Handbook of Auditing Pronouncements Vol. I FINAL

8/12/2019 Handbook of Auditing Pronouncements Vol. I FINAL

1/880


2/880

vii

CONTENTS

Foreword

Preface

How to Use this Volume .......................................................................I-VI

Section I: Author ity1. Announcements of the Council regarding Status of Various Documents

Issued by the Institute of Chartered Accountants of India.......................... I.12. Preface to the Standards on Quality Control, Auditing, Review,

Other Assurance and Related Services................................................... I.22

Section II: Standards on Quality Control (SQCs)1. Quality Control for Firms that Perform Audits and Reviews of

Historical Financial Information, and Other Assuranceand Related Services Engagements......................................................... II-1

Section III: Framework

1. Framework for Assurance Engagements................................................. III-1

Section IV: Audits and Reviews of Historical FinancialInformation

100-999 Standards on Auditing (SAs)

100-199 Introductory Matters

200-299 General Principles and Responsibili ties

200 Basic Principles Governing an Audit........................................................IV-1

200A Objective and Scope of the Audit of Financial Statements ....................IV-7

210 Terms of Audit Engagements ................................................................IV-11

(General Clarification (GC)-AASB/2/2004 on SA 210)...........................IV-19

220 Quality Control for Audit Work...............................................................IV-21


3/880

viii

230 Documentation.......................................................................................IV-26

240 (Revised) the Auditors Responsibilities Relating to Fraudin an Audit of Financial Statements .......................................................IV-31

240 The Auditors Responsibility to Consider Fraud and Errorin an Audit of Financial Statements ......................................................IV-79

250 Consideration of Laws and Regulations in an Audit ofFinancial Statements ..........................................................................IV-115

260 Communications of Audit Matters with Those Chargedwith Governance .................................................................................IV-125

299 Responsibility of Joint Auditors............................................................IV-131

300-499 Risk Assessment and Response to Assessed Risks

300 (Revised) Planning an Audit of Financial Statements ..........................IV-136

300 Audit Planning......................................................................................IV-150

310 Knowledge of the Business..................................................................IV-156

315 Identifying and Assessing the Risks of Material Misstatement ThroughUnderstanding the Entity and Its Environment.....................................IV-164

320 Audit Materiality....................................................................................IV-220

330 The Auditors Responses to Assessed Risks ......................................IV-225

400 Risk Assessments and Internal Control...............................................IV-251

401 Auditing in a Computer Information Systems Environment..................IV-269402 Audit Considerations Relating to Entities Using

Service Organizations .........................................................................IV-278

500-599 Audit Evidence

500 Audit Evidence ....................................................................................IV-284

501 Audit EvidenceAdditional Considerations forSpecific Items ......................................................................................IV-290

505 External Confirmations ........................................................................IV-302

510 Initial EngagementsOpening Balances ............................................IV-315

520 Analytical Procedures .........................................................................IV-319

530 Audit Sampling.....................................................................................IV-325

540 Audit of Accounting Estimates ............................................................IV-335


4/880

ix

550 Related Parties ...................................................................................IV-342

560 Subsequent Events .............................................................................IV-349570 Going Concern ....................................................................................IV-353

(General Clarification (GC)-AASB/3/2004 on SA 570).........................IV-360

580 Representations by Management .......................................................IV-362

600-699 Using Work of Others

600 Using the Work of Another Auditor .....................................................IV-372

610 Relying Upon the Work of an Internal Auditor .....................................IV-379

620 Using the Work of an Expert ................................................................IV-385

(General Clarification (GC)-AASB/1/2002 on SA 620).........................IV-391700-799 Audit Conclusions and Reporting

700 The Auditors Report on Financial Statements.....................................IV-392

710 Comparatives ......................................................................................IV-413

800-899 Specialized Areas

2000-2699 Standards on Review Engagements (SREs)

2400 Engagements to Review Financial Statements...................................IV-425

Section V: Assurance Engagements Other Than Audits orReviews of Historical Financial Information3000-3699 Standards on Assurance Engagements (SAEs)

3000-3399 Applicable to All Assurance Engagements

3400-3699 Subject Specific Standards

3400 The Examination of Prospective Financial Information ..........................V-1

Section VI: Related Services4000-4699 Standards on Related Services (SRSs)

4400 Engagements to perform Agreed-Upon Procedures Regarding FinancialInformation.............................................................................................VI-1

4410 Engagements to Compile Financial Information..................................VI-12


5/880

x

Section VII: Statements on Auditing

1. Statement on Reporting under Section 227(1A) of the Companies Act,1956 ......................................................................................VII-1

2. Statement on the Companies (Auditors Report) Order,2003 [Issued under Section 227 (4A) of theCompanies Act, 1956]........................................................................VII-11

3. Statement on Payments to Auditors for Other Services...................VII-270

Reconciliation of the International Standards on Quality Control, Auditing,Review, Other Assurance and Related Services, issued by the InternationalFederation of Accountants with the Standards, issued by ICAI (as on May 29,2008)

Back


6/880

How to Use This Volume

This Volume I of the Handbook of Auditing Pronouncements contains the text ofthe auditing standards as well as the Statements on Auditing issued by theInstitute of Chartered Accountants of India. The readers would find this edition ofVolume I quite different from the previous (2007) edition. To help the readers tofind the information that they need, we wish to highlight the following points:

I. Renaming, Re-numbering and Categorisation of Auditing and Assurance Standards1

The Auditing and Assurance Standards Board, in 2007, adopted the RevisedPreface to Standards on Quality Control, Auditing, Review, Other Assurance andRelated Services. In terms of the Revised Preface, the Auditing and AssuranceStandards are now renamed based on the type of assurance provided by theengagement undertaken by a member, viz.,

(i) Standards on Auditing (SAs)- to be applied in the audit of historicalfinancial information

(ii) Standards on Review Engagements (SREs) - to be applied in the review ofhistorical financial information

(iii) Standards on Assurance Engagements (SAEs) - to be applied in assuranceengagements, engagements dealing with subject matters other thanhistorical financial information

(iv) Standards on Related Services (SRSs) - to be applied to engagements toapply agreed upon procedures to information and other related servicesengagements such as compilation engagements

Further, there is also a mother standard on quality control.

In addition, each of the above group of Standards has been allotted a numericalseries as follows and the Standards pertaining to a particular group is allotted anumber from that numerical series:

1 This is based on the pattern followed by the International Auditing and Assurance StandardsBoard.

Back


7/880

II

Type of Standard Numerical Series

Standards on Quality Control 01 - 99

Standards on Auditing 100 999

Standards on Review Engagements 2000 2699

Standards on Assurance Engagements 3000 3699

Related Services 4000 4699

The Standards on Auditing have also been further divided into seven categorizebased on the aspect of audit engagement addressed by them and each of thesecategories has a unique numerical series allotted. Therefore, a Standardpertaining to a particular aspect of audit would be allotted a number from thatrelevant numerical series. These categories and series are as follows:

Aspect of Audit ing Covered Numerical Series

Introductory Matters 100 - 199

General Principles and Responsibilities 200 299

Risk Assessment and Response to AssessedRisk

300 - 499

Audit Evidence 500 599

Using Work of Others 600 - 699 Audit Conclusions and Reporting 700 - 799

Specialised Areas 800 - 899

Accordingly, the erstwhile Auditing and Assurance Standard (AAS) 30, ExternalConfirmationscan be found under the category Audit Evidence as Standard on

Auditing (SA) 505. Similarly, AAS 3, Documentationcan be found under thecategory General Principles and Responsibilities as SA 230. The readerswould therefore, find the Standards appearing in the order of the new numberallotted to them and not the number which they carried as AAS. A complete

table of old AAS numbers vis a vis corresponding SA number is given as APPENDIX A to this note. Also a diagrammatic representation of the structure ofStandards under the new Preface is given as APPENDIX B to this note.


