CA Final Auditing Smart Notes 2025 PDF
Document Details
Uploaded by Deleted User
2025
CA Ram Harsha
Tags
Summary
This document is a set of smart notes for CA Final Paper 3, Advanced Auditing, Assurance and Professional Ethics, using a new scheme for 2025. It contains a table of contents covering various topics including fundamentals of auditing, audit reporting, professional ethics, audit of banks and NBFCs, and more. It's a comprehensive study guide for students preparing for the exam.
Full Transcript
Learn contextually! CA FINAL | PAPER 3 [NEW SCHEME] ADVANCED AUDITING, ASSURANCE AND PROFESSIONAL ETHICS 1...
Learn contextually! CA FINAL | PAPER 3 [NEW SCHEME] ADVANCED AUDITING, ASSURANCE AND PROFESSIONAL ETHICS 1 Page CA Final l Advanced Auditing, Assurance and Professional Ethics l Smart Notes l CA Ram Harsha Learn contextually! 2 Page CA Final l Advanced Auditing, Assurance and Professional Ethics l Smart Notes l CA Ram Harsha Learn contextually! TABLE OF CONTENTS CROSS REFERENCING SM AND OUR MATERIAL................................................................ 5 1. FUNDAMENTALS OF AUDITING........................................................................................ 9 2. AUDIT REPORTING...............................................................................................................13 PART – I (REPORTING STANDARDS)................................................................ 13 SA 700 – FORMING OF AN OPINION AND REPORTING ON FINANCIAL STATEMENTS................................. 13 SA 701 – COMMUNICATING KEY AUDIT MATTERS IN THE INDEPENDENT AUDITOR’S REPORT............... 21 SA 705 – MODIFICATIONS TO THE OPINION IN THE INDEPENDENT AUDITORS REPORT....................... 23 SA 706 – EMPHASIS OF MATTER PARAGRAPH AND OTHER MATTER PARAGRAPH IN THE INDEPENDENT AUDITORS REPORT................................................................................................................................................................. 29 SA 299 – RESPONSIBILITIES OF JOINT AUDITORS................................................................................................. 31 SA 600 – USING THE WORK OF ANOTHER AUDITOR................................................................................................. 33 SA 570 – GOING CONCERN................................................................................................................................................... 35 SA 720 – AUDITORS RESPONSIBILITY IN RELATION TO OTHER INFORMATION........................................ 39 SA 710 – COMPARATIVE INFORMATION – CORRESPONDING FIGURES AND COMPARATIVE FINANCIAL STATEMENTS........................................................................................................................................................................... 43 SA 610 – USING THE WORK OF AN INTERNAL AUDITOR......................................................................................... 46 SA 620 – USING THE WORK OF AN AUDITOR’s EXPERT............................................................................................ 50 PART – II [LEGAL AND OTHER REGULATORY REQUIREMENTS]................................. 55 21 CLAUSES TO BE REPORTED............................................................................................................................................ 59 ADDITIONAL CONCEPTS............................................................................. 65 3. PROFESSIONAL ETHICS & LIABILITIES OF AUDITOR.............................................81 FIRST SCHEDULE..................................................................................... 103 SECOND SCHEDULE................................................................................... 127 4. AUDIT OF BANKS & NBFC................................................................................................ 155 4A. AUDIT OF BANKS............................................................................... 155 4B. AUDIT OF NBFC’S............................................................................... 174 5. GROUP AUDIT....................................................................................................................... 195 GLOSSARY............................................................................................. 212 CASE STUDY........................................................................................... 214 6. INTERNAL AUDIT............................................................................................................... 216 7. AUDIT OF PSU..................................................................................................................... 227 8. AUDIT PLANNING, STRATEGY AND EXECUTION..................................................... 247 9. RISK ASSESSMENT AND INTERNAL CONTROL......................................................... 258 10A. DUE DILIGENCE.............................................................................................................. 292 3 10B. FRAUD INVESTIGATION.............................................................................................. 301 Page CA Final l Advanced Auditing, Assurance and Professional Ethics l Smart Notes l CA Ram Harsha Learn contextually! 11. STANDARDS ON AUDITING.......................................................................................... 332 SA 240 THE AUDITOR’S RESPONSIBILITIES RELATING TO FRAUD.................................................................. 334 IN AN AUDIT OF FINANCIAL STATEMENTS............................................................................................................. 334 SA 250 CONSIDERATION OF LAWS AND REGULATIONS IN AN AUDIT OF FINANCIAL STATEMENTS351 SA 260 COMMUNICATION WITH THOSE CHARGED WITH GOVERNANCE....................................................... 358 SA 402 AUDIT CONSIDERATIONS RELATING TO AN ENTITY USING A SERVICE ORGANISATION.... 364 SA 500 AUDIT EVIDENCE................................................................................................................................................... 370 SA 501 AUDIT EVIDENCE - SPECIFIC CONSIDERATIONS FOR SELECTED ITEMS........................................ 372 SA 505 EXTERNAL CONFIRMATIONS............................................................................................................................ 377 SA 510 INTITIAL AUDIT ENGAGEMENTS - OPENING BALANCES........................................................................ 381 SA 530 AUDIT SAMPLING.................................................................................................................................................. 384 SA 550 RELATED PARTIES................................................................................................................................................. 386 SA 560 SUBSEQUENT EVENTS......................................................................................................................................... 388 SA 580 WRITTEN REPRESENTATION............................................................................................................................ 392 SA 320 MATERIALITY IN PLANNING AND PERFORMANCE OF AN AUDIT....................................................... 396 SQC 1 QUALITY CONTROL FOR FIRMS THAT PERFORM AUDITS AND REVIEWS OF HISTORICAL FINANCIAL INFORMATION, AND OTHER ASSURANCE AND RELATED SERVICES ENGAGEMENTS................................. 401 SA 220 QUALITY CONTROL FOR AN AUDIT OF FINANCIAL STATEMENTS.................................................... 410 MECHANISMS FOR REVIEW OF QUALITY CONTROL................................................................................................ 414 SA 540 AUDITING ACCOOUNTING ESTIMATES, INCLUDING FAIR VALUE ACCOUNTING ESTIMATES AND RELATED DISCLOSURES...................................................................................................................................................... 416 12. FORENSIC ACCOUNTING................................................................................................ 424 13. DIGITAL AUDITING AND ASSURANCE...................................................................... 434 NEW TECHNOLOGIES................................................................................ 466 14. SPECIALISED AREAS........................................................................................................ 469 SA 800 Special Considerations - Audits of Financial Statements Prepared in Accordance with Special Purpose Frameworks............................................................................................................................................................................... 469 SA 805 Special Considerations - Audits of Single Financial Statements and Specific Elements, Accounts or Items of a Financial Statement........................................................................................................................................................ 474 SA 810 Engagements to Report on Summary Financial Statements............................................................................ 482 15. RELATED SERVICES.......................................................................................................... 491 SRS 4400 Engagements to Perform Agreed upon procedures regarding Financial Information.......................... 492 SRS 4410 Compilation Engagements.................................................................................................................................... 