Nature, Objective &

Scope of Audit

Ch -1

By : CA Chirag Garg
 CHAPTER 1
Nature, Objective & Scope of Audit
---MASTER INDEX---
1. Meaning and nature of auditing
2. How auditor ensures that F.S would not mislead anybody ?
3. Interdisciplinary nature/relationship of auditing with diverse subjects
4. Objectives of audit
5. Scope of audit-
a. What it includes
b. What it does not includes

g
6. Audit vs investigation

r
7. Inherent limitations of audit (ILA)

a
8. What is an Engagement?

G
9. Benefits of audit-why audit is needed?
10. Audit- mandatory or voluntary?

g
a. Who appoints an auditor?

a
b. To whom report is submitted by an auditor?

r
11. Qualities of auditor

i
12. Meaning of assurance engagement

h
a. Elements of an assurance engagement

C
13. Audit vs. Review
14. Engagement and quality control standards: an overview
a. SAs

A
b. SREs

C
c. SAEs
d. SRSs
15. Standards On Quality Control (SQC)
16. Why are standards needed?
17. Duties in relation to engagement and quality control standards

---Do what is right, not what is easy---

Study Mat Pg (1.5 - 1.7) 1
MEANING AND NATURE OF AUDITING
An audit is an independent examination
of financial information
of any entity, whether profit oriented or not, and irrespective of its size or legal form
when such an examination is conducted with a view to expressing an opinion thereon”.
Independence, here, implies that the “judgement of a person is not subordinate to the wishes or
direction of another person” who might have engaged him. ex : CA cannot audit accounts of concern in
which his brother is sole proprietor/ or concern in which he is holding Shares.
The entity whose financial information is examined need not necessarily be profit oriented (can be
non-profit like an NGO or a charitable trust)
Any organization be it a small, medium or large.
Any entity irrespective of its legal structure (a proprietary concern, a partnership firm, a LLP,

g
private co., public co., a society or a trust)

r
The purpose of audit is to express an opinion on the F.S.

a
HOW AUDITOR ENSURES THAT F.S WOULD NOT MISLEAD ANYBODY ?

G
By Satisfying himself that :
The accounts have been drawn up with reference to entries in the books of a/c

g
The entries in the books of a/c are adequately supported by sufficient and

a
appropriate evidence

ir
None of the entries in the books of account has been omitted in the process of

h
compilation
The information conveyed by the statements is clear and unambiguous

C
The F.S amounts are properly classified, described and disclosed in conformity with
accounting standards

A
The statement of accounts presents a true and fair picture of the operational

C
results and of the assets and liabilities.
Class Notes

Interdisciplinary Nature/RELATIONSHIP of AUDITING with DIVERSE SUBJECTS

Auditing and Accounting: Auditing reviews the F.S which are a result of the overall
accounting process. hence, a sound knowledge of a/c principles is a fundamental
requirement for an auditor to conduct audit and express an opinion.
Auditing and Production: Good auditor is one who understands the client and his
business functions such as production, cost system, marketing etc.
Auditing and Economics: Auditor is expected to be familiar with the overall
economic environment of the client, in which specific business is operating.

“I only hope that we never lose sight of one thing — that. it was all started by a mouse”
- Founder of Disneyland and Mickey Mouse
Study Mat Pg (1.7) 2
Auditing and Statistics & Mathematics:
It is not possible for an auditor to check each and every transaction. So, use of
statistical methods to draw samples for conducting audit is made. Auditor is also
expected to have the knowledge of statistical sampling for meaningful conclusions
and mathematics for verification of inventories.
Auditing and Financial mgt.:
Auditor is expected to have knowledge about various financial techniques such as
working capital mgt., funds flow, ratio analysis, capital budgeting etc.
Auditing and Law:
The relationship between auditing and law is very close one. Auditing involves
examination of various transactions from the view point of whether or not these

g
have been properly entered into.

r
It necessitates that an auditor should have a good knowledge of business laws

a
affecting the entity.
He should be familiar with the law of contracts, negotiable instruments, etc.

G
The knowledge of taxation laws is also inevitable as entity is required to prepare
their F.S taking into account various provisions affected by various tax laws.

g
In analysing the impact of various transactions particularly from the accounting

a
aspect, an auditor ought to have a good knowledge about the direct as well as

ir
indirect Tax Laws.

h
Auditing and Data Processing:
Today, many organisations are carrying out their financial accounting activities with

C
the help of computers which can document, record, collate, allocate and value
accounting data and information in very large quantities at very high speed.

