Intermediate Course

Study Material
(Modules 1 to 2)

PAPER 6

AUDITING AND ASSURANCE

Module - 1

BOARD OF STUDIES
THE INSTITUTE OF CHARTERED ACCOUNTANTS OF INDIA

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This Study Material has been prepared by the faculty of the Board of Studies. The
objective of the Study Material is to provide teaching material to the students to
enable them to obtain knowledge in the subject. In case students need any
clarification or have any suggestion for further improvement of the material
contained herein, they may write to the Director of Studies.
All care has been taken to provide interpretations and discussions in a manner
useful for the students. However, the Study Material has not been specifically
discussed by the Council of the Institute or any of its Committees and the views
expressed herein may not be taken to necessarily represent the views of the
Council or any of its Committees.
Permission of the Institute is essential for reproduction of any portion of this
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© The Institute of Chartered Accountants of India
All rights reserved. No part of this book may be reproduced, stored in a retrieval
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Edition : September, 2021

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E-mail : bosnoida@icai.in

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BEFORE WE BEGIN….

Evolving role of a CA - Shift towards strategic decision making

The traditional role of a chartered accountant restricted to accounting and auditing,

has now changed substantially and there has been a marked shift towards strategic
decision making and entrepreneurial roles that add value beyond traditional financial
reporting. The primary factors responsible for the change are the increasing business
complexities on account of plethora of laws, borderless economies consequent to
giant leap in e-commerce, emergence of new financial instruments, emphasis on
corporate social responsibility, significant developments in information technology, to
name a few. These factors necessitate an increase in the competence of chartered
accountants to take up the role of not merely an accountant or auditor, but a global
solution provider. Towards this end, the scheme of education and training is being
continuously reviewed so that it is in sync with the requisites of the dynamic global
business environment; the competence requirements are being continuously reviewed
to enable aspiring chartered accountants to acquire the requisite professional
competence to take on new roles.

Skill requirements at Intermediate Level

Under the Revised Scheme of Education and Training, at the Intermediate Level,
you are expected to not only acquire professional knowledge but also the ability
to apply such knowledge in problem solving. The process of learning should also
help you inculcate the requisite professional skills, i.e., the intellectual skills and
communication skills, necessary for achieving the desired professional
competence.

Auditing – Core and Practical subject

Auditing is, perhaps, one of the most practical-oriented subjects in the C.A. curriculum.
This paper aims to provide knowledge of generally accepted auditing procedures and
of techniques and skills needed to apply them in audit engagements. A good
knowledge of the subject would provide a strong foundation to students while
pursuing the Chartered Accountancy course. A good understanding of the theoretical
concepts, particularly, in the context of auditing standards would make practical
training an enriching and enjoying experience. While studying this paper, students are
advised to integrate the knowledge acquired in other subjects, specifically, accounting

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and corporate laws in a meaningful manner. Such learning would only help a student
to become a better professional.

Know your Syllabus

The study material deals with the conceptual theoretical framework in detail.
In each chapter, the topic has been covered in a step by step approach. The text
has been explained, where appropriate, through illustrations, diagrams, tables,
flowcharts, screenshots etc. You should go through the chapter carefully ensuring
that you understand the topic and then can tackle the MCQs, Correct/Incorrect
and other question.

For understanding the coverage of the syllabus, it is important to read the study
material along with the Study Guidelines.
The entire syllabus has been divided into thirteen chapters.
Chapter-1 discusses the basics of audit such as nature, scope, objectives,
advantages, limitations etc. of audit. Also, Audit Engagement; Auditor’s
Independence; Role of International Auditing and Assurance Standards Board
(IAASB) & Auditing and Assurance Standards Board (AASB) have been discussed.
Chapter-2 is devoted to Audit Strategy; Audit planning and Audit programme;
Chapter-3 focusses on Audit Documentation; Audit evidence; Related Party
Transactions, Written Representations, External Confirmations, Subsequent Events,
Going Concern.
Chapter-4 is devoted to Audit Risk, Identifying and Assessing the Risk of Material
Misstatement, Risk Assessment procedures; Understanding the entity and its
environment; Internal Control.
Chapter-5 discusses the Responsibility for the Prevention and Detection of Fraud;
Fraud Risk Factors; Risks of Material Misstatement Due to Fraud; Communication
of Fraud.
Chapter-6 extensively deals with the Impact of IT related Risks, Impact on Controls,
Internal Financial Controls, Audit approach, Understanding and documenting
Automated environment, data analytics for audit.
Chapter-7 discusses about Audit Sampling.

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Chapter-8 deals with analytical procedures.

