Disclaimer of Opinion

On some occasions, an auditor is unable to complete an accurate audit report. This may occur for a variety
of reasons, such as an absence of appropriate financial records. When this happens, the auditor issues a
disclaimer of opinion, stating that an opinion of the firm’s financial status could not be determined.

: CHAPTER V:Auditing & Assurance Standard

5.1 Meaning & Importance of Audit & Assurance Standards

In India, Auditing and Assurance standards are issued by ICAI. In 1982, ICAI set up Auditing and Assurance
Standard Board (AASB) to prepare auditing standards. Accordingly, AASB issues Statements on Standard
Auditing Practices and Auditing and assurance Standards under the authority of the Council. As per section
143 (10) of the Companies Act, 2013, The Central Government may prescribe the standards of auditing or any
addendum thereto, as recommended by the Institute of Chartered Accountants of India, constituted under
section 3 of the Chartered Accountants Act, 1949, in consultation with and after examination of the
recommendations made by the National Financial Reporting Authority.

As per section 143 (9) of the Companies Act, 2013, every auditor shall comply with the auditing standards. If
for any reason the member is unable to perform an audit in accordance with the generally accepted auditing
standards, his report should draw attention to any material departures there from, failing which he would be
held guilty of professional misconduct under clause 9 of Part 1 of the Second Schedule to the Chartered
Accountants Act, 1949.

OBJECTIVES AND FUNCTIONS OF THE AUDITING AND ASSURANCE STANDARDS BOARD

(AASB) The following are the objectives and Functions of the Auditing and Assurance Standards Board
(AASB):

1. To review the existing and emerging auditing practices worldwide and identify areas in which Standards on
Quality Control, Engagement Standards and Statement on Auditing need to be developed.

2. To formulate Engagement Standards, Standards on Quality Control and Statement on Auditing so that these
may be issued under the authority of the Council of the Institute.

3. To review the existing Standards and Statements on Auditing to assess their relevance in the changed
conditions and to undertake their revision, if necessary.

4. To develop guidance notes on issues arising out of any Standard, auditing issues pertaining to any specific
industry or on generic issues, so that those may be issued under the authority of the Council of the Institute.

5. To review the existing Guidance Notes to access their relevance in the changed circumstances and to
undertake their revision, if necessary.

6. To formulate General Clarifications, where necessary, on issues arising from Standards.

7. To formulate and issue Technical Guides, Practice Manuals, Studies and other papers under its own
authority for guidance of professional accountants in the cases felt appropriate by the Board.

5.2 SA 200 -Basic Principles Governing an Audit:

1. SA 200 (Revised) issued under the Clarity Project, ―Overall Objectives of the Independent Auditor and
the Conduct of an Audit in Accordance with Standards on Auditing.”
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This standard primarily sets the objectives of an Independent Auditor (IA) and conduct of the audit in

accordance with the Standards on Auditing (SA)

Scope

Listed below is the scope of this standard:

1. Overall objectives of IA which are obliged to comply with

2. States an IA’s general responsibilities which should be adhered to in all audits

3. Determines the nature and scope of an audit necessary to achieve those responsibilities

Applicability

The Standards issued by the Auditing and Assurance Standards Board, apply equally to all entities, irrespective

of their form, size and nature.

Overall Objectives of the Auditor

Overall objectives of an IA with respect to audit of financial statements are as under:

• To obtain reasonable assurance whether the financial statements are free from material

misstatement and it’s prepared using applicable financial reporting framework

• To report on the financial statements and communicate auditor’s findings as required by SA If

reasonable assurance cannot be obtained and a qualified opinion in the auditor’s report is

insufficient then the auditor should disclaim an opinion or withdraw from the engagement if

withdrawal is legally permitted.

Definitions

Some of the important definitions are given below:

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Applicable financial reporting framework

“The financial reporting framework adopted by management and, where appropriate, those charged with

governance in the preparation and presentation of the financial statements that is acceptable in view of the

nature of the entity and the objective of the financial statements, or that is required by law or regulation.”

Audit evidence

Information used by IA based on which opinions are formed which includes data from financial statements

and any other sources. For the purpose of SA, sufficiency of audit evidence is the measure of quantity and

appropriateness is measured with the quality of the audit evidence.

Detection risk

“The risk that the procedures performed by an IA 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”

Management

The person(s) with executive responsibilities for the conduct of the entity’s day to day operations.

