Standards on Auditing

Index

SA 200 Overall objectives of an independent auditor & conduct of an audit in accordance 02 – 03

with standards on auditing
SA 210 Agreeing with the terms of audit engagement 04 – 05
SA 220 Quality control for an audit of financial statements 06 – 07
SA 230 Audit documentation 08 – 09
SA 240 The auditor’s responsibility relating to fraud in an audit of financial statements 10 – 13
SA 250 Consideration of laws & regulations in audit of financial statements 14 – 15
SA 260 Communication with those charged with governance 16 – 17
SA 265 Communicating deficiencies in internal control to those charged with governance 18 – 19
& management
SA 299 Responsibility of joint auditors 20 – 21
SA 300 Planning an audit of financial statements 22 – 24
SA 315 Identifying & assessing the risk of material misstatements through understanding 25 – 29
the entity & its environment
SA 320 Materiality in planning & performing an audit 30 – 31
SA 330 Responses to assessed risks 32 – 33
SA 402 Audit consideration relating to an entity using a service organization 34 – 35
SA 450 Evaluation of misstatements identified during the audit 36 – 37
SA 500 Audit evidence 38 – 39
SA 501 Audit evidence: Specific consideration for selected items 40 – 41
SA 505 External confirmation 42 – 43
SA 510 Initial audit engagement: Opening balances 44 – 45
SA 520 Analytical procedures 46 – 48
SA 530 Audit sampling 49 – 52
SA 540 Auditing estimates, including fair value accounting estimates & related disclosures 53 – 55
SA 550 Related parties 56 – 57
SA 560 Subsequent events 58 – 59
SA 570 Going concern 60 – 61
SA 580 Written representation 62 – 63
SA 600 Using the work of another auditor 64 – 65
SA 610 Using the work of internal auditor 66 - 69
SA 620 Using the work of auditor’s expert 70 – 73
SA 700 Forming an opinion & reporting on financial statements 74 – 77
SA 701 Communicating key audit matters in the independent auditor’s report 78 – 79
SA 705 Modification to the opinion in the independent auditor’s report 80 – 81
SA 706 Emphasis of matter paragraph & other matters paragraph in independent auditors 82 – 84
report
SA 710 Comparative information: Corresponding figures & comparative financial 86 – 87
statements
SA 720 The auditor’s responsibility in relation to other information in documents 88 – 89
containing audited financial statements
SQC 01 Standards on quality control 90

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SA 200: Overall objectives of an independent auditor & conduct of an audit in accordance with standards on
Auditing

Primary objective:
1) Obtain reasonable assurance about whether the financial statements (FS) as a whole are free from material
misstatement whether due to fraud or error, thereby enabling the auditor to express an opinion on FS
2) Financial statements are prepared according to the financial reporting framework (FRF)
3) To report on financial statements
4) In some cases, however, the applicable laws & regulations may require auditors to provide opinions on
other specific matters, such as the effectiveness of internal control, or the consistency of a separate
management report with the financial statements

Secondary objective:
1) As material misstatements can be due to fraud or error, hence, to detect material frauds & error is secondary
or incidental objective

Inherent limitations of audit:

1) The preparation of financial statements involves judgement by management in applying the requirements of the
entity’s applicable FRF to the facts & circumstances of the entity
2) Many items in FS involves subjective decisions or assessments or a degree of uncertainty & there may be a
range of interpretations which leads to inherent variability
3) Estimates are most affected because of above. Auditor should check reasonableness of estimates & qualitative
aspects of accounting practices including management bias
4) There are practical & legal limitations on the auditor’s ability to obtain audit evidence. For e.g.,
a) Intentional or unintentional information from management
b) Sophisticatedly designed frauds
c) No powers of investigation
d) Sampling & pervasive evidence
5) Difficulty, time or cost involved is not itself a valid basis for auditor to omit an audit procedure
6) Delays will reduce the value & quality of information

Ethical requirements:
The auditor shall comply with relevant ethical requirements, including those pertaining to independence, relating
to financial statement audit engagements. The auditor should comply with the following requirements as per code
of ethics
a) Confidentiality
b) Professional competence & due care
c) Professional behaviour
d) Integrity
e) Objectivity
f) Independence (Comprising both independence of mind & independence in appearance)

Professional scepticism:
Meaning: An attitude that includes a questioning mind, being alert to conditions which may indicate possible
misstatement due to error or fraud, & a critical assessment of audit evidence

How to remain sceptical

1) Auditor should have a questioning mind regarding reliability & suspicious conditions if any
2) Auditor should conduct critical assessment tests & stop blind reliance on documents by going beyond SAs

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3) Auditor shall plan & perform an audit with professional scepticism recognising that circumstances may exist
that cause the financial statements to be materially misstated

Professional Judgement:
The application of relevant training, knowledge & experience, within the context provided by auditing,
accounting & ethical standards in making informed decisions about the courses of action that are appropriate in
the circumstances of the audit engagement. Professional judgment is required w.r.t
1) Materiality & audit risk
2) Nature, timing & extent of audit procedures
3) Evaluating sufficiency & appropriateness of audit procedures
4) Evaluating management judgment in applying applicable FRF
5) Drawing conclusions based on audit evidence

Compliance withs SAs:

1) The auditor shall have an understanding of the entire text of SA including its application & other explanation
2) The auditor shall use the objectives stated in relevant SAs in planning & performing the audit
3) Compliance with SAs is to be specified in Audit report only in case of actual compliance
4) The auditor may judge it necessary to depart from SAs such fact should be disclosed & auditor should perform
alternate audit procedures
5) If the objective in a relevant SA cannot be achieved the auditor shall evaluate the need to modify the opinion
or withdraw from the engagement

Reasonable assurance & Sufficient appropriate audit evidence(s) (SAAE)

1) Sufficiency refers to quantum & Appropriateness
2) The purpose of SAAE is to reduce audit risk to an acceptably low level & thereby enable the auditor to
draw reasonable conclusions on which to base the auditor’s opinion
3) Risk that the auditor expresses an inappropriate audit opinion when the F.S. are materially misstated is audit
risk
4) Audit Risk is a function of the risk of material misstatement & detection risk

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SA 210: Agreeing with the terms of audit engagement

Objectives of an auditor & preconditions of an audit:

1) Determine whether the financial statements (FS) are prepared as per applicable financial reporting framework
(FRF)
2) Obtain the agreement of management/those charged with governance (TCWG) that is acknowledges &
understands its responsibility regarding
a) Preparation of financial statements in accordance with FRF
b) Ensuring proper internal controls are in place to prepare FS which are free from material misstatement
c) Providing information to auditor including additional information & unrestricted access to persons within
The entity from whom the auditor can obtain audit evidence
3) If the preconditions for an audit are not present the auditor shall discuss the matter with management. Unless
required by law the auditor shall not accept the proposed audit engagement

Limitation on scope prior to audit engagement acceptance:

If the management or TCWG impose a limitation on the scope of the auditors work in terms of a proposed audit
engagement such that the auditor believes the limitation will result in the auditor disclaiming an opinion on FS
the auditor shall not accept such limited engagement as an audit engagement unless required by law or regulation

Engagement letter:
The agreed terms of audit engagement shall be recorded in an audit engagement letter or other suitable form of
written agreement & shall include
1) The objectives & scope of the audit
2) The responsibilities of the management
3) Identification of the applicable FRF for the preparation of FS
4) The responsibilities of an auditor
5) Reference to the expected form & content of any reports to be issued by the auditor
If law or regulation prescribes in sufficient detail the terms of the audit engagement referred above, the auditor
need not record them in written agreement, except for the fact that such law & regulation applies that
Management acknowledges & understands its responsibilities as set out in pre conditions

Engagement letter for recurring audits:

On recurring audits, the auditor shall assess whether circumstances require the terms of the engagement to be
revised & whether there is a need to remind the entity of the existing terms of the audit engagement. The auditor
may decide not to send a new audit engagement letter or other written agreement each period.
Circumstances for issuing a new engagement letter
1) External changes:
a) A change in legal or regulatory requirement
b) A change in FRF adopted for preparing the FS
2) Change from management side:
a) A significant change in ownership
b) A recent change in senior management
c) A significant change in nature or size of the entity’s business
d) Any indication that the entity misunderstands the objective & scope of the audit
3) Changes from auditor’s side:
a) A change in other reporting requirement
b) Any revised or special terms of the audit engagement

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Change in terms of audit engagement:
1) General reasons for change in terms of audit engagement
a) A change in circumstances affecting the need of the service
b) A restriction on the scope of the engagement, whether imposed by management or caused by circumstances
c) An auditor who, before the completion of the engagement, is requested to change the engagement to one
which provides a lower level of assurance, should consider the appropriateness of doing so
d) A misunderstanding as to the nature of an audit or related service originally requested
2) Examine the reasons
The auditor shall not agree to a change in terms of audit engagement where there is no reasonable justification
for doing so
a) Justified:
If the terms of the audit engagement are changed, the auditor & management shall agree on & record the
new terms of engagement in an engagement letter or other suitable form of written agreement
b) Unjustified:
If the auditor is unable to agree to a change of the terms of the audit engagement & is not permitted by the
management to continue the original audit engagement the auditor shall
i) Shall withdraw from the engagement where possible
ii) Determine whether there is any obligation to report the circumstances

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SA 220: Quality control for an audit of financial statements

Objective:
Implement QC Policies that provide Reasonable Assurance that audit complies with professional standards&
audit report issued is appropriate

Quality of an audit:
Quality is maintained at particulars audit engagement if
1) There is a compliance with professional standards & regulatory & legal requirements
2) The reports issued are appropriate in the circumstances

Firm level quality & engagement level quality:

1) SA 220 deals with implementation of firm level quality control system to individual engagement level
2) It is applicable only to audit of historical information
3) It casts responsibility on engagement partner to implement quality control procedures

Leadership responsibility for quality of audit:

Engagement partner (EP) should emphasize the engagement team (ET) for the following
1) Compliance with professional standards & legal requirements
2) Compliance with firm’s quality control policies
3) Issuance of appropriate audit report
4) Ability to raise concerns without fear
5) Quality is essential & indispensable in engagement performance

Assignment of engagement team:

EP to be satisfied that ET & Auditor’s Expert not part of ET has appropriate competence & capabilities to
1) Perform audit engagement in accordance with professional standards & regulatory or legal requirements
2) Enable an AR that is appropriate in the circumstances

Ethical requirements:
1) EP to remain alert for evidence of non-compliance with relevant ethical requirements by ET through
a) Inquiry
b) Observation
2) If there is an indication of noncompliance with relevant ethical requirements, EP should
a) Consult others in the firm
b) Determine appropriate action

Independence:
The engagement partner shall form a conclusion on compliance with independence requirements that apply to
the audit engagement. In doing so the EP shall
1) Obtain relevant information from firm to Identify & Evaluate circumstances & Relationship that threatens
independence
2) Evaluate information on identified breaches
3) Take appropriate action to eliminate such threats or reduce them to an acceptable level by applying safeguards
or withdraw from the audit engagement wherever withdrawal is permitted by law or regulation
4) The EP shall promptly report to the firm any inability to resolve the matter for appropriate action

Acceptance & continuance procedures:

The EP shall determine that appropriate procedures regarding the acceptance & continuance of client
relationships & audit engagements have been followed & shall determine that conclusions reached are appropriate

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Information such as following assist the EP in determining whether the conclusions reached are appropriate
1) Integrity of Principal Owners, management & TCWG
2) Competency of ET to perform engagement
3) Availability of necessary capabilities, including time & resources
4) Compliance with relevant ethical requirements
5) Significant matters that arises during the current or previous audit engagement

Engagement performance:
1) Direction, Supervision & performance:
a) EP shall take the responsibility for directions, supervision & performance of audit engagement in
compliance with standards & regulatory requirements
b) To make an appropriate Audit Report
2) Reviews: EP shall take the following responsibilities
a) Reviews are being performed in accordance with policies / procedures
b) Be satisfied that SAAE has been obtained to support the conclusions reached & AR to be issued
through
i) Review of Audit Documentation
ii) Discussion with ET
3) Consultation: EP shall undertake consultation
a) wherever required
b) Ensure its implementation
4) Engagement Quality Control Review (required in case of listed entities):
a) Discussion of significant matters with ET 
b) Review of FS & proposed audit report
c) Review of selected audit documentation
d) Evaluation of conclusions reached
e) Considering whether proposed audit report is appropriate
5) Differences of Opinion:
a) If differences of opinion arise within the ET, with those consulted or where applicable, between the EP
&the engagement quality control reviewer, the ET shall follow the firm’s policies & procedures for
dealing with & resolving differences of opinion

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SA 230: Audit documentation

Basic purpose:
1) Evidence that the audit was planned & performed in accordance with SAs & applicable legal & regulatory
requirements
2) Evidence of the auditor’s basis for a conclusion about the achievement of the overall objectives of auditor

Additional purpose:
1) Assisting the ET to plan & perform the audit
2) Enabling the ET to be accountable for its work
3) Assisting members of ET responsible for supervision to direct & supervise the audit work & to discharge their
review responsibilities in accordance with SA 200
4) Enabling the code of conduct of quality control reviews & inspections in accordance with SQC 01
5) Enabling the conduct of external inspections in accordance with applicable legal & regulatory requirements
6) Retaining a record of matters of continuing significance to future audits

Factors affecting form, content & extent of audit documentation:

1) The size & complexity of entity
2) The identified risks of material misstatements
3) The nature of the audit procedures to be performed
4) The audit methodologies & tools used
5) The significance of the audit evidence obtained
6) The nature, extent & timing of exceptions identified
7) The need to document a conclusion

Assembly of audit file:

1) What is done in assembly: Teams provide evidence of completion of audit file assembly by wrapping up &
finalizing the audit file, finalizing the file is important to enable the Office to retain a final record of the
procedures performed; evidence obtained & conclusions reached.
2) When to assemble: On a timely basis after the date of the auditor’s report
3) Completion: Ordinarily not more than 60 days after the date of auditor’s report
4) After assembly: The auditor shall not delete & discard audit documentation of any nature before the end of its
retention period
5) Retention period: No shorter than 7 years from the date of auditor’s report, or, if later, the date of the group
auditors report
6) Matters after audit report: Document the specific reasons for making them & when & by whom they were made
& reviewed

Completion memorandum:
1) It is a part of the audit documentation & a summary that describes the significant matters identified during the
audit & how they were addressed, or that includes cross-references to another relevant supporting audit
documentation that provides such information
2) Such a summary may facilitate effective & efficient reviews & inspections of the audit documentation,
particularly for large & complex audit
3) Such a summary may assist the auditor’s consideration of the significant matters
4) It can also help the auditor to identify if there is any relevant SA objective that the auditor cannot achieve

Right to lien:
1) Any person having lawful possession of someone else’s property, on which he has worked, may retain the
property for non-payment of his dues on account of the work done on the property

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2) Auditor can exercise lien on books & documents placed at his possession by the client for non-payment of fee
for work done on the following conditions:
a) Documents retained must belong to the client who owes the money
b) Documents must have come in possession of the auditor on the authority of client
c) The auditor can retain the documents only if he has done work on the documents assigned to him
d) Such documents can be retained which are connected with the work on which fees have not been paid
3) As per Companies Act, 2013, section 128, books of accounts of a company must be kept at the registered
office, hence, this makes it impracticable for the auditor to have possession of the books & documents
4) Taking an overall view of the matter, it seems that though legally, auditor may exercise right of lien in cases
of companies, it is mostly impracticable for legal & practicable constraints
5) His working papers being his own property, the question of lien on them does not arise

Ownership of auditor’s documents:

Auditor/branch auditor is owner of its documents, he may make the copies available to the persons concerned
but ownership remains with the auditor/branch auditor

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SA 240: The auditor’s responsibility relating to fraud in an audit of financial statements

Definition of fraud:
An intentional act by one or more individuals among management, TCWG, employees or third parties to deceive,
to mislead or at least to cancel truth to obtain an unjust or illegal advantage

Types of frauds:
1) Fraudulent financial reporting:
a) This involves intentional misstatements including omissions of amount or disclosures in FS to deceive
the users of FS
b) This is done by management, TCWG or employees to obtain a person advantage which causes harm to
Company & stakeholders
c) Techniques by which management override controls to commit fraudulent financial reporting
i) Omission: Omitting, advancing or delaying recognition in the FS of events & transactions that have
occurred during the reporting period. Concealing or not disclosing facts that could affect the
amounts recorded in FS
ii) Manipulation: Recording fictitious journal entries to manipulate operating results or achieve other
objectives. Altering the records & terms related to significant & unusual transactions
iii) Misapplication: Inappropriately adjusting assumptions & changing judgements used to eliminate
account balances. Engaging in complex transactions that are structured to misrepresent the
financial position or financial performance of the entity
2) Misappropriation of assets:
a) This involves theft of an entity’s assets & is often perpetrated by employees in relatively small & immaterial
Amounts
b) It can also involve management who are usually more able to disguise or conceal misappropriation in ways
That are difficult to detect
c) Techniques of misappropriating assets are as
i) Embezzling receipts
ii) Stealing physical assets or intellectual property
iii) Using an entity’s assets for personal use
d) Misappropriation of assets is often accompanied by false or misleading records or documents in order to
conceal the fact that the assets are missing or have been pledged without proper authorization

Fraud risk factors:

Events or conditions that indicate an incentive or pressure to commit fraud or provide an opportunity to commit
fraud or rationalization

Fraudulent financial reporting (FFR) Misappropriation of assets (MAA)

Pressure 1) Financial stability or profitability is 1) Personal financial obligation
threatened by economic, industry or
entities operating conditions
2) Excessive pressure exists for
management to meet the requirements of
expectations of third party
3) Peer pressure from TCWG to achieve
Targets

Opportunities 1) Ability to dominate in industry 1) Large amount of cash in hand

2) Significant operations located across 2) Easily convertible investments such as
international borders Bearer bons, diamonds etc

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 3) Use of business intermediaries with no 3) Inadequate oversight of senior
justification management
4)Bank accounts & subsidiaries in tax havens 4) No segregation of duties
5) Complex or unstable organizational 5) Lack of mandatory leave for employees &
structure senior management
6) Less effective management monitoring 6) Inadequate system of authorization
7) Deficient internal control components 7) Inadequate job application screening
8) RPT not in ordinary course of business 8) Inadequate record keeping of assets

Attitude 1) Communication of inappropriate values 1) Disregarding internal control system over

that are not effective MAA
2) Known history of violations of securities 2) Overriding existing controls
laws or other laws 3) No action on existing deficiency
3) Excessive interest in increasing or 4) Intolerance to petty thefts
maintaining earning trend/stock price 5) Changes in behaviour or lifestyle

Rationalization 1) Low morale among senior management 1) Behaviour indicating displeasure/

2) Dispute between shareholders in a Dissatisfaction
closely held entity 2) Adverse relationship between entity &
3) Committing to achieve aggressive or Employees
Unrealistic forecasts
4) Inappropriate means to minimize
reported earnings for avoiding tax

Circumstances that indicate the possibility of fraud:

1) Discrepancies in the accounting records:
a) Evidence of employee’s access to system & records inconsistent with that necessary to perform their duties
b) Transactions that are not recorded in a complete or timely manner or are improperly recorded as to amount
accounting period, classification or entity policy
c) Unsupported or unauthorized balances or transactions
d) Last minute adjustments that significantly affect financial results
e) Tips or complaints to the auditor about alleged fraud
2) Missing evidence:
a) Inability to produce evidence of key systems development & program change testing & implementation
activities for current year system changes & deployment
b) Unavailability of other than photocopied or electronically transmitted documents when documents in
original form is expected to exist
c) Unavailable or missing electronic evidence, inconsistent with the entity’s record retention practices or
policies
d) Missing or non-existent cancelled cheques in circumstances where cancelled cheques are originally
returned to the entity with the bank statement
e) Missing documents
3) Conflicting evidence:
a) Inventory:
i) Missing inventory or physical assets of significant value
ii) Significant unexplained items on reconciliation
b) Trade receivables:
i) Large credit entries & adjustments made in trade receivables
ii) Unexplained & inadequately explained differences between sub ledger & control account
iii) Fewer responses to confirmations than expected

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4) Problematic or unusual relationship between the auditor & management:
a) Undue time pressures imposed by the management
b) Denial of access to key IT operations staff & facilities including denial of access to records, files, customers
etc from whom audit evidence might be sought
c) Unwillingness by management to meet privately with TCWG
d) Unwillingness to add or revise disclosures in the FS to make them more comparable & understandable
e) Unwillingness to address identified deficiencies in internal control on a timely basis
f) Accounting policies that appear to be at variance with industry norms
g) Frequent changes in accounting estimates that do not appear to result from changed circumstances

Risk assessment procedures for fraud:

The auditor shall perform the following procedures as per SA 315 to identify the risk of material misstatements
due to fraud
1) Inquiries of management & other within the entity:
The auditor shall make inquiries of management regarding
a) Management’s process for identifying & responding to the risk of fraud in the entity
b) Management’s assessment of the risk that the FS may be materially misstated due to fraud, including the
nature, timing & extent of such assessments
c) Management’s communication, if any, with TCWG regarding its process for identifying & responding to the
risk of fraud in the entity
d) Management’s communication, if any, with employees regarding its views on business practices & ethics
e) Inquiry with the internal auditors, if any, regarding internal audit function
2) Inquiries with TCWG:
a) The auditor shall obtain an understanding of how TCWG exercise oversight of managements processes
for identifying & responding to the risks of fraud in the entity & in internal control that management has
established to mitigate these risk
b) The auditor shall make inquiries with TCWG whether they have knowledge of any actual, suspected or
alleged fraud affecting the entity
3) Unusual or unexpected relationships identified:
a) The auditor shall evaluate whether unusual or unexpected relationships that have been identified in
performing analytical procedures
4) Other information:
a) The auditor shall consider whether other information obtained by him indicates risks of material
Misstatement due to fraud
5) Evaluation of fraud risk factors:
a) The auditor shall evaluate from risk assessment procedures performed that one or more fraud risk factors
are present or not
b) While fraud risks factors may not necessarily indicate the existence of fraud, they have been often present
in circumstances where frauds have occurred & therefore may indicate risks of material misstatements due
to fraud