Chapter-9 is devoted to the Audit of Items of Financial Statements. Chapter-10
discusses about the provisions of the Company Audit. Chapter-11 discusses
about various aspects of Auditor’s Report.
Chapter-12 deals with the Audit of Banks.
Chapter-13 extensively deals with the Appointment of Auditor, Audit Procedure
and Audit Report in respect of different Category of Entities.
Structure of the Study Material
The content for each chapter/unit at the Intermediate level has been structured in
the following manner –

Components of each About the component

Chapter
1. Learning Outcomes Learning outcomes which you need to demonstrate
after learning each topic have been detailed in the
first page of each chapter/unit. Demonstration of
these learning outcomes would help you to achieve
the desired level of technical competence.
2. Chapter Overview As the name suggests, this chart/table would give a
broad outline of the contents covered in the chapter.
3. Introduction A brief introduction is given at the beginning of each
chapter/unit which would help you get a feel of the
topic.
4. Content The concepts and provisions of law/standard are
explained in student-friendly manner with the aid of
Examples/illustrations/diagrams/flow charts. These
value additions would help you develop conceptual
clarity and get a good grasp of the topic. Diagrams
and Flow charts would help you understand the
concept/ provision in a better manner. Illustrations
would help you understand the application of
concepts/provisions.
5. Exercise Questions The exercise questions and answers would help you to
with Answers apply what you have learnt in problem solving. In

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effect, it would sharpen your application skills and test

your understanding as well as your application of
concepts/ provisions.
6. Let Us Recapitulate A summary of the chapter is given at the end to help
you revise what you have learnt. It would especially
help you to revise the chapter quickly the day before
the examination.
7. Test Your Knowledge This comprises of Multiple Choice Questions, Correct/
incorrect and other questions which test the breadth
and depth of your understanding of the topic.

We hope that these student-friendly features in the Study Material makes your
learning process more enjoyable, enriches your knowledge and sharpens your
application skills.

Happy Reading and Best Wishes!

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SYLLABUS

PAPER 6: AUDITING AND ASSURANCE (100 MARKS)

(One paper – Three hours – 100 Marks)
Objective:
To develop an understanding of the concepts in auditing and of the generally
accepted auditing procedures, techniques and skills and acquire the ability to
apply the same in audit and attestation engagements.
1. Nature, Objective and Scope of Audit
Auditing Concepts: Nature, objective and scope of Audit; Relationship of
auditing with other disciplines;
Standard Setting Process: Overview, Standard-setting process, Role of
International Auditing and Assurance Standards Board (IAASB) & Auditing
and Assurance Standards Board (AASB); Standards on Auditing, Guidance
Note(s) issued by the ICAI;
Engagement Standards: Qualities of Auditor, Elements of System of
Quality Control (SQC 1 Quality Control for Firms that Perform Audits and
Reviews of Historical Financial Information, and Other Assurance and
Related Services Engagements); Ethical requirements relating to an audit of
financial statements; Inherent Limitations of an audit (SA 200 Overall
Objectives of the Independent Auditor and the Conduct of an Audit in
Accordance with Standards on Auditing); Preconditions for an audit; Audit
Engagement; Agreement on Audit Engagement Terms; Terms of
Engagement in Recurring Audits (SA 210 Agreeing the Terms of Audit
Engagements); Leadership Responsibilities for Quality on Audits; Concept
of Auditor’s Independence; Threats to Independence; Acceptance and
Continuance of Client Relationships and Audit Engagements (SA 220
Quality Control for an Audit of Financial Statements).
2. Audit Strategy, Audit Planning and Audit Programme: Audit Strategy; Audit
planning (SA 300 Planning an Audit of Financial statements); Audit programme;
Development of Audit Plan and Programme, Control of quality of audit work -
Delegation and supervision of audit work; Materiality and Audit Plan; Revision of
Materiality; Documenting the Materiality; Performance Materiality (SA 320
Materiality in Planning and Performing an Audit).

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3. Audit Documentation and Audit Evidence: Concept of Audit

