Nature , Objective And Scope Of Audit Flashcards
The person conducting audit should take care to ensure that financial statements
would not mislead anybody. Explain stating clearly the meaning of Auditing.
“An audit is an independent examination of financial information of any entity, whether profit oriented or not, and
irrespective of its size or legal form, when such an examination is conducted with a view to expressing an opinion
thereon.”
The person conducting audit should take care to ensure that financial statements would not mislead anybody. This he
can do honestly by satisfying himself that:
i. the accounts have been drawn up with reference to entries in the books of account;
ii. the entries in the books of account are adequately supported by sufficient and appropriate evidence;
iii. none of the entries in the books of account has been omitted in the process of compilation and nothing which is
not in the books of account has found place in the statements;
iv. the information conveyed by the statements is clear and unambiguous;
v. the financial statement amounts are properly classified, described and disclosed in conformity with accounting
standards; and
vi. the statement of accounts present a true and fair picture of the operational results and of the assets and
liabilities.
GST & Co., a firm of Chartered Accountants has been appointed to audit the accounts of XYZ Ltd. The partner
wanted to cover principal aspects while conducting its audit of financial statements. Advise those principal
aspects.
The principal aspects to be covered in an audit concerning final statements of account are the following:
1) examination of accounting system and internal control to ascertain whether it is appropriate for the business and help in proper recording of all the transaction.
2) reviewing the system and procedure to find out whether they are adequate and comprehensive.
3) where the audit is of corporate body , confirming that the statutory requirement have been complied with.
4) ascertaining that a proper distinction has been made between items of capital nature and revenue nature.
5) checking of the arithmetical accuracy of books of account by verification of posting.
RAG is proprietorship firm engaged in the manufacturing of textile and handloom products. It sells its finished
products both in the domestic as well as in the international market. The company is making total turnover of
Rs. 30 crores. It has also availed cash credit limit of Rs. 5 crores from Canara Bank. In the year 2017-18,
proprietor of the firm is worried about the financial position of the company and is under the impression that
since he is out of India, therefore firm might run into losses. He approaches a CA about the advantages of getting
his accounts audited throughout the year so that he may not suffer due to accounting weaknesses.
Advise regarding advantages of getting accounts audited.
The chief utility of audit lies in reliable financial statements on the basis of which the state of affairs may be easy to
understand. Apart from this obvious utility, there are other advantages of audit. Some or all of these are of considerable
value even to those enterprises and organisations where audit is not compulsory, these advantages are given below:
● It safeguards the financial interest of persons who are not associated with the management of the entity,
whether they are partners or shareholders,bankers, FI’s, public at large etc.
● It acts as a moral check on the employees from committing defalcations or embezzlement.
● Audited statements of account are helpful in settling liability for taxes, negotiating loans and for determining
the purchase consideration for a business.
● These are also useful for settling trade disputes for higher wages or bonus as well as claims in respect of
damage suffered by property, by fire or some other calamity.
● An audit can also help in the detection of wastages and losses to show the different ways by which these might
be checked, especially those that occur due to the absence or inadequacy of internal checks or internal control
measures.
● Audit ascertains whether the necessary books of account and allied records have been properly kept and
helps the client in making good deficiencies or inadequacies in this respect.
● As an appraisal function, audit reviews the existence and operations of various controls in the
organisations and reports weaknesses, inadequacies, etc.in them.
● Audited accounts are of great help in the settlement of accounts at the time of admission or death of partner.
● Government may require audited and certified statement before it gives assistance or issues a license for a
particular trade.
The auditor is not expected to, and cannot, reduce audit risk to zero and cannot therefore obtain absolute
assurance that the financial statements are free from material misstatement due to fraud or error. This is
because there are inherent limitations of an audit. Explain
The auditor is not expected to, and cannot, reduce audit risk to zero and cannot therefore obtain absolute assurance
that the financial statements are free from material misstatement due to fraud or error. This is because there are
inherent limitations of an audit. The inherent limitations of an audit arise from:
1. The Nature of Financial Reporting: The preparation of financial statements involves judgment by management
in applying the requirements of the entity’s applicable financial reporting framework to the facts and
circumstances of the entity. In addition, many financial statement items involve subjective decisions or
assessments or a degree of uncertainty, and there may be a range of acceptable interpretations or judgments that
may be made.
