auditing and assurance standard

8/7/2019 Auditing and Assurance Standard

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Auditing andAssurance Standard

YOGITA


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Introduction

Points to note about the auditing and assurance standard

The central council of icai has approved an auditing and assurance standard' that

establishes standards on the professional responsibilities of a member in practice

(read accountant) while undertaking an engagement to compile financial statements

or information.

Engagements to provide limited assistance to the client in the area of preparation of

financial statements (for example selection of an appropriate accounting policy) are

unlikely to be considered as engagements to compile financial information.

In all circumstances, when an accountant's (member in practice) name is associated

with financial information compiled by him, the accountant would be required to

issue a report.

The auditing and assurance standard of icai is mandatory on all the members of icai.

In the auditing and assurance standard, the institute is likely to specify the form and

content of the report issued in connection with a compilation engagement so that the

association of the name of the accountant (member in practice) with the financial

statements is not misconstrued by the user of the statements as the same as having

been audited by the person giving the report.

A compilation engagement is quite different from an audit work. The objective ofthis is for the accountant to use accounting expertise, as opposed to auditing

expertise, to collect, classify and summarise financial information. The procedures

employed in compilation are not designed and do not enable an accountant to


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express any assurance on the financial information.

Even as a member is expected to comply with certain ethical principles such as

integrity, objectivity, confidentiality and professional conduct in such engagements,

it is learnt that `independence' would not be a requirement for a compilation

engagement.

Where an accountant is not independent, the icai's auditing and assurance standard is

likely to stipulate that a statement to that effect should be made in the accountant's

report.

AAS -1 basic principles governing an audit

AAS-1 describes the basic principles which govern the auditors professional

responsibilities and these should be complied with whenever any audit is carried out. The

principles laid down in aas-1 may be summarised as follows:

1) integrity, objectivity and independence:- the auditor should be straightforward, honest

and sincere in his approach to his work. He should maintain an impartial attitude and be,

and also appear to be, free of any interest which might, irrespective of its actual effect, beregarded as inconsistent with independence and integrity.

2) confidentiality:- the auditor should keep the information acquired by him in the course

of his work in strict confidence and not disclose it to a third party, unless his client

specifically permits him to do so, or where it is his legal or professional duty to disclose it.

3) skills and competence:- only persons with adequate training, experience and

competence in auditing should perform an audit and prepare audit reports with due

professional care.

4) work performed by others:- the auditor will be responsible in respect of his opinion on

the financial information even where he has delegated work to his assistants, or used the

work performed by other auditors or experts to form such opinion. He may rely on the work


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done by others, provided he has exercised due care and skill and there is nothing to

persuade him not to place such reliance. In case branch audit is performed by auditors

appointed by the company, he should make a reference to this fact in his report.

5) documentation:- the auditor should preserve all documents relating to important matterswhich may be cited as an evidence of the audit having been carried out in accordance with

the basic principles.

6) planning:- the auditor should plan his work such that audit may be conducted in an

effective and efficient manner. The audit plan should be used on

a) The clients accounting system, policies and internal control procedures ;

b) The extent to which internal control system may be relied upon ;

c) Determination of appropriate audit procedures ; and

d) Co-ordination of work. The audit plan should be revised as and when necessary.

7) audit evidence:- the auditor should obtain sufficient appropriate evidence to form his

opinion on the financial information. Audit evidence should be obtained by means of

compliance and substantive procedures. Compliance procedures will indicate whether the

internal controls are operating as stated. Substantive procedures will provide evidence of-

the completeness, accuracy and validity of the data produced by the accounting system.

8) accounting system and internal control:- maintenance of an adequate accounting

system incorporating appropriate internal controls is the responsibility of the management.

The auditor should see that the accounting system is adequate and that all accounting

information which ought to be recorded has been recorded. The auditor should get to know

the accounting system and the relevant internal controls. He should study and evaluate the

operation of the internal controls to be relied upon by him so as to determine the nature,

timing and extent of other audit procedures.

9) audit conclusions and reporting:- the auditor should express his opinion on the

financial information on the basis of a review and assessment of the conclusions drawn

from the audit evidence as also his knowledge of the business. Such review and assessment

will involve the forming of an overall conclusion as regards the following:


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a) Whether the financial information has been prepared using acceptable accounting

policies, which have been consistently applied;

b) Whether the financial information complies with the relevant regulations and

statutory requirements;

c) Whether there is adequate disclosure of all material matters relevant to proper

presentation of the financial information, subject to statutory requirements, where

applicable.

The audit report should contain a clear written expression of opinion on the financial information.

The form and contents of the report should be as prescribed in the relevant law, regulation or

agreement.

AAS -2:objective and scope of the audit of financial

statements

AAS-2 describes the overall objective and scope of the audit of general purpose financial

statements of an enterprise by an independent auditor. This statement should be read with

the preface to the statements on standard auditing practices issued by the institute. The

term, general purpose financial statements will include balance sheet, statement of profit

and loss, and other statements and explanatory notes which form part thereof, issued for the

use of shareholders/members, creditors, employees and the public at large. Aas-2 may be

summarised as follows:

1) objective of an audit:- the objective of an audit of financial statements is to enable an

auditor to express an opinion on such financial statements. For this purpose, it is necessary

that the financial statements are prepared as per recognised accounting policies and

practices and relevant statutory requirements, if any.

2) responsibility for the financial statements:- the responsibility for preparation of thefinancial statements is that of the management of the enterprise. The auditor is only

responsible for forming and expressing his opinion on those financial statements. The

managements responsibility in this regard would include


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a) Maintenance of adequate accounting records and internal controls ;

b) Selection and application of accounting policies ; and

c) Safeguarding of the assets of the enterprise. The management is not relieved of these

responsibilities despite the audit of financial statements.

3) scope of an audit:-

The scope of an audit is determined by the auditor, having regard to

a) The terms of the engagement ;

b) The requirements of the relevant legislation ; and

c) The pronouncements of the institute. However, the terms of the engagement cannot

restrict the scope of an audit in respect of matters which are prescribed by the

relevant legislation and pronouncements of the institute.

the audit should adequately cover all aspects of the enterprise which are relevant to

the financial statements under audit. The auditor should be reasonably satisfied that the

information contained in the accounting records, etc. Is reliable and sufficient for the

preparation of financial statements in respect of which he is to form his opinion. He should

also see that the disclosure of information is as per the legal requirements, if any.

4) the reliability and sufficiency of the information will be assessed by :-

a) Study and evaluation of the accounting systems and internal controls which are to be

relied upon so as to determine the nature, extent and timing of audit procedures ; and

b) Carrying out other necessary tests, enquiries, and verification procedures.

5) propriety of disclosure of information in the financial statements will be determined

by:-

a) Examining whether the financial statements properly summarise the transactions

and events recorded in the accounting records, etc and

b) Considering the managements judgements as regards preparation of financial

statements which will involve an assessment of selection and application of


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accounting policies, the manner of classification of information, and adequacy of

disclosure.

the auditor follows certain audit procedures so as to satisfy himself that the financial

statements reflect a true and fair view of the financial position and operating results of theenterprise. He recognises that because of the limitations inherent in the test checks, audit

and any system of internal control, some material misstatement may remain undiscovered.

