Audit project

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A PROJECT ON

“ SA 230 : AUDIT DOCUMENTATION & SA 500: AUDIT EVIDENCE ”

IN THE SUBJECT

ADVANCE AUDITING

SUBMITTED BY

SOUMEET SARKAR

A030

M.Com Part-II in Advance Accountancy

UNDER THE GUIDANCE OF

PROF. PRAKASH DEGADWALA

TO

UNIVERSITY OF MUMBAI

FOR

MASTER OF COMMERCE PROGRAMME (SEMESTER - IV)

In

ADVANCE ACCOUNTANCY

YEAR: 2014-15

SVKM’S

NARSEE MONJEE COLLEGE OF COMMERCE &ECONOMICS

VILE PARLE (W), MUMBAI – 400056.

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EVALUATION CERTIFICATE

This is to certify that the undersigned have assessed and evaluated the project on

“ SA 230 : AUDIT DOCUMENTATION & SA 500: AUDIT EVIDENCE ”

submitted by student of M.Com. – Part – II (Semester – IV) In ADVANCE

ACCOUNTANCY for the academic year 2014-15. This project is original to the

best of our knowledge and has been accepted for Internal Assessment.

Name & Signature of Internal Examiner

Name & Signature of External Examiner

PRINCIPAL

Shri Sunil B. Mantri

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DECLARATION BY THE STUDENT

I, SOUMEET SARKAR student of M.Com (Part – II) In ADVANCE

ACCOUNTANCY Roll No.: A030 hereby declare that the project titled “ SA 230 :

AUDIT DOCUMENTATION & SA 500: AUDIT EVIDENCE ” for the subject

ADVANCE AUDITING submitted by me for Semester – IV of the academic year

2014-15, is based on actual work carried out by me under the guidance and

supervision of PROF. PRAKASH DEGADWALA. I further state that this work is

original and not submitted anywhere else for any examination.

Place: MUMBAI

Date:

Name & Signature of Student:

Name: SOUMEET SARKAR

Signature:

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ACKNOWLEDGEMENT

It is indeed a great pleasure and proud privilege to present this project work.

I thank my project guide Prof. Prakash Degadwala & my M.Com. Co-

ordinator Prof. Hardik Pathak of SVKM‟s Narsee Monjee College of

Commerce and Economics. Their co-operation and guidance have helped me

to complete this project.

I would sincerely like to thank the principal of our college Shri Sunil B.

Mantri for his support and guidance.

I would also like to thank the college library and staff for helping and guiding

me, the class representatives and my family and friends who supported me in

this project.

THANK YOU

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CONTENT

Sr. No. PARTICULARS Page No.

1 INTRODUCTION 6

2 SA 230 : AUDIT DOCUMENTATION 11

3 SA 500 : AUDIT EVIDENCE 18

4 CONCLUSION 28

5 BIBLIOGRAPHY 30

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INTRODUCTION

The word audit is derived from the Latin word „audire‟ which means to hear. It is an important

tool of management. It is concerned with making an analytical and critical analysis of the books

of accounts, checking and verification of evidence in support of entries appearing in the books of

accounts, and ascertaining the authenticity of the financial statements. It is also concerned with

the examination of accounting data to determine the extent of an audit examination is too made

on the basis of evidential document such as invoice, money receipts and other records by the

authorized representative of the client. Auditor has used to send for the accountants and

hear whatever they had to say in connection with the accounts. The auditor has to look into the

facts behind figures and he must certify their accuracy. Auditing is to ascertain the balance sheet

and profit and loss account that they show a true and fair view of the financial state of affairs of a

concern. The Institute of Charted Accountants of India has issued a number of statements of

standard auditing practices and accounting standards for guidance of Auditor of India.

DEFINITION of AUDITING

According to DICKSEE, „An audit may be said to be such an examination of the books,

accounts and vouchers of a business, as will enable the auditor to satisfy himself that the balance

sheet is properly drawn up, so as to exhibit a true and fair value of the state of the affairs of the

business, whether the profit and loss account gives a true and fair value of the profit and loss for

the financial year. According to the best of his information and explanations given to him and as

shown by the books, and if not, in what respect he is not satisfy.‟

ORIGIN of AUDITING

Auditing has its origin in the necessity in the development of some system to put a check on the

persons whose duties were to record receipts and disbursements of money on the behalf of

owners. In the ancient days auditing was confined to public accounts only. With the development

of trade and commerce, the need for recording transactions was felt by businessman. This had

necessitated the development of some system of check upon the persons who recorded such

transactions on the behalf of businessman.The audit in its present shape is the result of large-

scale production inconsequence of Industrial Revolution during the 18th Century. With the

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development of banking facilities, communication and transport means, the concept of corporate

management has taken birth. It necessitated the investors to know whether their investment is

safe or not. Shareholders need an independent person having expert knowledge of accounts

to report on the working of the company and truthfulness of the profit or loss and financial

position disclosed by the management.

