Audit Revision Book

Audit Introduction
Audit

Audit Opinion

Audit evidence

Audit Procedures

2 Substantive 1 Compliance & RAP

Vouching Analysis of Key Risk assessment Internal Control

Verification Procedure Compliance
financial ratios

Audit opinion - Clear / unqualified / Clean / unmodified

- Qualified
- Adverse Modified
- Disclaimer of opinion

Compousarily Audit - Every Company OPC ; Pvt ; Pub ; - Every Year

- Non Companies

Business Profession

T10>2 cr. Gross receipts > 50 lacs

(sale)

1.Definition Audit may be defined as an independent examination of financial

information of an entity whether profit oriented or not irrespective of
its size and legal form and such an enamination is conducted with the
view to
express an opinion thereon (financial statement)

2. Objective The primary objective of an Auditor is not to detect frauds & errors
but; it is to comment and form an opinion whether the FS are showing
true & fair view or Not.

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3. FS will exhibit true

and fair view only if a) Accounting policies selected and applied by the management
following conditions must be proper.
are satisfied :-
b) All AS should have been followed.
c) Adequate Disclosure must be given in Notes to Accounts.
iv) Audit is a process Diagrametiacally Represented below :-
4. Audit a process
Audit

Audit opinion

Audit evidences

Audit procedures

Substantive Compliance & RAP(Risk Assessment Procedure)

Evalution of Internal
Controls
Vouching & Analysis of key
Verification financial Ratios

5. Vouching & Verification Vouching refers to checking of incomes & expenses but
verification refers to checking of assets & liabilities.
cp :- Purchase vouching ; cash verification
6. Analysis of KFR
Analysis of key financial ratios helps the auditor to
ascertain whether he has to check going concern assumption
of client or not. ex:- if current ratio is 1:4 then auditor
must check going concern assumption of client.

7. IC Internal control refers to various departments and

measures taken up by the client for smooth functioning
of organisation.

8. RMM At first auditor applies compliance & RAP in which he finds

internal control to be strong /weak which means RMM (Risk
of Material Mis-statement) will be less/more; which means
auditor will have to apply less/more substantive procedures.

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9. Auditor forms his opinion

by issuing anyone of the a) Clear/Clean/Unqualified report:- when there is no material
follow four audit reports :-
misstatement and no material limitation on scope of audit.
Modifoed Report

b) Qualified Report :- There is either material mis-statment or material limitation

or both.
c) Adverse Report :-
When material mistatement pervasive (huge).
d) Disclaimer of opinion :- When material limitation is pervasive.

10. Auditor The above audit is conducted by qualified CA in practise. who

must follow all the standards of auditing (SAs) otherwise he
will be guilty under chartered Accountants Act; 1949;

38 SAs

100-199 200-299 300-499 500-599 600-699 700-799 800-899

Introductory Matters Audit avidences Using the work of Audit report

“0” Standards (11 SAs) others (3 SAs.) (6 SAs) Specialied area
(3 SAs)
General principles and
responsibilities

Risk Assessment &

Response to Assessed
risk (6 SAs)
9 SAs.
200;210;220;230;240,
250;260;265;299

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S.A-200 “Overall Objective of an independent Auditor and Conduct

of Audit in accordance with standards of Auditing”
1. The General Princples
and responsibilities
Governing an Audit
are as follows:-

a. Ethical Requirement:- Auditor must satisfy the follow ethical requirements:-

i) Integrity:- An Auditor must maintain his integrity by having honest; sin-

cere and straight forward.

ii) objectivity:- He should maintain his objectivity forming an impartial opinion.

iii)Independence:- An Auditor must be independent in his approch. and conduct

Audit without following client’s directions.As per Guidance notes
on independence issued ICAI; It is not possible to define
independence if his judgement are not sub-order to anybodies
wishes or directions who has engaged him and not even to his
own self internet.

iv) confidentiality:- Any information acquired during the course of client’s Audit
cant be disclosed at any cost without prior consent of client.

v) professional skill An Auditor must conduct Audit carefully by excercising Due

and competence:- skill and care.

b.Professional skepticism:- It may be defined as an attitude of having Questioning mind;

being alert to the conditions that may indicate possible
misstate ment and critical Assessment of Audit evidences.
ex:- contradictory evidences ; missing evidences; possibility
of fraud.

c.Professional Judgement:- It may be defined as use of professional training; experience

and knowledge for making Appropriate Decision during the
course of an Audit.
ex:- How much substantive procedure to be applied;
Timing and extent of audit procedure.

Auditor must form his opinion on the basis of sufficient, Appropri-

d.Audit evidences:-
ate Audit evidences as per SA500.

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e. Conduct of Audit 1. Auditor must apply the Relevant S A. Relevant S A means
in accordance with there exist circumstances to apply the SA and that SA has
SAS mean; been made effective.

2. If entire SA is not relevant; then only the portion of that SA

which is relevant shall apply.

3. Auditor must perform procedure to achieve the objectives

started in the SA.

4. If such objective cant be achieved auditor should modify his

opinion; i.e. issue either qualified or adverse or disclaimer of
opinion or withdraw from engagement(resign)

2. Accounting system and Both are the responsibility of management and those charge with
Internal control:- governance (TCWG).Auditor is responsible not to create or
maintain but only to check them.

3. Objective of an auditor The primary objective of an auditor is to comment and form an

To Provide Reasonable opinion whether financial statements are showing true and fair
Assurance :- view or not. However; it doesn’t release management from their
responbility of prepairing financial statements as per applible
financial reporting framework (FRF).

4. Reasonable assurance The purpose of audit is to provide reasonable assurance regarding

v/s absolute assurance:- true and fair view of financial statement.

Reasonable assurance is an opinion which enhances the degree of

confidence of users on financial statement.

Absolute assurance is a guarantee that there exist no material

misstatements in financial statement.Auditor can never give
absolute assurance beacuse of “Audit Risk”

5. Audit Risk:- It’s a risk that some material misstatement may remain
undetected even though audit was properly planned and executed
Auditor by applying audit procedures and collecting sufficient
appropriate audit evidences can reduce the audit risk to an
acceptable low level but cant make it zero because of inherent
limitation of audit

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6. Inherent Limitations
of Audit:-

a) Nature of financial Accounting involves lot of judgements made by management.

reporting:- ex:- Accounting estimates like PBDD, Depreciations for which
there cant be any conclusive Audit evidences.
b) Nature of audit Auditor has to collect information from management and others
procedures:- which they may not give incomplete or inaccurate. The risk of not
detecting material mis-statement arising out of fraud; is higher
than that arising out of the error.

c) Limitation w.r.t time Auditor has to complete his audit within reasonable time and cost
and cost:- for which he has to do sampling
i e- selective checking and not 100% checking.

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“ Agreeing the terms of Audit Engagement”
S.A-210

1. Objective The objective of this SA is to check whether pre-condition

of audit exist or not.

2. Precondition If pre conditions of audit dont exist or if any limitation

exists on scope of audit by which if audit is accepted
will lead to disclaimer of opinion then auditor shouldn’t
accept the audit unless otherwise required by law.

3. Letter of engagement Before accepting the audit; auditor should sent to his client
an engagement letter containing pre-conditions of audit
as discussed below:-

a) Management should have prepared financial statements

as per applicable financial reporting framework
generally accepted accounting principles; accounting has
his own responsibility.

b) Management should agree that accounting in its own

responsibility.

c) Management should agree that preparation of internal

control is its own responsibility.

d) Auditor will be given an unrestricted access to books

of accounts and enquiry & confirmation from relevant
person of entity.

e) Management agrees that auditor; responsibility is only

to form an opinion on financial statements.

f) Auditor is not an employee of entity.

4. Documented The above pre-conditions alongwith objective and scope

of audit is signed and documented by both auditor and
management.

5. Recurring Audit Recurring audit means when same client’s financial

statement are audited year after year.

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6. Terms of Engagement Terms of audit engagement shall not be sent by auditor in case of
in Recurring Audit recurring audit except in following cases:-

a) If auditor feels that entity has misunderstood or forgotten

the terms of engagement.
b) When management changes.

c) When there is significant change in ownership.

d) When law requires.

e) As per any other reporting requirement.

7. Changes Any change in terms of engagement is possible only after

mutual consent and if changes justifiable.

8. Justifiable Justifiable changes are those which dont lead to lower level

of assurance. Its optional for auditor to agree to such change

ex: clients request to vouch all purchase bill.

9. Unjustifiable unjustifiable changes are those which hamper the quality of

audit and provide lower level of assurance then the assurance

as per previous terms of engagement.Its compulsory for

auditor to disagree. ex:- clients request to not to vouch any

purchasebill.
10. Resignation If auditor has disagree to a change but still client changes

the terms of engagement and doesn’t allow the auditor to

continue the previous terms then; auditor must resign and

inform other directors and members of company.

