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2) Confidentiality
Must not disclose any information Except any Legal or Professional duty
4) Documentation
matters providing evidence should be carefully documented
5) Planning
Keep in mind factors like Audit Programme, availability of audit staff, time etc.
7) Audit Evidence
Obtained by means of
Very Imp: Form and Content of the Audit Report should be as per Law
/Regulation/Agreement
1. Objective of an Audit: To express an opinion with regard to the true and fair view of the
financial position.
2. Responsibilities: Management is responsible for preparation of financial statements
3. Scope of an Audit:
a. Determined by: The terms of the engagement, the requirements of relevant legislation
and the pronouncements of the Institute.
b. Cannot be restricted: The scope of an audit in relation to matters prescribed by act.
4. The reliability of information is assessed by: Compliance procedures & substantive procedures
5. Primary objective - True & fair view.
6. Secondary objective - Detection of frauds and errors.
7. Concerned with material items only.
8. If any constraints have been placed in the scope of auditor’s duty, the auditor should make
necessary disclosure in his audit report. Thereafter he should issue an audit report
containing a qualified opinion or a disclaimer opinion, whichever is appropriate.
1. Purpose: SAP1 states that “The auditor should document matters which are important in providing
evidence that the audit was carried out in accordance with the basic principles governing audit.”
2. Meaning: Documentation, for purposes of this Statement, refers to the working papers.
3. The main functions of working papers:
a. To help in the planning and performance of the audit.
b. To help in the supervision and review of the audit work.
c. Provide evidence of the audit work performed to support the auditor’s opinion.
4. Form and Content.
5. Completeness: Working papers should be sufficiently complete and detailed .
6. Extent of documentation: Is a matter of professional judgment
7. Material items: All significant matters, which require the exercise of judgment, together
with the auditor’s conclusion thereon, should be included in the working papers.
8. In case of recurring audits: Working paper files may be classified as permanent audit files,
and current audit files
9. Property of auditor: Working papers are the property of the auditor. The auditor may, at
his discretion, permit to take xerox from his working papers to his Client
a)Inspection
b)Observation
c)Inquiry.and.Confirmation
d)Computation
e) Analytical Review – Study of significant Ratios & Trends & Investigations
A/C/S I/C/S
Transactions details – nature, type etc. conduct business properly
A/c Records, supporting documents Adherence to Mgt. Policies
A/c & financial reporting process Safeguarding of assets
Timely detection of Fraud & Error etc.
where,
A) Inherent Risk
It is the susceptibility of the account balance or class of transaction to a material
misstatement either individually or when aggregated with misstatements of other
balances or classes, assuming there were no internal controls
C) Detection Risk
It is the risk that the auditor’s substantive procedures will not detect a misstatement that
exists in an account balance or a class of transactions that could be material, either
individually or when aggregated with misstatements in other balances or classes
3) Other Items
AAS-7/ SA 610
Relying Upon The Work of An Internal Auditor
Though the work of an Internal Auditor can be useful to the Statutory Auditor:-
The Statutory Auditor alone will be responsible for his report and in no way will
reduce his responsibility.
The Statutory Auditor’s conclusions as to the review of the specific work should be
properly documented, after undertaking the Test Checking the work of Internal
Auditor.
The nature, timing and extent of his tests will depend on the evaluation of the Internal
Audit function, which is affected by Organisational Status, Scope of Coverage,
Technical Competence, and Due Professional Care
AAS-8/SA 300
Audit Planning
1. Continuous & involves: Planning should be continuous and involves:
a. Developing an overall plan for the scope and conduct of the audit &
b. Developing an audit programme for implementing the audit procedures .
2. Revisions: Changes in conditions may cause revisions of the audit plan & programme.
3. Factors to be considered: In planning his audit, the auditor will consider factors such as:
a. Complexity of the audit.
b. His previous experience with the client.
c. Knowledge of the client's business.