As the trade and commerce grew extensively globally, the involvement of public money therein

also increased manifolds. This in turn created a demand from the investors to have the accounts

of the business ventures examined by a person independent of the owners and management of

the business to ensure that they were correct and reliable. Such a demand laid down the

foundation for the profession of auditing. The extent of reliance placed by the public on the

auditors has increased so much with time that it is, unreasonably of course, felt by the public that

nothing can go wrong with an organisation which has been audited. Though the fact that an audit

has been carried out is not a guarantee as to the future viability of an enterprise, it is extremely

important that the auditors carry out their assignments with utmost professional care and

sincerity, to uphold the faith posed by the public in them.

INTERNATIONAL RESPONSE to AUDITING NEEDS

As a response to the above needs, the International Federation of Accountants (IFAC) was

established in 1973 with the objective of “worldwide development and enhancement of the

accountancy profession of high quality in the public interest”. The International Auditing and

Assurance Standards Board (IAASB), earlier known as the International Auditing Practices

Committee, of the IFAC was established to “improve the quality and uniformity of practice

throughout the world”, by, inter alia, issuing International Standards on Auditing (ISAs) and

guidance on the application of the ISAs.

INDIA’s RESPONSE to AUDITING NEEDS

The Institute of Chartered Accountants of India was set up in 1949 to regulate the profession of

chartered accountancy in India. Since its establishment, the Institute has taken numerous steps to

ensure that its members discharge their duties with due professional care, competence and

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sincerity. One of the steps is the establishment of the Auditing Practices Committee, or the

Auditing and Assurance Standards Board, as it is now known in September, 1982. One of the

main objectives of the Board is to issue auditing standards. Accordingly, the Board issues

Statements on Standard Auditing Practices and Auditing and assurance Standards under the

authority of the Council.

AUDITING STANDARDS - setting in India

As mentioned earlier, the Auditing and Assurance Standards Board of the Institute formulates the

auditing standards. Broadly, following is the procedure for formulating auditing standards:-

1. The Auditing and Assurance Standards Board identifies the areas where auditing

standards need to be formulated and the priority in regard to their selection.

2. In the preparation of the auditing standards, the Board is normally, assisted by study

groups comprising of a cross section of members of the Institute.

3. On the basis of the work of the study groups, an Exposure Draft of the proposed auditing

standard is prepared by the Board and issued for comments of the members.

4. After taking into the comments received, the draft of the proposed auditing standard is

finalised by the Board and submitted to the Council of the Institute.

5. The Council considers the final draft of the proposed auditing standard and, if necessary,

modifies the same in consultation with the Board. The auditing standard is then issued

under the authority of the Council.

While formulating the auditing standards, the Board also takes into consideration the applicable

laws, customs, usages and business environment in the country.

INTERNATIONAL HARMONISATION of AUDITING STANDARDS

The Institute of Chartered Accountants of India is a member of the International Federation of

Accountants. Therefore, as a matter of policy, the auditing standards issued by the ICAI are in

harmony with the International Standards on Auditing. Till date, the IAASB of the IFAC has

issued thirty nine Engagement Standards, comprising one Standard on Quality control (ISQC),

thirty two ISAs, two International Standards on Review Engagements (ISREs), two International

Standards on Assurance Engagements (ISAEs) and two International Standards on Related

Services (ISRSs). The ICAI has issued thirty five auditing standards corresponding to the

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Engagement Standards issued by the IAASB of the IFAC and three auditing standards are in the

pipeline. A list of the Engagement Standards issued by the IAASB and the auditing standards

issued by the ICAI there against is given as Annexure I. A reconciliation of the Engagement

Standards with the auditing standards issued by the ICAI are given as Annexure II.

Further, the Council of the Institute of Chartered Accountants of India has also approved the

following technical drafts:-

Preface to the Standards on Quality Control, Auditing, Review, Other Assurance and

Related Services

Due Process of the Auditing and Assurance Standards Board

Revised Classification and Numbering Pattern of the Auditing and Assurance Standards

Framework for Assurance Engagements

COMPLIANCE with AUDITNG STANDARDS

While discharging their attest functions, it is the duty of the members of the Institute to ensure

that the auditing standards are followed in the audit of financial information covered by their

audit reports. If for any reason the member is unable to perform an audit in accordance with the

generally accepted auditing standards, his report should draw attention to any material departures

therefrom, failing which he would be held guilty of professional misconduct under clause 9 of

Part 1 of the Second Schedule to the Chartered Accountants Act, 1949.

ASPECTS to be COVERED in AUDIT

The principal aspects to be covered in an audit concerning final statements of accounts are as

follows:-

1. An examination of the system of accounting and integral controls to ascertain whether it

is appropriate for the business and helps in properly recording all transactions.

2. Reviewing the systems and procedures to find out whether they are adequate and

comprehensive.

3. Check the arithmetical accuracy of books of accounts by the verification of postings,

balances etc.

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4. Examine the documentary evidence to establish the accuracy, authenticity and validity of

transactions recorded.

