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Chapter 1 -
•Nature and Scope of Auditing

CHAPTER 1 Nature and Scope of Auditing SHORT NOTES

1 MEANING AND DEFINITION OF
AUDITING
2 FEATURES/CHARATERISTICS
OF AUDIT
3 AUDIT TEAM AND FLOW

4 QUALITIES OF AN AUDITOR

5 SA 200 "OVERALL OBJECTIVES

OF THE INDEPENDENT
AUDITOR AND CONDUCT OF
THE AUDIT IN ACCORDANCE
WITH SA’s
6 TYPES OF AUDIT

7 ADVANTAGES OF AUDIT OF
FINANCIAL STATEMENTS
8 RELATIONSHIP OF AUDITING
WITH OTHER DISCIPLINES
9 STATEMENT AND GUIDANCE
NOTES
10 SA 220- QUALITY CONTROL
FOR AN AUDIT OF FINANCIAL
STATEMENT
11 INDEPENDENCE OF AUDITORS

12 SA 210- AGREEING THE TERMS

OF AUDIT ENGAGEMENT
 1. MEANING AND DEFINITION OF AUDITING

"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."

ANALYSIS OF DEFINITION
 Audit is Independent examination of financial information.
 of any entity - that entity may be profit oriented or not and
irrespective of its size or legal form. For example - Profit oriented - Audit
of Listed Company engaged in business. On the other hand, Audit of
NGO - not profit oriented.
 The objective of the audit is to express an opinion on the financial
statements.

2. FEATURES/CHARATERISTICS OF AUDIT
Systematic & independent
 Independence means that the judgement of a person is not subordinate to wishes of
another person. It requires that he should not act under any influence. Thus, he can
work in a complete unbiased manner.
Will Discuss in Detail SA 220

Financial statements

Auditor’s opinion is on financial statements including Profit and loss account. Balance
sheet & notes to accounts.
 The preparation of financial statements as per applicable Financial Reporting Framework
(F.R.F) is the responsibility of management of entity
Entity
 His client can be any entity whatever is the legal form i.e. it may be proprietorship,
partnership, trust or company etc.
 The entity may be profit oriented or a charitable one.
Opinion
 His opinion is on 'true & fair view’ of financial statements.
 For this, it is necessary that
(i) Financial statement have been prepared using acceptable policies which are consistently
applied,
(ii)Financial statements have been prepared as per relevant regulations, &
(iii) There is appropriate disclosure of all material items
Note – We will Study different types of Opinion in SA 700 Series
In India, audit is to be conducted by a professional having good accounting & auditing
background. A chartered accountant having certificate of practice is eligible to conduct audit.

The Auditor conducting Audit should take care to ensure that financial statements would
not mislead anybody.
(a) Ledger balances agree with the entries made in the books of account.
(b) Sufficient and Appropriate evidences are available for entries made in books of account.
(c) All transactions are being recorded in books of account, i.e. there is no omission.
(d) Information contained in the financial statements is clear and unambiguous.
(e) Amounts shown in financial statements are properly classified, described and
disclosures are made in conformity with applicable Accounting Standards.
(f) Financial statements reflect true and fair view of financial results and financial position.
 3. AUDIT TEAM AND FLOW Basic flow for Practical Knowledge

1- Client Proposal
2- Risk Formalities
3- Acceptance of Audit
4- Meeting with Management
5- Planning Meeting with Team
6- Process Understanding
7- Risk Understanding
8- Controls Understanding
9- 7 & 8 is covered under WT’s
10- Control Testing
11- Substantive Testing
12- Reporting/Conclusion
Partner 13- QRM Team
Senior Manager
Manager Refer SA 220 for Additional Information
Assistant Manager/ Seniors
Staff
4. QUALITIES OF AN AUDITOR
Technical
Auditor must have sound knowledge of followings:
1. Accountancy - its principles, procedures, techniques and standards [AS).
2. Auditing - its principles, procedures, techniques and standards [SA).
3. Direct and Indirect Taxation Laws.
4. General Principles of Law of contracts and partnership.
5. Corporate Laws;
6. Client Nature of Business.
Personal
Apart from the technical qualities, the auditor should also possess certain personal qualities
mentioned below:
1. Objectivity, Integrity and Independence.
2. Confidentiality of client information.
3. Effective Communication skills.
4. Tactful approach in dealing with clients.
5. Clear headedness and common sense;
6. Reliability and trust.

5. SA 200 "OVERALL OBJECTIVES OF THE INDEPENDENT AUDITOR AND CONDUCT OF

THE AUDIT IN ACCORDANCE WITH SAs
1- Overall Objective of Auditor
2- Scope of Audit
3- Aspects to be covered in Audit
4- Reasonable Assurance
5- Inherent Limitations of Audit
6- Auditor Requirement/Responsibility of Auditor
5.1 Overall Objectives of the Auditor
As per SA-200 "Overall Objectives of the Independent Auditor", in conducting an audit of
financial statements, the overall objectives of the auditor are:
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 F.S. are prepared, in all material respects, in
accordance with an applicable FRF, and
b) To report on the F.S. and communicate as required by the SAs, in accordance with the
auditor’s findings.
 In all 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.

Analysis of above points in detail

(a) The objective of an audit of financial statements prepared within a framework of recognized
accounting policies and practices and relevant statutory requirements, if any, is to enable
an auditor to express an opinion on such financial statements.

