01 Introduction & Chapter-1

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Nature, Scope and Objective of Audit

ICAI
The Institute of Chartered Accountants of India (ICAI) is the national professional accounting body of India.
● It was established on 1 July 1949 as a statutory body under the Chartered Accountants Act, 1949 enacted by the
Parliament (acting as the provisional Parliament of India) to regulate the profession of Chartered Accountancy
in India.
● ICAI is the second largest professional Accounting & Finance body in the world.
● ICAI is the only licensing and regulating body of the financial audit and accountancy profession in India.
Emblem of ICAI
Rules and Regulation For Accounting and Auditing

● __________________________
● __________________________
Why we need Rules for Accounting and Auditing

● _________________________
● _________________________
● _________________________
Practical Subject
“Auditing is, perhaps, one of the most practical-oriented subjects in the C.A. curriculum. This paper aims to provide
knowledge of generally accepted auditing procedures and of techniques and skills needed to apply them in audit
engagements. A good knowledge of the subject would provide a strong foundation to students while pursuing the
Chartered Accountancy course. A good understanding of the theoretical concepts, particularly, in the context of auditing
standards would make practical training an enriching and enjoying experience. While studying this paper, students are
advised to integrate the knowledge acquired in other subjects, specifically, accounting and corporate laws in a
meaningful manner. Such learning would only help a student to become a better professional.”
Lines Taken From ICAI Study Mat - www.icai.org

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A brief About Audit

● Genesis
● The person who conducts audit is known as auditor
● General Meaning
○ Evaluation Process
○ Undertaken to establish
○ Adherence to certain norms
● कोई भी काम उसके बनाए गए त रके से हुआ है या नह ं, इसे चेक करने को ह ऑ डट कहते है ।
● As a Chartered Accountant we are concerned with mostly with Financial Audit (Audit of Financial Information)
● Why we need Audit of Financial Information
○ ___________________________
○ ___________________________
○ ___________________________
● Standards on Auditing 200 (SA 200) - Overall Objectives of the Independent Auditor and the Conduct of an Audit
in Accordance with Standards on Auditing


Meaning of Audit
An Audit is
● independent examination of
● Financial information of
● any entity, whether profit oriented or not , and irrespective of its size or legal form, when such an examination is
conducted
● with a view to expressing an opinion thereon.



Overall Objectives of Auditor

In conducting an audit of financial statements, the overall objectives of the auditor are
● To obtain reasonable assurance about

○ whether the financial statements as a whole
○ are free from material misstatement,
■ whether due to fraud or error,
○ thereby enabling the auditor to express an opinion on
■ whether the financial statements are prepared,
■ in all material respects,
■ in accordance with an applicable financial reporting framework; and
● To report on the financial statements, and communicate as required by the SAs, in accordance with the auditor’s
findings.
Reasonable Assurance
● A high, but not absolute, level of assurance.

For auditor's opinion, reasonable Assurance is an absolute level of assurance (T/F)

Misstatement
A difference between
● the amount, classification, presentation, or disclosure
○ of a reported financial statement item
● and the amount, classification, presentation, or disclosure
○ that is required for the item to be in accordance with the applicable financial reporting framework.
Misstatements can arise from error or fraud.

● The distinguishing factor between fraud and error is whether the underlying action that results in the
misstatement of the financial statements is intentional or unintentional.
● Fraud’ deals with intentional misrepresentation but, ‘error’, on the other hand, refers to unintentional mistakes
in financial information.
Fraud is more difficult detect than error (True or False)

Statement is true, fraud is more difficult to detect than error. This is because fraud generally involves sophisticated and
carefully organized schemes to conceal it such as forgery deliberate failure to record transactions, intentional
misrepresentations to the auditor.


The risk not detecting a material misstatement from fraud is higher than risk of not detecting one resulting from error (T/F)
Material
Misstatements, including omissions, are considered to be material
● if they, individually or in the aggregate,
● could reasonably be expected to influence the economic decisions of users taken on the basis of the financial
statements;


Concept of true and fair view

The concept of true and fair is a fundamental concept in auditing.
The phrase “true and fair” in the auditor’s report signifies that the auditor is required to express his opinion
as to whether the state of affairs and the results of the entity as ascertained by him in the course of his audit are truly
and fairly represented in the accounts under audit. (jo usney paya, accounts mein bhi wo hi dikh raha hai)
This requires that the auditor should examine the accounts with a view to
● verify that all assets, liabilities, income and expenses are stated at amounts
○ which are in accordance with accounting principles and policies which are relevant.
● and no material amount, item or transaction has been omitted.
What constitutes a ‘true and fair’ view is a matter of an auditor’s judgment in the particular circumstances of a case. In
more specific terms, to ensure true and fair view, an auditor has to see:
1. That the assets are neither undervalued or overvalued, according to the applicable accounting principles,
2. No material asset is omitted;
3. The charge, if any, on assets are disclosed;
4. Material liabilities should not be omitted;
5. The profit and loss account and balance sheet discloses all the matters required to be disclosed;
6. Accounting policies have been followed consistently; and
7. All unusual, exceptional or non-recurring items have been disclosed separately.
Types of audit
Auditis not legally obligatory for all types of business organisations or institutions. On this basis audits may be of two
broad categories i.e., audit required under law and voluntary audits.
Audit required under law
Organisations which require audit under law are the following -

● companies governed by the Companies Act;
● banking companies;
● other statutory bodies required by their regulators or by specific Act.
Voluntary Audit
In the voluntary category are the audits of the accounts of
● proprietary entities,
● partnership firms,
● Hindu undivided families, etc.


