Audit Notes PDF

AUDITING & ETHICS PAPER 5 Chartered Accountant O F A RIV U P R O A C A DE M Y STUDY NOTES CA Karthik Shenoy CA INTERMEDIATE  AUDIT & ETHICS...

AUDITING & ETHICS PAPER 5 Chartered Accountant O F A RIV U P R O A C A DE M Y STUDY NOTES CA Karthik Shenoy CA INTERMEDIATE  AUDIT & ETHICS INDEX # CHAPTER NAME PAGE NO 1 NATURE, OBJECTIVE & SCOPE 1 - 17 2 AUDIT STRATEGY, PLANNING & PROGRAMME 18 - 34 3 RISK ASSESSMENT & INTERNAL CONTROL 35 - 72 4 AUDIT EVIDENCE 73 - 120 5 AUDIT OF ITEMS OF FS 121 - 165 6 AUDIT DOCUMENTATION 166 - 172 7 COMPLETION & REVIEW 173 - 197 8 AUDIT REPORT 198 - 248 9 AUDIT OF DIFFERENT ENTITIES 249 - 296 10 BANK AUDIT 297 - 326 11 ETHICS & TERMS OF ENGAGEMENT 327 - 346 "Focus on the Process not on the Result"  AUDITING & ETHICS – NATURE, OBJECTIVE & SCOPE OF AUDIT CHAPTER 1 – NATURE, OBJECTIVE & SCOPE OF AUDIT DEFINITION & DECODING OF THE DEFINITION Define Audit. “An audit is an independent examination of financial information of any entity, whether profit oriented or not, and irrespective of its size or legal form, when such an examination is conducted with a view to expressing an opinion thereon.” 1. Audit is an independent examination of financial information 2. of any entity – that entity may be profit oriented or not and irrespective of its size or legal form. For example – Profit oriented – Audit of Listed company engaged in business. On the other hand, Audit of NGO – not profit oriented. 3. The objective of the audit is to express an opinion on the financial statements It is also called as engagement: Engagement means an arrangement to do something. In the context of auditing, it means a formal agreement between auditor and client under which auditor agrees to provide auditing services. It takes the shape of engagement letter. The purpose of external audit engagements is to enhance the degree of confidence of intended users of financial statements. Such engagements are also reasonable assurance engagements. What are the points to be considered to ensure the financial statements are not misleading? 1. The accounts have been drawn up with reference to entries in the books of account; 2. The entries in the books of account are adequately supported by sufficient and appropriate evidence; 3. None of the entries in the books of account has been omitted in the process of compilation and nothing which is not in the books of account has found place in the statements; 4. The information conveyed by the statements is clear and unambiguous; 5. The financial statement amounts are properly classified, described and disclosed in conformity with accounting standards; and 6. The statement of accounts presents a true and fair picture of the operational results and of the assets and liabilities. CA KARTHIK G SHENOY | ARIVUPRO ACADEMY 1  AUDITING & ETHICS – NATURE, OBJECTIVE & SCOPE OF AUDIT OBJECTIVES AND SCOPE OBJECTIVES 1. 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 on whether the financial statements are prepared, in all material respects, in accordance with an applicable financial reporting framework. Absolute assurance cannot be given. However, reasonable assurance is not a guarantee but it is a high level of assurance. 2. To report on the financial statements, and communicate as required by the SAs, in accordance with the auditor’s findings. 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. 3. The auditor evaluates 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. 4. 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. Management is responsible for a. preparation of financial information, b. selection & application of accounting policies c. FS prepared on historical information 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 CA KARTHIK G SHENOY | ARIVUPRO ACADEMY 2  AUDITING & ETHICS – NATURE, OBJECTIVE & SCOPE OF AUDIT 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. 6. The auditor is not expected to perform duties which fall outside the scope of his competence. 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. TEST YOUR UNDERSTANDING 1 Lalji Bhai has purchased shares of a company listed on NSE. The audited financial statements of the company provide picture of healthy financial performance having robust turnover, low debt and good profits. On above basis, he is absolutely satisfied that money invested by him is safe and there is no chance of losing his money. Do audited results and audit reports of companies provide such assurance to investors like Lalji Bhai? Is thinking of Lalji Bhai correct? Hint Ans: An audit does not provide assurance to investor in shares regarding safety of his money TEST YOUR UNDERSTANDING 2 Good deeds Limited is engaged in business of recycling of wastes from dumping grounds of municipal corporation of Indore to usable manure. It is, in this way, also, helping to make the city clean. During course of audit by Zoha & Zoha, a firm of auditors, it is observed by auditors that company has received a notice from Central Bench of National Green Tribunal for not following certain environmental regulations involving imposition of hefty monetary penalty on the company. The company is yet to reply to the notice. The auditors point out that same is not stated in notes to accounts in financial statements. The company points out that auditors are going beyond scope of their work. Does such a matter fall within scope of audit? Hint Ans: Proper disclosure of financial information is well within scope of audit. TEST YOUR UNDERSTANDING 3 A huge fire broke out in NOIDA plant of KT Limited. Plant assets comprising building, machinery and inventories were insured from branch of a public sector insurance company. Apart from an insurance surveyor who was deputed for assessing loss, the regional office of insurance PSU also appointed a CA for verification of books of accounts/ financial records of the company and circumstances surrounding the loss. He was also requested to submit an early report. Would the report by CA in nature of audit report? Hint Ans: It is an investigation and not in nature of audit report. CA KARTHIK G SHENOY | ARIVUPRO ACADEMY 3  AUDITING & ETHICS – NATURE, OBJECTIVE & SCOPE OF AUDIT ASPECTS TO BE COVERED IN AUDIT 1. 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. 2. 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. 3. Checking of the arithmetical accuracy of the books of account. 4. 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. 5. Ascertaining that a proper distinction 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. 6. 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. 7. Verification of the title, existence and value of the assets appearing in the balance sheet. 8. Verification of the liabilities stated in the balance sheet. 9. Checking the result shown by the profit and loss and to see whether the results shown are true and fair. 10. Where audit is of a corporate body, confirming that the statutory requirements have been complied with. 11. 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 organisation. ADVANTAGES OF AUDIT OF FINANCIAL STATEMENTS – MS3D will BRinG Future 1. It acts as a moral check on the employees from committing defalcations or embezzlement. 2. Audited financial statements are helpful in settling liability for taxes, negotiating loans and for determining the purchase consideration for a business. 3. 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 fire or some other calamity. 4. Audited accounts are of great help in the settlement of accounts at the time of admission or death of partner CA KARTHIK G SHENOY | ARIVUPRO ACADEMY 4  AUDITING & ETHICS – NATURE, OBJECTIVE & SCOPE OF AUDIT 5. 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. 6. 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. 7. As an appraisal function, audit reviews the existence and operations of various controls in the organisations and reports weaknesses, inadequacies, etc., in them. 8. Government may require audited and certified financial statements before it gives assistance or issues a license for a particular trade. 9. It safeguards the financial interest of persons who are not associated with the management of the entity, whether they are partners or shareholders, bankers, Financial Institutions, public at large etc. INHERENT LIMITATIONS OF AUDIT 1. The Nature of Financial Reporting: The preparation of financial statements involves judgment by management in applying the requirements of the entity’s applicable financial reporting framework. 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. 2. The Nature of Audit Procedures: There are practical and legal limitations on the auditor’s ability to obtain audit evidence like – a. There is the possibility that management or others may not provide, the complete information that is relevant, intentionally or unintentionally. b. Fraud may involve sophisticated and carefully organised schemes designed to conceal it. 3. Not an official 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. 