8/880

III

II. Use of Bold Letteringvis a vis Plain Type Face The

new format of writing StandardsIn 2007, the AASB also adopted the format and conventions (popularly known asthe Clarity Convention/ Project) in which the International Auditing and

Assurance Standards Board is now writing its International Standards on Auditing. Accordingly, the Standards on Auditing issued in 2007 by AASB underthe Clarity Project, i.e., SA 240, SA 300, SA 315 and SA 330 have been writtenfollowing that format and conventions. As per this new format/ convention, aStandard on Auditing is divided into the following distinct parts:

Introduction Objective Definitions Requirements Application and Other Explanatory Material

The Requirements part of the Standard outlines the fundamental principlesenunciated in the Standard whereas the Application and Other ExplanatoryMaterial part provides guidance on the application of the aforesaid principles.

Readers may also note that in the AASs 14 to 35 (except the revised AAS 4, AAS 6 and AAS 10) the principles vis a vis application guidance wasdistinguished by use of the expression should coupled with bold type faceforthe principles and normal type face for the application guidance. This newformat for writing Standards also no longer uses the word should in stead ituses the word shall nor does it reflect the principles contained in theRequirement part in bold. All the text in the Standard, whether principles orapplication guidance is given in normal type face.

Readers may also note that even in erstwhile AAS 1 to 13, no bold type face wasused to distinguish between principles and application guidance, the entireStandard appeared in normal type face.

In any case, in the above context, it is essential to note that whatever be theformat/ convention used in writing a Standard, the entire Standard is mandatoryfor the members.


9/880

IV

APPENDIX A

Renumbering of the Auditing and Assurance Standards- At a Glance

Existing AAS

Number

Title of the Standard New Number of theStandard

1 Basic Principles Governing an Audit SA 200

2 Objectives and Scope of the Audit ofFinancial Statements

SA 200A

3 Documentation SA 230

4 The Auditors Responsibility toConsider Fraud and Error in an Auditof Financial Statements

SA 240

5 Audit Evidence SA 500

6 Risk Assessments and InternalControl

SA 400

7 Relying Upon the Work of an Internal Auditor

SA 610

8 Audit Planning SA 300

9 Using the Work of an Expert SA 620

10 Using the Work of Another Auditor SA 600

11 Representations by Management SA 580

12 Responsibility of Joint Auditors SA 299

13 Audit Materiality SA 320

14 Analytical Procedures SA 520

15 Audit Sampling SA 530

16 Going Concern SA 570

17 Quality Control for Audit Work SA 220

18 Auditing of Accounting Estimates SA 540


10/880

V

19 Subsequent Events SA 560

20 Knowledge of the Business SA 31021 Consideration of Laws and

Regulations in an Audit of FinancialStatements

SA 250

22 Initial Engagements OpeningBalances

SA 510

23 Related Parties SA 550

24 Audit Considerations Relating toEntities Using Service Organisations

SA 402

25 Comparatives SA 710

26 Terms of Audit Engagement SA 210

27 Communication of Audit Matters withThose Charged with Governance

SA 260

28 The Auditors Report on FinancialStatements

SA 700

29 Audit in a Computer InformationSystems Environment

SA 401

30 External Confirmations SA 505

31 Engagements to Compile FinancialInformation

SRS 4410

32 Engagements to Perform Agreed-upon Procedures RegardingFinancial Information

SRS 4400

33 Engagements to Review FinancialStatements

SRE 2400

34 Audit Evidence AdditionalConsiderations for Specific Items

SA 501

35 The Examination of ProspectiveFinancial Information

SAE 3400


11/880

VI

APPENDIX B

Diagrammatic Representation of the Structureof Standards Under the New Preface

Chartered Accountants Act, 1949,Code of Ethics and ot her relevant

Standards on Quality Control (SQCs)

Services covered by the pronouncements of the Auditingand Assurance Standards Board under the authority of theCouncil of ICAI

Assurance Services Related Services

Framework for AssuranceEn a ements

Audits and reviewsof historical

financialinformation

Assurance Engagementsother than audits orreviews of historicalfinancial information

Standards on Au di ti ng

(SAs)

100 - 999

Standards onReview

Engagements(SREs)

2000 - 2699

Standards on Assu ran ce

Engagements(SAEs)

3000 - 3699

Standards onRelated Servic es

(SRSs)

4000 - 4699

Back


12/880

ANNOUNCEMENTS OF THECOUNCIL

REGARDINGSTATUS OF V ARIOUSDOCUMENTS

ISSUED BY THEINSTITUTE OF CHARTERED ACCOUNTANTS OFINDIA

ContentsPage

A. Clarification regarding Authority Attached to DocumentsIssued by the Institute .................................................................I-2

B. Use of Bold Type Face/ Normal Type Face in Auditing and Assurance Standards................................................. I-5

C. Clarification on the Auditors Rights Where Clients andOther Auditors Seek Access to their Audit Working Papers ........... I-6

D. Format of Review Report under Clause 41 ofthe Listing Agreement..................................................................... I-7

E. Audit in Situations of Missing or Incomplete Records..................... I-8

F. List of Mandatory Statements and Standards on Auditing.............I-15

(I) List of Statements on Auditing as on 01.04.2008.....................I-15

(II) List of Quality Control and Engagement Standardsas on 01.04.2008......................................................................I-15

Back


13/880

Handbook of Auditing Pronouncements-I

An no un cement s I-2

A. Clarif ication regarding Authori ty At tached toDocuments Issued by the Institute1

1. The Institute has, from time to time, issued Guidance Notes andStatements on a number of matters. With the formation of the

Accounting Standards Board and the Auditing Practices Committee 2,Accounting Standards and Statements on Standard Auditing Practices 3 are also being issued.

2. Members have sought guidance regarding the level of authorityattached to the various documents issued by the Institute and the degreeof compliance required in respect thereof. This note is being issued toprovide this guidance.

3. The Statements have been issued with a view to securing

compliance by members on matters which, in the opinion of the Council,are critical for the proper discharge of their functions. Statementstherefore are mandatory. Accordingly, while discharging their attestfunction, it will be the duty of the members of the Institute:

(a) to examine whether Statements relating to accounting matters arecomplied with in the presentation of financial statements covered bytheir audit. In the event of any deviation from the Statements, it will betheir duty to make adequate disclosures in their audit reports so thatthe users of financial statements may be aware of such deviations; and

(b) to ensure that the Statements relating to auditing matters arefollowed in the audit of financial information covered by their auditreports. If, for any reason, a member has not been able to performan audit in accordance with such Statements, his report shoulddraw attention to the material departures therefrom.

1 Published in the December, 1985 issue of the The Chartered Accountant.2 The Auditing Practices Committee of the Institute of Chartered Accountants of India wasestablished in 1982 with, inter alia, the objectives of preparing the Statements on Standard

Auditing Practices (SAPs), Guidance Notes on matters related to auditing, etc. At its 226 th meeting held on July 2, 2002 at New Delhi, the Council of the Institute of Chartered

Accountants of India approved the recommendations of the Auditing Practices Committee tostrengthen the role being played by it in the growth and development of the profession ofchartered accountancy in India. The Council also approved renaming of the Committee as,Auditing and Assurance Standards Board (AASB) with immediate effect to better reflect the

activities being undertaken by the Committee. Apart from changes designed to strengthen theprocess for establishing auditing and assurance standards, such a move would bring aboutgreater transparency in the working of the Auditing Practices Committee now known as the

Auditing and Assurance Standards Board (AASB).The Council also approved the renaming of the Statements on Standard Auditing Practices(SAPs) as, Auditing and Assurance Standards (AASs).3 ibid.


