Chapter 0 - Basics

Chapter 0 - Basics
What is an assurance engagement?
● Assurance engagement is a kind of service engagement (arrangement) in which a person gives his opinion
on subject matter.
● The subject matter may be anything, it may be any specific information.
● There are three parties involved.
○ The person giving an opinion is called a practitioner.
○ The practitioner is usually appointed by the intended user, who is the person who will be using the
subject matter or information.
○ The “subject matter” is prepared by another party known as responsible party.
● For expressing an opinion on “subject matter” practitioner will examine and will obtain sufficient and
appropriate evidence.
● The practitioner evaluate the subject matter against a standard benchmark or a suitable criteria and will
obtain sufficient and appropriate evidence and then give his opinion whether the specific information is as
per the suitable criteria or not through a written report.

What is Auditing?
Auditing is an assurance service, in which auditor (The person who conducts audit) gives an opinion on financial
information.

Meaning of Audit
An audit is an
● Independent examination of
● financial information of
● any entity,
○ whether profit oriented or not, and irrespective of its size or legal form,
● when such an examination is conducted with a view to expressing an opinion thereon

Objectives of Auditor
In conducting audit of FSs, objectives of auditor in accordance with SA 200 “Overall Objectives of the Independent
auditor and the conduct of an audit in accordance with Standards on Auditing” are: -
a) To obtain reasonable assurance about whether the FSs as a whole are free from material misstatement,
whether due to fraud or error, thereby enabling the auditor to express an opinion on whether the FSs are
prepared, in all material respects, in accordance with an applicable financial reporting framework; and
b) To report on the FSs, and communicate as required by the SAs, in accordance with the auditor’s findings.

Reasonable Assurance
A high, but not absolute, level of assurance.

Misstatement
A difference between
● the amount, classification, presentation, or disclosure
○ of a reported FS item
● and the amount, classification, presentation, or disclosure
○ that is required for the item to be in accordance with the applicable financial reporting framework.

Misstatements can arise from error or fraud

● The distinguishing factor between fraud and error is whether the underlying action that results in the
misstatement of the FSs is intentional or unintentional.

Neeraj Arora | www.edu91.org 0.1

 Chapter 0 - Basics

● ‘Fraud’ deals with intentional misrepresentation but, ‘error’, on the other hand, refers to unintentional
mistakes in financial information.

When a misstatement will be considered as material

Misstatements, including omissions, are considered to be material
● if they, individually or in the aggregate,
● could reasonably be expected to influence the economic decisions of users taken on the basis of the FSs;

Types of Opinion
● Clean Opinion
● Modified Opinion
○ Qualified Opinion
○ Adverse
○ Disclaimer of Opinion

Auditor's Judgment about the Pervasiveness of the Effects or Possible

Nature of Matter Giving Rise to the Effects on the Financial Statements
Modification Material but Not Pervasive Material and Pervasive
Financial statements Are materially Qualified opinion Adverse opinion
misstated
Inability to obtain sufficient Qualified opinion Disclaimer of opinion
appropriate audit evidence

Meaning of Pervasive
● The term pervasive is used to describe the effect of misstatements on the financial statement
● Whether the effect of material misstatement is pervasive or not it depends on auditors judgement.
● While deciding that the effect is pervasive or not auditor must keep the following things in mind
● Effect is pervasive when it is not confined to a specific element
● Even if it is confined to a specific element the effect can be considered as pervasive if it represent a
substantial proportion of financial statements
● In relation to disclosures, The effect can be considered as pervasive if It is fundamental to users
understanding of the financial statements.

Those charged with governance

The person(s) or organisation(s) with responsibility for
● overseeing the strategic direction of the entity and
● obligations related to the of the entity

Management
● The person(s) with executive responsibility for conduct of entity's operation

Preconditions for an audit

In order to establish whether the preconditions for an audit are present, the auditor shall:
a. Determine whether the financial reporting framework is acceptable and
b. Obtain the agreement of management that it acknowledges and understands its responsibility:
i. For the preparation of the financial statements in accordance with the applicable financial reporting
framework including where relevant their fair representation;
ii. For such internal control as management considers necessary to enable the preparation of financial
statements that are free from material misstatement, whether due to fraud or error; and
iii. To provide the auditor with:

Neeraj Arora | www.edu91.org 0.2

 Chapter 0 - Basics

➢ Access to all information of which management is aware that is relevant to the preparation of
the financial statements such as records, documentation and other matters;
➢ Additional information that the auditor may request from management for the purpose of the
audit; and
➢ Unrestricted access to persons within the entity from whom the auditor determines it
necessary to obtain audit evidence.

