NATURE, OBJECTIVE AND SCOPE OF AUDIT

“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.
Overall objective of the auditor
 To obtain reasonable assurance
 To ensure that the financial statements as a whole are free from material
misstatements
 To report on the financial statements
 To communicate as required by the SAs
SCOPE OF AUDIT
 To form an opinion, the auditor should be satisfied that the accounting
information is reliable and sufficient as the basis for the preparation of the
financial statements.
 All aspects of the enterprise to be covered in audit.
 In forming his opinion, the auditor should also decide whether the relevant
information is properly disclosed in the financial statements.
 The auditor is not expected to perform duties which fall outside the scope of his
competence.
 Constraints on the scope of the audit that impair the auditor's ability to express
an unqualified opinion should be set out in his report.
Aspects to be covered in Audit
 An examination of the system of accounting and internal control
 Reporting to the appropriate person/body
 Checking the result shown by the profit and loss
 Verification of the authenticity and validity of transaction
 Comparison of the Items of FS with the underlying record
 Verification of the liabilities
 Verification of the title, existence and value of the assets
Advantages of audit of financial statements
 Safeguards the interest of persons not associated with the management
 Government may require audited and certified statement
 Acts as a moral check on the employees
 Helps in the detection of wastages and losses
 Helpful in settling liability for taxes
 Useful for settling trade disputes

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Inherent limitations of audit
Inherent Limitations of Audit (SA 200 “Overall Objectives of the Independent
Auditor and the Conduct of an Audit in Accordance with Standards on Auditing”):
The auditor is not expected to, and cannot, reduce audit risk to zero because there are
inherent limitations of an audit. The inherent limitations of an audit arise from:

The Nature of Financial Reporting: The preparation of financial statements

involves judgment by management.

The Nature of Audit Procedures: There are practical and legal limitations on the
auditor’s ability to obtain audit evidence such as:

Possibility that management or others Fraud may An audit is not an official

may not provide, intentionally or involve investigation into alleged
unintentionally, the complete sophisticated and wrongdoing.
information relevant for preparation carefully
and presentation of FS. organised
schemes.

Timeliness of Financial Reporting and the Balance between Benefit and Cost:
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.

Other Matters that Affect the Limitations of an Audit: Certain assertions or

subject matters are particularly significant, such assertions or subject matters include:

 Fraud, particularly involving  The occurrence of noncompliance with

senior management or collusion. laws and regulations.
 The existence and completeness  Future events or conditions that may cause
of related party relationships and an entity to cease to continue as a going
transactions. concern.

International Auditing and Assurance Standards Board (IAASB):

Auditing and Assurance Standards Board:
The IFAC Board has established the IAASB to develop and issue, in the public
interest and under its own authority, high quality auditing standards for use around the
world. The IAASB functions as an independent standard-setting body under the
auspices of IFAC. In India, ICAI constituted the AASB for the same purpose.

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Elements of a System of Quality Control :The firm’s system of quality control
should include policies and procedures addressing each of the following elements:
 Leadership responsibilities for quality within the firm.
 Ethical requirements.
 Acceptance and continuance of client relationships and specific engagements.
 Human resources.
 Engagement performance.
 Monitoring.
Relationship of auditing with other disciplines
 Accounting
 Production
 Financial Management
 Data Processing
 Statistics & Mathematics
 Law
 Economics
 Behavioural Science

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Auditing and Accounting: Auditing reviews the financial statements which are
nothing but a result of the overall accounting process.
Auditing and Law: An auditor should have a good knowledge of business laws
affecting the entity.
Auditing and Economics: Auditor is expected to be familiar with the overall
economic environment of the client.
Auditing and Behavioural Science: knowledge of human behaviour is essential for
an auditor to effectively discharge his duties
Auditing and Statistics & Mathematics: auditor is also expected to have the
knowledge of statistical sampling for meaningful conclusions and mathematics for
verification of inventories.
Auditing and Data Processing: EDP auditing in itself is developing as a discipline in
itself.
Auditing and Financial Management : the auditor is expected to have knowledge
about various financial techniques such as working capital management, funds flow,
ratio analysis, capital budgeting etc.
Auditing and Production: good auditor is one who understands the client and his
business functions such as production, cost system, marketing etc
Ethical Requirements Relating to Audit of Financial Statements
 Integrity;
 Objectivity;
 Professional competence and due care;
 Confidentiality;
 and Professional behaviour.
The auditor should be independent of the entity subject to the audit. The Code
describes independence as comprising both Independence of Mind +Independence in
Appearance.
Human Resources : The firm should establish policies and procedures designed to
address the following personnel issues:
 Recruitment;
 Performance evaluation;
 Capabilities;
 Competence;
 Career development;
 Promotion;
 Compensation; and

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  Estimation of personnel needs
Monitoring: The purpose of monitoring compliance with quality control policies and
procedures is to provide an evaluation of:
 Adherence to professional standards and regulatory and legal requirements;
 Whether the quality control system has been appropriately designed and
effectively implemented; and
 Whether the firm’s quality control policies and procedures have been
appropriately applied, so that reports that are issued by the firm or engagement
partners are appropriate in the circumstances.
 Follow-up by appropriate firm personnel so that necessary modifications are
promptly made to the quality control policies and procedures.
AUDIT STRATEGY, PLANNING AND PROGRAMME
After establishment of the overall audit strategy, an audit plan can be developed to
address the various matters identified in the overall audit strategy, taking into account
the need to achieve the audit objectives through the efficient use of the auditor’s
resources.
In establishing the overall audit strategy, the auditor shall:
 Identify the scope of the engagement;
 Ascertain the reporting objectives of the engagement;
 Consideration of significant factors in directing the engagement team’s efforts;
 Consider the results of preliminary engagement activities
 Ascertain the nature, timing and extent of resources required for the
engagement.
Planning is not a discrete phase of an audit, but rather a continual and iterative process
that often begins shortly after (or in connection with) the completion of the previous
audit and continues until the completion of the current audit engagement.

Development of an Overall Plan:

 The terms of his engagement and  Possible rotation of emphasis on specific

statutory responsibilities. audit areas.
 Nature and timing of reports  The nature and extent of audit evidence to
 Applicable legal or statutory be obtained.
requirements.  The work of internal auditors and the
 Accounting policies adopted by the extent of their involvement
client  The involvement of other auditors
 Effect of new accounting or auditing  The involvement of experts.
pronouncements on the audit.  The allocation of work between joint
auditors

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 Identification of significant audit  Establishing and coordinating staffing
areas. requirements.
 Setting of materiality levels for audit
purposes.
 The degree of reliance on accounting
system and internal control

The auditor shall document (a) the overall audit strategy;(b) the audit plan; and (c) any
significant changes made during the audit engagement to the overall audit strategy or the
audit plan, and the reasons for such changes.

AN AUDIT PROGRAMME is a detailed plan and consists of a series of verification

procedures to be applied to the financial statements and accounts of a given company
for the purpose of obtaining sufficient evidence to enable the auditor to express an
informed opinion on such statements. For framing an audit programme the following
points should be kept in view:
 Audit objective
 Audit procedure to be applied
 Extent of check
 Special instructions based on past experience of the auditee
 Allocation of work amongst the team members
 Timing of check

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 AUDIT DOCUMENTATION AND AUDIT
EVIDENCE
SA 230-"AUDIT DOCUMENTATION"
SA 230 on "Audit Documentation", deals with the auditor's responsibility to prepare
audit documentation for an audit of financial statements. It is to be adapted as
necessary in the circumstances when applied to audits of other historical financial
information. Laws or regulations may establish additional documentation
requirements.
Definition: Audit Documentation refers to
 record of audit procedures performed
 relevant audit evidence obtained
 conclusions the auditor reached
OBJECTIVE OF THE AUDITOR
To prepare documentation that provides-
 A sufficient and appropriate record of the basis for the auditor's report; and
 Evidence that the audit was planned and performed in accordance with SAS
and applicable legal and regulatory requirements.
NATURE OF AUDIT DOCUMENTATION
Audit documentation provides:
 evidence of the auditor's basis for a conclusion about the achievement of the
overall objectives of the auditor; and
 evidence that the audit was planned and performed in accordance with SAS.
PURPOSE OF AUDIT DOCUMENTATION
1. Assisting the engagement team to plan and perform the audit.
2. Assisting engagement team to direct and supervise the audit work.
3. Enabling the engagement team to be accountable for its work.
4. Retaining a record of matters of continuing significance to future audits.
5. Enabling the conduct of quality control reviews and inspections.
6. Enabling the conduct of external inspections.
EXAMPLES OF AUDIT DOCUMENTATION
Audit Documentation includes
 Analyses
 Audit programme
 Issues memoranda

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  Summary of significant matters
 Letter of confirmation and letter of representation
 Checklists
 Correspondence (including e-mail) concerning significant matters
AUDIT FILE-DEFINITION
Audit file may be defined as one or more folders or other storage media, in physical or
electronic form, containing the records that comprise the audit documentation for a
specific engagement.
IMPORTANT ASPECTS REGARDING AUDIT FILE
 An appropriate time limit within which to complete the assembly of the final
audit file is ordinarily not more than 60 days after the date of the auditor's
report.
 Changes may be made to the audit documentation during the final assembly
process, if they are administrative in nature.
 The retention period for audit engagements ordinarily is no shorter than seven
years from the date of the auditor's report, or, if later, the date of the group
auditor's report.
COMPLETION MEMORANDUM (Audit Documentation Summary)
 The auditor may consider it helpful to prepare and retain as part of the audit
documentation a summary that describes-
o the significant matters identified during the audit and
o how they were addressed.
 Such a summary may facilitate effective and efficient review and inspection of
the audit documentation. Further, the preparation of such a summary may assist
auditor's consideration of the significant matters.
 It may also help the auditor to consider whether there is any individual relevant
SA objective that the auditor cannot achieve that would prevent the auditor
from achieving the overall objectives of the auditor.
OWNERSHIP OF AUDIT DOCUMENTATION
 Standard on Quality Control (SQC) provides that audit documentation is the
property of the auditor.
 He may at his discretion, make portions of, or extracts from, audit
documentation available to clients.

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SA 500-"AUDIT EVIDENCE"
SA 500 "Audit Evidence", 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.
Definition
 Audit evidence is Information used by the auditor in arriving at the conclusions
on which the auditor's opinion is based
 It includes both information contained in the accounting records underlying the
financial statements and other information
OBJECTIVE OF THE AUDITOR
To design and perform audit procedures in such a way as to enable the auditor to
obtain sufficient appropriate audit evidence to be able to draw reasonable conclusions
on which to base the auditor's opinion.
SUFFICIENT AND APPROPRIATE AUDIT EVIDENCE
Sufficiency → measure of quantity of audit evidence
Appropriateness → measure of quality of audit evidence
FACTORS AFFECTING AUDITOR'S JUDGEMENT AS TO SUFFICIENCY
OF AUDIT EVIDENCE
 Materiality
 Risk of Material Misstatement
 Size & characteristics of the population
AUDIT PROCEDURES TO OBTAIN AUDIT EVIDENCE
 Inspection
 Observation
 External Confirmation
 Recalculation
 Reperformance
 Analytical Procedures
 Inquiry
The following chart illustrates different audit procedures:
Audit Procedures
 Risk Assessment Procedures
 Further Audit Procedures
o Test of Controls

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 o Substantive Procedures
 Test of Details
 Test of Transactions i.e. Vouching
 Test of Balances i.e. Verification
 Analytical Procedures
Risk Assessment Procedures refer to the audit procedures performed to obtain an
understanding of the entity and its environment, including the entity's internal control,
to identify and assess the risks of material misstatement, whether due to fraud or error,
at the financial statement and assertion levels.
Further Audit Procedures comprise of:
(i) Tests of controls, when required by the SAS or when the auditor has chosen
to do so; and
(ii) (ii) Substantive procedures, including tests of details and substantive
analytical procedures.
Test of Controls may be defined as an audit procedure designed to evaluate the
operating effectiveness of controls in preventing, or detecting and correcting, material
misstatements at the assertion level.
Substantive Procedure may be defined as an audit procedure designed to detect
material misstatements at the assertion level.
ASSERTION- DEFINITION
Representations by management that are embodied in the financial statements to
consider different types of potential misstatements
Assertions used by the auditor to consider the different types of potential
misstatements:
Classes of transactions and events
 Occurrence
 Completeness
 Accuracy
 Cut - Off
 Classification
Account balances
 Existence
 Rights and obligations
 Completeness
 Valuation and allocation
Presentation and Disclosure

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  Occurrence and rights and obligations
 Completeness
 Accuracy and valuation
 Classification and understandability
TYPES OF AUDIT EVIDENCE
Depending upon nature
 Visual
 Oral
 Documentary
Depending upon source
 Internal
 External
RELEVANCE AND RELIABILITY OF AUDIT EVIDENCE
Relevance deals with the logical connection with the purpose of the audit procedure
and the assertion under consideration.
The reliability of information to be used as audit evidence is influenced by its source
and its nature, and the circumstances under which it is obtained.
Reliability of Audit Evidence
Increases when
 Obtained from independent sources
 Related Control are effective
 Obtained directly by the auditor
 Obtained in documentary form
 Provided by Original Documents

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SA 580- "WRITTEN REPRESENTATIONS"
Definition of Written Representation:
 written statement by management
 provided to the auditor
 to confirm certain matters or
 to support other audit evidence
OBJECTIVES OF THE AUDITOR REGARDING WRITTEN
REPRESENTATION
 To obtain Written Representations
 To support other evidence
 To respond appropriately
Some IMPORTANT POINTS with respect to Written Representations:
 Written representations do not provide sufficient appropriate audit evidence on
their own about any of the matters with which they deal.
 The auditor shall request written representations from management.
 The auditor shall request management to provide a written representation that it
has fulfilled its responsibility for the preparation of the financial statements.
 Audit evidence obtained during the audit that management has fulfilled its
responsibilities is not sufficient. Auditor has to obtain confirmation from
management about the same.
 The auditor shall request management to provide a written representation that:
(a) It has provided the auditor with all relevant information and access as
agreed in the terms of the audit engagement, and
(b) All transactions have been recorded and are reflected in the financial
statements.
 The date of the written representations should not be after the date of the
auditor's report on the financial statements.
 The written representations shall be in the form of a representation letter
addressed to the auditor.
 If the auditor has concerns about the competence, integrity, ethical values or
diligence of management, the auditor shall determine the effect of such
concerns on the audit evidence.
 If management does not provide one or more of the requested written
representations, the auditor shall:
(a) Discuss the matter with management;
(b) Re-evaluate the integrity of management and evaluate the effect that this
may have on the reliability of representations (oral or written) and audit
evidence in general; and

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 (c) Take appropriate actions, including determining the possible effect on the
opinion in the auditor's report in accordance with SA 705.
SA 501- "AUDIT EVIDENCE- SPECIFIC CONSIDERATIONS FOR
SELECTED ITEMS"
SA 501 deals with specific considerations by the auditor in obtaining sufficient
appropriate audit evidence with respect to certain aspects of inventory, litigation and
claims involving the entity, and segment information in an audit of financial
statements.
OBJECTIVE OF THE AUDITOR
To obtain sufficient appropriate audit evidence regarding the:
(a) Existence and condition of inventory;
(b) Completeness of litigation and claims involving the entity; and
(c) Presentation and disclosure of segment information in accordance with the
applicable financial reporting framework.
Inventory:
When inventory is material to the financial statements, the auditor shall obtain
sufficient appropriate audit evidence regarding the existence and condition of
inventory by:
(a) Attendance at physical inventory counting, unless impracticable, to:
(i) Evaluate management's instructions and procedures for recording and
controlling the results of the entity's physical inventory counting:
(ii) Observe the performance of management's count procedures;
(iii) Inspect the inventory; and
(iv) Perform test counts.
(b) Performing audit procedures over the entity's final inventory records to determine
whether they accurately reflect actual inventory count results.
Attendance at Physical Inventory Counting
It Involves:
(a) Inspecting the inventory to ascertain its existence and evaluate its condition,
and performing test counts;
(b) Observing compliance with management's instructions and the performance of
procedures for physical inventory count; and
(c) Obtaining audit evidence as to the reliability of management's count
procedures.

