CA Final Audit Conceptual Notes

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INTRODUCTION
Traditionally, Chartered Accountants focused on attesting to past events. However, with

societal changes, there's a growing demand for their involvement in future-related
exercises. This is evident in the need for projected cash flow and profitability statements,
termed Prospective Financial Statements, crucial for loan and equity assessments by banks,
financial institutions, and investors. Chartered accountants' involvement adds credibility to
these forward-looking financial projections.
STANDARDS ON ASSURANCE ENGAGEMENTS
These standards govern assurance engagements beyond historical financial information,

encompassing examinations of prospective financial data or providing assurance on non-
financial aspects like internal control design and operation. They prescribe the
responsibilities of professional accountants in such engagements, offering a moderate level
of assurance.
Following Standards on Assurance Engagements have been issued: -
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SAE 3400 -
The Examination of Prospective
Financial Information
SAE 3402 -
Standards on Assurance
Assurance Reports on Controls at
Engagement
a Service Organisation
SAE 3420 -
Assurance Engagements to Report
on the Compilation of Pro Forma
Financial Information Included in a
Prospectus
SAE 3400 THE EXAMINATION OF PROSPECTIVE FINANCIAL INFORMATION
SAE 3400 guides engagements for examining and reporting on prospective financial
information, covering procedures for best-estimate and hypothetical assumptions. Notably,
this examination isn't exclusive to the statutory auditor of an entity's financial statements.
Prospective Financial Information: Prospective financial information is based on

assumptions about future events and potential entity actions. It involves significant
judgment in its preparation and can take the form of a forecast, a projection, or a
combination thereof, such as a 1-year forecast along with a 5-year projection.
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Forecast: A forecast is a type of Prospective Financial Information based on assumptions
about future events and the expected actions management plans to take. Best-estimate
assumptions are used, reflecting anticipated experiences without provisions for the risk of
adverse deviation.
Projection: A projection is a form of Prospective Financial Information that relies on

hypothetical assumptions about future events and management actions. These assumptions
may not necessarily be expected to occur, making projections suitable for entities in start-up
phases or contemplating significant changes in operations. Projections can also be a
combination of best-estimate and hypothetical assumptions.
Scope of SAE-3400
SAE-3400 establishes standards and guidance for engagements examining and reporting on
prospective financial information, covering procedures for best-estimate and hypothetical
assumptions. This standard doesn't apply to examining prospective financial information
expressed in general or narrative terms, such as in management's discussion and analysis.
While the term "auditor" is used, it doesn't mandate the statutory auditor of financial
statements to perform these services. Other Standards on Auditing principles should be
applied where practicable.
Nature of Assurance Regarding Prospective Financial Information
Assurance on prospective financial information is limited because it pertains to events and

actions that have not occurred and may not occur. While evidence may support
assumptions, it is speculative and future-oriented. As a result, expressing an opinion on
whether the depicted results will be achieved is not possible.
Responsibility of Preparation and Presentation of Prospective Financial Information
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Management holds the responsibility for preparing and presenting prospective financial
information, including identification, disclosure, explaining the forecast basis, and
underlying assumptions. While professional accountants can be associated with prospective
financial information, they must avoid vouching for the accuracy of forecasts.
Association of Professional Accountants with Prospective Financial Information: Chartered

accountants can be associated with prospective financial statements, but they should
refrain from implying vouching for forecast accuracy. They can participate in preparation or
review, indicating information sources and assumptions in reports. This applies to profit or
financial forecasts and projections based on hypothetical assumptions.
Duties of Member who is Examining the Prospective Financial Information
In examining prospective financial information, the auditor must obtain sufficient

appropriate evidence to ensure:
(a) Management's best-estimate assumptions are reasonable, and hypothetical assumptions

align with the information's purpose.
(b) The information is properly prepared based on the assumptions.
(c) Proper presentation and adequate disclosure of material assumptions, indicating

whether they are best-estimate or hypothetical.
(d) Consistent preparation with historical financial statements using appropriate accounting
principles. Other Standards on Auditing principles should be applied to the extent
practicable.
Acceptance of Engagement: Precautions to be taken by Auditor Before Accepting such an

Engagement
 Purpose: Understand the intended use.

 Distribution: Assess if it's for general or limited use.
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 Assumptions: Differentiate between best estimates and hypothetical assumptions.
 Elements: Define the elements included and ensure alignment with accounting principles.
 Period: Identify and assess the feasibility of the forecast period.
Examination Procedures
When determining examination procedures for prospective financial information,

consider:
(a) Past knowledge from previous engagements
(b) Management's competence in preparing the information
(c) Likelihood of material misstatement
(d) Influence of management's judgment on the information
(e) Source reliability, adequacy, and third-party data in supporting assumptions
(f) Stability of the entity's business
(g) Engagement team's experience with the entity and industry in reporting on such
information.
Assess evidence sources for management's assumptions (e.g., budgets, industry

publications). For hypothetical assumptions, consider implications (e.g., capacity growth
requiring investment) and ensure consistency and realism with the information's purpose.
Presentation and Disclosure
When assessing presentation and disclosure of prospective financial information, ensure:
(a) Clarity and non-misleading presentation
(b) Clear disclosure of accounting policies in notes
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(c) Adequate disclosure of assumptions, distinguishing best-estimates from hypothetical
ones, especially in uncertain areas
(d) Disclosure of the preparation date, with confirmation of appropriateness of assumptions

as of that date
(e) Transparent indication of the basis for establishing ranges, avoiding biased selection
(f) Disclosure of any changes in accounting policy, including reasons and effects, if different
from historical statements.
Report on Examination of Prospective Financial Information
Report on prospective financial information examination should include:
(i) Title
(ii) Addressee
(iii) Identification of the information
(iv) Reference to applicable auditing standards
(v) Acknowledgment of management's responsibility
(vi) Mention of purpose/restricted distribution if relevant
(vii) Confirmation of examination procedures, including testing evidence
(viii) Negative assurance on assumptions' reasonability
(ix) Opinion on proper preparation and presentation
(x) Appropriate caveats on result achievability
(xi) Date of report (completion date of procedures)
(xii) Place of signature
(xiii) Signature.
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Documentation
Document evidence supporting the prospective financial information examination report,

outlining adherence to SAE standards, procedures performed, findings, and compliance
throughout the process.
SAE 3402 ASSURANCE REPORTS ON CONTROLS AT A SERVICE ORGANISATION
SAE 3402 pertains to assurance engagements by public accountants, offering reports on

controls at a service organization. These reports are used by user entities and auditors to
assess the impact on internal control related to financial reporting. SAE 3402 aligns with SA
402, providing evidence for its requirements.
Scope of SAE 3402
SAE 3402 applies when a service organization asserts control design suitability. It does not
cover:
(a) Reporting solely on control operation.
(b) Reporting solely on controls unrelated to services impacting user entities' internal
control for financial reporting (e.g., production or quality control).
What is a Service Organisation?
A service organization is a third-party entity or segment providing services to user entities,

likely affecting the user entities' internal control concerning financial reporting. A user entity
is an entity utilizing services from a service organization.
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User Auditor and Service Auditor
User Auditor: Audits and reports on financial statements of a user entity.
Service Auditor: Professional accountant in public practice. Provides assurance report on

controls at a service organization, as requested by the service organization.
Objectives of Service Auditor in Accordance with SAE 3402
The service auditor's objectives under SAE 3402 are as follows:
(a) Obtain reasonable assurance regarding the service organization's system:
 Ensure the system description is fair and accurate.

 Verify that controls related to stated objectives were suitably designed.
 Assess the effective operation of controls (if within the engagement scope).
(b) Report findings on the above objectives in accordance with SAE 3402.
Type 1 Report & Type 2 Report
Type 1 report Type 2 report

System Description System Description
Assertion (at a specified date): Fair Assertion (throughout a specified period):
presentation of the system and controls' Fair presentation, suitable design, and
suitable design. effective operation of controls.
Focus: Design of controls at a specific date. Focus: Design and operating effectiveness of
controls over a specified period.
Service Auditor's Report: Reasonable Service Auditor's Report: Reasonable
assurance on design. assurance on design and operating
effectiveness.
Type 1 report is a report on the description and design of controls at a service organization
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whereas type 2 report is a report on the description, design and operating effectiveness of
controls at a service organization.
How such an Engagement is Proceeded with?
1) Ethical Compliance: Ensure adherence to ethical requirements, including independence.

2) Communication with Management: Interact with the service organization's
management or governance. Determine suitable individuals for communication.
3) Engagement Acceptance: Assess competence for the engagement. Ensure criteria
suitability and engagement scope usefulness.
4) Criteria Suitability Assessment: Evaluate if service organization used suitable criteria.
5) Materiality Consideration: Consider materiality for fair presentation and control
effectiveness.
6) Understanding of System: Obtain understanding of the service organization's system.
7) Evidence for Description: Obtain and evaluate the fairness of the service organization's
system description.
8) Evidence for Control Design: Determine necessary controls and assess their design.
9) Evidence for Operating Effectiveness: For Type 2 reports, test and assess operating
effectiveness of necessary controls.
10) Internal Audit Function Understanding: Understand the nature and relevance of the
internal audit function.
11) Written Representations: Request written representations reaffirming assertions,
providing relevant information, and disclosing non-compliance or deficiencies.
12) Subsequent Events Inquiry: Inquire about events post-description period affecting the
assurance report.
Reporting
The service auditor’s assurance report shall include the following basic elements: -
Title and Addressee:
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Title: Clear indication of an independent service auditor’s assurance report.
Addressee: Clearly specify the intended recipient.
Identification:
 Service organization’s system description and assertion.

 Parts not covered by the auditor’s opinion.
 Statement on complementary user entity controls and subservice organization activities.
Criteria and Responsibility:
 Identify criteria and party specifying control objectives.

 Clarify the report's intended audience.
 Highlight service organization's responsibilities.
Service Auditor's Responsibility:
 Express service auditor's responsibility and procedures.

 Confirm compliance with SAE 3402.
Summary of Procedures and Opinion:
 Summarize procedures for reasonable assurance.

 State the opinion, positive form, based on suitable criteria.
Limitations and Date:
 Declare limitations and risks associated with projecting to future periods.

 Include the date of the assurance report.
Signature and Place:
 Signature by the practitioner.

 Specify the location of the signature (city).
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Additional matters requiring reporting in type 2 report: In a Type 2 report, the service
auditor's assurance report includes:
1. Test of Controls Section:
 Describes tests of controls performed and results.

 Clearly states which controls were tested.
 Specifies whether the items tested represent all or a selection in the population.
 Details the nature of tests for user auditors' risk assessments.
2. Deviation Reporting:
 Reports deviations, regardless of achieving control objectives.

 Includes extent of testing leading to deviations and the number/nature of deviations
noted.
3. Modified Opinions:
If the service auditor concludes that:
 The description doesn't fairly present the system.

 Controls related to control objectives were not suitably designed.
 In a Type 2 report, tested controls did not operate effectively.
 Unable to obtain sufficient appropriate evidence.
The opinion is modified, and the report clearly explains all reasons for the modification.
Documentation
The service auditor must document:
(i) Procedures in line with SAE and legal requirements.
(ii) Results of procedures and obtained evidence.
(iii) Significant matters, conclusions, and professional judgments made during the
engagement.
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SAE 3420 ASSURANCE ENGAGEMENTS TO REPORT ON THE COMPILATION OF PRO FORMA
FINANCIAL INFORMATION INCLUDED IN A PROSPECTUS
SAE 3420 addresses practitioner engagements providing reasonable assurance on the

responsible party's compilation of pro forma financial information in a prospectus. It applies
when mandated by securities regulations or accepted as standard practice in the issuing
jurisdiction.
What is Pro forma financial information?
Pro forma financial information is adjusted financial data presented alongside unadjusted
figures to demonstrate the impact of a specific event or transaction as if it occurred at an
earlier date. Typically used in offer documents, such as a prospectus, it includes a Statement
of Profit and Loss and Balance Sheet. The purpose is illustrative, showing the effects on
assets, liabilities, and earnings.
Pro forma adjustments, assumptions, and transaction details are outlined in notes.
Importantly, pro forma financials do not reflect the actual financial position, performance,
or cash flows of the entity.
Objectives in Accordance with SA 3420
SA 3420 objectives:
1. Obtain reasonable assurance on the responsible party's compilation of pro forma financial
information.
2. Report based on the practitioner's findings.
Compilation of Pro forma financial information
Compilation of pro forma financial information involves the responsible party:
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 Identifying and extracting unadjusted financial information from the source.
 Making pro forma adjustments to illustrate the impact of a significant event or
transaction.
 Presenting the resulting pro forma financial information with relevant disclosures.
Nature of the Practitioner’s Responsibility
Under SAE 3420, the practitioner's role is to report on whether the pro forma financial
information has been compiled by the responsible party in line with applicable criteria. The
practitioner is not involved in compiling the information; their responsibility is limited to
assessing the adequacy of the criteria used by the responsible party.
Steps involved in such an Engagement
Engagement
acceptance
Planning and
performing the
engagement
Written
Representations
Forming the
opinion
Preparing the
assurance report
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Engagement Acceptance
Before accepting an engagement to report on pro forma financial information in a

prospectus, the practitioner must consider the following:
(a) Ensure capabilities and competence for the engagement.
(b) Confirm suitability of applicable criteria and assess potential misleading aspects.
(c) Evaluate the opinion's wording per relevant law or regulation.
(d) Assess the use of modified opinions in audited or reviewed sources, considering legal
permissions.
(e) Determine if understanding of the entity's financial practices is possible.
(f) Assess understanding of the acquiree's financial practices in case of an acquisition.
(g) Obtain the responsible party's agreement, ensuring disclosure of criteria, proper
compilation, and providing necessary information and access for the engagement.
Planning and Performing the Engagement
When planning and performing the engagement for reporting on pro forma financial
information:
 Assess the suitability of applicable criteria as per the Framework for Assurance
Engagements.
 Consider materiality in evaluating whether pro forma financial information is compiled
accurately.
 Gain an understanding of how the responsible party compiled the pro forma financial
information.
 Obtain evidence on the appropriateness of the source of unadjusted financial
information.
 If no audit or review report exists for the source, perform procedures to ensure its
appropriateness.
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 Verify whether the responsible party appropriately extracted unadjusted financial
information.
 Obtain evidence on the appropriateness of pro forma adjustments, considering their
nature and consistency.
 Evaluate the presentation of pro forma financial information.
 Read other information in the prospectus to identify material inconsistencies, if any, with
pro forma financial information.
Written Representations
The practitioner must obtain written representations from the responsible party
confirming that:
(a) All necessary pro forma adjustments to illustrate the impact of the event or transaction
have been identified.
(b) The pro forma financial information has been compiled, in all material respects, based
on the applicable criteria.
Opinion
Unmodified Opinion: Given when the practitioner concludes that the pro forma financial
information is compiled, in all material respects, by the responsible party based on the
applicable criteria.
Modified Opinion:
(a) If relevant law or regulation prohibits a prospectus with a modified opinion, the
practitioner discusses the matter with the responsible party.
(b) If the law allows a modified opinion, and the practitioner deems it appropriate, the
practitioner follows Framework for Assurance Engagements requirements on modified
opinions.
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Emphasis of Matter Paragraph:
 Used when a matter in the pro forma financial information or explanatory notes is
deemed crucial for user understanding.
 The paragraph is included only if the practitioner has evidence that the matter doesn't
affect whether the pro forma financial information is compiled, in all material respects,
based on the applicable criteria.
Preparing the Assurance Report
The practitioner’s report shall include the following basic elements: -
1. Title: Indicates an independent assurance report.
2. Addressee(s): Agreed in the engagement terms.
3. Introductory Paragraphs:
(i) Identifies pro forma financial information.
(ii) Specifies the source of unadjusted financial information and any audit/review reports.
(iii) Highlights the period or date of the pro forma financial information.
(iv) References the applicable criteria and its source.
4. Responsibilities:
(d) States responsible party's role in compiling pro forma financial information.
(e) Describes practitioner's responsibilities, emphasizing limitations and purpose of pro

forma information.
(f) States compliance with SAE 3420, outlining ethical requirements and procedures.
(g) Outlines procedures, criteria assessment, and overall evaluation in a concise manner.
5. Opinion:
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(h) Provides a condensed equivalent phrase expressing a reasonable assurance opinion.
6. Practitioner's Signature, Date, and Place.
This summary captures the key elements of the assurance report per SAE 3420, maintaining
clarity and brevity.
Documentation
Documentation in SAE 3420 assurance engagements is essential, ensuring the practitioner

maintains thorough records of procedures, evidence, and professional judgments made
during the engagement.
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AUDIT QUALITY
High audit quality is essential for building trust among users of financial information, such as
industry, government, and the public. It involves rigorous audit processes and quality control
procedures that adhere to laws, regulations, and professional standards. Standards like SQC 1
and SA-220 address quality control at the firm and individual audit engagement levels.
Additional standards, codes of ethics, and provisions in the Companies Act, 2013 support
quality control. Mechanisms for reviewing quality control include the Peer Review Board,
Quality Review Board, and NFRA (National Financial Reporting Authority).
SQC 1 - QUALITY CONTROL FOR FIRMS THAT PERFORM AUDITS AND REVIEWS OF HISTORICAL
FINANCIAL INFORMATION, AND OTHER ASSURANCE AND RELATED SERVICES ENGAGEMENTS
SQC 1 mandates that audit firms establish a quality control system to ensure compliance with
professional standards, legal requirements, and the appropriateness of their reports. It applies
to all types of audit firms, regardless of their organizational structure.
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ELEMENTS OF SYSTEM OF QUALITY CONTROL
The elements of a system of quality control for audit firms, as outlined in your description, are
as follows:
(a) Leadership responsibilities for quality within the firm: This involves setting a tone at the
top of the organization that emphasizes the importance of quality in all aspects of the firm's
work.
(b) Ethical requirements: Ensuring compliance with ethical standards and professional codes of
conduct, which are critical for maintaining independence, integrity, and objectivity.
(c) Acceptance and continuance of client relationships and specific engagements: Properly
assessing and deciding to take on new clients and engagements, as well as continuously
evaluating existing ones to ensure they align with the firm's capabilities and values.
(d) Human resources: Recruiting, training, and developing a competent and qualified
workforce, including audit professionals.
(e) Engagement performance: Ensuring that audit engagements are conducted in accordance
with applicable standards and regulatory requirements.
(f) Monitoring: Conducting regular internal and external quality reviews to assess the
effectiveness of the quality control system and make improvements where necessary.
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These elements collectively contribute to the firm's ability to deliver high-quality audit and
assurance services while maintaining ethical standards and compliance with regulations.
Leadership
responsibilities
for quality
within firm
Monitoring Ethical
requirements
Elements of
system of
quality control
Acceptance &
Engagement contnuance of
performance client
relationships
and specific
engagement
Human
resources
LEADERSHIP RESPONSIBILITIES FOR QUALITY WITHIN THE FIRM
The leadership of an audit firm plays a crucial role in ensuring high-quality work. The firm's CEO
or managing partners are responsible for maintaining a culture of quality. This means they must
prioritize quality over financial considerations. The firm's policies should also reflect this
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commitment to quality in areas like performance evaluation, compensation, and promotion of
staff. Adequate resources must be allocated to developing, documenting, and supporting these
quality control policies and procedures. In essence, quality in audits is non-negotiable and must
always come first.
ETHICAL REQUIREMENTS
The audit firm must establish policies and procedures to ensure that both the firm and its
employees adhere to ethical requirements outlined in the Code of Ethics issued by ICAI. These
ethical requirements include principles like integrity, objectivity, professional competence,
confidentiality, and professional behavior.
To uphold these principles:
Firm leadership must set an example.
The firm should raise awareness and provide training on ethics.
There should be a monitoring process in place.
A mechanism for handling non-compliance must exist.
Independence is a fundamental requirement. The firm's policies and procedures should

ensure that everyone, including experts and network firm personnel, maintains
independence as required by the Code. This involves:
(a) Clearly communicating independence requirements to the firm's personnel.
(b) Identifying and addressing circumstances that could threaten independence through
safeguards or, if necessary, withdrawing from the engagement.
There should be a mechanism for engagement partners to report potential threats to

independence promptly. All breaches of independence should be reported for appropriate
action. Annually, the firm should obtain written confirmation of compliance with its
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independence policies from all relevant personnel. This process aims to ensure that
independence requirements are met.
HUMAN RESOURCES
The firm must establish policies and procedures to ensure it has the right personnel with the
necessary skills, competence, and commitment to ethics to perform engagements in
compliance with professional standards and legal requirements. These policies should cover
aspects such as recruitment, compensation, training, career development, and performance
evaluation, with a strong focus on the ongoing professional development of the firm's
personnel.
The firm must appoint an engagement partner for each engagement and establish policies
and procedures to ensure:
(a) The client's management and governance are aware of the engagement partner's identity
and role.
(b) The engagement partner possesses the necessary capabilities, competence, authority, and
time to fulfill their role.
(c) The engagement partner's responsibilities are clearly defined and communicated.
Engagement teams should be adequately skilled and competent, and the firm should groom
and assess its partners and team members to ensure their commitment to quality in their work.
ENGAGEMENT PERFORMANCE
Maintaining consistent quality in engagement performance involves:
1. Clearly communicating engagement objectives.
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2. Ensuring compliance with engagement standards.
3. Providing supervision and training to engagement teams.
4. Implementing methods to review the quality of work.
5. Properly documenting the work performed.
MONITORING
Monitoring within the firm is crucial to ensure that quality control policies and procedures are
relevant, effective, and consistently followed. It involves ongoing evaluation and includes
periodic inspections of completed engagements to verify compliance and effectiveness in
practice. Quality control of engagements has to be monitored taking into account following
factors:
 Ensuring that policies and procedures are relevant, adequate, and effectively operational.
 Periodically inspecting completed engagements to assess quality control.
 Evaluating the design and implementation of the quality control system.
 Updating quality control policies to align with new professional standards, laws, and
regulations.
 Appointing experienced individuals to oversee the monitoring process.
 Addressing complaints and allegations related to non-compliance.
 Implementing remedial actions against personnel not adhering to quality control policies.
 Taking corrective action when deficiencies or non-compliance issues are identified in the
firm's quality control system.
SA-220 - QUALITY CONTROL FOR AN AUDIT OF FINANCIAL STATEMENTS:
SA-220, "Quality Control for an Audit of Financial Statements," operates within the framework
of the firm's quality control system established by SQC 1. Under this standard, engagement
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teams are responsible for implementing quality control procedures specific to the audit
engagement. They must provide the firm with necessary information related to independence.
The objective of SA-220 is to ensure that the audit:
(a) Complies with professional standards, regulatory, and legal requirements.
(b) Results in an appropriate auditor's report.
This standard is structured similarly to SQC 1 and outlines the responsibilities of the
engagement partner regarding leadership, ethical requirements, client relationships,
engagement teams, performance, and monitoring in the context of a specific audit
engagement.
DOCUMENTATION
For an audit engagement, the engagement partner must document:
 Significant engagement issues.

 Conclusions on engagement quality control.
 Sign-off on the audit engagement.
The engagement quality control reviewer must document:
 Ethical compliance issues and resolutions.

 Conclusions on independence.
 Decisions regarding client relationships and engagements.
 Consultations during the audit.
 Confirmation of compliance with engagement quality control review procedures.
 Completion of the engagement quality control review.
No unresolved matters affecting the appropriateness of significant judgments and conclusions

by the engagement team.
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MECHANISMS FOR REVIEW OF QUALITY CONTROL
PEER REVIEW BOARD
The Peer Review Board, established by the Council of ICAI, aims to ensure that members of ICAI
comply with technical, professional, and ethical standards, as well as regulatory requirements
when performing assurance assignments. It involves reviewing the systems and procedures of
Practice Units to ensure they meet the standards for assuring the quality of services. After a
Practice Unit undergoes a peer review, it receives a "peer review certificate" in case of an
unqualified report from the Peer Reviewer. If a qualified report is issued, the Practice Unit is
informed of the reasons and the due date for a follow-on review, if necessary. The objective is
to enhance the quality of professional work and produce more reliable and useful audit reports.
QUALITY REVIEW BOARD
The Quality Review Board (QRB), established by the Central government and the Council of
ICAI, has several functions:
 Making recommendations to the Council regarding the quality of services provided by ICAI
members.
 Reviewing the quality of services offered by ICAI members, including audit services.
 Providing guidance to ICAI members to enhance service quality and adherence to statutory
and regulatory requirements.
To assess audit quality, statutory auditors of companies are selected for audit quality review
using a risk-based approach. These reviews are conducted by technical reviewers hired by the
QRB on an engagement basis from various regions of the country. The primary aim is to
improve the quality of audit services provided by ICAI members.
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NATIONAL FINANCIAL REPORTING AUTHORITY (NFRA)
The National Financial Reporting Authority (NFRA) was established as per the Companies Act,
2013. Its responsibilities include:
 Monitoring and enforcing compliance with accounting and auditing standards.

