Audit Brahmastra Notes Final CA Audit

Are you worried about your CA Final Audit Preparation for Nov’22?
You want a quick brush up of all the concepts in exam oriented style?
Then here, I am with solution to all your problems with my
CA FinAl Audit nov’22 BrAhmAstrA revision notes.
Just follow these notes along with my revision videos hosted on youtube
Channel- The Audit Academy and experience the difference in Marksheet!
God bless you.

Regards,
CA Pragnesh Kanabar
(Senior audit Faculty at CA-Final and CA-Inter level)

This Module Contains- SA 500 series

These notes have been made with a purpose to revise all exam oriented points in exam oriented style.
The objective of these notes is to ensure last day revision of all points which are most probable in exams.

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Brahmastra Revision SA 501- Audit Evidence- Specific Considerations for selected items. Final Ca Audit

SA 501 deals with auditor’s responsibility to obtain

Sufficient and Appropriate Audit Evidence (SAAE) for verifying

Existence and Condition of Completeness of Presentation and disclosure of

Inventory Litigation and Claims Segment information

Main procedure:- Attend the Main procedure:- Perform Main procedure:- Verify the presentation and
physical counting of inventory Procedures to identify litigation and disclosure as per Applicable Financial
being done by the management claims involving the entity Reporting Framework (AS 17 and IND AS 108)

Part I- Part I- Auditor should attend inventory count when inventory is material to the FS

Audit procedures to be performed Matters relevant in Planning attendance at physical

inventory counting WIN LATER
Evaluate TOI Confirm
E- Evaluating Management’s instructions and procedures for W- Work in progress (determining completion)
recording and controlling the results of the entity’s physical I- Internal control for maintenance of inventory
inventory counting N- Nature of Inventory
T- Test Counts (sample verification) L- Location at which inventory is held
O- Observation of management’s count procedures A- Adequate procedures established by the management?
I- Inspect the inventory (to test its condition) (arrangements made by them for inventory count)
C- Confirmation with third parties (or inspection or both along with T- Timing of the count
additional procedures based upon the materiality of inventory held E- Expert’s assistance required?
with third parties). R- Risk of Material Misstatement involved.

Various possibilities while conducting physical verification- on next page

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Brahmastra Revision Part I- SAAE for verifying Existence and Condition of Inventory (when inventory is material Final Ca Audit
to the FS)… Various possibilities

If physical inventory counting is If the auditor is unable to attend physical If attendance at physical inventory
conducted at a date other than the inventory counting due to unforeseen counting is impracticable
date of FS circumstances

For e.g: Location is near border areas and

For e.g: 31st March is not possible For e.g: Mgmt is ready but Audit team was not currently there are disturbances making it
and verification is scheduled as able to visit as on the planned date due to impossible to conduct inventory count
on 25th March some unexpected situation.

Procedures: some physical counts on an Procedures: Perform alternate audit

Procedures: Perform E-TOPIC + procedure (e.g. verify previous records, ledger
Reconciliation for changes alternative date + perform audit procedures on
intervening transactions (recon) + Obtain a WR scrutiny and conduct recon till the count date,
between count date and the read internal auditor or other auditor reports
date of FS (adjustments made, from mgmt that all standard procedures were
followed for counting and they have informed etc.). If it does not provide SAAE then modify
differences, if any) opinion as per SA 705
auditor about differences, if any

Part II-SAAE for verifying COMPLETENESS OF Litigation and Claims I M CREW

I- Inquiring the entity’s In-house legal Counsel about the litigation and claims involving the entity
M- Inquiring the Management about the litigation and claims involving the entity
C- Communication between entity and its external legal counsel should be verified
R- Reviewing legal expense accounts of the entity to identify litigation and claims
E- External confirmation from the entity’s external legal counsel Mgmt should be asked to allow external legal counsel to
communicate with the auditor. Two possibilities
A) If mgmt refuses then consider impact on opinion as per SA 705
B) If mgmt allows but lawyer does not respond then perform alternate audit procedures. IF SAAE still not available then consider
impact on opinion as per SA 705
W- Written representation from mgmt as per SA 580 regarding
a) Completeness (no omission) of litigation and claims involving the entity
b) Presentation and disclosure in FS about litigation and claims involving the entity as per AFRF
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Brahmastra Revision Part III-SAAE for verifying Presentation and Disclosure OF Segment Information- 2 Points Final Ca Audit

A) Obtaining an understanding of the methods used by mgmt in determining segment information whether such methods provide fair
presentation as per AFRF and test the application of such methods. For example:
(i) Sales, transfers and charges between segments, and elimination of inter-segment amounts
(ii) Comparisons with budgets and other expected results, for example, operating profits as a percentage of sales.
(iii) The allocation of assets and costs among segments.
(iv) Consistency with prior periods, and the adequacy of the disclosures with respect to inconsistencies.
B) Perfom analytical procedures (ratios and comparisons) as per SA 520

SA 505 External Confirmation

1. Confirmation
Request

Auditor Paper, electronic or other medium Third Party

2. Direct Written
Response
Types of Confirmation Request

Positive Confirmation Request: Negative Confirmation Request:

A request that the confirming party respond directly to the auditor A request that the confirming party respond directly to the
indicating whether the confirming party agrees or disagrees with the auditor only if the confirming party disagrees with the
information in the request, or providing the requested information. information provided in the request.
It provides less persuasive (convincing) evidence than
4 conditions (Code word: HERD): Positive confirmation request. Therefore it should be used
1) R- Risk of Material Misstatement is low less frequently and only if all of these conditions are
2) H- Large Homogenous population with lower amounts satisfied:
3) D- 3rd party will not disregard such request.
4) E- Low rate of Exception is expected.