Internal Control
The Process designed, implemented and maintained by
➔ Those charged with governance
➔ Management
➔ Other personnel
To Provide Reasonable Assurance with regard to
● Reliability of financial reporting
● Effectiveness & Efficiency of operations
● Safeguarding of assets
● Compliance with applicable law & regulations

Framework to conduct audit

➔ Engagement / Appointment of the auditor
➔ Planning
➔ Materiality
➔ Risk assessment (Risk assessment procedures) ; and
➔ Response to the assessed risk (Further audit procedures)
◆ Tests of controls, when required by the SAs or when the auditor has chosen to do so; and
◆ Substantive procedures (Checking of Assertions), including
● Tests of details and
● Substantive analytical procedures.
➔ Audit Evidence
➔ Conclusions, Opinion and Reporting
➔ Audit Documentation.

Risk Assessment and Risk Assessment Procedures

● Risk assessment is done to assess the risk of material misstatement. (ROMM)
● Risk of material misstatement is defined as ‘the risk that the financial statements are materially misstated
prior to audit
● Risk assessment procedures are
○ used to
■ obtain an understanding of the entity and its environment,
■ including its internal control
○ in order to
■ assess the risk of material misstatement and
■ determine the nature, extent and timing of further audit procedures.
● After RAP, the Auditor can assess the level of ROMM.
● Once the ROMM is assessed, we can decide NET of FAPs
○ Nature - (Compliance or Substantive)
○ Extent - (Sample size, Less work or more work)
○ Timing - (Interim period and some transaction at the year end OR all year end in detail)
● Risk assessment procedures alone do not provide audit evidence sufficient to support audit opinion.
● They are required in all financial statement audits.

Neeraj Arora | www.edu91.org 0.3

 Chapter 0 - Basics

Further Audit Procedures

Compliance Procedure or Test of control
● Auditor will test internal control to assure that his initial understanding of IC was right or not.
● We will evaluate the operating effectiveness of controls in preventing, or detecting and correcting, material
misstatements
Substantive Procedure
● Auditor will check transactions, account balance presentation and disclosure
○ Analytical Procedures
○ Test of Details (Vouching and Verification)

Assertions
● Assertions refer to representations by management, explicit or otherwise, that are embodied in the financial
statements.
● By stating that the financial statements are in compliance with the relevant financial reporting framework,
management is making certain assertions about the proper recognition, measurement, presentation, and
disclosure of the various components of the financial statements and any accompanying disclosures.
● Auditor will check those claims (assertions).
● The assertions used by the auditor to identify potential errors or inaccuracies in financial statements can be
divided into three categories and may take the following forms.

Transactions Account balance Presentation and Disclosure

Occurrence Existence Occurence and rights and obligations

Completeness Rights and obligations Completeness

Accuracy or Measurement Completeness Classification and understandability

Cut-off Valuation and allocation Accuracy and valuation

Classification

Assertions related to transactions

Occurrence
Transactions that are recognized in the financial records as having occurred, i.e., did it really happen? and such
transactions and events pertain to the entity.

Completeness
All transactions and events that should have been recorded have been recorded.

Accuracy
Amounts and other data relating to recorded transactions and events have been recorded appropriately.

Cut-off
Transactions and events have been recorded in the correct accounting period.

Classification
Transactions and events have been recorded in the proper accounts.

Assertions related to Account Balance

Existence
Assets, liabilities, and equity interests exist.

Neeraj Arora | www.edu91.org 0.4

 Chapter 0 - Basics

Rights and obligation

the entity holds or controls the rights to assets, and liabilities are the obligations of the entity.

Completeness
All assets, liabilities and equity interests that should have been recorded have been recorded.

Valuation and allocation

Assets, liabilities, and equity interests are included in the financial statements at appropriate amounts and any
resulting valuation or allocation adjustments are appropriately recorded.

Assertions related to Presentation and Disclosure

Occurrence and rights and obligations
Disclosed events, transactions, and other matters have occurred and pertain to the entity.

Completeness
All disclosures that should have been included in the financial statements have been included.

Classification and understandability

Financial information is appropriately presented and described, and disclosures are clearly expressed.

Accuracy and valuation

Financial and other information are disclosed fairly and at appropriate amounts.

