Standards by Sanidhya Saraf Serial 1 5
Standards by Sanidhya Saraf Serial 1 5
COM
FACULTY AT WIRC, MUMBAI
C
Important abbreviations
used in notes :
FRF-Financial Reporting Framework
WR-Written Representation
SA 200
SA 200 states that the auditor shall ensure that his opinion on financial statement are reflecting True and Fair
view. Section 143(2) also requires the auditor to state in his report whether accounts examined by him and
financial statement give True and Fair view.(True and Fair view means financial information should be
truthfully recorded and fairly presented).
Auditor is required to obtain reasonable assurance that financial statement are free from material
misstatement.
Auditor is required to report on financial statements, and communicate as required by the SA's. Section
143(2) also requires the auditor to report to the members of the company on the accounts examined by him
and financial statement which are to be laid down in AGM.
As per SA 200, he should obtain SAAE to reduce Audit Risk to an acceptable low level i.e. the auditor should
consider SA 500 as per SA 200.
According to SA 200,if the auditor is unable to obtain SAAE to support his conclusions or unable to draw
reasonable assurance ,he should either give a disclaimer of opinion or should withdraw from engagement if
permitted by law.
Auditor cannot obtain absolute assurance i.e. he cannot reduce Audit Risk to zero. This is due to inherent
limitations of an audit due to which auditor obtains persuasive evidence rather than conclusive.
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STANDARDS ON AUDITING CA SANIDHYA SARAF (WIRC)
schemes.
Audit is not an official investigation- No power of search &
seizure.
Hence, the nature of audit procedures is such that audit
evidences obtained are persuasive rather than conclusive.
Timeliness & Cost-Benefit The matter of difficulty, time , or cost involved is not in itself
Analysis a valid basis for the auditor to omit an audit procedure for
which there is no alternative or to be satisfied with audit
evidence that is less than persuasive.
There is always a pressure to finish audit quickly, in least
possible time.
Further because of limited audit fees there is budget & cost
constraint.
Other limitations Frauds, particularly involving senior management or collusion.
Non-disclosure of related parties.
Non compliance with laws and regulation.
Information not provided by management.
Requirement of SA 200
Ethical Integrity
Requirements Objectivity
Confidentiality
Professional behaviour
Professional competence and due care-Example-Auditor said that i was
unaware of SA 505 issued by ICAI. Hence he is lacking professional
competence. As per Kingston Cotton Mills "The auditor is justified in
relying upon the management if due care is exercised.
Professional Professional skepticism is nothing but altitude of the auditor which requires
skepticism alertness towards information provided to him by the auditee. Auditor should
remain alert to conditions which may indicate possible misstatement due to
error or fraud, and a critical or fraud, and a critical assessment of audit
evidence.
He should maintain professional scepticism throughout the audit to identify
fraud risk factors, evaluate related party transactions etc.
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STANDARDS ON AUDITING CA SANIDHYA SARAF (WIRC)
SA 200 also states that the management cannot restrict the scope of auditor's audit function.
Questions on SA 200
1. Mr. X a practicing CA accepted audit of PQR Ltd where his wife is a MD. Comment.
Sol-Mr X shall not be eligible for appointment in PQR Ltd as per:
Section 141(3) of Co's Act 2013.
SA 200-Ethical Requirements.
General Council Guidelines issued by ICAI that states that a member of Institute should
not express his opinion on Financial Statements of any business or enterprise in which
his relative (within meaning of AS-18) have either themselves or in conjunction with a
member in business of enterprise.
Guidance Note on Auditor's Independence.
2.The auditor's need not review accounting policies unless there is a change in basis of
Accounting.
He should critically examine Accounting policies adopted by client and test for
conformity with Accounting Standards And Recommendations of the Institute.
As 1-Consistency of accounting policies
SA 200-True and Fair View.
3. The directors asked the auditor to accept reduced fees and asked the auditor not to carry out
full audit as he had done in the past.
The terms of engagement cannot, however, restrict the scope of an audit. In the given
question, terms of engagement on reduced fee are limiting the scope of audit as
determined by pronouncements of the institute and section 143 of Co's Act 2013.
4. Comment on the following: M/s XYZ & Co., auditors of Goodwill Education Foundation, a
recognised non profit organisation feels that the standards on auditing need not be applied as
Goodwill Education Foundation is a non-profit making concern.(May 2010)
Answer-
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STANDARDS ON AUDITING CA SANIDHYA SARAF (WIRC)
(a) The Preface to Standards on Auditing gives the scope of the Standards on Auditing. 9.
(b) As per the Preface, the SAs will apply whenever an independent audit is carried out; that is,
in the independent examination of financial statements/information of any entity; whether
profit- oriented or not and irrespective of its size, or legal form (unless specified otherwise)
when such an examination is conducted with a view to expressing an opinion thereon.
(c) Further on discharging their attest function; it is the duty of the Chartered Accountant to
ensure that SAs are followed in the audit of financial information covered by their audit reports.
(d) In the given case, even though the client is a non-profit oriented entity the SAs shall apply
and the auditor shall be guilty of professional misconduct.
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STANDARDS ON AUDITING CA SANIDHYA SARAF (WIRC)
SA 210
Contents of Engagement Letter- The agreed terms of the audit engagement shall be recorded in an
audit engagement letter or other suitable form of written agreement and includes:
1. The objective and scope of the audit of the financial statements;
2. The responsibilities of the auditor;
3. The responsibilities of the management;
4. Identification of the applicable FRF for the preparation of the financial statements; and
5. Reference to the expected form and content of any reports to be issued by the
auditor.
Limitation imposed before accepting assignment- If the auditor believes the limitations will result
in the auditor disclaiming an opinion on the financial statement, the auditor should not accept such
an assignment unless required by law.
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STANDARDS ON AUDITING CA SANIDHYA SARAF (WIRC)
FRF v/s Law-conflict-Discuss conflict with management. If additional requirement can't be met
even by additional disclosure, modify audit report as per SA 705.
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STANDARDS ON AUDITING CA SANIDHYA SARAF (WIRC)
SA-220
QUALITY CONTROL FOR AN AUDIT OF FINANCIAL STATEMENTS
These quality control policies must be present at both the levels of audit:
Firm level audits
Individual level audits
Audit work should be delegated to assistance with professional competence and should be appropriately
directed and supervised. The work of assistants should be reviewed.
There should be an engagement partner appointed to each audit engagement undertaken by firm to take
responsibility for engagement on firm's behalf. As per SQC 1, for listed entity, engagement partner should be
rotated every 7 years.
Questions on SA 220
1.You are an audit senior working for the firm Kala & Company. You are currently carrying out the
audit of W Ltd., a manufacturer of waste paper bins. You are unhappy with W Ltd.'s inventory
valuation policy and have raised the issue several times with the audit manager. He has dealt with
the client for a number of years and does not see what you are making a fuss about. He has refused
to meet you on site to discuss these issues. The former engagement partner to W Ltd. retired two
months ago. As the audit manager had dealt with W Ltd. for so many years, the other partners have
decided to leave the audit of W Ltd. in his capable hands. Comment on the situation outlines above.
(RTP)
Several quality control issues are raised in the scenario:
Engagement Partner: An engagement partner is usually appointed to each audit
engagement undertaken by the firm, to take responsibility for the engagement on behalf of
the firm. Assigning the audit to an experienced audit manager is not sufficient.
The lack of an audit engagement partner also means that several of the requirements of SA
220 directing, supervising and reviewing the audit are not in place.
In this scenario the audit manager and senior have conflicting views about the valuation of
inventory. This does not appear to have been handled well, with the manager refusing to
discuss the issue with the senior.
SA 220, requires that the audit engagement partner takes responsibility for setting disputes
in accordance with the firm's policy in respect of resolution of difference of opinion
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STANDARDS ON AUDITING CA SANIDHYA SARAF (WIRC)
required by SQC 1" Quality Control for Firms that Perform Audits and Reviews of Historical
Financial Information, and Other Assurance and Related Services Engagements".
In this case, the lack of engagement partner may have contributed to this failure to resolve
the disputes. In any event, at best, the failure to resolve the difference of opinion is a
breach of the firm's policy under SQC 1. At worst, it indicates that the firm does not have a
suitable policy concerning such disputes required by SQC1.
2. M/s Sureshchandra & Co. has been appointed as an auditor of SC Ltd. for the financial year
2015-16. CA. Suresh, one of the partners of M/s Sureshchandra & Co., completed entire
routine audit work by 29th May, 2016. Unfortunately, on the very next morning, while
roving towards office of SC Ltd. to sign final audit report, he met with a road accident and
died. CA. Chandra, another partner of M/s Sureshchandra & Co., therefore, signed the
accounts of SC Ltd., without reviewing the work performed by CA. Suresh. State with reasons
whether CA. Chandra is right in expressing an opinion on financial statements the audit of
which is performed by another auditor.
As per SA 220 “Quality Control for an audit of Financial Statements”, an engagement
partner taking over an audit during the engagement may apply the review procedures
such as the work has been performed in accordance with professional standards and
regulatory and legal requirements; significant matters have been raised for further
consideration; whether appropriate consultations have taken place and the resulting
conclusions have been documented.
One of the basic principles, which govern the auditor’s professional responsibilities
and which should be complied with wherever an audit is carried, is that when the
auditor delegates work to assistants or uses work performed by other auditor and
experts, he will continue to be responsible for forming and expressing his opinion on
the financial information. However, he will be entitled to rely on work performed by
others, provided he exercises adequate skill and care. However, the auditor should
carefully direct, supervise and review work delegated.
To conclude, CA. Chandra is allowed to sign the audit report, though will be responsible
for expressing the opinion.