4. Timeliness of Financial Reporting and decrease in relevance of information: Appropriate planning assists in making sufficient time and resources available for the conduct of the audit. The relevance of information & its value, tends to diminish over time. 5. Future Events: Future events or conditions may affect an entity adversely. Adverse events may seriously affect ability of an entity to continue its business. The business may cease to exist in future due to change in market conditions, emergence of new business models or products or due to onset of some adverse events. CA KARTHIK G SHENOY | ARIVUPRO ACADEMY 5  AUDITING & ETHICS – NATURE, OBJECTIVE & SCOPE OF AUDIT IS AUDIT MANDATORY OR VOLUNTARY? 1. It is not necessary that audit is always legally mandatory. There are entities like companies who are compulsorily required to get their accounts audited under law. 2. Even non-corporate entities may be compulsorily requiring audit of their accounts under tax laws. For example, in India, every person is required to get accounts audited if turnover crosses certain threshold limit under income tax law. 3. It is also possible that some entities like schools may be required to get their accounts audited for the purpose of obtaining grant or assistance from the Government. 4. Audit is not always mandatory. Many entities may get their accounts audited voluntarily because of benefits from the process of audit. Many such concerns have their internal rules requiring audit due to advantages flowing from an audit. WHO APPOINTS AN AUDITOR? 1. Generally, an auditor is appointed by owners or in some cases by constitutional or government authorities in accordance with applicable laws and regulations. For example, in case of companies, auditor is appointed by members (shareholders) in Annual General Meeting (AGM). Shareholders are owners of a company and auditor is appointed by them in AGM. 2. However, in case of government companies in India, auditor is appointed by Comptroller and Auditor General of India (CAG), an independent constitutional authority. 3. Take case of a firm who engages an auditor to audit its accounts. In such a case, auditor is appointed by partners of firm. 4. There may be a situation in which auditor may be appointed by a government authority in accordance with some law or regulation. For example, an auditor may be appointed under tax laws by a government authority. TO WHOM REPORT IS SUBMITTED BY AN AUDITOR? 1. The report is submitted to person making the appointment. a. In case of companies – these are shareholders b. In case of a firm – to partners who have engaged him. CA KARTHIK G SHENOY | ARIVUPRO ACADEMY 6  AUDITING & ETHICS – NATURE, OBJECTIVE & SCOPE OF AUDIT CASE STUDY – 1 Rohit, Gurpreet, Ali and Goreti are friends since their school days based in Mumbai. They have cleared CA foundation exams in the same attempt and now plan to appear for CA Intermediate exams. All of them are avid news listeners and regularly keep track of business news even on social media. They are trying to understand new subjects including auditing. Rohit, Gurpreet and Ali have also started attending Live Coaching Classes (LCC) being conducted by Board of studies of ICAI. Goreti has not been able to join Live Coaching Classes yet as she was away on a holiday with her parents. However, she plans to catch it up with her friends very soon. Ali had also joined the classes but he had skipped some lectures. During one informal get together, their discussions centred around new subject of auditing. They discussed many things regarding its nature, scope, benefits and other general practical issues. Goreti was regular in keeping track of audited results of companies being published in leading newspapers. Her view was that audited financial statements of companies give 100% guarantee to different stake holders. It is the main reason behind so much reliance upon auditing. But she could not understand why wrong doings in financial matters are being discovered after many years have gone by. Ali also concurred with her view and added that when financial statements are audited, each and every transaction appearing in books of accounts is verified. However, he could not give clarity to Goreti. Gurpreet was of the opinion that audit was conducted on the basis of sample checking. He was also of the view that audited financial statements are not a guarantee against probable wrong doings in financial matters of the companies. Not to be left behind, Rohit also jumped in the fray. He supported Gurpreet and also added something of his own. Based on above, answer the following questions: - 1. Gurpreet was of the view that audited financial statements are not a guarantee against probable wrong doings in financial matters of companies. What kind of assurance does audit of financial statements provide? a. It provides reasonable assurance meaning a moderate level of assurance. b. It provides reasonable assurance meaning a low level of assurance. c. It provides reasonable assurance meaning a high level of assurance. d. It provides reasonable assurance meaning an absolute level of assurance 2. Rohit added that auditor can force an employee of the company to provide him required information and documents. Can he do so? a. Yes, he can do so. It is necessary to obtain audit evidence. b. Yes, he can do so. There are express rights given to him in this respect. CA KARTHIK G SHENOY | ARIVUPRO ACADEMY 7  AUDITING & ETHICS – NATURE, OBJECTIVE & SCOPE OF AUDIT c. No, he cannot do so. He can only request for providing him with necessary information and documents. But it cannot be forced by him. d. No, he cannot do so. He has no right of seeking information and documents. Therefore, question of forcing does not arise. 3. Ali had listened in one of the classes that audit covers all aspects of an entity and concluded that each and every transaction of entity is verified by auditor. Goreti also seemed to be in agreement with him but she was of the view that besides this, it also meant that audit should be so organized to cover all areas of an entity. Which of following statements is appropriate in this regard? a. Only view of Ali is correct. b. Only view of Goreti is correct. c. Views of both Ali and Goreti are correct. d. Views of both Ali and Goreti are incorrect. 4. All of them also discussed about benefits of auditing. Which of the following is not a likely benefit of auditing? a. Since auditing is connected to future events, audited information can be easily relied upon by users. b. Errors or frauds may be discovered during audit. c. Government authorities can make use of audited accounts for different purposes. d. It can help in bringing out deficiencies in maintenance of financial records. 5. Goreti told her friends that she had read a news report about how a company had misled its auditors by producing some fabricated documents. Which of following statements seems to be appropriate in this regard? a. It was wrong on the part of auditor to rely upon fabricated documents. He must have discovered it as the same falls within the scope of his duties. b. Although it was wrong on the part of auditor to rely upon fabricated documents, he cannot do anything in the matter. He has to report on the basis of documents provided to him. He has no duty in this regard. c. Auditor has to conduct audit by exercising professional skill. But he is not an expert in discovering genuineness of documents. Hence, management consisting of dishonest persons may have led him to rely upon fabricated documents deliberately d. Management cannot mislead auditor due to high level of knowledge and expertise possessed by him. The above is an outlier case-one of the rare odd cases. CA KARTHIK G SHENOY | ARIVUPRO ACADEMY 8  AUDITING & ETHICS – NATURE, OBJECTIVE & SCOPE OF AUDIT TEST YOUR UNDERSTANDING 4 Zeeba Products is a partnership firm engaged in trading of designer dresses. The firm has appointed JJ & Co, Chartered accountants to audit their accounts for a year. The auditors were satisfied with control systems of firm, carried out required procedures and necessary verifications. In particular, they carried out sample checking of purchases, traced purchase bills to GST portal and also made confirmations from suppliers. They were satisfied with audit evidence obtained by them as part of audit exercise. An audit report was submitted to the firm giving an opinion that financial statements reflected true and fair view of state of affairs of the firm. However, later on, it was discovered that purchase manager responsible for procuring dresses from one location was also booking fake purchases of small values by colluding with unethical dealers. Payments to these dealers were also made in connivance with accountant through banking channel. The partners of firm blame auditors for futile audit exercise. Are partners of firm correct in their view point? Imagine any probable reason for such a situation. Hint Ans: This is an inherent limitation of audit. ASSURANCE ENGAGEMENT MEANING 1. An engagement in which a practitioner expresses a conclusion designed to enhance the degree of confidence of the intended users other than the responsible party about the outcome of the evaluation or measurement of a subject matter against criteria. 2. The practitioner gives an opinion about specific information due to which users of information are able to make confident decisions knowing well that chance of information being incorrect is diminished. ELEMENTS OF AN ASSURANCE ENGAGEMENT 1. A three-party relationship involving a practitioner, a responsible party, and intended users. 