-CA-Final _ TAXMANN®'S Advanced Auditing MCSE AUS Peace Salient Features Academic Updates or > Tabular presentation of subject matter > Coverage of All Past Exam Questions till Nov, 2019 > Coverage of Questions from RTPs and MTPs of ICAT > Chapter-wise Marks Distribution for Past Exams for each chapter Companies (Amendment) Act 2020 Companies (Auditor’s Report) Order 2020 SEBI (LODR) Amendment Re} Form 3CD (Revised) Form GSTR-9C (Revised) > Questions are covered along with every topic for Finance Act 2020 easy understanding Relevant Illustrations of AS, Ind-AS and > Approx. 900 Questions and Case Studies with Hints Schedule II for self practice lations vvvVvVVyY Pankaj Garg 4 TC BL Ma Lay i740) RS TCL) 7th Edition Also Available Reena Sonnet ‘# MCQ and Integrated Case Studies (comprising of Knowledge based ancl Application based MCQs} # Class Notes (Comprising Lecture-wise classSB Fina TAXMANN®'S i | | Advance? Auditing | Professional Ethics | Pankaj Garg 7th Edition For updates, Quick revision notes and revision videos visit @ wwwaltclasses.in and Join author telegram channel https://t.me/altclassesExe. © All rights reserved Price :€ 1125 Law stated in this book is as amended upto 31st October, 2020 Published by : ‘Taxman Publications (P) Ltd. Sales & Marketing : 59/32, New Rohtak Road, New Delhi-110 008 India Phone : +91-11-45562222 Website : wwww.texmann.com E-mail : soles@taxmann.com Regd. Office 21/35, West Punjabi Bagh, New Delhi-110 026 India Printed at : ‘Tan Prints (India) Pvt. Ltd. 44 Km, Mile Stone, National Highway, Rohtak Road. Village Rohad, Distt. Jhajjar (Haryana) India E-mail: sales@tanprints.com Disclaimer Every offort has been made to avold errors or amisslons inthis publication. In spite ‘of tis, errors may creep in. Any mistako, eror or discropancy noted may be brought to our notice which shall be taken caro of in the next edition. It is notified that neither tho publisher nor the author or seller will he responsible for any damage ‘or loss of action to any ono, of any kind, in any manner, theofrom, [No paut of this hook may be reproduced or copied in any form ot by any means [graphic, electronic or mechanical, including photocopying, cording, taping, oF Information eutrioval systems} or produced on any disc, tape, perforated mo ‘or ofher information storage device, ete, without the written permission of the publishers. Breach of this condition i liable fr legal action. For binding mistako, misprints or for missing pages, et. the publisher's Liability is limited to roplacement within seven days of purchase by similar edition. All ‘expensos in this connection are tobe borne by the purchaser All disputos are subjoct to Del jurtedition only 4 iAbout the Author Pankaj Garg is a Chartered Accountant, Company Secretary and Cost Accountant. He is an All India Topper of ICAI Examinations, Kolkata. He has also been awarded with Gold Medal by Institute of Cost Accountants of India, Kolkata. He possesses a vast experience of teaching to students of CA Intermediate and Final. At present, he is providing his classes in Pen Drive and Google Drive through online platform of “ALT Classes”. He is associated with Aldine Ventures (Pvt.) Ltd, (Aldine CA) since 2014 to provide live online classes. He is also associated with Prepladder Pvt.) Ltd. to provide his classes through Mobile Application (OnePrep). He has authored the books for Intermediate and Final Auditing for Taxmann Publications and very much appreciated by the students due to use of tabular presentations, simple and concise Ianguage, flowcharts and coverage of examinations asked in RTPs, MTPs and past examinations. 18Contents = PAGE About the Author 15 Preface to Seventh Eultion Ww | Chapter-wise Marks Distribution 1 : ‘Syllabus (New Course) M3 Modifications in the scope of syllabus (ICAI announcement dated 24-6-2019) M5 | Abbreviations _ “7 MODULE | I AUDITING CONCEPTS AND ENGAGEMENT STANDARDS f) Chapter 1 i | __@ Quality Control and Engagement Standards 13 : Chapter 2 Audit Planning, Strategy and Execution ee 21 ; © Chapter 3 ' + Risk Assessment and Internal Control - 31 | § Chapter 4 |_# Auditin an Automated Environment _ at MODULE I PROFESSIONAL ETHICS | Chapter 5 |__ Professional Ethics (Chartered Accountants Act, 1949) _ 53 MODULE itl | COMPANY AUDIT . : | 4 Chapter 6 i‘ |__¢ Company Audit s | Chapter 7 * Audit Reports _ ee —_ 71 Chapter 8 CARO, 2020 81 191-10 CONTENTS Chapter 9 | __& ‘Audit of Consolidated Financial Statements [| Chapter 10 Audit of Dividends Chapter 11 |, @ Audit Committee & Corporate Governance Chapter 12 © Liabilties of Auditor MODULE IV DIFFERENT TYPES OF AUDIT Chapter 13, * Internal Audit Chapter 14 ‘@ Management and Operational Audit Chapter 15 @ Audit under Fiscal laws (| Chapter 16 Due Diligence, Investigation and Forensic Audit Chapter 17 © Peer Review and Quality Review MODULE V AUDIT OF DIFFERENT ENTITIES Chapter 18 © Audit of Banks Chapter 19 ¢ Audit of Non-Banking Financial Companies © Chapter 20 ‘© Audit of Insurance Companies Chapter 21 © Audit of PSU MODULE VI ACCOUNTING STANDARDS, IND-AS AND SCHEDULE III Chapter 22 ‘© Questions on Accounting Standards and Ind-AS Chapter 23 Schedule It ‘CA Final May 2019 (New Syllabus) (Part It - Descriptive Questions) - Suggested Answers CA Final Nov. 2019 (New Syllabus) (Part Il - Descriptive Questions) - Suggested Answers Pace: 94 101 Id 121 133 141 151 161 71 183 191 aut 223 231 PL Ps| | i | Chapter-wise Marks Distribution — chop ee 2018 | 2018 |2019*|2019*| 2018 | 2018 |2019*|2019" 1 |Quality Control and Engagement Standards| 37 | 32 | 19 | 28 | 24 | 24 | 28 | 25 2__|Audit Planning, Strategy and Execution -|- -[s [a] - : - 3___ |Risk Assessment and Internal Control -[+{[s]/-[-[-|[-]|- 4 _|Auditinan Automated Environment | 4 | 4 | 5 | 4 4A _|Audit on Cls Environment Not in Syllabus 4 4B [Sox Audit _ ~L- LL 5__ [Professional Ethics zz | 18 | 14 [| 14 | 20 | 16 | 8 6 |The Company Audit o9|-|sf|s |iw6{iwzi|s |s [7 [audit Reports a4{[-[s[-[-[al- 8 |CARO,2016\CARO, 2020 Sn) Eon eel eel one 9 [Audit of Consolidated Financial Statements| 5 | 5 | 4 | - | 4 | 4 | 4 | 4 40 _ [Audit of Dividend _ -[s[-[-[-[-]-[- [Audit Committee & Corporate Governance | 4 | 4 | 6 | 5 | 4 | 4 | 5 | 5 {abilities of Auditor _ 7 4{[-[-[- [4a t-T- [cost Audit Notinsyllabus | - | 4 | - | - Internal Audit — |-;4]-[T-{-]-[s]- 14 [Management and Operational Audit tats |-[- [4a]. - 15 _ [Auditunder Fiscal Laws s|s[a[4fa4 10 | 9 | 16 _|DueDiligence,tnvestigition&Forensicauait, 9 | - | 5 | 4 | 4 _[s Peer Review and Quality Review La tal. - alate [Special Audit Assignments (with Members| | : - Excluded from syllabus from Nov, | | -[4]-[-[4la : 18 : a[«>a[s [sel 9 19 |Auditof NBFC -{[-{[-[s/[-[4][-[- 20 [auditofinsurance Companies | 4 -[4[elats 20A__|Audit of Cooperative Societies | -|-|- fs 21 [Audit of PSU _ afats[>sfafalts | - | [Accounting Standards and Ind AS s{s{[-/[-[-[-]|- ‘Schedule Ill of Companies Act, 2013 -f-t-{]-l4¢tsl-f- - Total _ 1z4 | 120 | a9 | a4* | 120 | 120 | sa* | a8 *Descriptive Questions Only (Marks of MCQ not included). Litt Syllabus (New Course) Paper 3 : Advanced Auditing and Professional Ethics Time : 3 Hrs. Marks: 100 Objectives: (@ To acquire the ability to analyse current auditing practices and procedures and apply them in auditing engagements; (b) To acquire the ability to solve cases relating to audit engagements, Contents: 1, Auditing Standards, Statements and Guidance Notes: Engagement & Quality Control Standards, Statements and Guidance Notes on Auditing issued by the ICAI; Elements of system of quality con- trol, leadership responsibilities for quality within the firm, Acceptance and Continuance of clients relationships and specific engagements, Engagement Performances, etc. (SOC 1 Quality Control for Firms that Perform Audits and Reviews of Historical Financial Information and Other Assurance and Related Services Engagements). : 2, Audit Planning, Strategy and Execution: Planning the flow of audit work; audit strategy, audit plan, audit programme and importance of supervision; principal's ultimate responsibility; extent of delegation; control over quality of audit work; Analytical Procedures prior to audit as well as to- wards finalization; Concept of Principal Auditor and Other Auditor, Acceptance as Principal Auditor, Procedures to be performed by Principal Auditor, Co-ordination between the Principal Auditor and Other Auditor (SA 600 Using the Work of Another Auditor); Concept of Internal Audit Functions and its evaluation, Using the work of the internal audit function, Using internal auditors to provide direct assistance (SA 610 Using the Work of Internal Auditors); Auditor's Expert - Meaning, Need for an Auditor’s Expert, Understanding the Auditor's Expert, Agreement with the Auditor’s Expert, Adequacy of the Auditor’s Expert’s Work (SA 620 Using the Work of an Auditor's Expert). 3. Risk Assessment and Internal Control: Evaluation of internal control procedures; Components of internal controls; Internal control and risk assessment; Risk-based audit, audit risk analysis, general steps; Internal audit; Reporting on internal control weaknesses (SA 265 Communicating Deficiencies in Internal Control to those charged with governance and management); Framework on Reporting of Internal Controls. 4, Special aspects of Auditing in an Automated Environment: Key features of automated environment, related risks and controls, Standards, Guidelines and procedures, using relevant frameworks and best practices, understanding and documenting automated environment, Enterprise Risk manage- ment overview, assessing IT-related risks and controls, evaluating risks and controls at entity level and process level, Considerations of automated environment at each phase of audit cycle, using relevant analytical procedures and tests using data analytics, key concepts of auditing in real automated environments such as E-Commerce, ERP, Core Banking, etc. 5. Audit of Limited Companies: Application of Relevant Provisions under the Companies Act, 2013 relating to Audit and Auditors and Rulesmade thereunder; Powers/rights, duties of auditors;Branch Audit; significance of true and fair view; Dividends and divisible profits-fnancial, legal, and policy considerations; depreciation; Special features of audit of Limited Liability Partnerships (LLPs)- Eligibility for audit, appointment of auditor, remuneration, etc. Audit report under the Companies Act, 2013; Reporting under CARO. 113114 ‘SYLLABUS (NEW COURSE) 6. Audit Reports: Basic elements of auditor’s report; Types of opinion; Notes on accounts; Distinction between notes and qualifications; Distinction between audit reports and certificates; Communica- tion to Management and those charged with Governance; Self Review threats; Drafting of different types of Audit Reports. 