It is true that in many situations a material misstatement by management may be discovered

in the course of an audit, but such discovery is not the main objective of audit and the

auditors programme of work is also not specifically designed for this purpose. However,

while an audit does not ensure the discovery of fraud or errors, it is the duty of the auditor

to extend his procedures if he has any indication that some fraud or error which is likely to

result in material misstatement, may have taken place.

the auditor is primarily concerned with the items which, whether individually or as a

group, are material in relation to the affairs on an enterprise. Material items are those which

might influence the decision of the user of the financial statements. However, in the absence

of any definite standard to judge materiality, the auditor should make a decision about it on

the basis of his professional experience and judgement. The auditor is not expected to

perform duties which are outside the scope of his competence, such as, determining

physical condition of certain assets. If there are any constraints as regards the scope of

audit, which impair the auditors ability to express an unqualified opinion on the financial

statements, he should set them out in his report and render a qualified opinion or a

disclaimer of opinion, as deemed appropriate.

AAS 3: documentation

according to aas-1, the auditor should document matters which are important in

providing evidence that the audit was carried out in accordance with the basic principles.

Aas-3, issued by the council of the icai, seeks to amplify the above principle, and the same

may be summarised as follows:


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Documentation, for the purpose of aas-3, refers to the working papers prepared or obtained

by the auditor and retained by him in connection with the performance of his audit.

i. Working papers should record the audit plan, and the nature, timing and extent of

auditing procedures performed, and the conclusions drawn from the evidenceobtained.

ii. Working papers should be designed and properly organised to meet the

circumstances of each audit and the auditors needs. They should also be

standardised so as to improve the efficiency of their preparation and review, and to

facilitate delegation and control of work.

iii. While working papers should be adequately complete and detailed to enable the

auditor to have an overall understanding of the audit, the extent of documentation is

a matter of professional judgment and it is neither necessary nor practical to

document every observation, consideration or conclusion in the working papers.

iv. All significant matters which require the exercise of judgment and the auditors

conclusion as regards them, should be included in the working papers.

v. The auditor should satisfy himself that the schedules, analyses and other working

papers prepared by the client and utilised in the course of audit have been properly

prepared.

vi. In the case of recurring audits, some working paper-files may be classified as

permanent audit files and current audit files. Permanent audit files should be

updated with information primarily relating to the audit of a single period.

1)the permanent audit file normally includes :-

Information concerning the legal organisational structure of the entity, such as

memorandum and articles of association in the case of a company, and the relevant

regulations in the case of a statutory corporation.

a) Extracts or copies of important legal documents, agreements, and minutes relevant

to the audit.


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b) A record of the study and evaluation of internal controls related to the accounting

system, whether in the form of narrative descriptions, questionnaires, flow charts,

etc.

c) Copies of audited financial statements for previous years.

d) Analysis of significant ratios and trends.

e) Copies of management letters issued by the auditor, if any.

f) Record of communication with the retiring auditor, if any, before acceptance of the

appointment as auditor.

g) Notes regarding significant accounting policies.

h) Significant audit observations of earlier years.

2) the current audit file normally includes:-

(a) correspondence relating to acceptance of annual reappointment.

(b) extracts of important matters in the minutes of board meetings and general meetings, as

are relevant to audit.

(c) evidence of the planning process of the audit and audit programme.

(d) analysis of transactions and balances.

(e) a record of the nature, timing and extent of auditing procedures performed, and the

results of such procedures.

(f) evidence that the work performed by assistants was supervised and reviewed.

(g) copies of the communications with other auditors, experts and other third parties.

(h) copies of letters or notes concerning audit matters communicated to or discussed with

the client, including the terms of the engagement and material weakness in relevant internalcontrols.

(i) letters or representation or confirmation received from the client.


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(j) conclusions reached by the auditor concerning significant aspects of the audit, including

the manner in which exceptional and unusual matters, if an disclosed by the auditors

procedures were resolved or treated.

(k) copies of the financial information being reported on, and the related audit reports.

3) ownership and custody of working papers:-

A) working papers are the property of the auditor though he may, at his discretion, make

any portions or extracts from his working papers available to the client.

B) the auditor should adopt reasonable procedures for custody and confidentiality of his

working papers and should retain them for a period of time sufficient to meet the needs of

his practice and satisfy any pertinent legal or professional requirements of records retention.

AAS 4: fraud and error

AAS-4 The purpose of, issued by the council of the icai, is to discuss the auditors

responsibility for the detection of material mis-statements resulting from fraud and error

when carrying out an audit of financial information (including financial statements) as

defined in aas-2, and to provide guidance as to the procedures that the auditor should

perform when he encounters circumstances that cause him to suspect, or when he

determines that fraud or error has occurred.

The term fraud refers to an intentional misrepresentation of financial information by one

or more individuals among the management, employees, or third parties. A fraud may

involve

a) Manipulation, falsification or alteration of records or documents;

b) Misappropriation of assets;

c) Suppression or omission of the effects of transactions from records or documents;

d) Recording of transactions without substance; or

e) Misapplication of accounting policies.


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The term error refers to unintentional mistakes in financial information. Such as,

a) Mathematical or clerical mistakes in the underlying records and accounting data;

b) Oversight or misinterpretation of facts; or

c) Misapplication of accounting policies.

1) responsibility for detection of fraud and error

prevention and detection of fraud and error is the responsibility of the management,

and for this purpose it should implement and continuously operate an adequate system of

internal control. But such a system can only reduce, and not eliminate, the possibility of

fraud and error. In forming his opinion as regards financial information, the auditor carries

out procedures to obtain evidence that will provide reasonable assurance that the financial

information is properly stated in all material respects. The auditor seeks to reasonably

assure himself that fraud or error which may be material to the financial information has not

occurred or that, if it has occurred, the effect of fraud is properly reflected in the financial

information, or that the error has been corrected. The audit should therefore be properly

planned such that there is reasonable expectation of detecting material mis-statement in

financial information resulting from fraud and error.

an audit suffers from certain inherent limitations. For example, firstly, the test-

nature of an audit will involve judgment as to the areas to be tested and the number of

transactions to be examined. Moreover, audit evidence in many cases is persuasive, and not

conclusive. Therefore, it should be recognised that some material mis-statements in

financial information may remain undetected. Secondly, material mis-statements resulting

from fraud are more difficult to detect than those resulting from error, because fraud will

usually involve acts such as collusion, forgery, non-recording of information and

misrepresentation to the auditor with a view to concealment of fraud. The auditor shouldplan and perform his audit assuming that there may be events and conditions leading him to

question whether fraud or error does exist. If he adheres to the basic principles governing an

audit, he will not be responsible for any subsequent discovery of material misstatement of


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financial information resulting from fraud or error. The test of adherence to the basis

principles will be

a) Whether the procedures undertaken by him were adequate in the circumstances; and

b) Whether the audit report c based on the results of these procedures.

