Inter Audit 1122333

AS PER
NEW COURSE
CA INTER AUDIT
Brahmashtra
This PDF contain extract of CA
Inter Audit Concept Book
Brahmastra by CA Sarthak Jain
Ch-1 Nature , Objective and

Scope of Audit
Ch-7 Completion & Review SA

560, 570, 450, 580, 260 & 265)
Ch-11 Ethics & Terms of Audit

Engagement(Covers SQC 1, SA
210 and SA 220)
CA SARTHAK JAIN
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Nature, Objective & Scope of Audit
NATURE, OBJECTIVE AND

Chapter 01 SCOPE OF AUDIT
1 ORIGIN OF AUDITING
Kautilya’s Arthshastra (4th century BC) - Reference to auditing is found where
it talks about fixed accounting year, a process for closure of accounts and audit
for the same. Even there are references to misstatements in financial statements
(FS) due to abuse of power.
Origin of word “AUDIT” (Medieval times – 1100 to 1500 AD)

Auditors used to hear the accounts read out to them to check that employees were
not careless and negligent. This lead to use of word audit originating from Latin
word “audire” meaning “to hear”.
Industrial revolution in Europe (Late 18th / Early 19th Century)

Led to astronomical expansion in volume of trade and consequently demand of
auditors.
Auditor of Government Entities in India (1860)

The first Auditor General of India was appointed in British India in 1860 having
both accounting and auditing functions. Later on, office of Auditor General was
given statutory recognition. Presently, Comptroller and Auditor General of India
(C&AG) is an independent constitutional authority responsible for auditing govern-
ment receipts and expenditures.
Institute of Chartered Accountants of India (1949)

It was established as a statutory body under an Act of Parliament in 1949 for
regulating the profession of Chartered Accountancy in the country.
2 MEANING AND NATURE OF AUDITING

“An audit is an independent examination of financial information of any entity,
whether profit oriented or not, and irrespective of its size or legal form, when such
an examination is conducted with a view to expressing an opinion thereon”.
AB AUDIT HOGA SABSE SCORING FA S T 1.1

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Analysis
A Audit is an independent examination of financial information

 Meaning of Independence - Judgement of a person is not subordinate to the wishes or
direction of another person who might have engaged him.
 The auditor should be independent of entity under audit to form opinion without any in-
fluence.
 Independence increases its ability to act objectively without any biases.
 Example, Auditor appointed by a company which is owned managed by his brother or
company where he has invested in shares of the company, auditor should not
accept as his own self-interest gets involved.
B Audit can be of entity that is a

 Business or a non-profit organization like an NGO or a charitable trust.
 Small, medium or large organisation.
 Any entity with any legal structure i.e. proprietary concern, a partnership firm, a LLP, a
private company, a public company, a society or a trust.
C The purpose of audit is to express an opinion on the FS.

 Preparation and presentation of FS of an entity is responsibility of management.
 The auditor expresses an opinion on FS by means of written audit report.
D Auditor to check that FS are not misleading anybody

He ensures that – (FS as per books → Supported by evidences → Nothing Omit →
Clearly → Class, disclosure, description as per AS → T&F View)
 the accounts have been drawn up with reference to entries in the books of account;
 the entries in the books of account are adequately supported by sufficient and ap-
propriate evidence;
 none of the entries in the books of account has been omitted in the process of compilation;
 the information conveyed by the statements is clear and unambiguous;
 FS amounts are properly classified, described and disclosed in conformity with ac-
counting standards; and
 the statement of accounts presents a true and fair picture of the operational results
and of the assets and liabilities.
1.2 FA S T CA INTER AUDIT - BY CA SJ

Auditing provides assurance. Its basic nature lies in providing assurance to users -
providing confidence to users of FS. Such an assurance lends credibility to FS.
3 AUDITING- RELATIONSHIP WITH OTHER DISCIPLINES

Auditing is interdisciplinary in nature and draws as well as make use of different
subjects. An auditor is required to have sound understanding of:
Accounting Auditing reviews the FS which are nothing but a result of the
overall accounting process hence a sound knowledge of accounting
principles is required.
Law An auditor should have a good knowledge of business laws and

taxation laws affecting the entity.
Economics Auditor is expected to be familiar with the overall economic

environment of the client in which the business is operating.
Behavioural Knowledge of human behaviour as auditor has to interact with
Science people for seeking information and making inquiries.
Statistics Knowledge of statistical sampling for meaningful conclusions.

Auditors uses statistical methods to draw samples in a scientific
manner. It is not possible for an auditor to check each and every
transaction. So, use of statistical methods to draw samples for
conducting audit is made.
Financial Auditor is expected to have knowledge about various financial
Management techniques such as working capital management, funds flow, ratio
analysis, capital budgeting etc. These also assist in applying some
audit procedures effectively. Knowledge of financial market is also
expected from auditor.
Mathematics For verification of inventories and other checks.

Data EDP auditing in itself is developing as a discipline in itself.
Processing
Good auditor is one who understands the client and his business
Production
functions such as production, cost system, marketing etc.

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4 OBJECTIVES OF AUDIT
SA-200 “Overall Objectives of the Independent auditor and the conduct of an audit
in accordance with Standards on Auditing”
In conducting audit of FS, objectives of auditor are: -
(a) To obtain reasonable assurance about whether the FS 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 FS are prepared, in all material
respects, in accordance with an applicable financial reporting framework; and
(b) To report on the FS, and communicate as required by the SAs, in accordance
with the auditor’s findings.
Analysis
 Reasonable assurance is to be distinguished from absolute assurance.

Absolute assurance is a complete assurance or a guarantee that FS 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.
 Audit is carried out with professional competence and skills in accordance with
Standards on Auditing.
Audit procedures are applied in accordance with SAs, audit evidence is obtained and evaluated.
On basis of that, conclusions are drawn and opinion is formed.
It leads to high level of assurance which is called as reasonable assurance but it is
not absolute assurance.
 Misstatements in FS can occur due to fraud or error or both
The auditor seeks to obtain reasonable assurance whether FS as a whole are free
from material misstatements caused by fraud or error.
He has to see effect of misstatements on FS as a whole, in totality.
 Opinion - FS as per applicable FRFW
Obtaining reasonable assurance that FS as a whole are free from material misstate-
ments enables the auditor to express an opinion on whether the FS are prepared, in
all material respects, in accordance with an applicable financial reporting framework.
 Audit Report – As per findings
The opinion is reported and communicated in accordance with audit findings through
a written report as required by SAs.

5 SCOPE OF AUDIT
(Scope refers to range or reach of something)
Purpose of an audit
To enhance the degree of confidence of intended users in the FS.
It is achieved by the expression of an opinion by the auditor on
whether the FS are prepared, in all material respects, in accord-
ance with an applicable financial reporting framework.
Users of FS
May be shareholders, employees, customers, government and
regulatory authorities, bankers etc.
Applicable financial reporting framework

Framework adopted in the preparation and presentation of the FS,
acceptable in view of the nature of the entity and the objective of
the FS, or that is required by law or regulation.
Example, in case of companies in India, financial reporting frame-
work is provided under Schedule III of Companies Act,2013.
A SCOPE OF AUDIT- WHAT IT INCLUDES
Scope of audit of FS:

(1) Coverage of all aspects of entity
All aspects of the entity relevant to the FS being audited are covered under audit.
(2) Reliability and sufficiency of financial information
By study and assessment of accounting systems and internal controls and by car-
rying out appropriate tests, enquiries and procedures auditor verifies information
contained in underlying accounting records and other source data (like bills, vouch-
ers, documents etc.) is reliable and sufficient basis for preparation of FS.
(3) Proper disclosure of financial information
FS should properly summarize transactions and events recorded therein. FS to
consider the judgments made by management in preparation of FS. For example,
choosing of appropriate accounting policies in relation to various accounting issues
like choosing method for valuation of inventories.
(4) Expression of Opinion on historical financial information
Auditor evaluates selection and consistent application of accounting policies by

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management. FS of an entity are prepared on historical financial information basis
hence audit is also based on historical financial information.
“Historical financial information” means information expressed in financial terms in
relation to a particular entity, derived primarily from that entity’s accounting sys-
tem, about economic events occurring in past time periods or about economic condi-
tions or circumstances at points in time in the past.
B SCOPE OF AUDIT- WHAT IT DOES NOT INCLUDES
 Responsibility of preparation and presentation of FS – Lies with Management

 Duties outside scope of competence of auditor - Auditor is not expected to perform
duties which fall outside domain of his competence, like:
 Physical condition of certain assets like that of sophisticated machinery
 Suitability and life of civil structures like buildings
 Expertise in authentication of documents - The genuineness of documents cannot be
authenticated by him because he is not an expert in this field.
 Investigation - Audit is distinct from investigation.
INVESTIGATION Vs AUDIT
 An audit is not an official investigation into alleged wrong doing.
 Auditors do not have any specific legal powers of search or recording statements of
witness on oath necessary for carrying out an official investigation.
 Investigation is a critical examination of the accounts with a special purpose. For
example, if fraud is suspected and it is specifically called upon to check the accounts
whether fraud really exists, it takes character of investigation.
 The objective of audit, is to obtain reasonable assurance about whether the FS as a
whole are free from material misstatement, whether due to fraud or error, thereby
enabling the auditor to express an opinion.
 The scope of audit is general and broad whereas scope of investigation is specific and narrow
6 INHERENT LIMITATIONS OF AUDIT

Certain inbuilt limitations due to which an auditor cannot obtain an absolute assur-
ance that FS are free from misstatement due to fraud or error. These fundamental
limitations arise due to the following factors:

A Nature of financial reporting
 Preparation of FS involves making many judgments by management.
 Management prepared FS free from material misstatements and devises internal
controls. Such controls also suffer from own limitations like lapse of control due to
collusion of employees.
B Nature of Audit procedures
 The auditor carries out his work by obtaining audit evidence through performance
of audit procedures.
 However, there are practical and legal limitations to obtain audit evidence like use of
sample testing or sometimes management may not provide complete information as
requested by auditor and auditor cannot force them, an example of legal limitation.
 The management may indulge in frauds and conceal it to make it hard to detect
by the auditor. It may produce fabricated documents to auditor. An auditor may
not be an expert to detect unauthenticated documents
 Entity may have entered into some transactions with related parties only paper
and auditor may not be able to detect probable wrong doings in such transactions.
C Not in nature of investigation
 Audit is not an official investigation. Hence, auditor cannot obtain absolute assur-
ance that FS are free from material misstatements due to frauds or errors.
D Timeliness of financial reporting and decrease in relevance of information over time
 The relevance of information decreases over time and auditors cannot verify each
and every matter.
E Future events
The business may cease to exist in future due to changes in market conditions, emer-
gence of new business models or products or due to onset of some adverse events.
In view of the above factors, an auditor cannot provide a guarantee that FS are free
from material misstatements due to frauds or errors.
7 WHAT IS AN ENGAGEMENT?
 Engagement means an arrangement to do something.