495 16. REVIEW OF FINANCIAL INFORMATION................................................................... 501 SRE 2400 Engagements to Review Historical Financial Statements........................................................................... 502 SRE 2410 Review of Interim Financial Information Performed by The Independent Auditor of The Entity.... 521 17. PROSPECTIVE FINANCIAL INFORMATION AND OTHER ASSURANCE SERVICES.................................................................................................................................... 535 SAE 3400 The Examination of Prospective Financial Information.............................................................................. 535 SAE 3402 Assurance Reports on Controls at a Service Organisation........................................................................ 543 SAE 3420 Assurance Engagements to Report on the Compilation of Pro Forma Financial Information Included in a Prospectus.................................................................................................................................................................................. 551 18. SUSTAINABLE DEVELOPMENT GOALS (SDG) & ENVIRONMENT, SOCIAL AND 4 GOVERNANCE (ESG) ASSURANCE........................................................................................ 558 Page CA Final l Advanced Auditing, Assurance and Professional Ethics l Smart Notes l CA Ram Harsha Learn contextually! CROSS REFERENCING SM AND OUR MATERIAL Chapter Chapter Name Topic Covered Chapter in which the SAME is No. covered in Our Material 1 Quality Control 1. SQC Full standard with Chapter 11 – Standards on Full content Auditing 2. SA 220 Full Content Chapter 11 – Standards on Auditing 3. Basic view of Peer Chapter 11 – Standards on review and Quality Auditing review and NFRA Review 2 GAAP & Auditors Responsibility 1. SA 240 [Copied from Chapter 11 – Standards on CA Inter] Auditing 2. SA 250 Full Content Chapter 11 – Standards on Auditing 3. SA 260 Full Content Chapter 2 – Audit Reporting 4. SA 299 Full Content Chapter 2 – Audit Reporting 5. SA 402 Full Content Chapter 11 – Standards on [Newly added] Auditing 3 Audit Planning, Strategy and Execution 1. SA 300 Content Chapter 8 – Audit Planning, Strategy and Execution 2. SA 600 Full Content Chapter 2 – Audit Reporting 3. SA 610 Full Content Chapter 2 – Audit Reporting 4. SA 620 Full Content Chapter 2 – Audit Reporting 5. SA 540 Full Content Chapter 11 – Standards on Auditing 6. SA 520 [Briefly Chapter 11 – Standards on Covered] [Exists in Auditing depth in CA Inter] 4 Materiality, Risk Assessment and Internal Control 1. SA 315 Full Content Chapter 9 – Risk Assessment 5 Page and Internal Control CA Final l Advanced Auditing, Assurance and Professional Ethics l Smart Notes l CA Ram Harsha Learn contextually! 2. SA 320 [Refer SA Chapter] 3. SA 330 [Refer CA Inter Material] 5 Audit Evidence 1. SA 500 [Briefly Chapter 11 – Standards on Covered] [Exists in Auditing depth in CA Inter] 2. SA 501 [Briefly Chapter 11 – Standards on Covered] [Exists in Auditing depth in CA Inter] 3. SA 505 [Briefly Chapter 11 – Standards on Covered] [Exists in Auditing depth in CA Inter] 4. SA 510 [Briefly Chapter 11 – Standards on Covered] [Exists in Auditing depth in CA Inter] 5. SA 530 [Briefly Chapter 11 – Standards on Covered] [Exists in Auditing depth in CA Inter] 6. SA 550 [Briefly Chapter 11 – Standards on Covered] [Exists in Auditing depth in CA Inter] 6 Completion and Review 1. SA 560 [Briefly Chapter 11 – Standards on Covered] Auditing 2. SA 570 [Briefly Chapter 2 – Audit Reporting Covered] 3. SA 580 [Briefly Chapter 11 – Standards on Covered] Auditing 7 Reporting 1. SA 700 [Full Content] Chapter 2 – Audit Reporting 2. SA 701 [Full Content] Chapter 2 – Audit Reporting 3. SA 705 [Full Content] Chapter 2 – Audit Reporting 4. Brief LODR Regulation Chapter 2 – Audit Reporting on Resignation of Auditor 5. SA 706 [Full Content] Chapter 2 – Audit Reporting 6. SA 710 [Full Content] Chapter 2 – Audit Reporting 7. SA 720 [Full Content] Chapter 2 – Audit Reporting 8. CARO 2020 Chapter 2 – Audit Reporting 9. Other Sec 143 Chapter 2 – Audit Reporting Reporting 10. Fraud Reporting Sec Chapter 2 – Audit Reporting 143 (12) 11. Miscellaneous Topics Chapter 2 – Audit Reporting 8 Specialised Area Chapter 14 – Specialised Areas 6 Page CA Final l Advanced Auditing, Assurance and Professional Ethics l Smart Notes l CA Ram Harsha Learn contextually! 9 Audit-Related Chapter 15 – Audit-Related Services Services 10 Review of Financial Chapter 16 – Review of Information Financial Information 11 Prospective Financial Chapter 17 – Prospective Information and Financial Information and Other Assurance Other Assurance 12 Digital Audit and Chapter 13 – Digital Audit and Assurance Assurance 13 Group Audit Chapter 5 – Group Audits 14 Audit of Banks and Chapter 4 – Audit of Banks and NBFC’s NBFC’s 15 Overview of PSU Chapter 7 – PSU Audit Audits 16 Internal Audit Chapter 6 – Internal Audit 17A Due Diligence Chapter 10A – Due Diligence 17B Investigation Chapter 10B – Investigation 17C Forensic Accounting Chapter 12 – Forensic [Minor Changes] Accounting 18 SDG & ESC Chapter 18 – SDG & ESC Assurance Assurance 19 Professional Ethics Chapter 3 – Professional Ethics and Liabilities of and Liabilities of Auditor Auditor 7 Page CA Final l Advanced Auditing, Assurance and Professional Ethics l Smart Notes l CA Ram Harsha Learn contextually! 8 Page CA Final l Advanced Auditing, Assurance and Professional Ethics l Smart Notes l CA Ram Harsha Learn contextually! 1. FUNDAMENTALS OF AUDITING 1. BOOKS OF ACCOUNTS: As per companies act, 2013 “books of account” as defined in Section 2(13) includes records maintained in respect of: all sums of money received and expended by a company and matters in relation to which the receipts and expenditure take place. all sales and purchases of goods and services by the company. the assets and liabilities of the company; and The items of cost as may be prescribed under section 148. 2. FINANCIAL STATEMENTS: a) Definition as per SA 200: A structured representation of historical financial information, including related notes, intended to communicate an entity’s economic resources or obligations at a point in time or the changes therein for a period of time in accordance with applicable financial reporting framework. The related notes ordinarily comprise a summary of significant accounting policies and other explanatory information. b) Definition as per Companies Act: Financial statements includes the following: Profit and Loss account or Income and Expenditure account Balance Sheet Cash flow Statement Statement of change in equity, if applicable Any explanatory notes annexed to or forming part of financial statements. c) USERS OF FINANCIAL STATEMENTS: Users Purpose Management For day-to-day decision-making and performance evaluation. Proprietor / To analyse performance, profitability and financial position. shareholders Note: Prospective investors are interested in the track record of the company. Lenders - banks & To determine the financial position and strength of the Company, fin. Institutions Debt Service Coverage, etc. Suppliers To determine the credit worthiness of the company. Customers To know the general business viability before entering into long- term contracts and arrangements. Government To ensure prompt collection of Direct and Indirect Tax revenues. To evaluate performance and contribution to social objectives. Research scholars For study, research and analysis purpose. 9 Employees Job security, bonus. Page CA Final l Advanced Auditing, Assurance and Professional Ethics l Smart Notes l CA Ram Harsha Learn contextually! 3. APPLICABLE FINANCIAL REPORTING FRAMEWORK: In view of the nature of the entity and the objective of the financial statements, the framework adopted by management for preparation and presentation of the financial statements is known as AFRFW. In other words, a financial reporting framework is nothing but, set of rules and regulations that are to be followed for preparation and presentation of financial statements. E.g.: For a company the AFRFW is SCH-III and Accounting standards. 4. GENERAL PURPOSE FINANCIAL STATEMENTS (GPFS): If the F/S are prepared in accordance with General Purpose Framework (GPFW) then they are called as GPFS. 5. SPECIAL PURPOSE FINANCIAL STATEMENTS (SPFS): Financial statements prepared in accordance with a special purpose framework. In other words, if the financial statements are prepared as per the requirement of a specific user, then they are known as SPFS. 6. GENERAL PURPOSE FRAMEWORK: A financial reporting framework designed to meet the common financial information needs of a wide range of users. (Framework may be understood as Rules and Regulations) Characteristics of GPFW: Fundamental accounting assumptions are used in this type of framework. Compliance with GAAP. Accounting standards as per AFRFW. Annual Preparation Periodically. Further this financial reporting framework may be a Compliance Framework (or) a Fair Presentation Framework. 7. COMPLIANCE FRAMEWORK (CFW): It refers to a framework where F/S are prepared and presented in accordance with the requirements of such framework without any deviation. The words “True and Fair View” do not appear in the financial statements in this type of framework. E.g.: Most of the special purpose financial statements are prepared as per compliance framework. 8. FAIR PRESENTATION FRAMEWORK: It refers to a framework where F/S are prepared and presented in accordance with the requirements of such framework (CFW) AND A. Contains disclosures beyond the requirements of such framework (Explicitly / Implicitly) or B. May deviate from the requirement of the framework” so as to achieve fair presentation. 