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Brahmastra Revision SA 505 External Confirmation Final Ca Audit

Factors that may assist the auditor in determining whether external confirmation procedures are to be performed as
substantive audit procedures include

KAWO of Third Party.

A) The confirming party’s knowledge of the subject matter
B) The ability or willingness of the intended confirming party to respond. For example:
C) The objectivity of the intended confirming party if it’s a related party then the response could be biased

External Confirmation Procedure

Determining the Selecting the Sending the requests to the

Determining the Designing the confirming party, including follow-up
information to be appropriate confirming
information to be confirmation requests requests (additional request)
confirmed or requested party
confirmed or requested

Factors to be considered for designing a confirmation request:

Example:
Code: PM CALRA
A) Confirming account
P- Past experience of the auditor while dealing with third parties.
balances
M- Management’s authorization of the request (so that third parties reply faster)**
B) confirm terms of
C- Communication method
agreement
A- Assertions being addressed (i.e. the nature of matter required)
C) Confirm absence of
L- Layout and presentation method
certain conditions
R- Risk of material misstatement involved in the matter
A- Ability of third party to provide the requested information

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Brahmastra Revision SA 505 External Confirmation Final Ca Audit

**What if Management refuses to authorize a confirmation request?

Inquire whether there is a reasonable justification for such refusal?

Valid Reasons Invalid Reasons

Consider
Risk of fraud
Perform Alternate Audit procedure Discuss the matter with TCWG

IF SAAE still not available

IF TCWG also refuses to allow the auditor to
send the request
Then modify opinion as per SA 705

Results of External Confirmation Procedure… continued

Reliability of the response: Following Categories of results possible (summarising previous

 Factors that may create doubt over reliability of response: chart)
A) A response by the appropriate confirming party indicating
A) Was received by the auditor indirectly agreement with the information provided in the confirmation
B) Appeared not to come from the originally intended confirming request, or providing requested information without exception.

party. B) A response deemed unreliable.

 When the auditor concludes that a response is unreliable, the C) A non-response.

D) A response indicating an exception.
auditor may need to revise the assessment of RoMM.

If a confirming party uses a third party to coordinate and provide responses to confirmation requests, the auditor may perform procedures to
address the risks that: ATS
A) A respondent may not be authorised to respond
B) The integrity of the transmission may have been compromised.
C) The response may not be from the proper source

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Brahmastra Revision SA 510 Initial Audit Engagement- Verification of opening balances. Final Ca Audit

Initial Audit Engagement (IAE): An engagement in which either…

The financial statements for the prior period The financial statements for the prior period were audited by a
O
were not audited predecessor (previous) auditor
R

Opening balances

Account balances that exist at the beginning of matters requiring disclosure that existed at the beginning of the
+ period, such as contingencies and commitments of the
the period i.e. prior period closing balances
prior period
Objective of SA 510

To obtain sufficient and appropriate audit evidence (SAAE) about whether:

Accounting policies reflected in the opening balances are:
Opening balances contain misstatements that materially A) Appropriate as per AFRF
affect the current period’s financial statements B) Consistently applied
C) Changes, if any, are properly accounted, presented & disclosed as
per AFRF
Audit Procedures for verifying opening balances Read Forward Adjustment Policy

Read the most recent financial statements, if any and predecessor auditor’s report, if any
Whether prior period balances have been correctly brought forward

Any adjustment to opening balances disclosed as prior period items in the current year’s P&L

Verify whether accounting policies are Appropriate as per AFRF, Consistently applied and changes, if any have been properly accounted, presented
and disclosed

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Brahmastra Revision Final Ca Audit

Use of Predecessor Auditor’s report

While performing Risk Assessment Procedure While forming audit conclusions

If predecessor auditor has expressed modified opinion on prior period Modified opinion expressed by the predecessor auditor on prior
FS then it helps the auditor to understand RoMM in the current period FS
period FS

Matter has been resolved in CYFS Matter remains unresolved in CYFS

Matter remains relevant and material in CYFS

Modify opinion on CYFS

S.N Situation Conclusion

1 the auditor is unable to obtain sufficient appropriate audit evidence regarding the
opening balances
2 the auditor concludes that the opening balances contain a misstatement that
materially affects the current period’s financial statements, and the effect of the
misstatement is not properly accounted for or not adequately presented or disclosed
3 the current period’s accounting policies are not consistently applied in relation to
opening balances in accordance with the applicable financial reporting framework
4 a change in accounting policies is not properly accounted for or not adequately
presented or disclosed in accordance with the applicable financial reporting
framework

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Brahmastra Revision SA 520 Analytical Procedures Final Ca Audit
(Substantive analytical procedures)
Definition of Analytical Procedures

evaluations of financial information through

analysis of plausible relationships among both financial and non-financial data

AP also cover such investigations as is necessary of

Identified fluctuations or relationships that are

 inconsistent with other relevant information or
 differ from expected values by a significant amount.

Objective as per SA 520

To obtain relevant and reliable To design and perform analytical procedures near the end of the audit
audit evidence when using SAP
that assist the auditor when forming an overall conclusion

whether the FS are consistent with the auditor’s understanding of the entity.

Consideration Public Sector Entities.

