The document provides an overview of International Standards on Auditing (ISAs) related to planning and conducting an audit. It discusses the objectives, definitions, and requirements of several key ISAs, including ISA 200 on overall audit objectives, ISA 210 on agreeing audit terms, ISA 230 on audit documentation, and ISA 300 on audit planning. The document is intended as reference material for understanding the international standards that govern audits.

1. Notes on International
Standards on Auditing
[CAF-9]
by Fawad Hassan - ACA

2. Table of Contents
Sr No Topic Page No
1 (ISA 200) Objectives and General Principals Governing an Audit 1
2 (ISA 210) Agreeing the terms of audit engagements 4
3 (ISA 230) Audit Documentation 7
4 (ISA 300) Planning 10
5 (ISA 315) Understanding entity 12
6 (ISA 320) Materiality 17
7 (ISA 500) Audit Evidence 20
8 (ISA 520) Analytical Procedures 23
9 (ISA 530) Audit Sampling 24
10 (ISA 550) Related Parties 26
11 (ISA 560) Subsequent Events 29
12 (ISA 580) Written Representations 31
13 (ISA 610) Using Work of Internal Auditors 33
14 (ISA 620) Using Work of Expert 37
15 (ISA 700) Forming Opinion & Reporting on Financial Statements 39
16 (ISA 705) Modifications to Audit Opinion 43
17 Companies Act 2017 44

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(ISA 200) Overall Objectives of Independent Auditor and Conduct of Audit in Accordance with
International Standards on Auditing
1. Introduction:
1.1. Scope:
This ISA deals with independent auditor’s overall responsibilities
1.2. Audit of Financial Statements:
1.2.1. Purpose of audit is to enhance degree of confidence of users of financial statements
1.2.2. Auditor expresses opinion whether financial statements are prepared in all material respects, in accordance with applicable financial reporting
framework
1.2.3. Preparation of financial statements is responsibility of Management with oversight of those charged with governance
1.2.4. In order to express opinion, auditor requires Reasonable Assurance, that whether financial statements are free from material misstatements,
either due to fraud or error
1.2.5. Reasonable Assurance is obtained through sufficient appropriate audit evidence to reduce the Audit Risk to acceptable low level.
2. Overall Objective of Auditor:
2.1. To obtain reasonable assurance – that whether financial statements are free from material misstatements, due to fraud or error
To express an opinion – that whether financial statements are prepared in accordance with applicable financial reporting framework
To report on financial statements – in accordance with auditors’ findings, as required by ISAs
2.2. Where reasonable assurance cannot be obtained and qualified opinion is insufficient, then auditor shall either disclaim an opinion or withdraw from
engagement
3. Definitions:
3.1. Applicable Financial Reporting Framework
The financial reporting framework, adopted by management and those charged with governance in preparation of financial statements that is
acceptable in view of nature of entity and objective of financial statements OR
that is required by law or regulation
3.2. Audit Evidence
Information used by auditor, in arriving at conclusion, on which audit opinion is to be based
Audit Evidence should be sufficient and appropriate
Sufficiency is measure of quantity of audit evidence
Appropriateness is measure of quality of audit evidence
3.3. Audit Risk
It is the risk that auditor will express an in appropriate audit opinion when financial statements are materially misstated
3.4. Detection Risk
It is the risk that audit procedures performed to reduce audit risk to an acceptable low level
will not detect a misstatement that exists
which can be material either individually or when aggregated with other misstatements
3.5. Management
Person(s) with executive responsibility of conduct of entity’s operations
It may or may not include, those charged with governance

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3.6. Misstatement
Difference between;
amount, classification, presentation, disclosure of a reported financial statement item &
amount, classification, presentation, disclosure required for that item in accordance with applicable Financial Reporting Framework
It may occur because of Fraud or Error
3.7. Professional Judgment
Application of relevant training, knowledge and experience
provided by auditing, accounting and ethical standards
in making informed decisions that are appropriate in circumstances of audit engagement
3.8. Professional Skepticism
An attitude that includes
a questioning mind
being alert to conditions, which may indicate possible misstatement &
A critical assessment of audit evidence
3.9. Reasonable Assurance
It is high level assurance, but not an absolute assurance
3.10. Risk of Material Misstatement
It is the risk that financial statements are materially misstated prior to audit. It has two components:
Inherent Risk
Susceptibility of an assertion about an account balance or a class of transaction or a disclosure towards misstatement
Control Risk
It is the risk that a material misstatement shall not be prevented, detected or corrected by internal controls
3.11. Those Charged with Governance
Person(s) responsible to oversee strategic direction of entity &
be accountable for the entity.
It may or may not include Management
4. Requirements:
4.1. Ethical Requirements:
comply with ethical requirements
4.2. Professional Skepticism:
plan and perform audit with professional skepticism
be aware that such circumstances may exist which can cause the financial statements to be materially misstated
4.3. Professional Judgment:
exercise professional judgment in planning and performing audit

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4.4. Sufficient Appropriate Audit Evidence and Audit Risk:
to obtain reasonable assurance, auditor shall obtain sufficient appropriate audit evidence to reduce audit risk to an acceptable low level
4.5. Conduct of Audit in accordance with ISAs:
4.5.1. Comply with ISAs relevant to audit
Auditor must comply with all ISAs relevant to audit. An ISA is relevant when:
it is effective &
circumstances addressed by ISA actually exist
Auditor must obtain complete understanding of ISA to apply it properly
Auditor shall not represent compliance with ISAs unless complied with all requirements of ISAs
4.5.2. Objectives stated in individual ISA
Auditor must use individual objectives of each ISA to achieve overall objective of audit
4.5.3. Comply with relevant requirements
Auditor shall comply with requirements of each ISA unless
entire ISA is not relevant OR
specific requirement is not relevant
In exceptional circumstances, Auditor may depart from requirement of an ISA and apply alternative procedures to achieve the aim of that
requirement
4.5.4. Failure to achieve an objective
Where objective of an ISA cannot be achieved, auditor shall evaluate that whether this prevents auditor from achieving overall objective of
audit
Auditor may consider modify the report or withdraw from engagement

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(ISA 210) Agreeing the Terms of Audit Engagements
1. Introduction:
Scope:
This standard deals with auditor’s responsibilities in agreeing terms of audit engagement.
There are certain preconditions, which must be present, before auditor accepts an engagement.
2. Objective:
Auditor should only accept or continue an engagement when:
 It is established that the preconditions for audit are present
 It is confirmed that there is common understanding between auditor and management & TCHG about terms of engagement
3. Requirements:
a) Preconditions for an Audit:
In order to establish that preconditions for audit exist, auditor shall do following:
i. Determine whether applicable financial reporting framework is acceptable or not
ii. Obtain agreement of management that it acknowledges and understands following responsibilities:
 Responsibility of preparation and fair presentation of financial statements
 Responsibility of necessary internal controls for preparation of financial statements free from material misstatements
 Responsibility to provide auditor with following:
 Access to all relevant information
 Additional information that auditor may request
 Unrestricted access to persons from whom auditor need to obtain audit evidence
Limitation on Scope, Prior to Acceptance of Audit Engagement:
If in proposed terms of engagement, the management imposes limitation on auditor’s work, which may result in disclaiming an opinion
then auditor shall not accept such engagement, unless required by law or regulation to do so.
Other Factors Affecting Acceptance of Audit Engagement:
If preconditions do not exist, then auditor shall discuss the matter with management
Auditor shall not accept an engagement under following circumstances unless law or regulation require him to accept engagement:
 Financial reporting framework applied by management is not acceptable
 Management has not acknowledged its responsibilities
b) Agreement on Audit Engagement Terms:
i. Auditor shall agree terms of engagement with management & TCWG
ii. Agreed terms shall be recorded in audit engagement letter. This letter shall include following:
a. Objective and scope of audit
b. Responsibilities of auditor
c. Responsibilities of management
d. Identification of applicable financial reporting framework
e. Form and contents of auditor’s report

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Additional components which may be included in engagement letter:
i. more details on the scope of the audit;
ii. the fact that because of the inherent limitations of an audit, and the inherent limitations of internal control, there is an
unavoidable risk that some material misstatements may not be detected even though the audit was properly planned and
performed in accordance with ISAs;
iii. arrangements regarding the planning and performance of the audit, including the composition of the audit team;
iv. the expectation that management will provide written representations;
v. the basis on which fees are computed and any billing arrangements;
vi. a request for management to acknowledge receipt of the engagement letter and to agree to its terms;
vii. arrangements concerning the involvement of other auditors, experts or internal auditors (or other staff of the entity); and
viii. any restriction of the auditor’s liability when such possibility exists.
Audits of components:
If auditor of holding company is also auditor of its subsidiary, then following factors shall be considered in deciding that whether to send
separate engagement letter to subsidiary or not:
i. Who appoints component auditor
ii. Whether separate audit report to be issued for component
iii. Legal requirements
iv. Degree of ownership by parent
v. Degree of independence of component management from parent
iii. If laws or regulations prescribe above terms of audit and management acknowledges its above stated responsibilities, then
auditor need not to record the same in audit engagement letter
iv. If laws or regulations describe responsibilities of management then auditor shall determine that whether the responsibilities
described in laws and regulations are equivalent in effect to above stated responsibilities of management. In case
responsibilities described in laws and regulations are not equivalent in effect, then auditor shall use engagement letter to
describe the responsibilities of management.
c) Recurring Audits:
In case of recurring audit, the auditor shall determine that whether there is a need to:
 Revise terms of audit engagement AND
 Remind entity about the existing terms of engagement
Factors requiring revision of terms of engagement :
i. Entity misunderstands objective and scope of audit
ii. Recent changes in senior management
iii. Significant change in ownership
iv. Change in size or nature of business
v. Change in legal or regulatory requirements
vi. Change in financial reporting framework
vii. Revised terms of engagement

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d) Acceptance of Change in Terms of Engagement:
i. Auditor shall not agree to change in terms of engagement, where there is no reasonable justification
ii. If, before completion of audit, the auditor is requested to change engagement to a lower level assurance engagement, then auditor
shall determine that whether there is reasonable justification for doing so
iii. If change in terms of engagement are reasonable, then auditor and management shall record new terms in a new engagement
letter or other written agreement
iv. If auditor is unable to agree to change in terms of engagement and management does not permit him to continue already agreed
engagement, then auditor shall do following:
 Withdraw from engagement &
 Determine, whether there is any responsibility to report the circumstance to others, such as owners, regulators or TCWG
e) Additional Considerations in Engagement Acceptance:
i. Financial reporting standards supplemented by law and regulation
If law and regulation specify requirements in addition to accounting and reporting standards, then auditor shall determine,
whether there exists any conflict between such additional requirements and standards.
In case conflicts exist, then auditor shall discuss with the management and agree on any one of following:
 Additional disclosure shall be made for such additional requirements OR
 Description of financial reporting framework shall be amended
If none of above is agree with management then auditor will modify the opinion in accordance with ISAs
ii. Financial Reporting framework prescribed by law and regulation
If financial reporting framework prescribed by law is unacceptable for auditor, then auditor shall accept engagement only if
following conditions are present:
 Management agrees to provide additional disclosure in financial statements so that the same may not remain
misleading
 It shall be agreed in terms of engagement that:
 Auditor’s report shall include an emphasis of matter paragraph to draw users attention towards above
disclosure
 Unless required by law or regulation, auditor’s report shall not include phrases “present fairly in all
material respects” OR “give a true and fair view”
If above conditions are not present then auditor shall:
 Evaluate effect on auditor’s report
 Refer this matter in engagement letter
iii. Auditor’s report prescribed by law or regulation
If law or regulation require a different layout or wording of auditor’s report then the one required by ISAs then auditor shall
evaluate following:
 Whether users will misunderstand the assurance from such audit, and if yes, then
 Will additional explanation in audit report will mitigate this misunderstanding
If additional explanation will not mitigate the misunderstanding, then auditor should not accept the engagement
If law or regulation require auditor to conduct audit in above circumstances, then auditor shall not state in report that audit has
been conducted in accordance with ISAs