2) procedure to be followed when there is indication that fraud or error may exist

if the auditor believes that the suspected fraud or error can materially affect the

financial information, he should appropriately modify his procedures or introduce new

ones, based on his judgement as to

a) The types of fraud or error that could occur;

b) The relative risk of their occurrence; and

c) The likelihood that a particular type of fraud or error could materially affect the

financial information.

if the suspicion of fraud or error is confirmed as a result of such procedures, he

should see that the effect of fraud is duly reflected in the financial information or that the

error is corrected.if there is no audit evidence either to confirm or dispel a suspicion of

fraud, the auditor should consider as to how this will affect the financial information and his

report. He should also consider the relevant laws and regulations and, if necessary, obtain

legal advice before rendering his report or before withdrawing from the engagement.

any instance of fraud or error should not be assumed to be an isolated occurrence,

unless there is a clear indication to that effect. If the fraud or error could have been

prevented or detected by the internal control system, the auditor should re-evaluate the

system and adjust his audit procedures accordingly. If a fraud or error involves a member of

the management, the auditor should reconsider the reliability of any representation made by

that person.

AAS 5: audit evidence


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AAS-5 The is in accordance with the evidence to be submitted along with the audit report

and it may be summarized as follows:

1) sufficient and appropriate audit evidence:-

the inter-related concepts of sufficiency and appropriateness refer to the

quantum and relevance and reliability of audit evidence. They apply to evidence obtained

through both compliance and substantive procedures. Evidence obtained through

compliance procedures is with a view to assuring the existence, effectiveness and continuity

of the internal control system in the enterprise under audit. Evidence obtained through

substantive procedure is with a view to assurance as regards existence of assets and

liabilities, occurrence of transactions during the relevant period, complete record of assets,

liabilities and transactions, appropriate valuation of assets and liabilities and presentation,

classification and disclosure of items. To be able to form his opinion to the financial

information, the auditor should ensure that he has obtained sufficient appropriate evidence.

Such evidence may be obtained on a selective basis, either by means of judgmental or

statistical sampling procedures.

the auditors judgement as regards what is sufficient appropriate audit evidence will be

influenced by the following factors:-

1. The degree of risk of mis-statement which may be affected by factors such as:

The nature of the item;

The adequacy of internal control;

The nature or size of the business and carried on by the enterprise;

Situations which may exert an unusual influence on management;

The financial position of the enterprise.

2. The materiality of the item.

3. The experience gained during previous audits.


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4. The results of auditing procedures, including fraud or error which may have been

found.

5. The type of information available.

6. The trend indicated by accounting ratios and analysis.

the reliability of audit evidence will depend on(a) its source, e.g., internal or

external; and (b) its nature, e.g., visual, documentary or oral. External evidence, such as,

confirmations received from third parties, is more reliable than internal evidence. Reliability

of internal evidence will depend on the effectiveness of internal control. Documentary

evidence is more reliable than oral evidence. Reliability of evidence obtained by the auditor

himself is greater than that obtained through the enterprise.

consistency in audit evidence should assure the auditor both as to its sufficiency and

appropriateness. On the other hand, if evidence obtained from one source is inconsistent

with that obtained from another, suitable procedures may have to be undertaken not only for

the evidence in question but also for evidence obtained from other sources. The auditor

should be thorough in his efforts to obtain evidence and objective in its evaluation. In case

of any doubt as regards an assertion of material significance, the auditor should obtain

sufficient appropriate evidence to remove the doubt, and if he is unable to do so, he should

not express an unqualified opinion.

2) obtaining audit evidence:- audit evidence may be obtained through compliance and

substantive procedures by any of the following methods:

(a) inspection:- it involves examination of records, documents or tangible assets.

Documentary evidence may originate from third parties or from the enterprise under audit

and it may be held by either of them. Inspection of tangible assets can only provide

evidence of their existence, but not necessarily as to their ownership or value.

(b) observation:- it consists of witnessing a process or procedure being performed by

others, such as, counting of inventories by the staff of the client.


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(c) inquiry and confirmation:- an inquiry may be formal or informal, and written or oral.

It may be addressed to persons inside or outside the enterprise. Who can provide

appropriate information, whether new or confirmatory.

(d) computation:- it consists of checking arithmetical accuracy of source documents oraccounting records, or making independent calculations.

(e) analytical review:- it consists of studying significant ratios and trends so as to

investigate unusual fluctuations and items.

AAS 6: study and evaluation of accounting system and

related internal controls in connection with an audit

1) introduction:-

the responsibility for maintaining an adequate accounting system and internal

controls appropriate to the size and nature of the business rests with the management of the

enterprise. The auditor should acquaint himself with the accounting system and study and

evaluate the related internal controls to assure himself reasonably that all the accounting

information to be recorded has in fact been recorded. The nature, timing and extent of his

audit procedures to assess the reliability and sufficiency of the financial information, will

depend on the adequacy of the accounting system and effectiveness of the internal controls.

an accounting system may be defined as the series of tasks in an enterprise by which

transactions are processed as a means of maintaining financial records. It should recognise,

calculate, classify, post, analyse, summarise and report the transactions.

the system of internal control is the plan of the organisation and all the methods and

procedures adopted by the management of an enterprise to accomplish the following

objectives

a) Execution of transactions in accordance with managements general or specific

authorisation;


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b) Prompt and correct recording of all transactions so as to enable preparation of

financial information as per recognised accounting policies and practices and

relevant legal requirements, if any, and to maintain accountability of assets;

c) Safeguarding of assets from unauthorised access, use or disposition;

d) Comparison of recorded assets with the existing assets at reasonable intervals so as

to enable appropriate action in the case of any difference.

the effectiveness of internal control procedures depends on the environment in

which the internal control system operates. But a strong environment with effective

budgetary and internal audit system may not necessarily ensure an effective internal control

system. The internal control environment may be affected by the following factors

a) Organisation structure, i.e., delegation of authority and assignment of functions so

as to facilitate the working of the internal control system.

b) Management supervision, i.e., a regular review of the adequacy of the internal

control system with a view to ensuring effective operation of all significant controls.

Internal audit system can also take care of such review.

c) Personnel, i.e., competence and integrity of the persons who are responsible for

establishment and operation of the internal control system.

2) audit procedures:-

the study and evaluation of internal controls is with a view to determining their

reliability and to enable the auditor to perform the necessary procedures so as to form his

opinion on the financial information. Effectiveness of the internal control procedures is an

assurance that the accounting system is fulfilling its objectives. Compliance procedures are

undertaken to obtain reasonable assurance as regards effectiveness of the internal controls

on which audit reliance is to be placed. Substantiative procedures are undertaken to obtain

evidence as regards completeness, accuracy and validity of the data produced by the

accounting system. While compliance procedures and substantive procedures can be

distinguished on the basis of their objectives, the results of each may contribute to the

purposes of the other.


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3) review and preliminary evaluation:-

the auditor should review the accounting system and the related internal controls to

understand the flow of transactions and the specific control procedures to identify the

controls which could be relied upon during the audit, keeping in view the size of theenterprise and the extent of controls. The review will be mainly by way of enquiries

addressed to personnel at various levels in the enterprise, together with reference to

documentation, e.g., procedure manuals, flow charts, job descriptions, etc. In a continuing

engagement, knowledge about the control procedures should be regularly updated.

a certain number of representative transactions should be traced through the

accounting system so as to understand the system and the related internal controls.

Information relating to the internal controls may be recorded by way of narrative

descriptions, questionnaires and flow charts, as the auditor deems appropriate.

preliminary review should be based on the assumption that the controls operate

generally as described, and they function effectively throughout the period of intended

reliance. The purpose of the review is only to identify the specific controls which can

continue to be relied upon. The auditor may decide not to rely on any particular controls

because of their defective design or because the effort required to test whether they are

being complied with, will not be commensurate with the reduction in effort to be achieved

by placing reliance on them.

