CA SHANKAR LAKHWANI # Audit Made Easy

CA FINAL AUDIT MAGIC CHARTS VOLUME 2

By CA SHANKAR LAKHWANI
(SA/SRS/SRE/SAE/CARO/Risk Assessment & Internal Control)

HELLO CHAMPIONS!!!!!
Important Points to Keep in Mind before Referring Magic Charts

• Magic Charts are to be referred for 1st

Reading as well as subsequent Revisions
• These Charts contain ICAI Keywords
• Covers 100% Syllabus
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INDEX
Chapter Pg No.
SA 200 81
SA 210 82
SQC-1 83
SA 220 87
SA 230 89
SA 240 90
SA 250 94
SA 260 96
SA 265 98
SA 299 99
SA 300 101
SA 315 104

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SA 320 105
SA 330 106
Risk Assessment & Internal Control 107
SA 402 112
SA 450 114
SA 500 116
SA 501 118
SA 505 120
SA 510 123
SA 520 125
SA 530 126
SA 540 129
SA 550 132
SA 560 135
SA 570 137
SA 580 139
SA 600 140
SA 610 142
SA 620 144
SA 700 147
SA 701 149
SA 705 150
SA 706 153
SA 710 154
SA 720 155
Reporting Miscellaneous & Section 143 of Companies Act, 2013 157
CARO 160
SA 800 164
SA 805 166
SA 810 169
SRS 4400 174
SRS 4410 176
SRE 2400 179
SRE 2410 183
SAE 3400 185
SAE 3402 188
SAE 3420 190

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SA 200 – Overall Objectives of Independent Auditor & Conduct of an Audit in accordance
with SAs

• Audit is a reasonable assurance engagement.

Q1) Inherent Limitations of Audit (ILA)

N • Nature of Financial Reporting

• Nature of Audit Procedures
• Not in nature of investigation
F • Timeliness of FR & decrease in relevance of information over time
• Future events

Q2) Is auditor correct when he argues that due to Inherent Limitations of Audit (ILA), he is
unable to get persuasive audit evidence and therefore fraud occurred?

No

Due to ILA, there is unavoidable risk that some Audit Evidence – Persuasive & not conclusive
MM can’t be detected even if audit as per (Auditor shouldn’t be satisfied with less than
SAs. persuasive audit evidence)
• ILA is not justification for auditor to be satisfied with less than persuasive AE.

Q3) Professional skepticism

• Questioning mind and being alert to conditions indicating possible misstatement (MST).
• Critical assessment of Audit evidence.

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SA 210 – Agreeing the terms of Audit Engagement

Q1) Factors where it is appropriate to revise terms of engagement / remind entity of

existing terms (Recurring Audits)

Change • Legal requirements

• Senior management
• Ownership
• Nature & size of business
• FRF
• Any revised / special terms of engagement
• Entity misunderstand objective and scope of audit

Q2) Auditor shall agree upon terms of engagement with management and these terms should
be recorded in audit engagement letter or other form of written agreement. What should be
included in Audit Engagement Letter?

Audit engagement letter is sent by auditor to client. Contents of audit engagement letter -

1) Objective and scope of audit

2) Responsibilities of auditor
3) Responsibilities of management
4) Identification of applicable FR framework for preparation of FS
5) Reference of expected form and content of audit report

Q3) Out of ORRFF, ORRF is there in engagement letter, then tell what is the discrepancy in
engagement letter?

F is missing (question may be framed where any component from ORRFF is missing. Identify &
answer it. All points to be written.)

Q4) Mgt has mentioned in audit terms that they will not be able to provide internal audit
report. They also imposed limitation on scope of audit work. Whether auditor should accept
audit engagement?

1) If management imposed limitation on scope and this results in auditor disclaiming opinion, then
auditor shall not accept engagement unless required by law.
2) If preconditions for audit not present, then auditor shall not accept engagement.
3) Conclusion - Auditor should not accept appointment due to limitation on scope of work.

Q5) Preconditions for audit

1) Determine whether FR framework is acceptable.

2) Management acknowledges & understands its responsibility -

For PPFS as per AFRF, including design, To provide auditor with –

implementation & maintenance of internal • All information
control • Additional information
• Unrestricted access to those within entity

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SQC 1 - Quality Control for Firms that perform Audits & Reviews of Historical Financial
Information & other Assurance and Related Services Engagements

Q1) Objective of SQC 1 & SA 220 – Most Important Line

Firms should establish quality control system to provide reasonable assurance that -

• Firm and personnel comply with PSRLR (Professional Std. & Regulatory & Legal Reqt.)
• Reports are appropriate

Q2) Elements of quality control system

• Human Resources
• Engagement Performance
• Monitoring
• Acceptance & continuance of client relations & specific engagements
• Leadership Responsibilities
• Ethical requirements
- SA 220 – same elements except HR — Assignment of engagement teams
- Firm Personnel

Q3) Leadership Responsibilities for Quality

• Managing partners: ultimate responsibility

• Inner culture, experience
• Quality: Paramount and non-negotiable
• Paisa, Log, Paisa
Paisa, Log, Paisa

Firm assigns mgt responsibilities so Firm’s policies for personnel Firm devotes sufficient
that commercial considerations do demonstrate overriding resources for
not override quality of work commitment to quality development of QCPP

Q4) Ethical requirements

(1) BCD In Out + Independence

• Professional behaviour
• Confidentiality
• Professional competence and due care
• Integrity
• Objectivity
• Independence
(2) Firm Independence requirements Personnel (SQC 1/SA 220)

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If threats,

Threat eliminate Khud hi eliminate (withdrawal from engagement)

(3) Personnel Firm

written confirmation of compliance with independence

At least annually

(4) Familiarity threat - same personnel for long time.

(5) Listed entities audit

EP to be rotated in at least 7 years Except sole practitioner

Q5) Acceptance & continuance of client relations and specific engagements

(1) Firm acquires vital info about client, before accepting engagement to decide about ICC.

• Integrity of client
• Competence to perform engagement
• Compliance with ethical requirements
(SA 220 – ICC + SM = Significant matters during current or previous engagement)

(2) Matters considered wrt integrity of client

• Identity and business reputation of client’s owners, management & TCWG

• Nature of client’s operations
• Info of attitude of client’s owners, mgt & TCWG towards aggressive interpretation of AS
• Whether client aggressively concerned with maintaining firm’s fees low
• Indications of inappropriate limitation on scope of work
• Reasons for appointment of firm and non-reappointment of previous firm
• Indications of money laundering and criminal activities
(3) Matters considered wrt firm’s capabilities, competence, time and resources-

• Firm personnel - knowledge of industry

• Firm personnel - experience - regulatory requirement
• Firm personnel - capabilities and competence
• Experts - available
• Individuals - eligibility requirement – EQCR - available
• Firm - complete engagement - reporting deadline
(4) Firm obtains info causing to decline eng. if obtainable earlier, policies on continuance
includes consideration of –

• Professional and legal responsibilities Possibility of withdrawing from –

• Whether firm to report to – • Engagement
1. Person who made appointment, OR • Both engagement and client relation
2. Regulatory Authorities
(5) Policies on withdrawal from eng. / both eng. & client relation address issues –

• Discussing with mgt and TCWG action firm might take.

• If appropriate to withdraw, discuss with mgt & TCWG, withdrawal & reasons.

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Consider PRL reqt. to remain in place or discuss with regulatory authorities, withdrawal &
•
reasons.
• Documenting significant -
o Issues
o Consultations
o Conclusions & its basis
Q6) Human Resources

Firm to establish policies requiring that-

Identity & role of EP Responsibilities of EP are EP has appropriate capabilities

communicated to client’s defined & communicated to him & time to perform role
mgt/TCWG

Q7) Engagement performance

(I) Consultation –

Difficult/contentious Within/outside firm TEO matters (Technical, Documentation

matters ethical, other matters)
(II) Engagement Quality Control Review (EQCR)

• Significant judgements reviewed by EQCRr (Engagement Quality Control Reviewer)

• It doesn’t reduce responsibilities of EP.
• Mandatory for audit of listed entities. Other – firm devise criteria.
• EQCR for audit of listed entities includes considering-
o Significance and disposition of corrected / uncorrected MST.
o Significant risks and responses.
o ET’s evaluation of independence.
o Whether WP reflect work performed & support conclusions.
o Appropriateness of report.
o Judgements made wrt materiality & significant risks.
• EQCRr

firm (ICAI Member) partner/employee of other firm

• EQCRr
o Objective
o No participation in decisions of engagement team.
o EP consult EQCRr so as not to compromise EQCRr’s objectivity.
o If objectivity impaired – EQCRr replaced
(III) Differences of opinion

Within engagement team Engagement team & consultant Engagement partner and EQCRr
• Report – after resolution of differences.
• Recommendations of EQCRr + Matter not resolved to
not accepted by Engagement partner EQCRr’s satisfaction

Established procedures - consulting

Another firm Professional/regulatory body

(IV) Engagement documentation
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Audit Other engagement
Engagement files to be completed in max 60 Appropriate time limit
days after AR date
• 2 reports on same subject matter – separate limit.
Eg, Component AR - consolidation purpose & legal purpose
• Engagement documentation – Firm’s property
Discretion – available to client provided it doesn’t undermine validity of work.
• Retention – minimum 7 years from AR date or if later, group AR date.

Q8) Monitoring

Quality control monitored considering following factors –

1. Taking remedial action against personnel who didn’t conform to quality control policies.
2. Taking action when –
a. deficiencies in design of quality control policies
b. non-compliance with quality control system.
3. Conducting monitoring by entrusting responsibility to partner/other persons with experience
& authority.
4. Dealing with complaints/allegations –
a. Non-compliance of PSRLR
b. Against firm/employees
c. By within/outside firm
5. Deciding whether quality control system properly designed and implemented.
6. Examining whether new developments in PSRLR reflected in quality control policies.

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SA 220 – Quality Control for Audit of Financial Statements

Q1) Leadership responsibilities

Importance to audit quality of – Fact – Quality is essential

• Performing work as per PSRLR
• Complying with quality control policies
• Issuing appropriate report
• Engagement team’s ability to raise
concerns without fear of reprisals

Q2) Engagement partner’s responsibility if EQCR

Determine – EQCRr appointed Discuss significant matters Not date AR until completion
with EQCRr of EQCR
• EQCRr’s objective evaluation of significant judgments involve –

Discussion of significant matters Review of audit Review of financial statements and

with engagement partner documentation audit report
Evaluation of conclusions reached in formulating AR

Q3) Documentation by engagement partner

Issues – Conclusion on compliance with Conclusion on acceptance and

• Compliance with ethical independence requirements continuance of client relation
requirements
• How resolved
Nature and scope of consultation

Q4) Documentation by EQCRr

Procedures on EQCR completed on/before Reviewer unaware of unresolved matters causing

EQCR performed AR date him to believe that significant
judgements/conclusions – inappropriate

Q5) SQC 1 v/s SA 220

SQC 1 SA 22O
Entire firm Audit
Responsibility – managing partner Responsibility – Engagement partner
Audit, review, assurance, related services Audit
Quality control policies – firm Quality control policies – audit
PSRLR + report SQC 1 is sine qua non for SA 220

Q6) Mechanism for review of quality control

(I) Peer Review Board

• Constituted by ICAI Council
• Objective of PR Board – Assurance assignments

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Technical, professional & ethical standards complied Proper system
• Quality enhancement by ICAI members.
• Check Karne wala – Peer Reviewer
Check Karwane wala – Practice Unit

Unqualified report – PR certificate Qualified report –

• No PR certificate
• Reasons
• Date for follow-on review
(II) Quality Review Board
• Set up by Central Government
• Members nominated by CG + ICAI Council
• Functions of Quality Review Board –

To make recommendations to To review quality To guide members to improve

Council as to quality quality
• Risk – Based Approach
• Review Karne wala – Technical Reviewer

(III) National Financial Reporting Authority (NFRA)

• Constituted under Companies Act 2013
• Duties

Monitor compliance with AS & Rule 3 of NFRA Rules, 2018 – Oversee quality
SA • Listed company
• Insurance/banking co.
• NFRA investigate auditors of companies specified in Rule 3
• QRB - other than Rule 3 + Referred by NFRA

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SA 230 – Audit Documentation

Q1) Meaning

Record of

Audit procedures Audit evidence Conclusions

Q2) Purpose

Engagement team to plan and Engagement team to supervise Engagement team is accountable
perform audit audit for its work
Continuing significance to EQCR/inspections (including external inspections)
future audit

Q3) Basics

1. More accurate

Documentation after audit work ❌ Documentation with audit work ✅

2. Auditor’s responsibility to provide access of audit documentation to regulators, not 3rd
party (after informing client).
3. Auditor’s discretion to make portions/extracts available to clients, provided it does not
undermine validity of work.

Q4) Form, content & extent of audit documentation depends on/Factors affecting amount of
working papers

Size and complexity of entity Nature of audit procedures Identified ROMM

Significance of audit evidence Audit methodology and tools

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SA 240 – The Auditor’s Responsibilities Relating to Fraud in Audit of Financial Statements

Q1) Fraud vs Error

1. Fraud –

Intentional act involving deception to obtain By mgt/employees/3rd party

unjust advantage
2. Misstatement may arise from fraud/error.
3. Fraud (2 types of intentional MST)

MST resulting from fraudulent financial MST resulting from misappropriation of assets
reporting

Q2) Fraudulent FR/ Source of fraudulent FR

1. Involves intentional MST including omission of amount/disclosures in FS to deceive FS

users.
2. Fraudulent FR accomplished by –

Manipulation, falsification, Misrepresentation/Intentional Intentional misapplication of

alteration of accounting omission of significant info in accounting principles wrt amt,
records FS classification & disclosures
3. Fraud by mgt overriding controls using techniques like –

Recording fictitious journal Inappropriately adjusting Omitting, advancing, delayed

entries (particularly period end) assumptions and changing recognition of transactions in
judgements FS
Concealing facts affecting FS Engaging in complex transactions to misrepresent financial
amount position

Q3) Misappropriation of assets

1. Theft of assets
2. By employees in small/immaterial amount.
3. Can also involve management who can conceal in ways difficult to detect.
4. It is accomplished by –

Embezzling receipts Stealing physical assets/intellectual Using entity’s assets for

(eg, Collection on property (eg, inventory for personal personal use (eg, as collateral
accounts receivable) use/sale, colluding with rival by disclosing for personal loan)
technological data)
Causing entity to pay for goods/services not received (eg, payment to fictitious vendors)

Q4) Responsibilities of management and auditor

1. Management/TCWG – Responsibility of prevention and detection of fraud.

2. Auditor –
• Obtain reasonable assurance – FS - free of material MST – fraud/error.
• Due to inherent limitations of audit, there is risk that some material MST may not be
detected, even if audit done as per SAs.
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• Risk of not detecting MM from fraud is higher than error, because fraud involves carefully
organised schemes to conceal it.
• Risk of not detecting MM from management fraud is higher than employee fraud, because
management is in position to manipulate accounting records.
• Auditor – Responsible for professional skepticism.
• Auditor identify and assess ROMM due to fraud and address ROMM by response.
• Auditor - report – COA 2013 & CARO 2020

Q5) Fraud risk factors

Events indicating incentive/pressure to commit fraud or provide opportunity to commit fraud.

A. Risk factors wrt MST arising from fraudulent FR

1. Incentives/Pressure
• High competition/market saturation, with declining margins.
• High vulnerability to rapid changes (eg, technology)
• Significant decline in demand
• Operating losses
• Recurring negative cash flows
• Rapid growth/unusual profitability than rivals
• New accounting, statutory, regulatory requirements
• Need to obtain additional debt/equity financing to stay competitive.
• Unrealistic expectation eg, over optimistic press release/annual report message.
• Ability to meet listing requirement/debt repayment/debt covenant requirement.
• Adverse effects of reporting poor financials on significant pending transactions like
business combination.
• Significant financial interest in entity.
• Compensation is contingent on aggressive targets.
• Personal guarantees of debts of entity.
• Excess pressure on management to meet targets.

2. Opportunities
• Significant related party transactions not in ordinary course of business.
• Significant unusual/complex transactions, especially at period end.
• Significant operations across international borders in jurisdictions where differing business
environment exist.
• Significant bank accounts/subsidiary/branch operations in tax haven jurisdictions.
• Strong financial presence/ability to dominate industry that allows entity to dictate T&C.
• Assets, liabilities, revenue, expenses based on significant estimates, involving subjective
judgements.
• Use of business intermediaries for which no business justification.

3. Attitudes/Rationalizations
• Communication of inappropriate values that are not effective.
• Non-financial management’s excess participation in selection of accounting policies.
• Known history of violation of L/R.
• Excess interest by mgt in maintaining/increasing entity’s stock price/earnings trend
• Management failing to remedy known significant deficiency in internal control.
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• Interest by mgt in employing inappropriate means to minimise earnings for tax saving.
• Low morale of senior management.
• Owner – manager makes no distinction between personal and business transactions.
• Dispute between shareholders in closely held entity.
• Recurring attempt by management to justify inappropriate accounting.
• Relation between management and auditor is strained due to –
Disputes Unreasonable demand on Restricted access to Dominant behaviour of
auditor eg Time constraint to auditor management
complete audit
B. Risk factors wrt MST from misappropriation of assets

1. Incentives/Pressure-
• Personal financial obligation may create pressure on management/employees to
misappropriate assets.
• Adverse relation between entity and employees due to following reasons –
Known/anticipated future Recent/anticipated change in Promotion/compensation,
layoffs employee compensation inconsistent with expectation

2. Opportunities –
• Large amount of cash on hand.
• Inventory items – small in size, high value, high demand.
• Easily convertible assets like bearer bonds, diamonds, computer chips.
• Fixed assets – small in size, marketable, lacking observable identification of ownership.
• Inadequate internal control over assets –
Inadequate segregation of Inadequate record keeping Lack of complete & timely
duties reconciliation of assets
Inadequate physical safeguards over cash, inventory, fixed assets

3. Attitudes/Rationalizations
• Changes in behaviour/lifestyle
• Behaviour indicating dissatisfaction with entity
• Tolerance of petty theft
• Disregard for need for monitoring/reducing risks related to misappropriation of assets.
• Disregard for internal control over appropriation of assets by –
o Overriding internal control
o Failing to take action on internal control deficiencies

Q6) Impossibility to continue audit/auditor unable to continue engagement

Determine professional/legal Consider If auditor withdraws –

responsibilities + Whether whether • Discuss with mgt/TCWG, withdrawal &
requirement to report to – appropriate to reasons
• Person who made withdraw from • Determine professional/legal
appointment or engagement, if responsibilities + Requirement to report
• Regulatory authorities legally permitted to –
o Person who made appointment or
o Regulatory authorities
withdrawal & reasons

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Q7) In determining responses to assessed ROMM due to fraud at FS level, auditor shall –

Assign and supervise personnel Evaluate whether selection & Incorporate unpredictability
on basis of Knowledge & skills application of a/cing policies are in selection of NTE of audit
& ROMM of engagement indicative of fraudulent FR procedures

Q8) Audit procedures responsive to risk of mgt override of controls

It is ROMM due to fraud + significant risk

Test appropriateness Review accounting For significant transactions outside normal course of
of journal estimates for business - Evaluate whether business rationale
entries/other biases suggest that they are entered for –
adjustments • Fraudulent FR
• Misappropriation of assets

Q9) Written representation from mgt/TCWG.

They acknowledge responsibility for They disclosed to They disclosed to auditor their
design, implementation, maintenance of auditor results of knowledge of fraud having
internal control to prevent/detect fraud mgt’s assessment of material effect on FS
ROMM due to fraud
They disclosed to auditor their knowledge of allegations of fraud communicated by employees

Q10) Communication Map

Auditor identified fraud –

Communicate to management If management involved Regulatory and enforcement authorities -

– communicate to communicate to 3rd parties (eg, RBI for
TCWG banks) when –
• Mgt/TCWG fails to take action OR
• There are provisions to do so
Q11) MCQ

If auditor concludes that no ROMM due to fraud wrt revenue recognition – Then auditor should
document reasons for it.