Documentation; Nature & Purpose of Audit Documentation; Form, Content
& Extent of Audit Documentation; Completion Memorandum; Ownership
and custody of Audit Documentation (SA 230 Audit Documentation); Audit
procedures for obtaining audit evidence; Sources of evidence; Relevance
and Reliability of audit evidence; Sufficient appropriate audit evidence,
Evaluation of Audit Evidence (SA 500 Audit Evidence); Written
Representations as Audit Evidence; Objective of Auditor regarding Written
Representation; Management from whom Written Representations may be
requested; Written Representations about Management’s Responsibilities (SA
580 Written Representations); Obtaining evidence of existence of inventory;
Audit procedure to identify litigation & claims (SA 501 Audit Evidence -
Specific Considerations for Selected Items); External confirmation
procedures; Management’s refusal to allow the auditor to send a
confirmation request; Negative Confirmations (SA 505 External
Confirmations); Audit evidence about opening balances; Accounting policies
relating to opening balances; Reporting with regard to opening balances (SA
510 Initial Audit Engagements-Opening Balances); Meaning of Related
Party; Nature of Related Party Relationships & Transactions; Understanding
the Entity’s Related Party Relationships & Transactions (SA 550 Related
Parties); Meaning of Subsequent Events; Auditor’s obligations in different
situations of subsequent events (SA 560 Subsequent Events);
Responsibilities of the Auditor with regard to Going Concern Assumption;
Objectives of the Auditor regarding Going Concern; Events or Conditions
that may cast doubt about Going Concern Assumption; Audit Procedures
when events or conditions are identified (SA 570 Going Concern).
4. Risk Assessment and Internal Control: Audit Risk, Identifying and Assessing
the Risk of Material Misstatement, Risk Assessment procedures;
Understanding the entity and its environment; Internal control,
Documenting the Risks; Evaluation of internal control system; Testing of
Internal control; Internal Control and IT Environment (SA 315 Identifying and
Assessing the Risks of Material Misstatement Through Understanding the
Entity and Its Environment); Materiality and audit risk (SA 320 Materiality in
Planning and Performing an Audit); Internal audit, Basics of Standards on
Internal Audit (SIAs) issued by the ICAI; Basics of Internal Financial Control
and reporting requirements; Distinction between Internal Financial Control
and Internal Control over Financial Reporting.

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5. Fraud and Responsibilities of the Auditor in this Regard: Responsibility

for the Prevention and Detection of Fraud; Fraud Risk Factors; Risks of
Material Misstatement Due to Fraud; Communication of Fraud (SA 240 The
Auditor’s responsibilities Relating to Fraud in an Audit of Financial
Statements); Provisions of the Companies Act 2013 relating to fraud and
rules thereunder including reporting requirements under CARO.
6. Audit in an Automated Environment: Key features, Impact of IT related
Risks, Impact on Controls, Internal Financial Controls as per Regulatory
requirements, Types of Controls, Audit approach, Understanding and
documenting Automated environment, Testing methods, data analytics for
audit, assessing and reporting audit findings.
7. Audit Sampling: Meaning of Audit Sampling; Designing an audit sample;
Types of sampling; Sample Size and selection of items for testing; Sample
selection method (SA 530 Audit Sampling).
8. Analytical Procedures: Meaning, nature, purpose and timing of analytical
procedures; Substantive analytical procedures, Designing and performing
analytical procedures prior to Audit; investigating the results of analytical
procedures (SA 520 Analytical Procedures).
9. Audit of Items of Financial Statements: Audit of sale of Products and
Services; Audit of Interest Income, Rental Income, Dividend Income, Net
gain/loss on sale of Investments etc.
Audit of Purchases, Employee benefits expenses, Depreciation, Interest
expense, Expenditure on Power & Fuel, Rent, Repair to building, Repair to
Machinery, Insurance, Taxes, Travelling Expenses, Miscellaneous Expenses
etc.
Audit of Share Capital, Reserve & Surplus, Long Term Borrowings, Trade
Payables, Provisions, Short Term Borrowings & Other Current Liabilities.
Audit of Land, Buildings, Plant & Equipment, Furniture & Fixtures, Vehicles,
Office Equipments, Goodwill, Brand/Trademarks, Computer Software etc.
Audit of Loan & Advances, Trade Receivable, Inventories, Cash & Cash
Equivalent, Other Current Assets. Audit of Contingent Liabilities.
(The list of items is illustrative only)
10. The Company Audit: Eligibility, Qualifications and Disqualifications of
Auditors; Appointment of auditors; Removal of auditors; Remuneration of
Auditors; Powers and duties of auditors; Branch audit; Joint audit; Reporting

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requirements under the Companies Act, 2013 including CARO; Other