4) compliance procedures:-

compliance procedures performed by an auditor have two objectives

(a) that the internal controls intended to be relied upon by him operate generally as

identified; and

(b) that they function effectively during the period of intended reliance, though this does not

rule out occasional deviations.

deviations from control procedures may be due to changes in key personnel,

seasonal fluctuations in volume of transactions, and human error. Compliance procedures


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should appropriately take into account such changes and fluctuations. Results of compliance

procedures would enable the auditor to evaluate if the internal controls are adequate for his

purpose. If the auditor concludes that it will not be appropriate to rely on any internal

controls to the extent intended, he should see if there are any alternative controls which may

be relied upon for the purpose. He may also modify the nature, timing or extent of his

substantive procedures. Compliance procedures should normally be applied to selected

transactions from the entire period under audit. If the transactions of a shorter period only

have been tested, the auditor should see what needs to be done to obtain reasonable

assurance as regards transactions of the rest of the period.

AAS 7: relying upon the work of an internal

auditor

internal audit function constitutes a separate component of internal control and its

objective is to determine whether other internal controls are well designed and properly

operated. Aas-7 seeks to provide guidance as to the procedures to be applied by the external

auditor in assessing the work of the internal auditor for the purpose of placing reliance upon

that work. The manufacturing and other companies (auditors report) order, (maocaro)

1988, has invested the internal audit function with special importance in the sense that, in

the case of every company to which the maocaro applies, the statutory auditor is to state

whether the internal audit system is commensurate with the size and nature of its business.

Much of the work of the internal auditor can be useful to the statutory auditor in his

examination of the financial information, including financial statements, though the

statutory auditor alone will be responsible for his report and for determination of the nature,

timing and extent of the auditing procedures.

1) relationship between internal and external auditors:-

i. Internal and external audit functions are different as regards their role and

objectives. However, there is often similarity between the means employed by them

to achieve their objectives and hence the external auditor can usefully draw on the


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work of the internal auditor to determine the nature, timing and extent of his

compliance and substantive procedures.

ii. However, the auditor should carefully evaluate the relevance of the internal control

system to his own examination.

iii. Internal audit function cannot be expected to have the same degree of independence

as is required for the external auditor in expressing his opinion. In any case, the

external auditor alone will be responsible for his report and his reliance on the

internal auditors work will in no way reduce this responsibility.

iv. If the external auditor intends to rely upon the work of the internal auditor, he

should ascertain the tentative internal audit plan for the year and discuss it with him

at an early stage to determine the areas where reliance may be placed on his work.

v. To ensure effective co-ordination, the external and internal auditor should meet at

appropriate intervals. While the external auditor should be advised of, and have

access to internal audit reports and any other information of relevance to him, he

should on his part inform the internal auditor of any matter of significance to the

latters work.

2) evaluating specific internal audit work:-

if the external auditor intends to rely upon specific internal audit work as a basis for

modifying the nature, timing and extent of his procedures, he should revise the internal

auditors work taking into account the following factors:-

a) The scope of work and related audit programme are adequate for the external

auditors purpose.

b) The work was properly planned and the work of assistants was properly supervised,

reviewed and documented.

c) Sufficient appropriate evidence was obtained to afford a reasonable basis for the

conclusions reached.


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d) Conclusions reached are appropriate in the circumstances and any reports prepared

are consistent with the results of the work performed.

e) Any exceptions or unusual matters disclosed by the internal auditors procedures

have been properly resolved.

3) the external auditors conclusions as to the review of the specific work should be

documented.

the external auditor should also test the work of the internal auditor on which he

intends to rely. The nature, timing and extent of his tests will be determined on the basis of

the materiality of the area concerned to the financial statements taken as a whole and the

results of his evaluation of the internal audit function and of the specific audit work.

AAS 8: audit planning

aas-8 applies to the planning process of the audit of financial statements as also

other financial information in the context of recurring audits. In a first audit, the process

may need to be extended. Planning should be continuous, involving development of an

overall plan for the expected scope and conduct of the audit and an audit programme

showing the nature, timing and extent of audit procedures. Changes in conditions or

unexpected results of audit procedures may necessitate revision of the audit plan and

programme and the auditor should document the reasons for any significant changes. Audit

planning helps to ensure that appropriate attention is devoted to important areas of the audit,

to see that potential problems are promptly identified, to ensure that the work is completed

expeditiously, to utilise the assistants properly; and to coordinate the work done by other

auditors and experts.

The factors to be considered while planning the audit are

a) Complexity of the audit;

b) Environment in which the entity operates;

c) Previous experience with the client; and


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d) Knowledge of the clients business.

Responsibility for the overall audit plan is that of the auditor though he may discuss the

plan and the audit procedures with the client.

1) knowledge of the clients business:-

This will help the auditor to identify the events, transactions and practices that, in his

judgment, may have a significant effect on the financial information. Such knowledge can

be derived from

a) The clients annual reports to shareholders;

b) Minutes of meetings of the shareholders, board of directors and important

committees;

c) Internal financial management reports, including budgets;

d) Previous years audit working papers;

e) Firms personnel responsible for non-audit services;

f) Discussions with client; (g) the clients policy and procedures manual;

g) Relevant publications of the institute, professional bodies, trade journals, magazines,

newspapers, etc.;

h) The state of the economy and its effect on the clients business; and

i) Visits to the clients premises and plant facilities.

2) development of an overall plan:-

The following matters should be considered while developing the overall audit plan

a) Terms of the audit engagement and statutory responsibilities.

b) Nature and timing of reports or other communication.


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c) Relevant legal or statutory requirements.

d) Accounting policies of the client and any changes therein.

e) Effect of new accounting or auditing pronouncements on the audit.

f) Identification of significant audit areas.

g) Conditions requiring special attention, e.g., possibility of material error or fraud, or

transactions with people in whom directors, etc. Are interested.

h) Degree of reliance as regards accounting system and internal control.

i) Possible rotation of emphasis on specific audit areas.

j) Nature and extent of audit evidence to be obtained.

k) Work of internal auditors and the extent of their involvement in the

l) Involvement of other auditors in the audit of subsidiaries or branches of client.

m) Allocation of work between joint auditors and the procedures for its control and

review.

n) Establishing and co-ordinating the staff requirements.

the overall plan should be documented developing the audit programme. The audit

programme should be in writing, setting forth the procedures that are needed to implement

in the audit plan. In preparing the audit programme, the auditor may wish to rely on certain

internal controls which according to him would make the conduct of audit efficient and

effective, however, if there are other more efficient ways of obtaining sufficient appropriate

audit evidence, he may also decide not to rely on the internal control.

the auditor normally has flexibility in deciding when to perform audit procedures.

However, in some cases, there may be no discretion as to timing, such as, observing the

stock-taking by the clients personnel, verifying the securities and cash balances at the year-

end. The audit planning ideally commences at the conclusion of the previous years audit,


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and along with the related programmes, it should be reconsidered for modification as the

audit progresses. Such consideration is based on the auditors review of the internal control,

his preliminary evaluation, and the result of his compliance and substantive procedures.

