SA Revision - Intermediate

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AUDIT
&
ASSURANCE
Revision class on
“Standards on Auditing”
Faculty – CA Dhananjay Bhave

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CA Dhananjay Bhave Page 1

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SA 200 - Overall Objectives of the Independent Auditor & Conduct of an Audit in

Accordance with SAs
Based on the audit evidences, expressing an opinion as to whether financial statements give a true and fair
view of the state of the company and whether they are free from material misstatement or not. The
auditor’s opinion therefore does not assure the future viability of the entity nor the efficiency or
effectiveness with which management has conducted the affairs of the entity. (SA 200)
As per SA 200, the overall objectives of the auditor are:
a) To obtain reasonable assurance about whether the FS are free from material misstatement; and
b) To express an opinion on FS.
Other points related to SA 200
1. The primary responsibility for the prevention & detection of fraud rests with Management & TCWG. It
is important that management place a strong emphasis on fraud prevention, which may reduce
opportunities for fraud to take place, and fraud deterrence (punishment), which could persuade
individuals not to commit fraud.
2. Detection & Correction of fraud & error is not the primary duty of audit. But if auditor comes across
instances of frauds & errors, then it is the part of his audit to suggest the corrective measures to avoid
the repetition of such mistakes.
What are the Basic things to be kept in mind to become a good auditor? OR What are the qualities of a
good auditor? Or what are the basic principles governing an audit
1. Integrity, objectivity & independence
2. Confidentiality
3. Skill & competence
4. Work performed by others
5. Audit evidence
6. Documentation
7. Accounting system & internal control
8. Planning
9. Audit conclusions & reporting
“Sufficiency & Appropriateness of audit evidence” (SA 500 & SA 200)

1. Sufficiency is the measure of the quantity of audit evidence.
2. The quantity of audit evidence is affected by the auditor’s assessment of the risks of misstatement.
Higher the chances of error, higher will be the number of evidences.
3. Sufficiency may be affected by the factors such as materiality, risk of misstatement & size of the
population.
4. Appropriateness is the measure of the quality of audit evidence.
5. Evidence’s relevance and its reliability in providing support to the conclusions is important.

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Compliance procedure & Substantive procedure (SA 200)

Compliance procedure is test of Controls & Substantive procedures is test of details.
The same is explained below:

Compliance procedures are tests designed to obtain reasonable assurance that those internal controls
on which audit reliance is to be placed are in effect.
Substantive procedures are designed to obtain evidence as to the completeness, accuracy and validity
of the data produced by the accounting system. They are of two types:
a) Tests of details of transactions and balances;
• Vouching (Test of Transactions)
• Verification (Test of Balances)
b) Analytical Procedures (Already discussed above)
Compliance Procedure – It is a test design to obtain reasonable assurance that the controls are effective &
efficient. Steps involved
a. Check whether there is internal control or not
b. If yes, check whether they are effective or not.
c. If effective, then check whether the controls were in place throughout the period or not.
When internal control is found to be effective, the accounting entries need not be checked substantively.
(As there is no chance for an error, there is no need of checking whether someone has done an error.). The
Accounting entries generated in a system where controls are in place are more reliable than in one where
the control is weak.
If the same auditor has conducted the audit in previous financial year and he plans to use audit evidence
from previous audit about the operating effectiveness of controls, he must check:
a) If there have been changes in the way control system works. If yes, then the auditor shall test the
controls in the current year audit also in detail.
b) If there have not been such changes, the auditor shall test some controls in the current audit to
satisfy himself about the effectiveness of controls.

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SA 210 Agreeing the Terms of Audit Engagement

SA 210 & SQC-1 requires the Auditor to obtain below information before accepting an engagement.
(i) The integrity of the Management, and TCWG.
(ii) Competence, Time & Resources available (Engagement team).
(iii) Compliance with relevant ethical requirements both of the firm & the entity;
(iv) Significant matters that have arisen during the previous audit.
Engagement Letter & its importance in Audit
1. The audit engagement letter is sent by the auditor to client.
2. It documents the objective & scope of the audit.
3. It is in the interest of both the auditor & the client to have an engagement letter so that the possibility of
misunderstanding is reduced.
4. Recurring Audits: In case of a recurring audit, the auditor may decide not to send a new engagement
letter each period. However, the following factors may make it appropriate to send a new letter:
 Any indication that the client misunderstands the objective and scope of the audit.
 Any revised or special terms of the engagement.
 A recent change in management, board of directors or ownership.
 A significant change in nature or size of the client’s business.
 Legal requirements or pronouncements of the ICAI.
5. If management imposes a limitation on the scope of the auditor’s work in the terms of audit
engagement such that the auditor believes the limitation will result in making it difficult to carry his
audit work, the auditor shall not accept such a limited engagement.
6. Acceptance of a Change in Engagement - A request from the client for the auditor to change the
engagement may come in the mid of the audit. The auditor would consider carefully the reason given
for the request, particularly the implications of restriction on his work. Auditor should not agree to a
change of engagement where there is no reasonable justification for doing so. If the auditor is unable
to agree to a change of the terms of the audit engagement and is not permitted by management to
continue the original audit engagement, the auditor shall withdraw from the audit engagement.

