as

1. Auditing Standards
– Practical Aspects
Presented by:

2. Contents of Presentation -
 Introduction
 History
 Standards – Why and What are they?
 Evolution of Auditing Standards
 ICAI – Standards on Audit
 Current Trends
 Practical Aspects

4. History
 5000 years ago, people in Mesopotamia were
found to be communicating basic information on
crops and taxes.
 Recordings of financial transactions have been
found in Egypt, Greek, Aztek, China, India etc.
 In ancient Rome, one official would compare
records with another, an application of duties
and verification.
 The ‘AUDIT’ was born.

5. History
 From the end of 19th
Century, Sweden recorded
the auditing profession gaining entry in public
management through the regulation of public
institutions.

6. Institute of Chartered Accountants
of India (ICAI)
Regulator of Auditing
Profession in India
AND
Authority Prescribing
Accounting and Auditing
Standards

7. Effective Compliance with Standards

8. Standards – Why?
 We need standards for variety reasons in every
walk of life.
 They represent ‘an international consensus on
good quality management practices’.
 Changing perception of customers has
necessitated bringing about and following
standards in services by professional bodies.
 Remove disparity in service provided by
members.

9. Standards – Purpose
 Delineate basic principles of audit as it
should be.
 Provide a framework for performing and
promoting a broad range of value added
audit activities.
 Establish the basis for the evaluation of
audit and assurance performance.
 Foster improved organisational processes
and operations.

10. Standards – Purpose
 Guidance to Members
 Codification of Current Practices
 Assurance of Consistent Practices
adopted across the Profession
 Assurance of Quality

11. What is a Standard?
 Attributes
 Performance
 Implementation
A standard is a document that establishes
uniform engineering or technical specifications,
criteria, methods, processes or practices.

13. Why Auditing
 Economic consequences – Impact of
using unreliable information
 Enhancing credibility of financial
information
 Conflict of interest – Users vs.
Preparers
 Remoteness – Physical, Legal
( A vital part of Economic Infrastructure)

14. AASB I
 Initially, a part of the Research Committee.
 Constituted as the AUDITING
PRACTICES COMMITTEE (APC) on
September 17, 1982.
 Non-standing Committee of ICAI.
 APC converted to AASB in July, 2002.

15. AASB II
ICAI is the ONLY Standard
setter in India

16. Relationship with IAASB
 ICAI is a founder member of IFAC
 Membership obligation –
convergence with ISAs
 NSS Policy Paper of IAASB on
convergence with ISAs, July,2006

17. International Acceptance of ISAs
World Bank ISAs are benchmarks for carrying
out its study on Observance of
Standards and Codes
INTOSAI ISAs used by national SAIs to
frame audit guidelines
IOSCO Evaluating conditions on which it
can endorse ISAs for cross border
purposes
European ISAs accepted subject to local due
Commission process in member countries

18. Size of firms - ICAI
Vast majority SMPs with SME clients
Cost and time vis a vis detailed requirements of Standards.
32,198
7,588
3,949
880
92
Proprietary
2 partner
3 - 5 partner
6 - 10 partner
11 - 20 partner

19. Effective Auditing Standards -
Essentials
Amenable to
enforcement
Flexibility for
application
Universal
acceptance
Easy to
understand
Principle
based
Auditing
Standards

20. Recent
Developments

21. Towards Convergence
 Revised Preface (w.e.f.April 6, 2008)
New Framework: Engagement and Quality Control
Standards
Revised Due Process
New Format of Standards
 Revised Framework of Assurance (w.e.f. April,
2008)
 Standard on Quality Control (SQC) (April,
1,2009)

22. A New Framework
Chartered Accountants Act, 1949,
Code of Ethics and other relevant pronouncements of the ICAI
Standards on Quality Control (SQCs)
Services covered by the pronouncements of AASB
Assurance Services Related Services
Framework for Assurance
Engagements
Audits and reviews of historical
financial information
Assurance Engagements other
than audits or reviews of
historical financial information
Standards on
Auditing (SAs)100 -
999
Standards on Review
Engagements (SREs)
2000 - 2699
Standards on Assurance
Engagements (SAEs)3000
- 3699
Standards on Related
Services (SRSs)4000 -
4699
Structure of Engagement & quality Control Standards

25. AUDITING RELATED SERVICES
Nature of
Service
Audit Review Agreed upon
Procedure
Compilation
Level of
Assurance
High, but not
absolute
Moderate
Assurance
No Assurance No Assurance
Report
Provided
Positive
Assurance on
assertions
Negative
Assurance on
Assertions
Factual
Findings of
procedures
Identification
of information
compiled

