CA AUDIT

(By CA Khushboo G Sanghavi)

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 INDEX
SR.NO CHAPTERS Page No.
1 SQC – 1 1-9
2 SA 200: Overall Objective of Independent Auditor 10-25
3 SA 210: Agreeing the Terms of Audit Engagement 26-33
4 SA 220: Quality Control for an Audit of Financial Statements 34-44
5 SA 230: Audit Documentation 45-52
6 SA 240: Auditor’s Responsibilities relating to Fraud in an Audit 53-67
7 SA 250: Consideration of Law and Regulation in an Audit 68-78
8 SA 260: Communication with those Charged with Governance 79-83
9 SA 265: Communicating Deficiencies in Internal Control to Those Charged 84-88
with Governance & Management
10 SA 299: Joint Audit of Financial Statement 89-97
11 SA 300: Planning in an Audit of Financial Statements 98-106
12 SA 315: Identifying & Assessing the risk of Material Misstatement 107-117
13 SA 320: Materiality in Planning and Performing an Audit 118-124
14 SA 330: Responds to Assessed Risk 125-130
15 SA 402: Audit Considerations relating to Entity using a Service Organization 131-138
16 SA 450: Evaluation of Misstatement Identified during the Audit 139-142
17 SA 500: Audit Evidence 143-149
18 SA 501: Audit Evidence of Specific Considerations for Selected Items 150-160
19 SA 505: External Confirmation 161-170
20 SA 510: Initial Audit Engagement – Opening Balance 171-179
21 SA 520: Analytical Procedures 180-185
22 SA 530: Audit Sampling 186-195
23 SA 540: Auditing Accounting Estimates includes Fair Value accounting 196-204
estimates, and Related Disclosure
24 SA 550: Related Parties 205-215
25 SA 560: Subsequent Events 216-224
26 SA 570: Going Concern 225-236
27 SA 580: Written Representations 237-245
28 SA 600: Using the work of Other Auditors 246-253
29 SA 610: Using the work of Internal Auditors 254-260
30 SA 620: Using the work of Auditor’s Expert 261-269
31 SA 700: Forming an Opinion & Reporting on Financial Statements 270-279
32 SA 701: Communicating Key Audit Matters in the Independent Auditor’s 280-288
Report
33 SA 705: Modifications to the opinion in the Independent Auditor’s Report 289-308
34 SA 706: Emphasis of Matter Paragraph and Other Matter Paragraph in the 309-321
Independent Auditor’s Report
35 SA 710: Comparative Information – Corresponding Figures and Comparative 322-325
Financial Statements
36 SA 720: The Auditor’s Responsibilities relating to Other Information 326-331
CHAPTER – 1 ENGAGEMENT & QUALITY CONTROL STANDARDS 10

SA 200 OVERALL OBJECTIVES OF AN INDEPENDENT AUDITOR

AND CONDUCT OF AUDIT IN ACCORDANCE WITH SA

1) OBJECTIVE

To obtain reasonable assurance on historical To report on the FS and

financial statement that the FS are free from communicate as required by
fraud or error and hereby enabling the auditor SA’s
express on opinion on whether the FS are
prepared as per AFRF

i) Obtain SAAE Sufficient and Appropriate Audit Evidence, where sufficiency relates
to quantity and appropriateness relate to Quality.
ii) Auditor has to report that FS presents True & Fair View of affairs of business. He
must take Into consideration:
→ Assets should be valued as per accounting principles.
→ Contingent liabilities should be properly disclosed.
→ Adequate provision should be made for depreciation and actual liabilities.
→ Proper distinction between capital and revenue expenditure.
→ Items of unusual nature to be disclosed separately.
→ Proper AS and SA’s are followed.
→ FS are free from material misstatements arising out of fraud or error.

2) DEFINITION

2.1 REASONABLE ASSURANCE

In the context of an audit of financial statements, a high, but not absolute, level of
assurance.