● In respect of such accounts, there is no basic legal requirement of audit.

● Many of such enterprises as a matter of internal rules require audit.
● Some may be required to get their accounts audited on the directives of Government for various purposes like
sanction of grants, loans, etc.
● But the important motive for getting accounts audited lies in the advantages that follow from an independent
professional audit.
● This is perhaps the reason why large numbers of proprietary and partnership business get their accounts
audited.
Auditing is legally obligatory for all types of business organisation (True or False)
Statement is false - Not obligatory for all, for example proprietorship entities, partnership firm etc.
Types of Opinion
● Clean Opinion
● Modified Opinion
○ Qualified Opinion
○ Adverse
○ Disclaimer of Opinion
Those charged with governance

The person(s) or organisation(s) with responsibility for
● overseeing the strategic direction of the entity and
● obligations related to the of the entity


Management
● The person(s) with executive responsibility for conduct of entity's operation
Pre- Conditions for an audit

In order to establish whether the preconditions for an audit are present, the auditor shall:
● Determine whether the financial reporting framework is acceptable; and
● Obtain the agreement of management that it acknowledges and understands its responsibility:
○ For the preparation of the financial statements in accordance with the applicable financial reporting
framework;
○ For the internal control as management considers necessary; and
○ To provide the auditor with:
■ Access to all information such as records, documentation and other matters;
■ Additional information that the auditor may request from management for the purpose of the
audit; and
■ Unrestricted access to persons within the entity from whom the auditor determines it necessary
to obtain audit evidence.
Internal Control
The Process designed, implemented and maintained by
➔ Those charged with governance
➔ Management
➔ Other personnel
To Provide Reasonable Assurance with regard to
● Reliability of financial reporting
● Effectiveness & Efficiency of operations
● Safeguarding of assets
● Compliance with applicable law & regulations
Test Checking
Application of Audit Procedures to less than 100% of the Transaction. It is also known as Sampling.
Judgement
The ability to make considered decisions or come to sensible conclusions.
Judgement from audit point of view

● Necessary for decision making
● Comes from experience
● May differ from person to person
● Can also be formed after consultation


Audit Procedures
Audit evidence to draw reasonable conclusions on which to base the auditor’s opinion is obtained by performing
➔ Risk assessment procedures; and
➔ Further audit procedures, which comprise:
◆ Tests of controls, when required by the SAs or when the auditor has chosen to do so; and
◆ Substantive procedures, including tests of details and substantive analytical procedures.
➔ The audit procedures described below may be used as
◆ risk assessment procedures,
◆ tests of controls or
◆ substantive procedures,
◆ Depending on the context in which they are applied by the auditor.
1. Inspection
2. Observation
3. External Confirmation
4. Recalculation
5. Reperformance
6. Analytical Procedure
7. Enquiry






Professional Skepticism
The auditor is responsible for maintaining an attitude of professional skepticism throughout the audit. Do you agree
with the statement?
As per SA 200, "Overall Objectives of the Independent Auditor and the Conduct of an Audit in Accordance with
Standards on Auditing",
● Professional skepticism is an attitude that includes a questioning mind,
● being alert to conditions which may indicate possible misstatement due to error or fraud,
● and a critical assessment of audit evidence.
This includes
● Questioning
○ contradictory audit evidence and जो मला
○ the reliability of documents and जो दखा
○ responses to inquiries and जो कहा,
○ other information obtained from management and those charged with governance. बाक़ बात पीने बाद
● (Critical assessment of audit evidence) Checking whether audit evidence obtained by auditor is sufficient and
appropriate as per the circumstance.
Why Professional Skepticism?

(Risk को कम करना चाहते है !) कौन से Risk को - Overlooking and Over Generalising क़े Risk को
● Maintaining professional skepticism throughout the audit is necessary to reduce the risks of
○ overlooking unusual circumstances,
○ Over generalising when drawing conclusions.
Further, while obtaining reasonable assurance, the auditor is responsible for maintaining professional skepticism
throughout the audit,
● considering the potential for management override of controls and (कह ं मैन मट override तो नह ं कर रह कं ो ज़
को)
● recognizing the fact that audit procedures that are effective for detecting error may not be effective in detecting
fraud. (एरर तो पकड़ सकते है ले कन ॉड नह ं)
● assessing the risks of material misstatement due to fraud and in designing procedures to detect such
misstatement. (ROMM को असेस करने के लए और MST को डटे ट करने के लए )
Therefore, we do agree with the statement.


Inherent Limitations of Audit - SA 200

Limitations of Audit: As per SA 200 "Overall Objectives of the Independent Auditor and the Conduct of an Audit in
Accordance with Standards on Auditing", the objectives of an audit, is to enable an auditor to express an opinion on
such financial statements.
The auditor is not expected to, and cannot, reduce audit risk to zero and cannot therefore obtain absolute assurance
that the financial statements are free from material misstatement due to fraud or error.
This is because there are inherent limitations of an audit, which result in most of the audit evidence on which the
auditor draws conclusions and bases the auditor’s opinion being persuasive rather than conclusive.
The process of auditing, however, is such that it suffers from certain limitations, i.e. the limitation which cannot be
overcome irrespective of the nature and extent of audit procedures. The limitations of an audit arise from:
1. The Nature of Financial Reporting
● The preparation of financial statements involves judgment by management.

