auditor.
In conducting an initial audit engagement, the objective of the auditor with respect to opening
balances is to obtain sufficient appropriate audit evidence about whether:
1. Opening balances contain misstatements that materially affect the current period’s
financial statements; and
2. Appropriate accounting policies reflected in the opening balances have been consistently
applied in the current period’s financial statements, or changes made are appropriately
accounted for, presented and disclosed in accordance with the applicable financial
reporting framework.
3. Audit procedures for Opening balances

The auditor shall obtain sufficient appropriate audit evidence about whether the opening
balance contain misstatements that materially affect the current period’s finanacial statements
by:
1. Determining whether the prior period’s closing balances have been correctly brought
forward to the current period or,
2. when appropriate, any adjustments have been disclosed as prior period items in the
current year’s Statement of Profit and Loss;
3. Determining whether the opening balances reflect the application of appropriate
accounting policies; and
4. The auditor shall read the most recent financial statements and audit report it any for
any information related to opening balance.
5. Performing one or more of the following:
a. Where the prior year financial statements were audited, perusing the copies of
the audited financial statements including the other relevant documents relating
to the prior period financial statements;
b. Evaluating whether audit procedures performed in the current period provide
evidence relevant to the opening balances; or
c. Performing specific audit procedures to obtain evidence regarding the opening
balances.
4. Misstatement in Opening Balances

The auditor obtains audit evidence that the opening balances contain misstatements that
could materially affect the current period’s financial statements:
1. The auditor shall perform such additional audit procedures as are appropriate in the
circumstances to determine the effect on the current period’s financial statements.
2. If the auditor concludes that such misstatements exist in the current period’s financial
statements, the auditor shall communicate the misstatements with the appropriate level
of management and those charged with governance.
5. Procedures adopted to Obtain Audit Evidence

Nature and Extent of Audit Procedures:
The nature and extent of audit procedures necessary to obtain sufficient appropriate audit
evidence regarding opening balances depend on such matters as:
1. The accounting policies followed by the entity.
2. The nature of the account balances, classes of transactions and disclosures and the risks
of material misstatement in the current period’s financial statements.
3. The significance of the opening balances relative to the current period’s financial

statements.
4. Whether the prior period’s financial statements were audited and, if so, whether the
predecessor auditor’s opinion was modified.
A. For current assets and liabilities:

Some audit evidence about opening balances may be obtained as part of the current period’s
audit procedures.
Inventory
In the case of inventories, however, the current period’s audit procedures on the closing
inventory balance provide little audit evidence regarding inventory on hand at the beginning
of the period. Therefore, additional audit procedures may be necessary, and one or more of
the following may provide sufficient appropriate audit evidence:
1. Observing a current physical inventory count and reconciling it to the opening inventory
quantities.
2. Performing audit procedures on the valuation of the opening inventory items.
3. Performing audit procedures on gross profit and cut-off.
B. For non- current assets and liabilities:

1. Such as property plant and equipment, investments and long-term debt, some audit
evidence may be obtained by examining the accounting records and other information
underlying the opening balances.
2. In certain cases, the auditor may be able to obtain some audit evidence regarding opening
balances through confirmation with third parties.

6. Audit reporting
If the auditor concludes that:
1. the current period’s accounting policies are not consistently applied in relation to opening
balances in accordance with the applicable financial reporting framework; or
2. a change in accounting policies is not properly accounted for or not adequately presented
or disclosed in accordance with the applicable financial reporting framework,
the auditor shall express a qualified opinion or an adverse opinion as appropriate in accordance
with SA 705.
Reporting Requirement:
1. If the auditor is unable to obtain sufficient appropriate audit evidence regarding the
opening balances, the auditor shall express a qualified opinion or a disclaimer of opinion,
as appropriate, in accordance with SA 705.
2. If the auditor concludes that the opening balances contain a misstatement that materially
affects the current period’s financial statements, and the effect of the misstatement is not
properly accounted for or not adequately presented or disclosed, the auditor shall express
a qualified opinion or an adverse opinion, as appropriate, in accordance with SA 705.

SA 520
1. Meaning of Analytical Procedures

The term “analytical procedures” means:
3. evaluations of financial information through analysis of plausible relationships among
both financial and non-financial data and
4. investigation of identified fluctuations, inconsistent relationships or amounts that differ
from expected values by a significant amount.
Meaning of Plausible :
Something that appears to be reasonable or believable, although it may not necessarily be true
or accurate.
Analytical procedures include comparisons of the entity’s financial

information:
1. Comparable information for prior periods.

2. Anticipated results of the entity, such as budgets or forecasts, or expectations of the
auditor, such as an estimation of depreciation.
3. Similar industry information, such as a comparison of the entity’s ratio of sales to accounts
receivable with industry averages or with other entities of comparable size in the same
industry
Analytical procedures also include consideration of relationships

1. Financial information elements, such as gross margin percentages, which are anticipated
to follow a consistent pattern based on the entity’s past experience, are to be expected.
2. Between financial information and relevant non-financial information, such as payroll
costs to number of employees.
The Objective of the auditor are:
1. To obtain relevant and reliable audit evidence when using substantive analytical
procedures; and
2. To design and perform analytical procedures near the end of the audit that assist the
auditor when forming an overall conclusion as to whether the financial statements are
consistent with the auditor’s understanding of the entity.
3. Timing of Analytical Procedure

Analytical procedures are required in Planning, Testing as well as Completion phase.
Analytical procedures can be used at all stages of an audit.
Preliminary analytical procedures:

SA 315 requires the auditor to perform analytical procedures as a risk assessment procedure.
In planning Stage analytical procedures assist the auditor in:
1. Identify aspects of the entity of which the auditor was unaware.
2. Assist in assessing the risks of material misstatement.
3. Assist in the identification of unusual transactions or events, as well as amounts, ratios,
and trends that could potentially impact an audit.
4. Help identify risks of material misstatement due to fraud.
This information will assist the auditor in determining the nature, timing and extent of his
other audit procedures.
Substantive analytical procedures:

SA 500 (Audit Evidence) allows the auditor to use analytical procedures as a substantive
procedure to help detect misstatement.
Final analytical procedure:

In addition, SA 500 requires the auditor to use analytical procedures at the completion stage
of the audit when forming an overall conclusion as to whether the financial statements are
consistent with the auditor’s understanding of the entity
4. Factors to be considered for Analytical Procedures

The auditor should consider the following factors for Substantive Audit Procedures:
Availability of Data:
The availability of reliable and relevant data will facilitate effective procedures.
Disaggregation:
The degree of disaggregation in available data can directly affect the degree of its usefulness
in detecting misstatements.
Account Type:
Substantive analytical procedures are more useful for certain types of accounts than for others.
Income statement accounts tend to be more predictable because they reflect accumulated
transactions over a period, whereas balance sheet accounts represent the net effect of
transactions at a point in time or are subject to greater management judgment.
Source:
Some classes of transactions tend to be more predictable because they consist of numerous,
similar transactions, (e.g., through routine processes). Whereas the transactions recorded
by non-routine and estimation SCOTs (significant class of transactions) are often subject to
management judgment and therefore more difficult to predict. The reliability of data depends
on the source from which information is received.

Predictability:
Substantive analytical procedures are more appropriate when an account balance or
relationships between items of data are predictable (e.g., between sales and cost of sales
or between trade receivables and cash receipts). A predictable relationship is one that may
reasonably be expected to exist and continue over time.
Nature of Assertion:
Substantive analytical procedures may be more effective in providing evidence for some
assertions (e.g., completeness or valuation) than for others (e.g., rights and obligations).
Predictive analytical procedures using data analytics can be used to address completeness,
valuation/measurement and occurrence.
Inherent Risk or “What Can Go Wrong”:

When we are designing audit procedures to address an inherent risk or “what can go wrong”,
we consider the nature of the risk of material misstatement in order to determine if a
substantive analytical procedure can be used to obtain audit evidence.
When inherent risk is higher, we may design tests of details to address the higher inherent risk.
When significant risks have been identified, audit evidence obtained solely from substantive

analytical procedures is unlikely to be sufficient.
5. Types of Analytical Procedure

Substantive analytical procedures generally take one of the following forms:
1. Trend analysis
2. Ratio analysis
3. Reasonableness tests
4. Structural modelling
Trend Analysis:
1. A commonly used technique is comparing current data with the prior period balance or
with a trend in two or more prior period balances.
2. We asses if the current account balance is consistent to the established trend of previous
account balances or if it is influenced by know factors that could lead to variations in the
account
3. This evaluation is an essential aspect of analysing financial information.
4. It helps in identifying potential errors, discrepancies, or irregularities in the financial
data.
5. Example: The auditor may compare the salary paid by the company during the year under
audit with the salary paid by the company for several earlier years. There may be some
percentage increase in the salary expense over the years. However, an unusual increase
in such expense amount may indicate that fraudulent payments are being made to fake
employees.

Ratio Analysis:
1. Ratio analysis is useful for analysing asset and liability accounts as well as revenue and
expense accounts.
2. An individual balance sheet account is difficult to predict on its own, but its relationship
to another account is often more predictable (e.g., the trade receivables balance related
to sales).
3. Ratios can also be compared over time or to the ratios of separate entities within the
group, or with the ratios of other companies in the same industry.
4. Example: Trade receivables or inventory turnover
Reasonableness Test:
1. Unlike trend analysis, this analytical procedure does not rely on events of prior periods,
but upon non-financial data for the audit period under consideration (e.g., occupancy
rates to estimate rental income or interest rates to estimate interest income or expense).
2. These tests are generally more applicable to income statement accounts and certain
accrual or prepayment accounts.
3. Examples:
a. Interest expense against interest bearing obligations
b. Raw Material Consumption to Production (quantity)
c. Wastage & Scrap % against production & raw material consumption (quantity)
d. Work-in-Progress based on issued of materials & Sales (quantity)
e. Sales discounts and commissions against sales volume
f. Rental revenues based on occupancy of premises
Structural modelling:
A modelling tool constructs a statistical model from financial and/or non-financial data of
prior accounting periods to predict current account balances (e.g., linear regression).
6. Analytical Procedures as Substantive test

When designing and performing substantive analytical procedures, either alone or in
combination with tests of details, as substantive procedures in accordance with SA 330, the
auditor shall:
1. Determine the suitability of particular substantive analytical procedures for given
assertions, taking account of the assessed risks of material misstatement and tests of
details, if any, for these assertions;
2. Assess the reliability of the data used to make expectations about recorded amounts or
ratios by considering the source, comparability, and relevance of the information, as well
as the controls in place for its preparation.

3. Develop an expectation of recorded amounts or ratios and evaluate whether the

expectation is sufficiently precise to identify a misstatement that, individually or when
aggregated with other misstatements, may cause the financial statements to be materially
misstated; and
4. Determine the amount of any difference of recorded amounts from expected values that
is acceptable without further investigation.
7. Suitability of particular analytical procedures for given assertions

1. Substantive analytical procedures are generally more applicable to large volumes of
transactions that tend to be predictable over time.
2. The application of planned analytical procedures is based on the expectation that
relationships among data exist and continue in the absence of known conditions to the
contrary.
3. However, the suitability of a particular analytical procedure will depend upon the auditor’s
assessment of how effective it will be in detecting a misstatement that, individually or
when aggregated with other misstatements, may cause the financial statements to be
materially misstated.
4. In some cases, even an unsophisticated predictive model may be effective as an analytical

procedure.
8. Extent of Reliance on Analytical Procedures

The reliability of data is influenced by its source and nature and is dependent on the
circumstances under which it is obtained. Accordingly, the following are relevant when
determining whether data is reliable for purposes of designing substantive analytical
procedures:
1. Source of the information available. For example, information may be more reliable
when it is obtained from independent sources outside the entity;
2. Comparability of the information available. For example, broad industry data may
need to be supplemented to be comparable to that of an entity that produces and sells
specialised products;
3. Nature and relevance of the information available. For example, whether budgets have
been established as results to be expected rather than as goals to be achieved; and
4. Controls over the preparation of the information that are designed to ensure its
completeness, accuracy and validity. For example, controls over the preparation, review
and maintenance of budgets.
5. The auditor may consider testing the operating effectiveness of controls, if any, over
the entity’s preparation of information used by the auditor in performing substantive
analytical procedures in response to assessed risks. When such controls are effective,
the auditor generally has greater confidence in the reliability of the information and,
therefore, in the results of analytical procedures.
9. The reliability of DATA

The reliability of data is influenced by its source and nature and is dependent on the
circumstances under which it is obtained. Accordingly, the following are relevant when
determining whether data is reliable for purposes of designing substantive analytical
procedures:
1. Source of the information available. For example, information may be more reliable when
it is obtained from independent sources outside the entity;
2. Comparability of the information available. For example, broad industry data may need to
be supplemented to be comparable to that of an entity that produces and sells specialised
products;
3. Nature and relevance of the information available. For example, whether budgets have
been established as results to be expected rather than as goals to be achieved; and
4. Controls over the preparation of the information that are designed to ensure its
completeness, accuracy and validity. For example, controls over the preparation, review
and maintenance of budgets.
10. Evaluation whether expectationis sufficiently Precise

Factors that auditor shall consider when determining whether an expectation can be
established with sufficient precision to identify a misstatement that could potentially cause
the financial statements to be materially misstated include:

The accuracy with which the expected results of substantive analytical procedures can be
predicted.
For example, the auditor may expect greater consistency in comparing gross profit margins
from one period to another than in comparing discretionary expenses, such as research.
The degree to which information can be disaggregated.
For example, substantive analytical procedures may be more effective when applied to financial
information on individual sections of an operation or to financial statements of components
of a diversified entity, than when applied to the financial statements of the entity as a whole.
The availability of the information, both financial and non-financial.
For example, the auditor may consider whether financial information, such as budgets or
forecasts, and non-financial information, such as the number of units produced or sold, is
available to design substantive analytical procedures. If the information is available, the
auditor may also consider the reliability of the information.
11. Amount of Acceptable Difference

The auditor’s determination of the amount of difference from the expectation that can be
accepted without further investigation is influenced by materiality and the consistency
with the desired level of assurance, taking account of the possibility that a misstatement,
individually or when aggregated with other misstatements, may cause the financial statements
to be materially misstated.
SA 330 requires the auditor to obtain more persuasive audit evidence the higher the auditor’s
assessment of risk. Accordingly, as the assessed risk increases, the amount of difference
considered acceptable without investigation decreases in order to achieve the desired level

of persuasive evidence.
12. Investigating results of Analytical Procedures

If analytical procedures performed in accordance with SA 520 identify:
1. Fluctuations or
2. Relationships that are inconsistent with other relevant information or that differ from
expected values by a significant amount
The auditor shall investigate such differences by:
Inquiring of management and obtaining appropriate audit evidence relevant

to management’s responses:
Audit evidence relevant to management’s responses may be obtained by evaluating those
responses taking into account the auditor’s understanding of the entity and its environment,
and with other audit evidence obtained during the course of the audit.
Performing other audit procedures as necessary in the circumstances:

The need to perform other audit procedures may arise when, for example, management

is unable to provide an explanation, or the explanation, together with the audit evidence
obtained relevant to management’s response, is not considered adequate.

SA 530
1. Meaning of Audit Sampling

Audit sampling refers to the:
3. application of audit procedures to less than 100% of items
4. within a population of audit relevance
5. such that all sampling units have a chance of selection
6. in order to provide the auditor with a reasonable basis
7. on which to draw conclusions about the entire population
The two major stages in the audit examination during which sampling is used are:
1. Studying and evaluating the client’s internal control and
2. Conducting substantive procedures.
Sample must be representative: Whatever may be the approach, the sample must be
representative. This means that it must be closely similar to the whole population although
not necessarily exactly the same. The sample must be large enough to provide statistically
meaningful results.
Sampling Unit: The individual items that make up the population are known as sampling
units.
The objective of the auditor when using audit sampling is to provide a reasonable basis for the
auditor to draw conclusions about the population from which the sample is selected.
3. Meaning of Population
Population refers to the entire set of data from which a sample is selected and about which the
auditor wishes to draw conclusions.
4. Characteristics of Population
1. Appropriateness: determine that the population from which the sample is drawn is
appropriate for the specific audit objective.
2. Completeness: The population also needs to be complete, which means that the population
needs to include all relevant items from throughout the entire period.
3. Reliable: The information upon which the audit sampling is performed is sufficiently
complete and accurate.
5. Approaches to Sampling
Audit sampling can be applied using either:

1. Non-statistical
2. Statistical sampling
Statistical sampling
Statistical sampling is an approach to sampling that has the:
1. random selection of the sample items;
2. the use of probability theory to evaluate sample results,
3. the use of probability theory including measurement of sampling risk characteristics
Statistical Sampling More Scientific:
1. Audit testing done through this approach is more scientific than testing based entirely on
the auditor’s own judgment because it involves use of mathematical laws of probability in
determining the appropriate sample size in varying circumstances.
2. Statistical sampling has reasonably wide application where a population to be tested
consists of a large number of similar items.
3. There Is no personal bias of the auditor in case of statistical sampling. Since it is scientific,

the results of sample can be evaluated and projected on the whole population in a more
reliable manner.
Non-Statistical Sampling
Non-Statistical Sampling: A sampling approach that does not have characteristics of statistical
sampling is considered non-statistical sampling.
When non-statistical methods are used, the auditor uses judgment to select the items to be
tested. Whilst this lends itself to auditor bias it does support the risk-based approach, where
the auditor focuses on those areas most susceptible to material misstatement.
The decision whether to use a statistical or non-statistical sampling approach is a matter for
the auditor’s judgment; however, sample size is not a valid criterion to distinguish between
statistical and non-statistical approaches.
6. Advantage of Statistical Sampling

The advantages of statistical sampling may be summarized as follows:
1. The amount of testing (sample size) does not increase in proportion to the increase in the
size of the area tested.
2. The sample selection is more objective and thereby more defensible.
3. The method provides a means of estimating the minimum sample size associated with a
specified risk and precision.
4. It provides a means for deriving a “calculated risk” and corresponding precision
(sampling error) i.e., the probable difference in result due to the use of a sample in lieu of
examining all the records in the group (universe), using the same audit procedures.

5. It may provide a better description of a large mass of data than a complete examination
of all the data, since non-sampling errors such as processing and clerical mistakes are not
as large.
7. Disadvantage with Non- Statistical Sampling

1. It is neither objective nor scientific
2. Risk of personal bias in selection of sample items
3. Sample are not been selected in accordance with the mathematically based statistical
techniques.
8. Sampling Risk
The risk that the auditor’s conclusion based on a sample may be different from the conclusion
if the entire population were subjected to the same audit procedure. Sampling risk can lead
to two types of erroneous conclusions:
1. In the case of a test of controls, that controls are more effective than they actually are, or
in the case of a test of details, that a material misstatement does not exist when in fact it
does. The auditor is primarily concerned with this type of erroneous conclusion because
it affects audit effectiveness and is more likely to lead to an inappropriate audit opinion.
2. In the case of a test of controls, that controls are less effective than they actually are, or
in the case of a test of details, that a material misstatement exists when in fact it does
not. This type of erroneous conclusion affects audit efficiency as it would usually lead to
additional work to establish that initial conclusions were incorrect.
9. Non-Sampling Risk
The risk that the auditor reaches an erroneous conclusion for any reason not related to sampling
risk. (In an auditing context, non-sampling risk arises when auditors use an inappropriate
procedure or misinterpret evidence they have obtained.)
10. Extent on checking on Sampling Plan

The factors that should be considered for deciding upon the extent of checking on a sampling
plan are following:
1. Size of the organisation under audit.
2. State of the internal control.
3. Adequacy and reliability of books and records.
4. Tolerable error range.
5. Degree of the desired confidence.
11. Stratification
1. Audit efficiency may be improved if the auditor stratifies a population by dividing it into
discrete sub-populations (strata) which have an identifying characteristic.

2. The objective of stratification is to reduce the variability of items within each stratum and
therefore allow sample size to be reduced without increasing sampling risk.
3. When performing tests of details, the population is often stratified by monetary value.
This allows greater audit effort to be directed to the larger value items, as these items
may contain the greatest potential misstatement in terms of overstatement.
4. If a class of transactions or account balance has been divided into strata, the misstatement
is projected for each stratum separately and then combined when considering the
misstatement on class of transactions or account balance level.
12. Sampling Process

Sample design, Size and Selection of items for testing
Sample Design
When designing an audit sample, the auditor shall consider the purpose of the audit
procedures and the characteristics of the population from which the sample will be drawn.
1. Purposeful Selection: The auditor takes into account the particular objective to accomplish
and determines the set of audit procedures that is most likely to effectively meet that
objective.
2. Understanding Deviation and Misstatement: Auditors analyze the nature of audit
evidence and potential deviations or misstatements to define what should be considered
in the sample and which population to examine.
3. Completeness Verification: Auditors perform procedures to ensure the population from
which the sample is drawn is complete, in line with the requirements of audit evidence
(SA 500)
Sample Size

The auditor shall determine a sample size sufficient to reduce sampling risk to an acceptably
low level.
The level of sampling risk that the auditor is willing to accept affects the sample size required.
The lower the risk the auditor is willing to accept, the greater the sample size will need to
be.
The sample size can be determined by the application of a statistically-based formula or
through the exercise of professional judgment.
Selection of Items for Testing

The auditor shall select items for the sample in such a way that each sampling unit in the
population has a chance of selection.
Factors Influencing Sample Size for Tests of Controls

1. Reliance on operating effectiveness of controls
2. Tolerable rate of deviation
3. Expected rate of deviation
4. Desired level of assurance

5. No. of sampling units
Factors Influencing Sample Size for Tests of Details

1. Assessment of ROMM
2. Use of other substantive procedures
3. Tolerable misstatement
4. Expected misstatement
5. Desired level of Assurance
6. Stratification
7. No. of sampling units
Effect on Sample Size

Examples of Factors Influencing Sample Size for Tests of Controls:

1. Greater the reliance the auditor places on the operating effectiveness of controls in the
risk assessment, the greater is the extent of the auditor’s tests of controls
2. If there is an increase in the tolerable rate of deviation then sample size will decrease.
3. Higher the expected rate of deviation, larger the sample size needs to be so that the
auditor is in a position to make a reasonable estimate of the actual rate of deviation
4. An increase in the auditor’s desired level of assurance that the tolerable rate of deviation
is not exceeded by the actual rate of deviation in the population will increase the sample
size.
5. There will be negligible effect on sample size due to increase in the number of sampling
units in the population.
Examples of Factors Influencing Sample Size for Tests of Details:

1. The higher the auditor’s assessment of the risk of material misstatement, the larger the
sample size needs to be.
2. The more the auditor is relying on other substantive procedures (tests of details or

substantive analytical procedures) to reduce to an acceptable level the detection risk
regarding a particular population, the less assurance the auditor will require from
sampling and, therefore, the smaller the sample size can be.
3. An increase in the auditor’s desired level of assurance that tolerable misstatement is not
exceeded by actual misstatement in the population will increase the sample size.
4. An increase in tolerable misstatement will decrease the sample size as lower the tolerable
misstatement, the larger the sample size needs to be.
5. The greater the amount of misstatement the auditor expects to find in the population, the
larger the sample size needs to be in order to make a reasonable estimate of the actual
amount of misstatement in the population.
6. When stratification of the population is appropriate then sample size will decrease as
when there is a wide range (variability) in the monetary size of items in the population, it
may be useful to stratify the population.
7. There will be negligible effect on sample size due to number of sampling units in the
population.
15. Selection of items for testing

1. Equal Chance of Selection: The auditor must ensure that each item in the population has
a chance of being selected in the sample.
2. Statistical Sampling: In statistical sampling, items are chosen based on known
probabilities.
3. Non-Statistical Sampling: When using non-statistical sampling, the auditor uses judgment
to select sample items.
4. Purpose of Sampling: Sampling is done to draw reliable conclusions about the entire

population. Therefore, it’s crucial to choose a representative sample that avoids bias,
selecting items typical of the population. With statistical sampling, sample items are
selected in a way that each sampling unit has a known probability of being selected.
16. Methods of Sample Selection

1. Random selection,
2. Systematic selection and
3. Haphazard selection
17. Random Sampling

Random selection ensures that all items in the population or within each stratum have a
known chance of selection. It may involve use of random number tables.
Random sampling includes two very popular methods which are discussed below:
Simple Random Sampling:

1. Under this method, each unit of the population has an equal chance of selection.
2. The selection of items is done by choosing numbers from random number tables and its
like picking them randomly from a drum.
3. The use of random number tables is preferred because they are simple, easy to use, and
provide assurance that bias does not affect the selection.
4. The method is suitable when the population to be sampled consists of similar units that
fall within a reasonable range
Stratified Random Sampling:

1. The method involves dividing the population into separate groups called strata and taking
a sample from each stratum.
2. Each stratum is treated as a separate population, and a proportionate number of items
are selected from each stratum.
3. The number of groups or strata into which the population is divided is determined by
auditor judgment.
4. Stratified sampling is used when a population is highly diversified, and weights are
allocated to reflect the differences between strata.
5. Stratified sampling is an extension of simple random sampling.
18. Interval Sampling or Systematic Sampling

1. Interval sampling is a systematic selection method where the population is divided by
the sample size to determine a sampling interval.
2. A constant sampling interval is used, and the first item is selected randomly.

3. The auditor needs to ensure that the sampling interval does not correspond with a
particular pattern in the population.
4. To minimize the effect of known patterns, multiple random starting points may be used.
5. The multiple random starting points minimize the risk of the sampling interval pattern
matching the population being sampled
19. Monetary Unit Sampling

1. Monetary Unit Sampling (MUS) is a statistical sampling technique used in auditing
2. The method involves selecting individual items from a population based on their value,
rather than selecting a fixed number of items.
3. It is a type of value-weighted selection in which sample size, selection and evaluation
results in done in monetary amounts.
Value weighted selection:

1. Value-weighted selection is a sampling method used in auditing to select a sample of items
based on their monetary value or importance to the financial statements.

2. In value-weighted selection, items are ranked based on their value, and a larger sample
size is typically selected from higher value items.
3. This method is used to ensure that the sample is representative of the overall monetary
value of the population being sampled.
4. By focusing on higher value items, the auditor can increase the likelihood of detecting
material misstatements or deviations that could impact the financial statements.
20. Haphazard Sampling

1. Haphazard selection is a sampling method used in auditing which involves selecting the
sample without following a structured technique.
2. The auditor would avoid conscious bias or predictability when selecting the sample.
3. The auditor would attempt to ensure that all items in the population have a chance of
selection.
4. Haphazard selection is not appropriate when using statistical sampling.
21. Block Sampling

1. Block selection is a sampling method that involves selecting a block of contiguous items
from within the population.
2. It is not a common technique in audit sampling as items in a sequence can be expected
to have similar characteristics to each other, but different characteristics from items
elsewhere in the population.
3. Examining a block of items may be appropriate in some circumstances, but it is rarely
appropriate when the auditor intends to draw valid inferences about the entire population

based on the sample.

4. Block selection is similar to non-statistical sampling, and has similar characteristics such
as simplicity and economy.
5. However, there is a risk of bias and of establishing a pattern of selection which may be
noted by the auditee
22. Nature and causes of Deviation and misstatements

1. The auditor shall investigate the nature and causes of any deviations or misstatements
identified, and evaluate their possible effect on the purpose of the audit procedure and
on other areas of the audit.
2. The auditor shall obtain a high degree of certainty that misstatement or deviation is not
representative of the population.
3. The auditor shall obtain this degree of certainty by performing additional audit procedures
to obtain sufficient appropriate audit evidence that the misstatement or deviation does
not affect the remainder of the population
4. Anomaly may be defined as a misstatement or deviation that is demonstrably not
representative of misstatements or deviations in a population
23. Projecting Misstatements

1. The auditor is required to project misstatements for the population to obtain a broad view
of the scale of misstatement but this projection may not be sufficient to determine an
amount to be recorded.
2. When a misstatement has been established as an anomaly, it may be excluded when
projecting misstatements to the population. However, the effect of any such misstatement,
if uncorrected, still needs to be considered in addition to the projection of the non-
anomalous misstatements.
3. For tests of details, the auditor shall project misstatements found in the sample to the
population whereas for tests of controls, no explicit projection of deviations is necessary
since the sample deviation rate is also the projected deviation rate for the population as
a whole.
24. Evaluating Results from Audit Sampling

The auditor shall evaluate:
1. The results of the sample; and
2. Whether the use of audit sampling has provided a reasonable basis for conclusions about
the population that has been tested.
25. Important Terms

Stratification – The process of dividing a population into sub-populations, each of which is a
group of sampling units which have similar characteristics (often monetary value).

Tolerable misstatement – A monetary amount set by the auditor in respect of which the
auditor seeks to obtain an appropriate level of assurance that the monetary amount set by the
auditor is not exceeded by the actual misstatement in the population.
Tolerable rate of deviation – A rate of deviation from prescribed internal control procedures
set by the auditor in respect of which the auditor seeks to obtain an appropriate level of
assurance that the rate of deviation set by the auditor is not exceeded by the actual rate of
deviation in the population.
Tolerable error is the maximum error in the population that auditor is ready to accept in a
given sample size. Smaller the tolerable error, larger will be the sample size.

SA 550
1. Meaning of Related Parties
A party that is either:
3. A related party as defined in the applicable financial reporting framework; or
4. 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:
- Common controlling ownership;
- Owners who are close family members; or
- Common key management.
2. Nature of Related Party Transactions

Many related party transactions are in the normal course of business. In such circumstances,
they may carry no higher risk of material misstatement of the financial statements than
similar transactions with unrelated parties.
However, the nature of related party relationships and transactions may, in some circumstances,
give rise to higher risks of material misstatement of the financial statements than transactions
with unrelated parties.
Example:
1. Related parties may operate through an extensive and complex range of relationships and
structures, with a corresponding increase in the complexity of related party transactions.
2. Information systems may be ineffective at identifying or summarising transactions and
outstanding balances between an entity and its related parties.
3. Transactions may not be conducted under normal market terms and conditions.
For example, some related party transactions may be conducted with no exchange of
consideration.
3. Understanding of Related Party Relationships & Transaction

The Auditor shall inquire of managementreg
1. The identity of the entity’s related parties, including changes from the prior period;
2. The nature of the relationships between the entity and these related parties;

3. Whether the entity entered into any transactions with these related parties during the
period and, if so, the type and purpose of the transactions.
The auditor shall inquire of management and others within the entity, and perform other risk
assessment procedures considered appropriate, to obtain an understanding of the controls,
if any, that management has established to:
1. Identify, account for, and disclose related party relationships and transactions in
accordance with the applicable financial reporting framework;
2. Authorise and approve significant transactions and arrangements with related parties;
and
3. Authorise and approve significant transactions and arrangements outside the normal
course of business.
How can an auditor verify the existence of related party relationships and
transactions?
During the audit, the auditor should maintain alertness for related party information while
reviewing records and documents. He may inspect the following records or documents that
may provide information about related party relationships and transactions, for example:

1. Entity income tax returns.
2. Information supplied by the entity to regulatory authorities.
3. Shareholder registers to identify the entity’s principal shareholders.
4. Statements of conflicts of interest from management and those charged with governance.
5. Records of the entity’s investments and those of its pension plans.
6. Contracts and agreements with key management or those charged with governance.
7. Significant contracts and agreements not in the entity’s ordinary course of business.
8. Specific invoices and correspondence from the entity’s professional advisors.
9. Life insurance policies acquired by the entity.
10.Significant contracts re-negotiated by the entity during the period.
11. Internal auditors’ reports.
12.Documents associated with the entity’s filings with a securities regulator e.g, prospectuses)

SA 610
1. Definition of Internal Audit Function

Internal audit function refers to:
A function of an entity that performs assurance and consulting activities designed to evaluate
and improve the effectiveness of the entity’s governance, risk management and internal
control processes.
The objectives and scope of internal audit functions typically include assurance and consulting
activities designed to evaluate and improve the effectiveness of the entity’s governance
processes, risk management and internal control such as the following:
4. Activities Relating to Governance : The internal audit function assesses governance
processes, including ethics, performance, and accountability, ensuring effective
communication among governance entities, auditors, and management.
5. Activities Relating to Risk Management: The internal audit function aids the entity in
identifying and assessing significant risks, enhancing risk management and internal
control, and contributes to improving the financial reporting process. Additionally, it
conducts procedures to assist in detecting fraud.
6. Activities Relating to Internal Control:

a. Evaluation of internal control : The internal audit function evaluates and
reviews controls, taking on specific responsibilities to assess their operation
and recommend improvements, ultimately providing assurance on the control
effectiveness.
b. Examination of financial and operating information: The internal audit function
examines financial and operating information, reviewing the methods used for
identification, measurement, classification, and reporting, including detailed
testing of transactions, balances, and procedures.
c. Review of operating activities: The internal audit function evaluates the cost-
effectiveness and efficiency of an entity’s operations, encompassing both financial
and non-financial aspects to ensure optimal performance.
d. Review of compliance with laws and regulations The internal audit function
ensures that an entity complies with external laws, regulations, and internal
policies, safeguarding against any deviations and enhancing adherence to
directives.
2. Ways in which the external auditor may make use for audit
While the objectives of an entity’s internal audit function and the external auditor differ, the
function may perform audit procedures similar to those performed by the external auditor in
an audit of financial statements. If so, the external auditor may make use of the function for
purposes of the audit in one or more of the following ways:
1. To obtain information that is relevant to the external auditor’s assessments of the risks of
material misstatement due to error or fraud.
2. Unless prohibited, or restricted to some extent, by law or regulation, the external auditor,

after appropriate evaluation, may decide to use work that has been performed by the
internal audit function during the period in partial substitution for audit evidence to be
obtained directly by the external auditor.
3. Unless prohibited, or restricted to some extent, by law or regulation, the external auditor
may use internal auditors to perform audit procedures under the direction, supervision
and review of the external auditor (referred to as “direct assistance”).
3. Scope of SA 610
Standard on Auditing (SA) 610 deals with the external auditor’s responsibilities if using the
work of internal auditors. This includes:
1. Using the work of the internal audit function in obtaining audit evidence and
2. Using internal auditors to provide direct assistance under the direction, supervision and
review of the external auditor.
Nothing in this SA requires the external auditor to use the work of the internal audit function
to modify the nature or timing, or reduce the extent, of audit procedures to be performed
directly by the external auditor; it remains a decision of the external auditor in establishing
the overall audit strategy.

