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Standards on Auditing - 2, SA 230: Audit Documentation, SA 240:…
Standards on Auditing - 2
SA 230: Audit Documentation
Audit documentation:
Record of audit procedures performed, AE obtained and conclusions reached
Purpose of audit documentation:
Evidence for auditor's basis for a conclusion
Evidence that audit was planned and performed in accordance with SAs
Additional purposes:
Assisting engagement team to plan & perform and audit
Assisting engagement team members to discharge supervision & review responsibilities
Engagement team accountable for its work
Retaining records for significance in future audits
EQCR SQC 1
Enabling external inspections
Experienced auditors:
An individual who has practical audit experience and reasonable understanding of:
Audit processes
SA & legal requirement
Business environemnt
Auditing & financial reporting issues relevant to industry
Form, extent & content of audit documentation:
NTE of audit procedures to comply with SA & legal requirements. While documenting, the auditor shall record:
a. Characteristics of matters tested
b. Date and person who performed the work
c. Date and person who reviewed the work
Results of audit procedures and audit evidence obtained
Significant matters arising during audit, conclusions reached and professional judgement made
Other important matters to be documented:
SA 260: Communication with TCWG
SA 720: Auditor identified information that is inconsistent with auditor's final conclusion
If auditor departs from the requirement of SA
SA 560: If auditor performs additional procedures and forms new conclusions after auditor's report
Factors affecting form, content & extent of audit documentation:
Size & complexity of entity
Nature of audit procedures to be performed
RMM
Significance of audit evidence obtained
Nature & extent of exceptions identified
Need to document conclusions not evident from work performed
Audit methodology
Working papers:
Details of procedure applied, tests performed, information obtained and conclusions reached
May be paper or electronic form
Audit documentation is not a substitute for entity's accounting records
Audit completion memorandum:
It may be helpful to prepare & retain a summary of significant matters, how they were addressed and cross reference to to relevant audit documentation
It may facilitate efficient review & inspection of audit documentation
It may assist auditor's consideration of significant matters
Identify if individual relevant SA objective has not been met, preventing auditor from achieving overall objective
Auditor's responsibility to provide access to third parties & regulators
Auditor should not provide access without specific authority, unless required by law/regulation
As per CA Act 1949, CA will be guilty of professional misconduct if he discloses information to third person without client's consent, unless required by law/regulation
SA 200: Auditor should respect confidentiality of information obtained and not disclose to third party without client's consent unless required by law/regulation
SQC 1 & SA 230: It is the property of auditor. It is auditor's responsibility to provide regulators with access to working paper and auditor's discretion to make available extracts of working papers to third parties
SA 240: Auditor's responsibilities relating to fraud in an audit of FS
Objective:
Identify and assess RMM due to fraud
Obtain SAAE about the assessed RMM
Respond appropriately to identified or suspected fraud
Definitions
Fraud:
An intentional act done by one or more individuals among management/TCWG/employees/3rd parties using deception to obtain illegal advantage.
Fraud risk factors:
Events that indicate incentive/pressure to commit fraud or opportunity to commit fraud
Types of fraud
Fraudulent Financial Reporting
Manipulation/Falsification of accounting records or documents
Misrepresentation or intentional omission of events or transactions
Intentional misapplication of accounting principles to classification, presentation or disclosure
Recording fictitious journal entries particularly near year end
Inappropriately changing assumptions or adjusting estimates
Omitting, advancing or delaying recognition of events/transactions
Misappropriation of assets:
Embezzling of receipts
Stealing physical assets or intellectual property
Paying for goods not received
Using entity's assets for personal use
Risk assessment procedures & related activities
Inquiries of management & others within the entity:
Management's assessment of RMM due to fraud
Management's process for identifying & responding to risks of fraud
Management's communication with TCWG
Management's communication to to employees regarding business practices & ethical behavior
Make inquiries of internal auditor
Inquiring TCWG
Obtain understanding of how TCWG supervises management's process
Ask TCWG of their knowledge of existence of fraud
Unusual or unexpected relationships identified:
If unusual or unexpected relationships may indicate RMM due to fraud
Fraud Risk factors:
Fruad risk factors may not indicate existence of fraud
Identifying & assessing RMM due to fraud:
The auditor shall identify and assess RMM at the FS level and assertion level for classes of transactions, balances & disclosures
Response to assessed RMM due to fraud:
Professional skepticism
Assignment of personnel
Accounting principles and practices
Control
Audit procedure related to management override of controls:
Management is in unique position to perpetrate fraud because of management's ability by overriding controls.
