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Description

SpiraaTM

AR W AL

A COMPLETE GUIDE FOR ADVANCE AUDITING

(CA FINAL)

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SpiraaTM A Complete Guide For

AR W AL

ADVANCE AUDITING (CA FINAL)

SUMIT AGGARWAL

• With solved Question Papers for Last 34 Exams • With Short Notes for Quick Revision

Foreword by

AMARJIT CHOPRA

SPIRAA PUBLISHING INC

NEW DELHI

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Copyright © 2014 SUMIT KUMAR AGGARWAL (All right Reserved) Printing & Publishing right with SUMIT KUMAR AGGARWAL

No part of this publication including Heading & Style may be reproduced or copied in any form (including graphic,

electronic or mechanical form) or by any means (including photocopying,

taping or storing in any information retrieval system) or reproduced in any disc,

perforated media or any other information storage device,

or translated in any other language without prior written permission of SUMIT KUMAR AGGARWAL

Any infringement shall result in criminal prosecution and civil claim for damages

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First Edition

Price : Rs

Published by

Spiraa Publishing Inc

-110085

-110085

Printed at

Disclaimer:

Every effort has been made to present this publication in the most authentic form without any errors and omissions

In spite of this errors might have inadvertently erupt in,

or there may be a difference of opinion on certain provisions,

or some judicial ruling might have been lost sight of

Any mistake,

error or discrepancy noted may be kindly brought to the notice of the Publisher,

which shall be dealt with suitably

It is notified that neither the Author nor the Publisher guarantees the accuracy or completeness of any information published herein,

the Author or seller will not be responsible for any damage or loss,

arising out of use of this information

This work is published with the understanding that the Publisher and the Author are supplying information but are not attempting to render any services

It is suggested that to avoid any doubt,

the reader should cross check all the facts,

law and contents of this publication with original Government Publications or Notifications

For binding mistakes,

misprints or for missing pages etc

the publisher’s entire liability,

and buyer’s exclusive remedy,

is replacement of this publication,

subject to availability of copies

All expenses in this connection are to be borne by the purchaser

All disputes are subject to Delhi Jurisdiction only

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About the Author

AR W AL

Sumit Kumar Aggarwal is a commerce graduate from Bikaner University,

having done his graduation from Seth G

Bihani S

He qualified Chartered Accountancy Course in 2005,

he also completed his Master in Commerce in 2005

He has cleared various exams conducted by NSE

He also qualified certification course in International Financial Reporting Standard (IFRS) from ICAI in January 2010

He is currently teaching auditing to CA Students & functioning as a Practicing Chartered Accountant

He is also a member of Institute of Certified Management Accountant,

Foreword

Financial Statements are important as these reveal the state of affairs of a particular entity on a particular date as well as the performance of the entity over the accounting period

These need to be transparent and give true and fair view of the state of affairs and of profit/loss for the period

Though the responsibility for preparation of financial statements lies with the managements,

to ensure that sound accounting policies and the relevant accounting standards have been complied with,

With a view to enable auditor to discharge his duties effectively and efficiently,

Standards on Auditing have been laid down

The same are in line with the Standards laid down by International Auditing and Assurance Standards Board (IAASB)

The Institute of Chartered Accountants of India have pronounced Standards on Auditing

These Standards lay down the responsibilities of the auditors and the procedures to be followed by them

Any deviation from these Standards has to be explained by the auditor giving the reasons,

In certain cases he may be required to modify his report

I am indeed glad to know that CA Sumit Kumar Aggarwal has authored "A Complete Guide For Advanced Auditing" for CA Final students

He has covered the various Standards and other topics meticulously

He has taken pains to include topics on Professional Ethics,

Bank Audit,

Cost Audit etc

He has also deftly handled the questions with answers from last 34 exams

The effort is laudable and I am sure that the students would be immensely benefitted by the book

With best wishes CA

Amarjit Chopra,

Fellow Member ICAI

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Preface It gives me immense pleasure in presenting before the student of C

the first edition of the book on “Advanced Auditing and Professional Ethics”

Auditing is one of the most dynamic subjects in the C

The Ministry of Company Affairs has replaced the Old “Companies Act,

2013”

The Institute of Chartered Accountants of India has revised most of the Standards on Auditing

The students of Chartered Accountancy are expected to have an expert knowledge of these SAs and other pronouncements

The present book has been written keeping in view the requirements of C

(Final) examination of the Institute of Chartered Accountants of India

The features of this book are as follow:

Salient Features: • Presentation of whole Syllabus in an easy language to understand the complex subject matter

• Tabular and graphic presentation to facilitate easy understanding and learning

• Inclusion of flowcharts on various topics,

including Standards on Auditing

• Presentation of maximum topics in point-wise manner

• Upto date amendments including Companies Act,

Clause 49 of Listing Agreement,

Revised form 3CD – Tax Audit Report etc

• Illustration of all “Audit Report” as per SA 700,

SA 705 & SA 706 at one place (See Chapter 24) for quick understanding of “Audit Report” in different situations with minimum time frame & fast understandability