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 In audit, it means a formal agreement between auditor and client under which
auditor agrees to provide auditing services.
 It takes the shape of an engagement letter.
External audit engagements
The purpose of external audit engagements is to enhance the degree of confidence

of intended users of FS. Such engagements are also reasonable assurance engage-
ments. For example, in India, companies are required to get their annual accounts
audited by an external auditor. Even non-corporate entities may choose to have
their accounts audited by an external auditor because of benefits of such an audit.
8 BENEFITS OF AUDIT-WHY AUDIT IS NEEDED?
 Confidence to users that information on which they are relying is qualitative and as
per globally recognized Standards.
 Shareholders interest is safeguarded by an audit of FS prepared by management.
 Moral check on employees for the fear of discovering frauds by audit.
 Audited FS are helpful to government authorities for determining tax liabilities.
 Audited FS can be relied upon by lenders, bankers for making their credit decisions
i.e. whether to lend or not to lend to a particular entity.
 An audit may also detect fraud or error or both.
 An audit reviews existence and operations of controls operating in any entity.
Hence, it is useful at pointing out deficiencies.
9 AUDIT- MANDATORY OR VOLUNTARY?
Companies Act – Every company to get its accounts audited

IT Act – Audit needed if turnover crosses specified limits
School / Colleges, etc – Audit pre-requisite for availing grants from the Government.
Audit is not always mandatory. Many entities may get their accounts audited volun-
tarily because of benefits from the process of audit. Many such concerns have their
internal rules requiring audit due to advantages flowing from an audit.
10 WHO APPOINTS AN AUDITOR?

Company - Appointed by members (shareholders) in Annual General Meeting (AGM).
Government companies - Appointed by C&AG, an independent constitutional authority.

Firm - Auditor is appointed by partners of firm.

Government Authority – Law may require to appoint auditor by government authorities.
11 TO WHOM REPORT IS SUBMITTED BY AN AUDITOR?

The outcome of an audit is written audit report with his opinion. The report is sub-
mitted to person making the appointment.
Example: Companies – Shareholders; Firm – Partners who have engaged him.
12 ASSURANCE ENGAGEMENT
“Assurance engagement” means an engagement in which a practitioner expresses
a conclusion designed to enhance the degree of confidence of the intended users
other than the responsible party about the outcome of the evaluation or measure-
ment of a subject matter against criteria.
A Elements of an Assurance Engagement
Following elements comprise an assurance engagement: -

1 Parties – 3 party - Practitioner, Responsible Party, and Intended Users
A practitioner is a person who provides the assurance (could be auditor of historical
financial information of report on prospective information).
A responsible party is the party responsible for preparation of subject matter.
Intended users are the persons for whom an assurance report is prepared.
2 Subject matter
It refers to the information to be examined by the practitioner. For example,
financial information contained in FS while conducting audit of FS.
3 Suitable criteria
These refer to benchmarks used to evaluate the subject matter like standards, guid-
ance, laws, rules and regulations.
4 Sufficient appropriate evidence

“Sufficient” - Quantity of evidence obtained by auditor.
“Appropriate” - Quality of evidence obtained by auditor.
One evidence may be providing more comfort to auditor than the other evidence.

CHAPTER 1
The evidence providing more comfort is qualitative and, therefore, appropriate. Evi-
dence should be both sufficient and appropriate.
5 A written assurance report in appropriate form

A written assurance report is the outcome of an assurance engagement.
B Meaning of Review; Audit Vs. Review
Audit is a reasonable assurance engagement. However, Review is a limited assurance

engagement. It provides:
 lower level of assurance than audit, and
 is based on fewer procedures; and
 is useful for drawing limited conclusions.
Both are based on historical financial information.
C Types of Assurance Engagements- Reasonable assurance engagement vs. Limited

assurance engagement
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 compared

procedures to obtain sufficient appro- to reasonable assurance engagement.
priate evidence.
It draws reasonable conclusions on the It involves obtaining sufficient appropri-

basis of sufficient appropriate evidence. ate evidence to draw limited conclusions.
Example of reasonable assurance en- Example of limited assurance engage-

gagement is an audit engagement. ment is review engagement.
D Prospective financial information

“Prospective financial information” means financial information based on as-
sumptions 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.

“Historical financial information” Vs “Prospective financial information.”

HFI - Information expressed in financial terms of an entity about economic events,
conditions or circumstances occurring in past periods. This is rooted in past events
PFI - Financial information based on assumptions about occurrence of future events
and possible actions by an entity. This is rooted in future events.

Assurance Reports Involving Prospective Financial Information
Practitioner obtains sufficient appropriate evidence that:
 management’s assumptions on which the prospective financial information is
based are not unreasonable,
 the prospective financial information is properly prepared based on the assumptions; and
 it is properly presented and all material assumptions are adequately disclosed.
Prospective financial information relates to future events hence auditor cannot ex-
press an opinion as to whether the results shown in the prospective financial infor-
mation will be achieved. Hence, practitioner provides a report assuring that nothing
has come to practitioner’s attention to suggest that these assumptions do not
provide a reasonable basis for the projection, providing only a “moderate” level of
assurance.
Examples of assurance engagements
Example of engagement assurance Type of assurance engagement

Audit of financial statements Reasonable assurance engagement
Review of financial statements Limited assurance engagement
Provides assurance regarding reason-
Examination of Prospective financial
ability of assumptions forming basis of
information
projections and related matters
Report on controls operating at an Provides assurance regarding design and
organization operation of controls
13 QUALITIES OF AUDITOR
 Personal qualities - Tact, caution, firmness, good temper, integrity, discretion,
industry, judgement, patience, clear headedness, and reliability are qualities which

CHAPTER 1
an auditor should have. In short, all personal qualities that make a good businessman.
 Shine of culture for attaining a great height.
 Highest degree of integrity backed by adequate independence.
 Basic human qualities of being trustworthy.
 Expert and exhaustive knowledge of accounting in all its branches is the sine qua
non of the practice of auditing. He must know thoroughly all accounting principles
and techniques.
14 ENGAGEMENT AND QUALITY CONTROL STANDARDS: AN OVERVIEW

The following Standards issued under authority of ICAI Council are collectively
known as Engagement Standards: -
 Standards on auditing (SAs) which apply in audit of historical financial information.
 Standards on review engagements (SREs) which apply in review of historical
financial information.
 Standards on Assurance engagements (SAEs) which apply in assurance engage-
ments other than audits and review of historical financial information.
 Standards on Related Services (SRSs) which apply in agreed upon procedures to
information, compilation engagements and other related service engagements.
The purpose of issue of these standards is to establish high quality standards and
guidance in the areas of FS audits and in other types of assurance services.

Limitations only live in our

minds. But if we use our
imagination, our possibilities
become limitless.

Engagement Standards
Standards on auditing Standards on review Standards on Assurance Standards on Related

(SAs) engagements (SREs) engagements (SAEs) Services (SRS)
Apply in agreed
Apply in assurance upon procedures to
Apply in audit of engagements other
Apply in review of information,
historical financial than audits and review
historical financial compilation
information by in- of historicalfinancial
information. engagements and
dependent auditor. information. other related ser-
vice engagements.
For example, an en-

Covers overall objec- Review is a limit- gagement to perform
Assurance engage-
tives of independent ed assurance en- certain procedures
ments, examination
auditor, audit docu- gagement, hence concerning individu-
is not of historical
mentation, planning involves fewer pro- al items of financial
financial information
an audit, identifying cedures than audit. data, say, accounts
or may relate to pro-
and assessing risk of Since it provides payable, accounts
viding assurance re-
material misstate- assurance to users, receivable, purchas-
garding non-financial
ment, audit sampling, it involves obtaining esfrom related parties
matters like design
audit evidence and SAAE. Eg. Review and salesand profits
and operation of in-
forming an opinion of interim financial of a segment of an
ternal control in an
and reporting on FS. information of an entity, or a FS, say, a
entity.
entity. balance sheet or even
a complete set of FS.
SA 200 to 800 series SRE 2000 series SAE 3000 series SRS 4000 Series
Standards on Quality Control
 Standards on Quality Control (SQCs) have been issued to establish standards and
provide guidance regarding a firm’s responsibilities for its system of quality control
 It covers quality control of audit and review of historical financial information and
for other assurance and related service engagements.
 SQC 1 has been issued in this regard.

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 It requires auditors/practitioners to establish system of quality control so that firm
and its personnel comply with professional standards and regulatory & legal require-
ments and reports issued are appropriate.
 Its basic objective is that while rendering services, to which engagement standards
apply, there should be a system of quality control with in firms to ensure complying
with professional standards/legal requirements.
 System of quality control ensures issuing of appropriate reports in the circumstances.
Why are Standards needed?

 Standards ensure carrying out of audit against established benchmarks at par with
global practices.
 Standards improve quality of financial reporting thereby helping users to make dili-
gent decisions.
 Standards promote uniformity as audit of FS is carried out following these Standards.
 Standards equip professional accountants with professional knowledge and skill.
 Standards ensure audit quality.
Duties in relation to Engagement and Quality Control Standards

 It is the duty of professional accountants to see that Standards are followed in en-
gagements undertaken by them.
 However, a situation may arise when a specific procedure as required in Standards
would be ineffective in a particular engagement.
 In such a case, he is required to document how alternative procedures performed
achieve the purpose of required procedure.
 Also, reason for departure has also to be documented unless it is clear. Further, his
report should draw attention to such departures.
 It is also to be noted that a mere disclosure in the report does not absolve a profes-
sional accountant from complying with applicable Standards.

Completion And Review
COMPLETION AND REVIEW

Chapter 07 (SA 560, 570, 450, 580, 260 & 265)
SUBSEQUENT EVENTS (SA 560)
Events Occurring After the date of FS
Many financial reporting frameworks specifically refer to such events ordinar-

ily categorising as two types of events, those that provide evidence of conditions
that:
&
Existed at the Arose after the
date of the FS date of the FS.
Examples of events providing evidence of conditions that:
Existed at the date of the FS Arose after the date of the FS
 Insolvency of debtor  Issue of new share capital

providing evidence on  Planned merger of the
recoverability company.
 Out of the court  Destruction of substantial
settlement of a case inventories due to fire
at reduced amount, for between the date of
which provision has been the FS and the date of
already made auditor’s report.
Subsequent Events (SE)
Events occurring between the:
date of the FS facts that become known to

and the date the auditor after the date
of the auditor’s of the auditor’s report are
report and known as subsequent events.

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Subsequent events
01 02 03
Facts which become

Events occuring Facts which become
known to the auditor after
between the Date known to the auditor
the Date of auditor's
of FS and Date of after the FS have
report but before Date been issued
auditor's report
FS are issued
Lets Say A & B EVENTS Lets Say C EVENTS Lets Say D EVENTS
1 Objectives of auditor in accordance with SA 560

The objectives of the auditor are to: -
 Obtain SAAE about Type A & B Events that require adjustment of, or disclosure in,
the FS are appropriately reflected in those FS and
 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.
2 Audit procedures relating to Type A&B events
SAAE 1. Perform audit procedures to obtain SAAE that all such events that require
adjustment in FS have been identified.
AE of
other AP 2. The auditor not required to perform additional audit procedures if previously
audit procedures have provided evidences.
AP 3. The auditor shall perform following procedures -
 Obtain understanding of management procedures to identify SE.
 Inquiring of management and, TCWG as any adjusting SE have occurred
 Reading minutes of entity’s owners, management and TCWG, and inquir-
ing matters discussed for meetings where minutes are not yet available.
 Reading the entity’s latest subsequent interim FS, if any.
Entity
Records 4. Such information may also be obtained by auditor from accounting records per-
taining to period after date of FS, reading entity’s latest available budgets etc.