Q12) Documentation

1. Auditor’s documentation of understanding entity & envt. & assessment of ROMM includes –

Significant decisions reached during discussion Identified and assessed ROMM due to fraud at
among engagement team regarding susceptibility FS level and assertion level
of FS to MM due to fraud
2. Auditor’s documentation of responses to assessed ROMM includes –

Overall responses to assessed ROMM due to Results of audit procedures, including those
fraud at FS level & assertion level designed to address risk of mgt override of
controls

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SA 250 – Consideration of Laws & Regulations in an Audit of Financial Statements

Q1) Responsibility of management

• Ensure that entity’s operations conducted as per L/R.

• Policies and procedures implemented by entity for prevention and detection of non-
compliance with L/R –

Monitoring legal requirement & ensuring Monitoring compliance with Developing, publicizing
that operating procedures are as per reqt. Code of Conduct (CoC) & following CoC
Maintain register of significant L/R & Ensuring employees – properly trained & understand
complaints CoC

Q2) Responsibility of auditor

1. Auditor is not responsible for preventing non-compliance and can’t be expected to detect
non-compliance with all L/R.
2. Auditor – obtain reasonable assurance that FS free from MM – fraud/error.
3. Auditor considers legal & regulatory framework.
4. For L/R, potential effects of inherent limitations on auditor’s ability to detect MM (SA
200) are greater because –
There are many L/R that Non-compliance may involve conduct Whether non compliance or
don’t affect FS & not designed to conceal it. Eg, collusion, not – matter of legal
captured by info system forgery, intentional determination by court of law
misrepresentation to auditor

Q3) 2 categories of L/R

L/R having direct effect on L/R not having direct effect on determination of amt &
determination of material amt & disclosures in FS but compliance is fundamental to –
disclosures in FS (eg, tax & labor law) • Operations
• Going concern
• Avoid material penalties
Non- compliance: material effect on FS

Q4) Auditor’s responsibilities

1. Common for A & B –

Auditor obtains general understanding of:

Legal & regulatory framework How entity is complying with framework

2. For A –

Auditor to obtain SAAE for compliance with L/R.

Eg, Law for form and content of FS/industry specific FR issues.
3. For B –

Auditor’s responsibility is limited to specified audit procedures to identify non-compliance with

L/R having material effect on FS -

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Inquiry of management/TCWG as to Inspecting correspondence with regulatory authorities
whether entity is complying with L/R
4. Auditor obtains written representation that known non-compliance are disclosed to auditor.

Q5) Audit procedures when non compliance identified/suspected.

1. Auditor to obtain –

Understanding of nature of act and Further information to evaluate possible effect on FS

circumstances in which it occurred
2. If auditor suspects non-compliance, he shall discuss with mgt/TCWG.
If mgt/TCWG don’t provide sufficient info and effect of non-compliance is material to
FS, auditor shall obtain legal advice.
3. If sufficient info can’t be obtained wrt suspected non-compliance – auditor shall evaluate
effect of lack of SAAE on opinion.
4. Auditor takes action.

Q6) Reporting of identified/suspected non-compliance.

1. Reporting to TCWG –
• Auditor communicates to TCWG matters of non-compliance coming to auditor’s attention,
other than inconsequential matters.
• Non-compliance – intentional & material
Auditor communicate TCWG
ASAP
• Auditor suspects that management/TCWG involved in non-compliance.
Auditor communicate Next higher level (eg, Audit Committee/Board)
If no higher authority /auditor believes communication may not be acted upon/unsure as to person
to whom to report – obtain legal advice.
2. Reporting in Audit Report

Non-compliance – Auditor precluded by Auditor unable to determine if

• material effect on FS mgt/TCWG from obtaining non-compliance occurred/not due
• not reflected in FS SAAE to evaluate if non- to limitations imposed by
compliance occurred/not circumstances

Qualified/adverse opinion Qualified/Disclaimer Give effect on opinion

3. Reporting to regulatory and enforcement authorities
• Auditor to determine if he has responsibility/not to report to parties outside entity.

Q7) Documentation

Non-compliance (Both - Results of discussion with –

identified and suspected) • Management/TCWG
• 3rd party

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SA 260 -Communication with TCWG

Q1) Basics

1. TCWG – Oversees (strategic direction & FR process) + Accountability

2. Significance of communication with TCWG – Two way communication
Helps in assisting

Auditor & TCWG Auditor to obtain info to TCWG to oversee FR process

• in understanding matters understand entity &
• in developing constructive environment
working relation

Q2) Matters communicated by auditor

Auditor’s responsibilities wrt FS Planned scope & timing of Significant findings from
audit audit audit
A. Auditor’s responsibilities wrt FS audit

To give opinion on FS prepared by Audit doesn’t relieve management/TCWG of their

management, with oversight of TCWG responsibilities
B. Planned scope & timing of audit

Overview of planned scope and timing of Effectiveness of audit shouldn’t be compromised (eg,
audit, including significant risks By making audit procedures too predictable)
identified by auditor
C. Significant findings from audit

Auditor’s views wrt significant qualitative aspects Significant Circumstances

of entity’s a/cing practices, policies & estimates difficulties affecting form and
+ encountered during content of audit
Why he considers a/cing practice audit report
• Acceptable – AFRF
• But not appropriate for entity
Other significant matters relevant to oversight of Unless all TCWG = mgt
FR process • Significant matters of audit
discussed with management
• Written representation auditor is
requesting

Q3) Explain significant difficulties during audit

Restriction on auditor by Unreasonably brief time to Mgt unwillingness to make going

management complete audit concern assessment
Extensive unexpected effort Unavailability of info
to obtain SAAE

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Q4) Significant matters of audit discussed with mgt

Significant transactions Business conditions affecting entity Concerns wrt mgt’s consultation
and business plans affecting ROMM with other accountants on -
• Accounting
• Auditing
matters
Discussion for Significant matters on which there was disagreement with mgt, except
appointment of auditor initial difference of opinion due to incomplete facts
for a/cing practices,
application of SAs

Q5) Communication of Auditor’s independence for listed entities

Auditor TCWG

Statement that engagement team • All relations & other matters between firm & entity
and others complied with ethical that has bear on independence, including total fees
requirements of independence for audit & non-audit services.
• Safeguards to reduce/eliminate threats to
independence.

Q6) MCQ

1. Auditor shall communicate in writing with TCWG regarding significant findings from audit,
if oral communication inadequate.
2. Auditor shall communicate in writing with TCWG regarding auditor independence in case of
listed entities.
3. Documentation

Oral Writing
Matter + when + to whom communicated Copy of communication

Q7) Circumstances in which auditor is required to include additional info in audit report as per
SAs & for which communication with TCWG is required –

1. Auditor expects to modify opinion (SA 705)

2. Material uncertainty related to going concern is reported (SA 570)
3. Key audit matters are communicated (SA 701)
4. EOM or OM para (SA 706)
5. Uncorrected material misstatement of other information (SA 720)
• Auditor provides TCWG – draft of auditor report to facilitate discussion of how such
matters will be addressed in audit report.

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SA 265 – Communicating Deficiencies in Internal Control to TCWG & Management

Q1) Auditor to communicate material weakness in internal control to management/audit

committee through letter of weakness/management letter OR Internal control weakness.

1. Letter Areas of weaknesses in system

Suggestions for improvement
2. It indicates that it discuss only weaknesses which came to auditor’s attention & it doesn’t
determine adequacy of internal control.
3. Letter – reference document for mgt for revising system & insisting on implementation.
4. Letter – minimize legal liability if major defalcation/loss due to internal control weakness.

• Auditor Communicate Management

In writing, significant Other deficiencies in internal control not communicated to mgt

deficiencies in internal control by other parties & auditor – professional judgement – sufficient
communicated to TCWG importance
• Auditor to include in written communication to TCWG of significant deficiencies in internal
control –
a. Description of deficiencies
Explanation of potential effects
b. Sufficient information to enable TCWG & mgt to understand context of
communication. Auditor explain that –

Purpose of audit Audit – consideration of IC relevant to Report – Deficiencies identified by

– opinion on FS PPFS to design audit procedures. Not auditor & auditor – sufficient
expressing opinion on effectiveness of IC importance for reporting to TCWG

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SA 299 – Joint Audit of Financial Statements

Q1) Responsibility & coordination among joint auditors.

1. Each joint auditor is responsible only for work allocated to him.

2. All joint auditors are jointly & severally responsible for –

Audit work not divided & Decision by all joint auditors wrt Matters brought to notice of
done by all joint auditorscommon areas concerning NTE of joint auditors by any one of
audit procedures to be performed them & on which there is
by each joint auditor agreement among joint auditors
Ensuring FS is as per Ensuring presentation & disclosure Ensuring audit report is as per
statutes of FS is as per AFRF statutes, SAs & pronouncements
3. If joint auditor comes across matters wrt responsibility of other joint auditor & which
deserve their attention
Said joint auditor communicate other joint auditor in writing
4. Responsibility of each joint auditor to determine NTE of audit procedures/study internal
controls & risks – for work allocated to him.
5. For pt. 2 – subpoint 2 above

All joint auditors responsible only for decisions Execution of audit procedures – individual
wrt NTE of audit procedures responsibility of joint auditor

Q2) Reporting

1. Normal case – common audit report

2. Disagreement by joint auditors – separate audit report by joint auditor who disagreed.
3.

Audit report of joint auditor makes reference Separate audit report of other joint auditor
to separate audit report of other joint auditor makes reference to audit report of joint auditor
Reference – OM para (SA 706)

Q3) In developing joint audit plan, what should joint auditors do?

Identify division of audit areas & Ascertain reporting Consider & communicate among all joint
common audit areas objectives auditors factors significant in
directing engagement team’s efforts
Consider results of preliminary
engagement activities & similar Ascertain NTE of resources
previous engagements.

Q4) Basic points

1. Each joint auditor assumes –

a. Other joint auditor done their work as per SAs & it’s not necessary to review
other’s work.
b. Other joint auditors have brought to said joint auditor’s notice any departure from
AFRF.

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2. Before finalizing report – joint auditors discuss & communicate respective conclusions with
each other.
3. Joint auditors obtain - common engagement letter & common written representation.
4. Work is divided among joint auditors by mutual discussion. Work allocation document -
signed by all joint auditors and communicated to TCWG.
5. If joint auditor expects to modify/include EOM or OM Para
Joint auditor communicate TCWG
Circumstances + wording of modification/para
6. Joint auditor document

NTE of audit procedures Division of work

7. When FS of branch/division audited by one of the joint auditors – other joint auditors
proceed on the basis that FS comply with AFRF & present T&F view.

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SA 300 – Planning an Audit of Financial Statements

Q1) Benefits/usefulness of planning audit of FS

Attention to important Timely resolution of potential Proper selection of engagement

areas problems team
Direction & supervision of Proper organisation & mgt of audit engagement
engagement team

Q2) Nature & extent of planning varies according to/Factors affecting nature & extent of
planning

Size & complexity of auditee Past experience and expertise Changes in circumstances

Q3) Planning is not discrete phase of audit but continual & iterative process.

1. Planning is not discrete phase of audit but continual & iterative process.
2. Begins after completion of previous audit & continues until completion of current audit.
3. Planning includes need to consider these matters –

Analytical procedures applied Obtaining general understanding of legal Determination of

as RAP & regulatory framework & its compliance materiality
Involvement of experts Performance of other RAP

Q4) Elements of planning

Preliminary engagement activities Planning activities

I. Preliminary engagement activities –
Performing procedures

Acceptance & continuance of client Compliance with ethical requirements, Understanding terms
relations & audit engagement including independence of engagement
II. Planning activities

Audit strategy (scope, timing, and direction) Audit plan (nature, timing, and extent)

Q5) Contents of audit plan

NTE of planned RAP NTE of planned FAP Other planned audit procedures

Q6) Changes in audit strategy and plan due to below factors

Unexpected events Changes in conditions Audit evidence Change in law

Q7) Factors while establishing audit strategy

Determination of characteristics of audit Reporting objectives Team’s efforts

Considering results of preliminary NTE of resources
engagement activities

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Q8) Benefits of overall audit strategy

Management of Allocation of quantity Timing of deployment Employment of

resources of resources of resources qualitative resources

Q9) Documentation

Audit strategy Audit plan Changes in both with reasons

(Record of key decisions) (Record of NTE of RAP)

Q10) Relation between audit strategy (AS) and audit plan (AP)

AS prepared before AP AP – More detailed. It gives NTE Change in one will result in
of audit procedures to obtain SAAE change in other
AS gives guidelines to make AP

Q11) Audit Programme

Allocates work to team members, including list of It also estimates duration to complete audit
procedures and instructions
A. Matters to be considered while preparing audit programme

Nature of business Overall plan Internal control system and

accounting procedures
Size of organisation & Information of organisation Accounting and management
management structure of business policies

B. Circumstances when audit programme altered –

If audit procedures designed It is discovered that internal Extraordinary increase in book

for certain volume of turnover control procedures were not debts/stock value compared to
and volume increased as effective as assumed when last year
substantially audit programme framed
Suspicion aroused/information received that assets are misappropriated
Audit plan and programme reconsidered as audit progresses.

C. Drawing up audit programme –

When auditor is appointed to audit accounts of entity for first time, audit programme should be
developed in 3 stages stated below –

1. Broad outline of audit programme should be drawn up.

2. After internal & a/cing procedures are reviewed, details should be filled up on a
consideration of deficiencies in internal control system.
3. After detailed checking procedure is over, extent to which special procedures that are
required to be applied should be determined. Eg, physical inspection of fixed assets.
At each subsequent engagement, programme should be reviewed and modified on account of –

Experience gained Important changes that have taken Evaluation of internal control
during previous audit place in business specially internal made for current year
control system & a/cing procedures

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Q12) Key phases in audit execution stage

Execution planning Risk & control evaluation Testing Reporting

Q13) Factors considered in development of audit plan

Terms of engagement Legal requirement Materiality

NTE of audit evidence NTE of report

Q14) Overall Audit Strategy & Audit Plan – Responsibility of Auditor

Audit strategy and audit plan is responsibility of auditor. When discussing matters with
management, care is required in order not to compromise effectiveness of audit. Eg, discussing
NTE of AP with management may compromise effectiveness of audit by making audit procedures
too predictable.

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SA 315 – Identifying & Assessing ROMM through understanding the entity & its environment

Q1) Assertions

Transactions and events Occurrence, completeness, accuracy, cut-off, classification

Account balance Existence, completeness, valuation, rights and obligation
Presentation & disclosure Occurrence, rights and obligation, completeness, classification, accuracy
and valuation

Q2) Significant risks/risks requiring special audit considerations/indications to judge that

risks are significant or not/factors to be considered while exercising judgement that risks are
significant or not.

Auditor has to consider

Risk of Risk related to significant Complexity of Significant Significant

fraud economic/accounting transactions transactions with transactions outside
development related parties normal course of
business

Q3) IT specific risks to internal control – Digital audit Ans. 7

Q4) Points to consider to evaluate ‘knowledge of business’ in conduct of audit/RAP to

understand entity, environment, internal control and obtain knowledge of business.

Understanding of

Industry Nature of entity – Entity’s selection Measurement Business

regulatory & • Operations & application of of entity’s risks
other external • Types of investments accounting financial
factors • Ownership & governance policies performance
structure
• Way in which entity is
structured & financed

Q5) Major sources to obtain info of client’s business.

Client’s policy and procedures manual Annual reports of client Discussion with client
Previous year’s audit working papers Visit to client premises

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SA 320 – Materiality in Planning & Performing Audit

Q1) Materiality

Benchmark x % (based on professional judgment)

Benchmark
Profit making entity Profit before tax
Loss making entity Revenue
Public utility program Total cost
% applied to PBT > % applied to revenue

Q2) Factors to identify benchmark

Elements of FS (Assets, Items of FS on which users’ Relative volatility of benchmark

liabilities, revenue, expenses) attention is focused (eg, for
profit oriented entity – profit)
Entity’s ownership structure Nature of entity & its industry & economic environment
and way it is financed

Q3) Re-evaluation of materiality/Revision of materiality

While establishing overall If any class of transaction, a/c balance Revision of materiality for
audit strategy – auditor or disclosure (CAD) for which MST of FS as whole takes place if
determines materiality less amount than overall materiality is auditor becomes aware of
for FS as a whole material, then auditor determines any info, which would have
materiality for that particular CAD caused auditor to determine
different amt. initially
If auditor concludes lower materiality for FS as a whole, auditor shall determine whether
necessary to revise performance materiality & whether nature, timing & extent of audit
procedures are appropriate

Q4) Meaning of performance materiality

Amount set by auditor at less than materiality to reduce probability to low level that aggregate of
uncorrected & undetected statements exceeds materiality for FS.

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SA 330 – The Auditor’s Responses to Assessed Risks

Q1) Considerations of auditor to assess ROMM & his response to such risks

SA 315 – IARC

1. Identify risk – by obtaining understanding of entity, environment and internal control.

2. Assess identified risks and evaluate whether they relate more pervasively to FS.
3. Relate identified risks to what can go wrong at assertion level.
4. Consider likelihood of misstatement & whether it is material misstatement.
SA 330 – “The Auditor’s Responses to Assessed Risks”

Consider reasons for assessment given to ROMM at assertion level, Obtain more persuasive
including audit evidence
• Likelihood of material misstatement
• Whether risk assessment takes controls into account, thereby
obtaining SAAE that whether controls are effective

Q2) Basics

Auditor’s responses to assessed risks

Test of Controls Substantive Procedures

Test of Details Substantive Analytical Procedures

Test of transactions Test of balances

(vouching) (verification)

• Auditor perform TOC when –

ROMM assessment at assertion level includes Substantive procedures alone can’t provide SAAE
expectation - controls operating effectively at assertion level

Auditor obtain more persuasive audit evidence – greater the reliance on operating effectiveness of
controls

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Risk Assessment & Internal Control

Q1) Audit risk components

A. Inherent Risk –
• Susceptibility of assertion to MST that could be material, assuming no controls.
• Arise from entity’s size, objectives, operations, complexity & regulatory environment.
• Eg, techno development making product obsolete.
B. Control Risk –
• Risk that internal control system will not prevent/detect/correct material MST.
• Internal control is missing.
• Some control risk always exists because of inherent limitations of internal control.
C. Detection Risk –
• Risk that auditor will not detect MM even if all audit procedures applied.
• Inverse relation to ROMM at assertion level.
AUDIT RISK = ROMM x Detection Risk

ROMM = Inherent Risk x Control Risk

• ROMM = Risk that MM may exist in FS before start of audit.

• Audit materiality has inverse relation with audit risk.

Q2) Steps for Risk Identification

1. Assess significance of assessed risk & impact of its occurrence

2. Determine likelihood of occurrence of assessed risk
3. Document assertions that are effected
4. Consider impact of risk on each assertions.
5. Identify degree of significant risks requiring separate attention by auditor
6. Enquire & document management’s response

Q3) Indicators of possible potential MST

Completeness Existence Recording Cut-off procedures

Q4) Risk-based audit (RBA) approach

1. Analyzes audit risks, set materiality thresholds based on audit risk analysis & develops audit
programmes that allocate large portion of audit resources to high risk areas.
2. Auditor doesn’t need to perform audit procedures on all areas of audit.
3. Steps/Phases

I. RISK ASSESSMENT
• Performing client acceptance or continuance procedures
• Planning overall engagement
• Performing RAP to understand business and identify inherent and control risks
• Assessing ROMM in FS
• Making informed assessment of ROMM at FS level and assertion level

II. RISK RESPONSE

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• Design and perform FAP that respond to ROMM and reduce it to acceptably low level.

III. REPORTING
• Issuing AR based on audit findings.

Q5) Internal control system meaning

All policies & procedures by management to assist in achieving management’s objective of ensuring-

• Efficient conduct of business

• Safeguarding of assets
• Prevention/detection of error/fraud
• Accuracy and completeness of accounting records
• Timely preparation of reliable financial information

Q6) Objectives of internal control wrt accounting system

1. Transactions are executed through management authorisation.

2. All transactions are promptly recorded in appropriate manner.
3. Assets and records – Safeguarded from unauthorised access, use, disposition.
4. Assets are verified at reasonable intervals & appropriate action is taken wrt discrepancies.