● In addition, many financial statement items involve subjective decisions or assessments or a degree of
uncertainty.
● Consequently, some financial statement items are subject to an inherent level of variability which cannot
be eliminated by the application of additional auditing procedures.
2. The Nature of Audit Procedures
● There are practical and legal limitations on the auditor's ability to obtain audit evidence. For example:
○ There is the possibility that management or others may not provide, intentionally or
unintentionally, the complete information that is relevant to the preparation and presentation of
the financial statements or that has been requested by the auditor.
○ Fraud may involve sophisticated and carefully organized schemes designed to conceal it. The
auditor is neither trained as nor expected to be an expert in the authentication of documents.
○ An audit is not an official investigation into alleged wrongdoing. Accordingly, the auditor is not
given specific legal powers, such as the power of search, which may be necessary for such an
investigation.
3. Timeliness of Financial Reporting and the Balance between Benefit and

Cost
● The relevance of information, and thereby its value, tends to diminish overtime,
● and there is a balance to be struck between the reliability of information and its cost.
● There is an expectation by users of financial statements that the auditor will form an opinion on the
financial statements within a reasonable period of time and at a reasonable cost


4. Other Matters that Affect the Limitations of an Audit
● In the case of certain assertions or subject matters, the potential effects of the limitations on the
auditor's ability to detect material misstatements are particularly significant. Such assertions or subject
matters include:
○ Fraud, particularly fraud involving senior management or collusion.
○ The existence and completeness of related party relationships and transactions.
○ The occurrence of non-compliance with laws and regulations.
○ Future events or conditions that may cause an entity to cease to continue as a going concern.
Because of the limitations of an audit, there is an unavoidable risk that some material misstatements of the financial
statements may not be detected, even though the audit is properly planned and performed in accordance with SAs.
However, the inherent limitations of an audit are not a justification for the auditor to be satisfied with less-than
persuasive audit evidence.


Auditor’s responsibility for failure to detect fraud and errors

As per SA 240 the responsibility for the prevention and detection of fraud and error rests with the management through
the implementation of an adequate system of internal control. Such a system reduces but does not eliminate the
possibility of fraud and error.
In other words primarily auditor is not responsible for prevention, detection and correction of misstatements.
Moreover because of Inherent limitations of auditing it is impossible for auditor to detect all misstatements whether
due to fraud or error.
However, if there are doubtful situation that some material misstatement exist, auditor should extend his procedure to
confirm/dispel the doubt.
The subsequent discovery of a material misstatement of the financial statements resulting from fraud or error does not
by itself indicate a failure to conduct an audit in accordance with SAs.
“ If there remains a deep laid fraud in the accounts, which in the normal course of examination of accounts may not
come to light,
● It will not be construed as failure of audit,
● provided the auditor was not negligent in carrying out his normal work”
Auditor WILL NOT BE considered as negligent

● If he has carried his work in accordance
○ with SA’s and
○ applicable law and regulations.
Whether the auditor has performed an audit in accordance with SAs and law and regulations is determined by the
● audit procedures performed in the circumstances, the
● sufficiency and appropriateness of the audit evidence obtained as a result thereof
● and the suitability of the auditor’s report based on an evaluation of that evidence in light of the overall
objectives of the auditor.
All this can be checked by AUDIT DOCUMENTATION.
However, the inherent limitations of an audit are not a justification for the auditor to be satisfied with less-than
persuasive audit evidence.



Assertion
Example on Assertion
Plant and Machinery (at cost) ₹ 4,00,000
Less: Depreciation till the end of ₹ 1,40,000

previous year
Depreciation for the year ₹ 26,000 ₹ 1,66,000
₹ 2,34,000
The assertions are as follows:

● the firm owns the plant and machinery;
● the historical cost of plant and machinery is ₹ 4 lacs;
● the plant and machinery physically exists;
● the asset is being utilised in the business of the company productively;
● total charge of depreciation on this asset is ₹ 1,66,000 to date on which ₹ 26,000 relates to the year in respect of
which the accounts are drawn up; and
● the amount of depreciation has been calculated on recognised basis and the calculation is correct.
● The above assertions are implicit
Explicit assertions are made when otherwise the reader will be left with an incomplete picture; it may even be
misleading.
● Secured Loans ₹ 4,00,000
● The description does not give us a complete picture. We do not know:
○ the name of the lender, if it is relevant;
○ the nature of security provided; and
○ the rate at which interest in payable.
Negative assertions are also encountered in the financial statements and the same may be expressed or implied.
For example, if it is stated that there is no contingent liability it would be an expressed negative assertion;
On the other hand, if in the balance sheet there is no item as “building”, it would be an implied negative assertion that
the entity did not own any building on the balance sheet date


Aspects to be covered in Audit

The principal aspect to be covered in an audit concerning final statements of account are the following:
1. An examination of the system of accounting and internal control to ascertain whether it is appropriate for the
business and helps in properly recording all transactions.
2. Reviewing the SYSTEM and procedures.
3. Checking of the ARITHMETICAL ACCURACY of the books of accounts.
4. Verification of the authenticity and validity of transactions in the books of accounts
5. Ascertaining that a proper distinction has been made between items of capital and of revenue nature
6. Comparison of the balance sheet and profit and loss account or other statements with the underlying record.
7. Verification of the title, existence and value of the assets appearing in the balance sheet.
8. Verification of the liabilities stated in the balance sheet.
9. Checking the result shown by the profit and loss and to see whether the results shown are true and fair.
10. Where audit is of a corporate body, confirming that the statutory requirements have been complied with.
11. Reporting to the appropriate person/body.