(b) The auditor’s opinion helps determination of the true and fair view of the financial position
and operating results of an enterprise.
(c) The user, however, should not assume that the auditor's opinion is an assurance as to the
future viability of the enterprise or the efficiency or effectiveness with which management
has conducted the affairs of the enterprise.
(d) Auditor should review and assess the conclusions drawn from the audit evidence obtained
and from his knowledge of business of the entity as the basis for the expression of his
opinion on the financial information.

5.2 SCOPE OF AUDIT (SA 200)

Audit should cover Information is Evaluation of I.C and The auditor is not
Relevant Information Constraints on
Accounting system to expected to perform
all relevant aspects reliable and disclosed in FS subject
to the financial Sufficient to form
check reliability of
to statutory
duties which fall the scope of the
Audit outside the scope of audit
statement an Opinion requirement
evidance/information his competence

1. The audit should be organized to cover adequately all aspects of the enterprise relevant
to the financial statements being audited.
2. To form an opinion on the financial statements, the auditor should be reasonably satisfied
as to whether the information contained in the underlying accounting records and
other source data is reliable and sufficient as the basis for the preparation of the financial
statements.
3. The auditor assesses the reliability and sufficiency of the information contained in the
underlying accounting records and other source data by:
(a) making a study and evaluation of accounting systems and internal controls and
(b) Carrying out such other tests, enquiries and other verification procedures of
accounting transactions and account balances as he considers appropriate in the particular
circumstances.
4. The auditor determines whether the relevant information is properly disclosed in the
financial statements by:
(a) comparing the financial statements with the underlying accounting records and
other source data to see whether they properly summarize the transactions and events
recorded therein; and
(b) considering the judgments that management has made in preparing the financial
statements accordingly, the auditor assess the selection and consistent application of
 accounting policies, the manner in which the information has been classified, and the
adequacy of disclosure.
5. The auditor is not expected to perform duties which fall outside the scope of his
competence. For example, the professional skill required of an auditor does not include
that of a technical expert for determining physical condition of certain assets.
6. Constraints on the scope of the audit of financial statements that impair the auditor's
ability to express an unqualified opinion on such financial statement should be set out in
his report, and a qualified opinion or disclaimer of opinion should be expressed as
appropriate. (Will Discuss in Detail in SA 705)

5.3 ASPECTS TO BE COVERED IN AUDIT (SA 200)

Opinion
and
Verification
Reporting
of Assets &
Vouching
Liabilities
Reviewing
of the
the system transaction
Examinatio & procedures s
n of AS & IC

Examination of Accounting System & Internal Control

♦ To ascertain whether it is appropriate for the business and helps in proper recording of all
the transactions.
♦ To determine the Nature, Timing and Extent (NTE) of Audit Procedures to be performed.
Reviewing the system & procedures
♦ To find out whether they are adequate and comprehensive.
Vouching of the transactions
♦ To ensure authenticity and validity of transactions.
♦ To check the arithmetical accuracy of the books of account.
♦ To ascertain proper distinction into capital and revenue items.

Verification of Assets & Liabilities

♦ To ensure existence and valuation of the assets and liabilities appearing in the balance sheet.
Statutory Compliances
♦ In case of entities governed by some law, rules or regulations, for example in case of audit of
a company incorporated under Companies Act, 2013.
Expression of Opinion
♦ On true and fair view of state of Affairs as reflected by Balance Sheet.
♦ On true and fair view of Financial Results as reflected by Statement of Profit and Loss.♦ On
true and fair view of Cash Flows as reflected by Cash Flow Statement.
Reporting on Other matters
As required by the law governing the entity.
Assertions about account balance at the period end.
A. Existence - assets, liabilities, and equity interests exist.
B. Right and Obligations - the entity holds or controls the rights to assets, and liabilities
are the obligations of the entity.
C. Completeness- all assets, liabilities and equity interests that should have been recorded
have been recorded.
 Valuation and allocation- assets, liabilities, and equity interests are included in the financial
statements at appropriate amounts and any resulting valuation or allocation adjustments are
appropriately recorded.

5.4 REASONABLE ASSURANCE W.R.T MISSTATEMENT

 Auditor is required to obtain reasonable assurance as to whether the financial statements

are free from material misstatements
 Thus, auditor obtains sufficient and appropriate audit evidence to reduce audit risk to
an acceptable low level.
 However, reasonable assurance is not absolute assurance. This is due to inherent
limitations of an audit.

5.5 INHERENT 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 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. The inherent limitations of an audit arise from:
1. The Nature of Financial Reporting
The preparation of financial statements involves judgment by management in applying the
requirements of the entity's applicable FRF to the facts and circumstances of the entity.
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. 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 organised schemes designed to conceal it.
Therefore, audit procedures used to gather audit evidence may be ineffective for
detecting an intentional misstatement that involves, for example, collusion to
falsify documentation which may cause the auditor to believe that audit evidence
is valid when it is not. 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 & the Balance between Benefit & Cost
♦ User expectation that the auditor will form an opinion on the F.S. within a reasonable period
of time and at a reasonable cost.
♦ It results 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.
1. 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:
(a) Fraud, particularly fraud involving senior management or collusion.
(b) The existence and completeness of related party relationships and transactions.
(c) The occurrence of non-compliance with laws and regulations.
(d) ) Future events or conditions that may cause an entity to cease to continue as a going
concern.
SUMMARY INHERENT LIMITATIONS OF AUDIT

Inherent Limitations of Audit - The auditor is not expected to, and cannot, reduce audit
risk to zero because there are inherent limitations of an audit. The inherent limitations of
an audit arise from:

The Nature of Financial Reporting: The preparation of financial statements involves

judgment by management.