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STANDARDS ON AUDITING CA SANIDHYA SARAF (WIRC)
SA 230
AUDIT DOCUMENTATION
As per SA 230 read with SQC 1,working papers should be preserved for a minimum period of 7 years.
i.e No working paper can be deleted or discarded upto 7 years from Audit Report.
DOCUMENTATION
Then the auditor shall document:
The circumstances encountered;
Additional procedures performed;
Audit evidences obtained; and
Conclusions reached thereon and their affect on audit report.
What are the factors affecting form, contents and extent of audit?
Size and Complexity of Entity.
Nature of Audit Procedures to be performed.
Identified risks of material misstatements.
Significance of Audit Evidence obtained.
Nature and extent of exceptions identified.
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STANDARDS ON AUDITING CA SANIDHYA SARAF (WIRC)
Can the auditor provide the access of his working papers to any 3 rd party?
Working papers may contain some vital information of the client.
As per SA 200, one of the ethical requirement that the auditor has to follow is
confidentiality.
Also clause 1 of part 1 of 2 nd Schedule provides that a CA in practice is deemed to be
guilty of professional misconduct if he discloses information of the client, without his
consent.
Hence, Auditor cannot share the working papers to any 3 rd party, unless it is a
requirement of law.
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STANDARDS ON AUDITING CA SANIDHYA SARAF (WIRC)
SA 240
Fraud means an intentional act by one or more individual among management , those charged with
governance, employees, or third parties, to deceive, to mislead or atleast to conceal the truth to obtain
an unjust or illegal advantage.
In accordance with SA 315,auditor should identify and assess risks of material misstatement due to fraud at
the financial statement level, and at assertion level for classes of transactions, account balances and
disclosures.
In accordance with SA 330,the auditor should determine overall responses to address the assessed risk of
material misstatement due to fraud at financial statement level.
Perform Risk Assessment Procedures,& General understanding of its entity ,its environment and Internal
Control System as per SA 315.
Obtaining Reasonable Assurance that financial statements taken as a whole are free
from material misstatement, whether due to fraud or error.
Maintain Professional Scepticism throughout the audit.
Obtain Written Representation.
As per SA 200, due to inherent limitations of an audit, there is an unavoidable risk that
some material misstatement of Financial statement will not be detected ,even though
the auditor is properly planned and performed in accordance with SA's.
Risk of not detecting a material misstatement resulting Management fraud is greater
than Employee fraud, because management can easily manipulate accounting records
because management is in a unique position to penetrate fraud because of
Management's ability to manipulate accounting records & prepare financial statements
by overriding controls.
Perform Risk Assessment Procedures
Enquiry of Management.
Enquiry of Those Charged With Governance.
Evaluation of fraud risk factor.
Evaluation of identified unusual & unexpected relationship.
Consider impact of fraud on financial statement.
Consider reliability of WR if management fraud found.
Communicate to chairman, Board of Directors.
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STANDARDS ON AUDITING CA SANIDHYA SARAF (WIRC)
Whenever any fraud is discovered by the auditor ,report under Section 143(12) to Central Government.
Additional reporting responsibility under CARO as per Section 143(11) issued by Central Government.
The person committing the fraud shall be liable under Section 447.
Fraud has been defined in paragraph 11 (a) of SA 240, “The Auditor’s Responsibilities Relating to Fraud in an
Audit of Financial statements” as an intentional act by one or more individuals among management, those
charged with governance, employees, or third parties, involving the use of deception to obtain an unjust or
illegal advantage.'
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STANDARDS ON AUDITING CA SANIDHYA SARAF (WIRC)
Questions of SA 240
1) While conducting statuary audit of ABC Ltd, you came across IOU's amounting to 2 cr. as against cash
balance of 2.10 cr. You also observed that despite similar balances throughout the year, small
amounts of Rs.50000 are withdrawn from bank to meet day to day expenses.( June 2009/RTP May
2013)
ANSWER:
2) Management has committed a Teeming and Lading Fraud. What are auditor's responsibilities relating
to fraud in an audit of financial statement. (May 2005/RTP Nov 2010)
[ Refer the heading- Auditors Reporting Responsibility in an Audit of Financial Statement]
3) You notice a misstatement resulting from fraud or suspected fraud during the audit and conclude
that it is not possible to continue the performance of audit.( Nov 2006)
[Refer the heading-If Auditor is unable to continue the engagement}]
4) In the course of audit of A Ltd you suspect the management has indulged in fraudulent financial
reporting. State the possible source of such fraudulent reporting. (May 2012)
5) While auditing accounts of public ltd co. for the year ended 31st March 2014,auditor found errors in
valuation of inventory which effects the materiality of financial statements.(Nov 2003/ RTP Nov
2013)
Hints-AS 2,SA 320,error if intentional SA 240,143(12),143(11),communicate to TCWG as per SA
260,Ask management to correct such errors .If management refuses to correct, modify as per SA
705.
6) Auditor observed that there was a specific audit done, suspicious of fraud, requested copy of report
to enable him to report on fraud. The same was not provided .The auditor then requested for WR
Management remained silent. Guide the auditor.(May 2014)
Obtain reasonable assurance that financial statements are free of fraud. If fraud found consider SA
240.
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STANDARDS ON AUDITING CA SANIDHYA SARAF (WIRC)
SA 250
CONSIDERATION OF LAWS AND REGULATIONS IN AN AUDIT OF
FINANCIAL STATEMENTS
Responsibilities of Auditor.
Auditor is not responsible for prevention/detection of non compliances. Management, with the
oversight of those charged with governance, is responsible for ensuring that the entity’s
operations are conducted in accordance with laws and regulations.
The auditor should obtain general understanding of regulatory framework and how entity
complies with it.
The auditor should obtain Sufficient and appropriate audit evidence w.r.t. laws directly
effecting determination of amount and disclosure in Financial statement.
He is not required to obtain expert understanding of other laws that do not have a direct
bearing on Financial statement such as compliance with environmental regulations.
Non compliance with other laws may result in litigations , fines and other consequences .The
auditor will disclose whether co. has made provisions for such fines ,litigations.
Obtain written representation that all instances of non- compliances or suspected non-
compliances with laws and regulations have been disclosed to the auditors.
Obtain Sufficient and appropriate audit evidence that all instances of non-compliances or
suspected non-compliances with laws and regulations have been disclosed to the auditors.
Obtain Sufficient and appropriate audit evidence that whether the misstatements found is due
to fraud or error. If it is done fraudulently , the auditor shall consider SA 240.
Whenever,any violations is being noticed, the Statuary Auditor's must report the same to
Management
Stakeholders
Those Charged with Governance
If Management/TCWG is involved, communicate to the next level-Supervisory Board or Audit
Committee.
If next level is not there, obtain legal advice.
If non compliances has material effect on Financial Statements, it means Financial statement is not
reflecting True and fair view(Required under SA 200 and Section 143(2).Hence the auditor is required to
give qualified/adverse report.
The auditor's duty of confidentiality would preclude reporting to a 3rd party. However ,in certain
circumstances duty of confidentiality is overridden by statute, law or by courts of law.
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STANDARDS ON AUDITING CA SANIDHYA SARAF (WIRC)
2. While verifying the employee records in a company , it was found that a major portion of the labour
employed was child labour. On questioning the management, the auditor was told that it was outside his
scope of the financial statement audit to look into the compliance with other laws. (Nov 2012, RTP May
2016)
If there is no direct effect on determination of amount and other disclosures ,but compliance is
fundamental to operational aspects of company, then to continue as going concern ,to avoid
fines and penalties ,auditor's responsibility to identify such non compliance.
If non compliance has a material effect and not adequately reflected in Financial statements,
express Qualified/Adverse.
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STANDARDS ON AUDITING CA SANIDHYA SARAF (WIRC)
SA 260
COMMUNICATING WITH THOSE CHARGED WITH GOVERNANCE
Key Definitions:
1. Management: Such personnel who are responsible to perform day to day functions of the
business and are also responsible for making financial statements.
For example: Executive members of Governance Board .i.e. Executive Board.
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STANDARDS ON AUDITING CA SANIDHYA SARAF (WIRC)
Mode of communication
All significant matters should be communicated in writing at reasonable time depending upon
the nature of the matter.
Timing of Communication should be appropriate. Any planning matters should be
communicated at the time of Audit Engagement Letter
1. Key audit matters as given in SA 701 are selected from matters communicated with those charged
with governance.
2. The auditor may communicate preliminary views about key audit matters while discussing the
planned scope and timings of the audit.
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STANDARDS ON AUDITING CA SANIDHYA SARAF (WIRC)
SA 265
COMMUNICATING DEFICIENCIES IN INTERNAL CONTROL TO THOSE
CHARGED WITH GOVERNANCE
PTR: Letter of weakness not only contains the lapses in the internal control system but also remedial
actions suggested by the auditor to overcome those weakness.
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STANDARDS ON AUDITING CA SANIDHYA SARAF (WIRC)
Question - Indicate the precise nature of auditor's liability in the following situations and support your
views with authority, if any: Certain weaknesses in the internal control procedure in the payment of
wages in a large construction company were noticed by the statutory auditor who in turn brought the
same to the knowledge of the Managing Director of the company. In the subsequent year huge
defalcation came to the notice of the management. The origin of the same was traced to the earlier
year. The management wants to sue the auditor for negligence and also plans to file a complaint with
the Institute In the given case, certain weaknesses in the internal control procedure in the payment of
wages in a large construction company were noticed by the statutory auditor and brought the same to
the knowledge of the Managing Director of the company. In the subsequent year, a huge defalcation
took place, the ramification of which stretched to the earlier year. The management of the company
wants to sue the statutory auditor for negligence. The precise nature of auditor's liability in the case
can be ascertained on the basis of the under noted considerations: (a) Whether the/ defalcation
emanated from the weaknesses noticed by the statutory auditor, the information regarding which
was passed on to the management; and (b) Whether the statutory auditor properly and adequately
extended the audit programme of the previous year having regard to the weaknesses noticed. (RTP
Nov 2014)
SA 265
clause 7,schedule 2,ca act
Auditor's defence-Kingston cotton mills.- If the auditor took care while discharging his duties,
he is not guilty.