4. The auditor needs to obtain a level of knowledge of the client's business
5. Development of an Overall Plan.
6. Documentation: The auditor should document his overall audit plan.
7. Developing the Audit Programme.
8. The preparation of audit planning & programme ideally commences at the conclusion
of the previous year's audit
AAS-9/SA 620
Using The Work Of An Expert
2) Skills of an expert
required professional qualification
Pre - Precautions: Whenever an auditor decides to rely on the work of an expert he should
AAS-10/SA 600
Using The Work Of Another Auditor
1) Introduction
Where Applicable:- Where the F/S of a component of a business are material as a
whole eg. Branch, Sales Depots etc.
How Applicable :- The audit report should expressly state the fact of the use of such
work after exercising adequate care and diligence.
1. Purpose: The purpose of this SAP is to establish standards to be applied in situations where
an auditor (herein after referred as principal auditor), reporting on the financial information
of an entity, uses the work of another auditor (herein after referred as other auditor) with
respect to the financial information of one or more branches/components included in F.S.
2. The principal auditor Can rely, unless there are special cases.
3. Perform audit procedures: When using such work, the principal auditor should:
a. Advise the other auditor of the use that is going to be made of the other auditor’s work.
b. Inform other auditor areas requiring special consideration, timetable for completion of audit.
c. Advise the other auditor of the significant accounting, auditing and reporting
requirements and obtain representation as to compliance with them.
5. Discussion or questionnaire or meet: The principal auditor may discuss with the other
auditor to answer a questionnaire or may also meet the other auditor.
6. The principal auditor may discuss with the other auditor or management affecting the
financial information of the components.
7. Supplementary tests: He may also carry out supplementary tests of the F.S. of the branch.
8. Documentation:
a. The principal auditor should document in his working papers the components (Branches)
whose financial statements were audited by other auditors, the names of the other auditors
b. Procedures performed & conclusions reached.
AAS-13
Audit Materiality
1. Meaning: significance. Any information is material if it influences the decision of the users of
F.S.
2. Criteria for materiality: purely professional judgment of the auditor. Sometimes
statutory provisions also contain the element of materiality criteria.
3. Several individual unimportant items together may become a material in total.
4. From the planning stage: SAP-13 states that while planning the audit, the auditor
should consider what would make the financial information materially misstated.
5. Change in materiality: However, the auditor’s assessment of materiality at the
concluding stage / during the course of audit may be different from that of the
materiality at the time of planning. The assessment of materiality would change
because of a change
in circumstances or a change in the auditor’s knowledge as a result of the audit.
6. Auditor should consider whether the effect of aggregate uncorrected mis-statements
on the financial information is material.
7. The aggregate of uncorrected mis-statements comprises:
a. Specific mis-statements identified by the auditor including the net effect of
uncorrected mis-statements.
b. Mis-statements which cannot be specifically identified i.e. projected errors.
8. If the aggregate of the uncorrected misstatements is material he may consider
it’s Impact in the F/S either himself or through management, otherwise, furnish
a qualified / adverse opinion
AAS – 14
Analytical Procedures
1. Purpose: SAP-5 recommends various methods of collection of evidence and among them
analytical review procedures is one of them. Analytical procedures include comparison of
financial information with prior period information, anticipated results such as budgets, and
similar industry information.
2. Applied to:
a. Consolidated financial statements.
b. Financial statements of components (i.e. Factories, Branch etc.)
c. Individual elements of financial information.
AAS – 15
Audit Sampling
1) Meaning of Some Terms for this AAS
a) Audit Sampling :-
Audit procedures carried out on less than 100 % of the items within an account
balance or a class of transactions amount to audit sampling. In view of increasing
complexities and number of transactions, the auditor may not be able to examine 100 %
of the information fully. Hence, he has to use this technique.
b) Population :-
The auditor should determine that the population from which the sample is drawn
is appropriate for that specific audit objective
c) Stratification :-
It means the sub classification of population, each of which have similar
characteristics
d) Sampling Units :-
The individual items constituting the population are called sampling units. The
auditor selects these units after considering materiality levels, homogeneity of the units
and audit objective
e) Sample Size :-
In order to decide sample size, the auditor should consider the overall population,
sampling risk, the tolerable and the expected error.