4. External Auditor’s Responsibility for the audit
1. The external auditor holds exclusive responsibility for the audit opinion, unaffected by
the involvement of the internal audit function or internal auditors, who lack the required
independence mandated for external auditors.
2. SA 200 establishes conditions for the external auditor to utilize the work of internal
auditors, outlining the necessary efforts to ensure the adequacy of the internal audit
function’s work, preventing excessive reliance and ensuring a balanced framework for
the external auditor’s judgment.
5. Objectives of external auditor : Entity has internal audit function

The objectives of the external auditor, where the entity has an internal audit function and the
external auditor expects to use the work of the function to modify the nature or timing, or
reduce the extent, of audit procedures to be performed directly by the external auditor, or to
use internal auditors to provide direct assistance, are:
1. To determine whether the work of the internal audit function or direct assistance from
internal auditors can be used, and if so, in which areas and to what extent; and having
made that determination:
2. If using the work of the internal audit function, to determine whether that work is
adequate for purposes of the audit; and
3. If using internal auditors to provide direct assistance, to appropriately direct, supervise
and review their work.
6. Evaluating the Internal Audit Function

The external auditor shall determine whether the work of the internal audit function

can be used for purposes of the audit by evaluating the following:

1. The extent to which the internal audit function’s organizational status and relevant policies
and procedures support the objectivity of the internal auditors;
2. The level of competence of the internal audit function; and
3. Whether the internal audit function applies a systematic and disciplined approach,
including quality control.
6. Objectivity and its evaluation

Objectivity refers to the ability to perform those tasks without allowing bias, conflict of interest
or undue influence of others to override professional judgments.
Factors that may affect the external auditor’s evaluation in relation to Objectivity include the
following:
1. Whether the organizational status of the internal audit function, including the function’s
authority and accountability, supports the ability of the function to be free from bias,
conflict of interest or undue influence of others to override professional judgments.
2. Whether those charged with governance oversee employment decisions related to the
internal audit function.

3. Whether there are any constraints or restrictions placed on the internal audit function
by management or those charged with governance, for example, in communicating the
internal audit function’s findings to the external auditor.
4. Whether the internal audit function is free of any conflicting responsibilities, for example,
having managerial or operational duties or responsibilities that are outside of the internal
audit function.
7. Competence and its evaluation

Competence of the internal audit function refers to the attainment and maintenance of
knowledge and skills of the function as a whole at the level required to enable assigned tasks
to be performed diligently and in accordance with applicable professional standards.
Factors that may affect the external auditor’s determination in relation to competence include
the following:
1. Whether the internal audit function is adequately and appropriately resourced relative to
the size of the entity and the nature of its operations.
2. Whether there are established policies for hiring, training and assigning internal auditors
to internal audit engagements.
3. Whether the internal auditors have adequate technical training and proficiency in
auditing.
4. Whether the internal auditors possess the required knowledge relating to the entity’s
financial reporting and the applicable financial reporting framework.
Objectivity and competence may be viewed as a continuum:

1. Objectivity and competence in the internal audit function exist on a continuum, with
organizational support and policies enhancing objectivity and competence facilitating
broader use by external auditors.
2. Strong support for internal auditors’ objectivity through organizational status and policies
cannot offset insufficient competence, and a high level of competence in the internal
audit function cannot compensate for inadequate support for auditors’ objectivity.
8. Application of a Systematic and Disciplined Approach

The application of a systematic and disciplined approach to planning, performing, supervising,
reviewing and documenting its activities distinguishes the activities of the internal audit
function from other monitoring control activities that may be performed within the entity.
Factors that may affect the external auditor’s determination of whether the internal audit
function applies a systematic and disciplined approach include the following:
1. The existence, adequacy and use of documented internal audit procedures or guidance
covering such areas as risk assessments, work programs, documentation and reporting,
the nature and extent of which is commensurate with the size and circumstances of an
entity.
2. Whether the internal audit function has appropriate quality control policies and

procedures.
9. Circumstances :Work of the Internal Audit function Can’t Be Used

The external auditor shall not use the work of the internal audit function if the external auditor
determines that:
1. The function’s organizational status and relevant policies and procedures do not adequately
support the objectivity of internal auditors;
2. The function lacks sufficient competence; or
3. The function does not apply a systematic and disciplined approach, including quality
control.
10. Determining the Nature and Extent of Work of the Internal Audit
Function that Can Be Used
As a basis for determining the areas and the extent to which the work of the internal audit
function can be used, the external auditor shall consider the nature and scope of the work
that has been performed, or is planned to be performed, by the internal audit function and its
relevance to the external auditor’s overall audit strategy and audit plan.
In other words, once the external auditor has determined that the work of the internal audit
function can be used for purposes of the audit, a first consideration is whether the planned
nature and scope of the work of the internal audit function that has been performed, or is
planned to be performed, is relevant to the overall audit strategy and audit plan that the
external auditor has established.
Examples of work of the internal audit function that can be used by the external auditor

1. Testing of the operating effectiveness of controls.

2. Substantive procedures involving limited judgment.
3. Observations of inventory counts.
4. Tracing transactions through the information system relevant to financial reporting.
5. Testing of compliance with regulatory requirements.
11. Circumstances in which the external auditor shall plan to use less
of the work of the Internal audit function and perform more of the
work directly
The external auditor shall make all significant judgments in the audit engagement and, to
prevent undue use of the work of the internal audit function, shall plan to use less of the work
of the function and perform more of the work directly if:
1. The more judgment is involved in:
a. (i) Planning and performing relevant audit procedures; and
b. (ii) Evaluating the audit evidence gathered;

2. The higher the assessed risk of material misstatement at the assertion level, with special
consideration given to risks identified as significant;
3. The less the internal audit function’s organizational status and relevant policies and
procedures adequately support the objectivity of the internal auditors; and
4. The lower the level of competence of the internal audit function.
12. Using the Work of the Internal Audit Function

If the external auditor plans to use the work of the internal audit function, the external auditor
shall:
1. Discuss the planned use of its work with the function as a basis for coordinating their
respective activities.
2. Read the reports of the internal audit function relating to the work of the function that the
external auditor plans to use to obtain an understanding of the nature and extent of audit
procedures it performed and the related findings.
3. Perform sufficient audit procedures on the body of work of the internal audit function as
a whole that the external auditor plans to use to determine its adequacy for purposes of
the audit.
Discussion and Coordination with the Internal Audit Function

In discussing the planned use of their work with the internal audit function as a basis for
coordinating the respective activities, it may be useful to address the following:
1. The timing of such work.
2. The nature of the work performed.

3. The extent of audit coverage.

4. Materiality for the financial statements as a whole (and, if applicable, materiality level
or levels for particular classes of transactions, account balances or disclosures), and
performance materiality.
5. Proposed methods of item selection and sample sizes.
6. Documentation of the work performed.
7. Review and reporting procedures.
Coordination between the external auditor and the internal audit function is
effective when, for example;
1. Discussions take place at appropriate intervals throughout the period.
2. The external auditor informs the internal audit function of significant matters that may
affect the function.
3. The external auditor is advised of and has access to relevant reports of the internal audit
function and is informed of any significant matters that come to the attention of the
function when such matters may affect the work of the external auditor so that the external

auditor is able to consider the implications of such matters for the audit engagement.
13. Determining Whether, in Which Areas, and to What Extent Internal

Auditors Can Be Used to Provide Direct Assistance
Direct assistance refers to the use of internal auditors to perform audit procedures under the
direction, supervision and review of the external auditor.
The external auditor may be prohibited by law or regulation from obtaining direct assistance
from internal auditors.
If using internal auditors to provide direct assistance is not prohibited by law or regulation,
and the external auditor plans to use internal auditors to provide direct assistance on the
audit, the external auditor shall evaluate the existence and significance of threats to objectivity
and the level of competence of the internal auditors who will be providing such assistance.
The external auditor’s evaluation of the existence and significance of threats to the internal
auditors’ objectivity shall include inquiry of the internal auditors regarding interests and
relationships that may create a threat to their objectivity.
The external auditor shall not use an internal auditor to provide direct
assistance if:
1. There are significant threats to the objectivity of the internal auditor; or
2. The internal auditor lacks sufficient competence to perform the proposed work.
The external auditor shall not use internal auditors to provide direct
assistance to perform procedures that:
1. Involve making significant judgments in the audit;

2. Relate to higher assessed risks of material misstatement where the judgment required
in performing the relevant audit procedures or evaluating the audit evidence gathered is
more than limited;
3. Relate to work with which the internal auditors have been involved and which has already
been, or will be, reported to management or those charged with governance by the
internal audit function; or
4. Relate to decisions the external auditor makes in accordance with this SA regarding the
internal audit function and the use of its work or direct assistance.
Prior to using internal auditors to provide direct assistance for purposes of

the audit, the external auditor shall:
1. Obtain written agreement from an authorized representative of the entity that the internal
auditors will be allowed to follow the external auditor’s instructions, and that the entity
will not intervene in the work the internal auditor performs for the external auditor; and
2. Obtain written agreement from the internal auditors that they will keep confidential
specific matters as instructed by the external auditor and inform the external auditor of
any threat to their objectivity.
14. Basics of Internal Financial Control and Reporting Requirements

Distinction between Internal Financial Control and Internal Control over financial reporting:
The term Internal Financial Controls (IFC) refers to the policies and procedures put in place
by companies for ensuring reliability of financial reporting, effectiveness and efficiency of
operations, compliance with applicable laws and regulations, safeguarding of assets and
prevention and detection of frauds.
On the other hand, Internal controls over financial reporting is required where auditors
are required to express an opinion on the effectiveness of an entity’s internal controls over
financial reporting, such opinion is in addition to and distinct from the opinion expressed by
the auditor on the financial statements.
Therefore, “internal financial control” is a wider term where as “internal controls over
financial reporting” is a narrower term restricted to entity’s internal controls over financial
reporting only.

CHAPTER 5
Audit of Items of FS

May 24
CA Himanshu
Chapter 5
1. Share Capital 3
2. Reserves and Surplus 6
3. Borrowings 8
4. Trade Receivables 11
5. Cash and Cash Equivalents 13
6. Inventories 15
7. Audit of PPE 17
8. Audit of Intangible Assets 21
9. Trade Payables and Other Current Liabilities 23
10. Loans and Advances and Other Current Assets 25
11. Provisions and Contingent Liabilities 27

12. Sales of Product and Services 28
13. Other Income 30
14. Purchases 31
15. Employee Benefit Expenses 33
16. Depreciation and Amortisation 34
17. Other Expense 36
18. Other Disclosures 37

CA Himanshu
1. Share Capital
1. Tally Share Capital: Compare the period-end share capital balance (authorized, issued,
and paid up) with the previous year’s audited financial statements.
2. Confirmation/Representation: If there’s no change during the year, obtain written
confirmation from the Company Secretary stating that there were no changes to the
entity’s capital structure.
3. Verification of Changes: If there’s any change, ensure the paid-up capital at the period-
end aligns with the authorized capital. Verify authorized capital by examining the
Memorandum of Association (MOA).
4. Certified Copies of Resolutions: Obtain certified copies of resolutions passed at board
and shareholder meetings authorizing changes in authorized or paid-up share capital.
5. Fresh Issue Compliance: For fresh issues in the current year, ensure compliance with
Companies Act 2013, covering aspects like Return of Allotment, Minimum Subscription,
and underwriting commission payment.
6. No Issuance at Discount: Confirm that no shares have been issued at a discount (as per
Section 53 of the Companies Act).
7. Nature of Issuance: Check whether shares are issued for cash or for considerations other
than cash (e.g., services to promoters or underwriters’ commission).
8. SEBI Regulations: Ensure compliance with SEBI regulations and guidelines related to
share issuances.
9. Verification of Filed Forms: Obtain and verify copies of forms filed with the Ministry
of Corporate Affairs (MCA) and Reserve Bank of India (RBI) to confirm the accuracy of
securities issued and their prices.

10. Fee and Stamp Duty: If there’s an increase in share capital, verify whether the company
has accurately calculated the required fees and stamp duty payable to MCA.
Shares Issued at Premium

1. If a company issues shares at a premium, that is the amount in excess of nominal value
of the share, whether for CASH or otherwise, Section 52 of the Companies Act, 2013
mandates the transfer of the premium amount to the securities premium account.
2. The purpose for which the amount in the account can be applied must be stated.
3. No Restriction on Premium Issue: The Act does not impose restrictions or conditions for
issuing shares at a premium.
4. Treatment Similar to Paid-up Capital: Provisions related to the reduction of share capital
apply to the securities premium account as if it were the paid-up share capital.
5. Application of Securities Premium Account: The securities premium account can be
utilized for various purposes, including:
a. Issuing fully paid bonus shares to members.
b. Writing off preliminary expenses.
c. Covering expenses, commission, or discount related to share or debenture issues.
d. Meeting the premium on redeeming preference shares or debentures.
e. Purchasing its own shares or securities under Section 68 (Buyback).
6. Auditor’s Verification: The auditor needs to verify:

a. Transfer of premium received on shares to the securities premium account.
b. Ensuring that any amount from the securities premium account is applied only
for specified purposes mentioned above.
Shares Issued at a Discount

Section 53 of Companies Act, 2013:
1. A company cannot issue shares at a discount, except for sweat equity shares under
Section 54.
2. Any share issued at a discounted price is considered void.
3. Exception: Companies may issue shares at a discount to creditors when debt is converted
into shares under a statutory resolution plan or debt restructuring scheme following RBI
guidelines.
Non-compliance Penalties:
Failure to comply results in penalties:
1. Company and defaulting officers liable to a penalty up to the amount raised through
discounted shares or five lakh rupees, whichever is less.
2. The company must refund all monies received with 12% per annum interest from the

issue date.
Auditor’s Verification:
1. Movement in Share Capital: Check changes in share capital during the year.
2. Discounted Share Issuance: Verify through meeting minutes that the company has not
issued shares at a discount.
3. Exceptional Cases: Verify if shares were issued at a discount to creditors during debt
conversion following RBI guidelines.
Sweat Equity Shares

Section 54 of Companies Act, 2013
According to Section 54 of the Companies Act, 2013, the employees may be compensated in
the form of ‘Sweat Equity Shares”.
Sweat Equity Shares means:
1. Equity shares issued to employees or directors.
2. Can be issued at a discount or for non-cash consideration (know-how, intellectual
property rights, or value additions).
Verification by Auditor:
1. Ensure Sweat Equity Shares are of an existing share class.
2. Compliance with Section 54 conditions:
a. Special resolution passed by the company
b. The resolution specifies details: number, market price, consideration, and
recipients.

c. Verify compliance of SEBI regulations for listed companies or prescribed rules
for unlisted companies.
Reduction of Capital
1. Verify shareholder meeting for special resolution, proper convening, and advance
circularisation.
2. Check Articles of Association for authorization of capital reduction.
3. Ensure no default in deposit repayment or interest payment.
4. Examine Tribunal order, its registration, and filing with Registrar of Companies.
5. Verify Registrar’s Certificate for capital reduction.
6. Vouch accounting entries for capital reduction, asset write-down, and compliance with
Schedule III.
7. Confirm proper disclosure of asset revaluation in the Balance Sheet.
8. Verify adjustment in members’ accounts in the Register of Members.
9. Confirm alteration or issuance of new share certificates and cancellation of old ones.
10. Add “and reduced” to the company name if required by the Tribunal.
11. Check compliance with tribunal-imposed terms and conditions.
12. Verify suitable alteration of the Memorandum of Association.
Disclosure for Share Capital

Ensure whether the following disclosure requirements of Schedule III (Part I) to Companies
Act, 2013 have been complied with:
1. Authorization and Issuance:
a. Number and amount of authorized shares.
b. Issued, subscribed, fully paid, and subscribed but not fully paid shares.
c. Par value per share.
2. Reconciliation of shares outstanding at the beginning and end of the reporting period.
3. Rights and Preferences:
a. Rights, preferences, and restrictions for each share class.
b. Restrictions on dividends and capital repayment.
4. Holding Company Details:
a. Shares of each class held by the holding company or ultimate holding company.
b. Shares held by subsidiaries or associates of the holding or ultimate holding
company.
5. Major Shareholders: Shares held by shareholders with more than 5% shares, specifying
the number.
6. Reserved Shares: Shares reserved for issue under options, contracts, commitments, or
disinvestment, including terms and amounts.
7. Historical Data (Last 5 Years):
a. Aggregate number and class of fully paid shares issued without cash receipt.

b. Aggregate number and class of bonus shares issued. CA Himanshu
c. Aggregate number and class of shares bought back.

8. Convertible Securities: Terms of convertible securities, including earliest conversion
dates in descending order.
9. Calls Unpaid: Aggregate value of calls unpaid, distinguishing those by directors and
officers.
10. Forfeited Shares: Amount originally paid for forfeited shares.
11. Where in respect of an issue of securities made for a specific purpose, the whole or
part of the amount has not been used for the specific purpose at the balance sheet date,
there shall be indicated by way of note how such unutilised amounts have been used or
invested.

2. Reserves and Surplus
Definition of Reserves: Appropriated amounts from profits not intended for specific liabilities,
contingencies, commitments, or asset value diminution.
Revenue Reserves:
Profits available for distribution or various purposes:
1. Supplement divisible profits in lean years.
2. Finance business extension.
3. Augment working capital.
4. Strengthen the company’s financial position.
Capital Reserves:
1. Reserves not available for distribution.
2. Utilized for limited purposes.
3. Examples of Capital Reserves: Securities premium and Capital redemption reserve.
4. Appropriation for Capital Purpose: If revenue profit is appropriated for the asset
replacement reserve, considered a capital reserve.

5. Creation of Capital Reserve: Originates from capital profits earned, e.g., sale of capital
assets or shares.
Utilization of Capital Reserves:
1. Used for writing down fictitious assets or losses.
2. Permitted for issuing bonus shares if realized.
3. Limitations on Certain Reserves: Securities premium or capital redemption reserve
governed by specific purposes in Sections 52 and 55 of the Companies Act, 2013.
Audit Procedure for Reserve and Surplus

Verification of Opening Balances:
1. Trace and tally the opening balance of reserves and surplus with the previous year’s
audited financial statements.
Current Year Additions/Utilizations:
1. Profit and Loss Balance: CA Himanshu
a. Trace movement to surplus/deficit in the Statement of Profit and Loss for the
current year.
b. Verify the movement in the Statement of Changes in Equity.
c. Verify board resolution on dividend recommendation and shareholder resolution
for dividend declaration.
d. Note: AS-4 (Revised) or IND AS 10 stipulates treatment if dividends are proposed
or declared post the balance sheet date.

2. Securities Premium:
a. Confirm the issuance of shares exceeding nominal value by obtaining and
verifying the board resolution.
b. Ensure utilisation aligns with limited purposes (Section 52 of Companies Act
2013).
Specific Considerations:
1. Dividend Recognition: Dividends proposed or declared after the balance sheet date
should be disclosed but not recognized as a liability.
2. Securities Premium Utilization: Securities premium account utilization restricted to
specified purposes and Confirm adherence to the restrictions outlined in Section 52 of
the Companies Act 2013.
Other Procedures:
1. Follow appropriate audit procedures to validate the movement in reserves and surplus,
ensuring compliance with regulatory provisions.
Disclosure for Reserve and Surplus

Reserves and Surplus shall be classified as:
1. Capital Reserves;
2. Capital Redemption Reserve;
3. Securities Premium

4. Debenture Redemption Reserve;
5. Revaluation Reserve;
6. Share Options Outstanding Account;
7. Other Reserves– (specify the nature and purpose of each reserve and the amount in
respect thereof)
8. Surplus
A reserve specifically represented by earmarked investments shall be termed as a “fund”
Debit balance of statement of profit and loss shall be shown as a negative figure under the
head “Surplus”
3. Borrowings
Audit Procedure for Existence Assertion

1. Review Board Minutes:
a. Review board minutes for approval of new lending agreements.
b. Ensure authorization of new loan agreements or bond issuances by the board.
c. Verify board approval for significant debt commitments.

2. Loan Agreement Verification:
a. Agree on details of recorded loans (interest rate, nature, and repayment terms)
with the loan agreement.
b. Verify adherence to borrowing limits specified in agreements.
3. Independent Balance Confirmations:
a. Roll out and obtain independent balance confirmations (SA 505) for all borrowings
from lenders (banks/financial institutions).
b. Ascertain that confirmations request all relevant information for testing debt
and related interest balances (e.g., interest rates, due dates, collateral, security
interests).
c. Send reminders for non-replies to confirmation requests.
d. Compare balances from confirmations to the books of accounts.
e. Ask for reconciliations if differences exist.
f. Test supporting documents for reconciling items on a sample basis.
4. Leases and Hire Purchase Verification: Agree details of leases and hire purchase
creditors with underlying contracts/agreements.
5. Debentures Examination: Examine debenture trust deed for redemption terms,
borrowing restrictions, and covenant compliance.
6. Debt Retirement Confirmation: When retiring debt, ensure receipt of a discharge on
assets securing the debt.
7. Written Representation: Obtain a written representation confirming that all recorded
liabilities represent valid claims by lenders.
Audit Procedure for Completeness Assertion

1. Borrowings Schedule Review:
a. Obtain a detailed schedule of short-term and long-term borrowings, encompassing
debts outstanding at the prior year-end and any new or renewed debt during the
current year.
b. Show beginning and ending balances, along with borrowings taken and repaid
during the year.
2. Evidence of Additional Debt: Consider any evidence of additional debt by examining
minutes of the board of directors, significant contracts, confirmations from banks/
lenders, and support for subsequent cash disbursements (when testing payables).
3. Closing Balance Verification: Trace the closing balances from the schedules to the
general ledger.
4. Review of Subsequent Transactions:
a. After the reporting period, review subsequent transactions to identify any
unrecorded liabilities at year-end and ensure proper recording in the correct
period.
b. Example: Evaluate transactions such as fresh loans taken near the balance sheet
date for accurate accounting.
Audit Procedure for Valuation Assertion

1. Accounting Policies and Methods: Determine appropriateness and consistent application
of accounting policies and methods for recording debt.
2. Agreement of Loan Balance: Agree loan balance and payables to the terms outlined in
the loan agreement.

3. Recomputation of Interest and Redemption Elements: Recompute interest, and assess
any discount or premium on redemption if applicable.
4. Amortization Computation: Check the computation of premium or discount amortization
if applicable.
5. Foreign Currency Loans: Verify the closing exchange rates used and compute
restatements of foreign currency balances per AS 11.
6. Provisions in Loan and Debt Agreements:
a. Test entity compliance with covenants and significant provisions in agreements.
b. Determine the classification of debt if there are non-compliant provisions.
c. Obtain confirmation of waiver if provisions have been waived by the lender.
7. Due Dates and Classification:
a. Examine due dates on loans for proper classification (long-term or short-term).
b. Verify correctness of disclosed installments of long-term loans due within the
next twelve months.
8. Restrictive Covenants and Default Provisions:
a. Examine debt agreements for restrictive covenants and default provisions.
b. Ensure proper disclosure in financial statements.
9. Security Aspects:
a. Review loan agreements and documents evidencing charge for compliance with

statutory requirements.
b. Verify compliance with applicable statute provisions on creation and registration
of charges.
c. Verify classification of secured loans in case the value of security falls below the
loan outstanding.
10. Hire Purchase Agreements:
a. Examine hire purchase agreements for asset purchases.
b. Ensure accuracy of outstanding amounts in accounts and review the security
aspect.
11. Borrowings from Related Parties: Carefully review borrowings from related parties,
ensuring compliance with AS 18 or IND AS 24.
12. Liabilities Towards Banks: Verify correct reflection and disclosure of liabilities toward
banks (e.g., bills discounted, negotiated, etc.).
13. Borrowing Powers and Restrictions:
a. Verify borrowing within company’s powers laid down by Articles of Association
and Memorandum of Association.
b. Check compliance with Sections 180, 185, and 186 of the Companies Act, 2013.
14. Purpose of Borrowing: Examine the purpose for borrowing, ensuring it aligns with the

company’s interest.
15. Deposit Compliance: Where applicable, ensure compliance with directives issued by the
Reserve Bank of India or other appropriate authority for accepted deposits.
Disclosure for Borrowings

Ensure whether the following disclosures as required under Schedule III (Part I) to Companies
Act, 2013 are made for each amount disclosed under each of the following headings:
Long- Term Borrowings:

Long-term borrowings shall be classified as:
1. Bonds/debentures;
2. Term loans: CA Himanshu
a. From banks.
b. From other parties.
c. Deferred payment liabilities;
d. Deposits;
e. Loans and advances from related parties;
f. Long term maturities of finance lease obligations;
g. Other loans and advances (specify nature).
Short Term Borrowings:

Short-term borrowings shall be classified as:
1. Loans repayable on demand;

a. From banks.
b. From other parties.
3. Loans and advances from related parties;
4. Deposits;
5. Other loans and advances (specify nature)
Current maturities of Long term borrowings shall be disclosed separately.
Common for both Long Term and Short Term Borrowings:

1. Borrowings shall further be sub-classified as secured and unsecured. Nature of security
shall be specified separately in each case.
2. Where loans have been guaranteed by directors or others, the aggregate amount of such
loans under each head shall be disclosed.
3. Period and amount of default as on the balance sheet date in repayment of loans and
interest, shall be specified separately in each case.
4. Trade Receivables
Test of Controls for Sales and Debtors

1. Ensure that trade receivables arise only from legitimate and genuine sales.
2. Confirm that all sales are made to customers approved by the company.
3. Verify that all sales are accurately recorded in the company’s books of accounts.
4. Confirm that recorded debtors can only be settled through cash receipts or under the
authority of a responsible official.
5. Ensure segregation of duties at various stages of the sales transaction, including
accounting for debtors, collecting payments, and sending reminders.
6. Verify that debtors are collected within the stipulated time frame.
7. Check procedures for sending reminders and initiating legal actions if debtors are not
collected within the specified time.
8. Confirm that balances are regularly reviewed to identify any anomalies or discrepancies.
9. Verify the existence of a robust system for following up on outstanding debts.
10. Ensure that an adequate provision for bad debt is made, supported by the preparation of
an aging schedule for debtors.

1. Check for controls preventing duplicate invoice recording and ensuring automatic recording
of receivable balances in the general ledger from the original invoice.
2. Request and analyze a period-end accounts receivable aging report, comparing the balance
to the general ledger.
3. Send Confirmation to customers to confirm amounts of unpaid accounts receivable.
4. Use preferable forms for confirmation requests, either with or without the balance mentioned.
5. Keep the method of selection confidential until after receiving the trade receivables’ ledger.
6. Provide a list of selected receivables for confirmation to the entity for preparing request

letters.
7. Investigate and reconcile discrepancies revealed by confirmations or additional tests.
8. In case of no replies, perform alternate procedures, including agreeing the balance to
subsequent cash received.
9. If large balances are overdue, inquire about reasons and justifications.
10. Review related party receivables for collectability, proper authorization, and reasonable and
arm’s length values.
11. Review trends in sales and accounts receivable through analytical procedures.
12. Measure average collection period and inquire about reasons for changes in trends,
documenting them in audit work papers.

1. Ensure accurate cut-offs to prevent understatement or overstatement of sales.
2. Perform cut-off procedures for invoices issued during the last few days of the reporting year.
3. Verify that all goods dispatched before the period/year-end have been invoiced and included
in debtors on a test check basis.
4. Confirm that no goods dispatched after the year-end have been invoiced and included in
debtors for the audited period.

5. Select invoices from the accounts receivable aging report.
6. Compare selected invoices with supporting documentation to ensure correct amounts,
customers, and dates.
7. Confirm that sales are recorded in the correct accounting period by comparing invoice dates
to shipment dates.
8. Review the process of providing discounts/incentives.
9. Review credit memos issued during and after the audit period on a sample basis.
10. Review credit memos issued after the period end to ensure relevance to transactions in the
audited period.

1. Obtain the ageing report for accounts receivable.
2. Scrutinize the analysis, identifying doubtful debtors.
3. Acquire a list of debtors under litigation and compare it with the previous year.
4. Discuss reasons with management for any exclusions from the provision for bad debts.
5. Conduct further testing in case of disputes.
6. Assess the allowance for doubtful accounts, comparing the method used this year with the
one used last year.
7. Prepare a schedule of movements for bad debts, provision accounts, and debts written off.
8. Compare the proportion of bad debt expense to sales for the current year with prior years to
assess reasonableness.
9. Verify if provisions are made at appropriate rates, considering the recoverability of amounts
due.
10. Check that write-offs of receivable balances have been approved by the appropriate authority,

such as the Board of Directors for a company.
Disclosure for Trade receivables

5. Cash and Cash Equivalents CA Himanshu

1. Verification of Cash Balances:
a. Conduct surprise checks on cash to ensure the custodian actually holds the
reported cash.
b. Simultaneously check all cash balances, including those with cashiers, petty
cashiers, branch cashiers, and employees with imprest balances.
c. Ensure the cashier is present during cash verification and signs the statement
detailing the cash balance.
d. Cross-check entries in the rough Cash Book or daily balance details with the Cash
Book to validate accuracy.
e. Verify any slips, chits, or I.O.U.s for temporary advances to employees, ensuring
approval by an authorized official.
2. Cash Sensitivity Analysis: Perform cash sensitivity analysis by summarizing total cash
receipts and payments monthly, analyzing trends, and obtaining brief descriptions from
management.
3. Verification of Bank Reconciliation Statements (BRS): Obtain BRS for all entity bank
accounts and understand the client’s BRS process and frequency.
a. Ensure the BRS is signed by authorized personnel.

b. Verify BRS by tallying bank book balances with bank confirmation/statements.
c. Check reconciling items related to cheques issued but not presented, cheques
deposited but not credited, and amounts/charges debited/credited by the bank.
d. For stale cheques, ensure their exclusion from BRS and reclassification as
liabilities.
4. Direct Confirmation Procedure: Directly contact banks/financial institutions to confirm
account balances in various accounts.
a. Emphasize confirmation of 100% of bank account balances.
b. In cases of non-replies, conduct additional testing, including agreeing balances to
bank statements received by the company or visiting the bank branch with entity
personnel for direct confirmation.
5. The auditor should ensure that all bank accounts holding foreign currency have been
restated at the closing exchange rates as per applicable Financial Reporting Framework.
Disclosure for Cash and Cash Equivalents
CA Himanshu
6. Inventories

1. Review of Inventory Count Plan: Review the entity’s plan for conducting inventory
counts.

2. Consigned Goods: Ensure the segregation of consigned goods.
3. Participation in Inventory Count: Actively participate in the inventory count along with
management.
4. Auditor’s Test Counts:
a. Observe employees adhering to the agreed plan.
b. Assure appropriate supervision during the count procedure.
c. Confirm proper tagging of all items.
d. Verify that tag amounts are correct.
e. Ensure controlled and reconciled tag and summary sheets.
f. Reconcile test counts with tags and summary sheets, noting any discrepancies.
g. Stay alert for issues like empty boxes and obsolete items.
h. Perform cut-off testing by documenting the last 5-10 receiving reports and
shipping documents as of the period end.
i. Exclude third-party stock and damaged or obsolete stock.
j. Ensure accounting for all stock sheets.
k. Investigate significant differences between physical stock and stock records in
books.
l. Ask entity personnel to sign all stock count sheets and agree on observed variances
to prevent conflicts.
4. Periodic System for Inventory Count:
a. When using a periodic system, conduct inventory counts at the end of the period.
b. For entities using a perpetual system with proper records, inventory counts may
be performed at interim dates.
5. Third-Party Inventory Confirmation: Confirm or investigate any inventory of the entity
held by a third party, especially relevant for job work done in the production process.

1. Analytical Procedures:
a. Perform analytical procedures, including comparison tests with industry averages,
budgets, prior years, and trend analysis.
b. Compute the inventory turnover ratio (COGS/average inventory).
c. Conduct vertical analysis (inventory/total assets).
d. Compare budgetary expectations with actuals.
2. Examination of Non-Financial Information: Examine non-financial information related
to inventory, such as weights and other measurements.
3. Purchase and Sales Cut-off Tests:
a. Perform purchase and sales cut-off tests.
b. Trace shipping documents (bills of lading and receiving reports, warehouse
records, and inventory records) to accounting records immediately before and
after year-end.
4. Tagged Inventory Tests: With respect to tagged inventory, perform tests for omitted
transactions and tests for invalid transactions.

5. Accuracy Verification:
a. Verify the clerical and arithmetical accuracy of inventory listings.
b. Reconcile physical inventory amounts with perpetual records.
c. Reconcile physical counts with general ledger control totals.
6. Third-Party Reconciliation: Reconcile inventories held by third parties like transporters,
warehouses, port authorities, etc.
7. Consignment Basis: Ensure goods received on consignment basis are properly segregated
from other items of inventory.

The choice of inventory valuation method, either First-in, First-out (FIFO) or weighted average,
depends on the business’s operational preferences.
For Raw materials and consumables

1. Identify the components of cost included, such as carriage inward and nonrefundable
duties.
2. If standard costs are employed, inquire about the basis of standards, the process of
comparison with actual costs, and the treatment of variances in accounting records.

3. Verify cost prices by cross-checking with purchase invoices from the preceding month(s).
4. Investigate the valuation of damaged or obsolete inventories observed during the physical
count to determine a realistic net realizable value.
For Work in Progress

1. Determine how different stages of production or value additions are measured, especially
if estimates are involved, and understand the basis for these estimates.
2. Identify the elements of cost included, with special attention to overhead costs. Compare
the basis of including overheads with the costing and financial data maintained by the
entity.
3. Verify that material costs do not include abnormal wastage factors.
For Finished Goods and Goods for Resale

1. Inquire about the costs included in inventory valuation and how they have been
determined.
2. Verify that overheads are based on normal costs and seem reasonable in relation to the
information in the financial statements.
3. Ensure inventories are valued at net realizable value if they may fetch a value lower than
their cost.
4. Check if relevant semi/ partly processed inventories (work in progress) and raw materials
have also been written down if needed.
Valuation of Obselete and Damaged Goods

Request the client to provide inventory ageing split and follow up for any inventories which at
time of observance of physical counting were noted as being damaged or obsolete.

1. Compare recorded costs with replacement costs.
2. Examine vendor price lists to determine if recorded cost is less than current prices.
3. Calculate inventory turnover ratio. Obsolete inventory may be revealed if ratio is
significantly lower.
4. In manufacturing environments, test overhead allocation rates and ensure that only
direct labor, direct material and overhead have been included.
5. Verify the correct application of lower of cost or net realizable value principles.
Disclosure for Inventory
CA Himanshu
7. Audit of PPE
Recognition Criteria for PPE
The cost of an item of PPE should be recognised as an asset if, and only if:
1. It is probable that future economic benefits associated with the item will flow to the
enterprise, and
2. The cost of the item can be measured reliably.
Elements of Cost
The cost of an item of property, plant and equipment comprises:
1. Purchase price, considering import duties and non-refundable purchase taxes, minus
trade discounts and rebates.

2. Costs directly linked to preparing the asset for operational use.
3. Initial estimate of costs for dismantling, removing the item, and restoring the site
(decommissioning, restoration, and similar liabilities).
4. Incurred obligations for decommissioning, restoration, or similar liabilities upon
acquisition or as a result of using the item for non-inventory production purposes.
Examples of Directly Attributable Cost:

1. Costs of employee benefits (as defined in AS 15, Employee Benefits) arising directly from
the construction or acquisition of the item of property, plant and equipment;
2. Costs of site preparation;
3. Initial delivery and handling costs;
4. Installation and assembly costs;
5. Costs of testing whether the asset is functioning properly, after deducting the net
proceeds from selling any items produced while bringing the asset to that location and
condition (such as samples produced when testing equipment);and
6. Professional fees
Examples of costs that are not costs of an item of property, plant and
equipment:

1. Costs of opening a new facility or business, such as, inauguration costs;
2. Costs of introducing a new product or service (including costs of advertising and
promotional activities);
3. Costs of conducting business in a new location or with a new class of customer (including
costs of staff training); and
4. Administration and other general overhead costs.