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SA 220 - Quality Control for Audit Work (SQC-1)

1. Engagement partner: the partner or other person in the firm who is a member of ICAI and is in full
time practice and is responsible for the engagement and its performance, and for the report that is
issued on behalf of the firm.
2. Quality control systems, policies & procedures are the responsibility of the audit firm.
3. This SA mainly covers below:

a. Responsibility of Leadership
b. Ethical requirements
c. Acceptance & Continuance of client relationship
d. Human Resource Management – Training, Appraisal.
e. Monitoring
f. Documentation
4. Engagement Quality Control Review (EQCR) - For audits of listed entities, and those other audits
for which the firm has determined that an EQCR is required, the engagement partner shall:
a. Appoint an EQC Reviewer.
b. Discuss significant matters arising during the audit with the EQCR; and
c. Do not sign the auditor's report until the completion of the EQCR.
5. Summary of Audit documentation is called “Completion memorandum”.
Assembly of the Final Audit File should be done within 60 days from the date of the auditor’s
report. (SQC-1).
Auditor should preserve these working papers for seven years from the date of Auditors Report
(SQC-1)
The auditor may consider it helpful to prepare and retain as part of the audit documentation a
summary (sometimes known as a completion memorandum) that describes-
The significant matters identified during the audit And How they were addressed.

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SA 230 – Documentation
 Audit Documents are often called as Audit working papers.
 The audit working papers constitute the link between auditor’s report & client’s records.
 Audit Documentation refers to the record of audit procedures performed, relevant audit evidence
obtained & conclusions the auditor has reached.
 The objects of an auditor’s working papers are to record & demonstrate the audit work from one year
to another.
Audit documentation serves a number of purposes (Advantages of working papers) (SA 230)
 Assisting the engagement team to plan & perform the audit.
 Enabling the audit team to be accountable for its work.
 Retaining a record of matters of continuing significance to future audits.
 Enabling the conduct of external inspections in accordance with applicable legal, regulatory
requirements.
 It provides guidance to the audit staff with regard to the manner of carrying the audit work.
 It can be used by the auditor as a defense in the court of law when charged with the duty of
negligence.
 Classification of audit working papers (SA 230)

Permanent working paper file: This file consists of papers which are relevant for Review by audit staff
prior to the commencement of audit. This file is maintained in the auditor’s office & used by the audit
staff for reference purpose. The documents in this file will not normally change every now & then. The
Current working paper file: This file consists of the papers required by the audit staff while performing
the current period audit. This file will change from audit to audit.
 Ownership of working papers (SA 230)
 The working papers are the property of the Auditor. The auditor should take proper measures for
custody & confidentiality of his working papers.
 The working papers should be retained for a sufficient length of time to meet the needs and satisfy
any legal or professional acquirements of record retention.
 Auditor is not required to provide the working papers to his client or the other auditors of the same
enterprise. However auditor, at his discretion, may give copies of his working papers to his clients
or other auditors. One of the basic principles governing an audit is confidentiality. Hence the
auditor should maintain the information in the working papers in confidential.

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SA 250 - Consideration of Laws and Regulations in an Audit of Financial

Statements
1. The responsibility for the prevention and detection of non-compliance rests with management.
2. An audit cannot be expected to detect non-compliance with all laws and regulations.
3. Indications that Non-compliance may have occurred:

a. Investigation by government departments or payment of fines or penalties.
b. Payments for unspecified services to consultants, related parties or government employees.
c. Purchases at prices significantly above or below market price.
d. Unusual payments in cash and other unusual transactions.
e. Unusual transactions with companies registered in tax havens.
4. The auditor is responsible for obtaining reasonable assurance.
5. When Non-compliance is discovered, obtain an understanding to evaluate the possible effect on FS.
6. Auditor may withdraw, when the entity does not take the remedial action that the auditor considers
necessary, even when the non-compliance is not material to FS.
SA 299 - Responsibility of Joint Auditors

1. Joint audit refers to audit of financial statements of business by more than one auditor. This SA does
not deal with the Branch Auditors.
2. Where joint auditors are appointed, they should, by mutual discussion, divide the audit work
among themselves.
 Geographical basis: East, West, North & South or State wise etc.
 Functional basis: Purchase, Sales, Production, Marketing, Selling etc.
 Financial statement basis: P&L Account & Balance Sheet
 Time period basis
3. The division of work among joint auditors should be documented & preferably communicated to
the entity.
4. For audit work divided among the joint auditors, each joint auditor is responsible only for the work
allocated to him.

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5. On the other hand, all the joint auditors are jointly and severally responsible:
 In respect of the audit work which is not divided;
 In respect of decisions taken by all the joint auditors that a particular item be audited by
everyone.
 In respect of matters which are brought to the notice of the joint auditors by any one of them
and on which there is an agreement among the joint auditors;
6. Normally, the joint auditors are able to arrive at an agreed report. However, where the joint
auditors are in disagreement with regard to any matters to be covered by the report, each one of
them should express his own opinion through a separate report.
7. A joint auditor is not bound by the views of the majority.
SA 300 – Audit Planning

As per SA 300 - Before preparing an audit strategy, Auditor shall-
a) Understand the scope of work as agreed in engagement letter
b) Consider the important areas that would require more time & efforts of the engagement team;
c) Ascertain the nature, timing and extent of resources necessary for the engagement.
Once the overall audit strategy has been established, an audit plan can be developed.
The establishment of the overall audit strategy and the detailed audit plan are not necessarily discrete or
sequential processes, but are closely inter-related since changes in one may result in consequential changes
to the other.
Auditor is not under any compulsion to share his audit strategy or plan or programme. However, at his
discretion, he may do so.
Management cannot advice/request for change in such audit strategies.
1. The term planning refers to the aspect of looking into the Future. Audit plan is considered as a
Standard Audit Practice to be followed before commencing the work.
2. Planning is done both for New and Recurring audits. It is generally prepared by the audit - in - charge
and submitted to the partner for Review.
3. Planning is not a ‘one time’ process. It is done throughout the audit & can undergo changes in the
course of audit (SA 300).
4. Advantages of Planning (SA 300)

a) Appropriate attention is devoted to important areas of the audit;
b) Potential problems are promptly identified;
c) Work is completed properly and in time;
d) Assistants are utilised properly; and
e) Work done by other auditors and experts is coordinated.

