Standards on Auditing Part 6 2

8/19/2019 Standards on Auditing Part 6 2

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Standards on Auditing-Part 6IPCC Paper 6, Auditing & Assurance, Volume 2

CA. Anurag Singal


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Learning Objectives

SA-570 SA-580 SA-600

SA-610 SA-620


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Scope of this SA

Deals with the auditor’s responsibility in the auditof financial statements w.r.t.

Management’s use of the Going Concern assumption in the preparation and presentation offinancial statements.


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Overall Objectives of the SA

To obtain sufficient appropriate audit evidence about the appropriateness ofmanagement’s use of the going concern assumption

To conclude, based on the audit evidence obtained, whether a materialuncertainty exists related to events or conditions that may castsignificant doubt on the entity’s ability to continue as a going concern

To determine the implications for the auditor’s report


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Going Concern Assumption

An entity is viewed as continuing in business for the foreseeablefuture.

General purpose financial statements are prepared on a goingconcern basis, unless management either intends to liquidatethe entity or to cease operations

When the use of the going concern assumption is appropriate,

assets and liabilities are recorded on the basis that the entity willbe able to realize its assets and discharge its liabilities in thenormal course of business.


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Responsibilities of Management

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The financial reporting framework may require the management to makean assessment of the entity’s ability to continue as a going concern andprepare the financial statements on a going concern basis

Management’s responsibility includes a responsibility to assess theentity’s ability to continue as a going concern even if the financialreporting framework does not include an explicit requirement to do so.

Making a judgment, at a particular point in time, about inherently uncertainfuture outcomes of events or conditions.


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Responsibilities of the Auditor

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The auditor’s responsibility is to obtain sufficient appropriate audit evidence about theappropriateness of management’s use of the going concern assumption

To conclude whether there is a material uncertainty about the entity’s ability to continue asa going concern

The potential effects of inherent limitations on the auditor’s ability to detect material

misstatements are greater for future events or conditions that may cause an entity to ceaseto continue as a going concern.

The absence of any reference to going concern uncertainty in an auditor’s report cannot beviewed as a guarantee as to the entity’s ability to continue as a going concern.


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Risk Assessment Procedures and

Related Activities

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The auditor shall consider whether there are events or conditions that maycast significant doubt on the entity’s ability to continue as a going concern.

He will check whether management has already performed a preliminaryassessment of the entity’s ability to continue as a going concern

The auditor shall remain alert throughout the audit for audit evidence ofevents or conditions that may cast significant doubt on the entity’s ability tocontinue as a going concern.


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Financial Indicators

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Net liability or

net currentliability position.

Adverse keyfinancial ratios.

Arrears ordiscontinuanceof dividends.

Inability to pay

creditors on duedates.

Change fromcredit to cash-

on-deliverytransactions with

suppliers.

Inability tocomply with the

terms of loanagreements.


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Operating Indicators

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Management intentionsto liquidate the entity or

to cease operations.

Shortages of importantsupplies.

Emergence of a highlysuccessful competitor.

Loss of a major market,key customer(s),

franchise, license, or

principal supplier(s).

Loss of keymanagement without

replacement.


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Others

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Non-compliance withcapital or other

statutoryrequirements.

Uninsured orunderinsured

catastrophes whenthey occur.

Pending legal orregulatory

proceedings against

the entity that may, ifsuccessful, result inclaims that the entityis unlikely to be able

to satisfy.

Changes in law orregulation or

government policyexpected toadversely affect the

entity.


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Evaluating Management’s Assessment

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The entity’s ability to continue as a going concern.

the auditor shall cover the same period as that used by management to

make its assessment as required by the applicable financial reportingframework

Period covered is less than 12 months from the date of the financialstatements as defined in SA 560, the auditor shall request managementto extend its assessment period to at least 12 months.

the auditor shall consider whether management’s assessment includes allrelevant information of which the auditor is aware as a result of the audit.


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Audit Conclusions and Reporting

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In the auditor’s judgment, a material uncertainty existsrelated to events or conditions that, individually orcollectively, may cast significant doubt on the entity’sability to continue as a going concern.

A material uncertainty exists when the magnitude of itspotential impact and likelihood of occurrence is such that,in the auditor’s judgment, appropriate disclosure of thenature and implications of the uncertainty is necessary


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Communication with Those Charged

with Governance

Governance events orconditions identified that

may cast significant doubton the entity’s ability to

continue as a going

concern.