2. The Nature of Audit Procedures: There are practical and legal limitations on the auditor’s ability to obtain
audit evidence. For example:
a. There is the possibility that management or others may not provide, intentionally or unintentionally, the
complete information that is relevant to the preparation and presentation of the financial statements or
that has been requested by the auditor.
b. Fraud may involve sophisticated and carefully organised schemes designed to conceal it. Therefore, audit
procedures used to gather audit evidence may be ineffective for detecting an intentional misstatement
that involves, for example, collusion to falsify documentation which may cause the auditor to believe that
audit evidence is valid when it is not. The auditor is neither trained nor expected to be an expert in the
authentication of documents.
c. An audit is not an official investigation into alleged wrongdoing. Accordingly, the auditor is not given
specific legal powers, such as the power of search, which may be necessary for such an investigation.
3. Timeliness of Financial Reporting and the Balance between Benefit and Cost: The matter of difficulty, time,
or cost involved is not in itself a valid basis for the auditor to omit an audit procedure for which there is no
alternative.
Appropriate planning assists in making sufficient time and resources available for the conduct of the audit.
Notwithstanding this, the relevance of information, and thereby its value, tends to diminish over time, and there
is a balance to be struck between the reliability of information and its cost.
4. Other Matters that Affect the Limitations of an Audit: In the case of certain subject matters, limitations on the
auditor’s ability to detect material misstatements are particularly significant. Such assertions or subject matters
include:
- Fraud, particularly fraud involving senior management or collusion.
- The existence and completeness of related party relationships and transactions.
- The occurrence of non-compliance with laws and regulations.
- Future events or conditions that may cause an entity to cease to continue as a going concern.
.
The objective of the IAASB is to serve the public interest by setting high quality auditing standards and by
facilitating the convergence of international and national standards, thereby enhancing the quality and
uniformity of practice throughout the world and strengthening public confidence in the global auditing and
assurance profession. Advise how this objective would be accomplished.
The objective of the IAASB is to serve the public interest by setting high quality auditing standards and by facilitating the
convergence of international and national standards, thereby enhancing the quality and uniformity of practice
throughout the world and strengthening public confidence in the global auditing and assurance profession.
The IAASB achieves this objective by:
1. Establishing high quality auditing standards and guidance for financial statement audits that are generally
accepted and recognized by investors, auditors, governments, banking regulators, securities regulators and other
key stakeholders across the world;
2. Establishing high quality standards and guidance for other types of assurance services on both financial and
non-financial matters;
3. Establishing high quality standards and guidance for other related services;
4. Establishing high quality standards for quality control covering the scope of services addressed by the IAASB;
and
5. Publishing other pronouncements on auditing and assurance matters, thereby advancing public understanding of
the roles and responsibility of professional auditors and assurance service providers.
The firm’s system of quality control should include policies and procedures addressing each element. Explain
The firm’s system of quality control should include policies and procedures addressing each of the following elements:
(a) Leadership responsibilities for quality within the firm.
(b) Ethical requirements.
(c) Acceptance and continuance of client relationships and specific engagements.
(d) Human resources.
(e) Engagement performance.
(f) Monitoring.
Relevant ethical requirements ordinarily comprise the Code of Ethics for Professional Accountants (IESBA Code)
related to an audit of financial statements. Discuss with reference to those fundamental principles of
professional ethics.
The auditor shall comply with relevant ethical requirements, including those pertaining to independence, relating to
financial statement audit engagements. Relevant ethical requirements ordinarily comprise the Code of Ethics for
Professional Accountants (IESBA Code) related to an audit of financial statements.
The Code establishes the following as the fundamental principles of professional ethics relevant to the auditor when
conducting an audit of financial statements:
(a) Integrity;
(b) Objectivity;
(c) Professional competence and due care;
(d) Confidentiality; and
(e) Professional behavior
The Chartered Accountant has a responsibility to remain independent by taking into account the context in
which they practice, the threats to independence and the safeguards available to eliminate the threats.
In the above context, explain the guiding principles.