Audit evidence
Information used by the auditor in arriving at the conclusions on which the auditor’s opinion is based. Audit
evidence includes both information contained in the accounting records underlying the financial statements and
other information.

Information contained in the accounting records

Accounting records include
● the records of initial accounting entries and supporting records such records of fund transfer
● Invoices;
● Contracts
● the ledgers, journal entries and other adjustments to the financial statements.
● records such as worksheets and spreadsheets supporting cost allocations, computations, reconciliations
and disclosures.

Other information
Other information that authenticates the accounting records and also supports the auditor’s rationale behind the
true and fair presentation of the financial statements:

Other information which the auditor may use as audit evidence includes, for example
● minutes of the meetings,
● written confirmations from trade receivables and trade payables,
● manuals containing details of internal control etc.

Audit Risk
The risk that the auditor expresses an inappropriate opinion when the FSs are materially misstated. Audit risk can
be divided into two part
● Risk of material misstatement.
○ Inherent risk

Neeraj Arora | www.edu91.org 0.5

 Chapter 0 - Basics

○ Control risk
● Detection Risk

What is not included in Audit Risk ?

● Risk that the auditor might express an opinion that the FSs are materially misstated when they are not.
● Audit risk is a technical term related to the process of auditing; it does not refer to the auditor's business
risks such as loss from litigation, adverse publicity, or other events arising in connection with the audit of
FSs.

Inherent Limitations of Audit

● Limitations of Audit: As per SA 200 "Overall Objectives of the Independent Auditor and the Conduct of an
Audit in Accordance with Standards on Auditing", the objectives of an audit, is to enable an auditor to
express an opinion on such financial statements.
● The auditor is not expected to, and cannot, reduce audit risk to zero and cannot therefore obtain absolute
assurance that the financial statements are free from material misstatement due to fraud or error.
● This is because there are inherent limitations of an audit, which result in most of the audit evidence on
which the auditor draws conclusions and bases the auditor’s opinion being persuasive rather than
conclusive.
● The process of auditing, however, is such that it suffers from certain limitations, i.e. the limitation which
cannot be overcome irrespective of the nature and extent of audit procedures. The limitations of an audit
arise from

The Nature of Financial Reporting

● The preparation of financial statements involves judgment by management.
● In addition, many financial statement items involve subjective decisions or assessments or a degree of
uncertainty.
● Consequently, some financial statement items are subject to an inherent level of variability which cannot be
eliminated by the application of additional auditing procedures.

The Nature of Audit Procedures

There are practical and legal limitations on the auditor's ability to obtain audit evidence. For example:
● There is the possibility that management or others may not provide, intentionally or unintentionally, the
complete information that is relevant to the preparation and presentation of the financial statements or that
has been requested by the auditor.
● Fraud may involve sophisticated and carefully organized schemes designed to conceal it. The auditor is
neither trained as nor expected to be an expert in the authentication of documents.
● An audit is not an official investigation into alleged wrongdoing. Accordingly, the auditor is not given specific
legal powers, such as the power of search, which may be necessary for such an investigation.

Timeliness of Financial Reporting and the Balance between Benefit and Cost
● The relevance of information, and thereby its value, tends to diminish overtime,
● and there is a balance to be struck between the reliability of information and its cost.
● There is an expectation by users of financial statements that the auditor will form an opinion on the financial
statements within a reasonable period of time and at a reasonable cost

Other Matters that Affect the Limitations of an Audit

In the case of certain assertions or subject matters, the potential effects of the limitations on the auditor's ability to
detect material misstatements are particularly significant. Such assertions or subject matters include:
● Fraud, particularly fraud involving senior management or collusion.
● The existence and completeness of related party relationships and transactions.
● The occurrence of non-compliance with laws and regulations.
● Future events or conditions that may cause an entity to cease to continue as a going concern.

Neeraj Arora | www.edu91.org 0.6

 Chapter 0 - Basics

Unavoidable risk that some material misstatements of the financial statements may not be detected
Because of the limitations of an audit, there is an unavoidable risk that some material misstatements of the
financial statements may not be detected, even though the audit is properly planned and performed in accordance
with SAs.

However, the inherent limitations of an audit are not a justification for the auditor to be satisfied with less-than
persuasive audit evidence.