Account- 5. When, as a result of the procedures performed, the auditor identifies
ing
events that require adjustment of, or disclosure in, the FS, the auditor shall
determine whether each such event is appropriately reflected in those FS.
WR 6. Seek written representation from management & TCWG that all events
occurring subsequent to date of FS that require adjustment or disclosure as
per A-FRFW have been adjusted or disclosed.
“Date the FS are issued”
Meaning Date auditor’s report and audited FS are made available to third parties.
Generally depends on regulatory environment. Date to be after the date
auditor’s report is provided to the entity and not before that, as FS are issued
with auditor’s report only.
Type C Events - Facts which become known after date of auditor’s report but
3
before date when FS are issued
Auditor’s Responsibility
No obligation to perform any audit procedures after the date of auditor’s report.
But if a fact becomes know, that had if was known to the auditor earlier, may
lead o change in auditor’s report, the auditor shall:
 Discuss the matter with management and, where appropriate, TCWG.
 Determine whether the FS need amendment and, if so,
 Inquire how management intends to address the matter in the FS.
Reporting Scenarios
1 If management amends the FS, the auditor shall
Reporting 2 Management amends FS but only for SE

identified
3
Scenarios:
When Law, regulation or the FRF/W does not
allow to issue amended FS
4 Management does not amend the FS at its option

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If management amends the FS, the auditor shall:
 Carry out audit procedures on amendment.
 If amendment is not restricted only to the SE causing amendment (See next para):
i. Extend the audit procedures, already referred, to the date of the new auditor’s
report and
ii. Provide a new auditor’s report on the amended FS.
The new auditor’s report shall not be dated earlier than the date of approval of
the amended FS.
Management amends FS but only for SE identified

When LorR or FRF/W does not prohibit management to amend and approve FS only
for effects of such SE, auditor is permitted to restrict audit procedures on SE to that
amendment. Auditor shall either: -
Dual
Date  Amend the auditor’s report to include an additional date restricted to that
amendment that thereby indicates that the auditor’s procedures on SE are
restricted solely to the amendment of the FS described in the relevant note to
the FS OR
EOM/
OM  Provide a new or amended auditor’s report with Emphasis of Matter or Other
Matter(s) that conveys that auditor’s procedures on SE are restricted solely to
the amendment of the FS as described in the relevant note to the FS.
3 When Law, regulation or the FRF/W does not allow to issue amended FS
Auditor need not provide an amended or new auditor’s report.
4 Management does not amend the FS at its option –

If auditor believes FS need to be amended, then: -
 If the auditor’s report has not yet been provided to the entity - Modify the opinion
(SA 705) and then provide auditor’s report or
 If the auditor’s report has already been provided to the entity - Notify manage-
ment, TCWG, not to issue the FS to third parties before the necessary amendments
have been made.
If FS are subsequently issued without the necessary amendments, auditor shall take
appropriate action, to prevent reliance on the auditor’s report.

Type D Events - Facts which become known to the auditor after the FS have
4
been issued
Auditor’s Responsibility
Same as in Type C events above
Reporting Scenarios
Same as in Type C however additionally when:

1. Management amends the FS - Auditor shall review management steps so that
anyone in receipt of FS and Auditor’s report is informed of the situation.
2. Management amends FS but only for SE identified
Same as in Type C above
3. When Law, regulation or the FRF/W does not allow to issue amended FS
Auditor need not provide an amended or new auditor’s report.
4. Management does not amend the FS at its option –
 Auditor will seek to prevent future reliance on the auditor’s report.
 If management or TCWG do not take necessary steps, auditor shall take
appropriate action to seek to prevent reliance on the auditor’s report.
GOING CONCERN (SA 570)
1 MEANING OF GOING CONCERN & ITS SIGNIFICANCE
 Under this fundamental accounting assumption of accounting, going concern, FS

are prepared on the assumption that entity will continue its operations for the
foreseeable future. Unless management either intends or has no realistic alterna-
tive to liquidate the entity or to cease operations.
 Assets and liabilities are recorded on the basis that entity will be able to realize
its assets and discharge its liabilities in the normal course of business.
 When not a going concern, the FS are prepared on liquidation basis. For example,
inventories written down as may be sold at lower price, Assets recorded at likely
prices they will fetch.

CHAPTER 7
A. Responsibility for assessment as a going concern
MGT Management to assess entity’s ability to continue as a going concern even if

Responsible FRFW (Financial Reporting Framework) does not specifically demands so.
Judgment Involves making a judgment, at a particular point in time, about inherently
uncertain future outcomes of events or conditions.
Factors Factors relevant to judgment: -
Later The  The degree of uncertainty associated withà outcome of an event or
Riskier condition à increases the further into the future it occurs.
Entity,  Judgment regarding the outcome of events or conditions is affected by:
Business,
Ext. Factors
Size and Nature and Degree of influence
complexity of condition of its of EXTERNAL
the ENTITY BUSINESS and FACTORS
Info  Judgment is based on available information and outcomes may be

Available
inconsistent with judgement made at earlier point in time.
B. Responsibilities of the auditor
(Obtain SAAE + Even if not specified in FRFW + Inherent Limitations)

 Obtain SAAE on appropriateness of management’s use of the going concern (GC) basis
 Conclude, based on audit evidence obtained, whether a material uncertainty (MU)
exists about the entity’s ability to continue as a GC.
 Irrespective of FRFW explicit requirement, auditor responsible to obtain SAAE.
 Inherent limitations of auditor:
 Auditor’s ability to detect material misstatements (MM) are greater for future
events or conditions affecting entity’s GC status.
 Hence auditor cannot predict them.
 Accordingly, auditor’s report cannot be viewed as a guarantee as to the
entity’s ability to continue as a GC.
C. Objectives of auditor in accordance with SA 570
The objectives of the auditor are: -

SAAE  Obtain SAAE on the appropriateness of management’s use of the GC;

MU  Conclude whether MU exists related to events or conditions that may cast

significant doubt on entity’s ability to continue as a GC (EorC–SD-GC); &
Report  Report in accordance with this SA.
2 Risk assessment procedures and related activities

When performing RAP (SA 315), auditor shall consider whether EorC-SD-GC.
RAP
Auditor shall remain

If MGT has already If MGT has NOT yet
alert throughout the
performed such an performed such an
audit for audit evidence
assessment- assessment-
of EorC-SD- GC.
Discuss and determine Discuss the basis for

whether individually or the intended use of
collectively, EorC-SD- the GC, and
GC identified and
Inquire of
management whether
Management plans to
whether individually or
address them
collectively, EorC-SD-
GC exists
A. Examples of EorC-SD-GC either individually or collectively
Financial  Net liability or net current liability position

EorC  Fixed-term borrowings approaching maturity without realistic prospects of
renewal or repayment; or excessive reliance on short-term borrowings to
finance long-term assets
 Indications of withdrawal of financial support by creditors
 Negative operating cash flows indicated by historical or prospective FS
 Adverse key financial ratios
 Substantial operating losses or significant deterioration in the value of
assets used to generate cash flows
 Arrears or discontinuance of dividends
 Inability to pay creditors on due dates

CHAPTER 7
 Inability to comply with the terms of loan agreements
 Change from credit to cash-on-delivery transactions with suppliers
 Inability to obtain financing for essential new product development or other
essential investments
Operating  Management intentions to liquidate the entity or to cease operations
EorC  Loss of key management without replacement
 Loss of a major market, key customer(s), franchise, license, or principal
supplier(s)
 Labour difficulties
 Shortages of important supplies
 Emergence of a highly successful competitor
Other  Non-compliance with capital or other statutory or regulatory requirements,
EorC such as solvency or liquidity requirements for financial institutions
 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
 Changes in law or regulation or government policy expected to adversely
affect the entity
 Uninsured or underinsured catastrophes when they occur
B. Evaluating management’s assessment
 The auditor shall evaluate management’s assessment of GC.

 It is not the auditor’s responsibility to rectify the lack of analysis by management.
 Auditor may conclude GC assumption is appropriate even if there is lack of detailed
analysis by management for example, when there is a history of profitable operations.
 Where detailed analysis is made auditor to evaluate management’s:
ASSUMPTIONS PLANS for future

GC assessment on which the action and its
PROCESS; assessment is feasiblity.
based; and
 Auditor to cover same period as that used by management to make its assessment unless:
 A-FRFW, or law or regulation specifies a longer period, or
 If management’s assessment is < 12 months from FS date, request management
to extend period to at least 12 months.
If EorC-SD-GC identified, auditor shall obtain SAAE to determine whether or not a

MU exists related to EorC-SD-GC through performing additional audit procedures,
including consideration of mitigating factors.

3 Additional audit procedures when events or conditions are identified
These procedures shall include: -
Ask to  Where management has not yet performed an assessment of the
make
Assessment entity’s ability to continue as a GC, requesting management to make its
assessment.
Evaluate
Plan–Impact–
 Evaluating management’s plans for future actions in relation to its
Feasibility GC assessment whether outcome of these plans is likely to improve
the situation and whether management’s plans are feasible in the
circumstances.
Cash Flow  Where the entity has prepared a cash flow forecast, and analysis of the
Forecast
forecast is a significant factor in considering the future outcome of events
or conditions in the evaluation of management’s plans for future actions:
Reliability  Evaluating the reliability of the underlying data generated to prepare
of data
the forecast; and
Support for  Determining whether there is adequate support for the assumptions
assumption
underlying the forecast.
Subsequent  Considering whether any additional facts or information have become
Facts
available since the date on which management made its assessment.
WR  Requesting written representations from management and, TCWG,
regarding their plans for future actions and the feasibility of these plans.
Examples of AP Examples of audit procedures when EorC-SD-GC identified
Analyse & Read Inquire & Confirm Evaluate, Perform,

Review etc.
(Forecast, InterimFS, (L&C, Existence of (Order fulfilment, Reg.
Breach of loan, Minutes) Borrowings and 3rd party actions, SE, asset
fund support) disposal)
1 Analysing and 1 Inquiring of the entity’s 1 Evaluating the
discussing cash flow, legal counsel regarding entity’s plans to
profit and other the existence of litiga- deal with unfilled
relevant forecasts with tion and claims and the customer orders
management reasonableness of man-
agement’s assessments
of their outcome and
the estimate of their fi-
nancial implications

CHAPTER 7
2
Analysing and discussing 2 Confirming the 2 Obtaining and reviewing
the entity’s latest existence, terms and reports of regulatory
available interim FS adequacy of borrowing actions
facilities Performing audit
3 Reading the terms 3
of debentures and 3 Confirming the procedures regarding

loan agreements and existence, legality SE to identify those
determining whether and enforceability that either mitigate
any have been breached of arrangements to or otherwise affect
provide or maintain the entity’s ability to
4 Reading minutes financial support with continue as a GC
of the meetings of related and third 4 Determining the
shareholders, TCWG and parties and assessing adequacy of support for
relevant committees for the financial ability of any planned disposals of
reference to financing such parties to provide assets
difficulties additional funds
(Categorisation only for memorization)
4 Auditor’s conclusions
The auditor shall evaluate whether SAAE has been obtained regarding:
Appropriateness of MU exists related

management’s use to EorC-SD-GC
of the GC basis of individually or
accounting collectively.
(MU exists when the magnitude of its potential impact and likelihood of occurrence
is such that, in the auditor’s judgment, appropriate disclosure of the nature and
implications of the uncertainty is necessary)
Adequacy of disclosures when EorC have been identified and auditor

concludes
MU Exists No MU Exists
Determine whether FS disclose- Determine whether FS
(a) Adequately the principal EorC-SD-GC and disclose:
management’s plans to deal with these events Adequately these EorC as
or conditions and per A-FRFW
(b) Clearly that there is a MU related to EorC-
SD-GC and, therefore, that it may be unable to
realize its assets and discharge its liabilities in
the normal course of business.