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  These procedures may serve as test of controls or substantive procedures
depending on the auditor's risk assessment, planned approach and the specific
procedures carried out.
Matters Relevant in Planning Attendance at Physical Inventory Counting:
It include, for example:
(a) Nature of inventory.
(b) Stages of completion of work in progress.
(c) The risks of material misstatement related to inventory.
(d) The nature of the internal control related to inventory.
(e) Whether adequate procedures are expected to be established and proper
instructions issued for physical inventory counting.
(f) The timing of physical inventory counting.
(g) Whether the entity maintains a perpetual inventory system.
(h) The locations at which inventory is held.
(i) Whether the assistance of an auditor's expert is needed.
Litigation and Claims:
The auditor shall design and perform audit procedures in order to identify litigation
and claims involving the entity which may give rise to a risk of material misstatement,
including:
(a) Inquiry of management and in-house legal counsel;
(b) Reviewing minutes of meetings of those charged with governance and
correspondence between the entity and its external legal counsel; and
(c) Reviewing legal expense accounts.
Segment Information:
The auditor shall obtain sufficient appropriate audit evidence regarding the
presentation and disclosure of segment information in accordance with the applicable
financial reporting framework by:
(a) Obtaining an understanding of the methods used by management in determining
segment information. Further,
(i) Evaluating whether such methods are likely to result in disclosure in accordance
with the applicable financial reporting framework; and
(ii) Where appropriate, testing the application of such methods; and
(b) Performing analytical procedures or other audit procedures appropriate in the
circumstances.

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SA 505- "EXTERNAL CONFIRMATIONS"
SA 505- "External Confirmations", deals with the auditor's use of external
confirmation procedures to obtain audit evidence. SA 500 indicates that the reliability
of audit evidence is influenced by its source and by its nature, and is dependent on the
individual circumstances under which it is obtained.
OBJECTIVE OF THE AUDITOR
The objective of the auditor, when using external confirmation procedures, is to
design and perform such procedures to obtain relevant and reliable audit evidence.
DEFINITION OF EXTERNAL CONFIRMATION
Audit evidence obtained as a direct written response to the auditor from a third party
in paper form, or by electronic or other medium
Other Important Terms-
 Positive confirmation request A request that - the confirming party respond
directly to the auditor indicating whether the confirming party agrees or
disagrees with the information in the request, or providing the requested
information.
 Negative confirmation request - A request that the confirming party respond
directly to the auditor only if the confirming party disagrees with the
information provided in the request.
 Non-response A failure of the confirming party to respond, or fully respond, to
a positive confirmation request, or a confirmation request returned undelivered.
 Exception- A response that indicates a difference between information
requested to be confirmed, or contained in the entity's records, and information
provided by the confirming party. The exception needs to be assessed to the
entire population after analysing the reason for difference.
EXTERNAL CONFIRMATION PROCEDURES
 Determining the information to be confirmed or requested;
 Selecting the appropriate confirming party;
 Designing the confirmation requests; and
 Sending the requests, including follow-up requests.
MANAGEMENT'S REFUSAL TO ALLOW THE AUDITOR TO SEND A
CONFIRMATION REQUEST
THE AUDITOR SHALL:
 Inquire as to management's reasons for the refusal, and seek audit evidence as
to their validity and reasonableness;

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  Evaluate the implications of management's refusal on the auditor's assessment
of the relevant risks of material misstatement; and
 Perform alternative audit procedures designed to obtain relevant and reliable
audit evidence.
If the auditor concludes that management's refusal to allow the auditor to send a
confirmation request is unreasonable, or the auditor is unable to obtain relevant and
reliable audit evidence from alternative audit procedures
 The auditor shall communicate with those charged with governance in
accordance with SA 260.
 The auditor shall also determine the implications for the audit and the auditor's
opinion in accordance with SA 705.
RESULTS OF THE EXTERNAL CONFIRMATION PROCEDURES
Reliability of Responses to Confirmation Requests
 If the auditor identifies factors that give rise to doubts about the reliability of
the response to a confirmation request,
o the auditor shall obtain further audit evidence to resolve those doubts.
 If the auditor determines that a response to a confirmation request is not
reliable,
o the auditor shall evaluate the implications on the assessment of the
relevant risks of material misstatement.
NEGATIVE CONFIRMATIONS
Negative confirmations provide less persuasive audit evidence than positive
confirmations.
Accordingly, the auditor shall not use negative confirmation requests as the sole
substantive audit procedure to address an assessed risk of material misstatement at the
assertion level unless all of the following are present:
(a) The auditor has assessed the risk of material misstatement as low and has
obtained sufficient appropriate audit evidence regarding the operating
effectiveness of controls relevant to the assertion;
(b) The population of items subject to negative confirmation procedures comprises
a large number of small, homogeneous, account balances, transactions or
conditions;
(c) A very low exception rate is expected; and
(d) The auditor is not aware of circumstances or conditions that would cause
recipients of negative confirmation requests to disregard such requests.

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EVALUATING THE EVIDENCE OBTAINED
SA 510- "Initial Audit Engagements- Opening Balances", 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.
DEFINITION OF INITIAL AUDIT ENGAGEMENT
An engagement in which either:
 The financial statements for the prior period were not audited; or
 The financial statements for the prior period were audited by a predecessor
auditor.
OBJECTIVE OF AUDITOR WITH RESPECT TO OPENING BALANCES IN
CONDUCTING AN INITIAL AUDIT ENGAGEMENT
In conducting an initial audit engagement, 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.
AUDIT PROCEDURES REGARDING OPENING BALANCES
The auditor shall read the most recent financial statements, if any, and the predecessor
auditor's report thereon, if any, for information relevant to opening balances, including
disclosures.
 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:
 Determining whether the prior period's closing balances have been correctly
brought forward to the current period;
 Determining whether the opening balances reflect the application appropriate
accounting policies; and
 Performing one or more of the following:
(i) Where the prior year financial statements were audited, perusing the copies
of the f audited financial statements;
(ii) Evaluating whether audit procedures performed in the current period
provide evidence relevant to the opening balances; or

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 (iii) Performing specific audit procedures to obtain evidence regarding the
opening balances.
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 and those charged with governance in accordance with SA 450.
SOME OTHER IMPORTANT POINTS
 Consistency of Accounting Policies relating to opening balances
 Audit Conclusions and Reporting in relation to Opening Balances
 Relevant Information in the Predecessor Auditor's Report
 Modification to the Opinion in the Predecessor Auditor's Report

SA 550-"RELATED PARTIES"
SA 550- "Related Parties", deals with the auditor's responsibilities regarding related
party relationships and transactions when performing an audit of financial statements.
DEFINITION OF RELATED PARTY
A party that is either:
(i) A related party as defined in the applicable framework; or financial reporting
(ii) Where the applicable financial reporting framework establishes minimal no related
party or requirements:
(a) A person or other entity that has control or significant influence, directly or
indirectly through one or more intermediaries, over the reporting entity;
(b) Another entity over which the reporting entity has control or significant
influence, directly or indirectly through one or more intermediaries; or
(c) Another entity that is under common control with the reporting entity through
having:
 Common controlling ownership;
 Owners who are close family members; or
 Common key management.

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However, entities that are under common control by a state (i.e., a national, regional
or local government) are not considered related unless they engage in significant
transactions or share resources to a significant extent with one another.
RESPONSIBILITIES OF THE AUDITOR
 There are specific accounting and disclosure requirements for related party
relationships, transactions and balances to enable users of the financial
statements to understand their nature and effects on the financial statements.
 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 related party relationships, transactions or
balances.
 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, insofar as they are affected by those relationships and
transactions:
o Achieve a true and fair presentation; or
o Are not misleading (for compliance frameworks).
 In addition, an understanding of the entity's related party relationships and
transactions is relevant to the auditor's evaluation of whether fraud risk factors
are present as required by SA 240. This is because fraud may be more easily
committed through related parties.
 Owing to the inherent limitations of an audit, there is an unavoidable risk that
some material misstatements of the financial statements may not be detected,
even though the audit is properly planned and performed in accordance with
the SAs.
 In the context of related parties, the potential effects of inherent limitations on
the auditor's ability to detect material misstatements are greater for such
reasons as the following:
o Management may be unaware of the existence of all related party
relationships.
o Related party relationships may present a greater opportunity for
collusion, concealment or manipulation by management.
 Planning and performing the audit with professional skepticism as required by
SA 200 is therefore particularly important in this context, given the potential
for undisclosed related party relationships and transactions.
 The requirements in this SA are designed to assist the auditor in identifying and
assessing the risks of material misstatement associated with related party
relationships and transactions, and in designing audit procedures to respond to
the assessed risks.

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SA 560, "SUBSEQUENT EVENTS"
SA 560, "Subsequent Events" deals with the auditor's responsibilities relating to
subsequent events in an audit of financial statements.
 Date of the financial statements
 Events occurring between
 Date of the auditor's report
 Facts become known after the Auditor's Report
Some definitions:
Subsequent Events
Events occurring between the date of the financial statements and the date of the
auditor's report, and facts that become known to the auditor after the date of the
auditor's report.
Date of financial statements
The date of the end of the latest period covered by the financial statements.
Date of the auditor's report
The date the auditor dated the report on the financial statements in accordance with
SA 700.
OBJECTIVES OF THE AUDITOR
 Obtain sufficient appropriate audit evidence
 Respond appropriately to facts
AUDIT PROCEDURE REGARDING EVENTS OCCURRING BETWEEN
THE DATE OF THE FINANCIAL STATEMENTS AND THE DATE OF THE
AUDITOR'S REPORT
Audit Procedure
 Obtaining an understanding of procedures
 Inquiring of management
 Reading minutes
 Reading interim financial statements
WRITTEN REPRESENTATIONS WITH RESPECT TO SUBSEQUENT
EVENTS
The auditor shall request management and, where appropriate, those charged with
governance, to provide a written representation in accordance with SA 580, "Written
Representations" that all events occurring subsequent to the date of the financial

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statements and for which the applicable financial reporting framework requires
adjustment or disclosure have been adjusted or disclosed.
AUDITOR'S OBLIGATIONS REGARDING SUBSEQUENT EVENTS
 Discuss with management
 Whether financial statements need amendment
 How management intends to address?

SA 570-"GOING CONCERN"
SA 570 on "Going concern" deals with:
(I) The auditor's responsibilities in the audit of financial statements relating to going
concern and
(II) The implications for the auditor's report.
OBJECTIVES OF THE AUDITOR REGARDING GOING CONCERN
Objectives
 To obtain sufficient appropriate audit evidence regarding, and conclude on, the
appropriateness of management's use of the going concern basis of accounting
in the preparation of the financial statements;
 To conclude, based on the audit evidence obtained, whether a material
uncertainty exists related to events or conditions that may cast significant doubt
on the entity's ability to continue as a going concern; and
 To report in accordance with this SA.
SOME OTHER IMPORTANT POINTS:
 Risk Assessment Procedures and Related Activities
 Remaining Alert throughout the Audit for Audit Evidence about Events or
Conditions
 Events or Conditions that may Cast Significant Doubt on the Entity's Ability to
Continue as a Going Concern
 Additional Audit Procedures when Events or Conditions are Identified
Implications for the Auditor's Report
(A) Use of Going Concern Basis of Accounting is Inappropriate
If the financial statements have been prepared using the going concern basis of
accounting but, in the auditor's judgment, management's use of the going
concern basis of accounting in the preparation of the financial statements is
inappropriate, the auditor shall express an adverse opinion.

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 (B) Use of the Going Concern Basis of Accounting is Appropriate but a Material
Uncertainty Exists
The identification of a material uncertainty is a matter that is important to users'
understanding of the financial statements. The use of a separate section with a
heading that includes reference to the fact that a material uncertainty related to
going concern exists alerts users to this circumstance.
(1) Adequate Disclosure of a Material Uncertainty is Made in the Financial Statements
 If adequate disclosure about the material uncertainty is made in the financial
statements:
 The auditor shall express an unmodified opinion and the auditor's report shall
include a separate section under the heading "Material Uncertainty Related to
Going Concern."
(2) Adequate Disclosure of a Material Uncertainty is Not Made in the Financial
Statements
 If adequate disclosure about the material uncertainty is not made in the
financial statements, the auditor shall:
(a) Express a qualified opinion or adverse opinion, as appropriate, in
accordance with SA 705 (Revised); and
(b) In the Basis for Qualified (Adverse) Opinion section of the auditor's report,
state that a material uncertainty exists that may cast significant doubt on the
entity's ability to continue as a going concern and that the financial
statements do not adequately disclose this matter.

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RISK ASSESSMENT AND INTERNAL CONTROL
Audit Risk:
Audit risk means the risk that the auditor gives an inappropriate audit opinion when
the financial statement are materially misstated
Audit Risk = Risk of Material Misstatement x Detection Risk
Risk of material misstatement may be defined as the risk that the financial statements
are materially misstated prior to audit.
Inherent risk
The susceptibility of an assertion to a misstatement that could be material before
consideration of any related controls.
Control risk
The risk that a misstatement that could occur in an assertion and that could be
material, will not be prevented, or detected and corrected, on a timely basis by the
entity's internal control.
Misstatement refers to a
difference between the amount, classification, presentation, or disclosure of a reported
financial statement item the amount, classification, presentation, or disclosure that is
required for the item to be in accordance with the applicable financial reporting
framework
Risks of Material Misstatement at Two levels:
(i) The overall financial statement level- Risks of material misstatement at the
overall financial statement level refer to risks of material misstatement that
relate pervasively to the financial statements as a whole and potentially affect
many assertions.
(ii) The assertion level for classes of transactions, account balances, and
disclosures- Risks of material misstatement at the assertion level are assessed
in order to determine the nature, timing. and extent of further audit procedures
necessary to obtain sufficient appropriate audit evidence.
Components of Risk of Material Misstatement:
The risks of material misstatement at the assertion level consist of two components:
(i) Inherent risk and
(ii) Control risk.
Risk of Material Misstatement- Inherent Risk x Control Risk

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Inherent Risk
 Inherent risk is higher for some assertions and related classes of transactions,
account balances, and disclosures than for others. For example, it may be
higher for complex calculations.
 Inherent risk factors are considered while designing tests of controls and
substantive procedures.
Control Risk
 Control risk is a function of the effectiveness of the design, implementation and
maintenance of internal control by management.
 Auditor assesses control risk as
Combined Assessment of the risk of Material Misstatement:
Audit Risk = Inherent Risk x Control Risk x Detection Risk
Detection Risk
 The risk that the procedures performed by the auditor
 to reduce audit risk to an acceptably low level
 will not detect a misstatement that exists.
As per SA 315- "Identifying and Assessing the Risks of Material Misstatement
through understanding the entity environment"
Objective of the auditor
 To identify and assess the risks of material misstatements, whether due to fraud
or error
 at the financial statement and assertion levels
 through understanding the entity and its environment, including the entity's
internal control
 thereby providing a basis for designing and implementing responses to the
assessed risks of material misstatement
Risk Assessment Procedures
 The audit procedures performed to obtain an understanding of the entity and its
environment, including the entity's internal control
 to reduce audit risk to an acceptably low level to identify and assess the risk of
material misstatement whether due to fraud or error will not detect a
misstatement that exists.
 at the financial statement and assertions levels.

 Risk assessment procedure provides a basis for the identification and assessment
of risks of material misstatement at the financial statement and assertion levels.

