Audit Short Notes

Ethics Integrity

Concept of Ethics ●​ Requires an accountant to be straightforward and honest

●​ Ethics means moral principles that guide a person’s ●​ Integrity implies fair dealing and truthfulness
behavior or actions. ●​ No association with reports etc which PA (Professional
●​ Guidelines for what is good and what is bad. accountant) believes is
●​ All professions have their code of ethics ○​ Materially false or misleading statement
○​ Negligently provided
Need for Professional Ethics in Auditing ○​ Omits required information
Trust in Society, government, clients, investors, and
CAs businesses trust CAs for their services. Objectivity

●​ Do Not Compromise Professional Judgment because of

Purpose of ●​ Ethics based on Morality important for
○​ Bias, Conflict of Interest, Undue Influence
Ethics respect/confidence
●​ Do Not Accept/Continue professional activity if any
●​ A profession gains respect when its
circumstances/relationship influences professional
members strictly follow ethical principles.
accountant’s judgment.
Responsibi CAs have a duty to act in the public interest and
lity of maintain professional integrity. Professional Competence & Due Care

CAs ●​ Attain & Maintain Professional knowledge & skills to

ICAI & CAs, whether in practice or service, must comply with provide competent professional service as per
Ethics code of ethics issued by ICAI ○​ Technical/Professional standards and
○​ Relevant legislation
Disciplinar Violating ethical responsibilities can lead to fines,
●​ Act diligently
y Actions suspension, or removal from ICAI membership.
●​ Diligence includes responsibility to act carefully,
thoroughly and on a timely basis as per requirements of
Principles Based Approach Vs Rules Based Approach
an assignment.
Principal Based Rule Based
●​ Compliance with spirit ●​ Strictly follows clearly Confidentiality

of ethics established rules. ●​ Respect the confidentiality of information obtained

●​ Use of Professional ●​ Narrow outlook during professional/business relationships
Judgement for ●​ Spirit of ethics may be ●​ Confidentiality serves the public interest.
arriving at overlooked ●​ Ensure free flow of information from client or
conclusions ●​ Rigid (may not deal with employing organization to the accountant, knowing it
●​ Flexible, can be every situation) won’t be disclosed to third parties.
applied to new ●​ Confidential information may be disclosed (EXCEPTION)
situations ○​ Required by law
●​ Can be applied across ○​ Permitted by law, Authorised by client
national boundaries. ○​ Professional duty to disclose, when not
prohibited by law
Fundamental Principles of Professional Ethics 🔥
●​ Standard behaviour expected from Professional Professional Behavior

Accountant ●​ Comply with relevant Laws and Regulations

●​ Professional accountant must comply with fundamental ●​ Avoid conduct that might discredit the profession
principles which are as follows ●​ Don’t engage in any employment(KNOWINGLY) that
1.​ Integrity impairs or might impair the integrity, objectivity or
2.​ Objectivity reputation of profession OR does not align with the
3.​ Professional competence and care fundamental principles.
4.​ Confidentiality
5.​ Professional behaviour

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 Audit Short Notes

Independence of Auditor

Basics
Threat Meaning Examples (Very Important)