1. Review the entity’s plan for physical verification of PPE, including the staff or third party
involved and the verification frequency.
2. Check for evidence of appropriate supervision during the physical verification process.
3. Obtain the PPE physical verification report and working sheets from the entity.
4. Assess if all PPE items are properly tagged and have identification marks/numbers.
5. Reconcile physically verified PPE items with the fixed asset register, checking for updated
additions.
6. Verify discrepancies noted during physical verification and how they are addressed in
the entity’s books and financial statements.
7. Ensure proper accounting for identified shortages or assets not in active use, including
necessary approvals and cessation of depreciation.
Audit for Completeness Assertion

1. Verify the movement in the PPE schedule, including opening balances, additions, and
deletions.
2. Tally the closing balance in the PPE schedule with the entity’s books of account.

3. Check the arithmetical accuracy of the movement in the PPE schedule.
4. Tally opening balances with the previous year’s audited financial statements.
5. Obtain a listing of all additions from the management for the period under audit.
6. Verify material additions to ensure they meet the criteria of PPE as per AS 10 (Revised).
7. Verify the cost of PPE items, ensuring compliance with AS 10 (Revised).
8. Test purchase invoices, installation certificates, or other documentation for the date of
addition.
9. Verify approval by authorized personnel for PPE additions.
10. Check internal processes and procedures, such as competitive quotations and tendering,
for procuring PPE items.
11. Understand and verify the reasons for deletions to PPE, including the disposal process.
12. Obtain management approval and discard notes for assets taken out of active use.
13. Verify the process followed for the sale of discarded PPE, including competitive quotes
and tenders.
14. Ensure accurate recording of the deletion of PPE and the resulting gain or loss on disposal
in the entity’s books of account.
Audit for Valuation Assertion

1. Verify that the entity has charged depreciation on all items of PPE, excluding non-
depreciable assets like freehold land.
2. Assess that the depreciation method used aligns with the pattern in which the asset’s
future economic benefits are expected to be consumed, such as straight-line, diminishing

value, or unit of production method.
3. Ensure that the management has conducted an impairment assessment, following
the requirements of AS 28 - Impairment of Assets, to determine whether any item of
property, plant, and equipment is impaired.
Audit for Rights Assertion

1. Verify that all purchase invoices for additions to PPE are in the name of the entity,
confirming legal title ownership.
2. For land and building additions, check conveyance deeds/sale deeds to ensure the entity
is the legal owner.
3. Insist on and verify original title deeds for all immovable properties held at the balance
sheet date.
4. If original title deeds are held as security for borrowings, request confirmation from
lenders about holding the deeds.
5. Check the register of charges to ensure that any charge against PPE is appropriately
recorded.

Disclosure for PPE
8. Audit of Intangible Assets

Audit for Existence Assertion
1. Verify the existence of intangible assets by checking if they are actively used in production,
rental, or administrative purposes.
2. For software, confirm its existence by checking if it is actively used, considering sales of
related services/goods during the audit period.
3. For design/drawings, verify their existence by checking production data to confirm if the
related products are being produced and sold.
4. If an intangible asset is not in active use, ensure that its deletion is recorded in the books
with management approval, and amortization ceases after deletion.

1. Verify the movement in the intangible assets schedule, ensuring the accuracy of
calculations.
2. Check the arithmetical accuracy of the schedule and tally closing balances with the
entity’s books.
3. For additions during the audit period, confirm that expenditure meets recognition
criteria per AS 26.
4. Ensure that no intangible asset from research is recognized, and research expenditures
are expensed.
5. Verify the date of use of the intangible asset by checking relevant documentation.
6. Confirm approvals from appropriate personnel for additions and verify adherence to
internal processes.
7. Check if competitive quotations or tenders were followed in vendor selection for
intangible assets.
8. For deletions, understand the rationale, obtain management approval, and verify the
disposal process.
9. Check documentation for the sale of discarded assets, including competitive quotes and
tenders.
10. Verify accurate recording of deletion details and resultant gain/loss on disposal in the
entity’s books.

1. Verify that the entity has charged amortization on all intangible assets.
2. Confirm that the amortization method used aligns with the expected consumption
pattern of economic benefits.
3. Check whether the management has conducted an impairment assessment for intangible
assets.
4. Verify if AS 28 - Impairment of Assets has been applied by the entity for reviewing
carrying amounts and determining recoverable amounts.
5. Ensure compliance with impairment assessment procedures to identify any impairment
loss on intangible assets.
Audit for Rights Assertion

1. Verify completeness of additions to intangible assets during the audit period.
2. Confirm that all expense invoices and purchase contracts are in the name of the entity.
3. Ensure legal title of ownership aligns with the entity’s name.
Disclosure for Intangible Assets
9. Trade Payables and Other Current Liabilities

CA Himanshu

1. Contact vendors independently to confirm accounts payable amounts at the end of the
reporting period.
2. Obtain consent from the entity for direct confirmation and assess the validity of any
management request to exclude certain payables.
3. Decide on the confirmation date in consultation with the company.
4. Choose a confirmation method, preferably using a form with no balance.
5. Keep the method of creditor selection confidential until after receiving the trade payables
ledger.
6. Reconcile and investigate any discrepancies revealed by confirmations or additional
tests.
7. Perform additional testing for non-responsive creditors, including testing subsequent
payments and detailed analysis of balances.
8. Review related party payables for proper authorization and reasonable transaction
values.
9. Analyze trends in purchases, expenses, and accounts payable over time, inquiring about
any unusual trends from management. CA Himanshu

1. Confirm goods received or ownership transfer for the last 5 invoices recorded at the
reporting date.
2. Ensure all goods received before the period-end are included in trade creditors.
3. Test purchases and expenses from accounts payable ledgers with supporting documents.
4. Match purchase invoice dates to gate entry dates for correct recording periods.
5. Review subsequent expense vouchers to identify transactions within the audit period.
6. Verify customer advances, checking documentation and resolving disputes.
7. Analyze statutory dues liabilities (TDS, GST, etc.) for reasonableness based on sales,
purchases, and employee benefit expenses.
8. Calculate and verify GST and Provident Fund liabilities for the last month, comparing
with entity records.
9. Obtain and verify challans for statutory liability deposits post-period end.
10. Prepare a comprehensive list of statutory dues and address reporting requirements
under CARO, 2020.

1. Review the Company’s process to identify and write back any old creditor balances,
comparing it with the method used in the previous year.
2. Obtain the ageing of payable balances and a list of vendors with disputes, claims, or
under litigation, comparing it with the previous year.
3. Verify that write-backs in liability balances deemed no longer payable have been
approved by authorized senior management.
4. Ensure proper restatement of foreign currency trade payables in accordance with AS 11.

5. Understand and test management’s process for identifying the principal amount and
unpaid interest to Micro, Small, and Medium-Sized Enterprises suppliers at the end of
the accounting year.
Disclosure for Trade Payables
10. Loans and Advances and Other Current Assets

1. Use direct confirmation procedures, similar to those for accounts receivable, to establish
the existence of loans and advances.
2. During circularisation, include both the principal amount and any interest receivable

based on agreed terms between the parties for confirmation

1. Comparison of Advances and Current Assets:
a. Obtain a list of all advances and current assets.
b. Compare these lists with ledger balances.
2. Verification of Loan Agreements and Acknowledgments:
a. Verify loan agreements and acknowledgments.
b. Ensure material loans and advances are authorized as per the Memorandum and
Articles of Association.
3. Confirmation of Competence for Loan Authorization:
a. Confirm that loans are within the competence of individuals who authorized
them.
b. Verify directors’ authorization for Company, partners for a firm, and trustees for
a trust.
4. Review of Board Meeting Minutes:
a. Inspect board meeting minutes.
b. Confirm approval of all material loans and advances by the board of directors.
5. Verification of Loan Acknowledgment and Security:
a. Verify loan acknowledgment by the party.
b. Inspect any deposited security against loan repayment.

c. Ascertain regularity of loan recovery.
6. Examination of Related Party Loans and Advances:
a. Review authorization of related party loans.
b. Ensure the value of transactions is reasonable and at arm’s length.
7. Reasonability Check for Balances with Statutory Authorities:
a. Assess GST input credit balances for reasonability.
b. Apply applicable rates to purchases/expenses for comparison.
h. Request reasons for variances with recorded amounts. CA Himanshu
9. Verification of Statutory Returns:
a. Obtain and verify statutory returns (e.g., GST returns).
b. Confirm recorded amounts align with claims made to authorities.

1. Reviewing Allowance for Doubtful Accounts:
a. Assess company’s method for deriving allowance.
b. Compare current method with the previous year.
c. Determine method appropriateness for the business.
2. Examining Aging Report of Loans and Advances:
a. Obtain aging report of loans and advances.

b. Obtain list of loans and advances under litigation and compare with the previous
year.
3. Scrutinizing and Identifying Doubtful Loans/Advances:
a. Scrutinize analysis to identify doubtful loans and advances.
b. Discuss reasons with management if not included in the provision.
4. Assessing Bad Loans/Advances Write-offs:
a. Evaluate write-offs of bad loans and advances.
b. Prepare schedule showing movements in Bad Loans/Advances – Provision
Accounts and written-off loans/advances.
5. Approval for Write-offs or Reductions: Confirm write-offs or reductions have senior
authority approval.
6. Restatement of Foreign Currency Loans and Advances: Ensure proper restatement per
AS 11.
Disclosure for Loans and Advances
11. Provisions and Contingent Liabilities

A provision is a liability which can be measured only by using a substantial degree of estimation.
A provision is recognised when:
1. An entity has a present obligation (legal or constructive) as a result of a past event;
2. It is probable that an outflow of resources embodying economic benefits will be required

to settle the obligation; and
3. A reliable estimate can be made of the amount of the obligation.
If the above conditions are not met, no provision is recognised.
A contingent liability is:
1. A possible obligation that arises from past events and whose existence will be confirmed
only by the occurrence or non-occurrence of one or more uncertain future events not
wholly within the control of the entity; or
2. A present obligation that arises from past events but is not recognized because:
a. It is not probable that an outflow of resources embodying economic benefits will
be required to settle the obligation; or
b. The amount of the obligation cannot be measured with sufficient reliability.
Audit of Existence, Completeness and Valuation Assertion

1. Provision List Comparison:
a. Obtain a list of all provisions.
b. Compare the list with ledger balances.
2. Inspection of Underlying Agreements:
a. Inspect agreements (e.g., customer agreements) to understand warranty
commitments and legal claims.
b. Obtain underlying workings and basis for each provision from management.
3. Verification of Accuracy and Completeness:

a. Verify the completeness and accuracy of provided information. CA Himanshu
b. Assess if the provided workings are complete and accurate.
4. Obtaining Expert Reports:
a. Obtain expert reports, calculations, and workings for provision amounts.
b. For complex matters like warranty calculations, request actuarial valuation
reports.
5. Verification of Expert Assumptions:
a. Verify assumptions used by experts.
b. Ensure consistency of expert assumptions with data provided by management.
6. Compliance with SA 500 – Audit Evidence:
a. Evaluate expert competence, capabilities, and objectivity.
b. Assess the independence of the expert.
c. Consider the auditor’s past experience with the expert.
7. Understanding of Expert’s Work:
a. Understand the nature of the expert’s work.
b. Evaluate the auditor’s expertise to assess the expert’s work.
c. Assess assumptions and methods used by the management.
8. Evaluation of Expert’s Work Appropriateness:
a. Evaluate the appropriateness of the expert’s work as audit evidence.

b. Assess relevance, reasonableness, and completeness of the expert’s findings.
c. Evaluate the relevance, completeness, and accuracy of source data used by the
expert.
9. Obtaining Written Representation:
a. Obtain written representation from management.
b. Confirm that all required provisions have been made according to recognized
accounting principles.
12. Sales of Product and Services
Audit for Occurence Assertion + Revenue Overstated/Understated:

1. Ensure revenue is not overstated by performing following audit procedures:
a. Check whether a single sales invoice is recorded twice or a cancelled sales invoice
could also be recorded.
b. Test check few invoices with their relevant entries in sales journal.
c. Obtain confirmation from few customers to ensure genuineness of sales
transaction
d. Whether any fictitious customers and sales have been recorded.

e. Whether any shipments were done without the consent and agreement of the
customer, especially at the year end to inflate the sales figure
f. Whether unearned revenue recorded as earned.
g. Whether any substantial uncertainty exists about collectability.
h. Whether customer obligations are contingent on other actions (financing, resale,
etc.).
2. Verification of Shipments:
a. Ensure shipments align with customer consent and agreements.
b. Pay attention to year-end shipments that may inflate sales figures.
3. Recognition of Revenue:
a. Verify the proper recognition of revenue, avoiding unearned revenue recorded as
earned.
b. Address any substantial uncertainty regarding collectability.
4. Customer Obligations: Examine customer obligations for dependencies on other actions
(e.g., financing, resale).
5. Review of Sales Invoices:
a. Review the sequence of sales invoices for consistency and completeness.
b. Scrutinize journal entries for any unusual transactions.
6. Ratio Analysis: Calculate the sales return to sales ratio and compare the ratio with the
previous year and inquire about any significant changes.
7. Verification of Sales Returns: Verify sales returns against related documents such as
sales invoices, challans, credit notes, and stock registers.
Audit for Completeness Assertion + Revenue Overstated/Understated:

1. Cut-Off Procedures for Revenue Recognition:
a. Ensure accurate recognition of revenues in the current accounting period.
b. Verify that sales were not manipulated towards the end of the period.
2. Identification of Cut-Off Errors:
a. Recognize potential cut-off errors where revenue is based on invoice generation
date rather than the transfer of risks and rewards.
b. Tailor cut-off tests to address specific engagement cut-off error risks.
3. Verification of Credit Notes:
a. Confirm the issuance of credit notes after the accounting period.
b. Guard against fictitious sales made before year-end to meet targets and
subsequently canceled with post-year-end credit notes.
4. Tracing from Shipping Documents: Trace information from shipping documents to the
sales journal.
5. Quantity Verification:
a. Check the appearance of quantities in the sales register.
b. Reconcile total sales/goods dispatched per stock records, financial records, and
statutory records like GST.
6. Review of GST Records:
a. Examine GST tax and returns, reconciling them with revenue reported in the
profit and loss account.
b. Assess reasonability of GST by applying the applicable rate to gross sales value.
c. Analyze variations between GST amounts in statutory returns and those in

financial records, identifying and understanding reasons for any discrepancies.
Audit for Accuracy Assertion

1. Transaction Tracing:
a. Examine selected transactions from initiation to conclusion (Examination in
depth).
b. For instance, take several sales transactions and scrutinize every underlying
document from the receipt of the sales order to the payment of receivable
balances.
c. Ensure proper recording at each stage, accurate measurement, and adherence to
the entity’s revenue recognition policy, including incentives and discounts.
2. Export Sales Compliance: Ensure compliance with AS 11 (Accounting Standard 11) if the
client is involved in export sales.
3. Understanding Operations and GAAP Issues:
a. Gain a comprehensive understanding of the client’s operations.
b. Address relevant GAAP (Generally Accepted Accounting Principles) issues, such
as revenue recognition policies, especially in cases of point of sale revenue
recognition versus percentage of completion where applicable.
4. Review of Related Party Sales:
a. Compare the rate of sales involving related parties.

b. Scrutinize related party transactions for collectability.
c. Confirm proper authorization of transactions and assess whether the value of
such transactions is reasonable and at arm’s length.
Disclosure for Revenue from Operations

13. Other Income
Fixed Deposits:
1. Obtain a listing of fixed deposits opened during the period under audit along with the
applicable interest rate and the number of days for which the deposit was outstanding
during the period.
2. Verify the arithmetical accuracy of the interest calculation made by the entity by
recomputing i.e. multiplying the deposit amount with the applicable rate and number of
days during the period under audit.
3. For deposits still outstanding as at the period- end, trace the same to the direct
confirmations obtained from the respective bank/ financial institution.
4. Obtain a confirmation of interest income from the bank and verify that the interest
income as per bank reconciles to the calculation shared by the entity.
5. Also, obtain a copy of Form 26AS (TDS withholding by the bank/ financial institution)
and reconcile the interest reflected therein to the calculation shared by client.
Dividend

1. Verify that the same are recognised in the statement of profit and loss only when the
entity’s right to receive payment of the dividend is established.
2. Verify that Gain/(loss) on sale of investment in mutual funds is recorded as other income
only on:
a. transfer of title from the entity AND
b. is determined as the difference between the redemption price and carrying value
of the investments.
3. For the purpose, obtain the mutual fund statement and trace the gain / loss as recorded
in the books of account to the gain/ loss as reflected in the statement.
Disclosure for Other Income

14. Purchases
Test of Controls for Purchases
1. Identify control points in the purchase cycle, such as segregation of duties, competitive
quotes, purchase committee authorization, goods receipt process, quality checks, invoice
approval, and purchase recognition in the system.
2. Test the effectiveness of controls in the purchase cycle.
3. Effective controls can reduce the need for extensive substantive testing.
4. Common controls include:
a. Competitive quotations,
b. Numbered purchase orders,
c. Authorization limits,
d. GRN generation,

e. Quality inspection,
f. 2-way/3-way matching, and
g. Purchase invoice authorization.
Audit for Occurence Assertion + Purchase Not Understated:

1. Review vendor selection process to detect fictitious vendors.
2. Perform procedures to ensure the existence of vendors.
3. Verify goods receipt at the factory gate.
4. Check entry in the security gate inward register.
5. Confirm whether quality inspection of goods was conducted.
6. Check if a goods receipt note (GRN) was prepared and signed by appropriate personnel.
7. Verify approval of purchase invoice based on delegation of authority.
8. Confirm if a 2 or 3-way match process was conducted.
9. Ensure the stock record has been updated by the stores personnel.
10. Verify purchase invoices as the “Original” copy.
11. Confirm purchase invoices were booked only when risk and reward of ownership were
transferred.

12. Check that purchase invoices are in the name of the entity or the appropriate branch.
13. Verify input tax component by comparing it with tax returns filed with authorities.
14. For purchases from related parties, confirm board approval and assess prices for arm’s
length compliance.
15. Use professional judgment to determine whether purchases should be capitalized or
expensed in the Profit and Loss statement.
16. Review journal entries for any unusual transactions.
Audit for Completeness + Accuracy Assertion:

Cut-off Testing:
1. Perform a cut-off test to ensure accurate recognition of purchases in the correct
accounting period.
2. Examine material inward records, especially the last 5 transactions at the period end
3. Verify that all corresponding invoices are entered in the Purchases book and none are
omitted.
Goods in Transit:
Ensure the correct accounting treatment of goods-in-transit based on agreed terms with the
vendor regarding the transfer of risk and reward of ownership.
Written Representation:
Obtain written representation from management confirming the proper recording of all
purchases throughout the year.

Analytical Procedures:
Conduct analytical procedures to assess the overall reasonableness of purchase

quantity and price.
Consumption Analysis:
1. Scrutinize raw material consumed as per the manufacturing account.
2. Compare with previous years, considering closing stock, and inquire about significant
variations.
Stock Composition Analysis:
1. Collect reports on the composition of stock, such as raw materials as a percentage of
total stock.
2. Compare with the previous year and inquire about significant variations.
Ratios Analysis:
Compare creditors turnover ratios and stock turnover ratios of the current year with previous
years.
Quantitative Reconciliation:
Review quantitative reconciliation of closing stocks with opening stock, purchases, and
consumption.
Disclosure for Purchase:

1. Whether purchases of stock-in-trade have been specifically disclosed.

2. Whether changes in inventories of finished goods, stock–in-trade and work- in-progress
have been specifically disclosed.
3. Whether the transactions with related parties are appropriately disclosed in notes to
accounts.
15. Employee Benefit Expenses

Employee Attendance Process:
1. Understand the entity’s process for capturing employee attendance to mitigate the risk
of recording expenses for fictitious employees.
2. Conduct in-person meetings with employees on a sample basis.
3. Select a sample of employees and request the payroll department to share their bank
details/identity proofs.
Employee List and Movement:
Obtain a list of employees as of the period-end with a monthly movement split between new
hires, leavers, and continuing employees.
New Hires Verification:
For a randomly selected sample of new hires, obtain appointment letters and verify whether
the salary for the first month and subsequent months was processed as per agreed terms.

Resigned Employees Verification:
1. For a randomly selected sample of resigned employees, obtain their full and final
computation.
2. Verify payment of all dues, including post-retirement benefits, and ensure
acknowledgment on the final computation is obtained.
Monthly Salary Registers:
1. Obtain monthly salary registers for all 12 months.
2. Compile a monthly payroll reasonability by calculating the average salary per employee
per month.
3. Compare with the previous year and preceding month and analyze variances attributable
to factors like annual increments, senior-level employees joining/leaving, bonus payouts,
etc.
Accruals for Employee Benefits:
Verify if accruals/provisions have been made for all employee benefits and obligations such as
bonus, gratuity, leave encashment, etc.
PF and ESI Verification:
1. If PF and ESI are applicable, compile a reasonability by applying the rate to basic wages
and comparing it with the recorded amount in books.

2. Obtain monthly deposit challans to verify timely deposit with authorities.
Analytical Procedures - Employee Benefit Expenses:
1. Perform analytical procedures to assess the overall reasonableness of employee benefit
expenses.
2. Include production per employee analysis, comparing units produced per employee
with previous years and industry trends. Inquire about significant variations.
Disclosure for Employee Benefit Expense

Employee Benefits Expense [showingseparately]
1. Salaries and wages,
2. Contribution to provident and other funds,
3. Expense on Employee Stock Option
4. Scheme (ESOP) and Employee Stock Purchase Plan (ESPP),
5. Staff welfare expenses].
16. Depreciation and Amortisation

Understanding Depreciation and Amortization Process:
Obtain an understanding of the entity’s process of charging depreciation and amortization.
Fixed Asset Register Verification:
1. Obtain the fixed asset register maintained by the entity.
2. Check the nature of assets from the register to prevent capitalization of expenses of

revenue nature or direct inclusion of capital expenditure in the income and expense
statement.
3. Physically verify material fixed assets to mitigate the risk of fake assets being capitalized.
4. Obtain a list of all additions/deletions with proper approval from authorized personnel.
Sample Verification from Fixed Assets Register:
1. Select a sample of assets from the Fixed Assets Register based on materiality
considerations.
2. Verify rates of depreciation and depreciation calculations.
3. Obtain a list of all components identified by management.
4. Ensure proper amortization of intangible assets like patents, goodwill, copyrights.
5. Verify that depreciation is charged from the date the asset is ready to use, not from the
date of actual usage.
6. Check proper accounting of depreciation on revalued amounts.
Depreciation Computation Verification:
1. Verify additions against the Companies Act and reconcile with the opening WDV to the
Tax audit schedule for the preceding assessment year.
2. Perform analytical procedures to assess overall reasonableness of depreciation and
amortization expenses.

3. Recompute the depreciation expense for the year.
4. Ensure charges align with the useful lives of Property, Plant, and Equipment (PPE) and
intangible assets.
5. Verify residual values for accurate computation of depreciation.
6. Ensure prospective computation of depreciation and amortization with any change in
useful lives.
Arithmetical Accuracy and Independent Calculations:
1. Check the arithmetical accuracy of records.
2. Independently calculate depreciation to cross-verify.
3. Prospective Changes and Residual Values:
4. Ensure prospective computation for changes in useful lives.
5. Verify and validate residual values impacting depreciation computation.
Disclosure for Depreciation Expense

1. Accounting policy for depreciation and amortization.
2. Useful lives of assets as per Schedule II to the Companies Act, 2013.
3. Residual value of assets.
4. Depreciation method.
17. Other Expense

Rent expense
1. Obtain a month wise expense schedule along with the rent agreements.

2. Verify if expense has been recorded for all 12 months and whether the rent amount is as
per the underlying agreement.
3. Specific consideration should be given to escalation clause in the agreement to verify
if the rent was required to be recorded on a straight-line basis during the period under
audit.
4. Also, verify if the agreement is in the name of the entity and whether the expense pertains
to premises used for running business operations of the entity.
Power and fuel expense

1. Obtain a month wise expense schedule along with the power bills.
2. Verify if expense has been recorded for all 12 months.
3. Also, compile a month wise summary of power units consumed and the applicable rate
and check the arithmetical accuracy of the bill raised on monthly basis.
4. In relation to the units consumed, analyse the monthly power units consumed by linking
it to units of finished goods produced and investigate reasons for variance in monthly
trends.
Insurance expense
1. Obtain a summary of insurance policies taken along with their validity period.
2. Verify whether the expense has been correctly classified between prepaid and expense

for the period based on number of days.
Legal and professional expenses

1. Obtain a month-wise and consultant-wise summary.
2. In case of monthly retainership agreements, verify whether the expenditure for all 12
months has been recorded correctly.
3. For non- recurring expenses, select a sample and vouch for the attributes discussed
above.
4. The auditor should be cautious while vouching for legal expenses as the same may
highlight a dispute for which the entity may not have made any provision and the matter
may also not have been discussed/highlighted to the auditor for his specific consideration.
Travel, repair and maintenance, printing and stationery, miscellaneous

expenses
1. The auditor should select a sample and vouch for the attributes discussed above
2. Wherever possible, the auditor should try to prepare a summary of expenditure on
monthly basis and then analytically compare the trends.
3. Perform analytical procedures to obtain audit evidence as to overall reasonableness of
other expense which may include expenditure per unit of production analysis.
4. Auditor should analyse expense per unit produced and compare the same with previous
years and present industry trends and ask for the reasons from the management, if any
significant variations are found.
18. Other Disclosures

Details of Benami Property held
Where any proceedings have been initiated or pending against the company for holding any
benami property under the Benami Transactions (Prohibition) Act, 1988 (45 of 1988) and the
rules made thereunder, the company shall disclose the following:
1. Details of such property, including year of acquisition,
2. Amount thereof,
3. Details of Beneficiaries,
4. If property is in the books, then reference to the item in the Balance Sheet,
5. If property is not in the books, then the fact shall be stated with reasons,
6. Where there are proceedings against the company under this law as an abetter of the
transaction or as the transferor then the details shall be provided,
7. Nature of proceedings, status of same and company‘s view on same.
Relationship with Struck off Companies

Where the company has any transactions with companies struck off under section 248 of the
Companies Act, 2013 or section 560 of Companies Act, 1956, the Company shall disclose the
following details:-
Disclosure for Ratio

The company shall explain the items included in numerator and denominator for computing
the above ratios. Further explanation shall be provided for any change in the ratio by more
than 25% as compared to the preceding year.
1. Current Ratio,
2. Debt-Equity Ratio,
3. Debt Service Coverage Ratio,
4. Return on Equity Ratio,

5. Inventory turnover ratio,
6. Trade Receivables turnover ratio,
7. Trade payables turnover ratio,
8. Net capital turnover ratio,
9. Net profit ratio,
10. Return on Capital employed,
11. Return on investment.
Undisclosed income
The Company shall give details of any transaction not recorded in the books of accounts that
has been surrendered or disclosed as income during the year in the tax assessments under
the Income Tax Act, 1961 (such as, search or survey or any other relevant provisions of the
Income Tax Act, 1961), unless there is immunity for disclosure under any scheme and also
shall state whether the previously unrecorded income and related assets have been properly
recorded in the books of account during the year.
Corporate Social Responsibility (CSR)

Where the company covered under section 135 of the companies act, the following shall be

disclosed with regard to CSR activities:-
1. amount required to be spent by the company during the year,
2. amount of expenditure incurred,
3. shortfall at the end of the year,
4. total of previous years shortfall,
5. reason for shortfall,
6. nature of CSR activities,
7. details of related party transactions, e.g., contribution to a trust controlled by the
company in relation to CSR expenditure as per relevant Accounting Standard,
8. where a provision is made with respect to a liability incurred by entering into a contractual
obligation, the movements in the provision during the year should be shown separately.
Details of Crypto Currency or Virtual Currency

Where the Company has traded or invested in Crypto currency or Virtual Currency during the
financial year, the following shall be disclosed:-
1. profit or loss on transactions involving Crypto currency or Virtual Currency
2. amount of currency held as at the reporting date,
3. deposits or advances from any person for the purpose of trading or investing in Crypto
Currency/ virtual currency.

CHAPTER 6
AUDIT
DOCUMENTATION
May 24

CA Himanshu
Chapter 6
2. What is Audit documentation (Working Papers) ? 4
3. Purpose/Importance of Audit documentation 4
4. Form content and extent of audit documentation 5
5. Documentation of Significant matters and Judgements 5
6. Completion Memorandum (Audit Summary) 6
7. Audit File 6
8. Assembly of Audit file 6
9. Ownership of Audit documentation 7

The objective of the auditor is to prepare documentation that provides:
1. A sufficient and appropriate record of the basis for the auditor’s report; and
2. Evidence that the audit was planned and performed in accordance with SAs and
applicable legal and regulatory requirements
2. What is Audit documentation (Working Papers) ?

Audit documentation refers to the record of:
a. audit procedures performed,
b. relevant audit evidence obtained, and
c. conclusions the auditor reached.

(Terms such as “working papers” or “work papers” are also sometimes used in reference to
audit documentation)
Examples of audit documentation:

1. Overall Audit Strategy
2. Audit plan
3. Issues memorandum
4. Summaries of significant matters.
5. Letters of confirmation and representation
6. Checklists
7. Correspondence (including e-mail) concerning significant matters
8. Memo on accounting and auditing matters
Benefit of audit documentation

Audit documentation provides:
a. evidence of the auditor’s basis for conclusion on their report.
b. evidence that the audit was planned and performed in accordance with SAs and
applicable legal and regulatory requirements.
3. Purpose/Importance of Audit documentation

The following are the purpose of Audit documentation:
1. Assists the engagement team to plan and perform the audit.
2. Assists members of the engagement team responsible for supervision to direct, supervise
and review the audit work

3. Enables the engagement team to be accountable for its work.
4. Retains a record of matters of continuing significance to future audits.
5. Enables the quality control reviews and inspections to be performed.
6. Enables the external quality inspections to be performed
4. Form content and extent of audit documentation

Documentation should be sufficient to enable an experienced auditor, with no previous
connection to the audit, to understand:
1. The nature, timing and extent of audit procedures performed.
a. The identifying characteristics of the specific items or matters tested;
b. Who performed the audit work and the date such work was completed; and
c. Who reviewed the audit and extent of such review
2. The results of the procedures performed and the evidence obtained.
3. The significant matters arising during the course of the audit and the conclusions reached
thereon, and significant professional judgments made in reaching those conclusions.
The form, content and extent of audit documentation depend on factors such as:
1. Size and complexity of the entity. (Reliance vs Binod Bhai & Co.)
2. Identified risks of material misstatement. (High vs Low)
3. Nature of the audit procedures to be performed. (Substantive vs TOC)
4. Significance of the audit evidence obtained.
5. Nature and extent of exceptions identified. (Misstatement)
6. Audit methodology and tools used.
7. Need to document a conclusion or the basis for a conclusion that isn’t clear from the audit
evidence or from the documentation of the work performed.
5. Documentation of Significant matters and Judgements
The auditor shall prepare audit documentation that is sufficient to enable an experienced
auditor to understand significant matters arising during the audit.
Judging the significance of a matter requires an objective analysis of the facts and circumstances.
Examples of significant matters include:

1. Matters that give rise to significant risks. (As per SA 315)
2. Results of audit procedures indicating
a. that the financial statements could be materially misstated, or

b. the auditor needs to change their previous assessment of the risks of material
misstatement financial statements and response to those risks
3. If the auditor faces challenges while performing necessary audit procedures or
4. If they find something that could change the audit opinion or require them to add an
Emphasis of Matter Paragraph in the auditor’s report, then it is significant.
Example of circumstances in which it is appropriate to prepare audit documentation

relating to the use of professional judgment:
1. When a requirement states that the auditor “shall consider” certain information or
factors, the auditor must provide the reasoning for their conclusion, particularly if it is
significant for the engagement.
2. The auditor must provide the basis for their conclusion on the reasonableness of areas of
subjective judgments made by management, such as significant accounting estimates.
3. If the auditor conducts further investigation to confirm the authenticity of a document due
to identified conditions during the audit, they must provide the basis for their conclusion
on the authenticity of the document, including the use of experts or confirmation
procedures.
6. Completion Memorandum (Audit Summary)

The auditor may consider it helpful to prepare and retain as part of the audit documentation
a summary (sometimes known as a completion memorandum) that describes:
a. the significant matters identified during the audit and
b. how they were addressed.
Such summary can aid in reviewing and inspecting audit documentation, specially useful for
large and complex audits
Preparing a summary can help the auditor focus on significant matters
The summary can help identify whether any SA objective cannot be achieved, which would
prevent achieving overall audit objectives
7. Audit File
Audit file may be defined as one or more folders or other storage media, in physical or
electronic form, containing the records that comprise the audit documentation for a specific
engagement.
8. Assembly of Audit file

1. SQC 1 requires firms to establish policies and procedures for the timely completion of the
assembly of audit files.
2. The auditor shall assemble the audit documentation in an audit file and complete the
administrative process of assembling the final audit file on a timely basis after the date
of the auditor’s report.