Important Provisions under the Companies Act, 2013 relating to Audit and
Auditors and Rules made thereunder.
11. Audit Report: Forming an opinion on the Financial Statements; Auditor’s
Report- basic elements (SA 700 Forming an Opinion and Reporting on
Financial Statements); Types of Modified Opinion; Circumstances When a
Modification to the Auditor’s Opinion is Required, Qualified, Adverse,
Disclaimer of Opinion (SA 705 Modification to the Opinion in the
Independent Auditor’s Report); Qualification, Disclaimer, Adverse opinion,
SA 706 Emphasis of Matter Paragraphs and Other Matter Paragraphs in the
Independent Auditor’s Report; Nature of Comparative Information;
Corresponding Figure; Comparative Financial Statements (SA 710
Comparative Information – Corresponding Figures and Comparative
Financial Statements).
12. Audit of Banks: Understanding of accounting system in Banks, Audit
Approach, Audit of Revenue items, Special Consideration in Bank Audit with
emphasis on Advances and NPAs.
13. Audit of Different Types of Entities: Appointment of Auditor, Audit
Procedure and Audit Report in respect of different Category of Entities:
Government; Local bodies and Not-for-profit organizations; Partnership Firms,
Audit of different type of undertakings, i.e., Educational institutions, Hotels,
Clubs, Hospitals Basics of Limited Liability Partnerships (LLPs) audit and Co-
operative Societies Audit.
Note:
(i) The specific inclusions/exclusions, in any topic covered in the syllabus, will
be effected every year by way of Study Guidelines.
(ii) The provisions of the Companies Act, 1956 which are still in force would
form part of the syllabus till the time their corresponding or new provisions
of the Companies Act, 2013 are enforced.
(iii) If new legislations/ Standards on Auditing/Guidance Notes/Statements are
enacted in place of the existing legislations, the syllabus would include the
corresponding provisions of such new legislations with effect from a date
notified by the Institute. The changes in this regard would also form part of
Study Guidelines.

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SIGNIFICANT UPDATIONS IN 2021 EDITION

OVER 2020 EDITION

Chapter Name Sections/Sub Sections wherein Page

major updations have been Numbers
done

TOPIC 6 (ii) The Nature of Audit 1.11-1.12

Procedures-Point no. 3
Distinction between audit and
investigation has been explained

Chapter 1: Nature, Topic 8.2-About SAs, SREs, SAEs 1.21-1.23

Objective and and SRSs-explained in detail.
Scope of Audit
Topic 10.2 fundamental principles 1.27-1.28
of professional ethics explained.

Topic 10.2.2 Threats to 1.30-1.31

Independence More explanation
added

Constructing an Audit
10.4 2.16
Chapter 2: Audit Programme- Topic has been
Strategy, Audit revised
Planning and Audit
Programme Fig. at page 2.17 modified 2.17

Topic 12- AUDIT PLANNING AND

2.21-2.23
MATERIALITY-elaborated

Chapter 5-Fraud Amendment related to 5.22

and Responsibilities Companies Act, 2013
of the Auditor in
Change related to CARO,2020 5.23-5.24
this Regard

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Changes related to disclosure Throughout

Chapter 9- Audit of
requirements of Schedule III have the Chapter
Items of Financial
been done at relevant places in at relevant
Statements
bold and italics. places.

Chapter 10: The Amendment in Rule 11 10.36-10.37

Company Audit CARO,2020 10.41

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CONTENTS

MODULE – 1
Chapter 1 : Nature, Objective and Scope of Audit
Chapter 2 : Audit Strategy, Audit Planning and Audit Programme
Chapter 3 : Audit Documentation and Audit Evidence
Chapter 4 : Risk Assessment and Internal Control
Chapter 5 : Fraud and Responsibilities of the Auditor in this Regard
Chapter 6 : Audit in an Automated Environment
Chapter 7 : Audit Sampling
Chapter 8 : Analytical Procedures

MODULE – 2
Chapter 9 : Audit of Items of Financial Statements
Chapter 10 : The Company Audit
Chapter 11 : Audit Report
Chapter 12 : Audit of Banks
Chapter 13 : Audit of Different Types of Entities

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MODULE – 1: DETAILED CONTENTS

CHAPTER – 1: NATURE, OBJECTIVE AND SCOPE OF AUDIT

Learning Outcomes ........................................................................................................... 1.1

Chapter Overview .............................................................................................................. 1.1
Contents:
1. Meaning and Definition of Auditing .................................................................... 1.2

2. Objectives of Audit ................................................................................................. 1.3

3. Scope of Audit ........................................................................................................ 1.4

3.1 Aspects to be covered in Audit .........................................................1.5

4 Types of Audit .................................................................................................1.7

5. Advantages of Audit of Financial Statements ..................................................... 1.9

6. Inherent Limitations of Audit .............................................................................. 1.10

7. Relationship of Auditing with other disciplines ................................................ 1.14

7.1 Auditing and Accounting ....................................................................... 1.15

7.2 Auditing and Law ..................................................................................... 1.15

7.3 Auditing and Economics ......................................................................... 1.15

7.4 Auditing and Behavioural Science ......................................................... 1.16

7.5 Auditing and Statistics & Mathematics ................................................ 1.16

7.6 Auditing and Data Processing ............................................................... 1.16

7.7 Auditing and Financial Management .................................................... 1.17

7.8 Auditing and Production ........................................................................ 1.17

8. Standard Setting Process..................................................................................... 1.18

8.1 Role of International Auditing and Assurance Standards Board ....... 1.18

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8.2 Role of Auditing and Assurance Standards Board .............................. 1.19

