Audit Documentation and Audit Evidence – CA Inter Audit Notes

Audit Documentation and Audit Evidence – CA Inter Audit Notes is designed strictly as per the latest syllabus and exam pattern.

Audit Documentation and Audit Evidence – CA Inter Auditing Notes

Question 1.
Define audit documentation. Also give some examples.
Or
Write short note on: Audit working papers [May 10 (5 Marks)]
Answer:
Audit documentation:
SA 230 “Audit Documentation” defines the term as “Record of audit procedures performed, relevant audit evidence obtained and the conclusions the auditor reached”.

Examples of audit documentation:
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.

Question 2.
Comment on the following in relation to SAs: “Audit documentation serves a number of additional purposes”. [May 11 (5 Marks)]
Or
Audit documentation serves a number of purposes. Explain with reference to SA 230. [May 15 (6 Marks)
Or
Audit documentation provides evidence of the auditor’s basis for a conclusion about the achievement of the overall objectives of the auditor and evidence that the audit was planned and performed in accordance with SAs and applicable legal and regulatory requirements. Explain stating clearly purpose of audit documentation. [MTP-Aug. 18]
Answer:
Purposes of audit documentation:
SA 2 3 0 “Audit Documentation” deals with the auditor’s responsibility to prepare audit documentation for an auditof financial statements. As per SA 2 30, Audit documentation serves a number ofpurposes, 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, and to discharge their review responsibilities.
• 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.
• Enabling the conduct of external inspections in accordance with applicable legal, regulatory or other requirements.

Question 3.
Audit documentation provides evidence of the auditor’s basis for a conclusion about the achievement of the overall objectives of the auditor. Explain clearly stating the nature and purpose of Audit Documentation. [MTP-Oct. 18]
Or
What do you mean by Audit Documentation? Also explain the nature and purpose of audit documentation. [RTP-May 19]
Or
Discuss the meaning and nature of Audit Documentation. [RTP-Nov. 19]
Answer:
Meaning of Audit Documentation:
SA 230 “Audit Documentation” defines the term as “Record of audit procedures performed, relevant audit evidence obtained and the conclusions the auditor reached”.

Nature of Audit Documentation:
SA 2 3 0 “Audit Documentation” deals with the auditor’s responsibility to prepare audit documentation for an audit of financial statements. As per SA 230, the Auditor is required to prepare documentation that provides:
(a) a sufficient and appropriate record of the basis for the auditor’s report; and
(b) evidence that the audit was planned and performed in accordance with SAs and applicable and other regulatory requirements.

Purposes of Audit Documentation:
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.

Question 4.
Judging the significance of a matter requires an objective analysis of the facts and circumstances. Documentation of the professional judgments made, where significant, serves to explain the auditor’s conclusions and to reinforce the quality of the judgment. Explain with the help of examples. [RTP-May 19]
Or
An important factor in determining the form, content and extent of audit documentation of signifi¬cant matters is the extent of professional j udgment exercised in performing the work and evaluating the results. Explain stating clearly the examples of significant matters. [RTP-Nov. 20]
Answer:
Documentation of Significant Matters and Related Significant Professional Judgments:
Judging the significance of a matter requires an objective analysis of the facts and circumstances. Examples of significant matters include:

• Matters that give rise to significant risks (as defined in SA 315).
• 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.
• Circumstances that cause the auditor significant difficulty in applying necessary audit procedures.
• 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.

Documentation of the professional judgments made, where significant, serves to explain the auditor’s conclusions and to reinforce the quality of the judgment. Such matters are of particular interest to those responsible for reviewing audit documentation, including those carrying out subsequent audits, when reviewing matters of continuing significance.

Examples of circumstances in which it is appropriate to prepare audit documentation relating to the use of professional judgment

• 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 s* the particular engagement.
• The basis for the auditor’s conclusion on the reasonableness of areas of subjective judgments (for example, the reasonableness of significant accounting estimates).
• 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.

Question 5.
“Audit documentation summary may facilitate effective and efficient reviews and inspections of the audit documentation, particularly for large and complex audits”. Explain.
Or
“Completion Memorandum” is helpful as part of the audit documentation. Explain. [May 19 (3 Marks)]
Answer:
Completion memorandum (audit documentation summary):
SA 230 “Audit Documentation” defines the term as “Record of audit procedures performed, relevant audit evidence obtained and the conclusions the auditor reached”. Accordingly, auditor may consider it helpful to prepare and retain as part of the audit documentation a summary (known as a completion memorandum) that describes:
(a) the significant matters identified during the audit and
(b) how they were addressed.
Such a summary may facilitate effective and efficient reviews and inspections of the audit documentation, particularly for large and complex audits. Preparation of such a summary may assist the auditor’s consideration of the significant matters. 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 has not met or is unable to meet that would prevent the auditor from achieving the auditor’s overall objective.

Question 6.
Discuss with reference to SAs: Factors effecting form, contents and extent of audit documentation. [May 13 (5 Marks) MTP-April 19]
Or
The Form, contentand extentofaudit documents depends on certain factors. Explain with reference to SA 230. [Nov. 15 (4 Marks)]
Or
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 etc. Explain in detail. [RTP-Nov. 18]
Answer:
Factors affecting form, content and extent of Audit Documentation:
SA 230 “Audit Documentation” deals with the auditor’s responsibility to prepare audit documentation for an audit of financial statements. Accordingly, the various factors that may affect form, content and extent of audit documentation are following-

• 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.

Question 7.
R.K & Company is the auditor of PQR Company Ltd. The Managing Director of the Company demands copies of the working papers from the auditors. Are the auditors bound to oblige the Managing Director? [Nov. 10 (4 Marks)]
Answer:
Ownership and custody of working papers:

• As per SA 230, “Audit Documentation” working papers are the property of the auditor. The auditor may, at his discretion, make portion of or extracts of his working papers available to his client.
• In the present case, the managing director of the company demands copies of the working papers from the auditor. Managing director has no right over the working papers of the auditors.

Conclusion: Managing Director of the company has no right over working papers of the auditor.
However, the auditor may, at his discretion, make portion of or extracts of his working papers
available to his company.

Question 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. Discuss. [MTP-March 18, March 19]
Or
Briefly explain the policies and procedures of assembling the final audit file on a timely basis after the date of auditor’s report under SQC-1. [Nov. 19 (3 Marks)]
Answer:
Assembly of Final Audit File:
SA 230 “Audit Documentation” defines audit file as 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.
Requirements of Audit File:

• 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, (within 60 days as per SQC 1).
• 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.
• After the assembly, the auditor shall not delete audit documentation before the end of its retention period.

Question 9.
Give some examples of circumstances in which it is appropriate to prepare audit documentation ® relating to the use of professional judgment where the matters and judgments are significant. [MTP-Oct. 20]
Answer:
Documentation of Significant Matters and Related Significant Professional Judgments:
Judging the significance of a matter requires an objective analysis of the facts and circumstances. Examples of significant matters include:

• Matters that give rise to significant risks (as defined in SA 315).
• 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.
• Circumstances that cause the auditor significant difficulty in applying necessary audit procedures.
• 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.

Documentation of the professional judgments made, where significant, serves to explain the auditor’s conclusions and to reinforce the quality of the judgment. Such matters are of particular interest to those responsible for reviewing audit documentation, including those carrying out subsequent audits, when reviewing matters of continuing significance.
Examples of circumstances in which it is appropriate to prepare audit documentation relating to the use of professional judgment

• 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.
• The basis for the auditor’s conclusion on the reasonableness of areas of subjective judgments (for example, the reasonableness of significant accounting estimates).
• 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.