Audit Procedures to obtain audit evidence

1. Inspection - Examining the documents
2. Observation - Witnessing a process being conducted by others
3. External Confirmation - direct written response to the auditor from a third party
4. Recalculation - Checking the mathematical accuracy
5. Reperformance - auditor’s independent execution of procedures or controls
6. Analytical Procedure - studying significant ratios and trends and investigating unusual fluctuations.
7. Enquiry - Seeking information from knowledgeable persons both financial and non-financial within the entity
or outside the entity.

A Analytical Procedures
E Enquiry
I Inspection
O Observation
U RecalcUlation
Reperformance
External Confirmation

Basics
Standards collectively known as the Engagements Standards issued by AASB under the authority of the council of
ICAI.

The following Standards issued by the Auditing and Assurance Standards Board under the authority of the Council
are collectively known as the Engagement Standards:
● Standards on Auditing (SAs), to be applied in the audit of historical financial information.
● Standards on Review Engagement (SREs), to be applied in the review of historical financial information.
● Standards on Assurance Engagements (SAEs), to be applied in assurance engagements, dealing with
subject-matters other than historical financial information.
● Standards on Related Services (SRSs), to be applied to engagements involving application of agreed upon
procedures to information, compilation engagements, and other related services engagements as may be
specified by the ICAI.
● Standards on Quality Control (SQCs) issued by the AASB under the authority of the Council, are to be applied
for all services covered by the Engagement Standards as described above.

It is to be understood that Standards on Auditing (SAs) apply in “audit of historical financial information” whereas
Standards on Review Engagements (SREs) apply in “review of historical financial information”. Remember that
Standards on auditing apply in “audit” of historical financial information which is a reasonable assurance
engagement whereas Standards on Review Engagements apply in “review” of historical financial information which
is a limited assurance engagement only.

Neeraj Arora | www.edu91.org 0.7

 Chapter 0 - Basics

There is another set of standards which apply in assurance engagements dealing with subject matters other than
historical financial information. Such assurance engagements do not include “audit” or “review” of historical
financial information. These standards are known as Standards on Assurance Engagements.

For example, an assurance engagement relating to examination of Internal Control of The Entity.

Standards on related services

These standards apply in engagements to perform agreed-upon procedures regarding financial information. For
example, an engagement to perform agreed-upon procedures may require the auditor to perform certain
procedures concerning individual items of financial data, say, accounts payable, accounts receivable, purchases
from related parties and sales and profits of a segment of an entity, or a financial statement, say, a balance sheet or
even a complete set of financial statements.

Standards on Quality Control

Standards on Quality Control (SQCs) are to be applied for all services covered by Engagement Standards.

What are Standards on Auditing (SAs)?

SAs are Auditing Standards, which prescribe the way the auditing should be conducted. They can also be termed as
performance benchmarks for the auditors. The main purpose is to bring as much uniformity as possible in work
performed by auditors.

Procedure for issuing SAs

Generally following procedure is followed for issuing the SAs
● Auditing and Assurance Standard Board (AASB) of the Institute of Chartered Accountants of India (ICAI)
determines the specific area in which the SAs need to be formulated.
● In preparation of SAs—
○ AASB is assisted by study groups constituted to consider specific subjects.
○ An exposure draft of the proposed SA is finalized by the AASB' of ICAI on the basis of work of the
study group.
○ The exposure draft of the proposed SA is published for comments by the members of the Institute
(ICAI).
○ AASB finalizes the draft of the proposed SA after considering the comments received and submit to
the Council of the Institute (ICAI).
○ The Council considers the draft of the proposed SA and if necessary, modifies the same in
consultation with AASB. The SA is then issued under the authority of the Council of the Institute of
Chartered Accountants of India.
○ AASB of ICAI tries to integrate/harmonize the SAs to the extent possible in the light of the condition
and practices prevailing in India with ISAs (International Standards For Auditing) issued by IAASB
(International Auditing and Assurance Standards Board) of IFAC.

ICAI re-classified the existing auditing and assurance standards in 2008. The objective of re-classification is to
converge our existing auditing and assurance standards with the International Standard on Auditing (ISA) issued by
the International Federation of Accountants (IFAC).

