SA 200 – Overall objective of an Independent Auditor and conduct of an audit in

accordance with SAs

The purpose of audit is to enhance the degree of confidence of the intended users in the FS

The overall objective of an independent auditor is to obtain reasonable assurance that financial statements, as a
whole, are free from material misstatements, whether due to fraud or error, to which to enable the auditor to
express an opinion that the financial statements are prepared, in all material respect, in accordance with an
applicable financial reporting framework; and

To report on the FS and communicate in accordance with SAs

In case of most general-purpose frameworks, that opinion is on whether the FS are presented fairly or give true and
fair view – The FS are prepared by the management of entity with the overlooking of TCWG

The audit is conducted on the ground that the management or TCWG have responsibilities that are fundamental to
the conduct of Audit, even though SAs do not impose any responsibility or do not override any laws and regulations,
such as

1. Preparation and presentation of FS, and design, implementation and maintenance of internal control in order
to facilitate the same
2. To provide auditor with -
a) All information, such as records and information that are relevant for the preparation of FS
b) Any additional information that the auditor may request
c) Unrestricted access to/within the entity

Reasonable assurance is an absolute assurance but a high level of assurance, and the same is attained by obtaining
sufficient and appropriate audit evidences
The auditor is not expected to attain absolute assurance due to inherent limitations of an audit

Audit Risk - Risk that the auditor expresses an inappropriate opinion when the FS are materially misstated
Detection Risk – The risk that procedures performed by the auditor fails to detect a misstatement and that could be
material, either individually or in aggregate
Inherent Risk – The susceptibility of an assertion to a misstatement and that could be material, before consideration
of any related controls
Control Risk – The risk that a misstatement that could occur in an assertion and that could be material will not be
prevented or detected and corrected in a timely manner by the entity’s related internal control

Risk of Material Misstatements – The risk that FS are materially misstated prior to audit
= Inherent Risk (x) Control Risk

Audit Risk = ROMM x Detection Risk

SA 300 - Planning an Audit of FS

The objective of the auditor is to plan an audit of FS so that it will be performed in an effective manner.

Planning an overall audit involves establishing an overall audit strategy for the engagement and developing an audit
plan- Audit strategy - An overall audit strategy is an auditor's general approach to achieving the objectives of an
audit.

“Preliminary engagement activities - Overall audit strategy - Identifying ROMM (SA 315) – Audit procedures in
response to identified risks (SA 330) – Other planned audit procedures [The last three are part of the detailed audit
plan] “
It sets the following

1. Scope – What are we auditing, financial statements, Internal controls, Operational controls etc.
2. Timing – When to conduct the audit – Beginning of the period, throughout the period or at the end of the
period
3. Direction – How to conduct the audit –

It serves as a blue print for crafting the audit plan.

Consideration in establishing overall audit strategy

[Link] of the engagement

 Applicable financial reporting framework on which management prepares the FS, whether there is any need
for the change in financial reporting framework
 Industry specific reporting requirements – (eg of specified industries: Airline, Banking and Insurance (IFRS
07), Agriculture (Ind AS 41), Oil extraction)
 The expected audit coverage – Including the number and location and components to be included.
 The nature of the control relationships between parent and its components that determines how the group
is to be consolidated and the extent to which components are audited by other auditors.
 The nature of the business to be audited, including the need of specialized knowledge
 The availability of the work of internal auditors and the extent of auditor’s potential reliance on such work –
SA 610
 The entity’s use of service organizations – SA 402
 The expected use of audit evidences obtained during previous audits – audit evidences related to risk
assessment procedures and test of controls

[Link] Objectives, Timing of the audit, and Nature of communication

 The entity’s time table for reporting – interim and final stages
 The organization of meeting with management and TCWG to discuss the nature, timing and extent of audit
work
 The discussion with management on the status of the audit work throughout the engagement
 Communication with auditors of the component regarding the expected types and timing of reports to be
issued and other communication in connection with the audit of components

[Link] factors, Preliminary engagement activities, and knowledge gained on other engagements