Question 10.
Audit evidence includes both information contained in the accounting records underlying the financial statements and other information. Discuss. [RTP-May 18]
Or
Auditing is a logical process. An auditor is called upon to assess the actualities of the situation, review the statements of account and give an expert opinion about the truth and fairness of such accounts. This he cannot do unless he has examined the financial statements objectively. He needs evidence to obtain information for arriving at his judgment. Discuss explaining clearly the detailed meaning of audit evidence. [RTP-Nov. 19]
Answer:
Audit Evidence:
Auditing is a logical process. An auditor is called upon to assess the actualities of the situation, review the statements of account and give an expert opinion about the truth and fairness of such accounts. This he cannot do unless he has examined the financial statements objectively. Auditor requires audit evidences to obtain information for arriving at his judgment.

Meaning of Audit Evidence:

• SA 500 “Audit Evidence” defines audit evidence as 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 information obtained from other sources.
• Accounting records include 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.
• Other information which the auditor may use as audit evidence includes, for example minutes of the meetings, written confirmations from trade receivables and trade payables, manuals containing details of internal control, annual reports etc. A combination of tests of accounting records and other information is generally used by the auditor to support his opinion on the financial statements.

Question 11.
Most of the auditor’s work in forming the auditor’s opinion consists of obtaining and evaluating audit evidence. Explain. [RTP-Nov. 18]
Or
Audit evidence is necessary to support the auditor’s opinion and report. It is cumulative in nature and is primarily obtained from audit procedures performed during the course of the audit. Most of the auditor’s work in forming the auditor’s opinion consists of obtaining and evaluating audit evidence. Explain. [RTP-Nov. 19]
Answer:
Obtaining and Evaluating Audit Evidence:

• SA 500 “Audit Evidence” defines audit evidence as 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 information obtained from other sources.
• Accounting records include 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.
• Other information which the auditor may use as audit evidence includes, for example minutes of the meetings, written confirmations from trade receivables and trade payables, manuals containing details of internal control, annual reports etc. A combination of tests of accounting records and other information is generally used by the auditor to support his opinion on the financial statements.
• As per SA 500 “Audit Evidence” audit procedures performed to collect audit evidences include the following:
  (a) Risk assessment Procedures
  (b) Further Audit procedures: It comprises of
  1. Test of Controls, and
  2. Substantive Procedures: consists of-
• Tests of Details,
• Substantive Analytical Procedures
• Audit procedures to obtain audit evidence also include inspection, observation, confirmation, recalculation, re-performance and analytical procedures, often in some combination, in addition to inquiry.

Question 12.
What do you mean by sufficient appropriate audit evidence? State various factors that heilp the auditor to ascertain as to what is sufficient appropriate audit evidence. [Nov. 10 (6 Marks)]
Or
State various factors that help the auditor to ascertain as to what is sufficient and appropriate audit evidence.: [Nov. 17 (4 Marks)]
Or
The quantity of audit evidence needed is affected by the auditor’s assessment of the risks of misstatement. Auditor’s judgment as to sufficiency may be affected by few factors. Explain. [RTP-May 18]
Or
The quantity of audit evidence needed is affected by the auditor’s assessment of the risks of misstatement (the higher the assessed risks, the more audit evidence is likely to be required) and also by the quality of such audit evidence (the higher the quality, the less may be required). Obtaining more audit evidence, however, may not compensate for its poor quality. Analyse and Explain stating clearly the factors affecting the auditor’s judgment as to sufficiency of audit evidence. [RTP-May 19]
Or
Sufficiency is the measure of the quantity of audit evidence. The quantity of audit evidence needed is affected by the auditor’s assessment of the risks of misstatement and also by the quality of such audit evidence. Obtaining more audit evidence, however, may not compensate for its poor quality. Explain also stating the factors affecting auditor’s judgment as to sufficiency of audit evidence. [RTP-Nov. 20]
Answer:
Sufficient appropriate audit evidence:
SA 500 defines audit evidence as information used by the auditor in arriving at the conclusions on which the auditor’s opinion is based. The auditor shall design and perform audit procedures that are appropriate in the circumstances for the purpose of obtaining sufficient appropriate audit evidence.
Sufficiency: It refers to the quantity of audit evidence. It is affected by the auditor’s assessment of the risks of material misstatement and also by the quality of such audit evidence.
Appropriateness: It refers to 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.

Factors affecting Sufficiency and Appropriateness:
(a] The degree of risk of misstatement 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 carried on by the entity;
• situations which may exert an unusual influence on management;
• the financial position of the entity.

(b) The materiality of the item.
(c) The experience gained during previous audits.
(d) The results of auditing procedures, including fraud and errors which may have been found.
(e) The type of information available.
(f) The trend indicated by accounting ratios and analysis.

Question 13.
What are the audit procedures to obtain audit evidence? Mention the same in brief.
Or
Explain the tests of controls and substantive procedures as audit procedures of obtaining sumCfiibt appropriate audit evidence for forming an audit opinion.
Or
Write short note on: Substantive procedures. [May 10 (5 Marks), Nov. 14 (4 Marks)]
Answer:
Audit procedures to obtain Audit Evidence:
As per SA 500 “Audit Evidence” audit procedures required to obtain audit evidence:
1. Risk assessment procedures:

• SA 315 defines risk assessment procedures as audit procedures performed to obtain understanding of the entity and its environment including the entity internal control, to identify and assess the risk of material misstatement whether due to fraud or error at the financial statement and assertion level.
• Components of risk assessment procedures comprises of inquiries, observation, inspection and analytical procedures.

2. Further audit procedures: comprises of Test of Controls and Substantive Procedures.
(A) Tests of controls: SA 3 3 0 defines tests of controls as audit procedures designed to evaluate the operating effectiveness of controls in preventing, or detecting and correcting, material misstatements at the assertion level.
Components of tests of controls generally comprises of inspection, inquiry and reperformances.
(B) Substantive procedures: SA 330 defines substantive procedures as audit procedures designed to detect the material misstatements at the assertion level.

• Substantive procedures comprise of tests of details and substantive analytical procedures.
• Tests of details may be performed through inspection of documents, inquiry, external confirmations, recalculations etc.
• Substantive analytical procedures involve consideration of relationships among financial as well as non-financial data and consideration of comparison with prior period data, anticipated results or industry averages.

Question 14.
“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”. Explain. [RTP-Nov. 20]
Answer:
Factors affecting nature and timing of Audit Procedure:
As per SA 500 “Audit Evidence” audit procedures performed to collect audit evidences include the following:
(a) Risk assessment Procedures

(b) Further Audit procedures: It comprises of
1. Test of Controls, and
2. Substantive Procedures: consists of-

• Tests of Details,
• Substantive Analytical Procedures

Nature and timing of audit procedures affected by:

• Availability of audit evidence in electronic form only.
• Availability of audit evidence at certain points/ 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.

Question 15.
Explain various methods to obtain audit evidence. (May 11 (8 Marks)]
Or
Write short note on: Methods to obtain audit evidence. [May 15 (4 Marks)]
Or
Mr. A was appointed statutory auditor of P Ltd. but he was not able to gather the sufficient audit evidences. Discuss how he should proceed to gather more audit evidences. [Nov. 15 [6 Marks)]
Answer:
Methods to obtain audit evidence:
As per SA 500 “Audit Evidence” the following methods can be used by the auditor for the purpose of obtaining audit evidence:
(a) Inspection: It involves examining records or documents, whether internal or external, in paper form, electronic form, or other media, or a physical examination of an asset.
(b) Observation: It 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.
(c) External confirmation: It 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.
(d) Recalculation: It consists of checking mathematical accuracy of documents or records. It may be performed manually or electronically.
(e) Re-performance: It involves the auditor’s independent execution of procedures or controls that were originally performed as part of the entity’s internal control.
(f) Analytical procedures: It consists of evaluations of financial information made by a study of relationships among both financial and non-financial data.
(g) Inquiry: It consists of seeking information of knowledgeable persons, both financial and non- financial, within the entity or outside the entity.