●​ Independence implies that Judgment of a person should

Self When an auditing ●​ Direct financial interest or
not be subordinate to the wishes or direction of another materially significant
Interest firm, its partner or
person specifically who has engaged him, or to his own indirect financial interest
Threat associate could
self-interest. ●​ Loan or guarantee to/from
benefit from a
●​ Independence is client
financial interest in
○​ Ability to form an opinion without being ●​ Close business relationship
an audit client.
affected by any influence. ●​ Potential employment
○​ Ability to Act with - Integrity, Objectivity and ●​ Contingent fees
Professional Skepticism ●​ Undue dependence on
client’s fees
●​ Not possible to define “independence” precisely.
○​ Should not be confused with the superficial Self Review Self-review threats ●​ Auditor who has recently
standards of independence or L/R Threat arise when held senior position within
reviewing a client organization
○​ Rules are framed with objectives, and cannot
●​ Auditor provided services
ensure the existence of independence. judgment or
which will be subject to audit
conclusion from a
by him.
Two perspectives of Independence of Auditors prior audit or
Independence of Mind Independence in Appearance non-audit
engagement or if
●​ State of mind that ●​ Avoidance of
an audit team
●​ Permits opinion without facts/circumstances
member was
being affected by ●​ which might lead a third
previously a
influences party to conclude
director or senior
●​ Acting with Integrity, ●​ Integrity, Objectivity or
employee of the
Objectivity & Professional Professional skepticism
client.
Skepticism had been compromised.
●​ A company offers an ●​ Example - If an auditor is Advocacy Promoting a client, ●​ Dealing in shares/securities
Threat it seems that of client
auditor a higher fee auditing a company owned
auditor is “taking ●​ Advocating for the co in
contingent on a favorable by their relative, the
third party disputes.
audit report . public might doubt their sides” of the client
●​ Representing the co in
objectivity, even if the litigation
audit is fair.
​
Independence of the auditor has not only to exist in fact, but it Familiarity Occur when auditors ●​ Close relative of audit team
should also appear to exist to all reasonable persons. Threat forms relationships working in a senior position
Independence is a condition of mind as well as personal character with client where in client co
●​ Former partner of audit firm
Threats to Independence 🔥 they end up being
TOO sympathetic to
being a director or senior ee
of the client
●​ Refer to actions, events, circumstances, or transactions the client’s
●​ Long association b/w
that affect, hamper, impact, or hurt an auditor’s interests​ auditors and client
independence.
●​ Acceptance of significant
●​ Code of Ethics for professional accountants, prepared by gifts/hospitality
IFAC identifies 5 types of threats
Intimidatio Client is trying to ●​ Threat of replacement over
○​ Self-interest threats
n Threat stop the auditor disagreements
○​ Self-review threats ●​ Threat of litigation
from acting
○​ Advocacy threats
objectively or/and ●​ Threat of reducing work
○​ Familiarity threats scope in proportion to
you will not exercise
○​ Intimidation threats reduced fees.
professional

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 Audit Short Notes

skepticism. Audit Quality

●​ Purpose of audit
○​ Increase the confidence of users of audited FS.
●​ Former director become Auditor : SELF REVIEW
○​ Therefore, quality is essential to maintain
THREAT
confidence in the assurance provided.
●​ Former partner of firm become Director: FAMILIARITY
●​ SQC 1 and SA 220 both deal with quality control.
THREAT

SQC1 SA 220
Safeguards to Independence

Meaning Firm level Engagement level

●​ Actions which helps professional accountants to reduce CEO , MP EP

or eliminate threats so that he can comply with

Broad - All engagements, Narrow- particular audit
fundamental principles.
Client relationship engagement
​
Guidelines to apply Safeguards 🔥 Get support from SA 220 Subject to SQC1
●​ Confidence - Independence
○​ For the public to have confidence in the quality SQC 1 - “Quality Control for Firms that Perform Audit and

of audit - auditors should appear independent Reviews of Historical Financial Information, & other Assurance

●​ Consider threats and Related Services Engagements”

○​ Before taking any work, auditor must ●​ Firm should establish a system of QC (SOQC)
conscientiously consider threats to ●​ Designed to provide reasonable assurance wrt
independence ○​ Firm and its personnel comply with
●​ When threat exists ■​ Professional Standards and
○​ Desist from the task or ■​ Regulatory and legal requirements
○​ Eliminate the threat or ○​ Reports issued are appropriate
○​ Put Safeguards to reduce the threats to
acceptable low levels.
​
Elements of System of Quality Control MODI JI 🔥
The firm is required to create Quality control policies and
✅ Example procedures w.r.t following elements of SOQC.
●​ An audit partner has been auditing the same company for
1)​ Leadership responsibilities for quality within the firm
10 years. ​
Threat: Familiarity threat – the auditor might develop a
2)​ Ethical requirements
biased view. 3)​ Acceptance/Continuance of client relationships &
●​ Action specific engagements
○​ Desist: The auditor resigns.
4)​ Human resources
○​
5)​ Engagement performance
Eliminate: Assign a new audit partner to the

engagement.