2. An appropriate subject matter 3. Suitable criteria 4. Sufficient appropriate evidence 5. A written assurance report in appropriate form Meaning of Review & Audit Vs. Review 1. Audit is a reasonable assurance engagement. It provides reasonable assurance. 2. Review is a limited assurance engagement. It provides lower level of assurance than audit. CA KARTHIK G SHENOY | ARIVUPRO ACADEMY 9  AUDITING & ETHICS – NATURE, OBJECTIVE & SCOPE OF AUDIT 3. Review involves fewer procedures and gathers sufficient appropriate evidence on the basis of which limited conclusions can be drawn up. 4. However, both “audit” and “review” are related to financial statements prepared on the basis of historical financial information. Types of Assurance Engagements- Reasonable assurance engagement vs. Limited assurance engagement Reasonable assurance engagement Limited assurance engagement Reasonable assurance engagement provides high Limited assurance engagement provides lower level level of assurance. of assurance than reasonable assurance engagement. It performs elaborate and extensive procedures to It performs fewer procedures as compared to obtain sufficient appropriate evidence. reasonable assurance engagement. It draws reasonable conclusions on the basis of It involves obtaining sufficient appropriate evidence sufficient appropriate evidence. to draw limited conclusions. Example of reasonable assurance engagement is an Example of limited assurance engagement is review audit engagement. engagement. Besides reasonable assurance engagements and limited assurance engagements, there is another kind of assurance which is related to matters other than historical 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. Such an assurance may relate to prospective financial information and not to historical financial information. It can be in the form of a forecast or projection or combination of both. In such type of assurance engagements, examination is not of historical financial information. Therefore, historical financial information is rooted in past events which have already occurred whereas prospective financial information is related to future events. CA KARTHIK G SHENOY | ARIVUPRO ACADEMY 10  AUDITING & ETHICS – NATURE, OBJECTIVE & SCOPE OF AUDIT TEST YOUR UNDERSTANDING 5 The management of Exotic Tours and Travels Limited requests its auditor Raja & Co.to provide an assurance report on the financial information for first quarter of a year by skipping required detailed procedures. Can Raja & Co. provide such a report? What would be nature of such a report? Would it be necessary for them to obtain sufficient appropriate evidence in such a case? Hint Ans: Such report would be in nature of “review”. However, auditors would have to obtain sufficient appropriate evidence. QUALITIES OF AUDITOR 1. Tact, caution, firmness, good temper, integrity, discretion, industry, judgement, patience, clear headedness and reliability are some of qualities which an auditor should have. 2. He must have the highest degree of integrity backed by adequate independence. 3. The auditor, who holds a position of trust, must have the basic human qualities apart from the technical requirement of professional training and education. 4. An exhaustive knowledge of accounting in all its branches is the essential condition of the practice of auditing. He must know thoroughly all accounting principles and techniques ENGAGEMENT AND QUALITY CONTROL STANDARDS 1. The following Standards issued under authority of ICAI Council are collectively known as Engagement Standards: - AREA OF APPLICATION APPLICABLE STANDARDS Audit of historical financial information Standards on auditing (SAs) Review of historical financial information. Standards on review engagements (SREs) Assurance engagements other than audits Standards on Assurance engagements (SAEs) and review of historical financial information Agreed upon procedures to information, compilation engagements and other related Standards on Related Services (SRSs) service engagements. Establish standards and provide guidance regarding a firm’s responsibilities for its Standards on Quality Control (SQCs) system of quality control CA KARTHIK G SHENOY | ARIVUPRO ACADEMY 11  AUDITING & ETHICS – NATURE, OBJECTIVE & SCOPE OF AUDIT 2. Why are Standards needed? [MCQ SEP 24] a. Standards ensure carrying out of audit against established benchmarks at par with global practices. b. Standards improve quality of financial reporting thereby helping users to make diligent decisions. c. Standards promote uniformity as audit of financial statements is carried out following these Standards. d. Standards equip professional accountants with professional knowledge and skill. e. Standards ensure audit quality. DUTIES IN RELATION TO ENGAGEMENT AND QUALITY CONTROL STANDARDS 1. It is the duty of professional accountants to see that Standards are followed in engagements undertaken by them. Ordinarily, these are to be followed by professional accountants. 2. However, a situation may arise when a specific procedure as required in Standards would be ineffective in a particular engagement. 3. In such a case, he is required to document how alternative procedures performed achieve the purpose of required procedure. 4. Reason for departure has also to be documented unless it is clear. 5. His report should draw attention to such departures. 6. It is also to be noted that a mere disclosure in the report does not absolve a professional accountant from complying with applicable Standards. TEST YOUR UNDERSTANDING 6 CA. P Ramu is conducting audit of financial statements of Quick Buy Private Limited. He was not able to obtain external confirmations from certain debtors due to practical difficulties and peculiar circumstances. However, such a procedure is mandated under one of Standards on Auditing. Unable to obtain external confirmations from these debtors, he relied upon sale details to these parties, e-invoices, e-way bills and also traced payments from these parties in bank accounts of the company. He was reasonably satisfied with audit evidence obtained. Is there any other reporting duty cast upon him relating to not following a mandated procedure in one of Standards on Auditing? Hint Ans: His report should draw attention to such departure. CA KARTHIK G SHENOY | ARIVUPRO ACADEMY 12  AUDITING & ETHICS – NATURE, OBJECTIVE & SCOPE OF AUDIT CASE STUDY 2 Me and You Private Limited has been newly incorporated. The plant of the company has recently started production with the help of funds provided by a bank for purchase and installation of machinery. Further, the company is also utilizing working capital credit facilities from the same bank for meeting its day to day working capital requirements like for purchase of raw materials, labour payment etc. However, just within six months of its operations, the management feels that working capital funds are inadequate and situation is creating liquidity issues in the company. The management of the company has approached its bankers and requested for enhancement in working capital credit facilities. The bank manager is insisting upon financial statements of the company for half year along with report providing assurance in this respect duly signed by Chartered Accountant as audit is far away. It also requires projected financial statements for coming years along with a report from CA providing assurance regarding these projections to consider request of management. The management approaches CA P, who has qualified recently and started practising. Reports providing assurance for half yearly results and projected financial statements are sought from CA P. The Management provides necessary information and records to him in this regard. Assume, in above case, the company only provides trial balance, financial statements in draft/preliminary form along with accompanying records for the relevant half year to CA P and requests him to provide duly signed financial statements with a report for mutually agreed professional fees. Based on above, answer the following questions 1. The management of company has engaged CA P to issue a duly signed report for half year. Which of the following standards, if any, issued by ICAI are relevant for CA P? a. Standards on Review Engagements b. Standards on Auditing c. Standards on Related Services d. There are no standards for issuing report in such situation. 2. Which of the following statements is MOST APRROPRIATE in given case situation? a. CA P can assist management in preparation of financial statements of the company. However, issue of a report in such a case is outside the scope of work. b. CA P can assist management in preparation of financial statements of the company and he can issue an audit report. c. CA P can assist management in preparation of financial statements of the company and he can issue a compilation report in this respect. CA KARTHIK G SHENOY | ARIVUPRO ACADEMY 13  AUDITING & ETHICS – NATURE, OBJECTIVE & SCOPE OF AUDIT d. The responsibility of preparation of financial statement is of company’s management. CA P cannot assist management in preparation of financial statements of the company. However, he can issue a review report 3. In the above said scenario for issuance of signed financial statements for half year by CA P, as discussed in last para of Case Study, identify the MOST APPROPRIATE statement: a. Standard on Quality control (SQC 1) is not applicable as CA P cannot issue audit report. b. Standard on Quality Control (SQC 1) is not applicable as CA P cannot issue review report. c. Standard on Quality Control (SQC 1) is applicable in such type of engagement. d. Standard on Quality Control (SQC 1) is not applicable as CA P is barred from issuing any report in such type of engagement. 