 Overseeing the quality of services provided by professionals involved in ensuring compliance
with these standards and suggesting improvements.
NFRA has the authority to monitor and enforce compliance with standards and oversee the
quality of services for auditors of certain classes of companies, including listed companies,
insurance companies, and banking companies. In contrast, the Quality Review Board (QRB) is
responsible for reviewing the quality of audit services provided by members of the Institute
only for entities not covered by NFRA's purview or those referred to QRB by NFRA under
relevant rules.
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SA 240 “THE AUDITOR’S RESPONSIBILITIES RELATING TO FRAUD IN AN AUDIT OF FINANCIAL
STATEMENTS”
SA 240 deals with the auditor’s responsibilities relating to fraud in an audit of financial
statements.
THE OBJECTIVES OF THE AUDITOR IN ACCORDANCE WITH SA 240 ARE: -
(a) Identify and Assess Risks: The auditor's first objective is to identify and assess the risks of
material misstatement in the financial statements due to fraud. This means understanding
where and how fraud might impact the financial statements.
(b) Obtain Audit Evidence: The second objective is to obtain sufficient and appropriate audit
evidence related to the assessed risks of material misstatement due to fraud. This involves
designing and implementing audit procedures specifically to detect and address fraud-related
misstatements.
(c) Respond to Fraud: Lastly, the auditor must respond appropriately to identified or suspected
fraud. This includes taking action when fraud is discovered or suspected, such as reporting it to
authorities or taking necessary legal steps.
In summary, SA 240 guides auditors in addressing the risk of fraud in financial statements
during an audit by identifying, gathering evidence on, and responding to potential fraud.
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MEANING OF FRAUD
Fraud is an intentional act involving deception by individuals within or outside an organization

(e.g., management, employees, or third parties) to gain an unjust or illegal advantage. It
distinguishes from errors by its deliberate, intentional nature.
TWO KEY TYPES OF INTENTIONAL MISSTATEMENTS AUDITORS ADDRESS:
Misstatements from Fraudulent Financial Reporting:
This type involves deceitful actions in preparing and presenting financial statements. It may
include manipulation of figures, fictitious transactions, or misrepresentation of financial data.
Misstatements from Misappropriation of Assets:
This pertains to fraudulent acts involving theft, embezzlement, or misuse of an organization's

assets. It can lead to distortions in the financial records.
In summary, auditors are primarily concerned with material fraud that can distort financial
statements, focusing on both fraudulent financial reporting and misappropriation of assets as
potential sources of intentional misstatements.
Fraud
Misstatements resulting from Misstatements resulting from

fraudulent financial reporting misappropriation of assets
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HOW FRAUDULENT FINANCIAL REPORTING MAY BE CAUSED BY ENTITIES?
1. Earnings Management and Deception:
 Small Actions Escalating: Fraudulent financial reporting often starts with minor
manipulations or inappropriate adjustments by management, gradually increasing in scale.
 Pressure and Incentives: External pressures or internal incentives, such as meeting market
expectations or maximizing compensation, can drive management to manipulate financial
statements.
 Material Misstatements: Management may take deliberate positions leading to significant
misstatements in financial statements, aiming to deceive users about the entity’s performance
and profitability.
2. Motivations Behind Fraudulent Financial Reporting:
 Market Expectations: Management might inflate earnings to meet market expectations,

enhancing the entity’s perceived performance.
 Compensation Goals: Maximizing compensation tied to performance metrics can lead to
fraudulent reporting.
 Tax Optimization: Some entities reduce earnings intentionally to minimize tax liabilities,
exploiting financial reporting for tax benefits.
 Securing Financing: Inflating earnings may be a tactic to secure favorable terms for bank
financing.
FRAUDULENT FINANCIAL REPORTING MAY BE ACCOMPLISHED BY THE FOLLOWING: -
 Manipulation of Records: Involves altering accounting records or supporting documents

used to prepare financial statements, employing techniques like forgery.
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 Misrepresentation and Omission: Deliberate misrepresentation or intentional omission of
events, transactions, or crucial information in financial statements to mislead users.
 Misapplication of Accounting Principles: Intentional misapplication of accounting
principles, affecting amounts, classifications, presentation, or disclosure, leading to deceptive
financial reporting.
In essence, fraudulent financial reporting often starts subtly but can escalate due to pressures
and incentives. Management may manipulate records, misrepresent information, or misuse
accounting principles to deceive users about the entity's financial position and performance.
HOW MISAPPROPRIATION OF ASSETS MAY BE ACCOMPLISHED BY ENTITIES?
Misappropriation of assets is asset theft, typically in small amounts, often carried out by
employees. Management can also be involved, using their position to hide misappropriations
more effectively. Detection is challenging due to the subtlety and diversity of these actions.
MISAPPROPRIATION OF ASSETS CAN BE ACCOMPLISHED IN A VARIETY OF WAYS INCLUDING: -
 Embezzling Receipts:
This involves diverting funds, like collections on accounts receivable, into personal bank
accounts. It may include siphoning off money from written-off accounts.
 Stealing Assets or Intellectual Property:

Theft can encompass physical assets (e.g., stealing inventory for personal use or resale) or
intellectual property. Collusion with competitors to disclose technological data for payment is
also a form.
 Fraudulent Payments:
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This includes tactics like payments for goods and services not received, such as payments to
fictitious vendors or kickbacks to purchasing agents for inflating prices. Payments to fictitious
employees also fall in this category.
 Misuse of Entity's Assets:

Misappropriation may involve using the entity's assets for personal purposes, like using them as
collateral for personal loans or loans to related parties.
RESPONSIBILITIES OF THE AUDITOR
 Auditors are responsible for obtaining reasonable assurance that financial statements are
free from material misstatement due to fraud or error.
 Inherent limitations in an audit mean some material misstatements may go undetected,

with fraud being particularly challenging to uncover.
 Fraud often involves sophisticated schemes to conceal it, making detection harder.
Collusion among individuals can further complicate the audit process.
 The auditor's ability to detect fraud depends on factors like the perpetrator's skill,
manipulation extent, collusion level, and the size of manipulated amounts.
 Identifying opportunities for fraud is possible, but distinguishing between fraud and error in
judgment areas like accounting estimates is difficult.
 The risk of not detecting material misstatements due to management fraud is higher, as
they can manipulate records, present fraudulent information, or override control procedures.
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Professional skepticism, consideration of management control override, and recognition of
differences in detecting fraud and error are vital in maintaining audit integrity.
WHAT ARE FRAUD RISK FACTORS?
 Incentives or Pressure: These are circumstances that push individuals to consider fraud, like
the need to meet third-party expectations for additional equity financing.
 Incentives: They involve enticing rewards or motivations, such as substantial bonuses tied
to achieving unrealistic profit targets, which can encourage fraud.
 Opportunities: Conditions that make it easier to commit fraud, like an ineffective control
environment within an organization.
In summary, fraud risk factors encompass incentives, pressures, and opportunities that may
lead individuals to engage in fraudulent activities.
MAINTAINING PROFESSIONAL SKEPTICISM
 The auditor is required to maintain professional skepticism throughout the audit, even if they
have a positive history with the entity's management and governance.
 By default, the auditor may accept records and documents as genuine unless there's a reason
to suspect otherwise.
 If the auditor encounters conditions that raise doubts about the authenticity of a document
or undisclosed modifications to its terms, further investigation is necessary.
 In cases of inconsistent responses from management or governance, the auditor must
thoroughly investigate these inconsistencies.
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In essence, professional skepticism means the auditor remains cautious, inquisitive, and ready
to investigate any potential red flags or inconsistencies, even when trust in the entity's integrity
exists.
EVALUATION OF AUDIT EVIDENCE
 The auditor must assess whether analytical procedures reveal any previously unrecognized
risks of material misstatement due to fraud when forming an overall conclusion on the financial
statements' consistency with the entity and its environment.
 If the auditor identifies a misstatement, they must determine whether it might indicate
fraud. In such cases, they should assess the implications of the misstatement for other aspects
of the audit, such as the reliability of management representations, recognizing that fraud
instances are often not isolated.
 When the auditor identifies a misstatement, whether material or not, and suspects it may be
due to fraud involving management, they must re-evaluate the risks of material misstatement
due to fraud and adjust audit procedures accordingly. This includes considering potential
collusion among employees, management, or third parties.
 If the auditor confirms or cannot conclude whether the financial statements are materially
misstated due to fraud, they should assess the impact on the audit.
In summary, the auditor's evaluation of audit evidence involves a thorough assessment of

potential fraud-related misstatements, their implications, and adjustments to audit procedures
when fraud involvement is suspected, while also considering possible collusion.
MANAGEMENT REPRESENTATIONS
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The auditor must obtain written representations from both management and, when applicable,
those charged with governance. These representations should acknowledge various
responsibilities and disclosures:
a. Acknowledge management's responsibility for designing, implementing, and maintaining

internal controls to prevent and detect fraud.
b. Confirm that management has shared the results of its assessment regarding the risk of
material misstatements in the financial statements due to fraud.
c. Management should disclose to the auditor any knowledge of fraud or suspected fraud
involving individuals with significant roles in internal control or others that could materially
affect the financial statements.
d. Inform the auditor of any allegations of fraud or suspected fraud related to the entity's
financial statements, which may have been communicated by employees, former employees,
analysts, regulators, or others.
These representations are essential for the auditor to assess the risk of fraud and conduct a
thorough audit, ensuring transparency and accountability in the process.
SA 250 “CONSIDERATION OF LAWS AND REGULATIONS IN AN AUDIT OF FINANCIAL

STATEMENTS”
SA 250 outlines the auditor's responsibility to assess the impact of laws and regulations on
financial statements during an audit. It focuses on identifying material misstatements in
financial statements resulting from non-compliance. The standard does not apply to assurance
engagements solely focused on testing compliance with specific laws or regulations.
EFFECT OF LAWS AND REGULATIONS ON FINANCIAL STATEMENTS OF AN ENTITY
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Laws and regulations effecting financial statements vary; some directly influence reported
amounts and disclosures, while others pertain to management compliance and business
conduct. Entities in heavily regulated sectors like banks face direct effect, while others, like
occupational safety laws, relate to operations. Non-compliance can lead to fines or legal
consequences, potentially effecting financial statements materially.
OBJECTIVES OF AUDITOR IN ACCORDANCE WITH SA 250
The objectives of the auditor according to SA 250 are as follows:
(a) Gather enough suitable audit evidence about compliance with laws and regulations that
directly impact the financial statement figures and disclosures.
(b) Carry out specific audit procedures to find instances of non-compliance with other laws and
regulations that could significantly affect the financial statements.
(c) Take appropriate action if non-compliance or suspected non-compliance with laws and
regulations is discovered during the audit.
SA 260 “COMMUNICATION WITH THOSE CHARGED WITH GOVERNANCE”
A 260 outlines the auditor's duty to communicate effectively with individuals or groups
responsible for governance within an organization during a financial statement audit. This
standard ensures clear and transparent communication, fostering understanding and
cooperation between auditors and the governing body, enhancing the overall audit process.
WHO ARE “THOSE CHARGED WITH GOVERNANCE”?
"Those charged with governance" refers to individuals or groups responsible for overseeing an
organization's strategic direction and accountability, including financial reporting. They can be
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executive board members, owners, or any individuals overseeing the entity's operations.
Governance structures vary, so the specific people with whom the auditor communicates
depend on the entity's structure and the nature of the communication. In some cases, the
auditor may need to clarify and agree with the engaging party on the appropriate individuals to
communicate with, considering the matter at hand. Understanding the entity's governance
structure, as assessed in accordance with SA 315, is crucial in determining who should be
involved in these communications.
SIGNIFICANCE OF COMMUNICATION WITH THOSE CHARGED WITH GOVERNANCE
Effective communication between auditors and those charged with governance is crucial for
several reasons:
(a) It helps auditors and governance individuals understand audit-related matters within the
broader context and fosters a positive working relationship, all while maintaining the auditor's
independence and objectivity.
(b) It enables auditors to gather relevant information from those charged with governance,
aiding in understanding the entity, identifying reliable sources of audit evidence, and obtaining
insights into specific transactions or events.
(c) It allows those charged with governance to fulfill their responsibility of overseeing the
financial reporting process, which ultimately reduces the risk of significant errors in the
financial statements. In essence, it enhances the quality and effectiveness of the audit process
and contributes to the overall reliability of financial reporting.
OBJECTIVES OF AUDITOR IN ACCORDANCE WITH SA 260
The objectives of the auditor in accordance with SA 260 are as follows:
(a) Clearly communicate to those in charge of governance what the auditor will do in the
financial statement audit and give an overview of the audit's planned scope and timing.
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(b) Gather important information from those in charge of governance that is relevant to the
audit.
(c) Share with those in charge of governance timely and significant findings from the audit that
are relevant to their role in overseeing the financial reporting process.
(d) Promote effective and open communication between the auditor and those in charge of
governance to ensure a productive working relationship and a smoother audit process.
COMMUNICATION OF AUDITOR’S INDEPENDENCE IN CASE OF LISTED ENTITIES
For listed entities, the auditor must communicate the following regarding their independence
to those in charge of governance:
(a) Confirmation that the engagement team, the firm, and, if applicable, network firms have
adhered to ethical requirements related to independence.
(b) Details about any relationships or matters between the firm, network firms, and the entity
that, in the auditor's professional judgment, could reasonably impact independence. This
includes disclosing the total fees charged for both audit and non-audit services by the firm and
network firms to the entity and its controlled components. The fees should be categorized to
help assess their effect on the auditor's independence. The auditor should also communicate
the safeguards applied to eliminate or reduce any identified threats to independence to an
acceptable level.
THE COMMUNICATION PROCESS
The auditor must inform those in charge of governance about how and when they will
communicate, including what topics will be discussed. If important audit findings need detailed
discussion, the auditor will provide written reports. These written reports don't have to cover
every detail but should include significant matters. For listed entities, information about auditor
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independence must be provided in writing. The auditor should ensure these communications
happen promptly and keep those in charge of governance informed in a timely manner.
ADEQUACY OF THE COMMUNICATION PROCESS
The auditor must assess if the communication between them and those in charge of
governance has been sufficient for the audit's needs. If it's found to be inadequate, the auditor
should consider how this might affect their understanding of potential risks in the financial
statements and their ability to gather the necessary audit evidence. Appropriate steps should
be taken to address any shortcomings in the communication process.
SA 299 “JOINT AUDIT OF FINANCIAL STATEMENTS”
SA 299 outlines principles for conducting joint audits to meet the auditor's overall objectives, as
defined in SA 200. It addresses specific considerations for audits carried out by multiple
auditors working together.
However, it does not cover the relationship between a primary auditor reporting on an entity's
financial statements and another auditor reporting on the financial statements of a component
(like a branch, subsidiary, or joint venture) included in the entity's financial statements.
OBJECTIVES IN ACCORDANCE WITH SA 299
The objectives in accordance with SA 299 are as follows:
(a) Establish general principles for joint auditors to follow in performing a joint audit.
(b) Create a consistent and standardized method for conducting joint audits.
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(c) Determine specific areas of work and define the scope of responsibility for each joint
auditor.
(d) Clarify the individual and shared responsibilities of the joint auditors regarding the audit
process.
AUDIT PLANNING, RISK ASSESSMENT AND ALLOCATION OF WORK
In a joint audit, the engagement partner and key team members from each auditor collaborate
in planning. They jointly establish an overall audit strategy that defines the scope, timing, and
direction of the audit. Before starting the audit, the joint auditors create a shared audit plan.
In developing this plan, they:
(a) Divide the audit areas among themselves, outlining what each auditor will cover. This
division could be based on units, specific areas, or items in certain situations.
(b) Determine when the audit will occur and what communications are needed.
(c) Discuss significant factors guiding the audit team's efforts.
(d) Consider information from prior engagements with the entity and share relevant
knowledge.
(e) Assess the resources required, considering the risks of material errors. These risks are
communicated and documented among the joint auditors.
The joint auditors then document the audit procedures for the areas they are responsible for
and communicate this to the entity's governance.
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They also obtain common engagement and management representation letters. After the work
allocation is identified and signed by all auditors, it's communicated to the entity's governance.
This process ensures a coordinated and effective joint audit.
RESPONSIBILITY AND CO-ORDINATION AMONG JOINT AUDITORS
In a joint audit, the responsibility for obtaining and evaluating information from management
is shared among all the auditors, unless they agree otherwise.
 Each auditor is responsible for the specific work allocated to them and the proper execution
of audit procedures within their scope.
 If different areas are assigned to different auditors, it's their individual responsibility to
gather and assess information from those areas. They should coordinate and communicate as
needed.
 If one auditor comes across matters relevant to other auditors' responsibilities, they must
inform the others in writing before completing the audit.
 Each auditor decides the audit procedures, timing, and extent for their assigned areas. They
also assess internal controls and risks within their areas.
For decisions made collectively in planning, all auditors are responsible for the appropriateness
of these decisions. However, executing these procedures is the individual auditor's
responsibility.
AUDIT CONCLUSION AND REPORTING
In a joint audit, auditors usually issue a single report together. However, if they disagree on the
opinion or what to include in the report, they can express their own opinions separately. Each
auditor can have their own viewpoint, and they are not bound by the majority's opinion.
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When separate reports are issued, they should reference each other under the "Other Matter
Paragraph" as per SA 706.
Each joint auditor can assume that:
(a) The others have done their part of the audit work in compliance with auditing standards,
without the need to review it.
(b) The others have shared any deviations from financial reporting rules or significant
observations relevant to their duties.
If one joint auditor is responsible for auditing a division or branch's financial statements, the
others can assume those statements meet all legal and regulatory requirements and present an
accurate view.
Before finalizing the audit report, the joint auditors must discuss and communicate their
conclusions with each other to shape the report's content.
COMMUNICATION WITH THOSE CHARGED WITH GOVERNANCE
In joint audits, if auditors plan to change the opinion in the report, they must inform those in
charge of governance about the reasons and the proposed wording of the modification,
ensuring compliance with SA 705. Similarly, if auditors plan to include specific paragraphs like
"Emphasis of Matter" or "Other Matter" in the report, they need to discuss this with those in
charge of governance and agree on the wording, following SA 706 guidelines. This
communication ensures transparency and compliance in the audit reporting process.
SA 402 “AUDIT CONSIDERATIONS RELATING TO AN ENTITY USING A SERVICE ORGANISATION”
SA 402 focuses on the user auditor's duty to gather adequate and relevant audit evidence when
a user entity employs services from service organizations. It elaborates on how the user auditor
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should apply SA 315 and SA 330 in understanding the user entity, including its internal controls,
to identify and evaluate the risks of significant errors. The standard guides the user auditor in
designing and executing additional audit procedures to address these risks effectively.
WHAT IS A SERVICE ORGANIZATION?
A service organization is an external entity or part of an entity that offers services related to
financial reporting systems to other businesses. A user entity is a business that utilizes services
from a service organization, and its financial statements are being audited.
WHO IS A SERVICE AUDITOR?
A service auditor is an auditor hired by a service organization to assess and provide an

assurance report on the organization's controls. On the other hand, a user auditor is an auditor
responsible for auditing and reporting on the financial statements of a user entity utilizing the
services of a service organization.
OBJECTIVES OF USER AUDITOR IN ACCORDANCE WITH SA 402
The objectives of the user auditor, when the user entity uses a service organization, are:
(a) Understand the services provided by the service organization and their impact on the user
entity's internal controls related to the audit, to identify and assess the risks of significant
errors.
(b) Create and execute audit procedures to address these risks effectively.
TYPE 1 REPORT AND TYPE 2 REPORT
A Type 1 report consists of:
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 A description provided by the service organization's management, detailing the
organization's system, control objectives, and the controls they have designed and put in place
as of a specific date.
 A report by the service auditor with the aim of providing reasonable assurance. This report
includes the auditor's opinion on the accuracy of the service organization's description of its
system, control objectives, and controls, as well as the suitability of the control designs to
achieve the specified control objectives.
Essentially, a Type 1 report assesses the design and suitability of controls at a specific point in
time.
A Type 2 report includes:
1. A description provided by the service organization's management that details their system,
control objectives, related controls, their design, and implementation. This description covers a
specified date or a designated period, and it may include information about the operating
effectiveness of controls during that period.
2. A report by the service auditor with the goal of providing reasonable assurance, which
comprises:
a. The service auditor's opinion on the accuracy of the service organization's description of its
system, control objectives, and controls. The report also assesses whether the control designs
are suitable for achieving the specified control objectives and examines the operating
effectiveness of these controls.
b. A description of the service auditor's tests of the controls and the results of those tests.
In summary, a Type 2 report assesses both the design and operational effectiveness of controls
over a specified period, offering a more comprehensive evaluation compared to a Type 1
report.
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USING TYPE 1 OR TYPE 2 REPORT
When the user auditor plans to use a Type 1 or Type 2 report as audit evidence to understand
the design and implementation of controls at the service organization, they should:
a) Assess whether the description and design of controls at the service organization are current
and suitable for the user auditor's needs.
b) Examine the adequacy and suitability of the report's evidence in helping the user auditor
understand the user entity's internal controls relevant to the audit.
c) Determine if any complementary controls identified by the service organization are

applicable to the user entity. If so, the user auditor should also assess whether the user entity
has implemented these controls.
This ensures that the user auditor effectively utilizes the service organization's report to
evaluate the relevant controls and their impact on the user entity's audit.
TESTS OF CONTROLS
In the context of audit procedures for assessing the effectiveness of controls at a service
organization, the user auditor has three options:
(a) Obtain a Type 2 report if available: If a Type 2 report is available, the user auditor can use it
as audit evidence to assess the effectiveness of controls.
(b) Perform tests of controls at the service organization: The user auditor can independently
test the controls at the service organization to ensure they are operating effectively.
(c) Use another auditor to perform tests of controls at the service organization: The user
auditor can delegate the testing of controls to another auditor, typically the service auditor.
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When using a Type 2 report as audit evidence, the user auditor should ensure the report meets
certain criteria:
(a) Check if the report's information about the controls' description, design, and operating
effectiveness is relevant and up-to-date for their audit purposes.
(b) Determine if there are user entity controls identified by the service organization and assess
their relevance to the user entity. If relevant, verify if the user entity has implemented these
controls and test their effectiveness.
(c) Evaluate the time period covered by the tests of controls in the report and the time elapsed
since the tests were conducted.
(d) Assess if the tests of controls and their results described in the service auditor's report are
pertinent to the user entity's financial statement assertions and whether they provide enough
appropriate audit evidence to support the user auditor's risk assessment.
These steps help the user auditor ensure that the Type 2 report is reliable and supports their
assessment of the service organization's control effectiveness.
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COMMENCING AN AUDIT
SA 200 tells us that to succeed in an audit, auditors must follow the goals outlined in auditing
standards (SAs) during their planning and execution. Without a well-thought-out plan, the
audit's main goal may not be met. Planning is crucial for a successful, efficient, and timely audit.
BENEFITS/ADVANTAGES OF PLANNING IN AN AUDIT OF FINANCIAL STATEMENTS
Planning an audit involves establishing the overall audit strategy for the engagement and
developing an audit plan. Adequate planning benefits the audit of financial statements in
several ways described hereunder-
(i) Focus on Important Areas: Planning helps auditors concentrate on crucial parts of financial
statements.
(ii) Solve Problems Early: Planning allows auditors to tackle issues before they become big
problems.
(iii) Organized Audit: It helps keep the audit well-organized and efficiently managed.
(iv) Right Team Selection: Auditors can pick the best team with the right skills.
(v) Team Guidance: Planning guides and supervises the audit team effectively.
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(vi) Smooth Coordination: It makes it easy for different auditors and experts to work together
smoothly.
In a nutshell, planning is vital for a successful and smooth financial statement audit.
NATURE AND EXTENT OF PLANNING
(i) Size and Complexity of the Organization: If the company being audited is big and
complicated, more planning is needed. Smaller, simpler companies require less planning.
(ii) Experience of the Team: If the auditors have lots of experience and skills, they might need
less planning. But if the team is less experienced, they need more planning to do the audit well.
(iii) Changes in Situations: If things change, like new laws or big events in the company,
auditors need to adjust their plans accordingly.
In simple terms, planning in an audit depends on how big the company is, how experienced the
auditors are, and if there are any important changes happening. More planning is needed for
bigger, complex companies and when things are changing a lot.
PLANNING - A CONTINUOUS PROCESS
Planning in an audit is an ongoing process that starts after the previous audit and continues
until the current one is finished. It involves:
 Analyzing Risks: Using procedures to understand potential risks in the audit.

 Legal and Regulatory Compliance: Checking if the company follows the laws and rules that
apply to it.
 Materiality: Deciding what financial amounts are significant enough to be examined closely.
 Experts' Involvement: When needed, getting help from specialists in specific areas.
 More Risk Assessment: Conducting additional procedures to assess risks thoroughly.
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In simpler terms, planning in an audit is not a one-time thing; it's a continuous process that
involves looking at risks, legal rules, money significance, and expert help.
ACCEPTANCE AND CONTINUANCE OF CLIENT RELATIONSHIPS AND AUDIT ENGAGEMENTS
Before starting an audit, it's crucial to ensure that the right procedures have been followed to
accept and continue the client relationship and audit engagement. The engagement partner
must be confident that these procedures have been correctly applied.
The auditor shall undertake the following activities at the beginning of the current audit
engagement-
(i) Checking Client and Engagement Suitability (SA 220, SQC 1): This involves ensuring that the
client's leadership is trustworthy, the audit team is capable, ethical requirements are met, and
reviewing any important issues from past audits that could affect the client relationship.
(ii) Ensuring Ethical Compliance (SA 220): Auditors must confirm that they follow ethical rules,
including independence.
(iii) Defining Audit Terms (SA 210): Auditors need to clearly understand and agree with the
client on what the audit will involve and its terms.
CONTENTS OF AN AUDIT PLAN
The auditor should develop an audit plan that shall include a description of-
 Risk Assessment Procedures: Describing how and when the auditor will assess risks (SA 315).
 Audit Procedures at Assertion Level: Detailing the procedures to address specific risks (SA
330).
 Other Required Procedures: Any additional procedures needed to comply with auditing
standards.
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The audit plan is more detailed than the overall audit strategy and specifies what the audit
team will do during the audit. It develops as the audit progresses.
CHANGES TO PLANNING DECISIONS
During an audit, the auditor should be ready to adjust their initial audit plan and strategy if
needed. This might happen because of new information or if they find the risks are different
from what they expected. It's important to be flexible and make changes as the audit
progresses.
The auditor may need to modify the overall audit strategy and audit plan due to below
mentioned factors—
Auditors may change their audit plan due to unexpected events, changing conditions, or new
evidence from audit procedures. They might also adjust the nature, timing, and extent of
procedures based on reassessed risks. This happens when new information significantly differs
from the original plan. Being flexible is key in auditing.
OVERALL AUDIT STRATEGY
The overall audit strategy outlines the audit's scope, timing, and direction, guiding the creation
of the detailed audit plan. It provides a roadmap for the entire audit process.
FACTORS WHILE ESTABLISHING OVERALL AUDIT STRATEGY
When establishing the overall audit strategy, auditors consider:
1. Audit Characteristics: Identifying the scope of the audit engagement based on its unique
features.
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2. Reporting Goals: Understanding reporting objectives to plan when and how audit findings
will be communicated.
3. Team's Focus: Recognizing significant factors that guide the audit team's efforts, as decided
by professional judgment.
4. Preliminary Activities: Reviewing results from initial engagement tasks and relevant
knowledge from previous similar audits.
5. Resources Needed: Determining the type, timing, and amount of resources required to
complete the audit effectively.
BENEFITS OF OVERALL AUDIT STRATEGY
Establishing the overall audit strategy helps the auditor in the following ways:
 Quality Resources: It helps in deciding which experienced team members and experts to use
for specific audit areas, like valuations or complex transactions.
 Quantity of Resources: It guides the allocation of resources to various audit areas, such as the
number of team members needed for tasks like inventory counting or reviewing work in group
audits.
 Timing of Resource Deployment: It determines when resources should be used, whether
early in the audit or closer to key dates.
 Resource Management: It helps in planning how resources will be managed, supervised, and
reviewed, including team meetings, partner and manager reviews, and quality control checks.
CONSIDERATIONS IN ESTABLISHING THE OVERALL AUDIT STRATEGY

Auditors consider several factors when establishing the overall audit strategy, which can vary
depending on the specific engagement. Some common considerations include:
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(A) CHARACTERISTICS OF THE ENGAGEMENT
(i) Financial Reporting Framework: Understanding the applicable accounting standards and
regulations that govern the entity's financial reporting.
(ii) Industry-Specific Reporting Requirements: Recognizing any additional reporting

requirements imposed by industry regulators or specific to the entity's sector.
(iii) Expected Audit Coverage: Determining the scope of the audit, including which components
will be audited and their locations.
(iv) Control Relationships: Assessing the nature of control relationships within a group,
especially for consolidation purposes.
(v) Audit by Other Auditors: Evaluating the extent to which components are audited by other
external auditors.
(vi) Service Organizations: Considering the use of service organizations and how to obtain
evidence regarding their control design and operation.
(vii) Use of Prior Audit Evidence: Deciding whether and how to incorporate audit evidence
from previous audits, especially related to risk assessment and controls.
(viii) Information Technology Impact: Recognizing the influence of information technology on

audit procedures, data analysis, and controls.
(ix) Client Personnel and Data Availability: Assessing the availability of client personnel and
data, which can affect audit timing and procedures.
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(B) REPORTING OBJECTIVES, TIMING OF THE AUDIT, AND NATURE OF COMMUNICATIONS:
(i) Entity's Reporting Timetable: Understanding the entity's deadlines for financial reporting to
plan the audit within the required timeframe.
(ii) Meetings with Management: Organizing meetings with management to discuss the nature,
timing, and extent of audit work, ensuring clear communication channels.
(iii) Type and Timing of Reports: Discussing with management the type and timing of audit
reports to be issued, aligning expectations with regulatory requirements.
(iv) Communication on Audit Progress: Discussing with management the communication

process for updating them on the status and progress of the audit work.
(v) Communication with Components: Interacting with auditors of components to coordinate

types and timing of reports, especially in group audits involving multiple entities.
(vi) Engagement Team Communications: Establishing the nature and timing of

communications among engagement team members to ensure efficient workflow and
information sharing.
(vii) Expected Communications with Third Parties: Identifying any statutory or contractual
reporting responsibilities arising from the audit, including communications with external
parties, and planning accordingly.
(C) SIGNIFICANT FACTORS, PRELIMINARY ENGAGEMENT ACTIVITIES, AND KNOWLEDGE