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 Information obtained by performing risk assessment procedures may be used as
audit evidence.
 The risks to be assessed include both those due to error and those due to fraud.
Risk assessment procedure provides a basis for the identification and assessment of
risks of material misstatement at the financial statement and assertion levels.
What is included in Risk Assessment Procedures?
The risk assessment procedures shall include the following:
(a) Inquiries of management and of others within the entity.
(b) Analytical procedures.
(c) Observation and inspection.
The Required Understanding of the Entity and Its Environment, Including the
Entity's Internal Control:
Auditor to obtain understanding of:
 Relevant industry, regulatory, and other external factors including the
applicable financial reporting framework
 The nature of the entity, including its operations, ownership and governance
structures
 The entity’s selection and application of accounting policies
 The entity’s objectives and strategies, and those related business risks that may
result in risks of material misstatement
 The measurement and review of the entity’s financial performance
Internal Control:
• As per SA-315, the internal control may be defined as
• the process designed, implemented and maintained by those charged with
governance, management and other personnel
• to provide reasonable assurance about the achievement of an entity’s objectives,
• with regard to reliability of financial reporting, effectiveness and efficiency of
operations, safeguarding of assets, and compliance with applicable laws and
regulations.
• The term “controls” refers to any aspects of one or more of the components of
internal control.
Objectives of Internal Control:
 Transactions are executed in accordance with managements general or specific
authorization

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  All transactions are promptly recorded in the correct amount in the appropriate
accounts and in the accounting period in which executed
 Assets are safeguarded from unauthorised access, use or disposition
 The recorded assets are compared with the existing assets at reasonable
intervals.
The Entity's Internal Control: The auditor shall obtain an understanding of internal
control relevant to the audit. Although most controls relevant to the audit are likely to
relate to financial reporting, not all controls that relate to financial reporting are
relevant to the audit. It is a matter of the auditor's professional judgment whether a
control is relevant to the audit.
Benefits of Understanding of Internal Control: An understanding of internal
control assists the auditor in-
 identifying types of potential misstatements
 identifying factors that affect the risks of material misstatement
 designing the nature, timing, and extent of further audit procedures.
Study of various aspects of Internal Control:
(I) General Nature and Characteristics of Internal Control
(II) Controls Relevant to the Audit.
(III) Nature and Extent to the Understanding of Relevant Controls
(IV) Components of Internal Control.
(I) General Nature and Characteristics of Internal Control Purpose of Internal
Control:
 Internal control addresses identified business risks that threaten the
achievement of any of the entity's objectives that concern:
 The reliability of the entity's financial reporting
 The effectiveness and efficiency of its operations
 Its compliance with applicable laws and regulations
 Safeguarding of assets
Limitations of Internal Control
 Internal control can provide only reasonable assurance
 Human judgement in decision-making
 Lack of understanding the purpose
 Collusion among People
 Judgements by Management
 Limitations in case of Small Entities
(II) Controls Relevant to the Audit

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There is a direct relationship between an entity's objectives and the controls it
implements to provide reasonable assurance about their achievement.
Factors relevant to the auditor's judgment about whether a control, individually or in
combination with others, is relevant to the audit may include such matters as the
following:
 Materiality.
 The significance of the related risk.
 The size of the entity.
 The nature of the entity's business.
 The diversity and complexity of the entity's operations.
 Applicable legal and regulatory requirements.
 The circumstances and the applicable component of internal control.
 The nature and complexity of the systems.
 Whether, and how, a specific control, individually or in combination with
others, prevents, or detects and corrects, material misstatement.
(III) Nature and Extent of the Understanding of Relevant Controls
(i) Evaluating the design of a control involves considering whether the control
is capable of effectively preventing, or detecting and correcting, material
misstatements. Implementation of a control means that the control exists
and that the entity is using it. An improperly designed control may represent
a significant deficiency in internal control.
(ii) Risk assessment procedures to obtain audit evidence about the design and
implementation of relevant controls may include-
 Inquiring of entity personnel. Observing the application of specific
controls.
 Inspecting documents and reports.
 Tracing transactions through the information system relevant to
financial reporting.
(iii) Obtaining an understanding of an entity's controls is not sufficient to test
their operating effectiveness.
(IV) Components of Internal Control
 The Control Environment
 Entity's Risk Assessment process
 Information System
 Control Activities
 Monitoring of Controls

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A. Control Environment- Component of Internal Control
The auditor shall obtain an understanding of the control environment. As part of
obtaining this understanding, the auditor shall evaluate whether:
(i) Management has created and maintained a culture of honesty and ethical
behaviour; and
(ii) The strengths in the control environment elements collectively provide an
appropriate foundation for the other components of internal control.
Elements of the Control Environment
 Communication and enforcement of integrity and ethical values
 Commitment to competence
 Participation by those charged with governance
 Management's philosophy and operating style
 Organisational structure
 Assignment of authority and responsibility
 Human resource policies and practices
B. The Entity's Risk Assessment Process-Component of Control Environment
The auditor shall obtain an understanding of whether the entity has a process for:
(a) Identifying business risks relevant to financial reporting objectives;
(b) Estimating the significance of the risks;
(c) Assessing the likelihood of their occurrence; and
(d) Deciding about actions to address those risks.
C. The information system, including the related business processes, relevant to
financial reporting and communication- Component of Control Environment
The auditor shall obtain an understanding of the information system, including the
related business processes, relevant to financial reporting, including the following
areas:
(a) The classes of transactions in the entity's operations that are significant to the
financial statements;
(b) The procedures by which those transactions are initiated, recorded, processed,
corrected as necessary, transferred to the general ledger and reported in the
financial statements;
(c) Backup records
(d) How the information system captures events and conditions that are significant
to the financial statements;
(e) The financial reporting process used to prepare the entity's financial statements;
(f) Controls surrounding journal entries

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Communicating Financial Roles and Responsibilities-
Obtaining an Understanding by the Auditor: The auditor shall obtain an understanding
of how the entity communicates financial reporting roles and responsibilities
including:
(a) Communications between management and those charged with governance and
(b) External communications, such as those with regulatory authorities.
The following points need consideration in this regard:
(i) Understanding of Roles and Responsibilities
(ii) Understanding regarding Relation of Activities
(iii) Policy Manuals and Financial Reporting Manuals
(iv) Open Communication Channels
(v) Less structured and easier for Small Entities
D. Control Activities- Component of Internal Control
The auditor shall obtain an understanding of control activities relevant to the audit,
which the auditor considers necessary to assess the risks of material misstatement. An
audit requires an understanding of only those control activities related to significant
class of transactions, account balance, and disclosure in the financial statements and
the assertions which the auditor finds relevant in his risk assessment process.
 Control activities are the policies and procedures
 that help ensure that
 management activities are carried out
Examples of specific control activities include those relating to the following -
 Authorization
 Segregation of Duties
 Physical Controls
 Performance Reviews
 Information Processing
Control activities that are relevant to the audit are:
 Control activities that relate to significant risks and those that relate to risks for
which substantive procedures alone do not provide sufficient appropriate audit
evidence; or
 Those that are considered to be relevant in the judgment of the auditor;
 As part of the risk assessment, the auditor shall determine whether any of the
risks identified are, in the auditor's judgment, a significant risk.
E. Monitoring of Controls - Component of Internal Control

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The auditor shall obtain an understanding of the major activities that the entity uses to
monitor internal control over financial reporting.
1. Monitoring of Controls defined:
 Monitoring of Control is a process
 to assess the effectiveness
 of internal control performance over time
2. Helps in assessing the effectiveness of controls on a timely basis
3. Management accomplishes monitoring of controls through ongoing activities,
separate evaluations, or a combination of the two.
4. Management's monitoring activities may include using information from
communications from external parties such as customer complaints and regulator
comments that may indicate problems or highlight areas in need of improvement.
5. In case of Small Entities: Management's monitoring of control is often
accomplished by management's or the owner- manager's close involvement in
operations.
Monitoring of Controls- If the entity has an internal audit function
If the entity has an internal audit function, the auditor shall obtain an understanding of
the following:
a) The internal audit function's responsibilities and how the internal audit function fits
in the entity's organisational structure; and
(b) The activities performed, or to be performed, by the internal audit function.
Evaluation of Internal Control by the Auditor:
The auditor should gain an understanding of the accounting system and related
internal controls and should study and evaluate the operations of these internal
controls upon which he wishes to rely in determining the nature, timing and extent of
other audit procedures.
The review of internal controls will enable the auditor to know:
 whether errors and frauds are likely to be located in the ordinary course of
operations of the business;
 whether an adequate internal control system is in use and operating as planned by
the management;
 whether an effective internal auditing department is operating
 whether any administrative control has a bearing on his work;
 whether the controls adequately safeguard the assets;

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 how far and how adequately the management is discharging its function in so far
as correct recording of transactions is concerned;
 how reliable the reports, records and the certificates to the management can be,
 the extent and the depth of the examination that he needs to carry out in the
different areas of accounting
 what would be appropriate audit technique and the audit procedure in the given
circumstances;
 what are the areas where control is weak and where it is excessive; and
 whether some worthwhile suggestions can be given to improve the control system.
Evaluation of Internal Control- Methods
Evaluation of Internal Control with the help of
 Narrative Record
 Check List
 Questionnaire
 Flow Chart
Narrative Record
Narrative record is a complete and exhaustive description of the system as found in
operation by the auditor
Check List
Check list is a series of instructions and/or questions which a member of the auditing
staff must follow and/or answer
Internal Control Questionnaire
This is a comprehensive series of questions concerning internal control. This is the
most widely used form for collecting information about the existence, operation and
efficiency of internal control in an organisation.
Flow Chart
Flow Chart is a graphic representation of each part of the company's system of
internal control
Testing of Internal Control:
Test of controls are performed to obtain audit evidence about the effectiveness of the:
(a) design of the accounting and internal control system, and;
(b) operation of the internal controls throughout the period.
Test of controls may include:

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  Inspection of documents supporting transactions and other events to gain audit
evidence that internal controls have operated properly.
 Inquiries about, and observation of, internal controls which leave no audit trail.
 Re-performance involves the auditor's independent execution of procedures or
controls that were originally performed as part of the entity's internal control.
 Testing of internal control operating on specific computerised applications or
over the overall information technology function.
Internal Control and IT Environment:
An entity's system of internal control contains manual elements and often contains
automated elements. The characteristics of manual or automated elements relevant to
the auditor's risk assessment and further audit procedures are explained hereunder-
(i) Controls in Manual and IT System: The use of manual or automated elements in
internal control affects the manner in which transactions are initiated, recorded,
processed, and reported:
1. Controls in a manual system may include such procedures as approvals and
reviews of transactions, and reconciliations and follow-up of reconciling items.
Alternatively, an entity may use automated procedures to initiate, record,
process, and report transactions, in which case records in electronic format
replace paper documents.
2. Controls in IT systems consist of a combination of automated controls (for
example, controls embedded in computer programs and manual controls.)
(ii) Use of IT: An entity's mix of manual and automated elements in internal control
varies with the nature and complexity of the entity's use of IT.
(iii)Generally, IT benefits an entity's internal control by enabling an entity to:
 Processing of large volumes of transactions or data becomes simple:
 Enhance the timeliness, availability, and accuracy of information;
 Facilitate the additional analysis of information;
 Enhance the ability to monitor the performance of the entity's activities and its
policies and procedures;
 Reduce the risk that controls will be circumvented; and
 Effective segregation of duties through security controls.
(iv) IT also poses specific risks to an entity's internal control, including, for example:
 Reliance on systems or programs that are inaccurately processing data,
processing inaccurate data, or both.
 Unauthorised access to data that may result in destruction of data or improper
changes to data.

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  The possibility of IT personnel gaining access privileges beyond those
necessary to perform their assigned duties thereby breaking down segregation
of duties.
 Unauthorised changes to data in master files.
 Unauthorised changes to systems or programs.
 Failure to make necessary changes to systems or programs.
 Inappropriate manual intervention.
 Potential loss of data or inability to access data as required.
(v) Suitability: Manual elements in internal control may be more suitable where
judgment and discretion are required.
(vi) Reliability: Manual elements in internal control may be less reliable than
automated elements because they can be more easily bypassed, ignored, or overridden.
(vii)Nature of Entity's Information System: The extent and nature of the risks to
internal control vary depending on the nature and characteristics of the entity's
information system. The entity responds to the risks arising from the use of IT or from
use of manual elements in internal control by establishing effective controls in light of
the characteristics of the entity's information system.
Materiality and Audit Risk:
Audit risk is the risk that the auditor expresses an inappropriate audit opinion when
the financial statements are materially misstated.
Audit risk is a function of the risks of material misstatement and detection risk.
Materiality and audit risk are considered throughout the audit, in particular,
when:
(a)Identifying and assessing the risks of material misstatement;
(b) Determining the nature, timing and extent of further audit procedures; and
(c) Evaluating the effect of uncorrected misstatements, if any, on the financial
statements and in forming the opinion in the auditor's report.
Documenting the Risk:
The auditor shall document:
(a) The discussion among the engagement team and the significant decisions reached;
(b) Key elements of the understanding obtained regarding each of the aspects of the
entity and its environment and of each of the internal control components;
(c) The identified and assessed risks of material misstatement at the financial
statement level and at the assertion level; and

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 (d) The risks identified, and related controls about which the auditor has obtained an
understanding.
Internal Audit:
An independent management function. which involves a continuous and critical
appraisal of the functioning of an entity with a view to suggest improvements thereto
and add value to and strengthen the overall governance mechanism of the entity
including the entity's strategic risk management and internal control system
Applicability of Provisions of Internal Audit
As per section 138 of the Companies Act, 2013 the following class of companies
(prescribed in rule 13 of Companies (Accounts) Rules, 2014) shall be required to
appoint an internal auditor or a firm of internal auditors, namely-
(a) every listed company;
(b) every unlisted public company having-
 paid up share capital of fifty crore rupees or more during the preceding
financial year; or
 turnover of two hundred crore rupees or more during the preceding financial
year; or
 outstanding loans or borrowings from banks or public financial institutions
exceeding one hundred crore rupees or more at any point of time during the
preceding financial year; or
 outstanding deposits of twenty five crore rupees or more at any point of time
during the preceding financial year; and
(c) every private company having-
 turnover of two hundred crore rupees or more during the preceding financial
year; or
 outstanding loans or borrowings from banks or public financial institutions
exceeding one hundred crore rupees or more at any point of time during the
preceding financial year.
It is provided that an existing company covered under any of the above criteria shall
comply with the requirements within six months of commencement of such section.
Who can be appointed as Internal Auditor?
As per section 138, the internal auditor shall either be a chartered accountant or a cost
accountant (whether engaged in practice or not), or such other professional as may be
decided by the Board to conduct internal audit of the functions and activities of the
companies. The internal auditor may or may not be an employee of the company.
The objectives and scope of internal audit function

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As per SA-610, "Using the Work of an Internal Auditor", the objectives of internal
audit functions vary widely and depend on the size and structure of the entity and the
requirements of management and, where applicable, those charged with governance.
The objectives and scope of internal audit functions typically include assurance and
consulting activities designed to evaluate and improve the effectiveness of the entity's
governance processes, risk management and internal control such as the following:
Internal Audit Function
 Activities relating to Governance
 Activities relating to Risk Management
 Activities relating to Internal Control
o Evaluation of Internal Control
o Examination of Financial and Operating Information
o Review of Operating Activities
o Review of Compliance with Laws & Regulations
Basics of Internal Financial Control and Re- porting Requirements:
Clause (e) of Sub-section 5 of Section 134 explains the meaning of internal financial
controls as,
 the policies and procedures adopted by the company for ensuring the orderly
and efficient conduct of its business including adherence to company's policies,
the safeguarding of its assets
 the prevention and detection of frauds and errors
 the accuracy and completeness of the accounting records
 and the timely preparation of reliable financial information
Auditors' Responsibility for Reporting on Internal Financial Controls over
Financial Reporting in India
Clause (i) of Sub-section 3 of Section 143 of the Act requires the auditors' report to
state whether the company has adequate internal financial controls system in place and
the operating effectiveness of such controls.
Objective of an auditor in an audit of internal financial controls over financial
reporting is to express an opinion on the effectiveness of the company's internal
financial controls over financial reporting. It is carried out along with an audit of the
financial statements.
Rule 8(5)(viii) of the Companies (Accounts) Rules, 2014 requires the board report of
all companies to state the details in respect of adequacy of internal financial controls
with reference to the financial statements.
Difference between Internal