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(ISA 230) Audit Documentation
1. Introduction:
Scope:
This ISA deals with auditor’s responsibility to prepare audit documentation for audit.
Nature & Purpose of Audit Documentation:
Audit documentation serves following purposes;
i. Evidence of auditor’s basis of conclusion
ii. Evidence that audit was performed in accordance with ISAs
Additional Purposes:
i. Assist engagement team to plan and perform audit
ii. Assist audit supervisors to direct, supervise and review audit work
iii. Assist engagement team to be accountable for its work
iv. Retaining record of continuing significance
v. Enable quality control reviews in accordance with ISQC
vi. Enable external inspection in accordance with regulatory requirements
2. Objective:
The objective of auditor is to prepare audit documentation that provides following:
i. Sufficient and appropriate record of basis for audit report
ii. Evidence that audit was planned and performed in accordance with ISAs and regulatory requirements
3. Definitions:
Audit Documentation: (also called “working papers” or “workpapers”)
 The record of audit procedures performed
 relevant audit evidence obtained
 conclusions the auditor reached
Audit File:
 One or more folders or storage media, in physical or electronic form,
 containing records that comprise audit documentation
Experienced Auditor:
Individual having audit experience and reasonable understanding of following:
 Audit processes
 ISAs and regulatory requirements
 Business environment of entity
 Auditing and financial reporting issues of entity’s industry
4. Requirements:
i. Timely Preparation of Audit Documentation:
Auditor shall prepare audit documentation on timely basis
ii. Documentations of Audit Procedures and Audit Evidence:
Form, Content and Extent of Audit Documentation
Prepare audit documentation in such a manner which enable an experienced auditor, having no previous connection with audit, to understand
following:
a) Nature, timing and extent of audit procedures
b) Results of audit procedures performed and audit evidence obtained
c) Significant matters and conclusions thereon and professional judgment made in reaching those conclusions

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Form, content and extent of audit documentation shall depend on following factors:
i. Size and complexity of entity
ii. Nature of audit procedures performed
iii. Risk of material misstatement
iv. Significance of audit evidence
v. Nature and extent of exceptions
vi. Need to document conclusion
vii. Audit methodology and tools used
Examples of documentation:
i. Audit programs
ii. Analyses
iii. Issues memoranda
iv. Summaries of significant matters
v. Confirmation letters
vi. Representation letters
vii. Checklists
viii. Correspondence
While documenting nature, timing and extent of audit procedures, auditor shall record following:
a) Indentifying characteristics of items tested
b) Work completed by whom and date
c) Work reviewed by whom, extent of review and date
Auditor shall also document discussions with management and TCWG and its date
Any information found inconsistent with auditor’s final conclusion, then document how inconsistency was addressed
Departure from Relevant Requirements
If auditor departs from requirements of any ISA then document following
a) How alternate procedures achieved the aim of requirement
b) Reasons of departure from requirement
Matters arising after Auditor’s Report
If after auditor’s report, auditor has performed any new procedure or drawn a new conclusion, then document following:
a) Circumstances encountered
b) New procedure performed, evidence obtained, conclusion reached and its impact on audit report
c) Who made and who reviewed documentation changes and its date
iii. Assembly of Final Audit File:
Auditor shall
 assemble audit documentation in audit file
 complete administrative process of assembling file
 complete assembling of file on timely basis
 retain file till retention period (i.e., at least 5 years from date of audit report)
 document all reasons for every change made in file, by whom made and date of change

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(ISA 300) Planning an Audit of Financial Statements
1. Introduction:
Scope:
This ISA deals with auditor’s responsibility to plan an audit.
Role and Timing of Planning:
Planning involves;
i. Establishing overall audit strategy &
ii. Developing an Audit Plan
Benefits of Planning:
i. Attention to important areas of audit
ii. Identify and resolve potential problems on timely basis
iii. Properly organize and manage audit so that it could be performed effectively and efficiently
iv. Assistance in selection of engagement team which will help in responding to anticipated risks and proper assignment of work to them
v. Facilitate direction and supervision of work
vi. Coordination of work done by auditors of components and experts
2. Objective:
The objective of auditor is to plan audit, so that it could be performed in an effective manner.
3. Requirements:
i. Involvement of Key Engagement Team Members:
Engagement Partner and key members shall be involved in planning audit
ii. Preliminary Engagement Activities:
Following activities shall be undertaken at beginning of audit:
i. Perform procedures required by ISA 220 (Quality Control for Audit of Financial Statements) regarding continuance of client
ii. Evaluate compliance with independence and other ethical requirements in accordance with ISA 220
iii. Ensure compliance with requirements of ISA 210 (Agreeing Terms of Audit Engagement)
iii. Planning Activities:
Auditor shall establish overall audit strategy. This will set scope timing and direction of audit. This will also guide development of audit plan.
In establishing overall audit strategy, auditor shall do following:
i. Identify characteristics of engagement. This will define the scope of engagement.
For example:
 the financial reporting framework used (for example, international financial reporting standards)
 any industry specific reporting requirements
 the location of the components of the entity (for example, there might be overseas branches).
ii. Ascertain reporting objectives of engagement. This will help to plan timing of audit and nature of communications required
iii. Consider factors which are significant in directing engagement team
iv. Consider results of “Preliminary Engagement Activities”
v. Consider whether knowledge gained by engagement partner on other engagements is relevant or not
vi. Ascertain nature, timing and extent of resources necessary to perform audit
Auditor should consider following:
 where experienced members of staff may be needed (for example, on high risk areas)
 the number of staff to be allocated to specific areas (for example, extra staff may be needed for attendance at the year-end
inventory count)
 when the resources are needed (for example, are more staff needed at the final audit than at the interim audit)
 how such resources are to be managed, directed and supervised (for example, the timing of team briefing meetings and manager
and partner reviews of work performed by other members of the audit team).

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Audit Plan shall include description of following:
i. Nature, timing and extent of PLANNED risk assessment procedures required by ISA 315 (Risk Assessment)
ii. Nature, timing and extent of PLANNED further audit procedures required by ISA 330 (Auditor’s Response to Assessed Risk)
iii. Other PLANNED audit procedures to ensure compliance with other ISAs
Auditor shall update and change Audit Strategy and Audit Plan as and when required during audit
Auditor shall plan nature, timing and extent of;
i. Direction to engagement team
ii. Supervision of engagement team
iii. Review of work of engagement team
iv. Documentation:
Following shall be documented:
i. Overall Audit Strategy
ii. Audit Plan
iii. Significant changes made in above and reasons thereof
v. Additional Considerations in Initial Audit Engagements:
Following shall be done by auditor in starting an initial engagement:
i. Perform procedure required by ISA 220 (Quality Control for Audit of Financial Statements)
ii. Communicate with predecessor auditor, in compliance of relevant ethical requirements

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(ISA 315) Identifying & Assessing Risk of Material Misstatement
through Understanding Entity & its Environment
1. Introduction:
Scope:
This ISA deals with auditor’s responsibility to identify and assess risk of material misstatement through understanding entity and its environment including
internal controls.
2. Objective:
The objective of auditor is to identify and assess risk of material misstatement
o At financial statement level &
o At assertion level
through understanding entity and its environment, including its internal controls.
This will provide basis for designing response to assessed risk.
3. Definitions:
Assertions Representations by management, embodied in financial statements, that are used by auditor to consider potential
misstatements.
Business Risk Risk resulting from
o circumstances, that adversely affect entity’s ability to achieve its objectives or execute its strategies or
o setting inappropriate objectives and strategies
Internal Control The process
o designed
o implemented &
o maintained
by
TCWG
Management
Personnel
which provide reasonable assurance about achievement of following objectives:
o reliability of financial reporting
o effectiveness & efficiency of operations
o compliance with law & regulations
Risk Assessment Procedure Audit procedures performed to obtain understanding of entity and its environment including internal controls to assess
risk of material misstatement, due to fraud or error, at financial statement level and assertion level.
Significant Risk An identified and assessed risk of material misstatement
that in auditor’s judgment requires special audit consideration.
4. Requirements:
i. Risk Assessment Procedures and Related Activities:
Auditor shall perform risk assessment procedures to identify and assess risk of material misstatement. These procedures do not provide sufficient &
appropriate audit evidence on which auditor could base his report.
Risk Assessment Procedures shall include following:
o Inquiries of management and other personnel who in auditor’s judgment could have knowledge which can assist auditor in identifying and
assessing risk of material misstatement
o Analytical Procedures: It involves the study of ratios and trends to identify the existence of unusual transactions or events or amounts,
ratios or trends that might have implications for the audit
o Observation & Inspection
Auditor shall do following:
o Consider whether information obtained at client acceptance stage is relevant to assessment of risk of material misstatement
o If other engagements also performed for same entity, then consider relevance of information, obtained during other engagements, to the
risk assessment

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o If audit of same entity was done in past, then before using information obtained in past audits, auditor should consider changes occurred
since previous audit and relevance to these changes to this audit.
o Engagement team members shall discuss;
→ Susceptibility of financial statement to material misstatement
→ Application of financial reporting framework to entity and its circumstances
ii. Required Understanding of Entity & its Environment including Internal Controls:
o Entity & its Environment:
Auditor shall obtain understanding of following:
→ Industry, regulatory & other external factors and financial reporting framework
→ Nature of entity:
Operations of entity
Ownership structure
Types of investments made
Structure of entity and modes of finances
→ Accounting policies adopted and changes made in accounting policies
→ Entity’s objectives, strategies and related business risks that may result in risk of material misstatement
Examples of matters to be considered:
i) Industry developments
ii) New products and services
iii) Expansion of business when product demand was not accurately estimated
iv) New accounting requirements
v) Regulatory requirements
vi) Current and future financing requirements
vii) IT related issues when compatibility of systems is feared
→ Financial performance of entity
o Internal Controls:
Auditor shall obtain understanding of internal controls relevant to audit. Auditor will use professional judgment in deciding which controls
are relevant to audit or not.
About Internal Controls
Purpose of internal controls:
i) reliability of financial reporting
ii) effectiveness & efficiency of operations
iii) compliance with law & regulations
Inherent Limitations of Internal Controls:
i) Human Error
ii) Collusion among employees
iii) Management override of controls
Benefits of Automated Controls:
i) Consistently applied
ii) Timely and accurate
iii) Facilitate additional analysis
iv) Enhanced monitoring of performance
v) Reduced risk of circumventing controls
vi) Effective segregation of duties
Risks of automated controls:
i) Reliance on inaccurate system
ii) Unauthorized access to data
iii) IT personnel can gain unauthorized access to data

