Misstatement :

Misstatement is the difference between amount, classification, presentation, disclosure of the

reported financial statement items and amount, classification, presentation, disclosure that is
required for that respective item as per the applicable financial reporting framework.
Material misstatement:

If in auditors judgement a misstatement can affect the decision of the users of financial

statement then auditor should consider such a misstatement as material misstatement.

Objective of an independent auditor:

As per SA 200, the objective of an independent Auditor is to obtain reasonable assurance whether the
financial statement are free from Material misstatement and are prepared in accordance with the
applicable financial reporting framework before expressing his opinion in audit report.
 SA 700
Revised audit report format:

1) Title- Independent Auditor Report.

2) Addressee.

3) A statement that it is a report of audit of financial statement.

4) Opinion paragraph: As per revised audit report, opinion heading includes the following paragraphs.

● Introductory paragraph- it will include the following:

● Name of the entity whose financial statements are audited.

● State that financial statements are audited.

● Identify title of each statement comprising of the financial statement.

● Refer to the notes and summary of significant accounting policies.

● Specify the date or duration covered by the financial statement.

● Auditor opinion on the financial statement, the opinion may be modified or unmodified.

5) Basis for opinion paragraph: in revised audit report format basis for opinion paragraph , should be included
even if auditor expresses a clean or modified opinion.

● In case of clean opinion ‘basis for opinion’ will include following:

● A statement that auditor has conducted audit as per SA’s.

● Refer to the section of the audit report which describes “ Auditors responsibilities” under the SA’s.

● Include a statement that the auditor is independent of the entity in accordance with relevant ethical
requirements as per code of ethics issued by ICAI and auditor has fullfill all the requirements of
applicable provisions of the Company's Act 2013.
 ● State that auditor believes that audit evidences obtained are sufficient and appropriate
to provide a basis for his opinion.( Refer SA 500)
● In case of modified opinion “basis for Modified opinion” will include:

● Reason for modification, that is misstatement identified by the auditor or possible

misstatements not identified by the auditor.
● A statement that auditor has conducted audit as per SA’s.

● Refer to the section of the audit report which describes “ Auditors responsibilities” under
the SA’s.
● Include a statement that the auditor is independent of the entity in accordance with
relevant ethical requirements as per code of ethics issued by ICAI and auditor has fullfill
all the requirements of applicable provisions of the Company's Act 2013.
● State that auditor believes that audit evidences obtained are sufficient and appropriate
to provide a basis for his opinion.( Refer SA 500).
6) Material uncertainty related to going concern.

7) Key audit matter paragraph.

8) Emphasis of matter paragraph.

9) Management responsibilities for financial statements.

10) Auditor responsibilities for audit of financial statements.

11) Other matter paragraph.

12) Reporting of other legal and regulatory requirements.

13) Firm name, firm registration number, partners name.

14) Sign and date

 SA 705

1) circumstances when a modification to the auditors opinion is required:

a. when auditor concludes based of the audit evidences obtained that the financial statements
are not free from material statements.
b. When auditor is unable to obtain sufficient and appropriate audit evidences to conclude that
the financial statement are free from material misstatement, there can be possible material
misstatements.
2) Types of modification:
a. Qualified.
b. Adverse.
c. Disclaimer.
3) Which modification is appropriate under what circumstances:

Nature of matter giving rise Material but not pervasive Material as well as
to modification pervasive

When financial Qualified opinion Adverse opinion

statements are
materially misstated

When auditor is unable Qualified opinion Disclaimer opinion

to obtain sufficient and
appropriate audit
evidences
Meaning of pervasive

● Pervasive is only used in context of misstatement to describe the effect or possible effects of
misstatement on the financial statements
● Pervasive effect on financial statements are those that in auditors judgment fulfills any of the
following criteria:
i. The effect or possible effect is not confined to a specific element or account balance or
item of the financial statements.
ii. The effect or possible effect are confined to a specific element or account balance of
a financial statement but it represents or could represent a substantial portion of
financial statements.
iii. In relation to disclosures the effect or possible effects are fundamental to the
users for the understanding of the financial statements.

Qualified opinion:

The auditor shall express a qualified opinion when:

a. The auditor having obtained sufficient and appropriate audit evidences, concludes that the
misstatements, individually or in aggregate are material but not pervasive to the financial
statements.
b. The auditor is unable to obtain sufficient and appropriate audit evidences on which to base an
opinion, but he concludes that the possible effects of such misstatements, if any, could be material
but not pervasive.
adverse opinion :-

Meaning- The auditor shall express a adverse opinion when the auditor , having obtained sufficient and
appropriate audit evidences concludes that the misstatements, individually or in aggregate are both material
as well as pervasive to the financial statements.