Responsibilities of the management include preparation of financial statements within applicable financial

reporting framework that are free from material misstatement. Management should provide the auditor with

the following:

• All information that are relevant to the preparation and presentation of the financial statements

• Any additional information that an IA may request from management

• Unrestricted access to IA to obtain audit evidence

Misstatement

It is the difference between what is reported on the financial statements and what should have been reported

as per the applicable financial reporting framework.

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Risk of material misstatement

The risk that the financial statements are materially misstated prior to audit. This consists of two components

– Inherent risk which is errors before consideration of any related controls and Control risk will not be

prevented by the entity’s internal control.

5.3 SA 200A –Objectives & Scope of Audit of Financial Statements :

The objectives of a Financial Statement Audit-

• The objective of a financial statement audit is to enable the auditor to express an opinion on financial
statements Audit prepared by the management of the entity.
• For this, it is essential that financial statements are prepared as per the recognized accounting
policies and practice and relevant statutory requirements, and they should disclose all material matters.
• However, his opinion does not constitute an assurance as to the future viability of the enterprise or the
efficiency or effectiveness with which its management has conducted the affairs of the enterprise.

Financial Statement audit is defined as an independent examination of the company’s financial statement and
its disclosures by auditors and provides with a true and fair view of its financial performance.
Top Financial Statements to Audit

• Income Statement: This is the statement of the financial performance of a company over a specific
accounting period. It shows revenue and expenses incurred through operating and non-operating
activities as well as net profit or loss incurred during this period.
• Balance Sheet: This is a statement of the financial position of the company at a specific point in time.
It is done by detailing the assets, liabilities, and shareholders’ equity to give an idea of what the
company owns along with the liabilities. The balance sheet is prepared based on the idea that Assets =
Liabilities + Shareholders’ Equity.
• Cash Flow Statement: This is a statement of the cash and cash equivalents receivedand released by the
company during a specific accounting period.

These financial statements are the ones often utilized for audit purposes. However, some adjustments might
be made to the statements by the company after the finalization of the audit for a better representation of facts.

Scope of Audit of Financial Statements

Scope of an Audit is largely determined by the terms of engagement. However, such terms cannot restrict the
scope of an audit regarding matters that have been laid down by legislature and pronouncements of the
Institute.

The auditor should reasonably satisfy himself about the reliability of underlying accounts, source data,
presentation of the financial statements, statutory disclosure requirements that are reflected in the financial
statements.

To assess the reliability that the auditor intends to place on the information he has to evaluate the accounting
and internal control systems and verify the authenticity of transactions and balances. On the basis of
preliminary assessment he can determine the nature, extent and timing of other audit procedures.
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As regards the presentation and disclosure requirements of the financial information the auditor has to compare
the statements with the underlying accounts and other source data, give due regard to the decisions of the
management relating to classification and disclosure.

Absolute certainty in an audit is rarely attainable due to the fact that audit is based on judgements of the auditor
who draws reasonable conclusions.

Due to the inherent limitations of an audit and of the internal controls, there is an unavoidable risk of some
material misstatement being undiscovered. Since such a discovery is not a main objective of an audit, it is not
an assurance that all frauds and errors have been detected in its course.

When the auditor has any reason to believe that a fraud or error might have occurred he must extend his
procedures.

The concept of materiality is a relative one and no specific standards as such can be laid down. It's a matter of
professional judgement.

An auditor is not expected to perform duties that fall out of the ambit of his professional competence.

Any constraints that compel an auditor to give an unqualified report are to be stated in his report.

5.4 SA 230- Audit Documentation :

Scope: This standard deals with auditors responsibilities in preparation of audit documentation while auditing
financial statements. Specific documentation requirements of other Standards on auditing do not limit its
scope.

Nature and Purpose: Audit Documentation provides evidence as to whether the overall objective of the
auditor was achieved as well as whether it was planned and performed in accordance with Standards of
Auditing as also applicable legal and regulatory requirements.

It assists in planning, performing, fixation of accountability and responsibility, supervision and review of
audits. Retaining the records for future audits, as also conduct of quality controls (SQC 1).

Definitions: Audit Documentation: The record of audit procedures performed, relevant audit evidence
obtained and conclusions the auditor reached (working papers, work papers).

Audit File: One or more folders or other storage media in physical or electronic form, containing the records
that comprise of the audit documentation for a specific engagement.