5. Verifying that a proper distinction is made between capital and revenue items.

6. Verification of the title, existence and valuation of assets appearing in the balance sheet.

7. Examination that the statutory requirements are complied with.

8. Verifications of the liabilities stated in the balance sheet.

9. Comparison of balance sheet and profit and loss account and other statements with

underlying records in order to see that they are in accordance there with.

10. Checking the results shown by the balance sheet and profit and loss account to see

whether the results shown are true and fair.

11. Reporting to the proper person as to what extent, accounts reveal a true and fair view of

the state of affairs and of the profit and loss account of the organization.

FUNCTIONS of AUDITING

Important functions of auditing can be summed up as follows:-

Reviewing systems and procedures of business.

Examining documentary evidence to establish the accuracy of recorded transactions.

Reviewing the system of accounting and Internal Controls.

To verify the valuation and existence of assets.

To examine the mathematical accuracy of accounting statements.

To see whether the statutory requirements have been complied with.

Reporting as to what extent, accounts exhibit true and fairness.

To make recommendations for improvement in Internal Control and Accounting System.

To verify the distinction between capital and revenue items.

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SA 230 : AUDIT DOCUMENTATION

This SA is effective for audits of financial statements for periods beginning on or after April 1,

2009.This Standard on Auditing (SA) deals with the auditor‟s responsibility to prepare audit

documentation for an audit of financial statements. It is to be adapted as necessary in the

circumstances when applied to audits of other historical financial information. The specific

documentation requirements of other SAs do not limit the application of this SA. Laws or

regulations may establish additional documentation requirements. Audit documentation that

meets the requirements of this SA and the specific documentation requirements of other relevant

SAs provides:

1. Evidence of the auditor‟s basis for a conclusion about the achievement of the overall

objectives of the auditor; and

2. Evidence that the audit was planned and performed in accordance with SAs and

applicable legal and regulatory requirements.

Audit documentation serves a number of additional purposes, including the following:

Assisting the engagement team to plan and perform the audit.

Assisting members of the engagement team responsible for supervision to direct and

supervise the audit work, and to discharge their review responsibilities in accordance

with SA 2203.

Enabling the engagement team to be accountable for its work.

Retaining a record of matters of continuing significance to future audits.

Enabling the conduct of quality control reviews and inspections in accordance with SQC

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Enabling the conduct of external inspections in accordance with applicable legal,

regulatory or other requirements.

OBJECTIVE of SA 230

The objective of the auditor is to prepare documentation that provides:-

1. A sufficient and appropriate record of the basis for the auditor‟s report; and

2. Evidence that the audit was planned and performed in accordance with SAs and

applicable legal and regulatory requirements.

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DEFINITIONS

Audit Documentation:- The record of audit procedures performed, relevant audit evidence

obtained, and conclusions the auditor reached (terms such as “working papers” or “workpapers”

are also sometimes used).

Audit File:- One or more folders or other storage media, in physical or electronic form,

containing the records that comprise the audit documentation for a specific engagement.

Experienced Auditor:- An individual (whether internal or external to the firm) who has

practical audit experience, and a reasonable understanding of:-

i. Audit processes;

ii. SAs and applicable legal and regulatory requirements;

iii. The business environment in which the entity operates; and

iv. Auditing and financial reporting issues relevant to the entity‟s industry.

REQUIREMENT

1. The auditor shall prepare audit documentation on a timely basis. Preparing sufficient and

appropriate audit documentation on a timely basis helps to enhance the quality of the

audit and facilitates the effective review and evaluation of the audit evidence obtained

and conclusions reached before the auditor‟s report is finalised. Documentation prepared

after the audit work has been performed is likely to be less accurate than documentation

prepared at the time such work is performed.

2. The auditor shall prepare audit documentation that is sufficient to enable an experienced

auditor, having no previous connection with the audit, to understand:-

a) The nature, timing, and extent of the audit procedures performed to comply with

the SAs and applicable legal and regulatory requirements;

b) The results of the audit procedures performed, and the audit evidence obtained;

and

c) Significant matters arising during the audit, the conclusions reached thereon, and

significant professional judgments made in reaching those conclusions.

3. In documenting the nature, timing and extent of audit procedures performed, the auditor

shall record:-

a) The identifying characteristics of the specific items or matters tested;

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b) Who performed the audit work and the date such work was completed; and

c) Who reviewed the audit work performed and the date and extent of such review.

4. The auditor shall document discussions of significant matters with management, those

charged with governance, and others, including the nature of the significant matters

discussed and when and with whom the discussions took place.

5. If the auditor identified information that is inconsistent with the auditor‟s final conclusion

regarding a significant matter, the auditor shall document how the auditor addressed the

inconsistency.

6. If, in exceptional circumstances, the auditor judges it necessary to depart from a relevant

requirement in a SA, the auditor shall document how the alternative audit procedures

performed achieve the aim of that requirement, and the reasons for the departure.