2.2 AFRF
→ The common financial information needs of a wide range of users (i.e., “general
purpose financial statements”);
→ The financial information needs of specific users (i.e., “special purpose financial
statements”).
→ The legal and ethical environment, including statutes, regulations, court decisions, and
professional ethical obligations in relation to accounting matters;
→ Published accounting interpretations of varying authority issued by standards setting,
professional or regulatory organisations;
→ Published views of varying authority on emerging accounting issues issued by
standards setting, professional or regulatory organisations;
→ General and industry practices widely recognised and prevalent; and
→ Accounting literature.

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 11 CA FINAL PAPER 3 – ADVANCE AUDITING AND PROFESSIONAL
ETHICS

AUDITOR SHOULD MAINTAIN

a) Professional Judgement b) Professional skepticism

Experience Being alert Possessing Critical assessment

questioning mind of evidences obtain

2.3 THE AUDITOR SHALL MAINTAIN PROFESSIONAL JUDGEMENT &

SKEPTICISM THROUGHOUT AUDIT

Identify and assess risks of Obtain sufficient Form an opinion

material misstatement,
whether due to fraud or
error, based on an
understanding of the entity
and its environment,
including the entity’s
internal control.
appropriate audit on the financial
evidence about whether statements based on
material misstatements conclusions drawn
exist, through designing from the audit
and implementing evidence obtained.
appropriate responses to
the assessed risks.

2.4 PROFESSIONAL JUDGEMENT IS NECESSARY, IN DECIDING ABOUT :-

a) Materiality and audit risk.
b) The nature, timing, and extent of audit procedures used to meet the requirements
of the SAs and gather audit evidence.
c) Evaluating whether SAAE has been obtained, and whether more needs to be done
to achieve the objectives of the SAs and thereby, the overall objectives of the
auditor.
d) The evaluation of management’s judgments in applying the entity’s AFRF
e) The drawing of conclusions based on the audit evidence obtained, for assessing
reasonableness of estimates.

2.5 CIRCUMSTANCES WHERE THE AUDITOR NEED TO EXERCISE SKEPTICISM:

a) Audit evidence that contradicts other audit evidence obtained
b) Information that brings into question the reliability of documents and responses
to inquiries to be used as audit evidence
c) Conditions that may indicate possible fraud
d) Circumstances that suggest the need for audit procedures in addition to those
required by the SAs.
e) Maintaining professional skepticism throughout the audit is necessary if the
auditor is to reduce the risks of:
• Overlooking unusual circumstances
• Over generalising when drawing conclusions from audit observations
• Using inappropriate assumptions in determining the nature, timing and
extent of the audit procedures and evaluating the result thereof.

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CHAPTER – 1 ENGAGEMENT & QUALITY CONTROL STANDARDS 12

3) ETHICAL REQUIREMENTS

(Key – C O P P I)
C – Confidentiality,
O – Objectivity,
P - Professional Competence & Due care
P - Professional Behaviour,
I – Integrity

3.1 CONFIDENTIALLY:
An auditor should respect the confidentially of information acquired while complying with
professional and employment work. Such information should be revealed only if it is
consented by his client or under any law…………Also refer PE - Schedule II.

3.2 OBJECTIVITY AND INDEPENDENCE:

An auditor should not compromise in case of making judgement because of bias / conflict
of interest / undue influence of others. For e.g., Auditor may not take audit assignment
where his relatives are director or he himself have substantial interest.

3.3 PROFESSIONAL COMPETENCE AND JUDGMENT:

First let’s understand competence - Auditor while planning & performing an audit should
acquire proper knowledge, take appropriate supervision and training, get updated and
aware of various laws and regulations. Even attained seminars to get updated. Take proper
training of latest EDP techniques / controls. Now come to judgement - Use proper
judgments wherever applicable. For eg: In case of encounter of NOCLAR use proper
judgement whether to report to TWCG or Audit Committee or to Directors or adopt
NOCLAR. Use judgements whether the misstatements are enough material or not. Make
judgement whether to issue QR, DR, Clean AR.