4. The banker of company has also requested for projected financial statements for coming years along with a report from CA regarding these projections to consider request of management. Which of the following standards issued by ICAI are relevant for CA P in such a situation, if any? a. Standards on Review Engagements b. There are no standards for issuing such type of reports. c. Standards on Related Services d. Standards on Assurance Engagements 5. Suppose CA P also accepts work of issuing projected financial statements with a report to be signed by him. The management has projected turnover of ₹100 core for the next year, ₹150 crore & ₹ 200 crore for following years respectively as compared to present turnover of ₹ 25 crore in current half year. Identify the MOST APPROPRIATE statement in this situation: a. CA P has to satisfy himself regarding arithmetical accuracy of projected data. b. CA P has to satisfy himself regarding reasonableness of assumptions underlying projected turnover and its consistency with actuals. c. CA P has to satisfy himself regarding arithmetical accuracy of data along with its proper presentation to banker. d. CA P has to satisfy himself regarding reasonableness of assumptions underlying projected turnover, its consistency with actuals, disclosure and presentation. CA KARTHIK G SHENOY | ARIVUPRO ACADEMY 14  AUDITING & ETHICS – NATURE, OBJECTIVE & SCOPE OF AUDIT STUDY MATERIAL QUESTIONS 1. “Choosing of appropriate accounting policies in relation to accounting issues is responsibility of management”. Do you agree? Discuss duty of auditor, if any, in relation to accounting policies. Hint Ans: Refer to scope of audit- what it includes. 2. Assurance engagements are not restricted to audit of financial statements alone. Discuss. Hint Ans: Refer to examples on assurance engagements 3. An assurance engagement involves a three-party relationship. Discuss meaning of three parties in such an engagement. Hint Ans: Refer to elements of assurance engagement. 4. A Chartered Accountant is specifically asked to check accounts whether fraud exists. State with reasons whether it is an example of reasonable assurance engagement. Hint Ans: It is not a reasonable assurance engagement. It is in nature of investigation. 5. An audit does not provide absolute assurance. Discuss how nature of audit procedures itself is one of the reasons due to which audit cannot provide absolute assurance. Hint Ans: Refer to second point of inherent limitations of audit. EXAMINATION QUESTIONS UNDER PREVIOUS NEW SYLLABUS 1. “An audit is independent examination of financial information of any entity, whether profit oriented or not, and irrespective of its size or legal form, when such an examination is conducted with a view to expressing an opinion thereon.” Explain stating clearly how the person conducting this task should take care to ensure that financial statements would not mislead anybody. [MTP-Oct. 19] 2. The person conducting audit should take care to ensure that financial statements would not mislead anybody. Explain stating clearly the meaning of Auditing. [RTP-May 20] 3. The objective of an audit of financial statements, prepared within a framework of recognised accounting policies and practices and relevant statutory requirements, if any, is to enable an auditor to express an opinion on such financial statements. 4. State the objectives of Audit according to SA 200. [RTP-May 20] 5. List the points that merit consideration in regard to scope of audit. 6. State briefly six important aspects to be considered by an auditor while conducting an audit. CA KARTHIK G SHENOY | ARIVUPRO ACADEMY 15  AUDITING & ETHICS – NATURE, OBJECTIVE & SCOPE OF AUDIT 7. State the matters which the statutory auditor should look into before framing an opinion on accounts on finalisation of audit of accounts. Discuss overall audit approach. 8. State the principal aspects to be covered in an audit concerning financial statement of account. [Nov 15-5 Marks] 9. GST & Co., a firm of Chartered Accountants has been appointed to audit the accounts of XYZ Ltd. The partner wanted to cover principal aspects while conducting its audit of financial statements. Advise those principal aspects. [RTP-May 18] 10. SWM is proprietorship firm engaged in the manufacturing of different kind of yarns. It sells its finished products both in the domestic as well as in the international market. The company is making total turnover of Rs. 30 crores. It has also availed cash credit limit of ₹3 crores from Dena Bank. In the year 2018-19. Proprietor of the firm is worried about the financial position of the company and is under the impression that since he is out of India, therefore firm might not run well. He approaches an Internal Auditor about as to what would be covered in Audit. Advise regarding principal aspects (any four) to be covered in getting accounts audited. [MTP-March 19] 11. The duties of the auditor are limited to verification of the arithmetical accuracy of the books of the accounts. Comment. 12. Discuss the types of audits required under law. [Nov 11-5 Marks] 13. What is the importance of having the accounts audited by independent professional auditors? [May 01-8 Marks] 14. What are the advantages of independent audit. [May 12-8 Marks] 15. Discuss the following: Advantages of Independent Auditor. [May 15-5 Marks] 16. RAG is proprietorship firm engaged in the manufacturing of textile and handloom products. It sells its finished products both in the domestic as well as in the international market. The company is making total turnover of Rs. 30 crores. It has also availed cash credit limit of Rs. 5 crores from Canara Bank. In the year 2018-19, proprietor of the firm is worried about the financial position of the company and is under the impression that since he is out of India, therefore firm might run into losses. He approaches a CA about advantages of getting his accounts audited throughout the year so that he may not suffer due to accounting weaknesses. Advise regarding advantages of getting accounts audited. [MTP-March 18, Oct.18] 17. 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 organisations where audit is not compulsory. Explain. [RTP-Nov. 18] CA KARTHIK G SHENOY | ARIVUPRO ACADEMY 16  AUDITING & ETHICS – NATURE, OBJECTIVE & SCOPE OF AUDIT 18. Discuss Limitations of audit. [May 11-8 Marks] 19. “The process of auditing is such that it suffers from certain limitations”. Discuss. 20. ABC Ltd. Requested the auditor to provide for absolute assurance in respect of its ten branches scattered in Mumbai and confirm that financial statements are free from material misstatements due to fraud or error. Advise. 21. The auditor is not expected to, and cannot, reduce audit risk to zero and cannot therefore obtain absolute assurance that the financial statements are free from material misstatement due to fraud or error. This is because there are inherent limitations of an audit. Explain. [RTP-Nov. 18] 22. There are practical and legal limitations on the auditor’s ability to obtain audit evidence. Explain with examples. [RTP-May 20] 23. In case of certain subject matters, limitations on the auditor’s ability to detect material misstatements are particularly significant. Explain such assertions or subject matters. [RTP-May 20] 24. 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. Explain. [RTP-May 18] 25. Discuss the following: The discipline of behavioural science is closely linked with the subject of auditing. [Nov 13-5 Marks] 26. What are the objectives and functions of Auditing and Assurance Standard Board (AASB)? Explain. [May 15-6 Marks] 27. Discuss the following: Standards collectively known as the Engagement Standards issued by AASB under the authority of Council of ICAI. [May 12-5 Marks] 28. State the Standards issued by AASB which are collectively known as engagement standards. [Nov 15-4 Marks] 29. PD & Co., Chartered Accountants, were appointed as the statutory Auditors of MR Ltd for the financial year. 2023-24. MR Ltd in the appointment letter to the auditors: “The auditor Shall be responsible for detecting the fraud that may happen in the company during the financial year 2023-24”. They audit our objective to inclusion of such a clause in the appointment letter. [Sep 24 – 3 Marks] CA KARTHIK G SHENOY | ARIVUPRO ACADEMY 17  AUDITING & ETHICS | AUDIT STRATEGY, AUDIT PLANNING AND AUDIT PROGRAMME CHAPTER 2 – AUDIT STRATEGY, AUDIT PLANNING AND PROGRAMME AUDIT PLANNING A. Benefits of Audit Planning: 1. Devote appropriate attention on important areas 2. Identify and resolve potential problems on a timely basis. 3. Helps in systematic organizing and managing the audit. 