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iv) Unauthorized changes to data in master files
v) Unauthorized changes to programs
vi) Potential loss of data
Circumstances where manual controls are more suitable than automated controls:
i) Unusual transactions
ii) Change in circumstances
iii) Circumstances where error is difficult to predict
iv) Monitoring automated controls
Circumstances where automated controls are more suitable than manual controls:
i) Large number of recurring transactions
ii) Control activities which can adequately be automated
Factors to be considered in evaluating, whether controls are relevant to audit or not:
i) Materiality
ii) Significance of risk
iii) Size of entity
iv) Nature of business
v) Complexity of operations
vi) Regulatory requirements
Procedures for assessment of control risk
i) Inquiry of personnel
ii) Observation of application of controls
iii) Inspection of documents
iv) Tracing transaction through system (walk-through tes)
→ Control Environment
Control environment comprises of following:
i) Communication and enforcement of integrity & ethical values
ii) Commitment to competence
iii) Participation by those charged with governance
iv) Management philosophy & operating style
v) Organizational structure
vi) Assignment of authority and responsibility
vii) Human resource policies
While understanding control environment, auditor shall evaluate that whether TCWG & Management have created and
maintained a culture of honesty and ethical behavior.
A satisfactory control environment reduces risk of fraud but is not an absolute prevention from fraud.
→ Entity’s Risk Assessment Process
Auditor shall obtain understanding that whether entity has process for following:
Identifying business risk relevant to financial reporting
Estimating significance of risk
Assessment of likelihood of occurrence of identified risk
Deciding about actions to address those risks
Risk of material misstatement can arise due to following factors:
i) Changes in operating environment
ii) New personnel
iii) New information system

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iv) Rapid growth
v) New technology
vi) New business model or activities
vii) Corporate restructurings
viii) Expanded foreign operations
ix) New accounting pronouncements
→ Information System
While obtaining understanding of information system, auditor shall obtain understanding of following:
Classes of transactions, significant to financial statements
Procedures through which these transactions are initiated, recorded, processed, transferred to general ledger and
reported in financial statements
Accounting record relating to these transactions
How information system captures events other than transactions
Financial reporting process used to prepare financial statements
Controls surrounding journal entries
Information system includes all methods and records that:
i) Identify and record transactions
ii) Provide sufficient detail of transactions of its classification
iii) Measure value of transactions
iv) Determine time period in which transactions occurred
v) Properly present and disclose transactions
→ Control Activities relevant to Audit
Auditor shall obtain understanding of control activities relevant to audit
Control activities are the policies and procedures pertaining to following
i) Performance review
ii) Information processing
iii) Physical controls
iv) Segregation of duties
Auditor shall also obtain understanding that how entity responds to risks arising from IT.
→ Monitoring of Controls
Obtain understanding of major activities used to monitor internal controls
If entity has internal audit functions, then auditor shall obtain its understanding.
Obtain understanding of sources of information used in monitoring activities and that how management assesses reliability of
such information
iii. Identify & Assess Risk of Material Misstatement:
o Auditor shall identify and assess risk of material misstatement at following levels
→ Financial statement level
Risk of material misstatement at financial statement level is the risk that relates pervasively
to financial statements as a whole and can affect many assertions.
These risks are not necessarily identifiable to specific assertion.

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e.g., management override of controls is a risk which is pervasive to financial statements as a
whole
→ Assertion level
Risk of material misstatement at assertion level need to be considered because this will assist in deciding nature, timing and
extent of audit procedures at assertion level.
Assertions used by auditor to consider potential misstatement are as follows:
Assertion
Class of
transaction for
the period of
audit
Account balances
at period end
Presentation &
disclosure
Occurrence   
Completeness   
Accuracy   
Cut-off   
Classification   
Existence   
Rights and obligations   
Valuation   
Allocation   
Understandability   
In order to identify risk of material misstatement at financial statement level or at assertion level auditor shall do following:
i) Identify risks throughout the process of understanding entity, its environment and internal controls
ii) Assess identified risks
iii) Relate identified risks to relevant assertion level
iv) Consider likelihood of misstatement and that it could be material or not
o Risks that require special audit consideration:
Auditor shall exercise judgment to determine that whether identified risk is a significant risk or not.
Following factors shall be considered in determining that whether identified risk is a significant risk:
i) Whether risk is a risk of fraud
ii) Whether risk is related to recent economic, accounting or other development
iii) Complexity of transaction
iv) Whether risk is in a transaction with related party
v) Degree of subjectivity in measurement of financial information
vi) Whether risk is in a non routine transaction
o Revision of risk assessment:
Risk assessment may change during course of audit as additional audit evidence is obtained. In such circumstances, auditor shall revise the
assessment.
iv. Documentation:
Following shall be documented:
i. Discussion among engagement team and decisions reached
ii. Understanding obtained about entity, its environment and internal controls
Source of information from which understanding was obtained
Risk assessment procedures performed
iii. Identified and assessed risk at Financial Statement Level
Identified and assessed risk at Assertion Level
iv. Identified risks and Internal controls relevant to those risks

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(ISA 320) Materiality in Planning and Performing Audit
1. Introduction:
Scope:
This ISA deals with auditor’s responsibility to apply concept of materiality in planning and performing audit.
Concept of Materiality:
Generally, the concept of materiality in financial reporting framework, if not stated otherwise, is as follows:
o Misstatements and omissions in financial statements are considered material, if they are reasonably expected to influence economic decision of
user, taken on basis of financial statements
o In making judgment about materiality following factors are also considered:
→ Surrounding circumstances
→ Size or nature of misstatement
Auditor determines materiality on basis of professional judgment. This judgment is influenced by auditor’s perception about the information needs of user of
financial statements. In making this perception about user needs auditor is entitled to assume following:
o Users have a reasonable knowledge of business and are willing to study the information in the financial statements diligently
o Users understand that financial statements are prepared and audited to levels of materiality
o Users recognize the uncertainties inherent in certain amounts in the financial statements (such as provisions)
o Users make reasonable economic decisions based on the information in the financial statements.
Concept of materiality shall be applied by auditor at following points:
o Planning and performing audit
o Evaluating effect of identified and uncorrected misstatements
o Forming opinion in auditor’s report
At planning stage auditor will make judgment about materiality level. This judgment will provide basis of following:
o Determining nature timing and extent of risk assessment procedures
o Identifying and assessing risk of material misstatement
o Determining nature timing and extent of audit procedures
2. Objective:
The objective of auditor is to apply the concept of materiality in planning and performing audit.
3. Definitions:
Performance Materiality It means amount set by auditor at a level less than the amount which has been considered material at financial
statement level. This will help to ensure that aggregate of all misstatements will not exceed that materiality level set for
financial statements.
4. Requirements:
i. Determine Materiality and Performance Materiality at Planning stage:
While establishing over all audit strategy, auditor shall determine
o materiality level for financial statement as a whole
o materiality level for class of transaction, account balance or disclosure (if in auditor’s judgment a lower amount is expected to influence
economic decision of user)
o performance materiality
ii. Revise materiality as audit progresses:

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Auditor must revise materiality level for financial statement as a whole, for class of transaction, account balance or disclosure and performance
materiality if he becomes aware of information which would have caused him to set different levels, had that information been known to him
iii. Documentation:
Auditor shall include in documentation following amounts and factors considered in determining these amounts:
o Materiality for financial statements as a whole
o If applicable, Materiality level for classes of transaction, account balances or disclosures
o Performance materiality
o Any revisions made in above materiality levels

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(ISA 500) Audit Evidence
1. Introduction:
Scope:
This ISA
o explains what constitutes an audit evidence &
o deals with auditor’s responsibility to design and perform audit procedures to obtain sufficient appropriate audit evidence to be able to draw
reasonable conclusion on which audit opinion will be based
2. Objective:
The objective of auditor is to design and perform audit procedures in such a way which enable him to obtain sufficient appropriate audit evidence. This
evidence will be used to draw reasonable conclusion on which audit opinion will be based.
3. Definitions:
Appropriateness of Audit Evidence This is the measure of quality of audit evidence.
This means its relevance and reliability in providing support for conclusions on which audit opinion
will be based.
Audit Evidence Information used by auditor in arriving at conclusion on which audit opinion is to be based.
It includes information contained in accounting records and other information.
Management’s Expert An individual or organization possessing expertise in a field other than accounting and auditing and
whose work is used by entity in preparing financial statements.
Sufficiency of Audit Evidence This is the measure of quantity of audit evidence.
The quantity of audit evidence needed will be effected by:
o auditor's assessment of risk of material misstatement &
o quality of audit evidence
4. Requirements:
i. Sufficient Appropriate Audit Evidence:
Auditor shall design audit procedures to obtain sufficient appropriate audit evidence
Audit evidence comprises of information that;
o Supports and corroborates management assertions &
o Contradicts management assertions
Absence of information is also used by auditor as audit evidence e.g., management’s refusal to provide requested representation
will constitute audit evidence
Sufficiency and appropriateness of audit evidence are interrelated. Sufficiency is measure of quantity and quantity of evidence
needed is effected by auditor’s risk assessment (if assessed risk is high more evidence will be required) and its quality (in case of
high quality of evidence, lesser quantity may be required). Obtaining more evidence may not compensate for its poor quality.
Sources of audit evidence:
o Audit procedures
o Consistent audit evidence from different sources or from items of different nature
o Information from sources independent of entity e.g., third party confirmations
Audit procedures to obtain audit evidence:
o Inspection involves examining records or documents and physical examination of an asset e.g., while testing
controls, the inspection of records for authorization
o Observation consists of looking at a process being performed by others e.g., auditor’s observation of inventory
counting by entity’s personnel
o External confirmation represents audit evidence obtained by auditor as direct written response to auditor from