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S.A-220 “Quality control for audit of financial statement:”-

-Refer Mat.
Acronym:- CLEAR PARI

DON’T
FORGET TO
REFER MAIN
MAT

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S.A-230 Audit Documentation

1. It may be defined as preparation and preservation of audit
1. Definition working papers which shall contain:-

a)Audit Procedures applied.

b)Audit Evidences collected.

c)Basis of Audit Opinion.

d)Date and name of persons who applied Audit Procedures.

e)Names of the person who recieved such procedures.

2. Audit file:- It is a collection of all the folders or any other storage media;

whether in physical or electronic file containing audit documenta-

tion/working papers of the relevant audit engagement.

3. There are two types a) Permanent audit file(PAF)

of Audit Files:-
b) Current audit file(CAF)

4. PAF PAF records those non-recurring Audit matters which generally

doesn’t change year after year.Examples of PAF are-

a)MOA

b)AOA

c)Significant Accounting Policies

d)Significant Audit Observations

e)Significant Ratios & Trends.

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5. CFA CAF records recurring Audit Matters which generally

changes year after year examples are-

a) Results of ratios & trends.

b)Results of vouching.

c)Results of verification.

d)communication with experts.

e)communication with other auditor.

6. Experience auditor:- It is an auditor who has practical knowledge and experience of

audit and understanding of

a)Audit procedures

b)SAS & statute

c)Nature of FR and AP. (financial reporting & audit procedures)

7. Importance of a) It establishes a basis of opinion

documentation:-
b) It acts as an evidence that Audit must properly planned SA’s

was applied and statute was complied.

c) Its other use is that it helps in future reference of articles

and assistants.

8. Ownership :- The ownership of working paper lies with auditor and also

lies on him that responsibility to keep them in safe custody.

9. Preservation :- Working papers must be preserved for minimum 7years.

10. Disclosure of working paper

To ICAI To client/other To others

compulsory ;if ICAI wants auditor optional i;e disallowed it will

if auditor wants leak client’s

confidentiality

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S.A-240 The Auditor’s responsibilities Relating to Fraud in an Audit

- Refer Chapter-5 Main Mat

S.A-300 Planning an Audit of Financial Statements

- Refer Chapter-2 Main Mat

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“Consideration of Laws & Regulation in audit of financial
S.A-250 statement”

1. Objective:- Auditor should check whether client has followed all the
applicable laws & regulation or not because Non- Compliance
of them may attract penalties & disclosure.

2. If auditor discovers a) Nature of Non-compliance ex:- what contravention has

only Non- Compliance taken place; Gst not deposited; return not filled or co,
of law or regulation act violated.
then he must check the
following:- b) Circumstances of non compliance:-Whether intentional or
non intentional.
Fraud
Error
c) Effect of non-compliance:-If client will have to pay
penalties;then;auditor shall ask to make provision for
penalties or if violation of law require disclosure then
auditor will ask for such disclosure which if client fails to
do then auditor shall issue either qualified or adverse
report.

3. Qualified / Disclaimer:- If auditor is precluded from collecting sufficient appropriate

audit evidences then he shall issue either qualified or disclaimer
of opinion.

4.To ensure the compliance a) Maintain a statutory register of all applicable laws.
of laws & regulation is
the duty of management
b) Maintain seperate legal deptt as per size of organisation.
for which an internal
control containing following
features measures must c) Establish a compliance procedure for applicable laws &
be established:- regulation.

d)Train employees about applicable laws.

e)Regularly update them about changes in law.

5. Hints of non Compliances:- 5. Few examples which hints auditor about non compliance of laws.

a) Investigation by regulatory authorities.

b) Unusal relation or payment to related parties.

c) High amount of sales commision paid.

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d) Investment in companies operating in taxhaven countries.

e) High amount of legal fees paid.

f) Adverse media report.

g) Payment made in other countries where goods are imported

from some other country.

h) Foreign exchange documents not properly maintained.

i) Adequate records & books of accounts not properly maintained.

a) check the books of accounts.

6. Audit procedures to
be applied by auditor
for checking compliance b) Inspect the challans of various statutory fees and returns
of laws:- submitted by the client.

c)Discussion with management.

d)Inspecting the statutory register.

e) Doing independent check with various regulatory authority

regaring compliance of laws.

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S.A-299 “Responsibility of joint Auditors”

Revised
1. Definition When financial statements of an entity are audited by
more than one auditor; in order to issue an Audit Report; it
is called Joint Audit.The Auditors are called Joint Auditors.

2. Plan Audit plan and strategy will have to be made jointly by engage-
ment partner and key audit members of all the Joint Auditors.

3. Joint plan contents contents of Joint Audit plan will be

a) The common audit areas.

b) Divison of audit work.

c) Nature; Timing and extent of Audit Procedures to be

performed.

d) The nature and timing of communication amongst the Joint

Auditors.

e) The discussions about preliminary knowledge of client’s

business.

4. Division of work If joint auditor have divided work amongst them then they
are not required to check the work allocated to other joint
auditor and also not required to check whether the other
joint auditor has apply proper audit procedures or not. for
ex :- if PWC & E & Y are the Joint Auditors and they are
divided purchase vouching and sale vouching respectively
between them then PWC is neither required to vouch any
sale bill nor required to check whether E&Y has applied
proper audit procedures or not.

5. Duty Before finalizing the audit report it shall be the duty of a

joint auditor to inform the other Joint Auditor about any
misstatement observe during the course of audit. for ex:- if
E&Y find any mis-statement in sales then it must inform PWC.

6. Joint Terms of Joint auditors before starting the audit shall sent joint
engagement
terms of audit engagement to client.

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7. What are the cases a) For common audit areas.

when Joint Auditors
are jointly & severally b) For those works which were not divided amongst them.
liable???
c) For determining nature; timing & extent of audit procedures.

d) For checking disclosures in notes to accounts.

e)To check that audit report complies with relevant SAs.

f) If one of joint auditors have deviated from the normal

audit procedures and the other joint auditors has given
consent to it.
8. What are the cases
when joint auditors are same as point (vii) except (b).
jointly and severally
liable inspite of the
work being divided
between them???
9. Joint Report Normally joint auditor have a common opinion for which
they shall issue a joint audit report but if they have a different
opinion then they shall issue different audit report but
such audit report shall bear a reference to the other joint
auditor’s report.
ex- PWC wants to issue clear report but E&y any Deloitte
qualified report then E&y and Deloitte will issue a common
qualified report bearing a reference to PWC’s clear report;
PWC shall issue a different clear report bearing a reference
to E&y and Deloitte audit report.
10.Matters to be documen-
ted by joint auditors:- a)The joint audit plan & strategy.

b)Agreed level of RMM.

c) The deviation from normal audit procedures if any.

d) Communication amongst the joint auditors.

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Identifying and Assessing the Risk of Material Misstate-

S.A-315 ment through understanding the Entity and its Environment.
1. Objective:- The auditor should identify and assess the risks of material mis-
statement, whether due to fraud or error, at the financial state-
ment and assertion levels. He should understand the entity and its
environment, including the entity’s internal control. Thus, he can
design and implement responses to the assessed risks of material
misstatement. This will help the auditor to reduce the risk of mate-
rial misstatement to an acceptably low level.
2. Definitions:-

a) Assertions :- Representations by management, explicit or otherwise, embodied in

the financial statements.

b) Business risk :- A risk resulting from significant conditions, events, circumstances,

actions or inactions that could
adversely affect an entity’s ability to achieve its objectives.

c) Internal control :- The process designed, implemented and maintained by those

charged with governance,management and other personnel. To
provide reasonable assurance about the achievement of an entity’s
objectives. With regard to reliability of financial reporting, effec-
tiveness and efficiency of operations, safeguarding of assets, and
compliance with applicable laws and regulations.

d) Risk assessment The audit procedures performed to obtain an understanding of the

procedures :- entity and its environment, including the entity’s internal control, to
identify and assess the risks of material misstatement at the
financial statement and assertion levels.

e) Significant risk :- An identified and assessed risk of material misstatement that re-
quires special audit consideration.

f) Material Weakness :- A weakness in internal control that could have a material effect on
the financial statements.

3. Risk Assessment Proce Risk assessment procedures by themselves, however,

dures and Related do not provide sufficient appropriate audit evidence on which to
Activities :-
base the audit opinion. The risk assessment procedures shall
include the following:

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(a) Inquiries of management, and of others within the entity

(b) Analytical procedures.