• All Example of Engagement Letter as per SA 210,

SA 2400,

SRE 2410,

SRS 4400,

SRS 4410 at one place (See Chapter

• All Illustration of Audit Report,

Review Report & Certificate as per SA 800,

SA 805,

SRE 810,

SRE 2400,

SRE 2410,

SAE 3400,

SRS 4400,

SRS 4410 at one place (See: Chapter

Review Report in different situations & their comparison with minimum time frame & fast understandability

• Full coverage of Questions appeared in past 34 exams has been arranged in following manners: ◊ Chapter wise/topic wise ◊ Standard of Auditing wise ◊ Accounting Standard wise

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Advance Auditing and Professional Ethics

◊ Clause wise & Schedule wise (Chapter – Professional Ethics) ◊ Clause wise (Chapter – Audit under Fiscal Law (Form 3CD) Graphs at the beginning of every chapter,

showing marks allotment in last twenty examinations

List of questions including case study’s appeared in past 34 examinations given at the end of each chapter

Suggested answer given after Questions,

so that student could first try to recall the Law/points/SA/Section/Act related to that case study and try to solved out the case study before seeing the suggested answer

It will enhance their irretrievability power

It will also help students to have an idea of paper style

Short Notes of all Chapters given at the end of the book (See Chapter – 26) for Quick revision

Table Showing Importance of Chapter on the Basis of Marks Allotment in Past Examinations

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Preface

I am thankful to my students and colleagues for their valuable suggestions while presenting this first edition

also grateful to “Spiraa Publishing Inc

” for their efforts in publishing the book

Suggestions and criticism from all readers would be highly appreciated and acknowledged

Finally,

I hope that students will find this book beneficial from exam point of view

In case of any suggestions,

please feel free in writing to me at [email protected]

Wishing every success to the readers

CA Sumit Kumar Aggarwal

For Legal and Regulatory updates give a missed call on 040-39-36-39-39

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Contents at a Glance INDEX

» » »

About the Author Preface to First Edition Syllabus (May 2015 Exams & Onwards)

CA Final November 2014 Examination

Study Plan

How to Prepare for Theory Subject

Table Showing Importance of Chapter on the Basis of Marks Allotment in Past Examinations

List of Abbreviations

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- 11 12

- 14 15

PLANNING AND PROGRAMMING RISK ASSESSMENT,

INTERNAL CONTROL & THE SARBANE

Chapter 1 1A 1B 2 Chapter 3

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Contents at a Glance

CA 24 25 26

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Chapter 19 20 21 22 Chapter 23 23 A 23 B 23 C Chapter

AUDIT OF CONSOLIDATED FINANCIAL STATEMENTS COST AUDIT AUDIT REPORT Part

MANAGEMENT & OPERATIONAL AUDIT INVESTIGATION AND DUE DILIGENCE LIABILITIES OF AUDITOR PEER REVIEW Part

1949 Part

MANAGEMENT REPRESENTATION LETTER,

AUDIT REPORT & CERTIFICATION ETC

AS PER STANDARDS OF AUDITING QUESTION BANK WITH ANSWER OF PAST 34 EXAMS SHORT NOTES FOR CHAPTER 1 TO 23 FOR QUICK REVISION

Auditing and Assurance Standards

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AUDITING AND ASSURANCE STANDARDS

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Title of the Standard

Standards on Qualitiy Control (SQCs)

Quality Control for firms that Perform Audits and Reviews of Historical Financial Information and Other Assurance and Related Services Engagements

Ist April' 2009)

200-299

General Principles and Responsibilities

Overall Objectives of the Independent Auditor and the Conduct of an Audit in Accordance with Standards on Auditing (w

Agreeing the Terms of Audit Engagements (w

Quality Control for an Audit of Financial Statements (w

Audit Documentation (w

The Auditor’s Responsibilities Relating to Fraud in an Audit of Financial Statements (w

Consideration of Laws and Regulations in an Audit of Financial Statements (w

Communication with Those Charged with Governance (w

Communicating Deficiencies in Internal Control to Those Charged With Governance and Management (w

Responsibility of Joint Auditors (w

Ist April' 1996)

Risk Assessment and Response to Assessed Risks

300-499

Planning an Audit of Financial Statements (w

Identifying and Assessing the Risk of Material Misstatement through Understanding the Entity and Its Environment and Internal Controls (w

Materiality in Planning and Performing an Audit (w

The Auditor’s Responses to Assessed Risks (w

Audit Considerations Relating to an Entity Using a Service Organisation (w

Evaluation of Misstatements Identified During the Audit (w

Audit Evidene

Audit Evidence (w

Audit Evidence—Specific Considerations for Selected Items (w

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Advance Auditing and Professional Ethics

Chapter- 1

External Confirmations (w

Initial Audit Engagements – Opening Balances (w

Analytical Procedures (w

Audit Sampling (w

Auditing Accounting Estimates,

Including Fair Value Accounting Estimates,

Related Parties (w

Subsequent Events (w

Going Concern (w

Written Representations (w

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600-699

Using work of Others

Using the Work of Another Auditor (w

Ist April 2002)