GAINED ON OTHER ENGAGEMENTS:
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(i) Determination of Materiality: Establishing the materiality threshold as per auditing
standards (SA 320) to identify the significance of potential errors in financial statements.
(ii) High-Risk Areas: Identifying areas with a higher risk of substantial errors or misstatements
in the financial statements, requiring closer scrutiny.
(iii) Risk Impact on Direction and Review: Understanding how the assessed risk of material
misstatement at the financial statement level affects the direction, supervision, and review of
audit procedures.
(iv) Professional Skepticism: Encouraging the engagement team to maintain a questioning

mindset, exercise professional skepticism, and be unpredictable in their approach to uncover
potential issues.
(v) Previous Audit Results: Considering findings from prior audits, including identified
deficiencies and actions taken to rectify them.
(vi) Discussions with Other Service Providers: Discussing audit-affecting matters with firm
personnel responsible for other services to the entity to coordinate efforts effectively.
(vii) Management's Commitment to Internal Controls: Assessing evidence of management's

dedication to robust internal control design, implementation, and maintenance.
(viii) Transaction Volume: Recognizing the volume of transactions and its impact on the
reliance placed on internal controls.
(ix) Importance of Internal Control: Determining the significance attributed to internal control
within the entity's operations.
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(x) Significant Business Developments: Identifying major changes or events within the entity
that can impact its financial statements.
(xi) Industry and Economic Developments: Staying informed about significant industry-specific
and economic environment changes.
(xii) Changes in Reporting Framework: Considering significant changes in the financial

reporting framework, such as new accounting standards.
(xiii) Legal and Regulatory Environment: Being aware of noteworthy changes in the legal and
regulatory landscape affecting the entity's operations.
(D) NATURE, TIMING, AND EXTENT OF RESOURCES:
(i) Engagement Team Selection and Work Assignment: Choosing the appropriate members for
the engagement team, considering their skills and expertise, and assigning specific audit tasks
and responsibilities to team members.
(ii) Engagement Budgeting: Planning the allocation of resources, including time and budget, to
ensure the audit is conducted efficiently and within the expected timeframe and financial
constraints.
DOCUMENTING THE AUDIT PLAN
(i) Overall Audit Strategy Documentation:
Records key decisions made for proper audit planning and communication within the
engagement team.
(ii) Audit Plan Documentation:
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Records planned risk assessment procedures, timing, and extent of audit procedures at the
assertion level in response to identified risks. It provides a blueprint for audit procedures and
can be reviewed and approved before execution. Standard audit programs and checklists can
be customized for the specific engagement.
(iii) Reasons for Changes:
Documents significant changes in the overall audit strategy and plan, along with reasons for
those changes. It explains why changes were necessary and details the final strategy and plan
adopted for the audit, reflecting how the audit adjusted to evolving circumstances during the
engagement.
RELATIONSHIP BETWEEN THE OVERALL AUDIT STRATEGY AND THE AUDIT PLAN
 The overall audit strategy precedes the audit plan and is a high-level framework.
 The audit plan is more detailed and outlines specific audit procedures.
 Both are interconnected, and changes in one affect the other.
 The strategy sets the scope and framework for the audit plan.
 The audit plan specifies the nature, timing, and extent of audit procedures for gathering
appropriate evidence.
 Both consider materiality and its relationship with risks and audit procedures.
AUDIT PROGRAMME
An audit program allocates tasks to team members, providing a list of audit procedures and
instructions for their execution. It also includes estimated timeframes for completing specific
audit tasks, helping to manage the audit's timeline and workflow effectively.
FORMULATING AN AUDIT PROGRAMME
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The audit program serves as a set of instructions for audit assistants, detailing audit objectives
for each area and helping control work execution.
Key considerations when creating the program include:

(a) Nature of Business: Understanding the technical, financial, and accounting aspects of the
organization's operations.
(b) Overall Plan: Ensuring the program aligns with the overall audit plan and systematically
approaches the audit work.
(c) Internal Control and Procedures: Evaluating the system of internal control and accounting
procedures to determine the reliance on them for audit procedures.
(d) Size and Structure: Accounting for the organization's size, complexity, and management
structure.
(e) Business Information: Gathering information about the client's history, purpose,
engagement nature, and time schedule.
(f) Accounting and Management Policies: Reviewing past financial statements to understand
historical accounting and management policies and their consistency.
DRAWING UP THE AUDIT PROGRAMME

When preparing the audit program, the auditor follows these stages, especially when auditing
an entity for the first time:
 Broad Outline: Initially, create a general framework for the audit program.
 Review Procedures: After assessing internal and accounting procedures, fill in the program
details, considering deficiencies in internal controls.
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 Special Procedures: After the detailed checks, determine the extent of special procedures,
such as verifying balances, physically inspecting assets, or conducting specific verifications
based on the nature of the business.
For subsequent audits, review and modify the program as needed due to:
 Experience gained from previous audits.

 Significant changes in the business, internal controls, or management structure.
 Evaluation of internal control for the current year.
AUDIT EXECUTION
Key phases in the audit execution stage are Execution Planning, Risk and Control Evaluation,
Testing and Reporting.
Risk and
Execution
Testing Reporting
Control
Planning
Evaluatio
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EXECUTION PLANNING
Before starting an audit, careful execution planning is vital. This involves creating a clear
roadmap to ensure timely and high-quality results. Auditors must plan effectively, considering
factors like audit objectives, scope, and approach, as well as manpower, team qualifications,
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and time constraints. Conducting a preliminary survey is essential to gather necessary
information for effective planning and execution.
RISK AND CONTROL EVALUATION
During the audit, auditors perform a comprehensive risk and control assessment for each audit
segment. This involves:
 Identifying Risks: Listing the risks that need to be reviewed within that segment.
 Evaluating Controls: Documenting existing or necessary controls to mitigate these risks.
 Testing Controls: Outlining the steps needed to assess the effectiveness of these controls.
The assessment takes into account materiality levels, as they are directly related to audit risks.
This process helps ensure a thorough evaluation of risk and control within the audit.
TESTING
After assessing risks and controls in an audit area, auditors perform tests to evaluate control
effectiveness. Various testing methods are employed to determine if controls are operating as
intended, helping auditors draw conclusions about their effectiveness.
REPORTING
 SA 700 (Standards on Auditing) outlines the standards for the form and content of an
auditor's report.
 The auditor reviews and assesses audit evidence to form an opinion on the financial
statements, considering their conformity with an acceptable financial reporting framework and
relevant statutory requirements.
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 The auditor's report must provide a clear written opinion on the financial statements as a
whole.
 Uniformity in the report's form and content is desirable for reader understanding and
identifying unusual circumstances.
 Statutes or regulators may prescribe specific requirements or formats for the auditor's
report in some cases.
OTHER IMPORTANT CONSIDERATIONS

In addition to above, there are certain other considerations which auditor is required to take
care while executing the audit, that are given below:
SA 600 - USING THE WORK OF ANOTHER AUDITOR

1. When an auditor delegates work to assistants or relies on work performed by other auditors
and experts, they remain responsible for forming and expressing their opinion on the financial
information.
2. The auditor can rely on work performed by others if they exercise sufficient skill and care and
have no reason to believe otherwise.
3. In cases of independent statutory appointments (e.g., branch auditors under the Companies
Act), the auditor's report should explicitly mention this reliance.
4. The auditor using the work of other auditors is referred to as the "Principal Auditor."
5. SA 600 does not address situations involving joint auditors or the auditor's relationship with a
predecessor auditor.
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PRINCIPAL AUDITOR
A "Principal Auditor" is the auditor responsible for reporting on the financial information of an
entity when that financial information includes the financial information of one or more
components audited by another auditor. The principal auditor is accountable for forming and
expressing an opinion on the entity's financial statements, even when they rely on the work of
other auditors for the components.
OTHER AUDITOR
The "Other Auditor" is an auditor, different from the principal auditor, who is responsible for
reporting on the financial information of a component. This component's financial information
is included in the financial information audited by the principal auditor. The other auditor
focuses on a specific segment or component and reports their findings to the principal auditor,
who then incorporates it into the overall audit report for the entity.
A "Component" is a part of an entity, like a division, branch, subsidiary, joint venture, or

associated company, whose financial information is examined by the principal auditor as part of
the entity's overall financial information.
When the
principal
auditor
principal auditor
to determine
how the work of
the other auditor
will affect the
audit.
uses the
work of
another
auditor
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I. ACCEPTANCE AS PRINCIPAL AUDITOR
Before accepting work as the Principal Auditor, the auditor considers:
 Materiality: Assessing the significance of the portion of financial information they will audit
within the entity's overall financial statements.
 Knowledge: Their level of understanding about the business operations of the components
that are audited by other auditors.
 Risk: Evaluating the risk of substantial errors in the financial information of components
audited by other auditors.
 Additional Procedures: Performing additional audit procedures, as required by the relevant
Standard on Auditing (SA), when they have significant involvement in the audit of these
components.
II. THE PRINCIPAL AUDITOR’S PROCEDURES

1. Right to Examine Books: The principal auditor can review the financial records of a
component.
2. Evaluating Other Auditor's Competence: The principal auditor assesses the professional
competence of the other auditor.
3. Procedures for Using Other Auditor's Work: The principal auditor outlines specific
procedures when relying on the work of another auditor.
4. Reviewing Other Auditor's Procedures: The principal auditor checks a written summary of
the procedures performed by the other auditor.
5. Considering Significant Findings: The principal auditor takes note of important findings
identified by the other auditor.
6. Non-Professionally Qualified Auditor: If the other auditor lacks professional qualifications,
the principal auditor addresses this matter appropriately.
7. Documentation: The principal auditor records in their working papers which components
had their financial information audited by other auditors. They also document the procedures
carried out and the conclusions drawn. However, they are not required to document the
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reasons for limiting procedures if they have sufficient evidence that the other auditor's practice
complies with quality control policies.
III. CO-ORDINATION BETWEEN AUDITORS

 Principal Auditor's Communication: The principal auditor may need to issue written
communications to the other auditor to ensure effective coordination.
 Other Auditor's Co-ordination: The other auditor, understanding how their work will be
utilized by the principal auditor, should coordinate closely with the principal auditor.
 Sharing Important Information: The principal auditor must inform the other auditor of any
relevant matters that might impact their work, fostering effective collaboration and ensuring a
comprehensive audit process.
The other auditor should co- The principal auditor should

Sufficient liaison between
advise the other auditor of
the principal auditor and ordinate with the principal
any matters having an
the other auditor. auditor. important bearing on the
other auditor’s work.
The principal auditor

The other auditor
may require the other
Should respond to such
questionnaire on a timely auditor to answer a
detailed questionnaire
basis.
IV. REPORTING CONSIDERATIONS
Scope Limitation: If the principal auditor encounters a limitation on the scope of the audit, they
may need to express a qualified opinion or a disclaimer of opinion in their report.
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Modified Report by Other Auditor: If the other auditor issues a modified report on their
component, the principal auditor should consider the implications of this modification in their
overall audit report.
V. DIVISION OF RESPONSIBILITY
The principal auditor is generally not accountable for the work conducted by other auditors,
except in situations where there are concerns about the reliability of their work. When the
principal auditor needs to base their opinion on the entity's financial information relying on
statements and reports from other auditors, their report should clearly outline the division of
responsibility. This involves specifying to what extent the financial information of components
audited by other auditors is incorporated into the entity's financial information. However, if the
Principal Auditor identifies any material issues, these must be addressed in their report.
SA 610- USING THE WORK OF INTERNAL AUDITORS
I. THE EXTERNAL AUDITOR’S RESPONSIBILITY FOR THE AUDIT
The external auditor holds complete responsibility for the audit opinion expressed, and this
responsibility remains unchanged even when utilizing the work of the internal audit function or
internal auditors for direct assistance. Despite performing similar audit procedures, the internal
audit function and internal auditors lack the independence required of external auditors in
accordance with SA 200.
SA 610, "Using the work of Internal Auditors," sets out the necessary conditions and efforts
needed for the external auditor to use the work of internal auditors effectively. These
requirements establish a framework for the external auditor's judgment to ensure appropriate
and balanced utilization of internal audit work, preventing overreliance on such assistance.
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II. SCOPE OF THIS SA
This Standard on Auditing (SA) outlines the responsibilities of the external auditor when
leveraging the work of internal auditors. It encompasses:
(a) Utilizing the Internal Audit Function's Work: This involves incorporating the internal audit
function's work to gather audit evidence.
(b) Engaging Internal Auditors for Direct Assistance: This refers to enlisting internal auditors to
provide direct assistance while being supervised and reviewed by the external auditor.
It's important to note that this SA does not apply if the entity lacks an internal audit function.
III. THE OBJECTIVES OF THE EXTERNAL AUDITOR, WHERE THE ENTITY HAS AN INTERNAL
AUDIT FUNCTION
When an external auditor utilizes the work of an internal audit function or internal auditors to
aid in the audit, they must ensure that their ultimate responsibility for the audit opinion
remains intact without any reduction in that responsibility. They should assess whether the
work of the internal audit function or assistance from internal auditors is suitable for the audit.
If using the work of the internal audit function, the external auditor should confirm its
adequacy for audit purposes. When utilizing internal auditors to provide assistance, the
external auditor must effectively guide, oversee, and review their work to ensure it aligns with
audit objectives.
MEANING OF INTERNAL AUDIT FUNCTION & DIRECT ASSISTANCE–
INTERNAL AUDIT FUNCTION
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An internal audit function is a department within an organization that conducts activities aimed
at providing assurance and offering advisory services to assess and enhance the efficiency of
the organization's governance, risk management, and internal control procedures.
DIRECT ASSISTANCE
Direct assistance refers to the utilization of internal auditors to carry out audit procedures while
being overseen and reviewed by the external auditor to support the audit engagement.
THE OBJECTIVES AND SCOPE OF INTERNAL AUDIT FUNCTIONS
The internal audit function has objectives related to governance, risk management, and
internal control:
 Governance Activities: They evaluate how well the organization adheres to ethics, values,
performance management, and accountability, and how effectively it communicates
information about risk and control.
 Risk Management Activities: They help the organization identify and assess significant risks.
They may also perform procedures to detect fraud.
 Internal Control Activities: These include assessing the effectiveness of internal controls,
examining financial and operational information, reviewing daily operations, and ensuring
compliance with laws and regulations.
IV. EVALUATING WHETHER WORK OF THE INTERNAL AUDIT FUNCTION CAN BE USED FOR
PURPOSES OF THE AUDIT
(i) The external auditor needs to check if they can use the internal audit function's work by
considering three things:
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1. Objectivity: They assess if the internal audit function's organization and policies ensure that
their auditors are unbiased and impartial.
2. Competence: They evaluate if the internal audit function has the necessary skills and
knowledge to perform the tasks effectively.
3. Systematic Approach: They examine whether the internal audit function follows a structured
and disciplined method, including quality control measures.
(ii) The external auditor shall not use the work of the internal audit function if the external
auditor determines that:
(a) The organization's structure and policies don't ensure the internal auditors' impartiality.
(b) The internal audit function doesn't have the required expertise.
(c) The internal audit function doesn't follow a systematic and disciplined approach with quality
control
V. DETERMINING THE NATURE AND EXTENT OF WORK OF THE INTERNAL AUDIT FUNCTION
THAT CAN BE USED
The external auditor is responsible for reviewing a company's financial statements to provide
an independent opinion. In some cases, they may use the work of the internal audit function to
assist in their audit. Here's a simplified explanation:
1. Using Internal Audit Work: The external auditor can rely on the work of the internal audit
team for certain tasks, such as checking controls, following transactions, and more.
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2. Balancing Act: To ensure independence, the external auditor should limit their reliance on
internal audit work when there's more judgment involved, higher risks, inadequate objectivity,
or lower competence in the internal audit team.
3. Extent of Involvement: The external auditor must assess whether using internal audit work
as planned still ensures their significant involvement in the audit, as they are solely responsible
for the audit opinion.
4. Communication: The external auditor should inform the company's governing body about
how they plan to use the internal audit work in their audit, as part of their overall audit
strategy.
VI. USING THE WORK OF THE INTERNAL AUDIT FUNCTION
 Discussion and Coordination: The external auditor talks with the internal audit team to plan
how they'll use the internal audit work together.
 Reading Internal Audit Reports: The external auditor reads reports from the internal audit
team to understand what they did and what they found.
 Evaluating Internal Audit's Work: The external auditor checks if the internal audit work was
properly planned, carried out, documented, and if it provides enough evidence for reasonable
conclusions.
 Adapting Audit Procedures: The external auditor decides how much of the internal audit
work to use based on factors like the complexity of the task, the risks involved, the objectivity
of the internal audit team, and their competence.
 Ongoing Evaluation: The external auditor keeps reviewing their use of the internal audit
work to ensure it remains suitable and reliable for their audit.
VII. DETERMINING WHETHER INTERNAL AUDITORS CAN BE USED TO PROVIDE DIRECT

ASSISTANCE FOR PURPOSES OF THE AUDIT
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(a) Prohibition: The external auditor is not allowed to get direct help from internal auditors. In
other words, they cannot directly use the internal audit team's work.
(b) Using Internal Auditors for Assistance: However, it's not prohibited for the external auditor
to use internal auditors for direct assistance if certain conditions are met. These conditions
include:
(i) Evaluating Threats: The external auditor must assess whether there are any potential threats
to the objectivity and competence of the internal auditors.
(ii) Inquiry: When assessing these threats, the external auditor can talk to the internal auditors
to ask them about any interests or relationships that might affect their objectivity.
In summary, using internal auditors for direct assistance in the external audit is generally
allowed as long as potential threats to their objectivity and competence are evaluated and
addressed.
REVIEW OF THE WORK PERFORMED BY INTERNAL AUDITORS
The external auditor shall direct, supervise and review the work performed by internal auditors
on the engagement in accordance with SA 220. In doing so:
(a) The external auditor must oversee the work done by internal auditors. This oversight should
consider that internal auditors are not completely independent from the company being
audited.
(b) The external auditor reviews the internal auditors' work by checking the underlying
evidence they used. This ensures the work is reliable. The external auditor's supervision and
review should be enough to ensure that internal auditors have gathered suitable evidence to
support their conclusions.
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In summary, SA 220 outlines the steps for external auditors to oversee and review the work of
internal auditors, considering their lack of complete independence, and making sure the
evidence supports the conclusions made.
SA 620-USING THE WORK OF AN AUDITOR’S EXPERT
I. SCOPE OF SA 620
SA 620 outlines the auditor's duties when utilizing work from experts in fields other than
accounting or auditing to acquire necessary and suitable audit evidence. It provides guidelines
for evaluating and incorporating such specialized work into the audit process.
Situations where The auditor’s use of the work of an

the engagement individual or organisation possessing
team includes a expertise in a field other than
SA-620 does member with accounting or auditing, whose work in
not deal with: expertise in that field is used by the entity to assist
specialised area the entity in preparing the financial
of accounting or statements (a management’s expert),
auditing which is dealt with in SA 500
II. THE AUDITOR’S RESPONSIBILITY FOR THE AUDIT OPINION
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The auditor is fully responsible for the audit opinion. Using an auditor's expert doesn't diminish
this responsibility. However, if the auditor determines the expert's work is suitable, they can
accept the expert's findings as valid audit evidence.
III. DETERMINING THE NEED FOR AN AUDITOR’S EXPERT
An auditor's expert may be necessary in these situations:
1.Understanding the company and its risks.
2. Creating responses to identified risks.
3. Conducting specific audit tests.
4. Evaluating the quality of audit evidence for forming the financial statement opinion.
IV. CONSIDERATIONS WHEN DECIDING WHETHER TO USE AN AUDITOR’S EXPERT
When deciding whether to use an auditor's expert, consider:
 Whether management used an expert.

 The complexity and importance of the matter.
 Risks of errors in the matter.
 The type of procedures needed and the auditor's experience with such experts.
 Availability of other evidence sources.
V. NATURE, TIMING AND EXTENT OF AUDIT PROCEDURES
These factors help determine the nature, timing, and extent of the audit procedures. The
auditor considers factors like:
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(a) The subject matter the expert's work covers.
(b) Risks of errors in that subject matter.
(c) How important the expert's work is in the audit.
(d) The auditor's past experience with the expert.
(e) Whether the expert follows the auditor's firm's quality control policies and procedures.
VI. THE COMPETENCE, CAPABILITIES AND OBJECTIVITY OF THE AUDITOR’S EXPERT
The auditor must assess if the auditor's expert possesses the required skills, capabilities, and
objectivity for the audit's needs. When dealing with an external expert, this evaluation must
also include questioning the expert about any interests or relationships that might compromise
their objectivity. In essence, the auditor ensures that the expert is both qualified and impartial
for the audit.
VII. OTHER MATTERS THAT MAY BE RELEVANT INCLUDE
Considerations when using an auditor's expert include the expert's suitability for the specific
matter, their expertise in relevant accounting and auditing rules, and the need to reassess their
competence, capabilities, and objectivity if unexpected events or audit results suggest a
reevaluation is needed during the audit process.
VIII. EVALUATION OF THE SIGNIFICANCE OF THREATS TO OBJECTIVITY AND NEED FOR

SAFEGUARDS
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Assessing the significance of threats to an auditor's expert's objectivity and determining if
safeguards are necessary depends on the expert's role and the importance of their work in the
audit.
When assessing the objectivity of an auditor's external expert, consider:
1. Asking the entity if they have any connections with the expert that might affect their
objectivity.
2. Discussing safeguards and professional requirements with the expert to ensure they are
sufficient to minimize threats.
3. Relevant factors to discuss with the expert include financial interests, personal relationships,
provision of other services, and in some cases, obtaining a written statement from the expert
about any connections they have with the entity.
IX. OBTAINING AN UNDERSTANDING OF THE FIELD OF EXPERTISE OF THE AUDITOR’S EXPERT
The auditor must know what the expert is skilled in to understand the nature and purpose of
their work for the audit. This understanding allows the auditor to assess if the expert's work is
suitable for the audit's needs.
X. AGREEMENT WITH THE AUDITOR’S EXPERT
The auditor and their expert should have a written agreement that covers:
(a) What the expert will do for the audit.
(b) Each party's roles and responsibilities.
(c) How and when they will communicate, and the format of any reports.
(d) Ensuring the expert keeps information confidential.
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XI. EVALUATING THE ADEQUACY OF THE AUDITOR’S EXPERT’S WORK
The auditor needs to assess the expert's work, including:
(a) Checking if the expert's findings or conclusions make sense and align with other audit
evidence.
(b) Reviewing the assumptions and methods used by the expert to ensure they're appropriate
for the situation.
(c) Verifying the accuracy and completeness of any important data the expert relied on. This
ensures the expert's work is reliable for the audit's purpose.
XII. WHEN WORK OF THE AUDITOR’S EXPERT IS NOT ADEQUATE FOR THE AUDITOR’S
PURPOSES
When the auditor finds that the expert's work isn't sufficient for the audit, they must either:
(a) Collaborate with the expert to determine what additional work is needed.
or
(b) Conduct additional audit procedures as necessary, considering the situation. This ensures
the audit remains thorough and reliable.
XIII. REFERENCE TO THE AUDITOR’S EXPERT IN THE AUDITOR’S REPORT
 Unless compelled by law, the auditor shouldn't mention an expert's work in an unmodified
opinion report. If required, they must clarify that the reference doesn't diminish their
responsibility for the audit opinion.
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 If the expert's work is referenced due to a modified opinion, the report must state that this
reference doesn't lessen the auditor's responsibility for the given opinion.
SA 540-AUDITING ACCOUNTING ESTIMATES, INCLUDING FAIR VALUE ACCOUNTING

ESTIMATES & RELATED DISCLOSURES
I. SCOPE OF THIS SA
This auditing standard (SA) outlines the auditor's duties when it comes to assessing accounting
estimates, including fair value estimates, and their disclosure in financial statement audits. It
provides additional details on how to apply existing auditing standards (SA 315 and SA 330) to
these estimates, covers how to handle errors in individual estimates, and identifies signs of
potential management bias in the estimates.
The auditor’s
responsibilities
related
regarding accounting
disclosures in an
estimates, including fair Scope of SA 540
audit of financial
value accounting
statements.
estimates,
II. NATURE OF ACCOUNTING ESTIMATES
Certain financial statement items, called accounting estimates, cannot be precisely measured
and must be estimated. Management uses various information sources, leading to different
levels of estimation uncertainty. Due to the inherent uncertainties in business, estimates are
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necessary, especially when specific asset, liability, or equity components require estimation
based on the financial reporting framework.
III. THE DEGREE OF ESTIMATION UNCERTAINTY
The degree of estimation uncertainty depends on:
 The nature of the accounting estimate.

 The existence of generally accepted methods for making the estimate.
 The subjectivity of the assumptions used for the estimate.
1. Not all fair value measurements involve estimation uncertainty.
2. Estimation is based on judgments made using available information, often involving

assumptions about uncertain future events. The auditor isn't responsible for predicting such
future events that might impact management's decisions or assumptions at the time of the
audit.
IV. MANAGEMENT BIAS
Management bias refers to the influence of management's judgment on accounting estimates.