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STANDARDS ON AUDITING CA SANIDHYA SARAF (WIRC)
SA 299
RESPONSIBILITY OF JOINT AUDITORS
SA 299 is applicable when more than one auditor are appointed to conduct the audit of large
entity.
Where joint auditors are appointed, they should , by mutual discussion , divide the audit work
among themselves. The division of work is on the basis of components of financial statement ,
period of time , specified areas etc.
INDIVIDUAL RESPONSIBILITIES
For work divided, in nature, time ,extend of audit procedure ,
professional judgement,
reviewing internal control,
reviewing audit reports of work allocated to him,
obtaining information and explanation.
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STANDARDS ON AUDITING CA SANIDHYA SARAF (WIRC)
Other Issues
1. Is it necessary for a joint auditor to review work of others?
No. can assume that worked in accordance with generally accepted auditing procedure since other
joint auditor is also a member of ICAI.
2. Is view of majority bound on the joint auditor?
No. each one of them has right to express his own opinion through a separate report.
Diverge views are to be reported in case of disagreement. However efforts must be made to arrive
at an agreed report so that users of financial statement don't get confused.
Question -1
ABC & Co. and DEF & Co., Chartered Accountant Firms were appointed as joint auditors of Good
Health Care Limited for 2009-10. A special audit was conducted u/s 233A of the Companies Act,
1956 during March 2011 and observed gross understatement of revenue. The revenue aspects
were look after by DEF & Co., but there was no documentation for the division of work between
the joint auditors.
Refer point 1,2,3
Since division of work not documented as per SA 299 guilty of negligence.
Also guilty of pm under CA ACT.
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STANDARDS ON AUDITING CA SANIDHYA SARAF (WIRC)
SA 300
AUDIT PLANNING
Can the Audit Plan or strategy be changed during the audit engagement?
Audit planning is a continuous process , the auditor may change the audit plan or
strategy during the performance of an audit engagement as a result of
Unexpected events;
Change in conditions; or
The audit evidence obtained from the result of audit procedures.
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STANDARDS ON AUDITING CA SANIDHYA SARAF (WIRC)
Relationship between the Overall Audit Strategy and the Audit Plan:
a. The audit strategy provides the guidelines for developing the audit plan. It establishes the
scope and conduct of the audit procedures and thereby works as basis for developing a
detailed audit plan.
b. Detailed audit plan would include the nature, timing and extent of the audit procedures to
obtain sufficient appropriate audit evidence.
c. The audit strategy is prepared before the audit plan.
d. The audit plan contains more details than the overall audit strategy.
e. Audit strategy and audit plan are inter-related because change in one would result into change
in the other.
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STANDARDS ON AUDITING CA SANIDHYA SARAF (WIRC)
SA 315
IDENTIFYING AND ASSESSING THE RISK OF MATERIAL MISSTATEMENT
THROUGH UNDERSTANDING THE ENTITY AND ITS ENVIRONMENT
A. Internal control is a process designed ,implemented and maintained by management and TCWG to ensure
Reliability of financial reporting.
Effectiveness & Efficiency of operation.
Safeguarding of Assets.
Compliance with laws and regulation.
B. Components of Internal Control System(ICRAM)
Information System-There are two types of information system, manual and
automated.(CIS)
Control Environment-Understanding the control environment, whether management,
with TCWG has created and maintained a culture of honesty and ethical behaviour.
Risk Assessment Procedures
Activities-The auditor shall obtain understanding of control activities relevant to an
audit. For example; Authorization , Segregation of duties, Safeguarding, Asset
accountability
Monitoring(SA-220)-Monitoring of controls is a process to assess the quality of internal
control performance over time.
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STANDARDS ON AUDITING CA SANIDHYA SARAF (WIRC)
The auditor shall perform risk assessment procedures to provide a basis for identification
and assessment of risk of material statement at the financial statement level and assertion
level.
Risk Assessment Procedures by themselves do not provide sufficient and audit evidence on
which to base the audit opinion.
Audit Risk is the risk that an auditor may issue an inappropriate opinion when there is material
misstatement in financial statement(Defined in SA 200)
There are two components of Audit Risk
a.) Risk of material misstatement-Risk that financial statement may contain
material misstatement assessed by the auditor prior to audit.
There are 2 components-Inherent Risk and Control Risk.
b ) .Detection Risk.
As per SA 315 read with SA 330,auditor exercises his professional judgement to assess audit risk and
to design audit procedures to ensure that it is reduces to an acceptable low level.
Detection Risk is the risk that even auditor's substantive procedure will fail to detect risk of material
misstatement although risk existing in account balance or class of transaction could be material.
Higher, the Inherent Risk and Control Risk, the more substantive procedures the auditor will perform,
obtain more audit evidence ,and reduce his detection risk so as to reduce audit risk to an acceptable
low level.
Inherent Risk- There will always be risk of material misstatement existing in account balance or class
of transaction or disclosure presuming that there is no internal Control. Therefore, such risk of
material misstatement due to non-existence of internal controls is known as an inherent risk.
Control Risk-The risk of material misstatement existing in account balance or class of transaction or
disclosure will not be prevented, detected and timely corrected by system of internal control.
Audit Risk = Risk of Material Misstatement × Detection Risk
Risk of Material Misstatement = Inherent Risk × Control Risk
Therefore, Audit Risk = IR × CR × DR
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STANDARDS ON AUDITING CA SANIDHYA SARAF (WIRC)
IT systems also pose specific risks to an entity's internal control? What are those risks?
Reliance on inaccurate input, processing and output.
Possibility of IT personnel gaining access beyond those necessary to perform their assigned duties
thereby breaking down segregation of duties.
In appropriate manual intervention.
Unauthorised access to data that may result in destruction of data or improper changes to data.(U)
Unauthorised changes to data in Master files.
Unauthorised changes to systems or programs.
Failure to make necessary changes to systems or programs.
Conditions and indications that may indicate Risk of Material Misstatements (Give few examples)
Significant transactions with related parties.
Weakness in internal control.
Changes in IT environment.
Launch of new products or services.
Going concern and liquidity issues.
Significant amount of unusual transactions.
Pending litigation and contingent liabilities.
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STANDARDS ON AUDITING CA SANIDHYA SARAF (WIRC)
SA 330
AUDITOR’S PROCEDURES RESPONSIVE TO RISK ASSESSED AT ASSERTION LEVEL
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STANDARDS ON AUDITING CA SANIDHYA SARAF (WIRC)
Questions on SA 330
1. "Surprise Checks" help the auditors to ascertain whether the internal control system is operating
effectively in a Company or not". Discuss.
Answer- SA 315 & SA 330 prescribes that the auditor should obtain an understanding of the
accounting and internal control systems sufficient to plan the audit and develop an effective audit
approach, in this context, surprise checks intend to ascertain whether the system of internal
control is operating effectively and whether the accounting and other records are prepared
concurrently and kept up-to-date. Surprise checks are a useful method of determining whether or
not errors exist and where they exist, of bringing the matter promptly to the attention of the
management so that corrective action is taken immediately. Consequently, surprise visits by the
auditor can exercise a good moral check on the client's staff. Therefore Surprise Checks help the
auditors to ascertain whether the internal control system is operating effectively in a Company or
not.
2. In the course of audit of Z Ltd, its auditor wants to rely on audit evidence obtained in previous
audit in respect of effectiveness of internal controls instead of retesting the same during the
current audit. As an advisor to the auditor kindly caution him about the factors that may warrant a
re-test of controls.
Factors that may rewarrant test of controls.
a.)Deficient Control environment.
b)Deficient monitoring of control.
c.)Deficient general IT controls.
d.)Changing circumstances that indicate the need for change in controls.
e.)Personnel changes
3.Procedure in case detection risk cannot be reduced to acceptance level OR "While commencing
the statutory audit of B Company Limited, the auditor undertook the risk assessment and found
that the detection risk relating to certain class of transactions cannot be reduced to acceptance
level." (RTP)
As per SA 315 read with SA 330,auditor exercises his professional judgement to assess audit
risk and to design audit procedures to ensure that it is reduces to an acceptable low level.
Detection Risk is the risk that even auditor's substantive procedure will fail to detect risk of
material misstatement although risk existing in account balance or class of transaction could be
material.
Higher, the Inherent Risk and Control Risk, the more substantive procedures the auditor will
perform, obtain more audit evidence ,and reduce his detection risk so as to reduce audit risk
to an acceptable low level.
If it cannot be reduced to an acceptable level, the auditor should express a qualified opinion or
disclaimer of opinion as may be appropriate.
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STANDARDS ON AUDITING CA SANIDHYA SARAF (WIRC)
SA 320
MATERIALITY IN PLANNING AND PERFORMING THE AUDIT
Material items are those which may influence the decision of uses of financial misstatement .Example .If one
student scores 50% and other student scores 52%,it might not be material for the interviewer. On the other
hand if other students scores rank, it might influence the decision.
Planning
Evaluation of audit evidence
Conclusion of reporting.
Amount set by the auditor at less than materiality level for the financial statement
as a whole. Why?
To ensure that aggregate of uncorrected and undetected misstatements is less than
materiality for the financial statement as a whole.