Question 16.
Discuss the following: inquiry is one of the audit procedure to obtain audit evidence. [May 13 (5 Marks)]
Or
Evaluating responses to inquiries is an integral part of the inquiry process. Explain. [RTP-May 18]
Answer:
Inquiry as audit procedure to obtain audit evidence:

• As per SA 500 “Audit Evidence” auditor may obtain audit evidences by performing a number of methods including the 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. However in case oral inquiries, the auditor may consider it necessary to obtain written representations from management and, where appropriate, TCWG to confirm responses to such inquiries.
• Evaluating responses to inquiries is an integral part of the inquiry process.
• 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. In some cases, responses to inquiries provide a basis for the auditor to modify or perform additional audit procedures.

Question 17.
Distinguish between: Internal Evidence and External Evidence.
Answer:
Internal Evidence vs. External Evidence:

	Internal Evidence	External Evidence
Meaning	Internal evidence is one that has been created within the client’s organization.	External evidence is one which originates from outside the client’s organisation.
Examples	Examples are: Duplicate sales invoice, Minute books, inventory reports etc.	For example: purchase invoice, forward­ing note, confirmations, bank statement, lease agreement etc.
Reliability	Generally, less reliable vis-a-vis External Evidence	Generally, more reliable vis-a-vis Internal Evidence

Question 18.
Discuss the principles which are useful in assessing the reliability of audit evidence.
Or
Write short note on following: Reliability of audit Evidence. [Nov. 11 (4 Marks)]
Or
Discuss the following: The reliability of audit evidence is influenced by its source, sample size and selection of items for testing. [Nov. 13 (5 Marks)]
Or
With reference to SA 500, “Audit Evidence”, discuss the different sources and their reliability, of audit evidence. [May 17 (6 Marks)]
Or
“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”. Explain. Also state clearly generalisations about the reliability of audit evidence. [RTP-May 18]
Answer:
Reliability of Audit Evidence:
As per SA 500 “Audit Evidence” reliability of audit evidence is guided by following principles:
(a) The reliability of audit evidence is increased when it is obtained from independent sources outside the entity.
(b) The reliability of audit evidence that is generated internally is increased when the related controls, imposed by the entity are effective.
(c) Audit evidence obtained directly by the auditor is more reliable than audit evidence obtained indirectly.
(d) Audit evidence in documentary form, whether paper, electronic, or other medium, is more reliable than evidence obtained orally.
(e) Audit evidence provided by original documents is more reliable than audit evidence provided by photocopies, 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.

Question 19.
A higher level of assurance may be sought about the operating effectiveness of controls when the approach adopted consists primarily of tests of controls, in particular where it is not possible or practicable to obtain sufficient appropriate audit evidence only from substantive procedures. Explain. [RTP-Nov, 18]
Or
A higher level of assurance may be sought about the operating effectiveness of controls when the approach adopted consists primarily of tests of controls. Explain and also state when will the auditor design and perform tests of controls to obtain sufficient appropriate audit evidence as to the operating effectiveness of relevant controls. [RTP – Nov. 20]
Answer:
Performing Test of controls:

• As per SA 3 30 “Responses to Assessed Risks” tests of controls may be defined as audit procedure designed to evaluate the operating effectiveness of controls in preventing, or detecting and correcting, material misstatements at the assertion level.
• The auditor shall design and perform tests of controls to obtain sufficient appropriate audit evidence as to the operating effectiveness of relevant controls when:
  (a) He expects that the controls are operating effectively, or
  (b) Substantive procedures alone cannot provide sufficient appropriate audit evidence at the assertion level.
• In designing and performing tests of controls, the auditor shall:
  (a) Perform other audit procedures in combination with inquiry to obtain audit evidence about the operating effectiveness of the controls, including:
  (i) How the controls were applied at relevant times during the audit.
  (ii) The consistency with which they are applied.
  (iii) By whom or by what means they were applied.
  (b) Determine whether the controls to be tested depend upon other controls (indirect controls) and if so, whether it is necessary to obtain audit evidence supporting the effective operation of those indirect controls.

Question 20.
Write short note on: Factors warranting re-testing of internal controls.
Answer:
Factors warranting re-test of controls:
As per SA 330 on “The Auditor’s Responses to Assessed Risks”, if the auditor plans to use audit evidence from a previous audit aboutthe operating effectiveness of specific controls, he shall establish the continuing relevance of that evidence by obtaining audit evidence about whether significant changes in those controls have occurred subsequent to the previous audit.

The auditor’s decision on whether to rely on audit evidence obtained in previous audits for control is a matter of professional judgment.
Factors that may warrant a re-test of controls are:

• A deficient control environment.
• Deficient monitoring of controls.
• A significant manual element to the relevant controls.
• Personnel changes that significantly affect the application of the control.
• Changing circumstances that indicate the need for changes in the control.
• Deficient general IT-controls.

Question 21.
Irrespective of the assessed risks of material misstatement, the auditor shall design and perform substantive procedures for each material class of transactions, account balance, and disclosure. Analyse and explain. [RTP-Nov. 18]
Or
A multinational Co. wants to appoint you to carry the statutory audit.” Discuss with reference to SA 330 the substantive procedures to be performed to assess the risk of material misstatement. [Nov. 18 (6 Marks)]
Answer:
Substantive Procedure to be performed to assess the risk of material misstatement:
Substantive procedures are audit procedure designed to detect material misstatements at the assertion level.

Substantive procedures comprise:

• Tests of details (of classes of transactions, account balances, and disclosures), and
• Substantive analytical procedures.

SA 330 “Responses to Assessed Risks” deals with the auditor’s responsibility to design and implement responses to the risks of material misstatements identified and assessed by the auditor in accordance with SA 315. Accordingly,

• Irrespective of the assessed risks of material misstatement, the auditor shall design and perform substantive procedures for each material class of transactions, account balance, and disclosure.
• Depending on the circumstances, the auditor may determine that:
  • Performing only substantive analytical procedures will be sufficient to reduce audit risk to an acceptably low level. For example, where the auditor’s assessment of risk is supported by audit evidence from tests of controls.
  • Only tests of details are appropriate.
  • A combination of substantive analytical procedures and tests of details are most responsive to the assessed risks.
• Substantive analytical procedures are generally more applicable to large volumes of transactions that tend to be predictable over time.
• Because the assessment of the risk of material misstatement takes account of internal control, the extent of substantive procedures may need to be increased when the results from tests of controls are unsatisfactory. However, increasing the extent of an audit procedure is appropriate only if the audit procedure itself is relevant to the specific risk.
• In designing tests of details, the extent of testing is ordinarily thought of in terms of the sample size.
  Note: Question asked in Nov. 18 seems to be drafted wrongly, as Substantive procedures are performed as a response to risk of material misstatement. To assess risk of material misstatement, procedures performed are known as Risk Assessment Procedures and covered by SA 315.

Question 22.
“External confirmation procedures frequently are relevant when addressing assertions associated with account balances and their elements, but need not be restricted to these items.” Explain.
Or
Point out any eight areas where external confirmation used as audit evidence. [May 15 (4 Marks}]
Answer:
Areas where external confirmations may be used:
As per SA 330 “Responses to Assessed Risks” External confirmation procedures frequently are relevant when addressing assertions associated with account balances and their elements, but need not be restricted to these items.
For example, the auditor may request external confirmation of the terms of agreements, contracts, or transactions between an entity and other parties.
Other situations where external confirmation procedures may provide relevant audit evidence in responding to assessed risks of material misstatement include:

• Bank balances and other information relevant to banking relationships.
• Accounts receivable balances and terms.
• Inventories held by third parties at bonded warehouses for processing or on consignment.
• Property title deeds held by lawyers or financiers for safe custody or as security.
• Investments held for safekeeping by third parties, or purchased from stockbrokers but not delivered at the balance sheet date.
• Amounts due to lenders, including relevant terms of repayment and restrictive covenants.
• Accounts payable balances and terms.

