CA Inter Audit BHASKAR Regular Notes Vol 1 May Nov 22

1
VOLUME
- Book Code :- KQW

PREFACE
Hello Everyone
We understand that audit is voluminous subject and sometimes it can tiring to study so we
spend lot of time in designing our books and lectures. They are like babies to us. And we are
hopeful that they should make your study efforts comfortable, efficient and effective.
Important features:
Almost each and every concept is having colourful chart
Key words in all concepts are highlighted
All amendments from new study material issued by ICAI are incorporated.
Notes are in tabular form along with corresponding headings and standard indenting so that there
is ease to read and remember.
Cross referencing is given for questions and mcqs to respective books, so that students can practice
questions as they cover topics.
Questions and MCQs which doesn’t have direct connection to any topic in Chapter, SA are given at
the end of chapter as unique questions and mcqs.
Colorful charts, summaries, mnemonics, stories and logical flow of points are given to improve
retention.
Meaning of text color: Green color is for Examples, Blue is for summary, Brown is for recent
modifications, Pink for shortcuts
Following are some important points which students should follow.

Study Methodology
1. Watch videos and understand the concept. It is advised to watch 2-3 hours of lecture every day
on continuous basis.
2. Equal time or at least half of the time should be given for self study same day, time requirement
will depend upon comfort level in audit subject. Lectures will be of no use if they are not backed
with self study.
3. Understanding concept and answering questions are two different things. Understanding is first
step, retention is second and then understanding pattern of what to write in which question is
final step.
4. Use study plan, practice papers and revision audios given on telegram channel to increase grip
over subject.
5. It is important for students to do writing practice of 30 to 50 questions from different chapters
and standards.
6. Keep revising headings of the chapters covered earlier every time you start your study, just
headings.
7. Ask each and every doubt in discussion point given on website www.auditguru.in.
Doubt Solving
It is very important to clear each and every doubt of yours. In this world of technology, you can post
all your doubts anytime from anywhere, simply login to Auditguru.in go to discussion point area and
post all your doubts chapter wise. You can also search and read doubts of other students. I answer
doubts continuously on website. You will get email as your doubt will be solved. You can take photos
of any content where you have doubt, upload on google drive and share link in questions or
comments, it will make doubt solving further easy.
You can Connect with Ravi sir @ 9096000033, 7020699683 he is generally available between 7 to 7.30
PM except on Sundays. Timings may change, you will get Auto SMS when you call, about new timings
in such case.
Suggestions
Any suggestions, mistakes, errors or discrepancy noted may be kindly brought to the notice shall be
dealt with suitably.
For Administrative purpose contact @ 09322011915

E-mail @ [email protected]
Connect with Ravi sir @9096000033 / 7020699683
CA RAVI TAORI
Special Thanks to Snehal Taori Ma’am for her important contribution in making this
book.
Get Revision Audios , Practice Papers , Study Plan and Other Resources from
“Auditguru Telegram Channel”
t.me/auditguru
Our Master Link for all resources at one place Tinyurl.com/AuditGuruAllinOne

INDEX
CHAPTER
01 NATURE, OBJECTIVE AND SCOPE OF AUDIT
Part 1-Introduc on to Audit 1.1-1.5

Part 2-Core Audit Process 1.6
Part 3-SA Introduc on 1.7-1.19
Part 4-SA 200 1.20-1.27
Part 5-SA 210 1.28-1.33
Part 6-SA 220 1.34-1.41
Part 7-Other Concepts 1.42-1.53
CHAPTER
02 AUDIT STRATEGY, AUDIT PLANNING AND

AUDIT PROGRAMME
Part 1-SA 300 2.1-2.9
Part 2-SA 320 2.10-2.19
CHAPTER
03 AUDIT DOCUMENTATION AND AUDIT

EVIDENCE
Part 01-SA 230 3.1-3.11
Part 02-SA 330 3.12-3.22
Part 03-SA 500 3.23-3.39
Part 04-SA 501 3.40-3.46
Part 05-SA 505 3.47-3.53
Part 06-SA 510 3.54-3.56
Part 07-SA 550 3.57-3.64
Part 08-SA 560 3.65-3.69
Part 09-SA 570 3.70-3.78
Part 10-SA 580 3.79-3.85
CHAPTER
04 RISK ASSESSMENT AND INTERNAL CONTROL
Part 1-SA 315 RISK 4.1-4.27

Part 2-SA 315 ICS 4.28-4.50
Part 3-SA 610 4.51-4.53
CHAPTER
05 FRAUD AND RESPONSIBILITIES OF THE

AUDITOR IN THIS REGARD
Part 1-SA 240 5.1-5.11
Part 2-SA 250 5.12
CHAPTER
06 AUDIT IN AN AUTOMATED ENVIRONMENT
Part 1-AAE 6.1-6.10
CHAPTER
07 AUDIT DOCUMENTATION AND AUDIT

EVIDENCE
Part 1-SA 530 7.1-7.24
CHAPTER
08 ANALYTICAL PROCEDURES
Part 1-SA 520 8.1-8.15

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CHAPTER NATURE, OBJECTIVE AND SCOPE OF AUDIT

1
Part 1 -- Introduction to Audit
(CNO--INTRO.020) BACKGROUND OF AUDIT
www.auditguru.in 1.1
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(CNO--INTRO.040) DEFINITION OF AUDIT & HOW TO CHECK WHETHER FINANCIAL STATEMENTS ARE
MISLEADING? (QNO--INTRO.040)
 Chart
 Definition An systematic, independent, examination of financial information of any entity, whether profit
of Auditing oriented or not, and irrespective of its size or legal form, when such an examination is conducted
(ICAI) with a view to expressing an opinion thereon, whether financial statements give true & fair view.
 How to The person conducting this task should take care to ensure that financial statements would not
check mislead anybody. This he can do honestly by satisfying himself that:
whether  none of the entries in the books of account has been omitted in the process of
financial compilation and nothing which is not in the books of account has found place in the
statements statements;
are  the entries in the books of account are adequately supported by sufficient and
misleading? appropriate evidence;
 the accounts have been drawn up with reference to entries in the books of account;
 the financial statement amounts are properly classified, described and disclosed in
conformity with accounting standards; and
 the information conveyed by the statements is clear and unambiguous;
(Cannot give amounts in range in P&L or BS, cannot give contradictory information)
 the statement of accounts presents a true and fair picture of the operational results and
of the assets and liabilities.
 Example While auditing the books of accounts of Talented and Efficient Limited for the financial year
2020-21, the auditor of the above mentioned company observed that Repair and Maintenance
Expenses of ₹ 1,30,000 and Power and Fuel Expenses of ₹ 2,92,000 were not recorded in books
of accounts, however they were appearing in financial statements (Statement of Profit and Loss)
of the above mentioned company. After such observation the auditor of Talented and Efficient
Limited came to the conclusion that the financial statements are not presenting a true and fair
picture of the operational results of Talented and Efficient Limited for the financial
year 2020-21.
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(CNO--INTRO.060) ORIGIN OF WORD AUDIT
 Chart
(CNO--INTRO.080) TYPES OF AUDIT (QNO—INTRO.080)

TYPES OF AUDIT BASED ON COMPULSION
Audit is not legally obligatory for all types of business organizations or institutions. On this basis audits, may be of
broad categories i.e. audit required under law and voluntary audit.
 Chart
 Audit required Audit got done to satisfy a statutory or legal obligation (i.e. obligation imposed by law) to get
under law i.e. account audited.
Statutory Audit  The organizations which required audit under law are the following
• Companies governed by the companies act,
• Banking companies governed by banking regulation act,
• Electricity supply companies governed by electricity supply act,
• Co- operative societies registered under the Co- operative societies Act
• Public and charitable trusts registered under various religious and endowment
acts,
• Corporations set up under an act of parliament or state legislature such as the
LIC
• Specified entities under various sections of the Income –Tax Act, 1961.
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 Voluntary audit In the Voluntary category are the audit of the accounts of proprietary entities, partnership
firms, HUF, etc. in respects of such accounts, there is no basic legal requirement of audit.
(CNO--INTRO.100) ADVANTAGES OF AUDIT OF FINANCIAL STATEMENTS (QNO—INTRO.100)
The chief utility of audit lies in reliable financial statements on the basis of which the state of affairs may be easy to
understand. Apart from this obvious utility, there are other advantages of audit. Some or all of these are of
considerable value even to those enterprises and organizations where audit is not compulsory, these advantages are
given below:
(As auditor regularly visits client)
 It acts as a moral check on the employees from committing defalcations or embezzlement.
 As an appraisal function, audit reviews the existence and operations of various controls in the organizations
and reports weaknesses, inadequacies, etc., in them.
(Delivery confirmation is not signed by customer, he can say no delivery or someone else may take goods)
 An audit can also help in the detection of wastages and losses to show the different ways by which these
might be checked, especially those that occur due to the absence or inadequacy of internal checks or internal
control measures.
(Excessive Raw Material Cost per Unit / Labour Cost Per Unit / Overhead Cost Per Unit etc. while doing
analytical procedures)
(As auditor finishes audit)
 It safeguards the financial interest of persons who are not associated with the management of the entity,
whether they are partners or shareholders, bankers, FI’s, public at large etc.
 Audit ascertains whether the necessary books of account and allied records have been properly kept and
helps the client in making good deficiencies or inadequacies in this respect.
(Post Audit Benefits)
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 Government may require audited and certified statement before it gives assistance or issues a license for a
particular trade.
 Audited statements of account are helpful in settling liability for taxes, negotiating loans and for determining
the purchase consideration for a business.
 These are also useful for settling trade disputes for higher wages or bonus as well as claims in respect of
damage suffered by property, by fi re or some other calamity.
 Audited accounts are of great help in the settlement of accounts at the time of admission or death of partner.
(BHASKAR Concept Notes are strictly as per recent study material, we add concepts recently included and delete
concepts removed by ICAI. Because as per our information, recent module is base for drafting question paper. This
makes BHASKAR bang on target, efficient & effective for studies).
Further PARAM Question bank is strictly as per New Course SM, RTP, MTP and Exam Questions, Questions of Old
course RTP, MTP, Exams, Practice Manual are generally not included, but if old course questions cover concepts in
recent ICAI module we included them & highlight them separately. We have marked questions which are present in
PARAM question bank but not having supporting material in BHASKAR as unique. These questions can be tricky as
they target new concepts and has 50-50 chances of coming in exams, we have covered them in our Q&A videos.)
Part 2 -- Core Audit Process
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Part 3 -- SA Introduction
(CNO--SAINTRO.060) TYPES OF STANDARDS IAASB (QNO--SAINTRO.07)

 Chart
 Engagement Engagement Standards

& Quality The following Standards issued by the Auditing and Assurance Standards Board under
Standards the authority of the Council are collectively known as the Engagement Standards:
(a) Standards on Auditing (SAs), to be applied in the audit of historical financial

information.
(b) Standards on Review Engagements (SREs), to be applied in the review of
historical financial information.
(c) Standards on Assurance Engagements (SAEs), to be applied in assurance
engagements, other than audits and reviews of historical financial information.
(d) Standards on Related Services (SRSs), to be applied to engagements involving
application of agreed upon procedures to information, compilation
engagements, and other related services engagements, as may be specified by
the ICAI.
Quality Standards
Standards on Quality Control (SQCs), issued by the AASB under the authority of the
Council, are to be applied for all services covered by the Engagement Standards as
described in paragraph above.
 Historical “Historical financial information means” information expressed in financial terms in relation to a
Information particular entity, derived primarily from that entity’s accounting system, about economic events
occurring in past time periods or about economic conditions or circumstances at points in time in
the past.
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(CNO--SAINTRO.62) STANDARDS ON AUDITING (100 – 999)
 Chart
 Matters Standards on Auditing have been issued on wide spectrum of issues in the field of auditing
covered by including (but not limited to) overall objectives of independent auditor, planning an audit of
SAs financial statements, identifying and assessing risk of material misstatement, audit evidence,
audit sampling, going concern and forming an opinion and reporting on financial statements,
audit documentation. You would be studying about these standards and many others in
subsequent chapters.
 Examples of Some examples of Standards on Auditing are
SAs  SA 200 Overall Objectives of the Independent Auditor and the Conduct of an Audit in
Accordance with Standards on Auditing
 SA 230 Audit Documentation
 SA 315 Identifying and Assessing the Risks of Material Misstatement through
Understanding the Entity and its Environment
 SA 500 Audit Evidence
 SA 700 Forming an Opinion and Reporting on Financial Statements
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(CNO--SAINTRO.64) STANDARDS ON REVIEW ENGAGEMENT
 Chart
 Audit vs It is to be understood that Standards on Auditing (SAs) apply in “audit of historical financial
Review information” whereas Standards on Review Engagements (SREs) apply in “review of historical
financial information”. Remember that Standards on auditing apply in “audit” of historical
financial information which is a reasonable assurance engagement whereas Standards on
Review Engagements apply in “review” of historical financial information which is a limited
assurance engagement only.
Here, we have to broadly understand that “audit” and “review” are two different terms. Audit
is a reasonable assurance engagement and its objective is reduction in assurance engagement
risk to an acceptably low level in the circumstances of the engagement. However, “review” is
a limited assurance engagement and its objective is a reduction in assurance engagement risk
to a level that is acceptable in the circumstances of the engagement.
 Examples of Examples of Standards on Review engagements are
SREs  SRE 2400 Engagements to Review Historical Financial Statements
 SRE 2410 Review of Interim Financial Information Performed by the
Independent Auditor of the Entity.
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(CNO--SAINTRO.66) STANDARDS ON ASSURANCE ENGAGEMENT
 Chart
 SAE Applicability of SAE

SAEs are applicable when we provide assurance on matters which are other than
historical information. For example, an assurance engagement relating to
examination of prospective financial information.
Prospective Financial Information

Prospective financial information means financial information based on assumptions
about events that may occur in the future and possible actions by an entity. It can be
in the form a forecast or projection or combination of both.
Prospective Financial Information vs Historical Financial Information

Here, it is important to note the difference between “Historical financial information”
and “Prospective financial information.” The former relates to information expressed
in financial terms of an entity about economic events, conditions or circumstances
occurring in past periods. The latter relates to financial information based on
assumptions about occurrence of future events and possible actions by an entity.
Therefore, historical financial information is rooted in past events which have already
occurred whereas prospective financial information is related to future events.
 Examples of Examples of Standards on Assurance Engagements are: -
SAEs  SAE 3400 The Examination of Prospective Financial Information
 SAE 3420 Assurance Engagements to Report on the Compilation of Pro Forma
Financial Information Included in a Prospectus
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(CNO--SAINTRO.68) STANDARDS ON RELATED SERVICES

 Chart
 SRS These standards apply in engagements to perform agreed-upon procedures regarding

financial information. For example, an engagement to perform agreed-upon procedures may
require the auditor to perform certain procedures concerning individual items of financial
data, say, accounts payable, accounts receivable, purchases from related parties and sales
and profits of a segment of an entity, or a financial statement, say, a balance sheet or even a
complete set of financial statements.
 Examples of Examples of Standards on related services are: -
SRSs  SRS 4400 Engagements to perform agreed-upon procedures regarding financial
information
 SRS 4410 Compilation engagements
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(CNO--SAINTRO.080) BREAK-UP OF SAS
 Chart
SA Content of SA
100-199 INTRODUCTORY MATTERS
200-299 GENERAL PRINCIPLES & RESPONSIBILITIES
300-499 RISK ASSESMENT & RESPONSE TO RISK
500-599 AUDIT EVIDENCE
600-699 USING WORK OF OTHERS
700-799 AUDIT REPORT
800-899 SPECIALISED AREAS
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(CNO--SAINTRO.180) COMPLIANCE WITH DOCUMENTS ISSUED BY THE INSTITUTE (QNO--SAINTRO.05)
 Chart
 1a. Statements / The Institute has from time to time, issued ‘Guidance Notes’ and ‘Statements’ on a number
Standards of matters. The ‘Statements’ have been issued with a view to securing compliance by
Mandatory members on matters which, in the opinion of the Council, are critical for the proper discharge
of their functions. ‘Statements’ therefore are mandatory.
 1b. Duty of Accordingly, while discharging their attest function, it will be the duty of the members of the
Auditor for Institute:
Statements / to examine whether ‘Statements’ relating to accounting matters are complied with
Standards in the presentation of financial statements covered by their audit. In the event of
any deviation from the ‘Statements’, it will be their duty to make adequate
disclosures in their audit reports so that the users of financial statements may be
aware of such deviations; and
to ensure that the ‘Statements’ relating to auditing matters are followed in the audit
of financial information covered by their audit reports. If, for any reason, a member
has not been able to perform an audit in accordance with such ‘Statements’, his
report should draw attention to the material departures, therefrom.
 2a. Guidance ‘Guidance Notes’ are primarily designed to provide guidance to members on matters which
Notes may arise in the course of their professional work and on which they may rely in the course
Recommendatory of their professional work and on which they may desire assistance in resolving issues which
may pose difficulty. Guidance Notes are recommendatory in nature.
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 2b. Duty of A member should ordinarily follow recommendations in a guidance note relating to
Auditor for an auditing matter except where he is satisfied that in the circumstances of the case,
Guidance Note it may not be necessary to do so.
Similarly, while discharging his attest function, a member should examine whether
the recommendations in a guidance note relating to an accounting matter have been
followed or not. If the same have not been followed, the member should consider
whether keeping in view the circumstances of the case, a disclosure in his report is
necessary.
(CNO--SAINTRO.200) COMPLIANCE WITH ENGAGEMENT AND QUALITY CONTROL STANDARDS

 Chart
 Duty to These Standards will apply whenever an independent audit is carried out; that is, in the
Follow SAs independent examination of financial 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.
While discharging their attest function, it will be the duty of members of the Institute to ensure
that the Standards are followed in the audit of financial information covered by their audit reports.
If for any reason a member has not been able to perform an audit in accordance with the
Standards, his report should draw attention to the material departures therefrom, auditors will
be expected to follow Standards in the audits commencing on or after the date specified in the
statement. Remember all Standards are mandatory from the date mentioned therein and it is
obligatory upon members of Institute to adhere to these whenever an audit is carried out.
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(CNO--SAINTRO.240) OBJECTIVES / ROLE / FUNCTIONS OF IAASB (QNO--SAINTRO.01)
 Chart
 Formation of In 1977, the International Federation of Accountants (IFAC) was formed with objective to
IFAC harmonize accounting and auditing on an international scale. They are doing this by
developing international financial reporting standards for accounting and international
standards on auditing for audit. ICAI is member of IFAC, so they have to implement this
harmonization in India.
 Formation & The IFAC has established the IAASB to develop and issue, in the public interest and under its
Objective of own authority, high quality auditing standards for use around the world. The IAASB functions
IAASB as an independent standard-setting body under the auspices of IFAC.
 Different The IAASB achieves this objective by:
Standards & (a) Establishing high quality auditing standards and guidance for financial statement
Pronouncements audits that are generally accepted and recognized by investors, auditors,
Issued to governments, banking regulators, securities regulators, and other key stakeholders
Achieve this across the world; (i.e., SAs)
Objective (b) Establishing high quality standards and guidance for other types of assurance services
on both financial and non-financial matters; (i.e., SREs & SAEs)
(c) Establishing high quality standards and guidance for other related services; (i.e., SRSs)
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(d) Establishing high quality standards for quality control covering the scope of services
addressed by the IAASB; (i.e., SQCs)
(e) Publishing other pronouncements on auditing and assurance matters, thereby
advancing public understanding of the roles and responsibility of professional
auditors and assurance service providers. (i.e., Standard wise Implementation Guide,
Handbook on Standards—Combined all standards & related material)
(CNO--SAINTRO.260) OBJECTIVES / ROLE / FUNCTIONS OF AASB (MCQ--INCS.02.5, INCS.09.5)

 Chart
 History of ICAI constituted Auditing Practices Committee (APC) in 1982, they use to issue Statements on
AASB Standard Auditing Practices (SAPs). In July 2002, this committee was converted into Auditing and
Assurance Standard Board (AASB) and nomenclature (Names) of SAPs was changed to Auditing
and Assurance Standards (AASs). In 2007, AASB issued several revised / new standards as per
IAASB clarity project. Objective of clarity project was to improve clarity of International Standards
on Auditing (ISAs) which are used by ICAI to issue SAs in India. These new standards were called
engagement and quality standards as discussed earlier.
 Objective of Objectives and Functions of the Auditing and Assurance Standards Board:
AASB
 To review existing & emerging practices and identify areas where new or revision
of existing & then to formulate / develop following
◊ Engagement Standards,
◊ Standards on Quality Control,
◊ Guidance Notes,
◊ General Clarifications,
◊ Technical Guides, Practice Manuals, Studies & Other papers (TPSO)
 Different Standards –Mandatory in nature unless exempted.
Terms
Statements – Statements and standards are same. Earlier we use to call them statements but now
as per international trend, we call them standards. So we can say that statement is old name of
standards.
General Clarification – Issued to explain content given in Standards / Statements.
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Guidance Notes -- Recommendatory in nature we may not follow them if there are justified
reasons. E.g., Guidance note on Bank Audit.
Technical Guides, Practice Manual, Studies and Other papers (TPSO) – ICAI used to issue them
to provide checklists and specimen working papers helpful for practicing chartered accountants.
Now a days ICAI issues them in the name of Implementation Guide or Practitioners Guide.
(CNO--SAINTRO.280) LIST OF SAs

Hello everyone, first of all let me clarify, I believe in 100% conceptual studies, where we know reasons & applications
through examples. If you do that, studying is fun & you remember things. But my crazy thought process came up with
something more to remember SA numbers in funny way. You may call it madness, you may laugh. But go through it
once imagine things given, I bet you will never do mistake with SA numbers. It is based on principles of memory
techniques. This is helpful when you get confused in exams. Read slowly one by one associate it with SA number, as
soon as you see number crazy logic should come up.
“Remember correct SA number cannot give you full marks they can only improve marking by 1 mark & it matters”
200 Double “O” agent (James Bond) Objectives of Audit Overall Objectives of the Independent
ek teer se 2 shikar (objective) Auditor and the Conduct of an Audit in
fulfil karta hai Accordance with Standards on Auditing
210 2 logo ne milkar 1 LETTER Engagement Letter Agreeing the Terms of Audit
(ENGAGEMENT LETTER) sign Engagements
kiya
220 Jab 2 aur 2 kandhe se kandha Quality Control Quality Control for an Audit of Financial
milakar kaam karte hai toh Statements
QUALITY improve hoti hai
230 2nd Page ke baad 3rd Page aata Audit Documentation Audit Documentation
hai koi bhi DOCUMENTS mein
240 Jo log 2 ka 4 kartein hai wooh Frauds The Auditor’s Responsibilities Relating to
FRAUD haotein hai Fraud in an Audit of Financial Statements
250 Ambani sahab 2 se 5 relaince ka Law Consideration of Laws and Regulations in
LEGAL COMPLIANCE dekhtein an Audit of Financial Statements
hai
260 6 is 3 times BIGGER than 2: - Big Communication to Communication with Those Charged with
means TCWG TCWG Governance
265 6 ke baad 5 kaise aa sakta hai, Communication of Communicating Deficiencies in Internal
there is PROBLEM WITH Internal Control Control to Those Charged with
SYSTEM Deficiency Governance and Management
299 2 “9” SAATH(JOINTLY) mein Joint Auditors Joint Audit of Financial Statements
kaam kar rahe hai
300 Double “O” agent ke paas har Planning Planning an Audit of Financial Statements.
project kr liye 3 PLAN hotein hai
315 15 / 3 =5, agar ek jagah pe Risk Assessment Identifying and Assessing the Risks of
paanch raastein miltein ho toh Material Misstatement Through
that is extremely RISKY Understanding the Entity and Its
Environment
320 20/3 = 6.677 0.677 is Materiality Materiality in Planning and Performing an
IMMATERIAL Audit
330 30 / 3 = 10, Auditor should Response to Risk The Auditor’s Responses to Assessed Risks
atleast have 10 responsive
procedures for various risks
402 Chaar se do hojao aur aapna Service Organization Audit Considerations Relating to an Entity
kaam outsource kardo Using a Service Organization
450 4-5 badi galtiyaan toh har audit Material Misstatement Evaluation of Misstatements Identified
mein milhi jati hai During the Audit
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500 Double “O” agent ke paas har Audit Evidence Audit Evidence
chiz ko prove karne ke liye 5
EVIDENCE hotein hai
501 1 number pe jo areas hotein hai Inventory / Litigation / Audit Evidence-Specific Considerations for
unko specific consideration Segment Reporting Selected Items
lagta hai, ignore pehla 5
505 Ek 5 andar hai dusra bhar hai, External Communication External Confirmations
andar wala 5
BAHAR(EXTERNAL) WALE SE
COMMUNICATION kar raha hai
510 5 se 10 saal mein rotation Initial Audit Initial Audit Engagements – Opening
lagata hai aur new firm ke liye Engagements Balances
initial audit engagement ho
jaata hain
520 20/5 =4, Humne isse ko charo Analytical Procedures Analytical Procedures
taraf se “ANALYSE” karna
chahiye
530 30/5 = 6, we cannot check Sampling Audit Sampling
everything at the max 6 items in
details so let’s do sampling
540 40/5 = 8, agar 8 ko kaatoge toh Estimates Auditing Accounting Estimates, Including
do ek E aur ek 3 banega and E Fair Value Accounting Estimates, and
for ESTIMATES (Highly Insane, I Related Disclosures
Know)
550 Yeh 5 aur 5 dono RELATIVES din Related Parties Related Parties
bhar aaps mein baat aur
transactions kartein hai
560 5-6 months are crucial after Subsequent Events Subsequent Events
balance Sheet date for
SUBSEQUENT EVENTS
570 5+7=12 aur agla number hai 13 Going Concern Going Concern
matlab khatra, NEXT YEAR IS
DARK (DOUBTFUL)
580 5+8=13 jab khatra bana hua ho, Written Representation Written Representations
saboot ki kaami mehsoos ho
toh support ke liye
management se WRITING MEIN
CONFIRMATION LENA
CHAHIYE
600 Double “O” always has 6 OTHER Other Auditors Using Work of Others
PEOPLE which help him
610 Companies generally have 1 Internal Auditor Using the Work of Internal Auditors
internal auditor
620 You should always have 2 Experts Using the Work of an Auditor’s Expert
EXPERTS for critical issues
700 Final work of Double” O” agent Audit Report Forming an Opinion and Reporting on
is to give 7 PARAGRAPH Financial Statements
REPORT
701 No 1 Secret to Success is Key Matter Communicating Key Audit Matters in the
Focusing on Key Matters Independent Auditor’s Report
705 7-5 = 2, 2 TYPES OF OPINION Types of Opinion Modifications to the Opinion in the
are possible “Unmodified & Independent Auditor’s Report
Modified” (again madness)
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706 7-6=1, 1 hi jaise 2 para graph EMP / OMP Emphasis of Matter Paragraphs and Other
EMP / OMP Matter Paragraphs in the Independent
710 10-7=3, compare with atleast 3 Comparatives Comparative Information—Corresponding
other reports Figures and Comparative Financial
Statements
720 20-7=13, 13 different Other Information The Auditor’s Responsibilities Relating to
documents are presented in Other Information
annual report
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Part 4 -- [SA 200] OVERALL OBJECTIVES OF THE INDEPENDENT AUDITOR AND THE
CONDUCT OF AN AUDIT IN ACCORDANCE WITH STANDARDS ON AUDITING
(CNO—SA200.020) WHAT IS OVERALL OBJECTIVE OF AUDIT?

 Chart
 Overall As per SA-200 “Overall Objectives of the Independent Auditor”, in conducting audit of financial
Objective statements, the overall objectives of the auditor are:
(QNO-
To obtain reasonable assurance about whether the financial statements as a whole are free
200.01,
from material misstatement, whether due to fraud or error, thereby enabling the auditor
200.03) to express an opinion on whether the financial statements are prepared, in all material
(MCQ- respects, in accordance with an applicable financial reporting framework; and
200.2,
200.4, To report on the financial statements, and communicate as required by the SAs, in
200.6, accordance with the auditor’s findings.
200.12,
200.14,
200.16,
200.17,
Incs.07.1,
Incs.18.2)
 Example While auditing the books of accounts of Different and Capable Limited for the financial year 2020-
21, Mr. Z the auditor of the above mentioned company explained to a new audit team members
about the objectives for which Audit of a company is conducted. While going through the financial
statements of the company, audit team observed that there were many errors in the heads of
expenses which were material and also requirements of Companies Act, 2013 were not complied
with. When audit team discussed the matters with Mr. Z with regard to Different and Capable
Limited, he came to the conclusion that there are material misstatements in FST, that means FST
are not free from material misstatements.
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(CNO—SA200.040) WHAT ARE INHERENT LIMITATIONS OF AUDIT (QNO-200.09) (MCQ-Incs.07.4)
 Chart
 Audit Risk The auditor is not expected to, and cannot, reduce audit risk to zero and cannot therefore obtain
Cannot Be absolute assurance that the financial statements are free from material misstatement due to fraud
Reduced to or error. This is because there are inherent limitations of an audit, which result in most of the audit
evidence on which the auditor draws conclusions and bases the auditor’s opinion being persuasive
Zero
rather than conclusive.
The inherent limitations of an audit arise from:

The nature of financial reporting;
The nature of audit procedures;
The need for the audit to be conducted within a reasonable period of time and at a
reasonable cost.
 The Nature Judgement Based: -
of Financial The preparation of financial statements involves judgment by management in applying the
Reporting requirements of the entity’s applicable financial reporting framework to the facts and
circumstances of the entity.
(E.g., Useful life of Fixed Assets & Residual Value / Valuation of Investments in Artistic Items
Like Painting / Costing of Inventory – FIFO, Weighted Average, Standard Costing, Retail
Costing)
FST Item involve Subjectivity / Degree of Uncertainty /Range of Interpretations: -
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In addition, many financial statement items involve subjective decisions or assessments or
a degree of uncertainty, and there may be a range of acceptable interpretations or
judgments that may be made.
 The Nature There are practical and legal limitations on the auditor’s ability to obtain audit evidence. For
of Audit example:
Procedures Intentional or Unintentional Misinformation from Management:
There is the possibility that management or others may not provide, intentionally or
unintentionally, the information that is relevant to the preparation and presentation of the
financial statements or that has been requested by the auditor. Accordingly, the auditor
cannot be certain of the completeness of information, even though the auditor has
performed audit procedures to obtain assurance that all relevant information has been
obtained.
(E.g., Management has entered in agreement to share revenue with Suppliers, Provision
remained unrecorded)
Sophisticatedly Designed Frauds: -

Fraud may involve sophisticated and carefully organised schemes designed to conceal it.
Therefore, audit procedures used to gather audit evidence may be ineffective for detecting
an intentional misstatement that involves, for example, collusion to falsify documentation
which may cause the auditor to believe that audit evidence is valid when it is not. The
auditor is neither trained as nor expected to be an expert in the authentication of
documents.
(E.g., Supplier, Store Manager, Quality Engineer, Accountant, MD all are involved)
No powers of Investigation: -
An audit is not an official investigation into alleged wrongdoing. Accordingly, the auditor is
not given specific legal powers, such as the power of search, which may be necessary for
such an investigation. (Audit vs Investigation is further discussed in Part-7)
 Timeliness Difficulty, Time, or Cost not Valid basis to Omit Audit Procedures
of Financial The matter of difficulty, time, or cost involved is not in itself a valid basis for the auditor to
Reporting omit an audit procedure for which there is no alternative or to be satisfied with audit
evidence that is less than persuasive. Appropriate planning assists in making sufficient time
and the
and resources available for the conduct of the audit.
Balance
between Delay reduces value of information: -
Notwithstanding this, the relevance of information, and thereby its value, tends to diminish
Benefit and
over time, and there is a balance to be struck between their liability of information and its
Cost
cost.
(QNO-
200.15)
(MCQ-
200.1)
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(CNO—SA200.060) POTENTIAL EFFECT OF THE INHERENT LIMITATIONS OF AN AUDITOR’S ABILITY TO DETECT
MMST IN CERTAIN AREAS / OTHER MATTERS THAT AFFECT THE LIMITATIONS OF AN AUDIT (QNO-200.18)
In the case of certain assertions or subject matters, the potential effects of the inherent limitations on the
auditor’s ability to detect material misstatements are particularly significant. Such assertions or subject
matters include: (Firangi)
 Fraud, particularly fraud involving senior management or collusion.
 The existence and completeness of related party relationships and transactions.
 The occurrence of non-compliance with laws and regulations.
 Future events or conditions that may cause an entity to cease to continue a going concern.
Relevant SAs identify specific audit procedures to assist in mitigating the effect of the inherent
limitations.
(CNO—SA200.080) SUBSEQUENT DISCOVERY OF MATERIAL MISSTATEMENT
Does not mean failure, it can be because of Inherent Limitations

Accordingly, the subsequent discovery of a material misstatement of the financial statements resulting from
fraud or error does not by itself indicate a failure to conduct an audit in accordance with SAs.
But Inherent Limitations cannot be misused for Poor Audit Evidence
However, the inherent limitations of an audit are not a justification for the auditor to be satisfied with less-
than-persuasive audit evidence.
Appropriateness depends on circumstances
Whether the auditor has performed an audit in accordance with SAs is determined by the audit procedures
performed in the circumstances, the sufficiency and appropriateness of the audit evidence obtained as a
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result thereof and the suitability of the auditor’s report based on an evaluation of that evidence in light of the
overall objectives of the auditor.
(CNO—SA200.100) WHAT ARE ETHICAL REQUIREMENTS? (QNO-200.19) (MCQ-200.9, 200.7, 200.8)

 Chart
 Ethics First, broadly understand what are ethics? ”Ethics” are the principles of conduct governing an
individual or group. Professions like law, medicine have their code of ethics. Auditing profession
is no exception. Rather, in profession of auditing, importance of ethics is manifold.
 Ethical The auditor shall comply with relevant ethical requirements, including those pertaining to
Requirements independence, relating to financial statement audit engagements.
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are
Mandatory in
Audit: -
 Derived from Relevant ethical requirements ordinarily comprise the Code of Ethics issued by the Institute of
Code of Ethics: Chartered Accountants of India.
(QNO-
The Code establishes the following as the fundamental principles of professional ethics relevant
200.21)
to the auditor when conducting an audit of financial statements and provides a conceptual
(MCQ-200.11,
framework for applying those principles; (O-C2BI)
Incs.32.2)
(b) Objectivity;
(d) Confidentiality;
(c) Professional Competence and Due Care;
(e) Professional Behaviour.
(a) Integrity;
 Objectivity The principle of objectivity requires an auditor not to compromise professional judgment
(QNO-200.24) because of bias, conflict of interest or undue influence of others.
 Confidentiality Confidentiality principle requires an auditor to respect the confidentiality of information acquired
as a result of professional or business relationships.
 Professional It requires that auditor attains and maintains professional knowledge and skill at the level
competence required to render competent professional service based on current technical and professional
and due care standards and legislation and also to act diligently and in accordance with technical and
professional standards. Diligence includes responsibility to act carefully, thoroughly and on a
timely basis in accordance with requirements of an assignment.
 Professional It requires an auditor to comply with relevant laws and regulations and avoid any conduct that
behaviour he knows or should know might discredit the profession.
 Integrity Integrity requires auditor to be straight forward and honest in all professional and business
(QNO-200.24) relationships. It implies fair dealing and truthfulness. It effectively means that he shall not be
associated with reports, returns, communications or other information which he believes
contains a materially false or misleading statement; contains statements or information provided
recklessly or omits required information where such omission could be misleading.
(Discussion with respect to Independence is covered in Part-7 of the chapter)
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(CNO—SA200.120) PROFESSIONAL SKEPTICISM (QNO-200.25) (MCQ-200.9, 200.7, 200.8, 200.18)
 Chart
 Definition: - Professional scepticism: - An attitude that includes a questioning mind, being alert to conditions
(MCQ-200.3) which may indicate possible misstatement due to error or fraud, and a critical assessment of
(MCQ-200.5) audit evidence.
(MCQ-200.5) (Some examples which are against professional scepticism,
 Only because last time there were no problems, blindly relying on management, internal
controls system.
 Accepting oral justifications, Xerox copies is important matters.
 Ignoring small, unusual things such as withdrawal of Rs 5 from bank or small errors such
as negative inventory balance of small item etc)
 How to remain Contradiction
sceptical? Audit evidence that contradicts other audit evidence obtained.
(E.g., Reconciliation given shows stock of 5,000 but insurance documents show stock of
(C-FAR) 3,500)
Fraud
Conditions that may indicate possible fraud.
(E.g., 20% increase in consumption of petrol while production increased 5%)
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Audit Procedure
Circumstances that suggest the need for audit procedures in addition to those required
by the SAs.
(E.g., SA 402 says rely on report if it is from Chartered Accountant, but we may not rely
because of bad past experience in other assignment)
Reliability
Information that brings into question the reliability of documents and responses to
inquiries to be used as audit evidence.
(E.g., Figures are over written / 5-year-old document is appearing as if just printed)
 What if PS is not Maintaining professional scepticism throughout the audit is necessary if the auditor is, for
followed? example, to reduce the risks of:
Overlooking unusual circumstances.
(E.g., % change in fuel consumption leads to discovery of fraud)
Over generalising when drawing conclusions from audit observations.

(E.g., Salary of one department was checked and it was declared salary of other 3
department would be same)
Using inappropriate assumptions in determining the nature, timing, and extent of the
audit procedures and evaluating the results thereof.
(E.g., Assuming that employees with more than 10 years with company are honest
hence no need to check sales executed by them)
 Don’t The auditor may accept records and documents as genuine unless the auditor has reason to
misinterpret believe the contrary. Nevertheless, the auditor is required to consider the reliability of
Professional information to be used as audit evidence. In cases of doubt about the reliability of information
Skepticism or indications of possible fraud, the SAs require that the auditor investigate further and
determine what modifications or additions to audit procedures are necessary to resolve the
matter.
The auditor cannot be expected to disregard past experience of the honesty and integrity of the
entity’s management and those charged with governance. Nevertheless, a belief that
management and those charged with governance are honest and have integrity does not relieve
the auditor of the need to maintain professional skepticism.
UNIQUE QUESTION
 QNO-200.07 Applicable financial reporting framework
 QNO-200.17 Professional Judgement
UNIQUE MCQ
 MCQ No. Incs.18.1, Incs.18.5
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Part 5 -- [SA 210] AGREEING THE TERMS OF AUDIT ENGAGEMENTS
(CNO—SA210.020) WHAT ARE PRECONDITIONS OF AUDIT (QNO-210.02)

(Before asking any information & thinking about acceptance & continuance as per SQC 1 & SA 200, these conditions
should be satisfied)
 Chart
 Preconditions
Agreement:- the agreement of management and, where appropriate, those charged
of an audit –
with governance to the premise on which an audit is conducted.
(Exp:- Management should agree and take responsibility of financial reporting)
Acceptable FRF:- The use by management of an acceptable financial reporting
framework (Exp:- Reliable / Relevant etc) in the preparation of the financial statements
and
 Auditor’s In order to establish whether the preconditions for an audit are present, the auditor shall:
Responsibility
Agreement:- Obtain the agreement of management that it acknowledges and
to Check 2
understands its responsibility:
Conditions
 Preparation of Financial Statements
For the preparation of the financial statements in accordance with the
applicable financial reporting framework, including where relevant their fair
presentation;
 Internal Control System
For such internal control as management determines is necessary to enable the
preparation of financial statements that are free from material misstatement,
whether due to fraud or error; and
 Information to Auditor
To provide the auditor with:
o Access to all information of which management is aware that is
relevant to the preparation of the financial statements such as records,
documentation and other matters;
o Additional information that the auditor may request from
management for the purpose of the audit; and
o Unrestricted access to persons within the entity from whom the
auditor determines it necessary to obtain audit evidence.
Acceptable FRF:- Determine whether the financial reporting framework to be applied

in the preparation of the financial statements is acceptable
 Don’t Accept If the preconditions for an audit are not present, the auditor shall discuss the matter with
Assignment management.
Unless required by law or regulation to do so, the auditor shall not accept the proposed audit
engagement:
If the auditor has determined that the financial reporting framework to be applied in
the preparation of the financial statements is unacceptable; or
If the agreement as discussed above has not been obtained.
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(CNO—SA210.040) LIMITATION ON SCOPE PRIOR TO AUDIT ENGAGEMENT ACCEPTANCE
If management or those charged with governance impose a limitation on the scope of the auditor’s work in the terms
of a proposed audit engagement such that the auditor believes the limitation will result in the auditor “disclaiming an
opinion” on the financial statements, the auditor shall not accept such a limited engagement as an audit engagement,
unless required by law or regulation to do so.
(CNO—SA210.060) IS ENGAGEMENT LETTER COMPULSORY? WHAT ARE ITS CONTENTS? (Mandatory Clauses)
(QNO-210.03) (MCQ-210.1, 210.2, 210.3, 210.4)
 Importance of Engagement Letter

Legal requirement to get the accounts audited so far extends only to companies, registered societies etc. In
these cases, the respective law governs the appointment of auditors and their duties. In all other cases, it is a
matter of contract. It is, therefore, important, both for the auditor and client, that each party should be clear
about the nature of the engagement. It must be reduced to writing and should exactly specify the scope of the
work. The audit engagement letter is sent by the auditor to his client.
 Additional Considerations in Audit of Partnership
In the case of partnerships, a few more precautions are needed. The appointment of the auditor is normally
governed by the partnership deed. The accountant, when he is approached for undertaking a professional
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assignment by a firm or a partner of a firm, should first get a clear idea of the nature of the service required and
then ensure, with reference to the terms of partnership agreement that his appointment is valid.
 SA 210- Terms of Engagement
The ICAI has issued SA 210 “Agreeing the Terms of Audit Engagements” on the subject. It is in the interest of
both the auditor and the client to issue an engagement letter so that the possibility of misunderstanding is
reduced to a great extent.
 Compulsory The auditor shall agree the terms of the audit engagement with management or those charged
Engagement with governance, as appropriate.
Letter
 Mandatory The agreed terms of the audit engagement shall be recorded in an audit engagement letter or other
Clauses suitable form of written agreement and shall include:
The objective and scope of the audit;
(E.g., Express Opinion on Financial Statements – Standalone, Consolidated, Subsidiaries,
Associates, Branches)
The responsibilities of the auditor;
(E.g., Conduct Audit as per SAs)
The responsibilities of management;
(E.g., Preparing Financial Statements etc)
Identification of the applicable financial reporting framework for the preparation of the
financial statements; and
(E.g., AS or Ind AS per Sec 133)
Reference to the expected form and content of any reports to be issued by the auditor and
a statement that there may be circumstances in which a report may differ from its
expected form and content.
(E.g., as per SA 700 series)
 Law If law or regulation prescribes in sufficient detail the terms of the audit engagement referred to in
prescribes above paragraph, the auditor need not record them in a written agreement, except for the fact
terms that such law or regulation applies, and that management acknowledges and understands its
(MCQ- responsibilities as set out in pre-conditions.
Incs.08.1) ( E.g., IRDA may issue regulation covering all above matters between auditor & client then no need
of engagement letter just has simple letter to client that terms are as per regulations, please sign
and send back the letter)
(CNO—SA210.080) IS ENGAGEMENT LETTER REQUIRED AT RECURRING AUDITS? (QNO-210.05) (MCQ-Incs.32.3)
On recurring audits, the auditor shall assess whether circumstances require the terms of the audit engagement to be
revised and whether there is a need to remind the entity of the existing terms of the audit engagement.
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The auditor may decide not to send a new audit engagement letter or other written agreement each period. However,
the following factors may make it appropriate to revise the terms of the audit engagement or to remind the entity of
existing terms:
 External A change in legal or regulatory requirements. (E.g., New company act / GST)
Changes
A change in the financial reporting framework (E.g., Ind AS)
adopted in the preparation of the financial
statements.
 Change form
Management A significant change in ownership. (E.g., Takeover from other business group,
Side pantaloons taken from Biyani to Aditya
Birla Group)
A recent change of senior management. (E.g., MD / CEO / CFO are replaced)
A significant change in nature or size of the (E.g., Started manufacturing along with
entity’s business. trading and now turnover has increased 3
times as compared to last year)
Any indication that the entity misunderstands (E.g., They ask for Fraud Report /
the objective and scope of the audit. Compliance Report / Tax Report / Fixed
Asset assessment report etc)
 Change from A change in other reporting requirements. (E.g., Reporting on Internal Financial
Auditors Side Control)
Any revised or special terms of the audit
(E.g., Separate Branch Auditors / Use of
engagement.
CAAT / Use of Expert etc which are justified)
(CNO—SA210.100) WHAT IF THERE IS CHANGE IN TERMS? (QNO-210.07/210.09)

(MCQ-210.5,210.6,210.7,210.8)
 Chart
 General A request from the client for the auditor to change the engagement may result from-
Reasons for a change in circumstances affecting the need for the service,
Change  (E.g., Change in Law -- IFCR)
a restriction on the scope of the engagement, whether imposed by management or caused
by circumstances.
 (E.g., Visit to foreign branches restricted to cut costs or because of war)
a misunderstanding as to the nature of an audit or related service originally requested.

 Examine The auditor would consider carefully the reason given for the request, particularly the implications
reasons of a restriction on the scope of the engagement, especially any legal or contractual implications.
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The auditor shall not agree to a change in the terms of the audit engagement where there is no
reasonable justification for doing so.
 (E.g., 3 months after appointment company plans to appoint separate branch
auditor for some branches, this is change in terms of engagement which said all
branches will be audited by principle auditor, auditor will have to determine
whether it is justified or not).
Justified
If the terms of the audit engagement are changed, the auditor and management shall
agree on and record the new terms of the engagement in an engagement letter or other
suitable form of written agreement.
 (E.g., Continuing above example, if these are new branches with low turnover
located far away from offices from principal auditor, then such steps appear
justified as it will save time & cost of both principle auditor & company, in such
case sign revised engagement letter)
Unjustified
If the auditor is unable to agree to a change of the terms of the audit engagement and is
not permitted by management to continue the original audit engagement, the auditor
shall:
 Withdraw from the audit engagement where possible under applicable law or
regulation; and
 Determine whether there is any obligation, either contractual or otherwise, to
report the circumstances to other parties, such as those charged with
governance, owners or regulators.
 (E.g., But if these branches are big branches of company contributing to 40% of
revenue and complicated matters then it is not justified then we will have to
withdraw from assignments and inform TCWG, CAG if required by law)
(CNO—SA210.110) REQUEST FOR LOWER LEVEL OF ASSURANCE

 Chart
 Request
for Lower An auditor who, before the completion of the engagement, is requested to change the engagement
Level of to one which provides a lower level of assurance, should consider the appropriateness of doing so.
Assurance
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If the auditor concludes that there is reasonable justification to change the engagement and
if the audit work performed complied with the SAs applicable to the changed engagement, the
report issued would be appropriate for the revised terms of engagement. In order to avoid
confusion, the report would not include reference to-
the original engagement; or
any procedures that may have been performed in the original engagement, except
where the engagement is changed to an engagement to undertake agreed-upon
procedures and thus reference to the procedures performed is a normal part of the
report.
 (E.g., If it is justified because of lack of time and need of report to be
submitted to investor quickly, we can accept such review assignment, then
it will become purely review assignment and no reference to audit will be
made.)
UNIQUE QUESTION
 QNO-210.11 Change in Terms of Engagement- Restricting Scope of Audit- Companies Act
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Part 6 -- [SA 220] QUALITY CONTROL FOR AN AUDIT OF FINANCIAL STATEMENTS
(CNO—SA220.040) WHAT DO YOU MEAN BY QUALITY OF AUDIT? WHAT IS FIRM LEVEL QUALITY &
ENGAGEMENT LEVEL QUALITY?
We will say that quality is maintained at particular audit engagement if: -

If there is compliance with professional standards and regulatory and legal requirements.
(E.g., AS / SA / Co Act / Sch III / Sch II etc)
The reports issued are appropriate in the circumstances.