To reduce risk to an appropriately low level.
Example- materiality level of rs.5lakh decided. lets say,40% of materiality level=rs.2
lakh decided as performance materiality. Agar 3 Galatia 2 lakh ki nikal gai,toh
aggregate basis main materiality level exceed hojayga.
The auditor can revise materiality level based on progress of audit. If he finds material misstatement, then
reduce materiality level to cover more items. Consider whether Nature, Time and extent of further Audit
Procedures will remain appropriate. If the auditor gets additional information then he should revise
materiality. For example, if there is new requirement of law/ regulation/FRF, entity has made a major
decision to dispose of a major part of the entity’s business, the auditor should revise the materiality level.
If materiality is more, the auditor will perform more audit procedures and reduce the overall audit risk.
The auditor may decide to evaluate misstatements even if it is less than materiality level set by him.
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STANDARDS ON AUDITING CA SANIDHYA SARAF (WIRC)
Factors that may effect the identification of an appropriate benchmark include the following(Nov 2013)
The elements of the F/S( for example, assets, liabilities, equity, revenue, expenses)
Items where attention of users of F/s may be focused.
Nature of entity.
Ownership structure of entity and way of financing( for example, if entity is financed
solely by assets , users may put more focus on assets, rather than earnings)
The relative volatility of the benchmark.
May 2015
Q.As an auditor of RST Ltd. Mr P applied the concept of materiality for the financial statement as a
whole. On the basis of obtaining information of significant contractual arrangements that draw
attention to a particular aspect of a company's business ,he wants to revaluate the materiality
concept. Please, guide him.
As per SA 320,set benchmark on the basis of which audit procedures will be performed.
point no 5
Can revaluate after considering necessity of such revision.
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STANDARDS ON AUDITING CA SANIDHYA SARAF (WIRC)
SA 402
AUDIT CONSIDERATIONS RELATING TO AN ENTITY USING SERVICE
ORGANISATIONS
When obtaining an understanding of the user entity in accordance with SA 315, the user auditor shall obtain
an understanding of how a user entity uses the services of a service organisation in the user’s entity
operations , including
Nature of services provided by service organisation to user entity and the significance
of those services to the user entity.
Nature of materiality of transactions processed by the service organisation.
Contractual terms for the activities undertaken by the service organisation.
Degree of interaction between activities of service organisation and user entity.
Design and implementation of controls at user's entity relating to service organisation.
General controls and computer systems controls.
If the auditor of user organisation is not able to obtain all information at user entity he shall
Type 1 Report is the report on description and design of controls designed and implemented at a service
organisation. It is a report by the service auditor that comprises of service organisation’s system, control
objectives and related controls that have been designed and implemented at a particular date.
Type 2 Report is more comprehensive. It includes Type 1 and additionally it also includes the description of
test of controls performed to arrive at the above opinion.
In determining the sufficiency and appropriateness of the audit evidence provided by a Type 1 or Type 2
report, the user auditor shall be satisfied as to:
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STANDARDS ON AUDITING CA SANIDHYA SARAF (WIRC)
If the auditor of user organisation is not able to obtain information , give qualified or disclaimer.
Reporting
Note-SA 3402 applies to auditor of service organisation whose duty is to report in type 1
or type 2 to the auditor of user's entity.He shall perform test of controls while providing
type 2 report.If controls are not fairly designed and implemented or he is unable to obtain
SAAE, modify the opinion.
Questions on SA 402
1. A Company gets its accounting data processed by a third party to achieve cost reduction. As a
Statutory Auditor of such a company, what are the additional precautions/checks that you would
consider for conduct of the audit?
Refer point no 1
consider the nature and extent of activities undertaken by service organisations so as to
determine whether those activities are relevant to the audit.
Obtain Type 1/2 report.
2. In the course of the audit of R Ltd., the audit manager of ABC & Co. observed that R Ltd. has
outsourced certain activities to an outsourcing agency. As the engagement partner guide the audit
manager in the assessment of services provided by the outsourcing agency in relation to the audit.
(RTP, May 2010, 2011).
Refer point no 1
3. G Ltd. is a mobile phone operating company. Barring the marketing function it had outsourced the
entire operations maintenance of mobile infrastructure, customer billing, payroll, accounting
functions, etc. Assist the auditor of G Ltd. as to how he can obtain an understanding of how G Ltd.
uses the services of the outsourced agency in its -ions. Nov 2013, RTP Nov 2014
Refer point no 1
.
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STANDARDS ON AUDITING CA SANIDHYA SARAF (WIRC)
SA 450
EVALUATION OF MISSTATEMENT IDENTIFIED DURING AUDIT
What is misstatement?
An item is said to be misstated when it is reported in financial statements in a way which is different from
that prescribed in FRF, may be due to error and fraud.
If misstatement is immaterial
Document all misstatement which is treated as material.
Obtain Written Representation that uncorrected misstatement are immaterial .
Communicate them to appropriate level of management and request them to correct it.
If management:
Refuses to correct Corrects them
Consider their reasons and Perform additional procedures to
effect on audit report. determine whether some other
misstatement remain.
Questions from SA 450
1. In audit plan for T Ltd, as the audit partner you want to highlight the sources of misstatements,
arising from other than fraud, to your audit team and caution them. Identify the sources of
misstatements.
inaccuracy in gathering or processing data from which the financial statements are prepared.
incorrect accounting estimate arising from overlooking, or clear misinterpretation of facts.
omission of an amount or disclosure.
Judgments of management concerning accounting estimates that the auditor considers
unreasonable.
application of accounting policies that the auditor considers inappropriate.
2. While auditing accounts of a public limited company for the year ended 31st March 2014, an auditor
found an error in the valuation of inventory, which affects the F/S materially- Comment as per
standards on auditing.(AS 2, SA 320, SA 450, SA 260, SA 240, consider implication on true and fair
view).
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STANDARDS ON AUDITING CA SANIDHYA SARAF (WIRC)
SA 500
AUDIT EVIDENCE
Information used by the auditor in arriving at the conclusions on which auditor's opinion is based.
The auditor should obtain sufficient and appropriate audit evidence as per SA 200 read with SA 500.
Audit procedures prescribed under SA 500 read with SA 315 and SA 330-Risk Assessment procedures, Test
of controls(compliance procedures) and Substantive procedures.
Substantive procedures further compromises of Test of details and substantive analytical procedures.
Meanings
Test of controls-Designed to check whether internal control system is designed and operating
effectively throughout the period(Auditor evaluates operating effectiveness of internal controls at
assertion level).The auditor performs such audit procedures so that he can obtain audit evidence
regarding adequacy of internal controls in an enterprise. After performing test of controls , if auditor
finds that controls are inadequate or absent he shall communicate the same to TCWG as per SA-265.
Substantive Procedures-These are designed to detect material misstatements at the assertion level.
compromise test of details and substantive analytical procedures.(SA-520).Substantive tests are
conducted in areas which are not subject to internal controls and are hence judgemental in nature.
External comfirmation-sa-505
Recalculation-checking mathematical accuracy of documents or records.eg-calculating
depreciation.
Reperformance-Auditor independently executes the procedures again or controls again.eg-
recounting of inventory.
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STANDARDS ON AUDITING CA SANIDHYA SARAF (WIRC)
When auditor wants to use any information as audit evidence prepared by managements expert,
Auditor is first required to evaluate competence, capability and objectivity of expert before using such
information. Also he should obtain understanding and evaluate appropriateness of experts work.
The auditor may also consider the following while evaluating the appropriateness of the managements
expert 's work as audit evidence for the relevant assertion:
The relevance and reasonableness of the expert's finding or conclusions, their consistency
with other audit evidence, and whether they have been appropriately reflected in the
financial statements.
If that expert's work involves use of significant assumptions and methods, the relevance
and reasonableness of those assumptions and methods;
If that expert's work involves significant use of source data , the relevance, completeness,
and accuracy of that source
Point to Remember:
The auditor/ auditor's will be held responsible for grossly negligence if faulty expert's work is used
without examining the adequacy of expert's work.
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STANDARDS ON AUDITING CA SANIDHYA SARAF (WIRC)
SA 501
AUDIT EVIDENCE-SPECIFIC CONSIDERATION FOR SPECIFIC ITEMS
1 .Comment on the following: You are the auditor of Easy Communications Ltd. for the year 2013–
14. The inventory as at the end of the year i.e. 31.3.14 was Rs. 2.25 crores. Due to unavoidable
circumstances, you could not be present at the time of annual physical verification. Under the
above circumstances how would you ensure that the physical verification conducted by the
management was in order?(Refer situation 2 in inventory)
2. LMN Ltd. supplies navy uniforms across the country. The company has 4 warehouses at
different locations throughout the India and 5 warehouses at the borders. The major stocks
are generally supplied from the borders. LMN Ltd. appointed M/s OPQ & Co. to conduct its
audit for the financial year 2015-16. Mr. O, partner of M/s OPQ & Co., attended all the
physical inventory counting conducted throughout the India but could not attend the same
at borders due to some unavoidable reason. You are required to advise M/s OPQ & Co.,
(i) How sufficient appropriate audit evidence regarding the existence and condition of
inventory may be obtained? (By conducting test count, observing management
procedure etc)
(ii) How an auditor is supposed to deal when attendance at physical inventory counting
is impracticable? (Refer situation 1 in inventory)
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STANDARDS ON AUDITING CA SANIDHYA SARAF (WIRC)
SA 505
EXTERNAL CONFIRMATIONS
This is one of the methods of obtaining audit evidence as enumerated under sa-500.
External confirmation is the process of obtaining and evaluating audit evidence through a direct
communication from a third party w.r.t. certain assertions made by management in financial
statements.