AAS 9: using the work of an expert

aas-9. using the work of an export as issued by the council of the icai is concerned

with determining the need to use the work of an expert, his skills, competence and

objectivity and evaluation of his work and its mention in the audit report. A summarised

version of aas-9 is as follows:

an auditor is not expected to have the expertise associated with another profession or

occupation, such as, an actuary or engineer. According to aas-1, basic principles governing

an audit, he is entitled to rely on work performed by others in specialised areas, provided

he exercises due skill and care while placing such reliance. An expert or specialist for

the purpose of aas-9 is a person or firm or association of persons possessing special skill,

knowledge and experience in a particular field, other than accounting and auditing. An

expert may be engaged or employed by the client or by the auditor. Where the auditor uses

the work of an expert employed by him, he is using that work in the employees capacity as

an expert, rather than delegating the work to an assistant on audit. Accordingly, he should

apply relevant test procedures so as to satisfy himself as to the work and findings of the

employee.

1) determining the need to use the work of an expert:- during the audit, an auditor may

seek to obtain, either independently or with the client, audit evidence by way of reports,

opinions, valuations and statements of experts, such as, value of certain types of assets,

quantity or physical condition of assets, actuarial valuation or legal opinions. Decision as to

use of lhe work of an expert should be based on materiality of the item being examined,nature and complexity of the item, etc.


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2) skills and competence of expert:- the auditor should satisfy himself as to the skills and

competence of the expert by considering the experts professional qualifications, and his

experience and reputation in his field of work.

3) objectivity of the expert:- the auditor should consider the objectivity of the expert. Such

objectivity may be affected if the expert is an employee of the client or is otherwise related

to the client.

4) evaluation of the work of an expert:-

The auditor should gain knowledge as to

a) The objectives and scope of the experts work;

b) General outline as to specific items in the experts report;

c) Confidentiality of the experts report, including the possibility that it may be

communicated to third parties;

d) Experts relationship with the client; and

e) Confidentiality of the clients information used by the expert.

the auditor should seek reasonable assurance that the experts work constitutes

appropriate audit evidence in support of the financial information by considering the source

data, assumptions and methods used by him, and that it is properly reflected in the financial

information. The auditor may also make enquiries of the expert to know whether the source

data used by him are sufficient, relevant and reliable and evolve his own procedures to

satisfy himself that the data are indeed appropriate. True, it is the responsibility of the

expert to ensure appropriateness and reasonableness of his methods and assumptions and

their applicability. However, the auditor is required to gain an understanding of those

assumptions and methods to determine whether the same are reasonable on the basis of his

own knowledge of the clients business and the results of his audit procedures. If the work

of an expert does not support the related representations in the financial information, the

auditor should attempt a resolution of the inconsistency by discussion with the client and


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the expert. To this end, he may apply additional procedures, including engaging another

expert.

5) reference to expert in audit report:- in the case of an unqualified opinion, the auditor

should not refer to the work of an expert in his report. However, if he decides not to express

an unqualified opinion, he may refer to or describe the work of the expert to explain the

nature of his reservation. If while doing so, the auditor considers it appropriate to disclose

the identity of the expert, he should obtain prior consent of the expert.

AAS -10 : using the work of another auditor

aas-10, as issued by the council of the icai, is concerned with using the work of

another auditor. It will become effective from 1st april 1995, and replace the statement on

the responsibility of joint auditors earlier issued by icai. Aas-10 discusses the procedures to

be applied in situations where an independent auditor (principal auditor), reporting on the

financial statements of an entity. Uses the work of another independent auditor (other

auditor) with respect to the financial statements of one or more divisions or branches

(referred to herein as components) included in the financial statements of the entity. This

statement also discusses the principal auditors responsibility in relation to his use of the

work of the other auditor. The statement does not deal with those instances where two or

more auditors are appointed as joint auditors, nor does it deal with the auditors relationship

with a predecessor auditor.

when the principal auditor concludes that the financial statements of a component

are immaterial, the procedures outlined in this statement do not apply. When several

components, immaterial in themselves, are together material in relation to the financial

statements of the entity as a whole, the procedures outlined in this statement should be

considered.

1) principal auditors procedures:-


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in certain situations, the statute governing the entity may confer a right on the

principal auditor to visit a component and examine the books of account and other records

of the said component, if he thinks it necessary to do so. Where another auditor has been

appointed for the component, the principal auditor would normally be entitled to rely upon

the work of such auditor unless there are special circumstances to make it essential for him

to visit the component and/or to examine the books of account and other records of the said

component.

when using the work of another auditor, the principal auditor should ordinarily

perform the following procedures:

a) Advise the other auditor of the use that is to be made of his work and report. The

principal auditor should also inform the other auditor of other matters related

thereto, such as areas requiring special consideration and the time-table for

completion of the audit. He should make sufficient arrangements for the co-

ordination of their efforts at the planning stage of his audit.

b) Advise the other auditor of the significant accounting, auditing and reporting

requirements and obtain representation as to compliance with them.

c) Ascertain from the other auditor any limitation on the scope of his work imposed by

the terms of engagement of the other auditor.

d) Consider the significant audit findings of the other auditor.

the principal auditor is not required to evaluate the professional competence or

independence of the other auditor, except in situations which create doubt about the

professional competence or independence of the other auditor. The principal auditor might

discuss with the other auditor the audit procedures applied or review a written summary of

the other auditors procedures and findings which may be in the form of a completed

questionnaire or checklist. The principal auditor may consider it appropriate to discuss with

the other auditor and the management of the component the audit findings or other matters

affecting the financial statements of the components. He may also decide that supplemental


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tests of the records or the financial statements of the component are necessary. He may

request the other auditor to perform such tests or alternatively, he may perform them

himself. In certain circumstances, the other auditor may happen to be a person other than a

professionally qualified auditor. This may happen, for instance, where a component is

situated in a foreign country and the applicable laws permit a person other than a

professionally qualified auditor to audit the financial statements of such component. In such

circumstances, the procedures outlined in paragraphs 5-9 assume added importance.

2) documentation:-

the principal auditor should document in his working papers the components whose

financial statements were audited by other auditors; their significance to the financial

statements of the entity as a whole; the names of the other auditors; and any conclusions

reached that individual components are not material. He should also document how he

applied the procedures he performed and the conclusions he reached. Where the other

auditors report is other than unqualified, the principal auditor should also document how he

has dealt with the qualifications or adverse remarks contained in the other auditors report

in framing his own report.

2) co-ordination between auditors:-

there should be sufficient liaison between the principal auditor and the other auditor.

For this purpose, the principal auditor may find it necessary to issue a written

communication to the other auditor. The other auditor, knowing the context in which his

work is to be used by the principal auditor, should co-operate with him and assist him

actively, for example, by bringing to the principal auditors immediate attention any

significant findings requiring to be dealt with at entity level, adhering to the time-table for

audit of the component, etc. He should ensure compliance with the relevant statutory

requirements. Similarly, the principal auditor should advise the other auditor of any matters

that come to his attention that he thinks may have an important bearing on the other

auditors work.


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When considered necessary by him, the principal auditor may require the other auditor to

answer a detailed questionnaire regarding matters on which the principal auditor requires

information for discharging his duties. The other auditor should respond to such

questionnaire on a timely basis.