Whether the events orconditions constitute amaterial uncertainty?

Whether the use of thegoing concern assumption

is appropriate in thepreparation and

presentation of thefinancial statements?

The adequacy of related

disclosures in the financialstatements.


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Significant Delay in the Approval of

Financial Statements

Auditor shall inquire as to the reasons for the delay.

When the auditor believes that the delay could berelated to events or conditions relating to the goingconcern assessment, the auditor shall perform thoseadditional audit procedures necessary


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Question

List theindications uponwhich the Auditor

should assessthe

appropriatenessof going concern

assumption.


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Financial Indicators

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Net liability or

net currentliability position.

Adverse keyfinancial ratios.

Arrears ordiscontinuanceof dividends.

Inability to paycreditors on due

dates.

Change fromcredit to cash-on-delivery

transactions withsuppliers.

Inability tocomply with the

terms of loanagreements.


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Operating Indicators

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Management intentionsto liquidate the entity orto cease operations.

Shortages of importantsupplies.

Emergence of a highlysuccessful competitor.

Loss of a major market,key customer(s),

franchise, license, orprincipal supplier(s).

Loss of key

management withoutreplacement.


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Others

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Non-compliance withcapital or other

statutoryrequirements.

Uninsured orunderinsured

catastrophes whenthey occur.

Pending legal orregulatory

proceedings againstthe entity that may, ifsuccessful, result inclaims that the entityis unlikely to be able

to satisfy.

Changes in law orregulation or

government policyexpected to

adversely affect theentity.


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Question

It is now an accepted fact that anauditor cannot take the “Going

concern” assumption for granted.The problem has become acute inview of ever growing sickness in

our industries.

You are required to prepare achecklist designed to test the

assumption that a particular client

organization is in fact a goingconcern


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Answer-1

Checklist: If the answers to

the following questions are“Yes”, then the going concernassumption may not be

appropriate, subject to otherfindings of the auditor.

1. Capital structure andfinancial aspects:

a. Does the concern have ahigh Debt Equity Ratio?

b. Is the concern heavily orincreasingly dependent upon

short-term finance?

c. Is the company utilizing theborrowing facility to the

maximum or whether there isany scope for further

borrowing?

d. Are leasing arrangementspreferred to capital

expenditure?


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Answer-3

3.Working capitalaspects:

a. Is there a gradualand significant decline

in current ratio, i.e.

current assets Currentliabilities?

b. Are purchasesbeing deferred,

thereby reducing

stocks to dangerouslylow levels?

c. Is there a markedslow down in the

collection of sundryDebtors?

d. Is there any inabilityto take advantage of

cash discounts fromcreditors?

e. Is there any

increase in the timetaken to pay creditors?


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Answer-4

4.Profit and Loss Account Aspects:

a. Does theconcern incur

substantial cashlosses?

b. Is there a steadydecline in the rate

of profitability?

c. Is there a growthbeyond limits such

that the company isover trading?


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SA-580 (Revised)

Written Representations


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Scope of this SA

Deals with the auditor’s responsibility toobtain written representations frommanagement

and, where appropriate, those charged withgovernance.


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Overall Objectives of the Auditor

To obtain written representations from management and, whereappropriate, those charged with governance that they believe that they havefulfilled their responsibility for the preparation of the financial statements

the completeness of the information provided to the auditor

To respond appropriately to written representations provided bymanagement and, where appropriate, those charged with governance


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A written statement by management provided tothe auditor to confirm certain matters or tosupport other audit evidence.

Written representations in this context do notinclude financial statements, the assertionstherein, or supporting books and records.


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Written Representations as Audit

Evidence

Necessary information that the auditor requires in connection with the audit of the entity’sfinancial statements

Written representations are audit evidence.

They do not provide sufficient appropriate audit evidence on their own about any of the

matters with which they deal.

The fact that management has provided reliable written representations does not affect thenature or extent of other audit evidence that the auditor obtains about the fulfillment ofmanagement’s responsibilities, or about specific assertions.