14/880

Announcements of the Council

An noun cem ent sI-3

4. A list of Statements issued by the Institute and currently in force isgiven at the end of this note. 4

5. Guidance Notes are primarily designed to provide guidance tomembers on matters which may arise in the course of their professionalwork and on which they may desire assistance in resolving issues whichmay pose difficulty. Guidance Notes are recommendatory in nature. Amember should ordinarily follow recommendations in a guidance noterelating to an auditing matter except where he is satisfied that in thecircumstances of the case, it may not be necessary to do so. Similarly,while discharging his attest function, a member should examine whetherthe recommendations in a guidance note relating to an accounting matterhave been followed or not. If the same have not been followed, themember should consider whether keeping in view the circumstances of

the case, a disclosure in his report is necessary.6. There are however a few guidance notes in case of which theCouncil has specifically stated that they should be considered asmandatory on members while discharging their attest function. A list ofthese guidance notes is given below:

(i) Guidance Note on Treatment of Interest on Deferred Payments readalong with the pronouncement of the Council, published in TheChartered Accountant, March 1984. 5

(ii) Provision for Depreciation in respect of Extra or Multiple Shift Allowance, published in The Chartered Accountant, May 1984. 6

4 An updated list of mandatory statements on accounting and auditing is included in the Listof Mandatory Statements and Standards given after this clarification. It may also be notedthat besides statements on accounting and auditing, the Institute has issued statements onother aspects also, namely, Statement on Peer Review and Statement on ContinuingProfessional Education.5 The nomenclature of this document was changed by the Council of the Institute at its 133 rd meeting held in April, 1988. The new nomenclature was Statement on Treatment of Intereston Deferred Payments. In view of para 8 of this Clarification, with Accounting Standard (AS)10 on Accounting for Fixed Assets, becoming mandatory (see Announcement II) in respect ofaccounts for periods commencing on or after 1.4.1991, the Statement on Treatment ofInterest on Deferred Payments stands automatically withdrawn except in the case of certainspecified non-corporate entities where it stands withdrawn in respect of accounts for periodscommencing on or after 1.4.1993 (see Announcements III, V and VI in this regard). It may benoted that pursuant to the issuance of Accounting Standard (AS) 16 on Borrowing Costs,which came into effect in respect of accounting periods commencing on or after 1-4-2000,paragraph 9.2 and paragraph 20 (except the first sentence) of AS 10, relating to treatment offinance costs including interest, stand withdrawn from that date.6 The nomenclature of this document was changed by the Council of the Institute at its 133 rd meeting held in April, 1988. The new nomenclature was Statement on Provision forDepreciation in respect of Extra or Multiple Shift Allowance. This statement has been


15/880



7. The Accounting Standards and Statements on Standard AuditingPractices 7 issued by the Accounting Standards Board and the Auditing

Practices Committee 8, respectively, establish standards which have to becomplied with to ensure that financial statements are prepared inaccordance with generally accepted accounting standards and thatauditors carry out their audits in accordance with the generally acceptedauditing practices. They become mandatory on the dates specified eitherin the respective document or by notification issued by the Council. 9

8. There can be situations in which certain matters are covered bothby a Statement and by an Accounting Standard/Statement onStandard Auditing Practices 10. In such a situation, the Statement shallprevail till the time the relevant Accounting Standard/Statement onStandard Auditing Practices 11 becomes mandatory. It is clarified that

once an Accounting Standard/Statement on Standard AuditingPractices 12 becomes mandatory, the concerned Statement or therelevant part thereof shall automatically stand withdrawn.

9. List of statements issued by the Institute and which are mandatoryin nature.

1. Statement on Companies (Auditors Report) Order, 2003 (Revised2005)

2. Statement on Reporting under Section 227(1A) of the Companies Act, 1956. List of Mandatory Statements and Standards

On the basis of the above announcements made by the Council, the

Secretariat of the Auditing and Assurance Standards Board 13 hasprepared the following list of statements and standards which aremandatory as on 01.04.2008 or would become mandatory at specifieddate(s) in future.

withdrawn in respect of accounting periods commencing on or after 1.4.1989, as per theGuidance Note on Accounting for Depreciation in Companies, issued in pursuance ofamendments in the Companies Act, 1956, through Companies (Amendment) Act, 1988.7 Refer footnote 2. Statements on Standard Auditing Practices have been renamed asAuditing and Assurance Standards.8 Refer footnote 2. The Auditing Practices Committee has been renamed as Auditing and

Assurance Standards Board.9 Subsequent to the publication of this Clarification, the Council has made various AccountingStandards mandatory. The Announcements made by the Council in this regard arereproduced hereafter.10 Refer footnote 2. Statements on Standard Auditing Practices have been renamed asAuditing and Assurance Standards.11 ibid. 12 ibid.13 Refer footnote 2.


16/880



B. Use of Bold Type Face/ Normal Type Face in Audit ing and Assurance Standards

I. As the members are aware, the Institute of Chartered Accountants of India has till date issued 35 (thirty five) Auditingand Assurance Standards (AASs). It may be reiterated that allthe Standards are mandatory in nature. This means that whilecarrying out an attest function, it will be the duty of themembers of the Institute to ensure that these AASs arefollowed in the audit of financial information covered by theiraudit reports. If for any reason a member has not been able toperform an audit in accordance with the AASs, his reportshould draw attention to the material departures therefrom.

II. Further, it might have been noted by the members that in caseof AAS 1 to AAS 15, the entire text of the Standards appearsin normal type face, except for the headings and sub headingstherein. On the other hand, in case of AAS 16 to AAS 35,certain text in the Standards is appearing in bold type faceand certain portion of the text appearing in normal type face.Normally, in these Standards, the bold type face has beenused to used to facilitate distinction between the principles vis-a-vis the application/ procedural aspects, which have beenwritten in normal type face. In any case, however, the entiretext of the Standard is mandatory, irrespective of the factwhether such distinction is made in the Standard or not.

The New Format (applicable from 1st Apri l, 2008)14[*] III. Members may also note that recently, the Council of the

Institute of Chartered Accountants of India has approved thePreface to the Standards on Quality Control, Audi ti ng ,Review, Other Assurance and Related Services. The saidPreface introduces a totally new format of writing Standards, inline with that adopted by the International Auditing and

Assurance Standards Board pursuant to its Clarity Project. According to the new format the Standards on Auditing (SAs)would now contain two distinct sections, one, theRequirements section and, two, the Application Guidance

section.

14[*] The Preface to Standards on Quality control, auditing, Review, Other Assurance andRelated Services and the document containing the Reclassification and renumbering of the

Auditing and Assurance Standards issued by the Institute have been published in the July2007 issue of the Journal.


17/880



IV. The fundamental principles of the Standard are contained in theRequirements section and represented by use of shall .

Hitherto, the word, should was used in the Standards, for thispurpose. Further, this format also does away with the need topresent the principles laid down by the Standard in bold text. Theapplication and other explanatory material contained in aStandard on Auditing (SA) is an integral part of the SA as itprovides further explanation of, and guidance for carrying out, therequirements of an SA, along with the background information onthe matters addressed in the SA. It may include examples ofprocedures, some of which the auditor may judge to beappropriate in the circumstances. Such guidance is, however, notintended to impose a requirement. In view of this format ofwriting, the standard portion or principles enunciated in aStandard would no longer be given in bold face.

V. The new presentation format has, however, not as yet beingfollowed in drafting the Standards on Quality Control and otherStandards.

VI. There is no change in the authority attached to theStandards, i.e., they are mandatory in nature,notwithstanding t he new format of writing t he Standards.

C. Clarification on the Auditors Rights Where Clients andOther Audi tors Seek Access to their Audit Working Papers*

I. Auditing and Assurance Standard (AAS) 1 15, Basic PrinciplesGoverning An Audit, states in para 6, The auditor shouldrespect the confidentiality of information acquired in the courseof his work and should not disclose any such information to athird party without specific authority or unless there is a legalor professional duty to disclose. Auditing and AssuranceStandard (AAS) 3 16, Documentation (Paragraph 13), states,Working papers are the property of the auditor. The auditormay, at his discretion, make portions of or extracts from hisworking papers available to his client. AAS 3 further requires(paragraph 14), inter alia, that the auditor should adoptreasonable procedures for custody and confidentially of hisworking papers.

* Published in May, 2000 issue of The Chartered Accountant.15 Now known as Standard on Auditing (SA) 200.16 Now known as Standard on Auditing (SA) 230.


18/880



II. Part I of the Second Schedule to the Chartered Accountants Act, 1949 provides that A Chartered Accountant in practice

shall be deemed to be guilty of professional misconduct, if he Discloses information acquired in the course of hisprofessional engagement to any person other than his client,without the consent of his client or otherwise than as requiredby any law for the time being in force.

III. Requests are sometimes received by the members of the Institute,who have/had been performing the duties as the auditors of anenterprise, to provide access to their audit working papers. Therequests may be made by the clients or other auditors of theenterprise or its related enterprise such as a parent enterprise.

