INDEX INDEX

Chapter No. Chapter Name Colour

1 NATURE, SCOPE AND OBJECTIVES OF AUDIT

2 AUDIT STRATEGY, PLANNING AND PROGRAMME

3 AUDIT DOCUMENTATION AND AUDIT EVIDENCE

4 RISK ASSESSMENT AND INTERNAL CONTROL

5 FRAUD AND RESPONSIBILITY OF AUDITOR IN THIS REGARD

6 AUDIT IN AUTOMATED ENVIRONMENT

7 AUDIT SAMPLING

8 ANALYTICAL PROCEDURES
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CHAPTER 1 - NATURE, SCOPE AND OBJECTIVES OF AUDIT

SA 200 Overall Objectives of the Independent Auditor and Conduct of the
Meaning Qualities of auditor Audit in Accordance with SAs

Audit is independent examination of nancial
information of any entity, whether prot oriented or not,
and irrespective of its size or legal form, when such an
examination is conducted wit
Note:- The user shouldn't assume that auditor's TECHNICAL
opinion is an assurance as to the future viability of the Sound knowledge of following:-
enterprise or the efciency/ effectiveness with which a) Accountancy
mgt has conducted affairs of the enterprise.
b) Auditing
c) Direct & Indirect tax
d) Corporate Law
e) Client nature of business
Auditor Requirement/Responsibility
PERSONAL OVERALL OBJECTIVE OF AUDITOR
a) Objectivity, Integrity and Independence a) To obtain reasonable assurance that FS
b) Condentiality are free from material misstatements
b) To report on the FS and communicate as
c) Communication skills
required by SAs.
d) Tactful approach
e) Clear headedness and common sense"
ASPECTS TO BE COVERED IN AUDIT
"a) Examination of A/c & IC system
b) Reviewing the system & procedures
c) Vouching of the transactions
d) Verication of Assets & Liabilities
e) Expression of Opinion"
SCOPE OF AUDIT
"a) Audit should cover all relevant aspectsto
FS
b) Info is reliable & Sufcient to forman
Opinion
c) Evaluation of I.C & A/c system tocheck
reliability of Audit evidence/info
d) Relevant Info disclosed in FS subjectto
statutory requirement
e) Auditor not expected to performduties
fall outside scope of his competence
f) Constraints on the scope of the audit"

Auditor required to obtain reasonable assurance whether FS free from material misstatements.
CONDUCT OF AUDIT IN ACCORDANCE PROFESSIONAL SKEPTICISM PROFESSIONAL JUDGMENT SUFFICIENT & APPROPRIATE AUDIT Auditor not expected to, & cannot, reduce audit risk to zero & cannot obtain absolute assurance
WITH SAs "1. Questioning mind "1. Application of training, knowledge & EVIDENCE due to.:-
1) Compliance:- Comply with all relevant 2. being alert to conditions, indicating experience in planning & performing "Sufciency = quantum Appropriateness =
INHERENT LIMITATIONS OF AUDIT
SAs possible misstatement due to error or audit quality"
2) Objectives:- Use objectives stated in fraud 2. Assist in deciding about : ETHICAL REQUIREMENTS (a) Nature of Financial Reporting :- Preparation of FS involves judgement by mgt
individual SAs 3. Reduces risk of - Materiality & audit risk (b) Nature of Audit Procedures:- Practical and legal limitations on auditor's ability to obtain audit
"1. Integrity
3) Comply with relevant requirements of - Overlooking unusual circumstances - NTE of audit procedures evidence such as:
2. Objectivity
SA - Over generalising when drawing - Evaluating sufciency & Mgt may not provide Audit is not ofcial
3. Professional competence & due care Fraud may involve sophisticated &
4) Failure to achieve objectives:- assess conclusions appropriateness of audit procedures complete info relevant for investigation into alleged
whether it necessitates modied opinion 4. Condentiality & Professional behaviour" carefully organised schemes
- Using inappropriate assumptions in - Evaluating mgt judgment preparation of FS wrong doing
determining NTE of audit procedures" - Drawing conclusions"
( c) Timeliness of Financial reporting & balance bw cost & revenue:- Relevance of info & its
ADVANTAGES OF AUDIT value diminish over time & a balance to be struck bw reliability of info & its cost
1. Protect interest of investors
(d) Other Matters:-
2. Moral check on employees
(i) Fraud, involving senior mgt or collusion. (iii) Non-compliance with laws & regulations
3. Settlement of taxes
(ii) Existence & completeness of RP (iv) Future events/conditions that may cause
4. Settlement of trade disputes relationships & transactions entity to cease to continue as going concern
5. Detection of wastages
6. Proper maintenance of books of account
7. Admission/retirement of partners
8. Appraisal of controls

SA 220 Quality Control for an audit of Financial Statements Engagement Quality control and review

INDEPENDENCE OF AUDITOR ACCEPTANCE & CONTINUANCE LEADERSHIP RESPONSIBILITIES FOR CONSULTATION Responsibility of EP Responsibility of EQR
OF CLIENT RELATIONSHIP & QUALITY OF AUDIT
Meaning :- As per GN, Independence implies that judgement AUDIT ENGAGEMENT EP shall 1. Determine EQR has been appointed 1. Discuss signicant matters with EP
of a person is not subordinate to wishes/directions of another EP should emphasize:- 2. Discuss signicant matters with EQR 2. Review FS & proposed audit report
EP satised that appropriate 1. take responsibility - ET taking appropriate
person who might have engaged him. procedures have been followed 1. Compliance with professional std & legal consultation 3. Not date report before EQR review 3. Review selected audit documentation
requirements
EP obtains info that would have 2. Satised - ET taken consultation within rm & 4. Review conclusions reached
INDEPENDENCE INDEPENDENCE OF caused to decline the engagement 2. Compliance with rm's QCP with others
OF MIND APPEARANCE
EXAMPLE OF SUCH INFO 3. Issuance of appropriate audit report 3. Nature & scope of conclusions from such
State of mind permits Avoidance of facts & Special considerations in case of listed entities
consultations agreed with the party consulted
provision of opinion without circumstances so signicant 1. Integrity of mgt and owners 4. Ability to raise concerns without fear 1. ET's evaluation of rm's independence
4. Conclusions have been implemented
being affected by inuences that third party would 2. Competency of ET to perform the 5. Quality is essential & indispensable 2. Appropriate consultation taken
allowing individual to act with conclude auditor's integrity, engagement
3. Audit documentation reviewed reects work performed & supports the conclusions
integrity, exercise objectivity objectivity/professional 3. Compliance with ethical requirement Independence of auditor not only to exist in fact but also appear to so exist to all
& professional skepticism skepticism compromised 4. Signicant matters during reasonable persons
current/previous audit

01
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CHAPTER 1 - NATURE, SCOPE AND OBJECTIVES OF AUDIT

Threats to Independence

SELF INTEREST SELF REVIEW INTIMIDATION ADVOCACY FAMILIARITY SAFEGUARDS TO INDEPENDENCE

As a result of nancial or other
interests of accountant or relative
Examples:- Direct nancial interest;
loan/guarantee; potential employment
Previous judgement re-evaluated by
person responsible for the judgement
Examples:- Past employment with
client; other service performed by
auditor for client
Occurs when auditors deterred from
acting objectively with adequate
degree of professional skepticism
This could occur due to threat of
replacement or pressure of reducing
work in response to reduced fees
Auditor promotes opinion to point that
subsequent objectivity is compromised
Example:- Auditor dealing with shares
of client; becomes client's advocate in
litigation
Auditor forms relationships with client
where they become too sympathetic
Examples:-Acceptance of gifts from
client; relative of audit team working in
client
1. Auditor should always be & appear to be independent
2. Auditor should abide with key fundamental principles of integrity, objectivity &
professional skepticism
3. Auditor should consider threats to independence before accepting the
engagement
4. In case of threat to independence - should not accept engagement unless
necessary safeguards can be put