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Points to be kept in mind while preparing an audit plan –
1. Preliminary Engagement activities - Understanding the terms of the engagement.

2. Knowledge of the client’s business - Understanding the business, its processes gives the auditor a
clarity on the Nature, Timing & Extent of Audit procedures to be adapted.
3. Complexity of the audit - The scope of work and reporting responsibilities should be taken into account
in determining the complexity of audit.
4. Environment in which the entity operates - This enables the auditor to understand various operational
aspects of audit, e.g., extent of computerization.
5. Previous experience with the client - By reviewing the previous year’s audit working papers, auditor
will pay attention to matters that require special attention.
6. Discussion with client: The auditor can discuss his plan & certain audit procedures with the client to
improve the efficiency of the audit and to coordinate with client’s personnel. The overall audit plan
however, remains the auditor’s responsibility.
7. Auditor should keep in mind the time & human resource required for each off his area.
SA 315 - Identifying & Assessing the Risk of Material Misstatement by

Understanding the Entity & its Environment
As per SA 315, Auditor should obtain an understanding of the following: Industry, regulatory factors;
Nature of entity; Selection and application of accounting policies; Objectives and strategies & related
business risks; Measurement and Internal control.
Auditor must obtain an understanding of entity and its environment at the beginning of the audit.
Auditors are required to relate identified risks to what can go wrong.
Auditor should consider -
- Potential magnitude of risks in the context of FS, Consider the likelihood that risks could result in a
material misstatement of FS. Auditor should document
 Discussion among engagement team;
 Key elements of understanding obtained;
 Sources of information;
 Risk assessment process; the identified &assessed risks;
As part of the risk assessment, the auditor shall determine whether any of the risks identified are, in
the auditor’s judgment, a significant risk. In exercising this judgment, the auditor shall exclude the
effects of identified controls related to the risk.
In exercising judgment as to which risks are significant risks, the auditor shall consider at least the
following-
(i) Whether the risk is a risk of fraud;
(ii) Whether the risk is related to recent significant economic, accounting or other
developments like changes in regulatory environment etc. and therefore requires
specific attention;
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(iii) The complexity of transactions;

(iv) Whether the risk involves significant transactions with related parties;
(v) The degree of subjectivity in the measurement of financial information related to the
risk, especially those measurements involving a wide range of measurement
uncertainty; and
(vi) Whether the risk involves significant transactions that are outside the normal course
of business for the entity or that otherwise appear to be unusual.
SA 320 - Materiality in Planning and Performing an Audit

1) As per SA 320, Information is material if its misstatement could influence the economic decisions of
users of financial information.
2) As per SA 320, Materiality should be considered by the auditor when:

 Determining the nature, timing and extent of audit procedures
 Evaluating the effect of misstatements
3) Materiality of an item can be judged:

d. From the impact that the item has on P&L or on Balance Sheet, and
e. On its comparison with the corresponding figure of the previous year.
4) As per SA 320, Whether a particular item is material or not can be judged from below characters (These
are also called as benchmarks):
a) Its size/amount.
b) Its nature (Ex: abnormal, non-recurring, extraordinary etc.).
c) Its legal requirements (Ex: Securities premium used for payment of dividend).
d) Its qualitative materiality (Ex: Fraud committed by managing director of small amount).
e) The auditor needs to consider the possibility of misstatements of relatively small amounts that,
cumulatively, could have a material effect on the financial information. (Ex: An error of Rs. 10 in
calculation of monthly interest in each savings account by Bank).
f) The auditor’s determination of materiality is a matter of professional judgment.
5) Performance materiality means the amount set by the auditor at less than materiality level to reduce
the detection risk. Performance materiality is relevant for auditor to decide whether an item needs to
verified or not. (SA 320)
Materiality refers to the state where financial data has the ability to affect decisions of users if some
information is misstated, omitted, or not disclosed. But, performance materiality refers to the amount of
variation that can exist in individual accounts due to errors without affecting the auditor’s opinion
regarding the objectivity of financial statements. So basically performance materiality level will be below
materiality level.

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6) Higher the materiality, lower is the risk of misstatement. Generally management/ employees don’t
commit fraud in high value items. Moreover, as a general practice, auditor checks high value items in
detail. Thus it is less risky that high value fraud and error may not be detected. So, high materiality
level leaves audit risks at lower degree.
7) The auditor shall revise materiality during the course of audit. (SA 320)
SA 500 - Audit Evidence
 The audit evidence is the information used by Auditor in arriving at the conclusions on which the
auditor’s opinion is based (SA 500)
Reliability of audit evidence increases when (SA 500)
 It is obtained from independent sources.