 The determination of materiality in accordance with SA 320

 Preliminary identification of areas where they maybe a higher risk of Material Misstatements
 The impact of the assessed risk of material misstatements at the overall financial statement level
 Results of previous audits that involved evaluating the operating effectiveness of internal control, including
the nature of identified deficiencies and actions taken to address them.
 Significant business development affecting the entity – including changes in information technology and
business process, changes in key management, acquisition, mergers and divestments
 Significant changes in Financial Reporting Framework, such as change in Accounting Standards

[Link], Timing and Extent of Resources

 The selection of engagement team and the assignment of audit work to team members
 Engagement budgeting

SA 315 – Identifying and Assessing the ROMM through understanding the Entity
and its environment

The objective of the auditor is to identify and assess the risks of material misstatement, whether due to fraud or
error, at the financial statement and assertion levels, through understanding the entity and its environment, including
the entity’s internal control, thereby providing a basis for designing and implementing responses to the assessed risks
of material misstatement. This will help the auditor to reduce the risk of material misstatement to an acceptably low
level.

Assertions – Representations by management, explicit or otherwise, that are embodied in the financial statements,
as used by the auditor to consider the different types of potential misstatements that may occur.

RISK ASSESSMENT PROCEDURES – The procedures performed by the auditor to identify and assess the ROMM
(i.e., in-order to identify risky areas by understanding the entity, Its environment including its internal control), it
shall include the following:

1. The inquiries of management and of others within the entity and who in the auditor’s judgement may have
information that is likely to assist in identifying risk of material misstatements due to fraud or error
2. Analytical procedure - It may include both financial and non - financial information. When analytical
procedures use data aggregated at a high level, the results of those analytical procedures only provide a
broad initial indication about whether a material misstatement may exist or not.
(a) Relationship between sales and volume of goods sold
(b) Relationship between sales and COGS
(c) Comparison between current financial year data with previous year data
3. Observation and Inspection

Understanding the Entity and its Environment:

1. Relevant Industry, Regulatory and other external factors including the applicable financial reporting
framework
2. The nature of the entity – Its Operation, its ownership and governance, the types of the investment the
company making or planning to make (including investment in special purpose entities), The way that the
entity is structured and financed
3. The entities selection and application of accounting policies, Including reasons for changes thereto. The
auditor shall evaluate whether the entity’s selected accounting policies are appropriate for its business and
consistent with AFR
4. The entities objectives and strategies, and those related business risk that may results in ROMM
5. The measurement and review of entities financial Performance

Understanding the entity’s internal control system

[Link] Environment

[Link] entity’s risk assessment process

1. The auditor shall obtain an understanding of whether the entity has a process for
(a) Identifying the business risk relevant to the financial reporting objectives
(b) Estimating the significance of the risk
(c) Assessing the likelihood of their its occurrence
(d) Deciding about actions to address those risks
2. The auditor shall obtain an understanding of the Information system, including the related business process,
relevant to financial reporting such as
(a) The classes of transaction in the entity’s Operation
(b) The procedures, both automated and manual, by which those transactions are initiated, recorded,
processed and corrected as necessary
(c) The related accounting records, supporting information
(d) The financial reporting process used to prepare entity’s financial statements, including significant
accounting estimate and disclosures

[Link] Activities

[Link] of Controls
Identifying and Assessing the ROMM

The auditor shall identify and assess the ROMM at 1) FS Level and 2)Assertion level for classes of Transactions,
Account Balances and Disclosures

SA 320 – Materiality in Planning and Performing an Audit

(At the beginning of the Audit)

Judgments about matters that are material to the users of the FS are based on a consideration of the common
financial information needs of the users as a group

Therefore misstatement, including omissions are considered to be material if they, individually or in aggregate, could
reasonably be expected to influence the economic decision of the users taken on the basis of the financial
statements

Quantitative components (Financial data) and Qualitative components (Non – Financial Data – like RPT)

When establishing the overall audit strategy, the auditor shall determine (THE TYPES OF MATERIALITY)