Question 23.
“When deviations from controls upon which the auditor intends to rely are detected, the auditor shall make specific inquiries to understand these matters and their potential consequences”. Explain.
Or
XYZ & Associates, Chartered Accountants, while evaluating the operating effectiveness of internal controls, detects deviation from controls. In such a situation, state the specific inquiries to be made by an auditor to understand these matters and their potential consequences. [May 18 (5 Marks)]
Answer:
Specific inquiries by auditor when deviations from controls are detected
As per SA 330 “Responses to Assessed Risks”, when deviations from controls upon which the auditor intends to rely are detected, the auditor shall make specific inquiries to understand these matters and their potential consequences, and shall determine whether:
(a) The test of controls that have been performed provide an appropriate basis for reliance on the controls;
(b) Additional test of controls is necessary; or
(c) The potential risks of misstatement need to be addressed using substantive procedures.

Question 24.
State the factors that may assist the auditor in determining whether external confirmation procedures are to be performed as substantive audit procedures
Answer:
Factors that may assist in determining use of external confirmations as substantive audit procedures:
As per SA 330 “Responses to Assessed Risks” factors that may assist the auditor in determining whether external confirmation procedures are to be External Confirmations performed as substantive audit procedures include:
1. The confirming party’s knowledge of the subject matter – Responses may be more reliable if provided by a person at the confirming party who has the requisite knowledge about the information being confirmed.

2. The ability or willingness of the intended confirming party to respond – For example, the confirming party:

• May not accept responsibility for responding to a confirmation request;
• May consider responding too costly or time-consuming;
• May have concerns about the potential legal liability resulting from responding;
• May account for transactions in different currencies; or
• May operate in an environment where responding to confirmation requests is not a significant aspect of day-to-day operations.

In such situations, confirming parties may not respond, may respond in a casual manner or may attempt to restrict the reliance placed on the response.

3. The objectivity of the intended confirming party – If the confirming party is a related party of the entity, responses to confirmation requests may be less reliable.

Question 25.
Discuss the various points which auditor needs to consider in determining whether it is appropriate to use audit evidence about operating effectiveness of controls obtained in previous audit, and if so, the length of the time period that may elapsed before retesting. [Nov. 19 (4 Marks)]
Answer:
Considerations in determining the appropriateness of using audit evidence about operating effectiveness of controls obtained in previous audit:
SA 3 3 0 “Responses to Assessed Risks” deals with the auditor’s responsibility to design and implement responses to the risks of material misstatements identified and assessed by the auditor in accordance with SA 315. Accordingly, in determining whether it is appropriate to use audit evidence about the operating effectiveness of controls obtained in previous audits, and, if so, the length of the time period that may elapse before retesting a control, the auditor shall consider the following:
(a) The effectiveness of other elements of internal control, including the control environment, the entity’s monitoring of controls, and the entity’s risk assessment process;
(b) The risks arising from the characteristics of the control, including whether it is manual or automated;
(c) The effectiveness of general IT-controls;
(d) The effectiveness of the control and its application by the entity, including the nature and extent of deviations in the application of the control noted in previous audits, and whether there have been personnel changes that significantly affect the application of the control;
(e) Whether the lack of a change in a particular control poses a risk due to changing circumstances; and
(f) The risks of material misstatement and the extent of reliance on the control.

Question 26.
When more persuasive audit evidence is needed regarding the effectiveness of a control, it may be appropriate to increase the extent of testing of the control as well as the degree of reliance on controls. Discuss the matters the auditor may consider in determining the extent of test of controls. [RTP-Nov. 20]
Answer:
Matters to be considered in determining the extent of test of controls.
When more persuasive audit evidence is needed regarding the effectiveness of a control, it may be
appropriate to increase the extent of testing of the control as well as the degree of reliance on controls.

Matters the auditor may consider in determining the extent of test of controls include the following:

• The frequency of the performance of the control by the entity during the period.
• The length of time during the audit period that the auditor is relying on the operating effectiveness of the control.
• The expected rate of deviation from a control.
• The relevance and reliability of the audit evidence to be obtained regarding the operating effectiveness of the control at the assertion level.
• The extent to which audit evidence is obtained from tests of other controls related to the assertion.

Question 27.
Explain clearly meaning of Management Representation and objective of the auditor regarding written representation.
Or
Explain clearly objective of the auditor regarding written representation. [RTP-Nov. 19]
Or
Audit evidence is all the information used by the auditor in arriving at the conclusions on which the audit opinion is based. Written representations are necessary information that the auditor requires in connection with the audit of the entity’s financial statements. Accordingly, similar to responses to inquiries, written representations are audit evidence. Explain stating clearly objectives of the auditor regarding written representation. (RTP-May 20]
Answer:
Written Representation:

• SA 580 “Written Representation” defines the term as a written statement by management provided to the auditor to confirm certain matters or to support other audit evidence.
• Written representations in this context do not include financial statements, the assertions therein or supporting books and records.
• Written representations are necessary information that the auditor requires in connection with the audit, hence they are recognised as audit evidence as a response to inquiries.
• Although written representations provide necessary audit evidence, they do notprovide sufficient appropriate audit evidence on their own about any of the matters with which they deal.
• Auditor requires the written representation from the management to support other audit evidence relevant to the Financial Statements or specific assertions in the Financial Statements.

Objective of Auditor regarding Written representation:
(a) To obtain written representations from management that management believes that it has fulfilled the fundamental responsibilities that constitute the premise on which an audit is conducted;
(b) To support other audit evidence relevant to the financial statements or specific assertions in the financial statements by means of written representations, if determined necessary by the auditor or required by other SAs; and
(c) To respond appropriately to written representations provided by management or if management does not provide the written representations requested by the auditor.

Question 28.
“Although written representations provide necessary audit evidence yet they do not provide sufficient appropriate audit evidence on their own about any of the matters with which they deal”. Discuss.
Answer:
Meaning and nature of written representations:

• SA 580 “Written Representation” defines the term as a written statement by management provided to the auditor to confirm certain matters or to support other audit evidence.
• Written representations in this context do not include financial statements, the assertions therein or supporting books and records.
• Written representations are necessary information that the auditor requires in connection with the audit, hence they are recognised as audit evidence as a response to inquiries.
• Although written representations provide necessary audit evidence, they do not provide sufficient appropriate audit evidence on their own about any of the matters with which they deal.
• Auditor requires the written representation from the management to support other audit evidence relevant to the Financial Statements or specific assertions in the Financial Statements.

Question 29.
The auditor P of PAR and Co., a firm of Chartered Accountants is conducting audit of AB Industries Ltd. The auditor requests management to provide Banker’s certificate in support of Fixed deposits whereas management provides only written representation on the matter.
Analyse how would you deal as an auditor. [RTP-May 18]
Answer:
Management Representation:

• SA 580 “Written Representation” defines the term as a written statement by management provided to the auditor to confirm certain matters or to support other audit evidence.
• Although written representations provide necessary audit evidence, they do not provide sufficient appropriate audit evidence on their own about any of the matters with which they deal. Furthermore, the fact that management has provided reliable written representations does not affect the nature or extent of other audit evidence that the auditor obtains about the fulfillment of management’s responsibilities, or about specific assertions.
• In the present case, auditor requests management to provide Banker’s certificate in support of Fixed deposits whereas management provides only written representation on the matter.
  Conclusion: Auditor would further request the management to provide him with the Banker’s certificate in support of fixed deposits held by the company.

