AUDITING

AUDIT:

NOTES ON

Audit is independent examination of financial statements of an entity with the objective of expressing opinion whether these financial statements are free from material (quantitative, qualitative) misstatements (fraud, error). SCOPE OF AUDIT: cope of audit refers to the audit procedures necessary to achieve the objective of audit. cope of an audit is govern by auditing standards, local laws (i.e. !"#), and guidance issued by auditors professional organi$ations (i.e. %"A#).

OBJECT OF AN AUDIT: &esponsibility for the preparation and presentation of financial statement is of the management of company, the responsibility of an auditor is to express an opinion on the financial statement based on audit. Audit enhances the credibility of financial statements. 'uture visibility of company is not guaranteed. (he auditor is not responsible for a subsequent discovery of material misstatements until and unless it is proved that the auditor is: )egligent or %nvolved with the management in the fraudulent activities. An absolute assurance is not provided by auditors because: *or+ of the auditor is permeated by judgments ,ost audit evidences are persuasive rather than conclusive. Audit is of test nature. %nternal control has inherent limitations. -

 )ot all the items in the financial statements are tested. (he testing is based on sampling. Audit evidence some times indicates what is probable, not certain. Internal control: internal control is the system design by the management to prevent, detect and correct fraud and error (fraud and error can not be completely eliminated but can be reduced lower acceptable level). Code of ethics: %ndependence %ntegrity "onfidentiality .bjectivity (echnical standard #rofessional competence and due care Professional ske ticis!: (he auditor should neither assume management honest or dishonest/ the audit should be conducted with questioning mind. "indo# dressin$: howing better financial position than actual.

Tee!in$ and ladin$: ,isappropriation of cash. Financial re ortin$ fra!e #ork: %t is a frame wor+ that assists the management in the preparation of financial statements. %ana$e!ent letter: %t is the letter issued by the auditor to the client identifies the wea+ness in internal control system. (his letter is also called wea+ness letter. Ne$ati&e o inion: )othing has come to our attention that causes us to believe that financial statements are not free from material misstatement. S'fficient: ufficiency is the measure of quantity of audit evidence and quantity is the measure of ris+ of material misstatement. 0igher the ris+ more audit evidence is needed. A ro riateness: %t is the measure of quality, reliability persuasiveness. *hat is appropriate is the matter of professional judgment. 1

 (here are certain guide lines 2generali$ations which are used by auditor to evaluate appropriateness of audit evidence. Audit evidence in written form is more reliable than oral. Audit evidence in the form of original is more reliable than photo copies. Audit evidence obtained from external sources is more reliable than audit evidence obtained from internal sources. Audit evidence obtained directly is more reliable than audit evidence through inference. Audit evidence obtained from internal sources is more reliable when internal controls are effective. !lement of audit report: (itle Addressee .pening paragraph &esponsibility .pinion ignature

3ate 4ocation

TE(%S OF AUDIT ENGAGE%ENT ISA )*+

INT(ODUCTION

(he auditor and client should agree on the terms of engagement and the same should be documented in an audit engagement letter and other suitable form of contract. %n some jurisdictions the objective and scope is governed by law and in that cases, sending engagement letter may be informative for their clients.

(he auditor response to a request by client to change the terms of engagement that provides lower level of assurance (i.e. audit to review).

AUDIT ENGAGE%ENT ,ETTE( An engagement letter formali$es the arrangement reached between the auditor and the client. (his letter serves as contract/ outline the responsibilities of both parties. (he letter is sent preferably before commencement of an audit %t helps in avoiding misunderstanding in terms of engagement. %t confirms: (he auditor6s acceptance of the appointment, (he objective and scope of the audit, (he extent of auditor6s responsibilities to the client.

CONTENTS OF AN AUDIT ENGAGE%NENT ,ETTE( .bjective of an audit financial statement/

&esponsibility of the financial statement is of management/ cope of an audit is determined by (local laws, professional organi$ations, % A)/ 'orm of reports or other communication/ 'act that the audit is of test nature and there are limitations of internal control *hich create a ris+ that some material misstatements may remain undetected/ 7nrestricted access to records 8asis of fee or any billing arrangements. Arrangements regarding experts, use of internal auditors !xpectations regarding management representation will be in written confirmation.

AUDTI OF CO%PONENTS %f the auditor of the parent company is also the auditor of the subsidiary , the factors that would lead to sending a separate engagement letter to a subsidiary would depend on: *ho appoints the auditor

A separate report is to be issued 4egal requirements !xtent of wor+ performed by other auditor 3egree of ownership by parent 3egree of independence by subsidiary RECURRING AUDITS *hether to send a engagement letter in a recurring audit would depend on: %ndication as the client misunderstands objective and scope of audit &evised terms of engagement &ecent change in the senior management ignificant change in ownership ignificant change in the nature of client6s business 4egal requirements "hange in international financial reporting frame wor+ adopted by the management in the preparing financial statements.

AGREEMENT ON APPLICABLE FINANCIAL REPORTING FRAMEWORK (he terms of engagement should identify the applicable financial reporting framewor+. (he auditor should determine whether the financial reporting framewor+ adapted by management in preparing the financial statements is acceptable. An acceptable financial reporting framewor+ is referred to in % As as the :applicable financial reporting framewor+;. (he auditor should determine whether the financial reporting framewor+ adapted by management is acceptable in the view of the nature of the entity. 4egislative and regulatory requirements often identify the applicable financial reporting framewor+ for general purpose financial statements. %n most cases, the applicable financial reporting framewor+ will be established by standard setting organi$ations that are authori$ed to promulgated standards in which entity is registered or operates. "hen sho'ld a'ditor acce t en$a$e!ent for a'dit if he has to decide after takin$ in to consideration the financial re ortin$ fra!e#ork ada ted -. !ana$e!ent/ <

 (he auditor should accept an engagement for an audit of financial statements only when the auditor concludes that the financial reporting framewor+ adopted by management is acceptable or when it is required by law or regulation. 7nless use of the financial reporting framewor+ is required by law or regulation, the auditor encourages management to address the deficiencies in the financial reporting framewor+ or to adopt another financial reporting framewor+ that is acceptable. *hen law or regulation requires use of a financial reporting framewor+ for general purpose financial statements that the auditor considers to be unacceptable, the auditor should accept the engagement only if the deficiencies in the framewor+ can be adequately explained to avoid misleading users. "hat is the i! ortance of financial re ortin$ fra!e#ork/ *ithout an acceptable financial reporting framewor+ management does not have an appropriate basis for preparing the financial statements and the auditor does not have suitable criteria for evaluating the entity6s financial statements. "hat is the res onsi-ilit. of an a'ditor0 #hen he acce ts an en$a$e!ent in&ol&in$ a lica-le financial re ortin$ fra!e#ork esta-lished -. standard settin$ or$ani1ations that are not a'thori1ed to ro!'l$ated standards for $eneral 'r ose financial state!ents of certain t. e of entities/ (he auditor may encounter deficiencies in that framewor+ that was not anticipated when the engagement was initially accepted and that indicate that the framewor+ is not acceptable for general purpose financial statements. %n these circumstances, the auditor should discuss the deficiencies with management and the ways in which such deficiencies may be addressed. %f the deficiencies result in financial statements that are misleading and there is agreement that management will adopt another financial reporting framewor+ that is acceptable. (he auditor refers to the change in the financial reporting framewor+ in a new engagement letter. %f management refuses to adopt another financial reporting framewor+, the auditor considers the impact of the deficiencies on the auditor6s report.

ACCEPTANCE OF C2ANGE IN ENGAGE%ENT:

 %f the auditor has been requested by the management to change the terms of engagement to one which provide lower level assurance, before the completion of the engagement, the auditor should consider the reasons for the same. "hen sho'ld a'ditor acce t the chan$e in en$a$e!ent fro! hi$her le&el ass'rance to lo#er le&el ass'rance/ Auditor should accept the change in engagement from higher level assurance to lower level assurance when: (he change is requested due to misunderstanding as to the nature of an audit or related services originally requested. "hange is required due to reasonable circumstances that affect the entities requirements. A change would not be considered reasonable if it appeared that the change relates to information that is incorrect, incomplete or otherwise unsatisfactory. (he auditor before agreeing to a change would also consider any legal or contractual obligation. %f the auditor agrees to a change in engagement, the auditor6s report would be based on the revised terms and in order to avoid confusions the report would not include the references of: .riginal engagement/ (he procedures that have been performed in the original engagement except agreed upon procedures. *hen the terms are changed the auditor and the management should agree on the revised terms. (he auditor should not agree to change in engagement when there is no reasonable justification for doing so. %f the auditor does not agree to a change in engagement and he is not permitted to continue the original engagement than auditor should withdraw and consider any legal and contractual obligations. "hat are the kinds of en$a$e!ent/ (here are four +inds of engagement: -) Audit/

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1) &eview/ 5) Agreed upon procedure/ 9) "ompilation "hat is difference a!on$ A'dit0 (e&ie#0 and A$reed ' on roced'res and Co! ilation/ AUDIT (E3IE" AG(EED UPON P(OCEDU(E S (o report findings. CO%PI,ATI ON (o convert data in to information to prepare '. (o incorporate figures from trial balance to '. . )o )o 'inancial statements

O-4ecti &e

Sco e

(o express an opinion on '. . #rocedure s deemed necessary .

(o express an opinion on '. .

O inion Ass'ra nce E5a! l e

#ositive &easonab le Annual audit

4imited enquires from management. Analytical review procedures "omparing ledger balances with 'inancial statements. )egative 4imited 0alf yearly review

Agreement between client and auditor.

)o )o (ax return

 6UA,IT7 CONT(O, FO( AUDITS OF 2ISTO(ICA, FINANCIA, INFO(%ATION ISA ))+

INT(ODUCTION:

(he purpose of this standard is to establish tandards provide guidance on specific responsibilities of firm personnel regarding @uality "ontrol #rocedures for audits of historical financial information. (he engagement team should implement quality control procedures that are applicable to the individual audit engagement. A firm has an obligation to establish a system of quality control designed to provide it with reasonable assurance that the firm and its personnel comply with professional standards and regulatory and legal requirements, and that the auditors6 reports issued by the firm or engagement partners are appropriate in the circumstances. !ngagement teams: A

a. %mplement quality control procedures that are applicable to the audit engagement/ b. #rovide the firm with relevant information to enable the functioning of that part of the firm6s system of quality control relating to independence/ and c. Are entitled to rely on the firm6s systems (for example, in relation to capabilities and competence of personnel through their recruitment and formal training)/ %mportant definitions:

%n this % A, the following terms have the meanings attributed below: A. :!ngagement partner; B the partner or other person in the firm who is responsible for the audit engagement and its performance, and for the auditor6s report that is issued on behalf of the firm. 8. :!ngagement quality control review; B a process designed to provide an objective evaluation, before the auditor6s report is issued, of the significant judgments the engagement team made and the conclusions they reached in formulating the auditor6s report. ". :!ngagement quality control reviewer; B a partner, other person in the firm, suitably qualified external person, or a team made up of such individuals, with sufficient and appropriate experience and authority to objectively evaluate, before the auditor6s report is issued, the significant judgments the engagement team made and the conclusions they reached in formulating the auditor6s report. 3. :%nspection; B in relation to completed audit engagements, procedures designed to provide evidence of compliance by engagement teams with the firm6s quality control policies and procedures. !. :,onitoring; B a process comprising an ongoing consideration and evaluation of the firm6s system of quality control, including a periodic inspection of a selection of completed engagements, designed to enable the firm to obtain reasonable assurance that its system of quality control is operating effectively. '. :&easonable assurance; B in the context of this % A, a high, but not absolute, level of assurance. C. : taff; B professionals, other than partners, including any experts the firm employs.

-D

0. : uitably qualified external person; B an individual outside the firm with the capabilities and competence to act as an engagement partner, for example a partner of another firm, or an employee (with appropriate experience) of either a professional accountancy body whose members may perform audits of historical financial information or of an organi$ation that provides relevant quality control services.

What are the responsibi ities o! a partner re"ar#in" the ea#ership !or $%a it& o! an a%#it' (he engagement partner should ta+e responsibility for the overall quality on each audit engagement to which that partner is assigned. (he engagement partner sets an example regarding audit quality to the other members of the engagement team through all stages of the audit engagement. .rdinarily, this example is provided through the actions of the engagement partner and through appropriate messages to the engagement team. uch actions and messages emphasi$e: a) (he importance of: #erforming wor+ that complies with professional standards and regulatory and legal requirements/ --

 "omplying with the firm6s quality control policies and procedures as applicable/ and %ssuing auditor6s reports that are appropriate in the circumstances/ and b) (he fact that quality is essential in performing audit engagements What are the responsibi ities o! an en"a"e(ent partner re"ar#in" ethi)a re$%ire(ents' (he engagement partner should consider whether members of the engagement team have complied with ethical requirements. !thical requirements relating to audit engagements ordinarily comprise #arts A and 8 of the %'A" "ode: PART A: GENERAL APPLICATION OF THE CODE -DD %ntroduction and 'undamental #rinciples --D %ntegrity -1D .bjectivity -5D #rofessional "ompetence and 3ue "are -9D "onfidentiality -<D #rofessional 8ehavior

PART B: PROFESSIONAL ACCOUNTANTS IN PUBLIC PRACTICE 1DD %ntroduction 1-D #rofessional Appointment 11D "onflicts of %nterest 15D econd .pinions 19D 'ees and .ther (ypes of &emuneration 1<D ,ar+eting #rofessional ervices 1=D Cifts and 0ospitality 1>D "ustody of "lient Assets -1

1?D .bjectivityBAll ervices 1AD %ndependenceBAssurance !ngagements

(he engagement partner remains alert for evidence of nonEcompliance with ethical requirements. %f matters come to the engagement partner6s attention through the firm6s systems or otherwise that indicate that members of the engagement team have not complied with ethical requirements, the partner, in consultation with others in the firm, determines the appropriate action. (he engagement partner and, where appropriate, other members of the engagement team, document issues identified and how they were resolved. What are the responsibi ities o! an en"a"e(ent partner *ith respe)t to in#epen#en)e re$%ire(ent that app & to a%#it en"a"e(ent' (he engagement partner should form a conclusion on compliance with independence requirements that apply to the audit engagement. %n doing so, the engagement partner should: .btain relevant information regarding creation of threats !valuate information (a+e appropriate actions 3ocument "onclusions (he engagement partner may identify a threat to independence regarding the audit engagement that safeguards may not be able to eliminate or reduce to an acceptable level. %n that case, the engagement partner consults within the firm to determine appropriate action, which may include eliminating the activity or interest that creates the threat, or withdrawing from the audit engagement. uch discussion and conclusions are documented What are the responsibi ities o! an en"a"e(ent partner re"ar#in" a))eptan)e an# )ontin%ation o! ) ient re ationship an# spe)i!i) a%#it en"a"e(ent' (he engagement partner should be satisfied that appropriate procedures regarding the acceptance and continuance of client relationships and

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specific audit engagements have been followed, and that conclusions reached in this regard are appropriate and have been documented &egardless of whether the engagement partner initiated that process, the partner determines whether the most recent decision remains appropriate Acceptance and continuance of client relationships and specific audit engagements include considering: FF (he integrity of the principal owners, +ey management and those charged with governance of the entity/ FF *hether the engagement team is competent to perform the audit engagement and has the necessary time and resources/ and FF *hether the firm and the engagement team can comply with ethical requirements Deciding whether to continue c!ient re! tion"hi# inc!ude" con"ider tion o$ "igni$ic nt % tter" th t h &e ri"en during the current or #re&iou" udit eng ge%ent' nd their i%#!ic tion" $or continuing the re! tion"hi#( For e) %#!e' c!ient % * h &e "t rted to e)# nd it" +u"ine"" o#er tion" into n re where the $ir% doe" not #o""e"" the nece"" r* ,now!edge or e)#erti"e( *here the engagement partner obtains information that would have caused the firm to decline the audit engagement if that information had been available earlier, the engagement partner should communicate that information promptly to the firm, so that the firm and the engagement partner can ta+e the necessary action. What are the responsibi ities o! an en"a"e(ent partner *ith respe)t to assi"n(ent o! en"a"e(ent tee(s' (he engagement partner should be satisfied that the engagement team collectively has the appropriate capabilities, competence and time to perform the audit engagement in accordance with professional standards and regulatory and legal requirements, and to enable an auditor6s report that is appropriate in the circumstances to be issued. (he appropriate capabilities and competence expected of the engagement team as a whole include the following: An understanding of, and practical experience with, audit engagements of a similar nature and complexity through appropriate training and participation. -9

 An understanding of professional standards and regulatory and legal requirements. Appropriate technical +nowledge, including +nowledge of relevant information technology. Gnowledge of relevant industries in which the client operates. Ability to apply professional judgment. An understanding of the firm6s quality control policies and procedures. Responsibi ities o! an en"a"e(ent partner *ith respe)t to en"a"e(ent per!or(an)e

(he engagement partner should ta+e responsibility for the direction, supervision and performance of the audit engagement/ (he engagement partner directs the audit engagement by informing the members of the engagement team of: a) (heir responsibilities/ b) (he nature of the entity6s business/ c) &is+Erelated issues/ d) #roblems that may arise/ and e) (he detailed approach to the performance of the engagement. What are the #%ties o! en"a"e(ent tea( *ith respe)t to per!or(an)e' (he engagement team6s responsibilities include: ,aintaining an objective state of mind and an appropriate level of professional s+epticism, #erforming the wor+ delegated to them in accordance with the ethical principle of due care. ,embers of the engagement team are encouraged to raise questions with more experienced team members. Appropriate communication occurs within the engagement team.

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 %t is important that all members of the engagement team understand the objectives of the wor+ they are to perform. Appropriate teamEwor+ing and training are necessary to assist less experienced members of the engagement team to clearly understand the objectives of the assigned wor+. En$a$e!ent artners res onsi-ilities re$ardin$ s' er&ision:

(he audit is supervised over all by engagement partner, but more practical supervision is given within the audit team by senior staff to more junior staff. it includes: (rac+ing the progress of the audit engagement/ "onsidering the capabilities and competence of individual members of the engagement team, whether they have sufficient time to carry out their wor+, whether they understand their instructions, and whether the wor+ is being carried out in accordance with the planned approach to the audit engagement/ Addressing significant issues arising during the audit engagement, considering their significance and modifying the planned approach appropriately/ %dentifying matters for consultation or consideration by more experienced engagement team members during the audit engagement. En$a$e!ent artners res onsi-ilities re$ardin$ re&ie#:

&eview responsibilities are determined on the basis that more experienced team members, including the engagement partner, review wor+ performed by less experienced team members. &eviewers consider whether: (he wor+ has been performed in accordance with professional standards and regulatory and legal requirements/ ignificant matters have been raised for further consideration/

Appropriate consultations have ta+en place and the resulting conclusions have been documented and implemented/ (here is a need to revise the nature, timing and extent of wor+ performed/ -=

 (he wor+ performed supports the conclusions reached and is appropriately documented/ (he evidence obtained is sufficient and appropriate to support the auditor6s report/ and (he objectives of the engagement procedures have been achieved. 8efore the audit report is issued, the engagement partner must be sure that sufficient and appropriate audit evidence has been obtained to support audit opinion. (he engagement partner need not review all audit documentation. 0owever, the partner documents the extent and timing of the reviews. %ssues arising from the reviews are resolved to the satisfaction of the engagement partner. *here more than one partner is involved in the conduct of an audit engagement, it is important that the responsibilities of the respective partners are clearly defined and understood by the engagement team. En$a$e!ent artners res onsi-ilities re$ardin$ cons'ltation:

(he engagement partner should: a. 8e responsible for the engagement team underta+ing appropriate consultation on difficult or contentious matters/ b. 8e satisfied that members of the engagement team have underta+en appropriate consultation during the course of the engagement, both within the engagement team and between the engagement team and others at the appropriate level within or outside the firm/ c. 8e satisfied that the nature and scope of, and conclusions resulting from such consultations are documented and agreed with the party consulted/ and d. 3etermine that conclusions resulting from consultations have been implemented. !ffective consultation with other professionals requires that those consulted be given all the relevant facts that will enable them to provide informed advice on technical, ethical or other matters.

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 *here appropriate, the engagement team consults individuals with appropriate +nowledge seniority and experience within the firm or, where applicable, outside the firm. "onsulting outside the firm (where the firm lacks appropriate internal resources) 3ocumentation of consultations involving difficult and contentious matters((he documentation is sufficiently complete and detailed to enable an understanding of: a) (he issue on which consultation was sought/ and b) (he results of the consultation, including any decisions ta+en, the basis for those decisions and how they were implemented 3ifference of opinion: these should be resolved according to firms policies and procedures. And matter involving different opinion should be brought in attention to engagement partner by team members. What are the responsibi ities o! an en"a"e(ent partner re"ar#in" en"a"e(ent $%a it& )ontro re+ie*' !ngagement quality control is mandatory for listed company only. !ngagement quality control reviewer may be partner or outsider. !ngagement quality control reviewer is performed before the issuance of audit report. %t is the responsibility of an engagement partner to appoint engagement quality control reviewer. An engagement quality control review should include an objective evaluation of: a. (he significant judgments made by the engagement team/ and b. (he conclusions reached in formulating the auditor6s report. An engagement quality control review ordinarily involves discussion with the engagement partner/

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 A review of the information and the auditor6s report, and, in particular, consideration of whether the auditor6s report is appropriate/ %t also involves a review of selected audit documentation relating to the significant judgments the engagement team made and the conclusions they reached/ (he extent of the review depends on the complexity of the audit engagement and the ris+ that the auditor6s report might not be appropriate in the circumstances/ (he significance and disposition of corrected and uncorrected misstatements identified during the audit/ *hether appropriate consultation has ta+en place on matters involving differences of opinion or other difficult or contentious matters, and the conclusions arising from those consultations/ (he matters to be communicated to management and those charged with governance/ (he review does not reduce the responsibilities of the engagement partner. En"a"e(ent partner responsibi it& re"ar#in" (onitorin", (he audit engagement partner is required to consider the result of monitoring of the firms quality control system and consider whether they have any impact o he specific audit he is conducting. (he engagement partner considers : a. *hether deficiencies noted in that information may affect the audit engagement/ and b. *hether the measures the firm too+ to rectify the situation are sufficient in the context of that audit. A deficiency in the firm6s system of quality control does not indicate that a particular audit engagement was not performed in accordance with professional standards and regulatory and legal requirements, or that the auditor6s report was not appropriate.

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 AUDIT DOCUMENTATION ISA -./

1D

 INTRODUCTION: DOCUMENTATION, 3ocumentation refers to the wor+ing papers +ept by the auditor as regards audit planning, procedures performed, information and explanations obtained from client and the conclusions drawn from the wor+ performed. E0perien)e# a%#itor: means an individual who has a reasonable understanding of -. Audit processes, 1. % As and applicable legal and regulatory requirements, 5. (he business environment in which the entity operates, and 9. Auditing and financial reporting issues relevant to the entity6s industry. (he auditor should prepare, on a timely basis, audit documentation that provides: A sufficient and appropriate record of the basis for the auditor6s report/ and !vidence that the audit was performed in accordance with % As and applicable legal and regulatory requirements. What are the ob1e)ti+es or i(portan)e or reasons o! #o)%(entation' #reparing sufficient and appropriate audit documentation on a timely basis helps to enhance the quality of the audit and facilitates the effective review and evaluation of the audit evidence obtained and conclusions reached before the auditor6s report is finali$ed. 3ocumentation prepared at the time the wor+ is performed is li+ely to be more accurate than documentation prepared subsequently. #reparation of audit program and performance of procedures in accordance with audit program assist in planning and performing audit. !nabling the audit team to be accountable for its wor+/ &etaining a record of matters of continuing significance to future audits/ *or+ing paper assist in supervision and review of audit wor+.

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 &ecord the audit evidence resulting from the audit wor+ performed to support the auditor6s opinion, including representation that the examination was conducted in accordance with %nternational tandards on Auditing. %n this context wor+ing papers will facilitate ensuring following matters: "onclusions drawn are consistent with result of wor+ performed/ !rrors and irregularities found are documented/ #roposed audit adjustments have been recorded/ #oints of further investigation are noted/ After the issuance of audit report wor+ing paper are the only tangible proof the auditor has, to demonstrate that the examination has been conducted in accordance with % As. (here is always possibility that the auditor will have to prove the adequacy and appropriateness of the tests in the court. What are the so(e o! the (etho#s %se# b& the a%#it to ens%re hi"h $%a it& o! *or2in" papers' Or What are the )hara)teristi)s *hi)h (a2e the #o)%(entation se ! e0p anator&' *or+ing paper are signed, dated and indexed/ All subsidiaries are cross referenced/ 4ead schedule agree with trial balance and financial statements/ *or+ has been done in accordance with audit programme/ (ime spent has been recorded/

Form, Content and Extent of Audit Documentation Working papers shoul !e sufficientl" complete an etaile . If through the stu " of working papers alone# another au itor who has no pre$ious e%perience with the client is a!le to un erstan : The nature# timing# an e%tent of the au it proce ures performe to compl" with I&'s an applica!le legal an regulator" re(uirements) The results of the au it proce ures an the au it e$i ence o!taine ) an
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 &ignificant matters arising uring the au it an the conclusions reache thereon. It consi ers that working papers are sufficientl" complete. You are asked to advise form and contents of audit working papers? The form an content of working papers will $ar" from entit" to entit". No matter what t"pe of client we are au iting# following points must !e taken into consi eration to eci e the form an contents of working papers. The form# content an e%tent of au it ocumentation epen on factors such as: The nature of the au it proce ures to !e performe ) The i entifie risks of material misstatement) The e%tent of *u gment re(uire in performing the work an e$aluating the results) The significance of the au it e$i ence o!taine ) The nature an e%tent of e%ceptions i entifie ) The nee to ocument a conclusion or the !asis for a conclusion not rea il" etermina!le from the ocumentation of the work performe or au it e$i ence o!taine ) an The au it metho olog" an tools use . It is# howe$er# neither necessar" nor practica!le to ocument e$er" matter the au itor consi ers uring the au it. Oral e%planations !" the au itor# on their own# o not represent a e(uate support for the work the au itor performe or conclusions the au itor reache # !ut ma" !e use to e%plain or clarif" information containe in the au it ocumentation. What are the qualities of good working papers? Working paper shoul !e sufficientl" complete an all un erstan ing of the au it. Working papers shoul !e: Clear
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etaile enough to pro$i e o$er

Concise Complete Neat Well in e%e Informati$e

CONTENTS OF WORKING PAPERS: Give a brief description of two broad classifications used for audit files? In case of recurring au it# working paper files are classifie as: +ermanent au it file) an Current au it file

What is permanent file and what information this file usually contains? List the documents or papers, which would normally be retained in the permanent file? +ermanent au it file: +ermanent au it files are use to accumulate information of continuing importance to succee ing au its# an are up ate e$er" "ear. Instea of o!taining certain ocumentation for each "ear,s working file# the au itor places them in separate file as a part of each "ear,s au it e$i ence. The use of separate file sa$e the time !" pro$i ing central reference point in respect of matters of continuing au it importance. The permanent au it files contain information of continuing importance an are up ate uring each au it. The information inclu es: &tatutor" material The rules an regulations of the enterprise Copies of ocuments of continuing importance (e.g. letter of engagement ' resses of the registere office an other premises .ist of !ooks an other recor s an where the" are kept /istor" of the organi0ation 19

 .ist of important accounting matters Other information of a continuing nature. Current audit file: Current au it files inclu e information relating to a single au it (accounting- perio . The information inclu es: ' cop" of the financial statements 'n in e% to the file ' escription of the internal control s"stem 'n au it programme ' sche ule for each of the !alance sheet items showing the opening !alance 1o$ement uring the perio an the closing !alance ' sche ule for each of the income statement (profit an loss account- items showing its makeup ' statutor" checklist ' sche ule of important statistics# copies of all communications with other people .etters of representation Conclusions reache !" the au itor concerning significant aspects of the au it 'n"thing else that contri!utes to the au it e$i ence for the current "ear2s au it. Documentation of t e Identif!in" C aracteri#tic# of S$ecific Item# or %atter# &ein" Te#ted %n documenting the nature, timing and extent of audit procedures performed, the auditor should record the identifying characteristics of the specific items or matters being tested. &ecording the identifying characteristics serves a number of purposes. 'or example: %t enables the audit team to be accountable for its wor+ and facilitates the investigation of exceptions or inconsistencies. %dentifying characteristics will vary with the nature of the audit procedure and the item or matter being tested. What is the responsibility regarding documentation of significant matters identified during the audit and what are the advantages in this regard? (he auditor may consider it helpful to prepare and retain as part of the audit documentation a summary that describes the significant matters 1<

identified during the audit and how they were addressed, or that includes crossEreferences to other relevant supporting audit documentation that provides such information. uch a summary may facilitate effective and efficient reviews and inspections of the audit documentation, particularly for large and complex audits. 'urther, the preparation of such a summary may assist the auditor6s consideration of the significant matters. (he auditor should document discussions of significant matters with management and others on a timely basis. %f the auditor has identified information that contradicts or is inconsistent with the auditor6s final conclusion regarding a significant matter, the auditor should document how the auditor addressed the contradiction or inconsistency in forming the final conclusion. Doc'!entation of De art'res fro! Basic Princi les or Essential Proced'res *here, in exceptional circumstances, the auditor judges it necessary to depart from a basic principle or an essential procedure that is relevant in the circumstances of the audit, the auditor should document how the alternative audit procedures performed to achieve the objective of the audit, and the reasons for the departure. (his involves the auditor documenting how the alternative audit procedures performed were sufficient and appropriate to replace that basic principle or essential procedure. Identification of Pre$arer and Re'ie(er (he auditor should record: *ho performed the audit wor+ and the date such wor+ was completed/ and *ho reviewed the audit wor+ performed and the date and extent of such review/

A##em)*! of t e Fina* Audit Fi*e

(he auditor should complete the assembly of the final audit file on a timely basis after the date of the auditor6s report. As % @" - indicates, =D days after the date of the auditor6s report is ordinarily an appropriate time limit within which to complete the assembly of the final audit file. (he completion of the assembly of the final audit file after the date of the auditor6s report is an administrative process that does not involve the performance of new audit procedures or the drawing of new conclusions. "hanges may, however, be made to the audit documentation during the final assembly process if they are administrative in nature. !xamples of such changes include: 3eleting or discarding superseded documentation. orting, collating and crossEreferencing wor+ing papers. igning off on completion chec+lists relating to the file assembly process.