Numbering of Standards
Standard on Quality Control (SQC) 01-99
Standard on Auditing (SA) 100-999
Standard on Review Engagement (SRE) 2000-2699
Standard on Assurance Engagement (SAE) 3000-3699
Related Services (SRS) 4000-4699

Neeraj Arora | www.edu91.org 0.8

 Chapter 0 - Basics

Classification of SAs
Introductory matters 100-199
General Principles and Responsibilities 200-299
Risk Assessment and Response to Assessed Risk 300-499
Audit Evidence 500-599
Using work of Others 600-699
Audit conclusions and Reporting 700-799
Specialised Areas 800-899

List of Standards
General Principles and Responsibilities

1 SA 200 Overall objectives of the Independent Auditor and the conduct of the Audit in Accordance with
Standard on Auditing
2 SA 210 Agreeing the Terms of Audit Engagements
3 SA 220 Quality Control for an Audit of financial statements
4 SA 230 Audit Documentation
5 SA 240 The Auditor’s Responsibilities Relating to Fraud in an Audit of Financial Statements.
6 SA 250 Consideration of Laws and Regulations in an Audit of Financial Statements
7 SA 260 Communication with those Charged with Governance
8 SA 265 Communicating Deficiencies in Internal control to those Charged with Governance and
Management
9 SA 299 Joint Audit of financial statements
Risk Assessment and Responses to Assessed Risks

10 SA 300 Planning an Audit of Financial Statements

11 SA 315 Identifying and Assessing the Risk of material Misstatements through understating the Entity and
Its Environment
12 SA 320 Materiality in Planning and Performing an Audit
13 SA 330 Response to Assessed Risks
14 SA 402 Audit consideration Relating to an Entity using a Service Organisation
15 SA 450 Evaluation of Misstatements Identified during the Audit
Audit Evidence
16 SA 500 Audit Evidence
17 SA 501 Audit Evidence-Specific Consideration for selected Items
18 SA 505 External Confirmations
19 SA 510 Initial Audit Engagement - Opening balances
20 SA 520 Analytical Procedures
21 SA 530 Audit Sampling
22 SA 540 Auditing Accounting Estimates, Including fair value Accounting Estimates and Related Disclosures
23 SA 550 Related Parties
24 SA 560 Subsequent Events
25 SA 570 Going Concern

Neeraj Arora | www.edu91.org 0.9

 Chapter 0 - Basics

26 SA 580 Written Representation

Using Work of Others
27 SA 600 Using the work of Other Auditors
28 SA 610 Using the Work of Internal Auditors
29 SA 620 Using the Work of an Auditor’s Expert
Audit Conclusions and Reporting
30 SA 700 Forming an Opinion and Reporting on Financial Statements
31 SA 701 Communicating key Audit Matters in the independent Auditor’s Report
32 SA 705 Modifications to the opinion in the independent Auditor’s Report
33 SA 706 Emphasis of Matter Paragraphs and other Matter Paragraphs in the Independent Auditor’s Report
34 SA 710 Comparative Information -Corresponding Figures and Comparative Financial Statements
35 SA 720 The Auditor’s responsibilities relating to Other Information
Standards on Quality Control
36 SQC 1 “Quality Control for Firms that Perform Audit and Reviews of Historical Financial Information, and
other Assurance and Related Services Engagements”
Standards on Review Engagements (SREs)
37 SRE 2400 Engagements to Review Historical Financial Statements
38 SRE 2410 "Review of Interim Financial Information Performed by the Independent Auditor of the Entity"
Standards on Assurance Engagements (SAEs)
39 SAE 3400 The Examination of Prospective Financial Information
40 SAE 3402 Assurance Reports on Controls At a Service Organisation
41 SAE 3420 Assurance Engagements to Report on the Compilation of Pro Forma Financial Information
Included in a Prospectus
Standards on Related Services (SRSs)
42 SRS 4400 Engagements to Perform Agreed-upon Procedures Regarding Financial Information.
43 SRS 4410 Compilation Engagements

How to get best out of this book

1. Study this book with the provided question bank.
2. After studying from this book, please attempt all the chapter wise mock tests provided with this book.
a. How to get a free chapter wise mock test and other resources and benefits that come for free with this book?
i. This book comes with a free course in which you will get
1. Self evaluated chapter wise mock tests with suggested answers.
2. Gamified MCQs Compilation.
3. Gamified Case study compilation.
4. Charts and Mind Maps for selected topics.
5. Guidance Videos For Audit.
6. Important Questions For Upcoming Exams.
7. Important updates and amendment for upcoming exams
b. How to get access to free course?
i. If you have purchased it from www.edu91.org, then check my courses tab on edu91 app or website
ii. If you have purchased it from any other source or seller, ask them to provide your details to
edu91.org so that we can provide you the access to the free course.

Neeraj Arora | www.edu91.org 0.10