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Internal Financial Control and Internal Control over Financial Reporting:
Internal Financial Control as per Section 134(5)(e),
"the policies and procedures adopted by the company for ensuring the orderly and
efficient conduct of its business, including adherence to company's policies, the
safeguarding of its assets, the prevention and detection of frauds and errors, the
accuracy and completeness of the accounting records, and the timely preparation of
reliable financial information.
Internal controls over financial reporting-is required where auditors are required to
express an opinion on the effectiveness of an entity's internal controls over financial
reporting, such opinion is in addition to and distinct from the opinion expressed by the
auditor on the financial statements.
The best executive is one who has sense enough to pick good people to do what he
wants done, and self- restraint enough to keep from meddling with them while they do
it
- Theodore Roosevelt

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 COMPANY AUDIT
Eligibility, Qualifications and Disqualifications of an Auditor: Section 141 of the
Companies Act, 2013
Eligibility and Qualifications of an Auditor
- A person shall be eligible for appointment as an auditor of a company only if-
- he is a chartered accountant
- A firm whereof majority of partners practising in India are qualified for
appointment may be appointed by its firm name to be auditor of a company.
- Where a firm including a limited liability partnership is appointed as an auditor
of a company,
- only the partners who are chartered accountants shall be authorised to act and
sign on behalf of the firm.
DISQUALIFICATIONS OF AN AUDITOR:
Under sub-section (3) of section 141 along with Rule 10 of the Companies (Audit and
Auditors) Rules, 2014 (CAAR), the following persons shall not be eligible for
appointment as an auditor of a company, namely-
(a) a body corporate other than a limited liability partnership registered under the
Limited Liability Partnership Act, 2008;
(b) an officer or employee of the company;
(c) a person who is a partner, or who is in the employment, of an officer or employee
of the company;
(d) a person who, or his relative or partner -
 is holding any security of or interest in the company or its subsidiary, or of its
holding or associate company or a subsidiary of such holding company;
 is indebted to the company, or its subsidiary, or its holding or associate
company or a subsidiary of such holding company, in excess of Rs. 5,00,000;
or
 has given a guarantee or provided any security in connection with the
indebtedness of any third person to the company or its subsidiary, or its holding
or associate company or a subsidiary of such holding company, in excess of Rs.
1,00,000.
The relative may hold security or interest in the company of face value not exceeding
Rs. 1,00,000.
In the event of acquiring any security or interest by a relative, above the threshold
prescribed, the corrective action to maintain the limits as specified shall be taken by
the auditor within 60 days of such acquisition or interest.

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(e) a person or a firm who, whether directly or indirectly has business relationship
with the company, or its subsidiary, or its holding or associate company or subsidiary
of such holding company or associate company, of such nature as may be prescribed.
(f) a person whose relative is a Director or is in the employment of the company as a
director or key Managerial Personnel.
(g) a person who is in full time employment elsewhere or a person or a partner of a
firm holding appointment as its auditor, if such person or partner is at the date of such
appointment or reappointment holding appointment as auditor of more than twenty
companies other than one person companies, dormant companies, small companies
and private companies having paid-up share capital less than Rs. 100 crore.
(h) a person who has been convicted by a Court of an offence involving fraud and a
period of ten years has not elapsed from the date of such conviction.
(i) a person who, directly or indirectly, renders any service referred to in section 144
to the company or its holding company or its subsidiary company.
CERTAIN SERVICES NOT TO BE RENDERED BY THE AUDITOR AS PER
SECTION 144 OF THE COMPANIES ACT, 2013
 Accounting and book keeping services,
 Internal audit;
 Design and implementation of any financial information system:
 Actuarial services;
 Investment advisory services;
 Investment banking services;
 Rendering of outsourced financial services;
 Management services; and
 Any other kind of services as may be prescribed.
Where a person appointed as an auditor of a company incurs any of the
disqualifications mentioned in sub-section (3) of Section 141 after his appointment, he
shall vacate his office as such auditor and such vacation shall be deemed to be a casual
vacancy in the office of the auditor.
SECTION 139: APPOINTMENT OF AUDITORS
Appointment of Auditor [Section 139]
 First Auditors
o Other than Government Company [Section 139(6)]
 Appointment by Board of Directors → within 30 days from Date
of Registration of the company → in case of failure: Members at
EGM within 90 days
 Hold the office till the conclusion of the first AGM

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 o Government Company defined u/s 2(45) [Section 139(7)]
 Appointment by C&AG within 60 days from the Date of
Registration of the company → in case CAG does not appoint -
Board of Directors to appoint within next 30 days → in case of
failure of Board -Members shall appoint within 60 days at EGM
 Hold the office till the conclusion of the first AGM
 Subsequent Auditors
o Other than Government Company [Section 139(1)]
 Appointment by Members at first AGM
 Hold the office from 1st AGM till the conclusion of its 6th
AGM subject to fulfillment of certain conditions
o Government Company defined u/s 2(45) [Section 139(5)]
 Appointment by C & AG within 180 days from the
commencement of financial year
 Hold the office till the conclusion of the AGM
OTHER IMPORTANT PROVISIONS REGARDING APPOINTMENT OF
AUDITORS
Other Important Provisions Regarding Appointment of Auditors
 A retiring auditor may be re-appointed at an annual general meeting, if-
(a) he is not disqualified for re- appointment;
(b) he has not given the company a notice in writing of his unwillingness to be
re-appointed; and
(c) a special resolution has not been passed at that meeting appointing some
other auditor or providing expressly that he shall not be re-appointed.
 Where at any annual general meeting, по auditor is appointed or re-appointed,
the existing auditor shall continue to be the auditor of the company.
ROTATION OF AUDITOR
Applicability of Section 139(2)-Rotation of Auditor:
Class of Companies for Rotation of Auditor → including Listed Companies +
excluding OPC (One Person Company) and Small Companies
 All unlisted public companies having paid up share capital ≥ Rs 10 crore
 All private limited companies having paid up share capital ≥ Rs 50 crore
 All companies having paid up share capital of below threshold limit mentioned,
but having public borrowings from financial institutions, banks or public
deposits ≥ Rs 50 crore
Rotation of Auditors (in listed companies or specified class of companies) [Section
139(2)]
Individual as Auditor → Maximum time: One term of 5 consecutive years

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Audit firm as auditor → Maximum time: Two terms of 5 consecutive years
Cooling period:-5 years from the completion of his/its term
Further, as on the date of appointment, no audit firm which has common partner/s to
the other audit firms whose tenure has expired in a company immediately preceding
the Financial Year, shall be appointed as auditor of the same Company for a period of
5 years.
APPLICABILITY OF SECTION 177 CONSTITUTION OF AUDIT
COMMITTEE
 all public companies with a paid up capital ≥ Rs. 10 crore
 all public companies, having in aggregate, outstanding loans or borrowings or
debentures or deposits > Rs 50 crore
 Class of Companies to constitute Audit Committee [including Listed Public
Companies]
 all public companies having turnover ≥ Rs 100 crore
FUNCTIONS OF AUDIT COMMITTEE
Evaluation of internal financial control and risk management system
 Making recommendation for auditor's appointment, remuneration and terms of
appointment of auditor
 Scrutiny of inter- corporate loans and investments
 Valuation of assets of the company, monitoring the end use of funds raised
through public offers and related/ matters
 Approval or any subsequent modification of transaction of the company with
related parties
 Examination of financial statements and auditor's report thereon.
 Reviewing and monitoring auditor's independence and performance &
effectiveness of audit process
Manner & Procedure of selection & appointment of Auditors-Rule 3 of CAAR,
2014
Company Required to Constitute an Cases where Audit Committee is not
Audit Committee required to be constituted
↓ ↓
Audit Committee Board
↓ ↓
shall consider qualification and experience of the auditor
↓
& whether such qualifications & experience are commensurate with the size &
requirements of the Company
↓

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 Audit Committee or Board may call for information from the proposed Auditor
↓ ↓
Company required to constitute Cases where Audit Committee is not
Audit Committee required to be constituted
↓ ↓
Board shall consider & recommend the
Audit Committee shall auditor
recommend the name of the ↓
auditor to the Board for To Members in the AGM for Appointment
consideration
↓

If the Board agrees with the If Board disagree with the recommendation
recommendation of the Audit of Audit Committee
Committee ↓
↓ Board shall refer back the recommendations
it shall further recommend the to the Audit Committee for reconsideration
appointment of auditor to the ↓
Members in AGM citing reasons for such disagreement
↓

If Audit Committee after considering → If Board agrees with the

reasons-decides not to reconsider recommendations of the Audit
↓ Committee
Board shall record the reasons for ↓
disagreement with Audit Committee It shall place the matter for consideration
↓ by members in the AGM
& send its own recommendation for
consideration of the members in the
AGM

FILLING OF CASUAL VACANCY (SECTION 139(8))

Other companies
 To be filled by the Board of Directors within 30 days
 In case of resignation, appointment shall also be approved at General Meeting
 General Meeting convened within 3 months of the recommendation of the
Board
Government Companies
 To be filled by the C&AG within 30 days
 In case C&AG does not fill the vacancy, the Board of Directors shall fill within
next 30 days

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Auditor's Remuneration Section 142
Remuneration of the Auditor shall be
 Fixed In General Meeting
OR
 In such manner as may be determined in the general meeting
Note: Board may fix remuneration of the First Auditor appointed by it.
Section 140: Removal, Resignation of auditor and giving of special notice
Removal of Auditor before expiry of term: Section 140(1)
 As per Section 140(1), the auditor may be removed before expiry of his term
only by a Special Resolution of the Company
 after obtaining the previous approval of the Central Government as per Rule 7
 Before taking any action under this sub-section, auditor concerned shall be
given a reasonable opportunity of being heard
 Application to the Central Government for removal of auditor shall be made in
Form ADT-2
 A board meeting will be held (To decide the above and then authorising the
filing of application to CG)
 Application to CG (to be made in ADT-2), within 30 days of the resolution
passed by the Board
 Approval of CG received
 Company shall hold the GM within 60 days of receipt of approval of the CG
for passing the Special Resolution
Direction by Tribunal in case Auditor acted in a Fraudulent Manner under section
140(5)
 Either on an application by Central Government or any person concerned
 Or Tribunal suo moto
 if it is satisfied that auditor of a Company acted in a fraudulent manner or
abetted or colluded in any fraud by or in relation to the company or its
Directors or Officers
 direct the company to change its auditor
 If the application is made by Central Government and the Tribunal is satisfied
that any change of auditor is required Tribunal shall
 within 15 days of receipt of such application, make an order that he shall not
function as auditor (Central Government may appoint another)

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RESPONSIBILITY OF AUDITOR TO COMMUNICATE IN CASE OF
CASUAL VACANCY BY RESIGNATION OF AUDITOR (SECTION 140 (2)}
Resignation by auditor' of Government company or company controlled by CG or SG
 Form ADT-3
 within 30 days of resignation/
 with Company, /Registrar &, CAG
Resignation by auditor of Other Co.
 Form ADT-3
 within 30 days of resignation/
 with Company and Registrar,
In case of failure, the auditor shall be liable to a penalty of fifty thousand rupees or the
remuneration of the auditor, whichever is less, and in case of continuing failure, with
further penalty of five hundred rupees for each day after the first during which such
failure continues, subject to a maximum of Two lakh rupees as per section 140(3).
Appointment of Auditor other than Retiring Auditor Section 140(4)

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Note
If the Tribunal is satisfied on an application either of the company or of any other
aggrieved person that the rights conferred by section 140(4) of the Companies Act,
2013 are being abused by the auditor, then, the copy of the representation may not be
sent, and the representation need not be read out at the meeting.
Reporting under Companies (Auditor's Report) Order, 2020
Exempted class of companies
 Banking company
 Private limited company subject to fulfilment of specified conditions*
 Small company
 Insurance Company
 Company licensed to operate under Section 8 of the Companies Act, 2013
 One person company

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*a private limited company, not being a subsidiary or holding company of a public
company, having a paid up capital and reserves and surplus not more than one crore
rupees as on the balance sheet date and which does not have total borrowings
exceeding one crore rupees from any bank or financial institution at any point of time
during the financial year and which does not have a total revenue as disclosed in
Scheduled III to the Companies Act (including revenue from discontinuing
operations) exceeding ten crore rupees during the financial year as per the financial
statements.
Paragraph 3: Matters to be included in auditor's report under CARO 2020:
Auditor's Report (under CARO 2020) shall include a statement on the following
matters:
(i)(a)
A. whether the company is maintaining proper records showing full particulars,
including quantitative details and situation of Property, Plant and Equipment;
B. whether the company is maintaining proper records showing full particulars of
intangible assets
(b) whether these Property, Plant and Equipment have been-
 physically verified by the management at reasonable intervals.
 whether any material discrepancies were noticed on such verification and if so,
 whether the same have been properly dealt with in the books of account.
(c) whether the title deeds of all the immovable properties disclosed in the financial
statements are held in the name of the company. If not, provide the details thereof in
the format below:-
Description Gross Held in Whether Period held Reason for
of property carrying name of promoter, – indicate not being
value director or range, held in
their where name of
relative or appropriate company*
employee
- - - - - *also
indicate if
in dispute

(d) whether the company has revalued its Property, Plant and Equipment (including
Right of Use assets) or intangible assets or both during the year and, if so,
 whether the revaluation is based on the valuation by a Registered Valuer;

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  specify the amount of change, if change is 10% or more in the aggregate of the
net carrying value of each class of Property, Plant and Equipment or intangible
assets.
(e) whether any proceedings have been initiated or are pending against the company
for holding any benami property. if so, whether the company has appropriately
disclosed the details in its financial statements.
(ii)
(a) whether physical verification of inventory has been conducted at reasonable
intervals by the management and whether, in the opinion of the auditor, the coverage
and procedure of such verification by the management is appropriate; whether any
discrepancies of 10% or more in the aggregate for each class of inventory were
noticed and if so, whether they have been properly dealt with in the books of account;
(b) whether during any point of time of the year, the company has been sanctioned
working capital limits in
excess of five crore rupees, in aggregate, from banks or financial institutions on the
basis of security of current assets; whether the quarterly returns or statements filed by
the company with such banks or financial institutions are in agreement with the books
of account of the Company, if not, give details.
(iii) whether during the year the company has made investments in, provided any
guarantee or security or granted any loans or advances in the nature of loans, secured
or unsecured, to companies, firms, Limited Liability Partnerships or any other parties,
if so,-
(a) whether during the year the company has provided loans or provided advances in
the nature of loans, or stood guarantee, or provided security to any other entity [not
applicable to companies whose principal business is to give loans], if so, indicate-
A. the aggregate amount during the year, and balance outstanding at the balance
sheet date with respect to such loans or advances and guarantees or security to
subsidiaries, joint ventures and associates;
B. the aggregate amount during the year, and balance outstanding at the balance
sheet date with respect to such loans or advances and guarantees or security to
parties other than subsidiaries, joint ventures and associates;
(b)
 whether the investments made, guarantees provided, security given and
 the terms and conditions of the grant of all loans and advances in the nature of
loans and guarantees provided
 are not prejudicial to the company's interest;
(c)

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  in respect of loans and advances in the nature of loans,
 whether the schedule of repayment of principal and payment of interest
 has been stipulated and whether the repayments or receipts are regular;
(d)
 if the amount is overdue,
 state the total amount overdue for more than ninety days,
 and whether reasonable steps have been taken by the company for recovery of
the principal and interest;
(e)
 whether any loan or advance in the nature of loan granted which has fallen due
during the year,
 specify the aggregate amount of such dues renewed or extended or settled by
fresh loans and
 has been renewed or extended or fresh loans granted to settle the overdues of
existing loans given to the same parties, if so,
 the percentage of the aggregate to the total loans or advances in the nature of
loans granted during the year [not applicable to companies whose principal
business is to give loans]:
(f)
 whether the company has granted any loans or advances in the nature of loans
 either repayable on demand or without specifying any terms or period of
repayment, if so,
 specify the aggregate amount, percentage thereof to the total loans granted,
aggregate amount of loans granted to promoters, related parties as defined in
clause (76) of section 2 of the Companies Act, 2013.
(iv) in respect of loans, investments, guarantees, and security, whether provisions of
sections 185 and 186 of the Companies Act have been complied with, if not, provide
the details thereof.
(v) in respect of deposits accepted by the company or amounts which are deemed to
be deposits, whether the directives issued by the Reserve Bank of India and the
provisions of sections 73 to 76 or any other relevant provisions of the Companies Act
and the rules made thereunder, where applicable, have been complied with, if not, the
nature of such contraventions be stated; if an order has been passed by Company Law
Board or National Company Law Tribunal or Reserve Bank of India or any court or
any other tribunal, whether the same has been complied with or not.
(vi) whether maintenance of cost records has been specified by the Central
Government under sub-section (1) of section 148 of the Companies Act and whether
such accounts and records have been so made and maintained.