IV. It is hereby clarified that except to the extent stated in para 5below, an auditor is not required to provide the client or theother auditors of the same enterprise or its related enterprisesuch as a parent or a subsidiary, access to his audit workingpapers. The main auditors of an enterprise do not have rightof access to the audit working papers of the branch auditors. Inthe case of a company, the statutory auditor has to considerthe report of the branch auditor and has a right to seekclarifications and/or to visit the branch if he deems it necessaryto do so for the performance of the duties as auditor. Anauditor can rely on the work of another auditor, without havingany right of access to the audit working papers of the otherauditor 17. For this purpose, the term auditor includes internalauditor.

V. As stated in para 4, the client does not have a right to accessthe working papers of the auditor. However, the auditor may,at his discretion, in cases considered appropriate by him,make portions of or extracts from his working papers availableto the client.

D. Format of Review Report** under Clause 41 of the Listing Agreement

I. As the members are aware, the Institute had in March 2005,issued Auditing and Assurance Standard (AAS) 33 18,

17 Reference in this regard may be made to the Auditing and Assurance Standard (AAS) 10,Using the Work of Another Auditor and the Auditing and Assurance Standard (AAS) 7,Relying on the Work of Internal Auditor.** Issued in July, 2005.18 Now known as Standard on Review Engagements (SRE) 2400.


19/880



Engagements to Review Financial Statements, applicable to allreview engagements relating to accounting periods beginning

on or after April 1, 2005. Appendix 3 to the said AAS containsan illustrative format of review report in respect of balancesheet. The illustrative format given in the AAS is different fromthe format of the review report required to be given underclause 41 of the Listing Agreement in that it is in respect ofreview of financial results and not a balance sheet.

II. In view of the above, the members are requested to note thatin so far as review carried out in terms of clause 41 of theListing Agreement is concerned, the members are expected tosubmit their review report in accordance with the formatprescribed by the Securities and Exchange Board of India inclause 41 of the Listing Agreement.

E. Audit in Situations of Missing or Incomplete Records***

I. Members of the Institute while carrying out audit assignmentsmight come across a situation where the records of the clientare incomplete or destroyed (partially or completely) onaccount of a natural calamity or otherwise. While guidance onreporting responsibilities of the members in such cases hasbeen provided to the members by way of publications such as

Auditing and Assurance Standard (AAS) 28 19, The AuditorsReport on Financial Statements, the Statement onQualifications in Auditors Report, opinions of the Expert

Advisory Committee, and a publication titled, Study on Auditand Certification in Case of Missing Records, issued by theInstitute, the Council, for the benefit of the members, wishes toreiterate the guidance in the following paragraphs.

II. The auditor should, first, obtain a representation from themanagement that the original accounts are not available foraudit. The letter should also include the fact whether theaccounts of the entity have been reconstructed by themanagement. If yes, the extent thereof (partial or complete)and the details of the items of financial statements that havebeen reconstructed should also be specified in the said letter.In case the accounts have been reconstructed, the members

must consider the limitation of scope in audit imposed by thecircumstances. Limitation on scope of audit can be of twotypes, firstly, inability of the management to reconstruct some

*** Issued in October, 2006.19 Now known as Standard on Auditing (SA) 700.


20/880



or all of the items of the financial statements either for thewhole financial year or for a certain period during the financial

year and secondly, lack of corroborative evidence to supportcertain or all the entries in the reconstructed accounts. In caseof completely reconstructed accounts, the lack of supportingevidence will pose a greater risk of limitation on scope,whereas, for partially reconstructed accounts, both types oflimitations, i.e., inability of the management to reconstructaccounts and lack of supporting evidence, can be material.While auditing the reconstructed accounts (partial as well ascomplete), the auditor should analyse the limitation imposedon application of audit procedures required to be applied in thegiven situation and use his professional judgment to determinewhether to issue an unqualified opinion, qualified opinion or

disclaimer of opinion. Further, the fact of scope limitation mustclearly be mentioned in the scope paragraph of the auditreport. The AAS 28, The Auditors Report on FinancialStatements, in its paragraphs 43 and 44 reproduced below,provides the guidance for the auditor in case of a scopelimitation:

43. A scope limitation may be imposed by circumstances, forexample, when the timing of the auditor's appointment issuch that the auditor is unable to observe the counting ofphysical inventories. It may also arise when, in theopinion of the auditor, the entity's accounting recordsare inadequate or when the auditor is unable to carryout an audit procedure believed to be desirable. Inthese circumstances, the auditor would attempt tocarry out reasonable alternative procedures to ob tainsufficient appropriate audit evidence to support anunqualified opinion. (emphasis added)

44. When there is a limitation on the scope of the auditor'swork that requires expression of a qualified opinion or adisclaimer of opinion, the auditor's report should describethe limitation and indicate the possible adjustments to thefinancial statements that might have been determined tobe necessary had the limitation not existed.

III. Guidance in respect of the matter discussed in the twoparagraphs above has been explained in paragraph 45 of the

AAS 28 by way of illustrative examples of the scopeparagraphs in the audit reports in the cases of qualifiedopinion and disclaimer of opinion:


21/880



In situations of Qualified Opinion

We have audited ...

Except as discussed in the following paragraph, we conductedour audit in accordance with .

We did not observe the counting of the physical inventories asat 31st March 2XXX since that date was prior to the time wewere appointed as auditors of .(Name of the entity).Owing to the nature of the entitys records, we were unable tosatisfy ourselves as to inventory quantities by other auditprocedures.

In situations of Disclaimer of Opinion

The paragraph discussing the scope of the audit wouldeither be omitted or amended according to thecircumstances. (emphasis added)

(Add a paragraph discussing the scope limitation as follows:)

We were not able to observe all physical inventories andconfirm accounts receivable due to limitations placed on thescope of our work by the entity.

IV. Paragraph 10 of AAS 13 20, Audit Materiality, reproducedbelow, states that the auditor while auditing the reconstructedaccounts must consider the concept of materiality and the

audit risk involved with specific account balances and classesof transactions:

10. There is an inverse relationship between materiality andthe degree of audit risk, that is, the higher the materialitylevel, the lower the audit risk and vice versa. Forexample, the risk that a particular account balance orclass of transactions could be misstated by an extremelylarge amount might be very low, but the risk that it couldbe misstated by an extremely small amount might be veryhigh. The auditor takes the inverse relationship betweenmateriality and audit risk into account when determiningthe nature, timing and extent of audit procedures. Forexample, if, after planning for specific audit procedures,the auditor determines that the acceptable materialitylevel is lower, audit risk is increased. The auditor would

20 Now known as Standard on Auditing (SA) 320.


22/880



compensate for this by either:

(a) reducing the assessed degree of control risk, wherethis is possible, and supporting the reduced degreeby carrying out extended or additional tests ofcontrol; or

(b) reducing detection risk by modifying the nature,timing and extent of planned substantiveprocedures.

V. While auditing the reconstructed accounts, since the auditorwould normally find it difficult to obtain internally generatedcorroborative evidences supporting the reconstructedaccounts, the auditor should apply alternative audit proceduressuch as inquiry and external confirmation as outlined inparagraphs 14 and 15 of the AAS 5 21, Audit Evidence,reproduced below:

Inquiry and Confirmation

14. Inquiry consists of seeking appropriate information fromknowledgeable persons inside or outside the entity. Inquiriesmay range from formal written inquiries addressed to thirdparties to informal oral inquiries addressed to persons insidethe entity. Responses to inquiries may provide the auditor withinformation which he did not previously possess or mayprovide him with corroborative evidence.

15. Confirmation consists of the response to an inquiry tocorroborate information contained in the accounting records.For example, the auditor requests confirmation of receivablesby direct communication with debtors.

For assessing the reliability of the evidence obtained by theauditor from various sources, the auditor is guided by theprinciples enunciated in paragraph 7 of AAS 5.

VI. The auditor, if he himself was not the auditor in theimmediately preceding financial year, must apply the principleslaid down in AAS 22 22, Initial Engagements - OpeningBalances while verifying the figures of opening balances.

