SA 200

SA 200 Overall Objectives of the Independent Auditor and the

Conduct of an Audit in Accordance with Standards on Auditing

Topics to be covered
● Overall Objectives of the auditor - Already Covered in Basics
● Inherent limitations of Auditing
● Historical financial information.
● Financial Statements.
● Financial reporting framework.
● Applicable financial reporting framework.
● Ethical Requirements Relating to an Audit of Financial Statements.
● Professional Skepticism.
● Professional Judgement
● Scope of the Audit
● Premise on which audit is conducted.
● Conduct of an audit in accordance with SAs

Historical financial information.

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.

Financial statements
A structured representation of historical financial information, including related notes, intended to
communicate an entity’s economic resources or obligations at a point in time or the changes therein for a
period of time in accordance with a financial reporting framework. The related notes ordinarily comprise a
summary of significant accounting policies and other explanatory information.

The term “financial statements” ordinarily refers to a complete set of financial statements as determined
by the requirements of the applicable financial reporting framework, but can also refer to a single financial
statement.

Financial reporting framework

The term financial reporting framework is defined as a set of criteria used to determine measurement,
recognition, presentation, and disclosure of all material items appearing in the financial statements

Generally it includes financial reporting standards established by an authorised or recognised standards

setting organisation, or legislative or regulatory requirements.

In some cases, the financial reporting framework may encompass both financial reporting standards
established by an authorised or recognised standards setting organisation and legislative or regulatory
requirements.

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 SA 200

Applicable financial reporting framework

The financial reporting framework adopted by management and, where appropriate, those charged with
governance in the preparation and presentation of the financial statements that is acceptable in view of the
nature of the entity and the objective of the financial statements, or that is required by law or regulation.

Ethical Requirements Relating to an Audit of Financial Statements

The auditor is subject to relevant ethical requirements, including those pertaining to independence,
relating to financial statement audit engagements.

Relevant ethical requirements ordinarily comprise the Code of Ethics issued by the Institute of Chartered
Accountants of India.

The Code establishes the following as the fundamental principles of professional ethics relevant to the
auditor when conducting an audit of financial statements and provides a conceptual framework for
applying those principles;
(a) Integrity;
(b) Objectivity;
(c) Professional competence and due care;
(d) Confidentiality; and
(e) Professional behavior.

Professional Skepticism
Professional skepticism refers to an attitude that includes a questioning mind, being alert to conditions
which may indicate possible misstatement due to error or fraud, and a critical assessment of audit evidence.

It also includes consideration of the sufficiency and appropriateness of audit evidence obtained in the light
of the circumstances.

Examples of professional skepticism:

The auditor shall plan and perform an audit with professional skepticism recognising that circumstances
may exist that cause the financial statements to be materially misstated.
Professional skepticism includes being alert to, for example:
● Audit evidence that contradicts other audit evidence obtained.
● Information that brings into question the reliability of documents and responses to inquiries to be
used as audit evidence.
● Conditions that may indicate possible fraud.
● Circumstances that suggest the need for audit procedures in addition to those required by the SAs.

Maintaining professional skepticism throughout the audit is necessary if the auditor is to reduce the risks
of:
➢ Overlooking unusual circumstances.
➢ Over generalizing when drawing conclusions from audit observations.
➢ Using inappropriate assumptions in determining the nature, timing, and extent of the audit
procedures and evaluating the results thereof.

Neeraj Arora
 SA 200

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.

Professional Judgement
The application of relevant
➔ training, knowledge & experience, (TKE)
➔ in making informed decisions
➔ about the courses of action that are appropriate in the circumstances of the audit engagement.
Professional judgment is essential to the proper conduct of an audit.

Professional judgment is necessary in particular regarding decisions about:

● Materiality and audit risk.
● The nature, timing, and extent of audit procedures used to meet the requirements of the SAs and
gather audit evidence.
● Evaluating whether sufficient appropriate audit evidence 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.
● The evaluation of management’s judgments in applying the entity’s applicable financial reporting
framework.
● The drawing of conclusions based on the audit evidence obtained, for example, assessing the
reasonableness of the estimates made by management in preparing the financial statements.