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third party.
o Recalculation consists of checking mathematical accuracy of documents or records.
o Reperformance means auditor’s independent execution of a procedure which was originally performed by entity’s
internal controls
o Analytical Procedures consists of evaluation of financial information through analysis of plausible relationship
among financial and non financial data
o Inquiry is seeking information of knowledgeable persons, inside and outside entity
ii. Information to be used as Audit Evidence:
Auditor shall consider relevance and reliability of information to be used as audit evidence
Quality of audit evidence is effected by relevance and reliability of information on which it is based.
Relevance:
Relevance deals with logical connection with purpose of audit procedure
Reliability:
Reliability of audit evidence is dependent upon its source, nature and circumstances in which it has been obtained. Following
shall be considered in determining reliability of audit evidence:
o Source:
Evidence from independent source, outside entity is more reliable
If internal controls are effective, then internally generated evidence is more reliable
Audit evidence obtained directly by auditor is more reliable then those obtained indirectly
o Nature:
Evidence in document form is more reliable then oral
Evidence from original document is more reliable then from photocopy or facsimiles
If information to be used as audit evidence was prepared by management’s expert, then auditor shall do following:
o Evaluate competence, capabilities and objectivity of expert
o Obtain understanding of work of expert
o Evaluate appropriateness of work of expert for relevant assertion
Nature, timing and extent of audit procedures to evaluate work of management expert shall be effected by following:
o Nature & complexity of matter
o Risk of material misstatement in the matter
o Availability of alternate source of audit evidence
o Nature scope and objective of expert’s work
o Whether management expert is employed or is engaged to provide such services
o Extent of management’s control over expert work
o Internal controls over expert’s work
o Auditor’s knowledge about expert’s field of expertise
o Auditor’s past experience of work of expert
Sources of information about competence and capabilities of expert:
o Personal experience with work of expert
o Discussion with expert
o Discussion with others who are familiar with work of expert
o Knowledge of expert’s qualification, licence to practice, professional membership etc
o Books or papers published by expert
When information produced by entity is to be used by auditor as audit evidence then auditor will do following:
o Evaluate whether information is reliable
o Obtain audit evidence about accuracy and completeness of information

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o Evaluate whether information is sufficiently precise and detailed for audit purposes
iii. Selecting items for testing to obtain Audit Evidence:
While designing audit procedures auditor shall determine how to select items for testing so that the purpose of audit procedure could be achieved.
Audit can select items for testing in any of following ways:
a. Selecting all items (100% testing)
b. Selecting specific items
c. Audit Sampling
a. Selecting all items (100% testing):
Selecting all items is appropriate in following circumstances:
o Population consists of small number of large value items
o There is a risk that other means will not provide other sufficient appropriate audit evidence
o Repetitive calculation or automatic processing by information system makes 100% examination cost effective
b. Selecting specific items:
Following factors are relevant in selecting specific items:
o Understanding of entity
o Assessed risk of material misstatement
o Characteristics of population being tested
Specific items selected may include following:
o High value or key items
For example items that have a history of errors, risk prone, unusual or suspicious
o All items over a certain amount
Auditor may decide to examine all items over a certain amount so that a large amount of total population could be
tested.
o Items to obtain information
To obtain information such nature of entity or nature of transaction.
c. Audit Sampling:
Will be discussed in ISA 530
iv. Inconsistencies in or doubts over Audit Evidence:
If
o Audit evidence obtained from one source is inconsistent with that from another source OR
o Auditor has doubts over reliability of information used as audit evidence
Then auditor shall
o consider modify the audit procedures to resolve the matter &
o consider effect of matter on other aspects of audit

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(ISA 520) Analytical Procedures
1. Introduction:
Scope:
This ISA deals with
o auditor’s use of substantive procedures as audit procedures (substantive analytical procedures) &
o auditor’s responsibility to perform analytical procedures near end of audit, to assist auditor in forming overall conclusion on financial statements
2. Objective:
The objectives of auditor are following:
o Obtain relevant and reliable audit evidence when using substantive analytical procedures
o Design and perform analytical procedures near end of audit that will assist auditor in forming overall conclusion as to whether financial
statements are consistent with auditor’s understanding of entity.
3. Definitions:
Analytical Procedures Means evaluation of financial information through analysis of plausible relationship among financial and non financial data.
It also includes investigation of fluctuations that are inconsistent with other information
Analytical procedures include:
Comparison of financial information with;
o Prior periods
o Anticipated results of entity, such as budgets or forecasts or expectations of auditor
o Similar industry information such as comparison of ratio of sales to debtors with industry average
Consideration of relationships;
o Among elements of financial information such as gross profit ratio
o Between financial information and non financial information such as payroll cost to number of employees
4. Requirements:
i. Substantive Analytical Procedures:
While designing and performing substantive analytical procedures, auditor shall do following:
o Determine suitability of substantive analytical procedure for given assertion
o Evaluate reliability of data from which auditor has developed expectation of recorded amounts. Reliability of data shall depend on following
factors
→ Source e.g., information will be more reliable if obtained from independent source outside entity
→ Comparability e.g., broad industry data need to be supplemented to make it comparable to entity
→ Nature and Relevance e.g., where budget has been prepared on basis of expected results rather than targets to be achieved
→ Controls over preparation
o Develop expectation of recorded amounts and evaluate whether expectation is sufficiently precise to identify misstatements
o Determine amount of difference, between expected amounts and actual amounts, which will not require further investigation and hence
will be acceptable
ii. Analytical Procedures that assist when forming an overall conclusion:
Auditor shall design and perform analytical procedures near end of audit that will assist auditor in forming overall conclusion as to whether financial
statements are consistent with auditor’s understanding of entity.
iii. Investigating results of Analytical Procedures:
If inconsistent fluctuations are identified then auditor will investigate differences in following ways:
o Inquiry of management and obtain appropriate audit evidence of management’s response
o Perform other audit procedures that are necessary in circumstances

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(ISA 530) Audit Sampling
1. Introduction:
Scope:
This ISA applies when auditor has decided to use audit sampling in performing audit procedures.
2. Objective:
While using audit sampling, the objective of auditor is to provide reasonable basis to draw conclusions about population from which sample is selected.
3. Definitions:
Audit Sampling Application of audit procedures to less than 100% of items of population in such a way that all sampling units have a
chance of selection.
Population Entire set of data from which sample is selected and about which auditor wishes to draw conclusions
Sampling Risk It is the risk that auditor’s conclusion based on sample may be different from conclusion if entire population were tested.
Sampling risk can lead to following two types of erroneous conclusions:
o For tests of controls – that controls are more effective than they actually are and for tests of details – that a
material misstatement does not exist when in fact it does.
o For tests of controls – that controls are less effective than they actually are and for tests of details – that a
material misstatement exists when in fact it does not.
Non Sampling Risk The risk that auditor will reach erroneous opinion for any reason not related to sampling risk
Anomaly A misstatement or deviation which is not representative of misstatement or deviation in population.
Sampling Unit The individual item constituting population.
Statistical Sampling A sampling approach that has following characteristics:
o Random selection of sample items
o Use of probability theory to evaluate sample results
Non Statistical Sampling Sampling approach that does not have characteristics of Statistical Sampling
Stratification Dividing population into sub-populations having similar characteristics.
Tolerable Misstatement Monetary amount set by auditor, in respect of which auditor wants to obtain an assurance that actual misstatement in
population does not exceed monetary amount set by auditor.
Tolerable Rate of
Deviation
Rate of deviation from internal controls set by auditor, in respect of which auditor wants to obtain assurance that actual
rate of deviation in population does exceed the rate of deviation set by auditor.
Advantages of statistical sampling:
o It provides an objective, mathematically precise basis for the sampling process.
o Sample size can be calculated precisely (using statistical probability techniques).
o There may be circumstances where statistical sampling is the only means of auditing efficiently (for example,
in the case of very large ‘populations’ of items).
Disadvantages of statistical sampling:
o Training and technical expertise is required to use sampling techniques effectively.
o This may require an investment in the necessary training for audit staff.
o Sample sizes may be larger than under a judgmental approach, thus increasing the time (and the cost)
involved in the audit.
o There may be circumstances where judgmental sampling would be better.

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4. Requirements:
i. Sample Design, Size and Selection of Items for Testing:
Sample Design:
While designing the sample, auditor is required to:
o consider the purpose of the audit procedure and the population from which the sample will be drawn
o determine a sample size sufficient to reduce sampling risk to an acceptably low level
o select items for the sample in such a way that each sampling unit in the population has an equal chance of selection
Sample Size:
Auditor shall determine sample size sufficient to reduce sampling risk to acceptable low level. The determination of sample size will depend on
following factors:
o sampling approach to be used (statistical or non-statistical)
o characteristics of the population from which the sample is to be drawn
o sample selection method
o what constitutes a misstatement or deviation
o ‘tolerable’ misstatement or rate of deviation
o ‘expected’ misstatement or rate of deviation.
Selection of Items for Testing:
Selection should be made in such a way that each sampling unit has a chance of selection. Following methods may be used for selection:
o Random Selection: All items in the population have an equal chance of selection. This is typically achieved by the use of random
numbers tables.
o Systematic Selection: The number of sampling units in population is divided by sample size to give a sampling interval. With
systematic sampling, a random starting point is chosen from the population and then items are selected with a standard gap between them
for example, every 50th item
o Haphazard Selection: The auditor selects sample without following structured techniques, for example, choosing any 100 invoices from
a file.
o Block Selection: This involves selection of a block of items from population.
ii. Performing Audit Procedures:
o Auditor shall perform audit procedures on each item selected
o If the audit procedure is not applicable to the selected item, the auditor must perform the procedure on a replacement item.
o If the auditor is unable to apply the procedure (or a suitable alterative), that item must be treated as a misstatement or deviation.
iii. Nature and Cause of Deviations and Misstatements:
o The auditor shall investigate the nature and cause of any misstatements or deviations and evaluate their possible effect
o If the auditor considers the misstatement or deviation to be an anomaly he must obtain a high degree of certainty about this and perform
additional audit procedures to obtain sufficient evidence that the misstatement or deviation does not affect the rest of the population.
iv. Projecting Misstatements:
For tests of details auditor will project the misstatements found in the sample to the entire population
For tests of details, auditor will use the sample results to estimate the likely misstatement that exists in the population by
extrapolating the error found in the sample over the population.
For tests of controls, the sample deviation rate will be the projected deviation rate for the population. An unexpectedly high
sample deviation rate may cause the auditor to review the assessed risk of misstatement and therefore increase the extent of
tests of detail to be performed.
v. Evaluating Results of Audit Sampling:
The auditor shall evaluate:
o the results of the sample
o whether the use of audit sampling has provided a reasonable basis for conclusions about the population. If auditor concludes that it does
not provide reasonable basis for conclusion then the auditor will need to consider carrying out additional audit procedures.

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(ISA 550) Related Parties
1. Introduction:
Scope:
This ISA deals with auditor’s responsibility relating to related party relationships and related party transactions in an audit of financial statements.
Nature of Related Party & Related Party Transactions:
Related party transactions can exist in normal course of business. In such situation, there may not be a high risk of material misstatement. However, in
following circumstances, related party transactions can pose high risk of material misstatement:
o Related party operated through complex relationships
o Information system is ineffective in identifying related parties and transactions with related parties
o Related party transactions are not conducted under normal market terms and conditions
Responsibilities of Auditor:
o Obtain understanding of related party relationships and transactions. This understanding must be sufficient for the auditor to:
→ recognize fraud risk factors arising from related party relationships and transactions
→ conclude whether the financial statements achieve fair presentation in respect of related party relationships and transactions.
o Obtain sufficient appropriate audit evidence that whether related party relationships and transactions have been appropriately identified,
accounted for and disclosed.
o Plan and perform audit with professional skepticism
2. Objective:
Objective of auditor is to:
o Obtain understanding of related party relationships and transactions
o Obtain sufficient appropriate audit evidence that whether related party relationships and transactions have been appropriately identified,
accounted for and disclosed
3. Definitions:
Arm’s Length Transactions Transaction between willing buyer and willing seller who are unrelated and are acting independently of each other and
are pursuing their best interest.
Related Party A party which is:
o A related party as defined in financial reporting framework OR
o If financial reporting framework does not establish related party requirements, then
→ Person or entity that has significant influence on reporting entity
→ Entity over which reporting entity has significant control
→ Entity that is under common control with reporting entity and another entity
4. Requirements:
i. Risk Assessment Procedures:
Following procedures shall be performed to identify risk of material misstatement associated with related parties:
a) Understanding entity’s related party relationships and transactions:
During risk assessment process, auditor shall perform following procedures to obtain understanding of related party relationships and
transactions:
o Consider the risk of material misstatement due to fraud or error arising from related party relationships and transactions.
o Make inquiries of management in respect of:
→ the identity of related parties
→ the nature of relationships with those related parties
→ the nature of transactions entered into with related parties
o Obtain an understanding of the internal controls over:
→ the identification of, accounting for and disclosure of related party relationships and transactions
→ the authorisation and approval of significant related party transactions
→ the authorisation and approval of significant transactions outside the normal course of business.