The relationships between individual financial statement items traditionally considered in the audit of business entities may not always
be relevant in the audit of governments or other non-business public sector entities

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Brahmastra Revision Final Ca Audit

When designing and performing SAP, auditor shall consider following: SRED

Evaluate the reliability of data Develop an expectation of recorded Determine the amount of any
Determine the suitability difference of recorded
from which the auditor’s amounts or ratios and evaluate
of particular SAP for a amounts from expected
expectation of recorded whether the expectation is sufficiently
given assertion values that is acceptable
amounts or ratios is developed precise
without further investigation
( It is influenced by
It depends upon: It depends upon: materiality)
It depends upon:
A) influenced by the nature Accurate Degree Available
SNC2
of the assertion A) The accuracy with which the
A) Source of the information.
B) how effective it will be in expected results of SAP can be
B) Comparability of the
detecting a misstatement predicted.
information.
C) Different types of B) The degree to which information can
C) Nature and relevance of the
analytical procedures be disaggregated.
information.
provide different levels of C) The availability of the information,
D) Controls over the information
assurance both financial and non-financial.

Techniques to be used for analytical procedures

Trend Analysis Ratio Analysis Reasonableness Test Structural Modelling

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Brahmastra Revision Final Ca Audit

Investigating results of SAP

If analytical procedures performed in accordance with this SA identify fluctuations or relationships that are inconsistent with other relevant
information or that differ from expected values by a significant amount

the auditor shall investigate such differences by

Inquiring of management and obtaining appropriate audit evidence relevant to management’s responseseliability of data from which the auditor’s
expectation of recorded amounts or ratios is developed

IF management is unable to provide an explanation

Perform other audit procedures as considered necessary in the circumstances.

SA 530 Audit Sampling

Sampling Definition

to less than 100% of such that all sampling in order to provide the auditor with a reasonable
The application of
items within the units have a chance of basis on which to draw conclusions about the
audit procedures to
population selection entire population.

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Brahmastra Revision Sampling Risk Final Ca Audit

Audit Procedures Sampling Result Actual Scenario It impacts

Audit Efficiency/
Effectiveness
Test of Controls
Audit Efficiency/
Effectiveness
Audit Efficiency/
Effectiveness
Test of Details
Audit Efficiency/
Effectiveness
Sampling Risk As per Bare SA:
The risk that the auditor’s conclusion based on a sample may be different from the conclusion if the entire population were subjected to the
same audit procedure
Type 1 In the case of a test of controls, that controls are more effective than they actually are, or in the case of a test of details, that a
material misstatement does not exist when in fact it does
Type 2 In the case of a test of controls, that controls are less effective than they actually are, or in the case of a test of details, that a
material misstatement exists when in fact it does not.

Tolerance Level
Tolerable misstatement:
Tolerable rate of deviation:
A monetary amount set by the auditor in respect of which
A rate of deviation from prescribed internal control procedures set by the
the auditor seeks to obtain an appropriate level of
auditor in respect of which the auditor seeks to obtain an appropriate
assurance that the monetary amount set by the auditor is
level of assurance that the rate of deviation set by the auditor is not
not exceeded by the actual misstatement in the
exceeded by the actual rate of deviation in the population.
population

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Brahmastra Revision Final Ca Audit

Sampling Techniques

________ Selection _________ Selection ________Sampling _________ Selection _________ Selection

 population is divided  selection of a block(s) of

 Every unit in the  selects the sample
by the sample size to contiguous items from within
population has an without following a
give a sampling interval  type of value- the population
equal chance of structured technique
 For example, weighted selection  cannot ordinarily be used
selection.  should avoid any
1000/20 = 50  in which sample size, in audit sampling because
 applied through conscious bias or
 having determined a selection and evaluation most populations are
random number predictability
starting point within results in a conclusion in structured such that items in
generators, for  is not appropriate
the first 50, each 50th monetary amounts. a sequence can be expected
example, random when using statistical
sampling unit to have similar characteristics
number tables sampling
thereafter is selected to each other

Stratification Dividing population into Value-Weighted selection

discrete (separate) sub-population.  to identify the sampling unit as the
 Objective allow sample size to reduce individual monetary units that make up the
without increasing sampling risk. population
 Stratification by monetary value or a  Having selected specific monetary units
particular characteristic from within the population, for example, the
 results of audit procedures applied to a accounts receivable balance, the auditor
sample of items within a stratum can only be may then examine the particular items, for
projected to the items that make up that example, individual balances, that contain
stratum those monetary units.
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Brahmastra Revision Final Ca Audit

Principles to be considered for Sample Design, Size and Selection for testing

Sample Design Sample Size Selection for testing

Determine a sample size sufficient to select items for the sample in such a way that
reduce sampling risk to an acceptably each sampling unit in the population has a
low level. chance of selection.
A) Consider the purpose of
audit procedure and
select items for the sample in such a way that each sampling unit in the population has a chance of selection
Characteristics of the
population.
B) Define What constitutes a Factors influencing sample size for TOC Factors influencing Sample Size for TOD
deviation or a misstatement
C) Define what population  An increase in the extent to which the auditor’s  An increase in the auditor’s assessment of the risk of
needs to be used. risk assessment takes into account relevant material misstatement  Sample Size _________
D) Determine whether controls  Sample Size _________  An increase in the use of other substantive procedures
stratification or value-  An increase in the tolerable rate of deviation directed at the same assertion  Sample
weighted selection is Sample Size_____________ Size_____________
appropriate  An increase in the expected rate of deviation of  An increase in the auditor’s desired level of assurance
E) decision whether to use a the population to be tested Sample  Sample Size______________
statistical or non-statistical Size______________  An increase in tolerable misstatement  Sample Size
sampling approach is a  An increase in the auditor’s desired level of __________
matter for the auditor’s assurance Sample Size __________  An increase in the amount of expected misstatement
judgment  Increase in number of sampling units in the Sample Size __________________
population ________________________