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3ocumenting audit evidence that the auditor has obtained discussed and agreed with the relevant members of the audit team before the date of the auditor6s report. After the assembly of the final audit file has been completed, the auditor should not delete or discard audit documentation before the end of its retention period. (he retention period for audit engagements ordinarily is no shorter than five years from the date of the auditor6s report, or, if later, the date of the group auditor6s report. *hen the auditor finds it necessary to modify existing audit documentation or add new audit documentation after the assembly of the final audit file has been completed, the auditor should, regardless of the nature of the modifications or additions, document: *hen and by whom they were made, and (where applicable) reviewed/ (he specific reasons for ma+ing them/ and (heir effect, if any, on the auditor6s conclusions. Chan$es to A'dit Doc'!entation in E5ce tional Circ'!stances after the Date of the A'ditor8s (e ort *hen exceptional circumstances arise after the date of the auditor6s report that require the auditor to perform new or additional audit procedures or that lead the auditor to reach new conclusions, the auditor should document: (he circumstances encountered/ (he new or additional audit procedures performed, audit evidence obtained, and conclusions reached/ and *hen and by whom the resulting changes to audit documentation were made, and (where applicable) reviewed.

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 T3E AUDITOR4S RESPONSIBILIT5 TO CONSIDER FRAUD IN AN AUDIT OF FINANCIAL STATEMENTS ISA -6/
%)&.37"(%.): The purpose of this I&' is to pro$i e gui ance on: The au itor,s responsi!ilit" to consi er frau in an au it of financial statements) The 'u itor,s +roce ures in Response to 'ssesse Risks are to !e applie in relation to the risks of material misstatement ue to frau )

C aracteri#tic# of Fraud How frauds are distinguished from errors? The istinguishing factor !etween frau an error is whether the un erl"ing action that results in the misstatement of the financial statements is intentional or unintentional. Error: The term 3error4 refers to an unintentional misstatement in financial statements. ' mistake in gathering or processing ata from which financial statements are prepare ) 'n incorrect accounting estimate arising from o$ersight or misinterpretation of facts
' mistake in the application of accounting principles relating to measurement# recognition# classification# presentation or isclosure) Fraud: The term 3frau 4 refers to an intentional act !" one or more In i$i uals among management# those charge with go$ernance# (1anagement frau 5mplo"ees# (5mplo"ee frau - or Thir parties# In$ol$ing the use of eception to o!tain an un*ust or illegal a $antage) The au itor is concerne with frau that causes a material misstatement in the financial statements. Two types of intentional misstatements are rele$ant to the au itor# that is# 6. Misstatements resulting from fraudulent financial reporting: in$ol$es intentional misstatements inclu ing Omissions of amounts or isclosures in financial statements to ecei$e financial statement users 7rau ulent financial reporting can !e cause !" the efforts of management to manage earnings in or er to ecei$e financial statement users !" influencing their perceptions as to the entit",s performance an profita!ilit" an 8. Misstatements resulting from misappropriation of assets: in$ol$es The theft of an entit",s assets) 5m!e00ling receipts (for e%ample# misappropriating collections on accounts recei$a!le or i$erting receipts in respect of written9off accounts to personal !ank accounts-)

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&tealing ph"sical assets or intellectual propert" (for e%ample# stealing in$entor" for personal use or for sale# stealing scrap for resale# collu ing with a competitor !" isclosing technological ata in return for pa"ment-) Causing an entit" to pa" for goo s an ser$ices not recei$e (for e%ample# pa"ments to fictitious $en ors# kick!acks pai !" $en ors to the entit",s purchasing agents in return for inflating prices# pa"ments to fictitious emplo"ees-) an Using an entit",s assets for personal use (for e%ample# using the entit",s assets as collateral for a personal loan or a loan to a relate part"-. easons to commit fraud! involves '. 7rau in$ol$es incenti$e or pressure to commit frau # In i$i uals ma" ha$e an incenti$e to misappropriate assets for e%ample# !ecause the in i$i uals are li$ing !e"on their means. 7rau ulent financial reporting ma" !e committe !ecause management is un er pressure# from sources outsi e or insi e the entit"# to achie$e an e%pecte (an perhaps unrealistic- earnings target :. ' percei$e opportunit" to o so ' percei$e opportunit" for frau ulent financial reporting or misappropriation of assets ma" e%ist when an in i$i ual !elie$es internal control can !e o$erri en# for e%ample# !ecause the in i$i ual is in a position of trust or has knowle ge of specific weaknesses in internal control. an C. &ome rationali0ation of the act In i$i uals ma" !e a!le to rationali0e committing a frau ulent act. &ome in i$i uals possess an attitu e# character or set of ethical $alues that allow them knowingl" an intentionall" to commit a ishonest act. /owe$er# e$en otherwise honest in i$i uals can commit frau in an en$ironment that imposes sufficient pressure on them.

Re#$on#i)i*itie# of T o#e C ar"ed (it Go'ernance and of %ana"ement

The primar" responsi!ilit" for the pre$ention an etection of frau rests with !oth those charge with go$ernance an with management of entit". It is important that management# with the o$ersight of those charge with go$ernance# place a strong emphasis on frau pre$ention# which ma" re uce opportunities for frau to take place# an frau eterrence# which coul persua e in i$i uals not to commit frau !ecause of the likelihoo of etection an punishment. This in$ol$es a culture of honest" an ethical !eha$ior. Creating a culture of honest" an ethical !eha$ior inclu es: &etting the proper tone) Creating a positi$e workplace en$ironment) /iring# training an promoting appropriate emplo"ees) Re(uiring perio ic confirmation !" emplo"ees of their responsi!ilities an Taking appropriate action in response to actual# suspecte or allege frau

In erent +imitation# of an Audit in t e Context of Fraud

Owing to the inherent limitations of an au it# there is an una$oi a!le risk that some material misstatements of the financial statements will not !e etecte # e$en though the au it is properl" planne an performe in accor ance with I&'s. The su!se(uent isco$er" of a material misstatement of the financial statements resulting from frau oes not# in an of itself# in icate a failure to compl" with I&'s. 1A

 The risk of not etecting a material misstatement resulting from frau is higher than the risk of not etecting a material misstatement resulting from error !ecause frau ma" in$ol$e sophisticate an carefull" organi0e schemes esigne to conceal it. &uch attempts at concealment ma" !e e$en more ifficult to etect when accompanie !" collusion. "ollusion may cause the auditor to believe that audit evidence is persuasive when it is, in fact, false. The uditor-" +i!it* to detect $r ud de#end" on $o!!owing $ ctor":

(he s+illfulness of the person responsible for, (he frequency and extent of manipulation, (he degree of collusion involved, (he relative si$e of individual amounts manipulated, and (he seniority of those individuals involved. Accounting estimates are caused by fraud (he ris+ of the auditor not detecting a material misstatement resulting from management fraud is greater than for employee fraud, because management is frequently in a position to directly or indirectly manipulate accounting records and present fraudulent financial information.

Re#$on#i)i*itie# of t e Auditor for Detectin" %ateria* %i##tatement Due to Fraud 'n au itor con ucting an au it in accor ance with I&'s o!tains reasona!le assurance (not a!solute assurance- that the financial statements taken as a whole are free from material misstatement# whether cause !" frau or error) /ence# an au itor is not an can not !e hel responsi!le for the pre$ention (not etection- of frau . The au itor shoul maintain an attitu e of professional skepticism throughout the au it# recogni0ing the possi!ilit" that a material misstatement ue to frau coul e%ist. &u!se(uent isco$er" of material misstatement in financial statements ue to frau oes not necessaril" mean that au itor was negligent. This can !e ue to inherent limitation of an au it. Whether an au itor has performe an au it in accor ance with I&'s is etermine !": The a e(uac" of au it proce ures performe in circumstances an The suita!ilit" of au it report !ase on results of those proce ures Di#cu##ion amon" t e En"a"ement Team 1em!ers of the engagement team shoul iscuss the suscepti!ilit" of the entit",s financial statements to material misstatement ue to frau .
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 The iscussion inclu es the engagement partner who uses professional *u gment# prior e%perience with the entit" an knowle ge of current e$elopments to etermine which other mem!ers of the engagement team are inclu e in the iscussion. Or inaril"# the iscussion in$ol$es the ke" mem!ers of the engagement team. The iscussion pro$i es an opportunit" for more e%perience engagement team mem!ers to share their insights a!out how an where the financial statements ma" !e suscepti!le to material misstatement ue to frau . The engagement partner shoul consi er which matters are to !e communicate to mem!ers of the engagement team not in$ol$e in the iscussion.
(he discussion ordinarily includes: An exchange of ideas among engagement team members about 0ow and where they believe the entity6s financial statements may be susceptible to material misstatement due to fraud, 0ow management could perpetrate and conceal fraudulent financial reporting, and 0ow assets of the entity could be misappropriated/

A consideration of external and internal factors that may create an incentive or pressure for management or others to commit fraud/ A consideration of management6s involvement in overseeing employees with access to cash or other assets susceptible to misappropriation/ A consideration of any unusual or unexplained changes lifestyle of management or employees/ A consideration of any allegations of fraud that have come to the auditor6s attention/ and A consideration of the ris+ of management override of controls/ It is important that after the initial iscussion while planning the au it# an also at inter$als throughout the au it.

Ri#, A##e##ment Procedure#

'u itor performs the following proce ures to o!tain information that is use to i entif" the risks of material misstatement ue to frau :

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"# $akes inquiries of management, of those charged with governance, and of others within the entity as appropriate for identifying and responding to the risks of fraud and the internal control that management has established to mitigate these risks %# &onsiders whether one or more fraud risk factors are present' (# &onsiders any unusual or une)pected relationships that have been identified in performing analytical procedures' *# &onsiders other information that may be helpful in identifying the risks of material misstatement due to fraud' In/uirie# and O)tainin" an 0nder#tandin" of O'er#i" t Exerci#ed )! T o#e C ar"ed (it Go'ernance 1atters that ma" !e iscusse as part of these in(uires inclu e: Whether there are su!si iar" locations# !usiness segments# t"pes of transaction# account !alances or financial statement categories where the possi!ilit" of error ma" !e high# or where the possi!ilit" frau risk factors ma" !e e%ist# an how the" are !eing a resse !" management. The work of entit",s internal au it function an whether internal au it has i entifie frau or an" material weakness in the s"stem of internal control) /ow management communicate to emplo"ees its $iew on responsi!le !usiness practice an ethical !eha$ior# such as through ethics policies or co e of con uct) If entit" has esta!lishe a programme that inclu es step to pre$ent an etect frau # we en(uire of those persons o$erseeing such programmes as to whether to program has i entifie frau risk factors) The au itor shoul make in(uiries of those charge with go$ernance to etermine whether the" ha$e knowle ge of an" actual# suspecte or allege frau affecting the entit". Con#ideration of Fraud Ri#, Factor# During the au it# au itor consi er whether e$ents or con itions that pro$i e an opportunit"# a moti$e or a means to commit frau are present or in ication that frau ma" alrea " occurre # &uch e$ents or con itions are referre to as 3frau risk factors4. 'u itor i entifies frau risk factors that ma" in icate the possi!ilit" of either frau ulent financial reporting or misappropriation of asset. 7or e%ample: The nee to meet e%pectations of thir parties to o!tain a itional e(uit" financing ma" create pressure to commit frau ) The granting of significant !onuses if unrealistic profit targets are met ma" create an incenti$e to commit frau ) an 'n ineffecti$e control en$ironment ma" create an opportunit" to commit frau . The si0e# comple%it"# an ownership characteristics of the entit" ha$e a significant influence on the consi eration of rele$ant frau risk factors. +he following are e)amples of risk factors relating to misstatements arising from fraudulent financial reporting# The risk factors are classifie !ase on the three con itions generall" present when material misstatements ue to frau occur: Incenti$es;pressures# Opportunities# an 'ttitu es;rationali0ations Incentives/Pressures Financial stability or profitability is t reatened by economic! industry! or entity operating conditions! suc as t e following: a. /igh egree of competition or market saturation# accompanie !" eclining margins 51

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!. /igh $ulnera!ilit" to rapi changes# such as changes in technolog"# pro uct o!solescence# or interest rates c. &ignificant eclines in customer eman an increasing !usiness failures in either the in ustr" or o$erall econom". . Operating losses making the threat of !ankruptc"# foreclosure# or hostile takeo$er imminent e. Recurring negati$e cash flows from operations or an ina!ilit" to generate cash flows from operations while reporting earnings an earnings growth f. Rapi growth or unusual profita!ilit" especiall" compare to that of other companies in the same in ustr". g. New accounting# statutor"# or regulator" re(uirements #$cessive pressure e$ists for management to meet t e re%uirements or e$pectations of t ird parties due to t e following: a. +rofita!ilit" e%pectations of in$estment anal"sts# institutional in$estors# significant cre itors# or other e%ternal parties (particularl" e%pectations that are un ul" aggressi$e or unrealistic-) !. Nee to o!tain a itional e!t or e(uit" financing to sta" competiti$e# inclu ing financing of ma*or research an e$elopment or capital e%pen itures. c. 1arginal a!ilit" to meet e%change listing re(uirements or e!t repa"ment or other e!t co$enant re(uirements) . +ercei$e or real a $erse effects of reporting poor financial results on significant pen ing transactions# such as !usiness com!inations or contract awar s) Information available indicates t at t e personal financial situation of management or t ose c arged wit governance is t reatened by t e entity's financial performance arising from t e following: a. &ignificant financial interests in the entit") !. &ignificant portions of their compensation (for e%ample# !onuses# stock options# an earn9out arrangements- !eing contingent upon achie$ing aggressi$e targets for stock price# operating results# financial position# or cash flow. c. +ersonal guarantees of e!ts of the entit" T ere is e$cessive pressure on management or operating personnel to meet financial targets establis ed by t ose c arged wit governance! including sales or profitability incentive goals. )pportunities The nature of the in ustr" or the entit",s operations pro$i es opportunities to engage in frau ulent financial reporting that can arise from the following: a. &ignificant relate 9part" transactions not in the or inar" course of !usiness or with relate entities not au ite or au ite !" another firm. !. ' strong financial presence or a!ilit" to ominate a certain in ustr" sector that allows the entit" to ictate terms or con itions to suppliers or customers that ma" result in inappropriate or non9arm,s length transactions. c. 'ssets# lia!ilities# re$enues# or e%penses !ase on significant estimates that in$ol$e su!*ecti$e *u gments or uncertainties that are ifficult to corro!orate. . &ignificant# unusual# or highl" comple% transactions# especiall" those close to perio en that pose ifficult 3su!stance o$er form4 (uestions. e. &ignificant operations locate or con ucte across international !or ers in *uris ictions where iffering !usiness en$ironments an cultures e%ist. f. Use of !usiness interme iaries for which there appears to !e no clear !usiness *ustification) g. &ignificant !ank accounts or su!si iar" or !ranch operations in ta%9ha$en *uris ictions for which there appears to !e no clear !usiness *ustification. 55

8. There is ineffecti$e monitoring of management as a result of the following: a. Domination of management !" a single person or small group (in a non owner9 manage !usiness- without compensating controls) !. Ineffecti$e o$ersight !" those charge with go$ernance o$er the financial reporting process an internal control. <. There is a comple% or unsta!le organi0ational structure# as e$i ence !" the following: a. Difficult" in etermining the organi0ation or in i$i uals that ha$e controlling interest in the entit") !. O$erl" comple% organi0ational structure in$ol$ing unusual legal entities or managerial lines of authorit") c. /igh turno$er of senior management# legal counsel# or those charge with go$ernance. =. Internal control components are eficient as a result of the following: a. Ina e(uate monitoring of controls# inclu ing automate controls an controls o$er interim financial reporting (where e%ternal reporting is re(uire -. !. /igh turno$er rates or emplo"ment of ineffecti$e accounting# internal au it# or information technolog" staff) c. Ineffecti$e accounting an information s"stems# inclu ing situations in$ol$ing material weaknesses in internal control. *ttitudes/+ationali,ations a. Ineffecti$e communication# implementation# support# or enforcement of the entit",s $alues or ethical stan ar s !" management or the communication of inappropriate $alues or ethical stan ar s.) !. Nonfinancial management,s e%cessi$e participation in or preoccupation with the selection of accounting policies or the etermination of significant estimates) c. >nown histor" of $iolations of securities laws or other laws an regulations# or claims against the entit"# its senior management# or those charge with go$ernance alleging frau or $iolations of laws an regulations. . 5%cessi$e interest !" management in maintaining or increasing the entit",s stock price or earnings tren ) e. ' practice !" management of committing to anal"sts# cre itors# an other thir parties to achie$e aggressi$e or unrealistic forecasts) f. 1anagement failing to correct known material weaknesses in internal control on a timel" !asis) g. 'n interest !" management in emplo"ing inappropriate means to minimi0e reporte earnings for ta%9moti$ate reasons) h. .ow morale among senior management) i. The owner9manager makes no istinction !etween personal an !usiness transactions) *. Dispute !etween sharehol ers in a closel" hel entit") k. Recurring attempts !" management to *ustif" marginal or inappropriate accounting on the !asis of materialit") l. The relationship !etween management an the current or pre ecessor au itor is straine # as e%hi!ite !" the following: i. 7re(uent isputes with the current or pre ecessor au itor on accounting# au iting# or reporting matters) ii. Unreasona!le eman s on the au itor# such as unreasona!le time constraints regar ing the completion of the au it or the issuance of the au itor,s report. iii. 7ormal or informal restrictions on the au itor that inappropriatel" limit access to people or information or the a!ilit" to communicate effecti$el" with those charge with go$ernance. 59

iv. 3omineering management behavior in dealing with the auditor, especially involving attempts to influence the scope of the auditor6s wor+ or the selection or continuance of personnel assigned to or consulted on the audit engagement (isk Factors Arisin$ fro! %isstate!ents Arisin$ fro! %isa ro riation of Assets &is+ factors that relate to misstatements arising from misappropriation of assets are also classified according to the three conditions generally present when fraud exists: %ncentives2pressures, .pportunities, and Attitudes2rationali$ations Incenti&e".Pre""ure" -. #ersonal financial obligations may create pressure on management or employees with access to cash or other assets susceptible to theft to misappropriate those assets. 1. Adverse relationships between the entity and employees with access to cash or other assets susceptible to theft may motivate those employees to misappropriate those assets. 'or example, adverse relationships may be created by the following: a. Gnown or anticipated future employee layoffs. b. &ecent or anticipated changes to employee compensation or benefit plans. c. #romotions, compensation, or other rewards inconsistent with expectations. O##ortunitie" -. "ertain characteristics or circumstances may increase the susceptibility of assets to misappropriation. 'or example, opportunities to misappropriate assets increase when there are the following: a. 4arge amounts of cash on hand or processed. b. %nventory items those are small in si$e, of high value, or in high demand/

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c. !asily convertible assets, such as bearer bonds, diamonds, or computer chips/ d. 'ixed assets which are small in si$e, mar+etable, or lac+ing observable identification of ownership. 1. %nadequate internal control over assets may increase the susceptibility of misappropriation of those assets. 'or example, misappropriation of assets may occur because there is the following: a. %nadequate segregation of duties or independent chec+s/ b. %nadequate oversight of senior management expenditures, such as travel and other reEimbursements. c. %nadequate management oversight of employees responsible for assets, for example, inadequate supervision or monitoring of remote locations. d. %nadequate job applicant screening of employees with access to assets. e. %nadequate record +eeping with respect to assets. f. %nadequate system of authori$ation and approval of transactions (for example, in purchasing). g. %nadequate physical safeguards over cash, investments, inventory, or fixed assets. h. 4ac+ of complete and timely reconciliations of assets. i. 4ac+ of timely and appropriate documentation of transactions, for example, credits for merchandise returns. j. 4ac+ of mandatory vacations for employees performing +ey control functions. +. %nadequate management understanding of information technology, which enables information technology employees to perpetrate a misappropriation. l. %nadequate access controls over automated records, including controls over and review of computer systems event logs. Attitude".R tion !i/ tion" a. 3isregard for the need for monitoring or reducing ris+s related to misappropriations of assets. 5=

b. 3isregard for internal control over misappropriation of assets by overriding existing controls or by failing to correct +nown internal control deficiencies. c. 8ehavior indicating displeasure or dissatisfaction with the entity or its treatment of the employee. d. "hanges in behavior or lifestyle that may indicate assets have been misappropriated. e. (olerance of petty theft. .7 Consi#eration o! Un%s%a or Une0pe)te# Re ationships When performing anal"tical proce ures to o!tain an un erstan ing of the entit" an its en$ironment# inclu ing its internal control# the au itor shoul consi er unusual or une%pecte relationships that ma" in icate risks of material misstatement ue to frau . 'nal"tical proce ures ma" !e helpful in i entif"ing the e%istence of unusual transactions or e$ents# an amounts# ratios# an tren s that might in icate matters that ha$e financial statement an au it implications. 2. Con#ideration of Ot er Information When o!taining an un erstan ing of the entit" an its en$ironment# inclu ing its internal control# the au itor shoul consi er whether other information o!taine in icates risks of material misstatement ue to frau . The iscussion among team mem!ers ma" pro$i e information that is helpful in i entif"ing such risks. Identification and A##e##ment of t e Ri#,# of %ateria* %i##tatement Due to Fraud When i entif"ing an assessing the risks of material misstatement 't the financial statement le$el# an 't the assertion le$el for classes of transactions# account !alances an isclosures# The au itor shoul i entif" an assess the risks of material misstatement ue to frau . Those assesse risks that coul result in a material misstatement ue to frau are significant risks an accor ingl"# to the e%tent not alrea " one so# the au itor shoul e$aluate the esign of the entit",s relate controls# It is important for the au itor to o!tain an un erstan ing of the controls that management has esigne an implemente to pre$ent an etect frau !ecause in esigning an implementing such controls# management ma" make informe *u gments on the nature an e%tent of the controls it chooses to implement# an the nature an e%tent of the risks it chooses to assume. The au itor ma" learn# for e%ample# that management has consciousl" chosen to accept the risks associate with a lack of segregation of uties. This ma" often !e the case in small entities where the owner pro$i es a"9to9 a" super$ision of operations. Ri#,# of Fraud in Re'enue Reco"nition

1aterial misstatements ue to frau ulent financial reporting often result from: 'n o$erstatement of re$enues) 7or e%ample# through premature re$enue recognition or recor ing fictitious re$enues) or
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 'n un erstatement of re$enues) 7or e%ample# through improperl" shifting re$enues to a later perio ) Therefore# the au itor or inaril" presumes that there are risks of frau in re$enue recognition an consi ers which t"pes of re$enue# re$enue transactions or assertions ma" gi$e rise to such risks. Re#$on#e# to t e Ri#,# of %ateria* %i##tatement Due to Fraud T e auditor s ould determine overall responses to address t e assessed ris-s of material misstatement due to fraud o *t t e financial statement level and s ould design and o Perform furt er audit procedures w ose nature! timing and e$tent are responsive to t e assessed ris-s at t e assertion level.
The au itor respon s to the risks of material misstatement ue to frau in the following wa"s: ' response that has an o$erall effect on how the au it is con ucte # that is# increase professional skepticism an a response in$ol$ing more general consi erations apart from the specific proce ures otherwise planne . ' response to i entifie risks at the assertion le$el in$ol$ing the nature# timing an e%tent of au it proce ures to !e performe . ' response to i entifie risks in$ol$ing the performance of certain au it proce ures to a ress the risks of material misstatement ue to frau in$ol$ing management o$erri e of controls# gi$en the unpre icta!le wa"s in which such o$erri e coul occur. The response to a ress the assesse risks of material misstatement ue to frau ma" affect the au itor,s professional skepticism in the following wa"s: Increase sensiti$it" in the selection of the nature an e%tent of ocumentation to !e e%amine in support of material transactions. Increase recognition of the nee to corro!orate management e%planations or representations concerning material matters. O'era** Re#$on#e#: In etermining o$erall responses to a ress the risks of material misstatement ue to frau at the financial statement le$el the au itor shoul : Consi er the assignment an super$ision of personnel) Consi er the accounting policies use !" the entit") an Incorporate an element of unpre icta!ilit" in the selection of the nature# timing an e%tent of au it proce ures. The au itor ma" respon to i entifie risks of material misstatement ue to frau !" assigning a itional in i$i uals with speciali0e skill an knowle ge) The au itor consi ers management,s selection an application of significant accounting policies# particularl" those relate to su!*ecti$e measurements an comple% transactions) In i$i uals within the entit" who are familiar with the au it proce ures normall" performe on engagements ma" !e more a!le to conceal frau ulent financial reporting. Therefore# the au itor incorporates an element of unpre icta!ilit" in the selection of the nature# e%tent an timing of au it proce ures to !e performe . Audit Procedure# Re#$on#i'e to Ri#,# of %ateria* %i##tatement Due to Fraud at t e A##ertion +e'e* The au itor,s responses to a ress the assesse risks of material misstatement ue to frau at the assertion le$el ma" inclu e changing the nature# timing# an e%tent of au it proce ures in the following wa"s: 5?

 The nature of au it proce ures to !e performe ma" nee to !e change to o!tain au it e$i ence that is more relia!le an rele$ant or to o!tain a itional corro!orati$e information. 7or e%ample: If the au itor i entifies that management is un er pressure to meet earnings e%pectations# there ma" !e a relate risk that management is inflating sales !" entering into sales agreements that inclu e terms that preclu e re$enue recognition or !" in$oicing sales !efore eli$er". In these circumstances# the au itor ma"# for e%ample# esign e%ternal confirmations not onl" to confirm outstan ing amounts# !ut also to confirm the etails of the sales agreements# inclu ing ate# an" rights of return an eli$er" terms. In a ition# the au itor might fin it effecti$e to supplement such e%ternal confirmations with in(uiries of non9financial personnel in the entit" regar ing an" changes in sales agreements an eli$er" terms. The timing of su!stanti$e proce ures ma" nee to !e mo ifie . The au itor ma" conclu e that performing su!stanti$e testing at or near the perio en !etter a resses an assesse risk of material misstatement ue to frau . The e%tent of the proce ures applie reflects the assessment of the risks of material misstatement ue to frau . 7or e%ample# increasing sample si0es or performing anal"tical proce ures at a more etaile le$el ma" !e appropriate. Audit Procedure# Re#$on#i'e to %ana"ement O'erride of Contro*# 1anagement is in a uni(ue position to perpetrate frau !ecause of management,s a!ilit" to irectl" or in irectl" manipulate accounting recor s an prepare frau ulent financial statements !" o$erri ing controls that otherwise appear to !e operating effecti$el". To respon to the risk of management o$erri e of controls# the au itor shoul esign an perform au it proce ures to: '. Test the appropriateness of *ournal entries recor e in the general le ger an other a *ustments ma e in the preparation of financial statements) :. Re$iew accounting estimates for !iases that coul result in material misstatement ue to frau ) an C. O!tain an un erstan ing of the !usiness rationale of significant transactions that the au itor !ecomes aware of that are outsi e of the normal course of !usiness for the entit"# or that otherwise appear to !e unusual gi$en the au itor,s un erstan ing of the entit" an its en$ironment) A. 3ourna* Entrie# and Ot er Ad4u#tment# The au itor ma": O!tains an un erstan ing of the entit",s financial reporting process an the controls o$er *ournal entries an other a *ustments) 5$aluates the esign of the controls o$er *ournal entries an other a *ustments an etermines whether the" ha$e !een implemente ) 1akes in(uiries of in i$i uals in$ol$e in the financial reporting process a!out inappropriate or unusual acti$it" relating to the processing of *ournal entries an other a *ustments) Determines the timing of the testing) an I entifies an selects *ournal entries an other a *ustments for testing. T e c aracteristics of fraudulent /ournal entries or ot er ad/ustments 'ppropriate *ournal entries or other a *ustments often ha$e uni(ue i entif"ing characteristics. &uch characteristics ma" inclu e entries 1a e to unrelate # unusual# or sel om9use accounts# 1a e !" in i$i uals who t"picall" o not make *ournal entries# 5A

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Recor e at the en of the perio or as post9closing entries that ha$e little or no e%planation or escription# 1a e either !efore or uring the preparation of the financial statements that o not ha$e account num!ers# or Containing roun num!ers or consistent en ing num!ers) T e nature and comple$ity of t e accounts Inappropriate *ournal entries or a *ustments ma" !e applie to accounts that Contain transactions that are comple% or unusual in nature# Contain significant estimates an perio 9en a *ustments# /a$e !een prone to misstatements in the past# /a$e not !een reconcile on a timel" !asis or contain un9reconcile ifferences# Contain inter9compan" transactions# or 're otherwise associate with an i entifie risk of material misstatement ue to frau . Accountin" E#timate# In re$iewing accounting estimates for !iases that coul result in material misstatement ue to frau the au itor: Consi ers whether ifferences !etween estimates !est supporte !" au it e$i ence an the estimates inclu e in the financial statements# e$en if the" are in i$i uall" reasona!le# in icate a possi!le !ias on the part of the entit",s management# in which case the au itor reconsi ers the estimates taken as a whole) an +erforms a retrospecti$e re$iew of management *u gments an assumptions relate to significant accounting estimates reflecte in the financial statements of the prior "ear. The o!*ecti$e of this re$iew is to etermine whether there is an in ication of a possi!le !ias on the part of management# an it is not inten e to call into (uestion the au itor,s professional *u gments ma e in the prior "ear that were !ase on information a$aila!le at the time.