Such bias can be unintentional or intentional, potentially affecting the desired outcome. The
more subjective the estimate, the higher the susceptibility to bias. Detecting bias is challenging
at the account level; it might be noticed when considering groups of estimates or over multiple
accounting periods. While some bias is inherent in subjective decisions, intentional bias is
considered fraudulent and misleading to financial statement users.
V. THE MEASUREMENT OBJECTIVE OF ACCOUNTING ESTIMATES
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The measurement objective of accounting estimates can vary based on the financial reporting
framework and the item in question. For some estimates, the objective is to predict outcomes
of certain events, while for others, like fair value estimates, it's about determining the current
value based on conditions at the measurement date.
Differences between estimated and actual outcomes may not necessarily indicate errors,
especially for fair value estimates, as subsequent events can impact the final results.
VI. OBJECTIVE OF SA 540
SA 540's objective is to ensure the auditor collects enough appropriate evidence to assess the
reasonableness of accounting estimates, including fair value estimates, in the financial
statements, and to confirm that the related disclosures in the statements are adequate, all
within the financial reporting framework.
VII. AUDITOR’S RESPONSIBILITY /AUDIT PROCEDURES
1. Risk assessment procedures and related activities for accounting estimates:
 The applicable financial reporting framework's requirements for accounting estimates and
disclosures.
 How management identifies events and conditions that require accounting estimates in the
financial statements.
 The auditor should inquire about changes that could lead to new or revised accounting
estimates. This understanding is crucial because the assessment of accounting estimates is vital
for forming the audit opinion.
2. Obtaining an Understanding of How Management Identifies the Need for Accounting

Estimates:
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Management is responsible for ensuring that all required accounting estimates are properly
recognized, measured, and disclosed in accordance with the relevant financial reporting
framework when preparing the financial statements.
3. How management makes the accounting estimates:
The auditor needs to understand how management makes accounting estimates, including the
method, relevant controls, use of experts, underlying assumptions, any changes from prior
periods, and how they assess estimation uncertainty. The auditor reviews past accounting
estimates, considering their nature and relevance to current risks, without questioning past
judgments based on available information at the time.
4. Estimation Uncertainty:
For accounting estimates with significant risks, the auditor must assess:
(a) How management considered alternative assumptions and why they rejected them, or how
they dealt with estimation uncertainty.
(b) Whether the significant assumptions used by management are reasonable.
(c) Whether management's intent to take specific actions and their ability to do so are relevant
to the assumptions and financial framework.
If the auditor believes that management hasn't adequately addressed estimation uncertainty,
they may develop a range to assess the reasonableness of the estimate.
5. The auditor must assess, based on audit evidence, whether the accounting estimates in the
financial statements are reasonable within the framework of the applicable financial reporting
standards or if they contain misstatements.
VIII. AUDIT REPORTING & DISCLOSURE:
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The auditor must ensure that financial statement disclosures related to accounting estimates
comply with the applicable financial reporting framework. For estimates with significant risks,
the adequacy of disclosing estimation uncertainty, including assumptions, methods, changes,
sources, and implications, is crucial. If disclosures seem insufficient despite compliance, the
auditor may deem them inadequate based on the circumstances.
CONTROL OF QUALITY OF AUDIT WORK
Audit firms are required to establish a system of quality control, as per SQC 1, to ensure that
they and their staff adhere to professional standards, as well as legal and regulatory
requirements. Engagement teams are responsible for applying quality control procedures
relevant to each audit and providing information to support the firm's quality control process,
particularly concerning independence.
Engagement teams can rely on the firm's quality control system unless there is information
suggesting otherwise. SA 220 addresses the quality of individual audit engagements.
The auditor's main goal is to carry out quality control procedures at the engagement level to
reasonably assure that the audit aligns with professional standards, regulations, and legal
requirements. They also aim to ensure that the audit report is appropriate for the given
circumstances.
ANALYTICAL PROCEDURES PRIOR TO AUDIT AS WELL AS TOWARDS FINALIZATION
I. WHEN DESIGNING AND PERFORMING SUBSTANTIVE ANALYTICAL PROCEDURES
When auditors use substantive analytical procedures, which involve evaluating financial
information for unusual trends or relationships, they should follow SA 520:
(a) Choose analytical procedures that match specific financial statement assertions, considering
the assessed risks of errors and any detailed tests conducted.
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(b) Assess the reliability of the data used to create expectations for recorded amounts or ratios.
This involves considering the source of data, its comparability, and its relevance, as well as the
controls in place.
(c) Develop an expectation for recorded amounts or ratios and determine if it's precise enough
to identify any misstatements that, on their own or combined with others, could make the
financial statements materially wrong.
(d) Establish an acceptable threshold for the difference between recorded amounts and
expected values, which, if not exceeded, would not require further investigation. This helps
auditors focus on more significant discrepancies.
II. ANALYTICAL PROCEDURES THAT ASSIST WHEN FORMING AN OVERALL CONCLUSION
Near the end of the audit, auditors conduct analytical procedures to help form their overall
conclusion about whether the financial statements align with their understanding of the
company. These procedures are meant to confirm the conclusions made during the audit of
specific financial statement components.
Results from these analytical procedures may reveal previously unnoticed risks of significant
errors. If this happens, auditors must reassess these risks and adjust their audit procedures
accordingly, as per SA 315. The analytical procedures used here can be similar to those
performed during the initial risk assessment.
III. INVESTIGATING RESULTS OF ANALYTICAL PROCEDURES
If analytical procedures uncover unusual fluctuations or relationships that don't align with
expectations or other relevant information, the auditor must investigate these differences. This
involves:
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(a) Asking management for an explanation and collecting relevant audit evidence related to
management's responses.
(b) Conducting additional audit procedures if needed. This might be necessary if management
cannot provide a satisfactory explanation, or if the explanation, along with the evidence
obtained, is deemed insufficient.
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MATERIALITY & RISK ASSESSMENT
In auditing (as per SA 320), materiality is the measure of the significance of misstatements in
financial statements. Auditors use materiality in planning, performing, and evaluating the audit.
It helps identify and assess risks, determine audit procedures, and evaluate the impact of errors
on financial statements and the audit opinion.
Audit risk and materiality are crucial considerations throughout the audit process. Audit risk is
assessed by evaluating the risks of material misstatements, considering factors like the business
environment, regulations, organizational structure, changes, and management concerns. This
assessment helps auditors focus on high-risk areas when conducting the audit.
IDENTIFICATION OF RISKS
Audit risk is the chance that auditors might provide an incorrect opinion about financial
statements that contain significant errors or misstatements.
AUDIT RISK COMPONENTS
The major components of audit risk are described in the Table below
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Audit Risk Component Description Commentary
Inherent Risk The vulnerability of an Arising from the entity's
assertion to a misstatement objectives, operations,
that could be significant, industry, regulatory
either on its own or when framework, and
combined with other size/complexity, these risks of
misstatements, assuming the material misstatement vary
absence of related controls. based on the nature of the
Addressed at both the account balance or class of
financial statement and transaction.
assertion levels.
Example- 1. Technological Auditors pay particular
advancements rendering attention to areas involving
specific products outdated, complicated calculations,
affecting the valuation of valuable inventory, uncertain
inventory. estimates, adequacy of
2. Intricate computations working capital, industry
prone to errors. stability, and technological
3. High-value inventory advancements. These factors
susceptible to overstatement. influence the risk of material
4. Accounting estimates with misstatement.
considerable measurement
uncertainty.
Control Risk The risk stemming from the The entity is responsible for
possibility that the entity's recognizing and evaluating its
internal control system may business risks, including fraud,
not prevent, detect, or rectify and must establish an internal
in a timely manner a control system. This system
misstatement that could be includes entity level controls
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significant, either individually like board oversight and IT
or when combined with other general controls, as well as
misstatements. specific activity level controls.
It's important to note that
some level of control risk
always exists due to inherent
limitations in any internal
control system.
Detection Risk The risk that auditors may fail Auditors identify assertions
to uncover a significant with potential material
misstatement within an misstatement risks and focus
assertion that could be their audit procedures in
material, either on its own or those specific areas.
when combined with other
misstatements. The
acceptable level of detection
risk is inversely related to the
risks of material misstatement
at the assertion level.
AUDIT RISK HAS TWO COMPONENTS:
1. Risk of Material Misstatement: Risk that financial statements have errors before the audit
begins. It includes inherent risk (natural risk in accounts) and control risk (risk of failures in
internal controls).
2. Detection Risk: Risk that auditors may not find errors during the audit despite applying
procedures.
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The relationship can be defined as follows:
 Audit Risk = Risk of Material Misstatement × Detection Risk

 Risk of Material Misstatement = Inherent Risk × Control Risk
 Inversely Related: Higher inherent and control risks mean lower detection risk. Similarly,
lower audit risk (materiality) means higher scrutiny during the audit.
• Risk of expressing an
inappropriate audit
Audit Risk opinion when FS are
containing material
misstatement.
Objective of the
Two key Audit to reduce
elements of The risk that the audit risk to an
financial statements acceptably low
Audit Risk: level, the
contain a material
auditor has to: Assess the risks of
misstatement prior to
audit material misstatement;
• (inherent and and
control risk);
The risk that the
auditor will not
detect such a Limit the
misstatement detection risk
• (detectio or
engagement risk)
The objective of an audit is to minimize audit risk to an acceptable level by conducting

procedures that address risks at various levels, including financial statements, transactions,
account balances, and assertions. Embedded assertions in management's representations
pertain to how financial elements are recognized, measured, presented, and disclosed in the
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SA 315, “Identifying and Assessing the Risks of Material Misstatement Through
Understanding the Entity and Its Environment” categorises the types of assertions used by
the auditor to consider the different types of potential misstatements that may occur, as
follows:
Assertions about classes of transactions and events in an audit refer to the key criteria the
auditor assesses:
1. Occurrence: Ensures that all recorded transactions and events actually happened and are
relevant to the entity.
2. Completeness: Verifies that all necessary transactions and events have been properly
recorded, leaving nothing out.
3. Accuracy: Confirms that the amounts and data related to recorded transactions are accurate
and correctly represented.
4. Cut-off: Ensures that transactions are recorded in the appropriate accounting period,
avoiding misplacement in time.
5. Classification: Checks that transactions and events are categorized and recorded in the
correct accounts, maintaining proper organization.
Assertions about account balances at the period end in an audit involve:
 Existence: Confirming that assets, liabilities, and equity interests actually exist as reported in
the financial statements.
 Rights and Obligations: Ensuring that the entity has the legal rights to assets and that
liabilities are genuine obligations of the entity.
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 Completeness: Verifying that all required assets, liabilities, and equity interests are included
in the financial statements, leaving nothing out.
 Valuation and Allocation: Checking that assets, liabilities, and equity interests are recorded at
the correct values and that any necessary adjustments for valuation or allocation are made
accurately.
Assertions about presentation and disclosure in an audit involve:
 Occurrence and Rights and Obligations: Ensuring that all disclosed events and transactions
are real and relevant to the entity, and the entity has the necessary rights and obligations
related to them.
 Completeness: Verifying that all required disclosures are included in the financial
statements, leaving nothing out.
 Classification and Understandability: Confirming that financial information is presented and
described correctly, and disclosures are clearly written and easy to understand.
 Accuracy and Valuation: Checking that all disclosed information is fair and accurate,
represented at appropriate amounts in the financial statements.
STEPS FOR RISK IDENTIFICATION
Here are the steps for risk identification in a more straightforward manner:
1. Evaluate the importance and impact of identified risks on specific account balances.
2. Assess the likelihood of these risks occurring and how they affect audit procedures.
3. Document which assertions (completeness, existence, accuracy, validity, valuation,

presentation) are influenced by these risks.
4. Analyze how the risks impact these assertions for the account balances, transactions, or
disclosures.
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5. Identify significant risks that need special attention, and plan audit procedures accordingly.
6. Ask and document how management plans to address these risks.
7. Consider the effectiveness of the internal control system in mitigating risks, looking at
routine, manual, or automated controls.
8. Take into account any unique characteristics of the risk.
9. Address any inherent risks in transactions or account balances, such as high-value inventory
or complex contracts, when designing audit procedures.
RISK-BASED AUDIT APPROACH
A risk-based audit approach means focusing the audit on the areas with the highest risks to the
audited entity's goals. It involves analyzing audit risks, setting materiality thresholds, and
directing more audit resources to high-risk areas. The auditor doesn't need to check every
aspect; they concentrate on the areas identified as the most risky for material misstatements in
the financial statements. This approach is crucial in financial audits, helping identify and reduce
the impact of risks on financial statements. It also highlights opportunities for the audited entity
to improve its operations based on non-financial risks. In performance audits, it assesses risks
to the efficient and effective delivery of programs, guiding audit attention to areas with the
greatest impact on economy, efficiency, and effectiveness.
AUDIT RISK ANALYSIS
Before an auditor starts their work, they need to assess the risks that could affect the
organization they're auditing. This assessment is subjective, relying on the auditor's
professional judgment and the specific circumstances. The primary concern is the risk that the
auditor might unintentionally miss significant errors or fraud in the financial statements.
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There are two key types of risks:
1. Error Risk: This arises from unintentional mistakes in financial statements. Errors can be
related to the use of incorrect principles, inaccurate estimates, critical data handling, the
financial reporting process, or disclosures.
2. Fraud Risk: This involves intentional deception or misconduct, such as altering records,
providing false information, misrepresenting events or transactions, misapplying accounting
principles, or misappropriating funds.
The auditor's responsibility is to plan and conduct the audit in a way that provides reasonable
confidence that the financial statements are free from significant errors or fraud, regardless of
the cause. They adjust their audit procedures based on their assessment of these risks to
ensure the accuracy and reliability of the financial statements.
GENERAL STEPS IN THE CONDUCT OF RISK BASED AUDIT
This involves the following three key steps:
 Risk assessment
 Risk response; and
 Reporting
 RISK ASSESSMENT
During the risk assessment phase of an audit, auditors follow these steps:
 Client Evaluation: Review the client's background and decide whether to accept or continue
the audit engagement.
 Planning the Audit: Outline the overall audit approach and strategy.
 Understanding the Business: Study the client's business operations to grasp its nature and
potential risks.
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 Assessing Internal Controls: Identify and evaluate internal controls that could prevent or
detect material misstatements in financial statements.
 Assessing Risks: Evaluate the risks of significant errors or fraud in the financial statements.
 Identifying Special Risks: Recognize specific risks needing special attention and additional
audit procedures.
 Communication: Inform management and governance about any significant weaknesses in
internal controls.
 Risk Assessment at Different Levels: Evaluate risks both at the overall financial statement
level and for specific financial statement assertions.
RISK RESPONSE
The risk response phase of the audit is about designing and conducting additional audit
procedures to address the identified risks of material errors or fraud. Here are some important
considerations for planning these procedures:
1. Assertions beyond Substantive Procedures: In cases where highly automated processes

with minimal manual intervention make it challenging to address certain financial statement
assertions through substantive testing alone, auditors should plan additional procedures.
2. Internal Control Testing: Auditors should evaluate the existence and effectiveness of
internal controls. If controls are robust and can be relied upon, this may reduce the extent of
substantive testing required.
3. Substantive Analytical Procedures: Auditors should explore the potential for using
substantive analytical procedures, which involve comparing financial data to expectations
based on historical data or industry benchmarks. These can be efficient in reducing the need
for other procedures.
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4. Unpredictability: Auditors should introduce an element of unpredictability into their audit
procedures to minimize the risk of management anticipating the nature and timing of audit
testing.
5. Addressing Management Override and Fraud: Auditors must perform additional

procedures to assess the potential for management's override of controls or other fraud
scenarios, as fraud risk is a significant consideration in the audit.
6. Significant Risks: Specific procedures should be designed and performed to address

"significant risks" identified during the risk assessment phase. These risks are particularly
relevant to the audit and require thorough examination.
REPORTING
In the final audit phase, auditors assess whether the gathered evidence is enough and suitable
to lower the audit risk to an acceptable level, ensuring the accuracy and reliability of the audit
process.
During the final audit phase, it's crucial to:

 Evaluate changes in the assessed level of risk.
 Confirm the appropriateness of conclusions drawn from the audit work.
 Investigate any suspicious circumstances that may have arisen during the audit process,
addressing them as needed for a comprehensive assessment of the financial statements.
When all procedures have been performed and conclusions reached:

1. Report Findings: Communicate audit findings to management and those responsible for
oversight, ensuring transparency and accountability.
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2. Form Audit Opinion: Based on the assessment of evidence and conclusions create the audit
opinion, deciding on the precise wording for the auditor's report. This opinion reflects the
auditors' professional judgment on the fairness of the financial statements.
INTERNAL CONTROL SYSTEM

Internal controls are policies and procedures put in place by management to ensure that an
organization operates efficiently, follows its goals, protects assets, detects and prevents fraud,
maintains accurate accounting records, and produces reliable financial information. These
controls are essential for achieving objectives related to financial reporting, operational
effectiveness, asset protection, and legal compliance, as outlined in auditing standards like SA
315.
SCOPE OF INTERNAL CONTROLS

The scope of internal controls encompasses more than just accounting controls and includes
administrative controls related to decision-making processes such as production methods,
quality control, and pricing policies. In an independent financial audit, auditors primarily focus
on controls that impact the accuracy of financial statements, such as safeguarding assets and
preventing fraud. Effective internal control is an integral process involving people that offers
reasonable assurance about risk and helps achieve organizational objectives. It's essential that
internal control is integrated into the company's activities rather than being isolated.
OBJECTIVES OF INTERNAL CONTROL SYSTEM

The objectives of an internal control system, tailored to the business's nature and scale,
include:
 Ensuring that transactions are authorized by management.
 Promptly recording transactions for financial reporting and asset accountability.
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 Safeguarding assets and records from unauthorized access or use.
 Periodically verifying assets and addressing discrepancies as needed.
Accounting control objectives aim to guarantee completeness, validity, and accuracy in

processed transactions, ensuring effective and reliable financial reporting. The basic
accounting control objectives which are sought to be achieved by any accounting control
system are:
Ensure all transactions are
Properly Recorded Properly Properly

Recorded Real Properly
Valued Timely Posted Summarized
Classified
and
Disclosed
LIMITATIONS OF INTERNAL CONTROL

Internal control has limitations, offering only reasonable, not absolute, assurance due to
factors like management's cost-benefit consideration, controls missing unusual transactions,
potential human errors, collusion risks, abuse of control, and manipulations by management in
financial statements' preparation.
STRUCTURE OF INTERNAL CONTROL

To achieve the objectives of internal control, various policies and procedures are
established, including:
1. Segregation of Duties: Allocating transaction tasks to different individuals to prevent one

person from completing a transaction independently. This minimizes fraud and error risks.
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2. Authorization of Transactions: Ensuring that transactions are carried out with proper
authorization, either general or specific, and comparing them with authorizations to confirm
compliance.
3. Adequate Records: Ensuring that transactions are executed as authorized, promptly

recorded at the correct amounts, classified appropriately, and in a manner facilitating financial
statement preparation. Records must protect assets from unauthorized access and maintain
asset descriptions for periodic physical verification.
4. Accountability and Safeguarding of Assets: Managing assets from acquisition to disposal,

safeguarding assets through maintenance, reconciliation, and physical verification, and
controlling access to sensitive assets.
5. Independent Checks: Periodic independent reviews of control systems by external auditors

or specially assigned staff to assess their effectiveness.
COMPONENTS OF INTERNAL CONTROLS

In general, a system of internal control to be considered adequate should include the
following five components:
1. Control Environment: This refers to the overall atmosphere and attitude toward internal
control within an organization. It involves leadership, ethical values, and the organizational
culture that promotes the importance of control.
2. Entity’s Risk Assessment Process: Organizations need to identify and assess the risks they
face, both internally and externally. This includes evaluating the likelihood and impact of
various risks to determine how to manage them effectively.
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3. Control Activities: These are specific policies and procedures that an organization puts in
place to mitigate risks and ensure that its objectives are achieved. They can include
authorization, segregation of duties, and physical safeguards.
4. Information System and Communication: Effective internal control systems rely on

accurate and timely information. This component involves ensuring that information is
captured and communicated in a way that supports control activities and decision-making.
5. Monitoring of Controls: Internal control systems need ongoing monitoring to ensure that
they are working as intended. This can involve regular assessments, evaluations, and
adjustments to improve controls over time.
Control
environment
Monitoring Entity’s risk

of assessment
controls process
Components
of Internal
Control
Information
system and Control
communicati activities
on
REVIEW OF THE SYSTEM OF INTERNAL CONTROLS

The importance of the control environment in an organization, which includes governance,
management functions, and the attitudes of people in charge regarding internal control.
Evaluating a control involves assessing its capability to prevent or detect material errors,
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considering both manual and automated elements. Manual controls are suitable for complex
or non-recurring transactions, situations where errors are hard to define, and cases requiring
judgment. The organization adapts its controls based on the risks arising from IT and manual
elements, ensuring effective internal control.
The review of the internal control system enables the auditor –

The review of an organization's internal control system helps auditors in two ways. First, it
helps them determine if the system is reliable enough to produce accurate financial
statements. Second, it identifies any weaknesses in the system so that audit procedures can be
adjusted accordingly. The timing of this review depends on the auditor's judgment and the
client's size and complexity.
The review is typically a separate phase of the audit process, but in smaller operations, it can
be integrated with other audit procedures. Auditors must communicate any identified
weaknesses to the client and follow up during the audit to see if improvements have been
made.
The review involves inquiries with personnel, examining documentation, and possibly tracing
transactions through the accounting system. The auditor assumes that controls are operating
as described and evaluates which controls to rely on. Different techniques can be used to
document information about the internal control system, chosen based on the auditor's
judgment.
INTERNAL CONTROL ASSESSMENT & EVALUATION

The quality and effectiveness of an organization's internal controls depend on its overall
environment. The leadership at the top, like the Board and Executive Management, sets the
tone and credibility for internal controls. Here are key components to assess and evaluate
this control environment:
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 Standard Operating Procedures (SOPs): Well-defined SOPs clarify roles, responsibilities,
processes, and controls. This ensures that everyone involved in a process understands and
consistently applies the controls, even when there's employee turnover.
 Enterprise Risk Management: Robust risk identification and mitigation processes across the
organization help spot issues early and take effective control measures, reducing surprises from
control failures.
 Segregation of Job Responsibilities: Control is enhanced when different individuals handle

various aspects of a transaction or decision. No single person should manage all aspects of a
commercial activity to prevent potential misuse.
 Job Rotation in Sensitive Areas: Regularly rotating employees in key roles helps prevent
complacency and misuse in sensitive areas, maintaining effective controls.
 Delegation of Financial Powers Document: As organizations grow, it's essential to delegate

financial and other powers to employees. A well-defined document on power delegation
ensures that controls can be maintained consistently without reliance on specific individuals.
 Information Technology-based Controls: Modern technology, such as computers and ERP

systems, allows for controls to be embedded directly into the system, reducing reliance on
human intervention. IT-based controls are less prone to failure, offer better audit trails, and are
easier to monitor. For example, systems can ensure correct invoicing rates and credit control,
improving the control environment.
TECHNIQUES OF EVALUATION OF INTERNAL CONTROL
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The following are the techniques of evaluation of internal control:
QUESTIONNAIRE
A questionnaire for evaluating internal control is a structured set of questions used by auditors
to assess the effectiveness of an organization's control systems. It's like a survey that covers
different functional areas such as purchases, sales, receivables, payables, and more. The
purpose is to identify strengths and weaknesses in the control environment.
The questionnaire is typically meant to be filled out by the company's executives responsible
for each area, but sometimes the auditor or their representative may help with this process.
The questions are designed in a way that often requires a simple "Yes," "No," or "Not
applicable" response. A "No" answer usually indicates a weakness in the control system,
aligning with what good control should be.
The questions are framed logically and sequentially to ensure consistency and clarity. It serves
as a record for the auditor to understand the state of internal control in the organization.
For first-time engagements, issuing a questionnaire is necessary. In subsequent years, instead

of issuing a new questionnaire, the auditor may inquire if there have been any changes in the
business that would impact the control system. If there have been changes, the auditor notes
them in the questionnaire. However, it's good practice to issue a questionnaire every few
years, even without significant changes, to stay updated and maintain a control-conscious
environment.
Questionnaires can cover various aspects of the internal control system, helping auditors
assess and improve control effectiveness.
CHECK LIST
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A checklist in auditing is a tool that auditors use to follow a series of instructions or questions
related to internal control. When performing an audit, the auditor goes through the checklist,
marking off each instruction as it is carried out. The checklist may include questions with "Yes,"
"No," or "Not Applicable" responses. It serves as a reminder to the auditor about what to
check when evaluating the internal control system. Checklists can take the form of
instructions, questions, or points to be examined. While questionnaires are typically directed
at the client, checklists can be intended for the auditor's staff or the client, depending on their
format.
FLOW CHART
A flow chart is a graphic representation used for evaluating an organization's internal controls.
It visually illustrates the control procedures in different sections or sub-sections. Unlike a
lengthy narrative description, a flow chart provides a concise and comprehensive way to
review internal controls, making it easier for auditors to convey their findings. Flow charts
reduce the need for detailed text, presenting the essential control structure in a condensed yet
meaningful manner. They offer a holistic overview of the system and result from the auditor's
review.
Flow charts include lines and symbols and can contain all relevant control-related details,
including how operations are performed. They provide a visual representation of document
flow and activities within a department, showing:
 Where documents are created or received.

 The number of document copies.
 The sequential stages documents and activities go through.
 Document distribution.
 Authorization and matching checks.
 Document filing.
 Final disposal or transmission.
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To effectively use flow-charting for evaluating internal controls, auditors need a deep
understanding of internal control requirements and analytical skills to identify appropriate
controls at relevant points.
It's essential to create flow charts section-wise or department-wise for readability and
comprehensibility.
Drawing of a flow chart

A flow chart is a visual representation of the flow of activities and documents within a process.
It typically follows a horizontal format with vertical column heads representing sections or
individuals involved. The first column head denotes the origin of a transaction, with
subsequent heads arranged in the order of the transaction flow. Flow charts are essential for
understanding and evaluating internal controls in various functions like sales, purchases,
wages, and production. Each main function should be connected to related functions to create
a comprehensive chart. To assess control systems, a questionnaire is often included, with
answers derived from the flow chart, helping identify any weaknesses in the system.
FRAMEWORKS OF INTERNAL CONTROL

Internal controls are crucial for safeguarding business value, whether a company adopts a
global framework or creates its own. The focus should be on integrating controls into
processes aligned with business objectives. Rather than creating separate risk reporting
systems, incorporating early warning mechanisms into existing management information
systems is recommended. Internal control is essential for day-to-day business operations,
spanning strategic, governance, and management processes. The chapter provides an
overview of common international frameworks guiding the establishment of robust internal
control systems.
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Guidance Note on Audit of Internal Financial Controls Over Financial Reporting: The ICAI
issued a Guidance Note on the Audit of Internal Financial Controls Over Financial Reporting,
covering aspects like the scope of reporting under the Companies Act 2013, essential
components of internal controls, and technical and implementation guidance. To ensure
financial statements present a true and fair view, compliance with the financial reporting
framework, including Accounting Standards, is crucial. Similarly, a benchmark internal control
system is essential for assessing adequacy and compliance. SA 315's Appendix 1 provides
criteria for internal financial controls over financial reporting in the Indian context.
INTERNATIONAL INTERNAL CONTROL FRAMEWORKS

An overview of different internal control frameworks followed internationally are given below:
A. Internal Control - Integrated Framework issued by Committee of the Sponsoring

Organisations of the Treadway Commission (COSO Framework)
The COSO Framework, introduced in 1992, provides guidance on establishing effective controls
for achieving company objectives. It categorizes objectives into operations, financial reporting,
and compliance. The framework comprises five components: control environment, risk
assessment, control activities, information and communication, and monitoring. With over 17
basic principles, it emphasizes key elements like integrity, ethical values, authorities and
responsibilities, policies and procedures, and reporting deficiencies for compliance.
The COSO Framework is designed to be used by organizations to assess the effectiveness of

the system of internal control to achieve objectives as determined by management. The
Framework lists three categories of objectives as below:
The COSO Framework assesses the effectiveness of internal control systems for achieving
management-determined objectives. It outlines three categories of objectives: Operations
(efficiency and effectiveness), Reporting (financial and non-financial reporting reliability,
timeliness, transparency), and Compliance (adherence to applicable laws and regulations).
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Recognizing the growing complexity of laws, regulations, and accounting standards, the
Framework addresses increased demands in these areas.
Limitations of Internal Control : The COSO Framework acknowledges limitations in internal

control systems, including events beyond an organization's control and the potential for
human error, judgment uncertainties, management override, and collusion. While an effective
system minimizes risks through design and implementation, it provides reasonable assurance,
not absolute, that the entity will achieve its objectives.
B. Guidance on Assessing Control published by the Canadian Institute of Chartered

Accountants (CoCo)
CoCo, introduced by the Canadian Institute of Chartered Accountants, aims to enhance
organizational performance through improved controls, risk management, and corporate
governance. The Criteria of Control (CoCo) framework outlines 20 criteria in four areas:
Purpose (direction), Commitment (identity and values), Capability (competence), and
Monitoring and Learning (evolution). Emphasizing that control starts at an individual level, the
framework guides the assessment of controls' existence and effectiveness by examining each
criterion.
C. Control Objectives for Information and Related Technology (COBIT)