4. Helps in selection of engagement team members with appropriate levels of capabilities and competence to respond to anticipated risks, and assigning work to them. 5. Directing, supervising and reviewing team member’s work. 6. Helps in coordination of work done. CAQ 1: Write short note on: Usefulness of careful and adequate audit planning. CAQ 2: Surya and Chand Ltd is a manufacturing company engaged in the production of miscellaneous electrical goods. Trilochan and Co. has been appointed as the auditors to carry out its audit. Auditor thinks that planning an audit would involve establishing the overall audit strategy for the engagement and developing an audit plan. Also, Adequate planning benefits the audit of financial statements in several ways. Analyse and advise explaining the benefits of adequate planning. [RTP-May 18] CAQ 3: “An adequate planning benefits the audit of financial statements.” Discuss. [Nov. 18 – 5 Marks] CAQ 5: Explain the benefits of planning in the audit of financial statements. [RTP-May 19] CAQ 6: Engagement partner of Audit Firm MKC AND COMPANY thinks that planning an audit would involve establishing the overall audit strategy for the engagement and developing an audit plan. Also, Adequate planning would benefit the audit of financial statements in several ways. Analyse explaining the benefits of adequate planning. [RTP-Nov. 19] CAQ 7: Adequate planning benefits the audit of financial statements in several ways. Explain [RTP-May 23] B. Is Audit Planning a continuous process? 1. It is not a describe phase but a continual and iterative process. 2. It begins after completion of previous audit and continues till the end of audit. 3. Planning includes the need to consider identification and assessment of ROMM (Risk of material misstatement such as CA KARTHIK G SHENOY | ArivuPro Academy 18  AUDITING & ETHICS | AUDIT STRATEGY, AUDIT PLANNING AND AUDIT PROGRAMME a. Analytical procedures as RAP b. Understanding applicable frame work and how it is complied. c. Determining materiality. d. Experts’ involvement. e. Performing other RAP. 4. The engagement partner and other key members of the engagement team shall be involved in planning the audit including planning and participating in the discussion among engagement team members. 5. The auditor may decide to discuss elements of planning with the entity’s management to facilitate the conduct and management of the audit engagement. CAQ 8: “Planning is not a discrete phase of an audit, but rather a continual and iterative process”. Discuss. [Nov. 18-5 Marks] CAQ 9: Planning is not a discrete phase of an audit, but rather a continual and iterative process that often begins shortly after the completion of the previous audit and continues until the completion of the current audit engagement. Analyse and explain. [RTP-Nov. 19] PLANNING PROCESS - ELEMENTS OF PLANNING The elements of planning can be categorized as under: - I. Preliminary engagement activities II. Planning activities I. PRELIMINARY ENGAGEMENT ACTIVITIES: The auditor considers whether relationship with client should be continued and whether ethical requirements including independence continue to be complied with. It includes: - a. Performing procedures regarding the continuance of the client relationship – (i) Ensure that appropriate procedures regarding the acceptance and continuance of client relationships and audit engagements have been followed and that conclusions reached in this regard are appropriate. (ii) The firm should obtain information considered necessary in the circumstances before accepting an engagement with a new client. (iii) Matters such as a. Integrity of principal owners and key management, b. Competence of engagement team to perform the audit engagement and CA KARTHIK G SHENOY | ArivuPro Academy 19  AUDITING & ETHICS | AUDIT STRATEGY, AUDIT PLANNING AND AUDIT PROGRAMME c. Implications of matters that have arisen during current and previous audit engagement may need to be considered Evaluating compliance with ethical requirements, including independence. (iv) In case of initial engagements, communication with predecessor auditor should be made, where there has been a change of auditors. b. Evaluating compliance with ethical requirements, including independence: - (i) The auditor shall continuously evaluate compliance with ethical requirements including independence (ii) The engagement partner shall remain alert, through observation and making inquiries as necessary, for evidence of non-compliance with relevant ethical requirements by members of the engagement team. (iii) If matters come to the engagement partner’s attention that indicate that members of the engagement team have not complied with relevant ethical requirements, the engagement partner, in consultation with others in the firm, shall determine the appropriate action. (iv) Form a conclusion on compliance with independence requirements that apply to the audit engagement. In doing so, the engagement partner shall: - a. Obtain relevant information from the firm to identify and evaluate circumstances and relationships that create threats to independence. b. Evaluate information on identified breaches, if any, of the firm’s independence policies and procedures to determine whether they create a threat to independence for the audit engagement and c. Take appropriate action to eliminate such threats or reduce them to an acceptable level by applying safeguards, or, if considered appropriate, to withdraw from the audit engagement, where withdrawal is permitted by law or regulation. The engagement partner shall promptly report to the firm any inability to resolve the matter for appropriate action. c. Establishing an understanding of terms of engagement: - It is in the interests of both the entity and the auditor that the auditor sends an audit engagement letter before the commencement of the audit to help avoid misunderstandings with respect to the audit. It ensures that there is no confusion with the client regarding terms of the engagement. CA KARTHIK G SHENOY | ArivuPro Academy 20  AUDITING & ETHICS | AUDIT STRATEGY, AUDIT PLANNING AND AUDIT PROGRAMME II. PLANNING ACTIVITIES: Planning activities involve: - Establishing the overall audit strategy a. 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. b. The process of establishing the overall audit strategy assists the auditor to determine such matters as: (i) The resources to deploy for specific audit areas a. High risk areas – Deploys experienced members b. Complex matters – Deploys experts (ii) Amount of resources to allocate to specific audit areas such as a. Number of team members assigned to observe the inventory count at material locations b. Extent of review of other auditors’ work c. The audit budget in hours to allocate to high risk areas (iii) When these resources are to be deployed such as whether at an interim audit stage or at key cut-off dates (iv) How these resources to be managed, directed and supervised such as meetings, reviews etc. CAQ 10: The process of establishing the overall audit strategy assists the auditor to determine certain matters with respect of team resource. Explain those matters. CAQ 11: Auditor of ABC Ltd. is worried as to management of key resources to be employed to conduct audit. How the audit strategy would be helpful to the auditor? CAQ 12: The engagement partner of AST AND ASSOCIATES, firm of Chartered Accountants appointed as auditor of Fabric India Ltd is considering as to management of key resources to be employed to conduct audit. Discuss how overall audit strategy would assist the auditor. [MTP-March 18] CAQ 13: Describe how the process of establishing the overall audit strategy assists the auditor in marshalling his human resources. [May 19 – 4 Marks] CAQ 14: Overall audit strategy sets the scope, timing and direction of the audit, and guides the development of the more detailed audit plan. The process of establishing the overall audit strategy assists the auditor to determine such matters as for example - 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. Explain the other three such matters. [RTP-May 20] CAQ 15: 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. Discuss stating the process of establishing the overall audit strategy that would assist the auditor to determine key matters. [RTP-Nov. 18] CA KARTHIK G SHENOY | ArivuPro Academy 21  AUDITING & ETHICS | AUDIT STRATEGY, AUDIT PLANNING AND AUDIT PROGRAMME c. Factors for establishing for overall strategy: (i) Identify characteristic and define scope. There are many characteristics of engagement defining its scope. Some of characteristics are as under: Applicable financial reporting framework applicable to the entity Nature of business segments to be audited including the need for specialized knowledge Industry specific reporting requirements required by industry regulators Expected use of audit evidence obtained in previous audits (ii) Ascertain reporting objectives to plan. This helps in the Timing of Audit Nature of communication. Some of the instances are as follows: The entity’s timetable for reporting Organization of meetings to discuss of nature, timing and extent of audit work with management Discussion with management regarding the expected type and timing of reports to be issued including the auditor’s report Discussion with management regarding the expected communications on the status of audit work throughout the engagement. Expected nature and timing of communications among engagement team members, including the nature and timing of team meetings and timing of the review of work performed CAQ 16: In establishing overall audit strategy, the auditor shall ascertain the reporting objectives of the engagement to plan the timing of the audit and the nature of the communications required. Elucidate those cases by which auditor can ascertain the reporting objectives of the engagement. [Nov. 19 – 4 Marks] (iii) Factors that are significant in auditors' judgement should be considered which will contribute in teams' effort like volume of transactions, Significant industry developments, Significant changes in the financial reporting framework, changes in the legal environment affecting the entity. (iv) Consider the result of preliminary engagement activities or other similar activities. (v) Ascertain CAQ 17: Comment nature on the timing following and extent in relation (NTE) to SAs: of resources Auditor necessary shall establish an overall strategy that sets the scope, timing and direction of the audit, and that guides the development of the audit plan”. [May 11 – 5 Marks] CAQ 18: Discuss the factors the auditor will consider while establishing the overall strategy. CA KARTHIK G SHENOY | ArivuPro Academy 22  AUDITING & ETHICS | AUDIT STRATEGY, AUDIT PLANNING AND AUDIT PROGRAMME Development of Audit plan 1. 