SA 210 AGREEING THE TERMS OF AUDIT ENGAGEMENT

PRECONDITIONS FOR AUDIT If present Accept the engagement RECURRING AUDIT

1. FRF applied in preparation of FS is acceptable If not present Don't accept the engagement 1. Auditor - assess circumstances require revision or to remind entity of existing terms
2. Mgt acknowledges responsibility of Factors to consider for revision or reminder of existing terms:-

a) Preparation of FS in b) Exercising necessary IC AGREEMENT ON AUDIT ENGAGEMENT TERMS a) Indication of misunderstanding of terms b) Change in senior mgt
accordance with FRF for preparation of FS 1. Auditor to agree terms in writing c) Change in ownership structure d) Change in nature & size of business
c) Provide auditor with: 2. Terms to be recorded in writing & shall include:
e) Change in legal, regulatory and other reporting requirements
Access to all Addn info as Unrestricted a) Objective & scope of audit b) Responsibilities of Auditor
relevant info auditor request access to persons
within entity c) Responsibilities of Mgt d) Identication of FRF ACCEPTANCE OF CHANGE IN TERMS
1. Auditor not to agree - there is no reasonable justication for the same

Limitation prior to engagement acceptance
Auditor believes limitation will result in disclaimer
REASONS FOR ENTITY REQUEST FOR CHANGE IN TERMS
1. Change in circumstances affecting need of service
2. Misunderstanding as to nature of audit as originally requested
3. Restriction on scope of engagement imposed by mgt or caused by other circumstances
2. Prior to completing engagement - auditor required to change it to engagement conveys
lower level of assurance - Reasonable justication for the change
3. Terms changed - Record in new engagement letter
4. Auditor not agree to change - Mgt not permit him to continue original engagement
a) Withdraw from engagement b) Any obligation to report to TCWG/others

Don’t accept the engagement

02
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CHAPTER 2 - AUDIT STRATEGY, PLANNING AND PROGRAMME

Usefulness of SA 300 - PLANNING AN AUDIT OF FINANCIAL STATEMENTS Audit Programme

Audit strategy

a) Resources to deploy for
specic area
b) Amt of resources to deploy
for specic audit area
c) When these resources are
to be deployed
d) Mgt, direction &
supervision of resources
Audit Plan to cover
a) Acquiring knowledge of
A/c system, policies & IC
procedure
b) Expected degree of
reliance on control
c) NTE of audit procedures
d) Coordinating work
Preliminary engagement activities
Perform procedure:
a) Understand terms of engagement (SA 210)
b) Compliance with ethical requirements (SA
220)
c) Continuance of client relationship (SA 220)
Auditor to update & change overall audit
strategy & plan as necessary during audit.
Benefits of Audit Planning
a) Devote appropriate attention to imp area
b) Identify & resolve problems on time
c) Organize & manage engagement
d) Select ET members with appropriate
qualities
e) Facilitate direction & supervision of ET
members & review of their work
f) Assist in coordination of work of
component auditor & experts
Auditor - establish overall audit strategy that sets scope, timing
& direction of audit, & guides development of audit plan.
Developing Audit Strategy
a) Identify characteristics of
engagement that dene
its scope
b) Ascertain reporting
objectives
c) Consider factors
signicant in guiding ET's
efforts
d) Consider result of
preliminary engagement
activities
e) Knowledge of other entity
is relevant
f) Ascertain NTE of
procedures
Acquiring knowledge of client's business
Developing Audit Plan
a) NTE of risk assessment
procedures as per SA
315
b) NTE of further audit
procedures (SA 330)
c) Other planned
procedures to be carried
out (SA 330)
Audit strategy and Plan are
the auditor's responsibility.
Series of verication procedure - applied for
obtaining evidence - enable auditor to express
Advantages of Audit Programme
- Provides assistant with clear set of
instructions
- Provides total perspective of work to be
performed
- Selection of assistants for jobs on the basis
of capability becomes easier
- If work carried out on basis of mental plan -
danger of ignoring/overlooking certain
books and records.
- Assistants, by putting their signature, accept
responsibility for work carried out by them
- Principal can control progress of various
audits
- Serves as guide for future audits
- Serves as evidence in the event of any
charge of negligence being brought against
auditor.
Evolving 1 Programme - - There should be periodic review of
Not Practicable for All Businesses programme to assess - same
- Businesses vary in nature, size & composition continues to be adequate for
obtaining knowledge & evidence
- Work suitable to one not be suitable to others
- Any change in business policy of
- Efciency & operation of IC & nature of service
client may not be adequately known
vary from assignment to assignment
& audit work may be
Constructing an Audit Programme
(1) Stay within scope & limitation of assignment.
(2) Prepare written programme setting forth procedures needed to implement audit plan.
(3) Determine evidence reasonably available & identify best evidence to derive necessary
satisfaction.
(4) Apply only those steps & procedures are useful in accomplishing verication purpose.
(5) Include audit objectives for each area & sufcient details to serve as set of
instructions for assistants involved in audit & help in controlling proper execution of
the work.
(6) Consider all possibilities of error.

Relationship bw Audit Strategy & Plan Auditor to obtain understanding of:-

Disadvantages of Audit Programme
- Audit Plan to be developed after establishment of Audit strategy taking into a) Relevant industry, regulatory, other external factors &
account need to achieve audit objectives through efcient utilisation of applicable FRF Programme tends to become rigid Inefcient assistants take shelter Kill initiative of assistants
resources & inexible behind programme
b) Nature of the entity, including:
- Establishment of strategy & detailed audit plan not necessarily discrete/
sequential processes, but closely inter-related - Its operations
- Changes in one result in consequential changes to the other - Ownership & governance structure
- Types of investments made & planning to make
- Planning not a discrete phase of an Audit, - Entity structure & nance
rather continual & iterative process c) Selection & application of accounting policies, including
- often begins shortly after completion of reasons for changes thereto
previous Audit & continues until completion d) Its objectives & strategies, & business risks that may
of current audit result in risks of material misstatement

Changes To Planning Decisions During The Course of the Audit

- Auditor shall update & change strategy & plan as necessary during the
course of audit
- As a result of unexpected events, changes in conditions, or audit evidence
obtained.
- When info comes to his attention differs signicantly from info available
when he planned audit procedures.