(c) Observation and inspection. The auditor shall consider whether

information obtained from the auditor’s client acceptance or
continuance process is relevant to identifying risks of material
misstatement. Where engagement partner has performed other
engagements for the entity, consider whether information
obtained is relevant to identifying risks of material misstate-
ment. If auditor uses his previous experience, consider if
changes have occurred since the previous audit. The engagement
partner and other key engagement team members shall discuss
the susceptibility of the entity’s financial statements to material
4. The Required misstatement.
Understanding of the
Entity and Its Environ-
ment, Including the
Entity’s Internal Control

a) The Entity and The auditor shall obtain an understanding of the following:
Its Environment - (a) Relevant industry, regulatory, and other external factors

(b) The nature of the entity, including:

(i) its operations; (ii) its ownership and governance structures; (iii)
the types of investments; and (iv) the way that the entity is struc-
tured and how it is financed;

(c) The entity’s selection and application of accounting policies,

including the reasons for changes thereto.

(d) The entity’s objectives and strategies, and those related

business risks that may result in risks of material
misstate ment.

(e) The measurement and review of the entity’s financial

performance.

b) The Entity’s The auditor shall obtain an understanding of internal control rele-
Internal Control - vant to the audit. Although most controls relevant to the audit are
likely to relate to financial reporting, not all controls that relate to
financial reporting are relevant to the audit.

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5. Division of Internal
Control into components:-
a) The Control (Component) Elements of the control environment that may be
Environment – relevant when obtaining an understanding of the control environ-
ment includes the following. :-
(a) Communication & enforcement of integrity and ethical values
–Auditor will evaluate that Mgmt &TCWG, has created &
main tained a culture of honesty & ethical behavior.

(b) Commitment to competence – Matter’s such as management’s

consideration of the competence level for particular jobs and
how those levels translate into requisite skills & knowledge.

(c) Participation by Tcwg – (i) Their independence from mgmt.

(ii)Their experience & stature.

(d) Management Philosophy & operating styles- characteristics

such as management’s. * Approach to taking and managing
business risks. * Attitudes and actions towards financial
reporting. (e) Organizational structure,Assignment of
Authority & Responsibility.
b) The Entity’s Risk
Assessment Process :- Consider if entity has a process for:

(a) Identifying business risks relevant to financial reporting

objectives;

(b) Estimating the significance of the risks;

(c) Assessing the likelihood of their occurrence; and

(d) Deciding about actions to address those risks. If the entity

has established entity’s risk assessment process, the auditor
shall obtain an understanding of it, and the results thereof. If
the entity has not established such a process or has an ad hoc
process, the auditor shall discuss with management whether
business risks relevant to financial reporting objectives have
been identified and how they have been addressed.

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(3) The information including the related business processes, relevant to financial re-
system, porting, and communication.
(i) Initiate, record, process, and report entity transactions (as well
as events and conditions) and to maintain accountability for the re-
lated assets, liabilities, and equity.

(ii) Resolve incorrect processing of transaction for example,

automated suspense files and procedures followed to clear
suspense items out on a timely basis.

(iii) Process and account for system overrides or bypass to control.

(iv) Transfer information from transaction processing systems

to the general ledger.

(v) The financial reporting process.

(vi) Controls surrounding journal entries. The auditor shall obtain an

understanding of:
(a) Communications between mgmt & TCWG.

(b) External communications, such as those with regulatory

authorities

6. Control Activities Control Activities are the policies & procedures that help ensure
(component) that mgmt directives are carried out. Examples of specific control
Activities:- Authorization. · Performance Reviews. ·
Information processing. Physical Controls. Segregation of duties.
Control Activities relevant to the audit. · The Auditor
shall obtain an understanding of control to assess the risks of ma-
terial mis-statement at the assertion level & design
further audit procedures. · In understanding the entity’s control
activities the auditor shall obtain an understanding of
how the entity has responded to risks arising from IT.
7. Monitoring of Controls
(Component):- Is a process to assess the effectiveness of internal control perfor-
mance over time. Obtain an understanding of the :

(a) activities that the entity uses to monitor internal control over
financial reporting, and

(b) sources of the information used in the entity’s monitoring

activities and their reliability.

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Materiality in Planning and Performing an Audit

S.A-320 There exists an inverse relationship between materiality and Audit
Q.1) Explain the
relationship between Risk. As per SA-320 an Item said to be material if its misstatment
materiality and Audit (omission or wrong statement) COULD influence the economic
Risk? decision of users of financial statement. On the other hand Audit
Risk refers to Risk that Auditor will issue clear report inspite of
financial statement being materially Misstated. The inverse Rela-
tionship is explained with elements of Audit Risk.

a) Relation between Inherent Risk is a type of uncontrollable Audit Risk, Which de-
Materiality & pend on scope of Audit. Higher the scope of Audit higher will be
Inherent Risk: Inherent Risk, but since scope of Audit can not be controllable, we
cannot control Inherent Risk also. Here there exist no relationship
between Materiality and Inherent Risk.

b) Relation between Control Risk arises because of reliance placed by Auditor on inter-
Materiality & nal control procedure. Higher the reliance on internal control higher
control Risk:- will be the control Risk, and vice-versa. If an item is material, Audi-
tor will place lesser Reliance on internal control and so control risk
will be less i.e., higher the materiality lower the control risk and
vice-versa.

c) Relation between Detection Risk arises because of lesser substantive procedure. If

Materiality & an Item is material, Auditor will apply more substantive procedure
Detection Risk:- which means detection Risk will be less i.e., higher materiality lower
will be the Detection Risk.

Thus from the Above discussion we conclude that higher the Mate-
riality Inherent Risk remain constant, control & detection Risk will
be lower i.e. , there exist inverse relationship between Materiality
and Audit Risk.

The fact of this relationship is known to the client and so client will
try to mistake non-material Items the Aggregate of which may be
material and so as per ICAI auditor should also check non Material
Items.

2) If an individual Item is material, any misstatement in it will

be material misstatement which if client fails to adjust Auditor
will Issue either Qualified or Adverse Report.

3) An individual Item may be non-material so any misstatement

in it will be non-material misstatement but Aggregate of
uncorrected non-material misstatement may reach materiality

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level which if client fails to adjust Auditor should Issue Qualified

or Adverse Report.

4) Aggregate of un-correct- a) Specific Misstatement identified by Auditor.

ed non material misstate-
ment comprise of:-
b) Estimated Misstatement.

5. professional judgment Materiality level is fixed by Auditor which is based on his

professional judgment and experience..
6) Example: -
- Materiality level is = 5%

Debtors Amount (Lakhs) Misstatement Amount (Lakhs)

A 20 1 Specific
B 20 2 Specific
Z 10 1 Specific

Aggregate of uncorrected non material misstatement

7. SOLUTION:-

Specific Estimated
1+2+1= 4 lakhs 4/50*50= 4 lakhs
so that aggregate =4+4= 8 lakhs

Materiality level= 5% of 100 lakhs= 5 lakhs, Since aggregate has

crossed the materiality level, client should adjust his financial
statement i.e., correct the uncorrected non material misstatement
failing which auditors should issue qualified or adverse report.

8. qualitative There can also a qualitative material misstatement. Example:- client

is not a going concern & it has not been disclosed by him in notes on
accounts.

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S.A-500 Audit Evidence

1. Objective Auditor must form his audit opinion on the basis of suffcient;

Appropriate audit evidences; which are collected by

performing RAP(Risk Assesment Procedures) and audit

procedures like substantive compliance.

2. Sufficiency & Sufficiency refers to quantum; appropriateness refers to
Appropriateness
relevance and reliability.
3. Factors Following factors determine whether none audit evidences

are sufficient or less:-

a) Size of organisation- If large size organisation then audit evidences required;but;if

small size organisation then less.

b) Nature of item:- If item is complex then more audit evidences required but; if

simple then less.

c) materiality of item:- If item is material mthen;more audit evidences required but if non

material then less.

d) Internal control:- If strong then less audit evidences required but if weak then
more.
e)Experience of auditor:- will guide the auditor,wheather collected audit evidences are

suffiecient or not

4. Types of Audit Evidences

Based on source Based on nature

internal-(collected within client’s visual(form observation)
organisation) ex:-Books of
External management respon. Documentary(from inspection)
(outside clients org)
ex:-bank;debtor;creditor oral(from inquiry)
etc.
Int < Ext Documentary is more reliable
‗
if But
if IC Strong
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5. Consistency If different types of audit evidences are consistent then

reliability will be more;but;if they are inconsistent then

auditor should collect further audit evidences are not available

then auditor should modify his opinion by issuing qualified or

disclaimer of opinion.

