CH - 1 - Sa 200 - Overall Objectives of An Independent Auditor and Conduct of The Audit in Accordance With Standard On Auditing

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Chapter 1
SA 200
Overall objectives of the Independent Auditor and
the conduct of the Audit in Accordance with
Standard on Auditing
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Professional Skepticism
The auditor is responsible for maintaining an attitude of professional skepticism throughout the audit. Do
you agree with the statement?
As per SA 200, "Overall Objectives of the Independent Auditor and the Conduct of an Audit in Accordance with
Standards on Auditing",
● Professional skepticism is an attitude that includes a questioning mind,
● being alert to conditions which may indicate possible misstatement due to error or fraud,
● and a critical assessment of audit evidence.
This includes
● Questioning
○ contradictory audit evidence and - जो मिला
○ the reliability of documents and - जो दिखा
○ responses to inquiries and - जो कहा,
○ Condition that may indicate possible fraud - जो हुआ
○ Circumstances that suggest the need for audit procedures in addition to those required by the
SAs. जो होगा
● (Critical assessment of audit evidence) Checking whether audit evidence obtained by auditor is
sufficient and appropriate as per the circumstance.
Why Professional Skepticism?

(Risk को कम करना चाहते है !) कौन से Risk को - Overlooking and Over Generalising and inappropriate assumptions क़े
Risk को
● Maintaining professional skepticism throughout the audit is necessary to reduce the risks of
○ Overlooking unusual circumstances,
○ Over generalising when drawing conclusions.
○ Using inappropriate assumptions in determining the nature, timing, and extent of the audit
procedures and evaluating the results thereof.
Further, while obtaining reasonable assurance, the auditor is responsible for maintaining professional
skepticism throughout the audit,
● considering the potential for management override of controls and (कहीं मैनज्में ट override तो नहीं कर रही
कंट्रोल्ज़ को)
● recognizing the fact that audit procedures that are effective for detecting error may not be effective in
detecting fraud. (एरर तो पकड़ सकते है लेकिन फ़्रॉड नहीं)

Therefore, we do agree with the statement.

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 or allow the
auditor to be satisfied with less-than-persuasive audit evidence when obtaining reasonable assurance.

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

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

● and there is a balance to be struck between the reliability of information and its cost.
● There is an expectation by users of financial statements that the auditor will form an opinion on
the financial statements within a reasonable period of time and at a reasonable cost
●
Other Matters that Affect the Limitations of an Audit
● In the case of certain assertions or subject matters, the potential effects of the limitations on the
auditor's ability to detect material misstatements are particularly significant. Such assertions or
subject matters include:
○ Fraud, particularly fraud involving senior management or collusion. (SA 240)
○ The existence and completeness of related party relationships and transactions. (SA 550)
○ The occurrence of non-compliance with laws and regulations. (SA 250)
○ Future events or conditions that may cause an entity to cease to continue as a going
concern. (SA 570)
Because of the limitations of an audit, there is an unavoidable risk that some material misstatements of the
financial statements may not be detected, even though the audit is properly planned and performed in
accordance with SAs.
However, the inherent limitations of an audit are not a justification for the auditor to be satisfied with less-than
persuasive audit evidence.
Question
There are practical and legal limitations on the auditor’s ability to obtain audit evidence. Explain with the
help of examples. (3 Marks)
ICAI MTP March 2021
Correct / Incorrect Marks 2 MTP April 2021

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 conclusive rather than persuasive.
Question - Correct / Incorrect Marks 2 January 2021 Exam Question
The Auditor is expected to reduce audit risk to zero and can therefore obtain absolute assurance that the
financial statements are free from material misstatement due to fraud or error.

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

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

DEF & Co. Chartered Accountants successfully carried out the audit of Shree Garments for the f.y. 2019-2020.
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 a failure on the
part of the auditor. Comment.
ICAI MTP May 2021

Conduct of an Audit in Accordance with SAs


SA 210 - Agreeing the terms of Audit Engagement

Pre- Conditions for an audit

In order to establish whether the preconditions for an audit are present, the auditor shall:
● Determine whether the financial reporting framework is acceptable; and
● Obtain the agreement of management that it acknowledges (मानती है ) and understands (जानती है ) its
responsibility:
○ For the preparation of the financial statementsin accordance with the applicable financial
reporting framework;
○ For the internal controlas management considers necessary; and
○ To provide the auditor with:
■ Access to all information such as records, documentation and other matters;
■ Additional information that the auditor may request from management for the purpose
of the audit; and
■ Unrestricted access to persons within the entity from whom the auditor determines it
necessary to obtain audit evidence.
Discuss preconditions for an audit as per SA 210. Explain how an auditor would proceed to establish the
presence of pre-conditions for an audit. - Hint Check the preconditions discussed as above and in the
basics chapter.
Agreement on Audit Engagement Terms
It is important, both for the auditor and client, that each party should be clear about the nature of the
engagement. It must be reduced to writing and should exactly specify the scope of the work.
The audit engagement letter is sent by the auditor to his client.
According to SA 210 “Agreeing the Terms of Audit Engagements”, the auditor shall agree the terms of the audit
engagement with management or those charged with governance, as appropriate.
In the case of partnerships, a few more precautions are needed. The appointment of the auditor is normally
governed by the partnership deed. The accountant, when he is approached for undertaking a professional
assignment by a firm or a partner of a firm, should first get a clear idea of the nature of the service required and
then ensure, with reference to the terms of partnership agreement that his appointment is valid.
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:

If law or regulation prescribes in sufficient detail the terms of the audit engagement , 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.
Even if law or regulation prescribes sufficient details of the terms of the audit engagement the auditor should
record them in a written agreement. - Correct / Incorrect - 2 Marks November 2020.
Recurring Audits

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

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

● the auditor is requested to change the audit engagement
● to an engagement that conveys a lower level of assurance,
● the auditor shall determine whether there is
● Reasonable justification for doing so.
If the auditor concludes that there is reasonable justification to change the engagement and if the audit work
performed complied with the SAs applicable to the changed engagement, the report issued would be
appropriate for the revised terms of engagement. In order to avoid confusion, the report would not include
reference to
● the original engagement; or
● any procedures that may have been performed in the original engagement.
If the terms of the audit engagement are changed, the auditor and management shall agree on and record the
new terms of the engagement in an engagement letter or other suitable form of written agreement.
The auditor should not agree to a change of engagement where there is no reasonable justification for doing so.
If the auditor is unable to agree to a change of the terms of the audit engagement and is not permitted by
management to continue the original audit engagement, the auditor shall:
➔ Withdraw from the audit engagement where possible under applicable law or regulation; and
➔ Determine whether there is any obligation, either contractual or otherwise, to report the circumstances
to other parties, such as those charged with governance, owners or regulators.
A request from the client for the auditor to change the engagement may result from-
● a change in circumstances affecting the need for the service,
● a misunderstanding as to the nature of an audit or related service originally requested.

● a restriction on the scope of the engagement, whether imposed by management or caused by

circumstances.
General MCQs Marks 1 MTP April 2021
"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:
a. Withdraw from the audit engagement where possible under applicable law or regulation;
b. Determine whether there is any obligation, either contractual or otherwise, to report the
circumstances to other parties, such as those charged with governance, owners or regulators.
c. Withdraw from the audit engagement where possible under applicable law or regulation and
determine whether there is any obligation, either contractual or otherwise, to report the
circumstances to other parties, such as those charged with governance, owners or regulators.
d. Withdraw from the audit engagement where possible under applicable law or regulation or
determine whether there is any obligation, either contractual or otherwise, to report the
circumstances to other parties, such as those charged with governance, owners or regulators."

Misc Topics Related To Standards
IFAC & IAASB
Role of International Auditing & Assurance Standard Board (IAASB)

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

b) Establishing high quality standards and guidance for other types of assurance services on both financial
and non-financial matters:
c) Establishing high quality standards and guidance for other related services;
d) Establishing high quality standards for quality control covering the scope of services addressed by the
IAASB; and
e) Publishing other pronouncements on auditing and assurance matters, thereby advancing public
understanding of the roles and responsibility of professional auditors and assurance service providers.
Standards on Auditing
What are Standards on Auditing (SAs)?
SAs are Auditing Standards, which prescribe the way the auditing should be conducted. They can also be
termed as performance benchmarks for the auditors.
The main purpose is to bring as much uniformity as possible in work performed by auditors.
Procedure for issuing SAs
Generally following procedure is followed for issuing the SAs

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

Objectives and Functions of AASB (Homework)
❖ To review the existing and emerging auditing practices worldwide and identify areas in which standards
on Quality Control, Engagement Standards and Statements on Auditing need to be developed .
❖ To formulate Engagement Standards, Standards on Quality Control and Statements on Auditing so that
these may be issued under the authority of the Council of the Institute.
❖ To review the existing Standards and Statements on Auditing to assess their relevance in the changed
conditions and to undertake their revisions, if necessary.
❖ To develop Guidance Notes on issues arising out of any Standard , auditing issued pertaining to any
specific industry or on generic issues, so that those may be issued under the authority of the Council of
the Institute.
❖ To review the existing Guidance Notes to assess their relevance in the changed circumstances and
undertake their revision , if necessary.
❖ To formulate General Clarifications , where necessary , on issues arising from Standards.
❖ To formulate and issue Technical Guides , practice Manuals Studies and other papers under its own
authority for guidance of professional accountants in the case felt appropriate by the Board.
Question Standards collectively known as the Engagements Standards issued by AASB under the
authority of the council of ICAI - Discuss
The following Standards issued by the Auditing and Assurance Standards Board under the authority of the
Council are collectively known as the Engagement Standards:
● Standards on Auditing (SAs), to be applied in the audit of historical financial information.
● Standards on Review Engagement (SREs), to be applied in the review of historical financial
information.
● Standards on Assurance Engagements (SAEs), to be applied in assurance engagements, dealing with
subject-matters other than historical financial information.
● Standards on Related Services (SRSs), to be applied to engagements involving application of agreed
upon procedures to information, compilation engagements, and other related services
engagements as may be specified by the ICAI.
● Standards on Quality Control (SQCs) issued by the AASB under the authority of the Council, are to be
applied for all services covered by the Engagement Standards as described above.
.
Renumbering of Standards
Standard on Quality Control (SQC) 01-99
Standard on Auditing (SA) 100-999
Standard on Review Engagement (SRE) 2000-2699
Standard on Assurance Engagement (SAE) 3000-3699