 Obtained directly by auditor.
 Obtained as a document instead of being oral.
 Supported by Original documents.
 Obtained with sufficient details.
 External evidences are more reliable than internal evidence in some cases.
How to obtain the evidences?
Methods of obtaining Evidence (SA 500)
 Inspection
 Observation
 External Confirmation
 Recalculation & Re-performance
 Analytical Procedures
 Inquiry

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SA 501 - Audit Evidence – Additional Considerations for Specific Items

Part A: Attendance at Physical Inventory Counting
• Physical verification of inventories is the responsibility of the management.

• The auditor should obtain evidence regarding its existence & condition by attendance at physical
inventory.
• If he is unable to attend the physical inventory count on the date planned, attend on alternative date
and perform alternative audit procedures to assess the changes..
• When inventory is under the custody and control of a third party, the auditor would ordinarily
obtain direct confirmation from the third party.
• Obtain a written representation from management concerning the completeness of information
provided regarding the inventory & adherence to laid down procedures
Part B: Inquiry Regarding Litigation and Claims
• Claims and Litigation, if results to:

a) Probable obligation - Create ‘Provision’
b) Possible obligation - Disclosure as ‘Contingent Liability’.
• Audit Procedure to be followed by auditor:
a) Make appropriate inquiries with management.
b) Review BOD minutes and correspondence with the entity’s lawyers.
c) Examine legal and other relevant expense accounts.
d) Use any other information obtained (Ex: discussions with in-house legal team)
• When litigation or claims have been identified by the management or when the auditor believes
they may exist, and are likely to be material, the auditor may seek direct communication with
entity’s lawyers.
• Obtain a written representation from management concerning the completeness and adequacy of
information provided.
Part C: Segment Information
• As per AS-17 on ‘Segmental Reporting’, the Company is required to disclose segmental information
in notes to accounts.
• The auditor should perform audit procedures designed to obtain sufficient appropriate audit
evidence for appropriate disclosure of segment information
• The auditor is not required to apply auditing procedures that would be necessary to express an
opinion on the segment information. Audit procedures regarding segment information ordinarily
consist of analytical procedures.
• The auditor would discuss with management the methods used in determining segment
information, and consider whether such methods are likely to result in proper disclosure and test
the application of such methods.
• Obtain a written representation from management concerning completeness of information; and
appropriateness of the selected segments.

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SA 505 – External Confirmation

 An external confirmation represents audit evidence obtained by the auditor as a direct written response
to the auditor from a third party (the confirming party). i.e., Bank statement, Debtors account
statement.
 External confirmation is always considered for main suppliers, customers, bank account balances etc. to
make sure that the major asset balances are not misstated.
 Process of external confirmation (SA 505)
 Determining information to be confirmed;
 Selecting the appropriate confirming party;
 Designing the confirmation requests in the letterhead of Auditor; and
 Sending the requests, including follow-up with the confirming party.
Additional points from SA 505
 Positive confirmation request: A request that the confirming party shall respond whether the
confirming party agrees or disagrees with the information in the request.
 Negative confirmation request: A request that the confirming party shall respond only if the
confirming party disagrees with the information provided in the request.
 If management refuses to allow the auditor to send confirmation request, then auditor shall
 Inquire management the reasons for refusal;
 Evaluate the implications of management's refusal
 If satisfied with management’s reason, perform alternative audit procedures.

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SA 510 - Initial Engagement – Opening Balances

1. Initial Engagement is an engagement where:
 FS are audited for first time; or
 FS for P.Y. were audited by another auditor
2. Auditor should obtain Audit Evidence that:

a. Closing Balance of Previous year has been correctly brought forward;
b. The opening balance does not contain a material mis-statement;
c. Accounting policies are consistently followed
3. Audit should read most recent FS for checking whether they are correctly brought forward. If the
prior period’s FS were audited by a predecessor auditor and there was a modification to the
opinion, the auditor shall evaluate the effect of the matter in the current period’s FS.
SA 520 - Analytical Procedure

As per SA 520 - Analytical Procedures means evaluation of financial information through analysis of
relationships among both financial and nonfinancial data.
Nature and Purpose of Analytical Procedures (SA 520)
 Analytical procedures include comparisons of the financial information with,

a) Comparable information for prior periods.
b) Anticipated results of the entity, such as budgets or forecasts.
c) Predictive estimates prepared by the auditor, such as an estimation of depreciatio.
d) Similar industry information, such as a comparison of the entity’s ratios with industry
averages, or with other entities of comparable size in the same industry.
 Analytical procedures also include consideration of relationships:
a) Among elements of financial information, such as gross margin percentages.
b) Between financial information and relevant non-financial information, such as payroll costs
to number of employees.
Analytical procedures generally take one of the following forms:
1) Trend analysis – A commonly used technique is the comparison of current data with the prior
period balance or with a trend in two or more prior period balances. We evaluate whether
the current balance of an account moves in line with the trend established with previous balances
for that account, or based on an understanding of factors that may cause the account to change.