6. Six steps to Collect

Audit Evidences:-

a) Inspection- Of written records to collect visual evidences.

b) Observation- Of managements operations to collect visual evidences.

c) Enquiry & confirmation- Enquiry is done from management and confirmation from

external parties.

d) Recalculation- To check arithmetical accuracy of books of accounts.

e) Analytical review- To analyse key financial ratios.

f) Reperformance- Auditor will reperform some of the works done by internal

control to check that internal control was efficient or not

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S.A-501
1. Objective :-
Audit Evidence — Specific Considerations For Selected Items
The objective of the auditor is to obtain sufficient appropriate
audit evidence regarding the:
(a) Existence and condition of inventory;

(b) Completeness of litigation and claims involving the entity; and

(c) Presentation and disclosure of segment information in accord-

2. Inventory :-
ance with the applicable financial reporting framework.

When inventory is material to the financial statements, the

auditor shall obtain sufficient appropriate audit evidence
regarding the existence and condition of inventory by:

(a) Attendance at physical inventory counting, unless

impracticable, to:
(i) Evaluate management’s instructions and procedures for
recording and controlling the results of the entity’s physical
inventory counting;

(ii) Observe the performance of management’s count procedures;

(iii) Inspect the inventory; and

(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.

3. Attendance at Physical Attendance at Physical Inventory Counting Involves:

Inventory Counting :- (a) Inspecting the inventory to ascertain its existence and
evaluate its condition, and performing test counts;

(b) Observing compliance with management’s instructions and the

performance of procedures for recording and controlling the
results of the physical inventory count; and

(c) Obtaining audit evidence as to the reliability of management’s

count procedures. These procedures may serve as test of
controls or substantive procedures depending on the auditor’s
risk assessment, planned approach and the specific
procedures carried out.

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 Audit Revision Book

4. Matters Relevant in
Matters relevant in planning attendance at physical inventory count-
Planning Attendance at ing include, for example:
Physical Inventory
Counting :- (a) Nature of inventory.

(b) Stages of completion of work in progress.

(c) The risks of material misstatement related to inventory.

(d) The nature of the internal control related to inventory.

(e) Whether adequate procedures are expected to be established

and proper instructions issued for physical inventory counting.

(f) The timing of physical inventory counting.

(g) Whether the entity maintains a perpetual inventory system.

(h) The locations at which inventory is held, including the

materiality of the inventory and the risks of material misstate-
ment at different locations, in deciding at which locations
attendance is appropriate

(i) Whether the assistance of an auditor’s expert is needed.

5. Physical Inventory
If physical inventory counting is conducted at a date other than the
Counting Conducted date of the financial statements, the auditor shall, in addition to the
Other than at the Date procedures required above, perform audit procedures to obtain au-
of the Financial dit evidence about whether changes in inventory between the count
Statements :- date and the date of the financial statements are properly
recorded.

6. If the Auditor is unable If the auditor is unable to attend physical inventory counting due to
to Attend Physical unforeseen circumstances, the auditor shall make or observe some
Inventory Counting due physical counts on an alternative date, and perform audit
to Unforeseen
Circumstances :-
procedures on intervening transactions.

7. Attendance at Physical If attendance at physical inventory counting is impracticable, the au-

Inventory Counting ditor shall perform alternative audit procedures to obtain sufficient
Is Impracticable :- appropriate audit evidence regarding the existence and condition of
inventory. If it is not possible to do so, the auditor shall modify the
opinion in the auditor’s report in accordance with SA 705.

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 Audit Revision Book

In some cases, attendance at physical inventory counting may be

impracticable. This may be due to factors such as the nature and
location of the inventory, for example, where inventory is held in
a location that may pose threats to the safety of the auditor.

The matter of general inconvenience to the auditor, however, is

not sufficient to support a decision by the auditor that attend-
ance is impracticable. Further, as explained in SA 200, the mat-
ter of difficulty, time, or cost involved is not in itself a valid basis
for the auditor to omit an audit procedure for which there is no
alternative or to be satisfied with audit evidence that is less than
persuasive.

In some cases where attendance is impracticable, alternative

audit procedures, for example inspection of documentation of the
subsequent sale of specific inventory items acquired or purchased
prior to the physical inventory counting, may provide sufficient
appropriate audit evidence about the existence and condition of
inventory.

In other cases, however, it may not be possible to obtain suffi-

cient appropriate audit evidence regarding the existence and con-
dition of inventory by performing alternative audit procedures. In
such cases, SA 705 requires the auditor to modify the opinion in
the auditor’s report as a result of the scope limitation.

When inventory under the custody and control of a third party

is material to the financial statements, the auditor shall obtain
sufficient appropriate audit evidence regarding the existence and
condition of that inventory by performing one
or both of the following:

(a) Request confirmation from the third party as to the quantities

and condition of inventory held on behalf of the entity.

(b) Perform inspection or other audit procedures appropriate in

the circumstances.

8. Litigation and Claims :- The auditor shall design and perform audit procedures in order to
identify litigation and claims involving the entity which may give
rise to a risk of material misstatement, including:

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(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 and correspondence between the entity and its
external legal counsel; and

(c) Reviewing legal expense accounts.

9. If the Auditor Assesses If the auditor assesses a risk of material misstatement regarding
a Risk of Material litigation or claims that have been identified, or when audit
Misstatement regarding procedures performed indicate that other material litigation or
Litigation or Claims - claims may exist, the auditor shall, in addition to the procedures
Communication with the
required by other SAs, seek direct communication with the entity’s
Entity’s External Legal
Counsel :- external legal counsel.

The auditor shall do so through a letter of inquiry requesting the

entity’s external legal counsel to communicate directly with the
auditor.

If law, regulation or the respective legal professional body prohib-

its the entity’s external legal counsel from communicating directly
with the auditor, the auditor shall perform alternative audit
procedures.

In certain circumstances, the auditor also may judge it necessary

to meet with the entity’s external legal counsel to discuss the
likely outcome of the litigation or claims.

• This may be the case, for example, where:

• The auditor determines that the matter is a signifi cant risk.
• The matter is complex.
• There is disagreement between management and the entity’s
external legal counsel. Ordinarily, such meetings
• require management’s permission and are held with a represent-
ative of management in attendance.

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S.A-505 “External Confirmation”

1. Definition :- i) It may be defined as a type of audit evidence which is a

direct written response given by the external party to the
auditor either in paper form or electronic form or in any
other media.
2. Examples of external a) Debtor confirmation
confirmation are :-
b) Creditor confirmation

c) Loan confirmation

d) Stock confirmation with consignee

e) Bank balance confirmation.

3. Types of external
confirmation:-
a) Positive confirm- In it auditor asks the external party to reply in both cases
ation request:- i.e; even if the balance talies and even if it does not.

b) Negative confirm- In it auditor asks the external party to reply only when the
ation request :- balance doesn’t tally.

4. Negative confirmation a) Risk of material misstatement or risk of exception

request can be sent (chances of deviation between the balance appearing in
only when all the following client’s book and that appearing in external parties books)
conditions are satisfied- is less.

b) Client’s internal control is strong.

c) Amount of item is less.

d) Auditor doesn’t have any reason to believe that external

party will ignore the negative
confirmation request.

5. Positive:- If any of the above condition is breach send positive confirmation

request.
6. B/S Date:-
Auditor should ask for external confirmation of the balance
prevaling on balance sheet date, but ; if that isnot available then

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 Audit Revision Book
close to the balance sheet date and auditorshould make necessary
adjustments to it to convert it into balance as an balance sheet
date.

7. Refusal by external If external party refuses to give audit evidences than

Party :- auditor should collect it from other sources of audit
evidences beacuse external confirmation is only one of
the many type of audit evidences.

8. Refusal by Client If client refuses the auditor to do external confirmation

and there is no genuine reason (examples of genuine reason
are :- dispute with external party going on in court or
external party committed a fraud) then ; it is a limitation
on scope of audit for which auditor can modify his
opinion i.e; issue qualified or disclaimer of
opinion.
9. steps of the external a) Select the item for which external confirmation is required.
confirmation-
b) Design the type of confirmation request to be send.

c) Send the confirmation request to external party.

d) Receive the reply.

e) Evaluate the reply.

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S.A-510 Initial Engagement-opening Balances

1. Applicability :- This SA applies only when auditor audits a new client FS for the first

time. It is not necessarily clients first audit or auditors first audit.

2. In case of intial engage- a) Check that closing balances of previous F;Y has been correctly
ment auditor must check
opening balances by brought forward as opening balances
applying following three
audit procedure:- b) check that accounting policies have been consistently followed.

c) check that opening balances should be free from material

mis statement.

3. Last Fy audit Conducted:- If last financial years audit of client was conducted and was

given clear report (obviously by a different auditor) then; auditor

can assume opening balances to be free from material mis-statement.

4. Modified report If last years audit was conducted and modified report was issued
issued Last Fy:-
then;auditor will consider whether such modification still exists in

the current financial year and if still exist auditor can also issue

a modified report.