The Chartered Accountant has a responsibility to remain independent by taking into account the context in which they
practice, the threats to independence and the safeguards available to eliminate the threats.
The following are the guiding principles in this regard: -
1. For the public to have confidence in the quality of audit, it is essential that auditors should always be and appears
to be independent of the entities that they are auditing.
2. In the case of audit, the key fundamental principles are integrity, objectivity and professional skepticism, which
necessarily require the auditor to be independent.
3. Before taking on any work, an auditor must conscientiously consider whether it involves threats to his
independence.
4. When such threats exist, the auditor should either desist from the task or put in place safeguards that eliminate
them.
5. If the auditor is unable to fully implement credible and adequate safeguards, then he must not accept the work.
CA Raj, an engagement partner wants to take a decision regarding acceptance and continuance of audit
engagement. Which information, he should obtain before accepting an engagement ?
SQC 1 requires the firm to obtain information before accepting an engagement. Information such as the following assists
the engagement partner in determining whether the decisions regarding the acceptance and continuance of audit
engagements are appropriate:
(a) The integrity of the principal owners, key management and those charged with governance of the entity.
(b) Whether the engagement team is competent to perform the audit engagement and has the necessary capabilities,
including time and resources.
(c) Whether the firm and the engagement team can comply with relevant ethical requirements; and
(d) Significant matters that have arisen during the current or previous audit engagement, and their implications for
continuing the relationship.
The firm should establish policies and procedures designed to provide it with
reasonable assurance that the policies and procedures relating to the system of quality
control are relevant, adequate, operating effectively and complied with in practice.
Such policies and procedures should include an ongoing consideration and evaluation
of the firm’s system of quality control, including a periodic inspection of a selection of
completed engagements. Explain in the above context the purpose of monitoring
compliance with quality control policies and procedures.
The firm should establish policies and procedures designed to provide it with
reasonable assurance that the policies and procedures relating to the system of quality
control are relevant, adequate, operating effectively and complied with in practice.
Such policies and procedures should include an ongoing consideration and evaluation
of the firm’s system of quality control, including a periodic inspection of a selection of
completed engagements.
The purpose of monitoring compliance with quality control policies and procedures is
to provide an evaluation of:
(a) Adherence to professional standards and regulatory and legal requirements;
(b) Whether the quality control system has been appropriately designed and effectively implemented; and
(c) Whether the firm’s qualitycontrol policies and procedures have been appropriately
applied, so that reports that are issued by the firm or engagement partners are
appropriate in the circumstances.
The firm should establish policies and procedures designed to provide it with
reasonable assurance that engagements are performed in accordance with
professional standards and regulatory and legal requirements, and that the firm or
the engagement partner issues reports that are appropriate in the circumstances.
Through its policies and procedures, the firm seeks to establish consistency in
the quality of engagement performance. This is often accomplished through
written or electronic manuals, software tools or other forms of standardized
documentation, and industry or subject matter-specific guidance materials.
In the above context state the matters addressed.
Matters
addressed include the following:
♦ How engagement teams are briefed on the engagement to obtain an
understanding of the objectives of theirwork.
♦ Processes for complying with applicable engagement standards.
♦ Processes of engagement supervision, staff training and coaching.
♦ Methods of reviewing the work performed, the significant judgments made
and the form of report being issued.
♦ Appropriate documentation of the work performed and of the timing and
extent of the review.
♦ Processes to keep all policies and procedures current.
R & Co, a firm of Chartered Accountants have not revised the terms of engagement and obtained confirmation
from the clients for last 5 years despite changes in business and professional environment.
Elucidate the circumstances that may warrant the revision in terms of engagement
As per SA 210 on “Agreeing the Terms of Audit Engagements”, the auditor may decide not to send a new audit
engagement letter or other written agreement each period.
However, the factors that may make it appropriate to revise the terms of the audit engagement or to remind the entity of
existing terms are as follows:
● Any indication that the entity misunderstands the objective and scope of the audit.
● Any revised or special terms of the audit engagement.
● A recent change of senior management.
● A significant change in ownership.
● A significant change in nature or size of the entity’s business.
● A change in legal or regulatory requirements.
● A change in the financial reporting framework adopted in the preparation of the financial statements.
● A change in other reporting requirements.