5 Auditor’s Reporting
Implications for the auditor’s report

FS prepared using GC accounting assumption and…
1 It is INAPPROPRIATE Auditor shall express an adverse opinion
2 GC basis of
accounting is
(A) Adequate Disclosure of a MU is made in the FS
appropriate but a Express an unmodified opinion with separate section under the
MU exists heading “MU Related to GC” to:
 Draw attention to note in FS that discloses such matters.
(B) Adequate Disclo-  State that these:
sure of a MU is Not  EorC indicate MU exists that may cast SD-GC and
Made in the FS  Auditor’s opinion is not modified on the matter.
 Express a qualified opinion or adverse opinion, as appropriate, in accordance with SA 705.

 Basis for Qualified (Adverse) Opinion section state:
 MU exists that may cast SD-GC and
 FS do not adequately disclose this matter.
3 Management
unwilling to make
Consider a qualified opinion or a disclaimer of opinion in
the auditor’s report, because it may not be possible for
or extend its auditor to obtain SAAE regarding management’s use of
assessment when
the GC basis of accounting
requested by auditor
EVALUATION OF MISSTATEMENTS IDENTIFIED DURING THE AUDIT (SA 450)
To evaluate: -
The effect The effect of

of identified uncorrected
misstatements on misstatements (UMs),
the audit and if any, on the FS.

CHAPTER 7
2 Accumulation of misstatements identified during the audit
 Accumulate misstatements identified during audit
 Other than clearly trivial misstatements (Absolutely inconsequential)
Factors  A misstatement may arise from a variety of factors for example,
 inaccuracy in gathering or processing data or
 omission of an amount or disclosure or
 wrongly capitalized machinery repair expenses
3 Consideration of identified misstatements as audit progresses

Revise AS  The auditor shall determine whether the overall audit strategy and audit plan
& AP
need to be revised if: -
Indicates  Nature & circumstances indicate other misstatements may exist à
more MM
that could be material when aggregated with other misstatements
accumulated during audit, or
Nears  Accumulated misstatements approaches materiality level (of SA 320).
Materiality
 Request management to:
Examine a class of Perform procedures

transactions, account to determine the Make appropriate
balance or disclosure (T- amount of the adjustments to the
AB-D) & understand the actual misstatement FS.
cause of a misstatement in the class of
identified T-AB-D, and
If management performs above procedures, auditor to check what misstatements remain.
4 Communication and correction of misstatements

 Communicate on timely basis with the management –
Misstatements accumulated during the audit and request them to correct.
 Why Timely Communication?
 It enables management to evaluate whether the items are misstatements, and
inform auditor if it disagrees.
 It helps to take corrective actions, if any. Such corrections helps in maintaining
accurate accounting books and records and reduces the RoMM of future FS.

 If management refuses to correct (some or all misstatements communicated to it)

 Auditor to obtain an understanding of management’s reasons and
 Take that understanding into account to evaluate whether FS as a whole are
free from MM.
5 Evaluating the effect of UMs

 Reassess Materiality of SA 320 –
Whether it is appropriate in light of actual financial results
 Evaluate the effect of UMs
Determine whether UMs are material, individually or in aggregate. For this consider:
Size, Na-  The size and nature of the misstatements, both in relation to particular
ture & Cir- classes of T-AB-D & FS as a whole, and the particular circumstances of
cumstance
their occurrence and
Prior Period  The effect of UMs related to prior periods on the relevant classes of T-AB-D,
Effects
and the FS as a whole.
6 Communication with TCWG

Communicate with TCWG the following:
 Request that UMs be corrected.
 Communicate all individually material UMs.
 UMs and their individual and overall effect on the auditor’s opinion.
 The effect of UMs related to prior periods on relevant classes of T-AB-D, and FS as a whole.
7 Written Representation from management regarding effects of uncorrected statements

Where management / TCWG believe the effects of UMs are immaterial, individually
and in aggregate, to the FS as a whole, seek a WR on it and attach the summary of
such items to the WR.
8 Documentation regarding misstatements identified during audit

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

CHAPTER 7
WRITTEN REPRESENTATIONS (SA 580)
1 Definition
A written representation is a written statement by management provided to the

auditor to confirm certain matters or to support other audit evidence. WR in this
context do not include FS, the assertions therein, or supporting books and records.
2 WR as audit evidence
(WR are AE, written better, Alerts if not provided, Not SAAE and OAP to apply)
AE  WR are necessary information that auditor requires in connection with audit.
Accordingly, similar to responses to inquiries, WR are audit evidence.
If not  If management modifies or does not provide requested written representations
provided
(WR), it may alert auditor to the possibility of significant issues.
Written  Written, rather than oral, representations may prompt management to
Better
consider matters more rigorously, thereby enhancing the quality of the
Not
representations.
SAAE  WR provide necessary audit evidence, they do not provide SAAE on their own
No impact  The fact that management has provided reliable WR does not affect the
on N-E of
OAP nature or extent of other audit evidence that the auditor obtains.
3 Objectives - SA 580
The objectives of the auditor are to:
Support Respond if
Obtain WR Provided or
Other AE Refused
A B C
A. Obtain WR - From management TCWG that they believe that they have fulfilled
their responsibility for the preparation of the FS and for the completeness of the
information provided to the auditor;
B. Support other audit evidence – As relevant to the FS; and
C. Respond appropriately - To WR provided or not provided by management and TCWG,.

4 From whom WR are requested by auditor?
Request from management with appropriate responsibilities for the FS and
knowledge of the matters concerned.
5 WR Types
WR Types
WR about WR About
Management’s
Responsibilities Specific
Other WR Assertions
Addition to
WR read by
other SAs
Preparation of FS AE to evaluate man-
agement judgments
To support other AE and intentions
Completeness of
Information To support MGT Responsi-
AE supporting man-
bility acknowledgement
agement judgments
To support information
provided to the auditor
A. WR about management’s responsibilities
(I) (II)
Preparation of FS Completeness of
Information
This involves confirmation of fulfilment of management’s responsibilities in

following areas:
I Preparation of the FS
Prepared  WR on management responsibility to prepare FS in accordance with

A-FRFW
A-FRFW, giving fair presentation, if applicable.

CHAPTER 7
MGT Re-  Management has sufficient knowledge of the process followed by the entity
sponsibility
in preparing and presenting the FS due to its responsibility for preparation
and presentation of FS and conduct of the entity’s business.
MGT  Management may also make inquiries of management experts, individuals
Experts
having specialized knowledge relating to matters about which WR are
requested. Such individuals may include:
 An actuary responsible for actuarially determined measurements.
 Staff engineers who may have responsibility for and specialized
knowledge about environmental liability measurements.
 Internal counsel who may provide information essential to provisions for
legal claims.
Language  Use of qualifying language in WR – Like, ‘to the best of its knowledge
and belief’, such WR are reasonable to accept if auditor is satisfied that
representations are being made by responsible and knowledgeable person.
After mak-  Auditor may request that management include in WR, confirmation that it
ing inquiries
has made necessary inquiries to be able to make the requested WR.
II Information provided and completeness of transactions
The auditor shall request management to provide a WR that: -
It has provided the

auditor with all All transactions
relevant information have been recorded
and access as agreed and are reflected in
in the terms of the FS.
engagement; and
Why WR about management responsibilities are necessary?

Auditor is not able to judge solely on other audit evidence whether management
has fulfilled above responsibilities.
Hence such WR are required as an acknowledgement and understanding of
management of its responsibilities in the terms of the audit engagement. The
auditor may also ask management to reconfirm its acknowledgement and
understanding of those responsibilities in WR (Audit Premise).

This is particularly appropriate when: -
Person singing Engagement Indication of Changes in

the engagement terms were management circumstances
terms have prepared in misunderstanding its require it.
changed previous year/s; responsibilities; or
How to describe management’s responsibilities in the WR

“WR required about management responsibilities” – describe responsibilities as
described in the terms of the audit engagement.
B. Other WR
(i) (ii) (iii)

To support other To support MGT To support
AE Responsibility information provided
acknowledgement to the auditor
(i) In addition to WR required in other SAs, auditor can seek WR to support other audit
evidence relevant to FS / assertions in FS.
(ii) Auditor can also seek WR in addition to management’s responsibilities regarding
preparation of FS on matters like:
 Whether selection and application of accounting policies are appropriate; and
 Whether following matters have been recognized, measured, presented or dis-
closed as per A-FRFW:
Plans or intentions Liabilities
That affect carrying value or
classification of assets and 1 2 Both actual and
contingent
liabilities
Assets Laws, regulations and

contractual agreements
Title, Control, Liens or 3 4 Aspects affecting FS,
encumbrances, Pledged as including non-compliance.
collateral
(iii) Additional WR about information provided to the auditor

Example WR that it has communicated to the auditor all deficiencies in internal
control of which management is aware.

CHAPTER 7
C. WR about specific assertions
(i) When obtaining evidence, evaluating judgments and intentions, auditor considers:
 The entity’s past history in carrying out its stated intentions.
 The entity’s reasons for choosing a particular course of action.
 The entity’s ability to pursue a specific course of action.
 The existence or lack of any other information obtained during audit but
inconsistent with management’s judgment or intent.
(ii) WR about specific assertions in FS to support an understanding of management’s
judgment or intent on completeness of a specific assertion.
For example, if the intent of management is important to the valuation basis for
investments, it may not be possible to obtain SAAE without a written representation
from management about its intentions.
6 Date of and Period(s) covered by WR

 WR are necessary audit evidence, hence auditor’s report cannot be dated, before the
date of the WR.
 The date of the WR shall be as near as practicable to, but not after, the date of the
auditor’s report on the FS.
Why?
As auditor is concerned with events occurring up to the date of the auditor’s report the
WR are dated as near as practicable to, but not after, the date of the auditor’s report.
 WR shall be for all FS and period(s) referred to in the auditor’s report.
Why? As management needs to reaffirm that the WR it previously made with respect to
prior periods remain appropriate.
 When current management were not present during all periods referred to in the
auditor’s report
Such fact does not diminish such persons’ responsibilities for the FS as a whole. Ac-
cordingly, the requirement for the auditor to request from them WR that cover the
whole of the relevant period(s) still applies.
7 Form of WR
 Letter addressed to the auditor.