Identification & assessment of fraud risks & fraud risks in revenue recognition:
1) As per SA 315 the auditor shall identify & assess the risks of material misstatements due to fraud at the
financial statement level & at the assertion level for classes of transactions, account balances & other
disclosures
2) The auditor shall, based on a presumption that there is risk of fraud in revenue recognition, evaluate which
types of revenue, revenue transactions or assertions give rise to such risks
3) The auditors shall properly document all the findings & evidences obtained
4) The auditors shall treat those assessed risks of material misstatement due to fraud as significant risks &
accordingly, the auditor shall obtain an understanding of the entity’s related controls including control

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 activities, relevant to such risks

Situation when auditor is unable to continue engagement due to fraud:

If as a result of a misstatement resulting from fraud or suspected fraud, the auditor encounters exceptional
circumstances that bring into question the auditor’s ability to continue performing the audit, the auditor shall
a) Determine the professional & 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 case,
to regulatory authorities
b) Consider whether it is appropriate to withdraw from the engagement, where withdrawal from engagement
Is legally permitted
c) If the auditor withdraws discuss with the appropriate level of management & TCWG, the auditor’s withdrawal
from the engagement & the reasons for such withdrawal & ensure whether there is a reporting requirement
with relevant authorities in case of withdrawal

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SA 250: Consideration of laws & regulations in audit of financial statements

Auditor’s responsibilities:
1) As per SA 315 the auditor shall obtain a general understanding of the legal & regulatory framework applicable
to the entity & the industry or sector in which entity operates & is the entity complying with those frameworks
2) The auditor shall obtain SAAE regarding compliance with the provisions of those laws & regulations generally
recognized to have direct effect on the determination of material amounts & disclosures in the FS
3) The auditors shall perform audit procedures like inquiry & inspection to help identify instances of non -
compliance with other laws & regulations that may have material effect on the FS
4) The auditors shall remain alert to the possibility that other audit procedures applied may bring instances of
non - compliance or suspected non – compliance with laws & regulations to the auditor’s regulation
5) The auditor shall obtain a written representation from management or TCWG that all known instances of
non – compliance or suspected non – compliance with laws & regulations whose effects should be considered
when preparing FS have been disclosed to the auditor

Indicators of non – compliance:

1) Payments for goods or services made other than to the Country from which the goods or services originated
2) Unusual Payments in Cash purchases in the form of cashiers' cheques payable to bearer or transfers to
numbered bank accounts
3) Payments for unspecified services or loans to consultants, related parties, employees or government
employees
4) Unauthorised transactions or improperly recorded transactions
5) Purchasing at Prices significantly above or below market price
6) 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
7) Unusual Transactions with companies registered in tax havens
8) Payments without proper Exchange control documentation
9) Investigations by regulatory organisations & government departments or payment of fines or penalties
10) Unusual payments towards legal & retainer ship fees
11) Existence of an information system which fails, whether by design or by accident, to provide an adequate audit
trail or sufficient evidence
12) Adverse media comments

Audit procedures to be performed if there is non-compliance:

1) An understanding of the nature of the act & the circumstances in which it his secured
2) Further information to evaluate the possible effect on the financial statements
3) If the auditor suspects there may be non-compliance, the auditor shall discuss the matter with management &
where appropriate, those charged with governance
4) If management or, as appropriate, those charged with governance do not provide sufficient information that
supports that the entity is in compliance with laws & regulations &, in the auditor's judgment, the effect of
the Suspected non-compliance may be material to the financial statements, the auditor shall consider the need
to obtain legal advice
5) If sufficient information about suspected non-compliance cannot be obtained, the auditor shall evaluate the
effect of lack of sufficient appropriate audit evidence on the auditor's opinion (Modify opinion as per SA 705)
6) The auditor shall evaluate the implications of non-compliance in relation to other aspects of the audit, including
the auditor's risk assessment & the reliability of written representations, & take appropriate action

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Reporting of non-compliance:
1) To regulatory & enforcement authorities:
If the auditor has identified or suspects non-compliance with laws & regulations, the auditor shall determine
whether the auditor has responsibility to report the identified or suspected non-compliance to the parties
outside entity
2) In the auditor’s report on the financial statements:
a) Qualified/Adverse opinion: If the auditor concludes that the non-compliance has a material effect on the
financial statements & has not been adequately reflected in the financial statements, the auditor shall,
in accordance with SA 705, express a qualified or adverse opinion on the financial statements
b) Qualified/Disclaimer of opinion: if the auditor is precluded by management or those charged with
governance from obtaining sufficient appropriate audit evidence to evaluate whether non-compliance that
may be material to the financial statements has, or is likely to have, occurred, the auditor shall express a
qualified opinion or disclaimer opinion on the financial statements on the basis of a limitation on the scope
of the audit in accordance with SA 705

Reporting non-compliance with TCWG:

1) Unless all of those charged with governance are involved in management of the entity, & therefore are aware
of matters involving identified or suspected on compliance already communicated by the auditor, the auditor
shall communicate with TCWG matters involving noncompliance with laws & regulations that come to the
auditor's attention during the course of the audit, other than when the matters are clearly inconsequential
2) If, in the auditor's judgment, the non-compliance referred to in above is believed to be intentional & material,
the auditor shall communicate the matter to TCWG as soon as possible
3) If the auditor suspects that management or TCWG are involved in non-compliance, the auditor shall
communicate the matter to the next higher level of authority at the entity, if it exists, such as an audit
committee or supervisory board. Where no higher authority exists, or if the auditor believes that the
communication may not be acted upon or is unsure as to the person to whom to report, the auditor shall
consider the need to obtain legal advice

Management’s responsibilities:
1) Monitoring legal requirements & ensuring that operating procedures are designed to meet these requirements
2) Instituting & operating appropriate systems of Internal control
3) Developing, publicising & following a code of conduct
4) Ensuring employees are properly trained & understand the code of conduct
5) Monitoring compliance with code of conduct & take actions to discipline employees who fail to comply with it
6) Engaging legal advisors to assist in monitoring legal requirements
7) Maintaining a register of significant laws & regulation with which the entity has to comply

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SA 260: Communication with those charged with governance

Meaning of those charged with governance (TCWG):

1) TCWG is group of people who meet periodically to supervise overview current management's performance,
take strategic long-term decisions & decide company's policies. This includes overseeing the financial
reporting process
2) TCWG may/may not be integral part of entity

Meaning of management:
Management is a group of people who are involved & take responsibility of day-to-day operations of the company

Auditor’s responsibility:
1) The auditor shall determine the appropriate person(s) within the entity's governance structure with whom to
communicate
2) If their governance structure includes committees, auditor may communicate to committees instead of Board
of Directors. Such committees are called Sub-Groups
3) He must identify appropriate committee which is responsible for overseeing financial reporting, which is
generally, audit committee

When all TCWG are involved in managing the entity:

In these cases, if matters required by this SA are communicated with person(s) with management responsibilities,
and those people(s) also have governance responsibilities, the matters need not be communicated again with
those same person(s) in their governance role.

Matters to be communicated to TCWG:

1) The Auditor's Responsibilities in Relation to the Financial Statement Audit:
a) The auditor is responsible for forming & expressing an opinion on the financial statements that have been
prepared by management with the oversight of TCWG
b) The audit of the financial statements does not relieve management or TCWG of their responsibilities
2) Planned Scope & Timing of the Audit:
a) Overview of the planned scope & timing of the audit, which includes communicating about the significant
risks identified by the auditor
3) Significant Findings from the Audit:
a) Significant difficulties, if any, encountered during the audit
b) Significant matters arising during the audit that were discussed, or subject to correspondence, with
management
c) Written representations the auditor is requesting
d) The auditors view about the significant qualitative aspects of the entity
e) circumstances that affect the form & content of the auditor's report, if any
f) Any other significant matters arising during the audit that, in the auditor's professional judgment, are
relevant to the oversight of the financial reporting process
g) Auditor Independence: In the case of listed entities, the auditor shall communicate with TCWG
 A statement that the engagement team & others in the firm as appropriate, the firm &, when
applicable, network firms have complied with relevant ethical requirements regarding
independence
 All relationships & other matters between the firm, network firms, & the entity that, in the
auditor's professional judgment, may reasonably be thought to bear on independence including
total fees charged for audit & non audit services provided by the firms & network firms
 The fees shall be allocated to all the categories of the services provided
 The related safeguards that have been applied to eliminate identified threats or to reduce them

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Significant difficulties to be communicated with TCWG:
1) An unnecessarily brief time within which to complete the audit
2) Restrictions imposed on the auditor by management
3) The unavailability of expected information
4) Significant delays of expected management providing required information.
5) Extensive unexpected effort required to obtain sufficient appropriate audit evidence
6) Management's unwillingness to make or extend its assessment of the entity's ability to continue as a going
concern when requested

Communication related to key audit matters (KAM):

1) 260 (Revised) requires the auditor to communicate with those charged with governance on a timely basis
2) Appropriate timing for communications about key audit matters will vary with circumstances of engagement
3) However, the auditor may communicate preliminary views about key audit matters when discussing the plan
scope & timing of the audit & may further discuss such matter when communicating about audit findings
a) Robust communication:
Doing so may help to alleviate the practical challenges of attempting to have a robust two-way dialogue
about key audit matters at the time the financial statements are being finalized for issuance.
b) Opportunity to TCWG:
Communication with those charged with governance enables them to be made aware of the key audit
matters that the auditor intends to communicate in the auditor's report & provides them with an
opportunity to obtain further clarification where necessary
4) The auditor may consider it useful to provide those charged the auditor's report to facilitate this discussion
governance with a draft of the auditor’s report to facilitate this discussion
5) Communication with TCWG recognizes their important role in overseeing the financial reporting process &
provides the opportunity for TCWG to understand the basis for auditor’s decision in relation to KAM & how
these matters will be described in the auditor’s report. It also enables TCWG to consider whether new or
enhanced disclosures may be useful in light of the fact that these matters will be communicated in auditors
report

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SA 265: Communicating deficiencies in internal control to those charged with governance & management

Meaning of deficiency:
1) Inability of internal control to prevent, or detect & correct, misstatements in the FS on a timely basis
2) An internal control is designed, implemented or operated in such a way that it is unable to prevent, or detect
& correct misstatement in the FS on a timely basis

Auditors’ responsibility:
Identification of deficiencies in internal control:
Step 1: Identify the deficiency
a) The auditor shall determine whether, on the basis of the audit work performed, the auditor has identified
one or more deficiencies in internal control
b) If the auditor has identified one or more deficiencies in internal control, the auditor shall determine, on
the basis of the audit work performed
Step 2: Is it significant deficiency or other deficiency
a) Whether, individually or in combination, they constitute significant deficiencies
Step 3: Communicate to TCWG
a) The auditor shall communicate in writing significant deficiencies in internal control identified during the
audit to TCWG on a timely basis
Step 4: Communicate to management
The auditor shall also communicate to management at an appropriate level of responsibility on a timely basis
a) In writing, significant deficiencies in internal control that the auditor has communicated or intends to
communicate to those charged with governance, unless it would be inappropriate to communicate directly
to management in the circumstances (Don't inform if management is also involved)
b) Other deficiencies in internal control identified during the audit that have not been communicated to
management by other parties & that, in the auditor's professional judgment, are of sufficient importance
to merit management's attention (No need to communicate if already covered in internal auditor’s report)

Contents of letter explaining internal control deficiency:

The auditor shall include in written communication of significant deficiencies in internal control
1) A description of the deficiencies & an explanation of their potential effects
2) Sufficient information to enable TCWG & management to understand the context of the communication
3) The purpose of the audit was for the auditor to express an opinion on the financial statements
4) The audit included consideration of internal control relevant to the preparation of the financial statements in
order to design audit procedures that are appropriate in the circumstances, but not for the purpose of
expressing an opinion on the effectiveness of internal control
5) The matters being reported are limited to those deficiencies that the auditor has identified during the audit
& that the auditor has concluded are of sufficient importance to merit being reported to TCWG

Factors to be considered while deciding whether deficiency is significant or not:

1) The significance of a deficiency or a combination of deficiencies in internal control depends not only on whether
a misstatement has actually occurred, but also on the likelihood that a misstatement could occur & the
potential magnitude of the misstatement
2) Significant deficiencies may therefore exist even though the auditor has not identified misstatements during
the audit
3) Examples
a) The volume of the activity that has occurred or could occurred
b) The FS amounts exposed to deficiency
c) Cause & frequency of exceptions detected as a result of deficiency in internal control
d) The likelihood of deficiency leading to material misstatement in FS in future

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 e) Interaction of deficiency with other deficiencies in internal control
f) Susceptibility to fraud or loss of the asset or liability
g) Subjectivity & complexity of determining estimated amounts, such as fair value accounting estimates

Importance of internal control to the financial reporting process:

1) Controls over significant transactions with related parties
2) Controls over significant transactions outside the entity's normal course of business
3) Controls over the prevention & detection of fraud
4) Controls over the selection & application of significant accounting policies
5) Controls over the period-end financial reporting process
6) General monitoring controls

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SA 299: Responsibility of joint auditors

Audit planning, risk assessment & allocation of work:

1) The joint auditors shall obtain common engagement letter
2) The EP & other key members of the ET from each joint auditor shall be involved in planning the audit
3) The joint auditors shall jointly establish an overall joint audit strategy that sets the scope, timing & direction of
the audit & that guides the development of joint audit plan
4) The joint auditors shall discuss & develop a joint audit plan. In developing joint audit plan the auditors shall
a) Consider the results of preliminary engagement activities &, where applicable, whether knowledge
gained on other or similar engagements performed earlier by the respective engagement partner(s) for the
entity is relevant
b) Identify division of audit areas & common audit areas amongst the joint auditors that define the scope of
the work of each joint auditor
c) Ascertain the nature, timing & extent of resources necessary to perform the engagement
d) Consider & communicate among all joint auditors the factors that, in their professional judgment are
significant in directing the engagement team's efforts
e) Ascertain the reporting objectives of the engagement to plan the timing of the audit & the nature of the
communications required
5) After identification & allocation of work among the joint auditors, the work allocation document shall be
signed by all the joint auditors & the same shall be communicated to TCWG of the entity
6) At this stage, risks of material misstatement need to be considered & assessed by each of the joint auditors
& shall be communicated to other joint auditors, & documented, whether pertaining to the overall financial
statements level or to the area of allocation among the other joint auditors
7) The joint auditors shall discuss & document the nature, timing, & the extent of the audit procedures for
common & specific allotted areas of audit to be performed by each of the joint auditors & the same shall be
communicated to those charged with governance
8) The joint auditors shall obtain common management representation letter

Responsibilities of joint auditor:

1) Specific responsibilities:
a) In respect of audit work divided among the joint auditors, each joint auditor shall be responsible only for
the work allocated to such joint auditor including proper execution of the audit procedure
b) It shall be the responsibility of each joint auditor to determine the nature, timing & extent of audit procedures
to be applied in relation to the areas of work allocated to said joint auditor
c) It is the individual responsibility of each joint auditor to study & evaluate the prevailing system of internal
control & assessment of risk relating to the areas of work allocated to said joint auditor
2) Joint responsibilities:
All the joint auditors shall be jointly & severally responsible for
a) The audit work which is not divided among the joint auditors & is carried out by all joint auditors
b) Decisions taken by all the joint auditors under audit planning in respect of common audit areas concerning
the nature, timing & extent of the audit procedure to be performed by each of the joint auditors
c) Matters which are brought to the notice of the joint auditors by any one of them & on which there is an
agreement among the joint auditors
d) Examining that the FS of the entity comply with the requirements of the relevant statues
e) Presentation & disclosures of the FS as required by the applicable FRF
f) Ensuring that the audit report complies with the requirements of the relevant statues, the applicable SAs
& other relevant pronouncements issued by ICAI

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Reliance on other joint auditors:
1) Each joint auditor is entitled to assume that
a) The other joint auditors have brought to said joint auditors notice any departure from applicable FRF or
significant observations that are relevant to their responsibilities noticed in the course of audit
b) The other joint auditors have carried out their part of the audit work & the work has been performed in
accordance with the SAs issued by ICAI
c) It is not necessary for a joint auditor to review the work performed by other joint auditors or perform any
tests in order to ascertain whether the work has actually been performed in such manner
2) Where FS of a division/branch are audited by one of the joint auditors, the other joint auditors are entitled to
proceed on the basis that such FS comply with all legal & regulatory requirements & present true & fair view of
the states of affairs & of the results of operations of the division/branch concerned

Audit conclusion & reporting:

1) The joint auditors are required to issue common audit report, however, where the joint auditors are in
disagreement with regard to the opinion or any matters to be covered by the audit report, they shall express
their opinion in a separate audit report
2) A joint auditor is not bound by the views of the majority of the joint auditors regarding opinion or matters to
be covered in the audit report & shall express opinion formed by the said joint auditor in separate audit report
in case of disagreement. In such circumstances, the audit report(s) issued by the joint auditor(s) shall make a
reference to the separate audit report(s) issued by other joint auditor(s). Further, separate audit report shall
also make a reference to the audit report issued by other joint auditors
3) Such reference shall be made under the heading “Other matter paragraph” as per revised SA 706, “Emphasis
of matter paragraphs & other matter paragraphs in the independent auditor’s report
4) Before finalizing their audit report, the joint auditors shall discuss & communicate with each other their
respective conclusions that would form the content of the audit report

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SA 300: Planning an audit of financial statements

Importance of planning:
1) To devote appropriate attention to important areas
2) Identify & Resolve potential problems on timely basis
3) Properly organized & managed Audit
4) Assists selection of ET members with requisite capabilities & competence
5) Co-ordination of work done by auditors of components & experts
6) Facilitating direction & supervision of Engagement team

Preliminary engagement activities (PEA):

The auditor shall undertake the following activities at the beginning of the current audit engagement
1) Performing procedures required by SA 220 Quality control in an audit of financial statements regarding the
continuance of the client relationship & the specific audit engagement
2) Evaluating compliance with ethical requirements, including independence as required by SA 220
3) Establishing an understanding of the terms of the engagement as required by SA 210
This will assist the auditor in identifying & evaluating events or circumstances that may adversely affect auditors
ability to plan & perform the audit engagement
Performing these PEA enables the auditor to plan an audit engagement for which
1) There are no issues with management integrity that may affect the auditor’s willingness to continue the audit
engagement
2) The auditor maintains the necessary independence & ability to perform the engagement
3) There is no misunderstanding with the client as to the terms of audit engagement

Establishing the overall audit strategy:

1) Identify the characteristics of the engagement that defines its scope
2) Ascertain the reporting objectives of the engagement to plan the timing of the audit & the nature of the
communications required
3) Consider the factors that, in the auditor’s professional judgement, are significant in directing the ETs effort
4) Consider the result of PEA & where applicable, whether knowledge gained on other engagements performed
by the management partner for the entity is relevant
5) Ascertain the nature, timing & extent of resources necessary to perform the engagement

Develop an audit plan:

The auditor shall develop an audit plan that shall include a description of
1) Nature, timing & extent of planned risk assessment procedures as determined under SA 315
2) Nature, timing & extent of planned further audit procedures at assertion level as determined under SA 330
3) Other planned audit procedures that are required to be carried out so that engagement complies with SAS
The audit plan is more detailed than the overall audit strategy that includes the nature, timing & extent of audit
procedures to be performed by ET members.
Planning for these audit procedures takes place over the course of audit as the audit plan for the engagement
develops
However, planning the nature, timing & extent of specific further audit procedures depends on the outcome of
those risk assessment procedures
In addition, the auditor may begin the execution of further audit procedures for some classes of transactions,
account balances & disclosures before planning all remaining further audit procedures

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Additional considerations in initial audit engagement:
The auditor shall undertake the following activities prior to starting an audit
1) Performing procedures required by SA 220 regarding the acceptance of the client relationship & the specific
audit engagement
2) Communicating with the previous auditor, where there has been a change of auditors, in compliance with
relevant ethical requirements
For initial audits, additional matters the auditor may consider in establishing the overall audit strategy & audit
plan include the following
1) Any major issues discussed with the management in connection with the initial selection as auditor, the
communication of these matters to TCWG & how these matters affect the overall audit strategy & audit plan
2) The audit procedures necessary to obtain SAAE regarding opening balance (SA 510)
3) Other procedures required by the firm’s system of quality control for initial audit engagement
4) Unless prohibited by law or regulation, arrangements to be made with the previous auditor

Changes to planning decisions:

1) The auditor shall update & change the overall audit strategy & the audit plan as necessary during the course of
audit
2) The auditor may need to modify the overall audit strategy & audit plan due to below mentioned factors
a) Changes in conditions
b) Result of unexpected events
c) Audit evidence obtained from the results of audit procedures
3) Further the auditor would also modify the nature, timing & extent of further audit procedures, based on the
revised consideration of assessed risks

Advantages & disadvantages of planning:

Advantages Disadvantages
1) Audit is carried out with total & clear set of 1) Work may become mechanical & particular parts
Instructions of programme may be carried out without any
2) Selection of assistants become easier when the understanding of the object
work is rationally planned 2) The programme often tends to become rigid &
3) Under a proper plan the danger is significantly inflexible following set grooves
less & the audit can proceed systematically 3) Inefficient assistants may take shelter behind the
4) With the help of signatures responsibility for the programme
work carried out by assistants is achieved 4) A hard & fast audit programme may kill the
5) Helps to devotes attention to important areas Initiative of efficient & enterprising assistants
6) Helps to identify & resolve potential problems in a
timely manner
7) Serves as a guide for audits to be carried out in
subsequent years
8) Serves as an evidence in the event of any charge
negligence being brought against the auditor