Using The Work of Internal Auditors (w

Using the Work of an Auditor’s Expert (w

700-799

Audit Conclusions and Reporting

Forming an Opinion and Reporting on Financial Statements (w

Modifications to the Opinion in the Independent Auditor’s Report (w

Emphasis of Matter Paragraphs and Other Matter Paragraphs in the Independent Auditor’s Report (w

Comparative Information—Corresponding Figures and Comparative Financial Statements (w

The Auditor’s Responsibility in Relation to Other Information in Documents Containing Audited Financial Statements (w

Specialised Areas

800-899

Special Considerations-Audits of Financial Statements Prepared in Accordance with Special Purpose Frameworks (w

Special Considerations—Audits of Single Financial Statements and Specific Elements,

Accounts or Items of a Financial Statement (w

Engagements to Report on Summary Financial Statements (w

20002699

Standards on Review Engagements (SREs)

SRE 2400 Engagements to Review Financial Statements (w

SRE 2410 30003699

Standards on Assurance Engagements (SAEs)

SAE 3400 The Examination of Prospective Financial Information (w

Ist April' 2007)

SAE 3402 Assurance Reports on Controls at a Service Organisation (w

Standard on Related Services (SRSs) Engagements to Perform Agreed-upon Procedures Regarding Financial Information (w

Ist April' 2004)

SRS 4410 Engagements to Compile Financial Information (w

Ist April' 2004)

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Chapter- 1

Auditing and Assurance Standards

General Clarification General Clarification (GC)-AASB/2/2004 on SA 210 (Refer SA 210) General Clarification (GC)-AASB/1/2002 on SA 620 (Refer SA 620)

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QUALITY CONTROL FOR FIRMS THAT PERFORM AUDITS AND REVIEWS OF HISTORICAL FINANCIAL INFORMATION AND OTHER ASSURANCE AND RELATED SERVICES ENGAGEMENTS

IST APRIL’ 2009)

Introduction: The objective of the SQC is to implement quality control procedures at the firm level that provide reasonable assurance that: • The firm performs engagements in accordance with professional standards and regulatory and legal requirements,

and • Enable the firm to issue reports that are appropriate in the circumstances

Element of Quality Control: The firms system of quality control should include policies and procedures w

following: • Leadership responsibilities for quality within the firm • Ethical requirements • Independence • Acceptance & continuance of client relationship & specified engagements • Human resources • Engagement performance • Monitoring

Leadership Responsibilities for Quality of an Audit: The engagement partner should take responsibility for the overall quality on each audit engagement to which that partner is assigned

Engagement team should have appropriate competence and capabilities to perform the audit engagement in accordance to the professional standards and regulatory and legal requirements

Ethical Requirements: The firm should establish policies & Procedures to ensure compliance with relevant ethical requirements which include: • Integrity • Objectivity • Professional competence & due care • Confidentiality • Professional behavior

Independence: Firm should establish policies and procedures designed to provide it with reasonable assurance that the firm,

its personnel and where applicable,

other subject to independence requirements,

maintain independence where required

For that purpose: • Firm should communicate Independence requirements to personnel

• Identify circumstances that create threats to Independence

• Take appropriate action to eliminate those threats or reduce them to an acceptable level or if considered appropriate,

firm should obtain written confirmation of compliance with independence from relevant firm personnel

audit engagement partner should be rotated after pre-defined period (maximum 7 Years)

• For all audit or attestation engagements where regulatory or other authorities require the rotation of personnel after a specified period,

the firm’s policies and procedures should address these requirements

Acceptance and Continuance of Client Relationship and Specified Engagements: • Firm should ensure that it will undertake / continue relationships only where it: ◊ Has considered integrity of client

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Advance Auditing and Professional Ethics

Chapter- 1

◊ Is competent to perform the engagement

◊ Can comply with legal and ethical requirements • When issues have been identified,

and the firm has decided to accept or continue the engagement,

the firm should document how the issues were resolved

if firm obtains information that would have caused it to decline an engagement,

if information had been available earlier,

then consider: ◊ Communicating it to appointing authority & regulatory authority

& ◊ Possibility of withdrawing from the engagement or from both the engagement & client relationship

Human Resources: • Firm should establish policies & Procedures which provide a reasonable assurance that it has sufficient personnel (capable,

competent & committed) to perform its engagement as per professional standard & regulatory requirements & to issue appropriate reports

• Firm should assign appropriate staff to perform engagements

Engagement Performance

with individuals within or outside the firm who have relevant specialized expertise

Firm should establish policies and procedures designed to provide it with reasonable assurance that: • Appropriate consultation takes place on different matters • The nature and scope of such consultations are documented

and • The conclusions resulting from such consultations are documented and implemented

Monitoring: • The firm should establish policies and procedures designed to provide it with reasonable assurance that the policies and procedures related to the system of QC is adequate,

operating effectively and complied with in practice

This will includes ongoing evaluation of firms system of QC including a periodic inspection of completed engagements