7. Audit Reports & Certificates for Special Purpose Engagement: Reporting on Agreed Upon: Proce- dure, Review Reports, Special Purpose Reports (SA 800 Special Considerations-Audits of Financial Statements Prepared in Accordance with Special Purpose Framework; SA 805 Special Consider- ations-Audits of Single Purpose Financial Statements and Specific Flements, Accounts or Items of a Financial Statement; SA 810 Engagements to Report on Summary Financial Statements); Guidance Note on Audit Reports and Certificates for Special Purposes including Scope of special purpose reports and certificates; Responsibility for preparation of special purpose statements, Scope of the reporting auditor's functions, Contents of such reports and certificates, Reports and certificates on specific items of financial statements, Communication of report or certificate, 8, Audit Committee and Corporate Governance: Audit committee; Role of auditor in Audit Committee and Certification of Compliance of Corporate Governance; Compliances with Laws and Regulations (SA 250 Consideration of Laws and Regulations in an Audit of Financial Statements); Disclosure requirements including those of SEBI; Regulatory requirements of Corporate Governance, Report on Corporate Governance. 9, Audit of Consolidated Financial Statements: Provisions under the Companies Act, 2013 in respect of Accounts of Companies and Rules made thereunder; Audit of Consolidated Financial State- ments- responsibility of parent company, auditor of the consolidated financial statements; audit considerations-permanent consolidation, current period consolidation; reporting 10. Special features of audit of Banks, Insurance & Non-Banking Financial Companies 11. Audit under Fiscal Laws: Audit under Fiscal Laws, viz,, Direct and Indirect Tax Laws including documentation for Form 3CD ete. 12. Special Audit Assignments: Special audit assignments like audit of members of stock exchange, mutual funds, depositories, bank borrowers; Environmental audit; Energy audit; Audit of Stock and Debtors (Unit Inspections). 13, Audit of Public Sector Undertakings: Special features, Directions of Comptroller and Auditor Gen- eral of India; Concept of propriety audit; Performance audit; Comprehensive audit 14, Liabilities of Auditors: Professional negligence; Civil liabilities; Criminal liabilities; Liabilities under different statutes - for example Income Tax Act, Companies Act. 15. Internal Audit, Management and Operational Audit: Provisions of internal audit as per Companies Act, 2013; Scope of internal auditing; Relationship between internal and external auditor; Basics of Internal Audit Standards issued by the ICAT; Draiting of Internal Audit Report; Management audit and Operational audit. 16. Due Diligence, Investigation and Forensic Audit: Due Diligence Review; Audit versus Investigation; Steps for investigation; Types of investigation; procedure, powers, etc. of investigator; Types of Fraud, indicators of fraud, follow-up thereof; Forensic audit-meaning, difference between statutory audit and forensic audit, forensic audit techniques, forensic audit report etc. 17. Peer Review and Quality Review 18. Professional Ethics: Code of Ethics with special reference to the relevant provisions of the Chartered Accountants Act, 1949 and the Regulations thereunder. Notes: (i The specific inclusions/exclusions, in any topic covered in the syllabus, will be effected every year by way of Study Guidelines. (i The provisions of the Companies Act, 1956 which are still in force would form part of the syllabus till the time their corresponding or new provisions of the Companies Act, 2013 are enforced. (ii) If new legislations/Engagement and Quality Control Standards/Guidance Notes/Statements are enacted in place of the existing legislations, the syllabus would include the corresponding provisions of such new legislations with effect from a date notified by the Institute. The changes in this regard would also form part of Study Guidelines.Modifications in the scope of [ Syllabus (ICAI Announcement Dated 24-06-2019) ‘ 1. Special Audit Assignment topic has been excluded. 2. Following Engagement and Quality Control Standards excluded: 2, Guidance Note on Independence of Auditors. Cale BS nee nee S58) ee : S.No. |TopicoftheSyllabus|, Exclusions, 2G j 1 A800 Special Considerations - Audits o _ dance with Special Purpose Fr _ | i 2 SA 805 Special Considerations - Audits of Single Purpose Financial Statements and | | Specific Elements, Accounts or Items of a Financial Statement _ | ee) Engagements to Report on Summary Financial Statements ‘SRE 2400 Engagements to Review Historical Financial Statements (Revised) ; 5 ‘SRE 2410 Review of Interim Financial Information Performed by the Independent : | Auditor of the Entity | i SAE 3400 ___ | The Examination of Prospective Financial Information _| | Sag e02 | acaence Wepoes on coolness Oaor / ~~ SAE 3420 “Assurance Engagementsto Reporton the Compilation of Pro forma Financial | - Information included in a Prospectus (New) | 9 SRS 4400 Engagements to Perform Agreed Upon Procedures Regarding Financial | | _| information | a0 [| _sRs4410 Compilations Engagements (Revised) _ ' 3. Following Guidance Notes and other publications are excluded: t 1. Code of Ethics (Chapter on Professional Ethics as covered in Study Material is in syllabus) Guidance Note on Audit of Inventories. Guidance Note on Audit of Debtors, Loans and Advances. Guidance Note on Audit of Investments. Guidance Note on Audit of Cash and Bank Balances. Guidance Note on Audit of Liabilities Guidance Note on Audit of Revenue. ep enarae Guidance Note on Audit of Expenses. 10. Guidance Note on Computer Assisted Audit Techniques (CATS). 11. Guidance Note on Audit of Payment of Dividend. 12. Guidance Note on Audit of Capital and Reserves. 13. Guidance Note on Reporting under section 143(3)({) and (h) of the Companies Act, 2013. n 143(12) of the Companies Act, 2013. 14. Guidance Note on Reporting on Fraud under se 15Abbreviations AASB Auditing and Assurance Standard Board AE Auditor’s Expert AGM. Annual General Meeting Auditor's Report ‘Accounting Standards ~ a Board Meeting _ CAAT ‘Computerised Assisted Audit Techniques CAG. "Comptroller & Auditor General of India 7 CG__| Central Government __ cis ‘Computerised Information System — COP | Certificate of Practice — : DIM Design, Implementation and Maintenance EC External Confirmation EDP Electronic Data Processing EGM Extraordinary General Meeting EOM Emphasis of Matter = EP Engagement Partner EQCR Engagement Quality Control Reviewer ERP Enterprise Resource Planning ET Engagement Team — — FRE Financial Reporting Framewc FS Financial Statements Ic Internal Control _ INFO| _ Information = = MNGT | Management MRL | _ Management Representation Letter NTE | Nature, Timing and Extent ~ OA Other Auditor 7 OLRT | _ Online Real Time Processing System OMP Other Matter Para 17118 ABBREVIATIONS, OR Ordinary Resolution PA Principal Auditor PFI Prospective Financial Information RAP Risk Assessment Procedure RBA Risk Based Audit RMM Risk of Material Misstatement ROM Register of Members SA Standard on Auditing SAAE Sufficient Appropriate Audit Evidence SAE ‘Standard on Assurance Engagement ‘SAP ‘Substantive Analytical Procedure SFS Summary Financial Statement (SA 810) SFS Single Financial Statement (SA 805) SG State Government sO Service Organisation SOC Standard on Quality Control SR Special Resolution SRE Standard on Review Engagement SRS Standard on Related Services ‘STD ‘Scope, Timing and Direction TCWG Those Charged with Governance TOC ‘Tests of Control TOD Tests of Details WR Written RepresentationMODULE | AUDITING CONCEPTS AND ENGAGEMENT STANDARDSIntroduction # Inthe simplestterms, auditingstandardsrepresentacodificationofthe best practices / in the field of auditing, Auditing standards are therefore, the performance benchmarks for the auditors. Auditing Standards contain guidance for the professionals on how they should carry out their professional engagements, enshrined as the basic principles and essential procedures to apply those basic principles that relates to judgment or behaviour. \ Standard Setting ‘@ The auditing standards in India are formulated by the Auditing and Assurance Stan- Process in India dards Board (AASB) of the Institute. @ The Standards formulated by the AASB are issued under the authority ofthe Council, of the Institute and are mandatory in nature, This implies that while carrying out thelr attest functions, it will be the duty of the members of the Institute to comply with these Standards, Ifforany reasona member has notbeen able to perform an audit in accordance with the applicable Standards, hisreportshould drawattention to thematerial departures therefrom. “gNNWAXYL | “AASB Wenios project ‘Study group constituted |» Draft submitted by study group | } Draft hosted on website J+ Draft sent to Chairman for approval rm esses aS ma ‘Gomments considered at ‘Comments received & | ‘AASB. ° hosted on website places betore Counc |» [ Final Standard tesued Objectives and ( Toreview the existing and emerging auditing practices worldwide and identify areas Functions of AASB in which Standards on Quality Control, Engagement Standards and Statements on Auditing need to be developed. 