Related Services (SRS) 4000-4699
Classification of SAs
Introductory matters 100-199
General Principles and Responsibilities 200-299
Risk Assessment and Response to Assessed Risk 300-499
Audit Evidence 500-599
Using work of Others 600-699
Audit conclusions and Reporting 700-799
Specialised Areas 800-899
List of Standards
General Principles and Responsibilities
1 SA200 (Revised) Overall objectives of the Independent Auditor and the conduct of the
Audit in Accordance with Standard on Auditing
2 SA210 (Revised) Agreeing the Terms of Audit Engagements
3 SA 220 (Revised) Quality Control for an Audit of financial statements
4 SA 230 (Revised) Audit Documentation
5 SA 240 (Revised) The Auditor’s Responsibilities Relating to Fraud in an Audit of Financial

Statements.
6 SA250 (Revised) Consideration of Laws and Regulations in an Audit of Financial

Statements
7 SA 260 (Revised) Communication with those Charged with Governance
8 SA265 Communicating Deficiencies in Internal control to those Charged with

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

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

understating the Entity and Its Environment
12 SA 320 Materiality in Planning and Performing an Audit
13 SA330 Response to Assessed Risks
14 SA 402 Audit consideration Relating to an Entity using a Service Organisation
15 SA450 Evaluation of Misstatements Identified during the Audit
Audit Evidence
16 SA500 (Revised) Audit Evidence
17 SA 501 (Revised) Audit Evidence-Specific Consideration for selected Items
18 SA 505 (Revised) External Confirmations
19 SA 510 (Revised) Initial Audit Engagement - Opening balances
20 SA 520 (Revised) Analytical Procedures
21 SA 530 (Revised) Audit Sampling
22 SA 540 (Revised) Auditing Accounting Estimates, Including fair value Accounting

Estimates and Related Disclosures
23 SA 550 (Revised) Related Parties
24 SA 560 (Revised) Subsequent Events
25 SA 570 (Revised) Going Concern
26 SA 580 (Revised) Written Representation
Using Work of Others
27 SA 600 Using the work of Other Auditors
28 SA 610 (Revised) Using the Work of Internal Auditors
29 SA 620 (Revised) Using the Work of an Auditor’s Expert
Audit Conclusions and Reporting

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

Financial Statements
35 SA 720 (Revised) The Auditor’s responsibilities relating to Other Information
Standards on Quality Control

36 SQC 1 “Quality Control for Firms that Perform Audit and Reviews of Historical
Financial Information, and other Assurance and Related Services
Engagements”
Difference Between SAs, SREs, SAEs SRSs and SQC.
It is to be understood that Standards on Auditing (SAs) apply in “audit of historical financial information” whereas Standards
on Review Engagements (SREs) apply in “review of historical financial information”. Remember that Standards on auditing
apply in “audit” of historical financial information which is a reasonable assurance engagement whereas Standards on
Review Engagements apply in “review” of historical financial information which is a limited assurance engagement only.
Audit Review
In our opinion, the financial statements give a true and fair Nothing has come to our attention that causes us to believe
view of the financial position of ___________ Company as at that the financial statements of ___________ Company as of
_____________, and of its financial performance and its cash __________ are not prepared, in all material respects, in
flows for the year then ended in accordance with CRITERIA accordance with an applicable financial reporting
(Financial Reporting Framework) framework.
Assurance Level High But Not Absolute Assurance level between moderate to low
Positively Worded Assurance Negative Assurance
Concludes that the subject matter is prepared as per the Conclude that the subject matter is plausible in the
criteria in all material respects. circumstances

There is another set of standards which apply in assurance engagements dealing with subject matters other than historical
financial information. Such assurance engagements do not include “audit” or “review” of historical financial information.
These standards are known as Standards on Assurance Engagements.
For example, an assurance engagement relating to examination of Internal Control of The Entity.
Standards on related services

These standards apply in engagements to perform agreed-upon procedures regarding financial information. For example,
an engagement to perform agreed-upon procedures may require the auditor to perform certain procedures concerning
individual items of financial data, say, accounts payable, accounts receivable, purchases from related parties and sales and
profits of a segment of an entity, or a financial statement, say, a balance sheet or even a complete set of financial statements.
Standards on Quality Control

Standards on Quality Control (SQCs) are to be applied for all services covered by Engagement Standards.
ICAI Announcement
Following Engagements and Quality Control Standards on Auditing excluded.
1. 260
2. 265
3. 330
4. 402
5. 450
6. 540
7. 600
8. 620
9. 720

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


Question - Correct / Incorrect Marks 2 MTP April 2021
It is the function of an audit to establish that payments have been made validly to the persons who are shown to be recipients.
Correct: It is the function of audit to establish that payments have been made validly to persons who are shown to be recipients. For
checking the validity of a transaction, it is usually necessary to refer to documentary evidence.

SA 220 - Quality Control For An Audit Of

Financial Statements
A discussion on SQC-1 - Refer Videos
Standard on Quality Control (SQC) 1
Quality Control for Firms that Perform

● Audits and
● Reviews of Historical Financial Information, and
● Other Assurance and Related Services Engagements.
The firm should establish a system of quality control designed to provide it with reasonable assurance
● that the firm and its personnel comply with
○ professional standards and
○ regulatory and legal requirements, and
● that reports issued by the firm or engagement partner(s) are appropriate in the circumstances.
Elements of a System of Quality Control
1. Leadership responsibilities for quality within the firm.