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(vii)
(a) whether the company is regular in depositing undisputed statutory dues including
Goods and Services Tax, provident fund, employees' state insurance, income tax,
sales-tax, service tax, duty of customs, duty of excise, value added tax, cess and any
other statutory dues to the appropriate authorities and if not, the extent of the arrears
of outstanding statutory dues as on the last day of the financial year concerned for a
period of more than six months from the date they became payable, shall be indicated;
(b) where statutory dues referred to in sub-clause (a) have not been deposited on
account of any dispute, then the amounts involved and the forum where dispute is
pending shall be mentioned (a mere representation to the concerned Department shall
not be treated as a dispute).
(viii) whether any transactions not recorded in the books of account have been
surrendered or disclosed as income during the year in the tax assessments under the
Income Tax Act, 1961 if so, whether the previously unrecorded income has been
properly recorded in the books of account during the year.
(ix) (a) Whether the company has defaulted in repayment of loans or other borrowings
or in the payment of interest thereon to any lender, if yes, the period and the amount
of default to be reported as per the format below:-
Nature of Name of Lender Amount Whether No. of Remarks,
borrowing, not paid principal or days If any
including on due interest delay or
debt date unpaid
securities
lender wise details
to be provided in
case of defaults to
banks, financial
institutions and
Government.

(b) whether the company is a declared wilful defaulter by any bank or financial
institution or other lender;
(c) whether term loans were applied for the purpose for which the loans were
obtained; if not, the amount of loan so diverted and the purpose for which it is used
may be reported;
(d) whether funds raised on short term basis have been utilised for long term purposes,
if yes, the nature and amount to be indicated;

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(e) whether the company has taken any funds from any entity or person on account of
or to meet the obligations of its subsidiaries, associates or joint ventures, if so, details
thereof with nature of such transactions and the amount in each case,
(f) whether the company has raised loans during the year on the pledge of securities
held in its subsidiaries, joint ventures or associate companies, if so, give details
thereof and also report if the company has defaulted in repayment of such loans
raised.
(x)
(a) whether money raised by way of initial public offer or further public offer
(including debt instruments) during the year were applied for the purposes for which
those are raised, if not, the details together with delays or default and subsequent
rectification, if any, as may be applicable, be reported:
(b) whether the company has made any preferential allotment or private placement of
shares or convertible debentures (fully, partially or optionally convertible) during the
year and if so, whether the requirements of section 42 and section 62 of the
Companies Act, 2013 have been complied with and the funds raised have been used
for the purposes for which the funds were raised, if not, provide details in respect of
amount involved and nature of non-compliance.
(xi)
(a) whether any fraud by the company or any fraud on the company has been noticed
or reported during the year, if yes, the nature and the amount involved is to be
indicated;
(b) whether any report under sub-section (12) of section 143 of the Companies Act has
been filed by the auditors in Form ADT-4 as prescribed under rule 13 of Companies
(Audit and Auditors) Rules, 2014 with the Central Government;
(c) whether the auditor has considered whistle- blower complaints, if any, received
during the year by the company.
(xii)
(a) whether the Nidhi Company has complied with the Net Owned Funds to Deposits
in the ratio of 1:20 to meet out the liability;
(b) whether the Nidhi Company is maintaining ten percent unencumbered term
deposits as specified in the Nidhi Rules, 2014 to meet out the liability;
(c) whether there has been any default in payment of interest on deposits or repayment
thereof for any period and if so, the details thereof.

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(xiii) whether all transactions with the related parties are in compliance with sections
177 and 188 of Companies Act, where applicable and the details have been disclosed
in the financial statements, etc., as required by the applicable accounting standards.
(xiv)
(a) whether the company has an internal audit system commensurate with the size and
nature of its business;
(b) whether the reports of the Internal Auditors for the period under audit were
considered by the statutory auditor.
(xv) whether the company has entered into any non-cash transactions with directors or
persons connected with him and if so, whether the provisions of section 192 of
Companies Act have been complied with.
(xvi)
(a) whether the company is required to be registered under section 45-IA of the
Reserve Bank of India Act, 1934 and if so, whether the registration has been obtained;
(b) whether the company has conducted any Non- Banking Financial or Housing
Finance activities without a valid Certificate of Registration (COR) from the Reserve
Bank of India as per the Reserve Bank of India Act, 1934;
(c) whether the company is a Core Investment Company (CIC) as defined in the
regulations made by the Reserve Bank of India, if so, whether it continues to fulfil the
criteria of a CIC, and in case the company is an exempted or unregistered CIC,
whether it continues to fulfil such criteria;
(d) whether the Group has more than one CIC as part of the Group, if yes, indicate the
number of CICS which are part of the Group.
(xvii) whether the company has incurred cash losses in the financial year and in the
immediately preceding financial year, if so, state the amount of cash losses.
(xviii) whether there has been any resignation of the statutory auditors during the year,
if so, whether the auditor has taken into consideration the issues, objections or
concerns raised by the outgoing auditors.
(xix) on the basis of the financial ratios, ageing and expected dates of realisation of
financial assets and payment of financial liabilities, other information accompanying
the financial statements, the auditor's knowledge of the Board of Directors and
management plans, whether the auditor is of the opinion that no material uncertainty
exists as on the date of the audit report that company is capable of meeting its
liabilities existing at the date of balance sheet as and when they fall due within a
period of one year from the balance sheet date.
(xx)

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(a) whether, in respect of other than ongoing projects, the company has transferred
unspent amount to a Fund specified in Schedule VII to the Companies Act within a
period of six months of the expiry of the financial year in compliance with second
proviso to sub-section (5) of section 135 of the said Act;
(b) whether any amount remaining unspent under subsection (5) of section 135 of the
Companies Act, pursuant to any ongoing project, has been transferred to special
account in compliance with the provision of subsection (6) of section 135 of the said
Act.
(xxi) whether there have been any qualifications or adverse remarks by the respective
auditors in the Companies (Auditor's Report) Order (CARO) reports of the companies
included in the consolidated financial statements, if yes, indicate the details of the
companies and the paragraph numbers of the CARO report containing the
qualifications or adverse remarks.

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 Audit Report
The Auditor’s Report on Financial Statements
The SA 700 series is purely dedicated to the auditor report to be issued by the auditor.
Here, we are discussing SA 700, SA 701, SA 705 and SA 706
SA-700 Forming an Opinion and Reporting on Financial Statements
Objective • Forming opinion on the financial statements.
• Form and content of the audit report.
Basic Elements of the Auditor’s Report: The auditor’s report includes the following basic
elements, which ordinarily includes in case of Auditors’ Report for Audits Conducted in
Accordance with Standards on Auditing:
1. Title
2. Addressee shall be addressed as required by the circumstances of the
engagement
3. Auditor’s Opinion: The first section of the auditor’s report shall include the
auditor’s opinion, and shall have the heading “Opinion.”
statements.
The Opinion section of the auditor’s report
shall also:
(a) Identify the entity whose financial statements
have been audited;
(b) State that the financial statements have been
audited;
(c) Identify the title of each statement comprising
the financial statements;
(d) Refer to the notes, including the summary of
significant accounting policies; and
(e) Specify the date of, or period covered by, each
financial statement comprising the financial
If the reference to the applicable financial reporting
framework in the auditor’s opinion is not to Accounting
Standards, the auditor’s opinion shall identify the origin of
such other framework.

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4. Basis for Opinion: The auditor’s report shall include a section, directly following
the Opinion section, with the heading “Basis for Opinion”,
that:
(a) States that the audit was conducted in accordance with
Standards on Auditing;
(b) Refers to the section of the auditor’s report that
describes the auditor’s responsibilities under the SAs;
(c) Includes a statement that the auditor is independent of
the entity in accordance with the relevant ethical
requirements relating to the audit, and has fulfilled the
auditor’s other ethical responsibilities in accordance with
these requirements. The statement shall refer to the Code
of Ethics issued by ICAI
(d) States whether the auditor believes that the audit
evidence the auditor has obtained is sufficient and
appropriate to provide a basis for the auditor’s opinion. ;
5. Going Concern: Where applicable, the auditor shall report in accordance with
SA 570
6. Key Audit Matters For audits of complete sets of general purpose financial
statements of listed entities, the auditor shall communicate key
audit matters in the auditor’s report in accordance with SA
701.
7. Responsibilities for the This section of the auditor’s report shall describe
Financial Statements: management’s responsibility for:
(a) Preparing the financial statements in accordance with the
applicable financial reporting framework, and for such
internal control as management determines is necessary to
enable the preparation of financial statements that are free
from material misstatement, whether due to fraud or error;
and
(b) Assessing the entity’s ability to continue as a going
concern and whether the use of the going concern basis of
accounting is appropriate as well as disclosing, if
applicable, matters relating to going concern. The
explanation of management’s responsibility for this
assessment shall include a description of when the use of
the going concern basis of accounting is appropriate.

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8. Auditor’s Responsibilities for the Audit of the Financial Statements: The auditors
report shall include a section with the heading “Auditor’s Responsibilities for the
Audit of the Financial Statements.”
(I) This section of the auditor’s report shall:
(a) State that the objectives of the auditor are to:
 Obtain reasonable assurance about whether the financial statements as a whole
are free from material misstatement, whether due to fraud or error; and
 Issue an auditor’s report that includes the auditor’s opinion.
(b) State that reasonable assurance is a high level of assurance, but is not a guarantee
that an audit conducted in accordance with SAs will always detect a material
misstatement when it exists; and
(c) State that misstatements can arise from fraud or error, and either:
 Describe that they are considered material if, individually or in the aggregate,
they could reasonably be expected to influence the economic decisions of users
taken on the basis of these financial statements; or
 Provide a definition or description of materiality in accordance with the
applicable financial reporting framework
(II) The Auditor’s Responsibilities for the Audit of the Financial Statements section of
the auditor’s report shall further:
Auditor’s Responsibilities for the Audit of the Financial Statements
 To exercises professional judgment and maintains professional skepticism
throughout the audit as per SAs;
 To describe an audit by stating that the auditor’s responsibilities are:
o To identify and assess the risks of material misstatement of the FS
o To obtain an understanding of internal control relevant for audit to
design audit procedures
o To evaluate the appropriateness of:
 accounting policies used
 reasonableness of accounting estimates
 related disclosures made by management.
o To conclude on the appropriateness of management’s use of the going
concern basis
o to evaluate the overall presentation, structure and content of the
financial statements
 To describe the auditor’s responsibilities in a group audit engagement as per
SA 600.

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(III)The Auditor’s Responsibilities for the Audit of the Financial Statements section of
the auditor’s report also shall:
(a) State that the auditor communicates with those charged with governance regarding,
among other matters:
 the planned scope and timing of the audit and
 significant audit findings,
 including any significant deficiencies in internal control that the auditor
identifies during the audit;
(b) State that the auditor provides those charged with governance with a statement that
the auditor has:
 complied with relevant ethical requirements regarding independence and
 communicate with them all relationships and
 other matters that may reasonably be thought to bear on the auditor’s
independence, and where applicable, related safeguards; and
(c) For audits of financial statements of all such entities for which key audit matters
are communicated in accordance with SA 701, state that, from the matters
communicated with those charged with governance, the auditor determines those
matters that were of most significance in the audit of the financial statements of the
current period and are therefore the key audit matters In accordance with the
requirements of SA 701, the auditor describes these matters in the auditor’s report
unless law or regulation precludes public disclosure about the matter or when, in
extremely rare circumstances, the auditor determines that a matter should not be
communicated in the auditor’s report because the adverse consequences of doing so
would reasonably be expected to outweigh the public interest benefits of such
communication.
9. Location of the description of the auditor’s responsibilities for the audit of the
financial statements: The description of the auditor’s responsibilities for the audit of
the financial statements required by this SA shall be included:
(a) Within the body of the auditor’s report;
(b) Within an appendix to the auditor’s report, in which case the auditor’s report
shall include a reference to the location of the appendix; or
(c) By a specific reference within the auditor’s report to the location of such a
description on a website of an appropriate authority, where law, regulation or
the auditing standards expressly permit the auditor to do so.
When the auditor refers to a description of the auditor’s responsibilities on a
website of an appropriate authority, the auditor shall determine that such
description addresses, and is not inconsistent with, the requirements of this SA.
10. Other Reporting Responsibilities:

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11. Signature of the Auditor: The auditor’s report shall be signed.
 The report is signed by the auditor (i.e. the engagement partner) in his personal
name.
 Where the firm is appointed as the auditor, the report is signed in the personal
name of the auditor and in the name of the audit firm.
 The partner/proprietor signing the audit report also needs to mention the
membership number assigned by the Institute of Chartered Accountants of
India. They also include the registration number of the firm, wherever
applicable, as allotted by ICAI, in the audit reports signed by them.
12. Place of Signature: The auditor’s report shall name specific location where the
audit report is signed.
13. Date of the Auditor’s Report: The auditor’s report shall be dated no earlier than
the date on which the auditor has obtained sufficient appropriate audit evidence on
which to base the auditor’s opinion on the financial statements, including evidence
that:
(a) All the statements that comprise the financial statements, including the related
notes, have been prepared; and
(a) Those with the recognized authority have asserted that they have taken
responsibility for those financial statements.
Auditor’s Report Prescribed by Law or Regulation: If the auditor is required by law or
regulation applicable to the entity to use a specific layout, or wording of the auditor’s
report, the auditor’s report shall refer to Standards on Auditing only if the auditor’s
report includes, at a minimum, each of the following elements
(1) A title.
(2) An addressee, as required by the circumstances of the engagement.
(3) An Opinion section containing an expression of opinion on the financial
statements and a reference to the applicable financial reporting framework used to
prepare the financial statements.
(4) An identification of the entity’s financial statements that have been audited.
(5) A statement that the auditor is independent of the entity in accordance with the
relevant ethical requirements relating to the audit, and has fulfilled the auditor’s other
ethical responsibilities in accordance with these requirements. The statement shall
refer to the Code of Ethics issued by ICAI.
(6) Where applicable, a section that addresses, and is not inconsistent with, the
reporting requirements of SA 570.