VII. Paragraph 4 of the AAS 28, The Auditors Report on FinancialStatements, provides that the auditors report should contain a

21 Now known as Standard on Auditing (SA) 500.22 Now known as Standard on Auditing (SA) 510.


23/880



clear written expression of opinion on the financial statementstaken as a whole. An unqualified opinion can be expressed

only if the auditor is able to satisfy himself, by way ofapplication of sufficient appropriate compliance andsubstantive procedures, that the financial statements give atrue and fair view. The scope limitation imposed by lack ofsupporting evidence implies a particular emphasis on obtainingalternative corroborative evidence. However, if the auditorconcludes that an unqualified opinion can not be expressedbut the limitation on scope is not so material and pervasive asto require a disclaimer of opinion, a qualified opinion should beexpressed. Further, a disclaimer of opinion should beexpressed when the possible effect of a limitation on scope isso material and pervasive that the auditor has not been able to

obtain sufficient appropriate audit evidence and is,accordingly, unable to express an opinion on the financialstatements. Paragraph 45 of AAS 28 illustrates the principlesenunciated here above. Having regard to the above, twoillustrative formats of reporting by the auditor are given in theparagraphs 8 and 10 below for guidance of the members.

VIII. Illustrative audit report where the auditor decides to express aqualified opinion about the true and fair view of the financialstatements:

I. (Where accounts have been reconstructed for some or allof the items for the whole financial year)

We have audited the attached Balance Sheet of .(name of the client), as at 31st March 2XXX, and also theProfit and Loss Account and the cash flow statement for theyear ended on that date annexed thereto. We have beeninformed by the management that because of _____(givereason)__________ the original accounts are not available foraudit and hence these financial statements have beenprepared from the reconstructed accounts prepared by themanagement. The accounts as well as the financial statementsare the responsibility of the management. Our responsibility isto express an opinion on these financial statements based onour audit of the accounts.

We conducted our audit in accordance with the auditingstandards generally accepted in India. Those Standards requirethat we plan and perform the audit to obtain reasonableassurance about whether the financial statements are free of


24/880



material misstatement. An audit includes examining, on a testbasis, evidence supporting the amounts and disclosures in the

financial statements. An audit also includes assessing theaccounting principles used and significant estimates made bymanagement, as well as evaluating the overall financialstatement presentation. We believe that our audit provides areasonable basis for our opinion.

We have not been able to obtain corroborative audit evidencesupporting following items of the financial statements whileauditing the accounts of the entity:

(State the areas for which the corroborative evidences werenot available along with their quantification, to the extentpossible and also their resultant effect on the financial

statements.)Subject to the above, the financial statements give a true andfair view:

(i) in the case of the balance sheet, of the state of the ___________ (name of the client) affairs as at the end ofits financial year;

(ii) in the case of the profit and loss account, of the profit orloss for its financial year; and

(iii) In the case of the cash flow statement, of the cash flowsfor the year ended on that date.

(iv) (where accounts have been reconstructed only for certainperiod during the year)

We have audited the attached Balance Sheet of .(name of the client), as at 31st March 2XXX, and also theProfit and Loss Account and the cash flow statement for theyear ended on that date annexed thereto. We have beeninformed by the management that because of _____(givereason)__________ the original accounts are not available foraudit and hence these financial statements have beenprepared from the reconstructed accounts prepared by themanagement for the period from _____ to _____ during thefinancial year. The accounts as well as the financialstatements are the responsibility of the management. Ourresponsibility is to express an opinion on these financialstatements based on our audit of the accounts.

(Other paragraphs shall be same as in the format given in Part


25/880



I above.)

IX. If the auditor is satisfied after obtaining a representation letterfrom the management and considering the results of sufficientappropriate audit procedures that the reconstruction of theaccounts of the entity is not possible, he has no other optionbut to issue a disclaimer of opinion. The auditor should issue areport to the shareholders mentioning therein that it is notpossible for him to express any opinion. The format of auditreport to express disclaimer of opinion has been suggested inthe following paragraph for guidance of the members.

X. Illustrative audit report in situations where the reconstruction ofthe accounts is not possible:

We were engaged to audit the Balance Sheet of. (name of the client), as at 31st March 2XXX,and also the Profit and Loss Account and the cash flowstatement for the year ended on that date. The financialstatements are the responsibility of the companysmanagement. The management of

____________________________(name of the client) hasinformed us that owing to ___________ (state the reason forunavailability of records), the books of account and/ or otherrelated records and documents of the ____________________(name of the client) have been completely destroyed. Themanagement has also informed us that the reconstruction ofthe accounts is also not possible.

Since we have not been able to examine the books of accountas well as the financial statements of

___________________(name of the client), we are unable toform any opinion on the financial statements.

XI. Members attention is also invited to the opinion given by theExpert Advisory Committee in September 1988 in situation ofan audit where the records etc., had been seized by theincome tax authorities and released after four years andrecords were reconstructed for the interregnum. TheCommittee, apart from the opinion on the type of the opinion to

be expressed by the auditor in such cases, has also opinedthat the auditor should not normally rely on the managementscertificate as to the opening balances unless the informationtherein can be corroborated by other supporting document.


26/880



F. List of Mandatory Statements and Standards on Auditing

I. Lis t of Statements on Audi ting as on 01.04.2008

1. Statement on the Companies (Auditors Report) Order,2003 (Revised 2005). 23

2. Statement on Reporting under section 227 (1A) of theCompanies Act, 1956 24.

II. List of Quality Control and Engagement Standards as on01.04.2008

Quality ControlNewStandardNumber(SQC)(1-99)

Standards onQuality Control(SQCs)

Corresponding Auditing and AssuranceStandard(AAS)Number

Date from whicheffective

1 Quality Control forFirms that Perform

Audit and Reviewsof HistoricalFinancialInformation, andother Assuranceand RelatedServices

Engagements25

-

Audits and Reviews of Historical Financial InformationNewStandardNumber(SA)(100-999)

Standards on Auditing (SAs)

Corresponding AAS Number


100-199 Introduc tory Matters

23 Issued in April, 2004, pursuant to the issuance of the Companies (Auditor's Report) Order,2003. The revised edition issued in April 2005 pursuant to the issuance of the Companies

(Auditors Report) (Amendment) Order, 2004.24 The Council, at its 269 th meeting held from July 18, 2007 to July 20, 2007 at New Delhi,decided to withdraw the Statement on Qualifications in Auditors Report except paragraphs2.1 to 2.30 dealing with reporting under section 227 (1A) of the Companies Act, 1956 and torename the Statement as Statement on Reporting under section 227 (1A) of the Companies

Act, 1956.25 Published in October, 2007 issue of the Journal.


27/880



200-299 General Princip les and Responsib ilit ies200 Basic Principles

Governing an Audit 26

1 Effective for all

audits related toaccounting periodsbeginning on or after

April 1, 1985200A Objective and

Scope of the Auditof FinancialStatements 27

2 Effective for allaudits related toaccounting periodsbeginning on or after

April 1, 1985210 Terms of Audit

Engagement26 Effective for all


April 1, 2003220 Quality Control for

Audit Work17 Effective for all


April 1, 1999230 Documentation 3 Effective for all

audits related toaccounting periodsbeginning on or afterJuly 1, 1985

240 The AuditorsResponsibility toConsider Fraud andError in an Audit ofFinancialStatements 28


April 1, 2003

240(Revised)

The AuditorsResponsibilitiesRelating to Fraud inan Audit of

SA 240 This SA is effectivefor audits of financialstatements forperiods beginning on

26 The Board has undertaken a project to issue a single Standard on Auditing (SA)corresponding to ISA 200, Objective and General Principles Governing an Audit of Financial

Statements and withdraw the SA 200 and SA 200A27 ibid 28 SA 240, The Auditors Responsibility to Consider Fraud and Error in an Audit of FinancialStatements becomes operative for all audits related to accounting periods beginning on orafter 1st April, 2003. The original AAS 4, Fraud and Error, issued in June, 1987, remainsoperative for all audits relating to accounting periods beginning on or before 31st March,2003.


28/880



FinancialStatements 29

or after 1st April,2009.

250 Consideration ofLaws andRegulations in an

Audit of FinancialStatements

21 Effective for allaudits commencingon or after July 1,2001

260 Communications of Audit Matters withThose Charged withGovernance


April 1, 2003299 Responsibility of

Joint Auditors12 Effective for all


April 1, 1996300-499 Risk Assessment and Response to Assessed Risks 300 Audit Planning 8 Effective for all


April 1, 1989300(Revised)

Planning an Audit ofFinancialStatements 30

SA 300 This SA is effectivefor audits of financialstatements forperiods beginning onor after 1st April,2008.