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Management from Whom Written

Representations Requested

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The auditor shall request writtenrepresentations from management withappropriate responsibilities for thefinancial statements and knowledge ofthe matters concerned


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Written Representations about Management’s

Responsibilities

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Preparation of theFinancial

Statements

The auditor shall requestmanagement to provide aWR that it has fulfilled its

responsibility for thepreparation of the financialstatements in accordancewith the applicable FRF,

including where relevanttheir fair presentation, asset out in the terms of the

audit engagement

InformationProvided and

Completeness ofTransactions

It has provided the auditorwith all relevant information

and access as agreed inthe terms of the audit

engagement

All transactions have beenrecorded and are reflectedin the financial statements


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Other Written Representations

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In addition to

such requiredrepresentations,the auditor

determines thatit is necessary

to obtain one or

more writtenrepresentations

to support otheraudit evidencerelevant to the

financialstatements

or one or more

specificassertions in thefinancial

statements, theauditor shallrequest such

other writtenrepresentations.


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Date of and Period s) Covered by


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The date of the writtenrepresentations shall beas near as practicable to,but not after, the date ofthe auditor’s report on

the financial statements.

The writtenrepresentations shall be

for all financialstatements and period(s)

referred to in the

auditor’s report.


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Form of Written Representations

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The writtenrepresentations

shall be in the formof a representationletter addressed to

the auditor.

If law or regulationrequires

management tomake written publicstatements about

its responsibilities,

the auditordetermines thatsuch statements

provide some or allof therepresentations

the relevantmatters covered by

such statementsneed not be

included in therepresentation

letter.


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Doubt as to the Reliability of Written Representations

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If the auditor has concerns about the competence, integrity, ethicalvalues or diligence of management, or about its commitment to orenforcement of these, the auditor shall determine

Whether written representations are inconsistent with other auditevidence, the auditor shall perform audit procedures to attempt toresolve the matter

If the auditor concludes that the written representations are notreliable, the auditor shall take appropriate actions, includingdetermining the possible effect on the opinion in the auditor’s report


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Requested Written Representations

Not Provided

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Discuss the matter with management

Re-evaluate the integrity of management andevaluate the effect that this may have on thereliability of representations

Take appropriate actions, including determining thepossible effect on the opinion in the auditor’s report


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Effect on Auditors Report

that the written representations required are not reliable ORmanagement does not provide the written representations

The auditor concludes that there is sufficient doubt about theintegrity of management such

The auditor shall disclaim an opinion on the financialstatements

Audit Procedures on Written


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Audit Procedures on Written

Representations

YES

Written Representation =necessary audit evidence

Written Representation ≠sufficient appropriate evidence

WRITTEN REPRESENTATION= AUDIT EVIDENCE ?


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Question

Discuss the position of anauditor in case he choosesto rely upon the certificates

from the management in

respect of Closing Stock,Cash in Hand etc.

List the circumstancesunder which he will be

justified in accepting and

relying upon the certificates.


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Answer-1

Role of managementrepresentations:

a. Management representationsare generally given for certifying

the value of inventories, provisionfor Liabilities, Disclosure of

contingent Liabilities, etc. Theseare intended to impress upon the

Directors their responsibility foraccounts.

b. Mere Possession of suchcertificates does not absolve the

auditor from carrying out a properaudit. These certificates can onlyact as second line of defense for

an auditor who has carried out hiswork with reasonable care, skill

and diligence.

c. The auditor should not seek or

accept certificates from themanagement when the subjectmatter is such that it is capable ofdirect verification by the auditor

himself.


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Answer-2

Situations whenmanagement certificates can

be justifiable:

a. The subject matter shouldnot be capable of direct

verification by the Auditor.

b. The matter relates toitems which are beyond the

competence of aprofessionally qualified

Accountant.

c. There are proper recordsand reliable internal checksin the client’s system that

can enable the directors toprepare and issue thecertificates.

d. The certificate should beprima facie in agreement

with the records maintained.

e. The certificate should beput to common-sense tests

by the auditor.


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Answer-3

In case of Third partycertificates e.g. Bankers,

Architects, Agents etc. thefollowing rules of reliance

may be taken into account:

a. The party issuing thecertificate is reputable and

trustworthy,

b. The certificates relate toan item which is normallydealt with or held by such

party,

c. The auditor himself is notin a position to verify the

item because of its technicalnature or because it would

be too costly or cumbersomefor him to do so,

d. The certificate prima facieis reliable and reasonable,

and

e. Reference to the thirdparty if available in the booksand documents of the client

as in possession of theconcerned goods, property

or securities belonging to theclients


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SA-600Using the Work of Another

Auditor


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Scope of this SA

When the principal auditor uses thework of another auditor, the principalauditor should determine how thework of the other auditor wil l affectthe audit


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Definition

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Principal auditor

• The auditor withresponsibility forreporting on thefinancial informationof an entity

• when that financialinformation includesthe financialinformation of oneor morecomponents auditedby another auditor.