Question 30.
Discuss with reference to SAs: What do you mean by “Written Representations”? As an auditor, how would you deal if management does not provide requested written representations? [May 14 (5 Marks)]
Answer:
Meaning of written representation:

• SA 580 “Written Representation” defines the term as a written statement by management provided to the auditor to confirm certain matters or to support other audit evidence.
• Written representations in this context do not include financial statements, the assertions therein or supporting books and records.
• Written representations are necessary information that the auditor requires in connection with the audit, hence they are recognised as audit evidence as a response to inquiries.
• Although written representations provide necessary audit evidence, they do not provide sufficient appropriate audit evidence on their own about any of the matters with which they deal.
• Auditor requires the written representation from the management to support other audit evidence relevant to the Financial Statements or specific assertions in the Financial Statements.

Auditor’s duties if management refuses to provide written representation:
If the management does not provide oneormore of the requested written representation, the auditor shall:

• Discuss the matter with management and
• Re-evaluate the reliability and integrity of management.
• Take appropriate action including the determining the possible effect on the opinion.
• Under these circumstances the auditor shall issue a disclaimer of opinion.

Question 31.
Explain the procedures to be performed by auditor to obtain sufficient and appropriate audit evidence regarding the existence and condition of inventory.
Or
How would an auditor proceed to obtain sufficient appropriate audit evidence regarding the exis¬tence and condition of inventory? Also, state reporting requirements in this respect.
Or
ABC Ltd is engaged in manufacturing of different type of yarns. On-going through its financial statements for the past years, it is observed that inventory is material to the financial statements.
You as an auditor of the company Wanted to obtain sufficient appropriate audit evidence regarding the existence and condition of the inventory as appearing in the financial statements. Discuss, how would you proceed as an auditor. [MTP-March 18, Aug. 18, Oct.18, March 19, May 20]
Answer:
Procedure to be performed to obtain sufficient and appropriate evidence regarding existence and condition of inventory:
SA 501 “Audit Evidence – Specific Considerations for selected items” deals with specific considerations by the auditor in obtaining sufficient and appropriate audit evidence, with respect to certain aspects of inventory, litigation and claims, and segment information in an audit of financial statements.

Accordingly, when inventory is material to the F.S., the auditor shall obtain sufficient appropriate audit evidence regarding the existence and condition of inventory by:
(a) Attendance at physical inventory counting, unless impracticable, to:

• Evaluate management instructions & procedures for recording & controlling the results of the entity’s physical inventory counting;
• Observe the performance of management’s count procedures;
• Inspect the inventory;
• Perform test counts;

(b) Performing audit procedures over the entity’s final inventory records to determine whether they accurately reflect actual inventory count results.

Question 32.
Explain clearly the examples of matters relevant in planning attendance at physical inventory counting. [RTP-May 20]
Answer:
Matters relevant in planning attendance at physical inventory counting:

• Nature of inventory.
• Stages of completion of work in progress.
• The risks of material misstatement related to inventory.
• The nature of the internal control related to inventory.
• Whether adequate procedures are expected to be established and proper instructions issued for physical inventory counting.
• The timing of physical inventory counting.
• Whether the entity maintains a perpetual inventory system.
• The locations at which inventory is held, including the materiality of the inventory and the risks of material misstatement at different locations, in deciding at which locations attendance is appropriate.
• Whether the assistance of an auditor’s expert is needed.

Question 33.
Explain the auditor’s procedures w.r.t. determination of existence and condition of inventory under the following circumstances:
(a) Inventory count conducted at a date other than balance sheet.
(b) To attend the inventory is impracticable.
Answer:
Auditor’s procedures w.r.t. determination of existence and condition of inventory:
SA 501 “Audit Evidence – Specific Considerations for selected items” deals with specific considerations by the auditor in obtaining sufficient and appropriate audit evidence, with respect to certain aspects of inventory, litigation and claims, and segment information in an audit of financial statements.

Inventory count conducted a date other than balance sheet: If physical inventory counting is conducted at a date other than the date of the financial statements, the auditor shall, in addition to the general procedures, perform audit procedures to obtain audit evidence about whether changes in inventory between the count date and the date of the financial statements are properly recorded.

To attend the inventory is impracticable:

• If attendance at physical inventory counting is impracticable, the auditor shall perform alternative audit procedures to obtain sufficient appropriate audit evidence regarding the existence and condition of inventory.
• If it is not possible to do so, the auditor shall modify the opinion in the auditor’s report in accordance with SA 705.

Question 34.
“P India” Ltd. is a manufacturer of various sports products. The company is having several cases of litigation pending in courts. The auditor wanted to identify litigation and claims, which may give rise to risk of material misstatements. Suggest the audit procedures in the given case. [May 19 {4 Marks), MTP-May 20]
Answer:
Audit Procedure for identifying litigation and claim:
SA 501 “Audit Evidence – Specific Considerations for selected items” deals with specific considerations by the auditor in obtaining sufficient and appropriate audit evidence, with respect to certain aspects of inventory litigation and claims, and segment information in an audit of financial statements. Accordingly,

The auditor shall design and perform audit procedures in order to identify litigation and claims involving the entity which may give rise to a risk of material misstatement, including:
(a) Inquiry of management and, where applicable, others within the entity, including in-house legal counsel;
(b) Reviewing minutes of meetings of those charged with governance and correspondence between the entity and its external legal counsel; and
(c) Reviewing legal expense accounts.

If the auditor assesses a risk of material misstatement regarding litigation or claims that have been identified, or when audit procedures performed indicate that other material litigation or claims may exist, the auditor shall, in addition to the procedures required by other SAs, seek direct communication with the entity’s external legal counsel. If law, regulation or the respective legal professional body prohibits the entity’s external legal counsel from communicating directly with the auditor, the auditor shall perform alternative audit procedures.

The auditor shall modify the opinion in the auditor’s report in accordance with SA 705, if:
(a) management refuses to give the auditor permission to communicate or meet with the entity’s external legal counsel, or the entity’s external legal counsel refuses to respond appropriately to the letter of inquiry, or is prohibited from responding; and
(b) the auditor is unable to obtain sufficient appropriate audit evidence by performing alternative audit procedures.

Question 35.
Define the following:
(i) Positive confirmation request
(ii) Negative confirmation request
(iii) Non-response
(iv) Exception [RTP-May 20]
Answer:
Definition of various terms:
SA 505 “External Confirmations” defines the various terms as follows:
(i) Positive confirmation request – A request that the confirming party respond directly to the auditor indicating whether the confirming party agrees or disagrees with the information in the request, or providing the requested information.
(ii) Negative confirmation request – A request that the confirming party respond directly to the auditor only if the confirming party disagrees with the information provided in the request.
(iii) Non-response – A failure of the confirming party to respond, or fully respond, to a positive confirmation request, or a confirmation request returned undelivered.
(iv) Exception – A response that indicates a difference between information requested to be confirmed, or contained in the entity’s records, and information provided by the confirming party.

Question 36.
What is meant by external confirmation? Mention four situations where external confirmation may be useful for auditors.
Or
Explain the process of External Confirmation. Give some examples where external confirmation may be used as audit evidence, [Nov. 11 (8 Marks)]
Answer:
External confirmation:
SA 505 “External Conformation” deals with the auditor’s use of external confirmation procedures to obtain audit evidence.
Meaning of External Conformation: SA 505 defined external confirmation as Audit evidence obtained 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 is of two types:
1. Positive Confirmation request: A request that the confirming party respond directly to the auditor indicating whether the confirming party agrees or disagrees with the information in the request, or providing the requested information.
2. Negative Confirmation request: A request that the confirming party respond directly to the auditor only if the confirming party disagrees with the information provided in the request.