(E.g., Clean / Qualified / Adverse / Disclaimer etc)
SQC 1 says that audit firm is supposed to maintain systems at firm level to achieve quality in audit with above
things as ultimate objective. Such principles will be applicable to all assurance & related assignments of the
firm as per SQC1.
On the other hand, SA 220 deals with implementation of firm level quality control system to individual
engagement level. Is applicable only to audit of historical information. It casts responsibility on engagement
partner to implement quality control procedures.
(CNO—SA220.045) OBJECTIVE OF SA 220

 Chart
 Objective (a) The audit complies with professional standards and regulatory and legal requirements; and
(b) The auditor’s report issued is appropriate in the circumstances.
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(CNO—SA220.060) ELEMENTS OF A SYSTEM OF QUALITY CONTROL
(QNO-220.01/220.02) (MCQ-220.3, Incs.32.1)
The firm’s system of quality control should include policies and procedures addressing each of the following elements:
Leadership responsibilities for quality within the firm.
Human resources.
Ethical requirements.
Acceptance and continuance of client relationships and specific engagements.
Engagement performance.
Monitoring.
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(CNO—SA220.080) WHAT IS LEADERSHIP RESPONSIBILITY FOR QUALITY OF AUDIT? (QNO-220.03)
 Chart
 Engagement Engagement partner refers to the partner or other person in the firm who is responsible for the
Partner audit engagement and its performance, and for the auditor’s report that is issued on behalf of
the firm, and who, where required, has the appropriate authority from a professional, legal or
regulatory body.
 Quality The engagement partner shall take responsibility for the overall quality on each audit
Responsibility engagement to which that partner is assigned.
& Emphasis
The actions of the engagement partner (His knowledge & implementation of accounting &
auditing standards) and appropriate messages to the other members of the engagement team,
in taking responsibility for the overall quality on each audit engagement, emphasise:
The fact that quality is essential (Absolutely Necessary) in performing audit
engagements. (Don’t compromise on quality for time & cost / client relations etc)
The importance to audit quality of:
 Performing work that complies with professional standards and regulatory and
legal requirements;
 Complying with the firm’s quality control policies and procedures as applicable;
 The engagement team’s ability to raise concerns without fear of reprisals;
 Issuing auditor’s reports that are appropriate in the circumstances;
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(CNO—SA220.100) ETHICAL REQUIREMENTS RELATING TO AN AUDIT OF FINANCIAL STATEMENTS
(MCQ-220.2)
Standard on Quality Control (SQC) 1 sets out the responsibilities of the firm for establishing policies and procedures
regarding compliance with relevant ethical requirements.
SA 220 sets out the engagement partner’s responsibilities with respect to relevant ethical requirements. These include
evaluating whether members of the engagement team have complied with relevant ethical requirements. SA 220
recognises that the engagement team is entitled to rely on a firm’s systems in meeting its responsibilities with respect
to quality control procedures.
(CNO—SA220.120) HUMAN RESOURCES

 Chart
 Sufficient The firm should establish policies and procedures designed to provide it with reasonable
personnel with assurance that it has sufficient personnel with the capabilities, competence, and commitment
the Capabilities, to ethical principles necessary to perform its engagements in accordance with professional
Competence, standards and regulatory and legal requirements, and to enable the firm or engagement
and partners to issue reports that are appropriate in the circumstances.
Commitment to
Ethical Principles
 Personnel Issues Such policies and procedures address the following personnel issues:
Estimation of personnel needs.
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Capabilities;
Competence;
Recruitment;
Performance evaluation;
Compensation;
Promotion;
Career development
Addressing these issues enables the firm to ascertain the number and characteristics of the
individuals required for the firm’s engagements. The firm’s recruitment processes include
procedures that help the firm select individuals of integrity as well as the capacity to develop
the capabilities and competence necessary to perform the firm’s work.
(CNO—SA220.140) ACCEPTANCE AND CONTINUANCE OF CLIENT RELATIONSHIPS AND AUDIT ENGAGEMENTS

(QNO-220.06)
A&C Procedures
The engagement partner shall be satisfied that appropriate procedures regarding the acceptance and continuance of
client relationships and audit engagements have been followed:
SQC 1 & SA 220 explain Information such as the following assists the engagement partner in determining whether the
conclusions reached regarding the acceptance and continuance of client relationships and audit engagements are
appropriate:
The integrity of the principal owners, key management and those charged with governance of the entity;
(E.g., Kingfisher / Essar / Toshiba / Satyam etc)
Whether the engagement team is competent to perform the audit engagement and has the necessary
capabilities, including time and resources;
(E.g., Knowledge training for Insurance / Defence / Space etc)
Whether the firm and the engagement team can comply with relevant ethical requirements; and
(E.g., Judgement will it be possible, afterwards it is throughout the audit)
Significant matters that have arisen during the current or previous audit engagement, and their implications
for continuing the relationship.
(E.g., Satyam & Toshiba)
If the engagement partner obtains information that would have caused the firm to decline the audit engagement had
that information been available earlier, the engagement partner shall communicate that information promptly to the
firm, so that the firm and the engagement partner can take the necessary action.
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(CNO—SA220.160) ENGAGEMENT PERFORMANCE (QNO-220.07)
The firm should establish policies and procedures designed to provide it with reasonable assurance that engagements
are performed in accordance with professional standards and regulatory and legal requirements, and that the firm or
the engagement partner issues reports that are appropriate in the circumstances.
Through its policies and procedures, the firm seeks to establish consistency in the quality of engagement performance.
This is often accomplished through written or electronic manuals, software tools or other forms of standardized
documentation, and industry or subject matter-specific guidance materials.
Matters addressed include the following:
Processes to keep all policies and procedures current.
(E.g., Recent Standards SA 299 / SA 720 Etc)
How engagement teams are briefed on the engagement to obtain an understanding of the objectives of their
work.
(E.g., Don’t rely on unsigned printouts)
Processes for complying with applicable engagement standards.
(E.g., SA Series wise Checklist)
Processes of engagement supervision, staff training and coaching.
(E.g., Every Friday & Saturday)
Methods of reviewing the work performed, the significant judgments made, and the form of report being
issued. (First Assistant Manager then Manager then Senior Manager or Partner)
Appropriate documentation of the work performed and of the timing and extent of the review.
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(CNO—SA220.180) MONITORING PROCESS (QNO-220.08) (MCQ-220.4,220.09)
 Chart
 Firms System of The firm should establish policies and procedures designed to provide it with reasonable
Quality Control -- assurance that the policies and procedures relating to the system of quality control are
Relevant, relevant, adequate, operating effectively and complied with in practice. Such policies and
Adequate, procedures should include an ongoing consideration and evaluation of the firm’s system of
Operating quality control, including a periodic inspection of a selection of completed engagements.
Effectively and
Complied – By
Evaluation of
System &
Inspection of
Completed
Engagements
 Responsibility to The firm entrusts responsibility for the monitoring process to a partner or partners or
Partner or other persons with sufficient and appropriate experience and authority in the firm to
Partners – assume that responsibility. Monitoring of the firm’s system of quality control is
Competent performed by competent individuals and covers both the appropriateness of the design
Individuals – and the effectiveness of the operation of the system of quality control
Appropriateness
The purpose of monitoring compliance with quality control policies and procedures is to
of Design &
provide an evaluation of:
Effectiveness of
Adherence to professional standards and regulatory and legal requirements;
Operations
Whether the quality control system has been appropriately designed and
effectively implemented; and
Whether the firm’s quality control policies and procedures have been
appropriately applied, so that reports that are issued by the firm or engagement
partners are appropriate in the circumstances
.
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UNIQUE QUESTION
 QNO-220.09 Relying on Work Performed by Others/ Death of original EP/ signed by other partner.
UNIQUE MCQS
 MCQ No. 220.1
 MCQ No. 220.8
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PART 7 – OTHER CONCEPTS
(CNO—C1OC.020) RELATIONSHIPS OF AUDITING WITH OTHER DISCIPLINES (MCQ-CIA.1)

 Chart
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 Auditing and Both are closely related with each other as auditing reviews the financial statements
Accounting which are nothing but a result of the overall accounting process.
(CAF ACC) The auditor to have a thorough and sound knowledge of generally accepted principles of
(CNO- accounting before he can review the financial statements.
COA.08)
 Auditing and The auditor should have a good knowledge of business laws affecting the entity.
Law He should be familiar with the law of contracts, negotiable instruments, etc.
(CAF LAW) The knowledge of taxation laws is also inevitable as entity is required to prepare their
(CNO- financial statements taking into account various provisions affected by various tax laws.
COA.09) In analysing the impact of various transactions particularly from the accounting aspect,
an auditor ought to have a good knowledge about the direct as well as indirect tax laws.
 Auditing and From the auditing viewpoint, the auditors are more concerned with Micro economics
Economics rather than with the Macro economics.
(CAF ECO) The knowledge of Macroeconomics should include the nature of economic force that
(CNO- affect the firm, relationship of price, productivity and the role of Government and
COA.11) Government regulations.
Auditor is expected to be familiar with the overall economic environment in which his
client is operating.
 Auditing and With the passage of time, test check procedures in auditing have become part of
Statistics & generally accepted auditing procedures.
Mathematics With the emergence of test check procedure, discipline of statistics has come quite close
(CAF Maths to auditing as the auditor is also expected to have the knowledge of statistical sampling
(CNO- so as to arrive at meaningful conclusions.
COA.13) The knowledge of mathematics is also required on the part of auditor particularly at the
time of verification of inventories.
 Auditing and Financial auditor deals basically with the figures contained in the financial statements,
Behavioural but he shall be required to interact with a lot of people in the organization.
Science The internal auditor or a management auditor is expected to deal with human beings
(CA IPCC rather than financial figures.
Ethics & One of the basic elements in designing the internal control system is personnel.
Communica- The knowledge of human behaviour is indeed very essential for an auditor so as to
tion) effectively discharge his duties.
(CNO-
COA.15)
 Auditing and Auditor is required to evaluate transactions from the accounting aspect in relation to the
Production process through which it has passed through as accounting for by-products; joint-
(CA Inter products may also require to be done. The knowledge of production process shall become
Costing) more essential in case of an internal auditor.
The auditor shall also require understanding the cost system in operation in the factory
and assessing whether the same is adequate for the particular company.
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 Auditing and The auditor is expected to have knowledge about various financial techniques such as
Financial working capital management, funds flow, ratio analysis, capital budgeting etc.
Management The auditor is also expected to have a fair knowledge of the institutions that comprise
(CA Inter FM) the market place.
The knowledge of various institutions and Government activities that influence the
operations of the financial market are also required to be understood by an auditor.
 Auditing and Organizations are witnessing revolution in the field of data processing of accounts.
Data Many organizations are carrying out their financial accounting activities with the help of
Processing computers which can document, record, collate, allocate and value accounting data and
(CA Inter information in very large quantity at very high speed. The dependence on the accuracy
EISM) of the programmed instructions given today, the computer is able to carry out each of
these activities with complete accuracy.
With such a phenomenal growth in the field of computer sciences, the auditor should
have good knowledge of the components, general capability of the system and the
related terms. In fact, EDP auditing in itself is developing as a discipline in itself.
 With others On the similar pattern the auditor is also expected to have good understanding about the
marketing, personnel and other general business management areas.
(CNO—C1OC.040) SCOPE OF AUDIT

 Chart
 What to Cover The following points merit consideration in regard to scope of audit:
1. The audit should be organized to cover adequately all aspects of the enterprise relevant to
the financial statements being audited.
2. To form an opinion on the financial statements, the auditor should be reasonably satisfied
as to whether the information contained in the underlying accounting records and other
source data is reliable and sufficient as the basis for the preparation of the financial
statements.
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3. In forming his opinion, the auditor should also decide whether the relevant information is
properly disclosed in the financial statements subject to statutory requirements, where
applicable.
4. The auditor assesses the reliability and sufficiency of the information contained in the
underlying accounting records and other source data by:
(a) making a study and evaluation of accounting systems and internal controls and
(b) carrying out such other tests, enquiries and other verification procedures of accounting
transactions and account balances as he considers appropriate in the particular circumstances.
5. The auditor determines whether the relevant information is properly disclosed in the
financial statements by:
(a) comparing the financial statements with the underlying accounting records and other
source data to see whether they properly summarize
the transactions and events recorded therein; and
(b) considering the judgments that management has made in preparing the financial
statements accordingly, the auditor assesses the selection and consistent application of
accounting policies, the manner in which the information has been classified, and the
adequacy of disclosure.
 What not to 6. The auditor is not expected to perform duties which fall outside the scope of his
Cover & competence. For example, the professional skill required of an auditor does not include that
Constraint on of a technical expert for determining physical condition of certain assets.
Scope 7. Constraints on the scope of the audit of financial statements that impair the auditor’s ability
to express an unqualified opinion on such financial statement should be set out in his report,
and a qualified opinion or disclaimer of opinion should be expressed as appropriate.
(CNO—C1OC.060) REFERENCE OF SCOPE IN ENGAGEMENT LETTER & AUDIT REPORT

 Chart
 Discussion As discussed in SA 210, the auditor should get the scope of his duties and responsibilities
defined by obtaining instructions in writing. Also, it is always a wise precaution to state in the
report, accompanying the financial statements of proprietary or partnership firms or other
similar organisations, the nature of the work carried out and explain the important features of
the financial statements on which a report has been made. Furthermore, to ensure that the
report will be brought to the notice of all concerned stakeholders, the accounts should bear
reference to the report.
(CNO—C1OC.080) COVERAGE OF ENTITIES

 Chart
 Discussion Business oriented entities are generally covered in audit. In case of Non-Profit Organization &
Trusts sometimes audit is mandatory to get License, Govt. Grants and Tax Exemption. Further
Governing Bodies, Members, Beneficiaries want audit to be conducted to prevent & detect
financial irregularities.
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(CNO—C1OC.100) ASPECTS TO BE COVERED IN AUDIT (QNO-COA.17)
(Similar to Core Audit Process we have studied before, this theory is based on old theory of audit)
 Aspects to be covered in Audit
The principal aspects to be covered in an audit of the financial statements are the following:
An examination of the system of accounting and internal control to ascertain whether it is appropriate for
the business and helps in properly recording all transactions.
Reviewing the system and procedures to find out whether they are adequate and comprehensive and
incidentally whether material inadequacies and weaknesses exist to allow frauds and errors going unnoticed.
Checking of the arithmetical accuracy of the books of account by the verification of postings, balances, etc.
Verification of the authenticity and validity of transactions entered into by making an examination of the
entries in the books of accounts with the relevant supporting documents.
Ascertaining that a proper distinction has been made between items of capital and of revenue nature and
that the amounts of various items of income and expenditure adjusted in the accounts corresponding to the
accounting period.
Comparison of the balance sheet and profit and loss account or other statements with the underlying record
in order to see that they are in accordance therewith.
Verification of the title, existence and value of the assets appearing in the balance sheet.
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 Assertions about account balances at the period end:

(a) Existence—assets, liabilities, and equity interests exist.
(b) Rights and obligations—the entity holds or controls the rights to assets, and liabilities are the obligations
of the entity.
(c) Completeness—all assets, liabilities and equity interests that should have been recorded have been
recorded.
(d) Valuation and allocation—assets, liabilities, and equity interests are included in the financial statements
at appropriate amounts and any resulting valuation or allocation adjustments are appropriately recorded.
Verification of the liabilities stated in the balance sheet.
Checking the result shown by the profit and loss and to see whether the results shown are true and fair.
Where audit is of a corporate body, confirming that the statutory requirements have been complied with.
Reporting to the appropriate person/body whether the statements of account examined do reveal a true and
fair view of the state of affairs and of the profit and loss of the organization.
(CNO—C1OC.120) QUALITIES OF AN AUDITOR (QNO-COA.27)

 Chart
 Professional Knowledge of the required acts: He should have an expert knowledge of various laws which
/Technical are related to his professional duties. He can’t be an expert of all laws. However, he should
Qualities have adequate knowledge of the laws relating to business, banking, companies, tax etc. 1
Knowledge about the business practices and transactions. 2
Expert knowledge in accounting: 3
 He should be an expert in understanding various accounting systems.
 He should have a good knowledge on treatment of various events / transactions
and its effect on various parts of the financial statements.
Expert knowledge in auditing: This is the most important quality. Unless an auditor
thoroughly knows the techniques to be adopted in an audit, he cannot discharge his duties
efficiently. 4
Continuing awareness of latest developments: Several developments affect the work of the
auditor. For example, the recent growth in the use of computers for maintaining accounting
records had a significant effect on auditing techniques. Another example is any changes in
law may affect the auditor’s duties and responsibilities. 5
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 Personal Ethics: He must sincerely follow the professional ethics framed by ICAI.
Qualities Integrity: It refers to the honesty of an auditor. He should not issue audit report containing
untrue statements.
Objectivity: It refers to unbiased, being unaffected by personal feelings or prejudices.
Independence in decision making: He should be independent in decision making with regard
to audit matters i.e., the audit decisions should be taken without giving importance to his
personal wishes.
Application of practical approach: He must be practical in his approach while doing audit or
giving advice to his clients.
Analytical in approach: He should be highly analytical in approach. If the facts placed before
him are not properly analysed, the conclusions reached by him will not be proper.
Confidentiality: The nature of audit work is confidential. He should not reveal anything about
his client to others without the consent of the client.
Firmness and patience: He must be firm and patient.
Common sense: Above all, he should have common sense.
(CNO—C1OC.140) INDEPENDENCE OF AUDITOR (QNO—COA.32)

 Chart
 Definition It is not possible to define “independence” precisely. Rules of professional conduct dealing with
independence are framed primarily with a certain objective. The rules themselves cannot create
or ensure the existence of independence. Independence is a condition of mind as well as
personal character. It should not be confused with the superficial and visible standards of
independence which are sometimes imposed by law.
There are two interlinked perspectives of independence of auditors, one, independence of mind;
and two, independence in appearance. The Code of Ethics for Professional Accountants issued
by International Federation of Accountants (IFAC) defines the term ‘Independence’ as follows:
“Independence is:
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(a) Independence of mind – the state of mind that permits the provision of an opinion without
being affected by influences allowing an individual to act with integrity, and exercise objectivity
and professional skepticism; and
(b) Independence in appearance – the avoidance of facts and circumstances that are so
significant that a third party would reasonably conclude an auditor’s integrity, objectivity or
professional skepticism had been compromised.”
 Discussion Professional integrity and independence are considered essential characteristics of all the
professions but are more so in the case of accountancy profession. Independence implies that
the judgement of a person is not subordinate to the wishes or direction of another person who
might have engaged him.
Independence enhances the auditor’s ability to act with integrity, to be objective and to maintain
an attitude of professional skepticism.
Independence of the auditor has not only to exist in fact, but also appear to so exist to all
reasonable persons. The auditor should be straightforward, honest and sincere in his approach
to his professional work. He must be fair and must not allow prejudice or bias to override his
objectivity. He should maintain an impartial attitude and both be and appear to be free of any
interest which might be regarded as being incompatible with integrity and objectivity.
 Threats to Many different circumstances, or combination of circumstances, may be relevant and
Independence accordingly it is impossible to define every situation that creates threats to independence and
specify the appropriate mitigating action that should be taken. In addition, the nature of
assurance engagements may differ and consequently different threats may exist requiring the
application of different safeguards.
(CNO—C1OC.160) THREATS TO INDEPENDENCE (QNO-COA.33)

The Code of Ethics for Professional Accountants prepared by the International Federation of Accountants (IFAC)
identifies five types of threats. These are:
 Chart
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 Self-Interest Self-interest threats, which occur when an auditing firm, its partner or associate could
Threats: benefit from a financial interest in an audit client. Examples include
(MCQ-CIA.5, (i) direct financial interest or materially significant indirect financial interest in a client,
CIA.6, CIA.7) (ii) loan or guarantee to or from the concerned client,
(iii) undue dependence on a client’s fees and, hence, concerns about losing the engagement,
(iv) close business relationship with an audit client,
(v) potential employment with the client, and
(vi) contingent fees for the audit engagement.
Like, in case an audit firm unduly relies on fees from a client, it may result in threat to self-
interest of auditor and he may not work objectively for the fear of losing client.
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 Self-Review Self-review threats, which occur when during a review of any judgement or conclusion
Threats: reached in a previous audit or non-audit engagement (Non audit services include any
professional services provided to an entity by an auditor, other than audit or review of the
financial statements. These include management services, internal audit, investment
advisory service, design and implementation of information technology systems etc.), or
when a member of the audit team was previously a director or senior employee of the client.
Instances where such threats come into play are
(i) when an auditor having recently been a director or senior officer of the company, and
(ii) when auditors perform services that are themselves subject matters of audit.
 Advocacy Advocacy threats, which occur when the auditor promotes, or is perceived to promote, a
Threats: client’s opinion to a point where people may believe that objectivity is getting compromised,
e.g. when an auditor deals with shares or securities of the audited company, or becomes the
client’s advocate in litigation and third-party disputes. In such situations, auditor can be
perceived as backing and championing causes of auditee client and it may lead to belief that
auditor is not acting and working objectively. Remember that auditor has not only to be
independent but also appear to be acting so.
 Familiarity Familiarity threats are self-evident, and occur when auditors form relationships with the
Threats client where they end up being too sympathetic to the client’s interests. This can occur in
(MCQ-CIA.2) many ways:
(i) close relative of the audit team working in a senior position in the client company,
(ii) former partner of the audit firm being a director or senior employee of the client,
(iii) long association between specific auditors and their specific client counterparts, and
(iv) acceptance of significant gifts or hospitality from the client company, its directors or
employees.
Provisions in Companies Act, 2013 regarding rotation of auditors mainly address these very
familiarity threats. Such provisions prescribe that auditor is rotated after a certain number
of years so that auditors do not become too familiar with their clients. You would study
about these provisions in detail in Chapter 10 on Company audit.
 Intimidation Intimidation threats, which occur when auditors are deterred from acting objectively with an
Threats adequate degree of professional skepticism. Basically, these could happen because of threat of
(MCQ-CIA.11) replacement over disagreements with the application of accounting principles, or pressure to
disproportionately reduce work in response to reduced audit fees or being threatened with
litigation. Such threats attempt to intimidate auditors to deter them from acting objectively.
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(CNO—C1OC.180) SAFEGUARDS TO INDEPENDENCE
The Chartered Accountant has a responsibility to remain independent by taking into account the context in which they
practice, the threats to independence and the safeguards available to eliminate the threats.
 Chart
 The following For the public to have confidence in the quality of audit, it is essential that auditors
are the should always be and appears to be independent of the entities that they are auditing.
guiding In the case of audit, the key fundamental principles are integrity, objectivity and
principles in professional skepticism, which necessarily require the auditor to be independent.
this regard: - Before taking on any work, an auditor must conscientiously consider whether it involves
(QNO- threats to his independence.
COA.35) When such threats exist, the auditor should either desist from the task or put in place
safeguards that eliminate them.
If the auditor is unable to fully implement credible and adequate safeguards, then he
must not accept the work.
(CNO—C1OC.200) AUDIT VS INVESTGATION (QNO-COA.07)

 Discussion We have to clearly understand that audit is distinct from investigation. Investigation is a critical
examination of the accounts with a special purpose. For example, if fraud is suspected and it is
specifically called upon to check the accounts whether fraud really exists, it takes character of
investigation.
The objective of audit, on the other hand as we have already discussed, is to obtain reasonable
assurance about whether the financial statements as a whole are free from material
misstatement, whether due to fraud or error, thereby enabling the auditor to express an
opinion.
Therefore, audit is never started with a pre-conceived notion about state of affairs; about
wrong-doing; about some wrong having been committed. The auditor seeks to report what he
finds in normal course of examination of accounts. However, it is quite possible that sometimes
investigation results from the prima facie findings of the auditor. It may happen that auditor has
given some findings of serious concern. Such findings may prompt for calling an investigation.
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UNIQUE QUESTIONS
 QNO-COA.29 "Provisions giving concrete shape to Auditor’s Independence"
 QNO-COA.31 Importance of Independent Audit
 QNO-COA.39 Others- Self Revealing Error
UNIQUE MCQS
 MCQ No. CIA.4, CIA.9, CIA.10
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CHAPTER AUDIT STRATEGY, AUDIT PLANNING AND AUDIT

2 PROGRAMME
Part 1 -- SA 300
(CNO--SA300.010) AUDIT PLANNING
 Chart
 Strategy Planning an audit involves:

& Plan (a) Establishing the overall audit strategy
(b) Developing an audit plan
(CNO--SA300.020) ESTABLISHING THE OVERALL AUDIT STRATEGY

 Chart
(QNO-300.03)
 Overall  Identify the characteristics of the engagement that define its scope;
Audit  Ascertain the reporting objectives of the engagement to plan the timing of the audit
Strategy and the nature of the communications required;
MCQ-300.3,  Consider the factors that, in the auditor’s professional judgment, are significant in
300.5,300.7, directing the engagement team’s efforts;
300.9  Consider the results of preliminary engagement activities and, where applicable,
whether knowledge gained on other engagements performed by the engagement
partner for the entity is relevant; and
 Ascertain the nature, timing and extent of resources necessary to perform the
engagement.
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(CNO--SA300.040) FACTORS CONSIDERED FOR DETERMINING OVERALL AUDIT STRATEG (FURTHER DETAILED
EXPLANATION OF EACH FACTOR)
 Chart
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 Resources In establishing the overall audit strategy, the auditor shall
 Ascertain the nature, timing and extent of resources necessary to perform the
engagement.
 Example
 The selection of engagement team and the assignment of audit work to the
team members, including the assignment of appropriately experienced team
members to areas where there may be higher risks of material
misstatement.
 Engagement budgeting, including considering the appropriate amount of
time to set aside for areas where there may be higher risks of material
misstatement.
 Characteristics  Identify the characteristics of the engagement that define its scope;
of the
Engagement  Example
that define  The expected audit coverage, including the number and locations of
SCOPE components to be included.
 The nature of the business segments to be audited, including the need for
specialized knowledge.
 The expected use of audit evidence obtained in previous audits, for example,
audit evidence related to risk assessment procedures and tests of controls.
 Reporting &  Ascertain the reporting objectives of the engagement to plan the timing of the audit
Communication and the nature of the communications required;
(QNO—300.05)  Example
 The entity’s timetable for reporting, such as at interim and final stages.
 The organization of meetings with management and those charged with
governance to discuss the nature, timing and extent of the audit work.
 The discussion with management and those charged with governance
regarding the expected type and timing of reports to be issued and other
communications, both written and oral, including the auditor’s report,
management letters and communications to those charged with governance.
 The discussion with management regarding the expected communications
on the status of audit work throughout the engagement.
 Preliminary  Consider the results of preliminary engagement activities and, where applicable,
Engagement whether knowledge gained on other engagements performed by the engagement
Activities & partner for the entity is relevant; and
Factors  Consider the factors that, in the auditor’s professional judgment, are significant in
Significant in directing the engagement team’s efforts;
Directing
Engagement  Example
Team  Preliminary identification of areas where there may be a higher risk of
material misstatement.
 Results of previous audits that involved evaluating the operating
effectiveness of internal control, including the nature of identified
deficiencies and action taken to address them.
 Volume of transactions, which may determine whether it is more efficient
for the auditor to rely on internal control.
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(CNO--SA300.060) OVERALL AUDIT STRATEGY -- FOR RESOURCES MANAGEMENT
(QNO-300.07) (MCQ-300.12, 300.15, 300.16, Incs.02.1, Incs.02.2, Incs.09.1)
 The auditor shall establish an overall audit strategy that sets the scope, timing and direction of the audit,
and that guides the development of the audit plan.
 The process of establishing the overall audit strategy assists the auditor to determine, subject to the
completion of the auditor’s risk assessment procedures, such matters as:
 The amount of resources to allocate to specific audit areas, such as the number of team members
assigned to observe the inventory count at material locations, the extent of review of other
auditors’ work in the case of group audits, or the audit budget in hours to allocate to high risk
areas;
 The resources to deploy for specific audit areas, such as the use of appropriately experienced team
members for high risk areas or the involvement of experts on complex matters;
 When these resources are to be deployed, such as whether at an interim audit stage or at key cut-
off dates; and
 How such resources are managed, directed and supervised, such as when team briefing, and
debriefing meetings are expected to be held, how engagement partner and manager reviews are
expected to take place (for example, on-site or off-site), and whether to complete engagement
quality control reviews.
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(CNO--SA300.080) DEVELOP AN AUDIT PLAN (MCQ-300.1, 300.2, 300.4, 300.6, 300.8)
 Chart
 3 Types The auditor shall develop an audit plan that shall include a description of:
of Audit  The nature, timing and extent of planned risk assessment procedures, as determined
Plan under SA 315 “Identifying and Assessing the Risks of Material Misstatement through
Understanding the Entity and Its Environment”.
 The nature, timing and extent of planned further audit procedures at the assertion
level, as determined under SA 330 “The Auditor’s Responses to Assessed Risks”.
 Other planned audit procedures that are required to be carried out so that the
engagement complies with SAs.
The audit plan is more detailed than the overall audit strategy that includes the nature, timing
and extent of audit procedures to be performed by engagement team members. Planning for
these audit procedures takes place over the course of the audit as the audit plan for the
engagement develops.
 Example Planning of the auditor’s risk assessment procedures occurs early in the audit process.
However, planning the nature, timing and extent of specific further audit procedures depends
on the outcome of those risk assessment procedures. In addition, the auditor may begin the
execution of further audit procedures for some classes of transactions, account balances and
disclosures before planning all remaining further audit procedures.
(Concept relating to knowledge of clients business is covered in Chapter 3 Part-1)
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(CNO--SA300.100) RELATIONSHIP BETWEEN OVERALL AUDIT STRATEGY AND AUDIT PLAN
(QNO-300.15) (MCQ- 300.14, Incs.09.2)
Once the overall audit strategy has been established, an audit plan can be developed to address the various matters
identified in the overall audit strategy, taking into account the need to achieve the audit objectives through the
efficient use of the auditor’s resources. The establishment of the overall audit strategy and the detailed audit plan
are not necessarily discrete or sequential processes but are closely inter-related since changes in one may result in
consequential changes to the other.
(CNO--SA300.120) PLANNING DIRECTION / SUPERVISION / REVIEW (QNO-300.29)
The auditor shall plan the nature, timing and extent of direction and supervision of engagement team members and
the review of their work.
The nature, timing and extent of the direction and supervision of engagement team members and review of their
work vary depending on many factors, including:
 The size and complexity of the entity.
 The area of the audit.
 The assessed risks of material misstatement
o For example, an increase in the assessed risk of material misstatement for a given area of the audit
ordinarily requires a corresponding increase in the extent and timeliness of direction and
supervision of engagement team members, and a more detailed review of their work).
 The capabilities and competence of the individual team members performing the audit work. SA 220
contains further guidance on the direction, supervision and review of audit work.
o We may have identified a problem related to the production process that raised concerns about
inventory obsolescence. After obtaining an understanding of the entity’s process that raised
concerns about inventory obsolescence (which we had identified as a significant class of
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transactions), we concluded that additional tests of details were required. Therefore, the senior will
likely take part, along with the team, in the discussions with management about the provision for
obsolescence and examine related documentation supporting the provision, rather than just
reading the memo on file. These procedures should be completed as the work is being performed
rather than as an after the fact review. The extent of the senior’s involvement requires judgment,
taking into consideration the complexity of the area and the experience of the team.
(CNO--SA300.140) CHANGES TO PLANNING DECISIONS DURING THE COURSE OF THE AUDIT

(QNO-300.17) (MCQ-300.11)
Changes in Condition / Contradictory Audit Evidence / Results leading to Additional Audit Procedures
The auditor shall update and change the overall audit strategy and the audit plan as necessary during the course of
the audit. As a result of unexpected events, changes in conditions, or the audit evidence obtained from the results
of audit procedures, the auditor may need to modify the overall audit strategy and audit plan and thereby the
resulting planned nature, timing and extent of further audit procedures, based on the revised consideration of
assessed risks. This may be the case when information comes to the auditor’s attention that differs significantly
from the information available when the auditor planned the audit procedures.
For example, audit evidence obtained through the performance of substantive procedures may contradict the audit
evidence obtained through tests of controls.
(CNO--SA300.160) ADDITIONAL CONSIDERATIONS IN INITIAL AUDIT ENGAGEMENTS

 Chart
 (As per SA- (As per SA-300, “Planning an Audit of Financial Statements”) The auditor shall undertake the
300, following activities prior to starting an initial audit:
“Planning an  Performing procedures required by SA 220 regarding the acceptance of the client
Audit of relationship and specific audit engagement, and
Financial  Communicating with the predecessor auditor, where there has been a change of
Statements”) auditors, in compliance with relevant ethical requirements.
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(CNO--SA300.180) DOCUMENTATION OF AUDIT PLAN (QNO-300.27) (MCQ-300.10)
 Chart
 What should be  The auditor shall document:

Documented?  the overall audit strategy;
 the audit plan; and
 any significant changes made during the audit engagement to the overall
audit strategy or the audit plan, and the reasons for such changes.
 Further  Overall Audit Strategy
Explanation The documentation of the overall audit strategy is a record of the key decisions
considered necessary to properly plan the audit and to communicate significant
matters to the engagement team.
Example The auditor may summarize the overall audit strategy in the form of a
memorandum that contains key decisions regarding the overall scope, timing and
conduct of the audit.
 Audit Plan
The documentation of the audit plan is a record of the planned nature, timing and
extent of risk assessment procedures and further audit procedures at the assertion
level in response to the assessed risks. It also serves as a record of the proper
planning of the audit procedures that can be reviewed and approved prior to their
performance. The auditor may use standard audit programs and/or audit completion
checklists, tailored as needed to reflect the particular engagement circumstances.
 Significant Changes
A record of the significant changes to the overall audit strategy and the audit plan,
and resulting changes to the planned nature, timing and extent of audit procedures,
explains why the significant changes were made, and the overall strategy and audit
plan finally adopted for the audit. It also reflects the appropriate response to the
significant changes occurring during the audit.
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(CNO--SA300.190) EXAMPLES OF MATTERS WHICH SHOULD FORM PART OF AUDIT DOCUMENTATION WHICH
ARE RELATED TO PLANNING STAGES
 Chart
 Discussion  Past Auditor’s report on the entity’s financial statements.

 Past Other reports as specified in the engagement agreement (e.g., debt covenant
compliance letter)
 A summary of discussion with the entity’s key decision makers.
 Other communications or agreements with management or those charged with governance
regarding the scope, or changes in scope, of our services.
 Audit documentation access letter
 Documentation of audit committee pre-approval of services, where required.
recent ICAI module we included them & highlight them separately. We have marked questions which are present
in PARAM question bank but not having supporting material in BHASKAR as unique. These questions can be tricky
as they target new concepts and has 50-50 chances of coming in exams, we have covered them in our Q&A
videos.)
UNIQUE QUESTIONS
 QNO-300.01 Overall Audit Plan (Factors for Development)
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Part 2 -- [SA 320] MATERIALITY IN PLANNING AND PERFORMING AN AUDIT
(CNO--SA320.010) FINANCIAL STATEMENTS SHOULD DISCLOSED MATERIAL ITEMS

 Chart
 Important Financial Statements are prepared to portray a true and fair view of the performance and state of
Principles affairs of an enterprise. In selecting a policy, alternative accounting policies should be evaluated in
that light. In particular, materiality is one of the major considerations that governs the selection of
a particular policy. Financial statements should disclose all ‘material items, i.e. the items the
knowledge of which might influence the decisions of the user of the financial statement.
Materiality is not always a matter of relative size. For example a small amount lost by fraudulent
practices of certain employees can indicate a serious flaw in the enterprise’s internal control
system requiring immediate attention to avoid greater losses in future.
In certain cases quantitative limits of materiality is specified.
 Examples A few of such cases are given below:
(a) A company should disclose by way of notes additional information regarding any item of
income or expenditure which exceeds 1% of the revenue from operations or `1,00,000 whichever
is higher (Refer general Instructions for preparation of Statement of Profit and Loss in Schedule III
to the Companies Act, 2013).
(b) A company should disclose in Notes to Accounts, shares in the company held by each
shareholder holding more than 5 per cent shares specifying the number of shares held.
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(CNO--SA320.020) MATERIALITY (QNO-320.01) (MCQ-320.03, Incs.09.3)
 Chart
 Definition According to SA 200 “Overall Objectives of the Independent Auditor and the Conduct of an Audit
in Accordance with Standards on Auditing”, financial reporting frameworks often discuss the
concept of materiality in the context of the preparation and presentation of financial statements.
Although financial reporting frameworks may discuss materiality in different terms, they generally
explain that:
 Misstatements, including omissions, are considered to be material if they, individually or
in the aggregate, could reasonably be expected to influence the economic decisions of
users taken on the basis of the financial statements;
 Depends on  Judgments about materiality are made in the light of surrounding circumstances, and are
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Circumstan affected by the auditor’s perception of the financial information needs of users of the
ces financial statements, and by the size or nature of a misstatement, or a combination of
both; and (CSR expenditure after Sec 135 was notified)
 Common  The auditor’s determination of materiality is a matter of professional judgment and is
needs of affected by the auditor’s perception of the financial information needs of users of the
users as financial statements.
group  Judgments about matters that are material to users of the financial statements are based
on a consideration of the common financial information needs of users as a group. The
possible effect of misstatements on specific individual users, whose needs may vary
widely, is not considered.
(E.g., Advertisement costs are analyzed in depth in FMCG industry by public at large but
some individuals may pay more attention to employee costs)
 FRF Such a discussion, if present in the applicable financial reporting framework, provides a frame of
reference to the auditor in determining materiality for the audit. If the applicable financial
reporting framework does not include a discussion of the concept of materiality, the
characteristics referred above provides the auditor with such a frame of reference.
 Assumption In this context, it is reasonable for the auditor to assume that users:
about users  Have a reasonable knowledge of business and economic activities and accounting and a
willingness to study the information in the financial statements with reasonable diligence;
 Understand that financial statements are prepared, presented and audited to levels of
materiality;
 Recognize the uncertainties inherent in the measurement of amounts based on the use of
estimates, judgment and the consideration of future events; and
 Make reasonable economic decisions on the basis of the information in the financial
statements.
The concept of materiality is applied by the auditor both in planning and performing the audit, and
in evaluating the effect of identified misstatements on the audit and of uncorrected
misstatements, if any, on the financial statements and in forming the opinion in the auditor’s
report.
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(CNO--SA320.040) BENCHMARKING (MCQ-Incs.02.4, Incs.09.4)
Determining materiality involves the exercise of professional judgment. A percentage is often applied to a chosen
benchmark as a starting point in determining materiality for the financial statements as a whole.
(E.g., PAT × 5%, Total Assets × 1%, Turnover × 5%)
 Chart
 Step 1 Factors that may affect the identification of an appropriate benchmark include the following:
Decide  The elements of the financial statements;
Benchmark o Example
(Base) Assets, liabilities, equity, revenue, expenses;
(QNO-  Whether there are items on which the attention of the users of the particular entity’s
320.03) financial statements tends to be focused;
(MCQ-320.3, o Example
Incs.40.5) For the purpose of evaluating financial performance users may tend to focus on
profit, revenue or net assets
 The nature of the entity, where the entity is at in its life cycle, and the industry and
economic environment in which the entity operates;
o Example
Entity’s in initial phase may focus on sales and growth but in later stages they
focus on profits
 The entity’s ownership structure and the way it is financed;
o Example
If an entity is financed solely by debt rather than equity, users may put more
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emphasis on assets, and claims on them, than on the entity’s earnings;
 The relative volatility of the benchmark.
o Example
Profit before tax from continuing operations is often used for profit-oriented
entities. When profit before tax from continuing operations is volatile, other
benchmarks may be more appropriate, such as gross profit or total revenues.
 Examples of Examples of benchmarks that may be appropriate, depending on the circumstances of the entity,
Benchmarks include categories of
 Earnings based
o Normalized Earning
o EBIT (PBT from Continuing Op)
o EBITDA
o Gross Margin
 Activity based
o Revenues
o Operating Expenses
 Capital based
o Equity
o Assets
 Step 2
Collecting
relevant
financial data
& adjusting it
as per
circumstances
In relation to the chosen benchmark, relevant financial data ordinarily includes –

 prior periods’ financial results and financial positions,
 the period to-date financial results and financial position, and
 budgets or forecasts for the current period,
Adjusted for significant changes in the circumstances of the entity (for example, a significant
business acquisition) and relevant changes of conditions in the industry or economic
environment in which the entity operates.
For example, when, as a starting point, the materiality for the financial statements as a whole is
determined for a particular entity based on a percentage of profit before tax from continuing
operations, circumstances that give rise to an exceptional decrease or increase in such profit
may lead the auditor to conclude that the materiality for the financial statements as a whole is
more appropriately determined using a normalized profit before tax from continuing
operations figure based on past results.
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 Step 3
Determine
Percentage
(MCQ-
320.1)
Determine Percentage to be applied to a chosen benchmark involves the exercise of professional

judgment. There is a relationship between the percentage and the chosen benchmark, such that a
percentage applied to profit before tax from continuing operations will normally be higher than a
percentage applied to total revenue.
For example, the auditor may Materiality in Planning and Performing an Audit consider five
percent of profit before tax from continuing operations to be appropriate for a profit-oriented
entity in a manufacturing industry, while the auditor may consider one percent of total revenue or
total expenses to be appropriate for a not-for-profit entity. Higher or lower percentages, however,
may be deemed appropriate in different circumstances.
(CNO--SA320.060) FINANCIAL STATEMENT LEVEL V/S SPECIFIC AREA LEVEL (QNO-320.04)
When establishing the overall audit strategy, the auditor shall determine materiality for the financial statements as a
whole. If, in the specific circumstances of the entity, there is one or more particular classes of transactions, account
balances or disclosures for which misstatements of lesser amounts than the materiality for the financial statements
as a whole could reasonably be expected to influence the economic decisions of users taken on the basis of the
financial statements, the auditor shall also determine the materiality level or levels to be applied to those particular
classes of transactions, account balances or disclosures.
Factors that may indicate the existence of one or more particular classes of transactions, account balances or
disclosures for which misstatements of lesser amounts than materiality for the financial statements as a whole could
reasonably be expected to influence the economic decisions of users taken on the basis of the financial statements
include the following:
 Whether law, regulations or the applicable financial reporting framework affect users expectations
regarding the measurement or disclosure of certain items.
For Example
 Related party transactions, and the remuneration of management and those charged with
governance.
 The key disclosures in relation to the industry in which the entity operates.
For Example
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 Research and development costs for a pharmaceutical company.
 Whether attention is focused on a particular aspect of the entity’s business that is separately disclosed in
the financial statements.
For Example
 A newly acquired business.
In considering whether, in the specific circumstances of the entity, such classes of transactions, account balances or
disclosures exist, the auditor may find it useful to obtain an understanding of the views and expectations of those
charged with governance and management.
(CNO--SA320.080) PERFORMANCE MATERIALITY (MCQ- Incs.02.3)
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Performance materiality means the amount or amounts set by the auditor at less than materiality for the financial
statements as a whole to reduce to an appropriately low level the probability that the aggregate of uncorrected and
undetected misstatements exceeds materiality for the financial statements as a whole. If applicable, performance
materiality also refers to the amount or amounts set by the auditor at less than the materiality level or levels for
particular classes of transactions, account balances or disclosures.
The auditor shall determine performance materiality for purposes of assessing the risks of material misstatement
and determining the nature, timing, and extent of further audit procedures
Planning the audit solely to detect individually material misstatements overlooks the fact that the aggregate of
individually immaterial misstatements may cause the financial statements to be materially misstated and leaves no
margin for possible undetected misstatements.
Performance materiality (which, as defined, is one or more amounts) is set to reduce to an appropriately low level
the probability that the aggregate of uncorrected and undetected misstatements in the financial statements exceeds
materiality for the financial statements as a whole. Similarly, performance materiality relating to a materiality level
determined for a particular class of transactions, account balance or disclosure is set to reduce to an appropriately
low level the probability that the aggregate of uncorrected and undetected misstatements in that particular class of
transactions, account balance or disclosure exceeds the materiality level for that particular class of transactions,
account balance or disclosure.
The determination of performance materiality is not a simple mechanical calculation and involves the exercise of
professional judgment. It is affected by the auditor’s understanding of the entity, updated during the performance of
the risk assessment procedures; and the nature and extent of misstatements identified in previous audits and
thereby the auditor’s expectations in relation to misstatements in the current period.
(CNO--SA320.100) RELATIONSHIP BETWEEN MATERIALITY & AUDIT RISK (QNO320.05) (MCQ- 320.2)
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 Materiality and audit risk are considered throughout the audit, in particular, when:
o Identifying and assessing the risks of material misstatement;
o Determining the nature, timing, and extent of further audit procedures; and
o Evaluating the effect of uncorrected misstatements, if any, on the financial statements and in
forming the opinion in the auditor’s report.
 Not given in SA 320
Further there is inverse relationship between materiality and audit risk, if materiality is more, we do more
audit procedures which reduces audit risk.
(CNO--SA320.120) REVISION OF MATERIALITY (QNO-320.07)
The auditor shall revise materiality for the financial statements as a whole (and, if applicable, the materiality level or
levels for particular classes of transactions, account balances or disclosures) in the event of becoming aware of
information during the audit that would have caused the auditor to have determined a different amount (or
amounts) initially.
If the auditor concludes that a lower materiality for the financial statements as a whole (and, if applicable,
materiality level or levels for particular classes of transactions, account balances or disclosures) than that initially
determined is appropriate, the auditor shall determine whether it is necessary to revise performance materiality,
and whether the nature, timing and extent of the further audit procedures remain appropriate.
Materiality for the financial statements as a whole (and, if applicable, the materiality level or levels for particular
classes of transactions, account balances or disclosures) may need to be revised as a result of a change in
circumstances that occurred during the audit.
(For example, a decision to dispose of a major part of the entity’s business), new information, or a change in the
auditor’s understanding of the entity and its operations as a result of performing further audit procedures.
(For example, if during the audit it appears as though actual financial results are likely to be substantially different
from the anticipated period end financial results that were used initially to determine materiality for the financial
statements as a whole, the auditor revises that materiality).
(CNO--SA320.140) DOCUMENTING THE MATERIALITY (MCQ-Incs.40.4)
The audit documentation shall include the following amounts and the factors considered in their determination:
 Materiality for the financial statements as a whole.
 If applicable, the materiality level or levels for particular classes of transactions, account balances or
disclosures;
 Performance materiality; and
 Any revision of above as the audit progressed.
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UNIQUE QUESTIONS
 QNO-320.02 Materiality Discussion, Multiple Points
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Part 3 – Other Concepts
(CNO--C2OC.020) AUDIT PLAN TO CONDUCT AN EFFECTIVE AUDIT (QNO-C2OC.020) (MCQ- Incs.34.2)

 Chart
 Why Planning? “The auditor should plan his work to enable him to conduct an effective audit in an efficient
and timely manner. Plans should be based on knowledge of the client’s business”.
 What should acquiring knowledge of the client’s accounting systems, policies and internal control
plan cover? procedures;
establishing the expected degree of reliance to be placed on internal control;
determining and programming the nature, timing, and extent of the audit
procedures to be performed; and
coordinating the work to be performed.
 Revision of Plans should be further developed and revised as necessary during the course of the
Plan audit.
(CNO--C2OC.040) PLANNING - A CONTINUOUS PROCESS (QNO- C2OC.040)
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Planning is not a discrete phase of an audit but rather a continual and iterative process. It often begins shortly
after (or in connection with) the completion of the previous audit and continues until the completion of the
current audit engagement. Planning includes consideration of the timing of certain activities and audit procedures.
It also involves Audit Programming.
Planning includes the need to consider such matters as:
 Obtaining a general understanding of the legal and regulatory framework applicable to the entity
and how the entity is complying with that framework.
 The determination of materiality.
 The analytical procedures to be applied as risk assessment procedures.
 The performance of other risk assessment procedures.
 The involvement of experts.
(CNO--C2OC.060) OVERALL AUDIT STRATEGY AND AUDIT PLAN - RESPONSIBILITY OF THE AUDITOR
(QNO- C2OC.060)
 Chart
 Discussing The auditor may decide to discuss elements of planning with the entity’s management to
Elements of facilitate the conduct and management of the audit engagement.
Planning with
For example - to coordinate some of the planned audit procedures with the work of the
Management
entity's personnel.
 Ultimate Although these discussions often occur but the overall audit strategy and the audit plan remain
Responsibility the auditor's responsibility. When discussing matters about the overall audit strategy or audit
of Auditor plan, care is required in order not to compromise the effectiveness of the audit to be taken to
see there is no compromise in the effectiveness of the audit.
For Example - discussing the nature and timing of detailed audit procedures with
management may compromise the effectiveness of the audit by making the audit
procedures too predictable.
 Involvement of The engagement partner and other key members of the engagement team shall be involved
Engagement in planning the audit. The involvement of the engagement partner and other key members
Partner & of the engagement team in planning the audit draws on their experience thereby enhancing
Other Key the effectiveness and efficiency of the planning process.
Members
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(CNO--C2OC.080) AUDIT PROGRAMME (MCQ- Incs.32.5, Incs.41.1)
 Chart
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 Meaning An audit programme consists of a series of verification procedures to be applied to the
financial statements and accounts of a given company for the purpose of obtaining sufficient
evidence to enable the auditor to express an informed opinion on such statements.
 The Assistant To start with, an auditor having regard to the nature, size and composition of the business
Engaged - Be and the dependability of the internal control and the given scope of work, should frame a
Encouraged to programme which should aim at providing for a minimum essential work which may be
Keep An termed as a standard programme. As experience is gained by actually carrying out the work,
Open Mind the programme may be altered to take care of situations which were left out originally, but
are found relevant for the particular concern. Similarly, if any work originally provided for
proves beyond doubt to be unnecessary or irrelevant, it may be dropped. The assistant
engaged in the job should be encouraged to keep an open mind beyond the programme
given to him. He should be instructed to note and report significant matters coming to his
notice, to his seniors or to the partners or proprietor of the firm engaged for doing the audit.
 Evolving One Businesses vary in nature, size and composition; work which is suitable to one business may
Audit Programme not be suitable to others; efficiency and operation of internal controls and the exact nature
– Not Practicable of the service to be rendered by the auditor are the other factors that vary from assignment
for All Businesses to assignment. On account of such variations, evolving one audit programme applicable to
all business under all circumstances is not practicable. However, it becomes a necessity to
(QNO-C2OC.085) specify in detail in the audit programme the nature of work to be done so that no time will
be wasted on matters not pertinent to the engagement and any special matter or any specific
situation can be taken care of.
 Periodic Review There should be periodic review of the audit programme to assess whether the same
of The Audit continues to be adequate for obtaining requisite knowledge and evidence about the
Programme transactions. Unless this is done, any change in the business policy of the client may not be
(QNO-C2OC.090) adequately known, and consequently, audit work may be carried on, on the basis of an
(MCQ- 300.17) obsolete programme and, for this negligence, the whole audit may be held as negligently
conducted and the auditor may have to face legal consequences.
Example
If the audit programme for the audit of a branch of a financing house, drawn up a number
of years ago, fails to take into consideration that the previous policy of financing of a vehicle
has been changed to financing of real estate acquisition, the whole audit conducted
thereunder would be entirely misdirected and may even result into nothing more than a
farce. [Pacific Acceptance Corporation Ltd. v. Forsyth and Others.]
The utility of the audit programme can be retained and enhanced only by keeping the
programme as also the client’s operations and internal control under periodic review so that
inadequacies or redundancies of the programme may be removed. However, as a basic
feature, audit programme not only lists the tasks to be carried out but also contains a few
relevant instructions, like the extent of checking, the sampling plan, etc. So long as the
programme is not officially changed by the principal, every assistant deputed on the job
should unfailingly carry out the detailed work according to the instructions governing the
work. Many persons believe that this brings an element of rigidity in the audit programme.
This is not true provided the periodic review is undertaken to keep the programme as up-to-
date as possible and by encouraging the assistants on the job to observe all salient features
of the various accounting functions of the client.
 Audit In most of the assertions much of the evidence be drawn and each one should be considered
Programme- and weighed to ascertain its weight to prove or disprove the assertion. In this process, an
Designed to prove auditor would be in a position to identify the evidence that brings the highest satisfaction to
Assertions from him about the appropriateness or otherwise of the assertion.
variety of fields
(QNO— An auditor picks up evidence from a variety of fields and it is generally of the following
C2OC.087) broad types:
(a) Physical examination,
(b) State of internal controls and internal checks,
(c) Documentary examination,
(d) Minutes,
(e) Statements and explanation of management, officials and employees,
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(f) Arithmetical calculations by the auditor,
(g) Inter-relationship of the various accounting data,
(h) Subsidiary and memorandum records,
(i) Statements and explanations of third parties,
(j) Subsequent action by the client and by others.
Example
1. For investment pledged with a bank, the banker’s certificate.
2. For verifying assertions about book debts, the client’s ledger invoices, debit notes,
credit notes, monthly accounts statement sent to the customers are all evidence: some
of these are corroborative, other being complementary. In addition, balance
confirmation procedure is often resorted to, to obtain greater satisfaction about the
reliability of the assertion.
3. For cash in hand, the best evidence is ‘count’
The auditor, however, has to place appropriate weight on each piece of evidence and
accordingly should prescribe the priority of verification. It is true that in all cases one
procedure may not bring the highest satisfaction and it may be dangerous for the auditor
to ignore any evidence that is available. By the word “available” we do not mean that
the evidence available with the client is the only available evidence. The auditor should
know what normally should be available in the context of the transaction having regard
to the circumstances and usage.
 Construction of For the purpose of programme construction, the following points should be kept in view:
Audit Programme
(QNO-C2OC.080) SPECS
Stay within the Scope and limitation of the (E.g.-Time & Budget)
assignment
Consider all Possibilities of error (All risky areas should be
covered)
Determine the Evidence reasonably (Visual for Inventory, Documents
available and identify the best evidence for Investment, Oral for
for deriving the necessary satisfaction. understanding system)
Co-ordinate the procedures to be applied (First Sale, then C&B, then
to related items. Debtors)
Apply only those Steps and procedures No need to check production
which are useful in accomplishing the planning, but need to see stock
verification purpose in the specific verification planning)
situation.
 Audit Audit Evidence may be defined as the information used by the auditor in arriving at the
Programme- conclusions on which the auditor’s opinion is based. Audit evidence includes both
Designed to information contained in the accounting records underlying the financial statements and
provide Audit other information.
Evidence
Evidence is the very basis for formulation of opinion and an audit programme is designed to
provide for that by prescribing procedures and techniques. What is best evidence for testing
the accuracy of any assertion is a matter of expert knowledge and experience. This is the
primary task before the auditor when he draws up the audit programme. Transactions are
varied in nature and impact; procedures to be prescribed depend on prior knowledge of what
evidence is reasonably available in respect of each transaction.
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Example
Sales are evidenced by:
(i) price list;