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. 2. 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. 3. Understanding client’s business is one of the important principles in developing an audit plan. 4. SA-300 states that auditor shall develop an audit plan that shall include description of – (i) The nature, timing and extent of planned risk assessment procedures (ii) The nature, timing and extent of planned further audit procedures at assertion level (iii) Other planned audit procedures Relationship between audit strategy and audit plan 1. Audit strategy sets the broad overall approach to the audit whereas audit plan addresses the various matters identified in the overall audit strategy. 2. Audit strategy determines scope, timing and direction of audit. Audit plan describes how strategy is going to be implemented. 3. 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. 4. 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. CAQ 19: Discuss the relationship between overall audit strategy and audit plan. CAQ 20: “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”. Discuss. CAQ 21: The establishment of the overall audit strategy and the detailed audit plan are closely inter-related. Explain. [MTP-Mar 19] CAQ 22: Once the overall audit has been established, an audit plan can be developed to address the various matters identified in the overall audit strategy. The establishment of the overall audit strategy and the detailed audit plan are closely inter-related. [RTP-MAY 22] Overall audit strategy – The auditors responsibility. 1. When discussing matters in audit strategy and audit plan, sufficient strategy is required so that effectiveness of the audit is not compromised. CA KARTHIK G SHENOY | ArivuPro Academy 23  AUDITING & ETHICS | AUDIT STRATEGY, AUDIT PLANNING AND AUDIT PROGRAMME 2. The involvement of partners and other key members draws on their experience and insights there by enhancing the effectiveness and efficiency of the planning process. Changes to plan 1. The auditor shall update and change the strategy and the plan as required during the course of audit. 2. As a result of unexpected events, changes in conditions, evidence obtained from results of procedures performed, the auditor may need to modify the strategy and plan. 3. This may be the case when the information comes to the auditor’s attention that differs significantly from the information available the audit procedures were planned. CAQ 23: The auditor shall update and change the overall audit strategy and the audit plan as necessary during the course of the audit. Explain. [RTP-Nov 18] CAQ 24: 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. Explain. [RTP-Nov 19] CAQ 25: Plans should be further developed and revised as necessary during the course of the audit. Explain. [RTP-May 20] CAQ 26: Once the audit plan has been drafted and communicated, it is obligatory on the auditor to follow the same. [MAY 22 – 2 marks] Planning of Supervision and Review of team member’s work 1. Auditor shall plan the nature, timing and extent. 2. While planning the above the following factors has to be considered. a. Size & complexity of the entity. b. Area of the audit. c. Assessed risks of material misstatement. d. Capabilities and competence of the members performing a work. CAQ 27: “The Nature, timing and extent of the direction and supervision of engagement team members and review of their work vary depending on many factors.” Explain. CAQ 28: 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. Explain giving examples. [RTP NOV 20] Documentation 1. The auditor shall document. a. Overall audit strategy – Key decisions CA KARTHIK G SHENOY | ArivuPro Academy 24  AUDITING & ETHICS | AUDIT STRATEGY, AUDIT PLANNING AND AUDIT PROGRAMME b. Audit Plan – planned RAP & FAP c. Significant changes made during the engagement to the plan or strategy with reasons. 2. The documentation of the strategy is the record of any key decision considered. 3. Documentation of audit plan is a record of Plan NTE and Risk Assessment Procedures and Further Audit Procedures. 4. The record of significant changes to strategy and plan explains why the changes were made and also the final strategy and plan. 5. Examples of Audit Documentation: a. Summary of discussions with entities key decision makers. b. Documentation of audit committees’ approval of services. c. Access letters, d. Other communications or agreements with management, TCWG regarding scope and changes in scope. e. Auditors report. f. Other reports mentioned in the engagement agreement. CAQ 29: The auditor shall document 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. Explain. [MTP-Aug. 18, RTP-Nov. 18] CAQ 30: The auditor shall document the overall audit strategy, the audit plan and any significant changes made to the overall audit strategy or the audit plan. Explain in detail giving examples. [RTP-Nov 20] CAQ 31: Documentation of audit plan serves as 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. What all activities in the planning phase should form part of auditor's documentation? State with examples. [MAY 21 – 4 marks] AUDIT PROGRAMME Meaning It is a list of examination and verification and steps to be applied and set out in such a way that the inter relationship of one step to another is clearly shown and designed. Definition “It consists of series of verification procedures to be applied on the FS and its items and accounts of a given company for the purpose of obtaining sufficient evidence to unable the auditor to express an informed opinion on such statements.” CA KARTHIK G SHENOY | ArivuPro Academy 25  AUDITING & ETHICS | AUDIT STRATEGY, AUDIT PLANNING AND AUDIT PROGRAMME In other words, audit programme is a detailed plan of applying the procedures in the given circumstances with instructions for the appropriate techniques to be adopted for accomplishing the objectives. CAQ 32: Write short note on: Audit Programme. [Nov. 06 – 4 marks] CAQ 33: “An audit programme is a detailed plan of applying the audit procedure in the given circumstance for accomplishing the audit objectives”. Discuss. Some Important points on AP (i) One programme not practicable: a. Evolving one audit programme applicable to all business under all circumstances is not practicable. b. The factors that vary are – vary in nature, size and composition; work which is suitable to one business may not be suitable to others; efficiency and operation of internal controls and the exact nature of the service to be rendered by the auditor. CAQ 34: Evolving one audit programme applicable to all audit engagements under all circumstances is not practicable. Explain [RTP-May 18] CAQ 35: Evolving one audit programme applicable to all business under all circumstances is not practicable. Explain clearly stating in detail the meaning of audit programme. [RTP-May 18] (ii) Keep an open mind: As experience is gained by actually carrying out the work, 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. CA KARTHIK G SHENOY | ArivuPro Academy 26  AUDITING & ETHICS | AUDIT STRATEGY, AUDIT PLANNING AND AUDIT PROGRAMME CAQ 36: M/s TP & Co., a firm of Chartered Accountants, is auditor of KSR Ltd. for many years. KSR Ltd. has diversified their business into newer areas during the last year. The senior member of the audit team handed over the standard audit programme of earlier years to the audit assistants and instructed them to follow the same. The assistants are conducting the audit accordingly. Whether the attitude of the audit assistants is justified or they are required to keep an open mind? Guide them. [NOV – 4 marks] (iii) Periodic Review: There should be periodic review of the audit programme to assess whether the same continues to be adequate for obtaining requisite knowledge and evidence about the transactions. On the basis of an obsolete programme and, for this negligence, the whole audit may be held as negligently conducted and the auditor may have to face legal consequences. This is done so that inadequacies or redundancies of the programme may be removed. 