2. Ethical requirements.
3. Acceptance and continuance of client relationships and specific engagements.
4. Human resources.
5. Engagement performance.
6. Monitoring
Now Let Us Start SA 220
This Standard on Auditing (SA) deals with the specific responsibilities of the auditor regarding quality control
procedures for an audit of financial statements.
It also addresses, where applicable, the responsibilities of the engagement quality control reviewer. This SA is to
be read in conjunction with relevant ethical requirements
System of Quality Control and Role of Engagement Teams
● Quality control systems, policies and procedures are the responsibility of the audit firm.
● Under SQC 1, the firm has an obligation to establish and maintain a system of quality control to provide it
with reasonable assurance that

○ The firm and its personnel comply with professional standards and regulatory and legal
requirements; and
○ The reports issued by the firm or engagement partners are appropriate in the circumstances.
Some definitions
● Engagement partner – the partner or other person in the firm who is a
○ member of the Institute of Chartered Accountants of India and

○ is in full time practice and
○ is responsible for the engagement and its performance, and for the report that is issued on
behalf of the firm, and who, where required,
○ has the appropriate authority from a professional, legal or regulatory body.
● Engagement quality control review –

○ a process designed to provide an objective evaluation,
■ before the report is issued,
○ of the significant judgments the engagement team made and
○ the conclusions they reached in formulating the report.
● Engagement quality control reviewer –

○ a partner, other person in the firm,
○ suitably qualified external person, or
○ a team made up of such individuals,
■ with sufficient and appropriate
● experience and
● authority
■ to objectively evaluate,
■ before the report is issued,
■ the significant judgments the engagement team made and
■ the conclusions they reached in formulating the report.
○ However, in case the review is done by a team of individuals, such a team should be headed by a
member of the Institute.
● Engagement team – all personnel performing an engagement, including any experts contracted by the
firm in connection with that engagement.
● Personnel – partners and staff.

Leadership Responsibilities for Quality on Audits
As per SA 220 “Quality Control for an Audit of Financial Statements”, the engagement partner shall take
responsibility for the overall quality on each audit engagement to which that partner is assigned.
The actions of the engagement partner and appropriate messages to the other members of the engagement
team, in taking responsibility for the overall quality on each audit engagement, emphasise:
1. The importance to audit quality of

a. Performing work that complies regulatory and legal requirements; with professional standards
and
b. Complying with the firm’s quality control policies and procedures as applicable;
c. Issuing auditor’s reports that are appropriate in the circumstances; and
d. The engagement team’s ability to raise concerns without fear of reprisals; and
2. The fact that quality is essential in performing audit engagements.
Relevant Ethical Requirements (Covered in topics of Independence and Ethical

Requirement)
Acceptance and Continuance of Client Relationships and Audit Engagements
SA 220 requires the firm to obtain information before accepting an engagement. Information such as the
following assists the engagement partner in determining whether the decisions regarding the acceptance
and continuance of audit engagements are appropriate
1. The integrity of the principal owners, key management and those charged with governance of the
entity.
2. Whether the engagement team is competent to perform the audit engagement and has the necessary
capabilities, including time and resources;
3. Whether the firm and the engagement team can comply with relevant ethical requirements; and
4. Significant matters that have arisen during the current or previous audit engagement, and their
implications for continuing the relationship.

If the engagement partner obtains information that would have caused the firm to decline the
audit engagement had that information been available earlier, the engagement partner shall
communicate that information promptly to the firm, so that the firm and the engagement partner
can take the necessary action.
Assignment of Engagement Teams
The engagement partner shall be satisfied that the engagement team, and any auditor’s experts who are not
part of the engagement team, collectively have the appropriate competence and capabilities to:
● Perform the audit engagement in accordance with professional standards and regulatory and legal
requirements; and
● Enable an auditor’s report that is appropriate in the circumstances to be issued.
Human Resource (SQC -1 Text)

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

(a) Recruitment;
(b) Performance evaluation;
(c) Capabilities;
(d) Competence;
(e) Career development;
(f) Promotion;
(g) Compensation; and
(h) Estimation of personnel needs.
Addressing these issues enables the firm to ascertain the number and characteristics of the individuals
required for the firm’s engagements.
The firm’s recruitment processes include procedures that help the firm select individuals of integrity as well as
the capacity to develop the capabilities and competence necessary to perform the firm’s work.
Engagement Performance
The firm should establish policies and procedures designed to provide it with reasonable assurance that
engagements are performed in accordance with professional standards and regulatory and legal requirements,
and that the firm or the engagement partner issues reports that are appropriate in the circumstances.