10 (Explicitly) Page C. The words true and fair view appears only in this type of framework. CA Final l Advanced Auditing, Assurance and Professional Ethics l Smart Notes l CA Ram Harsha Learn contextually! E.g.: Most of the general-purpose financial statements are prepared as per fair presentation framework. 9. LEGAL FORM: There are several types of legal forms in which people ordinarily conduct businesses. This is similar to “Person” Definition under Income Tax. The following are the various types of legal forms: Proprietorship firm Partnership firm Limited Liability Partnership Society and Company AOP or BOI Any other artificial Judicial Person. 10. MISSTATEMENT: 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 as per applicable financial reporting framework. Misstatements can arise from error or fraud. 11. FRAUD: An intentional act by one or more individuals among management, those charged with governance, employees, or third parties, involving the use of deception to obtain an unjust or illegal advantage. FRAUDULENT FINANCIAL REPORTING: It involves intentional misstatements, including omissions of amounts or disclosures in financial statements, to deceive financial statement users. Either Overstatement or understatement of performance / position. a) MISAPPROPRIATION OF ASSETS: Involves the theft of an entity’s assets and is often perpetrated by employees in relatively small and immaterial amounts. Also, it involved misuse of resources. 12. ERROR: The term “error” refers to unintentional mistakes in financial statements such as: Clerical errors, like errors of omission, errors of commission, errors of duplication and compensating errors. Misapplication of accounting policies (Called errors of principle). From the point of view of audit these errors are two types namely – Self revealing errors (Apparent on record and easily identifiable) and non-self-revealing errors (Not apparent and require additional efforts to detect them). 11 Page CA Final l Advanced Auditing, Assurance and Professional Ethics l Smart Notes l CA Ram Harsha Learn contextually! 13. MEANING OF AUDIT: An audit is an independent examination of financial information of any entity, whether or not profit oriented and irrespective of its size or legal form, when such an examination is conducted with a view to express an opinion thereon. 14. OBJECTIVE OF THE AUDIT/AUDITOR: To express opinion (Audit Report) on financial statements: Whether the financial statements are free from material misstatements and Whether they are prepared as per Applicable Financial Reporting Framework. 15. AUDITOR: “Auditor” is used to refer to the person or persons conducting the audit, usually the engagement partner or other members of the engagement team, or the firm. When it comes to acceptance of Responsibility or being accountable to regulatory authorities then engagement partner shall only be referred as auditor. Practically the meaning of auditor includes the following persons (mentioned in Point No. 16. ENGAGEMENT TEAM: a) Engagement Partner b) Audit Manager c) Paid assistant d) Senior article assistant e) Junior article assistant f) Any other designation 12 Page CA Final l Advanced Auditing, Assurance and Professional Ethics l Smart Notes l CA Ram Harsha Learn contextually! 2. AUDIT REPORTING [(COVERING SA 700, 701, 705, 706, 710, 720, 299, 600, 610, 620 & 570 AND REPORTING REQUIREMENTS U/S 143 OF COMPANIES ACT 2013 INCLUDING CARO, 2020)] PART – I (REPORTING STANDARDS) SA 700 – FORMING OF AN OPINION AND REPORTING ON FINANCIAL STATEMENTS A. OBJECTIVES OF THE AUDITOR UNDER SA- 700: The objectives of the auditor are: a. To form an opinion on the financial statements based on the conclusions drawn from audit evidence obtained; and b. To express an opinion on the financial statements through a written report, known as Auditor’s report. Note: Applicable in the context of audit of complete set of GPFS. B. FORMING AN OPINION ON THE FINANCIAL STATEMENTS: 1. The auditor shall form an opinion on whether the financial statements are prepared, in all material respects, in accordance with the applicable financial reporting framework. 2. In order to form that opinion, the auditor shall obtain reasonable assurance about whether the financial statements as a whole are free from material misstatement whether due to fraud or error. 3. Further, when the financial statements are prepared in accordance with a fair presentation framework, the auditor shall also evaluate as to whether the financial statements achieve fair presentation by considering: a. The overall presentation, structure and content of the financial statements and b. Whether the financial statements, including the related notes, represent the underlying transactions and events in a manner that achieves fair presentation. In other words, the auditor shall express an unmodified opinion when the auditor concludes that the financial statements are prepared, in all material respects, in accordance with the applicable financial reporting framework. C. DEFINITIONS: Unmodified opinion: When the auditor concludes that the financial statements are free from material misstatements (i.e., give a true and fair view) and are also prepared in accordance with the applicable financial reporting framework, then he shall express an unmodified opinion which is also known as Unqualified Opinion or Clean Opinion. Unmodified opinion indicates: 1. The auditor has obtained sufficient appropriate evidence. 2. The financial statements disclosed all relevant information as required by law or regulatory. 13 3. The accounting policies and changes therein are adequately disclosed in the financial Page statements. CA Final l Advanced Auditing, Assurance and Professional Ethics l Smart Notes l CA Ram Harsha Learn contextually! 4. The financial statements are prepared as per applicable financial reporting framework. D. EVALUATIONS TO BE MADE BY AUDITOR: The auditor shall evaluate whether the financial statements are prepared in accordance with the applicable financial reporting framework. While evaluating the auditor shall also consider: 1. QUALITATIVE ASPECTS OF ENTITIES ACCOUNTING PRACTICES: a) Management makes a number of judgments about the amounts and disclosures in the financial statements. b) Further while evaluating accounting systems, the auditor may find existence of management bias and lack of neutrality over accounting practices. c) These situations may cast significant doubt on reliability of financial statements which may be materially misstated. d) The indicators of management bias or lack of neutrality are as follows: i) Selective correction of misstatements brought to the notice of management by auditor. E.g.: Correcting only those misstatements which increases reported earnings and ignoring the other misstatements that decrease the earnings. ii) Possible management bias over selecting appropriate accounting estimates. iii) Frequent changes in accounting policies without a proper reason. 2. SPECIFIC EVALUATIONS WHILE FORMING OPINION: The auditor shall take into account the following specific factors while forming an opinion: a. Whether the financial statements adequately disclose the significant accounting policies selected and applied. b. Whether the accounting policies selected and are applied consistently and also check they are in accordance with the applicable financial reporting framework and are appropriate. c. Whether the accounting estimates made by management are reasonable. d. Whether the information presented in the financial statements is relevant, reliable, comparable, and understandable and not misleading. e. Whether the terminology used in the financial statements, including the title of each assertion in financial statements, are appropriate. E. WHEN IS A MODIFIED OPINION ISSUED? a. If the auditor concludes that based on the Sufficient and appropriate audit evidence obtained, the financial statements as a whole are NOT free from material misstatement; or b. Is unable to obtain sufficient appropriate audit evidence to conclude that the financial statements as a whole are free from material misstatement. F. CONTENTS OF THE AUDITOR’S REPORT: 14 1. Title Page 2. Addressee (GPFS - Members and in case of SPFS - BOD) CA Final l Advanced Auditing, Assurance and Professional Ethics l Smart Notes l CA Ram Harsha Learn contextually! 