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2) Ratio analysis – Ratio analysis is useful for analysing asset and liability accounts as well as
revenue and expense accounts. An individual balance sheet account is difficult to predict on its
own, but its relationship to another account is often more predictable (e.g., the trade receivables
balance related to sales). Ratios can also be compared over time or to the ratios of separate
entities within the group, or with the ratios of other companies in the same industry.
3) Reasonableness tests – Unlike trend analysis, this analytical procedure does not rely on events
of prior periods, but upon non-financial data for the audit period under consideration
(e.g., occupancy rates to estimate rental income or interest rates to estimate interest income
or expense). These tests are generally more applicable to income statement accounts and
certain accrual or prepayment accounts.
Extent of Reliance on Analytical Procedures (SA 520)

The extent of reliance that the auditor places on the results of analytical procedures depends on
the following factors:
a) Materiality of the items involved, for example, when inventory balances are material, the
auditor does not rely only on analytical procedures
b) Other audit procedures directed toward the same audit objectives
c) Accuracy with which the expected results of analytical procedures can be predicted.
d) Assessments of Control risks, for example, if internal control over sale transactions is weak and,
therefore, control risk is high, more reliance on tests of details should be placed than on analytical
procedures.
Investigating Unusual results (SA 520)
a) Inquiry with management
b) Further investigation & performing other audit procedures –
The need to perform other audit procedures may arise when, for example, management is unable to
provide an explanation, or the explanation, together with the audit evidence obtained relevant to
management’s response, is not considered adequate.

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SA 530 - Audit Sampling

1. Audit sampling refers to the application of audit procedures to less than 100% of items within a
population, such that all sampling units have a chance of selection in order to provide the auditor with
a reasonable basis on which to draw conclusions about the entire population. (SA 530)
2. The auditor should consider few factors in order to adopt Test Checking.
Such factors are -
 Size of the organization under audit.
 State of the internal control.
 Adequacy and reliability of books and records.
 Tolerable error range.
 Degree of the desired confidence.
3. Precautions to be taken by auditor before going for Sampling

 The transactions of the concern should be classified under appropriate heads and may be stratified
(grouped) if wide variations are there between transactions of the same kind.
 The whole of the system of internal control should be studied and evaluated for its efficiency,
soundness and capability for producing reliable accounting data. This can be done by studying the
controls. If the internal controls are strong, number of samples can be less and Vice-versa.
 Identification of the areas where test check may not be done. For example, if there are only 20
Export sales in the year and all invoices are High Value invoices, it is better to do 100% checking as
the numbers of transactions are less & amount is also material.
Items those are not suitable for Sampling (Test Checking) – NO LIFE
N-Non recurring, O-Opening & Closing balance, L-Law, I-Important, F-Fixed Asset, E-Estimation
 Opening and closing entries.
 Bank Reconciliation Statement.
 Fixed asset purchases.
 Matters involving estimation as well as computation, e.g., depreciation, royalty etc.
 Transaction that may be small in number but important e.g., Penalties & interest.
 Transactions, which are recognized by law to be looked into by the auditor carefully e.g.,
managerial remuneration, dividends etc.
 Transactions of non-recurring nature or exceptional transactions. e.g., insurance claim.

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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 be reached if the entire population were subjected to the same
audit procedure.
Non-Sampling Risk:
The risk that the auditor reaches an erroneous conclusion for any reason not related to sampling risk.
Sources of Non-Sampling risk are:
 Human Mistakes
 Misinterpreting the sample results
 Applying audit procedures not appropriate to the objectives of audit
 Relying on erroneous information
SA 550 - Related Parties
1. As per the standard, Management is responsible for the identification and disclosure of related
parties.
2. The objectives of the auditor is to obtain an understanding of related party relationships &
transactions sufficient to be able:
a. To recognise fraud risk factors, if any, arising from related party relationships and
transactions; and
b. To conclude whether the FS, in so far as they are affected by those relationships &
transactions achieve a true and fair presentation; or are not misleading.
3. Auditor should obtain evidences about whether related party relationships & transactions have
been appropriately identified, accounted and disclosed as per the applicable accounting standards.
4. Auditor should Inquire of management regarding:
 The identity of the entity's related parties;
 The nature of the relationships; and
 Transactions with related parties.

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SA 560 – Subsequent Events

1. Subsequent events means, significant events which occurs after the BS date but before the date of
the auditor’s report.
2. As per AS 4, there are two types:
 Adjusting Events: Provides additional evidence as to conditions that existed at the BS date.
They are adjusted in books.
 Non-adjusting Events: Do not provide additional evidence as to conditions that existed at
the BS date. If material, they are disclosed in BOD Report.
Non-adjusting Events which affects the going concern status will be treated as an Adjusting
event.
3. The procedures to be followed by Auditor:
 Reviewing Mgmt. procedures to identify the subsequent events.
 Reading minutes of the meetings of SHs & BOD.
 Read entity's latest available Interim FS, budgets, cash flow forecasts.
 Inquiring with entity's lawyers regarding the status of litigation and claims.
 Inquiring Mgmt. as to whether any subsequent events have occurred after the BS date.
4. Facts Known After the Date of Auditor’s Report but Before the FS are Issued -
a. Discuss with Mgmt.
b. Determine whether FS need amendment;
c. Inquire how Mgmt. intends to address the issue.
Management’s
response
Agrees to amend the Does not agree to

FS amend FS
Auditor should- Auditor should-
Check the amendments; and If Report has not yet provided to entity, modify the
opinion; or
Provide a new auditor’s report on
the amended FS. If report is already provided, request Mgmt. not to issue FS
to third parties. If Mgmt. issues, take appropriate action, to
prevent reliance on auditor’s report.