3.4 PROFESSIONAL BEHAVIOUR:

Auditor should avoid any conduct which might discredit the profession. Not to engage in
any assignment / service which can bring disgrace or may impair the integrity, reputation
of the profession. For E.g., Exaggerating claims / fees less than the experience / qualf, Buck
passing work to other auditors in case of joint audits, pointing wrong remarks about the
client / employer co., sending bad remarks about others work, smoking or cracking jokes at
work site, any direct or indirect measures to advertise its services. Such behaviour can
sometimes lend the auditor to “Professional or even Other misconduct”.

3.5 INTEGRITY:
An auditor should be straight forward and honest in professional and business dealings. For
E.g., If the auditor provides modified report, it does not mean he has breached or he is
dishonest.

Note:

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 13 CA FINAL PAPER 3 – ADVANCE AUDITING AND PROFESSIONAL
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4) INDEPENDENCE

Independence is

Independence of mind and Independence of appearance

The state of mind that permits the
provision of an opinion without being
affected by influences allowing an
individual to act with integrity, and excise
objectivity and professional skepticism.
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.

5) OPINION

Owning to inherent limitation to audit, Auditor expresses Reasonable assurance 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 is inherent limitation of an audit. The inherent limitation of an
audit arises from:
Nature of Nature of Audit Timeline of FS & Other Subject
Reporting Procedures balance between matters and
benefit assertions (PEQ)

• FS involves • Auditor’s obtains • Time is • Fraud,

management’ information & limited to particularly fraud
s judgement evidence from carry out audit involving senior
& estimation management & procedures management or
• Items management may • Cost involved conclusion.
involved not provide valid or in gathering • The existence &
subjective correct information reliable completeness of
decision & • Procedure may be information is related party
uncertainty ineffective to detect high as relationships &
intentional & compared to transactions
sophisticated fraud its benefits • The occurrence
• An audit is not an of non-
official compliance with
investigation into laws &
alleged wrong regulations
doing, he should • Further events or
not initiate audit conditions that
with pre- may cause an
conceived notion entity to cease to
about state of continue as a
affairs or any going concern
wrong doing.

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CHAPTER – 1 ENGAGEMENT & QUALITY CONTROL STANDARDS 14

Note:
i) In any case these are not excuse for omitting any audit procedures based on the
above limitations
ii) Evidence obtained by an auditor are persuasive and NOT CONCLUSIVE.
iii) Owing to above inherent limitative auditor express REASONABLE ASSURANCE.

6) AUDIT RISK

AUDIT RISK → It is the risk of expressing inappropriate opinion. (RTP N 03, 11)

Risk of Material Misstatement Detection Risk

Inherent Risk Control Risk The risk that the

procedures
The susceptibility The risk that a performed by the
of an assertion misstatement that auditor to reduce
about a class of could occur in an audit risk to an
transaction, assertion about a class acceptably low level
account balance or of transaction, will not detect a
disclosure to a account balance or misstatement that
misstatement that
disclosure & that exists & that could be
could be material,
could be material, material. Either
either individually
or when either individually or individually or when
aggregated with when aggregated aggregated with
other with other other misstatements.
misstatements, misstatements, will
before not be prevented, or
consideration of detected & corrected, The risk of not detecting
any related on a timely basis by Misstatement
controls. the entity’s internal
control.

Risk before applying

Risk after
Controls ⸫ AR = IR x CR x DR (RTP M 19)
applying Controls

Note: -
Auditor Assess RMM & manage detection risk in order to reduce audit risk to an
acceptable lower level.