Process of obtaining External Confirmation:
(a) Determining the information to be confirmed or requested: It may be with respect to

• • Account balances & their elements.
• Terms of agreements/contracts/transactions.

(b) Selecting the appropriate confirming party
(c) Designing the confirmation requests: It also includes determining that requests are properly addressed, and contain return information for responses to be sent directly to the auditor.
(d) Sending the requests, including follow-up requests when applicable, to the confirming party.

Situations where External Confirmation may be used:

• Bank balances and other information relevant to banking relationships.
• Accounts receivable balances and terms.
• Inventories held by third parties at bonded warehouses for processing or on consignment.
• Property title deeds held by lawyers or financiers for safe custody or as security.
• Investments held for safekeeping by third parties, or purchased from stockbrokers but not delivered at the balance sheet date.
• Amounts due to lenders, including relevant terms of repayment and restrictive covenants.
• Accounts payable balances and terms.

Question 37.
When using external confirmation procedures, the auditor shall maintain control over external confirmation requests including sending the requests, including follow-up requests when applicable, to the confirming party. Explain the other points as to when using external confirmation procedures, the auditor would be required to maintain control over external confirmation requests. [RTP-May 20]
Answer:
Control over External Confirmation requests:
As per SA 505 “External Confirmations” when using external confirmation procedures, the auditor shall maintain control over external confirmation requests, including:
(a) Determining the information to be confirmed or requested;
(b) Selecting the appropriate confirming party;
(c) Designing the confirmation requests, including determining that requests are properly addressed and contain return information for responses to be sent directly to the auditor; and
(d) Sending the requests, including follow-up requests when applicable, to the confirming party.

Question 38.
What are the factors to be considered while designing a confirmation request. [Nov. 12 (8 Marks)]
Answer:
Factors to be considered while designing a confirmation request:
SA 505 “External Confirmation” deals with the auditor’s use of external confirmation procedures to obtain audit evidence. Accordingly, while designing a confirmation request auditor should consider the following factors:

• Assertion being addressed.
• Specific identified Risk of Material Misstatement.
• Layout & presentation of request.
• Prior experience on the audit.
• Method of communication.
• Management authorisation/encouragement to Confirming Party to respond to auditor.
• Ability of Confirming Party to provide/confirm requested information.

Question 39.
While conducting the audit of Amrit Ltd., the auditor A of ABC and Associates, Chartered Accountants observes that there are a large number of trade receivables standing in the books of account as on 31st March. The auditor wanted to send confirmation request to a few large trade receivables but the management refused the auditor to send confirmation request. How would the auditor proceed? [Nov. 20 (4 Marks)]
Answer:
Management refusal to allow auditor to send confirmation request:

• SA 505, “External Confirmations”, establishes standards on the auditor’s use of external confirmation as a means of obtaining audit evidence. It requires that the auditor should employ external confirmation procedures in consultation with the management.
• The auditor may come across certain situations in which the management may request him not to seek external confirmation from certain parties because of some reasons, for example, due to a dispute with the particular creditor or debtor.

In such cases, if management refuses to allow the auditor to send a confirmation request, the auditor shall:
1. Inquire as to management’s reasons for the refusal, and seek audit evidence as to their validity and reasonableness;
2. Evaluate the implications ofmanagement’s refusal on the auditor’s assessmentofthe relevant risks of material misstatement, including the risk of fraud, and on the nature, timing and extent of other audit procedures; and
3. Perform alternative audit procedures designed to obtain relevant and reliable audit evidence.

If the auditor concludes that management’s refusal to allow the auditor to send a confirmation request is unreasonable, or the auditor is unable to obtain relevant and reliable audit evidence from alternative audit procedures, the auditor shall communicate with TCWG in accordance with SA 260. The auditor also shall determine the implications for the audit and the auditor’s opinion in accordance with SA 705.

The auditor should also ask the management to submit its request in a written form, detailing therein the reasons for such a request.

Question 40.
Write short note on: Reliability of external confirmations. [Nov. 10 (4 Marks)]
Answer:
Reliability of external confirmations:
As per SA 505 “External Confirmation”, the reliability of external confirmations depends among other factors, upon the application of appropriate procedures by the auditor in designing the external confirmation request, performing the external confirmation procedures, and evaluating the results of the external confirmation procedures. The factors that affect the reliability of confirmations include:
(a) The control which the auditor exercises over confirmation request and responses;
(b) The character of respondents; and
(c) Any restrictions included in the response or imposed by the management.
If the auditor determines that a response to a confirmation request is not reliable, the auditor shall evaluate the implications on the assessment of the relevant risks of material misstatement, including the risk of fraud, and on the related nature, timing and extent of other audit procedures.

Question 41.
Write short note on: Initial audit engagement. [May 12 (4 Marks)]
Answer:
Initial audit engagements:
As per SA 510 “Initial Audit Engagements – Opening Balances”, initial audit engagement is an engagement in which either:

• The financial statements for the prior period were not audited; or
• The financial statements for the prior period were audited by a predecessor auditor.

Audit Procedures in case of Initial Audit Engagement:
As per SA 505 “External Confirmation”, the reliability of external confirmations depends among other factors, upon the application of appropriate procedures by the auditor in designing the external confirmation request, performing the external confirmation procedures, and evaluating the results of the external confirmation procedures. The factors that affect the reliability of confirmations include:
(a) The control which the auditor exercises over confirmation request and responses;
(b) The character of respondents; and
(c) Any restrictions included in the response or imposed by the management.
If the auditor determines that a response to a confirmation request is not reliable, the auditor shall evaluate the implications on the assessment of the relevant risks of material misstatement, including the risk of fraud, and on the related nature, timing and extent of other audit procedures.

Question 42.
Discuss the objective of Auditor with respect to Opening balances – in conducting an initial audit engagement.
Answer:
Objectives of Auditor w.r.t. Opening balances in case of Initial audit engagement:
As per SA 510 “Initial Audit Engagements- Opening Balances”, the objective of the Auditor while conducting an initial audit engagement with respect to opening balances is to obtain sufficient appropriate audit evidence so that the:

• opening balances of the preceding period have been correctly brought forward to the current period;
• opening balances do not contain any misstatement that materially affect the current period’s financial statements; and
• appropriate accounting policies reflected in the opening balances have been consistently applied in the current period’s financial statements, or changes thereto are properly accounted for and adequately presented and disclosed in accordance with the applicable financial reporting framework.

Question 43.
What are the audit procedures to be followed by a statutory auditor in the audit of opening balances if the financial statements for the preceding year were audited by another auditor.
Or
Discuss with reference to SA ‘510’ Initial Audit Engagements – “Opening Balances”, the procedures the auditor should undertake in respect of opening balances for a new audit engagement. [May 17 (5 Marks)]
Answer:
Audit procedures for verification of opening balances in case of initial audit engagement:
As per SA 510 “Initial Audit Engagements- “Opening Balances”, while verifying the opening balances in case of initial audit engagement, auditor need to perform following procedures:
The auditor shall read the most recent financial statements, if any, and the predecessor auditor’s report thereon, if any, for information relevant to opening balances, including disclosures.

The auditor shall obtain sufficient appropriate audit evidence about whether the opening balances contain misstatements that materially affect the current period’s ES. by:
(a) Determining whether the prior period’s closing balances have been correctly brought forward to the current period or, when appropriate, any adjustments have been disclosed as prior period items in the current year’s Statement of Profit and Loss;
(b) Determining whether the opening balances reflect the application of appropriate accounting policies; and
(c) Performing one or more of the following:

• Where the prior year F.S. were audited, perusing the copies of the audited F.S. including the other relevant documents relating to the prior period F.S.;
• Evaluating whether audit procedures performed in the current period provide evidence relevant to the opening balances; or
• Performing specific audit procedures to obtain evidence regarding the opening balances.