What are the advantages of an independent audit?
Advantages of an Independent Audit

The chief utility of audit lies in reliable financial statements on the basis of which the state of affairs may be easy to
understand. Apart from this obvious utility, there are other advantages of audit. Some or all of these are of considerable
value even to those enterprises and organisations where audit is not compulsory, these advantages are given below
1. It safeguards the financial interest of persons who are not associated with the management of the entity,
whether they are partners or shareholders.
2. It acts as a moral check on the employees from committing defalcations or embezzlement.
3. Audited statements of account are helpful in settling liability for taxes, negotiating loans and for determining the
purchase consideration for a business.
4. These are also useful for settling trade disputes for higher wages or bonus as well as claims in respect of damage
suffered by property, by fire or some other calamity.
5. An audit can also help in the detection of wastages and losses to show the different ways by which these might
be checked, especially those that occur due to the absence or inadequacy of internal checks or internal control
measures.
6. Audit ascertains whether the necessary books of account and allied records have been properly kept and helps
the client in making good deficiencies or inadequacies in this respect.
7. As an appraisal function, audit reviews the existence and operations of various controls in the organisations and
reports weaknesses, inadequacies, etc., in them.
8. Audited accounts are of great help in the settlement of accounts at the time of admission or death of partner.
9. Government may require audited and certified statements before it gives assistance or issues a license for a
particular trade.



SA 210 - Agreeing the terms of Audit Engagement


Agreement on Audit Engagement Terms
It is important, both for the auditor and client, that each party should be clear about the nature of the engagement. It
must be reduced to writing and should exactly specify the scope of the work.
The audit engagement letter is sent by the auditor to his client.
According to SA 210 “Agreeing the Terms of Audit Engagements”, the auditor shall agree the terms of the audit
engagement with management or those charged with governance, as appropriate.
The agreed terms of the audit engagement shall be recorded in an audit engagement letter or other suitable form of
written agreement and shall include:


Recurring Audits
Question
It is not mandatory to send a new engagement letter in recurring audit, but sometimes it becomes mandatory to send new
letter". Explain those situations where new engagement letter is to be sent. (M.imp)
On recurring audits, the auditor shall assess whether circumstances require the terms of the audit engagement to be
revised and whether there is a need to remind the entity of the existing terms of the audit engagement.
The auditor may decide not to send a new audit engagement letter or other written agreement each period. However, in
the following situations it is appropriate to revise the terms of the audit engagement or to remind the entity of existing
terms


Limitation on Scope Prior to Audit Engagement Acceptance
● If
○ management or those charged with governance
○ impose a limitation on the scope of the auditor’s work
○ in the terms of a proposed audit engagement
○ such that the auditor believes the limitation will result in the auditor disclaiming an opinion on the
financial statements,
■ the auditor
■ shall not accept such a limited engagement as an audit engagement,
■ unless required by law or regulation to do so.
Acceptance of a change in engagement
If, prior to completing the audit engagement,

● the auditor is requested to change the audit engagement
● to an engagement that conveys a lower level of assurance,
● the auditor shall determine whether there is
● Reasonable justification for doing so.
If the terms of the audit engagement are changed, the auditor and management shall agree on and record the new terms
of the engagement in an engagement letter or other suitable form of written agreement.
The 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 where possible under applicable law or regulation; and
➔ Determine whether there is any obligation, either contractual or otherwise, to report the circumstances to other
parties, such as those charged with governance, owners or regulators.
A request from the client for the auditor to change the engagement may result from-
● a change in circumstances affecting the need for the service,
● a misunderstanding as to the nature of an audit or related service originally requested.
● a restriction on the scope of the engagement, whether imposed by management or caused by circumstances.


Relationship of Auditing with other disciplines
Auditing and Accounting
Auditing and Law


Overview of Elements of System of Quality Control


Misc Topics Related To Standards
What are Standards on Auditing (SAs)?
SAs are Auditing Standards, which prescribe the way the auditing should be conducted. They can also be termed as
performance benchmarks for the auditors
Procedure for issuing SAs
Generally following procedure is followed for issuing the SAs

● Auditing and Assurance Standard Board (AASB) of the Institute of Chartered Accountants of India (ICAI)
determines the specific area in which the SAs need to be formulated.
● In preparation of SAs—
○ AASB is assisted by study groups constituted to consider specific subjects.
○ An exposure draft of the proposed SA is finalized by the AASB' of ICAI on the basis of work of the study
group.
○ The exposure draft of the proposed SA is published for comments by the members of the Institute (ICAI).
○ AASB finalizes the draft of the proposed SA after considering the comments received and submit to the
Council of the Institute (ICAI).
○ The Council considers the draft of the proposed SA and if necessary, modifies the same in consultation
with AASB. The SA is then issued under the authority of the Council of the Institute of Chartered
Accountants of India.
○ AASB of ICAI tries to integrate/harmonize the SAs to the extent possible in the light of the condition and
practices prevailing in India with ISAs (International Standards For Auditing) issued by IAASB
(International Auditing and Assurance Standards Board) of IFAC.
ICAI re-classified the existing auditing and assurance standards in 2008. The objective of re-classification is to converge
our existing auditing and assurance standards with International Standard on Auditing (ISA) issued by the International
Federation of Accountants (IFAC).
Question Standards collectively known as the Engagements Standards