(a) Planning Materiality/Overall Materiality – Materiality for the FS as a whole, it is the auditors starting
point of materiality
(b) Performance Materiality – There is one or more particular class of transactions, account balances or
disclosures for which misstatements of lesser amount than the materiality for the FS as a whole could
reasonably be expected to influence the economic decisions of the users – The auditor shall also
determine level or levels of materiality lesser than the materiality of FS as a whole.
(c) Materiality for specific transactions and balances - RPT
(d) Clearly Trivial Threshold

Overall Materiality/ Planning Materiality

SA 320 does not specify any formula or methods to determine overall materiality – it is purely based on the
professional judgement of the Auditor, but it does suggest the following benchmarks (RULE OF THUMB);

Benchmarks Percentages Professional Judgment

Total Revenue/Expenses ½ - 1% The auditor can choose any

amount from the left based on
PBT 5 – 10% his professional judgement
Total Assets/Liabilities 1 – 2%

*The benchmarks selected must be

- Appropriate to the nature of industry

Particulars Comparatively Higher Comparatively Lower

(BENCHMARK)
Architect Co. Revenue/PBT Asset
Manufacturing Co. Asset/Liabilities Revenue/PBT
Charitable Organization Asset/Revenue PBT

- Not Volatile – That is the benchmark chosen is not fluctuating through out the year
- Figures not too small
- The figures for revenue & PBT must be grossed up to 12 months (i.e., for interim audit purposes it must be
grossed up to 12 months)

Determining a percentage to be applied to a chosen benchmark involves the exercise of professional judgement. Ther
is a relationship between the percentage and the chosen benchmark, such that a percentage applied to PBT from
continuing operation shall be higher than that applied to Total revenue.
Performance Materiality

Planning the audit solely to detect individually material misstatements overlooks the fact that the aggregate of
individually immaterial misstatements may cause the FS to be materially misstated, and leaves no margin for possible
undetected misstatements.

Performance materiality is the ‘working materiality’ – it is assessed to help the auditor determine Nature, Time and
Extent of Further Audit Procedure

** Performance materiality is set to reduce to an appropriately low level the probability that the aggregate of
undetected/Uncorrected misstatements in the FS exceeds the materiality for the FS as a whole

Practically transactions and balances of greater than performance materiality will

- Be subjected to detailed testing.

- Require more audit evidence (which is directly proportional to no. of transactions and balances).
- Require more precise timing of when audit procedures should be carried out.

SA 450 – Evaluation of Misstatements identified during the Audit

(Materiality at the end of the Audit)

The objective of the auditor is to evaluate

(a) The effect of identified misstatements on the audit;

(b) The effect of uncorrected misstatements, if any, on the FS
(c)

Origin of Misstatements or how can a misstatement happen?

It may result from the following:

 An inaccuracy in gathering or processing data to which to base the FS are being prepared
 An omission of an amount or disclosure
 An incorrect accounting estimate from overlooking, or clear misinterpretation of, facts and
 Judgments of management concerning accounting estimates that the auditor considers unreasonable

- An asset is not valued in accordance with applicable IFRS/Ind AS, an incorrect amount being recognised ( Ind
AS 2, Ind AS 16, Ind AS 116 etc)
- An item being classified incorrectly - finance cost is included in COGS, Legal expenses shown under sales and
marketing expenses
- Presentation is not appropriate – The details of discontinued operation are not shown separately
-

Main Contents:

Consideration of Identified Misstatements as the Audit progress

Communication, correction and evaluating the effect of Uncorrected Misstatements

SA 330 – The Auditor’s response to Assessed Risk

The objective of the auditor is to obtain sufficient and appropriate audit evidence about the assessed risk of material
misstatement (SA 315), through design and implementing appropriate responses too those risks.

Substantive Procedure or Further Audit Procedure: an audit procedure designed to detect MM at assertion level

Substantiate means – Provide evidence to support or prove the truth – Therefore substantive procedure means
substantiating the “accounting records” to “original source or documents”
 (a) Test of Details (of classes of transaction, account balances, and disclosures)
(b) Substantive analytical procedure

Test of Controls – audit procedure designed to evaluate the operative effectiveness of the Internal Controls

What is internal control weakness –

 Control Gap or No Control – means there is no control or overlooking over a sensitive area, like no significant
person is allocated to fill the cash register ‘or’ to note down the production loss
 Poor designed internal control – There is no proper segregation of JD, like the person filling the cash register
and issuing cash are same

Why we have to conduct the test of controls – Because any weakness is an opening for misstatements, whether due
to fraud or error, that could be material.