Q7) Basic accounting control objectives

Ensure all transactions are

Recorded Real Properly Recorded Properly Properly classified Properly

valued timely posted and disclosed summarised

Q8) Limitations of internal control

1. Management’s consideration that cost doesn’t exceed benefit.

2. Most internal control not directed at transaction of unusual nature. Potential of human
error due to carelessness, distraction, etc.
3. Possibility of circumvention of internal control by collusion with employees/with parties
outside entity.
4. Possibility that person responsible to exercise internal control could abuse that
responsibility.
5. Manipulations by management wrt judgements in preparation of FS.
Q9) Structure of internal control – Write answer 13

Q10) Components of internal control

I. CONTROL ENVIRONMENT

Communication and enforcement of Commitment to competence Participation by TCWG

integrity and ethical values
Mgt’s philosophy and operating style Organisational structure Assignment of authority
and responsibility
II. ENTITY’S RISK ASSESSMENT PROCESS

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Risks can arise/change due to circumstances –

New personnel - Different New/revamped info system New technology

understanding of IC
New business models, New accounting pronouncements
products, activities
III. CONTROL ACTIVITIES

Categorised as policies & procedures related to –

Performance reviews Information processing Physical controls Segregation of duties

Performance reviews - actual versus budget.

Physical controls –

Physical security of assets Authorisation for access to Periodic counting & comparison
computer programs with amount on control records
IV. INFORMATION SYSTEM & COMMUNICATION
• Consist of infrastructure (physical and hardware components), software, people,
procedures, data. Info system wrt FR objectives encompasses methods/records that –
Write basic accounting control objectives
V. MONITORING OF CONTROLS
• Whether controls operating as intended

Q11) Internal check system and its objectives

It implies organisation of overall system of book-keeping and arrangement of staff duties in such a
way that no one person can carry through a transaction and record every aspect thereof.

Objectives of internal check system-

1. To detect error and frauds with ease.

2. To increase efficiency of staff working within organisation.
3. To minimize possibility of commission of errors and fraud by any staff.
4. To locate responsibility area and stages where actual fraud/error occurs.
5. To prevent misappropriation of cash & falsification of accounts.

Q12) Effectiveness of efficient system of internal check depends on following

considerations/considerations on which effectiveness of internal check system depends –

Clarity of responsibility Division of work Standardization Appraisal

Q13) General conditions pertaining to internal check system

1. Staff duties – rotated from time to time.

2. No single person should have complete control over important aspect of business operation.
3. Every member of staff encouraged to go on leave at least once a year.
4. Persons – physical custody of assets – not permitted to have access to BoA.
5. Budgetary control exercised. Wide deviations – reconciled.

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Q14) Need for manual elements in internal control.

Manual elements in internal control - more suitable when judgement and discretion required.

1. Large, unusual, non-recurring transactions.

2. Circumstances where errors are difficult to define.
3. In circumstances requiring control response outside scope of existing automated control.
4. In monitoring effectiveness of automated controls.

Q15) Standard operating procedures

1. Enterprise risk management - Organisation – robust process to identify and mitigate risks.
2. Segregation of job responsibilities – Multiple activities should not be concentrated with one
individual.
3. Job rotation in sensitive areas – To avoid degeneration of controls.
4. Delegation of financial powers document – Organisation maintain clearly defined document
on delegation of powers.
5. Information technology based controls – It’s easier to embed controls through system
instead of being human dependent.

Q16) Techniques of evaluation of internal control.

1. Questionnaire
• Set of questions about each functional area.
• Filled by company executives.
• In use of internal control questionnaire, assumptions of elements of good control are –
Employees concerned with No single person has There should be evidence to
accounting function are not responsibility to complete identify person who has
assigned custodial function transaction all by himself done work
Work of one - expected to Proper documentation and recording of transactions
come under review of
another
2. Check List
• Series of instructions/questions on internal control which auditor must follow/answer.
• Distinction between internal control questionnaire and check list.
o ICQ - Large number of detailed questions
CL - Questions wrt main control objective with area under review
o ICQ – Answered by company executives
CL - Answered by auditor
o Significance of “NO” in ICQ indicate weakness but significance of that weakness is
not revealed automatically.
CL – Specific statement required when apparent weakness is material.
3. Flow Chart
• Graphic presentation of internal control in organisation.
• Comprehensive way to review internal control.
• Gives bird’s eye view of internal control.
• Provides neat picture of whole department. More specifically it can show –
o Number of copies in which document raised/received.
o At what point document

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▪ raised internally
▪ received from external sources
o Checking authorisation and matching at relevant stages
o Filing of documents
o Final disposal by sending out/destruction

Q17) International Internal Control Frameworks

A. Internal Control - Integrated Framework issued by Committee of Sponsoring

Organisations of Treadway Commission (COSO Framework)
- Introduced in 1992 as guidance on how to establish better controls.
- Components of COSO –
Control environment Risk assessment Control activities Information & Monitoring
communication
- Framework lists 3 categories of objectives –

a. Operations objectives - related to effectiveness and efficiency of operations.

b. Reporting objectives - related to financial and non-financial reporting to stakeholders.
c. Compliance objectives – related to compliance with L/R.
B. Guidance on Assessing Control published by Canadian Institute of Chartered
Accountants (CoCo)
- Outlines criteria for effective control in 4 areas –
Purpose Commitment Capability Monitoring &
learning
C. Control Objectives for Information & Related Technology (COBIT)
- Has 34 high level processes covering 210 control objectives
- Used globally by all managers responsible for IT business processes.
- Framework created by ISACA (Information Systems Audit & Control Association) for IT
governance & mgt.
- Categorised in 4 domains –
o Planning and organisation
o Acquisition and implementation
o Delivery and support
o Monitoring and evaluation
D. Internal Control : Guidance for Directors on Combined Code, published by Institute of
Chartered Accountants in England & Wales (Turnbull Report)
E. Sarbanes-Oxley Section 404 –

SEC rules & PCAOB (Public co. A/cing Oversight Board) std. require that –
- Management perform formal assessment of controls over FR including test that confirm
operating effectiveness of controls.
- Management includes in annual report ICFR assessment.
- External auditors provide 2 opinions as part of single integrated audit of company
o Independent opinion on effectiveness of ICFR system
o Traditional opinion on FS

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SA 402 – Audit Considerations relating to Entity using Service Organisation

Q1) A Ltd. gets its a/cing data processed by service organisation (SO). CA SRL is auditor of
A Ltd. He wants to obtain understanding of how A Ltd. is using SO’s services. What all
understanding to obtain? OR What are additional precautions CA SRL would consider?

Understanding

Nature & significance Nature and materiality Degree of interaction Nature of relation
of services & its effect of transactions between activities of between service
on user entity’s internal service organisation and organisation and
control user entity user entity

Q2) As an auditor of user entity, mention factors to be considered for financial reporting of
service organisation (SO) ? OR What services of SO are relevant to audit of user entity’s
FS?

Services of SO are relevant to audit of user entity’s FS when they are part of user entity’s info
system, relevant to FR i.e., when those services affect any of following –

Class of transactions in user Controls for journal entries, FR process to prepare user
entity’s operations, significant including non-standard journal entity’s FS, including a/cing
to user entity’s FS entries estimates
How user entity’s info system Procedures within IT & manual system by which user entity’s
captures events, significant to transactions – initiated, recorded & reported in FS.
FS

Q3) Type 1 Report

(I) Description by mgt of SO of (II) Report by service auditor to give

• System reasonable assurance, including his opinion on (I)
• Control objectives
• Controls
Designed and implemented as at specified date

Q4) Type 2 Report / report on description, design & operating effectiveness of controls of
service Organisation.

(I)Description by mgt of SO of (II) Report by service auditor to give

• System reasonable assurance, including -
• Control objectives • Service auditor’s opinion on (I)
• Controls • Description of service auditor’s TOC &
• Their design and implementation its results.
• Their operating effectiveness
throughout period

Q5) If user auditor is unable to obtain understanding from user entity, he will use these
procedures –

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Obtain Type 1/2 report Contacting SO to obtain Visit SO to perform
specific info procedures giving info of
controls at SO
Using another auditor to perform procedures giving info of controls at SO

Q6) Reporting by user auditor

1. User auditor – modifies opinion in user auditor’s report (SA 705), if user auditor unable to
obtain SAAE of SO’s services.
2. User auditor not to refer service auditor’s work in user auditor’s report containing
unmodified opinion, unless law/regulation says.
3.

If Law/regulation says Reference is relevant to understand modification

(unmodified opinion) (modified opinion)
Reference will come but state that it doesn’t diminish user auditor’s responsibility

Q7) Using type 1/2 Report

Supports user auditor’s To see if audit evidence is sufficient-appropriate (SAAE), check

understanding of controls at • Service auditor’s competence (except when ICAI member)
SO & independence from SO
• Adequacy of standard of report
User auditor shall –
• Check whether description of controls at SO is at date or for period.
• Check if audit evidence is SAAE.
• Check whether complementary user entity controls are relevant to user entity & if yes,
whether user entity implemented them.
Complementary user entity controls are controls that SO assumes, will be implemented by user
entity.

Q8) Test of controls

When user auditor expects controls at SO are effective, he obtains SAAE of operating
effectiveness by –

Type 2 report Performing test of controls Using another auditor to

(TOC) at SO perform TOC at SO
If type 2 report, user auditor to determine whether it provides SAAE of operating effectiveness
by –

Checking whether description, Checking adequacy of – Checking whether

design & operating • Time period of TOC complementary user entity
effectiveness of controls at • Time elapsed since TOC controls are relevant to user
SO is at date or for period entity & if yes, whether user
entity implemented them & if
yes, testing operating
effectiveness
Checking whether TOC by service auditor are relevant to assertions in user entity’s FS

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SA 450 – Evaluation of Misstatements Identified During the Audit

Q1) Definitions

Misstatement Difference b/w amount, classification, presentation, disclosure of

FS item & amount, classification, presentation, disclosure required
as per AFRF. Misstatements can arise from error/ fraud.

Uncorrected Misstatements Misstatements that auditor has accumulated during audit & that
have not been corrected.
Factual misstatements Misstatements about which there is no doubt.
Judgmental misstatements Differences arising from judgements of mgt concerning accounting
estimates that auditor considers unreasonable or selection or
application of accounting policies that auditor considers
inappropriate.
Projected misstatements Auditor’s best estimate of misstatements in populations, involving
projection of misstatements identified in audit samples to entire
populations from which samples were drawn.

Q2) Accumulation of identified MST

1. Auditor shall accumulate MST identified during audit, other than those that are clearly
trivial.
2. Accumulation of clearly trivial amounts would not have a material effect on FS.
3. When there is uncertainty about whether item is clearly trivial, it is considered not to
be clearly trivial.

Q3) Consideration of identified misstatements as audit progresses

Auditor shall determine whether overall audit strategy & audit plan need to be revised, if –

Nature of identified MST & circumstances of Aggregate of MST accumulated during audit
their occurrence indicate that other MST may approaches materiality determined as per SA
exist that, when aggregated with MST 320
accumulated during the audit, could be
material
If, at auditor’s request, mgt has examined CAD & corrected MST that were detected, auditor
shall perform additional audit procedures to determine whether MST remain.

Q4) Communication & Correction of MST

1. Auditor shall communicate all MST accumulated during audit with mgt, unless prohibited
by L/R.
2. Auditor shall request mgt to correct MST.
3. If mgt refuses to correct MST communicated by auditor, auditor shall obtain
understanding of mgt’s reasons for not making corrections & shall take that understanding
into account when evaluating whether FS as a whole are free of MM.

Q5) Evaluating effect of uncorrected MST

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1. Auditor shall reassess materiality determined as per SA 320 to confirm whether it
remains appropriate in context of entity’s actual financial results.
2. Auditor shall determine whether uncorrected MST are material, individually/in aggregate.
3. In making this determination, auditor shall consider –

Size & nature of MST, both in relation to CAD Effect of uncorrected MST related to prior
& FS as a whole & particular circumstances of periods on CAD & FS as a whole .
their occurrence

Q6) Communication with TCWG

1. As per SA 260, auditor shall communicate with TCWG – uncorrected MST & effect that
they, individually/in aggregate, may have on opinion in AR, unless prohibited by L/R.
2. Auditor’s communication shall identify material uncorrected MST individually.
3. Auditor shall request that uncorrected MST be corrected.
4. Auditor shall also communicate with TCWG – effect of uncorrected MST related to prior
periods on CAD/FS as a whole.

Q7) Written representation (WR)

Auditor shall request WR from mgt & TCWG, whether they believe effect of uncorrected MST are
immaterial, individually & in aggregate, to FS as a whole.

Q8) Audit documentation

1. Amount below which MST would be regarded as clearly trivial.

2. All MST accumulated during audit & whether they have been corrected.
3. Auditor’s conclusion as to whether uncorrected MST are material, individually/in aggregate,
& basis for that conclusion.

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SA 500 – Audit Evidence

Q1) Methods to obtain audit evidence in performing compliance and substantive procedures.

Inspection Examination of doc/assets. Eg, test of controls, doc. of shares.

Inquiry Info from knowledgeable person – financial/non financial,
within/outside entity, formal/informal, written/oral.
Analytical procedures Study relation between financial & non financial data to identify
fluctuations & significant deviation from predictions.
External confirmation Direct written response from confirming party.
Recalculation Checking arithmetical accuracy of records.
Reperformance Independent execution of procedures originally performed as
internal control.
Observation Looking at process performed by others. Eg, inventory counting
Limitation – limited to point of time of observation.

Q2) Factors affecting nature, timing & extent of audit procedures in case of mgt’s expert.

Ans. Same as SA 620. Ans. 4 – Part 2. Give reference of SA 500.

Q3) Using the work of mgt’s expert (eg, actuary)

ROLE OF AUDITOR

Evaluate competence, Understand his work Evaluate his appropriateness of

capability, objectivity of work
expert
How? How? How?
Personal experience with past See methods of work Relevance of work, assumptions,
work/discussion/books by source data
expert
Famous question - Variation in gratuity/salary benefits

Auditor satisfied Not satisfied

Use work of mgt expert Report in audit report

Q4) Basics

1. Audit evidence means info used by auditor

to arrive at conclusions to form opinion

It includes financial and non-financial info.

2. Audit Procedures

Risk Assessment Procedures Further Audit Procedures

(RAP) (FAP)

Compliance procedures Substantive procedures

(Test of controls) (Test of details)
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3. Selection of items to obtain audit evidence –

100% examination (all items) Specific items Audit sampling (SA 530)
4. Types of audit evidence
Depending on nature Visual, oral, documentary
Depending on source Internal and external
5. Reliability of audit evidence increases when –

Obtained from independent Obtained directly by auditor Obtained in documentary form

(external) sources
Controls are effective Provided by original documents

Q5) Factors affecting auditor’s judgements as to sufficiency of audit evidence (AE)

Materiality ROMM Size and characteristics of

population
Assertions – Assertions – Small and homogeneous
• less material • less ROMM population – less AE
• less AE • less AE
Large and heterogeneous
population – more AE

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SA 501 – Audit Evidence – Specific Considerations for Selected Items

Q1) Need for physical verification of inventory/When inventory is material to FS, auditor
obtains SAAE for existence and condition of inventory by attending physical inventory count.
Why?

Evaluate management Inspect inventory Perform test count Observe

instructions for performance of
recording results of management count
physical inventory count procedures
Audit procedures on final inventory records to determine whether reflect actual

Q2) Duty of auditor to ensure that 3rd party (who holds inventory) are not such with whom
stock shouldn’t be held & stock actually belongs to company.

Perform these procedures

Confirmation from 3rd party – Inspection/other audit procedures (eg, if doubt about
quantity and condition integrity of 3rd party)

• Attending/arranging another auditor to attend, 3rd

party’s physical counting of inventory
• Obtaining another auditor’s report/service auditor’s
report, on adequacy of 3rd party’s internal control to
ensure that inventory is properly counted &
safeguarded
• Inspecting documentation eg, warehouse receipts

Q3) Audit procedures if physical count other than FS date.

Ans 1 + Perform AP + Why? - For audit evidence about change between 2 dates– properly
recorded

Factors to be considered-

1. Whether perpetual inventory records - properly adjusted.

2. Reliability of perpetual inventory records.
3. Reasons for significant difference between info obtained in physical count and perpetual
inventory records.

Q4) How sufficient appropriate audit evidence obtained when auditor couldn’t attend physical
inventory count due to unforeseen circumstances - earthquake and protest?

Inventory count at alternative date Audit procedures on intervening transactions

Q5) Attendance at physical inventory count is impracticable/impractical.

1. Why impractical? – Nature and location of inventory.

2. Safety threat to auditor

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3. But

General inconvenience to auditor SA 200 - If difficulty/time/cost, it doesn’t

Impracticable mean that auditor will omit audit procedures.
4. Alternative audit procedures performed eg, inspection of documents of subsequent sale.
5. If alternative audit procedures impossible – modify (SA 705) due to scope limitation.

Q6) Auditor wants to ensure that method adopted by management to determine segment info
have resulted in disclosure as per AFRF. Guide auditor with examples of matters/presentation
and disclosure of segment information.

Examples of matters relevant when obtaining understanding of methods used by management in

determining segment info and whether such methods are likely to result in disclosure as per AFRF.

The allocation of assets and Comparison with budgets Eg, Consistency with prior periods
costs among segments. Operating profit as % of and adequacy of disclosure
sales wrt inconsistencies.
Sales, transfer, charges between segments and elimination of inter segment amount.

Q7) Audit procedures to identify litigation/claims resulting in ROMM.

Inquiry from Reviewing minutes of meeting Reviewing legal expense account

• Mgt of TCWG
• In-house legal counsel

Q8) Communication with external legal counsel.

When AP indicate Through letter of inquiry prepared by mgt & sent by auditor
• Material litigation requesting external legal counsel to communicate directly with
• ROMM auditor
Auditor directly communicates
with external legal counsel
1. If it is unlikely that external legal counsel will respond to letter of general inquiry.
Letter of specific inquiry
LoL (List of litigation) Mgt’s assessment of outcome Request to confirm
of litigation and estimate of reasonableness of mgt
financial implication assessment & provide further
info if incomplete
2. Auditor meets external legal counsel (ELC)

Significant risk wala matter Complex matter Disagreement between mgt &
ELC
3. Obtain WR – Litigation & claims – accounted & disclosed
4. Modify –

Mgt refuses auditor to ELC refuses to respond No SAAE

communicate with ELC

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SA 505 – External Confirmations

Q1) Basics

1. External Confirmation – Audit evidence obtained as direct written response from 3rd party
in paper/electronic/other medium.
2. Positive confirmation request –

Confirming party Direct response whether agrees/disagrees Auditor

3. Negative confirmation request –

Confirming party Direct response only if disagrees Auditor

4. Non – response

Confirming party didn’t respond to positive Confirmation request returned undelivered

confirmation request
5. Exception – Difference between

Info requested to be confirmed Info provided by confirming party

Q2) Situations when external confirmation can be used

Bank balance, accounts receivable/payable balance, inventory held by 3rd party, loan from lender.

Q3) External confirmation procedures/controls over external confirmation requests.

Determining info to be Selecting Designing confirmation request Sending request and

• confirmed confirming & determining that request is follow-up request
• requested party • properly addressed
• contain return info

Q4) Factors to be considered while designing confirmation request.

Assertions being addressed Specific identified ROMM, Layout & presentation of

including fraud risk confirmation request
Prior experience on audit Method of communication Ability of confirming party to
(paper/electronic form) confirm
Mgt’s authorisation to confirming party to respond to auditor

—Factors assisting auditor in determining whether external confirmation procedures are to be

performed as substantive audit procedures –

Confirming party’s knowledge of Ability/willingness of Objectivity of confirming party

subject matter confirming party to respond (if confirming party is related,
responses may be less reliable)

Q5) Positive confirmation request

1. Definition in ans 1
2. Effects of using positive confirmation request –

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Provide reliable audit Risk that confirming party may Solution of risk – Give blank conf.
evidence reply w/o verifying that info is request & ask to fill amt. But low
correct response rate due to high efforts

Q6) Negative confirmation request

1. Definition in ans 1
2. Provide less persuasive audit evidence
3. Factors to consider/auditor not to use negative confirmation request as sole substantive
audit procedure, unless all the following are present –

Very low Low ROMM & SAAE Auditor isn’t aware Population of items subject
exception rate obtained as to of circumstances to -ve conf. is large no. of
expected operating effectiveness causing recipients to small, homogeneous
of controls disregard request trans./account balance
4. Failure to receive response does not imply misstatement necessarily as negative
confirmation request is to respond only if confirming party disagrees.
5. Negative confirmation request to deposit holders of bank is useful to consider if balance is
understated and not overstated.