issued by AASB under the authority of the council of ICAI - Discuss
The following Standards issued by the Auditing and Assurance Standards Board under the authority of the Council are
collectively known as the Engagement Standards:
● Standards on Auditing (SAs), to be applied in the audit of historical financial information.
● Standards on Review Engagement (SREs), to be applied in the review of historical financial information.
● Standards on Assurance Engagements (SAEs), to be applied in assurance engagements, dealing with
subject-matters other than historical financial information.


● Standards on Related Services (SRSs), to be applied to engagements involving application of agreed upon
procedures to information, compilation engagements, and other related services engagements as may be
specified by the ICAI.
● Standards on Quality Control (SQCs) issued by the AASB under the authority of the Council, are to be applied for
all services covered by the Engagement Standards as described above.
Role of International Auditing & Assurance Standard Board (IAASB)

The IAASB functions as an independent standard-setting body under the auspices of IFAC . The objective of the IAASB is
to serve the public interest by setting high quality auditing standards and by facilitating the convergence of
international and national standards, thereby enhancing the quality and uniformity of practice throughout the world
and strengthening public confidence in the global auditing and assurance profession. The IAASB achieves this objective
by:
a) Establishing high quality auditing standards and guidance for financial statement audits that are generally
accepted and recognized by investors, auditors,governments, banking regulators , securities regulators and
other key stakeholders across the world;


b) Establishing high quality standards and guidance for other types of assurance services on both financial and
non-financial matters:
c) Establishing high quality standards and guidance for other related services;
d) Establishing high quality standards for quality control covering the scope of services addressed by the IAASB;
and
e) Publishing other pronouncements on auditing and assurance matters, thereby advancing public understanding
of the roles and responsibility of professional auditors and assurance service providers.
Objectives and Functions of AASB

❖ To review the existing and emerging auditing practices worldwide and identify areas in which standards on
Quality Control, Engagement Standards and Statements on Auditing need to be developed .
❖ To formulate Engagement Standards, Standards on Quality Control and Statements on Auditing so that these
may be issued under the authority of the Council of the Institute.
❖ To review the existing Standards and Statements on Auditing to assess their relevance in the changed conditions
and to undertake their revisions, if necessary.
❖ To develop Guidance Notes on issues arising out of any Standard , auditing issued pertaining to any specific
industry or on generic issues, so that those may be issued under the authority of the Council of the Institute.
❖ To review the existing Guidance Notes to assess their relevance in the changed circumstances and the
undertake their revision , if necessary.
❖ To formulate General Clarifications , where necessary , on issues arising from Standards.
❖ To formulate and issue Technical Guides , practice Manuals Studies and other papers under its own authority for
guidance of professional accountants in the case felt appropriate by the Board.
Renumbering of Standards
Standard on Quality Control (SQC) 01-99
Standard on Auditing (SA) 100-999
Standard on Review Engagement (SRE) 2000-2699
Standard on Assurance Engagement (SAE) 3000-3699
Related Services (SRS) 4000-4699
Classification of SAs
Introductory matters 100-199
General Principles and Responsibilities 200-299
Risk Assessment and Response to Assessed Risk 300-499
Audit Evidence 500-599
Using work of Others 600-699


Audit conclusions and Reporting 700-799
Specialised Areas 800-899
List of Standards
General Principles and Responsibilities

1 SA200 (Revised) Overall objectives of the Independent Auditor and the conduct of the Audit in
Accordance with Standard on Auditing
2 SA210 (Revised) Agreeing the Terms of Audit Engagements
3 SA 220 (Revised) Quality Control for an Audit of financial statements
4 SA 230 (Revised) Audit Documentation
5 SA 240 (Revised) The Auditor’s Responsibilities Relating to Fraud in an Audit of Financial

Statements.
6 SA250 (Revised) Consideration of Laws and Regulations in an Audit of Financial Statements
7 SA 260 (Revised) Communication with those Charged with Governance
8 SA265 Communicating Deficiencies in Internal control to those Charged with

Governance and Management
9 SA299 (Revised) Joint Audit of financial statements
Risk Assessment and Responses to Assessed Risks

10 SA300 Planning an Audit of Financial Statements
11 SA315 Identifying and Assessing the Risk of material Misstatements through

understating the Entity and Its Environment
12 SA 320 Materiality in Planning and Performing an Audit
13 SA330 Response to Assessed Risks
14 SA 402 Audit consideration Relating to an Entity using a Service Organisation
15 SA450 Evaluation of Misstatements Identified during the Audit
Audit Evidence
16 SA500 (Revised) Audit Evidence
17 SA 501 (Revised) Audit Evidence-Specific Consideration for selected Items


18 SA 505 (Revised) External Confirmations
19 SA 510 (Revised) Initial Audit Engagement - Opening balances
20 SA 520 (Revised) Analytical Procedures
21 SA 530 (Revised) Audit Sampling
22 SA 540 (Revised) Auditing Accounting Estimates, Including fair value Accounting Estimates and
Related Disclosures
23 SA 550 (Revised) Related Parties
24 SA 560 (Revised) Subsequent Events
25 SA 570 (Revised) Going Concern
26 SA 580 (Revised) Written Representation
Using Work of Others