 Where law or regulation requires management to make written public statements
about its responsibilities, which are relevant to this SA then such statements need
not be included in the representation letter.

8 Doubt as to the reliability of WR
Doubt as to the reliability of WR
If the auditor has concerns about If WR are inconsistent with other

audit evidence the auditor shall
perform audit procedures to attempt
to resolve the matter.
competence, integrity, ethical values auditor shall reconsider the

or diligence of management, or about assessment of the competence,
its commitment to or enforcement of integrity, ethical values or diligence of
these, the auditor management, or of its commitment
to or enforcement of these, and
the auditor shall determine effect that such concerns may have on the
reliability of representations and audit evidence in general
If the auditor concludes that the WR are not reliable

auditor shall take appropriate actions, including qualifying opinion or considering
requirements of disclaimer of opinion (SA 705)
9 Requested WR not provided

 If management does not provide one or more of the requested WR, the auditor shall: -
Discuss the matter with management;
 Re-evaluate the integrity of management and evaluate the effect that this may
have on the reliability of representations and audit evidence in general; and
 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 require-
ment of disclaimer of opinion.
Disclaimer of opinion in case of non-reliability of WR about management’s

10 responsibilities or failure to provide such WR
The auditor shall disclaim an opinion on the FS in accordance with SA 705 if WR

about management fulfilling its responsibilities regarding preparation of FS and
about information provided and completeness of transactions:
 There is sufficient doubt about the integrity of management such that the are not
reliable; or
 Management does not provide such WR

CHAPTER 7
COMMUNICATION WITH TCWG (SA 260)
1 Benefits of Two-Way Communication
Communication from auditor is important with TCWG. An effective two-way com-

munication is important in assisting: -
To Both  To understand matters related to audit and developing constructive working
relationship alongwith maintaining auditor’s independence and objectivity.
To Auditor  in obtaining from TCWG information relevant to the audit. For example,
TCWG may assist the auditor in
understanding identifying in providing

the entity and appropriate sources information about
its environment, of audit evidence, specific transactions
and or events; and
TO TCWG  In fulfilling their responsibility to oversee the FR process, thereby reducing

the risks of MM of the FS.
2 Who are “TCWG”?
 The person(s) or organization(s) (e.g., a corporate trustee) with responsibility for
overseeing the obligations related to

strategic direction the accountability of
the entity, this includes
of the entity and
overseeing the FR process.
 Governance structures vary by entities. For example, in some entities,
a supervisory TCWG hold positions TCWG are involved in

board exists that as a part of entity’s managing the entity,
is separate from legal structure like, but in other entities
executive board. company directors. both are different.

 Why it is not possible to specify for all audits persons with whom auditor is to
communicate particular matters of governing interest?
Most
 Governance is the collective responsibility of a governing body, such as a BoD,
entities
Supervisory Board, Partners, Management Committee, Trustees, etc.
Smaller  One person may be charged with governance, for example, the owner-manager
entities
or sole trustee.
Legal  In some cases, TCWG may not be clearly identifiable from applicable legal
FW
framework or other engagement circumstances, for example family-owned
entities and some NPOs.
Agree with  Due to such diversity, auditor may need to discuss and agree with the
Client
engaging party, relevant persons with whom to communicate, using his own
understanding of entity’s governance structure (SA 315).
Matter  Persons with whom to communicate may vary depending on matter to be
communicated.
3 Scope
SA 260 deals with auditor’s responsibility to communicate with TCWG.

The objectives of the auditor are: -
Responsibility,
Panned Scope  To communicate clearly with TCWG the responsibilities of the auditor in relation
& Timing
to the FS audit, and an overview of the planned scope and timing of the audit;
Info
Relevant  To obtain from TCWG information relevant to the audit;
to Audit
Audit
 To provide TCWG with timely observations arising from audit that are
Observa-
tion significant and relevant to their responsibility to oversee the FR process and
2-Way  To promote effective two-way communication between the auditor and TCWG.
5 Determining appropriate persons with whom to communicate
Theauditor shall determine the appropriate person(s) within the entity’s governance
structure with whom to communicate.

CHAPTER 7
6 Matters to be communicated by auditor to TCWG
Auditor responsible for

Auditor’s opinion
responsibilities in
A relation to FS in Management or TCWG
Audit responsibilities for FS not
reduced by Audit.
Planned scope Overview, plan and
B and timing of significant risk areas
the audit
Accounting Esit- Judge- Deviation
Qualitative ments, required
practices Policies, mates &
with from FRFW
Significant difficulties, faced in audit;
Significant Unless all of Significant Circumstances

C findings from TCWG are matters WR affecting form
audit involved in communicat- auditor is and content of
managing ed with man- requesting the auditor's
the entity: - agement; report, and
Any either significant matters

arising during audit
Statement of complaince Eng. Team Network

Auditor’s Firm
with ethical requirements by & Others Firms
independence
D in case of listed Relationships Total For Audit By To
entities that may af- Fees / Non- Firm / Entity/
fect indepen- during Audit Nework Group
dence like the priod Services Firm entity
A. Auditor’s responsibilities in relation to FS audit

 Auditor is responsible for opinion on FS prepared by management with
TCWG oversight and
 The audit does not relieve management or TCWG of their responsibilities.
B. Planned scope and timing of the audit

Auditor shall communicate with TCWG overview of the planned scope and timing
of the audit including significant risks identified.

C. Significant findings from audit

 Qualitative practices of entity’s accounting including:
 Accounting policies,
 Accounting estimates and
 FS disclosures.
When a significant accounting practice, acceptable under FRFW, but not most
appropriate to the entity
 Significant difficulties, if any, encountered during the audit;
 Unless all of TCWG are involved in managing the entity: -
 Significant matters arising during the audit that were discussed, or subject
to correspondence, with management;
 WR the auditor is requesting
 Circumstances affecting form and content of the auditor’s report, and
 Any other significant matters arising during the audit that are relevant to the
oversight of the FR process.
D. Communication of auditor’s independence in case of listed entities (Independence

Communication)
In the case of listed entities, auditor to make communicate to TCWG:
1.
A statement of compliance with relevant ethical requirements regarding
independence by:
engagement team and

the firm and, network firms
others in the firm,
and
2. (i) All relationships that may bear on independence including:
total fees charged audit and non-
during FS period for 1 2 audit services
The effect of service
on the independence provided by the firm
6 3 and network firms
of the auditor,
Allocated to categorise
the effect of services to the entity and
appropriate to assist 5 4 components con-
TCWG in assessing trolled by the entity.

CHAPTER 7
and
(ii) Safeguards applied to eliminate or reduce identified threats to independence.
The auditor shall communicate with TCWG on timely basis the:
 Form, timing and expected general content of communications.
 In writing, significant findings from audit & auditor independence when
required in case of listed entities.
a. Adequacy of the communication process
Evaluate adequacy of 2-way communication. If not, re-evaluate RoMM and abil-

ity to obtain SAAE, and shall take appropriate action.
b. Documentation
Where matters communicated orally, document the such matters, and when and
to whom they were communicated.
Where matters have been communicated in writing, retain a copy.
Communicating Deficiencies in Internal Control to TCWG and

Management (SA 265)
1 Why communication of significant deficiencies in internal control is necessary?
It reflects the importance of these matters and assists TCWG in fulfilling their
oversight responsibilities.
2 Scope
 Auditor’s responsibility to communicate appropriately to TCWG and management

deficiencies in IC the auditor has identified in an audit of FS.
 Auditor when identifying and assessing the RoMM obtains understanding of IC
relevant to audit and accordingly designs audit procedures.
 Such procedures on IC are not for the purpose of expressing an opinion on
effectiveness of IC.
 Auditor may identify deficiencies in IC not only during this risk assessment
process but also at any other stage of the audit.
 SA 265 specifies which identified deficiencies the auditor is required to
communicate to TCWG and management.

3 Objectives
To communicate appropriately to TCWG and management deficiencies in IC
identified during the audit and that, in the auditor’s professional judgment, are of
sufficient importance to merit their respective attentions.
4 Deficiency in IC and Significant Deficiency in IC

 Deficiency in IC – This exists when: -
Ineffective i. A control is designed, implemented or operated in such a way that it is
unable to PorD&C, misstatements in the FS on a timely basis or
Non- ii. A control necessary to PorD&C, misstatements in the FS on a timely basis is
Existence
missing.
 Significant deficiency in IC – A deficiency or combination of deficiencies in IC that,
in the auditor’s professional judgment, is of sufficient importance to merit the
attention of TCWG.
The significance depends not on whether a misstatement has actually occurred, and
even based on likelihood of a potential misstatement and its magnitude. Hence if
may exist even if there are no identified misstatements during the audit.
Matters Considered in Determining Whether Deficiency in IC Constitutes a

5
Significant Deficiency
Examples of matters that the auditor may consider in determining whether a

deficiency or combination of deficiencies in IC constitutes significant deficiency:
(Amount involved, volume, subjectivity, probability of loss,
potential loss, exceptions frequency & cause, IC importance &
cross-interaction)
 The FS amounts exposed to the deficiencies.
 The volume of activity that has occurred or could occur in the account balance or
class of transactions exposed to the deficiency or deficiencies.
 The subjectivity and complexity of determining estimated amounts, such as fair
value accounting estimates.
 The susceptibility to loss or fraud of the related asset or liability.
 The likelihood of the deficiencies leading to MMs in the FS in the future.
 The cause and frequency of the exceptions detected as a result of IC deficiencies.

CHAPTER 7
 The importance of the controls to the FR process, for example:
General monitoring controls (such

as oversight of management).
Controls over the period-
end financial reporting
process (such as controls
1 Controls over the prevention
over non-recurring and detection of fraud.
journal entries). 6 2
Controls over the selection
Controls over significant
transactions outside the
5 3 and application of
significant accounting
entity’s normal course 4 policies.
of business.
Controls over significant

transactions with related parties.
 The interaction of the deficiency with other deficiencies in IC.
6 Indicators of Significant Deficiencies in IC (Examples)
(Ineffective CE, RAP – No or ineffective, Response – Ineffective,

No Mgt oversight on FR, Misstatements in FS & PPI)
 Evidence of ineffective aspects of the control environment, such as: -
 Indications that significant transactions in which management is financially
interested are not being appropriately scrutinised by TCWG.
 Identification of management fraud, whether or not material, that was
 not prevented by the entity’s IC.
 Management’s failure to implement appropriate remedial action on significant
deficiencies previously communicated.
 Absence of a risk assessment process within the entity where such a process
would ordinarily be expected to have been established.
 Evidence of an ineffective entity risk assessment process, such as management’s
failure to identify a RoMM that the auditor would expect the entity’s risk
assessment process to have identified.