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(7) Where applicable, a Basis for Qualified (or Adverse) Opinion section that
addresses, and is not inconsistent with, the reporting requirements of SA 570
(Revised).
(8) Where applicable, a section that includes the information required by SA 701, or
additional information about the audit that is prescribed by law or regulation and that
addresses, and is not inconsistent with, the reporting requirements in that SA 701.
(9) A description of management’s responsibilities for the preparation of the financial
statements and an identification of those responsible for the oversight of the financial
reporting process that addresses, and is not inconsistent with, the requirements.
(10)A reference to Standards on Auditing and the law or regulation, and a description
of the auditor’s responsibilities for an audit of the financial statements that addresses,
and is not inconsistent with, the requirements.
(11)The auditor’s signature.
(12)The Place of signature
(13)The date of the auditor’s report
Auditor’s Report for Audits Conducted in Accordance with Both Standards on
Auditing Issued by ICAI and International Standards on Auditing or Auditing
Standards of Any Other Jurisdiction. In this case, the auditor’s report may refer to
Standards on Auditing in addition to the International Standards on Auditing or
auditing standards of such other jurisdiction, but the auditor shall do so only if:
(a) There is no conflict between the requirements in the ISAs or such auditing
standards of other jurisdiction and those in SAs that would lead the auditor:
 to form a different opinion, or
 not to include an Emphasis of Matter paragraph or Other Matter paragraph that,
in the particular circumstances, is required by SAs; and
(b) The auditor’s report includes, at a minimum, each of the elements set out in
Auditor’s Report Prescribed by Law or Regulation discussed above when the auditor
uses the layout or wording specified by the Standards on Auditing. However,
reference to “law or regulation” in above paragraph shall be read as reference to the
Standards on Auditing. The auditor’s report shall thereby identify such Standards on
Auditing.
When the auditor’s report refers to both the ISAs or the auditing standards of a
specific jurisdiction and the Standards on Auditing issued by ICAI, the auditor’s
report shall clearly identify the same including the jurisdiction of origin of the other
auditing standards.
Supplementary Information Presented with the Financial Statements:

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If supplementary information that is not required by the applicable financial reporting
framework is presented with the audited financial statements, the auditor shall
evaluate:
 whether, in the auditor’s professional j u d g m e n t , s u p p l e m e n t a r y
information is nevertheless an integral part of the financial statements due to its
nature or how it is presented. When it is an integral part of the financial
statements, the supplementary information shall be covered by the auditor’s
opinion.
 whether such supplementary information is presented in a way that sufficiently
and clearly differentiates it from the audited financial statements. If this is not
the case, then the auditor shall ask management to change how the unaudited
supplementary information is presented. If management refuses to do so, the
auditor shall identify the unaudited supplementary information and explain in
the auditor’s report that such supplementary information has not been audited.
SA-701 Communicating Key Audit Matters in the Independent
Auditor’s Report
Objective • To enhance the communicative value of the auditor’s report
by providing greater transparency about the audit that was
performed.
• To assist the user in understanding those matters that, in the
auditor’s professional judgment, were of most significance in
the audit of the financial statements of the current period.
Definition of Key Key Audit matter are those matters that, in the auditor’s
Audit Matters professional judgment, were of most significance in the audit of
the financial statements of the current period. Key audit matters
are selected from matters communicated with those charged
with governance.
Scope: a substitute for disclosures in the financial statements;
Communicating a substitute for reporting in accordance with SA 570 or
key audit matters a substitute for the auditor expressing a modified opinion when
in the auditor’s required by the circumstances of a specific audit engagement in
report is not: accordance with SA 705;
a separate opinion on individual matters.
Applicability of It is intended to address both the auditor’s judgment as to what
SA 701 to communicate in the auditor’s report and the form and content
of such communication
♦ This SA applies to audits of complete sets of general purpose
financial statements of :
 listed entities and
 circumstances when the auditor otherwise decides to
communicate key audit matters in the auditor’s report and
 required by law or regulation to communicate key audit
matters in the auditor’s report

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 However, SA 705 (Revised) prohibits the auditor from
communicating key audit matters when the auditor disclaims an
opinion on the financial statements, unless such reporting is
required by law or regulation
Determining Key Audit Matters: The auditor shall determine, from the matters
communicated with those charged with governance, those matters that required
significant auditor attention in performing the audit. In making this determination,
the auditor shall take into account the following:
(a) Areas of higher assessed risk of material misstatement, or significant risks
identified in accordance with SA 315
(b) Significant auditor judgments relating to areas in the financial statements that
involved significant management judgment, including accounting estimates that
have been identified as having high estimation uncertainty.
(c) (c) The effect on the audit of significant events or transactions that occurred
during the period.
Communicating The introductory language in this section of the auditor’s report
Key Audit shall state that:
Matters: (a) Key audit matters are those matters that, in the auditor’s
professional judgment, were of most significance in the audit of
the financial statements [of the current period]; and.
(b) These matters were addressed in the context of the audit of
the financial statements as a whole, and in forming the auditor’s
opinion thereon, and the auditor does not provide a separate
opinion on these matters.

SA-705 Modifications to the Opinion in the Independent Auditor’s

Report
Scope:  This SA deals with the auditor’s responsibility to issue an
appropriate report in circumstances when, in forming an
opinion in accordance with SA 700 (Revised), the auditor
concludes that a modification to the auditor’s opinion on
the financial statements is necessary.
 This SA also deals with how the form and content of the
auditor’s report is affected when the auditor expresses a
modified opinion
Objective The objective of the auditor is to express clearly an
appropriately modified opinion on the financial statement that
is necessary when:
(a) The auditor concludes, based on the audit evidence
obtained, that the financial statements as a whole are not free
from material misstatement; or
(b) The auditor is unable to obtain sufficient appropriate audit
evidence to conclude that the financial statements as a whole
are free from material misstatement.

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 Types of Modified Types of Modified Opinions as per SA 705:
Opinion (i) Qualified Opinion
(ii) Adverse Opinion
(iii) Disclaimer of Opinion
The decision regarding which type of modified opinion is
appropriate depends upon:
(a) The nature of the matter giving rise to the modification,
that is, whether the financial statements are materially
misstated or, in the case of an inability to obtain sufficient
appropriate audit evidence, may be materially misstated; and
(b) The auditor’s judgment about the pervasiveness of the
effects or possible effects of the matter on the financial
statements.

Requirements
Circumstances When a Modification to the Auditor’s Opinion is Required:
The auditor shall modify the opinion in the auditor’s report when:
 The auditor concludes that, based on the audit evidence obtained, the financial
statements as a whole are not free from material misstatement; or
 The auditor is unable to obtain sufficient appropriate audit evidence to
conclude that the financial statements as a whole are free from material
misstatement.
Determining the Type of Modification to the Auditor’s Opinion:
Qualified Opinion: The auditor shall express a qualified opinion when:
(a) The auditor, having obtained sufficient appropriate audit evidence, concludes that
misstatements, individually or in the aggregate, are material, but not pervasive, to the
financial statements; or
(b) The auditor is unable to obtain sufficient appropriate audit evidence on which to
base the opinion, but the auditor concludes that the possible effects on the financial
statements of undetected misstatements, if any, could be material but not pervasive.
Adverse Opinion: The auditor shall express an adverse opinion when the auditor,
having obtained sufficient appropriate audit evidence, concludes that misstatements,
individually or in the aggregate, are both material and pervasive to the financial
statements.
Disclaimer of Opinion: The auditor shall disclaim an opinion when the auditor is
unable to obtain sufficient appropriate audit evidence on which to base the opinion,
and the auditor concludes that the possible effects on the financial statements of
undetected misstatements, if any, could be both material and pervasive

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Consequence of an Inability to Obtain Sufficient Appropriate Audit Evidence Due to a
Management Imposed Limitation after the Auditor Has Accepted the Engagement
The auditor need to express a qualified opinion or to disclaim an opinion on the
financial statements and auditor shall request that management remove the limitation.
If management refuses to remove the limitation, the auditor shall communicate the
matter to those charged with governance, unless all of those charged with governance
are involved in managing the entity, and determine whether it is possible to perform
alternative procedures to obtain sufficient appropriate audit evidence.
If the auditor is unable to obtain sufficient appropriate audit evidence, the
auditor shall determine the implications as follows:
(a) If the auditor concludes that the possible effects on the financial statements of
undetected misstatements, if any, could be material but not pervasive, the auditor shall
qualify the opinion;
or
(b) If the auditor concludes that the possible effects on the financial statements of
undetected misstatements, if any, could be both material and pervasive so that a
qualification of the opinion would be inadequate to communicate the gravity of the
situation, the auditor shall:
(i) Withdraw from the audit, where practicable and possible under applicable law or
regulation; or (ii) If withdrawal from the audit before issuing the auditor’s report is not
practicable or possible, disclaim an opinion on the financial statements.
If the auditor decides to withdraw: When the auditor decides to withdraw before
withdrawing, the auditor shall communicate to those charged with governance any
matters regarding misstatements identified during the audit that would have given rise
to a modification of the opinion.
Other Considerations Relating to an Adverse Opinion or Disclaimer of Opinion:
When the auditor considers it necessary to express an adverse opinion or disclaim an
opinion on the financial statements as a whole, the auditor’s report shall not also
include an unmodified opinion with respect to the same financial reporting framework
on a single financial statement or one or more specific elements, accounts or items of
a financial statement. To include such an unmodified opinion in the same report in
these circumstances would contradict the auditor’s adverse opinion or disclaimer of
opinion on the financial statements as a whole. Unless required by law or regulation,
when the auditor disclaims an opinion on the financial statements, the auditor’s report
shall not include a Key Audit Matters section in accordance with SA 701.
Communication with Those Charged with Governance: When the auditor expects to
modify the opinion in the auditor’s report, the auditor shall communicate with those

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charged with governance the circumstances that led to the expected modification and
the wording of the modification.
Nature of Matter Giving Auditor’s judgment about the Pervasiveness of the
Rise to the Modification: Effects or Possible Effects on the
Financial Statements
Material but not pervasive Material and pervasive
Financial Statements are Qualified Opinion Adverse Opinion
materially misstated
Inability to obtain Qualified Opinion Disclaimer of Opinion
Sufficient appropriate
audit evidence

SA-706 Emphasis of Matter Paragraphs and Other Matter Paragraphs in the

Independent Auditor’s Report
Scope
This SA deals with additional communication in the auditor’s report when the auditor
considers it necessary to draw users’ attention to a matter or matters
(a) presented or disclosed in the financial statements that are of such importance that
they are fundamental to users’ understanding of the financial statements; or
(b) other than those presented or disclosed in the financial statements that are relevant
to users’ understanding of the audit, the auditor’s responsibilities or the auditor’s
report.
Objectives
The objective of the auditor, having formed an opinion on the financial statements, is
to draw users’ attention, when in the auditor’s judgment it is necessary to do so, by
way of clear additional communication in the auditor’s report, to:
 A matter, although appropriately presented or disclosed in the financial
statements, that is of such importance that it is fundamental to users’
understanding of the financial statements; or
 As appropriate, any other matter that is relevant to users’ understanding of the
audit, the auditor’s responsibilities or the auditor’s report.
Definitions
 Emphasis of Matter paragraph : A paragraph included in the auditor’s report
that refers to a matter appropriately presented or disclosed in the financial
statements that, in the auditor’s judgment, is of such importance that it is
fundamental to users understanding of the financial statements.
 Other Matter paragraph: A paragraph included in the auditor’s report that refers
to a matter other than those presented or disclosed in the financial statements

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 that, in the auditor’s judgment, is relevant to users’ understanding of the audit,
the auditor’s responsibilities or the auditor’s report.
Requirements
Emphasis of Matter Paragraphs in the Auditor’s Report When the auditor includes an
Emphasis of Matter paragraph in the auditor’s report, the auditor shall:
 Include the paragraph within a separate section of the auditor’s report with an
appropriate heading that includes the term “Emphasis of Matter”;
 Include in the paragraph a clear reference to the matter being emphasized and
to where relevant disclosures that fully describe the matter can be found in the
financial statements. The paragraph shall refer only to information presented or
disclosed in the financial statements; and
 Indicate that the auditor’s opinion is not modified in respect of the matter
emphasized.
Other Matter Paragraphs in the Auditor’s Report If the auditor considers it necessary
to communicate a matter other than those that are presented or disclosed in the
financial statements that, in the auditor’s judgment, is relevant to users’ understanding
of the audit, the auditor’s responsibilities or the auditor’s report, the auditor shall
include an Other Matter paragraph in the auditor’s report, provided:
 This is not prohibited by law or regulation; and
 When SA 701 applies, the matter has not been determined to be a key audit
matter to be communicated in the auditor’s report. The auditor shall include the
paragraph within a separate section with the heading “Other Matter,” or other
appropriate heading.
Communication with Those Charged with Governance If the auditor expects to
include an Emphasis of Matter or an Other Matter paragraph in the auditor’s report,
the auditor shall communicate with those charged with governance regarding this
expectation and the wording of this paragraph.
Types of banks in India:
 Commercial Banks.
 Regional Rural Banks.
 Co-operative Banks.
 Payment Banks.
 Development Banks (more commonly known as ‘Term-Lending Institutions’).
Small Finance Banks.
Major Functions of Bank:
Two major functions of bank
 Granting Advances

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  Accepting Deposits
Regulatory Framework:
 Banking Regulation Act, 1949.
 State Bank of India Act, 1955.
 Companies Act, 2013.
 Banking Companies (Acquisition and Transfer of Undertakings) Act, 1970.
 Regional Rural Banks Act, 1976. Banking Companies (Acquisition and
Transfer of Undertakings) Act, 1980.
 Information Technology Act, 2000.
 Prevention of Money Laundering Act, 2002.
 Securitisation and Reconstruction of Financial Assets and Enforcement of
Security Interest Act, 2002.
 Credit Information Companies Regulation Act, 2005.
 Payment and Settlement Systems Act, 2007.
Types of Audit Reports to be issued (generally):
Presently, the Statutory Central Auditors (SCAs) have to furnish the following reports
in addition to their main audit report:
 Report on adequacy and operating effectiveness of Internal Controls over
Financial Reporting in case of banks which are registered as companies under
the Companies Act in terms of Section 143(3)(i) of the Companies Act, 2013.
 Long Form Audit Report
 Report on compliance with SLR requirements
 Report on whether the treasury operations of the bank have been conducted in
accordance with the instructions issued by the RBI from time to time.
 Report on whether the income recognition, asset classification and provisioning
have been made as per the guidelines issued by the RBI from time to time.
 Report on whether any serious irregularity was noticed in the working of the
bank which requires immediate attention.
 Report on status of the compliance by the bank with regard to the
implementation of recommendations of the Ghosh Committee relating to frauds
and malpractices and of the recommendations of Jilani Committee on internal
control and inspection/ credit system
 Report on instances of adverse credit-deposit ratio in the rural areas.

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Performing Control Activities:

Nature of Questions to be considered / answered

Questions

Who Who performs the control?

Does the above person have requisite knowledge and authority to
perform the control?

What • What evidence is available to demonstrate / prove that the control is

performed?

When When and with what frequency is the control performed?

Is the frequency enough to prevent, detect and correct risk of material
misstatements?

Where Where is the evidence of performance of the control retained?

For how long is the evidence retained?
Is the evidence accessible/ available for audit?

Why Why is the control being performed?

What type of errors are prevented or detected through the performance
of the control?

How How is the control performed?

What are the control activities?
Can these activities be bypassed?
Can the bypass, if any, be detected?
How are exceptions/deviations resolved on identification?
What is the time frame for resolving the exceptions?