Measures to overcome disadvantages of audit planning:

1) The auditors should consider the overall suitability of the audit programme
2) Internal controls should be reviewed & evaluated to obtain knowledge of changes in the controls & procedures
3) The auditor should obtain information about new lines of business or new systems to carry on the old business
4) There should be a participative approach in audit team
5) The audit programme should be revised on a timely basis & should not be stereotyped

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Documentation of audit plan:
The auditor shall document
 The overall audit strategy:
1) The documentation of the overall audit strategy is a record of the key decisions considered
necessary to properly plan the audit & to communicate significant matters to the ET
 Audit plan:
1) The documentation of the audit plan is record of the planned nature, timing & extent of risk
assessment procedures & further audit procedures at the assertion level in response to the
assessed risks
2) It also serves as a record of the proper planning of the audit procedures that can be reviewed
& approved prior to their performance
3) The auditor may use standard audit program &/or audit completion checklists, tailored as
needed to reflect the particular engagement circumstances
 Significant changes:
1) A record of the significant changes to the overall audit strategy & the audit plan, & resulting
changes to the planned nature, timing & extent of audit procedures, explains why the significant
changes were made, & the overall strategy & audit plan finally adopted for the audit
2) It also reflects the appropriate responses to the significant changes occurring during the audit

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SA 315: Identifying & assessing the risk of material misstatements through understanding the entity & its
Environment

Audit risks & its components:

1) Inherent risk
 The susceptibility of an assertion about a class of transactions, account balances & disclosures to a
misstatement that could be material, either individually or when aggregated with other misstatements,
before consideration of any related controls
 Examples
i) Complexity
ii) Estimates
iii) Business risk
iv) Factors in the entity & its environment
2) Control Risk
 The risk that misstatement that could occur in an assertion about a class of transaction, account
balance or disclosure & that could be material, either individually or when aggregated with other
misstatements, will not be prevented, or detected & corrected, on a timely basis by the entity’s internal
Control
 Examples
i) Human errors or mistakes
ii) Management override
iii) Collusion with other employees
3) Risk of material misstatements (RMM)
 The risk that the financial statements are materially misstated prior to the audit
 RMM consists two components
i) Inherent risk
ii) Control risk
4) Detection risk
 The risk that the procedures performed by the auditor to reduce audit risk to an acceptably low level
will not detect a misstatement that exists & that could be material, either individually or when aggregated
with other misstatements
 Factors affecting detection risk
i) Adequate planning
ii) Proper of personnel to the ET
iii) The application pf professional scepticism
iv) Inappropriate selection of audit procedures, misapplication of audit procedures
 Even though inherent & control risk cannot be controlled by the auditor, the auditor can assess them &
design his substantive procedures to produce an acceptable level of detection risk, thereby reducing
audit risk to an acceptably low level
5) Audit Risk
 The risk that the auditor expresses an inappropriate audit opinion when the FS are materially misstated
 Audit risk is a function of the risks of material misstatements & detection risk
i) Audit risk = Risk of material misstatement x Detection risk
ii) Risk of material misstatement = Inherent risk x Control risk
From i) & ii)
iii) Audit risk = Inherent risk x Control risk x Detection risk

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Risk assessment procedures:
The audit procedures performed to obtain an understanding of the entity & its environment, including entity’s
internal control, to identify & assess the risks of material misstatement, whether due to fraud or error, at the
financial statement & assertion levels
The risk assessment procedures shall include the following
1) Observation & inspection
2) Inquiries with management & TCWG
3) Analytical procedures

Understanding the entity & its environment:

The auditor shall obtain an understanding of the following
1) Relevant industry, regulatory & other external factors including FRF
2) Nature of entity including
a) Its operations
b) Ownership & governance structure
c) Types of investments
d) The way entity is structured & how it is financed
3) Entities selection & application of accounting policies & reasons for changes thereto
4) Entity objectives & Strategies & those business risks that may result in RMM
5) Measurement & review of financial performance

Identifying & assessing the risks of material misstatements:

The auditor shall identify & assess the risk of material statements at two levels
1) Financial statement level:
a) Meaning
i) Risks of material misstatement at the financial statement level refer to risks that relate
pervasively to the financial statements as a whole & potentially affect many assertions
ii) Risks of this nature are not necessarily risk’s identifiable with specific assertions at the class of
transactions, account balance, or disclosure level
iii) Rather, they represent circumstances that may increase the risks of material misstatement at the
assertion level, for example, through management override of internal control
iv) Financial statement level risks may be especially relevant to the auditor's consideration of the risks
of material misstatement arising from fraud
b) Effect of Control Environment
i) Risks at the financial statement level may derive in particular from deficient control environment
(although these risks may also relate to other factors, such as declining economic conditions)
c) Auditability of Financial Statements
Understanding of Internal Control System may result in following
i) Concerns about the integrity of the entity's management may be so serious as to cause the auditor
to conclude that the risk of management misrepresentation in the financial statements is such that
an audit cannot be conducted
ii) Concerns about the condition & reliability of an entity's records may cause the auditor to
conclude that it is unlikely that sufficient appropriate audit evidence will be available to support an
unqualified opinion on the financial statements
SA 705, "Modifications to the Opinion in the Independent Auditor's Report" establishes requirements
& provides guidance in determining whether there is a need for the auditor to consider a qualification
or disclaimer of opinion or, as may be required in some cases, to withdraw from the engagement where
this is legally possible

26
2) Assertion level:
a) Risks of material misstatement at the assertion level for classes of transactions, account balances, &
disclosures need to be considered because such consideration directly assists in determining the nature,
timing, & extent of further audit procedures at the assertion level necessary to obtain sufficient
appropriate audit evidence
b) In identifying & assessing risks of material misstatement at the assertion level, the auditor may
conclude that the identified risks relate more pervasively to the financial statements as a whole &
potentially affect many assertions.
c) Assertions used by the auditor to consider different types of potential misstatements that may occur
fall into the following 3 categories & may take the following forms
i) Account balances
 Existence
 Completeness
 Valuation & allocation
 Rights & obligations
ii) Classes of transactions & events
 Occurrence
 Completeness
 Accuracy
 Cut-off
 Classification
iii) Presentation & disclosure
 Occurrence, rights & obligations
 Completeness
 Accuracy & valuation
 Classification & understandability

Risks that require special audit considerations:

As a part of risk assessment, the auditor shall determine whether any of the risks identified are, in the auditor’s
judgement, a significant risk. In exercising this judgement, the auditor shall exclude the effects of identified
controls related to the risk. Risks that require special audit considerations are as follows
1) Risk of significant changes in regulatory environment, economy etc
2) Risk of fraud
3) Risk outside the normal course of business
4) Risk of complexity of transactions
5) Degree of subjectivity in FS
6) Risk of significant transactions with related parties

Documenting the risk:

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

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Internal control:
As per SA 315 internal control may be defined as "The process designed (made), implemented & maintained by
TCWG, management & other personnel to provide reasonable assurance about the achievement of an entity's
objectives with regard to
1) Safeguarding of assets
2) Effectiveness & efficiency of operations Objectives of internal control
3) Compliance with applicable laws & regulations
4) Reliability of financial reporting

Components of internal control:

1) Control environment
Control environment - Attitudes, awareness, ability & actions of those charged with governance &
management condemning the entity's internal control & its importance in the entity also includes the
governance & management functions. The control environment is a component of internal control
Control environment includes the following
a) Participation by TCWG
b) Management’s philosophy & operating style
c) HR policies & procedures
d) Commitment to competence
e) Organizational structure
f) Assignment of authority & responsibility
g) The existence of satisfactory control environment
2) Risk assessment process
For financial reporting purposes, the entity's risk assessment process includes how management identifies
business risks relevant to the preparation of financial statements in accordance with the entity's applicable
financial reporting framework, estimates their significance, assesses the likelihood of their occurrence, &
decides upon actions to respond to & manage them & the results thereof. Risk can arise or change due to
circumstances such as the following
a) New personnel
b) Expanded foreign operations
c) New accounting pronouncements
d) New technology
e) Changes in regulatory or operating environment
f) Rapid growth
g) New or revamped information systems
h) Corporate restructuring
3) Control activities
Generally, control activities that may be relevant to an audit may be categorized as policies & procedures
that pertain to following
a) Segregation of duties
b) Physical controls
c) Performance reviews
d) Information processing
4) Monitoring of controls
Monitoring of controls is a process to assess the effectiveness of internal control performance over time.
It helps in
a) Helps in assessing the effectiveness of controls on a timely basis
b) Management accomplishes monitoring through ongoing activities, separate evaluations etc
5) Tools for internal control
Narrative record, Flow chart, check list, internal control questionnaire

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Internal control in small businesses:
1) The auditor needs to obtain the same degree of assurance in order to give an unqualified opinion on the
financial statements of both small & large entities
2) However, many controls which would be relevant to large entities are not practical in the small business
3) In circumstances where segregation of duties is limited, or evidence of supervisory controls is lacking, the
evidence necessary to support the auditor's opinion on the financial information may have to be obtained
largely through the performance of substantive procedures

Risks because of IT systems:

1) IT personnel gaining access, privileges beyond necessary
2) Unauthorized access to data leading to destruction, unauthorized transactions, non-existent transaction/
Potential data loss
3) Manual intervention/inaccurate processing of data
4) Failure to make changes/unauthorized changes to systems/unauthorized changes to master files

Limitations of internal control:

1) Internal control provides only reasonable assurance
2) It is based upon judgements made by management (Top level)
3) It may lead to collusion among employees (Mid-level)
4) It relies on human judgement in decision making (Lower level)
5) Not effective in small entities

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SA 320: Materiality in planning & performing an audit

Concept of materiality:
Materiality is a subject of professional judgment & discussion presented in FRF provides a reference to the
auditor in determining materiality. If FRF does not include a discussion, following can be referred
1) Misstatements including omissions expected to influence the economic decision of users
2) Size or nature of misstatement & the surrounding circumstances
3) Common financial information needs of the users as a group
Judgment of materiality provides a basis for
1) Determination of nature, timing & extent of risk assessment procedures
2) Identifying & assessing risk of material misstatements
3) Nature, timing & extent of further audit procedures

Benchmarking:
Determining materiality involves the exercise of professional judgment. A percentage is often applied to a chosen
benchmark as a starting point in determining materiality for the financial statements as a whole
Step 1 – Identify the benchmark
This will include the following
1) Elements of FS
2) Attention of the users of the FS
3) Life cycle, industry & economic environment in which the entity operates
4) Relative volatility of the benchmark
5) Entity’s ownership structure & the way it is financed
Step 2 – Normalization (adjusting the benchmark)
1) Prior period FS & financial positions
2) Changes in the business entity
3) Changes in budgets or forecasts for the current period
4) Exclusion of abnormal items
Step 3 – Determine the percentage
1) Determine Percentage to be applied to a chosen benchmark involves the exercise of professional judgment
2) There is a relationship between the percentage & the chosen benchmark, such that á percentage applied
to profit before tax from continuing operations will normally be higher than a percentage applied to total
Revenue

Financial statement level vs specific area level materiality:

1) When establishing the overall audit strategy, the auditor shall determine materiality for the FS as a whole
2) If, in the specific circumstances of the entity, there is one or more particular classes of transactions, account
balances or disclosures for which misstatements of lesser amounts than the materiality for the financial
statements as a whole could reasonably be expected to influence the economic decisions of users taken on
the basis of the financial statements, the auditor shall also determine the materiality level or levels to be
applied to those particular classes of transactions, account balances or disclosures
3) Factors that may indicate the existence of one or more particular classes of transactions, account balances
or of transactions, account balances or disclosures
a) Whether law, regulations or applicable FRF affects user’s expectations regarding certain items in FS
b) The key disclosures in relation to industry in which the entity operates
c) Whether attention is focused on a particular aspect of the entity’s business that is separately disclosed
in FS
4) Auditor may find it useful to obtain an understanding of the views & expectations of TCWG & management

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Performance materiality:
1) Performance materiality means the amount or amounts set by the auditor at less than materiality for the
financial statements as a whole to reduce to an appropriately low level the probability that the aggregate
of uncorrected & undetected misstatements exceeds materiality for the financial statements as a whole
2) If applicable, performance materiality also refers to the amount or amounts set by the auditor at less than
the materiality level or levels for particular classes of transactions, account balances or disclosures
3) The auditor shall determine performance materiality for purposes of assessing the risks of material
misstatement & determining the nature, timing & extent of further audit procedures
4) Planning the audit solely to detect individually material misstatements overlooks the fact that the aggregate
of individually immaterial misstatements may cause the financial statements to be materially misstated &
leaves no margin for possible undetected misstatements
5) Performance materiality (which, as defined, is one or more amounts) is set to reduce to an appropriately low
level the probability that the aggregate of uncorrected & undetected misstatements in the financial
statements exceed materiality for the financial statements as a whole
6) Similarly, performance materiality relating to a materiality level determined for a particular class of
transactions, account balance or disclosure is set to reduce to an appropriately low level the probability that
the aggregate of uncorrected & undetected misstatements in that particular class of transactions, account
balance or disclosure exceeds the materiality level for that particular class of transactions, account balance
or disclosure
7) The determination of performance materiality is not a simple mechanical calculation & involves the
exercise of professional judgment
8) It is affected by the auditor's understanding of the entity, updated during the performance of the risk
assessment procedures
9) The nature & extent of misstatements identified in previous audits & thereby the auditor's expectations
in relation to misstatements in the current period

Revision of materiality:
1) The auditor shall revise materiality for the FS as a whole in the event of becoming aware of information
during the audit that would have caused the auditor to have determined a different amount initially
2) If the auditor concludes that a lower materiality for the FS as a whole than the initially determined is
appropriate, the auditor shall determine whether it is necessary to revise performance materiality, &
whether the nature, timing & extent of the further audit procedures remain appropriate
3) Materiality for the FS as a whole may need to be revised as a result of a change in circumstances that
occurred during the audit

Documenting the materiality:

The audit documentation shall include the following amounts & factors considered in their determination
1) Materiality for the FS as a whole
2) If applicable, the materiality level or levels for particular classes of transactions, account balances or
Disclosures
3) Performance materiality &
4) Any revision of the above points as the audit progresses

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SA 330: Responses to assessed risks

Overall responses:
The auditor shall design & implement overall responses to address the assessed risks of material misstatement
at the financial statement level. Overall responses to address the assessed risks of material misstatement at
the financial statement level may include
1) Assigning more experienced staff or those with special skills or using experts
2) Emphasizing to the audit team the need to maintain professional scepticism
3) Incorporating additional elements of unpredictability in the selection of further audit procedures to be
performed
4) Making general changes to the nature, timing or extent of audit procedures
5) Providing more supervision

Test of controls:
Test of Controls are performed to obtain audit evidence about effectiveness of
1) Design of the accounting & internal control systems, i.e., whether they are suitably designed to prevent or
detect & correct material misstatements
2) Operation of the internal controls throughout the period
3) The auditor shall design & perform tests of controls to obtain sufficient appropriate audit evidence as to the
operating effectiveness of relevant controls when
a) The auditor's assessment of risks of material misstatement at the assertion level includes an
expectation that the controls are operating effectively
b) Substantive procedures alone cannot provide sufficient appropriate audit evidence at assertion level
4) In designing & performing test of controls, the auditor shall
a) Perform other audit procedures in combination with inquiry to obtain audit evidence about the operating
effectiveness of the controls
b) Determine whether the controls to be tested depend upon other controls & if so, obtain SAAE
Regarding those other controls
5) Extent of controls: The extent of test of controls includes the following
a) Frequency of performance of control
b) Length of time during audit period
c) Expected rate of deviation
d) Relevance & reliability of audit evidence
e) Audit evidence from test of other controls
The auditor shall test controls for the particular time, or throughout the period, for which the auditor
intends to rely on those controls in order to provide an appropriate basis for the auditors intended reliance

Using audit evidence obtained in previous audit:

Auditor has to determine whether it is appropriate to use audit evidence about effectiveness of controls from
previous year & if so, the length of the time period that may elapse before retesting a control, the auditor shall
consider the following
1) Personal changes having significant effects
2) Manual or automated controls
3) Other components of control effectiveness
4) Risk of material misstatement & extent of reliance on controls
5) Changing circumstances but lack of change in controls
6) General IT control effectiveness
If the auditor plans to use audit evidence from a previous audit the obtain SAAE whether significant changes in
those controls have occurred subsequent to the previous audit. The auditor obtains these SAAE by performing
inquiry combined with observation or inspection to confirm the understanding of those specific controls

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If there have been changes that affect the continuing relevance of the audit evidence from the previous audit,
the auditor shall test the controls in the current audit. If there have not been such changes, the auditor shall test
the controls at least once in every third audit, & shall test some controls each audit to avoid the possibility of
testing all the controls on which the auditor intends to rely in a single audit period with no testing of controls in
the subsequent two audit periods

Evaluating the operating effectiveness of controls:

When deviations from controls upon which the auditor intends to rely are detected, the auditor shall make
specific inquiries to understand these matters & their potential consequences, & shall determine whether
1) The tests of controls that have been performed provide an appropriate basis for reliance on the controls
2) Additional tests of controls are necessary
3) The potential risks of misstatement need to be addressed using substantive procedures
When evaluating the operating effectiveness of relevant controls, the auditor shall evaluate whether
misstatements that have been detected by substantive procedures indicate that controls are not operating
effectively. The absence of misstatements detected by substantive procedures, however, does not provide audit
evidence that controls related to the assertion being tested are effective. A material misstatement detected by
the auditor's procedures are a strong indicator of the existence of a significant deficiency in internal control.

Substantive procedures:
1) The auditor shall design & perform substantive procedures for each material class of transactions, account
balances & disclosures. This requirement reflects the fact that
a) The auditor’s assessment of risk is judgemental & so may not identify all risk of material misstatement
b) There are inherent limitations to internal control, including management override
2) Depending upon the circumstances the auditor may determine that
a) Performing only substantive analytical procedures will be sufficient to reduce audit risk to an acceptably
low level
b) Only tests of details are appropriate
c) A combination of substantive analytical procedures & tests of details are most responsive to the
assessed risks
3) Substantive analytical procedures are generally more applicable to large volumes of transactions that tend
to be predictable over time
4) SA 520, "Analytical Procedures" establishes requirements & provides guidance on the application of
analytical procedures during an audit
5) The nature of the risk & assertion is relevant to design of tests of details
6) The auditor shall consider whether external confirmation procedures are to be performed as substantive
audit procedure
7) The auditors substantive audit procedures shall include the following audit procedures relating to the FS
closing process
a) Agreeing or reconciling the FS with the underlying accounting record
b) Examining material journal entries & other adjustments made during the course of preparing the FS
8) The nature, extent & timing of the auditor’s examination of journal entries & other adjustments depends on
the entity’s financial reporting process & the related risk of material misstatements

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SA 402: Audit consideration relating to an entity using a service organization

Obtaining an understanding of the services provided by a service organization, including internal controls:
When obtaining an understanding of the user entity in accordance with SA 315, the user auditor shall obtain an
understanding of how a user entity uses the services of a service organisation in the user entity's operations,
including
1) The nature of the services provided by the service organisation & the significance of those services to the
user entity, including the effect thereof on the user entity's internal control
2) The nature & materiality of the transactions processed, or accounts or financial reporting processes
affected by the service organisation
3) The nature of the relationship between the user entity & the service organisation
4) Including the relevant contractual terms for the activities undertaken by the service organisation
5) The degree of interaction between the activities of the service organisation & those of the user entity
6) When obtaining an understanding of internal control relevant to the audit in accordance with SA 315, the
user auditor shall evaluate the design & implementation of relevant controls at the user entity that relate
to the services provide by the service organisation, including those that are applied to the transactions
processed by the service organisation

Unable to obtain sufficient understanding from user entity;

If the user auditor is unable to obtain a sufficient understanding from the user entity, the user auditor shall obtain
that understanding from one or more of the following procedures
1) Contacting the service organisation, through the user entity, to obtain specific information
2) Using another auditor to perform procedures that will provide the necessary information about the relevant
controls at the service organization
3) Obtaining a Type 1 or Type 2 report, if available
4) Visiting the service organisation & performing procedures that will provide the necessary information
about the relevant controls at the service organisation

Factors to be considered to understand relevance of services to financial reporting:

As per SA 402 "Audit Considerations relating to an Entity using a Service Organization", services provided by
a service organisation is relevant to the audit of a user entity's financial statements when those services, & the
controls over them, are part of the user entity's information system, including related business processes,
relevant to financial reporting
Although most controls at the service organisation are likely to relate to financial reporting, there may be other
controls that may also be relevant to the audit, such as controls over the safeguarding of assets. A service
organisation's services are part of a user entity's information system, including related business processes,
relevant to financial reporting if these services affect any of the following
1) Financial reporting process used to prepare FS including significant accounting estimates & disclosures
2) Controls surrounding journal entries
3) Classes of transactions which are significant to user entity’s FS
4) The related accounting records either in electronic or manual form
5) The procedures within both information technology & manual system
6) Capture of events & conditions that are significant to the FS

Type 1 report:
Report on the description & design of controls at a service organisation (referred to in this SA as a Type 1
report) - A report that comprises
1) A description, prepared by management of the service organisation, of the service organisation's system,
control objectives & related controls that have been designed & implemented as at a specified date

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2) A report by the service auditor with the objective of conveying reasonable assurance that includes service
auditor's opinion on the description of the service organisation's system, control objectives & related
Controls & the suitability of the design of the controls to achieve the specified control objectives