26. New Format of SAs
 Distinct sections – no more bold lettering used,
instead use of “SHALL”
 Introduction
 Scope – Objective
 Effective Date
 Requirements – basic principles, “shall”
 Application & Explanatory Material
 Appendices
 Application material & Appendix integral part of SA
but do not impose requirement.
* w.e.f. April 1, 2008

27. Other Important Facts
About SAs
 Nomenclature AASs done away with
 Standards on Quality Control and Engagement Standards:
 Standards on Auditing
 Standards on Review Engagements
 Standards on Assurance Engagements
 Standards on Related Services
 Standard on Quality Control (SQC) 1 is the Mother
Standard.
 Renumbering/ re-categorisation as per IAASB format
 New Format – Two Sections
 Differences from ISs given as “Material Modification to ISs
in SAs”
 Due Process made more rigorous
* w.e.f. April 1, 2008

28. Recently Issued
SAs – An Overview
200-299 General Principles & Responsibilities
 SA 230, “Audit Documentation” (w.e.f. April 1, 2009)
 SA 240, “The Auditor’s Responsibilities Relating to Fraud in an Audit of Financial
Statements” (w.e.f. April 1, 2009)
 SA 250, “The Auditor’s Responsibilities relating to Laws and Regulation in an Audit of
Financial Statements” (w.e.f. April 1, 2009)
 SA 260, “Communication with Those Charged with Governance (w.e.f. April 1, 2009)
300 – 499: Risk Assessment
 SA-300 Audit Planning April 1, 2008)
 SA 315, “Identifying and Assessing the Risk of Material Misstatement through
understanding the Entity and its Environment”, (April 1, 2009).
 SA 330, “The Auditor’s Responses to Assessed Risks” (w.e.f. April 1, 2008)

29. Recently Issued
SAs – An Overview
500-599 Audit Evidence
 600-699 Audit work of Others
 700-799 Audit Conclusions & Reporting
 SA 510, “Initial Audit Engagements-Opening Balances” (w.e.f. April 1, 2010)
 SA 530, “Audit Sampling” (w.e.f. April 1, 2009)
 SA 540, “Auditing Accounting Estimates, Including Fair Value Accounting
Estimates, and Related Disclosures” (w.e.f. April 1, 2009)
 SA 550, “Related Parties” (w.e.f. April 1, 2010)
 SA 560, “Subsequent Events” (w.e.f. April 1, 2009)
 SA 570, “Going Concern” (w.e.f. April 1, 2009)
 SA 580, “Written Representations” (w.e.f. April 1, 2009)

30. Recently Issued
SAs – An Overview
600 -699 – Using work of Others
700-799 – Audit Conclusions & Reporting
 SA 720, “The Auditor’s Responsibilities in Relation to Other Information
in Documents containing Audited Financial Statements.
800-899 - Specialized Areas

31. Compliance with SAs
 Compliance with SAs
 Mandatory
 Departure only if alternate audit procedures achieve
objective of SAs
 Document reasons for departure
 Document alternative procedures
 Report to draw attention
 SA not applicable if situation outlined in SA is absent.
 Document alternative procedures performed

32. Framework of Assurance Engagement
Subject matter Criteria
evaluation
Responsible
party
Practitioner
outcome
Assurance Report
O
pinion
Intended users
Enhanced
confidence
Evidence gathering

33. Elements of Assurance
Engagement
I. Three party relationship
II. Appropriate subject matter
III. Suitable criteria
IV. Sufficient appropriate evidence
V. Written assurance report

34. I. Three Party Relationship
The three parties:
1.Practitioner
2.Responsible party
3.Intended user

35. II. Subject Matter
 Forms:
 Financial performance/ conditions
 Non financial performance/ conditions
 Physical characteristics
 Systems and processes
 Behaviour
 Characteristics:
 Qualitative/ quantitative
 Objective/ subjective
 Historical/ prospective
 Point in time/ covers a period
Characteristics affect precision in evaluation against criteria and
persuasiveness of audit evidence

36. Can Engagement
Risk be Zero?
NO.
 Selective testing
 Inherent limitations of internal controls
 Persuasive nature of evidence
 Use of judgment in gathering & evaluating
evidence
 Characteristics of subject matter

37. System of Quality Control
 All firms to establish system of quality
control that provides Reasonable
Assurance that:
 Firm & personnel comply with professional standards,
regulatory & legal requirements; and
 Reports issued are appropriate in the circumstances

38.  Communicate Independence Requirements
 Identify and Evaluate Threats to
Independence
 Notification of Breaches
 Annual written independence confirmation
 Audit of FS of listed entities – rotation of
engagement partner – at least every 7 years
Independence

39. Client Relationship
 Client acceptance/ continuation policies to
reasonably assure:
 All information on client integrity
 Firm has capability, time & resources for the
engagement
 Firm can comply with ethical requirements
 Withdrawal from the Engagement or
Client Relationship