Test appropriateness of JE
Make inquiries of management
Select JE at end of reporting period
Test JE
Review accounting estimate
SA 450: Evaluating misstatements identified during audit
Objective of the auditor:
The effect of identified misstatements on audit
The effect on uncorrected misstatements on FS
Accumulation of identified misstaements:
Accumulate all misstatements other than those that are not material. To evaluate effect of misstatements, distinguish between
factual, judgemental and projected misstatements
Consideration of identified misstatements as the audit progresses:
Revised audit strategy and plan if:
Identified misstatements indicate that other misstatements may exist and together they can be material
Aggregate of misstatements approaches materiality SA 320
Communication & correction of misstatements:
Auditor to communicate & request correction of misstatement identified to appropriate level of management unless prohibited by law.
If management agrees and corrects, auditor to perform additional AE to check if misstatements remain.
If management refuses, auditor shall obtain reasons and understanding and consider that while evaluating misstatements
Evaluating effect of uncorrected misstatements:
Auditor shall first reassess materiality as per SA 320 if it remains applicable
To determine if uncorrected misstatements are material: size and nature of misstatement, effect of prior period uncorrected misstatements on assertions & FS
Communication with TCWG:
Communicate to TCWG uncorrected misstatements that may have effect on audit opinion unless prohibited by law/regulation. Also communicate effect of uncorrected misstatements on FS
SQC 1: Quality control
(LEAHEM)
Leadership responsibilities for quality within the firm:
Policies & procedures to promote good internal culture
Firm's leadership to assume responsibility for QC
Policies & procedures to be communicated by seminars & meetings
Responsibility to be assigned to experienced & able person
Ethical requirements:
Integrity, objectivity, competence, confidentiality, professional behaviour
Independence: Identify and eliminate threats, compliance of independence from all persons
Acceptance & continuance of client relationships & specific engagement:
Consider integrity of the client, identity and business reputation of client's principal owners, KMP, related parties, TCWG. Integrity can be checked by nature of client's operations and attitude of client's people
Competence & capability to perform engagements
Comply with legal & ethical requirements
Human resources:
Recruitment process to select individual
Performance evaluation & compensation policy
Development of capabilities & competence
Career development & estimation of personnel needs
Engagement performance
Direction, supervision & review
Direction:
How engagement teams are briefed about the engagement
Process for complying with engagement standards
Processes of engagement supervision, staff training & mentoring
Method of reviewing the work performed
Appropriate documentation of work performed
Appropriate communication of results
Process to keep all policies & procedures current
Supervision:
Tracking progress made
Consider competence & capabilties of each engagement member, if they understand directions
Addressing significant matters during audit engagement, consider their significance and modify engagement plan
Identify matter for consultation or consideration by more experienced team members
Review:
Work has been performed in accordance wth professional standards, legal requirements
Significant matters have been raised for further consideration
Appropriate consultations have taken place
Need to revise NTE of work performed
Work performed supports conclusions reaced
SAAE is obtained to support auditor's report
Objectives of engagement procedures have been achieved
Engagement documentation:
Assembling of file should be done within 60 days from date of auditor's report
Retain documents for at least 7 years
Property of firm, may make extracts available to firm
Consultation:
Appropriate consultations take place for difficult issues
SA resources are available to enable appropriate conclusions
All facts known to engagement team are made known to those consulted
It is documented
Conclusions reached are documented and implemented
EQCR (listed entities) :
EQCR can be partner, member of ICAI, qualified external person, team made up of such individuals
Evaluation of firm's independence
Significant risks & responses to those risks
Judgements - SR/materiality
Consultation on difficult matters
Significance of UCMS
Matters to be communicated to TCWG
Documentation supports conclusions reached
Appropriateness of report
Differences of opinion:
Establish policies & procedures for resolving differences of opinion within engagement team
Monitoring:
periodic inspection of policies & procedures
SA 320: Materiality in planning & performing an audit of FS
Concept of audit materiality:
Any item in the FS is said to be material if it influences the mind of the reader of those FS. Some items, may individually may not be material but may be collectively material
It is a matter of professional judgement and depends on auditor's perception of needs of users of FS
Materiality to be considered from point of view: Individual balances, overall financial information
Materiality can qualitative or quantitative
Performance materiality:
It mean the amount set by auditor which is less than materiality to reduce to an appropriately low level that probability that the aggregate of UUCMS exceeds materiality for the FS as a whole
Also refers to that materiality level for a particular class of transaction, balances or disclosures
Determination of performance materiality:
Professional judgement
Auditors understanding of entity
Previous experience
Auditor's expectations
Relationship between materiality & audit risk:
Audit risk is a function of RMM and detection risk
Materiality & audit risk are considered during 315, 330 & 450