13-TAXMANN®- 14 MODULE I: AUDITING CONCEPTS AND ENGAGEMENT STANDARDS Revised Preface (i) To formulate Engagement 7 Standards, Standards on Quality Control and Statements on Auditing so that these may be issued under the authority of the Council of the Institute, review the existing Standardsand Statementson Auditingtoassesstheir relevance in the changed conditions and to undertake their revision, if necessar (iv) To develop Guidance Notes on issues arising out of any Standard, auditing issues pertaining to any specific industry or on generic issues, so that those may be issued under the authority of the Council of the Institute. (v) To review the existing Guidance Notes to assess their relevance in the changed circumstances and to undertake their revision, if necessary. (Vi). Toformulate General Clarifications, wherenecessary,onissuesarising from Standards. (vil) To formulate and issue Technical Guides, Practice Manuals, Studies and other papers undef its own authority for guidance of professional accountants in the cases felt appropriate by the Board. . oe ® ‘The Auditing and Assurance Standards Board (AASB), as a top priority, has taken on the ambitious project of convergence with the International Standards issued by the International Auditing and Assurance Standards Board. Asa first step towards convergence, it had, after going through its rigorous due process, in uly 2007 published the Revised Prefaceto Standardson Quality Control, Auditing, Review, Other Assurance and Related Services, corresponding to its namesake issued by the AASB in 2006. The Revised Preface, applicable from April 1, 2008, has changed the face of the auditing literature, introducing some more fundamental concepts to the existing ones, Engagement Standards ‘The Revised Preface categorisesthe Standardsbased on thenature of service beingprovided byamember.It, therefore, introduces an umbrella concept of Engagement Standards. The term “Engagement Standards” comprises the following Standar Standards on Audit- ing (SA) to be applied in the audit of historical financial information. Standards on Re- view Engagements (SREs) to be applied in the review of historical financial information. Standardson Assur- ance Engagements (SAEs) tobeapplied in assurance engagements, engagements dealing with subject matter other than historical financial information. Standards on Relat- ed Services (SRRs) tobe applied to engagements involving application of agreed upon procedures to information and other related services such as com- pilation engagements, ‘@ The Revised Preface therefore, does away with the nomenclature “Auditing and Assurance Standards". # Italso contains provisions for Standards; to be known as the Standards on Quality Control (SQCs), which would be fundamental to all the services covered by the Engagement Standards.CH. 1: QUALITY CONTROL AND ENGAGEMENT STANDARDS 15 “Renumberingof | Standards on Quality Control (SQC)___| 01-99 Standards Standards on Auditing (5A) 100-999 Standards on Review Engagements (SRE) 2000-2699 Standardson Assurance Engagements (SAE) | "3000-3699 _ Related Services (SRS) 4000-4699 Classification of | Introductory matters 100-199 | SAS General Principles and Responsibilities 200-299 _ Risk Assessments and Response to Assessed 300-499 Risk ‘Audit Evidence __ 500-599 | Using work of Others 600-699 ‘Audit conclusions and Reporting ____ 700-799 | Specialised Areas _ 800. New Format of i SAs-IAASB Clarity | Convention Section -T ‘Section =i Requirements section Application Material Objective + Explanatory Guidance Introduction 2 Appendices Definitions Requirements Represented by use of SHALL Introduction the ‘Introduction’ section deals the purpose and scope of the Standard, subject matter of the Standard and effective date of the Standard. F Objectives ‘@ The ‘Objectives’ section provides the reference in which the Requirements are elaborated in the Standard. Thealmofthe auditor isto achieve the Objectivesas specified | in all Standards of Auditing (SAs). Definitions The ‘Definitions’ section deals with the meaning attributed to certain expressions for the purpose of SAs. The aim is to assist the auditors to ensure consistent application of the Standards. Requirements ‘® The fundamental principles of the Standard are contained in | the Requirements section and presented by use of “shall” | © Further, this format also does away with the need to present the principles laid down by the Standard in bold text. The ‘Requirements’ section also contains cross reference to the | relevant Application and Other Explanatory Material, | | Application and ‘@ The ‘Application and Other Explanatory Material’ contained Other Explanatory in an SA is an integral part of the SA as it provides further Material cexplanationof,and guidance for carryingout, therequirements | | ofanSA,alongwiththe background information on thematters | addressed in the SA. INVIRXYL- ofTAXMANN® 16 ‘MODULE I : AUDITING CONCEPTS AND ENGAGEMENT STANDARDS Itmay include examples of procedures, some of which the auditor may judgetobeappropriatein thecircumstances.Such guidance is, however, not intended to impose a requirement. ‘@ Appendices which form part of Application and Other Explanatory Material are an integral part of a Standard, Quality Control for Firms that perform Audits and Review of Historical Financial Information, and other Assurance and Related Service Engage- ments. 01.04.2009 ic | Overall Objectives ofthe! independent Audtorandthe Conductofan Ault 2 |sa200 (Revised) 01.04.2010 in Accordance with Standards on Auditing 3 __[SA210 (Revised) | Agreeing the Terms of Audit Engagements 01.04.2010 4 [SA 220 (Revised) | Quality Control for an Audit of Financial Statements 01.04.2010 5 | SA230 (Revised) | Audit Documentation 01.04.2009 6 | SA240 (Revised) | The Auditor’s Responsibilities Relating to Fraud in an Audit of | Financial | 01.04.2009 Statements. 7 _|SA250 (Revised) | Consideration of Lawsand Regulations’ in an Audit of Financial Statements | 01.04.2009 8 | SA260(Revised) | Communication with Those Charged with Governance 01.04.2017 9 |SA265 Communicating Deficiencies in Internal control to those Charged with | 01.04.2010 governance and Management 10 | SA299(Revised) | Joint. Audit of Financial Statements 01.04.2018 = 5 11 _| SA 300 (Revised) Planning; an ‘Ault of Financial Statements 01.04.2008 12 |SA315, Identifying and Assessing the Risk of material Misstatements through | 01.04.2008 understating the Entity and Its Environment 13 | SA 320 (Revised) | Materiality in Planning and Performing an Audit 01.04.2010 14 | SA330 Responses to Assessed Risks 01.04.2008 15 | SA 402 (Revised) | Audit Considerations Relating to an Entity using a Service Organisation | 01.04.2010 16 |SA450 Evaluation of Se Identified during the Audit 01. oe 2010 [Audit Evidence 17 | SA500 (Revised) | Audit Evidence 01.04.2009 18 | SA501 (Revised) | Audit Evidence - Specific Considerations for Selected Items“ 01.04.2010 19 | SA'505 (Revised) | External Confirmations. 01.04.2010 20 | SA510 (Revised) | initial Audit Engagements - Opening balances 01.04.2010 21 |SA520 (Revised) | Analytical Procedures 01.04.2010 22 |SA530 (Revised) | Audit Sampling 01.04.2009 23 |SA540 (Revised) | Auditing Accounting Estimates, Including fair Value Accounting Estimates | 01.04.2009 and Related Disclosures 24 | SA550 (Revised) | Related Parties 01.04.2010CH. 1: QUALITY CONTROL AND ENGAGEMENT STANDARDS 417 S. | Number of ‘Name of SQG/SA/SRE/SAE/SRS Effective No.| Standards ee Date 25 | SA 560 (Revised) | Subsequent Events 01.04.2009 26 | SA570(Revised) | Going Concern 01.04.2017 27_| SA 580 (Revised) | Written Representation _ 01.04.2009 Using Work of Others one 28 | SA600 Using the Work of Other Au = — 29 | S610 (Revised) | Using the work of Internal Auditors 01.04.2016 “30 Using the Work of an Auditor's 01.04.2010 | Audit Conclusions and Reporting ee 31_| A700 (Revised) | Forming an Opinion and Reporting on Financial Statements _ 01.04.2018 32 |SA701 Communicating Key Audit Matters in the Independent Auditor’s | 01.04.2018 Report a 33 | A705 (Revised) | Modifications to the Opinion in the Independent Auditor’s Report_| 01.04.2018 34 | SA706 (Revised) | Emphasis of Matter Paragraphs and Other Matter Paragraphs in the | 01.04.2018 L Independent Auditor's Report ae 35 |SA710 (Revised) | Comparative Information - Corresponding Figures and Comparative | 01.04.2011 Financial Statements _ 36 | SA720(Revised) | The Auditor’s responsibilities relating to Other Information 01.04.2018 Specialised Areas _ 37 | SA 800 Special Considerations - Audits of Financial Statements Prepared in | 01.04.2011 Accordance with Special Purpose Framework EE 38 | SA805 Special Considerations- Audits of Single Financial tatementsand Specific | 01.04.2011 _ Elements, Accounts or Items of a Financial Statement 39 |sagio Engagements to Report on Summary Financial Statements 01.04.2011 Standards on Review Engagement : = 40 [SRE 2400 (Re- | Engagements to Review Financial Statements 01.04.2016 vised) _ 41 | SRE 2410 Review of Interim Financial Information Performed by the Independent | 01.04.2011 Auditor of the entity _ on Assurance Engagements J eS SAE 3400 The Examination of Prospective Financial Information 43 | SAE 3402 Assurance Reports on Controls at a Service Organization 01.04.2011 “44 | SAE 3420 ‘Assurance Engagements to Report on the Compilation of Pro Forma | 01.04.2016 Financial Information included in a Prospectus (Standards on related Services = e 45 [srs 4400 Engagements to Perform Agreed Upon Procedures Regarding Financial Information - 46 |SRS 4410 (Re-| Compilation Engagements - 01.04.2016 vised) NNN —TAXMANN®- 18 MODULE I: AUDITING CONCEPTS AND ENGAGEMENT STANDARDS All firms to have system of quality control that provides reasonable assurance that: (a) Firm & personnel comply with professional standards, regulatory & legal requirements, and (b)_Reports issued by firm or partners are appropriate in the circumstances. Requirements of SQC = = e Leadership Re- sponsibilities for Quality control (ac) Ethical requirements Independence (@ Promote internal culture wists Essential of quality in engagements, Compliance with professional standards, regulatory /legal requirements. Issue of reports appropriate in circumstances. (b) Require CEO/Managing partner to assume ultimate responsibility for QC. (©) Recognise & reward high quality work. Establish policies & procedures to reasonable assure that Firm & personnel comply with relevant ethical requirements of Integrity. © Objectivity. + Professtonal competence & due care. Confidentiality. ¢ Professional behaviour: Policies & procedures should enable: Communication of independence requirements to personnel & others. $ Identification of circumstances threatening independence. ‘© Take appropriate action for elimination of threats/withdrawal from engagement. Resolution of breaches of independence. Maintenance of ‘ Engagement partners to provide firm with relevant independence of information about client. personnel ‘Prompt notification of threats to independence. Accumulation & communication of relevant information to appropriate personnel, Other Points Firm should obtain Annual written confirmation as to compliance with independence requirements. © Create policies to reduce Familiarity threat. For Example, rotation of engagement partner atleast every seven years in case of audit of listed entities, Client Acceptance/ Continuance ‘ Establish policies/procedures to reasonable assure that clients are accepted/ continued only where: (a) Client integrity has been considered. (b) Firm is competent to perform engagement wart. capability, time & resources. (©) Firm can comply with ethical requirements. @ Thefirmshould obtain such informationasitconsidersnecessary inthe circumstances before accepting an engagement with a new client, when deciding whether torANDARDS: 19 CH.1: QUALITY CONTROL AND ENGAG! continue an existing engagement, and when considering acceptance of a new engagement with an existing client. Where issues have been identified, and the firm decides to accept or continue the client relationship or a specific engagement, it should document how the issues were resolved. Establish policies war-t. withdrawal from engagement and communication requirements, if circumstances warrant, | Considerations as to integrity of clients | With regard to the integrity ofa client, matters thatthe firm considers include, for example: | 1. ‘Theidentity and businessreputation ofthe client'sprincipal owners, key management, | related parties and those charged with its governance. 