3. Opinion Para [Refer G 1] 4. Basis for Opinion [Refer G 2] 5. Material Uncertainty related to Going Concern (SA 570) 6. Key Audit Matters (SA 701) Applicable as per the relevant 7. Emphasis of Matter Paragraph (SA 706) standard 8. Other Matter Paragraph (SA 706) 9. Other Information (SA 720) 10. Responsibilities of Management for the Financial Statements [Covered in SA 210] 11. Auditor’s Responsibilities for the Audit of the Financial Statements [QB] [Refer G 4] 12. *Report on Other Legal and regulatory requirements (E.g., CARO, 2020) [Refer G 5] 13. Signature of the Auditor [Refer G 6] 14. Place of Signature [Ordinarily the city where the audit report is signed] 15. Date of the Auditor’s Report [Refer G 7] 16. UDIN (Unique Document Identification Number w.e.f.1st July 2019) [The requirement to mention UDIN is applicable both for manually and digitally signed reports/certificates including certificates uploaded online.] Note: Refer Formats of Audit Reports on Various situations in ICAI SM [Edition 2023 – Page 7.73 to 7.91] Also, For Format of Auditors report prescribed by Law or Regulation is NOT Covered in our material. Refer ICAI SM [2023 Edition – Pg. 7.18] [Not required from Exam Viewpoint] G. DETAILED EXPLANATION TO FEW CONTENTS OF AUDIT REPORT: 1. OPINION PARAGRAPH / AUDITOR’S OPINION: The opinion section shall mention the following: a. Identify the entity whose financial statements have been audited b. State that the financial statements have been audited (Not in case of Disclaimer of Opinion) c. Identify the title of each statement comprising the financial statements. d. Refer to the notes, including the summary of significant accounting policies and e. Specify the date of, or period covered by, each financial statement comprising the financial statements. WORDINGS OF UNMODIFIED OPINION: [Refer Illustrations in ICAI Pronouncements SA 700] a. FAIR PRESENTATION FRAMEWORK: When expressing an unmodified opinion on financial statements prepared in accordance with a fair presentation framework, the 15 auditor’s opinion shall, unless otherwise required by law or regulation, use one of the Page following phrases, which are regarded as being equivalent: CA Final l Advanced Auditing, Assurance and Professional Ethics l Smart Notes l CA Ram Harsha Learn contextually! i. In our opinion, the accompanying financial statements present fairly, in all material respects, […] in accordance with [the applicable financial reporting framework] or ii. In our opinion, the accompanying financial statements give a true and fair view of […] in accordance with [the applicable financial reporting framework]. b. COMPLIANCE FRAMEWORK: When expressing an unmodified opinion on financial statements prepared in accordance with a compliance framework, the auditor’s opinion shall be that the accompanying financial statements present fairly are prepared, in all material respects, in accordance with [the applicable financial reporting framework]. c. If the reference to the applicable financial reporting framework in the auditor’s opinion is not to Accounting Standards, the auditor’s opinion shall identify the origin of such other framework. [E.g., In Company audit report – we refer Companies act, 2013] 2. BASIS FOR OPINION PARAGRAPH: a. States that the audit was conducted as per standards on auditing. b. Refers to the section of the auditor’s report that describes the auditor’s responsibilities under the SAs. c. Includes a statement that the auditor is independent of the entity in accordance with the relevant ethical requirements relating to the audit and has fulfilled the auditor’s other ethical responsibilities in accordance with these requirements. The statement shall refer to the Code of Ethics issued by ICAI. d. Statement as to whether the auditor has obtained sufficient appropriate audit evidence for the opinion expressed by him. 3. RESPONSIBILITIES FOR FINANCIAL STATEMENTS: a. The auditor’s report shall use the term that is appropriate in the context of the legal framework applicable to the entity and need not refer specifically to “management”. b. In some entities, the appropriate reference may be to those charged with governance. c. This section of the auditor’s report shall describe management’s responsibility for: a. Preparing the financial statements in accordance with the applicable financial reporting framework, and 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 b. Assessing the entity’s ability to continue as a going concern and whether the use of the going concern basis of accounting is appropriate as well as disclosing, if applicable, matters relating to going concern. The explanation of management’s responsibility for this assessment shall include a description of when the use of the going concern basis of accounting is appropriate. 4. AUDITORS RESPONSIBILITIES FOR AUDIT OF FINANCIAL STATEMENTS: This section of the auditor’s report shall: 16 PRIMARY RESPONSIBILITIES: Page a. State that the objectives of the auditor are to: CA Final l Advanced Auditing, Assurance and Professional Ethics l Smart Notes l CA Ram Harsha Learn contextually! i. Obtain reasonable assurance about whether the financial statements as a whole are free from material misstatement, whether due to fraud or error and ii. Issue an auditor’s report that includes the auditor’s opinion. b. State that reasonable assurance is a high level of assurance, but is not a guarantee that an audit conducted in accordance with SAs will always detect a material misstatement when it exists; and c. State that misstatements can arise from fraud or error, and either: i. Describe that they are considered material if, individually or in the aggregate, they could reasonably be expected to influence the economic decisions of users taken on the basis of these financial statements or ii. Provide a definition or description of materiality in accordance with the applicable financial reporting framework. RESPONSIBILITES UNDER SA: The Auditor’s Responsibilities for the Audit of the Financial Statements section of the auditor’s report shall further STATE THAT: a. STATE ABOUT PROF. JUDGMENT AND SKEPTICISM: State that, as part of an audit in accordance with SAs, the auditor exercises professional judgment and maintains professional skepticism throughout the audit and b. Describe an audit by stating that the auditor’s responsibilities are: (i) RISK ASSESSMENT: i. To identify and assess the risks of material misstatement of the financial statements, whether due to fraud or error; ii. to design and perform audit procedures responsive to those risks and iii. to obtain audit evidence that is sufficient and appropriate to provide a basis for the auditor’s opinion. iv. The risk of not detecting a material misstatement resulting from fraud is higher than for one resulting from error, as fraud may involve collusion, forgery, intentional omissions, misrepresentations, or the override of internal control. (ii) INTERNAL CONTROLS: i. To obtain an understanding of internal control relevant to the audit in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the entity’s internal control. ii. In circumstances when the auditor also has a responsibility to express an opinion on the effectiveness of internal control in conjunction with the audit of the financial statements, the auditor shall omit the phrase that the auditor’s consideration of internal control is not for the purpose of expressing an opinion on the effectiveness of the entity’s internal control. (iii) ACCOUNTING POLICIES AND ESTIMATES: To evaluate the appropriateness of 17 accounting policies used and the reasonableness of accounting estimates and related disclosures made by management. Page CA Final l Advanced Auditing, Assurance and Professional Ethics l Smart Notes l CA Ram Harsha Learn contextually! (iv) GOING CONCERN: i. To conclude on the appropriateness of management’s use of the going concern basis of accounting and, 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. ii. If the auditor concludes that a material uncertainty exists, the auditor is required to draw attention in the auditor’s report to the related disclosures in the financial statements or, if such disclosures are inadequate, to modify the opinion. iii. The auditor’s conclusions are based on the audit evidence obtained up to the date of the auditor’s report. However, future events or conditions may cause an entity to cease to continue as a going concern. (v) FAIR PRESENTATION: When the financial statements are prepared in accordance with a fair presentation framework, to evaluate the overall presentation, structure and content of the financial statements, including the disclosures, and whether the financial statements represent the underlying transactions and events in a manner that achieves fair presentation. c. GROUP AUDITS: When SA 600, “Using the Work of Another Auditor”, applies, further describe the auditor’s responsibilities in a group audit engagement by stating, the division of responsibility for the financial information of the entity by indicating the extent to which the financial information of components is audited by the other auditors have been included in the financial information of the entity, e.g., the number of divisions/branches/subsidiaries or other components audited by other auditors. COMMUNICATION RESPONSIBILITIES: The Auditor’s Responsibilities for the Audit of the Financial Statements section of the auditor’s report also shall: a. PLANNED SCOPE AND TIMING: State that the auditor communicates with those charged with governance regarding, the planned scope and timing of the audit and significant audit findings, including any significant deficiencies in internal control that the auditor identifies during the audit; b. COMPLIANCES WITH ETHICS REQUIREMENTS: State that the auditor provides those charged with governance with a statement that the auditor has: a. complied with relevant ethical requirements regarding independence and b. communicate with them all relationships and c. other matters that may reasonably be thought to bear on the auditor’s d. independence, and where applicable, related safeguards; and c. KAM FOR LISTED ENTITIES: For audits of financial statements of all such entities for which key audit matters are communicated in accordance with SA 701, state that, from the matters communicated with those charged with governance, the auditor determines those matters that were of most significance in the audit of the financial statements of the current period and are therefore the key audit matters. 