7. If, in exceptional circumstances, the auditor performs new or additional audit procedures

or draws new conclusions after the date of the auditor‟s report, the auditor shall

document:-

a) The circumstances encountered;

b) The new or additional audit procedures performed, audit evidence obtained, and

conclusions reached, and their effect on the auditor‟s report; and

c) When and by whom the resulting changes to audit documentation were made and

reviewed.

8. The auditor shall assemble the audit documentation in an audit file and complete the

administrative process of assembling the final audit file on a timely basis after the date of

the auditor‟s report.

9. After the assembly of the final audit file has been completed, the auditor shall not delete

or discard audit documentation of any nature before the end of its retention period.

10. In circumstances other than those envisaged in paragraph 13 where the auditor finds it

necessary to modify existing audit documentation or add new audit documentation after

the assembly of the final audit file has been completed, the auditor shall, regardless of the

nature of the modifications or additions, document:-

a) The specific reasons for making them; and

b) When and by whom they were made and reviewed.

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DOCUMENTATION of the AUDIT PROCEDURES PERFORMED and

AUDIT EVIDENCE OBTAINED

The form, content and extent of audit documentation depend on factors such as:-

The size and complexity of the entity.

The nature of the audit procedures to be performed.

The identified risks of material misstatement.

The significance of the audit evidence obtained.

The nature and extent of exceptions identified.

The need to document a conclusion or the basis for a conclusion not readily determinable

from the documentation of the work performed or audit evidence obtained.

The audit methodology and tools used.

Audit documentation may be recorded on paper or on electronic or other media. Examples of

audit documentation include:-

Audit programmes.

Analyses.

Issues memoranda.

Summaries of significant matters.

Letters of confirmation and representation.

Checklists.

Correspondence (including e-mail) concerning significant matters.

The auditor may include abstracts or copies of the entity‟s records (for example, significant and

specific contracts and agreements) as part of audit documentation. Audit documentation,

however, is not a substitute for the entity‟s accounting records.

The auditor need not include in audit documentation superseded drafts of working papers and

financial statements, notes that reflect incomplete or preliminary thinking, previous copies of

documents corrected for typographical or other errors, and duplicates of documents.

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Oral explanations by the auditor, on their own, do not represent adequate support for the work

auditor performed or conclusions the auditor reached, but may be used to explain or clarify

information contained in the audit documentation.

DOCUMENTATION of COMPLIANCE with SA

In principle, compliance with the requirements of this SA will result in the audit documentation

being sufficient and appropriate in the circumstances. Other SAs contain specific documentation

requirements that are intended to clarify the application of this SA in the particular circumstances

of those SAs. The specific documentation requirements of other SAs do not limit the application

of this SA. Furthermore, the absence of a documentation requirement in any particular SA is not

intended to suggest that there is no documentation that will be prepared as a result of complying

with that SA.

Audit documentation provides evidence that the audit complies with SAs. However, it is neither

necessary nor practicable for the auditor to document every matter considered, or professional

judgment made, in an audit. Further, it is unnecessary for the auditor to document separately (as

in a checklist, for example) compliance with matters for which compliance is demonstrated by

documents included within the audit file. For example:-

The existence of an adequately documented audit plan demonstrates that the auditor has

planned the audit.

The existence of a signed engagement letter in the audit file demonstrates that the auditor

has agreed the terms of the audit engagement with management, or where appropriate,

those charged with governance.

An auditor‟s report containing an appropriately qualified opinion demonstrates that the

auditor has complied with the requirement to express a qualified opinion under the

circumstances specified in the SAs.

In relation to requirements that apply generally throughout the audit, there may be a

number of ways in which compliance with them may be demonstrated within the audit

file:-

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a) For example, there may be no single way in which the auditor‟s professional

skepticism is documented. But the audit documentation may nevertheless provide

evidence of the auditor‟s exercise of professional skepticism in accordance with

SAs. Such evidence may include specific procedures performed to corroborate

management‟s responses to the auditor‟s inquiries.

b) Similarly, that the engagement partner has taken responsibility for the direction,

supervision and performance of the audit in compliance with the SAs may be

evidenced in a number of ways within the audit documentation. This may include

documentation of the engagement partner‟s timely involvement in aspects of the

audit, such as participation in the team discussion required by SA 315.

DOCUMENTATION of SIGNIFICANT MATTERS & RELATED

SIGNIFICANT PROFESSIONAL MATTERS

Judging the significance of a matter requires an objective analysis of the facts and circumstances.

Examples of significant matters include:-

1. Matters that give rise to significant risks (as defined in SA 315).

2. Results of audit procedures indicating:-

a) that the financial statements could be materially misstated, or

b) a need to revise the auditor‟s previous assessment of the risks of material

misstatement and the auditor‟s responses to those risks.

3. Circumstances that cause the auditor significant difficulty in applying necessary audit

procedures.

4. Findings that could result in a modification to the audit opinion or the inclusion of an

Emphasis of Matter paragraph in the auditor‟s report.