Through its policies and procedures, the firm seeks to establish consistency in the quality of engagement
performance. This is often accomplished through written or electronic manuals, software tools or other
forms of standardized documentation, and industry or subject matter- specific guidance materials.
Matters addressed include the following
● How engagement teams are briefed on the engagement to obtain an understanding of the objectives
of their work.
● Processes for complying with applicable engagement standards.
● Processes of engagement supervision, staff training and coaching.
● Methods of reviewing the work performed, the significant judgments made and the form of report
being issued.
● Appropriate documentation of the work performed and of the timing and extent of the review.
● Processes to keep all policies and procedures current.
Through its policies and procedures, the firm seeks to establish consistency in the quality of
engagement performance. This is often accomplished through written or electronic manuals, software
tools or other forms of standardized documentation, and industry or subject matter-specific guidance
materials. Explain the matters to be addressed in this context.
Monitoring
The firm should establish policies and procedures designed to provide it with reasonable assurance that the
policies and procedures relating to the system of quality control are relevant, adequate, operating effectively and
complied with in practice.
The purpose of monitoring compliance with quality control policies and procedures is to provide an evaluation
of:
● Adherence to professional standards and regulatory and legal requirements;
● Whether the quality control system has been appropriately designed and effectively implemented;
● Whether the firm’s quality control policies and procedures have been appropriately applied, so that
reports that are issued by the firm or engagement partners are appropriate in the circumstances.
● Follow-up by appropriate firm personnel so that necessary modifications are promptly made to the
quality control policies and procedures.
Documentation (Homework)
The auditor shall document:
● Issues identified with respect to compliance with relevant ethical requirements and how they were resolved.
● Conclusions on compliance with independence requirements that apply to the audit engagement, and any relevant
discussions with the firm that support these conclusions.

● Conclusions reached regarding the acceptance and continuance of client relationships and audit engagements.
● The nature and scope of, and conclusions resulting from, consultations undertaken during the course of the audit
engagement.
The engagement quality control reviewer shall document, for the audit engagement reviewed, that:
● The procedures required by the firm’s policies on engagement quality control review have been performed;
● The engagement quality control review has been completed on or before the date of the auditor’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.
Question - Write a short note on“Quality control for audit work at firm level”.
Quality Control for Audit Work at Firm Level:
SA 220 on Quality Control for an Audit of Financial Statements deals with the specific responsibilities of the auditor regarding quality
control procedures for an audit of financial statements.
Quality control systems, policies and procedures are the responsibility of the audit firm.
Within the context of the firm’s system of quality control, engagement teams have a responsibility to implement quality control procedures
that are applicable to the audit engagement.
The requirements are
● Leadership Responsibilities for Quality on Audits: The engagement partner shall take responsibility for the overall quality on each
audit engagement to which that partner is assigned.
● Relevant Ethical Requirements: Throughout the audit engagement, the engagement partner shall remain alert, through
observation and making inquiries as necessary, for evidence of non-compliance with relevant ethical requirements by members of
the engagement team. The engagement partner shall form a conclusion on compliance with independence requirements that
apply to the audit engagement.
● Acceptance and Continuance of Client Relationships and Audit Engagements: The engagement partner shall be satisfied that
appropriate procedures regarding the acceptance and continuance of client relationships and audit engagements have been
followed, and shall determine that conclusions reached in this regard are appropriate.
● Assignment of Engagement Teams: The engagement partner shall be satisfied that the engagement team, and any auditor’s
experts who are not part of the engagement team, collectively have the appropriate competence and capabilities to perform the
audit engagement in accordance with professional standards and regulatory and legal requirements and enable an auditor’s
report that is appropriate in the circumstances to be issued.
● Engagement Performance: The engagement partner shall take responsibility for the direction, supervision and performance of the
audit engagement. He shall take responsibility for reviews being performed in accordance with the firm’s review policies and
procedures and shall take responsibility for the engagement team undertaking appropriate consultation on difficult or

contentious matters. For audits of financial statements of listed entities, and those other audit engagements, if any, for which the
firm has determined that an engagement quality control review is required, the engagement partner shall determine that an
engagement quality control reviewer has been appointed. Further, if differences of opinion arise within the engagement team,
with those consulted or, where applicable, between the engagement partner and the engagement quality control reviewer, the
engagement team shall follow the firm’s policies and procedures for dealing with and resolving differences of opinion.
● Monitoring: The engagement partner shall consider the results of the firm’s monitoring process as evidenced in the latest
information circulated by the firm and, if applicable, other network firms and whether deficiencies noted in that information may
affect the audit engagement.
Direction, Supervision and Performance
The engagement partner shall take responsibility for:

● The direction, supervision and performance of the audit engagement in compliance with professional standards
and regulatory and legal requirements; and
● The auditor’s report being appropriate in the circumstances.
Reviews / Engagement Quality Control Review
● The engagement partner shall take responsibility for reviews being performed in accordance with the firm’s
review policies and procedures.
● On or before the date of the auditor’s report, the engagement partner shall, through a review of the audit
documentation and discussion with the engagement team, be satisfied that sufficient appropriate audit evidence
has been obtained to support the conclusions reached and for the auditor’s report to be issued.
● For audits of financial statements of listed entities and those other audit engagements, if any, for which the firm
has determined that an engagement quality control review is required, the engagement partner shall:
○ Determine that an engagement quality control reviewer has been appointed;
○ Discuss significant matters arising during the audit engagement, including those identified during the
engagement quality control review, with the engagement quality control reviewer; and
○ Not date the auditor’s report until the completion of the engagement quality control review.
Matters to be evaluated by EQC Reviewer.