310 Knowledge of theBusiness @

20 Effective for allaudits commencingon or after April 1,2000

315 Identifying and Assessing the Risksof MaterialMisstatementthroughUnderstanding the

This SA is effectivefor audits of financialstatements forperiods beginning onor after April 1, 2008.

29 Published in December, 2007 issue of the Journal.30 Published in December, 2007 issue of the Journal.@ SA 310 shall stand withdrawn once SA 315 and SA 330 become effective.


29/880



Entity and ItsEnvironment 31

320 Audit Materiality 13 Effective for allaudits related toaccounting periodsbeginning on or after

April 1, 1996330 The Auditors

Responses to Assessed Risks 32

This SA is effectivefor audits of financialstatements forperiods beginning onor after April 1, 2008.

400 Risk Assessmentsand InternalControl 33


April 1, 2002401 Audit in a Computer

InformationSystemsEnvironment@@


April 1, 2003402 Audit

ConsiderationsRelating to EntitiesUsing ServiceOrganisations


April 1, 2003

500599 Audit Evidence500 Audit Evidence 5 Effective for all

audits related toaccounting periodsbeginning on or afterJanuary 1, 1989

501 Audit Evidence AdditionalConsiderations for

34 Applicable to allaudits related toaccounting period

31 Published in February, 2008 issue of the Journal.32 Published in February, 2008 issue of the Journal.33

SA 400, Risk Assessments and Internal Control is operative for all audits related toaccounting periods beginning on or after 1st April 2002. The original AAS 6, Study andEvaluation of the Accounting System and Related Internal Controls in Connection with an

Audit issued in May, 1988 was operative for all audits relating to accounting periodsbeginning on or before 31st March, 2002. The SA 400 shall stand withdrawn once the SA 315and SA 330 come into effect.@@ SA 401 shall stand withdrawn once the SA 315 and SA 330 come into force.


30/880



Specific Items beginning on or after April 1, 2005

505 ExternalConfirmations 30 Effective for allaudits related toaccounting periodsbeginning on or after

April 1, 2003510 Initial

Engagements Opening Balances

22 Effective for allaudits commencingon or after July 1,2001

520 AnalyticalProcedures


April 1, 1997530 Audit Sampling 15 Effective for all


April 1, 1998540 Auditing of

AccountingEstimates

18 Effective for allaudits commencingon or after April 1,2000

550 Related Parties 23 Effective for allaudits related toaccounting periodsbeginning on or after

April 1, 2001560 Subsequent

Events19 Effective for all

audits commencingon or after April 1,2000

570 Going Concern 16 Effective for allaudits related toaccounting periodsbeginning on or after

April 1, 1999

580 Representations byManagement 11 Effective for allaudits related toaccounting periodsbeginning on or after

April 1, 1995


31/880



600-699 Using Work of Others600 Using the Work of

Another Auditor 34

10 Effective for all


April 1, 2002610 Relying Upon the

Work of an Internal Auditor


April 1, 1989620 Using the Work of

an Expert9 Effective for all


April 1, 1991700-799 Audit Conclus ions and Reporting700 The Auditors

Report onFinancialStatements


April 1, 2003710 Comparatives 25 Effective for all


April 1, 2003800-899 Special ized AreasNewStandardNumber(SRE)(2000-2699)

Standards onReviewEngagements(SREs)

CorrespondingExisting AASNumber


2400 Engagements toReview FinancialStatements 35

33 Applicable to allreview engagementsrelating toaccounting periods

34 SA 600, Using the Work of Another Auditor becomes operative for all audits related toaccounting periods beginning on or after 1st April 2002. The original AAS 10, Using the Work

of Another Auditor issued in April 1995 remains operative for all audits relating to accountingperiods beginning on or before 31st March, 2002.35 With the issuance of SRE 2400, the Guidance Note on Engagement to Review FinancialStatements issued by the Institute of Chartered Accountants of India in May 2000 standswithdrawn.


32/880



beginning on or after April 1, 2005

Assurance Engagements Other Than Audits or Reviewsof Historical Financial Information

NewStandardNumber(SAE)(3000-3699)

Standards on AssuranceEngagements(SAEs)



3000-3399

Applicable to all Assurance Engagements

3400-3699

Subject Specific Standards

3400 The Examination ofProspectiveFinancialInformation

35 Effective in relationto reports onprojections/forecasts,issued on or after

April 1, 2007Related ServicesNewStandardNumber(SRS)(4000- 4699)

Standards o nRelated Services(SRSs)


Date from whic heffective

4400 Engagements toPerform Agreed-upon ProceduresRegardingFinancialInformation 36

32 Applicable to allagreed uponproceduresengagementsbeginning on or after

April 1, 2004

4410 Engagements toCompile FinancialInformation 37

31 Applicable to allcompilationengagementsbeginning on or after

April 1, 2004

36 With the issuance of this SRS, the Guidance Note on Engagements to Perform Agreed-upon Procedures regarding Financial Information, issued by the Institute of Chartered

Accountants of India in July 2001, shall stand withdrawn.37 With the issuance of this SRS, the Guidance Note on Members Duties regardingEngagements to Compile Financial Information, issued by the Institute of Chartered

Accountants of India in February 2002, shall stand withdrawn.

Back


33/880

PREFACE TO STANDARDS ONQUALITYCONTROL,

AUDITING, REVIEW, OTHER ASSURANCE ANDRELATEDSERVICES1

(Effecti ve from April 1, 2008)

Contents

Paragraph(s)

Introduction............................................................................................. 1-2Standards Issued by AASB Under the Authority of the Council .............. 3-4Standards on Auditing............................................................................. 5-9

Objectives ...................................................................................... 10Requirements............................................................................. 11-14

Application and Other Explanatory Material................................ 15-16Introductory Material and Definitions.......................................... 17-18

Standards on Quality Control ................................................................... 19Other Standards....................................................................................... 20Statements on Auditing............................................................................ 21General Clarifications............................................................................... 22Professional Judgment............................................................................. 23

Authority Attached to Other Standards,Statements on Auditing and General Clarifications.............................. 24-25Guidance Notes ....................................................................................... 26Technical Guides, Practice Manuals, Studiesand Other Papers Published by the

Auditing and Assurance Standards Board................................................ 27Material Modifications to the Preface to International Standards on QualityControl, Auditing, Review, Other Assurance and Related Services Annexure - Structure of Standards issued by Auditing and Assurance StandardsBoard under the Authority of the Council of ICAI

Appendix Auditing and Assurance Standards Board and its Due Process

1 Issued in July, 2007.

Back


34/880

Preface to SQC, Audit ing, Review and Other Servic es

PrefaceI-23

Introduction

1. This Preface to the Standards on Quality Control, Auditing, Review,Other Assurance and Related Services has been issued to facilitateunderstanding of the scope and authority of the pronouncements of the

AASB issued under the authority of the Council of the Institute of Chartered Accountants of India (the ICAI).

2. The ICAI is committed to the goal of enabling the accountancy profession inIndia to provide services of high quality in the public interest and which areaccepted worldwide. To further this goal, the ICAI develops and promulgatestechnical Standards and other professional literature. The ICAI being one of thefounder members of the International Federation of Accountants (IFAC), the

Standards developed and promulgated by the AASB under the authority of theCouncil of the ICAI are in conformity with the corresponding InternationalStandards issued by the International Auditing and Assurance Standards Board(IAASB), established by the IFAC. The Due Process of the AASB forformulation of Standards, Statements, Guidance Notes and its otherpronouncements is given in the Appendix to this Preface.

Standards Issued by AASB Under the Authority of the Council of ICAI

3. The following Standards issued by the Auditing and Assurance StandardsBoard under the authority of the Council are collectively known as theEngagement Standards:

(a) Standards on Auditing (SAs), to be applied in the audit of historical financialinformation.

(b) Standards on Review Engagements (SREs), to be applied in the review ofhistorical financial information.

(c) Standards on Assurance Engagements (SAEs), to be applied in assuranceengagements, dealing with subject matters other than historical financialinformation.

(d) Standards on Related Services (SRSs), to be applied to engagementsinvolving application of agreed-upon procedures to information, compilation

engagements, and other related services engagements, as may bespecified by the ICAI.