(ii) forwarding notes to client;
(iii) sales managers’ advice to the inventory section;
(iv) inventory-issue records;
(v) acknowledgements of the receipt of goods by the customers; and
(vi) invoices raised by the client;
(vii) collection of money against sales by the client.
(CNO--C2OC.100) ADVANTAGES & DISADVANTAGES OF PLANNING & HOW TO OVERCOME THEM

(QNO-C2OC.100)
 Chart
 Advantages Selection of assistants for the jobs on the basis of capability becomes easier when
the work is rationally planned, defined and segregated.
It provides the assistant carrying out the audit with total and clear set of
instructions of the work generally to be done.
Without a written and pre-determined programme, work is necessarily to be
carried out on the basis of some ‘mental’ plan. In such a situation, there is always
a danger of ignoring or overlooking certain books and records. Under a properly
framed programme, the danger is significantly less, and the audit can proceed
systematically.
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The assistants, by putting their signature on programme, accept the responsibility
for the work carried out by them individually and, if necessary, the work done may
be traced back to the assistant.
Helping the auditor to devote appropriate attention to important areas of the
audit.
Helping the auditor identify and resolve potential problems on a timely basis.
Assisting, where applicable, in coordination of work done by auditors of
components and experts.
The principal can control the progress of the various audits in hand by examination
of audit programmes initiated by the assistants deputed to the jobs for completed
work.
It serves as a guide for audits to be carried out in the succeeding year.
A properly drawn up audit programme serves as evidence in the event of any
charge of negligence being brought against the auditor. It may be of considerable
value in establishing that he exercised reasonable skill and care that was expected
of professional auditor.
 Disadvantages The work may become mechanical and particular parts of the programme may be
(MRI2 Disadvantages) carried out without any understanding of the object of such parts in the whole
audit scheme.
The programme often tends to become rigid and inflexible following set grooves;
the business may change in its operation of conduct, but the old programme may
still be carried on. Changes in staff or internal control may render precaution
necessary at points different from those originally decided upon.
Inefficient assistants may take shelter behind the programme i.e., defend
deficiencies in their work on the ground that no instruction in the matter is
contained therein.
A hard and fast audit programme may kill the initiative of efficient and enterprising
assistants.
(CNO--C2OC.120) QUALITY CONTROL FOR AUDIT WORK – DELEGATION AND SUPERVISION OF AUDIT WORK
An audit is a complex task involving number of people at different levels. As we observed in the preparation and
development of audit programme, the auditor would naturally have to depend upon number of technical experts as
well. During the course of his work, the auditor is also likely to use the work performed by other auditors also.
A lot of work is delegated by auditor to his assistants. The auditor should carefully direct, supervise and review work
delegated to assistants. The auditor should obtain reasonable assurance that work performed by other auditors or
experts is adequate for his purpose. SA 220, “Quality Control for an Audit of Financial Statements” lays down standards
on the quality control.
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CHAPTER AUDIT DOCUMENTATION AND AUDIT EVIDENCE

3
Part 1 -- [SA 230] AUDIT DOCUMENTATION
(CNO--SA230.020) WHAT IS AUDIT DOCUMENTATION?

(QNO-230.01) (MCQ-230.1, 230.2, 230.4, 230.5, 230.11, 230.13)
 Chart
 Definition Text Example

(MCQ-Incs.39.4) The record of audit procedures performed, (Test of Controls / Substantive Procedures)
Relevant audit evidence obtained, and (Oral / Visual / Documentary)
Conclusions the auditor reached (Modified or Unmodified)
(Terms such as “working papers” or “work papers” are also sometimes used).
 Role of SA 230 & SA 230 “Audit Documentation deals with auditor’s responsibilities to maintain audit
other SA’s documents for audit of financial statements and other financial information. Other SA’s also
provide specific documentation requirement. Laws or regulations may establish additional
documentation requirements.
 Includes abstracts The auditor may include abstracts or copies of the entity’s records (for example, significant
or copies of entity and specific contracts and agreements) as part of audit documentation. Audit
records documentation, however, is not a substitute for the entity’s accounting records. (It’s not for
client Its for auditor Its auditor’s property)
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 Examples Audit documentation may be recorded on paper or on electronic or other media.
Examples of audit documentation include:
 Audit programmes. (At initial stages)
 Checklists. (While Performing Audit)
 Analyses. (Throughout the audit)
 Issues memoranda. (Unresolved matters between auditor & client)
 Summaries of significant matters. (Significant Risk / Significant Difficulties /

Material Misstatements etc.)
 Correspondence (including e-mail)
concerning significant matters.
 Letters of confirmation and (Taken near end of the audit)
representation.
(CNO--SA230.030) OBJECTIVE OF AUDITOR AS PER SA 230
The objective of the auditor is to prepare documentation that provides:

(a) Evidence that the audit was planned and performed in accordance with SAs and applicable legal and regulatory
requirements; and
(b) A sufficient and appropriate record of the basis for the auditor’s report.
(CNO--SA230.040) WHY WE NEED AUDIT DOCUMENTATION AND WHAT ARE ITS PURPOSES? (QNO-230.03)
 Chart
 Basic Audit documentation that meets the requirements of this SA and the specific documentation
Purpose requirements of other relevant SAs provides:
/Objective  Evidence that the audit was planned and performed in accordance with SAs and applicable legal
/Importance and regulatory requirements.
 Evidence of the auditor’s basis for a conclusion about the achievement of the overall objectives
/Need /
of the auditor; and
Nature
 Additional Audit documentation serves a number of additional purposes, including the following:
Purpose  Assisting the engagement team to plan and perform the audit.
 Enabling the engagement team to be accountable for its work.
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 Assisting members of the engagement team responsible for supervision to direct and supervise
the audit work, and to discharge their review responsibilities in accordance with SA 220.
 Enabling the conduct of quality control reviews and inspections in accordance with SQC 1.
 Enabling the conduct of external inspections in accordance with applicable legal, regulatory or
other requirements. (Like Peer Review & Review by Quality Review Board)
 Retaining a record of matters of continuing significance to future audits.
(CNO--SA230.060) WHAT ARE DIFFERENT TYPES OF AUDIT FILES? (MCQ-230.20, Incs.39.1)
Audit file: - One or more folders or other storage media, in physical or electronic form, containing the records that
comprise the audit documentation for a specific engagement.
In case of recurring audits, auditors generally prepare two types of audit files.
 Permanent Documents which don’t change over the period of time and their useful for future audits of the
Audit file entity are kept in this file. This file is not specific to audit of any particular financial year, it is useful
for all annual audit’s of the entity. Documents such as Certificate of Incorporation, MOA, AOA, Long
term legal Agreements, Internal Controls Manual etc. are generally kept in this file.
 Current Separate current audit file is prepared for audit of each financial year and it is relevant only for that
Audit file audit. Document such as Current Year Audit Strategy, Audit Plan, Issue Memoranda etc. are
maintained in this file.
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(CNO--SA230.080) FORM, CONTENT AND EXTENT OF AUDIT DOCUMENTATION
 Chart
 AD should  The auditor shall prepare audit documentation that is sufficient to enable an experienced
enable auditor, having no previous connection with the audit, to understand:
understand  The nature, timing and extent of the audit procedures performed.
ing of  The results of the audit procedures performed and the audit evidence obtained
following and
points  Significant matters arising during the audit and the conclusions reached thereon
and significant professional judgements made in reaching those conclusions.
 Details to  Further in documenting the nature, timing and extent of audit procedures performed, the
be auditor shall record:
recorded  The identifying characteristics of the specific items or matters tested.
for NTE  Who performed the audit work and the date such work was completed; and
QNO-230.04  Who reviewed the audit work performed and the date and extent of such review.
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 Details to  The auditor shall document discussions of significant matters with management, those
be charged with governance, and others, including the nature of the significant matters
recorded discussed and when and with whom the discussions took place.
for  If the auditor identified information that is inconsistent with the auditor’s final conclusion
Significant regarding a significant matter, the auditor shall document how the auditor addressed the
Matters inconsistency
(CNO--SA230.100) WHAT ARE FACTORS AFFECTING FORM, CONTENT & EXTENT OF AUDIT DOCUMENTATION?
(QNO-230.13) (MCQ 230.12, Incs.39.2)
Text Examples
Form, Content and Extent of Audit Documentation
The form, content and extent of audit documentation depend on factors such as:
The size and complexity of the entity. (↑Size ↑Extent, ↑Complexity ↑ Extent)
The identified risks of material misstatement. (↑Risk ↑Extent)
The nature of the audit procedures to be performed. (Test of controlsFlow Charts Content / Analytical
Procedures Graphs & Ratios)
The audit methodology and tools used. (Manual Inspection of RecordsPhysical Form /
CAATElectronic Form)
The significance of the audit evidence obtained. (High Court Order of AmalgamationPhotocopy
Document Form / Regular Purchase OrderInspection +
recorded PO number)
The nature and extent of exceptions identified. (fraud + materialExtent ↑ / error + materialExtent ↓)
The need to document a conclusion or the basis for a (Complex workingDetailed Calculation will be covered in
conclusion not readily determinable from the content / Simple Only references will be given in
documentation of the work performed or audit evidence content)
obtained.
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(CNO--SA230.110) TIMELY PREPARATION OF AUDIT DOCUMENTATION
 Chart
 Enhancing The auditor shall prepare audit documentation on a timely basis. Preparing sufficient and appropriate
Quality of audit documentation on a timely basis helps to enhance the quality of the audit and facilitates the
effective review and evaluation of the audit evidence obtained and conclusions reached before the
Audit
auditor’s report is finalised. Documentation prepared after the audit work has been performed is likely
to be less accurate than documentation prepared at the time such work is performed.
(CNO--SA230.120) WHAT IS ASSEMBLY OF AUDIT FILE? (QNO-230.15)(MCQ-230.17, 230.18, 230.14, 230.16, 230.3,
230.7, 230.8, 230.9)
 Chart
 What is done The completion of the assembly of the final audit file after the date of the auditor’s report is an
in assembly? administrative process that does not involve the performance of new audit procedures or the
drawing of new conclusions. Changes may, however, be made to the audit documentation during
the final assembly process if they are administrative in nature. Examples of such changes include:
 Deleting or discarding superseded documentation.
 Sorting, collating and cross-referencing working papers.
 Signing off on completion checklists relating to the file assembly process.
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 Documenting audit evidence that the auditor has obtained, discussed and agreed with the
relevant members of the engagement team before the date of the auditor’s report.
Superseded Documents:
The auditor need not include in audit documentation superseded drafts of working papers and
financial statements, notes that reflect incomplete or preliminary thinking, previous copies of
documents corrected for typographical or other errors, and duplicates of documents.
 When to The auditor shall assemble the audit documentation in an audit file and complete the
assemble? administrative process of assembling the final audit file on a timely basis after the date of the
auditor’s report.
 Completion? SQC 1 requires firms to establish policies and procedures for the timely completion of the assembly
of audit files. An appropriate time limit within which to complete the assembly of the final audit
file is ordinarily not more than 60 days after the date of the auditor’s report.
 What after After the assembly of the final audit file has been completed, the auditor shall not delete or discard
assembly? audit documentation of any nature before the end of its retention period.
 Retention SQC 1 requires firms to establish policies and procedures for the retention of engagement
Period documentation. The retention period for audit engagements ordinarily is no shorter than seven
(QNO- years from the date of the auditor’s report, or, if later, the date of the group auditor’s report.
230.03)
(MCQ-
Incs.40.1)
 What if In circumstances, other than those “Matters arising after date of audit report” where the auditor
matters after finds it necessary to modify existing audit documentation or add new audit documentation after
AR? the assembly of the final audit file has been completed, the auditor shall, regardless of the nature
of the modifications or additions, document:
 The specific reasons for making them; and
 When and by whom they were made and reviewed.
An example of a circumstance in which the auditor may find it necessary to modify existing audit
documentation or add new audit documentation after file assembly has been completed is the
need to clarify existing audit documentation arising from comments received during monitoring
inspections performed by internal or external parties.
(CNO--SA230.140) WHAT IS COMPLETION MEMORANDUM? (QNO-230.17) (MCQ-Incs.23.1, Incs.40.2)
The auditor “may” consider it helpful to prepare and retain as part of the audit documentation a summary (sometimes
known as a completion memorandum) that describes the significant matters identified during the audit and how they
were addressed, or that includes cross- references to other relevant supporting audit documentation that provides
such information. Such a summary may facilitate effective and efficient reviews and inspections of the audit
documentation, particularly for large and complex audits. Further, the preparation of such a summary may assist the
auditor’s consideration of the significant matters. It may also help the auditor to consider whether, in light of the audit
procedures performed and conclusions reached, there is any individual relevant SA objective that the auditor cannot
achieve that would prevent the auditor from achieving the overall objectives of the auditor.
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(CNO--SA230.160) DOCUMENTATION OF SIGNIFICANT MATTERS AND RELATED SIGNIFICANT PROFESSIONAL
JUDGMENTS (QNO-230.19) (MCQ-230.6)
 Chart
 How to Judging the significance of a matter requires an objective analysis of the facts and circumstances.
Determine
Significant
Matter
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 Examples Examples of significant matters include:
 Matters that give rise to significant risks.
 Circumstances that cause the auditor significant difficulty in applying necessary audit
procedures.
 Results of audit procedures indicating:-
 that the financial statements could be materially misstated, or
 a need to revise the auditor’s previous assessment of the risks of material
misstatement and the auditor’s responses to those risks.
 Findings that could result in a modification to the audit opinion or the inclusion of an
Emphasis of Matter Paragraph in the auditor’s report.
 Documentation An important factor in determining the form, content and extent of audit documentation of
depends on significant matters is the extent of professional judgment exercised in performing the work and
Professional evaluating the results.
Judgement
Documentation of the professional judgments made, where significant, serves to explain the
auditor’s conclusions and to reinforce the quality of the judgment. Such matters are of particular
interest to those responsible for reviewing audit documentation, including those carrying out
subsequent audits, when reviewing matters of continuing significance
(For example, when performing a retrospective review of accounting estimates).
 Examples of Some examples of circumstances in which it is appropriate to prepare audit documentation
Professional relating to the use of professional judgment include, where the matters and judgments are
Judgement significant:
 The basis for the auditor’s conclusions about the authenticity of a document when
further investigation (such as making appropriate use of an expert or of confirmation
procedures) is undertaken in response to conditions identified during the audit that
caused the auditor to believe that the document may not be authentic.
(SA 240)
 The basis for the auditor’s conclusion on the reasonableness of areas of subjective
judgments (for example, the reasonableness of significant accounting estimates).
(SA 540)
 The rationale for the auditor’s conclusion when a requirement provides that the auditor
‘shall consider’ certain information or factors, and that consideration is significant in the
context of the particular engagement.
(SA 600 & SA 620)
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(CNO--SA230.180) RIGHT TO LIEN (QNO-230.21) (MCQ-Incs.15.3)

 Chart
 General In terms of the general principles of law, any person having the lawful possession of somebody else’s
Principles of property, on which he has worked, may retain the property for non-payment of his dues on account of
Law the work done on the property. On this premise, auditor can exercise lien on books and documents
placed at his possession by the client for non-payment of fees, for work done on the books and
documents.
 ICAEW Auditor can exercise lien on books and documents placed at his possession by the client for non-
Conditions payment of fee for work done on the following conditions:
 Documents retained must belong to the client who owes the money;
 Documents must have come into possession of the auditor on the authority of the client;
 The auditor can retain the documents only if he has done work on the documents assigned
to him;
 Such documents can be retained which are connected with the work on which fees have
not been paid.
 Sec 128 of Under section 128 of the Act, books of account of a company must be kept at the registered office.
Company Act These provisions ordinarily make it impracticable for the auditor to have possession of the books
and documents. The company provides reasonable facility to auditor for inspection of the books of
account by directors and others authorised to inspect under the Act.
 In Saxena Vs Supreme Court Said that professionals should not exercise line on client documents as it would
Sharma Case lead to a problem in running client business. ICAI ESB also said if CA exercises lien it will be
misconduct.
 Conclusion Taking an overall view of the matter, it seems that though legally, auditor may exercise right of lien
in cases of companies, it is mostly impracticable for legal and practicable constraints. His working
papers being his own property, the question of lien, on them does not arise.
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(CNO--SA230.200) OWNERSHIP OF AUDIT DOCUMENTS (QNO- 230.05, 230.07)

 Chart
 Discussion  Standard on Quality Control (SQC) 1 provides that, unless otherwise specified by law or regulation,
audit documentation is the property of the auditor.
 He may at his discretion, make portions of, or extracts from, audit documentation available to clients,
provided such disclosure does not undermine the validity of the work performed, or, in the case of
assurance engagements, the independence of the auditor or of his personnel.
UNIQUE Question
 SA230.30 Documenting every matter considered & separate documentation showing compliance of SA
not required.
UNIQUE MCQS
 MCQ No. 230.10
 MCQ No. 230.15
 MCQ No. Incs.39.3
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Part 2 -- [SA 330] THE AUDITOR RESPONSE TO ASSESSED RISK
(CNO--SA330.040) TESTS OF CONTROLS (MCQ-330.4, 330.5)

 Chart
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 Definition Test of Controls are performed to obtain audit evidence about effectiveness of
(QNO- (a) design of the accounting and internal control systems, i.e., whether they are suitably designed to
330.03/ prevent or detect and correct material misstatements; and
330.07) (b) operation of the internal controls throughout the period.
 Which The auditor shall design and perform tests of controls to obtain sufficient appropriate audit evidence
Controls as to the operating effectiveness of relevant controls when:
Should be The auditor’s assessment of risks of material misstatement at the assertion level includes
Tested an expectation that the controls are operating effectively
(QNO- (E.g., the auditor intends to rely on the operating effectiveness of controls in determining
330.01/ the nature, timing and extent of substantive procedures); or (Rate of goods purchased is
330.03) approved by purchase manager (who is new to organization), latter system checks it with
rates in agreements and average of past 3 / 6 months. Software based control is expected
to function effectively so let’s check it)
Substantive procedures alone cannot provide sufficient appropriate audit evidence

at the assertion level.
A higher level of assurance may be sought about the operating effectiveness of
controls when the approach adopted consists primarily of tests of controls, in particular
where it is not possible or practicable to obtain sufficient appropriate audit evidence
only from substantive procedures.
(In banks interest and other charges are automated, they are system generated entries in
such situations test of controls are must they cannot be ignored, in fact we will check them
in greater details)
 Nature of In designing and performing tests of controls, the auditor shall:
test of Perform other audit procedures in combination with inquiry to obtain audit evidence about
controls the operating effectiveness of the controls, including:
(a) How the controls were applied at relevant times during the period under audit. 3
(Are there any changes during the year, if yes have separate evaluation)
(b) The consistency with which they were applied. 2 (Whether every transaction is
evaluated carefully, automated controls are consistent but human based controls
can be more or less depending on people or product involved, MD related
purchases may be compromised in rates)
(c) By whom or by what means they were applied. 1 (By Purchase Manager by Signing
PO, By Software by matching customer code and rejecting unregistered names)
Determine whether the controls to be tested depend upon other controls (indirect
controls), and if so, whether it is necessary to obtain audit evidence supporting the effective
operation of those indirect controls. 4 (Software based controls may depend on general IT
/ EDP controls of access controls, development controls etc. so we will have to check them
also)
Further explanation of point (a) above Inquiry alone is not sufficient to test the operating
effectiveness of controls.
Accordingly, other audit procedures are performed in combination with inquiry. In this
regard, inquiry combined with inspection or reperformance may provide more assurance
than inquiry and observation, since an observation is pertinent only at the point in time at
which it is made.
The nature of the particular control influences the type of procedure required to obtain
audit evidence about whether the control was operating effectively. For example, if
operating effectiveness is evidenced by documentation, the auditor may decide to inspect
it to obtain audit evidence about operating effectiveness.
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 Extent of When more persuasive audit evidence is needed regarding the effectiveness of a control, it may be
test of appropriate to increase the extent of testing of the control as well as the degree of reliance on
controls controls. Matters the auditor may consider in determining the extent of tests of controls include the
(QNO-330.05) following:
(MCQ-330.2)
Right- LEFT
The Relevance and reliability of the audit evidence to be obtained regarding the operating
effectiveness of the control at the assertion level. (Double payment is big risk so software
feature to detect same number of PO is relevant, so check more)
The Length of time during the audit period that the auditor is relying on the operating
effectiveness of the control. (More time more checking)
The Expected rate of deviation from a control. (If expected rate is very close to tolerable
rate of deviation then we have to check more of that control, to extra sure)
The Frequency of the performance of the control by the entity during the period. (Stock
count is weekly Vs Fixed asset count is half yearly)
The extent to which audit evidence is obtained from Tests of other controls related to the
assertion. (If other controls on that assertion are not effective do more checking here)
 Timing of The auditor shall test controls for the particular time, or throughout the period, for which the auditor
Tests of intends to rely on those controls in order to provide an appropriate basis for the auditor’s intended
Controls reliance. (Some controls are performed at year end so they should be checked at year end example,
cut off control etc.)
Audit evidence pertaining only to a point in time may be sufficient for the auditor’s purpose, for
example, when testing controls over the entity’s physical inventory counting at the period end. If,
on the other hand, the auditor intends to rely on a control over a period, tests that are capable of
providing audit evidence that the control operated effectively at relevant times during that period
are appropriate. Such tests may include tests of the entity’s monitoring of controls.
(CNO--SA330.060) USING AUDIT EVIDENCE OBTAINED IN PREVIOUS AUDITS

 Factors
(QNO-330.09)
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In determining whether it is appropriate to use audit evidence about the operating effectiveness of
controls obtained in previous audits, and, if so, the length of the time period that may elapse before
retesting a control, the auditor shall consider the following:
CPM @ MCG
The effectiveness of other elements of internal control, including the Control environment,
the entity’s monitoring of controls, and the entity’s risk assessment process; (Poor attitude
of management towards internal control system is encouragement to wrong doers)
The risks arising from the characteristics of the control, including whether it is Manual or
automated; (Quotation Selection & Issuing PO is subjective matter and depends on approving
authority, behaviour can change over period of time)
The effectiveness of General IT-controls; (Purchase entries are ID restricted, but people use
each other’s computer and they know username passwords)
The effectiveness of the control and its application by the entity, including the nature and
extent of deviations in the application of the control noted in previous audits, and whether
there have been Personnel changes that significantly affect the application of the control;
(Purchase & Store Manager Retired at the beginning of the year, they were replaced my
newcomers)
Whether the lack of a change in a particular control poses a risk due to Changing
circumstances; and (GST)
The risks of Material misstatement and the extent of reliance on the control. (Higher risk less
reliance on previous year evidence)
 Auditor If the auditor plans to use audit evidence from a previous audit about the operating effectiveness of
plans to specific controls, the auditor shall establish the continuing relevance of that evidence by obtaining
rely on audit evidence about whether significant changes in those controls have occurred subsequent to the
previous previous audit. The auditor shall obtain this evidence by performing inquiry combined with
year observation or inspection, to confirm the understanding of those specific controls, and:
evidence
Changes in ICS
on TOC
If there have been changes that affect the continuing relevance of the audit evidence from
the previous audit, the auditor shall test the controls in the current audit.
Frequency of TOC
If there have not been such changes, the auditor shall test the controls at least once in every
third audit, and shall test some controls each audit to avoid the possibility of testing all the
controls on which the auditor intends to rely in a single audit period with no testing of
controls in the subsequent two audit periods.
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(CNO--SA330.080) EVALUATING THE OPERATING EFFECTIVENESS OF CONTROLS
 Chart
 Specific When deviations from controls upon which the auditor intends to rely are detected, the auditor
inquiries by shall make specific inquiries to understand these matters and their potential consequences, and
auditor when shall determine whether:
deviations The tests of controls that have been performed provide an appropriate basis for reliance
from controls on the controls; (Sample rate of deviation was 8% and tolerable rate is also 10%, so it is
are detected. appropriate basis to rely on controls, if sample rate of deviation would have been higher
(QNO-330.13) than 10% then it would not be reliable control)
(MCQ-330.1) Additional tests of controls are necessary; or (If junior officers’ signature are obtained in
20% bills, check whether rate and quality was appropriate in such bills)
The potential risks of misstatement need to be addressed using substantive procedures.
(If controls are not reliable auditor will have to work on substantive procedures)
 Role of When evaluating the operating effectiveness of relevant controls, the auditor shall evaluate
Misstatement whether misstatements that have been detected by substantive procedures indicate that controls
Detected are not operating effectively. The absence of misstatements detected by substantive procedures,
however, does not provide audit evidence that controls related to the assertion being tested are
effective.
A material misstatement detected by the auditor’s procedures is a strong indicator of the
existence of a significant deficiency in internal control. (Even tough purchase manager is honest
and approves purchase bill carefully, team detected over payment in 5 bills then rethink should
we rely on controls)
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(CNO--SA330.90) PROCEDURAL TESTS (TRADITIONAL THEORY) (QNO—330.14)
 Chart
 Procedural It has been suggested that actual operation of the internal control should be tested by the
Tests application of procedural tests and examination in depth. Procedural tests simply mean testing of
the compliance with the procedures laid down by the management in respect of initiation,
authorization, recording and documentation of transaction at each stage through which it flows.
 Example of 1. Before acceptance of any order the position of inventory of the relevant article should be known
Procedural to ascertain whether the order can be executed in time.
Test in Sales 2. An advice under the authorization of the sales manager should be sent to the party placing the
order, internal reference number, and the acceptance of the order. This advice should be prepared
on a standardized form and copy thereof should be forwarded to inventory section to enable it to
prepare for the execution of the order in time.
3. The credit period allowed to the party should be the normal credit period. For any special credit
period a special authorization of the sales manager would be necessary.
4. The rate at which the order has been accepted and other terms about transport, insurance, etc.,
should be clearly specified.
5. Before deciding upon the credit period, a reference should be made to the credit section to
know the creditworthiness of the party and particularly whether the party has honored its
commitments in the past.
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(CNO--SA330.100) DESIGNING AND PERFORMING SUBSTANTIVE PROCEDURES (QNO-330.15) (MCQ-Incs.23.3)
 Chart
 Substantive Designing and Performing Substantive Procedures Irrespective of the assessed risks of material
Procedures misstatement, the auditor shall design and perform substantive procedures for each material class
for Material of transactions, account balance, and disclosure.
Items This requirement reflects the facts that:
(QNO-330.03) The auditor’s assessment of risk is judgmental and so may not identify all risks of material
misstatement; and
There are inherent limitations to internal control, including management override.
 Types of Depending on the circumstances, the auditor may determine that:
Substantive Performing only substantive analytical procedures will be sufficient to reduce audit risk to
Tests an acceptably low level. For example, where the auditor’s assessment of risk is supported
by audit evidence from tests of controls. (Electricity bills payments)
Only tests of details are appropriate. (Legal Expenses)
A combination of substantive analytical procedures and tests of details are most
responsive to the assessed risks (Salary)
 Substantive Substantive analytical procedures are generally more applicable to large volumes of transactions
Analytical that tend to be predictable over time. SA 520, “Analytical Procedures” establishes requirements
Procedures and provides guidance on the application of analytical procedures during an audit.
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(QNO-330.15)
(MCQ-330.20)
 Test of The nature of the risk and assertion is relevant to the design of tests of details. For example, tests
Details of details related to the existence or occurrence assertion may involve selecting from items
(QNO-330.15) contained in a financial statement amount and obtaining the relevant audit evidence. On the other
hand, tests of details related to the completeness assertion may involve selecting from items that
are expected to be included in the relevant financial statement amount and investigating whether
they are included. (List to actual stock Existence and actual stock to list Completeness)
 External Other Points
Confirmation The auditor shall consider whether external confirmation procedures are to be performed as
(QNO-330.03) substantive audit procedures.
 Effect of Test Because the assessment of the risk of material misstatement takes account of internal control, the
of Controls extent of substantive procedures may need to be increased when the results from tests of controls
are unsatisfactory. In designing tests of details, the extent of testing is ordinarily thought of in
terms of the sample size. However, other matters are also relevant, including whether it is more
effective to use other selective means of testing.
 Closing The auditor’s substantive procedures shall include the following audit procedures related to the
Process financial statement closing process:
Agreeing or reconciling the financial statements with the underlying accounting records;
and
Examining material journal entries and other adjustments made during the course of
preparing the financial statements.
The nature, and also the extent, of the auditor’s examination of journal entries and other
adjustments depends on the nature and complexity of the entity’s financial reporting process and
the related risks of material misstatement.
(CNO--SA330.110) EXTERNAL CONFIRMATION AS SUBSTANTIVE PROCEDURES

 Chart
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 Mandatory The auditor shall consider whether external confirmation procedures are to be performed as
to consider substantive audit procedures.
 Relevant for 1. External confirmation procedures frequently are relevant when addressing assertions
account associated with account balances and their elements, but need not be restricted to these items.
balances but For example, the auditor may request external confirmation of the terms of agreements,
not restricted contracts, or transactions between an entity and other parties. External confirmation procedures
to it also may be performed to obtain audit evidence about the absence of certain conditions.
For Example, a request may specifically seek confirmation that no “side agreement” exists that
may be relevant to an entity’s revenue cut-off assertion.
 Examples • Other situations where external confirmation procedures may provide relevant audit evidence
where we in responding to assessed risks of material misstatement include:
can take EC (i) Bank balances and other information relevant to banking relationships.
(ii) Accounts receivable balances and terms.
(iii) Inventories held by third parties at bonded warehouses for processing or on consignment.
(iv) Property title deeds held by lawyers or financiers for safe custody or as security.
(v) Investments held for safekeeping by third parties, or purchased from stockbrokers but not
delivered at the balance sheet date.
(vi) Amounts due to lenders, including relevant terms of repayment and restrictive covenants.
(vii) Accounts payable balances and terms.
 Less relevant 2. Although external confirmations may provide relevant audit evidence relating to certain
for some assertions, there are some assertions for which external confirmations provide less relevant audit
assertions evidence.
Example
External confirmations provide less relevant audit evidence relating to the recoverability of
accounts receivable balances, than they do of their existence.
 One request 3. The auditor may determine that external confirmation procedures performed for one purpose
can give lot provide an opportunity to obtain audit evidence about other matters.
of Example
information For example, confirmation requests for bank balances often include requests for information
relevant to other financial statement assertions.
Such considerations may influence the auditor’s decision about whether to perform external
confirmation procedures.
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(CNO--SA330.115) FACTORS AFFECTING USE OF EC
 Chart
 Discussion 4. Factors that may assist the auditor in determining whether external confirmation procedures
are to be performed as substantive audit procedures include:
(i) The confirming party’s knowledge of the subject matter – responses may be more reliable if
provided by a person at the confirming party who has the requisite knowledge about the
information being confirmed.
(ii) The ability or willingness of the intended confirming party to respond – For example, the
confirming party:
 may operate in an environment where responding to confirmation requests is not a
significant aspect of day-to-day operations.
 may not accept responsibility for responding to a confirmation request;
 may consider responding too costly or time consuming;
 may have concerns about the potential legal liability resulting from responding; or
 may account for transactions in different currencies;
In such situations, confirming parties may not respond, may respond in a casual manner or may
attempt to restrict the reliance placed on the response.
(iii) The objectivity of the intended confirming party – if the confirming party is a related party of
the entity, responses to confirmation requests may be less reliable.
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(CNO--SA330.120) SUBSTANTIVE PROCEDURES RESPONSIVE TO SIGNIFICANT RISKS
 Chart
 Important When the auditor has determined that an assessed risk of material misstatement at the assertion
principles level is a significant risk, the auditor shall perform substantive procedures that are specifically
responsive to that risk. When the approach to a significant risk consists only of substantive
procedures, those procedures shall include tests of details.
 Explanation The above paragraph requires the auditor to perform substantive procedures that are specifically
responsive to risks the auditor has determined to be significant risks. Audit evidence in the form
of external confirmations received directly by the auditor from appropriate confirming parties may
assist the auditor in obtaining audit evidence with the high level of reliability that the auditor
requires to respond to significant risks of material misstatement, whether due to fraud or error.
 Example If the auditor identifies that management is under pressure to meet earnings expectations, there
may be a risk that management is inflating sales by improperly recognising revenue related to
sales agreements with terms that preclude revenue recognition or by invoicing sales before
shipment. In these circumstances, the auditor may, for example, design external confirmation
procedures not only to confirm outstanding amounts, but also to confirm the details of the sales
agreements, including date, any rights of return and delivery terms. In addition, the auditor may
find it effective to supplement such external confirmation procedures with inquiries of non-
financial personnel in the entity regarding any changes in sales agreements and delivery terms.
UNIQUE QUESTION
 QNO-330.11 TOC & Preliminary Risk Assessment of Controls
UNIQUE MCQS
 MCQ No. Incs.10.3, 10.5, Incs.15.4
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Part 3 -- [SA 500] AUDIT EVIDENCE
(CNO--SA500.010) ROLE OF AUDIT EVIDENCE

 Chart
 Discussion Auditing is a logical process. An auditor is called upon to assess the actualities of the situation,
review the statements of account and give an expert opinion about the truth and fairness of such
accounts. This he cannot do unless he has examined the financial statements objectively.
Objective examination connotes critical examination and scrutiny of the accounting statements of
the undertaking with a view to assessing how far the statements present the actual state of affairs
in the correct context and whether they give a true and fair view about the financial results and
state of affairs. An opinion founded on a rather reckless and negligent examination and evaluation
may expose the auditor to legal action with consequential loss of professional standing and
prestige.
He needs evidence to obtain information for arriving at his judgement.
SA 500 – “Audit Evidence”, explains what constitutes audit evidence in an audit of financial
statements, and deals with the auditor’s responsibility to design and perform audit procedures to
obtain sufficient appropriate audit evidence to be able to draw reasonable conclusions on which
to base the auditor’s opinion.
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(CNO--SA500.020) AUDIT EVIDENCE (QNO-500.01) (MCQ-500.1)
 Chart
 Definition Audit Evidence means anything which gives information to form an opinion (Obtained from client
or Prepared by Auditor). Explaining this further, audit evidence includes: -
 The accounting records used for the preparation of financial statements and
 Other information that authenticates the accounting records and also supports the auditor’s
rationale behind the true and fair presentation of the financial statements.
 Accounting records include the records of initial accounting entries and supporting
records, such as checks and records of electronic fund transfers; invoices; contracts; the
general and subsidiary ledgers, journal entries and other adjustments to the financial
statements that are not reflected in journal entries; and records such as work sheets and
spread sheets supporting cost allocations, computations, reconciliations and disclosures.
 Other information which the auditor may use as audit evidence includes,
(E.g., minutes of the meetings, written confirmations from trade receivables and trade
payables, manuals containing details of internal control etc.)
A combination of tests of accounting records and other information is generally used by
the auditor to support his opinion on the financial statements.
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(CNO--SA500.040) TYPES OF AUDIT EVIDENCE
 Chart
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 Depending  Visual Evidence- that can be observed
upon (E.g. stock taking, physical verification)
NATURE
 Oral Evidence- that can be listened
(E.g. Information and explanation, Inquiry)
 Documentary Evidence- written representations

(E.g. Bank Statement, Purchase Invoice)
 Depending  Persuasive - not confirm evidence

upon (E.g. just by seeing a purchase invoice we confirm that there is a purchase, but purchase
IMPACT invoice may be fake)
(MCQ-
Incs.18.4)  Conclusive-confirm evidence
(E.g., Physical Verification of Machine)
 Depending  Internal Evidence: Evidence which originates within the organisation being audited is internal
upon evidence.
SOURCE  Example
Sales invoice, Copies of sales challan and forwarding notes, goods received note,
inspection report, copies of cash memo, debit and credit notes, etc.
 External evidence: The evidence that originates outside the client’s organization is external
evidence.
 Example
Purchase invoice, supplier’s challan and forwarding note, debit notes and credit notes
coming from parties, quotations, confirmations, etc.
In an audit situation, the bulk of evidence that an auditor gets is internal in nature. However,
substantial external evidence is also available to the auditor. Since in the origination of internal
evidence, the client and his staff have the control, the auditor should be careful in putting reliance
on such evidence. It is not suggested that they are to be suspected; but an auditor has to be alive
to the possibilities of manipulation and creation of false and misleading evidence to suit the client
or his staff. The external evidence is generally considered to be more reliable as they come from
third parties who are not normally interested in manipulation of the accounting information of
others. However, if the auditor has any reason to doubt the independence of any third party who
has provided any material evidence e.g., an invoice of an associated concern, he should exercise
greater vigilance in that matter. As an ordinary rule the auditor should try to match internal and
external evidence as far as practicable. Where external evidence is not readily available to match,
the auditor should see as to what extent the various internal evidence corroborate each other.
(CNO--SA500.050) OBJECTIVE OF THE AUDITOR AS PER SA 500
The objective of the auditor is to design and perform audit procedures in such a way as to enable the auditor to obtain
sufficient appropriate audit evidence to be able to draw reasonable conclusions on which to base the auditor’s opinion.
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(CNO--SA500.060) SOURCES OF EVIDENCE ROLE OF A/C RECORDS
 Chart
 Internal Some audit evidence is obtained by performing audit procedures to test the accounting records,
Sources – for example, through analysis and review, reperforming procedures followed in the financial
Accounting reporting process, and reconciling related types and applications of the same information.
Records Through the performance of such audit procedures, the auditor may determine that the
accounting records are internally consistent and agree to the financial statements.
 Independent Information from sources independent of the entity that the auditor may use as audit evidence
Sources may include confirmations from third parties, analysts’ reports, and comparable data about
competitors (benchmarking data)
 More More assurance is ordinarily obtained from consistent audit evidence obtained from different
Sources / sources or of a different nature than from items of audit evidence considered individually. For
Different example, corroborating information obtained from a source independent of the entity may
Nature of increase the assurance the auditor obtains from audit evidence that is generated internally, such
Sources – as evidence existing within the accounting records, minutes of meetings, or a management
More representation.
Assurance
(CNO--SA500.070) AUDIT PROCEDURE TO OBTAIN EVIDENCE

 Chart
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 Divided in 2 Audit evidence to draw reasonable conclusions on which to base the auditor’s opinion is obtained
Parts by performing:
(a) Risk assessment procedures; and
(b) Further audit procedures
 Risk Risk assessment procedures refer to the audit procedures performed to obtain an understanding
Assessment of the entity and its environment, including the entity’s internal control, to identify and assess the
Procedures risks of material misstatement, whether due to fraud or error, at the financial statement and
assertion levels.
 Further Further Audit Procedures comprise of:
Audit (i) Tests of controls, when required by the SAs or when the auditor has chosen to do so; and
Procedures (ii) Substantive procedures, including tests of details and substantive analytical procedures.
(CNO--SA500.080) METHODS OF OBTAINING AUDIT EVIDENCE (QNO-500.05) (MCQ-500.3,500.7)
 Observation Observation consists of looking at a process or procedure being performed by others, for
(MCQ-500.13) example, the auditor’s observation of inventory counting by the entity’s personnel, or of the
performance of control activities. Observation provides audit evidence about the
performance of a process or procedure but is limited to the point in time at which the
observation takes place, and by the fact that the act of being observed may affect how the
process or procedure is performed.
 Inspection Inspection involves examining records or documents, whether internal or external, in paper
form, electronic form, or other media, or a physical examination of an asset.
 Inquiry Inquiry consists of seek information of knowledgeable persons, financial and non- financial,
(MCQ-500.8) within the entity or outside the entity. Inquiry is used extensively throughout the audit in
addition to other audit procedures.
 Recalculation Recalculation consists of checking the mathematical accuracy of documents or records.
Recalculation may be performed manually or electronically.
 Re-performance Re-performance involves the auditor’s independent execution of procedures or controls that
were originally performed as part of the entity’s internal control.
 Analytical Analytical procedures consist of evaluations of financial information made by a study of
Procedures plausible relationships among both financial and non-financial data.
Analytical procedures also encompass the investigation of identified fluctuations and
relationships that are inconsistent with other relevant information or deviate significantly
from predicted amounts. (Discussed in detailed in SA 520).
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 External An external confirmation represents audit evidence obtained by the auditor as a direct
Confirmation written response to the auditor from a third party (the confirming party), in paper form, or by
electronic or other medium. (Discussed in detailed in SA 505).
 Author’s Note Term Audit Procedure in general means performing any audit related activity depending on
context it may mean following things:-
1) RAP or FAP as discussed earlier
2) It may mean different methods of collecting evidence
3) It may simply mean any activity specified in SA
(CNO--SA500.100) INSPECTION & INQUIRY IN DETAIL (QNO-500.05)

 Chart
 Inspection  Definition
Inspection involves examining records or documents, whether internal or external, in paper
form, electronic form, or other media, or a physical examination of an asset.
 Degree of Reliability
Inspection of records and documents provides audit evidence of varying degrees of
reliability, depending on their nature (Original Vs Duplicate) and source (Internal Vs
External) and, in the case of internal records and documents, on the effectiveness of the
controls over their production (Software/Register used).
 Example of use in Test of Control
An example of inspection used as a test of controls is inspection of records for evidence of
authorization.
 Example of use in Substantive testing (Test of Detail)
 Existence Some documents represent direct audit evidence of the existence of an
asset,
for example, a document constituting a financial instrument such as a share
certificate or bond. Inspection of such documents may not necessarily provide audit
evidence about ownership or value.
 Not for Valuation & Rights & Obligation Inspection of tangible assets may provide
reliable audit evidence with respect to their existence, but not necessarily about
the entity’s rights and obligations or the valuation of the assets. Inspection of
individual inventory items may accompany the observation of inventory counting.
 Revenue Recognition Policy
In addition, inspecting an executed contract may provide audit evidence relevant
to the entity’s application of accounting policies, such as revenue recognition.
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 Chart
 Inquiry  Definition
Inquiry consists of seeking information of knowledgeable persons, both financial and non-
financial, within the entity or outside the entity.
 Written or Oral
Inquiry is used extensively throughout the audit in addition to other audit procedures.
Inquiries may range from formal written inquiries to informal oral inquiries.
 Responses
Evaluating responses to inquiries is an integral part of the inquiry process. Responses to
inquiries may provide the auditor with information not previously possessed or with
corroborative audit evidence. Alternatively, responses might provide information that
differs significantly from other information that the auditor has obtained, for example,
information regarding the possibility of management override of controls. In some cases,
responses to inquiries provide a basis for the auditor to modify or perform additional audit
procedures.
 Evidence about Management’s Intent
Although corroboration of evidence obtained through inquiry is often of particular
importance, in the case of inquiries about management intent, the information available to
support management’s intent may be limited. In these cases, understanding management’s
past history of carrying out its stated intentions, management’s stated reasons for choosing
a particular course of action, and management’s ability to pursue a specific course of action
may provide relevant information to corroborate the evidence obtained through inquiry. In
respect of some matters, the auditor may consider it necessary to obtain written
representations from management and, where appropriate, those charged with
governance to confirm responses to oral inquiries.
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(CNO--SA500.110) NATURE AND TIMING OF THE AUDIT PROCEDURES CHANGE IF DATA IS IN ELECTRONIC
FORM (QNO-500.14)
 Chart
 Discussion The nature and timing of the audit procedures to be used may be affected by the fact that some
of the accounting data and other information may be available only in electronic form or only at
certain points or periods in time.
For example, source documents, such as purchase orders and invoices, may exist only in electronic
form when an entity uses electronic commerce, or may be discarded after scanning when an entity
uses image processing systems to facilitate storage and reference.
Certain electronic information may not be retrievable after a specified period of time. For example,
if files are changed and if backup files do not exist. Accordingly, the auditor may find it necessary
as a result of an entity’s data retention policies to request retention of some information for the
auditor’s review or to perform audit procedures at a time when the information is available.
(CNO--SA500.120) SUFFICIENCY AND APPROPRIATENESS OF AUDIT EVIDENCE

(QNO-500.03) (MCQ-Incs.44.5)
 Chart
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 Sufficiency  Sufficiency is measure of quantity of audit evidence.
and  Appropriateness is measure of quality of audit evidence.
Appropriate
 Discussion  The auditor shall design and perform audit procedures that are appropriate in the
circumstances for the purpose of obtaining sufficient and appropriate audit evidence.
 Audit evidence is necessary to support the auditor’s opinion and report. It is cumulative
in nature and is primarily obtained from audit procedures performed during the course
of the audit.
 It may, however, also include information obtained from other sources such as previous
audits.
 In addition to other sources inside and outside the entity, the entity’s accounting records
are an important source of audit evidence.
 Also, information that may be used as audit evidence may have been prepared using the
work of a management’s expert.
 Audit evidence comprises both information that supports and corroborates
management’s assertions, and any information that contradicts such assertions.
 In addition, in some cases the absence of information (for example, management’s
refusal to provide a requested representation) is used by the auditor, and therefore, also
constitutes audit evidence.
Most of the auditor’s work in forming the auditor’s opinion consists of obtaining and evaluating
audit evidence. Audit procedures to obtain audit evidence can include inspection, observation,
confirmation, recalculation, re-performance and analytical procedures, often in some
combination, in addition to inquiry. Although inquiry may provide important audit evidence, and
may even produce evidence of a misstatement, inquiry alone ordinarily does not provide
sufficient audit evidence of the absence of a material misstatement at the assertion level, nor of
the operating effectiveness of controls.
As explained in SA 200, “Overall Objectives of the Independent Auditor and the Conduct of an
Audit in Accordance with Standards on Auditing”, reasonable assurance is obtained when the
auditor has obtained sufficient appropriate audit evidence to reduce audit risk (i.e., the risk that
the auditor expresses an inappropriate opinion when the financial statements are materially
misstated) to an acceptably low level. The sufficiency and appropriateness of audit evidence are
interrelated.
(CNO--SA500.125) SUFFICIENCY OF AUDIT EVIDENCE

 Chart
 Inter- Interrelationship Between Quantity & Quality

relationship
(QNO- The sufficiency and appropriateness of audit evidence are interrelated.
500.07) The higher the quality, the less quantity may be required. Obtaining more audit evidence,
however, may not compensate for its poor quality.
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 Sufficiency & More Evidence from Different Sources and in Bigger Size
Factors Sufficiency is the measure of the quantity of audit evidence.
Affecting
Sufficiency Auditor’s judgment as to sufficiency may be affected by the factors such as: (MRP)
(QNO- (i) Materiality
500.07) (ii) Risk of material misstatement
(MCQ- (iii) Size and characteristics of the Population.
500.4,  Materiality Direct Relationship
MCQ-  Meaning of Materiality
500.11) Materiality may be defined as the significance of classes of transactions, account
balances and presentation and disclosures to the users of the financial statements.
 Relationship
Less evidence would be required in case assertions are less material to users of the
financial statements. But on the other hand, if assertions are more material to the
users of the financial statements, more evidence would be required.
 Risk Direct Relationship
 Meaning of RMM
Risk of material misstatement may be defined as the risk that the financial
statements are materially misstated prior to audit. This consists of two
components described as follows at the assertion level: -
o Inherent risk—The susceptibility of an assertion to a misstatement that
could be material before consideration of any related controls.
o Control risk—The risk that a misstatement that could occur in an assertion
that could be material will not be prevented or detected and corrected on
a timely basis by the entity’s internal control.
 Relationship
Less evidence would be required in case assertions that have a lower risk of
material misstatement. But on the other hand, if assertions have a higher risk of
material misstatement, more evidence would be required.
 Size of Population Direct Relationship & Characteristic of Population Homogeneous –
Less Heterogeneous – More
Size of a population refers to the number of items included in the population. Less
evidence would be required in case of smaller, more homogeneous population but on
the other hand in case of larger, more heterogeneous populations, more evidence would
be required.
(CNO--SA500.135) APPROPRIATENESS OF AUDIT EVIDENCE

 Chart
 Discussion Appropriateness is the measure of the quality of audit evidence; that is, its relevance and its
reliability in providing support for the conclusions on which the auditor’s opinion is based.
The reliability of evidence is influenced by its source and by its nature, and is dependent on the
individual circumstances under which it is obtained.
SA 330, “The Auditor’s Responses to Assessed Risks” requires the auditor to conclude whether
sufficient appropriate audit evidence has been obtained. Whether sufficient appropriate audit
evidence has been obtained to reduce audit risk to an acceptably low level, and thereby enable
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the auditor to draw reasonable conclusions on which to base the auditor’s opinion, is a matter of
professional judgement. SA 200 contains discussion of such matters as the nature of audit
procedures, the timeliness of financial reporting, and the balance between benefit and cost, which
are relevant factors when the auditor exercises professional judgement regarding whether
sufficient appropriate audit evidence has been obtained.
In order to obtain reliable audit evidence, information produced by the entity that is used for
performing audit procedures needs to be sufficiently complete and accurate.
(CNO--SA500.140) RELIABLE & RELEVANT
When designing and performing audit procedures, the auditor shall consider the reliability & relevance of the
information to be used as audit evidence.
 Reliability The reliability of information to be used as audit evidence, and therefore of the audit evidence itself,
(QNO- is influenced by its source and its nature, and the circumstances under which it is obtained, including
500.09) the controls over its preparation and maintenance where relevant.
For example, information obtained from an independent external source may not be reliable if the
source is not knowledgeable, or a management’s expert may lack objectivity. While recognising that
exceptions may exist, the following generalisations about the reliability of audit evidence may be
useful:
 The reliability of audit evidence is increased when it is obtained from independent sources
outside the entity.
 Audit evidence in documentary form, whether paper, electronic, or other medium, is more
reliable than evidence obtained orally
(E.g., a contemporaneously written record of a meeting is more reliable than a subsequent
oral representation of the matters discussed).
 Audit evidence provided by original documents is more reliable than audit evidence
provided by photocopies or facsimiles, or documents that have been filmed, digitised or
otherwise transformed into electronic form, the reliability of which may depend on the
controls over their preparation and maintenance.
 Audit evidence obtained directly by the auditor
(E.g., observation of the application of a control) is more reliable than audit evidence
obtained indirectly or by inference (for example, inquiry about the application of a control).
 The reliability of audit evidence that is generated internally is increased when the related
controls, including those over its preparation and maintenance, imposed by the entity are
effective.
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 Case on The auditor of a limited company has given a clean report on the financial statement on the basis
Reliability of Xerox copies of the books of accounts, vouchers and other records which were taken away by
the Income Tax Department in search under section 132 of the I.T. Act, 1961. Comment.
Answer
 First explain all above points and then write below discussion and conclusion.
Applying the above, the degree of reliance which can be placed by the auditor on the
documentary audit evidence available in the present case will be considerably increased if
the Xerox copies of account books and vouchers are certified to be true copies by the
Income Tax Department. If the tax authorities refuse to certify the same, the auditor
should get the certificate to this effect from the management of the company.
The auditor should use procedure like confirmation of balances from third parties,
inspection of tangible assets, etc. and obtain evidence which corroborates the
documentary evidence available. In any case, the auditor has to satisfy himself that he
has obtained sufficient and appropriate audit evidence to support the figures contained in
the financial statements and formulate his opinion accordingly. Under such
circumstances, the auditor should appropriately report (EMP / OMP) and bring this fact
to the attention of shareholders. In case he was satisfied, a simple paragraph of
information was enough but in case the auditor failed to establish the reliability of
evidence available, he would be required to a disclaimer of opinion.
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 Chart
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 Relevance  Meaning of Relevance – Covering Purpose or Assertion of Audit Procedure
Relevance deals with the logical connection with, or bearing upon, the purpose of the audit
procedure and, where appropriate, the assertion under consideration. The relevance of
information to be used as audit evidence may be affected by the direction of testing.
 Example Evidence for Overstatement & Understatement is Different
If the purpose of an audit procedure is to test for overstatement in the existence or
valuation of accounts payable, testing the recorded accounts payable may be a relevant
audit procedure. On the other hand, when testing for understatement in the existence or
valuation of accounts payable, testing the recorded accounts payable would not be
relevant, but testing such information as subsequent disbursements, unpaid invoices,
suppliers’ statements, and unmatched receiving reports may be relevant.
 Evidence for Assertion of Existence & Cut Off is Different
A given set of audit procedures may provide audit evidence that is relevant to certain
assertions, but not others. For example, inspection of documents related to the collection
of receivables after the period end may provide audit evidence regarding existence and
valuation, but not necessarily cut-off. Similarly, obtaining audit evidence regarding a
particular assertion, for example, the existence of inventory, is not a substitute for
obtaining audit evidence regarding another assertion, for example, the valuation of that
inventory. On the other hand, audit evidence from different sources or of a different nature
may often be relevant to the same assertion.
 Test of Controls should be designed to cover purpose or Assertion, for occurrence of
purchases authorising signature should be checked
Test of controls are designed to evaluate the operating effectiveness of controls in
preventing, or detecting and correcting, material misstatements at the assertion level.
Designing test of controls to obtain relevant audit evidence includes identifying conditions
(characteristics or attributes) that indicate performance of a control, and deviation in
conditions which indicate departures from adequate performance. The presence or
absence of those conditions can then be tested by the auditor.
 Substantive Procedures should be designed to Cover Purpose or Assertion
Substantive procedures are designed to detect material misstatements at the assertion
level. They comprise tests of details and substantive analytical procedures. Designing
substantive procedures includes identifying conditions relevant to the purpose of the test
that constitute a misstatement in the relevant assertion.
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(CNO--SA500.160) USING THE WORK OF A MANAGEMENT’S EXPERT / INFORMATION TO BE USED AS AUDIT
EVIDENCE (QNO-500.02,500.13)
 Chart
 Basic Principle When designing and performing audit procedures, the auditor shall consider the relevance and
reliability of the information to be used as audit evidence.
 Steps before When information to be used as audit evidence has been prepared using the work of a
relying on management’s expert the auditor shall, to the extent necessary, having regard to the
Management’s significance of that expert’s work for the auditor’s purposes, -
Expert.
 Evaluate the competence, capabilities and objectivity of that expert;
 Obtain an understanding of the work of that expert; and
 Evaluate the appropriateness of that expert’s work as audit evidence for the relevant
assertion.
(We excluded detailed discussion on above three steps as they were not covered in recent edition of Study Material
neither they are targeted in New Course RTP’s, MTP’s and Exam).
(CNO—SA500.165) INFORMATION PRODUCED BY ENTITY TO BE USED AS AUDIT EVIDENCE
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 When using information produced by the entity, the auditor shall evaluate whether the information is
sufficiently reliable for the auditor’s purposes, including as necessary in the circumstances:
 Obtaining audit evidence about the accuracy and completeness of the information; and
 Evaluating whether the information is sufficiently precise and detailed for the auditor’s purposes.
(CNO—SA500.175) INCONSISTENCY IN OR DOUBTS OVER RELIABILITY OF AUDIT EVIDENCE
 If:
 audit evidence obtained from one source is inconsistent with that obtained from another; or
 the auditor has doubts over the reliability of information to be used as audit evidence,
 the auditor shall determine what modifications or additions to audit procedures are necessary to resolve the
matter, and shall consider the effect of the matter, if any, on other aspects of the audit.
(CNO--SA500.180) SELECTING ITEMS FOR TESTING TO OBTAIN AUDIT EVIDENCE

 Chart
 Selection When designing tests of controls and tests of details, the auditor shall determine means of
Approach selecting items for testing that are effective in meeting the purpose of the audit procedure.
(We excluded detailed discussion on above points as they were not covered in recent edition of Study Material
Further PARAM Question bank is strictly as per New Course SM, RTP, MTP and Exam Questions, Questions of Old course
RTP, MTP, Exams, Practice Manual are generally not included, but if old course questions cover concepts in recent ICAI
module we included them & highlight them separately. We have marked questions which are present in PARAM
question bank but not having supporting material in BHASKAR as unique. These questions can be tricky as they target
new concepts and has 50-50 chances of coming in exams, we have covered them in our Q&A videos.)
UNIQUE MCQS
 MCQ No. 500.2, 500.5, 500.5, Incs.44.3, 500.10, 500.12
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Part 4 -- [SA 501] AUDIT EVIDENCE: - SPECIFIC CONSIDERATIONS FOR SELECTED ITEMS
(CNO--SA501.020) OBJECTIVE AS PER SA 501
The objective of the auditor is to obtain sufficient appropriate audit evidence regarding the:
Existence and condition of inventory;
Completeness of litigation and claims involving the entity; and
Presentation and disclosure of segment information in accordance with the applicable financial reporting
framework.
PART 1: - INVENTORY
(CNO--SA501.040) EXISTENCE & CONDITION OF INVENTORY (QNO-501.05) (MCQ-Incs.05.1, 05.2, 05.3, 05.4)
When inventory is material to the financial statements, the auditor shall obtain sufficient appropriate audit evidence
regarding the existence and condition of inventory by:
Attendance at physical inventory counting, unless impracticable
 *Evaluate management’s instructions and procedures for recording and controlling the results of the
entity’s physical inventory counting; Obtaining audit evidence as to the reliability of management’s
count procedures
 Observe the performance of management’s count procedures;
 Inspect the inventory; and
 Perform test counts; and
Performing audit procedures over the entity’s final inventory records to determine whether they accurately
reflect actual inventory count results.
These procedures may serve as test of controls or substantive procedures depending on the auditor’s risk
assessment, planned approach and the specific procedures carried out.
(ICAI has included above concept twice in module, we have excluded repetitive parts to avoid confusion and make
studies efficient and effective).
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(CNO--SA501.060) COUNTING IS CONDUCTED AT A DATE OTHER THAN YEAR END
If physical inventory counting is conducted at a date other than the date of the financial statements, the auditor shall,
in addition to the procedures discussed before, perform audit procedures to obtain audit evidence about whether
changes in inventory between the count date and the date of the financial statements are properly recorded.
For Example, If the auditor is unable to attend physical inventory counting due to unforeseen circumstances, the
auditor shall make or observe some physical counts on an alternative date, and perform audit procedures on
intervening transactions.
(CNO--SA501.080) COUNTING IS IMPRACTICABLE

 Reasons for
Impractical
Inventory
Counting
In some cases, attendance at physical inventory counting may be impracticable.