A
The dependence is on the accuracy of the programmed instructions given today, the

C
computer is able to carry out each of these activities with complete accuracy.
With such a phenomenal growth in the field of computer sciences, the auditor
should have good knowledge of the components, general capability of the system
and the related terms.
Computerised Information System auditing is developing as a discipline in itself.
Auditing and Behavioural Science:
Knowledge of Human Behaviour is very essential for auditor to effectively
discharge his duties
A Financial Auditor deals basically with Figures contained in F.S, but he shall be
required to interact with a lot of people in the organisation
On the other hand an Internal Auditor or Mgt. Auditor is expected to deal with
Human Beings rather than financial figures. One of the basic element in designing
Internal Controls is personnel.
However even Sound Internal Control can‘t work Unless people are Honest.
Class Notes :

CAwithChirag CA Chirag Garg

Study Mat Pg (1.8-1.10) 3
OBJECTIVES OF AUDIT
SA-200 “Overall Objectives of the Independent auditor and the conduct of an audit in
accordance with Standards on Auditing” [OOIA CASA]
In conducting audit of F.S, objectives of auditor are: -
(a) To obtain reasonable assurance about whether the F.S as a whole are free from
material misstatement, whether due to fraud or error,
thereby enabling the auditor to express an opinion
on whether the F.S are prepared, in all material respects,
in accordance with an applicable FRF; and
(b) To report on the F.S, and communicate as required by the SAs, in accordance with
the auditor’s findings.
Reasonable assurance v/s Absolute assurance: Absolute assurance is a complete assurance or a
guarantee that F.S are free from material misstatements. However, reasonable assurance is not a
complete guarantee. Although it is a high-level of assurance but it is not complete assurance. Audit of
F.S is carried out by the auditor with professional competence and skills in accordance with SAs.

g
(Audit procedures are applied in accordance with SAs, audit evidence is obtained and evaluated.
On basis of that, conclusions are drawn and opinion is formed. It leads to high level of assurance

r
which is called as reasonable assurance but it is not absolute assurance.)

a
Misstatements in F.S can occur due to fraud or error or both.
Obtaining reasonable assurance enables auditor to express an opinion on whether the F.S are

G
prepared, in accordance with AFRF.
Applicable FRF: A framework adopted in the preparation and presentation of the F.S that is

g
ACCEPTABLE in view of the nature of the entity and the objective of the F.S, or that is

a
REQUIRED by law or regulation (T shape B/S or Sch III)
The opinion is reported and communicated through a written report as required by SAs.

Class Notes

hir
C
CA SCOPE OF AUDIT-WHAT IT INCLUDES
Coverage of all aspects of entity: Audit of F.S should be organized adequately to
cover all aspects of the entity relevant to the F.S being audited.
Reliability and sufficiency of financial information: The auditor should be reasonably
satisfied that information contained in underlying a/c records and other source data
(like bills, vouchers, documents etc.) is reliable and sufficient basis for preparation of
F.S. The auditor makes a judgment of reliability and sufficiency of financial
information by assessment of a/c systems and internal controls and by carrying out
appropriate tests, enquiries and procedures
Proper disclosure of financial information: The auditor should also decide whether
relevant information is properly disclosed in the F.S. He should also keep in mind
applicable statutory requirements in this regard. It is done by ensuring that F.S
properly summarize transactions and events recorded therein and by considering the
judgments made by mgt. in preparation of F.S. .
9817664456 CA-Chirag-Garg
Study Mat Pg (1.11-1.13) 4
The mgt. responsible for preparation and presentation of F.S makes many judgments in
this process of preparing and presenting F.S. For example, choosing of appropriate
accounting policies (method of charging depreciation on fixed assets or method for
valuation of inventories.)
The auditor Evaluates SELECTION and CONSISTENT APPLICATION of a/c policies
by mgt; whether such a selection is proper and whether chosen policy has been applied
consistently on a period-to-period basis.
F.S of an entity are prepared on historical financial information basis.
“Historical financial information” means information expressed in financial terms about
economic events occurring in past time periods.

