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Auditing Standards – Practical Aspects

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  1. Auditing Standards – Practical Aspects Presented by: CA VIJAY JOSHI

  2. Contents of Presentation - • Introduction • History • Standards – Why and What are they? • Evolution of Auditing Standards • ICAI – Standards on Audit • Current Trends • Practical Aspects

  3. History • 5000 years ago, people in Mesopotamia were found to be communicating basic information on crops and taxes. • Recordings of financial transactions have been found in Egypt, Greek, Aztek, China, India etc. • In ancient Rome, one official would compare records with another, an application of duties and verification. • The ‘AUDIT’ was born.

  4. History • From the end of 19th Century, Sweden recorded the auditing profession gaining entry in public management through the regulation of public institutions.

  5. Regulator of Auditing Profession in India AND Authority Prescribing Accounting and Auditing Standards Institute of Chartered Accountants of India (ICAI)

  6. Effective Compliance with Standards

  7. Standards – Why? • We need standards for variety reasons in every walk of life. • They represent ‘an international consensus on good quality management practices’. • Changing perception of customers has necessitated bringing about and following standards in services by professional bodies. • Remove disparity in service provided by members.

  8. Standards – Purpose • Delineate basic principles of audit as it should be. • Provide a framework for performing and promoting a broad range of value added audit activities. • Establish the basis for the evaluation of audit and assurance performance. • Foster improved organisational processes and operations.

  9. Standards – Purpose • Guidance to Members • Codification of Current Practices • Assurance of Consistent Practices adopted across the Profession • Assurance of Quality

  10. What is a Standard? • Attributes • Performance • Implementation A standard is a document that establishes uniform engineering or technical specifications, criteria, methods, processes or practices.

  11. Why Auditing • Economic consequences – Impact of using unreliable information • Enhancing credibility of financial information • Conflict of interest – Users vs. Preparers • Remoteness – Physical, Legal ( A vital part of Economic Infrastructure)

  12. AASB I • Initially, a part of the Research Committee. • Constituted as the AUDITING PRACTICES COMMITTEE (APC) on September 17, 1982. • Non-standing Committee of ICAI. • APC converted to AASB in July, 2002.

  13. AASB II ICAI is the ONLY Standard setter in India

  14. Relationship with IAASB • ICAI is a founder member of IFAC • Membership obligation – convergence with ISAs • NSS Policy Paper of IAASB on convergence with ISAs, July,2006

  15. International Acceptance of ISAs World Bank ISAs are benchmarks for carrying out its study on Observance of Standards and Codes INTOSAI ISAs used by national SAIs to frame audit guidelines IOSCO Evaluating conditions on which it can endorse ISAs for cross border purposes European ISAs accepted subject to local due Commission process in member countries

  16. Size of firms- ICAI Vast majority SMPs with SME clients Cost and time vis a vis detailed requirements of Standards.

  17. Effective Auditing Standards - Essentials

  18. Recent Developments

  19. Towards Convergence • Revised Preface (w.e.f.April 6, 2008) • New Framework: Engagement and Quality Control Standards • Revised Due Process • New Format of Standards • Revised Framework of Assurance (w.e.f. April, 2008) • Standard on Quality Control (SQC) (April, 1,2009)

  20. A New Framework Structure of Engagement & quality Control Standards Chartered Accountants Act, 1949, Code of Ethics and other relevant pronouncements of the ICAI Standards on Quality Control (SQCs) Services covered by the pronouncements of AASB Assurance Services Related Services Framework for Assurance Engagements Audits and reviews of historical financial information Assurance Engagements other than audits or reviews of historical financial information Standards on Auditing (SAs)100 - 999 Standards on Review Engagements (SREs) 2000 - 2699 Standards on Assurance Engagements (SAEs)3000 - 3699 Standards on Related Services (SRSs)4000 - 4699

  21. COMPARISON OF SERVICES RENDERED BY PROFESSIONAL ACCOUNTANT

  22. New Format of SAs • Distinct sections – no more bold lettering used, instead use of “SHALL” • Introduction • Scope – Objective • Effective Date • Requirements – basic principles, “shall” • Application & Explanatory Material • Appendices • Application material & Appendix integral part of SA but do not impose requirement. * w.e.f. April 1, 2008

  23. Other Important Facts About SAs • Nomenclature AASs done away with • Standards on Quality Control and Engagement Standards: • Standards on Auditing • Standards on Review Engagements • Standards on Assurance Engagements • Standards on Related Services • Standard on Quality Control (SQC) 1 is the Mother Standard. • Renumbering/ re-categorisation as per IAASB format • New Format – Two Sections • Differences from ISs given as “Material Modification to ISs in SAs” • Due Process made more rigorous * w.e.f. April 1, 2008

  24. Recently IssuedSAs – An Overview 200-299 General Principles & Responsibilities • SA 230, “Audit Documentation” (w.e.f. April 1, 2009) • SA 240, “The Auditor’s Responsibilities Relating to Fraud in an Audit of Financial Statements” (w.e.f. April 1, 2009) • SA 250, “The Auditor’s Responsibilities relating to Laws and Regulation in an Audit of Financial Statements” (w.e.f. April 1, 2009) • SA 260, “Communication with Those Charged with Governance (w.e.f. April 1, 2009) 300 – 499: Risk Assessment • SA-300 Audit Planning April 1, 2008) • SA 315, “Identifying and Assessing the Risk of Material Misstatement through understanding the Entity and its Environment”, (April 1, 2009). • SA 330, “The Auditor’s Responses to Assessed Risks” (w.e.f. April 1, 2008)