Q7) Mgt’s refusal to allow auditor to send confirmation request.

1. Auditor shall

Inquire reasons Evaluate implications on ROMM Alternative audit procedures

2. Auditor communicate TCWG

If refusal unreasonable Unable to obtain relevant/reliable audit evidence from

alternative audit procedures
3. Auditor determines impact on audit opinion (SA 705).

Q8) Alternative audit procedures.

Accounts receivable Accounts payable

Examining – Examining –
• subsequent cash receipts • subsequent cash disbursed
• shipping documents • correspondence from 3rd party
• goods received note.

Q9) Results of external confirmation requests

Response indicating agreement Unreliable Non response Response indicating

with info/providing info without response exception
exception

Q10) MCQ/small case study

1. Choosing debtors, designing request and receiving responses is duty of external auditor and not
internal auditor.

2. If management refuses to send confirmation request, then below reason is valid –

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“Legal dispute/ongoing negotiation with confirming party, resolution of which may be affected by
untimely confirmation request”

Eg, CFO refused auditor to send confirmation request. Matter is sub judice. Efforts are being
made for out of court settlement. No fraud risk factor. Is unwillingness of CFO justifiable?

Ans, YES, justifiable

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SA 510 – Initial Audit Engagements – Opening Balances

Q1) Meaning of Initial Audit Engagement

Engagement in which either –

FS for prior period were not FS for prior period audited by predecessor auditor
audited

Q2) Steps to ensure that closing balance of year 1 is b/f as opening balance of year 2 &
opening balance has no misstatement.

Auditor’s objective – To obtain SAAE

Whether opening balance has misstatements Whether appropriate accounting policies

that materially affect current period FS. reflected in opening balance are consistently
applied in current FS/ changes are accounted &
disclosed as per AFRF.
STEPS –

1. Peruse copies of audited FS.

2. For current assets & liability – collection/payment of opg. bal. of receivable/payable
provides evidence of existence, rights and obligation,completeness & valuation at year start.
3. For non current assets & liability – Examination of records/3rd party confirmation.

Q3) Procedures to follow when FS are audited for preceding period by another auditor.

To obtain SAAE for opg bal – Auditor will peruse Current auditor can place reliance on closing
copies of audited FS + other documents of balance of preceding period, except when
prior period FS like schedules of FS during performance of audit procedures for
current period, possibility of misstatements in
opening balance is indicated

Q4) Procedures to follow when FS are audited first time

Since opening balance represent effect of Auditor can obtain management representation
transactions of preceding period, auditor has to for opening balance
obtain evidence having regard to nature of
opening balance, materiality of opening balance
and accounting policy

Q5) If auditor not satisfied for correctness of opening balance, what approach to follow in
drafting report?

If auditor is unable to obtain SAAE for opening If objective 1, 2 not met -express
balance – express qualified opinion/disclaimer qualified/adverse opinion
of opinion.

Q6) CA SL – 1st audit assignment - KPP P. Ltd.

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• obtained audit evidence for P&L items
• But for balance sheet, he left out confirmation from debtor of 150 lacs, continued as
it is from last year.
• Management said that there are no receipts and further credits during this year.
• CA SL excluded from audit programme, audit of debtors on understanding that it is of
last year, so already audited by predecessor auditor. Comment.

-Write Ans 2 + 3

- SA 580 – “Written Representations” – Auditor may consider it necessary to request management

to provide WR about specific assertions in FS.

-CA SL should have requested mgt for WR for their views and he shouldn’t exclude from audit
programme.

-CA SL : professional misconduct, no due diligence, gross negligence as per Code of Ethics.

Q7) Auditor wants to be satisfied about sufficiency and appropriateness of opening balance
to ensure they are free of MM. Audit procedures to be followed in initial audit engagement?
OR Obtain SAAE whether opg balance has MST that materially affect current period FS.

Determine whether prior Determine whether opening Specific audit procedures

period closing balance balance reflect application of
correctly b/f appropriate accounting policies

Auditor communicate TCWG

If opening balance has MST which exist in current period FS

Q8) Inventory – Current period audit procedures on closing inventory – provide little audit
evidence of opening inventory. What additional audit procedures to be followed?

Observing current physical Performing audit procedures on Performing audit procedures on

inventory count and reconciling valuation of opening inventory gross profit and cut-off
to opening quantities

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SA 520 – Analytical Procedures

Q1) Considerations while performing analytical procedures/Designing and performing

substantive analytical procedures/Analytical procedures used as substantive procedures (tests)

Determine suitability of Evaluate reliability of data Develop expectation of ratios

particular substantive from which auditor’s and evaluate whether
analytical procedures for given expectation of ratio is expectation is precise.
assertions, taking into account developed.
ROMM & TOD.
Determine amount of difference of recorded amount from expected values that is acceptable
without further investigation.

Q2) In audit of X Ltd, auditor used analytical procedures. Results show inconsistency with
other relevant info. State course of action that auditor should take to ensure ROMM would
be contained to low level fixed as per materiality level.

If analytical procedures identify fluctuations, inconsistent with other relevant info, auditor shall
investigate differences by –

Inquiring mgt & obtaining audit evidence Performing other audit procedures
relevant to mgt responses

Q3) Factors to determine that data used for designing analytical procedures is reliable.

Source of info Nature and Comparability of info Controls over preparation of info
relevance of info

Q4) Analytical procedures for room rentals and payroll.

1. Payroll - When entity has known number of employees at fixed rate throughout period, he
can calculate estimated total payroll cost with accuracy.
2. Room rental - Room tariff, number of rooms, vacancy rates are to be considered first.
Then auditor calculates estimated rental income.

-Auditor finds persuasive audit evidence and may eliminate test of details for further verification.

Q5) Meaning (MCQ)

1. Use analytical procedures near end of audit.

2. Analytical procedures –
a. Evaluation of financial info
b. through analysis of relation among both financial & non-financial data.

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SA 530 – Audit Sampling

Q1) Basics

1. Sampling –

Application of audit procedures to less than 100% All sampling units have chance of selection
population
Auditor – reasonable conclusion of population

2. Population – all items

3. Sampling units – items in population
4.

Tolerable MST - For TOD Tolerable rate of deviation – For TOC

5. Sample – representative of population
6. Sample size – sufficient to reduce sampling risk.
7. Anomaly – MST not representative of MST in population.

Q2) Sampling risk and risk factors in sampling techniques.

Conclusion based on sample may be different from conclusion had the same audit procedures
been applied to population
JFU - Non-sampling risk – Risk – wrong conclusion & reason not related to sampling risk

Risk factors/types of erroneous conclusions –

1. TOC - Controls more effective than actual.

TOD – MM Doesn’t exist when it does-

Concerned with audit effectiveness Leads to inappropriate audit opinion

2. TOC – Controls less effective than actual.
TOD - MM exist when it doesn’t

Concerned with audit efficiency Leads to additional work to establish that initial
conclusions were incorrect

Q3) Approaches of sampling/types of sampling/statistical versus non-statistical sampling.

Statistical Non-statistical
Scientific rather than judgement based Personal experience and knowledge of auditor

Uses mathematical laws of probability Simple/judgement used

Wide application where population has large Element of surprise, no pattern

number of similar items 2023 - April, May, December
2024 -June, September, March (random testing)

Q4) Principal methods of sample selection

1. Random sampling – All items : known chance & random number tables.
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Simple random sampling Stratified sampling

- Each unit – equal chance Dividing heterogeneous population into strata
- Homogeneous population with similar range (Homogeneous sub population)
2. Interval/systematic sampling
Sampling units = sampling interval, example 50
Sample size

Determine start point from 1st 50 & each 50th • Ensure no pattern
unit is selected • Risk low - >1 start point
3. Monetary unit sampling –

Value weighted selection Monetary amount

4. Haphazard sampling –

No structured technique Not appropriate when using statistical sampling

5. Block sampling –

Selection of block of contiguous items Not appropriate as all items in block have similar
characteristics

Q5) Sample size and factors influencing sample size

Acceptable risk (willing to accept)

Sample size

Factors influencing sample size –

1. Expected rate of deviation/MST

Sample size

2. Assurance
Sample size

3. Reliance on OE of controls/TOC
Sample size

4. ROMM
Sample size

5. Tolerable rate of deviation/MST

Sample size

6. Stratification appropriate
Sample size

7. Sampling units
Sample size Negligible effect
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Q6) Guide auditor about his role if audit sampling doesn’t provide reasonable basis for
conclusion/ evaluating results of audit sampling.

As per SA 530 – Auditor evaluate –

Results of sample Whether audit sampling provided reasonable basis for

conclusion of population .

If no, auditor may –

• Request mgt to investigate MST & make adjustments.
• Tailor NTE of FAP to achieve assurance. Eg, TOC –
extend sample size.

Q7) Performing audit procedures

Each item NA – replacement item If unable – deviation/MST

Q8) Projecting MST

Exclude anomaly If uncorrected, Non- Anamalous MST + Anamalous MST

Q9) Meaning and uses of stratification

Meaning - Dividing population into sub population with similar characteristics.

Uses –

Sample size low without increasing Greater audit effort to MST projected for each strata
sampling risk. Therefore, audit larger value items
efficiency, high

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SA 540 – Auditing Accounting Estimates, including Fair Value Accounting Estimates & Related
Disclosures

Q1) Accounting estimates with low estimation uncertainty and low ROMM.

AE in entities having business AE frequently made wrt routine AE derived from readily
activities that are not complex transactions available (observable) data
Fair value AE where Fair value AE where measurement method as per AFRF is simple
measurement model is well
known (Inputs to model are
observable)

Q2) Accounting estimates with high estimation uncertainty, if based on significant

assumptions.

AE wrt outcome of litigations Fair value AE for derivative Fair value AE for which highly
financial instrument, not specialised entity developed
publicly traded model is used.(Inputs can’t be
observed)
AE for wage revision agreement if negotiation with trade union is on the way

Q3) Degree of estimation uncertainty varies based on

Nature of AE Extent to which there is Subjectivity of assumptions

generally accepted method to used to make AE
make AE

Q4) Situations where AE, other than fair value AE required.

Allowance for doubtful accounts Inventory obsolescence Warranty obligations

Outcome of long-term contracts Depreciation method/asset useful life

Q5) Situations where fair value AE required

Complex financial instruments Assets/liabilities acquired in Share based payments

not traded in open market business combination
Property held for disposal Exchange of assets/liabilities without monetary consideration

Q6) Audit reporting and disclosure.

I. Presentation of FS includes disclosure of material matters like

Assumptions used Method of estimation, Basis for selection of

including model estimation
Changes in method of
estimation from prior period Sources of estimation uncertainty
and its subsequent effect
II. For accounting estimates having significant risk, even where disclosures are as per
AFRF, auditor may conclude that disclosure of estimation uncertainty is inadequate.

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Q7) MCQ

1. Auditor to obtain WR from management/TCWG, whether they believe assumptions in

making accounting estimates are reasonable.
2. Documentation of accounting estimates

Basis of auditor’s conclusion of Indicators of possible management bias

reasonableness of accounting
estimates & their disclosure
that give rise to significant risk

Q8) Auditor’s responsibility/procedures

I. RISK ASSESSMENT PROCEDURES

SA 315 - While performing RAP – Auditor to understand 2 things :

Requirement of AFRF wrt AE, How management identifies transactions that need AE by
including disclosures making inquiries
II. OBTAINING UNDERSTANDING OF HOW MGT. IDENTIFIES NEED FOR AE

Inquiries of mgt about change in circumstances may include inquiries about whether –

Entity has engaged in new type Terms of transactions have Accounting policies related to
of transactions changed AE have changed
New conditions/events occurred Regulatory/other changes outside mgt control
III. HOW MANAGEMENT MAKES AE

Estimation making process of management –

Method, model used in making Relevant controls Whether mgt used expert?
AE
Assumptions underlying AE Whether change from prior period in methods for making AE &
if yes, why?
IV. ESTIMATION UNCERTAINTY

For AE with significant risks, in addition to other substantive procedures as per SA 330, auditor
shall evaluate following –

How management considered Whether significant Management’s intent and

alternative assumptions and assumptions by management ability to carry out specific
why it rejected them are reasonable course of action
- If mgt has not addressed effects of estimation uncertainty, auditor shall develop range to
evaluate reasonableness of AE.

Q9) Identify & address ROMM.

I. IDENTIFYING & ASSESSING ROMM (SA 315)

Auditor shall determine –

Estimation uncertainty Whether any AE with high estimation uncertainty has significant risk

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II. RESPONSE TO ASSESSED ROMM (SA 330)
A. Auditor determines –

Whether AFRF applied by mgt Whether methods to make AE Whether changes in AE from
are appropriate prior period appropriate
B. Auditor undertakes following –

Determine whether events up Test check data used by management to make AE

to date of audit report provide
SAAE wrt a/cing estimate
C. Auditor shall consider whether specialised skills wrt AE are required to obtain SAAE.

Q10) Review of prior period AE

1. Auditor review outcome of AE included in prior period FS and subsequent re-estimation

for current period.
2. Outcome of AE differs from AE in prior period FS. To identify reasons of difference,
auditor obtains –

Info as to effectiveness of Audit evidence pertinent to Audit evidence of matters

mgt’s prior period estimation re-estimation of prior period that may be required to be
process AE in current period disclosed in FS

3. Assist auditor to 4. Review is not intended to question judgements of prior

identify management period made on basis of info available at that time.
bias
ICAI QUESTION - Mgt cannot refuse to provide information.

Q11) Management bias

Management bias can be difficult to detect at account level.

1. It may only be identified when considered in aggregate of groups of AE or

2. All accounting estimates or
3. When observed over a number of accounting periods.

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SA 550 – Related Parties

Q1) How auditor can verify existence of related parties/RP relationships & transactions/
documents/records to gather RP info./Source of RP information.

IT Returns Internal audit reports Life insurance policies of entity

Shareholder registers (to identify Info supplied by entity to regulatory authority
entity’s principal shareholders)

Q2) Significant related party transactions outside normal course of business.

Complex equity transactions Transactions with offshore Transactions without

(corporate restructuring/ entities in jurisdictions with consideration (eg, leasing of
acquisition) weak corporate law premises)
Sales with large discount Sale & repurchase

Q3) Review of records and documentation of company for RP transactions in normal course of
business /Being alert for RP transactions

1. Auditor ko alert rehna hai, jab wo inspect karega records/docs for RP transactions that
mgt hasn’t previously disclosed to auditor.
2. Auditor has to inspect –

Bank, legal & 3rd party Minutes of meetings of Other records

confirmations shareholders and TCWG
3. Write answer 1.

Q4) Dealing with biased RP transaction/audit procedures for transactions outside normal
course of business.

Auditor shall –

1. Inspect contracts and evaluate

Business rationale of Terms of transactions are Transactions are accounted and

transaction suggest consistent with management disclosed as per AFRF
• Fraudulent financial explanation
reporting
• Misappropriation of
assets
2. Obtain audit evidence whether transactions are authorised.
3. Remain alert for unusual transactions.
4. Obtain written representation – accounted and disclosed

Q5) Meaning of RP

1. Party that is

Related party as per AFRF If AFRF establish no related party requirement

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• Person or entity that has control/significant influence
directly/indirectly over reporting entity
• Entity over which reporting entity has control/significant
influence directly/indirectly
• Another entity that is under common control with reporting
entity by
o Common controlling ownership
o Close family members
o Common key management
Parties under common control by state (national/regional/local
govt) are not related unless they engage in significant
transaction/share resources to a significant extent with one
another.

Q6) Tell disclosure/reporting requirements

1. Long-term borrowings from parent company has no written terms and neither interest nor
principal is repaid.
2. Computers received from parent co. free of cost of 23,000 & no disclosure is made in notes.
3. RPT of 325,000. But arm’s length price is only 300000. It is not disclosed in notes.
4. CFO refused to provide information of RPT of 47 lakhs since it is confidential.
- CFO is wrong as denying for details is imposing limitation on scope of auditor as per SA 705.
- Disclosure in FS as per Ind AS 24/AS 18.
- CARO 2020 - Whether Sec 177 & 188 of COA 2013 complied with.
- Reported to TCWG.

Q7) Engagement team’s discussion that SA 315 & SA 240 include specific consideration of
susceptibility of FS to material misstatement. What are matters to be addressed in
engagement team’s discussion?

Nature & extent of entity’s Emphasis on maintaining Records indicating RP

relations & transactions with professional skepticism transactions
RP
Circumstances indicating Consideration of how RP may involve in fraud. Eg –
existence of RP transactions • Fraudulent FR
that mgt hasn’t • Misappropriation of assets
identified/disclosed to auditor

Q8) Inquiry of management by auditor.

Identity of RP + changes from Nature of relation Whether trans b/w entity & RP & if
prior period between entity and RP yes, type & purpose of transaction

Q9) Communication with TCWG.

Auditor significant matters about RP TCWG

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For eg -

Non-disclosure by mgt Significant RPT Disagreement with mgt wrt Non-compliance with
of significant RPT not authorised a/cing of significant RPT as L/R
per AFRF

Q10) Identification of previously unidentified/undisclosed RPT (Mgt didn’t identified/

disclosed to auditor)

Auditor determine whether Communicate with Request mgt to identify all transactions
circumstances confirm team with newly identified RP
existence of transactions
Perform more substantive Reconsider risks wrt If non-disclosure by management
procedures other RP appears intentional, evaluate
implications for audit

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SA 560 – Subsequent Events

Q1) Meaning of Subsequent events

1. Events between date of FS and date of AR.

2. Facts that become known to auditor after date of AR.

Q2) Auditor’s responsibility/audit procedures for events between FS date and AR date.

1. Auditor – audit procedures – to obtain SAAE – all subsequent events that require disclosure
in FS are identified.
2. Auditor not expected to perform additional procedures if previous one gives satisfactory
conclusions.
3. Following procedures by auditor –
Obtain understanding of Inquiring mgt & TCWG Reading entity’s latest
management procedures subsequent interim FS
Reading minutes of meetings of owners, management & TCWG
4. Auditor obtain WR from management and TCWG that all SE which requires disclosure are
disclosed/adjusted.

Q3) Fire in April 2021. Material destroyed which was lying since March 2021. FS not
adopted till fire date.

SA 560 & AS 4 – Non adjusting event. No conditions exist at B/S date (31/03/21). Don’t create
provision but disclosure is needed.

Q4) Auditor wants to conduct inquiry of mgt as to whether any SE have occurred which might
affect FS. Guide him with matters where specific inquiry can be conducted to evaluate
subsequent events.

1. Whether new commitment, borrowings, guarantees are entered into.

2. Whether sales/acquisition of assets are planned.
3. Whether there are any developments in contingencies.
4. Whether unusual accounting adjustments made.
5. Whether any events wrt recoverability of assets.

Q5) X Limited hasn’t included in B/S (31/03/21) 1.5 crores (arrears of salary for two years)
as a result of negotiation. Negotiation concludes on 30/04/21. Audit report date 31/05/21.
Negotiation result become known to auditor on 15/05/21.

• SA 560 & AS 4 – 1.5 cr : material amount. It is the event after B/S date.
• Auditor – procedures – obtain SAAE – period from FS (31/03/21) to AR (31/05/21).
• Create provision for outstanding expenses
• Conclusion -Auditor should request mgt to adjust 1.5 crore by making provision for expense.
If management doesn’t accept, auditor should qualify auditor report.

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Q6) Year 2020-21. AR date 04/05/21. Incentive received from government in May 2021.
Amended accounts 08/05/21. Management requires auditor to issue fresh audit report of
2020-21 in which incentive from government is shown.

Facts which become known to auditor after date of AR but before FS are issued.