 Evidence of an ineffective response to identified significant risks (e.g., absence of

controls over such a risk).
 Evidence of management’s inability to oversee the preparation of the FS.
 Misstatements detected by the auditor’s procedures that were not prevented, or
detected and corrected, by the entity’s IC.
 Disclosure of a MM due to error or fraud as prior period items in the current year’s SPL.
7 Determination of Significant Deficiencies in IC

If the auditor has identified deficiencies in IC, determine, whether, individually or in
combination, they constitute significant deficiencies.
8 Communication of Significant Deficiencies in IC to TCWG
 The auditor shall communicate in writing significant deficiencies in IC identified

during the audit to TCWG on a timely basis.
 Communication with Management on timely basis:
 In writing, significant deficiencies in IC communicated or to be communicated
to TCWG; and
 In any form, Other deficiencies in IC that have not been communicated to
management by other parties and are of sufficient importance to merit
management’s attention.
 Written communication of significant deficiencies in IC to include:
Description a. A description of the deficiencies and an explanation of their potential effects; and
& Impact
b. Sufficient information to enable TCWG and management to understand the
context of the communication.
In particular, the auditor shall explain that: -
Purpose of i. The purpose of audit was for auditor to express an opinion on FS;
Audit
ii. The audit included consideration of IC relevant to the preparation of FS to
Why
IC design audit procedures that are appropriate in the circumstances, but not
for the purpose of expressing an opinion on the effectiveness of IC; and
Those
Identified
iii. 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 TCWG.

CHAPTER 7
NOTES

Ethics & Terms of Audit Engagement
ETHICS & TERMS OF AUDIT ENGAGEMENT

Chapter 11 (Covers SQC 1, SA 210 and SA 220)
Chapter Covers:
Ethics & Professional Ethics
Independence, Threats & Safeguards
Professional Skepticism
SA 210 - Terms Of Engagement
SQC 1 - Quality Control for Firms
SA 220 Quality Control for an Audit
ETHICS & PROFESSIONAL ETHICS
1 MEANING OF ETHICS – A STATE OF MIND
“Ethics” means moral principles which govern a person’s behaviour or his conduct-
ing of an activity.
 Comes from an individual intrinsically.
 Needs to be inculcated in the habit and temperament of an individual, so that
there is an overall culture of ethics
 The force has to be strong enough to withstand any selfish motive or temptation.
 It is a state of mind to act and perform in accordance with moral principles.
 Ethics is the science of morals in human conduct.
 Such moral principles and rules of conduct impose obligations upon individuals.

CHAPTER 11
2 NEED FOR PROFESSIONAL ETHICS
Professions like law, medicine have their code of ethics. In the profession of
auditing, requirement of ethics is manifold as society in general, governments,
clients, taxing authorities, employees, investors, the business and financial com-
munity have tremendous trust in services rendered by a CA.
1. The purpose of assurance engagements is to enhance confidence of the intended

users. Therefore, users need to trust the person who is providing such services.
2. Professional ethics are based on morality. Human nature being what it is, a man,
often, places his personal gain above service and those who do not, they are the
one who command respect and honour.
3. The professional body to which such professionals belong needs to interpret the
concept of public interest broadly for good of public at large.
4. The respect and confidence enjoyed by a profession, is dependent on the strict-
ness and scrupulousness with which such ethics are adhered to by self-discipline.
5. A distinguishing feature of the accountancy profession is its acceptance of the
responsibility to act in the public interest.
6. Professional ethics seek to protect the interests of the profession as a whole and
act as a shield that enables us to command respect.
7. A Chartered Accountant, either in practice or in service, has to:
 Abide by ethical behaviours, and
 Follow fundamental principles of professional ethics while performing their
duties.
8. Users should feel secure that there exists a framework of professional ethics
which governs the provision of those services.
9. Hence ICAI requires its members to comply with the principles of ethics while
performing their duties, whether in practice or in service.
10. Any deviation from the ethical responsibilities brings the disciplinary mechanism
into action against the CAs which may result into fines, suspension of member-
ship, removal from membership or other disciplinary actions.

3 PRINCIPLES BASED APPROACH VS RULES BASED APPROACH TO ETHICS
(ETHICAL OR LEGAL)
Principles-based Rule-based
approach approach
 Requires compliance with spirit of  Rules-based approach to ethics
ethics.  Strictly follows clearly estab-
 Requires accountants to exer- lished rules.
cise professional judgment:  Leads to a narrow outlook and
i) in every situation based spirit of ethics may be overlooked
upon their professional while strictly adhering to rules.
knowledge, skill and expertise.  Are rigid as it may not be possi-
ii) to evaluate every situation to ble to deal with every practical
arrive at conclusions.
situation relying upon rules.
Therefore, it is necessary that spirit of code is followed.
4 FUNDAMENTAL PRINCIPLES OF PROFESSIONAL ETHICS

The fundamental principles of ethics establish the standard of behaviour expected.
A professional accountant shall comply with each of the fundamental principles.
The fundamental principles of professional ethics are as under: -
1 2 3 4 5
Integrity Objectivity Professional Confidentiality Professional

competence & due Behaviour
care
1 Integrity
 Accountant to be straightforward and honest in all professional and business rela-

tionships.
 Integrity implies fair dealing and truthfulness.
 He should not knowingly associate with reports, returns, communications or other
information contains:

CHAPTER 11
i) materially false or misleading statement
ii) information provided negligently or
iii) omits or obscures required information making it misleading.
2 Objectivity
 Objectivity requires an auditor not to compromise professional judgment because of

bias, conflict of interest or undue influence of others.
 Requires not to undertake professional activity if circumstance or relationship un-
duly influences the accountant’s professional judgment.
3 Professional competence and due care
 Attain and maintain professional knowledge and skill to ensure client or employing
organization receives competent professional service, based on current technical and
professional standards (TPS) and relevant legislation; and
 Act diligently and in accordance with applicable technical and professional standards (TPS).
Diligence - Responsibility to act carefully, thoroughly and on a timely basis in an
assignment.
4 Confidentiality
 Maintain confidentiality of information acquired as a result of professional or busi-

ness relationships, so that there is free flow of information from the professional
accountant’s client or employing organization to the accountant.
 Disclosure may be required:
i) When it is required / permitted by law
ii) Authorised by the client or employer or
iii) There is a professional duty or right to disclose when not prohibited by law.
5 Professional Behaviour
 Accountant to comply with relevant laws and regulations

 Avoid conduct that might discredit the profession.
 Not knowingly engage in that adversely affects integrity, objectivity or good reputa-
tion of the profession.

INDEPENDENCE, THREATS &
SAFEGUARDS
1 INDEPENDENCE OF AUDITORS
Independence of an auditor assumes significance in context of providing confidence

to users of financial statements.
 Independence implies that the judgement of a person is not subordinate to the
wishes or direction of another person who might have engaged him, or to his own
self-interest.
 It is not possible to define “independence” precisely. Rules, by themselves, cannot
create or ensure the existence of independence.
 Independence is a condition of mind as well as personal character and should not
be confused with the superficial and visible standards of independence which are
sometimes imposed by law.
 These legal standards may be relaxed or strengthened but the quality of independ-
ence remains unaltered.
 Independence of the auditor has not only to exist in fact, but also appear to so exist to
all reasonable persons. Hence, 2 interlinked perspectives of independence of auditors exists:
Independence Independence
of mind in appearance
A. Independence of mind – expressing opinion without influences that compromise

professional judgment. Allows individual to act with integrity, and objectivity and
professional skepticism; and
B. Independence in appearance – the avoidance of facts and circumstances that a

reasonable and informed third party, having knowledge of all relevant information,
including any safeguards applied, would reasonably conclude a firm’s / member of
team’s, integrity, objectivity or professional skepticism had been compromised.
Independence is a very subjective matter. Therefore CA to determine for himself
whether or not he can act independently in the given circumstances.

CHAPTER 11
2 THREATS TO INDEPENDENCE
Why is it is impossible to define every situation that creates threats to independence
and specify the appropriate mitigating action?
Different circumstances, different nature of assurance engagements and consequently
different threats require different safeguards to be applied. Hence, to protect independ-
ence of auditor, he should understand following 5 threats to independence of auditors:
Self-interest Intimidation
threats Self-review Familiarity threats
threats Advocacy threats
Self-interest threats
Familiar- Auditors are de-
threats occur Self-review
ity threats are terred from acting
when an auditing threats occur:
Advocacy threats self-evident, objectively with
 During review
firm, its partner professional skepti-
of judgement occur when the and occur when
or associate could cism and intimate
or conclusion auditor promotes, auditors form
benefit from a auditors. Example :
reached in a or is perceived to relationships
financial inter-
previous audit promote, a cli- with the cli-
est in an audit
or non-audit ent’s opinion to a ent where they  threat of re-
client.
engagement, or point where peo- end up being too placement over
 Member of
ple may believe sympathetic to disagreements
Examples include : audit team was that objectivity is the client’s in- with the applica-
 direct financial previously a di- getting compro- terests. This can tion of account-
interest or sig- rector or senior mised, occur in many ing principles,
nificant indirect employee of the ways including:  pressure to dis-
financial inter- client. proportionately
est in a client reduce work for
 close relative of audit
 loan or guaran- reduced audit
Example: team working in a senior
tee to or from fees, or
 Auditor deals with position with client
the concerned  being threatened
shares or securi-  former partner of the firm
client with litigation.
ties of the audited being a director or senior
 undue depend-
company, employee with client
ence on a cli-  long audit association and
 Becomes the client’s
ent’s fees  acceptance of signifi-
advocate in litiga-
 close business
tion and third party cant gifts / hospitality
relationship with from client / directors /
disputes.
an audit client employees.
 potential em-
Provisions in Companies
ployment with Act, 2013 regarding rota-
the client and tion of auditors mainly
 contingent fees
address these very famili-
for the audit arity threats.
engagement

3 SAFEGUARDS TO INDEPENDENCE
Safeguards are actions that professional accountants take reduce threats to comply
with the fundamental principles to an acceptable level.
To address the issue, the following guiding principles are to be applied: -
 Auditors should always be and appears to be independent of the entities under audit.
 Consider before accepting an audit, whether it involves threats to independence.
 When threats exist, either:
put in place safeguards
eliminate the to reduce threats to
Desist, or
threat, or acceptable level and
document them.
 Else not accept the work.
PROFESSIONAL SKEPTICISM
1. Professional skepticism (PS) refers to an attitude that includes:
being alert
to conditions a critical
a questioning which may indicate assessment of
possible misstate-
mind, audit evidence.
ment due to error
or fraud, and
2. It signifies that auditor has to remain alert forever. The auditor shall plan and per-
form an audit with PS recognising that circumstances may exist that cause the FS
to be materially misstated.
3. PS includes being alert to, for example:
Audit evidence that contradicts other audit evidence obtained.
Information that questions reliability of documents and responses, used as audit

evidence.