4. Standards on Quality Control (SQCs), issued by the AASB under theauthority of the Council, are to be applied for all services covered by the


35/880


Preface I-24

Engagement Standards as described in paragraph 3 above.

A diagram containing the structure of the Standards issued by the Auditing and Assurance Standards Board under the authority of the Council is given as Annexure to this Preface.

Standards on Audi ting 5. The Standards on Auditing (SAs) referred to in Paragraph 3(a) above areformulated in the context of an audit of financial statements by an independentauditor. They are to be adapted as necessary in the circumstances when appliedto audits of other historical financial information.

6. The objective of an audit of financial statements is to enable the auditor to

express an opinion whether the financial statements are prepared, in all materialrespects, in accordance with an applicable financial reporting framework. It isundertaken to enhance the degree of confidence of intended users in thefinancial statements. The Standards on Auditing, taken together, provide thestandards for the auditors work in fulfilling this objective.

7. In conducting an audit, the overall objective of the auditor is to obtainreasonable assurance about whether the financial statements as a whole arefree from material misstatement, whether due to fraud or error, and to report onthe financial statements in accordance with the auditors findings. However,owing to the inherent limitations of an audit, there is an unavoidable risk thatsome material misstatements of the financial statements will not be detected,even though the audit is properly planned and performed in accordance with theSAs. In all cases, when this overall objective has not been or cannot beachieved, the SAs require the auditor to modify the auditors opinion accordinglyor withdraw from the engagement as may be appropriate, depending upon thefacts and circumstances of each case.

8. The auditor applies each Standard on Auditing (SA) relevant to the audit. An SA is relevant when the SA is in effect and the circumstances addressed bythe SA exist.

9. The SAs deal with the general responsibilities of the auditor, as well as theauditors further considerations relevant to the application of thoseresponsibilities to specific areas. An SA contains objectives and requirementstogether with related guidance in the form of application and other explanatorymaterial. It may also contain introductory material that provides context to a


36/880


PrefaceI-25

proper understanding of the SAs, and definitions. It is, therefore, necessary to

consider the entire text of an SA to understand and apply its requirements.

Objectives

10. Each SA contains an objective or objectives, which provide the context inwhich the requirements of the Standards on Auditing are set. Any limitation of theapplicability of a specific Standard is made clear in the Standard itself. Anindividual Standard should be read in the context of the objective stated in theStandard as well as this Preface. The auditor aims to achieve these objectives,having regard to the interrelationships amongst the SAs. For this purpose, theauditor uses the objectives to judge whether, having complied with therequirements of the SAs, sufficient appropriate audit evidence has been obtained

in the context of the overall objective of the auditor. Where an individual objectivehas not been or cannot be achieved, the auditor considers whether this preventsthe auditor from achieving his overall objective.

Requirements2

11. The requirements of each SA are contained in a separate section andexpressed using the word shall. The auditor applies the requirements in thecontext of the other material included in the Standard.

12. The auditor complies with the requirements of an SA in all cases wherethey are relevant in the circumstances of the audit. In exceptional circumstances,

however, the auditor may judge it necessary to depart from a relevantrequirement by performing alternate audit procedures to achieve the aim of that

2 The International Auditing and Assurance Standards Board, pursuant to its Clarity Project, hasadopted a new format for presentation of the International Standards on Auditing (ISAs) issued byit. As per the new format, an ISA is divided into two sections, one, the requirements section andsecond, the application and other explanatory material section. Accordingly, the practice ofpresenting the standard portion (i.e., the principles enunciated) in bold lettering and theapplication/ explanatory guidance in plain lettering has been done away with. The entire text of theStandard, whether the requirements section or the application and other explanatory materialsection are presented in plain lettering.In so far as the Auditing and Assurance Standards (AASs) issued by the Institute are concerned, inthe AASs issued prior to December 1997, the entire text of the Standard is presented in the plainlettering, whereas in case of the AASs issued subsequent to that date, the standard portion/principles enunciated are given in bold lettering whereas the explanatory/ application guidance isgiven in plain lettering. The presentation of the Standards on Auditing, issued subsequent to thedate this Preface comes into effect, would be in line with that adopted by the IAASB for its ISAspursuant to the Clarity Project. In the due course, the existing Standards would also be brought inline with the abovementioned convention.


37/880


Preface I-26

requirement. The need for the auditor to depart from a relevant requirement is

expected to arise only where the requirement is for a specific procedure to beperformed and, in the specific circumstances of the audit, that procedure wouldbe ineffective.

13. When a situation envisaged in paragraph 12 above arises, the auditor isrequired to document how alternative procedures performed achieve the aim ofthe requirement, and, the reasons for the departure. Further, his report alsoshould draw attention to such departures. However, a mere disclosure in hisreport does not absolve an auditor from complying with the applicableStandard(s).

14. A requirement is not relevant only in the cases where the SA is not

relevant, or the circumstances envisioned do not apply because the requirementis conditional and the condition does not exist. The auditor is not required tocomply with a requirement that is not relevant in the circumstances of the auditand this does not constitute a departure from the requirement. However, theauditor should document the steps undertaken by him to satisfy himself that theprocess adopted in the circumstances of the audit assisted him in achieving hisoverall objective.

Application and Other Explanatory Material

15. The application and other explanatory material contained in an SA is anintegral part of the SA as it provides further explanation of, and guidance for

carrying out, the requirements of an SA, along with the background informationon the matters addressed in the SA. It may include examples of procedures,some of which the auditor may judge to be appropriate in the circumstances.Such guidance is, however, not intended to impose a requirement.

16. Appendices, which form part of the application and other explanatorymaterial, are an integral part of an SA. The purpose and intended use of anappendix are explained in the body of the related Standard or within the title andintroduction of the appendix itself.

Introductory Material and Definitions

17. Introductory material may include, as needed, such matters as explanationof the purpose and scope of the Standard, including how the SA relates to otherSAs, the subject matter of the SA, specific expectations from the auditor andothers, and the context in which the SA is set.


38/880

Preface to SQC, Audit ing, Review and Other Services

PrefaceI-27

18. A Standard on Auditing may include, in a separate section under the

heading Definitions, a description of the meanings attributed to certain terms forpurposes of the SAs. These are provided to assist in the consistent applicationand interpretation of the SAs, and are not intended to override definitions thatmay be established for other purposes, whether in law, regulation or otherwise.Unless otherwise indicated, those terms will carry the same meanings throughoutthe SAs.

Standards on Quality Control19 SQCs are written to apply to firms 3 in respect of all their services fallingunder the Engagement Standards issued by the AASB of ICAI. The authority ofSQCs is set out in the introduction to the SQCs.

Other Standards20. The other Engagement Standards identified in paragraph 3 (b) to (d) as wellas Standards on Quality Control referred to in paragraph 4 contain basic principlesand essential procedures (identified in bold type lettering and by the wordshould) together with related guidance in the form of explanatory and othermaterial, including appendices. The basic principles and essential procedures areto be understood and applied in the context of the explanatory and other materialthat provides guidance for their application. It is therefore necessary to consider theentire text of a Standard to understand and apply the basic principles and essential

procedures. Appendices, which form part of the application material, are an integralpart of a Standard. The purpose and intended use of an appendix are explained inthe body of the related Standard or within the title and introduction of the appendixitself. An individual Standard should be read in the context of the objective stated inthe Standard as well as this Preface. Any limitation of the applicability of a specificStandard is made clear in the Standard itself.

Statements on Auditing21. Statements on Auditing are issued with a view to securing compliance byprofessional accountants on matters which, in the opinion of the Council, arecritical for the proper discharge of their functions. Statements are, therefore,

mandatory.

3 The term firm refers to a sole practitioner/proprietor, partnership, or any such entity ofprofessional accountants, as may be permitted by law.


39/880


Preface I-28

General Clarifications

22. General Clarifications are issued by the Board under the authority of theCouncil of the Institute with a view to clarify any issues arising from theStandards. General Clarifications are mandatory in nature.

Professional Judgment 23. The nature of the Standards/Statements/General Clarifications requires theprofessional accountant 4 to exercise professional judgment in applying them.