Nature & Location of Inventory
This may be due to factors such as the nature and location of the inventory, for example,
where inventory is held in a location that may pose threats to the safety of the auditor.
The matter of general inconvenience to the auditor, however, is not sufficient to support
a decision by the auditor that attendance is impracticable.
Difficulty / Time / Cost
Further, as explained in SA 200, the matter of difficulty, time, or cost involved is not in itself
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.
 Examples of In some cases, where attendance is impracticable, alternative audit procedures, for example
Alternative inspection of documentation of the subsequent sale of specific inventory items acquired or
Procedures purchased prior to the physical inventory counting, may provide sufficient appropriate audit
evidence about the existence and condition of inventory.
 Alternative In other cases, however, it may not be possible to obtain sufficient appropriate audit evidence
Procedures regarding the existence and condition of inventory by performing alternative audit procedures. In
Doesn’t
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Give such cases, SA 705 requires the auditor to modify the opinion in the auditor’s report as a result of
Sufficient & the scope limitation.
Appropriate
Evidence
 Conclusion If attendance at physical inventory counting is impracticable, the auditor shall perform alternative
& Basic audit procedures to obtain sufficient appropriate audit evidence regarding the existence and
Principle – condition of inventory. If it is not possible to do so, the auditor shall modify the opinion in the
If auditor’s report in accordance with SA 705.
impractical
Perform
Alternative
Procedures
(CNO--SA501.100) CUSTODY AND CONTROL OF A THIRD PARTY (QNO-501.07) (MCQ-501.1, Incs.40.3)

 Chart
 Basic Principle – If When inventory under the custody and control of a third party is material to the financial
Custody & Control statements, the auditor shall obtain sufficient appropriate audit evidence regarding the
of Third Party Then existence and condition of that inventory by performing one or both of the following:
Request Request confirmation from the third party as to the quantities and condition of
Confirmation or inventory held on behalf of the entity.
Other Audit Perform inspection or other audit procedures appropriate in the circumstances.
Procedures
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(CNO--SA501.120) MATTERS RELEVANT IN PLANNING ATTENDANCE AT PHYSICAL INVENTORY COUNTING
(QNO-501.09)
Text Examples
Matters relevant in planning attendance at physical inventory counting
Visit & Related
The locations at which inventory is held
Nature of inventory. (Solid / Liquid / Gaseous)
Stages of completion of work in progress. (100% Complete / In-complete)
Risk & Related
The risks of material misstatement related to inventory. (Low: - Unsalable/ High: - Saleable)
The nature of the internal control related to inventory. (Strong / Weak)
Whether the entity maintains a perpetual inventory system
Physical Verification
Whether adequate procedures are expected to be established (Adequate / Inadequate)
and proper instructions issued for physical inventory counting.
The timing of physical inventory counting. (Year End / Latter)
Whether the assistance of an auditor’s expert is needed.
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(CNO--SA501.140) PART 2: - LITIGATIONS & CLAIMS
DESIGN AND PERFORM AUDIT PROCEDURES FOR COMPLETENESS LITIGATION AND CLAIMS (MCQ- Incs.24.2)
The auditor shall design and perform audit procedures in order to identify litigation and claims involving the entity
which may give rise to a risk of material misstatement, including:
 Step 1 Inquiry of management and, where applicable, others within the entity, including in-house
(QNO- legal counsel;
501.11) Reviewing minutes of meetings of those charged with governance and
(MCQ- Correspondence between the entity and its external legal counsel; and
501.2) Reviewing legal expense accounts.
 Step 2
IF RISK OF MATERIAL MISSTATEMENT, THEN DIRECT COMMUNICATION WITH THE ENTITY’S EXTERNAL LEGAL
COUNSEL.
 LETTER What if RMM exists? – Direct Communication with Lawyer
(QNO- If the auditor assesses a risk of material misstatement regarding litigation or claims that
501.11) have been identified, or when audit procedures performed indicate that other material
litigation or claims may exist, the auditor shall, in addition to the procedures required by
other SAs, seek direct communication with the entity’s external legal counsel.
The auditor shall do so through a letter of inquiry, prepared by management and sent by
the auditor, requesting the entity’s external legal counsel to communicate directly with the
auditor.
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Prohibition
If law, regulation or the respective legal professional body prohibits the entity’s external
legal counsel from communicating directly with the auditor, the auditor shall perform
alternative audit procedures.
 MEET In Certain Cases – Complexity / Significant Risk / Disagreement between Counsel &
Management then – Meet External Legal Counsel
In certain circumstances, the auditor also may judge it necessary to meet with the entity’s
external legal counsel to discuss the likely outcome of the litigation or claims.
This may be the case, for example, where:
 The auditor determines that the matter is a significant risk.
 The matter is complex.
 There is disagreement between management and the entity’s external legal
counsel.
 Ordinarily, such meetings require management’s permission and are held with a
representative of management in attendance.
 Step 3 Written Representations
The auditor shall request management and, where appropriate, those charged with
governance to provide written representations that all known actual or possible litigation
and claims whose effects should be considered when preparing the financial statements
have been disclosed to the auditor and appropriately accounted for and disclosed in
accordance with the applicable financial reporting framework.
PART 3: - SEGMENT INFORMATION

(CNO--SA501.200) PRESENTATION AND DISCLOSURE OF SEGMENT INFORMATION (QNO-501.14)
 Chart
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 Audit The auditor shall obtain sufficient appropriate audit evidence regarding the presentation and
Procedures disclosure of segment information in accordance with the applicable financial reporting
framework by:
Obtaining an understanding of the methods used by management in determining
segment information. Further,
 Evaluating whether such methods are likely to result in disclosure in accordance
with the applicable financial reporting framework; and
 Where appropriate, testing the application of such methods; and
Performing analytical procedures or other audit procedures appropriate in the circumstances
 Further Depending on the circumstances, example of matters that may be relevant when
Explanation: obtaining an understanding of the methods used by management in determining
Understanding segment information and whether such methods are likely to result in disclosure in
of the accordance with the applicable financial reporting framework include:
Methods Used  Sales, transfers and charges between segments, and elimination of intersegment
by amounts.
Management  Comparisons with budgets and other expected results, for example, operating
profits as a percentage of sales.
 The allocation of assets and costs among segments.
 Consistency with prior periods, and the adequacy of the disclosures with respect
to inconsistencies
Further PARAM Question bank is strictly as per New Course SM, RTP, MTP and Exam Questions, Questions of Old course
RTP, MTP, Exams, Practice Manual are generally not included, but if old course questions cover concepts in recent ICAI
module we included them & highlight them separately. We have marked questions which are present in PARAM
question bank but not having supporting material in BHASKAR as unique. These questions can be tricky as they target
new concepts and has 50-50 chances of coming in exams, we have covered them in our Q&A videos.)
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Part 5 -- [SA 505] EXTERNAL CONFIRMATIONS

(CNO—SA505.020) WHAT IS EXTERNAL CONFIRMATION? (QNO-505.03)
 Chart
 External External confirmation– Audit evidence obtained as a direct written response to the auditor from
confirmation a third party (the confirming party), in paper form, or by electronic or other medium.
Following points explains factor affecting reliability same as those in SA 500, external confirmation
incorporates all these points which makes it reliable audit evidence: -
Audit evidence is more reliable when it is obtained from independent sources outside the
entity.
Audit evidence obtained directly by the auditor is more reliable than audit evidence
obtained indirectly or by inference.
Audit evidence is more reliable when it exists in documentary form, whether paper,
electronic or other medium.
Accordingly, depending on the circumstances of the audit, audit evidence in the form of external
confirmations received directly by the auditor from confirming parties may be more reliable than
evidence generated internally by the entity.
 Examples Situations where External Confirmations may be used/parties to whom we are ask for
conformation.
Debtor balances;
Creditor balances;
Terms of agreement or transactions with third parties;
Bank Balance and other information from bankers;
Stock held by third parties;
Property title deeds held by third parties;
Investments purchased but delivery not taken; &
Bank loans.
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(CNO—SA505.040) EXTERNAL CONFIRMATION PROCEDURES (QNO-505.05/505.07) (MCQ-505.6)
 Chart
 Auditors When using external confirmation procedures, the auditor shall maintain control over external
Control over confirmation requests, including:
External 1. Determining the information to be confirmed or requested;
Confirmations 2. Selecting the appropriate confirming party;
3. Designing the confirmation requests, including determining that requests are properly
addressed and contain return information for responses to be sent directly to the auditor;
and
4. Sending the requests, including follow-up requests when applicable, to the confirming party.
1. Determining External confirmation procedures frequently are performed to confirm or request information
the regarding account balances and their elements. They may also be used to confirm terms of
Information to agreements, contracts, or transactions between an entity and other parties, or to confirm the
be Confirmed absence of certain conditions, such as a “side agreement”.
or Requested
2. Selecting the Responses to confirmation requests provide more relevant and reliable audit evidence when
Appropriate confirmation requests are sent to a confirming party the auditor believes is knowledgeable about
Confirming the information to be confirmed.
Party (E.g. a financial institution official who is knowledgeable about the transactions or arrangements
for which confirmation is requested may be the most appropriate person at the financial institution
from whom to request confirmation.)
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3. Designing
Confirmation
Requests
Directly affect the confirmation response rate, and the reliability and the nature of the audit
evidence.
Factors to consider when designing confirmation requests include:

 Sending Determining that requests are properly addressed, includes testing the validity of some or all of the
Requests addresses on confirmation requests before they are sent out.
Follow-Up on Confirmation Requests
The auditor may send an additional confirmation request when a reply to a previous request has
not been received within a reasonable time.
(E.g. the auditor may, having re-verified the accuracy of the original address, send an additional or
follow-up request.)
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(CNO—SA505.050) OBJECTIVE AND DEFINITIONS
 Chart
 Objective as The objective of the auditor, when using external confirmation procedures, is to design and
per SA 505 perform such procedures to obtain relevant and reliable audit evidence.
 Definition of Positive confirmation request – A request that the confirming party respond directly to the
important auditor indicating whether the confirming party agrees or disagrees with the information in the
terms request, or providing the requested information.
Negative confirmation request – A request that the confirming party respond directly to the
auditor only if the confirming party disagrees with the information provided in the request.
Non-response – A failure of the confirming party to respond, or fully respond, to a positive

confirmation request, or a confirmation request returned undelivered.
Exception – A response that indicates a difference between information requested to be

confirmed, or contained in the entity’s records, and information provided by the confirming party.
The exception needs to be assessed to the entire population after analyzing the reason for
difference
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(CNO—SA505.080) NEGATIVE CONFIRMATIONS (QNO-505.08) (MCQ-505.5, 505.3, Incs.24.3)
 Chart
 Definition Negative confirmation request – A request that the confirming party respond directly to the
auditor only if the confirming party disagrees with the information provided in the request.
 Situations Negative confirmations provide less persuasive audit evidence than positive confirmations.
Accordingly, the auditor shall not use negative confirmation requests as the sole substantive audit
procedure to address an assessed risk of material misstatement at the assertion level unless all of
the following are present:
The auditor has assessed the risk of material misstatement as low and has obtained
sufficient appropriate audit evidence regarding the operating effectiveness of controls
relevant to the assertion;
The population of items subject to negative confirmation procedures comprises a large
number of small, homogeneous, account balances, transactions or conditions;
A very low exception rate is expected; and
The auditor is not aware of circumstances or conditions that would cause recipients of
negative confirmation requests to disregard such requests.
(CNO—SA505.100) RELIABILITY OF RESPONSES TO CONFIRMATION REQUESTS (SOME RESULTS OF THE

EXTERNAL CONFIRMATION PROCEDURES) (MCQ-505.5, 505.3, Incs.24.3)
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The auditor shall evaluate whether the results of the external confirmation procedures provide relevant and reliable
audit evidence, or whether performing further audit procedures is necessary.
If the auditor identifies factors that give rise to doubts about the reliability of the response to a confirmation request,
the auditor shall obtain further audit evidence to resolve those doubts.
If the auditor determines that a response to a confirmation request is not reliable, the auditor shall evaluate the
implications on the assessment of the relevant risks of material misstatement, including the risk of fraud, and on the
related nature, timing and extent of other audit procedures.
(CNO—SA505.120) MANAGEMENT’S REFUSAL TO ALLOW THE AUDITOR TO SEND A CONFIRMATION REQUEST

(QNO-505.11) (MCQ-Incs.11.3)
 Chart
 Inquiry If management refuses to allow the auditor to send a confirmation request, the auditor shall:
Inquire as to management’s reasons for the refusal, and seek audit evidence as to their validity and
reasonableness;
 Evaluate Evaluate the implications of management’s refusal on the auditor’s assessment of the relevant risks
of material misstatement, including the risk of fraud, and on the nature, timing and extent of other
audit procedures; and
 Alternative Perform alternative audit procedures designed to obtain relevant and reliable audit evidence.
audit If the auditor concludes that management’s refusal to allow the auditor to send a confirmation
procedures request is unreasonable, or the auditor is unable to obtain relevant and reliable audit evidence from
alternative audit procedures, the auditor shall communicate with those charged with governance in
accordance with SA 260. The auditor also shall determine the implications for the audit and the
auditor’s opinion in accordance with SA 705.
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(CNO—SA505.130) EVALUATING THE EVIDENCE OBTAINED
 Chart
 Discussion The auditor shall evaluate whether the results of the external confirmation procedures provide
relevant and reliable audit evidence, or whether performing further audit procedures is necessary.
UNIQUE QUESTION
 QNO-505.04 Overview of external confirmation-Types /Non Response/Exception
UNIQUE MCQS
 MCQ No. 505.1, 505.2, 505.4, 505.5 Incs.11.5, Incs.24.4
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Part 6 -- [SA 510] INITIAL AUDIT ENGAGEMENTS OPENING BALANCES
(CNO--SA510.020) APPLICABILITY & OBJECTIVES OF SA 510 (QNO-510.01/510.03)
Applicability
This Standard on Auditing (SA) deals with the auditor’s responsibilities relating to opening balances when
conducting an initial audit engagement.
Initial audit engagement – An engagement in which either:
 The financial statements for the prior period were not audited; or
 The financial statements for the prior period were audited by a predecessor auditor.
Objective
In conducting an initial audit engagement, the objective of the auditor with respect to opening balances is to
obtain sufficient appropriate audit evidence about whether:
 Opening balances contain misstatements that materially affect the current period’s financial
statements; and
 Appropriate accounting policies reflected in the opening balances have been consistently applied in
the current period’s financial statements or changes thereto are properly accounted for and
adequately presented and disclosed in accordance with the applicable financial reporting
framework.
(CNO--SA510.040) INCLUSIONS IN OPENING BALANCES
In addition to financial statement amounts, opening balances include matters requiring disclosure that existed at
the beginning of the period, such as contingencies and commitments.
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(CNO--SA510.060) AUDIT PROCEDURES TO EXAMINE OPENING BALANCES (QNO-510.03)
The auditor shall read the most recent financial statements, if any, and the predecessor auditor’s report thereon, if any,
for information relevant to opening balances, including disclosures.
The auditor shall obtain sufficient appropriate audit evidence about whether the opening balances contain
misstatements that materially affect the current period’s financial statements by:
Determining whether the prior period’s closing balances have been correctly brought forward to the current
period or, when appropriate, any adjustments have been disclosed as prior period items in the current year’s
Statement of Profit and Loss;
Determining whether the opening balances reflect the application of appropriate accounting policies; and
Performing one or more of the following:
 Where the prior year financial statements were audited, perusing the copies of the audited financial
statements including the other relevant documents relating to the prior period financial statements;
 Evaluating whether audit procedures performed in the current period provide evidence relevant to the
opening balances; or
 Performing specific audit procedures to obtain evidence regarding the opening balances.
Relevant Information in the Predecessor Auditor’s Report
If the prior period’s financial statements were audited by a predecessor auditor and there was a modification to
the opinion, the auditor shall evaluate the effect of the matter giving rise to the modification in assessing the
risks of material misstatement in the current period’s financial statements in accordance with SA 315.
If the auditor obtains audit evidence that the opening balances contain misstatements that could materially
affect the current period’s financial statements, the auditor shall perform such additional audit procedures as
are appropriate in the circumstances to determine the effect on the current period’s financial statements. If the
auditor concludes that such misstatements exist in the current period’s financial statements, the auditor shall
communicate the misstatements with the appropriate level of management and those charged with
governance in accordance with SA 450.
Consistency of Accounting Policies
The auditor shall obtain sufficient appropriate audit evidence about whether the accounting policies reflected
in the opening balances have been consistently applied in the current period’s financial statements, and
whether changes in the accounting policies have been properly accounted for and adequately presented and
disclosed in accordance with the applicable financial reporting framework.
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(CNO--SA510.080) AUDIT CONCLUSIONS AND REPORTING (MCQ-510.1, 510.2)
If the auditor is unable to obtain sufficient appropriate audit evidence regarding the opening balances, the auditor
shall express a qualified opinion or a disclaimer of opinion, as appropriate, in accordance with SA 705.
Conclusion and Reporting on Material Misstatement of Opening Balance: -
If the auditor concludes that the opening balances contain a misstatement that materially affects the current
period’s financial statements, and the effect of the misstatement is not properly accounted for or not
adequately presented or disclosed, the auditor shall express a qualified opinion or an adverse opinion, as
appropriate, in accordance with SA 705.
Conclusion and Reporting on Consistency of Accounting Policies relating to Opening Balance: -
If the auditor concludes that:
 The current period’s accounting policies are not consistently applied in relation to opening balances
in accordance with the applicable financial reporting framework; or
 A change in accounting policies is not properly accounted for or not adequately presented or
disclosed in accordance with the applicable financial reporting framework, the auditor shall express a
qualified opinion or an adverse opinion as appropriate in accordance with SA 705.
Modification in Predecessor Auditor’s Report

If the predecessor auditor’s opinion regarding the prior period’s financial statements included a modification
to the auditor’s opinion that remains relevant and material to the current period’s financial statements, the
auditor shall modify the auditor’s opinion on the current period’s financial statements in accordance with SA
705(Revised) and SA 710
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Part 7 -- [SA 550] RELATED PARTIES
(CNO--SA550.020) DEFINITION OF RELATED PARTY

 Chart
 What if If FRF defines related party use that definition. (Like in India AS 18 defines related party but this
definition is need not be the case in all FRFs like Special Purpose FRFs, which may be as per agreement,
given in FRF? regulator, holding company etc., in such FRFs related party may not be defined.)
 What if no If there is no definition in FRF then we should use SA 550 definition, below is the definition as per
definition is SA 550
given in FRF?
 Definition in Any party controlling (i.e., More than 50%, ability to decide financial and operating
SA 550 policies) or having significant influence (i.e., 20 % or more, ability to participate in
financial and operating policies) over entity (Direct or Indirect through Intermediaries
i.e., Subsidiaries)
(E.g., of such related parties are Holding Company, Big Investor, KMP etc.)
Any party who is under significant influence or control of entity (Direct or Indirect
through Intermediaries i.e., Subsidiaries)
(E.g., of such related parties are Subsidiary, Associate, Joint Venture etc.)
Parties which are under common control with entity because of common ownership,
common KMP or Owners are close friends or relatives.
 SA 550 Entities under control of governments (State or Central) but they will be covered if they have
Exclusion significant transactions or significant resource sharing between them.
from related (For example, HPCL and BHEL are in common control of government, still they will not be
party considered as related parties, to avoid hardship on government companies, otherwise each
government company will have 1000s of related parties just because of common control of
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transactions government, but HPCL and BPCL will be considered if they are having significant transactions or
resource sharing as they are in same business of OIL)
(CNO--SA550.040) NATURE OF RELATED PARTY RELATIONSHIPS AND TRANSACTIONS

(QNO-550.02) (MCQ-Incs.24.5)
 Chart
 RPT in Many related party transactions are in the normal course of business. In such circumstances,
normal they may carry no higher risk of material misstatement of the financial statements than similar
course transactions with unrelated parties.
doesn’t lead
to higher
RMM
 Situation However, the nature of related party relationships and transactions may, in some
when RPT circumstances, give rise to higher risks of material misstatement of the financial statements than
will lead to transactions with unrelated parties. For example:
higher RMM
They are not conducted at normal market prices, terms & conditions.
(E.g., Goods purchased at double the market price from MDs son proprietor firm or
goods sold to brother of MD at triple the market price)
Transactions are conducted through complex related party relationships & structures.
(E.g., Indian Co pays Technical Consultancy Fees USA Sub pays Management
Consultancy UK Sub pays Dividend  Canada Holding Co where MD is having major
stake)
Where there are no appropriate information system’s (employees/ register / software)

to identify, authorize, record, summaries and disclose related party transactions which
may lead to non-compliance of AS 18.
(E.g., Delhi based Company indirectly holds controlling stake in Australian company
through its subsidiaries in Mumbai and Chennai, but this thing is not disclosed in
financial statement as per AS 18, because of lack of expertise in staff managing related
party transactions) (Non-CA / CS / CWA)
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(CNO--SA550.060) RESPONSIBILITIES OF THE AUDITOR (QNO-550.03)
 Chart
 Presentation AS 18 / Ind AS 24 deals with Related Party, such standards generally provide accounting &
in Financial disclosure treatment, In India they provide only disclosure treatment
Statement There are specific accounting and disclosure requirements for related party relationships,
transactions and balances to enable users of the financial statements to understand their nature
and effects on the financial statements.
 Risk Auditor’s Responsibility to Assess RMM (Including ROF) and Perform Further Audit
Assessment Procedures
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& Further The auditor has a responsibility to perform audit procedures to identify, assess and
Audit respond to the risks of material misstatement arising from the entity’s failure to
Procedures appropriately account for related party relationships, transactions or balances.
In addition, it is relevant to the auditor’s evaluation of whether fraud risk factors are
present as required by SA 240. This is because fraud may be more easily committed
through related parties.
 Conclusion The auditor needs to obtain an understanding of the entity’s related party relationships and
transactions sufficient to be able to conclude whether the financial statements, insofar as they
are affected by those relationships and transactions:
(a) Achieve a true and fair presentation; or
(b) Are not misleading (for compliance frameworks).
 Problems / Inherent Limitations of Audit & It increases in context of RPT
Issues Owing to the inherent limitations of an audit, there is an unavoidable risk that some
material misstatements of the financial statements may not be detected, even though
the audit is properly planned and performed in accordance with the SAs. In the context
of related parties, the potential effects of inherent limitations on the auditor’s ability to
detect material misstatements are greater for such reasons as the following:
 Management may be unaware of the existence of all related party relationships.
 Related party relationships may present a greater opportunity for Collusion.
 Concealment or Manipulation by management.
(E.g., Collusion – Transferring profits to Dubai / Concealment  Stolen stock shown as
sale to subsidiary in Mauritius / Manipulation  Gave loan to RP to purchase goods &
boost own sales)
 Solution Importance of Professional Skepticism
Planning and performing the audit with professional skepticism as required by SA 200 is
therefore particularly important in this context, given the potential for undisclosed
related party relationships and transactions.
Matter of SA 550
The requirements in this SA are designed to assist the auditor in identifying and
assessing the risks of material misstatement associated with related party relationships
and transactions, and in designing audit procedures to respond to the assessed risks.
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(CNO--SA550.080) MAINTAINING ALERTNESS FOR RELATED PARTY INFORMATION WHEN REVIEWING
RECORDS OR DOCUMENTS (HOW CAN AN AUDITOR VERIFY THE EXISTENCE OF RELATED PARTY
RELATIONSHIPS AND TRANSACTIONS?)
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.
 Chart
 Compulsory In particular, the auditor shall inspect the following for indications of the existence of related
to see party relationships or transactions that management has not previously identified or disclosed
following to the auditor:
documents
Bank, legal and third-party confirmations obtained as part of the auditor’s procedures;
Bank Confirmations -- (For guarantees / securities given or taken, arrangements such as
minimum balance setoff arrangement / joint holders / nominee)
Legal Confirmations -- (Contracts / MOUs etc.)
Third Party Confirmations -- (From Directors / Subsidiaries)
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Minutes of meetings of shareholders and of those charged with governance; and
(E.g., Approvals under Sec 177 & Sec 188)
Such other records or documents as the auditor considers necessary in the

circumstances of the entity. (E.g., Company Restructuring Documents)
 Documents (Previous Year Data)
which can  AS 18 / Schedule III disclosures of Previous Years (Old Records)
give (Control / SI)
information  Shareholders register (Control / SI)
about  Director’s register (SI)
related  Contracts with TCWG / Directors / KMP (SI)
parties  Life insurance policies (SI)
QNO-550.04  Records of Entity’s pension plans (SI)
 Statements of Conflict of Interest (SI)
 Investment Register (Control / SI)
(Legal Documents)
 Sec 189 Register
 Information supplied to Regulatory Authorities
o Filing with SEBI / SEC
o Tax Returns
(Other Documents)
 Internal Auditor’s Report
 Invoices & Correspondence with professional advisor
 Contracts not in ordinary course of business / Contracts re-negotiated
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(CNO--SA550.140) THE IDENTITY OF THE ENTITY’S RELATED PARTIES

 Chart
 FRF Where the applicable financial reporting framework establishes related party
Establishes requirements, information regarding the identity of the entity’s related parties is
Related Party likely to be readily available to management because the entity’s information systems
Requirements will need to record, process and summarise related party relationships and
transactions to enable the entity to meet the accounting and disclosure requirements
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of the framework.
Management is therefore likely to have a comprehensive list of related parties and
changes from the prior period. For recurring engagements, making the inquiries
provides a basis for comparing the information supplied by management with the
auditor’s record of related parties noted in previous audits.
 FRF Does Not However, where the framework does not establish related party requirements, the
Establish entity may not have such information systems in place.
Related Party Under such circumstances, it is possible that management may not be aware of the
Requirements existence of all related parties. Nevertheless, the requirement to make the inquiries
specified above still applies because management may be aware of parties that meet
the related party definition set out in this SA.
In such a case, however, the auditor’s inquiries regarding the identity of the entity’s
related parties are likely to form part of the auditor’s risk assessment procedures and
related activities performed in accordance with SA 315 to obtain information
regarding:
 The entity’s ownership and governance structures;
 The types of investments that the entity is making and plans to make; and
 The way the entity is structured and how it is financed.
In the particular case of common control relationships, as management is more likely
to be aware of such relationships if they have economic significance to the entity, the
auditor’s inquiries are likely to be more effective if they are focused on whether
parties with which the entity engages in significant transactions, or shares resources
to a significant degree, are related parties.
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Part 8 -- [SA 560] SUBSEQUENT EVENTS
(CNO--SA560.020) REQUIREMENT OF FINANCIAL REPORTING FRAMEWORK (QNO-560.02)
Financial statements may be affected by certain events that occur after the date of the financial statements. Many
financial reporting frameworks specifically refer to such events. Such financial reporting frameworks ordinarily
identify two types of events:
(a) Those that provide evidence of conditions that existed at the date of the financial statements; and
(b) Those that provide evidence of conditions that arise after the date of the financial statements.
(Other than adjusting)
SA 700 explains that the date of the auditor’s report informs the reader that the auditor has considered the effect of
events and transactions of which the auditor becomes aware and that occurred up to that date.
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(CNO—SA560.040) DEFINITION OF SUBSEQUENT EVENTS (QNO-560.01)
SA 560 on “Subsequent Events”, defines the term “subsequent events” as events occurring between the date of the
financial statements and the date of the auditor’s report, and facts that become known to the auditor after the date
of the auditor’s report. Facts can be further divided in 2 parts facts till date of publishing and facts after date of
publishing.
(CNO--SA560.050) OBJECTIVES AS PER SA 560

 Chart
 Discussion The objectives of the auditor are to:

(a) Obtain sufficient appropriate audit evidence about whether events occurring between the
date of the financial statements and the date of the auditor’s report that require adjustment of,
or disclosure in, the financial statements are appropriately reflected in those financial
statements; and
(b) Respond appropriately to facts that become known to the auditor after the date of the
auditor’s report, that, had they been known to the auditor at that date, may have caused the
auditor to amend the auditor’s report.
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(CNO--SA560.060) EVENTS OCCURRING BETWEEN THE DATE OF THE FINANCIAL STATEMENTS AND THE DATE
OF THE AUDITOR’S REPORT (QNO-560.03)
 Duty of Auditor should examine whether all adjusting events should be identified
Auditor The auditor shall perform audit procedures designed to obtain sufficient appropriate
audit evidence that all events occurring between the date of the financial statements and
the date of the auditor’s report that require adjustment of, or disclosure in, the financial
statements have been identified. The auditor shall perform the procedures so that they
cover the period from the date of the financial statements to the date of the auditor’s
report, or as near as practicable thereto.
No need to check again is some areas are checked in regular audit procedures
The auditor is not, however, expected to perform additional audit procedures on matters
to which previously applied audit procedures have provided satisfactory conclusions.
Nature and extent depends on risk assessment
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The auditor shall take into account the auditor’s risk assessment in determining the
nature and extent of such audit procedures, which shall include the following:
 Audit Obtaining an understanding of any procedures management has established to ensure
Procedures that subsequent events are identified.
Inquiring of management and, where appropriate, those charged with governance as to
whether any subsequent events have occurred which might affect the financial
statements.
Reading minutes, if any, of the meetings, of the entity’s owners, management and those
charged with governance, that have been held after the date of the financial statements
and inquiring about matters discussed at any such meetings for which minutes are not
yet available.
Reading the entity’s latest subsequent interim financial statements, if any.
 Adjusting When, as a result of the procedures performed as explained above, the auditor identifies events
Event 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.
 Written The auditor shall request management and, where appropriate, those charged with governance,
Representa- to provide a written representation in accordance with SA 580, “Written Representations” that all
tions 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.
(CNO--SA560.080) FACTS WHICH BECOME KNOWN TO THE AUDITOR AFTER THE DATE OF THE AUDITOR’S
REPORT BUT BEFORE THE DATE THE FINANCIAL STATEMENTS ARE ISSUED (MCQ-560.1)
 No The auditor has no obligation to perform any audit procedures regarding the financial
obligation statements after the date of the auditor’s report. However, when, after the date of the auditor’s
(QNO- report but before the date the financial statements are issued, a fact becomes known to the
560.06) auditor that, had it been known to the auditor at the date of the auditor’s report, may have
caused the auditor to amend the auditor’s report, the auditor shall:
Discuss the matter with management and, where appropriate, those charged with
governance.
Determine whether the financial statements need amendment and, if so,
Inquire how management intends to address the matter in the financial statements.
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(CNO--SA560.100) FACTS WHICH BECOME KNOWN TO THE AUDITOR AFTER THE FINANCIAL STATEMENTS
HAVE BEEN ISSUED.
All Steps of Earlier Point will apply Plus Following Additional Point will be Applicable
Review the steps taken by management to ensure that anyone in receipt of the previously issued financial
statements together with the auditor’s report thereon is informed of the situation.
recent ICAI module we included them & highlight them separately. We have marked questions which are present
in PARAM question bank but not having supporting material in BHASKAR as unique. These questions can be tricky
as they target new concepts and has 50-50 chances of coming in exams, we have covered them in our Q&A
videos.)
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Part 9 -- [SA 570] GOING CONCERN
(CNO--SA570.010) GOING CONCERN BASIS OF ACCOUNTING

 Chart
 Discussion Under the going concern basis of accounting, the financial statements are prepared on the
assumption that the entity is a going concern and will continue its operations for the foreseeable
future.
General purpose financial statements are prepared using the going concern basis of accounting,
unless management either
(i) intends to liquidate the entity or to cease operations,
(ii) or has no realistic alternative but to do so. (Liquidate)
When the use of the going concern basis of accounting is appropriate, assets and liabilities are
recorded on the basis that the entity will be able to realize its assets and discharge its liabilities in
the normal course of business.
(CNO--SA570.020) OBJECTIVES OF THE AUDITOR REGARDING GOING CONCERN (QNO-570.01)
The objectives of the auditor are:

To conclude, based on the audit evidence obtained, whether a material uncertainty exists related to events
or conditions that may cast significant doubt on the entity’s ability to continue as a going concern; and
To obtain sufficient appropriate audit evidence about the appropriateness of management’s use of the
going concern assumption in the preparation and presentation of the financial statements;
To determine the implications for the auditor’s report.
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(CNO--SA570.030) RESPONSIBILITIES OF THE AUDITOR (QNO-570.02)
Simply achieving above Objectives

The auditor’s responsibilities are to obtain sufficient appropriate audit evidence regarding, and conclude on,
the appropriateness of management’s use of the going concern basis of accounting in the preparation of the
financial statements, and to conclude, based on the audit evidence obtained, whether a material
uncertainty exists about the entity’s ability to continue as a going concern.
Absence of Material Uncertainty is Not Guarantee as Going Concern
However, as described in SA 200, the potential effects of inherent limitations on the auditor’s ability to
detect material misstatements are greater for future events or conditions that may cause an entity to cease
to continue as a going concern. The auditor cannot predict such future events or conditions. Accordingly,
the absence of any reference to a material uncertainty about the entity’s ability to continue as a going
concern in an auditor’s report cannot be viewed as a guarantee as to the entity’s ability to continue as a
going concern
(CNO--SA570.040) STEP 1- RISK ASSESSMENT PROCEDURE AND REMAINING ALERT THROUGHOUT THE AUDIT
 Chart
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 Risk When performing risk assessment procedures as required by SA 315, the auditor shall consider
Assessment whether events or conditions exist that may cast significant doubt on the entity’s ability to
Procedure continue as a going concern.
QNO-570.15
In so doing, the auditor shall determine whether management has already performed a
preliminary assessment of the entity’s ability to continue as a going concern, and:
(a) If such an assessment has been performed, the auditor shall discuss the assessment with
management and determine whether management has identified events or conditions that,
individually or collectively, may cast significant doubt on the entity’s ability to continue as a
going concern and, if so, management’s plans to address them; or
(b) If such an assessment has not yet been performed, the auditor shall discuss with
management the basis for the intended use of the going concern basis of accounting, and inquire
of management whether events or conditions exist that, individually or collectively, may cast
significant doubt on the entity’s ability to continue as a going concern.
 Remaining The auditor shall remain alert throughout the audit for audit evidence of events or conditions
alert that may cast significant doubt on the entity’s ability to continue as a going concern.
throughout
the audit SA 315 requires the auditor to revise the auditor’s risk assessment and modify the further
planned audit procedures accordingly when additional audit evidence is obtained during the
course of the audit that affects the auditor’s assessment of risk.
(CNO--SA570.060) EVENTS OR CONDITIONS CREATING SIGNIFICANT DOUBT OVER GOING CONCERN?

(QNO-570.03) (MCQ- 570.2)
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The following are examples of events or conditions that, individually or collectively, may cast significant doubt
about the going concern assumption. This listing is not all-inclusive nor does the existence of one or more of the
items always signify that a material uncertainty exists.
 Financial (In sequence of falling business)
 Substantial operating losses or significant deterioration in the value of assets
used to generate cash flows.
 Negative operating cash flows indicated by historical or prospective financial
statements.
 Arrears or discontinuance of dividends.
 Net liability or net current liability position.
 Adverse key financial ratios.
(Borrowing Related Points)
 Inability to comply with the terms of loan agreements.
(Maintaining Stock Levels, Margin Money)
 Fixed-term borrowings approaching maturity without realistic prospects of

renewal or repayment; or excessive reliance on short-term borrowings to finance
long-term assets.
(Kingfisher Airlines)
 Inability to obtain financing for essential new product development or other

essential investments.
(Satyam, Banks refused to give new loans)
(Creditor Related Points)

 Inability to pay creditors on due dates.
 Indications of withdrawal of financial support by creditors.
(No extension from creditors)
 Change from credit to cash-on-delivery transactions with suppliers.
 Operating Management intentions to liquidate the entity or to cease operations.
(E.g. Start-up’s)
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Loss of key management without replacement.
Shortages of important supplies.
(E.g.Power Generating Plants)
Labour difficulties.
Loss of a major market, key customer(s), franchise, license, or principal supplier(s).
Emergence of a highly successful competitor.
(E.g.Milk Butter Vs Peanut Butter)
 Other Uninsured or underinsured catastrophes when they occur.
(Law related matters)
Non-compliance with capital or other statutory requirements.
(E.g. CAR in Banks)
Changes in law or regulation or government policy expected to adversely affect the

entity.
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.
(CNO--SA570.080) STEP 2:-ADDITIONAL AUDIT PROCEDURES WHEN EVENTS OR CONDITIONS ARE IDENTIFIED
(QNO-570.07)
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If events or conditions have been identified that may cast significant doubt on the entity’s ability to continue as a
going concern, the auditor shall obtain sufficient appropriate audit evidence to determine whether or not a material
uncertainty exists related to events or conditions that may cast significant doubt on the entity’s ability to continue
as a going concern (hereinafter referred to as “material uncertainty”) through performing additional audit
procedures, including consideration of mitigating factors. These procedures shall include:
 Compulsory Management's Assessment if not prepared yet
Where management has not yet performed an assessment of the entity’s ability to
continue as a going concern, requesting management to make its assessment.
Future Plan
Evaluating management’s plans for future actions (Introducing new products, cost
cutting, sale of assets, sale of investments, issue of shares, taking new loans etc.) in
relation to its going concern assessment, whether the outcome of these plans is likely to
improve the situation.
(E.g., Will such funds be sufficient to carry on business) and whether management’s
plans are feasible in the circumstances. (Can they pull off such big changes in given short
span)
Cash flow & forecast
Where the entity has prepared a cash flow forecast, and analysis of the forecast is a
significant factor in considering the future outcome of events or conditions in the
evaluation of management’s plans for future actions:
 Evaluating the reliability of the underlying data generated to prepare the
forecast; and
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 Determining whether there is adequate support for the assumptions underlying
the forecast.
Events
Considering whether any additional facts or information have become available since the
date on which management made its assessment.
Written Representation
Requesting written representations from management and, where appropriate, those
charged with governance, regarding their plans for future actions and the feasibility of
these plans.
 Optional if Audit procedures that are relevant to the requirement may include the following:
required
Future Action Plans of Third Parties & Management
(In Sequence of Power)
 Obtaining and reviewing reports of regulatory actions.
 Inquiring of the entity’s legal counsel regarding the existence of litigation and
claims and the reasonableness of management’s assessments of their outcome
and the estimate of their financial implications.
 Reading minutes of the meetings of shareholders, those charged with
governance and relevant committees for reference to financing difficulties.
 Determining the adequacy of support for any planned disposals of assets.
 Reading the terms of debentures and loan agreements and determining whether
any have been breached.
 Evaluating the entity’s plans to deal with unfilled customer orders. (When there
is shortage of raw material)
Cash flow, forecast & interim financial statements
 Analyzing and discussing cash flow, profit and other relevant forecasts with
management.
 Analyzing and discussing the entity’s latest available interim financial statements.
Subsequent Events
 Performing audit procedures regarding subsequent events to identify those that
either mitigate or otherwise affect the entity’s ability to continue as a going
concern.
Written Representation of Third Parties

 Confirming the existence, legality and enforceability of arrangements to provide
or maintain financial support with related and third parties and assessing the
financial ability of such parties to provide additional funds.
 Confirming the existence, terms and adequacy of borrowing facilities.
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(CNO--SA570.090) STEP 3 -- IMPLICATIONS FOR THE AUDITOR’S REPORT

 Chart
 Going Concern If the financial statements have been prepared using the going concern basis of accounting but,
is in the auditor’s judgement, management’s use of the going concern basis of accounting in the
Inappropriate preparation of the financial statements is inappropriate, the auditor shall express an adverse
opinion.
When the use of the going concern basis of accounting is not appropriate in the circumstances,
management may be required, or may elect, to prepare the financial statements on another
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basis (e.g., liquidation basis). The auditor may be able to perform an audit of those financial
statements provided that the auditor determines that the other basis of accounting is
acceptable in the circumstances. The auditor may be able to express an unmodified opinion on
those financial statements, provided there is adequate disclosure therein about the basis of
accounting on which the financial statements are prepared, but may consider it appropriate or
necessary to include an Emphasis of Matter paragraph in accordance with SA 706 (Revised) in
the auditor’s report to draw the user’s attention to that alternative basis of accounting and the
reasons for its use.
 Going Concern The identification of a material uncertainty is a matter that is important to users’ understanding
is Appropriate of the financial statements. The use of a separate section with a heading that includes reference
QNO-570.10 to the fact that a material uncertainty related to going concern exists alerts users to this
circumstance.
(1) Adequate Disclosure of a Material Uncertainty is Made in the Financial Statements

If adequate disclosure about the material uncertainty is made in the financial statements, the
auditor shall express an unmodified opinion and the auditor’s report shall include a separate
section under the heading “Material Uncertainty Related to Going Concern.”
(2) Adequate Disclosure of a Material Uncertainty is Not Made in the Financial Statements
If adequate disclosure about the material uncertainty is not made in the financial statements,
the auditor shall:
(a) Express a qualified opinion or adverse opinion, as appropriate, in accordance with SA 705
(Revised); and
(b) In the Basis for Qualified (Adverse) Opinion section of the auditor’s report, state that a
material uncertainty exists that may cast significant doubt on the entity’s ability to continue as a
going concern and that the financial statements do not adequately disclose this matter.
(CNO--SA570.100) MATERIAL UNCERTAINITY BY ITS NATURE IS A KEY AUDIT MATTER

 Chart
 Discussion SA 701 deals with the auditor’s responsibility to communicate key audit matters in the auditor’s
report. SA 701 acknowledges that, when SA 701 applies, matters relating to going concern may be
determined to be key audit matters, and explains that a material uncertainty related to events or
conditions that may cast significant doubt on the entity’s ability to continue as a going concern is,
by its nature, a key audit matter.
UNIQUE QUESTIONS
 QNO-570.05 Material Uncertainty Exists & no mitigating factors
 QNO-570.18 Management's Ability to make judgement about going concern
UNIQUE MCQS
 MCQ No. 570.1
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Part 10 -- [SA 580] WRITTEN REPRESENTATIONS
(CNO--SA580.020) WRITTEN REPRESENTATION (QNO-580.01/580.09)

 Chart
 Definition A written statement by management provided to the auditor to confirm certain matters or to
(MCQ- support other audit evidence.
580.1, (For example, to confirm things which were committed at the start of the audit (preparation
580.2) of financial statements, inform about all frauds & errors during the audit etc.) or to support /
corroborate other audit evidences said orally during the audit (Scrap value is Rs 2 lakhs only).
 Excludes Written representations in this context do not include financial statements, the assertions
therein, or supporting books and records.
For purposes of this SA, references to “management” should be read as “management and,
where appropriate, those charged with governance.”
 Types There are two types of written representations: -
Written Representations about Management’s Responsibilities (Compulsory)
Other Written Representations.
 Not a substitute Audit evidence is all the information used by the auditor in arriving at the conclusions on
of regular audit which the audit opinion is based. Written representations are necessary information that the
procedure auditor requires in connection with the audit of the entity’s financial statements. Accordingly,
(Written similar to responses to inquiries, written representations are audit evidence.
Representation
as Audit Although written representations provide necessary audit evidence, they do not provide
Evidence) sufficient appropriate audit evidence on their own about any of the matters with which they
(QNO- deal.
580.05,580.07)
Furthermore, the fact that management has provided reliable written representations does
(MCQ-Incs.24.1)
not affect the nature or extent of other audit evidence that the auditor obtains about the
fulfilment of management’s responsibilities, or about specific assertions.
It makes it absolutely clear that written representations cannot be a substitute for other
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evidence that the auditor could expect to be reasonably available.
(CNO--SA580.040) WRITTEN REPRESENTATIONS ABOUT MANAGEMENT’S RESPONSIBILITIES