The Bank Auditor:

ELIGIBILITY, QUALIFICATIONS AND DISQUALIFICATIONS OF
AUDITOR
• Section 141 of the Companies Act, 2013

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APPOINTMENT OF AUDITOR
• The auditor of a banking company is to be appointed at the Annual General Meeting
of the shareholders, whereas the auditor of a nationalised bank is to be appointed by
the bank concerned acting through its Board of Directors.
REMUNERATION OF AUDITOR
• The remuneration of auditor of a banking company is to be fixed in accordance with
the provisions of Section 142 of the Companies Act, 2013
POWERS OF AUDITOR
• The auditor of a banking company, nationalised bank, State Bank of India,
subsidiary of State Bank of India or regional rural bank has the same powers as those
of a company’s auditor in the matter of access to the books, accounts, documents and
vouchers
CONDUCTING A BANK AUDIT
Conducting an Audit:
1. Initial consideration by the statutory auditor:
 Declaration of Indebtness
 Internal Assignments in Banks by Statutory Auditors
 Planning
 Communication with Previous Auditor
 Terms of Audit Engagement
 Initial Engagements
 Assessment of Engagement Risk
 Establishment of Engagement Team
 Understanding the Bank & Its Environment
2. Identifying and Assessing the Risks of Material Misstatements
3. Understanding the Bank and its Environment including Internal Control
4. Understanding the Bank’s Accounting Process
5. Understanding the Risk Management Process
a) Oversight and involvement in the control process by those charged with
governance
b) Identification, measurement and monitoring of risks
c) Control activities
d) Monitoring activities
e) Reliable information systems
6. Engagement Team Discussions

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7. Establish the Overall Audit Strategy - SA 300 “Planning an Audit of financial
Statements’’
8. Develop the Audit Plan
9. Audit Planning Memorandum
10. Determine Audit Materiality
11.Consider Going Concern
12. Assess the Risk of Fraud including Money Laundering
13. Assess Specific Risks
14. Risk Associated with Outsourcing of Activities
15. Response to the Assessed Risks
16. Stress Testing
17. BASEL III Framework
18. Reliance on / review of other reports
Advances:
Advances comprise of
 Term loans
 Cash credits, Overdrafts, Demand Loans
 Bills Discounted and Purchased
 Balances in Deposit Accounts
 Participation on Risk Sharing basis
 Interest-bearing Staff Loans
Legal requirements of Disclosure in the Balance Sheet:
A. (i) Bills purchased and discounted
(iii) Cash credits, Overdrafts and loans repayable on demand
(iv) (iii) Term Loans
B.
I. Secured by tangible assets
II. Covered by Bank/ Government guarantees
III. Unsecured
C.I. Advances in India:
i. Priority sectors
ii. Public sector
iii. Banks

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 iv. Others
C.II. Advances outside India
i. Due from Banks
ii. Due from Others:
(a) Bills Purchased and discounted
(b) Syndicated loans
(c) Others
Classification of Advances:
Internal Auditor Function
 Sector wise
o Priority
o Non Priority
 Security wise
o Secured
o Unsecured
 Prudential Norms
o Standard
o NPAS
Classification of Advances as per RBI Prudential Norms
 Standard Loans
o Standard Regular
o SMA-Special Mention Accounts
 SMA 0 (Accounts showing stress signals)
 SMA 1 (Overdue between 31 to 60 days)
 SMA 2 (Overdue between 61 to 90 days)
 NPA Loans
o Sub-Standard
o Doubtful [D1/D2/D3]
o Loss
Non-Performing Asset (NPA):
A non-performing asset (NPA) is a loan or an advance where :-
 interest and / or installment of principal remain overdue for a period of more than
90 days in respect of a term loan;
 the account remains 'out of order' in respect of an Overdraft / Cash Credit (OD /
CC);
 the bill remains overdue for a period of more than 90 days in the case of bills
purchased and discounted.

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Income Recognition :- Income from nonperforming assets (NPA) is not recognized on
accrual basis but is booked as income only when it is actually received.
Borrower Wise :- Asset classification would be borrower-wise and not facility-wise.
All facilities including investments in securities would be termed as NPA.
Record of Recovery :- Classification as NPA should be based on the record of
recovery. Availability of security or net worth of borrower/guarantor is not to be taken
into account for purpose of treating an advance as NPA or otherwise.
Provisioning of NPA
Categories of Non-Performing Assets: Provision required
Substandard Assets:
15%
• Would be one, which has remained NPA for a
period less than or equal to 12 months.
Doubtful Assets:
• Would be one, which has remained in the
(Secured + Unsecured)
substandard category for a period of 12
25% +100%
months.
40% +100%
Sub-categories:
100% +100%
• Doubtful up to 1 Year (D1) Doubtful 1 to 3
Years (D2)
• Doubtful more than 3 Years (D3)
Loss Assets:
• Would be one, where loss has been identified
by the bank or internal or external auditors or 100%
the RBI inspection but the amount has not
been written off wholly.

Drawing Power:
Meaning :- Drawing Power generally addressed as “DP” is an important concept for
Cash Credit (CC) facility availed from banks and financial institutions. Drawing
power is the limit up to which a firm or company can withdraw from the working
capital limit sanctioned.
Different from Sanction Limit:- The Sanctioned limit is the total exposure that a bank
can take on a particular client for facilities like cash credit, overdraft, export packing
credit, non-funded exposures etc. On the other hand, Drawing Power refers to the
amount calculated based on primary security less margin as on a particular date.
Considerations:- All accounts should be kept within both the drawing power and the
sanctioned limit at all times. The accounts which exceed the sanctioned limit or
drawing power or are against unapproved securities or are otherwise irregular should
be brought to the notice of the Management/Head Office regularly.

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Bank’s Duties:- Banks should ensure that drawings in the working capital account are
covered by the adequacy of the current assets. Drawing power is required to be arrived
at based on current stock statement which should not be older than three months
otherwise it is deemed as irregular.
Auditor’s Concern:- The stock statements, quarterly returns and other statements
submitted by the borrower to the bank should be scrutinized in detail. The audited
Annual Report submitted by the borrower should be scrutinized properly. The
monthly stock statement of the month for which the audited accounts are prepared and
submitted should be compared and the reasons for deviations, if any, should be
ascertained.
Stock Audit:- The stock audit should be carried out by the bank for all accounts
having funded exposure of more than R5 crores. Auditors can also advise for stock
audit in other cases if the situation warrants the same.
Computation of DP:- DP needs to be calculated as per the extant guidelines
formulated by the Board of Directors of the respective bank and agreed upon by the
concerned Statutory auditors. Special consideration should be given to proper
reporting of sundry creditors for the purposes of calculating drawing power.
Audit of Advances:
In carrying out audit of advances, the auditor is primarily concerned with obtaining
evidence about the following:
a) Amounts included in balance sheet in respect of advances which are
outstanding at the date of the balance sheet.
b) Advances represent amount due to the bank.
c) Amounts due to the bank are appropriately supported by loan documents
and other documents as applicable to the nature of advances.
d) There are no unrecorded advances.
e) The stated basis of valuation of advances is appropriate and properly
applied and the recoverability of advances is recognised in their valuation.
f) The advances are disclosed, classified and described in accordance with
recognised accounting policies and practices and relevant statutory and
regulatory requirements.
g) Appropriate provisions towards advances have been made as per the RBI
norms, Accounting Standards and generally accepted accounting practices
The auditor can obtain sufficient appropriate audit evidence about advances by:
a) examining the validity of the recorded amounts; examining loan
documentation;
b) reviewing the operation of the accounts;
c) examining the existence, enforceability and valuation of the security;

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 d) checking compliance with RBI norms including appropriate classification
and provisioning; and
e) carrying out appropriate analytical procedures.
Evaluation of internal controls over advances
In general, the internal controls over advances should include the following:
a) The bank should make an advance only after satisfying itself as to the
creditworthiness of the borrower and after obtaining proper sanctions.
b) All the necessary documents should be executed.
c) The compliance with the terms of sanction and end use of funds should be
ensured.
d) Sufficient margin as specified in the sanction letter should be kept.
e) If the securities are in the nature of shares, debentures, etc., the ownership
of the same should be transferred in the name of the bank.
f) Drawing power register should be updated every month.
g) The accounts should be kept within both the drawing power and the
sanctioned limit.
h) All the accounts which exceed the sanctioned limit or drawing power
should be brought to the notice of controlling authority.
i) The operation of each advance account should be reviewed at least once a
year.
Audit of Revenue Items:
Audit Approach and Procedures
In carrying out audit of income, the auditor is primarily concerned with obtaining
reasonable assurance that the recorded income arose from transactions, which took
place during the relevant period and pertained to the bank, there is no unrecorded
income and the income is recorded at appropriate amount.
RBI has advised that in respect of any income which exceeds one percent of the total
income of the bank if the income is reckoned on a gross basis or one percent of the net
profit before taxes if the income is reckoned net of costs, should be considered on
accrual as per relevant Accounting Standard.
If any item of income is not considered to be material as per the above norms, it may
be recognised when received and the auditors need not qualify their report in that
situation.
Banks recognise income (such as interest, fees and commission) on accrual basis, i.e.,
as it is earned. It is an essential condition for accrual of income that it should not be
unreasonable to expect its ultimate collection.

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In view of the significant uncertainty regarding ultimate collection of income arising
in respect of non-performing assets, the guidelines require that banks should not
recognize income on non-performing assets until it is actually realised.
Interest on advances against Term Deposits, National Savings Certificates (NSCs),
Indira Vikas Patras (IVPs), Kisan Vikas Patras (KVPs) and Life policies may be taken
to income account on the due date, provided adequate margin is available in the
accounts.
In the case of bills purchased outstanding at the close of the year the discount received
thereon should be properly apportioned between the two years. Interest (discount)
component paid by Bank/Branch on rediscount of bills from other financial
institutions, is not to be netted off from the discount earned on bills discounted.
In the case of bills for collection, the auditor should also examine the procedure for
crediting the party on whose behalf the bill has been collected.
Fees and commissions earned by the banks as a result of renegotiations or
rescheduling of outstanding debts should be recognised on an accrual basis over the
period of time covered by the re-negotiated or rescheduled extension of credit.
Test check the fees and commissions earned by the banks made for commission on
bills for collection, letters of credit and bank guarantees.
Audit of Expenses:
Broad categories of Expenditure
 Interest Expense
o Interest on Deposits
o Interest on Reserve Bank of India/ Inter-Bank Borrowings
o Others
 Expenses
o Payments to and Provisions for Employees
o Rent, Taxes and Lighting
o .Printing and Stationery
o Advertisement and Publicity
o Depreciation on Bank's Property
o Directors' Fees Allowances and Expenses
o Auditors' Fees and Expenses
o Legal expenses
o Postage, Telegrams, Telephones, etc.
o Repairs and Maintenance
o Insurance
o Marketing Expenses
o Other Expenses
 Provisions and Contingencies

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 o Provisions made in respect of the Non-performing assets.
o Provisions for Taxation
o Provisions for Diminution in the value of investments
o Provisions for contingencies
Audit Approach and Procedures for Interest Expenses
In carrying out an audit of interest expense, the auditor is primarily concerned with
assessing the overall reasonableness of the amount on interest expenses by analysing
ratios of interest paid on different types of deposits and borrowings to average
quantum of the respective liabilities during the year.
The auditor should obtain from the bank an analysis of various types of deposits
outstanding at the end of each quarter.
The auditor should also compare the average rate of interest paid on the relevant
deposits with the corresponding figures for the previous years and anlyse any material
differences.
The auditor should obtain general ledger break-up for the interest expense incurred on
deposits and borrowings each month/ quarter.
Audit Approach and Procedures for Operating Expenses
For audit of operating expenses, the auditor should study and evaluate the system of
internal control relating to expenses, including authorization procedures in order to
determine the nature, timing and extent of his other audit procedures.
The auditor should examine whether there are any divergent trends in respect of major
items of expenses.
The auditor should perform substantive analytical procedures in respect of these
expenses. eg. assess the reasonableness of expenses by working out their ratio to total
operating expenses and comparing it with the corresponding figures for previous
years.
The auditor should also verify expenses with reference to supporting documents and
check the calculations wherever required.
Audit Approach and Procedures for Provisions and contingencies
For audit of Provisions and contingencies, the auditor should ensure that the
compliances for various regulatory requirements for provisioning as contained in the
various circulars have been fulfilled.
The auditor should obtain an understanding as to how the bank computes provision on
standard assets and non-performing assets.
The auditor should perform substantive analytical procedures in respect of these
expenses. eg. assess the reasonableness of expenses by working out their ratio to total

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operating expenses and comparing it with the corresponding figures for previous
years.
The auditor may verify the loan classification on a sample basis.
The auditor should also verify expenses with reference to supporting documents and
check the calculations wherever required. The auditor should obtain the detailed break
up of standard loans, non-performing loans and agree the outstanding balances with
the general ledger.
The auditor should obtain the tax provision computation from the bank’s management
and verify the nature of items debited and credited to profit and loss account to
ascertain that the same are appropriately considered in the tax provision computation.
SA 200- "Overall Objectives of the Independent Auditor and the Conduct of an
Audit in Accordance with Standards on Auditing"
 Scope of the SA
This SA establishes the independent auditor's overall responsibilities when
conducting an audit of financial statements in accordance with SAs. It sets out
the overall objectives of the independent auditor, and explains the nature and
scope of an audit.
 Overall objectives of the Auditor
In conducting an audit of financial statements, the overall objectives of the
auditor are
(a) To obtain reasonable assurance about whether the financial statements as a
whole are free from material misstatement, whether due to fraud or error,
thereby enabling the auditor to express an opinion on whether the financial
statements are prepared, in all material respects, in accordance with an
applicable financial reporting framework; and
(b) To report on the financial statements, and communicate as required by the
SAs, in accordance with the auditor's findings.
 Ethical requirements, professional skepticism, professional judgement and
SAAE & audit risk
The auditor shall:
1. comply with ethical requirements including independence.
2. plan & perform an audit with professional skepticism.
3. exercise professional judgement in planning & performing an audit of
financial statements.

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 4. obtain sufficient appropriate audit evidence (SAAE) to reduce audit risk to
an acceptably low level.
 Conduct of an Audit in accordance with SAs
A) The auditor shall:
1. comply with all SAs relevant to the audit.
2. have an understanding of the entire text of SA, including its application
& other explanatory material.
3. not represent compliance with SAs in the auditor's report unless the
auditor has complied with the requirements of this SA & all other SAs
relevant to the audit.
B) To achieve the overall objectives, the auditor shall use the objectives stated
in the relevant SAs in planning & performing the audit.
C) The auditor shall comply with each requirement of an SA unless, in the
circumstances of the audit:
a) The entire SA is not relevant; or
b) The requirement is not relevant because it is conditional and the
condition does not exist. In exceptional circumstances, the auditor may
judge it necessary to depart from a relevant requirement in an SA. In
such circumstances, the auditor shall perform alternative audit
procedures to achieve the aim of that requirement.
D) If an objective in a relevant SA cannot be achieved, the auditor shall
evaluate whether this prevents the auditor from achieving the overall objectives
of the auditor and thereby require the auditor to modify the opinion or
withdraw from the engagement.
Definitions:
Applicable financial reporting framework
The financial reporting framework (FRF) adopted by management and, where
appropriate, those charged with governance in the preparation and presentation of the
financial statements that is acceptable in view of the nature of the entity and the
objective of the financial statements, or that is required by law or regulation.
Audit evidence
Information used by the auditor in arriving at the conclusions on which the auditor’s
opinion is based. Audit evidence includes both information contained in the
accounting records underlying the financial statements and other information.
Audit risk

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The risk that the auditor expresses an inappropriate audit opinion when the financial
statements are materially misstated. Audit risk is a function of the risks of material
misstatement and detection risk.
Auditor
“Auditor” is used to refer to the person or persons conducting the audit, usually the
engagement partner or other members of the engagement team, or, as applicable, the
firm.
Detection risk
The risk that the procedures performed by the auditor to reduce audit risk to an
acceptably low level will not detect a misstatement that exists and that could be
material, either individually or when aggregated with other misstatements.
Misstatement
A difference between the amount, classification, presentation, or disclosure of a
reported financial statement item and the amount, classification, presentation, or
disclosure that is required for the item to be in accordance with the applicable
financial reporting framework. Misstatements can arise from error or fraud.
Professional judgement
The application of relevant training, knowledge and experience, within the context
provided by auditing, accounting and ethical standards, in making informed decisions
about the courses of action that are appropriate in the circumstances of the audit
engagement
Professional scepticism
An attitude that includes a questioning mind, being alert to conditions which may
indicate possible misstatement due to error or fraud, and a critical assessment of audit
evidence.
Reasonable assurance
In the context of an audit of financial statements, a high, but not absolute, level of
assurance.
Risk of material misstatement
The risk that the financial statements are materially misstated prior to audit.
Those charged with governance
The person(s) or organisation(s) (e.g., a corporate trustee) with responsibility for
overseeing the strategic direction of the entity and obligations related to the
accountability of the entity. This includes overseeing the financial reporting process.