Process of external confirmation, ordinarily, consists of the following:
Selecting the items for which confirmations are needed.
Designing form of confirmation request.
Communicating confirmation request to appropriate third party.
obtaining response from third party.
evaluating information.
Give examples of areas in which external confirmation is required.
Bank Balance.
Accounts receivable balance.
Stocks held by third parties.
Accounts payable balances.
Loans from lenders.
What are the various factors to be considered while designing confirmation request?
As per SA 505, “External Confirmation”, factors to be considered when designing
confirmation requests include:
(i) The assertions being addressed.
(ii) Specific identified risks of material misstatement, including fraud risks.
(iii) The layout and presentation of the confirmation request.
(iv) Prior experience on the audit or similar engagements.
(v) The method of communication (for example, in paper form, or by electronic
or other medium).
(vi) Management’s authorisation or encouragement to the confirming parties to
respond to the auditor. Confirming parties may only be willing to respond to
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STANDARDS ON AUDITING CA SANIDHYA SARAF (WIRC)
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STANDARDS ON AUDITING CA SANIDHYA SARAF (WIRC)
SA 510
INITIAL AUDIT ENGAGEMENTS-OPENING BALANCES
If previous year financial year were audited by another auditor CA in practise ,then in the current year, the
new auditor is not required to reaudit the previous financial statement. But obtain sufficient and
appropriate audit evidence regarding MP plus read most recent financial statements.
If previous year financial year were unaudited then in the current year, the new auditor is not required to
reaudit the previous financial statement .However ,he need to disclose this fact in his audit report in the
other matters para plus read most recent financial statements.
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STANDARDS ON AUDITING CA SANIDHYA SARAF (WIRC)
SA 520
ANALYTICAL PROCEDURES
What are analytical procedures. For what purposes they can be used?
“Analytical procedures” means evaluation of financial information through analysis
of plausible relationships among financial and non- financial data.
It refers to comparisons and ratio analysis(i.e analysis of significant ratios and
trends.
Comparison with-Prior period , budgets, similar industry information.
Purposes of analytical procedures
a)to assist auditor in planning NTE of other audit procedures.
b)Investigating unusual fluctuations.
c)analysis of significant ratios and trends.
d)to be used as substantive procedures when there use can be more effective than
test of details in reducing detection risk.
Auditor's objective w.r.t SA 520
To obtain relevant and reliable audit evidence when using substantive audit
procedure.
To design and perform SAP near the end of audit.
If there is unusual fluctuations, then make enquiry of the management and
perform extended procedures(further investigation, obtain more explanations,
more evidence.
Reliance on Analytical procedures.
Depending upon materiality of items involved-if more materiality level, perform
analytical procedure plus other substantive procedures ,if less material ,may rely
solely on analytical procedures.
Depending upon other inherent risk and control risk-more risk ,more reliance on
comprehensive test of details and not solely on analytical procedures.
Accuracy of results of analytical procedures.
Factors to be considered while performing Analytical Procedures:
Suitability-Determine the suitability of particular substantive Analytical Review
Procedure for a given assertion. For example-in case of predictable relationships,
analytical procedures is more suitable.
Reliability- Reliability of data; source of information ,relevance of information,
comparability of information.(Nov 2015)
Expectations-To develop an expectation of recorded amount and evaluate whether
expectation is sufficiently precise to identify misstatement.
Difference-Difference of recorded amounts from expected values i.e. acceptable
without further investigation.
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STANDARDS ON AUDITING CA SANIDHYA SARAF (WIRC)
Questions on SA 520
1. What are the considerations to be kept in mind while performing analytical procedures?
2.In the audit of Hotel Great Hay Limited its Auditor wants to use the the analytical procedure as
substantive procedure in respect of room rental income as well as payroll cost, guide him as to how
it can be done.
Sol: In case of Payroll Cost- Where an entity has a known number of employees at fixed rates of pay
throughout the period , it may be possible for the auditor to use this data to estimate the total payroll
costs for the period with a high degree of accuracy, there by providing audit evidence for a significant
item in the financial statements and reducing the need to perform test of details on the payroll.
In case of Room Rental Income of Hotel- Different types of AP provides different level of assurance.
AP involves the prediction of total rental income in case of hotel taking the room tariff rates, the
number of rooms and vacancy rates into consideration, can provide persuasive evidence and may
eliminate the need of further verification by means of Test of Details, provided the elements are
appropriately verified.
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STANDARDS ON AUDITING CA SANIDHYA SARAF (WIRC)
SA 530
AUDIT SAMPLING
MEANING
Audit sampling refers to application of Audit Procedures to less than 100% of the financial statements.
What is sampling risk? What are the types of sampling risk?/Risk factors to be kept in mind while applying
sampling technique(May 2010)
Sampling risk-Risk that auditor's conclusion based on a sample is different from conclusion if entire
population were subjected to same audit procedure .In other words,
Sampling Risk=Opinion based upon selected sample size-Opinion based on cent-percent financial
statement/larger sample size.
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STANDARDS ON AUDITING CA SANIDHYA SARAF (WIRC)
Perform audit procedures on each item selected. If the auditor is unable to do so, treat
item as a deviation or misstatement in case of test of details. Investigate the nature and
cause of deviation.
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STANDARDS ON AUDITING CA SANIDHYA SARAF (WIRC)
SA 540
AUDITING ACCOUNTING ESTIMATES , INCLUDING FAIR VALUE
ACCOUNTING ESTIMATES AND RELATED DISCLOSURES
Fair Value Accounting Estimates-Estimates where current transaction cost basis is used or Based
on condition prevailing in market. Examples -ESOP, Options, Futures, Financial Instruments.
Other Accounting Estimates-Every estimate other than Fair Value Accounting Estimate. Example-
Provision for Doubtful Debts, Warranty Obligations, Depreciation Method or Estimating Asset
useful life, Expected life of Intangible Assets, Outcome of Long term Contracts, Provision for
Contingent Liability.
Duties of Auditor:
Auditor should obtain sufficient and appropriate accounting estimate that all estimates by management
used in preparation and presentation of financial statements are
Reasonable
Disclosed properly as per FRF.
PTR: Inappropriate accounting estimate is a misstatement . Hence ,requirements of SA 450 will also apply.
Procedures to be followed:
Risk Assessment Procedures Further Audit Procedures
Understand the nature of entity business and the Auditor may apply his own audit procedures
significance of use of estimate. to get his point estimate and should
compare with Management Point Estimate.
How Management identifies those transactions, Evaluate whether management has used an
events and conditions that may give rise to the need management expert under SA 500. The
for accounting estimates to be disclosed .Make auditor may also use an expert under SA
enquiry of management for the same. 620.
Evaluate process used by the management in Consider consistency of estimation
making estimates(Assumptions used) procedures applied by management. If
changed , whether change is justified.
Auditor should confirm from management, how Evaluate reasonableness of accounting
they ensure reliability of data used in estimates and estimates, disclosures, obtain written
methods and methods and assumptions used. representation.
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STANDARDS ON AUDITING CA SANIDHYA SARAF (WIRC)
Questions on SA 540
1. While auditing Z Ltd, you observe certain material financial statement assertions have been
based on estimates made by the management. As the auditor how will you minimize the risk of
material misstatements.(May 2011/RTP Nov 2012)
Duties of an auditor & Procedures to be followed.
2. With reference to the Standards of Auditing, state the examples of accounting estimates that
may have a high estimation uncertainity.
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STANDARDS ON AUDITING CA SANIDHYA SARAF (WIRC)
SA 550
RELATED PARTIES
Elaborate how the Statutory Auditor can verify the existence of related parties for the purpose of
reporting under Accounting Standard 18.
As per SA 550 “Related Parties”, during the audit, the auditor shall remain alert, when inspecting records
or documents, for arrangements or other information that may indicate the existence of related party
relationships or transactions that management has not previously identified or disclosed to the auditor.
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STANDARDS ON AUDITING CA SANIDHYA SARAF (WIRC)
Examples-
(iv) Statements of conflicts of interest from management and those charged with governance.
(v) Records of the entity’s investments and those of its pension plans.
(vi) Contracts and agreements with key management or those charged with governance. (vii) Significant
contracts and agreements not in the entity’s ordinary course of business.
(viii) Specific invoices and correspondence from the entity’s professional advisors.
(xii)Documents associated with the entity’s filings with a securities regulator (e.g., prospectuses)
(xiv) Such other records or documents as the auditor considers necessary in the circumstances of the
entity.(MOA, AOA, Section 189 register, Annual Returns etc.
As per SA 550 on, “Related Parties”, the auditor should review information provided by the
management of the entity identifying the names of all known related parties.
However, it is the management, which is primarily responsible for identification of related parties.
The duties of an auditor with regard to reporting of related party transaction as required by
Accounting Standard 18 “Related Party Disclosures” is given in SA 550.
To ensure compliance of Financial Reporting Framework and Co's Act as far as related to
related parties.
To obtain understanding of entity's Related Party’s Transaction.
Perform audit procedures to identify , assess & respond to Risk of material misstatement.
To evaluate fraud risk factors in relation to related parties.
To have an attitude of professional skepticism.
Obtain Written Representation regarding all RPT's.
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STANDARDS ON AUDITING CA SANIDHYA SARAF (WIRC)
Communicate to Those Charged With Governance all significant matters arising during the
audit in relation to RPT's.
1. A Ltd .holds the ownership of 10% of voting power and control over the composition of BOD of
B Ltd. While planning the statuary audit of A Ltd. what factors will be considered by you for audit
of financial statements.(May 2015 exam)
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STANDARDS ON AUDITING CA SANIDHYA SARAF (WIRC)
AS 18
Section 188 if any transaction between them.