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Ga
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SCOPE OF AUDIT-WHAT IT DOES NOT INCLUDES

h
Auditor is not expected to perform duties which fall outside domain of his

C
competence (ex: physical condition of certain assets like that of machinery or
suitability and life of civil structures like buildings cannot be determined by him)

A
An auditor is not an expert in authentication of documents. The genuineness of
documents cannot be authenticated by him because he is not an expert in this field.

C
An audit is not an official investigation into alleged wrong doing. He does not have
any specific legal powers of search or recording statements of witness on oath
which may be necessary for carrying out an official investigation.

AUDIT ...VS... INVESTIGATION

Audit is distinct from investigation. Investigation is a critical examination of the
accounts with a special purpose. E.g: if fraud is suspected and it is specifically
called upon to check the accounts whether fraud really exists
The objective of audit, on the other hand, is to obtain reasonable assurance about
whether the F.S as a whole are free from material misstatement, whether due to
fraud or error, thereby enabling the auditor to express an opinion.
Audit is never started with a pre conceived notion about state of affairs. Auditor
seeks to report what he finds in the normal course of examination of accounts
The scope of audit is general and broad whereas scope of investigation is specific
and narrow.
Sometimes, Investigation results from Prima facie findings of the auditor. Auditor
might give some findings of concern and such findings may prompt for investigation.

“Success is the sum of small efforts, repeated”.

Study Mat Pg (1.14-1.16) 5
INHERENT LIMITATIONS OF AUDIT
The process of audit suffers from certain inbuilt limitations due to which an auditor
cannot obtain an absolute assurance that F.S are free from misstatement due to fraud
or error.
(1) Nature of financial reporting
One of the premises for conducting an audit is that mgt. acknowledges its
responsibility of preparation of F.S in accordance with applicable FRF and for
devising suitable internal controls.
Preparation of F.S involves making many judgments by mgt. Judgments may involve
subjective decisions or a degree of uncertainty. (Depreciaton method/Bad debt) Or

g
Controls may not have operated to produce reliable financial information due to

r
their own limitations (ex: Collusion b/w Purchase Dept. and Goods Receiving Section)

a
Therefore, auditor may not be able to obtain absolute assurance that F.S are free

G
from material misstatements due to frauds or errors.
(2) Nature of Audit procedures

g
The auditor carries out his work by obtaining audit evidence through performance

a
of audit procedures. However, there are practical and legal limitations on ability of

r
auditor to obtain audit evidence. (Ex : Auditor does not test all transactions and

i
balances. He forms his opinion only by testing samples - Practical Limitation. Mgt.

h
may not provide complete info. as requested by auditor. Auditor cannot force mgt.

C
to provide complete info. as may be requested by auditor. In case he is not provided
with required information, he can only report - Legal Limitation)

A
The mgt. may consist of dishonest people and may be, itself, involved in fraud. It
may be engaged in concealing fraud by designing sophisticated and carefully

C
organized schemes which may be hard to detect by the auditor. It may produce
fabricated documents before auditor to lead him to believe that audit evidence is
valid. However, auditor is not an expert in authentication of documents. Therefore,
he may be led to accept invalid audit evidence on the basis of unauthentic docs.
Entity may have entered into some transactions with related parties. Such
transactions may be only paper transactions and may not have actually occurred.
The auditor may not be aware of such related party relationships or audit
procedures may not be able to detect probable wrong doings in such transactions.
(3) Not in nature of investigation
Audit is not an official investigation. Hence, auditor cannot obtain absolute
assurance that F.S are free from material misstatements due to frauds or errors.
(4) Timeliness of financial reporting and decrease in relevance of info. over time
The relevance of information decreases over time and auditor cannot verify each
and every matter. Therefore, a balance has to be struck between reliability of
information and cost of obtaining it.
(5) Future events
Future events or conditions may affect an entity adversely. Adverse events may
seriously affect ability of an entity to continue its business. The business may
cease to exist in future due to change in market conditions, emergence of new
business models or products or due to onset of some adverse events.

Nobody can go back and start a new beginning, but anyone can start today and make a new ending.
Study Mat Pg (1.17) 6

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Ga
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C
WHAT IS AN ENGAGEMENT?
A formal agreement between auditor and client under which auditor agrees to provide

A
auditing services. It takes the shape of engagement letter.