CHAPTER 11
Conditions that may indicate possible fraud.
Circumstances that suggest the need for additional audit procedures above as
required by SAs.
4. Maintaining PS throughout the audit is necessary if the auditor is to reduce the risks of:
 Overlooking unusual circumstances.
 Over generalising when drawing conclusions from audit observations.
 Using inappropriate assumptions in determining the nature, timing, and extent of the
audit procedures and evaluating the results thereof.
5. PS includes consideration of sufficiency and appropriateness of audit evidence obtained

in the light of the circumstances.

6. The auditor may accept records and documents as genuine unless the auditor has
reason to believe the contrary. Nevertheless, is to consider the reliability of information
to be used as audit evidence.
7. In cases of doubt about the reliability of information or indications of possible fraud,

the SAs require that the auditor investigate further and determine what modifications
or additions to audit procedures are necessary to resolve the matter.
8. Past experience of honesty and integrity of the entity’s management and those
charged with governance (TCWG) is considered but that does not relieve auditor of need
to maintain PS.
Q. How application of professional skepticism throughout audit is helpful in reducing
audit risk?
Life is never made unbearable by

circumstance, but only by lack of
meaning and purpose.

SA 210
AGREEING THE TERMS OF AUDIT
ENGAGEMENTS
Objectives Auditor to accept or continue an audit engagement only when the basis upon
which it is to be performed has been agreed, through:
 Establishing whether the preconditions for an audit are present; and
 Confirming that there is a common understanding between auditor and
management and TCWG of the terms of audit engagement.
Precondi- Defined as management and TCWG if applicable,

tions For (a) use an acceptable FRFW in the preparation of the FS; and
An Audit (b) agreement to audit premise.
In order to establish whether the preconditions for an audit are present, the
auditor shall:
(i) Determine whether the financial reporting framework is acceptable; and
(ii) Obtain the agreement of management that it acknowledges and under-
stands 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
(c) To provide the auditor with:
 Access to all information such as records, documentation and
other matters;
 Additional information that the auditor may request from man-
agement for the purpose of the audit; and
 Unrestricted access to persons within the entity from whom the
auditor determines it necessary to obtain audit evidence.
Need of an Audit is a matter of contract between auditor and client (except where law defines
EL the terms like Companies Act).
Therefore, important, that each party should clear the nature of the engagement
and agree in writing with exact scope of the work in an audit engagement letter
(EL) or other suitable form of written agreement to avoid misunderstanding.

CHAPTER 11
Content of The auditor shall agree the terms of the audit engagement with manage-
EL ment or TCWG, as appropriate. Such a letter includes:-
 The objective and scope of the audit of the FS
 The responsibilities of the auditor
 The responsibilities of management
 Identification of the applicable financial reporting framework for the
preparation of the FS and
 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.
EL terms – Law or regulation prescribes in sufficient detail the terms of the audit en-
Prescribed
gagement, the auditor need not record them in a written agreement, except
by Law or
regulation for the fact that:
 such law or regulation applies; and
 management acknowledges and understands its responsibilities (audit
premise).
What hap- Discuss matter with management. Unless required by law or regulation, not
pens if pre- to accept the proposed audit engagement:
conditions
 If auditor has determined that FRFW is unacceptable, or
for an au-
 If agreement of management is not obtained on matters discussed in
dit are not
audit premise (all points of audit premise to be mentioned)
present?
Limitation If management or TCWG impose a limitation on the scope of the auditor’s

on scope work
prior to  such that the auditor believes the limitation will result in the auditor
audit en- disclaiming an opinion on the FS,
gagement  the auditor shall not accept such a limited engagement
acceptance  unless required by law or regulation to do so.
Change in The auditor shall not agree to a change in the terms of the audit engage-
the terms ment where there is no reasonable justification for doing so.
of the audit
engagement

Request from Reasonable justifications could be – Change in terms resulting from:

Entity to  change in circumstances affecting the need for the service,
change the  a misunderstanding as to the nature of an audit as originally requested or
Terms -When  a restriction on the scope of the audit engagement, whether imposed by man-
Reasonable agement or caused by other circumstances.
Justification Auditor to consider the justification given, particularly the restriction on the scope
Exists? of the audit engagement.
Change If it appears that the change relates to information that is incorrect, incomplete
may not be or otherwise unsatisfactory.
considered An example might be where the auditor is unable to obtain sufficient appropriate
reasonable audit evidence regarding receivables and the entity asks for the audit engage-
when…? ment to be changed to a review engagement to avoid a qualified opinion or a
disclaimer of opinion.
What should 1st - Determine whether there is reasonable justification for doing so.
auditor con- 2nd - When engaged to perform an audit in accordance with SAs may also need
sider before to assess any legal or contractual implications of the change.
agreeing to 3 - If auditor concludes there is reasonable justification to change the audit
rd
change the engagement to a review or a related service,

audit en-  the audit work performed to the date of change may be relevant to the
gagement changed engagement.
to the en-  However, the report on the related service would not include reference to:
gagement i) The original audit engagement or
providing ii) Any procedures performed in the original audit engagement
Lastly- If the terms of the audit engagement are changed, the auditor and man-
lower level of
agement shall agree on and record the new terms of the engagement in an en-
assurance?
gagement letter or other suitable form of written agreement.
Recourse in
If the auditor is unable to agree to a change of the terms of the audit en-
case of non-
gagement and is not permitted by management to continue the original
agreement to a
change in terms audit engagement, the auditor shall:
of engagement  Withdraw from the audit engagement where possible under applicable
and manage- law or regulation and
ment limita-  Determine whether there is any obligation, either contractual or
tion to continue otherwise, to report the circumstances to other parties, such as TCWG,
original engage- owners or regulators.
ment

CHAPTER 11
Terms Of
Engagement Recurring Audit - Audit which is performed by an auditor over years.
In Recur- Auditor shall assess whether circumstances require revision in terms of the
ring Audits audit engagement and whether there is a need to remind the entity of the
– Whether
existing terms of the audit engagement.
new audit
engage- The auditor may decide not to send a new audit engagement letter or other
ment letter written agreement each period.
required in However, the following factors may make it appropriate:
every pe- (i) Any indication that the entity misunderstands the objective and
riod? scope of the audit.
(ii) Any revised or special terms of the audit engagement.
(iii) A recent change of senior management.
(iv) A significant change in ownership.
(v) A significant change in nature or size of the entity’s business.
(vi) A change in legal or regulatory requirements.
(vii) A change in the FRFW adopted in the preparation of the FS.
(viii) A change in other reporting requirements.
Q. A Chartered accountant is conducting audit of a client for last two years. Before
proceeding to start audit for next year, he notices that there is substantial
change in management. Besides, client has ventured into areas of business
activity which were not present at time of accepting initial audit engagement.
Discuss responsibility of auditor in this regard in context of SA 210.
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“QUALITY CONTROL FOR FIRMS THAT PERFORM AUDITS AND

SQC 1 REVIEWS OF HISTORICAL FINANCIAL INFORMATION, AND OTHER
ASSURANCE AND RELATED SERVICES ENGAGEMENTS”
AUDIT QUALITY
SQC 1 SA 220
Quality Control Quality Control

Deals with all engagements including Applies to audit engagements only
audits, reviews and other assurance
and related service engagements
SA 220 applies to a particular
SQC 1 applies to entire firm audit engagement
SQC 1 requires firm to establish a system of quality control (QC). System should consist
of policies designed to obtain reasonable assurance that the firm and its personnel:
 comply with professional standards and regulatory & legal requirements (PS-RLs), and
 that reports issued by the firm or engagement partners are appropriate in the circumstances.
1 ELEMENTS OF SYSTEM OF QUALITY CONTROL
(Set of policies and procedures addressing following elements)
Acceptance and continu-

ance of client relationships
and specific engagements
Ethical requirements Human resources
Engagement performance
5
Leadership respon-
sibilities for quality
within the firm
Monitoring
6
Documentation, Communication & Feedback:
Quality control policies and procedures (QCPP) should be documented and
communicated to the firm’s personnel.
Encourage its personnel to communicate their views or concerns on QC matters.

CHAPTER 11
1 Leadership responsibilities for quality within the firm
 SQC 1 requires firms to design policies and procedures (P&Ps) to promote internal
culture that quality is essential in performing engagements.
 Firm’s CEO or managing partners to assume ultimate responsibility for QC.
 Firm’s persons assigned operational responsibilities for firm’s QC system by the CEO
or managing partners should have sufficient and appropriate experience, ability and
the necessary authority to assume that responsibility.
2 Ethical requirements
The P&Ps should provide reasonable assurance that firm and its personnel comply
with relevant ethical requirements contained in the Code of ethics issued by ICAI.
Fundamental principles prescribed in code include integrity, objectivity, professional
competence and due care, confidentiality and professional behaviour.
Independence (Basic, Who will follow, P&P enables to…, EP + Team responsible to
communicate and Written confirmation)
 Observance of “Independence” in all engagements is also a fundamental requirement.
 P&Ps designed to provide reasonable assurance that following maintain independ-
ence where required by the Code:
its network firm

personnel experts con-
the firm tracted, and personnel
 Such P&Ps should enable the firm to:

i) Communicate the requirements relating to independence to its personnel
ii) Identify & evaluate circumstances & relationships creating threats to
independence, and
iii) to take appropriate action to eliminate or reduce them to acceptable level by
applying safeguards (or, if considered appropriate, withdraw from the
engagement).
 Communication Mechanism
There should exist a mechanism by which:

i) EP : To provide firm with relevant information about client engagements

ii) Personnel of the Firm : To promptly notify firm of circumstances and rela-
tionships that create a threat to independence.
All breaches of independence should be promptly notified to firm for appropri
ate action so that independence requirements are satisfied.
 Annual Written Confirmation from all Personnel
At least annually, the firm should obtain written confirmation of compliance with
its P&Ps on independence from all firm personnel required to be independent in
terms of the requirements of the Code.
Q. How does SQC 1 ensure that independence in engagements is not breached by
an audit firm?
3 Acceptance and Continuance of Client Relationships and Specific Engagements
 A firm before accepting an engagement should acquire vital information about the
client. Firm to undertake or continue relationships and engagements only where:
i) Client integrity has been considered;
ii) Is competent to perform engagement w.r.t. capability, time & resources; and
iii) Can comply with the ethical requirements (as discussed above)
 When issues have been identified, and the firm still decides to accept or continue the client
relationship or a specific engagement, it should document how the issues were resolved.
 Integrity of a client - matters that the firm considers include, for example:
 The identity & business reputation of the client’s principal owners, KMP etc.
 The nature of the client’s operations, including its business practices.
 Information concerning the attitude of the client’s principal owners.
 Indications of an inappropriate limitation in the scope of work.
 Client is aggressively concerned with maintaining the firm’s fees as low as possible.
 Indications that the client might be involved in money laundering.
 The reasons for the proposed appointment and non-reappointment of the firm.
 Source of Information on client integrity:

 Communications with existing or previous providers of professional accountancy
services to the client, and discussions with other third parties.