Important Questions
Some limitations associated with special report or certificate (M 19)

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15 CA FINAL PAPER 3 – ADVANCE AUDITING AND PROFESSIONAL
ETHICS

Illustration

Q1. M/s SG & Co. Chartered Accountants were appointed as Statutory

Auditors of XYZ Limited for the F.Y 2020-2021. The Company
implemented internal controls for prevention and early detection of
any fraudulent activity. Auditors carried out test of controls and found
out no major observations. After the completion of audit, audit report
was submitted by the auditors and audited results were issued. Fraud
pertaining to the area of inventory came to light subsequently for the
period covered by audit and auditors were asked to make submission
as to why audit failed to identify such fraud. Auditors submitted that
because of inherent limitations of audit, it is not possible to get
persuasive evidence of certain matters like fraud. Do you think auditor
made correct statement? Also discuss certain subject matters or
assertions where it is difficult to detect material misstatements due to
potential effects of inherent limitations. OR
In case of certain subject matters, limitations on the auditor’s ability
to detect material misstatements are particularly significant. Explain
such assertions or subject matters.
PEQ JULY’21
ANS: Other Matters that Affect the Inherent Limitations of an Audit
In the case of certain assertions or subject matters, the potential effects of
the inherent 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.
See SA 240 for further discussion.
• The existence and completeness of related party relationships and
transactions. See SA 550 for further discussion.
• The occurrence of non-compliance with laws and regulations. See SA
250 for further discussion.
• Future events or conditions that may cause an entity to cease to
continue as a going concern. See SA 570(Revised) for further
discussion.
• Relevant SAs identify specific audit procedures to assist in mitigating
the effect of the inherent limitations.
Q2. Standards on Auditing (SAs) apply in “audit of historical financial
information” whereas Standards on Review Engagements (SREs)
apply in “review of historical financial information.” Explain in detail
giving examples.

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CHAPTER – 1 ENGAGEMENT & QUALITY CONTROL STANDARDS 16

(RTP MAY 22)

ANS: 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 historical
financial information which is a limited assurance engagement only.
“Historical financial information means” information expressed in
financial terms in relation to a particular entity, derived primarily from
that entity’s accounting system, about economic events occurring in past
time periods or about economic conditions or circumstances at points in
time in the past.
Here, we have to broadly understand that “audit” and “review” are two
different terms. Audit is a reasonable assurance engagement, and its
objective is reduction in assurance engagement risk to an acceptably low
level in the circumstances of the engagement. However, “review” is a
limited assurance engagement, and its objective is a reduction in
assurance engagement risk to a level that is acceptable in the
circumstances of the engagement,
Standards on Auditing have been issued on wide spectrum of issues in
the field of auditing including (but not limited to) overall objectives of
independent auditor, audit documentation, planning an audit of
financial statements, identifying and assessing risk of material
misstatement, audit evidence, audit sampling, going concern and
forming an opinion and reporting on financial statements.
Some examples of Standards on Auditing are:
i) SA 200 Overall Objectives of the Independent Auditor and the
Conduct of an Audit in Accordance with Standards on Auditing
ii) SA 230 Audit Documentation
iii) SA 315 Identifying and Assessing the Risks of Material
Misstatement through Understanding the Entity and its
Environment
iv) SA 500 Audit Evidence
v) Revised SA 700 Forming an Opinion and Reporting on Financial
Statements
Examples of Standards on Review engagements are
(i) SRE 2400 (Revised) Engagements to Review Historical Financial
Statements
(ii) SRE 2410 Review of Interim Financial Information Performed by
the Independent Auditor of the Entity
Q3. Compute the overall Audit Risk if looking to the nature of business
there are chances that 40% bills of services provided would be
defalcated, inquiring on the same matter management has assured that
internal control can prevent such defalcation to 75%. At his part the