C
External audit engagements: The purpose of external audit engagements is to
enhance the degree of confidence of intended users of F.S. Such engagements are
also reasonable assurance engagements. (Ex- In India, co. are required to get their
annual accounts audited by an external auditor. Non-corporate entities may choose
to have their accounts audited by an external auditor because of benefits of such
an audit)

rg
BENEFITS OF AUDIT-WHY AUDIT IS NEEDED?

a
Audited accounts provide high quality information. It gives confidence to users that
information on which they are relying is qualitative and it is the outcome of an

G
exercise carried out by following Auditing Standards recognized globally.
In case of co., shareholders may or may not be involved in daily affairs of the co.

g
The F.S are prepared by mgt. consisting of directors. As shareholders are owners

a
of the company, they need an independent mechanism so that financial information

ir
is qualitative and reliable. Hence, their interest is safeguarded by an audit.

h
Audited financial statements can be relied upon by lenders, bankers for making
their credit decisions i.e. whether to lend or not to lend to a particular entity.

C
An audit acts as a moral check on employees from
committing frauds for the fear of being discovered.

A
Audited financial statements are helpful to government

C
authorities for determining tax liabilities.
An audit may also detect fraud or error or both.
An audit reviews existence and operations of various
controls operating in any entity. Hence, it is useful at
pointing out deficiencies.

“You are braver than you believe, stronger than you seem and smarter than you think.”
-Pooh & Friends
Study Mat Pg (1.18-1.22) 7
AUDIT- MANDATORY OR VOLUNTARY?
It is not necessary that audit is always legally mandatory.
There are entities like companies who are compulsorily required to get their a/c
audited under law.
Even non-corporate entities may be compulsorily requiring audit of their accounts
under tax laws. Ex: In India, every person is required to get accounts audited if
turnover crosses certain threshold limit under income tax law (10cr.)
It is also possible that some entities like schools may be required to get their a/c
audited for the purpose of obtaining grant or assistance from the Govt.
Audit is not always mandatory. Many entities may get their accounts audited
voluntarily because of benefits from the process of audit. Many such concerns have

g
their internal rules requiring audit due to advantages flowing from an audit.

WHO APPOINTS AN AUDITOR?

ar
Generally, an auditor is appointed by owners or in some cases by constitutional or

G
government authorities in accordance with applicable laws and regulations. Ex :

g
In case of co., auditor is appointed by shareholders in AGM.
However, in case of govt. companies in India, auditor is appointed by CAG

ra
(Comptroller & Auditor General of India - an independent constitutional authority)

i
In Case of firm, an auditor is appointed by partners of firm.

h
There may be a situation in which auditor may be appointed by a govt. authority in

C
accordance with some law or regulation. ex: under tax laws by a govt. authority.

TO WHOM REPORT IS SUBMITTED BY AN AUDITOR?

A
The report is submitted to person making the appointment.

C
In case of companies, these are shareholders
In case of a firm, to partners who have engaged him.

QUALITIES OF AUDITOR
An auditor is concerned with the reporting on financial matters of business and other
institutions. Financial matters inherently are to be set with the problems of human
fallibility; errors and frauds are frequent.
Tact, caution, firmness, good temper, integrity, discretion, industry judgement,
patience, clear headedness and reliability are some of qualities which an auditor
should have. In short, all those personal qualities that go to make a good
businessman contribute to the making of a good auditor.
In addition, he must have the shine of culture for attaining a great height.
He must have the highest degree of integrity backed by adequate independence.
The auditor, who holds a position of trust, must have the basic human qualities
apart from the technical requirement of professional training and education.
An exhaustive knowledge of accounting in all its branches is the sine qua non of the
practice of auditing. He must know thoroughly all accounting principles and
techniques. (sine qua non - A necessary or inevitable cause/अनिवार्य)
TACT ~ the ability to deal with people without offending or upsetting them/ चातुर्य / तरीका
DISCRETION ~ the freedom and power to make decisions by yourself / विवेक / बुद्धिमानी

Don’t let what you cannot do interfere with what you can do
Study Mat Pg (1.22-1.23) 8
MEANING OF ASSURANCE ENGAGEMENT
An engagement in which a practitioner expresses a conclusion
designed to enhance the degree of confidence
of the intended users other than the responsible party
about the outcome of the evaluation of a subject matter against criteria.
Practitioner gives an opinion about specific info. due to which users of info. are able to
make confident decisions, knowing, that chance of info. being incorrect is diminished