C. &u#ine## Rationa*e for Si"nificant Tran#action#

The au itor o!tains an un erstan ing of the !usiness *ustification for significant transactions that are outsi e the normal course of !usiness for the entit"# or that otherwise appear to !e unusual gi$en the au itor,s un erstan ing of the entit" an its en$ironment an other information o!taine uring the au it. Whether the form of such transactions appears o$erl" comple% (for e%ample# the transaction in$ol$es multiple entities within a consoli ate group or multiple unrelate thir parties-. Whether management has iscusse the nature of an accounting for such transactions with those charge with go$ernance of the entit"# an whether there is a e(uate ocumentation. Whether the transactions in$ol$e pre$iousl" uni entifie relate parties or parties that o not ha$e the su!stance or the financial strength to support the transaction without assistance from the entit" un er au it.

E'a*uation of Audit E'idence

The au itor# !ase on the au it proce ures performe an the au it e$i ence o!taine # e$aluates whether the assessments of the risks of material misstatement at the assertion le$el remain appropriate. This e$aluation is primaril" a (ualitati$e matter !ase on the au itor,s *u gment. &uch an e$aluation ma" pro$i e further insight a!out the risks of material misstatement ue to frau an whether there is a nee to perform a itional or ifferent au it proce ures. 9D

 0 en t e auditor identifies a misstatement! t e auditor s ould consider w et er suc a misstatement may be indicative of fraud and if t ere is suc an indication! T e auditor s ould consider t e implications of t e misstatement in relation to ot er aspects of t e audit! particularly t e reliability of management representations. Exam$*e# of Circum#tance# t at Indicate t e Po##i)i*it! of Fraud The following are e%amples of circumstances that ma" in icate the possi!ilit" that the financial statements ma" contain a material misstatement resulting from frau . 6. Discrepancies in the accounting recor s# inclu ing the following: Transactions that are not recor e in a complete or timel" manner or are improperl" recor e as to amount# accounting perio # classification# or entit" polic". Unsupporte or unauthori0e !alances or transactions. .ast9minute a *ustments that significantl" affect financial results. 5$i ence of emplo"ees, access to s"stems an recor s inconsistent with that necessar" to perform their authori0e uties. Tips or complaints to the au itor a!out allege frau . 8. Conflicting or missing e$i ence# inclu ing the following: 1issing ocuments. Documents that appear to ha$e !een altere . Una$aila!ilit" of other than photocopie or electronicall" transmitte ocuments when ocuments in original form are e%pecte to e%ist. &ignificant une%plaine items on reconciliations. Unusual !alance sheet changes or changes in tren s or important financial statement ratios or relationships# for e%ample recei$a!les growing faster than re$enues. Inconsistent# $ague# or implausi!le responses from management or emplo"ees arising from in(uiries or anal"tical proce ures. Unusual iscrepancies !etween the entit",s recor s an confirmation replies. .arge num!ers of cre it entries an other a *ustments ma e to accounts recei$a!le recor s. Une%plaine or ina e(uatel" e%plaine ifferences !etween the accounts recei$a!le su!9le ger an the control account# or !etween the customer statements an the accounts recei$a!le su!9le ger. 1issing or non9e%istent cancelle checks in circumstances where cancelle checks are or inaril" returne to the entit" with the !ank statement. 1issing in$entor" or ph"sical assets of significant magnitu e. Una$aila!le or missing electronic e$i ence# inconsistent with the entit",s recor retention practices or policies. 7ewer responses to confirmations than anticipate or a greater num!er of responses than anticipate . Ina!ilit" to pro uce e$i ence of ke" s"stems e$elopment an program change testing an implementation acti$ities for current9"ear s"stem changes an eplo"ments. <. +ro!lematic or unusual relationships !etween the au itor an management# inclu ing the following: Denial of access to recor s# facilities# certain emplo"ees# customers# $en ors# or others from whom au it e$i ence might !e sought. Un ue time pressures impose !" management to resol$e comple% or contentious issues.

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Complaints !" management a!out the con uct of the au it or management intimi ation of engagement team mem!ers# particularl" in connection with the au itor,s critical assessment of au it e$i ence or in the resolution of potential isagreements with management. Unusual ela"s !" the entit" in pro$i ing re(ueste information. Unwillingness to facilitate au itor access to ke" electronic files for testing through the use of computer9assiste au it techni(ues. Denial of access to ke" IT operations staff an facilities# inclu ing securit"# operations# an s"stems e$elopment personnel. 'n unwillingness to a or re$ise isclosures in the financial statements to make them more complete an un erstan a!le. 'n unwillingness to a ress i entifie weaknesses in internal control on a timel" !asis. Other inclu es the following: Unwillingness !" management to permit the au itor to meet pri$atel" with those charge with go$ernance. 'ccounting policies that appear to !e at $ariance with in ustr" norms. 7re(uent changes in accounting estimates that o not appear to result from changes circumstances. Tolerance of $iolations of the entit",s co e of con uct. What is the responsibility of an auditor regarding fraud which is not material in nature and what is the responsibility of an auditor when fraud is committed by higher management? If the au itor !elie$es that a misstatement is or ma" !e the result of frau # !ut the effect of the misstatement is not material to the financial statements# the au itor e$aluates the implications# especiall" those ealing with the organi0ational position of the in i$i ual(sin$ol$e . Con$ersel"# if the matter in$ol$es higher9le$el management# e$en though the amount itself is not material to the financial statements# it ma" !e in icati$e of a more per$asi$e pro!lem# 7or e%ample# implications a!out the integrit" of management. In such circumstances# the au itor re9e$aluates the assessment of the risks of material misstatement ue to frau an its resulting impact on the nature# timing# an e%tent of au it proce ures to respon to the assesse risks. The au itor also reconsi ers the relia!ilit" of e$i ence pre$iousl" o!taine since there ma" !e ou!ts a!out the completeness an truthfulness of representations ma e an a!out the genuineness of accounting recor s an ocumentation. The au itor also consi ers the possi!ilit" of collusion in$ol$ing emplo"ees# management or thir parties when reconsi ering the relia!ilit" of e$i ence. $odification of report When the au itor confirms that# or is una!le to conclu e whether# the financial statements are materiall" misstate as a result of frau ) The au itor shoul consi er the implications for the au it : Whether frau is material an Whether there is nee for mo ification)

%ana"ement Re$re#entation#
The au itor shoul o!tain written representations from management that: It acknowle ges its responsi!ilit" for the esign an implementation of internal control to pre$ent an etect frau ) 91

 It has isclose to the au itor the results of its assessment of the risk that the financial statements ma" !e materiall" misstate as a result of frau ) It has isclose to the au itor its knowle ge of frau or suspecte frau affecting the entit" in$ol$ing: 1anagement) 5mplo"ees who ha$e significant roles in internal control) or Others where the frau coul ha$e a material effect on the financial statements) an It has isclose to the au itor its knowle ge of an" allegations of frau # or suspecte frau # affecting the entit",s financial statements communicate !" emplo"ees# former emplo"ees# anal"sts# regulators or others.

Communication# (it %ana"ement and T o#e C ar"ed (it Go'ernance

If the au itor has i entifie a frau or has o!taine information that in icates that a frau ma" e%ist# the au itor shoul communicate these matters as soon as practica!le to the appropriate le$el of management. If the au itor has i entifie frau in$ol$ing: 1anagement) 5mplo"ees who ha$e significant roles in internal control) or Others where the frau results in a material misstatement in the financial statements# The au itor shoul communicate these matters to those charge with ?o$ernance as soon as practica!le. If the integrit" or honest" of management or those charge with go$ernance is ou!te # the au itor consi ers seeking legal a $ice to assist in the etermination of the appropriate course of action. The au itor shoul make those charge with go$ernance an management aware# as soon as practica!le# an at the appropriate le$el of responsi!ilit"# of material weaknesses in the esign or implementation of internal control to pre$ent an etect frau which ma" ha$e come to the au itor,s attention.

Auditor 0na)*e to Continue t e En"a"ement

If# as a result of a misstatement resulting from frau or suspecte frau # the au itor encounters e%ceptional circumstances that !ring into (uestion the au itor,s a!ilit" to continue performing the au it the au itor shoul : Consi er the professional an legal responsi!ilities applica!le in the circumstances# inclu ing whether there is a re(uirement for the au itor to report to the person or persons who ma e the au it appointment or# in some cases# to regulator" authorities) Consi er the possi!ilit" of with rawing from the engagement) an If the au itor with raws: a-Discuss with the appropriate le$el of management an those charge with go$ernance the au itor,s with rawal from the engagement an the reasons for the with rawal) an

95

!Consi er whether there is a professional or legal re(uirement to report to the person or persons who ma e the au it appointment or# in some cases# to regulator" authorities# the au itor,s with rawal from the engagement an the reasons for the with rawal. 1uc e$ceptional circumstances can arise! for e$ample! w en: The entit" oes not take the appropriate action regar ing frau that the au itor consi ers necessar" in the circumstances# e$en when the frau is not material to the financial statements) The au itor,s consi eration of the risks of material misstatement ue to frau an the results of au it tests in icate a significant risk of material an per$asi$e frau ) or The au itor has significant concern a!out the competence or integrit" of management or those charge with go$ernance.

Documentation
The ocumentation shoul inclu e: The significant ecisions reache uring the iscussion among the 5ngagement team regar ing the suscepti!ilit" of the entit",s financial statements to material misstatement ue to frau ) an The i entifie an assesse risks of material misstatement ue to frau at the financial statement le$el an at the assertion le$el. The ocumentation of the au itor,s responses shoul inclu e: The o$erall responses to the assesse risks of material misstatements ue to frau at the financial statement le$el an the nature# timing an e%tent of au it proce ures# an the linkage of those proce ures with the assesse risks of material misstatement ue to frau at the assertion le$el) an The results of the au it proce ures# inclu ing those esigne to a ress the risk of management o$erri e of controls. The au itor shoul ocument communications a!out frau ma e to management# those charge with go$ernance# regulators an others. When the au itor has conclu e that the presumption that there is a risk of material misstatement ue to frau relate to re$enue recognition is not applica!le in the circumstances of the engagement# the au itor shoul ocument the reasons for that conclusion.

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 PLANNING ISA .//

%)&.37"(%.): (he purpose of this standard is to provide guidance on: (he considerations and activities applicable to planning an audit of financial statements. (his % A is framed in the context of recurring audits. (he auditor should plan the audit so that the engagement will be performed in an effective manner. !stablish an overall strategy 3evelop an audit plan &educe audit ris+ to an acceptably low level #lanning involves the engagement partner and other +ey members of the who have experience and insight. What are the ob1e)ti+es o! p annin"' Adequate planning helps: -. (o ensure that appropriate attention is devoted to important areas of the audit, 1. #otential problems are identified and resolved on a timely basis 5. (he audit engagement is properly organi$ed and managed in order to be performed in an effective and efficient manner. 9. Adequate planning also assists in the proper assignment of wor+ to engagement team members, <. %t also facilitates the direction and supervision of engagement team members and the review of their wor+, =. (o assists, where applicable, in coordination of wor+ done by auditors of components and experts. )ature and extent of planning would depend on 9<

 i$e of the entity "omplexity of business Auditor6s previous experience with the entity "hanges occurred during the period of current audit Plannin$ is a contin'o's hase and it is not done at any particular stage but throughout the audit. (he planning process starts after the end of the prior year6s audit and ends at the end of the audit: 0owever, in planning an audit, the auditor considers the timing of certain planning activities and audit procedures that need to be completed prior to the performance of further audit procedures. 'or example, a) the auditor plans the discussion among engagement team members, b) the analytical procedures to be applied as ris+ assessment procedures, c) the obtaining of a general understanding of the legal and regulatory framewor+ applicable to the entity and how the entity is complying with that framewor+, d) the determination of materiality, the involvement of experts and the performance of other ris+ e) assessment procedures prior to identifying and assessing the ris+s of material misstatement and performing further audit procedures at the assertion level for classes of transactions, account balances, and disclosures that are responsive to those ris+s. What are the responsibi ities re"ar#in" pre i(inar& en"a"e(ent a)ti+ities' At the beginning of the current audit the auditor should: #erform procedures regarding the continuance of the client relationship and the specific audit engagement !valuate compliance with ethical requirements, including independence "hec+ integrity of the management !stablish an understanding of the terms of the engagement What is the p%rpose o! pre i(inar& en"a"e(ent a)ti+ities'

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 (he purpose of performing these preliminary engagement activities is to ensure that the auditor has considered any events or circumstances that may adversely affect the auditor6s ability to plan and perform the audit engagement. #erforming these preliminary engagement activities helps to ensure that the auditor plans an audit engagement for which: (he auditor maintains the necessary independence and ability to perform the engagement. (here are no issues with management integrity that may affect the auditor6s willingness to continue the engagement. (here is no misunderstanding with the client as to the terms of the engagement. PLANNING ACTI8ITIES, -. (he over all audit strategy: 1. Audit plan *9 The o&er all a'dit strate$.: (he over all audit strategy sets the scope, timing, and direction of the audit, and guides the development of the more detailed audit plan. !stablishment of overall audit strategy involves 3etermining the characteristics of engagement to identify scope , financial reporting framewor+ used, industry specific issues and location of branches etc Ascertaining the reporting objectives of the engagement , reporting and communication requirements, reporting deadlines etc "onsidering the important focus points that will help the audit team diverting their attention to high ris+ areas such as: 3etermination of appropriate materiality levels, #reliminary identification of areas where there may be higher ris+s of material misstatement, #reliminary identification of material components and account balances, !valuation of whether the auditor may plan to obtain evidence regarding the effectiveness of internal control, and 9>

%dentification of recent significant entityEspecific,

%ndustry, financial reporting or other relevant developments. 3eveloping the overall audit strategy would also help the auditor to identify the nature timing and extent of the resources to deploy li+e: 7se of experienced team members )umber of team members *hen the staff should be inducted 0ow to ma+e the review and supervision .nce the overall audit strategy has been formulated then the auditor can ma+e a more detailed audit plan ta+ing into account the objective ris+ areas and other issues. ,a+ing audit plan and strategy are not two different processes but are sequential and closely interrelated and changes in one may result in changes in other. A'dit strate$. for s!all entities: %n audits of small entities, the entire audit may be conducted by a very small audit team. ,any audits of small entities involve the audit engagement partner (*ho may be a sole practitioner) wor+ing with one engagement team member (or without any engagement team members). *ith a smaller team, coordination and communication between team members are easier. !stablishing the overall audit strategy for the audit of a small entity need not be a complex or timeEconsuming exercise/ it varies according to the si$e of the entity and the complexity of the audit. 'or example, a brief memorandum prepared at the completion of the previous audit, based on a review of the wor+ing papers and highlighting issues identified in the audit just completed, updated and changed in the current period based on discussions with the ownerEmanager, can serve as the basis for planning the current audit engagement . )9 A'dit lan: Audit plan is more detailed then the audit strategy. (he auditor also ma+e sure the audit plan is documented properly which would help in performance of the audit. (he auditor should develop an audit plan for the audit in order to reduce audit ris+ to an acceptably low level 9?

 %ncludes details of: (he nature, timing and extent of planned ris+ assessment procedures (he nature, timing and extent of planned further audit procedures at the assertion level reflecting the decision whether to test .! of controls and nature, timing and extent of substantive procedures (he auditor may wish to discuss the elements of planning with those charged with the governance of the management and it may result in increasing the efficiency of the audit. (he auditor though discuss the planning process but this things should be +ept in mind .verall audit plan and the strategy should be updated if there is a change during the course of an audit. Dire)tion9 S%per+ision an# Re+ie* (he auditor should plan the nature, timing and extent of direction and supervision of engagement team members and review of their wor+ %n the case of sole practitioners these considerations do not arise 87( when dealing with complex or unusual issues consider consulting with other suitablyEexperienced auditors. (he nature, timing and extent of the direction and supervision of engagement team members and review of their wor+ vary depending on many factors: %ncluding the si$e and complexity of the entity, (he area of audit, (he ris+s of ,aterial misstatement, and (he capabilities and competence of personnel performing the audit wor+. DOCU%ENTATION: (he auditor should document the overall audit strategy and the audit plan, including any significant changes made during the audit engagement.

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 Co!!'nications #ith Those Char$ed #ith Go&ernance and %ana$e!ent: 3iscussions with management often occur to facilitate the conduct and management of the audit engagement (he overall audit strategy and the audit plan remain the auditor6s responsibility *hen discussions of matters included in the overall audit strategy or audit plan occur, care is required in order to not compromise the effectiveness of the audit. Additional Considerations in Initial A'dit En$a$e!ents %n the case of a first time audit the following additional procedures should be performed prior to starting any wor+: #erform procedures regarding the acceptance of the client relationship and the specific audit engagement "ommunicate with the previous auditor, where there has been a change of auditors, in compliance with relevant ethical requirements and the professional clearance letter from the retiring auditor should be obtained

UNDERSTANDING T3E ENTIT5 AND ITS EN8IRONMENT AND ASSESSING T3E RISKS OF MATERIAL MISSTATEMENT
Introduction:
Auditors cannot approach their wor+ with a fixed audit program which they expect will wor+ in all circumstances/ (hey must understand their client, identify and assess audit ris+, and plan their wor+ accordingly/ % A 5-< deals with understanding and assessing ris+/ (he purpose of this % A to provide guidance on .btaining an understanding of the entity and its environment, %ncluding its internal control, and .n assessing the ris+s of material misstatement in a financial statement audit/ The uditor "hou!d o+t in n under"t nding o$ the entit* nd it" en&iron%ent' inc!uding it" intern ! contro!' "u$$icient to identi$* nd ""e"" the ri"," o$ % teri ! %i""t te%ent o$ the $in nci ! "t te%ent" whether due to $r ud or error' nd "u$$icient to de"ign nd #er$or% $urther udit #rocedure"( The !o o*in" is an o+er+ie* o! the re$%ire(ents o! this stan#ar#, 0( Ri", ""e""%ent #rocedure" nd "ource" o$ in$or% tion +out the entit* nd it" en&iron%ent' inc!uding it" intern ! contro!1 <D

1.

5.

2(

<.

(his section explains the audit procedures that the auditor is required to perform to obtain the understanding of the entity and its environment, including its internal control (ris+ assessment procedures). %t also requires discussion among the engagement team about the susceptibility of the entity6s financial statements to material misstatement. 7nderstanding the entity and its environment, including its internal control/ (his section requires the auditor to understand specified aspects of the entity and its environment, and components of its internal control, in order to identify and assess the ris+s of material misstatement. Assessing the ris+s of material misstatement/ (his section requires the auditor to identify and assess the ris+s of material misstatement at the financial statement and assertion levels. (he auditor %dentifies ris+s by considering the entity and its environment, including relevant controls, and by considering the classes of transactions, account balances, and disclosures in the financial statements/ &elates the identified ris+s to what can go wrong at the assertion level/ and "onsiders the significance and li+elihood of the ris+s. (his section also requires the auditor to determine whether any of the assessed ris+s are significant ris+s that require special audit consideration or ris+s for which substantive procedures alone do not provide sufficient appropriate audit evidence. (he auditor is required to evaluate the design of the entity6s controls, including relevant control activities, over such ris+s and determine whether they have been implemented. Co%%unic ting with tho"e ch rged with go&ern nce nd % n ge%ent( (his section deals with matters relating to internal control that the auditor communicates to those charged with governance and management. 3ocumentation/ (his section establishes related documentation requirements.

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 What are p%rposes an# a#+anta"es o! obtainin" %n#erstan#in" the entit& an# its en+iron(ent' .btaining an understanding of the entity and its environment is an essential aspect of performing an audit in accordance with % As. %n particular, that understanding establishes a frame of reference within which the auditor plans the audit and exercises professional judgment about assessing ris+s of material misstatement of the financial statements and responding to those ris+s throughout the audit, for example when: !stablishing materiality and evaluating whether the judgment about materiality remains appropriate as the audit progresses/ "onsidering the appropriateness of the selection and application of accounting policies, and the adequacy of financial statement disclosures/ %dentifying areas where special audit consideration may be necessary, for example, related party transactions, the appropriateness of management6s use of the going concern assumption, or considering the business purpose of transactions/ 3eveloping expectations for use when performing analytical procedures/ 3esigning and performing further audit procedures to reduce audit ris+ to an acceptably low level/ and <1

 !valuating the sufficiency and appropriateness of audit evidence obtained, such as the appropriateness of assumptions and of management6s oral and written representations.

Ri#, A##e##ment Procedure# and Source# of Information a)out t e Entit! and It# En'ironment, Inc*udin" It# Interna* Contro* O!taining an un erstan ing of the entit" an its en$ironment# inclu ing its internal control# is a continuous# "namic process of gathering# up ating an anal"0ing information throughout the au it. The au itor also ma" choose to perform su!stanti$e proce ures or tests of controls concurrentl" with risk assessment proce ures !ecause it is efficient to o so.

A: (isk Assess!ent Proced'res (he auditor should perform the following ris+ assessment procedures to obtain an understanding of the entity and its environment, including its internal control: %nquiries of management and others within the entity/ Analytical procedures/ and .bservation and inspection/ %n addition, the auditor performs other audit procedures where the information obtained may be helpful in identifying ris+s of material misstatement. Analytical procedures may be helpful in identifying the existence of unusual transactions or events, and amounts, ratios, and trends that might indicate matters that have financial statement and audit implications. !nquiries may need to extend beyond those charged with governance or accounting (eg., to sales or production management, internal audit, etc) .bservation and inspection may support inquiries of management and others, and also provide information about the entity and its environment. *hen the auditor intends to use information about the entity and its environment obtained in prior periods, the auditor should determine whether changes have occurred that may affect the relevance of such information in the current audit. B: Disc'ssion a!on$ the En$a$e!ent Tea!

1em!ers of the engagement team shoul iscuss the suscepti!ilit" of the entit",s financial statements to material misstatement ue to frau . The iscussion inclu es the engagement partner who uses professional *u gment# prior e%perience with the entit" an knowle ge of current e$elopments to etermine which other mem!ers of the engagement team are inclu e in the iscussion. Or inaril"# the iscussion in$ol$es the ke" mem!ers of the engagement team. The iscussion pro$i es an opportunit" for more e%perience engagement team mem!ers to share their insights a!out how an where the financial statements ma" !e suscepti!le to material misstatement ue to frau . The engagement partner shoul consi er which matters are to !e communicate to mem!ers of the engagement team not in$ol$e in the iscussion.
(he purpose is for engagement team members to communicate and share information obtained throughout the audit that may affect the assessment <5

of the ris+s of material misstatement due to fraud or error or the audit procedures performed to address the ris+s.

0nder#tandin" t e Entit! and It# En'ironment, Inc*udin" It# Interna* Contro*

(he auditor6s understanding of the entity and its environment consists of an understanding of the following aspects: -. %ndustry, regulatory, and other external factors, including the applicable financial reporting framewor+. 1. )ature of the entity, including the entity6s selection and application of accounting policies. 5. .bjectives and strategies and the related business ris+s that may result in a material misstatement of the financial statements. 9. ,easurement and review of the entity6s financial performance. <. %nternal control. *: Ind'str.0 (e$'lator. and Other E5ternal Factors0 Incl'din$ the A lica-le Financial (e ortin$ Fra!e#ork: (he auditor should obtain an understanding of relevant industry, regulatory, and other external factors including the applicable financial reporting framewor+. (hese factors include industry conditions such as: (he competitive environment, upplier and customer relationships, and (echnological developments/ (he applicable financial reporting framewor+, (he legal and political environment, and !nvironmental requirements affecting the industry and the entity/ and .ther external factors such as general economic conditions.
1. Nature of t e Entit!

(he auditor should obtain an understanding of the nature of the entity. (he nature of an entity refers to: (he entity6s operations, %ts ownership and governance, (he types of investments that it is ma+ing and #lans to ma+e, the way that the entity is structured and 0ow it is financed. An understanding of the nature of an entity enables the auditor to understand the classes of transactions, account balances, and disclosures to be expected in the financial statements. (he auditor should obtain an understanding of the entity6s selection and application of accounting policies and consider whether they are appropriate for its business and consistent with the applicable financial reporting framewor+ and accounting polices used in the relevant industry. ;: O-4ecti&es and Strate$ies and (elated B'siness (isks (he auditor should obtain an understanding of the entity6s objectives and strategies, and the related business ris+s that may result in material misstatement of the financial statements. (he entity conducts its business in the context of industry, regulatory and other internal and external factors. <9

 (o respond to these factors, the entity6s management or those charged with governance define objectives, which are the overall plans for the entity. 8usiness ris+s result from significant conditions, events, circumstances, actions or inactions that could adversely affect the entity6s ability to achieve its objectives and execute its strategies, or through the setting of inappropriate objectives and strategies. 8usiness ris+ is broader than the ris+ of material misstatement of the financial statements, though it includes the latter. An understanding of business ris+s increases the li+elihood of identifying ris+s of material misstatement. 0owever, the auditor does not have a responsibility to identify or assess all business ris+s. ,ost business ris+s will eventually have financial consequences and, therefore, an effect on the financial statements. 0owever, not all business ris+s give rise to ris+s of material misstatement. <: %eas're!ent and (e&ie# of the Entit.8s Financial Perfor!ance An auditor should understand how performance is measured or reviewed within a company (o improve his own understanding, and the quality of his analytical review processes (o understand the pressures which may result in management actions which increase the ris+ of misstatements #erformance measures, whether external or internal, create pressures on the entity that, in turn, may motivate management to ta+e action to improve the business performance or to misstate the financial statements. .btaining an understanding of the entity6s performance measures assists the auditor in considering whether such pressures result in management actions that may have increased the ris+s of material misstatement. ,anagement6s measurement and review of the entity6s financial performance is to be distinguished from the monitoring of controls: ,onitoring of controls is specifically concerned with the effective operation of internal control through consideration of information about the control. (he measurement and review of performance is directed at whether business performance is meeting the objectives set by management. 8ut in some cases performance indicators also provide information that enables management to identify deficiencies in internal =: Internal Control (he auditor should obtain an understanding of internal control relevant to the audit. "2AT DO "E %EAN B7 INTE(NA, CONT(O,/ %nternal control is the process designed and effected by HmanagementI to provide reasonable assurance about the achievement of the entity6s objectives with regard to: <<

 &eliability of financial reporting !ffectiveness and efficiency of operations, and "ompliance with applicable laws and regulations.