• The firm should evaluate the effect of deficiencies noted as a result of monitoring process and should determine whether they are either: • Instances,

that may not indicate insufficiency of firm Q

C • Systematic,

repetitive or other significant deficiencies requiring prompt corrective action

• Firm should also communicate to relevant engagement partner,

deficiencies noted and recommendations for appropriate remedial action

• The Firm should also ensure proper dealing with complaints & Allegations about non-compliance with legal or Professional standards & firm’s system of Q

Difference of Opinion: The firm should establish policies and procedures to resolve difference of opinion within engagement Team,

with those consulted & engagement partner & engagement QC reviewer

Conclusions reached should also be documented and implemented

The report should not be issued until the matter is resolved

Engagement Q

Review: • For audits of the financial statements of listed entities,

and those other audit engagements,

for which the firm has determined that an engagement quality control review is required,

the engagement partner shall: ◊ Determine that an engagement quality control reviewer has been appointed

◊ Discuss the significant matters arising during the audit engagement,

with the engagement quality control reviewer

• The engagement quality control reviewer shall perform an objective evaluation of the significant judgments made by the engagement team,

and the conclusions reached in formulating the auditor’s report

This evaluation shall involve: ◊ Discussion of significant matters with the engagement partner

◊ Review of the financial statements and the proposed auditor’s report

◊ Evaluation of the conclusions reached in formulating the auditor’s report,

and consideration of whether the proposed auditor’s report is appropriate

Review,

the firm should establish policies and procedures setting out: ◊ NTE of an engagement quality control review

AR W AL

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Chapter- 1

Auditing and Assurance Standards

◊ Criteria for the eligibility of engagement quality control reviewer

and ◊ Documentation requirements for an engagement quality control review

Completion of assembly of Final Engagement Files: The firm should establish policies and procedures for engagement teams to complete the assembly of final engagement files on a timely basis after the engagement reports have been finalized

Confidentiality,

Safe Custody etc

of Engagement Documentation: The firm should establish policies and procedures designed to ensure the confidentiality,

accessibility and retrievability of engagement documentation

This engagement documentation should also to be retained for sufficient period

Documentation: The firm should establish policies and procedures requiring appropriate documentation to provide evidence of the operation of each element of its system of Q

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OVERALL OBJECTIVES OF THE INDEPENDENT AUDITOR AND THE CONDUCT OF AN AUDIT IN ACCORDANCE WITH STANDARDS ON AUDITING (W

Overall objectives of the Independent Auditor [M93]: While auditing the financial statements,

the overall objectives of the auditor are: • To obtain reasonable assurance about whether the financial statements are free from material misstatements thereby enabling the auditor to express an opinion on whether financial statement are prepared as per applicable financial reporting framework

and • To report on financial statements and communicate as required by the SAs,

in accordance with the auditor’s findings

• If reasonable assurance cannot be obtained and qualified opinion is insufficient then he should either disclaim the opinion or withdraw from engagement,

where withdrawal is legally permitted

Definitions :

Applicable Financial Reporting Framework: means,

framework/law/regulations followed by the management in preparation of financial statements

(Example: Schedule III of the Co

Accounting Standards etc

Audit Evidence: Information used by the auditor in arriving at the conclusions on which the auditor’s opinion is based

Professional Judgment: The applicable of relevant training,

knowledge and experience in taking appropriate decisions during audit engagement

Professional Skepticism: An attitude that includes a questioning mind being alert to conditions which may indicate possible misstatement due to error or fraud,

and a critical assessment of audit evidence

Risk of Material Misstatement: Risk that financial statements are misstated prior to audit

It consists of two components: Inherent risk and control Risk

Misstatement: A difference between the amounts,

or disclosure of a reported financial statement item and the amount,

or disclosure that is required for the item to be in accordance with the applicable financial reporting framework

Misstatement can arise from error or fraud

Reasonable Assurance: Auditor is required to obtain reasonable assurance as to whether the financial statements are free from material misstatements

However,

reasonable assurance is not absolute assurance

This is due to inherent limitations of an audit

auditor obtains sufficient and appropriate audit evidence to reduce audit risk to an acceptable low level

Inherent limitations of an Audit [M89 M11]: Auditor cannot obtain absolute assurance

(Cannot reduce audit risk to Zero)

This is due to inherent limitations of an audit due to which auditor obtains persuasive

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Advance Auditing and Professional Ethics

Chapter- 1

evidence rather than conclusive

It arises from: Nature of Financial Reporting: • Preparation of financial statement involves judgment by mgt

For Example,

Moreover,

auditor has to consider whether these estimates appear to be reasonable

• There may be subjective decisions

such items can only be persuasive

Nature of Audit Procedures: • Mgt

or others may not provide complete information

• Moreover frauds may involve carefully designed schemes to conceal it

Thus auditor may not detect them

Limitations w

Time and Cost: • Users expect that the auditor will form an opinion on financial statements within reasonable time and cost

• Thus auditor resorts to test procedures (not 100% checking)

he directs more efforts to risky areas

AR W AL

Due to aforesaid inherent limitations,

there is unavoidable risk that some material mis-statement may remain undetected

Requirements/ Responsibilities of the Auditor:

Ethical Requirements: The auditor is subject to following relevant ethical requirements including independence