9. Qualities of an Auditor ......................................................................................... 1.22

10. Elements of a System of Quality Control........................................................... 1.23

10.1. Leadership Responsibilities for Quality on Audits .........................1.23

10.2 Ethical Requirements Relating to an Audit of Financial

Statements ............................................................................................................... 1.24

10.3 Acceptance and Continuance of Client Relationships and Audit

Engagements .......................................................................................................... 1.34

10.4 Human Resources ....................................................................................... 1.34

10.5 Engagement Performance........................................................................ 1.35

10.6 Monitoring.................................................................................................... 1.35

11. Preconditions for an Audit................................................................................................ 1.36

12. Agreement on Audit Engagement Terms................................................................ 1.37

13. Recurring Audits ................................................................................................................... 1.38

14. Limitation on Scope Prior to Audit Engagement Acceptance ........................ 1.39

15. Acceptance of a Change in Engagement .......................................................... 1.40

Summary............................................................................................................................ 1.42

Test Your Knowledge ...................................................................................................................... 1.43

CHAPTER – 2: AUDIT STRATEGY, AUDIT PLANNING AND AUDIT PROGRAMME

Learning Outcomes ........................................................................................................... 2.1

Chapter Overview .............................................................................................................. 2.1
Contents:

1. Audit Planning........................................................................................................................ 2.2

1.1 Audit Plan to conduct an effective audit........................................................ 2.2

1.2 Benefits of Planning in the audit of financial statements ........................ 2.2

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2. Audit Strategy.......................................................................................................................... 2.3

2.1 Overall Audit Strategy – Assistance to auditor ............................................ 2.3

2.2 Establishment of overall audit strategy .......................................................... 2.4

3. Relationship Between Overall Audit Strategy and Audit Plan............................... 2.6

4. Development of Audit Plan ................................................................................................ 2.6

4.1 Description of Audit Plan ..................................................................................... 2.6

4.2 Knowledge of the Client’s Business.................................................................. 2.7

5. Audit Planning a Continuous Process .......................................................................... 2.10

5.1 Additional Considerations in Initial Audit Engagements ....................... 2.10

6. Overall Audit Strategy and the Audit Plan – The Auditor’s

Responsibility......................................................................................................................... 2.10

7. Changes to Planning Decisions During the Course of the Audit ....................... 2.11

8. Direction, Supervision and Review ................................................................................ 2.12

9. Documentation. .................................................................................................................... 2.13

10. Audit Programme................................................................................................................. 2.14

10.1 Evolving One Audit Programme – Not Practicable For All

Businesses ................................................................................................................ 2.14

10.2 The Assistant Engaged - Be Encouraged

To Keep An Open Mind ...................................................................................... 2.14

10.3 Periodic Review of The Audit Programme................................................... 2.15

10.4 Constructing an Audit Programme ................................................................ 2.16

10.5 Audit Programme- Designed to provide audit evidence....................... 2.17

10.6 Advantages and Disadvantages of an Audit Programme...................... 2.19

11. Quality Control for Audit Work-Delegation and Supervision of

Audit Work.............................................................................................................................. 2.20

12. Audit Planning and Materiality ....................................................................................... 2.21

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12.1 Determining Materiality and Performance Materiality when

Planning the Audit ................................................................................................ 2.24

12.2. Materiality Level or Levels for Particular Classes of Transactions,

Account Balances or Disclosures ..................................................................... 2.27

12.3 Revision in Materiality level as the Audit Progresses .............................. 2.28

12.4 Documenting the Materiality............................................................................ 2.29

Summary ............................................................................................................................................... 2.29

Test Your Knowledge ...................................................................................................................... 2.30

CHAPTER – 3: AUDIT DOCUMENTATION AND AUDIT EVIDENCE

Learning Outcomes ........................................................................................................... 3.1
Chapter Overview .............................................................................................................. 3.2
Contents

1. Audit Documentation ........................................................................................................... 3.2