1. No obligation of auditor to perform procedure regarding FS after AR date.

2. But if a fact causes auditor to amend AR, he shall –

Discuss matter with mgt & Determine whether FS needs Inquire how mgt addresses
TCWG amendment matters in FS
3. Date of new AR shall not be earlier than date of approval of amended FS.
4. If management amends FS, auditor shall –

Carry out audit procedures on amendment Extend audit procedures to date of new report
5. If FS issued without necessary amendment, auditor shall take action to seek to prevent
reliance on AR.

CONCLUSION – Write summary of case + 1 std line - Date of new AR shall not be earlier than
date of approval of amended FS.

NOTE- Same answer if facts become known to auditor after FS issued.

Q7) FY 2020-21. AR 25/07/21. Case file against company on 04/08/21. Incident for which
case filed 17/01/21. Mgt decided to amend FS of FY 2020-21. Mgt decided to disclose
matter as contingent liability in notes with no additional disclosures. Auditor decides to
include this matter in EOM para. Mgt told auditor that disclosure as contingent liability is
enough as auditor would be including matter in EOM para.

(A) Whether auditor properly adhered to his responsibilities on becoming aware of

court case.

Ans. Yes, properly adhered. Write answer 6.

(B) Whether contention of management is valid wrt disclosure?

Ans. As per SA 706, EOM Para is not substitute for –

Modified opinion as per SA 705 Disclosures in FS Reporting as per SA 570

• Management feels that disclosure as contingent liability is enough and no further disclosure
is required since auditor is including matter in EOM Para.
• Mgt contention is invalid since EOM Para is not substitute of disclosures in FS that are
necessary to achieve fair presentation.

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SA 570 – Going Concern

Q1) Events casting significant doubt on going concern.

I. Financial Events

Net liability position Fixed term borrowings maturing Withdrawal of financial support
w/o prospects of repayment by creditors
-ve cash flows/substantial Adverse ratio Arrear of dividend
operating loss
Inability to pay creditors on Inability to comply with T&C of Change from credit to COD
due date loan transactions with suppliers
Inability to obtain finance for new product
II. Operating Events

Mgt intention to Loss of key mgt/customer/ Labour difficulties

liquidate/cease operations supplier/market/franchise/license
Shortage of important Emergence of highly successful competitor
supplies
III. Other Events

Non compliance with L/R Change in L/R/govt policy Pending legal/regulatory proceedings
adversely affecting entity resulting in claims unlikely to satisfy
Uninsured/underinsured catastrophe

Q2) MCQ

1. Going concern – Fundamental accounting assumption

2. If no GC – FS prepared on liquidation basis.
3. Auditor – SA 315 – Risk Assessment Procedures (RAP)
- Auditor checks whether events of Ans. 1 exist.
- Auditor checks whether mgt performed GC assessment.

Assessment done Assessment not done

Auditor discuss assessment with mgt & Auditor discuss with management basis of use of
mgt’s plans to address events, if any. GC basis of accounting
4. If normal FS – use GC basis of a/cing.
5. Preliminary going concern assessment – management.
Next going concern assessment – auditor.
6. Auditor will cover same period considered by management.
7. If management covers less than 12 months from FS date, auditor requests management to
cover at least 12 months.

Q3) Additional audit procedures when events cast significant doubt on GC to determine
whether material uncertainty exists.

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When management not Evaluating management plans When entity prepared cash
performed GC assessment – for future actions for GC flow forecast, evaluate-
request management to make assessment • Reliability of data
assessment • Determine whether
adequate support for
assumptions
Consider whether additional Requesting WR from management/TCWG for future plans and
info available feasibility.

Q4) Reporting

I. Use of GC basis of accounting – inappropriate – adverse opinion.

II. Management unwilling to make/extend assessment - consider implications on AR
(Qualified/Disclaimer)
III. Use of GC basis appropriate but material uncertainty (MU) exists –

MU Disclosed MU not disclosed

1. Unmodified opinion 1. Qualified/adverse opinion
2. Separate section – “MU related to GC” 2. Mention in basis of opinion para
NOTE - If use of GC basis appropriate – No para needed in AR mentioning it.

- If events casting significant doubt on GC are there but no MU exists - make disclosure in
FS about events.
- Auditor communicate with TCWG – events of Ans. 1

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SA 580 – Written Representation

Q1) Meaning

1. Written statement by management to auditor to confirm certain matters or to support

other audit evidence.
2. It is in the form of management representation letter.

Q2) Extent of reliance on WR/Reliability of WR/Doubt as to reliability of WR.

If auditor has concerns about If WR- inconsistent with other If WR not reliable – Auditor
integrity of mgt, he shall audit evidence – auditor take action, including
determine effect on reliability perform procedures to resolve determining effect on audit
of WR matter opinion.

Q3) If mgt refuse to provide WR, auditor shall

Discuss matter with Re-evaluate integrity of mgt Take action including

management and evaluate effect on determining effect on audit
reliability of WR and audit opinion (SA 705)
evidence

Q4) Reporting

Disclaimer of opinion
No WR WR not reliable (doubt about mgt’s integrity)

Q5) Date & period

Date - Near to but not after Period- Covers all FS & all WR are given by current mgt
date of audit report period referred to in AR

Q6) MCQ

WR do not provide WR are not substitute of other audit WR do not include –

SAAE (though they evidence • FS and its assertions
provide necessary • Books and records
audit evidence)
- What?

Preparation of FS All info provided All transactions recorded

(completeness of transactions)
Qualifying language - To the best of our knowledge and belief

- Why?

Those who signed terms Terms – last year Changes in circumstances Management
– no longer responsible misunderstanding
- If law – Written public statement, auditor may WR

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SA 600 – Using The Work of Another Auditor

Q1) Basics

1. When auditor delegates/uses work of another auditor, he will continue to be responsible for
opinion.
2. He will rely on work of others, provided he exercises skill and care and is unaware of reason
to believe that he should not have relied.
3. Audit report states fact of reliance.

Q2) Factors to consider before accepting work as principal auditor (PA)

Materiality of portion PA’s degree of ROMM in financial Performance of additional

of financial knowledge of info of procedures as per SAs regarding
information which PA business of components components audited by other
audits components audited by other auditors, resulting in PA’s
auditors. significant participation in audit

Q3) Principal auditor’s procedures

1. PA – right to visit & examine books of accounts of component.

2. PA to consider professional competence of OA if OA is not ICAI Member.
3. PA to perform following procedures to obtain SAAE that OA’s work is adequate

Advise OA of use of his work & report Advise OA of significant

• Accounting
& make arrangements for coordination at • Auditing
planning stage of audit • Reporting
Requirements and obtain representation of its
PA to inform OA of – compliance.
• Areas of special consideration
• Time table for completion of audit
• Procedures for identification of inter
component transactions
4. PA

Discuss with OA audit procedures applied Review written summary of OA’s procedures
5. PA to document in working papers
• Components audited by OA ❌
• Procedures and conclusions
• OA’s report – modified Reason of limiting procedures if OA complies
PA to document how he dealt with qualification quality control policies.
in OA’s report in framing own report.

Q4) Coordination between PA and OA.

1. Sufficient liaison between PA & OA.

2. PA written communication OA
3. OA to coordinate with PA by

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Bringing significant findings to Adhering to timetable Complying with statutory
PA’s attention requirement
4. PA to advice OA of matters having imp. bearing on OA’s work.
5. PA requires OA to answer detailed questionnaire.
6. OA should respond to questionnaire timely.

Q5) Reporting

PA - Qualified/disclaimer if If OA gives modified report – PA considers

• OA’s work can’t be used & whether modification required in PA’s report
• PA unable to perform sufficient
additional procedures for component

Q6) Division of responsibility

1. PA is not responsible for OA’s work except if suspicion of reliability of work.

2. PA’s report – Division of responsibility & shows extent of OA’s work.
3. But if PA notice material discrepancies, he should bring to OA’s knowledge + state in audit
report.

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SA 610 – Using the Work of Internal Auditor

Q1) Basics

1. External auditor – sole responsibility of audit & not reduced by use of IA’s work.
2. External auditor should be independent. No such requirement for internal auditor.
3. Using work of internal auditor

Using work of Internal Audit Function IAs provide direct assistance under direction,
(IAF) supervision, review of external auditors (EA)
4. Internal audit function – Perform assurance & consulting activities to improve entity’s
governance, risk management & internal control process.

Q2) Evaluating if work of internal audit function can be used OR Can stat auditor (external
auditor) rely on IA’s work?

EA shall evaluate OCD –

Extent to which IAF’s Level of competence of IAF Whether IAF applies systematic
organisational status & policies & disciplined approach, including
support objectivity of IAs quality control
- EA not to use IAF’s work if no OCD.

Q3) IAF’s work that can be used by EA

Testing operating Inventory count observation Substantive procedures with

effectiveness of controls limited judgement
Tracing transactions through Testing of compliance with Audit/review of insignificant
info system, relevant to FR regulatory requirements subsidiaries

Q4) When EA use less work of IAF and performs more work directly.

More judgement in Assessed ROMM is high at Less objectivity Less competence

planning and performing assertion level, with special
audit procedures and consideration to significant
evaluating audit evidence risks

Q5) What factors weigh considerations in opting to make use of direct assistance of IAs?

To determine nature and extent of work that can be assigned to IAs providing direct assistance,
EA shall consider

Judgement wrt planning and performing audit Assessed Evaluation of existence of

procedures and evaluating audit evidence ROMM threats to objectivity

Q6) Factors relevant in evaluating significance of threats to objectivity of internal auditor

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Extent of objectivity Family/personal Association with Significant financial interest
of internal auditor relation division other than remuneration

Q7) EA not to use IA to provide direct assistance to perform these procedures

Involving significant ROMM high & judgment more Relate to work with which IAs
judgements than limited involved & reported to
mgt/TCWG by IAF
Relates to decisions EA makes about IAF

Q8) Significant judgements

Assessing ROMM Evaluating sufficiency of test Evaluating appropriateness of

performed mgt’s use of GC assumption
Evaluating adequacy of Evaluating significant accounting estimates
disclosures in FS

Q9) Audit documentation by EA if EA uses IAs to provide direct assistance

Evaluation of significance of Written agreement from Work papers of IAs

threats to objectivity of IAs entity & IA
Who reviewed work
Date of review
Extent of review

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SA 620 – Using the Work of Auditor’s Expert

Q1) Basics

NA when auditor uses work of mgt expert (SA 500)

Auditor’s expert Mgt’s expert

Expertise in other than accounting, auditing Same
Whose work used by auditor Whose work used by entity in preparing FS
Internal/external expert
Auditor has sole responsibility for audit opinion and is not reduced by use of expert’s work.

Q2) Expertise in other than accounting, auditing includes expertise in/types of reports,
opinion, statements auditor can obtain from expert.

Valuation of complex financial Actuarial calculation of Estimation of oil and gas

instruments,L&B, P&M liabilities reserves
Interpretation of contracts, Analysis of complex tax compliance issues
law, regulation

Q3) Auditor’s expert to assist auditor in following

Understand entity, environment, Identifying and assessing Determining response to assessed

internal control (SA 315) ROMM (SA 315) risks at FS level (SA 330)
Designing further audit Evaluating if audit evidence is sufficient and appropriate (SA
procedures – TOC and 500)
substantive procedures (SA 330)

Q4) Considerations to decide whether to use auditor’s expert.

Whether management used Nature and significance of ROMM in matter

management’s expert matter, including complexity
Expected nature of procedures to respond to risks, auditor’s knowledge & experience with work of
experts & alternative source of audit evidence
• If management used mgt’s expert, also consider –

Nature, scope, objectives Mgt expert’s competence & Extent to which mgt can exercise
of mgt expert’s work capabilities control over mgt expert’s work
Controls in entity over mgt Whether mgt expert subject to technical performance standards
expert’s work

Q5) To determine NTE of auditor’s procedures, auditor shall consider these matters –

Nature of matter to which Significance of expert’s Auditor’s knowledge & experience

expert’s work relates work in context of audit of previous work of that expert
Whether expert is subject to audit firm’s quality control policies & procedures
• Factors suggesting need for different/more extensive procedures –

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Auditor’s expert’s work relates Auditor hasn’t previously used Auditor’s expert is performing
to significant matter – expert’s work & has no prior integral procedures, rather
subjective/complex judgement knowledge of expert’s than being consulted for advice
competence /capability on individual matter
External expert & thus not subject to firm’s quality control policies

Q6) Evaluating objectivity of auditor’s external expert

Inquire entity of interests and Discuss with experts about safeguards – Interest & relations –
relations with experts • Financial interest
• Business and personal relation
• Provision of other services by expert
• Auditor obtain WR from expert of interest/relation with
entity

Q7) Auditor shall agree in writing with auditor’s expert on-

Nature, scope, objectives of Roles and responsibilities of NTE of communication

expert’s work auditor and expert between auditor and expert
Need for expert to observe confidentiality requirements

Q8) Auditor shall evaluate adequacy of expert’s work/extent of rely on expert’s

work/evaluative or review procedures

Relevance & reasonableness of If expert’s work involves use of If expert’s work involves use of
expert’s findings/conclusions & significant source data, relevance,
their consistency with other assumptions/methods, completeness & accuracy of
audit evidence relevance & reasonableness of source data
assumptions and methods
• Specific procedures to evaluate adequacy of auditor’s expert’s work

Inquiries of auditor’s expert Reviewing auditor’s expert’s working

papers/reports
Corroborative procedures Discussion with another expert having
• Observing expert’s work expertise when findings of auditor’s expert are
• Examining published data Eg, statistical not consistent with other audit evidence
reports
• Confirming relevant matters with 3rd
parties
• Performing detailed analytical procedures
• Re-performing calculations
Discussing auditor’s expert’s report with management
• Factors relevant to auditor’s evaluation of assumptions and methods include whether
they are -

Generally accepted within Consistent with the Dependent on use of

auditor’s expert’s field requirements of AFRF specialised models
• Procedures to test source data

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Verifying origin of data & testing internal controls Reviewing data for completeness and internal
of data consistency

Q9) If auditor determines that auditor’s expert’s work is not adequate, he shall

Agree with expert on nature & extent of Perform further audit procedures
further work

Q10) Reporting

1. If auditor concludes –

Auditor’s expert’s work not adequate Auditor can’t resolve matter by additional audit
procedures (further work) by auditor & expert
Auditor – modified opinion (since no SAAE)

2. Auditor not to refer work of expert in audit report with unmodified opinion, unless
required by law/regulation.
3.

If required by L/R (unmodified opinion) If reference is relevant to understand

modification (modified opinion)
Auditor indicates that it doesn’t reduce auditor’s responsibility

Q11) Written agreement required when auditor and expert

1. Sensitive maamla - sensitive information

2. Complex maamla - complex matter
3. Naya maamla - auditor hasn’t previously used expert’s work
4. Bada maamla - greater extent of work

Q12) Auditor obtain understanding of other field by –

Experience in auditing entities that require such expertise in preparation of FS –

• Education in that field - courses, discussion with individuals having expertise in field
• Discussion with auditors who have performed similar engagements

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SA 700 - Forming an opinion & Reporting on Financial Statements

Q1) Basic elements of audit report

Title Addressee Auditor’s opinion

Basis for opinion Going concern (SA 570) KAM (SA 701)
Other info (SA 720) Responsibilities for FS (mgt’s Auditor’s responsibilities for
responsibility) audit of FS
Location of description of Other reporting Signature of auditor
auditor’s responsibilities for responsibilities (separate
audit of FS section)
Place of signature (City where Date of auditor’s report (not before SAAE)
audit report signed )

Q2) Title – Independent Auditor’s Report

Q3) Auditor’s Opinion

Opinion +

Entity State that FS has been audited Title of each statement of FS

Notes, including summary of Period of FS
significant accounting policies

Q4) Basis for opinion

Audit done as per SAs Refer to section of audit report State that auditor is
having auditor’s responsibilities independent
State whether auditor believes audit evidence to be sufficient and appropriate

Q5) Location of description of auditor’s responsibilities

Within body of auditor report Within appendix to AR AR has reference of website

Q6) Audit report if audit as per SAs & International SAs

Audit report will refer to both only if –

No conflict between both leading auditor

to –
• Form different opinion Audit report include all elements as per SAs
• Not include EOM/OM Para
If both referred in AR, it should identify jurisdiction of other SAs clearly

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Q7) Supplementary information presented with FS

Supplementary info not required by AFRF is presented with FS; auditor evaluate whether it is
integral part of FS

If yes If no, differentiate it from FS

Give opinion

If done If not differentiated

OK Auditor asks mgt to change

presentation of supple information

If mgt agrees If mgt refuses

OK Auditor identify supple info + explain in AR that it is not audited

Example 1 Notes to FS has explanation/reconciliation of compliance with another FRF – supple

info is not differentiated – thus, auditor will give opinion.

Example 2 Additional P/L A/c with specific expenditure or income is given in separate schedule
and is appendix to FS – Supple info is differentiated – thus, auditor will not give opinion.

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SA 701 – Communicating Key Audit Matters in the Independent Auditor’s Report

Q1) Definition

1. Matters, which in auditor’s professional judgement, are of most significance in audit of

current period.
2. These are selected from matters communicated with TCWG.
3. Purpose of communicating KAM

Communicative value of audit Additional info to Assist users in understanding entity and
report increases users significant management judgment
4. No KAM if

Law/regulation says Adverse Consequences > Benefits

Q2) Communicating KAM is not –

Substitute of Substitute of reporting when Substitute of Separate opinion

disclosures as per material uncertainty of events modified opinion on individual
AFRF that cast significant doubt on (SA 705) matters
GC (SA 570)

Q3) Applicability of SA 701

1. General purpose financial statements of

Listed entities Situation when auditor decides Required by law/regulation

to communicate KAM
2. SA 705 – If disclaimer of opinion is there, KAM is not communicated, unless reqd by L/R.
3. If there is no KAM, then also KAM Para is given in audit report. But mention in KAM Para
that there is no KAM.

Q4) Factors to consider in determining KAM

SA 315 – ROMM/Significant Significant auditor judgement Effect on audit of significant

risk high wrt areas with significant events/transactions
management judgement,
including a/cing estimates with
high estimation uncertainty
Matters not related to financials can be KAM if it requires significant attention of auditor and it
has impact on audit.

Eg, implementation of new IT system/significant changes in old systems

Q5) Examples of KAM

Impairment assessment Provision for loss & contingency Valuation of financial

instruments
Revenue recognition matters Tax matters

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SA 705 – Modifications to the Opinion in the Independent Auditor’s Report

Q1) Circumstances & types of modification

Circumstances –

When MM is there When SAAE not there

Types of modification –

Qualified opinion (Q) Adverse opinion (A) Disclaimer of opinion (DOO)

QO AO DOO
SAAE ✅ ❌ ✅ ❌
Material ✅ ✅ ✅ ✅
Pervasive ❌ ❌ ✅ ✅
Rare Case of disclaimer of opinion –

• Multiple uncertainties are there

• SAAE obtained
• But not possible to form opinion due to –

Interaction of uncertainties Cumulative effect on FS

Q2) Pervasive

Describes effect of misstatement on FS.