 Chart
 WR for The auditor shall request management to provide a written representation that it has fulfilled
Preparation its responsibility for the preparation of the financial statements in accordance with the
of the Financial applicable financial reporting framework, including where relevant their fair presentation, as
Statements set out in the terms of the audit engagement.
Audit evidence obtained during the audit that management has fulfilled the responsibilities is
not sufficient without obtaining confirmation from management about the same. This is
because the auditor is not able to judge solely on other audit evidence.
For example, the auditor could not conclude that management has provided the auditor with
all relevant information agreed in the terms of the audit engagement without asking it
whether, and receiving confirmation that, such information has been provided.
 WR for The auditor shall request management to provide a written representation that:
Information It has provided the auditor with all relevant information and access as agreed in the
Provided and terms of the audit engagement, and
Completeness All transactions have been recorded and are reflected in the financial statements.
of Transactions
 Management Management’s responsibilities shall be described in the written representations in the
Responsibility manner in which these responsibilities are described in the terms of the audit engagement.
as per Terms
of Engagement The auditor may also ask management to reconfirm its acknowledgement and understanding
of those responsibilities in written representations. This is particularly appropriate when:
Those who signed the terms of the audit engagement on behalf of the entity no
longer have the relevant responsibilities;
The terms of the audit engagement were prepared in a previous year;
There is any indication that management misunderstands those responsibilities; or
Changes in circumstances make it appropriate to do so.
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(CNO--SA580.050) OTHER WRITTEN REPRESENTATIONS
 Chart
 Discussion Other SAs require the auditor to request written representations. If, in addition to such
required representations, the auditor determines that it is necessary to obtain one or more
written representations to support other audit evidence relevant to the financial statements or
one or more specific assertions in the financial statements, the auditor shall request such other
written representations.
(CNO--SA580.060) MANAGEMENT FROM WHOM WRITTEN REPRESENTATIONS REQUESTED

 Chart
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 Request WR The auditor shall request written representations from management with appropriate
are from responsibilities for the financial statements and knowledge of the matters concerned.
Appropriate
Management
 From people Written representations are requested from those responsible for the preparation and
responsible presentation of the financial statements. Those individuals may vary depending on the
for governance structure of the entity, and relevant law or regulation; however, management
preparation & (rather than those charged with governance) is often the responsible party. Written
presentation representations may therefore be requested from the entity’s chief executive officer and chief
of financial financial officer, or other equivalent persons in entities that do not use such titles. In some
statements / circumstances, however, other parties, such as those charged with governance, are also
Generally responsible for the preparation and presentation of the financial statements.
management
Due to its responsibility for the preparation and presentation of the financial statements, and
but even it
its responsibilities for the conduct of the entity’s business, management would be expected to
can be TCWG
have sufficient knowledge of the process followed by the entity in preparing and presenting
the financial statements and the assertions therein on which to base the written
representations.
 Management In some cases, however, management may decide to make inquiries of others who participate
may do in preparing and presenting the financial statements and assertions therein, including
Inquiry & individuals who have specialized knowledge relating to the matters about which written
Include their representations are requested. Such individuals may include:
name in WR An actuary responsible for actuarially determined accounting measurements.
Staff engineers who may have responsibility for and specialized knowledge about
environmental liability measurements.
Internal counsel who may provide information essential to provisions for legal claims.
 Qualifying In some cases, management may include in the written representations qualifying language to
Language the effect that representations are made to the best of its knowledge and belief. It is
reasonable for the auditor to accept such wording if the auditor is satisfied that the
representations are being made by those with appropriate responsibilities and knowledge of
the matters included in the representations.
To reinforce the need for management to make informed representations, the auditor may
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request that management include in the written representations, confirmation that it has
made such inquiries as it considered appropriate to place it in the position to be able to make
the requested written representations. It is not expected that such inquiries would usually
require a formal internal process beyond those already established by the entity.
(CNO--SA580.080) DATE OF AND PERIOD(S) COVERED BY WRITTEN REPRESENTATIONS
The date of the written representations shall be as near as practicable to, but not after, the date of the auditor’s
report on the financial statements. The written representations shall be for all financial statements and period(s)
referred to in the auditor’s report.
(Even if management has changed still they will have to provide WR for last year as whole FST is there responsibility
irrespective of change)
(CNO--SA580.100) REQUESTED WRITTEN REPRESENTATIONS NOT PROVIDED (QNO-580.09)
If management does not provide one or more of the requested written representations, the auditor shall:
Discuss the matter with management;
Re-evaluate the integrity of management and evaluate the effect that this may have on the reliability of
representations and audit evidence in general; and
Take appropriate actions, including determining the possible effect on the opinion in the auditor’s report in
accordance with SA 705.
(CNO--SA580.120) FORM OF WRITTEN REPRESENTATIONS
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The written representations shall be in the form of a representation letter addressed to the auditor. If law or
regulation requires management to make written public statements about its responsibilities, and the auditor
determines that such statements provide some or all of the representations required, the relevant matters covered
by such statements need not be included in the representation letter.
(CNO--SA580.140) DOUBT AS TO THE RELIABILITY OF WRITTEN REPRESENTATIONS
If the auditor has concerns about the competence, integrity, ethical values or diligence of management, or about its
commitment to or enforcement of these, the auditor shall determine the effect that such concerns may have on the
reliability of representations (oral or written) and audit evidence in general.
In particular, if written representations are inconsistent with other audit evidence, the auditor shall perform audit
procedures to attempt to resolve the matter.
If the matter remains unresolved, the auditor shall reconsider the assessment of the competence, integrity, ethical
values or diligence of management, or of its commitment to or enforcement of these, and shall determine the effect
that this may have on the reliability of representations (oral or written) and audit evidence in general.
If the auditor concludes that the written representations are not reliable, the auditor Shall take appropriate actions,
including determining the possible effect on the opinion in the auditor’s report in accordance with SA 705.
(CNO--SA580.160) OBJECTIVES OF AUDITOR AS PER SA 580

 Chart
 Objectives The objectives of the auditor are

of Auditor To obtain written representations
(QNO- To obtain written representations from management. Also, that management believes
580.05) that it has fulfilled its responsibility for the preparation of the financial statements and for
the completeness of the information provided to the auditor;
To support other evidence
To support other audit evidence relevant to the financial statements or specific assertions
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in the financial statements by means of written representations; and
To respond appropriately
To respond appropriately to written representations provided by management or if
management does not provide the written representations requested by the auditor.
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o
CHAPTER RISK ASSESSMENT AND INTERNAL CONTROL
4
Part 1 -- [SA 315] IDENTIFYING AND ASSESSING RISK OF MATERIAL MISSTATEMENT

THROUGH UNDERSTANDING ENTITY AND ITS ENVIRONMENT
(CNO—SA315-P1.020) AUDIT RISK & ITS COMPONENTS (QNO-315.01) (MCQ 315.1, 315.18, 315.4, 315.5)
(MCQ-Incs.18.3)
 Chart of Different
Types of Risks
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 Chart of Inherent
Risk
 Inherent Risk  Definition

(QNO- The susceptibility of an assertion about a class of transaction, account balance or
315.11) disclosure to a misstatement that could be material, either individually or when
(MCQ- 315.20, aggregated with other misstatements, before consideration of any related controls.
Incs.23.2) (E.g., Retail, Jewellery, Telecom)
 Explanation of Definition
There is always a risk that before considering any existence of internal control in an
entity, a particular transaction, balance of an account or a disclosure required to be
made in the financial statements of an entity have a chance of being misstated and such
misstatement can be material. This risk is known as Inherent Risk.
 Higher Inherent Risk

Inherent risk is higher for some assertions and related classes of transactions, account
balances, and disclosures than for others. For example, it may be higher for complex
calculations. External circumstances giving rise to business risks may also influence
inherent risk. For example, technological developments might make a particular
product obsolete. Factors in the entity and its environment may also influence the
inherent risk related to a specific assertion.
Example
A lack of sufficient working capital to continue operations or a declining industry
characterized by a large number of business failures.
Inherent risk factors are considered while designing tests of controls and substantive
procedures. Category of auditor’s assessment lower or higher, each category covers a
range of degrees of inherent risk. Auditor may assess the inherent risk of two different
assertions as lower while recognizing that one assertion has less inherent risk than the
other, although both have been assessed as lower. It is important to consider the reason
for each identified inherent risk even if the risk is lower, when auditor designs tests of
controls and substantive procedures.
(E.g., Weight of Coal can be manipulated by changing moisture content, it is inherent
risk, in purchase of coal & stock count.)
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 Chart of Control
Risk
 Control Risk  Definition

(QNO- The risk that a misstatement that could occur in an assertion about a class of
315.11,315.13) transaction, account balance or disclosure and that could be material, either
(MCQ-Incs.10.1) individually or when aggregated with other misstatements, will not be prevented, or
detected and corrected, on a timely basis by the entity’s internal control.
It is a function of the effectiveness of the design, implementation and maintenance of
internal control by management to address identified risks that threaten the
achievement of the entity’s objectives relevant to preparation of the entity’s financial
statements. (Design Problem: - No monthly stock counting rule, Implementation
Problem: - Rule exists but not followed, Maintenance Problem:- Counting sheets and
procedures not updated as per new products)
 Explanation of Definition
Control Risk is a risk that internal control existing and operating in an entity would not
be efficient enough to stop from happening, or find and then rectify in an appropriate
time, any material misstatement relating to a transaction, balance of an account or
disclosure required to be made in the financial statements of that entity. So, in a way it
can be said that there exists an inverse relation between Control Risk and Efficiency of
Internal Control of an Entity. When efficiency of internal control of an entity is high the
control risk is low and when efficiency of internal control of that entity is low the control
risk is high.
 100% Elimination Not Possible
However, internal control, no matter how well designed and operated, can only reduce,
but not eliminate, risks of material misstatement in the financial statements, because
of the inherent limitations of internal control. These include, for example, the possibility
of human errors or mistakes, or of controls being circumvented by collusion or
inappropriate management override. Accordingly, some control risk will always exist.
The SAs provide the conditions under which the auditor is required to, or may choose
to, test the operating effectiveness of controls in determining the nature, timing and
extent of substantive procedures to be performed.
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 Combined Vs Separate Assessment
The SAs do not ordinarily refer to inherent risk and control risk separately, but rather to
a combined assessment of the “risks of material misstatement”. However, the auditor
may make separate or combined assessments of inherent and control risk depending
on preferred audit techniques or methodologies and practical considerations. The
assessment of the risks of material misstatement may be expressed in quantitative
terms, such as in percentages, or in non-quantitative terms. In any case, the need for
the auditor to make appropriate risk assessments is more important than the different
approaches by which they may be made.
(In big assignments go for separate analysis, further if auditor is relying extensively
on test of controls, then separate analysis id preferred)
 Chart of RMM
 Risk of Material  Definition

Misstatement The risk that the financial statements are materially misstated prior to audit.
(QNO-
315.11)  Components
(MCQ 315.2, As per SA 200, the risks of material misstatement at the assertion level consist of two
315.3, 315.13) components: inherent risk and control risk.
 Inherent Risk – Definition and Its Explanation

 Control Risk -- Definition and Its Explanation
Inherent risk and control risk are the entity’s risks; they exist independently of the audit
of the financial statements.
 Misstatement
Misstatement refers to a difference between the amount, classification, presentation,
or disclosure of a reported financial statement item and the amount, classification,
presentation, or disclosure that is required for the item to be in accordance with the
applicable financial reporting framework. Misstatements can arise from error or fraud.
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 Matter of Professional Judgement

The assessment of risks is based on audit procedures to obtain information necessary
for that purpose and evidence obtained throughout the audit. The assessment of risks
is a matter of professional judgment, rather than a matter capable of precise
measurement.
 Risks of Material Misstatement at Two levels

The risks of material misstatement may exist at two levels:
 The overall financial statement level- Risks of material misstatement at the
overall financial statement level refer to risks of material misstatement that
relate pervasively to the financial statements as a whole and potentially affect
many assertions.
 The assertion level for classes of transactions, account balances, and
disclosures- Risks of material misstatement at the assertion level are assessed
in order to determine the nature, timing, and extent of further audit
procedures necessary to obtain sufficient appropriate audit evidence. This
evidence enables the auditor to express an opinion on the financial statements
at an acceptably low level of audit risk.
 Chart of Detection
Risk
 Detection Risk  Meaning: -

(MCQ-315.10) The risk that the procedures performed by the auditor to reduce audit risk to an
acceptably low level will not detect a misstatement that exists and that could be
material, either individually or when aggregated with other misstatements.
Suppose auditor of a company uses certain audit procedures for the purpose of
obtaining audit evidence and reducing audit risk, but still there will remain a risk that
audit procedures used by the auditor may not be able to detect a misstatement which
by nature is material, then that risk is known as Detection Risk.
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 Example
While auditing the books of accounts of Grateful Limited for the financial year 2020-21,
the auditor of the above mentioned company used various audit procedures, for
example-observation, inspection, reperformance, recalculation etc for obtaining audit
evidence regarding stock, Debtors, sales, purchases etc., and consequently reducing the
audit risk. However, there will always remain a risk that various audit procedures as
used by auditor of Grateful Limited will not be able to detect misstatements which are
material in nature. This risk is known as Detection Risk.
 Interrelationship of the components of audit risk:

Inherent and control risks differ from detection risk in that they exist independently of
an audit of financial information. Inherent and control risks are functions of the entity’s
business and its environment and the nature of the account balances or classes of
transactions, regardless of whether an audit is conducted.
Even though inherent and control risks cannot be controlled by the auditor, the auditor
can assess them and design his substantive procedures to produce an acceptable level
of detection risk, thereby reducing audit risk to an acceptably low level.
For a given level of audit risk, the acceptable level of detection risk bears an inverse
relationship to the assessed risks of material misstatement at the assertion level. For
example, the greater the risks of material misstatement the auditor believes exists, the
less the detection risk that can be accepted and, accordingly, the more persuasive the
audit evidence required by the auditor.
 Chart of Audit Risk
 Audit risk Audit risk means the risk that the auditor gives an inappropriate audit opinion when the financial
(QNO- statement are materially misstated. Thus, it is the risk that the auditor may fail to express an
315.05) appropriate opinion in an audit assignment.
(MCQ-Incs.10.2)
Audit Risk could be simply understood as follows:
During the audit of a company if the financial statements of that company are misstated and
those misstatements are material in nature, then there will be a risk that audit opinion given by
the auditor regarding audit of that company would be incorrect. Then that risk will be known as
Audit Risk.
Example
Strength limited purchased a Plant and Machinery for ₹ 2 Crores in the financial year 2020-2021.
The accountant of strength limited debited ₹ 2 crores in the Repair and Maintenance account in
the statement of Profit and loss instead of taking it to the balance sheet as PPE and claim
depreciation on it . While auditing the accounts of this company the auditor did not notice this
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and consequently did not report anything regarding the plant and machinery. Therefore, opinion
given by the auditor would be inappropriate resulting in audit risk.
Audit risk is a function of the risks of material misstatement and detection risk.
From the above, it is clear that –

Audit Risk = Risk of Material Misstatement x Detection Risk------(1)
Further Risk of Material Misstatement= Inherent Risk x Control Risk------(2)
From (1) and (2), we arrive at Audit Risk = Inherent Risk x Control Risk x Detection Risk
What is not included in Audit Risk?
 Audit risk does not include the risk that the auditor might express an opinion
that the financial statements are materially misstated when they are not. This
risk is ordinarily insignificant.
 Further, audit risk is a technical term related to the process of auditing; it does
not refer to the auditor’s business risks such as loss from litigation, adverse
publicity, or other events arising in connection with the audit of financial
statements.
(CNO—SA315-P1.022) CONTROL RISK ASSESSMENT

 Chart
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 Factors  When making control risk assessments, consider:
 Our testing Approach over SCOTs and disclosure processes (i.e., controls reliance or
substantive only strategy).
 The Control environment’s influence over internal control. A control environment that
supports the prevention, and detection and correction, of material misstatements
allows greater confidence in the reliability of internal control and audit evidence
generated within the entity. However, it does not guarantee the effectiveness of
specific controls. We, therefore, test the operating effectiveness of controls over
significant class of transactions (SCOTs) when we plan to take a controls reliance
strategy. Conversely, the control environment may undermine the effectiveness of
specific controls and is a key factor in our control risk assessments.
 The Expectation of the operating effectiveness of controls based on the understanding
of entity’s processes.
 Evaluations of the related IT processes that support application and IT-dependent
manual controls.
 Example  Identify a control that a shipping report is prepared only for goods that have been
shipped. To determine that only sales that have occurred are recorded, identify a
further control that sales cannot be recorded unless a shipping report is produced. In
this example, several controls operate collectively in order to address the occurrence
assertion for sales.
 In another example, a regular reconciliation of quantities shipped to quantities billed
is a specific control that may be effective enough by itself to address the WCGW (What
Could Go Wrong) regarding the completeness assertion in a sales process.
 Whether several controls are required to operate collectively (i.e., a suite of controls)
to achieve a financial reporting objective. If so, the auditor should assess whether all
controls operate effectively in order to rely on controls.
(CNO—SA315-P1.024) CONTROL RISK ASSESSMENT WHEN CONTROL DEFICIENCY IS IDENTIFIED (QNO--315.02)

 Chart
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 Discussion When auditor identifies deficiencies and report on internal controls, he determines the
significant financial statement assertions that are affected by the ineffective controls in order
to evaluate the effect on control risk assessments and strategy for the audit of the financial
statements.
When control deficiencies are identified and auditor identifies and tests more than one control
for each relevant assertion, he evaluates control risk considering all of the controls he has
tested. If auditor determines that they support a ‘rely on controls’ risk assessment, or if
compensating controls are identified, tested and evaluated to be effective, he may conclude
that the ‘rely on controls’ is still appropriate. Otherwise, we change our control risk assessment
to ‘not rely on controls’.
When a deficiency relates to an ineffective control that is the only control identified for an
assertion, he revises risk assessment to ‘not rely on controls’ for associated assertions, as no
other controls have been identified that mitigate the risk related to the assertion. If the
deficiency relates to one WCGW (what can go wrong) out of several WCGW’s, he can ‘rely on
controls’ but performs additional substantive procedures to adequately address the risks
related to the deficiency.
(CNO—SA315-P1.030) OBJECTIVE OF AUDITOR AS PER SA 315

 Chart
 Objective As per SA 315 - “Identifying and Assessing the Risks of Material Misstatement through
Understanding the Entity and its Environment”, the objective of the auditor is to identify
and assess the risks of material misstatement, whether due to fraud or error, at the financial
statement and assertion levels, through understanding the entity and its environment,
including the entity’s internal control, thereby providing a basis for designing and
implementing responses to the assessed risks of material misstatement. This will help the
auditor to reduce the audit risk to an acceptably low level.
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(CNO—SA315-P1.040) RISK ASSESSMENT PROCEDURE (How to collect information?) (MCQ-315.7, Incs.23.4)
 Chart
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 Definition The audit procedures performed to obtain an understanding of the entity and its environment,
including the entity’s internal control, to identify and assess the risks of material misstatement,
whether due to fraud or error, at the financial statement and assertion levels.
 Risk assessment procedure - a basis for the identification and assessment of risks of
material misstatement at the financial statement and assertion levels
The auditor shall perform risk assessment procedures to provide a basis for the
identification and assessment of risks of material misstatement at the financial statement
and assertion levels. Risk assessment procedures by themselves, however, do not provide
sufficient appropriate audit evidence on which to base the audit opinion.
 What is The risk assessment procedures shall include the following:
included in  Inquiries of management and of others within the entity who in the auditor’s judgment
Risk may have information that is likely to assist in identifying risks of material misstatement
Assessment due to fraud or error.
Procedures?  Analytical procedures.
(MCQ-  Observation and inspection.
Incs.10.4)
 Inquiries of Much of the information obtained by the auditor’s inquiries is obtained from management and
Management those responsible for financial reporting. However, the auditor may also obtain information, or a
and Others different perspective in identifying risks of material misstatement, through inquiries of others
Within the within the entity and other employees with different levels of authority.
Entity
 Inquiries directed towards those charged with governance may help the auditor
(QNO-
understand the environment in which the financial statements are prepared.1
315.05.50)
 Inquiries directed toward internal audit personnel may provide information about
internal audit procedures performed during the year relating to the design and
effectiveness of the entity’s internal control and whether management has satisfactorily
responded to findings from those procedures. 3
 Inquiries directed to the risk management function (or those performing such roles) may
provide information about operational and regulatory risks that may affect financial
reporting. 2
 Inquiries directed toward in-house legal counsel may provide information about such
matters as litigation, compliance with laws and regulations, knowledge of fraud or
suspected fraud affecting the entity, warranties, post-sales obligations, arrangements
(such as joint ventures) with business partners and the meaning of contract terms.4
 Inquiries directed towards marketing or sales personnel may provide information about
changes in the entity’s marketing strategies, sales trends, or contractual arrangements
with its customers.6
 Inquiries directed to information systems personnel may provide information about
system changes, system or control failures, or other information system related risks. 5
 Inquiries of employees involved in initiating, processing or recording complex or unusual
transactions may help the auditor to evaluate the appropriateness of the selection and
application of certain accounting policies. 7
 Analytical  New Information which auditor was unaware
Procedures Analytical procedures performed as risk assessment procedures may identify aspects of
(QNO- the entity of which the auditor was unaware and may assist in assessing the risks of
315.06) material misstatement in order to provide a basis for designing and implementing
responses to the assessed risks.
 Financial as well as non-financial
Analytical procedures performed as risk assessment procedures may include both
financial and non-financial information, for example, the relationship between sales and
square footage of selling space or volume of goods sold.
 Unusual Items
Analytical procedures may help identify the existence of unusual transactions or events,
and amounts, ratios, and trends that might indicate matters that have audit implications.
Unusual or unexpected relationships that are identified may assist the auditor in
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identifying risks of material misstatement, especially risks of material misstatement due
to fraud.
However, when such analytical procedures use data aggregated at a high level (which may
be the situation with analytical procedures performed as risk assessment procedures), the
results of those analytical procedures only provide a broad initial indication about
whether a material misstatement may exist.
 Results of Analytical Procedures &Other Information will be helpful
Accordingly, in such cases, consideration of other information that has been gathered
when identifying the risks of material misstatement together with the results of such
analytical procedures may assist the auditor in understanding and evaluating the results
of the analytical procedures.
 Observation Observation and inspection may support inquiries of management and others and may also
and provide information about the entity and its environment.
Inspection
Examples of such audit procedures include observation or inspection of the following:
(QNO-
 The entity’s premises and plant facilities.
315.06.50)
 The entity’s operations.
 Documents (such as business plans and strategies), records, and internal control
manuals.
 Reports prepared by management (such as quarterly management reports and interim
financial statements) and those charged with governance (such as minutes of board of
directors’ meetings).
(CNO—SA315-P1.050) RISK ASSESSMENT PROCEDURE – USED AS AUDIT EVIDENCE AND RISK DUE TO ERROR &
FRAUD
 Chart
 Used as Audit Information obtained by performing risk assessment procedures and related activities may
Evidence be used by the auditor as audit evidence to support assessments of the risks of material
misstatement. In addition, the auditor may obtain audit evidence about classes of
transactions, account balances, or disclosures and related assertions and about the
operating effectiveness of controls, even though such procedures were not specifically
planned as substantive procedures or as tests of controls. The auditor also may choose to
perform substantive procedures or tests of controls concurrently with risk assessment
procedures because it is efficient to do so.
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 Risk due to The risks to be assessed include both those due to error and those due to fraud, and both
Error & Fraud are covered by this SA. However, the significance of fraud is such that further requirements
and guidance are included in SA 240, “The Auditor’s Responsibilities Relating to Fraud in an
Audit of Financial Statements”, in relation to risk assessment procedures and related
activities to obtain information that is used to identify the risks of material misstatement
due to fraud. (Fraud risk is discussed in detail in Chapter 5 Fraud and Responsibilities of an
Auditor in this regard).
(CNO—SA315-P1.060) UNDERSTANDING OF THE ENTITY AND ITS ENVIRONMENT (Which basic information should
be collected?) (QNO-315.07)
 Chart
 Obtain  The auditor shall obtain an understanding of the following:

Understanding
(a) Relevant industry, regulatory, and other external factors including the applicable
financial reporting framework.
(b) The nature of the entity, including:

(i) its operations;
(ii) its ownership and governance structures;
(iii) the types of investments that the entity is making and plans to make, including
investments in special-purpose entities; and
(iv) the way that the entity is structured and how it is financed;
to enable the auditor to understand the classes of transactions, account balances, and
disclosures to be expected in the financial statements.
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(c) The entity’s selection and application of accounting policies, including the reasons for
changes thereto. The auditor shall evaluate whether the entity’s accounting policies are
appropriate for its business and consistent with the applicable financial reporting
framework and accounting policies used in the relevant industry.
(d) The entity’s objectives and strategies, and those related business risks that may
result in risks of material misstatement.
(e) The measurement and review of the entity’s financial performance.

 Chart of
Industry &
Related Points
 Industry &  Points

Related Points Relevant industry, regulatory, and other external factors including the applicable
(QNO--315.08) financial reporting framework.
 Example
• The competitive environment, including demand, capacity, product and price
competition as well as cyclical or seasonal activity.
• Supplier and customer relationships, such as types of suppliers and customers (e.g.,
related parties, unified buying groups) and the related contracts with those entities.
• Technological developments, such as those related to the entity’s products
• Energy supply and cost.
• The effect of regulation on entity operations.
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 Chart of
Nature of
Entity &
Related Points
 Nature of The nature of the entity, including:

Entity &  its operations;
Related Points  its ownership and governance structures;
 The types of investments that the entity is making and plans to make, including
investments in special-purpose entities; and
 The way that the entity is structured and how it is financed; to enable the
auditor to understand the classes of transactions, account balances, and
disclosures to be expected in the financial statements.
 Example
• Understanding the sources of an entity’s earnings can help us identify risks of material
misstatement related to valuation of certain products or lines of businesses or areas that
may be more susceptible to management fraud.
• Understanding key supplier and customer relationships can help us identify potential
related parties or risks related to revenue recognition.
• An entity with components in multiple tax jurisdictions, resulting in additional risk of
misstatement in the tax accounts.
• An acquisition may result in a complex structure of holding companies to achieve
benefits to the shareholders giving rise to significant intercompany transactions which
may give rise to material misstatements due to fraud or error.
• Transactions outside the entity’s normal course of business may include: complex
equity transactions, transactions regarding the leasing of premises, or the rendering of
management services by the entity to another party, when no consideration is
exchanged, transactions under contracts with terms that change before expiration
should be studied in depth.
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 Chart of
Accounting
Policies
Related Points
 Accounting  The entity’s selection and application of accounting policies, including the reasons for
Policies & changes thereto. The auditor shall evaluate whether the entity’s accounting policies are
Related Points appropriate for its business and consistent with the applicable financial reporting
framework and accounting policies used in the relevant industry.
 Example
1. We use our understanding of the entity’s accounting principles, financial reporting
policies or disclosures to help us determine:
 The need to involve a specialist to help perform audit procedures related to
particular disclosures, such as pension disclosures.
 The effect on our audit of significant new or revised disclosures that may be
required as a result of changes in the entity’s environment, financial condition
or activities, such as a change in the segments for the reporting of segment
information arising from a significant business combination.
2. Management determines that most of the entity’s competitors have adopted an
accounting policy that is different from that adopted by the entity. After evaluation,
management determines that the alternative accounting policy is generally accepted
and further determines that the alternative accounting policy preferable as it will result
in greater comparability and result in reliable and more relevant information.
Management therefore decides to change the entity’s accounting policy.
 Chart of
Financial
Performance
Related Points
 Financial  The measurement and review of the entity’s financial performance.

Performance &
Related Points  Example
External information such as analysts reports and credit rating agency reports may be
useful information for us to obtain an understanding of an entity’s performance
measures. Such reports can often be obtained from the entity.
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 Chart of
Objectives &
Strategy
Related Points
 Objectives &  The entity’s objectives and strategies, and those related business risks that may result
Strategies in risks of material misstatement.
Related Points
 Example
1. If one of management’s objectives is to grow the business, management may develop
a strategy of steady but regular growth through specific marketing campaigns and
development of new markets. Alternatively, management may develop a more
aggressive, complex strategy of acquiring competitors. Each of these strategies gives rise
to differing business risks and potentially differing risks of material misstatement.
2. Examples of potential business risks include:
 Failure to keep up to date with new products, technologies or services.
 Excessive reliance on a key supplier, product or individual, such as the owner.
 Lack of personnel with expertise to react to changes in the industry.
 Insufficient or excessive production capacity caused by inaccurate estimation of
demand.
 Loss of financing due to the entity’s inability to meet financial covenants
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(CNO—SA315-P1.080) NEED OF UNDERSTANDING OF THE ENTITY-AND IT IS A CONTINUOUS PROCESS
(QNO-315.09)
 Chart
 Understan- Obtaining an understanding of the entity and its environment, including the entity’s internal
ding of the control (referred to hereafter as an “understanding of the entity”), is a continuous, dynamic
entity and its process of gathering, updating and analysing information throughout the audit. The understanding
Environment establishes a frame of reference within which the auditor plans the audit and exercises
professional judgment throughout the audit, for example, when: (M-ain AREAS)
 M - Determining materiality in accordance with SA 320;
 R - Assessing risks of material misstatement of the financial statements;
 A- Considering the appropriateness of the selection and application of accounting
policies;
 S- Identifying areas where special audit consideration may be necessary, for example,
related party transactions, the appropriateness of management’s use of the going concern
assumption, or considering the business purpose of transactions;
 A- Developing expectations for use when performing analytical procedures;
 E - Evaluating the sufficiency and appropriateness of audit evidence obtained, such as
the appropriateness of assumptions and of management’s oral and written
representations.
 Illustration The auditor of ABC Textiles Ltd chalks out an audit plan without understanding the entity’s
business. Since he has carried out many audits of textile companies, there is no need to understand
the nature of business of ABC Ltd. Advise the auditor how he should proceed.
 Solution Obtaining an understanding of the entity and its environment, including the entity’s internal
control (referred to hereafter as an “understanding of the entity”), is a continuous, dynamic
process of gathering, updating and analysing information throughout the audit. The auditor should
proceed accordingly.
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(CNO—SA315-P1.100) IDENTIFYING AND ASSESSING THE RISKS OF MATERIAL MISSTATEMENT (MCQ-315.15)
 Chart
 RMM at 2 The auditor shall identify and assess the risks of material misstatement at:
Levels  The financial statement level; and
(QNO-  The assertion level for classes of transactions, account balances, and disclosures; to provide
315.05, a basis for designing and performing further audit procedures.
315.15) For this purpose, the auditor shall:
(MCQ-  Identify risks throughout the process of obtaining an understanding of the entity and its
315.25) environment, including relevant controls that relate to the risks, and by considering the
classes of transactions, account balances, and disclosures in the financial statements;
(Har information collect karne ke baad risk ke baarein mein sochtein raho)
 Relate the identified risks to what can go wrong at the assertion level, taking account of
relevant controls that the auditor intends to test; and
(Kahi assertion level pet oh nahi)
 Assess the identified risks, and evaluate whether they relate more pervasively to the
financial statements as a whole and potentially affect many assertions;
(Ya financial statement level pet oh nahi)
 Consider the likelihood of misstatement, including the possibility of multiple
misstatements, and whether the potential misstatement is of a magnitude that could result
in a material misstatement.
(Badi risk toh nahi hai , with big amount and more probability)
Example only for reference no need to include in answer
Understanding State of State of Ownership &
Entity & Its Environment Economy Economy Governance
(Downturn in (Downturn in (80% of shares belong
Economy) Economy) to one family + Family
Management + Past
History of Manipulation)
Description of Risk Difficult to Inventory may There are chances that
collect remain unsold some related party
Receivables transactions are
manipulated to increase
profits.
Impact Valuation Valuation Anywhere in financial
statements
Probability (Points) 5 6 8
Amount 2 4 5
(Points)
Combined Effect 10 24 40
Significant Risk No Yes Yes
(Above 20 Significant Risk)
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 Financial
Statement Level
Assessment of Risks of Material Misstatement at the Financial Statement Level

 Meaning
Risks of material misstatement at the financial statement level refer to risks that relate
pervasively to the financial statements as a whole and potentially affect many
assertions. Risks of this nature are not necessarily risks identifiable with specific
assertions at the class of transactions, account balance, or disclosure level. Rather,
they represent circumstances that may increase the risks of material misstatement at
the assertion level, for example, through management override of internal control.
Financial statement level risks may be especially relevant to the auditor’s consideration
of the risks of material misstatement arising from fraud.
 Effect of Control Environment
Risks at the financial statement level may derive in particular from deficient control
environment (although these risks may also relate to other factors, such as declining
economic conditions). For example, deficiencies such as management’s lack of
competence may have a more pervasive effect on the financial statements and may
require an overall response by the auditor.
Auditability of Financial Statements
Understanding of Internal Control System may result in following
 Concerns about the integrity of the entity’s management may be so serious
as to cause the auditor to conclude that the risk of management
misrepresentation in the financial statements is such that an audit cannot be
conducted.
 Concerns about the condition and reliability of an entity’s records may cause
the auditor to conclude that it is unlikely that sufficient appropriate audit
evidence will be available to support an unqualified opinion on the financial
statements.
 SA 705, “Modifications to the Opinion in the Independent Auditor’s Report”
establishes requirements and provides guidance in determining whether
there is a need for the auditor to consider a qualification or disclaimer of
opinion or, as may be required in some cases, to withdraw from the
engagement where this is legally possible.
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 Assessment of
Risks of
Material
Misstatement at
the Assertion
Level
(QNO-
315.16/
315.17/315.19)
(MCQ-
315.24,
Incs.19.4,
Incs.44.1, 44.2,
44.4)
 Assertions
Assertions refer to representations by management, explicit or otherwise, that are
embodied in the financial statements, as used by the auditor to consider the different
types of potential misstatements that may occur.
 Use of Assertions
In representing that the financial statements are in accordance with the applicable
financial reporting framework, management implicitly or explicitly makes assertions
regarding the recognition, measurement, presentation and disclosure of the various
elements of financial statements and related disclosures.
Assertions used by the auditor to consider the different types of potential

misstatements that may occur fall into the following three categories.
Assertions about account balances at the period end:

o Existence—assets, liabilities, and equity interests exist.
o Completeness—all assets, liabilities and equity interests that should
have been recorded have been recorded.
o Valuation and allocation—assets, liabilities, and equity interests are
included in the financial statements at appropriate amounts and any
resulting valuation or allocation adjustments are appropriately
recorded.
o Rights and obligations—the entity holds or controls the rights to
assets, and liabilities are the obligations of the entity.
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Assertions about classes of transactions and events for the period under
audit:
o Occurrence—transactions and events that have been recorded have
occurred and pertain to the entity.
o Completeness—all transactions and events that should have been
recorded have been recorded.
o Accuracy—amounts and other data relating to recorded transactions
and events have been recorded appropriately.
o Cut-off—transactions and events have been recorded in the correct
accounting period.
o Classification—transactions and events have been recorded in the
proper accounts.
Assertions about presentation and disclosure:
o Occurrence and rights and obligations—disclosed events,
transactions, and other matters have occurred and pertain to the
entity.
o Completeness—all disclosures that should have been included in the
financial statements have been included.
o Accuracy and valuation—financial and other information are
disclosed fairly and at appropriate amounts.
o Classification and understandability—financial information is
appropriately presented and described, and disclosures are clearly
expressed.
 RMM at Assertion Level

Risks of material misstatement at the assertion level for classes of transactions, account
balances, and disclosures need to be considered because such consideration directly assists in
determining the nature, timing, and extent of further audit procedures at the assertion level
necessary to obtain sufficient appropriate audit evidence. In identifying and assessing risks of
material misstatement at the assertion level, the auditor may conclude that the identified risks
relate more pervasively to the financial statements as a whole and potentially affect many
assertions.
 Assertions may The auditor may use the assertions as described above or may express them differently
be expressed provided all aspects described above have been covered. For example, the auditor may choose
differently by to combine the assertions about transactions and events with the assertions about account
Some Auditors balances.
When making assertions about the financial statements of certain entities, especially, for
example, where the Government is a major stakeholder, management may often assert that
transactions and events have been carried out in accordance with legislation or proper
authority. Such assertions may fall within the scope of the financial statement audit.
 Negative A specific mention is required about these things for a proper appreciation of the item and the
Assertion financial position. Negative assertions are also encountered in the financial statements and the
same may be expressed or implied. For example, if it is stated that there is no contingent
liability it would be an expressed negative assertion; on the other hand, if in the balance sheet
there is no item as “building”, it would be an implied negative assertion that the entity did not
own any building on the balance sheet date.
 Overall Every financial statement contains an overall representation in addition to the specific
Assertions assertions so far discussed. Each financial statement purports to present something as a whole
in addition to its component details. For example, an income statement purports to present
“the results of operations” a balance sheet purports to present “financial position”. The
auditor’s opinion is typically directed to these overall representations. But to formulate and
offer an opinion on the overall truth of these statements he has first to inquire into the truth
of many specific assertions, expressed and implied, both positive, and negative, that makes up
each of these statements. Out of his individual judgments of these specific assertions he arrives
at a judgement on the financial statement as a whole.
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 Identifying
 Examples
Assertions
Let us elaborate this with the help of two illustrations. We must clearly understand
Examples
that each item contained in financial statements asserts something to the readers of
(QNO-315.23)
the accounts to indicate the ownership, existence, quantity of various things, etc.
(MCQ-315.19,
Auditing is concerned with the testing of the authenticity of the information thus
500.10)
conveyed.
 Example 1: When we find in the balance sheet, an item under current assets reading
as “cash in hand - Rs 8,000” the obvious assertions that would strike the mind are the
following:
o The firm concerned had Rs 8,000 in hand in valid notes and coins on
the balance sheet day;
o That the cash was free and available for expenditure to the firm; and
o That the books of account show a cash balance of identical amount at
the end of the day on which the balance sheet is drawn up.
 Example 2:
Particulars Rs
Plant and Machinery (at cost) 70,000 2,00,000

Less: Depreciation till the end of previous year 13,000 83,000
Depreciation for the year
1,17,000
The assertions are as follows:

 the firm owns the plant and machinery;
 the historical cost of plant and machinery is Rs 2 lacs;
 the plant and machinery physically exist;
 the asset is being utilised in the business of the company productively;
 total charge of depreciation on this asset is Rs 83,000 to date on which Rs
13,000 relates to the year in respect of which the accounts are drawn up; and
 the amount of depreciation has been calculated on recognised basis and the
calculation is correct.
From the above two illustrations we know the sort of assertions that are implied
in the financial statements. Incidentally, the assertions are generally implied and
not specifically spelt out, though some explicit assertions are also found in the
financial statements. Explicit assertions are made when otherwise the reader will
be left with an incomplete picture; it may even be misleading.
An example of the former category may be found in the following items appearing
in the liability side of the balance sheet:
Secured Loans Rs 4,00,000
The description does not give us a complete picture. We do not know:
 the name of the lender, if it is relevant;
 the nature of security provided; and
 the rate at which interest in payable.
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(CNO—SA315-P1.120) RISKS THAT REQUIRE SPECIAL AUDIT CONSIDERATION (QNO-315.25)
As part of the risk assessment, the auditor shall determine whether any of the risks identified are, in the auditor’s
judgment, a significant risk. In exercising this judgment, the auditor shall exclude the effects of identified controls
related to the risk.
In exercising judgment, as to which risks are significant risks, the auditor shall consider at least the following:
(CFO-CSR)
 Whether the risk is related to recent significant economic, accounting, or other developments like changes in
regulatory environment, etc., and, therefore, requires specific attention;
 Whether the risk is a risk of fraud;
 Whether the risk involves significant transactions that are outside the normal course of business for the
entity, or that otherwise appear to be unusual.
 The complexity of transactions;
 The degree of subjectivity in the measurement of financial information related to the risk, especially those
measurements involving a wide range of measurement uncertainty; and
 Whether the risk involves significant transactions with related parties;
 When the auditor has determined that a significant risk exists, the auditor shall obtain an understanding of
the entity’s controls, including control activities, relevant to that risk.
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(CNO—SA315-P1.140) IDENTIFYING SIGNIFICANT RISKS (QNO-315.26)
 Chart
 Definitions  Significant risks often relate to significant nonroutine transactions or

judgmental matters.
 Significant risks are inherent risks with both a higher likelihood of occurrence
and a higher magnitude of potential misstatement. The auditor assesses
assertions affected by a significant risk as higher inherent risk.
 Non-routine transactions are transactions that are unusual, due to either size
or nature, and that therefore occur infrequently.
 Judgmental matters may include the development of accounting estimates for
which there is significant measurement uncertainty.
 Always The following are always significant risks:
Significant Risk  Risks of material misstatement due to fraud
 Significant transactions with related parties that are outside the normal course of
business for the entity
 Risks of Risks of material misstatement may be greater for significant non-routine transactions arising
Material from matters such as the following:
Misstatement  Greater management intervention to specify the accounting treatment.
Greater for  Greater manual intervention for data collection and processing.
Significant  Complex calculations or accounting principles.
Non-Routine  The nature of non-routine transactions, which may make it difficult for the entity to
Transactions implement effective controls over the risks.
(Examples)
 Risks of Risks of material misstatement may be greater for significant judgmental matters that require
material the development of accounting estimates, arising from matters such as the following:
misstatement  Accounting principles for accounting estimates or revenue recognition may be subject
Greater for to differing interpretation.
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Significant  Required judgment may be subjective or complex, or require assumptions about the
Judgmental effects of future events, for example, judgment about fair value.
Matters
(Examples)
(CNO—SA315-P1.160) DOCUMENTING THE RISK
The auditor shall document:

 The discussion among the engagement team and the significant decisions reached;
 Key elements of the understanding obtained regarding each of the aspects of the entity and its environment
and of each of the internal control components, the sources of information from which the understanding was
obtained; and the risk assessment procedures performed;
 The identified and assessed risks of material misstatement at the financial statement level and at the assertion
level ; and
 The risks identified, and related controls about which the auditor has obtained an understanding.
APPENDIX, ONLY FOR REFERENCE NOT IMPORTANT FOR EXAMS

Understanding Examples Impact Assertion Level / Financial
Entity & Its Statement Level
Environ
 State of Downturn in economy Receivables may be difficult to Can affect provision for doubtful
Economy collect- debts Assertion Level Risk
Inventory write-downs may be Can affect Inventory
required Valuation Assertion Level Risk
 Nature of Fast changing technology Fixed Assets (Machines) may Can affect valuation of fixed
Industry become obsolete assets, can lead to impairment
 Assertion Level Risk (High
Likelihood & Impact Hence
Significant Risk)
 Regulatory Stringent rules of TRAI Can lead to heavy penalties. Provision for penalties can be
Requirement regarding call drops & other inadequate (in
matters complete)Assertion level risk
 Ownership & 80% of shares belong to one Many related party There are chances that some
Governance family and there are multiple transactions take place related party transactions are
subsidiaries & associates not identified or not properly
recorded it can affect many
financial itemsFinancial
Statement Level Risk
(High Likelihood & Impact Hence
Significant Risk)
 Financing & Heavy debt financing, with Management may resort to Can affect many items in
Structure stringent debt covenants manipulations to satisfy debt financial statements Financial
regarding debt: equity, covenants Statement Level Risk
inventory levels, cash flows
etc. Derivative Contracts are
also used
 Types of Invested huge amount in These are risky investments. Affects Investment Valuation
Investments African countries Assertion Level Risk
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 Nature of 30% Revenue from Government may not give Affects revenue recognition
Operations Government & 40% from money on time. Corporates Assertion Level Risk
Corporates may change contract anytime (High Likelihood & Impact Hence
Significant Risk)
 Financial Shift to Ind AS is required Many ambiguities in Can affect many items in
Reporting implementation financial statement Financial
Framework Statement Level Risk
(High Likelihood & Impact Hence
Significant Risk)
 Selection & Senior accountant Errors because of his Can affect many items in
Application not trained inexperience & others may financial statements  Financial
of properly take advantage and fraud. Statement Level Risk
Accounting
Policies
 Financial Monthly sales are compared Managers will try to show Can affect revenue
Performance to 3 competitors who are better picture. recognition Assertion Level
doing good. Risk
 Objectives & Introduction of a new Errors in cost allocation and Can Affect Inventory Valuation
Strategies product during the year inventory valuation.  Assertion Level Risk
Management may be tempted Can affect many items in
to manipulate financial financial statements  Financial
statements to ensure Statement Level Risk
compliance with the bank
covenants.
UNIQUE MCQS
 MCQ No. 315.8
 MCQ No. 315.12
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Part 2 -- [SA 315] INTERNAL CONTROL SYSTEM
(CNO—SA315-P2.020) DEFINITION & OBJECTIVES OF INTERNAL CONTROL (SA 315)

 Chart
 Definition As per SA-315, “Identifying and Assessing the Risk of Material Misstatement Through
(QNO- Understanding the Entity and its Environment” the internal control may be defined as “The
ICS.01,315.27) process designed (made), implemented and maintained by those charged with governance,
management, and other personnel to provide reasonable assurance about the achievement of
an entity’s objectives with regard to :
(Mnemonic -LOAF)
safeguarding of Assets, (Insurance, Restricted Access, Approval before

Sale etc.)
(use of the asset to achieve objectives of
effectiveness and efficiency of Operations,
production and sale)
compliance with applicable Laws and
(Environmental & Other approvals, Taxes etc.)
regulations,
(books of accounts, trial balance, consolidations
reliability of Financial reporting
etc.)
The term “controls” refers to any aspects of one or more of the components of internal control.
 Objectives of  Assets
Internal  assets are safeguarded from unauthorized access, use or disposition; and
Control:  the recorded assets are compared with the existing assets at reasonable
(Mere intervals and appropriate action is taken with regard to any differences.
repetition &
elaboration)  Operations
 transactions are executed in accordance with managements general or specific
authorization;
 Transactions are efficient &effective.
 Law Compliance
 Rules & Regulations are followed while executing transactions.
 Financial Reporting
 all transactions are promptly recorded in the correct amount in the
appropriate accounts and in the accounting period in which executed so as to
permit preparation of financial information within a framework of recognized
accounting policies and practices and relevant statutory requirements, if any,
and to maintain accountability for assets;
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(CNO—SA315-P2.030) UNDERSTANDING ENTITY’S INTERNAL CONTROL
 Obtain The auditor shall obtain an understanding of internal control relevant to the audit. Although
Understanding most controls relevant to the audit are likely to relate to financial reporting, not all controls
that relate to financial reporting are relevant to the audit. It is a matter of the auditor’s
professional judgment whether a control, individually or in combination with others, is
relevant to the audit.
 Benefits (i) identifying types of potential misstatements;
(ii) identifying factors that affect the risks of material misstatement, and
(iii) designing the nature, timing, and extent of further audit procedures.
(CNO—SA315-P2.040) STUDY OF VARIOUS ASPECTS OF INTERNAL CONTROL SYSTEM
(CNO—SA315-P2.060) GENERAL NATURE AND CHARACTERISTICS OF INTERNAL CONTROL

 Purpose of Internal control is designed, implemented, and maintained to address identified business risks
Internal that threaten the achievement of any of the entity’s objectives that concern:
Control:  The reliability of the entity’s financial reporting.
 The effectiveness and efficiency of its operations;
 Its compliance with applicable laws and regulations; and
 Safeguarding of assets.
The way in which internal control is designed, implemented, and maintained varies with an
entity’s size and complexity.
(CNO—SA315-P2.065) CONTROLS RELEVANT TO THE AUDIT (QNO-ICS.14)

 Factors to be Factors relevant to the auditor’s judgment about whether a control, individually or in
considered combination with others, is relevant to the audit may include such matters as the
following:
 Materiality.
 The significance of the related risk.
 The size of the entity.
 The nature of the entity’s business, including its organisation and ownership
characteristics.
 The diversity and complexity of the entity’s operations.
 Applicable legal and regulatory requirements.
 The circumstances and the applicable component of internal control.
 The nature and complexity of the systems that are part of the entity’s internal
control, including the use of service organisations.
 Whether, and how, a specific control, individually or in combination with others,
prevents, or detects and corrects, material misstatement.
(CNO—SA315-P2.075) NATURE AND EXTENT OF THE UNDERSTANDING OF RELEVANT CONTROLS.