How to identify control weaknesses –

1. Mapping process / Flowchart – you draw a different component of a process/activity to find any gaps or
weaknesses
2. Imagine/Brainstorm various forms of misstatements or errors – like sending customer a wrong qty, charging
customer a wrong price and checking whether there is a proper control design and implemented for that.
3. Checking with respect to Assertions –
Sample Template

Controls Occurrence / Accuracy / Completeness Cut-off / Classification Presentation

Existence Valuation Rights and / Allocation & Disclosure
Obligation
1
2
3

*Vouching – can be used to check the occurrence or existence assertion – It is done from “Journal Entry” to “Source
Document”

*Tracing – Can be used to check the completeness assertion – It is done from the “Source Document” to “journal
entry or Ledger balance”

SA 500 – Audit Evidences

Objective: Design and perform audit procedures to obtain sufficient and appropriate audit evidence to draw
reasonable conclusions on which to base the auditor’s opinion

Appropriate – Quality of audit evidence; The higher the quality, the less may be required

Sufficient – Quantity of audit evidence; The higher the assessed risk, the more audit evidence is likely to be required.

“The sufficiency and appropriateness of audit evidence are interrelated”

This SA explains what constitute an Audit Evidence – It is the information used by the auditor in arriving at the
conclusions on which the auditor’s opinion is based

Audit procedure to obtain audit evidence can include Inspection, observation, confirmation, recalculation,
reperformance and analytical procedure
The audit procedures described above maybe used as Risk Assessment Procedures, Test of Controls or Substantive
Procedures – Depending on the context in which they are applied by the auditor

[Link]
Inspection involves examining records or documents, whether internal or external, in paper form, electronic form or
other media or a physical examination of asset.
*An example of inspection used as a test of controls is inspection of records for evidence of authorisation.

*Inspection of tangible assets may provide reliable audit evidence with respect to their existence, but not necessarily
about the entity’s right and obligation or valuation of the Assets

[Link]

It involves looking at a process or procedures being performed by others, for example, the auditor’s observation of
inventory taking by company’s personal or the performance of control activities.
*Audit evidence obtained through observation is limited to the point in time at which the observation took place.

[Link] Confirmation

[Link] Procedures – SA 520

ETC.

Appropriateness of Audit Evidences

The quality of all audit evidence is primarily affected by the relevance and reliability of the information upon which it
is based
Relevance – It deals with the logical connection with, or bearing up on, the purpose of the audit procedure and,
where appropriate, the assertion under consideration.

A given set audit procedures may provide audit evidence that is relevant to certain assertions, but not others.
for example inspection of inventories provide audit evidence regarding their existence not with respect to valuation
On the other hand, audit evidence from different source, or of different nature may often relevant to the same
assertion.

Reliability – It is influenced by its source, nature and the circumstances under which it is obtained, including the
control over its preparation and maintenance where relevant.
*For example, information obtained from an independent external source may not be reliable if the source is not
knowledgeable, or a management expert may lack objectivity.

 The reliability is increased when AE is obtained from an independent from source

 The reliability of internally sourced AE is increased, if the related internal controls are efficient and effective
 The AE obtained directly by the auditor (eg: observation of the application of a control) is more reliable than
an indirect one (inquiries)
 AE in document form > AE obtained orally
 AE as original docs > AE of photocopies

Selecting items for testing to obtain audit evidence

(a) Selecting all Items (100%) – Done when, the population constitute a small no. of large value items, there is
significant risk and other means does not provide sufficient and appropriate AE
(b) Selecting specific item – Like all items over a specified amount
(c) Audit sampling – SA 530, it is designed to draw a conclusion on the entire population under review

SA 501 – AE -Specific consideration for selective items

The objective of the auditor is to obtain sufficient appropriate audit evidence regarding the

1. Existence and condition of Inventory

2. Completion of litigation and claims involving the entity
3. Presentation and disclosure of segment information in accordance with AFRF
SA 505 – External Confirmation
External confirmation – Audit evidence obtained as a direct written response to the auditor from a third party (the
confirming party), in paper, electronic or other form.