Other auditor

• An auditor, otherthan the principalauditor, withresponsibility forreporting on thefinancial informationof a component

• which is included inthe financialinformation auditedby the principalauditor.

Component

• A division, branch,subsidiary, jointventure, associatedenterprises or otherentity

• whose financialinformation isincluded in thefinancial informationaudited by theprincipal auditor.


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Considerations by Principal Auditor

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When planning to use the work of another auditor, the principal auditorshould consider the professional competence of the other auditor

The principal auditor would inform the other auditor of matters such as areasrequiring special consideration, procedures for the identification of inter-component transactions that may require disclosure and the time-table forcompletion of audit

The principal auditor might discuss with the other auditor the audit proceduresapplied or review a written summary of the other auditor’s procedures andfindings which may be in the form of a completed questionnaire or check-list


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Considerations by Principal Auditor-2

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He may also decide that supplemental tests of the records or the financial statementsof the component are necessary.

The principal auditor should document in his working papers the componentswhose financial information was audited by other auditors;

Their significance to the financial information of the entity as a whole; thenames of the other auditors; and any conclusions reached that individualcomponents are not material.

The principal auditor should enquire about the limitations on his work

In case of foreign component, consider another auditors qualification and experience


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Co-ordination Between Auditors

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There should besufficient liaison

between theprincipal auditorand the other

auditor.

The principalauditor may find itnecessary to issue

writtencommunication(s)

to the otherauditor.


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Reporting Considerations

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When the

principalauditorconcludes thatthe work of theother auditor

cannot be used

the principalauditor has notbeen able to

performsufficient

additionalprocedures

regarding thefinancial

information ofthe componentaudited by the

other auditor

the principalauditor should

express a

qualifiedopinion ordisclaimer of

opinionbecause thereis a limitation

on the scope ofaudit.

If anotherauditor issues

modifiedauditor's report,

the principalauditor shouldconsider

whether thesubject of themodification isof such nature

andsignificance


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Division of Responsibility

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When the principal auditor has tobase his opinion on the financial

information of the entity as awhole

relying upon the statements andreports of the other auditors, hisreport should state clearly the

division of responsibility

for the financial information ofthe entity by indicating the extentto which the financial information

of components audited by theother auditors have beenincluded in the financialinformation of the entity


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Reporting

Reporting

If work of anotherauditor used in

preparation of FS.Qualified opinion

Is not able toperform sufficient

additionalprocedures

Disclaimer ofopinion


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Question-1

Write shortnotes on

coordinationbetweenprincipal

auditor and

other auditor.


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Answer

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There should besufficient liaison

between the

principal auditorand the other

auditor.

The principalauditor may find it

necessary toissue writtencommunication(s)

to the otherauditor.


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Question-2

Discuss thereporting

considerationsof the principalauditor under

SA 600.


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SA-610Using The Work of Internal

Auditor


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Scope of this SA

Deals with the external auditor’s responsibilities

Regarding the work of internal auditors when theexternal auditor has determined, in accordance withSA 315, that the internal audit function is likely to be

relevant

R l i hi b h I l A di


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Relationship between the Internal Audit

Function and the External Auditor

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The role and objectives of the internalaudit function are determined by

management and, where applicable,TCWG.

Irrespective of the degree of autonomyand objectivity of the internal audit

function, such function is not independentof the entity as is required of the externalauditor when expressing an opinion on

financial statements.


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Objectives of the external auditor

Where the entity has an internal audit function

a) Whether, and to what extent, to use specific work of the internal auditors; and

b) If so, whether such work is adequate for the purposes of the audit.


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Internal Audit Function

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An appraisal activity established or provided as a service to theentity.

Its functions include, amongst other things, examining, evaluatingand monitoring the adequacy and effectiveness of internal control.


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Internal Auditors

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Those individuals who perform the activities of the internal audit function.