18 Page CA Final l Advanced Auditing, Assurance and Professional Ethics l Smart Notes l CA Ram Harsha Learn contextually! In accordance with the requirements of SA 701, the auditor describes these matters in the auditor’s report unless law or regulation precludes public disclosure about the matter or when, in extremely rare circumstances, the auditor determines that a matter should not be communicated in the auditor’s report because the adverse consequences of doing so would reasonably be expected to outweigh the public interest benefits of such communication. AUDITORS RESPONSIBILITY SECTION IN CASE OF DISCLAIMER OF OPINION: When the auditor disclaims an opinion on the financial statements due to an inability to obtain sufficient appropriate audit evidence, the auditor shall amend the description of the auditor’s responsibilities required by SA 700 (Revised) to include only the following: 1. A statement that the auditor’s responsibility is to conduct an audit of the entity’s financial statements in accordance with Standards on Auditing and to issue an auditor’s report. 2. A statement that, however, because of the matter(s) described in the Basis for Disclaimer of Opinion section, the auditor was not able to obtain sufficient appropriate audit evidence to provide a basis for an audit opinion on the financial statements. and 3. The statement about auditor independence and other ethical responsibilities required by SA 700 (Revised). LOCATION OF DESCRIPTION OF AUDITORS RESPONSIBILITES (b) Within an appendix to the auditor’s (a) Within the body of the report, in which case the auditor’s report auditor’s report (c) By a specific reference within the auditor’s shall include a reference to the location report to the location of such a description on a of the appendix or website of an appropriate authority, where law, regulation or the auditing standards expressly permit the auditor to do so. 5. OTHER REPORTING RESPONSIBILITIES: [NOT REQUIRED FROM EXAM VIEWPOINT] a. SEPARATE SECTION: If the auditor addresses other reporting responsibilities in the auditor’s report on the financial statements that are in addition to the auditor’s responsibilities under the SAs, these other reporting responsibilities shall be addressed in a separate section in the auditor’s report with a heading titled “Report on Other Legal and Regulatory Requirements” or otherwise as appropriate to the content of the section, unless these other reporting responsibilities address the same topics as those presented under the reporting responsibilities required by the SAs in which case the other reporting responsibilities may be presented in the same section as the related report elements required by the SAs. b. DIFFERENTIATION: If other reporting responsibilities are presented in the same section as the related report elements required by the SAs, the auditor’s report shall 19 clearly differentiate the other reporting responsibilities from the reporting that is Page required by the SAs. CA Final l Advanced Auditing, Assurance and Professional Ethics l Smart Notes l CA Ram Harsha Learn contextually! c. REPORT ON AUDIT OF F/S: If the auditor’s report contains a separate section that addresses other reporting responsibilities, the requirements of this SA shall be included under a section with a heading “Report on the Audit of the Financial Statements.” The “Report on Other Legal and Regulatory Requirements” shall follow the “Report on the Audit of the Financial Statements.” 6. SIGNATURE OF THE AUDITOR: a. PERSONAL NAME: The auditor’s report shall be signed. The report is signed by the auditor (i.e., the engagement partner) in his personal name. b. FIRM NAME: Where the firm is appointed as the auditor, the report is signed in the personal name of the auditor and in the name of the audit firm. c. MRN: The partner/proprietor signing the audit report also needs to mention the membership number assigned by the Institute of Chartered Accountants of India. d. FRN: They also include the registration number of the firm, wherever applicable, as allotted by ICAI, in the audit reports signed by them. The report is to be signed by the maker of the report. e. SEC. 145: Under Section 145 read with Section 141(2) of the Companies Act, 2013, only the person appointed as an auditor of the company or, where a firm is so appointed, only the partner in the firm who is a chartered accountant, may sign the auditor’s report or sign or authenticate any other document of the company required by law to be signed or authenticated by the auditor. 7. DATE OF THE AUDITOR’S REPORT: The auditor’s report shall be dated NO EARLIER THAN the date on which the auditor has obtained sufficient appropriate audit evidence on which to base the auditor’s opinion on the financial statements, including evidence that: a. All the statements that comprise the financial statements, including the related notes, have been prepared and b. APPROVAL OF F/S: Those with the recognized authority have asserted that they have taken responsibility for those financial statements. In other words, The auditors report date shall be only on or after obtaining sufficient and appropriate evidence and on or after Approval of F/s by competent authority. H. AUDITOR’S REPORT FOR AUDITS CONDUCTED IN ACCORDANCE WITH BOTH STANDARDS ON AUDITING ISSUED BY ICAI AND INTERNATIONAL STANDARDS ON AUDITING OR AUDITING STANDARDS OF ANY OTHER JURISDICTION: COVERED AS PART OF QUESTION BANK [NOT IMP FROM EXAMS VIEWPOINT] I. SUPPLEMENTARY INFORMATION ALONG WITH FINANCIAL STATEMENTS: 20 1. If supplementary information that is not required by the applicable financial reporting framework is presented with the audited financial statements, the auditor shall evaluate Page CA Final l Advanced Auditing, Assurance and Professional Ethics l Smart Notes l CA Ram Harsha Learn contextually! whether, in the auditor’s professional judgment whether such supplementary information is an integral part of the financial statements due to its nature or how it is presented. a. INTEGRAL PART: When it is an integral part of the financial statements, the supplementary information shall be covered by the auditor’s opinion. b. NOT AN INTEGRAL PART: i. The auditor shall evaluate whether such supplementary information is presented in a way that sufficiently and clearly differentiates it from the audited financial statements. ii. If this is not the case, then the auditor shall ask management to change how the unaudited supplementary information is presented. iii. If management refuses to do so, the auditor shall identify the unaudited supplementary information and explain in the auditor's report that such supplementary information has not been audited. 2. Examples of Supplementary information: a. INTEGRAL PART: When the notes to the financial statements include an explanation or the reconciliation of the extent to which the financial statements comply with another financial reporting framework, the auditor may consider this to be supplementary information that cannot be clearly differentiated from the financial statements. the auditor’s opinion would also cover notes or supplementary schedules that are cross referenced from the financial statements. b. NOT AN INTEGRAL PART: When an additional profit and loss account that discloses specific items of expenditure is disclosed as a separate schedule included as an appendix to the financial statements, the auditor may consider this to be supplementary information that can be clearly differentiated from the financial statements. SA 701 – COMMUNICATING KEY AUDIT MATTERS IN THE INDEPENDENT AUDITOR’S REPORT A. DEFINITION OF KEY AUDIT MATTER: The matters which in auditor’s Judgment are of most significant in the audit of the financial statements of the current period and these are selected from the matters communicated with those charged with governance. B. PURPOSE OF KEY AUDIT MATTER (OBJECTIVE): 21 1. The purpose of communicating key audit matters is to enhance the communicative value of Page auditor’s report by providing greater transparency about the audit that was performed. CA Final l Advanced Auditing, Assurance and Professional Ethics l Smart Notes l CA Ram Harsha Learn contextually! 2. KAM provides additional information to the intended users of the F/S to assist them in understanding the entity and areas of significant matters in the professional judgment of auditor. 3. Communicating key audit matters in the auditor’s report is: a) NOT a substitute for disclosures in the financial statements that the applicable financial reporting framework requires management to make; b) NOT a substitute for the auditor expressing a modified opinion when required by the circumstances of a specific audit engagement in accordance with SA 705; c) NOT a separate opinion on individual matters. d) NOT a substitute for reporting in accordance with SA – 570 – where a material uncertainty there related to going concern of the entity. C. APPLICABILITY AND PROHIBITION ON KEY AUDIT MATTERS (KAM): 1. This SA applies to audits of complete sets of general-purpose financial statements of: a. Listed entities and b. Circumstances when the auditor otherwise decides to communicate key audit matters in the auditor’s report and c. Required by law or regulation to communicate key audit matters in the auditor’s report 2. SA 705 prohibits the auditor from communicating key audit matters when the auditor disclaims an opinion on the financial statements D. FACTORS FOR DETERMINING KEY AUDIT MATTERS: The auditor shall determine, from the matters communicated with those charged with governance, those matters that required significant auditor attention in performing the audit. The auditor shall take into account the following factors while determining the Key Audit Matters: 1. Areas of higher assessed risk of material misstatement or significant risks identified in accordance with SA 315 2. Significant auditor judgments relating to areas in the financial statements that involved significant management judgment, including accounting estimates that have been identified as having high estimation uncertainty. 