As such, the internal controls are designed to minimi$e the ris+s that the company is exposed to and which, if those ris+s arose, could prevent the company from meeting its strategic objectives. 'or example, in a shop where cash sales ta+e place, controls will be put in place to ensure that money is received prior to the sale being made, and that the ris+ of cash being misappropriated is minimi$ed. ,anagement also needs a control system that generates reliable information for decision ma+ing. (he auditor needs assurance about the reliability of the data generated by the information system in terms of how it affects the fairness of the financial statements and how well the assets and records of the entity are safeguarded. Wh& it is so ne)essar& !or an a%#itor to %n#erstan# entities interna )ontro ' (he auditor uses ris+ assessment procedures to obtain an understanding of the entity6s internal control and uses this understanding: (o identify the types of potential misstatements, Ascertain factors that affect the ris+ of material misstatement, and 3esign tests of controls and substantive procedures. (he auditor6s understanding of the internal control is a major factor in determining the overall audit strategy. (he auditor6s responsibilities for internal control are discussed under two major topics: -. .btaining an understanding of internal control and 1. Assessing control ris+. (o gain an understanding of the entity, the auditor will need to review both the design of internal controls to ensure they are effective in preventing and2or detecting material misstatement, and also implementation of the control activities to ensure that they have been correctly operating throughout the period. Contro s Re e+ant to the A%#it

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 7sually, those controls which pertain to the entity6s objective of preparing financial statements are relevant to audit. %t is a matter of the auditor6s professional judgment, ubject to the requirements of this % A, *hether a control, individually or in combination with others, %s relevant to the auditor6s considerations in assessing the ris+s of material misstatement and 3esigning and performing further procedures in response to assessed ris+s. %n exercising that judgment, the auditor considers the circumstances, the applicable component and factors such as the following: (he auditor6s judgment about materiality. (he si$e of the entity. (he nature of the entity6s business, including its organi$ation and ownership characteristics. (he diversity and complexity of the entity6s operations. Applicable legal and regulatory requirements. (he nature and complexity of the systems that are part of the entity6s internal control, including the use of service organi$ations. %nternal control applies to the entire entity or to any of its operating units or business processes, an understanding of internal control relating to each of the entity6s operating units and business processes may not be relevant to the audit. "ontrols relating to operations and compliance objectives may, however, be relevant to an audit if they pertain to data the auditor evaluates or uses in applying audit procedures. Depth o! Un#erstan#in" o! Interna Contro .btaining an understanding of internal control involves evaluating the design of a control and determining whether it has been implemented <>

 !valuating the design of a control involves considering whether the control, individually or in combination with other controls, is capable of effectively preventing, or detecting and correcting, material misstatements. %mplementation of a control means that the control exists and that the entity is using it. .btaining an understanding of an entity6s controls is generally not sufficient to serve as testing the operating effectiveness of controls/ &is+ assessment procedures to obtain audit evidence about the design and implementation of relevant controls may include: %nquiring of entity personnel .bserving the application of specific controls, %nspecting documents and reports, and (racing transactions through the information system relevant to financial reporting/ Chara)teristi)s o! Man%a an# A%to(ate# E e(ents o! Interna Contro Re e+ant to the A%#itor4s Ris2 Assess(ent ,ost entities ma+e use of %( systems for financial reporting and operational purposes. 0owever, even when %( is extensively used, there will be manual elements to the systems. (he balance between manual and automated elements varies. As a result, an entity6s system of internal control is li+ely to contain manual and automated elements, the characteristics of which are relevant to the auditor6s ris+ assessment and further audit procedures based thereon. (he use of manual or automated elements in internal control also affects the manner in which transactions are initiated, recorded, processed, and reported. (he extent and nature of the ris+s to internal control vary depending on the nature and characteristics of the entity6s information system. (herefore in understanding internal control, the auditor considers whether the entity has responded adequately to the ris+s arising from the use of %( or manual systems by establishing effective controls. Ad&anta$es of IT in internal control: Cenerally, %( provides potential benefits of effectiveness and efficiency for an entity6s internal control because it enables an entity to: "onsistently apply predefined business rules and perform complex calculations in processing large volumes of transactions or data/ !nhance the timeliness, availability, and accuracy of information/ 'acilitate the additional analysis of information/ !nhance the ability to monitor the performance of the entity6s activities and its policies and procedures/ &educe the ris+ that controls will be circumvented/ and !nhance the ability to achieve effective segregation of duties by implementing security controls in applications, databases, and operating systems. Disa#+anta"es o! IT in interna )ontro , <?

 %( also poses specific ris+s to an entity6s internal control, including the following: &eliance on systems or programs that are inaccurately processing data, processing inaccurate data, or both. 7nauthori$ed access to data that may result in destruction of data or improper changes to data, including the recording of unauthori$ed or nonexistent transactions, or inaccurate recording of transactions. #articular ris+s may arise where multiple users access a common database. (he possibility of %( personnel gaining access privileges beyond those necessary to perform their assigned duties thereby brea+ing down segregation of duties. 7nauthori$ed changes to data in master files. 7nauthori$ed changes to systems or programs. 'ailure to ma+e necessary changes to systems or programs. %nappropriate manual intervention. #otential loss of data or inability to access data as required. A#+anta"es o! (an%a s&ste(, ,anual aspects of systems may be more suitable where judgment and discretion are required such as for the following circumstances: 4arge, unusual or nonErecurring transactions. "ircumstances where errors are difficult to define anticipate or predict. %n changing circumstances that require a control response outside the scope of an existing automated control. %n monitoring the effectiveness of automated controls. Disa#+anta"es o! (an%a s&ste( ,anual controls are performed by people, and therefore pose specific ris+s to the entity6s internal control. ,anual controls may be less reliable than automated controls because they can be more easily bypassed, ignored, or overridden and they are also more prone to simple errors and mista+es. "onsistency of application of a manual control element cannot therefore be assumed. ,anual systems may be less suitable for the following: 0igh volume or recurring transactions, or in situations where errors that can be anticipated or predicted can be prevented or detected by control parameters that are automated. "ontrol activities where the specific ways to perform the control can be adequately designed and automated. Li(itations o! Interna Contro %nternal control, no matter how well designed and operated, can provide an entity with only reasonable assurance about achieving the entity6s financial reporting objectives. (he li+elihood of achievement is affected by limitations inherent to internal control.

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 (hese include the realities that human judgment in decisionEma+ing can be faulty and that brea+downs in internal control can occur because of human failures, such as simple errors or mista+es. "ontrols can be circumvented by the collusion of two or more people or inappropriate management override of internal control. COMPONENTS OF INTERNAL CONTROL

%nternal control, as discussed in this % A, consists of the following components: A. (he control environment/ 8. (he entity6s ris+ assessment process/ ". (he information system, including the related business processes, relevant to financial reporting, and communication/ 3. "ontrol activities/ !. ,onitoring of controls1 A. The )ontro en+iron(ent % n ge%ent-" ttitude nd $ir%-" cu!ture tow rd contro!" (he % A requires auditors to Jobtain an understanding of the control environmentJ. "ontrol environment is governance and management functions and the attitudes, awareness and actions of those charged with governance and management concerning the entityJs internal control and its importance in the entity. (he contro! en&iron%ent sets the tone of an organisation and is the foundation for effective internal control, providing discipline and structure. The )ontro pro)e#%res, control procedures mean those policies and procedures in addition to control environment which management has established to achieve the entities specific objectives. %n evaluating the design of the entity6s control environment, the auditor considers the following elements and how they have been incorporated into the entity6s processes: =D

a. Co!!'nication and enforce!ent of inte$rit. and ethical &al'es : essential elements which influence the effectiveness of the design, administration and monitoring of controls. 3oes the board display integrity and have ethical rules been developed and implemented throughout the organi$ationK b. Co!!it!ent to co! etence: management6s consideration of the competence levels for particular jobs and how those levels translate into requisite s+ills and +nowledge. 3oes the board demonstrate a commitment to having wellEtrained staff who possess the right s+ills setsK c. Partici ation -. those char$ed #ith $o&ernance: independence from management, their experience and stature, the extent of their involvement and scrutiny of activities, the information they receive, the degree to which difficult questions are raised and pursued with management and their interaction with internal and external auditors. 0as an audit committee been established to ensure good corporate governanceK d. %ana$e!ent8s hiloso h. and o eratin$ st.le: management6s approach to ta+ing and managing business ris+s, and management6s attitudes and actions toward financial reporting, information processing and accounting functions and personnel. %s a specific department charged with overseeing the company6s ris+ management activitiesK e. Or$ani1ational str'ct're > the frame wor+, within which an entity6s activities for achieving its objectives are planned, executed, controlled and reviewed. 3oes the entity have an organi$ational structure which clearly identifies authority levels and employee6s responsibilitiesK f. Assi$n!ent of a'thorit. and res onsi-ilit.: how authority and responsibility for operating activities are assigned and how reporting relationships and authori$ation hierarchies are established. g. 2'!an reso'rce olicies and ractices: recruitment, orientation, training, evaluating, counseling, promoting, compensating and remedial actions. A##!ic tion to S% !! Entitie" mall entities may implement the control environment elements differently than larger entities.

'or example, small entities might not have a written code of conduct but, instead, develop a culture that emphasi$es the importance of integrity and ethical behavior through oral communication and by management example. imilarly, those charged with governance in small entities may not include an independent or outside member.

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 (he nature of an entity6s control environment is such that it has a pervasive effect on assessing the ris+s of material misstatement. (he auditor6s evaluation of the design of the entity6s control environment includes considering whether the strengths in the control environment elements collectively provide an appropriate foundation for the other components of internal control (he existence of a satisfactory control environment can be a positive factor when assessing the ris+s of material misstatement %t may help to reduce the ris+ of fraud, although a satisfactory control environment is not an absolute deterrent to fraud. "onversely, wea+nesses in the control environment may undermine the effectiveness of controls and therefore be negative factors in the auditor6s assessment of the ris+s of material misstatement, in particular in relation to fraud. (he control environment in itself does not prevent, or detect and correct a material misstatement in classes of transactions, account balances, and disclosures and related assertions. (he auditor, therefore, ordinarily considers the effect of other components along with the control environment when assessing the ris+s of material misstatement/ for example, the monitoring of controls and the operation of specific control activities. E0a(p e, imple structure E management of the company is dominated by ,r aqib hai+h, who is responsible for mar+eting, purchasing, and approving major transactions. 0e has a good understanding of the business and the industry in which it operates ,r aqib hai+h is committed to hiring experienced personnel because of limited segregation of duties. ,ost of the significant accounting functions are performed by 47"GL, the boo++eeper, and aqib6s secretary, *aqar. 47"GL was hired by the company in 1DD5, has a wor+ing +nowledge of accounting fundamentals, and we have no reason to question her competence. aqib hai+h and 47"GL regularly consult with our firm on routine accounting questions. .ur firm also assists in the preparation of the financial statements. aqib hai+h considers lower taxes to be as important as financial results/ he has a conservative attitude toward accounting estimates. 8oard is composed of family members. %t is not expected to monitor the business or ownerEmanagerJs activities. E&al'ation: ,ade enquiries of aqib hai+h regarding operating performance for the year compared with prior years, new investments, and financing activities during the year. 0e continues to demonstrate a conservative attitude toward business ris+s E company appears to have maintained a significant reduce beyond wor+ing capital, dividend, and compensating balance requirements of debt agreements. =1

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(here has been no turnover of personnel wor+ing directly with the accounting system. I! act on a'dit: 3ue to si$e of company and lac+ of segregation of duties, we will perform substantive testing with no reliance on controls. The Entit&4s Ris2 Assess(ent Pro)ess (he auditor should obtain an understanding of the entity6s process for identifying business ris+s relevant to financial reporting objectives and deciding about actions to address those ris+s, and the results thereof/ (he ris+ assessment process should consider external and internal events and circumstances that may arise and adversely affect the entity6s ability to initiate record, process and report financial data consistent with the assertions of management in the financial statements. .ur understanding of the entityJs ris+ assessment process includes how management: %dentifies ris+s/ !stimates the significance of the ris+s/ Assesses the li+elihood and frequency of their occurrence/ 3ecides upon actions to manage them/ Auditor inquires about business ris+s and considers whether they may result in material misstatement. Con"ider tion" $or "% !!er entitie" 8asic concepts are relevant to every entity &is+ assessment process li+ely to be less formal and less structured in smaller entities. ,anagement nevertheless may be aware of ris+s related to these objectives without the use of a formal process but through direct personal involvement with employees and outside parties.

a) Chan$es in o eratin$ en&iron!ent. "hanges in the regulatory or operating environment can result in changes in competitive pressures and significantly different ris+s. b) Ne# ersonnel. )ew personnel may have a different focus on or understanding of internal control. c) Ne# or re&a! ed infor!ation s.ste!s. ignificant and rapid changes in information systems can change the ris+ relating to internal control. =5

d) (a id $ro#th. ignificant and rapid expansion of operations can strain controls and increase the ris+ of a brea+down in controls. e) Ne# technolo$.. %ncorporating new technologies into production processes or information systems may change the ris+ associated with internal control. f) Ne# -'siness !odels0 rod'cts0 or acti&ities . !ntering into business areas or transactions with which an entity has little experience may introduce new ris+s associated with internal control. g) Cor orate restr'ct'rin$s. &estructurings may be accompanied by staff reductions and changes in supervision and segregation of duties that may change the ris+ associated with internal control. h) E5 anded forei$n o erations. (he expansion or acquisition of foreign operations carries new and often unique ris+s that may affect internal control, for example, additional or changed ris+s from foreign currency transactions. i) Ne# acco'ntin$ rono'nce!ents. Adoption of new accounting principles or changing accounting principles may affect ris+s in preparing financial statements. A##!ic tion to S% !! Entitie" (he basic concepts of the entity6s ris+ assessment process are relevant to every entity, regardless of si$e, but (he ris+ assessment process is li+ely to be less formal and less structured in small entities than in larger ones. All entities should have established financial reporting objectives, but they may be recogni$ed implicitly rather than explicitly in small entities. ,anagement may be aware of ris+s related to these objectives without the use of a formal process but through direct personal involvement with employees and outside parties. C7 In!or(ation S&ste(9 In) %#in" the Re ate# B%siness Pro)esses9 Re e+ant to Finan)ia Reportin"9 an# Co((%ni)ation, De!inition, The in$or% tion "*"te% relevant to financial reporting objectives, which includes the accounting system, consists of the procedures and records established to initiate, record, process, and report entity transactions and to maintain accountability for the related assets, liabilities, and equity.

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 (he auditor needs to understand the accounting records, procedures, policies and processes relevant to an organi$ation6s financial reporting requirements. %ncluding the following areas: a. (he classes of transactions in the entity6s operations that are significant to the financial statements. b. (he procedures, within both %( and manual systems, by which those transactions are initiated, recorded, processed and reported in the financial statements. c. (he related accounting records, whether electronic or manual, supporting information, and specific accounts in the financial statements, in respect of initiating, recording, processing and reporting transactions. d. 0ow the information system captures events and conditions, other than classes of transactions that are significant to the financial statements. e. (he financial reporting process used to prepare the entity6s financial statements, including significant accounting estimates and disclosures. %n obtaining this understanding, the auditor considers the procedures used to transfer information from transaction processing systems to general ledger or financial reporting systems . %n obtaining an understanding, the auditor considers ris+s of material misstatement associated with inappropriate override of controls over journal entries and the controls surrounding nonEstandard journal entries. Auditor needs a detailed understanding of the procedures that govern both the computeri$ed and manual systems which initiate, record, process and report business transactions in the financial statement. (he auditor needs to consider: (he process for preparing and controlling journals (he management of incorrect posting of transactions, such as the use of a suspense account 0ow any significant accounting estimates, such as depreciation, are reportedK (he items to be disclosed in the financial statements/ (he auditor also needs to understand the communication process used for financial reporting, including the roles and responsibilities involved in this process. =<

 %f senior managers are involved in this process then the auditors will be reassured that the controls are li+ely to be operating well/ A we!! de"igned in$or% tion "*"te% th t i" o#er ting e$$ecti&e!* c n reduce the ri", o$ % teri ! %i""t te%ent(

A##!ic tion to S% !! Entitie" %nformation systems and related business processes relevant to financial reporting in small entities are li+ely to be less formal than in larger entities, but their role is just as significant. mall entities with active management involvement may not need extensive descriptions of accounting procedures, sophisticated accounting records, or written policies. "ommunication may be less formal and easier to achieve in a small entity than in a larger entity due to the small entity6s si$e and fewer levels as well as management6s greater visibility and availability. D7 Contro A)ti+ities

(he auditor should obtain a sufficient understanding of control activities: (o assess the ris+s of material misstatement at the assertion level (o design further audit procedures responsive to assessed ris+s Auditor is not required to understand all control activities related to each significant class of transactions, account balance, disclosure, etc (he emphasis must be on controls in those areas where material misstatements are more li+ely/ #rimary consideration B whether and how a specific control activity prevents, detects and corrects material misstatements in classes of transactions, account balances or disclosures Whi)h )ontro a)ti+ities are re e+ant to the a%#it' ==

 An audit does not require an understanding of all the control activities related to each significant class of transactions, account balance and disclosure in the f2s or to every assertion relevant to them !mphasis is on identifying and obtaining an understanding of control activities that address the areas where material misstatements are more li+ely to occur. Genera &9 )ontro a)ti+ities that (a& be re e+ant to an a%#it (a& be )ate"ori:e# as po i)ies an# pro)e#%res that pertain to the !o o*in", a) Per!or(an)e re+ie*s: (hese control activities include reviews and analyses of actual performance versus budgets, forecasts, and prior period performance/ together with analyses of the relationships and investigative and corrective actions/ comparing internal data with external sources of information/ b) In!or(ation pro)essin": A variety of controls are performed to chec+ accuracy, completeness, and authori$ation of transactions. (he two broad groupings of information systems control activities are application controls and general %(Econtrols. Application controls apply to the processing of individual applications. (hese controls help ensure that transactions occurred, are authori$ed, and are completely and accurately recorded and processed. Ceneral %(Econtrols are polices and procedures that relate to many applications and support the effective functioning of application controls by helping to ensure the continued proper operation of information systems. c) Ph.sical controls: (hese activities encompass the physical security of assets, including adequate safeguards such as secured facilities over access to assets and records/ authori$ation for access to computer programs and data files/ and periodic counting and comparison with amounts shown on control records. d) Se$re$ation of d'ties: Assigning different people the responsibilities of authori$ing transactions, recording transactions, and maintaining custody of assets is intended to reduce the opportunities to allow any person to be in a position to both perpetrate and conceal errors or fraud in the normal course of the person6s duties. A##!ic tion to S% !! Entitie" (he concepts underlying control activities in small entities are li+ely to be similar to those in larger entities, but the formality with which they operate varies. 'urther, small entities may find that certain types of control activities are not relevant because of controls applied by management. An appropriate segregation of duties often appears to present difficulties in small entities. =>

 !ven companies that have only a few employees, however, may be able to assign their responsibilities to achieve appropriate segregation or, if that is not possible, to use management oversight of the incompatible activities to achieve control objectives. E7 Monitorin" o! Contro s (he auditor should understand how the entity monitors its internal controls over financial reporting and how it initiates corrective action. ,onitoring of controls is a process to assess the quality of internal control performance over time. %t involves assessing the design and operation of controls on a timely basis and ta+ing necessary corrective actions. ,onitoring is done to ensure that controls continue to operate effectively. %n many entities, internal auditors or personnel performing similar functions contribute to the monitoring of an entity6s controls through separate evaluations. (hey regularly provide information about the functioning of internal control, focusing considerable attention on evaluating the design and operation of internal control. (hey communicate information about strengths and wea+nesses and recommendations for improving internal control. *hen the auditor intends to ma+e use of the entity6s information produced for monitoring activities, such as internal auditors6 reports, the auditor considers whether the information provides a reliable basis and is sufficiently detailed for the auditor6s purpose.

A##e##in" t e Ri#,# of %ateria* %i##tatement

(he auditor should identify and assess the ris+s of material misstatement at the financial statement level, and at the assertion level for classes of transactions, account balances and disclosures 'or this purpose, the auditor should follow 9 steps to assess the ris+ of material misstatement: i. Identif. risk through the process of obtaining an understanding of the entity and its environment ii. &elate the risks to what can go wrong at the assertion le&el iii. "onsider whether the ris+s are of a !a$nit'de can result in a material misstatement of the f2s iv. "onsider the likelihood that the ris+s could result in a material misstatement of the f2s %n ma+ing ris+ assessments the auditor may identify controls that are li+ely to prevent, or detect and correct material misstatement in specific assertions "ontrols can be either directly or indirectly related to an assertion. (he more indirect the relationship, the less effective that control may be in preventing, or detecting and correcting, misstatements in that assertion. (he auditor6s understanding of internal control may raise doubts about the audit of an entity6s financial statements.

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 "oncerns about the integrity of the entity6s management may be so serious as to cause the auditor to conclude that the ris+ of management misrepresentation in the financial statements is such that an audit cannot be conducted. Also, concerns about the condition and reliability of an entity6s records may cause the auditor to conclude that it is unli+ely that sufficient appropriate audit evidence will be available to support an unqualified opinion on the financial statements. %n such circumstances, the auditor considers a qualification or disclaimer of opinion, but in some cases the auditor6s only recourse may be to withdraw from the engagement.

Si"ni!i)ant Ris2s that Re$%ire Spe)ia A%#it Consi#eration,

(he auditor should determine which of the ris+s identified are requiring special audit consideration/ such ris+s are defined as :significant ris+s;. (he identification of significant ris+s is part of the ris+ assessment process (hese arise on most audits (heir determination is a matter of professional judgment !ffect of identified controls related to the ris+ excluded whilst performing 9 steps to assessing ris+ .ften relate to significant nonEroutine transactions and judgmental matters #articular attention required on: &is+s of material fraud/ "omplex or related party transactions/ %nformation involving a wide range of measurement uncertainty/ (ransactions outside the normal course of business/ (he auditor should evaluate the design of the entity6s controls over significant ris+s, including relevant control activities and determine whether they have been implemented %f management has not appropriately responded by implementing controls over significant ris+s and if, as a result, the auditor judges that there is a =A

material wea+ness in the entity6s internal control, the auditor communicates this matter to those charged with governance. Ris2s !or *hi)h S%bstanti+e Pro)e#%res A one Do Not Pro+i#e S%!!i)ient Appropriate A%#it E+i#en)e (he auditor should evaluate the design and determine the implementation of the entity6s controls over those ris+s where it is not possible or practicable to reduce audit ris+ to an acceptably low level through substantive procedures alone

!xamples of situations where the auditor may find it impossible to design effective substantive procedures that by themselves provide sufficient appropriate audit evidence that certain assertions are not materially misstated include the following: An entity that conducts its business using %( to initiate orders for the purchase and delivery of goods based on predetermined rules of what to order and in what quantities and to pay the related accounts payable based on systemEgenerated decisions initiated upon the confirmed receipt of goods and terms of payment. )o other documentation of orders placed or goods received is produced or maintained, other than through the %( system. An entity that provides services to customers via electronic media (for example, an %nternet service provider or a telecommunications company) and uses %( to create a log of the services provided to its customers, initiate and process its billings for the services and automatically record such amounts in electronic accounting records that are part of the system used to produce the entity6s financial statements.

Re+ision o! Ris2 Assess(ent

(he ris+ assessment is based on available audit evidence B this may change during the course of the audit as additional audit evidence is obtained/ (he auditor may need to revise his ris+ assessment and modify the further audit procedures accordingly/

&ommunicating with +hose &harged with Governance and $anagement

(he auditor should ma+e those charged with governance or management aware, as soon as practicable, and at an appropriate level of responsibility, of material wea+nesses in the design or implementation of internal control which have come to the auditor6s attention.

Documentation
3ocumentation should cover: >D

(he discussion among the engagement team Gey elements of the understanding obtained (he sources of information (he ris+ assessment process (he identified and assessed ris+s ignificant ris+s evaluated &is+s evaluated for which substantive procedures alone

Sma** com$an!5 reference#:

#ara 59 B small entities have less formal objectives and strategies/ we need to observe, and enquire with management #ara 9D B same for measuring performance, but management will always have some +ey indicators #ara 9? B when judging relevance of controls, si$e of entity is a valid consideration #ara == B controls are more limited, and more easily overridden, in small entities #ara >A B in small companies, ris+ assessment processes are less formal

MATERIALIT5 ISA .-/

%)(&.37"(%.) (he purpose of this standard is to provide guidance on: &esponsibility of the auditor is to consider the materiality and its relationship with audit ris+. %aterialit.: %nformation is material if its omission or misstatement could influence the economic decisions of users ta+en on the basis of the financial statements. (he assessment of what is material is a matter of professional judgment. >-

 ,ateriality can be qualitative or quantitative. @ualitative materiality means that the decision of the user is affected for any reason not related to amount. (%.e. illegal payments, inadequate description of accounting policy, non compliance of law and regulation, breach of social responsibility) (he auditor should consider the effect of smaller amount of misstatement that could cumulatively become material. ,ateriality should be considered at two different levels: At the financial statement level At the account balance2class of transaction2 disclosure level 'or materiality the auditor should consider the regulatory requirement which could result di$$erent % teri !it* !e&e!" $or di$$erent ccount + ! nce 3 teri !it* i" con"idered +* the uditor when At #! nning "t ge in deter%ining the n ture ti%ing nd e)tent o$ udit #rocedure" 4hen e& !u ting the e$$ect o$ %i""t te%ent on uditor-" re#ort( RELATIONS3IP BETWEEN MATERIALIT5 AND AUDIT (IS? The uditor t ,e" n in&er"e re! tion"hi# +etween the udit ri", nd the % teri !it* !e&e!( 4hen the udit ri", incre "e the uditor reduce" the % teri !it* !e&e!' hence incre "ing the " %#!e "i/e nd reducing the detection ri",. *e should always consider the materiality with reference to audit ris+ *hen the audit ris+ increases the auditor can either: &educe the ris+ of material misstatement by extending test of controls .& &educing the detection ris+ by modifying the nature timing and extent of audit procedures Auditor6s assessment of materiality can be different at the planning stage and at the time when the effects of misstatement is considered because the auditor can become aware of circumstances which were not +nown to him at the time of planning.

>1

 To erab e error, The maximum error the auditor can tolerate. (olerable error is an amount lower or equal to materiality. (he more the margin of safety requires the lower the tolerable error would need to be.

(olerable error never exceed ,ateriality E3A,UATING T2E EFFECTS OF %ISSTATE%ENT (he objective of the audit is to express an opinion whether the financial statements are free from !aterial !isstate!ents (he auditor considers the misstatement with the tolerable error (otal misstatement means ( pecific errors identified by the auditor including the effects of misstatement identified in the prior audits) M projected errors %f the misstatement approaches the materiality level the auditor needs to reduce the audit ris+ by extending the audit procedures or requesting management to adjust the financial statements. %n any event, management may need to adjust the financial statements for the misstatements identified. %f management does not adjust the misstatement the auditor should consider the impact on the auditors report. Auditor# to a##e## re$ortin" materia*it! u#e t Pre6tax income Net 7or after6tax8 income Gro## re'enue E/uit! Tota* a##et# ).(!: ((his chart is only for e fo**o(in" materia*it! "uide*ine#: =@*+A 96-:; :.96-; =@*+A :.96-; guidance purposes)

*here an entityJs results are expected to be NnormalN, then reporting materiality is based on after tax income amounts. 0owever, where the entity incurs losses, has potential going concern problems or the results are in other ways unusual, materiality may be based on one or more of the other factors referred to above.

>5

 'or example, if the entity is incurring losses, both before and after tax, the auditor may use total assets or total revenue, whichever is the greater. (he final assessment of reporting materiality is subjective and depends on the auditorJs perception of, for example, what information is relevant, who the users of the financial statements are, what decisions the users may ma+e and what would influence those decisions. )ote that financial statements may be materially misstated as a result of either a quantitative misstatement (in relation to its monetary value) or a qualitative misstatement (in relation to its accuracy of presentation, disclosure, description

AUDIT E8IDENCE ISA ;//

%)(&.37"(%.) (he purpose of this standard is to provide guidance on: *hat constitutes audit evidence in an audit of financial statements (he quantity and quality of audit evidence to be obtained, and (he audit procedures that auditors use for obtaining that audit evidence. Audit evidence assists the auditor in drawing an opinion on the financial statements. What #oes the )on)ept o! a%#it e+i#en)e (ean' >9

 Audi t evidence is the by product of the audit procedures. (he result of audit procedures in the form of evidence is called audit evidence. :Audit evidence; is all the information used by the auditor in arriving at the conclusions on which the audit opinion is based, and includes the information contained in the accounting records underlying the financial statements and information. (he auditor in expressing the audit opinion provides a reasonable assurance after considering the sufficient appropriate audit evidence. Auditors are not expected to address all information that may exist. Audit evidence, which is cumulative in nature, includes audit evidence obtained from audit procedures performed during the course of the audit and may include audit evidence obtained from other sources. Accounting records are basically the underlying evidence that the financial statements are consistent. ,erely by reviewing the accounting records the auditor can not obtain the sufficient appropriate audit evidence and procedures li+e inquiry confirmations etc are required to be performed to support the audit opinion.

S%!!i)ient appropriate a%#it e+i#en)e, The a'ditor in e5 ressin$ the a'dit o inion ro&ides a reasona-le ass'rance after considerin$ the s'fficient a ro riate a'dit e&idence: %t is difficult to set out precisely as to what constitute sufficient audit evidence. (he slandered sets out certain indicators to judge the sufficiency and appropriateness of audit e$i ence. Audit ris+ and materiality !xperience gained in previous audit &esult of audit procedures &eliability of audit evidence ,ufficiency is the measure of the (uantit" of au it e$i ence.