2, The nature of the client's operations, including its business practices | 3. Information concerningtheattitude ofthe client's principal owners, key management and those charged with its governance towards such matters as aggressive interpretation of accounting standards and the internal control environment. 4. Whether the clientis aggressively concerned with maintaining the firm's fees as low as possible. 5. Indications of an inappropriate limitation in the scope of work. 6. Indications that the client might be involved in money laundering or other criminal activities. 7. The reasons for the proposed appointment of the firm and non-reappointment of the previous firm. ‘The extent of knowledge a firm will have regarding the integrity of a client will generally grow within the context of an ongoing relationship with that client. Human Resources _| Establish policies/procedures to reasonable assure that: gNNVIUXYL: Firmhassufficientpersonnel with capabilities, competence & commitmenttoethical | principles; & |__# Responsibility of engagement partner clearly defined & communicated to him/her, Engagement Establish policies/procedures to reasonable assure w.rt.: Performance ‘# Compliance with professional standards. ‘# Compliance with laws/regulations. @ Engagement partner issues reports appropriate in the circumstances, Supervision ‘@ Tracking the process of engagement. ‘# Considering capabilities, competence of individuals on team. @ Addressing issues arising during the engagement. + Identifying matters for consultation & consideration by L sd members of team. Matters considered by reviewer: ‘@ Performance of workin accordance with standards & legal/ regulatory requirements. © Significant matters raised for further consideration. mented. | ® Consultations undertaken & results documented & imple- |TAXMANN 1.10 ‘MODULE I: AUDITING CONCEPTS AND ENGAGEMENT STANDARDS Need to revise nature, timing & extent of work performed. @ Worksupportsconclusionsreached & appropriate documen- tation. Sufficiency & appropriateness ofevidence-supportsthe report. @ Achievement of engagement objectives. Consultation Establish policy/procedures to provide reasonable assurance: ‘© Appropriateconsultation takesplaceon difficult orcontentious matters; Sufficient resources are available to enable appropriate consultation to take place; @ Thenature and scope of such consultations are documented; and # Conclusions resulting from consultations are documented and implemented, Differences of Policies & procedures for dealing/resolving differences of opinion: opinion With in engagement team. @ With Consultants - internal/external. ‘@ Engagement partner vis-a-vis QC reviewer. Document the conclusions reached & their implementation. Report not to be issued until matter is resolved. Engagement Q.C. | @ Require QC review for all audits of FS.o review ed companies. ‘© Establish criteria for QC review ofall other audits/reviews of historical financial information & other assurance & related service engagements © Require QC for engagements covered by criteria above. @ Require completion of engagement before QC review. Provide forreplacementof QCreviewerifhisability to perform 7 objective review is impaired. | Engagement docu- | Assembly of files on timely bases after engagement reports mentation has been finalized. Ensure confidentiality, safe custody, integrity, accessibility and retrieve ability of engagement documentation. ‘@ Ensureretention of engagement documentation for sufficient period (not lower than 7 years). “Monitoring Establish Policies & procedures to reasonable assure that QC policies/procedures are: ® Relevant! © Adequate. © Operating effectively. © Complied with in practice Italso includes ongoing consideration & evaluation of QC system, periodic inspection of completed Assignments. i |CH. 1: QUALITY CONTROL AND ENGAGEMENT STANDARDS 114 IMPORTANT QUESTIONS Q.No. 1: BSS & Associates is a partnership firm of Chartered Accountants which was established five Q.No. 2: yearss back. The firm was offering only advisory services at the beginning, however, after audit rotation and advent of GST, firm sees lot of potential in these areas also and started looking for opportunities in these areas also. These services being assurance in nature, the firm required some internal restructuring and set up some policies and procedures for compliance year on year. ‘The firm started getting new clients for these new services and is now looking to obtain such informationasitconsidersnecessary in the circumstancesbefore acceptinganengagement with anew client, when deciding whether to continue an existing engagement, and when considering acceptance of a new engagement with an existing client, Where issues have been identified, and the firm decides to accept or continue the client relationship or a specific engagement, it has been setting up a process to document how the issues were resolved. ‘The firm is now looking to worl with only select clients which are in line with the policies of the firm, The firm understands that the extent of knowledge it will have regarding the integrity of a cllent will grow within the context ofan ongoing relationship with that client, With regard to the integrity of a client, you are required to give some examples of the matters to be considered by the firm as per the requirements of SQC 1. [RTP-May 19] or MB & Associates is a partnership firm of the Chartered Accountants which was established seven years back. The firm is getting new clients and has also been offered new engagement services with existing clients. The firm is concerned about obtaining such information as it considers necessary in the circumstances before accepting an engagement with a new client and acceptance of a new engagement with an existing client. The firm is looking to work with only select clients to adhere to the Quality Control Standards. Guide MB & Associates about the matters to be considered with regard to the integrity of a client, as per the requirements ofSQC1. INov, 19 - New Syllabus (4 Marks)] HINT: Refer the topic "Considerations as to integrity of clients" You are an audit senior working for the firm Bohra & Company. You are currently carrying out the audit of Wisdom Ltd., a manufacturer of waste paper bins. You are unhappy with Wisdom Ltd/s inventory valuation policy and have raised the issue several times with the audit manager, He has dealt with the client for a number of years and does not see what you are making an ‘objection about, He has refused to meet you on site to discuss those issues. As the audit manager had dealt with Wisdom Ltd. for so many years, the other partners have decided to leave the audit of Wisdom Ltd. in his capable hands. Comment on the situation out- lines above. t HINT: Audit Firm has not complied with the requirements of SQC-1 and SA 220 in so far as appears that no engagement partner Is appointed to audit engagement undertaken by the firm, to take respon- sibility for the engagement on behalf ofthe firm and the firm does not have a suitable policy to resolve conflicting views. is [i@SA 200 (REVISED) “OVERALL OBJECTIVES OF THEIN! IN ACCORDANCE WITH STANDARDS ON AUDITING? (W.E,F.01.04.2010) € SNE AOD OF A cope acne Overall Objectives | In conducting an audit of financial statements, the overall objectives of the auditor are: of the Auditor (a) To obtain reasonable assurance about whether the F. S. 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 RS. are prepared, in all material respects, in accordance with an applicable FRE, and |TAXMANN® 112 MODULE I : AUDITING CONCEPTS AND ENGAGEMENT STANDARDS (B) To report on the FS, and communicate as required by the SAs, in accordance with the auditor's findings. Inall cases when reasonable assurance cannot be obtained and a qualified opinion in the auditor's report is insufficient, the SAs require that the auditor disclaim an opinion or withdraw from the engagement. 2 Requirements of | (a) Ethical 1. The auditorshall comply with relevant ethical requirements, Standard Requirements including independence. | Relatingtoan | 2, Relevant ethical requirements ordinarily comprise the Code | Audit of FS of Ethics issued by the ICAI, The fundamental principles are: | Integrity, / © Objectivity; | Professional competence and due care; Confidentiality; and | | Professional behaviour, Independence comprises both independence of mind and independence of appearance, 4, Independence enhances the auditor's ability to act with integrity to be objective and to maintain an attitude of professional skepticism, (®) Professional | Meaning: Skepticism + an attitude that includes ® a questioning mind, being alert to conditions which may indicate possible misstatement due to error or fraud, and, acritical assessment of audit evidence, ements: 1. Theauditorshall planand perform anaudit with professional skepticism. 2. ItReduces risk of: @ Overlooking unusual circumstances. Overgeneralisingwhen drawingconclusionsfromaudit observations, Using inappropriate assumptions in determining N, 7, E of audit procedures & evaluating the results thereof. 