03
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CHAPTER 3 - AUDIT DOCUMENTATION AND AUDIT EVIDENCE

SA 230 AUDIT DOCUMENTATION SA 500 AUDIT EVIDENCE (AE)

"It provides: Completion Memorandum/ "Meaning:- Info used by auditor in arriving at Sufficiency of AE Appropriateness of AE
Meaning :- It refers to record of
Audit Documentation Summary conclusions on which auditor's opinion is based.
audit procedures performed, • Evidence of auditor's basis for a conclusion about achievement of Sufciency = quantum Appropriateness = quality
relevant audit evidence overall objectives; and "Auditor may prepare & retain as part of It includes both info contained in A/c records &
obtained, & conclusions auditor Factors affecting sufficiency and appropriateness
• Evidence that audit was planned & performed in accordance with documentation a summary that states:- other information."
reached SAs & legal & regulatory requirements." "a) Materiality - Low materiality, higher samples "a) Source of Evidence
1. Signicant matters identied during
b) ROMM - Low ROMM, lower samples b) IPE of evidence - complete & accurate
audit
Purpose of Audit Documentation Advantages Reliability of evidence c) Size & characteristics of population - Small c) Nature & dependent on individual
2. How they were addressed This may
homogeneous - Low samples" circumstances under which it is obtained."
"• Assisting RT to plan & perform audit. "• Provides guidance to audit staff. facilitate effective & efcient review & "- Reliability increased - obtained from
• Assisting members of ET responsible for inspection of documentation." independent sources outside entity.
• Responsibility of work can be xed Info used as AE prepared using work of mgt expert
supervision to direct & supervise work.
• Act as a defence if charge of negligence is - If AE generated internally is reliability
• Enabling ET to be accountable for its work Ownership of Audit Documentation "- Evaluate competence, capabilities & objectivity of expert
brought. increased when related controls are effective.
• Retaining record of matters of continuing - Obtain understanding of work of expert; &
• Important for future planning. "- Ownership & custody of Wp rests - AE obtained directly by the auditor more
signicance to future audits. - Evaluate appropriateness of expert's work as AE"
with auditor. It is auditor's property.
• Enabling conduct of quality control reviews and • Contains basis for forming an opinion. reliable than AE obtained indirectly
inspections. - Client doesn't have any right to
• Helps senior to review work" - AE in documentary form more reliable than Methods to obtain AE Procedures to obtain AE
• Enabling conduct of external inspections" access audit W.P. kept by auditor.
evidence obtained orally "- Risk Assessment Procedure
- But auditor may, at his discretion, Re calculation Reperformance Observation Inquiry Inspection
show some/ complete W.P. to - AE provided by original documents more - Compliance Procedure
Form, content & extent of Documentation Assembly of the final audit file
client." reliable than by photocopies or facsimiles" External Conrmation Analytical Procedures
"Auditor prepare documentation sufcient to - Substantive Procedures"
"Auditor to assemble documentation in an audit
enable experienced auditor to understand: le in not more than 60 days after date of
- Size & complexity of entity auditor's report.
- Nature of audit procedures performed
SA 501 AUDIT EVIDENCE - SPECIFIC CONSIDERATIONS FOR SELECTED ITEMS SA 505 EXTERNAL CONFIRMATION
After the assembly auditor not delete it before
- Identied ROMM end of retention period (7 yrs).
- Signicance of audit evidence obtained
- Nature & extent of exceptions identied. Inventory - Existence Litigation & claims AE obtained as a direct written response to auditor from a third
Assembly of audit le - administrative process
does not involve performance of new audit When inventory material to FS, auditor obtain sufcient appropriate AE regarding existence party, in any form/manner.
- Need to document conclusion/basis for "- Inquiry of mgt & in-house legal
conclusion not readily determinable from procedures/drawing of new conclusions. & condition of same by: counsel &
documentation Changes may be made to documentation if Positive confirmation Negative confirmation
- Reviewing minutes of
- Audit methodology & tools used." administrative in nature." Attendance at physical counting, to Count conducted Other "Conrming party respond "Conrming party respondonly
meetings of TCWG &
"- Evaluate mgt instructions for recording & controlling than at the date of FS correspondence between whether it agrees/ if it disagrees with info
"Matters arising after date of the report: "Examples of changes include: results of counting entity & external legal counsel disagreeswith info" provided in request."
The auditor shall document: • Deleting superseded documentation - Observe performance of count procedure Obtain AE whether change in
- Reviewing legal expense A/c"
- Circumstances encountered; stock properly recorded. Use Negative Confm only if all of following are present:
• Sorting, collating & cross referencing Wp - Inspect inventory; and Obtain WR all know litigation
- New/additional procedures performed, evidence • Signing off on completion checklists ROMM is low Effective I.C
- Perform test counts. Auditor unable to attend disclosed to auditor
obtained, & conclusions reached, & their effect
• Documenting audit evidence - obtained, the count Mgt. not permit auditor Item contains small amt Expected Low exception rate
on the auditor's report; & - Performing procedures over nal records - whether
discussed & agreed"
- When & by whom changes to documentation they accurately reect actual inventory count results." communicate with legal counsel -> No reason to believe recipient may disregard request
were made & reviewed." Observe count on other date then modify opinion
Attendance at Physical Counting Involves & perform procedure on Reliability of Response
intervening transactions Segment Info
SA 510 INITIAL AUDIT ENGAGEMENT - OPENING BALANCES "- Objectivity of confirming party: Responses to not bereliable if
"- Inspecting inventory - ascertain its existence & "Sufficient AE:- W.r.t. Presentation conrming party related to the client.
Meaning:- Engagement in which FS for prior period were not audited; or were audited by a predecessor condition, & performing test counts Unpracticable to attend & disclosure of segment info
auditor count - Knowledge about the matter: Depends on knowledge of
- Observing compliance with mgt instructions & Audit procedures: understand conrming party about subject matter being conrmed.
procedures for recording & controlling results of count; methods used by Mgt.& evaluate
AUDIT PROCEDURES REGARDING OPENING BALANCES - Willingness of third party to respond: Third party may
- Obtaining AE as to reliability of mgt count procedures." Perform alt procedures consistency with applicable F.R.F"
"1. Read most recent FS & predecessor auditor's report consider responding time consuming /costly affair."
2. Obtain sufcient appropriate AE whether opening balances contain misstatements that materially
Inventory under control of 3rd Party External Confirmation Procedures
affect the current period's FS by:
a. Determining prior period's closing balances have been correctly b/f or any adjustments have been "- Request conrmation from the third party 1. Determine Info to 2. Select appro. party 3. Designing request 4. Sending request including
disclosed as prior period items in the current year's SPL - Inspection/other audit procedures as appropriate be conrmed follow up request
b. Determining opening balances reect the application of appropriate A/c policies - Obtain service auditors report w.r.t. adequacy of procedures of third party.
Factors to consider when designing requests "Mgt Refusal to allow to
c. Performing one or more of the following: - Attending/arranging another auditor to attend third party's counting procedure. send Confirmation Request"
"- Identied ROMM, including fraud risks.
i. Where the prior year FS were audited, perusing the copies of the audited FS - Inspecting documentation (Example - warehouse receipts)." - Layout & presentation of request. "- Inquire mgt's reasons for the refusal & seek
ii. Evaluating procedures performed in current period provide evidence relevant to the opening AE for their validity & reasonableness
balances; - Prior experience
If the prior period's FS were audited by predecessor auditor & there was a - Evaluate its implications assessment of
iii. Performing specic procedures to obtain evidence regarding opening balances." - Assertions being addressed.
modication to the opinion, auditor evaluate effect of matter giving rise to the ROMM & on NTE of other procedures
- Method of communication- Mgt
modication in assessing ROMM in the current period's FS. authorisation/encouragement to conrming - Perform alt audit procedures"
"Auditor obtains AE that opening balances contain misstatements that could materially affect the
current period's FS, he shall perform addn procedures as to determine the effect on the current parties to respond to the auditor. Mgt's refusal appropriate: Perform Alt
period's FS. - Ability of intended party to conrm or provide procedures
If the auditor concludes that misstatements exist in the current period's FS, he shall requested information" Mgt's refusal not appropriate: Communicate
communicate same with the mgt & TCWG in accordance with SA 450." 04 In case of no response:- Perform Alt procedures with TCWG & assess impact on opinion
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CHAPTER 3 - AUDIT DOCUMENTATION AND AUDIT EVIDENCE