Type 2 report:
Report on the description, design, & operating effectiveness of controls at a service organisation (referred to
in this SA as a Type 2 report)- A report that comprises
1) A description, prepared by management of the service organisation, of the service organisation's system,
control objectives & related controls, their design & implementation as at a specified date or throughout
a specified period and, in some cases, their operating effectiveness throughout a specified period
2) A report by the service auditor with the objective of conveying reasonable assurance that includes
a) The service auditor's opinion on the description of the service organisation's system, control objectives
& related controls, the suitability of the design of the controls to achieve the specified control
objectives, & the operating effectiveness of the controls
b) A description of the service auditor's tests of the controls & the results thereof

Type 1 & type 2 reports that exclude the services of a subservice organization:
1) It may happen that underlying entity is taking services from, service organization which are in turn given by
sub-service organization
2) Sub-service organization may be related to service organization or separate entity all together
3) Nature of Services / Significance of services / Effect of services on internal control system/Nature &
materiality of transactions in determining significance of service organization & sub service organization
control
4) If sufficient understanding is not obtained from user entity, then Type 1/Type 2 report can give auditor
better understanding
5) Auditor needs to consider controls at sub-service organization
6) One of the important aspects is regarding Interactions, it will include interaction between underlying entity,
service organization & sub-service organization
7) Service organization auditor may either include or exclude control objectives & controls of sub-service
organization. These 2 methods of reporting are called inclusive & carve out method respectively
8) It is mandatory for service organization to include description of controls at sun service organization in its
description of controls.
9) If carve out method of reporting is used & controls at sub-service organization are relevant, then auditor
needs to apply requirements of SA 402 in respect of sub-service organization

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SA 450: Evaluation of misstatements identified during the audit

Misstatements & sources:

Misstatement:
1) A difference between the amounts, classification, presentation, or disclosure of a reported financial
statement item & the amount, classification, presentation, or disclosure that is required for the item to be
in accordance with the applicable financial reporting framework
2) Misstatements can arise from error or fraud
Sources:
Misstatements may result from
1) An omission of an amount or disclosure
2) An inaccuracy in gathering or processing data from which the financial statements are prepared
3) An incorrect accounting estimate arising from overlooking, or clear misinterpretation of facts
4) Selection or application of accounting policies that the auditor considers inappropriate
5) Judgments of management concerning accounting estimate that the auditor considers unreasonable

What to do when misstatements are detected (Evaluation of misstatements):

1) The auditor shall accumulate misstatements identified during audit, other than those that are clearly trivial
2) The auditor shall determine whether the overall audit strategy & audit plan need to be revised if
a) The nature of identified misstatements & the circumstances of their occurrence indicates that other
misstatements may exist that, when aggregated with misstatements accumulated during the audit, could
be material
b) The aggregate of misstatements accumulated during the audit approaches materiality determined in
accordance with SA 320
3) The auditor shall communicate on a timely basis all misstatements accumulated during the audit with the
appropriate level of management, unless prohibited by law or regulation. The auditor shall request
management to correct those misstatements
4) If, at the auditor's request, management has examined a class of transactions, account balance or disclosure
& corrected misstatements that were detected, the auditor shall perform additional audit procedures to
determine whether misstatements remain
5) If management refuses to correct some or all of the misstatements communicated by the auditor, the auditor
shall obtain an understanding of management's reasons for not making the corrections & shall take that
understanding into account when evaluating whether the financial statements as a whole are free from
material misstatement
6) Prior to evaluating the effect of uncorrected misstatements, the auditor shall reassess materiality
determined in accordance with SA 320 to confirm whether it remains appropriate in the context of the
entity's actual financial results
7) The auditor shall determine whether uncorrected misstatements are material, individually or in aggregate
In making this determination, the auditor shall consider
a) The size & nature of the misstatements, both in relation to particular classes of transactions, account
balances or disclosures & the financial statements as a whole, & the particular circumstances of
their occurrence
a) The effect of uncorrected misstatements related to prior periods on the relevant classes of
transactions, account balances or disclosures, & the financial statements as a whole
8) The auditor shall communicate with those charged with governance uncorrected misstatements & the
effect that they, individually or in aggregate, may have the opinion in the auditor's report, unless prohibited
by law or regulation. The auditor's communication shall identify material uncorrected misstatements
individually. The auditor shall request that uncorrected misstatements be corrected. The auditor shall also
communicate with those charged with governance the effect of uncorrected misstatements related to
prior periods on the relevant classes of transactions, account balances or disclosures, & the FS as w whole

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9) The auditor shall request a written representation from management, and, where appropriate, those charged
with governance whether they believe the effects of uncorrected misstatements are immaterial, individually
& in aggregate, to the financial statements as a whole. A summary of such items shall be included in or
attached to the written representation
10) Consider effect of uncorrected misstatements on Audit Opinion as per SA 705

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SA 500: Audit evidence

Meaning of audit evidence:

Audit evidence is the information used by auditor in arriving at the conclusions on which auditors’ opinion is based
Audit evidence needs to be
1) Sufficient (measure of quantity)
2) Appropriate (measure of quality)
The sufficiency & appropriateness of audit evidence are interrelated. Higher the quality, less quantity may be
required. Obtaining more audit evidence, however, may not compensate for its poor quality

Methods of obtaining audit evidence:

1) Observation:
a) Observation consists of looking at a process or procedure being performed by others
b) Observation provides audit evidence about the performance of a process or procedure but is limited to
the point in time at which the observation takes place, & by the fact that the act of being observed
may affect how the process or procedure is performed
2) Inspection:
a) Inspection involves examining records or documents, whether internal or external, in paper form,
electronic form, or other media, or a physical examination of an asset
b) Inspection of records & documents provide audit evidence of varying degrees of reliability, depending on
their nature & source & in the case of internal records & documents, on the effectiveness of the controls
over their production
3) Inquiry:
a) Inquiry consists of seeking information of knowledgeable persons, financial & non- financial, within the
entity or outside the entity
b) Inquiry is used extensively throughout the audit in addition to other audit procedures
c) Inquiries may range from formal written inquiries to informal oral inquiries
d) Evaluating responses to inquiries is an integral part of the inquiry process
e) Responses to inquiries may provide the auditor with information not previously possessed or with
corroborative audit evidence
f) Alternatively, responses might provide information that differs significantly from other information that
the auditor has obtained
g) In some cases, responses to inquiries provide a basis for the auditor to modify or perform additional
audit procedures
h) Although corroboration of evidence obtained through inquiry is often of particular importance, in the
case of inquiries about management intent, the information available to support management's intent
may be limited
i) In these cases, understanding management's past history of carrying out its stated intentions,
management's stated reasons for choosing a particular course of action, & management's ability to
pursue a specific course of action may provide relevant information to corroborate the evidence
obtained through inquiry
j) In respect of some matters, the auditor may consider it necessary to obtain written representations
from management and, where appropriate TCWG to confirm responses to oral inquiries
4) Recalculation:
a) Recalculation consists of checking the mathematical accuracy of documents or records
b) Recalculation may be performed manually or electronically
5) Re-performance:
a) Re-performance involves the auditor's independent execution of procedures or controls that were
originally performed as part of the entity's internal control

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6) Analytical procedures:
a) Analytical procedures consist of evaluations of financial information made by a study of plausible
relationships among both financial & non-financial data
b) Analytical procedures also encompass the investigation of identified fluctuations & relationships that
are inconsistent with other relevant information or deviate significantly from predicted amounts
7) External confirmation:
a) An external confirmation represents audit evidence obtained by the auditor as a direct written response
to the auditor from a third party (the confirming party), in paper form, or by electronic or other medium
8) Written representation:
a) Written Statement by Management to confirm certain matters or to support other evidence

Reliability of audit evidence:

When designing & performing audit procedures, the auditor shall consider the reliability & relevance of the audit
information to be used as audit evidence. The following generalizations may be useful
1) External evidences are considered more reliable than internal evidences
2) The reliability of internal evidence is increased when the related controls, imposed by entity are effective
3) Audit evidence obtained directly by the auditor is more reliable than audit evidence obtained indirectly
4) Audit evidence in documentary form, is more reliable than evidence obtained orally
5) Audit evidence provided by original documents is more reliable than audit evidence provided by photocopies

Using the work of managements expert:

The auditor shall
1) Evaluate competence, capability & objectivity of the expert:
Sources of information for evaluation
a) Knowledge of that expert’s qualifications
b) Published papers or books written by that expert
c) Personal experience with previous work of that expert
d) Discussions with that expert
e) Discussions with others who are familiar with that expert’s work
2) Obtain an understanding of the work of that expert:
a) Aspects of the management's expert's field relevant to the auditor's understanding may include what
assumptions & methods are used by the management's expert, & whether they are generally
accepted within that expert's field & appropriate for financial reporting purposes
3) Evaluate the appropriateness of that expert’s work as audit evidence for the relevant assertion:
The auditor may also consider the following while evaluating the appropriateness of the management's
expert's work as audit evidence for the relevant assertion
a) If that expert's work involves significant use of source data, the relevance, completeness, & accuracy
of that source data
b) If that expert's work involves use of significant assumptions & methods, the relevance &
reasonableness of those assumptions & methods
c) The relevance & reasonableness of that expert's findings or conclusions, their consistency with other
audit evidence, & whether they have been appropriately reflected in the financial statements

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SA 501: Audit evidence - Specific consideration for selected items

Objectives:
The objective of the auditor is to obtain sufficient appropriate audit evidence regarding
1) The existence & condition of inventory
2) The completeness of litigation & claims involving the entity
3) The Presentation & disclosure of segment information in accordance with the applicable FRF

1) Inventory:
The auditor shall obtain SAAE regarding the existence & condition of inventory by
a) Attendance at physical inventory counting to (unless impracticable)
i) Evaluate managements instructions & procedures for physical inventory counting
ii) Observe the performance of management’s count procedure
iii) Inspect the inventory
iv) Perform test counts
b) Performing audit procedures over the entity's final inventory records to determine whether they
accurately reflect actual inventory count results
c) Counting is conducted at a date other than year end
i) If physical inventory counting is conducted at a date other than the date of the financial statements,
the auditor shall in addition to the procedures discussed before, perform audit procedures to obtain
audit evidence about whether changes in inventory between the count date & the date of the
financial statements are properly recorded
d) In some cases, attendance at physical inventory counting may be impracticable because of
i) Nature & location of inventory
ii) Difficulty, time & cost
In these cases, alternative audit procedures should be performed. If alternative audit procedures
does not provide SAAE the auditor shall modify the opinion as per SA 705
e) When inventory under the custody & control of a third party is material to the financial statements,
the auditor shall obtain sufficient appropriate audit evidence regarding the existence & condition of
that inventory by performing one or both of the following
i) Request confirmation from the third party as to the quantities & condition of inventory held on
behalf of the entity
ii) Perform inspection or other audit procedures appropriate in the circumstances
 Requesting confirmation from other parties when inventory has been pledged as collateral
 Inspecting documentation regarding inventory held by third parties etc

2) Litigations & claims:

The auditor shall design & perform audit procedures in order to identify litigation & claims involving the
entity which may give rise to a risk of material misstatement, including
a) Inquiry of management and, where applicable, others within the entity, including in house legal counsel
b) Reviewing minutes of meetings of those charged with governance
c) Correspondence between the entity & its external legal counsel
d) Reviewing legal expense accounts
e) If risk of material misstatements exist the auditor should
i) Communicate with the entity’s external legal counsel
ii) In certain cases, the auditor may also meet the external legal counsel
f) The auditor shall request management and, where appropriate, those charged with governance to
provide written representations that all known actual or possible litigation & claims whose effects
should be considered when preparing the financial statements have been disclosed to the auditor &
appropriately accounted for & disclosed in accordance with the applicable FRF

40
3) Segment information:
Obtain SAAE regarding presentation & disclosure of segment information in accordance with the applicable FRF
by
a) Obtaining an understanding of the methods used by management in determining segment information &
i) Evaluate whether such methods are likely to result in disclosure in accordance with applicable FRF
ii) Where appropriate, testing the application of such methods
b) Performing analytical procedures or other audit procedures appropriate in the circumstances

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SA 505: External confirmation

What is external confirmation?

Audit evidence obtained as a direct written response to the auditor from a third party (the confirming party), in
paper form, or by electronic or other medium
1) Audit evidence is more reliable when it is obtained from independent sources outside the entity
2) Audit evidence obtained directly by the auditor is more reliable than audit evidence obtained indirectly or by
inference
3) Audit evidence is more reliable when it exists in documentary form, whether paper, electronic or other
medium
Accordingly, depending on the circumstances of the audit, audit evidence in the form of external confirmations
received directly by the auditor from confirming parties may be more reliable than evidence generated internally
by the entity

Situations where external confirmation may be used/parties to whom we can ask for confirmation:
1) Trade receivables
2) Trade payables
3) Terms of agreement or transactions with third parties
4) Bank balance & other information from bankers
5) Stock held by third parties
6) Property title deeds held by third parties
7) Investments purchased but delivery not taken
8) Bank loans etc

External confirmation procedures:

1) Determining the information to be confirmed or requested
a) External confirmation procedures frequently are performed to confirm or request information
regarding account balances & their elements
b) They may also be used to confirm terms of agreements, contracts, or transactions between an entity
& other parties, or to confirm the absence of certain conditions, such as a "side agreement".
2) Selecting the appropriate confirming party
a) Responses to confirmation requests provide more relevant & reliable audit evidence when
confirmation requests are sent to a confirming party the auditor believes is knowledgeable about the
information to be confirmed
3) Designing the confirmation request
a) Directly affects the confirmation response rates & the reliability& nature of the audit evidence
b) Factors to be considered while designing confirmation requests include
i) Layout & presentation
ii) Management encouragement
iii) Assertions
iv) Ability to confirm
v) Management authorization
vi) Method of communication
vii) Prior experience
viii) Risk of material misstatements
4) Sending requests including follow up requests
a) Determining that requests are properly addressed, includes testing the validity of some or all of the
addresses on confirmation requests before they are sent out
a) The auditor may send an additional confirmation request when a reply to a previous request has not
been received within a reasonable time (follow up requests)

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Negative confirmations:
1) A request that the confirming party respond directly to the auditor only if the confirming party disagrees
with the information provided in the request
2) Situations
a) The auditor has assessed the risk of material misstatement as low & has obtained sufficient
appropriate audit evidence regarding the operating effectiveness of controls relevant to the assertion
b) The population of items subject to negative confirmation procedures comprises a large number of small,
homogeneous, account balances, transactions or conditions
c) A very low exception rate is expected
d) The auditor is not aware of circumstances or conditions that would cause recipients of negative
confirmation requests to disregard such requests

Reliability of responses:
1) If the auditor identifies factors that give rise to doubts about the reliability of the response to a confirmation
request, the auditor shall obtain further audit evidence to resolve those doubts
2) If the auditor determines that a response to a confirmation request is not reliable, the auditor shall evaluate
the implications on the assessment of the relevant risks of material misstatement, including the risk of fraud,
& on the related nature, timing & extent of other audit procedures
3) Factors affecting reliability of responses
a) Appropriate external control process & control
b) Proper source & person
c) Medium
d) Source environment
e) Language used etc

Management’s refusal to allow the auditor to send a confirmation request:

If management refuses to allow the auditor to send a confirmation request, the auditor shall
1) Inquire as to management's reasons for the refusal, & seek audit evidence as to their validity & reasonableness
2) Evaluate the implications of management's refusal on the auditor's assessment of the relevant risks of
material misstatement, including the risk of fraud, & on the nature, timing & extent of other audit procedures
3) Perform alternative audit procedures designed to obtain relevant & reliable audit evidence
4) If the auditor concludes that management's refusal to allow the auditor to send a confirmation request is
unreasonable, or the auditor is unable to obtain relevant & reliable audit evidence from alternative audit
procedures, the auditor shall communicate with those charged with governance in accordance with SA 260
5) The auditor also shall determine the implications for the audit & the auditor's opinion in accordance with
SA 705

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SA 510: Initial audit engagement - Opening balances

Applicability:
1) This SA deals with the auditor's responsibilities relating to opening balances when conducting an initial audit
engagement
2) Initial audit engagement - An engagement in which either
a) The financial statements for the prior period were not audited
b) The financial statements for the prior period were audited by a predecessor auditor

Objective:
In conducting an initial audit engagement, the objective of the auditor with respect to opening balances is to
obtain sufficient appropriate audit evidence about whether
1) Opening balances contain misstatements that materially affect the current period's financial statements
2) Appropriate accounting policies reflected in the opening balances have been consistently applied in the
current period's financial statements or changes thereto are properly accounted for & adequately
presented & disclosed in accordance with the applicable financial reporting framework

Audit procedures to examine opening balances:

1) The auditor shall read the most recent financial statements, if any, & the predecessor auditor's report
thereon, if any, for information relevant to opening balances, including disclosures
2) The auditor shall obtain sufficient appropriate audit evidence about whether the opening balances contain
misstatements that materially affect the current period's financial statements by
a) Determining whether the prior period's closing balances have been correctly brought forward to the
current period or, when appropriate, any adjustments have been disclosed as prior period items in the
current year's statement of profit & loss
b) Determining whether the opening balances reflect the application of appropriate accounting policies
c) Performing one or more of the following:
i) Where the prior year financial statements were audited, perusing the copies of the audited financial
statements including the other relevant documents relating to the prior period financial statements
ii) Evaluating whether audit procedures performed in the current period provide evidence relevant to
the opening balances
iii) Performing specific audit procedures to obtain evidence regarding the opening balances
3) Relevant Information in the Predecessor Auditor's Report
a) If the prior period's financial statements were audited by a predecessor auditor & there was a
modification to the opinion, the auditor shall evaluate the effect of the matter giving rise to the
modification in assessing the risks of material misstatement in the current period's financial statements
in accordance with SA 315
b) If the auditor obtains audit evidence that the opening balances contain misstatements that could
materially affect the current period's financial statements, the auditor shall perform such additional
audit procedures as are appropriate in circumstances to determine the effect on current period's FS
c) If the auditor concludes that such misstatements exist in the current period's financial statements, the
auditor shall communicate the misstatements with the appropriate level of management & those
charged with governance in accordance with SA 450
4) Consistency of Accounting Policies
a) The auditor shall obtain sufficient appropriate audit evidence about whether the accounting policies
reflected in the opening balances have been consistently applied in the current period's FS
b) Whether changes in the accounting policies have been properly accounted for & adequately presented
& disclosed in accordance with the applicable financial reporting framework

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Audit conclusion & reporting:
1) Opening balances:
a) If the auditor is unable to obtain SAAE then he should express a qualified or disclaimer of opinion as per
SA 705
b) If the opening balances contain material misstatement (no proper accounting/presentation) the auditor
should express a qualified or adverse opinion as per SA 706
2) Consistency of accounting policies:
a) If the accounting policies are not consistently applied on opening balances or if the changes are not
properly accounted, presented & disclosed then the auditor shall express a qualified or adverse opinion
3) Modification to the predecessor’s audit report:
a) If the modification in predecessor’s audit report is relevant & material in the audit of current years FS
then the auditor shall modify his opinion as per SA 705

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SA 520: Analytical Procedures

Definition:
1) The term "analytical procedures" means evaluation of financial information through analysis of plausible
relationships among both financial & non-financial data
2) Analytical procedures also encompass such investigation as is necessary of identified fluctuations or
relationships that are inconsistent with other relevant information or that differ from expected values by a
significant amount
3) Thus, analytical procedures include the consideration of comparisons of the entity's financial information
with as well as consideration of relationships

Comparison of financial data:

Analytical procedures include the consideration of comparisons of the entity's financial information with, for e.g.,
1) Comparable information for prior periods (Trend Analysis)
2) Anticipated results of the entity, such as budgets or forecasts, or expectations of the auditor, such as an
estimation of depreciation (Comparative Analysis)
3) Auditor's own estimates (Predictive Analysis)
4) Similar industry information, such as a comparison of the entity's ratio of sales to accounts receivable with
industry averages or with other entities of comparable size in the same industry (Inter Firm Analysis)

Comparisons to complex analysis:

1) Various methods may be used to perform analytical procedures
2) These methods range from performing simple comparisons to performing complex analyses using advanced
statistical techniques (Correlation & Regression)
3) Analytical procedures may be applied to consolidated financial statements, components & individual
elements of information
4) For example,
a) Among elements of financial information that would be expected to conform to a predictable pattern
based on the entity's experience, such as gross margin percentages
b) Between financial information & relevant non-financial information, such as payroll costs to number
of employees

Application/purpose of analytical procedures:

Analytical procedures are used for the following purposes:
1) To assist the auditor in planning the nature, timing & extent of other auditing procedures
2) To obtain relevant & reliable audit evidence when using substantive analytical procedures
3) To design & perform analytical procedures near the end of the audit that assist the auditor when forming
an overall conclusion as to whether the financial statements are consistent with the auditor's understanding
of the entity

Analytical procedures in planning the audit:

1) In the planning stage, analytical procedures assist the auditor in understanding the client's business & in
identifying areas of potential risk by indicating aspects of & developments in the entity's business of which
he was previously unaware
2) This information will assist the auditor in determining the nature, timing & extent of his other audit
procedures
3) Analytical procedures in planning the audit use both financial data & non-financial information, such as
number of employees, square feet of selling space, volume of goods produced & similar information

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Analytical procedures used as substantive tests:
When designing & performing substantive analytical procedures, either alone or in combination with tests of
details, as substantive procedures in accordance with SA 330, the auditor shall
1) Determine the suitability of particular substantive analytical procedures for given assertions, taking account
of the assessed risks of material misstatement & tests of details, if any, for these assertions
2) Evaluate the reliability of data from which the auditor's expectation of recorded amounts or ratios is
developed, taking account of source, comparability, & nature & relevance of information available, &
controls over preparation
3) Develop an expectation of recorded amounts or ratios & evaluate whether the expectation is sufficiently
precise to identify a misstatement that, individually or when aggregated with other misstatements, may cause
the financial statements to be materially misstated
4) Determine the amount of any difference of recorded amounts from expected values that is acceptable
without further investigation