COBIT, developed by ISACA, is an IT governance and management framework with 34
processes covering 210 control objectives in four domains: planning, acquisition, delivery, and
monitoring. It bridges the gap between technical issues, business risks, and control
requirements, providing a model for value delivery and improved risk management. Used
globally, COBIT ensures the integrity of information systems, guiding organizations in using IT
resources effectively for compliance, efficiency, and reliability. Well-governed IT practices help
businesses comply with laws, regulations, and contractual arrangements.
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D. Internal Control: Guidance for Directors on the Combined Code, published by the Institute
of Chartered Accountants in England & Wales (known as the Turnbull Report)
The Turnbull Report, by the Institute of Chartered Accountants in England & Wales, provides
guidance on implementing the requirements of the Committee on Corporate Governance's
Combined Code. It emphasizes maintaining a sound internal control system to protect
shareholders' investments and company assets. Directors should conduct an annual review
covering financial, operational, and compliance controls, reporting to shareholders. The
guidance advocates a risk-based approach integrated into normal management processes, not
as a separate regulatory compliance exercise.
E. Sarbanes-Oxley Section 404
Sarbanes-Oxley Section 404 mandates internal controls for financial reporting in publicly-traded
companies to curb corporate fraud. SOX aims to enhance reporting integrity through stringent
procedures. The Sarbanes-Oxley Act overhauled federal regulations for corporate governance,
leading to the creation of PCAOB, overseeing audits of public companies and SEC-registered
entities to protect investors and ensure informative, accurate, and independent audit reports.
The SEC rules and PCAOB standard require that:
SEC and PCAOB rules mandate that management conducts a formal assessment, including tests
confirming the design and effectiveness of financial reporting controls. Management must
include this assessment in the annual report. External auditors, in a single integrated audit,
provide two opinions: one on the independent effectiveness of the internal control over
financial reporting (ICFR) system and another on the traditional financial statements.
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SA 510 Initial Audit
SA 505 External Engagements –
Confirmations Opening Balances
SA 501 Audit
Evidence
- Specific SA 530 Audit
Considerations for Sampling
Selected Items
SA 500 Audit Audit SA 550 Related

Evidence
Evidence Parties
SA 500 AUDIT EVIDENCE
Statement on Auditing Standards (SA) 500 outlines the auditor's duty to plan and execute
audit procedures to acquire enough and pertinent evidence for forming reasonable
conclusions supporting the auditor's opinion. This standard defines the nature of audit
evidence in financial statement audits.
Scope of the SA
SA 500 focuses on guiding auditors in planning and executing audit procedures to secure
adequate and relevant audit evidence for forming sound conclusions to support their
opinion. This standard applies universally to all audit evidence gathered throughout the
audit process.
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Objective of the auditor
The auditor's objective is to strategically plan and execute audit procedures, ensuring the
acquisition of enough and pertinent audit evidence. This process is vital for forming sound
conclusions that serve as the foundation for the auditor's opinion.
Information to be used as audit evidence
When utilizing information as audit evidence, it is crucial for auditors to assess its relevance
and reliability. This is applicable whether the information is sourced from management
experts or produced by the entity under audit. To streamline this evaluation process,
consider the following condensed guidance:
1. Information from Management Experts:
 Competence: Assess the proficiency of the management expert to ensure their

qualifications align with the subject matter.
 Objectivity: Evaluate the objectivity of the expert, ensuring independence and lack of
bias.
 Appropriateness of Work: Scrutinize the appropriateness of the expert's work in relation
to the audit objectives.
2. Information Produced by the Entity:
 Reliability: Evaluate the dependability of the information, considering its source,

consistency, and verifiability.
 Completeness: Ensure that the information provides a comprehensive view, covering all
relevant aspects without omissions.
 Accuracy: Verify the accuracy of the information, confirming its precision and absence of
errors.
Audit procedures to obtain audit evidence
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To secure audit evidence for sound conclusions and opinions, auditors employ two main
steps:
1. Risk Assessment Procedures: Understand the entity's environment and assess risks of
material misstatement.
2. Further Audit Procedures: Divided into Test of Controls (evaluate internal controls) and
Substantive Procedures (direct tests on financial data).
This structured approach ensures a comprehensive yet concise audit process.
Inconsistency in or doubts over reliability of audit evidence
Auditors must identify necessary modifications or additions to audit procedures for

resolution. Additionally, they should assess the potential impact of the matter on other
aspects of the audit.
SA 501 AUDIT EVIDENCE – SPECIFIC CONSIDERATIONS FOR SELECTED ITEMS
SA 501 addresses the auditor's specific considerations for obtaining sufficient and
appropriate audit evidence related to inventory, litigation and claims, and segment
information in financial statement audits.
Scope of the SA
The Scope of this Specific Audit (SA) involves the auditor's focus on obtaining sufficient and
appropriate audit evidence in three key areas: inventory, litigation and claims, and segment
information. For inventory, the auditor will assess the accuracy and valuation of goods. In
the case of litigation and claims, the focus is on evaluating potential legal obligations and
their impact on financial statements. Lastly, the auditor will scrutinize segment information
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to ensure it is accurately presented in the financial statements. This SA outlines the specific
considerations and procedures necessary for a thorough audit in these critical areas.
The primary objective of the auditor in this context is to gather sufficient and appropriate
audit evidence related to three key aspects:
1. Existence and Condition of Inventory:
 Ensure the physical existence of inventory items.

 Evaluate the condition of the inventory items.
2. Completeness of Litigation and Claims:
 Verify that all relevant litigation and claims involving the entity are accounted for.
 Confirm that the financial statements reflect a comprehensive picture of legal
obligations.
3. Presentation and Disclosure of Segment Information:
 Confirm that segment information is presented accurately in accordance with the

applicable Financial Reporting Framework (FRF).
 Assess whether the disclosure of segment information aligns with the established
standards and regulations.
Inventory
For material inventory:
a) Obtain evidence for existence and condition through:
 Physical inventory counting attendance.
 Audit procedures on final inventory records.
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b) If inventory counted on a date other than financial statement date, perform additional
procedures for the period between count date and financial statement date.
c) If unable to attend physical count due to unforeseen circumstances, make/observe a

physical count on an alternate date and perform audit procedures on intervening
transactions.
d) If physical count attendance is impracticable, perform alternate procedures; if not

possible, modify the opinion.
e) When inventory is held by a third party, request confirmation and conduct inspections
and other necessary procedures.
Litigations & Claims
a) Perform procedures to identify litigation and claims by:

 Inquiring with management.
 Reviewing minutes of meetings.
 Scrutinizing legal expense accounts.
b) If material misstatement risk is assessed, communicate directly with external legal

counsel.
c) If unable to communicate with external legal counsel, modify the opinion per SA 705.
d) Obtain written representation confirming disclosure and accounting conformity for all
known litigation and claims as per applicable Financial Reporting Framework (FRF).
Segment Information
Auditor to obtain evidence on presentation and disclosure in line with applicable FRF by:
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 Understanding management's methods for determining segment information.
 Performing analytical procedures.
SA 505 EXTERNAL CONFIRMATIONS

SA 505 guides auditors in using external confirmation procedures aligned with SA 500
requirements, aiding in the design and execution of procedures to obtain pertinent and
reliable audit evidence.
Scope of the SA & Objective of the auditor
Scope: This SA addresses the auditor's application of external confirmation procedures for
obtaining audit evidence.
Objective: Design and execute external confirmation procedures to acquire pertinent and
trustworthy audit evidence.
External Confirmation Procedures
1. Identify the information to be confirmed/requested.

2. Choose the suitable confirming party.
3. Develop confirmation requests.
4. Dispatch the requests, including any necessary follow-up requests.
Management's refusal to allow the audit to send a confirmation request
 Inquire about management's refusal, assessing reasons and validity.

 Evaluate the impact on risk assessment and adjust audit procedures accordingly.
 Conduct alternative procedures for obtaining relevant and reliable audit evidence.
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If management's refusal is unjustified, communicate with those charged with governance
(TCWG) and consider implications for the audit opinion.
Results of the External Confirmation procedures
A) If doubt on response reliability, obtain further evidence; if response deemed unreliable,

assess implications on risk of material misstatement.
B) Non-response: Conduct alternative audit procedures.
C) If no response to positive confirmation, assess implications on audit and auditor's

opinion.
D) Exceptions: Investigate exceptions to determine misstatement indication.
E) Negative Confirmation: Use as sole substantive procedure when:
 Low risk of material misstatement with effective controls.

 Population comprises numerous small, homogeneous transactions.
 Expect very low exception rate.
 No known circumstances to disregard negative confirmation requests.
SA 510 INITIAL AUDIT ENGAGEMENTS-OPENING BALANCES
SA 510 outlines the auditor's duties regarding opening balances in an initial audit
engagement, which involves unaudited or predecessor-audited financial statements from
the prior period.
Scope of the SA
This Standard on Auditing (SA) outlines the auditor's responsibilities concerning opening
balances during the course of an initial audit engagement.
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1. Obtain sufficient and appropriate audit evidence to assess whether opening balances
have material misstatements impacting the current period's financial statements.
2. Evaluate the consistent application of appropriate accounting policies and proper

accounting for and disclosure of any changes.
AUDIT PROCEDURES
Opening Balances
The auditor shall:
 Read the most recent financial statements and predecessor's auditor's report.
 Confirm correct bringing forward of the prior period's closing balance.
 Verify appropriateness of accounting policies reflected in opening balances.
 Execute audit procedures on opening balances.
 If misstatements in opening balances affect current period financial statements,
communicate with management or those charged with governance (TCWG).
Consistency of Accounting Policies: Obtain audit evidence regarding consistent application

of accounting policies. If changes exist, verify proper accounting, presentation, and
disclosure.
Relevant Information in the Predecessor's Auditor's Report: Evaluate the impact of any
modifications in the predecessor auditor's report on the current period's financial
statements.
Audit Conclusion and reporting
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Opening Balances:
 Unable to obtain evidence - Qualified/Disclaimer.

 If misstatements present - Qualified/Adverse Opinion.
Consistency of Accounting Policies: Inconsistent application or improper accounting for

changes - Qualified/Adverse Opinion.
Modification in Predecessor's Auditor's Report: If relevant and material, modify the current
period audit report.
SA 530 AUDIT SAMPLING
SA 530 guides auditors in employing statistical and non-statistical sampling for designing,
selecting, and evaluating audit samples during tests of controls and tests of details.
Scope of the SA & Objective of the auditor
Scope of SA 530: This Standard on Auditing applies when auditors opt to utilize audit
sampling in their audit procedures, encompassing both statistical and non-statistical
sampling methods.
Objective of SA 530: To furnish the auditor with a reasonable basis for drawing conclusions
about the entire population from which the audit sample is selected.
Sample design, size and selection of items for testing
Design: Consider the audit procedure purpose and population characteristics.
Size Determination: Set a sample size adequate to minimize sampling risk to an acceptable
level.
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Selection: Choose sample items ensuring each unit in the population has a chance of
selection.
Performing Audit Procedures
 Procedure Application: Execute suitable audit procedures on each selected item.

 Inapplicable Procedure: If a procedure is not applicable, apply it to a replacement item.
 Unable to Apply Procedure: If unable to apply the designed procedure, treat the item as
a deviation from prescribed control (for tests of controls) or a misstatement (for tests of
details).
Other points of consideration
1. Investigation of Deviation/Misstatement: Investigate nature and cause of identified

deviation or misstatement, evaluating its potential effect.
2. Anomalies: If a deviation/misstatement is deemed an anomaly, conduct procedures for a

high degree of certainty that it is not representative of the population.
3. Projection of Misstatements: In tests of details, project misstatements found in the

sample to the population.
4. Evaluation of Results: Assess sample results, ensuring that the use of audit sampling
provides a reasonable basis for conclusions about the tested population.
SA 550 RELATED PARTIES
SA 550 outlines the auditor's responsibilities for addressing risks of material misstatement
related to related party relationships and transactions during the audit of financial
statements.
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Scope of the SA
This Standard on Auditing addresses the auditor's duties concerning related party
relationships and transactions. It provides guidance on applying SA 315, SA 330, and SA 240
in the context of related party matters.
Objectives of the auditor
Understand Related Party Transactions: Identify fraud risk factors and assess whether
financial statements, affected by such transactions, achieve a true and fair presentation and
are not misleading.
Obtain Audit Evidence: Verify proper identification, accounting, and disclosure of related
party transactions in the financial statements.
Requirements of the SA
 Risk Assessment Procedures: Conduct risk assessment procedures and related activities.
 Understanding Entity's Related Party Relationships: Acquire an understanding of the
entity's related party relationships and transactions.
 Maintaining Alertness: Stay alert for related party information during the review of
records or documents.
 Sharing Information: Share related party information with the engagement team.
 Identification and Assessment of Risks: Identify and assess the risk of material
misstatement linked to related party transactions and relationships.
 Responses to Risks: Implement responses to address the risks of material misstatement
associated with related party relationships and transactions.
Identification of previously unidentified or undisclosed related part transactions
1. Confirmation of Circumstances: The auditor must determine whether underlying

circumstances confirm the existence of previously unidentified transactions.
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2. Communication within the Team: Share information within the audit team.
3. Management Request: Ask management to identify all transactions involving newly

discovered related parties.
4. Enhanced Substantive Procedures: Perform additional substantive procedures.
5. Reconsider Risks: Reassess risks concerning other related parties.
6. Evaluation of Non-Disclosure: If intentional non-disclosure by management is suspected,

evaluate its implications for the audit.
Identified Significant Related Party Transactions Outside the Normal Course of Business
1. Contract Inspection: Scrutinize underlying contracts, assessing:
a) Business rationale.
b) Consistency of terms with management's explanations.
c) Proper accounting for transactions.
2. Audit Evidence for Authorization: Obtain evidence confirming appropriate authorization

and approval of the transactions.
Other Important Points
 Written Representation: Obtain written representation confirming:

 Disclosure of all related parties and transactions.
 Proper accounting and disclosure of all such transactions.
 Communication with TCWG: Communicate significant matters related to the entity's
related parties to those charged with governance (TCWG).
 Documentation: Include in audit documentation the names of related parties and the
nature of related party transactions.
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Completion and Review
SA 560 SA 570 SA 580
Going Concern Written

Subsequent Events
(Revised) Representations
SA 560 SUBSEQUENT EVENTS
SA 560, "Subsequent Events," outlines the auditor's tasks related to events o
occurring after financial statement dates but before the audit report issuance. The key goals
are to gather enough relevant evidence to determine if adjustments or disclosures are
needed in the financial statements, ensuring their fairness and compliance with reporting
standards. The auditor must respond appropriately to facts arising post-audit report that, if
known earlier, might have prompted a modification of the report. In essence, SA 560
safeguards the accuracy and completeness of financial information by addressing events
occurring between the statement date and the report issuance.
Scope of the SA
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SA 560 outlines what auditors should do regarding events happening after financial
statements are prepared but before the audit report is issued. It guides auditors in ensuring
they have the right information about these events to decide if adjustments or disclosures
are needed in the financial statements. The main aim is to make sure that the financial
statements are accurate and meet reporting standards, considering any significant events
that occurred after the financial statement date.
In short, SA 560 focuses on how auditors handle events that come up between the financial
statement date and the issuance of the audit report.
Definitions of Subsequent Events
"Subsequent Events" refer to occurrences between the financial statement date and the
auditor's report date, including facts discovered by the auditor after issuing the report. In
essence, these events are crucial for ensuring the financial statements remain current and
accurate up to the point of the auditor's report, considering developments both before and
after the report date.
The objectives of the auditor regarding subsequent events are twofold.
Firstly, it involves obtaining sufficient and appropriate audit evidence to assess whether
events occurring between the financial statement date and the auditor's report date, which
require adjustments or disclosure, are accurately represented in the financial statements.
Secondly, the auditor aims to respond appropriately to facts discovered after the auditor's
report date that might have led to a modification of the report had they been known at that
time. In summary, the objectives focus on ensuring the accuracy of financial statements in
light of events occurring both before and after the report date.
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Events occurring between the date of the Financial Statements and date of the auditor's
report
1. The auditor must actively identify all such events through audit procedures.
2. The nature and extent of these procedures should be influenced by the auditor's risk
assessment.
3. Upon identification of an event, the auditor assesses whether it is appropriately reflected
in the financial statements.
4. To confirm completeness, the auditor obtains written representation, ensuring that all
relevant events have been either adjusted in the financial statements or disclosed. In
summary, the process involves identification, assessment, and confirmation to ensure the
accurate representation of events in the financial statements.
Facts which become known to the auditor after the date of the auditor's report but before
the date the financial statements are issued
 Discuss with Management or TCWG: Engage in discussions with management or those

charged with governance (TCWG) to understand the nature and implications of the newly
discovered facts.
 Determine the Need for Amendment: Assess whether the financial statements require
amendment in light of the new information.
 Inquire about Management's Intentions: Inquire with management about their plans to
address the matter in the financial statements.
If Management Amends the Financial Statements:
 Extend audit procedures.

 Either amend the audit report, adding a restricted additional date, or provide a
new/amended report, including a statement in the explanatory or other-matter paragraph.
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If Management Doesn't Amend the Financial Statements:
 If the audit report has not been issued to management, modify the opinion.
 If the report has been issued, inform TCWG not to release it to third parties.
 If still issued, take appropriate action to prevent reliance on the auditor's report.
Facts that become known to the auditor after the financial statements have been issued
1. Discuss with Management or TCWG: Engage in discussions with management or those

charged with governance (TCWG) to understand the nature and implications of the newly
discovered facts.
2. Determine the Need for Amendment: Assess whether the financial statements need
amendment in light of the new information.
3. Inquire about Management's Intentions: Inquire with management about their plans to
address the matter in the financial statements.
Review Management's Communication: Review if management has taken steps to inform

everyone who received the previously issued financial statements about the situation.
If Management Takes Steps to Inform: Issue a new/amended report, including an

explanatory or other-matter paragraph (EOM/OM) to address the situation.
If Management Doesn't Take Adequate Steps: Take appropriate measures to prevent

reliance on the auditor's report, ensuring that stakeholders are aware of the updated
information and understand the need for caution.
SA 570 GOING CONCERN
SA 570, "Going Concern," outlines the auditor's responsibilities in assessing an entity's

ability to continue as a going concern. The standard guides auditors in obtaining sufficient
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evidence to determine the presence of material uncertainties that may cast significant
doubt on the entity's ability to remain a going concern, impacting the content of the
auditor's report.
Scope of the SA
The scope of SA 570 involves the auditor's responsibilities in auditing financial statements
with a focus on the entity's ability to continue as a going concern. The standard addresses
the implications of this assessment on the content of the auditor's report. In essence, SA
570 guides auditors in evaluating and reporting on an entity's capacity to operate as a going
concern, ensuring transparency and disclosure in the audit process.
Responsibilities of the management
Management has two primary responsibilities concerning the entity's ability to continue
as a going concern:
first, to conduct a specific assessment of this ability, and second, to provide relevant
disclosures in the financial statements regarding the entity's going concern status.
Responsibilities of the auditor
The auditor is responsible for obtaining adequate audit evidence to assess and conclude on
the appropriateness of management's use of the going concern basis. Additionally, the
auditor evaluates if there is a material uncertainty regarding the entity's ability to continue
as a going concern. However, it's crucial to note that the auditor cannot guarantee the
entity's on-going viability.
When conditions or events are identified
The auditor takes several steps:
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 Request Management's Assessment: Ask management to assess the entity's ability to
continue as a going concern.
 Evaluate Management's Plan: Assess the adequacy of management's plan for future
actions.
 Analyse Cash Flow Forecast: Examine the entity's cash flow forecast to understand its
financial trajectory.
 Consider Additional Information: Factor in any additional facts or information available
regarding the entity's financial status.
 Request Written Representation: Obtain written representation from management,
confirming their plans for future actions and the feasibility of these plans.
Implications on the auditor's report
If the Going Concern Basis of Accounting is appropriately used, the auditor expresses an
adverse opinion. An adverse opinion signals a significant concern about the entity's ability to
continue operations, reflecting a severe qualification of the audit report.
Going Concern Basis Appropriate with Material Uncertainty (Adequate Disclosure):
If the Going Concern basis of accounting is suitable, yet a material uncertainty exists with
sufficient disclosure in the financial statements, the auditor issues an unmodified opinion.
The report includes a separate section titled "Material Uncertainty related to going concern"
to transparently address the disclosed uncertainty.
Going Concern Basis Appropriate with Inadequate Disclosure:
If the Going Concern basis of accounting is fitting, but there's a material uncertainty and
inadequate disclosure in the financial statements, the auditor issues a qualified/adverse
opinion. The basis of opinion paragraph explicitly mentions the material uncertainty related
to going concern. This signals a qualification due to the lack of transparency regarding the
uncertainty.
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Other Important Points to be considered
Communication with TCWG: The auditor is obligated to communicate with Those Charged
with Governance (TCWG) when events or conditions raising significant doubt about the
entity's ability to continue as a going concern are identified. This ensures transparency and
awareness among key stakeholders.
Delay in Financial Statements Approval: If there is a delay in the approval of financial

statements, and the auditor suspects a connection to events or conditions related to the
going concern assessment, additional procedures are performed. The auditor also considers
the impact of such delays on their conclusion regarding the entity's ability to continue as a
going concern. This ensures that potential delays are thoroughly examined and addressed in
the audit process.
SA 580 WRITTEN REPRESENTATIONS
SA 580, "Written Representations," outlines the auditor's duty to obtain written statements
from management and, if applicable, those charged with governance. While these
representations offer essential audit evidence, they are not independently sufficient for all
matters they address. Even if management provides reliable written representations, it
doesn't alter the nature or extent of other audit evidence the auditor collects regarding
management's responsibilities or specific assertions. In summary, while written
representations are crucial, they are part of a broader set of evidence required for a
comprehensive audit assessment.
Scope of the SA
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SA 580 addresses the auditor's responsibility to procure written representations from
management and, when applicable, those charged with governance. The standard
emphasizes the importance of obtaining these written statements to support the audit
process, ensuring transparency and accountability in financial reporting.
Confirmation of Responsibilities: Obtain written statements from management or those

charged with governance (TCWG) confirming their belief in fulfilling responsibilities for
financial statement preparation and ensuring the completeness of information provided to
the auditor.
Supporting Audit Evidence: Use written representations to complement other audit

evidence relevant to the financial statements or specific assertions, enhancing the overall
evidential basis for the audit.
Appropriate Response: Respond effectively to written representations provided by

management or TCWG, ensuring that the auditor addresses and considers these
representations in the overall audit process. This includes assessing the reliability and
appropriateness of the representations in the context of the audit.
Written Representation as Audit Evidence
While written representations serve as crucial audit evidence, it's important to note that
they are not independently sufficient. Written representations, although valuable, do not
alone provide enough appropriate audit evidence. Auditors must rely on a comprehensive
set of audit procedures and evidence to ensure a thorough and reliable audit assessment.
Date & Periods covered by Written Representation
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The written representations should be dated close to the auditor's report date and cover all
the financial statements and periods mentioned in that report. This ensures that the
information provided is up-to-date and relevant for the audit.
Important points to be considered
Doubts About Reliability: If written representations conflict with other audit evidence, the
auditor must conduct additional procedures to resolve the inconsistency. If the auditor
determines that the written representations are unreliable, they must take suitable action
following the guidelines of SA 705.
Missing Written Representations: If the requested written representations are not

provided, the auditor should talk to the management, reassess the trustworthiness of
management, and take appropriate actions, including considering the impact on the audit
report in accordance with SA 705.
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INTRODUCTION
The issuance of an audit report marks the culmination of the audit field work, serving as the
key communication tool for a statutory auditor to express expert views on financial
statements. Given its significant impact on financial statement credibility and stakeholder
reliance, auditors must meticulously adhere to reporting standards to ensure objectivity and
uniformity in audit opinions.
THE AUDITOR’S REPORT ON FINANCIAL STATEMENTS
The SA 700 series is dedicated to the auditor's report, encompassing several Standards on
Auditing (SAs) that auditors need to be aware of. The key SAs within this series include:
SA Number Head Purpose

SA-700 Forming an Opinion and Forming an opinion on financial
Reporting on Financial statements; determining the form and
Statements content of the auditor’s report; addressing
Un-Modified (Clean) opinions.
SA-701 Communicating Key Audit Enhancing the communicative value of the
Matters in the Independent auditor’s report by providing transparency
Auditor’s Report about the audit performed; aiding user
understanding of the most significant
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matters in the audit.
SA-705 Modifications to the Opinion Issuing an appropriate auditor’s report
in the Independent Auditor’s when modification of the opinion is
Report necessary; dealing with the revised form
and content in case of opinion
modification.
SA-706 Emphasis of Matter Drawing user attention to critical matters
Paragraphs and Other Matter presented or undisclosed in financial
Paragraphs in the statements for better user understanding.
Independent Auditor’s
Report
SA 700 FORMING AN OPINION AND REPORTING ON THE FINANCIAL STATEMENTS
SA 700 outlines the auditor's responsibility to form an opinion on financial statements and
establishes guidelines for the form and content of the resulting audit report.
Objective: As per SA 700 the objectives of the auditor are:
 Form an opinion on financial statements.