3) reporting considerations:-

the principal auditor should qualify his report or disclaim an opinion when he

concludes, based on his procedures, that he cannot use the work of the other auditor and has

not been able to perform sufficient additional procedures with respect to the financial

statements of the component reported on by the other auditor. In all circumstances, if the

other auditor qualifies his report, the principal auditor should consider whether the subject

of the qualification is of such nature and significance, in relation to the financial statements

of the entity on which the principal auditor is reporting, that it requires a qualification in his

report.

4) division of responsibility:-

the principal auditor would not be responsible in respect of the work entrusted to the

other auditors, except in circumstances which should have aroused his suspicion about the

reliability of the work performed by the other auditors. When the principal auditor has to

base his opinion on the financial statements of the entity as a whole relying upon the

statements and reports of the other auditors, his report should state clearly the division of

responsibility for the financial statements of the entity by indicating the extent to which the

financial statements of components audited by the other auditors have been included in the

financial statements of the entity, e.g., the number of branches/divisions audited by other

auditors.

AAS 11: representations by management

aas-11, representations by management as issued by the council of the institute of

chartered accountants of india, became operative for all audits


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a) Seek corroborative audit evidence from sources inside or outside the entity;

b) Evaluate whether the representations made by management appear reasonable and

consistent with other audit evidence obtained, including other representations; and

c) Consider whether the individuals makingthe representations can be expected to be

well-informed on the matter relating to accounting periods beginning on or after

april 1, 1995.

1) introduction:-

the purpose of aas-11 is to establish standards on the use of management

representations as audit evidence, procedures to the applied in evaluating and documenting

management representation, and the action in case of managements refusal to provide

appropriate representation. The auditor should obtain representation from management,

where considered appropriate.

2) acknowledgement by management of its responsibility for the financial

information:-

the auditor should obtain the evidence that management acknowledges its

responsibility for preparation and presentation of financial information.

3) representations by management as audit evidence:-

the auditor should exercise his professional judgement in determining the matters on

which he wishes to obtain representations from management. Similarly, the matters on

which the auditor wishes to obtain such representations in writing should also be

determined by the auditor using his professional judgement. However, representations

should be obtained from management invariably in writing on matters material to financial

information, either individually or collectively, when other sufficient appropriate audit

evidence cannot reasonably be expected to exist. Matters which might be included in a

representation letter from management in an audit of financial statements are contained in

the example of a management representation letter in the appendix. During the course of an


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audit, management makes many representations to the auditor, either unsolicited or in

response to specific enquiries. Representations by management cannot be a substitute for

other audit evidence that the auditor could reasonably expect to be available. For example, a

representation by management as to the quantity, existence and cost of inventories is no

substitute for adopting normal audit procedures regarding verification and valuation of

inventories. If the auditor is unable to obtain sufficient appropriate audit evidence that he

believes would be available regarding a matter which has or may have a material effect on

the financial information. This will constitute a limitation on the scope of his examination

even if he has obtained a representation from management on the matter.

in certain instances such as where knowledge of the facts is confined to management

or where the matter is principally one of intention, a representation by management may be

the only audit evidence which can reasonably be expected to be available; for example,

intention of management to hold a specific investment for long-term appreciation. If a

representation by management is contradicted by other evidence, the auditor should

examine the circumstances and, when necessary, reconsider the reliability of other

representations made by management.

4) documentation of representations by management:-

The auditor should document in his working papers evidence of managements

representations.a written representation is better audit evidence than an oral representation

and can take the form of:

a) A representation letter from management:

b) A letter from the auditor outlining the auditors understanding of managements

representations, duly acknowledged and confirmed by management;

c) A duly authenticated copy of relevant minutes of meetings of the board of directors

or similar body.


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AAS 12: responsibility of joint auditors

(aas) 12, responsibility of joint auditors as issued by the institute of chartered accountants

of india, will replace statement on the responsibility of joint auditors earlier issued by icai in

respect of all accounting periods beginning on or after 1st april 1996. It should be read in

conjunction with the basic text as also preface to the statements on standard auditing

practices issued by icai.

1) introduction:-

the practice of appointing more than one auditor to conduct the audit of large entities

is in vogue these days. Such auditors, known as joint auditors, conduct the audit jointly and

report on the financial statements of the entity. This statement deals with the professional

responsibilities which the auditors undertake in accepting such appointments as joint

auditors. The statement does not deal with the relationship between a principal auditor who

is appointed to report on the financial statements of an entity and another auditor who is

appointed to report on the financial statements of one or more divisions or branches

included in the financial statements of the entity, e.g., the relationship between a company

auditor appointed under section 224 of the companies act, 1956 and a branch auditor

appointed under section 228 of the said act.

These aspects have been dealt with in statement on standard auditing practices (aas)-1o,

using the work of another auditor. Presently, there is no legal requirement under the

companies act, 1956 to prepare consolidated accounts or group accounts. Section 212 of the

companies act, requires that the accounts of a holding company shall have attached thereto

the balance sheet, profit and loss account, directors report and auditors report of each

subsidiary company. Certain additional information is also required. A subsidiary is a

separate legal entity, hence the council of the institute is of opinion that no responsibilityattaches to auditors of a holding company in respect of the work performed by the auditors

of the subsidiary.

2) division of work:-


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where joint auditors are appointed, they should mutually divide the audit work

among themselves. Division of work should ordinarily be in terms of audit of identified

units or specified areas. In some cases, due to the nature of business of the entity under

audit, such a division of work may not be possible. In such situations, the division of work

may be with reference to items of assets or liabilities or income or expenditure or with

reference to periods of time. Certain areas of work, owing to their importance or owing to

the nature of work involved, would often not be divided and would be covered by all the

joint auditors. The division of work among joint auditors as well as the areas of work to be

covered by all of them should be adequately documented and preferably communicated to

the entity.

3) coordination:-

where, in the course of his work, a joint auditor comes across matters which are

attention, or which require disclosure or require discussion with, or application of

judgement by, other joint auditors, he should communicate the same to all the other joint

auditors in writing. This should be done by the submission of a report or note prior to the

finalisation of the audit.

4) relationship among joint auditors:-

In respect of audit work divided among the joint auditors, each joint auditor is responsible

only for the work allocated to him, whether or not he has prepared a separate report on the

work performed by him. On the other hand, all the joint auditors are jointly and severally

responsible -

a) In respect of the audit work which is not divided among the joiit auditors and is

carried out by all of them;

b) In respect of decisions taken by all the joint auditors concerning the nature, timingor extent of the audit procedures to be performed by any of the joint auditors. It

may, however, be clarified that all the joint auditors are responsible only in respect

of the appropriateness of the decisions concerning the nature, timing or extent of the


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audit procedures agreed upon among them; proper execution of these audit

procedures is the separate and specific responsibility of the joint auditor concerned;

c) In respect of matters which are brought to the notice of the joint auditors by any one

of them and on which there is an agreement among the joint auditors

d) For examining that the financial statements of the entity comply with the disclosure

requirements of the relevant statute; and

e) For ensuring that the audit report complies with the requirements of the relevant

statute.

in the case of audit of a large entity with several branches, including those required

to be audited by branch auditors, the branch audit reports/returns may be required to be

scrutinised by different joint auditors in accordance with the allocation of work. In such

cases, it is the specific and separate responsibility of each joint auditor to review the audit

reports/returns of the divisions/branches allocated to him and to ensure that they are

properly incorporated into the accounts of the entity. In respect of the branches which do

not fall within any divisions or zones which are separately assigned to the various joint

auditors, they may agree among themselves as regards the division of work relating to the

review of such branch returns. It is also the separate and specific responsibility of each joint

auditor to exercise his judgement with regard to the necessity of visiting such

divisions/branches in respect of which the work is allocated to him.

a significant part of the audit work involves obtaining and evaluating information

and explanations from the management. This responsibility is shared by all the joint

auditors unless they agree upon a specific pattern of distribution of this responsibility. In

cases where specific divisions, zones or units are allocated to different joint auditors, it is

the separate and specific responsibility of each joint auditor to obtain appropriate

information and explanations from the management in respect of such divisions/zones/units

and to evaluate the information and explanations so obtained by him.