The Nature of Audit Procedures: There are practical and legal limitations on the auditor’s
ability to obtain audit evidence such as:

Possibility that management or Fraud may involve An audit is not an official

others may not provide, sophisticated and investigation into alleged
intentionally or unintentionally, carefully organised wrongdoing.
the complete information schemes.
relevant for preparation and
presentation of FS.

Timeliness of Financial Reporting and the Balance between Benefit and Cost:
Relevance of information, and thereby its value, tends to diminish over time, and there is
a balance to be struck between the reliability of information and its cost.

Other Matters that Affect the Limitations of an Audit: Certain assertions or subject
matters are particularly significant, such assertions or subject matters include:
 The occurrence of non-compliance
 Fraud, particularly involving senior
with laws and regulations.
management or collusion.
 Future events or conditions that may
 The existence and completeness of
cause an entity to cease to continue
related party relationships and
as a going concern.
transactions.
ILLUSTRATION 1
MNO Ltd requested the auditor CA P to provide for absolute assurance in respect of its ten
branches scattered in Delhi and confirm that the financial statements are free from material
misstatement due to fraud or error. Advise
SOLUTION
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.
In view of the above, CA P cannot provide audit absolute assurance to MNO Ltd in respect of its
branches.
Note- To support your answer explain the inherent limitations of an audit.
ILLUSTRATION 2
DEF & Co. Chartered Accountants successfully carried out the audit of Shree Garments for the f.y.
2015-2016. After the completion of the audit, there were found material misstatements due to
fraud in the financial statements which were not noticed and reported by the auditor. Management
alleges that it is failure on the part of auditor. Comment.
SOLUTION
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. Accordingly, 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. However, the inherent
limitations of an audit are not a justification for the auditor to be satisfied with less-than-
persuasive audit evidence. Whether the auditor has performed an audit in accordance with SAs
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.
Note- To support your answer explain the inherent limitations of an audit.

5.6 AUDITOR REQUIREMENT/RESPONSIBILITIES OF THE AUDITOR

Conduct of an Ethical Sufficient

Audit in Requirements Professional Professional Appropriate Audit Risk
Accordance with Relating to an Skepticism Judgment Audit Evidence
SAs Audit of F.S.

Ethical Requirements Professional Professional Sufficient Appropriate

Conduct of an Audit in
Relating to an Audit of
Accordance with SAs
1. Compliance
2. Objectives
3. Complying with
relevant Requirements
4. Failure to Achieve an
Objective
Audit Risk
Audit Evidence
Skepticism Judgment
F.S.
1. Integrity;
1. Questioning mind, 1. Application of relevant
2. Objectivity; To obtain reasonable
2. being alert to training, knowledge and risk that the auditor
assurance
3. Professional onditions,may indicate experiencein planning expresses an
competence and due and performing an audit 1. Reasonable Assurance: inappropriate audit
possible misstatement due
care; of financial statements A high, but not absolute, opinion
to error or fraud
level of assurance.
4. Confidentiality; and 3. Reduces risk of 2. exercised throughout
Professional behaviour. the audit 2. Sufficient Appropriate
- Overlooking unusual Audit Evidence:
circumstances. 3. important when Sufficiency refers to
deciding about: quantum and
- Over generalising when
drawing conclusions from - Materiality & audit risk. Appropriateness refers to
audit observations. - NTE of audit procedures. quality.
- Using inappropriate - Evaluating sufficiency &
assumptions in - appropriateness of audit
determining N, T, E of procedures.
audit procedures
- Evaluating management
judgment in applying
applicable FRF.
- Drawing conclusions
based on audit evidence.

1. Conduct of an Audit in Accordance with SAs

 Compliance
 Objectives
 Complying with relevant Requirements
 Failure to Achieve an Objective

Compliance –
The auditor shall comply with all SAs relevant to the audit.

 The auditor shall have an understanding of the entire text of an SA.

 The auditor shall not represent compliance with SAs in the auditor’s report unless the
auditor has complied with the requirements of this SA and all other SAs relevant to the
audit.
Objectives-
Use this objective to achieve overall states in India- objectives.
 Having regard to interrelationship between SAs:
 Determine if any audit procedure in addition to that required by SAs is necessary.
 Evaluate whether sufficient appropriate audit evidence has been obtained.

Complying with relevant Requirements of SA

Auditor have to comply all the SA’s unless,

 Entire SA is not relevant.
 Requirement is not relevant because it is conditional & condition does not exist.
 Departure form requirement in exceptional circumstances - perform alternative
procedures to achieve aim of requirement.
Failure to Achieve an Objective
Auditor should evaluate if the failure Prevents auditor from achieving the overall objectives of
the auditor, and Necessitates modified audit opinion. Auditor should withdraw from
engagement if It is a significant matter for documentation.
2. Ethical Requirements Relating to an Audit of F.S.
A. The auditor shall comply with relevant ethical requirements, including independence.
B. Relevant ethical requirements ordinarily comprise the Code of Ethics issued by the ICAI.
The fundamental principles are:
 Integrity;
 Objectivity;
 Professional competence and due care;
 Confidentiality; and
 Professional behaviour.
C. Independence comprises both independence of mind and independence of appearance.
D. Independence enhances the auditor’s ability to act with integrity to be objective and to
maintain an attitude of professional skepticism.
3. Professional Skepticism
Professional skepticism refers to 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.
Professional Skepticism Requirement and Auditor Expectation.

