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Kapil Goyal Audit Discussion
SA 200 "OVERALL OBJECTIVES OF THE INDEPENDENT AUDITOR AND
CONDUCT OF THE AUDIT IN ACCORDANCE WITH SAS
1.1 Overall Objectives of the Auditor
As per SA-200 "Overall Objectives of the Independent Auditor", in conducting an audit of
financial statements, the overall objectives of the auditor are:
a) To obtain reasonable assurance about whether the F. S. 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 F.S. are prepared, in all material respects, in
accordance with an applicable FRF, and
b) To report on the F.S. and communicate as required by the SAs, in accordance with
the auditor’s findings.
In all cases when reasonable assurance cannot be obtained and a qualified opinion in
the auditor’s report is insufficient, the SAs require that the auditor disclaim an opinion
or withdraw from the engagement.
1.2 AUDITOR REQUIREMENT/RESPONSIBILITIES OF THE AUDITOR
risk that the auditor expresses an inappropriate audit opinion
Audit Risk
To obtain reasonable assurance
1. Reasonable Assurance: A high, but not absolute, level of assurance.
2. Sufficient Appropriate Audit Evidence: Sufficiency refers to quantum and Appropriateness refers to quality.
Sufficient Appropriate Audit Evidence
1. Application of relevant training, knowledge and experiencein planning and performing an audit of financial statements
2. exercised throughout the audit
3. important when deciding about:
- Materiality & audit risk.
- NTE of audit procedures.
- Evaluating sufficiency & -appropriateness of audit procedures.
- Evaluating management judgment in applying applicable FRF.
- Drawing conclusions based on audit evidence.
Professional
Judgment
1. Questioning mind,
2. being alert to onditions,may indicate possible misstatement due to error or fraud
3. Reduces risk of
- Overlooking unusual circumstances.
- Over generalising when drawing conclusions from audit observations.
- Using inappropriate assumptions in determining N, T, E of audit procedures
Professional
Skepticism
1. Integrity;
2. Objectivity;
3. Professional competence and due care;
4. Confidentiality; and Professional behaviour.
Ethical Requirements Relating to an Audit of
F.S.
1. Compliance
2. Objectives
3. Complying with relevant Requirements
4. Failure to Achieve an Objective
Some Extra Summary for CA IPCC and INTER – CA Final Students can ignore this part.
SA 210- AGREEING THE TERMS OF AUDIT ENGAGEMENT
•Acknowledgement by management of it's responsibility w.r.t
•preperation of financial statement as per FRF
•I.C so that financial statement should be free from frauds and error
•They will provide auditor with : #access to all information#additional information#unrestricted access to persons if necessary
Preconditions for an Audit
•Audit Engagements letter includes
•Objectives of the Audit
•Scope of Audit
•Responsibility of Mgt. and Auditor
•Identification of FRF
•Reference to expected form & content of reports to be issued by the auditors
•If Laws/Regulation prescribes terms, then no need for separate written terms except that management acknowledge the same.
Audit Engagement Terms
If additional disclosure in financial statements or amendment to standard is possible
Yes, OK No, Modify Audit Report
Additional Consideration
Financial Reporting Standards are in conflict with law, Discuss with management
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 F.S.
A change in other reporting requirements.
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Aforesaid precondition not present Prior to acceptance management impose
limitations
Recurring Audit - Whether to revise/remind the
terms?
Before completing Audit, if the client requests the auditor to change the terms that conveys
lower assurance
Consider whether justification for change is
reasonable
Yes No
Agree to new
terms
If management doesn't permit Original Engagement,
then withdraw for engagement and communicate to
TCWG and members
Auditor should not accept audit if
SA 220 “QUALITY CONTROL FOR AN AUDIT OF FINANCIAL STATEMENT
Examples of
Information which should consider by firm before acceptance of new client
The identity and business reputation of the client’s principal owners, key management, related parties
and those charged with its governance.
The nature of the client’s operations, including its business practices.
Information concerning the attitude of the client’s principal owners, key management and those
charged with its governance towards such matters as aggressive interpretation of accounting standards
and the internal control environment.
Whether the client is aggressively concerned with maintaining the firm’s fees as low as possible.