SA 560 SUBSEQUENT EVENTS SA 550 RELATED PARTIES (RP)

Subsequent events - Events occurring bw date of FS & the date of the auditor's report, and facts that become known to the Risk assessment procedures and related activities Identification of previously unidentified/undisclosed RP or
auditor after the date of the auditor's report. 1. Understanding the entity's related party relationships and transactions significant RP transactions
"Inquire mgt regarding: "- Communicate relevant info to the other members of ET
Facts become known to auditor after date of auditor's "Facts which become known to the auditor after the a. Identity of entity's RP, including changes from the prior period; - Where applicable FRF establishes RP requirements:
report but before date FS issued
financial statements have been issued" i. Request mgt to identify all transactions with newly identied RP
"Auditor has no obligation to perform procedures regarding b. Nature of the relationships between the entity & these RP; and
"- After FS have been issued, auditor has no obligation for the auditor's further evaluation; and
FS after date of auditor's report. c. Whether entity entered into any transactions with these RP during the period &, if so, the type &
toper form any procedures regarding such FS. purpose of transactions. ii. Inquire why entity's controls over RP relationships & transactions
When, after the date of report but FS issued, a fact becomes failed to enable identication / disclosure
known had it been known may have caused auditor to amend - When, after FS have been issued, a fact becomes Obtain understanding of controls that has been established to:
report, auditor shall: known to the auditor that, had it been known to the - Perform appropriate substantive procedures relating to such newly
a. Identify, account for, & disclose RP relationships & transactions identied RP or RP transactions;
a. Discuss the matter with mgt & TCWG auditor at the date of the report, may have caused
b. Authorise & approve signicant transactions & arrangements - Reconsider risk that other unidentied RP or signicant RP
auditor to amend the report, the auditor shall:
b. Determine FS need amendment and, if so, c. Authorise & approve signicant transactions & arrangements outside thenormal course of business." transactions may exist
c. Inquire how mgt intend to address the matter in FS- a. Discuss the matter with mgt and TCWG.
2. Maintaining alertness for RP info - If the non-disclosure by mgt appears intentional evaluate the
If mgt amends FS, auditor shall: b. Determine whether FS need amendment and, if so, implications for the audit."
"Auditor shall remain alert, when inspecting records/documents, for arrangements /other info that may
a. Extend procedures referred to the date of the new c. Inquire how mgt intends to address the matter in FS indicate existence of RP relationships/transactions not previously identied or disclosed to the auditor. Identified significant RP transactions outside the entity's normal
auditor's report; and If the auditor identies signicant transactions outside the entity's normal courseof business he shall course of business:-
- If mgt amends FS, auditor shall carry out the procedures
b. Provide a new auditor's report" necessary in the circumstances on the amendment inquire mgt about nature of these transactions & whether RP could be involved." "- Inspect underlying contracts/agreements & evaluate:
"When mgt does not amend FS in but where auditor believes &review steps taken by mgt to ensure that anyone in "In forming an opinion on the FS, auditor shall evaluate: i. Business rationale of transactions
they need to be amended, then receipt of the previously issued FS is informed of the a. Identied RP relationships & transactions appropriately accounted for & disclosed in accordance with ii. Terms of transactions are consistent with mgt'sexplanations; and
a. If the report has not yet been provided to the entity, the situation. the applicable FRF; and iii. Transactions appropriately accounted for & disclosed
auditor shall modify the opinion; or - If mgt does not take the necessary steps to ensure that b. Whether Effects of the RP relationships & transactions prevent the FS from achieving true and fair inaccordance with the applicable FRF; and
b. If the auditor's report has already been provided, auditor anyone in receipt of the previously issued FS is informed presentation; or cause the FS to be misleading." - Obtain AE transactions have been appropriately authorised&
shall notify mgt &TCWG, not to issue FS to 3rd parties If of the situation, auditor will seek to prevent future approved."
FS are issued without necessary amendments, auditor reliance on the auditor's report."
shall take appropriate action, to seek toprevent reliance
on the auditor's report."
SA 580 WTITTEN REPRESENTATIONS (WR)
Events occurring bw date of FS and date of auditor's report
"- Obtain sufcient appropriate AE all events occurring between the date of FS & date of auditor's report that require
adjustment of/disclosure in. FS have been identied.
"A written statement by mgt provided to Objectives of the auditor
- Auditor shall :
auditor to conrm certain matters or to "- To obtain WR from mgt that mgt believes
a. Obtain understanding of any procedures mgt established to ensure that subsequent events are identied. support other AE. WR do not include FS, the that it has fullled the fundamental
b. Inquiring of mgt and TCWG. assertions therein or supporting books and responsibilities.
c. Read minutes of the meetings, of the entity's owners, mgt & TCWG held after date of FS records.
- To support other AE by means of WR and
d. Read the entity's latest subsequent interim FS, if any." Auditor request WR from mgt with for the FS
and knowledge of matters concerned." - To respond appropriately to WR provided
by mgt"
SA 570 GOING CONCERN
Date and period covered by WR:- As near as practicable to, but not after, the date of the
auditor's report. WR shall be for all FS and periods) referred to in the auditor's report.
Mgt Responsibilities Auditor responsibility/ Objectives "If FS prepared using going concern basis
Doubt as to the reliability Requested written
"- Assess entity's ability to continue as "- Obtain SAAE about appropriateness of but, in auditor's judgment, mgt's use of the
of written representations representations not provided
going concern. mgt's use of going concern. basis is inappropriate,the auditor shall
express an adverse opinion." "- I f a u d i t o r h a s c o n c e r n s a b o u t He shall discuss the matter with mgt. & re-
- In case FS not prepared on going concern - Consider whether there is material competence, integrity, ethical values or evaluate reliability & integrity of mgt. Also
basis - Fact to be disclosed in FS" uncertainty about entity's ability to diligence of mgt, auditor shall determine consider its effect on audit report.
continue as going concern." their effect on reliability of representations.
• In particular, if WR inconsistent with
Evaluating Management's Assessment other AE, auditor perform procedures to
attempt to resolve the matter
"- Auditor shall cover same period as that used by mgt. If mgt's assessment of the entity's ability to continue as going concern covers less than 12 months from • If the auditor concludes that WR are not
the date FS, auditor shall request mgt to extend its assessment period to at least 12 months from that date. reliable, auditor shall take appropriate
- In evaluating mgt's assessment, auditor consider whether mgt's assessment includes all relevant info of which auditor is aware" actions, including determining possible
effect on the opinion."
Use of Going Concern Basis appropriate but Material Uncertainty Exists
Additional Procedures if Event/Condition Identified
Adequate Disclosure of Material Uncertainty Made Adequate Disclosure of Material Uncertainty Not Made "Auditor obtain SAAE whether or not material uncertainty exists may cast signicant doubt on
"Express unmodied opinion & the report include a separate section under "a.Express a qualied opinion/adverse opinion, as appropriate, in the entity's ability to continue as a going concern through performing addn procedures.
heading Material Uncertainty Related to Going Concern to: accordance with SA 705; and Procedures shall include:
I. Draw attention to note in FS that discloses the matter; b. In the Basis for Qualied Opinion section of the auditor's report, state that a - Mgt not performed assessment, requesting mgt to make its assessment.
material uncertainty exists that may cast signicant doubt on the entity's - Evaluating mgt's plans for future actions
ii. State that these events indicate that a material uncertainty exists & that
ability to continue as a going concern and that FS do not adequately - Evaluating the reliability of underlying data to prepare the cash ow forecast; &
opinion is not modied in respect of matter"
disclose this matter." determining there is adequate support for assumptions underlying forecast
- Considering any addn facts or info become available since date on which mgt made its
05 assessment.
- Requesting Wr from mgt & TCWG, regarding their plans for future actions"
Page - 1