1. The auditor shall plan and perform an audit with professional skepticism.
2. It Reduces risk of:
 Overlooking unusual circumstances.
 Over generalising when drawing conclusions from audit observations.
 Using inappropriate assumptions in determining N, T, E of audit procedures &
evaluating the results thereof.

3. Professional skepticism includes being alter to:

 Contradictory audit evidence.
 Questions on reliability of documents.
 Conditions indicating possible frauds.
 Circumstances suggesting need for audit procedures in addition to those suggested in
SAs.
Professional skepticism is necessary to the critical assessment of audit evidence. It also includes
consideration of the sufficiency and appropriateness of audit evidence obtained in the light of
the circumstances, for example in the case where fraud risk factors exist and a single document,
of a nature that is susceptible to fraud, is the sole supporting evidence for a material financial
statement amount.
The auditor may accept records and documents as genuine unless the auditor has reason to
believe the contrary. Nevertheless, the auditor is required to consider the reliability of
information to be used as audit evidence. In cases of doubt about the reliability of information
or indications of possible fraud, the SAs require that the auditor investigate further and
determine what modifications or additions to audit procedures are necessary to resolve the
matter.
The auditor cannot be expected to disregard past experience of the honesty and integrity of the
entity's management and those charged with governance. Nevertheless, a belief that
management and those charged with governance are honest and have integrity does not relieve
the auditor of the need to maintain professional skepticism.
4. Professional Judgment
Meaning:
 The application of relevant training, knowledge and experience,
 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:
A. The auditor shall exercise professional judgment in planning and performing an audit
of financial statements.
B. Its exercise depends on facts & circumstances known to the auditor.
C. Professional Judgment is to be exercised throughout the audit and to be appropriately
documented.
D. 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 applicable FRF.
 Drawing conclusions based on audit evidence.
5. Sufficient Appropriate 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 context of an audit of financial statements, a high, but

not absolute, level of assurance.
 Sufficient Appropriate Audit Evidence: Sufficiency refers to quantum and
Appropriateness refers to quality.

6. Audit Risk
Audit risk is a function of risk of material misstatement (ROMM) and detection risk. In simple
words a risk that auditor expresses an opinion that financial statements are giving true and
fair view when in fact they don’t because of existence of material misstatement, it is an audit
risk.
The risk that the auditor expresses an inappropriate audit opinion when the financial
statements are materially misstated. It is a function of the risks of material misstatement and
detection risk.

6. TYPES OF AUDIT

Voluntary Audits
Audit required under law
a) Companies governed by the
a) Audits of the accounts of proprietary
Companies Act, 2013;
entities, partnership firms, HUF, etc.
b) Banking companies governed by the
b) In respect of such entities, there is no
Banking Regulation Act, 1949;
basic legal requirement of audit. Many
c) Electricity supply companies governed
of such enterprises as a matter of
by the Electricity Supply Act, 1948;
internal rules require audit.
d) Co-operative societies registered
c) Some may be required to get their
under the Co-operative Societies Act,
accounts audited on the directives of
1912;
Government for various purposes like
e) Public and charitable trusts registered
sanction of grants, loans, etc.
under various Religious and
d) But the important motive for getting
Endowment Acts;
accounts audited lies in the advantages
f) Corporations set up under an Act of
that follow from an independent
Parliament or State Legislature such
professional audit.
as the LIC of India.
e) The auditor should get the scope of his
g) Specified entities under various
duties and responsibilities defined by
sections of the Income-tax Act, 1961.
obtaining instructions in writing.
 7. ADVANTAGES OF AUDIT OF FINANCIAL STATEMENTS
1. Protect the interest of fund providers
1. It safeguards the financial interests of persons who are not associated with the management of
the organisation e.g. partners or shareholders.
2.
3. 2. Moral check on employees
4. It acts as a moral check on employees from committing defalcations or embezzlement.
5.
6. 3. Settlement of Taxes, etc.
7. Auditing statements of accounts are helpful in settling of taxes, negotiating loans and for
determining the purchase consideration for a business.
8.
9. 4. Settlement of Trade Disputes
Audited statements are useful for settling trade disputes for higher wages or bonus.
5. Detection of Wastages
Audited statements also help in detection of wastages and losses and shows the different ways
by which these might be checked especially those that occurred due to absence or inadequacy
of internal checks or internal control measures.
6. 6.Proper maintenance of books of account
Independent 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. Appraisal of controls
As an appraisal function, audit reviews the existence and operations of various controls in the
organisations and reports weaknesses, inadequacies etc.
8. Admission/retirement of Partner
Audited accounts are of great help in the settlement of accounts at the time of admission or
death of the partner.
9. Grant of License
Government may require audited and certified statements before it gives assistance or issues
the license for a particular trade.

8. RELATIONSHIP OF AUDITING WITH OTHER DISCIPLINES

Auditing and Accounting

♦Accounting and auditing are closely related with each other as auditing reviews the financial
statements which are nothing but a result of the overall accounting process.
♦Auditing begins when accounting ends.
♦It requires that the auditor must have a thorough and sound knowledge of generally accepted
principles of accounting before he can review the financial statements.