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17 CA FINAL PAPER 3 – ADVANCE AUDITING AND PROFESSIONAL
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Auditor assesses that the procedure he could apply in the remaining

time to complete Audit gives him satisfaction level of detection of
frauds & error to an extent of 60%. Analyse the Risk of Material
Misstatement and find out the overall Audit Risk.
MTP-Apr-19
ANS: Refer Heading no. 6
Q4. A professional accountant in public practice is always subject to
various threats in compliance with fundamental principles of his
profession and you, as a professional accountant, are worried about
engagement specific threat in your audit assignment of M/s Soft Ltd.
and want to implement some measures to eliminate and reduce the
same. E5. numerate some engagement specific safeguards which you
may introduce in your work environment to ward off such threats.
May 2019
ANS: Engagement-specific safeguards in the work environment may include:
• Involving an additional professional accountant to review the work
done or otherwise advise as necessary.
• Consulting an independent third party, such as a committee of
independent directors, a professional regulatory body or another
professional accountant.
• Discussing ethical issues with those charged with governance of the
client.
• Disclosing to those charged with governance of the client the nature
of services provided and extent of fees charged.
• Involving another firm to perform or re-perform part of the
engagement.
• Rotating senior assurance team personnel.
Q5. The matter of difficulty, time, or cost involved is not in itself a valid
basis for the auditor to omit an audit procedure for which there is no
alternative or to be satisfied with audit evidence that is less than
persuasive. Explain.
Ans. Timeliness of Financial Reporting and the Balance between Benefit
and Cost: The matter of difficulty, time, or cost involved is not in itself a
valid basis for the auditor to omit an audit procedure for which there is
no alternative or to be satisfied with audit evidence that is less than
persuasive. Appropriate planning assists in making sufficient time and
resources available for the conduct of the audit. Notwithstanding this, the
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. 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,

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CHAPTER – 1 ENGAGEMENT & QUALITY CONTROL STANDARDS 18

recognising that it is impracticable to address all information that may

exist or to pursue every matter exhaustively on the assumption that
information is in error or fraudulent until proved otherwise.
Q6. Explain the overall objective of the auditor as contained in SA 200.
[RTP M 19/20]
Ans. Refer Heading no. 1
Q7. 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. The Code establishes the fundamental
principles of professional ethics relevant to the auditor when
conducting an audit of financial statements. Explain
[(a) → PEQ Nov 22 | (b) → RTP MAY 2019 & MOCK PAPER MAY 2020
– 3 Mks) / Nov 22
Ans. Refer Heading no. 3
Q8. There are practical and legal limitations on the auditor’s ability to
obtain audit evidence. Explain with examples.
Ans. The Nature of Audit Procedures: There are practical and legal
limitations on the auditor’s ability to obtain audit evidence. For example:
1. 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.
2. 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.
3. 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.
Q9. 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. Explain
OR
In case of certain subject matters, limitations on the auditor's ability
to detect material misstatements are particularly significant. Explain
such assertions or subject matters.

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19 CA FINAL PAPER 3 – ADVANCE AUDITING AND PROFESSIONAL
ETHICS

(PEQ JULY 2021)

Ans. Refer Heading no. 5
Q10. "Professional judgment is essential to the proper conduct of an audit."
Discuss
(PAST PAPER NOV 2018 – 5 Mks)
Ans. Refer para 2.4 of Heading no. 2
Q11. The auditor shall plan and perform an audit with professional
skepticism recognizing that circumstances may exist that cause the
financial statements to be materially misstated. Discuss any four
examples of professional skepticism.
(PAST PAPER NOV 2019 – 4 Mks)
Ans. Refer para 2.5 of Heading no. 2
Q12. 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. In
the above context, explain the guiding principles.
OR
Describe the guiding principles which the auditor should take into
account which serves as the safeguards to eliminate the threats to
independence.
[PEQ NOV 2020 , RTP NOV 2019 & MOCK PAPER MAY 2020 ]
Ans. 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 appears to be
independent of the entities that they are auditing.
2. In the case of audit, the key fundamental principles are integrity,
objectivity and professional skepticism, which necessarily require
the auditor to be independent.
3. Before taking on any work, an auditor must conscientiously
consider whether it involves threats to his independence.
4. When such threats exist, the auditor should either desist from the
task or put in place safeguards that eliminate them.
If the auditor is unable to fully implement credible and adequate
safeguards, then he must not accept the work.
III INDEPENDENCE OF AN AUDITOR
Q13. Write a note on “Self-review threats”
[RTP NOV 2019]
Self-review threats, which occur when during a review of any
judgement or conclusion reached in a previous audit or non-audit