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Obtain a list of related parties from management and ensure its completeness through following procedures:
o Review working papers for previous years, to look for known related parties.
o Review the company’s procedures for identifying related parties.
o Inquire about relationships between directors and other entities (for example, does any director own another
company, and have there been any transactions between that company and the client?)
o Review shareholder records for the names of major shareholders.
o Review minutes of shareholder meetings (general meetings)
o Ask any other audit firms involved in the audit about related parties (if the audit is the audit of a group of
companies and more than one firm of auditors is involved). Or ask previous auditors of the company about their
knowledge of related parties
b) Alertness towards related party information while reviewing records:
Auditor should remain alert, while inspecting records, for information that may be helpful in identifying related party relationships or
transactions. Auditor is required to inspect following :
o bank and legal confirmations obtained as part of audit work.
o Minutes of shareholder and management meetings
o Any other records or documents the auditor considers necessary
c) Share related party information with engagement team:
Auditor should share with engagement team, relevant related party information
ii. Indentify and Assess Risk of Material Misstatement Associated with Related Party and Related Party Transactions:
Auditor shall comply with requirements of ISA 315 and ISA 240.
iii. Responses to Identified Risks:
a) Identification of previously unidentified related parties and transactions with related parties:
In such circumstance, auditor shall do following:
o Determine whether the underlying circumstances confirm the existence of those relationships or transactions.
o Communicate the relevant information to the audit team.
o Request management to identify all transactions with the newly identified related parties.
o Inquire as to why the entity’s system failed to identify or disclose these related party relationships or transactions.
o Perform appropriate substantive procedures on the newly identified related parties or significant related party transactions.
o Reconsider the risk of there being unidentified or undisclosed related parties or (significant) related party transactions and
perform additional procedures as necessary.
o If the non-disclosure appears intentional, evaluate the implications for the audit.
b) Identified related party transactions outside normal course of business:
In such circumstance, auditor shall do following:
o Inspect the underlying contracts or agreements to evaluate whether:
→ the contracts etc. were entered into in order to engage in fraudulent financial reporting or to hide the misappropriation
of assets (a lack of business rationale might indicate this)
→ the terms of the contracts etc. are consistent with management’s explanations
→ the transactions have been properly accounted for and disclosed.
o Obtain evidence that the transactions were properly authorised.
c) Assertion that related party transactions were conducted at arm’s length:
If management has made a statement in the notes to the financial statements that a related party transaction was made on the same terms as an
arm’s length transaction, the auditor must obtain evidence to support this assertion.
iv. Evaluation of Identified Related Party Relationships and Transactions:
Auditor shall evaluate following:
o Whether identified related party relationships and transactions have been appropriately accounted for and disclosed
o Whether effect of related party relationship and transactions;
→ Prevent financial statements from achieving fair presentation OR
→ Cause financial statements to be misleading

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v. Written Representations:
Obtain written representation from management and those charged with governance regarding following:
o That they have completely disclosed to auditor all related parties, related party relationships and transactions
o That they have appropriately accounted for and disclosed related party relationships and transactions
vi. Communication with Those Charged with Governance:
Where those charged with governance are not involved in management of entity, then the auditor must communicate to those charged with
governance significant matters arising during the audit in connection with related parties.
vii. Documentation:
Document following:
o Names of identified related parties
o Nature of related party relationships

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(ISA 560) Subsequent Events
1. Introduction:
Scope:
This ISA deals with auditor’s responsibility relating to subsequent events in an audit of financial statements.
Subsequent Events:
While referring to subsequent events, financial reporting framework usually refers to two types of events:
o Those that provide evidence of condition that existed at date of financial statements
o Those that provide evidence of condition that arose after date of financial statements
2. Objective:
Objective of auditor is to:
o obtain sufficient, appropriate evidence about whether events occurring between the date of the financial statements and the date of the audit
report are appropriately reflected in financial statements.
o respond appropriately to facts that become known to him after the date of the audit report which if were known to him at date of audit report,
may have caused him to amend his report.
3. Definitions:
Date of Financial Statements Date of end of latest period covered by Financial Statements.
Date of approval of Financial Statements Date when Financial Statements have been prepared and approved by recognized authority.
The date mentioned on Auditor’s Report in accordance with ISA 700.
Date of issue of Financial Statements The date on which auditor’s report and financial statements are made available to third parties.
Subsequent Events Subsequent Events are:
o Events occurring between date of financial statements and date of auditor’s reports and
o Facts that become known to auditor after auditor’s report
4. Requirements:
i. Events between Date of Financial Statements & Date of Auditor’s Report:
Auditor shall obtain sufficient appropriate audit evidence that subsequent events requiring adjustment or disclosure in financial statements have been
identified and reported in financial statements. During normal audit procedures auditor can find evidence of subsequent events and in this situation
additional procedures are not required. Such normal audit procedures may include following:
Normal Audit Verification Procedures:
Receivables: consider whether receivables at the end of the reporting period are collectable. Cash receipts after the year-end may
indicate a significant non-payment, suggesting the need to write off a debt as irrecoverable
Inventories: Review the net realisable value of inventory. Sales of inventory after the year-end may indicate that some inventory in the
balance sheet is over-valued because NRV was less than its cost.
Unrecorded Liabilities: Review invoices received after the reporting period but relating to the period covered by the financial statements
Dishonoured Cheques: A review of the entity’s cash position at the end of the reporting period may find that a cheque from a customer, recorded
as part of the bank balances, was dishonoured after the reporting period
Audit Procedures for Identifying Subsequent Events:
o obtain an understanding of management’s procedures for identifying subsequent events
o inquire of management as to whether any subsequent events have occurred which might affect the financial statements
o read the entity’s latest subsequent financial statements

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o read minutes of shareholders’ meetings, meetings of the board of directors and senior management meetings held after the date of the financial
statements and inquire about matters discussed at any such meetings where minutes are not yet available
o obtain written representations in respect of subsequent events.
Written Representations:
Obtain written representation from management and TCWG, that subsequent events have been accounted for and disclosed in financial statements in
accordance with requirements of financial reporting framework.
ii. Facts Discovered after date of Auditor’s Report but before Date of Issue of Financial Statements:
Auditor has no obligation to perform audit procedures after date of audit report. His liability is limited only to the facts he becomes aware of after
issuing audit report.
if he becomes aware of a fact which if were known to him at the date of his report, may have caused him to amend his report then following should be
done:
o discuss the matter with management
o determine whether the financial statements need amending
o inquire how management intend to address the matter in the financial statements
If the financial statements are amended, the auditor shall do following:
o carry out the necessary audit procedures on the amendment
o extend his review of subsequent events up to the date of the new audit report
If financial statements are not amended by management and auditor feels that an amendment is necessary then following should be done:
o If the audit report has not yet been provided to the entity, modify his opinion as appropriate
o If the audit report has been provided to the entity:
→ instruct management not to issue the financial statements before the necessary amendments have been made
→ if even then management issues financial statements, then take appropriate action to prevent reliance on the audit report, after
taking legal advice.
iii. Facts Discovered after Financial Statements have been Issued:
Auditor has no obligation to perform any audit procedures after financial statements have been issued. However, if he becomes aware of a fact, which if
were known to him at date of audit report, may have caused him to amend his report, then following steps must be taken by auditor:
o discuss the matter with management
o determine whether the financial statements need amendment
o inquire how management intend to address the matter in the financial statements
If the financial statements are amended, then:
o carry out the necessary audit procedures on the amendment
o review the steps taken by management to inform anyone who received the original financial statements and audit report
o extend his review of subsequent events up to the date of the new audit report
o issue a new audit report, containing an emphasis of matter paragraph. This should refer to a note in the revised financial statements that
explains in more detail the reason for the re-issue of the financial statements
If financial statements are not amended and auditor feels that an amendment is necessary then following should be done:
o take appropriate action to prevent reliance on the audit report, after taking legal advice

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(ISA 580) Written Representations
1. Introduction:
Scope:
This ISA deals with auditor’s responsibility to obtain written representation from management or from TCWG in an audit of financial statements.
Written Representation as Audit Evidence:
Written representation is used as audit evidence in response to auditor’s inquiries.
Written representations provide necessary audit evidence in various cases; however, it is quite possible that they do not provide sufficient appropriate audit
evidence on their own about the matter.
If management does not provide the requested written representations, it may alert the auditor to the possibility that any significant issues may exist.
Representation could be oral or written. A request for written representation, rather than oral representation, may prompt management to consider such
matters more rigorously. This will ultimately enhance the quality of the representation.
2. Objective:
Objective of auditor is:
o to obtain written representations from management and TCWG that
→ they have fulfilled their responsibility for the preparation of the financial statements
→ the information provided to the auditor is complete
o to support other audit evidence or specific assertions in the financial statements by means of written representations
o to respond appropriately when
→ written representations is provided, or
→ if requested representation is not provided to the auditor
3. Definitions:
Written Representation A written statement by management provided to the auditor to confirm certain matters or to support other audit evidence.
Written representations do not include:
o financial statements
o assertions in financial statements
o supporting books and records
4. Requirements:
i. Management from whom Written Representations Requested:
Auditor must always request for representation from management with appropriate responsibility for financial statements and having knowledge of
the matters concerned.
In some cases management may make inquiries of others who have specialized knowledge relating to a matter.
Such individuals may include:
o An actuary responsible for actuarially determined accounting measurements.
o Staff engineers who may have responsibility for and specialized knowledge about environmental
liability measurements.
o Legal Advisor, who may provide information essential to provisions for legal claims.
ii. Written Representations about Management’s Responsibilities:
In these representations management acknowledges that:
o it has fulfilled its responsibility for the preparation and fair presentation of financial statements in accordance with the applicable financial
reporting framework
o it has provided the auditor with all relevant information
o all transactions have been recorded and are reflected in the financial statements.