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Brahmastra Revision Final Ca Audit

Sampling Result Classroom Working

Projecting Misstatements:
 The auditor is required to project misstatements for the population to obtain a broad view of the scale of misstatement but this projection
may not be sufficient to determine an amount to be recorded.
 When a misstatement has been established as an anomaly, it may be excluded when projecting misstatements to the population. However,
the effect of any such misstatement, if uncorrected, still needs to be considered in addition to the projection of the non-anomalous
misstatements.
 In the case of tests of details, the projected misstatement plus anomalous misstatement, if any, is the auditor’s best estimate of
misstatement in the population.
 For tests of controls, no explicit projection of deviations is necessary since the sample deviation rate is also the projected deviation rate for
the population as a whole.
 If the auditor concludes that audit sampling has not provided a reasonable basis for conclusions about the population that has been
tested, the auditor may Request mgmt to investigate misstatements that have been identified or modify the NTE of further audit procedures.

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Brahmastra Revision SA 540 Auditing Accounting Estimates, Including Fair Value Accounting Final Ca Audit
Estimates, and Related Disclosures
Nature of Accounting Estimates

Classification of estimates based upon degree of estimation uncertainty Classification based upon type of estimate

Low estimation Uncertainty examples where accounting examples where fair value
High Estimation Uncertainty: accounting estimates may be
 Accounting estimates arising in estimates, other than fair
 Accounting estimates relating required include:
entities that engage in business value accounting estimates,
to the outcome of litigation  Complex financial
activities that are not complex may be required include:
Fair value accounting instruments, which are not
relate to routine transactions.  Allowance for doubtful
estimates for derivative financial traded in an active and open
 derived from data that is readily accounts
instruments not publicly traded. market.
available, such as published interest  Inventory obsolescence
Fair value accounting  Share-based payments.
rate data or exchange-traded prices  Warranty obligations
estimates for which a highly  Property or equipment held
of securities.  Depreciation method or
specialised entity-developed for disposal.
where the method of asset useful life
model is used or for which there  Certain assets or liabilities
measurement prescribed by the  Outcome of long term
are assumptions or inputs that acquired in a business
applicable financial reporting contracts.
cannot be observed in the combination, including
framework is simple and applied  Financial Obligations /
marketplace goodwill and intangible assets.
easily Costs arising from litigation
settlements and judgments.  Transactions involving the
exchange of assets or liabilities
between independent parties
Factors that can influence estimation uncertainty:
without monetary
A) Extent of dependence on Judgment
consideration
B) Availability of reliable data from external sources
C) Extent to which estimate is based on ‘observable’ and ‘unobservable’ inputs.
D) Sensitivity associated with assumptions?

Objective of SA 540

to obtain sufficient appropriate audit evidence whether in the context of the AFRF:
A) Reasonableness of estimates
B) adequacy of the related disclosures

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Brahmastra Revision Estimates with Indicators of management bias Final Ca Audit

A) Use of an entity’s own assumptions for fair value accounting estimates when they are inconsistent with observable marketplace
assumptions.
B) Selection or construction of significant assumptions that yield a point estimate favourable for management objectives.
C) Selection of a point estimate that may indicate a pattern of optimism or pessimism.
D) Abrupt changes in accounting estimates based upon subjective assessment of changes in circumstances.

Risk Assessment Procedure.

Obtain an understanding of the following in order to provide a basis for identification and assessment of RoMM for accounting estimates

How management identifies those TEC How management makes the Other Points:
Requirements of
transactions, events and conditions that may accounting estimates, and an  Review the outcome of
AFRF relevant to
give rise to the need for accounting estimates understanding of the data on accounting estimates of the
accounting
to be recognised or disclosed in the FS. which they are based, prior period.
estimates including
(Circumstances  new/ revised estimates) including:  Evaluate the degree of
related disclosures
estimation uncertainty (High
uncertainty High RoMM)
Whether mgmt will be Circumstances MECCA EFFECT
AFRF helps us to able to identify such TEC is new/ revised A) Method or model Matters that auditor may consider in
understand: based upon: estimates: used. understanding how mgmt. has
A) certain Knowledge of BSF A) New types of B) Expert used? assessed the estimation uncertainty?
conditions for A) Mgmt’s knowledge of transaction. C) Controls over A) Whether and how management has
recognition, entity’s BUSINESS and B) Change in terms of information used for considered alternative assumptions
B) methods for industry. transactions accounting estimates. or outcomes?
measurement, B) Mgmt’s knowledge of C) Changes in AFRF D) Change from Prior B) How management determines the
C) Required/ implementation of business D) Regulatory Period? accounting estimate when analysis
permitted STRATEGIES in the current changes. E) Assumptions indicates a number of outcome
disclosures period. E) Changes in business taken? scenarios
C) Mgmt’s cumulative environment outside F) Effect of C) Whether management monitors the
experience in preparing the control of the estimation outcome of accounting estimates
entity’s FS for prior period. mgmt. uncertainty? made in the prior period

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Brahmastra Revision Further Audit Procedure Responses to the Assessed RoMM Final Ca Audit