Section 189.
2. JY & Co. is appointed as auditor of Breeze Ltd. JY & Co. seeks your guidance for reviewing the
records and documentation of the company regarding 'related party transactions in the normal
course of business'. Describe the steps to be followed.
Hint: Maintain alertness, Apply professional skepticism when reviewing records/documents.
3. Elaborate how the statuary auditor can verify the existence of related parties for the purpose
of reporting under AS 18.
OR
In the course of audit of Q Ltd., its statuary auditor wants to be sure of adequacy of RPT's. Kindly
guide the auditor in identifying the possible sources of RP information.
4. In the course of your audit you have come across a related party transaction which prima facie
appears to be biased. How would you deal with it?(SA Background plus case no 2)
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STANDARDS ON AUDITING CA SANIDHYA SARAF (WIRC)
SA 560
SUBSEQUENT EVENTS
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STANDARDS ON AUDITING CA SANIDHYA SARAF (WIRC)
Finally, When the auditor identifies events that require adjustment of, or disclosure in, the financial
statements, the auditor shall determine whether each such event is appropriately reflected in those
financial statements.
QUESTIONS:
1. As a statutory auditor of a company, comment on the following:
(a) A fire broke out on15th May, 2013, in which material worth ` 50 lakhs which was lying in inventory
since 1st March, 2013 was totally destroyed. The financial statements of the company have not been
adopted till the date of fire. The management of the company argues that since the loss occurred in the
year, 2013-14, no provision for the loss needs to be made in the financial statements for 2012-13.
This case requires attention to SA 560 “Subsequent Events” and AS 4 “Contingencies and Events
occurring after the Balance Sheet Date”.
As per AS 4 only those events the contingency of which existed at the Balance Sheet Date can be
adjusted. However the exceptions being
a)When the Going Concern is Effected
b)Proposed dividend.
As per SA 560 “Subsequent Events”, the auditor should assure that all events occurring
subsequent to the date of the financial statements and for which the applicable financial
reporting framework requires adjustment or disclosure have been adjusted or disclosed.
The event took place after the close of the accounting year and does not relate to conditions
existing at the balance sheet date. Thus, it will have no effect on items appearing at the balance
sheet date because as per AS 4.
However, the auditor has to ensure that this loss will not materially affect the substratum of the
enterprises as per its size, nature and complexity of operations.(Because if it effects materially
the going concern, adjustment is required.
Thus, assuming that going concern concept is not violated, the company has correctly accounted
by not providing provision. However, the auditor is required to ensure the proper disclosure of
abovementioned event.
(iii) A Co. Ltd. has not included in the Balance Sheet as on 31-03-2014 a sum of ` 1.50 crores
being amount in the arrears of salaries and wages payable to the staff for the last 2 years
as a result of successful negotiations which were going on during the last 18 months and
concluded on 30-04-2014. The auditor wants to sign the said Balance Sheet and give the
audit report on 31-05- 2014. The auditor came to know the result of the negotiations on 15-
05-2014. Comment
Subsequent Events: This case requires attention to SA 560 “Subsequent Events”, AS 4
“Contingencies and Events occurring after the Balance Sheet Date” and AS 29 "Provisions,
Contingent liabilities and Contingent Assets".
Condition existing on balance sheet date. Hence adjusting event as per As 4.
However its a contingent liability. Hence provision to be made as per Para 68 of AS 29.
Perform procedures prescribed under SA 560.
SA 570
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STANDARDS ON AUDITING CA SANIDHYA SARAF (WIRC)
GOING CONCERN
Financial Indications
Net liability or net current liability position.
Fixed-term borrowings approaching maturity without realistic prospects of renewal or
repayment; or excessive reliance on short-term borrowings to finance long-term assets.
Indications of withdrawal of financial support by trade payables.
Negative operating cash flows indicated by historical or prospective financial statements.
Adverse key financial ratios.
Substantial operating losses or significant deterioration in the value of assets used to
generate cash flows.
Operating Indications
Management intentions to liquidate the entity or to cease operations.
Loss of key management without replacement.
Loss of a major market, key customer(s), franchise, license, or principal supplier(s).
Labour difficulties.
Shortages of important supplies.
Emergence of a highly successful competitor.
Other Indicators
Change in government policies.
Change in laws.
Consider events, conditions that may cast significant doubt on going concern. Also
determine whether Management has performed assessment of entity available to
consider as Going Concern.
Maintain Professional Skepticism.
Obtain Sufficient And Appropriate Audit Evidence-Review latest interim financial
statement, Subsequent Events after Balance Sheet Date, Review BOD minutes,
Budgeted Cash flow statement.
Communicate to TCWG events/conditions that may cast significant doubt on entity's
ability on Going Concern.
Mitigatory Factors if present, auditor may include the matter in Emphasis Of
Matter’s Para.
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STANDARDS ON AUDITING CA SANIDHYA SARAF (WIRC)
Material uncertainty related to events or conditions that may cast significant doubt on the entity’s
ability to continue as a going concern is itself a key audit matter but to be reported as per SA 570.
Questions on SA 570
1.ABC Company files a law suit against Unlucky Company for ` 5 crores. The Attorney of Unlucky
Company feels that the suit is without merit, so Unlucky Company merely discloses the existence
of the law suit in the notes accompanying its financial statements. As an auditor of Unlucky
Company, how will you deal with the situation?
AS 29-Contingent Liability as per Para 68 since possible obligation not in control of
enterprise.
As per SA 570 “Going Concern”, there are certain examples of events or conditions that,
individually or collectively, may cast significant doubt about the going concern assumption.
Pending legal or regulatory proceedings against the entity that may, if successful, result in
claims that the entity is unlikely to be able to satisfy is one of the example of such event.
If the auditor finds the uncertainty, he may request the management to adjust the sum of 5
crore by making provision for expenses as per AS 29. If the management does not accept the
request the auditor should qualify the audit report.
Mention in Audit report since pending litigation as per Rule 11 of Company(Audit and
Auditor) rules.
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STANDARDS ON AUDITING CA SANIDHYA SARAF (WIRC)
2. R & Co. is the statutory auditor of S Ltd. For the financial year ended on 31st March 2014, S Ltd
had disclosed in the notes (Note No. X) "The state pollution control board had ordered the closure
of the company's only manufacturing plant on the ground that it is environmentally damaging,
which the company had challenged in a law suit. Pending the outcome of the law suit the financial
statements are prepared on a going concern basis". Further the financial statements prepared by
the management of S Ltd include financial statements of certain branches which are audited by
other auditors. What are the reporting responsibilities of R & Co.?
SA 200, Section 143(9)-Compliance with all SAs.
Para 10 of AS 1-Going concern is a fundamental accounting assumption.
SA 570 reporting responsibility .
SA 600 since audit of branch. Section 143(8)
SA 620 (May use work of auditor's expert.
3.M/s TK Projects Ltd , a manufacturing company in the Steel industry was allegedly involved in
some irregularity relating to allotment of coal blocks for which a complaint was lodged against the
company by the government. The financial institution stopped additional working capital finance
which caused a financial crisis resulting in stoppage of production. The company incurred a
massive loss during the year 2014-2015 . There were delays in salary and other payments. Certain
KMP including GM finance and certain other employees left the Company. The company has no
sound action plan to mitigate these situations. Guide the statuary auditor on how he should deal
with this situation.
Give adverse opinion as there are several indicators effecting going concern and there are
no mitigatory factors present
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STANDARDS ON AUDITING CA SANIDHYA SARAF (WIRC)
SA 580
WRITTEN REPRESENTATION
If Written Representation is inconsistent with other audit evidences obtained ,the auditor shall
perform additional audit procedures to resolve the matter. If the matter remains unsolved ,
reconsider the reliability of WR. Example. Management provides Written Representation, that
there are no frauds in organisation. Other evidences indicate existence of fraud.
Its professional judgement of auditor to obtain WR. Some standards where WR to be obtained
mandatorily in writing.
(SA -250,SA-501,SA-505,SA-540,SA-550,SA-560,SA-570).
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STANDARDS ON AUDITING CA SANIDHYA SARAF (WIRC)
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STANDARDS ON AUDITING CA SANIDHYA SARAF (WIRC)
SA 600
USING THE WORK OF ANOTHER AUDITOR
Another auditor is the person other than principal auditor of company. example. branch auditor, auditor
of subsidiary.
The principal auditor should properly co-ordinate with another auditor i.e there should be a sufficient
liaison between the principal auditor and other auditor. For this purpose, the principal auditor may find
it necessary to issue written communication to the other auditor.
The other auditor should coordinate in the following manner:
Adhering to time table.
Bringing to the attention of principal auditor any significant finding.
Compliance with relevant statuary requirements.
Respond to detailed questionare.
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STANDARDS ON AUDITING CA SANIDHYA SARAF (WIRC)
There should be statement of division of responsibility showing to what extend to which financial
statement of component audited by another auditor has been included in financial statement of entity.
As per SA-705,Principal auditor should modify his audit report if he can't use the work of another auditor
or perform sufficient additional procedures.
2. "There should be sufficient liaison between a principal auditor and other auditor's."Discuss the
above statement and state in this context the reporting considerations, when the auditor uses the
work performed by the other auditor's.
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STANDARDS ON AUDITING CA SANIDHYA SARAF (WIRC)
SA 610(Revised)
USING THE WORK OF INTERNAL AUDITOR
Scope :
SA 610 (Revised) does not apply if the entity does not have an internal audit function. Activities similar to those
performed by an internal audit function may be conducted by functions with other titles within an entity. Some or all of
the activities of an internal audit function may also be outsourced to a third-party service provider. Neither the title of
the function, nor whether it is performed by the entity or a third-party service provider, are sole determinants of
whether or not the external auditor can use the work of the function. Rather, it is the nature of the activities; the extent
to which the internal audit function’s organizational status and relevant policies and procedures support the objectivity
of the internal auditors; competence; and systematic and disciplined approach of the function that are relevant.