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iii. Other Written Representations:
Other ISAs may also require the auditor to request written representations. In such situation, the auditor shall request such other written
representations.
iv. Date of and Period Covered by Written Representation:
The date of the written representations shall be as near as practicable to, but not after, the date of the auditor’s report on the financial statements.
The written representations shall be for all financial statements and period(s) referred to in the auditor’s report.
v. Form of Written Representations:
The written representations shall be in the form of a representation letter addressed to the auditor. [Pg 255-256 of Study Text]
vi. Written Representation provided by Management is Doubtful OR is not provided by Management:
Doubtful Representations:
If the auditor has doubts about the competence, integrity, ethical values or diligence of management, the auditor shall determine the effect on
reliability of representations and audit evidence in general.
If written representations are inconsistent with other audit evidence, the auditor shall:
o perform audit procedures to resolve the matter
→ If the matter remains unresolved, the auditor shall reconsider the assessment of the competence, integrity, ethical values or
diligence of management
o determine the effect that this may have on the reliability of representations (oral or written) and audit evidence in general
If the auditor concludes that the written representations are not reliable, the auditor shall determining the possible effect on the opinion in the
auditor’s report in accordance with ISA 705
Written Representation Refused:
If management refuses to provide requested written representations the auditor is required to:
o discuss the matter with management
o re-evaluate the integrity of management and reconsider the impact on other representations and audit evidence
o take appropriate action, including considering the effect on the audit report

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(ISA 610-Revised) Using Work of Internal Auditors
1. Introduction:
Scope:
This ISA deals with external auditor’s responsibility in following situations:
o Using work of internal audit in obtaining audit evidence
o Obtaining direct assistance from internal audit
This ISA does not apply if entity does not have an internal audit function.
If entity has internal audit function, then this ISA will not apply if:
o Work of internal audit is not relevant to audit
o External auditor, based on initial understanding of entity, does not intend to use work of internal audit
Nothing in this standard require auditor to reduce nature, timing and extent of audit procedures
Relationship between ISA 315 (Revised) and ISA 610 (Revised):
The objectives of the internal audit function are determined by management and TCWG. While the objectives of the internal audit function and the external
auditor are different. Some of the ways in which the internal audit function and the external auditor achieve their objectives may be similar.
While obtaining understanding of entity, auditor shall determine that whether:
o Work of internal audit is to be used for obtaining audit evidence
o Auditor can obtain direct assistance from internal audit
o Work of internal audit is relevant for external auditor
o External auditor intend to use the work of internal audit
This understanding will affect the nature, timing and extent of audit procedures to be applied by external auditor
External Auditor’s Responsibility for Audit:
The external auditor has sole responsibility for the audit opinion, and that responsibility is not reduced by the external auditor’s use of the work of the
internal auditor.
This ISA provides guidance on following:
o conditions that are necessary for the external auditor, to be able to use the work of internal auditors
o necessary effort to obtain sufficient appropriate evidence that the work of the internal auditor is adequate for external audit
o provide a framework to prevent over or undue use of work of internal audit
2. Objective:
Objectives of auditor are:
o To determine whether to use the work of internal auditor or to use direct assistance from internal auditor
o If using the work of internal auditor, then, to determine whether that work is adequate for the external auditor’s purposes
o If using direct assistance from internal auditor, then, to appropriately direct, supervise and review his work
3. Definitions:
Internal Audit Function A function of an entity that performs assurance and consulting activity to evaluate and improve effectiveness
o Governance
o Risk management
o Internal controls
Direct Assistance Use of internal auditor to perform audit procedures under direction, supervision and review of external auditor.
4. Requirements:
i. Determine whether work of internal audit can be used, in which areas work can be used and to what extent work of internal
audit can be used:
Whether work of internal audit can be used?

34. Audit and Assurance [CAF-9]
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The external auditor shall determine whether the work of the internal audit function can be used for purposes of the audit by
evaluating the following:
o The extent to which organizational status of internal audit and relevant policies and procedures support the objectivity of
the internal audit
o The level of competence of the internal audit function
o Whether the internal audit function applies a systematic and disciplined approach, including quality control
The external auditor shall not use the work of the internal audit function if the external auditor determines that
o The function’s organizational status and relevant policies and procedures do not adequately support the objectivity of
internal auditors
o The function lacks sufficient competence
o The function does not apply a systematic and disciplined approach, including quality control
Areas where work of internal audit can be used and the extent to which such work can be used:
As a basis for determining the areas and the extent to which the work of the internal audit function can be used, the external auditor
shall consider
o nature and scope of the work that has been performed by the internal audit function
o its relevance to the external auditor’s overall audit strategy and audit plan
The external auditor shall prevent undue use of the work of the internal audit function and shall plan to use less of the work of the
function and perform more of the work directly in following situations:
o The more judgment is involved in
→ Planning and performing relevant audit procedures
→ Evaluating the audit evidence gathered
o The higher the assessed risk of material misstatement at the assertion level
o The less the internal audit function’s organizational status and relevant policies and procedures adequately support the
objectivity of the internal auditor
o The lower the level of competence of the internal audit function
The external auditor shall also evaluate whether, in aggregate, using the work of the internal audit function would still result in the
external auditor being sufficiently involved in the audit. This sufficient involvement is important, as auditor has sole responsibility of
audit opinion.
The external auditor shall communicate with TCWG
o planned scope and timing of the audit
o how the external auditor has planned to use the work of the internal audit function
ii. Using work of Internal Audit Function:
If the external auditor plans to use the work of the internal audit function, the external auditor shall discuss the planned use with internal audit.
The external auditor shall read the reports of the internal audit to obtain understanding of the nature and extent of audit procedures performed and
the findings
The external auditor shall perform sufficient audit procedures on work of the internal audit function as a whole to determine its adequacy for purposes
of the audit. External auditor shall also determine whether
o The work of internal audit had been properly planned, performed, supervised, reviewed and documented
o Sufficient appropriate evidence had been obtained to enable internal auditor to draw reasonable conclusions
o Conclusions reached are appropriate in the circumstances and the reports prepared by internal audit are consistent with the
results of the work performed
The nature and extent of the external auditor’s audit procedures shall be determined on basis of following factors:
o The amount of judgment involved
o The assessed risk of material misstatement
o The extent to which the internal audit’s organizational status and relevant policies and procedures support the objectivity of the internal
auditor
o The level of competence of the function

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iii. Determine whether direct assistance of internal audit can be used, in which areas direct assistance can be used and to what
extent direct assistance can be used:
Whether direct assistance can be used?
Auditor shall not use direct assistance from internal auditor when prohibited by law or regulation
If using internal auditors to provide direct assistance is not prohibited by law or regulation, and the external auditor plans to use internal
auditors to provide direct assistance, then external auditor shall evaluate:
o Existence of threats to objectivity of internal auditor. This may include inquiry of internal auditor regarding interests and
relationships that may create a threat to objectivity
o significance of threats to objectivity
o level of competence of the internal auditors
The external auditor shall not use an internal auditor to provide direct assistance if
o There are significant threats to the objectivity of the internal auditor
o The internal auditor lacks sufficient competence to perform the proposed work
Areas where direct assistance can be used and the extent to which direct assistance can be used:
In determining the nature and extent of work that may be assigned to internal auditors and the nature, timing and extent of direction,
supervision and review that is appropriate in the circumstances, the external auditor shall consider:
o The amount of judgment involved in;
→ Planning and performing relevant audit procedures
→ Evaluating the audit evidence gathered
o The assessed risk of material misstatement
o The external auditor’s evaluation of the existence and significance of threats to the objectivity and level of competence of the
internal auditors who will be providing such assistance
The external auditor shall not use direct assistance to perform procedures
o That involve making significant judgments in the audit
o Which have higher risks of material misstatement in making such judgment
o Which relate to the work already done by internal auditor himself
After evaluation, external auditor will decide whether or not to obtain direct assistance and to what extent direct assistance to be obtained
external auditor shall communicate following points with TCWG:
o an overview of the planned scope and timing of the audit in accordance with ISA 260
o communicate the nature and extent of the planned use of internal auditors to provide direct assistance
The external auditor shall evaluate whether, in aggregate, using internal auditors to provide direct assistance, would still result in the
external auditor being sufficiently involved in the audit. This sufficient involvement is important because external auditor has sole
responsibility for the audit opinion.
iv. Using Internal Auditor to provide Direct Assistance:
Before using internal auditors to provide direct assistance, the external auditor shall do following:
o Obtain written agreement from an authorized representative of the entity that
→ internal auditors will be allowed to follow the external auditor’s instructions
→ the entity will not intervene in the work the internal auditor performs for the external auditor
o Obtain written agreement from the internal auditors that
→ they will keep confidential of matters as instructed by the external auditor
→ inform the external auditor of any threat to their objectivity.
The external auditor shall direct, supervise and review the work of internal auditors on the engagement in accordance with ISA 220. This will enable
auditor to do following:
o To recognize that whether or not, the internal auditors are independent of the entity
o To respond to the risks associated with using direct assistance from internal audit
o While applying review procedures, external auditor shall be checking underlying audit evidence for work performed by the internal
auditors

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The direction, supervision and review by the external auditor should be sufficient
v. Documentation:
If external auditor uses work of internal auditor, following shall be documented:
o An evaluation of following:
→ Whether organizational status of internal audit and policies and procedures of entity support the objectivity of internal auditor
→ Level of competence of internal audit function
→ Whether internal audit uses systematic and disciplined approach
o Nature and extent of work used. Also document basis on which this decision was taken
o Audit procedures performed by external auditor to evaluate adequacy of work used by external auditor
If external auditor uses direct assistance from internal auditor, following shall be documented:
o Evaluation of following:
→ existence of threats to the objectivity of the internal auditors
→ significance of threats to the objectivity of the internal auditors
→ level of competence of the internal auditors
o Nature and extent of work used. Also document basis on which this decision was taken
o Who reviewed the work performed and the date and extent of that review
o Written agreements obtained from an authorized representative of the entity and the internal auditors
o Working papers prepared by the internal auditors who provided direct assistance on the audit engagement