Authority Attached to Other Standards, Statements on Auditing and General Clarifications

24. It is the duty of the professional accountants to ensure that theStandards/Statements/General Clarifications are followed in the engagementsundertaken by them 5. The need for the professional accountants to depart froma relevant requirement is expected to arise only where the requirement is for aspecific procedure to be performed and, in the specific circumstances of theengagement, that procedure would be ineffective. If because of that reason, aprofessional accountant has not been able to perform an engagement procedurein accordance with any Standard/Statement/General Clarification, he is requiredto document how alternative procedures performed achieve the purpose of theprocedure, and, unless otherwise clear, the reasons for the departure. Further,his report should draw attention to such departures. However, a mere disclosure

in his report does not absolve a professional accountant from complying with theapplicable Standards/Statements/General Clarifications 6.

4 The term professional accountant refers to a member of the Institute of Chartered Accountantsof India.5 Members attention is invited to Clause 5 of Part I of the Second Schedule to the Chartered

Accountants Act, 1949, according to which a chartered accountant in practice shall be deemed tobe guilty of professional misconduct, if he fails to disclose a material fact known to him which is notdisclosed in a financial statement, but disclosure of which is necessary in making such financialstatement where he is concerned with that financial statement in a professional capacity. FurtherClause 7 of Part I of the Second Schedule to the Chartered Accountants Act, 1949 states that achartered accountant in practice shall be deemed to be guilty of professional misconduct, if hedoes not exercise due diligence, or is grossly negligent in the conduct of his professional duties.6 Attention of the members is also drawn to Clause 9 of Part I of the Second Schedule to theChartered Accountants Act, 1949, whereby, a member is deemed to be guilty of professionalmisconduct if he fails to invite attention to any material departure from the generally acceptedprocedures of audit applicable to the circumstances.


40/880


PrefaceI-29

25. There may be a situation where a matter is covered both by a Standard as

also by a Statement on Auditing. In such a situation, the Statement shall prevailtill the time the Standard becomes mandatory. Once a Standard becomesmandatory, the concerned Statement or the relevant portion(s) thereof willautomatically be withdrawn.

Guidance Notes26. Guidance Notes are issued to assist professional accountants inimplementing the Engagement Standards and the Standards on Quality Controlissued by the AASB under the authority of the Council. Guidance Notes are alsoissued to provide guidance on other generic or industry specific audit issues, notnecessarily arising out of a Standard. Professional accountants should be awareof and consider Guidance Notes applicable to the engagement. A professionalaccountant who does not consider and apply the guidance included in a relevantGuidance Note should be prepared to justify the appropriateness andcompleteness of the alternate procedures adopted by him to deal with theobjectives and basic principles set out in the Guidance Note.

Technical Guides, Practice Manuals, Studies and OtherPapers Published by the Auditing and AssuranceStandards Board27. The Board may also publish Technical Guides, Practice Manuals, Studiesand other papers. Technical Guides are ordinarily aimed at imparting broadknowledge about a particular aspect or of an industry to the professionalaccountants. Practice Manuals are aimed at providing additional guidance toprofessional accountants in performing audit and other related assignments.Studies and other papers are aimed at promoting discussion or debate orcreating awareness on issues relating to quality control, auditing, assurance andrelated service, affecting the profession. Such publications of the Board do notestablish any basic principles or essential procedures to be followed in audit,review, other assurance or related services engagements, and accordingly, haveno authority of the Council attached to them.

Material Modifications to the Preface to InternationalStandards on Quality Control, Auditing, Review, Other Assurance and Related Services Additions

1. This Preface, by virtue of the requirement of the Clause 9 of Part I of the


41/880


Preface I-30

Second Schedule to the Chartered Accountants Act, 1949, requires a member to

draw attention to any material departures from the requirements of the applicableStandards, Statements and General clarifications in his report. However, there isno such requirement in the Preface issued by the IAASB.

2. This Preface deals, apart from the Standards, with the Statements on Auditing and the General Clarifications as the mandatory documents for use bythe professional accountants in performing engagements by them, whereas, thePreface issued by the IAASB does not deal with such aspects. Further, thenomenclature of International Auditing Practice Statements (IAPSs) referred inthe Preface issued by the IAASB has been changed to Guidance Notes in thisPreface.

3. The Preface issued by the IAASB requires documentation of the reasonsfor the departure from the requirements of the other International Standards only,i.e., International Standards other than International Standards on Auditing andInternational Standard on Quality control, whereas this Preface requires suchdocumentation in the cases of departure from the requirements of anyEngagement Standard, Statement and/or General Clarification.

4. The Preface issued by the AASB refers to inherent limitations of an audit inparagraph 7 for better understanding of audit function.

Deletion

1. The Preface issued by the IAASB provides to include, in appropriate cases,additional considerations specific to public sector entities within the body of theStandard. However, since the Standards, Statements, General Clarifications andGuidance Notes issued by the ICAI are equally applicable in case of allengagements, irrespective of the form, nature and size of the entity, this Prefacedoes not deal separately with the public sector perspective.


42/880


PrefaceI-31

Annexure

Structure of Standards issued by the Auditing and Assurance St andards Board under the Authority of theCouncil o f ICAI

The Chartered Accountants Act, 1949,Code of Ethics and other r elevant

pronouncements of the ICAI

Standards on Quality Control (SQCs)

Framework for AssuranceEn a ements

Audits and reviewsof historical

financialinformation

Assurance Engagementsother than audits orreviews of historicalfinancial information

Standards on Au di ti ng

(SAs)

100 - 999

Standards onReview

Engagements(SREs)

2000 - 2699

Standards on Assu ran ce

Engagements (SAEs)

3000 - 3699

Standards onRelated Servic es

(SRSs)

4000 - 4699

Services covered by the pronouncements of the Auditingand Assurance Standards Board under the authority of theCouncil of ICAI

As su rance Servi ces Related Services


43/880


Preface I-32

Appendix

Auditing and Assurance St andards Boardand its Due Process

Brief History

1. The Institute of Chartered Accountants of India (ICAI) constituted the Auditing Practices Committee (APC) on 17 th September 1982, to review theexisting auditing practices in India and to develop Statements on Standard

Auditing Practices so that these may be issued under the authority of theCouncil of the Institute. Subsequently, at its 226 th meeting held in July 2002,the Council of the Institute approved certain recommendations of the APC tostrengthen its role in the growth and development of the accountancyprofession in India. The Council, at the said meeting, also approved therenaming of the Auditing Practices Committee as the Auditing and AssuranceStandards Board (AASB) as well as renaming of the Statements on Standard

Auditing Practices as Auditing and Assurance Standards (AASs).

2. The ICAI is one of the founder members of the International Federationof Accountants (IFAC). It is one of the membership obligations of the Instituteto actively propagate the pronouncements of the International Auditing and

Assurance Standards Board (IAASB) of the IFAC to contribute towards globalharmonisation and acceptance of the Standards issued by the IAASB.

Accordingly, while formulating Engagement and Quality Control Standards,

the AASB takes into consideration the corresponding Standards, if any,issued by the IAASB. In addition, the AASB also takes into consideration theapplicable laws, customs, usages and business environment prevailing inIndia within the parameters of the July 2006 Policy Paper, A Guide forNational Standard Setters that Adopt IAASBs International Standards butFind it Necessary to Make Limited Modifications, issued by the IAASB.

Objectives and Functions of the Auditing and AssuranceStandards Board

3. The following are the objectives and functions of the Auditing and Assurance Standards Board:

(i) To review the existing and emerging auditing practices worldwide andidentify areas in which Standards on Quality Control, EngagementStandards and Statements on Auditing need to be developed.


44/880


PrefaceI-33

(ii) To formulate Engagement Standards, Standards on Quality Control and

Statements on Auditing so that these may be issued under the authorityof the Council of the Institute.

(iii) To review the existing Standards and Statements on Auditing to assesstheir relevance in the changed conditions and to undertake theirrevision, if necessary.

(iv) To develop Guidance Notes on issues arising out of any Standard,auditing issues pertaining to any specific industry or on generic issues,so that those may be issued under the authority of the Council of theInstitute.

(v) To review the existing Guidance Notes to assess their relevance in the

changed circumstances and to undertake their revision, if necessary.(vi) To formulate General Clarifications, where necessary, on issues arising

from Standards.

(vii) To formulate and issue Technical Guides, Practice Manuals, Studiesand other pa