Indications of an inappropriate limitation in the scope of work.
Indications that the client might be involved in money laundering or other criminal activities.
The reasons for the proposed appointment of the firm and non-reappointment of the previous firm
The extent of knowledge a firm will have regarding the integrity of a client will generally grow within
the context of an ongoing relationship with that client.
Information which may cause firm to withdraw
The integrity of the principal owners, key management and TCWG of the entity;
Competency of engagement team to perform the audit engagement and availability of necessary
capabilities, including time and resources;
Compliance with relevant ethical requirements by firm and the engagement team; and
Significant matters that have arisen during the current or previous audit engagement, and their
implications for continuing the relationship.
Pla
nn
ing
Stag
e •Acceptance and continuance of client relationships and specific engagements.
•Human resources
•Assignment of engagement teams
•Independence
•Ethical requirements
•Leadership responsibilities for quality within the firm.
Exe
cuti
on
/ En
gage
men
t P
erfo
rman
ce
•Direction, Supervision
•Review
•Consultation
•Discuss Key Matters
•Monitoring
•EQR
•Documentation
Enga
gem
ent
Qu
alit
y C
on
tro
l Rev
iew
(EQ
R )
•Review all process including
•Appointment
•Independence
•Discuss Significant Matters
•Review Propose Audit Report
•Review Documentation
•Difference of Opinion?
•EQR Documentation
Engagement quality control review (EQR)
PARTNER QUALITY CONTROL REVIEWER
1. The engagement partner shall:
a) Determine that an engagement
quality control reviewer has been
appointed,
b) Discuss significant matters with
the engagement quality control
reviewer, and
c) Not date the auditor report until the
completion of the engagement
quality control review,
Differences of opinion- Firm’s policies
and procedures for dealing with and
resolving differences of opinion.
1. The engagement quality control reviewer shall evaluate
the following:
a) Discussion of significant matters with the engagement
partner
b) Review of the financial statements and the proposed
auditors report
c) Review of selected audit documentation and
d) Conclusions reached in formulating the auditor’s report and
consideration of whether the proposed auditor’s report is
appropriate.
2- For audits of financial statements of listed entities,
(a) The engagement team’s evaluation of the firm’s
independence
(b) Whether appropriate consultations has taken place
and the conclusions arising from those
consultations
(c) Whether audit documentation selected for reviews
reflects the work performed and supports the
conclusions reached
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SA 230 – AUDIT DOCUMENTATIONS
UPDATED CHART WILL COME IN HARD COPY CHART BOOK SOON.
SA 240– THE AUDITOR’S RESPONSIBILITIES RELATING TO FRAUD IN AN AUDIT OF
FINANCIAL STATEMENTS
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Why Management do Fraud
Incentive – Bonus to employess for more sales
Abality of people – If you will not achieve this target, Bonus will not paid
Opportunity to commit Fraud – Weak Internal control (Issue Procedure)
SITUATION MANAGEMENT AUDITOR
Responsibility for
the Prevention and
Detection of Fraud
Primary Responsibility – Management
& TCWG
Management and those charged with
governance, should place a strong
emphasis on fraud prevention.
An auditor is responsible for obtaining
reasonable assurance that the financial
statements taken as a whole are free
from material misstatement.
Link With –
SA 200 INHERENT
LIMITATION
RISK OF FRAUD IS
HIGHER THAN ERROR
INTENTIONAL FRAUD
AUDITOR SHOULD
MAINTAIN
PROFESSIONAL
SKEPTICISM
AUDIT PROCEDURE
RISK ASSESSMENT
PROCEDURE
IDENTIFICATION &
ASSESSMENT OF ROMM
RESPONSE TO ROMM DUE
TO FRAUD
. Enquiring Management and
Others within the Entity
The auditor shall make
inquiries of management
regarding:
i. Management’s
assessment of the risk of
material misstatement due
to fraud;
ii. Management’s process
for identifying &
responding to the risks of
fraud in the entity,
including any specific
risks of fraud;
iii. Management’s
communication, if any, to
those charged with
governance; and
iv. Management’s
communication, if any, to
employees regarding its
In accordance with SA 315, the
auditor shall identify and assess
the risks of material misstatement
due to fraud at the financial
statement level, and at the
assertion level for classes of
transactions, account balances and
disclosures.