 Nature and  Evaluating the design of a control involves considering whether the control,
Extent of the individually or in combination with other controls, is capable of effectively
Understanding preventing, or detecting and correcting, material misstatements.
of Relevant Implementation of a control means that the control exists and that the entity is using
Controls it. There is little point in assessing the implementation of a control that is not
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effective, and so the design of a control is considered first.
An improperly designed control may represent a significant deficiency in internal
control.
 Risk assessment procedures to obtain audit evidence about the design and
implementation of relevant controls may include-
 Inquiring of entity personnel.
 Observing the application of specific controls.
 Inspecting documents and reports.
 Tracing transactions through the information system relevant to financial
reporting.
Inquiry alone, however, is not sufficient for such purposes.
 Obtaining an understanding of an entity’s controls is not sufficient to test their

operating effectiveness, unless there is some automation that provides for the
consistent operation of the controls.
 Example
Obtaining audit evidence about the implementation of a manual control at a point in
time does not provide audit evidence about the operating effectiveness of the
control at other times during the period under audit. However, because of the
inherent consistency of IT processing, performing audit procedures to determine
whether an automated control has been implemented may serve as a test of that
control’s operating effectiveness, depending on the auditor’s assessment and testing
of controls such as those over program changes.
(CNO—SA315-P2.080) COMPONENTS OF INTERNAL CONTROL(CNO-ICS.03)

 Chart
 Division The division of internal control into the following five components provides a useful framework for
of auditors to consider how different aspects of an entity’s internal control may affect the audit:
Internal  The control environment;
Control  The entity’s risk assessment process;
into  Control activities; and
Compone  The information system, including the related business processes, relevant to financial
nts reporting, and communication;
 Monitoring of controls.
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(CNO—SA315-P2.100) CONTROL ENVIRONMENT– COMPONENT OF INTERNAL CONTROL– (QNO-ICS.03)

 Chart
 Understanding The auditor shall obtain an understanding of the control environment. As part of obtaining this
Control understanding, the auditor shall evaluate whether:
Environment (i) Management has created and maintained a culture of honesty and ethical behaviour; and
(ii) The strengths in the control environment elements collectively provide an appropriate
foundation for the other components of internal control.
 Definition The control environment includes:
(QNO ICS.11) (i) the governance and management functions and
(ii) the attitudes, awareness, and actions of those charged with governance and management .
The control environment sets the tone of an organization, influencing the control consciousness
of its people.
Elements of the control environment that may be relevant when obtaining an understanding of the control
environment include the following:
 TCWG Related Participation by those charged with governance – Attributes of those charged with governance
such as:
 Their independence from management.
 Their experience and stature (Reputation).
 The extent of their involvement and the information they receive, and the scrutiny of
activities.
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 The appropriateness of their actions, including the degree to which difficult questions
are raised and pursued with management, and their interaction with internal and
external auditors.
 Management Management’s philosophy and operating style – Characteristics such as management’s:
Related  Approach to taking and managing business risks.
 Attitudes toward information processing and accounting functions and personnel.
 Attitudes and actions toward financial reporting.
 Human Human resource policies and practices – Policies and practices that relate to, for example,
Resource recruitment, orientation, training, evaluation, counselling, promotion, compensation, and
remedial actions.
 Competence Commitment to competence – Matters such as management’s consideration of the competence
levels for particular jobs and how those levels translate into requisite skills and knowledge.
 Organisation Organisational structure – The framework within which an entity’s activities for achieving its
Structure objectives are planned, executed, controlled, and reviewed.
 Authority Assignment of authority and responsibility - Matters such as how authority and responsibility for
operating activities are assigned and how reporting relationships and authorisation hierarchies
are established.
 Communi- Communication and enforcement of integrity and ethical values – These are essential elements
cation that influence the effectiveness of the design, administration and monitoring of controls.
(CNO—SA315-P2.110) SATISFACTORY CONTROL ENVIRONMENT - NOT AN ABSOLUTE DETERRENT TO FRAUD:

 Chart
 Discussion The existence of a satisfactory control environment can be a positive factor when the auditor
(QNO-ICS.05) assesses the risks of material misstatement. However, although it may help reduce the risk of
fraud, a satisfactory control environment is not an absolute deterrent to fraud.
Conversely, deficiencies in the control environment may undermine the effectiveness of
controls, in particular in relation to fraud.
For example, management’s failure to commit sufficient resources to address IT security risks
may adversely affect internal control by allowing improper changes to be made to computer
programs or to data, or unauthorized transactions to be processed. As explained in SA 330, the
control environment also influences the nature, timing, and extent of the auditor’s further
procedures.
The control environment in itself does not prevent, or detect and correct, a material
misstatement. It may, however, influence the auditor’s evaluation of the effectiveness of
other controls (for example, the monitoring of controls and the operation of specific control
activities) and thereby, the auditor’s assessment of the risks of material misstatement.
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(CNO—SA315-P2.120) THE ENTITY’S RISK ASSESSMENT PROCESS– COMPONENT OF INTERNAL CONTROL
Theauditorshallobtainanunderstandingofwhethertheentityhasaprocessfor:
 Identifying business risks relevant to financial reportingobjectives;1
 Estimating the significance of therisks;3
 Assessing the likelihood of their occurrence; and2
 Deciding about actions to address thoserisks.4
The entity’s risk assessment process forms the basis for the risks to be managed. If that process is
appropriate, it would assist the auditor in identifying risks of material misstatement. Whether the entity’s risk
assessment process is appropriate to the circumstances is a matter of judgment.
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(CNO—SA315-P2.140) CONTROL ACTIVITIES– COMPONENT OF INTERNAL CONTROL

(QNO-ICS.06) (MCQ-ICS.3)
The auditor shall obtain an understanding of control activities relevant to the audit, which the auditor considers
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necessary to assess the risks of material misstatement. An audit requires an understanding of only those control
activities related to significant class of transactions, account balance, and disclosure in the financial statements
and the assertions which the auditor finds relevant in his risk assessment process.
Control activities are the policies and procedures that help ensure that management directives are carried out.
Control activities, whether within IT or manual systems, have various objectives and are applied at various
organizational and functional levels. Examples of specific control activities include those relating to the following:
Control activities that are relevant to the audit are:
 Control activities that relate to significant risks and those that relate to risks for which substantive
procedures alone do not provide sufficient appropriate audit evidence; or
 Those that are considered to be relevant in the judgment of the auditor;
 Aspartoftheriskassessment,theauditorshalldeterminewhetheranyofthe risks identified are, in the auditor’s
judgment, a significant risk.
(CNO—SA315-P2.160) MONITORING OF CONTROLS – COMPONENT OF INTERNAL CONTROL (QNO-ICS.07)
The auditor shall obtain an understanding of the major activities that the entity uses to monitor internal
control over financial reporting.
 Monitoring of controls Defined:
Monitoring of controls is a process to assess the effectiveness of internal control performance
overtime.
Helps in assessing the effectiveness of controls on a timely basis: It involves assessing the
effectiveness of controls on a timely basis and taking necessary remedial actions.
 Management accomplishes through ongoing activities, separate evaluations etc.: Management
accomplishes monitoring of controls through ongoing activities, separate evaluations, or a combination
of the two. Ongoing monitoring activities are often built into the normal recurring activities of an entity
and include regular management and supervisory activities.
 Management’s monitoring activities include: Management’s monitoring activities may include using
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information from communications from external parties such as customer complaints and regulator
comments that may indicate problems or highlight areas in need of improvement.
 In case of Small Entities: Management’s monitoring of control is often accomplished by management’s
or the owner-manager’s close involvement in operations. This involvement often will identify
significant variances from expectations and inaccuracies in financial data leading to remedial action to
the control.
(CNO—SA315-P2.190) MONITORING OF CONTROLS– IF THE ENTITY HAS AN INTERNAL AUDIT FUNCTION

 Discussion If the entity has an internal audit function, the auditor shall obtain an understanding of the
following :
(a) The internal audit function’s responsibilities and how the internal audit function fits in the
entity’s organisational structure; and
(b) The activities performed, or to be performed, by the internal audit function.
The following points merit consideration in this regard:
(i) Internal Audit Function relevant to the Audit: The entity’s internal audit function is likely to
be relevant to the audit if its activities are related to the entity’s financial reporting. Also if the
auditor expects to use the work of the internal auditors to modify the audit procedures to be
performed. When the auditor determines that the internal audit function is likely to be relevant
to the audit, SA 610 applies.
(ii) Size and Structure of the Entity: The objectives of an internal audit function vary widely
depending on the size and structure of the entity and the requirements of management.
(iii) Internal audit function may include: The responsibilities of an internal audit function may
include, for example, monitoring of internal control, risk management, and review of compliance
with laws and regulations.
On the other hand, the responsibilities of the internal audit function may be limited to the
review of the economy, efficiency and effectiveness of operations, for example, and accordingly,
may not relate to the entity’s financial reporting.
(iv) External auditor’s activities- on the basis of Internal Audit activities: If the internal audit
function’s responsibilities are related to the entity’s financial reporting, the external auditor’s
consideration of the activities performed may include review of the internal audit function’s
audit plan for the period.
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(CNO—SA315-P2.195) THE INFORMATION SYSTEM, INCLUDING THE RELATED BUSINESS PROCESSES,

RELEVANT TO FINANCIAL REPORTING AND COMMUNICATION– COMPONENT OF CONTROL ENVIRONMENT
(QNO-ICS.08)
The auditor shall obtain an understanding of the information system, including the related business processes,
relevant to financial reporting, including the following are as:
 The classes of transactions in the entity’s operations that are significant to the financialstatements;1.
 The procedures by which those transactions are initiated, recorded, processed, corrected as
necessary, transferred to the general ledger, and reported in the financialstatements;2.
 The related accounting records, supporting information and specific accounts in the financial
statements that are used to initiate, record, process, and report transactions;3.
 How the information system captures events and conditions that are significant to the
financialstatements;4
 The financial reporting process used to prepare the entity’s financial statements;6.
 Controls surrounding journalentries.5
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(CNO—SA315-P2.198) COMMUNICATING FINANCIAL ROLES AND RESPONSIBILITIES

 Chart
 Obtaining an The auditor shall obtain an understanding of how the entity communicates financial reporting
Understanding roles and responsibilities including:
by the (a) Communications between management and those charged with governance; and
Auditor: (b) External communications, such as those with regulatory authorities.
The following points need consideration in this regard:

Understanding of Roles and Responsibilities: Communication by the entity of the financial
reporting roles and responsibilities would involves providing an understanding of individual
roles and responsibilities pertaining to internal control over financialreporting.1
Understanding regarding Relation of Activities: It includes understanding by employees as to
how their activities relate to the work of others and the means of reporting exceptions to
higher level within theentity.3
Policy Manuals and Financial Reporting Manuals: Communication may take such forms as
policy manuals and financial reportingmanuals.2
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Open Communication Channels: Open communication channels help ensure that exceptions
are reported and actedon.4
Less structured and easier for Small Entities: Communication may be less structured and
easier to achieve in a small entity than in a larger entity due to fewer levels of responsibility
and management’s greater visibility and availability.
(CNO—SA315-P2.200) EVALUATION OF INTERNAL CONTROL BY THE AUDITOR
So far as the auditor is concerned, the examination and evaluation of the internal control system is an
indispensable part of the overall audit programme. The auditor needs reasonable assurance that the accounting
system is adequate and that all the accounting information which should be recorded has in fact been recorded.
Internal control normally contributes to such assurance. The auditor should gain an
understandingoftheaccountingsystemandrelatedinternalcontrolsandshouldstudy and evaluate the operations of
these internal controls upon which he wishes to rely in determining the nature, timing, and extent of other audit
procedures.
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 Benefits of The review of internal controls will enable the auditor to know:
Evaluation of
Shortcut to Remember – A4R2IS2E for benefits
Internal
Control to the  whether an adequate internal control system is in use and operating as planned by
Auditor. the management;
(QNO-  whether any administrative control has a bearing on his work (for example, if the
ICS.31,315.29) control over worker recruitment and enrolment is weak, there is a likelihood of
dummy names being included in the wages sheet and this is relevant for the auditor);
 whatwouldbeappropriateaudittechniqueandtheauditprocedureinthegiven
circumstances;
 what are the areas where control is weak and where it is excessive;
 howfarandhowadequatelythemanagementisdischargingitsfunctioninsofar as correct
recording of transactions is concerned;
 how reliable the reports, records and the certificates to the management can be;
 whether an effective internal auditing department is operating;
 whether the controls adequately safeguard the assets;
 whether some worthwhile suggestions can be given to improve the control system.
 whether errors and frauds are likely to be located in the ordinary course of operations
of the business;
 the extent and the depth of the examination that he needs to carry out in the
different areas of accounting;
(CNO—SA315-P2.210) FORMULATE AUDIT PROGRAM AFTER UNDERSTANDING INTERNAL CONTROL

(QNO-ICS.41)
 Discussion The auditor can formulate his entire audit programme only after he has had a satisfactory
understanding of the internal control systems and their actual operation. If he does not care to
study this aspect, it is very likely that his audit programme may become unwieldy and
unnecessarily heavy and the object of the audit may be altogether lost in the mass of entries and
vouchers. It is also important for him to know whether the system is actually in operation. Often,
after installation of a system, no proper follow up is there by the management to ensure
compliance. The auditor, in such circumstances, may be led to believe that a system is in
operation which in reality may not be altogether in operation or may at best operate only
partially. This state of affairs is probably the worst that an auditor may come across and he
would be in the midst of confusion, if he does not take care.
It would be better if the auditor can undertake the review of the internal control system of
client. This will give him enough time to assimilate the controls and implications and will enable
him to be more objective in the framing of the audit programme. He will also be in a position to
bring to the notice of the management the weaknesses of the system and to suggest measures
for improvement. At a further interim date or in the course of the audit, he may ascertain how
far the weaknesses have been removed.
From the foregoing, it can be concluded that the extent and the nature of the audit programme
is substantially influenced by the internal control system in operation. In deciding upon a plan of
test checking, the existence and operation of internal control system is of great significance.
A proper understanding of the internal control system in its content and working also enables an
auditor to decide upon the appropriate audit procedure to be applied in different areas to be
covered in the audit programme.
In a situation where the internal controls are considered weak in some areas, the auditor might
choose an auditing procedure or test that otherwise might not be required; he might extend
certain tests to cover a large number of transactions or other items than he otherwise would
examine and at times he may perform additional tests to bring him the necessary satisfaction.
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 Example
Normally the distribution of wages is not observed by the auditor. But if the internal
control over wages is so weak that there exists a possibility of dummy workers being
paid, the auditor might include observation of wages distribution in his programme in
order to find out the workers who do not turn up for receipt of wages.
On the other hand, if he is satisfied with the internal control on sales and trade
receivables, the auditor can get trade receivables’ balances confirmed at almost any
time reasonably close to the balance sheet date. But if the control is weak, he may feel
that he should get the confirmation exactly on the date of the year closing so that he
may eliminate the risk of errors and frauds occurring between the intervening period.
Also, he may in that situation, decide to have a large coverage of trade receivables by
the confirmation procedure.
(CNO—SA315-P2.220) EVALUATION OF INTERNAL CONTROL– METHODS

 Chart
 First Step The first step involves determination of the control and procedures laid down by the
management. By reading company manuals, studying organisation charts and flow charts and by
making suitable enquiries from the officers and employees, the auditor may ascertain the
character, scope and efficacy of the control system. To acquaint himself about how all the
accounting information is collected and processed and to learn the nature of controls that
makes the information reliable and protect the company’s assets, calls for considerable skill and
knowledge. In many cases, very little of this information is available in writing; the auditor must
ask the right people the right questions if he is to get the information he wants. It would be
better if he makes written notes of the relevant information and procedures contained in the
manual or ascertained on enquiry.
 Methods To facilitate the accumulation of the information necessary for the proper review and evaluation
of internal controls, the auditor can use one of the following to help him to know and assimilate
the system and evaluate the same:
 Narrative record;
 Flow chart.
 Check List;
 Questionnaire;
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(CNO—SA315-P2.240) THE NARRATIVE RECORD (QNO-ICS.23,ICS.25) (MCQ-Incs.41.3)
 This is a complete and exhaustive description of the system as found in operation by the auditor.
 Actual testing and observation are necessary before such a record can be developed.
 It may be recommended in cases where no formal control system is in operation and would be more suited
to small business.
 The basic  To comprehend the system in operation is quite difficult.
disadvantages  To identify weaknesses or gaps in the system.
of narrative  To incorporate changes arising on account of reshuffling of manpower, etc.
records are:
 Example of
Narrative
Records
(CNO—SA315-P2.260) FLOW CHART (QNO-ICS.15) (MCQ-Incs.41.4)
 It is a graphic presentation of each part of the company’s system of internal control. A flow chart is
considered to be the most concise way of recording the auditor’s review of the system.
 It minimises the amount of narrative explanation and thereby achieves a consideration or presentation not
possible in any other form.
It gives bird’s eye view of the system and the flow of transactions and integration and in documentation, can be
easily spotted and improvements can be suggested.
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Cheques
(CNO—SA315-P2.280) CHECK LIST (QNO-ICS.21,ICS.25) (MCQ-Incs.41.2)
 This is a series of instructions and/or questions which a member of the auditing staff must follow and/or
answer.
 When he completes instruction, he initials the space against the instruction.
 Answers to the check list instructions are usually Yes, No or Not Applicable. This is again an on-the-job
requirement and instructions are framed having regard to the desirable elements of control.
 A few  Are tenders called before placing orders?
examples of  Are the purchases made on the basis of a written order?
check list  Is the purchase order form standardised?
instructions  Are purchase order forms pre-numbered?
are given  Are the stock control accounts maintained by persons who have nothing to do with:
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hereunder:  custody of work;
 receipt of stock;
 inspection of stock; and
 Purchase of stock?
The complete check list is studied by the Principal/Manager/Senior to ascertain existence of
internal control and evaluate its implementation and efficiency.
Sr
No Question Not Applicable Yes No Weakness Remarks
Minor Major
Is standard procedure
designed for different mode of
1 collection? .
Are employees given
orientation before starting
2 job? .
3 Is there segregation of duties? .
Whether cheques received
4 records are maintained? .
Do they save scanned copy of
cheque received or cheque
5 number? . .
Do they have standard
procedure for cheques
6 returned? . .
Examples
(CNO—SA315-P2.300) INTERNAL CONTROL QUESTIONNAIRE (QNO-ICS.17) (MCQ-ICS.1, Incs.41.5)
 The questionnaire is usually issued to the client and the client is requested to get it filled by the concerned
executives and employees.
 In the questionnaire, generally questions are so framed that a ‘Yes’ answer denotes satisfactory position
and a ‘No’ answer suggests weakness. Provision is made for an explanation or further details of ‘No’
answers. In respect of questions not relevant to the business, ‘Not Applicable’ reply is given.
 This is a comprehensive series of questions concerning internal control.
 This is the most widely used form for collecting information about the existence, operation, and efficiency
of internal control in an organisation.
 With a proper questionnaire, all internal control evaluation can be completed at one time or in sections.
 It is the general practice to review the internal control system annually and record the review in detail.
 If on a perusal of the answers, inconsistencies or apparent incongruities are noticed, the matter is further
discussed by auditor’s staff with the client’s employees for a clear picture.
The concerned auditor then prepares a report of deficiencies and recommendations for improvement.
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Example
Sr Not
No Question Applicable Yes No Elaborate Remarks
Do you think your collection system is
1 deficiency free?
Whether all collections transactions are real,
2 and they have occurred?
3 Whether transactions recorded promptly?
4 Whether transactions recorded accurately?
Whether transactions are recorded in current
5 account?
Whether transactions are recorded in current
6 period?
(CNO—SA315-P2.320) INTERNAL CONTROL IN SMALL BUSINESS (QNO-ICS.27)

 Chart
 Audit The auditor needs to obtain the same degree of assurance in order to give an unqualified
objectives are opinion on the financial statements of both small and large entities.
Same
 Controls in However, many controls which would be relevant to large entities are not practical
Small & Large in the small business
are not Same
 Example: - For example, in small business, accounting work may be performed by only a few persons.
Segregation of These persons may have both operating and custodial responsibilities, and segregation of
Duty functions may be missing or severely limited. Inadequate segregation of duties may, in some
cases, be offset by owner/manager supervisory controls which may exist because of direct
personal knowledge of the business and involvement in the business transactions.
 Extensive use In circumstances where segregation of duties is limited, or evidence of supervisory controls is
of substantive lacking, the evidence necessary to support the auditor’s opinion on the financial information
procedures may have to be obtained largely through the performance of substantive procedures
(CNO—SA315-P2.325) MANUAL AND AUTOMATED INTERNAL CONTROLS

 Discussion Characteristics of Manual and Automated Elements of Internal Control Relevant to the
Auditor’s Risk Assessment: An entity’s system of internal control contains manual elements
and often contains automated elements. The characteristics of manual or automated elements
relevant to the auditor’s risk assessment and further audit procedures are explained here
under-
 Controls in Manual and IT System: The use of manual or automated elements in
internal control affects the manner in which transactions are initiated, recorded,
processed, and reported:
 Controls in a manual system may include such procedures as approvals and reviews of
transactions, and reconciliations and follow up of reconciling items. Alternatively, an
entity may use automated procedures to initiate, record, process, and report
transactions, in which case records in electronic format replace paper documents.
 Controls in IT systems consist of a combination of automated controls (for example,
controls embedded in computer programs) and manual controls. Further, manual
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controls may be independent of IT, may use information produced by IT, or may be
limited to monitoring the effective functioning of IT and of automated controls, and to
handling exceptions.
 Use of IT: An entity’s mix of manual and automated elements in internal control varies
with the nature and complexity of the entity’s use of IT.
(CNO—SA315-P2.335) BENEFITS OF IT IN ENTITY’S INTERNAL CONTROL (QNO-ICS.33)

 Discussion  Consistently apply predefined business rules and perform complex calculations in
processing large volumes of transactions or data;
 Enhance the timeliness, availability, and accuracy of information;
 Facilitate the additional analysis of information;
 Enhance the ability to monitor the performance of the entity’s activities and its
policies and procedures;
 Reduce the risk that controls will be circumvented; and
 Enhance the ability to achieve effective segregation of duties by implementing
security controls in applications, databases, and operating systems.
(CNO—SA315-P2.340) RISKS BECAUSE OF IT SYSTEMS (QNO-ICS.13)
 IT also poses specific risks to an entity’s internal control, including, for example:
 Reliance on systems or programs that are inaccurately processing data, processing inaccurate data,
or both.
 Unauthorised access to data that may result in destruction of data or improper changes to data,
including the recording of unauthorised or non- existent transactions, or inaccurate recording of
transactions. Particular risks may arise where multiple users access a common database.
 The possibility of IT personnel gaining access privileges beyond those necessary to perform their
assigned duties thereby breaking down segregation of duties.
 Unauthorised changes to data in master files.
 Unauthorised changes to systems or programs.
 Failure to make necessary changes to systems or programs.
 Inappropriate manual intervention.
 Potential loss of data or inability to access data as required.
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(CNO—SA315-P2.360) LIMITATIONS OF INTERNAL CONTROL (QNO-ICS.29)
Internal control can provide only reasonable assurance:

Internal control, no matter how effective, can provide an entity with only reasonable assurance about achieving
the entity’s financial reporting objectives. The likelihood of their achievement is affected by inherent
limitations of internal control.
 Human Realities that human judgment in decision-making can be faulty and that breakdowns in
judgment internal control can occur because of human error
indecision-
making:
(Lower Level)
There may be an error in the design of, or in the change to, a control.
 Lack of Equally, the operation of a control may not be effective, such as where information
understanding produced for the purposes of internal control (for example, an exception report) is not
the purpose: effectively used because the individual responsible for reviewing the information does not
(Middle Level) understand its purpose or fails to take appropriate action.
 Collusion Additionally, controls can be circumvented by the collusion of two or more people or
among inappropriate management override of internal control. For example, management may
People: enter into side agreements with customers that alter the terms and condition soft he
(Middle Level) entity’s standard sales contracts, which may result in improper revenue recognition. Also,
edit checks in a software program that are designed to identify and report transactions
that exceed specified credit limits may be overridden or disabled.
 Judgements Further, in designing and implementing controls, management may make judgments on
by the nature and extent of the controls it chooses to implement, and the nature and extent
Management: of the risks it chooses to assume.
(Top Level)
 Limitations in Smallerentitiesoftenhavefeweremployeesduetowhichsegregationofdutiesis not
case of Small practicable. However, in a small owner-managed entity, the owner-manager may be able
Entities: to exercise more effective oversight than in a larger entity. This oversight may
compensate for the generally more limited opportunities for segregation of duties.
On the other hand, the owner-manager may be more able to override controls because the
system of internal control is less structured. This is taken into account by the auditor when
identifying the risks of material misstatement due to fraud.
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(CNO—SA315-P2.380) IFC Vs IFCR (QNO-ICS.33.500, QNO-ICS.34)

 Chart
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 Definition of  Source
IFC Clause (e) of Sub-section 5 of Section 134 explains the meaning of internal
(Similar to financial controls.
Definition of
 Definition
Internal
Control as per  the safeguarding of its assets,
SA 315) (E.g., Units purchased are marked with company logo & kept under CCTV
(QNO— surveillance)
ICS.33.400)  orderly and efficient conduct of its business including adherence to
company's policies,
(E.g., It is companies’ policy to purchase from vendors with atleast 5 years
of experience in the business)
 The prevention and detection of frauds and errors,
(E.g., Purchase price & quality is approved by 2 purchase managers and
GRN is checked by Store Manager)
 the accuracy and completeness of the accounting records,
(E.g., Barcode reader is used for recording purchases)
 and the timely preparation of reliable financial information
(E.g., Weekly Purchase report is prepared by locations & consolidated )
 Definition of  Source
IFCR Not defined in Company’s Act but defined in Guidance Note over IFCR
 Definition
 A process designed to provide reasonable assurance regarding the reliability of
financial reporting and the preparation of financial statements for external
purposes in accordance with generally accepted accounting principles.
 Difference  IFC covers all controls have financial impact on entity, but IFCR covers only those
between IFC controls which affect financial reporting.
Vs IFCR  IFC is much broader concept as compared to IFCR. So IFCR is subset of IFC.
 Legal Requirements also differ
 Legal  Responsibility of Board
Requirements Sec 134 (5) (e): - Board of director has to specify in Director Responsibility
Regarding IFC Statement annexed to BOD Report that IFC are adequate & operating effectively in
Listed Companies.
 Responsibility of Audit Committee
Sec 177 (4) (vii): - Companies in which audit committee is applicable, AC has to
evaluate Internal Financial Controls.
 Responsibility of Independent Directors
Sec 149(8) & Sch IV: - In case of all companies where Independent Directors are
required, IDs to satisfy themselves on the integrity of financial information and
that financial controls are robust and defensible.
 Legal  Responsibility of Board
Requirements Sec 134 Companies Accounts Rules 2014, Rule 8 (v) (vii): - All companies should
Regarding specify following in BOD report: - the details in respect of adequacy of internal
IFCR financial controls with reference to the Financial Statements. (That means IFCR)
 Responsibility of Auditor
 Sec 143 (3) (i): - Auditors to report if the company has adequate IFC
systems and that they are operating effectively. (Word used is IFC, but
guidance notes say that it should be read as IFCR taking into account role
of auditor & similar requirement in other countries also. (Again, related to
IFCR)
 Not Applicable
It may be noted that auditor’s reporting on internal financial controls is a
requirement specified in Company Act and, therefore, will apply only in
case of reporting on financial statements prepared under the Act and
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reported under Section 143.
Accordingly, reporting on internal financial controls will not be applicable
with respect to interim financial statements, such as quarterly or half-
yearly financial statements, unless such reporting is required under any
other law or regulation. And also, not applicable to entities other than
company such as individual, partnership, trust, co-operative society etc.
UNIQUE QUESTION
 QNO-ICS.39 Weakness in ICS (Case Study)
 QNO-ICS.43 Control risk assessment when control deficiencies are identified
(Covered in SA 315 CNO—SA315-P1.022)
UNIQUE MCQS
 MCQ No. ICS.2
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Part 3 -- [SA 610] USING THE WORK OF INTERNAL AUDITORS

(CNO—SA610.020) SCOPE AND OBJECTIVES OF THE INTERNAL AUDIT FUNCTION (QNO-610.01)
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 Definition 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.
 Objective & The objectives and scope of internal audit functions typically include assurance and consulting
Scope activities designed to evaluate and improve the effectiveness of the entity’s governance
processes, risk management and internal control such as the following:
Activities Relating to Governance
The internal audit function may assess the governance process in its accomplishment of
objectives on 1ethics and values, 2performance management and accountability,
3communicating risk and control information to appropriate areas of the organization
and effectiveness of communication among those charged with governance, external
and internal auditors, and management.
Activities Relating to Risk Management
The internal audit function may assist the entity by identifying and evaluating significant
exposures to risk and contributing to the improvement of risk management and internal
control (including effectiveness of the financial reporting process).
The internal audit function may perform procedures to assist the entity in the detection
of fraud.
Activities Relating to Internal Control
1. Review of operating activities. The internal audit function may be assigned to
review the economy, efficiency, and effectiveness of operating activities, including
nonfinancial activities of an entity.
2. Evaluation of internal control the internal audit function may be assigned specific
responsibility for reviewing controls, evaluating their operation, and
recommending improvements thereto. In doing so, the internal audit function
provides assurance on the control. For example, the internal audit function might
plan and perform tests or other procedures to provide assurance to management
and those charged with governance regarding the design, implementation, and
operating effectiveness of internal control, including those controls that are
relevant to the audit.
3. Review of compliance with laws and regulations. The internal audit function may
be assigned to review compliance with laws, regulations, and other external
requirements, and with management policies and directives and other internal
requirements.
4. Examination of financial and operating information. The internal audit function
may be assigned to review the means used to identify, recognize, measure, classify
and report financial and operating information, and to make specific inquiry into
individual items, including detailed testing of transactions, balances, and
procedures.
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(CNO—SA610.060) USING WORK VS TAKING DIRECT ASSISTANCE
(CNO—SA610.070) BASICS OF STANDARDS ON INTERNAL AUDIT ISSUED BY ICAI

 CIA Considering the increasing importance of internal auditing, the Institute of Chartered
Accountants of India has constituted a Committee on Internal Audit (CIA) as a non- standing
committee on February 5, 2004. The CIA was constituted with the object of formulating
Standards and Guidance Notes on Internal Audit now it is known as Internal Audit Standard
Board.
 SIA The Board has, till date, issued thirteen new Standards on Internal Audit (SIAs). The SIAs aim to
codify the best practices in the area of internal audit and also serve to provide a benchmark of
the performance of the internal audit services. While formulating SIAs, the Board takes into
consideration the applicable laws, customs, usages and business environment and generally
accepted auditing practices in India.
These 13 SIAs are recommendatory in nature. The Standards shall become mandatory from such
date as notified by the council.
We have not included list of SIA’s as it is not expected to remember and reproduced this list.
concepts removed by ICAI. Because as per our information, recent module is base for drafting question paper.
This makes BHASKAR bang on target, efficient & effective for studies).
course RTP, MTP, Exams, Practice Manual are generally not included, but if old course questions cover concepts
in recent ICAI module we included them & highlight them separately. We have marked questions which are
present in PARAM question bank but not having supporting material in BHASKAR as unique. These questions can
be tricky as they target new concepts and has 50-50 chances of coming in exams, we have covered them in our
Q&A videos.)
UNIQUE MCQ
MCQ No. Incs.08.3, 08.4, 08.5
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CHAPTER FRAUD AND RESPONSIBILITIES OF THE AUDITOR IN

5 THIS REGARD
Part 1 -- [SA 240] THE AUDITOR’S RESPONSIBILITIES RELATING TO FRAUD IN AN AUDIT

OF FINANCIAL STATEMENTS
(CNO—SA240.020) WHAT ARE FRAUDS & ITS TYPES?

 Chart
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1. Definition An intentional act by one or more individuals among management, those charged with
and Types of governance, employees, or third parties, to deceive, to mislead (Advance received from customer
Fraud shown as sales) or at least to conceal the truth (Contingent Liability not disclosed) to obtain an
unjust or illegal advantage.
(QNO-
240.01/ It follows that other things being equal, they are more serious than unintentional errors because
240.11) of the implication of dishonesty which accompanies them. Its auditor’s secondary / incidental
(MCQ- objective to find out with reasonable assurance whether material frauds & errors exists. He may
suspect or identify fraud and report it, but it is not his responsibility to prove it in court of law.
240.9)
Two types of intentional misstatements are relevant to the auditor–misstatements resulting
from:
1. Fraudulent Financial Reporting (Window-dressing / Shenanigan)
2. Misappropriation of assets.
2. Fraudulent What is FFR?
Financial Fraudulent financial reporting involves intentional misstatements including omissions of
Reporting amounts or disclosures in “financial statements” to deceive financial statement users.
Who does it? How it Starts? Why they do it?
(QNO-
It can be caused by the efforts of management to manage earnings in order to deceive
240.03) financial statement users by influencing their perceptions as to the entity’s performance
(MCQ- and profitability. Such earnings management may start out with small actions or
Incs.36.1, inappropriate adjustment of assumptions and changes in judgments by management.
36.3) Pressures and incentives may lead these actions to increase to the extent that they
result in fraudulent financial reporting. Such a situation could occur when, due to
pressures to meet market expectations or a desire to maximize compensation based on
performance, management intentionally takes positions that lead to fraudulent financial
reporting by materially misstating the financial statements. In some entities,
management may be motivated to reduce earnings by a material amount to minimize
tax or to inflate earnings to secure bank financing.
Techniques by which management override controls to commit fraudulent financial
reporting.
Fraudulent financial reporting often involves management override of controls that
otherwise may appear to be operating effectively. Fraud can be committed by
management overriding controls using such techniques as:-
 Omission
o Omitting, advancing, or delaying recognition in the financial statements
of events and transactions that have occurred during the reporting
period.
(E.g., delaying recording of claims paid to suppliers for late payment etc)
o Concealing, or not disclosing, facts that could affect the amounts
recorded in the financial statements.
(E.g., Did not disclose that increase in share capital is through bonus
issue and not due to fundraising, did not disclose that increase in fixed
assets is due to upward revaluation)
 Manipulation
o Recording fictitious journal entries, particularly close to the end of an
accounting period, to manipulate operating results or achieve other
objectives.
(E.g., Passing accounting entry for payments to creditors to improve
current assets ratio, Recording fake sale entries etc)
o Altering records and terms related to significant and unusual
transactions
(E.g., Records related to MBA fees paid for children of directors was
shown as employee development expenses / Properties were taken on
rent by MD for personal purpose, but agreement was altered to show it
as business purpose)
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 Misapplication
o Inappropriately adjusting assumptions and changing judgments used to
estimate account balances.
(E.g., Suddenly increasing useful life to reduce depreciation & increase
profits, Increasing % completion of WIP to increase profits)
o Engaging in complex transactions that are structured to misrepresent
the financial position or financial performance of the entity.
(E.g., loan taken & repaid was structured into sale & repurchase, loan
taken was shown as lease (which is finance lease)
3. Misappro- Misappropriation of assets involves the theft of an entity’s assets and is often
priation of perpetrated by employees in relatively small and immaterial amounts. However, it can
Assets: - also involve management who are usually more able to disguise or conceal
misappropriations in ways that are difficult to detect. Misappropriation of assets can be
(QNO-
accomplished in a variety of ways including:
240.06)
 Embezzling receipts
(MCQ- (E.g., misappropriating collections on accounts receivable or diverting receipts
Incs.33.3) in respect of written-off accounts to personal bank accounts).
 Causing an entity to pay for goods and services not received
(For example, payments to fictitious vendors, kickbacks paid by vendors to the
entity’s purchasing agents in return for inflating prices, payments to fictitious
employees).
 Stealing physical assets or intellectual property
(For example, stealing inventory for personal use or for sale, stealing scrap for
resale, colluding with a competitor by disclosing technological data in return for
payment).
 Using an entity’s assets for personal use
(For example, using the entity’s assets as collateral for a personal loan or a loan
to a related party).
Misappropriation of assets is often accompanied by false or misleading records or
documents in order to conceal the fact that the assets are missing or have been pledged
without proper authorization.
Example
Vineet is a manager in Zed Ex Ltd. He is having authority to sign cheques up to ₹
10,000. While performing the audit, Rajan, the auditor, noticed that there were many
cheques of ₹ 9,999 which had been signed by Vineet. Further Vineet had split large
payments (amounting to more than ₹ 10,000 each, into two or more cheques less than ₹
10,000 each so that he may authorize the payments). This raised suspicion in the
auditor’s mind.
The auditor found that the cheques of ₹ 9,999 were deposited in Vineet’s personal
account i.e. Vineet had misappropriated the amount.
Splitting the cheques into lower amounts involves manipulation of accounts.
The fraud was committed by an employee.
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(CNO—SA240.040) WHAT ARE FRAUD RISK FACTORS? (QNO-240.09/240.11) (MCQ-240.5, 240.6, Incs.33.1)
Fraud risk factors - Events or conditions that indicate an incentive or pressure to commit fraud or provide an
opportunity to commit fraud or rationalization.
Incentive or pressure to commit fraudulent financial reporting may exist when management is under
pressure, from sources outside or inside the entity, to achieve an expected (and perhaps unrealistic)
earnings target or financial outcome – particularly since the consequences to management for failing to
meet financial goals can be significant. Similarly, individuals may have an incentive to misappropriate
assets, for example, because the individuals are having habit of living beyond their means.
A perceived opportunity to commit fraud may exist when an individual believes internal control can be
overridden, for example, because the individual is in a position of trust or has knowledge of specific
deficiencies in internal control.
Individuals may be able to rationalize committing a fraudulent act. Some individuals possess an attitude,
character, or set of ethical values that allow them knowingly and intentionally to commit a dishonest act.
However, even otherwise honest individuals can commit fraud in an environment that imposes sufficient
pressure on them.
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Points Fraudulent Financial Reporting (FFR) Miss Appropriation of Assets (MAA)
 Incentives / Financial stability or profitability is Personal financial obligations may
Pressure threatened by economic, industry, or entity create pressure on management or
(MCQ- operating conditions, such as (or as indicated employees with access to cash or
Incs.36.2) by): other assets susceptible to theft to
 Significant declines in customer misappropriate those assets.
demand and increasing business Adverse relationships between the
failures in either the industry or overall entity and employees with access to
economy. cash or other assets susceptible to
 High degree of competition or market theft may motivate those employees
saturation, accompanied by declining to misappropriate those assets. For
margins. example, adverse relationships may
 High vulnerability to rapid changes, be created by the following:
such as changes in technology, product  Known or anticipated future
obsolescence, or interest rates. employee layoffs.
 Operating losses making the threat of  Recent or anticipated changes to
bankruptcy, foreclosure, or hostile employee compensation or
takeover imminent. benefit plans.
 Recurring negative cash flows from  Promotions, compensation, or
operations or an inability to generate other rewards inconsistent with
cash flows from operations while expectations.
reporting earnings and earnings
growth.
 New accounting, statutory, or
regulatory requirements.
 Opportunities The nature of the industry or the entity’s Certain characteristics or
(QNO-240.11) operations provides opportunities to engage circumstances may increase the
(MCQ- in fraudulent financial reporting that can susceptibility of assets to
Incs.33.4, 33.5) arise from the following: misappropriation. For example,
 Significant related-party transactions opportunities to misappropriate
not in the ordinary course of business assets increase when there are the
or with related entities not audited or following:
audited by another firm.  Large amounts of cash on hand
 A strong financial presence or ability to or processed.
dominate a certain industry sector that  Inventory items that are small in
allows the entity to dictate terms or size, of high value, or in high
conditions to suppliers or customers demand.
that may result in inappropriate or non-  Easily convertible assets, such as
arm’s-length transactions. bearer bonds, diamonds, or
 Assets, liabilities, revenues, or computer chips.
expenses based on significant  Fixed assets which are small in
estimates that involve subjective size, marketable, or lacking
judgments or uncertainties that are observable identification of
difficult to corroborate. ownership.
 Significant, unusual, or highly complex Inadequate internal control over
transactions, especially those close to assets may increase the susceptibility
period end that pose difficult of misappropriation of those assets.
“substance over form” questions. For example, misappropriation of
 Significant bank accounts or subsidiary assets may occur because there is
or branch operations in tax-haven the following:
jurisdictions for which there appears to o Inadequate segregation of
be no clear business justification. duties or independent checks.
o Inadequate oversight of senior
management expenditures,
such as travel and other
reimbursements.
o Inadequate record keeping with
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respect to assets.
o Inadequate system of
authorization and approval of
transactions (for example, in
purchasing).
o Inadequate physical safeguards
over cash, investments,
inventory, or fixed assets.
o Lack of complete and timely
reconciliations of assets.
o Lack of timely and appropriate
documentation of transactions,
for example, credits for
merchandise returns.
o Lack of mandatory vacations for
employees performing key
control functions.
o Inadequate management
understanding of information
technology, which enables
information technology
employees to perpetrate a
misappropriation.
o Inadequate access controls over
automated records, including
controls over and review of
computer systems event logs.
 Attitude / Communication, implementation, support, Disregard for the need for
Rationalization or enforcement of the entity’s values or monitoring or reducing risks related
ethical standards by management, or the to misappropriations of assets.
communication of inappropriate values or  Disregard for internal control
ethical standards, that are not effective. over misappropriation of assets
 Known history of violations of securities by overriding existing controls
laws or other laws and regulations. or by failing to take appropriate
 Excessive interest by management in remedial action on known
maintaining or increasing the entity’s deficiencies in internal control.
inventory price or earnings trend.  Behaviour indicating displeasure
 Management failing to remedy known or dissatisfaction with the entity
significant deficiencies in internal or its treatment of the
control on a timely basis. employee.
 An interest by management in  Changes in behaviour or lifestyle
employing inappropriate means to that may indicate assets have
minimize reported earnings for tax- been misappropriated
motivated reasons.  Tolerance of petty theft.
 The owner-manager makes no
distinction between personal and
business transactions.
 The relationship between management
and the current or predecessor auditor
is strained, as exhibited by the
following:
o Frequent disputes with the
current or predecessor auditor
on accounting, auditing, or
reporting matters.
o Unreasonable demands on the
auditor, such as unrealistic time
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constraints regarding the
completion of the audit or the
issuance of the auditor’s
report.
o Restrictions on the auditor that
inappropriately limit access to
people or information or the
ability to communicate
effectively with those charged
with governance.
o Domineering management
behaviour in dealing with the
auditor, especially involving
attempts to influence the scope
of the auditor’s work or the
selection or continuance of
personnel assigned to or
consulted on the audit
engagement.
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(CNO—SA240.060) EXAMPLES OF CIRCUMSTANCES THAT INDICATE THE POSSIBILITY OF FRAUD
Examples of circumstances that indicate the possibility of fraud: The following are examples of circumstances that
may indicate the possibility that the financial statements may contain a material misstatement resulting from fraud.
 Discrepancies (System Access / Transactions Recording / Unsupported or Unauthorised / Last Minute
in the Adjustments / Complaints)
accounting Evidence of employees’ access to systems and records inconsistent with that
records, necessary to perform their authorized duties.
including: (E.g., entries during odd time, post 9 PM or pre 9 AM)
(QNO-
240.12) Transactions that are not recorded in a complete or timely manner or are improperly
recorded as to amount, accounting period, classification, or entity policy.
(E.g., Some customer details such as PAN number, Addressee not recorded, interest on
working capital loan capitalised)
Unsupported or unauthorized balances or transactions.
(E.g., Office expenses debited as production expenses, transactions from username
which was not authorised)
Last-minute adjustments that significantly affect financial results.
(E.g., Adjustment to percentage completion of WIP)
Tips or complaints to the auditor about alleged fraud.

(E.g., Chits in suggestion box alleging fraud)
 Conflicting
or missing
evidence,
including:
(QNO-
240.13)
(MCQ-
Incs.36.5)
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Missing Evidence
 Inability to produce evidence of key systems development and program change
testing and implementation activities for current-year system changes and
deployments.
(E.g., Inadequate justification for change in sales software)
 Unavailability of other than photocopied or electronically transmitted

documents when documents in original form are expected to exist.
(E.g., Transport bill is available in Xerox)
 Unavailable or missing electronic evidence, inconsistent with the entity’s record

retention practices or policies.
(E.g., Customer tax registration numbers missing)
 Missing documents.
(E.g., Transport agreement missing)
 Documents that appear to have been altered.

(E.g., Some customer orders have different format)
Conflicting Evidence
 Unusual balance sheet changes or changes in trends or important financial
statement ratios or relationships,
(E.g., receivables growing faster than revenues.)
 Inconsistent, vague, or implausible responses from management or employees
arising from inquiries or analytical procedures.
(E.g., Management unable to explain rapid growth in receivables)
 Unusual discrepancies between the entity's records and confirmation replies.

Inventory
 Missing inventory or physical assets of significant magnitude.
 Significant unexplained items on reconciliations.
(E.g., Reconciliation of actual to system stock has long outstanding sales return &
GIT)
Accounts Receivable
 Large numbers of credit entries and other adjustments made to accounts
receivable records.
(E.g., Many discounts, rebates etc in dealer schemes)
 Unexplained or inadequately explained differences between the accounts

receivable subledger and the control account, or between the customer statements
and the accounts receivable sub-ledger.
 Fewer responses to confirmations than anticipated or a greater number of
responses than anticipated.
Bank
Missing or non-existent cancelled cheques in circumstances where cancelled cheques
are ordinarily returned to the entity with the bank statement.
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 Problematic
or unusual
relationships
between the
auditor and
manage-
ment,
including:
(QNO-
240.15)
Time
 Undue time pressures imposed by management to resolve complex or
contentious issues.
Denial
 Denial of access to records, facilities, certain employees, customers, vendors, or
others from whom audit evidence might be sought.
 Unwillingness to facilitate auditor access to key electronic files for testing
through the use of computer-assisted audit techniques.
 Denial of access to key IT operations staff and facilities, including security,
operations, and systems development personnel.
Delay
 Unusual delays by the entity in providing requested information.
Management
 Complaints by management about the conduct of the audit or management
intimidation of engagement team members, particularly in connection with the
auditor’s critical assessment of audit evidence or in the resolution of potential
disagreements with management.
 An unwillingness to add or revise disclosures in the financial statements to
make them more complete and understandable.
 An unwillingness to address identified deficiencies in internal control on a
timely basis.
Other (Industry / TCWG / Estimates)
 Accounting policies that appear to be at variance with industry norms.
 Unwillingness by management to permit the auditor to meet privately with those
charged with governance.
 Frequent changes in accounting estimates that do not appear to result from
changed circumstances.
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(CNO—SA240.120) SITUATION WHEN AUDITOR IS UNABLE TO CONTINUE ENGAGEMENT DUE TO FRAUD?

(QNO-240.21) (MCQ-240.4)
 Chart
 Discussion If, as a result of a misstatement resulting from fraud or suspected fraud, the auditor
encounters exceptional circumstances that bring into question the auditor’s ability to continue
performing the audit, the auditor shall:
Determine the professional and legal responsibilities applicable in the circumstances,
including whether there is a requirement for the auditor to report to the person or
persons who made the audit appointment or, in some cases, to regulatory authorities;
[E.g., Sec 143(12)]
Consider whether it is appropriate to withdraw from the engagement, where

withdrawal from the engagement is legally permitted; and
If the auditor withdraws:
 Discuss with the appropriate level of management and those charged with
governance, the auditor’s withdrawal from the engagement and the reasons for
the withdrawal; and determine whether there is a professional or legal
requirement to report to the person or persons who made the audit
appointment or, in some cases, to regulatory authorities, the auditor’s
withdrawal from the engagement and the reasons for the withdrawal.
Q&A videos.)
UNIQUE QUESTION
 QNO-240.05 Manipulation of Accounts
 QNO-240.14 Factors which induce management/employees to commit fraud
 QNO-240.19 Auditor Responsibility- Misstatements Management Fraud
 QNO-240.31 Fraud Case (Provision without Documentary or Other Evidence)
UNIQUE MCQS
 MCQ No. 240.1
 MCQ No. 240.2
 MCQ No. 240.8
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Part 2 -- [SA 250] CONSIDERATION OF LAWS AND REGULATIONS IN AN AUDIT OF

FINANCIAL STATEMENTS
(ICAI module is not having any content from SA 250, in New Course no question has been asked in RTP’s, MTP’s and
Exams. In Old Course they use to have one question from SA 250. We are strictly following recent ICAI module and New
Course ICAI questions because they are the base for drafting paper. Hence we excluding concepts from this SA).
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Part 3 – Other Concepts
(Concepts discussed in this part are given in ICAI module, they are not as per SA 240, they are taken from
traditional theory on auditing. These concepts may appear similar with concepts discussed in SA 240. But a direct
question can be asked on it).
(CNO—C5OC.020) MANIPULATION OF ACCOUNTS

 Detection Detection of manipulation of accounts with a view to presenting a false state of affairs is a task
requiring great tact and intelligence because generally management personnel in higher
management cadre are associated with this type of fraud and this is perpetrated in methodical
way.
 Why This type of fraud is generally committed:
Manipulation  to avoid incidence of income-tax or other taxes;
is done?  for declaring a dividend when there are insufficient profits;
 to withhold declaration of dividend even when there is adequate profit (this is
often done to manipulate the value of shares in stock market to make it possible
for selected persons to acquire shares at a lower cost); and
 for receiving higher remuneration where managerial remuneration is payable by
reference to profits.
 Ways of There are numerous ways of committing this type of fraud. Some of the methods
committing are given below:
manipulation  inflating or suppressing purchases and expenses;
 inflating or suppressing sales and other items of income,
 inflating or deflating the value of closing inventory;
 failing to adjust outstanding liabilities or prepaid expenses; and
 charging items of capital expenditure to revenue or by capitalising revenue
expenses.
 Manipulation (FFR terminology is used in SA 240. If question is using this terminology answer it as per SA 240. On
of Account vs the otherhand if question is using manipulation of account then answer it as per above concepts).
Fraudulent
Financial
Reporting
(CNO— C5OC.040) WHY DO MANAGEMENT/ EMPLOYEES COMMIT FRAUD? WHAT INDUCES MANAGEMENT/
EMPLOYEES TO COMMIT FRAUD?
 Reasons Following are certain instances which will help to understand these questions:
 Financial obligations/ Pressure.
 Management’s unrealistic goals.
 Dissatisfied Employees or Lack of motivation among employees.
 Name game (E.g., management using power of authority by asking employees to do
something illegal).
 Opportunity to commit fraud.
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(CNO— C5OC.060) MISAPPROPRIATION OF GOODS
 Discussion Fraud in the form of misappropriation of goods is still more difficult to detect; for this, management
has to rely on various measures. Apart from the various requirements of record keeping about the
physical quantities and their periodic checks, there must be rules and procedures for allowing
persons inside the area where goods are kept. In addition, there should be external security
arrangements to see that no goods are taken out without proper authority. Goods can be anything
in the premises; it may be machinery. It may even be the daily necessities of the office like
stationery. The goods may be removed by subordinate employees or even by persons quite higher
up in the management. Auditors can detect this by undertaking a thorough and strenuous checking
of records followed by physical verification process. Also, by resorting to intelligent ratio analysis,
auditors may be able to form an idea whether such fraud exists.
Therefore, it is clear from the above that the ‘fraud’ deals with intentional misrepresentation but,
‘error’, on the other hand, refers to unintentional mistakes in financial information.
Intentional errors are most difficult to detect and auditors generally devote greater attention to
this type because out of long and sometimes unfortunate experience, auditors have developed a
point of view that, if they direct their procedures of discovering the more difficult intentional
errors, they are reasonably certain to locate the more simple and far more common unintentional
errors on the way.
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(CNO—C5OC.080) EXPLAIN DEFALCATION OF CASH AND HOW TO DETECT IT? (QNO-240.23/240.25/240.27)
(MCQ-240.7, Incs.07.2, Incs.36.4)
 Chart
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 Ways of Defalcation of cash has been found to perpetrate generally in the following ways:
Defalcation By suppressing cash receipts: - Few Techniques of how receipts are suppressed are:
(MCQ-  Not accounting for cash sales fully.
Incs.33.2) (E.g. Omission, Lower Rates or Quantity on Bill)
 Not accounting for miscellaneous receipts,
(E.g., sale of scrap, quarters allotted to the employees, etc.)
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 Adjusting unauthorised or fictitious rebates, allowances, discounts, etc. to
customer accounts and misappropriating amount paid by them.
 Writing off as debts in respect of such balances against which cash has already
been received but has been misappropriated.
 Writing down asset values in entirety, selling them subsequently and
misappropriating the proceeds.
(E.g. Write-off machine completely, make book value NIL and close account. Then
sale it but don’t account for cash received and misappropriate it)
 Teeming and Lading: Amount received from a customer being misappropriated;
also, to prevent its detection the money received from another customer
subsequently being credited to the account of the customer who has paid earlier.
Similarly, moneys received from the customer who has paid thereafter being
credited to the account of the second customer and such a practice is continued so
that no one account is outstanding for payment for any length of time, which may
lead the management to either send out a statement of account to him or
communicate with him.
(E.g. Money received from A is not accounted, then money received from B is shown
received from A and so on)
By inflating cash payments.
Examples of inflation of payments:
 Making payments against fictitious vouchers.
(E.g. Fake bills, Duplicate Bills)
 Making payments against vouchers, the amounts whereof have been inflated.
 Manipulating totals of wage rolls either by including therein names of dummy
workers or by inflating them in any other manner.
(E.g. Inflate over time or reduce leave deduction)
By casting wrong totals in the cash book.