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. CAQ 37: “The utility of the audit programme can be retained and enhanced only by keeping the programme and also the client’s operations and internal control under periodic review so that inadequacies or redundancies of the programme may be removed”. Explain. [RTP-May 19] CONSTRUCTING AN AUDIT PROGRAMME The following points shall be considered while constructing the programme 1. Stay within the limits - Stay with the scope and limitation of the engagement. 2. Prepare a written audit programme setting forth the procedures that are needed to implement the audit plan. 3. Get enough proof - Determine the evidences are reasonably available and identify the best evidence for deriving a satisfaction. 4. Relevance - Apply only those steps and procedures which are useful in the specific situations. 5. Include the audit objectives for each area and sufficient details which serve as a set of instructions for the assistants involved in audit and help in controlling the proper execution of the work 6. Error - Consider all possibilities of error. 7. Co-ordination - Coordinate the procedures to be applied to related items. CA KARTHIK G SHENOY | ArivuPro Academy 27  AUDITING & ETHICS | AUDIT STRATEGY, AUDIT PLANNING AND AUDIT PROGRAMME CAQ 38: Arpana Hospitals Ltd having Gross Professional Charges of ₹50 crores is engaged in providing healthcare services. STP & Co., a firm of auditors is appointed as its auditors. Advise what special points to be kept in mind for the purpose of construction of an Audit programme. Explain. [RTP-May 18] CAQ 39: Explain the significant points auditor would consider while developing an audit programme. [RTP-May 19] CAQ 40: List out the points that should be kept in mind by the auditor for the purpose of constructing an audit programme. [May 19 – 3 Marks] CAQ 41: Discuss the points to be considered by auditor for the purpose of constructing an audit programme. [Nov 19 – 4 Marks] It is designed to provide audit evidence 1. It means the information used by the auditor in arriving at the conclusion on which the opinion is based. 2. What is the best evidence for testing the accuracy is a matter of expert’s knowledge and experience. 3. 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 4. The auditor, however, has to place appropriate weight on each piece of evidence and accordingly should prescribe the priority of verification. 5. The audit evidence is generally classified into a. Documentary b. Physical examination c. Statements and explanations of management. d. Statements and explanation of third party. e. Arithmetical calculation by the auditor. f. State of internal control and internal check. g. Inter relationship of various accounting data. h. minutes book. i. subsequent action by client and by others. CAQ 42: Evidence is the very basis for formulation of opinion and an audit programme is designed to provide for that by prescribing procedures and techniques. Analyse and explain with the help of example of evidence in respect of Sales. [RTP-May 20] CAQ 43: In most of the assertions much of the evidence be drawn and each one should be considered and weighed to ascertain its weight to prove or disprove the assertion. An auditor picks up evidence from a variety of fields. Analyse and explain with the help of examples. [RTP-Nov 20] CA KARTHIK G SHENOY | ArivuPro Academy 28  AUDITING & ETHICS | AUDIT STRATEGY, AUDIT PLANNING AND AUDIT PROGRAMME DEVELOPING THE AUDIT PROGRAMME AND ADVANTAGES, DISADVANTAGES 1. Audit planning – Generally begins at the conclusion of previous year audit along with related programme. Sometimes it should be reconsidered for modification based on auditor’s review of: a. Internal control b. Preliminary evaluation c. Compliance procedures d. Substantive procedures 2. Written audit programme – The auditor should prepare AP in writing setting forth the procedures that are needed. 3. Audit objective and instructions to assistants – AP may also have the objective for each area and set of instructions with details which will serve as means to control and proper execution of work. 4. Reliance on internal control – The auditor should have an understanding of accounting system and related ICS on which rely in determining NTE of audit procedures. a. May conclude on relying on ICS is an effective and efficient way to conduct his audit b. May decide not to rely on ICS when there are other efficient ways of obtaining SAAE. Also consider: a. Timing of procedures. b. Co-ordination of assistance from the client. c. Availability of assistants. d. Involvement of other auditors or experts 5. Timing of performance of audit procedures – Auditor has flexibility in deciding when to perform the procedures. In some cases, auditor will have no discretion as to timing. ADVANTAGES OF AUDIT PROGRAMME 1. Can carry out the audit with clear set off instructions. 2. Provides a total perspective of work to be performed. 3. Selection of assistance becomes easier on the basis of their capability when the work is planned, defined and segregated. 4. Reduces danger of ignoring or overlooking certain books and records. 5. Accountability – The assistants will have the responsibility for the work carried on by them individually. It may be raised back to the assistant. 6. The auditor can have the control over the progress of various audits. 7. This serves as a guide in succeeding year. CA KARTHIK G SHENOY | ArivuPro Academy 29  AUDITING & ETHICS | AUDIT STRATEGY, AUDIT PLANNING AND AUDIT PROGRAMME 8. Serves as the evidence in case of any charges brought against the auditor. CAQ 44: Discuss the following: Despite of several disadvantages, audit programme is required to start an audit. [Nov 13 – 5 Marks] CAQ 45: How does an audit programme help to plan and perform the audit? DISADVANTAGES OF AUDIT PROGRAMME 1. It may become mechanical and the work may be carried out without any understanding of the object in the entire audit scheme. 2. Becomes too rigid and inflexible in case of changes in the business operations, staff and internal control. 3. Inefficient assistants may take shelter behind the programme. 4. A hard and fast programme may kill the initiative of efficient assistants. CAQ 46: What are the disadvantages of the use of an Audit Programme. [May 07 – 4 Marks] CAQ 47: Write short note on: Disadvantages of the use of an Audit Programme. [May 12 – 4 Marks] Extract of Sample audit programme pertaining to sales of an entity Name of the concern Fine Industries Financial Year 2022-23 Prepared by Priya (with date) Reviewed by Raj (with date) Approved by Suresh (with date) Serial Extent of Basis of Nature of Procedure Done by Number Check Sample (a) Vouch few sales invoices from copies available in record of the concern. (b) Trace these invoices into the account books of the concern (c) Verify few invoices with e-way bills generated on the e-way bill portal (d) Trace few sales invoices into the stock records to ensure that sold quantities have been reduced from stocks (e) Trace also few sales invoices into accounts of buyers CA KARTHIK G SHENOY | ArivuPro Academy 30  AUDITING & ETHICS | AUDIT STRATEGY, AUDIT PLANNING AND AUDIT PROGRAMME STUDY MATERIAL QUESTIONS 1. Discuss how performing preliminary engagement activities as part of planning an audit assists auditor. Hint Ans: It assists in identifying and evaluating events or circumstances that may affect auditor’s ability to plan and perform audit engagement. 2. Discuss how an engagement partner ensures that firm complies with relevant ethical requirements including independence in relation to client. Hint Ans: Refer to point on evaluating compliance with ethical requirements including independence. 3. “Purported disadvantages of an audit programme can be overcome”. Do you agree? Hint Ans: Purported disadvantages of audit programme may be eliminated by imaginative supervision of the work carried on by the assistants; the auditor must have a receptive attitude as regards the assistants; the assistants should be encouraged to observe matters objectively and bring significant matters to the notice of supervisor/principal. 4. An auditor of a company fails to document audit strategy and audit plan. Briefly outline consequences of such failure. Hint Ans: Refer to point on documentation 5. SA 300 states that auditor shall plan the nature, timing and extent of direction and supervision of engagement team members and the review of their work. Discuss few factors affecting such supervision and review of work of engagement team members. Hint Ans: Refer to point on Planning supervision and review of work of engagement team members EXAMINATION QUESTIONS UNDER PREVIOUS NEW SYLLABUS 1. “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” Discuss stating clearly the broad points you would be covering in framing plan to conduct audit in an efficient and effective manner. [MTP-Mar 18, Mar 19] 2. Planning is not a discrete phase of an audit, but rather a continual and iterative process that often begins shortly after (or in connection with) the completion of the previous audit and continues until the completion of the current audit engagement. Discuss stating clearly the broad points you would be covering in framing plan to conduct audit in an efficient and effective manner. [MTP-Oct. 18] CA KARTHIK G SHENOY | ArivuPro Academy 31  AUDITING & ETHICS | AUDIT STRATEGY, AUDIT PLANNING AND AUDIT PROGRAMME 3. 