The auditor shall obtain an
understanding of the entity’s
related controls, including control
activities, relevant to such risks.
Overall Responses SA 330
The auditor shall:
Assign and supervise
personnel as per their
capability;
Evaluate whether
accounting policies
adopted by the entity
indicate fraudulent
financial reporting
resulting from
management’s effort to
manage earnings; and
Incorporate surprise
element in the selection of
the NTE of audit
procedures.
Response to Assessed Risks of
Material Misstatement Due to
Fraud at the Assertion Level
views on business
practices and ethical
behaviour.
For those entities that have an
internal audit function, the
auditor shall make inquiries of
internal auditor.
2. Enquiring Those Charged
with Governance
i. He shall obtain an
understanding of how
TCWG supervise
management’s processes.
ii. The auditor shall ask
TCWG whether they have
knowledge of any fraud
affecting the entity.
Perform further audit
procedure
If Auditor identify mis-
statement than consider
whether such a
misstatement is indicative
of fraud
Re-evaluate the
assessment of the risks of
material misstatement due
to fraud and its resulting
impact on the nature,
timing and extent of audit
procedures.
Evaluate the implications
for the audit
OBTAIN MRL FOR
1. Its responsibility for the design, implementation and maintenance of internal control to prevent and detect
fraud;
2. It has disclosed to the auditor the results of its assessment of the risk of fraud;
3. It has disclosed to the auditor its knowledge of fraud or suspected fraud affecting the entity involving:
a. Management;
b. Employees who have significant roles in internal control; or
c. Others; and
4. It has disclosed to the auditor its knowledge of any allegations of fraud, or suspected fraud, affecting the
entity’s financial statements.
REPORTING RESPONSIBILITY
To
MANAGEMENT/
TCWG
SEC
143(12)
IN CARO,2016 NOT ABLE TO CONTINUE
REFER CHART REFER
CHART
The auditor is also
required to report as
per Clause (x) of
Paragraph 3 of
CARO, 2016,
Whether any fraud
by the company or
any fraud on the
company by its
officers or
employees has been
noticed or reported
during the year; If
yes, the nature and
the amount involved
is to be indicated.
The auditor shall:
Determine the professional and legal
responsibilities applicable in the circumstances,
including whether there is a requirement for the
auditor to report to the person or persons who
made the audit appointment or, in some cases, to
regulatory authorities;
Consider whether it is appropriate to withdraw
from the engagement; and
If the auditor withdraws:
Discuss with the appropriate level of
management and those charged with
governance, the auditor’s withdrawal from the
engagement and the reasons for the
withdrawal; and
Determine whether there is a professional or
legal requirement to report to the person or
persons who made the audit appointment or, in
some cases, to regulatory authorities, the
auditor’s withdrawal from the engagement and
the reasons for the withdrawal.
No liability of auditor [Section 143(13)]
•An auditor shall not be deemed to be guilty for breach of any of his duties by reason of his reporting any matter to the Central Government if such reporting is done in good faith.
Provisions applicable to other auditors [Section 143(14)]
•The provisions w.r.t. reporting of fraud shall mutatis mutandis apply to -
•(a) the cost accountant conducting cost audit under section 148; or
•(b) the company secretary in practice conducting secretarial audit under section 204.
Punishment for non-compliance [Section
143(15)]
•(a) Minimum Fine: Rs. 1 lakh
•(b) Maximum Fine: Rs. 25 lakh.
SA 250 CONSIDERATION OF LAWS AND REGULATIONS IN AN AUDIT OF FINANCIAL
STATEMENTS
Audit procedures when noncompliance is identified or suspected
The auditor shall obtain:
An understanding of the nature of the act and the circumstances in which it has occurred; and
Further information to evaluate the possible effect on the financial statements.
If the auditor suspects there may be non-compliance, the auditor shall discuss the matter with
management and those charged with governance. If management or those charged with
governance do not provide sufficient information the auditor shall consider the need to obtain legal
advice. If sufficient information about suspected non-compliance cannot be obtained, the auditor
shall evaluate the effect of the lack of sufficient appropriate audit evidence on the auditor’s opinion.