5. Not Conducted :- If last year audit was not conducted then;

a) For opening balances of current assests & current liabilities

current year audit procedures are sufficient. Example:-client

was showing Mr.x as its debtor having opening balance of

5000000. But during the current year only 2000000 was recieved

from and when auditor did external confirmation from it was

found that opening balance was only 2000000.Now auditor should

ask the client to rectify the opening balance of otherwise auditor

should modify his opinion i;e. issue either or adverse.

b) For checking opening balances of non current assets non-current

liab. ; shareholder; fund; auditor shall apply verification procedure.

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S.A-520 Analytical Procedures

It may be defined Evaluation of financial information through
analysis of plausible relationship between financial & nonfinancial data
1. Definition :-

2. Type :- It is a type of substantive audit procedure.

3. Methods :- Following are some of the methods of analytical procedure.

a) Comparison of clients business data with that of industry

average.

b) Comparing current years figures with those of previous

years.

c)Comparison with budgeted data.

d) Analysis of key financial ratios.

4. Whether the auditor a) If item is material then auditor should place less reliance
should place more reliance on its results of analytical procedures.
or less reliance on the
results of analytical b)If item is complex then less reliance.
procedures depend on
the following factors :-
c)If internal control is strong then more reliance.

d)If expected result talies with the actual result of analytical

procedure then more reliance.

e)If other audit evidences are consistent then more reliance.

5. Importance of
analytical procedure:- a) It helps in collecting audit evidences.

b)It helps to ascerting whether he has to check the going con-

cern assumption of client
or not.

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S.A-530 Audit Sampling

1. Definition :- Audit sampling is a technique which auditor applies audit procedure
to less than 100% items of financial statement.

2. Sample :- Item on which audit procedure are applied refers to sample.

3. Population :- Area from which sample is drawn refers to population.

Stratification is a process in which population is divided into sub

4. Stratification :-
population. Example:- Sub population of material items & non ma-
terial items & then sample is drawn from material item also & non
material item also.

5. Sample Size :- Together all the sample make a sample size. Higher the sample size
lower will be the sampling risk and vice- versa.

6. Example:- DEBTORS (Population)

High value debtors ( sub population) Low value debtors ( sub population)

A,B,Z ( Sample) M,N (Sample)

Sample size:- A+B+Z+M+N…..

Sampling risk is a risk that sample result may not be same as pop-
7. Sampling risk :- ulation result if the same audit procedures that have been applied
on sample were also be applied on the population.

8. Sampling risk may arise at I) At compliance level:-

2 levels :-
a) Risk of over reliance:- sample of internal control strong so audi-
tor thought population also strong but population may be weak.

b) Risk of under reliance:- sample weak so population weak but pop-

ulation may be strong.

II) At substantive level:-

a) Risk of incorrect acceptance:- Sample ok so population ok but

population may not be ok.

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 Audit Revision Book

b) Risk of incorrect rejection:- Sample not ok so population not ok

but population may be ok.

9. Risk :- Risk of over reliance & risk of incorrect acceptance are more
detrimental.
10. Tolerable :-
Tolerable error refuse to deviation between sample result and pop-
ulation result which auditor is willing to accept & still conclude that
sample result & population result are same.

Expected error is the deviation expected by auditor to remain

11. Expected error :-
between sample result & population result. Higher the sample size
lowers the expected error and it should always lie within the arms
of the tolerable error.

12.

Expected error < tolerable error Expected error > tolerable error

Sampling objective achieved Sampling objective not yet

achieved, so increase the sam-
ple size to make E.E. < T.E.
12. 5 ways to draw sample:- a) Random selection :- ( using the random no. table of Monte
Carlo)

b) Systematic selection :- ( After constant Intervals)

c) Haphazard selection:- (Kaise bhi karo)

d) Monetary Unit

e) Block

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S.A-540 “Auditing accouting Estimates including fair value accounting

estimates & disclosures”
Although Removed but still required

1. Definition :- Accounting estimates may be defined as approximation of those

items whose precise means of measurement are not available.

2) Some of the accountive a) Provision for tax

estimates are:-
b) PBDD

C) Depreciation

d) Provision for law suits

e) Provision for WIP

f) Provision for repair

g) Provision for warranty

h) Provision for Retirement Benefits

3) Auditor shall apply

following procedures a) Auditor shall apply risk assessment procedure(RAP)
for auditing accounting
estimates:- b) Auditor shall responce to the results of RAP.

4) Risk assessment These are the audit procedures by which auditor ascertain the risk
procedure (RAP):-
of material mis-statement and management accounting estimate. It

includes following procedures:-

a) Auditor shall check whether management has made accounting

estimates as per applicable financial reporting framewor

(i:e, accounting policies, accounting policies, accounting

standard, laws & regulations must have been followed)

b) Auditor will enquire the management the factors by which

management identified the transactions, conditions, events for

which provision was required

c) Auditor shall check management’s way of computing an accounting

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 Audit Revision Book
estimates by checking the following.
Source data used by management

Assumption made by management

Arithmetical accuracy

d) Auditor shall apply analytical procedure for example:- comparing

current years accoun-ting estimate with previous year

5. Auditors responce After applying RAP; if auditor finds the risk of

to accessed risk:- - material mis-statement in accounting estimates then he shall

- use an own independent estimate.

- Review subsequent events.

- Ask the client to give adequate disclosue in notes to

accounts.

6. Qualified Adve :- vi) If after using independent estimate and reviewing subsequent

event; Auditor finds accounting estimates failing which he shall

issue either qualified or adverse report.

7. Pvs estimates :- vii) If previous years estimate of management were correct then

auditor shall place more reliance on management estimates.

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Related Parties
S.A-550
1. Objective :- The objectives of the auditor are:

(a) Irrespective of whether the applicable financial reporting

framework establishes related party requirements, to obtain
an understanding of related party relationships and
transactions sufficient to be able:

(i) To recognise fraud risk factors, if any, arising from related

party relationships and transactions that are relevant to the
identification and assessment of the risks of material
misstatement due to fraud; and

(ii) To conclude whether the financial statements, insofar as they

are affected by those relationships and transactions: a.
Achieve a true and fair presentation; or b. Are not misleading; and

(b) In addition, where the applicable financial reporting framework

establishes related party requirements, to obtain sufficient
appropriate audit evidence about whether related party
relationships and transactions have been appropriately
identified,, accounted for and disclosed in the financial
statements in accordance with the framework.

2. Risk Assessment Proce- The auditor shall inquire of management regarding:

dures and Related
Activities Understanding
the Entity’s Related Party
(a) The identity of the entity’s related parties, including changes
Relationships and from the prior period;
Transactions :-
(b) The nature of the relationships between the entity and these
related parties; and

(c) Whether the entity entered into any transactions with these
related parties during the period and, if so, the type and
purpose of the transactions. The auditor shall inquire of
management and others within the entity, and perform other
risk assessment procedures considered appropriate, to obtain
an understanding of the controls, if any, that management
has established to:

(a) Identify, account for, and disclose related party relationships

and transactions in accordance with the applicable financial
reporting framework;

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 Audit Revision Book
(b) Authorise and approve significant transactions and arrange
ments with related parties; and

(c) Authorise and approve significant transactions and arrange-

ments outside the normal course of business.

3. Responses to the Risks of If the auditor identifies related parties or significant related party
Material Misstatement transactions that management has not previously identified or dis-
Associated with Related closed to the auditor, the auditor shall:
Party Relationships and
Transactions Identifica-
tion of Previously Uniden- (a) Promptly communicate the relevant information to the other
tified or Undisclosed members of the engagement team;
Related Parties or
Significant Related Party (b) Where the applicable financial reporting framework establishes
Transactions :- related party requirements:

(i) Request management to identify all transactions with the newly

identified related parties for the auditor’s further evaluation; and

(ii) Inquire as to why the entity’s controls over related party

relationships and transactions failed to enable the identifica-
tion or disclosure of the related party relationships or
transactions;

(c) Perform appropriate substantive audit procedures relating to

such newly identified related parties or significant related
party transactions;

(d) 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, and perform
additional audit procedures as necessary; and
(e) If the non-disclosure by management appears intentional
evaluate the implications for the audit.

4. Identified Significant For identified significant related party transactions outside the
Related Party Transac- entity’s normal course of business, the auditor shall:
tions outside the Entity’s
Normal Course of
Business :- (a) Inspect the underlying contracts or agreements, if any, and
evaluate whether:

(i) 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;

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(ii) The terms of the transactions are consistent with management’s

explanations; and

(iii) The transactions have been appropriately accounted for and

disclosed in accordance with the applicable financial
reporting framework; and

(b) Obtain audit evidence that the transactions have been

appropriately authorised and approved.