3. Professional skepticism includes being alert to: | © Contradictory audit evidence © Questions on reliability of documents. ‘@ Conditions indicating possible frauds. Circumstances suggestingneed for audit procedures in addition to those suggested in SAs. (Q) Professional | Meaning: Judgment theapplicationofrelevanttraining, knowledgeand experience,CH. 1: QUALITY CONTROL AND ENGAGEMENT STANDARDS, 113 (@ Sufficient Appropriate ‘Audit Evidence and Audit Risk ‘@ within the context provided by auditing, accounting and ethical standards, ‘@ in making informed decisions about the courses of action ‘@ that are appropriate in the circumstances of the audit engagement. Requirements: 1, The auditor shall exercise professional judgment in planning and performing an audit of financial statements. 2. Its exercise depends on facts & circumstances known to the auditor. 3. Professional Judgmentistobe exercised throughouttheaudit and to be appropriately documented. 4. Professional Judgment is important when deciding about: © Materiality & audit risk ‘# NTE of audit procedures, ‘@ Evaluating sufficiency & appropriateness of audit procedures @ Evaluating management judgment in applying appli- cable FRF. 4 Drawing conclusions based on audit evidence. ‘@ To obtain reasonable assurance, the auditor shall obtain sufficient appropriate audit evidence to reduce audit risk to an acceptably low level and thereby enable the auditor to draw reasonable conclusions on which to base the auditor's opinion. @ Reasonable Assurance: in the contextofanauditoffinancial statements, a high, but not absolute, level of assurance. Sufficient Appropriate Audit Evidence: Sufficiency refers to quantum and Appropriateness refers to quality. @ Audit Risk: The risk that the auditor expresses an inappropriate auditopinion when the financial statementsare materially misstated, Itis a function of the risks of material misstatement and detection risk. (©) Conduct of an Audit in Accordance with SAs 1. Compliance ‘ The auditor shall comply with all SAs with SAS relevant to the audit. Relevant to the AnSAisrelevanttotheauditwhen the SAis in effect and the circumstances addressed by the SA exist. audit @ The auditor shall have an under- standing of the entire text ofan SA. @ The auditor shall not represent compliance with SAs in the auditor's reportunlesstheauditorhascomplied with the requirements of this SA and her SAs relevant to the audi gNNYWXYLTAXMANN® 114 MODULE | : AUDITING CONCEPTS AND ENGAGEMENT STANDARDS states in | objectives. Individual SAs_ | Having regard to interrelationship between SAs: Determine if any audit proce- dureinaddition tothat required by SAsis necessary. = Evaluate whether sufficient appropriate audit evidence has been obtained, 2. Objectives Use this objective to achieve overall 3. Complying | Unless: with relevant | @ Entire SAis not relevant. Requirements | Requirement is not relevant because itis conditional & condition does not exist. @ Departure from requirement in exceptional circumstances - perform alternativeprocedurestoachieveaim 7 of requirement. 4. Failure to @ Evaluate if the failure: Achieve an = Preventsauditor from achieving Objective the overall objectives of the auditor, and = Necessitates modified audit opinion. or = Withdraw fromtheengagement. @ Itisa significant matter fordocumen- tation. “Scope of Audit @ The auditor’s opinion on the financial statements deals with whether the FS. are prepared, in all material respects, in accordance with the applicable FRE. Such an opinion is common to all audits of financial statements. @ 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. In some cases, however, the applicable laws and regulations may require auditors to provide opinions on other specific matters, such as the effectiveness of internal control, or the consistency of a separate management report with the financial statements, ‘© While the SAs include requirements and guidance in relation to such matters to the extent that they are relevant to forming an opinion on the financial statements, the auditor would be required to undertake further work if the auditor had additional responsibilities to provide such opinions.“Preparation of FS. CH. 1: QUALITY CONTROL AND ENGAGEMENT STANDARDS 1.45 Anaudi appropriate, TCWG have responsibility: (1) For the preparation and presentation of the FS. in accordance with the applicable FRF; this includes the design, implementation and maintenance of internal control relevant to the preparation and presentation of FS. that are free from material misstatement, whether due to fraud or error; (2) To provide the auditor with: () All information, such as records and documentation, and other matters that are relevant to the preparation and presentation of the financial statements; (i) Any additional information that the auditor may request from management and, where appropriate, TCWG; and (iif) Unrestricted accessto those within theentity from whom theauditor determines it necessary to obtain audit evidence. (3) As part of their responsibility for the preparation and presentation of the financial statements, management and, where appropriate, TCWG are responsible for: © The identification of the applicable FRE, in the context of any relevant laws or regulations. The preparation and presentation ofthe FS. in accordance with that framework, ‘@ An adequate description of that framework in the financial statements. ‘The preparation of the FS. requires managementtoexercisejudgmentinmakingaccounting estimates that are reasonable in the circumstances, as well as to select and apply appro- priate accounting policies. These judgments are made in the context of the applicable FRE. in accordance with SAsis conducted on the premise that management and, where Risk of Material misstatement (1) The risks of material misstatement may exist at two levels: The overall financial statement level; and ‘Theassertion level for classes oftransactions, accountbalances,and disclosures. (2) Risks of material misstatement at the overall financial statement level refer to risks of material misstatement that relate pervasively to the financial statements as a whole and potentially affect many assertions, (3) Risksofmaterial misstatementatthe assertion evel areassessed in order todetermine the NTE of further audit procedures necessary to obtain sufficient appropriate audit evidence. (4) The risks of material misstatement at the assertion level consist of two components: | inherent risk and control risk. (5) TheSAsdonotordinarily refer to inherentriskand control riskseparately, but rather ‘0a combined assessment of the “risks of material misstatement’ Inherent Limitations for an audit ‘The auditor is not expected to, and cannot, reduce audit risk to zero and gannot therefore obtainabsolute assurance thatthe financial tatementsare free from material misstatement due to fraud or error. ‘Thisis because there are inherent limitations ofan audit, which Fesultin most of the audit, evidence on which the auditor draws conclusions and bases the auditor's opinion being persuasive rather than conclusive. The inherent limitations of an audit arise from: “gNNVINXYL1.16 TAXMANN®- MODULE I : AUDITING CONCEPTS AND ENGAGEMENT STANDARDS ‘The preparation of FS. involves judgment by managementinapplyingtherequirements ofthe applicable FRF to the facts and circumstances of the entity, For ex: Accounting (1) The nature of financial reporting: estimates | (@) The nature of audit procedures: | ‘ Management & others do not provide complete information intentionally/ unintentionally. ‘# Audit procedures used to gather audit evidence may be ineffective against fraud detection. Audit is not an official investigation into alleged wrongdoings: (3) Balance between benefit and Cost: User expectation that the auditor will form an opinion on the FS. within a "reasonable period of time and at a reasonable cost. Itresults into use of Test checking and putting most of efforts over the areas having risk of material misstatement with corresponding less efforts in other areas IMPORTANT QUESTIONS Q.No. 3: DiscusswithreferencetoSAs:Theauditorisresponsibleformaintaininganattitudeofprofessional skepticism throughout the audit, Do you agree with the statement. HINT: Refer the topic “Professional Skepticism’ Q.No.4: “An Opinion expressed by the auditor is neither an assurance as to the future viability of the ‘enterprise nor the efficiency or effectiveness with which management has conducted the affairs of the enterprise.” HINT: Refer the topic "Scope of Audit" Objective of ‘The objective of the auditor is to accept or continue an audit engagement only when the Auditor basis upon which it is to be performed has been agreed, through: (@) Establishing whether the preconditions for an audit are present; and (b) Confirming that there is a common understanding between the auditor and management and TCWG, of the terms of the audit engagement. Preconditions for | (a) Determinewhetherthe financial reporting frameworkto beappliedin the preparation an Audit ofthe financial statements is acceptable; and (b) Obtain the agreement of management that, it acknowledges and understands its responsibilities for followings: (0 the preparation of the FS. in accordance with the applicable RE (i) exercising necessary internal control to enable the preparation of F. free from material misstatement, whether due to fraud or error. that are (iti) ‘To provide the auditor with: 4, Access to all relevant information such as records, documentation and other matters;Limitation on Scope Prior to ‘Audit Engagement Acceptance CH. 1: QUALITY CONTROL AND ENGAGEMENT STANDARDS 1.17 . Additional information that the auditor may request from management for the purpose of the audit; and c. Unrestricted access to persons within the entity from whom the auditor determines it necessary to obtain audit evidence. Points to remember Additional information that theauditor may request from management forthe pur- pose oftheaudit mayincludewhenapplicable, mattersrelatedto otherinformation in accordance with SA 720. When the auditor expects to obtain other information | after the date of the auditor’s report, the terms of the audit engagement may also ‘acknowledge the auditor's responsibilities relating to such other information including, if applicable, the actions that may be appropriate or necessary if the auditor concludes that a material misstatement of the other information exists in other information obtained after the date of the auditor's report. If management or TCWG 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 