○​ Apply Safeguards: Implement peer review of the

6)​ Monitoring
audit work by another independent auditor.

●​ Record (Document) the safeguards. It will serve as Quality control policies and procedures should be
evidence of compliance with the process. ●​ Documented and
●​ If auditor is unable to implement adequate safeguards ●​ Communicated to the firm’s personnel.
→ Must NOT accept the work ○​ Firm must take feedback on SOQC
○​ Encourages its personnel to communicate their
views or concerns on QC matters.
Holding of shares involves financial interest in the company and is
in the nature of self-interest threat. A professional accountant
should take steps to eliminate the threat by selling shares Leadership responsibilities for quality within the firm

●​ SQC 1 requires firms to promote an internal culture

immediately before accepting appointment.
recognizing quality as essential in engagements.

●​ CEO or Managing Partner - Hold ultimate responsibility

for the firm’s system of quality control

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 Audit Short Notes

●​ must set examples to encourage high quality

Leaders

audit work
●​ CEO , MP - may assign operational responsibility of QC
to any person
○​ That person should have sufficient/appropriate
experience, ability and necessary authority.​

Ethical Requirements

Compliance with ethical Requirements

Firm should establish policies and procedures designed to provide Acceptance and Continuance of Client Relationships and Specific

with reasonable assurance that firm and its personnel Engagements

●​ Comply with relevant ethical requirements as per Code

of ethics issued by ICAI.
●​ Code establishes 5 fundamental principles of
professional ethics

Independence

Independence in all engagements is required.

Firm should establish policies and procedures designed to provide
it with reasonable assurance that
○​ Firm, its personnel (including experts contracted by firm
and network firm personnel)
○​ maintain independence where required by Code.
Such policies and procedures should enable the firm to: Matters to be considered with regard to INTEGRITY of the client
○​ Communicate its independence requirements to its ●​ Reputation of principal owners, key MGT, related parties,
personnel TCWG
○​ Identify and Evaluate threats to independence ●​ towards matters such as aggressive
Attitude

○​ Take Action to eliminate/reduce threats by applying interpretation of accounting standards and IC

safeguards, or to withdraw. environment.
​ ●​ Nature of the operations and business practices
Information Flow Mechanism
●​ Whether client is aggressively concerned with
-​ EPcan provide the firm with relevant information about
maintaining fees as low as possible
client
○​ Indication of an Inappropriate limitation in
-​ Personnel can notify threats to independence
scope of work.
-​ All breaches of independence should be promptly notified
●​ Money laundering and criminal activities
to firm for appropriate action
●​ Reasons for proposed appointment & non-reappointment
of previous firm
Written confirmation

Firm should obtain annual written confirmation Other points

-​ of compliance with its policies and procedures ●​ A firm's knowledge of a client’s integrity grows over time
-​ on independence ●​ Resolve any conflict of interest before accepting the
-​ from all relevant firm personnel engagement.

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 Audit Short Notes

How to achieve Consistency in Quality of Engagement

Performance

Briefing of engagement team

●​ Objectives of ET

●​ Processes for complying with engagement standards

●​ Processes of engagement supervision and training
●​ Methods of reviewing performance of work
●​ Appropriate documentation of work performed

Consultation

●​ Appropriate consultation takes place on difficult matters

Human Resources
●​ With individuals within or outside the firm
Firm should establish policies & procedures designed to provide it ●​ May take advisory services provided from other firms
with reasonable assurance that
●​ it has sufficient personnel with Engagement Quality Control Review

○​ Capabilities, Significant judgments made in an engagement should be reviewed

○​ Competence, and by EQCRR (Engagement quality control reviewer) for taking an
○​ Commitment to ethical principles objective view before the report is issued.
●​ Necessary to perform engagements in accordance with
○​ Professional standards and The extent of the review depends on the
○​ Regulatory and legal requirements and ●​ complexity of the engagement and
●​ Issue reports that are appropriate in the circumstances ●​ risk that the report might not be appropriate in the
circumstances.
Address matters such as recruitment, compensation, training, The review does not reduce the responsibilities of EP
career development, performance evaluation etc. ​
EQCR is mandatory for all listed entities. In other engagements,
There should be emphasis on the continuing professional firm should devise criteria to determine requirement of review
development of firm’s personnel
Difference of Opinion