Disclaimer of opinion:
Meaning -
The auditor shall disclaim an opinion when he is unable to obtain sufficient appropriate audit
evidences to base his opinion, and auditor concludes that the possible effect on the financial statement
of undetected misstatement if any, could be material as well as pervasive.
The auditor shall disclaim an opinion when, in extremely rare circumstances involving multiple
uncertainties, the auditor concludes that, notwithstanding having obtained sufficient appropriate audit
evidences regarding each of the individual uncertainties, it is not possible to form an opinion the financial
statements due to the potential interaction of the uncertainties and their possible cumulative effects of the
financial statements.

Note :
Before modifying his opinion the auditor should communicate to those charged with governance and the
management as per SA 260 regarding the misstatement identified during the course of audit and provide
them a reasonable opportunity to adjust or correct the same.

or matters which will help in deciding which modification is appropriate under what circumstances:

a. Nature of matter giving rise to modification such as financial statements are materially misstated or
the auditor is unable to obtain sufficient and appropriate audit evidences.
b. The auditors judgment about the pervasiveness of the effects or possible effects on the
financial statements, whether it is material and pervasive or it is material but not pervasive
Changes in audit report format when there is a disclaimer:

1) Changes in opinion heading:

● The auditor should use “we were engaged to audit” instead of “we have audited”.

● The auditor should use a statement that “we have not been able to obtain sufficient and

appropriate audit evidences to base our opinion”.

● Auditor should use “we do not express our opinion on the financial statements”.

2) Changes in basis for opinion paragraph:

● Auditor should include only reason for modification, therefore general points regarding compliance

of SA’s, independent and ethical requirements are not included in the basis of opinion paragraph.
3) Changes in auditors responsibilities paragraph:

● A statement that the auditors responsibility is to conduct an audit of the entity’s financial statement

in accordance with standards on auditing and to issue an audit report.

● A statement that because of the matter described in the basis for disclaimer opinion section,

auditor was unable to obtain sufficient and appropriate audit evidences to provide a basis for an
audit opinion on the financial statement.

● A statement about auditors independence and other ethical responsibilities required by SA 700.
 SA 701

Key audit matter

1) those matters that is auditors professional judgement were of most significance in the audit can
be included under Key Audit Matter (KAM)
2) key audit matter are selected from matters communicated to TCWG and Management.
3) Purpose of communicating key audit matters: (SQ)
a. As per SA 701, “communicating key audit matters in the audits report”, the purpose of
communicating KAM is to enhance the communicating value of the auditors report by
providing grater transparency about the audit that was performed.
b. KAM will also provide additional information to the intended users to assist them in
understanding those matters that is auditors professional judgment were most significant in the
audit.
c. KAM will also assist the intended users in understanding the entity and areas of significant
management judgment in the audited financial statements. Ex :accounting estimates with
high
estimation uncertainty.
4) Determining Key Audit Matters (SQ)
In making this determination that what matters should be included under KAM, auditor shall take into account
the following factors:
i. Areas of higher assessed ROMM or significant risks identified as per SA 315.
ii. Areas of financial statements that involves significant management and auditors judgment that
is accounting estimates with high estimation uncertainty.
iii. Effect on audit of significant events or transections that occurred during the period.
Note: therefore subsequent events that is events after balance sheet date are not covered in KAM rather they are
covered in EOM paragraph.
5) Communicating KAM in the auditors report is not:(SQ)
i. A substitute for disclosure in the financial statements that the applicable financial
reporting framework requires management to make .
ii. A substitute for the auditor expressing a modified opinion when required by circumstances.
iii. A substitute for reporting in accordance with SA 570 when a material uncertainty exists relating to
going concern.
iv. The communicated KAM in the auditors report is not a separate opinion on individual matters.
6) Communication to TCWG and management :
a. Before including natters under KAM auditor should communicate these matters to TCWG
And management.
b. If applicable depending upon the facts and circumstances auditor may communicate with management
and TCWG that there are no KAM to be included in the auditors report.
7) Introductory language in the auditors report for key audit matter paragraph:
i. Definition of KAM.
ii. These matters were addressed in the context of audit of financial statements as a whole
and informing the auditors opinion. Auditors does not provide a separate opinion on these
matters.
Note : auditor should include each key audit matter using an appropriate sub heading under the main heading Key
Audit Matter. He should also include details about audit procedures performed to address each such matter.
 SA 580
Written representations