RS, the auditor shall not accept such a limited engagement as an audit engagement, unless required by law or regulation todo so. Other Factors Ifthe preconditions for an audit are not present, the auditor shall discuss the matter with Affecting Audit | management. The auditor shall not accept the proposed audit engagement: Engagement (a) If the auditor has determined that the FRF to be applied in the preparation of the Acceptance RS. is unacceptable, or (b) Ifthe management does not agree with its responsibilities prescribed above. ‘Agreement on (1) The auditor shall agree the terms of the audit engagement with management or Audit Engagement TCWG, as appropriate. Terms | Recurring Audits (2) ‘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: (a) The objective and scope of the audit of the FS; (b) The responsibilities of the auditor; (©) The responsibilities of management; @ © Identification of the applicable FRF for the preparation ofthe FS3 and Reference to the expected form and content of any reports to be issued by the auditor and a statement that there may be circumstances in which a report | ‘may differ from its expected form and content. (3) Iflaw or regulation prescribes in sufficient detail the terms of the audit engagement referred above, the auditor need not record them ina written agreement, except for tie fact that such law or regulation applies and that management acknowledges and understands its responsibilities. _ In case of recurring audits, the auditor shall assess whether circumstances require revision in terms of the audit engagement and whether there is a need to remind the entity of the existing terms of the audit engagement. @ (2) The auditor may decide not to send a new audit engagement letter or other written agreement each period. However, the following factors may make it appropriate to |_*_revise the terms of the audit engagement or to remind the entity of existing terms: INVIVXYL.TAKMANN®- 118 MODULE I : AUDITING CONCEPTS AND ENGAGEMENT STANDARDS ‘ Any indication that the entity misunderstands the objective and scope of the audit. @ Any revised or special terms of the audit engagement. @ Arecent change of senior management. Asignificant change in ownership. ‘© A significant change in nature or size of the entity’s business. ‘@ Achange in legal or regulatory requirements, ‘@ A change in the financial reporting framework adopted in the preparation of, the FS ‘© Achange in other reporting requirements, ‘Acceptance of ‘a Change in the ‘Terms of the Audit Engagement (@) The auditor shall not agree to a change in the terms of the audit engagement where there is no reasonable justification for doing so. (b) 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. (6) Ifthe 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. (If the auditor is unable to agree to a change of the terms of the audit engagement andis not permitted by management to continue the original audit engagement, the auditor shall: ‘@ Withdraw from the audit engagement where po: regulation; and. le under applicable law or Determine whether there is any obligation, either contractual or otherwise, to reportthe circumstances to other parties, such as TCWG, owners orregulators. Form and Content ofthe Audit Engagement Letter Form & content of the audit engagement letter may vary for each entity. In addition to including the matters prescribed above, an audit engagement letter may make reference to followings: # Elaboration of the scope of the audit, including reference to applicable legislation, regulations, SAs, and ethical and other pronouncements of professional bodies to which the auditor adheres, # The form of any other communication of results of the audit engagement. @ Thefactthat because ofthe inherentlimitations ofanaudit togetherwiththe inherent limitations of internal control, there is an unavoidable risk that some material misstatements may not be detected, even though the audit is properly planned and performed in accordance with SAs. @ Arrangements regarding the planning and performance of the audit, including the composition of the audit team, ‘© The expectation that management will provide written representations. ‘® The agreement of management to make available to the auditor draft FS. and any accompanying other information in time to allow the auditor to complete the audit in accordance with the proposed timetable. suivantsCH. 1: QUALITY CONTROL AND ENGAGEMENT STANDARDS 119 Example of an Audit engagement letter ° oe ° ‘The agreement of management to inform the auditor of facts that may affect the FS. of which management may become aware during the period from the date of the auditor's report to the date the financial statements are issued. ‘The basis on which fees are computed and any billing arrangements, A request for management to acknowledge receipt of the audit engagement letter and to agree to the terms of the engagement outlined therein, ‘The factthat the audit process may be subjected toa peer review under theChartered Accountants Act, 1949. “NNVIWXYL.STAXMANN®- 1.20 [MODULE I: AUDITING CONCEPTS AND ENGAGEMENT STANDARDS in making Our risk assessments, we consider internal control relevant to the entity's preparation of the financial statements in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the entity's internal control, However, we will communicate to you in ‘writing concerning any significant deficiencies in internal control relevant to the audit of the financial statements that we have identified during the audit. My/Our audit will be conducted on the basis that the Management and those charged with governance (Audit Committee/Board) acknowledge and understand that they have the responsibility: (@ Forthepreparation offinancial statementsthatgivea trueand fairviewin accordance with the applicable Financial Reporting Standards and other generally accepted accounting principles in India. This includes: ‘4 Compliance with the applicable provisions of the Companies Act, 2013 ¢ Proper maintenance of accounts and other matters connected therewith; The responsibility for the preparation of the financial statements on a going concern basis; £ The preparation of the annual accounts in accordance with, the applicable ‘accounting standards and providing proper explanation relatingto any material departures from those accounting standards; ‘# Selection of accounting policies and applying them consistently and making judgments and estimates that are reasonable and prudent so as to give a true and fair view of the state of affairs of the Company at the end of the financial ‘year and of the profit and loss of the Company for that period ‘ Taking proper and sufficient cate for the maintenance of adequate accounting, records in accordance with the provisions of the Companies Act, 2013 for safeguarding the assets of the Company and for preventing and detecting fraud. and other irregularities; ‘ Laying down internal financial controlsto be followed by the Company and that such internal financial controls are adequate and were operating effectively; and Devising proper systems to ensure compliance with the provisions of all applicable laws and that such systems were adequate and operating effectively, (B) Identifying and informing me/us of financial transactions or matters that may have any adverse effect dn the functioning of the Company. : (0) Identifying and informing me/us of; All the pending litigations and confirming that the impact of the pending litigations on the Company’s financial position hasbeen disclosed inits financial statements; ‘4 Allmaterial foresceablelosses, ifany,on longterm contracts including derivative " contractsand the accrual for suchlossesastequired underany laworaccounting standards; and Any delay in transferring amounts, required to be transferred, to the Investor Education and Protection Fund by the Company.CH. 1: QUALITY CONTROL AND ENGAGE! 1.21 (@ Informing me/us of facts that may affect the financial statements, of which Manage- a date the financial statements are isstied, {e) Identifying and informing me/us as to whether any director is disqualified as on March 31, 20YY from being appointed as a director in terms of Section 164(2) of the Gompanies Act, 2013. This should be supported by written representations: ecelved from the directors as on March 31, 20YY and taken on tecord by the Board of Directors, Q : (A) To provide me/us, inter alia, wit (0) Access, at all times, toall information, including the books, accounts, vouchers and other records and documentation of the Company, whether kept at the Head Office or elsewhere, of which the Managementis aware that are relevant to the preparation of the financial statements such as records, documentation. and other matters. This will include books ofaccouint maintained inelectronic. mode; (i) Access, at all times, to the records of all the subsidiaries (including associate companies and joint ventures) of the Company in so far as it relates to te consolidation ofits financial statements; : oy) ‘Access to reports, if any, relating to internal reporting on ‘rads (eg, iB) “mhéchanism reports etc, inchiding those submitted by cost accountant or company secretary in practice to the extent it relates to thelr reporting on frauds in accordance with the requirements of Section 143(12); (iv) Additional information that I/we may request from the Management for the purposes of my /our audit: (v)_ Unrestricted access to persons with{n the Company from whom I/we deem it necessary to obtainauditevidence. Thisincludes my/our entitlementtorequire from the officers of the Company such information and explanations as I/we may think necessary for the performance of my/our duties as the auditors of the Company; and (0) All the required support to discharge my/our dutiesas the statutory auditor as stipulated under the Companies Act, 2013/IGAI standards on auditing and applicable guidance. ‘As part of my/our audit process, I/we will request from the Management written confirmation concerningrepresentations made to me/us in connection withmy/ouraudit, ‘My/Our report prepared in accordance with relevant provisions of the Companies Act, 2013 would be addressed to the shareholders ofthe Company for adoption ofthe accounts ‘at the Annual General Meeting. In respect of other services, my/our report would be | addressed to the Board of Directors. The form and content of my/ou ir report may need to- be amended in the light of