●​ Between ET with those consulted

Engagement Performance
●​ Between EP and EQCR
●​ Issue report only after resolution of such differences.
●​ Recommendations of EQCRR are not accepted by EP and
matter is not resolved to reviewer’s satisfaction,

○​ Matter should be resolved by following

established procedures of the firm like by
consulting with another practitioner/firm, or
professional/regulatory body.

Assembly of Final Engagement Files

Assembly of engagement files should be completed in not more

than 60 days after date of Audit Report in case of audit

engagements and in other cases within the limits appropriate to

Firm should establish policies and procedures designed to provide engagements
it with reasonable assurance that
●​ engagements are performed in accordance with Other Points

○​ professional standards and Policies and procedures should be designed to maintain the
○​ regulatory and legal requirements, and ●​ Confidentiality
●​ Reports issued are appropriate

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 Audit Short Notes

●​ Safe custody, His action and message should emphasise -

●​ Integrity, ●​ Importance to audit quality of (Factors crucial for maintaining audit
●​ Accessibility and retrievability quality.) (Audit quality ke liye in factors ki kya importance hai aur audit quality ke
liye kaunse factors sabse jyada important hai)
○​ of engagement documentation
○​ that complies with professional standards and
Work

regulatory and legal requirements;

Monitoring
○​ Complying with the firm’s SOQC policies and procedures
Firm should ensure that policies and procedures relating to the
○​ Reports are appropriate in the circumstances
system of QC are
○​ ET’s ability to raise concerns without fear of reprisals.
●​ Relevant,
●​ Fact that quality is essential in performing audit
●​ Adequate,
engagements.
●​ Operating effectively
Relevant Ethical Requirement
●​ Complied in practice
EP's responsibilities are as under
Must include an
●​ Identifying threats to independence.
●​ Ongoing consideration & evaluation of firm’s system of
○​ That safeguards may not be able to eliminate or
QC
reduce to an acceptable level. (Financial Interest –
●​ Periodic inspection of selected completed engagements. If the auditor owns shares in the client company, even

safeguards like disclosure cannot eliminate the conflict.)

SA 220-Quality Control For an Audit of Financial Statements ●​ Reporting by EP

Objective of the auditor
○​ to relevant persons in firm
To implement QCP at the engagement level that provide the ○​ to determine appropriate action, which may
auditor with reasonable assurance that: - include
●​ The audit complies with professional standards and ■​ Eliminate the threat
regulatory and legal requirements ■​ Withdrawing from the audit
●​ The auditor’s report issued is appropriate in the engagement
circumstances
Acceptance and Continuance of Client Relationships and Audit

SA 220 is premised on the basis that the firm is subject to SQC 1 Engagements

●​ EP is responsible for ensuring QCP as per SA 220. Responsibilities of EP

●​ SA 220’s effectiveness depends on SOQC at the firm level. ●​ Obtain such information as he considers necessary in the
●​ SA 220 provides support to SQC1 circumstances
○​ ET must provide NECESSARY information to support ○​ before accepting an engagement with a new
firm’s quality control, specifically regarding client,
independence ○​ when deciding whether to continue an existing
SA 220 is based on the assumption that the audit firm follows SQC 1 engagement, and
(firm-wide quality control standards) ○​ when considering acceptance of a new

Engagement Partner’s Responsibilities under SA 220 🔥 engagement with an existing client

●​ Information on
It describes responsibilities of EP in relation to following matters
○​ Integrity of principal owners
●​ Leadership responsibilities for quality on audits
○​ Competence of ET
●​ Relevant ethical requirements
○​ Compliance with relevant ethical requirements
●​ Acceptance and continuance of client relationships and
audit engagements
Significant matters from current/previous audits Assist EP in
●​ Assignment of engagement teams
assessing acceptance and continuance of client and audit
●​ Engagement performance
engagements
●​ Monitoring

Leadership responsibilities for quality of audits 🔥 Assignment of engagement teams

EP should ensure
EP must take responsibility for overall quality of audit
●​ ET and auditor’s experts have necessary
engagement.

