AdvAnced Auditing & ProfessionAl Ethics

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CA FINALadvancEd auditing & ProfEssional EthicsSTANDARDSONAUDITING(Relevant for MAY 2020 &NOV 2020 examination)These Notes has been prepared by CA ATUL AGARWAL (AIR 1 CA FINAL) from ICAIMaterial. These cover Chapter 1, 2, 3 and 6 of ICAI Study Material with weightage of approx. 35Marks in the exams. Author scored Ever-Highest Marks (83) in Auditing in CA Final.Join us at following links for any guidance and notes: Telegram Channel – air1ca Youtube – Atul Agarwal Facebook/ Instagram/ Linkedin – 14atul15In case of any query/ doubt/ suggestion, students can contact us at following:Email – air1icai@gmail.comMobile – 9024119090Best Wishes Radhe Radhe!!

STANDARDS ON AUDITING“Chapter 1” “Standards on Auditing” – Basic Concepts1. Standard collectively known as Engagements Standards issued by Auditing & AssuranceStandards Board (AASB) Standard on Auditing (SAs) to be applied in audit of historical Financial Information Standard on Review Engagements (SREs) to be applied in review of historical FinancialInformation Standard on Assurance Engagements (SAEs) to be applied in assurance engagements dealing withmatters other than historical Financial Information Standard on Related Services (SRSs) to be applied to engagements involving application of agreedupon procedures, Compilation engagements and Other related services engagements2. Objectives & Functions of AASBTo review the – Existing & emerging auditing practices worldwide and identify areas in which Standards on qualitycontrol, Engagement Standards and Statements on Auditing need to be developed Existing standards & Statements on Auditing to Assess their relevance & to undertake their revision Existing guidance notes To assess their relevance & to undertake their revisionTo Formulate – Engagement standards, Standards on quality control & Statements on Auditing so that these may beissued under authority of council of the Institute General clarification on issues arising from standards And issue technical guides, practice manuals, studies and other papers under its own authority forguidance of professional accountantsTo Develop Guidance Notes on – Issues arising out of any standard Auditing issues pertaining to any specific industry General IssuesBY CA ATUL AGARWALAIR 1 CA FINALPage 1

STANDARDS ON AUDITINGThe Council of the ICAI has issued following Quality Control & Engagement Standards:No.1SQC 0313233343536SA 200SA 210SA 220SA 230SA 240SA 250SA 260SA 265SA 299SA 300SA 315SA 320SA 330SA 402SA 450SA 500SA 501SA 505SA 510SA 520SA 530SA 540SA 550SA 560SA 570SA 580SA 600SA 610SA 620SA 700SA 701SA 705SA 706SA 710SA 7203738SA 800SA 805394041424344SA 810SRE 2400SRE 2410SAE 3400SAE 3402SAE 34204546SRS 4400SRS 4410Title of the StandardQuality Control for Firms that Perform Audits and Reviews of Historical FinancialInformation, and Other Assurance and Related Services EngagementsOverall Objectives of the Independent Auditor and the Conduct of an Audit as per SAAgreeing the Terms of Audit EngagementsQuality Control for an Audit of Financial StatementsAudit DocumentationThe Auditor’s responsibilities Relating to Fraud in an Audit of Financial StatementsConsideration of Laws and Regulations in an Audit of Financial StatementsCommunication with Those Charged with GovernanceCommunicating Deficiencies in Internal Control to TCWG and ManagementResponsibility of Joint AuditorsPlanning an Audit of Financial StatementsIdentifying and Assessing Risks of MM through Understanding the Entity and its EnvironmentMateriality in Planning and Performing an AuditThe Auditor’s Responses to Assessed RisksAudit Considerations Relating to an Entity Using a Service OrganizationEvaluation of Misstatements Identified during the AuditsAudit EvidenceAudit Evidence - Specific Considerations for Selected ItemsExternal ConfirmationsInitial Audit Engagements-Opening BalancesAnalytical ProceduresAudit SamplingAuditing Accounting Estimates, Including Fair Value AE, and Related DisclosuresRelated PartiesSubsequent EventsGoing ConcernWritten RepresentationsUsing the Work of Another AuditorUsing the Work of Internal AuditorsUsing the Work of an Auditor’s ExpertForming an Opinion and Reporting on Financial StatementsCommunicating Key Audit Matters in the Independent Auditor’s ReportModifications to the Opinion in the Independent Auditor’s ReportEmphasis of Matter Paragraphs & Other Matter Paragraphs in Independent Auditor’s ReportComparative Information – Corresponding Figures and Comparative Financial StatementsThe Auditor’s Responsibility in Relation to Other Information in Documents ContainingAudited Financial StatementsSpecial Considerations-Audits of FS Prepared as per Special Purpose FrameworkSpecial Considerations-Audits of Single Purpose Financial Statements and Specific Elements,Accounts or Items of a Financial StatementEngagements to Report on Summary Financial StatementsEngagements to Review Historical Financial StatementsReview of Interim Financial Information Performed by the Independent Auditor of the EntityThe Examination of Prospective Financial InformationAssurance Reports on Controls At a Service OrganisationAssurance Engagements to Report on the Compilation of Pro Forma Financial InformationIncluded in a ProspectusEngagements to Perform Agreed Upon Procedures Regarding Financial InformationCompilations EngagementsBY CA ATUL AGARWALAIR 1 CA FINALPage 2