The engagement quality control reviewer shall perform an objective evaluation of the significant judgments made by the
engagement team, and the conclusions reached in formulating the auditor’s report.
This evaluation shall involve:

● Discussion of significant matters with the engagement partner;
● Review of the financial statements and the proposed auditor’s report;
● Review of selected audit documentation relating to the significant judgments the engagement team made and
the conclusions it reached; and
● Evaluation of the conclusions reached in formulating the auditor’s report and consideration of whether the
proposed auditor’s report is appropriate.
Consultation

The engagement partner shall:

a. Take responsibility for the engagement team undertaking appropriate consultation on difficult or contentious
matters;
b. Be satisfied that members of the engagement team have undertaken appropriate consultation during the course
of the engagement, both within the engagement team and between the engagement team and others at the
appropriate level within or outside the firm;
c. AGREED WITH - Be satisfied that the nature and scope of, and conclusions resulting from, such consultations are
agreed with the party consulted; and
d. CONCLUSIONS IMPLEMENTED - Determine that conclusions resulting from such consultations have been
implemented.
Differences of Opinion
If differences of opinion arise within the engagement team, with those consulted or, where applicable, between the
engagement partner and the engagement quality control reviewer, the engagement team shall follow the firm’s policies
and procedures for dealing with and resolving differences of opinion.

Ethical Requirements Relating to an Audit of Financial Statements
The auditor shall comply with relevant ethical requirements, including those pertaining to independence,
relating to financial statement audit engagements. Relevant ethical requirements ordinarily comprise the Code
of Ethics for Professional Accountants (IESBA Code) related to an audit of financial statements.
First, broadly understand what are ethics? ”Ethics” are the principles of conduct governing an individual or
group. Professions like law, medicine have their code of ethics. Auditing profession is no exception. Rather, in
profession of auditing, importance of ethics is manifold.
The IESBA Code establishes the following as the fundamental principles of professional ethics relevant to the
auditor when conducting an audit of financial statements. We shall understand broad meaning and intent of
these fundamental principles as under:-
Integrity
Integrity requires auditor to be straight forward and honest in all professional and business relationships. It
implies fair dealing and truthfulness. It effectively means that he shall not be associated with reports, returns,
communications or other information which he believes contains a materially false or misleading statement;
contains statements or information provided recklessly or omits required information where such omission
could be misleading.
Objectivity
The principle of objectivity requires an auditor not to compromise professional judgment because of bias,
conflict of interest or undue influence of others.
Professional competence and due care
It requires that auditor attains and maintains professional knowledge and skill at the level required to render
competent professional service based on current technical and professional standards and legislation and also
to act diligently and in accordance with technical and professional standards. Diligence includes responsibility
to act carefully, thoroughly and on a timely basis in accordance with requirements of an assignment.
Confidentiality
Confidentiality principle requires an auditor to respect the confidentiality of information acquired as a result of
professional or business relationships
Professional behaviour
It requires an auditor to comply with relevant laws and regulations and avoid any conduct that he knows or
should know might discredit the profession.

Descriptive Question Marks 4 January 2021 Exam Question

Explain the fundamental principles of professional ethics relevant to the auditor when conducting an
audit of financial statements in accordance with Code of Ethics issued by ICAI.
Independence of Auditor
The auditor’s independence safeguards the auditor’s ability to form an audit opinion without being affected by
any influences.
Independence enhances the auditor’s ability to act with integrity, to be objective and to maintain an attitude of
professional skepticism.
Standard on Quality Control (SQC) 1 sets out the responsibilities of the firm for establishing policies and
procedures regarding compliance with relevant ethical requirements.
SA 220 sets out the engagement partner’s responsibilities with respect to relevant ethical requirements. These
include evaluating whether members of the engagement team have complied with relevant ethical
requirements.
SA 220 recognises that the engagement team is entitled to rely on a firm’s systems in meeting its
responsibilities with respect to quality control procedures.
Independence implies that the judgement of a person is not subordinate to the wishes or direction of another
person who might have engaged him.
It is not possible to define “independence” precisely. Rules of professional conduct dealing with independence
are framed primarily with a certain objective. The rules themselves cannot create or ensure the existence of
independence. Independence is a condition of mind as well as personal character. It should not be confused
with the superficial and visible standards of independence which are sometimes imposed by law.
There are two interlinked perspectives of independence of auditors,

1. independence of mind; and two,
2. independence in appearance.
The Code of Ethics for Professional Accountants issued by International Federation of Accountants (IFAC)
defines the term ‘Independence’ as follows:
“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 it should also appear to exist to all reasonable
persons. ( होनी भी चाहिये, दिखनी भी चाहिये )

Threats to Independence
The Code of Ethics for Professional Accountants, prepared by the International Federation of Accountants (IFAC)
identifies five types of threats. These are:
Self-interest threats
Occur when an auditing firm, its partner or associate could benefit from a financial interest in an audit client.
Examples include

● direct financial interest or materially significant indirect financial interest in a client,