Factors affecting suitability of analytical procedures:

1) Volume of transactions:
a) Substantive analytical procedures are generally more applicable to large volumes of transactions that
tend to be predictable over time
b) The application of planned analytical procedures is based on the expectation that relationships among
data exist & continue in the absence of known conditions to the contrary
c) However, the suitability of a particular analytical procedure will depend upon the auditor's assessment
of how effective it will be in detecting a misstatement that, individually or when aggregated with other
misstatements, may cause the financial statements to be materially misstated
2) Risk of material misstatement:
a) The determination of the suitability of particular substantive analytical procedure is influenced by the
nature of the assertion & the auditor's assessment of the risk of material misstatement
3) Different levels of assurance:
a) Different types of analytical procedures provide different levels of assurance
b) Analytical procedures involving, for example, the prediction of total rental income on a building divided
apartments, taking the rental rates, the number of apartments & vacancy rates into consideration,
can provide persuasive evidence & may eliminate the need for further verification by means of tests
of details, provided the elements are appropriately verified
c) In contrast, calculation & comparison of gross margin percentages as a means of confirming a revenue
figure may provide less persuasive evidence but may provide useful corroboration if used in combination
with other audit procedures
4) Test of details:
a) Particular substantive analytical procedures may also be considered suitable when tests of details are
performed on the same assertion
b) For example, when obtaining audit evidence regarding the valuation assertion for accounts receivable
balances, the auditor may apply analytical procedures to an aging of customers' accounts in addition to
performing tests of details on subsequent cash receipts to determine the collectability of receivables

Factors affecting reliability of data/extent of reliance on analytical procedures:

1) SA 520 on 'Analytical Procedures' provides that the reliability of data is influenced by its source & nature
& is dependent on the circumstances under which it is obtained
2) Accordingly, the following are relevant criteria when determining whether data is reliable for purposes of
designing substantive analytical procedures
a) Source of the information available
b) Comparability of the information available
c) Nature & relevance of the information available

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 d) Controls over the preparation of the information that are designed to ensure its completeness,
accuracy & validity

Investigating results of analytical procedures:

If analytical procedures performed in accordance with this SA identify fluctuations or relationships that are
inconsistent with other relevant information or that differ from expected values by a significant amount, the
auditor shall investigate such differences by
1) Inquiring of management & obtaining appropriate audit evidence relevant to management's responses
a) Audit evidence relevant to management's responses may be obtained by evaluating those responses
taking into account the auditor's understanding of the entity & its environment, & with another audit
evidence obtained during the course of the audit
2) Performing other audit procedures as necessary in the circumstances
a) The need to perform other audit procedures may arise when, for example, management is unable to
provide an explanation, or the explanation, together with the audit evidence obtained relevant to
management's response, is not considered adequate

Analytical procedures that assist when forming an overall conclusion:

1) The auditor shall design & perform analytical procedures near the end of the audit that assist the auditor
when forming an overall conclusion as to whether the financial statements are consistent with the auditor's
understanding of the entity
2) The conclusions drawn from the results of analytical procedures designed & performed in accordance with
above paragraph intended to corroborate conclusions formed during the audit of individual components or
elements of the financial statements
3) This assists the auditor to draw 2 reasonable conclusions on which to base the auditor's opinion
4) The results of such analytical procedures may identify a previously unrecognised risk of material
misstatement
5) In such circumstances, SA 315 requires the auditor to revise the auditor's assessment of the risks of
material misstatement & modify the further planned audit procedures accordingly
6) The analytical procedures performed for overall conclusion may be similar to those that would be used as
risk assessment procedures

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SA 530: Audit sampling

Meaning:
Application of audit procedures to less than 100% of items within a population

Sampling risk:
The risk that the auditor’s conclusion based on a sample may be different from the conclusion if the entire
population were subjected to the same audit procedure. This risk can lead to two types of errors:
1) Type I error
2) Type II error

Non-sampling risk:
The risk that the auditor reaches an erroneous conclusion for any reason not related to sampling risk
1) Inappropriate audit procedure
2) Failure to recognize a misstatement or deviation
3) Misinterpretation of audit evidence

Types of sampling:
1) Statistical sampling
An approach to sampling that has the following characteristics
a) Random selection of the sample items
b) The use of probability theory to evaluate sample results, including measurement of sampling risk
Advantages of statistical sampling
a) It provides a means for deriving a "calculated risk" & corresponding precision (sampling error) i.e., the
probable difference in result due to the use of a sample in lieu of examining all the records in the group
(universe), using the same audit procedures
b) The method provides a means of estimating the minimum sample size associated with a specified risk
& precision
c) The amount of testing (sample size) does not increase in proportion to the increase in the size of the
area (universe) tested
d) The sample selection is more objective & thereby more defensible
e) It may provide a better description of a large mass of data than a complete examination of all the data,
since non-sampling errors such as processing & clerical mistakes are not as large
2) Non-Statistical Sampling
A sampling approach that does not have characteristics of random selection & use of probability theory is
considered non statistical sampling

Sampling process:
1) Sample design
When designing an audit sample, the auditor’s consideration includes
a) The specific purpose to be achieved
b) The combination of audit procedures that is likely to best achieve
c) Consideration of the nature of the audit evidence sought & that purpose
d) Possible deviation or misstatement conditions or other characteristics relating to that audit evidence
will assist the auditor in defining what constitutes a deviation or misstatement
e) What population to use for sampling
f) In fulfilling the requirement of SA 500 Audit Evidence, when performing audit sampling, the auditor
performs audit procedures to obtain evidence that the population from which the audit sample is drawn
is complete

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2) Sample size
a) The auditor shall determine a sample size sufficient to reduce sampling risk to an acceptably low level
b) The level of sampling risk that the auditor is willing to accept affects the sample size required
c) Lower the risk the auditor is willing to accept, the greater the sample size will need to be
d) The sample size can be determined by the application of a statistically based formula or through the
exercise of professional judgment
3) Sample selection methods
Sample should be selected in such a manner that it is representative of the population from which the sample
is being selected. It will necessitate that each item in the population has an equal chance of being included in
the sample. Some of the important methods of selecting the sample are discussed below
a) Random sampling
Random selection ensures that all items in the population or within each stratum have a known chance
of selection. It may involve use of random number tables. Random sampling includes two very popular
methods which are discussed below
i) Simple random sampling: Under this method each unit of the whole population has an equal chance
of being selected. The mechanics of selection of items may be by choosing numbers from table of
random numbers by computers or picking up numbers randomly from a drum. It is considered that
random number tables are simple & easy to use & also provide assurance that the bias does not
affect the selection. This method is considered appropriate provided the population to be sampled
consists of reasonably similar units & fall within a reasonable range
ii) Stratified sampling: This method involves dividing the whole population to be tested in a few
separate groups called strata & taking a sample from each of them. Each stratum is treated as
if it was a separate population & if proportionate of items are selected from each of these
stratums. The number of groups into which the whole population has to be divided is determined
on the basis of auditor judgment
b) Interval sampling (systematic sampling)
It involves selecting items using a constant interval between selections, the first interval having a
random start. The interval might be based on a certain number of items or a monetary total. When using
systematic selection, the auditor should determine that the population is not structured in such a
manner that the sampling interval corresponds with a particular pattern in the population. To minimise
the effect of the possible known buyers through a pattern in the population, more than one starting
point may be taken. The multiple random starting points are taken
c) Cluster sampling
This method involves dividing the population into groups of items known as clusters. A number of
clusters are randomly selected from all the clusters rather than individual items of the population.
Cluster sampling can be used together with both unrestricted random & stratified sampling. The
cluster is less effective for a given sample size than unrestricted random & stratified samples as items
are not individually selected. However, the time saved can be utilised to have a larger sample to make
the sample results more reliable. As per SA 530, the auditor shall determine a sample size sufficient
to reduce sampling risk to an acceptably low level
d) Monetary unit sampling
It is a type of value weighted selection in which sample size, selection & evaluation results in a conclusion
in monetary limits
e) Haphazard selection
Haphazard selection, in which the auditor selects the sample without following a structured technique.
Although no structured technique is used, the auditor would nonetheless avoid any conscious bias or
predictability (for example, avoiding difficult to locate items, or always choosing or avoiding the first or
last entries on a page) & thus attempt to ensure that all items in the population have a chance of
selection. Haphazard selection is not appropriate when using statistical sampling

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 f) Block selection
Block selection involves selection of a block(s) of contiguous items from within the population. Block
selection cannot ordinarily be used in audit sampling because most populations are structured such that
items in a sequence can be expected to have similar characteristics to each other, but different
characteristics from items elsewhere in the population. Although in some circumstances it may be an
appropriate audit procedure to examine a block of items, it would rarely be an appropriate sample
selection technique when the auditor intends to draw valid inferences about the entire population based
on the sample
4) Performing audit procedures
a) The auditor shall perform audit procedures, appropriate to the purpose, on each item selected
b) If the audit procedure is not applicable to the selected item; auditor shall perform the procedure on a
replacement item
c) If the auditor is unable to apply the designed audit procedures, or suitable alternative procedures, to a
selected item, the auditor shall treat that item as a deviation from the prescribed control, in the case of
tests of controls, or a misstatement, in the case of tests of details
5) Nature & causes of deviation & misstatements
a) The auditor shall investigate the nature & cause of any deviations or misstatements identified &
evaluate their possible effect on the purpose of the audit procedure & on other areas of the audit
b) In the extremely rare circumstances when the auditor considers a misstatement or deviation discovered
in a sample to be an anomaly, the auditor shall obtain a high degree of certainty that such misstatement
or deviation is not representative of the population
c) The auditor shall obtain this degree of certainty by performing additional audit procedures to obtain
sufficient appropriate audit evidence that the misstatement or deviation does not affect the remainder
of the population
d) In analysing the deviations & misstatements identified, the auditor may observe that many have a
common feature
e) In such circumstances, the auditor may decide to identify all items in the population that possess the
common feature & extend audit procedures to those items
f) In addition, such deviations or misstatements may be intentional, & may indicate the possibility of fraud
6) Projecting misstatement
a) For test of controls
i) For tests of controls, no explicit projection of deviations is necessary since the sample deviation
rate is also the projected deviation rate for the population as a whole
ii) SA 330 provides guidance when deviations from controls upon which the auditor intends to rely
are detected
b) For test of details
i) For tests of details, the auditor shall project misstatements found in the sample to the population
ii) The auditor is required to project misstatements for the population to obtain a broad view of the
scale of misstatement, but this projection may not be sufficient to determine an amount to be
recorded
iii) When a misstatement has been established as an anomaly, it may be excluded when projecting
misstatements to the population
iv) However, the effect of any such misstatement, if uncorrected, still needs to be considered in
addition to the projection of the non-anomalous misstatements
7) Evaluating sample results
a) The auditor shall evaluate
i) The results of the sample
ii) Whether the use of audit sampling has provided a reasonable basis for conclusions about the
population that has been tested

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b) For tests of controls, an unexpectedly high sample deviation rate may lead to an increase in the assessed
risk of material misstatement, unless further audit evidence substantiating the initial assessment
is obtained
c) For tests of details, an unexpectedly high misstatement amount in a sample may cause the auditor to
believe that a class of transactions or account balance is materially misstated, in the absence of further
audit evidence that no material misstatement exists
d) Considering the results of other audit procedures helps the auditor to assess the risk that actual
misstatement in the population exceeds tolerable misstatement, & the risk may be reduced if additional
audit evidence is obtained
e) In the case of tests of details, the projected misstatement plus anomalous misstatement, if any, is the
auditor's best estimate of misstatement in the population
f) When the projected misstatement plus anomalous misstatement, if any, exceeds tolerable
misstatement, the sample does not provide a reasonable basis for conclusions about the population that
has been tested
g) The closer the projected misstatement plus anomalous misstatement is to tolerable misstatement, the
more likely that actual misstatement in the population may exceed tolerable misstatement
h) Also, if the projected misstatement is greater than the auditor's expectations of misstatement used to
determine the sample size, the auditor may conclude that there is an unacceptable sampling risk that
the actual misstatement in the population exceeds the tolerable misstatement
i) In case the auditor concludes that audit sampling has not provided a reasonable basis for conclusions
about the population that has been tested, the auditor may request management to investigate
misstatements that have been identified & the potential for further misstatements & to make any
necessary adjustments; or tailor the nature, timing & extent of those further audit procedures to be
achieve the required assurance

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SA 540: Auditing estimates, including fair value accounting estimates & related disclosures

Nature of accounting estimates:

1) Some financial statement items cannot be measured precisely but can only be estimated
2) For purposes of this SA, such financial statement items are referred to as accounting estimates
3) Because of the uncertainties inherent in business activities (utilization of machines, continuity of
departments), some financial statement items can only be estimated
4) Further, the specific characteristics of an asset, liability or component of equity, (investments, provisions
for litigations) or the basis of or method of measurement prescribed by the financial reporting framework,
(value in use in AS 28, fair valuation in Ind AS may give rise to the need to estimate a FS item
5) Some financial reporting frameworks prescribe specific methods of measurement & the disclosures that
are required to be made in the financial statements, while other FRFs are less specific
6) Estimation involves judgments based on information available when the financial statements are prepared
7) For many accounting estimates, these include making assumptions about matters that are uncertain at the
time of estimation
8) The auditor is not responsible for predicting future conditions, transactions or events that, if known at the
time of audit, might have significantly affected management's actions or assumptions used by management

Types of accounting estimates:

1) Fair value accounting estimate
Fair value is a rational & unbiased estimate of the potential market price of the asset or liability. Examples of
situations where fair value estimates may be required include
a) Fixed assets
b) Investments
c) Liabilities
d) Business combinations
2) Other accounting estimates
Estimates apart from fair value estimates. Examples of situations where accounting estimates, other than
fair value accounting estimates, may be required include
a) Fixed assets
b) Investments
c) Current assets
d) Liabilities
e) P & L

Risk assessment procedures & related activities:

While performing risk assessment procedures & related activities to obtain an understanding of the entity & its
environment the auditor shall obtain an understanding of the following
1) Requirements of applicable FRF
2) How management identifies transactions, events & conditions that give rise to need for accounting estimates
3) Estimation making process adopted by management & data on which they are based including
a) Methods/model used in making accounting estimates
b) Relevant controls
c) Use of management expert
d) Changes in the methods from the prior period along with reasons
e) Assessment of effect of estimation uncertainties
4) The auditor shall review the outcome of accounting estimates included in the prior period FS, or, where
applicable, their subsequent re-estimation for the purpose of the current period

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Identifying & assessing the risk of material misstatement:
1) In identifying & assessing the risks of material misstatement, as required by SA 315, the auditor shall
evaluate the degree of estimation uncertainty associated with an accounting estimate
2) The auditor shall determine whether, in the auditor's judgment, any of those accounting estimates that have
been identified as having high estimation uncertainty give rise to significant risks

Factors affecting uncertainty:

1) The degree of estimation uncertainty associated with an accounting estimate may influence the estimate’s
susceptibility to bias
2) The degree of estimation uncertainty associated with an accounting estimate may be influenced by factors
such as
a) The extent to which the accounting estimate depends on judgment
b) The sensitivity of the accounting estimate to changes in assumptions
c) The existence of recognised measurement techniques that may mitigate the estimation uncertainty
(though the subjectivity of the assumptions used as inputs may nevertheless give rise to estimation
uncertainty)
d) The extent to which the accounting estimate is based on observable or unobservable input
e) The length of the forecast period, & the relevance of data drawn from forecast future events
f) The availability of reliable data from external sources
g) The degree of estimation uncertainty associated with an accounting estimate may influence the
estimate's susceptibility to bias
3) Examples of high estimation uncertainty
a) Accounting estimates relating to the outcome of litigation
b) Fair value accounting estimates for derivative financial instruments not publicly traded
c) Fair value accounting estimates for which a highly specialized entity-developed model is used or for
which there are assumptions or inputs that cannot be observed in the marketplace
4) Examples of low estimation uncertainty
a) Accounting estimates that are frequently made & updated because they relate to routine transactions
b) Fair value accounting estimates where the method of measurement prescribed by the applicable FRF
is simple & applied easily to the asset or liability requiring measurement at fair value
c) Accounting estimates arising in entities that engage in business activities that are not complex
d) Fair value accounting estimates where the model used to measure the accounting estimate is well
known or generally accepted, provided that the assumptions or inputs to the model are observable
e) Accounting estimates derived from data that is readily available, such as published interest rate data
or exchange-traded prices of securities. Such data may be referred to as "observable" in the context
of a fair value accounting estimate

Responses to assessed risks:

Based on the assessed risks of material misstatement, the auditor shall determine
1) Whether the methods for making the accounting estimates are appropriate & have been applied
consistently, & whether changes, if any, in accounting estimates or in the method for making those from
the prior period is appropriate in the circumstance
2) Whether management has appropriately applied the requirements of the applicable financial reporting
framework relevant to the accounting estimate
3) In responding to the assessed risk of material misstatement, as required by SA 330, the auditor shall
undertake one or more of the following, taking account of nature of the accounting estimate
a) Determine whether events occurring up to date of auditor’s report provide audit evidence regarding
audit evidence
b) Test how management made the accounting estimate & the data on which it is based
c) Test the operating effectiveness of the controls

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 d) Develop a point estimate or a range to evaluate management’s point estimate

Disclosures related to accounting estimates:

1) The auditor shall obtain sufficient appropriate audit evidence about whether the disclosures in the financial
statements related to accounting estimates are in accordance with the requirements of the applicable FRF
2) For accounting estimates that give rise to significant risks, the auditor shall also evaluate the adequacy of
the disclosure of their estimation uncertainty in the financial statements in the context of applicable FRF
3) The presentation of financial statements in accordance with the applicable financial reporting framework
includes adequate disclosure of material matters. The applicable financial reporting framework may permit,
or prescribe, disclosures related to accounting estimates, & some entities may disclose voluntarily
additional information in the notes to the financial statements. These disclosures may include, for example
a) The assumptions used
b) The method of estimation used, including any applicable model
c) The basis for the selection of the method of estimation
d) The effect of any changes to the method of estimation from the prior period
e) The sources & implications of estimation uncertainty
4) Such disclosures are relevant to users in understanding accounting estimates recognized or disclosed in FS,
& SAAE needs to be obtained about whether disclosures are in accordance with the requirements of
applicable FRF

Written representations:
The auditor shall obtain written representations from management and, where appropriate, those charged with
governance whether they believe significant assumptions used in making accounting estimates are reasonable

Documentation:
The audit documentation shall include
1) The basis for the auditor's conclusions about the reasonableness of accounting estimates
2) their disclosure that gives rise to significant risks; & indicators of possible management bias, if any,

55
SA 550: Related parties

Nature of related party relationships & transactions:

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

Understanding the entity’s related party relationship’s & transaction’s:

1) The engagement team discussion that SA 315 & SA 240 require, shall include specific consideration of
the susceptibility of the FS to material misstatement due to fraud or error that could result from the entity's
related party relationships & transactions
2) The auditor shall inquire of management regarding
a) The identity of the entity's related parties, including changes from the prior period
b) The nature of the relationships between the entity & these related parties
c) Whether the entity entered into any transactions with these related parties during the period and, if
so, the type & purpose of the transactions

Maintaining alertness for related party information when reviewing records or documents:
During the audit, the auditor shall remain alert, when inspecting records or documents, for arrangements or
other information that may indicate the existence of related party relationships or transactions that management
not previously identified or disclosed to the auditor. In particular, the auditor shall inspect the following for
indications of the existence of related party relationships or transactions that management has not previously
identified or disclosed to the auditor
1) Bank, legal & third-party confirmations as a part of the auditor’s procedure
2) Minutes of meetings of shareholders & of TCWG
3) Such other documents as the auditor considers necessary in the circumstances of the entity
4) Documents which can give information about related parties
a) Previous years records
b) Documents which can show significant influence/control on company
c) Documents which can show significant influence/control by company
d) Legal documents
e) Other documents

Identification of previously unidentified or undisclosed related parties or significant related party transactions:
1) If the auditor identifies arrangements or information that suggests the existence of related party
relationships or transactions that management has not previously identified or disclosed to the auditor, the
auditor shall determine whether the underlying circumstances confirm the existence of those relationships
or transactions
2) If the auditor identifies related parties or significant related party transactions that management has not
previously identified or disclosed to the auditor, the auditor shall
a) Promptly communicate the relevant information to the other members of the ET
b) Request the management to identify all transactions with the newly identified related parties for the
auditor’s further evaluation
c) Inquire as to why the internal controls failed to identify & disclose the related party transactions

56
 d) Perform appropriate substantive audit procedures relating to such newly identified related parties or
significant related party transactions
e) Reconsider the risk that other related parties or significant related party transactions may exist that
management has not previously identified or disclosed to the auditor, & perform additional audit
procedures as necessary
f) If the non-disclosure by management appears intentional (and therefore indicative of a risk of material
misstatement due to fraud), evaluate the implications for the audit

Identified significant related party transactions outside the entity’s normal course of business:
For identified significant related party transactions outside entity's normal course of business, the auditor shall
1) Obtain audit evidence that the transactions have been appropriately authorized & approved
2) Inspect the underlying contracts or agreements, if any, & evaluate whether
a) The business rationale (or lack thereof) of the transactions suggests that they may have been entered
into to engage in fraudulent financial reporting or to conceal misappropriation of assets
b) The terms of the transactions are consistent with management's explanations
c) The transactions have been appropriately accounted for & disclosed in accordance with the applicable
financial reporting framework

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SA 560: Subsequent events

Definition:
SA 560 on "Subsequent Events", defines the term "subsequent events" as events occurring between the date
of the financial statements & the date of the auditor's report, & facts that become known to the auditor after
the date of the auditor's report