• Integrity • Objectivity • Professional competence and due care • Confidentiality and • Professional behavior • He is also required to comply with code of ethics issued by ICAI

Professional Skepticism: The Auditor shall plan and perform an audit with professional skepticism recognising that the circumstances may exist,

that causes the financial statements to be materially mis-stated

He should recognize the conditions indicating possible misstatements

It includes being alert to,

for example:• Contradictory evidence • Conditions indicating possible frauds • Conditions questioning reliability

Professional Judgment: The Auditor shall exercise professional judgement in planning and performing an audit of financial statements

Professional judgement depends on facts & circumstances known to the auditor

Professional judgement should also be exercised throughout the Audit

Professional judgement is necessary regarding decisions about:• Materiality • Audit risk • NTE of audit Procedure • Sufficiency & appropriateness of audit evidence • Drawing of conclusions based on the audit evidence obtained

Moreover,

it requires critical assessment of audit evidence gathered

By maintaining professional skepticism,

Sufficient & appropriate Audit Evidence and Audit Risk: To obtain reasonable assurance,

the auditor shall obtain sufficient appropriate audit evidence to reduce audit risk to an acceptably low level and thereby enable the auditor to draw reasonable conclusions on which to base the auditor’s opinion

Sufficiency is the measure of quantity of audit evidence whereas appropriateness is the measure of quality of audit evidence

Conduct of an Audit in Accordance with SAs: The auditor shall comply with all SAs relevant to the audit

An SA is relevant to the audit when the SA is in effect and the circumstances addressed by the SA exist

The auditor should have an understanding of the entire text of an SA to apply it properly

He should represent compliance with SAs in auditor’s report only if he has complied with requirements of all relevant SAs

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Chapter- 1

Auditing and Assurance Standards

fails to achieve an objective in relevant SAs,

he should consider the need to modify the audit report,

or withdraw from the engagement

It is a significant matter requiring documentation as well

Question Bank

Refer Point/ Ans

M89 M11

What are the overall objectives of the Auditor under SA 200

Discuss the inherent limitations of an audit

“An auditor is responsible for expressing his opinion on financial statements in statutory audit”

Comment

Enumerate (in brief) the basic principles governing an audit

N03 N05 N06

"The auditors need not review accounting policies unless there is a change in the basis of accounting ''

M00 M08

Explain briefly duties and responsibilities of an auditor in case of material misstatement resulting from Management Fraud

AR W AL

• The opinion that he expresses should be of the “true and fair” view of the financial position and the operational results reflected in the financial statements

auditor can express his opinion on the financial statements only after obtaining reasonable assurance

To obtain reasonable assurance,

the auditor shall obtain sufficient appropriate audit evidence to reduce audit risk to an acceptably low level and thereby enable the auditor to draw reasonable conclusions on which to base the auditor’s opinion

SA 200 on “Overall objectives of an Independent Auditor and the conduct of an audit in accordance with SAs” issued by the ICAI describes the basic principles which govern the auditor’s professional responsibilities and which should be complied with whenever an audit of financial information of any entity is carried out

The basic principles as stated are as under: • Integrity,

Objectivity and Independence: The auditor should be honest,

straightforward and sincere in his approach to his professional work

He must be fair and must not allow prejudice or bias to override his objectivity

He should maintain an impartial attitude and both be and appear to be free of any interest which might be regarded,

as being incompatible with integrity and objectivity

• Confidentiality: The auditor should respect the confidentiality of information acquired in the course of his work and should not disclose any such information to a third party without specific authority or unless there is a legal or professional duty to disclose

• Skills and Competence: The audit should be performed and the report should be prepared with due professional care by persons who have adequate training,

experience and competence in auditing

• Work Performed by Others: When the auditor delegates work to assistants or uses work performed by other auditors and experts,

he will be entitled to rely on work performed by others provided he exercise adequate skill and care and is not aware of any reasons to believe that he should not have so relied

The auditor should carefully direct supervise and review work delegated to assistants and obtains reasonable assurance that work performed by other auditors or experts is adequate for his purpose since he will continue to be responsible for forming and expressing his opinion on the financial information

• Documentation: The auditor should document matters which are important in providing evidence that the audit was carried in accordance with the basic principles

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• Planning: Planning enables the auditor to conduct an effective audit in an efficient and timely manner

Primarily,

planning should be based on the knowledge of the client’s business

Plans should be further developed and revised as necessary during the course of the audit

• Audit Evidence: The auditor should obtain sufficient appropriate audit evidence through the performance of compliance and substantive procedures to enable him to draw reasonable conclusions there from on which to base his opinion on the financial information

• Accounting System and Internal Control: The auditor should reasonably assure himself that the accounting system is adequate and that all the accounting information which should be recorded has in fact been recorded and internal controls normally contribute to such assurance

• Audit Conclusion and Reporting: The auditor should review and assess the conclusions drawn from the audit evidence obtained and from his knowledge of business of the entity as the basis for the expression of his opinion on the financial information

This review and assessment involves forming an overall conclusion as to whether: ◊ the financial information has been prepared using acceptable accounting policies which have been consistently applied,