A) Whether mgmt has appropriately applied the requirements of AFRF

B) Whether disclosures in the FS related to accounting estimates as per AFRF
C) Methods rationale? As per AFRF? Appropriate? consistently applied? changes are reasonable and accounted?
D) Test of Model validated? Theoretically sound? Mathematical integrity? Consistency? Market Practices? Periodically reviewed? Changes, if
any, approved? Documentation of the model?
E) Audit of Recognition and measurement criteria:
(i) Whether mgmt.’s decision to recognise or not to recognise estimates in FS  appropriate?
(ii) measurement methods, assumptions as per AFRF, appropriate and reasonable?
F) Whether Subsequent Events considered for recognizing/revising estimate
G) Auditor’s point Estimate vs Mgmt’s point estimate take into account all variables and evaluate significant difference
(this is required when estimate is highly uncertain or mgmt.’s process is not effective or auditor has obtained some contradictory information
or alternate reliable and relevant data is available)
H) Whether there is a need to use the work of an Expert (Why? highly uncertain estimate or auditor is not familiar with the nature of
business or complex calculations/mathematical models required or RoMM is high)
I) Audit of estimation uncertainty:
(i) How mgmt. has considered alternative assumptions and outcomes
(ii) reasonable?
(iii) mgmt.’s intent to carry out the specific course of action
(iv) whether auditor needs to develop a range to evaluate the effect of uncertainty?
J) Whether indicators of management bias?
K) Test the operating effectiveness of controls over accounting estimates
L) Written Representations from mgmt. significant assumptions are reasonable? In case of estimates with high RoMM obtain WR about
Method of Measurement, Ability and Intent to carry a course of action, Disclosures as per AFRF
The assumptions on which accounting estimates are based may reflect what management expects will be the outcome of specific objectives
and strategies. Audit of Reasonableness of assumptions?
Assumptions should be consistent with:
A) Economic environment, B) Plans of the entity, C) Industry practice, D) Prior Period, E) Past Experience
The reasonableness of the assumptions used may depend on management’s intent and ability to carry out certain courses of action. How to
verify whether mgmt has the intent and ability?
A) Review of mgmt.’s history, B) written plans and other documentation, C) Inquiry of mgmt. D) Review subsequent events E) Current
economic scenario.

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Brahmastra Revision SA 550 Related Party Final Ca Audit

Definition

As defined in the applicable financial reporting framework (AFRF) AS 18/ IND AS 24

If AFRF is silent

Then following relationships will be considered as Related Parties

A) A person or other entity that has control (C) or significant influence (SI), directly or indirectly through one or more intermediaries, over
the reporting entity (entity being audited)

C OR SI C OR SI
X Y Z

C OR SI
X A Person or other entity
Y Intermediary
Z Reporting entity (entity being audited)
In the above diagram X, Y and Z are related Parties
For definition of Control/Significant influence Refer AS-18 (inter-ca), IND AS 24 (final ca)

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Brahmastra Revision SA 550 Related Party Final Ca Audit

B) Another entity over which the reporting entity has control or significant influence, directly or indirectly through one or more
intermediaries

C OR SI C OR SI
Z P Q

C OR SI
Q A Person or other entity
P Intermediary
Z Reporting entity (entity being audited)
In the above diagram Z, P and Q are related Parties
For definition of Control/Significant influence Refer AS-18 (inter-ca), IND AS 24 (final ca)

C) Another entity that is under common control with the reporting entity through having:
Z R
i. Common controlling ownership;
ii. Owners who are close family members or
iii. Common key management.

R A Person or other entity

Z Reporting entity (entity being audited)
Z and R being commonly controlled in any of the above mentioned ways.

Exception: Government controlled entities However, entities that are under common control by a state (i.e., a national,
regional or local government) are not considered related unless they engage in significant transactions or share resources to a
significant extent with one another

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Brahmastra Revision RPR Related Party Relationships, RPT Related Party Transactions Final Ca Audit

Risk Assessment Procedure

Understanding the entity’s RPR and RPT:
Conduct Inquiry of the management regarding
i) RPR Identity of entity’s related parties, changes from prior period, nature of entity’s related party relationship
ii) RPT type and purpose of transactions
Evaluating internal controls over entity’s RPR and RPT:
i) How entity IAD Identifies, Accounts for and Discloses RPR and RPT in FS
ii) Who authorizes and approves significant arrangements with related parties
iii) Who authorizes and approves significant transactions with related parties including transactions outside the normal course of
business.
Discussion with engagement team. Matters that may be addressed in the discussion among the engagement team include
1) The nature and extent of the entity’s relationships and transactions with related parties.
2) Importance of maintaining professional skepticism throughout the audit.
3) circumstances or conditions of the entity that may indicate the existence of RPR and RPT.
4) The records or documents that may indicate the existence of RPR and RPT
5) how related parties may be involved in fraud

In the context of related parties, the potential effects of inherent limitations on the auditor’s ability to detect material
misstatements are greater for such reasons as the following:

i) Management may be unaware of the existence of all related party relationships and transactions, particularly if the AFRF does not
establish related party requirements.
Ii) Related party relationships may present a greater opportunity for collusion (secret understanding), concealment or manipulation by
management.

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Brahmastra Revision Risk Assessment Procedures continued….. Final Ca Audit

RPR and RPT can lead to High RoMM than other transactions. Explain with Examples COMPLEX ABNORMAL SYSTEM
i) Related parties may operate through an extensive and COMPLEX range of relationships and structures, with a corresponding
increase in the complexity of related party transactions.
ii) RPT may not be conducted under normal market terms (ABNORMAL) and conditions; for example, some related party
transactions may be conducted with no exchange of consideration.
iii) Information SYSTEMS may be ineffective at identifying or summarising transactions and outstanding balances between an entity
and its related parties.