Not confined to specific If confined – represents Disclosures fundamental to

element substantial portion of FS users’ understanding

Q3) Decision as to which modified opinion is appropriate depends on –

Nature of matter giving rise to modification Auditor’s judgement about pervasiveness

Q4) Special considerations for modified opinion

I. QUALIFIED OPINION

Auditor states that except for effects of matter in Basis for Qualified opinion section:

Fair presentation framework Compliance framework

FS present fairly, in all material respects as per FS prepared, in all material respects, as per
AFRF AFRF
When inability to obtain SAAE – use phrase “except for possible effect of matter”

II. ADVERSE OPINION

Auditor state that due to significance of matter in Basis for Adverse opinion section –

Fair presentation framework Compliance framework

FS do not present fairly, as per AFRF FS not prepared, in all material respects, as per AFRF
III. DISCLAIMER OF OPINION

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Auditor shall –

State that no opinion State that due to significance of Amend statement in SA 700,
expressed matter in Basis for DOO section – indicating FS audited, to state that
he is unable to obtain SAAE auditor was engaged to audit

Q5) MCQ

1. Opinion section heading changed to “Qualified Opinion/Adverse Opinion/Disclaimer of

Opinion” in case of modified opinion.
2. Basis for Opinion section heading changed to “Basis for QO/AO/DOO”, in case of
modified opinion.
3. If MM is of non-disclosure of info, auditor shall –

Discuss with TCWG Describe omitted info in “Basis Include disclosure, if

for Opinion” practicable & if SAAE obtained
4. If auditor expects to modify opinion,

Auditor communicate TCWG

Circumstances of Wording of expected Audit findings Types of

expected modification modification misstatements

Q6) Inability to obtain SAAE due to management imposed limitation

Request mgt to remove limitation

Mgt removes limitation Mgt refuses

Proceed with audit procedures

Communicate with TCWG & perform alternative

procedures

Unable to obtain SAAE

Material ✅ Both material and pervasive

Pervasive ❌

Qualified opinion Withdraw from audit/DOO

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Q7) Withdrawal of auditor

1. Auditor before withdrawal communicate to TCWG

Misstatement that would have given rise to modification

2. Withdrawal not permitted without Audit/Review report –

Listing agreement and SEBI directive on resignation of auditor –

If auditor proposes to resign –

Within 45 days from end of After 45 days from end of If limited review report issued
any quarter, auditor before any quarter, auditor before for all 3 quarters, auditor
resignation – issue resignation – issue before resignation – issue audit
audit/Limited review report audit/Limited review report report for full year
of such quarter of such quarter and next
quarter
3. Auditor mentions reason of resignation in resignation letter to company.
4. Unlisted company’s auditor shall not mention “professional pre-occupation” as reason.

Q8) Disclaimer of opinion

When auditor disclaim opinion on FS, auditor’s report shall not include following elements –

1. Reference to section of AR where auditor’s responsibilities are described.

2. Statement about whether audit evidence obtained is sufficient and appropriate.
When auditor disclaims opinion due to inability to obtain SAAE, auditor shall amend description of
auditor’s responsibilities to include only following -

1. Statement that auditor’s responsibility is to conduct audit as per SAs.

2. Statement that auditor was unable to obtain SAAE.
3. Statement about auditor independence and other ethical responsibilities.

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SA 706 – Emphasis of Matter Paragraphs & Other Matter Paragraphs in Independent
Auditor’s Report

Q1) Meaning of EOM & OM Para

1. EOM Para - Emphasis of Matter Paragraph

Para in audit report Refers to matter Fundamental to users’ understanding

presented/disclosed in FS of FS, in auditor’s judgment
2. OM Para – Other Matter Paragraph

Para in audit report Refers to matter not Fundamental to users’ understanding

presented/disclosed in FS of audit, auditor’s responsibilities,
audit report
3. EOM & OM para are given in separate section of audit report with heading “EOM/OM”

Q2) EOM Para provided when

1.

No modification as a result of matter No KAM (SA 701)

2. These circumstances include –

FRF prescribed by L/R is To alert users – FS is Facts become known to auditor after
unacceptable but for fact that as per special purpose AR date & auditor provides new
it is prescribed by L/R framework auditor report (subsequent event)
3. Circumstances when auditor includes EOM Para

Uncertainty of future Early application of new AS, having material Significant subsequent
outcome of effect on FS event b/w FS date & AR
litigation/regulatory action date
Major catastrophe having significant effect on financial position

Q3) EOM Para is not substitute of

Disclosure in FS as per Modified opinion (SA 705) Reporting when material uncertainty
AFRF wrt events casting significant doubt
on going concern (SA 570)

Q4) OM para provided if –

Not prohibited by L/R No KAM

MCQ - If auditor expects to include EOM/OM, he shall communicate with TCWG – expectation and
wording

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SA 710 – Comparative Information – Corresponding Figures & Comparative FS

Q1) Basics

1. Corresponding Figures –

Amount/disclosures of prior period are integral part of current period FS Read only
2. Comparative FS – Amount/disclosures of prior period are included for comparison with
current period.
3. Difference

Corresponding figures Comparative FS

Audit opinion – only current period Audit opinion – each period

Q2) Auditor’s procedures/responsibilities wrt comparative information

1. To determine FS has appropriately classified comparative info, auditor should –

Ensure comparative info agrees Accounting policies are If change in application of

with amount/disclosure in prior consistent with current period a/cing policies, whether
period properly disclosed & presented
2. If Misstatement in comparative information,

Auditor perform audit procedures to obtain If auditor audited prior period FS, follow SA
SAAE 560
3. SA 580 - Auditor request WR for all periods in audit opinion + obtain specific WR for prior
period item disclosed in current year’s FS.

Q3) Corresponding figures -Audit reporting

Audit opinion not refer to corresponding figures, except in following circumstances –

Audit report of prior period has modified Auditor obtains SAAE that MM in prior period FS
opinion and matter is unresolved – Auditor on which unmodified opinion previously issued –
modifies current period FS. Auditor verify whether MST dealt as per AFRF & if
not – qualified/adverse opinion on current period FS

Q4) Comparative FS – Audit reporting

Audit opinion is of If opinion on prior period

MM affecting prior period FS on which
each period FS differs from previous
predecessor auditor reported without
opinion – auditor disclose
modification. Auditor report to mgt/TCWG &
reason in OM para request predecessor auditor be informed. If new
report, auditor report on only current period
Q5) Reporting common for both – corresponding figures and comparative FS

1. Prior period FS audited by predecessor auditor, auditor to state in OM Para

FS of prior period audited by Type of opinion by predecessor Date of audit report

predecessor auditor auditor
2. If prior period FS not audited – Report it in OM Para. But it won’t relieve auditor from
responsibility to obtain SAAE that opening balance do not have MM.

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SA 720 – The Auditor’s Responsibilities Relating to Other Information

Q1) Basics

1. Auditor reads other information (OI). If it is materially inconsistent with FS, it indicates
that there is MM in FS or OI.
2. Not applicable to –

Preliminary announcement of financial info Securities offering documents (eg, prospectus)

3. Other info in annual report - Financial & Non-financial (other than FS & audit report)

Q2) Responding when auditor concludes that MM of OI exists.

I. If auditor concludes that there is MM in OI –

Auditor Request Mgt

to correct OI

If mgt

Agrees Refuses
Auditor determines that Auditor Request TCWG
correction made to correct OI
II. If auditor concludes that there is MM in OI obtained prior to audit report (AR) &
OI not corrected after communicating with TCWG,

Auditor

• Consider implications on AR Withdraw from engagement, if

• Communicate with TCWG – plan to address MM in AR possible

III. If auditor concludes that there is MM in OI obtained after AR,

Auditor

If OI corrected If OI not corrected

Perform necessary procedures after communicating with TCWG, take action considering
auditor’s rights, to bring uncorrected MM to users’ attention

Q3) Reporting

AR has separate section with heading “Other Info”. This section includes –

Statement that management is Identification of No audit

responsible for OI • Other info obtained by auditor opinion/assurance on
prior to AR OI by auditor
• For listed entity –
OI expected to be obtained after AR
Auditor’s responsibilities of If OI obtained prior to AR, Either
reading, considering, • Statement that auditor has nothing to report, OR
reporting on OI as per SA 720 • Statement that describes uncorrected MM of OI, if any

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Q4) Obtaining, Reading & Considering Other Info (OI)

Obtaining Other Info (OI) –

Auditor shall –

• Determine, through discussion with management, which document comprises annual report &
manner & timing of issuance of such document.
• Make appropriate arrangements with mgt to obtain final version of document prior to AR
date.
• If document will not be available until after date of AR, request mgt to provide WR that
final version of document will be provided to auditor prior to its issuance by entity.
Reading and considering other info (OI) –

Auditor shall read OI and consider -

• Whether there is material inconsistency between OI & FS.

• Whether there is material inconsistency b/w OI & auditor’s knowledge obtained in audit.

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CA SHANKAR LAKHWANI # Audit Made Easy
Reporting Miscellaneous

• In case of unmodified opinion, don’t use –

With the foregoing explanation Subject to

Q1) Certificate for special purpose versus audit report

Certificate Report
Auditor verify accuracy of facts Formal statement after inquiry, examination, review
No opinion Opinion
Eg, Certify import export value of Company Differs from one professional to other
No question of exactitude as judgements

Q2) Duties of auditor

1. Duty to Inquire
a. Whether loans and advances shown as deposits.
b. Whether personal expenses charged to revenue.
c. Whether shares, debentures sold at less than cost (Not investment or banking company)
d. Whether transactions which are book entries are prejudicial to interests of company.
e. Whether loans and advances made are properly secured and terms are prejudicial to
interest of company/members.
f. If shares allotted for cash, whether cash received and if no cash received – position in BoA
is not misleading.
Research Committee of ICAI

OK Adverse
Don’t Report Report
2. Duty to sign audit report.
3. Duty to comply with auditing standards.
4. Duty to audit report – Sec 143(3) of COA 2013
A. Whether obtained info necessary. If ❌- details and effect on FS.
B. Whether Proper books of accounts kept by Company
Proper returns received from unvisited branch
C. Whether report on a/cs of branch audited by other auditor – sent and manner of dealing.
D. Whether P/L & B/S as per books of accounts.
E. Whether financial statements comply with AS.
F. Comments on financial transactions having adverse effect.
G. Whether Director disqualified.
H. Qualification related to maintenance of accounts.
I. Whether internal financial controls wrt financial statements –

In place Operating effectiveness

Not applicable to private company –

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CA SHANKAR LAKHWANI # Audit Made Easy
One person company or small Turnover < 50 crores
company &
Aggregate borrowings < 25 crores

Bank FI Body corporate

at any point of time

J. Other matters
o Whether co. disclosed impact of pending litigation on financial position.
o Whether provision for material foreseeable loss on long-term contracts, including
derivatives.
o Whether delay in transferring amount to Investor Education & Protection Fund.
o Whether dividend declared/paid as per section 123.
o Whether co. used a/cing software with feature of recording audit trail (edit log)

Operated throughout year Not tampered Preserved

o (i) Whether mgt represented – no funds – A/L/I/G/S
Company Intermediary Ultimate Beneficiary
(ii) Ultimate Beneficiary Company Funding Party
(iii) No material misstatement in (i) & (ii)

- Auditor states if excess remuneration paid to directors.

- Applicable for auditors of public companies in Audit Report section “Report on Other Legal &
Regulatory Requirements”.

5. Duty to report on frauds – Sec 143(12)

A. Individual fraud amt. 1 crore or above against co. by officers/employees.

Auditor Report CG

-Auditor Report Board/AC

immediately but not later than 2 Days of knowledge of fraud,

seeking reply within 45 Days

-Reply

Auditor Forward within 15 Days of receipt of reply CG

Report + Reply + Comments on reply

-Reply

Auditor Forward CG

Report + Note having report for which no reply

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CA SHANKAR LAKHWANI # Audit Made Easy
-Report to Secretary, MCA RPAD/Speed post

Followed by email

Letterhead of auditor

Form ADT – 4

B. Fraud less than 1 crore

Auditor Report Board/AC

immediately but not later than 2 Days of knowledge of fraud

Report Board’s Report

Nature of fraud with description Same
Approx. amount Same
Parties Parties, if remedial action not taken
Remedial action
-No contravention if good faith.

-CA/CS (secretarial auditor) /CMA (cost auditor)

Penalty: 5 lakh – Listed co. & 1 lakh – other co.

-CAR0 2020

6. Duty to report on other matter specified by CG.

7. Branch auditor.

8. Duty to state reason for qualification/negative report.

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CA SHANKAR LAKHWANI # Audit Made Easy
CARO 2020

Companies (Auditor’s Report) Order, 2020

Applicable Non applicable

All companies (including foreign co.) Banking co., insurance co., Section 8 co., One Person
co., Small co.

Private company, not subsidiary/holding of public co.

• PUSC & R/S upto 1 cr. as on B/S Date &
• Total borrowings upto 1 cr. from bank/FI at
any point of time &
• Total Revenue (including revenue from
discontinuing operations) upto 10 cr. during FY
Audit report on conso FS

21 Clauses –

1) Fixed Assets
• Tangible/Intangible
• Records – DQS (Details - Quantity/Situation)
• Physical verification ✅ / ❌
• Material discrepancy – Report
• Title deeds of immovable property – name of co. (If lessee – NA)
If title deeds not on company’s name –

Description Gross Held in the Whether promoter, Reason of not in Holding

carrying value name of director or their company’s name period
relative or employee
• Revaluation of PPE/intangible assets ✅ / ❌
Revaluation by registered valuer ✅ / ❌
• If revaluation – specify change amount, if change is 10% or more in aggregate of net
carrying value of each class of PPE/intangible assets.
• Proceedings initiated/pending – Benami Transactions (Prohibition) Act 1988
If yes – whether disclosed in FS

2) Inventories
• Physical verification ✅ / ❌
• Discrepancy 10% or more aggregate – each class of inventory. If yes – dealt in BoA.
• At any point of year - company has been sanctioned working capital limit > 5 crore from
banks/FI in aggregate on security of current assets.
• Quarterly returns – Co. files with bank/FI are in agreement of BoA. If not – details.

3) Company – Investment/Guarantee/Security/Loans & Advances – Company

Firm/LLP
Others

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• Not Applicable – Company principal business – Give loan.
• Total amount Subsidiaries, Associates, JV
Balance outstanding on B/S Date Other Parties
• Investment/guarantee/security/loans & advances – not prejudicial to interests of company.
• Repayment of principal and interest component – regular.
• If overdue, state amount overdue > 90 days.

Whether reasonable steps taken for recovery of principal and interest.

• Loans and advances – renewed/extended/fresh loan granted to settle overdue of existing

loan of same party.
If so - specify amount and % to total L&A granted.
• Company granted L&A Loan repayable on demand
without terms/period of repayment

If so – specify amount, % to total L&A granted & aggregate amount of loan to

Promoters/related parties.

4) Investment/guarantee/security/loans and advances – Section 185 & 186 of COA.

If not – details.

5) Deposits accepted by company/deemed deposits – Check DPO

• RBI ke Directives
• Companies Act ke Provisions complied
• NCLT ke Orders

6) Whether maintenance of cost records specified by CG under COA

& whether accounts & records made & maintained
(General review ✅ , Detailed examination ❌)

7) Co. – regular in depositing undisputed statutory dues (Eg, tax)

If no – outstanding > 6 months (Last day of FY) – Report
Disputed statutory dues – Amount & forum where dispute pending
(Mere representation to Department is not dispute)

8) Transaction not recorded in BoA – disclosed as income during the year in tax assessment
under Income Tax Act, 1961
If yes - previously unrecorded income – properly record in BoA.

9) Co. – default in repayment of loans/interest

If yes – period & amount
(ICAI Question – Report in case of reschedulement also)

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CA SHANKAR LAKHWANI # Audit Made Easy
Nature of Name of lender Amt. unpaid on Principal/interest Delay Remarks
borrowing due date period
• Banks
• FI
• Govt
Lenderwise
details
• Company – wilful defaulter
• Term loan applied for authorised purpose.
If not – amount diverted and purpose
• Funds raised on short term basis utilised for long-term. If yes - nature and amount.
• Company – taken funds to meet obligation of subsidiaries, associates, joint ventures.
• Company raise loans on pledge of securities of subsidiaries, associates, joint ventures.

10) Money raised by IPO/FPO applied for authorised purpose.

If no Details
Default and subsequent rectification
• Company Preferential allotment
Private placement of shares/convertible debentures
If yes – funds used for authorised purpose

11) Fraud by/on company

If yes – Nature & amount
• Report section 143 (12) – Filed by auditor to CG in Form ADT – 4
• Auditor considered whistle-blower complaints.

12) Nidhi Company

• Net owned funds : Deposits
1 : 20 to meet out liability
• Maintain 10% unencumbered term deposits to meet out liability.
• Default in payment of interest on deposit/repayment.

13) Related Party Transactions – Section 177/188 of COA

AS ke hisaab se details in FS.

14) Company - internal audit system – size and nature of business

Internal audit report – considered by statutory auditor.

15) Non-cash transactions with directors/persons connected with him – Section 192 of COA.

16) Whether company is required to be registered under section 45-IA of RBI Act, 1934
& if yes - whether registration obtained.
• Company – conducted – Non-banking financial activity
Housing finance activity

without certificate of registration from RBI.

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CA SHANKAR LAKHWANI # Audit Made Easy
• Company – core investment company (CIC).
If yes - criteria of CIC ✅
If exempted/unregistered CIC – Criteria ✅
• Does group to which company belongs has > 1 CIC.
If yes – Number of CIC in group

17) Company incurred cash losses – in financial year

in immediately preceding FY

If yes – Amount

18) Resignation of statutory auditors

If yes – auditor consider – objections, concerns & issues of outgoing auditors.

19) Whether auditor – opinion – that no material uncertainty as on date of AR that co. is
capable to meet its liabilities as on B/S date as & when they fall due within 1 year from
B/S Date.

20)

Non-ongoing project Ongoing project

Company transfer unspent amt. to Sch VII Fund Unspent amount of CSR transfer to special a/c
within 6 months of expiry of FY u/s 135

21) Qualification/adverse remarks by respective auditors in CARO Report of company in

Consolidated FS.
If yes – details of company
Para Number of CARO Report – Qualification/Adverse remark

Question - Physical Verification 30% value inventory, 70% next year

1. Physical verification ✅ / ❌
2. Coverage and procedure of physical verification – appropriate or not.
3. Periodicity of physical verification depends on nature/location.
4. Management decides periodicity.
5. Normally, if practicable – all items – once/year.
6. Auditor examine – evidence/records of physical verification.
7. Here, 30 % due to lack of time and resources.
8. CARO requirement not fulfilled.
9. Auditor point out – areas where procedures are inadequate & unreasonable.
10. Auditor consider impact on FS and report accordingly.

Yes, I will definitely clear my CA Exams 163

CA SHANKAR LAKHWANI # Audit Made Easy
SA 800 – Special Considerations - Audits of Financial Statements prepared in accordance
with Special Purpose Frameworks

Q1) What is special purpose framework?

FRF to Specific FIN (Financial information needs)

meet of Specific users

FRF Fair presentation framework

Compliance framework

Cash basis of accounting & cash flow info for creditors

Examples FR provisions by regulator
FR provisions of contract (eg, bond indenture, loan agreement, project grant)

General purpose framework Special purpose framework

Common FIN of wide users Specific FIN of specific users

FS Complete set of SPFS with significant a/cing policies & other explanatory info

Q2) Considerations when accepting such engagement.

• Specific FIN of specific users - Key factor to determine acceptability of FRF.

• FRF encompass FR std. established by

Authorised org following established process L&R /Regulator Contract

• If c - consider whether framework exhibits attributes exhibited by FRF as per SA
210. It is a matter of professional judgement.
• SA 210 requires auditor to determine

whether conflicts b/w FR std & L/R reqt If yes – actions

Q3) MCQ

• To compute net assets, very prudent estimates of allowances for uncollectible debtors are
taken.
• It is not neutral when compared to general purpose framework.

Q4) Considerations when planning and performing such audit.

• SA 200 requires auditor to comply with

Relevant ethical reqt, including independence All SAs relevant to audit

• Auditor to comply with each reqt of SA, unless it is not relevant because it is conditional/
depart from reqt in SA by performing alternative audit procedures.

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CA SHANKAR LAKHWANI # Audit Made Easy
• SA 320 – Materiality depends on

Common FIN of wide users (General case) Specific FIN of specific users
• SA 315 – Obtain understanding of a/cing policies. If FS as per contract, auditor obtain
understanding of significant interpretations of contract made by mgt. Interpretation is
significant when adoption of other reasonable interpretation would have produced material
difference in info presented in FS.
• SA 450 – Mgt & specific users determine THRESHOLD below which MST not corrected.
Also, apply SA 320 (Auditor not relieved).
• SA 260 - Auditor to communicate with TCWG. When both GPFS + SPFS - Person
responsible for oversight of preparation of SPFS may not be same as TCWG Responsible
for oversight of preparation of GPFS.