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5. Facts Known after the FS have been Issued

 Discuss with Mgmt.
 Determine whether FS need amendment;
 Inquire how Mgmt. intends to address the issue.
Management’s
response
Agrees to amend the Does not agree to

FS amend FS
Auditor should extend the audit procedures for Auditor should Take appropriate
amendments; action, to prevent reliance on
auditor’s report.
Review the steps taken by mgmt. to inform others about
amendment; and Provide a new auditor’s report on the
amended FS.

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SA 570 – Going Concern

1. Going Concern is one of the fundamental accounting assumptions (AS 1).
2. Going Concern means entity has neither the need nor the intention to liquidate the business.
3. Auditor should obtain audit evidence regarding appropriateness of going concern assumption.
4. Indicators that question going concern:
 Financial indicators:
i. Adverse key financial ratios.
ii. Substantial operating losses.
iii. Substantial negative cash flows from operations.
iv. Discontinuance of dividends.
v. Inability to pay creditors on time.
vi. Difficulty in complying with the terms of loan agreements.
 Operating indicators:
vii. Loss of KMP.
viii. Loss of a major market, franchise, Licence, or supplier.
ix. Labour difficulties.
 Other indicators:
x. Non-compliance with statutory requirements.
xi. Pending legal cases that may result in huge liability.
xii. Changes in legislationor government policy.
5. Audit procedures when events or conditions are identified:
a. Reviewing subsequent events;
b. Review compliance with debts;
c. Budgeted cash-flow;
d. Minutes of meeting;
e. Feasibility of clients' recovery plan
Going Concern
Assumption
Going concern assumption is appropriate but Going concern

material uncertainty exists assumption is NOT
appropriate
If adequate disclosure is made in If adequate disclosure is Adverse Opinion

FS, Then Auditor shall issue not made in FS, then
unmodified opinion but draw auditor must issue
attention to the matter by way of qualified or adverse
separate paragraph in audit opinion
report.

Yeshas Academy
SA 580 – Representation by Management

1. Written representations are written statement by management, provided to the auditor to confirm
certain matters or to support other audit evidence.
2. Although written representations are audit evidences, they do not provide sufficient appropriate
audit evidence on their own.
3. Basic elements of Management Representation Letter
a. The letter should be addressed to the auditor
b. The date of the letter should be the same date as the auditor's report or a date prior thereto.
c. Confirmation from management that they acknowledge their responsibility of preparation
of FS.
d. Areas/Points on which management wants to provide a representation.
e. The letter should be signed by responsible officials of the management like Managing
Director
4. Representations by management cannot be a substitute for other audit evidence. They are the last
way of getting audit evidences, when no other evidences are available in the circumstance (Ex:
Intention to hold investment for classification of Investment as Long term Investment or Current
Investment).
5. Where the representation is obtained on matters which are material to the financial information, the
auditor should:
a. Seek corroborative evidence (other evidence which confirms the representations given by
management);
b. Evaluate the reasonableness and consistency of such a representation with other audit
evidence;
6. In case management is not willing to give in writing the representations made by it, the auditor
should himself prepare a letter in writing and send it to the management with a request to
acknowledge and confirm it. If the management refuses to acknowledge or confirm the letter sent
by the auditor, this will constitute a limitation on the scope of his audit. He may consider giving a
disclaimer of opinion.

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SA 610 (Revised) – Relying upon the Work of Internal Auditor
1. This SA deals with whether Statutory Auditor can use the work performed by Internal Auditor.
2. While determining whether to use the work done by internal auditor or not, auditor shall
evaluate-
 The competence of internal auditor
 Determine the extent to which internal auditor has discharged his function effectively.
 Check whether internal auditor apply a systematic and disciplined approach
3. If using the work of the internal audit function, the external auditor shall
discuss the planned use of its work with internal auditor and read the reports of the internal
audit & discuss the same with internal auditor, if necessary.
4. Ultimately Statutory Auditor is responsible for negligence in discharging his duty as only
statutory auditor will be signing the Statutory Audit report.
5. If Statutory Auditor wishes to involve internal auditor, then Statutory Auditor should
• Obtain written agreement from management that the internal auditors will be allowed to
follow the external auditor’s instructions, and that the entity will not intervene;
• Obtain written agreement from the internal auditors that they will maintain confidentiality.
• The external auditor shall direct, supervise and review the work performed by internal
auditors.

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SA 700 - The Auditor’s Report on Financial Statements

Auditor should form an opinion on the FS based on the conclusions drawn from the audit evidence
obtained; and express clearly through a written report including the basis for such opinion.
ELEMENTS OF AUDIT REPORT
1) Title - The auditor’s report shall have a title that clearly indicates that it is the report of an
independent auditor.
2) Addressee - The auditor’s report shall be addressed, as appropriate, based on the circumstances of
the engagement.
3) Auditor’s Opinion
1. Auditor’s report shall include the auditor’s opinion, and shall have the heading
“Opinion.”
2. The Opinion section of the auditor’s report shall also:
a) Identify the entity whose FS have been audited;
b) State that the FS have been audited by the Firm;
3. When expressing an unmodified opinion the auditor shall, use one of the following
phrases, which are regarded as being equivalent:
a) In our opinion, the accompanying FS present fairly the state of affairs of the company.
b) In our opinion, the accompanying FS give a true & fair view
4) Basis for Opinion
The auditor’s report shall include a section, directly following the Opinion section, with the
heading “Basis for Opinion”, that:
a) States that the audit was conducted in accordance with Standards on Auditing;
b) Refers to the section of the auditor’s report that describes the auditor’s responsibilities;
c) Includes a statement that the auditor is independent of the entity in accordance with the
relevant ethical requirements relating to the audit, and has fulfilled the auditor’s other ethical
responsibilities in accordance with these requirements.
d) States whether the auditor believes that the audit evidence the auditor has obtained is
sufficient and appropriate to provide a basis for the auditor’s opinion.