Scope of the Audit

The auditor’s opinion on the financial statements deals with whether the financial statements are prepared,
in all material respects, in accordance with the applicable financial reporting framework. Such an opinion
is common to all audits of financial statements.

The auditor’s opinion therefore does not assure, for example, the future viability of the entity nor the
efficiency or effectiveness with which management has conducted the affairs of the entity.

In some cases, however, the applicable laws and regulations may require auditors to provide opinions on other
specific matters, such as the effectiveness of internal control, or the consistency of a separate management
report with the financial statements.

Premise on which audit is conducted.

An audit in accordance with SAs is conducted on the premise that management and, where appropriate,
those charged with governance have responsibility
a. For the preparation and presentation of the financial statements in accordance with the applicable
financial reporting framework; this includes the design, implementation and maintenance of internal

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 SA 200

control relevant to the preparation and presentation of financial statements that are free from
material misstatement, whether due to fraud or error; and
b. To provide the auditor with:
i. All information, such as records and documentation, and other matters that are relevant to
the preparation and presentation of the financial statements;
ii. Any additional information that the auditor may request from management and, where
appropriate, those charged with governance; and
iii. Unrestricted access to those within the entity from whom the auditor determines it necessary
to obtain audit evidence.

Conduct of an audit in accordance with SAs

Complying with Relevant SAs
● An auditor needs to comply with the relevant SAs. For complying with relevant SAs, he must
understand the SA, including its application and other explanatory material.
● To achieve the overall objectives of the auditor, the auditor shall use the objectives stated in relevant
SAs in planning and performing the audit.
● If an objective in a relevant SA cannot be achieved,
○ And it is also restricting the auditor from achieving the overall objectives of the auditor then
auditor must
■ modify the auditor's opinion or
■ withdraw from the engagement.
Complying with Requirements of SAs
● The auditor shall comply with each requirement of an SA unless,
○ The entire SA is not relevant; or
○ The requirement is not relevant because it is conditional and the condition does not exist.
● In exceptional circumstances, the auditor may judge it necessary to depart from a relevant
requirement in an SA. In such circumstances, the auditor shall perform alternative audit procedures
to achieve the aim of that requirement.
● The auditor shall not represent compliance with SAs in the auditor's report unless the auditor has
complied with the requirements of this SA and all other SAs relevant to the audit

M/s SG & Co. Chartered Accountants were appointed as Statutory Auditors of XYZ Limited for the F.Y
2022-2023. 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.
(SA, July 2021, 5 Marks)

Neeraj Arora
 SA 200

Yupee (P) Ltd. got incorporated on 15th May 2022 and Mr. Harsh, the director of Yupee (P) Ltd. proposed to
Kamal & Co. on 24th May 2022, for being appointed as its statutory auditor. Mr. Kamal, the sole proprietor of
Kamal & Co., after checking the compliance with all the statutory requirements, accepted the said offer and
issued an audit engagement letter vide email to Yupee (P) Ltd. Mr. Harsh found all terms of audit engagement
to be proper but in the paragraph relating to auditor’s responsibly in the engagement letter, as produced
below:-
“We will conduct our audit in accordance with Standards on Auditing (SAs), issued by the Institute of
Chartered Accountants of India (ICAI). Those Standards require that we comply with ethical requirements
and plan and perform the audit to obtain reasonable assurance about whether the financial statements are
free from material misstatement.”
Certain queries raised in his mind that what does reasonable assurance meant? Which Standard on Auditing
requires the auditor to obtain such reasonable assurance? Is it possible to give absolute assurance on such
financial statements?
Assuming that you are Mr. Kamal, the newly appointed statutory auditor of Yupee (P) Ltd. Please address to
the queries of Mr. Harsh as stated above.
(MTP2, May 2022, 5 Marks)

Neeraj Arora