WIRC OF ICAI 16th January, 2009

STANDARDS ON AUDITING (SA)

Paper Presented by :

CA Ismail B. Sonawalla
Office No.1, 1 floor, 166, Samuel Street Mumbai 400 009. Tele: 022-2345 6142 / 2347 8105
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Topics to be covered
A. SA 220 Quality Control for Audit Work B. SA 240 The Auditors Responsibilities Relating to Fraud in an Audit of Financial Statements (Revised) C. SA 300 Planning an Audit of Financial Statements (Revised) Background The Standards on Auditing (formerly known as Auditing Assurance Standards) are issued by Auditing and Assurance Standards Board (AASB) of The ICAI. These standards are in conformity with the corresponding International Standards issued by the International Auditing and Assurance Standards Board (IAASB) established by International Federation of Accountants (IFAC) IAASB has adopted a new format for presentation of International Standards on Auditing (ISAs) issued by it. The standards now being issued / revised by AASB are in line with and also numbered similar to the ISAs. Effective from April 1, 2008 the ICAI has issued Preface to the Standards on Quality Control, Auditing, Review, Other Assurance and Related Services, which sets out the authority of the Standards on Auditing (SAs). The following Standards issued by the AASB under the authority of the ICAI are collectively known as the Engagement Standards (Annexure I) Standards on Auditing (SAs), to be applied in the audit of historical financial information. Standards on Review Engagements (SREs), to be applied in the review of historical financial information. Standards on Assurance Engagements (SAEs), to be applied in assurance engagements, dealing with subject matters other than historical financial information. Standards on Related Services (SRSs), to be applied to engagements involving application of agreed-upon procedures to information, compilation engagements, and other related services engagements, as may be specified by the ICAI. All the SAs are interlinked and are not to be implemented in isolation, but as a cohesive set of guidelines during the course of any audit
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 The number given to the SAs is similar to the numbering system followed for ISAs and at times the standards are also nearly similar.

A.

SA 240 The Auditors Responsibilities Relating to Fraud in an Audit of Financial Statements (Revised) General Effective for audits of financial statements for periods beginning on or after April 1, 2009 Misstatements intentional or unintentional leading to fraud or error Frauds - Misstatements from fraudulent financial report or misappropriation of assets In rare cases does the Auditor detect the fraud generally, has to obtain a reasonable assurance that the accounts are free from misstatements.

Who commits Fraud Lower level staff Senior Management Governor / Board / Owner Why Frauds are committed Incentive or pressure - internal or external bonuses / stock options / earn-out arrangements linked to profits, managements desire for higher ratings, stock market requirements inability to meet exchange listing requirements, shareholders / stakeholders expectation, stakeholders desire to exit the company, need for additional debt or equity, high degree of competition / declining margins, decline in customer demand / stock pile up, product / technology obsolescence, operating losses and negative cash flows, unusual high demand leading to unusual profits as compared to industry Perceived opportunity significant related party transactions not audited or audited by another firm, ability to dominate market or vendors or buyers, highly complex transactions which cannot be easily dissected, use of business intermediaries, oversight is not effective due to poor governance, high turnover, complex organizational structure, systems not implemented or effective, large amounts of cash in hand, poor inventory control small size high value inventory items, easily convertible assets bearer bonds, diamonds, Attitudes / Rationalization Communication / implementation of unethical practices, employing inappropriate means to save tax, lax attitude to internal and external violations / frauds, etc, unrealistic forecast, justification of inappropriate accounting by management, strained relationship between management and auditors,

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Types of Fraud Fraudulent Financial Reporting (Intentional) Manipulation / Falsification / Alteration of accounting records fictitious journal entries or entries not supported by adequate documentation, inappropriate adjustments, significant transactions outside the normal course of business, over/understatement of revenues through improper shifting of revenue entries, intentional reclassification of entries at the time of consolidation, deliberate nonreconciliation of various accounts banks, debtors, creditors Misrepresentation or intentional omission of significant information discounts, bad debts, returns, disputes, suits, Intentional misapplication of accounting principles complex or unusual transactions, significant changes in assumptions relating to estimates, Misappropriation of Assets Diverting receipts to other accounts Stealing physical assets Payment for goods / services not received or excessive payments Use of assets for personal / non-business use Implementation Process Auditor to maintain attitude of Professional Skepticism Questioning mind and critical assessment Cross verification internal and external Discussion amongst engagement team for unusual changes in lifestyle / attitude of employees / management, management access to cash SA-315 Risk Assessment SA-330 Auditors response to assessed risk evaluation of the assessed risk qualitative judgement. Audit procedure to respond to assessed risk computer assisted audit techniques, manual verification Evaluation of Audit Evidence through - SA-520 Analytical Procedures SA-610 Work of Internal Auditor Use services of expert, if deemed necessary Information of Managements system for risk assessment and systems established / steps taken

