AUDITING AND ACCOUNTING STANDARDS (AAS)

ISSUED BY ICAI

The following AAS are effective for all audits, unless otherwise stated:

AAS 1: BASIC PRINCIPLES GOVERNING AN AUDIT

Corresponding International Statement on Auditing (ISA): ISA 200

"OBJECTIVES & GENERAL PRINCIPLES GOVERNING AN AUDIT OF
FINANCIAL STATEMENTS"

The auditor, while carrying out independent audit of the financial

statements should adhere to the basic principles governing an audit.
These principles are INTEGRITY, OBJECTIVITY AND INDEPENDENCE,
CONFIDENTIALITY, SKILLS AND COMPETENCE, WORK PERFORMED BY
OTHERS, DOCUMENTATION, PLANNING, AUDIT EVIDENCE,
ACCOUNTING SYSTEM AND INTERNAL CONTROL, AUDIT
CONCLUSIONS AND REPORTING

AAS 2: OBJECTIVE AND SCOPE OF THE AUDIT OF FINANCIAL

STATEMENTS

Corresponding ISA: ISA 200 "Objectives & General Principles

Governing an Audit of Financial Statements"

Objective of an independent audit is to enable the auditor to express

an opinion on the financial statements as to whether they reflect true
and fair view of financial position and operating results of the
enterprise and the state of affairs of the enterprise.

AAS 3: DOCUMENTATION

Corresponding ISA: ISA 230 "Documentation"

The auditor should make suitable documentation during the conduct of

audit. Documentation refers to the working papers that the auditor
obtains in connection with the performance of their audit. Working
papers aid in planning, performance, supervision and review of their
audit work. It provides evidence of their work performed.

The working papers should be properly designed and organised to

meet circumstances of each audit. Using standardised working papers
improve efficiency. They should be sufficiently complete and detailed.
Working papers may be classified into permanent audit files and
current audit files. Permanent audit files contain information of
continuing importance to succeeding audits whereas current audit files
contain information primarily relating to audit of a single period.
AAS 4: THE AUDITOR’S RESPONSIBILITY TO CONSIDER FRAUD
AND ERROR IN AN AUDIT OF FINANCIAL STATEMENTS

Corresponding ISA: ISA 240 "The Auditor’s Responsibility to Consider

Fraud and Error in an Audit of Financial Statements"

The primary responsibility of prevention and detection of frauds and

errors is of the management as well as those charged with
governance. Auditor has to obtain reasonable assurance that financial
information is properly stated in all material aspects. Therefore, when
planning and performing audit procedures and evaluating and
reporting the results thereof, the auditor should consider the risk of
material misstatements in the financial statements resulting from
fraud or error. The auditor plans and performs an audit with an
attitude of professional skepticism. Such an attitude is necessary for
the auditor to identify and properly evaluate the fact that an audit is
carried out may act as a deterrent, but the auditor is not and cannot
be held responsible for the prevention of fraud and error.

The auditor’s opinion on the financial statements is based on the

concept of obtaining reasonable assurance; hence, in an audit, the
auditor does not guarantee that material misstatements, whether from
fraud or error, will be detected. Therefore, the subsequent discovery of
a material misstatement of the financial statements resulting from
fraud or error does not, in and of itself, indicate:

a. failure to obtain reasonable assurance

b. inadequate planning, performance or judgment

c. absence of professional competence and due care or

d. failure to comply with auditing and assurance standards

generally accepted in India

AAS: 5: AUDIT EVIDENCE

Corresponding ISA: ISA 500 "AUDIT EVIDENCE"

The auditor is required to obtain sufficient appropriate audit evidence

to enable them to draw reasonable conclusions therefrom on which to
base their opinion on the financial information. The auditor normally
relies on evidence that is persuasive rather than conclusive in nature.
The auditor may obtain evidence on a selective basis by way of either
judgmental or statistical sampling procedures. Evidence is obtained
through the performance of compliance and substantive procedures.
Compliance procedures are tests designed to obtain reasonable
assurance that those internal controls on which audit reliance is to be
placed are in effect. Substantive procedures are designed to obtain
evidence as to the completeness, accuracy and validity of the data
produced by the accounting system.
AAS–6: RISK ASSESSMENTS AND INTERNAL CONTROL

Corresponding ISA: ISA 400 "RISKS ASSESSMENTS AND INTERNAL

CONTROLS"