Indicators of dominant influence exerted by a related party include:

1) The related party has vetoed significant business decisions taken by mgmt.
2) Significant transactions are referred to the related party for final approval
3) There is little or no debate among mgmt and TCWG regarding business proposals by such related party
4) Transactions involving the related party are rarely independently reviewed and approved.

Examples of transactions outside the entity’s normal course of business may include:

1) Complex equity transactions, such as corporate restructurings or acquisitions

2) Transactions with offshore entities in jurisdictions with weak corporate laws
3) Sales transactions with unusually large discounts or returns
4) Transactions with circular arrangements, for example, sales with a commitment to repurchase.
5) Transactions under contracts whose terms are changed before expiry.

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Brahmastra Revision Further Audit Procedure (responding to the assessed RoMM) Final Ca Audit
5 Points IDENTIFY NAAW

1) IDENTIFICATION of previously unidentified or undisclosed Related Parties or Significant Related Party Transactions
Examples of records/documents which can show the existence of RPR and RPT
I4S2
A) I Income tax returns
B) I Internal auditors’ reports.
C) I Records of the entity’s investments
D) I Information supplied by the entity to regulatory authorities
E) S Significant contracts and agreements not in the entity’s ordinary course of business.
F) S Shareholder registers etc..

On Identifying RPR and RPT not identified earlier, auditor shall:

1) Communicate to audit team
2) Request mgmt to identify all RPR and RPT related to the newly identified relationships
3) Evaluate the possibility of intentional misstatement.

2) Procedures for Significant transactions outside the NORMAL course of business: CAA
A) Inspect the supporting CONTRACTS Rationale (logic) behind such transaction?, whether terms of the contract is as per
mgmt.’s explanation?
B) Whether such transactions have been IAD Identified, ACCOUNTED and disclosed in FS as per AFRF
C) Who APPROVED such transactions appropriate?

3) Whether RPT have been done at ARMS Length Price (fair value): OPEN UAE
A) Comparing the terms of the transaction to known market terms for broadly similar transactions on an open market.
B) Comparing the terms of the related party transaction to those of an identical or similar transaction with one or more unrelated
parties
C) Evaluating the reasonableness of any significant assumptions on which the assertion is based
D) Engaging an external expert to determine a market value and to confirm market terms and conditions for the transaction.

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Brahmastra Revision Final Ca Audit
4) Evaluation of the Accounting for and Disclosure of Identified Related Party Relationships and Transactions Obtain
Sufficient and Appropriate Audit Evidence (SAAE) whether it has been done as per AFRF
5) Written Representations obtain WR from mgmt and TCWG that they have
A) Disclosed to the auditor the identity of entity’s related parties
B) Appropriately accounted for and disclosed in FS as per AFRF

Examples of significant related party matters to be communicated with TCWG

1) Non-disclosure by management to the auditor of RPR & RPT

2) The identification of significant RPT not appropriately authorised and approved
3) Disagreement with management about the accounting for and disclosure of significant RPT in accordance with the AFRF.
4) Non-compliance with applicable law or regulations.
5) Difficulties in identifying the party that ultimately controls the entity.

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Brahmastra Revision SA 560 Subsequent Events Final Ca Audit

Definition of Subsequent Events

Events occurring between the date of the financial facts that become known to the auditor after the date of the auditor’s report.
statements and the date of the auditor’s report

Objectives of Auditor

Obtain SAAE about whether events occurring

Respond appropriately to facts that become known to the auditor after the date
between the date of the financial statements and
of the auditor’s report, that, had they been known to the auditor at that date,
the date of the auditor’s report
may have caused the auditor to amend the auditor’s report..

that require adjustment of, or disclosure in, the FS

are appropriately reflected in those financial FS as
per AFRF

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Brahmastra Revision SA 560 Subsequent Events Final Ca Audit

Part I Events Occurring Between the Date of the Financial Statements and the Date of the Auditor’s Report

Audit Procedures: INQUIRE about WUMI

A) Understanding of procedures established by mgmt to identify subsequent events.
B) Inquiry of mgmt. and where appropriate, TCWG whether any subsequent events have occurred which might affect the FS.
C) Minutes Reading minutes, if any, of meetings of TCWG and mgmt. held after the date of FS.
D)Interim FS Reading the entity’s latest subsequent interim FS.
E) WR Written representation all events occurring subsequent to the date of the financial statements and for which the AFRF
requires adjustment or disclosure have been adjusted or disclosed in the FS.

Examples of inquiry of mgmt. that can be conducted to identify subsequent events:

A) Whether new commitments, borrowings or guarantees have been entered into.
B) Whether sales or acquisitions of assets have occurred or are planned
C) Whether there have been any developments regarding contingencies
D) Whether any unusual accounting adjustments have been made or are planned.
E) Whether any events have occurred that are relevant to the measurement of estimates or provisions made in the FS.
F) Whether any events have occurred that are relevant to the recoverability of assets

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Brahmastra Revision SA 560 Subsequent Events Final Ca Audit

Part II Facts Which Become Known to the Auditor After the Date of the Auditor’s Report but Before the Date the Financial
Statements are Issued

the auditor has no obligation to perform any audit procedures regarding such FS

However, if a fact becomes known to the auditor that, had it been known to the auditor at the date of the auditor’s report, may have caused the
auditor to amend the auditor’s report, the auditor shall

A) Discuss the matter with management and, where appropriate, TCWG.