3. An appropriate time limit within which to complete the assembly of the final audit file is
ordinarily not more than 60 days after the date of the auditor’s report.
4. The completion of the assembly of the final audit file after the date of the auditor’s
report is an administrative process that does not involve the performance of new audit
procedures or the drawing of new conclusions. Changes may, however, be made to the
audit documentation during the final assembly process, if they are administrative in
nature.
5. Examples of such changes include
a. Deleting or discarding superseded documentation.
b. Sorting, collating and cross-referencing working papers.
c. Signing off on completion checklists relating to the file assembly process.
d. Documenting audit evidence that the auditor has obtained, discussed and agreed
with the relevant members of the engagement team before the date of the auditor’s
report.
6. After the assembly of the final audit file has been completed, the auditor shall not delete
or discard audit documentation of any nature before the end of its retention period.
7. SQC 1 requires firms to establish policies and procedures for the retention of engagement
documentation. The retention period for audit engagements ordinarily is no shorter than
7 years from the date of the auditor’s report, or, if later, the date of the group auditor’s
report
9. Ownership of Audit documentation

1. Standard on Quality Control (SQC) 1 provides that, unless otherwise specified by law or
regulation, audit documentation is the property of the auditor.
2. He may at his discretion, make available portions of, or extracts from, audit documentation
to clients, provided such disclosure does not undermine the validity of the work performed,
or, in the case of assurance engagements, the independence of the auditor


CHAPTER 7
May 24

CA Himanshu
Chapter 7
SA 260 4
2. Who are “Those charged with governance”? 4
3. Significance of communication with TCWG 4
4. Matters to be communicated by auditor 5
5. Communication in case of Listed Entities 5
6. The Communication Process 6
7. Adequacy of the communication process 6
8. Documentation 6
SA 265 7
2. Meaning of Deficiency & Significant Deficiency 7
3. Examples of Matters 7
4. Examples of Indicators 8
5. Communication of Significant deficiencies 8
6. How it should be communicated ? 9
SA 560 10
1. Meaning of Subsequent events 10 CA Inter with CA Himanshu
3. Audit procedures for Subsequent events 10
4. Fact known After Date of Audit Report but Before Date of Issue of FS 11
5. Fact known After Date of Issue of FS 12
6. Refusal of Mangement to Amend 12

SA 570 13
1. Meaning of Going Concern 13
2. Management’s Responsibility for Assessment of Going Concern 13
4. Risk Assessment Procedures 13
5. Example of events that may impact Going Concern 14
6. Evaluating Managements Assessment 15
7. Audit procedures : When Event or Conditions are Identified 15
8. Implications for the auditor’s report 16
SA 580 18
1. Meaning of Written Representation 18
3. Written representation is requested from ? 19
4. Written representation about management’s responsibility 19
5. Why WR about management responsibilities are necessary? 20
6. Other Written Representations 20
7. Written representations about specific assertions 20
5. Date of and Period covered by Written Representations 21
6. Doubt as to the reliability of Written representations 21
7. Management’s refusal to provide representation 21
8. Disclaimer of opinion in case of Non Realiabililty of WR 21
SA 450 22
1. Objective 22
2. Accumulation of misstatements identified during the audit 22
3. Consideration of identified misstatements as the audit progresses 22
3. Communication and correction of misstatements 22

4. Evaluating the effect of uncorrected misstatements 22

5. Communication with TCWG 23
6. WR from management regarding effects of uncorrected statements 23
7. Documentation regarding misstatements identified during audit 23

SA 260
The objectives of the auditor are:
1. To communicate clearly with those charged with governance the responsibilities of the
auditor in relation to the financial statement audit, and an overview of the planned scope
and timing of the audit;
2. To obtain from those charged with governance information relevant to the audit
3. To provide those charged with governance with timely observations arising from the
audit that are significant and relevant to their responsibility to oversee the financial
reporting process and
4. To promote effective two-way communication between the auditor and those charged
with governance.
2. Who are “Those charged with governance”?

1. Individuals or organizations responsible for overseeing the entity’s strategic direction
and accountability.
2. Includes responsibilities for financial reporting oversight.
3. Management structures differ based on cultural, legal, size, and ownership factors.
4. TCWG may include management personnel or be distinct from them.
5. SA 315 guides the auditor in understanding an entity’s governance structure.
6. Identifying appropriate communication recipients depends on the matter being
communicated.
7. In cases where legal frameworks or engagement circumstances don’t clearly define
communication recipients, discussion with the engaging party is needed.
3. Significance of communication with TCWG

Communication from auditor is important with those charged with governance. An effective
two-way communication is important in assisting:
1. The auditor and TCWG in understanding matters related to the audit in context, and in
developing a constructive working relationship. This relationship is developed while
maintaining the auditor’s independence and objectivity
2. The auditor in obtaining from those charged with governance information relevant to
the audit. For example, TCWG may assist the auditor in understanding the entity and its
environment etc.
3. Those charged with governance in fulfilling their responsibility to oversee the financial
reporting process, thereby reducing the risks of material misstatement of the financial
statements.

4. Matters to be communicated by auditor

Following matters are required to be communicated by auditor with those charged with
governance:
1. The auditor’s responsibilities in relation to the financial statement audit
2. Planned scope and timing of the audit
3. Significant findings from the audit
The auditor’s responsibilities in relation to the financial statement audit:

The auditor shall communicate with those charged with governance the responsibilities of
the auditor in relation to the financial statement audit, including that:
1. The auditor is responsible for forming and expressing an opinion on the financial
statements that have been prepared by management with the oversight of those charged
with governance and
2. The audit of the financial statements does not relieve management or those charged
with governance of their responsibilities.
Planned scope and timing of the audit:

The auditor shall communicate with those charged with governance an overview of the
planned scope and timing of the audit, which includes communicating about the significant
risks identified by the auditor.
Significant findings from the audit

The auditor shall communicate with those charged with governance:
1. The auditor’s views about significant qualitative aspects of the entity’s accounting
practices, including accounting policies, accounting estimates and financial statement
disclosures. When applicable, the auditor shall explain to those charged with governance
why the auditor considers a significant accounting practice, that is acceptable under the
applicable financial reporting framework, not to be most appropriate to the particular
circumstances of the entity
2. Significant difficulties, if any, encountered during the audit CA Inter with CA Himanshu
3. Significant matters arising during the audit that were discussed, or subject to
correspondence, with management
4. Written representations the auditor is requesting
5. Circumstances that affect the form and content of the auditor’s report, if any and
6. Any other significant matters arising during the audit that, in the auditor’s professional
judgment, are relevant to the oversight of the financial reporting process.
5. Communication in case of Listed Entities

In the case of listed entities, the auditor shall communicate with those charged with governance:

1. A statement that the engagement team and others in the firm as appropriate, the firm
and, when applicable, network firms have complied with relevant ethical requirements
regarding independence.
2. The auditor considers and evaluates all relationships and other factors between the
auditing firm, network firms, and the entity under audit, which, in their professional
judgment, could reasonably be perceived to influence or impact independence.
3. This shall include total fees charged during the period covered by the financial statements
for audit and non-audit services provided by the firm and network firms to the entity and
components controlled by the entity.
4. These fees shall be allocated to categories that are appropriate to assist those charged
with governance in assessing the effect of services on the independence of the auditor
and
5. The related safeguards that have been applied to eliminate identified threats to
independence or reduce them to an acceptable level.
6. The Communication Process

1. The auditor shall communicate with TCWG the form, timing and expected general content
of communications.
2. The auditor shall communicate in writing with those charged with governance regarding
significant findings from the audit if, in the auditor’s professional judgment, oral
communication would not be adequate
3. Written communications need not include all matters that arose during the course of the
audit.
4. The auditor shall communicate in writing with those charged with governance regarding
auditor independence when required in case of listed entities.
5. The auditor shall communicate with those charged with governance on a timely basis.
7. Adequacy of the communication process

The auditor shall evaluate whether the two-way communication between the auditor and
those charged with governance has been adequate for the purpose of the audit. If it has
not, the auditor shall evaluate the effect, if any, on the auditor’s assessment of the risks of
material misstatement and ability to obtain sufficient appropriate audit evidence, and shall
take appropriate action.
8. Documentation
1. Where matters required by SA 260 to be communicated are communicated orally, the
auditor shall include them in the audit documentation, and when and to whom they
were communicated.
2. Where matters have been communicated in writing, the auditor shall retain a copy of
the communication as part of the audit documentation.

SA 265
he objective of the auditor is to communicate appropriately to those charged with governance
and management deficiencies in internal control that the auditor has identified during the
audit and that, in the auditor’s professional judgment, are of sufficient importance to merit
their respective attentions.
2. Meaning of Deficiency & Significant Deficiency

Deficiency:
This exists when:
3. A control is designed, implemented or operated in such a way that it is unable to prevent,
or detect and correct, misstatements in the financial statements on a timely basis or
4. A control necessary to prevent, or detect and correct, misstatements in the financial
statements on a timely basis is missing.
Significant deficiency in internal control:

A deficiency or combination of deficiencies in internal control that, in the auditor’s professional
judgment, is of sufficient importance to merit the attention of those charged with governance.
The significance of a deficiency or a combination of deficiencies in internal control depends
not only on whether a misstatement has actually occurred, but also on the likelihood that
a misstatement could occur and the potential magnitude of the misstatement. Significant
deficiencies may, therefore, exist even though the auditor has not identified misstatements
during the audit.
3. Examples of Matters
Examples of matters that the auditor may consider in determining whether
a deficiency or combination of deficiencies in internal control constitutes a
significant deficiency:
1. The importance of the controls to the financial reporting process, for example:
a. General monitoring controls (such as oversight of management).
b. Controls over the prevention and detection of fraud.
c. Controls over the selection and application of significant accounting policies.
d. Controls over significant transactions with related parties.
e. Controls over significant transactions outside the entity’s normal course of
business.
f. Controls over the period-end financial reporting process (such as controls over
non-recurring journal entries).

2. The cause and frequency of the exceptions detected as a result of the deficiencies in the
controls.
3. The volume of activity that has occurred or could occur in the account balance or class of
transactions exposed to the deficiency or deficiencies.
4. The subjectivity and complexity of determining estimated amounts, such as fair value
accounting estimates.
5. The susceptibility to loss or fraud of the related asset or liability
4. Examples of Indicators
Examples of Indicators of Significant Deficiency:
1. Absence of a risk assessment process within the entity where such a process would
ordinarily be expected to have been established.
2. Evidence of an ineffective entity risk assessment process, such as management’s failure
to identify a risk of material misstatement that the auditor would expect the entity’s risk
assessment process to have identified.
3. Evidence of an ineffective response to identified significant risks (e.g., absence of controls
over such a risk).
4. Misstatements detected by the auditor’s procedures that were not prevented, or detected
and corrected, by the entity’s internal control.
5. Disclosure of a material misstatement due to error or fraud as prior period items in the
current year’s Statement of Profit and Loss.
6. Evidence of management’s inability to oversee the preparation of the financial statements.
7. Evidence of ineffective aspects of the control environment, such as:
a. Indicatin of significant transactions in which management is financially interested
are not being appropriately scrutinised by those charged with governance.
b. Identification of management fraud, whether or not material, that was not
prevented by the entity’s internal control.
c. Management’s failure to implement appropriate remedial action on significant CA Inter with CA Himanshu
deficiencies previously communicated.
5. Communication of Significant deficiencies

The auditor shall communicate in writing significant deficiencies in internal control identified
during the audit to those charged with governance on a timely basis.
The auditor shall also communicate to management at an appropriate level of responsibility
on a timely basis:
1. In writing, significant deficiencies in internal control that the auditor has communicated
or intends to communicate to those charged with governance, unless it would be
inappropriate to communicate directly to management in the circumstances; and

2. Other deficiencies in internal control identified during the audit that have not been
communicated to management by other parties and that, in the auditor’s professional
judgment, are of sufficient importance to merit management’s attention.
6. How it should be communicated ?

The auditor shall include in the written communication of significant deficiencies in internal
control:
1. A description of the deficiencies and an explanation of their potential effects; and
2. Sufficient information to enable those charged with governance and management to
understand the context of the communication.
In particular, the auditor shall explain that:

1. The purpose of the audit was for the auditor to express an opinion on the financial
statements
2. The audit included consideration of internal control relevant to the preparation of the
financial statements in order to design audit procedures that are appropriate in the
circumstances, but not for the purpose of expressing an opinion on the effectiveness of
internal control; and
3. The matters being reported are limited to those deficiencies that the auditor has identified
during the audit and that the auditor has concluded are of sufficient importance to merit
being reported to those charged with governance.

SA 560
1. Meaning of Subsequent events
Events occurring between the date of the financial statements and the date of the auditor’s
report, and facts that become known to the auditor after the date of the auditor’s report.
For example: if a company prepares financial statements for the period ending 31 March,
2023, and the auditor issued an unqualified opinion on May 15, 2023, any events or facts that
occurred between 31 March, 2023, and May 15, 2023, would be considered subsequent events.
Financial statements may be affected by certain events that occur after the date of the
financial statements. Many financial reporting frameworks specifically refer to such events.
Such financial reporting frameworks ordinarily identify two types of events:
4. Those that provide evidence of conditions that existed at the date of the financial
statements and
5. Those that provide evidence of conditions that arose after the date of the financial
statements.
Examples of events providing evidence of conditions that existed at the date of the financial
statements
Declaration of insolvency of a major debtor of the entity between the date offinancial
statements and the date of auditor’s report providing evidence on the recoverability of the
money due from debtor as on date of the financial statements.
Examples of events providing evidence of conditions that arose after the date of the financial
statements
1. Issue of new share capital.
2. Planned merger of the company.
3. Destruction of substantial inventories due to fire between the date of the financial
statements and the date of auditor’s report.
1. Obtain sufficient appropriate audit evidence about whether events occurring between
the date of the financial statements and the date of the auditor’s report, that require
adjustment or disclosure are appropriately reflected in accordance with the applicable
financial reporting framework.
2. Respond appropriately to facts that become known to the auditor after the date of the
auditor’s report, that, had they been known to the auditor at that date, may have caused
the auditor to amend the auditor’s report.
3. Audit procedures for Subsequent events

The auditor shall take into account the auditor’s risk assessment which shall include:
1. Obtaining an understanding of any procedures management has established to ensure
that subsequent events are identified.

2. Inquiring of management and, where appropriate, those charged with governance as to

whether any subsequent events have occurred which might affect the financial statements.
3. Reading minutes, if any, of the meetings, of the entity’s owners, management and those
charged with governance, that have been held after the date of the financial statements
and inquiring about matters discussed at any such meetings for which minutes are not
yet available.
4. Reading the entity’s latest subsequent interim financial statements, if any
4. Fact known After Date of Audit Report but Before Date of Issue of FS
1. Discuss the matter with management and, where appropriate, those charged with
governance.
2. Determine whether the financial statements need amendment and, if so,
3. Inquire how management intends to address the matter in the financial statements.
If management amends the financial statements, the auditor shall:

1. Carry out the audit procedures necessary in the circumstances on the amendment.
2. Unless the circumstances in succeeding para apply:
a. Extend the audit procedures, already referred, to the date of the new auditor’s
report and
b. Provide a new auditor’s report on the amended financial statements.
The new auditor’s report shall not be dated earlier than the date of approval of the amended
financial statements.
If the rules don’t prohibit management from changing the financial statements only for recent
events, and those approving the statements agree, auditors can focus their checks on those
specific changes. In such case that auditor shall either:
1. Amend the auditor’s report to include an additional date restricted to that amendment
that thereby indicates that the auditor’s procedures on subsequent events are restricted
solely to the amendment of the financial statements described in the relevant note to the
financial statements or
2. Provide a new or amended auditor’s report that includes a statement in an Emphasis of
Matter paragraph or Other Matter(s) paragraph that conveys that auditor’s procedures on
subsequent events are restricted solely to the amendment of the financial statements as
described in the relevant note to the financial statements.
If management does not amends the financial statements, the auditor shall:
1. If the auditor’s report has not yet been provided to the entity, the auditor shall modify the
opinion as required by SA 705 and then provide the auditor’s report or
2. If the auditor’s report has already been provided to the entity, the auditor shall notify
management and, unless all of those charged with governance are involved in managing
the entity, those charged with governance, not to issue the financial statements to third
parties before the necessary amendments have been made. If the financial statements

are nevertheless subsequently issued without the necessary amendments, the auditor
shall take appropriate action, to seek to prevent reliance on the auditor’s report.
5. Fact known After Date of Issue of FS

The auditor has no obligation to perform any audit procedures regarding the financial
statements after the date of the auditor’s report.
However, when, after the date of the auditor’s report but before the date the financial statements
are issued, a fact becomes known to the auditor that, had it been known to the auditor at the
date of the auditor’s report, may have caused the auditor to amend the auditor’s report, the
auditor shall:
1. Discuss the matter with management and, where appropriate, those charged with
governance.
2. Determine whether the financial statements need amendment and, if so,
3. Inquire how management intends to address the matter in the financial statements.
Same procedure as above plus:

1. Carry out the audit procedures necessary in the circumstances on the amendment.
2. Review the steps taken by management to ensure that anyone in receipt of the previously
issued financial statements together with the auditor’s report thereon is informed of the
situation.
6. Refusal of Mangement to Amend

When management does not amend the financial statements in circumstances where the
auditor believes they need to be amended, then:
1. If the auditor’s report has not yet been provided to the entity, the auditor shall modify the
opinion as required by SA 705 and then provide the auditor’s report or
2. If the auditor’s report has already been provided to the entity, the auditor shall notify
management and, unless all of those charged with governance are involved in managing
the entity.
3. If, despite such notification, management or those charged with governance do not take
these necessary steps, the auditor shall take appropriate action to seek to prevent reliance
on the audit report.

SA 570
1. Meaning of Going Concern
Under the going concern basis of accounting, the financial statements are prepared on
the assumption that the entity is a going concern and will continue its operations for the
foreseeable future.
General purpose financial statements are prepared using the going concern basis of accounting,
unless management either:
1. Intends to liquidate the entity or to cease operations, or
2. Has no realistic alternative but to do so.
2. Management’s Responsibility for Assessment of Going Concern

Management’s assessment of the entity’s ability to continue as a going concern involves
making a judgment, at a particular point in time, about inherently uncertain future outcomes
of events or conditions.
The following factors are relevant to that judgment:
1. Uncertainty Increases with Time: The further into the future an event occurs, the more
uncertain its outcome becomes.
2. Entity Size and External Factors Matter: The size, complexity, and external influences on
a business affect predictions about future events or conditions.
3. Judgment Based on Current Information: Predictions about the future are made using
available information at that time. Subsequent events may change these predictions, even
if they were reasonable at the time they were made.
The objectives of the auditor are:
1. To obtain sufficient appropriate audit evidence regarding and conclude on the
appropriateness of management’s use of the going concern basis of accounting in the

preparation of the financial statements; The auditor’s responsibilities in the audit of
financial statements relating to going concern and
2. To conclude, based on the audit evidence obtained, whether a material uncertainty exists
related to events or conditions that may cast significant doubt on the entity’s ability to
continue as a going concern; and
3. To report in accordance with this SA.
4. Risk Assessment Procedures

When assessing risks as per auditing standards, auditors check if there are events or conditions
that might seriously question the company’s ability to survive. They also see if the management
has already assessed this.

The auditor shall remain alert throughout the audit for audit evidence of events or conditions
that may cast significant doubt on the entity’s ability to continue as a going concern.
A. Assessment Already Performed by Management:

1. If management has assessed the company’s ability to continue, the auditor talks to
management.
2. Auditor inquire if any events or conditions raise serious concerns about the company’s
survival.
3. If issues are found, the auditor discusses how management plans to handle them.
B. Assessment Not Yet Done by Management:

1. If management hasn’t assessed yet, the auditor discusses why the company plans to
continue.
2. Auditor inquire if there are any events or conditions that might threaten the company’s
survival.
The auditor shall remain alert throughout the audit for audit evidence of events or conditions
that may cast significant doubt on the entity’s ability to continue as a going concern.
5. Example of events that may impact Going Concern

Financial
1. Net liability or net current liability position.
2. Fixed-term borrowings approaching maturity without realistic prospects of renewal or
repayment; or excessive reliance on short-term borrowings to finance long-term assets.
3. Indications of withdrawal of financial support by creditors.
4. Negative operating cash flows indicated by historical or prospective financial statements.
5. Adverse key financial ratios
6. Arrears or discontinuance of dividends
7. Inability to pay creditors on due dates CA Inter with CA Himanshu
8. Inability to comply with the terms of loan agreements

9. Change from credit to cash-on-delivery transactions with suppliers
Operating
1. Management intentions to liquidate the entity or to cease operations.
2. Loss of key management without replacement.
3. Loss of a major market, key customer(s), franchise, license, or principal supplier(s).
4. Labour difficulties.

5. Shortages of important supplies.

6. Emergence of a highly successful competitor.
Others:
1. Non-compliance with capital or other statutory or regulatory requirements, such as
solvency or liquidity requirements for financial institutions.
2. Pending legal or regulatory proceedings against the entity that may, if successful, result
in claims that the entity is unlikely to be able to satisfy.
3. Changes in law or regulation or government policy expected to adversely affect the entity.
4. Uninsured or under insured catastrophes when they occur.
6. Evaluating Managements Assessment

The auditor shall evaluate management’s assessment of the entity’s ability to continue as a
going concern. Management’s assessment of the entity’s ability to continue as a going concern
is a key part of the auditor’s consideration of management’s use of the going concern basis of
accounting.
It is not the auditor’s responsibility to rectify the lack of analysis by management. In some
circumstances, however, the lack of detailed analysis by management to support its assessment
may not prevent the auditor from concluding whether management’s use of the going concern
basis of accounting is appropriate in the circumstances.
For example, when there is a history of profitable operations and a ready access to financial
resources, management may make its assessment without detailed analysis. In this case,
the auditor’s evaluation of the appropriateness of management’s assessment may be made
without performing detailed evaluation procedures if the auditor’s other audit procedures
are sufficient to enable the auditor to conclude whether management’s use of the going
concern basis of accounting in the preparation of the financial statements is appropriate in
the circumstances.
In other circumstances, evaluating management’s assessment of the entity’s ability to continue
as a going concern, may include an evaluation of the process management followed to make
its assessment, the assumptions on which the assessment is based and management’s plans
for future action and whether management’s plans are feasible in the circumstances.
In evaluating management’s assessment of the entity’s ability to continue as a going concern,
the auditor shall cover the same period as that used by management to make its assessment
as required by the applicable financial reporting framework, or by law or regulation if it
specifies a longer period. If management’s assessment of the entity’s ability to continue as a
going concern covers less than twelve months from the date of the financial statements, the
auditor shall request management to extend its assessment period to at least twelve months
from that date.
7. Audit procedures : When Event or Conditions are Identified

If events or conditions have been identified that may cast significant doubt on the entity’s
ability to continue as a going concern.

The auditor shall obtain sufficient appropriate audit evidence to determine whether or not
a material uncertainty exists related to events or conditions that may cast significant doubt
on the entity’s abili.ty to continue as a going concern through performing additional audit
procedures, including consideration of mitigating factors.
These procedures shall include:
1. Inquire of management about their assessment of the entity’s ability to continue as a
going concern.
2. Evaluate management’s proposed future actions to mitigate going concern issues.
3. Analyse management’s cash flow forecast in terms of management’s plans for future
action by
a. evaluating the reliability of the underlying data of the forecast and
b. determine if there is adequate support for the assumptions underlying the
forecast.
c. Consider whether any significant additional facts have occurred since the date of
the going concern assessment.
d. Request written representations from management regarding their future action
plans and the feasibility of these plans.
Audit procedures that are relevant to the requirement as stated above may include the
following:
1. Analyzing and discussing cash flow
2. Analyzing and discussing the entity’s latest available interim financial statements.
3. Reading the terms of debentures and loan agreements and determining whether any have
been breached.
4. Reading minutes of the meetings of shareholders, those charged with governance and
relevant committees
5. Inquiring of the entity’s legal counsel regarding the existence of litigation and claims
6. Evaluating the entity’s plans to deal with unfilled customer orders.
7. Confirming the existence, terms and adequacy of borrowing facilities CA Inter with CA Himanshu
8. Obtaining and reviewing reports of regulatory actions
8. Implications for the auditor’s report

If the auditor concludes that management’s use of the going concern basis of accounting is
appropriate in the circumstances but a material uncertainty exists, the auditor shall determine
whether the financial statements: -
1. Adequately disclose the principal events or conditions that may cast significant doubt on
the entity’s ability to continue as a going concern and management’s plans to deal with
these events or conditions and
2. Disclose clearly that there is a material uncertainty related to events or conditions that

may cast significant doubt on the entity’s ability to continue as a going concern and,
therefore, that it may be unable to realize its assets and discharge its liabilities in the
normal course of business.
If events or conditions have been identified that may cast significant doubt on the entity’s
ability to continue as a going concern but, based on the audit evidence obtained the auditor
concludes that no material uncertainty exists, the auditor shall evaluate whether, in view of
the requirements of the applicable financial reporting framework, the financial statements
provide adequate disclosures about these events or conditions.
I. If use of Going concern basis of accounting is inappropriate

If the financial statements have been prepared using the going concern basis of accounting
but, in the auditor’s judgment, management’s use of the going concern basis of accounting
in the preparation of the financial statements is inappropriate, the auditor shall express an
adverse opinion.
II. If use of going concern basis of accounting is appropriate but a material

uncertainty exists
A. Adequate Disclosure of a Material Uncertainty is made in the Financial Statements
If adequate disclosure about the material uncertainty is made in the financial statements,
the auditor shall express an unmodified opinion and the auditor’s report shall include a
separate section under the heading “Material Uncertainty Related to Going Concern” to:
1. Draw attention to the note in the financial statements that discloses such matters.
2. State that these events or conditions indicate that a material uncertaint exists that may
cast significant doubt on the entity’s ability to continue as a going concern and that the
auditor’s opinion is not modified in respect of the matter.
B. Adequate Disclosure of a Material Uncertainty is Not Made in the Financial Statements
If adequate disclosure about the material uncertainty is not made in the financial statements,
the auditor shall:
1. Express a qualified opinion or adverse opinion, as appropriate, in accordance with SA
705.
2. In the Basis for Qualified (Adverse) Opinion section of the auditor’s report, state that
a material uncertainty exists that may cast significant doubt on the entity’s ability to
continue as a going concern and that the financial statements do not adequately disclose
this matter.
C. Management unwilling to make or extend its assessment
1. The auditor shall consider the implications for the auditor’s report.
2. In such a situation, a qualified opinion or a disclaimer of opinion in the auditor’s report
may be appropriate, because it may not be possible for the auditor to obtain sufficient
appropriate audit evidence regarding management’s use of the going concern basis of
accounting in the preparation of the financial statements.

SA 580
1. Meaning of Written Representation
Written representations may be defined as a written statement by management provided to
the auditor to confirm certain matters or to support other audit evidence.
Written representations in this context do not include financial statements, the assertions
therein, or supporting books and records.
Although written representations provide necessary audit evidence, they do not provide
sufficient appropriate audit evidence on their own about any of the matters with which they
deal.
Furthermore, the fact that management has provided written representations does not affect
the nature or extent of other audit evidence that the auditor obtains.
Written Representations requires the auditor to obtain written representations from
management:
To obtain written representations

That they have fulfilled their responsibility for the preparation of the financial statements
and completeness of the information provided to the auditor
To support other evidence

To support other audit evidence relevant to the financial statements or specific assertions if
deemed necessary by the auditor or required by specific SAs.
To respond appropriately
To respond appropriately to written representations provided by management or if
management does not provide the written representations requested by the auditor.

3. Written representation is requested from ?

3. People who have responsibility for financial statements are asked to provide written
confirmation.
4. Depending on who makes the financial statements, the request for written confirmation
is usually sent to the CEO, CFO, or similar positions.
5. Management should have enough knowledge of the financial statement preparation
process to provide written confirmation, as they are responsible for making the statements
and running the business.
6. In some cases, management used experts who have specialised knowledge,
7. Management may use a qualifying language like: ‘representations are made to the best of
its knowledge and belief’, such wordings are reasonable to accept.
4. Written representation about management’s responsibility

Written representation about management’s responsibilities involves confirmation of
fulfilment of management’s responsibilities in following areas:
1. Preparation of the financial statements
2. Information provided and completeness of transactions
I. Preparation of Financial Statements

The auditor shall request management to provide a written representation that it has fulfilled
its responsibility for the preparation of the financial statements.
The written representation requests management to confirm that they have fulfilled their
responsibilities based on their previously agreed acknowledgement and understanding.
In some cases, however, management may decide to make inquiries of others who participate
in preparing and presenting the financial statements and assertions therein, including
individuals who have specialized knowledge relating to the matters about which written
representations are requested. Such individuals may include:
a. An actuary responsible for actuarially determined accounting measurements.

b. Staff engineers who may have responsibility for and specialized knowledge about
environmental liability measurements.
c. Internal counsel who may provide information essential to provisions for legal
claims.
II. Information provided and completeness of transactions

The auditor shall request management to provide a written representation that:
1. It has provided the auditor with all relevant information and access as agreed in the
terms of the audit engagement and
2. All transactions have been recorded and are reflected in the financial statements.

5. Why WR about management responsibilities are necessary?

Audit evidence obtained during the audit that management has fulfilled its responsibilities
regarding preparation of financial statements and about information provided and
completeness of transactions is not sufficient without obtaining confirmation from
management that it believes that it has fulfilled those responsibilities.
This is because the auditor is not able to judge solely on other audit evidence whether
management has prepared and presented the financial statements and provided
information to the auditor on the basis of the agreed acknowledgement and understanding
of its responsibilities.
The auditor may also ask for reconfirmation of these responsibilities. This is especially
necessary when:
1. Those who signed the terms of the audit engagement on behalf of the entity no longer
have the relevant responsibilities;
2. The terms of the audit engagement were prepared in a previous year;
3. There is any indication that management misunderstands those responsibilities; or
4. Changes in circumstances make it appropriate to do so.
6. Other Written Representations

Auditors are required to ask for written statements from management as part of various
auditing standards (SAs). These statements confirm certain facts or assertions that are crucial
for the audit.
However, if the auditor believes that additional written statements are necessary beyond the
required ones, especially to support specific information or claims in the financial statements,
they can request these additional written confirmations.
They may include representations about the following:
1. Whether the selection and application of accounting policies are appropriate.
2. Whether matters such as the following, where relevant under the applicable financial
reporting framework, have been recognized, measured, presented or disclosed in
accordance with that framework:
a. Plans or intentions that may affect the carrying value or classification of assets
and liabilities;
b. Liabilities, both actual and contingent;
c. Title to, or control over, assets, the liens or encumbrances on assets, and assets
pledged as collateral; and
d. Aspects of laws, regulations and contractual agreements that may affect the
financial statements, including non-compliance.
7. Written representations about specific assertions

When obtaining evidence about, or evaluating, judgments and intentions, the auditor may

consider one or more of the following:

1. The entity’s past history in carrying out its stated intentions.
2. The entity’s reasons for choosing a particular course of action.
3. The entity’s ability to pursue a specific course of action.
4. The existence or lack of any other information that might have been obtained during
the course of the audit that may be inconsistent with management’s judgment or intent.
5. Date of and Period covered by Written Representations

The date of the written representations shall be as near as practicable to but not after, the
date of the auditor’s report on the financial statements.
The written representations shall be for all financial statements and period(s) referred to in
the auditor’s report.
Furthermore, because the auditor is concerned with events occurring up to the date of the
auditor’s report that may require adjustment to or disclosure in the financial statements.
6. Doubt as to the reliability of Written representations

If the auditor concludes that the written representations are not reliable, the auditor shall take
appropriate actions, including determining the possible effect on the opinion in the auditor’s
report in accordance with SA 705, having regard to the requirement of disclaimer of opinion.
7. Management’s refusal to provide representation

If requested written representation not provided by management:
1. The auditor shall discuss the matter with management
2. Re-evaluate integrity of management and evaluate the effect of this may have on the
reliability of representation and audit evidence in general
3. Take appropriate actions, including determining possible effect on the opinion in the
auditor’s report
8. Disclaimer of opinion in case of Non Realiabililty of WR

The auditor shall disclaim an opinion on the financial statements in accordance with SA 705
if:
1. The auditor concludes that there is sufficient doubt about the integrity of management
such that the written representations about management fulfilling its responsibilities
regarding preparation of financial statements and about information provided and
completeness of transactions are not reliable;
2. Management does not provide the written representations relating to fulfilling its
responsibilities regarding preparation of financial statements and about information
provided and completeness of transactions.

SA 450
1. Objective
The objective of the auditor is to evaluate: -
1. The effect of identified misstatements on the audit and
2. The effect of uncorrected misstatements, if any, on the financial statements.
2. Accumulation of misstatements identified during the audit

The auditor shall accumulate misstatements identified during the audit, other than those
that are clearly trivial. A misstatement may arise from a variety of factors. For example, an
inaccuracy in gathering or processing data from which financial statements are prepared or
an omission of an amount or disclosure can result into a misstatement.
An entity has wrongly capitalized machinery repair expenses amounting to Rs.5 lacs resulting
in overstatement of profits. It is an example of misstatement.
3. Consideration of identified misstatements as the audit progresses

The auditor shall determine whether the overall audit strategy and audit plan need to be
revised if:
1. The nature of identified misstatements and the circumstances of their occurrence
indicate that other misstatements may exist that, when aggregated with misstatements
accumulated during the audit, could be material or
2. The aggregate of misstatements accumulated during the audit approaches materiality
determined in accordance with SA 320
3. Communication and correction of misstatements

The auditor shall communicate on a timely basis all misstatements accumulated during the
audit with the appropriate level of management, unless prohibited by law or regulation. The
auditor shall request management to correct those misstatements. Timely communication of
misstatements to the appropriate level of management is important as it enables management
to evaluate whether the items are misstatements, inform the auditor if it disagrees and take
action as necessary.
4. Evaluating the effect of uncorrected misstatements

Prior to evaluating the effect of uncorrected misstatements, the auditor shall reassess
materiality determined in accordance with SA 320 to confirm whether it remains appropriate
in the context of the entity’s actual financial results.
The auditor shall determine whether uncorrected misstatements are material, individually
or in aggregate. In making this determination, the auditor shall consider:
1. The size and nature of the misstatements, both in relation to particular classes of
transactions, account balances or disclosures and the financial statements as a whole,
and the particular circumstances of their occurrence and

2. The effect of uncorrected misstatements related to prior periods on the relevant classes
of transactions, account balances or disclosures, and the financial statements as a whole.
5. Communication with TCWG

The auditor shall communicate with those charged with governance regarding uncorrected
misstatements and the effect that they, individually or in aggregate, may have on the opinion
in the auditor’s report, unless prohibited by law or regulation. The auditor’s communication
shall identify material uncorrected misstatements individually. The auditor shall request that
uncorrected misstatements be corrected.
The auditor shall also communicate with those charged with governance the effect of
uncorrected misstatements related to prior periods on the relevant classes of transactions,
account balances or disclosures, and the financial statements as a whole.
6. WR from management regarding effects of uncorrected statements

The auditor shall request a written representation from management and, where appropriate,
those charged with governance whether they believe the effects of uncorrected misstatements
are immaterial, individually and in aggregate, to the financial statements as a whole. A
summary of such items shall be included in or attached to the written representation.
7. Documentation regarding misstatements identified during audit

The audit documentation shall include:
1. The amount below which misstatements would be regarded as clearly trivial;
2. All misstatements accumulated during the audit and whether they have been corrected;
and
3. The auditor’s conclusion as to whether uncorrected misstatements are material,
individually or in aggregate, and the basis for that conclusion.