 Under casting receipts, Over casting payments.
 Casting a larger total for petty cash expenditure and adjusting the excess in the totals
of the detailed columns so that cross totals show agreement.
 Detection of With a view to check misappropriation of cash, the existence of internal check system is quite
Defalcation essential. In particular, the following may be noted-
Existence of System / Segregation of Duties
Ascertaining the existence of system of cash receipts and cash sales and disbursements
of purchases and existence of internal checks at various stages is quite important. In
particular, the separation of duties and incompatible functions,
(E.g., an employee who receives and deposits cash and cheques should not prepare sales
invoices, or reconcile bank accounts, and should not approve vouchers for payment as
authorised signatory.)
Verification of cash sales from cash carbon copies & cash sales summary book
Verify cash sales with carbon copies of cash memos. If sales are quite voluminous then
a Cash Sales Summary Book is maintained, and the cash memos are traced into it; the
totals of the Summary Book are verified, and the daily totals of the Summary book traced
into the Cash Book.
Verification of Dates
One of the matters, to which attention of the auditor should be paid in the process, is
that the dates on the cash memos should tally with those on which cash collected in
respect thereof, as entered in the Cash Book. Checking of date of each receipt as it is
entered in the cash memo or the counterfoil of the receipt issued in respect thereof
corresponds with the date on which it is entered in the Cash Book. If there is a time lag
between them, it is possible that the person who had collected the amount had failed to
deposit it with the cashier immediately thereafter. When such a discrepancy is observed,
the cause thereof should be ascertained.
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Verification of cash receipts with counter foils / types of frauds / efficient internal check
Checking of cash receipts with counterfoils of the receipts issued. But the issue of
receipts with counterfoils in respect of amounts collected by itself would not ensure that
all the amounts collected have been fully accounted for or have been correctly adjusted.
For instance, a receipt might be issued for a larger amount than entered on its
counterfoils. Again, only one receipt might have been issued for two or more amounts
collected from a party while the counterfoils may show that separate receipts have been
issued in respect of each amount collected and the one or more receipts forms, thus
saved, may have been used for issuing a receipt of another amount collected which have
been misappropriated. Therefore, before accepting counterfoils or receipts as evidence
or the correctness of the amount collected, the auditor should satisfy himself that there
exists an efficient system of internal check which would prevent any receipt from being
misappropriated.
(E.g. CCTV or Signature of senior on receipt and counter foil)
(CNO—C5OC.100) RESPONSIBILITY OF AUDITOR WITH RESPECT TO FRAUD DURING AUDIT (QNO-240.17)

 Chart
 Overall
As per SA 240 “The Auditor’s Responsibilities relating to fraud in an audit of Financial
Responsibility
Statements”, an auditor conducting an audit in accordance with SAs is responsible for obtaining
of Financial
reasonable assurance that the financial statements taken as a whole are free from material
Statement
misstatement, whether caused by fraud or error.
(QNO-240.29)
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 Inherent Owing to the inherent limitations of an audit, there is an unavoidable risk that some material
limitations misstatements of the financial statements will not be detected, even though the audit is properly
(QNO-240.29) planned and performed in accordance with the SAs.
 Primary When obtaining reasonable assurance, the auditor is responsible for:
Responsibility  maintaining an attitude of professional skepticism throughout the audit,
of Auditor for  considering the potential for management override of controls and recognizing
Fraud the fact that audit procedures that are effective for detecting error may not be
effective in detecting fraud.
 Secondary The auditor also has the responsibility to:
Responsibility  communicate the misstatement to the appropriate level of management on a
of Auditor for timely basis and consider the need to report to it then changed with governance.
Fraud  He may also obtain legal advice before reporting on the financial information or
before withdrawing from the engagement.
 The auditor should satisfy himself that the effect of fraud is properly reflected
in the financial information or the error is corrected in case the modified
procedures performed by the auditor confirm the existence of the fraud.
 Reporting The auditor should also consider the implications of the frauds and errors and frame
Responsibility his report appropriately. In case of a fraud, the same should be disclosed in the
for Fraud financial statement. If adequate disclosure is not made, there should be a suitable
disclosure in his audit report.
(CNO—SA240.130) RESPONSIBILITY OF AUDITOR FOR FRAUD DETECTED AFTER COMPLETION OF AUDIT

(QNO-240.16)
 Discussion Detection of Fraud after Completion of Statutory Audit: As per SA 240, the primary responsibility
for the prevention and detection of fraud rests with both those charged with governance of the
entity and management. It is important that management, with the oversight of those charged
with governance, place a strong emphasis on fraud prevention, which may reduce opportunities
for fraud to take place, and fraud deterrence, which could persuade individuals not to commit
fraud because of the likelihood of detection and punishment. Such a system reduces but does
not eliminate the possibility of fraud and error.
An auditor conducting an audit in accordance with SAs is responsible for obtaining reasonable
assurance that the financial statements taken as a whole are free from material misstatement,
whether caused by fraud or error. Owing to the inherent limitations of an audit, there is an
unavoidable risk that some material misstatements of the financial statements will not be
detected, even though the audit is properly planned and performed in accordance with the SAs.
The risk of not detecting a material misstatement resulting from fraud is higher than the risk of
not detecting one resulting from error. This is because fraud may involve sophisticated and
carefully organized schemes designed to conceal it, such as forgery, deliberate failure to record
transactions, or intentional misrepresentations being made to the auditor. Such attempts at
concealment may be even more difficult to detect when accompanied by collusion.
The subsequent discovery of material misstatement of the financial information resulting from
fraud or error existing during the period covered by the auditor’s report does not, in itself,
indicate that whether the auditor has adhered to the basic principles governing an audit. The
question of whether the auditor has adhered to the basic principles governing an audit (such as
performance of the audit work with requisite skills and competence, documentation of important
matters, details of the audit plan and reliance placed on internal controls, nature and extent of
compliance and substantive tests carried out, etc.) is determined by the adequacy of the
procedures undertaken in the circumstances and the suitability of the auditor’s report based on
the results of these procedures.
The liability of the auditor for failure to detect fraud exists only when such failure is clearly due
to not exercising reasonable care and skill. Thus, in the instant case, after the completion of the
statutory audit, if a fraud has been detected, the same by itself can not mean that the auditor did
not perform his duty properly. If the auditor can prove with the help of his papers
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(documentation) that he has followed adequate procedures necessary for the proper conduct of
an audit, he cannot be held responsible for the same. If however, the same cannot be proved, he
would be held responsible.
Q&A videos.)
CA Ravi Taori
CHAPTER AUDIT IN AN AUTOMATED ENVIRONMENT

6
(CNO—AAE.020) WHAT IS AN AUTOMATED ENVIRONMENT? & KEY FEATURES OF AN AUTOMATED

ENVIRONMENT (QNO-AAE.01) (MCQ-AAE.12)
 Definition Let us first understand what the term “Automated Environment” means. An automated
environment basically refers to a business environment where the: -
Text Examples
Processes, Purchase Process, Production Process, Sales Process
Operations or Procedures, Raising PRN, Selecting Quotation, Placing Purchase Order,
Receiving Goods, Storage
Accounting and Purchase Book, Creditor’s Ledger, Credit or Debit Notes,
Periodical Reconciliation
Even Decisions Re-Order Level / Order Size / Frequency etc.
are carried out by using computer systems – also known as Information Systems (IS) or
Information Technology (IT) systems. Nowadays, it is very common to see computer systems
being used in almost every type of business.
Example to further support above definition
Think about how banking transactions are carried out using ATMs (Automated Teller Machines),
or how tickets can be purchased using “apps” on mobile phones, etc. In these examples, you can
see how these computer systems enable us to transact business at any time and any day.
 Key features Fundamental Principle
of an The fundamental principle of an automated environment is the ability to carry out
Automated business with less manual intervention and more system driven. The complexity of a
Environment business environment depends on the level of automation i.e., if a business environment
(QNO- is more automated, it is likely to be more complex.
AAE.05) (Automated Environment = Less Manual Involvement = More Automation = More
Complexity)
Example to support above paragraph
If a company uses an integrated enterprise resource planning system (ERP) viz., SAP,
Oracle etc., then it is considered more complex to audit. On the other hand, if a
company is using an off-the-shelf accounting software, then it is likely to be less
automated and hence less complex environment.
Some of the key features of an automated environment are as follows:

(Shortcut to remember Features of Automated Environment)
LIC FLASH policy has many automatic features
 Provides Latest information. (L)
 Integration between business operations (I)
 Connectivity and Networking capability. (C)
 Enables Faster business operations(F)
 Ability to process Large volumes of transactions (L)
 Accuracy in data processing and computation (A)
 Better Security and controls. (S)
 Less prone to Human Errors. (H)
Similarly, there are several other aspects that an auditor should consider
determining the level of automation and complexity of a business environment
which we will look at in the following sections.
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(CNO—AAE.040) RELEVANCE OF ‘IT’ IN AN AUDIT (QNO-AAE.10)
Given below are some situations in which IT will be relevant to an audit,
Shortcut to Remember
Hify CESS at PVR is relevant.
Text Examples
Hi-tech nature of business (H) Telecom, e-Commerce
Complexity of transactions has increased (C) multiple systems, network of systems
Increases Efficiency and effectiveness of audit. (E)
Increased use of Systems and Application Software in use of ERPs
Business (S)
Required by Indian and International Standards - (S) ISO, PCI-DSS, SA 315, SOC, ISAE.
Company Policy (P) Compliance
Volume of transactions are high (V) Insurance, Banking, Railways ticketing
Regulatory requirements - (R) Companies Act 2013 IFC, IT Act 2008.
 Relevance In some of the above situations it is likely that carrying out audit using traditional substantive audit
changes procedures may be difficult or even not feasible if the company prepares, records and conducts
from majority of business activities through IT systems only.
company to
On the other hand, many companies may use less complex IT systems including desktop-based
company
accounting or spreadsheets. In such situations, the relevance of IT to an audit could be less.
However, the auditor is still required to carry out at least an understanding the IT environment of
the company and document the same.
 Data Another area where IT can be relevant to audit is by using data analytics using computer assisted
Analytics audit techniques (CAATs). By using data analytics, it is possible to improve the effectiveness and
efficiency of an audit. We will learn more about data analytics in the later sections of this chapter.
From the above, we can see how IT is relevant to an audit under different situations viz., audit,
non-audit and meeting regulatory compliance requirements. We will learn more about
understanding risks, controls and documentation in further sections of this chapter.
(CNO—AAE.060) RISKS & CONTROLS IN AN AUTOMATED ENVIRONMENT

UNDERSTANDING AND DOCUMENTING AUTOMATED ENVIRONMENT (QNO-AAE.15)
In the previous section, we have learnt that, in an audit of financial statements, an auditor is required to understand
the entity and its business, including IT as per SA 315 Understanding the entity and its automated environment
involves understanding how IT department is organized, IT activities, the IT dependencies, relevant risks and
controls.
Given below are some of the points that an auditor should consider obtaining an understanding of the company’s
automated environment:
Text Examples
Location of IT systems - local vs global.
Their purpose financial and non-financial.
Information systems being used one or more application systems and what they are.
Version functions and risks could vary in different versions of same application.
In-house vs Packaged.
Architecture desktop based, client-server, web application, cloud based.
Interfaces within systems in case multiple systems exist.
Key persons CIO, CISO, Administrators.
Outsourced activities IT maintenance and support.
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The understanding of a company’s IT environment that is obtained should be documented [Ref. SA 230 – Audit
Documentation] using any standard format or template.
An example of one such template that can be used to document our understanding is illustrated below.
Location- Purpose Information Version In-House Architecture Interfaces Key Persons Outsourced In-
Local Systems vs. within Activities Scope
Vs being used Packaged systems
Global
Texas, USA Accounting, SAP ECC Packaged Client/Server, Paymaster CIO, Yes
Supply 6.0, Unix AIX 5.3, Administrators
chain, EHPS MS-SQL
Production
Server 2008
Gurgaon, Payroll Pay Master 5.3 Packaged Web-based, SAP, Payroll Yes
India Windows, Accent processed
Apache, at ADP
Oracle 11g
Hyderabad, Appraisal Accent 2 In-house Lotus Notes, Paymaster No
India Windows
Hyderabad, Management Budget King 1 In-house Web-based, None No

India MIS Windows,
Budgeting Apache,
Oracle 11 g
Having a summarized document helps the auditor in determining the areas considered in scope of audit as can be
seen from the last column. In this illustration, it can be seen that two applications have been considered as in scope
for audit based on the purpose and financial relevance to the audit.
Having obtained an understanding of the IT systems and the automated environment of a company, the auditor
should now understand the risks that arise from the use of IT systems.
(CNO—AAE.080) RISKS BECAUSE OF IT SYSTEMS (QNO-AAE.20)

IT system also poses specific risks to an entity’s Internal Control. They are–
(First Comes IT Personnel)
IT Personnel gaining access, Privileges beyond necessary
 The possibility of IT personnel gaining access privileges beyond those necessary to perform their
assigned duties thereby breaking down segregation of duties. (Approved Purchase & Payment)
(Then comes Data)
Unauthorised Access to Data leading to destruction, unauthorised transaction, non-existent transaction / Potential
loss of Data
 Unauthorised access to data that may result in destruction of data or improper changes to data,
including the recording of unauthorised or non-existent transactions, or inaccurate recording of
transactions. Particular risks may arise where multiple users access a common database.
 Potential loss of data or inability to access data as required. (Ransomware)
(Then happened processing)
Manual Intervention / Inaccurate Processing / Processing Inaccurate Data
 Inappropriate manual intervention.
 Reliance on systems or programs that are inaccurately processing data, processing inaccurate
data, or both. (TDS Calculator / NPA Calculator)
(If required Changes)
Failure to make Changes / Unauthorised changes to systems / Unauthorised changes to Master Files
 Failure to make necessary changes to systems or programs.(Boss shifted to Office 365, Rest of the
office-on-Office 2007)
 Unauthorised changes to systems or programs.
 Unauthorised changes to data in master files.
CA Ravi Taori
(CNO—AAE.100) IMPACT OF IT RELATED RISKS I.E. ON SUBSTANTIVE AUDIT, CONTROLS AND REPORTING
(QNO-AAE.25) (MCQ-AAE.13)
The above risks, if not mitigated, could have an impact on audit in different ways. Let us understand how:
Impact on Controls
 cannot rely on automated controls, system calculation and accounting procedures built into
applications.
 cannot rely on IT dependent manual controls.
Hence system data and reports should be tested substantively for completeness and accuracy.
more substantive audit work is needed.
Impact on Substantive Audit
 cannot rely on the data obtained from system.
 system data and reports should be tested substantively for completeness and accuracy
Hence more audit evidence is needed. We may not be able to rely on the data obtained from
systems where such risks exist. This means, all forms of data, information or reports that we obtain
from systems for the purpose of audit has to be thoroughly tested and corroborated for
completeness and accuracy.
Impact on Reporting
 communication to those charged with governance.
 modified auditors report.
 due to the regulatory requirement of auditors to report on internal financial controls of a company,
the audit report also may have to be modified in some instances.
In all the above scenarios, it is likely that the auditor will be required to obtain more audit evidence and perform
additional audit work. The auditor should also be able to demonstrate how the risks were identified and what audit
evidence was obtained and validated to address these IT risks.
Here, we should remember that as the complexity, automation and dependence of business operations on IT
systems increases, the severity and impact of IT risks too increases accordingly. The auditor should apply
professional judgement in determining and assessing such risks and plan the audit response appropriately.
To mitigate the above (and more) risks and maintain the confidentiality, integrity, availability and security of data,
companies implement IT controls. Let us learn about the various types of IT controls in more detail.
(CNO—AAE.120) TYPES OF CONTROLS IN AN AUTOMATED ENVIRONMENT (MCQ-Incs.01.1, Incs.01.2,

Incs.25.2, Incs.30.5)
A. General IT Controls
B. Application Controls
C. IT-Dependent Controls
A. GENERAL IT CONTROLS (AS PER SA 315) (QNO-AAE.29) (MCQ-AAE.2, AAE.3, AAE.8, AAE.11, Incs.01.3,
Incs.25.3, Incs.30.1)
 Definition General IT controls includes infrastructure, policies and procedures that support,
affects IT system of organization and relate to many applications and support the
effective functioning of application controls. They apply to mainframe, and end-user
environments.
 Objective General IT-controls that maintain the
 Integrity of information (Accuracy),
 Safety &Security of Data
 Mitigates Risk These are IT controls generally implemented to mitigate the IT specific risks and
applied commonly across multiple IT systems, applications and business processes.
 Pervasive / Hence, General IT controls are known as “pervasive” controls or “indirect” controls.
Indirect Controls
 Types of Commonly include controls over the following:
General IT Data center and network operations Controls
Controls Program change Controls
Access security Controls
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Application system acquisition, development, and maintenance (Business
Applications) Controls.
Let us now learn about each of the General IT controls in more detail.
App 1
Data
App 2
App 3 System
Device Software
App 4 Network
User
Applications Data Center
1
3
Access Data Center & Network
Controls Operations Controls
2
Application 4
System ADM Program Change Control
Control
(CNO—AAE.140) TYPES OF GENERAL IT CONTROLS

1. ACCESS SECURITY (MCQ-Incs.30.2)
 Objective To ensure that access to programs and data is authenticated and authorized to meet
(MCQ- financial reporting objectives.
AAE.14)
 Activities Auditor Met Security Team
 Security Organization & Management (Adequate People, Knowledge, Skills of
Team)
 Security Policies & Procedures (Well defined roles & responsibility)
 System Administration & Privileged Accounts – Sysadmins, DBAs, Super users
(Track of these accounts & powers)
Auditor Entered IT Department
 Physical Security – access controls, environment controls (Id controlled doors,
guard, entry register, temperature controls, water control)
 Network Security – internal network, perimeter network (boundary between
private & public network)
Auditor accesses Computer
 Operating System Security (Boot Password / Windows Password)
 Data Security (Id wise data access)
 Application Security (Id wise application access)
2. APPLICATION SYSTEM ACQUISITION, DEVELOPMENT, AND MAINTENANCE

 Objective To ensure that systems are developed, configured and implemented to meet financial reporting
objectives.
 Activities Company Level Meeting
Overall Mgmt. of Development Activities (GST Proposed / Development Head called for
cross section meeting of different departments / Briefed Everyone / Called for fortnightly
meetings)
Committee Formation
Project Initiation (Formed committee consisting of CA / Lawyer / IITian)
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Progress
Analysis & Design (After analysis of act & rules changes in design were proposed)
Coding
Construction (Coding started)
Testing
Testing & Quality Assurance (beta version was checked through dummy entries by
employees of various departments)
Data Migration
Data Conversion (All entries were completed by 30th June & Data conversion started
12pm on 30th June)
New software lives
Go-Live Decision (After testing by all department heads between 12pm to 3pm on 1st
July)
Documentation
Documentation & Training (On week training of employees & documentation of whole
process)
3. DATA CENTER AND NETWORK OPERATIONS (QNO-AAE.29)

 Objective To ensure that information systems are processed to meet financial reporting objectives.
 Activities Overall Management of Computer Operations Activities (Number of computers, servers,
its allocation, identification, safety and Security)
Batch jobs – preparing, scheduling and executing (Daily transaction processing)
Help Desk Functions – recording, monitoring & tracking (Error Solving)
Performance Monitoring – operating system, database and networks (Quantum
processing / Speed of Processing / Response Time etc.)
Backups – monitoring, storage & retention
Recovery from Failures – BCP, DRP
Service Level Agreements – monitoring & compliance (System Audit)
Documentation – operations manuals, service reports
4. PROGRAM CHANGE (QNO-AAE.28) (MCQ-AAE.15)

 Objective To ensure that modified systems continue to meet financial reporting objectives.
 Activities Change Management Process – definition, roles & responsibilities
(Similar to Change Requests – record, manage, track
Application Making Changes – analyze, design, develop
Test Changes – test plan, test cases, UAT Apply Changes in Production Emergency & Minor
System
Changes
ADM) Documentation – user/technical manuals
User Training
B. APPLICATION CONTROLS (MCQ-AAE.5)

Application controls include both automated or manual controls that operate at a business process level. Automated
Application controls are embedded into IT applications viz., ERPs and help in ensuring the completeness, accuracy
and integrity of data in those systems.
Examples of automated applications include edit checks and validation of input data, sequence number checks, user
limit checks, reasonableness checks, mandatory data fields.
C. IT DEPENDENT CONTROLS
IT dependent controls are basically manual controls that make use of some form of data or information or report
produced from IT systems and applications. In this case, even though the control is performed manually, the design
and effectiveness of such controls depends on the reliability of source data.
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Due to the inherent dependency on IT, the effectiveness and reliability of Automated application controls and IT
dependent controls require the General IT Controls to be effective.
(CNO—AAE.160) GENERAL IT CONTROLS VS. APPLICATION CONTROLS

These two categories of control over IT systems are interrelated.
The relationship between the application controls and the General IT Controls is such that General IT
Controls are needed to support the functioning of application controls, and both are needed to ensure
complete and accurate information processing through IT systems.
(CNO—AAE.180) TESTING METHODS (QNO-AAE.35)

 4 Types of Having learnt about the various IT risks and
Audit Tests controls, let us understand the different ways
(MCQ- testing is performed in an automated
AAE.16) environment.
There are basically four types of audit tests
that should be used. They are inquiry,
observation, inspection and reperformance.
 Efficiency Inquiry Most Efficient

Vs As shown in the illustration, inquiry is the most efficient audit test, but it is also gives the
Effectivene least audit evidence. Hence, inquiry should always be used in combination with any one of
ss the other audit testing methods. Inquiry alone is not sufficient.
(MCQ-
Reperformance most Effective
AAE.10)
Reperformance is most effective as an audit test and gives the best audit evidence.
However, testing by reperformance could be very time consuming and least efficient most
of the time.
Combination of inquiry & inspection is most efficient and effective
Generally, applying inquiry in combination with inspection gives the most effective and
efficient audit evidence. However, which audit test to use, when and in what combination
is a matter of professional judgement and will vary
Factors affecting selection
depending on several factors including:-
 #first 4 are components of ICS#
o control environment,
o risk assessment,
o nature of control activity
o monitoring of controls
 #Remaining Points are Logical#
o Complexity of business,
o History of errors/ misstatements,
o Desired level of evidence required,
o Assertions being addressed, etc.
The auditor should document the nature of test (or combination of tests) applied along with the
judgements in the audit file as required by SA 230.
 Further When testing in an automated environment, some of the more common methods are as follows:
elaboration Inquiry Combinations
of methods  Obtain an understanding of how an automated transaction is processed by doing
/ application a walkthrough of one end-to-end transaction using a combination of inquiry,
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of methods observation and inspection.
Observation
 Observe how a user processes transaction under different scenarios.
 Carry out a test check (negative testing) and observe the error message displayed
by the application.
Inspection
 Inspect technical manual / user manual of systems and applications.
 Inspect the configuration defined in an application.
 Inspect the system logs to determine any changes made since last audit testing.
Reperformance
Conduct reperformance using raw source data and independently applying formulae,
business rules or validations on the source data using CAATs.
 Importance To rely on the system and application-based information including data, reports, automated
of General controls, configurations, calculations and IT dependent it is essential to first determine the
IT Controls existence and effectiveness of General IT Controls
Where the general IT controls are not existing or existing but ineffective, the auditor should assess
the impact of IT risks and complexity of the automated environment in which the business
operations take place and plan alternative audit procedures in order to rely on the system-based
information.
(CNO—AAE.200) INTERNAL FINANCIAL CONTROLS AS PER REGULATORY REQUIREMENTS

Covered in detail in Chapter 4
(CNO—AAE.220) AUDIT APPROACH FOR IFCR

 Chart &
Text
(CNO—AAE.230) REPORTING AUDIT FINDINGS – AN ILLUSTRATION

Password resets should be supported with proper request.
 Observation As per Information Security Policy User Access changes should be initiated and approved.
However, we observed that there is no formal process being followed for password reset
in SAP.
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Password reset requests are presently communicated over phone and there is no
supporting documentation being maintained for password reset requests.
[Ref Information Security policy sub-section no.........]
 Exposure Passwords of User ID with critical privileges may be reset and misused.
Non-compliance with Information Security Policy.
 Recommendations It is recommended that all password resets should be requested through a formal
process.
Adequate supporting documentation should be maintained for user changes in SAP,
including password resets, and reviewed periodically.
 Management Comments
Response
(CNO—AAE.240) DATA ANALYTICS FOR AUDIT (QNO-AAE.40) (MCQ-AAE.7, Incs.01.5, Incs.25.4, Incs.30.3)
 Importance In today’s digital age when companies rely on more and more on IT systems and networks to
of Data operate business, the amount of data and information that exists in these systems is enormous.
A famous businessman recently said, “Data is the new Oil”.
 Definition of The combination of processes, tools and techniques that are used to tap vast amounts of
Data electronic data to obtain meaningful information is called data analytics.
Analytics
 Both While it is true that companies can benefit immensely from the use of data analytics in terms of
Company increased profitability, better customer service, gaining competitive advantage, more efficient
and Auditors operations, etc., even auditors can make use of similar tools and techniques in the audit process
are and obtain good results. The tools and techniques that auditors use in applying the principles of
Benefitted data analytics are known as Computer Assisted Auditing Techniques or CAATs in short.
(CAAT)
 Uses of Data Data analytics can be used in testing of electronic records and data residing in IT systems using
Analytics spreadsheets and specialized audit tools viz., IDEA and ACL to perform the following:
(MCQ- Shortcut
AAE.14) in data analytics we came to know that one CS is also working as R2Js and making many FDs
Check Completeness of data and population that is used in either test of controls or
substantive audit tests.(C)
Selection of audit Samples – random sampling, systematic sampling.(S)
Re-computation of balances – reconstruction of trial balance from transaction data.(R)
Reperformance of mathematical calculations – depreciation, bank interest
calculation.(R)
Analysis of Journal entries as required by SA 240.(J)
Fraud investigation.(F)
Evaluating impact of control Deficiencies.(D)
There are several steps that should be followed to achieve success with CAATs and any of the
supporting tools.
 Approach to A suggested approach to benefit from the use of CAATs is given in the illustration below:
use Data Understand Business Environment including IT (Business uses ERP)
Analytics / Define the Objectives and Criteria (Use of analytical procedures to verify cash discount)
CAAT Identify Source and Format of Data (ERP, CSV File)
Extract Data (Export Data from ERP)
Verify the Completeness and Accuracy of Extracted Data (Match total from ERP)
Apply Criteria on Data Obtained (Identify transactions eligible for cash discount and
check whether only these transactions are given cash discount)
Validate and Confirm Results (See documentary evidence for few items)
Report and Document Results and Conclusions (Document Results)
(CNO—AAE.250) ASSESS AND REPORT AUDIT FINDINGS (QNO-AAE.55)

 Internal A deficiency in internal control exits if a control is designed, implemented or operated in
Control such a way that it is unable to prevent, or detect and correct, misstatements in the
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Deficiency financial statements on a timely basis; or the control is missing.
Evaluation and assessment of audit findings and control deficiencies involves applying
professional judgement that include considerations for quantitative and qualitative
measures. Each finding should be looked at individually and in the aggregate by
combining with other findings/deficiencies.
 Reporting At the conclusion of each audit, it is possible that there will be certain findings or
Internal exceptions in IT environment and IT controls of the company that need to be assessed
Control and reported to relevant stakeholders including management and those charged with
Deficiency governance viz., Board of directors, Audit committee [Students may refer SA 260
(Revised) – Communication with Those Charged with Governance for more details].
Some points to consider are as follows:
 Are there any weaknesses in IT controls?
 What is the impact of these weaknesses on overall audit?
 Report deficiencies to management – Internal Controls Memo or Management
Letter.
 Communicate in writing any significant deficiencies to Those Charged With
Governance.
UNIQUE QUESTIONS
 QNO- AAE.07 Important IT related terms in brief
 QNO- AAE.50 Framework for Testing Internal financial control over financial reporting(IFCR)
 QNO- AAE.60 Definition of multiple terms
 QNO- AAE.65 Definition of Multiple Terms (Second)
 QNO- AAE.70 Definition of Multiple Terms (Third)
UNIQUE MCQS
 MCQ No. AAE.1, AAE.4, AAE.6, Incs.01.4, Incs.30.4
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CHAPTER
SA 530 -- AUDIT SAMPLING
7
(CNO—SA530.020) SAMPLING & POPULATION

 Chart
 Definition of According to SA 530 “Audit sampling”, ‘audit sampling’ refers to the application of audit
Sampling procedures to less than 100% of items within a population of audit relevance such that all
(QNO- sampling units have a chance of selection in order to provide the auditor with a reasonable
basis on which to draw conclusions about the entire population.
530.01)
(MCQ- The objective of the auditor when using audit sampling is to provide a reasonable basis for the
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Incs.27.1, auditor to draw conclusions about the population from which the sample is selected.
Incs.38.2,
Incs.38.4)
 Definition of Population refers to the entire set of data from which a sample is selected and about which the
Population auditor wishes to draw conclusions.
The auditor should select sample items in such a way that the sample can be expected to be
representative of the population. This requires that all items in the population have an
opportunity of being selected.
 Characteristics  Appropria- (Appropriateness & Example to Explain Appropriateness, Population
of Population teness Changes as per Purpose / Objective of Audit Procedure)
–CAR
It is important for the auditor to ensure that the population is
(MCQ-530.10)
appropriate to the objective of the audit procedure, which will include
consideration of the direction of testing. The auditor will need to
determine that the population from which the sample is drawn is
appropriate for the specific audit objective.
If the auditor’s objective were to test for overstatement of accounts
receivable, the population could be defined as the accounts receivable
listing. On the other hand, when testing for understatement of accounts
payable, the population would not be the accounts payable listing, but
rather subsequent disbursements, unpaid invoices, suppliers’ statements,
unmatched receiving reports, or other populations that would provide
audit evidence of understatement of accounts payable.
(Division of Population into Sampling Units and its Appropriateness & its
Example)
The individual items that make up the population are known as sampling
units. The population can be divided into sampling units in a variety of
ways.
(If late payment fee levy checking then divide bill wise, if external
confirmation then divide balance wise)
If the auditor’s objective were to test the validity of accounts receivables,
the sampling unit could be defined as customer balances or individual
customer invoices. The auditor defines the sampling unit in order to
obtain an efficient and effective sample to achieve the particular audit
objectives.
 Reliable When performing the audit sampling, the auditor performs audit
procedures to ensure that the information upon which the audit
sampling is performed is sufficiently complete and accurate.
 Complete- The population also needs to be complete, which means that if the
ness auditor intends to use the sample to draw conclusions about whether
a control activity operated effectively during the financial reporting
period, the population needs to include all relevant items from
throughout the entire period.
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(CNO—SA530.040) SAMPLING RISK & NON-SAMPLING RISK
 Chart
 SAMPLING RISK The risk that the auditor’s conclusion based on a sample may be different from the
(QNO-530.01) conclusion if the entire population were subjected to the same audit procedure.
(MCQ-Incs.38.1)
 Chart
 NON-SAMPLING The risk that the auditor reaches an erroneous conclusion for any reason not related to
RISK sampling risk.
(MCQ-530.1) Examples of non-sampling risk include use of inappropriate audit procedures, or
misinterpretation of audit evidence and failure to recognise a misstatement or deviation.
 Inappropriate Audit Procedure: - Only cost of fixed assets was checked by tracing
bills & agreements with fixed asset register, no checking for depreciation,
revaluation, AS compliance, physical verification.
 Misinterpretation of Audit Evidence: - Only 2 debtors out sample of 200 picked
from 3000 debtors sent replies to positive confirmation request, stating that there
was small mismatch. Auditor concluded that in all other debtors’ balances match
hence no material misstatement exists in sample and population. It was case of
inadequate evidence; he should have performed alternative audit procedures.
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 Failure to recognize a misstatement or deviation: - Customers were given discount
at the time recovery of credit sales without any authorization. Article failed to point
it out as irregularity as all details were on printed documents.
(CNO—SA530.080) SAMPLING PROCESS (MCQ-Incs.16.5)
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(CNO—SA530.100) SAMPLE DESIGN (QNO-530.03/530.04)
 Considera- (Consider Purpose / Audit Procedures / Nature of Audit Evidence Required / What Constitutes
tions while Deviation or Misstatement Then Define Population and Consider Characteristic of Population for
designing Stratification)
sample
When designing an audit sample, the auditor’s consideration includes;
 the specific purpose to be achieved
 and the combination of audit procedures that is likely to best achieve that purpose.
 Consideration of the nature of the audit evidence sought and
 possible deviation or misstatement conditions or other characteristics relating to that
audit evidence will assist the auditor in defining what constitutes a deviation or
misstatement
 and what population to use for sampling.
 In fulfilling the requirement of SA 500 Audit Evidence, when performing audit sampling,
the auditor performs audit procedures to obtain evidence that the population from
which the audit sample is drawn is complete.
 What will be The auditor’s consideration of the purpose of the audit procedure includes a clear
deviation & understanding of what constitutes a deviation or misstatement so that all, and only, those
misstateme- conditions that are relevant to the purpose of the audit procedure are included in the
nt depends evaluation of deviations or projection of misstatements.
on purpose
(Example)
In a test of details relating to the existence of accounts receivable, such as confirmation,
payments made by the customer before the confirmation date but received shortly after that
date by the client, are not considered a misstatement. Also, a mis posting between customer
accounts does not affect the total accounts receivable balance.
Therefore, it may not be appropriate to consider this a misstatement in evaluating the sample
results of this particular audit procedure, even though it may have an important effect on other
areas of the audit, such as the assessment of the risk of fraud or the adequacy of the allowance
for doubtful accounts.
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 Chart
 Role of In considering the characteristics of a population, for tests of controls, the auditor makes an
Expected assessment of the expected rate of deviation based on the auditor’s understanding of the
Rate of relevant controls or on the examination of a small number of items from the population. This
Deviation & assessment is made in order to design an audit sample and to determine sample size.
Misstatement
If the expected rate of deviation is unacceptably high, the auditor will normally decide not to
in Sample
perform tests of controls.
Designing
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Similarly, for tests of details, the auditor makes an assessment of the expected misstatement in
the population. If the expected misstatement is high, 100% examination or use of a large
sample size may be appropriate when performing tests of details.
(CNO—SA530.120) SAMPLE SIZE (QNO-530.05) (MCQ-530.6, 530.14, Incs.16.1, 16.2)
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 The auditor shall determine a sample size sufficient to reduce sampling risk to an acceptably low level.
 The level of sampling risk that the auditor is willing to accept affects the sample size required. The lower the
risk the auditor is willing to accept, the greater the sample size will need to be.
 The sample size can be determined by the application of a statistically based formula or through the
exercise of professional judgment.
Story Situation Impact on Sample Size
Auditor sent to Construction An increase in the The higher the auditor’s assessment of the risk of
company for checking WAGES auditor’s assessment of material misstatement, the larger the sample size
(High Inherent Risk) & the risk of material needs to be. The auditor’s assessment of the risk of
preliminary assessment shows Misstatement material misstatement is affected by inherent risk and
no guidance or training for control risk.
payment staff (High Control
Risk). So, resulting RMM is
High.
He gets call from colleague Decrease in the use of The less the auditor is relying on other substantive
that he will not be coming so other substantive procedures (tests of details or substantive the same
no analytical procedures and procedures directed at assertion analytical procedures) to reduce to an
now things will be depending the same assertion. acceptable level the detection risk regarding a
on his checking only. particular population, the more assurance the auditor
will require from sampling and, therefore, the larger
the sample size can be.
Last year file shows many An increase in the The greater the amount of misstatement the auditor
misstatements. amount of expects to find in the population, the larger the sample
Out of 3 supervisors 1 is on misstatement the size needs to be in order to make a reasonable
leave & 1 is ill for past 9 auditor expects to find estimate of the actual amount of misstatement in the
months. in the population population.
After performing test of
Factors relevant to the auditor’s consideration of the
controls, he concluded that
expected misstatement amount include the extent, to
controls are weak. It appears
which item values are determined subjectively, the
expected misstatement is
results of risk assessment procedures, the results of
high.
tests of control, the results of audit procedures applied
in prior periods, and the results of other substantive
procedures.
Senior Accountant Says that Stratification of the When there is a wide range (variability) in the
they cannot generate list of population when monetary size of items in the population, it may be
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workers’ areas wise or site- appropriate Decrease useful to stratify the population. When a population
wise or month-wise joining so cannot be appropriately stratified, the sample size
stratification is not possible. from the population generally will be Higher than the
sample size that would have been required to attain a
given level of sampling risk, as compared to aggregate
of samples from strata.
His senior calls and says he An increase in the The greater the level of assurance that the auditor
wants higher level of auditor’s desired level requires that the results of the sample are in fact
assurance & lower tolerable of assurance that indicative of the actual amount of misstatement in the
misstatement tolerable misstatement population, the larger the sample size needs to be.
is not exceeded by
The lower the tolerable misstatement, the larger the
actual misstatement in
sample size needs to be.
the Population
Decrease in tolerable
misstatement
Further he observes number Change in the number Negligible effect for large populations, the actual size
of workers has increased from of sampling units in the of the population has little, if any, effect on sample
1000 to 3000 Population size. Thus, for small populations, audit sampling is
often not as efficient as alternative means of obtaining
sufficient appropriate audit evidence.
However, when using monetary unit sampling, an
increase in the monetary value of the population
increases sample size, unless this is offset by a
proportional increase in Materiality.
In MUS
= )
From as Population Value increases and also Tolerable

Misstatement increases then effect will be nullified.
Similar points are there for sample size in case of test on control
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(CNO—SA530.140) SELECTION OF ITEMS FOR TESTING (QNO-530.07) (MCQ-Incs.27.2)
 Chart
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 Approaches The approaches to sampling are:

to  Statistical sampling; and
Sampling:  Non-statistical sampling.
 Representative
Whatever may be the approach non-statistical or statistical sampling, the sample must
be representative. This means that it must be closely similar to the whole population
although not necessarily exactly the same.
 Not Sample Size but Way of Selection
The decision whether to use a statistical or non-statistical sampling approach is a
matter for the auditor’s judgment; however, sample size is not a valid criterion to
distinguish between statistical and non-statistical approaches, it is the way we select
sample which differentiates 2 approaches. The sample must be large enough to provide
statistically meaningful results.
 Statistical  Definition of Statistical Sampling
Sampling & Statistical sampling – An approach to sampling that has the following characteristics:
Characte-  Random selection of the sample items; and
ristics  The use of probability theory to evaluate sample results, including
(MCQ- measurement of sampling risk.
530.12,
Incs.38.5) A sampling approach that does not have characteristics (i) and (ii) is considered non-
statistical sampling.
 Known Probability / Equal Probability
With statistical sampling, sample items are selected in a way that each sampling unit has
a known probability of being selected. With non-statistical sampling, judgment is used to
select sample items. Because the purpose of sampling is to provide a reasonable basis for
the auditor to draw conclusions about the population from which the sample is selected,
it is important that the auditor selects a representative sample, so that bias is avoided,
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by choosing sample items which have characteristics typical of the population.
 Scientific in Nature
Audit testing done through this approach is more scientific than testing based entirely
on the auditor’s own judgment because it involves use of mathematical laws of
probability in determining the appropriate sample size in varying circumstances.
 Suitable for Large Population Having Similar Items
Statistical sampling has reasonably wide application where a population to be tested
consists of a large number of similar items and more in the case of transactions involving
compliance testing, trade receivables’ confirmation, payroll checking, vouching of
invoices and petty cash vouchers
 Non-  Depends on Personal Experience & Knowledge of Auditor
Statistical Under this approach, the sample size and its composition are determined on the basis of
Sampling the personal experience and knowledge of the auditor.
Traditionally, the auditor on the basis of his personal experience will determine the size
of the sample and express it in terms that number of pages or personal accounts in the
purchases or sales ledger to be checked.
 Simple to Apply
This approach has been in common application for many years because of its simplicity in
operation.
 Used to Check Cut Off Assertion
It is a common practice to check large number of items towards the close of the year so
that the adequacy of cut-off procedures can also be determined.
 Avoid Establishing Pattern of Selection & Maintain Element of Surprise
For example, March, June and September may be selected in year one and different
months would be selected in the next year. An attempt would be made to avoid
establishing a pattern of selection year after year to maintain an element of surprise as
to what the auditor is going to check.
 Not Scientific nor Objective, Risk of Personal Bias
The non-statistical sampling is criticised on the grounds that it is neither objective nor
scientific. The expected degree of objective cannot be assured in non-statistical sampling
because the risk of personal bias in selection of sample items cannot be eliminated.
In non-statistical sampling the auditor’s opinion determines the sample size but it cannot
be measured how far the sample size would fulfil the audit objective. In statistical
sampling, the sample results are measurable as to the adequacy and reliability of the
audit objectives.
 Difficulty in Projection
The closeness of the qualities projected by the sample results with that of the whole
population cannot be measured because the sample has not been selected in
accordance with the mathematically based statistical techniques. However, it may be
stated that the auditor with his experience and knowledge of the client’s business can
evaluate accurately enough the sample findings to make audit decision and the
mathematical proof of accuracy in some cases may be a luxury which the auditor cannot
afford.
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(CNO—SA530.160) ADVANTAGES OF STATISTICAL SAMPLING (QNO-530.09) (MCQ-530.4, 530.7)
The advantages of statistical sampling may be summarized as follows –

 It provides a means for deriving a “calculated risk” and corresponding precision (sampling error) i.e. the
probable difference in result due to the use of a sample in lieu of examining all the records in the group
(universe), using the same audit procedures.
 The method provides a means of estimating the minimum sample size associated with a specified risk and
precision.
 The amount of testing (sample size) does not increase in proportion to the increase in the size of the area
(universe) tested.
 The sample selection is more objective and thereby more defensible.
 It may provide a better description of a large mass of data than a complete examination of all the data,
since non-sampling errors such as processing and clerical mistakes are not as large.
(CNO—SA530.180) SAMPLE SELECTION METHODS SAMPLING (QNO-530.11)
Sample should be selected in such a manner that it is representative of the population from which the sample is
being selected. It will necessitate that each item in the population has an equal chance of being included in the
sample.
Some of the important methods of selecting the sample are discussed below
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 Chart
 Random Random selection ensures that all items in the population or within each stratum have a known
Sampling: chance of selection. It may involve use of random number tables.
(QNO-530.13) Random sampling includes two very popular methods which are discussed below: –
(MCQ-
(530.2,530.11,  Simple random sampling: Under this method each unit of the whole population
Incs.27.3) E.g. purchase, or sales invoice has an equal chance of being selected. The mechanics of
selection of items may be by choosing numbers from table of random numbers by
computers or picking up numbers randomly from a drum.
It is considered that random number tables are simple and easy to use and also
provide assurance that the bias does not affect the selection.This method is
considered appropriate provided the population to be sampled consists of reasonably
similar units and fall within a reasonable range.
For example, the population can be considered homogeneous, if say, trade receivables
balances fall within the range of Rs 5,000 to Rs 25,000 and not in the range between Rs
25 to Rs 2,50,000.
 Stratified Sampling: This method involves dividing the whole population to be tested
in a few separate groups called strata and taking a sample from each of them. Each
stratum is treated as if it was a separate population and if proportionate of items are
selected from each of these stratums. The number of groups into which the whole
population has to be divided is determined on the basis of auditor judgment.
For example, in the above case, trade receivables balances may be divided into four
groups as follows: -
 Balances in excess of Rs 1,00,000;
 Balances in the range of Rs 75,000 to Rs 1,00,000;
 Balances in the range of Rs 25,000 to Rs 75,000; and
 Balances below Rs 25,000.
From these above groups the auditor may pick up different percentage of items from each of
the group. From the top group i.e. balances in excess of Rs 1,00,000, the auditor may examine
all the items; from the second group 25 per cent of the items; from the third group 10 per cent
of the items; and from the lowest group 2 per cent of the items may be selected.
The reasoning behind the stratified sampling is that for a highly diversified population, weights
should be allocated to reflect these differences. This is achieved by selecting different
proportions from each stratum. It can be seen that the stratified sampling is simply an
extension of simple random sampling.
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 Chart
 Interval It involves selecting items using a constant interval between selections, the first interval having
sampling or a random start. The interval might be based on a certain number of items (for example every
systematic 20th voucher) or a monetary total (for example every Rs 1,000 in the cumulative value of the
sampling: population). When using systematic selection, the auditor should determine that the
population is not structured in such a manner that the sampling interval corresponds with a
particular pattern in the population.
For example, if in a population of branch sales, particular branch sales occur only as every
100th item and the sampling interval selected is 100. The result would be that either the auditor
would have selected all or none of the sales of that particular branch.
To minimise the effect of the possible known buyers through a pattern in the population,
more than one starting point may be taken. The multiple random starting points are taken
because it minimises the risk of interval sampling pattern with that of the population being
sampled.
 Chart
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 Cluster This method involves dividing the population into groups of items known as clusters. A number
sampling: of clusters are randomly selected from all the clusters rather than individual items of the
population. Cluster sampling can be used together with both unrestricted random and
stratified sampling, for example 500 to 540, 2015 to 2055 etc. The first item i.e. 500, 2015 is
randomly selected from random number tables. The items of selected cluster can either be
checked completely or a randomly selected proportion of them can be examined.
The cluster is less effective for a given sample size than unrestricted random and stratified
samples as items are not individually selected. However, the time saved can be utilised to
have a larger sample to make the sample results more reliable.
As per SA 530, the auditor shall determine a sample size sufficient to reduce sampling risk to an
acceptably low level.
 Monetary It is a type of value-weighted selection in which sample size, selection and evaluation results in
Unit a conclusion in monetary amounts.
Sampling
Example (Just for understanding no need to write in exams)
(MCQ-
Total Sales 20,00,000 / Sample Size 5 / Monetary Interval between 2 bills should be 20,00,000 ÷
530.3)
5 = 4,00,000 / Select Starting Point Randomly Between (1 – 4,00,000) is say 620 /
Selection will be 620 / 4,00,620 / 8,00,620 / 12,00,620 / 16,00,620
Bill No Bill Amount Cumulative Amount Selection Base
1 50,000 50,000 620

2 3,00,000 3,50,000
3 1,00,000 4,50,000 4,00,620
4 2,50,000 7,00,000
5 1,00,000 8,00,000
6 75,000 8,75,000 8,00,620
7 25000 9,00,000
8 40,000 9,40,000
9 60,000 10,00,000
10 1,50,000 11,50,000
11 85,000 12,35,000 12,00,620
12 60,000 12,95,000
13 90,000 13,85,000
14 15,000 14,00,000
15 45,000 14,45,000
16 95,000 15,40,000
17 98,000 16,38,000 16,00,620
18 84,000 17,22,000
19 1,29,000 18,51,000
20 1,49,000 20,00,000
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 Chart
 Chart
 Haphazard Haphazard selection, in which the auditor selects the sample without following a structured
selection technique. Although no structured technique is used, the auditor would nonetheless avoid any
conscious bias or predictability (for example, avoiding difficult to locate items, or always
choosing or avoiding the first or last entries on a page) and thus attempt to ensure that all
items in the population have a chance of selection. Haphazard selection is not appropriate
when using statistical sampling.
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 Chart
 Block Block selection involves selection of a block(s) of contiguous items from within the population.
selection Block selection cannot ordinarily be used in audit sampling because most populations are
(MCQ- structured such that items in a sequence can be expected to have similar characteristics to each
Incs.16.4) other, but different characteristics from items elsewhere in the population. Although in some
circumstances it may be an appropriate audit procedure to examine a block of items, it would
rarely be an appropriate sample selection technique when the auditor intends to draw valid
inferences about the entire population based on the sample.
(CNO—SA530.200) PERFORMING AUDIT PROCEDURES
The auditor shall perform audit procedures, appropriate to the purpose, on each item selected. If the audit
procedure is not applicable to the selected item, the auditor shall perform the procedure on a replacement item.
An example of when it is necessary to perform the procedure on a replacement item is when a cancelled cheque is
selected while testing for evidence of payment authorisation. If the auditor is satisfied that the cheque has been
properly cancelled such that it does not constitute a deviation, an appropriately chosen replacement is examined.
If the auditor is unable to apply the designed audit procedures, or suitable alternative procedures, to a selected
item, the auditor shall treat that item as a deviation from the prescribed control, in the case of tests of controls,
or a misstatement, in the case of tests of details.
An example of when the auditor is unable to apply the designed audit procedures to a selected item is when
documentation relating to that item has been lost.
An example of a suitable alternative procedure might be the examination of subsequent cash receipts together with
evidence of their source and the items they are intended to settle when no reply has been received in response to a
positive confirmation request.
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(CNO—SA530.220) NATURE & CAUSE OF DEVIATION AND MISSTATEMENTS
Q “An auditor while analysing the errors in a sample need not consider the qualitative aspects of errors
detected.” Please comment)
Answer
The auditor shall investigate the nature and cause of any deviations or misstatements identified and evaluates their
possible effect on the purpose of the audit procedure and on other areas of the audit.
In the extremely rare circumstances when the auditor considers a misstatement or deviation discovered in a
sample to be an anomaly, the auditor shall obtain a high degree of certainty that such misstatement or deviation
is not representative of the population.
The auditor shall obtain this degree of certainty by performing additional audit procedures to obtain sufficient
appropriate audit evidence that the misstatement or deviation does not affect the remainder of the population.
In analysing the deviations and misstatements identified, the auditor may observe that many have a common
feature, For example, type of transaction (Sales vs Interest Income), location (Big Branch Vs Small Branch),
product line (Old product vs New Product) or period of time (Peak Season Vs Slack Season). In such circumstances,
the auditor may decide to identify all items in the population that possess the common feature and extend audit
procedures to those items. In addition, such deviations or misstatements may be intentional, and may indicate the
possibility of fraud.
(CNO—SA530.240) PROJECTING MISSTATEMENT (QNO-530.15)

 Chart
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 For tests of For tests of controls, no explicit projection of deviations is necessary since the sample deviation
controls rate is also the projected deviation rate for the population as a whole. SA 330 provides guidance
when deviations from controls upon which the auditor intends to rely are detected.
 For tests of For tests of details, the auditor shall project misstatements found in the sample to the population.
details The auditor is required to project misstatements for the population to obtain a broad view of the
scale of misstatement, but this projection may not be sufficient to determine an amount to be
recorded.
When a misstatement has been established as an anomaly, it may be excluded when projecting
misstatements to the population. However, the effect of any such misstatement, if uncorrected,
still needs to be considered in addition to the projection of the non-anomalous misstatements.
(CNO—SA530.260) EVALUATING SAMPLING RESULTS (QNO-530.17)(MCQ-530.8, 530.9, 530.5, Incs.16.3, Incs.38.3)
 Evaluation The auditor shall evaluate-

 The results of the sample; and
 Whether the use of audit sampling has provided a reasonable basis for conclusions about
the population that has been tested.
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For tests of controls, an unexpectedly high sample deviation rate may lead to an increase in the
assessed risk of material misstatement, unless further audit evidence substantiating the initial
assessment is obtained.
For tests of details, an unexpectedly high misstatement amount in a sample may cause the auditor
to believe that a class of transactions or account balance is materially misstated, in the absence of
further audit evidence that no material misstatement exists.
 Special In the case of tests of details, the projected misstatement plus anomalous misstatement, if any, is
Case the auditor’s best estimate of misstatement in the population. When the projected misstatement
plus anomalous misstatement, if any, exceeds tolerable misstatement, the sample does not
provide a reasonable basis for conclusions about the population that has been tested. The closer
the projected misstatement plus anomalous misstatement is to tolerable misstatement, the more
likely that actual misstatement in the population may exceed tolerable misstatement.
Considering the results of other audit procedures helps the auditor to assess the risk that actual
misstatement in the population exceeds tolerable misstatement, and the risk may be reduced if
additional audit evidence is obtained.
 What if no In case the auditor concludes that audit sampling has not provided a reasonable basis for
reasonable conclusions about the population that has been tested, the auditor may request management to
Basis? investigate misstatements that have been identified and the potential for further misstatements
and to make any necessary adjustments; or tailor the nature, timing and extent of those further
audit procedures to best achieve the required assurance. For example, in the case of tests of
controls, the auditor might extend the sample size test an alternative control or modify related
substantive procedures.
(CNO—SA530.280) EXTENT OF CHECKING ON SAMPLING PLAN (QNO-530.21)