Each joint auditor is entitled to assume that the other joint auditors have carried out their

part of the audit work in accordance with the generally accepted audit procedures. It is not


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necessary for a joint auditor to review the work performed by other joint auditors or

perform any tests in order to ascertain whether the work has actually been performed in

such a manner. Each joint auditor is entitled to rely upon the other joint auditors for

bringing to his notice any departure from generally accepted accounting principles or any

material error noticed in the course of the audit. Reference may be made in this regard to

the statements on standard auditing practices and other mandatory statements relating to

auditing matters issued by the council of the institute from time to time.

Ii. Where separate financial statements of a division/branch are audited by one of the joint

auditors, the other joint auditors are entitled to proceed on the basis that such financial

statements comply with all the legal and professional requirements regarding the

disclosures to be made and present a true and fair view of the state of affairs and of the

working results of the division/branch concerned, subject to such observations as may be

communicated by the joint auditor concerned.

5) reporting responsibilities:-

Normally, the joint auditors are able to arrive at an agreed report. However, where the joint

auditors are in disagreement with regard to any matters to be covered by the report, each

one of them should express his own opinion through a separate report. A joint auditor is not

bound by the views of the majority of the joint auditors regarding matters to be covered in

the report and should express his opinion in a separate report in case of a disagreement.

AAS 13 audit materiality

Aas-13, audit materiality as issued by the council of the institute of chartered accountants

of india should be read in conjunction with the basic text as also preface to the statements

on standard auditing practices issued by icai. It became operative for all audits relating to

accounting periods beginning on or after april 1, 1996.

1) introduction:-


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the purpose of this statement is to establish standards on the concept of materiality and its

relationship with audit risk. The auditor should consider materiality and its relationship with

audit risk when conducting an audit. The auditor should consider materiality and its

relationship with audit risk when conducting an audit.

2) materiality:-

information is material if its misstatement (i.e., omission or erroneous statement)

could influence the economic decisions of users taken on the basis of the financial

information. Materiality depends on the size and nature of the item, judged in the particular

circumstances of its misstatement. Thus, materiality provides a threshold or cut-off point

rather than being a primary qualitative characteristic which the information must have if it

is to be useful. The objective of an audit of financial information prepared within a

framework of recognised accounting policies and practices and relevant statutory

requirements, if any, is to enable the auditor to express an opinion on such financial

information. The assessment of what is material is a matter of professional judgement.

the concept of materiality recognises that some matters, either individually or in the

aggregate, are relatively important for true and fair presentation of financial information in

conformity with recognised accounting policies and practices. The auditor considers

materiality at both the overall financial information level and in relation to individual

account balances and classes of transactions. Materiality may also be influenced by other

considerations, such as the legal and regulatory requirements, non-compliance with which

may have a significant bearing on the financial information, and considerations relating to

individual account balances relationships. This process may result in different levels of

materiality depending on the matter being audited. Although the auditor ordinarily

establishes an acceptable materiality level to detect quantitatively material misstatements,

both the amount (quantity) and nature (quality) of misstatements need to be considered. An

example of a qualitative misstatement would be the inadequate or improper description of

an accounting policy when it is likely that a user of the financial statements would be


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misled by the description. The auditor needs to consider the possibility of misstatements of

relatively small amounts that, cumulatively, could have a material effect on the financial

information.

For example, an error in a month-end (or other periodic) procedure could be an indication

of a potential material misstatement if that error is repeated each month or each period, as

the case may be.

Materiality should be considered by the auditor when

a) Determining the nature, timing and extent of audit procedures;

b) Evaluating the effect of misstatements.

3) the relationship between materiality and audit risk:-

when planning the audit, the auditor considers what would make the financial

information materially misstated. The auditors preliminary assessment of materiality,

related to specific account balances and classes of transactions, helps the auditor decide

such questions as what items to examine and whether to use sampling and analytical

procedures. This enables the auditor to select audit procedures that, in combination, can beexpected to support the audit opinion at an acceptably low degree of audit risk. There is an

inverse relationship between materiality and the degree of audit risk, that is, the higher the

materiality level, the lower the audit risk and vice versa. For example, the risk that a

particular account balance or class of transactions could be misstated by an extremely large

amount might be very low, but the risk that it could be misstated by an extremely small

amount might be very high. The auditor takes the inverse relationship between materiality

and audit risk into account when determining the nature, timing and extent of audit

procedures. For example, if, after planning for specific audit procedures, the auditor

determines that the acceptable materiality level is lower, audit risk is increased.

The auditor would compensate for this by either:


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a) Reducing the assessed degree of control risk, where this is possible, and supporting

the reduced degree by carrying out extended or additional tests of control; or

b) Reducing detection risk by modifying the nature, timing and extent of planned

substantive procedures.

the auditors assessment of materiality and audit risk may be different at the time of

initially planning the engagement from that at the time of evaluating the results of his audit

procedures. This could be because of a change in circumstances or a change in the auditors

knowledge as a result of the audit. For example, if the audit is planned prior to period end,

the auditor will anticipate the results of operations and the financial position. If actual

results of operations and financial position are substantially different, the assessment of

materiality and audit risk may also change. Additionally, the auditor may, in planning theaudit work, intentionally set the acceptable cut off level for verifying individual transactions

at a lower level than is intended to be used to evaluate the results of the audit. This may be

done to cover a larger number of items and thereby reduce the likelihood of undiscovered

misstatements and to provide the auditor with the margin of safety when evaluating the

effect of misstatements discovered during the audit.

when the auditor tests an account balance or class of transactions by an analytical

procedure, he ordinarily would not specifically identify misstatements but would only

obtain an indication of whether misstatements might exist in the balance or class and

possibly its approximate magnitude. If the analytical procedure indicates that misstatements

might exist, but not its approximate amount, the auditor ordinarily would have to employ

other procedures to enable him to estimate the aggregate misstatement in the balance or

class. When an auditor uses audit sampling to test an account balance or class of

transactions, he projects the amount of known misstatements identified by him in his

sample to the items in the balance or class from which his sample was selected. That

projected misstatement, along with the results of other substantive tests, contributes to the

auditors assessment of aggregate misstatement in the balance or class.


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if the aggregate of the uncorrected misstatements that the auditor has identified

approaches the materiality level, or if auditor determines that the aggregate of uncorrected

misstatements causes the financial information to be materially misstated, he should

consider requesting the management to adjust the financial information or extending his

audit procedures. In any event, the management may want to adjust the financial

information for known misstatements. The adjustment of financial information may

involve, for example, application of appropriate accounting principles, other adjustments in

amounts, or the addition of appropriate disclosure of inadequately disclosed matters. If the

management refuses to adjust the financial information and the results of extended audit

procedures do not enable the auditor to conclude that the aggregate of uncorrected

misstatements is not material, the auditor should express a qualified or adverse opinion, as

appropriate.