3. The effect of significant events or transactions that occurred during the period under audit. Examples: (Inclusive list) a. Assessment of Impairment. b. Provision for losses and contingencies. c. Valuation of financial instruments. d. Matters relating to Revenue recognition 22 e. Taxation matters (multiple tax jurisdictions, uncertain tax position, deferred tax assets) Page CA Final l Advanced Auditing, Assurance and Professional Ethics l Smart Notes l CA Ram Harsha Learn contextually! E. CERTAIN MATTERS NOT TO BE COMMUNICATED AS “KAM” [RESTRICTIONS ON KAM]: In the following circumstances the auditor shall not communicate KAM: a. Law or regulation prohibits such disclosure about the matter; or b. The auditor determines that the matter should not be communicated in the auditor’s report because of the possible adverse consequences. c. If the auditor concluded that the matter is highly confidential or sensitive at the interest of the company. WORDINGS IN AUDITORS REPORT 1. The auditor shall describe each key audit matter, using an appropriate subheading, in a separate section of the auditor’s report under the heading “Key Audit Matters”. What would the introductory language in this section of the auditor’s report state. Also, state the purpose of communicating key audit matters. ANSWER: Key audit matters are those matters that, in our professional judgment, were of most significance in our audit of the financial statements of the current period. These matters were addressed in the context of our audit of the financial statements as a whole, and in forming our opinion thereon, and we do not provide a separate opinion on these matters. (Not relevant from exam perspective) Also write about purpose of KAM. 2. The following illustrates the presentation in the auditor’s report if the auditor has determined there are no key audit matters to communicate: ANSWER: [Except for the matter described in the Basis for Qualified (Adverse) Opinion section or Material Uncertainty Related to Going Concern section,] We have determined that there are no [other] key audit matters to communicate in our report.] SA 705 – MODIFICATIONS TO THE OPINION IN THE INDEPENDENT AUDITORS REPORT A. OBJECTIVE OF THE AUDITOR / CIRCUMSTANCES WHEN A MODIFICATION TO THE AUDITOR’S OPINION IS REQUIRED: The objective of the auditor is to express clearly an appropriately modified opinion on the financial statements that is necessary when: a. The auditor concludes that, based on the audit evidence obtained, the financial statements as a whole are not free from material misstatement; or b. The auditor is unable to obtain sufficient appropriate audit evidence to conclude that the financial statements as a whole are free from material misstatement. B. DIFFERENT TYPES OF MODIFIED OPINIONS: The decision regarding which type of opinion 23 is appropriate depends upon: a) The Nature of the matter giving rise to the modification: Page i) Whether the misstatements are material CA Final l Advanced Auditing, Assurance and Professional Ethics l Smart Notes l CA Ram Harsha Learn contextually! ii) Inability to obtain audit evidence for material items of financial statements. b) Auditor’s judgment about pervasiveness of effects or possible effects of matters related to financial statements. 1. QUALIFIED OPINION: The auditor shall express a qualified opinion when: a. The auditor, having obtained sufficient appropriate audit evidence, concludes that misstatements, individually or in the aggregate, are material, but NOT pervasive, to the financial statements or b. The auditor is unable to obtain sufficient appropriate audit evidence on which to base the opinion, but the auditor concludes that the possible effects on the financial statements of undetected misstatements, if any, could be material but NOT pervasive. 2. ADVERSE OPINION: The auditor, having obtained sufficient appropriate audit evidence, concludes that misstatements, individually or in the aggregate, are BOTH material AND pervasive, to the financial statements 3. DISCLAIMER OF OPINION: The auditor is unable to obtain sufficient appropriate audit evidence on which to base the opinion, but the auditor concludes that the possible effects on the financial statements of undetected misstatements, if any, could be BOTH material AND pervasive. NOTE: The auditor shall disclaim an opinion when, in extremely rare circumstances involving multiple uncertainties, the auditor concludes that, notwithstanding having obtained sufficient appropriate audit evidence regarding each of the individual uncertainties, it is not possible to form an opinion on the financial statements due to the potential interaction of the uncertainties and their possible cumulative effect on the financial statements. [if auditor concludes that the evidence obtained in unreliable] C. MEANING OF PERVASIVE EFFECTS: Pervasive effects on the financial statements are those that, in the auditor’s judgment: a. Are not confined (limited) to specific elements, accounts or items of the financial statements. b. If so confined, represent or could represent a substantial proportion of the financial statements or c. In relation to disclosures, are fundamental to user’s understanding of the financial statements. 24 Page CA Final l Advanced Auditing, Assurance and Professional Ethics l Smart Notes l CA Ram Harsha Learn contextually! BELOW TABLE SHOWS DIFFERENT TYPES OF OPINIONS BASED IN DIFFERENT SITUATIONS MMS SITUATION CASE PERVASIVE? OPINION EXIST? Sufficient and appropriate A No NA Unqualified Opinion evidence OBTAINED B Yes No Qualified Opinion C Yes Yes Adverse Opinion IS THE IS IT POSSIBLE SITUATION CASE OPINION MATERIAL? EFFECT PERVASIVE? Sufficient and appropriate A No NA Unqualified Opinion evidence NOT OBTAINED B Yes No Qualified Opinion C Yes Yes Disclaimer Opinion Observations: 1. Adverse Opinion arises only in a situation where Sufficient and appropriate evidence is Available. 2. Disclaimer of Opinion arises only in a situation where sufficient and appropriate evidence is NOT Available. In other words, “Availability of sufficient and appropriate evidence and Disclaimer of Opinion are mutually exclusive” D. SPECIAL CONSIDERATIONS BEFORE EXPRESSING MODIFIED OPINION: 1. QUALIFIED OPINION: When the auditor expresses a qualified opinion due to a material misstatement in the financial statements, the auditor shall state that, in the auditor’s opinion, except for the effects of the matter(s) described in the Basis for Qualified Opinion section: a. When reporting in accordance with a fair presentation framework, the accompanying financial statements present fairly, in all material respects (or give a true and fair view of) […] in accordance with [the applicable financial reporting framework]; or b. When reporting in accordance with a compliance framework, the accompanying financial statements have been prepared, in all material respects, in accordance with [the applicable financial reporting framework]. When the modification arises from an inability to obtain sufficient appropriate audit evidence, the auditor shall use the corresponding phrase “except for the possible effects of the matter(s)...” for the modified opinion. 2. ADVERSE OPINION: When the auditor expresses an adverse opinion, the auditor shall state that, in the auditor’s opinion, because of the significance of the matter(s) described in the Basis for Adverse Opinion section: a. When reporting in accordance with a fair presentation framework, the accompanying financial statements do not present fairly (or give a true and fair view of) […] in accordance with [the applicable financial reporting framework]; or b. When reporting in accordance with a compliance framework, the accompanying 25 financial statements have not been prepared, in all material respects, in accordance with [the applicable financial reporting framework]. Page CA Final l Advanced Auditing, Assurance and Professional Ethics l Smart Notes l CA Ram Harsha Learn contextually! 3. DISCLAIMER OF OPINION: When the auditor disclaims an opinion due to an inability to obtain sufficient appropriate audit evidence, the auditor shall: a. State that the auditor does not express an opinion on the accompanying financial statements. b. State that, because of the significance of the matter(s) described in the Basis for Disclaimer of Opinion section, the auditor has not been able to obtain sufficient appropriate audit evidence to provide a basis for an audit opinion on the financial statements and c. Amend the statement required in SA 700 (Revised), which indicates that the financial statements have been audited, to state that the auditor was engaged to audit the financial statements. NOTE: REQUIREMENTS FOR BASIS FOR MODIFIED OPINION IS DISCUSSED AS PART OF QUESTION BANK. E. REFERENCE IN AUDIT REPORT IN CASE OF MODIFIED OPINION: The Opinion paragraph and Basis for opinion paragraph headings shall be appropriately modified where the auditor expresses a modified opinion: 1. In case of Qualified Opinion: a) Qualified Opinion b) Basis for Qualified Opinion 2. In case of Adverse Opinion: a) Adverse Opinion b) Basis for Adverse Opinion 3. In case of Disclaimer Opinion: a) Disclaimer Opinion b) Basis for Disclaimer Opinion DESCRIPTION OF BASIS FOR OPINION PARA IN CASE OF MODIFIED OPINION: 1. MMS IN F/S - QUALTIFY: If there is a material misstatement of the financial statements that relates to specific amounts in the financial statements (including quantitative disclosures in the notes to the financial statements), the auditor shall include in the Basis for Opinion section a description and quantification of the financial effects of the misstatement, unless impracticable. 