The factors that should be considered for deciding upon the extent of checking on a sampling plan are following:
 Size of the organisation under audit. (Big)
 State of the internal control. (Strong)
 Adequacy and reliability of books and records. (Accurate & Reliable)
 Tolerable error range. (High)
 Degree of the desired confidence.(Low)
(Then higher reliance on sampling)
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(CNO—SA530.300) STRATIFICATION AND VALUE-WEIGHTED SELECTION (QNO-530.19)
In considering the characteristics of the population from which the sample will be drawn, the auditor may determine
that stratification or value-weighted selection technique is appropriate. SA 530 provides guidance to the auditor on
the use of stratification and value-weighted sampling techniques.
 Stratificati- Audit efficiency may be improved if the auditor stratifies a population by dividing it into discrete
on sub-populations which have an identifying characteristic. The objective of stratification is to
reduce the variability of items within each stratum and therefore allow sample size to be
reduced without increasing sampling risk.
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 Monetary / When performing tests of details, the population is often stratified by monetary value. This allows
Age wise greater audit effort to be directed to the larger value items, as these items may contain the
Stratificati- greatest potential misstatement in terms of overstatement. Similarly, a population may be
on stratified according to a particular characteristic that indicates a higher risk of misstatement, for
example, when testing the allowance for doubtful accounts in the valuation of accounts
receivable, balances may be stratified by age.
The results of audit procedures applied to a sample of items within a stratum can only be
projected to the items that make up that stratum. To draw a conclusion on the entire population,
the auditor will need to consider the risk of material misstatement in relation to whatever other
strata make up the entire population.
20% of the items in a population may make up 90% of the value of an account balance. The
auditor may decide to examine a sample of these items. The auditor evaluates the results of this
sample and reaches a conclusion on the 90% of value separately from the remaining 10% (on
which a further sample or other means of gathering audit evidence will be used, or which may be
considered immaterial).
If a class of transactions or account balance has been divided into strata, the misstatement is
projected for each stratum separately. Projected misstatements for each stratum are then
combined when considering the possible effect of misstatements on the total class of
transactions or account balance.
 Value- When performing tests of details, it may be efficient to identify the sampling unit as the individual
Weighted monetary units that make up the population. Having selected specific monetary units from within
Selection the population, for example, the accounts receivable balance, the auditor may then examine the
particular items, for example, individual balances, that contain those monetary units. One benefit
of this approach to defining the sampling unit is that audit effort is directed to the larger value
items because they have a greater chance of selection and can result in smaller sample sizes.
This approach may be used in conjunction with the systematic method of sample selection and is
most efficient when selecting items using random selection.
(CNO—SA530.320) EFFECT OF SAMPLING ON AUDIT (SAMPLING VS TRADITIONAL METHOD OF AUDITING)

 Less Efforts In most of the circumstances, the evidence available is not conclusive and the auditor always takes
Good a calculated risk in giving his opinion. Even by undertaking hundred percent checking of the
Satisfaction transactions, the auditor does not derive absolute satisfaction. This state of uneasiness led
pragmatic auditors to adopt the statistical theory of sampling to derive the necessary satisfaction
about the state of affairs by checking only a part of the total population of entries. Auditors
realised that they can derive good satisfaction by undertaking a much lesser checking by adoption
of this technique in the auditing process. It is a mathematical truth that the sample, if picked
purely on a random basis would reveal the features and characteristics of the population.
 Role of By adopting the sampling technique, the auditor only checks a part of the whole mass of
Internal transactions. The satisfaction he used to derive earlier, by checking all the transactions, can be
Controls derived by a sample checking provided he can put reliance on the internal controls and checks
within the client’s organisation because they provide the reliability of the records. What should be
the extent of desirable checking in any particular matter is for auditor to judge on basis of his
opinion about the state of control in a particular area. If control is satisfactory in its design and
implementation, a much smaller sample can give the auditor the necessary reliability of the result
he obtains. On the other hand, if in certain areas controls are slack or not properly implemented,
the auditor may have to take a much larger sample for getting satisfactory result.
 Cannot be Under some audit circumstances, statistical sampling methods may not be appropriate. The
used in auditor should not attempt to use statistical sampling when another approach is either necessary
some or will provide satisfactory information in less time or with less effort, for instance when exact
Circumsta- accuracy is required or in case of legal requirements etc.
nces
 Cannot Another truth about the sampling technique should be noted. It can never bring complete
give reliability; it cannot give precisely accurate results. It is a process of estimation. It may have some
Complete error. What error is tolerable for a particular matter under examination is a matter of the
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Reliability individual’s judgment in that particular case.
 Example Mr. X may consider that in his estimation of stores valuation, an error of 2% may not be material;
he also decides that he needs at least 98% reliability of the result. He is to pick up the requisite
number of items of the stores for reliability of the result. The requisite number he can get from
the random number table. The question of reliability of the result is directly linked with the
reliability of the internal control and of the books and records; when these are satisfactory, lesser
degree of reliability of the sampling estimation may suffice – if these are not satisfactory, the
auditor may have to decide upon a higher degree of reliability which can only be obtained from a
larger sample.
Very often we come across this term when an audit is conducted on the basis of a part checking.
This, it is said, owes its origin to the statistical theory of sampling.
Q&A videos.)
UNIQUE QUESTIONS
 QNO-530.10 Why auditors use sampling ?
 QNO-530.16 Multiple Definitions
 QNO-530.23 Sampling- Traditional Approach Extensive Checking – All Entities
 QNO-530.24 Precautions of Test Check
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CHAPTER SA 520 – ANALYTICAL PROCEDURES

8
(CNO—SA520.020) ANALYTICAL PROCEDURES (QNO-520.01)(MCQ-520.5, 520.6, 520.9, 520.10, 520.11)

 Chart
 Definition The term “analytical procedures” means evaluation of financial information through analysis of
plausible relationships among both financial and non-financial data. Analytical procedures also
encompass such investigation as is necessary of identified fluctuations or relationships that are
inconsistent with other relevant information or that differ from expected values by a
significant amount.
Thus, analytical procedures include the consideration of comparisons of the entity’s financial
information with as well as consideration of relationships.
 Examples of Text Examples
Comparison Analytical procedures include the consideration of (Trend Analysis)
of Financial comparisons of the entity’s financial information with,
Data for example:
(MCQ- Comparable information for prior periods. (Comparative Analysis)
520.13
Anticipated results of the entity, such as budgets or
(Predictive Analysis)
forecasts, or expectations of the auditor, such as an
estimation of depreciation.
(Intern Firm Analysis)
Auditor’s own estimate
Similar industry information, such as a comparison of the
entity’s ratio of sales to accounts receivable with industry
averages or with other entities of comparable size in the same
industry.
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4 types of Comparisons as explained above
Thus, we can say that Analytical Procedures may be segregated into these major types as
comparison of client and industry data, comparison of client data with similar prior period data,
comparison of client data with client-determined expected results, comparison of client data
with auditor-determined expected results and comparison of client data with expected results,
using non-financial data.
 Simple Various methods may be used to perform analytical procedures. These methods range from
Comparisons performing simple comparisons to performing complex analyses using advanced statistical
to Complex techniques. (Correlation & Regression) Analytical procedures may be applied to consolidated
Analysis financial statements, components and individual elements of information.
 Financial & Analytical procedures also include consideration of relationships, for example:
Non-Financial Among elements of financial information that would be expected to conform to a
Relationships predictable pattern based on the entity’s experience, such as gross margin percentages.
Between financial information and relevant non-financial information, such as payroll
costs to number of employees.
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(CNO—SA520.040) TECHNIQUES AVAILABLE AS SUBSTANTIVE ANALYTICAL PROCEDURES (QNO-520.03)
 Chart
 Requirements (This is not covered by SA 520 but included / repeated by module)

for SAP
Creativity / Experience / Reliable Data required for SAP
The design of a substantive analytical procedure is limited only by the availability of
reliable data and the experience and creativity of the audit team.
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 Different Substantive analytical procedures generally take one of the following forms:
forms of Shortcut- STAR techniques for SAP
analytical
procedures Data Comparison with Previous Years
(MCQ-520.12,  Trend Analysis – A commonly used technique is the comparison of current data
Incs.15.2) with the prior period balance or with a trend in two or more prior period
balances. We evaluate whether the current balance of an account moves in line
with the trend established with previous balances for that account or based on an
understanding of factors that may cause the account to change.
Ratio Comparison with Other Firms, Like Inter Firm Analysis
 Ratio Analysis – Ratio analysis is useful for analyzing asset and liability accounts
as well as revenue and expense accounts. An individual balance sheet account is
difficult to predict on its own, but its relationship to another account is often
more predictable
(E.g., the trade receivables balance related to sales).
Ratios can also be compared over time or to the ratios of separate entities within
the group, or with the ratios of other companies in the same industry.
 Financial ratios may include:
o Trade receivables or inventory turnover
o Freight expense as a percentage of sales revenue
Correlation, Regression to construct equation and then use it to Predict Current Year
 Structural modelling – A modelling tool constructs a statistical model from
financial and/or non-financial data of prior accounting periods to predict current
account balances
(E.g., linear regression).
Comparison with expected Data, Like Predictive Analysis

 Reasonableness Tests – Unlike trend analysis, this analytical procedure does not
rely on events of prior periods, but upon non-financial data for the audit period
under consideration.
(e.g., occupancy rates to estimate rental income or interest rates to estimate
interest income or expense). These tests are generally more applicable to income
statement accounts and certain accrual or prepayment accounts.
 Examples:
o Interest expense against interest bearing obligations.
o Raw Material Consumption to Production (quantity)
o Wastage & Scrap % against production & raw material consumption
(quantity)
o Work-in-Progress based on issued of materials & Sales (quantity)
o Sales discounts and commissions against sales volume
o Rental revenues based on occupancy of premises.
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(CNO—SA520.060) APPLICATION / PURPOSE OF ANALYTICAL PROCEDURES (MCQ-520.14, Incs.15.1)
Analytical procedures are used for the following purposes:

To assist the auditor in planning the nature, timing and extent of other auditing procedures.
To obtain relevant and reliable audit evidence when using substantive analytical procedures; and
To design and perform analytical procedures near the end of the audit that assist the auditor when forming
an overall conclusion as to whether the financial statements are consistent with the auditor’s
understanding of the entity.
(CNO—SA520.080) ANALYTICAL PROCEDURES IN PLANNING THE AUDIT (520.03.50) (MCQ-520.1)
In the planning stage, analytical procedures assist the auditor in understanding the client’s business and in
identifying areas of potential risk by indicating aspects of and developments in the entity’s business of which he
was previously unaware. This information will assist the auditor in determining the nature, timing and extent of his
other audit procedures. Analytical procedures in planning the audit use both financial data and non-financial
information, such as number of employees, square feet of selling space, volume of goods produced and similar
information.
(CNO—SA520.100) ANALYTICAL PROCEDURES USED AS SUBSTANTIVE TESTS (QNO-520.04)
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When designing and performing substantive analytical procedures, either alone or in combination with tests of
details, as substantive procedures in accordance with SA 330, the auditor shall:
Determine the suitability of particular substantive analytical procedures for given assertions, taking
account of the assessed risks of material misstatement and tests of details, if any, for these assertions;
Evaluate the reliability of data from which the auditor’s expectation of recorded amounts or ratios is
developed, taking account of source, comparability, and nature and relevance of information available, and
controls over preparation;
Develop an expectation of recorded amounts or ratios and evaluate whether the expectation is sufficiently
of scope precise to identify a misstatement that, individually or when aggregated with other misstatements,
may cause the financial statements to be materially misstated; and
Determine the amount of any difference of recorded amounts from expected values that is acceptable
without further investigation.
(CNO—SA520.120) FACTORS AFFECTING SUITABILITY (MCQ-520.4, 520.8)
First Summarized Table is given and then detailed theory: -

V-RAT is suitable for all formats of cricket
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 Table
Factors Impact Example
(Suitability)
Volume of Large: - Suitable Interest Earned / Investments
Transactions Many: - Suitable (Do Analytical Procedures)
Small: - Less Suitable Few: -Not Suitable (Do Test of Details)
Also
Regular Vs New Product
Test of Details Gives S&A Evidence: - If adequate debtor’s confirmations are received not
Less Analytical need to perform extensive analysis such as debtor
Procedures (Vice turnover ratio, debtor to current asset ratio, trend
Versa) analysis etc.
Risk of High: - Analytical + For high risk areas we should use analytical
Material TOD procedures and test of details both.
Misstatement Low: - Analytical
Level of High: - Suitable Using Monthly Graphs for Rent / Total Rent
Assurance Predictions / Occupancy Rate Comparison may
Obtained Low: - Less Suitable provide so much assurance that no need to perform
test of details
Gross Profit Margin Comparison will give less

persuasive assurance about trading account items.
 DETAILED Volume of Transactions

THEORY Substantive analytical procedures are generally more applicable to large volumes of
(QNO- transactions that tend to be predictable over time. The application of planned analytical
520.05) procedures is based on the expectation that relationships among data exist and continue
(MCQ- in the absence of known conditions to the contrary. However, the suitability of a
520.15) particular analytical procedure will depend upon the auditor’s assessment of how
effective it will be in detecting a misstatement that, individually or when aggregated with
other misstatements, may cause the financial statements to be materially misstated.
In some cases, even an unsophisticated predictive model may be effective as an

analytical procedure.
(E.g., If 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, thereby providing audit evidence for
a significant item in the financial statements and reducing the need to perform tests of
details on the payroll. The use of widely recognized trade ratios (such as profit margins
for different types of retail entities) can often be used effectively in substantive analytical
procedures to provide evidence to support the reasonableness of recorded amounts.)
Risk of Material Misstatement

The determination of the suitability of particular substantive analytical procedure is
influenced by the nature of the assertion and the auditor’s assessment of the risk of
material misstatement. For example, if controls over sales order processing are weak,
the auditor may place more reliance on tests of details rather than on substantive
analytical procedures for assertions related to receivables.
Different Levels of Assurance

Different types of analytical procedures provide different levels of assurance. Analytical
procedures involving, for example, the prediction of total rental income on a building
divided into apartments, taking the rental rates, the number of apartments and vacancy
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rates into consideration, can provide persuasive evidence and may eliminate the need
for further verification by means of tests of details, provided the elements are
appropriately verified. In contrast, calculation and comparison of gross margin
percentages as a means of confirming a revenue figure may provide less persuasive
evidence but may provide useful corroboration if used in combination with other audit
procedures.
Test of Details
Particular substantive analytical procedures may also be considered suitable when tests
of details are performed on the same assertion. For example, when obtaining audit
evidence regarding the valuation assertion for accounts receivable balances, the auditor
may apply analytical procedures to an aging of customers’ accounts in addition to
performing tests of details on subsequent cash receipts to determine the collectability of
the receivables.
(CNO—SA520.140) FACTORS AFFECTING RELIABILITY OF DATA / EXTENT OF RELIANCE ON ANALYTICAL

PROCEDURES (QNO-520.07)
SA 520 on ‘Analytical Procedures’ provides that the reliability of data is influenced by its source and nature and is
dependent on the circumstances under which it is obtained. Accordingly, the following are relevant criteria when
determining whether data is reliable for purposes of designing substantive analytical procedures-
Source of the information available. E.g. information may be more reliable when it is obtained
from independent sources outside the entity;
Comparability of the information available. E.g. broad industry data may need to be supplemented to
be comparable to that of an entity that produces and sells
specialized products;
Nature and relevance of the information E.g. whether budgets have been established as results to
available. be expected rather than as goals to be achieved; and
Controls over the preparation of the E.g. controls over the preparation, review and
information that are designed to ensure its maintenance of budgets.
completeness, accuracy and validity.
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(CNO—SA520.160) FACTORS AFFECTING DEVELOPING EXPECTATIONS
 Table If we can develop appropriate expectations, it will be useful to identify Risk of Material
Misstatement of Financial Data.
Factors (Developing
Impact Example
Expectations)
Availability of Yes: - Very Useful Sales Amount / Quantity / Number of
Financial as well as No: - Not Very Useful Orders / Dispatches / Number of Sales
Non-Financial Executive Available: Better Analysis
Accuracy of Expected Accuracy: - Better Sales Commission can be predicted with
Results identification of MMST more accuracy as compared to
Advertising to Sales Ratio.
Less Accuracy: -
Difficulty in detecting Difference in expected sales commission,
misstatements indicates MMST but difference in
expected advertising expense may not
show MMST
Disaggregation Disaggregated: - Better Department wise sales comparison: -
identification of MMST Better
Aggregated: - Difficulty Overall Sales Comparison: - Not that
in detecting useful
misstatements
 Detailed Matters relevant to the auditor’s evaluation of whether the expectation can be developed
Text sufficiently precisely to identify a misstatement that, when aggregated with other
misstatements, may cause the financial statements to be materially misstated, include:
The accuracy with which the expected results of substantive analytical procedures
can be predicted.
For example, the auditor may expect greater consistency in comparing gross profit
margins from one period to another than in comparing discretionary expenses, such
as research or advertising.
The degree to which information can be disaggregated.
For example, substantive analytical procedures may be more effective when applied
to financial information on individual sections of an operation or to financial
statements of components of a diversified entity, than when applied to the financial
statements of the entity as a whole.
The availability of the information, both financial and non-financial.
For example, the auditor may consider whether financial information, such as
budgets or forecasts, and non-financial information, such as the number of units
produced or sold, is available to design substantive analytical procedures. If the
information is available, the auditor may also consider the reliability of the
information.
(CNO—SA520.170) DETERMINE WHETHER DIFFERENCE IS ACCEPTABLE

 Discussion The auditor’s determination of the amount of difference from the expectation that can be
accepted without further investigation is influenced by materiality and the consistency with the
desired level of assurance, taking account of the possibility that a misstatement, individually or
when aggregated with other misstatements, may cause the financial statements to be materially
misstated.
SA 330 requires the auditor to obtain more persuasive audit evidence the higher the auditor’s
assessment of risk. Accordingly, as the assessed risk increases, the amount of difference
considered acceptable without investigation decreases in order to achieve the desired level of
persuasive evidence
CA Ravi Taori
(CNO—SA520.180) INVESTIGATING RESULTS OF ANALYTICAL PROCEDURES (QNO-520.09) (MCQ-Incs.19.1)
If analytical procedures performed in accordance with this SA identify fluctuations or relationships that are
inconsistent with other relevant information or that differ from expected values by a significant amount, the auditor
shall investigate such differences by:
Inquiring of management and obtaining appropriate audit evidence relevant to management’s responses;
and
Audit evidence relevant to management’s responses may be obtained by evaluating those responses taking
into account the auditor’s understanding of the entity and its environment, and with other audit evidence
obtained during the course of the audit.
Performing other audit procedures as necessary in the circumstances.
The need to perform other audit procedures may arise when, for example, management is unable to
provide an explanation, or the explanation, together with the audit evidence obtained relevant to
management’s response, is not considered adequate.
CA Ravi Taori
(CNO—SA520.200) ANALYTICAL PROCEDURES THAT ASSIST WHEN FORMING AN OVERALL CONCLUSION

(MCQ-520.7)
 Near End of
Audit
The auditor shall design and perform analytical procedures near the end of the audit that
assist the auditor when forming an overall conclusion as to whether the financial statements
are consistent with the auditor’s understanding of the entity.
 Corroborate The conclusions drawn from the results of analytical procedures designed and performed in
conclusions accordance with above paragraph intended to corroborate conclusions formed during the
with evidence audit of individual components or elements of the financial statements. This assists the
during audit auditor to draw reasonable conclusions on which to base the auditor’s opinion.
 May modify The results of such analytical procedures may identify a previously unrecognised risk of
RMM & Further material misstatement. In such circumstances, SA 315 requires the auditor to revise the
Audit auditor’s assessment of the risks of material misstatement and modify the further planned
Procedures audit procedures accordingly.
 Similar to The analytical procedures performed for overall conclusion may be similar to those that
procedures used would be used as risk assessment procedures.
during planning
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(CNO—SA520.220) CONSIDERATIONS SPECIFIC TO PUBLIC SECTOR ENTITIES
 Chart
 Relationships in The relationships between individual financial statements items traditionally considered in
Business Entity the audit of business entities may not always be relevant in the audit of governments or
May Not Be other non-business public sector entities;
Relevant for (Example: - In PSE / PSU more expenditure more revenue may not be visible, and
PSE/ PSUs capitalizations may also differ if it’s for public – different accounting principles)
For example, in many public sector entities there may be little direct relationship between
revenue and expenditure.
In addition, because expenditure on the acquisition of assets may not be capitalized, there
may be no relationship between expenditures on, for example, inventories and fixed assets
and the amount of those assets reported in the financial statements.
 Some industry Also, industry data or statistics for comparative purposes may not be available in the public
data may be sector. However, other relationships may be relevant, for example, variations in the cost per
relevant; some kilometer of road construction or the number of vehicles acquired compared with vehicles
data may be retired.
Relevant
CA Ravi Taori
(CNO—SA520.240) FACTORS TO BE CONSIDERED FOR SUBSTANTIVE ANALYTICAL PROCEDURES

(QNO-520.20) (MCQ-520.16)
 Chart
 Predictability PANDANI factors for Substantive ANALYTICAL

Procedures.
Alternative shortcut – ANANDI is P-redictable
The auditor should consider the following factors for
Substantive Audit Procedures:
Substantive analytical procedures are more appropriate
when an account balance or relationships between items of
data are predictable (e.g., between sales and cost of sales or between trade receivables and cash
receipts). A predictable relationship is one that may reasonably be expected to exist and
CA Ravi Taori
continue over time.
 Availability The availability of reliable and relevant data will facilitate effective procedures.
of Data
 Nature of Some classes of transactions tend to be more predictable because they consist of numerous,
Transactions similar transactions, (e.g., through routine processes). Whereas the transactions recorded by
non-routine and estimation SCOTs (Significant Class of Transactions) are often subject to
management judgment and therefore more difficult to predict.
 Disaggregati The degree of disaggregation in available data can directly affect the degree of its usefulness in
on detecting misstatements.
 Account Substantive analytical procedures are more useful for certain types of accounts than for others.
Type Income statement accounts tend to be more predictable because they reflect accumulated
transactions over a period, whereas balance sheet accounts represent the net effect of
transactions at a point in time or are subject to greater management judgment.
We can analyze data to understand the relationship to another account and through this,
disaggregate the transactions flowing to and from the balance sheet account (e.g., sales and cash
receipts flowing through trade receivables), or to compare ratios over time as this enhances our
ability to obtain audit evidence for balance sheet accounts.
 Nature of Substantive analytical procedures may be more effective in providing evidence for some
Assertion assertions (e.g., completeness or valuation) than for others (e.g., rights and obligations).
Predictive analytical procedures using data analytics can be used to address completeness,
valuation/measurement and occurrence.
 Inherent Risk When we are designing audit procedures to address an inherent risk or “what can go wrong”, we
or “What consider the nature of the risk of material misstatement in order to determine if a substantive
Can Go analytical procedure can be used to obtain audit evidence. When inherent risk is higher, we may
Wrong” design tests of details to address the higher inherent risk. When significant risks have been
identified, audit evidence obtained solely from substantive analytical procedures is unlikely to be
sufficient.
(CNO—SA520.260) OBJECTIVES
The objectives of the auditor are:
(a) To obtain relevant and reliable audit evidence when using substantive analytical procedures; and
(b) To design and perform analytical procedures near the end of the audit that assist the auditor when forming
an overall conclusion as to whether the financial statements are consistent with the auditor’s understanding of
the entity.
(CNO—SA520.270) ROUTINE CHECKS CANNOT IDENTIFY ALL MISSTATEMENTS

 Discussion Since routine checks cannot be depended upon to disclose all the mistakes or manipulation that
may exist in accounts, certain other procedures also have to be applied like comparisons, trend
and ratio analysis in addition to reasonable tests. These collectively are known as overall tests.
With the passage of tests, analytical procedures have acquired lot of significance as substantive
audit procedure. SA-520 on Analytical Procedures discusses the application of analytical
procedures during an audit.
Q&A videos.)
CA Ravi Taori
UNIQUE QUESTIONS
 QNO-520.03.20 Financial Statement Based -- Common Used Ratios
 QNO-520.04.50 Matters to be consider to decide combination of analytical procedures and test of details
 QNO-520.11 Analytical Procedure-Inventories
 QNO-520.13 Analytical Procedure- Trade Receivable
 QNO-520.21 Analytical Procedures for Rental Payments
UNIQUE MCQS
 MCQ No. 520.2, 520.3
ICAI SM to BHASKAR Regular Notes Mapping
Chapter & Part

Concept
Chapter & Topics from ICAI Study Material 21 (Latest) from BHASKAR
Number
Notes
CHAPTER – 1: NATURE, OBJECTIVE AND SCOPE OF AUDIT
1. Meaning and Definition of Auditing Ch 1 Part 1 INTRO.040
2. Objectives of Audit Ch 1 Part 4 SA200.020
3. Scope of Audit Ch 1 Part 7 C1OC.040
3.1 Aspects to be covered in Audit Ch 1 Part 7 C1OC.060
4 Types of Audit Ch 1 Part 1 INTRO.080
5. Advantages of Audit of Financial Statements Ch 1 Part 1 INTRO.100
6. Inherent Limitations of Audit Ch 1 Part 4 SA200.040
7. Relationship of Auditing with other disciplines Ch 1 Part 7 C1OC.020
7.1 Auditing and Accounting Ch 1 Part 7 C1OC.020
7.2 Auditing and Law Ch 1 Part 7 C1OC.020
7.3 Auditing and Economics Ch 1 Part 7 C1OC.020
7.4 Auditing and Behavioural Science Ch 1 Part 7 C1OC.020
7.5 Auditing and Statistics & Mathematics Ch 1 Part 7 C1OC.020
7.6 Auditing and Data Processing Ch 1 Part 7 C1OC.020
7.7 Auditing and Financial Management Ch 1 Part 7 C1OC.020
7.8 Auditing and Production Ch 1 Part 7 C1OC.020
8. Standard Setting Process Heading
8.1 Role of International Auditing and Assurance Standards Board Ch 1 Part 3 SAINTRO.240
8.2 Role of Auditing and Assurance Standards Board Ch 1 Part 3 SAINTRO.260
9. Qualities of an Auditor Ch 1 Part 7 C1OC.120
10. Elements of a System of Quality Control Ch 1 Part 6 SA220.060
10.1. Leadership Responsibilities for Quality on Audits Ch 1 Part 6 SA220.080
10.2 Ethical Requirements Relating to an Audit of Financial Statements Ch 1 Part 6 SA220.100
10.2.1 Independence of Auditors Ch 1 Part 7 C1OC.140
10.2.2Threats to Independence Ch 1 Part 7 C1OC.160
10.2.3Safeguards to Independence Ch 1 Part 7 C1OC.180
10.2.4 Professional Skepticism Ch 1 Part 4 SA200.120
10.3 Acceptance and Continuance of Client Relationships and Audit Engagements Ch 1 Part 6 SA220.140
10.4 Human Resources Ch 1 Part 6 SA220.120
10.5 Engagement Performance Ch 1 Part 6 SA220.160
10.6 Monitoring Ch 1 Part 6 SA220.180
11. Preconditions for an Audit Ch 1 Part 5 SA210.020
12. Agreement on Audit Engagement Terms Ch 1 Part 5 SA210.060
13. Recurring Audits Ch 1 Part 5 SA210.080
14. Limitation on Scope Prior to Audit Engagement Acceptance Ch 1 Part 5 SA210.040
15. Acceptance of a Change in Engagement Ch 1 Part 5 SA210.100
CHAPTER – 2: AUDIT STRATEGY, AUDIT PLANNING AND AUDIT PROGRAMME
1. Audit Planning Heading
1.1 Audit Plan to conduct an effective audit Ch 2 Part 3 C2OC.020
1.2 Benefits of Planning in the audit of financial statements Ch 2 Part 3 C2OC.100
2. Audit Strategy Heading
2.1 Overall Audit Strategy – Assistance to auditor Ch 2 Part 1 SA300.060
SA300.020
2.2 Establishment of overall audit strategy Ch 2 Part 1
SA300.040
3. Relationship Between Overall Audit Strategy and Audit Plan Ch 2 Part 1 SA300.100
4. Development of Audit Plan Heading
4.1 Description of Audit Plan Ch 2 Part 1 SA300.080
4.2 Knowledge of the Client’s Business Ch 4 Part 4 SA315-P1.060
5. Audit Planning a Continuous Process Ch 2 Part 3 C2OC.040
5.1 Additional Considerations in Initial Audit Engagements Ch 2 Part 1 SA300.160
6. Overall Audit Strategy and the Audit Plan – The Auditor’s Responsibility Ch 2 Part 3 C2OC.060
7. Changes to Planning Decisions During the Course of the Audit Ch 2 Part 1 SA300.140
8. Direction, Supervision and Review Ch 2 Part 1 SA300.120
9. Documentation Ch 2 Part 1 SA300.180
10. Audit Programme Ch 2 Part 3 C2OC.080
10.1 Evolving One Audit Programme – Not Practicable For All Businesses Ch 2 Part 3 C2OC.080
10.2 The Assistant Engaged - Be Encouraged To Keep An Open Mind Ch 2 Part 3 C2OC.080
10.3 Periodic Review of The Audit Programme Ch 2 Part 3 C2OC.080
10.4 Constructing an Audit Programme Ch 2 Part 3 C2OC.080
10.5 Audit Programme- Designed to provide audit evidence Ch 2 Part 3 C2OC.080
10.6 Advantages and Disadvantages of an Audit Programme Ch 2 Part 3 C2OC.100
11. Quality Control for Audit Work-Delegation and Supervision of Audit Work Ch 2 Part 3 C2OC.120
SA320.010
12. Audit Planning and Materiality Ch 2 Part 2
SA320.020
12.1 Determining Materiality and Performance Materiality when Planning the Audit Ch 2 Part 2 SA320.080
12.1.1 Use of Benchmarks in Determining Materiality for the Financial Statements as a
Ch 2 Part 2 SA320.040
Whole
12.1.2 Examples of appropriate benchmarks depending on entity’s circumstances Ch 2 Part 2 SA320.040
12.1.3Chosen Benchmark – Relevant financial data Ch 2 Part 2 SA320.040
12.1.4 Determining a percentage to be applied to a chosen benchmark involves the
Ch 2 Part 2 SA320.040
exercise of professional judgment.
12.2. Materiality Level or Levels for Particular Classes of Transactions, Account Balances
Ch 2 Part 2 SA320.060
or Disclosures
12.3 Revision in Materiality level as the Audit Progresses Ch 2 Part 2 SA320.120
12.4 Documenting the Materiality Ch 2 Part 2 SA320.140
CHAPTER – 3: AUDIT DOCUMENTATION AND AUDIT EVIDENCE
1. Audit Documentation Ch 3 Part 1 SA230.020
1.1 Definition of Audit Documentation Ch 3 Part 1 SA230.020
1.2 Objective of the Auditor Ch 3 Part 1 SA230.030
1.3 Nature of Audit Documentation Ch 3 Part 1 SA230.040
1.4 Purpose of Audit Documentation Ch 3 Part 1 SA230.040
SA230.080
1.5 Form, Content and Extent of Audit Documentation Ch 3 Part 1
SA230.100
1.6 Examples of Audit Documentation Ch 3 Part 1 SA230.020
1.7 Timely Preparation of Audit Documentation Ch 3 Part 1 SA230.110
1.8 Audit File Ch 3 Part 1 SA230.120
1.9 Assembly of the Final Audit File Ch 3 Part 1 SA230.120
1.10 Documentation of Significant Matters and Related Significant Professional
Ch 3 Part 1 SA230.160
Judgments
1.11 Completion Memorandum or Audit Documentation Summary Ch 3 Part 1 SA230.140
1.12 Ownership of Audit Documentation Ch 3 Part 1 SA230.200
2. Audit Evidence Heading
2.1 Introduction Ch 3 Part 3 SA500.010
2.2 Definition of Audit Evidence Ch 3 Part 3 SA500.020
2.3 Objective of the Auditor Ch 3 Part 3 SA500.050
2.4 Information to be used as Audit Evidence Ch 3 Part 3 SA500.165
2.5 Inconsistency in or Doubts over Reliability of Audit Evidence Ch 3 Part 3 SA500.175
2.6 Sufficiency and Appropriateness of Audit Evidence Ch 3 Part 3 SA500.120
2.7 Sufficiency of Audit Evidence Ch 3 Part 3 SA500.125
2.8 Appropriateness of Audit Evidence Ch 3 Part 3 SA500.135
2.9 Sources of Audit Evidence Ch 3 Part 3 SA500.060
2.10 Audit Procedures to Obtain Audit Evidence Ch 3 Part 3 SA500.070
Ch 3 Part 3 SA500.080
2.11 Audit Procedures Ch 3 Part 2 Whole SA 330
Ch 4 Part 1 SA315-P1.100
2.12 Types of Audit Evidence Ch 3 Part 3 SA500.040
2.13 Relevance and Reliability Ch 3 Part 3 SA500.140
3. Written Representations Ch 3 Part 10 SA580.020
3.1 Written Representations as Audit Evidence Ch 3 Part 10 SA580.020
3.2 The Objectives of the Auditor regarding Written Representation Ch 3 Part 10 SA580.160
3.3 Management from Whom Written Representations Requested Ch 3 Part 10 SA580.060
SA580.040
3.4 Written Representations about Management’s Responsibilities Ch 3 Part 10
SA580.050
3.5 Information Provided and Completeness of Transactions Ch 3 Part 10 SA580.040
3.6 Date of and Period(s) Covered by Written Representations Ch 3 Part 10 SA580.080
3.7 Form of Written Representations Ch 3 Part 10 SA580.120
3.8 Doubt as to the Reliability of Written Representations Ch 3 Part 10 SA580.140
3.9 Requested Written Representations Not Provided Ch 3 Part 10 SA580.100
4. Audit Evidence-Specific Considerations For Selected Items Ch 3 Part 4 SA501.020
4.1 Inventory Ch 3 Part 4 SA501.040
4.2 Attendance at Physical Inventory Counting Ch 3 Part 4 SA501.040
4.3 Matters relevant in Planning Attendance at Physical Inventory Counting Ch 3 Part 4 SA501.120
4.4 Physical Inventory Counting Conducted other than at the date of the Financial
Ch 3 Part 4 SA501.060
Statements
4.5 If the auditor is unable to attend Physical Inventory Counting due to unforeseen
Ch 3 Part 4 SA501.080
circumstances
4.6 Attendance at Physical Inventory Counting is Impracticable Ch 3 Part 4 SA501.080
4.7 Litigation and Claims Ch 3 Part 4 SA501.140
4.8 If the auditor assesses a risk of material misstatement regarding litigation or claims-
Ch 3 Part 4 SA501.140
Communication with the Entity’s External Legal Counsel
4.9 Segment Information Ch 3 Part 4 SA501.200
5. External Confirmation Ch 3 Part 5 SA505.020
5.1 Objective of the auditor Ch 3 Part 5 SA505.050
5.2 Definition of External Confirmation Ch 3 Part 5 SA505.050
5.3 External Confirmation Procedures Ch 3 Part 5 SA505.040
5.4 Determining the Information to be Confirmed or Requested Ch 3 Part 5 SA505.040
5.5 Selecting the Appropriate Confirming Party Ch 3 Part 5 SA505.040
5.6 Designing Confirmation Requests Ch 3 Part 5 SA505.040
5.7 Follow-Up on Confirmation Requests Ch 3 Part 5 SA505.040
5.8 Management’s Refusal to Allow the Auditor to Send a Confirmation Request Ch 3 Part 5 SA505.120
5.9 Results of the External Confirmation Procedures Ch 3 Part 5 SA505.100
5.10 Negative Confirmations Ch 3 Part 5 SA505.080
5.11 Evaluating the Evidence Obtained Ch 3 Part 5 SA505.130
6. Initial Audit Engagement Ch 3 Part 6 SA510.020
6.1 Objective of Auditor with respect to Opening Balances - in conducting an initial audit
Ch 3 Part 6 SA510.020
engagement
6.2 Audit Procedures regarding Opening Balances Ch 3 Part 6 SA510.060
6.3 Consistency of Accounting Policies relating to Opening Balances Ch 3 Part 6 SA510.060
6.4 Relevant Information in the Predecessor Auditor’s Report Ch 3 Part 6 SA510.060
6.5 Audit Conclusions and Reporting in relation to Opening Balances Ch 3 Part 6 SA510.080
6.6 Consistency of Accounting Policies Ch 3 Part 6 SA510.080
6.7 Modification to the Opinion in the Predecessor Auditor’s Report Ch 3 Part 6 SA510.080
7. Meaning of Related Party Ch 3 Part 7 SA550.020
7.1 Nature of Related Party Relationships and Transactions Ch 3 Part 7 SA550.040
7.2 Responsibilities of the Auditor Ch 3 Part 7 SA550.060
7.3 The Identity of the Entity’s Related Parties Ch 3 Part 7 SA550.140
8. Concept of True and Fair Ch 11 Part 1 SA700.180
9. Auditor and the Subsequent Events Ch 3 Part 8 SA560.020
9.1 Objectives Ch 3 Part 8 SA560.020
9.2 Audit Procedure Regarding Events Occurring between the Date of the Financial
Ch 3 Part 8 SA560.060
Statements and the Date of the Auditor’s Report
9.3 Written Representations with respect to subsequent events Ch 3 Part 8 SA560.060

SA560.080
9.4 Auditor’s Obligations Regarding Subsequent Events Ch 3 Part 8
SA560.100
10. Auditor and the Going Concern Assumption Ch 3 Part 9 SA570.010
10.1 Objectives of the auditor regarding going concern Ch 3 Part 9 SA570.020
10.2 Responsibilities of the Auditor Ch 3 Part 9 SA570.030
10.3 Risk Assessment Procedures and Related Activities Ch 3 Part 9 SA570.040
10.4 Remaining Alert throughout the Audit for Audit Evidence about Events or
Ch 3 Part 9 SA570.040
Conditions
10.5 Events or Conditions That May Cast Significant Doubt on the Entity’s Ability to
Ch 3 Part 9 SA570.060
Continue as a Going Concern
SA570.080
10.6 Additional Audit Procedures When Events or Conditions Are Identified Ch 3 Part 9
SA570.090
CHAPTER – 4: RISK ASSESSMENT AND INTERNAL CONTROL
1. Audit Risk Ch 4 Part 1 SA315-P1.020
1.1 Assessment of Risks - Matter of Professional Judgement Ch 4 Part 1 SA315-P1.020
1.2 What is not included in Audit Risk? Ch 4 Part 1 SA315-P1.020
1.3 Risks of Material Misstatement at Two levels Ch 4 Part 1 SA315-P1.020
SA315-P1.020
1.4 Components of Risk of Material Misstatement Ch 4 Part 1 SA315-P1.022
SA315-P1.024
1.5 Combined Assessment of the Risk of Material Misstatement Ch 4 Part 1 SA315-P1.020
1.6 Detection Risk Ch 4 Part 1 SA315-P1.020
2. Identifying and Assessing the Risks of Material Misstatement Ch 4 Part 1 SA315-P1.030
2.1 Identify and Assess the Risks of Material Misstatement Ch 4 Part 1 SA315-P1.100
SA315-P1.030
2.1.1Risk Assessment Procedures Ch 4 Part 1 SA315-P1.040
SA315-P1.050
2.2 Understanding of the Entity- A Continuous Process Ch 4 Part 1 SA315-P1.080
2.3 The Required Understanding of the Entity and Its Environment Including the Entity’s
Ch 4 Part 1 SA315-P1.060
Internal Control
SA315-P2.020
TO
3. Internal Control Ch 4 Part 2
SA315-P2.198
SA315-P2.360
SA315-P2.200
4. Evaluation of Internal Control by the Auditor Ch 4 Part 2 SA315-P2.210
SA315-P2.220
4.1 The Narrative Record Ch 4 Part 2 SA315-P2.240
4.2 A Check List Ch 4 Part 2 SA315-P2.260
4.3 Internal Control Questionnaire Ch 4 Part 2 SA315-P2.300
4.4 Flow Chart Ch 4 Part 2 SA315-P2.280
SA330.040
5. Testing of Internal Control Ch 4 Part 2
SA330.090
SA315-P2.325
6. Internal Control and “IT” Environment. Ch 4 Part 2 SA315-P2.335
SA315-P2.340
7. MATERIALITY AND AUDIT RISK Ch 4 Part 2 SA320.100
8. Documenting the Risk Ch 4 Part 2 SA315-P1.160
9. Internal Audit Ch 10 Part 3 COACC.060
9.1 Applicability of Provisions of Internal Audit Ch 10 Part 3 COACC.060
9.2 Who can be appointed as Internal Auditor Ch 10 Part 3 COACC.060
9.3 Internal Audit Function Ch 4 Part 3 SA610.020
9.3.1The objectives and scope of internal audit functions Ch 4 Part 3 SA610.020
10. Basics of Standards on Internal Audit issued by ICAI Ch 4 Part 2 SA315-P2.380
11. Basic of Internal Control and Reporting requirements Ch 4 Part 2 SA315-P2.380
12. Difference between Internal Financial Control and Internal Control over Financial
Ch 4 Part 2 SA315-P2.380
Reporting
CHAPTER – 5: FRAUD AND RESPONSIBILITIES OF THE AUDITOR IN THIS REGARD
1. Meaning of Fraud. Ch 5 Part 1 SA240.020
2. Characteristics of Fraud Ch 5 Part 1 SA240.020
2.1 Fraud is Intentional Ch 5 Part 1 SA240.020
2.2 Fraud is a broad legal concept Ch 5 Part 1 SA240.040
2.2.1Fraudulent financial reporting involves intentional misstatements including
Ch 5 Part 1 SA240.020
omissions of amounts or disclosures in financial statements to deceive financial
Ch 5 Part 3 C5OC.020
statement users
2.2.2 Misappropriation of Assets: Ch 5 Part 1 SA240.020
2.2.2.1 Misappropriation of Goods Ch 5 Part 3 C5OC.060
2.2.2.2 Defalcation of Cash Ch 5 Part 3 C5OC.080
C5OC.100
3. Detection of Fraud and Error: Duty of an Auditor Ch 5 Part 3
C5OC.130
4. Fraud Risk Factors and Possibility of Fraud Ch 5 Part 1 SA240.040
4.1 Fraud Risk Factors Ch 5 Part 1 SA240.040
4.2 Circumstances Relating to Possibility of Fraud Ch 5 Part 1 SA240.060
5. Fraud Reporting Ch 10 Part 1 CA.420
6. Auditor unable to continue the engagement Ch 5 Part 1 SA240.120
CHAPTER – 6: AUDIT IN AN AUTOMATED ENVIRONMENT
1. What is an automated environment? Ch 6 Part 1 AAE.020
1.1 Key features of an Automated Environment Ch 6 Part 1 AAE.020
2. Relevance of ‘IT’ in an Audit Ch 6 Part 1 AAE.040
3. Risk & Controls in an Automated Environment Ch 6 Part 1 Heading
AAE.060
3.1 Understanding and Documenting Automated Environment Ch 6 Part 1
AAE.080
3.2 Impact of IT related risks i.e. on Substantive Audit, Controls and Reporting Ch 6 Part 1 AAE.100
3.3 Types of Controls in an Automated Environment Ch 6 Part 1 AAE.120
AAE.120
3.3.1 General IT Controls Ch 6 Part 1
AAE.140
3.3.2Application Controls Ch 6 Part 1 AAE.140
3.3.3IT dependent Controls Ch 6 Part 1 AAE.140
3.3.4General IT Controls vs. Application Controls Ch 6 Part 1 AAE.160
4. Testing methods Ch 6 Part 1 AAE.180
5. Internal Financial Controls as per Regulatory Requirements Ch 4 Part 2 SA315-P2.380
5.1 Audit Approach Ch 6 Part 1 AAE.220
6. Data Analytics for Audit Ch 6 Part 1 AAE.240
7. Assess and report Audit Findings Ch 6 Part 1 AAE.250
7.1 Reporting Audit Findings – An Illustration Ch 6 Part 1 AAE.230
CHAPTER – 7: AUDIT SAMPLING
1. Sampling: An audit Procedure Ch 7 Part 1 NA
SA530.020
2. Meaning of Audit Sampling Ch 7 Part 1
SA530.140
2.1 Population Ch 7 Part 1 SA530.020
2.1.1Characteristics of Population Ch 7 Part 1 SA530.020
3. Approaches to Sampling Ch 7 Part 1 SA530.140
3.1 Statistical Sampling- More scientific Ch 7 Part 1 SA530.140
SA530.140
3.2 Non-statistical Sampling Ch 7 Part 1
SA530.320
SA530.080
3.3 Appropriateness of Sampling Approaches Ch 7 Part 1
SA530.160
4. Sample Design, Size and Selection of Items for testing Ch 7 Part 1 SA530.100
4.1 Sample Design Ch 7 Part 1 SA530.100
4.1.1Stratification and Value-Weighted Selection Ch 7 Part 1 SA530.300
4.2 Sample Size Ch 7 Part 1 SA530.120
4.2.1Examples of Factors Influencing Sample Size for Tests of Controls Ch 7 Part 1 SA530.120
4.2.2Examples of Factors Influencing Sample Size for Tests of Details Ch 7 Part 1 SA530.120
4.3 Selection of Items for Testing Ch 7 Part 1 SA530.140
4.4 Sample Selection Methods Ch 7 Part 1 SA530.180
4.5 Sampling and Non-Sampling Risk Ch 7 Part 1 SA530.040
5. Performing Audit Procedures Ch 7 Part 1 SA530.200
6. Nature and cause of deviations and Misstatements Ch 7 Part 1 SA530.220
7. Projecting Misstatements Ch 7 Part 1 SA530.240
8. Evaluating results of Audit Sampling Ch 7 Part 1 SA530.260
CHAPTER – 8: ANALYTICAL PROCEDURES
1. Meaning of Analytical Procedures Ch 8 Part 1 SA520.020
1.1 SA -520 Analytical Procedures Ch 8 Part 1 SA520.260
2. Purpose and timing of Analytical Procedures Ch 8 Part 1 Heading
2.1 Purpose of Analytical Procedures Ch 8 Part 1 SA520.020
2.2 Timing of Analytical Procedures Ch 8 Part 1 SA520.060
2.3 Analytical Procedures in Planning the Audit Ch 8 Part 1 SA520.080
3. Substantive analytical procedures Ch 8 Part 1 SA520.100
3.1 Factors to be considered for Substantive Audit Procedures Ch 8 Part 1 SA520.240
3.2 Techniques available as Substantive Analytical Procedures Ch 8 Part 1 SA520.040
3.3 Analytical Procedures used as Substantive Tests Ch 8 Part 1 SA520.100
4. Suitability of Particular Analytical Procedures for given Assertions Ch 8 Part 1 SA520.120
5. The Reliability of Data Ch 8 Part 1 SA520.140
6. Evaluation of Whether the expectation is sufficiently precise Ch 8 Part 1 SA520.160
7. Amount of difference of recorded amounts from expected values that is acceptable Ch 8 Part 1 SA520.170
8. Investigating Results of Analytical Procedures Ch 8 Part 1 SA520.180
9. Analytical Procedures that Assist when forming an Overall conclusion Ch 8 Part 1 SA520.200
10. Considerations specific to Public sector entities Ch 8 Part 1 SA520.220

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- Book Code :- KQW

Following are some important points which students should follow.

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01 NATURE, OBJECTIVE AND SCOPE OF AUDIT

Part 1-Introduc on to Audit 1.1-1.5

02 AUDIT STRATEGY, AUDIT PLANNING AND

03 AUDIT DOCUMENTATION AND AUDIT

04 RISK ASSESSMENT AND INTERNAL CONTROL

Part 1-SA 315 RISK 4.1-4.27

05 FRAUD AND RESPONSIBILITIES OF THE

06 AUDIT IN AN AUTOMATED ENVIRONMENT

Part 1-AAE 6.1-6.10

07 AUDIT DOCUMENTATION AND AUDIT

Part 1-SA 520 8.1-8.15

CHAPTER NATURE, OBJECTIVE AND SCOPE OF AUDIT

Part 1 -- Introduction to Audit

(CNO--INTRO.020) BACKGROUND OF AUDIT

(CNO--INTRO.080) TYPES OF AUDIT (QNO—INTRO.080)

(CNO--INTRO.100) ADVANTAGES OF AUDIT OF FINANCIAL STATEMENTS (QNO—INTRO.100)

(CNO--SAINTRO.060) TYPES OF STANDARDS IAASB (QNO--SAINTRO.07)

 Engagement Engagement Standards

(a) Standards on Auditing (SAs), to be applied in the audit of historical financial

 SAE Applicability of SAE

Prospective Financial Information

Prospective Financial Information vs Historical Financial Information

(CNO--SAINTRO.68) STANDARDS ON RELATED SERVICES

 SRS These standards apply in engagements to perform agreed-upon procedures regarding

(CNO--SAINTRO.200) COMPLIANCE WITH ENGAGEMENT AND QUALITY CONTROL STANDARDS

(CNO--SAINTRO.260) OBJECTIVES / ROLE / FUNCTIONS OF AASB (MCQ--INCS.02.5, INCS.09.5)

General Clarification – Issued to explain content given in Standards / Statements.

(CNO--SAINTRO.280) LIST OF SAs

(CNO—SA200.020) WHAT IS OVERALL OBJECTIVE OF AUDIT?

The inherent limitations of an audit arise from:

FST Item involve Subjectivity / Degree of Uncertainty /Range of Interpretations: -

Sophisticatedly Designed Frauds: -

(CNO—SA200.080) SUBSEQUENT DISCOVERY OF MATERIAL MISSTATEMENT

Does not mean failure, it can be because of Inherent Limitations

(CNO—SA200.100) WHAT ARE ETHICAL REQUIREMENTS? (QNO-200.19) (MCQ-200.9, 200.7, 200.8)

Over generalising when drawing conclusions from audit observations.

Part 5 -- [SA 210] AGREEING THE TERMS OF AUDIT ENGAGEMENTS

(CNO—SA210.020) WHAT ARE PRECONDITIONS OF AUDIT (QNO-210.02)

Acceptable FRF:- Determine whether the financial reporting framework to be applied

(CNO—SA210.040) LIMITATION ON SCOPE PRIOR TO AUDIT ENGAGEMENT ACCEPTANCE

 Importance of Engagement Letter

(CNO—SA210.080) IS ENGAGEMENT LETTER REQUIRED AT RECURRING AUDITS? (QNO-210.05) (MCQ-Incs.32.3)

A recent change of senior management. (E.g., MD / CEO / CFO are replaced)

(CNO—SA210.100) WHAT IF THERE IS CHANGE IN TERMS? (QNO-210.07/210.09)

a misunderstanding as to the nature of an audit or related service originally requested.

(CNO—SA210.110) REQUEST FOR LOWER LEVEL OF ASSURANCE

Part 6 -- [SA 220] QUALITY CONTROL FOR AN AUDIT OF FINANCIAL STATEMENTS

We will say that quality is maintained at particular audit engagement if: -

The reports issued are appropriate in the circumstances.

(CNO—SA220.045) OBJECTIVE OF SA 220

(CNO—SA220.120) HUMAN RESOURCES

(CNO—SA220.140) ACCEPTANCE AND CONTINUANCE OF CLIENT RELATIONSHIPS AND AUDIT ENGAGEMENTS

(CNO—C1OC.020) RELATIONSHIPS OF AUDITING WITH OTHER DISCIPLINES (MCQ-CIA.1)

(CNO—C1OC.040) SCOPE OF AUDIT

(CNO—C1OC.060) REFERENCE OF SCOPE IN ENGAGEMENT LETTER & AUDIT REPORT

(CNO—C1OC.080) COVERAGE OF ENTITIES

 Aspects to be covered in Audit