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Outcome Management representations written confirmations Communication to Management / Regulatory authorities (RBI) - intimation to management and if required regulatory authorities Inability to continue engagement due to prevalence of significant risk or fraud, managements inaction towards risk assessed, management / board incompetent or concern about their integrity, management / board suspected or found to be involved in fraud.

B.

Documentation

S A 300 Planning an Audit of Financial Statements (Revised) (formerly AAS-8) Generally on the lines of ISA 300 Effective for audits of financial statements for periods beginning on or after April 1, 2008 Objective to plan the audit, so that it is performed in an effective manner Preliminary engagement activities Quality Control for Audit Work and Evaluate ethical requirements (SA-220), establish independence of auditor (SA-210) Planning establish overall audit strategy scope, timing and direction of the audit characteristics of the engagement, reporting objectives, resources required Compliance of SAs 315, 330 assessing the risk and the responses Documentation

C.

SA 220 Quality Control for Audit Work (formerly known as AAS-17) Effective for all audits relating to accounting periods beginning on or after April 1, 1999 Purpose to establish standards on quality control - policies and procedures To be implemented at the level of audit firm and individual audits. Audit Firm Level Professional requirement independence, integrity, objectivity, confidentiality, professional behaviour Skills and competence Assignment, delegation, consultation and monitoring Evaluation of clients Individual Audits Implementation of quality control procedures appropriate to individual audit

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Annexure - I

S.N.

S.A.NO.

PARTICULARS

100 999 100 199

STANDARDS ON AUDITING (SAs) Introductory Matters

200 - 299
1 2 3 4 5 6 7 8 9 200 200A 210 220 230 (R) 240 (R) 250 (R) 260 (R) 299

General Principles and Responsibilities

Basic Principles Governing an Audit Objectives and Scope of the Audit of Financial Statements Terms of Audit Engagement Quality Control for Audit Work Audit Documentation (Revised) The Auditors Responsibilities Relating to Fraud in an Audit of Financial Statements (Revised) Consideration of Laws and Regulations in an Audit of Financial Statements (Revised) Communication of Audit Matters with Those Charged with Governance (Revised) Responsibility of Joint Auditors

300 - 499
10 11 12 13 14 300 (R) 315 320 330 402

Risk Assessment and Response to Assessed Risks

Planning an Audit of Financial Statements (Revised) Identifying and Assessing the Risk of Material Misstatement Through Understanding the Entity and its Environment (Newly issued) Audit Materiality The Auditors Responses to Assessed Risks (Newly issued) Audit Considerations Relating to Entities Using Service Organisations

500 - 599
15 16 17 18 19 20 21 22 23 24 25 500 (R) 501 505 510 520 530 (R) 540 (R) 550 560 (R) 570 (R) 580 (R)

Audit Evidence
Audit Evidence (Revised) Audit Evidence - Additional Considerations for Specific Items External Confirmations Initial Engagements Opening Balances Analytical Procedures Audit Sampling (Revised) Auditing of Accounting Estimates, Including Fair Value Accounting Estimates and Related Disclosures (Revised) Related Parties Subsequent Events (Revised) Going Concern (Revised) Written Representations (Revised)

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S.N.

S.A.NO.

PARTICULARS

600 - 699
26 27 28 600 610 620

Using Work of Others

Using the Work of Another Auditor Relying Upon the Work of an Internal Auditor Using the Work of an Expert

700 - 799
29 30 31 700 710 720

Audit Conclusions and Reporting

The Auditor's Report on Financial Statements Comparatives The Auditors Responsibility in Relation to Other Information in Documents Containing Audited Financial Statements

800 - 899 2000 - 2699 3000 - 3699

Specialized Areas Standards on Review Engagements (SREs) Standards on Assurance Engagements (SAEs) 3000 - 3399 Applicable to All Assurance Engagements 3400 - 3699 Subject Specific Standards

4000 - 4699

Standards on Related Services (SRSs)

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