An important factor in determining the form, content and extent of audit documentation of

significant matters is the extent of professional judgment exercised in performing the work and

evaluating the results. Documentation of the professional judgments made, where significant,

serves to explain the auditor‟s conclusions and to reinforce the quality of the judgment. Such

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matters are of particular interest to those responsible for reviewing audit documentation,

including those carrying out subsequent audits, when reviewing matters of continuing

significance.

Some examples of circumstances in which, in accordance with paragraph 8, it is appropriate to

prepare audit documentation relating to the use of professional judgment include, where the

matters and judgments are significant:-

1. The rationale for the auditor‟s conclusion when a requirement provides that the auditor

„shall consider‟ certain information or factors, and that consideration is significant in the

context of the particular engagement.

2. The basis for the auditor‟s conclusion on the reasonableness of areas of subjective

judgments (for example, the reasonableness of significant accounting estimates).

3. The basis for the auditor‟s conclusions about the authenticity of a document when further

investigation (such as making appropriate use of an expert or of confirmation procedures)

is undertaken in response to conditions identified during the audit that caused the auditor

to believe that the document may not be authentic.

The auditor may consider it helpful to prepare and retain as part of the audit documentation a

summary (sometimes known as a completion memorandum) that describes the significant

matters identified during the audit and how they were addressed, or that includes cross-

references to other relevant supporting audit documentation that provides such information. Such

a summary may facilitate effective and efficient reviews and inspections of the audit

documentation, particularly for large and complex audits. Further, the preparation of such a

summary may assist the auditor‟s consideration of the significant matters. It may also help the

auditor to consider whether, in light of the audit procedures performed and conclusions reached,

there is any individual relevant SA objective that the auditor cannot achieve that would prevent

the auditor from achieving the overall objectives of the auditor.

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SA 500: AUDIT EVIDENCE

This SA is effective for audits of financial statements for periods beginning on or after April 1,

2009. This Standard on Auditing (SA) explains what constitutes audit evidence in an audit of

financial statements, and deals with the auditor‟s responsibility to design and perform audit

procedures to obtain sufficient appropriate audit evidence to be able to draw reasonable

conclusions on which to base the auditor‟s opinion.

This SA is applicable to all the audit evidence obtained during the course of the audit. Other SAs

deal with specific aspects of the audit (for example, SA 315), the audit evidence to be obtained in

relation to a particular topic (for example, SA 570), specific procedures to obtain audit evidence

(for example, SA 520), and the evaluation of whether sufficient appropriate audit evidence has

been obtained (SA 200 and SA 330).

OBJECTIVE of SA 500

The objective of the auditor is to design and perform audit procedures in such a way as to enable

the auditor to obtain sufficient appropriate audit evidence to be able to draw reasonable

conclusions on which to base the auditor‟s opinion.

DEFINITIONS

For purposes of the SAs, the following terms have the meanings attributed below:-

Accounting Records:- The records of initial accounting entries and supporting records, such as

checks and records of electronic fund transfers; invoices; contracts; the general and subsidiary

ledgers, journal entries and other adjustments to the financial statements that are not reflected in

journal entries; and records such as work sheets and spreadsheets supporting cost allocations,

computations, reconciliations and disclosures.

Appropriateness of Audit Evidence:- The measure of the quality of audit evidence; that is, its

relevance and its reliability in providing support for the conclusions on which the auditor‟s

opinion is based.

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Audit Evidence:- Information used by the auditor in arriving at the conclusions on which the

auditor‟s opinion is based. Audit evidence includes both information contained in the accounting

records underlying the financial statements and other information.

Management’s Expert:- An individual or organization possessing expertise in a field other than

accounting or auditing, whose work in that field is used by the entity to assist the entity in

preparing the financial statements.

Sufficiency of Audit Evidence:- The measure of the quantity of audit evidence. The quantity of

the audit evidence needed is affected by the auditor‟s assessment of the risks of material

misstatement and also by the quality of such audit evidence.

REQUIREMENTS

1. Sufficient Appropriate Audit Evidence:- The auditor shall design and perform audit

procedures that are appropriate in the circumstances for the purpose of obtaining

sufficient appropriate audit evidence.

2. Information to be Used as Audit Evidence:- When designing and performing audit

procedures, the auditor shall consider the relevance and reliability of the information to

be used as audit evidence. When information to be used as audit evidence has been

prepared using the work of a management‟s expert, the auditor shall, to the extent

necessary, having regard to the significance of that expert‟s work for the auditor‟s

purposes:-

a) Evaluate the competence, capabilities and objectivity of that expert;

b) Obtain an understanding of the work of that expert; and

c) Evaluate the appropriateness of that expert‟s work as audit evidence for the

relevant assertion.

When using information produced by the entity, the auditor shall evaluate whether the

information is sufficiently reliable for the auditor‟s purposes, including as necessary in

the circumstances:-

a) Obtaining audit evidence about the accuracy and completeness of the information;

and

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b) Evaluating whether the information is sufficiently precise and detailed for the

auditor‟s purposes.

3. Selecting Items for Testing to Obtain Audit Evidence:- When designing tests of

controls and tests of details, the auditor shall determine means of selecting items for

testing that are effective in meeting the purpose of the audit procedure.