References in this SA to the work of the internal audit function include relevant activities of other functions or third-
party providers that have these characteristics.
Internal audit function – A function of an entity that performs assurance and consulting activities
designed to evaluate and improve the effectiveness of the entity’s governance, risk management and
internal control processes;
Direct assistance – The use of internal auditors to perform audit procedures under the direction,
supervision and review of the external auditor. The external auditor may be prohibited by law or
regulation from obtaining direct assistance from internal auditors;
Relationship between SA 315 and SA 610 (Revised) – Many entities establish internal audit functions
as part of their internal control and governance structures. Depending upon the factors discussed in point
(e) below, the external auditor should also apply principles of SA 315 and SA 330 so that he would be able
to use the work of the internal audit function in a constructive and complementary manner;
Factors that external auditor will consider before using the work of internal auditor:
(Amended)*
Extend to which internal auditor function’s organisational status & relevant policies
and procedures support objectivity of internal auditor.
Level of competence of internal audit function.
Whether the Internal Audit function applies a systematic & disciplined approach
including quality control.
Further, the external auditor shall not use the work of the internal audit function if the
external auditor determines that:
The function’s organizational status and relevant policies and procedures do not
adequately support the objectivity of internal auditors;
The function lacks sufficient competence; or
The function does not apply a systematic and disciplined approach, including
quality control.
Further the auditor will determine in what areas & to what extend work of
internal auditor can be used (Depending on his judgement & assessed risk of
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STANDARDS ON AUDITING CA SANIDHYA SARAF (WIRC)
Whether work was performed by internal auditors having adequate technical training and
proficiency;
Whether the work was properly supervised, reviewed and documented;
Whether the internal auditor has obtained adequate audit evidence to draw reasonable
conclusions;
Whether the conclusions reached are appropriate in the circumstances and the reports
prepared by the internal auditors are consistent with the results of the work performed;
Whether the exceptions or unusual matters , if any, disclosed by the internal auditors are
properly resolved.
The statuary auditor has to determine whether direct assistance can be used i.e. to use work of the
internal auditor under his direction, supervision and review. It is allowed when
It is not prohibition by law or regulation
There should be no significant threats to objectivity of Internal Auditor
Internal auditor should be competent and capable
Further, he will determine the Nature, Time and Extent on which direct assistance can be taken.
Point to be noted- These SA does not deal with instances when individual internal auditors provide
direct assistance to the external auditor in carrying out audit procedures.
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SA 620
USING THE WORK OF AUDITOR’S EXPERT
Auditor's Expert-An individual or organisation possessing expertise in a field other than accounting or auditing,
whose work in that field is used by auditor to assist the auditor in obtaining SAAE. Auditors expert may be
internal auditors expert or external auditors expert.
The following factors may suggest the need for more a detailed agreement than would otherwise be the
case, or for the agreement to be set out in writing:
The auditor’s expert will have access to sensitive or confidential entity information.
The respective roles or responsibilities of the auditor and the auditor’s expert are different from
those normally expected.
Multi-jurisdictional legal or regulatory requirements apply.
The matter to which the auditor’s expert’s work relates is highly complex.
The auditor has not previously used work performed by that expert.
The greater the extent of the auditor’s expert’s work, and its significance in the context of the
audit.
OR
While doing audit, RAM, the auditor requires reports from experts for the purpose of Audit
Evidence. What types of reports/opinions he can obtain and to what extent he can rely upon the
same?
Valuation of complex financial instruments ,land and building, plant and machinery,
jewellery, works of art, antiques, intangible assets, impaired assets and liabilities.
Actuarial calculation of liabilities associated with insurance contracts or employee benifit
plans. 62
Estimation of oil and gas reserves.
STANDARDS ON AUDITING CA SANIDHYA SARAF (WIRC)
SA 700
FORMING AN OPINION AND REPORTING ON FINANCIAL STATEMENTS
SA-700 mainly deals with unmodified opinion and form and content of Independent Auditor's Report.
Unmodified opinion means that the entire financial statement has been prepared in accordance with
applicable FRF.
SA 700 is in context of general purpose financial statements only. F/S under special purpose framework
are dealt by SA 800 and 805.Also it does not deals with audit of particular financial statement out of
complete set or any particular component of financial statement.
SA 700 requires that auditor shall form an opinion on whether the Financial Statements are
prepared in all material respects as per applicable FRF. To form this opinion , auditor needs to
conclude as to whether he has obtained reasonable assurance the financial statements as a
whole are free from material misstatements, whether due to fraud or error. As per SA 700, to
conclude that reasonable assurance has been obtained , auditor shall consider
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Going Concern Where applicable, the auditor shall report in accordance with SA
570.
Key Audit Matters For audits of complete sets of general purpose financial
statements of listed entities, the auditor shall communicate key
audit matters in the auditor’s report in accordance with SA 701.
When the auditor is otherwise required by law or regulation or
decides to communicate key audit matters in the auditor’s report,
the auditor shall do so in accordance with SA 701.
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SA 701
COMMUNICATING KEY MATTERS IN THE INDEPENDENT AUDTOR’S
REPORT
Key audit matters are those matters that, in the auditor’s professional judgment, were of most
significance in the audit of financial statements of the current period. Key audit matters are selected
from matters communicated with those charged with governance.
The purpose of communicating key audit matters is to enhance the communicative value of the
auditor’s report by providing greater transparency about the audit that was performed.
Communicating key audit matters is not a substitute for modified opinion or substitute for reporting
in accordance with SA 570 .
The auditor should take into account the following factors while determining key audit matters
The auditor shall not communicate a matter in the Key Audit Matters section of the auditor’s report
when the auditor would be required to modify the opinion in accordance with SA 705(Revised) as a
result of the matter.
Examples of Key audit matters but not to be reported as key audit matters-A matter giving rise to
modified opinion in accordance with SA 705 (Revised), or a material uncertainty related to events or
conditions that may cast significant doubt on the entity’s ability to continue as a going concern in
accordance with SA 570.
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STANDARDS ON AUDITING CA SANIDHYA SARAF (WIRC)
SA 705
MODIFICATIONS TO THE OPINION IN THE INDEPENDENT AUDITOR’S
REPORT
Nature of matter giving rise to Auditor's Judgement about the pervasiveness of the Effects
modification or Possible Effects on the Financial Statements
Material but not Pervasive Material and Pervasive
Financial statements are materially Qualified opinion Adverse opinion
misstated
Inability to obtain sufficient and Qualified opinion Disclaimer of opinion
appropriate audit evidence
Note- Most of the time auditor is not able to obtain SAAE due to :
"In our opinion and to the best of information and explanation given to us, except for the matter described
in Basis of Qualified Opinion paragraph, the financial statement reflect a true and fair view.
"Because of the significance of matters described in the Basis for Disclaimer of Opinion paragraph, we have
not been able to obtain sufficient appropriate audit evidence to provide a basis for an audit opinion.
Accordingly, we do not express an opinion on financial statements.
OR
In our opinion, because of significance of matter discusses in the Basis for Adverse Opinion paragraph, the
consolidated F/S do not give a true and fair view in conformity with the accounting principles generally
accepted in India.
Note- Before drafting the qualified/disclaimer para , the auditor must prepare a Basis for
Qualified/Disclaimer opinion drawing the intention of users of F/S towards the reason of giving Q/D.
Unless required by law or regulation, when the auditor disclaims an opinion on the financial statements,
the auditor’s report shall not include a Key Audit Matters section in accordance with SA 701.
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SA 706
EMPHASIS OF MATTER PARAGRAPHS AND OTHER PARAGRAPHS IN THE
INDEPENDENT AUDITOR’S REPORT
Emphasis of Matter paragraph:If the auditor considers it necessary to draw user’s attention to matter
presented or disclosed in the financial statements that in the auditor’s judgment, is of such matter that it is
fundamental to user’s understanding of the F/S, the auditor shall include an EOM para provided that
Auditor is not required to modify the opinion and the matter has not been determined as a key audit
matter.
Examples of emphasis of matter which may have an adverse effect on the functioning of the company :
Factors leading to material uncertainty that may cast a significant doubt the company’s
ability to continue as going concern;
Material uncertainty regarding the outcome of a litigation;
Examples of emphasis of matter which may not have an adverse effect on the functioning of the company
Excess managerial remuneration paid;
Accrual of a contractually receivable claim based on management estimate where the
ultimate realisation could be different from the amount accrued;
On frauds that have been dealt with in the financial statements of the company and would
not have any continuing effect on the financial statements.
Other matters Para- If the auditor considers it necessary to draw user’s attention to matter other than
those presented or disclosed in the financial statements that in the auditor’s judgment, is of such matter
that it is fundamental to user’s understanding of the F/S, the auditor shall include an OM para provided:
this is not prohibited by law and the matter has not been determined as a key audit matter
If the auditor expects to include an EOM or an Other Matter paragraph in the auditor's report, the auditor
shall communicate with TCWG regarding this expectation and the proposed wording of this paragraph.
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SA 710
COMPARATIVE INFORMATION-CORRESPONDING FIGURES AND
COMPARATIVE FINANCIAL STATEMENTS
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If prior period financial statement has been audited by the auditor himself, apply SA-560"Subsequent
Events also".