37. Audit and Assurance [CAF-9]
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(ISA 620) Using Work of Auditor’s Expert
1. Introduction:
Scope:
This ISA deals with auditor’s responsibility relating to work of an expert.
This ISA does not deal with following situations:
o when engagement team includes an expert, which is dealt with in ISA 220
o when entity has used work of expert to assist in preparation of financial statements, which is dealt with in ISA 500
Auditor’s Responsibility for Audit Opinion:
The sole responsibility of audit opinion lies on auditor. This responsibility is not reduced by use of auditor’s expert. However, if auditor has followed this ISA
and concluded that work of expert is adequate, then auditor may accept expert’s conclusions/findings as audit evidence.
2. Objective:
Objectives of auditor are:
o To determine whether to use the work of an auditor’s expert
o If using the work of an auditor’s expert, to determine whether that work is adequate for the auditor’s purposes
3. Definitions:
Auditor’s Expert An individual or organization possessing expertise in a field other than accounting and auditing and whose work is used by
auditor in obtaining sufficient appropriate audit evidence.
Auditor’s expert may be INTERNAL EXPERT (such as a partner or staff) or an EXTERNAL EXPERT
Expertise Skills, knowledge and experience in a particular field.
Management’s Expert An individual or organization possessing expertise in a field other than accounting and auditing and whose work is used by
entity in preparing financial statements.
4. Requirements:
i. Determine need for Auditor’s Expert:
Auditor shall use Expert’s Work if it is necessary to obtain sufficient appropriate audit evidence.
Expert’s work may be needed in following areas:
o Obtaining an understanding of the entity and its environment, including its internal control
o Identifying and assessing the risks of material misstatement
o Determining response to assessed risk
o Designing and performing audit procedures to respond to assessed risks
o Evaluating the sufficiency and appropriateness of audit evidence obtained in forming an opinion on the financial
statements
Consider following factors in deciding whether expert needed or not:
o the nature, significance and complexity of the matter
o the risk of material misstatement
o the availability of alternative sources of audit evidence
ii. Nature, Timing and Extent of Audit Procedures:
Nature timing and extent of audit procedures (mentioned in para iii to vii below) shall depend on following factors:
o nature of relevant matter
o risk of material misstatement in the matter
o significance of expert’s work in the context of the audit
o auditor’s knowledge and experience with previous work performed by expert
o Whether that expert is subject to the auditor’s firm’s quality control policies and procedures

38. Audit and Assurance [CAF-9]
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iii. Competence, Capabilities and Objectivity of the Auditor’s Expert:
The competence, capabilities and objectivity of an expert may be assessed in one or more of the following ways:
o Personal experience with previous work of that expert
o Discussions with that expert
o Discussions with other auditors or others who are familiar with that expert’s work
o Knowledge of that expert’s qualifications, membership of a professional body or industry association, license to practice, or other forms of
external recognition
o Published papers or books written by that expert.
iv. Obtain Understanding of Field of Expertise:
Auditor shall obtain understanding of field of expertise, which will enable auditor to:
o Determine the nature, scope and objectives of expert’s work for auditor’s purposes
o Evaluate the adequacy of expert’s work for audit purpose
v. Agreement with Auditor’s Expert:
The auditor shall agree in writing on following matters with the auditor’s expert
o nature, scope and objectives of that expert’s work
o roles and responsibilities of the auditor and expert
o nature, timing and extent of communication between the auditor and expert, including the form of any report to be provided by that expert
o confidentiality requirements
vi. Evaluate Adequacy of Expert’s Work:
While evaluating work of expert, following points shall be evaluated:
o relevance and reasonableness of expert’s conclusions, and their consistency with other audit evidence
o relevance and reasonableness of assumptions and methods used by expert
o relevance, completeness, and accuracy of source data
If the auditor determines that the work of the auditor’s expert is not adequate for the auditor’s purposes, the auditor shall:
o Agree with expert further work to be performed; or
o Perform appropriate additional audit procedures
vii. Reference to Auditor’s Expert in Auditor’s Report:
o Auditor shall not refer to the work of an auditor’s expert in an unmodified auditor’s report unless required by law or regulation
o If reference is required by law or regulation, the auditor shall indicate in the auditor’s report that the reference does not reduce the
auditor’s responsibility for the auditor’s opinion
o If the auditor makes reference to the work of an auditor’s expert in the auditor’s report because such reference is relevant to an
understanding of a modification to the auditor’s opinion, the auditor shall indicate in the auditor’s report that such reference does not
reduce the auditor’s responsibility for that opinion

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(ISA 700) Forming an Opinion & Reporting on Financial Statements
1. Introduction:
Scope:
This ISA deals with
o auditor’s responsibility to form opinion on financial statements based on an evaluation of the conclusions drawn from the audit evidence obtained
o form and content of auditor’s report
This ISA promotes consistency in auditor’s report
o which promotes credibility of audit report in global market place
o helps user understanding
o identify usual circumstances
2. Objective:
Objectives of auditor are:
o To form an opinion on the financial statements based on an evaluation of the conclusions drawn from the audit evidence obtained
o To express clearly that opinion through a written report that also describes the basis for that opinion
3. Definitions:
Unmodified Opinion The opinion expressed by the auditor when the auditor concludes that the financial statements are prepared, in all material
respects, in accordance with the applicable financial reporting framework
4. Requirements:
i. Forming Opinion on Financial Statements:
Auditor shall form opinion after evaluating that whether:
o sufficient appropriate audit evidence has been obtained that financial statements are free from material misstatement
o uncorrected misstatements are immaterial, individually or in aggregate
o financial statements have been prepared in accordance with applicable financial reporting framework
o financial statements adequately refer to applicable financial reporting framework
o financial statements adequately disclose significant accounting policies
o significant accounting policies are appropriate and consistent with the applicable financial reporting framework
o accounting estimates are reasonable
o the information in the financial statements is relevant, reliable, comparable and understandable
o the financial statements provide adequate disclosures
o the terminology used in the financial statements is appropriate
ii. Form of Opinion:
The auditor shall express an unmodified opinion when the auditor concludes that the financial statements are prepared, in all material respects, in
accordance with the applicable financial reporting framework
iii. Auditor’s Report:
o Audit report for audits conducted in accordance with ISAs
→ Title
Title should clearly indicate that it is a report of independent auditor
→ Addressee
Report shall be addressed as required by circumstances of engagement
→ Introductory Paragraph
The introductory paragraph in the auditor’s report shall:
a) Identify the entity whose financial statements have been audited
b) State that the financial statements have been audited
c) Identify the title of each statement that comprises the financial statements
d) Refer to the summary of significant accounting policies and other explanatory information
e) Specify the date or period covered by each financial statement

40. Audit and Assurance [CAF-9]
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→ Management’s Responsibility for Financial Statements
Management is responsible for following:
a) preparation of the financial statements in accordance with the applicable financial reporting framework
b) for such internal controls as deemed necessary to enable the preparation of financial statements which are free from
material misstatement
→ Auditor’s Responsibility
Following shall be stated in this section:
a) the responsibility of the auditor is to express an opinion on the financial statements
b) the audit was conducted in accordance with ISAs
c) standards require the auditor to comply with ethical requirements, plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free from material misstatement.
d) an audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the
financial statements
e) the procedures selected depend on the auditor’s judgement, including his assessment of the risks of material
misstatement of the financial statements.
f) As part of this assessment, the auditor considers relevant internal controls. He does not consider internal controls
for the purpose of expressing an opinion on their effectiveness
g) audit includes evaluating the appropriateness of the accounting policies used, the reasonableness of accounting
estimates made by management, and the presentation of the overall financial statements.
In case of unmodified report auditor should end with a statement that the auditor believes that the audit evidence
he has obtained is sufficient and appropriate to provide a basis for his opinion
→ Auditor’s Opinion
Unmodified opinion should be expressed when:
a) When the financial statements have been prepared in accordance with a “fair presentation” framework and
b) Auditor concludes that financial statements give a true and fair view or are presented fairly, in all material respects,
in accordance with the applicable financial reporting framework
→ Other Reporting Responsibilities
Other reporting responsibilities should be addressed in a separate section of the report, following the opinion paragraph, sub-
titled “Report on Other Legal and Regulatory Requirements”
→ Signature of Auditor
a) The report should be signed:
 in the name of the audit firm, or
 in the personal name of the auditor, or
 both
b) The report is usually signed in the name of the firm because the firm assumes responsibility for the audit
→ Date of Audit Report
The auditor’s report shall be dated no earlier than
a) the date on which the auditor has obtained sufficient appropriate audit evidence on which to base the auditor’s
opinion
b) all financial statements have been prepared
c) management &/or TCWG have taken responsibility for preparation of financial statements
→ Auditor’s Address
The auditor’s report shall name the location in the jurisdiction where the auditor practices

41. Audit and Assurance [CAF-9]
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o Audit report prescribed by Law or Regulations [Refer pg 328 para 5.4 of study text]
o Audit report for audits conducted both in accordance with ISAs and audit standards of a specific jurisdiction
The auditor’s report may refer to International Standards on Auditing in addition to the national auditing standards, but the auditor shall
do so only if:
a) There is no conflict between the requirements in the national auditing standards and those in ISAs that would lead the auditor
a. to form a different opinion, OR
b. not to include an Emphasis of Matter paragraph that, in the particular circumstances, is required by ISAs; and
b) The auditor’s report includes minimum elements when the auditor uses the layout or wording specified by the national auditing
standards. Reference to law or regulation shall be read as reference to the national auditing standards. The auditor’s report
shall identify such national auditing standards.
When the auditor’s report refers to both the national auditing standards and International Standards on Auditing, the auditor’s report shall
identify the jurisdiction of origin of the national auditing standards.
iv. Supplementary Information Published with Financial Statements:
If supplementary information that is not required by the applicable financial reporting framework is presented with the audited financial statements,
the auditor shall evaluate whether such supplementary information is clearly differentiated from the audited financial statements.
If such supplementary information is not clearly differentiated from the audited financial statements, the auditor shall ask management to change how
the unaudited supplementary information is presented.
If management refuses to do so, the auditor shall explain in the auditor’s report that such supplementary information has not been audited
Supplementary information that is not required by the applicable financial reporting framework but is nevertheless an integral part of the financial
statements because it cannot be clearly differentiated from the audited financial statements due to its nature and how it is presented shall be covered
by the auditor’s opinion.

42. Audit and Assurance [CAF-9]
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(ISA 705) Modification to Opinion in Independent Auditor’s Report
1. Introduction:
Scope:
This International Standard on Auditing (ISA) deals with the auditor’s responsibility when auditor concludes that a modification to the auditor’s opinion on
the financial statements is necessary.
Types of Modified Opinions:
This ISA establishes three types of modified opinions, namely, a qualified opinion, an adverse opinion, and a disclaimer of opinion.
2. Objective:
The objective of the auditor is to express clearly an appropriately modified opinion on the financial statements when:
o The auditor concludes that the financial statements as a whole are not free from material misstatement OR
o The auditor is unable to obtain sufficient appropriate audit evidence to conclude that the financial statements as a whole are free from material
misstatement.
3. Definitions:
Pervasive: A term used, in the context of misstatements, to describe the effects on the financial statements of misstatements that are
undetected due to an inability to obtain sufficient appropriate audit evidence.
Pervasive effects on the financial statements are those that:
(i) Are not confined to specific elements, accounts or items of the financial statements;
(ii) If so confined, represent or could represent a substantial proportion of the financial statements; or
(iii) In relation to disclosures, are fundamental to users’ understanding of the financial statements
Modified Opinion: A qualified opinion, an adverse opinion or a disclaimer of opinion
4. Requirements:
i. Circumstances when Modification is Required:
When:
o The auditor concludes that the financial statements as a whole are not free from material misstatement OR
o The auditor is unable to obtain sufficient appropriate audit evidence to conclude that the financial statements as a whole are free from
material misstatement.
ii. Determining Type of Modification:
Qualified Opinion
The auditor shall express a qualified opinion when:
o The auditor has obtained sufficient appropriate audit evidence and concludes that misstatements are material, but not pervasive, to
the financial statements; or
o The auditor is unable to obtain sufficient appropriate audit evidence on which to base the opinion, but the auditor concludes that the
possible effects on the financial statements of undetected misstatements, if any, could be material but not pervasive.
Adverse Opinion
The auditor shall express an adverse opinion when the auditor has obtained sufficient appropriate audit evidence and concludes that misstatements are
both material and pervasive to the financial statements
Disclaimer of Opinion
The auditor shall disclaim an opinion when the auditor is unable to obtain sufficient appropriate audit evidence on which to base the opinion, and the
auditor concludes that the possible effects on the financial statements of undetected misstatements, if any, could be both material and pervasive.
The auditor shall disclaim an opinion when, due to some uncertainties, it is not possible to form an opinion on the financial statements.