27 SA 600 Using the work of Other Auditors
28 SA 610 (Revised) Using the Work of Internal Auditors
29 SA 620 (Revised) Using the Work of an Auditor’s Expert
Audit Conclusions and Reporting

30 SA700 (Revised) Forming an Opinion and Reporting on Financial Statements
31 SA 701 Communicating key Audit Matters in the independent Auditor’s Report
32 SA 705 (Revised) Modifications to the opinion in the independent Auditor’s Report
33 SA 706 (Revised) Emphasis of Matter Paragraphs and other Matter Paragraphs in the
Independent Auditor’s Report
34 SA 710 (Revised) Comparative Information -Corresponding Figures and Comparative Financial

Statements
35 SA 720 (Revised) The Auditor’s responsibilities relating to Other Information


Statements and Guidance Notes
Statements
The Institute has, from time to time, issued ‘Guidance Notes’ and ‘Statements’ on a number of matters. The ‘Statements’
have been issued with a view to securing compliance by members on matters which, in the opinion of the Council, are
critical for the proper discharge of their functions. ‘Statements’ therefore are mandatory.
Guidance Notes
Primarily designed to provide guidance to members on matters which may arise in the course of their professional
work and on which they may rely in the course of their professional work and on which they may desire assistance in
resolving issues which may pose difficulty.
Guidance Notes are recommendatory in nature.
A member should ordinarily follow recommendations in a guidance note relating to an auditing matter except where he
is satisfied that in the circumstances of the case, it may not be necessary to do so.
Similarly, while discharging his attest function, a member should examine whether the recommendations in a guidance
note relating to an accounting matter have been followed or not. If the same have not been followed, the member should
consider whether keeping in view the circumstances of the case, a disclosure in his report is necessary.
There are however a few guidance notes in case of which the Council has specifically stated that they should be
considered as mandatory on members while discharging their attest function.



Elements of a System of Quality Control
Standard on Quality Control (SQC) 1 & SA 220

The purpose of this Standard on Quality Control (SQC) is
● to establish standards and
● provide guidance
regarding a firm’s responsibilities for its system of quality control
● for audits and
● reviews of historical financial information, and
● for other assurance and
● related services engagements.
Additional standards and guidance on the responsibilities of firm personnel regarding quality control procedures for
specific types of engagements are set out in other pronouncements of the Auditing and Assurance Standards Board
(AASB) issued under the authority of the Council. For example, Standard on Auditing (SA) 220, “Quality Control for an
Audit of Financial Statements”, establishes standards and provides guidance on quality control procedures for audits of
historical financial information.
The firm should establish a system of quality control designed to provide it with reasonable assurance that the firm and
its personnel comply with professional standards and regulatory and legal requirements, and that reports issued by the
firm or engagement partner(s) are appropriate in the circumstances.


A system of quality control consists of policies designed to achieve the objectives and the procedures necessary to
implement and monitor compliance with those policies.
Some Definitions
Engagement partner
the partner or other person in the firm who is a member of the Institute of Chartered Accountants of India 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, and who, where required, has the appropriate authority from a professional, legal or regulatory body.
The firm’s system of quality control should include policies and procedures addressing each of the following elements:
(a) Leadership responsibilities for quality within the firm.
(b) Ethical requirements.
(c) Acceptance and continuance of client relationships and specific engagements.
(d) Human resources.
(e) Engagement performance.
(f) Monitoring.
Leadership Responsibilities for Quality on Audits


Ethical Requirements Relating to an Audit of Financial Statements
Ethical requirements are provided in the code of ethics for professional accountant issue by The International Ethics
Standards Board for Accountants (IESBA)
The Code establishes the following as the fundamental principles of professional ethics relevant to the auditor when
conducting an audit of financial statements
(a) Integrity;
(b) Objectivity;
(c) Professional competence and due care;
(d) Confidentiality; and
(e) Professional behavior.
Standard on Quality Control (SQC) 1 sets out the responsibilities of the firm for establishing policies and procedures
regarding compliance with relevant ethical requirements.
SA 220 sets out the engagement partner’s responsibilities with respect to relevant ethical requirements. These include
evaluating whether members of the engagement team have complied with relevant ethical requirements.
Independence
Independence of the auditor has not only to exist in fact, but also appear to so exist to all reasonable persons.
It is not possible to define “independence” precisely. Rules of professional conduct dealing with independence are
framed primarily with a certain objective. The rules themselves cannot create or ensure the existence of independence.
Independence is a condition of mind as well as personal character. It should not be confused with the superficial and
visible standards of independence which are sometimes imposed by law.
“Independence is: (a) Independence of mind – the state of mind that permits the provision of an opinion without being
affected by influences allowing an individual to act with integrity, and exercise objectivity and professional skepticism;
and
(b) Independence in appearance – the avoidance of facts and circumstances that are so significant that a third party
would reasonably conclude an auditor’s integrity, objectivity or professional skepticism had been compromised.”