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SA 720
THE AUDITOR’S RESPONSIBILITY IN RELATION TO OTHER
INFORMATION IN DOCUMENTS CONTAINING AUDITED FINANCIAL
STATEMENTS
Material misstatement of
facts(unrelated with financial
statement)
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STANDARDS ON AUDITING CA SANIDHYA SARAF (WIRC)
SA 800
SPECIAL CONSIDERATIONS- AUDIT OF F.S. PREPARED IN ACCORDANCE
WITH SPECIAL PURPOSE FRAMEWORKS
SA 800 deals with audit condiderations for a particular purpose . example-loan agreement/projectreport.
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STANDARDS ON AUDITING CA SANIDHYA SARAF (WIRC)
SA 805
SPECIFIC CONSIDERATIONS-AUDIT OF SINGLE PURPOSE FINANCIAL STATEMENT AND
SPECIFIC ELEMENTS, ACCOUNTS OR ITEMS OF FINANCIAL STATEMENT
Single financial element means specific element of a financial statement .example cash flow, profit and loss
account.
If the auditor is unable to comply with the standards of auditing relevant for his audit purpose, he shall not
accept engagement.
The auditor should Include in Emphasis of Matters Para alerting users that it is the audit of single purpose
financial statement/specific item and not the audit of entire financial statements.
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STANDARDS ON AUDITING CA SANIDHYA SARAF (WIRC)
SA- 810
ENGAGEMENT TO REPORT ON SUMMARY FINANCIAL STATEMENT
Summary financial statement-It is the historical financial information derived from the financial statement
but contains less details than financial statement.
Ensure that available financial statements are available to intended users without undue difficulty.
This assignment may be accepted only by the auditor who conducted a audit of Annual financial
statement.
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3.While compiling the financial statements of a concern, you observed that the input information
supplied by the concern is incomplete , incorrect and few of the Accounting Standards have not
been followed. Describe, in brief , the procedure you will follow in the above.
Make enquiries of Mgt, Assess Internal Control, Verify matters or explanations.
Obtain additional information , may be by Written Representation.
If Mgt refuses to give additional information, withdraw from engagement , stating
entity reasons for withdrawal.
If one or more accounting standards are not complied with, same should be
brought to notice of the management and if same is not rectified, accountant
should include the same in notes to accounts and the compilation report to the
management.
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STANDARDS ON AUDITING CA SANIDHYA SARAF (WIRC)
SAE 3400
THE EXAMINATION OF PROSPECTIVE FINANCIAL INFORMATION
Factors to be considered before accepting the audit engagement and what audit evidence will be
obtained for reporting on projected financial statements?
Acceptance of Engagement: As per SAE 3400, “The Examination of Prospective Financial Information”,
before accepting an engagement to examine prospective financial information, the auditor would consider,
amongst other things:
the intended use of the information;
whether the information will be for general or limited distribution;
the nature of the assumptions, that is, whether they are best-estimates or hypothetical
assumptions;
the elements to be included in the information; and
the period covered by the information.
Further, the auditor should not accept, or should withdraw from, an engagement when the assumptions
are clearly unrealistic or when the auditor believes that the prospective financial information will be
inappropriate for its intended use. In accordance with SA 210, “Terms of Audit Engagement”, it is
necessary that the auditor and the client should agree on the terms of the engagement.
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STANDARDS ON AUDITING CA SANIDHYA SARAF (WIRC)
In case the auditor expresses a modified opinion or withdraws from the engagement, the reasons forming
the basis of such decision.
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STANDARDS ON AUDITING CA SANIDHYA SARAF (WIRC)
SAE 3420
ASSURANCE ENGAGEMENTS TO REPORT ON THE COMPILATION OF
PRO FORMA FINANCIAL INF0RMATION INCLUDED IN A PROSPECTUS
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STANDARDS ON AUDITING CA SANIDHYA SARAF (WIRC)
6. Unadjusted financial information – Financial information of the entity to which pro forma
adjustments are applied by the responsible party.
Nature of the Practitioner’s Responsibility: In an engagement performed under this SAE, the
practitioner has no responsibility to compile the pro forma financial information for the entity; such
responsibility rests with the responsible party. The practitioner’s sole responsibility is to report on
whether the pro forma financial information has been compiled, in all material respects, by the
responsible party on the basis of the applicable criteria.
Assessment of unadjusted financial information and pro forma financial information: The
practioner should assess the appropriateness of these information on the basis of following factors:
(a) Source of such information - the extent to which it can be relied upon;
(b) Whether such financial information is factually supportable;
(c) Consistency with the entity’s applicable financial reporting framework and its accounting
policies under that framework;
(d) Determine whether the calculations within the pro forma financial information are arithmetically
accurate.
Purpose of Pro Forma Financial Information Included in a Prospectus: The purpose of pro forma
financial information included in a prospectus is solely to illustrate the impact of a significant event or
transaction on unadjusted financial information of the entity as if the event had occurred or the
transaction had been undertaken at an earlier date selected for purposes of the illustration. This is
achieved by applying pro forma adjustments to the unadjusted financial information. Pro forma financial
information does not represent the entity’s actual financial position, financial performance, or cash flows.
For example, the entity may acquire a number of businesses prior to an initial public offering. In such
circumstances, the responsible party may choose to present a pro forma net asset statement to
illustrate the impact of the acquisitions on the entity’s financial position and key ratios such as debt to
equity as if the acquired businesses had been combined with the entity at an earlier date. The
responsible party may also choose to present a pro forma income statement to illustrate what the
results of operations might have been for the period ended on that date. In such cases, the nature of the
pro forma financial information may be described by titles such as “Pro Forma Balance Sheet as at
March 31, 20X1” and “Pro Forma Statement of profit and loss for the Year Ended March 31, 20X1.”
Compilation of Pro Forma Financial Information: The compilation of pro forma financial information
involves the responsible party gathering, classifying, summarizing and presenting financial information
that illustrates the impact of a significant event or transaction on unadjusted financial information of the
entity as if the event had occurred or the transaction had been undertaken at the selected date. Steps
involved in this process include:
(a) Identifying the source of the unadjusted financial information to be used in compiling the pro
forma financial information, and extracting the unadjusted financial information from that source;
(b) Making pro forma adjustments to the unadjusted financial information for the purpose for which
the pro forma financial information is presented; and
(c) Presenting the resulting pro forma financial information with accompanying disclosures
Nature of Reasonable Assurance Engagement: A reasonable assurance engagement to report on
the compilation of pro forma financial information involves performing the procedures set out in this
SAE to assess whether the “applicable criteria” used by the responsible party in the compilation of the
pro forma financial information provide a reasonable basis for presenting the significant effects directly
attributable to the event or transaction, and to obtain sufficient appropriate evidence about whether:
(a) The related pro forma adjustments give appropriate effect to those criteria; and
(b) The resulting pro forma column reflects the proper application of those adjustments to the
unadjusted financial information.
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STANDARDS ON AUDITING CA SANIDHYA SARAF (WIRC)
It also involves evaluating the overall presentation of the pro forma financial information. The
engagement, however, does not involve the practitioner updating or reissuing any reports or opinions on
any historical financial information used in compiling the pro forma financial information, or performing an
audit or review of the financial information used in compiling the pro forma financial information.
Relationship with Other Professional Pronouncements: During the course of this engagement, the
practitioner should:
(a) Comply with the independence and other requirements of the Code of Ethics, issued by the
Institute of Chartered Accountants of India; and
(b) Implement quality control procedures that are applicable to the individual engagement.
Presentation of pro forma financial information: The practitioner shall evaluate the presentation of
the pro forma financial information. This shall include consideration of:
(a) The overall presentation and structure of the pro forma financial information, including whether
it is clearly labeled to distinguish it from historical or other financial information;
(b) Whether the pro forma financial information and related explanatory notes illustrate the impact
of the event or transaction in a manner that is not misleading;
(c) Whether appropriate disclosures are provided with the pro forma financial information to
enable the intended users to understand the information conveyed; and
(d) Whether the practitioner has become aware of any significant events subsequent to the date of
the source from which the unadjusted financial information has been extracted that may
require reference to, or disclosure in, the pro forma financial information.
Written Representations: The practitioner shall request written representations from the responsible
party that:
(a) In compiling the pro forma financial information, the responsible party has identified all
appropriate pro forma adjustments necessary to illustrate the impact of the event or transaction
at the date or for the period of the illustration; and
(b) The pro forma financial information has been compiled, in all material respects, on the basis of
the applicable criteria.
Forming the Opinion: The practitioner shall form an opinion on whether the pro forma financial
information has been compiled, in all material respects, by the responsible party on the basis of the
applicable criteria. In order to form that opinion, the practitioner shall conclude whether the practitioner
has obtained sufficient appropriate evidence about whether the compilation of the pro forma financial
information is free from material omissions, or inappropriate use or application of a pro forma
adjustment. That conclusion shall include an evaluation of whether the responsible party has
adequately disclosed and described the applicable criteria to the extent that these are not publicly
available.
(a) Unmodified Opinion: If pro forma financial information has been compiled, in all material
respects, by the responsible party on the basis of the applicable criteria.
(b) Modified Opinion – Qualified/ Adverse/ Disclaimer/ EOM, as the case may be: If pro forma
financial information has not been compiled, in all material respects, by the responsible party
on the basis of the applicable criteria.
But where the relevant law or regulation precludes (i.e. does not permit) publication of a
prospectus that contains a modified opinion with regard to whether the pro forma financial
information has been compiled, in all material respects, on the basis of the applicable criteria
and the practitioner concludes that a modified opinion is nevertheless appropriate in
accordance with the Framework for Assurance Engagements, the practitioner shall discuss
the matter with the responsible party. If the responsible party does not agree to make the
necessary changes, the practitioner shall:
(i). Withdraw from the engagement; or
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