CHAPTER 8
Audit Report

May 24
CA Himanshu
Chapter 8
SA 700 6
2. Financial Reporting Framework 6
3. Forming Opinion on Financial Statements 6
4. Evaluation of Qualitative aspects of accounting 7
5. Specific Evaluation of applicable FRF 7
6. Other Evaluation 7
7. Elements of Audit Report 8
8. UDIN 17
9. Audit Report as required by Law or Regulation (Along with Module) 17
SA 705 18

1. Types of Opinion 18
2. Circumstances when modification is required 18
3. Meaning of Pervasive 18
4. Types of Modified Opinions 20
5. Which type of Opinion is appropriate ? 20
6. Unable to obtain Sufficient Evidence - Mgmt. Imposed limitation 21
7. Audit Opinion: Form and Content in case of Modified Opinion 22
8. Basis for Opinion - Important 23
9. Description of Auditor’s responsibility in case of Disclaimer 24
10. Disclaimer of Opinion and KAM 24
11. Communication with those charged with Governance 25
SA 701 26
1. Meaning of KAM 26

3. Applicability 26
4. Purpose of Communicating KAM 26
5. Determining Key Audit Matters 26
6. Communicating Key Audit Matters 27
7. KAM is not a substitute for disclosure in FS 27
8. Communicating with TCWG 27
9. Example 27
SA 706 29
1. Meaning of Emphasis of Matter Paragraph 29
2. Meaning of Other Matter Paragraph 29
4. Emphasis of Matter Paragraphs in the Auditor’s Report 29

5. Separate section for Emphasis of Matter paragraph 29
6. Examples of circumstances of EOM 29
6. EOM is not Substitute for ? 30
6. Other Matter Paragraphs in the Auditor’s Report 30
7. Separate section for Other Matter paragraph 30
8. Communication with TCWG 30
SA 710 31
1. Background 31
2. Meaning of Comparative Information 31
3. Type of Comparative Information 31
4. Difference in Approach 31
6. Audit Procedures for comparative information 32
7. Audit Reporting regarding Corresponding Figures 32

8. Prior Period Audited by a Predecessor Auditor 33

9. Audit Reporting regarding Corresponding Figures 33
SA 299 35
1. Requirements 35
2. Joint Responsibility 35
3. Communication Responsibility 36
4. Difference of Opinion 36
Audit of Branch Accounts 37

1. Responsibility of Principal Auditor 37
Companies (Auditor’s Report) Order (CARO) 39

A. Applicability of CARO, 2020 39
1. Clause (i): Property, Plant & Equipment & Intangible Asset 39
2. Clause (ii): Inventory 41
3. Clause (iii): Investments made, Guarantee or security given 41
4. Clause (iv): loans, investments, guarantees, and security given 42
5. Clause (v): Deposits 42
6. Clause (vi): Cost Records 42
7. Clause (vii): Statutory Dues 42
8. Clause (viii): Prior period undisclosed Income 43
9. Clause (ix): Default in repayment of loans and Borrowings 43
10. Clause (x): Issuance of Security 44
11. Clause (xi): Fraud 44
12. Clause (xii): Nidhi Companies 44
13. Clause (xiii): Related Party Transactions 45
14. Clause (xiv): Internal Audit & Auditor 45

15. Clause (xv): Non-Cash transactions 45

16. Clause (xvi): Banking & Investment Companies 45
17. Clause (xvii): Cash Losses 45
18. Clause (xviii): Resignation of statutory auditors 45
19. Clause (xix): Liquidity and solvency position 46
20. Clause (xx): Transfer of unspent amount of CSR funds 46
21. Clause (xxi): Qualification in CARO,2020 46
B. Qualification in report/unfavorable report 46
C. Fraud Reporting: 47

SA 700
The objectives of the auditor as per SA 700 (Revised), “Forming an Opinion And Reporting on
Financial Statements” are:
1. To form an opinion on the financial statements based on an evaluation of the conclusions
drawn from the audit evidence obtained; and
2. To express clearly that opinion through a written report.
2. Financial Reporting Framework

General Purpose Framework:
A financial reporting framework designed to meet the common financial information needs
of a wide range of users. The financial reporting framework may be a fair presentation
framework or a compliance framework.
Fair Presentation Framework:

The term “fair presentation framework” is used to refer to a financial reporting framework
that requires compliance with the requirements of the framework and:
1. Acknowledges explicitly or implicitly that, to achieve fair presentation of the financial

statements, it may be necessary for management to provide disclosures beyond those
specifically required by the framework; or
2. Acknowledges explicitly that it may be necessary for management to depart from a
requirement of the framework to achieve fair presentation of the financial statements.
Such departures are expected to be necessary only in extremely rare circumstances
Compliance Framework:
The term “compliance framework” is used to refer to a financial reporting framework that
requires compliance with the requirements of the framework, but does not contain the
acknowledgements in (1) or (2) above.
3. Forming Opinion on Financial Statements

The auditor shall form an opinion on whether the financial statements are prepared, in all
material respects, in accordance with the applicable financial reporting framework.
That conclusion shall take into account:
1. The auditor’s conclusion, in accordance with SA 330, whether sufficient appropriate
audit evidence has been obtained;
2. The auditor’s conclusion, in accordance with SA 450, whether uncorrected misstatements
are material, individually or in aggregate;
3. The evaluation of:

a. Qualitative aspects of entity’s accounting practices

b. Reference or description of applicable financial reporting framework
c. Requirements of applicable financial reporting framework
d. Fair presentation framework
4. Evaluation of Qualitative aspects of accounting

1. Management makes a number of judgments about the amounts and disclosures in the
2. SA 260 (Revised) contains a discussion of the qualitative aspects of accounting practices.
3. In considering the qualitative aspects of the entity’s accounting practices, the auditor may
become aware of possible bias in management’s judgments.
4. SA 540 addresses possible management bias in making accounting estimates.
5. The auditor may conclude that lack of neutrality together with uncorrected misstatements
causes the financial statements to be materially misstated. Indicators of a lack of neutrality
a. The selective correction of misstatements brought to management’s attention
during the audit.

b. Possible management bias in the making of accounting estimate
5. Specific Evaluation of applicable FRF

The auditor shall evaluate whether:
1. The financial statements adequately disclose the significant accounting policies selected
and applied;
2. The accounting policies selected and applied are consistent with the applicable financial
reporting framework and are appropriate;
3. The accounting estimates made by management are reasonable;
4. The information presented in the financial statements is relevant, reliable, comparable,
and understandable;
5. The financial statements provide adequate disclosures to enable the intended users to
understand the effect of material transactions and events on the information conveyed
in the financial statements; and
6. The terminology used in the financial statements, including the title of each financial
statement, is appropriate.
6. Other Evaluation
When the financial statements are prepared in accordance with a fair presentation framework,
the evaluation shall also include an evaluation by the auditor as to whether the financial
statements achieve fair presentation which shall include consideration of:

1. Overall presentation structure and content of the financial statement

2. Whether the financial statements, including the related notes, represent the underlying
transactions and events in a manner that achieve fair presentation
The auditor shall evaluate whether financial statements adequately refer to or describe the
applicable financial reporting framework.
7. Elements of Audit Report

(The Address of Auditor opinion is on the basis of going concern and key audit matters, for
which management is responsible. Auditor also have some responsibilities and other reporting
requirements which he will sign and put his address and date.)
1. Title
2. Addressee
3. Auditor’s opinion
4. Basis for opinion
5. Going concern
6. Key audit matters
7. Responsibilities of financial statements
8. Auditor’s responsibilities for audit of financial statements

9. Other Reporting Responsibilities
10. Signature of the Auditor
11. Auditor’s Address
12. Date of Auditor’s report
Title
The auditor’s report shall have a title that clearly indicates that it is the report of an independent
auditor.
Addresse
The auditor’s report is normally addressed to those for whom the report is prepared, often
either to the shareholders or to those charged with governance of the entity whose financial
statements are being audited.

Auditor’s Opinion (Introductory Paragraph)

The first section of the auditor’s report shall include the auditor’s opinion, and shall have the
heading “Opinion.”
The Opinion section of the auditor’s report shall also:
1. Identify the entity whose financial statements have been audited;
2. State that the financial statements have been audited;
3. Identify the title of each statement comprising the financial statements;
4. Refer to the notes, including the summary of significant accounting policies; and
5. Specify the date of, or period covered by, each financial statement comprising the

When the auditor expresses an unmodified opinion, it is not appropriate to use phrases such
as “with the foregoing explanation” or “subject to” in relation to the opinion, as these suggest
a conditional opinion or a weakening or modification of opinion.
Basis for Opinion:

The auditor’s report shall include a section, directly following the Opinion section, with the
heading “Basis for Opinion”, that:
1. States that the audit was conducted in accordance with Standards on Auditing;
2. Refers to the section of the auditor’s report that describes the auditor’s responsibilities
under the SAs;
3. Includes a statement that the auditor is independent of the entity in accordance with the
relevant ethical requirements relating to the audit and has fulfilled the auditor’s other
ethical responsibilities in accordance with these requirements.

4. States whether the auditor believes that the audit evidence the auditor has obtained is
sufficient and appropriate to provide a basis for the auditor’s opinion.
Going Concern:
Where applicable, the auditor shall report in accordance with SA 570

1. The auditor shall evaluate whether sufficient appropriate audit evidence has been
obtained regarding, and shall conclude on, the appropriateness of management’s use of
the going concern basis of accounting in the preparation of the financial statements.
2. Based on the audit evidence obtained, the auditor shall conclude whether, in the auditor’s
judgement, a material uncertainty exists related to events or conditions that, individually
or collectively, may cast significant doubt on the entity’s ability to continue as a going
concern.
3. A material uncertainty exists when the magnitude of its potential impact and likelihood of
occurrence is such that, in the auditor’s judgement, appropriate disclosure of the nature
and implications of the uncertainty is necessary.
Key Audit Matters

For audits of complete sets of general-purpose financial statements of listed entities, the
auditor shall communicate key audit matters in the auditor’s report in accordance with SA
701:
1. When the auditor is otherwise required by law or regulation or decides to communicate
key audit matters in the auditor’s report, the auditor shall do so in accordance with SA
701.
2. Law or regulation may require communication of key audit matters for audits of entities
other than listed entities.
3. The auditor may also decide to communicate key audit matters for other entities,

including those that may be of significant public interest, for example because they have
a large number and wide range of stakeholders and considering the nature and size of the
business.
Responsibilities of financial statements

This section of the auditor’s report shall describe management’s responsibility for:
1. Preparing the financial statements in accordance with the applicable financial reporting
framework, and
2. For such internal control as management determines is necessary to enable the
preparation of financial statements that are free from material misstatement, whether
due to fraud or error and
3. Assessing the entity’s ability to continue as a going concern and whether the use of the

going concern basis of accounting is appropriate as well as disclosing, if applicable,
matters relating to going concern.
4. The explanation of management’s responsibility for this assessment shall include a
description of when the use of the going concern basis of accounting is appropriate
Oversight of the financial reporting process:

This section of the auditor’s report shall also identify those responsible for the oversight of

the financial reporting process, when those responsible for such oversight are different from
Management. In this case, the heading of this section shall also refer to “Those Charged with
Governance”
Auditor’s responsibilities for audit of financial statements

Part 1
The auditor’s report shall include a section with the heading “Auditor’s Responsibilities for the
Audit of the Financial Statements.”
1. State that the objectives of the auditor are to:
a. Obtain reasonable assurance about whether the financial statements as a whole
are free from material misstatement, whether due to fraud or error; and
b. Issue an auditor’s report that includes the auditor’s opinion.
2. State that reasonable assurance is a high level of assurance, but is not a guarantee that an
audit conducted in accordance with SAs will always detect a material misstatement when
it exists; and
3. State that misstatements can arise from fraud or error, and either
4. Describe that misstatemements are considered material if, individually or in the aggregate,
they could reasonably be expected to influence the economic decisions of users taken on
the basis of these financial statements; or
5. Provide a definition or description of materiality in accordance with the applicable

financial reporting framework.
Part 2
The Auditor’s Responsibilities for the Audit of the Financial Statements section of the auditor’s

report shall further:

1. State that, as part of an audit in accordance with SAs, the auditor exercises professional
judgment and maintains professional skepticism throughout the audit; and
2. Describe an audit by stating that the auditor’s responsibilities are:
a. To identify and assess the risks of material misstatement of the financial statements,
whether due to fraud or error; to design and perform audit procedures responsive
to those risks; and to obtain audit evidence that is sufficient and appropriate to
provide a basis for the auditor’s opinion. The risk of not detecting a material
misstatement resulting from fraud is higher than for one resulting from error, as
fraud may involve collusion, forgery, intentional omissions, misrepresentations,
or the override of internal control.
b. To obtain an understanding of internal control relevant to the audit in order to
design audit procedures that are appropriate in the circumstances.
c. To evaluate the appropriateness of accounting policies used and the reasonableness
of accounting estimates and related disclosures made by management.
d. To conclude on the appropriateness of management’s use of the going concern
basis of accounting and, based on the audit evidence obtained, whether a material
uncertainty exists related to events or conditions that may cast significant doubt
on the entity’s ability to continue as a going concern.
Part 3
The Auditor’s Responsibilities for the Audit of the Financial Statements section of the auditor’s
report also shall:
1. State that the auditor communicates with those charged with governance regarding,
among other matters, the planned scope and timing of the audit and significant audit

findings, including any significant deficiencies in internal control that the auditor
identifies during the audit;
2. For audits of financial statements of listed entities, state that the auditor provides
those charged with governance with a statement that the auditor has complied with
relevant ethical requirements regarding independence and communicate with them all
relationships and other matters that may reasonably be thought to bear on the auditor’s
independence, and where applicable, related safeguards; and
3. For audits of financial statements of listed entities and any other entities for which key
audit matters are communicated in accordance with SA 701, state that, from the matters
communicated with those charged with governance, the auditor determines those matters
that were of most significance in the audit of the financial statements of the current
period and are therefore the key audit matters. The auditor describes these matters in the
auditor’s report unless law or regulation precludes public disclosure.
Location of the description of the auditor’s responsibilities for the audit of the
financial statements:
The description of the auditor’s responsibilities for the audit of the financial statements shall
be included:
1. Within the body of the auditor’s report
2. Within an appendix to the auditor’s report, in which case the auditor’s report shall include
a reference to the location of the appendix or
3. By a specific reference within the auditor’s report to the location of such a description on a
website of an appropriate authority, where law, regulation or national auditing standards
expressly permit the auditor to do so.

Other Reporting Responsibilities

1. If the auditor addresses other reporting responsibilities in the auditor’s report on the
financial statements that are in addition to the auditor’s responsibilities under the
SAs, these other reporting responsibilities shall be addressed in a separate section
in the auditor’s report with a heading titled- “Report on Other Legal and Regulatory
Requirements”
2. If other reporting responsibilities are presented in the same section as the related report
elements required by the SAs, the auditor’s report shall clearly differentiate the other
reporting responsibilities from the reporting that is required by the SAs.
3. If the auditor’s report contains a separate section that addresses other reporting
responsibilities, the requirements stated above shall be included under a section with a
heading “Report on the Audit of the Financial Statements.” The “Report on Other Legal
and Regulatory Requirements” shall follow the “Report on the Audit of the Financial
Statements.”
Signature of the Auditor

1. The report is signed by the auditor (i.e. the engagement partner) in his personal name.
2. Where the firm is appointed as the auditor, the report is signed in the personal name of
the auditor and in the name of the audit firm.
3. The partner/proprietor signing the audit report also needs to mention the membership
number assigned by the Institute of Chartered Accountants of India.
Auditor’s Address:
The auditor’s report shall name specific location, which is ordinarily the city where the audit
report is signed

Date of the Auditor’s Report

The auditor’s report shall be dated no earlier than the date on which the auditor has obtained
sufficient appropriate audit evidence on which to base the auditor’s opinion on the financial
statements
The date of the auditor’s report informs the user of the auditor’s report that the auditor has
considered the effect of events and transactions of which the auditor became aware and that
occurred up to that date. The auditor’s responsibility for events and transactions after the
date of the auditor’s report is addressed in SA 560.
8. UDIN
It was noticed that financial documents/ certificates attested by third person misrepresenting
themselves as CA Members were misleading the Authorities and Stakeholders. ICAI also
received number of complaints of signatures of CAs being forged by non CAs. ICAI implemented
an innovative concept of UDINi.e. Unique Document Identification Number.
Chartered Accountants having full-time Certificate of Practice can register on UDIN Portal
and generate UDIN by registering the certificates attested/certified by them.
Accordingly, an auditor is required to mention the UDIN with respect to each audit report
being signed by him, along with his membership number while signing an audit report.
9. Audit Report as required by Law or Regulation (Along with Module)

1. Title
2. Addressee : As required by engagement
3. Opinion Section
a. Identification of applicable financial reporting framework
b. Statement about independence and ethical requirements
4. Going concern : where applicable and is not inconsistent with SA 570
5. Basis for opinion
6. Key audit matters
7. Management’s responsibilities

8. Auditor’s Responsibilities: Ref. to auditing and law or regulation as applicable

9. Auditor’s signature
10. Place of signature
11. Date of audit report

SA 705
1. Types of Opinion
Unmodified opinion:
The auditor shall express an unmodified opinion when the auditor concludes that the financial
statements are prepared, in all material respects, in accordance with the applicable financial
reporting framework
Modified opinion:
If the auditor :
1. Concludes, that based on the audit evidence obtained, the financial statements as a whole
are not free from material misstatement
2. Unable to obtain sufficient and appropriate audit evidence to conclude that the financial
statement as a whole are free from material misstatement.
2. Circumstances when modification is required

The auditor shall modify the opinion in the auditor’s report when:
1. The auditor concludes that, based on the audit evidence obtained, the financial statements
as a whole are not free from material misstatement; or

2. The auditor is unable to obtain sufficient appropriate audit evidence to conclude that the
financial statements as a whole are free from material misstatement.
3. Meaning of Pervasive
This means that the misstatements were not limited to a particular account or area of the
financial statements, but were present throughout the records and the misstatements were

significant enough to affect the overall accuracy and reliability of the financial statements.
Pervasive effects on the financial statements are those that, in the auditor’s judgment:
1. Are not confined to specific elements, accounts or items of the financial statements;
2. If so confined, represent or could represent a substantial proportion of the FS; or
3. In relation to disclosures, are fundamental to users’ understanding of the financial
statements
Out of Course Examples:
A. Material but not pervasive

1. Inventory Valuation Error: Suppose a company makes an error in valuing its inventory,
leading to a material overstatement of the asset. While this misstatement is significant
in terms of financial impact, it might not pervasively affect other areas of the financial
statements.
2. Revenue Recognition Issue: If a company incorrectly recognizes revenue from a specific
contract, resulting in a material overstatement, this could be a material misstatement.
However, if the error is confined to this particular transaction and doesn’t impact other
revenue streams, it may not be pervasive.
3. Depreciation Calculation Mistake: An error in the calculation of depreciation for a

significant asset can lead to a material misstatement. If this mistake is limited to a specific
asset and doesn’t extend to the depreciation of the entire asset base, it might be material
but not pervasive.
4. Expense Classification Error: Imagine a scenario where a company misclassifies a
significant expense, leading to a material misstatement in the income statement. If this
misclassification is isolated and doesn’t affect the overall presentation of other expenses,
it could be material without being pervasive.
5. Tax Provision Error: A company might make an error in estimating its tax provision,
resulting in a material misstatement in the financial statements. If this error is confined
to the tax provision and doesn’t impact the reporting of other liabilities or assets, it could
be material but not pervasive.
B. Material and Pervasive

1. Overstatement of Revenue Recognition: If a company consistently recognizes revenue
prematurely across various contracts and transactions, affecting multiple reporting
periods, it becomes a pervasive misstatement. This could distort the overall financial
performance and position.
2. Failure to Disclose Significant Liabilities: A company fails to disclose a substantial liability,
such as pending litigation, across various reporting periods. This lack of disclosure can
be pervasive as it impacts the financial statements’ overall transparency and reliability.
3. Material Errors in Financial Statement Presentation: Imagine a scenario where a company
consistently misclassifies assets or liabilities, affecting multiple line items in the financial
statements. Such pervasive misstatements can lead to a distorted overall picture of the

company’s financial health.

4. Inventory Fraud: If a company consistently overstates the value of its inventory, impacting
multiple reporting periods, it becomes a pervasive misstatement. This could affect the
accuracy of the income statement and balance sheet.
5. Systematic Understatement of Depreciation: Suppose a company consistently understates
the depreciation expenses for its fixed assets over several reporting periods. This
misstatement, if pervasive, can distort the carrying amounts of assets and the overall
profitability.
4. Types of Modified Opinions

There are three types of modified opinions, namely-
1. A qualified opinion
2. An adverse opinion
3. A disclaimer of opinion
Qualified Opinion
The auditor shall express a qualified opinion when:
1. The auditor, having obtained sufficient appropriate audit evidence, concludes that
misstatements, individually or in the aggregate, are material, but not pervasive, to the
financial statements; or
2. The auditor is unable to obtain sufficient appropriate audit evidence on which to base the
opinion, but the auditor concludes that the possible effects on the financial statements of
undetected misstatements, if any, could be material but not pervasive.
Adverse Opinion
The auditor shall express an adverse opinion when the auditor, having obtained sufficient
appropriate audit evidence, concludes that misstatements, individually or in the aggregate,
are both material and pervasive to the financial statements.
Disclaimer of Opinion
1. The auditor shall disclaim an opinion when the auditor is unable to obtain sufficient
appropriate audit evidence on which to base the opinion, and the auditor concludes that
the possible effects on the financial statements of undetected misstatements, if any, could
be both material and pervasive.
2. The auditor shall disclaim an opinion when, in extremely rare circumstances involving
multiple uncertainties, the auditor concludes that, notwithstanding having obtained
sufficient appropriate audit evidence regarding each of the individual uncertainties,
it is not possible to form an opinion on the financial statements due to the potential
interaction of the uncertainties and their possible cumulative effect on the financial
statements.
5. Which type of Opinion is appropriate ?

The decision regarding which type of modified opinion is appropriate depends upon:
1. The nature of the matter giving rise to the modification, that is, whether the financial
statements are materially misstated or, in the case of an inability to obtain sufficient
appropriate audit evidence, may be materially misstated; and
2. The auditor’s judgement about the pervasiveness of the effects or possible effects of the
matter on the financial statements.

6. Unable to obtain Sufficient Evidence - Mgmt. Imposed limitation

1. The auditor shall request that management remove the limitation.

2. If management refuses to remove the limitation referred above, the auditor shall
communicate the matter to those charged with governance, unless all of those charged
with governance are involved in managing the entity and determine whether it is possible
to perform alternative procedures to obtain sufficient appropriate audit evidence.
3. If the auditor is unable to obtain sufficient appropriate audit evidence, the auditor shall
determine the implications as follows:
a. If the auditor concludes that the possible effects on the financial statements of
undetected misstatements, if any, could be material but not pervasive, the auditor
shall qualify the opinion; or
b. If the auditor concludes that the possible effects on the financial statements of
undetected misstatements, if any, could be both material and pervasive so that a
qualification of the opinion would be inadequate to communicate the gravity of
the situation, the auditor shall: Withdraw if possible or Disclaim an opinion.
c. If the auditor withdraws, then before withdrawing, the auditor shall communicate
to those charged with governance any matters regarding misstatements identified
during the audit that would have given rise to a modification of the opinion.
7. Audit Opinion: Form and Content in case of Modified Opinion

When the auditor modifies the audit opinion, the auditor shall use the heading “Qualified
Opinion,” “Adverse Opinion,” or “Disclaimer of Opinion,” as appropriate, for the Opinion
section.
Qualified Opinion
When the auditor expresses a qualified opinion due to a material misstatement in the financial
statements, the auditor shall state that, in the auditor’s opinion, except for the effects of the
matter(s) described in the Basis for Qualified Opinion section,
1. When reporting in accordance with a fair presentation framework, the accompanying
financial statements present fairly, in all material respects (or give a true and fair view
of) […] in accordance with [the applicable financial reporting framework]; or
2. When reporting in accordance with a compliance framework, the accompanying
financial statements have been prepared, in all material respects, in accordance with
[the applicable financial reporting framework].
When the modification arises from an inability to obtain sufficient appropriate audit evidence,
the auditor shall use the corresponding phrase “except for the possible effects of the matter(s)
...” for the modified opinion.
Adverse Opinion
When the auditor expresses an adverse opinion, the auditor shall state that, in the auditor’s
opinion, because of the significance of the matter(s) described in the Basis for Adverse
Opinion section,

1. When reporting in accordance with a fair presentation framework, the accompanying

financial statements do not present fairly (or give a true and fair view of) […] in accordance
with [the applicable financial reporting framework]; or
2. When reporting in accordance with a compliance framework, the accompanying financial
statements have not been prepared, in all material respects, in accordance with [the
applicable financial reporting framework].
Disclaimer of Opinion
When the auditor disclaims an opinion due to an inability to obtain sufficient appropriate
audit evidence, the auditor shall:
1. State that the auditor does not express an opinion on the accompanying financial
statements;
2. State that, because of the significance of the matter(s) described in the Basis for Disclaimer
of Opinion section, the auditor has not been able to obtain sufficient appropriate audit
evidence to provide a basis for an audit opinion on the financial statements; and
3. Amend the statement required by SA 700 (Revised), which indicates that the financial
statements have been audited, to state that the auditor was engaged to audit the financial
statements.
8. Basis for Opinion - Important

When the auditor modifies the opinion on the financial statements, the auditor shall, in
addition to the specific elements required by SA 700 (Revised):
1. Amend the heading “Basis for Opinion” required by para of SA 700 (Revised) to “Basis for
Qualified Opinion,” “Basis for Adverse Opinion,” or “Basis for Disclaimer of Opinion,” as
appropriate; and
2. Within this section, include a description of the matter giving rise to the modification.
Drafting in case of modified opinion:

1. If there is a material misstatement of the financial statements that relates to specific
amounts in the financial statements (including quantitative disclosures in the notes to
the financial statements), the auditor shall include in the Basis for Opinion section a
description and quantification of the financial effects of the misstatement, unless
impracticable.
2. If it is not practicable to quantify the financial effects, the auditor shall so state in this
section.
3. If there is a material misstatement of the financial statements that relates to narrative
disclosures, the auditor shall include in the Basis for Opinion section an explanation of
how the disclosures are misstated.
4. If there is a material misstatement of the financial statements that relates to the non-
disclosure of information required to be disclosed, the auditor shall:
a. Discuss the non-disclosure with those charged with governance;

b. Describe in the Basis for Opinion section the nature of the omitted information;
and
c. Unless prohibited by law or regulation, include the omitted disclosures, provided
it is practicable to do so and the auditor has obtained sufficient appropriate audit
evidence about the omitted information.
5. If the modification results from an inability to obtain sufficient appropriate audit
evidence, the auditor shall include in the Basis for Opinion section the reasons for that
inability.
6. When the auditor expresses a qualified or adverse opinion, the auditor shall amend the
statement about whether the audit evidence obtained is sufficient and appropriate to
provide a basis for the auditor’s opinion required by SA 700 (Revised) to include the word
“qualified” or “adverse”, as appropriate.
a. Example 1: The audit evidence we have obtained, except for the effects of the
matter described in the Basis for Qualified Opinion section, is sufficient and
appropriate to provide a basis for our qualified opinion.
b. Example 2: The audit evidence we have obtained is not sufficient and appropriate
to provide a basis for our opinion.
7. When the auditor disclaims an opinion on the financial statements, the auditor’s report
shall not include the following elements required by SA 700 (Revised).
a. A reference to the section of the auditor’s report where the auditor’s responsibilities
are described; and

b. A statement about whether the audit evidence obtained is sufficient and
appropriate to provide a basis for the auditor’s opinion.
Even if the auditor has expressed an adverse opinion or disclaimed an opinion on the financial
statements, the auditor shall describe in the Basis for Opinion section the reasons for any
other matters of which the auditor is aware that would have required a modification to the
opinion, and the effects thereof.
9. Description of Auditor’s responsibility in case of Disclaimer

When the auditor disclaims an opinion on the financial statements due to an inability to obtain
sufficient appropriate audit evidence, the auditor shall amend the description of the auditor’s
responsibilities required by SA 700 (Revised) to include only the following:
1. A statement that the auditor’s responsibility is to conduct an audit of the entity’s financial
statements in accordance with Standards on Auditing and to issue an auditor’s report;
2. A statement that, however, because of the matter(s) described in the Basis for Disclaimer
of Opinion section, the auditor was not able to obtain sufficient appropriate audit
evidence to provide a basis for an audit opinion on the financial statements; and
3. The statement about auditor independence and other ethical responsibilities required by
SA 700 (Revised).
Unless required by law or regulation, when the auditor disclaims an opinion on the financial
statements, the auditor’s report shall not include a Key Audit Matters section in accordance
with SA 701.

10. Disclaimer of Opinion and KAM

Unless required by law or regulation, when the auditor disclaims an opinion on the financial
statements, the auditor’s report shall not include a Key Audit Matters section in accordance
with SA 701.
11. Communication with those charged with Governance

When the auditor expects to modify the opinion in the auditor’s report, the auditor shall
communicate with those charged with governance the circumstances that led to the expected
modification and the wording of the modification.

SA 701
1. Meaning of KAM
Those matters that, in the auditor’s professional judgment, were of most significance in the
audit of the financial statements of the current period. Key audit matters are selected from
matters communicated with those charged with governance
The objectives of the auditor are to:
1. Determine key audit matters and, having formed an opinion on the financial statements
2. Communicate those matters by describing them in the auditor’s report.
3. Applicability
This SA applies to audits of complete sets of general purpose financial statements of :
1. Listed entities and
2. Circumstances when the auditor otherwise decides to communicate key audit matters in
the auditor’s report and required by law or regulation to communicate key audit matters
in the auditor’s report

However, SA 705 (Revised) prohibits the auditor from communicating key audit matters
when the auditor disclaims an opinion on the financial statements, unless such reporting
is required by law or regulation
4. Purpose of Communicating KAM

The purpose of communicating key audit matters is:
1. To enhance the communicative value of the auditor’s report by providing greater
transparency about the audit that was performed.
2. Communicating key audit matters provides additional information to intended users
of the financial statements to assist them in understanding those matters that, in the
auditor’s professional judgment, were of most significance in the audit of the financial
statements of the current period.
3. Communicating key audit matters may also assist intended users in understanding the
entity and areas of significant management judgment in the audited financial statements.
5. Determining Key Audit Matters

The auditor shall determine, from the matters communicated with those charged with
governance, those matters that required significant auditor attention in performing the audit.
In making this determination, the auditor shall take into account the following:
1. Areas of higher assessed risk of material misstatement, or significant risks identified in

accordance with SA 315.

2. Significant auditor judgments relating to areas in the financial statements that involved
significant management judgment, including accounting estimates that have been
identified as having high estimation uncertainty.
3. The effect on the audit of significant events or transactions that occurred during the
period.
6. Communicating Key Audit Matters

The auditor shall describe each key audit matter, using an appropriate subheading, in a
separate section of the auditor’s report under the heading “Key Audit Matters”.
The introductory language in this section of the auditor’s report shall state that:
1. Key audit matters are those matters that, in the auditor’s professional judgment, were of
most significance in the audit of the financial statements [of the current period]; and
2. These matters were addressed in the context of the audit of the financial statements as a
whole, and in forming the auditor’s opinion thereon, and the auditor does not provide a
separate opinion on these matters.
7. KAM is not a substitute for disclosure in FS

Communicating key audit matters in the auditor’s report is in the context of the auditor having

formed an opinion on the financial statements as a whole.
Communicating key audit matters in the auditor’s report is not:
1. A substitute for disclosures in the financial statements that the applicable financial
reporting framework requires management to make, or that are otherwise necessary to
achieve fair presentation;
2. A substitute for the auditor expressing a modified opinion when required by the
circumstances of a specific audit engagement in accordance with SA 705 (Revised);
3. A substitute for reporting in accordance with SA 570 when a material uncertainty exists
relating to events or conditions that may cast significant doubt on an entity’s ability to
continue as a going concern; or
4. A separate opinion on individual matters.
8. Communicating with TCWG

The auditor shall communicate with those charged with governance:
1. Those matters the auditor has determined to be the key audit matters; or
2. If applicable, depending on the facts and circumstances of the entity and the audit,
the auditor’s determination that there are no key audit matters to communicate in the
auditor’s report.
9. Example
The following illustrates the presentation in the auditor’s report if the auditor has determined

there are no key audit matters to communicate:
Key Audit Matters

[Except for the matter described in the Basis for Qualified (Adverse) Opinion section or
Material Uncertainty Related to Going Concern section,] We have determined that there are
no [other] key audit matters to communicate in our report.

SA 706
1. Meaning of Emphasis of Matter Paragraph

A paragraph included in the auditor’s report that refers to a matter appropriately presented
or disclosed in the financial statements that, in the auditor’s judgment, is of such importance
that it is fundamental to users’ understanding of the financial statements.
2. Meaning of Other Matter Paragraph

A paragraph included in the auditor’s report that refers to a matter other than those presented
or disclosed in the financial statements that, in the auditor’s judgment, is relevant to users’
understanding of the audit, the auditor’s responsibilities or the auditor’s report.
The objective of the auditor, having formed an opinion on the financial statements, is to
draw users’ attention, when in the auditor’s judgment it is necessary to do so, by way of clear
additional communication in the auditor’s report, to:
1. A matter, although appropriately presented or disclosed in the financial statements,
that is of such importance that it is fundamental to users’ understanding of the financial

statements; or
2. As appropriate, any other matter that is relevant to users’ understanding of the audit, the
auditor’s responsibilities or the auditor’s report.
4. Emphasis of Matter Paragraphs in the Auditor’s Report

The auditor shall include an Emphasis of Matter paragraph in the auditor’s report provided:
1. The auditor would not be required to modify the opinion in accordance with SA 705
(Revised) as a result of the matter; and
2. When SA 701 applies, the matter has not been determined to be a key audit matter to be
communicated in the auditor’s report.
5. Separate section for Emphasis of Matter paragraph

When the auditor includes an Emphasis of Matter paragraph in the auditor’s report, the
auditor shall:
1. Include the paragraph within a separate section of the auditor’s report with an appropriate
heading that includes the term “Emphasis of Matter”;
2. Include in the paragraph a clear reference to the matter being emphasized and to
where relevant disclosures that fully describe the matter can be found in the financial
statements. The paragraph shall refer only to information presented or disclosed in the
financial statements; and indicate that the auditor’s opinion is not modified in respect
of the matter emphasized.

6. Examples of circumstances of EOM

1. An uncertainty relating to the future outcome of exceptional litigation or regulatory
action.
2. A significant subsequent event that occurs between the date of the financial statements
and the date of the auditor’s report.
3. Early application (where permitted) of a new accounting standard that has a material
effect on the financial statements.
4. A major catastrophe that has had, or continues to have, a significant effect on the entity’s
financial position.
6. EOM is not Substitute for ?

An Emphasis of Matter paragraph is not a substitute for:
1. A modified opinion in accordance with SA 705 (Revised) when required by the
circumstances of a specific audit engagement;
2. Disclosures in the financial statements that the applicable financial reporting framework
requires management to make, or that are otherwise necessary to achieve fair presentation;
or
3. Reporting in accordance with SA 570 (Revised) when a material uncertainty exists relating
to events or conditions that may cast significant doubt on an entity’s ability to continue as
a going concern.
6. Other Matter Paragraphs in the Auditor’s Report

The auditor shall include an Other Matter paragraph in the auditor’s report, provided:
1. This is not prohibited by law or regulation; and
2. When SA 701 applies, the matter has not been determined to be a key audit matter to be
communicated in the auditor’s report.
7. Separate section for Other Matter paragraph

When the auditor includes an Other Matter paragraph in the auditor’s report, the auditor shall
include the paragraph within a separate section with the heading “Other Matter,” or other
appropriate heading.
8. Communication with TCWG

If the auditor expects to include an Emphasis of Matter or an Other Matter paragraph in the
auditor’s report, the auditor shall communicate with those charged with governance regarding
this expectation and the wording of this paragraph.