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 Audit Short Notes

○​ competence and capabilities to perform (Compliance, Independence, Acceptance/Continuance

engagement consultation)

○​ as per professional standards & regulatory and ●​ identified wrt compliance with ethical
Issues

legal requirements. requirements and how they were resolved.

●​ Conclusions on
Engagement Performance ○​ Compliance with independence requirements
EP is responsible for - and
●​ Conduct of an audit as per ○​ Discussions supporting these conclusions.
○​ professional standards and ●​ Conclusions on client acceptance and continuance.
○​ regulatory and legal requirements ●​ Nature and scope of, and conclusions resulting from
●​ Issue of Report appropriate in circumstances consultations undertaken
●​ Review of audit documentation before issue of audit ​
report Short Forms

●​ Ensuring sufficient appropriate audit evidence supports EP Engagement Partner

conclusions. ET Engagement Team
●​ Responsible for consultation on difficult matters within EQCRR Engagement Quality Control Reviewer
or outside team QC Quality Control
​
SOQC System of Quality Control
Responsibilities of EP for engagement quality control review

For listed entities, and for entities for which the firm has QCP Quality Control Procedures
determined that an engagement quality control review is SAAE Sufficient Appropriate Audit Evidence
required, EP shall:
●​ Determine EQCRR has been appointed.
●​ Discuss significant matters with EQCRR
●​ Not date the auditor's report until completion of
engagement quality control review.

Differences of opinion

●​ Within ET, with those consulted

●​ Between EP and EQCRR
●​ Follow the firm’s policies and procedures for dealing with
and resolving differences of opinion.

Monitoring

●​ Effective monitoring process designed to provide firm

with reasonable assurance that its policies & procedures
relating to system of QC are
○​ Relevant
○​ Adequate, and
○​ Operating effectively
●​ EP shall consider
○​ latest information circulated by firm or
network firms (Latest monitoring results)
○​ whether deficiencies noted in that information
may affect audit engagement.

EP should document following matters pertaining to audit

engagement

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 Audit Short Notes

Professional Skepticism 🔥 Other Points

Meaning ●​ Auditor may consider past experience of management’s

●​ Attitude of honesty
○​ Questioning Mind ●​ However, trust in management does not eliminate the
○​ Being alert to conditions need for professional skepticism.
■​ which may indicate possible
misstatement
■​ due to error or fraud, and
○​ a critical assessment of audit evidence.
●​ It signifies that auditor has to remain alert forever
●​ Application in Audit
○​ The auditor shall plan and perform an audit with
professional skepticism
○​ Considering that circumstances may exist that
cause FS to be materially misstated.

Examples of Professional Skepticism

Professional skepticism includes Being Alert to

●​ Audit evidence
○​ Audit evidence that contradicts other audit
evidence obtained.
●​ Information
○​ Information that brings into question
reliability of documents & responses to
inquiries to be used as audit evidence.
●​ Conditions
○​ Conditions that indicate possible fraud
●​ Circumstances
○​ Circumstances that suggest the need for audit
procedures in addition to those required by SAs
​
Maintaining professional skepticism

Maintaining professional skepticism throughout the audit is

necessary if the auditor want to reduce the risk of
●​ Overlooking unusual circumstances
●​ Over generalising when drawing conclusions from audit
observations
●​ Using Inappropriate Assumptions in determining NET of
audit procedures & evaluating the results thereof

Professional Skepticism and Audit Evidence

●​ Evaluate sufficiency and appropriateness based on

circumstances.
●​ If fraud risk exists, assess reliability of sole supporting
document for material FS amount.
●​ Accept records as genuine unless there is reason to
doubt their authenticity.
●​ Assess reliability of information used as audit evidence.
○​ If in doubt, investigate further and modify/add
audit procedures as needed.

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