The auditor should use professional judgment to assess audit risk and
to design audit procedures to ensure that it is reduced to an
acceptably low level. Audit risk means the risk that the auditor gives
an inappropriate audit opinion when the financial statements are
materially misstated. Audit risk has three components: INHERENT
RISK, CONTROL RISK AND DETECTION RISK. INHERENT RISK is the
susceptibility of an account balance or class of transactions to
misstatement assuming that there were no related internal controls.
Control risk is the risk that a misstatement will not be prevented or
detected and corrected on a timely basis by the accounting and
internal control systems. DETECTION RISK is the risk that an auditor’s
substantive procedures will not detect a misstatement.

The internal control system extends beyond those matters which relate
directly to the functions of the accounting system and comprises of the
control environment and control procedures. The internal control
systems are subject to some inherent limitations. In developing the
audit programme, the auditor should relate their assessment of
inherent risk to material account balances and classes of transactions
at the level of assertions made in the financial statements.

AAS 7: RELYING UPON THE WORK OF AN INTERNAL AUDITOR

Corresponding ISA: ISA 610 "CONSIDERING THE WORK OF INTERNAL

AUDITING"

External auditor should, as part of their audit, evaluate the internal

audit function to the extent they consider that it will be relevant in
determining the nature, timing and extent of their compliance and
substantive procedures. Depending upon such evaluation, the external
auditor may be able to adopt less extensive procedures than would
otherwise be required. The external auditor’s general evaluation of the
internal audit function will assist them in determining the extent to
which s/he can place reliance upon the work of the internal auditor.
Important aspects to be considered in this context are organisational
status of the entity; nature and depth of the internal audit
assignment; the technical competence of the internal audit staff and
the degree of due professional care taken by internal audit staff.
External auditor must ascertain internal auditor’s tentative plan for the
year and discuss it with them at an early stage to determine areas
where they could consider relying upon the work of the internal
auditor.

AAS 9: USING THE WORK OF AN EXPERT

Corresponding ISA: ISA 620 "USING THE WORK OF AN EXPERT"

When the auditor uses the work of an expert employed by them, s/he
is using that work in the employee’s capacity as an expert rather than
delegating the work to an assistant on the audit. Accordingly, in such
circumstances, s/he should apply relevant procedures. Before asking
for an expert’s opinion, the auditor should satisfy themselves about
the skills and competence of that expert. The auditor should also
consider the objectivity of the expert.

The auditor should seek reasonable assurance that the expert’s work
constitutes appropriate audit evidence in support of the financial
information. The auditor should consider whether the expert has used
source data which are appropriate in the circumstances. The
appropriateness and reasonableness of assumptions and methods used
and their application are the responsibility of the expert. The auditor
does not have the same expertise and, therefore, cannot always
challenge the expert’s assumptions and methods.

AAS 10: USING THE WORK OF ANOTHER AUDITOR

Corresponding ISA: ISA 600 "USING THE WORK OF ANOTHER

AUDITOR"

When the principal auditor uses the work of another auditor, the
principal auditor should determine how the work of the other auditor
will affect the audit. The auditor should consider the professional
competence of the other auditor in the context of specific assignment
if the other auditor is not a Chartered Accountant. The auditor should
inform the other auditor of matters such as areas requiring special
consideration, procedures for the identification of inter–component
transactions and significant accounting, auditing and reporting
requirements. The auditor should consider the significant findings of
the other auditor. There should be proper co–ordination and
communication between the two auditors. When the principal auditor
concludes that the work of the other auditor cannot be used and s/he
has not been able to perform sufficient additional procedures regarding
the financial information of the component audited by the other
auditor, s/he should express a qualified opinion or disclaimer of
opinion. The principal auditor would not be responsible in respect of
the work entrusted to the other auditors

AAS 11: REPRESENTATIONS BY MANAGEMENT

Corresponding ISA: ISA 580 "MANAGEMENT REPRESENTATIONS"

During the course of an audit, management makes many

representations to the auditor, either unsolicited or in response to
specific enquiries. Management representations both oral and written
constitute an important form of audit evidence.