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engagement (Non audit services include any professional services

provided to an entity by an auditor, other than audit or review of the
financial statements. These include management services, internal audit,
investment advisory service, design and implementation of information
technology systems etc.), 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.
Q14. “The Code of Ethics for Professional Accountants, prepared by the
International Federation of Accountants (IFAC) identifies five types of
threats”. Explain
(PEQ May 18,N 20)(asked as correct/incorrect, JULY 21)
Ans. The Code of Ethics for Professional Accountants, prepared by the
International Federation of Accountants (IFAC) identifies five types of
threats. These are:
Threats to Independence (Key – S2AIF)
What are Threats: Threats are obstacles faced by an auditor which may
endanger their independence and objectivity.
1. Self-interest threats: It is a share or participation which will
inappropriately influence a PA’s judgment or behaviour.
Circumstances that may create self-interest threats:
a) PA / assurance firm have direct financial inter-est in assurance
client
b) Exchange of gift and hospitality between PA / assurance firm &
Client.
c) Undue dependence on total fees from a client.
d) Having a close commercial relationship with a client. For e.g:
Debtors / Creditors relation, Lender / Borrower.
e) Concern about the possibility of losing a client.
f) Loan to or from an assurance client or any of its directors or officers
of client.
g) Potential employment with a client.
h) Having access to confidential information of the client that might
be used for personal gain.
i) A PA participating in incentive compensation arrangements
offered by the employer client.
j) A PA being offered a special treatment from a supplier of the
employer client.
k) Assurance client offers contingent fees based on performance.
l) Assurance client offers high performance of fees.
m) Assurance firm demands very low fees. This is known as
Lowballing.

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21 CA FINAL PAPER 3 – ADVANCE AUDITING AND PROFESSIONAL
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2. Self-review threats: SRT arises when members review their own work
or advice as a part of an assurance engagement. (It is as good as a
student is allowed to check his/her own homework).
Circumstances that may create self-review threats:
a) PA / assurance firm providing audit / assurance services but they
are also engaged in: Internal audit, Taxation services, Financial
services, Valuation services.
b) Even though it is not disqualification but it is better the PA /
assurance firm should not give any other services other than
Assurance Services. [Also recall section 143(3)(i) read with section
144 of Companies Act, 2013]
3) Advocacy threats: Assurance firm also provides Advocacy
services. Now if the same PA / assurance firm is appointed as
Advocate in legal matters it will be very difficult by the PA /
assurance firm to give straight forward and independent opinion.
Circumstances that may create Advocacy threats:
a) Defending Company in litigation by acting as Advocate,
b) Act as an advisor for promoting / issue of shares.
c) Lobbying in favour of legislation on behalf of a client.

3. Intimidation threats: When assurance client / employer threaten the

members assurance firm by giving him life fear, job fear, family fear,
fear of losing client litigation fear it is known as Intimidation threats.
Circumstances that may create Intimidation threats:
a) Pressure to issue of Unqualified Report.
b) Being threatened with dismissal or replacement in relation to a client
engagement because of a disagreement about a professional matter.
c) Being pressured to reduce inappropriately the extent of work
performed in order to reduce fees.
d) Being feeling pressured to agree with the judgment of a client
because the client has more expertise on the matter in question.
e) Being informed that a planned promotion will not occur unless the
accountant agrees with an inappropriate accounting treatment.
4. Familiarity-review threats: Relatives having interest / provides
guarantee indebted in an entity where the PA is providing assurance
services it will be caught by disqualification of Auditors as per Section
141 (3). Sometimes indirect family relation or friendship which need
not be a factor for disqualification but at least it gives rise to
Familiarity threats, also in order to reduce this threats, provision
relating to rotation of auditor as added u/s Companies Act, 2013
Circumstances that may create Familiarity-review threats:
(a) A member of the engagement team / firm having a friendship or
family relationship with a director or officer of the client firm.