Internal auditors may belong to an internal audit department or equivalentfunction.


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Determining whether and to what extent to use

the work of the Internal Auditors

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Whether the work of theinternal auditors is likely

to be adequate forpurposes of the audit

The planned effect of thework of the internalauditors on the nature,timing or extent of the

external auditor’sprocedures.

The external auditorshall evaluate:

A)The objectivity of theinternal audit function;

B)The technicalcompetence of theinternal auditors;

C)Whether the work ofthe internal auditors islikely to be carried outwith due professional

care; and

D)Whether there is likelyto be effective

communication betweenthe internal auditors and

the external auditor.


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Determining Whether and to What Extent to

Use the Work of the Internal Auditors-2

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In determiningthe plannedeffect of the

work of theinternal

auditors on thenature, timing

or extent of theexternalauditor’s

procedures, theexternal auditorshall consider:

The nature andscope of

specific workperformed

The assessedrisks of materialmisstatement

at the assertionlevel for

particularclasses of

transactions,account

balances, anddisclosures;

and

The degree ofsubjectivity

involved in theevaluation of

the auditevidencegathered


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Using Specific Work of the Internal Auditors

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The external auditor shall

evaluate and perform auditprocedures on that work to

determine its adequacy

The work was performed by

internal auditors havingadequate technical training

and proficiency;

The work was properlysupervised, reviewed and

documented;

Adequate audit evidencehas been obtained to enablethe internal auditors to draw

reasonable conclusions;

Conclusions reached areappropriate in the

circumstances and anyreports prepared by the

internal auditors areconsistent with the results of

the work performed; and

Any exceptions or unusualmatters disclosed by the

internal auditors are properlyresolved.


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Documentation

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When the externalauditor uses specificwork of the internal

auditors,

the external auditorshall documentconclusions regardingthe evaluation of the

adequacy of the work ofthe internal auditors,

the audit proceduresperformed by the

external auditor on thatwork


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Question

What aspects should beconsidered in the evaluation of

internal Audit function?

Or You have been appointed asauditor of a large industrial

company which has anestablished internal audit

department. You are required to

state the main aspects youwould consider to find out theeffectiveness of the department.


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Answer

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Whether the work of theinternal auditors is likely

to be adequate forpurposes of the audit

The planned effect of thework of the internal

auditors on the nature,timing or extent of the

external auditor’sprocedures.

The external auditorshall evaluate:

A)The objectivity of theinternal audit function;

B)The technicalcompetence of theinternal auditors;

C)Whether the work ofthe internal auditors islikely to be carried outwith due professional

care; and

D)Whether there is likelyto be effective

communication betweenthe internal auditors and

the external auditor.


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SA-620

(REVISED)USING THE WORK OF AN

AUDITOR’S EXPERT


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Scope of this SA

Deals with the auditor’s responsibilities regarding theuse of an individual or organization's work

In a field of expertise other than accounting orauditing, when that work is used to assist the auditorin obtaining sufficient appropriate audit evidence

Applicability


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Applicability

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Situations where the auditor useswork of an individual or organizationpossessing expertise in a field other

than accounting or auditing,

whose work in that field is used bythe entity to assist in preparing the

financial statements(amanagement’s expert)


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The Auditor’s Responsibility for the

Audit Opinion

The auditor has sole responsibility for the audit opinion expressed, and that responsibilityis not reduced by the auditor’s use of the work of an auditor’s expert.

Nonetheless, if the auditor using the work of an auditor’s expert, having followed thisSA, concludes that the work of that expert is adequate for the auditor’s purposes,

the auditor may accept that expert’s findings or conclusions in the expert’s field asappropriate audit evidence.

Objective of the Auditor


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Objective of the Auditor

To determine whether to use the workof an auditor’s expert and

If using the work of an auditor’s expert,to determine whether that work is

adequate for the auditor’s purposes


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DEFINITION

A dit ’ E t


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Auditor’s Expert

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An individual or organisation possessing expertise in a field other thanaccounting or auditing,

Experts work is used by the auditor to assist the auditor in obtainingsufficient appropriate audit evidence.

An auditor’s expert may be either an auditor’s internal expert (who is a partner orstaff, including temporary staff, of the auditor’s firm or a network firm), or anauditor’s external expert.