my/our audit findings. z ‘ In accordance with the provisions of Section 143(12) and 143(13) ofthe cane Act, 2013 if in the course of performance of my/our duties as auditor, I/we haye reason to believe that an offenceinvolving fraud is being orhasbeen committed against the Company by officers or employees of the Company, 1/we will be required to. report to the Central Government, in accordance with the rules prescribed in this regard which, inter alia, requires me/us to forward my/our report to the Board or Audit Committee, as the case ‘may be, seeking their reply or observations, to enable me/us to forward the same to the Central Government. Such reporting will be made in good faith and, therefore, cannot be considered as breach of maintenance of client confidentiality requirements or be subject NVHXYL:1.22 MODULE I: AUDITING CONCEPTS AND ENGAGEMENT STANDARDSCH.1: QUALITY CONTROL AND ENGAGEMENT STANDARDS, 1.23 ‘The statutory auditors want to enter into an engagement letter with the company in respect of their services but the management has contended that since the statutory audit is mandated by law, engagement letter may not be required. Auditors did not agree to this and have shared format of engagement letter with the management for their reference before getting that signed. In this respect management would like to understand that as per SA 210 (auditing standard referred to by the auditors), if the agreed terms of the engagement shall be recorded in an engagement letter or other suitable form of written agreement, what should be included in terms of agreed audit engagement letter? [MTP-April 19] HINT: Refer the topic "Agreement on Audit Engagement "Terms" Q.No.7: Comment on the following: “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. or R&Co, afirmof Chartered Accountants have notrevised the terms of engagements and obtained confirmation from the clients, for last 5 years despite changes in business and professional development. Please elucidate the circumstances that may warrant the revision in terms of ‘engagement. HINT: Refer the Topic ‘Recurring Audits” [May 13 (4 Marks)] X, a Chartered Accountant was engaged by PQR & Co, Ltd. for auditing their accounts, He sent his letter ‘of engagement to the Board of Directors, which was accepted by the Company. In the course of audit of the company, the auditor was unable to obtain appropriate sufficient audit evidence regarding recelvables. The client requested for a change in the terms of engagement. Offer your comments in this regard. HINT: Refer the Topic “Acceptance of a Change in the ‘Terms of the Audit Engagement” imited is a listed company having its operation across India. MEA Limited appointed Mr. X, Mr, Yand Mr. Z, as its joint auditors for the year 2020-21. After making sure that all of them are qualified to be appointed as statutory auditor, MEA Limited issued engagement letter to all of them. But Mr. X was not clear on some points, so he requested MEA Limited to slightly change the terms of his engagement. This change will not impact the ultimate opinion on the financial statement. The engagement letter contains the details on objective and scope of audit, responsibilities of atiditor and identification of ttamework applicable. It also contains the reference to expected form and content of report from all three joint auditors. In your opinion ‘what was the discrepancy in the Audit engagement letter issued by MEA Limited? [RTP-Nov, 20] HINT: Engagement letter issued by MEA Ltd, does not specify the responsibilities of management, Q.No.9: MEAL ‘whereas as per SA 210, it should also specify responsibilities of management. Objectives of the auditor Implement Q¢ Procedures ——— 2 ‘At Engagement Level = ‘That provide Reasonable assurance ee ee ‘Audit complies with professional standards & legal requirements ‘Audit Report issued is appropriate In the circumstances _gNNVIUXWI-TAXMANN®- 1.24 MODULE I : AUDITING CONCEPTS AND ENGAGEMENT STANDARDS ements to implement QC Procedures (a) Leadershi Engagement Partner (EP) totake responsibility for overall quality on each auditengagement Responsibilities | assignedtohim/her. Asapartofthis responsibility Engagement Partnershould emphasizes for Quality in | the following to the engagement Team (ET): Audits Compliance with professional Standards and legal requirements. % Compliance with firm's Quality Control Policies. Issuance of appropriate audit report. © Ability to raise concerns without fear |__& Quality is essential & indispensable in engagement performance, (B) Relevant (1) EPtoremainalert for evidence ofnon-compliance with relevantethical requirements Ethical by ET through: requirements © Inquiry. (2) Ifthere is an indication of non-compliance with relevant ethical requirements, EP | | | ‘© Observation. | should: Consult others in the firm __ # Determine appropriate action. (© Independence Form a conclusion on compliance Obtain relevant information from Firm with applicable independence -——> requirements EE Identify & Evaluate circumstances & Evaluate information on identified k= Relationship that threatens breaches. Le es independence ‘Take appropriate action to eliminate such Determine if these threaten threats Independence audit = prompt report inability to take engagement. appropriate action to firm: (d) Acceptance and — pat Engagement Partner of Client v i Relationship Be Satisfied Determine and audit a qu Engagement “Appropriate procedures regarding client "| Conclisions reached are acceptance continuance have been followed. appropriate If Engagement partner obtains information that would have caused firm to withdraw ‘engagement, communicate information promptiy tothe firm Examples of information which may cause the firm to withdraw ‘The integrity of the principal owners, key management and TCWG of the entity; ‘# Competency of engagement team to perform the audit engagement and availability of necessary capabilities, including time and resources;CH. 1: QUALITY CONTROL AND ENGAGEME} NDARDS 1.25 (©) Assignment of Engagement team “() Engagement Performance ‘© Compliance with relevant ethical requirements by firm and the engagement team; and rentorpreviousauditengagement, | © Significantmattersthathavearisenduringthect | ship. and their implications for continuing the rel | EP to be satisfied that ET & Auditor's Expert not part of ET has appropriate competence & capabilities to: | © Performauditengagementinaccordancewith professional standardsand regulatory or legal requirements, and Enable an auditor's report that appropriate in the circumstances, Direction, ‘The Engagement Partner shall take responsibility for: Supervision and @ The Direction, supervision and performance of the audit Performance engagement in compliance with professional standards and regulatory and legal requirements; and @ Enable the auditor's report that is appropriate in the circumstances to be issued, Reviews ‘The Engagement partner shall take the following responsibilities: @ Reviews are being performed in accordance with the firm's review policies and procedures. Be satisfied that Sufficient Appropriate Audit Evidence has been obtained to support the conclusions reached and audit report to be issued through: | | | | = Review of audit documentation. | | INVIVXYL- 1 Discussion with engagement team. Consultation Engagement Partner shall: @ Takeresponsibility for ET undertaking consultationondiflicult issues. ; Be satisfied that members of ET have undertaken such consultation, Be satisfied that nature & scope and conclusions of such consultations are agreed with consultant. | ‘@ Determine that conclusions resulting from such conclusions have been implemented. Engagement Required in case of audit of FS. of listed entities and other audit Quality Control —_| engagement for which EQCRis required. Engagement Partner shall Review ‘@ Determine that an EQC Reviewer had been appointed. | © Discuss significant matters arising during audit engagement | with £QC reviewer. © # Not date the audit report until completion of EQC Review. tters to be evaluated by HQC Reviewer 4 The EQC reviewer shall evaluate the following: Discussion of significant matters with BT, Review of FS & proposed audit report. Review ofselected audit documentation regardingsignificant judgments & conclusions of ET.1.26 MODULE | : AUDITING CONCEPTS AND ENGAGEM! T STANDARDS ‘@ Evaluation of conclusions reached Considering whether proposed audit report is appropriate, | | | Additional Considerations in audit of FS. of Listed Entities: ‘@ ET's evaluation of firm's independence in relation to audit engagement. © Whether appropriate consultation has taken place on matters involving differences of opinion/difficult matters & conclusions arising from consultations. © Whetherauditdocumentation selected for review reflects the workperformed wart. significantjudgmentsmade& supports the conclusions reached. Differences of Te may arise: opinion © Within the BT, ‘© With those consulted, or ‘@ Between the EP and EQC Reviewer. Engagement Team shall follow the firm's policies and procedures _ for dealing with and resolving differences of opinion, | (9) Monitoring 1. Monitoring process provides the firm with reasonable assurance that its policies and procedures relating to the system of quality control are relevant, adequate, and operating effectively. 