4. Inconsistency in, or Doubts over Reliability of, Audit Evidence:- If:-

a) audit evidence obtained from one source is inconsistent with that obtained from

another; or

b) the auditor has doubts over the reliability of information to be used as audit

evidence,

The auditor shall determine what modifications or additions to audit procedures are

necessary to resolve the matter, and shall consider the effect of the matter, if any, on

other aspects of the audit.

SOURCES of AUDIT EVIDENCE

Some audit evidence is obtained by performing audit procedures to test the accounting records,

for example, through analysis and review, re-performing procedures followed in the financial

reporting process, and reconciling related types and applications of the same information.

Through the performance of such audit procedures, the auditor may determine that the

accounting records are internally consistent and agree to the financial statements.

More assurance is ordinarily obtained from consistent audit evidence obtained from different

sources or of a different nature than from items of audit evidence considered individually. For

example, corroborating information obtained from a source independent of the entity may

increase the assurance the auditor obtains from audit evidence that is generated internally, such

as evidence existing within the accounting records, minutes of meetings, or a management

representation.

Information from sources independent of the entity that the auditor may use as audit evidence

may include confirmations from third parties, analysts‟ reports, and comparable data about

competitors (benchmarking data).

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SELECTING ITEMS for TESTING to OBTAIN AUDIT EVIDENCE

An effective test provides appropriate audit evidence to an extent that, taken with other audit

evidence obtained or to be obtained, will be sufficient for the auditor‟s purposes. In selecting

items for testing, the auditor is required by paragraph 7 to determine the relevance and reliability

of information to be used as audit evidence; the other aspect of effectiveness (sufficiency) is an

important consideration in selecting items to test. The means available to the auditor for selecting

items for testing are:-

1. Selecting All Items:- The auditor may decide that it will be most appropriate to examine

the entire population of items that make up a class of transactions or account balance (or

a stratum within that population). 100% examination is unlikely in the case of tests of

controls; however, it is more common for tests of details. 100% examination may be

appropriate when, for example:-

The population constitutes a small number of large value items;

There is a significant risk and other means do not provide sufficient appropriate

audit evidence; or

The repetitive nature of a calculation or other process performed automatically by

an information system makes a 100% examination cost effective.

2. Selecting Specific Items:- The auditor may decide to select specific items from a

population. In making this decision, factors that may be relevant include the auditor‟s

understanding of the entity, the assessed risks of material misstatement, and the

characteristics of the population being tested. The judgmental selection of specific items

is subject to non-sampling risk. Specific items selected may include:-

High value or key items:- The auditor may decide to select specific items within a

population because they are of high value, or exhibit some other characteristic, for

example, items that are suspicious, unusual, particularly risk prone or that have a

history of error.

All items over a certain amount:- The auditor may decide to examine items whose

recorded values exceed a certain amount so as to verify a large proportion of the

total amount of a class of transactions or account balance.

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Items to obtain information:- The auditor may examine items to obtain

information about matters such as the nature of the entity or the nature of

transactions.

While selective examination of specific items from a class of transactions or account

balance will often be an efficient means of obtaining audit evidence, it does not constitute

audit sampling. The results of audit procedures applied to items selected in this way

cannot be projected to the entire population; accordingly, selective examination of

specific items does not provide audit evidence concerning the remainder of the

population.

3. Audit Sampling:- Audit sampling is designed to enable conclusions to be drawn about

an entire population on the basis of testing a sample drawn from it. The application of

audit procedures to less than 100% of items within a population of audit relevance such

that all sampling units have a chance of selection in order to provide the auditor with a

reasonable basis on which to draw conclusions about the entire population.

AUDIT PROCEDURES for OBTAINING AUDIT EVIDENCE

As required by, and explained further in, SA 315 and SA 330, audit evidence to draw reasonable

conclusions on which to base the auditor‟s opinion is obtained by performing:-

a) Risk assessment procedures; and

b) Further audit procedures, which comprise:-

Tests of controls, when required by the SAs or when the auditor has chosen to do

so; and

Substantive procedures, including tests of details and substantive analytical

procedures.

The audit procedures described in paragraphs A14-A25 below may be used as risk assessment

procedures, tests of controls or substantive procedures, depending on the context in which they

are applied by the auditor. As explained in SA 330, audit evidence obtained from previous audits

may, in certain circumstances, provide appropriate audit evidence where the auditor performs

audit procedures to establish its continuing relevance10.

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The nature and timing of the audit procedures to be used may be affected by the fact that some of

the accounting data and other information may be available only in electronic form or only at

certain points or periods in time. For example, source documents, such as purchase orders and

invoices, may exist only in electronic form when an entity uses electronic commerce, or may be

discarded after scanning when an entity uses image processing systems to facilitate storage and

reference.

Certain electronic information may not be retrievable after a specified period of time, for

example, if files are changed and if backup files do not exist. Accordingly, the auditor may find

it necessary as a result of an entity‟s data retention policies to request retention of some

information for the auditor‟s review or to perform audit procedures at a time when the

information is available.