M t’ E t


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Management’s Expert

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An individual or organisation possessing expertise in a field otherthan accounting or auditing,

whose work in that field is used by the entity to assist the entity inpreparing the financial statements.


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Nature, Timing and Extent of Audit

Procedures

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The nature ofthe matter towhich that

expert’s workrelates;

The risks ofmaterial

misstatementin the matter

Thesignificance

of thatexpert’s work

The auditor’s

knowledge ofand

experiencewith previous

workperformed bythat expert;

and

Whether thatexpert issubject to the

auditor’sfirm’s quality

controlpolicies andprocedures.

The Competence, Capabilities and Objectivity


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of the Auditor’s Expert

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The auditor shall evaluatewhether the auditor’s expert

has the necessarycompetence, capabilities and

objectivity for the auditor’s

purposes.

In the case of an auditor’s

external expert, theevaluation of objectivity shall

include inquiry regardinginterests and relationshipsthat may create a threat to

that expert’s objectivity.


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Agreement with the Auditor’s Expert

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The nature, scope andobjectives of that expert’s

work

The respective roles andresponsibilities of the

auditor and that expert

The nature, timing andextent of communication

between the auditor andthat expert, including theform of any report to beprovided by that expert

The need for the

auditor’s expert toobserve confidentialityrequirements.


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Evaluating the Adequacy of the

Auditor’s Expert’s Work

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The relevanceand

reasonablenessand their

consistencywith other audit

evidence

use ofsignificant

assumptionsand methods,the relevance

andreasonableness

of thoseassumptions

and methods in

thecircumstance

work involvesthe use of

source data thatis significant tothat expert’s

work, therelevance,

completeness,and accuracy of

that source

data.

Agree with thatexpert on thenature and

extent of furtherwork to be

performed bythat expert

Perform furtheraudit

proceduresappropriate to

thecircumstances.

Reference to the Auditor’s Expert in


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the Auditor’s Report

If the auditor makesreference to the work of an

auditor’s expert in theauditor’s report

such reference isrelevant to an

understanding of amodification to theauditor’s opinion,

the auditor shall indicatein the auditor’s reportthat such reference doesnot reduce the auditor’s

responsibility for thatopinion.

The auditor shall not refer tothe work of an auditor’s

expert in an auditor’s reportcontaining an unmodifiedopinion unless required bylaw or regulation to do so.

If such reference isrequired by law or

regulation,

the auditor shall indicatein the auditor’s reportthat the reference doesnot reduce the auditor’s

responsibility for theaudit opinion

Reporting


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Reporting

Reference to auditor's expert in audit report

if unmodified opinion

- no reference reqd.

- But if reqd by law,heshould state that suchref. does not reduces

auditor's responsibilities

if modified opinion

- reference should begiven in audit report

indicating that such ref.does not reduces

auditor'sresponsibilities.


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Answer


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Answer

a. The auditor can seekaudit evidence from an

expert, eitherindependently or inconjunction with the

client.

b. Such audit evidence

may be in the form ofreports, opinions,

valuations and otherstatements like legalopinions concerning

interpretations ofagreements, statutes,

regulations,notifications, etc.

c. Where the expert’sopinion is inconsistentwith the provisions oflaw, then the auditor

should deal with such

inconsistency suitably.He may do it by

discussing the issuewith the Auditee client

or the concernedexpert.

d. However, the auditorshould ensure that the

expert’s is prima faciedependable under thecircumstances before

relying upon the same.

A 2


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Answer-2

a. The auditor should seethat the advocate’s opinionis prima facie dependable.

b. The situation describedabove clearly brings out theinconsistency between the

opinion and the legalprovisions with regard to

certain items.

Such inconsistency couldhave been detected and

corrected if

the auditor has soughtassurance as to the

appropriateness of thesource data, assumptionsinvolved therein and themethods adopted by the

expert.

c. The auditor could havedetected the inconsistencyin legal opinions if he hadgone through the same

carefully.

This is evident havingregard to the wide differencein the liability worked out by

the assessing authority.

(Rs 5 cr Vs Rs 15 cr)

d. Under the circumstances,the auditor should haverejected the opinion and

insisted upon making properprovision.

The opinion is basicallyerroneous.

Lesson Summary


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Lesson Summary

SA-570 SA-580 SA-600

SA-610 SA-620


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Thank You

Documents

Standards on Auditing Part 6 2