The following matters, it may also be an indication of non-compliance with laws and regulations:
Investigations by regulatory organizations and government departments or payment of fines or penalties.
Payments for unspecified services or loans to consultants, related parties, employees or government employees.
Sales commissions or agent’s fees that appear excessive in relation to those ordinarily paid by the entity or in its industry or to the services actually received.
Purchasing at prices significantly above or below market price.
some laws or regulations have a direct effect on the
financial statements
The auditor’s responsibility isto obtain sufficient appropriateaudit evidence aboutcompliance with the provisionsof those laws and regulations.
1.The auditor shall obtain a generalunderstanding of:
2.1- The legal and regulatoryframework applicable to the entityand the industry or sector in which theentity operates; and
3.2- How the entity is complying withthat framework.
Other laws or regulations are to be complied with by
management but do not have a direct effect on an entity’s
financial statements
The auditor’s responsibility islimited to undertaking specifiedaudit procedures to helpidentify non-compliance withthose laws and regulations thatmay have a material effect onthe financial statements.
1.The auditor shall perform thefollowing audit procedures to identifyinstances of non-compliance
2.1- Inquiring of management; and
3.2- Inspecting correspondence, ifany, with the relevant licensing orregulatory authorities.
Unusual payments in cash, purchases in the form of cashiers’ cheques payable to bearer or transfers to numbered bank accounts.
Unusual payments towards legal and retainership fees.
Unusual transactions with companies registered in tax havens.
Payments for goods or services made other than to the country from which the goods or services originated.
Payments without proper exchange control documentation.
Existence of an information system which fails, whether by design or by accident, to provide an adequate audit trail or sufficient evidence.
Unauthorized transactions or improperly recorded transactions.
Adverse media comment
Non-Compliance Reporting
To those charged with governance
In the auditor’s report
In CARO,2016 To regulatory and enforcement authorities
Unless all of those charged with governance are involved in management of the entity, the auditor shall communicate as soon as practicable with those charged with governance matters involving non-compliance with laws and regulations that come to the auditor’s attention.
Where no higher authority exists, or if the auditor believes that the communication may not be acted upon, the auditor shall consider the need to obtain legal advice.
Modify the Audit Report
as per SA 705.
Example - If non-
compliance belongs to
Statutory Dues as per
Clause VII.
Auditor shall determine whether the auditor has a responsibility to report the identified or suspected non-compliance to parties outside the entity.
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SA 260 COMMUNICATION WITH THOSE CHARGED WITH GOVERNANCE
The Role of Communication
Understanding matters related to the audit in context, and in developing a constructive
working relationship, while maintaining the auditor’s independence and objectivity.
Obtain Relevant Information from TCWG to understand the Entity
Understand the TCWG responsibility relating to Financial reporting to reduce the
ROMM.
Auditor does not relieve from his responsibility if management communicated the same
information to TCWG.
OBJECTIVE OF COMMUNICATION
MATTERS TO BE COMMUNICATED
Auditor Responsibility
Planning, Scope and Timing
Obtain Relevant Information
Provide Observation on Timely
Basis
Effective Communication between
Auditor and TCWG
1- The Auditor’s Responsibilities in Relation to
the Financial Statement Audit – SA 200
linking
2- Planned Scope and Timing of the Audit
3- Significant Findings from the Audit
4- Auditor Independence
5- Significant difficulties, if any, encountered
during the audit
Significant difficulties encountered during the audit may include such
matters as:
a. Significant delays by management, the unavailability of entity personnel, or
unwillingness by management to provide information necessary for the auditor to
perform the auditor’s procedures.
b. An unreasonably brief time within which to complete the audit.
c. Extensive unexpected effort required to obtain sufficient appropriate audit evidence.
d. The unavailability of expected information.
e. Restrictions imposed on the auditor by management.
f. Management’s unwillingness to make or extend its assessment of the entity’s ability
to continue as a going concern when requested
The Communication Process
- Form , Timing and Content
- In Written
- If Communication Process is not Effective – Effect on FS and appropriate
action
Documentation
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