CHAPTER 4 - RISK ASSESSMENT AND INTERNAL CONTROL

Audit Risk (AR) and its components SA 315 IDENTIFYING AND ASSESSING RISK OF MATERIAL MISSTATEMENT

Audit Risk (AR) and its components
Audit risk - risk that auditor may give inappropriate opinion when FS materially misstated
Inherent Risk (IR) Control Risk (CR)
"Susceptibility of an account Risk that material
balance/class of transaction misstatement will not be
to a material misstatement, prevented/detected &
assuming that there were no corrected on timely basis by
internal controls." the IC system.
Risk of Material Misstatement (ROMM)
ROMM exists at 2 levels:-
Detection Risk (DR)
Risk that the substantive
procedures performed by the
auditor fails to detect material
misstatement.
IR and CR
What is not included in Audit Risk
"I. Risk that auditor might express an opinion
that FS are materially misstated when
they are not. This risk is ordinarily
insignicant.
ii. It does not refer to the auditor's business
risks such as loss from litigation, adverse
publicity, or other events arising in
connection with the audit of FS"
Relationship b/w
ROMM and DR
Risk Assessment Process Risk Assessment Procedures
"a. Identify risks throughout process of obtaining understating of Inquiries of mgt & Analytical Procedures Observation &
entity & its environment including the entity's IC; others within the entity Inspection
b. Assess identied risks & evaluate whether they relate more
Internal Control (IC)
pervasively to the FS as a whole;
"Process designed, implemented & maintained by TCWG, mgt & other
c. Relate identied risks to what can go wrong at the assertion
level; &d. Consider the likelihood of misstatement" personnel to provide reasonable assurance about achievement of an entity's
objectives with regard to,
Objectives of IC > reliability of nancial reporting,
> effectiveness & efciency of operations,
"a. Transactions are executed in accordance with mgt
general/specic authorization; > safeguarding of assets, and

Overall FS level
Refer to ROMM that relate pervasively to
FS as a whole & potentially affect many
assertions.
Assertion level
Refer to ROMM that relate to particular
classes of transactions, account
balances, & disclosures.
AR = CR x IR (ROMM) x DR
Mgt reacts to IR by designing
accounting & IC systems &
therefore, in many cases, IR
and CR are highly interrelated.
Inverse relationship bw DR
and the combined level of IR
and CR.
b. All transactions are promptly recorded in the correct amt; > Compliance with applicable laws and regulations."
appropriate accounts; accounting period
c. Assets safeguarded from unauthorised access, use/ Limitations of IC
disposald. Recorded assets compared with existing assets & IC provide Human judgment in Collusion
appropriate action taken with regard to any differences." reasonable assurance decision making among people
Mgt judgement
Lack of understanding the purpose Limitation in case of small entities

Conditions which increase risk of fraud/Risk requiring special audit consideration Assertions evaluated
Components of IC System
"1. Weaknesses in design of IC system & non-compliance with the laid down procedures. Transactions Balances at Presentation &
during year year end Disclosure
2. Doubts about the integrity or competence of the mgt. 1. Control Environment 3. The info system, including the related business processes, relevant to
Occurrence Existence Rights & financial reporting & communication
3. Unusual pressures within the entity. "Control environment includes:
Completeness Rights & Obligations Auditor to obtain understanding of:
4. Unusual transactions such as transactions with related parties. Accuracy Obligations Completeness I. governance & mgt functions
Cut off Completeness Classication a. Classes of transactions signicant to FS
5. Problems in obtaining SAAE, e.g., inadequate documentation." ii. attitudes, awareness, & actions of TCWG & mgt.
Classication Valuation Accuracy b. Procedures by which those transactions are initiated, recorded, processed,
iii. It sets the tone of an organisation" corrected as necessary, transferred to GL and reported
IC and IT Environment
c. Related A/c records, supporting info & specic accounts used to initiate, record,
Benefits of IT to IC Risk to IC imposed by IT Elements of Control Environment process and report transactions;
"- Consistently apply predened business rules & perform complex "- Reliance on systems or programs inaccurately processing data, "- Communication & enforcement of integrity & d. How info system captures events & conditions signicant to FS
calculations processing inaccurate data or both- Unauthorised access to data ethical values e. The nancial reporting process
- Enhance timeliness, availability, & accuracy of info; - Possibility of IT personnel gaining access beyond those necessary - Commitment to competence f. Controls surrounding journal entries.
- Facilitate addn analysis of info; to perform their assigned duties there by breaking down SOD
- Participation by TCWG
- Enhance ability to monitor performance of entity's activities - Unauthorised changes to data in Master les. Obtain understanding of how entity communicates nancial reporting roles &
- Mgt's philosophy & operating style- responsibilities b/w mgt & TCWG and external communications
- Reduce risk that controls will be circumvented- Enhance ability to - Unauthorised changes to systems or programs. Organisational structure
achieve effective SOD" - Failure to make necessary changes to systems or programs.- - Assignment of authority & responsibility Following pts need - Understanding of Roles & Responsibilities
Inappropriate manual intervention consideration
- HR policies & practices" - Understanding relation of activities
- Potential loss of data or inability to access data as required."
2. Entity's Risk assessment process - Policy Manuals & Financial Reporting Manuals
Internal Check
4. Control Activities - Open communtion channel
Check on day to day transactions, Operating continuously as part of routine system, whereby work carried out by one person is
- Less structured for small entities
automatically checked by another to prevent fraud/error, & early detection of fraud and error.
General consideration in framing system of internal check Evaluation of IC by auditor Satisfactory control environment not absolute deterrent to fraud 5. Monitoring of Control
Review of IC will enable auditor to • Work as positive factor when the auditor assesses the ROMM '- H e l p s i n a s s e s s i n g t h e
Distribution of Powers No independent control Custody record distribution Check by another Job rotation effectiveness of controls on a
know:
• Deciencies in control environment may undermine the timely basis
Budgetary Control Accounting control Stock control Cash control Leave - Errors & frauds likely to be effectiveness of controls, in particular in relation to fraud.
located - Mgt accomplishes it through
- Adequate IC system is in use & • Control environment inuences the NTE of auditor's further ongoing activities, separate
operating as planned by mgt procedures. evaluations, or a combination of
- Effective internal audit dept is • Control environment does not prevent, or detect & correct, a material the two.
operating misstatement. Inuence the auditor's evaluation of the effectiveness - Mgt's monitoring activities may
- Any admin control has a bearing of other controls and thereby auditor's assessment of ROMM. include using info from
on work Testing of IC system (TOC) - includes communications from external
- Controls adequately safeguard parties
assets; Inspection of documents Inquiry & Re Testing on
to gain AE that IC observation performance computerised - In case of Small Entities: Mgt's
- How far & adequately mgt is monitoring of control is often
discharging its function have operated properly. of IC of IC application
06 - how reliable reports, records &
accomplished by mgt's or owner-
manager's close involvement in
the certicates to mgt can be; operations
Page - 2