Representations should be obtained from management in writing on

matters material to financial information, when other sufficient
appropriate audit evidence cannot reasonably be expected to exist.
Representations by management cannot be a substitute for other audit
evidence that the auditor could reasonably expect to be available.
Where the matter is principally one of intention, a representation by
management may be the only audit evidence which can reasonably be
expected to be available. If a representation by management is
contradicted by other evidence, the auditor should examine the
circumstances and, when necessary, reconsider the reliability of other
representations made by management.

AAS 12: RESPONSIBILITY OF JOINT AUDITORS

Where joint auditors are appointed, they should, by mutual discussion,

divide the audit work among themselves. The division of work would
usually be in terms of audit of identifiable units or specified areas. In
some cases, due to the nature of the business of the entity under
audit, such a division of work may not be possible. In such situations,
the division of work may be with reference to items of assets or
liabilities or income or expenditure or with reference to periods of
time. Where, in the course of his work, a joint auditor comes across
matters which are relevant to areas of responsibility of other joint
auditors and which deserve their attention, or which require disclosure
or discussion with, or application of judgement by, other joint auditors,
he should communicate the same to all other joint auditors in writing
prior to finalisation of audit. Certain areas of work, owing to their
importance or owing to the nature of the work involved, would often
not be divided and would have to be covered by all the joint auditors.
Each joint auditor is responsible only for the work allocated to them,
whether or not s/he has prepared a separate report on the work
performed by them. All the joint auditors are jointly and severally
responsible in respect of the audit work which is not divided amongst
them. For examining that the financial statements of the entity comply
with the disclosure requirements of the relevant statute, for ensuring
that the audit report complies with the requirements of the relevant
statute and in respect of matters which are brought to the notice of
the joint auditors by any one of them and on which there is an
agreement among the joint auditors.

AAS 13: AUDIT MATERIALITY

Corresponding ISA: ISA 320 "AUDIT MATERIALITY"

Information is material if its misstatement (i.e., omission or erroneous

statement) could influence the economic decisions of users taken on
the basis of the financial information. Materiality depends on the size
and nature of the item, judged in the particular circumstances of its
misstatement. The concept of materiality recognises that some
matters, either individually or in the aggregate, are relatively
important for true and fair presentation of financial information in
conformity with recognised accounting policies and practices. The
auditor considers materiality at both, the overall financial information
level and in relation to individual account balances and classes of
transactions. Materiality may also be influenced by other
considerations, such as legal and regulatory requirements, non–
compliance with which may have a significant bearing on financial
information, and considerations relating to individual account balances
and relationships. Materiality should be considered by the auditor
when determining the nature, timing and extent of audit procedures
and while evaluating the effect of misstatements. There is an inverse
relation between materiality and audit risk. The auditor takes this
relationship into account when determining the nature, timing and
extent of audit procedures. The auditor’s assessment of materiality
and audit risk may be different at the time of initially planning the
engagement from that at the time of evaluating the results of their
audit procedures.

AAS 14: ANALYTICAL PROCEDURES

Corresponding ISA: ISA 520 "ANALYTICAL PROCEDURES"

The auditor should apply analytical procedures at the planning and

overall review stages of the audit. Analytical procedures are the
analysis of significant ratios and trends including the resulting
investigation of fluctuations and relationships that are inconsistent
with other relevant information or which deviate from predicted
amounts. The auditor should apply analytical procedures at the
planning and overall review stages of the audit as well as while
applying substantive procedures. Analytical procedures in planning the
audit use both financial and non–financial information. The application
of analytical procedures is based on the expectation that relationships
among data exist and continue in the absence of known conditions to
the contrary. The presence of these relationships provides audit
evidence as to the completeness, accuracy and validity of the data
produced by the accounting system..

AAS 15: AUDIT SAMPLING

Corresponding ISA: ISA 530 "AUDIT SAMPLING AND OTHER

SELECTIVE TESTING PROCEDURES"

When using either statistical or non–statistical sampling methods, the

auditor should design and select an audit sample, perform audit
procedures thereon, and evaluate sample results so as to provide
sufficient appropriate audit evidence. When designing an audit sample,
the auditor should consider the specific audit objectives, the population
from which the auditor wishes to take sample, and the sample size. To
assist in the efficient and effective design of the sample, stratification
may be appropriate. Stratification is the process of dividing a
population into sub–populations. When determining the sample size,
the auditor should consider sampling risk, the tolerable error, and the
expected error. Tolerable error is the maximum error in the population
that the auditor would be willing to accept and still conclude that the
result from the sample has achieved the audit objective. If the auditor
expects error to be present in the population, a larger sample needs to
be examined to conclude that the actual error in the population is not
greater than the planned tolerable error. The auditor should select
sample items in such a way that the sample can be expected to be
representative of the population. This requires that all items in the
population have an opportunity of being selected. After having carried
out, on each sample item, those audit procedures that are appropriate
to the particular audit objective, the auditor should analyse any errors
detected in the sample, project the errors found in the sample to the
population and reassess the sampling risk.