STANDARDS ON AUDITING"SA 200" Overall objectives of the Independent Auditors & the conduct of an Audit inAccordance with SAPurpose of Audit To enhance the degree of confidence of intended users in FSSA require the auditor to obtain reasonable assurance whether FS as a whole are free from MMReasonable assurance is a high level of assurance To reduce audit risk to an acceptably low level Reasonable assurance is not an absolute level of assurance because there are inherent limitations of anAudit.(i)Premise on which an audit is conducted / Mgt. & TCWG have the following responsibilities: Preparation & presentation of FS as per FRF includes design, implementation andmaintenance of internal control relevant to preparation & presentation of FS that are free fromMM To provide the auditors with:(a) All information such as records & documents relevant to preparation and presentation of FS(b) Any additional information, auditor’s request from mgt. & TCWG(c) Unrestricted access to those within entity which auditor determines necessary to obtain auditevidenceProfessional JudgmentApplication of relevant training knowledge & experience provided by auditing, accounting & ethicalstandards for making informed decisions.Professional SkepticismAn attitude that includes a questioning mind, being alert to conditions that indicate misstatement dueto error or fraud & a critical assessment of audit evidenceOther pointsAuditor may accept Records & documents as genuine unless reason to believe the contraryAuditor cannot expected to disregard past experience of honesty & integrity of Mgt. & TCWGBY CA ATUL AGARWALAIR 1 CA FINALPage 3

STANDARDS ON AUDITING"SA210" Agreeing the terms of Audit Engagement(i)Objective of Auditor How to decide whether to accept or continue audit engagement Whether preconditions for an audit are present Whether there is common understanding between auditor & Mgt/TCWG of terms of auditengagement(ii) Preconditions for an audit Determine whether FRF applied in preparation of FS acceptable Mgt. acknowledges & understands its responsibility:(a) Preparation & presentation of FS as per FRF includes design, implementation andmaintenance of internal control relevant to preparation & presentation of FS that are freefrom MM(b) To provide the auditors with: All information such as records & documents relevant to preparation and presentation of FS Any additional information, auditor’s request from mgt. & TCWG Unrestricted access to those within entity which auditor determines necessary to obtain auditevidence(iii) Limitation on Scope imposed prior to Audit Engagement acceptanceIf Mgt./TCWG impose limitation on scope of auditor’s work and limitation will result in disclaiming anopinion on FS Auditor shall not accept such a limited engagement Unless required by law orregulation. Auditor shall also not accept If preconditions for an audit are not present.(iv) Agreement on Audit Engagement Terms / Audit Engagement Letter & what it containsAuditor shall agree terms of audit engagement with Mgt. & agreed terms of audit engagement shall berecorded in Audit Engagement Letter or other form of written agreement & shall include:(a) Objective & scope of audit of FS(b) Responsibilities of Auditor(c) Responsibilities of Mgt(d) Identification of applicable FRF for preparation of FS(v)Factors where it is appropriate to revise the terms of engagement or to remind entity of existingterms (Recurring Audits)a) Any indication that entity misunderstands the objective & scope of auditb) Any revised or special terms of engagementc) A recent change in senior managementd) Significant change in ownershipe) Significant change in nature & size of entity's businessf) Change in legal or regulatory requirementsg) Charge in FRF adopted in preparation of FSh) Change in other reporting requirementsBY CA ATUL AGARWALAIR 1 CA FINALPage 4