CHAPTER 4 - RISK ASSESSMENT AND INTERNAL CONTROL

SA 320 MATERIALITY IN PLANNING AND PERFORMING AN AUDIT

Meaning of Materiality
"- Misstatements are material if they
inuence economic decisions of users
- Judgments are made in light of
surrounding circumstances, & are
affected by size/ nature of a
misstatement
- Based on consideration of common
nancial info needs of users as a
group."
Revision in materiality
"1. Revise materiality for FS as a wholein
event of becoming aware of info that
would have caused him to determine
a different amount initially.
2. If the auditor concludes that a lower
materiality for FS as a whole than that
initially determined is appropriate, he
shall determine whether it is
necessary to revise performance
materiality, & whether the NTE of the
further audit procedures remain
appropriate."
Auditor's determination of materiality is a Judgement of materiality Use of Benchmarks in Methods to review IC system
matter of professional judgment, & is provides basis for :- determining Materiality Particulars Narrative record Check List Questionnaire Flow Chart
affected by the auditor's perception of the "- Determining NTE of risk "Factors that may affect
nancial info needs of the users. assessment procedures Exhaustive description of Series of questions which Comprehensive series of Graphic presentation of
identication of appro.
Intro system as found in a member of the auditing questions concerning each part of the company's
In this context, it is reasonable for the - Identifying & assessing Benchmark includes:-
operation by the auditor. staff must answer. internal control. system of internal control.
auditor to assume that users: ROMM- Determining NTE
• Elements of the FS• Items
- Have reasonable knowledge of of further audit on which attention of users - identify weaknesses/gaps - Motivating as on the job - Recommendation can be - Concise presentation
business & economic activities & A/c procedures" - incorporate changes on requirement easily provided by auditor - Easily understandable
tends to be focused Advantages
- Understand that FS are prepared, account of change in - Easy location of - Easy location of - Complete view of system
• Nature of entity, where team weakness weakness
presented & audited to level of "Performance materiality entity is at in its life cycle, &
materiality means amtset by auditor < - Time consuming - Time consuming - Time consuming - Time consuming
industry& economic
- Recognize uncertainties inherent in materiality for FS as a whole to Disadvantages - Doesn't identify weakness - Requires intelligence to - Client may answer in haste - Weakness can't be
environment in which entity
measurement of amts based on use of reduce to an appropriately low in the system prepare proper checklist - Manipulation in answers readily located
operates;
estimates, judgment & the level probability that
consideration of future events; and aggregate ofuncorrected & • Ownership structure & the
undetected misstatements way it is nanced
- Make reasonable economic decisions
exceeds materiality for FS." • Relative volatility of
on the basis of the info in the FS
benchmark."
SA 610 USING THE WORK OF INTERNAL AUDITORS

INTERNAL AUDIT Objectives of Auditor

Determining Whether, in Which Areas, and to What Extent
Objectives and Scope of Internal Audit Function Objectives of external auditor, where external auditor Work of Internal Audit Function Can Be Used
expects to use internal auditor's work or use internal Evaluating internal audit function
Independent appraisal activity, within an Activities relating to Activities relating to IC auditors to provide direct assistance, are:
org for review of activities & providing governance "a. Extent to which the function's organizational status &
a) Evaluation of IC a. To determine work of the internal audit relevant policies & procedures support objectivity of IA;
suggestions for improvement thereof.
Activities relating to b) Examination of nancial & operating info function/direct assistance can be used, and if so,
b. Level of competence of the function; and
risk management in which areas & to what extent
c) Review of operating activities c. Whether function applies a systematic & disciplined
b. If using work of the function, to determine that
Requirement for Internal Audit (Sec 138) d) Review of compliance with laws & regulations approach, including quality control."
work is adequate for his purpose
a) Every listed co. b) Every unlisted public co having c. If using internal auditors to provide direct
"Internal Auditor - CA/CS/CMA or any other Determining nature & extent of work of the function that
c) Every Pvt co having "- Share capital Rs. 50 cr or more in professionalHe may/may not be an employee" assistance, to appropriately direct, supervise & can be used
"- Turnover Rs. 200 or more PY- Turnover Rs. 200 or more in PY- review their work
"1. Consider nature & scope of work performed/planned to be
in PY- Loans/borrowings Loans/borrowings Rs. 100 cr or more
performed
Rs. 100 cr or more at any at any time during PY- Deposits Rs. 25
Determining whether, in which areas, and to what extent IA can be used to provide direct assistance 2. External Auditor make all signicant judgments and, use
time during PY" cr or more at any time during PY"
"Determining whether IA be used to provide Determining nature & extent of work that can less work of the function & perform more of work directly.
directassistance for purposes of the audit" be assigned to IA providing direct assistance
INTERNAL FINANCIAL CONTROL (IFC) 3. External auditor evaluate whether, using work of IA would
"1. External auditor evaluate existence & signicance "External auditor shall consider: still result in him being sufciently involved in audit4.
Section 134(5)(e) - IFC means policies & procedures adopted by of threats to objectivity & level of competence of External auditor communicate how he has planned to use
company for ensuring orderly & efcient conduct of its business, a. The amount of judgment involved in: the work of the function."
IA.
including adherence to company's policies, safeguarding of its assets, i. Planning and performing relevant audit
prevention & detection of frauds & errors, accuracy & completeness of 2. External auditor not use IA to provide direct procedures; and Using the work of the internal audit function
the accounting records, & timely preparation of reliable nancial info. assistance if:
ii. Evaluating the audit evidence gathered; "1. External auditor read reports of IA
a. There are signicant threats to objectivity of IA
b. Assessed ROMM" 2. External auditor perform sufcient procedures on body of
Reporting under The Companies Act 2013 b. IA lacks sufcient competence to perform
work of IA
"a) 143(3)(I) - By Auditor proposed work"
3. External auditor to determine adequacy for purposes of the
b) Rule 8(5)(vii) - Board Report of company to state details in respect audit, including evaluating whether:
Using IA to provide direct assistance
of adequacy of IFC with reference to FS.
a. Work of IA properly planned, performed, supervised,
c) Inclusion of matters relating to IFC in directors responsibility "a. Obtain written agreement from entity that IA be allowed to follow external auditor's instructions, & entity will
reviewed and documented;
statement not intervene in work
b. Sufcient appropriate evidence had been obtained to
d) Sec 177 - AC to call for comments on IC by stat auditors" b. Obtain written agreement from IA will keep condential matters as instructed by external auditor & inform
enable function to draw reasonable conclusions; and
him of any threat to their objectivity.
c. Conclusions reached are appropriate & reports are
External auditor direct, supervise & review work performed by IA in accordance with SA 220." consistent with results of the work performed."

07
Page - 1

CHAPTER 5 - FRAUD AND RESPONSIBILITY OF AUDITOR IN THIS REGARD

Fraud Reporting (Sec 143(12) & Rule 13)

Amt < 1 cr Amt 1cr or above

Primary responsibility for prevention & detection of fraud rests with TCWG and mgt.