Safeguards to Independence
The following are the guiding principles in this regard: -
1. For the public to have confidence in the quality of audit, it is essential that auditors should always be and
appears to be independent of the entities that they are auditing.
2. In the case of audit, the key fundamental principles are integrity, objectivity and professional skepticism, which
necessarily require the auditor to be independent.
3. Before taking on any work, an auditor must conscientiously consider whether it involves threats to his
independence.
4. When such threats exist, the auditor should either desist from the task or put in place safeguards that eliminate
them.
5. If the auditor is unable to fully implement credible and adequate safeguards, then he must not accept the work


Professional Skepticism
(Already Covered)
Acceptance and Continuance of Client Relationships and Audit Engagements
SQC 1 requires the firm to obtain information before accepting an engagement. Information such as the following assists
the engagement partner in determining whether the decisions regarding the acceptance and continuance of audit
engagements are appropriate
1. The integrity of the principal owners, key management and those charged with governance of the entity.
2. Whether the engagement team is competent to perform the audit engagement and has the necessary
capabilities, including time and resources;
3. Whether the firm and the engagement team can comply with relevant ethical requirements; and
4. Significant matters that have arisen during the current or previous audit engagement, and their implications for
continuing the relationship.
SA 220 - If the engagement partner obtains information that would have caused the firm to decline the audit
engagement had that information been available earlier, the engagement partner shall communicate that information
promptly to the firm, so that the firm and the engagement partner can take the necessary action.
Human Resource (SQC -1 Text)

The firm should establish policies and procedures designed to provide it with reasonable assurance that it has sufficient
personnel with the capabilities, competence, and commitment to ethical principles necessary to perform its
engagements in accordance with professional standards and regulatory and legal requirements, and to enable the firm
or engagement partners to issue reports that are appropriate in the circumstances
Such policies and procedures address the following personnel issues:

(a) Recruitment;
(b) Performance evaluation;
(c) Capabilities;
(d) Competence;
(e) Career development;
(f) Promotion;
(g) Compensation; and
(h) Estimation of personnel needs.
Addressing these issues enables the firm to ascertain the number and characteristics of the individuals required for the
firm’s engagements. The firm’s recruitment processes include procedures that help the firm select individuals of
integrity as well as the capacity to develop the capabilities and competence necessary to perform the firm’s work.


Engagement Performance
The firm should establish policies and procedures designed to provide it with reasonable assurance that engagements
are performed in accordance with professional standards and regulatory and legal requirements, and that the firm or
the engagement partner issues reports that are appropriate in the circumstances.
Through its policies and procedures, the firm seeks to establish consistency in the quality of engagement performance.
This is often accomplished through written or electronic manuals, software tools or other forms of standardized
documentation, and industry or subject matter- specific guidance materials. Matters addressed include the following
● How engagement teams are briefed on the engagement to obtain an understanding of the objectives of their
work.
● Processes for complying with applicable engagement standards.
● Processes of engagement supervision, staff training and coaching.
● Methods of reviewing the work performed, the significant judgments made and the form of report being issued.
● Appropriate documentation of the work performed and of the timing and extent of the review.
● Processes to keep all policies and procedures current.
Monitoring
The firm should establish policies and procedures designed to provide it with reasonable assurance that the policies
and procedures relating to the system of quality control are relevant, adequate, operating effectively and complied with
in practice.
The purpose of monitoring compliance with quality control policies and procedures is to provide an evaluation of:
● Adherence to professional standards and regulatory and legal requirements;
● Whether the quality control system has been appropriately designed and effectively implemented;
● Whether the firm’s quality control policies and procedures have been appropriately applied, so that reports that
are issued by the firm or engagement partners are appropriate in the circumstances.
● Follow-up by appropriate firm personnel so that necessary modifications are promptly made to the quality
control policies and procedures.


Key Terms -
SA 220
Engagement Quality Control Review (EQCR)

Process to evaluate judgment & conclusion of ET (Engagement Team) before report is issued.
EQC Reviewer (EQCRr)

● Partner or
● Other person
● External person
● Or a Firm
● To conduct review
Responsibilities of EP
● Leadership REQ Leadership responsibilities for quality on Audits- is of EP (Engagement Partner)
● Ethical REQ
○ EP shall remain alert for non-compliance of ethical requirement by ET member
○ In case of non-compliance determine appropriate action after consultation
● Independence
○ EP form conclusion with independent requirement
○ Identify circumstances of threat to independence
○ Take appropriate action to eliminate such threats
● Acceptance & continuance of client engagement & relationship
○ All procedure for acceptance followed
○ Got information that would have caused the firm to decline the AE (Audit Engagement) had that
information have been available earlier
○ Communicate information to firm for prompt action
● Assignment of engagement team
○ Competent or capable team
○ Performance as per professional/ legal requirements
○ Appropriate audit report
● Performance
○ Direction, supervision
○ of audit engagement in compliance with professional standards and regulatory & legal requirements, a
○ Appropriateness of audit report
● Review
○ In accordance with the firm’s review policy
○ Review on or before the date of audit report
○ Audit Documentation & Discussion with the engagement team.
○ Be Satisfied that Sufficient and appropriate evidence has been obtained to support
○ conclusions on which audit report will be based


Consultation-
● ET should take proper consultation on difficult matters
● It may be within the team or outside team
● EP shall ensure- consultation are agreed with person consulted
● Check conclusion have been implemented or not
EQCR
● EP shall ensure EQCRr has been appointed
● Discuss matters with EQCRr
● Audit Report shall be dated after EQCR is complete.
● EQCRr shall evaluate the following-
○ Significant matters discussed with EP
○ FS + Proposed AR
○ Selected Audit doc
○ Conclusion for AR
○ Independence
○ Consultation
Difference of opinion
● ET- Parties consulted
● EP- EQCR
● Follow firm policy for dealing and resolving matter


Question
Write a short note on“Quality control for audit work at firm level”.