STANDARDS ON AUDITING"SA 220" Quality control for an Audit of Financial statement(i)Factors considered for incorporating quality control in audit work at firm level Professional RequirementsSkills & ce & Retention of ClientsQuality control is not confined to audit firm alone, it extended to individual audits also(ii)Relying on work performed by another auditorAn engagement partner taking over an audit during the engagement may apply reviewprocedures such as: Work performed as per professional standards & regulatory & legal requirements Significant matters raised for further consideration Appropriate consultation have been taken place & resulting conclusion documented &implemented There is a need to revise the NTE of work performed Work Performed supports the conclusions reacted and is appropriately documented Evidence obtained is sufficient & appropriate to support auditor’s report Objective of the engagement procedures have been achieved.When auditor delegates work Continues to be responsible for forming & expressing his opinion.He is entitled to rely on work performed by other Provided he exercise adequate skill & care andcarefully direct, supervise, review work delegated.BY CA ATUL AGARWALAIR 1 CA FINALPage 5

STANDARDS ON AUDITING"SA 230" "Audit Documentation"MeaningRecord of audit procedures performed, relevant audit evidence obtained and conclusions the auditorreached. (Terms such or working paper / work papers also used)(i)Purpose of Audit Documentation Why documentation Assisting engagement team to plan & perform the auditAssisting members of engagement team responsible for supervision to supervise audit workEnabling engagement team to be accountable for its work.Retaining a record of matters of continuing significance for future auditEnabling conduct of quality control review & inspectionEnabling conduct of external inspection as per applicable legal requirements(ii) Timely preparation of Audit Documentation Audit documentation should be prepared on timely basis Documentation prepared after audit work has been performed are likely to be less accurate thandocumentation prepared at the time when such work is performed.(iii) Assembly of the Final Audit file Auditor shall assemble audit documentation in an audit file & complete administration process ona timely basis within 60 days after date of auditor’s report After assembly completed, auditor shall not delete or discard audit documentation of any naturebefore end of its relation period which is not shorter than 7 years from date of auditor’s report If auditor finds necessary to modify or add documentation after assembly of Final audit filecompleted Auditor shall document:(a) Specific reasons for making them(b) When & by whom they were made & reviewed.(iv) Ownership of Audit Documentation-Auditor responsibility to provide access to workingpapers As per SQC, Audit documentation is the property of Auditor. Auditor may at its discretion makecopies of or extract from working papers available to the client provided such disclosure doesnot undermine the validity of work performed and independence of auditor or of his personnel. Auditor responsibility to provide access only to regulators but not to third parties.(v) Factors influencing the amount of working papers required to be maintained for AuditForm, content & extent of Audit documentation depends on the following factors: Size & complexity of Entity Nature of Audit procedure to be performed Identified risks of MM Significance of Audit Evidence obtained Nature & Extent of Exceptions identified Need to document a conclusion or basis for a conclusion not readily determinable fromdocuments of work performed or evidence obtained Audit methodology & tools used Timely preparation of Audit documentation.BY CA ATUL AGARWALAIR 1 CA FINALPage 6

STANDARDS ON AUDITING“SA 240” “The Auditor's responsibilities relating to Fraud in an Audit of FinancialStatements”(i)Duties & Responsibilities of an Auditor in case of MM resulting from Management Fraud Misstatement in FS can arise form Fraud or Error Fraud is an intentional act by one or more individuals among Mgt. or TCWG Auditor is concerned with fraudulent acts that cause MM in FS Fraud involving 1 or more member of Mgt. or TCWG is Management Fraud Primary Responsibility for prevention & detection of fraud is TCWG & Mgt. of entity Auditor is responsible for obtaining reasonable assurance that FS as a whole are free from MMcaused by error or Fraud Owing to inherent limitations of Audit There is unavoidable risk that some MM may notdetected even audit is properly planned & performed as per SA Risk of not detecting MM From Mgt. Fraud is greater than from employee fraud because Mgt.directly or indirectly manipulate Accounting records, Present fraudulent financial information andOverride control procedures Auditor's opinion on FS is based on concept of obtaining reasonable assurance, hence auditor cannot guarantee that MM will be detected Sec. 143 (12) of Companies Act, 2013 Clause (x) of paragraph 3 of CARO, 2016 Impossibility to continue the performance of audit (Point No. ii)(ii) Impossibility to continue the performance of auditAs a result of MM resulting from fraud, Auditor encounters exceptional circumstances that bringquestions to auditor's ability to continue performing the audit Auditor shall : Determine Professional & legal responsibilities whether requirement to report to person Whomade the audit appointment or Regulatory Authorities Consider whether appropriate to withdraw from engagement where withdrawal is legallypermitted If auditor withdraws: Discuss with appropriate level of Mgt. & TCWG Auditor’s withdrawal & reasons forwithdrawal Determine whether there is professional & legal requirement to report to Person with madethe appointment or Regulatory Authorities(iii) If Written Representation is respect of fraud not provided by the company SA 580 WRSec. 143 (12) of Companies Act, 2013Clause (x) of paragraph 3 of CARO, 2016Impossibility to continue the performance of audit (Point No. ii)BY CA ATUL AGARWALAIR 1 CA FINALPage 7