When management has made an assertion in the financial statements

5. Assertion s That
Related Party Transactions to the effect that a related party transaction was conducted on
Were Conducted on Terms terms equivalent to those prevailing in an arm’s length transaction,
Equivalent to Those the auditor shall obtain sufficient appropriate audit evidence about
Prevailing in an Arm’s the assertion.
Length Transaction :-

6. Evaluation of the
In forming an opinion on the financial statements the auditor shall
Accounting for and evaluate:
Disclosure of Identified
Related Party (a) Whether the identified related party relationships and
Relationships and transactions have been appropriately accounted for and
Transactions :-
disclosed in accordance with the applicable financial reporting
framework; and

(b) Whether the effects of the related party relationships and

transactions:

(i) Prevent the financial statements from achieving true and fair
presentation; or

(ii) Cause the financial statements to be misleading. Where the

applicable financial reporting framework establishes related
party requirements, the auditor shall obtain written
representations from management and, where appropriate,
those charged with governance that:

7. Written Representations :-
(a) They have disclosed to the auditor the identity of the entity’s
related parties and all the related party relationships and
transactions of which they are aware; and

(b) They have appropriately accounted for and disclosed such

relationships and transactions in accordance with the
requirements of the framework.

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8. Communication with Those Unless all of those charged with governance are involved in
Charged with Governance:- managing the entity, the auditor shall communicate with those
charged with governance significant matters arising during the
audit in connection with the entity’s related parties.

9. Documentation - In meeting the documentation requirements of SA 230 and oth-

er SAs, the auditor shall include in the audit documentation the
names of the identified related parties and the nature of the
related party relationships.

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S.A-560 Subsequent Events

1. Definition :- These are the events whether favourable or unfavourable

that occur after B/S date but before signing of financial

statements.

2. Type :- Subsequent events may be of two types-

a)Adjusting event

b)Non- adjusting event

3. Adjusting :- Adjusting event are those types of subsequent event which

provides evidences and clarification related to transactions

that have occur prior to B/S date.

ex:- Provision for law suits 200 lack on 31|3|18 gets confirm

by courts judgements on 15|6|18 (Before signing on financial

statement) that the penalty is 100lacks & not 200 lacs.

Accounting is require to be adjusted failing which auditor

shall issue either qualified or adverse reports.

4. Non Adjusting :- Non-adjusting events dont provide any evidence related to

any transaction prior to balance sheet date and so accounting

is not require to be adjusted.

5. Substratum :- If Non-Adjusting event is no material that its affects the

substraturm of organisation then; disclosure in directors report

shall be required.

6. Audit Procedurees :- Audit procedures to find out subsequent events:-

a) Discuss with management.

b) Review interim financial statements

c) Review pending litigation.

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7.

Adjusting Non-adjusting

If material then disclosure

in directors
Accounts adjusted Accounts not
report required
by management adjusted by
ok management
Disclosed Not Disclosed
Qualified/Adverse.
ok ok
because director
report is not a
part of financial
statement

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S.A-570 Going-Concern

1. Definition :- Going concern is a Fundamental Accounting Assumption.As

per which client will carry on its operations for infinite period

of time and not adequate in near future.

2. No disclosure :- If client is a going concern; no disclosure is required for that.

3. Disclosure :- If client is not a going concern; it must be disclosed in its

notes to accounts. Failing which; it such a material and

pervasive misstatement that auditor must issue adverse report.

4) Whetherto check a) Financial Indicators

going concern assumption
of client or not; auditor b) Operating Indicatiors
must check three types of
indicating factor:- c) Other Indicators

5) Financial Indicators:- i.) Negative Networth

ii.) Negative W.C.

iii.) Nagative cash flows

iv.) Substantial operating loses.

v.) Adverse key financial ratios.

vi.) Inability to pay dividend

vii.) Inability to pay creditors

viii.) Internal Reconstruction.

6) Operating Indicators:- i.) Loss of key management without replacement.

ii.) Loss of major market.

iii.) Loss of major franchise.

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 Audit Revision Book
iv.) Labour Difficulties.

v.)Shortage of raw materials.

7. Others Indicator:- i) Change in govt policy

ii) Pending litigation

8. If any of the above a) Discuss with Mgmt.

indicating factor
negative; auditor shall b) Review interim F.S
check going concern
assumption of client by c) Review events occuring after balance sheet date.
applying following audit
procedures:- d) Review status of pending litigations.

e) Check financial position of that party who may financially

assess the client.

9. Mitigating Factors Those factors and evidences on the basis of which auditor

concludes the client to be a going concern are called

“mitigating factors” (M.F)

EX:-Huge order recieved by client.If auditor asks the client

to disclose m.f and client doesnt disclose then; auditor

may issue either qualified or adverse.

10. Not Resolved If going concern question is not satisfactory resolved

which means auditor is unable to conclude whether client

is a going concern or not because of limitation impose on scope

of audit then auditor may issue either qualified or disclaimer

and also asks the client to give following three disclosures:-

a) Negative Indicating factors

b)Reasonable uncertanity about going concern

c)B/S has been prepared at historical cost.

11. Disclosure If above disclosure are not given then auditor will issue

either qualified or adverse report.

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S.A-580 Written Representation

1. These are the assertions or statements or information or

facts or claims made by management to the auditor during

the course of audit.

2. Two types of management

representation are:-

a) Unsolicited- When management makes representation on its own motion.

b) In response When management makes representation on being asked

specific queries:- by auditor.

3. Examples of management a) Assertions given by management as to their

representation are-
responsibility of preparing and presenting financial

statement and internal control.

b) Assertions given by management to support other

evidences and to solve auditors queries.

4. Management Rather it is just one of many audit evidences avaiable and so

representation is not a whenever auditor receive management representation; he should

substitute of other perform.following three audit procedures:-

audit evidences; a) Seek collaborative audit evidences

b) Compare them with management representation and if

management representation is found to be false the

re-evaluate other representation given by management and

place lesser reliance on them.

c) check whether management which made the representation

was himself well informed on the matter or not.

5. Two modes of managment a)Oral

representation:- b)Written

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6. Auditor should always ask for written representation

management gives No representation

Management gives written
oral representation limitation on scope
representation
of audit for which

Auditor should write them auditor should

ok
down & get it signed by modify his opinion

management. i;e issue qualified

disclaimer of opinion

Management signs
Mgt doesn’t sign.

ok limitation on scope of

audit for which auditor

should modify his opinion

i.e; issue qualified/

disclaimer of

opinio.

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Using the work of other auditor
S.A-600 Although Removed but still required

1. Applicability :- This S.A is applicable on principal auditor of organisation having

one or more components audited by other auditor.

2. PA :- Principal auditor is statutory auditor of main organisation.

3. OA :- Other auditor is a statutory auditor of a component.

4. Component :-
4. Component means a branch of subsidiary or Associate or joint
venture of main organisation.

5. Material mis-st may If other auditor has given a qualified or adverse report but if
be non- material :- principal auditor thinks material mis-statement of a component
to be a non material for the organisation; he can still issue
clear report.

6. Audit Procedures :- If principal auditor finds a component and work of other auditor
to be material then.

a) If other auditor has given a clear report then principle

auditor shall also give clear report but mention in his audit
report that he has relied on the work of other auditor.

b)If other auditor has given qualified or adverse then principal

auditor shall also give qualified or adverse.

c) If other auditor has refused to co-operate then it being a

material limitation on scope of audit he shall issue either
qualified or disclaimer.

7. Liason :- ”There should exist liason (co-ordination) between principal

and other auditor?? -correct; write entire SA-600.

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S.A-610 Using the work of Internal Auditors

1. Scope of this SA :- This Standard on Auditing (SA) deals with the external auditor’s
responsibilities regarding the work of internal auditors when the
external auditor has determined, in accordance with SA 315, that
the internal audit function is likely to be relevant to the audit. This
SA does not deal with instances when individual internal auditors
provide direct assistance to the external auditor in carrying out
audit procedures or where, in terms of the applicable legal and
regulatory framework, it is not permissible for the internal auditor
to provide access to his working papers to the third parties.

2. Relationship between the The role and objectives of the internal audit function are deter-
Internal Audit Function mined by management and, where applicable, those charged with
and the External Auditor:- governance. While the objectives of the internal audit function and
the external auditor are different, some of the ways in which the
internal audit function and the external auditor achieve their
respective objectives may be similar. Irrespective of the degree of
autonomy and objectivity of the internal audit function, such
function is not independent of the entity as is required of the
external auditor when expressing an opinion on financial statements.
The external auditor has sole responsibility for the audit opinion
expressed, and that responsibility is not reduced by the external
auditor’s use of the work of the internal auditors.