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4) Going Concern - Where applicable, the auditor shall report in accordance with SA 570.
5) Key Audit Matters – (SA 701) - For audits listed entities, the auditor shall communicate key
audit matters in the auditor’s report in accordance with SA 701.
6) Responsibilities for the FS- This section of the auditor’s report shall describe management’s
responsibility for preparing the FS in accordance with the AFRF, and for such internal control to enable
the preparation of FS that are free from material misstatement, whether due to fraud or error.
7) Auditor’s Responsibilities for the Audit of the FS
1. The auditor’s report shall include a section with the heading “Auditor’s
Responsibilities for the Audit of the FS.”
2. This section of the auditor’s report shall:
a) State that the objectives of the auditor are to:
i) Obtain reasonable assurance about whether the FS as a whole are free from material
misstatement, whether due to fraud or error; and
ii) Issue an auditor’s report that includes the auditor’s opinion.
8) Other reporting responsibility- This section shall cover the auditor’s responsibility to report on
other legal & regulatory requirements such as CARO (to be discussed later in the chapter).
9) Signature of the Auditor

The auditor’s report shall be signed.
 If he is Sole Proprietor – He should sign in his personal name.
 If it is firm – He should sign in his personal name & mention the audit firm name as well.
 The Proprietor/Partner signing the audit report needs to mention the membership
number assigned by the ICAI.
 They also include the Firm Registration Number (FRN) (allotted by ICAI) in the audit
reports signed by them.
10) Place of Signature

11) Date of the Auditor’s Report

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SA 701– Communicating Key Audit Matters in Independent Auditor’s Report
1. Key audit matters are those matters that, in the auditor’s opinion, were of most significance in the
audit of the current period. Key audit matters are selected from matters communicated with
management & those charged with governance.
2. The purpose of communicating key audit matters is to enhance the communicative value of the
auditor's report.
3. Communicating key audit matters is NOT:
• Substitute for disclosures in the financial statements
• Substitute for the auditor expressing a modified opinion
• Substitute for reporting in accordance with SA 570
4. In making this determination, the auditor shall consider following:

• Areas of higher risk of material misstatement, or risks identified (SA 315).
• Areas that involved estimates identified as having high uncertainty.
• Significant events or transactions that occurred during the period.

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SA 705 - Modifications to the Opinion in the Independent Auditors Report

 Following are the 4 types of Audit opinions (Audit reports).
 Clean report is called Unmodified/Unqualified report. (SA 700)
 Qualified, Adverse, Disclaimer opinions are called Modified Reports (SA 705)
Audit report
Clean report or
Qualified audit Disclaimer
unqualified Adverse report
report report
report
Clean Report or Unqualified report (SA 700)

a) A clean report (Unconditional, Unqualified, Unmodified report) is issued by the auditor when he
does not have any reservations with regard to the matters contained in the FS.
b) In such a case, the audit report may state that the FS show a true & fair view of the state of affairs.
c) For issuing this type of report, the auditor need not state any reasons.
Qualified Audit Report: (SA 705)

a) Qualified report is one in which the auditor gives true & fair view of the company “subject to certain
reservations”.
b) The Seriousness or Materiality of such reservations will vary depending upon the circumstances. In
majority of the cases the reservations may not be so material.
c) In case of a qualified audit report the following wording should appear-
d) “The Book of Accounts shows a True & Fair View Subject to the items mentioned in basis paragraph”.
e) Accordingly, whenever the auditor issues a qualified audit report he should “state the reasons” for
such qualifications.
Adverse Report: (SA 705)

1) The Auditor issues Adverse (Negative) report when the FS does not show a true & fair view of the state
of affairs of the organization.
2) The auditor considers the Materiality of an item while issuing adverse report. If the reservations are not
so material to negate the opinion, then he may issue Qualified Report. But if the reservations are highly
material then it is advisable to issue adverse report.
3) The auditor is required to “Specify the Reasons” on the basis of which he gave a negative report.

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Disclaimer of Opinion: (SA 705)

a) When the auditor fails to obtain sufficient Information to warrant an expression of opinion, and thus, is
unable to form an opinion, he may issue a disclaimer of opinion.
b) Accordingly, the auditor may state that he is unable to express an opinion because he has not been able
to obtain sufficient and appropriate audit evidence to form an opinion.
c) The reason may be - “Books are Seized by excise authorities or Destroyed in Fire” etc.
d) In case he is unable to obtain audit evidence even from Alternative sources, then the auditor can only
state that he is unable to form an opinion.
Which report to be issued by auditor?
Pervasiveness – It means that the item is spread everywhere in the Financial Statements. These are not
confined to specific elements, accounts or items of FS.
Example – If there is a misstatement in Bad debt provision, it impacts only 1 or 2 ledgers. So its not
pervasive. But if Cash ledger is incorrect, then it impacts so many ledgers that the seriousness about the
misstatement would be more.
No. Case Type of Report
1 Auditor verifies all evidences & concludes that there are not Misstatements. Clean
Auditor verifies all evidences & concludes that Misstatements are Material &
2 Adverse
Pervasive.
Auditor verifies all evidences & concludes that Misstatements are Material &
3 Qualified
But not Pervasive.
Auditor Fails to obtain evidences & But he believes that Misstatements are
4 Disclaimer
Material & Pervasive
Auditor Fails to obtain evidences & But he believes that Misstatements are
5 Qualified
Material & but not Pervasive