Auditing and Law

 Auditing involves examination of various transactions from the view point of whether or
not these have been properly entered into as per the requirements of law, in particular,
when an entity is governed by any law, for example companies.
 It necessitates that an auditor should have a good knowledge of business and corporate
laws affecting the entity. He should be familiar with the law of contracts, negotiable
instruments, etc.
 In analysing the impact of various transactions particularly from the accounting aspect,
an auditor ought to have a good knowledge about the direct as well as indirect tax laws.
Auditing and Behavioural Science
The field of auditing as a discipline involves review of various assertions; both in financial as
well as in non-financial terms, with a view to prove the veracity of such assertions and
expression of opinion by auditor on the same. Thus, it is quite logical and natural that the
function of audit can be performed if and only if the person also possesses a good knowledge
about the fields in respect of which he is conducting such a review.
The discipline of behavioural science is closely linked with the subject of auditing. While it may
be said that an auditor, particularly the financial auditor, deals basically with the figures
contained in the financial statements but he shall be required to interact with a lot of people in
the organisation. As against the financial auditor, the internal auditor or a management auditor
is expected to deal with human beings rather than financial figures. One of the basic elements
in designing the internal control system is personnel. Howsoever, if a sound internal control
structure is designed, it cannot work until and unless the people who are working in the
organisation are competent and honest. The knowledge of human behaviour is indeed very
essential for an auditor so as to effectively discharge his duties

 While performing audit, auditor is required to interact with a lot of people in the
organisation.
 Management auditor is expected to deal with human beings rather than financial
figures.
 One of the basic elements in designing the internal control system is personnel.
 Internal control system in an organisation cannot work until and unless the people who
are working in the organisation are competent and honest.
Auditing and Statistics & Mathematics
 While performing audit, auditor examines the transaction on test checking basis,
wherein auditor is required to select the samples.
 Discipline of statistics plays an important role as the auditor is also expected to have
the knowledge of statistical sampling so as to arrive at meaningful conclusions.
 The knowledge of mathematics is also required on the part of auditor particularly at the
time of verification of inventories.
Auditing and Data Processing
 Today, a number of organisations are carrying out their financial accounting activities
with the help of computers which can document, record, collate, allocate and value
accounting data and information in very large quantity at very high speed.
 To carry out audit in an computerised environment, the auditor should have good
knowledge of the components, general capability of the system and the related terms.
 In fact, EDP auditing in itself is developing as a discipline.
Auditing and Financial Management
 Auditing is closely related with functional fields of business such as finance, production,
marketing, personnel and other general areas of business management.
 The auditor is expected to have knowledge about various financial techniques such as
working capital management, funds flow, ratio analysis, capital budgeting etc.
 The knowledge of various institutions and Government activities that influence the
operations of the financial market are also required to be understood by an auditor.
Auditing and Production
 While carrying out the audit, the auditor is required to evaluate transactions from the
accounting aspect in relation to the process through which it has passed through.
 The knowledge of production process shall become more essential in case of an internal
auditor. The auditor shall also require understanding the cost system in operation in
the factory and assessing whether the same is adequate for the particular company.
 The understanding of the terminology of the production shall enable an auditor to
communicate with production employees in connection with his work.

9. STATEMENT AND GUIDANCE NOTES

STATEMENTS
Issued with a view to securing compliance by members on matters which in the opinion of the
council of the institute are critical for the proper discharge of their functions. Compliance is
Mandatory in Nature, and it is the duty of members of ICAI/Auditor

 to examine whether 'Statements' relating to accounting matters are complied with in the
presentation of financial statements covered by their audit. In the event of any deviation
from the 'Statements', it will be their duty to make adequate disclosures in their audit
reports so that the users of financial statements may be aware of such deviations; and
 to ensure that the 'Statements' relating to auditing matters are followed in the audit of
financial information covered by their audit reports. If, for any reason, a member has
not been able to perform an audit in accordance with such 'Statements', his report
should draw attention to the material departures, therefrom.
Example
♦ Statement on Reporting u/s 227(1A) of the Companies Act, 1956. (Now Sec. 143(1) of
Companies Act, 2013.
♦ Framework for the Preparation and Presentation of Financial Statements.
GUIDANCE NOTES
Designed to provide guidance to members on matters which may arise in the course of their
professional work and on which they may desire assistance. Compliance is recommendatory
in nature, 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. Duties of members of ICAI/Auditor

Accounting
 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, consider whether keeping in view the circumstances
of the case, a disclosure in his report is necessary.

Auditing
 Follow recommendations in a guidance note except where he is satisfied that in the
circumstances of the case, it may not be necessary to do so.

Example
 Guidance Note on Accounting Treatment for Excise Duty, Accounting for Depreciation in
Companies, Accounting Treatment for CENVAT and Accounting for Corporate Dividend
Tax,
 Guidance Note on Independence of Auditors.
 Guidance Note on Audit of Fixed Assets.
 Guidance Note on Audit u/s 44AB of the Income-tax Act.
 Guidance Note on Audit of Abridged Financial Statements.

10. SA 220 “QUALITY CONTROL FOR AN AUDIT OF FINANCIAL STATEMENTS

As per SQC 1 "Quality Control for Firms that perform Audits and Reviews of Historical Financial
Information, and Other Assurance and Related Services Engagements", the firm’s system of
quality control should include policies and procedures addressing each of the following
elements:
 • Acceptance and

Execution/ Engagement
• Review all process

Performance
Planning Stage

Review (EQR )
Engagement Quality Control
continuance of client •Direction, including
relationships and specific Supervision • Appointment
engagements. •Review • Independence
• Human resources •Consultation • Discuss Significant
• Assignment of engagement Matters
teams •Discuss Key Matters
•Monitoring • Review Propose Audit
• Independence Report
• Ethical requirements •EQR • Review Documentation
• Leadership responsibilities •Documentation • Difference of Opinion?
for quality within the firm. • EQR Documentation