Requirement of AS 4:
1) Subsequent Event Definition: All significant events / favourable or unfavourable / occur between balance
sheet date & date of approval by BOD
2) Types of events: Events giving evidence regarding conditions existing on balance sheet date / Events giving
evidence on conditions which arose after balance sheet date
3) 3 Exceptions to above: Events required to be adjusted by law or AS/ events affecting going concern/events
which are significant, material but not requiring adjustment can be disclosed in BOD report

Events occurring between the date of the financial statements & the date of the auditor’s report:
1) Duties of auditor
a) The auditor shall perform audit procedures designed to obtain sufficient appropriate audit evidence that
all events occurring between the date of the financial statements & the date of the auditor's report
that require adjustment of, or disclosure in, the financial statements have been identified
b) The auditor shall perform the procedures so that they cover the period from the date of the financial
statements to the date of the auditor's report, or as near as practicable thereto
c) The auditor is not, however, expected to perform additional audit procedures on matters to which
previously applied audit procedures have provided satisfactory conclusions
d) The auditor shall take into account the auditor's risk assessment in determining the nature & extent
of such audit procedures
2) Audit procedures
a) Perform procedures to obtain SAAE that all events which require adjustment/disclosure have been
identified
b) For the purpose of determining nature & timing of procedures, auditor may
i) Obtain understanding of procedures applied by management for identification of significant events
ii) Inquire with the management as to occurrence of subsequent events which may affect the FS
iii) Read the minutes of meetings that held after the balance sheet date
iv) Study the interim financial statements, if any
c) If auditor identifies any event which require any adjustment/disclosure, he should ensure its appropriate
treatment in FS
d) Obtain a written representation from management that all known events have been appropriately
adjusted/disclosed, as the case may be
3) Adjusting event
When, as a result of the procedures performed as explained above, the auditor identifies events that require
adjustment of, or disclosure in, the financial statements, the auditor shall determine whether each such event
is appropriately reflected in those financial statements
4) Written representation
The auditor shall request management and, where appropriate, those charged with governance,
representation to provide a written representation in accordance with SA 580, "Written Representations"
that all events occurring subsequent to the date of the financial statements & for which the applicable
financial reporting framework requires adjustment or disclosure have been adjusted or disclosed
5) Specific inquiries to be made from management:
a) Whether new commitments, borrowings or guarantees have been entered into
b) Whether sales or acquisitions of assets have occurred or are planned

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 c) Whether there have been increases in capital or issuance of debt instruments
d) Whether any assets have been appropriated by government or destroyed
e) Whether there have been any developments regarding contingencies
f) Whether any unusual accounting adjustments have been made
g) Whether any events have occurred that will bring into question the appropriateness of accounting
policies used in the FS
h) Whether any events have occurred that are relevant to the measurement of estimates or provisions
made in the FS
i) Whether any events have occurred that are relevant to the recoverability of assets

Facts which become known to the auditor after date of the auditor’s report but before the date FS are issued:
The auditor has no obligation to perform any audit procedures regarding the financial statements after the date
of the auditor's report. However, when, after the date of the auditor's report but before the date the financial
statements are issued, a fact becomes known to the auditor that, had it been known to the auditor at the date of
the auditor's report, may have caused the auditor to amend the auditor's report, the auditor shall
1) Discuss the matter with management and, where appropriate, those charged with governance
2) Determine whether the financial statements need amendment and, if so
3) Inquire how management intends to address the matter in the financial statements
If management amends financial statements - The auditor shall:
1) Carry out the audit procedures necessary in the circumstances on the amendment
2) Unless the restricted by law
a) Extend the audit procedures to the date of the new auditor's report
b) Provide a new auditor's report on the amended financial statements. The new auditor's report shall not
be dated earlier than the date of approval of the amended financial statements
If management does not amend financial statement – The auditor shall:
1) Modify the opinion as required by SA 705 & then provide the auditor's report if the auditor's report has
not yet been provided to the entity
2) Notify management and, unless all of those charged with governance are involved in managing the entity,
those charged with governance, not to issue the financial statements to third parties before the necessary
amendments have been made. If the financial statements are nevertheless subsequently issued without the
necessary amendments, the auditor shall take appropriate action, to seek to prevent reliance on the
auditor's report, if the auditor's report has already been provided to the entity
Other amendments - When there are other amendments the auditor shall
1) Amend the auditor's report to include an additional date restricted to that amendment that thereby indicates
that the auditor's procedures on subsequent events are restricted solely to the amendment of the financial
statements described in the relevant note to the financial statements
2) Provide a new or amended auditor's report that includes a statement in an Emphasis of Matter paragraph
or Other Matter(s) paragraph3 that conveys that auditor's procedures on subsequent events are restricted
solely to the amendment of the financial statements as described in the relevant note to the FS

Facts which become known to the auditor after the financial statements have been issued:
All steps of earlier point will apply plus following additional point will be applicable
1) Review the steps taken by management to ensure that anyone in receipt of the previously issued financial
statements together with the auditor’s report thereon is informed of the situation

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SA 570: Going concern

Meaning:
The concept of going concern is an underlying assumption in the preparation of financial statements, hence it is
assumed that the entity has neither the intention, nor the need, to liquidate or curtail materially the scale of its
operations

Management’s responsibility:
1) Asses the entity’s ability to continue as a going concern
2) General purpose FS are prepared on a going concern basis unless management intends to liquidate the entity
or to cease operation
3) In case FS are not prepared on going concern basis, the fact would need to be appropriately disclosed

Auditor’s duties:
1) To obtain SAAE about the appropriateness of management use of going concern basis of accounting
2) Determine whether management has already performed a preliminary assessment of entity ability to
continue as going concern
3) If auditor identifies events that cast significant doubt on entity ability to continue as going concern, he shall
perform additional audit procedures. These shall include
a) Where management has not yet performed an assessment of the entity's ability to continue as a going
concern, requesting management to make its assessment
b) Evaluating management's plans for future actions in relation to its going concern assessment, whether
the outcome of these plans is likely to improve the situation
c) Where the entity has prepared a cash flow forecast, & analysis of the forecast is a significant factor
in considering the future outcome of events or conditions in the evaluation of management's plans for
future actions
i) Evaluating the reliability of the underlying data generated to prepare the forecast
ii) Determining whether there is adequate support for the assumptions underlying the forecast
d) Considering whether any additional facts or information have become available since the date on which
management made its assessment
e) Requesting written representations from management and, where appropriate, those charged with
governance, regarding their plans for future actions & the feasibility of these plans
f) Audit procedures that are relevant to the requirement may include the following (Optional)
i) Obtaining & reviewing reports of regulatory actions
ii) Inquiring of entity's legal counsel regarding the existence of litigation & claim & the reasonableness
of management's assessments of their outcome & the estimate of their financial implications
iii) Reading minutes of the meetings of shareholders, TCWG & relevant committees for reference to
financing difficulties
iv) Determining the adequacy of support for any planned disposals of assets
v) Reading the terms of debentures & loan agreements & determining whether any have been breached
vi) Evaluating the entity's plans to deal with unfilled customer orders
vii) Analysing & discussing cash flow, profit & other relevant forecasts with management
viii) Analysing & discussing the entity's latest available interim financial statements
ix) Performing audit procedures regarding subsequent events to identify those that either mitigate or
otherwise affect the entity's ability to continue as a going concern
x) Confirming the existence, legality & enforceability of arrangements to provide or maintain
financial support with related & third parties & assessing the financial ability of such parties to
provide additional funds
xi) Confirming the existence, terms & adequacy of borrowing facilities

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Auditor’s conclusions:
1) The auditor shall evaluate whether SAAE has been obtained regarding, & shall conclude on, the
appropriateness of management's use of the going concern basis of accounting in the preparation of the FS
2) Based on the audit evidence obtained, auditor shall conclude whether, in the auditor’s judgment, a material
uncertainty exists related to events or conditions that, individually or collectively, may cast significant doubt
on the entity's ability to continue as a going concern
3) A material uncertainty exists when magnitude of its potential impact & likelihood of occurrence is such that,
in auditor's judgment, appropriate disclosure of nature & implications of the uncertainty is necessary for
a) In the case of a fair presentation financial reporting framework, the fair presentation of the FS
b) In the case of a compliance framework, the financial statements not to be misleading
4) If the auditor concludes that management's use of the going concern basis of accounting is appropriate in
the circumstances but a material uncertainty exists, the auditor shall determine whether the FS
a) Adequately disclose the principal events or conditions that may cast significant doubt on the entity's
ability to continue as a going concern & management's plans to deal with these events or conditions
b) Disclose clearly that there is a material uncertainty related to events or conditions that may cast
significant doubt on the entity's ability to continue as a going concern and, therefore, that it may be
unable to realize its assets & discharge its liabilities in the normal course of business
5) If events or conditions have been identified that may cast significant doubt on the entity's ability to continue
as a going concern but, based on the audit evidence obtained the auditor concludes that no material
uncertainty exists, the auditor shall evaluate whether, in view of the requirements of the applicable FRF,
the financial statements provide adequate disclosures about these events or conditions

Implications for the auditor’s report:

1) If the financial statements have been prepared using the going concern basis of accounting but, in the
auditor's judgment, management's use of the going concern basis of accounting in the preparation of the FS
is inappropriate, the auditor shall express an adverse opinion
2) If adequate disclosure about the material uncertainty is made in the financial statements, the auditor shall
express an unmodified opinion & the auditor's report shall include a separate section under the heading
"Material Uncertainty Related to Going Concern"
a) Draw attention to note in the financial statements that discloses the matters related to going concern
b) State that these events or conditions indicate that a material uncertainty exists that may cast
significant doubt on the entity's ability to continue as a going concern & that the auditor's opinion is
not modified in respect of the matter
3) If adequate disclosure about the material uncertainty is not made in the FS, the auditor shall
a) Express a qualified opinion or adverse opinion, as appropriate, in accordance with SA 705
b) In the Basis for Qualified (Adverse) Opinion section of the auditor's report, state that a material
uncertainty exists that may cast significant doubt on the entity's ability to continue as a going concern
& that the financial statements do not adequately disclose this matter
4) If management is unwilling to make or extend its assessment when requested to do so by the auditor, the
auditor shall consider the implications for the auditor's report

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SA 580: Written representation

Definition & detailed explanation:

1) A written representation is a written statement by management provided to the auditor to confirm certain
matters or to support another audit evidence
2) Further, a request for written, rather than oral, representations in many cases may prompt management to
consider such matters more rigorously, thereby enhancing the quality of the representations
3) Written representations in this context do not include financial statements, the assertions therein, or
supporting books & records
4) For purposes of this SA, references to "management" should be read as "management and, where
appropriate, those charged with governance
5) There are two types of written representations
a) Written Representations about Management's Responsibilities (Compulsory)
b) Other Written Representations
6) Although written representations provide necessary audit evidence, they do not provide sufficient
appropriate audit evidence on their own about any of the matters with which they deal
7) Furthermore, the fact that management has provided reliable written representations does not affect the
nature or extent of other audit evidence that the auditor obtains about the fulfilment of management's
responsibilities, or about specific assertions
8) It makes it absolutely clear that written representations cannot be a substitute for other evidence that the
auditor could expect to be reasonably available

Date of the written representations & period(s) covered by written representations:

1) The date of the written representations shall be as near as practicable to, but not after, the date of the
auditor's report on the financial statements
2) The written representations shall be for all financial statements & period(s) referred to in audit report
(Even if management has changed still, they will have to provide written representation for last year as
whole FS is their responsibility irrespective of change)

Requested written representations not provided:

If management does not provide one or more of the requested written representation the auditor shall
1) Discuss the matter with management
2) Re-evaluate the integrity of management & evaluate the effect that this may have on the reliability of
representations & audit evidence in general
3) Take appropriate actions, including determining the possible effect on the opinion in the auditor's report
accordance with SA 705
4) Issue disclaimer of opinion

Doubt as to the reliability of written representation:

1) If the auditor has concerns about the competence, integrity, ethical values or diligence of management, or
about its commitment to or enforcement of these, the auditor shall determine the effect that such concerns
may have on the reliability of representations (oral or written) & audit evidence in general
2) In particular, if written representations are inconsistent with other audit evidence, the auditor shall perform
audit procedures to attempt to resolve the matter
3) If the matter remains unresolved, the auditor shall reconsider the assessment of the competence, integrity,
ethical values or diligence of management, or of its commitment to or enforcement of these, & shall
determine the effect that this may have on the reliability of representations (oral or written) & audit
evidence in general

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4) If the auditor concludes that the written representations are not reliable, the auditor shall take appropriate
actions, including determining the possible effect on the opinion in the auditor's report in accordance with
SA 705

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SA 600: Using the work of another auditor

Applicability:
In situation where an auditor (principal auditor), reporting on the financial information of an entity, uses the work
of another auditor (other auditor) with respect to the financial information of one/more components (division,
branch subsidiary, J. V. etc.), included in the financial information of the entity

Non applicability:
1) Joint auditors
2) Auditor’s relationship with a predecessor auditor

Acceptance as principal auditor:

The auditor should consider whether the auditor's own participation is sufficient to be able act as the principal
auditor. For this purpose, the auditor would consider
1) The materiality of the portion of the financial information which the principal auditor audits
2) The risk of material misstatements in financial information of the components audited by the other auditor
3) The principal auditor's degree of knowledge regarding the business of the components
4) The performance of additional procedures as set out in this SA regarding the components audited by other
auditor resulting in the principal auditor having significant participation in such audit

The procedures of principal auditor:

1) Consider the professional competence of other auditor, if other auditor is not a member of ICAI
2) Visit component & examine books of account, if essential
3) Obtain SAAE, that work of other auditor is adequate for principal auditor's purposes
4) Discuss audit procedures applied by other auditor
5) Review a written summary of other auditor’s procedures & findings through questionnaires/checklist
6) Consider significant findings of other auditor
a) Discuss audit findings with other auditor & management of component
b) Perform supplemental tests if necessary
7) In case other auditor is not a professionally qualified auditor - for instance, where a component is situated
in foreign country
a) Procedures mentioned above assume added importance
8) Documentation

Special circumstances:
1) In certain situations, the statute governing the entity may confer a right on the principal auditor to visit a
component & examine the books of account & other records of the said component, if he thinks it
necessary to do so
2) Where another auditor has been appointed for the component, the principal auditor would normally be
entitled to rely upon the work of such auditor unless there are special circumstances to make it essential
for him to visit the component and/or to examine the books of account & other records of the said component

Co-ordination between auditor’s:

1) There should be sufficient liaison between the principal auditor & the other auditor. For this purpose, the
principal auditor may find it necessary to issue written communication(s) to the other auditor
2) The principal auditor should advise the other auditor of any matters that come to his attention that he thinks
may have an important bearing on the other auditor's work
3) The other auditor, knowing the context in which his work is to be used by the principal auditor, should co-
ordinate with the principal auditor
4) He should ensure compliance with the relevant statutory requirements

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5) When considered necessary by him, the principal auditor may require the other auditor to answer a detailed
questionnaire regarding matters on which principal auditor requires information for discharging his duties
6) The other auditor should respond to such questionnaire on a timely basis

Reporting consideration:
1) When the principal auditor concludes, based on his procedures, that work of the other auditor cannot be
used & the principal auditor has not been able to perform sufficient additional procedures regarding the
financial information of the component audited by the auditor; the principal auditor should express a qualified
should express a qualified opinion or disclaimer of opinion because there is a limitation on the scope of audit
2) In all circumstances, if the other auditor issues, or intends to issue, a modified auditor's report, the principal
auditor should consider whether the subject of the modification is of such nature & significance, in relation
to the financial information of the entity on which the principal auditor is reporting that it requires a
modification of the principal auditor's report

Division of responsibility:
1) The principal auditor would not be responsible in respect of the work entrusted to the other auditors, except
in circumstances which should have aroused his suspicion about the reliability of the work performed by the
other auditors
2) When the principal auditor has to base his opinion on the financial information of the entity as a whole relying
upon the statements & reports of the other auditors, his report should state clearly the division of
responsibility for the financial information of the entity by indicating the extent to which the financial
information of components audited by the other auditors have been included in the financial information of
the entity
3) When the auditor delegates work to assistants or uses work performed by other auditors & experts, he
will continue to be responsible for forming & expressing his opinion on the financial information
4) However, he will be entitled to rely on work performed by others, provided he exercises adequate skill &
care & is not aware of any reason to believe that he should not have so relied
5) In the case of any independent statutory appointment to perform the work on which the auditor has to rely
in forming his opinion, such as in the case of the work of branch auditors appointed under the companies
act the auditor's report should expressly state the fact of such reliance

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SA 610: Using the work of internal auditor

Definition:
A function of an entity that performs Assurance & Consulting activities designed to evaluate & improve the
effectiveness of the entity's governance, risk management & internal control processes

Objective & scope:

The objectives & scope of internal audit functions typically include assurance & consulting activities designed
to evaluate & improve the effectiveness of the entity's governance processes, risk management & internal
control such as the following
1) Activities relating to governance
a) Ethics & values
b) Performance management & accountability
c) Communicating risk & control information to appropriate areas of the organization & its effectiveness
2) Activities relating to risk management
3) Activities relating to internal control
a) Review of operating activities
b) Evaluation of internal control
c) Review of compliance with laws & regulations
d) Examination of financial & operating information

Difference between internal audit & external audit:

Particulars Internal audit External audit

Definition Assurance & Consulting activities Audit of financial or other quantitative

designed to evaluate & improve the information of any entity with a view to
effectiveness of the entity's governance, express an opinion thereon
risk management & internal control
processes
Necessity It is voluntary. Compulsory to some It is normally compulsory. U/S 143
companies U/S 138
Auditor CA/CWA / Such Other Professional The external or statutory auditor is not part of
who may or may not be in practice may be the organization
employee
Appointment By the Management (BOD) of the By the owners (shareholders) of the enterprise
enterprise (generally)
Scope of It is determined by the Management and It arises from the responsibilities placed on him
work ranges from the pure review of accounting by the statute or the terms of engagement
functions to the review of various
operational services in the organization
Format of No format is prescribed The aspects to be covered in the Report are
the report prescribed by law SA 700
Submission To the management To the Shareholders
of report
Orientation Management oriented Oriented to the needs of the users of financial
statements & also management

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Using the work of internal auditor:
Step 1 – Evaluating the internal audit function
The external auditor shall determine whether the work of the internal audit function can be used for purposes
of the audit by evaluating the following
1) The extent to which the internal audit function's organizational status & relevant policies & procedures
support the objectivity of the internal auditors
2) The level of competence of the internal audit function
3) Whether the internal audit function applies a systematic & disciplined approach, including quality control
The external auditor shall not use the work of the internal audit function if the external auditor determines that
1) The function's organizational status & relevant policies & procedures do not adequately support the
objectivity of internal auditors
2) The function lacks sufficient competence
3) The function does not apply a systematic & disciplined approach, including quality control

Step 2 – Determining the nature, timing & extent of work of internal audit function that can be used:
As a basis for determining the areas & the extent to which the work of the internal audit function can be used,
external auditor shall consider the nature & scope of the work that has been performed, or is planned to be
performed, by the internal audit function & its relevance to external auditor's overall audit strategy & audit plan
Examples of work of the internal audit function that can be used by the external auditor include the following
1) Testing of the operating effectiveness of controls
2) Substantive procedures involving limited judgment
3) Testing of compliance with regulatory requirements
4) Tracing transactions through the information system relevant to financial reporting. In some circumstances,
audits or reviews of the financial information of subsidiaries that are not significant components to the group
(where this does not conflict with the requirements of SA 600)
5) Observations of inventory counts
The external auditor shall make all significant judgments in the audit engagement and, to prevent undue use of
the work of the internal audit function, shall plan to use less of the work of the function & perform more of the
work directly
1) The more judgment is involved in
a) Planning & performing relevant audit procedures
b) Evaluating the audit evidence gathered
2) The higher the assessed risk of material misstatement at the assertion level, with special consideration
given to risks identified as significant
3) The less the internal audit function's organizational status & relevant policies & procedures adequately
support the objectivity of the internal auditors
4) The lower the level of competence of the internal audit function

Step 3 – Using the work of the internal audit function

If the external auditor plans to use the work of the internal audit function the external auditor shall
1) Discuss the planned use of its work with the function as a basis for co-ordinating the activities
2) Read the reports of internal audit function to understand nature, timing & extent of audit procedures & related
findings
3) Perform sufficient audit procedures on the work of internal audit function
4) His own audit procedures should be responsive depending upon factors like judgement, risk of material
misstatement, organizational status & relevant policies & regulation
5) Evaluate the conclusions regarding internal audit function as per this SA remain appropriate

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Direct assistance:
Definition:
The use of internal auditors to perform audit procedures under the direction, supervision & review of external
auditor
Step 1 – Determining whether internal auditors can be used to provide direct assistance for the purpose of audit
1) The external auditor may be prohibited by law or regulation from obtaining direct assistance from internal
auditors. If so, then no need to check other factors
2) If using internal auditors to provide direct assistance is not prohibited by law or regulation, & the external
auditor plans to use internal auditors to provide direct assistance on the audit, the external auditor shall
evaluate the existence & significance of threats to objectivity & the level of competence of the internal
auditors who will be providing such assistance
3) The external auditor's evaluation of the existence & significance of threats to the internal auditors
objectivity shall include inquiry of the internal auditors regarding interests & relationships that may create
a threat to their objectivity
4) The external auditor shall not use an internal auditor to provide direct assistance if
a) There are significant threats to the objectivity of the internal auditor
b) The internal auditor lacks sufficient competence to perform the proposed work
5) In case where the external auditor is prohibited by law or regulation from using internal auditors to provide
direct assistance, it is relevant for the principal auditors to consider whether the prohibition also extends
to component auditors and, if so, to address this in the communication to the component auditors