STANDARDS ON AUDITING(iv) Steps for dealing in "Teeming & Lading" fraud Firstly, Auditor shall perform procedures whether FS are materially misstated because instance offraud cannot considered as isolated occurrence Secondly, Auditor needs to consider impact of fraud on FS & Disclosure in Audit Report Thirdly, Auditor should communicate matter to Chairman & BOD Finally, Fraud committed at highest level of Mgt. affects reliability of audit evidence previouslyobtained, since genuine doubt about representation of Mgt. Sec. 143 (12) of Companies Act, 2013 Clause (x) of paragraph 3 of CARO, 2016(v) Auditor's responsibility in Errors in Inventories/ Auditor’s responsibility in differencebetween control A/c’s and subsidiary records If circumstances indicate existence of fraud or error Auditor should consider potential effect ofsuspected fraud or error on FI If material effect on FI Perform modified or additionalprocedure as appropriate When auditor identifies misstatement evaluate whether these are indicative of fraud Ifindication Evaluate implications of misstatement to other aspects of audit When auditor confirms that or unable to conclude whether FS are material misstated as result offraud Evaluate the implications for audit. Auditor should request mgt. to adjust Financial Information. If Mgt. refuses to adjust, auditor shallexpress qualified or adverse opinion.(vi) Possible sources of Fraudulent Financial Reporting Fraudulent Financial Reporting involves intentional misstatement or omissions of amounts ordisclosure in FS to deceive FS users. It may be accomplished by: Manipulation, falsification Alteration of records Misrepresentations or Intentional Omission in FS It also involves Mgt. override of controls, misappropriation of assets etc. Fraud committed by Mgt. overriding controls using techniques such as: Recording fictitious journal entries Inappropriately adjusting assumption & changing judgments Concealing or not disclosing facts Engaging in complex transactions Altering records & terms Embezzling Receipts Stealing physical assets or intellectual Property Causing entity to pay for goods & services not received Using entity assets for personal useBY CA ATUL AGARWALAIR 1 CA FINALPage 8

STANDARDS ON AUDITING(vii) Risk factors relating to misstatements arising from misappropriation of Assets Misappropriation of Assets involve theft & perpetrated by employees in small & immaterialamounts. It also involve Mgt. who is able to disguise & conceal that are difficult to detect Risk factors are classified according to 3 conditions - Incentives/Pressures, Opportunities andAttitude/Rationalization Example of Risk Factors are:(a) Incentives / pressures Personal financial obligations create pressure on Mgt. & Employees to Misappropriateassets Adverse relationship b/w entity & employees may motivate employees tomisappropriate assets. For example - Adverse relationship may be created byfollowings – Future layoffs, Recent changes to benefit plans, Rewards inconsistent withexpectations(b) Opportunities Certain circumstances increase may cause assets to misappropriation such as Inventoryis of small size and high value, Fixed assets are of small size and high value,Inadequate IC over assets(c) Attitude / Rationalization Disregard for ICBehavior indicating dissatisfactionChanges in Lifestyle(viii) Auditor to make inquires of Mgt. regarding Mgt. own assessment of Risk of Fraud Mgt. responsibility is for entity's IC & preparation of entity's FS Appropriate for auditor to make inquiries regarding Mgt. own assessment of risk of fraud Need, Extent & Frequency of Mgt. assessment vary from entity to entity Auditor inquiries may provide useful information that risk of MM in FS is from employee fraudand not from management fraud.BY CA ATUL AGARWALAIR 1 CA FINALPage 9

STANDARDS ON AUDITING"SA 250" Consideration of laws & Regulations in an Audit of Financial StatementsNon Compliance Act of omission or commission by the entity, either intentional or unintentional whichare contrary to the prevailing laws or regulations. It does not include personal misconduct related to businessof entity by TCWG, mgt. or employees.(i)Roles / Responsibilities/ Objectives / Duties of auditor in relation to compliance with laws& regulations by the entityAs part of obtaining understanding of entity & its environment, auditor shall obtai

Standard on Assurance Engagements (SAEs) to be applied in assurance engagements dealing with matters other than historical Financial Information Standard on Related Services (SRSs) to be applied to engagements involving application of agreed upon procedures, Compilation engagements a

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