2)
a) Sampling Risk
Sampling Risk arises from the possibility that the auditor’s conclusion based on a sample
may be different from the conclusion that would have been reached if the entire population were
subjected to the audit procedure.
Sample size is affected by the amount of risk the auditor is willing to accept and has an
INVERSE relationship between them
b) Tolerable Error
The maximum errors the auditor can bear and able to frame an opinion. Tolerance level
helps in determining the sample size
c) Expected Error
If the auditor expects the presence of error in the sample then he should consider a large
sample and vice – versa.
AAS –16
Going Concern
AAS –17
Quality Control For Audit Work
1. Purpose: The purpose of this SAP is to establish standards on quality control:
a. Policies and procedures of an audit firm regarding audit work generally and
b. Procedures regarding the work delegated to assistants on an audit.
2. Two levels: Quality Control Procedures should be implemented both at the level of the
audit firm & at individual audits level.
The objectives of the quality control policies at Audit Firm
level
Professional requirements, Skill and Competence, Assignment, The work assigned to
the assistants must be properly directed & supervised, Expert consultation, Monitoring on
policies.
3. The firm’s quality control procedures should be communicated to its
personnel/assistants
so that they understood and implemented.
Quality control At Individual Audits level
4. The auditor should implement the designed quality control procedures appropriate
to the individual audit.
5. The audit supervisor shall consider the competence of assistants both at the time
of the delegating & deciding the extent of direction, supervision.
6. Manner of delegation: with due care by persons having the needed professional
knowledge.
7. Direction involves: Informing assistants of their responsibilities, informing them the
nature
of the entity business and possible accounting or auditing problems that may
affect the nature, timing and extent of audit procedures.
8. Functions of supervisor: Monitor the progress of the audit, Modifying the Audit
Programme due to the latest developments, He may request the audit personnel
to perform certain additional procedures, Settle any differences in audit opinions
between audit staff.
AAS-18
Audit Of Accounting Estimates
1. "Accounting estimate" means an estimate of the amount of an item in the absence of an
exact measurement. Examples are: Provision for taxation, Provision for a loss from a
lawsuit.
2. Management is responsible for making accounting estimates.
3. Approaches in audit: Auditor has to follow one or more methods in the audit of
estimate:
a. Review and testing the process used by management to develop the estimate.
b. Use independent estimate for comparison with that prepared by management.
c. Review subsequent events which confirm the estimate made.
8. Difference: When there is a difference between the auditor's estimate of the amount
and the estimated made by the management:
a. If the difference is small it may not require adjustment.
b. If the difference is big, management would be requested to make the adjustment.
AAS – 19
Subsequent Events
AAS – 20
AAS – 21
Consideration Of Laws & Regulations In An Audit Of Financial statements
1. Purpose: The purpose is to establish standards on the auditor’s responsibility
regarding consideration of laws and regulations in an audit of F.S.
2. Meaning of non compliance: Omission/Commission, Personal misconduct.
3. An audit cannot be expected to detect non compliance with all laws and
regulations.
4. It is the Responsibility of Management for the Compliance with Laws and
Regulations.
5. The following procedures may assist management in discharging its responsibilities
for the prevention and detection of non-compliance with laws and regulations.
a. Developing and following a Code of Conduct.
b. Ensuring employees are properly trained and understand the Code of Conduct
and punishing strictly for non compliance.
c. Establishing a legal department to assist in monitoring legal requirements.
6. The auditor should obtain representation that management has disclosed all known
actual
or possible non-compliance with laws and regulations.