● loan or guarantee to or from the concerned client,
● undue dependence on a client’s fees and, hence, concerns about losing the engagement,
● close business relationship with an audit client,
● potential employment with the client, and
● Contingent fees for the audit engagement.
● audit firm unduly relies on fees from a client, it may result in threat to self interest of auditor and he may
not work objectively for the fear of losing client.
Self-review threats,
Where non-audit work is provided to an audit client and is then subject to audit, the auditor will be unlikely to
admit to errors in their own work, or may not identify the errors in their own work.
or when a member of the audit team was previously a director or senior employee of the client.
Instances where such threats come into play are (i) when an auditor having recently been a director or senior
officer of the company, and (ii) when auditors perform services that are themselves subject matters of audit.
Advocacy threats
Promoting the position of a client or representing them in some way would mean the audit firm is seen to be
'taking sides' with the client.
Example - when an auditor deals with shares or securities of the audited company, or becomes the client’s
advocate in litigation and third party disputes.
In such situations, auditor can be perceived as backing and championing causes of auditee clients and it may
lead to belief that the auditor is not acting and working objectively.
Remember that auditor has not only to be independent but also appear to be acting so.
Familiarity threats
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
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 or being threatened with litigation. Such threats attempt to intimidate auditors to deter
them from acting objectively.
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: -
1. For the public to have confidence in the quality of audit, it is essential that auditors should always be and
appear to be independent of the entities that they are auditing.
2. In the case of audit, the key fundamental principles are integrity, objectivity and professional skepticism,
which necessarily require the auditor to be independent.
3. Before taking on any work, an auditor must conscientiously consider whether it involves threats to his
independence.
4. When such threats exist, the auditor should either desist from the task or put in place safeguards that
eliminate them.
5. If the auditor is unable to fully implement credible and adequate safeguards, then he must not accept
the work.

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

● companies governed by the Companies Act;
● banking companies;
● other statutory bodies required by their regulators or by specific Act.
Voluntary Audit
In the voluntary category are the audits of the accounts of

● proprietary entities,
● partnership firms,
● Hindu undivided families, etc.
● In respect of such accounts, there is no basic legal requirement of audit.

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

How can an auditor ensure that FS would not mislead anybody?
The person conducting this task should take care to ensure that financial statements would not mislead
anybody. This he can do honestly by satisfying himself that
1. the accounts have been drawn up with reference to entries in the books of account;
2. the entries in the books of account are adequately supported by sufficient and appropriate evidence;
3. none of the entries in the books of account has been omitted in the process of compilation and nothing
which is not in the books of account has found place in the statements;
4. the information conveyed by the statements is clear and unambiguous;
5. the financial statement amounts are properly classified, described and disclosed in conformity with
accounting standards; and
6. the statement of accounts presents a true and fair picture of the operational results and of the assets and
liabilities.

Scope of Audit
The following points merit consideration in regard to scope of audit:

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. In forming his opinion, the auditor should also decide whether the relevant information is properly
disclosed in the financial statements subject to statutory requirements, where applicable.
4. 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.
5. 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 assesses the selection and consistent application of accounting policies,
the manner in which the information has been classified, and the adequacy of disclosure.
6. 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 the physical condition of certain assets.
7. 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.
Correct / Incorrect Marks 2 MTP April 2021

The terms of audit engagement can restrict the scope of an audit.
Aspects to be covered in Audit.

The principal aspects to be covered in an audit of the financial statements are the following:
1. An examination of the system of accounting and internal control to ascertain whether it is appropriate
for the business and helps in properly recording all transactions.

2. Reviewing the system and procedures to find out whether they are adequate and comprehensive and
incidentally whether material inadequacies and weaknesses exist to allow frauds and errors going
unnoticed
3. Checking of the arithmetical accuracy of the books of account by the verification of postings, balances,
etc..
4. Verification of the authenticity and validity of transactions entered into by making an examination of the
entries in the books of accounts with the relevant supporting documents.
5. Ascertaining that a proper distinction has been made between items of capital and of revenue nature
and that the amounts of various items of income and expenditure adjusted in the accounts
corresponding to the accounting period.
6. Comparison of the balance sheet and profit and loss account or other statements with the underlying
record in order to see that they are in accordance therewith.
7. Verification of the title, existence and value of the assets appearing in the balance sheet.
8. Verification of the liabilities stated in the balance sheet.
9. Checking the result shown by the profit and loss and to see whether the results shown are true and fair.
10. Where audit is of a corporate body, confirming that the statutory requirements have been complied
with.
11. Reporting to the appropriate person/body whether the statements of account examined do reveal a true
and fair view of the state of affairs and of the profit and loss of the organisation.

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

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

Relationship of Auditing with other disciplines
Auditing and Accounting
It has been pointed out earlier that both 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. It naturally
calls on the part of the auditor to have a thorough and sound knowledge of generally accepted principles of
accounting before he can review the financial statements. In fact, auditing as a discipline is also closely related
with various other disciplines as there is lot of linkages in the work which is done by an auditor in his day-to-day
activities. To begin with, it may be noted that the discipline of auditing itself is a logical construct and everything
done in auditing must be bound by the rules of logic. Ethical precepts are the foundations on which the
foundation of the entire accounting profession rests. The knowledge of language is also considered essential in
the field of auditing as the auditor shall be required to communicate, both in writing as well as orally, in
day-to-day work.
Auditing and Law
The relationship between auditing and law is very close one. Auditing involves examination of various
transactions from the view point of whether or not these have been properly entered into. It necessitates that an

auditor should have a good knowledge of business laws affecting the entity. He should be familiar with the law
of contracts, negotiable instruments, etc. The knowledge of taxation laws is also inevitable as entity is required
to prepare their financial statements taking into account various provisions affected by various tax laws. 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 Data Processing
Today, organisations are witnessing revolution in the field of data processing of accounts. Many 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 quantities at very high speed. The
dependence on the accuracy of the programmed instructions given today, the computer is able to carry out
each of these activities with complete accuracy. With such a phenomenal growth in the field of computer
sciences, the auditor should have good knowledge of the components, general capability of the system and the
related terms. In fact, Computerised Information System auditing is developing as a discipline in itself.