AAS 14: analytical procedures

Aas-14, analytical procedures as issued by the council of the institute of chartered

accountants of india should be read in conjunction with its basic text as also the preface to

the statements on standard auditing practices issued by icai. It became operative for all

audits relating to accounting periods beginning on or after april 1, 1997.

1) introduction:-

the purpose of this statement on standard auditing practices (aas) is to establish

standards on the application of analytical procedures during an audit. The auditor should

apply analytical procedures at the planning and overall review stages of the audit.

Analytical procedures may also be applied at other stages. analytical procedures means

the analysis of significant ratios and trends including the resulting investigation of

fluctuations and relationships that are inconsistent with other relevant information or whichdeviate from predicted amounts.

2) nature and purpose of analytical procedures:-


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analytical procedures include the consideration of comparisons of the entitys

financial information with, for example:

Comparable information for prior periods.

Anticipated results of the entity, such as budgets or forecasts.

Predictive estimates prepared by the auditor, such as an estimation of depreciation

charge for the year.

Similar industry information, such as a comparison of the entitys ratio of sales to

trade debtors with industry averages, or with other entities of comparable size in the

same industry.

analytical procedures also include consideration of relationships:

Among elements of financial information that would be expected to conform to a

predictable pattern based on the entitys experience, such as gross margin percentages.

Between financial information and relevant non-financial information, such as payroll

costs to number of employees. Various methods may be used in performing the above

procedures. These range from simple comparisons to complex analyses using advanced

statistical techniques. Analytical procedures may be applied to consolidated financial

statements, financial statements of components (such as subsidiaries, divisions or

segments) and individual elements of financial information. The auditors choice of

procedures, methods and level of application is a matter of professional judgement.

Analytical procedures are used for the following purposes:

a) To assist the auditor in planning the nature, timing and extent of other audit

procedures;


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b) As substantive procedures when their use can be more effective or efficient than

tests of details in reducing detection risk for specific financial statement

assertions; and

c) As an overall review of the financial statements in the final review stage of the

audit.

3) analytical procedures in planning an audit:-

the auditor should apply analytical procedures at the planning stage to assist in

understanding the business and in identifying areas of potential risk. Application of

analytical procedures may indicate aspects of the business of which the auditor was

unaware and will assist in determining the nature, timing and extent of other audit

procedures. Analytical procedures in planning the audit use both financial and nonfinancial

information, for example, the relationship between sales and square footage of selling space

or volume of goods sold. Analytical procedures as substantive procedures. The auditors

reliance on substantive procedures to reduce detection risk relating to specific financial

statement assertions may be derived from tests of details, from analytical procedures, or

from a combination of both. The decision about the procedures to use to achieve a particular

audit objective is based on the auditors judgement about the expected effectiveness and

efficiency of the available procedures in reducing detection risk for specific financial

statement assertions.

the auditor will ordinarily inquire of management as to the availability and

reliability of information needed to apply analytical procedures and the results of any such

procedures performed by the entity. It may be efficient to use analytical data prepared by

the entity, provided the auditor is satisfied that such data is properly prepared. When

intending to perform analytical procedures as substantive procedures, the auditor will need

to consider a number of factors such as the:

Objectives of the analytical procedures and the extent to which their results can be

relied upon


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Nature of the entity and the degree to which information can be disaggregated,

Availability of information, both financial, such as budgets or forecasts, and non-

financial

Reliability of the information available

Relevance of the information available

Source of the information available

Comparability of the information available

Knowledge gained during previous audits, together with the auditors understanding of

the effectiveness of the accounting and internal control systems and the types of

problems that in prior periods have given rise to accounting adjustments.

AAS 15: Audit Sampling

(aas) 15,audit sampling, issued by the council of the institute of chartered accountants of

india, became operative for all audits relating to accounting periods beginning on or after

april 1, 1998. It should be read in conjunction with its basic text as also preface to the

statements on standard auditing practices issued by icai.

1) introduction:-

the purpose of this statement on standard auditing practices (aas) is to establish

standards on the design and selection of an audit sample and the evaluation of the sample

results. This aas applies equally to both statistical and non-statistical sampling methods.

Either method, when properly applied, can provide sufficient appropriate audit evidence.

When using either statistical or non-statistical sampling methods, the auditor should design

and select an audit sample, perform audit procedures thereon, and evaluate sample results so

as to provide sufficient appropriate audit evidence. Audit sampling means the application

of audit procedures to less than 100% of the items within an account balance or class of


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transactions to enable the auditor to obtain and evaluate audit evidence about some

characteristic of the items selected in order to form or assist in forming a conclusion

concerning the population. It is important to recognise that certain testing procedures do not

come within the definition of sampling. Tests performed on 100% of the items within a

population do not involve sampling. Likewise, applying audit procedures to all items within

a population which have a particular characteristic (for example, all items over a certain

amount) does not qualify as audit sampling with respect to the portion of the population

examined, nor with regard to the population as a whole, since the items were not selected

from the total population on a basis that was expected to be representative. Such

characteristic of the remaining portion of the population but would not necessarily be the

basis for a valid conclusion about the remaining portion of the population.

2) design of a sample:-

5. When designing an audit sample, the auditor should consider the specific audit

objectives, the population from which the auditor wishes to sample.

3) sample size:-

the auditor would first consider the specific audit objectives to he achieved and the

audit sampling is appropriate, consideration of the nature of the audit evidence sought and

possible error conditions or other characteristics relating to that audit evidence will assist

the auditor in defining what constitutes an error and what population to use for sampling.

For example, when performing tests of control over an entitys purchasing procedures, the

auditor will be concerned with matters such as whether an invoice was clerically checked

and properly approved. On the other hand, when performing substantive procedures on

invoices processed during the period, the auditor will be concerned with matters such as the

proper reflection of the monetary amounts of such invoices in the financial statements.

when determining the sample size, the auditor should consider sampling risk, the

tolerable error, and the expected error. Sampling risk arises from the possibility that the

auditors conclusion. Based on a sample. May he different from the conclusion that would

be reached if the entire population were subjected to the same audit procedure. Sample size


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is affected by the level of sampling risk the auditor is willing to accept from the results of

the sample. The lower the risk the auditor is willing to accept, the greater the sample size

will need to be.

4) evaluation of sample results:-

Having carried out, on each sample item, those audit procedures that are appropriate to the

particular audit objective, the auditor should:

a) Analyse any errors detected in the sample;

b) Project the errors found in the sample to the population; and

c) Reassess the sampling risk. Analysis of errors in a sample

in analysing the errors detected in the sample, the auditor will first need to

determine that an item in question is in fact an error. In designing the sample, the auditor

will have defined those conditions that constitute an error by reference to the audit

objectives. For example, in a substantive procedure relating to the recording of accounts

receivable, a mis-posting between customer accounts does not affect the total accounts

receivable. Therefore, it may be inappropriate to consider this an error in evaluating the

sample results of this particular procedure, even though it may have effect on other areas of

the audit such as the assessment of doubtful accounts. When the expected audit evidence

rega

auditing and assurance standard

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