Q5) Forming an opinion and reporting

• Consider SA 700
• Description of AFRF

SA 700 - Auditor to consider whether FS describe SA 700 deals with form & content of audit
AFRF. If FS is as per contract, whether FS report
describe significant interpretations of contract.
• In case of AR on SPFS,

Audit report describe If mgt – choice of FRF – Mgt responsibility-

➢ Purpose of SPFS & users OR makes reference – AFRF is acceptable
➢ Refer to note that contains purpose & users
• KAM in AR on SPFS – SA 701 applies.
• Report with SPFS to provide owners (or similar stakeholders) with info on matters
presented in SPFS - considered annual report for SA 720. “Similar stakeholders” =
specific users whose FIN met by SPFW. SA 720 applies.
• Refer in OM para in AR on SPFS, to AR on GPFS/to matter reported as per SA 706. Eg,
refer in AR on SPFS to MURG section in AR on GPFS.

Q6) Alerting readers and restricting distribution.

Auditor alerts users of AR by EOM Para (SA 706) Auditor indicates that AR is for specific
users
• FS as per SP F/w
• Not for other purpose • By restricting distribution or use of
(eg, if regulator to place SPFS on public record) AR
• Para alerting readers is expanded and
heading modified

Yes, I will definitely clear my CA Exams 165

CA SHANKAR LAKHWANI # Audit Made Easy
SA 805 -Special Considerations - Audits of Single Financial Statements and Specific
Elements, Accounts or Items of financial statement

Q1) Basics

• GP F/w – SA 805
• SP F/w – SA 800 + SA 805
• Doesn’t apply to report of component auditor, who works at request of principal auditor for
audit of conso FS.

Q2) Meaning

• Single FS - Cash flow statement

• Element, account, item – Trade receivable, cash and bank balance
• Includes notes + summary of significant accounting policies (SAP)

Q3) Considerations when accepting engagement

Ans. (I) APPLICATION OF SAs

1. SA 200 requires auditor to comply with

Relevant ethical reqt, including independence All SAs relevant to audit

2. Auditor to comply with each reqt of SA, unless it is not relevant because it is conditional/
depart from reqt in SA by performing alternative audit procedures.
3. Compliance with SAs for audit of single FS/specific element - Not practicable when
auditor not auditing complete FS
4. No same understanding of

Entity Environment Internal control

5. No audit evidence of quality of a/cing records. So further Audit evidence needed.
6. Some SAs require audit work, disproportionate to element being audited (SA 570)
7. If auditing as per SAs is impractical

Auditor discuss mgt

Other type of eng. more practicable

(II) ACCEPTABILITY OF AFRF

Auditor determines

Acceptability of FRF as per SA 210 Whether adequate disclosures are there for
users to understand information

Q4) Considerations when planning and performing audit.

1. Auditor shall adapt all SAs. Specific element–SA 240, SA 550, SA 570 are relevant as
element could be misstated.

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2. SA 260 - Auditor to communicate with TCWG. When both complete FS + Single FS/element
- Person responsible for oversight of preparation of single FS/element may not be same as
TCWG Responsible for oversight of compete FS.
3. Audit of single FS/specific element + complete FS, auditor while auditing single FS /
specific element –
Use audit evidence of complete FS Plan and perform audit as per SAs to obtain SAAE
4. Auditor unable to consider FS or element in isolation - perform procedures for interrelated
items.
5. Materiality for single FS/specific element – lower than materiality for complete FS. This
will affect NTE of audit procedures.

Q5) Factors affecting auditor’s consideration as to whether to use “presents fairly in all
material respects” OR “Gives T&F view”

Factors

Whether AFRF restricted to whether single FS/specific element will –

preparation of complete FS • Comply fully with reqt of F/w relevant to
o single FS
o specific element
& presentation includes disclosures
• If necessary to achieve fair presentation,
o Provide extra disclosures OR
o Depart from reqt of AFRF
Auditor’s decision as to form of opinion - matter of professional judgement

Q6) Opinion

1. Going Concern (SA 570): Description in AR of mgt + auditor’s responsibilities wrt GC to be

adapted.
2. Report with single FS/element to provide owners (or similar stakeholders) with info on
matters presented in single FS/element - considered annual report for SA 720. SA 720
applies.
3. Sign of auditor: By auditor in personal name & firm name. Mention membership no.,
registration no. of firm.
4. Auditor to consider implications of matters in AR on complete FS for audit of single FS/
element. Involves prof. judgment.
Factors relevant to consider implications-
• Nature of matter & extent to which it relates to what is included in single FS/element.
• Pervasiveness of matter.
• Nature and extent of difference b/w AFRFs.
• Extent of diff. b/w period of complete FS & single FS/element.
• Time elapsed since date of AR on complete FS.
Eg, Qualification – Debtors in AR on complete FS & single FS/element – debtors. Implication
chances – high. Qualification – long term debt in AR on complete FS & single FS/ element- debtors.
Implication chances – low.

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CA SHANKAR LAKHWANI # Audit Made Easy
If no implication, auditor refer in OM para in AR on single FS/element (SA 706) Eg, Refer in AR on
single FS/element, MURG section in AR on complete FS.

5. If auditor audits single FS/specific element + complete FS, he will give separate opinion.
6.
Audited single FS/ specific Auditor mgt Auditor will also differentiate
element may be published with opinion
audited complete FS Ask to rectify • Single FS/ specific
element
If no differentiation • Complete FS
7. Auditor shall not issue AR containing opinion on single FS/specific element until satisfied
with differentiation.
8. AR on Complete FS – modified opinion/EOM/OM Para/MURG section/statement describing
uncorrected material MST of other info (SA 720), auditor consider implications for audit
of single FS/element.
9. Very important for exam
Complete FS Single FS / specific element
Adverse opinion/disclaimer of opinion Unmodified opinion not allowed
Exception - Specific element but if 3 conditions are met

Auditor not prohibited by L/R Opinion expressed in AR not Element doesn’t constitute
published together with AR major portion of complete FS
having adverse/DOO
Not allowed for single FS as it is major portion.

10. Complete FS

Disclaimer on operations & cash flows Unmodified opinion – state of affairs

Permitted
Generally – Opinion on FS as a whole.

Yes, I will definitely clear my CA Exams 168

CA SHANKAR LAKHWANI # Audit Made Easy
SA 810 – Engagements to Report on Summary FS

Q1) Basics

Less detailed. Ordinarily, auditor should be auditor of FS.

Q2) Before accepting engagement to report on summary FS, auditor shall,

Determine whether applied Obtain agreement of mgt that Agree with mgt on form of
criteria - acceptable it acknowledges & understand opinion on summary FS
it’s responsibility

(A) Determine whether applied criteria - acceptable

1. Applied criteria - applied by mgt in preparation of SFS.
2. Factors affecting auditor’s determination of acceptability of applied criteria-

Nature of entity Purpose of SFS Info needs of intended Whether applied criteria
users of SFS result in SFS – not misleading
3. Criteria established by-
Authorised organisation L/R If no criteria, developed by mgt
4. Auditor concludes applied criteria

Unacceptable No agreement of mgt

• Auditor not accept engagement to report on SFS unless required by L/R.
• If reqd by L/R –
o SA 810 not complied
o AR on SFS not indicate eng. as per SA 810 + Reference in terms of eng. + Effect on
audit of FS

(B) Obtain agreement of mgt that it acknowledge and understand its responsibility

For preparation of SFS as per To make audited FS available to users of SFS without
applied criteria undue difficulty

(If L/R-Audited FS need not be made available +

Establishes criteria for SFS to describe L/R in SFS )
To include AR on SFS in document that contains SFS & that indicates auditor has reported on
them.
Factors affecting auditor’s evaluation of whether audited FS are available to users of SFS
without difficulty-

SFS describe clearly from Audited FS on public record Mgt established process by
whom/where audited FS which users of SFS can get
available ready access to audited FS

(C) Agree with mgt on form of opinion on SFS

Q3) Nature of procedures by auditor.

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1. Evaluate SFS - as per AC (applied criteria).
2. Evaluate SFS - adequately disclose AC.
3. Evaluate SFS - adequately disclose summarised nature & identify audited FS.
4. Evaluate audited FS - available to users of SFS w/o difficulty, unless L/R.
5. Evaluate whether SFS
a. Has necessary info so as not to be misleading
b. Appropriate aggregation
6. Compare SFS with audited FS to determine SFS
a. agree from audited FS
b. recalculated
7. If SFS not accompanied by audited FS, evaluate whether they describe clearly-
a. From whom/where audited FS available.
b. L/R - Audited FS need not be made available + establish criteria for SFS.

Q4) Restriction on distribution / use / alerting readers.

• Distribution / use of AR on audited FS-restricted similar restriction/alert

• AR on audited FS alert readers about SP F/w in AR on SFS

Q5) Comparatives

Audited FS has comparatives but SFS do not. Auditor determine-

Is omission reasonable Effect of unreasonable omission on AR on SFS

If SFS contain comparatives reported on by other auditor, AR on SFS contain matters that SA
710 requires auditor to include in AR on audited FS.

Q6) Unaudited supplementary info with SFS.

Auditor evaluate whether unaudited supplementary info presented with SFS - clearly
differentiated?

If yes – OK If NO

Auditor ask mgt

To change presentation of supple info

If mgt agrees If mgt refuse

OK Auditor explain in AR on SFS

that supple info is not covered by AR

Q7) Other info in documents containing SFS.

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CA SHANKAR LAKHWANI # Audit Made Easy
1. Auditor read info in doc. having SFS
AR on SFS
to check material inconsistency b/w info
SFS
2. If material inconsistency – Auditor discuss with mgt & determine whether
• SFS or info needs to be revised.
• If info needs to be revised & mgt refuses to revise info- Take action including implications
on AR on SFS.

Q8) Timing of work and events subsequent to AR on audited FS.

1. AR on SFS state that SFS & audited FS don’t reflect events subsequent to AR on audited
FS.
2. Auditor – aware of facts existed at date of AR on audited FS but was previously unaware.
Not issue AR on SFS until consideration of facts wrt audited FS as per SA 560 completed.

3. Auditor reports on SFS after completion of audit of FS.

4. Since SFS derived from audited FS, auditor is not required to-
• Obtain additional audit evidence on audited FS.
• Report on events subsequent to AR on audited FS.

Q9) Auditor association.

1. Entity plans to state that auditor reported on SFS in doc. having SFS, but doesn’t plan to
include AR.

Auditor request to include AR in doc. Mgt

If mgt agrees – OK If mgt refuses

Auditor takes other action to prevent mgt from

inappropriately associating auditor

2. Auditor report on FS

not on SFS

• Entity plans to make statement in doc. that refers to auditor and fact that SFS derived
from FS.
• Auditor shall be satisfied that-
(a) Reference to auditor is in context of (b) Statement doesn’t give impression that
AR on audited FS auditor reported on SFS

3. If (a)/(b) not met

• Auditor request mgt to change statement to meet them OR
• Not to refer to auditor in doc.

4. Alternative 2 – Entity engage auditor to report on SFS

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CA SHANKAR LAKHWANI # Audit Made Easy
5. If mgt

Doesn’t change statement Doesn’t delete reference Doesn’t alternative 2

Auditor advise Mgt

that auditor disagrees with reference & auditor - other action to prevent mgt from
inappropriately referring to auditor

Q10) AR on SFS

• Title
• Addressee
• Identification of SFS, including title of statement- If SFS in doc containing other info,
auditor identifies page no. on which SFS presented
• Identification of audited FS
• Clear expression of opinion
• Statement-SFS don’t contain all disclosures as per AFRF + reading SFS & its AR is not
substitute of reading audited FS & its AR.
• Statement - SFS and audited FS don’t reflect events subsequent to AR on audited FS.
• Reference to AR on audited FS + date of that report + fact of unmodified opinion in that
report
• Description of management responsibility for SFS
• Statement - auditor responsible for opinion on SFS
• Auditor’s signature
• Date of AR (No earlier than SAAE date & AR on audited FS)
• Place of signature

Q11) Form of opinion.

1. If unmodified opinion on SFS, 1 of 2 phrases-

SFS consistent, in all material respects, with SFS - fair summary of audited FS as per AC
audited FS as per AC
2. If L/R prescribe different wording, auditor shall-

Apply procedures to enable Evaluate whether users of SFS – misunderstand auditor’s

auditor to express prescribed opinion on SFS
opinion
If yes -whether additional explanation can mitigate
misunderstanding

If yes – OK If NO – Not accept eng., unless L/R

If reqd by L/R SA 810 not complied

Auditor’s report on SFS not indicate eng. as per SA 810

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Q12) Modification/EOM & OM Para

i.

AR on audited FS SFS – consistent, in all material respects, with

audited FS, as per AC
Qualified opinion, EOM/OM Para/MURG OR
section, KAM (SA 701), Statement describing SFS - fair summary of audited FS as per AC
uncorrected material MST of other info (SA
720) AR on SFS -
a. State that AR on audited FS includes……..
b. Describe :
• Basis of qualified opinion on audited FS &
effect on SFS
• Matter in EOM/OM para/MURG section
in AR on audited FS & effect on SFS
• Uncorrected material MST of other info
& effect on info included in doc.
containing SFS & AR on SFS
ii. AR on audited FS – Adverse opinion/disclaimer of opinion
Then, AR on SFS
State that AR on audited FS – Describe basis of Since adverse/DOO on audited FS
adverse/DOO adverse/ DOO
It is inappropriate to express opinion on
SFS
iii. SFS

Not consistent, in all material respects, Not fair summary of audited FS as per AC
with audited FS, as per AC
& mgt not agrees to make changes – Auditor - Adverse opinion on SFS

Yes, I will definitely clear my CA Exams 173

CA SHANKAR LAKHWANI # Audit Made Easy
SRS 4400 - Engagements to perform Agreed upon Procedures regarding Financial Information

Q1) Basics

• Individual items of financial data - accounts payable

• Related services – auditor – ✅/ ❌
• Objective-
o Auditor-procedures of audit nature + auditor & entity & 3rd parties – agree + Auditor
- report of FF
o Non assurance engagement. Users assess themselves factual findings of auditor and
draw own conclusions.
o Restricted report
• Eg-accounts payable
o Compare names & amount -TB
o SA 505
o Variations-report of Factual findings

Q2) General principles of AUP engagement.

• Code of Ethics (ICAI) – integrity, objectivity, professional competence & due care,
confidentiality, professional conduct & technical standards
• No Independence Terms/objective of engagement
Statement in report of FF

Q3) Matters to be agreed

1. Nature of engagement + fact – procedures –

Audit, review, assurance- ❌
2. Stated purpose of engagement
3. Identification of financial information
4. NTE of specific procedures
5. Limitation on distribution of report of FF. Limitation – conflict - legal reqt - auditor
won’t accept.

Q4) Matters included in engagement letter

• Listing of procedures to be performed as agreed upon b/w parties.

• Statement that distribution of report of FF would be restricted to specified parties who
have agreed to procedures to be performed.

Q5) Procedures

• Inquiry & analysis

• Recomputation, comparison & clerical accuracy checks
• Observation
• Inspection
• Obtaining confirmations

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Q6) Reporting (Report of FF)

1. Title
2. Addressee (appointing Authority)
3. Identification - FI/NFI to which AUP applied.
4. Statement-procedures performed-AU with recipient.
5. Statement-engagement as per SRS.
6. Identification of purpose.
7. Listing of specific procedures.
8. Factual findings + details of Errors & exceptions
9. Statement - Audit, review, assurance- ❌
10. Statement-had auditor performed additional procedures/audit/review-other matters-light-
reported.
11. Statement - report restricted.
12. Statement only to elements/accounts/items/FI/NFI specified
FS as a whole ❌
13. Date of report
14. Place of signature
15. Auditor’s signature

Q7) Documentation

Imp. matters, evidence-engagement as per SRS, terms of engagement.

Q8) Audit vs AUP

Audit AUP
Opinion & assurance No assurance.Report of FF-Users draw own conclusions

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SRS 4410 – Compilation Engagements

Q1) Basics

• Applies to compilation engagement for historical financial information (HFI)

• FI other than HFI/NFI - after adaptation.
MEANING-

• Practitioner applies a/cing & FR expertise to assist mgt in PPFS as per AFRF & report.
• Assist in PPFS - professional accountant in public practice.
• Non-assurance engagement.
• Practitioner not reqd. to verify accuracy/completeness of FI/gather evidence to
express audit opinion or review.
• FI – subject of compilation eng – Purposes –
Comply with mandatory periodic FR requirement Other
(law) • For mgt/TCWG (particular purposes)
• For external parties (contract)
• Transactional purpose (change to
ownership)
• Responsibility of management for PPFS.
• Practitioner - ethical requirement - Code of ethics (ICAI)
• No independence – But L/R may specify independence reqt.

Q2) Engagement acceptance & continuance

Agreeing terms of engagement between practitioner and management.

• Intended use & distribution of FI & restriction on use or distribution.

• Identification of AFRF.
• Objective and scope of compilation engagement.
• Responsibilities of practitioner, including ethical requirements-comply
• Responsibilities of management
o PPFS as per AFRF.
o DIM of IC - Preparation of FS - Free of MM – Fraud/error.
o Accuracy & completeness of docs, other info provided by mgt.
o Judgements in PPFS, incl. those practitioner-provide assistance.
• Expected form & content of practitioner’s report.

Q3) MCQ

Ans. Practitioner mgt/TCWG

communicate all matters (prac. judgment)

sufficient importance

Q4) Engagement level quality control.

EP’s responsibility-

• Overall quality of CE to which he is assigned.

• Engagement-performed-firm’s QCPP.

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Q5) Documentation.

Practitioner include in engagement documentation-

• Significant matters and how addressed by practitioner.

• Record - How compiled FI reconciles with records, docs, other info provided by mgt.
• Copy of final version of compiled FI for which mgt/TCWG - acknowledged responsibility &
prac. report.
-May - copy of trial balance, summary of significant a/cing records/other info

Q6) Performing engagement.

1. Prac. obtain understanding-

Entity’s business & operations, a/cing system, AFRF, including application in entity’s industry
a/cing records
2. Prac. compile FI using records, docs, OI provided by mgt.
3. Prac. discuss with mgt/TCWG significant judgements (SJ) - prac. provided assistance.
4. Prac. read CFI in light of understanding of (1).
5. Prac. - aware - records, docs, OI, SJ provided by mgt -
incomplete/inaccurate/unsatisfactory – Prac. – attention of mgt & request
additional/corrected info.
6. Prac. – unable to complete engagement – mgt failed to provide records, docs, OI, SJ

Practitioner

Withdraw from eng. Inform mgt & TCWG reasons of withdrawing

7. Prac. – aware –

CFI – AFRF ❌ Amendments to CFI required for financial information, CFI- misleading
not to be materially misstated
Prac. – propose – amendments to management

8. Mgt Declines Amendments to CFI

Doesn’t permit practitioner

Practitioner

Withdraw from eng. Inform mgt & TCWG reasons of withdrawing

9. Withdrawal not possible. Prac. – Professional and legal responsibilities.
10. Prac. obtain acknowledgement from mgt/TCWG-Responsibility for final version of CFI.

Q7) Practitioner’s report.

1. Report title
2. Addressee
3. Statement - prac. compiled FI based on info provided by mgt.
4. Responsibility of mgt/TCWG.
5. Identification of AFRF (If SPFRF - description)
6. Identification of FI-
a. Title of each element
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b. Date of FI or period
7. Prac. responsibility in compiling FI – comply SRS & ethical reqt.
8. Description of what CE entails – SRS.
9. Explanation-
a. Non-assurance engagement. Prac. - not reqd to verify accuracy/completeness.
b. Opinion, review – ❌ - AFRF
10. SPFRF, Explanatory para-
a. Purpose
Intended users
Refer to note that discloses both

b. Draw attention of readers of report-

SPFRF
Other purpose - not suitable
11. Date of practitioner’s report
12. Practitioner’s signature
13. Place of signature

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SRE 2400 – Engagements to Review Historical FS

Q1) Basics

Practitioner is not auditor of entity’s FS.

Q2) Factors affecting acceptance & continuance of client relations & review eng.

Practitioner - not accept RE if –

a) Practitioner not satisfied:

i. That there is rational purpose for eng.
No rational purpose if
Significant limitation on scope Association of practitioner’s L/R requires FS to be audited
name with FS inappropriately
ii. Review eng. would be appropriate in circumstances. If not, he may recommend
another type of eng.
b) Practitioner – RTB – ethical reqt, including independence will not satisfy.
c) Prac’s preliminary understanding indicates that info to perform RE likely to be
unavailable/unreliable.
d) Prac has cause to doubt mgt’s integrity.
e) Mgt/TCWG - limitation on scope such that prac believes - result in disclaiming conclusion.