1.1 Definition of Audit Documentation .................................................................. 3.2

1.2 Objective of the Auditor ....................................................................................... 3.3

1.3 Nature of Audit Documentation ....................................................................... 3.3

1.4 Purpose of Audit Documentation ..................................................................... 3.3

1.5 Form, Content and Extent of Audit Documentation .................................. 3.4

1.6 Examples of Audit Documentation................................................................... 3.5

1.7 Timely Preparation of Audit Documentation ............................................... 3.5

1.8 Audit File..................................................................................................................... 3.6

1.9 Assembly of the Final Audit File ........................................................................ 3.6

1.10 Documentation of Significant Matters and Related Significant

Professional Judgments ........................................................................................ 3.7

1.11 Completion Memorandum or Audit Documentation Summary ........... 3.8

1.12 Ownership of Audit Documentation................................................................ 3.9

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2. Audit Evidence......................................................................................................................... 3.9

2.1 Introduction............................................................................................................... 3.9

2.2 Definition of Audit Evidence ............................................................................. 3.10

2.3 Objective of the Auditor ..................................................................................... 3.11

2.4 Information to be used as Audit Evidence .................................................. 3.11

2.5 Inconsistency in or Doubts over Reliability of Audit Evidence ............3.12

2.6 Sufficiency and Appropriateness of Audit Evidence ................................ 3.12

2.7 Sufficiency of Audit Evidence ........................................................................... 3.13

2.8 Appropriateness of Audit Evidence................................................................ 3.15

2.9 Sources of Audit Evidence ................................................................................. 3.15

2.10 Audit Procedures to Obtain Audit Evidence ............................................... 3.16

2.11 Audit Procedures ................................................................................................... 3.16

2.12 Types of Audit Evidence ..................................................................................... 3.34

2.13 Relevance and Reliability.................................................................................... 3.36

3. Written Representations.................................................................................................... 3.38

3.1 Written Representations as Audit Evidence ................................................ 3.39

3.2 The Objectives of the Auditor regarding Written

Representation ....................................................................................................... 3.40

3.3 Management from Whom Written Representations Requested ........3.41

3.4 Written Representations about Management’s Responsibilities ........3.42

3.5 Information Provided and Completeness of Transactions ....................3.42

3.6 Date of and Period(s) Covered by Written Representations ................3.43

3.7 Form of Written Representations.................................................................... 3.43

3.8 Doubt as to the Reliability of Written Representations .......................... 3.43

3.9 Requested Written Representations Not Provided .................................. 3.44

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4. Audit Evidence-Specific Considerations For Selected Items................................ 3.44

4.1 Inventory .................................................................................................................. 3.45

4.2 Attendance at Physical Inventory Counting ................................................ 3.45

4.3 Matters relevant in Planning Attendance at

Physical Inventory Counting ............................................................................. 3.45

4.4 Physical Inventory Counting Conducted other than at the

date of the Financial Statements..................................................................... 3.46

4.5 If the auditor is unable to attend Physical Inventory Counting

due to unforeseen circumstances ................................................................... 3.46

4.6 Attendance at Physical Inventory Counting is Impracticable ...............3.46

4.7 Litigation and Claims ........................................................................................... 3.48

4.8 If the auditor assesses a risk of material misstatement regarding

litigation or claims-Communication with the Entity’s External
Legal Counsel ......................................................................................................... 3.48

4.9 Segment Information .......................................................................................... 3.50

5. External Confirmation ......................................................................................................... 3.51

5.1 Objective of the auditor ..................................................................................... 3.51

5.1 Definition of External Confirmation .............................................................. 3.51

5.2 External Confirmation Procedures .................................................................. 3.53

5.3 Determining the Information to be Confirmed or Requested .............3.53

5.4 Determining the Information to be Confirmed or Requested .............3.53

5.5 Selecting the Appropriate Confirming Party .............................................. 3.53

5.6 Designing Confirmation Requests .................................................................. 3.53

5.7 Follow-Up on Confirmation Requests ........................................................... 3.54

5.8 Management’s Refusal to Allow the Auditor to Send a

Confirmation Request ......................................................................................... 3.54

5.9 Results of the External Confirmation Procedures ..................................... 3.55

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5.10 Negative Confirmations ...................................................................................... 3.56

5.11 Evaluating the Evidence Obtained .................................................................. 3.56

6. Initial Audit Engagement................................................................................................... 3.56

6.1 Objective of Auditor with respect to Opening Balances - in

conducting an initial audit engagement ...................................................... 3.57

6.2 Audit Procedures regarding Opening Balances ........................................ 3.57

6.3 Consistency of Accounting Policies relating to

Opening Balances. ................................................................................................ 3.58

6.4 Relevant Information in the Predecessor Auditor’s Report ..................3.58

6.5 Audit Conclusions and Reporting in relation to

Opening Balances. ................................................................................................ 3.58