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. Explain. [RTP-Nov. 18] 4. Plans should be made to cover acquiring knowledge of the client’s accounting systems, policies and internal control procedures. Explain. [RTP-Nov. 19] 5. SA 300 states that auditor should plan his work to enable him to conduct an effective audit in an efficient and timely manner. What matters should be covered in such Plan by the auditor? [RTP-May 23] Points to be covered in framing audit plan 1. Planning in auditing encompasses developing an overall plan for the expected scope and conduct of the audit and developing an audit programme showing the nature, timing and extent (NTE) of audit procedures. 2. The audit planning is necessary to conduct an effective audit in an efficient and timely manner. 3. SA 300 “Planning an Audit of Financial Statements” deals with the auditor’s responsibility to plan an audit of financial statements. 4. Plans should be made to cover, among other things: (a) Acquiring knowledge of the client’s accounting systems, policies and internal control procedures; (b) Establishing the expected degree of reliance to be placed on internal control; (c) Determining and programming the nature, timing, and extent of the audit procedures to be performed; & (d) Coordinating the work to be performed. 6. In performing an audit of financial statements, the auditor shall have or obtain knowledge of the business. Explain in the light of SA 315. [May 04 – 8 Marks] 7. State the matters to be considered for acquiring knowledge of the business of the client by the auditor. [May 05 – 6 Marks] 8. Write short note on: Knowledge of Client’s Business. [May 09 – 5 Marks] 9. ‘Knowledge of Client business’ is one of the important principles in developing an overall audit plan. Explain. [Nov 17 – 6 Marks] CA KARTHIK G SHENOY | ArivuPro Academy 32  AUDITING & ETHICS | AUDIT STRATEGY, AUDIT PLANNING AND AUDIT PROGRAMME Knowledge of Client’s Business Knowledge of client’s business is one of the important principles in developing an overall audit plan. In fact, without adequate knowledge of client’s business, a proper audit is not possible. As per SA 315 “Identifying and Assessing the Risk of Material Misstatements through understanding the entity and its environment” auditor is required to obtain an understating of following as a part of risk assessment procedures: (a) Industry, regulatory, and other external factors including applicable financial reporting framework. (b) The nature of the entity, including: its operations; its ownership and governance structures; the types of investments that the entity is making and plan to make & the way that the entity is structured and how it is financed; (c) The entity’s selection and application of accounting policies, including the reasons for changes thereto. (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. 10. Knowledge of the Client’s business is one of the important principles in developing an overall audit plan. In fact, without adequate knowledge of client’s business, a proper audit is not possible. As per SA- 315, “Identifying and Assessing the Risk of Material Misstatement through Understanding the Entity and Its Environment”, the auditor shall obtain an understanding of the relevant industry, regulatory and other external factors including the applicable financial reporting framework. Substantiate with the help of examples. [RTP-May 20] Examples of industry, regulatory and other external factors including the applicable FRF 1. The competitive environment, including demand, capacity, product and price competition as well as cyclical or seasonal activity. 2. 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. 3. Technological developments, such as those related to the entity’s products, energy supply and cost. 4. The effect of regulation on entity operations. CORRECT / INCORRECT QUESTIONS 1. The establishment of the overall audit strategy and the detailed audit plan are not necessarily discrete or sequential processes, but are closely interrelated since changes in one may result in consequential changes to the other. Ans: Correct. 2. Establishing an overall audit strategy that sets the scope, timing and direction of the audit, and that guides the development of the audit plan is prerogative (exclusive right) of the management. CA KARTHIK G SHENOY | ArivuPro Academy 33  AUDITING & ETHICS | AUDIT STRATEGY, AUDIT PLANNING AND AUDIT PROGRAMME Ans: Incorrect. It is the part of the audit planning activities. 3. Planning is a discrete phase of an audit. [RTP-Nov 19] Ans: Incorrect. It is a continual & iterative process. 4. There is no relation between Audit Plans and knowledge of the client’s business. [RTP-May 19] Ans: Incorrect. Plans should be based on knowledge of the client’s business. 5. Planning is not a discrete phase of an audit, but rather a continual and iterative process. [RTP-May 19] Ans: Correct 6. A well designed and drafted audit plan and audit strategy which takes care of all the uncertainties and conditions, need not be changed during the course of audit. [Nov 18-2 Marks] Ans: Incorrect. update and change the overall audit strategy and the audit plan as necessary during the course of the audit. 7. The auditor need not discuss elements of planning with the entity’s management in any case. Ans: Incorrect. auditor may decide to discuss elements of planning with the entity’s management [RTP-Nov 19] 8. Under a properly framed audit programme by the auditor, the danger is significantly less and audit can proceed systematically. [Nov 19-2 Marks] Ans: Correct. A written and pre-determined programme will ensure danger is reduced. 9. In the planning stage, analytical procedures would not in any way assist the auditor. [RTP-May 20] Ans: Incorrect. Analytical procedures assist the auditor in understanding the client’s business and in identifying areas of potential risk. CA KARTHIK G SHENOY | ArivuPro Academy 34  AUDITING & ETHICS | RISK ASSESSMENT & INTERNAL CONTROL CHAPTER 3 – RISK ASSESSMENT AND INTERNAL CONTROL AUDIT RISK (a) Audit risk means the risk that the auditor gives an inappropriate audit opinion when the financial statements are materially misstated. It means that an auditor expresses an unmodified opinion when financial statements are materially misstated. (b) Thus, it is the risk that the auditor may fail to express an appropriate opinion in an audit assignment. (c) 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. (d) 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 and consequently did not report anything regarding the plant and machinery. Therefore, opinion given by the auditor would be inappropriate resulting in audit risk. (e) Therefore, Audit Risk = Risk of Material Misstatement x Detection Risk (f) 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. (g) The risks of material misstatement may exist at two levels: i. The overall financial statement level ii. The assertion level for classes of transactions, account balances, and disclosures. (h) 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 i. Inherent risk—The susceptibility (weakness) of an assertion about a class of transaction, account balance or disclosure to a misstatement that could be material, either individually or when aggregated with other misstatements, before consideration of any related controls. There is always a risk that before considering any existence of internal control in an entity, a particular transaction, balance or a disclosure have a chance of being misstated and such misstatement can be material. This risk is known as Inherent Risk. CA KARTHIK G SHENOY | ArivuPro Academy 35  AUDITING & ETHICS | RISK ASSESSMENT & INTERNAL CONTROL ii. Control risk— (1) The risk that a misstatement that could occur in an assertion about a class of transaction, account balance or disclosure and that could be material, either 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. (2) 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. (3) 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. (i) Detection Risk – i. 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. ii. Detection risk comprises sampling and non-sampling risk. (j) Relationship i. CR ↑ - controls ↓ - IR ↑ - errors & frauds ↑ - checking ↑ - DR ↓ - Audit risk ↓ ii. CR ↓ - controls ↑ - IR ↓ - errors & frauds ↓ - checking ↓ - DR ↑ - Audit risk ↓ FS are not materially misstated (k) The assessment of risks is a matter of professional judgment, rather than a matter capable of precise measurement. (l) What is not included in Audit Risk? i. The risk that the auditor might express an opinion that the financial statements are materially misstated when they are not. ii. Business risks such as loss from litigation, adverse publicity, or other events arising in connection with the audit of financial statements. CA KARTHIK G SHENOY | ArivuPro Academy 36  AUDITING & ETHICS | RISK ASSESSMENT & INTERNAL CONTROL RISKS OF MATERIAL MISSTATEMENT 1. The risks of material misstatement may exist at two levels: a) 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. Example: Integrity of mgt, Nature of industry, pressure on mgt, quality of accounting systems etc. b) The assertion level for classes of transactions, account balances, and disclosures- To determine the NTE of further audit procedures necessary to obtain SAAE. This evidence enables the auditor to express an opinion on the financial statements at an acceptably low level of