1. It is the auditors responsibility to obtain written representations from the management and
were appropriate, TCWG.
2. Written representations can be defined as written statement by the management provided by the
auditor to confirm certain matter or to support another audit evidence.
3. Written representations provides audit evidences but they do not provide sufficient and appropriate
audit evidence on there own.
4. Therefore the fact that management has provided reliable written representations does not effect
nature timing extent of normal audit procedures to obtain required audit evidences.
5. The date of written representations shall be as near as practicable to the date of auditors report. The
date of WR should not be after the date of auditor report. Because written representations provides
necessary audit evidences and auditor cannot express his opinion before obtaining sufficient and
appropriate audit evidences.
6. requested written representations not provided by the management:hw
7. Doubt as to the reliability of the written representations:
a. When written representation are inconsistent with other audit evidences then auditor may
have concerns about competence , integrity , ethical values or diligence of management or about
managements commitment about its responsibilities.
b. Auditor should perform additional or alternative procedures to resolve the matter. If the
matter remains unresolved then auditor should reconsider his assessment of the managements
competence, integrity, ethical values or diligence.
c. Is auditor concludes that their written representation are not reliable then he should take
appropriate action that is he should consider its possible effect on his opinion as per SA
705.
8. Disclaimer of opinion under following cases
a. When management does not provide the requested written representation to the auditor
regarding fulfill of management responsibility of preparation of financial statement and other info
to be provided and completeness of transections in the financial statements.
b. When auditor concludes that there is sufficient doubt about the integrity of the management that
written representations provided by management about responsibility for financial statement,
information to be provided and completeness of transection is not reliable.

9. Objective of SA 580 :
(a) To obtain written representation – to obtain written representation from the management. Written
representation may include a statement that management has fulfilled it's responsibility to prepare
and present financial statement and they have provided required information to the auditor.
(b) To support other evidence- Written representation can act as a support for other audit evidences that is
obtained during the course of financial statement audit. Generally Auditor performs his audit
procedures for specific assertions.
(c) To respond appropriately- Auditor should respond appropriately when management provides the
requested written representation and also when management does not provide requested
written representation.
10. Form of written representation- Auditor should obtain written representation in the form
of representation letter addressed to the auditor.
11. Responsibility of management in written representation:
i) For preparation of financial statement
a. Auditor shall request the management to provide WR that it is fulfilled it's responsibility to
prepare financial statements as per applicable FRF, as agreed in terms of engagement.
b. Generally management is responsible for preparation and conducting the entity's business therefore
they are expected to have sufficient knowledge about the process that was followed for preparation
of financial statement.
 c. Some time management may decide to make inquires with other(individual with specialized
knowledge that is management expert used for financial statements. For example- actuary , entity's
internal legal counsel , engineer.
d. Sometimes management may include qualifying language in the WR, Auditor may accept such
wording if he believes that the representations made by the management and the language included is
appropriate.
ii) Information provided and completeness of transection
a. Auditor shall request the management to provide a WR that it has provided the auditor with all
relevant information and access to people as agreed in the engagement terms.
b. Auditor should ask the management to include in WR that they have recorded all transection in the
financial statements that have taken place during the period.
12. Why written representation about management's responsibility is necessary:
a. Auditor evidence obtained during the audit that management has fulfilled it's responsibility for financial
statements and completeness of transactions is not sufficient without obtaining confirmation from the
management in a WR that they have fulfilled it.
b. Auditor will not be able to conclude that management has provided all the required information as agreed
to the auditor unless he obtains a confirmation from management in WR regarding the same.
13. In exceptional circumstances the Auditor may also ask the management to reconfirm its acknowledgment and
understanding of responsibilities in WR.
Eg:
a. those who signed the terms on behalf of company are no longer in charge.
b. The terms were prepared in a previous year.
c. There is an indication that management misunderstands it's responsibilities.
d. Change in circumstances.
 SA -300
Audit planning
1. Why planning an audit is necessary
HW

Note:-
When audit work is appropriately planned it will reduce the risk of expressing an inappropriate opinion. In other
words it will reduce audit risk to an acceptably low level.
2. Elements of planning
preliminary engagement activity.(GQ) Planning activities
Refer point 3
3. (Very very important) Preliminary engagement activities includes the following
a. Performing procedures regarding the continuance of clients relationship. (Refer note 1)
b. Evaluation compliance with ethical requirement including independence. (Refer chapter 11 and SA
220)
c. Establishing an understanding of the terms of engagement.(refer note 2)

Note 1: performing procedures regarding continuance of clients relationship:(SQ)

Acceptance. Continue
For initial audit engagement recurring audit
a. Auditor should ensure that appropriate procedures regarding acceptance and continuance of client
relationship has been performed and conclusions reached are appropriate
b. Auditorshould obtain necessary information to conclude whether to accept a new client, to continue an
existing client or to accept a new engagement with existing client. Information may include the following:
● Integrity of principle owners and Key Management People.
● Competence of the engagement team to perform the audit engagement.
● Implications or effects of matters that have arisen during current and previous audit engagement.
Note 2:-
a. Auditor should send an engagement letter to the client before commencement of Audit to avoid
misunderstanding or confusion relating to engagement terms.
b. Engagement terms when agreed will assist the Auditor in appropriately planning and performing audit
procedures to obtain sufficient and appropriate audit evidences.