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Consequence of an Inability to Obtain Sufficient Appropriate Audit Evidence Due to a Management-Imposed Limitation after the Auditor Has Accepted
the Engagement
If, after accepting the engagement, management has imposed a limitation on the scope of the audit which is likely to result in a qualified opinion or
disclaim an opinion, the auditor shall request that management remove the limitation.
If management refuses to remove the limitation, the auditor shall communicate the matter to those charged with governance and shall apply alternate
procedures.
If the auditor is unable to obtain sufficient appropriate audit evidence, the auditor shall determine the implications as follows:
o If the auditor concludes that the possible effects of undetected misstatements, could be material but not pervasive, the auditor shall qualify
the opinion; or
o If the auditor concludes that the possible effects of undetected misstatements, could be both material and pervasive, the auditor shall:
→ Withdraw from the audit, where practicable and possible under applicable law or regulation; or
→ If withdrawal from the audit before issuing the auditor’s report is not possible, disclaim an opinion on the financial statements.
If the auditor withdraws from engagement, then before withdrawing, the auditor shall communicate to those charged with governance any matters
regarding misstatements identified during the audit that would have given rise to a modification of the opinion.
Other Considerations Relating to an Adverse Opinion or Disclaimer of Opinion
When the auditor considers it necessary to express an adverse opinion or disclaim an opinion on the financial statements as a whole, the auditor’s
report shall not include an unmodified opinion with respect to the same financial reporting framework on a single financial statement or one or more
specific elements, accounts or items of a financial statement.
To include such an unmodified opinion in the same report in these circumstances would contradict the auditor’s adverse opinion or disclaimer of
opinion on the financial statements as a whole.
iii. Form & Content of Modified Report:
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iv. Communication with TCWG:
When the auditor expects to modify the opinion in the auditor’s report, the auditor shall communicate with TCWG;
o circumstances that led to the expected modification and
o proposed wording of the modification

44. Audit and Assurance [CAF-9]
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Provisions of Companies Act 2017 regarding Audit
Section 246: Appointment, removal and fee of auditors:
Appointing Authority Time frame Tenure of Appointment
Remuneration
decided by
1st Auditor Directors within 90 days from date of
incorporation of company
Upto next Annual General Meeting Directors
SECP* Upto next Annual General Meeting SECP
Subsequent
Auditors
Shareholders in Annual General
Meeting after obtaining:
 Consent of auditor &
 Recommendation of
Board
Shareholders must be given notice
of such appointment with notice
of AGM
Upto next Annual General Meeting Shareholders in
Annual General
Meeting
Casual Vacancy Directors Within 30 days of casual
vacancy
Upto next Annual General Meeting Directors
SECP* Upto next Annual General Meeting SECP
(*)SECP either on its own or on an application made to it by the company /member(s) direct to make such appointment within a specified time. In case
company fails to report compliance within specified period, SECP shall appoint auditors of the company.
An auditor appointed by board or members in general meeting can be removed from office by shareholders through a special resolution in a General Meeting.
Where auditor removed during tenure, the vacancy shall be filled by Directors with prior approval of SECP
Where Auditor, other than retiring auditor is appointed;
Action Timeframe
Member(s) having atleast 10% shares obtained consent of auditor before proposing his name as auditor Before giving notice to company
Member(s) having atleast 10% shares shall give notice to company, requiring appointment of another person
as auditor
Atleast 7 days before AGM
Company must give copy of notice to following:
(i) Retiring auditor
(ii) Post it on company’s website
Forthwith
Retiring Auditor can give representation in writing to the company
[the representation shall be read out at the meeting before taking up the agenda for appointment of the
auditor]
Where above representation is made, it will be mandatory for auditor to attend the general meeting
Atleast 2 days before AGM
After appointment of auditor, company shall send following to Registrar:
(i) Intimation of appointment of auditor
(ii) Consent of auditor
Within 14 days from date of appointment

45. Audit and Assurance [CAF-9]
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Section 247: Qualification & Disqualification of Auditor:
Companies Act 2017 specifies that only, a Chartered Accountant having certificate of practice, can be auditor in case of following:
(i) Public Company
(ii) Private Company which is subsidiary of a Public company
(iii) Private Company having paid up capital of Rs 3.0 million or more
In case of a company other than above, a Chartered Accountant or a Cost & Management Accountant having certificate of practice, shall be appointed as auditor.
In case the majority of partners of audit firm are qualified for appointment as auditor, the appointment shall be made in the name of firm.
If partnership firm is appointed as auditor of a company, only the partners who meet above qualification requirements shall be authorized to act and sign on behalf
of the firm
Disqualifications for auditor:
(i) Director, Other officer or Employee of company at any time in 3 preceding years
(ii) Partner or employee of Director, Other officer, or Employee of Company
(iii) Spouse of Director
(iv) Person indebted to Company, except where he is indebted to company in its ordinary course of business
(v) Person who has given a guarantee or provided any security in connection with the indebtedness of any third person to the company other than in
the ordinary course of business of such entities
(vi) Person who has business relationship with company, other than in ordinary course of business
(vii) a person convicted of committing a fraud by a court and a period of ten years has not elapsed from the date of such conviction
(viii) Body corporate
(ix) Person not eligible to act as auditor under the code of ethics adopted by ICAP and ICMAP
(x) Where auditor or his spouse or minor child or any partner of the audit firm holds shares of Company or its associates
(Where auditor holds shares prior to his appointment, he shall disclose this fact upon his appointment and shall divest such shares within 90 days
of appointment)
Following shall not be considered indebted to company:
Credit Card holder upto Rs 1,000,000/-
Unpaid utility bill not exceeding 90 days from due date
An auditor disqualified for a company shall also be disqualified for its holding company, its subsidiary company and subsidiary of its holding company
Where disqualification occurs after appointment of auditor, he shall be deemed to have vacated his office forthwith
Consequences of appointing a disqualified person as auditor:
Level 2 penalty on standard scale.
If any person is appointed as auditor, who was not qualified for such appointment, then SECP shall appoint a person as auditor in its place.
Section 248: Auditors’ right to information:
(i) Access to books, papers, accounts & vouchers
(ii) access to copies / extracts from the books and accounts of the branch as transmitted to the principal office of company
(iii) Require such information as necessary for audit from any of following:
a. any director, officer or employee of company
b. any person holding any of the company‘s books, accounts or vouchers
c. any subsidiary undertaking of the company
d. any officer, employee or auditor of any such subsidiary undertaking of the company
e. any person holding any books, accounts or vouchers of any such subsidiary undertaking of the company
Consequences of obstructing audit or denying access to books or record or failure to give notice of meeting to auditor:
Penalty under section 252

46. Audit and Assurance [CAF-9]
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Section 249: Duties of Auditor:
(i) Conduct audit in accordance with ISAs as adopted by ICAP
(ii) Carry out such examination to enable him to form opinion on following:
a. whether adequate accounting records have been kept
b. whether adequate returns have been received from branches not visited by auditor
c. whether financial statements are in agreement with the accounting records and returns
(iii) Make report to members on books of accounts, records, financial statements and every other document forming part of these financial statements,
which will be laid before company in its general meeting. This report shall state:
a. whether or not they have obtained all the information and explanations which to the best of their knowledge and belief were necessary for
the purposes of the audit and if not, the details thereof and the effect of such information on the financial statements
b. whether or not in their opinion proper books of accounts as required by this Act have been kept by the company
c. whether or not in their opinion the statement of financial position and profit and loss account and other comprehensive income or the
income and expenditure account and the cash flows have been drawn up in conformity with the requirements of accounting and reporting
standards as notified under this Act and are in agreement with the books of accounts and returns
d. whether or not in their opinion and to the best of their information and according to the explanations given to them, the said accounts give
the information required by this Act in the manner so required and give a true and fair view:
i. in the case of the statement of financial position, of the state of affairs of the company as at the end of the financial year
ii. in the case of the profit and loss account and other comprehensive income or the income and expenditure account, of the profit
or loss and other comprehensive income or surplus or deficit, as the case may be, for its financial year; and
iii. in the case of statement of cash flows, of the generation and utilisation of the cash and cash equivalents of the company for its
financial year
e. whether or not in their opinion
i. investments made, expenditure incurred and guarantees extended, during the year, were for the purpose of company‘s business
ii. zakat deductible at source under the Zakat and Usher Ordinance, 1980 (XVIII of 1980), was deducted by the company and
deposited in the Central Zakat Fund established under section 7 of that Act
[Where the auditor‘s report contains a reference to any other report, statement or remarks which they have made on the financial
statements examined by them, such statement or remarks shall be annexed to the auditor‘s report and shall be deemed to be a part of the
auditor‘s report]
(iv) Where any of above matters is answered in the negative or with a qualification, the report shall state the reason for such answer along with the
factual position to the best of the auditor‘s information
(v) Any other matter required by SECP
(vi) The auditor shall express unmodified or modified opinion in compliance with the requirements of ISAs
(vii) SECP may also direct auditor to issue a review report on statement of compliance [under section 227(4)]
(viii) Auditor is entitled to:
a. attend any general meetings
b. receive all notices of and communication of general meeting which any member of company is entitled to receive
c. be heard at any general meeting on any part of the business which concerns him as auditor
(ix) In case of listed company, auditor or person authorized by him, should be present in general meeting
Section 250: Audit of Cost Accounts:
Cost audit shall be conducted by auditor having following qualification:
(i) Chartered Accountant OR
(ii) Cost & Management Accountant
Auditor shall have the same powers, duties and liabilities as an auditor of a company and such other powers, duties and liabilities as may be specified
The audit of cost accounts shall be directed by the SECP subject to the recommendation of the regulatory authority supervising the business of relevant sector
Section 251: Signature of auditors’ report:
The auditor‘s report must
(i) state name of the auditor and engagement partner
(ii) be signed
(iii) be dated and
(iv) indicate the place at which it is signed
Where the auditor is an individual, the report must be signed by him

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Where the auditor is a firm, the report must be signed by the partnership firm with the name of the engagement partner
Section 252: Penalty for non compliance with provisions by companies:
On non compliance with requirements of sections 246, 247, 248 and 250:
penalty of level 3 on the standard scale
Section 253: Penalty of non compliance with provisions by Auditor:
On non compliance with requirements of section 131, sections 249 and 251:
penalty of level 2 on the standard scale.
If intention behind above non compliance was to profit auditor or any other person or to put another person to a disadvantage
in addition to above penalty imprisonment upto 2 years + penalty upto 1,000,000/- rupees