Meaning of Fraud:- Intentional act by Report to CG

Defalcation of cash Report to Disclosure in
one/more individuals among mgt, Board/AC Board report
TCWG, employees, or 3rd parties, Suppressing receipts:- Within 2 days of know -
Types of misstatement relevant to auditor Inflating payment Teeming and lading
involving use of deception to obtain Report to Board/AC
unjust/illegal advantage Within 2 days a) Nature Seeking reply in 45 days
of know b) Approx amt
Misstatements resulting from fraudulent financial reporting Misstatements resulting from misappropriation of assets
c) Parties, if Reply received Not received
"1. Incentives/Pressure - High competition with declining "1. Incentives/Pressure - Personal nancial obligation of Report:-
Risk of not detecting material a) Nature action not taken
margin; High vulnerability to rapid changes; Decline in employee; Adverse relationship with employee Report + reply+ Report + note
misstatement resulting from fraud b) Approx amt d) Action taken comments to CG reply not
higher than risk of not detecting one Fraud Risk customer demand
2. Opportunities - Large amt of cash on hand; Inventory item with c) Parties in 15 days of received to
resulting from error Factors 2. Opportunities - Known history of violation of laws; signicant high value & small size; Inadequate IC over assets receipt CG
RP transactions; Ability to dominate the industry3.
3. Attitudes/Rationalization - Disregard for need of reducing risk
Attitudes/Rationalization - Mgt unable to remedy deciency in
"- Fraud involve sophisticated & related to misappropriation of asset; Disregard for IC over Sec 143 (13) Sec 143 (14)
IC; Excessive pressure by Mgt in maintaining earning trend"
carefully organized schemes designed assets"
Auditor not guilty of breach of Provision of fraud applies to
to conceal it - Concealment even more
any duties by reason of CS - secretarial audit &
difcult to detect when accompanied by
reporting to CG CMA - cost audit
collusion.- Difcult to determine Circumstances relating to possibility of fraud Auditor unable to continue engagement
misstatements in judgment areas such
as accounting estimates" Discrepancies in A/c records Conicting/missing evidence Others "- Determine professional & legal responsibilities- Whether it is
appropriate to withdraw from engagement
Problematic/unusual relationship with mgt Sec 143(15)
- If auditor withdraws:-
Risk of not detecting a material
misstatement resulting from mgt a) Discuss with mgt & TCWG along with reasons for Penalty for non compliance of Sec 143(12)
fraud is greater than for employee Manipulation of Accounts - generally committed to withdrawal - Listed co. - 5L and Any other co - 1L
fraud b) Whether any requirement to report to any person"
avoid taxes declaring dividends Withhold declaration
of dividend Reporting under Clause (xi) of CARO 2020
Receiving high salary
Any fraud by co or any fraud on Co has been noticed/reported.
By:- Inating/suppressing purchases/expenses/sales If yes, nature & amt involved is to be indicated.
Mgt override controls using techniques such as:-
Inating/deating closing stock Charing capex to revenue/ vice versa Fictitious JE Inappropriate assumptions Concealing facts
failing to adjust o/s liability/prepaid expense Misapplication of A/c policies
Omit/advance/delay recognition Altering records

Engaging in complex transactions

08
Page - 1

CHAPTER 6 - AUDIT IN AUTOMATED ENVIRONMENT

Meaning:- Business environment where processes, operations, A/c & even

decisions carried out using computer systems - also known as Information
Systems (IS) or Information Technology (IT) systems.

Features of Automated environment Relevance of IT in an audit Types of controls in automated environment

"- Enables business operations at a faster speed "When business operates in automated environment - we will see several business 1. General IT Controls:- Policies & procedures relate to many apps & support effective functioning of application controls.
functions & activities happening within the systems. Consider the following aspects They include controls over the following:
- less prone to human errors
instead of'
- Provides better security & IC features - Computation & Calculations automatically carried out Data Centre & Program Change Access Security App system
- Process large volume of transactions in less time - A/c entries posted automatically Network oper
- Accuracy in computations & data processing - Business policies & procedures, including IC, applied automatically "Production systems "Modied systems Access to programs & Systems developed,
- Reports produced from systems. Mgt & other stakeholders rely on these reports & processed to meet continue to meet data authenticated & congured & implemented
- Providing latest info
info produced Objectives nancialreporting nancial reporting authorized to meet the objectives
- Networking capabilities. better connectivity & integration - User access & security controlled by assigning system roles to users" objectives"
objectives"
bw business operations is possible."
Understanding automated environment "- Mgt of computer "- Change mgt process "- Security mgt & "- Mgt of development
Some situations in which IT will be relevant to an audit operations activities - Change requests organization activities
Info System being used Its purpose Location of IT system Activities
"• Increased use of Systems & Application software - Failure recovery - record, manage. Track - Application security - Project initiation
• Complexity of transactions has increased Interface with system Architecture Version - Documentation - Making changes - Data security - Analysis & design
Key persons
• Hi-tech nature of business - Service lvl agreement - Test changes - Operating system - Construction
Inhouse Vs packages (CSO, CISC) - Performance - Apply changes in security - Data conversion"
• Volume of transactions are high Outsourced activities
monitoring" production" - Network security"
• Company Policy
Risks in IT system
• Regulatory requirements -Companies Act 2013 IFC 2. Application Controls:- Include automated & manual controls operate at business process level. Automated Application
• Required by Indian & International Standards - ISO Inaccurate data processing Unauthorized access controls are embedded into IT applications & help in ensuring completeness, accuracy & integrity of data in those systems.
• Increases efciency & effectiveness of audit."
Direct data changes Excessive access Loss of Data
3. IT Dependent Controls:- Manual controls that make use of some form of data produced from IT systems & applications.
Inadequate SOD Unauthorized Changes Effectiveness & reliability of application controls & IT dependent controls require General IT Controls to be effective.
Testing Methods
"A. Obtain understanding how an automated transaction is
processed by doing a walkthrough Impact of IT risks on controls, substantive procedures & reporting General IT Vs Application Control:- These two control are interrelated. General IT Controls are needed to support functioning of
application controls, & both are needed to ensure complete & accurate information processing through IT systems.
B. Observe how user processes transactions in diff Substantive Procedures Reporting Control
scenarios
- can’t rely on data processed - Communicate with - Can't rely on
C. Inspect conguration dened in application. - Need to test the program TCWG automated controls Data Analytics Steps in use of CAAT
D. Inspect system logs to determine changes made - Completeness & accuracy of - Report u/s 143(3) - High control risk Meaning:- Combination of processes, tools & techniques used to tap vast "1. Understand business env including IT
E. Inspect user manual of systems & applications. reports to be tested - Modication of - Test system data & amts of data to obtain meaningful info 2. Dene Objectives & criteria
F. Carry out test check & observe error message displayed - Obtain more evidence opinion report "Tools & techniques used in applying principles of data analytics - Computer 3. Identify source & format of data
Assisted Auditing Techniques (CAAT)"
G. Re-performance using raw source data" 4. Extract Data
5. Verify completeness & accuracy of
Audit Approach Use of Data Analytics data
Efficiency Inquiry Time Risk Understand & Testing for effectiveness Reporting "- Check completeness of data & population- Selection of audit samples 6. Apply criteria on data obtained
High Low assessment evaluate
Observation - Re-computation of balances- Re-performance of mathematical 7. Validate & conrm results
"- Identify A/c and "- Document understanding "- Assess NTE of control "- Evaluate calculations
Inspection disclosures of business process testing deciencies 8. Report & document results"
Reperformance - Analysis of JE as required by SA 240
Low High - Qualitative & - Prepare RCM - Assess reliability & - Remediation of
quantitative completeness of source weakness - Fraud investigation.
- Understand design of
consideration data - Evaluating impact of control deciencies
controls through - IC Memo/ Mgt
- Relevant FSA walkthrough - Test key reports letter- Auditor - Identifying inconsistencies or signicant uctuations"
report"
- Identify source- - Process wise - Sample testing
Consider IT risk" consideration for
- Competence/ capability/
ELC/SOD
independence of
- IT general, App controls" staff/team"

09
Page - 1

CHAPTER 7 - AUDIT SAMPLING (SA 530)