Step 2 – Determining the nature, timing & extent of work that can be assigned to internal auditors
In determining the nature & extent of work that may be assigned to internal auditors & the nature, timing &
extent of direction, supervision & review that is appropriate in circumstances, external auditor shall consider
1) The amount of judgment involved in
a) Planning & performing relevant audit procedures
b) Evaluating the audit evidence gathered
2) The assessed risk of material misstatement
3) The external auditor's evaluation of the existence & significance of threats to the objectivity & level of
competence of the internal auditors who will be providing such assistance
The external auditor shall not use internal auditors to provide direct assistance to perform procedures that
1) Involve making significant judgments in the audit
2) Relate to higher assessed risks of material misstatement where the judgment required in performing the
relevant audit procedures or evaluating the audit evidence gathered is more than limited
3) Relate to work with which the internal auditors have been involved & which has already been, or will be,
reported to management or those charged with governance by the internal audit function
4) Relate to decisions the external auditor makes in accordance with this SA regarding the internal audit
function & the use of its work or direct assistance

Step 3 – Using internal auditors to provide direct assistance

Prior to using internal auditors to provide direct assistance for purposes of the audit, the external auditor shall
1) Obtain written agreement from an authorized representative of the entity that the internal auditors will be
allowed to follow the external auditor's instructions, & that the entity will not intervene in the work the
internal auditor performs for the external auditor
2) Obtain written agreement from the internal auditors that they will keep confidential specific matters as
instructed by the external auditor & inform the external auditor of any threat to their objectivity

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The external auditor shall direct, supervise & review the work performed by internal auditors on the
engagement in accordance with SA 220 in doing so
1) The nature, timing & extent of direction, supervision, & review shall recognize that the internal auditors
are not independent of the entity & be responsive to the outcome of the evaluation of the factors in
paragraph of this SA
2) The review procedures shall include the external auditor checking back to the underlying audit evidence for
some of the work performed by the internal auditors

Direct assistance from internal auditor in case of external confirmation procedures:

1) SA 610 "Using the Work of Internal Auditor" provide relevant guidance in determining the nature & extent
of work that may be assigned to internal auditors
2) In determining the nature of work that may be assigned to internal auditors, the external auditor is careful
to limit such work to those areas that would be appropriate to be assigned
3) Further, in accordance with SA 505, "External Confirmation" the external auditor is required to maintain
control over external confirmation requests & evaluate the results of external confirmation procedures,
it would not be appropriate to assign these responsibilities to internal auditors
4) However, internal auditors may assist in assembling information necessary for the external auditor to
resolve exceptions in confirmation responses

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SA 620: Using the work of auditor’s expert

Auditor’s expert:
1) An individual or organisation possessing expertise in a field other than accounting or auditing, whose work
in that field is used by the auditor to assist the auditor in obtaining sufficient appropriate audit evidence
2) An auditor's expert may be either an auditor's internal expert (who is a partner or staff, including temporary
staff, of the auditor's firm or a network firm), or an auditor's external expert

Management’s expert:
An individual or organisation possessing expertise in a field other than accounting or auditing, whose work in that
field is used by the entity to assist the entity in preparing the financial statements

Areas of expertise:
1) The valuation of complex
a) Financial instruments
b) Land & buildings
c) Plant & machinery
d) Work of art
e) Antiques
f) Intangible assets
2) Actuarial calculation with respect to insurance contracts or employee benefit plans
3) The estimation of oil & gas reserves
4) The valuation of environmental liabilities &site clean-up costs
5) The interpretation of contracts, laws & regulations
6) The analysis of complex or unusual tax compliance issues

Factors affecting the nature, timing & extent of auditor’s procedures:

In determining the nature, timing & extent of those procedures, the auditor shall consider matters including
1) The significance of that expert's work in the context of the audit
2) The nature of the matter to which that expert's work relates
3) The risks of material misstatement in the matter to which that expert's work relates
4) The auditor's knowledge of & experience with previous work performed by that expert
5) Whether that expert is subject to the auditor's firm's quality control policies & procedures
The following factors may suggest the need for different or more extensive procedures than would otherwise
be the case
1) The auditor's expert is performing procedures that are integral to the audit, rather than being consulted to
provide advice on an individual matter
2) The work of the auditor's expert relates to a significant matter that involves subjective & complex judgments
3) The auditor has not previously used the work of the auditor's expert, & has no prior knowledge of that
expert's competence, capabilities & objectivity
4) The expert is an auditor's external expert & is not, therefore, subject to the firm's quality control policies &
Procedures

Step 1 – Determining the need for an auditor’s expert

1) Need for auditor’s expert
a) If expertise in a field other than accounting or auditing is necessary to obtain SAAE, the auditor shall
determine whether to use the work of an auditor's expert
b) Considerations when deciding whether to use an auditor's expert may include
i) The nature & significance of the matter, including its complexity
ii) The risks of material misstatement in the matter

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 iii) The expected nature of procedures to respond to identified risks, including the auditor's knowledge
of & experience with the work of experts in relation to such matters
iv) The availability of alternative sources of audit evidence
v) Whether management has used a management's expert in preparing the financial statements

2) Activities in which auditor’s expert may be needed

An auditor’s expert may be needed to assist the auditor in one or more of the following
a) Obtaining an understanding of the entity & its environment, including its internal control
b) Identifying & assessing the risks of material misstatement
c) Determining & implementing overall responses to assessed risks at the financial statement level
d) Designing & performing further audit procedures to respond to assessed risks at the assertion level,
comprising tests of controls or substantive procedures
e) Evaluating the sufficiency & appropriateness of audit evidence obtained in forming an opinion on FS

3) When management has used managements experts whether to use auditor’s expert
When management has used a management's expert in preparing the financial statements, the auditor's
decision on whether to use an auditor's expert may also be influenced by such factors as
a) The management's expert's competence & capabilities
b) Whether the management's expert is employed by the entity, or is a party engaged by it to provide
relevant services
c) The nature, scope & objectives of the management’s expert’s work
d) Whether the management's expert is subject to technical performance standards or other professional
or industry requirements
e) Any controls within the entity over the management's expert's work
f) The extent to which management can exercise control or influence over work of management's expert

Step 2 – Obtaining an understanding of the field of expertise pf the auditor’s report

1) The auditor shall obtain a sufficient understanding of the field of expertise of the auditor's expert to enable
the auditor to
a) Determine the nature, scope & objectives of that expert's work for the auditor's purposes
b) Evaluate the adequacy of that work for the auditor's purposes
2) An auditor who is not an expert in a relevant field other than accounting or auditing May nevertheless be
able to obtain a sufficient understanding of that field to perform the audit without an auditor's expert. This
understanding may be obtained through
a) Experience in auditing entities that require such expertise in the preparation of their FS
b) Education or professional development in the particular field. This may include formal courses or
discussion with individuals possessing expertise in the relevant field for the purpose of enhancing the
auditor's own capacity to deal with matters in that field. Such discussion differs from consultation with
an auditor's expert regarding a specific set of circumstances encountered on the engagement where
that expert is given all the relevant facts that will enable the expert to provide informed advice about
the particular matter
c) Discussion with auditors who have performed similar engagements

Step 3 – The competence, capabilities & objectivity of the auditor’s expert

The auditor shall check the following of the expert
1) Competence
2) Capability
3) Objectivity

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Step 4 – Agreement with the auditor’s expert
The auditor shall agree, in writing when appropriate, on the following matters with the auditor's expert
1) The nature, scope & objectives of that expert's work
2) The respective roles & responsibilities of the auditor & that expert
3) The nature, timing & extent of communication between the auditor & that expert, including the form of
any report to be provided by that expert
4) When the work of the auditor's expert relates to the auditor's conclusions regarding a significant risk, both
a formal written report at the conclusion of that expert's work, & oral reports as the work progresses,
may be appropriate
5) Identification of specific partners or staff who will liaise with the auditor's expert, & procedures for
communication between that expert & the entity, assists timely & effective communication, particularly
on larger engagements
6) The need for the auditor's expert to observe confidentiality requirements
7) It is necessary for the confidentiality provisions of relevant ethical requirements that apply to the auditor
also, to apply to the auditor's expert
8) Additional requirements may be imposed by law or regulation.
9) The entity may also have requested that specific confidentiality provisions be agreed with auditor's external
experts
Circumstances/factors which may lead to more detailed agreement
Following circumstances/factors which may lead to more detailed agreement are as follows
1) The auditor has not previously used work performed by that expert
2) The respective roles or responsibilities of the auditor & the auditor's expert are different from those
normally expected
3) The greater the extent of the auditor's expert's work, & its significance in the context of the audit
4) The auditor's expert will have access to sensitive or confidential entity information
5) Multi-jurisdictional legal or regulatory requirements apply
6) The matter to which the auditor's expert's work relates is highly complex

Step 5 – Evaluating the adequacy of the auditor’s expert’s work

1) Assumptions & methods
If that expert’s work involves use of significant assumptions & methods, the relevance & reasonableness of
those assumptions & methods in the circumstances. Factors relevant to the auditor’s evaluation of those
assumptions & methods include whether they are:
a) Generally accepted within the auditor's expert's field
b) Consistent with the requirements of the applicable financial reporting framework
c) Consistent with those of management, & if not, the reason for, & effects of, the differences
d) Dependent on the use of specialised models
2) Findings & conclusions
The relevance & reasonableness of that expert’s findings or conclusions & their consistency with another
audit evidence. The auditor shall perform following specific procedures to evaluate the findings & conclusions
a) Inquiries of the auditor's expert
b) Reviewing the auditor's expert's working papers & reports
c) Corroborative procedures, such as
i) Observing the auditor's expert's work
ii) Examining published data, such as statistical reports from reputable, authoritative sources
iii) Confirming relevant matters with third parties
iv) Performing detailed analytical procedures
v) Re-performing calculations
d) Discussing the auditor's expert's report with management
e) Discussion with another expert with relevant expertise

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3) Inadequate work
a) If the auditor determines that the work of the auditor's expert is not adequate for the auditor's
purposes, the auditor shall
i) Agree with that expert on the nature & extent of further work to be performed by that expert
ii) Perform further audit procedures appropriate to the circumstances
b) If the auditor concludes that the work of the auditor's expert is not adequate for the auditor's purposes
& the auditor cannot resolve the matter through the additional audit procedures, which may involve
further work being performed by both the expert & the auditor, or include employing or engaging
another expert, it may be necessary to express a modified opinion in the auditor's report in accordance
with SA 705 because the auditor has not obtained sufficient appropriate audit evidence

Step 6 – Reference to the auditor’s expert in the auditor’s report

1) Unmodified opinion
a) The auditor shall not refer to the work of an auditor's expert in an auditor's report containing an
unmodified opinion unless required by law or regulation to do so
b) If such reference is required by law or regulation, the auditor shall indicate in the auditor's report that
the reference does not reduce the auditor's responsibility for the audit opinion
2) Modified opinion
a) If the auditor makes reference to the work of an auditor's expert in the auditor's report because such
reference is relevant to an understanding of a modification to the auditor's opinion, the auditor shall
indicate in the auditor's report that such reference does not reduce the auditor's responsibility for that
opinion

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SA 700: Forming an opinion & reporting on financial statements

Types of FRF:
1) General purpose FRF (report covered by SA 700)
2) Special purpose FRF (Report covered by SA 700 & SA 800)

Further classification of FRF:

1) Fair presentation FRF
If financial statements prepared in accordance with the requirements of a fair presentation framework do
not achieve fair presentation, the auditor shall discuss the matter with management and, depending on the
requirements of the applicable financial reporting framework & how the matter is resolved, shall determine
whether it is necessary to modify the opinion in the auditor's report in accordance with SA 705
2) Compliance framework
a) When the financial statements are prepared in accordance with a compliance framework, the auditor is
not required to evaluate whether the financial statements achieve fair presentation
b) However, if in extremely rare circumstances the auditor concludes that such financial statements are
misleading, the auditor shall discuss the matter with management and, depending on how it is resolved,
shall determine whether, & how, to communicate it in the auditor's report

Unmodified opinion:
The auditor shall express an unmodified opinion when the auditor concludes that the financial statements are
prepared, in all material respects, in accordance with the applicable financial reporting framework

Modified opinion:
If the auditor
1) Concludes that, based on the audit evidence obtained, the financial statements as a whole are not free from
material misstatement
2) is unable to obtain sufficient appropriate audit evidence to conclude that the financial statements as a whole
are free from material misstatement
the auditor shall modify the opinion in the auditor's report in accordance with SA 705

Basic elements of the auditor’s report:

1) Title
“Independent Auditor’s Report” – so as to distinguish from reports issued by other
2) Addressee
Auditor’s Report shall be addressed as appropriate. Generally, it is addressed to those for whom it is
Prepared
3) Auditor’s opinion
Opinion Para shall cover the following
a) Identify the entity
b) Identify the title of each financial statement
c) Specify the period/date covered by each FS
d) State that FS have been audited
e) Fair presentation framework
In our opinion, the FS present fairly in all material respects in accordance with (applicable FRF) or in
our opinion, the FS gives a true & fair view of ___in accordance with (applicable FRF)
f) Compliance framework
In our opinion, the FS present, in all material respect in accordance with (applicable FRF)
4) Basis for opinion
a) States that audit was conducted in accordance with SAs

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 b) Refer to Section of Auditor’s report that describes the auditor’s responsibilities
c) Compliance of ethical requirements including independence
d) Auditor’s believing that they had obtained sufficient & appropriate audit evidence to provide a basis
for the opinion
5) Going concern
Where applicable, auditor shall report in accordance with SA 570
6) Key audit matter’s
In case of Listed Entity, auditor shall communicate Key Audit Matters in Auditor’s Report in accordance
with SA 701
7) Management Responsibilities for the FS
a) To prepare FS in accordance with applicable FRF
b) Maintenance of adequate records for safeguarding of assets & prevention & detection of fraud
c) Making reasonable & prudent judgements & estimates
d) Design, implementation & maintenance of internal control
e) Assessing the appropriateness of going concern basis of accounting
f) Overseeing the financial reporting process
8) Auditor’s responsibilities for the audit of FS
a) State the objective of auditor to obtain reasonable assurance that FS as a whole are free from material
misstatements & issue the auditor’s report that includes an auditor’s opinion
b) Explanation with respect to reasonable assurance & application of concept of materiality
c) Statement that auditor exercises professional judgement & maintain professional scepticism
throughout audit
d) State auditor’s responsibilities with respect to
i) Identifying & assessing the risk of material misstatement (RMM)
ii) Design & perform audit procedures responsive to assessed risks
iii) Obtain SAAE
iv) Understanding of internal control
v) Expressing opinion on adequacy & operating effectiveness of internal financial control
vi) Evaluation of appropriateness of accounting policies & reasonableness of accounting estimates
vii) Conclude on appropriateness of management use of going concern basis of accounting
viii) Evaluate overall presentation, structure & content of FS
e) State Auditor’s responsibilities with respect to
i) Matters communicated to TCWG
ii) Providing statement to TCWG on compliance of ethical requirements
iii) Determining key audit matters out of matters communicated to TCWG
9) Other Reporting responsibilities
a) Heading: “Reporting on Other Legal & Regulatory Requirements”
b) Will include reporting of CARO, 2016/2020, reporting u/s 143(3) of Companies Act, 2013, Rule 11
of CAAR, 2014
10) Signature
In personal name & name of firm, along with the membership number & firm registration number
11) Place
The city where audit report is signed
12) Date
It should not be earlier than date on which audit evidences are collected

Auditor report prescribed by law or regulation:

Refers to SAs only if the auditor's report includes, at a minimum, basic elements of audit report, except that
going concern / key audit matter / other reporting requirements only if required. In India we don't refer to SA
700 while preparing tax audit report because it is not having management’s & auditor’s responsibility paragraph

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Standards on auditing in one audit report:
1) An auditor may be required to conduct an audit in accordance with, in addition to the SAs issued by ICAI,
the International standards on auditing or auditing standards of any other jurisdiction
2) If this is the case, the auditor's report may refer to SAs in addition to the international standards on auditing
or auditing standards of such other jurisdiction, but the auditor shall do so only if
a) There is no conflict between the requirements in the ISAS or such auditing standards of other
jurisdiction & those in SAS that would lead the auditor
i) To form a different opinion
ii) Not to include an Emphasis of Matter paragraph or Other Matter paragraph that, in the particular
circumstances, is required by SAs
b) The auditor's report includes, at a minimum, each of the elements set out for audit report as per law
c) When the auditor's report refers to both the ISAs or the auditing standards of a specific jurisdiction
& the SAs issued by ICAI, the auditor's report shall clearly identify the same including the jurisdiction
of origin of the other auditing standards
d) Entity may decide to present financial statement as per 2 FRF, for example as per AS & IFRS
e) So, description will contain both FRFs provided both the FRFs should be fully complied (i.e., can't use
particular FRF only for one or two items of FS) &no need for reconciliation between both
f) If only one FRF is followed & there is only reconciliation from FRF to another or just disclosure how
much other FRF is compiled no need to refer both?

Supplementary information:
If supplementary information that is not required by the applicable FRF is
1) Presented with the audited financial statements, the auditor shall evaluate whether, in the auditor's
professional judgment, supplementary information is nevertheless an integral part of the FS due to its nature
or how it is presented. When it is an integral part of the FS, the supplementary information shall be covered
by the auditor's opinion
2) not considered an integral part of the audited financial statements, the auditor shall evaluate whether such
supplementary information is presented in a way that sufficiently & clearly differentiates it from the
audited FS. If this is not the case, then the auditor shall ask management to change how the unaudited
supplementary information is presented. If management refuses to do so, the auditor shall identify the
unaudited supplementary information & explain in the auditor's report that such supplementary information
has not been audited

Audit certificate vs Audit report:

1) A certificate is a written confirmation of the accuracy of the facts stated therein & does not involve any
estimate or opinion. The term 'certificate' is, therefore, used where the auditor verifies the accuracy of
facts. An auditor may thus, certify the circulation figures of a newspaper or the value of imports or exports
of a company. An auditor's certificate represents that he has verified certain figures & is in a position to
vouch safe their accuracy as per his examination of documents & books of account
2) A report, on the other hand, is a formal statement usually made after an enquiry, examination or reviews of
specified matters under report & includes the reporting auditor's opinion thereon. Thus, when a reporting
auditor issues a certificate; he is responsible for the factual accuracy of what is stated therein
3) On the other hand, when a reporting auditor gives a report, he is responsible for ensuring that the report is
based on factual data, that his opinion is in due accordance with facts, & that it is arrived at by the
application of due care & skill. The 'report' involves expression of opinion which may differ from one
professional to another
4) There is no question of exactitude in case of a report since the information contained therein is based on
estimates & involves judgement element

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Reporting to shareholders vs Reporting to TCWG:

Reporting to shareholders Reporting to TCWG

1) Section 143 of the companies’ act, 2013 deals 1) SA 260 deals with the provisions relating to
with provisions relating to reporting to TCWG
shareholders. Thus, it is a statutory audit report
which is addressed to the members
2) Statutory audit report is on true & fair view & as 2) It is a reporting on matters TCWG like scope of
per prescribed format audit, audit procedures, audit modifications, etc
3) Statutory audit report are available in public 3) Reporting to TCWG is an internal document
domain i.e., private document

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SA 701: Communicating key audit matters in the independent auditor’s report

In which circumstances, auditor should think/consider about key audit matter paragraph?
AS per SA 700
1) For audits of complete sets of general-purpose financial statements of listed entities, the auditor shall
communicate key audit matters in the auditor's report in accordance with SA 701
2) When the auditor is otherwise required by law or regulation or decides to communicate key audit matters
in the auditor's report, the auditor shall do so in accordance with SA 701
3) Apart from compulsory consideration these two situations are possible
a) If required by law
b) Auditor decides to communicate if entity is of significant public interest
4) Public sector entities, even where not listed, may be significant due to size, complexity or public interest
aspects. In such cases, an auditor of a public-sector entity may be required by law or regulation or may
otherwise decide to communicate key audit matters in the auditor's report
5) However, SA 705 prohibits the auditor from communicating key audit matters when the auditor
disclaims an opinion on the financial statements, unless such reporting is required by law or regulation

Key audit matters (KAM):

Those matters that, in the auditor's professional judgment, were of most significance in the audit of the financial
statements of the current period. Key audit matters are selected from matters communicated with TCWG

Significant auditor attention:

The auditor shall determine, from the matters communicated with TCWG those matters that require significant
auditor attention in performing the audit. In making this determination, the auditor shall take into account the
following
1) Areas of higher assessed risk of material misstatement, or significant risks identified as per SA 315
2) Significant auditor judgements relating to areas in the FS that involved significant management judgement,
including accounting estimates that have been identified as having high estimation uncertainty
3) The effect on the audit of significant events or transactions that occurred during the period

Most significant matters:

The auditor shall determine which of the matters determined in accordance with the above points were of most
significance in the audit of the FS of the current period & therefore are the key audit matters

How to communicate KAM in audit report?