6.6 Consistency of Accounting Policies................................................................ 3.59

6.7 Modification to the Opinion in the Predecessor Auditor’s Report ....3.59

7. Meaning of Related Party ................................................................................................. 3.59

7.1 Nature of Related Party Relationships and Transactions ....................... 3.60

7.2 Responsibilities of the Auditor ......................................................................... 3.60

7.3 The Identity of the Entity’s Related Parties.................................................. 3.61

8. Concept of True and Fair................................................................................................... 3.63

9. Auditor and the Subsequent Events ............................................................................. 3.65

9.1 Objectives................................................................................................................. 3.65

9.2 Audit Procedure Regarding Events Occurring between

the Date of the Financial Statements and the Date of
the Auditor’s Report............................................................................................. 3.66

9.3 Written Representations with respect to subsequent events ....................3.67

9.4 Auditor’s Obligations Regarding Subsequent Events ................................... 3.67

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10. Auditor and the Going Concern Assumption ............................................................ 3.68

10.1 Objectives of the auditor regarding going concern ................................ 3.69

10.2 Responsibilities of the Auditor ......................................................................... 3.69

10.3 Risk Assessment Procedures and Related Activities ................................ 3.70

10.4 Remaining Alert throughout the Audit for Audit

Evidence about Events or Conditions ............................................................ 3.70

10.5 Events or Conditions That May Cast Significant Doubt on

the Entity’s Ability to Continue as a Going Concern................................ 3.71

10.6 Additional Audit Procedures When Events or Conditions

Are Identified .......................................................................................................... 3.72

Summary............................................................................................................................ 3.74

Test Your Knowledge ...................................................................................................... 3.76

CHAPTER – 4: RISK ASSESSMENT AND INTERNAL CONTROL

Learning Outcomes ........................................................................................................... 4.1

Chapter Overview ............................................................................................................................... 4.1

Contents:

1. Audit Risk .................................................................................................................................. 4.2

1.1 Assessment of Risks - Matter of Professional Judgement....................... 4.3

1.2 What is not included in Audit Risk? ................................................................. 4.3

1.3 Risks of Material Misstatement at Two levels .............................................. 4.4

1.4 Components of Risk of Material Misstatement ........................................... 4.4

1.5 Combined Assessment of the Risk of Material Misstatement ............... 4.6

1.6 Detection Risk........................................................................................................... 4.7

2. Identifying and Assessing the Risks of Material Misstatement ............................ 4.8

2.1 Identify and Assess the Risks of Material Misstatement .......................... 4.9

2.2 Understanding of the Entity- A Continuous Process ............................... 4.12

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2.3 The Required Understanding of the Entity and Its Environment

Including the Entity’s Internal Control .......................................................... 4.14

3. Internal Control ..................................................................................................................... 4.15

4. Evaluation of Internal Control by the Auditor ........................................................... 4.29

4.1 The Narrative Record ........................................................................................... 4.32

4.2 A Check List ............................................................................................................. 4.32

4.3 Internal Control Questionnaire ........................................................................ 4.33

4.4 Flow Chart ................................................................................................................ 4.34

5. Testing of Internal Control ............................................................................................... 4.35

6. Internal Control and “IT” Environment.........................................................................4.38

7. Materiality and Audit Risk ................................................................................................. 4.40

8. Documenting the Risk ........................................................................................................ 4.41

9. Internal Audit ......................................................................................................................... 4.42

9.1 Applicability of Provisions of Internal Audit ............................................... 4.42

9.2 Who can be appointed as Internal Auditor................................................. 4.44

9.3 Internal Audit Function. ...................................................................................... 4.44

10. Basics of Standards on Internal Audit issued by ICAI............................................. 4.47

11. Basic of Internal Control and Reporting requirements .......................................... 4.48

12. Difference between Internal Financial Control and Internal Control

over Financial Reporting.................................................................................................... 4.50

Summary............................................................................................................................ 4.50

Test Your Knowledge ...................................................................................................... 4.52

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CHAPTER – 5: FRAUD AND RESPONSIBILITIES OF THE AUDITOR IN THIS

REGARD

Learning Outcomes ........................................................................................................... 5.1

Chapter Overview .............................................................................................................. 5.2

Contents:

1. Meaning of Fraud. .................................................................................................. 5.2

2. Characteristics of Fraud ......................................................................................... 5.3

2.1 Fraud is Intentional ................................................................................................. 5.3