  25. Recently IssuedSAs – An Overview 500-599 Audit Evidence • 600-699 Audit work of Others • 700-799 Audit Conclusions & Reporting • SA 510, “Initial Audit Engagements-Opening Balances” (w.e.f. April 1, 2010) • SA 530, “Audit Sampling” (w.e.f. April 1, 2009) • SA 540, “Auditing Accounting Estimates, Including Fair Value Accounting Estimates, and Related Disclosures” (w.e.f. April 1, 2009) • SA 550, “Related Parties” (w.e.f. April 1, 2010) • SA 560, “Subsequent Events” (w.e.f. April 1, 2009) • SA 570, “Going Concern” (w.e.f. April 1, 2009) • SA 580, “Written Representations” (w.e.f. April 1, 2009)

  26. Recently IssuedSAs – An Overview 600 -699 – Using work of Others 700-799 – Audit Conclusions & Reporting • SA 720, “The Auditor’s Responsibilities in Relation to Other Information in Documents containing Audited Financial Statements. 800-899 - Specialized Areas

  27. Compliance with SAs • Compliance with SAs • Mandatory • Departure only if alternate audit procedures achieve objective of SAs • Document reasons for departure • Document alternative procedures • Report to draw attention • SA not applicable if situation outlined in SA is absent. • Document alternative procedures performed

  28. Framework of Assurance Engagement Subject matter Criteria evaluation outcome Practitioner Responsible party Evidence gathering Opinion Enhanced confidence Assurance Report Intended users

  29. Elements of Assurance Engagement • Three party relationship • Appropriate subject matter • Suitable criteria • Sufficient appropriate evidence • Written assurance report

  30. I. Three Party Relationship The three parties: 1. Practitioner 2. Responsible party 3. Intended user

  31. II. Subject Matter • Forms: • Financial performance/ conditions • Non financial performance/ conditions • Physical characteristics • Systems and processes • Behaviour • Characteristics: • Qualitative/ quantitative • Objective/ subjective • Historical/ prospective • Point in time/ covers a period Characteristics affect precision in evaluation against criteria and persuasiveness of audit evidence

  32. Can Engagement Risk be Zero? NO. • Selective testing • Inherent limitations of internal controls • Persuasive nature of evidence • Use of judgment in gathering & evaluating evidence • Characteristics of subject matter

  33. System of Quality Control • All firms to establish system of quality control that provides Reasonable Assurance that: • Firm & personnel comply with professional standards, regulatory & legal requirements; and • Reports issued are appropriate in the circumstances

  34. Independence • Communicate Independence Requirements • Identify and Evaluate Threats to Independence • Notification of Breaches • Annual written independence confirmation • Audit of FS of listed entities – rotation of engagement partner – at least every 7 years

  35. Client Relationship • Client acceptance/ continuation policies to reasonably assure: • All information on client integrity • Firm has capability, time & resources for the engagement • Firm can comply with ethical requirements • Withdrawal from the Engagement or Client Relationship

  36. EngagementQC Review (EQCR)A Litmus test for QC!! Process: • To provide objective evaluation • Before report is issued • For significant judgments & conclusions of engagement team • In formulating report

  37. Engagement Documentation • Firm to establish time limits appropriate to nature of engagement to assemble files – not more than 60 days in case of audit • Maintain confidentiality, safe custody, integrity, accessibility and irretrievability • Policies/procedures for retention of engagement documentation is no shorter than ten years from the date of the auditor’s report, or if later, the date of the group auditor’s report • Ownership of documentation - Property of the firm

  38. Documentation • Policies/procedures for documentation to provide evidence of operation of each element of QC system • Form & Content – factors to consider • size of the firm and the number of offices • Degree of authority both personnel and offices have • Nature and complexity of the firm’s practice and organisation • Retention • Time period sufficient to permit evaluation of firm’s compliance with QC system • Longer period, if required by law

  39. SA 230 : Audit Documentation Record of: • audit procedures performed • relevant audit evidence obtained • conclusions reached Also known as “working papers”, “work papers”

  40. SA 230 : Audit File • one or more folders or other storage media • in physical or electronic form • containing records that comprise audit documentation for a specific engagement

  41. SA 230 : Scope Auditor’s responsibility to prepare audit dox for an audit of FS To be adapted to audits of other historical fin info Scope Specific dox requirements of other SAs do not limit application of this SA L&R may establish additional requirements

  42. SA 230 : Nature & Purpose Evidence of basis for conclusion re achievement of overall objectives Evidence of audit planning & performance as per SAs & L&R

  43. SA 230 : Objective Prepare documentation that provides Sufficient & Appropriate record of basis of auditor’s report Evidence that audit was planned and performed in accordance with SAs & L&R

  44. SA 230 : Experienced Auditor An individual (whether internal or external to the firm) who has practical audit experience, and a reasonable understanding of: • audit processes • SAs and applicable L&R reqts • business environment • auditing and financial reporting issues

  45. SA 230 : Requirements

  46. SA 240Responsibility for Fraud Prevention • Those charged with governance • Oversight of management policies • Consider potential for management override of controls • Consider potential for management’s inappropriate influence on financial reporting • Management • Establish proper policies • Emphasis on ethics and honesty