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SA 706 - Emphasis of Matter (EOM) Paragraph & Other Matter (OM) paragraph
 EoM Para: A Para included in auditor’s report that refers to matter appropriately presented in FS
that, in auditor’s judgment is of such importance that is fundamental to user’s understanding of FS.
Ex: Material Pending Litigation, Early Application of Voluntary Accounting Standards.
 OM Para: A Para included in auditor’s report that refers to matter NOT in FS that in auditor’s
judgment is relevant to user’s understanding.
Ex: Number of Branches/Subsidiaries Audited by Other Auditors, Prior period FS audited by
predecessor (another) auditor.
 Both these paras are included in auditor’s report to draw user’s attention, when in auditor’s
judgment it is necessary to do. EOM Para comes after “Key Audit Matters”. OM Para comes after
EOM Para.
 If the auditor expects to include an Emphasis of Matter or an Other Matter paragraph in the
auditor’s report, the auditor shall communicate with management regarding this expectation and
the proposed wording of this paragraph.
 Inclusion of these paras in Audit report doesn’t mean it is an adverse / disclaimers / qualified
opinion.

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SA 710 – Comparatives
1) This SA deals with Auditor's responsibility regarding Comparative Information in audit of FS.
2) Comparative Information or Comparatives are those amounts for prior period that are included as
integral part of current period FS. The Auditor's opinion refers to current period only, which
included comparative information.
3) The auditor shall evaluate whether:

 The comparative information agrees with amounts in prior period.
 Accounting policies are consistently followed.
4) If auditor becomes aware of possible material misstatement in the comparative information, the
auditor shall perform such additional procedure as appropriate.
5) Material misstatement in prior period FS on which unmodified opinion was given, auditor shall verify
whether the misstatement has been dealt with & if NOT, Current year’s FS should be modified w.r.t.
corresponding figures.
6) If previous audit report modified & matter not resolved:

 Current year report will be modified for both, if the item is affecting CY's figures. Ex: Previous
Year Closing Stock.
 If NOT affecting CY's figures, then also CY's FS Modified with respect to corresponding figures.
Ex: Previous year provision for repairs.
7) If Prior period FS are audited by predecessor auditor OR Prior period FS are not at all audited, then
Current year Auditor must state that in “Other Matter Paragraph”.
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Yeshas Academy

Faculty – CA Dhananjay Bhave

CA Dhananjay Bhave Page 1

SA 200 - Overall Objectives of the Independent Auditor & Conduct of an Audit in

Other points related to SA 200

“Sufficiency & Appropriateness of audit evidence” (SA 500 & SA 200)

CA Dhananjay Bhave Page 2

Compliance procedure & Substantive procedure (SA 200)

The same is explained below:

CA Dhananjay Bhave Page 3

SA 210 Agreeing the Terms of Audit Engagement

1. The audit engagement letter is sent by the auditor to client.

2. It documents the objective & scope of the audit.

CA Dhananjay Bhave Page 4

SA 220 - Quality Control for Audit Work (SQC-1)

3. This SA mainly covers below:

5. Summary of Audit documentation is called “Completion memorandum”.

CA Dhananjay Bhave Page 5

 Classification of audit working papers (SA 230)

 Ownership of working papers (SA 230)

CA Dhananjay Bhave Page 6

SA 250 - Consideration of Laws and Regulations in an Audit of Financial

3. Indications that Non-compliance may have occurred:

4. The auditor is responsible for obtaining reasonable assurance.

SA 299 - Responsibility of Joint Auditors

CA Dhananjay Bhave Page 7

7. A joint auditor is not bound by the views of the majority.

SA 300 – Audit Planning

4. Advantages of Planning (SA 300)

CA Dhananjay Bhave Page 8

Points to be kept in mind while preparing an audit plan –

1. Preliminary Engagement activities - Understanding the terms of the engagement.

SA 315 - Identifying & Assessing the Risk of Material Misstatement by

(iii) The complexity of transactions;

SA 320 - Materiality in Planning and Performing an Audit

2) As per SA 320, Materiality should be considered by the auditor when:

3) Materiality of an item can be judged:

CA Dhananjay Bhave Page 10

SA 500 - Audit Evidence

Reliability of audit evidence increases when (SA 500)

 It is obtained from independent sources.

How to obtain the evidences?

Methods of obtaining Evidence (SA 500)

 Recalculation & Re-performance

CA Dhananjay Bhave Page 11

SA 501 - Audit Evidence – Additional Considerations for Specific Items

• Physical verification of inventories is the responsibility of the management.

Part B: Inquiry Regarding Litigation and Claims

• Claims and Litigation, if results to:

Part C: Segment Information

CA Dhananjay Bhave Page 12

SA 505 – External Confirmation

Additional points from SA 505

CA Dhananjay Bhave Page 13

SA 510 - Initial Engagement – Opening Balances

2. Auditor should obtain Audit Evidence that:

SA 520 - Analytical Procedure

Nature and Purpose of Analytical Procedures (SA 520)