SA 710
1. Background
This Standard on Auditing (SA) deals with the auditor’s responsibilities regarding comparative
information in an audit of financial statements.
When the financial statements of the prior period have been audited by a predecessor auditor
or were not audited, the requirements and guidance in SA 510 regarding opening balances
also apply.
2. Meaning of Comparative Information

The amounts and disclosures included in the financial statements in respect of one or more
prior periods in accordance with the applicable financial reporting framework.
3. Type of Comparative Information

There are two different broad approaches to the auditor’s reporting responsibilities in respect
of such comparative information:
1. Corresponding figures and
2. Comparative financial statements

4. Difference in Approach
The essential audit reporting differences between the approaches are:
1. For corresponding figures: the auditor ’s opinion on the financial statements refers to the
current period only;
2. For comparative financial statements: the auditor ’s opinion refers to each period for
which financial statements are presented.
As per SA 710, the objectives of the auditor are:
1. To obtain sufficient appropriate audit evidence about whether the comparative information
included in the financial statements has been presented, in all material respects, in
accordance with the requirements for comparative information in the applicable financial
reporting framework; and
2. To report in accordance with the auditor’s reporting responsibilities.

6. Audit Procedures for comparative information

1. The auditor shall determine whether the financial statements include the comparative
information required by the applicable financial reporting framework and whether
such information is appropriately classified. For this purpose, the auditor shall evaluate
whether:
a. The comparative information agrees with the amounts and other disclosures
presented in the prior period; and
b. The accounting policies reflected in the comparative information are consistent
with those applied in the current period or, if there have been changes in
accounting policies, whether those changes have been properly accounted for
and adequately presented and disclosed.
2. If the auditor becomes aware of a possible material misstatement in the comparative
information while performing the current period audit, the auditor shall perform such
additional audit procedures as are necessary in the circumstances to obtain sufficient
appropriate audit evidence to determine whether a material misstatement exists. If the
auditor had audited the prior period’s financial statements, the auditor shall also follow
the relevant requirements of SA 560.
3. As required by SA 580, the auditor shall request written representations for all periods
referred to in the auditor’s opinion. The auditor shall also obtain a specific written
representation regarding any prior period item that is separately disclosed in the current
year’s statement of profit and loss.
7. Audit Reporting regarding Corresponding Figures

Definition of Corresponding Information:
Comparative information is when the financial statements for the previous period are
included alongside the current period’s financial statements. These previous period numbers
are meant to be read only in relation to the current period numbers.
The level of detail provided for the previous period numbers is determined by how important
they are to understanding the current period numbers.
When corresponding figures are presented, the auditor’s opinion shall not
refer to the corresponding figures except in the following circumstances:
1. Prior Period Opinion was Modified and in unresolved in current period

1. If the auditor’s report on the prior period, as previously issued, included a qualified
opinion, a disclaimer of opinion, or an adverse opinion and the matter which gave rise
to the modification is unresolved, the auditor shall modify the auditor’s opinion on the
current period’s financial statements. In the Basis for Modification paragraph in the
auditor’s report, the auditor shall either:
a. Refer to both the current period’s figures and the corresponding figures in the
description of the matter giving rise to the modification when the effects or
possible effects of the matter on the current period’s figures are material; or
b. In other cases, explain that the audit opinion has been modified because of the

effects or possible effects of the unresolved matter on the comparability of the

current period’s figures and the corresponding figures.
2. Prior Period contains Material Misstatement but Unmodified Opinion was

Issued
If the auditor obtains audit evidence that a material misstatement exists in the prior period
financial statements on which an unmodified opinion has been previously issued.
The auditor shall verify whether the misstatement has been dealt with as required under the
applicable financial reporting framework and, if that is not the case, the auditor shall express a
qualified opinion or an adverse opinion in the auditor’s report on the current period financial
statements, modified with respect to the corresponding figures included therein.
3. Prior Period financials not Audited

If the previous period’s financial statements were not audited, the auditor must mention this
under “Other matter paragraph” in their report but they still need to obtain sufficient and
appropriate evidence that the opening balance do not contain misstatements they materially
affects the current period.
8. Prior Period Audited by a Predecessor Auditor

If the financial statements of the prior period were audited by a predecessor auditor and

the auditor is permitted by law or regulation to refer to the predecessor auditor’s report on
the corresponding figures and decides to do so, the auditor shall state in an Other Matter
paragraph in the auditor’s report:
1. That the financial statements of the prior period were audited by the predecessor auditor;
2. The type of opinion expressed by the predecessor auditor and, if the opinion was modified,
the reasons therefore; and
3. The date of that report.
9. Audit Reporting regarding Comparative Financial Approach

Comparative information where amounts and other disclosures for the prior period are
included for comparison with the financial statements of the current period but, if audited, are
referred to in the auditor ’s opinion. The level of information included in those comparative
financial statements is comparable with that of the financial statements of the current period.
Auditor’s opinion- to refer each period: When comparative financial statements are
presented, the auditor’s opinion shall refer to each period for which financial statements are
presented and on which an audit opinion is expressed.
When reporting on prior period financial statements in connection with the

current period’s audit
When an auditor is reporting on prior period financial statements in connection with the
current period’s audit, and the opinion the auditor previously expressed differs from the
current opinion, the auditor must provide a disclosure explaining the substantive reasons
for the different opinion. This disclosure is made in an Other Matter paragraph, as per SA

706.
Prior Period Financial Statements Audited by a Predecessor Auditor

If the financial statements of the prior period were audited by a predecessor auditor, in
addition to expressing an opinion on the current period’s financial statements, the auditor
shall state in an Other Matter paragraph:
1. That the financial statements of the prior period were audited by the predecessor auditor;
2. The type of opinion expressed by the predecessor auditor and, if the opinion was modified,
the reasons therefore; and
3. The date of that report.
Unless the predecessor auditor’s report on the prior period’s financial statements is revised
with the financial statements.
If the auditor concludes that a material misstatement exists that affects the prior period
financial statements on which the predecessor auditor had previously reported without
modification, the auditor shall communicate the misstatement with the appropriate level of
management and those charged with governance and request that the predecessor auditor
be informed. If the prior period financial statements are amended, and the predecessor
auditor agrees to issue a new auditor’s report on the amended financial statements of the
prior period, the auditor shall report only on the current period.
Prior Period Financial Statements Not Audited

If the prior period financial statements were not audited, the auditor shall state in an Other
Matter paragraph that the comparative financial statements are unaudited. Such a statement
does not, however, relieve the auditor of the requirement to obtain sufficient appropriate
audit evidence that the opening balances do not contain misstatements that materially affect
the current period’s financial statements.

SA 299
1. Requirements
This Standard deals with the special considerations in carrying out audit by joint auditors. It
requires that–
1. The engagement partner and other key members of the engagement team from each of
the joint auditors should be involved in planning the audit.
2. The joint auditors should jointly establish an overall audit strategy which sets the scope,
timing and direction of the audit, and also guides the development of the audit plan.
3. Before the commencement of the audit, the joint auditors should discuss and develop a
joint audit plan. In developing the joint audit plan, the joint auditors should:
a. Identify division of audit areas and common audit areas;
b. Ascertain the reporting objectives of the engagement;
c. Consider and communicate among all joint auditors the factors that are significant
in directing the engagement team’s efforts;
d. Consider the results of preliminary engagement activities, or similar engagements

performed earlier.
e. Ascertain the nature, timing and extent of resources necessary to accomplish the
engagement.
4. Each of the joint auditors should consider and assess the risks of material misstatement
and communicate to other joint auditors.
5. The joint auditors should discuss and document the nature, timing, and the extent of the
audit procedures for (I) common and (II) specific allotted areas of audit to be performed.
6. The joint auditors should obtain common engagement letter and common management
representation letter.
7. The work allocation document should be signed by all the joint auditors and communicated
to those charged with governance.
2. Joint Responsibility
In respect of audit work divided among the joint auditors, each joint auditor shall be
responsible only for the work allocated to such joint auditor including proper execution of
the audit procedures.
All the joint auditors shall be jointly and severally responsible for:
1. The audit work which is not divided among the joint auditors and is carried out by all joint
auditors;
2. Decisions taken by all the joint auditors under audit planning in respect of common audit
areas;

3. Matters which are brought to the notice of the joint auditors by any one of them and there
is an agreement among the joint auditors on such matters;
4. Examining that the financial statements of the entity comply with the requirements of the
relevant statutes;
5. Presentation and disclosure of the financial statements as required by the applicable
financial reporting framework;
6. Ensuring that the audit report complies with the requirements of the relevant statutes,
applicable Standards on Auditing and other relevant pronouncements issued by ICAI.
3. Communication Responsibility
In case a joint auditor comes across matters which are relevant to the areas of responsibility
of other joint auditors and which deserve their attention, or which require disclosure or
require discussion with, or application of judgment by other joint auditors, the said joint
auditor shall communicate the same to all the other joint auditors in writing prior to the
completion of the audit.
4. Difference of Opinion
It may be noted that the joint auditors are required to issue common audit report. However,
where the joint auditors are in disagreement with regard to the opinion or any matters to be
covered by the audit report, they shall express their opinion in a separate audit report. In
such circumstances, the audit report(s) issued by the joint auditor(s) shall make a reference
to each other’s audit report(s).

Audit of Branch Accounts

The branch auditor shall prepare a report on the accounts of the branch examined by him and
send it to the auditor of the company who shall deal with it in his report in such manner as he
considers necessary.
Principal auditor means the auditor with responsibility for reporting on the financial
information of an entity when that financial information includes the financial information
of one or more components audited by another auditor.
Other auditor means an auditor, other than the principal auditor, with responsibility for
reporting on the financial information of a component which is included in the financial
information audited by the principal auditor.
Component means a division, branch, subsidiary, joint venture, associated enterprises or
other entity whose financial information is included in the financial information audited by
the principal auditor.
Using the Work of another Auditor: SA 600, “Using the Work of another
Auditor
It makes clear that in certain situations, the statute governing the entity may confer a right
on the principal auditor to visit a component and examine the books of account and other
records of the said component, if he thinks it necessary to do so.
Where another auditor has been appointed for the component, the principal auditor would
normally be entitled to rely upon the work of such auditor unless there are special circumstances
to make it essential for him to visit the component and/or to examine the books of account
and other records of the said component.
Further, it requires that the principal auditor should perform procedures to obtain sufficient
appropriate audit evidence, that the work of the other auditor is adequate for the principal
auditor’s purposes, in the context of the specific assignment.
1. Responsibility of Principal Auditor

When using the work of another auditor, the principal auditor should ordinarily perform the
following procedures:
1. Advise the other auditor of the use that is to be made of the other auditor’s work and
report and make sufficient arrangements for co-ordination of their efforts at the planning
stage of the audit.
2. The principal auditor would inform the other auditor of matters such as are as requiring
special consideration, procedures for the identification of inter -component transactions
that may require disclosure and the time-table for completion of audit; and
3. Advise the other auditor of the significant accounting, auditing and reporting requirements
and obtain representation as to compliance with them.
4. The principal auditor might discuss with the other auditor the audit procedures applied
or review a written summary of the other auditor’s procedures and findings which may be
in the form of a completed questionnaire or check-list.
5. The principal auditor may also wish to visit the other auditor.

The nature, timing and extent of procedures will depend on the circumstances of the
engagement and the principal auditor’s knowledge of the professional competence of the
other auditor. This knowledge may have been enhanced from the review of the previous audit
work of the other auditor.

Companies (Auditor’s Report) Order (CARO)

Companies (Auditor’s Report) Order (CARO) is an extended version of an Audit report wherein
the Auditor provides more information in his audit report about the auditee company to make
the report more transparent and reliable. Under the Companies Act, CARO has been in place
for a very long time. However, it has been amended over a period of time as per changes of
business and the economy.
CARO, 2020 is having 21 clauses and it is applicable for all statutory audits commencing on or
after 1st April 2021.
A. Applicability of CARO, 2020

CARO 2020 is applicable to all companies including foreign companies. However, the following
are the exceptions:
6. A banking company (as defined in section 5(c) of the Banking Regulation Act, 1949);
7. An insurance company (as defined under the Insurance Act, 1938);
8. A company licensed to operate u/s 8 of Companies Act
9. One Person Company;
10. Small company as defined in Section 2(85) of the Companies Act, 2013. As per the
Companies Act, Small company is those companies that are not public companies and
has:
a. Paid-up share capital does not exceed INR 4 Crores; and

b. Gross turnover does not exceed INR 40 Crores as per its last profit and loss
accounts.
11. Private Company (not being a subsidiary or holding company of a public company),
having-
a. Paid up Share capital and reserves and surplus not more than INR 1 crore as on
the balance sheet date; and
b. Total borrowings have not exceeded INR 1 Crores from any bank or financial
institution at any point time during the financial year; and
c. Total revenue, as disclosed in Schedule III to the Act (including revenue from
discontinuing operations), was up to INR 10 crore during the financial year as per
the financial statements.
The table is given below lists down all matters required to be reported in the
auditor’s report under the purview of CARO, 2020:
1. Clause (i): Property, Plant & Equipment & Intangible Asset
Clause Reporting Requirement

(a) Whether the company The Auditor shall specify whether the company is maintaining
has maintained proper proper records of Property, Plant & Equipment, and Intangible
records Asset such as:
1. Quantitative Details
2. Description of Asset
3. Location
4. Cost
5. Year of purchase
6. Depreciation, etc
(b) Physical verification The Auditor shall specify whether the management has
physically verified the Property, plant, and equipment at
reasonable intervals. Further, any material discrepancies, if
found, have been dealt with properly in the books of account.
(c) Title in Immovable The requirement of having title deeds in the name of the
Property company as disclosed in financial statements should be verified
with the register of Property, Plant, and Equipment.
In the case of a lease where the company is the lessee, lease
agreements are duly executed in favor of the lessee.
The following information shall be provided with respect to
Immovable property in which the company is not having the

title:
1. Description of Property
2. Gross Carrying Value
3. Held in Name of Whether promoter, director or their
relative or employee
4. Reason for not being held in name of the company
(d) Revaluation of The auditor shall report whether any property, plant &
Property, Plant & equipment or intangible asset has been revalued during the
Equipment year. In case of positive response, the auditor shall mention
following information:
1. Whether valuation is based on report of registered valuer;
2. Amount of change, if change is 10% or more in the aggregate
of the net carrying value of each class of Property, Plant and
Equipment or intangible assets.
(e) Holding benami Whether any proceedings are initiated or are pending against
property the company for holding any benami property under the
Benami Transactions (Prohibition) Act, 1988. In case of positive
response, whether the company has appropriately disclosed the
details in its financial statements

2. Clause (ii): Inventory

(a) Physical verification The auditor shall report:
of inventory
1. Whether physical verification of inventory has been
conducted at reasonable intervals or not by the management.
2. Coverage and procedure of such verification is appropriate
or not;
3. Whether any discrepancies of 10% or more in the aggregate
for each class of inventory were noticed or not and if so,
whether they have been properly dealt with in the books of
account;
(b) Working Capital The Auditor shall check:
limit
1. Whether the company has been sanctioned working capital
limits in excess of INR 5 Crores during the year in aggregate,
from banks or financial institutions on security of current assets;
2. Whether the quarterly returns or statements filed by the
company for such loan purposes are in agreement with the
books of account of the Company.
3. In case of deviation, auditor needs to provide details of
deviations
3. Clause (iii): Investments made, Guarantee or security given

1. This clause requires reporting of:
a. Investments made,
b. The guarantee provided or security provided or
c. Loan or advances granted, secured or unsecured,
to companies, firms, LLP, or any other parties during the year.
2. If the company has provided loans or advances or stood guarantee or provided security to
any other entity during the year then the auditor shall report:
a. Loans or advances and guarantees or security to subsidiaries, joint ventures and
associates: the aggregate amount given during the year and balance outstanding
at the balance sheet date
b. Loans or advances and guarantees or security to other: the aggregate amount
given during the year and balance outstanding at the balance sheet date.
3. Whether these investments or guarantees or security and their terms and conditions are
not prejudicial to the company’s interest
4. In the case of loans and advances, whether the repayment schedule of principal and
interest has been stipulated and whether the repayments are regular. In case of an

amount overdue for more than 90 days, whether the company has taken reasonable steps
for recovery.
5. In case any loan or advance is due during the year, whether the such loan has been
renewed or extended or fresh loans are granted against existing loans. If yes, the auditor
shall specify:
a. Amount of dues renewed or extended or settled by fresh loans
b. % of aggregate to the total loans or advances in the nature of loans granted during
the year.
6. Whether the company has granted any loans or advances without specifying any terms
or period of repayment. In case of an affirmative answer, the auditor shall report:
a. Aggregate amount,
b. % of such loan to the total loans granted, the aggregate amount of loans granted to
Promoters, related parties as defined in clause (76) of section 2 of the Companies
Act, 2013;
4. Clause (iv): loans, investments, guarantees, and security given

1. This clause requires the auditor to check whether the Company has complied following
provisions:
a. Provisions of Section 185 in case of loans to Directors; and
b. Provisions of Section 186 in case of Loans and Investment by Company.

2. In case of non-compliance, the auditor is required to provide details of non-compliance.
5. Clause (v): Deposits

1. In case a company has accepted any deposits or amounts deemed as deposits, the auditor
shall ensure that whether the company has complied with following provisions:
a. Directives issued by RBI;
b. Provisions of Sections 73 to 76 of the Companies Act
c. Any other applicable provisions of Companies At and Rules made thereunder
2. In case of contravention, the auditor shall report the nature of the Contravention.
3. Further, in the case where any order has been passed by the Company law board or NCLT
or RBI or Any court or tribunal, whether the same has been complied with or not.
6. Clause (vi): Cost Records

The auditor shall report whether:
a. The company is required to maintain cost records;
b. Whether such cost records have been made and maintained if required.
7. Clause (vii): Statutory Dues

1. The auditor shall check whether the company is regular in depositing undisputed statutory
dues such as GST, Provident Funds, ESI, Income Tax, Service Tax, and any other statutory
dues.
2. In case of non-compliance, the auditor shall report:
a. Amount of statutory dues outstanding as of the last day of the Financial year for
more than 6 months.
b. Whether such amount is not deposited on account of any dispute, if so, then the
auditor shall report:
- Amount involved;
- Forum where the dispute is pending
3. A mere representation to the concerned department shall not be considered as a dispute
8. Clause (viii): Prior period undisclosed Income

1. This clause reports whether there is any transaction that is not recorded in the books of
accounts. However, such a transaction is disclosed as income under Income Tax Act. If so,
whether previously unrecorded income has been properly recorded in books of accounts.
9. Clause (ix): Default in repayment of loans and Borrowings


(a) Default in repayment The Auditor shall scrutinize whether the company has
of loans or borrowings defaulted in repayment of loans or interest thereon to any
lender.
If Yes, the auditor shall provide the following information:
1. Nature of Borrowings including debt security;
2. Name of Lender
3. Amount not paid on due date
4. Whether principal or interest
5. Number of days delay or unpaid
(b) Wilful Defaulter Whether the company has been declared as a willful defaulter
by any bank or financial institutions
(c) Utilisation of Loan Whether the Loan has been utilized for the same purpose for
which it was obtained. If no, the auditor shall report:
1. Amount of loan so diverted; and
2. Purpose of utilization
Further, funds raised on a short-term basis are utilized for long-
term purposes. If yes, nature and amount.

(d) Loans to meet the Whether the company has obtained any loan to meet the
obligation of Subsidiary, obligation of its subsidiary company, Associates or Joint Venture.
Associates, or JV If so, the auditor shall provide:
1. Nature of such transaction; and
2. Amount
(e) Loan on a pledge of The auditor shall provide details of loans obtained on a pledge
Securities held in name of securities held in its subsidiary, JV, or Associates and default
of Subsidiary, JV or in repayment of such loans.
Associates
10. Clause (x): Issuance of Security

IPO/FPO:
1. The auditor shall ensure that funds raised through IPO/FPO during the year were applied
for the purpose for which funds were raised.
2. If it is not the case, the auditor shall report:
a. Delays or defaults
b. Subsequent rectification, if any.
Preferential Allotment or Private Placement or Convertible Debentures:

The Auditor shall check:
1. Provisions of sections 42 (private placement) and 62 (Issue of shares on preferential basis)
of the Act have been complied with or not.
2. Funds raised are utilized for the purpose for which it was raised.
In case of non-compliance, the auditor shall report the amount involved and the nature of
non-compliance.
11. Clause (xi): Fraud

This is another important clause in CARO, 2020 wherein the auditor shall check whether any
fraud by the company or any fraud on the company has been noticed. If so, the auditor shall
report the nature and amount involved.
Fraud involving amounts of INR 1 crore or more needs to be reported by the auditor to the board
or audit committee and after their replies, it should be submitted to the Central Government
in ADT-4. This clause covers the reporting of Form ADT-4.
In this chain, this clause also needs to report on any complaint made by a whistle-blower to
the company during the current year.
12. Clause (xii): Nidhi Companies

Reporting is required whether the Nidhi company has compiled with the following requirement:

a. Net Owned Funds to Deposit in the ratio of 1:20

b. 10% unencumbered term deposits is maintained
c. Whether there has been any default in repayment of interest on deposits
13. Clause (xiii): Related Party Transactions

1. According to this clause, all related party transactions entered into are to be checked for
compliance viz. approvals, limits, etc. of sections 177 (audit committee) and 188 (related
party transactions) of the Act.
2. Also, the disclosures of related party transactions in financial statements should be in
accordance with applicable accounting standards.
14. Clause (xiv): Internal Audit & Auditor

1. Internal audit, is a major system prevailing in listed companies and other specified
companies given in section 138 of the Companies Act, 2013.
2. The Auditor shall ensure that whether the internal audit system implemented by the
company is commensurate with the size and nature of its business.
3. Whether the Report of the internal auditor is used by the auditor or not.
15. Clause (xv): Non-Cash transactions

1. This clause puts a check on non-cash transactions undertaken by a company that involves
the director or any person connected with him/her.
2. If such transactions have taken place in the company, then make sure that proper
approvals as required in section 192 of the Act are obtained.
16. Clause (xvi): Banking & Investment Companies

This clause requires reporting on the following issues:
1. Whether the company is required to be registered under RBI Act. If so, whether the
registration has been obtained.
2. Whether the company has conducted any non-banking financial or housing finance
activities without a valid certificate of registration from RBI.
3. Whether the company is a Core Investment Company (CIC) and if so, whether it continues
to fulfil the criteria of CIC.
4. Whether the group has more than one CIC. If yes, number of CICs
17. Clause (xvii): Cash Losses

The auditor shall report the cash losses incurred in the current year and last year.
18. Clause (xviii): Resignation of statutory auditors

This clause requires reporting of any resignation by a statutory auditor during the year along

with the objections, and concerns raised.
19. Clause (xix): Liquidity and solvency position

This clause examines a company’s solvency position for repayment of its liabilities over a
period of one year considering various factors like financial ratios, ageing, knowledge of
management and board of directors plan, and most importantly, non-existence of any material
uncertainty in business.
20. Clause (xx): Transfer of unspent amount of CSR funds

1. This clause is relating to CSR funds and their application. Confirmation from management
is to be obtained about activities undertaken in accordance with Schedule VII of the Act.
2. Details of the amount spent on projects should also be taken from management and
verified with bank statements, vouchers, etc.
3. The basis that, it should be reported that any unspent amount on projects is transferred
to a fund specified in the aforesaid schedule for projects other than ongoing ones within
6 months of the close of the financial year and to a special account for ongoing projects
within 30 days of the close of the financial year.
21. Clause (xxi): Qualification in CARO,2020

In case any qualifications or adverse remarks are included by the respective auditors, then

details of the companies and the paragraph numbers of the CARO, 2020 report containing the
qualifications or adverse remarks are required to be included in the consolidated financial
statements of the group.
B. Qualification in report/unfavorable report

1. Where, in the auditor’s report, the answer to any of the questions referred to in paragraph
3 is unfavourable or qualified, the auditor’s report shall also state the basis for such
unfavourable or qualified answer, as the case may be.
2. Where the auditor is unable to express any opinion on any specified matter, his report
shall indicate such fact together with the reasons as to why it is not possible for him to
give his opinion on the same.

C. Fraud Reporting:



Audit Inter with CA Himanshu
CHAPTER 9
AUDIT of Different Types
of Entities
Read Along with Module
May 24
CA Himanshu
Audit Inter with CA Himanshu Page No. 1

Chapter 9
1. What is Government Audit 5
2. Objective of Government Audit 5
3. Appointment of C&AG 5
4. Tenure and Fees 6
5. Duties of C&AG 6
6. Powers of C&AG 6
7. Expenditure Audit 7
8. Audit against Rules & Orders 7
9. Audit of sanctions 8
10. Audit against provision of funds 8
11. Propriety audit 8
12. Performance audit 9
13. Audit of Receipts 9
14. Audit of Stores and Inventories 10
15. Audit of Commercial Accounts 10
16. Reporting Procedures 12
A. Audit of NGO’s 13
1. Questions 13
2. Sources and Applications of Funds 14
3. Provisions Relating to Audit 14
4. Audit Programme 15
5. Verification of Income/Receipts 16
B. Audit of Firm 17
1. Questions 17
2. Matter Prior to Audit 17

3. Advantage of Audit 18
4. Audit of Accounts of Partnership firm 18
C. Audit of LLP 19
D. Audit of Charitable Institutions 21
E. Audit of Educational Institutions 23
F. Audit of Hospitals: 24
G. Audit of Hotels 26
H. Audit of Cinema 27
I. Audit of Club 28
J. Audit of Local body: 29
K. Audit of Cooperative Society: 31
L. Audit of Multi-State- Cooperative society 33
M. Audit of Hire Purchase and Leasing Companies 36

Questions:
1. Define Government Audit and explain its objectives. (Jul 21)
2. In case of Government entities, audit of accounts of stores and inventories has been
developed as part of expenditure audit. Discuss about the duties and responsibilities
entrusted to C&AG. (Dec 21)
3. Discuss the power of C & AG in Government audit ( May 2019)
4. Write short notes on: Audit of expenditure in Government audit. (May 2011)
5. The audit of receipts of government is not as old as audit of expenditure but with the
rapid growth of public enterprises audit of receipts tax or non-tax has come to stay.
Discuss audit of receipts with respect to Government Audit. (Nov 2020)
6. ‘What is the function of audit while examining various law’s, regulations and orders
with regard to Audit against Rules & Orders by C & AG ? (Nov 2020)
7. Write basic standards set for Expenditure Audit of Government. (Nov 2018)
8. Audit against the propriety seeks to ensure that expenditure confirms to certain
principles. (Nov 2016)
9. What are the focus points in doing propriety audits by C & AG as regards government
expenditure ? (Nov 2011)
10. Explain in detail the duties of Comptroller and Auditor General of India
11. The first auditors of a Government company was appointed by the Board of Directors.
(May 2016)
12. All entities that are under common control by a state (i.e., national, regional or local
government) are considered related party. (Nov 2019)
13. Government audit has not only adopted the basic essentials of auditing as known and
practised in the profession to suit the requirements of governmental transactions
but has also added new concepts, techniques and procedures to the audit profession.
Explain stating clearly the definition of Government auditing as discussed in U.N.
Handbook on Govt Auditing and Developing Countries and also state Objectives of Govt
audit (May 2021)
14. Government audit is neither equipped nor intended to function as an investigating
agency, to pursue every irregularity or misdemeanour to its logical end. Explain (May
2021)

1. What is Government Audit

Government Audit is :
1. The objective, systematic, professional and independent examination of financial,
administrative and other operations of a public entity
2. for the purpose of evaluating and verifying them,
3. presenting a report containing explanatory comments on audit findings,
4. together with conclusions and recommendations for future actions by the responsible
officials and
5. in the case of examination of financial statements, expressing the appropriate
professional opinion regarding the fairness of the presentation.
2. Objective of Government Audit

1. Accounting for Public Funds: Government audit is a process for public accounting of
government funds.
2. Appraisal of Government policies: Government audit ensures that the officials
administering the operational, management, program and policy aspects of public
administration are held accountable for their actions.
3. Base for Corrective actions: Audit observations are based on facts collected, and they
highlight lower-level lapses. This helps supervisory officers take corrective action.
4. Administrative accountability: Government audit is neither equipped nor intended to
function as an investigating agency, to pursue every irregularity or misdemeanour to
its logical end.
a. Government audit’s primary goal is to ensure accountability of administration to
the legislature and aid administration.
b. It is not intended to investigate every irregularity or wrongdoing.
c. The Comptroller and Auditor General (C&AG) oversees the function of Government
Audit through the Indian Audit and Accounts Department.
d. The purpose of audit is to ensure public accountability, and C&AG ensures
that various authorities act in accordance with the Constitution, laws made by
Parliament, and conform to the rules or orders made thereunder.
3. Appointment of C&AG
1. The C&AG is appointed by the President of India and cannot be removed from office
except for proven misbehavior or incapacity.
2. Similar to a judge of the Supreme Court, the C&AG can only be removed by a two-thirds
majority of each house of Parliament.
3. The Parliament can make laws to determine the salary and other conditions of service
for the C&AG, but these cannot be changed to his disadvantage after appointment.

4. Tenure and Fees

1. The Comptroller & Auditor General’s (Duties, Powers and Conditions of Service) Act,
1971 was enacted to support the provisions of the Constitution of India.
2. The act prescribes a fixed tenure for the C&AG’s office.
3. The C&AG is to be paid a salary equivalent to that of a Supreme Court judge, which
strengthens his independence.
5. Duties of C&AG
1. Compile and submit Accounts of Union and States
2. General Provisions Relating to Audit
a. To audit and report on all expenditure from the Consolidated Fund of India, each
State, and each Union Territory with a Legislative Assembly.

b. To check whether the disbursed money was legally available and used
appropriately for the designated service or purpose.
c. To ensure that the expenditure adheres to the governing authority.
d. To audit and report all transactions relating to Contingency Funds and Public
Accounts of the Union and the States.
e. To audit and report all trading, manufacturing, profit and loss accounts, and
subsidiary accounts in any department of the Union or a State
6. Audit of Receipts and Expenditure
7. Audit of Grants or Loans
8. Audit of Receipts of Union or States
9. Audit of Accounts of Stores and Inventory
10. Audit of Government Companies and Corporations
6. Powers of C&AG
The C&AG Act gives the following powers to the C&AG in connection with the performance of
his duties
1. To inspect any accounts office controlled by the Union or State Government, including
offices responsible for initial or subsidiary accounts.
2. To require accounts, books, papers, and other documents relevant to transactions
under audit to be sent to specified places.
3. To ask questions and make observations to the person in charge of the office and call
for necessary information to prepare any account or report which is his duty to prepare.
4. The C&AG can choose to dispense with any part of the detailed audit of accounts or
transactions and apply limited checks as he sees fit during the audit process.

7. Expenditure Audit
The audit of government expenditure is one of the major components of government audit.
The audit makes sure that the government only spends money that has been approved and
that there are limits to how much money can be spent. This helps to ensure that government
spending is done responsibly.
These standards are:
Audit against ‘rules and orders’

The government’s spending must follow the laws and rules that have been created by the
authorities who are in charge of managing finances. The audit checks to make sure that the
government is following these rules and spending the money correctly. Such an audit is
called as the audit against ‘rules and orders’.
Audit of sanctions
Before spending money, the government needs permission from the competent authority.
The audit checks to make sure that the government has received permission before spending
the money. This type of audit is called the audit of sanctions.
Audit against provision of funds.

The government can only spend money that has been set aside for specific purposes and
that they have permission to use. The audit checks to make sure that the government is only
spending money that has been authorized and allocated for that purpose. This type of audit
is called the audit against provision of funds.
Propriety audit
The government’s spending must be done in a responsible and ethical manner, taking into
consideration general principles of financial responsibility. The audit checks to make sure
that the government is spending money in a proper and ethical way. Such an audit is also
called as propriety audit.
Performance Audit
The government’s programs, schemes, and projects must be run in a cost-effective way and
must produce the expected results. The audit checks to make sure that the government is
achieving its goals and that the money is being used efficiently. This type of audit is called the
performance audit.
8. Audit against Rules & Orders

The government’s spending must follow the laws and rules that have been created by the
authorities who are in charge of managing finances. The audit checks to make sure that the
government is following these rules and spending the money correctly. Such an audit is called
as the audit against ‘rules and orders’
1. The purpose of an audit against rules and orders is to ensure that spending aligns with
the relevant laws, rules, and Constitution provisions.

2. The audit also checks that spending follows the financial regulations and orders issued
by a competent authority.
3. The audit of expenditure against regularity involves interpreting the Constitution,
statutes, rules, regulations, and orders.
4. This is a quasi-judicial type of work performed by audit authorities.
5. However, the final power of interpretation does not rest with the C&AG.
These rules, regulations and orders against which regularity audit is conducted mainly fall
under the following categories:
1. Rules regulating the powers to incur and sanction expenditure
2. Rules dealing with claims, withdrawing money, and general financial rules
3. Rules and regulation regulating conditions of service, pay and allowances, and
pensions of government servants
9. Audit of sanctions
1. The auditor must make sure that every expense has been authorized by the appropriate
authority, either through a general or special sanction.
2. The audit of these sanctions has two goals: to ensure that the expense has been properly
authorised and that the authorizing authority has the legal power to do so.
3. This is determined by examining the Constitution, laws, rules, and orders related to the
expenditure, as well as any financial delegation rules made by a competent authority.
10. Audit against provision of funds

1. The purpose of an audit against the provision of funds is to check that the money
allocated for a specific purpose has been spent on that purpose.
2. The audit also aims to ensure that the amount spent does not exceed the amount
allocated.
3. This helps to prevent misuse of funds and ensures that government resources are
being used appropriately.
11. Propriety audit

The government’s spending must be done in a responsible and ethical manner, taking into
consideration general principles of financial responsibility. The audit checks to make sure
that the government is spending money in a proper and ethical way.
The Audit Code outlines general principles of financial propriety that aim to ensure expenses
conform to these recognized standards.
1. Expenditure should be reasonable and not excessive, and public officers should be
prudent with public money as they would with their own.
2. No authority should exercise its powers of sanctioning expenditure to pass an order
which will be directly or indirectly to its own advantage

3. Public moneys should not be utilised for the benefit of a particular person or section
of the community unless:
a. the amount of expenditure involved is insignificant; or
b. claim for the amount could be enforced in a Court of law; or
c. the expenditure is in pursuance of a recognised policy or custom; and
d. the amount of allowances, such as traveling allowances, granted to meet specific
expenditure, are not a source of profit for the recipients
12. Performance audit

The scope of audit has been extended to cover efficiency, economy and effectiveness audit or
performance audit, or full scope audit:-
1. Efficiency audit examines whether schemes/projects are executed economically and
yielding expected results. It aims to find out the extent to which operations are carried
out efficiently.
2. Economy audit examines if government has acquired resources economically and it
checks if sanctioning and spending authorities have observed economy.
3. Effectiveness audit appraises the performance of programs, schemes, and projects. It
evaluates whether the overall targeted objectives are achieved and whether the means
adopted are efficient for achieving those objectives.
4. Efficiency-cum-performance audit is an objective examination. It is done on financial
and operational performance of an organization, program, authority, or function. The
objective is to identify opportunities for greater economy and effectiveness
The procedure for conducting performance audit covers:
1. Identification of topic,
2. Preliminary study,
3. Planning ,
4. Execution of audit, and
5. Reporting
13. Audit of Receipts

1. Audit focuses on assessing whether all revenues and debts owed to the government
are properly assessed, realized, and credited to the government account.
2. Adequate regulations and procedures must be framed and implemented to ensure
effective checks on assessment, collection, and allocation of cases.
3. Adequate checks are necessary to ensure prompt detection and investigation of
irregularities, fraudulent refunds, and other revenue losses.
4. The review of systems and procedures is necessary to secure correct and regular
accounting of demands, collection, refunds, and dues.