40. Engagement
Engagement QC Review
QC Review
(EQCR)
(EQCR)
A Litmus test for QC!!
Process:
 To provide objective evaluation
 Before report is issued
 For significant judgments &
conclusions of engagement team
 In formulating report

41. Engagement D
Engagement Documentation
 Firm to establish time limits appropriate to
nature of engagement to assemble files – not
more than 60 days in case of audit
 Maintain confidentiality, safe custody, integrity,
accessibility and irretrievability
 Policies/procedures for retention of
engagement documentation is no shorter than
ten years from the date of the auditor’s report,
or if later, the date of the group auditor’s report
 Ownership of documentation - Property of the
firm

42. Documentation
 Policies/procedures for
documentation to provide evidence
of operation of each element of QC
system
 Form & Content – factors to consider
 size of the firm and the number of offices
 Degree of authority both personnel and offices have
 Nature and complexity of the firm’s practice and organisation
 Retention
 Time period sufficient to permit evaluation of firm’s
compliance with QC system
 Longer period, if required by law

43. SA 230 : Audit Documentation
Record of:
 audit procedures performed
 relevant audit evidence obtained
 conclusions reached
Also known as “working papers”, “work papers”

44. SA 230 : Audit File
 one or more folders or other storage
media
 in physical or electronic form
 containing records that comprise
audit documentation for a specific
engagement

45. SA 230 : Scope
Scope
To be adapted
to audits
of other historical
fin info
Auditor’s
responsibility to
prepare audit dox
for an audit of FS
Specific dox requirements
of other SAs do not
limit application of this SA
L&R may establish
additional
requirements

46. SA 230 : Nature & Purpose
Assist team in planning
& performing
Assist supervision
& direction
Assist QC review
Create accountability
Record matters of
continuing significance
Assist external
inspection
Evidence of basis
for conclusion re
achievement of
overall objectives
Evidence of
audit planning
& performance
as per SAs
& L&R

47. Prepare documentation
that provides
Sufficient & Appropriate
record of basis of
auditor’s report
Evidence that audit was
planned and performed
in accordance with
SAs & L&R
SA 230 : Objective

48. SA 230 : Experienced Auditor
An individual (whether internal or
external to the firm) who has practical
audit experience, and a reasonable
understanding of:
audit processes
SAs and applicable L&R reqts
business environment
auditing and financial reporting issues

49. SA 230 : Requirements
Assembly
of
Final Audit File
Documentation of
Audit Procedures
and Audit Evidence obtained
Timely Preparation of Audit Documentation

50. SA 240 Responsibility for Fraud Prevention
 Those charged with governance
 Oversight of management policies
 Consider potential for management override of controls
 Consider potential for management’s inappropriate
influence on financial reporting
 Management
 Establish proper policies
 Emphasis on ethics and honesty

51. SA 240
The Auditor’s Responsibilities Relating to Fraud in
an Audit of Financial Statements
Responsibility of Auditor
 Obtain reasonable assurance that financial statements
are free of material misstatements.
Subject to:
 Inherent limitations of audit
 Fraud – deliberately concealed so difficult to
detect
But exercise PROFESSIONAL SKEPTICISM.

52. SA 240:Aspects covered under
Requirements
1. Professional skepticism
2. Discussion among engagement team
3. Risk Assessment Procedures and Related Activities
4. Identification & assessment of risks of material misstatements
5. Responses to assessed risks of material misstatement
6. Evaluation of audit evidence
7. Auditor unable to continue engagement
8. Management representations
9. Communications to management and those charged with
governance
10. Communication to regulatory authorities
11. Documentation

53. SA 240: Professional Skepticism
 Attitude that includes:
 Questioning mind
 Critical assessment of audit evidence
 Reliability of audit evidence
 Controls over preparation & maintenance of information
 Do not take client integrity and honesty for
granted
 Documents may be accepted as genuine if no
contrary indications.
 But when in doubt, may:
 Confirm directly with 3rd
party
 Engage expert to assess authenticity

54. SA 240:Auditor Unable to Continue the
Engagement
 Exceptional circumstances
 Determine professional & legal responsibilities &
reporting to:
 Appointing authority
 Regulator
 Consider if withdrawal is appropriate
 If withdraws:
 Discuss reasons with management & those charged with governance
 Determine legal/ professional requirement to report to the appointing
authority, regulator

55. SA 240:Communications – Management &
Those Charged With Governance
 To management:
 Fraud identified/ information indicating fraud
 Timely basis
 Appropriate level
 To those charged with governance:
 Management fraud; OR
 Frauds by employees having significant role in internal
control; OR
 Frauds by others where they result in material
misstatement in financial statements

56. SA 240:Communication –
Regulators
 Actual/ suspected fraud
 Determine duty to report to regulator
 Legal/ regulatory responsibilities normally
override client confidentiality requirements
 Seek legal advice to determine appropriate
course having regard to PUBLIC INTEREST

57. SA 315 - Small Entity Considerations
 Do not have formal processes
to measure & review financial
performance
 Inquire management for any
informal process
 Since no performance/review
measurement exists, it leads to
increased risk of undetected &
uncorrected misstatements.