><

 (he quantity of audit evidence needed is affected by the ris+ of misstatement: (he greater the ris+ (inherent ris+ and control ris+), the more audit evidence is li+ely to be required) (he lower the detection ris+ the auditor can assume, the higher the audit evidence would need to be. Appropriateness of audit evidence relates to the quality, reliability, persuasiveness. (he auditor uses the professional judgment in analy$ing the quality of audit evidence. Accordingly, the sufficiency and appropriateness of audit evidence are interrelated. 0owever, the poor quality of the audit evidence can not be supported by the higher quantity. (he quality of audit evidence needed is affected by the ris+ of misstatement (the higher the (ualit"# the less au it e$i ence ma" !e re(uire What are the factors which affects the reliability of audit evidence? (he reliability of audit evidence is influenced by its source and by its nature and is dependent on the individual circumstances under which it is obtained. There are certain gui e lines ;generali0ations which are use !" au itor to e$aluate appropriateness of au it e$i ence. 'u it e$i ence in written form is more relia!le than oral. 'u it e$i ence in the form of original is more relia!le than photo copies. 'u it e$i ence o!taine from e%ternal sources is more relia!le than au it e$i ence o!taine from internal sources. 'u it e$i ence o!taine irectl" is more relia!le than au it e$i ence through inference. 'u it e$i ence o!taine from internal sources is more relia!le when internal controls are effecti$e. 'n au it rarel" in$ol$es the authentication of ocumentation# nor is the au itor traine as or e%pecte
to !e an e%pert in such authentication. /owe$er# the au itor consi ers the relia!ilit" of the information to !e use as au it e$i ence.( he can appoint e%pert for an" authentication-

The au itor or inaril" o!tains more assurance from consistent au it e$i ence o!taine from ifferent sources or of a ifferent nature than from items of au it e$i ence consi ere in i$i uall". In a ition# o!taining au it e$i ence from ifferent sources or of a ifferent nature ma" in icate that an in i$i ual item of au it e$i ence is not relia!le. The au itor consi ers the relationship !etween the cost of o!taining au it e$i ence an the usefulness of the information o!taine . /owe$er# the matter of ifficult" or e%pense in$ol$e is not in itself a $ali !asis for omitting an au it proce ure for which there is no alternati$e.

>=

 (he auditor to obtain reliable audit evidence, the information upon which the audit procedures are based needs to be sufficiently complete and accurate. -inancial statements assertions 'inancial statements are responsibility of entity6s management. (he financial statements represent a series of management assertion. %t is the responsibility of auditor to obtain and evaluate audit evidence to verify such assertions. A given set of audit procedures may provide audit evidence that is relevant to certain assertions, but not others. 'or example: .ne assertion can be verified by one audit evidence. ,any assertions can be verified by many audit evidences. ,any assertions can be verified by one audit evidence. 'ssertions use !" the au itor fall into the following categories: '. 'ssertions a!out profit loss account: 6. Occurrence@transactions an e$ents ha$e !een occurre an recor e ) 8. Completeness@all transactions an e$ents are completel" recor e <. 'ccurac"@amounts an other ata relating to recor e transactions appropriatel". =. Cutoff@transactions an e$ents ha$e !een recor e in the correct accounting perio . A. Classification@transactions an e$ents ha$e !een recor e in the proper accounts. :. 'ssertions a!out account !alances at the perio en : 6. 5%istence@assets# lia!ilities# an e(uit" interests e%ist. 8. Rights an o!ligations@the entit" hol s or controls the rights to assets# an lia!ilities are the o!ligations of the entit". <. Completeness@all assets# lia!ilities an e(uit" interests that shoul ha$e !een recor e ha$e !een recor e . =. Baluation an allocation@assets# lia!ilities# an e(uit" interests are inclu e in the financial statements at appropriate amounts. C. 'ssertions a!out presentation an isclosure: >>

6. Occurrence an rights an o!ligations9 isclose e$ents# transactions# an other matters ha$e occurre . 8. Completeness@all isclosures that shoul ha$e !een inclu e in the financial statements ha$e !een inclu e . <. Classification an un erstan a!ilit"@financial information is appropriatel" presente an escri!e # an isclosures are clearl" e%presse . =. 'ccurac" an $aluation@financial an other information are isclose fairl" an at appropriate amounts. The follo#in$ ta-le #o'ld hel assertions: A !&(%.) &!4A(!3 (. A"".7)( 8A4A)"! A"".7)( 8A4A)"!2 #&! !)(A(%.) A)3 3% "4. 7&! A"".7)( 8A4A)"! 'nderstandin$ the !O#4A%)A(%.) assets and liabilities exist appropriately valued right to use the asset and obligation to pay liability no unrecorded transaction transaction and event pertains to the entity transactions are appropriately recorded recorded in the correct accounting period recorded in the appropriate accounts

!O% (!)"! PA47A(%.) &%C0( A)3 .84%CA(%.)

".,#4!(!)!

A"".7)( 8A4A)"!2 "4A .' (&A) A"(%.)2 #&! !)(A(%.) A)3 3% "4. 7&! "4A .' (&A) A"(%.)2#&! !)(A(%.) A)3 3% "4. 7&! "4A .' (&A) A"(%.)2 #&! !)(A(%.) A)3 3% "4. 7&! "4A .' (&A) A"(%.)

.""7&&!)"!

A""7&A"L

"7(.''

"4A

%'%"A(%.)

"4A .' (&A) A"(%.)2 #&! !)(A(%.) A)3 3% "4. 7&!

>?

 Audit Procedure# for O)tainin" Audit E'idence: What are the procedures which an auditor should perform to obtained audit evidence? 7ollowing are au it proce ures which are performe !" the au itor in o!taining 'u it e$i ence Risk assessment proce ures Test of control &u!stanti$e proce ures (isk assess!ent roced'res:

&is+ assessment procedures provide audit evidence about areas where there is a high ris+ of material misstatements. Risk assessment proce ures do not themselves provide audit evidence about misstatements, they only identify ris+ of material misstatements that is why the auditor should perform further audit procedures i.e.: (est of controls and substantive procedures Test of control: (est of controls are performed to assess the effectiveness of the internal control and to support a lower control ris+. (he management is responsible for the suitable design and effective operations of accounting and internal control systems.

(he auditor tests the design and operation of internal controls by performing (est of control procedures. (est of controls are necessary in following circumstances: *hen there is an expectation that the controls are effective and to support the lower control ris+ *hen the substantive procedures do not provide sufficient appropriate audit evidence to reduce the ris+ to an acceptably low level. 0owever when the auditor expect the control to be ineffective then the auditor assumes the higher control ris+ and reduces the detection ris+ by extending the nature timing and extent of substantive audit procedures. S'-stanti&e roced'res

>A

ubstantive procedures are performed to identify the material misstatements is the financial statements. ubstantive procedures are of two types -. (! ( .' 3!(A%4 .' (&A) A"(%.) 1. A)A4L(%"A4 &!P%!* #&."!37&!

(est of details of transaction means the details testing of account balance and class of transactions by performing procedures li+e "onfirmations to debtors, creditors or review of the subsequent payments Analytical procedures are analysis of significant ratios and trends to identify the deviations or variations. Analytical procedures are performed when there exist a plausible relationship. (he analytical review can be done by "omparison of the current year with the prior years "omparison of current year with the budgets "omparison of current year with the industry averages Analytical review involves considering of both the financial and non financial data %rrespective of the effectiveness of internal controls the control ris+ cannot be reduced to $ero as there are inherent limitations of internal control system, therefore there would always be a need to perform substantive procedures. What are the (o#es o! obtainin" a%#it e+i#en)e' 'ollowing are the modes of obtaining audit evidence: A. %)@7%&L %nquiry consists of see+ing information of +nowledgeable persons, both financial and nonEfinancial, throughout the entity or outside the entity. %n respect of some matters, the auditor obtains written representations from management to confirm responses to oral inquiries 8. %) #!"(%.)

?D

 %nspection consists of examining records or documents, whether internal or external, in paper form, electronic form, or other media. Inspection of tangi!le assets consists of ph"sical e%amination of the assets. ". .8 !&PA(%.) .bservation consists of loo+ing at a process or procedure being performed by others 3. &!#!&'.&,A)"! &eEperformance is the auditor6s independent execution of procedures or controls that were originally performed as part of the entity6s internal control !. ".)'%&,A(%.) "onfirmation, which is a specific type of inquiry, is the process of obtaining a representation of information or of an existing condition directly from a third party. "onfirmations are frequently used in relation to account balances and their components, but need not be restricted to these items. '. &!"A4"74A(%.) &ecalculation consists of chec+ing the mathematical accuracy of documents or records. &ecalculation can be performed through the use of information technology, for example, by obtaining an electronic file from the entity and using "AA(s to chec+ the accuracy of the summari$ation of the file. C. A)A4L(%"A4 &!P%!* Analytical procedures consist of evaluations of financial information made by a study of plausible relationships among both financial and nonEfinancial data. (hese procedures can be performed as &% G A ! ,!)( #&."!37&! , (! ( .' ".)(&.4 .& 78 (A)(%P! #&."!37&! to obtain audit evidence depending upon their intended use. AUDIT (IS? 2AS T2(EE CO%PONENETS *: IN2E(ENT (IS? ): CONT(O, (IS? ?-

;: DETECTION (IS? IN2E(ENT (IS? is the susceptibility of an account balance or class of transaction to misstatement, assuming that there are no related internal controls. 'or example cash in hand by its nature susceptible to misstatement CONT(O, (IS? is the ris+ that the internal control of an entity would not detect and correct the misstatement. %nternal controls have some inherent limitations for example ,anagement override of a control or the internal controls are directed towards routine transactions 8oth inherent ris+ and control ris+ are client specific ris+

DETECTION (IS? is the ris+ that the audit procedures would not detect a material misstatement. (he auditor can reduce the detection ris+ by: %n case the detection ris+ relates to sampling ris+ then by extending the audit procedures %n case the detection ris+ relates to non sampling ris+ then by proper supervision, review and planning

"2EN T2E CONT(O, AND IN2E(ENT (IS? A(E 2IG2 T2E AUDITO( ASSU%ES A ,O"E( DETECTION (IS? TO (EDUCE AUDIT (IS? TO AN ACCEPTAB,7 ,O" ,E3E, 4hen !ower detection ri", i" ""u%ed then S %#!e "i/e i" incre "ed S %#!e ri", i" reduced Non " %#!ing ri", i" reduced S ti"$ ction !e&e! incre "e" E)tent o$ udit #rocedure" i" incre "ed The uditor ""e""e" the ri", $or e ch % teri ! ccount + ! nce nd c! "" o$ tr n" ction t the ""ertion !e&e! &is+ based auditing means that the auditor would assess the ris+ and on that basis would determine the nature timing and extent of audit procedures. &is+ would determine the extent of testing to be performed. ?1

 E<TERNAL CONFIRMATION ISA ;/;

INTODUCTION: (he purpose of this % A) is to provide guidance on use of external confirmations as a means of obtaining audit evidence. E5ternal confir!ation is the process of obtaining and evaluating audit evidence through a representation of information or an existing condition directly from a third party in response to a request for information about a particular item affecting assertions in the financial statements or related disclosures. When an# *here e0terna )on!ir(ation )an be %se# to obtain s%!!i)ient appropriate a%#it e+i#en)e' (he auditor should determine whether the use of external confirmations is necessary to obtain sufficient appropriate audit evidence at the assertion level. !xternal confirmations are frequently used in relation to account balances and their components, but need not be restricted to these items. 'or example, the auditor may request external confirmation of the terms of agreements or transactions an entity has with third parties. (he confirmation request is designed to as+ if any modifications have been made to the agreement, and if so what the relevant details are. !xternal confirmations may also be used to obtain audit evidence about the absence of certain conditions, for example, the absence of a :side agreement; that may influence revenue recognition. .ther examples of situations where external confirmations may be used include the following: 8an+ balances and other information from ban+ers. Accounts receivable balances. toc+s held by third parties at bonded warehouses for processing or on consignment.

#roperty title deeds held by lawyers or financiers for safe custody or as security.

?5

 %nvestments purchased from stoc+bro+ers but not delivered at the balance sheet date. 4oans from lenders. Accounts payable balances. What are the !a)tors *hi)h )an a!!e)t the re iabi it& o! a%#it e+i#en)e obtaine# !ro( e0terna )on!ir(ation' 'actors affecting the reliability of confirmations include (he control the auditor exercises over confirmation requests and responses, (he characteristics of the respondents, and Any restrictions included in the response or imposed by management. What assertions are +eri!ie# o! a))o%nt re)ei+ab e *hen an a%#itor per!or(s pro)e#%re o! e0terna )on!ir(ation' !xternal confirmation of an account receivable provides reliable and relevant audit evidence regarding the existence of the account as at a certain date. "onfirmation also provides audit evidence regarding the operation of cutoff procedures. 0owever, such confirmation does not ordinarily provide all the necessary audit evidence relating to the valuation assertion, since it is not practicable to as+ the debtor to confirm detailed information relating to its ability to pay the account.

De#i"n of t e Externa* Confirmation Re/ue#t:

What are the responsibi ities o! an a%#itor re"ar#in" the #esi"nin" e0terna )on!ir(ation re$%est' (he auditor should tailor external confirmation requests to the specific audit objective. *hen designing the request, the auditor considers: a. (he assertions being addressed and

?9

b. (he factors those are li+ely to affect the reliability of the confirmations. 'actors such as: (he form of the external confirmation request, #rior experience on the audit or similar engagements, (he nature of the information being confirmed, and (he intended respondent, (hese factors affect the design of the requests because these factors have a direct effect on the reliability of the audit evidence obtained through external confirmation procedures. Also, in designing the request, the auditor considers the type of information respondents will be able to confirm readily since this may affect the response rate and the nature of the audit evidence obtained. "onfirmation requests ordinarily include management6s authori$ation to the respondent to disclose the information to the auditor. &espondents may be more willing to respond to a confirmation request containing management6s authori$ation, and in some cases may be unable to respond unless the request contains management6s authori$ation.

0#e of Po#iti'e and Ne"ati'e Confirmation#:

(he auditor may use positive or negative external confirmation requests or a combination of both. "hat is the !eanin$ of ositi&e confir!ation and #hen it is s'ita-le to send ositi&e confir!ation reB'est/ A positive external confirmation request as+s the respondent to reply to the auditor in all cases either by indicating the respondent6s agreement with the given information, or by as+ing the respondent to fill in information. A response to a positive confirmation request is ordinarily expected to provide reliable audit evidence. (here is a ris+/ however, that a respondent may reply to the confirmation request without verifying that the information is correct. (he auditor is not ordinarily able to detect whether this has occurred. (he auditor may reduce this ris+, however, by using positive confirmation requests that do not state the amount (or other information) on the confirmation request, but as+ the respondent to fill in the amount or furnish other information. .n the other hand, use of this type of :blan+; confirmation request may result in lower response rates because additional effort is required of the respondents. ?<

 "hat is the !eanin$ of ne$ati&e confir!ation and #hen it is s'ita-le to send ne$ati&e confir!ation reB'est/ A negative external confirmation request as+s the respondent to reply only in the event of disagreement with the information provided in the request. 0owever, when no response has been received to a negative confirmation request, the auditor remains aware that there will be no explicit audit evidence that intended third parties have received the confirmation requests and verified that the information contained therein is correct. Accordingly, the use of negative confirmation requests ordinarily provides less reliable audit evidence than the use of positive confirmation requests, and the auditor considers performing other substantive procedures to supplement the use of negative confirmations. )egative confirmation requests may be used to reduce the ris+ of material misstatement to an acceptable level when: (he assessed ris+ of material misstatement is lower/ A large number of small balances are involved/ A substantial number of errors is not expected/ and (he auditor has no reason to believe that respondents will disregard these requests. "hen it is s'ita-le to send a co!-ination of ositi&e and ne$ati&e e5ternal confir!ations reB'est/ A combination of positive and negative external confirmations may be used. 'or example, where the total accounts receivable balance comprises a small number of large balances and a large number of small balances, the auditor may decide that it is appropriate to confirm all or a sample of the large balances with positive confirmation requests and a sample of the small balances using negative confirmation requests (

%ana"ement Re/ue#t#:
What is the a%#itor4s #%t& in )ase o! ba an)es !or *hi)h (ana"e(ent has re$%este# !or not sen#in" the )on!ir(ation' *hen the auditor see+s to confirm certain balances or other information, and management requests the auditor not to do so, the auditor should consider whether there are valid grounds for such a request and obtain audit evidence to support the validity of management6s requests. %f the auditor agrees to management6s request not to see+ external confirmation regarding a particular matter, the auditor should apply alternative audit procedures to obtain sufficient appropriate audit evidence regarding that matter %f the auditor does not accept the validity of management6s request and is prevented from carrying out the confirmations, there has been a limitation on the scope of the auditor6s wor+ and the auditor should consider the possible impact on the auditor6s report. *hen considering the reasons provided by management, the auditor applies an attitude of professional s+epticism and considers whether the request has any implications regarding management6s integrity. ?=

 (he auditor considers whether management6s request may indicate the possible existence of fraud or error.

C aracteri#tic# of Re#$ondent#:
Is it ne)essar& to %n#erstan# the )hara)teristi)s o! respon#ents *hen sen#in" )on!ir(ations' (he reliability of audit evidence provided by a confirmation is affected by the respondent6s competence, independence ' authority to respond, +nowledge of the matter being confirmed, and objectivity. 'or this reason, the auditor attempts to ensure, where practicable, that the confirmation request is directed to an appropriate individual. (he auditor also assesses whether certain parties may not provide an objective or unbiased response to a confirmation request. %nformation about the respondent6s competence, +nowledge, motivation, ability or willingness to respond may come to the auditor6s attention. (he auditor considers the effect of such information on designing the confirmation request and evaluating the results, including determining whether additional audit procedures are necessary. (he auditor also considers whether there is sufficient basis for concluding that the confirmation request is being sent to a respondent from whom the auditor can expect a response that will provide sufficient appropriate audit evidence. 'or example, the auditor may encounter significant unusual yearEend transactions that have a material effect on the financial statements, the transactions being with a third party that is economically dependent upon the entity. %n such circumstances, the auditor considers whether the third party may be motivated to provide an inaccurate response.

T e Externa* Confirmation Proce##:

What are the )ontro s an a%#itor sho% # p%t in p a)e *hen sen#in" the )on!ir(ation to e0terna parties' "hen erfor!in$ confir!ation roced'res0 the a'ditor sho'ld !aintain control o&er: The rocess of selectin$ those0 to #ho! a reB'est #ill -e sent0 The re aration and sendin$ of confir!ation reB'ests0 and The res onses to those reB'ests (he auditor ensures that it is the auditor who sends out the confirmation requests, that (he requests are properly addressed, and that %t is requested that all replies are sent directly to the auditor. (he auditor considers whether replies have come from the purported senders.

No Re#$on#e to a Po#iti'e Confirmation Re/ue#t

The au itor shoul perform alternati$e au it proce ures where no response is recei$e to a positi$e e%ternal confirmation re(uest. The alternati$e au it proce ures shoul !e such as to pro$i e au it e$i ence a!out the assertions that the confirmation re(uest was inten e to pro$i e.

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 Where no response is recei$e # the au itor or inaril" contacts the recipient of the re(uest to elicit a response. Where the au itor is una!le to o!tain a response# the au itor uses alternati$e au it proce ures.

Re*ia)i*it! of Re#$on#e# Recei'ed

(he auditor considers whether there is any indication that external confirmations received may not be reliable. (he auditor considers the response6s authenticity and performs audit procedures to dispel any concern. (he auditor may choose to verify the source and contents of a response in a telephone call to the purported sender. %n addition, the auditor requests the purported sender to mail the original confirmation directly to the auditor. *ith everEincreasing use of technology, the auditor considers validating the source of replies received in electronic format (for example, fax or electronic mail). .ral confirmations are documented in the wor+ papers. %f the information in the oral confirmations is significant, the auditor requests the parties involved to submit written confirmation of the specific information directly to the auditor(

Cau#e# and Fre/uenc! of Exce$tion#: *hen the auditor forms a conclusion that the confirmation process and alternative audit procedures have not provided sufficient appropriate audit evidence regarding an assertion, the auditor should perform additional audit procedures to obtain sufficient appropriate audit evidence. %n forming the conclusion, the auditor considers the: &eliability of the confirmations and alternative audit procedures/ )ature of any exceptions, including the implications, both quantitative and qualitative of those exceptions/ and Audit evidence provided by other audit procedures. 8ased on this evaluation, the auditor determines whether additional audit procedures are needed to obtain sufficient appropriate audit evidence. Externa* Confirmation# Prior to t e <ear6end: *hen the auditor uses confirmation as at a date prior to the balance sheet to obtain audit evidence to support an assertion, (he auditor obtains sufficient appropriate audit evidence that transactions relevant to the assertion in the intervening period (remaining or un audited period) have not been materially misstated.

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 ANAL5TICAL PROCEDURES ISA ;-/

%)(&.37"(%.): (he purpose of this % A <1D is to guidance on the application of analytical procedures during an audit. Anal.tical roced'res:

:Analytical procedures; means the analysis of significant ratios and trends including the resulting investigation of fluctuations and relationships that are inconsistent with other relevant information or deviate from predicted amounts. Analytical procedures include: (he comparison of financial information with, for example: "omparable information for prior periods/ Anticipated results E e.g. budgets, forecasts or auditor6s expectations/ imilar industry information

(he consideration of relationships between elements of financial information expected to conform to a predictable pattern, e.g. gross profit margins/ (he consideration of relationships between financial information and relevant nonEfinancial information, e.g. payroll costs to number of employees %t is the study of relationship among the financial and nonEfinancial data including the investigation of identified fluctuations and relationships which are in consistent with others or which deviated from predicted amount.

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 !xamples: (he relationship between the salary cost of a department and the no of employees &elationship between the units dispatched by a cement company and no of cement bags consumed &elationship between the )ewspapers used and no of rooms occupied in a hotel 7 ! .' A)A4L(%"A4 #&."!37&! 8L (0! A73%(.& Ana &ti)a pro)e#%res are %se# in the three sta"es o! the a%#it, *9 To assist the a'ditor in lannin$ the nat're0 ti!in$ and e5tent of other a'dit roced'resC )9 As s'-stanti&e roced'res #hen their 'se can -e !ore effecti&e or efficient than tests of detailsC and ;9 As an o&erall re&ie# of the financial state!ents in the final re&ie# sta$e of the a'dit:

7 ! .' A)A4L(%"A4 #&."!37&! 8L (0! A73%(.&

=7 Use o! ana &ti)a pro)e#%res as a ris2 assess(ent pro)e#%res to %n#erstan# the entit& an# en+iron(ent (he auditor should apply analytical procedures at the planning stage to assist in understanding the business and in identifying areas of potential ris+. (% A 5-< #ara -D says) Analytical review procedures should be applied initially which might indicate the deviations and also indicate the ris+s associated with the ' . (he auditor before using the analytical procedures should have a clear understanding of plausible relationships and expected pattern that would be used as a bench mar+ for the analysis. Application of these procedures might indicate the areas about which the auditor was unaware and will also assist in deciding the nature timing and extent of the audit procedures. !xample: After getting the first draft financial statement and at the time of ma+ing an over all audit plan the auditor would calculate the GP (ATIO0 CU((ENT (ATIO0 and NP (ATIO AND DEBTO(8( TU(NO3E( (ATIO. (he auditor would have a benchmar+ in mind about the results of the ratios, which would be guided by the prior year6s accounts, industry data or the general understanding of the auditor about the entity. After calculating the actual ratios auditor might identify areas of concern and misstatement. -7 Use o! Ana &ti)a pro)e#%res as s%bstanti+e pro)e#%res 8efore discussing we should +now what the substantive procedures are: S'-stanti&e roced'res are the procedures performed to detect a material misstatement at the assertion level and includes AD

-) (! ( .' 3!(A%4 .' (&A) A"(%.) 1) A)A4L(%"A4 #&."!37&! (he use of any of the above depends on many factors, which would all be directed towards the fact that the objective in effectively and efficiently achieved in reducing the ris+ to an acceptably low level. As discussed earlier auditor would need the information to apply analytical procedures (ex budgets, non financial information). (he auditor would inquire from the management about the information and at times it is efficient to use the analytical procedures as substantive procedures provided that the auditor is satisfied that the information is prepared appropriately. Whi e %sin" the ana &ti)a re+ie* pro)e#%res the a%#itor *o% # nee# to )onsi#er, A. uitability of using the A&# as substantive procedures 7sing A&# as a substantive procedure would generally be applicable where there is a large volume of data which is tend to be predictable over the period and based on the expectation that the relationship exists between the data and this might provide evidence about the accuracy, occurrence and completeness about the information. (he reliance to be placed on the A&# as substantive would depend on the following. a) The ""e""%ent o$ the ri", o$ % teri ! %i""t te%ent( (he auditor considers the understanding of the entity and its internal control, the materiality and li+elihood of misstatement of the items involved, and the nature of the assertion in determining whether substantive analytical procedures are suitable. 'or example, if controls over sales order processing are wea+, the auditor may place more reliance on tests of details rather than substantive analytical procedures for assertions related to receivables.

b) An* te"t" o$ det i!" directed tow rd the " %e ""ertion( ubstantive analytical procedures may also be considered appropriate when tests of details are performed on the same assertion. 'or example, when auditing the collectability of accounts receivable, the auditor may apply substantive analytical procedures to an aging of customers6 accounts in addition to tests of details on subsequent cash receipts. 8. &eliability of the data: (he reliability of data is influenced by its source and by its nature and is dependent on the circumstances under which it is obtained. %n determining whether data is reliable for purposes of designing substantive analytical procedures, the auditor considers the following:

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ources of information available(external sources are more reliable than internal)

"omparability of the information available )ature and relevance of information available "ontrols over preparation of information (he auditor may test the control over the preparation of information and at times the nonEfinancial information can be tested in conjunction with the financial information. *hen such controls are effective, the auditor has greater confidence in the reliability of the information and, therefore, in the results of substantive analytical procedures ". *hether the expectation is sufficiently precise %n assessing whether the expectation can be developed sufficiently precise to identify a material misstatement at the desired level of assurance, the auditor considers factors such as the following: The ccur c* with which the e)#ected re"u!t" o$ "u+"t nti&e n !*tic ! #rocedure" c n +e #redicted. 'or example, the auditor will ordinarily expect greater consistency in comparing gross profit margins from one period to another than in comparing discretionary expenses, such as research or advertising.

3egree at which information can be disaggregated 'or example, analytical procedures are generally more effective when applied to individual sections of a business. Availability of the information 'or example, the auditor considers whether financial information, such as budgets or forecasts, and nonEfinancial information, such as the number of units produced or sold, is available to design substantive analytical procedures. %f the information is available, the auditor also considers the reliability of the information 3. 3ifference between the recorded and the expected amount is Acceptable (he tolerance limit needs to be set and then the actual results are compared with the expected results and the factors that would be involved in setting the tolerance would depend on the materiality etc. %f the auditor is involved in an interim audit the substantive procedures can be applied at that stage and later at the final stage once again provided auditor thin+s that the final figures would also confirm the expected pattern.

(# .se of analytical procedures as an over all review at the end of the audit
A1

 The au itor shoul appl" anal"tical proce ures at the en of the au it when forming an o$erall conclusion as to whether the financial statements as a whole are consistent with the au itor,s knowle ge of the !usiness. The re$iew might confirm an corro!orate the au it e$i ences o!taine from other sources or it e$en in icates the other areas where the au itor woul nee to appl" a itional au it proce ures. /nvestigation of unusual items When anal"tical proce ures i entif" significant fluctuations or relationships that are inconsistent with other rele$ant information or that e$iate from pre icte amounts# the au itor shoul in$estigate an o!tain a e(uate e%planations an appropriate corro!orati$e e$i ence. The in$estigation of unusual fluctuations !egins with in(uiries of management# followe !": Corro!oration with the au itor,s un erstan ing of the entit" or with other e$i ences Use of a itional au it proce ures when the information pro$i e !" the management is not appropriate or the management oes not pro$i e an" information
Con) %#in" )o((ents, Anal.tical roced'res $enerall. ro&ide less relia-le s'-stanti&e e&idence than tests of detail: Therefore the. are rarel. 'sed as a sole so'rce of e&idence: The choice of AP to 'se #ill &ar. de endin$ on the ind'str. in #hich the a'ditor o erates and the data a&aila-le: J'd$!ent al#a.s needs to -e e5ercised #hen: Decidin$ #hich AP to 'seC Decidin$ #hich data to 'seC Identif.in$ relationshi sC and (eachin$ concl'sions

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 AUDIT SAMPLING AND OT3ER MEANS OF TESTING ISA ;./

%)(&.37"(%.): (esting all of the transactions entered into by an audit client would clearly be both impractical and uneconomic B consequently auditors have always had recourse to sampling in the course of gathering sufficient and appropriate audit evidence to support their audit opinion *hen designing audit procedures, the auditor should determine appropriate means for selecting items for testing so as to gather sufficient appropriate audit evidence to meet the objectives of the audit procedures : (he objective of the auditor when using audit sampling is: (o design and elect the audit sample,

#erform audit procedures on the sample items, and !valuate the results from the sample in a manner that will provide an appropriate basis for the auditor to draw conclusions about the population from which the sample is drawn. DEFINITIONS: -) Sa! lin$ means application of audit procedures to less then *++A of ite!s in a way that all sa! lin$ 'nits h &e ch nce o$ "e!ection 1) Sa! lin$ 'nit means individual items constituting a population (i.e. an account, a transaction, or document in support of transaction). ampling units are identified in relation to objective of test 5) Error with reference to test of control means control deviation, and misstatement when performing test of details 9) Ano!alo's error is an error which arises from an isolated event which is not representative of the total population, hence can not be projected <) Po 'lation is the entire set of data from which sample is selected

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Sa! lin$ risk &ampling risk is the risk that the sample is not representative of the population from which it is rawn an thus the au itor,s conclusion is different to that which woul !e reache if the whole population was e%amine . DIt !i$ht affect efficienc. or effecti&eness of the a'dit9 ampling ris+ has two components i. Q(he ris+ of incorrect rejection which arises when the sample indicates a higher level of errors than is actually the case or the ris+ that the auditor will conclude on the basis of the evidence that the controls are not wor+ing2that material error does exist when the controls are wor+ing2material error does not exist (type - error) (his situation is usually resolved by additional audit wor+ being performed. (his ris+ affects audit e$$icienc* but should not affect the validity of the resulting audit conclusion. ii. (he ris+ of incorrect acceptance when material error is not detected in a population because the sample failed to select sufficient items containing errors or the ris+ that the auditor will conclude on the basis of the evidence that the controls are wor+ing2that material error does not exist when the controls are not wor+ing2material error does exist (type 1error) (his ris+, which affects audit e$$ecti&ene"", can be quantified using statistical sampling techniques. Although it is possible that an unqualified auditors6 report could be issued inappropriately, such errors should be detected by other complementary audit procedures (assuming that the sample si$e is appropriate to the level of detection ris+). E5a! le: *hile u performs the ubstantive on 5DR of the population and the error u found was -DD,DDD and u project the same on the population and get the error amount of 555,DDD. 0ad u chec+ed the entire population the total error could be -1D,DDD (leads to additional audit procedures and affects the efficiency of the audit ADD,DDD(leads to in appropriate opinion and affects the effectiveness of the audit) &is+ related toK ample si$e.0ow the ris+ can be reducedK8y %ncreasing the sample si$e -) Non sa! lin$ risk arises from factor not related to sample si$e ( in appropriate procedures, auditor might misinterpret audit evidence) )onEsampling ris+ is when an auditor reaches an erroneous conclusion for reasons unconnected with the sampling procedures B for example in A<

circumstances where the auditor tests an item which is in error but does not appreciate that it is in error. )on sampling ris+ may arise due to following reasons: a. 'ailure to investigate significant fluctuations in relationships when placing reliance on analytical procedures/ and b. #lacing reliance on management representations as a substitute for other audit evidence that could reasonably be expected to be available. c. (he auditor6s evolution erroneously indicates that an account balance is not susceptible of material error while in fact it may be. "onsequently the detection ris+ and audit ris+ will not be appropriately determined. d. (he auditor incorrectly assessed that the design and operations of control is effective to prevent and detect misstatements. e. %nappropriate procedures adopted by auditor. f. ,ost audit evidences are persuasive rather than conclusive. %n many cases it is difficult to obtain conclusive audit evidence. ( i.e. allowance for doubtful accounts) g. ,isinterpretation of evidence. (%.e. in case of non response of a negative confirmation, the auditor concludes that the customer balance was correct. %n fact there is disagreement between client and customer but the response was not received due to postal problem). !xample: )egative confirmations were sent to the debtors when the postal system was not effective. &is+ related toK 0ow the ris+ can be reducedK Application of the audit procedures 8y proper supervision guidance and training

1) Stratification is a process of dividing a population into sub population 5) Ano!alo's error (he error which has occurred on a specific situation and it is not representative of the population 9) Tolera-le error is the maximum error the auditor is willing to accept nd "ti!! conc!ude th t the udit o+5ecti&e h " +een chie&ed( A=

 (olerable misstatement B A monetary amount set by the auditor in respect of which the auditor see+s to obtain an appropriate level of assurance that it is not exceeded by the actual misstatement in the population. (olerable rate of deviation B A rate of deviation from prescribed internal control procedures set by the auditor in respect of which the auditor see+s to obtain an appropriate level of assurance that it is not exceeded by the actual rate of deviation in the population. -) Statistical sa! lin$ means any approach to sampling that has the following characteristics: &andom selection of a sample/ and 7se of probability theory to evaluate sample results, including measurement of sampling ris+ A sampling approach that does not have above characteristics is considered nonEstatistical sampling. 1) Pro4ected !isstate!ents B (he auditor6s best estimate of misstatements in populations involving the projection of misstatements identified in audit samples to the entire populations from which the samples were drawn. The Fo o*in" tab e *o% # ) ari!& the basi) #e!initions, 8&!AG 7# .' (0! (."G %) (&A3! toc+ at factory -DD,DDD 8rea+ up of above & ,aterial S<DDDD *%# S 5DDDD ' Coods S 1DDDD toc+ at 8ranches 1<,DDD 8rea+ up of above & ,aterial S<DDD *%# S -?DDD ' Coods S 1DD toc+ with (hird party 5<,DDD 8rea+ up of above & ,aterial S5<DDD (otal toc+ ->D,DDD

(otal toc+ ->D,DDD is population &aw material, *%# and ' Coods are the individual ampling 7nits *hen u split the toc+ in (rade in toc+ at factory, branch and with third party the process is called tratification with each brea+ up is a sub population or a stratum. Means o! obtainin" a%#it e+i#en)e, A>

NATU(E: Ri", ""e""%ent #rocedure" USED FO(: 'or assessing ris+ and are used to obtain audit evidence DESC(IPTION: )ormally not part of sampling and the procedures li+e review of last year6s, A&# at the beginning etc are performed as the ris+ assessment procedures

NATU(E: Te"t o$ Contro!" USED FO(: 'or identifying the control deviations which indicate departures from adequate performance. DESC(IPTION: #erformed to identify the control deviations and to assess the control ris+. %f the auditor assesses that the control ris+ is high then no need to perform the (.". (he operation of a particular control is tested.

NATU(E: Su+"t nti&e Procedure" USED FO(: 7sed to identify the material misstatement in an account balance or a class of transactions account balances, and disclosures and substantive analytical procedures. DESC(IPTION: %t could either be Analytical review procedures or the test of details of transactions. (he purpose of substantive procedures is to obtain audit evidence to detect material misstatements at the assertion level.

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 When planning the au it proce ures to !e a opte # the ecision to sample account !alances an transactions is influence !": 1aterialit" an the num!er of items in the population) Inherent risk (of errors arising-) Rele$ance an relia!ilit" of e$i ence a$aila!le through non9sampling proce ures) an Costs an time in$ol$e . To o!tain the o$erall le$el of assurance re(uire # a cost9effecti$e com!ination of sampling an non9sampling proce ures shoul !e etermine . 'u it sampling proce ures are effecte in four stages: 6- &ample esign) 8- &ample selection) <- Testing (i.e.# performing the au it proce ure-) an =- 5$aluation APPROAC3 FOR SELECTING ITEMS TO OBTAIN AUDIT E8IDENCE: "hen desi$nin$ a'dit roced'res0 the a'ditor sho'ld deter!ine a ro riate !eans of selectin$ ite!s for testin$: (he means available to the auditor are: a) b) electing all items (-DDR examination)/ electing specific items/ and

c) Audit sampling (he decision as to which approach to use will depend on the circumstances, and (he application of any one or combination of the above means may be appropriate in particular circumstances. *hile the decision as to which means, or combination of means, to use is made on the basis of the ris+ of material misstatement related to the assertion being tested and audit efficiency, (he auditor needs to be satisfied that methods used are effective in providing sufficient appropriate audit evidence to meet the objectives of the audit #rocedure. SELECTING ITEMS, SE,ECTING *++A OF ITE% Applicable where the small number of high value transactions ignificance ma+es it necessary to test -DDR (legal and professional) AA

 &epetitive calculations ma+e it cost and time effective (for example, through the use of computerEassisted audit techniques ("AA(s). -DDR examination is unli+ely in the case of tests of controls/ 0owever, it is more common for tests of details. Selectin$ s ecific ite!s (he judgmental selection of specific items is subject to nonE sampling ris+. a) 0igh value or +ey items or significant items: (he auditor may decide to select specific items within a population because they are of high value, or exhibit some other characteristic, for example items that are suspicious, unusual, particularly ris+Eprone or that have a history of error. b) %tems over a certain amount (ex. amount exceeding tolerable error) c) %tems to test control (control on specific days: stri+e days) d) %tems to obtain information *hile selective examination of specific items from a class of transactions or account balance will often be an efficient means of gathering audit evidence, (he above methods are not sampling and there can be no element of sampling ris+ present: The ele!ent of non@sa! lin$ risk is resent: (he results of audit procedures applied to items selected in this way cannot be projected to the entire population. (he auditor considers the need to obtain sufficient appropriate audit evidence regarding the remainder of the population when that remainder is material. Statisti)a +ers%s Non>Statisti)a Sa(p in" Approa)hes Statistical sa! lin$ means any approach to sampling that has the following characteristics: &andom selection of a sample/ and 7se of probability theory to evaluate sample results, including measurement of sampling ris+ A sampling approach that does not have above characteristics is considered nonEstatistical sampling. Difference -et#een Statistical and Non@Statistical Sa! lin$ A roaches Statistical Sa! lin$ A roaches Non@Statistical Sa! lin$ A roaches

&tatistical sampling re(uires that sample items are

With non9statistical sampling# an au itor

-DD

selecte at ran om so that each sampling unit has a uses professional *u gment to select the known pro!a!ilit" of !eing selecte . items for a sample.
@uantitatively evaluation of sample result %t requires +nowledge of statistical methods @ualitative evolution of sample result %t does not required any statistical methods

The ecision whether to use a statistical or non9statistical sampling approach is a matter for the au itor,s *u gment &tatistical measurements of sampling risk are $ali onl" when the approach a opte has the characteristics of statistical sampling. The purpose of sampling is to raw conclusions a!out the entire population# it is important that the au itor selects a representati$e sample !" choosing sample items# which ha$e characteristics t"pical of the population# an so that !ias is a$oi e .
"hoice between statistical or non statistical sampling is based on: Auditor6s +nowledge of statistical techniques "ost vs. benefits relationships *hether the auditor requires an estimation of sampling ris+ *hether audit evidence is obtained through test of control or substantive test. Sa! le desi$n ample design, which may be set out in a sample plan, includes consideration of: Audit o+5ecti&e6"7 of the test/ Po#u! tion from which the sample is to be drawn/ S %#!ing unit1 &esults or conditions that will be regarded as error" or de&i tion"1 S %#!e "i/e( %n normal sampling techniques the following steps are followed. %dentification of the population 3efinition of an error "omputation the appropriate sample si$e !valuation of the results of sample. C aracteri#tic# of acce$ta)*e audit #am$*e 7 Sa(p in"?, En%(erate essentia )onsi#eration in se e)tion an# e+a %ation o! sa(p e res% t, (he auditor first considers the specific objectives to be achieved and the combination of audit procedures which is li+ely to best achieve those objectives. #opulations from which sample is selected should be a ro riate to meet the objective of audit procedures. #opulation should be co! lete because if the auditor wants to draw a conclusion on population then it should be complete. *hen the auditor selects the sample he should consider whether sa! lin$ risk is red'ced to an acce ta-l. lo# le&el: -D-

ample should be selected with the expectation that all sa! lin$ 'nits ha&e a chance of selection

*hen performing test of controls auditor is concerned ri!aril. #ith the fact that controls o erated effecti&el. thro'$ho't the eriod *hen performing tests of controls, the auditor generally ma+es an assess!ent of the rate of error the auditor expects to find in the population to be tested. *hen performing ubstantive procedures auditor is concerned #ith the !isstate!ents 'or test of details ro4ection is reB'ired, however no e5 licit ro4ection is needed for test of controls " the " %#!e error r te i" !"o the #ro5ected r te o$ error. 'or tests of details, the auditor generally ma+es an assess!ent of the e5 ected a!o'nt of error in the population. ample should be based upon objective of the audit test. ample should be s read o&er the #hole of acco'ntin$ eriod.

%f the o 'lation is of di&ersified characteristics, stratification is advisable. ample 'nit should be clearl. identified.

!rror detected in a sample should be analy$ed to deter mine #hether an ite! is act'all. an error. (he quality of error should also be considered. (he error result should be projected for whole of the population. So(e testin" pro)e#%res #o not in+o +e sa(p in" e0a(p e, Tr n" ction nd + ! nce" which' though $ew in nu%+er re o$ gre t "igni$ic nce in ter%" o$ "i/e: e(g( ! nd nd +ui!ding nd e)tr ordin r*.e)ce#tion ! ite%"( Non8ho%ogeneou" #o#u! tion where "orting wi!! h &e to t ,e #! ce +e$ore " %#!ing c n +e tte%#ted( S% !! #o#u! tion where "t ti"tic !' theor* wi!! cre te un cce#t +!e % rgin" o$ error( Te"ting 099: o$ ite%" in An !*tic ! #rocedure"1 -D1 #o#u! tion

 Te"t" in tot ! 6 !"o c !!ed #roo$" in tot ! or !ogic te"t"7 i(e(' c !cu! tion" o$ re "on +!ene"" + "ed on inde#endent!* &eri$ied d t 1 ;4 !,8through- te"t"' i(e(' tr cing $ew tr n" ction" in order to o+t in ,now!edge nd under"t nding o$ the de"ign nd o#er tion o$ ccounting nd intern ! contro! "*"te%"1 nd Other "e!ecti&e te"ting o$ "#eci$ic ite%"' e(g(' high8& !ue' ,e* nd unu"u ! 6+ut not re#re"ent ti&e7 ite%"( "hat are the li!itations of sa! lin$/ ample may not be representative of population

Auditor6s judgment is required in selecting sample si$e Tudgments are also required in drawing conclusion from sample result (he auditor may use inappropriate population or the population may not be complete.

Stratification &tratification in$ol$es i$i ing the population into homogeneous groups or su! populations.
Audit efficiency may be improved if the auditor stratifies a population by dividing it into discrete subEpopulations which have an identifying characteristic. (he objective of stratification is to reduce the variability of items within each stratum and therefore allow sample si$e to be reduced without a proportional increase in sampling ris+. ubEpopulations need to be carefully defined such that any sampling unit can only belong to one stratum

*hen performing tests of details, a class of transaction or account balance or is often stratified by monetary value. (his allows greater audit effort to be directed to the larger value items which may contain the greatest potential monetary error in terms of overstatement. imilarly, a population may be stratified according to a particular characteristic that indicates a higher ris+ of error, for example, when testing the valuation of accounts receivable, balances may be stratified by age.

-D5

 (he results of audit procedures applied to a sample of items within a stratum can only be projected to the items that ma+e up that stratum. (o draw a conclusion on the entire population, the auditor will need to consider the ris+ of material misstatement in relation to whatever other strata ma+e up the entire population SELECTION T3E SAMPLE MET3ODS Ran#o( se e)tion, ample is treated as random if each unit in population has an equal chance of being selected. &andom sampling may b used in non statistical sampling however statistical sampling can not be used without random sampling. S&ste(ati) se e)tion, %n systematic selection population si$e and sample si$e is +nown. ampling intervals are computed by dividing the number of items in the population by sample si$e. 'or example, if ?D items are selected from a population Df -=DD items, the auditor will select every 9Dth item. ystematic selection involves selecting item using constant interval between selections, the first interval having a random start. 8a %e *ei"hte# se e)tion, (his method is a variation of systematic selection method. 0ere population value (instead of units) is divided by the sample si$e to identify the items to be selected for testing. (he limitation of systematic selection based on monetary values are: %tems of high monetary values have greater chances to be selected. *here a few items represent substantially high values, the auditor may not be able to select number of items planned to be tested. All items in excess of sampling intervals are sure to be selected. 3apha:ar# se e)tion, uch selection refers to any non systematic way o selecting sample unit. ampling units are selected without any bias, 0owever it does not mean that the items are selected carelessly. B o)2 sa(p in", 8loc+ sampling is the practice of selecting contiguous transactions. (he auditor selects all items specified time processed on a particular day, wee+, or month. Sa(p e Si:e %n determining the sample si$e, the auditor should consider whether sampling ris+ is reduced to an acceptably low level. ample si$e is affected by the level of sampling ris+ that the auditor is willing to accept. -D9

 (he lower the ris+ the auditor is willing to accept, the greater the sample si$e will need to be. (he sample si$e can be determined by the application of a statisticallyE based formula or through the exercise of professional judgment objectively applied to the circumstances. Calc'lations of the Sa! le si1e E5a! le: 'ixed assets balance is 1<D,DDD,DDD ,ateriality S -D,DDD,DDD (olerable error S >,DDD,DDD (otal no of transactions -DD (ransactions exceeding tolerable error 1< (value -><,DDD,DDD) 9 transactions whose total value is 51,DDD,DDD pertains to a specific ris+ (each exceeding > million) 5 (ransactions valuing 1<DDDD pertains to a particular information

ample si$e )ature !xceeding (! pecific ris+ %nformation ). .' (&A) A"(%.) Palue 1< -><,DDD,DDD )o effectU )o effect 5 1<DDDD 1? UAlready included in the amount exceeding tolerable error.

8A4A)"! (&A) A"(%.) 4!'( -DDE1<E5S>1 4.* 3etection (1DR) <? (>1U.?) &% G ,.3!&A(! &% G (9AR) 5=(>1U.<-) 0%C0 &% G (><R) -?(>1U.1<)

Se e)tin" the sa(p e (he auditor should select items for the sample with the expectation that all sampling units in the population have a chance of selection. Per!or(in" the A%#it Pro)e#%re (he auditor applies appropriate auditing procedures to determine an audit value for each unit included in the sample.

-D<

 0owever, in some cases, selecting sampling for each unit may be missing or adequate documents may not be available. (he treatment of lac+ of sufficient evidence for sample unit selected will depend upon auditor6s judgment of over all sample evaluation. Cenerally, if the auditor concludes that the sample evaluation will not change even if supporting documents for sampling units are missing, he would not perform alternative procedures. %f the missing evidence has material impact on sample evaluation, he would perform alternative procedures to verify the balance.

Nature and Cau#e of Error#

The a'ditor sho'ld consider the sa! le res'lts0 (he nature and cause of any errors identified, and (heir possible effect on the particular audit objective and .n other areas of the audit. %t is not enough to quantify the error in population. (he auditor should also see the qualitative aspect of error. %n certain cases, the deviation rate may not be as relevant as the nature of the error discovered. 'or example if an error is caused because of fraud, additional auditing procedures need to be applied. (he cause of error and its impact on financial statements should be evaluated. #roblem may be caused by inadequate definition as to what constitutes an error. @ualitative evaluation involves error analysis. uch analysis includes consideration of matters li+e: %s the error an isolated case or common to all transactions in groupK %s it intentional or unintentionalK 0as the error resulted due to misunderstandingK "areless or override the control by managementK 3oes the error only affect one account or has pervasive effectK %n analy$ing the errors discovered, the auditor may observe that many have a common feature, for example, type of transaction, location, product line or period of time. %n such circumstances, the auditor may decide to identify all items in the population that possess the common feature, and extend audit procedures in that stratum. 'or example if the auditor6s test indicates unauthori$ed discount relating to sales invoices for a specific customer, he would chec+ all the invoices issued to such customer. (he auditor should also consider the possible effect of error on other areas of audit. 'or example error found in sales may also affect auditor6s conclusions on inventories, cost of goods sold and account receivable. ometimes, the auditor may be able to establish that an error arises from an isolated event that has not recurred other than on specifically identifiable occasions and is therefore not representative of similar errors in the population (an anomalous error). (o be considered an anomalous error, the auditor has to have a high degree of certainty that such error is not representative of the population. -D=

(he auditor obtains this certainty by performing additional audit procedures. (he additional audit procedures depend on the situation, but are adequate to provide the auditor with sufficient appropriate audit evidence that the error does not affect the remaining part of the population. Pro1e)tin" errors, (he auditor6s best estimate of misstatements in populations involving the projection of misstatements identified in audit samples to the entire populations from which the samples were drawn. %f no error is found in the sample, than the projected population error is $ero. And the allowance for sampling ris+ is no more than tolerable error. %f errors are found the auditor calculates the projected error. (he auditor projects the total error for the population to obtain a broad view of the scale of errors, and to compare this to the tolerable error. *hen an error has been established as an anomalous error, it may be excluded when projecting sample errors to the population. (he effect of any such error, if uncorrected, still needs to be considered in addition to the projection of the nonEanomalous errors. %f a class of transactions or account balance has been divided into strata, the error is projected for each stratum separately. #rojected errors plus anomalous errors for each stratum are then combined when considering the possible effect of errors on the total class of transactions or account balance. 'or tests of controls, no explicit projection of errors is necessary since the sample error rate is also the projected rate of error for the population as a whole. E0a(p e Assuming that the following errors occurred in the sample: !rror in amount exceeding tolerable 1,<DD,DDD !rror in transactions for information -<DDD 8alance sample si$e -? (value verifiedS1D,DDD,DDD) error is <,DDD,DDD including the anomalous error amounting to -,DDD,DDD 7o' are reB'ired to ro4ect the errors/ (L#! !&&.& !O"!!3%)C (.4!&A84! !&&.& 1,<DD,DDD '.& %)'.&,A(%.) -<DDD A).,A4.7 !&&.& -,DDD,DDD A,#4! -9,A<D,DDDU (.(A4 !&&.& -?,9=<,DDD (otal value on which projection is needed 1<D,DDD,DDDE-><,DDD,DDDE1<DDDDS>9,><D,DDD !rror found in population sample S <,DDD,DDD 4ess anomalous error S-,DDD,DDD !rror that is representative of sample S 9,DDD,DDD

-D>

 Palue of projected error in sample S 9,DDD,DDD21D,DDD,DDDU>9,><D,DDDS-9,A<D,DDD *hen the projected error is close to the (! the auditor needs to apply additional audit procedures to reduce the audit ris+. (%ssues discussed in materiality standards)

E'a*uatin" t e Sam$*e Re#u*t#: 'fter the performing the test# the au itor shoul e$aluate the sample result. The o!*ecti$e of e$aluation is to etermine whether the preliminar" assessment of the characteristics of population is confirme or nee to !e re$ise . In ca#e of te#t of contro*# if the e$iation rate is higher than tolera!le rate# control risk is to !e assesse at a ma%imum. Control risk will also !e assesse at ma%imum if e$iation rate s (uite close to tolera!le rate. If the e$iation rate is lower than tolera!le rate# control risk can !e assesse at low an accor ingl" su!stanti$e test ma" !e restricte . /owe$er the au itor shoul !e alert that there is a risk that actual e$iation rate in population ma" !e higher than the tolera!le rate ue to sampling risk. In other wor s# if the sample e$iation rate plus allowance for sampling risks oes not e%cee the tolera!le rate# the au itor ma" conclu e that controls are relia!le an woul restrict "ear en su!stanti$e test. If sample results o not support reliance on controls# reliance will not !e place on controls an e%pen e su!stanti$e proce ures will !e carrie out. In case of su!stanti$e tests# if the amount of pro*ecte error is less than !ut close to tolera!le error# the au itor shoul still !e alert for further misstatement ue to sampling risk. The au itor shoul also compare actual e$iation rate with e%pecte e$iation rate in or er to confirm or chase awa" his preliminar" assessment of control risk. If the actual e$iation rate is greater than e%pecte rate set at planning stage# the au itor will mo if" the control risk. If the au itor inten s to e$aluate control risk at low# he will ha$e to perform test of control on e%ten e sample si0e. 'lternati$el" if control risk is assesse at high# the au itor shoul mo if" the su!stanti$e tests.
%f the evaluation of sample results indicates that the assessment of the relevant "haracteristic of the population needs to be revised, the auditor may: a. &equest management to investigate identified errors and the potential for further errors, and to ma+e any necessary adjustments/ and2or b. ,odify the nature, timing and extent of further audit procedures. 'or example, in the case of tests of controls, the auditor might extend the sample si$e, test an alternative control or modify related substantive procedures/ and2or c. "onsider the effect on the audit report. E0a(p es o! Fa)tors In! %en)in" Sa(p e Si:e !or Tests o! Contro s -D?

 (he following are factors that the auditor considers when determining the sample si$e for tests of controls. (hese factors, which need to be considered together, assume the auditor does not modify the nature or timing of tests of controls or otherwise modify the approach to substantive procedures in response to assessed ris+s. D*9 Nat're: An increase in the extent to which the ris+ of material misstatement is reduced by the operating effectiveness of controls. Effect on sa! le si1e: %ncrease E0p anation, (he more assurance the auditor intends to obtain from the operating effectiveness of controls, the lower the auditor6s assessment of the ris+ of material misstatement will be, and the larger the sample si$e will need to be. *hen the auditor6s assessment of the ris+ of material misstatement at the assertion level includes an expectation of the operating effectiveness of controls, the auditor is required to perform tests of controls. .ther things being equal, the more the auditor relies on the operating effectiveness of controls in the ris+ assessment, the greater is the extent of the auditor6s tests of controls (and therefore, the sample si$e is increased). D)9 Nat're: An increase in the rate of deviation from the prescribed control activity that the auditor is willing to accept Effect on sa! le si1e: 3ecrease E0p anation, (he lower the rate of deviation that the auditor is willing to accept, the larger the sample si$e needs to be. D;9 Nat're An increase in the rate of deviation from the prescribed control activity that the auditor expects to find in the population Effect on sa! le si1e: %ncrease E0p anation, (he higher the rate of deviation that the auditor expects, the larger the sample si$e needs to be so as to be in a position to ma+e a reasonable estimate of the actual rate of deviation. 'actors relevant to the auditor6s consideration of the expected error rate include the auditor6s understanding of the business (in particular, ris+ assessment procedures underta+en to obtain an understanding of internal control), changes in personnel or in internal control, the results of audit procedures applied in prior periods and the results of other audit procedures. 0igh expected error rates ordinarily warrant little, if any, reduction of the assessed ris+ of material misstatement, and therefore in such circumstances tests of controls would ordinarily be omitted. D<9 Nat're: An increase in the auditor6s required confidence level (or conversely, a decrease in the ris+ that the auditor will conclude that the ris+ of material misstatement is lower than the actual ris+ of material misstatement in the population) Effect on sa! le si1e: increase E0p anation,

-DA

(he greater the degree of confidence that the auditor requires that the results of the sample are in fact indicative of the actual incidence of error in the population, the larger the sample si$e needs to be. D=9 Nat're: An increase in the number of sampling units in the population Effect on sa! le si1e: De end on circ'!stances E0p anation, 'or large populations, the actual si$e of the population has little, if any, effect on sample si$e. 'or small populations however, audit sampling is often not as efficient as alternative means of obtaining sufficient appropriate audit evidence. E0a(p es o! Fa)tors In! %en)in" Sa(p e Si:e !or Tests o! Detai s (he following are factors that the auditor considers when determining the sample si$e for tests of details. (hese factors, which need to be considered together, assume the auditor does not modify the approach to tests of controls or otherwise modify the nature or timing of substantive procedures in response to the assessed ris+s. D*9 Nat're: An increase in the auditor6s assessment of the ris+ of material misstatement Effect on sa! le si1e: %ncrease E0p anation, (he higher the auditor6s assessment of the ris+ of material misstatement, the larger the sample si$e needs to be. (he auditor6s assessment of the ris+ of material misstatement is affected by inherent ris+ and control ris+. 'or example, if the auditor does not perform tests of controls, the auditor6s ris+ assessment cannot be reduced for the effective operation of internal controls with respect to the particular assertion. (herefore, in order to reduce audit ris+ to an acceptably low level, the auditor needs a low detection ris+ and will rely more on substantive procedures. (he more audit evidence that is obtained from tests of details (that is, the lower the detection ris+), the larger the sample si$e will need to be. D)9 Nat're: An increase in the use of other substantive procedures directed at the same assertion Effect on sa! le si1e: 3ecrease E0p anation, (he more the auditor is relying on other substantive procedures (tests of details or substantive analytical procedures) to reduce to an acceptable level the detection ris+ regarding a particular class of transactions or account balance, the less assurance the auditor will require from sampling and, therefore, the smaller the sample si$e can be. D;9 Nat're: An increase in the auditor6s required confidence level (or conversely, a decrease in the ris+ that the auditor will conclude that a material error does not exist, when in fact it does exist) Effect on sa! le si1e: %ncrease E0p anation,

--D

(he greater the degree of confidence that the auditor requires that the results of the sample are in fact indicative of the actual amount of error in the population, the larger the sample si$e needs to be. D<9 Nat're: An increase in the total error that the auditor is willing to accept (tolerable error) Effect on sa! le si1e: 3ecrease E0p anation, (he lower the total error that the auditor is willing to accept, the larger the sample si$e needs to be D=9 Nat're: An increase in the amount of error the auditor expects to find in the population Effect on sa! le si1e: %ncrease E0p anation, (he greater the amount of error the auditor expects to find in the population/ the larger the sample si$e needs to be in order to ma+e a reasonable estimate of the actual amount of error in the population. 'actors relevant to the auditor6s consideration of the expected error amount include the extent, to which item values are determined subjectively, the results of ris+ assessment procedures, the results of tests of control, the results of audit procedures applied in prior periods, and the results of other substantive procedures. DE9 Nat're: tratification of the population when appropriate 3ecrease Effect on sa! le si1e: 3ecrease E0p anation, *hen there is a wide range (variability) in the monetary si$e of items in the population. %t may be useful to group items of similar si$e into separate subE populations or strata. (his is referred to as stratification. *hen a population can be appropriately stratified, the aggregate of the sample si$es from the strata generally will be less than the sample si$e that would have been required to attain a given level of sampling ris+, had one sample been drawn from the whole population. DF9 Nat're: 'n increase in the number of sampling units in the population. Effect on sa! le si1e: )egligible effect E0p anation, 'or large populations, the actual si$e of the population has little, if any, effect on sample si$e. (hus, for small populations, audit sampling is often not as efficient as alternative means of obtaining sufficient appropriate audit evidence. 0owever, when using monetary unit sampling, an increase in the monetary value of the population increases sample si$e, unless this is offset by a proportional increase in materiality.

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 RELATED PARTIES ISA ;;/

%)(&.37"(%.)

What is the ob1e)ti+e o! this ISA ;;/ re ate# parties' (his standard is established to provide guidance to auditor regarding: %dentification of related parties 3isclosure of related parties and their balance at year end 3isclosure of transactions with related parties during the year and their effect on financial statements What is !irst an# !ore(ost responsibi it& o! an a%#itor re"ar#in" re ate# parties #is) os%re' Auditor should obtain the sufficient appropriate audit evidence regarding the identification and disclosure of related party and the effect of related party transaction Auditor is not expected to identify all the related party transactions. As there are limitations regarding the persuasiveness of the audit evidences available, this standard provides that if the procedures set out in this standard as regards related parties are carried out by the auditor/ it --1

is assumed that sufficient appropriate audit evidence has been obtained to verify related parties transactions. (he only two exceptions where such procedures will be inadequate are: o o 7nusual inherent and control ris+s ,aterial misstatement has been indicated regarding related parties.

%n the above two situations the auditor will have to carry out additional modified procedures. What is the (eanin" o! re ate# parties' :related party;, in relation to a company, means an entity which has the ability to control the company or exercise significant influence over the company in ma+ing financial and operating decisions or &ice &er" and includes the following, namely: !ntities that directly or indirectly through one or more intermediaries control, or are controlled by, or are under common control with, the reporting company including holding companies, subsidiaries and fellow subsidiaries/ Associates, as defined in the %nternational Accounting tandard 1?, Accounting for %nvestments in Associates/ %ndividuals owning, directly or indirectly, an interest in the voting power of the reporting company that gives them significant influence over the company, and close members of the family of any such individual/ +ey management personnel, that is, persons having authority and responsibility for planning, directing and controlling the activities of the reporting company including directors and officers of such company and close members of the families of such individuals/ !ntities in which a substantial interest in the voting power is owned, directly or indirectly, by any person described in clause (c) or (d) or over which such person is able to exercise significant influence including entities owned by directors or major shareholders of the reporting company and entities that have a +ey management personnel in common with the reporting company/ !ntities in which one or more of the directors or members of the governing board are appointed by the reporting company or &ice &er" 1

--5

 *here one or more of the directors or members of the governing board of the entity as well as the reporting company are appointed by the same person or persons/ !ntities whose process of manufacture or business is wholly dependent on the use of +nowEhow, patents, copyrights, tradeEmar+s, licenses, franchises or any other business or commercial rights of similar nature, or any data, documentation, drawing or specification relating to any patent, invention, model, design, secret formula or process, of which the reporting company is the owner or in respect of which the company has exclusive rights or &ice &er" 1 *here more than half of the raw materials and consumables required in the process of manufacture of an entity are supplied by the reporting company, or by persons specified by the company, or &ice &er" ' and the prices and other conditions relating to the supply are influenced by the entity or the company/ and *here goods or articles manufactured or processed by an entity are sold or transferred to the reporting company or to persons specified by the company, or &ice &er" , and the prices and other conditions relating thereto are influenced by the entity or the company. E)#! n tion(E(-) in considering each possible related party relationship, attention should be directed to the substance of the relationship and not merely to the legal form. *hat are the responsibilities of management of an entity regarding the related partiesK ,anagement is responsible for the identification and disclosure of related parties and transactions with such parties. (his responsibility requires management to implement adequate internal control to ensure that transactions with related parties are appropriately identified in the information system and disclosed in the financial statements. What are the #%ties o! an a%#itor re"ar#in" the %n#erstan#in" o! an entit& to obtain s%!!i)ient appropriate a%#it e+i#en)e *ith respe)t to re ate# parties' *e should have sufficient understanding of the entity and the industry in which operate and the environment so as to identify the related parties. !xistence of related party and the transaction is the routine feature of the business, yet it is significant because: --9

 'inancial &eporting frame wor+ requires separate disclosures &elated party transactions may affect the financial statement &eliability of audit evidence is affected. As we say that A! obtained from outside party is more reliable then the audit evidence obtained from inside but the reliability might be reduced if the outside party is a related party (he transaction is made for a purpose other then the routine purpose What are the responsibi ities o! an a%#itor re"ar#in" i#enti!i)ation o! re ate# parties' *e should review the information provided by the management regarding related parties and the following audit procedures shall be performed &eview prior years wor+ing papers &eview management6s procedures for identification of related parties %nquiries from the management 4ist of major share holders &eview minutes of share holders meeting or other statutory records %nquire from the predecessor auditor &eview tax returns %f the ris+ of undetected related parties is low then the above procedures may be curtailed. *here the applicable financial reporting framewor+ requires disclosure of related party relationships, the auditor should be satisfied that the disclosure is adequate. What are the responsibi ities o! an a%#itor re"ar#in" i#enti!i)ation an# #is) os%re o! transa)tion *ith re ate# parties' (he auditor should review information provided by those charged with governance and management identifying related party transactions and should be alert for other material related party transactions.

--<

 3uring the review of the internal controls regarding the related party auditor should consider the adequacy of the control regarding authori$ation and recording of related party transactions. 3uring the course of the audit, the auditor needs to be alert for transactions which appear unusual in the circumstances and may indicate the existence of previously unidentified related parties. 'or example: (ransactions with abnormal terms of trade or which lac+ the logical reason for the occurrence (ransaction in which substance differ from form (ransaction processed in unusual manner 0igh turnover from some customers or suppliers 7nrecorded transactions such as the receipt or provision of management services at no charge What are the pro)e#%res *hi)h an a%#itor sho% # per!or( to i#enti!& %ni#enti!ie# re ate# parties' #rocedures which should be performed by an auditor to trace unidentified related party existence may be: 3etailed test of transaction and balances &eview of the minutes &eview confirmations from ban+ and other sources &eviewing accounting records for large or unusual transactions or balances, paying particular attention to transactions recogni$ed at or near the end of the reporting period. &eviewing investment transactions What are the #%ties o! an a%#itor a!ter i#enti!&in" transa)tion *ith re ate# parties' (he auditor should obtain sufficient appropriate audit evidence that the identified related party transactions are properly recorded and disclosed. (he nature of related parties relationships and audit evidence regarding related parties transaction may be limited, for example, regarding the existence of inventory held by a related party on consignment or an --=

instruction from a parent company to a subsidiary to record a royalty expense. 8ecause of the limited availability of appropriate audit evidence about such transactions, the auditor considers performing audit procedures such as: o "onfirming the terms and amount of the transaction with the related party %nspecting information in possession of the related party "onfirming or discussing information with persons associated with the transaction, such as ban+s, lawyers, guarantors and agents.

o o

What is the #%t& o! an a%#itor re"ar#in" (ana"e(ent representation' (he auditor should obtain representation regarding "ompleteness of the related party information Adequacy of the related party disclosures %f the auditor cannot obtain the sufficient appropriate audit evidence regarding the related parties, its transactions and disclosures then auditor6s report shall be modified.

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 SUBSI@UENT E8ENTS ISA ;A/

%)(&.37"(%.) The purpose of this I&' is to esta!lish stan ar s an pro$i e gui ance regar ing su!se(uent e$ents an the term su!se(uent e$ents is meant to inclu e !oth e$ents i.e.

&et(een t e date of t e financia* #tatement and t e date of t e auditor5# re$ort After t e date of auditor5# re$ort The au itor shoul consi er the effect of su!se(uent e$ents on the financial statements an on the au itor,s report. I'& 6C escri!es the su!se(uent e$ents of two t"pes One t at confirm# t e condition# t at exi#ted at t e )a*ance # eet date 7Ad4u#tin" E'ent#8 One t at i# indicati'e of t e condition# t at aro#e #u)#e/uent to t e )a*ance # eet 7Non Ad4u#tin" e'ent#8 Date of financial statements means !alance sheet. E=ENTS OCC0RING 0P TO T>E DATE OF A0DITOR5S REPORT The au itor shoul o!tain sufficient appropriate au it e$i ence that all the e$ents that either re(uires isclosure or a *ustment ha$e !een i entifie . The au itor performs these proce ures as near to ate of au it report as practica!le. To i entif" the su!se(uent e$ents the following proce ures ma" !e performe Re$iew management,s proce ures to i entif" su!se(uent e$ents Re$iew minutes of the meetings of those charge with the go$ernance or meetings of the share hol ers Rea ing entit",s latest interim financial statements# cash flows# !u gets etc In(uiring entit",s legal council In(uiring management a!out su!se(uent e$ents that ha$e occurre # e%amples of ' *usting e$ents: &u!se(uent agreement of purchase price of the assets ac(uire !efore the !alance sheet.
--?

&u!se(uentl" re$aluation of fi%e assets which pro$i e e$i ence of permanent iminution in $alue Insol$enc" of customer) 'mount settle in respect of pen ing claims) 5%amples of non a *usting e$ents: 1ergers an ac(uisitions) Issue of shares) 'c(uisition an isposal of fi%e assts an in$estments) .osses ue to earth(uake or floo s) Opening or e%ten ing of new !ranch or i$ision) Changes in rate of foreign e%change) Changes in (uote price of shares of liste compan". &trike an la!or isputes) Changes in (uote price of shares of liste compan". If an" su!se(uent e$ent ha$e !een i entifie the au itor shoul consi er whether such e$ent has !een properl" accounte for an isclose in the 7inancial &tatements. FACTS DISCO=ERED AFTER T>E A0DITOR5S REPORT >AS &EEN ISS0ED &0T &EFORE T>E FINANCIA+ STATE%NTS ARE ISS0ED No responsi!ilit" to perform an" au it proce ures or make an" in(uir" after the ate of au itor,s report. 7rom the ate of the au itor,s report to the ate 7& are issue the responsi!ilit" to inform the au itor a!out su!se(uent e$ents rests with the management. If the au itor !ecomes aware of an" su!se(uent e$ents which materiall" affects the 7s the au itor shoul consi er either a!out the amen ment in the 7& (' *ustment or isclosure- an the he shoul iscuss the matter with the management. NO
"onsider whether ' needs amendment. D5& )o action

,anagement amends accounts.

%ssueNO qualified or adverse opinion

D5&
"arry out procedures to verify reported subsequent events. %ssue new audited report.

"hat re!ed. a&aila-le to the a'ditor if the !ana$e!ent disa$rees to a!end FS Dand the re ort has not -een released to the !ana$e!ent9/
--A

 %f management does not agree to amend the ' which the auditor thin+s it should be amended and if the auditor6s report has not been released to the management then the auditor should modify the auditor6s report "hat re!ed. a&aila-le to the a'ditor if the !ana$e!ent disa$rees to a!end FS Dand the re ort has alread. -een released to the !ana$e!ent9/ (he auditor would inform those charged with governance of the entity not to issue the ' and the report. %f the ' are released despite the auditor6s notice then the auditor would ta+e appropriate steps to prevent the reliance on the auditor6s report. FACTS DISCO3E(ED AFTE( T2E ISSUANCE OF T2E FINANCIA, STATE%ENTS After the issue of the ' the auditor does not have any responsibility to inquire from the management about any subsequent event %f auditor becomes aware of any event which if +nown at the date of report could have resulted in the modified report then the auditor should discuss this with the management and consider about the revision of the ' %f the ' are revised and reissued the auditor would also review managements6 procedures to inform all those persons who are in receipt of the previously issued ' *hen the ' are reissued the auditor6s report would also be reissued and include the emphasis of matter paragraph stating the reasons for the issue. %f the management does not revise the ' and does not initiate the appropriate procedures to inform the persons who are in receipt of the ' then the auditor would ta+e necessary action which would depend on the legal rights of the auditor and the recommendations of the auditor6s lawyer. CONDITION "2EN T2E (EISSUE OF T2E FS IS NOT NECESSA(7
-1D

 %f the next issue of the 's is imminent then the auditor might consider not reissuing the ' provided that the adequate disclosure has been made in the ' whose issue is imminent.

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 MANAGEMENT REPRESENTATION ISA ;B/

%ana$e!ent re resentation: &epresentations made by the management to the auditors during the course of audit either unsolicited or a response to a particular query. P'r ose of the standard: 7se of management representation as audit evidence/ #rocedures for evaluation and documentation of management representation/ Action to be ta+en if the ,anagement refuses to give appropriate representation. (es onsi-ilit. of the financial state!ents: &esponsibility of the presentation of ' is of the management and the auditor should obtain A! that the management ac+nowledges the same. (he ac+nowledgement can be in any of the following forms: ,inutes of the ,eetings/ *ritten representation from the management/ igned copy of financial statements. (he auditor should obtain written representation from management that: &esponsibility for design and operation of internal control is of the management and the auditor should obtain the written representations for that. (he auditor should also ta+e the representation that the management believes that uncorrected misstatements are immaterial. "hat are the d'ties of a'ditors as re$ards 'sin$ !ana$e!ent re resentation as a'dit e&idence/ &epresentation should be obtained on all the material matters when the other A! are not expected to exist. (he misunderstanding is reduced when the representations are in writing.
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 (he representations should be obtained only for those items which are material either individually or collectively. 8efore evaluating and considering ,& as audit evidence, the auditor will need to: Cet the corroborative audit evidence from other sources. "onsider that the person ma+ing ,& is well informed !valuate that the representation made by the management is consistent and reasonable with other audit evidences. Note: %f a representation by management is contradicted by other audit evidence, the auditor should investigate the circumstances and, when necessary, reconsider the reliability of other representations made by management. Auditor has to ma+e sure that the ,& cannot be a substitute for other audit evidences which are expected to be available. *here other sufficient appropriate expected to exist, and the auditor is unable to obtain such evidence, a mere representation by management on that matter would not justify issuance of unqualified report and it should be considered a limitation in scope of an audit. 3ocumentation of management representation ,& from the management 4etter from the auditor of its understanding of ,& duly signed and confirmed by the management &elevant minutes of the meeting Basic ele!ent of !ana$e!ent re resentation letter: Addressed to the auditor "ontained specified information igned and dated (signed by the person who has main responsibility of the entity li+e the "!. or "'.) ()ormally be dated the same date as the Auditors report however, in

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certain circumstances, ,& can be obtained after the date of auditor6s report. Actions if !ana$e!ent ref'ses to iss'e !ana$e!ent re resentation: (his is the scope limitation and modified auditor6s report shall be issued by auditor. %n such circumstances auditor should have to reevaluate the reliance placed of other ,& during the course of an audit.

USING T3E WORK OF ANOT3ER AUDITOR ISA A//

INT(ODUCTION: (he purpose of this % A is to provide guidance when an auditor, reporting on the financial statements of an entity, uses the wor+ of another auditor on the financial information of one or more components included in the financial statements of the entity. (his % A does not deal with those instances where two or more auditors are appointed as joint auditors.

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 'urther, when the principal auditor concludes that the financial statements of a component are immaterial, the standards in this % A do not apply. *hen, however, several components, immaterial in themselves, are together material, the procedures outlined in this % A would need to be considered. :#rincipal auditor; means: the concept of an principal auditor arises only when the financial statements of the entity include certain information audited by another auditor :.ther auditor; means an auditor, other than the principal auditor, with responsibility for reporting on the financial information of a component which is included in the financial statements audited by the principal auditor. .ther auditors include affiliated firms, whether using the same name or not, and correspondents, as well as unrelated auditors. :"omponent; means a division, branch, subsidiary, joint venture, associated company or other entity whose financial information is included in financial statements audited by the principal auditor When an a%#itor sho% # a))ept an en"a"e(ent as prin)ipa a%#itor o! an entit&' (he auditor should consider whether the auditor6s own participation is sufficient to be able to act as the principal auditor. 'or this purpose the principal auditor would consider: (he materiality of the portion of the financial statements which the principal auditor audits/ (he principal auditor6s degree of +nowledge regarding the business of the components/ (he ris+ of material misstatements in the financial statements of the components audited by the other auditor/ and

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 (he performance of additional procedures as set out in this % A regarding the components audited by the other auditor resulting in the principal auditor having significant participation in such audit. Des)ribe the pro)e#%res nor(a & e(p o&e# b& the prin)ipa a%#itor to obtain s%!!i)ient appropriate e+i#en)e that the *or2 o! other a%#itor is a#e$%ate !or his p%rposes' 'ollowing procedures normally employed by the principal auditor to obtain sufficient appropriate evidence that the wor+ of other auditor is adequate for his purposes: (he principal auditor should consider professional competence of other auditor in the context of specific assignment, such as membership of professional organi$ation. (he auditor should perform procedures to obtain sufficient appropriate audit evidence that the wor+ of other auditor is sufficient for principal auditor6s purposes. (he principal auditor should advise the other auditor of: %ndependence requirements regarding both the entity and the component being audited and obtained written representation as to compliance with them/ (he use that is to be made of other auditor6s wor+/ (he relevant accounting, auditing and reporting requirements and he must obtain written representation from the other auditor as to compliance with them. (he principal auditor might also: 3iscuss with other auditor the audit procedures applied by him. &eview a written summary of other auditor6s procedures. &eview of wor+ing papers of other auditor. (he principal auditor should consider the significant findings of other auditor, at the time of forming his audit opinion.
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 (he principal auditor may consider it necessary to discuss with other auditor and the management of other component the audit findings or other matters affecting the financial statements of the component and may also decide to carry out certain supplementary of the records or the financial information of component which considers necessary. Is there an& responsibi it& o! prin)ipa a%#itor re"ar#in" the #o)%(entation o! in!or(ation o! )o(ponents *hi)h is to be a%#ite# b& other a%#itor'

Les, it is the responsibility of principal auditor to document following information in his wor+ing paper file: (he components whose financial statements were audited by other auditor/ (heir significance to the financial statements of entity as whole/ (he names of other auditors/ Any other conclusions e.g. individual components are immaterial in the context of entity as whole. What is the responsibi it& o! other a%#itor re"ar#in" the )ooperation *ith prin)ipa a%#itor'

% A =DD requires the other auditor to cooperate with principal auditor. %n particular, the auditor should advise the principal auditor of significant matters that he considers should be brought to the attention of principal auditor. What are the #%ties o! prin)ipa a%#itor re"ar#in" reportin" )onsi#eration' %n case the wor+ of other auditor in inadequate to express an opinion on the components and the principal auditor is unable to perform additional procedures, a qualified or disclaimer of opinion should be issued on the ground of scope limitation.

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 *here the other auditor6s report is qualified, the principal auditor has to use his judgment whether the qualification is material to the financial statements as whole. %f the principal auditor concludes that the qualification is not material in relation to the financial statements ta+en as whole, he may omit such qualification in his report. DI3ISIONN OF (ESPONSIBI,IT7:

*here the local regulation allow the principal auditor to base the audit opinion on the financial statements ta+en as whole, solely upon the report of other auditor regarding a component, the report should, in both the scope and opinion paragraph, clearly indicate the degree of responsibility and the proportion of financial statements examined by each auditor. *hen the principal auditor ma+es such a reference in the auditor6s report, audit procedures are ordinarily limited to following: (he principal auditor should consider professional competence of other auditor in the context of specific assignment, such as membership of professional organi$ation. (he principal auditor should advise the other auditor of: %ndependence requirements regarding both the entity and the component being audited and obtained written representation as to compliance with them/ (he use that is to be made of other auditor6s wor+/ (he relevant accounting, auditing and reporting requirements and he must obtain written representation from the other auditor as to compliance with them

CONSIDERATION OF WORK OF INTERNAL AUDITING ISA A=/

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INT(ODUCTION

INTE(NA, AUDITING: An appraisal (review and evolution) activity established within an entity as a service to entity. (he external auditor should consider the activities of internal auditing and there effect, if any, on external audit procedures. 'or determining the nat're0 ti!in$ and e5tent of external audit procedures, certain parts of internal auditing wor+ may be useful to the external auditor. What is the s)ope an# ob1e)ti+e o! interna a%#itin"' (he scope and objective of internal auditing very widely depends on the si$e and structure of an entity and the requirements of its management. %nternal auditing activities include one or more of following: 3onitoring o$ intern ! contro!: %nternal auditing is ordinarily assigned specific responsibility by management for reviewing controls, monitoring their operations and recommending improvements in thereto. E) %in tion o$ $in nci ! nd o#er ting in$or% tion : %nternal reviews made by internal auditor, of financial and operating information enhance the credibility and reliability of such information for decision ma+ing purpose. (his function includes detailed testing of transactions and account balances, review of monthly managements accounts. Re&iew o$ econo%*' e$$icienc* nd e$$ecti&ene"" o$ o#er tion" inc!uding non $in nci ! contro!" o$ n entit*: Re&iew o$ co%#!i nce with ! w"' regu! tion" nd other e)tern ! re<uire%ent" nd with % n ge%ent #o!ice" nd directi&e" nd other intern ! re<uire%ent"( Difference -et#een internal a'ditor and e5ternal a'ditor EGTE(NA, INTE(NA,
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AUDITO(S AUDITO(S Appointed by members Appointed by in AC,. management. @ualification determined )o qualification by companies ordinance -A?9. prescribed. #aid on fee basis. #aid on salary basis. &eports to shareholders. &eports to management. 'ocus is on expression of Appraises activities as a opinion on financial service to organi$ation. statements. cope is identified by cope is defined by law. management. Understandin$ reli!inar. assess!ent of internal a'dit: %t is mandatory that the auditor should obtain sufficient understanding of internal audit activities to assist in planning the audit and developing an audit approach and to ma+e a preliminary assessment of internal auditing is relevant to the external audit of the financial statements in specific audit areas. !ffective internal auditing may enable to external auditor to reduce the wor+ to be performed in !valuating accounting and internal control system and #erforming test of controls and substantive tests.

Criteri $or under"t nding nd #er$or%ing intern ! udit $unction: Or$ani1ational stat's: internal auditor should report to highest level of management and should not be involved in any operating responsibility. %n particular internal auditor will need to be free to communicate fully with external auditor. Sco e of f'nction: the external should examine the job description of the internal auditor to understand the nature and extent of internal auditing assignment performed. (he external auditor would also need to consider weather management acts upon internal audit reports and weather this is evidenced.

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 Technical co! etence: weather internal auditing is performed by person having adequate technical training and proficiency in internal auditing. (he external auditor may review the policies for hiring and training the internal auditing staff and their experience and professional qualification. D'e rofessional care: weather internal auditing is properly planned, supervised, and documented. ,iaison and coordination: .nce the external auditor has decided, on the basis of preliminary assessment of internal audit function, that he would be able place reliance on internal audit wor+s/ 0e should agree with the internal auditor the timing of internal wor+, test level, sample selection and form of document used. %t is high time that internal audit wor+ be developed in consultation with the external auditor to pave the way for avoiding unnecessary duplication of wor+. (his will further lea to reduction of the extent of details resulting in test chec+. !ffective coEordination requires advance planning between two auditors. "oEordination with internal audit involves: 'requent meeting with internal auditor/ Access to internal auditor6s program and wor+ing papers/ !xchange of audit reports and management letters.

E&al'ation of s ecific #ork of internal a'dit %t %nvolves consideration of adequacy of the scope of wor+ and the related program/

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 And consideration whether the assessment of internal auditing remains appropriate and includes: *or+ is done by the persons having adequate +nowledge and the wor+ is properly reviewed and supervised. ufficient appropriate audit evidence is obtained to draw the conclusions "onclusions reached are appropriate in the circumstances and the reports generated are consistent with the results !xceptional and unusual matters are properly resolved (he nature timing and extent of audit procedures performed on the specific wor+ of internal audit would depend on: !xternal auditor6s judgment of ris+ Assessment of internal auditing !valuation of specific wor+ (re examination of the wor+ performed by the internal audit or the observation) (he external auditor would document the specific internal audit wor+ evaluated and the procedures performed thereon.

USING T3E WORK OF AN E<PERT ISA A-/

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%)(&.37"(%.) (his % A deals with the auditor6s use of the wor+ of an expert possessing expertise in a field other than accounting or auditing, for the purpose of audit evidence.

(he auditor is solely responsible for the auditor6s opinion, even when using evidence provided by an auditor6s expert. #rovided the a'ditor sho'ld o-tain s'fficient a ro riate a'dit e&idence that s'ch #ork is adeB'ate for the 'r oses of the a'dit: An expert may be: (a) "ontracted by the entity/ (b) "ontracted by the auditor/ (c) !mployed by the entity/ or (d) !mployed by the auditor. *hen the auditor uses the wor+ of an expert employed by the audit firm, the auditor will be able to rely on the firm6s systems for recruitment and training that determine that expert6s capabilities and competence. 3!(!&,%)%)C (0! )!!3 (. 7 !(0! *.&G .' A) !O#!&( When an a%#itor sho% # en"a"e an e0pert to obtain s%!!i)ient an appropriate e+i#en)e'

*hen determining the need to use the wor+ of an expert, the auditor would consider: A. (he engagement team6s +nowledge and previous experience of the matter being considered/ 8. (he ris+ of material misstatement based on the nature, complexity, and materiality of the matter being considered/ and ". (he quantity and quality of other audit evidence expected to be obtained.
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 A!ter #eter(inin" the nee# !or %sin" the *or2 o! an e0pert *hat is the responsibi it& o! an a%#itor in the en"a"e(ent o! an e0pert' An auditor should assess the professional competence of an expert. (his will involve considering the expert6s: #rofessional certification or licensing by, or membership in, an appropriate professional body/ and !xperience and reputation in the field in which the auditor is see+ing audit evidence. An auditor should also chec+ the objectivity and the independence of an expert. (he ris+ that an expert6s objectivity is impaired increased when the expert: !mployed by an entity/ &elated in some other manner to the entity, for example by being financially dependent upon, or having an investment, in the entity. What *i happen i! a%#itor ha reser+ation re"ar#in" the )o(peten)& an# ob1e)ti+it& o! an e0pert' %f an auditor has reservation regarding the competency and objectivity of an expert: 0e should discuss with the management/ 0e should consider whether sufficient and appropriate evidence can be obtained/ 0e may underta+e additional audit procedures or see+ evidence from other expert. An auditor may consider the implication of these for his report. What sho% # be )onsi#ere# b& an a%#itor to assess the s)ope o! an e0pert'
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 An auditor should obtained sufficient and appropriate audit evidence that the scope of expert is adequate for the purpose of an audit. Audit evidence may be obtained through a review of the terms of reference which are often set out in written instructions from the entity to the expert. uch instructions to the expert may cover matters such as the following:

(he objective and scope of an expert wor+/ A general outline as to specific matters that expert6s report is to cover/ (he intended use of an experts wor+ including the possible communication to third parties of an expert6s identity and extent of involvement/ (he extent of expert6s access to appropriate records and files/ "larification of the expert6s relationship with the entity, if any/ "onfidentiality of the entity6s information/ %nformation regarding the assumptions and methods intended to be used by the expert and their consistency with those prior periods. %f no such instruction exist, or are insufficient, then auditor should communicate with the management of an entity directly to obtain evidence of the scope of their wor+. What is the responsibi it& o! an a%#itor re"ar#in" the assessin" the appropriateness o! the e0perts *or2 as an a%#it e+i#en)e' An auditor should assess whether the substance of an expert findings is appropriate. %t will also require consideration of: (he source date used/
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 (he assumption and methods used/ *hen the expert carried out the wor+/ (he reason for any change in assumptions and methods comparing with those used in prior periods/ (he result of an expert6s wor+ in the light of an auditor6s overall +nowledge of the business and the result of other audit procedures. *hen loo+ing at source data, an auditor might carry out the following procedures: ,a+e enquiries regarding any procedures underta+en by an expert to establish whether the source data is sufficient relevant and reliable. &eview or test the data used by the expert. An auditor should also chec+ the reasonableness of assumptions etc. based on his other audit evidence, +nowledge of business and so on. What happene# i! the res% ts o! the e0pert4s *or2 #o not pro+i#e s%!!i)ient appropriate a%#it e+i#en)e or i! the res% ts are not )onsistent *ith other a%#it e+i#en)e' %f the results of the expert6s wor+ do not provide sufficient appropriate audit evidence or if the results are not consistent with other audit evidence then an auditor resolve the matter in any of following (his may involve discussion with both client and expert/ Additional procedures (including use of another expert) may be necessary. Auditor may modify his report. Can an a%#itor "i+e a re!eren)e o! an e0pert in his report'

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 %t the auditor is satisfied with the wor+ of expert, he should not refer the wor+ of expert in his report as the users may misunderstood such reference to be a qualification or division of responsibility. %f, as a result of the wor+ of an expert, the auditor decides to issue a modified auditor6s report, in some circumstances it may be appropriate to refer the wor+ of the expert (including the identity of the expert and the extent of the expert6s involvement). %n these circumstances, the auditor would obtain the permission of the expert before ma+ing such a reference. %f permission is refused and the auditor believes a reference is necessary, the auditor may need to see+ legal advice.

MODIFICATION TO INDEPENDENT AUDITORS REPORT ISA C/=

%)(.37"(%.)

(he purpose of this % A is to provide guidance on the circumstances when: *hen the independent auditor6s report should be modified/ and (he form and content of the modification to the auditors report in those circumstances.

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 (his % A also describes how the auditor6s report wording is modified in the following situations: %atters that Do Not Affect the A'ditor8s O inion !mphasis of matter %atters that Do Affect the A'ditor8s O inion @ualified opinion, 3isclaimer of opinion, or Adverse opinion.

3 tter" th t don-t $$ect the uditor-" o#inion: When an# ho* an a%#itor sho% # a## an e(phasis o! (atter para"raph in his report' %n certain circumstances an auditor6s report may be modified by adding an emphasis of matter paragraph to highlight a matter that affect the financial statements/ which is included in notes to financial statements. (he addition of such an emphasis of matter paragraph does not affect the auditor6s opinion. (he paragraph preferably be included after the paragraph containing the auditor6s opinion but before the section on any other reporting responsibilities, if any. (he emphasis of matter paragraph would ordinarily refer to the fact that the uditor-" o#inion i" not <u !i$ied(
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 What are the )ir)%(stan)es in *hi)h an a%#itor (a& a## an e(phasis o! (atter para"raph' (he auditor should modify the auditor report by adding an emphasis of matter paragraph in following circumstances: ignificant uncertainty/

Coing concern basis uncertainty/ ,aterial inconsistency between standards and relevant laws/ and A matter that doesn6t affect the financial statements but it undermines the credibility of auditor6s report. Amendment required in other information included in annual report. What *i be the a%#itor4s opinion9 i! there are (% tip e %n)ertainties that are si"ni!i)ant to !inan)ia state(ents' %n extreme cases when situations involving multiple uncertainties that are significant to the financial statements, the auditor may consider it appropriate to express a disclaimer of opinion instead of adding an emphasis of matter paragraph.

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 ,aters that do affect the auditors report: "hat are the reasons d'e to those an a'ditor can not e5 ress an 'nB'alified o inion/ An auditor may not be able to express an unqualified opinion due to following circumstances and, according to auditors judgment, the effect of these matters is or may be material to the financial statements: A. (here is a limitation on the scope of the auditor6s wor+( it leads to qualified opinion or disclaimer of opinion) / or 8. (here is a disagreement with management regarding the acceptability of the accounting policies selected, the method of their application or the adequacy of financial

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statement disclosures (it leads to qualified adverse opinion).

What are the t&pes the t&pes o! a%#itor4s report other than %n$%a i!ie# report' A B'alified o inion should be expressed when there is scope limitation on the wor+ of an auditor or there is disagreement between auditor and the management regarding any policy, method or disclosure, and matters are not so material and pervasive as to require to express adverse or disclaimer of opinion. A disclai!er of o inion should be expressed when the possible effect of a limitation on scope is so material and pervasive that the auditor has not been able to obtain sufficient appropriate audit evidence and accordingly is unable to express an opinion on the financial statements. An ad&erse o inion should be expressed when the effect of a disagreement is so material and pervasive to the financial statements that the auditor concludes that a qualification of
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the report is not adequate to disclose the misleading or incomplete nature of the financial statements E0p ain the )ir)%(stan)es *here an opinion other than %n$%a i!ie# is re$%ire#' Li%it tion o$ "co#e: A disclaimer is required when the possible effect of scope limitation is so material and pervasive that an auditor is unable to express an opinion. 0owever, if the multiple accounts are not affected and the effect of financial statement is not pervasive, a qualified report is issued. *hen there is a limitation on the scope of the auditor6s wor+ that requires expression of a qualified opinion or a disclaimer of opinion, the auditor6s report should describe the limitation and indicate the possible adjustments to the financial statements that might have been determined to be necessary had the limitation not existed7 Di" gree%ent with % n ge%ent: An adverse opinion is required when the effect of disagreement is so material and pervasive that disqualification on the report is inadequate. 0owever, if multiple accounts are not affected and the effect on financial statements is not pervasive, a qualified report is issued. 3ATERIAL 3ATERIAL AND PER>ASI>E DISAGREE3ENT =UALIFIED OPINION AD>ERSE OPINION SCOPE LI3ITATION =UALIFIED OPINION DISCLAI3ER OF AN OPINION

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 RE8IEW OF INTERIM FINANCIAL INFORMATION PERFORMED B5 T3E INDEPENDENT AUDITOR OF T3E ENTIT5 ISRE -6=/

%ntroduction Ceneral #rinciples of a &eview of %nterim 'inancial %nformation !thical requirements %mplement quality control procedures #rofessional s+epticism .bjective of an !ngagement to &eview 3ifference between audit and review Agreeing the (erms of the !ngagement !ngagement letter #rocedures for a &eview of %nterim 'inancial %nformation %dentify the potential material misstatements and li+elihood of their occurrence electing inquiries, analytical and other review procedures !valuation of ,isstatements ,anagement &epresentations Auditor6s &esponsibility for Accompanying %nformation "ommunication &eporting the )ature, !xtent and &esults of the &eview of %nterim 'inancial %nformation "ontents of report 3eparture from applicable financial reporting frame wor+ 4imitation on scope (by management) Coing concern and significant uncertainties 3ocumentation

INTRODUCTION

(he purpose of this % &! 19-D is to provide guidance on the auditor6s professional responsibilities when the auditor underta+es an engagement to review interim financial information of an audit client, and on the form and content of the report.

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 (he term :auditor; is used throughout this % &!, not because the auditor is performing an audit function but because the scope of this % &! is limited to a review of interim financial information performed by the independent auditor of the financial statements of the entity. The a'ditor #ho is en$a$ed to erfor! a re&ie# of interi! financial infor!ation sho'ld erfor! the re&ie# in accordance #ith this IS(E: Interi! financial infor!ation is the financial infor!ation that is re ared and resented in accordance #ith a lica-le financial re ortin$ fra!e #ork and co! rises either as co! lete or a condensed set of financial state!ents for a eriod that is shorter than the entit.8s financial .ear:

Genera* Princi$*e# of a Re'ie( of Interim Financia* Information:

The a'ditor sho'ld co! l. #ith the ethical reB'ire!ents rele&ant to the a'dit of the ann'al financial state!ents of the entit.: (hese ethical requirements govern the auditor6s professional responsibilities in the following areas: independence, integrity, objectivity, professional competence and due care, confidentiality, professional behavior, and technical standards. The a'ditor sho'ld i! le!ent B'alit. control a lica-le to the indi&id'al en$a$e!ent: roced'res that are

(he elements of quality control that are relevant to an individual engagement include: leadership responsibilities for quality on the engagement, !thical requirements, -99

 Acceptance and continuance of client relationships and pecific engagements,

Assignment of engagement teams, !ngagement performance and monitoring The au itor shoul plan an perform the re$iew with an attitu e of professional skepticism.

O)4ecti'e of an En"a"ement to Re'ie( Interim Financia* Information

What is the ob1e)ti+e o! re+ie*' (he objective of an engagement to review interim financial information is to enable the auditor to express a conclusion: *hether, on the basis of the review, anything has come to the auditor6s attention that causes the auditor to believe that the interim financial information is not prepared, in all material respects, in accordance with an applicable financial reporting framewor+. (he auditor ma+es inquiries, and performs analytical and other review procedures in order to reduce to a moderate level the ris+ of expressing an inappropriate conclusion when the interim financial information is materially misstated. What is the #i!!eren)e bet*een a%#it an# re+ie*' The o+5ecti&e o$ re&iew o$ interi% $in nci ! in$or% tion di$$er" "igni$ic nt!* $ro% th t o$ n udit conducted in ccord nce with Intern tion ! St nd rd" on Auditing 6ISA"7( A re&iew o$ interi% $in nci ! in$or% tion doe" not #ro&ide + "i" $or e)#re""ing n o#inion whether the $in nci ! in$or% tion gi&e" true nd $ ir &iew' or i" #re"ented $ ir!*' in !! % teri ! re"#ect"' in ccord nce with n ##!ic +!e $in nci ! re#orting $r %ewor,( A re&iew' in contr "t to n udit' i" not de"igned to o+t in re "on +!e ""ur nce th t the interi% $in nci ! in$or% tion i" $ree $ro% % teri ! %i""t te%ent( A re&iew con"i"t" o$ % ,ing in<uirie"' #ri% ri!* o$ #er"on" re"#on"i+!e $or $in nci ! nd ccounting % tter"' nd ##!*ing n !*tic ! nd other re&iew #rocedure"( A re&iew % * +ring "igni$ic nt % tter" $$ecting the interi% $in nci ! in$or% tion to the uditor-" ttention' +ut it doe" not #ro&ide !! o$ the e&idence th t wou!d +e re<uired in n udit( -9<

A"reein" t e Term# of t e En"a"ement

The a'ditor and the client sho'ld a$ree on the ter!s of the en$a$e!ent: (he agreed terms of the engagement are ordinarily recorded in an engagement letter. uch a communication helps to avoid misunderstandings regarding the nature of the engagement and, in particular, the objective and scope of the review, management6s responsibilities, the extent of the auditor6s responsibilities, the assurance obtained, and the nature and form of the report.

Procedure# for a Re'ie( of Interim Financia* Information

(he auditor should have an understanding of the entity and its environment, including its internal control, as it relates to the preparation of both annual and interim financial information, sufficient to plan and conduct the engagement so as to be able to: A. %dentify the types of potential material misstatement and consider the li+elihood of their occurrence/ and 8. elect the inquiries, analytical and other review procedures that will provide the auditor with a basis for reporting whether anything has come to the auditor6s attention that causes the auditor to believe that the interim financial information is not prepared, in all material respects, in accordance with the applicable financial reporting framewor+.

(he procedures performed by the auditor to update the understanding of the entity and its environment, including its internal control, ordinarily include the following: &eading the documentation "onsidering any significant ris+s, including the ris+ of management override of controls that were identified in the audit of the prior year6s financial statements &eading the most recent annual and comparable prior period interim financial information "onsidering materiality "onsidering the nature of any corrected material misstatements and any identified uncorrected immaterial misstatements in the prior year6s financial statements. "onsidering significant financial accounting and reporting matters that may be of continuing significance such as material wea+nesses in internal control. -9=

 "onsidering the results of any audit procedures performed with respect to the current year6s financial statements. "hanges in the entity6s business activities. significant changes in internal control In order to #! n nd conduct re&iew o$ interi% $in nci ! in$or% tion' recent!* ##ointed uditor' who h " not *et #er$or%ed n udit o$ the nnu ! $in nci ! "t te%ent" in ccord nce with ISA"' "hou!d o+t in n under"t nding o$ the entit* nd it" en&iron%ent' inc!uding it" intern ! contro!' " it re! te" to the #re# r tion o$ +oth nnu ! nd interi% $in nci ! in$or% tion.

In/uirie#, Ana*!tica* and Ot er Re'ie( Procedure#

(he auditor should ma+e inquiries, primarily of persons responsible for financial and accounting matters, and perform analytical and other review procedures to enable the auditor to conclude whether, on the basis of the procedures performed, anything has come to the auditor6s attention that causes the auditor to believe that the interim financial information is not prepared, in all material respects, in accordance with the applicable financial reporting framewor+: A review ordinarily does not require tests of the accounting records through inspection, observation or confirmation. #rocedures for performing a review of interim financial information are ordinarily limited to ma+ing inquiries, primarily of persons responsible for financial and accounting matters, and applying analytical and other review procedures, rather than corroborating information obtained concerning significant accounting matters relating to the interim financial information. (he auditor ordinarily performs the following procedures: &eading the minutes of the meetings of shareholders, those charged with governance/ "onsidering the effect, if any, of matters giving rise to a modification of the audit or review report/ "ommunicating with other auditors of component/ *hether there have been any changes in accounting principles or in the methods of applying them. *hether the interim financial information contains any +nown uncorrected misstatements. 7nusual or complex situations ignificant assumptions li+e going concern assumption/ related party transactions ignificant changes in commitments and contractual obligations. ignificant changes in contingent liabilities including litigation or claims. ignificant transactions occurring in the last several days of the interim period or the first several days of the next interim period Gnowledge of any allegations of fraud Gnowledge of any actual or possible noncompliance with laws and regulations

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 Applying analytical procedures to the interim financial information designed to identify relationships and individual items that appear to be unusual and that may reflect a material misstatement in the interim financial information. (he auditor may also decide to perform, at the time of the interim review, auditing procedures that would need to be performed for the purpose of the audit of the annual financial statements. (he auditor should obtain evidence that the interim financial information agrees or reconciles with the underlying accounting records. (he auditor may obtain evidence that the interim financial information agrees or reconciles with the underlying accounting records by tracing the interim financial information to: (he accounting records, such as the general ledger, or a consolidating schedule that agrees or reconciles with the accounting records/ and .ther supporting data in the entity6s records as necessary. (he auditor should inquire whether management has changed its assessment of the entity6s ability to continue as a going concern. *hen, as a result of this inquiry or other review procedures, the auditor becomes aware of events or conditions that may cast significant doubt on the entity6s ability to continue as a going concern, the auditor should: %nquire of management as to its plans for future actions based on its going concern assessment, the feasibility of these plans, and whether management believes that the outcome of these plans will improve the situation/ and "onsider the adequacy of the disclosure about such matters in the interim financial information. *hen a matter comes to the auditor6s attention that leads the auditor to question whether a material adjustment should be made for the interim financial information to be prepared, in all material respects, in accordance with the applicable financial reporting framewor+, the auditor should ma+e additional inquiries or perform other procedures to enable the auditor to express a conclusion in the review report.

E'a*uation of %i##tatement#:
T e auditor s ould evaluate! individually and in t e aggregate! w et er uncorrected misstatements t at ave come to t e auditor's attention are material to t e interim financial information. (he auditor may designate an amount below which misstatements need not be aggregated, because the auditor expects that the aggregation of -9?

such amounts clearly would not have a material effect on the interim financial information. %n so doing, the auditor considers the fact that the determination of materiality involves quantitative as well as qualitative considerations, and that misstatements of a relatively small amount could nevertheless have a material effect on the interim financial information.

%ana"ement Re$re#entation#
The a'ditor sho'ld o-tain #ritten re resentation fro! !ana$e!ent re$ardin$: %mplementation of internal control 'inancial information is prepared accordance applicable reporting framewor+ 7ncorrected misstatements, both individually and in the aggregate are immaterial 3isclosed to the auditor significant facts relating to any frauds 3isclosed to the auditor all +nown actual or possible noncompliance with laws and regulations 3isclosed to the auditor subsequent event to the balance sheet date

Auditor5# Re#$on#i)i*it! for Accom$an!in" Information

The uditor "hou!d re d the other in$or% tion th t cco%# nie" the interi% $in nci ! in$or% tion to con"ider whether n* "uch in$or% tion i" % teri !!* incon"i"tent with the interi% $in nci ! in$or% tion( %f the auditor identifies a material inconsistency, the auditor considers whether the interim financial information or the other information needs to be amended. %f an amendment is necessary in the interim financial information and management refuses to ma+e the amendment, (he auditor considers the implications for the review report. %f an amendment is necessary in the other information and management refuses to ma+e the amendment, the auditor considers including in the review report an additional paragraph describing the material inconsistency, or ta+ing other actions, such as withholding the issuance of the review report or withdrawing from the engagement.

Communication 4hen' " re"u!t o$ #er$or%ing the re&iew % tter co%e" to the uditor-" ttention th t c u"e" to +e!ie&e there i": Need" $or % teri ! d5u"t%ent' E)i"tence o$ $r ud or Nonco%#!i nce +* the entit* with ! w" nd regu! tion" The uditor "hou!d co%%unic te to the ##ro#ri te !e&e! o$ % n ge%ent( 4hen' in the uditor-" 5udg%ent' tho"e ch rged with go&ern nce do not re"#ond ##ro#ri te!* within re "on +!e #eriod o$ ti%e' the uditor "hou!d con"ider: 4hether to %odi$* the re#ort1 or The #o""i+i!it* o$ withdr wing $ro% the eng ge%ent1 nd
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 The #o""i+i!it* o$ re"igning $ro% the ##oint%ent to udit the nnu ! $in nci ! "t te%ent"
Re$ortin" t e Nature, Extent and Re#u*t# of t e Re'ie( of Interim Financia* Information: The au itor shoul issue a written report that contains the following: A. An appropriate title 8. An addressee ". %dentification of the interim financial information reviewed, %ncluding identification of the title of each of the statements contained in the complete or "ondensed set of financial statements and (he date and period covered by the interim financial information 3. A statement that management is responsible for the preparation of the interim financial information in accordance with the applicable reporting framewor+. !. A statement that the auditor is responsible for expressing a conclusion on the interim financial information based on the review '. A statement that the review of the interim financial information was conducted in accordance with %nternational tandard on &eview !ngagements (% &!) 19-D C. A statement that a review is substantially less in scope than an audit conducted in accordance with %nternational tandards on Auditing and consequently does not enable the auditor to obtain assurance that the auditor would become aware of all significant matters that might be identified in an audit and that accordingly no audit opinion is expressed. 0. '.& C!)&A4 #7&#. ! '. : A conclusion as to whether anything has come to the auditor6s attention that causes the auditor to believe that the interim financial information does not give a true and fair view, or does not present fairly, in all material respects, in accordance with the applicable financial reporting framewor+ %. %n other circumstances, a conclusion as to whether anything has come to the auditor6s attention that causes the auditor to believe that the interim financial information is not prepared, in all material respects, in accordance with the applicable financial reporting framewor+. T. (he date of the report. G. (he location in the country or jurisdiction where the auditor practices. 4. (he auditor6s signature.

De$arture from t e A$$*ica)*e Financia* Re$ortin" Frame(or,

(he auditor should express a qualified or adverse conclusion when interim financial information is not prepared, in all material respects, in accordance with the applicable financial reporting framewor+.

+imitation on #co$e im$o#ed )! mana"ement

(he auditor does not accept an engagement to review the interim financial information if the auditor6s preliminary +nowledge of the engagement indicates that the auditor would not be able to complete the review due to scope limitation by management. %f, after accepting the engagement, management imposes a limitation on the scope of the review, the auditor requests the removal of that limitation.

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Goin$ Concern and Si$nificant Uncertainties

%f management refuses to do so, the auditor is unable to complete the review and express a conclusion. %n such cases, the auditor communicates, in writing, to the appropriate level of management. (he auditor also considers the legal and regulatory responsibilities, including whether there is a requirement for the auditor to issue a report. %f there is such a requirement, the auditor disclaims a conclusion, and provides in the review report the reason why the review cannot be completed. 0owever, if a matter comes to the auditor6s attention that causes the auditor to believe that a material adjustment, the auditor also communicates such a matter in the report. %f adequate disclosure is made in the interim financial information, the auditor should add an emphasis of matter paragraph to the review report to highlight a material uncertainty relating to an event or condition that may cast significant doubt on the entity6s ability to continue as a going concern. %f a material uncertainty that casts significant doubt about the entity6s ability to continue as a going concern is not adequately disclosed in the interim financial information, the auditor should express a qualified or adverse conclusion, as appropriate. (he report should include specific reference to the fact that there is such a material uncertainty. (he auditor should consider modifying the review report by adding a paragraph to highlight a significant uncertainty (other than a going concern problem) that came to the auditor6s attention, the resolution of which is dependent upon future events and which may affect the interim financial information.

Documentation:
(he auditor should prepare review documentation that is sufficient and appropriate to provide a basis for the auditor6s conclusion and to provide evidence that the review was performed in accordance with this % &! and applicable legal and regulatory requirements. (he documentation enables an experienced auditor having no previous connection with the engagement to understand the nature, timing and extent of the inquiries made, and analytical and other review procedures applied, information obtained, and any significant matters considered during the performance of the review, including the disposition of such matters.

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 So(e I(portant De!initions

A"ree#>%pon pro)e#%res en"a"e(entVan engagement in which an auditor is engaged to carry out those procedures of an audit nature to which the auditor and the entity and any appropriate third parties have agreed and to report on factual findings. (he recipients of the report form their own conclusions from the report by the auditor. (he report is restricted to those parties that have agreed to the procedures to be performed since others, unaware of the reasons for the procedures may misinterpret the results. Ana &ti)a pro)e#%resV!valuations of financial information made by a study of plausible relationships among both financial and nonEfinancial data. Analytical procedures also encompass the investigation of identified fluctuations and relationships that are inconsistent with other relevant information or deviate significantly from predicted amounts. AppropriatenessV(he measure of the quality of evidence, that is, its relevance and reliability in providing support for, or detecting misstatements in, the classes of transactions, account balances, and disclosures and related assertions. AssertionsV&epresentations by management, explicit or otherwise, that are embodied in the financial statements. A%#it e+i#en)eVall of the information used by the auditor in arriving at the conclusions on which the audit opinion is based. Audit evidence includes the information contained in the accounting records underlying the financial statements and other information. A%#it o! !inan)ia state(entsVthe objective of an audit of financial statements is to enable the auditor to express an opinion whether the financial statements are prepared, in all material respects, in accordance with an applicable financial reporting framewor+. A%#it ris2VAudit ris+ is the ris+ that the auditor expresses an inappropriate audit opinion when the financial statements are materially misstated. Audit ris+ is a function of the ris+ of material misstatement (or simply, the :ris+ of material misstatement;) (i.e., the ris+ that the financial statements are materially misstated prior to audit) and the ris+ that the auditor will not detect such misstatement (:detection ris+;). (he ris+ of material misstatement has two components: inherent ris+ and control ris+ (as described at the assertion level below). 3etection ris+ is the ris+ that the auditor6s procedures will not detect a misstatement that exists in an

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assertion that could be material, individually or when aggregated with other misstatements. Inherent ris2V%nherent ris+ is the susceptibility of an assertion to a misstatement, that could be material, individually or when aggregated with other misstatements assuming that there were no related internal controls. Contro ris2?"ontrol ris+ is the ris+ that a misstatement that could occur in an assertion and that could be material, individually or when aggregated with other misstatements, will not be prevented or detected and corrected on a timely basis by the entity6s internal control. A%#it sa(p in"Vthe application of audit procedures to less than -DDR of items within an account balance or class of transactions such that all sampling units have a chance of selection. (his will enable the auditor to obtain and evaluate audit evidence about some characteristic of the items selected in order to form or assist in forming a conclusion concerning the population from which the sample is drawn. Audit sampling can use either a statistical or a nonEstatistical approach. Ano% !ou" error?an error that arises from an isolated event that has not recurred other than on specifically identifiable occasions and is therefore not representative of errors in the population. Non8" %#!ing ri",?Arises from factors that cause the auditor to reach an erroneous conclusion for any reason not related to the si$e of the sample. 'or example, most audit evidence is persuasive rather than conclusive, the auditor might use inappropriate procedures, or the auditor might misinterpret evidence and fail to recogni$e an error. S %#!ing ri",?Arises from the possibility that the auditor6s conclusion, based on a sample may be different from the conclusion reached if the entire population were subjected to the same audit procedure. Str ti$ic tionVthe process of dividing a population into subpopulations, each of which is a group of sampling units which have similar characteristics (often monetary value). To!er +!e errorVthe maximum error in a population that the auditor is willing to accept. Tot ! error?either the rate of deviation or total misstatement.

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 Con!ir(ationVa specific type of inquiry that is the process of obtaining a representation of information or of an existing condition directly from a third party. Contro a)ti+itiesVthose policies and procedures that help ensure that management directives are carried out. "ontrol activities are a component of internal control. Contro en+iron(entVincludes the governance and management functions and the attitudes, awareness and actions of those charged with governance and management concerning the entity6s internal control and its importance in the entity. (he control environment is a component of internal control. En)r&ption Dcr. to$ra h.9Vthe process of transforming programs and information into a form that cannot be understood without access to specific decoding algorithms (cryptographic +eys). 'or example, the confidential personal data in a payroll system may be encrypted against unauthori$ed disclosure or modification. !ncryption can provide an effective control for protecting confidential or sensitive programs and information from unauthori$ed access or modification. 0owever, effective security depends upon proper controls over access to the cryptographic +eys. En"a"e(ent #o)%(entationHthe record of wor+ performed, results obtained, and conclusions the practitioner reached (terms such as :wor+ing papers; or :wor+ papers; are sometimes used). (he documentation for a specific engagement is assembled in an engagement file. En"a"e(ent partnerHthe partner or other person in the firm who is responsible for the engagement and its performance, and for the report that is issued on behalf of the firm, and who, where required, has the appropriate authority from a professional, legal or regulatory body. En"a"e(ent etterHan engagement letter documents and confirms the auditor6s acceptance of the appointment, the objective and scope of the audit, the extent of the auditor6s responsibilities to the client and the form of any reports. E0pertHa person or firm possessing special s+ill, +nowledge and experience in a particular field other than accounting and auditing. E0terna )on!ir(ationHthe process of obtaining and evaluating audit evidence through a direct communication from a third party in response -<9

to a request for information about a particular item affecting assertions made by management in the financial statements. Fra%#HAn intentional act by one or more individuals among management, those charged with governance, employees, or third parties, involving the use of deception to obtain an unjust or illegal advantage. (wo types of intentional misstatement are relevant to the auditor: misstatements resulting from fraudulent financial reporting and misstatements resulting from misappropriation of assets (also see fraudulent financial reporting and ,isappropriation of assets). Fra%#% ent !inan)ia reportin"H%nvolves intentional misstatements, including omissions of amounts or disclosures in financial statements, to deceive financial statement users. Goin" )on)ern ass%(ptionHunder this assumption, an entity is ordinarily viewed as continuing in business for the foreseeable future with neither the intention nor the necessity of liquidation, ceasing trading or see+ing protection from creditors pursuant to laws or regulations. Accordingly, assets and liabilities are recorded on the basis that the entity will be able to reali$e its assets and discharge its liabilities in the normal course of business. In!or(ation s&ste( re e+ant to !inan)ia reportin"HA component of internal control that includes the financial reporting system, and consists of the procedures and records established to initiate, record, process and report entity transactions (as well as events and conditions) and to maintain accountability for the related assets, liabilities and equity. Li(itation on s)opeVA limitation on the scope of the auditor6s wor+ may sometimes be imposed by the entity (for example, when the terms of the engagement specify that the auditor will not carry out an audit procedure that the auditor believes is necessary). A scope limitation may be imposed by circumstances (for example, when the timing of the auditor6s appointment is such that the auditor is unable to observe the counting of physical inventories). %t may also arise when, in the opinion of the auditor, the entity6s accounting records are inadequate or when the auditor is unable to carry out an audit procedure believed desirable. Materia it&H%nformation is material if its omission or misstatement could influence the economic decisions of users ta+en on the basis of the financial statements. ,ateriality depends on the si$e of the item or error judged in the particular circumstances of its omission or misstatement. (hus, materiality provides a threshold or cutoff point rather than being a

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primary qualitative characteristic which information must have if it is to be useful. Misappropriation o! assetsHinvolves the theft of an entity6s assets and is often perpetrated by employees in relatively small and immaterial amounts. 0owever, it can also involve management who are usually more capable of disguising or concealing misappropriations in ways that are difficult to detect. Ris2 assess(ent pro)e#%resHthe audit procedures performed to obtain an understanding of the entity and its environment, including its internal control, to assess the ris+s of material misstatement at the financial statement and assertion levels. S(a entit&Hany entity in which:

a. (here is concentration of ownership and management in a small number of individuals (often a single individual)/ and b. .ne or more of the following are also found: 'ew sources of income/ 7nsophisticated recordE+eeping/ and 4imited internal controls together with the potential for management override of controls.

mall entities will ordinarily display characteristic (a), and one or more of the characteristics included under (b). Un#erstan#in" o! the entit& an# its en+iron(entHthe auditor6s understanding of the entity and its environment consists of the following aspects: a. %ndustry, regulatory, and other external factors, including the applicable financial reporting framewor+. b. )ature of the entity, including the entity6s selection and application of accounting policies. c. .bjectives and strategies and the related business ris+s that may result in a material misstatement of the financial statements. d. ,easurement and review of the entity6s financial performance. e. %nternal control.

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