◊ the financial information complies with relevant regulations and statutory requirements,

◊ There is an adequate disclosure of all material matter relevance to the proper presentation of the financial information,

subject to statutory requirements,

The auditor while conducting an audit should critically examine the accounting policies adopted by the client and test them for conformity with the accounting standards and recommendations of the Institute

The Companies Act,

This requirement is implicit even in the absence of a specific statutory provision to this effect

However,

what constitutes a 'true and fair' view has not been defined either in the Companies Act,

The pronouncements of the Institute seek to describe the accounting principles and the methods of applying these principles in the preparation and presentation of financial statements so that they give a true and fair view

The 'Preface to the Statements of Accounting Standards' issued by the Institute in 1979 states as under:

"While discharging their attest function,

it will be the duty of the members of the Institute to ensure that the Accounting Standards are implemented in the presentation of financial statements covered by their audit reports

In the event of any deviation from the Standards,

it will be also their duty to make adequate disclosures in their reports so that the users of such statements may be aware of such deviations

In cases where no pronouncement of the Institute exists,

the auditor should examine the acceptability of the said accounting policy

The view presented in the financial statements of an enterprise of its state of affairs and of the profit or loss can be significantly affected by the accounting policies followed in the preparation and presentation of the financial statements

The accounting policies followed vary from enterprise to enterprise

Disclosure of significant accounting policies followed is necessary if the view presented is to be properly appreciated

It is also quite clear that there is no single list of accounting policies which are applicable to all circumstances

The differing circumstances in which enterprises operate in a situation of diverse and complex economic activity make alternative accounting principles and methods of applying those principles acceptable

The choice of the appropriate accounting principles and the methods of applying those principles in the specific circumstances of each enterprise calls for considerable judgement by the management of the enterprise

The auditor is further required to determine whether the relevant information is properly disclosed in the financial statements by considering the judgements that management has made in preparing the financial statements

the auditor assesses the selection and consistent application of accounting policies,

the manner in which the information has been classified,

and the adequacy of disclosure

the auditor should determine himself as to whether or not the said treatment is consistent with the basic principles of accounting

Therefore,

it would not be correct to state that the auditor need not review the accounting policies unless there is a change in the basis of accounting

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The term fraud refers to an 'Intentional Act' by one more individuals including management and TCWG

The primary responsibility for the prevention and detection of fraud rests with CWG and the management of the entity

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“SA 200A” indicates that an audit conducted in accordance with the “SA” is designed to provide a reasonable assurance,

that the FS taken as a whole are free from any material misstatement,

whether caused by error or fraud

Owing to the inherent limitations of an audit,

there is some unavoidable risk,

that some material misstatements may not be detected,

even though the audit is properly planned and performed in accordance with the “SA” generally accepted in India

An audit does not guarantee that all material misstatement will be detected

Certain levels of management may be in a position to override the control procedures designed to prevent similar frauds by other employees

The auditor's opinion on the FS is based on the concept of obtaining reasonable assurance

the auditor does not guarantee that material misstatements will be detected

AGREEING THE TERMS OF AUDIT ENGAGEMENTS (W

Introduction: This SA is applicable to engagement relating to (a) audit of financial statements

and (b) other services like management consultancy,

The clients and the auditor should agree on the terms of engagement by way of audit engagement letter,

Auditor should send audit engagement letter preferably before commencement of engagement

Preconditions for an Audit: Before accepting an audit engagement,

auditor is required to ensure existence of preconditions

Accordingly,

Pre-conditions to be examined are: • Determine whether the financial reporting framework to be applied in the preparation of the financial statements is acceptable

and • Obtain the agreement of management that it acknowledges and understands its responsibilities for followings: ◊ The preparation of the F

in accordance with the applicable FRF

◊ Exercising necessary internal control to enable the preparation of F

that are free from material misstatement,

◊ To provide the auditor with (a) Access to all relevant information such as records,

documentation and other matters

(b) Additional information that the auditor may request from management for the purpose of the audit

and (c) Unrestricted access to persons within the entity from whom the auditor determines it necessary to obtain audit evidence

Limitation on Scope prior to Audit Engagement Acceptance: If management or TCWG impose a limitation on the scope of the auditor’s work,

and auditor believes that such limitation will result in the auditor disclaiming an opinion on the FSs,

the auditor should not accept such a limited engagement as audit engagement,

unless required by law or regulation to do so

Principal contents of Audit Engagement Letter:

Following are the mandatory items to be included in Audit Engagement Letter: • The Objective and scope of the audit • The responsibilities of the auditor • The responsibilities of the management • Identification of the applicable financial reporting framework for the preparation of the financial statements • 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

Followings items are optional to be included in Audit Engagement Letter,

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• The fact that because of the inherent limitations of an audit,

together with the inherent limitations of internal control,

there is an unavoidable risk that some material misstatements may not be detected,

even though the audit is properly planned and performed in accordance with SAs

• The expectation that management will provide written representations

• The agreement of management to make available to the auditor draft financial statements and any accompanying other information till time to allow the auditor to complete the audit in accordance with the proposed timetable