ELEMENTS OF AN ASSURANCE ENGAGEMENT

A three party relationship involving a practitioner, a responsible party, and
intended users
A Practitioner is a person who provides the assurance. (The term practitioner is
broader than auditor. Audit is related to historical information whereas
practitioner may provide assurance not necessarily related to historical
financial information)
A Responsible Party is the party responsible for preparation of subject matter.
Intended users are the persons for whom an assurance report is prepared.
These persons may use the report in making decisions.

An appropriate subject matter

g
It refers to the information

r
3 party Relationship
to be examined by the

a
practitioner. Ex- financial

G
info. contained in F.S while
conducting audit of F.S.
Elements

g
Written Assurance Subject Matter
of an

a
Suitable criteria Assurance Engagement

r
These refer to benchmarks

i
used to evaluate the subject

h
matter like standards,

C
guidance, laws, rules and
regulations.
Sufficient and

A
Appropriate evidence
Suitable Critera

C
Sufficient appropriate evidence (Benchmark)
It is on the basis of evidence that conclusions are arrived and an opinion is
formed by auditor.
“Sufficient” relates to quantity of evidence obtained by auditor.
“Appropriate” relates to quality of evidence obtained by auditor.
One evidence may be providing more comfort to auditor than the other
evidence. The evidence providing more comfort is qualitative and, therefore,
appropriate. Evidence should be both sufficient and appropriate.
A written assurance report in appropriate form
A written report is provided containing conclusion that conveys the assurance
about the subject matter. (It is the outcome of an assurance engagement)
Aankhen band karo aur chart ki pictures yaad karo, Dekho kaise 5 sec me 5 points yaad aajaayenge :)
Study Mat Pg (1.24-1.26) 9
AUDIT VS. REVIEW
Audit is a reasonable assurance engagement (reasonable assurance which is a high level
of assurance). However, review is a limited assurance engagement. It provides lower
level of assurance than audit (It is only a moderate level of assurance)
Further, review involves fewer procedures and gathers sufficient appropriate evidence
on the basis of which limited conclusions can be drawn up.
However, both “audit” and “review” are related to financial statements prepared on the
basis of historical financial information.

Reasonable assurance engagement Limited assurance engagement

Limited assurance engagement provides

Reasonable assurance engagement
lower level of assurance than reasonable
provides high level of assurance.
assurance engagement.

It performs elaborate and extensive

rg
It performs fewer procedures as

a
procedures to obtain sufficient compared to reasonable assurance

G
appropriate evidence. engagement.

g
It draws reasonable conclusions on the It involves obtaining sufficient appropriate
basis of sufficient appropriate evidence evidence to draw limited conclusions.

Example of reasonable assurance

ira Example of limited assurance engagement

h
engagement is an audit engagement. is review engagement.

C
There is another kind of assurance which is related to prospective financial information
and not to historical financial information.

A
It may relate to providing assurance on internal controls in an entity.

C
Prospective financial information : Financial information based on ASSUMPTIONS
about events that MAY occur in the future and possible actions by an entity. It can
be in the form of a forecast or projection or combination of both.
In such type of assurance engagements, examination is not of historical financial
information.
Historical financial information is rooted in past events which have already
occurred whereas prospective financial information is related to future events.
In assurance reports involving prospective financial information, the practitioner
obtains sufficient appropriate evidence that
Management’s assumptions on which the prospective financial information is
based are not unreasonable,
the prospective financial information is properly prepared on the basis of the
assumptions and
it is properly presented and all material assumptions are adequately disclosed.
Prospective financial information relates to future events and While evidence may
be available to support the assumptions on which the prospective financial
information is based, such evidence is itself generally future- oriented. The auditor

Review Audit Prospective (Assurance)

Study Mat Pg (1.26-1.29) 10
is, therefore, not in a position to express an opinion as to whether the results
shown in the prospective financial information will be achieved.
Therefore, in such assurance engagements, practitioner provides a report assuring
that nothing has come to practitioner’s attention to suggest that these assumptions
do not provide a reasonable basis for the projection.
Hence, such type of assurance engagement provides only a “moderate” level of
assurance.