5. The audit is conducted based on a general review principle, but individual cases are
also important.
6. The extent and quantum of audit required for each category of audit are determined by
the C&AG and cannot be negotiated or questioned.
14. Audit of Stores and Inventories

The audit of the accounts of stores and inventories is a part of the overall expenditure audit
conducted by the C&AG (Comptroller and Auditor General) in accordance with the duties and
responsibilities assigned to them.
Audit of stores and spares is conducted to:
1. Check if regulations for purchasing, receiving, issuing, storing, selling, and taking
inventory of stores are well-designed and effectively implemented.
2. Identify deficiencies in the quantities of stores held and defects in the control system,
which are then brought to the attention of the government.
3. Ensure that purchases are sanctioned properly, made economically, and comply with
the rules for purchase set by the competent authority.
4. Ensure that prices paid for stores are reasonable and in accordance with the contract,
and that certificates of quality and quantity are provided. It also identifies cases of
uneconomical purchases and losses due to poor quality stores.
5. Check the accuracy and correctness of accounts of receipts, issues, and inventory
balances. It also ensures that inventory levels are in line with specified norms, and
excess or idle inventory is identified.
6. Check whether periodic verification of inventory is conducted to ensure its existence,
and prices charged are reviewed regularly to ensure reasonableness.
15. Audit of Commercial Accounts

Public enterprises are required to maintain commercial accounts and are generally classified
under three categories:
1. Departmental Concerns:
a. Audit conducted similar to government department accounting.
b. Commercial accounts treated in the same manner.
3. Statutory Bodies/Corporations:
a. Audit approach depends on governing statute.
b. C&AG handles financial and accounts audit.
c. If C&AG compiles accounts, professional audit norms followed.
4. Government Companies:

a. Conducted by own auditors as per statute.

b. C&AG performs supplementary test audit and periodic financial audit.
c. Appraisal of performance included.
d. Audit reports issued to government/legislatures.
e. C&AG issues directions to company auditors on specific audit aspects.
f. Audit reports condensed for government/legislatures.
g. Mechanism of Audit Board, including audit and government representatives.
h. Board processes reviews and appraisals, involving functional specialists.
The audit of Government companies is conducted by their own auditors under the statute
appointed by C&AG. Role of C&AG is prescribed under sub section (5), (6) and (7) of section
143 of the Companies Act, 2013
1. Authority for Government Company Auditor Appointment:
a. Section 143(5) of the Act specifies the authority for appointing auditors for
Government companies.
b. Applies to companies owned or controlled by the Central Government, State
Governments, or a mix of both.
c. Comptroller and Auditor-General of India (C&AG) is designated to make these
appointments.
2. Appointment Procedures:
a. The C&AG appoints auditors as per Section 139 for first or Subsequent Auditor.
b. The appointed auditor receives directives on auditing procedures for the
Government company’s accounts.
3. Audit Report Submission:
a. The appointed auditor must submit an audit report copy to the Comptroller and
Auditor-General of India.
b. The audit report includes various details, notably the directions issued by the
C&AG.
4. Content of Audit Report:

a. Audit report covers actions taken based on C&AG’s directions.
b. Impact of these actions on the company’s accounts and financial statements is
addressed.
c. This process ensures proper oversight and adherence to auditing standards for
Government companies.
Power to conduct Supplementary Audit & comment thereupon:

Power to conduct Supplementary Audit & comment thereupon: The Comptroller and Auditor-

General of India shall within 60 days from the date of receipt of the audit report have a right
to:
1. Conduct a supplementary audit under section 143(6)(a)
2. Comment upon or supplement such audit report under section 143(6)(b): Any
comments given by the Comptroller and Auditor-General of India upon, or supplement
to, the audit report shall be sent by the company to every person entitled to copies of
audited financial statements.
3. Test Audit under section 143(6)(b): In case of any company covered under sub-section
(5) or sub-section (7) of section 139, if C&AG considers necessary, by an order, cause
test audit to be conducted of the accounts of such company and the provisions of
section 19A of the Comptroller and Auditor- General’s (Duties, Powers and Conditions
of Service) Act, 1971, shall apply to the report of such test audit.
In the case of a government company, audit is conducted by professional auditors appointed
on the advice of the C&AG and the later is authorised under section 143 of the Companies Act,
2013 to conduct supplementary or test audit.
Test Audit:
1. The Comptroller and Auditor-General of India (C&AG) can order a test audit for
companies under Section 139(5) or Section 139(7) of the Companies Act.
2. Section 19A of the Comptroller and Auditor-General’s Act, 1971, applies to the report of
such a test audit.
3. Professional auditors, appointed based on C&AG advice, conduct audits for government
companies.
4. C&AG, under Section 143, can conduct supplementary or test audits, providing
directions on book-keeping, accounts, and internal control.
5. Statutory auditors must submit their audit report to C&AG, who can comment or
supplement it.
6. Section 134(3) of the Companies Act requires the board to explain or comment on audit
report reservations.
16. Reporting Procedures

Article 151 of the Indian Constitution enjoins that the C&AG shall report on the accounts of
the Union and of each of the States to the President or the Governor concern and the letter
shall cause the report to be laid before the legislatures.

A. Audit of NGO’s
1. Questions
1. What important points should an auditor keep in mind while checking receipt of
income of a Non-Governmental Organization (N.G.O.) ? (Nov 2010)
2. NGOs registered under the Companies Act, 2013 can maintain their books on either
accrual or cash basis. (May 2011)
3. What are the points on which an auditor should concentrate while planning audit of an
N.G.O. ? (May 2013)
4. As an Auditor of NGO, how do you check/ verify at least four receipts of income during’
the year ? (Jan 21)
5. While planning the audit of an NGO, the auditor may focus on Knowledge of the NGO’s
work, its mission and vision, Updating knowledge of relevant statutes especially with
regard to recent amendments, circulars etc. Explain the other relevant points the
auditor needs to focus while planning the audit of NGO. (Nov 21)
6. You have been appointed as an auditor of an NGO, briefly state the points on which
you would concentrate while planning the audit of such an organisation?
7. An NGO operating in Delhi had collected large scale donations for Tsunami victims.
The donations so collected were sent to different NGOs operating in Tamil Nadu for
relief operations. This NGO operating in Delhi has appointed you to audit its accounts
for the year in which it collected and remitted donations for Tsunami victims. Draft
audit programme for audit of receipts of donations and remittance of the collected
amount to different NGOs. Mention six points each, peculiar to the situation, which
you will like to incorporate in your audit programme for audit of said receipts and
remittances of donations.
Registration
1. 1. If an NGO is established as a trust and involves immovable property valued at more
than one hundred rupees:
a. Compliance with Section 17(1) of the Registration Act, 1908 and Section 123 of the
Transfer of Property Act, 1882 is mandatory.
b. Registration of the trust is required.
2. In some states, such as Maharashtra and Gujarat, specific Public Trusts Acts (e.g.,
Bombay Public Trusts Act 1950) mandate the registration of all charitable trusts
3. Additionally, registration under the Income Tax Act, 1961, and the Foreign Contribution
(Regulation) Act, 1976 may be required in many cases for NGOs
Accounting method:
1. NGOs registered under the Companies Act, 2013 must maintain their books of account
on an accrual basis as per section 128.
2. Non-compliance of this provision would occur if accounts are not maintained on an

accrual basis.
3. NGOs not registered under the Companies Act, 2013 can maintain accounts either on
an accrual or cash basis.
2. Sources and Applications of Funds

1. NGOs obtain funding through various means, including grants, donations, fundraising,
fees, subscriptions, and sales.
2. Promoter’s contributions can be either corpus contributions (for the NGO’s capital) or
revolving fund contributions (for temporary loans).
3. Corpus contributions are shown as liabilities on the balance sheet, and voluntary
contributions to the corpus are exempt from income tax.
4. Revolving fund contributions are meant to be rotated by lending to other NGOs or
beneficiaries.
5. Grants for specific fixed assets require the NGO to acquire those assets.
6. NGOs may receive contributions in kind, such as buildings, vehicles, and materials for
projects
7. NGOs allocate their funds into various areas including:
a. Establishment Costs
b. Office and Administrative Expenses
c. Maintenance Expenses
d. Programme/Project Expenses
e. Charity
f. Donations and Contributions Given
3. Provisions Relating to Audit

1. Auditors of an NGO are appointed by the Management of the Society or Trust or the
members of the company, depending on the type of registration.
2. Certain statutes require the accounts of NGOs to be audited and submitted to the
prescribed authorities, and failure to do so may result in forfeiture of exemptions and
benefits.
3. The Foreign Contribution (Regulation) Act 1976 prescribes a specific format for audit
reports, which must be submitted to the Ministry of Home Affairs within 60 days from
the close of the financial year.
To plan the audit, the auditor should focus on:

1. Knowledge of the NGO’s work, mission and vision, areas of operation, and environment
2. Updating knowledge of relevant statutes and rules
3. Reviewing legal forms of the organization and related documents

4. Reviewing financial and administrative manuals, project and program guidelines,

funding agency requirements, and budgetary policies
5. Examining minutes of governing bodies to understand their impact on financial records
6. Studying accounting systems, procedures, internal controls, and internal checks
7. Setting materiality levels for audit purposes
8. Determining the nature and timing of reports or other communications
9. Involving experts and reviewing their reports
10. Reviewing the previous year’s audit report.
4. Audit Programme
The audit program should cover all assets, liabilities, income, and expenditures in sequential
order to ensure no material item is omitted:
1. Verification of contribution/Grants
2. Checking of Ear-Marked Funds
3. Vouching for Disbursements/Expenditures
4. Verification of loans
5. Verification of fixed assets
6. Verification of Investments
7. Physical Verification of Cash & Bank Balance
8. Verification of Inventory
9. Verification of project and programme expense
10. Checking of Establishment expense
Verification of Contributions/Grants
1. Verify contributions/grants for the corpus fund with reference to donor letters.
2. Check transfers from projects/programs with donor letters and board resolutions of
the NGO.
Ear-Marked Funds Check

1. Check ear-marked funds for requirements of donor institutions, board resolutions of
the NGO, and rules and regulations of the schemes.
Vouching for Disbursements/Expenditures

1. Vouch for disbursements and expenditures as per agreements with donors for project/
agency balances.
2. Verify loans with loan agreements and counterfoils of receipts issued.

Vouching of Fixed Assets

1. Vouch for acquisitions, sales, or disposal of assets including depreciation and
authorizations for the same.
2. Check the title of immovable property.
Verification of Investments:
1. Verify investments through the investment register and physically ensure that
investments are in the name of the NGO.
Physical Verification of Cash:

1. Physically verify cash in hand and imprest balances.
2. Check bank reconciliation statements and ascertain details for old outstanding and
unadjusted amounts.
Verification of Inventory:
1. Verify inventory in hand and obtain a certificate from the management for the quantities
and valuation of the same
Verification of Program/Project Agreements:

1. Verify agreement with the donor/contributor(s) supporting a particular program or
project.
2. Ascertain the conditions with respect to undertaking the program/project.
Verification of Establishment expense:

1. Verify that provident fund, life insurance premium, employees state insurance, and
their administrative charges are deducted, contributed, and deposited within the
prescribed time.
2. Check other office and administrative expenses such as postage, stationery, traveling,
etc.
5. Verification of Income/Receipts
1. Contributions and Grants: Verify agreements, ensure proper accounting, and deposit
foreign contributions as per the law.
2. Receipts from Fundraising Programs: Verify internal controls and ensure daily counting
and depositing of collections.
3. Membership Fees: Check fees with the Membership Register, classify types of fees, and
reconcile received fees with expected fees.
4. Subscriptions: Check with subscription register and receipts, reconcile received
subscriptions with printed and dispatched materials, and verify receipts with the
subscription rate schedule.
5. Interest and Dividends: Verify received and receivable interest and dividends with

investments held during the year.
B. Audit of Firm
1. Questions
1. Mention important points which auditors will consider while conducting audit of
accounts of a partnership firm. (May 2013)
2. What are the advantages of the audit of the accounts of a partnership firm ? (May 2015)
3. Mention any six special points which you as an auditor would look into while auditing
the books of a partnership firm. (May 2016)
4. There are certain points which are required to consider specially in the audit of
accounts of a partnership. Discuss any three points briefly. (Nov 2019)
Appointment
1. Auditors are usually appointed by the partners of a firm and their remuneration is
fixed by the partners.
2. The appointment letter should clearly state the nature and scope of the audit and any
limitations.
3. If there is a change of auditor, the incoming auditor should communicate with the
previous auditor.
4. The auditor should ensure the application of accounting standards and disclose any
non-compliance in the audit report.
2. Matter Prior to Audit

When auditing a partnership, the auditor should review the partnership agreement for
information on the following:
1. Business name
2. Partnership duration
3. Capital contributions by partners
4. Proportions for profit/loss distribution
5. Accounting standards and corrections

6. Borrowing capacity
7. Interest rates on loans and accounts
8. Salaries and withdrawals
9. Partner duties and management roles
10. Bank account operation and investment of surplus funds
11. Limitations, partner rights, and implied authority.

3. Advantage of Audit
1. Disputes: Audited accounts prevent disputes among partners and provide a reliable
means of settling accounts.
2. Dissolution: Audited accounts help in calculating amounts due to retiring or deceased
partners.
3. Reliable: Banks and prospective buyers rely on audited accounts for evidence of a
business’s profitability and financial position.
4. Admission: Audited accounts aid in admitting new partners.
5. An audit is an effective safeguard against any undue advantage being taken by a working
partner or partners especially in the case of those partners who are not actively
associated with the working of the firm.
An audit prevents working partners from taking undue advantage, especially those not actively
involved in the business.
4. Audit of Accounts of Partnership firm

1. Letter of Apppointment: The letter of appointment should clearly define the scope of
the audit and any limitations.
2. Partneship Documents: Review partnership documents and minute book to ensure
authorization of decisions such as extraordinary expenditures, loans, and asset
purchases.
3. Object of Partnership: Verify that the partnership’s business is authorized under the
partnership agreement or any extensions or modifications agreed upon subsequently.
4. Books of Accounts: Examine the partnership’s books of account to ensure they are
reasonable and adequate for the nature of the business.
5. Mutual Interest: Verify that no partner’s interest has been negatively affected by
unauthorized activities or violations of the partnership agreement.
6. Porvision for taxes: Confirm that the accounts have made a provision for the firm’s tax
payable before calculating the amount of profit divisible among partners.
7. Division of Profit: Verify that profits and losses have been divided among partners
according to their agreed profit-sharing ratio.
8. The overall objective of auditing a partnership is to ensure that the balance sheet and
statement of profit and loss exhibit a true and fair state of affairs for the firm.
9. Examining the partnership agreement is important to report to the partners if any
partner’s interest has been negatively affected by unauthorized activities or violations
of the partnership agreement.

C. Audit of LLP
1. Questions
1. If an LLP (Limited Liability Partnership Firm) is appointed ‘- an auditor of a company,
every partner of a firm shall be authorized to act as an auditor. (May 2015)
2. The accounts of every LLP shall be audited in accordance with rule 24 of LLP Rules
2009. (May 2019)
3. Every LLP is required to submit Statement of Account and Solvency in Form 8, which
shall be filed within a period of sixty days from the end of three months of the financial
year to which the Statement of Account and Solvency relates. (Nov 2020)
4. Torno Construction Engineering T J ,P approached CA K to understand various returns
to be maintained and filed by them. Guide/Discuss the various returns to be maintained
and filed by them. (Jul 21)
Registration:
1. Minimum of 2 Partners can form an LLP and atleast two partners would be Designated
Partners who would be required to take DPIN ( Designated Partner Identification
Number )
2. LLPs are required to have their accounts audited in accordance with Rule 24 of the LLP
Rules 2009.
3. LLPs with a turnover not exceeding 40 lakh rupees or a contribution not exceeding 25
lakh rupees in any financial year are not required to get their accounts audited.
Small Limited Liability Partnership to denote any LLP:

1. The Contribution of which, does not exceed twenty-five lakh rupees (INR 25,00,000) or
such higher amount, not exceeding five crore rupees, as may be prescribed; and
2. The Turnover of which, as per the Statement of Accounts and Solvency for the
immediately preceding financial year, does not exceed forty lakh rupees (INR 40,00,000)
or such higher amount, not exceeding fifty crore rupees, as may be prescribed;
Whether LLP is required to maintain Books of Accounts:

An LLP shall be under obligation to maintain annual accounts reflecting true and fair view of
its state of affairs. LLP’s are required to maintain books of accounts which shall contain:
1. Particulars of all sums of money received and expended by the LLP and the matters in
respect of which the receipt and expenditure takes place,
2. A record of the assets and liabilities of the LLP,
3. Statements of costs of goods purchased, inventories, work-in-progress, finished goods
and costs of goods sold,
4. Any other particulars which the partners may decide.

Advantages / Purpose / Need of Audit:

1. Detection of Errors:- Auditing the accounts of a LLP helps in detecting errors & frauds
& verification of financial statements.
2. Disputes:-Disputes, if any between any partners in the matter of accounts can be settled
with the help of audited accounts.
3. Reliability:- Banks & financial institutions lend money to the firms only on the basis of
audited accounts.
4. Better Compliance and Management:-Periodical visits & suggestions by the auditor
will be helpful in improving the management of the LLP.
5. Reconstitution:- For settling accounts between partners at the time of admission,
death, retirement, insolvency, insanity, etc. audited accounts are accepted by those
concerned who have dealings with the LLP.
Appointment of Auditor:
The auditor may be appointed by the designated partners of the LLP:
1. At any time for the first financial year but before the end of first financial year,
2. At least thirty days prior to the end of each financial year (other than the first financial
year),
3. To fill the casual vacancy in the office of auditor,
4. To fill the casual vacancy caused by removal of auditor.
The partners may appoint the auditors if the designated partners have failed to appoint
them.
Auditor’s Duty Regarding Audit of LLP:

1. Engagement Letter: The auditor must receive clear written instructions outlining the
scope of work to be performed.
2. Minutes Book: If the partners maintain a minute book, the auditor should refer to it for
any resolutions related to the accounts.
3. LLP Agreement: The auditor should review the LLP agreement and take note of specific
provisions, including:
a. Nature of the LLP’s business.
b. Capital contributions by each partner.
c. Interest on additional capital contributions.
d. Duration of the partnership.
e. Allowable partner drawings.
f. Payments such as salaries and commissions to partners.
g. Borrowing powers of the LLP.

h. Rights and duties of partners.

i. Method of settling accounts during events like partner admission, retirement,
etc.
j. Any loans provided by the partners.
k. Profit-sharing ratios.
4. Reporting: The auditor’s report should include:
a. Confirmation of the correctness and reliability of the firm’s records.
b. Confirmation of obtaining all necessary information and explanations.
c. Mention of any restrictions imposed on the auditor during the audit process.
Returns to be maintained and filed by an LLP:

1. Every LLP would be required to file annual return in Form 11 with ROC within 60 days
of closer of financial year. The annual return will be available for public inspection on
payment of prescribed fees to Registrar.
2. Every LLP is also required to submit Statement of Account and Solvency in Form 8
which shall be filed within a period of thirty days from the end of six months the
financial year to which the Statement of Account and Solvency relates.
D. Audit of Charitable Institutions

1. Questions
1. In the case of audit of a charitable institution, what attentions should be paid by auditor
regarding audit of expenditure items ? (Nov 2019)
2. CA A is appointed as the auditor of a charitable institution. Discuss the audit procedure
undertaken by him while auditing the Subscription and Donation received by the
charitable institution.(Dec 21)
Point to be considered during audit:

1. General
a. Study the institution’s constitution.

b. Verify legal compliance in its management.
c. Examine the internal control system, especially for collections.
d. Verify income, ensuring prompt bank deposits.
e. Review the Trust Deed or Regulations
2. Subscriptions and Donations:
a. Check changes in membership subscription amounts.

b. Ensure official receipts are issued and controlled.

c. Verify counterfoils with the cash book.
d. Examine systems for controlling collections, including box collections and flag
days.
e. Match total subscriptions with figures in charity reports.
3. Legacies: Verify legacy amounts through correspondence and available information.
4. Grants:
a. Verify grant amounts through relevant correspondence, receipts, and minute
books.
b. Obtain a certificate from a responsible official.
5. Investments Income:
a. Vouching the amounts received with the dividend and interest counterfoils.
b. Checking the calculations of interest received on securities bearing fixed rates of
interest.
c. Checking that the appropriate dividend has been received where any investment
has been sold ex-dividend or purchased cum-dividend.
d. Comparing the amounts of dividend received with schedule of investments
making special enquiries into any investments held for which no dividend has
been received.
5. Rent & Expenditure
a. Examining the rent roll and inspecting tenancy agreements, noting in each case:
The amount of Rent and due dates.
b. Vouching the rent on to the rent roll from the counterfoils of receipt books and
checking the totals of the cash book.
6. Income Tax Refunds: Where income-tax has been deducted at source from the
Investment income, it should be seen that a refund thereof has been obtained since
charitable institutions are exempt from payment of Income-tax. This involves:
a. Vouching the Income-tax refund with the correspondence with the Income- tax
Department; and
b. Checking the calculation of the repayment of claims.
7. Expenditure:
a. Vouching payment of grants, also verifying that the grants have been paid only
for a charitable purpose or purposes falling within the purview of the objects for
which the charitable institution has been set up and that no trustee, director or
member of the Managing Committee has benefited there from either directly or
indirectly.
b. Verifying the schedules of securities held, as well as inventories of properties both

movable and immovable by inspecting the securities and title deeds of property
and by physical verification of the movable properties on a test- basis.
c. Verifying the cash and bank payments.
d. Ascertaining that any funds contributed for a special purpose have been utilised
for the purpose.
E. Audit of Educational Institutions

1. Questions
1. National College, an institution managed by a trust, has received a grant of Rs 2.40
crore from Government nodal agencies for funding a project of research on rural health
systems in India. Draft an audit programme for auditing this fund in the accounts of
the college. (May 2011)
2. Mention the eight important points which an auditor will consider while conducting
the audit of educational institutions. (May 2012)
3. You have been appointed as an auditor of VJM Schools. Discuss the points which merit
your consideration as an auditor while: verifying Assets and Liabilities of VJM Schools.
(Jul 21)
Point to be considered during audit:

1. General
a. Review the Trust Deed or Regulations and relevant legislative Acts.
b. Examine minutes of Managing Committee meetings for resolutions affecting
accounts and compliance
2. Fee from Students:
a. Verify student fees by cross-referencing with class registers.
b. Check fees received through counterfoils, Cash Book entries, and Fee Register
c. Ensure advance fees and irrecoverable arrears are properly handled.
d. Verify admission fees and proper crediting.
e. Confirm compliance with rules for free studentships and concessions.
f. Check collection or remission of fines.’

g. Ensure hostel dues are collected and caution money refunded.
3. Other Receipts/Grants & Donations:
a. Verify rental income, endowments, legacies, and investment income.
b. Inspect securities related to investments.
c. Verify Government or local authority grants and reasons for any disallowed
expenses.

4. Expenditure:
a. Confirm Provident Fund investments.
b. Vouch donations and ensure their intended use.
c. Verify capital expenditure with Committee sanction.
d. Audit establishment expenses and report any excessive spending.
e. Confirm staff salary increases were sanctioned.
5. Assets & Liabilities:
a. Report old arrears to the Committee.
b. Ensure student deposits forare classified as liabilities and not transferred to
income unless they are non-refundable.
c. Check investments for prize endowment funds and any income in excess of the
prizes have been accumulated and invested along with corpus.
d. Verify inventory items against registers and previous records.
e. Verify all bills are authorised before approved before payment.
6. Compliances:
a. Confirm the refund of deducted taxes on investment income.
b. Verify annual statements, including specific fund statements.
F. Audit of Hospitals:
1. Questions
1. The general transactions of a hospital include patient treatment, collection of receipts,
donations, capital expenditures. You are required to mention special points of
consideration while auditing such transactions of a hospital?
2. What steps would you take into consideration in auditing the receipts from patients of
a Hospital ‘? (Nov 2011)
3. Mention any 8 special points which you as an auditor would look into while auditing
the books of accounts of Hospital (May 2011)
4. What are the eight audit points to be considered by the auditor during the audit of a
Hospital ? (Nov 2012)
5. Mention any eight important points which an auditor will consider while conducting
the audit of hospital. (May 2014)
6. Mis T & Co. Chartered Accountants, a partnership firm, is appointed as an auditor of
Treatment Hospital run by Smile Foundation, a charitable trust. Over and above the
receipts of treatment of patients, during the year trust has received donations from
various donors to treat COVID-19 patients and also incurred some capital expenditure
for further development of the hospital. On some of the investment income, income
tax has been deducted. What are the special points to be considered by Mis T & Co.

while auditing such transactions of Treatment Hospital ? (May 2022)
Points to be considered:
1. Register of Patients:
a. Vouch patient records with bills issued.
b. Cross-check bills for accuracy against attendance records.
c. Ensure all recoverable amounts have been billed.
2. Collection of Cash:
a. Match cash collections in the Cash Book with supporting evidence, like receipts
and counterfoils.
3. Income from Investments, Rent, etc:
a. Confirm that all expected income from rent and investments has been collected.
4. Legacies and Donations:
a. Verify that legacies and donations are used for their intended purpose.
5. Reconciliation of Subscriptions:
a. Reconcile collected subscriptions and donations with the respective registers.
6. Authorizations and Sanctions:
a. Ensure purchases, expenses, and capital expenditure had proper authorization.
b. Verify staff appointments and increments were duly authorized.
7. Grants and TDS:
a. Check for government grants and ensure proper accounting.
b. Verify the claim for tax deductions at source.
8. Budgets:
a. Compare actual expenditure and income with the budgeted amounts.
b. Report significant variations to the Trustees or Managing Committee.
9. Internal Check:
a. Review the internal control system for receipt and issuance of various items.
b. Ensure proper recording of purchases and authorized issues.
10. Depreciation:
a. Confirm that depreciation has been correctly applied to all assets.
11. Registers:
a. Inspect bonds, share certificates, and property deeds.
b. Verify their details against property and Investment Registers.

12. Inventories:
a. Obtain year-end inventories, physically check a sample.
b. Compare total values with ledger balances.
13. Management Representation and Certificate:
a. Request proper representation and certification from management for various
audit aspects.
G. Audit of Hotels
1. Questions
1. You have been appointed as an auditor of ABC Hotel, a three star hotel, for Financial
Year 2021-22. As an auditor what are the special points that need to be considered in
verifying the Inventories in the nature of food and beverages? (Nov 22)
2. Pilfering is one of the greatest problems in any hotel and the importance of internal
control cannot be undermined. Explain. (May 2022)
Points to be considered while auditing:

Internal Controls:
1. Internal controls are essential to prevent pilfering in hotels.
2. Management must implement controls to minimize theft.
3. Regular trading accounts are prepared and scrutinized for profit percentages.
4. Auditors should verify restaurant bills and tax payments to authorities.
5. Weak internal controls pose serious issues for auditors.
Room Sales & Hall Bookings:
1. Charges for room sales are recorded in guest bills.
2. Auditors should ensure correct guest charges and investigate rate discrepancies.
3. Daily reports of occupied rooms should be cross-checked.
4. Proper valuation of occupancy-in-progress and booking records for special events are
important
Inventories:
1. Proper documentation for inventory movements is crucial.
2. Secure storage areas with restricted access are necessary.
3. Professional valuers often assess inventories; auditors should verify their
reasonableness.
4. Auditors may attend physical inventory counts and perform pricing tests.
Fixed Assets:

1. Different hotels have varied accounting policies for fixed assets.

2. Detailed definitions for inventory items are essential.
3. Costs of repairs and minor renovations are considered revenue expenditure.
4. Costs of major alterations and additions are capitalized.
Casual Labour:
1. Casual labour is common in the hotel industry, but wage payment records are often
inadequate.
2. Auditors should suggest controls to prevent defalcation.
Travel Agents & Shops:
1. Bills from travel agents should be settled according to credit terms.
2. Commission payments to travel agents should be checked against agreements.
H. Audit of Cinema
1. Question
1. Cinescreen Multiplex Ltd. is operating cinemas in different locations in Mumbai and
has appointed you as an internal auditor. What are the areas that need to be verified in
relation to receipts from sale of Tickets? (Nov 22)
Point to be considered in audit:

1. Internal Control Verification:
a. Confirm that entrance is allowed only with printed tickets.
b. Ensure tickets are serially numbered.
c. Check that ticket numbers vary for each show and class, even if it’s on the same
day.
d. Verify a separate series for advance bookings.
e. Ensure ticket inventory is in the custody of a responsible official.
2. Cash Reconciliation:
a. Verify that a statement of tickets sold and cash collected is prepared at the end of
each show.
3. Free Passes Record:
a. Confirm that records of ‘free passes’ are maintained and issued under proper
authority.
4. Entertainment Tax:
a. Reconcile the collected Entertainment Tax with the total number of tickets issued
for each class.

b. Verify the monthly entertainment tax returns.

5. Cash Book Entries:
a. Match cash collected for different shows with Daily Statements and records of
tickets issued.
6. Advertisement Charges:
a. Verify charges for advertisement slides and shorts by referencing the Register of
Slides and Shorts Exhibited and agreements with advertisers.
b. Expenditure Verification:
c. Audit expenses for advertisement, repairs, and maintenance.
d. Ensure none of these expenses are capitalized.
7. Depreciation Check:
a. Confirm that depreciation on machinery and furniture is correctly charged at an

appropriate rate.
8. Film Hire Payments:
a. Verify payments for film hire with distributor bills and refer to relevant agreements.
9. Advance Payment Reconciliation:
a. Examine unadjusted balances of advances paid to distributors for recoverability.
c. Enquire about unadjusted advances for films that have already run.
d. Consider making provisions for advances deemed irrecoverable.
10. Restaurant Income:
a. Investigate the arrangement for collecting the share of restaurant income, whether
it’s a fixed sum or percentage.
b. If the cinema operates the restaurant, audit its accounts, covering the sale and
purchase of various food items and beverages.
I. Audit of Club
1. Entrance Fee: Verify entrance fee receipts by cross-referencing with member
applications, counterfoils, and committee minutes.
2. Subscriptions: Confirm member subscriptions by comparing receipt counterfoils with
the Register of Members; reconcile total due with collections and outstanding amounts.
3. Arrears of Subscriptions: Ensure correct treatment of arrears from the previous year,
arrears for the current year, and advance payments.
4. Arithmetical Accuracy: Check and cross-verify totals in the Register of Members.
5. Irrecoverable Member Dues: Identify and inquire about overdue member dues; report

any irrecoverable amounts in the audit report.

6. Pricing: Verify charges for food, drinks, and special services provided to members and
guests.
7. Member Accounts: Confirm that member accounts accurately reflect amounts owed
for supplies and services.
8. Purchases: Validate purchases of sports items, furniture, crockery, etc., and ensure
they are correctly recorded in inventory registers.
9. Margins Earned: Check purchases of consumables and confirm that gross profit rates
align with industry norms; physically verify year-end inventory and its valuation.
10. Inventories: Physically check the inventory of furniture, sports equipment, and other
assets against inventory registers or year-end inventories.
11. Investments: Inspect share scrips and bonds for investments, determine their current
values for financial reporting, and assess their safe custody arrangements.
12. Management Powers: Examine the financial authority of the secretary; report any
instances of exceeding authorized limits to the Managing Committee for confirmation.
J. Audit of Local body:

1. Questions
1. Draft an audit programme for conducting audit of accounts of a Local Body. (May 2010)
2. What are the important objectives of local body audits ? (May 2011)
3. State the background of “Local Bodies”. Draft an audit programme for audit of local
bodies. (May 2014)
4. State the important objectives of local body’s audit. (May 2015)
5. Draft an audit programme for conducting audit of accounts of a local body. (May 2016)
6. Explain the different types of revenue grants which. local bodies may receive. (Nov
2020)
7. Local Fund Audit Wing of a State Government has appointed you to audit accounts of
one of the Local body governed by it. As an auditor, what will be your reporting areas?
(Dec 21)
Municipal government in India covers five distinct types of urban local authorities-
1. the municipal corporations,
2. the municipal councils,
3. the notified area committees,
4. the town area committees and
5. the cantonment committees.

Objective of Audit of Muncipal government:

The important objectives of audit are:
1. reporting on the fairness of the content and presentation of financial statements;
2. reporting upon the strengths and weaknesses of systems of financial control;
3. reporting on the adherence to legal and/or administrative requirements;
4. reporting upon whether value is being fully received on money spent; and
5. detection and prevention of error, fraud and misuse of resources.
Aspects to be considered in Audit Programme:

1. APPOINTMENT:- The Local Fund Audit Wing of the State Govt. is generally in- charge
of the audit of municipal accounts. Sometimes bigger municipal corporations e.g.
Delhi, Mumbai etc have power to appoint their own auditors for regular external audit.
So the auditor should ensure his appointment.
2. AUDITOR’S CONCERNS:-The auditor while auditing the local bodies should report on
the:
a. fairness of the contents and presentation of financial statements,
b. the strengths and weaknesses of system of financial control,
c. the adherence to legal and/or administrative requirements;
d. whether value is being fully received on money spent.
His objective should be to detect errors and fraud and misuse of resources.
3. RULES & REGULATIONS :- The auditor should ensure that the expenditure incurred
conforms to the relevant provisions of the law and is in accordance with the financial
rules and regulations framed by the competent authority.
4. AUTHORISATIONS :- He should ensure that all types of sanctions, either special or
general, accorded by the competent authority.
5. PROVISIONING :- He should ensure that there is a provision of funds and the
expenditure is incurred from the provision and the same has been authorized by the
competent authority.
6. PERFORMANCE :- The auditor should check that the different schemes, programmes
and projects, where large financial expenditure has been incurred, are running
economically and getting the expected results.
Different types of revenue grants which local bodies may receive:

Local bodies may receive different types of grants from the state administration as
well. Broadly, the revenue grants are of three categories:
1. General purpose grants: These are primarily intended to substantially bridge the gap
between the needs and resources of the local bodies.
2. Specific purpose grants: These grants which are tied to the provision of certain services

or performance of certain tasks.