3. Objectives:,- The objectives of the external auditor, where the entity has an
internal audit function that the external auditor has determined is
likely to be relevant to the audit, are to determine:

(a) Whether, and to what extent, to use specific work of the

internal auditors; and

(b) If so, whether such work is adequate for the purposes of

the audit.

4. Determining Whether and 1. The external auditor shall determine:

to What Extent to Use
the Work of the Internal
Auditors :-
(a) Whether the work of the internal auditors is likely to be
adequate for purposes of the audit; and

(b) If so, the planned effect of the work of the internal auditors
on the nature, timing or extent of the external auditor’s
procedures.

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2. In determining whether the work of the internal auditors is

likely to be adequate for purposes of the audit, the external
auditor shall evaluate:

(a) The objectivity of the internal audit function;

(b) The technical competence of the internal auditors;

(c) Whether the work of the internal auditors is likely to be

carried out with due professional care; and

(d) Whether there is likely to be effective communication between

the internal auditors and the external auditor.

3. In determining the planned effect of the work of the internal

auditors on the nature, timing or extent of the external
auditor’s procedures, the external auditor shall consider:

(a) The nature and scope of specific work performed, or to be

performed, by the internal auditors;

(b) The assessed risks of material misstatement at the assertion

level for particular classes of transactions, account balances,
and disclosures; and

(c) The degree of subjectivity involved in the evaluation of the

audit evidence gathered by the internal auditors in support of
the relevant assertions.

5. Using Specific Work 1. In order for the external auditor to use specific work of the
of the Internal Auditors :- internal auditors, the external auditor shall evaluate and perform
audit procedures on that work to determine its adequacy for
the external auditor’s purposes.

2. To determine the adequacy of specific work performed by the

internal auditors for the external auditor’s purposes, the
external auditor shall evaluate whether:

(a) The work was performed by internal auditors having adequate

technical training and proficiency;

(b) The work was properly supervised, reviewed and documented;

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(c) Adequate audit evidence has been obtained to enable the

internal auditors to draw reasonable conclusions;

(d) Conclusions reached are appropriate in the circumstances and

any reports prepared by the internal auditors are consistent
with the results of the work performed; and

(e) Any exceptions or unusual matters disclosed by the internal

auditors are properly resolved.

6. Documentation :- The external auditor shall document conclusions regarding the

evaluation of the adequacy of the work of the internal auditors,
and the audit procedures performed by the external auditor on
that work.

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S.A-700(Revised) Forming an opinion and Reporting on financial statements

Drafs an audit report as per SA-700 (revised)

Ans

1. (Title). Independent Audit Report.

2. (Address). To the members of MA ltd.

3. Opinion:- We have audited the stand alone or consolidated (as given)

financial statements of MA LTD.The financial statements compri-

se of balance sheet as on 31st march 2019, statement of profit

& loss and cash flow statement for the year ended 31st March, 2019

(statement of change in equity, if applicable). We have also

audited notes on the aforesaid financial statement including

Summary of Accounting Policies used.

In our opinion and to the best of our information and according

to the explanation given to us,the aforesaid financial statement give the

information required by the act and also gives the true and fair view; in

accordance with the accounting principles which have generally accepted

in india of the state of affairs as at 31st mar 2019 and of the profit and

loss and cash flows for the year ended 31st mar 2019.

We have formed our audit opinion by following all the standards on

4. (Basis of opinion):- auditing as per section 143(10) of companies act 2013. Our

responsibilities relating to the financial statement has been mentioned

in the paragraph below.We have conducted the audit be remaining inde-

pendent of the entity and by complying the code of profesional ethics

laid down by institute of chartered accountants of india;1949 and other

applicable laws.We have formed our opinion on the basis of sufficient;

appropriate audit evidences collected by us.

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5. Going concern:- Reporting will be done as per SA-570

6. Key Audit Matters:- Key audit matters:-Reporting will be done as per SA-701.

7. Managements responsi- The companies Board of Directors is responsible for the matters
bility relating to financial
statement:- stated in section 134(5) of the companies act 2013 relating to

preparation of these financial statement by complying all the

applicable accounting standards selecting and applying such acount-

ing policies and making prudent estimates to enable the financial

statements showing true and fair view.They are also responsible to

maintain adequate accounting records for safeguarding the assets

of company and preventing and detecting the frauds & errors.

In preparing the financial statements management is responsible

for accessing the ability of company to continue as going concern

and to ensure that it operate smoothly.It is also their responsibili-

ty to ensure that proper controls exist to comply all the applicable

statutory laws & regulation.

8. Auditors responsibility for Our objective is to obtain a reasonable assurance that financial state-
the audit of financial
statements:- ment taken as a whole are free from material statement due to fraud

error.The term reasonable assurance means high level of assurance but

not a guarantee that an audit conducted in according with S/A will al-

ways detect material mis statement when its exists.Material mis-state-

ment means any mis statement whether due to fraud & error which

could use economic decision of users of financial statement. Emphasis

on matters paragraph and other matter; Reporting will be done as per

S.A-706

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9. Report on other legal

and regulatory Require

ment:-143(1), (3), (11)

10. Auditors Sign For xyz& co chartered Accountant

(firms reg no)

Signature of member

(Name & Designation)

(membership no)

11. Auditor city

12. Date

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Communicating Key Audit Matters In The Independent

S.A-701 Auditor’s Report

1. Definition of Key Those matters that, in the auditor’s professional judgment, were
Audit Matters :- of most significance in the audit of the financial statements of the
current period. Key audit matters are selected from matters
communicated with those charged with governance.

2. Purpose of Communicat- As per SA 701, “Communicating Key Audit Matters in the Auditor’s
ing Key Audit Matters:- Report”, the purpose of communicating key audit matters is to
enhance the communicative value of the auditor’s report by pro-
viding greater transparency about the audit that was performed.
Communicating key audit matters provides additional information to
intended users of the financial statements to assist them in un-
derstanding those matters that, in the auditor’s professional judg-
ment, were of most significance in the audit of the financial state-
ments of the current period. Communicating key audit matters may
also assist intended users in understanding the entity and areas of
significant management judgment in the audited financial
statements.
3. Objectives of the Auditor
As per SA 701, “Communicating Key Audit Matters in The Inde-
regarding Key Audit
Matters:- pendent Auditor’s Report”, the objectives of the auditor
are to determine key audit matters and, having formed an opinion
on the financial statements, communicate those
matters by describing them in the auditor’s report.

4. Determining Key Audit The auditor shall determine, from the matters communicated with
Matters:- those charged with governance, those matters that required
significant auditor attention in performing the audit.

In making this determination, the auditor shall take into account

the following:

(a) Areas of higher assessed risk of material misstatement, or

significant risks identified in accordance with SA 315.

(b) Significant auditor judgments relating to areas in the financial

statements that involved significant management judgment,
including accounting estimates that have been identified as
having high estimation uncertainty.

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(c) The effect on the audit of significant events or transactions

that occurred during the period.
The auditor shall determine which of the matters determined in
accordance with above stated para were of most significance in the
audit of the financial statements of the current period and
therefore are the key audit matters.

5. Communicating Key Audit The auditor shall describe each key audit matter, using an appro-
Matters:- priate subheading, in a separate section of the auditor’s report
under the heading “Key Audit Matters”. The introductory language
in 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]; and

(b) These matters were addressed in the context of the audit of

the financial statements as a whole, and in forming
the auditor’s opinion thereon, and the auditor does not provide
a separate opinion on these matters.

6. Communicating Key Audit Communicating key audit matters in the auditor’s report is in the
Matters- not a substi- context of the auditor having formed an opinion on
tute for disclosure in the the financial statements as a whole. Communicating key audit mat-
Financial Statements etc
ters in the auditor’s report is not:

(a) A substitute for disclosures in the financial statements that

the applicable financial reporting framework requires
management to make, or that are otherwise necessary to
achieve fair presentation;

(b) A substitute for the auditor expressing a modified opinion when

required by the circumstances of a specific audit engagement in
accordance with SA 705 (Revised);

(c) A substitute for reporting in accordance with SA 570 when a

material uncertainty exists relating to events or conditions
that may cast significant doubt on an entity’s ability to continue
as a going concern; or

(d) A separate opinion on individual matters.

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1.Modifications To The Opinion In The Independent Audi-

S.A-705 tor’s Report
1. Circumstances When a The auditor shall modify the opinion in the auditor’s report when:
Modification to the Auditor’s
Opinion Is Required (a) The auditor concludes that, based on the audit evidence
obtained, the financial statements as a whole are not free
from material misstatement; or

(b) The auditor is unable to obtain sufficient appropriate audit

evidence to conclude that the financial statements as a
whole are free from material misstatement.