Meaning:- Application of audit procedures to Projecting misstatement Basis Test Checking Routine Checking
less than 100% of items within a population - "Obtain broad view of scale but it may not Meaning Examine < whole population Detailed checking of all aspects of transactions
all sampling units have a chance of selection determine amt to be recorded. When
in order to provide auditor with a reasonable misstatement established as anomaly, Objective Form opinion on FS Ensure accuracy of entries
basis on which to draw conclusions about excluded when projecting misstatements
entire population. For TOD, the auditor project Nature Judgmental/statistical Mechanical process
misstatements to population whereas for
TOC, no projection of deviations Level of By higher lvl audit staff Junior audit staff
Precautions while conducting test checking function
necessary"
"- Thorough understanding of A/c & IC system Time Saves time of audit staff More time consuming
- Area not suitable for sampling (Bank conrmation)
- Proper planning and classication
- No bias and Analysis of misstatement" Sample Design Sample selection Method
"When designing an audit sample, Auditor to consider:- 1. Random :- Simple random;
Population • Specic purpose to be achieved Stratied random
Meaning:- Entire set of data from which sample is selected & about which auditor • Determine stratication/value-weighted appropriate" 2. Interval Sampling
wishes to draw conclusions. 3. Monetary Unit
Characteristics of population Appropriateness Accuracy Completeness 4. Haphazard
Stratification Value Weighted Selection 5. Block selection
"Reduce variability of items "Identify sampling unit as
Approaches to Sampling with in each stratum individual monetary units
Statistical Non Statistical/Judgmental This allows greater audit Examine particular items Sampling Risk
effort to be directed to contain the units Auditor's conclusion based on sample diff from
Based on personal experience &
"- More scientic larger value items Effort directed to larger conclusion if entire population subject to same procedure.
knowledge of auditor
- Use of law of probability Results of procedures value items This may be Can lead to two types of erroneous conclusions :
"Limitation of non statistical method:- applied to sample of items used in conjunction with
- No personal bias" systematic method of a) TOC - controls are more b) TOC - Controls less
a) Neither objective nor scientic within stratum can only be
b) Risk of personal bias" sample selection" effective/TOD - material effective/ TOD - material
projected to that stratum."
misstatement doesn't exist misstatement exists
Affects audit effectiveness Affects audit efciency
"Advantages of Statistical Sampling:- Performing Audit Procedures Samples Size (High - H; Low - L) & lead to inappropriate & lead
a) Sample size not increase proportion to Auditor perform procedures on each item Factor affecting Factor affecting audit opinion to additional work
increase in size of area selected. If procedure not applicable, auditor sample size in TOC sample size in TOD
b) Objective method perform procedure on replacement item. If "Increased samples size:- "Increased samples size:- Non Sampling Risk
c) provides means of estimating min sample size auditor unable to apply designed procedures, H - reliance on control H - ROMML - Reliance on The risk that auditor reaches an erroneous conclusion
treat that item as deviation in case of TOC, or a L - tolerable deviation rate substantive
d) Reduced sampling risk for any reason not related to sampling risk.
misstatement, in case of TOD. H - Expected deviation rate L - tolerable misstatement
e) Better description of large mass of data" H - Desired assurance lvl H - Desired assurance lvl
H- Population size" H- Expected misstatement"

10
Page - 1

CHAPTER 8 - ANALYTICAL PROCEDURES (SA 520)

Meaning:- Evaluation of nancial info through Considerations in designing analytical procedures

Auditor's choice of procedures, methods & level of
analysis of plausible relationship among both application is matter of professional judgment. "1. Determine the suitability of particular procedures for given assertions, taking account of the assessed
nancial & non-nancial data ROMM & TOD, if any, for these assertions;
2. Evaluate reliability of data from which auditor's expectation of recorded amts/ratios developed, taking
account of source, comparability, & nature & relevance of info available, & controls over preparation;
Timing of Analytical Procedures Nature of Analytical Procedures
3. Develop expectation of recorded amts/ratios & evaluate expectation sufciently precise to identify a
"1. At planning stage - assist in risk assessment "Consideration of comparisons of nancial info with:•
misstatement 4. Determine amt of any diff of recorded amts from expected values acceptable without
procedure & help in determining NTE of other Comparable info for prior periods.
further investigation."
procedures. • Anticipated results
2. While performing audit • Similar industry info"
Suitability of particular analytical procedures for given assertions
a. Procedures at assertion level may be TOD,
substantive analytical procedures, or a "1. Analytical procedures more applicable to large volumes of transactions that tend to be predictable over
"Consideration of relationships such as: time. Based on expectation relationships among data exist & continue in absence of known conditions to
combination of both.
• Among elements of nancial info the contrary
b. Decision about which audit procedures to
• Bw nancial info & relevant non-nancial info" 2. In some cases, even unsophisticated predictive mode maybe effective as analytical procedure.
perform based on auditor's judgment
3. Different types of analytical procedures provide different levels of assurance.
c. Inquire mgt as to availability & reliability of
info needed to apply substantive analytical 4. Determination of suitability of particular analytical procedures inuenced by nature of assertion and ROMM"
procedures
3. Near end FS are consistent with his Extent of reliance on procedures influenced by:- Evaluation whether expectation is sufficiently precise
understanding" a. Source of the information available a. Accuracy with which expected results can be
b. Comparability of the information available. predicted
Factors to be considered for substantive analytical procedures b. Degree to which info can be disaggregated.
c. Nature and relevance of the information available
"1. Availability of Data - Availability of reliable & relevant data will facilitate effective procedures c. Availability of info, both nancial & non-nancial
d. Controls over the preparation of the information
2. Disaggregation - Degree of disaggregation directly affect degree of its usefulness
3. Account Type - Analytical procedures more useful for certain accounts than for others. Income statement
accounts tend to be more predictable, whereas balance sheet accounts are subject to greater mgt Investigating results of analytical procedures
judgment
"If analytical procedures performed identify uctuations or that differ from expected values by a signicant
4. Source - Some classes of transactions tend to be more predictable as they consist of numerous similar amount, auditor shall investigate such differences by:-
transaction
i. Inquiring mgt & obtaining appropriate AE
5. Predictability - More appropriate when account balance/relationships bw items of data are predictable
ii. Performing other procedures as necessary in the circumstances:"
6. Nature of Assertion - More effective in providing evidence for some assertions (e.g., completeness or
valuation] than for others (e.g., rights and obligations].
Considerations specific to Public sector entities
7. Inherent Risk - When IR higher, design TOD to address it. When signicant risks identied, AE obtained
"- Relationship bw individual FS items traditionally considered may not always be relevant
solely from analytical procedures is unlikely to be sufcient."
- Expense on acquisition of assets not capitalised.
- Industry data/statistics for comparison not available"
Techniques available as substantive analytical procedures
"1. Trend analysis - Comparison of current data with prior period balance or with trend in 2 or more prior
period
2. Ratio analysis - Useful for analysing asset & liability A/c & revenue & expense A/c. Individual balance
sheet A/c difcult to predict on its own, but its relationship to another account often more predictable Ratios
can be compared over time or to ratios of separate entities within group, or with ratios of other companies
in same industry.
3. Reasonableness tests - Rely upon non-nancial data for audit period under consideration (e.g.,
occupancy rates toestimate rental income or interest rates to estimate interest income or expense). More
applicable to income statement accounts and certain accrual or prepayment accounts.
4. Structural modelling - Constructs statistical model from nancial and/or non- nancial data of prior
accounting periods to predict current account balances (e.g., linear regression) ."

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