CHAPTER 11
 Conflict of Interest between firm and client -
It should be properly resolved before accepting the engagement.
 Subsequent acquisition of information, that if acquired earlier would lead to decline
of engagement
Refer firm’s P&Ps on continuance of engagement and client relationship which
should also consider:
(a) The professional and legal responsibilities that apply to the circumstances, includ-
ing whether there is a requirement for the firm to report to the person or persons
who made the appointment or, in some cases, to regulatory authorities; and
(b) The possibility of withdrawing from the engagement or from both the engage-
ment and the client relationship.
4 Human resources
The firm should establish P&Ps designed to provide reasonable assurance that it has:
i) sufficient personnel with the capabilities, competence, and commitment to
ethical principles necessary to perform its engagements in accordance with PS-
RLs, and
ii) to enable the firm or engagement partners to issue reports that are appropriate
in the circumstances.
Such P&Ps should address relevant HR issues including recruitment, compensation,
training, career development, performance evaluation etc. There should be emphasis
on the continuing professional development of firm’s personnel.
5 Engagement performance
Direction – Assembly of Engagement

Engagement Difference
Supervision - Consultation final engage- Documentation
QC Review of opinion
Review ment files (ED)
1 Direction – Supervision - Review
Consistency in quality of engagement performance is achieved through:

5. appropriate documenta-
tion of work performed.
4. methods of reviewing
performance of work,
3. processes of
engagement supervi-
2. processes for com- sion and training,
plying with engage-
ment standards, 1. briefing of engagement
teams of their objectives,
2 Consultation
Consultation includes discussion, at the appropriate professional level, with

individuals within or outside the firm who have specialized expertise, to resolve a
difficult or contentious matter pertaining to an engagement. It may be from
external sources.
3 Engagement QC Review
 Coverage
Significant judgments made in an engagement should be reviewed by an en-
gagement QC reviewer for taking an objective view before the report is issued.
Extent 
The extent of the review depends on the complexity of the engagement and the
risk that the report might not be appropriate in the circumstances.
 Responsibility of EP
The review does not reduce the responsibilities of the engagement partner.
Applicable 
Engagement QC review is mandatory for all audits of FS of listed entities.
In respect of other engagements, the firm should devise criteria to require EQC
Review.

CHAPTER 11
4 Difference of opinion
There could be difference of opinion:

 within engagement team,
 with those consulted and
 between EP and Engagement QC Reviewer.
The report should only be issued after resolution of such differences. The matter
should be resolved by following established procedures of firm like by consulting with
another practitioner or firm, or a professional or regulatory body.
5 Assembly of final engagement files
P&P to require:
 assembly of working paper files on timely basis (not more than 60 days of auditor’s
report in case of audit and for others within limit appropriate), after the engagement
reports have been finalized
 P&Ps should be designed to maintain the confidentiality, safe custody, integrity, ac-
cessibility and retrievability of engagement documentation.
6 Engagement Documentation (ED)

 ED is the property of the firm (unless otherwise specified by law or regulation)
 The firm may, at its choice, make portions / extracts available to clients, provided it
does not affects the validity of the work performed or its independence.
 Retention Period for ED
i) Facilitate Monitoring - Period of time sufficient to permit those performing mon-
itoring procedures to evaluate the firm’s compliance with its system of QC, or for
a longer period if required by law or regulation.
ii) For audit engagements – Ordinarily no shorter than 7 years from the date of the
auditor’s report, or, if later, the date of the group auditor’s report.
6 Monitoring
The firm should ensure that P&Ps relating to the system of QC are
Operating Complied with in

Relevant, Adequate,
effectively and practice.

P&Ps should include an ongoing evaluation of the firm’s system of QC, and a
periodic inspection of a selection of completed engagements.
SA 220
QUALITY CONTROL FOR AN AUDIT OF FS
1 OBJECTIVE OF SA 220
The objective of the auditor is to implement QC procedures at the engagement level

that provide the auditor with reasonable assurance that: -
 The audit complies with PS-RLs and
 The auditor’s report issued is appropriate in the circumstances.
2 EP & TEAM’S RESPONSIBILITY
Assuming that the firm is subject to SQC 1, SA 220 requires:

 EP (engagement partner) to be responsible for applying QC procedures on a par-
ticular audit engagement in accordance with SA 220.
 Engagement teams to:
i) implement QC procedures applicable to audit engagement; and
ii) provide firm with relevant information required by QC policies and procedures
relating to independence.
2 SA 220 IS MODELLED ON LINES OF SQC 1
It describes responsibilities of EP in relation to following matters: -

 Leadership responsibilities for quality on audits
 Relevant ethical requirements
 Acceptance and continuance of client relationships and audit engagements
 Assignment of engagement teams
 Engagement performance
 Monitoring
A. Leadership responsibilities for quality on audits
EP is to take responsibility for the overall quality on each audit engagement. The
actions of the EP and communications team members to emphasise:

CHAPTER 11
 The importance to audit quality of: -
i) Performing work that complies with PS-RLs;
ii) Complying with the firm’s QCPP as applicable;
iii) Issuing auditor’s reports that are appropriate in the circumstances; and
iv) The engagement team’s ability to raise concerns without fear of reprisals.
 The fact that quality is essential in performing audit engagements.
B. Relevant ethical requirements
The responsibilities of an EP :

 Identifying a threat to independence that safeguards may not be able to eliminate or
reduce to an acceptable level.
 Reporting by EP to the relevant persons within the firm to determine appropriate
action. This may include:
i) eliminating the activity or interest that creates the threat, or
ii) withdrawing from the audit engagement, where withdrawal is legally permitted.
C. Acceptance and Continuance of Client Relationships and audit Engagements
EP in lines of SQC 1 requires obtaining such information as it considers necessary in

the circumstances before accepting an engagement with a new client or with an
existing client. Following information assist the EP in determining whether the
conclusions reached regarding the acceptance and continuance of client relationships
and audit engagements are appropriate:
 integrity of principal owners,
 competence of engagement team and consideration of necessary capabilities
including time and resources,
 compliance with relevant ethical requirements; and
 significant matters arisen during current or previous audit engagement and their
implications
D. Assignment of engagement teams
It should be ensured by EP 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 in accordance with PS-RLs.

E. Engagement Performance
 EP has the responsibility for direction, supervision and performance of audit

engagement in accordance with PS-RLs.
 He is responsible for auditor’s report being appropriate in circumstances.
 Further, review of audit documentation before issue of audit report is his responsibility.
 It has to be ensured that sufficient appropriate audit evidence (SAAE) has been
obtained to support the conclusions reached and for issuance of auditor’s report.
 EP 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.
 For audits of FS of listed entities, and those other audit engagements, if any, for which
the firm has determined that an engagement QC review is required, the EP shall:
i) Determine that an engagement QC reviewer has been appointed.
ii) Discuss significant matters arising during the audit engagement, including
those identified during the engagement QC review, with the engagement QC
reviewer.
iii) Not date the auditor’s report until the completion of the engagement QC review.
 If differences of opinion arise within the engagement team, with those consulted
or, where applicable, between the EP and the engagement QC reviewer, the
engagement team shall follow the firm’s P&Ps for dealing with and resolving
differences of opinion.
F. Monitoring
1. An effective system of QC includes a monitoring process designed to provide the

firm with reasonable assurance that its P&Ps relating to the system of QC are rel-
evant, adequate, and operating effectively.
2. The EP shall consider the results of the firm’s monitoring process as evidenced in the
latest information circulated by the firm and, if applicable, other network firms and
whether deficiencies noted in that information may affect the audit engagement.
3. The EP should document following matters pertaining to an audit engagement: -
 Issues identified with respect to compliance with relevant ethical requirements
and how they were resolved.

CHAPTER 11
 Conclusions on compliance with independence requirements that apply to the
audit engagement, and any relevant discussions with the firm that support
these conclusions.
 Conclusions reached regarding the acceptance and continuance of client
relationships and audit engagements.
 The nature and scope of, and conclusions resulting from, consultations
undertaken during the course of the audit engagement.
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AS PER

Ch-1 Nature , Objective and

Ch-7 Completion & Review SA

Ch-11 Ethics & Terms of Audit

For Further Details-

NATURE, OBJECTIVE AND

Origin of word “AUDIT” (Medieval times – 1100 to 1500 AD)

Industrial revolution in Europe (Late 18th / Early 19th Century)

Auditor of Government Entities in India (1860)

Institute of Chartered Accountants of India (1949)

2 MEANING AND NATURE OF AUDITING

AB AUDIT HOGA SABSE SCORING FA S T 1.1

A Audit is an independent examination of financial information

B Audit can be of entity that is a

C The purpose of audit is to express an opinion on the FS.

D Auditor to check that FS are not misleading anybody

1.2 FA S T CA INTER AUDIT - BY CA SJ

3 AUDITING- RELATIONSHIP WITH OTHER DISCIPLINES

Law An auditor should have a good knowledge of business laws and

Economics Auditor is expected to be familiar with the overall economic

Statistics Knowledge of statistical sampling for meaningful conclusions.

Mathematics For verification of inventories and other checks.

AB AUDIT HOGA SABSE SCORING FA S T 1.3

 Reasonable assurance is to be distinguished from absolute assurance.

1.4 FA S T CA INTER AUDIT - BY CA SJ

Applicable financial reporting framework

A SCOPE OF AUDIT- WHAT IT INCLUDES

Scope of audit of FS:

AB AUDIT HOGA SABSE SCORING FA S T 1.5

B SCOPE OF AUDIT- WHAT IT DOES NOT INCLUDES

 Responsibility of preparation and presentation of FS – Lies with Management

6 INHERENT LIMITATIONS OF AUDIT

1.6 FA S T CA INTER AUDIT - BY CA SJ

B Nature of Audit procedures

C Not in nature of investigation

D Timeliness of financial reporting and decrease in relevance of information over time

AB AUDIT HOGA SABSE SCORING FA S T 1.7

External audit engagements

The purpose of external audit engagements is to enhance the degree of confidence

8 BENEFITS OF AUDIT-WHY AUDIT IS NEEDED?

9 AUDIT- MANDATORY OR VOLUNTARY?

Companies Act – Every company to get its accounts audited

10 WHO APPOINTS AN AUDITOR?

1.8 FA S T CA INTER AUDIT - BY CA SJ

Firm - Auditor is appointed by partners of firm.

11 TO WHOM REPORT IS SUBMITTED BY AN AUDITOR?

A Elements of an Assurance Engagement

Following elements comprise an assurance engagement: -

4 Sufficient appropriate evidence

AB AUDIT HOGA SABSE SCORING FA S T 1.9

5 A written assurance report in appropriate form

B Meaning of Review; Audit Vs. Review

Audit is a reasonable assurance engagement. However, Review is a limited assurance

C Types of Assurance Engagements- Reasonable assurance engagement vs. Limited

Reasonable assurance engagement Limited assurance engagement

Reasonable assurance engagement Limited assurance engagement provides

It performs elaborate and extensive It performs fewer procedures as compared

It draws reasonable conclusions on the It involves obtaining sufficient appropri-

Example of reasonable assurance en- Example of limited assurance engage-

D Prospective financial information

1.10 FA S T CA INTER AUDIT - BY CA SJ

“Historical financial information” Vs “Prospective financial information.”

Examples of assurance engagements

Example of engagement assurance Type of assurance engagement