Definitions
(i) Engagement Documentation: - Record of work performed, its result & conclusions.
It is assembled in an engagement file.
(ii) Engagement Partner: - Partners other person in firm (C.A full time in practice) responsible
for engagement & report thereon.
(iii) Engagement Quality Control Review: - Process to evaluate the judgment & conclusions of
Engagement Team before report is issued.
(iv) Engagement O.C Reviewer: - Partner/ other person in firm /external person or a team to
conduct Review.
(v) Engagement team: - All person performing an engagement including any expert.
(vi) Firm: - Sole practitioner / Proprietorship firm/ partnership firm.
(vii) Inspection: - Procedures to check compliance by engagement team with firm’s Q.C policies
w.r.t. completed engagements.
(viii) Monitoring: Evaluation of firm’s system of O.C. to check its operational effectiveness. (It
includes inspection)
(ix) Network firm: - Entity under common control ownership or management with firm
(Nationally / Internationally).
(x) Staff: - Professionals other than partners.

Acceptance 1. The engagements partner shall be satisfied that appropriate procedures

and regarding the acceptance and continuance of client relationship and
continuance audit engagements have been followed.
of client
2. If the engagement partner obtains information that would have caused
relationships
the firm to decline the audit engagement had that information been
and audit
available earlier, the engagement partner shall communicate that
engagements.
information promptly to the firm, so that the firm and the engagement
partner can take the necessary action.

Examples of Information which may cause 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;
 Compliance with relevant ethical requirements by firm and the
engagement team; and
 Significant matters that have arisen during the current or previous
audit engagement, and their implications for continuing the
relationship.
Human As per SQC1 "Quality Control for Firms that perform Audits and Reviews of
resources Historical Financial Information, and Other Assurance and Related Services
Engagements”, 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:
 Recruitment;
 Performance evaluation;
 Capabilities;
 Competence
 Career development;
 Promotion;
 Compensation; and
 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.

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

Independence The engagement partner shall form a conclusion on compliance with

independence requirements. In doing so, the engagement partner shall:
1- Obtain relevant information to identify circumstances and relationship
that create threats to independence;
1. Evaluate information on identified breaches, of the firm’s independence
policies and procedures; and
Take appropriate action to eliminate such threats or reduce them to an
acceptable level or to withdraw from the audit engagement.

Relevant 1. Throughout the audit engagement, the engagement partner shall

ethical remain alert, for non- compliance with relevant ethical requirements by
requirements members of the engagement team.
Note – 2. If matters come to the engagement partner’s attention that indicate that
Covered in SA members of the engagement team have not complied with relevant
200 ethical requirements, the engagement partner, in consultation with
others in the firm, shall determine the appropriate action.
Fundamental principles of professional ethics, which include:
(a) Integrity;
(b) Objectivity;
(c) Professional competence and due care;
(d) Confidentiality; and
(e) Professional behaviour.
(f) Independence
Note – Ethical Requirement covered in SA 200
Leadership, As per SA 220 "Quality Control for an Audit of Financial Statements” the
responsibiliti engagement partner shall take responsibility for the overall quality on each
es for quality audit engagement to which that partner is assigned.
on audits As a part of this responsibility Engagement Partner should emphasizes the
following to the engagement Team (ET):
 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.
Meaning of 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.

Engagement Direction, The engagement partner shall take responsibility for:

performance supervision
1. the direction, supervision and performance of the audit
and
engagement in compliance with professional standards
performance
and regulatory and legal requirements, and
2. The auditor’s report being appropriate in the
circumstances.

Reviews 1. The engagement partner shall take responsibility for

reviews being performed in accordance with the firm’s
review policies and procedures.

2. On or before the date of the auditor’s report, the

engagement partner shall, be satisfied that sufficient
appropriate audit evidence has been obtained to
support the conclusions and the auditor’s report.

Consultation The engagement partner shall:

1. Take responsibility for the engagement team
undertaking appropriate consultation of difficult
matters;
2. Be satisfied that engagement team have undertaken
consultation both within the engagement team and
between the engagement team and others;
3. Be satisfied that the nature and scope of and
conclusions resulting from, such consultations are
agreed with the party consulted; and
4. Determine that conclusions resulting from such
consultations have been implemented.

Engagement 1. For audits of financial statements of listed entities and

quality those other audit engagement for which the
control engagement quality control reviews is required, the
review engagement partner shall:
a) Determine that an engagement quality control
reviewer has been appointed,
b) Discuss significant matters with the engagement
quality control reviewer, and
c) Not date the auditor report until the completion
of the engagement quality control review,
 2. The engagement quality control reviewer shall evaluate
the following:
(a) Discussion of significant matters with the
engagement partner
(b) Review of the financial statements and the proposed
auditors report
(c) Review of selected audit documentation and
(d) Conclusions reached in formulating the auditor’s
report and consideration of whether the proposed
auditor’s report is appropriate.
3. For audits of financial statements of listed entities, the
engagement quality control reviewer shall also consider
the following:
(a) The engagement team’s evaluation of the firms
independence
(b) Whether appropriate consultations has taken place
and the conclusions arising from those consultations
(c) Whether audit documentation selected for reviews
reflects the work performed and supports the
conclusions reached

Differences If differences of opinion arise within the engagement team with

of opinion those consulted or 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.

Monitoring A monitoring process is designed to provide the firm with reasonable

assurance that its policies and procedures relating to quality control are
relevant adequate and operating effectively. The engagement partner shall
consider the result of the firms monitoring process.