If the auditor obtains audit evidence that the opening balances contain misstatements that could materially affect the current period’s F.S., the auditor shall perform such additional audit procedures as are appropriate in the circumstances to determine the effect on the current period’s F.S.

If the auditor concludes that such misstatements exist in the current period’s F.S., the auditor shall communicate the misstatements with the appropriate level of management and TCWG in accordance with SA 450.

Question 44.
M/s Pankaj & Associates, Chartered Accountants, have been appointed as an auditor of ABC Limited. CA Pankaj did not apply any audit procedures regarding opening balances. He argued that since financial statements were audited by the predecessor auditor therefore he is not required to verify them. Is CA Pankaj correct in his approach? [Nov. 18 (5 Marks)]
Answer:
Auditor’s procedures w.r.t. Opening balances in case of Initial audit engagement:
As per SA 510 “Initial Audit Engagements- Opening Balances”, in case of initial audit engagement auditor shall obtain sufficient appropriate audit evidence about whether the opening balances contain misstatements that materially affect the current period’s F.S. by:
(a) Determining whether the prior period’s closing balances have been correctly brought forward to the current period or, when appropriate, any adjustments have been disclosed as prior period items in the current year’s Statement of Profit and Loss;
(b) Determining whether the opening balances reflect the application of appropriate accounting policies; and
(c) Performing one or more of the following:

• Where the prior year F.S. were audited, perusing the copies of the audited F.S. including the other relevant documents relating to the prior period F.S.;
• Evaluating whether audit procedures performed in the current period provide evidence relevant to the opening balances; or
• Performing specific audit procedures to obtain evidence regarding the opening balances.

In the present case, M/s Pankaj & Associates, Chartered Accountants, have been appointed as an auditor of ABC Limited. CA Pankaj did not apply any audit procedures regarding opening balances. He argued that since financial statements were audited by the predecessor auditor therefore, he is not required to verify them.
Conclusion: Approach of Mr. Pankaj is not correct. He needs to apply the procedures as stated in SA 510.

Question 45.
Auditors of M/s Tender India (P) Ltd. were changed for the accounting year 2020-21. The closing inventory of the company as on 31.3.2020 amounting to ? 100 lacs continued as it is and became closing inventory as on 31.3.2021. The auditors of the company propose to exclude from their audit programme the audit of closing inventory of? 100 lacs on the understanding that it pertains to the preceding year which was audited by another auditor. [MTP-Oct. 19]
Answer:
Verification of Inventory:
As per SA 510 “Initial Audit Engagements – Opening Balances”, in conducting an initial audit engagement, the objective of the auditor with respect to opening balances is to obtain sufficient appropriate audit evidence about whether-

• Opening balances contain misstatements that materially affect the current period’s financial statements; and
• Appropriate accounting policies reflected in the opening balances have been consistently applied in the current period’s financial statements, or changes thereto are properly accounted for and adequately presented and disclosed in accordance with the applicable financial reporting framework.

When the financial statements for the preceding period were audited by predecessor auditor, the current auditor may be able to obtain sufficient appropriate audit evidence regarding opening balances by perusing the copies of the audited financial statements including the other relevant documents relating to the prior period financial statements such as supporting schedules to the audited financial statements. Ordinarily, the current auditor can place reliance on the closing balances contained in the financial statements for the preceding period, except when during the performance of audit procedures for the current period the possibility of misstatements in opening balances is indicated.

General principles governing verification of assets require that the auditor should confirm that assets have been correctly valued as on the Balance Sheet date.

The contention of the management that the inventory has not undergone any change cannot be accepted, it forms part of normal duties of auditor to ensure that the figures on which he is expressing opinion are correct and properly valued. Moreover, it is also quite likely that the inventory lying as it is might have deteriorated and the same need to be examined. The auditor is advised not to exclude the audit of closing inventory from his audit programme.

Question 46.
The nature of related party relationships and transactions may, in some circumstances, give rise to higher risks of material misstatement of the financial statements than transactions with unrelated parties. Explain with the help of at least three examples. [RTP-May 20]
Answer:
Nature of Related Party Relationships & Transactions:
Many related party transactions are in the normal course of business. In such circumstances, they may carry no higher risk of material misstatement of the financial statements than similar transactions with unrelated parties.
However, the nature of related party relationships and transactions may, in some circumstances, give rise to higher risks of material misstatement of the financial statements than transactions with unrelated parties.

For example:
(a) Related parties may operate through an extensive and complex range of relationships and structures, with a corresponding increase in the complexity of related party transactions.
(b) Information systems may be ineffective at identifying or summarising transactions and outstanding balances between an entity and its related parties.
(c) Related party transactions may not be conducted under normal market terms and conditions; for example, some related party transactions may be conducted with no exchange of consideration.

Question 47.
Explain the responsibilities of auditor in relation to related parties.
Or
There are specific accounting and disclosure requirements for related party relationships, transactions and balances to enable users of the financial statements to understand their nature and effects on the financial statements. Analyse and explain stating the responsibility of auditor in this regard. [RTP-May 19, Nov. 20]
Answer:
Responsibilities of auditor in relation to related parties:
SA 5 50 “Related Parties” deals with the auditor’s responsibilities regarding related party relationships
and transactions when performing an audit of financial statements. Accordingly
1. Many financial reporting frameworks establish specific accounting and disclosure requirements for related party relationships, transactions and balances to enable users of the financial statements to understand their nature and effects on the financial statements.

2. Where the applicable FRF establishes such requirements, the auditor has a responsibility to perform audit procedures to identify, assess and respond to the RMM arising from the entity’s failure to appropriately account for or disclose related party relationships, transactions or balances in accordance with the requirements of the framework.

3. Even if the applicable FRF establishes minimal or no related party requirements, the auditor nevertheless needs to obtain an understanding of the entity’s related party relationships and transactions sufficient to be able to conclude whether the financial statements, insofar as they are affected by those relationships and transactions:
(a) achieve a true and fair presentation; or
(b) are not misleading.

4. in addition, an understanding of the entity’s related party relationships and transactions is relevant to the auditor’s evaluation of whether one or more fraud risk factors are present as required by SA 240 because fraud may be more easily committed through related parties.

5. Owing to the inherent limitations of an audit, there is an unavoidable risk that some material misstatements of the financial statements may not be detected, even though the audit is properly
planned and performed in accordance with the SAs. In the context of related parties, the potential effects of inherent limitations on the auditor’s ability to detect material misstatements are greater for such reasons as the following:
(a) Management may be unaware of the existence of all related party relationships and transactions, particularly if the applicable financial reporting framework does not establish related party requirements.
(b) Related party relationships may present a greater opportunity for collusion, concealment or manipulation by management.
Planning and performing the audit with professional skepticism as required by SA 200 is therefore particularly important in this context, given the potential for undisclosed related party relationships and transactions.

Question 48.
Write short note on: Identification of significant related party transaction outside business. [Nov. 13 (4 Marks)]
Or
Discuss the following: With reference to SA 550 Identification of significant related party transaction outside the entity’s normal course of business. [May 16 (5 Marks)]
Answer:
Identification of Significant Related Party Transaction outside business:
SA 550 “Related Parties” deals with the auditor’s responsibilities regarding related party relationships and transactions when performing an audit of financial statements. Accordingly, for identified significant related party transactions outside the entity’s normal course of business, the auditor shall:
(a) Inspect underlying contracts/agreements and evaluate whether:

• Business rationale [or lack thereof) suggests that transactions entered to engage in fraudulent financial reporting or to conceal misappropriation of assets.
• Terms of transactions consistent with management’s explanations.
• Transactions appropriately accounted for/disclosed in accordance with FRF.

(b) Obtain evidence that transactions have been appropriately authorised & approved.