ENGAGEMENT AND QUALITY CONTROL STANDARDS: AN OVERVIEW

The following Standards issued under authority of ICAI Council are collectively known
as Engagement Standards: -

g
Engagement Standards Apply in

Standards on auditing (SAs)

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Audit of historical financial information

Standards on review engagements (SREs)

G
Review of historical financial information.

ag
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assurance engagements OTHER than

i
Standards on Assurance engagements
audits and review of historical financial
(SAEs)

h
information

C
agreed upon procedures to information,
Standards on Related Services (SRSs) compilation engagements and other

A
related service engagements

C
The purpose of these standards is to establish high quality standards and guidance in
the areas of F.S audits and in other types of assurance services.

Standards on Auditing (SAs)

SAs apply in the context of an audit of F.S by an independent auditor, in audit of
historical information. These establish high quality benchmarks and are followed by
auditors in conducting audit of F.S.
SAs have been issued on wide spectrum of issues in the field of auditing ranging from
overall objectives of independent auditor, audit documentation, planning an audit of
F.S, identifying and assessing risks and forming an opinion and reporting on F.S. These
cover all significant aspects of audit of F.S. Some examples of SAs are: -
♦ SA 230 Audit Documentation
♦ SA 500 Audit Evidence
Standards on Review Engagements (SREs)
SREs apply in the context of review of F.S. Review is a limited assurance engagement
and it provides assurance which is lower than audit. As review involves fewer
procedures when compared to audit. Since a review also provides assurance to users, it
also involves obtaining sufficient appropriate evidence.

9817664456 CA-Chirag-Garg
Study Mat Pg (1.30) 11
E.g: when an auditor performs review of interim financial information of an entity.
Examples of SREs are:
♦ SRE 2400 (Revised) Engagements to Review Historical F.S
♦ SRE 2410 Review of Interim Financial Information Performed by the Independent
Auditor of the Entity
Both SAs and SREs apply to engagements involving historical financial information.
Benchmark ~ a standard that other things can be compared to / तुलना के लिए निर्धारित मानक
Spectrum ~ varieties
Standards on Assurance Engagements (SAEs)
SAEs apply in assurance engagements dealing with subject matters other than
historical financial information. Such assurance engagements do not include “audit” or

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“review” of historical financial information. For example, an assurance engagement

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relating to examination of prospective financial information, or engagement may relate

a
to providing assurance regarding non-financial matters like design and operation of
internal control in an entity. Examples of SAEs are:

G
♦ SAE 3400 The Examination of Prospective Financial Information
♦

g
SAE 3420 Assurance Engagements to Report on the Compilation of Pro Forma
Financial Information Included in a Prospectus

ra
Standards on Related Services (SRS)

i
SRS apply in engagements to perform agreed-upon procedures regarding financial

h
information. For example,

C
An engagement to perform certain procedures concerning individual items of
financial data, say, accounts payable, accounts receivable, purchases from related
parties and sales and profits of a segment of an entity, or

A
A financial statement, say, a balance sheet or

C
Even a complete set of F.S.
An engagement in which practitioner may be called upon to assist management with the
preparation and presentation of historical financial information without obtaining
assurance on that information. Such type of compilation engagements fall in the
category of related services and
Practitioner issues a report clearly stating that it is not an assurance engagement and
no opinion is being expressed. These types of services are called related services and
standards have been issued to deal with practitioner’s responsibilities in this regard.
Examples of SRS are:
♦ SRS 4400 Engagements to perform agreed-upon procedures regarding financial
information
♦ SRS 4410 (Revised) Compilation engagements

All the above standards i.e. SAs, SREs, SAEs and SRSs are collectively known as the
Engagement Standards.
Engagement Standards issued under the authority of Council of ICAI deal with
responsibilities of auditor/practitioner.

“I think it’s possible for ordinary people to choose to be extraordinary.”