Documentatio 1. The auditors shall document:

n a) Issues identified with respect to compliance with relevant ethical
requirement and how they were resolved
b) Conclusions on compliance with independence requirements
c) Conclusions reached regarding the acceptance and continuance of
client relationships and audit engagements
d) The consultations undertaken during the course of the audit
engagement
2. The engagement quality control reviewer shall document, for the audit
engagement reviewed that,

a) The procedures for engagement quality control review have been

performed
b) The engagement quality control review has been completed on or
before the date of the auditors reports and
c) The reviewer is not aware of any unresolved matters

11. INDEPENDENCE OF AUDITORS

Meaning of Independence
 To define "independence” precisely is not possible since independence is a state of mind
and personal character.
 According to the Guidance Note of the ICAI on "Independence of Auditors” independence
implies that the judgment of a person is not subordinate to the wishes or directions of
another person who might have engaged him.
  It stipulates that the independence is a condition of mind and personal character and
should not be confused with the visible standards of independence.
"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."
Independence of the auditor has not only to exist in fact, but also appear to so exist to all
reasonable persons.
 The auditor has to conduct himself in such a way that no reasonable person, can doubt
his objectivity and integrity. In fact, the word independent as a prefix in audit
proposition in itself enshrines the concept of independence of an auditor and it is thus,
considered fundamental concept in the theory of auditing.
 The relationship between the auditor and the client should be such that firstly, he
himself is satisfied about his client and then it is understood by others that the
independence of the auditor is not affected.

Requirements of law ensuring independence

Law also makes an attempt to ensure auditor’s independence. For instance:
 The Companies Act, 2013 contains specific provisions to ensure the independence of the
auditor e.g.
 the right of access given to the auditor to the books of account and other
documents,
 provisions disqualifying certain persons to act as auditor,
 Provisions relating to appointment, removal, etc. are to ensure the independence
of the auditor.
 Various provisions in the Schedules to the Chartered Accountants’ Act, 1949 on
misconduct are also an attempt to protect the independence of the auditor and to keep
the professional competence.
THREATS TO INDEPENDENCE

Self-interest
threats
Self-interest threats- It may occur as a result of
the financial or other interests of a professional
accountant or of a relative. Examples are:
Intimidat  Direct or indirect financial interest in a client,
Self-review
ion threats  loan or guarantee to or from the concerned
threats client,
Threats of
Independence
 undue dependence on a client's fees,
 close business relationship with an audit client,
 potential employment with the client, and
 contingent fees for the audit engagement
Familiarity Advocacy
threats threats
Self-review threats- It may occur when a
previous judgment needs to be re- evaluated by
the professional accountant responsible for that
judgment. Instances where such threats may arise are:
 when an auditor having recently been a director or senior officer of the company, and
 when auditors perform services that are themselves subject matters of audit.

Advocacy threats- It may occur when a professional accountant promotes a position or opinion
to the point that subsequent objectivity may be compromised. For example, an auditor dealing
with shares or securities of the audited company, or becomes the client’s advocate in litigation
and third-party disputes.
Familiarity threats- are self-evident, and occur when auditors form relationships with the
client where they end up being too sympathetic to the client's interests. This can occur in many
ways:
 close relative of the audit team working in a senior position in the client company,
 former partner of the audit firm being a director or senior employee of the client,
 long association between specific auditors and their specific client counterparts, and
 Acceptance of significant gifts or hospitality from the client company, its directors or
employees.
Intimidation threats- which occur when auditors are deterred from acting objectively with an
adequate degree of professional skepticism. Basically, these could happen because of threat of
replacement over disagreements with the application of accounting principles, or pressure to
disproportionately reduce work in response to reduced audit fees.
Safeguards to Independence
The Chartered Accountant has a responsibility to remain independent by taking into account
the context in which they practice, the threats to independence and the safeguards available to
eliminate the threats.
The following are the guiding principles in this regard: -
I. Auditors should always be and appears to be independent of the entities that they are
auditing.
II. Auditor should abide himself with the key fundamental principles are integrity,
objectivity and professional skepticism.
III. Auditor should consider threats to independence before accepting any audit assignment.
IV. In case of existence of any threats to independence, auditor should not accept the
engagement or put in place safeguards that eliminate them. If necessary safeguards
cannot be put in place due to circumstances, auditor should withdraw.

Preconditions for an Audit

•Acknowledgement by management of it's responsibility w.r.t
•preperation of financial statement as per FRF
•I.C so that financial statement should be free from frauds and error
•They will provide auditor with :
#access to all information
#additional information
#unrestricted access to persons if necessary

Audit Engagement Terms

•Audit Engagements letter includes
•Objectives of the Audit
•Scope of Audit
•Responsibility of Mgt. and Auditor
•Identification of FRF
•Reference to expected form & content of reports to be issued by the auditors
•If Laws/Regulation prescribes terms, then no need for separate written terms except that management acknowledge the same.
 12. SA 210- AGREEING THE TERMS OF AUDIT ENGAGEMENT

Auditor should not accept audit if

Aforesaid precondition not present Prior to acceptance management impose limitations

Recurring Audit - Whether to revise/remind the terms?