B) Determine whether the financial statements need amendment and, if so,
C) Inquire how management intends to address the matter in the financial statements

Law/AFRF requires Law/AFRF requires management to amend the FS but does Law/AFRF does not require mgmt. to amend the FS
management to not restrict to amend only to the extent of effect of for the subsequent events
amend the FS only to subsequent events
the extent of the effect
the auditor need not provide an amended or new
of subsequent events
Auditor is permitted to restrict procedures only on the auditor’s report
A) Extend the audit subsequent events to that amendment.
procedures to the date A) Amend the auditor’s report to include an additional date However, if auditor believes that amendment is
of new auditor’s report. restricted to that amendment (Dual dating) required and mgmt. does not amend FS then
And OR
B) Provide a new B) Provide a new or amended auditor’s report that includes
auditor’s report on the a statement in EOM or OM PARA stating that auditor’s If auditor’s report
If auditor’s report given to
amended FS. procedures on subsequent events are restricted solely to not yet given to
the entity then inform
the amendment of the FS the entity then
mgmt. not to issue such
modify opinion as
report to third party
per SA 705

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Brahmastra Revision Final Ca Audit

Part III Facts Which Become Known to the Auditor After Financial Statements have been issued

Law/AFRF requires mgmt. to Law/AFRF requires management to amend the FS but does not restrict to Law/AFRF does not require
amend the FS only to the amend only to the extent of effect of subsequent events mgmt. to amend the FS for the
extent of the effect of
subsequent events
subsequent events
Auditor is permitted to restrict procedures only on the subsequent events
to that amendment. Report to the appropriate
A) Extend the audit A) Amend the auditor’s report to include an additional date restricted to statutory body
procedures to the date of that amendment (Dual dating)
new auditor’s report. OR
And B) Provide a new or amended auditor’s report that includes a statement in
B) Provide a new auditor’s EOM or OM PARA stating that auditor’s procedures on subsequent events
report on the amended FS. are restricted solely to the amendment of the FS

Review the steps taken by management to ensure that anyone in receipt of the previously issued financial statements together with the auditor’s
report thereon is informed of the situation.
 If management does not take necessary steps even after discussion with mgmt. and TCWG then the auditor shall take appropriate action to
seek to prevent reliance on the auditor’s report. (depends upon auditor’s legal rights and obligations seek legal advice)

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Brahmastra Revision SA 570 Going Concern Final Ca Audit
Objectives of Auditor

To obtain SAAE and conclude on the appropriateness To conclude whether a material uncertainty exists related To report in
of mgmt.’s use of going concern basis of accounting to events or conditions that may cast significant doubt on accordance with this
in the preparation of FS the entity’s ability to continue as going concern. SA.

Risk Assessment Procedure

consider whether events or conditions exist that may cast significant doubt on the entity’s ability to continue as a going concern

determine whether management has already performed a preliminary assessment of the entity’s ability to continue as a going concern

On analysing such assessment, inquire whether mgmt has identified If such an assessment has not been performed then
events or conditions that can cast significant doubt over entity’s ability Inquiring on what basis mgmt. is applying going concern accounting?
to continue as going concern.
Indicators of Material Uncertainty

Financial Indicator Operating Indicator Other Indicator

A) Management intentions to A) Non-compliance with capital or
A) Net liability/ current liability position, B) Fixed-term borrowings other statutory or regulatory
liquidate the entity or to cease
approaching maturity without realistic prospects of renewal; or requirements, such as solvency or
operations. B) Loss of key
excessive reliance on short-term borrowings to finance long-term liquidity requirements for financial
management without
assets, C) Indications of withdrawal of financial support, D) institutions. B) Pending legal or
replacement. C) Loss of a
Negative operating cash flows indicated by historical or regulatory proceedings against the
major market, key customer(s),
prospective FS, E) Adverse key financial ratios, F) Substantial entity that may, if successful, result in
franchise, license, or principal
operating losses or significant deterioration in the value cash flow claims that the entity is unlikely to be
supplier(s) D) Labor difficulties.
generating assets, G) Arrears or discontinuance of dividends, H) able to satisfy. C) Changes in law or
E) Shortages of important
Inability to pay creditors on due dates, I) Inability to comply with regulation or government policy
supplies. F) Emergence of a
the terms of loan agreements, J) Change from credit to cash-on- expected to adversely affect the entity.
highly successful competitor.
delivery transactions, K) Inability to obtain financing for essential D) Uninsured or underinsured
new product etc. catastrophes when they occur.
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Brahmastra Revision SA 570 Going Concern Final Ca Audit
Further Audit Procedures

The auditor shall evaluate management’s assessment of the entity’s ability to continue as a going concern.

Following matters should be considered:

Complete Period Beyond Future Forecasts Facts to be Written
A) Period Covered: cover the same period as that used by management to make its assessment as required by AFRF (not less than 12 months from
the balance sheet date)
B) Completeness: Whether it includes all relevant information known to the auditor
C) Period beyond management’s assessment: whether there are events or conditions beyond the period of management’s assessment that can
create material uncertainty over going concern.
D) Management’s plans for future action: Whether the outcome of these plans can improve the situation
E) Evaluation of Cash flow Forecast: Evaluating the reliability of the supporting data and whether assumptions are reasonable
F) Additional facts post assessment: whether there is any need to re-assess entity’s ability to continue as going concern.
G) Written Representation: Requesting WR from mgmt. and where appropriate, TCWG regarding their plans for future actions and feasibility of
these plans.

Additional Audit Procedures When Events or Conditions Are Identified casting significant doubt on entity’s ability to continue as going concern.