2.2 Fraud is a broad legal concept ............................................................................. 5.3

3. Detection of Fraud and Error: Duty of an Auditor .............................................. 5.9

4. Fraud Risk Factors and Possibility of Fraud ....................................................... 5.13

4.1 Fraud Risk Factors. ................................................................................................ 5.13

4.2 Circumstances Relating to Possibility of Fraud................................................. 5.17

5. Fraud Reporting .................................................................................................... 5.19

6. Auditor unable to continue the engagement ................................................... 5.26

Summary............................................................................................................................ 5.27

Test Your Knowledge ...................................................................................................... 5.28

CHAPTER – 6: AUDIT IN AN AUTOMATED ENVIRONMENT

Learning Outcomes ........................................................................................................... 6.1

Chapter Overview .............................................................................................................. 6.2

Contents:

1. What is an automated environment? .................................................................. 6.2

1.1 Key features of an Automated Environment.......................................... 6.3

2. Relevance of ‘IT’ in an Audit .................................................................................. 6.4

3. Risk & Controls in an Automated Environment ................................................. 6.6

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3.1 Understanding and Documenting Automated Environment .............. 6.6

3.2 Impact of IT related risks i.e. on Substantive Audit,

Controls and Reporting ............................................................................ 6.8

3.3 Types of Controls in an Automated Environment ................................. 6.9

4. Testing methods.................................................................................................... 6.12

5. Internal Financial Controls as per Regulatory Requirements.......................... 6.15

5.1 Audit Approach ........................................................................................ 6.17

6. Data Analytics for Audit. ...................................................................................... 6.17

7. Assess and report Audit Findings ....................................................................... 6.19

7.1 Reporting Audit Findings – An Illustration ........................................... 6.21

Glossary.............................................................................................................................. 6.21

Abbreviation ..................................................................................................................... 6.24

Summary............................................................................................................................ 6.25

Test Your Knowledge ...................................................................................................... 6.26

CHAPTER – 7: AUDIT SAMPLING

Learning Outcomes ........................................................................................................... 7.1

Chapter Overview ............................................................................................................................... 7.1

Contents:

1. Sampling: An audit Procedure .............................................................................. 7.2

2. Meaning of Audit Sampling .................................................................................. 7.3

2.1 Population.................................................................................................................. 7.3

3. Approaches to Sampling ....................................................................................... 7.5

3.1 Statistical Sampling- More scientific ....................................................... 7.6

3.2 Non-statistical Sampling .......................................................................... 7.7

3.3 Appropriateness of Sampling Approaches ............................................ 7.9

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4. Sample Design, Size and Selection of Items for testing .................................. 7.11

4.1 Sample Design ......................................................................................... 7.11

4.2 Sample Size .............................................................................................. 7.14

4.3 Selection of Items for Testing ....................................................................... 7.17

4.4 Sample Selection Methods..................................................................... 7.17

4.5 Sampling and Non-Sampling Risk ........................................................ 7.21

5. Performing Audit Procedures ............................................................................. 7.22

6. Nature and cause of deviations and Misstatements........................................ 7.23

7. Projecting Misstatements .................................................................................... 7.24

8. Evaluating results of Audit Sampling ................................................................. 7.24

Summary............................................................................................................................ 7.26

Test Your Knowledge ...................................................................................................... 7.27

CHAPTER – 8: ANALYTICAL PROCEDURES

Learning Outcomes ..................................................................................................8.1

Chapter Overview .............................................................................................8.1

Contents:

1. Meaning of Analytical Procedures ................................................................8.2

1.1 SA -520 Analytical Procedures .................................................................. 8.5

2. Purpose and timing of Analytical Procedures ..............................................8.6

2.1 Purpose of Analytical Procedures .....................................................8.6

2.2 Timing of Analytical Procedures .......................................................8.8

2.3 Analytical Procedures in Planning the Audit ....................................8.8

3. Substantive analytical procedures ................................................................8.9

3.1 Factors to be considered for Substantive Audit Procedures ...........8.9

3.2 Techniques available as Substantive Analytical Procedures ..........8.11

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3.3 Analytical Procedures used as Substantive Tests ...........................8.13

4. Suitability of Particular Analytical Procedures for given Assertions .........8.14

5. The Reliability of Data ..................................................................................8.15

6. Evaluation of Whether the expectation is sufficiently precise ..................8.17

7. Amount of difference of recorded amounts from

expected values that is acceptable ..................................................................... 8.17

8. Investigating Results of Analytical Procedures ..........................................8.18

9. Analytical Procedures that Assist when forming an Overall conclusion ...8.18

10. Considerations specific to Public sector entities ........................................8.19

Summary ..................................................................................................................8.19

Test Your Knowledge .............................................................................................8.20

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