AAS 16: GOING CONCERN

Corresponding ISA: ISA 570 "GOING CONCERN"

When planning and performing audit procedures and in evaluating the

results thereof, the auditor should consider the appropriateness of the
going concern assumption underlying the preparation of the financial
statements. An entity’s continuance as a going concern for foreseeable
future, generally a period not to exceed one year after the balance
sheet date, is assumed in preparation of financial statements in
absence of information to the contrary. Auditor should consider the
risk that going concern assumption may no longer be appropriate.
Indications of risk that continuance as a going concern may be
questionable could come from the financial statements, operational
activities or from other sources.

These may be financial indicators, operating indicators or other

indicators.

AAS 18: AUDIT OF ACCOUNTING ESTIMATES

Corresponding ISA: ISA 540 "AUDIT OF ACCOUNTING ESTIMATES"

The auditor should obtain sufficient appropriate audit evidence

regarding reasonableness of accounting estimates. Accounting
estimate means an approximation of the amount of an item in the
absence of a precise means of measurement. The determination of an
accounting estimate may be simple or complex, depending upon the
nature of the item. The auditor should adopt one or a combination of
the following approaches in the audit of an accounting estimate:

a. review and test the process used by management to

develop the estimate;

b. use an independent estimate for comparison with that

prepared by management; or

c. review subsequent events which confirm the estimate

made

AAS 19: SUBSEQUENT EVENTS

Corresponding ISA: ISA 560 "SUBSEQUENT EVENTS"

Subsequent events are significant events occurring between the
balance sheet date and the date of the auditor’s report.

The auditor should consider the effect of subsequent events on the

financial statements and on the auditor’s report.

The auditor should perform procedures designed to obtain sufficient

appropriate audit evidence that all events up to the date of the
auditor’s report that may require adjustment of, or disclosure in, the
financial statements have been identified. The procedures to identify
events that may require adjustment of, or disclosure in, the financial
statements would be performed as near as practicable to the date of
the auditor’s report.

AAS 21: CONSIDERATION OF LAWS AND REGULATIONS IN AN

AUDIT OF FINANCIAL STATEMENTS

Corresponding ISA: ISA 250 "CONSIDERATION OF LAWS AND

REGULATIONS IN AN AUDIT OF FINANCIAL STATEMENTS"

The auditor should recognise that non–compliance by the entity with

laws and regulations may materially affect the financial statements. It
is management’s responsibility to ensure that the entity’s operations
are conducted in accordance with laws and regulations. The auditor is
not responsible for preventing non–compliance. The auditor should
plan and perform the audit recognising that the audit may reveal
conditions or events that would lead to questioning whether an entity
is complying with laws and regulations. The risk of non detection of
material misstatements is higher with regard to material
misstatements resulting from non–compliance with laws and
regulations due to various factors. The auditor should obtain a general
understanding of the legal and regulatory framework applicable to the
entity and how the entity is complying with that framework. After
obtaining general understanding, the auditor should perform
procedures to identify instances of non–compliance with these laws
and regulations where non–compliance should be considered when
preparing financial statements.

AAS 22: INITIAL ENGAGEMENTS — OPENING BALANCES

Corresponding ISA: ISA 510 "INITIAL ENGAGEMENTS – OPENING

BALANCES"

For initial audit engagements, the auditor should obtain sufficient

appropriate audit evidence that the closing balances of the preceding
period have been correctly brought forward to the current period, the
opening balances do not contain misstatements that materially affect
the financial statements for the current period and appropriate
accounting policies are consistently applied. The auditor should
consider whether the accounting policies followed in the preceding
period, as per which the opening balances have been arrived at, were
appropriate and that those policies are consistently applied. Ordinarily,
the current auditor can place reliance on the closing balances
contained in the financial statements for the preceding period, except
when during the performance of audit procedures for the current
period the possibility of misstatements in the opening balances is
indicated. When the financial statements of the preceding period were
not audited, the auditor must adopt other procedures such as for
current assets and liabilities.