Before completing Audit, if the client request the auditor to change the terms that conveys lower assurance

Consider whether justification for change is reasonable

Yes No

If management doesn't permit Original Engagement then withdraw

Agree to new terms for engagement and communicate to TCWG and members

Additional Consideration

Financial Reporting Standards are in conflict with law, Discuss with management

If additional disclosure in financial statements or amendment to standard is possible

Yes, OK
No, Modify Audit Report

Objective of Auditor
The objective of the auditor is to accept or continue an audit engagement only when the basis
upon which it is to be performed has been agreed, through:
a) 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 an Audit
The use by management of an acceptable FRF in the preparation of the financial statements
and the agreement of management and, where appropriate, TCWG to the premise on which an
audit is conducted. In order to establish whether the preconditions for an audit are present, the
auditor shall:
I. Determine whether the financial reporting framework to be applied in the preparation of
the financial statements is acceptable; and
II. Obtain the agreement of management that it acknowledges and understands its
responsibilities for followings:
 The preparation of the F.S. in accordance with the applicable FRF.
 Exercising necessary internal control to enable the preparation of F.S. that are free
from material misstatement, whether due to fraud or error.
 to provide the auditor with:
 Access to all relevant 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.
Limitation on Scope Prior to Audit Engagement Acceptance
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 F.S., the auditor shall not accept such a limited
engagement as an audit engagement, unless required by law or regulation to do so.
Other Factors Affecting Audit Engagement Acceptance
If the preconditions for an audit are not present, the auditor shall discuss the matter with
management. The auditor shall not accept the proposed audit engagement:
 If the auditor has determined that the FRF to be applied in the preparation of the F.S.
is unacceptable, or
 If the management does not agree with its responsibilities prescribed above.
Agreement on Audit Engagement Terms

1) The auditor shall agree the terms of the audit engagement with management or TCWG,
as appropriate.
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:
 The objective and scope of the audit of the F.S.;
 The responsibilities of the auditor;
 The responsibilities of management;
 Identification of the applicable FRF for the preparation of the F.S.; 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. If law or regulation prescribes in sufficient detail the terms of the audit engagement
referred above, the auditor need not record them in a written agreement, except for the
fact that such law or regulation applies and that management acknowledges and
understands its responsibilities.
Recurring Audits
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. 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:
 Any indication that the entity misunderstands the objective and scope of the audit.
 Any revised or special terms of the audit engagement.
 A recent change of senior management.
 A significant change in ownership.
 A significant change in nature or size of the entity's business.
 A change in legal or regulatory requirements.
 A change in the financial reporting framework adopted in the preparation of the F.S.
 A change in other reporting requirements.

Acceptance of a Change in the Terms of the Audit Engagement:

1. The auditor shall not agree to a change in the terms of the audit engagement where there
is no reasonable justification for doing so.
2. 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.
3. 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.
4. 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 TCWG, owners or regulators.

Reasons for entity request for changes in terms of engagement:

A request from the entity for the auditor to change the terms of the audit engagement may result
from
(a) Change in circumstances affecting the need for the service,
(b) Misunderstanding as to the nature of an audit as originally requested or
(c) Restriction on the scope of the audit engagement, whether imposed by management or caused
by other circumstances.
 The auditor, considers the justification given for the request, particularly the implications
of a restriction on the scope of the audit engagement.
 If the auditor concludes that there is reasonable justification to change the audit
engagement to a review or a related service, the audit work performed to the date of
change may be relevant to the changed engagement; however, the work required to be
performed and the report to be issued would be those appropriate to the revised
engagement.

ILLUSTRATION
R & Co, a firm of Chartered Accountants have not revised the terms of engagements and obtained
confirmation from the clients for Last 5 years despite changes in business and professional
environment.
Required
Elucidate the circumstances that may warrant the revision in terms of engagement.

SOLUTION
 As per SA 210 on "Agreeing the Terms of Audit Engagements", the auditor may decide
not to send a new audit engagement letter or other written agreement each period.
However, the factors that may make it appropriate to revise the terms of the audit
engagement or to remind the entity of existing terms are discussed above.
ILLUSTRATION
M/s Sureshchandra & Co. has been appointed as an auditor of SC Ltd. for the financial year 2014-
15. CA. Suresh, one of the partners of M/s Sureshchandra & Co., completed entire routine audit
work by 29th May, 2015. 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.
Required
State with reasons whether CA. Chandra is right in expressing an opinion on financial statements
the audit of which is performed by another auditor.
SOLUTION
Relying on Work Performed by Another Auditor: As per SA 220 "Quality Control for an Audit of
Financial Statements", an engagement partner taking over an audit during the engagement may
apply the review procedures such as the work has been performed in accordance with
professional standards and regulatory and legal requirements; significant matters have been
raised for further consideration; appropriate consultations have taken place and the resulting
conclusions have been documented and implemented; there is a need to revise the nature,
timing and extent of work performed; the work performed supports the conclusions reached and
is appropriately documented; the evidence obtained is sufficient and appropriate to support the
auditor's report; and the objectives of the engagement procedures have been achieved.
Further, one of the basic principles, which govern the auditor's professional responsibilities and
which should be complied with wherever an audit is carried, is that when the auditor delegates
work to assistants or uses work performed by other auditor and experts, he will continue to be
responsible for forming and expressing his opinion on the financial information. However, he
will be entitled to rely on work performed by others, provided he exercises adequate skill and
care and is not aware of any reason to believe that he should not have so relied. This is the
fundamental principle which is ethically required as per Code of Ethics.
However, the auditor should carefully direct, supervise and review work delegated. He should
obtain reasonable assurance that work performed by other auditors/experts and assistants is
adequate for his purpose.
In the given case, all the auditing procedures before the moment of signing of final report have
been performed by CA. Suresh. However, the report could not be signed by him due to his
unfortunate death. Later on, CA. Chandra signed the report relying on the work performed by
CA. Suresh. Here, CA. Chandra is allowed to sign the audit report, though, will be responsible
for expressing the opinion. He may rely on the work performed by CA. Suresh provided he further
exercises adequate skill and due care and review the work performed by him.