2. To Monitor QC Policies Engagement Partner shall consider: © Results of firm’s monitoring process. TAXMAN = 4 Whether deficiencies noted may affect the audit engagement. _ (h) Documentation | By Auditor ‘ Issues identified w.rt. compliance with relevant ethical yy e requirements and how they were resolved. | @ Conclusionsoncompliancewith independence requirements | Conclusions reached regarding the acceptance and conti- nuance of client relationships and audit engagements. @ The nature and scope of, and conclusions resulting from, | consultations undertaken during the course of the audit engagement, By EQC Reviewer ‘@ Procedures for engagement quality control review have been performed; @ EQCRhasbeencompletedonorbeforethe date oftheauditor’s report and | | ‘© The reviewer is not aware of any unresolved matters that would cause the reviewer to believe that the significant judgments the engagement team made and the conclusions they reached were not appropriate. IMPORTANT QUESTIONS Q.No. 10: During the auditofFMPLtd, alisted company, EngagementPartner (EP) completed hisreviewsand also ensured compliance with independence requirements that apply to the audit engagement. ‘The engagement files were also reviewed by the Engagement Quality Control Reviewer (EQCR) except the independence assessment documentation, Engagement Partner was of the view that matters related to independence assessment are the responsibility of the Engagement Partner| | aa petites CH. 1: QUALITY CONTROL AND ENGAGEMENT STANDARDS 1.27 ‘and not Engagement Quality Control Reviewer. Engagement Quality Control Reviewer objected to this and refused to sign off the documentation. Please advise as per SA 220. IRTP-May 19, MTP - Oct.19] HINT: Refer the topic "Independence and EQCR™ Q.No, 11: M/s Sureshchandra & Co, has been appointed as an auditor of SC Ltd. for the financial year 2019-20, CA. Suresh, one of the partners of M/s Sureshchandra & Co., completed entire routine audit work by 29th May, 2020, Unfortunately, on the very next morning, while roving towards office of SC Ltd, to sign final audit report, he met with a road accident and died. CA, Chandra, another partner of M/s Sureshchandra & Co., therefore, signed the accounts of SC Ltd, without reviewing the work performed by CA. Suresh. Slate withreasous iiether CA, Ghandralsrightin expressingan epinionon financial statements the audit of which is performed by another auditor, : IMTP - April 18] HINT: CA, Chandra may rely on the work performed by CA, Suresh provided he exercises adequate skill and due ¢are and review the work performed by CA Suresh, Q.No. 12: Mentionany fourinformation whichassists the auditorinacceptingandcontinuingofrelationship with the client as per SA 220. HINT: Refer the Topic “Acceptance and Continuance of Client Relationship and audit Engagement” Q.No, 13: OP & Associates are the statutory auditors of BB Ltd, BB Ltd is a listed company and started its operations 5 years back. The field work during the audit of the financial statements of the com- pany for the year ended March 31, 2020 got completed on July 1, 2020. The auditor's report was dated July 12, 2020, During the documentation review of the engagement, it was observed that the engagement quality control review was completed on July 15, 2020, Engagement partner had completed his reviews in entirety by July 10,2020. Comment, _ [MTP-Oct, 18, March 19] HINT: Signing ofauiditor’s reporton July 12,2020 whichis before the completion of review engagement quality control review Le. July 45, 2020, is not in order: "179A 230 (REVISED) AUDIT DOCUMENTATION (W.EE 01.04.2009) SA 230 “Documentation” expounds the basic principle of documentation and requires that the working papers should be prepared or obtained by the auditor and retained by him in connection with the performance ofhis audit. Meaning of Audit | The term audit Documentation has been defined as “the record of audit procedures Documentation performed, relevant audit evidence obtained, and conclusions the auditor reached” (commonly known as working papers). Purposes of Audit | Audit documentation serves a number of purposes, including the following: Documentation 1. Assisting the engagement team to plan and perform the audit. 2, Assisting members of the engagement team responsible for supervision to direct and supervise the audit, and to discharge their review responsibilities. Enabling the engagement team to be accountable for its work. Retaining a record of matters of continuing significance to future Sudits. Enabling the conduct of quality control reviews and inspections. aaa ew Enabling the conduct of external inspections in accordance with applicable legal, regulatory or other requirements, “Nature of Audit | The Auditor is required to prepare documentation that provides: Documentation (a), Asufficient and appropriate record of the basis for the auditor’s report; and (b) Bvidence that the audit was planned and performed in accordance with SAs and applicable and other regulatory requirements. @NNWIXWE—TAXMANN®- 1.28 MODULE 1: AUDITING CONCEPTS AND ENGAGEMENT STANDARDS ‘Timely preparation | The auditor shall prepare audit documentation on a timely basis. It helps to enhance the of Audit | quality of the audit and facilitates the effective review and evaluation of the audit evidence documentation _| obtained and conclusions reached. Form, Contentand_| The auditor shall prepare audit documentation that is sufficient to enable an exp Extent of Audit | auditor to understand; nced Documentation (a) The nature, timing, and extent of the audit procedures; (0) The results ofthe audit procedures performed, and theaudit evidence obtained; and () Significant matters arising during the audit and the conclusions reached thereon, significant professional judgments made in the reaching those conclusions. In documenting the nature, timing and extent of audit procedures performed, the auditor shall record: (0 ‘The identifying characteristics ofthe specific items or matters tested; | (ii) Who performed the audit work and the date such work was completed; and (iii) Who reviewed the audit work performed and the date and extent of such review. | Factors effecting Form, content and extent of audit documentation “The size and complexity of the entity. ‘The nature of the audit procedures to be performed. ‘The identified risks of material misstatement. | ‘The significance of the audit evidence obtained. ‘The nature and extent of exceptions identified a aR EN ‘The need to documenta conclusion or the basis for a conclusion notreadily determin- able from the documentation of the work performed or audit evidence obtained. 7. The audit methodology and tools used. 8, Timely preparation of audit documentation. | Documentation of | @ The auditor shall document discussions of significant matters with management, discussions those charged with governance, and others, including the nature of the significant matters discussed and when and with whom the discussion took place. If the auditor identified information that is inconsistent with the auditor's final conclusion regardinga significantmatter, the auditorshalldocumenthowtheauditor addressed the inconsistency. Documentation | If, in exceptional circumstances, the auditor judges it necessary to depart from a relevant ofaDeparture _| requirement in a SA, the auditor shall document froma Relevant @ the reasons for the departure and | Requirement | $ alternative procedures performe _ | Documentation | If,in exceptional circumstances, the auditor performs new or additional audit procedures ofMatters Arising | or drawsnew conclusions after the date of theauditor’sreport,theauditor shall document: | afterthe Date | 4, ‘The circumstances encountered; | forsee Auditors 2. The new or additional audit procedures performed, audit evidence obtained, and | Report conclusions reached, and their effect on the auditor's report; and | ee 3. When and by whom the changes to audit documentation were made and reviewed. ‘Assembly ofthe | The auditor shall assemble the audit documentation in an audit file and complete the Final Audit File | administrative process of assembling the final audit file on a timely basis after the date of | the auditor’s report, After the assembly, the auditor shall not delete audit documentation before the end of its retention period, | Zz ICH 1: QUALITY CONTROL AND ENGAGEMENT STANDARDS: 1.29 Retention Period _| 7 years from the date of audit report Ownership 1. Unless otherwise specified by law or regulation, audit documentation is the property of the auditor. 2, May at his discretion, make portions of, or extracts from, audit documentation available to the clients, provide: @ Such disclosure does not undermine the validity of the work performed, or Inthe case of assurance engagements, does not undermine the independence of the auditor or of his personnel, IMPORTANT QUESTIONS Q.No, 14: Mr: A, a practicing Chartered Accountant, has been appointed as an auditor of True Pvt, Ltd, ‘What factors would influence the amount of working papers required to be maintained for the purpose of his audit? INov. 15 (5 Marks), RTP-May 20] HINT; Refer the topic "Factors affecting Form, content and Extent of Audit Documentation” Q.No. 15: Discuss the Auditor's responsibilities to provideaccess tohis audit workingpapers to Regulators and the third parties. [Nov. 14 (3 Marks)] HINT: It is auditor's responsibility to provide access to his audit working papers to Regulators when required by law, whereas auditor is under no obligation to provide access to working papers to third parties, Q.No. 16: As an auditor, how would you deal with the following: The statutory auditor of the Holding Company demands for the working papers of the auditors of the subsidiary company, of which you are the auditor. é HINT: Statutory auditor of Holding company cannothave accessto audit working papersof thesubsidiary. company's auditor. He can however, asks the auditor to answer certain questions about the manner in ‘which the audit is conducted and certain other clarifications regarding audit. Q.No. 17: Bis the Principal Auditor of ABC Co. Ltd., with 8 branches audited by 8 Branch Auditors. B wanted toensure that the works of Branch Auditors were adequate for the purpose of his audit. Hence, he insisted on Branch Auditors to get familiar with a check list he prepared for branches and, besides, required them to share the working papers complied by them for his review and return. Is principal auditor within his right in asking for such sharing of working papers? [May 18 - New Syllabus (5 Marks)] HIN‘: Principal Auditor is not within his rights toask the branch auditors to share the working papers ‘compiled by branch auditors, Principal auditor is entitled to reply on the work performed by thebranch auditors in accordance with the provisions of SA.600, but is not entitled to review the working papers of branch auditors as per the provisions of $A 230. = 1.8 - SA 240 (REVISED) AUDITOR'S RESPONSIBILITIES RELATING TO FRAUD IN AN AUDIT OF FINANCIAL STATEMENTS (WEF. 01.04.2009) = 5 Meaning and (a) Fraud may be defined as an intentional act by one or more individuals among nature of Fraud ‘management, TCWG, employees, or third parties, involving the use of deception to obtain an unjust or illegal advantage. (b) The auditor is concerned with fraud that causes a material misstatement In the financial statements. Two types of intentional misstatements are relevant to the auditor: ‘@ misstatements resulting from fraudulent financial reporting; @ misstatements resulting from mis: iation of assets. “gNNWAIXVE-