58. SA 315 - Internal Control – Components
Monitoring
Information
System
Entity’s
RAPs
Control
Activities
Control
Environment
INTERNAL
CONTROL

59. SA 315 - Smaller Entity Considerations
(para A72 – A74)
 Those charged with governance may not be
independent/ outside members.
 Governance role undertaken by owner.
 No documentary evidence on existence of
control environment.
 Attitudes, awareness and actions of owner are of
particular importance

60. SA 315 - Smaller Entity Considerations
(Para A89-A90)
 Underlying concepts same as in larger entities,
but less formal
 Some controls may not be relevant due to
direct owner oversight
 Relate mainly to transaction cycles
 Understand CARA:
 Necessary for assessing risk of material
misstatement at assertion level and designing audit
procedures responsive to risk
 Response to IT risks

61. SA 330:The Auditor’s Responses
to Assessed Risk
 Tests of Controls
 Audit Procedure for evaluating operating effectiveness of
controls in preventing/ detecting & correcting material
misstatement at assertion level
 Substantive Procedures
 Analytical Procedures designed to detect material misstatements
at assertion level:
 Tests of details – classes of transactions/ account balances/
disclosures
 Substantive analytical procedures

62. SA 540: Auditing Accounting Estimates,
Including Fair Value Accounting Estimates,
and Related Disclosures
Scope
 Auditor’s responsibility for AE fair value AE.
And related disclosures
 Application of SA 315 and SA 330 in relation to
AE
 Requirement and guidance on misstatements
of individual AE, and indicators of possible
management bias

63. SA 540
Nature of Accounting Estimates
 PS items that cannot be measured precisely but can only
be estimated
 Measurement objective for some AE-To forecast the
outcome of one or more transactions, events or conditions
 Measurement objective for fair value AE Expressed in
terms of the value of a current transaction or PS item
 Difference between outcome of an AE and amt originally
disclosed in FS does not necessarily represent a
misstatement of FS, particularly for fair value AE.

64. SA 540:
Accounting Estimates Examples
 Allowance for doubtful accounts
 Inventory Obsolescence
 Warranty obligations
 Depreciation method or asset useful life
 Provision against the carrying amount of an investment
 Outcome of long term contracts
 Financial Obligations/Costs arising from litigation settlements
and judgments

65. SA 540
Fair Value Accounting Estimates – Examples
 Complex financial instruments, which are not traded in an
active and open market
 Share-based payments
 Property or equipment held for disposal
 Certain assets or liabilities acquired in a business
combination, including goodwill and intangible assets
 Transactions involving the exchange parties without
monetary consideration

66. SA 540
 O b j e c t i v e
 Obtain SAAE in context of applicable FRF:
AE including fair value AE in the FS are
reasonable
Related disclosure in the FS are adequate.

67. SA 580 - Smaller Entity
Considerations
 Not many control activities exist
 Extent of documentation of controls is limited
 Use substantive procedures
 In some cases – absence of control activities or a
component of IC, obtaining appropriate audit evidence
difficult

68. Practice Management-I
Environmental Pressure
 Competition Pressures
 To acquire and maintain clients
 Cutting costs where integrity is impaired
 Provision of non-audit services to clients
 Timing of completion of Audit Work
 Audit Fees Vs Cost of Compliance
 Heighten Regulations

69. Practice Management-II
 Maintaining Adequate Documentation
 Implementation of Standards
 Time Management

70. Audit Documentation
 Legal Defence for a practitioner
 Standardisation of working papers –
Checklist
Specimen letter
 Document profile of client
 Document significant observation
 Cost of Documentation

71. Implementation of Standards
 Prepare a checklist
 Update checklist regularly
Hold group meeting
Attend study circle meetings
Read literature
 Record compliance in respect of each client

72. Time Management
 Time Recording
 Matching actual time spent with budgeted
time
 Holding meetings with client after
completion of audit

73. Concluding Observations
 Bear in mind the increasing cases before
Disciplinary Board and the need to be
transparent in the services provided.
 Believe in documentation and not in verbal
communications or relations.
 An audit should be seen having been
effectively carried out with documentation.

74. Concluding Observations
 Apply Professional Judgment
 Technical knowledge, skill and experience
 Intuitive skills – To deal with any situation
 Nose for Truth
 Auditor Responds
 Beware of Professional Liability vis-à-vis
ICAI as well as general public & regulators