2. UNABLE TO QUANTIFY: If it is not practicable to quantify the financial effects, the auditor shall so state in this section. 3. If there is a material misstatement of the financial statements that relates to narrative disclosures, the auditor shall include in the Basis for Opinion section an explanation of how the disclosures is misstated. 26 Page CA Final l Advanced Auditing, Assurance and Professional Ethics l Smart Notes l CA Ram Harsha Learn contextually! 4. MMS BY WAY OF NON-DISCLOSURE: If there is a material misstatement of the financial statements that relates to the non-disclosure of information required to be disclosed, the auditor shall: a. Discuss the non-disclosure with those charged with governance. b. Describe the nature of the omitted information; and c. Unless prohibited by law or regulation, include the omitted disclosures, provided it is practicable to do so, and the auditor has obtained sufficient appropriate audit evidence about the omitted information. 5. INABILITY TO OBTAIN EVIDENCE: If the modification results from an inability to obtain sufficient appropriate audit evidence, the auditor shall include in the Basis for Opinion section the reasons for that inability. 6. When the auditor disclaims an opinion on the financial statements, the auditor’s report shall not include the following elements required by SA 700 (Revised). a. A reference to the section of the auditor’s report where the auditor’s responsibilities are described; and b. A statement about whether the audit evidence obtained is sufficient and appropriate to provide a basis for the auditor’s opinion. 7. Even if the auditor has expressed an adverse opinion or disclaimed an opinion on the financial statements, the auditor shall describe in the Basis for Opinion section the reasons for any other matters of which the auditor is aware that would have required a modification to the opinion, and the effects thereof. 8. AUDITORS RESPONSIBILITY SECTION ON DISCLAIMER OF OPINION: When the auditor disclaims an opinion on the financial statements due to an inability to obtain sufficient appropriate audit evidence, the auditor shall amend the description of the auditor’s responsibilities required by SA 700 (Revised) to include only the following: 1. A statement that the auditor’s responsibility is to conduct an audit of the entity’s financial statements in accordance with Standards on Auditing and to issue an auditor’s report. 2. A statement that, however, because of the matter(s) described in the Basis for Disclaimer of Opinion section, the auditor was not able to obtain sufficient appropriate audit evidence to provide a basis for an audit opinion on the financial statements. and 3. The statement about auditor independence and other ethical responsibilities required by SA 700 (Revised). F. CLARIFICATION ON EMPHASIS OF MATTER PARA IN CASE OF ADVERSE OPINION / DISCLAMER OF OPINION: When the auditor considers it necessary to express an adverse opinion or disclaim an opinion on the financial statements as a whole, the auditor’s report shall not also include an unmodified opinion with respect to the same financial reporting framework on a single financial statement or one or more specific elements, accounts or items of a financial statement. To include such an unmodified opinion in the same report in these circumstances would contradict the auditor’s adverse opinion or disclaimer of opinion on the financial statements as a whole. 27 [WE MAY NOT USE EMPHASIS OF MATTER IN THE AUDITORS REPORT] Page CA Final l Advanced Auditing, Assurance and Professional Ethics l Smart Notes l CA Ram Harsha Learn contextually! G. CONSEQUENCE OF AN INABILITY TO OBTAIN SUFFICIENT APPROPRIATE AUDIT EVIDENCE DUE TO A MANAGEMENT-IMPOSED LIMITATION AFTER THE AUDITOR HAS ACCEPTED THE ENGAGEMENT: 1. REQUEST FOR REMOVAL OF LIMITATION: If, after accepting the engagement, the auditor becomes aware that management has imposed a limitation on the scope of the audit that the auditor considers likely to result in the need to express a qualified opinion or to disclaim an opinion on the financial statements, the auditor shall request that management remove the limitation. 2. ALTERNATIVE PROCEDURES: If management refuses to remove the limitation, the auditor shall communicate the matter to those charged with governance, unless all of those charged with governance are involved in managing the entity and determine whether it is possible to perform alternative procedures to obtain sufficient appropriate audit evidence. 3. REPORTING: If the auditor is unable to obtain sufficient appropriate audit evidence, the auditor shall determine the implications as follows: a. If the auditor concludes that the possible effects on the financial statements of undetected misstatements, if any, could be material but not pervasive, the auditor shall qualify the opinion or b. If the auditor concludes that the possible effects on the financial statements of undetected misstatements, if any, could be both material and pervasive so that a qualification of the opinion would be inadequate to communicate the gravity of the situation, the auditor shall: i. Withdraw from the audit, where practicable and possible under applicable law or regulation or ii. If withdrawal from the audit before issuing the auditor’s report is not practicable or possible, disclaim an opinion on the financial statements. NOTE: When the auditor decides to withdraw before withdrawing, the auditor shall communicate to those charged with governance any matters regarding misstatements identified during the audit that would have given rise to a modification of the opinion. Resignation of auditor [LODR Regulations – Discussed under SA 240]: The listing agreement and the SEBIs directive on the resignation of auditor does not permit withdrawing from the engagement without issuing the audit / review report. It provides that: If the auditor proposes to resign: a. within 45 days from the end of any of the quarters of a period covered under the appointment, then the auditor shall, before such resignation, issue the audit / limited review report for such quarter. b. after 45 days from the end any of the quarters of a period covered under the appointment, then we shall, before such resignation, issue the audit / Limited review report for such quarter as well as the next quarter. c. If the Limited review report has been issued for all the three quarters, then the auditor shall issue the audit report for the full year before resigning from the engagement. ICAI ANNOUNCEMENT ON THE RESIGNATION OF AUDITOR FOR UNLISTED COMPANIES: The auditor of an unlisted company shall not mention “professional pre-occupation” as a reason for 28 the resignation. The auditor shall mention the reasons clearly for the resignation in the resignation Page letter issued to the Company. CA Final l Advanced Auditing, Assurance and Professional Ethics l Smart Notes l CA Ram Harsha Learn contextually! SA 706 – EMPHASIS OF MATTER PARAGRAPH AND OTHER MATTER PARAGRAPH IN THE INDEPENDENT AUDITORS REPORT A. DEFINITIONS: 1. EMPHASIS OF MATTER PARAGRAPH: A paragraph included in the auditor’s report that refers to a matter appropriately presented or disclosed in the financial statements that, in the auditor’s judgment, is of such importance that it is fundamental to users’ understanding of the financial statements. 2. OTHER MATTER PARAGRAPH: A paragraph included in the auditor’s report that refers to a matter other than those presented or disclosed in the financial statements that in auditors’ judgment, is relevant for users understanding of the audit, auditors’ responsibilities or the auditor’s report. B. WHEN TO USE EMPHASIS OF MATTER PARAGRAPH: 1. CONDITIONS: If the auditor considers it necessary to draw users’ attention to a matter presented or disclosed in the financial statements that, in the auditor’s judgment, is of such importance that it is fundamental to users’ understanding of the financial statements, the auditor shall include an Emphasis of Matter paragraph in the auditor’s report provided: a. The auditor would not be required to modify the opinion in accordance with SA 705 (Revised) as a result of the matter and b. When SA 701 applies, the matter has not been determined to be a key audit matter to be communicated in the auditor’s report. 2. CIRCUMSTANCES: These circumstances may include: a. When a financial reporting framework prescribed by law or regulation would be unacceptable but for the fact that it is prescribed by law or regulation. b. To alert users that the financial statements are prepared in accordance with a special purpose framework. c. When facts become known to the auditor after the date of the auditor’s report and the auditor provides a new or amended auditor’s report (i.e., subsequent events). d. An uncertainty relating to the future outcome of an exceptional litigation or regulatory action. e. A major catastrophe that has had, or continues to have, a significant effect on the entity’s financial position. 3. RELATIONSHIP BETWEEN KAM AND EOMP ARE: a. KAM are those which in auditors’ professional judgement, require significant auditors’ attention. b. EOMP necessarily may not require significant attention of the auditor but are significant for USERS understanding of Financial statements in view of auditor’s judgement. 