 Clearly express the opinion through a written report.
PURPOSE OF SA 700
 Applies to audits of complete general-purpose financial statements.
 Aims for a balance between global consistency and increased relevance in auditor
reporting.
 Enhances the value of auditor reporting for users.
 Promotes consistency in global auditor reporting while allowing flexibility for
jurisdictional nuances.
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 Fosters credibility in the global marketplace by identifying audits conducted in line with
recognized standards.
 Facilitates user understanding and identification of unusual circumstances in financial
statements.
BASIC ELEMENTS OF THE AUDITOR’S REPORT

The auditor's report, as per SA 700, must be in writing and include basic elements for audits
conducted in accordance with Standards on Auditing:
1. Title: The auditor's report must have a title indicating it is the report of an independent
auditor.
2. Addressee: The report's address should comply with the circumstances of the
engagement.
3. Auditor’s Opinion: The initial section, labeled "Opinion," for an unmodified opinion on
financial statements prepared in accordance with a fair presentation framework, should use
phrases affirming fair presentation or true and fair view as specified by applicable financial
reporting framework. If using a compliance framework, the opinion should state the
financial statements are prepared in accordance with the relevant framework. If a non-
Accounting Standards framework is referenced, the origin must be identified in the opinion.
4. Basis for Opinion: following the Opinion section, with the heading “Basis for Opinion”,
that:
(a) Declares the audit was conducted in line with Standards on Auditing (SAs).
(b) References the section describing the auditor’s responsibilities under the SAs.
(c) Asserts auditor independence and compliance with ethical requirements, referencing the
ICAI's Code of Ethics.
(d) Expresses the auditor's belief in the sufficiency and appropriateness of obtained audit
evidence as the basis for the opinion.
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Title
Addressee
Auditor's Opinion
Basis for opinion
Going Concern
Key Audit Matters
Other Information
Responsibility for Financial Statement
Auditor’s Responsibilities for the Audit of the

Financial Statements
Location of the description of the auditor’s

responsibilities for the Audit of the F.S
Other Reporting Responsibilities
Signature of the Auditor
Place of Signature
Date of the Auditor's Report
5. Going Concern: In compliance with SA 570, the auditor reports on the going concern in
the auditor's report when applicable. The auditor's responsibilities include obtaining
adequate audit evidence to assess whether management's use of the going concern basis in
financial statement preparation is appropriate. Furthermore, based on the evidence
gathered, the auditor concludes on the presence of any material uncertainty regarding the
entity's ability to continue as a going concern.
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Implications for the Auditor’s Report:
1. Inappropriate Use: If management's use of the going concern basis is deemed
inappropriate, the auditor issues an adverse opinion.
2. Material Uncertainty with Adequate Disclosure:
 Adequate Disclosure: If material uncertainty is disclosed adequately, the auditor gives an
unmodified opinion but includes a separate section highlighting the uncertainty.
 No Adequate Disclosure: If disclosure is insufficient, the auditor issues a qualified or
adverse opinion, stating the material uncertainty in the Basis for Qualified (Adverse) Opinion
section.
 Management Unwilling to Assess: If management refuses to assess when requested, the
auditor evaluates the impact on the auditor's report.
6. Key Audit Matters: Auditors must communicate KAM in the report for listed entities per
SA 701.
7. Other Information: Compliance with SA 720 (Revised) is observed when applicable.
8. Responsibilities for the Financial Statements: Management and Governance

Responsibilities:
 Section Heading: "Responsibilities for Financial Statements."
 Content: Describes management's duty for accurate financial statements and effective
internal controls, including assessing the entity's ability to continue as a going concern. This
section identifies those overseeing the financial reporting process, using "Those Charged
with Governance" when applicable. For fair presentation frameworks, it emphasizes "the
preparation and fair presentation" or "the preparation of financial statements that give a
true and fair view," as suitable.
9. Auditor’s Responsibilities for the Audit of the Financial Statements:
Section Heading: "Auditor’s Responsibilities for the Audit of the Financial Statements."
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Content: Describes auditor's objectives, clarifies the nature of reasonable assurance, defines
materiality, outlines audit responsibilities (risks, internal control, accounting policies,
estimates, going concern, fair presentation), addresses communication with governance,
and highlights key audit matters (KAM) in applicable cases.
10. Location of the description of the auditor’s responsibilities for the audit of the
financial statements:
(a) Within the auditor’s report.
(b) In an appendix to the auditor’s report, with a reference in the main report.
(c) By specific reference to a website allowed by law, regulation, or auditing standards.
Website Reference: If using a website, the auditor ensures the description aligns with SA
requirements and is not inconsistent.
11. Other Reporting Responsibilities:
 Separate Section: If addressing additional reporting responsibilities beyond SA

requirements, use a separate section titled "Report on Other Legal and Regulatory
Requirements" unless covering the same topics as SA-required reporting.
 Same Section Differentiation: If combined with SA-required reporting, clearly
differentiate other responsibilities.
 Structural Placement: If a separate section is used, it follows the "Report on the Audit of
the Financial Statements" section.
12. Signature of the Auditor: The auditor's report must be signed, with the engagement
partner signing in their personal name if an individual or in the personal name and the audit
firm's name if a firm is appointed. The signing partner, whether an individual or part of a
partnership firm, includes their membership number from the Institute of Chartered
Accountants of India and the firm's registration number if applicable. The Companies Act,
2013, specifies that only the appointed auditor or the chartered accountant partner in the
firm may sign the report or authenticate relevant documents. Allowing non-members to
sign on behalf of the auditor is considered professional misconduct under the Chartered
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Accountants Act, 1949, aiming to maintain the professional purity and clarity of professional
responsibility. The Council of the Institute recommends that in partnerships, the signature
on the auditor's report or related documents should adhere to specific guidelines to ensure
professional integrity and responsibility.
13. Place of Signature: The auditor's report must specify the location, typically the city
where the report is signed.
14. Date of the Auditor’s Report: The report's date should not precede the auditor's
acquisition of sufficient and appropriate evidence for forming an opinion on the financial
statements. This includes confirmation that:
All financial statement components, along with related notes, are prepared, and those with
recognized authority have asserted responsibility for the statements.
SUPPLEMENTARY INFORMATION PRESENTED WITH THE FINANCIAL STATEMENTS

 If supplementary information, not mandated by the financial reporting framework, is
presented with audited financial statements, the auditor assesses whether it's integral to
the financial statements based on its nature or presentation. If integral, it falls under the
auditor's opinion.
 If deemed not integral, the auditor checks if it's presented distinctly from the audited
financial statements. If not, the auditor requests management to alter the presentation. If
management declines, the auditor identifies the unaudited supplementary information in
the report, emphasizing that it hasn't been audited.
SA 701 COMMUNICATING KEY AUDIT MATTERS IN THE INDEPENDENT AUDITOR’S REPORT

SA 701 outlines guidelines for auditors to communicate Key Audit Matters (KAM) in the
independent auditor's report. It focuses on the auditor's responsibility, emphasizing
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judgment in determining what to communicate. The standard aims to enhance transparency
by addressing the form and content of KAM communication in the auditor's report.
KeyAuditmatterarethosematter
sthat,intheauditor’sprofessional Keyauditmattersareselectedfro
judgment,wereofmostsignifican mmatterscommunicatedwithth
ceintheauditofthefinancialstate osechargedwithgovernance.
mentsofthecurrentperiod.
PURPOSE
The objective is to boost the informative quality of the auditor’s report by offering increased
transparency about the conducted audit. By communicating key audit matters, additional
insights are provided to users of financial statements, aiding their comprehension of crucial
aspects identified by the auditor as most significant in the current period's financial
statement audit. KAM disclosure also helps users grasp key aspects of management
judgment within the audited financial statements.
SCOPE OF COMMUNICATING KEY AUDIT MATTERS (KAM)
KAM communication is situated within the context of the auditor forming an opinion on the
financial statements as a whole. It is not a replacement for:
(a) Disclosures mandated by the financial reporting framework or essential for fair
presentation,
(b) The auditor providing a modified opinion as required by SA 705 (Revised) for specific
audit circumstances,
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(c) Reporting under SA 570 (Revised) for material uncertainties related to an entity's ability
to continue as a going concern,
(d) A separate opinion on individual matters.
DETERMINING KEY AUDIT MATTERS
The auditor identifies KAM based on communication with those charged with governance.
Considerations include:
(a) Areas of higher risk of material misstatement or significant risks per SA 315,
(b) Auditor judgments in areas with significant management judgment, especially in high
estimation uncertainty accounting estimates,
(c) Impact of significant events or transactions during the period on the audit.
COMMUNICATING KEY AUDIT MATTERS
 Highlights crucial audit areas.

 Addressed within the overall financial audit.
 No separate opinion issued on these matters.
 Explicit mention if no Key Audit Matters to communicate.
SA 705 MODIFICATIONS TO THE OPINION IN THE INDEPENDENT AUDITOR’S REPORT

Modified Opinions: Governs the auditor's obligation to issue a suitable report when, after
applying SA 700 (Revised), the auditor determines that a modification to the opinion on
financial statements is required.
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TYPES OF MODIFIED OPINIONS
1. QUALIFIED OPINION
A qualified opinion by an auditor is issued under two circumstances. First, when the
auditor, after obtaining enough relevant audit evidence, determines that there are material
misstatements in the financial statements, but these errors are not widespread or
pervasive.
Second, a qualified opinion is expressed when the auditor is unable to gather sufficient
appropriate audit evidence and acknowledges that potential undetected misstatements
could have a material impact on the financial statements, though not pervasive throughout.
Qualified Opinion
Types of
Modified
Opinions
Disclaimer of
Adverse Opinion
Opinion
2. ADVERSE OPINION
An adverse opinion is issued by an auditor when, after acquiring enough relevant audit
evidence, they determine that the misstatements in the financial statements, either
individually or collectively, are both significant and widespread (pervasive). In essence, this
signals a serious concern about the overall accuracy and reliability of the financial
statements.
3. DISCLAIMER OF OPINION
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A disclaimer of opinion by an auditor occurs in two scenarios. First, when there is
insufficient audit evidence, and potential undetected misstatements could be both material
and widespread in the financial statements.
Second, in extremely rare cases involving multiple uncertainties, despite having enough
evidence for each uncertainty individually, the auditor disclaims an opinion due to the
unpredictable cumulative effect of these uncertainties on the financial statements. In both
situations, the auditor is unable to provide a definitive opinion on the financial statements.
OBJECTIVE
The objective of the auditor is to clearly state a suitably adjusted opinion on the financial
statements when, based on the audit evidence, they determine that the financial
statements are not entirely free from material misstatement, or when they cannot obtain
enough appropriate audit evidence to confirm that the financial statements are free from
material misstatement.
In either case, the goal is to transparently communicate the auditor's assessment of the
financial statements' accuracy and reliability.
CIRCUMSTANCES WHEN A MODIFICATION TO THE AUDITOR’S OPINION IS REQUIRED

The auditor must modify the opinion in the report if
they find, based on obtained audit evidence, that the financial statements have material
misstatements, or
if they cannot gather enough appropriate evidence to confirm the absence of material
misstatement in the financial statements.
SA 706 EMPHASIS OF MATTER PARAGRAPHS AND OTHER MATTER PARAGRAPHS IN THE

INDEPENDENT AUDITOR’S REPORT
OBJECTIVE
The objective of SA 706 is to enable the auditor, after forming an opinion on financial
statements, to use clear additional communication in the report to draw attention to:
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(a) a crucial matter appropriately presented in the statements fundamental for user
understanding, or
(b) any other relevant matter for understanding the audit, the auditor’s responsibilities, or
the report.
An Emphasis of Matter paragraph highlights a vital matter in the financial statements, while
an Other Matter paragraph addresses issues outside the statements relevant to user
comprehension of the audit or the auditor's role.
WHEN TO GIVE EMPHASIS OF MATTER PARAGRAPHS IN THE AUDITOR’S REPORT?

The auditor includes an Emphasis of Matter paragraph in the report when it is necessary to
highlight a significant matter in the financial statements that is fundamental for user
understanding, under the conditions that:
(a) the matter doesn't necessitate modifying the opinion as per SA 705 (Revised), and
(b) for cases falling under SA 701, the matter is not identified as a key audit matter for
communication in the auditor's report.
WHEN THE AUDITOR INCLUDES AN EMPHASIS OF MATTER PARAGRAPH IN THE AUDITOR’S

REPORT, THE AUDITOR SHALL:
(a) place it in a distinct section labeled "Emphasis of Matter,"
(b) clearly reference the emphasized matter and direct users to relevant disclosures in the
financial statements, and
(c) state that the auditor's opinion is unmodified regarding the emphasized matter.
When to issue other Matter Paragraphs in the Auditor’s Report?

For Other Matter paragraphs, the auditor includes one in the report when it's necessary to
communicate a relevant matter outside the financial statements, given that it's not
prohibited by law or regulation and is not identified as a key audit matter under SA 701. The
auditor places the Other Matter paragraph in a separate section labeled "Other Matter" or
an appropriate heading.
DISTINCTION BETWEEN NOTES ON ACCOUNTS AND QUALIFICATIONS
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In financial reporting, management typically provides its perspective on disagreements with
auditors through notes in the financial statements, explaining its viewpoint on various
matters. Auditors, as independent parties, may encounter situations where management
urges them not to modify their opinion, emphasizing that comprehensive notes cover the
relevant details. Despite such requests, auditors must exercise professional judgment and
determine if modification is necessary, considering whether disclosure alone is sufficient.
Emphasis of Matter is not a substitute for modifying the opinion.
When modification is warranted, the auditor may refer to management's notes but must
express the qualification clearly, providing reasons for any negative responses to statutory
affirmations.
Qualifications must be explicitly stated in the auditor's report, independently of
management's notes, ensuring a clear distinction between the auditor's perspective and
management's viewpoint for user understanding.
DISTINCTION BETWEEN AUDIT REPORT AND CERTIFICATE

In auditing, the term "report" is used when expressing an opinion, while "certificate" is
preferred when verifying or commenting on facts. For instance, under the Companies Act,
2013, auditors issue certificates in specific situations, like filing a certificate with the tribunal
for capital reduction under Section 66. The distinction lies in the nature of the
communication: a report involves expressing an opinion, as seen in Section 143 of the
Companies Act, while a certificate pertains to the verification or confirmation of specific
facts, as required in various statutory contexts.
COMMUNICATION TO MANAGEMENT AND THOSE CHARGED WITH GOVERNANCE
According to SA 260, auditors must communicate with those in charge of governance during
a financial audit, regardless of the entity's size. In cases where all those charged with
governance are actively involved in management or for listed entities, specific
considerations apply.
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The auditor identifies the right person(s) to communicate within the governance structure.
If communicating with a subgroup like an audit committee, the auditor assesses if
communication with the overall governing body is necessary.
REPORTING REQUIREMENTS IN CASE OF COMPARATIVE INFORMATION
SA 710, Comparative Information-Corresponding Figures and Comparative Financial

Statements, outlines two approaches for auditors regarding comparative information in
financial statement audits: Corresponding Figures and Comparative Financial Statements.
The key reporting distinctions are:
 Corresponding Figures: The auditor's opinion pertains to the current period only.
 Comparative Financial Statements: The auditor's opinion covers each period presented
in the financial statements.
AUDIT PROCEDURES FOR COMPARATIVE INFORMATION

For auditing comparative information, auditors employ specific procedures:
(a) Perform Specific Audit Procedure:
 Confirm that comparative information aligns with prior period figures and disclosures.
 Ensure consistency in accounting policies between the current and prior periods.
 Disclose any changes in policy application appropriately.
(b) Evaluate Impact on Financial Statements:

 If potential misstatements are identified in comparative information, conduct necessary
audit procedures to gather sufficient evidence.
 Adhere to relevant requirements of SA 560 if the auditor audited the prior period's
(c) Written Representation: Following SA 580, auditors should seek written representation.
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Obtain specific written representation regarding any prior period item disclosed in the
current year's financial statement.
AUDIT REPORTING
(a) With Reference to Corresponding Figures:
 The auditor's opinion typically doesn't reference corresponding figures, except:
 If the prior period's auditor's report wasn't unqualified.
 If the auditor, backed by sufficient evidence, believes a material misstatement exists in
the prior period's financial statement.
(b) With Reference to Comparative Financial Statement:

 The auditor's opinion refers to each period presented.
 If the opinion on the prior period differs from the one previously issued, the auditor
discloses the substantive reason in an Other Matter paragraph.
 If a material misstatement is identified in the previously audited figures, the auditor
reports it to management and urges informing the predecessor auditor. If prior statements
are amended, the auditor reports only on the current period.
(c) Reporting Treatment Common to Both:

 If the prior period was audited by a predecessor auditor and the law allows, the auditor
may refer to the predecessor's report, stating the type of opinion and its date.
 If the prior period was not audited, the auditor discloses this in an Other Matter
paragraph but remains responsible for ensuring opening balances are free from material
misstatements.
SA 720 THE AUDITOR’S RESPONSIBILITIES RELATING TO OTHER INFORMATION

SA 720 outlines the auditor's responsibilities regarding other information (financial or non-
financial) in an entity's annual report, excluding financial statements and the auditor's
report.
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The auditor is required to read and assess this information, as material inconsistencies may
indicate a misstatement in the financial statements or the other information, potentially
impacting the credibility of the financial statements and the auditor's report. This standard
does not cover preliminary financial announcements or securities offering documents,
including prospectuses.
OBJECTIVE
The auditor, upon reading other information, aims to:
(a) Assess for material inconsistencies between the other information and the financial
statements;
(b) Assess for material inconsistencies between the other information and the auditor's
knowledge gained during the audit;
(c) Take appropriate action if material inconsistencies or potential material misstatements

are identified; and
(d) Report accordingly in adherence to this SA.
OBTAINING THE OTHER INFORMATION:
(a) Discuss with management to identify the annual report and understand its planned
issuance.
(b) Arrange with management to promptly receive the final version of the annual report,
ideally before the auditor's report date.
(c) If certain parts will be available post-report date, request a written representation
ensuring timely provision before the entity's issuance.
Reading and Considering the Other Information:

 Assess for material inconsistencies between other information and financial statements
by comparing selected amounts or items.
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 Evaluate material inconsistencies between other information and audit knowledge in the
context of evidence obtained and conclusions reached during the audit. Be vigilant for
indications of material misstatements in non-financial information unrelated to financial
statements or audit knowledge.
Responding When a Material Inconsistency Appears to Exist or Other Information Appears

to Be Materially Misstated
If the auditor notes a material inconsistency or becomes aware of material misstatement in

other information, they must discuss it with management. Subsequently, additional
procedures are performed to determine if:
1. There is a material misstatement in the other information;
2. There is a material misstatement in the financial statements; or
3. The auditor's understanding of the entity and its environment needs updating.
RESPONDING WHEN THE AUDITOR CONCLUDES THAT A MATERIAL MISSTATEMENT OF

THE OTHER INFORMATION EXISTS
If the auditor finds a material misstatement in other information:
Correction Request: The auditor requests management to correct the other information. If
management:
(a) Agrees to correct, the auditor ensures the correction is made.
(b) Refuses to correct, the auditor communicates the issue to those charged with
governance, urging correction.
Post-Communication Actions: If the material misstatement persists after communication:
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(a) For material misstatements pre-audit report, the auditor considers report implications
and communicates plans to address it.
(b) Withdrawal: If allowed by law, withdrawal from the engagement is considered.
Post-Report Misstatement: If a material misstatement surfaces after the audit report:
(a) If corrected, the auditor performs necessary procedures.
(b) If not corrected, the auditor takes appropriate action, considering legal rights, to
highlight the uncorrected misstatement to users for whom the report is prepared.
Responding When a Material Misstatement in the Financial Statements Exists or the

Auditor’s Understanding of the Entity and Its Environment Needs to Be Updated
If, through the procedures in 11.2, the auditor finds a material misstatement in the financial
statements or a need to update their understanding of the entity and its environment, they
must respond appropriately following other relevant SAs.
REPORTING
The auditor's report should include a distinct section titled "Other Information," or an
appropriate heading, when:
 Auditing financial statements of a listed entity, and the auditor has obtained or expects
to obtain other information by the report date.
 Auditing financial statements of an unlisted corporate entity, and the auditor has
obtained some or all of the other information by the report date.
DUTIES OF AUDITORS
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Sections 143 of the Companies Act, 2013 specifies the duties of an auditor of a company in a
quite comprehensive manner. It is noteworthy that scope of duties of an auditor has
generally been extending over all these years.
1. Duty to Inquire: Inquire about secured loans, prejudicial transactions, sale of assets,
proper accounting of loans, personal expenses, and correctness of share allotments for
cash.
2. Duty to Sign Audit Report: The appointed auditor must sign the report, and adverse
effects on the company mentioned in the report should be read before the general meeting.
3. Duty to Comply with Auditing Standards: Every auditor must comply with auditing
standards prescribed by the Central Government or the Institute of Chartered Accountants
of India.
4. Duty in Auditor's Report: The auditor's report should address various aspects, including
seeking necessary information, proper bookkeeping, compliance with accounting standards,
observations on financial transactions, director disqualifications, internal financial controls,
and more.
Additional Reporting Requirements (Rule 11):
 The auditor's report should include views and comments on matters like disclosure of
litigation impact, provisions for foreseeable losses, timely transfer of funds to the Investor
Education and Protection Fund, and compliance with section 123 of the Companies Act,
2013.
 Specific representations related to fund transactions with intermediaries and funding
parties should be addressed.
 Assurance that nothing has been noticed indicating material misstatements in the
representations.
5. Duty to report on frauds:
A. Reporting to Central Government- If the auditor, during the audit, suspects fraud
involving a prescribed amount, they must report to the Central Government.
Prescribed Amount: Typically, if fraud involves ₹1 crore or more.
Reporting Process:
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 Immediate Report to Board or Audit Committee: Within 2 days of detecting fraud,
report to the Board or Audit Committee, seeking their reply within 45 days.
 Forwarding the Report to Central Government: On receiving the reply or observations,
the auditor forwards the report, replies, and comments to the Central Government within
15 days.
 If No Response from Board or Audit Committee: If no response is received within the 45-
day period, forward the report to the Central Government along with a note detailing the
lack of response.
 Submission Details: Send the report to the Secretary, Ministry of Corporate Affairs, in a
sealed cover via Registered Post with Acknowledgement Due or by Speed Post, followed by
an email confirmation.
 Report Format: The report should be on the auditor's letterhead, including contact
details, and signed with the auditor's seal, indicating their Membership Number.
 Form ADT-4: The report should be in the specified format, typically Form ADT-4.
B. Reporting to the Audit Committee or Board: If fraud involves less than ₹1 crore, auditor
reports to the audit committee (under section 177) or directly to the Board.
Timeframe for Reporting: Report immediately, but not later than 2 days from knowledge of
the fraud.
Report Content: Specify:
(a) Nature of Fraud with description,
(b) Approximate amount involved, and
(c) Parties involved.
C. Disclosure in Board's Report: If auditors report fraud to the audit committee or Board
(but not to the Central Government), the company must disclose details in the Board's
Report. Details to be Disclosed (Rule 13, sub-rule 4): Include:
(a) Nature of Fraud with description,
(b) Approximate Amount involved,
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(c) Parties involved (if remedial action not taken), and
(d) Details of remedial actions taken.
6. Reporting on Matters Specified by Central Government:
 The Central Government, in consultation with NFRA, can direct auditors to include
statements on specific matters in their reports for certain classes of companies.
 Until NFRA is constituted, the Central Government may consult a committee chaired by a
Joint Secretary or equivalent in the MCA, with representatives from ICAI and Industry
Chambers, and special invitees from NACAS and the office of the C&AG.
 By a notification dated March 21, 2018, the provisions of subsections (3) and (11) of
section 132 came into force.
7. Auditor's Duties and Powers Regarding Branch Audit: Duties and powers of the
company’s auditor regarding the audit of branches and the branch auditor are discussed
separately.
8. Qualification or Negative Report: According to sub-section (4) of section 143, if any

required audit matter is answered negatively or with qualification, the report must state the
reasons for such findings.
REPORTING UNDER CARO, 2020
Reporting Under CARO, 2020 (Section 143(11), Companies Act, 2013): The Central
Government, in consultation with the National Financial Reporting Authority under Section
132, has mandated the Companies (Auditor’s Report) Order, 2020 (CARO, 20) dated 25th
February 2020, empowering auditors with additional reporting obligations.
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1. Applicability of the Order: CARO, 2020 is an additional reporting requirement for all
companies, including foreign ones (Section 2(42), Companies Act, 2013).
Exemptions include banking (Section 5, Banking Regulation Act, 1949), insurance (Insurance
Act, 1938), Section 8 licensed companies, One Person Companies (Section 2(62)), small
companies (Section 2(85)), and certain private limited companies meeting specified criteria
on capital, borrowings, and revenue (Section 2, Section 143, and Scheduled III, Companies
Act, 2013).
2. Matters to be included in the auditor's report - The auditor's report on the accounts of a
company to which this Order applies shall include a statement on the following matters,
namely:-
(i) (a) (A) Records Maintenance:
 Proper records for Property, Plant, and Equipment (PPE) and intangible assets.
 Quantitative details and the situation of assets are included.
(B) Physical Verification:
 Management's physical verification of PPE at reasonable intervals.

 Addressing material discrepancies found during verification in the books.
(c) Title Deeds:
 Ensuring title deeds of immovable properties are in the company's name.

 Exception for leased properties, with duly executed lease agreements.
(d) Revaluation:
 Checking if the company revalued PPE or intangible assets during the year.
 Verification based on a valuation by a Registered Valuer.
 Specifying changes, especially if it exceeds 10% of the net carrying value.
(e) Benami Property:
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 Verifying any proceedings under the Benami Transactions Act.
 Ensuring appropriate disclosure of details in financial statements.
(ii) (a) Has the management conducted timely physical inventory checks, and does the
auditor approve of the process? Were there any significant discrepancies of 10% or more in
any inventory category, and if so, were they properly addressed in the books?
(b) Did the company, at any point in the year, receive working capital limits exceeding five
crore rupees based on current asset security from banks or financial institutions? Do the
quarterly returns to these entities align with the company's books, and if not, provide
details?
(iii) During the year, the company's financial dealings with other entities are as follows:
(a) Loans, Advances, Guarantees, and Security:
(A) Amounts and balances outstanding for loans, advances, guarantees, or security provided
to subsidiaries, joint ventures, and associates.
(B) Amounts and balances outstanding for loans, advances, guarantees, or security provided
to entities other than subsidiaries, joint ventures, and associates.
(b) Evaluation of Investments, Guarantees, and Loans: Assess whether investments made,
guarantees provided, and terms of loans and advances are in the company's best interest.
(c) Repayment Schedules and Regularity: Check if repayment schedules for principal and
interest on loans and advances have been stipulated and if payments are regular.
(d) Overdue Amounts: Specify the total amount overdue for more than ninety days and
confirm whether the company has taken reasonable steps for recovery.
(e) Renewals or Extensions: Provide details if any loans due during the year have been
renewed, extended, or settled with fresh loans, specifying the aggregate amount and its
percentage relative to total loans granted during the year.
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(f) Unspecified Loans: Confirm whether the company has granted any loans repayable on
demand or without specified terms. Specify the aggregate amount, percentage to total
loans, and the amount granted to promoters and related parties.
(iv) Loans, Investments, Guarantees, and Security: Confirm compliance with Sections 185
and 186 of the Companies Act regarding loans and financial transactions. If not, provide
details of any non-compliance.
(v) Deposits and Regulatory Compliance: Ensure adherence to Reserve Bank of India
directives and Sections 73 to 76 of the Companies Act regarding deposits. If there are any
contraventions, specify the nature. Confirm compliance with any orders from authorities
like the Company Law Board, National Company Law Tribunal, Reserve Bank of India, or
other relevant tribunals.
(vi) Maintenance of Cost Records: Verify if the company has maintained cost records as
required by Section 148(1) of the Companies Act.
(vii) Statutory Dues:
(a) Confirm if the company consistently pays undisputed statutory dues like GST, provident
fund, income tax, etc., to the appropriate authorities. If not, specify the extent of overdue
statutory dues as of the last day of the financial year, outstanding for more than six months
from their due date.
(b) If non-payment is due to a dispute, provide details on the amounts involved and the
forum where the dispute is pending. Note that a mere representation to the department is
not considered a dispute.
(viii) Income Tax Assessments: Determine if any transactions not recorded in the books
have been disclosed as income during the tax assessments under the Income Tax Act. If so,
confirm whether this unrecorded income has been appropriately accounted for during the
year.
(ix) Financial Obligations and Borrowings:
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(a) Report any company defaults in loan repayments or interest payments, providing details
like the nature of borrowing, lender's name, unpaid amount, type (principal or interest),
days delayed, and any remarks.
(b) Confirm whether the company is declared a wilful defaulter by any bank or financial
institution.
(c) Verify if term loans were used for their intended purpose; if not, report the diverted
amount and its purpose.
(d) Indicate if short-term funds were used for long-term purposes and specify the nature
and amount.
(e) Report any funds obtained to fulfill obligations of subsidiaries, associates, or joint
ventures, detailing transactions and amounts.
(f) If the company raised loans using securities from subsidiaries, joint ventures, or
associates, provide details and report any defaults in repayment.
(x) Utilization of Funds:
(a) Confirm if funds from initial or further public offerings were used for their intended
purposes. If not, provide details of deviations, delays, defaults, and any subsequent
rectifications.
(b) Preferential Allotment or Private Placement:
 Report any preferential allotment or private placement of shares or convertible

debentures during the year.
 Confirm compliance with Sections 42 and 62 of the Companies Act, 2013.
 Verify if the funds raised have been used for the designated purposes; if not, provide
details of non-compliance, including amounts involved.
(xi) Fraud and Reporting:

(a) Confirm if any fraud by the company or on the company was identified or reported
during the year. Provide details of the nature and amount involved.
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(b) Auditor's Reports: Check if the auditors filed a report in Form ADT-4 (under sub-section
12 of section 143 of the Companies Act) with the Central Government.
(c) Confirm whether the auditor considered any whistle-blower complaints received by the
company during the year.
(xii) Nidhi Company Compliance:
(a) Confirm if the Nidhi Company meets the Net Owned Funds to Deposits ratio of 1:20.
(b) Verify if the company maintains ten percent unencumbered term deposits as required by
the Nidhi Rules, 2014.
(c) Report any defaults in interest payment or deposit repayment and provide details.
(xiii) Related Party Transactions: Ensure compliance with Sections 177 and 188 of the
Companies Act for all transactions with related parties. Confirm disclosure in financial
statements as per accounting standards.
(xiv) Internal Audit:
(a) Verify if the company has an internal audit system suitable for its size and business
nature.
(b) Confirm if the statutory auditor considered reports from internal auditors.
(xv) Non-Cash Transactions: Check if the company engaged in non-cash transactions with
directors or related persons. Confirm compliance with Section 192 of the Companies Act.
(xvi) RBI Compliance:
(a) Confirm if the company is required to register under Section 45-IA of the RBI Act and
whether registration has been obtained.
(b) Verify if the company conducted any Non-Banking Financial or Housing Finance activities
without a valid Certificate of Registration from the RBI.
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(c) Check if the company qualifies as a Core Investment Company (CIC) as defined by RBI
regulations and whether it continues to meet the criteria. For exempted or unregistered
CICs, confirm ongoing compliance.
(d) If the company is part of a group with more than one CIC, indicate the number of CICs in
the group.
(xvii) Cash Losses: Report if the company incurred cash losses in the financial year and the
preceding one, specifying the amount.
(xviii) Auditor Resignation: If there was any resignation of statutory auditors during the
year, confirm whether the auditor considered issues raised by the outgoing auditors.
(xix) Material Uncertainty: Based on financial ratios, asset and liability details, and
management plans, confirm if the auditor believes no material uncertainty exists regarding
the company meeting its liabilities within one year from the balance sheet date.
(xx) Utilization of Corporate Social Responsibility (CSR) Funds:
(a) Confirm if, for completed projects, the company transferred unspent CSR funds to a
Fund specified in Schedule VII to the Companies Act within six months of the financial year's
end, complying with Section 135(5) of the Act.
(b) Report if any unspent CSR funds from ongoing projects were transferred to a special
account in accordance with Section 135(6) of the Companies Act.
(xxi) Auditor Qualifications in CARO Reports: Check if there are any qualifications or
adverse remarks in the Companies (Auditor's Report) Order (CARO) reports for companies
included in the consolidated financial statements. If yes, provide details, including the
names of the companies and the specific paragraph numbers in the CARO report containing
the qualifications or adverse remarks.
3. Reasons for Unfavourable, Qualified Answers, or Inability to Express Opinion:
(a) If the auditor provides an unfavourable or qualified answer to any question in the report
(as mentioned in paragraph 3), the report will explain the basis for such an answer.
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(b) If the auditor cannot express an opinion on a specific matter, the report will state this
fact and provide reasons for the inability to form an opinion.
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INTRODUCTION
In auditing, special considerations apply to specific scenarios:
SA 800: Focuses on auditing financial statements prepared under special purpose

frameworks.
SA 805: Addresses special considerations when auditing a single financial statement or a

specific element of a financial statement.
SA 810: Outlines auditor responsibilities when reporting on summary financial statements

derived from financial statements audited under SAs by the same auditor.
SA 800 - SPECIAL CONSIDERATIONS - AUDITS OF FINANCIAL STATEMENTS PREPARED IN

ACCORDANCE WITH SPECIAL PURPOSE FRAMEWORKS
SA 800 focuses on special considerations related to the audit of financial statements

prepared under special purpose frameworks. It covers three main aspects:
(a) Engagement Acceptance: Special considerations related to accepting the engagement to

audit financial statements prepared in accordance with a special purpose framework.
(b) Planning and Performance: Guidelines for planning and conducting the audit
engagement, taking into account the unique aspects of financial statements prepared under
special purpose frameworks.
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(c) Opinion Formation and Reporting: Addressing specific considerations in forming an
opinion and reporting on financial statements. It's important to note that SA 800 does not
pertain to expressing an opinion on the effectiveness of the entity's internal control.
WHAT IS SPECIAL PURPOSE FRAMEWORK?
A special purpose framework, as defined by SA 800, is a financial reporting framework

tailored to meet the specific financial information needs of particular users. It can take the
form of either a fair presentation framework or a compliance framework. Unlike a general
purpose framework, which caters to the common financial information needs of a broad
audience, a special purpose framework is crafted to fulfill the unique requirements of
specific users or stakeholders.
CONSIDERATIONS WHEN ACCEPTING SUCH ENGAGEMENT
When considering an engagement for special purpose financial statements, the acceptability
of the financial reporting framework is primarily influenced by the financial information
needs of the intended users. The framework may include standards established by an
authorized organization, presumed acceptable if a transparent process involving
stakeholder deliberation is followed. Legal requirements, such as those set by regulators,
may prescribe the framework for specific entities, presumed acceptable unless indicated
otherwise.
If legislative or regulatory requirements supplement financial reporting standards, SA 210

mandates the auditor to assess conflicts and take necessary actions. The acceptability of the
financial reporting framework, which could encompass contractual provisions or other
sources, is determined by assessing its alignment with attributes typical of acceptable
financial reporting frameworks, guided by SA 210. In the case of a special purpose
framework, the auditor's professional judgment is crucial in determining the relative
importance of these attributes for a specific engagement.
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CONSIDERATIONS WHEN PLANNING AND PERFORMING SUCH AUDIT
When planning and performing an audit of special purpose financial statements, the auditor
must adhere to relevant ethical requirements and all applicable Statements on Auditing
(SAs), unless a particular SA or its requirement is deemed irrelevant or conditional, and the
condition does not exist. In exceptional circumstances, the auditor may deviate from a
relevant requirement by employing alternative audit procedures.
Certain considerations arise in the audit of special purpose financial statements. For
instance:
 Judgments about materiality are based on the financial information needs of intended
users rather than the common needs of users as a group (SA 320).
 Management and intended users may set a threshold for correcting identified
misstatements, but this doesn't exempt the auditor from determining materiality according
to SA 320.
Communication with the entity's governance structure, as required by SA 260 (Revised),

involves determining the appropriate person(s) for communication. When general purpose
financial statements are also prepared, those overseeing the special purpose financial
statements might differ from those overseeing the general purpose financial statements.
When forming an opinion and reporting on special purpose financial statements, the auditor
follows the requirements outlined in Revised SA 700.
DESCRIPTION OF THE APPLICABLE FINANCIAL REPORTING FRAMEWORK
Revised SA 700 mandates the auditor to assess whether the financial statements
appropriately refer to or describe the applicable financial reporting framework. For financial
statements prepared under a contract, the auditor evaluates whether the statements
adequately describe any significant interpretations of the contract influencing their
preparation.
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In an auditor's report on special purpose financial statements:
(a) The report must describe the purpose of the financial statements and, if needed, identify
the intended users. Alternatively, it may refer to a note in the special purpose financial
statements containing that information.
(b) If management can choose from various financial reporting frameworks, the explanation
of management's responsibility in the financial statements should also reference its
responsibility for determining the acceptability of the chosen financial reporting framework
in the given circumstances.
ALERTING READERS THAT THE FINANCIAL STATEMENTS ARE PREPARED IN ACCORDANCE

WITH A SPECIAL PURPOSE FRAMEWORK
To prevent misunderstandings, the auditor includes a notification in the auditor's report

that the financial statements are prepared in accordance with a special purpose framework.
This serves as an alert to users that the financial statements may not be suitable for
purposes other than those for which they were intended.
RESTRICTION ON DISTRIBUTION OR USE
The auditor may find it suitable to specify that the auditor's report is exclusively intended
for specific users. Depending on applicable laws or regulations, the auditor may restrict the
distribution or use of the report. In such cases, the paragraph alerting readers may be
expanded to encompass these additional considerations, and the heading may be adjusted
accordingly.
SA 805-SPECIAL CONSIDERATIONS—AUDITS OF SINGLE FINANCIAL STATEMENTS AND

SPECIFIC ELEMENTS, ACCOUNTS OR ITEMS OF A FINANCIAL STATEMENT
SA 805 applies SAs to the audit of a single financial statement or specific elements. It
addresses special considerations in acceptance, planning, and reporting for financial
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information under general or special purpose frameworks. SA 800 applies if using a special
purpose framework. Not applicable to component auditor reports for group financial
statement audits.
The objective is to address specific considerations without opining on internal control

effectiveness.
WHAT IS A SINGLE FINANCIAL STATEMENT?
A single financial statement refers to an individual financial report, like a cash flow
statement, distinct from a complete set of financial statements.
WHAT IS THE ELEMENT OF A FINANCIAL STATEMENT?
An "element of a financial statement" refers to a specific component, account, or item

within a financial statement. For example, trade receivables or cash and bank balances are
elements of a financial statement. This term encompasses related notes that typically
provide a summary of significant accounting policies and additional explanatory information
relevant to the financial statement or its specific elements.
CONSIDERATIONS WHEN ACCEPTING SUCH ENGAGEMENT
APPLICATION OF SAS
When conducting an audit of a single financial statement or a specific element of a financial

statement, auditors are required to comply with all relevant Standards on Auditing (SAs), as
outlined in SA 200. This compliance includes adherence to ethical requirements, including
independence standards. Auditors must follow the requirements of each SA unless a specific
condition renders it irrelevant, and in exceptional circumstances, they may deviate from a
relevant requirement by employing alternative audit procedures.
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However, practical challenges may arise when auditing a single financial statement or a
specific element without also auditing the complete set of financial statements. The auditor
might lack a comprehensive understanding of the entity and its environment, including
internal control aspects. Additionally, they may not possess audit evidence regarding the
general quality of accounting records obtained in an audit of the entire set of financial
statements.
In situations where compliance with SAs may not be practicable, especially for specific
elements, auditors may need additional evidence to corroborate findings from accounting
records. Certain SAs, such as SA 570, may necessitate audit work disproportionate to the
element being examined, raising considerations about practicality. If auditors find that
conducting an audit in line with SAs might not be feasible, discussions with management
about alternative engagement types may be initiated.
ACCEPTABILITY OF THE FINANCIAL REPORTING FRAMEWORK
SA 210 mandates auditors to assess the acceptability of the financial reporting framework
used in preparing financial statements. When auditing a single financial statement or a
specific element, this evaluation includes ensuring that the application of the financial
reporting framework results in a presentation with sufficient disclosures. The goal is to
enable intended users to comprehend the information and understand the impact of
material transactions and events on the financial statement or element.
A single financial statement or specific element may adhere to an applicable financial

reporting framework based on standards established by an authorized organization for a
complete set of financial statements. In such cases, determining the acceptability involves
assessing whether the framework for the single statement or specific element includes all
relevant requirements from the broader framework on which it is based, ensuring adequate
disclosures.
CONSIDERATIONS WHEN PLANNING AND PERFORMING THE AUDIT
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When planning and conducting the audit of a single financial statement or a specific
element of a financial statement, auditors must adapt relevant Standards on Auditing (SAs)
as needed for the specific engagement. If auditing a single financial statement or specific
element concurrently with the complete set of financial statements, auditors may leverage
evidence obtained from the overall audit, but SAs mandate planning and performing
procedures to gather sufficient appropriate evidence for the specific financial statement or
element.
Given the interrelated nature of individual financial statements and their elements, auditors
may be unable to consider a single financial statement or element in isolation.
Consequently, procedures related to interrelated items may be necessary to achieve the
audit objective.
Additionally, the materiality threshold for a single financial statement or specific element
might be lower than for the entire set of financial statements, influencing the nature,
timing, and extent of audit procedures and the assessment of uncorrected misstatements.
FORM OF OPINION
In an audit of a single financial statement or a specific element of a financial statement, the

expected form of opinion is a crucial aspect outlined in SA 210. The auditor must ensure
that the anticipated opinion aligns with the circumstances of the engagement.
The form of opinion is contingent on the applicable financial reporting framework and
relevant laws or regulations. As per Revised SA 700:
 For an unmodified opinion on a complete set of financial statements under a fair

presentation framework, the auditor's opinion asserts that the financial statements present
fairly, or give a true and fair view, as required.
 For an unmodified opinion on financial statements prepared under a compliance
framework, the opinion states that the financial statements are prepared in accordance
with the applicable financial reporting framework.
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FORMING AN OPINION AND REPORTING CONSIDERATIONS
When forming an opinion on a single financial statement or element, auditors follow

Revised SA 700, adapting as needed. If reporting on both a single statement and the
complete set, separate opinions are given. Audited statements may be published together,
but if they lack differentiation, auditors ask management to fix it before issuing the report.
The auditor ensures a clear distinction in opinions and holds off on issuing the report until
satisfied.
If an auditor wants to express an unmodified opinion on a specific element despite issuing

an adverse opinion or disclaimer for the complete set, they can only do so if:
(a) Not prohibited by law or regulation,
(b) The opinion is in a separate report not published with the adverse opinion or disclaimer,
and
(c) The specific element is not a major portion of the entity's complete set of financial
statements.
The auditor cannot give an unmodified opinion on a single financial statement within a
complete set if an adverse opinion or disclaimer is expressed for the whole set, even if
reports are not published together. This is because a single financial statement is considered
a major portion. Revised SA 700 mandates evaluating disclosures for user understanding.
Modifications, even if unrelated, might be mentioned in an "Other Matter" paragraph in the
report. In the complete set report, a disclaimer on operations and cash flows, with an
unmodified opinion on the state of affairs, is permitted. SA 800 and 805 don't override other
requirements or cover all circumstances.
SA 810 - ENGAGEMENTS TO REPORT ON SUMMARY FINANCIAL STATEMENTS
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SA 810 focuses on the auditor's responsibilities when reporting on summary financial
statements derived from financial statements audited by the same auditor in accordance
with SAs.
WHAT DO SUMMARY FINANCIAL STATEMENTS REFLECT?
Summary financial statements represent historical financial information derived from full
financial statements. They offer a condensed version with less detail while maintaining a
structured representation consistent with the entity's economic resources or obligations at
a specific point in time or changes over a period.
ENGAGEMENT ACCEPTANCE
The auditor should generally accept an engagement to report on summary financial

statements only when engaged to audit the financial statements from which the summaries
are derived. Without auditing the source financial statements, the auditor lacks the
necessary knowledge to fulfill responsibilities under this SA.
Before accepting an engagement to report on summary financial statements, the auditor

shall:
(a) Confirm the acceptability of the applied criteria. Management is responsible for
determining the information reflected in the summaries to ensure consistency with or a fair
summary of the audited financial statements. The risk of potential misleading information is
higher in summary financial statements, especially when criteria for their preparation are
not well-established.
Factors affecting the auditor’s determination of the acceptability of the applied criteria:
 The entity's nature

 The purpose of the summaries
 Information needs of intended users
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 Ensuring that applied criteria prevent misleading information in the circumstances.
If established criteria for summary financial statements aren't in place, they can be set by
authorized bodies or laws. In such cases, the auditor can presume their acceptability.
However, if criteria are deemed unacceptable or there's no agreement with management,
the auditor should not accept the engagement unless required by law. In such cases, the
engagement does not comply with the SA, and the auditor's report must reflect this, with
appropriate reference in the engagement terms. The auditor also assesses the impact on
the audit of the full financial statements derived from the summaries.
(b) Obtain the agreement of management that it acknowledges and understands its
responsibility:
i. Preparing summary financial statements in line with applied criteria.
ii. Making audited financial statements available to intended users unless exempted by law,
which should be specified in the summary financial statements.
iii. Including the auditor's report in any document featuring the summary financial
statements, explicitly stating that the auditor has reported on them.
(c) Agree with management on the form of opinion to be expressed on the summary
NATURE OF PROCEDURES TO BE PERFORMED BY AUDITOR
The auditor, to form an opinion on summary financial statements, performs the following
procedures:
(a) Ensure that the summary financial statements clearly disclose their summarized nature
and identify the audited financial statements.
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(b) When not accompanied by audited financial statements, evaluate if they clearly indicate
where to obtain the audited financial statements or specify legal exemptions.
(c) Confirm that the summary financial statements adequately disclose the applied criteria.
(d) Compare summary financial statements with related audited financial information to
verify agreement or recalculation feasibility.
(e) Assess if the summary financial statements adhere to the applied criteria.
(f) Considering the purpose, evaluate whether the summary financial statements provide
necessary information at an appropriate level of aggregation, avoiding potential misleading
aspects.
(g) Ensure audited financial statements are available to intended users of the summary
financial statements without undue difficulty unless exempted by law, with criteria details
stated.
FORM OF OPINION
If the auditor deems an unmodified opinion on the summary financial statements

appropriate, the opinion should use one of the following phrases, unless law or regulation
dictates otherwise:
(a) The summary financial statements are consistent, in all material respects, with the
audited financial statements, following the applied criteria. or
(b) The summary financial statements are a fair summary of the audited financial
statements, following the applied criteria.
If law or regulation specifies a different wording for the opinion on summary financial
statements:
(a) Apply necessary procedures to express the prescribed opinion.
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(b) Assess if users might misunderstand the auditor's opinion and, if so, consider additional
explanation in the report to mitigate potential misunderstandings.
If the auditor determines that additional explanation cannot address potential

misunderstandings, they should not accept the engagement unless required by law. In such
cases, the engagement does not comply with the SA, and the auditor's report must reflect
this.
AUDITOR’S REPORT ON SUMMARY FINANCIAL STATEMENTS
The auditor's report on summary financial statements includes:
(a) Title as an independent auditor's report
(b) Addressee, evaluated for appropriateness based on engagement terms, entity nature,
and summary purpose
(c) Introductory Paragraph:
(i) Identifies summary financial statements and audited financial statements
(ii) Refers to the auditor's report on audited financial statements
(iii) States if unmodified opinion on audited financial statements
(iv) Clarifies if the report date is later than the auditor's report on audited financial
statements, reflecting no post-report events
(v) Notes that summary financial statements lack all required disclosures, not a substitute
for audited financial statements
(d) Description of management's responsibility for summary financial statements
(e) Statement of the auditor's responsibility for expressing an opinion based on SA

procedures
(f) A paragraph clearly expressing the auditor's opinion
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(g) Auditor's signature, firm registration, Institute of Chartered Accountants of India
membership number, and Unique Document Identification Number (UDIN)
(h) Date of the report no earlier than the date when sufficient evidence is obtained and the
date of the auditor's report on audited financial statements
(i) Place of signature.
MODIFICATIONS TO THE OPINION, EMPHASIS OF MATTER PARAGRAPH OR OTHER

MATTER PARAGRAPH IN THE AUDITOR’S REPORT ON THE AUDITED FINANCIAL
STATEMENTS
If the auditor's report on audited financial statements includes a qualified opinion, an

Emphasis of Matter paragraph, or an Other Matter paragraph, but the auditor is satisfied
that the summary financial statements are consistent or a fair summary, the auditor's
report on the summaries must also:
(a) State that the auditor's report on audited financial statements contains a qualified
opinion, Emphasis of Matter, or Other Matter.
(b) Describe the basis for the qualified opinion, Emphasis of Matter, or Other Matter in the
audited financial statements and its effect on the summary financial statements, if any.
If the auditor's report on audited financial statements has an adverse opinion or

disclaimer, the report on the summary financial statements must additionally:
(a) State that the report on audited financial statements contains an adverse opinion or
disclaimer.
(b) Describe the basis for the adverse opinion or disclaimer.
(c) State that due to the adverse opinion or disclaimer, it is inappropriate to express an
opinion on the summary financial statements.
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MODIFIED OPINION ON THE SUMMARY FINANCIAL STATEMENTS
If the summary financial statements are not consistent or not a fair summary of the audited
financial statements, and management refuses to make necessary changes, the auditor
must express an adverse opinion on the summary financial statements.
RESTRICTION ON DISTRIBUTION OR USE OR ALERTING READERS TO THE BASIS OF

ACCOUNTING
If the distribution or use of the auditor's report on audited financial statements is restricted,
or if the report alerts readers that the audited financial statements follow a special purpose
framework, a similar restriction or alert must be included in the auditor's report on the
summary financial statements.
COMPARATIVES
If the audited financial statements have comparatives, the auditor must assess if their
absence in the summary financial statements is reasonable for the engagement. The auditor
considers the impact of an unreasonable omission on the report for the summary financial
statements.
If the summary financial statements have comparatives audited by another auditor, the
report on the summary financial statements should include the matters outlined in SA 710
for the auditor's report on audited financial statements.
UNAUDITED SUPPLEMENTARY INFORMATION PRESENTED WITH SUMMARY FINANCIAL

STATEMENTS
The auditor must assess if unaudited supplementary information accompanying the

summary financial statements is distinct from the summaries. If the presentation is unclear,
the auditor requests management to change it. If management declines, the auditor clarifies
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in the report that the unaudited supplementary information is not covered by the auditor's
report on the summary financial statements.
OTHER INFORMATION IN DOCUMENTS CONTAINING SUMMARY FINANCIAL STATEMENTS
The auditor reads other information in a document with summary financial statements to
check for material inconsistencies. If found, the auditor assesses whether revisions are
needed for the summary financial statements or the other information. If revisions are
necessary for the other information, the auditor discusses the matter with management.
AUDITOR ASSOCIATION
If the auditor learns that the entity plans to claim the auditor reported on summary financial
statements in a document but won't include the related auditor's report, the auditor
requests its inclusion. If management refuses, the auditor takes appropriate actions to
prevent inappropriate association.
In cases where the auditor is engaged for financial statements but not for the summary
financial statements, and the entity plans to mention the auditor in a document, the auditor
ensures that the reference is in the context of the auditor's report on the audited financial
statements and doesn't imply reporting on the summary financial statements. If not met,
the auditor requests changes or advises against referencing the auditor. If management
doesn't comply, the auditor disagrees with the reference and takes actions to prevent
inappropriate association.
TIMING OF WORK AND EVENTS SUBSEQUENT TO THE DATE OF THE AUDITOR’S REPORT
ON THE AUDITED FINANCIAL STATEMENTS
When reporting on summary financial statements after auditing financial statements, the
auditor doesn't need additional evidence or to report on events post the audit report. This is
because summary financial statements are derived from the audited financial statements.
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INTRODUCTION
Chartered Accountants frequently offer services that don't require expressing an opinion on
financial statement accuracy. To standardize procedures for such non-assurance services,
the ICAI's AASB issued two related standards:
SRS 4400 for agreed-upon procedures on financial information, and SRS 4410 for
compilation engagements. These standards provide a framework for planning, execution,
and reporting, ensuring consistency and quality in these specialized services.
WHAT ARE RELATED SERVICES?
Related Services encompass engagements where practitioners don't express conclusions to

enhance user confidence, unlike assurance engagements. In assurance engagements,
practitioners provide conclusions to boost confidence in the evaluation or measurement of
a subject matter against criteria, offering opinions that aid users in making informed
decisions with reduced chances of incorrect information.
Related Services include activities like tax return preparation, consulting (e.g., management
and tax consulting), and engagements covered by Standards for Related Services, such as
agreed-upon procedures and compilations, where no assurance conclusions are expressed.
WHAT ARE AGREED-UPON PROCEDURES?
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Agreed-upon procedures involve an engagement where the auditor is specifically engaged
by the client to conduct and report on factual findings based on pre-defined procedures.
These procedures are applied to specified subject matter, including elements, accounts, or
items within a financial statement. The resulting report provides a detailed account of the
auditor's factual findings based on the agreed-upon procedures, offering a targeted and
customized assessment of the specified aspects of financial information.
SRS 4400 ENGAGEMENTS TO PERFORM AGREEDUPON PROCEDURES REGARDING

FINANCIAL INFORMATION
This standard offers guidance on the specific procedures to be followed and details the
format and content requirements for the report issued by the auditor in connection with
such engagements. In essence, it provides a framework for auditors to conduct and report
on procedures agreed upon with the client concerning financial information, ensuring
consistency and quality in these specialized engagements.
OBJECTIVE IN ACCORDANCE WITH SRS 4400
The objective of an agreed-upon procedures engagement, as per SRS 4400, is for the auditor
to conduct audit-like procedures agreed upon with the entity and relevant third parties. The
auditor's role is to report factual findings based on these procedures. Importantly, the
report does not provide assurance, and users must independently assess the procedures
and findings.
Typically restricted to parties involved in the agreement, the report is not widely distributed
to prevent misinterpretation by those unaware of the engagement's context and purpose.
AUDIT VS. AGREED-UPON PROCEDURES
Aspect Audit Agreed-Upon Procedures

Assurance Provides assurance through Offers only factual findings
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an expressed opinion on from agreed-upon
financial statements. procedures; no assurance is
provided.
User Conclusion Users rely on the auditor's Users draw their own
opinion for their conclusions based on factual
assessments. findings in the report.
Report Nature Involves expressing an Provides a report of specific
opinion and overall factual findings without
assessment. assurance.
Actual Findings Emphasizes overall financial Reports actual findings (e.g.,
statement reliability. balance variations) without
providing assurance.
GENERAL PRINCIPLES OF AN AGREED-UPON PROCEDURES ENGAGEMENT
In an agreed-upon procedures engagement, the auditor must adhere to the Code of Ethics
issued by the Institute of Chartered Accountants of India. Ethical principles governing this
engagement include integrity, objectivity, professional competence and due care,
confidentiality, professional conduct, and technical standards.
Unlike some other engagements, independence is not a mandatory requirement for agreed-
upon procedures. However, if the terms or objective of the engagement necessitate
independence, the auditor should comply with the independence requirements of the Code
of Ethics. In cases where independence is not maintained, the report of factual findings
should include a statement acknowledging this fact.
DEFINING THE TERMS OF THE ENGAGEMENT
In defining the terms of the engagement for agreed-upon procedures, the auditor ensures a
clear understanding with the entity and designated parties who will receive the report of
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factual findings. It is advisable for the auditor to send an engagement letter, outlining key
terms, to confirm acceptance and prevent misunderstandings. This letter covers aspects
such as the agreed-upon procedures, the engagement's objectives and scope, the auditor's
responsibilities, and the format of reports.
The engagement letter typically includes a list of agreed-upon procedures and a statement
indicating that the report's distribution will be restricted to specific parties who have agreed
to the procedures, enhancing clarity and avoiding potential misinterpretations.
PLANNING
In the context of an audit or agreed-upon procedures engagement, planning is essential for

the auditor to ensure the effective and successful execution of the work. Planning involves
outlining the approach, resources, and steps necessary to conduct a thorough and
meaningful engagement.
Procedures and Evidence
The auditor conducts procedures as agreed upon and uses the gathered evidence as the
foundation for the report of factual findings.
Procedures perform Re computation,