Positive Confirmation – A request that the confirming party respond directly to the auditor indicating whether the
confirming party agrees or disagrees with the information in the request.

Negative Confirmation – A request that the confirming party directly respond to the auditor only if the confirming
party disagrees with the information provided in the request.

Exception – A response that indicates a difference between information requested to be confirmed and information
provided by the confirming party

Non – Respond - A failure pf the confirming party to respond

SA 510 – Initial Audit Engagements – Opening balances

SA 520 – Analytical Procedures

The objective of the auditor are

1. To obtain relevant and reliable AE when using Substantive Analytical Procedure

2. To design and perform Analytical Procedure near the end of the audit that assist the auditor when forming
an overall conclusion as to whether FS are consistent with the auditor’s understanding of the entity

Analytical include the consideration of comparison of entity’s Financial Information with, for example

1. Comparable information for prior periods

2. Anticipated results of the entity, such as budgets, forecasts or auditor’s expectations
3. Similar industry information
4. Gross margin percentages
5. Between financial information to non-financial information
payroll cost to number of employees, Total revenue to total cubic volume of warehouse, the prediction of
total rental income of building divided into apartments (considering rental rates, no. of apartments- occupied
and vacant, Revenue to total no. of unit produces/sold,

SA 530 – Audit Sampling

Audit sampling – The application of audit procedures to less than 100% of items within a population of audit
relevance such that all sampling units have a chance of selection (not an equal chance of selection, some data will
have higher chance of selection).

Sampling Risk – The risk that the auditor’s conclusion maybe different from the conclusion, if the entire population
were to be considered for audit procedures.

Statistical sampling – Random selection of sample items OR The use of probability theory (If not these two types,
then it is called non-statistical sampling)
A sampling approach that does not have any above characteristics is considered as non-statistical sampling

The decision of which sampling method to be used is based on the auditor’s professional judgement

Sample Size – level of sampling risk is Inversely proportional to the sample size required
The lower the risk the auditor willing to accept, the greater the sample size required to be.

Selection of items for testing – Statistical or Non statistical

Statistical – Items are selected in a way that each sampling unit has a known probability of being selected, “it is
based on the laws of probability”
Statistical sample selection methods

1. Random selection – Applied through random number generators, eg: excel, random number tables
2. Systematic selection – Select every Nth data; like every 10th data or with respect to a formula like (n+5)
When using systematic selection, the auditor would need to determine that sampling units within the
population are not structured in such a way that the sampling intervals corresponds with a particular pattern
in the population
3. Monetary unit sampling – Value weighted selection
4. Haphazard selection – The auditor selects the sample without following a structured technique, that is the
auditor would nonetheless avoid any conscious bias or predictability
5. Block selection – it involves selection of block(s) of contiguous items from within the population
Group of adjustment items are selected, particular period of time (two weeks, one month and so on)

Non statistical – Professional judgement is used to select sample items

SA 540 - Auditing Accounting Estimates, Including Fair Value AE, and Related
Disclosures

Accounting Estimate – An approximation of a monetary amount in the absence of a precise means of measurement.

Estimation Uncertainty – The susceptibility of an accounting estimate and related disclosures to an inherent lack of
precision in its measurement.

Examples of accounting estimates related to transactions, account balance and disclosures includes

1. Inventory obsolescence
2. Depreciation
3. Valuation of infrastructure assets
4. Valuation of Financial Instruments
5. Outcome of pending litigations
6. Provision for expected credit losses
7. Valuation of Insurance Contract liabilities
8. Warranty obligations
9. Employee benefit liabilities
10. Share based payments
11. FV of Assets or Liabilities

Objective - The objective of the auditor to sufficient and appropriate audit evidences whether in the context of AFRF

 Accounting estimate, including fair value accounting estimates, in the FS, whether recognised or
disclosed, are reasonable and
 Related disclosure in the FS are adequate