• The agreement of management to inform the auditor of facts that may affect the financial statements,

of which management may become aware during the period from the date of the auditor’s report to the date the financial statements are issued

• The basis on which fees are computed and any billing arrangements

• A request for management to acknowledge receipt of the audit engagement letter and to agree to the terms of the engagement outlined therein

• The fact that the audit process may be subjected to a peer review under the Chartered Accountants Act,

• Arrangements concerning the involvement of other auditors and experts in some aspects of the audit

• Arrangements concerning the involvement of internal auditors and other staff of the entity

• Any restriction of the auditor’s liability when such possibility exists

• A reference to any further agreements between the auditor and the entity

• Any obligations to provide audit working papers to other parties

Recurring Audits [M13]: The auditor may decide not to send a new audit engagement letter or other written agreement each period

However,

the following factors may make it appropriate to revise the terms of the audit engagement or to remind the entity of existing terms: • Any indication that the entity misunderstands the objective and scope of the audit

• Any revised or special terms of the audit engagement

• A recent change of senior management

• A significant change in ownership

• A significant change in nature or size of the entity’s business

• A change in legal or regulatory requirements

• A change in the financial reporting framework adopted in the preparation of the financial statements

• A change in other reporting requirements

Acceptance of change in Engagement Terms: • The auditor should not agree to a change in the terms of the audit engagement,

where there is no reasonable justification for doing so

any legal or contractual implications of the change

• If the auditor is not agree with changed terms of the audit engagement & client doesn’t permit him to continue with original audit engagement,

then the auditor should Withdraw from the audit engagement and consider any obligation to report the circumstances to other parties such as those charged with governance,

Additional Consideration

Financial Reporting Standards (FRS) Supplemented by Law or Regulation: If FRS established by an authorized or recognized standards setting organization are supplemented by law or regulation,

the auditor should determine whether there are any conflicts between the FRS and the additional requirements

If such conflicts exist,

the auditor should discuss with management the nature of the additional requirements and shall agree whether: • The additional requirements can be met through additional disclosures in the financial statements

or • The description of the applicable financial reporting framework in the financial statements can be amended accordingly

If neither of the above actions is possible,

the auditor should determine whether it will be necessary to modify the auditor’s opinion in accordance with SA 705 (Revised)

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Financial Reporting Framework prescribed by Law or Regulation: If the auditor has determined that the financial reporting framework prescribed by law or regulation would be unacceptable but for the fact that it is prescribed by law or regulation

Auditor shall accept the audit engagement only if the following conditions are present: • Management agrees to provide additional disclosures in the financial statements required to avoid the financial statements being misleading,

and • It is recognized in the terms of the audit engagement that: ◊ The auditor’s report on the financial statements will incorporate an Emphasis of Matter paragraph,

drawing users’ attention to the additional disclosures,

in accordance with SA 706(Revised),

and ◊ Unless the auditor is required by law or regulation to express the auditor’s opinion on the financial statements by using the phrases “present fairly,

or “give a true and fair view” in accordance with the applicable financial reporting framework,

the auditor’s opinion on the financial statements will not include such phrases

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Auditing and Assurance Standards

If the conditions outlined above are not present and the auditor is required by law or regulation to undertake the audit engagement,

the auditor shall: • Evaluate the effect of the misleading nature of the financial statements on the auditor’s report

and • Include appropriate reference to this matter in the terms of the audit engagement

Auditor’s Report Prescribed by Law or Regulation: Some times,

the law or regulation applicable to the entity prescribed the layout or wording of the auditor’s report in a form or in terms that are significantly differ from the requirement of SAs

In these circumstances,

the auditor should evaluate: • Whether,

users might misunderstand the assurance obtained from the audit of the financial statements and,

additional explanation in the auditor’s report can mitigate possible misunderstanding

If the auditor concludes that additional explanation in the auditor’s report can’t mitigate possible misunderstanding,

the auditor should not accept the audit engagement,

unless required by law or regulation to do so

GENERAL CLARIFICATION (GC) – AASB/2/2004 ON SA 210 • Whether it is necessary that the engagement letter issued by the auditor should be acknowledged by addressee and returned to the auditor to indicate that the client’s understanding of the terms of the engagement is in accordance with SA 210

the objective and scope of an audit and the auditor’s obligations are,

laid down in the applicable statute or regulations and the pronouncements of the ICAI,

the audit engagement letters would be informative for the clients

” • From the above it is clear that the basic purpose of issuing an engagement letter is that the auditor and the client should agree on the terms of the engagement

• The auditor and the client are normally considered to be agreeing on the terms of the engagement if the objective and scope of an audit and the auditor’s obligations are laid down in the statute or regulations governing the engagement

Examples of such engagements include audit u/s 143 of the Companies Act,

In such cases,

it is not necessary that the engagement letter sent by the auditor in accordance SA 210 is acknowledged by the addressee and returned to the auditor

• It shall be sufficient compliance with the requirements related to sending the audit engagement letter,

if an engagement letter is appropriately delivered to the client and the auditor retains the evidence for such delivery