Qualified Opinion Adverse Opinion Disclaimer of Opinion

The auditor shall The auditor shall disclaim
The auditor, having
expressan adverse opinion an opinion when he is unable
obtained sufficient
when the auditor, having to obtain sufficient appro-
appropriate audit obtained sufficient ap- priate audit evidence and
evidence, concludes propriate audit evidence, he concludes that the possi-
that misstatements concludes that misstate- ble effects on the financial
are material,but ments, individually or in statements of undetected
not pervasive. the aggregate, are both misstatements could be both
material and pervasive material and pervasive

2. 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; or

(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 financial statements
of undetected misstatements, if any, could be material
but not pervasive.

3. 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 and pervasive to the financial statements.

a) Disclaimer of Opinion:- The auditor shall disclaim an opinion when the auditor is unable to
obtain sufficient appropriate audit evidence on which to base the

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opinion, and the auditor concludes that the possible effects on the
financial statements of undetected misstatements, if any, could be
both material and pervasive.

The auditor shall disclaim an opinion when, in extremely rare cir-

cumstances 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 financial statements due to the
potential interaction of the uncertainties and their possible cumula-
tive effect on the financial statements.

b) Definition of Pervasive:- A term used, in the context of misstatements, to describe the ef-
fects on the financial statements of misstatements or the possible
effects on the financial statements of misstatements, if any, that
are undetected due to an inability to obtain sufficient appropriate
audit evidence.
c) Pervasive effects on (i) Are not confined to specific elements, accounts or items of the
the financial statements
financial statements;
are those that, in the
auditor’s judgment:-
(ii) If so confined, represent or could represent a substantial
proportion of the financial statements; or

(iii) In relation to disclosures, are fundamental to users’

understanding of the financial statements.

Nature of Matter Giving Rise Auditor’s Judgment about the Pervasiveness of the
to the Modification Effects or Possible Effects on the Financial Statments
Material but Not Pervasive Material and Pervasive
Financial statements are mate- Qualified opinion Adverse opinion
rially misstated
Inability to obtain sufficient Qualified opinion Disclaimer of opinion
appropriate audit evidence

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S.A-706 Emphasis Of Matter Paragraphs And Other Matter Para-

graphs In The Independent Auditor’s Report.

1. Objective of the As per SA 706 (Revised) on “Emphasis of Matter Paragraphs and

Auditor as per SA 706 Other Matter Paragraphs In The Independent Auditor’s Report”,
the objective of the auditor, having formed an opinion on the finan-
cial statements, is to draw users’ attention, when in the auditor’s
judgment it is necessary to do so, by way of clear additional com-
munication in the auditor’s report, to:

(a) A matter, although appropriately presented or disclosed in the

financial statements, that is of such importance that it is
fundamental to users’ understanding of the financial statements; or

(b) As appropriate, any other matter that is relevant to users’

understanding of the audit, the auditor’s responsibilities
or the auditor’s report.
2. Definitions
a) Emphasis of Matter A paragraph included in the auditor’s report that refers to a mat-
paragraph:- ter 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.

b) Other Matter A paragraph included in the auditor’s report that refers to a mat-
paragraph:– ter other than those presented or disclosed in the financial state-
ments that, in the auditor’s judgment, is relevant to users’ under-
standing of the audit, the auditor’s responsibilities or the auditor’s
report.

3. Emphasis of Matter If the auditor considers it necessary to draw users’ attention to a

Paragraphs in the matter presented or disclosed in the financial statements that, in
Auditor’s Report the auditor’s judgment, is of such importance that it is fundamen-
tal to users’ understanding of the financial statements, the audi-
tor shall include an Emphasis of Matter paragraph in the auditor’s
report provided:

(a) The auditor would not be required to modify the opinion in

accordance with SA 705 (Revised) as a result of the matter; and

(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.

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4. Separate section for When the auditor includes an Emphasis of Matter paragraph in the
Emphasis of Matter auditor’s report, the auditor shall:
paragraph
(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 and to where relevant disclosures that fully
describe the matter can be found in the financial statements.
The paragraph shall refer only to information presented or
disclosed in the financial statements; and

(c) Indicate that the auditor’s opinion is not modified in respect of

the matter emphasized.

5. Other Matter If the auditor considers it necessary to communicate a matter oth-

Paragraphs in the er than those that are presented or disclosed in the financial state-
Auditor’s Report ments that, in the auditor’s judgment, is relevant to users’ under-
standing of the audit, the auditor’s responsibilities or the auditor’s
report, the auditor shall include an Other Matter paragraph in the
auditor’s report, provided:

(a) This is not prohibited by law or regulation; and

(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.

When the auditor includes an Other Matter paragraph in the audi-

6. Separate section for
Other Matter paragraph tor’s report, the auditor shall include the paragraph within a
separate section with the heading “Other Matter,” or other appro-
priate heading.

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S.A-710 Standard On Auditing-710, “Comparative Information-Cor-

responding Figures And Comparative Financial Statements”

1. The Nature of the The nature of the comparative information that is presented in an
Comparative Information- entity’s financial statements depends on the requirements of the
applicable financial reporting framework. There are two differ-
ent broad approaches to the auditor’s reporting responsibilities in
respect of such comparative information: corresponding figures and
comparative financial statements. The approach to be adopted is
often specified by law or regulation but may also be specifi ed in
the terms of engagement.

The essential audit reporting differences between the approaches

are:

(a) For corresponding figures, the auditor’s opinion on the financial

statements refers to the current period only;whereas

(b) For comparative financial statements, the auditor’s opinion

refers to each period for which financial statements are
presented.

a) Definition of Compar- The amounts and disclosures included in the financial statements in
ative information :– respect of one or more prior periods in accordance with the appli-
cable financial reporting framework.

2. Audit Procedures The auditor shall determine whether the financial statements in-
regarding comparative
information
clude the comparative information required by the applicable
financial reporting framework and whether such information is
appropriately classified. For this purpose, the auditor shall evaluate
whether:

(a) The comparative information agrees with the amounts and other
disclosures presented in the prior period; and

(b) The accounting policies reflected in the comparative informa

tion 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 and adequately
presented and disclosed.

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3. Audit Reporting regarding Definition of Corresponding figures – Comparative information where

Corresponding Figures amounts and other disclosures for the prior period are included as
an integral part of the current period financial statements, and are
intended to be read only in relation to the amounts and other disclo-
sures relating to the current period (referred to as “current period
figures”). The level of detail presented in the corresponding amounts
and disclosures is dictated primarily by its relevance to the
current period figures.

4. When corresponding
figures are presented,
the auditor’s opinion shall
not refer to the corre-
sponding fi gures except in
the following
circumstances:-

a) If the auditor’s report and the matter which gave rise to the modification is unresolved, the
on the prior period, as auditor shall modify the
previously issued, auditor’s opinion on the current period’s financial statements. In the
included a qualified opin- Basis for Modification paragraph in the auditor’s
ion, a disclaimer of opin- report, the auditor shall either:
ion,or an adverse opinion
(a) Refer to both the current period’s figures and the corresponding
figures in the description of the matter giving rise to the
modification when the effects or possible effects of the matter
on the current period’s figures are material; or

(b) In other cases, explain that the audit opinion has been modified
because of the effects or possible effects of the unresolved
matter on the comparability of the current period’s figures and
the corresponding figures.

b) If the auditor obtains on which an unmodified opinion has been previously issued, the audi-
audit evidence that a tor shall verify whether the misstatement has been
material misstatement dealt with as required under the applicable financial reporting
exists in the prior pe- framework and, if that is not the case, the auditor shall
riod financial statements express a qualified opinion or an adverse opinion in the auditor’s re-
port on the current period financial statements, ed.

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c) Prior Period If the prior period financial statements were not audited, the audi-
Financial Statements tor shall state in an Other Matter paragraph in the auditor’s report
Not Audited - that the corresponding figures are unaudited. Such a statement
does not, however, relieve the auditor of the requirement to obtain
sufficient appropriate audit evidence that the opening balances do
not contain misstatements that materially affect the current peri-
od’s financial statements.
5. Comparative Financial
Statements

a) Definition:- Comparative information where amounts and other disclosures for

the prior period are included for comparison with the financial
statements of the current period but, if audited, are referred to
in the auditor’s opinion. The level of information included in those
comparative financial statements is comparable with that of the
financial statements of the current period.

b) Auditor’s opinion- to When comparative financial statements are presented, the auditor’s
refer each period:- opinion shall refer to each period for which financial statements are
presented and on which an audit opinion is expressed.

c) When reporting on if the auditor’s opinion on such prior period financial statements
prior period financial differs from the opinion the auditor previously expressed, the audi-
statements in connec- tor shall disclose the substantive reasons for the different opinion
tion with the current in an Other Matter paragraph in accordance with SA 706.
period’s audit,

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