Agreed-upon comparison and other
Inquiry and analysis
Procedures clerical accuracy
engagements checks
Obtaining
Observation Inspection
confirmations
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REPORTING
In reporting for an agreed-upon procedures engagement, the report must sufficiently detail
the purpose and agreed-upon procedures, allowing readers to comprehend the nature and
extent of the work conducted. It explicitly states that no audit or review has been
performed, emphasizing transparency about the engagement's scope and limitations. This
clear communication ensures that users understand the nature of the procedures
undertaken and the absence of a broader audit or review.
DOCUMENTATION
In agreed-upon procedures engagements, the auditor must thoroughly document important

matters to provide evidence supporting the report of factual findings. This documentation
serves to demonstrate compliance with the applicable standard (SRS) and the terms agreed
upon in the engagement.
SRS 4410 COMPILATION ENGAGEMENTS
SRS 4410 outlines practitioner responsibilities in assisting management with historical

financial information preparation without providing assurance. It's applicable to compilation
engagements for historical financial information, adaptable for non-historical financial or
non-financial information. SQC 1, applying to all Engagement Standards, extends to firms in
the context of SRS 4410 for compilation engagements.
WHAT IS A COMPILATION ENGAGEMENT?
A Compilation engagement involves a practitioner applying accounting expertise to aid

management in preparing and presenting financial information according to an applicable
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financial reporting framework. The practitioner issues a report as part of this engagement.
This service is typically requested by management to receive professional assistance in the
accurate presentation of an entity's financial information.
SCOPE OF COMPILATION ENGAGEMENTS
In a Compilation engagement, the scope varies based on circumstances but generally

involves aiding management in preparing financial information according to a chosen
financial reporting framework. Management may have already drafted the information.
Management retains responsibility for the information's preparation, including judgment
application, accounting policy selection, and reasonable estimates. Various frameworks,
from entity-specific to established standards, can be used depending on the entity's nature
and the intended use of the information.
ETHICAL REQUIREMENTS
In Compilation engagements, practitioners must adhere to ethical requirements outlined in

the Code of Ethics. They should identify and address any threats to compliance with ethical
standards. Unlike assurance engagements, independence requirements do not apply to
compilations. However, local laws or regulations might specify rules or disclosure
requirements related to independence.
ENGAGEMENT ACCEPTANCE AND CONTINUANCE
Before starting a compilation engagement, the practitioner and management must agree on
terms, covering the use and distribution of financial information, applicable reporting
framework, engagement scope, practitioner's responsibilities, and management's duties for
accurate financial presentation.
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PERFORMING THE ENGAGEMENT
 Understand the entity's business, operations, accounting system, and applicable financial
reporting framework.
 Compile financial information using records provided by management.
 Discuss significant judgments with management.
 Read the compiled financial information considering the entity's business and the
financial reporting framework.
 Address any incomplete or inaccurate information with management.
 Withdraw from the engagement if management fails to provide necessary information.
 Propose amendments if the financial information is inadequate, misleading, or requires
correction.
 If management rejects amendments, consider withdrawal and inform relevant parties.
 Obtain acknowledgment from management or governance for their responsibility over
the final compiled financial information.
 These terms are recorded in an engagement letter or written agreement. For recurring
engagements, the practitioner periodically reviews and updates the terms based on
changing circumstances, reminding management of existing terms as needed.
COMMUNICATION WITH MANAGEMENT AND THOSE CHARGED WITH GOVERNANCE
During a compilation engagement, the practitioner must communicate timely with

management or those charged with governance about any matters deemed important
enough to warrant attention. This ensures that relevant parties are informed promptly
about significant aspects of the compilation engagement according to the practitioner's
professional judgment.
THE PRACTITIONER’S REPORT
The practitioner's report in a compilation engagement communicates the nature of the

engagement, the practitioner's role, and responsibilities. It does not express an opinion or
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conclusion on the financial information but emphasizes transparency about the
engagement's purpose and limitations.
ENGAGEMENT LEVEL QUALITY CONTROL
The engagement partner shall take responsibility for: -
 The engagement partner oversees the overall quality of assigned compilation

engagements.
 Ensures that the engagement adheres to the firm's quality control policies and
procedures.
DOCUMENTATION
In the engagement documentation, the practitioner must include:
 Significant matters encountered during the compilation and how they were addressed.
 A record detailing how the compiled financial information aligns with the information
provided by management.
 A copy of the final version of the compiled financial information, along with management
or governance's acknowledgment of responsibility and the practitioner's report.
Additionally, the practitioner may choose to include the entity's trial balance or other
pertinent information used in the compilation process.
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INTRODUCTION
A "review" is a limited assurance engagement, providing a level of certainty less than an

audit but still sufficient for the circumstances. It involves fewer procedures than an audit,
gathering enough evidence for limited conclusions. Reviews enhance confidence in financial
statements, similar to audits, and focus on historical financial information.
Standards on Review Engagements
Standards on Review Engagements, applicable when practitioners conduct a financial

information review, include:
SRE 2400: Engagements to Review Historical Financial Statements
SRE 2410: Review of Interim Financial Information Performed by the Independent Auditor of
the Entity
These standards are under Engagement Standards, and the application of Standards on
Quality Control (SQC) is necessary for all services, including review engagements. Quality
control for individual review engagements is based on compliance with SQC 1 at the firm
level.
SRE 2400 ENGAGEMENTS TO REVIEW HISTORICAL FINANCIAL STATEMENTS
SRE 2400, "Engagements to Review Historical Financial Statements," outlines the

practitioner's responsibilities in reviewing financial statements when not the entity's
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auditor. The report, expressing a conclusion for user confidence, is based on limited
assurance obtained through primarily inquiry and analytical procedures. If potential material
misstatements are identified, additional procedures are conducted.
SRE 2400 addresses the form and content of the practitioner's report and is relevant for
both general purpose and special purpose financial statements.
OBJECTIVES IN A REVIEW OF FINANCIAL STATEMENTS IN ACCORDANCE WITH SRE 2400
In a review of financial statements according to SRE 2400, the practitioner's objectives

are:
(a) Obtain limited assurance through inquiry and analytical procedures to conclude if the
financial statements are materially misstated or prepared in accordance with the financial
reporting framework.
(b) Report on the financial statements and communicate as per SRE requirements.
If limited assurance cannot be achieved, and a modified conclusion is insufficient, the

practitioner must either disclaim a conclusion or, if legally possible, withdraw from the
engagement under applicable laws or regulations.
COMPLIANCE WITH ETHICAL REQUIREMENTS AND ENGAGEMENT LEVEL QUALITY

CONTROL
The practitioner, led by the engagement partner, ensures adherence to independence

standards and overall quality in review engagements.
Factors influencing the acceptance and continuation of client relationships and review
engagements include:
(a) Ensuring a rational purpose for the engagement, avoiding limitations on scope, and
assessing appropriateness for review.
(b) Ensuring compliance with relevant ethical requirements, including independence.
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(c) Assessing the availability and reliability of information crucial for the review engagement.
(d) Evaluating doubts regarding management's integrity that could impact the review's
proper execution.
(e) Rejecting a review engagement if management or those in governance impose

limitations likely to lead to disclaiming a conclusion on the financial statements.
Preconditions for Accepting a Review Engagement
Before accepting a review engagement, a practitioner must ensure certain conditions are
met:
Financial Reporting Framework Acceptance:
 Determine if the financial reporting framework used for preparing statements is

acceptable.
 Understand the purpose and intended users for special purpose financial statements.
Management Acknowledgment:
 Obtain management's agreement that they understand their responsibilities:

 For preparing financial statements in line with the applicable framework.
 To establish necessary internal controls for accurate financial statements.
 To provide the practitioner with access to all relevant information and unrestricted
access to personnel.
Access to Information:
 Ensure access to all pertinent information, records, and documentation.

 Obtain any additional information requested by the practitioner for the review.
If the practitioner is unsatisfied with any of these conditions, they must discuss the matter
with management. If issues persist and cannot be resolved, the practitioner should not
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accept the engagement unless required by law. If issues arise after acceptance, the
practitioner should discuss with management, determine if the matter can be resolved,
decide whether to continue the engagement, and consider how to communicate the matter
in their report.
Agreeing to the Terms of Engagement
The practitioner must agree on engagement terms with management beforehand,

documented in an engagement letter. For recurring reviews, they assess if changes are
needed based on circumstances. Changes to terms won't happen without reasonable
justification. If a shift to a non-assurance engagement is requested mid-review, justification
is evaluated, and if terms change, a new written agreement is reached with management or
governance.
Overview of performing the review engagement after its acceptance in accordance with
SRE2400
1. Materiality in Financial Statement Review: The practitioner sets materiality for the entire
financial statements, guiding procedures and evaluations consistently across assurance
levels. The judgment on materiality remains uniform, and adjustments may occur if new
information emerges during the review.
2. Understanding the Entity in Review: The practitioner gains insight into the entity, its
environment, and the financial reporting framework to identify potential areas for material
misstatements. This understanding forms the basis for designing corrective procedures.
3. Designing and Performing Review Procedures: In obtaining evidence for a conclusion on

financial statements, the practitioner employs inquiry and analytical procedures. These
procedures address all material items, including disclosures, and focus on areas prone to
material misstatements. While specific procedures vary based on the engagement, the
practitioner may choose additional methods, like reviewing significant contracts or
accounting records, without altering the objective of obtaining limited assurance.
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Designing and Performing Review Procedures:
In obtaining evidence for a conclusion on financial statements, the practitioner employs

inquiry and analytical procedures. These procedures address all material items, including
disclosures, and focus on areas prone to material misstatements. While specific procedures
vary based on the engagement, the practitioner may choose additional methods, like
reviewing significant contracts or accounting records, without altering the objective of
obtaining limited assurance.
(a) Inquiry: In a review, inquiry involves seeking information from management and others
on matters like accounting estimates, related parties, fraud, events impacting going
concern, commitments, and non-monetary transactions. The practitioner evaluates
responses for consistency and reasonableness.
(b) Analytical Procedures: Designing analytical procedures involves assessing the adequacy
of data from the entity's accounting system. The practitioner considers the reasonableness
and consistency of management's responses and utilizes industry knowledge to identify and
address inconsistencies.
Significance of Inquiry and Analytical Procedures in Review
In a review, inquiry is crucial as it often provides the primary evidence about management's
intentions. Despite potential limitations, understanding management's historical actions,
stated reasons, and their ability to carry out plans can corroborate inquiry evidence.
Applying professional skepticism during inquiry helps assess the risk of material
misstatements in financial statements.
Moreover, inquiry procedures aid in updating the practitioner's understanding of the entity
and identifying areas prone to material misstatements.
4. Procedures to Address Specific Circumstances
 Related Parties: During the review, the practitioner remains watchful for signs of
undisclosed related party relationships or transactions. If significant transactions outside the
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normal course arise, the practitioner inquires with management about their nature, possible
related parties, and the business rationale.
 Fraud and Non-compliance: If indications of fraud or non-compliance with laws or
regulations emerge, the practitioner communicates this to senior management or
governance. Management's assessment of the effects on financial statements is considered
in the practitioner's conclusion and report, with a potential responsibility to report to
external parties.
 Going Concern: In assessing the entity's ability to continue, the practitioner inquires
about management's plans and their feasibility if significant doubts arise. Evaluation of
management's responses considers whether financial statements should continue on a
going concern basis and if there are material misstatements related to the entity's ability to
continue, in light of all relevant information.
 Use of Work Performed by Others: If the practitioner uses work done by other
practitioners or experts, they ensure its adequacy for their review purposes. In the context
of group financial statements, the review procedures are directed to achieve objectives
while considering the group's specific circumstances.
5. Addressing Material Misstatements: If the practitioner suspects material misstatements

in the financial statements, additional procedures are performed to:
(a) Conclude that the matter is not likely to cause material misstatements, or
(b) Determine that the matter causes material misstatements.
In case of events post-financial statement date requiring adjustments or disclosure, the

practitioner urges management to correct the misstatements. Although no obligation exists
for post-report procedures, if new facts emerge before issuance that might alter the report,
the practitioner discusses with management, decides on necessary amendments, and
ensures proper handling. If management fails to amend and the report is already provided,
the practitioner advises against third-party issuance until amendments are made, taking
further action to prevent reliance on the report if necessary.
6. Written Representations in Review: Written representations are crucial evidence in a

review. The practitioner requests management to confirm fulfillment of responsibilities for
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financial statement preparation, access provision, and transaction recording. If required
public statements cover these aspects, additional representation may not be needed. If
management doesn't provide requested representations:
(a) Discuss with management and governance,
(b) Re-evaluate management's integrity and its impact on reliability,
(c) Take appropriate actions, including assessing the effect on the conclusion.
The practitioner disclaims or withdraws if:
(i) Doubt arises about management's integrity, making representations unreliable, or
(ii) Management fails to provide required representations on financial statement

preparation and transaction recording.
7. Evaluating Evidence in Review: The practitioner assesses if sufficient appropriate

evidence has been obtained from performed procedures. If not, additional necessary
procedures are carried out. In situations where expected evidence isn't obtained, the
practitioner may extend or perform other necessary procedures.
If neither option is feasible, and sufficient evidence cannot be obtained, the practitioner
discusses the impact on the report or the ability to complete the engagement with
management and governance. Inability to perform a specific procedure doesn't limit the
review scope if sufficient evidence is obtained through alternative procedures. Limitations
imposed by management may have implications for areas prone to misstatements and the
overall engagement.
8. Forming Conclusion in Review: In forming a conclusion, the practitioner considers the

impact of uncorrected misstatements, prior-year reviews, and qualitative aspects of
accounting practices. For fair presentation frameworks, the evaluation includes overall
presentation and whether the financial statements represent transactions in a fair manner.
Unmodified Conclusion: Expressed when the practitioner obtains limited assurance that
nothing indicates the financial statements are not, in all material aspects, in line with the
applicable financial reporting framework.
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Modified Conclusion: Expressed when the practitioner finds material misstatements or is
unable to obtain sufficient evidence on material items. The report includes a phrase
reflecting the nature of the modification.
Adverse Conclusion: Expressed when a significant issue prevents a true and fair view, with a
specified phrase based on the type of financial reporting framework used.
Qualified Conclusion: Expressed when the practitioner, due to insufficient evidence,

qualifies the conclusion. The report includes a phrase indicating the limitation's possible
effects on the financial statements.
9. Practitioner’s Report in Review:
(a) Title indicating an independent practitioner's report for a review engagement.
(b) Addressee(s) based on engagement circumstances.
(c) Introductory paragraph identifying reviewed financial statements, mentioning the period
covered, and referring to significant accounting policies.
(d) Description of management's responsibility for financial statements' preparation,

internal control, and fair presentation.
(e) For special purpose financial statements, describe their purpose, intended users, and
management's responsibility for choosing the applicable financial reporting framework.
(f) Description of the practitioner’s responsibility to express a conclusion, referencing the

relevant standards and regulations.
(g) Explanation of the review procedures, their limitations, and statements highlighting the
limited assurance nature.
(h) Conclusion paragraph expressing the practitioner’s conclusion and referencing the
(i) When conclusion is modified, include a paragraph with the modified conclusion and one
describing the reason for modification.
(j) Reference to the practitioner’s obligation to comply with ethical requirements.
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(k) Date of the report, not earlier than when sufficient evidence is obtained.
(l) Practitioner’s signature.
(m) Place of signature.
EMPHASIS OF MATTER AND OTHER MATTER PARAGRAPHS IN THE PRACTITIONER’S

REPORT
If a matter in the financial statements is deemed crucial for user understanding but not
likely materially misstated, an Emphasis of Matter paragraph is included after the
conclusion. It focuses solely on the information presented.
For communicating other relevant matters beyond the financial statements, not prohibited
by law, the practitioner includes an "Other Matter" paragraph. This addresses issues
pertinent to the review, the practitioner’s responsibilities, or the report.
OTHER REPORTING RESPONSIBILITIES
If additional reporting responsibilities beyond the financial statements are requested, the
practitioner addresses them separately. This section, titled "Report on Other Legal and
Regulatory Requirements," follows the section reporting on the financial statements.
DOCUMENTATION
Effective documentation in a review is essential for demonstrating adherence to standards

and legal requirements, providing a credible record for the practitioner's report. The
practitioner should document:
 Procedures: Clearly record the nature, timing, and extent of procedures to comply with
the SRE, as well as relevant legal and regulatory requirements.
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 Results and Conclusions: Document outcomes and the practitioner’s conclusions derived
from the conducted procedures.
 Significant Matters: Record notable issues encountered during the engagement, along
with the practitioner’s conclusions and key professional judgments.
While documenting the nature, timing and extent of procedures performed as required in
this SRE, the practitioner shall record:
(a) Who performed the work and the date such work was completed and
(b) Who reviewed the work performed for the purpose of quality control for the
engagement, and the period and extent of the review.
Effective documentation ensures compliance with SRE, legal requirements, and provides a
clear record for external understanding.
AUDIT VS. REVIEW
Overview of distinctive areas between Audit and Review
Aspect Audit Review

Assurance Level Reasonable Assurance Limited Assurance
Nature of Procedures Elaborate and Extensive Fewer Procedures (Primarily
(Including tests of controls inquiry and analytical
and substantive procedures) procedures)
Conclusions Drawn Reasonable Conclusions Limited Conclusions based
based on sufficient on sufficient appropriate
appropriate evidence evidence
Opinion Provided Assurance Opinion Limited Assurance Opinion
(Positively Worded)
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SRE 2410 REVIEW OF INTERIM FINANCIAL INFORMATION PERFORMED BY THE
INDEPENDENT AUDITOR OF THE ENTITY
Guidelines for auditors reviewing an audit client's interim financial information, covering
professional responsibilities and report content.
WHAT IS INTERIM FINANCIAL INFORMATION?
Financial data prepared under a relevant financial reporting framework, presenting either a
complete or condensed set of financial statements for a period shorter than the entity’s
fiscal year, such as quarterly financial statements.
OBJECTIVE OF AN ENGAGEMENT TO REVIEW INTERIM FINANCIAL INFORMATION IN

ACCORDANCE WITH SRE 2410
The goal is to express a conclusion on whether anything has come to the auditor's attention
during the review, indicating that the interim financial information is not, in all material
aspects, in line with the applicable financial reporting framework. This review, unlike an
audit, focuses on reducing the risk of an inappropriate conclusion without providing
reasonable assurance on the absence of material misstatements.
AGREEING THE TERMS OF THE ENGAGEMENT
The auditor and client establish agreed terms through an engagement letter, clarifying the
review's nature, objectives, and scope. This communication prevents misunderstandings
about management and auditor responsibilities, the assurance level, and the report's nature
and form.
UNDERSTANDING THE ENTITY AND ITS ENVIRONMENT INCLUDING ITS INTERNAL

CONTROL
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To review annual and interim financials, auditors must grasp the entity's environment and
internal control. For annual statements, a prior audit provides this understanding. However,
for interim reviews, the auditor updates this comprehension, considering risks, materiality,
past misstatements, internal control nuances, audit results, and management assessments.
Inquiry about fraud risks, business changes, and internal control modifications is crucial. This
comprehensive understanding guides review planning and procedures, ensuring a thorough
assessment of interim financial information alignment with reporting standards.
INQUIRIES, ANALYTICAL AND OTHER REVIEW PROCEDURES
In conducting a review, auditors inquire with financial personnel, perform analytical and
other review procedures to identify potential misstatements in interim financial
information. Unlike audits, reviews don't typically involve tests of accounting records
through inspection or confirmation. The auditor's understanding of the entity, risk
assessments, and materiality considerations influence the nature and extent of these
procedures. Review procedures may be performed early in the interim period, facilitating
early identification of significant accounting matters. The auditor, engaged for both interim
review and annual audit, may opt for concurrent procedures for efficiency. Corroborating
inquiries about litigation is usually unnecessary, unless specific concerns arise.
Inquiring about events up to the review report date, assessing going concern, and
addressing identified doubts are integral to the process. If issues arise that question
material adjustments, the auditor conducts additional inquiries or procedures for a
comprehensive review report.
EVALUATION OF MISSTATEMENTS
The auditor evaluates identified misstatements, including inadequate disclosures, both

individually and collectively to assess their materiality in the interim financial information.
Professional judgment is applied to determine if material adjustments are necessary for the
financial information to comply with the applicable reporting framework.
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MANAGEMENT REPRESENTATIONS
The auditor secures written representations from management, confirming:
(a) Acknowledgment of responsibility for internal control design against fraud and error.
(b) Adherence to the applicable financial reporting framework in preparing interim financial
information.
(c) Belief that uncorrected misstatements identified by the auditor are immaterial
individually and collectively.
(d) Disclosure of all known frauds or suspected frauds affecting the entity.
(e) Disclosure of results from the assessment of risks related to material misstatement due
to fraud.
(f) Disclosure of all known instances of non-compliance with relevant laws and regulations.
(g) Disclosure of significant events post-balance sheet date affecting the interim financial
information.
AUDITOR’S RESPONSIBILITY FOR ACCOMPANYING INFORMATION
The auditor examines accompanying information to assess material consistency with interim
financial data. If a material inconsistency is found:
 For interim financial information, the auditor evaluates the need for amendment,
considering implications if management disagrees.
 For other information, potential amendments are discussed with management. If refused,
the auditor may report the inconsistency or take actions like withholding the report or
withdrawing from the engagement.
 In cases of apparent misstatements in the other information, the auditor discusses with
management, assessing validity and considering further actions, such as requesting legal
advice if an amendment is necessary and refused by management.
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COMMUNICATION
 If a matter suggests a material adjustment is needed in the interim financial information,

the auditor promptly communicates it to management. If management response is
inadequate, those charged with governance are informed.
 Communication, oral or written, depends on factors like nature and significance. If
governance does not respond appropriately, the auditor considers modifying the report,
withdrawing from the engagement, or resigning from the appointment.
 If fraud or noncompliance is suspected, the auditor communicates promptly with
relevant management levels, considering collusion likelihood. Reporting to governance is
considered, and implications for the review are assessed.
 The auditor communicates governance-relevant matters identified during the review,
providing important information for financial reporting oversight.
REPORTING THE NATURE, EXTENT AND RESULTS OF THE REVIEW OF INTERIM FINANCIAL
INFORMATION
The auditor should issue a written report that contains the following: -
 Title, addressee, and identification of reviewed interim financial information, including

statement titles, date, and period covered.
 Management's responsibility for preparation and presentation, expressed based on the
 Auditor's responsibility for expressing a conclusion on the interim financial information
through a review.
 Mention of the review conducted following SRE 2410, involving inquiries and analytical
procedures, with a note on its limited scope compared to an audit.
 Conclusion regarding the true and fair view or fair presentation of the interim financial
information, based on the applicable framework.
 Inclusion of the report date and place of signature.
 Auditor's signature, membership number, and, if applicable, the firm's registration
number assigned by the Institute of Chartered Accountants of India (ICAI).
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UDIN (Unique Document Identification Number) generation and statement for engagements
under SRE 2400 or SRE 2410, emphasizing the assurance nature of the engagement.
DEPARTURE FROM THE APPLICABLE FINANCIAL REPORTING FRAMEWORK
Qualified Conclusion: Expressed when the auditor believes a material adjustment is needed
for the interim financial information to comply with the applicable financial reporting
framework. The qualification details the nature of the adjustment.
Modification of Review Report: If the auditor identifies a potential material departure from
the financial reporting framework that is not corrected by management, the review report is
modified. This modification includes describing the departure's nature and, if possible, its
effects on the interim financial information.
Inadequate Disclosure: If essential information for disclosure is missing in the interim

financial information, the review report is modified to include necessary details, often
through an explanatory paragraph.
Material and Pervasive Departure: In cases where the departure's impact is significant and
widespread, and a qualified conclusion is deemed insufficient to convey the misleading or
incomplete nature, the auditor expresses an adverse conclusion in the review report.
LIMITATION ON SCOPE IMPOSED BY MANAGEMENT
 Avoidance: Auditor avoids engagements with anticipated scope limitations.

 After Acceptance: If limitations arise post-acceptance, auditor seeks removal; refusal
prompts written communication.
 Material Adjustments: Identified material adjustments communicated despite
limitations.
 Legal Compliance: Legal obligations considered; disclaimer issued if necessary, with
reasons explained.
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 Review Report: Matters requiring material adjustments communicated in the review
report.
OTHER LIMITATIONS ON SCOPE
When limitations on scope arise from factors other than management directives, the
auditor typically can't complete the review and provide a conclusion. However, in rare cases
where limitations are specific, material, but not pervasive to interim financial information,
the auditor modifies the review report. This modification, explained in an added paragraph,
notes the constrained scope but still qualifies the conclusion.
If a qualified opinion resulted from limitations in the prior annual audit, the auditor assesses
if those limitations persist and considers their impact on the current review report.
OTHER CONSIDERATIONS
The engagement terms mandate that if a document contains interim financial information
claiming review by the entity’s auditor, the review report must be included. If management
fails to do so, the auditor may seek legal advice for appropriate action.
Modified Report and Document Inclusion: If a modified review report isn't included in the
document with the interim financial information, the auditor may consider seeking legal
advice and evaluate the possibility of resigning from the annual financial statements' audit
appointment.
Understanding Interim Financial Information: Interim financial information, especially in

condensed form, may lack details found in a full set of financial statements. Users are
presumed to have access to the latest audited financial statements. In other cases, the
auditor discusses with management the need to clarify that the interim information should
be read with the latest audited financial statements. If absent, the auditor assesses
potential misleading aspects and implications for the review report.
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DOCUMENTATION
The auditor must create sufficient and appropriate review documentation. This
documentation serves as the basis for the auditor's conclusion and provides evidence that
the review aligns with Standard on Review Engagements (SRE) and relevant legal and
regulatory requirements.
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CAtestseries.

As Per New Syllabus of

Unique MCQ’s with Detailed Reasoning

INDIA’S FIRST FREE DOUBT SOLVING

Traditionally, Chartered Accountants focused on attesting to past events. However, with

STANDARDS ON ASSURANCE ENGAGEMENTS

These standards govern assurance engagements beyond historical financial information,

Following Standards on Assurance Engagements have been issued: -

SAE 3400 THE EXAMINATION OF PROSPECTIVE FINANCIAL INFORMATION

Prospective Financial Information: Prospective financial information is based on

Projection: A projection is a form of Prospective Financial Information that relies on

Nature of Assurance Regarding Prospective Financial Information

Assurance on prospective financial information is limited because it pertains to events and

Responsibility of Preparation and Presentation of Prospective Financial Information

Association of Professional Accountants with Prospective Financial Information: Chartered

Duties of Member who is Examining the Prospective Financial Information

In examining prospective financial information, the auditor must obtain sufficient

(a) Management's best-estimate assumptions are reasonable, and hypothetical assumptions

(b) The information is properly prepared based on the assumptions.

(c) Proper presentation and adequate disclosure of material assumptions, indicating

Acceptance of Engagement: Precautions to be taken by Auditor Before Accepting such an

 Purpose: Understand the intended use.

When determining examination procedures for prospective financial information,

(a) Past knowledge from previous engagements

(b) Management's competence in preparing the information

(c) Likelihood of material misstatement

(d) Influence of management's judgment on the information

(e) Source reliability, adequacy, and third-party data in supporting assumptions

(f) Stability of the entity's business

Assess evidence sources for management's assumptions (e.g., budgets, industry

Presentation and Disclosure

When assessing presentation and disclosure of prospective financial information, ensure:

(a) Clarity and non-misleading presentation

(b) Clear disclosure of accounting policies in notes

(d) Disclosure of the preparation date, with confirmation of appropriateness of assumptions

Report on Examination of Prospective Financial Information

Report on prospective financial information examination should include:

(iii) Identification of the information

(iv) Reference to applicable auditing standards

(v) Acknowledgment of management's responsibility

(vi) Mention of purpose/restricted distribution if relevant

(vii) Confirmation of examination procedures, including testing evidence

(viii) Negative assurance on assumptions' reasonability

(ix) Opinion on proper preparation and presentation

(x) Appropriate caveats on result achievability

(xi) Date of report (completion date of procedures)

(xii) Place of signature

Document evidence supporting the prospective financial information examination report,

SAE 3402 ASSURANCE REPORTS ON CONTROLS AT A SERVICE ORGANISATION

SAE 3402 pertains to assurance engagements by public accountants, offering reports on

Scope of SAE 3402

(a) Reporting solely on control operation.

What is a Service Organisation?

A service organization is a third-party entity or segment providing services to user entities,

User Auditor: Audits and reports on financial statements of a user entity.

Service Auditor: Professional accountant in public practice. Provides assurance report on

Objectives of Service Auditor in Accordance with SAE 3402

The service auditor's objectives under SAE 3402 are as follows:

(a) Obtain reasonable assurance regarding the service organization's system:

 Ensure the system description is fair and accurate.