4. Planning activities
Overall Audit strategy. Audit plan. Audit programme
refer note 7
Note 3:- developing an audit plan - Auditor shall develop an audit plan that shall include a description of
a. Nature timing and extent of planned risk assessment procedure as determined under SA 315.
b. Nature timing and extent of planned further audit procedures as determined under SA 330.
c. other planned audit procedures that are required to be carried out so that audit engagement complies with
 all applicable SA’s. Eg- there are specific SA’s such as 240 for frauds, 550 for related party, 560 for
subsequent event, 570 for going concern.
Note 4:- establishing overall audit strategy-
a. Auditor shall establish an overall audit strategy that sets the scope, timing and direction of audit and also
guides in the development of audit plan.
b. In establishing the overall audit strategy Auditor shall consider the following:
1. Auditor should identify the characteristics of engagement that defines it's scope. (Refer page 1B.5)
2. Auditor should ascertain the reporting objective of the engagement to plan the timing of audit and
nature of communications required.
3. Auditor should consider the factors that are significant is directing engagement team efforts.
4. Auditor should also consider the results of preliminary engagement activities and where applicable
whether knowledge gained on other engagement is relevant.
5. Auditor should consider the nature timing and extent of resources which are necessary to
perform the engagement.imp(refer note 5)
Note 5:- nature timing and extent of resources or benefits of overall audit strategy-home work

Note 6:- relationship between overall audit strategy and audit plan-
a. Overall audit strategy sets the overall broad approach to the audit by indicating the scope timing and
direction of audit engagement.
b. Audit strategy will help in developing the Audit plan to address various matters identified during the
strategizing phase.
c. Audit plan is more detailed then the overall audit strategy since it includes the nature timing and extent of
audit procedures to be performed.
d. The establishment of overall audit strategy and audit plan are not necessarily discrete or sequential
processes but are closely interrelated therefore change in one will also impact the other.

Note 7:- audit programme-

a. Audit programme includes series of verification steps to be applied to a specific account balance of the
financial statement to obtain sufficient and appropriate audit evidences so that auditor can express an
informed opinion on the financial statements.
b. Advantages of audit programme:-
1. Total and clear set of instructions for assistance.
2. Selection of assistance will become easy.
3. Engagement partner or principle and control the progress of various audits.
4. It will serve as a guide for audit of succeeding years.
5. It will serve as an evidence in the event of any charge of negligence brought against the auditor.
6. Audit staff can be made accountable for the work carried out by them.
c. Disadvantages of audit programme:
1. Work may become mechanical and assistants may follow the steps without understanding the
object of audit.
2. Programme may become rigid and inflexible therefore if there is any change in business operations
staff may carry out the audit with old programme itseld.
3. Inefficient assistants may take shelter behind the programme to defend their deficiencies.
4. A hard and fast audit programme may kill the initiative of efficient assistants.
Note:- all these disadvantages may be eliminated by imaginative supervisor of the work carried out by the
assistants. Also auditor must have a receptive attitude regarding the assistants that is we should
encourage the assistants to observe matters objectively and bring significant matters to the notice of
Engagement partner.(important)

d. Businesses may very in terms of size , nature, efficiency of internal control, etc. Therefore it is not possible to
evolve one audit programme applicable to all businesses.
e. Periodic review of audit programme.
1. The Auditor should periodically review the audit programme to access whether it is appropriate to
continue with the old audit programme or it is required to be revised.
2. Is periodic review is not performed auditor may carry out his audit procedures on the basis of obsolete
programme and the overall audit may be negligently conducted and an auditor may face legal
consequences for the same.
3. The utility of audit programme can be retained and enhanced by periodical review. that is removing the
inadequacies or redundancies from the programme on the basis of changes in entity's business operations
and internal control.
f. Assistants should be instructed to keep an open mind: homework

g. For the purpose of construction of an audit programme following points should be kept in mind:(factors)
a. Stay within the scope and limitation.
b. Prepare a written audit programme.
c. Determine what audit evidences can be reasonable obtained and plan the procedure to obtain reasonable
assurance from the same.
d. Consider all possibilities of error(ROMM)
e. Coordinate the procedures to be applied to related items. Eg - I a manufacturing business inventory
checking will require comfort over purchases and sales.
5. Changes to planning decisions during the course of audit:
a. Auditor shall update and change the overall audit strategy and audit plan if he comes across and
unexpected events or changes in events or the Audit obtained from results of audit procedures performed.
b. For example: audit evidence from substantive procedure may contradict with Audit evidence from test of
control.
6. The nature timing and extent of direction and supervision of engagement team members and review of their
work depends upon the following:(factors)
a. Size and complexity of business.
b. Assessed ROMM.
c. Capability and competence of individual team Members.
d. Area of audit.