AAS – 23
Related Parties
AAS – 24
Audit Considerations Relating To Entities Using Service Organizations
1) Introduction
When the client of the auditor uses a service organization for eg. Information
processing, maintenance of a/c records, maintenance of safe custody of assets
like Investments etc.
2) Auditor’s Considerations
a) The auditor should consider how a service organization affects the client’s
accounting & internal control systems
c)
Where activities of Auditor should
service org’n are
Significant
Either Or
The client’s auditor should consider whether he controls tested by the auditor of the service
organization are relevant and provide proper evidence for lowering the risk assessed by the
auditor or not. The client’s auditor may also request the auditor of the service organization to
perform substantive tests in some areas.
Most Imp: The audit report of the client should not should nor make any reference to
report received from the service organization’s auditor.
AAS – 25
Comparatives
1) Introduction
This AAS specifies that the auditor should determine whether the comparatives
comply in all material respects, with the financial reporting framework* relevant
to the F/S being audited.
2) Auditor’s Responsibilities
a) For obtaining the sufficient audit evidence, involves assessing whether the a/c
policies and the corresponding figures agree with the A/c policies of the current
period or requires adjustments, if any
b) In case the F/S of the prior period have been audited by another auditor or are
unaudited, the Incoming Auditor should comply with the requirements of
relevant Financial Reporting Framework
3) Reporting
When the auditor’s report on the prior period, as previously issued included a qualified
opinion / disclaimer of opinion / adverse opinion and the matter, which gave rise to the
modification in, the audit report is still: -
a) Unresolved, and results in a modification of the auditor’s report regarding the current
period figures, the auditor’s report should be modified regarding the corresponding
figures ; or
AAS – 26
Terms Of Audit Engagement
1) Concept
The auditor should send an engagement letter, preferably before the commencement
of the engagement, to help avoid any misunderstanding.
AAS – 27
Imp. Note:- In certain when a modification of the auditor’s report on the F/S is required
as per AAS – 28 , a qualified, adverse or disclaimer of opinion can’t be a
substitute
AAS – 28
The Auditor’s Report On Financial Statements
1) Introduction
The auditor should review & assess the conclusions drawn from the audit evidence
AAS – 29
Information Systems Environment
1) Introduction
Procedures to be followed when an audit is conducted in a Computer Information
systems (CIS) environment
5) Auditor’s Considerations
a) The CIS infrastructure and the application software used by the entity
b) Potential for Computer Assisted Audit Techniques – CAAT’s
c) Internal Controls with regard to the authorization and access to the information
d) Lack of Transaction Trials
e) Dependence of controls over computer processing
AAS – 30
External Confirmations
1) Meaning
It is the process of obtaining and evaluating audit evidence thru a direct communication
from a third party in the response to a request for information about a particular item
affecting the assertions of the management
AAS – 34
Audit Evidence – Additional Considerations For Specific Items
This AAS is a Specific Extension of AAS – 5 i.e. Audit Evidence
It is sub-divided into 4 parts
I) - Management Representation
1) The information asked for should be complete & accurate as per the requirements
2) Proper Valuation / Quantification should be complete
3) The change in the related Accounting policy, if any should be brought to the notice
of the auditor
In case, the auditor is unable to obtain sufficient audit evidence he may frame a
Qualified Opinion or Disclaimer of Opinion, as the case may be.
Similar Points :-
1) General Principles
To comply with the “Code of Ethics” issued by ICAI. The Ethical principles are
Technical Standards, Objectivity, Professional Competence, Integrity,
Confidentiality,( TOPIC ) and Due Care, Professional Conduct,
2) Terms of Engagement
As per AAS – 26 & it should be specifically mentioned in the terms of engagement
the engagement has been specifically made under this AAS.
3) Planning & Documentation
The auditor should plan the work an effective engagement can be performed in
providing evidence to support the report & evidence that the report was carried out in
Difference Points :-