Q3) Preconditions for accepting RE.

Practitioner –

(a) Determine whether FRF – prep. of FS – acceptable.

(b) Obtain agreement of mgt that it acknowledges & understand its responsibility
i. For prep. of FS – AFRF
ii. For IC – FS free of MM – Fraud/error
iii. To provide prac –
• Access to all info
• Additional info
• Unrestricted access to persons within entity

Q4) Performing RE

1. Materiality in review of FS
• Determine materiality for FS as a whole.
• Prac - revise materiality, if needed.

2. Obtain understanding of entity and AFRF

• To identify areas of possible material MST.

3. Design & perform “Inquiry” and “Analytical Procedures”

• Inquiry – seeking info from mgt & other persons within entity
• Analytical procedures
• Why inquiry & AP are important in review?/Benefits/importance/need

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a) Evidence through inquiry is principal source of evidence of mgt intent. BUT info to
support mgt’s intent is limited. So, understanding –
Mgt’s history of carrying out Mgt’s reasons for choosing Mgt’s ability to pursue
intentions particular action specific action
provide relevant info to corroborate inquiry
b) Benefits of inquiry-understanding entity & envt to identify areas of possible MM.
c) Benefits of AP –
Understanding entity & envt to identify Providing corroborative evidence
areas of possible MM
Identifying inconsistencies from expected Serving as additional procedures when prac
trends in FS becomes aware that FS – MM

4. Perform procedures to address specific circumstances

• Related Parties - Prac remains alert for info indicating RP relations/trans. mgt hasn’t
previously disclosed to practitioner.
• Fraud and non-compliance with L/R – Indication - Fraud/NC or suspected fraud/NC –
Prac communicate to senior mgt/TCWG & request mgt’s assessment of effects on FS.
• Going concern - Review includes GC assessment of entity. Prac – event – significant
doubt – GC, prac shall,
o Inquire Mgt plans for future actions
Whether above - improve situation
o Evaluate results of inquiries of mgt.
o Consider mgt responses in light of all relevant info of which prac aware.
• Use of work performed by others – It may be necessary to use work of other
Prac/expert – check adequacy of work.

5. Perform additional procedures on becoming aware that FS may be MM

• Perform additional procedures to enable prac. to-

Conclude that matter is not likely to cause FS Determine that matter causes FS as a whole to
as a whole to be materially MM be MM
• Procedures may be –

Additional inquiry/AP (eg, greater Other types of procedures (eg,substantive

detail/focused on affected items) TOD/external conf.)

Q5) Subsequent events.

Ans. If prac – aware – events b/w FS date & report that require adj/disclosure in FS,

Prac. Request to adjust/disclose mgt

Q6) Written representation.

1. Prac request mgt to provide WR that-

Mgt has fulfilled responsibility for – All transactions recorded in FS

• PPFS-AFRF
• provided all info & access

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2. Prac also request WR that mgt disclosed to prac-
• Identity of RP & RP relations & trans. of which mgt aware.
• Significant facts - fraud/suspected frauds known to management.
• Known actual/possible non-compliance with L/R.
• All info wrt use of GC assumption in FS.
• Events subsequent to FS date requiring adj/disclosure have been adjusted/disclosed.

3. If no WR from mgt, Prac shall,

Discuss matter with Re-evaluate integrity of mgt & Take appropriate action, including
mgt/TCWG evaluate effect on reliability of effect on conclusion in report
representation.

4. Prac – disclaim conclusion on FS/withdraw from eng, if-

Prac. has sufficient doubt about integrity of Mgt doesn’t provide WR wrt responsibilities –
mgt, such that WR aren’t reliable PPFS & recording all transactions

Q7) Types of conclusion.

Unmodified Conclusion - If limited assurance to conclude that nothing came to attention that
causes to believe that FS not prepared as per AFRF.

Modified Conclusion –

Qualified conc. Adverse conc. Disclaimer of conc.

SAAE ✅ ❌ ✅ ❌
Material ✅ ✅ ✅ ✅
Pervasive ❌ ❌ ✅ ✅

Q8) Description of review of FS and limitations.

Limitations para-

• Limited assurance engagement.

• Procedures-inquiry and analytical procedures.
• Procedures substantially less than audit. No opinion.

Q9) Report.

1. Title
2. Addressee
3. Introductory para-
• Identifies – FS, title of each statement, date and period.
• Refers to summary of SAP.
• States FS reviewed.
4. Description of mgt responsibility for PPFS-AFRF & IC.
5. Description of prac. Responsibility-reference to SRE & L/R.
6. Date of report (Not earlier than SAE)

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7. Practitioner’s signature
8. Place of signature

• Prac’s report can include EOM/OM para.

Q10) Documentation.

(A) Practitioner shall document-

NTE of procedures to Results obtained from Significant matters arising during eng,
comply with SRE & L/R procedures + conclusion prac’s conclusions & significant
judgments made in reaching conclusions

(B) While documenting NTE of procedures, prac shall record –

Who performed work and date when work Who reviewed work and period and extent of
completed review

Q11) Difference b/w Audit & Review.

AUDIT REVIEW
1. Reasonable assurance eng- Provides RA. Limited assurance eng- Provides lower level of
assurance than audit.
2. Elaborate/extensive procedures - TOC & Fewer procedures - Inquiry & analytical
substantive procedures. procedures.
3. Reasonable conclusion Limited conclusion
4. Assurance opinion. Language of assurance Assurance conclusion. Language of assurance
opinion is positively worded. conclusion is negatively worded.

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SRE 2410 – Review of Interim Financial Information Performed by Independent Auditor of
Entity

Q1) Basics.

• Interim FI - FI for period shorter than FY eg, quarter.

• Audit and review by same person.

Q2) Procedures by auditor to update understanding of entity & envt including internal control.

1. Reading recent annual prior period Interim FI.

2. Inquiring mgt of effect of changes in business activities.
3. Considering results of audit procedures wrt current year’s FS.
4. Considering results of internal audit & subsequent actions by mgt.
5. Considering significant risks, including risk of mgt override of controls identified in audit of
prior year’s FS.

Q3) Inquiries, analytical & other review procedures.

Procedures performed by auditor-

1. Reading minutes of meetings of shareholders,TCWG to identify matters affecting interim

FI & inquiring about matters for which minutes not available.
2. Communicating with other auditors performing review of interim FI of entity’s significant
components.
3. Inquiring of mgt responsible for financial and a/cing matters about following-
a. Compliance with debt covenants.
b. Significant changes in commitments & contractual obligations.
c. Significant changes in contingent liabilities, incl. litigation/claims.
d. Whether interim FI contains uncorrected MST.
e. Whether new trans. necessitated application of new accounting principle.
4. Applying analytical procedures to interim FI to identify unusual relations.
5. Reading interim FI & considering whether anything came to auditor’s attention that causes
him to believe that it is not as per AFRF.

Q4) Management representations

Auditor obtains WR from mgt that-

1. It acknowledges responsibility for design/implementation of IC.

2. Interim FI – prepared and presented as per AFRF.
3. It disclosed to auditor significant facts – fraud/suspected fraud.
4. It disclosed to auditor actual/possible non-compliance with L/R.
5. It disclosed to auditor significant events subsequent to B/S date till date of review report
requiring adjustment in interim FI.

Q5) Communication.

1) When auditor believes it is necessary to make material adjustment to interim FI for it to be

prepared as per AFRF.
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Auditor communicate mgt.

If mgt doesn’t respond within time,then to TCWG.

2) If TCWG doesn’t respond within time, auditor consider-

• Whether to modify report or

• Whether to withdraw from engagement and
• Whether to resign from appointment to audit of annual FS.

Q6) Reporting.

1. Title
2. Addressee (Board of Directors)
3. Identification-
• Interim FI reviewed
• Title of each statement
• Date & period
4. Statement - mgt responsible for preparation & presentation of interim FI as per AFRF.
5. Statement auditor responsible – conclusion.
6. Date of report
7. Place of signature
8. Auditor’s signature
(UDIN – SRE 2400/2410)

Q7) Departure from AFRF.

1) Material adjustment needed in interim FI for it to be prepared as per AFRF- Qualified/Adverse

2) If no adequate disclosure in interim FI-

Qualified (Explanatory para to review report) Adverse

Material ✅, Pervasive ✅
Q8) Limitation on scope.

Limitation imposed by management – Auditor doesn’t accept eng.

• If after accepting eng.– limitation – auditor requests removal of limitation.

If mgt accepts If mgt refuses
NO PROBLEM Review ❌, Conclusion ❌
Auditor written communication mgt/TCWG
Reason why review can’t complete
• L/R reqt to issue report

If reqt If no reqt
Disclaimer of conclusion with reason NO PROBLEM
Q9) Going concern and significant uncertainties.

• MU – event - Significant doubt – Going concern + disclosure in interim FI = EOM Para.

• If auditor added EOM para in prior audit/review report &
If MU still exist + disclosure in interim FI
Adding para to highlight continued MU (modification)
• MU + No disclosure in interim FI = Qualified/adverse conclusion.
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SAE 3400 - The Examination of Prospective Financial Information

Q1) Basics

• Examination of PFI – not necessarily by statutory auditor.

Q2) What is PFI?

1. PFI is financial info based on-

• Assumptions about future events.
• Entity’s possible actions.
2. PFI can be in form of forecast, projection, combo.
3. Forecast-
• Assumptions as to future events mgt expects to take place
• Actions
• These are best estimate assumptions i.e. no provision for risk of adverse deviation.
4. Projection-
• Assumptions as to future events not expected to take place
• Actions
• Hypothetical assumptions - Entity in startup phase/major change in nature of
operations.
• Mixture of best estimate and hypothetical assumptions.

Q3) MCQ

1) This SAE doesn’t apply to examination of PFI expressed in general/narrative terms, found in
mgt’s discussion & analysis in annual report.
2) Opinion as to whether results in PFI will be achieved can’t be expressed.
3) Mgt is responsible for preparation & presentation of PFI, including assumptions.

Q4) Can professional accountants be associated with PFI?

Clause 3 – Second Schedule – CA Act, 1949

• Practicing CA-professional misconduct if permits his name to be used wrt estimate of

earnings contingent on future transactions in manner which may lead to belief that he
vouches for accuracy of forecast. But it doesn’t preclude CA from associating name with
PFI.
• CA can participate in preparation of financial forecasts & can review them, provided he
indicate in his report-
Source of info Basis of forecast Assumptions in arriving at
forecast
& doesn’t vouch for accuracy of forecast. Same applies to projections.

Q5) Duties of member examining PFI.

Auditor should obtain SAE as to whether-

1. Mgt’s best estimate assumptions are not unreasonable & hypothetical assumptions are
consistent with purpose of info.

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2. PFI - properly prepared on basis of assumptions.
3. PFI – properly presented & all material assumptions adequately disclosed (indicating best
estimate & hypothetical)
4. PFI – consistent basis with historical FS.

Q6) Precautions to be taken by auditor before accepting engagement.

(I) Before accepting eng. to examine PFI, auditor considers-

Intended use of info Nature of assumptions- Period covered

Best estimate/hypothetical
Whether info for general/ltd Elements in PFI
distribution
(II) Auditor – not accept/withdraw from eng. when

• Assumptions – unrealistic OR
• PFI inappropriate for intended use

Q7) When determining NTE of examination procedures, consider these matters-

Knowledge of previous Mgt’s competence as to Likelihood of MM

engagements preparation of PF
Extent to which PFI affected Stability of entity’s business Eng. Team’s experience with
by mgt’s judgment industry & reporting

Q8) Presentation and disclosure – P&D

While assessing P&D of PFI & assumptions, it is to be considered whether-

1. Presentation of PFI Informative

Not misleading
2. A/cing policies clearly disclosed in notes to PFI.
3. Assumptions adequately disclosed in notes to PFI–Best estimate & hypothetical.
4. Date as of which PFI prepared is disclosed.
5. Basis of establishing points in range – indicated & range not selected in biased manner.
6. If change in a/cing policy from recent historical FS, whether-
• Reason of change disclosed
• Effect on PFI

Q9) Report on examination of PFI.

1. Title
2. Addressee
3. Identification of PFI
4. Reference to SAs
5. Statement - mgt responsible for PFI.
6. Reference to purpose/restricted distribution of PFI.
7. Statement – examination procedures – test basis.
8. Statement of -ve assurance as to whether assumptions provide reasonable basis for PFI.

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9. Opinion - whether PFI as per – assumptions & FRF.
10. Caveats as to achievability of result.
11. Date of report (date procedures have been completed)
12. Place of signature
13. Signature

Q10) Reporting

1) P&D - Not adequate – qualified or adverse opinion /withdrawal from eng

Eg, when financial info doesn’t disclose consequences of highly sensitive assumptions.
2) Assumptions don’t provide reasonable basis for PFI – adverse opinion /withdrawal from eng.
3) Examination affected by conditions that prelude procedures (scope limitation) – disclaimer of
opinion /withdrawal from eng.

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SAE 3402 – Assurance Reports on Controls at Service Organisation

Q1) Objectives of service auditor

1) To obtain reasonable assurance about whether-

• Service org’s description of system presents system as designed & implemented
throughout specified period/as at specified date.
• Controls wrt control objectives stated in service org’s description of system were
suitably designed throughout specified period/as at specified date.
• Controls operated effectively to provide reasonable assurance that control objectives
achieved throughout specified period.

2) To report on above matters as per service auditor’s findings.

Q2) Type 1 & 2 report

Type 1 Report - Report on description & design of controls at service organisation on specified
date.
Type 2 report – Report on description, design & operating effectiveness of controls at service
organisation throughout specified period.

Q3) How such engagement is proceeded with?

1. Compliance with ethical requirements, including independence.

2. Determination of mgt & TCWG & communication with them.
3. Acceptance and changes in terms of engagement.
4. Assessing of suitability of criteria.
5. Determination of materiality.
6. Obtaining understanding of service organisation’s system.
7. Obtaining evidence regarding description.
8. Obtaining evidence regarding design of controls.
9. Obtaining evidence regarding operating effectiveness of controls (if type 2 report)
10. Understanding internal audit function.
11. Asking for written representation.
• Service auditor requests service organisation to provide WR-
o That reaffirm assertion accompanying description of system.
o That it has provided service auditor with all info & access.
o That it has disclosed to service auditor-
▪ NC with L/R, fraud attributable to service organisation affecting user
entities.
▪ Design deficiencies in controls.
▪ Instances where controls not operated as described.
▪ Subsequent events.
12. Subsequent events.

Q4) Elements of service auditor’s assurance report.

1. Title – Independent service auditor’s assurance report

2. Addressee

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3. Identification of service organisation’s description of system.
4. Statement - report only for user entities and their auditors.
5. Statement - SO responsible for –
Preparing description of Stating control objectives Providing services covered by
system SO’s description of system
Designing & implementing controls to achieve control objectives
6. Statement – service auditor’s responsibility – opinion on service org’s description, design &
operating effectiveness of controls (Type 2 report)
7. Statement-engagement as per SAE 3402.
8. Statement–No procedures on OE of controls–Type 1 report- So no opinion
9. Statement of limitations of controls.
10. Service auditor’s opinion – positive form.
11. Date of service auditor’s assurance report (Not earlier than SAE date)
12. Signature
13. Place of signature

Q5) Modified opinion.

If service auditor concludes that-

SO’s description doesn’t Controls wrt control Type 2 report – Service auditor
present system as objectives – not controls tested didn’t unable to obtain
designed & implemented suitably designed operate effectively SAE
Modify + Description of reasons of mod. in service auditor’s assurance report

Q6) Additional reporting in case of Type 2 Report

1. Type 2 report – service auditor’s assurance report – separate section describing TOC & its
results.
2. TOC – service auditor clearly state

Which controls tested Whether items tested Nature of test

represent all/selected items
3. Deviations- If deviations identified, service auditor include-

Extent of testing (including sample size) No. & nature of deviations

4. Service auditor report deviations even if control objective achieved.

Q7) Documentation by service auditor.

NTE of procedures Results of procedures Significant matters

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SAE 3420-Assurance Engagements to Report on Compilation of Pro Forma Financial
Information Included in a Prospectus

Q1) Basics

1. Reasonable assurance engagement.

2. Reporting required by securities law.
3. Pro forma FI – FI shown with adjustments to illustrate impact of trans., on unadjusted FI
as if transaction had been undertaken earlier.
4. Pro forma FI doesn’t show actual financial position.
5. Compilation of pro forma FI – Responsibility of responsible party (RP).
6. Report on whether pro forma FI – compiled as per applicable criteria (AC) – Responsibility of
practitioner.
7. Steps in process –
a. Identifying source of unadjusted FI (UFI) & extracting it.
b. Making pro forma adjustments to UFI.
c. Presenting pro forma FI with disclosures.

Q2) Factors to consider before accepting engagement/engagement acceptance

1. Determine prac. has capabilities & competence to perform eng.

2. Determine that applicable criteria – suitable & unlikely that pro forma FI is misleading.
3. Evaluate wording of opinion prescribed by L/R to determine that prac will be able to
express opinion.
4. Entity’s historical FI never 5. If acquisition – acquiree’s historical
audited/reviewed FI never audited/reviewed
Consider whether prac can obtain sufficient
understanding of – Same
• Entity
• A/cing & FR practice
6. Obtain agreement of RP that it acknowledge & understand its responsibility for-
i. Adequately disclosing AC to intended users.
ii. Compiling pro forma FI on basis of AC.
iii. Providing practitioner with-

Access to all info to Additional Access to those Access to individuals within acquiree
evaluate whether pro forma info within entity in business combination
FI compiled as per AC

Q3) Factors to consider in planning and performing engagement

1. Prac assess whether applicable criteria (AC) suitable.

2. Consider materiality to evaluate whether proforma FI compiled as per AC.
3. Understanding how RP compiled pro forma FI.
4. Obtain evidence of appropriateness of source of UFI.
5. If no audit/review report on source, perform procedures to be satisfied that source is
appropriate.
6. Determine whether RP appropriately extracted UFI from source.

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7. Obtain evidence about appropriateness of pro forma adjustments. Pro forma adjustments
include-
Adj. to UFI illustrating impact of significant Adj. to UFI necessary for pro forma FI to be
trans. as if occurred earlier compiled as per AFRF
8. Evaluate presentation of pro forma FI
9. Read other info in prospectus to identify material inconsistencies with pro forma FI.

Q4) Written representation

Practitioner request WR from RP that-

RP identified all pro forma adjustments to Pro forma FI compiled as per AC

illustrate impact of transaction

Q5) Opinion

1) Unmodified opinion: Pro forma FI compiled as per AC.

2) Modified opinion
CASE “A” - L/R preludes publication of prospectus containing modified opinion wrt pro forma
FI & prac concludes modified opinion – appropriate.
Prac discuss with RP
If RP agrees to make changes If RP doesn’t agree to make changes
OK Withdraw from eng. OR Legal advice
CASE “B” – L/R doesn’t prelude publication of prospectus containing modified opinion wrt pro
forma FI & prac concludes - modified opinion – appropriate.
3) EOM Para - Refers to info presented/disclosed in pro forma FI/notes. Included when as
per prac, matter is of such importance that it is fundamental to users‘ understanding of
whether pro forma FI compiled as per AC.

Q6) Report

1. Title - Indicates: Independent assurance report

2. Addressee
3. Introductory para-
Pro forma FI Source from which Period/date of pro Reference to AC
UFI extracted forma FI
4. Statement – RP is responsible for compiling pro forma FI as per AC.
5. Practitioner’s responsibilities-
Opinion – whether pro forma Prac not responsible for Purpose-Illustrate impact of
FI compiled as per AC updating/reissuing report or significant trans on UFI as if
opinion on HFI + Prac not occurred earlier. So no
performed audit/review of FI assurance that actual outcome =
used in compiling proforma FI as presented
6. Statement – engagement as per SAE 3420.
7. Practitioner’s opinion
8. Practitioner’s signature
9. Date of report
10. Place of signature

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