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(b) Frequent interaction of PA in the client firm / employer

organisation.
(c) A member of the engagement team / firm having a close or
immediate family relationship with an employee of the client who
is in a position to exert direct and significant influence over the
subject matter of the engagement.
(d) A former partner of the firm being a director or officer of the client
or an employee in a position to exert direct and significant
influence over the subject matter of the engagement.
(e) Long association of an audit team member with the audit client.
Q15. There are two interlinked perspectives of independence of auditors,
one, independence of mind; and two, independence in appearance.
Explain.
There are two interlinked perspectives of independence of auditors, one,
independence of mind; and two, 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: (i) 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
(ii) 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.”

MCQ
1. The purpose of audit of financial statements in context of SA 200 is:
a) Enhance the degree of confidence of intended users of financial statements;
b) Compliance with regulatory requirements of Companies Act 2013, SEBI and other
regulators;
c) Prevent or detect the fraud or error;
d) Enable management of the company to understand the financial position of the
company.
2. Professional judgement and professional skepticism shall be exercised by the
auditor during
a) While forming an opinion based on conclusion drawn
b) While obtaining sufficient and appropriate audit evidence
c) All of the above
d) Identifying and assessing the risk of material misstatement
3. Auditor’s opinion on the financial statement provides

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a) True and fair view c) True and correct view

d) All of the above b) List of frauds and misstatements
4. The fair presentation financial reporting framework, under which the financial
statements are prepared, refers to:
a) Compliance with the requirements of the framework;
b) Compliance with the requirements of the framework and explicitly acknowledges
that for fair presentation, it may be necessary for management to provide
disclosures, beyond or may depart from, the requirement of framework;
c) Both (a) and (b)
d) None of the above
5. Which of the following statement is correct?
a) Materiality is applied by the auditor only during the planning stage of an audit
b) Auditor of the financial statement shall be independent of the audit only at the
beginning of the audit
c) Auditor is not responsible for the detection of misstatements that are not material
to the financial statements as a whole
d) All disclosures in the financial statements shall be as per guidance by auditor of
the financial statements
6. In an audit of financial statements, when reasonable assurance cannot be obtained
and a qualified opinion in the auditor’s report is insufficient in the circumstances
for the purposes of reporting then:
a) Auditor shall resign if legally permitted;
b) Auditor shall disclaim an opinion;
c) Auditor shall highlight the circumstances to Central Government;
d) Either (a) or (b)
7. Risk of material misstatement in an audit of financial statements may exist at
a) Overall financial statements level b) Both (a) and (b)
c) Assertion level d) Either (a) or (b)
8. The inherent limitations of an audit arise from:
a) The nature of financial reporting
b) The nature of audit procedures
c) The need for the audit to be conducted within a reasonable period of time and at
reasonable cost
d) All of the above

9. Identify the correct sentence from the following, considering the audit of financial
statements carried out by an Independent Auditor:
a) An Audit of financial statements is an official investigation of auditee’s financials
statements
b) An audit is not an official investigation into alleged wrong doing
c) An Auditor is given with certain legal powers like power to search which may be
necessary for concluding the audit
d) None of the above
10. In the event that the requirement of applicable laws and regulations differ from the
requirements of SAs, an audit conducted in accordance with the law and regulation
will:
a) Not automatically comply with SA
b) Will automatically comply with SA
c) Be enough for an auditor to conclude and express the audit option
d) Require an auditor to obtain legal advice
11. Profession skepticism means:

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a) Being alert b) Questioning mind

c) Both (a) and (b) d) None of the above
12. Which of the following statement is incorrect?
a) Reasonable assurance means absolute level of assurance
b) Reasonable assurance gives high level of assurance
c) Limited assurance is also known as negative assurance
d) Application of Standards on Auditing is mandatory in the audit of financial
statements
13. Professional judgment is necessary, and in particular, for the decisions relating to:
a) Accepting the audit engagement
b) Materiality and audit risk
c) Assessing the reasonableness of the estimates made by management in preparing
the financial statements
d) Communicating the matters with those charged with governance
14. Ethical requirements relating to an audit of financial statements is specified under
SA 200 and includes:
a) Confidentiality and Objectivity b) Profitability
c) Accuracy d) Integrity
15. Don't Pay for Fun (DPF)' is a start-up who is trying to get funding from investors.
One of the investors has expressed interest in looking at the investment proposal
but has insisted that the proposal also contain DPF's financial statements which
audited by an independent auditor. DPF engages CA Abhishek to conduct an
independent audit and Abhishek issues an engagement letter for the independent
audit to the owner of DPF which is duly acknowledged. DPF while finalising the
financial statements is facing some difficulties so its owner requests Abhishek to
provide advice as it needs to furnish the proposal to the investor fast. Since
Abhishek is already engaged in the audit of the transactions, he assists DPF's
accounting officer and the financial statements are finalised. Abhishek also
completes the audit and presents the audit report which is provided to the investor.
Has the condition set by the investor been fulfilled?
a) No, the investor had asked for independent audit
b) Yes, as the audit report is issued after proper audit engagement letter and also
examination of the books of accounts.
c) No, because CA Abhishek did not change the terms of engagement to include the
advice part along with the independent audit. In order for his audit report to be
independent, he should have charged separate fees for the advice.
d) Yes, DPF has hired a qualified CA to conduct the audit. Not only there is no
evidence to suggest that the auditor allowed any misrepresentation, but the
auditor himself advised DPF in finalising the financial statements which speaks
highly of the quality of financial statements.
16. In order to form the opinion, the auditor shall conclude as to whether the auditor
has obtained_____ about whether the financial statements as a whole are free from
material misstatement whether due to fraud or error.
a) Reasonable assurance
b) Absolute assurance
c) Limited assurance
d) None of the above
17. The auditor’s ____ safeguards the auditor’s ability to form an audit opinion without
being affected by any influences.
a) Objectivity
b) Independence

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c) Confidentiality
d) Integrity
18. Professional skepticism is defined as:
a) An attitude to avoid significant mistakes which could influence the economic
decisions of users taken on the basis of the financial statements
b) An analysis of management decisions in terms of failed outcomes.
c) The application of relevant training, knowledge and experience in making
informed decisions about the courses of action that are appropriate in the
circumstances of the audit engagement.
d) 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
evidence
19. Professional Judgement is defined as:
a) Training, knowledge and experience within the context provided by auditing,
accounting and ethical standards, in making informed decisions about the course
of action that are appropriate in the circumstances of the audit engagement.
b) Decision making about the requirements of the accounting profession.
c) To avoid significant mistakes
d) Questioning mind, being alert to conditions
20. The following inherent limitation in an audit affect the auditor’s ability to detect
material misstatement except
a) Audit evidence
b) Poor corporate governance
c) Audit process permeated by judgement
d) Test sampling

Solutions
Sr.no. Answers Hint (from ICAI Bare Standards)
1. [a] As per para 3 of SA 200
2 [c] As per para 7 of SA 200
3. [a] As per para 3 of SA 200
4. [b] As per para 13 of (a) of SA 200
5. [c] As per para 6 of SA 200
6. [d] As per para 12 of SA 200
7. [b] As per para A34 of SA 200
8. [d] As per para A45 of SA 200
9. [b] As per para A47 of SA 200
10 [a] As per para A56 of SA 200
11. [c] As per para 14 point (l) of SA 200
12. [a] As per para 14 point (m) of SA 200
13. [b & c] As per para A23 of SA 200

CA Khushboo G Sanghavi