1) Introductory language
The auditor shall describe each key audit matter, using an appropriate subheading, in a separate section of
the auditor's report under the heading "Key Audit Matters,". The introductory language this section of the
auditor's report shall state that
a) Key audit matters are those matters that, in the auditor's professional judgment, were of most
significance in the audit of the financial statements (of the current period)
b) These matters were addressed in the context of the audit of the financial statements as a whole, & in
forming auditor's opinion thereon, & the auditor does not provide a separate opinion on these matter
(Above 2 are general statements, they should be specified at the start every time auditor specifies KAM)
2) Descriptions
The description of each key audit matter in the Key Audit Matters section of the auditor's report shall
include a reference to the related disclosure(s), if any, in the financial statements & shall address
a) Why the matter was considered to be one of most significance in the audit & therefore determined
to be a key audit matter
b) How the matter was addressed in the audit

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3) Not communicated
Circumstances in which a matter determined to ne a key audit matter is not communicated in the auditors
report
a) Law or regulation precludes public disclosure about the matter
b) In extremely rare circumstances the auditor determines that the matter should not be communicated in
the auditor’s report because the adverse consequences of doing so would reasonably be expected to
outweigh the public interest benefits of such communication. This shall not apply if the entity has
publicly disclosed information about the matter
4) Other circumstances
Form & content of the key audit matters section in other circumstances
If the auditor determines, depending on the facts & circumstances of the entity & the audit, that there
are no key audit matters to communicate or that the only key audit matters communicated are those matters
which are not to be communicated in audit report, the auditor shall include a statement to this effect in a
separate section of the auditor's report under the heading "Key Audit Matters”

What is the relationship between key audit matters, the auditor’s opinion & other elements of the auditor’s
report?
1) Interaction between descriptions of KAM & other elements required to be included in auditors report
A matter giving rise to a modified opinion in accordance with SA 705, or a material uncertainty related to
events or conditions that may cast significant doubt on the entity's ability to continue as a going concern in
accordance with SA 570 (Revised), are by their nature key audit matters. However, in such circumstances,
these matters shall not be described in the Key Audit Matters section of the auditor's report & the
requirements of specific disclosure as KAM. Rather, the auditor shall
a) Report on these matter(s) in accordance with the applicable SAs
b) Include a reference to the basis for qualified (adverse) opinion or the material uncertainty related to
going concern section(s) in the key audit matters section
2) Key audit matters not a substitute for expressing a modified opinion
a) The auditor shall not communicate a matter in the key audit matters section of the auditor's report
when the auditor would be required to modify the opinion in accordance with SA 705 as a result of the
matter
b) Qualified under SA 705 don't include in KAM just give reference of basis of qualification in KAM para
c) Adverse under SA 705 don't include in KAM just give reference basis of qualification in KAM para
d) Disclaimer under SA 705 don't give KAM para as audit was not conducted
e) EMP/OMP under SA 706 If matter of EMP/OMP is also KAM, include it in KAM you can highlight
more by putting it first in sequence & describing it more then no need to put separate EMP/OMP
f) Apart from this there can be separate matters where only EMP/OMP is required & no need to
include them in KAM, this concept is explained in detail in SA 706

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SA 705: Modification to the opinion in the independent auditor’s report

When to modify the opinion:

The auditor shall modify the opinion in the auditor's report when
1) The auditor concludes that, based on the audit evidence obtained, the financial statements as a whole are
not free from material misstatement
2) The auditor is unable to obtain sufficient appropriate audit evidence to conclude that the financial statements
as a whole are free from material misstatement

Types of opinion:
1) Qualified opinion
The auditor shall express a qualified opinion when
a) The auditor, having obtained sufficient appropriate audit evidence, concludes that misstatements,
individually or in the aggregate, are material, but not pervasive, to the financial statements
b) The auditor is unable to obtain sufficient appropriate audit evidence on which to base the opinion, but
the auditor concludes that the possible effects on the FS of undetected misstatements, if any, could be
material but not pervasive
2) Adverse opinion
The auditor shall express an adverse opinion when the auditor, having obtained sufficient appropriate audit
evidence, concludes that misstatements, individually or in the aggregate, are both material & pervasive to
the financial statements
3) Disclaimer of opinion
a) The auditor shall disclaim an opinion when the auditor is unable to obtain sufficient appropriate audit
evidence on which to base the opinion, & the auditor concludes that the possible effects on the
financial statements of undetected misstatements, if any, could be both material & pervasive
b) The auditor shall disclaim an opinion when, in extremely rare circumstances involving multiple
uncertainties, the auditor concludes that, notwithstanding having obtained sufficient appropriate audit
evidence regarding each of the individual uncertainties, it is not possible to form an opinion on the FS
due to the potential interaction of the uncertainties & their possible cumulative effect on the FS

Nature of the matter Auditor’s judgement

Material but not pervasive Material but pervasive
FS are materially misstated Qualified opinion Adverse opinion
Unable to obtain SAAE Qualified opinion Disclaimer of opinion

Limitation on scope imposed by management after acceptance of audit engagement;

If the auditor is of the opinion that the audit engagement is likely to result in qualification or disclaimer of opinion
the auditor shall
1) Request the management to remove the limitation on scope imposed
2) If the management refused then the auditor shall communicate with TCWG & perform alternative audit
Procedure
3) If the auditor is unable to obtain SAAE & concludes that the possible effects on the FS could be
i) Material but not pervasive he should qualify the report
ii) Material & pervasive he should reign (if at early stage) or issue disclaimer of opinion (If in advance
stage)

Communication with TCWG:

When the auditor expects to modify the opinion in the auditor’s report, the auditor shall communicate with
TCWG the circumstances that led to the expected modification & the wording of the modification

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Opinion section:
Wordings of the opinion
1) Qualified opinion
Except for the effects of matters prescribed in “Basis of Qualified Opinion” section, the FS have been
prescribed fairly in all material respects in accordance with applicable FRF
2) Adverse opinion
In auditor’s opinion, because of significance of the matters described in “Basis of Adverse Opinion” section,
the FS does not give a true & fair view of ___in accordance with applicable FRF
3) Disclaimer of opinion
Because of significance of matters described in the “Basis for Disclaimer of Opinion” section, the auditor
has not been able to obtain sufficient appropriate audit evidence to provide a basis for audit opinion on FS

Basis for opinion section:

1) Amend the heading – Basis for qualified opinion/Basis for adverse opinion/Basis for disclaimer of opinion
2) Include a description of matter giving rise to modification
a) Material misstatement in amount
i) Description of Misstatement
ii) Quantification of financial effect, if determinable
iii) If not determinable, state the fact
b) Material misstatement in disclosure
i) Explanation how the disclosures are misstated
c) Material misstatement due to non-disclosure of required information
i) Describe nature of omitted information
ii) Include the omitted disclosure provided it is practicable
d) Inability to obtain SAAE
i) State the reason for inability
3) Amend the statement with respect to auditor believing that audit evidences are sufficient & appropriate
to provide a basis for “Qualified opinion” or “Adverse opinion”
4) In case of disclaimer, auditor’s report shall not include the reference to section of auditor’s report that
describes the auditor’s responsibilities & statement with respect to auditor’s believing that SAAE obtained

Auditor’s responsibility section:

When an auditor disclaims the opinion, the auditor shall amend the description of auditor’s responsibilities to
include only the following
1) Statement that the auditor’s responsibility is to conduct an audit in accordance with SAs & to issue
auditor’s report
2) Statement that because of significance of matters described in basis for disclaimer of opinion section, auditor
was not able to obtain SAAE to provide a basis for an audit opinion
3) Statement about auditor’s independence & other ethical requirements

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SA 706: Emphasis of matter paragraph & other matters paragraph in independent auditor’s report

Emphasis of matter paragraph (EMP):

1) Definition
A paragraph included in the auditor's report that refers to a matter appropriately presented or disclosed in
the financial statements that, in the auditor's judgment, is of such importance that it is fundamental to user’s
understanding of the FS
2) Examples
Examples of circumstances where the auditor may consider it necessary to include an EMP are
a) Major prior period items
b) Major amalgamation during the year
c) A major catastrophe that has had, or continues to have, a significant effect on the entity's financial
position
d) Early application (where permitted) of a new accounting standard that has a material effect on the FS
e) An uncertainty relating to the future outcome of exceptional litigation or regulatory action
f) A significant subsequent event that occurs between the date of the FS & the date of the auditor's report
3) Conditions
If the auditor considers it necessary to draw users' attention to a matter presented or disclosed in the FS
that, in the auditor's judgment, is of such importance that it is fundamental to users' understanding of the
FS, the auditor shall include an EMP in the auditor's report provided
a) The auditor would not be required to modify the opinion in accordance with SA 705 as a result of matter
b) When SA 701 applies, the matter has not been determined to be a key audit matter to be communicated
in the auditor's report
4) Content
When the auditor includes an Emphasis of Matter paragraph in the auditor's report, the auditor shall
a) Include the paragraph within a separate section of the auditor's report with an appropriate heading that
includes the term "Emphasis of Matter"
b) Include in the paragraph a clear reference to the matter being emphasized & to where relevant
disclosures that fully describe the matter can be found in the FS. The paragraph shall refer only to
information presented or disclosed in the FS & (No need to give reference of BOD report, Annual
Report etc)
5) Placement
a) When the EMP relates to the applicable FRF including circumstances where the auditor determines
that the FRF prescribed by law or regulation would otherwise be unacceptable, the auditor may
consider it necessary to place the paragraph immediately following the basis of opinion section to
provide appropriate context to the auditor's opinion
a) When a key audit matters section is presented in the auditor's report, an EMP may be presented either
directly before or after the key audit matters section, based on the auditor's judgment as to the relative
significance of the information included in the EMP. The auditor may also add further context to the
heading "Emphasis of Matter", such as "Emphasis of Matter - Subsequent Event", to differentiate the
EMP from the individual matters described in the key audit matters section

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Other matter paragraph (OMP):
1) Definitions
A paragraph included in the auditor's report that refers to a matter other than those presented or disclosed
in the FS that, in the auditor's judgment, is relevant to users' understanding of the audit, the auditor's
responsibilities or the auditor's report
2) Circumstances
a) Audit was not conducted in previous financial year
b) Someone else did audit in previous financial year
c) Audit of branches, subsidiaries etc is done by someone else
d) Reporting on more than one set of financial statements
e) Restriction on distribution or use of the auditor's report
3) Conditions
If the auditor considers it necessary to communicate a matter other than those that are presented or
disclosed in the FS that, in the auditor's judgment, is relevant to users' understanding of the audit, the
auditor's responsibilities or the auditor's report, the auditor shall include an OMP in the auditor's report,
Provided
a) This is not prohibited by law or regulation
b) When SA 701 applies, the matter has not been determined to be a key audit matter to be communicated
in the auditor's report
4) Content
When the auditor includes an OMP in the auditor's report, the auditor shall include the paragraph within a
separate section with the heading "Other Matter," or other appropriate heading
5) Placement
a) When a Key Audit Matters section is presented in the auditor's report & an OMP is also considered
necessary, the auditor may add further context to the heading "Other Matter", such as "Other Matter-
Scope of the Audit", to differentiate the OMP from the individual matters described in the key audit
matters section
b) When an OMP is included to draw users' attention to a matter relating to other reporting
responsibilities addressed in the auditor's report, the paragraph may be included in the report on other
legal & regulatory requirements section
c) When relevant to all the auditor’s responsibilities or user’s understanding of the auditor’s report, the
OMP may be included as a separate section following the report on the audit of the FS & the report on
other legal & regulatory requirement

Communication with TCWG:

1) If the auditor expects to include an EOM or another Matter paragraph in the auditor's report, the auditor
shall communicate with those charged with governance regarding this expectation & the proposed wording
of this paragraph
2) Such communication enables those charged with governance to be made aware of the nature of any specific
matters that the auditor intends to highlight in the auditor's report & provides them with an opportunity
to obtain further clarification from the auditor where necessary. Where the inclusion of another Matter
paragraph on a particular matter in the auditor's report recurs on each successive engagement, the auditor
may determine that it is unnecessary to repeat the communication on each engagement

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Difference between key audit matter & emphasis of matter paragraph:
1) Key audit matters
a) Definition
i) Those matters that, in the auditor's professional judgment, were of most significance in the audit
of the financial statements of the current period
ii) Key audit matters are selected from matters communicated with TCWG (SA 701)
b) Common matter
i) Matters that are determined to be key audit matters in accordance with SA 701 may also be, in the
auditor's judgment, fundamental to users' understanding of the financial statements
ii) In such cases, in communicating the matter as a key audit matter in accordance with SA 701, the
auditor may wish to highlight or draw further attention to its relative importance
c) Provides additional information
i) Communicating key audit matters provides additional information to intended users of the financial
statements to assist them in understanding those matters that, in the auditor's professional
judgment, were of most significance in the audit & may also assist them in understanding the entity
& areas of significant management judgment in the audited financial statements
d) Further basis to engage with management
i) The communication of key audit matters in the auditor's report may also provide intended users a
basis to further engage with management & those charged with governance about certain
matters relating to the entity, the audited financial statements, or the audit that was performed

2) Emphasis of matter paragraph

a) Definition
A paragraph included in the auditor's report that refers to a matter appropriately presented or
disclosed in the financial statements that, in the auditor's judgment, is of such importance that it is
fundamental to users' understanding of the financial statements (SA 706)
b) Should not be a KAM
i) There may be a matter that is not determined to be a key audit matter in accordance with SA 701
(i.e., because it did not require significant auditor attention), but which, in the auditor's judgment, is
fundamental to users understanding of the financial statements (e.g., a subsequent event)
ii) If the auditor considers it necessary to draw user’s attention to such a matter, the matter is
included in an Emphasis of Matter paragraph in the auditor's report in accordance with this SA
c) Effect of widespread
A widespread use of Emphasis of Matter paragraphs may diminish the effectiveness of the auditor's
communication about such matters
d) Not a substitute
Use of Emphasis of Matter paragraphs is not a substitute for a description of individual key audit
matters where SA 701 is applicable
e) More prominent than KAM
The auditor may do so by presenting the matter more prominently than other matters in the key audit
matters section (e.g., as the first matter) or by including additional information in the description of the
key audit matter to indicate the importance of the matter to users' understanding of the financial
statements

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SA 710: Comparative information: Corresponding figures & comparative financial statements

Meaning & types of comparative information:

1) Comparative information
The amounts & disclosures included in the F.S. in respect of one or more prior periods in accordance with
applicable FRF
2) Corresponding figures
Comparative information where amounts & other disclosures for the prior period, are included as an
integral part of current period FS, & are intended to be read only in relation to the amounts & other
disclosures relating to the current period
3) Comparative financial statements
Comparative information where amounts & other disclosures for the prior period, are included for
comparison with the FS of the current period but, if audited, are referred to in the auditor’s opinion

Audit procedures:
1) Basic evaluation of comparative information
a) The Auditor shall determine whether the financial statements include the comparative information
required by the applicable FRF & whether such information is appropriately classified
b) For this Purpose, the Auditor shall evaluate whether
i) The comparative information agrees with the amounts & other disclosures presented in the prior
period,
ii) The accounting policies reflected in the comparative information are consistent with those applied
in the current period or, if there have been changes in accounting policies, whether those changes
have been properly accounted for & adequately presented & disclosed
2) Additional procedures in case of material misstatement
a) If the Auditor of becomes aware of a possible material misstatement in the comparative information
while performing the current period audit, he shall perform such additional audit procedures as are
necessary in the circumstances, to obtain sufficient appropriate audit evidence to determine whether a
material misstatement exists
b) If the Auditor had audited the prior period's financial statements, he shall also follow the relevant
requirements of SA 560 on the effect of subsequent events
3) Written representation
The auditor shall
a) Request written representations for all periods referred to in the opinion
b) Obtain a specific written representation regarding any prior period item that is separately disclosed in
the current year's statement of profit & loss
c) In case of comparative financial statements
i) Written representations are requested for all periods referred to in the auditor's opinion because
management needs to reaffirm that the written representations it previously made with respect to
the prior period remain appropriate
d) In case of corresponding figures
i) Written representations are requested for the financial statements of the current period only,
because the auditor’s opinion is on those financial statements, which include the corresponding
Figures

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Audit reporting:
1) Comparative financial statements
a) Audit opinion to refer to each period for which FS are presented & on which opinion is expressed
b) If opinion on prior period FS expressed in current period differs from opinion expressed in the relevant
prior period, give substantive reason for difference in OMP
2) Corresponding figures
Audit opinion not to refer to corresponding figures, except
a) Auditor’s report in prior period FS was modified & the subject matter is still unresolved - Modify
current audit report also
b) Auditor obtains audit evidence with respect to existence of material misstatement in prior period FS on
which unmodified opinion was issued - Express qualified/ adverse opinion on current FS with respect
to corresponding figures if misstatement has not been dealt as required by applicable FRF
3) Prior period FS audited by another auditor
Audit report to also contain OMP, stating that
a) FS of prior period were audited by predecessor auditor
b) Type of opinion expressed by him (reasons for modifications, if any)
c) Date of that report
4) Prior period FS are unaudited
Include other matters para
a) That corresponding FS are unaudited
b) But this does not relieve the auditor from need to obtain SAAE that opening balances do not contain
misstatements that can potentially affect current FS

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SA 720: The auditor’s responsibility in relation to other information in documents containing audited financial
statements

Other information:
Financial or non-financial information (other than financial statements & the auditor's report thereon) included
in an entity's annual report

Obtaining the other information:

The auditor shall
1) Determine, through discussion with management, which document(s) comprises the annual report, & the
entity's planned manner & timing of the issuance of such document(s)
2) Make appropriate arrangements with management to obtain in a timely manner and, if possible, prior to the
date of the auditor's report, the final version of the document(s) comprising the annual report
3) When some or all of the document(s) determined in (a) will not be available until after the date of the auditor's
report, request management to provide a written representation that the final version of the document(s)
will be provided to the auditor when available, & prior to its issuance by entity, such that the auditor can
complete the procedures required by this SA

Reading & considering the other information:

The auditor shall read the other information and, in doing so shall
1) Consider whether there is a material inconsistency between the other information & the financial
statements. As the basis for this consideration, the auditor shall, to evaluate their consistency, compare
selected amounts or other items in the other information (that are intended to be the same as, to summarize,
or to provide greater detail about, the amounts or other items in the financial statements) with such amounts
or other items in the financial statements
2) Consider whether there is a material inconsistency between the other information & the auditor's
knowledge obtained in the audit, in the context of audit evidence obtained & conclusions reached in audit
3) While reading the other information in accordance with above paragraphs, the auditor shall remain alert for
indications that the other information not related to the financial statements or the auditor's knowledge
obtained in the audit appears to be materially misstated

Nature of related party relationships & transaction:

If the auditor identifies that a material inconsistency appears to exist (or becomes aware that the other
information appears to be materially misstated), the auditor shall discuss the matter with management and, if
necessary, perform other procedures to conclude whether
1) A material misstatement of the other information exists
2) A material misstatement of the financial statements exists
3) The auditor's understanding of the entity & its environment needs to be updated

Responding when auditor concludes that a material misstatement of the other information exists:
If the auditor concludes that a material misstatement of the other information exists, the auditor shall request
management to correct the other information. If management
1) Agrees to make the correction, the auditor shall determine that the correction has been made
2) Refuses to make the correction, the auditor shall communicate the matter with TCWG & request that
the correction be made
If the auditor concludes that a material misstatement exists in other information obtained prior to the date of the
auditor's report, & the other information is not corrected after communicating with those charged with
governance, the auditor shall take appropriate action, including
1) Considering the implications for the auditor's report & communicating with those charged with
governance about how the auditor plans to address the material misstatement in the auditor's report

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2) Withdrawing from the engagement, where withdrawal is possible under applicable law or regulation
If the auditor concludes that a material misstatement exists in other information obtained after the date of the
auditor's report, the auditor shall
1) If the other information is corrected, perform the procedures necessary in the circumstances
2) If the other information is not corrected after communicating with those charged with governance, take
appropriate action considering the auditor's legal rights & obligations, to seek to have the uncorrected
material misstatement appropriately brought to the attention of users for whom the auditor's report is
prepared

Responding when a material misstatement in the financial statements exists or the auditor’s understanding of
the entity & its environment needs to be updated:
1) If, as a result of performing the procedures in paragraphs to "Reading & Consideration of Other Information",
the auditor concludes that a material misstatement in the financial statements exists or the auditor's
understanding of the entity & its environment needs to be updated, the auditor shall respond appropriately
in accordance with the other SAs
2) The auditor's report shall include a separate section with a heading "Other Information", or other
appropriate heading, when, at the date of the auditor's report
i) For an audit of financial statements of a listed entity, the auditor has obtained, or expects to obtain,
the other information
ii) For an audit of financial statements of an unlisted corporate entity, the auditor has obtained some
or all of the other information

Reporting:
When the auditor's report is required to include an other information section in accordance with paragraph
above para, this section shall include
1) A statement that management is responsible for the other information
2) An identification of
i) Other information, if any, obtained by the auditor prior to the date of the auditor's report
ii) For an audit of financial statements of a listed entity, other information, if any, expected to be
obtained after the date of the auditor's report
3) A statement that the auditor's opinion does not cover the other information and, accordingly, that the
auditor does not express (or will not express) an audit opinion or any form of assurance conclusion thereon
4) A description of the auditor's responsibilities relating to reading, considering & reporting on other
information as required by this SA
5) When other information has been obtained prior to the date of the auditor's report, either
i) A statement that the auditor has nothing to report
ii) If the auditor has concluded that there is an uncorrected material misstatement of the other
information, a statement that describes the uncorrected material misstatement of the other
Information
6) When the auditor expresses a qualified or adverse opinion in accordance with SA 705, the auditor shall
consider the implications of the matter giving rise to the modification of opinion for the statement required
in above paragraph point (5)

Objectives if the auditor:

1) To consider whether there is a material inconsistency between other information & the FS
2) To consider whether there is a material inconsistency between other information & auditor’s knowledge
3) To respond appropriately to such material inconsistencies or other information
4) To report in accordance with SAs

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SQC 1: Standards on quality control

Elements:
The firm's system of quality control should include policies & procedures addressing each of the following
elements
1) Leadership responsibilities for quality within the firm
2) Human resources
3) Ethical requirements
4) Acceptance and continuance of client relationships and specific engagements
5) Engagement performance.
6) Monitoring

Documentation/communication/objectives/personal responsibility/feedback
1) The quality control policies and procedures should be documented and communicated to the firm's personnel
2) Such communication describes the quality control policies and procedures and the objectives they are
designed to achieve and includes the message that each individual has a personal responsibility for quality
and is expected to comply with these policies and procedures
3) In addition, the firm recognizes the importance of obtaining feedback on its quality control system from its
personnel
4) Therefore, the firm encourages its personnel to communicate their views or concerns on quality control
matters

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