AAS 23: RELATED PARTIES

Corresponding ISA: ISA 550 "RELATED PARTIES"

The auditor should perform audit procedures designed to obtain

sufficient appropriate audit evidence regarding the identification and
disclosure by management of related parties and the related party
transactions that are material to the financial statements. Definitions
regarding related parties are given in Accounting Standard 18 and are
adopted for the purposes of this AAS. Management is responsible for
identification and disclosure of related parties and transactions with
such parties. This responsibility requires management to implement
adequate accounting and internal control systems to ensure that
transactions with related parties are appropriately identified in
accounting records and disclosed in financial statements. Auditor
needs to have a level of knowledge of the entity’s business and
industry that will enable identification of the events, transactions and
practices that may have a material effect on the financial statements.
The auditor should review information provided by the directors and
management identifying the names of all known related parties and
should perform other procedures in respect of completeness of this
information.

AAS 24: AUDIT CONSIDERATIONS RELATING TO ENTITIES

USING SERVICE ORGANISATIONS

Corresponding ISA: ISA 402 "AUDITING CONSIDERATION RELATING

TO ENTITIES USING SERVICE ORGANISATION"

The auditor should consider how a service organisation affects the

client’s accounting and internal control systems so as to plan the audit
and develop an effective audit approach. The policies and procedures
established and executed by service organisations are physically and
operationally separate from the client’s organisation. When the service
organisation executes the client’s transactions and maintains
accountability, the client may deem it necessary to rely on policies and
procedures of the service organisation. If the auditor of the client
concludes that the activities of the service organisation are significant
to the entity and relevant to the audit, the auditor should obtain
sufficient information to understand the accounting and internal
control systems of the service organisation and to assess control risk.
When using a service organisation auditor’s report, the auditor of the
client should consider the nature of and content of that report. The
report of the service organisations auditor will ordinarily be one of two
types: Type A — Report on Suitability of Design – giving an
understanding of the accounting and internal control systems installed
by the service organisation; Type B — Report on Suitability of Design
and Operating Effectiveness — giving an understanding of accounting
and internal control systems installed by service organisation and
effectiveness of such system.

AAS 25: COMPARATIVES

Corresponding ISA: ISA 710 "COMPARATIVES"

Existence of differences in financial reporting frameworks results in

comparative financial information being presented differently in each
framework. The frameworks and methods of presentation that are
referred to in this AAS are corresponding figures where amounts and
other disclosures for the preceding period are included as part of the
current period financial statements and Comparative Financial
Statements where amounts and other disclosures for the preceding
period are included for comparison with the financial statements of the
current period. The auditor should obtain sufficient appropriate audit
evidence that the corresponding figures meet the requirements of the
relevant financial reporting framework. This involves verifying whether
the accounting policies used for the corresponding figures are
consistent with those of the current period and whether corresponding
figures agree with the amounts and other disclosures presented in the
prior period.

AAS 26: TERMS OF AUDIT ENGAGEMENTS

Corresponding ISA: ISA 210 "TERMS OF AUDIT ENGAGEMENT"

The auditor and the client should agree on the terms of the
engagement. The agreed terms would need to be recorded in an audit
engagement letter or other suitable form of contract. This AAS is
intended to assist the auditor in the preparation of engagement letters
relating to audits and other related services. The form and content of
audit engagement letter may vary for each client, but it would
generally include reference to the objectives of the audit;
Management’s responsibility for the financial statements, selection and
application of appropriate accounting policies and accounting
standards. Making judgments and estimates, maintenance of adequate
accounting records and internal controls; scope of audit: fact that due
to inherent limitations of audit there is an unavoidable risk of non
detection of some material misstatements. Other matters as per the
circumstances should also be included.