—Elon Musk
Study Mat Pg (1.31-1.32) 12
STANDARDS ON QUALITY CONTROL (SQC)
SQCs have been issued to establish standards and provide guidance regarding
A firm’s responsibilities for its system of quality control for the conduct of audit
and review of historical financial information and for other assurance and related
service engagements.
SQC 1 has been issued in this regard. It requires auditors/practitioners to
establish system of quality control so that firm and its personnel comply with
professional standards and regulatory & legal requirements and reports issued are
appropriate.

g
Its basic objective is that while rendering services, to which engagement standards

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apply, there should be a system of quality control with in firms to ensure compliance

a
with professional standards/legal requirements. System of quality control ensures

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issuing of appropriate reports in the circumstances. Further, it is also to be
remembered that Standards on Quality Control (SQCs) are to be applied for all

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services covered by Engagement Standards.

a
WHY ARE STANDARDS NEEDED?

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Standards ensure carrying out of audit against established benchmarks at par with

h
global practices.
Standards improve quality of financial reporting thereby helping users to make

C
diligent decisions.
Standards promote uniformity as audit of financial statements is carried out

A
following these Standards.

C
Standards equip professional accountants with professional knowledge and skill.
Standards ensure audit quality.

DUTIES IN RELATION TO ENGAGEMENT AND QUALITY CONTROL STD.

It is the duty of professional accountants to see that Standards are followed in
engagements undertaken by them.
Ordinarily, these are to be followed by professional accountants. However, a
situation may arise when a specific procedure as required in Standards would be
ineffective in a particular engagement. In such a case, he is required to document
how alternative procedures performed achieve the purpose of required procedure.
Also, reason for departure has also to be documented unless it is clear.
Further, his report should draw attention to such departures.
Mere disclosure in the report does not absolve a professional accountant from
complying with applicable Standards.
ABSOLVE ~ To officially remove guilt or responsibility for something wrong /दोषमुक्त करना

Class Notes :

CAwithChirag CA Chirag Garg

SA 200
Purpose Of Audit
The purpose of an audit is
To enhance the degree of confidence of intended users in the F.S
By the expression of an opinion by auditor on
whether the F.S are prepared, in all material respects, in accordance
with an AFRF (Applicable Financial Reporting Framework).
The auditor’s opinion does not assure,
the future viability of the entity or
the efficiency or effectiveness with which mgt. has conducted the affairs of the
entity.

g
*In some cases, however, the applicable laws and regulations may require auditors to provide opinions

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on other specific matters, such as

a
the effectiveness of internal control, or
the consistency of a separate management report with the financial statements

Premise/ Responsibilities of Mgt. or TCWG

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g
Mgt./TCWG have the following responsibilities that are fundamental to the conduct of

a
an audit in accordance with SAs.

ir
(i) For the Preparation and Presentation of the F.S in accordance with the AFRF;

h
this includes the Design, Implementation and Maintenance of internal control

C
relevant to the preparation and presentation of F.S that are free from material
misstatement, whether due to fraud or error; and

A
(ii) To provide the auditor with:

C
a. All information, such as records and documentation, and other
matters that are relevant to the PPFS;
b. Any additional information that the auditor may request from
mgt. and, where appropriate, TCWG; and
c. Unrestricted access to those within the entity from whom the
auditor determines it necessary to obtain audit evidence.
In case of a fair presentation framework,
the responsibility is for the preparation and fair presentation of the F.S
in accordance with the financial reporting framework; or
the preparation of F.S that give a true and fair view in accordance with the
financial reporting framework.

TCWG The person(s) or organisation(s) (e.g., a corporate trustee) with

responsibility for
overseeing the strategic direction of the entity and
obligations related to the accountability of the entity.
This includes overseeing the financial reporting process.
For some entities, TCWG may include mgt. personnel, e.g.,
Those Charged executive members of a governance board of a private or public
with Governance sector entity, or an owner-manager
SA 200
Misstatement

g
A difference b/w

r
the Amount, Classification, Presentation, or Disclosure of a REPORTED F.S item &

a
the Amount, Classification, Presentation, or Disclosure that is REQUIRED for the
item

G
to be in accordance with the AFRF (Applicable Financial Reporting Framework).

g
“Jo hua” aur “jo hona chahiye tha” uske beech ke difference ko Missatement kahenge

a
Misstatements can arise from error or fraud.

ir
When the auditor expresses an opinion on whether the F.S are presented fairly, in all

h
material respects, or give a T&F view,
misstatements also include those ADJUSTMENTS of

C
Amount, Classification, Presentation, or Disclosures that, are necessary for
the F.S to be presented fairly, in all material respects, or to give a T&F view.

CA