4. MANNER OF PRESENTATION OF EMPHASIS OF MATTER: a) Include the paragraph within a separate section of the auditor’s report with an appropriate heading that includes the term “Emphasis of Matter”: i) Shall express the matter being emphasized (highlighted) and give the reference to such matter in the financial statements. Accordingly, this paragraph shall refer only to information presented or disclosed in the financial statements; and 29 ii) Also state that the auditor’s opinion is not modified in respect of the matter emphasized. Page CA Final l Advanced Auditing, Assurance and Professional Ethics l Smart Notes l CA Ram Harsha Learn contextually! b) An Emphasis of Matter Para is not a substitute for i) A modified Opinion in accordance with SA 705 ii) Disclosures in Financial statements as per AFRFW. iii) Reporting in accordance with SA 570 when a material uncertainty exists relating to entities ability to continue as a going concern. C. WHEN TO ISSUE OTHER MATTER PARAGRAPH IN THE AUDITOR’S REPORT: 1. If the auditor considers it necessary to communicate a matter other than those that are presented or disclosed in the financial statements that, in the auditor’s judgment, is relevant to users’ understanding of the audit, the auditor’s responsibilities or the auditor’s report, the auditor shall include an Other Matter paragraph in the auditor’s report, provided: a. This is not prohibited by law or regulation and b. When SA 701 applies, the matter has not been determined to be a key audit matter to be communicated in the auditor’s report. 2. MANNER OF PRESENTATION: When the auditor includes an Other Matter paragraph in the auditor’s report, the auditor shall include the paragraph within a separate section with the heading “Other Matter,” or other appropriate heading. D. COMMUNICATION WITH THOSE CHARGED WITH GOVERNANCE: If the auditor expects to include an Emphasis of Matter or an Other Matter paragraph in the auditor’s report, the auditor shall communicate with those charged with governance regarding their expectation and the wording of this Para. 30 Page CA Final l Advanced Auditing, Assurance and Professional Ethics l Smart Notes l CA Ram Harsha Learn contextually! SA 299 – RESPONSIBILITIES OF JOINT AUDITORS A. MEANING: The process of appointing two or more individuals or firms or combination of individuals and firms is known as joint audit. (SA 299 – Joint Audit of Financial Statements) B. VARIOUS ADVANTAGE OF JOINT AUDIT: a. Sharing of expertise. b. Mutual consultation. c. Lower workload. d. Better quality of performance. e. Improved service to the client. f. A sense of healthy competition towards a better performance. C. THE GENERAL DISADVANTAGES MAY BE THE FOLLOWING: a. The fees being shared. b. Psychological problem where firms of different standing are associated in the joint audit. c. General superiority complexes of some auditors. d. Problems of co-ordination of the work. e. Areas of work of common concern being neglected. f. Uncertainty about the liability for the work done. D. RESPONSIBILITY OF JOINT AUDITOR: 1. Individual / Separate Responsibilities: Where work is divided among the joint auditors on a suitable basis then each joint auditor is responsible only for the work performed by them. Generally, the work will be divided based on the following basis. a) Items of Assets or liabilities b) Income or Expenditure c) Geographical areas d) Identified units e) Period of Financial statements 2. Joint / Combined Responsibility: In the following areas all the joint auditors will have indivisible or combined responsibility. a) In respect of audit work not divided among themselves b) In respect of decisions taken by all the joint auditors c) In respect of matters brought to the notice of all joint auditors d) For verifying disclosure requirements of financial statements; and e) For ensuring that the audit report complies with relevant statute. E. AUDIT REPORTING IN CASE OF JOINT AUDIT: a) Generally, all the joint auditors arrive common conclusions and express common opinion through a single audit report. b) However, NO joint auditor is not bound by majority’s opinion. c) If there is a difference of opinion among joint auditors, then such disagreeing auditor can express his own opinion by a separate report. In such a case each joint auditor shall refer 31 about other joint auditor’s report in their audit report. Page CA Final l Advanced Auditing, Assurance and Professional Ethics l Smart Notes l CA Ram Harsha Learn contextually! Note: Each joint auditor is entitled to rely on the work performed by another joint auditor and need not review the work performed by others. F. SPECIAL CONSIDERATIONS AS PER SA – 299: (NOV 2019 – 4M) 1. The Engagement partner and Key engagement Team from each of the Joint auditors shall be involved in planning the audit. 2. All joint auditors should establish jointly the overall audit strategy as required under SA – 300. (Steps involved in developing overall strategy are discussed in “Audit Strategy, Planning and Programme”) 3. All Joint auditors shall discuss and develop a Joint audit plan. The following points shall be kept in mind: a. Identify division of areas and common areas. b. Ascertain reporting objectives of engagement team. c. Communicate significant factors identified with each of the joint auditors. d. Consider the results of preliminary engagement activities. 4. Each of the Joint auditors shall assess the risk of Material Misstatement and communicate to other Joint auditors. 5. The Joint auditors should discuss and document the nature, timing and extent of audit procedures for Common areas and Specific areas of audit to be performed. 6. Joint auditors shall obtain common engagement letter and common management representation letter regarding fulfilment of responsibilities by management. 7. The Work allocation between joint auditors shall be documented and signed by all the joint auditors which shall also be communicated to those charged with governance. 32 Page CA Final l Advanced Auditing, Assurance and Professional Ethics l Smart Notes l CA Ram Harsha Learn contextually! SA 600 – USING THE WORK OF ANOTHER AUDITOR PREFACE: When the auditor delegates work to assistants or uses work performed by other auditors and experts, he will continue to be responsible for forming and expressing his opinion on the financial information. However, he will be entitled to rely on work performed by others, provided he exercises adequate skill and care and is not aware of any reason to believe that he should not have so relied. In the case of any independent statutory appointment to perform the work on which the auditor has to rely in forming his opinion, such as in the case of the work of branch auditors appointed under the Companies Act, 2013 the auditor’s report should expressly state the fact of such reliance. A. DIVISION OF RESPONSIBILITY: 1. The principal auditor would NOT BE RESPONSIBLE in respect of the work entrusted to the other auditors, except in circumstances which should have aroused his suspicion about the reliability of the work performed by the other auditors. 2. When the principal auditor has to base his opinion on the financial information of the entity as a whole relying upon the statements and reports of the other auditors, his report should STATE CLEARLY THE DIVISION OF RESPONSIBILITY for the financial information of the entity by indicating the extent to which the financial information of components audited by the other auditors have been included in the financial information of the entity, e.g., the number of divisions/branches/subsidiaries or other components audited by other auditors. B. DEFINITIONS: a. PRINICIPAL AUDITOR: "Principal auditor" means the auditor with responsibility for reporting on the financial information of an ENTITY when that financial information includes the financial information of one or more components audited by another auditor. b. OTHER AUDITOR: "Other auditor" means an auditor, other than the principal auditor, with responsibility for reporting on the financial information of a component which is included in the financial information audited by the principal auditor. (AKA Component auditor) c. COMPONENT: "Component" means a division, branch, subsidiary, joint venture, associated enterprises or other entity whose financial information is included in the financial information audited by the principal auditor. C. ACCEPTANCE OF PRINCIPAL AUDITOR: The auditor should consider whether the auditor's own participation is sufficient to be able to act as the principal auditor. For this purpose, the auditor would consider: 1. The materiality of the portion of the financial information which the principal auditor audits. 2. The principal auditor's degree of knowledge regarding the business of the components. 3. The risk of material misstatements in the financial information of the components 33 audited by the other auditor; and Page CA Final l Advanced Auditing, Assurance and Professional Ethics l Smart Notes l CA Ram Harsha Learn contextually! 4. The performance of additional procedures as set out in this SA regarding the components audited by other auditor resulting in the principal auditor having significant participation in such audit. Note: Where another auditor has been appointed for the component, the principal auditor would normally be ENTITLED TO RELY upon the work of such auditor unless there are special circumstances to make it essential for him to visit the component and/or to examine the books of account and other records of the said component. D. PRINCIPAL AUDITOR PROCEDURES: 1. The principal auditor should perform procedures to obtain sufficient appropriate audit evidence, that the work of the other auditor is adequate for the principal auditor's purposes, in the context of the specific assignment. When using the work of another auditor, the principal auditor should ordinarily perform the following procedures:
