Review of Indai's Audit Assurance Standards (Summary)

Topic: - Audit Assurance Standards
Subject: - Auditing
Class: - Third Year Bachelor of Commerce (Accounting & Finance)
Semester: - 5
Group Members:
Name Roll No.
Aditya Chaubal 06
Krishnan Ramamurthy 26
Amit Rajapurkar 40
Robin Mathew 42
Ankit Sawant 46
Rajan Shinde 52
Year: - 2009 – 2010

Project Guide: Prof. Amish Thakkar
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ACKNOWLEDGEMENT
We take this opportunity with great pleasure to present

this project on Audit Assurance Standards which is a result of
co-operation, hard work and good wishes of many people in
one way or other. We would like to express our heartiest
gratitude towards all those who have helped us.
We would like to thank our project guide Prof. Amish

Thakkar for his guidance throughout the project.
Finally we are thankful to all our friends, family members

and teachers who have lent a helping hand to complete this
project.
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Table of Contents
Sr. No. Topic Page No.

1. Introduction 5
2. Auditing and Assurance Standard (AAS) 1 7
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37. Case Studies 82
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1 – INTRODUCTION
Auditing along with other disciplines such as accounting and law,

equips you with all the knowledge that is required to enter into auditing as a
profession. No business or institution can effectively carry on its activities
without the help of proper records and accounts, since transactions take
place at different points of time with numerous persons and entities. The
effects of all transaction have to be recorded and suitably analysed to see the
results as regards the business as a whole. Periodical statements of accounts
are drawn up to measure the success or failure of the activities in achieving
the objective of the organization. This would be impossible without a
systematic record of transactions.
Financial statements are often the basis for decision making by the
management and for corrective action so as to even closing down the
organization or a part of it. All this would be possible only if the statements
are reliable; decisions based on wrong accounting statements may prove very
harmful or even fatal to the business. For example, if the business has really
earned a profit but because of wrong accounting, the annual accounts show
a loss, the proprietor may take the decision to sell at a loss. Thus from the
point of view of the management itself, authenticity of financial statements
is essential. It is more essential for those who have invested their money in
the business but cannot take part in its management, for example
shareholders in a company, such persons certainly need an assurance that
the annual statements of accounts sent to them are fully reliable. It is
auditing which ensures that the accounting statements are authentic. In
today’s economic environment, information and accountability have
assumed a large role than ever before. As a result, the independent audit of
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an entity’s financial statement is a vital service to investors, creditors, and
other participants in economic exchange.
Historically, the word

‘auditing’ has been derived from
the latin word “audire” which
means “to hear”. In fact, such an
expression conveyed the manner
in which the auditing was
conducted during the ancient
time. However, over a period of
time, the manner of conducting
has undergone revolutionary
change. According to Dicksee,
traditionally auditing can be
understood as an examination of
accounting records undertaken
with a view to establish whether they completely reflect the transaction
correctly for the related purpose. But this is not the end of matter. In
addition the auditor also expresses his opinion on the character of the
statements of accounts prepared from the accounting records so examined
as to whether they portray a true and fair picture.
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2. Auditing and Assurance Standard (AAS) 1
Basic Principles Governing an Audit
1. AAS 1 describes the basic principles which govern the auditors

professional responsibilities and which should be complied with
whenever an audit is carried out. Compliance with the basic principles
requires the application of auditing procedures and reporting practices
appropriate to the particular circumstances.
2. The auditor should be honest, sincere to his professional approach.

He should respect the confidentiality of information acquired in the
course of work. He must be fair and not allow bias to override his
objectivity.
3. The auditor requires specialised skills and competence. He should have

adequate training, experience and competence in auditing
4. The auditor should carefully direct, supervise and review work delegated
to assistants & he is responsible forming and expressing his opinion on
financial information. Though an auditor delegates his work, he alone
will be responsible for forming and expressing his opinion on the
financial information.
5. The auditor should document matters and should plan his work which
can help in providing evidence for effective audit.
Plans should be made for:
a) Acquiring knowledge of the client’s accounting system;
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b) Establishing the expected degree of reliance to be placed on
internal control;
c) Coordinating the work to be performed.
6. The auditor should obtain sufficient appropriate audit evidence through

the performance of compliance and substantive procedures. This will
enable him to draw reasonable conclusion on the financial information.
7. The auditor should gain an understanding of the accounting system

related internal controls and should study and evaluate the operation of
those internal controls. Auditor should assure himself that the
accounting system is adequate.
8. The review assess of the audit involves forming of conclusion as to:

a) financial information has been prepared using acceptable
accounting policies;
b) financial information complies with relevant regulations and
requirements;
c) there is adequate disclosure of all relevant matters.
9. This AAS becomes operative for all audits relating to accounting periods
beginning on or after April 1, 1985.
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Objective and Scope of the Audit of Financial

Statements
1. The objective of an audit of financial statements, prepared within a

framework of recognized accounting policies and practices and relevant
statutory requirements, if any, is to enable an auditor to express opinion
on such financial statements.
2. The auditor opinion helps in determination of true and fair view of the
financial position and operating results of an enterprise.
3. The auditor is responsible for forming and expressing his opinion on the
financial statements but the responsibility for their preparation is that of
management of the enterprise. The main responsibility of financial
statement lies with the management, auditor only gives his assurance.
4. The scope of an audit of financial statements will be determined by the

auditor having regard to the terms of the engagement. The terms of
engagement do not restrict the scope of an audit In relation to matters
which are prescribed by legislation or by the pronouncements of the
Institute.
5. The auditor assess the reliability of the information contained in the

underlying account records and other source data by making study and
evaluation and also by carrying out tests, enquiries and verification
procedures.
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6. The auditor should determines whether the relevant information is
properly disclosed in the financial statement by comparing the
underlying accounting records and considering the judgements that
management has made in preparing the financial statements.
7. The auditor is not expected to perform duties which fall outside the
scope of his competence. Any constraint on the scope of audit that
impairs the auditor’s ability to express an unqualified opinion should be
mentioned in his report.
8. If the auditor has indication that some fraud or error have occurred
which could result in misstatement, he can extent his procedures to
confirm or dispel his suspicions.
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Audit Documentation
1. AAS 3 deals with the auditor’s responsibility to prepare documentation

for an audit of financial statements.
2. Audit documentation serves a number of additional purposes like

assisting the engagement team to plan and perform the audit, assisting
members of the engagement team responsible for supervision to direct
and supervise the audit report.
3. The objective of the auditor to prepare the documentation is to provide

a sufficient and appropriate record of the basis for the auditor’s report.
4. The auditor shall prepare the documentation on a timely basis, helps to

enhance the quality of the audit and facilitates the effective review.
5. The form, content and extent of audit documentation depends on

several factors like size and complexity of the entity, nature of the audit
procedures to be obtained, identified risks of material misstatement,
nature and extent of exceptions identified and the audit methodology
and tools used.
6. The objective and requirements are designed to support the

achievement of the overall objective of the auditor; the documentation
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requirement applies only to requirements that are relevant in the
circumstances.
7. The auditor performs new or additional audit procedures or draws new

conclusions after the date of the auditor’s report, the auditor shall
document the circumstances encountered, the new or additional audit
procedure performed, audit evidence obtained, and conclusions
reached and their effects on auditor’s report and when and by whom
the resulting changes to audit documentation were made and reviewed.
8. The auditor shall assemble the audit documentation in an audit file and
complete the administrative process of assembling the audit file on a
timely basis after the date of the auditor’s report, after the assembly of
the final audit file has been completed the auditor shall not delete or
discard audit documentation of any nature before the end of its
retention period.
commencing on or after 1st April 2003.
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The Auditor’s Responsibility to Consider Fraud

and Error in an Audit of Financial Statements
1. AAS 4 establishes standards on the auditor’s responsibility to consider fraud

and error in an audit of financial statement.
While planning, performing and evaluating the audit programme, the
auditor should consider the risk of fraud or error in financial statements.
2. The term ‘fraud’ refers to an unintentional misstatement in the financial

statement. The term ‘fraud’ refers to an unintentional act by employees,
management or third parties for any unjust or illegal advantage.
The distinguishing factor between fraud and error is intention.
3. The risk of not detecting fraud is higher than the risk of not detecting error
because fraud is a carefully organised scheme with an intention to conceal
it. The risk of fraud goes up when the fraud is done by management itself as
they can override the control procedures.
4. While planning the audit, the auditor should have discussions with other
members of the audit team about the susceptibility of the entity to fraud or
error.
5. The auditor should also make inquires of management to understand:

a) management’s own assessment of the risk of fraud;
b) accounting and internal control systems in place to prevent and
detect error;
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c) whether management is aware of any fraud that has affected the
entity or is suspecting any fraud;
d) Whether management has discovered any material errors.
6. Auditor may identify certain events or conditions in an entity that provide

an opportunity to commit frauds or where fraud might have been already
committed. Such events are known as ‘fraud risk factors’. Auditor will give
more focus to such area in his audit programme.
7. If an auditor has identified a misstatement which results in fraud, he should

communicate the information to management or those charged to
governance. Such communication should be done on a timely basis as it
enables the management to take necessary action.
Sometimes the auditor may even have to inform the Regulatory and
Enforcement Authorities about the incidence of fraud. This might be
because of a statute, the law or decision of a court of law.
8. The auditor should also communicate to management any material

weakness in internal control, relating to prevention or detection of fraud or
error.
commencing on or after April 1, 2003.
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Audit Evidence
1. This Standard on Auditing (SA) explains what constitutes audit evidence in

an audit of financial statements, and deals with the auditor’s responsibility
to design and perform audit procedures to obtain sufficient appropriate
audit evidence to be able to draw reasonable conclusions on which to base
the auditor’s opinion.
2. The objective of this standard is to make the auditor aware about how to
design his audit and perform his audit procedures in a way that as to enable
him to obtain sufficient information and audit evidence to be able to draw
reasonable conclusions on which to base the auditor’s opinion.
3. The reliability of audit evidence depends on its sources – internal or

external and on its nature – visual, documentary or oral.
When audit evidence obtained from one source is inconsistent with that
obtained from another, further procedure may have to be performed to
resolve the inconsistency.
4. When the auditor is in doubt as to any assertion of material significant, he

would attempt to obtain sufficient appropriate evidence to remove such
doubt. If he is unable to obtain sufficient appropriate evidence he should
not express a clean opinion.
5. The auditor obtains evidence in performing compliance and substantive

procedures by one or more of the following methods: Inspection,
Observation Inquiry and confirmation, Computation, Analytical Review.
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a) Inspection
b) Observation
c) Inquiry and Confirmation
d) Computation
e) Analytical, Review – Study of significant Ratios & Trends &
Investigations.
6. Most of the audit evidence is primarily obtained through the audit

procedures performed during the course of the audit, it may also include
information obtained from other sources and previous audits of the firm,
therefore the following points are important while considering such
information for audit evidence: -
a) Relevance and Reliability

b) Reliability on information obtained from management experts.
c) The competence, capability and objectivity of a Management’s
Expert.
d) Obtaining an understanding of the work of the management’s expert.
e) Evaluating the appropriateness of the management’s expert’s work.
7. This AAS is effective for audits of financial statements for periods

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Risk Assessments and Internal Control
1. The purpose of AAS 6 is to establish standards on the procedures to be

followed to obtain an understanding of the accounting and internal control
systems and on audit risk and its components: inherent risk, control risk
and detection risk.
2. To plan an effective audit approach, the auditor should obtain an

understanding of the accounting and internal control systems.
Auditor should make an assessment of both control risk and inherent risk to
determine the appropriate detection risk that may be accepted by him
while auditing the financial statements.
3. While developing the audit plan, the auditor should assess inherent risk.
Inherent risk is the susceptibility of the account balance or a class of
transaction to a material misstatement, either individually or when
aggregated together.
4. Auditor should have a proper understanding of the accounting system and

internal control system in place.
The understanding of relevant aspects of accounting and internal control
systems, together with inherent and control assessments, will enable the
auditor to:
a) assess the adequacy of internal control;
b) identify the types of potential misstatements;
c) consider factors that affect the risk of material misstatements;
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d) develop an appropriate audit plan.
Limitations of internal control are:
a) Transactions of unusual nature are usually not detected
b) Circumvention through collusion with employees
c) Person responsible for exercising the power may abuse it
d) Manipulations by management.
5. After obtaining an understanding of the accounting system and internal

control system, the auditor should make a preliminary assessment of
control risk for each material account balance or class of transactions.
6. For any assessment of control risk which is less than high, the auditor
should obtain audit evidence through tests of control.
Test of control may include:
a) Inspection of documents supporting documents.

b) Re-performance of internal controls.
c) Testing of internal control operating on specific computerised
applications.
Based on these results, auditor should decide whether internal controls are
designed and operating as contemplated in the preliminary assessment of
control risk.
7. The level of detection risk relates directly to the auditor’s substantive

procedures.
Detection risk is the risk that the auditor’s substantive procedures will not
detect a misstatement that could be material, either individually or
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cumulatively with other misstatements. When the auditor determines that
detection risk cannot be reduced to an acceptable level, then he should
express a qualified opinion or disclaimer of opinion as may be appropriate.
8. The auditor should make management aware, as soon as possible of any

material weakness in the design or operation of internal control systems,
which have to auditor’s attention.
9. This AAS becomes applicable for all audits relating to accounting periods
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Relying upon the work of an Internal Auditor
1. AAS 7 provides guidelines as to the procedures which should be applied

by the external auditor in assessing the work of internal auditor for the
purpose of placing reliance upon that work.
2. The scope and objectives of internal audit vary widely and are
dependent upon the size and structure of the entity.
The role of internal audit function within an entity is determined by
management, while an external auditor who is appointed to report
independently on the financial statements.
3. The external auditor should, as part of his audit, evaluate the internal
audit function to the extent he considers that it will be relevant in
determining the nature, timing and extent of his compliance and
substantive procedures.
4. The internal audit function cannot be expected to have the same degree
of independence as is essential when the external auditors express his
opinion on financial statement.
5. The external auditor’s general evaluation on the internal audit function

will assist him in determining the extent to which he can place reliance
upon the work of the internal auditor.
He should review the internal auditor’s work, taking into account the
following factors:
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a) Whether internal audit is undertaken by an outside agency or an
internal audit department.
b) Scope of work and related audit programmes.
c) Conclusions reached.
d) Any exceptions or unusual matters disclosed.
6. The co-ordination with the internal auditor will be more effective when
meetings are held between both of them. It is desirable that the
external auditor is advised of and has access to, relevant internal audit
reports and in addition is kept informed, along with management of any
significant matter that comes to the internal auditor’s attention and
which he believes may affect the work of the external auditor.
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9. Auditing and Accounting Standard (AAS) 8
Planning an Audit of Financial Statements
1. This AAS deals with auditor’s responsibility to plan an audit of financial

statements. This standard is framed in the context of recurring audits.
The objective of the auditor is to plan the audit so that it will be
performed in an effective manner.
2. Auditor alone will not be planning the audit program. The engagement
partner and other key members of the engagement team shall be
involved in planning the audit, including planning and participating in
the discussion among engagement team members.
The auditor shall plan the nature, timing and extent of direction and
supervision of engagement team members and the review of their work.
3. The auditor shall undertake the following activities prior to starting an

initial audit:
a) Performing procedures regarding the acceptance of the client
relationship and the specific audit engagement.
b) Communicating with the predecessor auditor, where there has been
a change of auditors, in compliance with relevant ethical
requirements.
c) Establishing an understanding of the terms of the engagement.
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3. The auditor shall establish an overall audit strategy that sets the scope,
timing and direction of the audit.
While establishing the overall audit, the auditor shall also;
a) Identify the characteristics of the engagement;

b) Find out the reporting objectives of the engagement;
c) Consider factors which may be essential for directing the
engagement team’s efforts;
d) Ascertain the nature, timing and extent.
4. The auditor’s audit plan should include a description of:

a) Nature, timing and extent of planned risk assessment procedures;
b) Nature, timing and extent of further audit procedures;
c) Other audit procedures necessary to be carried out under
provision.
5. The audit plan should be flexible. He should update and change the
overall audit strategy and audit plan as and when the situation
demands.
6. Documentation is a very important step. It is through this that auditor

will be able to assess the audit work. The auditor should document:
a) The overall audit strategy;
b) The audit plan; and
c) Any significant changes made to the audit plan.
7. This AAs is effective for audits of financial statements for periods

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Using the Work of an Expert
1. The auditor’s education and experience enable him to be knowledgeable

about business matters in general, but he is not expected to have the
expertise of a person trained for another profession or occupation.
2. During the audit, the auditor may seek to obtain, in consultation with client
or independently, audit evidence in the form of reports, options, valuations
and statements of an expert.
Examples are – valuation of certain types of assets, determination of
physical condition of assets, actuarial valuation, etc.
3. To determine whether to use the work of an expert or not, the auditor

should consider the nature and complexity of item, the materiality of item
and other audit evidence available with respect to the item.
4. When the auditor plans to use the experts work as audit evidence he
should satisfy himself as to the expert skills and competence by considering
the experts professional qualification , license & experience and reputation
in the field.
5. To use the appropriateness and reasonableness of assumptions of methods

is the responsibility of expert. The auditor does not have the same
expertise and therefore cannot always challenge the expert’s assumptions
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and methods. However he should obtain an understanding of the expert’s
work to determine that they are reasonable based on his knowledge
6. If after performing the procedures auditor concludes that the work of

expert is inconsistent or it cannot form a part of audit evidence then he
should express his opinion in his report.
7. The auditor should not refer to the work of an expert in his report for
expressing an unqualified opinion. If he wants to disclose the identity of
expert, he should get the prior approval of expert before doing so.
8. This AAs becomes operative for all audits relating to accounting periods
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Using the work of another Auditor
1. The purpose of this AAS is to establish standards to be applied in

situations where an auditor, reporting ting on the financial information
of an entity, uses the work of another auditor. It does not deal with
those instances where two or more auditors are appointed as neither
joint auditors nor deals with the auditor’s relationship with a
predecessor auditor.
2. When the principal auditor uses the work of other auditor, the principal
auditor determines how the work of the other auditor will affect the
audit.
The principal auditor should consider the professional competence of
the other auditor, while planning to use the work of another auditor.
3. The auditor should consider whether the auditors own work

participation is sufficient to be able to act as the principal auditor. He
should consider the following points for evaluating this:
a) The materiality of the portion of financial statements which the
principal auditor audits;
b) The principal auditor’s degree of knowledge about the business of
the components;
c) The risk of misstatements in the financial statement audited by
the other auditor.
4. The principal auditor might discuss with the other auditor about the
audit procedures which may be in the form of complete questionnaire
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or check-list. The other auditor should respond to such questionnaire on
a timely basis.
5. The principal auditor should consider the significant findings of the

other auditor. The principal auditor may consider it appropriate to
discuss with the other auditor the components of audit findings
affecting the financial information of the company.
6. The other auditor knowing the context in which his work is to be used by
the principal auditor he should co-ordinate with him. For this purpose,
principal auditor might have to give a written communication to the
other auditor.
7. When the principal auditor concludes, based on his procedures, that the
work of the other auditor cannot be used and the principal auditor has
not been able to perform sufficient additional procedures regarding the
financial information of the components audited by the other auditor,
the principal auditor should express a qualified opinion.
8. When the principal auditor has to base his opinion on the financial
information of the entity as a whole, relying upon the work of the other
auditor also, then his report should clearly state the division of
responsibility by indicating the extent to which the other auditor has
contributed.
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Representations by Management
1. This AAS speaks about auditor's responsibility to obtain written

representations from management and, where appropriate, those
charged with governance.
2. Written representation is the statement offered by management which

confirms certain matters or they form a part of audit evidence. It is with
the help of this audit evidence that an auditor will arrive at the
conclusion of his audit work.
3. The written representations shall be for all financial statements and

period referred to in the auditor's report.
The written representations shall be in the form of a representation
letter addressed to the auditor.
4. The objectives of the auditor:

a) To obtain written representations from management that
management believes that it has fulfilled the responsibilities;
b) To support other audit evidence relevant to the financial
statements;
c) To respond appropriately to written representations provided by
management
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5. When obtaining evidence about, or evaluating, judgments and
intentions, the auditor may consider one or more of the following:
a) The entity's past history in carrying out its stated intentions.
b) The entity's reasons for choosing a particular course of action.
c) The entity's ability to pursue a specific course of action.
d) The existence or lack of any other information that might have
been obtained during the course of the audit that may be
inconsistent with management's judgment or intent.
6. Auditor should check that the date of the written representations shall
be as near as practicable. But it should not be after the date of auditor’s
report.
7. If the auditor has any concerns about the competence, integrity or

diligence of management, or about its commitment, the auditor shall
determine the effect that that such concerns may have on the
representations.
If the auditor is of the opinion that written representations are not
reliable, then auditor should take appropriate actions.
8. If management does not provide one or more requested

representations, the auditor shall:
a) Discuss the matter with management;
b) Re-valuate the integrity of management;
c) Take appropriate actions.

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Responsibility of Joint Auditors
1. AAS 12 deals with professional responsibilities which the joint auditors

undertake in accepting such appointments as joint auditors.
Joint auditors are normally appointed for conducting the audit of large
audits. They conduct the audit together, and report on the financial
statements of the entity.
2. Where joint auditors are appointed, they should, by mutual discussion,

divide the audit work among themselves and work should be adequately
documented and preferably communicated to the entity.
3. In respect of audit work divided among the joint auditors, each joint
auditor is responsible only for the work allocated to him, whether or not
he has prepared a separate report on the work performed by him.
On the other hand, all the joint auditors are jointly and severally
responsible –
a) in respect of the audit work which is not divided among the joint
auditors and is carried out by all of them;
b) in respect of decisions taken by all the joint auditors concerning
the nature, timing or extent of the audit procedures to be
performed by any of the joint auditors.
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c) in respect of matters which are brought to the notice of the joint
auditors by any one of them and on which there is an agreement
among the joint auditors;
d) for examining that the financial statements of the entity comply
with the disclosure requirements of the relevant statute; and
e) for ensuring that the audit report complies with the requirements
of the relevant statute.
4. Each joint auditor is entitled to assume that the other joint auditors
have carried out their part of the audit work in accordance to the
generally accepted audit procedures. It is not necessary for one joint
auditor to review the work performed by other auditor.
5. Normally the joint auditors are to arrive at an agreed report. However

when the joint auditors disagree, each one of them should express his
own opinion in a separate report.
6. This AAS becomes operative in respect of all audits relating to

accounting periods beginning on or after April 1, 1996.
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Audit Materiality
1. AAS 13 establishes standard on the concept of materiality and its relation

to audit risk.
An auditor should always take into consideration materiality and its
relationship to audit risk while performing an audit.
2. Information is material if by its misstatements the economic decisions

taken are affected. Materiality depends on the size and nature of the item,
judged on the basis of its misstatement.
The assessment of what is material is a matter of professional judgement.
3. The auditor should consider materiality both at the overall financial

information level and in relation to individual account balances and
transactions.
4. The auditor normally establishes an acceptable materiality level at the start

of the engagement. This acceptable materiality level is a consideration of
both the amount and nature of misstatements.
5. Sometimes misstatements of relatively small amount can cumulatively have

a material effect on the financial information. This should be considered by
an auditor.
6. There is an inverse relationship between materiality and the degree of

audit risk. Higher the materiality level, lower is the audit risk and lower the
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material level higher is the audit risk. The auditor should take this inverse
relationship into consideration while determining the nature, timing and
extent of audit procedures.
7. The acceptability materiality level may change as the audit process
continues. This may be because of a change in circumstances or a change in
auditor’s knowledge as a result of the audit.
8. If the aggregate of uncorrected misstatements are close to the materiality

level or if the misstatements are affecting the financial information, then
the auditor should ask the management to adjust the financial information
or extend his audit procedure.
If the management refuses to adjust the financial information then the
auditor should express his adverse opinion.
9. This AAS becomes operative for all audits relating to accounting periods on
or before April 1, 1996.
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Analytical Procedures
1. The purpose of AAs 14 is to establish standards on the application of

analytical procedures during an audit.
Analytical procedures mean the analysis of significant ratios and trends
including the resulting investigation of fluctuations that are inconsistent
with other information. The auditor should apply analytical procedures
at the planning and overall review stages of the audit.
2. The nature and purpose of analytical procedures are:

a) Comparable information for prior periods.
b) Anticipated results of the entity.
c) Predictive estimates prepared by the auditor.
d) Comparison with other similar entities.
3. Analytical procedures are used for the following purposes:

a) to assist the auditor in planning the audit;
b) as substantive procedures when they can be more effective and
efficient than other tests;
c) as an overall review of the financial statements.
4. The auditor should apply analytical procedures at the planning stage to

assist in understanding the business and in identifying areas of potential
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risk. Application of analytical procedures may indicate aspects of
business, which the auditor was unaware off.
5. The auditor should apply analytical procedures at or near the end of the
audit when forming an overall conclusion as to whether the financial
statements as a whole are consistent with the auditor's knowledge of
the business.
6. The extent of reliance that the auditor places on the results of analytical
procedures depend on the following factors:
a) Materiality of the items involved;
b) Other audit procedures directed towards the same audit
objectives;
c) Accuracy with which the results can be predicted.
7. When analytical procedures identify significant fluctuations or

relationships that are inconsistent with other relevant information or
that deviate from predicted amounts, the auditor should investigate and
obtain adequate explanations and appropriate corroborative evidence.
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Audit Sampling
1. AAS 15 is applicable when the auditor has decided to use audit sampling to
perform audit procedure. It deals with auditor’s use of statistical and non-
statistical sampling when selecting an audit sample, conducting tests, and
evaluating the results.
The objective of the auditor when using audit sample is to provide a
reasonable basis to draw conclusions about the population from which the
audit sample has been selected.
2. There are many sample selection methods. The principal methods are
random selection, systematic selection, haphazard selection, and block
selection. An auditor has to select a proper method because it is on the
basis of the particular method selected that he has to draw conclusion
about the entire population.
3. It is important that the auditor selects a representative sample, so that bias
is avoided, by choosing sample items which have characteristics typical of
the population.
4. Points to be consider by an auditor before undertaking audit sample:
a) Purpose of the audit procedure and characteristics of the population
from which the sample is taken
b) Selection of sufficient sample size so as to reduce the risk to an
acceptable low level.
c) Selection of samples in such a way that each unit of population has a
chance of selection.
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5. After selection of sample, the auditor shall perform the audit procedure on
each of the selected item.
If the audit procedure is not applicable on the selected item, the auditor
shall perform the procedure on a replacement item.
6. If the auditor is unable to apply the audit procedure or alternative
procedures on any selected item, then that item will be treated as a
deviation from the prescribed control.
7. The auditor shall then investigate the nature of deviation and find out their
possible effect on the purpose of audit procedure and other areas of audit.
8. Sometimes the deviation found may be present in just the particular
sample selected and hence the rest of population would not be affected by
it. The auditor can ensure this by performing additional audit procedures. In
such a situation opinion on the entire population cannot be drawn on the
basis of the sample.
9. Finally the auditor shall evaluate the results of the sample and check
whether the use of audit sampling is enough to draw conclusion about the
entire population.
10. If the auditor concludes that audit sampling is not enough to draw
conclusion about the entire population, then he may:
a) Request management to investigate deviation identified;
b) Take necessary steps to prepare further audit procedures that
achieve the required assurance.
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Going Concern
1. This AAS deals with the auditor’s responsibility in the audit of financial
statement in relation to management’s use of going concern assumption in
the preparation and presentation of financial statements
2. Under the going concern assumption, it is assumed that the entity is going
to continue its business for a foreseeable future. All the financial
statements are also prepared on this assumption, unless the management
has plans to cease operations.
When going concern assumption is used correctly, assets and liabilities are
recorded on the basis that entity will be able to realise them in the normal
course of business.
3. The management of the entity needs to make certain judgement about

future events or conditions while making the going concern assumption.
The factors related to making this judgement are:
a) The size and complexity of the business, the nature and condition of
business.
b) The degree to which the entity will be affected by any external
factors after taking such judgements.
c) Any judgement about future is based on information available at the
time of judgement. Any further events may result in outcome that is
inconsistent with the judgements taken.
4. The objectives of an auditor are:

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a) To obtain audit evidence about the appropriateness of managements
use of going concern assumption.
b) To conclude whether an uncertain situation exist that cast a doubt on
the entity’s ability to continue as a going concern.
c) To determine the implication of auditor’s report.
5. The auditor shall discus with the management whether they have identified
any situation or event that cast doubt on the entity’s ability to continue as a
going concern.
6. The auditor shall also evaluate the management’s risk assessment of the
entity’s ability to continue as a going concern. While evaluating
management’s assessment, the auditor should consider whether it includes
all relevant information that he is aware off.
7. When any events or condition have been identified that puts a doubt into
the entity’s ability to continue as a going concern auditor shall take the
following measures:
a) Request management to make its assessment, if it has not performed
one.
b) Evaluating management’s future plans in relation to improve the
situation.
c) Whether any additional facts are available since the time of
evaluation.
d) Requesting written representations from management regarding
their future plans and feasibility of these plans.
8. If the financial statements have been prepared on a going concern basis,

but in auditor’s opinion those judgements are inappropriate then he shall
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give an adverse opinion. If the management is unwilling to consider the
assessment when requested by the auditor, he shall consider the
implications for the auditor’s report.
9. This AAS is effective for audits of financial statements beginning on or after
April 1, 2009.
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Quality control for audit work
The main Purpose of this standard is to establish standards on the quality control:
1. Policies and procedures of an audit firm regarding audit work generally; and
2. Procedures regarding the work delegated to assistants on an individual
audit.
This standard talks about quality control policies and procedures being
implemented at both levels of the audit firm and on individual audit.
A. Audit Firm
The audit firms are expected to implement appropriate quality control practices
and procedures to ensure that all audits are carried out in accordance with
Statements on Standard Auditing Practices. Following are the key areas that an
audit firm should incorporate while adopting the objectives of quality control:
a. Professional Requirements:
Personnel are to adhere to principles of independence, integrity,
objectivity, confidentiality and professional behaviour.
b. Skills and competence:
The personnel should have attained and maintain the Technical

Standards and Professional Competence.
c. Assignment:
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Audit should be assigned to personnel degree of technical training
and proficiency required.
d. Delegation:
There should be sufficient direction, supervision and review of work.
e. Consultation:
Consultation within or outside the firm is to occur with those who
have proper expertise, whenever necessary.
f. Acceptance and retention of clients:

Firm’s independence and ability to serve the client properly are to be
considered while deciding to accept or retain a client.
g. Monitoring:
Continuous monitoring of quality control and procedures should be

done.
B. Individual Audit
The firm’s general quality control policies and procedures should be
communicated to its personnel in a manner that provides reasonable
assurance that the policies and procedures are understood and
implemented. For effective individual audits the auditor has to take the
following points into consideration:
a. Direction:
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By showing the audit programme, informing assistants about their
responsibilities, nature of entity’s business, possible accounting or auditing
problems.
b. Supervision
Auditor or his personnel should review assistants’ capabilities in
auditing, their understanding of audit directions and check if work is in line
with audit programme.
c. Review
Work performed by assistants should be reviewed by personnel to
see whether work is done as per audit programme, results obtained have
been documented; audit objectives are achieved, etc.
This Statement on Standard Auditing Practices became operative for all audits
relating to accounting periods beginning on or after April 1, 1999.
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Audit of Accounting Estimates
1. Some of the financial statements items cannot be measured precisely, but

can only be estimated. For purpose finding the closest possible value of the
items and showing a true and fair view of the concern in this Standard they
are referred to as Accounting Estimates.
2. Management is responsible for making accounting estimates.
3. The auditor makes effort to understand the internal control, risk

assessment procedures and related activities or understanding the
environment of the entity. While doing so he understands the various
policies and procedures for accounting estimates.
4. The auditor reviews the accounting estimates of the prior period financial
statements, or, where applicable, their subsequent re-estimation for the
period.
5. The auditor must also identify and assess the risk of material misstatement
and point out the degree of wrong estimate.
6. The following are the various Substantive procedures to Respond to

significant Risks: -
a) Estimation uncertainty.
b) Recognition and measurement criteria.
c) Evaluating the reasonableness of the accounting estimates, and
determining misstatements.
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d) Disclosure related to accounting estimates.
e) Indicators of possible management bias.
f) Written representation.
g) Documentation.
7. When there is a difference between the auditors estimate of the amount

and the estimated made by the management:
a) If the difference is small it may not require adjustment.

b) If the difference is big, management would be requested to make the
adjustment.
8. This standard of audit also consist a brie not and discussion about fair value
and disclosure norms under different Financial reporting frameworks. For
background and context. Certain framework provide specific basis and
some provide general.
9. The term fair value also differs among different financial frameworks.
10.This AAS is effective for auditor of financial statements for the period
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Subsequent Events
1. AAS 19 deals with the auditors responsibilities relating to subsequent

events in an audit of financial statements. Financial statements may be
affected by certain events that occur after the date of the financial
statements. These events are known as subsequent events.
2. The objectives of the auditor are to:
a) Obtain sufficient appropriate audit evidence about whether

events occurring between the date of the financial statements
and the date of auditor’s reports; and
b) Respond appropriately to facts that became known after the date

of auditor’s reports.
3. When auditor has identified events occurring between the date of

financial statements and the date of auditor’s report, he shall follow a
prescribed procedure and then identify the events that require
disclosure in the final accounts. He shall then give a written
representation to consider these events in the financial statements.
4. Sometimes there are facts which become known to auditor after the
date of the auditor’s report but before the date of financial statements
are issued. In this case, the auditor shall:
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a) Discuss the matter with management;
b) Determine whether the financial statements need amendment;
c) Inquire how management intends to address the matter in
financial statement.
5. If facts which became known to the auditor after the financial
statements have been issued, then again auditor will follow the same
steps as mentioned in the above point.
6. When the management has issued the financial statement despite the
auditors notification not to issue to the financial statement to the third
parties, the course a action to prevent reliance on the auditor’s report
on financial statements depend upon auditor legal rights and obligation.
Consequently, the auditor may consider it appropriate to seek legal
advice.
7. This AAS is effective for audits of all financial statements for periods
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21. Audit Assurance Standard (AAS) 20
Knowledge of the Business
1. AAS 20 establishes standards on what knowledge of the business is, why it

is important to the auditor and to members of the audit staff working on an
engagement, why is it relevant to all phases of an audit and how the
auditor uses the knowledge.
In performing an audit of financial statements, the auditor should obtain
knowledge of the business and the industry to identify and understand the
events, transactions and practices that can influence the financial
statement or the audit report.
2. The auditor can obtain knowledge of the business and industry through
various sources like:
a) Previous experience with the entity.
b) Discussion with people with the entity, with internal auditors and
review of internal audit reports.
c) Publications related to the industry.
d) Visits to the entity.
e) Documents produced by the entity.
3. Having knowledge about the business and industry will assist the auditor in:
a) Assessing risk and identifying problems.
b) Planning and performing the audit effectively and efficiently.
c) Evaluating audit evidence.
d) Identifying areas where special considerations or specialisations may
be required.
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e) Recognising unusual circumstances.
f) Checking the correctness of accounting policies and financial
statement disclosures.
4. Even the audit staff assigned by the auditor should have sufficient
knowledge about the business. The staff should also share any additional
information acquired with the auditor and other staff members.
5. Effective use of the knowledge about the business can be made only if the
auditor considers it with the financial statements taken as a whole and also
whether the assertions in financial statements are consistent with the
auditor’s knowledge of business.
Only then will the auditor be able to meet the audit objectives effectively.
6. This AAS becomes operative for all audits commencing on or after April 1,
2000.
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Consideration of Laws and Regulations in an

Audit of Financial Statements
1. AAS 21 deals with the auditor’s responsibilities to consider laws and

regulations when performing an audit of financial statements. It does not
apply to other assurance engagements in which the auditor is specifically
engaged to test and report separately on compliance with specific laws.
2. The effect of laws and regulations on the financial statements varies

considerably. Some have a direct effect on the disclosures of the financial
statements while some others have to be complied with by the
management and do not affect the financial statements directly.
It is the responsibility of the management to ensure that the entity's
operations are conducted in accordance with the provisions of laws and
regulations.
Non-compliance of laws and regulations may result in fines, litigation or
other consequences for the entity which may have an effect on the
financial statement.
3. The responsibility of an auditor with respect to this AAS are:

a) identifying material misstatement of the financial statements due to
noncompliance with laws and regulations;
b) obtaining reasonable assurance that the financial statements, are
free from material misstatement, whether caused by fraud or error.
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c) recognising whether the laws and regulations have a direct effect on
disclosures in the financial statements;
d) recognising whether an act constituting of non-compliance of laws
and regulations is a matter of legal determination.
4. While auditing the financial statements of an entity the auditor has to:
a) obtain sufficient appropriate evidence regarding compliance with the
provisions of audit;
b) perform special audit procedures to help identify instances on non-
compliance having any effect on financial statements;
c) respond appropriately to non-compliance or suspected non-
compliance with laws and regulations identified during audit.
5. Any act of omission or commission by the entity, intentionally or

unintentionally, which are contrary to the prevailing laws and conditions
non-compliance of laws and regulations.
6. When an auditor becomes aware of any information concerning an

instance of non-compliance or suspected of non-compliance he should:
a) obtain an understanding of the nature of act and circumstances
under which they have taken place;
b) obtain further information to evaluate the possible effect on
financial statements;
c) discuss the matter with management;
d) evaluate the implications of non-compliance to other aspects of
auditing.
7. This AAS is effective for audits of financial statements for periods beginning
on or after April 1, 2009.
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Initial Engagements - Opening Balance
1. This Standard on Auditing (SA) deals with the auditor's responsibilities

relating to opening balances when conducting an initial audit engagement.
In addition to financial statement amounts, opening balances include
matters requiring disclosure that existed at the beginning of the period,
such as contingencies and commitments.
2. the objective of the auditor with respect to opening balances is to obtain

sufficient appropriate audit evidence about whether:
a) Opening balances contain misstatements that materially affect the

current period's financial statements; and
b) Appropriate accounting policies reflected in the opening balances
have been consistently applied in the current period's financial
statements, or changes thereto are properly accounted for and
adequately presented and disclosed in accordance with the
applicable financial reporting framework.
3. The auditor shall obtain sufficient appropriate audit evidence about

whether the opening balances contain misstatements that materially affect
the current period's financial statements by:
a) Determining whether the prior period's closing balances have been
correctly brought forward to the current period or;
b) Determining whether the opening balances reflect the application of
appropriate accounting policies; or.
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c) Performing specific audit procedures to obtain evidence regarding
the opening balances; or
d) Evaluating whether audit procedures performed in the current
period provide evidence relevant to the opening balances.
4. If the auditor obtains audit evidence that the opening balances contain
misstatements that could materially affect the current period's financial
statements, the auditor shall perform such additional audit procedures as
are appropriate in the circumstances to determine the effect on the current
period's financial statements.
If the auditor concludes that such misstatements exist in the current
period's financial statements, the auditor shall communicate the
misstatements with the appropriate level of management.
5. The auditor shall obtain sufficient appropriate audit evidence about

whether the accounting policies reflected in the opening balances have
been consistently applied in the current period's financial statements, and
whether changes in the accounting policies have been properly accounted
for and adequately presented and disclosed in accordance with the
applicable financial reporting framework.
6. If the auditor concludes that the opening balances contain a misstatement

that materially affects the current period's financial statements, and the
effect of the misstatement is not properly accounted for or not adequately
presented or disclosed, the auditor shall express a qualified opinion or an
adverse opinion.
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Related Parties
1. AAS 23 deals with the auditor’s responsibilities regarding related party

relationships and transactions when performing an audit of financial
statements. Specifically, it explains on how SA 315, SA 330, and SA 240 are
to be applied in relation to risks of material misstatement associated with
related party relationships and transactions.
2. Many related party transactions are in the normal course of business. In

such circumstances, they may carry no higher risk of material misstatement
of the financial statements than similar transactions with unrelated parties.
However, the nature of related party relationships may, in some
circumstances, give rise to higher risks of material misstatement of the
financial statements than transactions with unrelated parties.
3. The responsibilities of an auditor are:
The auditor has a responsibility to perform audit procedures to identify,

assess and respond to the risks of material misstatement arising from the
entity’s failure to appropriately account for or disclose related party
relationships, transactions or balances in accordance with the requirements
of the financial reporting framework. The auditor needs to obtain an
understanding of the entity’s related party relationships and transactions
sufficient to be able to conclude whether the financial statements, as they
are affected by those relationships and transactions:
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a) Achieve a true and fair presentation (for fair presentation
frameworks)
b) Are not misleading (for compliance frameworks)
4. Further, the primary responsibilities of the auditor are:

a) Understanding the Entity’s Related Party Relationships and
Transactions
b) Maintaining Alertness for Related Party Information when
reviewing records or documents
c) Sharing related party information with the engagement team
d) Identification of previously unidentified or undisclosed related
parties or significant related party transactions.
e) Identify significant related party transactions outside the entity’s
normal course of business
f) Assertions that related party transactions were conducted on
terms equivalent to those prevailing in an arm’s length
transaction.
g) Financial reporting frameworks that establish minimal related
party requirements
h) Understanding the identity of the entity’s related parties
i) Understanding the entity’s controls over related party
relationships and transactions.
j) To identify risk factors associated with a related party with
dominant influence.
on or after April 1, 2010
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Audit Considerations Relating to Entities Using

Service Organisation
1. AAS 24 establishes standards for an auditor whose client uses a service

organisation.
2. When the services provided by the service organisation are limited to

recording and processing transactions of the client and the client retains
authorisation and maintenance of accountability, the client might be able
to implement effective policies and procedures within its organisation.
When the service organisation executes the client's transactions and
maintains accountability, the client may deem it necessary to rely on
policies and procedures at the service organisation.
Hence the auditor should consider how a service organisation affects the
client’s accounting and internal control systems so as to plan the audit and
develop an effective audit approach.
3. Thus the auditor of the client has to consider the following points:
a. Nature of the services provided.
b. Terms of contract.
c. The material financial statement affected and the inherent risk
associated.
d. Extent to which the client’s accounting and internal control system
interact with the systems at the service organisation.
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e. Client’s internal control system that are applied to the transactions
with the service organisation.
f. Service organisation’s capability and financial strength.
4. The auditor of the client should also refer third-party reports from service
organisation’s auditors. This will provide him with the information about
the accounting and internal control systems of the service organisation.
If the auditor is satisfied that the control risk assessment of the entity will
not be affected by the controls of service organisation then further
consideration of this AAS is unnecessary.
5. If the auditor feels that the activities of service organisation are relevant to
the audit then he should obtain additional information about the internal
control system of the service organisation.
He can even request the auditor of the service organisation to perform
such procedures as to supply the necessary information.
An auditor of client wishing to visit a service organisation can ask the client
to request the service organisation to give him access to the necessary
information.
6. By reading the third-part report of the service organisation’s auditor, the

auditor of the client will be able to understand the accounting and internal
control systems affected.
7. When the auditor of the client uses a report from the auditor of a service
organisation, no reference should be made in the client auditor’s report to
the service organisation’s auditor report.
8. This AAS becomes operative for all audits related to accounting periods
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Comparatives
1. The purpose of this Auditing and Assurance Standard (AAS) is to establish

standards on the auditor's responsibilities regarding comparatives. It does
not deal with situations when summarized financial statements or data are
presented with the audited financial statements.
2. The auditor should determine whether the comparatives comply, in all

material respects, with the financial reporting framework relevant to the
financial statements being audited.
3. Comparatives are presented in compliance with the relevant financial

reporting framework. The essential audit reporting differences are that:
a) for corresponding figures, the auditor's report only refers to the
financial statements of the current period; whereas
b) for comparative financial statements, the auditor's report refers to
each period that financial statements are presented.
4. The auditor should obtain sufficient appropriate audit evidence that the
corresponding figures meet the requirements of the relevant financial
reporting framework.
This involves the audit or assessing whether
a) accounting policies used for the corresponding figures are consistent
with those of the current period or whether appropriate adjustments
and/or disclosures have been made; and
b) corresponding figures agree with the amounts and other disclosures
presented in the prior period or whether appropriate adjustments
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and/or disclosures have been made.
5. If the auditor becomes aware of a possible material misstatement in the

corresponding figures when performing the current period audit, the
auditor should perform such additional procedures as are appropriate in the
circumstances.
6. When the auditor’s report on the prior period as previously issued included
a qualified opinion/disclaimer of opinion/adverse opinion and the matter,
which gave rise to modification in the audit report is still:
a) Unresolved and results in a modification of the auditor’s reports
regarding the current years reports, the auditor’s report should be
modified regarding the corresponding figures; or
b) Unresolved and does not results in a modification of the auditor’s
reports regarding the current years reports, the auditor’s report
should be modified regarding the corresponding figures; or
c) In case the period prior financial period is audited, the incoming
auditor should state such fact in auditor’s report.
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Terms of Audit Engagement
1. The purpose of AAS 26 is to establish standard on agreeing the terms of

engagement with the client or a change in terms of engagement providing
lower level of assurance.
2. In the interest of both client and auditor, the auditor should send an
engagement letter, preferably before the commencement of the
engagement, to help avoid any misunderstandings with respect to the
engagement. The engagement letter documents and confirms the auditor's
acceptance of the appointment, the objective and scope of the audit and
the extent of the auditor's responsibilities to the client.
3. The form and content of audit engagement letter may vary for each client,
but it would generally include reference to:
a) Judgement on going concern.

b) Maintenance of adequate accounting records.
c) Internal control and safeguard of assets.
d) Implication/adherence to all the applicable legislations.
e) Nature, timing and extent of the audit along with the inherent records.
f) Unrestricted access to any record, documentation and information.
g) Audit process may subject to a peer review.
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4. The auditor may also include the following matters in the engagement
letter:
a) Audit planning.
b) Basis for prof. fees and billing arrangements.
c) Involvement to be made with the predecessor auditor.
d) Any restriction of the auditor’s liability when suspects possible exist.
e) Suitable consideration when doing audit components (Branch/unit)
f) Suitable consideration for recurring audits.
5. An auditor who, before the completion of the engagement, is requested to

change the engagement to one which provides a lower level of assurance,
should consider the appropriateness of doing so.
6. Factors to be considered are: -

a) The reason for change in the engagement.
b) Implication of restrictions, if any
c) Any legal/contractual implication of the change.
7. Where the change is accepted the reference to the original engagement

need not be mentioned.
8. If does not agree to the change in engagement, then

a) Withdraw the engagement.
b) Report the circumstances necessitating the withdrawals to the BOD
and shareholders, etc.
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Communications of Audit Matters with those

charged with Governance
1. AAS 27 deals with the auditor’s responsibility to communicate with those

charged with governance in relation to an audit of the financial statements.
This AAS does not establish requirements for the auditor to have
communication with the entity’s management or owners unless they are
also charged with a governance role.
2. The objectives of the auditor are:

a) Communicate clearly his responsibilities with respect to audit of
financial statements.
b) Obtain from those charged with the governance information relevant
to the audit.
c) Provide those charged with governance with timely observations
arising from the audit.
d) Promote effective two ways communication.
3. The matters which the auditor needs to communicate with those charged
with governance, both before and after conducting an audit are:
a) The auditor's responsibilities in relation to the audit.
b) Planned scope and timing of audit.
c) Significant findings from the audit.
d) Significant qualitative aspects of accounting practises.
e) Significant difficulties encountered during the audit.
f) Significant matters discussed, of subject to correspondence with
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management.
g) Other significant matters relevant to the financial reporting process.
4. The communication between an auditor of entity and those charged with

governance will include the following processes:
a) Establishing the communication process:

The auditor shall communicate with those charged with governance.
Clear communication of the auditor's responsibilities, the planned
scope and timing of the audit and the expected general content of
communications helps establish the basis for effective two way
communication.
b) Forms of communication:
Effective communication may involve structured presentations and
written reports as well as discussions. The auditor shall communicate
in writing or orally (as required) with those charged with governance
regarding significant findings from the audit.
c) Timing of communication:
The auditor shall communicate with those charged with governance
on a timely basis. The appropriate timing for communications will
vary with circumstances of the engagement.
d) Adequacy of the communication process:
The auditor shall evaluate whether the two ways communication
process between the auditor and those charged with governance has
been adequate for the purpose of audit. This evaluation may be
based on observations resulting from audit procedures performed
for other purposes.
e) Documentation:
Where communication is in the form of writing, the auditor shall
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retain a copy of the minutes prepared by the entity as part of the
audit documentation where those minutes are an appropriate record
of the communication.
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The Auditor’s Report on Financial Statements.
1. AAS 28 establishes standards on the form and contents of audit report

issued by the auditor after conducting audit in an entity.
The auditor’s report should contain a clear written opinion of the auditor
about the financial statements.
2. The layout of an auditor’s reports has the following basic elements, in the
following layout:
a) Title;
b) Addressee;
c) Opening or introductory paragraph;
d) Scope paragraph;
e) Opinion paragraph;
f) Date of the report;
g) Place of signature; and
h) Auditor’s signature.
3. Sometimes a statute governing the entity or regulator may require the

auditor to include certain items in addition to the ones specified in this AAS.
Auditor should include those items in the form prescribed.
4. An unqualified opinion should be given by the auditor when the auditor

concludes that the financial statements give a true and fair view of the
entity.
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An unqualified report indicates that:
a) the financial reports have been prepared using the general
accounting principles;
b) the financial reports comply with all the statutory requirements and
regulations; and
c) there is adequate disclosure of all the relevant matters.
5. In certain circumstances, the auditor’s report may be modified by adding a
paragraph about a matter affecting the financial statement. However the
matter may not be so pervasive or material, and hence it does not affect
the auditor’s opinion. The paragraph is included before the opinion
paragraph. These are ’matters that do not affect the audit report’.
6. If an auditor’s report has ‘matters that do affect the audit report’, then the
auditor can give a ‘disclaimer of opinion’ or ‘adverse opinion’.
Circumstances which lead to this are:
a) There is a limitation in the scope of audit work; or
b) There is disagreement with the management.
In the auditor’s opinion the effect of these circumstances may affect the
financial statements and hence they are ’matters that do affect the audit
report’.
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Auditing in a Computer Information Systems

Environment
1. The purpose of this AAS is to establish standards on procedures to be

followed when an audit is conducted in a Computer Information System
(CIS) environment. In a CIS environment there are one or more computers
involved in the processing of financial information.
2. The overall objective and scope of an audit does not change in a CIS
environment. But the use of computer may influence the accounting and
internal control system of the entity. Hence the auditor will have to modify
the procedure, risk evaluation and audit design to meet the audit objective
in a CIS environment.
3. The auditor should take into consideration the following factors to

determine the effect of CIS environment on the audit:
a) Extent to which CIS environment is used.
b) System of Internal Control in place.
c) Impact of CIS on the audit trail.
4. In a CIS environment the auditor should have sufficient knowledge about

the computer-system. Even specialised skills might be needed to conduct
the audit in a proper manner. If specialised skills are required the auditor
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can take the assistance of an expert having such skills, who may either be
the auditor’s staff or an outside professional.
5. There are risks in a CIS environment like lack of transaction trails, uniform
processing, lack of segregation of functions, chances of errors, and
dependence of other controls over computer processing. An auditor has to
make sure that he understands all these inherent risks and their influence
before planning the audit.
6. Thus an auditor should consider whether a CIS environment:

a) Ensure correct and complete data is made available for processing;
b) Provide for timely detection and correction of errors;
c) Prevent unauthorised changes to the programmes;
d) Provide for safe custody of data files.
7. In an audit in CIS environment some of the audit evidence may be in the

electronic form. Sometimes it may be difficult for an auditor to obtain
certain data for inspection without computer assistance. In such a situation,
the auditor has to satisfy himself that such evidence is safely stored and is
retrievable whenever required.
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External Confirmations
1. The purpose of AAS 30 is to establish standards on the auditor's use of

external confirmations as a means of obtaining audit evidence. External
Confirmations is the process of obtaining and evaluating audit evidence
thru a direct communication from a third party in the response to a
request for information about a particular item affecting the assertions
of the management.
2. The process of external confirmations, ordinarily, consists of the

following:
a) Selecting the items for which confirmations are needed.
b) Designing the form of the confirmation request.
c) Communicating the confirmation request to the appropriate
third party.
d) Obtaining response from the third party.
e) Evaluating the information or absence thereof.
3. Situations where External Confirmations may be Used

a) Bank Balances and other information from the bankers
b) Stock held by third parties
c) Property title deeds held by the third parties
d) Investments purchased but not taken
4. Process of External Confirmations -

a) Selection of items
Page | 69
b) Designing the Form of Communication Request
c) Communicating the confirmation request to the appropriate
party
d) Obtaining the response from that third party
e) Evaluation of the information or absence thereof
5. The auditor may use positive or negative external confirmation requests or

a combination of both.
a) Positive Confirmation Request: - It asks the respondent to

answer the auditor in all cases in any mode
b) Negative Confirmation Request: - It asks the respondent to

answer the auditor only in the event of disagreement with the
information provide in the request
6. This auditing and assurance standard is effective for audits related to

accounting period beginning on or after 1 s t April, 2003.
Page | 70
Engagements to Compile Financial Statements
1. The purpose of this AAS is to establish standards on the professional

responsibilities of the accountant, when an engagement to compile
financial statements or other financial information is undertaken.
This AAS is directed towards compilation of financial information.
2. The objective of a compilation engagement is for an accountant to use

accounting expertise, as opposed to auditing expertise, to collect, classify
and summaries financial information.
3. The responsibility of management towards computing financial statements

are:
a) Ensuring that the financial information generated in the entity is
correct, complete and reliable;
b) Marinating accounting and other records and internal controls;
c) Establishing controls designed to safeguard the assets;
d) Establishing controls to provide reasonable assurance that the entity
compiles with laws and regulations.
4. An engagement letter would be of assistance in planning the compilation

work. It is interest of the accountant and the client, the accountant sends
an engagement letter to the client. It ensures there is a clear understanding
between both of them.
An engagement letter would include the following matters:
a) Nature of the engagement;
Page | 71
b) Fact that the engagement cannot be relied upon to disclose frauds;
c) Nature of the information to be supplied;
d) Intended use and distribution of the information;
e) Unrestricted access to whatever records or documents required in
connection with the engagement;
f) Basis on which fees would be computed and any billing
arrangements.
5. To compile financial information, the accountant requires a general

understanding of the nature of business transactions, accounting policies
and decisions. He normally obtains this knowledge through experience with
the entity or enquiry with the personnel.
6. If the accountant becomes aware that any information supplied to him is

incomplete, incorrect or otherwise unsatisfactory, then he should request
management to provide him additional information.
If management refuses to provide it to him, then he should withdraw from
the engagement.
7. While preparing the report on compilation engagement, it is essential that

the accountant clearly brings out the nature of association with the
financial statements and the nature of the work performed by him.
8. This AAS is applicable to all compilation engagements beginning on or after

April 1, 2004.
Page | 72
Engagements to Perform agreed-upon Procedures

regarding Financial Information
1. The purpose of AAS 32 is to establish standards and provide guidance on

auditor's professional responsibilities when an engagement to perform
agreed upon procedures regarding financial information is undertaken and
the content of the report the auditor should issue. The auditor should
report factual findings based on specified procedures on specified subject
matter of specified elements, accounts or items of a financial statements.
2. The objective of an agreed-upon procedures are:

a) To prepare a report by the auditor by carrying out procedures to
which auditor, entity and the appropriate third party have agreed and
to report on factual findings.
b) The users of this report have to draw their own conclusions from the
work done as this report involves factual findings and no assurance is
expressed by the auditor in this report.
c) This report is restricted to those parties that have agreed to the
procedures to be performed because other viewers might
misinterpret this report.
3. The auditor should ensure with the representative of the entity and other
parties who are to receive this report that there is clear understanding
regarding the agreed procedures and the conditions of the engagement.
Matters to be agreed include:
a) Nature and purpose for the Engagement.
Page | 73
b) Identification of the financial information to which agreed-upon
procedures will be applied.
c) Nature, timing and extent of the specified procedures to be applied
d) Limitations on distribution of the report.
The auditor should make it clear that procedures performed will not
constitute an audit or a review and that accordingly no assurance will be
expressed
4. Auditor should send an engagement letter in the interests of both the client
and the auditor. Matters that would be included in engagement letter are:
a) A listing of the procedures to be performed as agreed-upon between
the parties.
b) A statement that the distribution of the report will be restricted to
the specified parties.
5. The auditor should carry out procedures agreed upon and use the evidence
obtained as the basis for report of factual findings.
The procedure may include:
a) Inquiry and Analysis
b) Observation
c) Inspection
d) Obtaining confirmations
e) Recompilation, comparison and other clerical accuracy checks.
6. The report on an agreed-upon procedures engagement needs to describe
and the agreed-upon procedures of the engagement in sufficient detail to
enable the reader to understand the nature and the extent of work
performed. To report should also clearly mention that no audit or review
has been performed.
7. This AAS is applicable to all agreed-upon procedures engagements
Page | 74
Engagements to Review Financial Statements
1. Purpose of AAS 33 is to establish standards and provide guidance to the

auditor's professional responsibilities in an engagement to review financial
statements.
2. The objective of a review of financial statement is to enable the auditor to

state whether, anything has come to auditor’s notice that causes him to
believe that financial statements have not been prepared in accordance
with the financial reporting framework
3. General principles of a review engagement are:

a) The auditor has to comply with Code of Ethics issued by the ICAI.
b) The auditor should conduct a review in accordance with this AAS.
c) For the auditor to show a negative assurance in the review report, he
has to gather sufficient evidence proving the same.
4. The review should provide a judgement as to whether the statements are

misstated or not. Although the auditor attempts to become aware of all
significant matters, the limited procedures of a review make it difficult to
achieve the objective and hence the auditor provides relatively less
assurance than that given in an audit.
5. The auditor and the client should agree on the terms of the engagement.
The agreed terms would be recorded in an engagement letter.
Engagement letter will be of assistance in planning the review work. It is in
Page | 75
the interests of both the client and auditor that the auditor sends an
engagement letter documenting key points of the appointment
6. Matters that should be included in the engagement letter are:
 Objective of the service.
 Management’s responsibility for financial statements.
 Scope of review with reference to this AAS.
 Unrestricted access to documents and other information related to
audit.
 The fact that the engagement cannot be relied upon to disclose
errors and other irregularities.
 A statement that audit is not performed and that an audit opinion
will not be expressed.
7. Procedures for the review of financial statement would include:

a) Understanding the entity’s business and industry.
b) Inquires related to the entity’s accounting principles, policies and
procedures.
c) Analytical procedures designed to identify unusual items.
d) Obtaining reports from other auditors, if any.
e) Inquires of persons having responsibility of financial and accounting
matters.
f) Checking whether financial statements have been prepared in
accordance to accounting principles.
8. The report should contain a clear written expression of the negative

assurance, if any. He should give a negative assurance only if he has proper
evidence to support it.
The auditor should also state to management whether he has found any
misstatements in the financial statements.
Page | 76
The auditor should make it clear that an audit was mot performed and
hence an audit opinion cannot be expressed.
9. This AAS becomes operative for all review engagements relating to

accounting periods beginning on or after April 1, , 2005.
Page | 77
Audit Evidence - Additional Considerations for

Specific Items
1. The purpose AAS 34 is to establish standards on the auditor's

responsibilities, audit procedures and provide additional guidance to that
contained in Auditing and Assurance Standard (AAS) 5, "Audit Evidence",
with respect to certain specific financial statement amounts and other
disclosures. Application of the standards and guidance provided in the AAS
will assist the auditor in obtaining audit evidence with respect to the
specific financial statement amounts and other disclosures.
2. This AAS comprises the following parts:
Part A: Attendance at Physical Inventory Counting

Part B: Inquiry Regarding Litigation and Claims
Part C: Valuation and Disclosure of Long-term Investments
Part D: Segment Information
3. PART - A: Attendance at Physical Inventory Counting
a. It lays due emphasis on the attendance of the auditor at Physical

Inventory Counting
b. Physical Verification is the responsibility of the management
Page | 78
c. When the inventory is material to the F/S, he should get the proper
evidence regarding its existence and proper condition
d. Unless impracticable, due to the nature / location of inventory or

unforeseen situations he should devise some alternative sufficient
evidence for framing an opinion in the F/S
e. The auditor can opt for a direct confirmation as well, for eg. In case
of Consignment Stock, Stock in Transit, Branch Stock Transfers etc.
f. Management’s instructions relating to the stage of completion of

WIP, items of slow moving nature obsolete / damaged / rejected
stock items
3. PART - B: Inquiry Regarding Litigation & Claims

a) “Litigation” means a lawful suit or legal action including all
proceedings therein “Claims” means right to an equitable breach of
performance
b) When any material litigation or claims have been identified by the

management the auditor may seek direct confirmation from the
lawyer’s and other professionals. Such correspondence letters
should be prepared by the management, under the control of the
auditor.
4. PART - C: Valuation & Disclosure of Long Term Investments

a) Proper evidence should be obtained for the valuation, disclosure &
ownership of the investments
Page | 79
b) Discussions with the management about as to whether the entity has the
ability to continue to hold the investments on a long term basis or not.
5. PART - D: Segment Information

a) The auditor should obtain the sufficient audit evidence as to the proper
disclosure in accordance with the identified reporting framework
b) The auditor should consider the segment information in relation to the F/S
as a whole.
c) He is not required to apply the auditing procedures on the single segment
alone.
d) However, the auditing procedures normally consist of analytical procedures
& other tests as appropriate in the given circumstances.
6. Common Points for the Parts - A / B / C / D

a) Management Representation
i. The information asked for should be complete & accurate as per the
requirements
ii. Proper Valuation / Quantification should be complete
iii. The change in the related Accounting policy, if any should be brought
to the notice of the auditor.
b) Audit Conclusions & Reporting
In case, the auditor is unable to obtain sufficient audit evidence he may frame a
Qualified Opinion or Disclaimer of Opinion, as the case may be.
beginning on or after 1st April, 2005.
Page | 80
The Examination of Prospective Financial

Information
1. The purpose of AAS 35 is to establish standards and report on prospective

financial information including examination procedures for best-estimate
and hypothetical assumptions.
Prospective Financial Information means financial information based on
assumptions about events that may occur in the future and possible actions
by the entity. It is highly subjective in nature and its preparation requires
exercise of considerable judgement.
2. Prospective financial statements may be prepared:

a) as an integral management tool or
b) for the distribution/submission to third parties as a prospectus, an
annual report or a document.
3. Management prepares prospective financial information. The auditor may

be asked to review and examine it to enhance its creditability.
4. Before accepting an engagement to examine prospective financial

information, the auditor should consider:
a) the intended use of the information;
b) whether the information will be for general or limited distribution;
c) nature of assumption;
d) element to be included in the information;
e) the period covered by the assumption.
Page | 81
The auditor should not accept an engagement when he believes that the
assumptions are unrealistic or it will be inappropriate for its intended use.
5. In an engagement to examine prospective financial information, the auditor
should obtain sufficient financial information as to whether:
a) management’s assumption are not unreasonable and are consistent
with the information;
b) the prospective financial statements are properly prepared on the
basis of assumptions;
c) it is properly presented and all assumptions are disclosed;
d) it is prepared on a consistent basis with historic financial statements,
using proper accounting principles.
6. It is very important that the auditor obtain a sufficient knowledge of

business to be able to evaluate the prospective financial information.
The auditor will also need to become familiar with the entity’s process for
preparing financial information, by considering:
a) The internal controls over the system used.
b) The nature of the documentation prepared.
c) The methods used to develop and apply assumptions.
d) The accuracy of prospective financial information prepared in prior
periods.
7. The auditor should consider the extent to which reliance on the entity’s
historical financial information is justified. He should check whether the
historical information was audited or reviewed.
8. The auditor should also consider the period of time covered by the
prospective financial information. As the length of the period covered
increases, the ability of management to make best-estimate assumption
Page | 82
reduces. The period should not extend the time for which the management
cannot provide reasonable basis for assumption.
9. While determining nature timing and extent of examination procedures,

auditor should consider:
a) the knowledge obtained during any previous engagement;
b) management’s competence;
c) likelihood of misstatement;
d) stability of entity's business;
e) source of information used.
10.The auditor should assess the source and reliability of the evidence
supporting managements best estimate assumptions. Sufficient evidence
supporting such assumptions would be obtained from internal and external
sources and they should be evaluated as to whether they are within the
entity’s capacity. The auditor also considers whether when hypothetical
assumptions are used all significant implications of such assumptions have
been taken into consideration. The auditor should be satisfied whether the
assumptions are consistent and there is no reason to believe they are
unrealistic.
11.While preparing a report on examination of prospective financial

information, auditor should mention in it whether anything has come to his
notice which makes him believe that the assumptions are not reasonable.
He should also express an opinion in it as to whether the prospective
financial information is prepared properly based on the assumptions.
12.This AAS is effective in relation to reports on projections/forecast, issued on

or after April 1, 2009.
Page | 83
37. 7CASE STUDIES
A SUMMARY OF THE SIGNIFICANT LEGAL DECISIONS.
1. THE LEED ESTATE BUILDING & INVESTMENT COMAPNAY V. SHEPHERD (1887)
This case was decided by Mr. Justice Stirling in the chancery Division on 9 th
August, 1887.
Held, that it was an auditors duty to ascertain that the accounts he certifies are
correct and that if he fails in his duty he is liable in damages for dividends wrongly
paid out of capital.
The company was formed in 1869 under the Companies Act, 1862. In 1882 it went
into voluntary liquidation and the action was brought by the company in
liquidation against the directors, the managers, and the auditors, to make them
liable in respect of certain sums paid out of capital as dividends, and for fees and
bonuses to the directors and managers respectively.
The balance sheets which were not shown to the shareholders as required by the
articles were found to be false and to have been prepared to enable the
declaration of a dividend. They were prepared by the manager and examined by
the auditor. The directors trusted these two officials and did not know that the
accounts were inaccurate and that dividends were paid out of capital.
The court found the directors liable to make good the several sums paid out of
the capital and that the manager and the auditor were liable to the same amount;
that the auditor must not confine himself merely to the task of ascertaining the
arithmetical accuracy of the balance sheet, but must see that it was a true
representation of the company’s affairs; that it was no excuse that the auditor
Page | 84
had not seen articles; that the Statute of Limitations enabled the auditor’s liability
to be limited to dividends paid within six years of the commencement of the
action.
2. BOLTON v. THE NATAL LAND AND COLONISATION COMPANY LIMITED

(1891)
This case was decided before Mr. Justice Romer in the Chancery Division on the
8th , 9th and 10th of December, 1891.
In 1882 the company in question, under peculiar circumstances, debited their

Profit and Loss Account with $70,000 in writing off a certain bad debt, and per
contra, credited the same Profit and Loss Account with a sum of nearly $70,000
in respect of an increase in value attributed to their lands in South Africa above
and beyond the cost price at which such lands previously stood in the books, the
result being to make the profit and loss practically balance each other upon next
year’s accounts. The company having subsequently earned a working profit,
declared a dividend there out, in respect of the year 1885. There upon the
plaintiff, in action commenced in 1886 to restrain the payment of such dividend,
contented that at the time the value of the land was written up in 1882 they were
valued, and now stood. At an amount considerably exceeding their true value,
and that, before a profit could be deemed to have been made which would be
properly available for the payment of a dividend, the lands in question must be
written down to their true value, and the difference debited to Profit and Loss
Account in the same way as the supposed increase had been credited to the Profit
and Loss Account for the year 1882.
It was held by Mr. Justice Romer that, assuming a part of capital had been in fact
been lost, and not subsequently made good, no sufficient ground was thereby
afforded for restraining the payment of the dividend; that the fact of the
company having written up the value of their land in 1882, and credited the
Page | 85
increase to the profit of that year in the manner described, did not place then
under any obligation to bring into account in every subsequent year the increase
or decrease in the value of their lands; and that, having regards to the case of Lee
v. Neuchatel Asphalte Co. Ltd., it was not correct, in estimating the profits of a
year, to take into account the increase or decrease in the value of the capital
asset of the company.
3. LUBBOCK v. THE BRITISH BANK OF SOUTH AMERICA LIMITED (1892)
This case was decided before Mr. Justice Chitty, in the Chancery Division, on 1 s t
April, 1892, when it was held that, if a company’s articles of association so
provide, a profit made on the sale of a part of the undertaking is available for
dividend.
The case was a motion by the plaintiff on behalf of himself and all the other
shareholders of the defendant company to restrain the company from acting
upon or carrying into effect a resolution passed by the directors of the company
placing a sum of $205,000 to credit of the Profit and Loss Account, and from
dealing with or distributing the same as if it were the income of company. The
$20,000 in question was realized profit made by the company on sale of a part of
its undertaking to another concern. The action was a friendly one, both parties
being desirous of obtaining the opinion of the court.
It was held by Mr. Justice Chitty that the $205,000 was plainly profit on capital,
and not part of the capital itself, for that sum was the surplus ascertained on the
asset aside after the liabilities and capital were placed on one side of the account
and the asset on the other. Under the articles of the company the directors were
justified in carrying over the $205,000 to a Profit and Loss Account, and having
appropriated to the reserve fund so much of the sum as they thought fit they
could distribute the remainder as dividends after an ordinary meeting called in
pursuance of the articles had passed the requisite resolution.
Page | 86
4. VERVER v. THE GENERAL AND COMMERCIAL INVESTMENT TRUST LIMITED
(1894):
The decision was to the effect that an injunction to restrain a company from
paying a proposed dividend out of current profits, on the ground that the capital
of the company is not intact, must be refused if the company is solvent and is
acting its articles
5. WILMER v. M’NAMARA & COMPANY LIMITED (1895)
This case was decided before Mr. Justice Stirling, in the chancery Division, on the
26th April, 1895.
The Judgement of Mr. Justice Stirling read:
‘It is necessary to consider whether the depreciation in goodwill and leaseholds is

to be treated as loss of “fixed” capital or of “floating” of “circulating” capital, and
on this point I am of opinion that it is to be treated as a loss of “fixed” capital… I
think that the balance sheet cannot be impeached simply because it does not
charge anything against revenue in respect of goodwill. I feel much more doubt
whether $200 is a sufficient sum to allow in respect of depreciation of leaseholds,
but I do not think under the circumstances that a case has been made out for an
injunction, and motion must be refused.’
Page | 87

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Topic: - Audit Assurance Standards

Class: - Third Year Bachelor of Commerce (Accounting & Finance)

Year: - 2009 – 2010

We take this opportunity with great pleasure to present

We would like to thank our project guide Prof. Amish

Finally we are thankful to all our friends, family members

Sr. No. Topic Page No.

Auditing along with other disciplines such as accounting and law,

Historically, the word

Basic Principles Governing an Audit

1. AAS 1 describes the basic principles which govern the auditors

2. The auditor should be honest, sincere to his professional approach.

3. The auditor requires specialised skills and competence. He should have

a) Acquiring knowledge of the client’s accounting system;

6. The auditor should obtain sufficient appropriate audit evidence through

7. The auditor should gain an understanding of the accounting system

8. The review assess of the audit involves forming of conclusion as to:

Objective and Scope of the Audit of Financial

1. The objective of an audit of financial statements, prepared within a

4. The scope of an audit of financial statements will be determined by the

5. The auditor assess the reliability of the information contained in the

1. AAS 3 deals with the auditor’s responsibility to prepare documentation

2. Audit documentation serves a number of additional purposes like

3. The objective of the auditor to prepare the documentation is to provide

4. The auditor shall prepare the documentation on a timely basis, helps to

5. The form, content and extent of audit documentation depends on

6. The objective and requirements are designed to support the

7. The auditor performs new or additional audit procedures or draws new

The Auditor’s Responsibility to Consider Fraud

1. AAS 4 establishes standards on the auditor’s responsibility to consider fraud

2. The term ‘fraud’ refers to an unintentional misstatement in the financial

5. The auditor should also make inquires of management to understand:

6. Auditor may identify certain events or conditions in an entity that provide

7. If an auditor has identified a misstatement which results in fraud, he should

8. The auditor should also communicate to management any material

1. This Standard on Auditing (SA) explains what constitutes audit evidence in

3. The reliability of audit evidence depends on its sources – internal or

4. When the auditor is in doubt as to any assertion of material significant, he

5. The auditor obtains evidence in performing compliance and substantive

6. Most of the audit evidence is primarily obtained through the audit

a) Relevance and Reliability

7. This AAS is effective for audits of financial statements for periods

Risk Assessments and Internal Control

1. The purpose of AAS 6 is to establish standards on the procedures to be

2. To plan an effective audit approach, the auditor should obtain an

4. Auditor should have a proper understanding of the accounting system and

5. After obtaining an understanding of the accounting system and internal

a) Inspection of documents supporting documents.

7. The level of detection risk relates directly to the auditor’s substantive

8. The auditor should make management aware, as soon as possible of any

Relying upon the work of an Internal Auditor

1. AAS 7 provides guidelines as to the procedures which should be applied

5. The external auditor’s general evaluation on the internal audit function

Planning an Audit of Financial Statements

1. This AAS deals with auditor’s responsibility to plan an audit of financial

3. The auditor shall undertake the following activities prior to starting an

a) Identify the characteristics of the engagement;

4. The auditor’s audit plan should include a description of:

6. Documentation is a very important step. It is through this that auditor

7. This AAs is effective for audits of financial statements for periods

Using the Work of an Expert

1. The auditor’s education and experience enable him to be knowledgeable

3. To determine whether to use the work of an expert or not, the auditor

5. To use the appropriateness and reasonableness of assumptions of methods

Review of Indai's Audit Assurance Standards (Summary)

Review of Indai's Audit Assurance Standards (Summary)