AAS 27: COMMUNICATIONS OF AUDIT MATTERS WITH THOSE

CHARGED WITH GOVERNANCE

Corresponding ISA: ISA 260 "COMMUNICATIONS OF AUDIT MATTERS

WITH THOSE CHARGED WITH GOVERNANCE"
The auditor should communicate audit matters to those charged with
governance of an entity. Such matters may include: Overall scope of
the audit; the selection of or changes in, significant accounting
policies; the potential effect on the financial statements of any
significant risks and exposures, such as pending litigation;
adjustments to financial statements arising out of audit that have, or
could have, a significant effect on the entity’s financial statements;
material uncertainties related to events and conditions that may cast
significant doubt on the entity’s ability to continue as a going concern,
disagreements with management about matters that could be
significant to the entity’s financial statements or the auditor’s report;
expected modifications to the auditor’s report. The auditor should
communicate audit matters of governance interest on a timely basis.
The auditor’s communication may be made orally or in writing. In case
of oral communication, the auditor should document their oral
communications and the response thereof.

AAS 29: AUDITING IN A COMPUTER INFORMATION SYSTEMS

ENVIRONMENT

Corresponding ISA: ISA 401 "AUDITING IN A COMPUTER

INFORMATION SYSTEMS ENVIRONMENT"

The overall objective and scope of an audit does not change in a

Computer Information Systems (CIS) environment. However, the use
of a computer changes the processing, storage, retrieval and
communication of financial information and may affect the accounting
and internal control systems employed by the entity. The auditor
should consider the effect of a CIS environment on the audit. The
auditor should have sufficient knowledge of the computer information
systems to plan, direct, supervise, control and review the work
performed. If the use of such a professional is planned, the auditor
should apply procedures as per AAS 9. In planning the portions of the
audit which may be affected by the CIS environment, the auditor
should obtain an understanding of the significance and complexity of
the CIS activities and the availability of the data for use in the audit.
Auditor should obtain an understanding of the CIS environment and
whether it may influence the assessment of inherent risks and control
risks. The nature of risks and the internal controls have various
characteristics in CIS environments.

AAS 30: EXTERNAL CONFIRMATIONS

Corresponding ISA: ISA 505 "EXTERNAL CONFIRMATIONS"

External confirmation is the process of obtaining and evaluating audit

evidence through a direct communication from a third party in
response to a request for information about a particular item. Before
making use of external confirmations, the auditor should consider
materiality, the assessed level of inherent and control risk, and how
the evidence from other planned audit procedures will reduce audit
risk to an acceptably low level. The auditor should employ external
confirmation procedures in consultation with the management.
External confirmations are mostly sought for account balances and
their components but they are not to be restricted to these items only.
The use of confirmation procedures may be effective in providing
sufficient appropriate audit evidence when auditor determines the
higher level of assessed inherent and control risk. The request for
confirmations is to be made either at the date of financial statements
or at a date close to it. The requests are to be designed to the specific
audit objectives.

AAS 31: ENGAGEMENTS TO COMPILE FINANCIAL INFORMATION

Corresponding ISA: ISA 930 "ENGAGEMENTS TO COMPILE FINANCIAL

INFORMATION"

In such types of engagements, the accountant uses accounting

expertise as against auditing expertise to collect, classify and
summarise financial information. The accountant should comply with
the "Code of Ethics", issued by ICAI. However, where the accountant is
not independent, a statement to that effect should be made in the
accountant’s report. It should be ensured that there is a clear
understanding between the client and the accountant regarding the
terms of the engagement by means of an engagement letter or such
other suitable form of contract. Accountant should obtain an
acknowledgement from management of its responsibility for
appropriate preparation and presentation of financial statements or
other information and of its approval of such information to be
compiled. Accountant should also obtain an acknowledgement from
management of its responsibility for accuracy and completeness of
underlying accounting data and complete disclosure of all material and
relevant information.

AAS 32: ENGAGEMENTS TO PERFORM AGREED-UPON

PROCEDURES REGARDING FINANCIAL INFORMATION

Corresponding ISA: ISA 920 "ENGAGEMENTS TO PERFORM AGREED–

UPON PROCEDURES REGARDING FINANCIAL INFORMATION"

In an engagement to perform agreed–upon procedures, the auditor is

engaged by the client to issue a report of factual findings, based on
specified procedures performed on specified matters of a financial
statement. As the auditor simply provides a report of the factual
findings of agreed–upon procedures, no assurance is expressed by
them in the report. The report is restricted to those parties that have
agreed to the procedures to be performed since others, unaware of the
reasons for the procedures, may misinterpret the results. The auditor
should comply with the Code of Ethics, issued by ICAI. Where the
auditor is not independent, a statement to that effect should be made
in the report of factual findings. The terms of the engagement should
be well defined so as to avoid any misunderstandings.