INSPECTION:- Inspection involves examining records or documents, whether internal or

external, in paper form, electronic form, or other media, or a physical examination of an asset.

Inspection of records and documents provides audit evidence of varying degrees of reliability,

depending on their nature and source and, in the case of internal records and documents, on the

effectiveness of the controls over their production. An example of inspection used as a test of

controls is inspection of records for evidence of authorisation.

Some documents represent direct audit evidence of the existence of an asset, for example, a

document constituting a financial instrument such as a stock or bond. Inspection of such

documents may not necessarily provide audit evidence about ownership or value. In addition,

inspecting an executed contract may provide audit evidence relevant to the entity‟s application of

accounting policies, such as revenue recognition.

Inspection of tangible assets may provide reliable audit evidence with respect to their existence,

but not necessarily about the entity‟s rights and obligations or the valuation of the assets.

Inspection of individual inventory items may accompany the observation of inventory counting.

OBSERVATION:- Observation consists of looking at a process or procedure being performed

by others, for example, the auditor‟s observation of inventory counting by the entity‟s personnel,

or of the performance of control activities. Observation provides audit evidence about the

performance of a process or procedure, but is limited to the point in time at which the

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observation takes place, and by the fact that the act of being observed may affect how the process

or procedure is performed. You may refer to SA 501 for further guidance on observation of the

counting of inventory.

EXTERNAL CONFIRMATION:- An external confirmation represents audit evidence

obtained by the auditor as a direct written response to the auditor from a third party (the

confirming party), in paper form, or by electronic or other medium. External confirmation

procedures frequently are relevant when addressing assertions associated with certain account

balances and their elements. However, external confirmations need not be restricted to account

balances only. For example, the auditor may request confirmation of the terms of agreements or

transactions an entity has with third parties; the confirmation request may be designed to ask if

any modifications have been made to the agreement and, if so, what the relevant details are.

External confirmation procedures also are used to obtain audit evidence about the absence of

certain conditions, for example, the absence of a “side agreement” that may influence revenue

recognition. You may refer to SA 505 for further guidance.

RECALCULATION:- Recalculation consists of checking the mathematical accuracy of

documents or records. Recalculation may be performed manually or electronically.

REPERFORMANCE:- Re-performance involves the auditor‟s independent execution of

procedures or controls that were originally performed as part of the entity‟s internal control.

ANALYTICAL PROCEDURE:- Analytical procedures consist of evaluations of financial

information made by a study of plausible relationships among both financial and non-financial

data. Analytical procedures also encompass the investigation of identified fluctuations and

relationships that are inconsistent with other relevant information or deviate significantly from

predicted amounts. You may refer to SA 520 for further guidance.

INQUIRY:- Inquiry consists of seeking information of knowledgeable persons, both financial

and non- financial, within the entity or outside the entity. Inquiry is used extensively throughout

the audit in addition to other audit procedures. Inquiries may range from formal written inquiries

to informal oral inquiries. Evaluating responses to inquiries is an integral part of the inquiry

process.

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Responses to inquiries may provide the auditor with information not previously possessed or

with corroborative audit evidence. Alternatively, responses might provide information that

differs significantly from other information that the auditor has obtained, for example,

information regarding the possibility of management override of controls. In some cases,

responses to inquiries provide a basis for the auditor to modify or perform additional audit

procedures.

Although corroboration of evidence obtained through inquiry is often of particular importance, in

the case of inquiries about management intent, the information available to support

management‟s intent may be limited. In these cases, understanding management‟s past history of

carrying out its stated intentions, management‟s stated reasons for choosing a particular course of

action, and management‟s ability to pursue a specific course of action may provide relevant

information to corroborate the evidence obtained through inquiry. In respect of some matters, the

auditor may consider it necessary to obtain written representations from management and, where

appropriate, those charged with governance to confirm responses to oral inquiries. You may refer

to SA 580 for further guidance.

INFORMATION to be USED as AUDIT EVIDENCE

While audit evidence is primarily obtained from audit procedures performed during the course of

the audit, it may also include information obtained from other sources such as, for example,

previous audits, in certain circumstances, and a firm‟s quality control procedures for client

acceptance and continuance. The quality of all audit evidence is affected by the relevance and

reliability of the information upon which it is based.

RELEVANCE:- Relevance deals with the logical connection with, or bearing upon, the purpose

of the audit procedure and, where appropriate, the assertion under consideration. The relevance

of information to be used as audit evidence may be affected by the direction of testing. For

example, if the purpose of an audit procedure is to test for overstatement in the existence or

valuation of accounts payable, testing the recorded accounts payable may be a relevant audit

procedure. On the other hand, when testing for understatement in the existence or valuation of

accounts payable, testing the recorded accounts payable would not be relevant, but testing such

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information as subsequent disbursements, unpaid invoices, suppliers‟ statements, and unmatched

receiving reports may be relevant.