Quality Control for Audit Work at Firm Level: SA 220 on Quality Control for an Audit of Financial Statements deals with the
specific responsibilities of the auditor regarding quality control procedures for an audit of financial statements. Quality control
systems, policies and procedures are the responsibility of the audit firm. Within the context of the firm’s system of quality
control, engagement teams have a responsibility to implement quality control procedures that are applicable to the audit
engagement and provide the firm with relevant information to enable the functioning of that part of the firm’s system of quality
control relating to independence.

The requirements are-
1. Leadership Responsibilities for Quality on Audits: The engagement partner shall take responsibility for the overall
quality on each audit engagement to which that partner is assigned.

2. Relevant Ethical Requirements: Throughout the audit engagement, the engagement partner shall remain alert, through
observation and making inquiries as necessary, for evidence of non-compliance with relevant ethical requirements by
members of the engagement team. The engagement partner shall form a conclusion on compliance with independence
requirements that apply to the audit engagement.

3. Acceptance and Continuance of Client Relationships and Audit Engagements: The engagement partner shall be
satisfied that appropriate procedures regarding the acceptance and continuance of client relationships and audit
engagements have been followed, and shall determine that conclusions reached in this regard are appropriate

4. Assignment of Engagement Teams: The engagement partner shall be satisfied that the engagement team, and any
auditor’s experts who are not part of the engagement team, collectively have the appropriate competence and
capabilities to perform the audit engagement in accordance with professional standards and regulatory and legal
requirements and enable an auditor’s report that is appropriate in the circumstances to be issued.

5. Engagement Performance: The engagement partner shall take responsibility for the direction, supervision and
performance of the audit engagement. He shall take responsibility for reviews being performed in accordance with the
firm’s review policies and procedures and shall take responsibility for the engagement team undertaking appropriate
consultation on difficult or contentious matters. For audits of financial statements of listed entities, and those other
audit engagements, if any, for which the firm has determined that an engagement quality control review is required, the
engagement partner shall determine that an engagement quality control reviewer has been appointed. Further, if
differences of opinion arise within the engagement team, with those consulted or, where applicable, between the
engagement partner and the engagement quality control reviewer, the engagement team shall follow the firm’s
policies and procedures for dealing with and resolving differences of opinion.

6. Monitoring: The engagement partner shall consider the results of the firm’s monitoring process as evidenced in the
latest information circulated by the firm and, if applicable, other network firms and whether deficiencies noted in that
information may affect the audit engagement.


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These notes are incomplete without our videos. Study from these notes at your own risk.

Nature, Scope and Objective of Audit

Rules and Regulation For Accounting and Auditing

Why we need Rules for Accounting and Auditing

Lines Taken From ICAI Study Mat - ​www.icai.org

A brief About Audit

Overall Objectives of Auditor

● To obtain reasonable assurance about

Misstatements can arise from error or fraud.

Fraud is more difficult detect than error (True or False)

Concept of true and fair view

Audit required under law

Organisations which require audit under law are the following -

● In respect of such accounts, there is no basic legal requirement of audit.

Those charged with governance

Pre- Conditions for an audit

Judgement from audit point of view

Why Professional Skepticism?

Therefore, we do agree with the statement.

Inherent Limitations of Audit - SA 200

1. The Nature of Financial Reporting

● The preparation of financial statements involves judgment by management.

2. The Nature of Audit Procedures

3. Timeliness of Financial Reporting and the Balance between Benefit and

4. Other Matters that Affect the Limitations of an Audit

Auditor’s responsibility for failure to detect fraud and errors

Auditor WILL NOT BE considered as negligent

All this can be checked by AUDIT DOCUMENTATION.

Plant and Machinery (at cost) ₹ 4,00,000

Less: Depreciation till the end of ₹ 1,40,000

Depreciation for the year ₹ 26,000 ₹ 1,66,000

The assertions are as follows:

Aspects to be covered in Audit

What are the advantages of an independent audit?

Advantages of an Independent Audit

SA 210 - Agreeing the terms of Audit Engagement

Agreement on Audit Engagement Terms

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

Limitation on Scope Prior to Audit Engagement Acceptance

Acceptance of a change in engagement

If, prior to completing the audit engagement,

Relationship of Auditing with other disciplines

Auditing and Accounting

Auditing and Law

Overview of Elements of System of Quality Control

Misc Topics Related To Standards

What are Standards on Auditing (SAs)?

Procedure for issuing SAs

Generally following procedure is followed for issuing the SAs

Question Standards collectively known as the Engagements Standards

Role of International Auditing & Assurance Standard Board (IAASB)

Objectives and Functions of AASB

Standard on Auditing (SA) 100-999

Standard on Review Engagement (SRE) 2000-2699

Standard on Assurance Engagement (SAE) 3000-3699

Related Services (SRS) 4000-4699

General Principles and Responsibilities 200-299

Risk Assessment and Response to Assessed Risk 300-499

01 Introduction & Chapter-1

01 Introduction & Chapter-1

01 Introduction & Chapter-1

Lines Taken From ICAI Study Mat - www.icai.org