There is an inverse relationship
Use of benchmark:
A percentage is applied to a benchmark to determine materiality
Factors that may affect identification of appropriate benchmark:
Elements of FS
Items on which users attention tends to be focused
Nature of entity
Ownership structure
Volatility of benchmark
Revision as the audit progresses:
He shall revise in light of new information
Lower materiality: revise performance materiality, NTE of further audit procedures
Change in materiality: change in circumstances, new information, change in auditor's understanding
SA 300: Planning an audit of FS
Advanatges of audit planning:
Appropriate attention to important areas
Identify and resolve potentional problems
Help the engagement team to perform in an efficient and effective manner
Selecting appropriate engagement team members
Direction & supervision of engagement team members
Assisting in coordination of auditor and expert's work
Preliminary engagement activities during recurring audit:
Continuance of client relationship - SA 220, SQC 1
Evaluating compliance with ethical requirements and independence
Establish terms of engagement - SA 210
Additional considerations for initial audit engagement:
Client acceptance procedures: SA 220, SQC 1
Communicating with predecessor auditor
Knowledge of client's business from annual reports, board minutes, previous auditor's report, MIS reports, visit to client's premises
Considerations while establishing an overall audit strategy:
Identify characteristics of engagement and define its scope
Ascertain reporting objectives of engagement
Factors that are significant in directing engagement team's effort in auditors professional judgement
Consider results of preliminary engagement team activities
NTE of resources
Selection of competent, capable engagement team members
Assisting in coordination of work done by auditors
Analytical procedures to be applied as RAP
General understanding of entity's legal framework
Determination of materiality
Involvement of experts
Performance of other RAP
Description of overall audit plan shall include:
NTE of RAP - SA 315
NTE of FAP - SA 330
Other planned AP
Audit plan shall be modified as necessary during audit
NTE of direction & supervision of engagement team members and review of the work
SA 330: Auditor's response to assessed risk
Further audit procedures. The ultimate objective is to reduce audit risk to an acceptably low level.
Overall response to RMM at FS level:
Audit team to maintain professional skepticism
Assigning more experienced staff
Provide more supervision
Making general changes to NTE of audit procedures
Incorporating additional elements of unpredicatibility while selecting FAP
Overall response to RMM at assertion level
Test of controls
Operating effectiveness of control:
The auditor's assessment of RMM at the assertion level includes an expectation that controls are operating effectively
Substantive procedures alone cannot provide SAAE
Timing of test of controls:
For particular time, or throughout the period
Using audit evidence obtained during interim period:
Obtain audit evidence about significant changes in control subsequent to the interim period
Additional audit evidence to obtained for the remaining period
Using audit evidence obtained during previous audits:
If controls have not changed, auditor shall test it at least once in every third audit.
Factors that may decrease the period:
Weak control environment
Weak monitoring of controls
Significant manual element to control
Person changes that affect the application of control
Change in circumstances that indicate change in control
Weak general IT controls
Control over significant risks:
When auditor relies on control over a significant risk, he shall test controls in the current period
Evaluating operating effectiveness of controls:
If there are misstatements identified during substantive procedures, indicates that controls are not operating effectively.
Even if no misstatement, controls may still not be operating effectively
Substantive procedures:
1. Design & perform substantive procedures:
It should be designed irrespective of the RMM
2. Substantive procedures related to the FS closing process
: Reconciling the FS with underlying records, examining material journal entries
3. Substantive procedures responsive to significant risks:
Substantive procedures specifically responsive to that risk
4. Timing:
If performed for interim period, it shall be performed for remaining period
Nature, timing and extent of audit procedure
Nature:
it refers to the purpose and their type
Timing:
When audit procedures are performed. The higher the RMM, the nearer to the end it shall be performed.Or to perform at unpredictable times.
Other considerations:
Control environment
When info is available
Nature of risk
Period to which evidence relates
Extent:
Quantity specific audit procedure
RMM
Judgement
Materiality
Degree of assurance
SA 250: Consideration of laws and regulations in an audit of FS
What is non compliance:
It refers to an act of omission or commission by entity intentional or unintentional in contravention to laws/regulation. It does not include personal misconduct of employees.
Objectives of auditor:
Obtain SAAE regarding compliance with laws
Perform specified audit procedure to identify instances of non compliance
Respond appropriately to non compliances identified
Responisbility of auditor/audit procedures
(PARUSS)
Understanding legal & regulatory framework:
After 315, obtain understanding of legal and regulatory framework applicable to company and how entity is complying with it
SAAE:
Specified audit procedures:
Inquire of management/TCWG
Inspect correspondence with relevant regulatory authorities
Professional skepticism:
Auditor shall remain alert to instances of non compliance
WR:
The auditor shall request management for WR about instances of non compliance they are aware of who's effects should be considered while preparing FS
SA 220: Quality control in an audit of FS