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SA 210- "Agreeing the Terms of Audit Engagements"
Scope of the SA & objective of the auditor
Scope
This SA deals with the auditor's responsibilities in agreeing the terms of the audit
engagement with management/ TCWG.
Objective
To accept or continue an audit engagement only when the basis upon which it is to
be performed has been agreed, through:
a) Establishing whether the preconditions for an audit are present.
b) Confirming that there is a common understanding between the auditor &
management/ TCWG of the terms of the audit engagement.
Preconditions for an audit
In order to establish whether the preconditions for an audit are present, the auditor
shall:
1. Determine whether the FRF to be applied in the preparation of the financial
statements is acceptable and 2. Obtain the agreement of managment that it
acknowledges and understands its responsibility:
i) For the preparation of financial statement as per FRF.
ii) For such internal control as management determines is necessary to enable the
preparation of financial statements that are free from material misstatement,
whether due to fraud or error; and
iii) To provide the auditor with access to all the information, additional
information, & unrestricted access to persons within the entity.
Limitations on scope prior to audit engagement acceptance
If management or those charged with governance impose a limitation on the scope
of the auditor's work in the terms of a proposed audit engagement, such that the
auditor believes the limitation will result in the auditor disclaiming an opinion on
the financial statements, the auditor shall not accept such a limited engagement as
an audit engagement, unless required by law or regulation to do so.
Other factors affecting audit engagement acceptance
If the preconditions of audit are not present, the auditor shall discuss the matter
with managment. The auditor shall not accept the proposed engagement if FRF is
not acceptable or if engagement agreement has not been obtained.
Agreement on audit engagement terms

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 Audit engagement terms shall include:
i) Objective & scope of audit
ii) Responsibilities of the auditor
iii) Responsibilities of management
iv) Identification of applicable FRF
v) Reference to expected content & form of report.
If law/ regulation prescribes the terms of audit engagement, then the auditor need
not record them in a written agreement, except for the fact that such law/ regulation
applies & the management acknowledges the same.
Recurring audits
On recurring audits, the auditor shall assess whether circumstances require the
terms of the audit engagement to be revised and whether there is a need to remind
the entity of the existing terms of the audit engagement.
Acceptance of a change in the terms of the audit engagement
1. If, prior to completing the audit engagement, the auditor is requested to change
the audit engagement that conveys a lower level of assurance, the auditor shall
determine whether there is reasonable justification for doing so.
2. If terms of audit engagement are changed, the auditor & management shall agree
on the new terms of engagement.
3. If the auditor is unable to agree to a change of the terms of the audit engagement
and is not permitted by management to continue the original audit engagement, the
auditor shall:
(a) Withdraw from the audit engagement where possible under applicable law or
regulation; and
(b) Determine whether there is any obligation, either contractual or otherwise, to
report the circumstances to other parties, such as those charged with governance,
owners or regulators.
SA 220- "Quality Control for an Audit of Financial Statements"
Scope of the SA & Objective of the Auditor
Scope
This SA deals with the specific responsibilities of the auditor regarding quality
control procedures for an audit of financial statements. It also addresses the
responsibilities of the engagement quality control reviewer.

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 Objective
To implement quality control procedures at the engagement level that provide the
auditor with reasonable assurance that:
i) the audit complies with professional standards & regulatory & legal
requirements, and
ii) the auditor's report issued is appropriate in the circumstances.
Leadership Responsibilities for Quality on Audits
The engagement partner shall take responsibility for the overall quality on each
audit engagement to which that partner is assigned.
Relevant Ethical Requirements
Throughout the audit engagement, the engagement partner shall remain alert,
through observation and making inquiries as necessary, for evidence of non-
compliance with relevant ethical requirements by members of the engagement
team.
If matters come to the engagement partner's attention through the firm's system of
quality control or otherwise that indicate that members of the engagement team
have not complied with relevant ethical requirements, the engagement partner, in
consultation with others in the firm, shall determine the appropriate action.
Independence
The engagement partner shall form a conclusion on compliance with independence
requirements that apply to the audit engagement. In doing so, the engagement
partner shall:
i) Obtain relevant information from the firm to identify and evaluate circumstances
and relationships that create threats to independence,
ii) Evaluate information on identified breaches, if any, of the firm's independence
policies and procedures to determine whether they create threats to independence,
iii) Take appropriate action to eliminate such threats or reduce them to an
acceptable level by applying safeguards, or, if considered appropriate, to withdraw
from the audit engagement, where withdrawal is permitted by law or regulation
Acceptance & Continuance of Client Relationships and Audit Engagements
1. The engagement partner shall be satisfied that appropriate procedures regarding
the acceptance and continuance of client relationships and audit engagements have
been followed, and shall determine that conclusions reached in this regard are
appropriate.

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 2. If the engagement partner obtains information that would have caused the firm to
decline the audit engagement had that information been available earlier, the
engagement partner shall communicate that information promptly to the firm, so
that the firm and the engagement partner can take the necessary action.
Engagement Performance
The engagement partner shall take responsibility for:
1. the direction, supervision & performance of audit engagement & the
appropriateness of auditor report.
2. the reviews being performed in accordance with the firm's review policies &
procedures. 3. the engagement team taking appropriate consultation on difficult &
contentious matters,
SA 230- "Audit Documentation"
Scope of the SA & Objective of the Auditor
Scope
This SA deals with auditor's responsibility to prepare audit documentation for an
audit of financial statements.
Objective
The objective of the auditor is to prepare documentation that provides:
a) sufficient appropriate record of the basis for auditor's report.
b) evidence that the audit was planned & performed in accordance with SAS &
legal & regulatory requirements.
Definitions
Audit Documentation: The record of audit procedures performed, relevant audit
evidence obtained and conclusions the auditor reached
Audit File:
One or more folders or other storage media, in physical or electronic form,
containing the records that comprise the audit documentation for a specific
engagement.
Experienced Auditor:
An individual (whether internal or external to the firm) who has practical audit
experience, and a reasonable understanding of:
(i) Audit processes;
(ii) SAs and applicable legal and regulatory requirements;

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 (iii) The business environment in which the entity operates; and
(iv) Auditing and financial reporting issues relevant to the entity's industry.
Nature and Purposes of Audit Documentation
Audit documentation that meets the requirements of this SA and the specific
documentation requirements of other relevant SAs provides:
(a) Evidence of the auditor's basis for a conclusion about the achievement of the
overall objectives of the auditor; and
(b) Evidence that the audit was planned and performed in accordance with SAs and
applicable legal and regulatory requirements.
Audit documentation serves a number of additional purposes, including the
following:
• 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 work, and to discharge their review responsibilities in
accordance with SA 220.
• Enabling the engagement team to be accountable for its work.
• Retaining a record of matters of continuing significance to future audits.
• Enabling the conduct of quality control reviews and inspections in accordance
with SQC 1. •Enabling the conduct of external inspections in accordance with
applicable legal, regulatory or other requirements.
Timely Preparation of Audit Documentation
The auditor shall prepare audit documentation on a timely basis. Preparing
sufficient and appropriate audit documentation on a timely basis helps to enhance
the quality of the audit and facilitates the effective review and evaluation of the
audit evidence obtained and conclusions reached before the auditor's report is
finalised. Documentation prepared after the audit work has been performed is likely
to be less accurate than documentation prepared at the time such work is
performed.
Form, content & extent of Audit Documentation
1. The auditor shall prepare audit documentation that is sufficient to enable an
experienced auditor, having no previous connection with the audit, to understand:
a) The nature, timing and extent of the audit procedures performed to comply with
the SAS and applicable legal and regulatory requirements;

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 b) The results of the audit procedures performed, and the audit evidence obtained;
and
c) Significant matters arising during the audit, the conclusions reached thereon,
and significant professional judgements made in reaching those conclusions.
2. In documenting the nature, timing and extent of audit procedures performed, the
auditor shall record:
a) The identifying characteristics of the specific items or matters tested;
b) Who performed the audit work and the date such work was completed; and
c) Who reviewed the audit work performed and the date and extent of such review,
3. The auditor shall document discussions of significant matters with management,
those charged with governance, and others, including the nature of the significant
matters discussed and when and with whom the discussions took place.
4. If the auditor identified information that is inconsistent with the auditor's final
conclusion regarding a significant matter, the auditor shall document how the
auditor addressed the inconsistency.
Matters Arising after the Date of the Auditor’s Report
If, in exceptional circumstances, the auditor performs new or additional audit
procedures or draws new conclusions after the date of the auditor’s report, the
auditor shall document:
(a) The circumstances encountered;
(b) The new or additional audit procedures performed, audit evidence obtained, and
conclusions reached, and their effect on the auditor’s report; and
(c) When and by whom the resulting changes to audit documentation were made
and reviewed.
Assembly of Final Audit File
1. The auditor shall assemble the audit documentation in an audit file and complete
the administrative process of assembling the final audit file on a timely basis after
the date of the auditor’s report.
2. 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.
3. Where the auditor finds it necessary to modify existing audit documentation or
add new audit documentation after the assembly of the final audit file has been
completed, the auditor shall, regardless of the nature of the modifications or
additions, document:

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 (a) The specific reasons for making them; and
(b) When and by whom they were made and reviewed.
SA 240- " The Auditor's Responsibilities Relating to Fraud in an Audit of
Financial Statements"
Scope of the SA & Objective of the Auditor
Scope
This SA deals with auditor's responsibilities relating to fraud in an audit of financial
statements. It expands on how SA 315 & SA 330 are to be applied in relation to
ROMM due to fraud.
The objectives of the auditor are:
(a) To identify and assess the risks of material misstatement in the financial
statements due to fraud;
(b) To obtain sufficient appropriate audit evidence about the assessed risks of
material misstatement due to fraud, through designing and implementing
appropriate responses; and
(c) To respond appropriately to identified or suspected fraud.
Characteristics of Fraud
1. Misstatements in the financial statements can arise from either fraud or error.
2. The distinguishing factor between fraud and error is whether the underlying
action that results in the misstatement of the financial statements is intentional or
unintentional.
3. Although fraud is a broad legal concept, for the purposes of the SAs, the auditor
is concerned
with fraud that causes a material misstatement in the financial statements.
4. Two types of intentional misstatements are relevant to the auditor-misstatements
resulting from fraudulent financial reporting and misstatements resulting from
misappropriation of assets.
5. Although the auditor may suspect or, in rare cases, identify the occurrence of
fraud, the auditor does not make legal determinations of whether fraud has actually
occurred.
Professional Skepticism
In accordance with SA 200, the auditor shall maintain professional skepticism
throughout the audit, recognizing the possibility that a material misstatement due to
fraud could exist.

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 Unless the auditor has reason to believe the contrary, the auditor may accept
records and documents as genuine.
Where responses to inquiries of management or those charged with governance are
inconsistent, the auditor shall investigate the inconsistencies.
Discussion Among the Engagement Team
SA 315 requires a discussion among the engagement team members and a
determination by the engagement partner of matters which are to be communicated
to those team members not involved in the discussion.
This discussion shall place particular emphasis on how and where the entity's
financial statements may be susceptible to material misstatement due to fraud,
including how fraud might occur.
The discussion shall occur notwithstanding the engagement team members' beliefs
that management and those charged with governance are honest and have integrity.
Risk Assessment Procedures and Related Activities
When performing risk assessment procedures and related activities to obtain an
understanding of the entity and its environment, including the entity's internal
control, required by SA 315, the auditor shall perform the specified procedures to
obtain information for use in identifying the risks of material misstatement due to
fraud.
Identification and Assessment of the Risks of Material Misstatement Due to
Fraud
In accordance with SA 315, the auditor shall identify and assess the risks of
material misstatement due to fraud at the financial statement level, and at the
assertion level for classes of transactions, account balances and disclosures.
When identifying and assessing the risks of material misstatement due to fraud, the
auditor shall, based on a presumption that there are risks of fraud in revenue
recognition, evaluate which types of revenue, revenue transactions or assertions
give rise to such risks. The auditor shall treat those assessed risks of material
misstatement due to fraud as significant risks.
Responses to the Assessed Risks of Material Misstatement Due to Fraud-
Overall Responses
In accordance with SA 330, the auditor shall determine overall responses to address
the assessed risks of material misstatement due to fraud at the financial statement
level.
In determining overall responses to address the assessed risks of material
misstatement due to fraud at the financial statement level, the auditor shall:

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 (a) Assign and supervise personnel taking account of the knowledge, skill and
ability of the individuals to be given significant engagement responsibilities and the
auditor's assessment of the risks of material misstatement due to fraud for the
engagement;
(b) Evaluate whether the selection and application of accounting policies by the
entity, particularly those related to subjective measurements and complex
transactions, may be indicative of fraudulent financial reporting resulting from
management's effort to manage earnings; and
(c) Incorporate an element of unpredictability in the selection of the nature, timing
and extent of audit procedures.
Audit Procedures Responsive to Assessed Risks of Material Misstatement Due
to Fraud at the Assertion Level
In accordance with SA 330, the auditor shall design and perform further audit
procedures whose nature, timing and extent are responsive to the assessed risks of
material misstatement due to fraud at the assertion level.
Evaluation of Audit Evidence The auditor shall evaluate whether analytical
procedures that are performed when forming an overall conclusion as to whether
the financial statements as a whole are consistent with the auditor's understanding
of the entity and its environment indicate a previously unrecognized risk of material
misstatement due to fraud.
When the auditor identifies a misstatement, the auditor shall evaluate whether such
a misstatement is indicative of fraud.
If there is such an indication, the auditor shall evaluate the implications of the
misstatement in relation to other aspects of the audit.
If the auditor identifies a misstatement and the auditor has reason to believe that it
is or may be the result of fraud and that management (in particular, senior
management) is involved, the auditor shall re-evaluate the assessment of the risks
of material misstatement due to fraud.
The auditor shall also consider whether circumstances or conditions indicate
possible collusion involving employees, management or third parties when
reconsidering the reliability of evidence previously obtained.
When the auditor confirms that, or is unable to conclude whether, the financial
statements are materially misstated as a result of fraud, the auditor shall evaluate
the implications for the audit.
Auditor Unable to Continue the Engagement

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 If, as a result of a misstatement resulting from fraud or suspected fraud, the auditor
encounters exceptional circumstances that bring into question the auditor's ability to
continue performing the audit, the auditor shall:
(a) Determine the professional and legal responsibilities applicable in the
circumstances.
(b) Consider whether it is appropriate to withdraw from the engagement, where
withdrawal from the engagement is legally permitted; and
(c) If the auditor withdraws:
(i) Discuss with the appropriate level of management and those charged with
governance, the auditor's withdrawal from the engagement and the reasons for the
withdrawal; and
(ii) Determine whether there is a professional or legal requirement to report to the
person or persons who made the audit appointment.

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