In such cases,

the audit engagement letters would be informative for the clients

the client seeks any further explanations or clarification in regard to any terms,

conditions or other contents of the engagement letter issued,

it might indicate that there exists a difference in understanding of the terms of audit engagement either on the part of the client or on the part of the auditor

In such cases,

the auditor should take necessary steps to resolve the issues

• There may be certain engagements where the objective and scope of the engagement and the auditor’s obligations are not laid down in the applicable statute or regulations

In such situations,

An audit conducted in accordance with law or regulation does not comply with SAs

Accordingly,

the auditor should not include any reference within the auditor’s report to the audit having been conducted in accordance with SAs

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request the client that a copy of the engagement letter be acknowledged by the addressee and returned to the auditor to establish that (a) the client’s understanding of the arrangements for the engagement is in accordance with the engagement letter issued by the auditor

and (b) that the auditor has complied with the requirements of the standard in so far as they are related to sending the audit engagement letter

Format of Audit Engagement Letter [N07]: Refer Chapter 24

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Question Bank

Refer Point/ Ans

R & Co,

a firm of Chartered Accountants have not revised the terms of engagements and obtained confirmation from the clients,

for last 5 years despite changes in business and professional environment

Please elucidate the circumstances that may warrant the revision in terms of engagement

PQR & Company,

Chartered Accountants have been appointed Statutory Auditors of a listed Company for the year ended 31st March,

Draft an appropriate engagement letter to be sent to the Board of Directors for the same

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QUALITY CONTROL FOR AN AUDIT OF FINANCIAL STATEMENTS (W

Objective: The objective of the auditor is to implement quality control procedures at the engagement level that provide the auditor with reasonable assurance that: • The audit complies with professional standards and regulatory and legal requirement

and • The auditor’s report issued is appropriate in the circumstances

Responsibility of the Engagement Partner: To ensure quality control for an audit of financial statements for particular audit engagement,

the engagement partner should follow the following requirements: • Leadership Responsibilities: The engagement partner should take responsibility for the overall quality on each audit engagement to which that partner is assigned

• Ethical Requirement: Member of the engagement team should comply with relevant ethical requirements

• Independence: The engagement partner should form a conclusion on compliance with independence requirements

• Acceptance and Continuation of Client Relationship and Audit Engagement: The engagement partner shall be satisfied that appropriate procedures regarding the acceptance and continuance of client relationship and audit engagements have been followed

• Assignment of Engagement Teams: The engagement partner should satisfied himself that engagement team have the appropriate competence and capabilities to ◊ Perform the audit engagement in accordance with professional standards and regulatory and legal requirements,

and ◊ Enable an auditor’s report that is appropriate in the circumstances to be issued

• Engagement Performance: The engagement partner should take responsibility for the direction,

supervision and performance of the audit engagement team and should satisfy that sufficient appropriate audit evidence has been obtained to support the conclusions and the auditor’s report

• Consultation: The engagement partner should take responsibility for the engagement team that they are taking appropriate consultation for difficult matters

• Difference of Opinion: If difference of opinion arises,

the engagement team should follow the firm’s policies and procedures for dealing with and resolving differences of opinion

Engagement Quality Control Review: For audits of financial statements of listed entities and those other audit engagement for which the engagement quality control reviews is enquired,

the engagement partner should: • Determine that an engagement quality control reviewer has been appointed

and • Discuss significant matters arising during audit engaement with the engagement quality control reviewer

The Engagement Quality Control Reviewer should evaluate the following: • Discussion of significant matters with the engagement partner

• Review of the financial statements and the proposed auditor’s report

• Review of selected audit documentation

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• Conclusion reached in formulating the auditor’s report and consideration of whether the proposed auditor’s report is appropriate

Monitoring: An effective system of quality control includes a monitoring process designed to provide the firm with reasonable assurance that its policies and procedures relating to the system of quality control are relevant,

adequate and operating effectively

Documentation:

The Auditor shall document: • Issue identified w

compliance with relevant ethical requirements and how they were resolved

• 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

audit conclusions resulting from,

consultations undertaken during the course of the audit engagement

The Engagement Quality Control Reviewer shall document,

for the Audit Engagement reviewed that: • The procedures for engagement quality control review have been performed

• The engagement quality control review has been completed on or before the date of the auditor’s reports

• The reviewer is not aware of any unresolved matters

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AUDIT DOCUMENTATION (W

Scope of this SA: This SA deal with auditor’s responsibility to prepare audit documentation for an audit of financial statements

The specific documentation requirements of other SAs do not limit the application of this SA

Laws or regulations may establish additional documentation requirements

Nature and Purpose of Audit Documentation: Audit documentation refers to the working papers prepared or obtained and retained by the auditors for his audit work

Audit documentation serves the following purpose: • Evidence that support the auditor opinion in his audit report

and • Evidence that the audit was planned and performed in accordance with SAs and applicable legal and regulatory requirements

Audit documentation serves a number of additional purposes including the following: • Assisting the engagement team to plan and perform the audit

• Assisting members of the engagement team responsible for supervision to direct and supervise the audit work