3. Statutory and compensatory grants: These grants, under various enactments, are
given to local bodies as compensation on account of loss of any revenue on taking over
a tax by state government from local government.
K. Audit of Cooperative Society:

1. Questions
1. You are appointed as an auditor of co-operative society. State the special features of the
co-operative audit to be borne in mind by 1st auditor, concerning.
a. Audit classification of society.
b. Discussion of draft audit report with the management committee.
2. Mr. M, has served as an auditor in the Co-Operative Department of a Government, is
appointed as a statutory auditor by a Co-Operative Society that has receipts over Rs 3
crores during the financial year. He is not a Chartered Accountant. Mr. D, Chartered
Accountant is appointed to conduct tax audit of the society under section 44AB of the
Income Tax Act, 1961. Comment.
Qualification of Auditor
CA or any persons holding govt diploma in co-operative accounts/in co-operation &
accountancy & also person served as an auditor in co-operative department of govt.
Restrictions on shareholding (Sec 5)

Where liability of member limited, no member of society other than registered society hold
portion of share capital of society as would exceed a maximum of 20% of total no of shares or
of the value of shareholding to 1,000/-.
Restriction on loans
Registered society not make loan to any person other than member. With special sanction of
Registrar, registered society may make a loan to another registered society
Contribution for charitable purpose:

Registered society may, with sanction of Registrar, contribute an amt not exceeding 10% of
net profits remaining after compulsory transfer to reserve fund for any charitable purpose
Appropriation of profit (Sec 33)

“Prescribed % of profits transferred to Reserve Fund before distribution as dividend/bonus to
members”
Contribution to education fund:

Some of the state acts provide that every society shall contribute annually towrds the education
fund of teh state fedral society.

Special feature of Co-operative audit

1. Examination of overdue debts : Overdue debts for period from 6 months to 5 years and
more than 5 years to be classified & reported by an auditor. Auditor to ascertain proper
provision for doubtful debts made
2. Overdue Interest : Overdue interest amount should be excluded from interest
outstanding and accrued while calculating profit.
3. Certification of Bad debts: In some state act, bad debts to be written off are certified
by auditor.
4. Verification of assets and liabilities
5. Adherence to co-operative principles
6. Observation of the provisions of the Acts and Rules
7. Verification of members register and examination of their passbook

8. Special report to registrar
9. Audit classification of society : After a judgement of overall performance of the society,
the auditor has to award a class to the society. The judgement is to be based on the
criteria specified by the registrar. If management of the society is not satisfied about
the award of the class, it can make an appeal to the registrar.
10. Discussion of draft audit report with managing committee: on conclusion, the auditor
should ask the secretary of the society to convene the managing committee meeting to
discuss the draft report. The audit report should never be finalised without discussion
with the managing committee.
Special report to registrar

“If auditor notices some irregularities in working of society, report these to the Registrar. In
following cases, a special report may become necessary:
a. Personal profiteering by members detrimental to interest of society.
b. Detection of fraud
c. Specific examples of mis-management
d. In case of urban co-operative banks, disproportionate advances to vested interest
groups, & deliberate negligence about recovery thereof.
Form of Audit report:

1. Whether he obtained all necessary info & explanations which were necessary for
purpose of audit.
2. In his opinion & to best of his info & according to explains, said accounts give all info
required by Act.
3. PL A/c gives true & fair view of Profit & Loss made
4. BS gives true & fair view of state of affairs

5. Proper books of account as required properly maintained.

6. Whether BS and PL A/c in agreement with books of account”
“In addition, auditor attach schedules regards following info:
1. All transactions which appear to be contrary to provisions of the Act, the rules and
byelaws of the society.
2. All sums, which ought to have been, but have not been brought into account by the
society.
3. Any material, or property belonging to society which appears to the auditor to be bad
or doubtful of recovery.
4. Any material irregularity or impropriety in expenditure or in the realisation or monies
due to society.
5. Any other matters specified by the Registrar in this behalf.”
Audit Questionnaires
1. “Auditor to answer 2 sets of questionnaires called as audit memos:-
2. First set of general nature & applicable to all types of societies.
3. Second set is specific for particular type Generally audit report as per convention
divided into two parts styled as part I & part-II:-
4. Part I throws light on comparative financial position, capital structure, solvency
position & profitability. Contain comments on working of society & suggestions for
future improvements.
5. Part II points out observations of routine nature, which are finished products of routine
vouch & post audit such as missing vouchers, loan bonds, inadequacies of documents
etc.”
Investment of funds (Sec 32)

“Society may invest its funds in any one or more of following:
1. In Central or State Co-operative Bank
2. In any of securities specified in section 20 of Indian Trusts Act, 1882
3. In shares, securities, bonds or debentures of any other society with limited liability.
4. In any co-operative bank, other than Central/State co-operative bank, as approved by
Registrar
5. In any other moneys permitted by Central or State Government.”
L. Audit of Multi-State- Cooperative society

1. Question
1. Central Govt. hold 55% of the paid up share Capital in Kisan Credit Co-operative Society,
which is incurring huge losses. Advise when the Central Government can direct Special

Audit under Section 77 of the Multi State Co-operative Society Act. (May 2019)
2. Briefly explain the provisions for qualification and appointment of Auditors under the
Multi-State Co-operative Societies Act, 2002.
3. No inspection under Section 79 of Multi-State Co-operative Societies Act, 2002 shall be
made unless a notice has been given to the multi-state co-operative society. Explain
stating clearly when and how such inspection can be made. Also state the powers
available with the Central Registrar in this regard along with provisions relating to
communication of the inspection report under the said section.
4. Multi-State Co-operative Societies Act, 2002 states that a person who is a Chartered
Accountant within the meaning of the Chartered Accountants Act, 1949 can only be
appointed as auditor of Multi-State cooperative society. Explain stating also the persons
who are not eligible for appointment as auditors of a Multi-State co-operative society.
5. “As per Multi-state Co-operative Societies Act, 2002, the auditor shall make a report to
the members of the Multi-State co-operative society on the accounts examined by him
and on every balance-sheet and profit and loss account and on every other document
required to be part of or annexed to the balance-sheet or profit and loss account.
Explain”
Qualification of auditor (Sec 72)

“Chartered accounted to be appointed as auditor.
Persons not eligible for appointment as auditors:
1. A body corporate
2. An officer/employee of the society
3. A person member/who is in employment, of an officer or employee of society
4. A person indebted to the society or has given any guarantee or provided any security of
any third person to the society for an amount exceeding 1,000”
Appointment of Auditor (Sec 70)

1. First auditor: by BOD within 1 month of date of registration & hold office until
conclusion of First AGM
2. If BOD fails, society in GM may appoint first auditor
3. Subsequent auditor appointed by society, at each AGM. Hold office from conclusion of
that meeting until conclusion of next AGM.”
Books of accounts
“Every MSCS keep books of account with respect to:
1. all sum of money received & expended & matters in respect of which receipt &
expenditure take place;
2. all sale & purchase of goods;
3. the assets & liabilities;

4. in case of MSCS engaged in production, processing & manufacturing, particulars

relating to utilization of materials or labour or other items of cost”
Content of Auditor’s report

“In his opinion & to best of his info & according to explanation given, said account give info
required & give a true & fair view :
1. In case of BS, of state of society’s affairs as at end of its FY; &
2. In case of PL, of PL for its FY. The report shall also state:
a. He obtained all info & explanation necessary for audit
b. Proper books of account kept by the society so far as appears from examination of
books & proper returns received from branches or offices not visited by him.
3. Report on accounts of any branch audited by person other than him forwarded to him
& how he dealt with same
4. Society’s BS & PL A/c in agreement with books of account & return
5. Where any matters answered in negative, the auditor’s report shall state reason”
Powers of CG to direct special audit (Section 77)

1. Affairs Not Managed in Accordance With, Prudent Commercial Practices
2. Financial Position its such as would endanger its Insolvency
3. Managed as it would Cause Injury to Interest of Trade or Industry or Business
4. CG at any time by order direct that a special audit of the society’s accounts for such
period as may be specified
5. CG order for special audit only if Govt hold 51% or more of paid-up share capital in
such society.
6. Special auditor same powers & duties as an auditor has under section 73. Special
auditor make report to CG.
7. On receipts of report CG take such action as it considers necessary. If CG does not take
any action within 4 months, govt send to the society copy of, or relevant extract from,
there port with its comments thereon & require the society either to circulate that copy
to members or to have such copy or extracts read before the society at its next GM”
Inquiry by central registrar (section 78) or Inspection of society (Section 79)
When:
On request from: federal co-operative to which society is affiliated or
a creditor or
not less than 1/3 of members or
not less than 1/5 of total no of members

Opportunity of being Heard

Before holding such inquiry/inspection 15 days notice must be given to the society
Powers given to Central Registrar:

1. Access to books, accounts, documents, securities, cash & other properties & summon
any person in possession/responsible for custody of any such thing
2. Require officers to call GM by giving notice of not less than 7 days & place at head
quarters to consider such matters as may be directed, and where officers refuse to call
such a meeting, he have power to call it himself.
3. Summon any person reasonably believed to have any knowledge of affairs of the society
to appear before him”
Powers given for Inspection:

1. Access to all books, accounts, papers, vouchers, securities, stock & other property of
society & in event of serious irregularities discovered take them into custody & have
power to verify cash balance & to call a meeting where such GM is, in his opinion
necessary.
2. Every officer or member shall furnish such info with regard to working as the central
registrar or the person making such inspection may require.”
Followup:
With in a period of 3 months communicate report of inquiry to the society
M. Audit of Hire Purchase and Leasing Companies

Hire Purchase
Definition: A hire-purchase agreement involves letting goods on hire with an option for the
hirer to purchase them based on agreed terms.
Inclusions: The agreement covers cases where possession is delivered based on periodic
payments, property transfer occurs upon the last installment, and the hirer can terminate the
agreement before property transfer.
Parties Involved: The hirer is the person in possession under the hire-purchase agreement,
and the owner is the one delivering possession to facilitate the purchase, including any initial
payments by the hirer.
Audiit Procedures for Hire-Purchase Transaction:

The auditor may examine the following:
1. Hire purchase agreement is in writing and is signed by all parties.
2. Hire purchase agreement specifies clearly:
a. The hire-purchase price of the goods to which the agreement relates;
b. The cash price of the goods, that is to say, the price at which the goods may be

purchased by the hirer for cash;

c. The date on which the agreement shall be deemed to have commenced;
d. The number of instalments by which the hire- purchase price is to be paid, the
amount of each of those instalments, and the date, or the mode of determining
the date, upon which it is payable, and the person to whom and the place where it
is payable; and
e. The goods to which the agreement relates, in a manner sufficient to identify them.
3. Ensure that instalment payments are being received regularly as per the agreement.
LEASES:
Audiit Procedures for Lease Transaction:
1. Object Clause: Check if the leasing company’s object clause allows leasing of goods,
such as capital goods or consumer durables, and if it permits financing activities.
2. Credit Analysis: Verify the existence of a procedure to assess the lessee’s creditworthiness,
considering factors like ability to meet commitments, credit history, and collateral.
3. Lease Agreement: Examine the lease agreement for details like parties involved,
equipment description, installation location, tenure, payment terms, return conditions,
and restrictions on assignment or subletting.
4. Lease Proposal Form: Review the lessee’s lease proposal form submitted to the lessor.
5. Invoice: Ensure safekeeping of the lease invoice due to the long-term nature of the
contract.
6. Acceptance Letter: Examine the acceptance letter from the lessee confirming the
satisfactory receipt of the equipment.
7. Board Resolution: Confirm that a board resolution authorizing a specific director to
execute the lease agreement has been passed.
8. Insurance Policies: Verify that copies of insurance policies have been obtained by the
lessor for record-keeping.


CHAPTER 11
ETHICS AND TERMS
OF AUDIT
ENGAGEMENTS
May 24
CA Himanshu

Chapter 11
1. Meaning of Independence 3
2. Threat to Independence 3
4. Professional Skepticism (SA 200) 5
6. Preconditions of Audit (SA 210) 6
7. Terms of Engagement Letter (SA 210) 6
8. If Preconditions are Not Present (SA 210) 7
9. Limitation on Scope Prior to Engagment (SA210) 7
10. Acceptance of change in terms of Engagement (SA 210) 7
11. Agreeing on New Terms (SA 210) 7
12. Unable to agree on new terms (SA 210) 8
13. Recurring Audit (SA 210) 8
14. Audit Quality 9
15. Objective of SQC 1 9
16. Elements of System of Quality Control (HEMALE) 9
18. Leadership responsibilities for quality on audits 13
19. Ethical Requirements 13
20. Acceptance and continuance of client relationship 14
20. Assignment of Engagement teams 14
21. Engagement Performance 14
22. Monitoring 14

1. Meaning of Independence
Independence implies that the judgement of a person is not subordinate to the wishes or
direction of another person who might have engaged him. Independence is linked to the
fundamental principles of objectivity and integrity. It comprises:
a. Independence of mind
b. Independence in appearance
Independence of mind:
The state of mind that permits the expression of conclusion/opinion without being affected by
influences that compromise professional judgement, thereby allowing an individual to:
a. Act with integrity
b. Exercise objectivity and
c. Professional skepticism
Independence in appearance:
The avoidance of facts and circumstance that are so significant that a reasonable and informed
third party would be likely to conclude that a firm’s or an audit or assurance team member’s
integrity, objectivity and professional skepticism has been compromised. (This relates to
others perception of auditor’s independence).
2. Threat to Independence
Self Interest Threats:

which occur when an auditing firm, its partner or associate could benefit from a financial
interest in an audit client. Examples include:
1. Direct financial interest or materially significant indirect financial interest in a client.
E.g., equity ownership
2. Loan or guarantee to or from the concerned client
3. undue dependence on a client’s fees and, hence, concerns about losing the engagement.
E.g., large proportion of revenue from one client.
4. Close business relationship with an audit client. E.g., joint venture with client
5. potential employment with the client. E.g., Auditor or auditor’s spouse enters into
employment negotiation with client
6. Contingent fees for the audit engagement. E.g., contingent fees are arrangement where
fee is dependent of outcome of a certain event or fixed fees is not charged and computed
on percentage basis.
Self-Review Threats:
This occure:
1. during the review of any judgement or conclusion reached in a previous audit or non-
Exemption Batch - To Join contact 90824 49096 Page No. 3

audit engagement
2. when a member of the audit team previously was an employee of the client (especially
a director or senior officer) in a position to exert significant influence over the subject
matter of the audit engagement. For example, assisting an audit client in matters such
as preparing accounting records or financial statements. This may create a self-review
threat when the firm subsequently audits the financial statements.
Advocacy Threats:
This occur when the auditor promotes, or seems to promote, a client’s opinion to a point
where people may believe that objectivity is getting compromised. E.g., when an auditor deals
with shares or securities of the audited company, or becomes the client’s advocate in litigation
and third-party disputes.
Familiarity threats:
These threats are are self-evident, and occur when auditors become too sympathetic to the
client’s interests. This can occur in many ways:
1. close relative of an audit team member is working in a senior position in the client
company,
2. former partner of the audit firm being a director or senior employee of the client
3. long association between specific auditors and their specific client counterparts, and
4. acceptance of significant gifts or hospitality from the client company, its directors or
employees.
Intimidation threats:
This occurs when auditors are deterred from acting objectively with an adequate degree of
professional skepticism. Two examples of intimidation threats are:
1. when an auditor is told he will be replaced based on a disagreement over application of
an accounting principle and
2. pressure to reduce the scope of the audit in order to reduce fees.
3. Safeguard to Independence
The Chartered Accountant has a responsibility to remain independent, safeguards should be
identified and applied to eliminate the threats. The following are the guiding principles in this
regard :
1. For the public to have confidence in the quality of audit, it is essential that auditors should
always be and appears to be independent of the entities that they are auditing.
2. In the case of audit, the key fundamental principles are integrity, objectivity and
professional skepticism, which necessarily require the auditor to be independent. (Extra
point)
3. Before taking on any work, an auditor must conscientiously consider whether it involves
threats to his independence.

4. When such threats exist, the auditor should either desist from the task or eliminate
the threat or at the very least, put in place safeguards which reduce the threats to an
acceptable level. All such safeguards measures need to be recorded in a form that can
serve as evidence of compliance with due process. When such threats exist, the auditor
should either desist from the task or put in place safeguards that eliminate them.
5. If the auditor is unable to fully implement credible and adequate safeguards, then he
must not accept the work
4. Professional Skepticism (SA 200)

As per SA 200, Professional skepticism refers to an attitude that includes a questioning mind,
being alert to conditions which may indicate possible misstatement due to error or fraud, and
a critical assessment of audit evidence.
The auditor has to remain alert forever. The auditor’s attitude should be of questioning mind-
of challenging the things in light of available evidence.
The auditor shall plan and perform an audit with professional skepticism recognising that
circumstances may exist that cause the financial statements to be materially misstated.
Professional scepticism requires the auditor to be alert to (for example) :
1. When audit evidence contradicts other evidence obtained, this can indicate a problem.
2. When information raises doubts about the reliability of documents and responses to
inquiries, this can indicate an issue.
3. When there are conditions that may suggest possible fraud.
4. Sometimes, circumstances arise that suggest the need for additional audit procedures
beyond what is required by the Standards on Auditing
5. During an audit, the auditor needs to be careful and maintain professional skepticism to
avoid making mistakes. This helps in reducing the chances of missing important things
like:
a. Unusual changes (Overlooking unusual circustances)
b. Relying on incomplete information (Over generalising)
c. Making wrong assumptions when planning the audit work (Using inappropriate
assumption in planning and concluding audit)
The objective of the auditor is to accept or continue an audit engagement only when the basis
upon which it is to be performed has been agreed, through:
a. Establishing whether the preconditions for an audit are present; and
b. Confirming that there is a common understanding between the auditor and
management and, where appropriate, those charged with governance of the
terms of the engagment.

6. Preconditions of Audit (SA 210)
As per SA 210 “Agreeing the Terms of Audit Engagements”, preconditions for an audit
may be defined as management’s use of an acceptable financial reporting framework in
the preparation of the financial statements and the agreement of management and, where
appropriate, those charged with governance to the premise on which an audit is conducted.
In order to establish whether the preconditions for an audit are present, the auditor shall:
1. Determine whether the financial reporting framework is acceptable; and
2. Obtain the agreement of management that it acknowledges and understands its
responsibility:
a. For the preparation of the financial statements in accordance with the applicable
financial reporting framework;
b. For the internal control as management considers necessary; and
3. To provide the auditor with:
a. Access to all information such as records, documentation and other matters
b. Additional information that the auditor may request from management for the
purpose of the audit; and
4. Unrestricted access to persons within the entity from whom the auditor determines it
necessary to obtain audit evidence.
7. Terms of Engagement Letter (SA 210)

According to SA 210 “Agreeing the Terms of Audit Engagements”, the auditor shall agree
the terms of the audit engagement with management or those charged with governance, as
appropriate.
The agreed terms of the audit engagement shall be recorded in an audit engagement letter or
other suitable form of written agreement and shall include:
1. The objective and scope of the audit of the financial statements;
2. The responsibilities of the auditor;
3. The responsibilities of management;
4. Identification of the applicable financial reporting framework for the preparation of the
financial statements; and
5. Reference to the expected form and content of any reports to be issued by the auditor
and a statement that there may be circumstances in which a report may differ from its
expected form and content.
“If law or regulation prescribes in sufficient detail the terms of the audit engagement, the
auditor need not record them in a written agreement, except for the fact that such law or
regulation applies and that management acknowledges and understands its responsibilities.”

8. If Preconditions are Not Present (SA 210)
1. If the preconditions for an audit are not present, the auditor shall discuss the matter with
management.
2. Unless required by law or regulation to do so, the auditor shall not accept the proposed
audit engagement:
a. If the auditor has determined that the financial reporting framework to be applied
in the preparation of the financial statements is unacceptable or
b. If the agreement of management is not obtained on matters relating to
understanding of responsibility of management on preparation of financial
statements, internal controls for preparation of financial statements, providing
access to all information to auditor and unrestricted access to persons within the
entity.
9. Limitation on Scope Prior to Engagment (SA210)

If the auditor believes the limitation will result in the auditor disclaiming an opinion on
the financial statements, the auditor shall not accept such a limited engagement as an audit
engagement, unless required by law or regulation to do so.
10. Acceptance of change in terms of Engagement (SA 210)

1. If, prior to completing the audit engagement, the auditor is requested to change the audit
engagement to an engagement that conveys a lower level of assurance, the auditor shall
determine whether there is reasonable justification for doing so.

2. The auditor shall not agree to a change in the terms of the audit engagement where there
is no reasonable justification for doing so.
3. The auditor considers the justification given for the request, particularly the implications
of a restriction on the scope of the audit engagement.
4. Change may not be considered reasonable if it appears that the change relates to
information that is incorrect, incomplete or otherwise unsatisfactory.
5. Before agreeing to change an audit engagement to a review or a related service, an auditor
who was engaged to perform an audit in accordance with SAs may also need to assess any
legal or contractual implications of the change.
A request from the client for the auditor to change the engagement may result from:
1. A misunderstanding as to the nature of an audit or related service originally requested.
2. Change in circumstances affecting the need for the service,
3. Restriction on the scope of the engagement, whether imposed by management or caused
by circumstances.
11. Agreeing on New Terms (SA 210)

If the auditor concludes that there is reasonable justification to change the audit engagement
to a review or a related service, the audit work performed to the date of change may be relevant

to the changed engagement. However, the work required to be performed and the report to be
issued would be those appropriate to the revised engagement.
In order to avoid confusing the reader, the report on the related service would not include
reference to:
1. The original engagement; Or

2. Any procedures that may have been performed in the original audit engagement, except
where the audit engagement is changed to an engagement to undertake agreed- upon
procedures and thus reference to the procedures performed is a normal part of the report.
If the terms of the audit engagement are changed, the auditor and management shall agree on
and record the new terms of the engagement in an engagement letter or other suitable form
of written agreement.
12. Unable to agree on new terms (SA 210)

If the auditor cannot agree to a change in the terms of the audit engagement and management
does not allow the original engagement to continue, then the auditor shall:
1. Withdraw from the audit engagement where possible under applicable law or regulation;
And
2. Determine whether there is any obligation, either contractual or otherwise, to report
the circumstances to other parties, such as those charged with governance, owners or
regulators.
13. Recurring Audit (SA 210)

Recurring audit is an audit which is performed by an auditor over years. On recurring audits,
the auditor shall assess whether circumstances require the terms of the audit engagement to
be revised and whether there is a need to remind the entity of the existing terms of the audit
engagement.
The auditor may decide not to send a new audit engagement letter or other written agreement
each period. However, the following factors may make it appropriate to revise the terms of the
audit engagement or to remind the entity of existing terms:
1. Any indication that the entity misunderstands the objective and scope of the Audit.
2. Any revised or special terms of the audit engagement.
3. A recent change of senior management.
4. A significant change in ownership.
5. A significant change in nature or size of the entity’s business.
6. A change in legal or regulatory requirements.
7. A change in the financial reporting framework adopted in the preparation of the financial
statements.
8. A change in other reporting requirements.

14. Audit Quality
1. SQC 1 and SA 220 both deal with quality control.
2. SQC 1 deals with all engagements including audits, reviews and other assurance and
related service engagements, SA 220 applies to audit engagements only.
3. SQC 1 applies to entire firm. However, SA 220 applies to a particular audit engagement
15. Objective of SQC 1

The objective of the firm is to establish and maintain a system of quality control to provide it
with reasonable assurance that::
a. The firm and its personnel comply with professional standards and
b. Reports issued by the firm or engagement partners are appropriate in the
circumstances.
16. Elements of System of Quality Control (HEMALE)

The firm’s system of quality control should include policies and procedures addressing each
of the following elements:
1. Leadership responsibilities for quality within the firm
2. Ethical requirements
3. Acceptance and continuance of client relationships and specific engagements
4. Human resources
5. Engagement performance
6. Monitoring
1. Leadership Responsibilities fir quality within the firm

The behavior of the firm’s leaders has a big impact on the firm’s internal culture.
To create a culture that values quality, the firm’s management at all levels should frequently and
consistently demonstrate the importance of the firm’s quality control policies and procedures,
and the need to follow them and requirement to:
1. Perform work that complies with professional standards and applicable legal and
regulatory requirements; and
2. Issue reports that are appropriate in the circumstances.
2. Ethical Requirements
The firm must establish policies ensuring compliance with ethical requirements from the
Code of Ethics issued by ICAI. Firm leaders are responsible for maintaining quality within the
firm.

Ethical Requirements 1. The Code outlines fundamental principles like
integrity, objectivity, competence, confidentiality, and
professional behavior.
Independence Requirement 2. Independence in all engagements is crucial.

3. Policies should be in place to communicate
independence requirements to its personnel
4. Identify and evaluate circumstances and relationships
that creat threats, and take appropriate action to
maintain independence.
5. Take actions or apply safegards to reduce them to
accpetable low level or if considered appropriate
withdraw from the engagement.
Reporting Mechanism 6. There should be a system for engagement partners to

report relevant information about client engagements
and any threats to independence.
7. Breaches in independence must be promptly reported
for necessary action
Annual Confirmation 8. The firm should obtain written confirmation

annually from personnel required to be independent,
ensuring compliance with independence policies and
procedures.
The Code establishes the following as the fundamental principles of professional ethics
relevant to the auditor when conducting an audit of financial statements:
Integrity:
1. Integrity Principle: Accountants must be honest and straightforward in their professional
dealings.
2. Fair Practices: They should engage in fair and ethical conduct in all financial matters.
3. Avoid Misleading Information: Accountants shouldn’t be part of any reports or
communication that contains false or misleading statements.
4. Full Disclosure: They must include all necessary information and avoid hiding or
obscuring details that could mislead others.
Objectivity:
The principle of objectivity requires an auditor not to compromise professional judgment
because of bias, conflict of interest or undue influence of others.
It requires that a professional accountant shall not undertake a professional activity if a
circumstance or relationship unduly influences the accountant’s professional judgment
regarding that activity
Professional competence and due care:

It requires that auditor attains and maintains professional knowledge and skill at the level
required to render competent professional service based on current technical and professional
standards and legislations.
Diligence includes responsibility to act carefully, thoroughly and on a timely basis in
accordance with requirements of an assignment.
Confidentiality:
Confidentiality principle requires an auditor to respect the confidentiality of information
acquired as a result of professional or business relationships.
Keeping information confidential helps because it allows clients to share freely with
accountants, knowing their information won’t be shared with others. Professional behaviour:
However, such confidential information may be disclosed, for example, when it is required
by law.
Professional behaviour:
It requires an auditor to comply with relevant laws and regulations and avoid any conduct that
he knows or should know might discredit the profession.
3. Acceptance and continuation of client relationship

SQC 1 requires the firm to obtain information before accepting an engagement.
The following factors assists the engagement partner in determining whether the decisions
regarding the acceptance and continuance of audit engagements are appropriate:
1. Integrity, trustworthiness of the owners, management, and those charged with

governance of the entity.
2. Whether the engagement team is competent to perform the audit engagement and has
the necessary capabilities, including time and resources;
3. Compliance with ethical requirements by the firm and the engagement team.
4. Any significant issues that arose during the current or past audit engagement and their
impact on the continuity of the relationship.
With regard to the integrity of a client, matters that the firm considers include, for example:
(Any four or five)
1. The identity and business reputation of the client’s principal owners, key management,
related parties and those charged with its governance.
2. The nature of the client’s operations, including its business practices.
3. Information concerning the attitude of the client’s principal owners, key management
and those charged with its governance towards such matters as aggressive interpretation
of accounting standards and the internal control environment.
4. Whether the client is aggressively concerned with maintaining the firm’s fees as low as
possible.
5. Indications of an inappropriate limitation in the scope of work.

6. Indications that the client might be involved in money laundering or other criminal
activities.
7. The reasons for the proposed appointment of the firm and non-reappointment of the
previous firm.
Human resources (Not asked in Exams)

The firm should establish policies and procedures designed to provide it with reasonable
assurance that it has sufficient personnel with the capabilities, competence, and commitment
to ethical principles necessary to perform its engagements:
Such policies and procedures address the following personnel issues:
1. Recruitment;
2. Performance evaluation;
3. Capabilities;
4. Competence;
5. Career development;
6. Promotion;
7. Compensation; and
8. Estimation of personnel needs.
Engagement Performance
Consistency in 1. Ensured by briefing teams, complying with standards,

Performance: supervision, training, and proper documentation of
work.
Consultation 2. Team discusses difficult matters, consulting experts
within/outside the firm. External consultation allowed if
internal resources lacking.
Quality Control Review 3. Significant judgments reviewed objectively by a control
reviewer. Mandatory for listed entities; criteria set for
other cases. for necessary action
Resolution of 4. Disagreements resolved within the team. If not, follow

Differences firm procedures or consult external parties
Timely Documentation: 5. Engagement files assembled within 60 days for audits,

appropriate timelines for other engagements.
Documentation Security 6. Policies maintain confidentiality, safe storage, integrity,

and accessibility. Documentation is firm property, can be
shared with clients if it doesn’t compromise work validity
or independence.

Retention Period 7. Documentation retained for monitoring evaluation, not
less than seven years from the auditor’s report date or
group auditor’s report date, or longer if required by law.
Monitoring
1. The firm must create policies and take steps to ensure its quality control system is relevant,
sufficient, works well, and is followed in practice.
2. Checking compliance ensures that the firm meets professional standards and legal rules.
3. It assesses if the quality control system is designed and implemented correctly.
4. The evaluation checks if the firm’s policies and procedures are used correctly.
5. The aim is to make sure that the reports issued by the firm or engagement partners are
suitable for the situation.

The objective of the auditor is to implement quality control procedures at the Engagement
level that provides the auditor with reasonable assurance that:
a. The audit complies with professional standards and applicable legal and
regulatory requirements; and
b. The auditor’s report issued is appropriate in the circumstances.
18. Leadership responsibilities for quality on audits

The engagement partner shall take responsibility for the Overall Quality on each audit
engagement to which that partner is assigned.
1. The engagement partner should emphasise the importance of:
a. Performing work that complies with professional standards and regulatory and
legal requirements;
b. Complying with the firm’s quality control policies and procedures as applicable;
c. Issuing auditor’s reports that are appropriate in the circumstances; and
d. The engagement team’s ability to raise concerns without fear of reprisals.
2. The fact that quality is essential in performing audit engagements.
19. Ethical Requirements

The responsibilities of an engagement partner in relation to ethical requirements in an audit
engagement are as under:
1. Identifying a threat to independence regarding the audit engagement that safeguards
may not be able to eliminate or reduce to an acceptable level.
2. Reporting by engagement partner to the relevant persons within the firm to determine

appropriate action., which may include eliminating the the threat, or withdrawing from
the audit engagement, where withdrawal is legally permitted.
20. Acceptance and continuance of client relationship

1. Pre-engagement Assessment: The engagement partner, as per SQC 1, gathers essential
information before accepting a new client, continuing an existing engagement, or taking
on new work from an existing client.
2. Information Considered: This includes assessing the integrity of client owners, the
competence of the engagement team, and ensuring they have necessary resources.
3. Ethical Compliance: Checking if the client complies with ethical requirements and
reviewing significant issues from past or current audits to make informed decisions about
client relationships and engagements.
20. Assignment of Engagement teams

It should be ensured by engagement partner that the engagement team and any auditor’s
experts who are not part of the engagement team, collectively have the appropriate competence
and capabilities to perform the engagement.
21. Engagement Performance

1. Engagement partner has the responsibility for direction, supervision and performance
of audit engagement in accordance with professional standards and regulatory and legal
requirements
2. Engagement partner is also responsible for ensuring undertaking appropriate consultation
on difficult or contentious matters by engagement team not only within the team but also
with others at appropriate level within or outside the firm.
3. For audits of financial statements of listed entities, the engagement partner shall:
a. Determine that an engagement quality control reviewer has been appointed.
b. Discuss significant matters arising during the audit engagement, including those
identified during the engagement quality control review, with the engagement
quality control reviewer.
c. Not date the auditor’s report until the completion of the engagement quality
control review
4. If differences of opinion arise within the engagement team, with those consulted or,
where applicable, between the engagement partner and the engagement quality control
reviewer, the engagement team shall follow the firm’s policies and procedures for dealing
with and resolving differences of opinion.
22. Monitoring
The engagement partner should document following matters pertaining to an audit
engagement:
1. Issues identified with respect to compliance with relevant ethical requirements and how

they were resolved.
2. Conclusions on compliance with independence requirements that apply to the audit
engagement, and any relevant discussions with the firm that support these conclusions.
3. Conclusions reached regarding the acceptance and continuance of client relationships
and audit engagements.
4. The nature and scope of, and conclusions resulting from, consultations undertaken
during the course of the audit engagement.

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CHAPTER 1

Nature Objective & Scope

CA Inter with CA Himanshu

CA Inter with CA Himanshu Page No. 1

CA Inter with CA Himanshu

CA Inter with CA Himanshu Page No. 2

3. Auditor’s task that Financials should not mislead

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5. Scope of Audit - What it includes & won’t

CA Inter with CA Himanshu

6. Inherent Limitation of Audit (SA 200)

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These fundamental limitations arise due to the ollowing factors:

The Nature of Financial Reporting:

b. These judgments may involve subjective decisions or a degree of uncertainty.

The Nature of Audit Procedures:

Audit is not investigation

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7. Advantages of Audit of Financial Statement

CA Inter with CA Himanshu

8. Audit Mandaory or Voluntary ?

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To whom audit report is submitted by an auditor ?

10. Meaning of Assurance Engagement

Elements of an Assurance Engagement:

11. Audit Vs. Review

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12. Reasonable Assurance vs Limited Assurance

Reasonable assurance engagement Limited assurance engagement

13. Prospective vs Historical financial Information

CA Inter with CA Himanshu

14. Engagement and Quality control standards : An Overview

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Standards on Review engagements:

Standards on Assurance Engagements:

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Standards on related services:

CA Inter with CA Himanshu

15. Why are Standards required ?

16. Duties in relation to Standards

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Please Memorise and Do Scanner Questions. Because in Exams you

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CA Inter with CA Himanshu

#Ab Nahi Darenge Audit Se

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#Abhi Nahi toh Kabhi Nahi Page No. 2

3. Planning is a CONTINUOUS process

Involvement of key engagement team members in planning audit

Discussion of elements of planning with entity’s management

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4. Planning Process- Elements of Planning

Preliminary engagement activities:

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#Abhi Nahi toh Kabhi Nahi Page No. 4

Planning activities involve:

Establishing the overall audit strategy:

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Audit Strategy - Assistance in Resource mobilisation

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6. Audit Plan : Auditor’s Responsibility

7. Relation between Strategy and Plan

2. Audit strategy determines scope, timing and direction of audit.

1. Evaluation of Internal Control– Methods 18

1. What is Automated Environment 21

10. Test of Details 33