Experienced Auditor: An Individual (whether Internal or external to the firm) who has practical audit
experience and a reasonable understanding of audit processes, SAs and applicable legal and regulatory
requirements, the business environment in which the entity operates and auditing and financial reporting issues
relevant to the entity’s industry.

Form, Content and Extent in addition to the Nature and Purpose

An auditor should prepare audit documentation sufficient to enable an experienced auditor having no previous
connection with the audit to understand.

a. Nature, timing and extent of audit procedures:

o Identifying characteristics of specific items and matters tested.
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 o Who performed the audit and the date of completion.
o Who reviewed the report, the date and extent of review.
b. Results of the audit procedures performed and evidence obtained:
o Document discussions of significant matters.
o Nature of the significant matters – when and with whom discussed.
c. Significant matters arising during the audit:
o Document how the inconsistencies have been addressed.
o In case of departure from the standard, the relevant requirements and the reason for departure,
the alternative audit procedures performed to achieve the aim of that requirement.

Matters arising after the date of the Auditor's Report

If, in the exceptional circumstances, auditor performs new or additional audit procedures or draws new
conclusions after the date of the auditor’s report, the auditor shall document:

• Circumstances encountered
• Newer additional procedures performed, evidence obtained, conclusions reached and its effect on
auditor’s report.
• When and by whom the resulting changes to audit documentation were made and reviewed.

Additional Points

• Assembling of the final Audit file should be completed on a timely basis after the date of the auditor’s
report.
• After assembling the same, the auditor shall not delete or discard documentation of any nature before
the end of its retention period.
• In case the auditor finds it necessary to modify existing or add new documentation post assembly, he
should specify the reasons for them and when and by whom it was made and reviewed.

Application and Other Explanatory Material

• Timely preparation enhances quality, review, evaluation of the audit evidence and conclusions reached
before finalisation of the auditor’s report. Documentation prepared after audit work is less accurate
than that prepared during audit.
• Form, content and extent depends on size and complexity of the entity, nature of procedures performed,
risks, exceptions, audit methodology, tools used and professional judgment.
• Audit documentation may be recorded on paper or on electronic or other media. Examples: Audit
programmes, checklists, analysis, correspondence.
• Audit documentation should not include superseded drafts of working papers and financial statements,
notes reflecting incomplete and preliminary thinking.
• Oral explanations can clarify or explain information contained in audit documentation.
• It is not necessary nor practicable for the auditor to document every matter considered or professional
judgment made.
• Judging the significance of a matter requires an objective analysis of the facts and circumstances.
• Summary describing significant matters identified during the audit and how they were addressed, or
that includes cross-references to other relevant supporting audit documentation that provides such
information.

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 • The identifying characteristics should be recorded which helps serve a number of purposes.
• Documentation also includes records prepared by the entity’s personnel .
• Retention period of audit engagements is no shorter than seven years from the date of the auditor’s
report.
• Unless otherwise stated audit documentation is the property of the auditor. He may make disclosures
but these should not affect his independence nor invalidate his work.

5.5 SA 240 -Auditor’s responsibility to consider Frauds & Errors in an Audit of

Financial statements:

Have you assessed risks of material misstatement in the financial statement

• Have you evaluated the design of internal checks & control mechanisms placed by the management &
recorded the weaknesses in them

• Are there loopholes in the control environment where senior level of management can or does override
control procedures

• Whether inquiries have been made with the management regarding the following

• The managements assessments to the risk relating to the material misstatements may be due to fraud is done
on a satisfactory basis as per the size of the entity

• The accounting & internal control systems management has put in place to address such risk

• Does the audit team have an understanding of the managements process of the following • Identifying &
responding to the risk of fraud

• Internal control of mitigating those risk

• Has the auditor identified areas in the financial statements that may be susceptible to risk of fraud

• Have the following items been taken into consideration to mitigate the risk of fraud in the financial statements
• Have we identified the transactions that are improperly or incorrectly recorded

• Is there any unsupported or unathorised transactions

• Are there any last minute adjustment that significantly affects the financial results

• Are there some cases where the evidence is missing which are of significant importance • Are there any
unusual discrepancies between entity’s records & confirmation replies

• Is there any unusual relationship between the auditor & the management • Is the management relying on one
person for major accounting & financing activity

• Are there inconsistent, vague, or implausible responses from the management or employees arising from
inquiries or analytical procedures

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