Audit is not Investigation
We have to clearly understand that audit is distinct from investigation. Investigation is a critical examination of
the accounts with a special purpose. For example, if fraud is suspected and it is specifically called upon to check
the accounts whether fraud really exists, it takes on the character of investigation.
The objective of audit, on the other hand as we have already discussed, is to obtain reasonable assurance about
whether the financial statements as a whole are free from material misstatement, whether due to fraud or
error, thereby enabling the auditor to express an opinion.
Therefore, audit is never started with a preconceived notion about state of affairs; about wrong-doing; about
some wrong having been committed. The auditor seeks to report what he finds in the normal course of
examination of accounts. However, it is quite possible that sometimes investigation results from the prima facie
findings of the auditor. It may happen that the auditor has given some findings of serious concern. Such
findings may prompt an investigation.

Qualities of An Auditor
It is not enough to realise what an auditor should be. He is concerned with the reporting on financial matters of
business and other institutions. Financial matters inherently are to be set with the problems of human fallibility;
errors and frauds are frequent. The qualities required, according to Dicksee, are tact, caution, firmness, good
temper, integrity, discretion, industry, judgement, patience, clear headedness and reliability. In short, all those
personal qualities that go to make a good businessman contribute to the making of a good auditor. In addition,
he must have the shine of culture for attaining a great height. He must have the highest degree of integrity
backed by adequate independence. In fact, Code of ethics mentions integrity, objectivity and independence as
one of the fundamental principles of professional ethics.
He must have a thorough knowledge of the general principles of law which govern matters with which he is
likely to be in intimate contact. The Companies Act need special mention but mercantile law, specially the law
relating to contracts, is no less important. Needless to say, where undertakings are governed by a special statute,
its knowledge will be imperative; in addition, a sound knowledge of the law and practice of taxation is
unavoidable.
He must pursue an intensive programme of theoretical education in subjects like financial and management
accounting, general management, business and corporate laws, computers and information systems, taxation,
economics, etc. Both practical training and theoretical education are equally necessary for the development of
professional competence of an auditor for undertaking any kind of audit assignment.
The auditor should be equipped not only with a sufficient knowledge of the way in which business generally is
conducted but also with an understanding of the special features peculiar to a particular business whose
accounts are under audit. The auditor, who holds a position of trust, must have the basic human qualities apart
from the technical requirement of professional training and education.
He is called upon constantly to critically review financial statements and it is obviously useless for him to
attempt that task unless his own knowledge is that of an expert. An exhaustive knowledge of accounting in all
its branches is the sine qua non of the practice of auditing. He must know thoroughly all accounting principles
and techniques.
Lord Justice Lindley in the course of the judgment in the famous London & General Bank case had succinctly
summed up the overall view of what an auditor should be as regards the personal qualities. He said, “an auditor
must be honest that is, he must not certify what he does not believe to be true and must take reasonable care
and skill before he believes that what he certifies is true”.


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These notes are incomplete without our videos. We keep on updating our books, notes and videos.

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Why Professional Skepticism?

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Therefore, we do agree with the statement.

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Inherent Limitations of Audit - SA 200

The Nature of Financial Reporting

● The preparation of financial statements involves judgment by management.

The Nature of Audit Procedures

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ICAI MTP March 2021

Correct / Incorrect Marks 2 MTP April 2021

Question - Correct / Incorrect Marks 2 January 2021 Exam Question

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Auditor’s responsibility for failure to detect fraud and errors

Auditor WILL NOT BE considered as negligent

All this can be checked by AUDIT DOCUMENTATION.

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ICAI MTP May 2021

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Conduct of an Audit in Accordance with SAs

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SA 210 - Agreeing the terms of Audit Engagement

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Pre- Conditions for an audit

Agreement on Audit Engagement Terms

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

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Limitation on Scope Prior to Audit Engagement Acceptance

Acceptance of a change in engagement

If, prior to completing the audit engagement,

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● a restriction on the scope of the engagement, whether imposed by management or caused by

General MCQs Marks 1 MTP April 2021

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Misc Topics Related To Standards

IFAC & IAASB

Role of International Auditing & Assurance Standard Board (IAASB)

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What are Standards on Auditing (SAs)?

Procedure for issuing SAs

Generally following procedure is followed for issuing the SAs

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Objectives and Functions of AASB (Homework)

Standard on Auditing (SA) 100-999

Standard on Review Engagement (SRE) 2000-2699

Standard on Assurance Engagement (SAE) 3000-3699

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Related Services (SRS) 4000-4699

General Principles and Responsibilities 200-299

Risk Assessment and Response to Assessed Risk 300-499

Audit Evidence 500-599

Using work of Others 600-699

Audit conclusions and Reporting 700-799

Specialised Areas 800-899

General Principles and Responsibilities

2 SA210 (Revised) Agreeing the Terms of Audit Engagements

3 SA 220 (Revised) Quality Control for an Audit of financial statements