A given set of audit procedures may provide audit evidence that is relevant to certain assertions,

but not others. For example, inspection of documents related to the collection of receivables after

the period end may provide audit evidence regarding existence and valuation, but not necessarily

cut-off. Similarly, obtaining audit evidence regarding a particular assertion, for example, the

existence of inventory, is not a substitute for obtaining audit evidence regarding another

assertion, for example, the valuation of that inventory. On the other hand, audit evidence from

different sources or of a different nature may often be relevant to the same assertion.

Tests of controls are designed to evaluate the operating effectiveness of controls in preventing, or

detecting and correcting, material misstatements at the assertion level. Designing tests of controls

to obtain relevant audit evidence includes identifying conditions (characteristics or attributes)

that indicate performance of a control, and deviation conditions which indicate departures from

adequate performance. The presence or absence of those conditions can then be tested by the

auditor.

Substantive procedures are designed to detect material misstatements at the assertion level. They

comprise tests of details and substantive analytical procedures. Designing substantive procedures

includes identifying conditions relevant to the purpose of the test that constitute a misstatement

in the relevant assertion.

RELIABILITY:- The reliability of information to be used as audit evidence, and therefore of

the audit evidence itself, is influenced by its source and its nature, and the circumstances under

which it is obtained, including the controls over its preparation and maintenance where relevant.

Therefore, generalisations about the reliability of various kinds of audit evidence are subject to

important exceptions. Even when information to be used as audit evidence is obtained from

sources external to the entity, circumstances may exist that could affect its reliability. For

example, information obtained from an independent external source may not be reliable if the

source is not knowledgeable, or a management‟s expert may lack objectivity. While recognising

that exceptions may exist, the following generalisations about the reliability of audit evidence

may be useful:-

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The reliability of audit evidence is increased when it is obtained from independent

sources outside the entity.

The reliability of audit evidence that is generated internally is increased when the related

controls, including those over its preparation and maintenance, imposed by the entity are

effective.

Audit evidence obtained directly by the auditor (for example, observation of the

application of a control) is more reliable than audit evidence obtained indirectly or by

inference (for example, inquiry about the application of a control).

Audit evidence in documentary form, whether paper, electronic, or other medium, is

more reliable than evidence obtained orally (for example, a contemporaneously written

record of a meeting is more reliable than a subsequent oral representation of the matters

discussed).

Audit evidence provided by original documents is more reliable than audit evidence

provided by photocopies or facsimiles, or documents that have been filmed, digitised or

otherwise transformed into electronic form, the reliability of which may depend on the

controls over their preparation and maintenance.

SA 520 provides further guidance regarding the reliability of data used for purposes of designing

analytical procedures as substantive procedures.SA 240 deals with circumstances where the

auditor has reason to believe that a document may not be authentic, or may have been modified

without that modification having been disclosed to the auditor.

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CONCLUSION

SQC 1 requires firms to establish policies and procedures for the timely completion of the

assembly of audit files. An appropriate time limit within which to complete the assembly of the

final audit file is ordinarily not more than 60 days after the date of the auditor‟s report. The

completion of the assembly of the final audit file after the date of the auditor‟s report is an

administrative process that does not involve the performance of new audit procedures or the

drawing of new conclusions. Changes may, however, be made to the audit documentation during

the final assembly process if they are administrative in nature. Examples of such changes

include:-

Deleting or discarding superseded documentation.

Sorting, collating and cross referencing working papers.

Signing off on completion checklists relating to the file assembly process.

Documenting audit evidence that the auditor has obtained discussed and agreed with the

relevant members of the engagement team before the date of the auditor‟s report.

SQC 1 requires firms to establish policies and procedures for the retention of engagement

documentation. The retention period for audit engagements ordinarily is no shorter than seven

years from the date of the auditor‟s report, or, if later, the date of the group auditor‟s report.

Standard on Quality Control (SQC) 1, “Quality Control for Firms that Perform Audits and

Reviews of Historical Financial Information, and Other Assurance and Related Services

Engagements”, issued by the Institute, provides that, unless otherwise specified by law or

regulation, audit documentation is the property of the auditor. He may at his discretion, make

portions of, or extracts from, audit documentation available to clients, provided such disclosure

does not undermine the validity of the work performed, or, in the case of assurance engagements,

the independence of the auditor or of his personnel.

Obtaining audit evidence from different sources or of a different nature may indicate that an

individual item of audit evidence is not reliable, such as when audit evidence obtained from one

source is inconsistent with that obtained from another. This may be the case when, for example,

responses to inquiries of management, internal audit, and others are inconsistent, or when

responses to inquiries of those charged with governance made to corroborate the responses to

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inquiries of management are inconsistent with the response by management. SA 230 includes a

specific documentation requirement if the auditor identified information that is inconsistent with

the auditor‟s final conclusion regarding a significant matter.

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BIBLIOGRAPHY:-

1. www.icai.org

2. www.google.co.in

3. www.wikipedia.org

4. GUIDANCE NOTES ISSUED by ICAI