A) Analyzing and discussing cash flow, profit and other relevant forecasts with management
B) Analyzing and discussing the entity’s latest available interim financial statements.
C) Reading the terms of debentures and loan agreements and determining whether any have been breached.
D) Determining the adequacy of support for any planned disposals of assets. Etc.

Conclusions discussed along with SA 700 series discussions.

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Brahmastra Revision SA 580 Written Representation Final Ca Audit

Definition

A written statement by management provided to the auditor to confirm certain matters or to support other audit evidence.
Basic Points

Reliability of Written Representation Form of Written Representation Content of Written Representation

A) Fulfillment of its responsibility:
A) representation letter addressed i) It has fulfilled its responsibility for preparation and
A) Although WR is a necessary evidence
to the auditor. presentation of FS as per AFRF as agreed in the terms of
but it is not considered as a SAAE.
B) date as near as practicable engagement.
B) WR is considered as a supporting
to, but not after, the date of the ii) It has provided the auditor with all relevant
evidence.
auditor’s report on the FS. information and access as agreed in the terms of the
C) The fact that mgmt is going to
C) period The written audit engagement.
provide WR should not stop auditor
representations shall be for all iii) All transactions have been recorded and are
from performing his planned audit
financial FS referred to in the reflected in the financial statements
procedures to verify whether mgmt has
auditor’s report. B) For matters as required by other SAs.
fulfilled its responsibilities.
C) Any other matter as required by the auditor.

The auditor shall request written representations from management with appropriate responsibilities for the financial statements and
knowledge of the matters concerned. Elaborate

A) Written representations are requested from those responsible for the preparation and presentation of the financial statements.
B) Individuals may vary depending on the governance structure of the entity, and relevant law or regulation; however, management (rather
than TCWG) is often the responsible party.
C) In some cases, however, management may decide to make inquiries of others who participate in preparing and presenting the financial
statements and assertions therein, including individuals who have specialized knowledge relating to the matters about which written
representations are requested. (actuary, engineer, lawyer etc.)
D) Auditor may request that management include in the written representations, confirmation that it has made such inquiries as it
considered appropriate

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Brahmastra Revision Important points… Final Ca Audit

1) In some cases, it may be appropriate for the auditor to obtain a written representation about a specific assertion in the financial statements
during the course of the audit. Where this is the case, it may be necessary to request an updated written representation.

2) The auditor and management may agree to a form of written representation that updates written representations relating to the prior
periods by addressing whether there are any changes to such written representations and, if so, what they are.

3) Situations may arise where current management were not present during all periods referred to in the auditor’s report. This fact, however,
does not diminish such persons’ responsibilities for the financial statements as a whole. The requirement for the auditor to request from them
written representations that cover the whole of the relevant period(s) still applies.

4) In some cases, management may include in the written representations qualifying language to the effect that representations are made to the
best of its knowledge and belief. It is reasonable for the auditor to accept such wording if the auditor is satisfied that the representations are
being made by those with appropriate responsibilities and knowledge of the matters included in the representations

Explain the circumstances where the auditor may also ask management to reconfirm its acknowledgement and understanding of management’s
responsibilities as agreed in letter of engagement.

 Those who signed the terms of the audit engagement on behalf of the entity no longer have the relevant responsibilities
The terms of the audit engagement were prepared in a previous year
 There is any indication that management misunderstands those responsibilities;
 Changes in circumstances make it appropriate to do so.

If law or regulation requires management to make written public statements about its responsibilities, and the auditor determines that such
statements provide some or all of the representations required by SA 580, the relevant matters covered by such statements need not be included in
the representation letter.
The expression of management’s responsibilities in law or regulation is also not a substitute for the requested written representations

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Brahmastra Revision Auditor has requested management to provide written representations Final Ca Audit

Management provides the requested WRs Management refuses to provide the requested WRs

IF auditor develops doubt over the reliability of WRs

Then auditor shall ____________

Then auditor shall_______________

IF WRs are still not provided to the auditor

If auditor concludes that WRs _______________

Then auditor shall _________________

Then auditor shall ____________________

In the above situations, auditor should

A) Re-assess the Reliability, integrity and ethical values of the management
B) Consider possibility of fraud in the FS
C) Determine the effect on other evidences obtained till date from the management

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Audit Brahmastra Notes SA 500 Audit Evidence Final CA Audit

Sufficient and Appropriate Audit Evidence (SAAE)

Appropriateness means quality of the information.

Sufficiency means quantity of the information. Quality means relevance (logical connection) and reliability
(complete and accurate).

 Audit evidence is cumulative in nature.

 Auditor needs to obtain at-least persuasive audit evidence.
Type of Evidence Evidence can be obtained from

Based upon Source of Based upon Accounting Records:

Information:  BOA Other Information Supporting
nature of
A) Internal Evidence: Originates  Ledger Accounting Records:
Information:
from the entity being audited  Invoices  Minutes of Meeting
A) Written
B) External evidence: Originates  Bank Statements  Confirmation from third party
B) Oral
from sources outside the entity. etc.  MOA/AOA
C) Visual

When information to be used as audit evidence has been prepared using the work of a management’s expert, the auditor
shall:

 Evaluate the competence, capabilities and objectivity of that expert;

 Obtain an understanding of the work of that expert
 Evaluate the appropriateness of that expert’s work as audit evidence for the relevant assertion
Auditor’s judgment as to sufficiency may be affected by the factors such as

 Materiality (SA 320 CONCEPT)

 RoMM (SA 315 CONCEPT)
 Size and characteristics of the population ( SA 530 Concept)

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