Question 49.
Discuss the concept of “True and Fair”. [May 05 (8 Marks), Nov. 12 (6 Marks)]
Answer:
True and fair view:

• The concept of “true and fair” is a fundamental concept in auditing. The phrase “true and fair” in the auditor’s report signifies that the auditor is required to express his opinion as to whether the state of affairs and the results of the entity as ascertained by him in the course of his audit are truly and fairly represented in the accounts under audit.
• What constitutes “true and fair” has not been defined in the legislation.
• Sec. 128(1) of Companies Act, 2013 provides that every company shall prepare and keep at its registered office books of account and other relevant books and papers and financial statement for every financial year which gives a true and fair view of the state of the affairs of the company.
• Sec. 129(1) of Companies Act, 2013 provides that the financial statements shall give a true and fair view of the state of affairs of the company or companies, comply with the accounting standards notified under section 133 and shall be in the form or forms as may be provided for different class or classes of companies in Schedule 111.
• Sec. 143(2) of Companies Act, 2013 requires the auditor to make a report to the members of the company indicating therein that, to the best of his information and knowledge, the accounts and financial statements give a true and fair view of the state of the company’s affairs as at the end of its financial year & profit or loss & cash flow for the year & other matters as may be prescribed.

In specific terms to ensure truth and fairness, auditor is required to examine the accounts with a view to verify that all assets and liabilities, income and expenses are stated at the amounts which are in accordance with accounting principles and policies and no material item has been omitted.

Question 50.
What constitutes true and fair view is a matter of auditor’s judgment, but some specific points must be seen by the auditor to ensure true and fair view.
Or
What constitutes a ‘true and fair’ view, is the matter of an auditor’s judgment in the particular circumstances of a case. In order to ensure ‘true and fair’ view, auditor has to review certain points. Mention any such 5 (five) points in brief. [May 18 (5 Marks)]
Answer:
Specific points to be seen to ensure true and fair view:
The concept of “true and fair” is a fundamental concept in auditing. The phrase “true and fair” in the auditor’s report signifies that the auditor is required to express his opinion as to whether the state of affairs and the results of the entity as ascertained by him in the course of his audit are truly and fairly represented in the accounts under audit.

What constitutes “true and fair” has not been defined in the legislation. In specific terms to ensure truth and fairness, an auditor has to see that:

• (/) the assets are neither undervalued or overvalued;
• no material asset is omitted;
• the charge on assets, if any, is disclosed;
• material liabilities should not be omitted, and liabilities are neither undervalued or overvalued;
• accounting policies have been followed consistently;
• all unusual, exceptional, non-recurring items have been disclosed separately;
• accounts have been drawn as per requirement of Schedule III to the Companies Act; and
• the accounts have been drawn in compliance to the relevant AS.
• In case of deviation from AS, disclosure should be made of the reasons for such deviation and financial effects, if any arising due to such deviation.

Question 51.
Write short note on: Subsequent Events.
Or
Explain the meaning of term “Subsequent Events” as used in SA 560. Should all types of subsequent events be considered by the auditor in attest functions. [May 12 (8 Marks)]
Answer:
Subsequent Events:
SA 560 “Subsequent Events” defined the term as:
(a) Events occurring between the date of the financial statements and the date of the auditor’s report, and
(b) Facts that become known to the auditor after the date of the auditor’s report.

Consideration of subsequent events by the auditor:
In respect of subsequent events, auditor is required to consider the followings:
(a) Obtain sufficient appropriate audit evidence about whether events occurring between the date of the financial statements and the date of the auditor’s report that require adjustment of, or disclosure in, the financial statements as per the requirement of AS-4 “Events Occurring after
the Balance Sheet Date” are appropriately reflected in those financial statements; and
(b) Respond appropriately to facts that become known to the auditor after the date of the auditor’s report, that, had they been known to the auditor at that date, may have caused the auditor to amend the auditor’s report.

Question 52.
“The auditor should consider the effect of subsequent events on the financial statements and auditor’s report according to SA 560”. Comment. [MTP-Oct-19]
Or
The auditor shall perform audit procedures designed to obtain sufficient appropriate audit evidence that all events occurring between the date of the financial statements and the date of the auditor’s report that require adjustment of, or disclosure in, the financial statements have been identified. Explain. [RTP-May 19]
Answer:
Consideration of Effect of subsequent events:
SA 560 “Subsequent Events” requires the auditor to obtain sufficient appropriate audit evidence
about whether events occurring between the date of the financial statements and the date of the
auditor’s report that require adjustment of, or disclosure in, the financial statements are appropriately
reflected in those financial statements. For this purpose, auditor shall perform the following:
(a) Obtain an understanding of the procedures through which management has identified subsequent events.
(b) Inquiring of management as to occurrence of Subsequent events which affect the financial statements.
(c) Read minutes of management meetings that have been held after the date of the financial statements.
(d) Read the entity’s latest subsequent interim financial statements, if any.
(e) If auditor identifies events that require adjustment or disclosure in the financial statements, the auditor should determine whether each such event is appropriately reflected in the financial statements.
(f) The auditor shall request the management to provide a “Written Representation” that all events occurring subsequent to the date of the financial statements and requires adjustment or disclosure have been adjusted or disclosed.

Question 53.
The auditor has no obligation to perform any audit procedures regarding the financial statements after the date of the auditor’s report. However, when, after the date of the auditor’s report but before the date the financial statements are issued, a fact becomes known to the auditor that, had it been known to the auditor at the date of the auditor’s report, may have caused the auditor to amend the auditor’s report. Explain the auditor’s obligation in the above situation. [RTP-May 20]
Answer:
Audit Procedures regarding Facts Which Become Known to the Auditor After the Date of the Auditor’s Report but Before the Date the F.S. are Issued:
As per SA 560 “Subsequent Events” the auditor has no obligation to perform any audit procedures regarding the financial statements after the date of the auditor’s report. However, when, after the date of the auditor’s report but before the date the financial statements are issued, a fact becomes known to the auditor that, had it been known to the auditor at the date of the auditor’s report, may have caused the auditor to amend the auditor’s report, the auditor shall:
[a] Discuss the matter with management and, where appropriate, those charged with governance.
[b] Determine whether the financial statements need amendment and, if so,
[c] Inquire how management intends to address the matter in the financial statements.

Question 54.
Enquiry from management is helpful for auditor to evaluate subsequent events. Discuss specific enquiries in reference of SA 560, which might have effect on the financial statements. [Nov. 14 (5 Marks)]
Or
In the context of SA 560 “Subsequent events”, state-specific enquiries on matters by an auditor which may have effect on Financial Statements. [Nov. 17 (5 Marks)]
Answer:
Specific enquiries to be conducted in reference to SA 560:
SA 560 “Subsequent Events” requires the auditor to obtain sufficient & appropriate audit evidence to ensure that events which require adjustments or disclosure in the financial statements have been identified. For this purpose, auditor is required to inquire the management as to occurrence of Subsequent events which affect the financial statements. Specific inquiries as specified by SA 560 include the following:

• Whether new commitments, borrowings or guarantees have been entered into.
• Whether sales or acquisitions of assets have occurred or are planned.
• Whether there have been increases in capital or issuance of debt instruments, such as the issue of new shares or debentures, or an agreement to merge or liquidate has been made or is planned.
• Whether any assets have been appropriated by government or destroyed, for example, by fire or flood.
• Whether there have been any developments regarding contingencies.
• Whether any unusual accounting adjustments have been made or are contemplated.
• Whether any events have occurred or are likely to occur that will bring into question the appropriateness of accounting policies used in the financial statements, as would be the case, for example, if such events call into question the validity of the going concern assumption.
• Whether any events have occurred that are relevant to the measurement of estimates or provisions made in the financial statements.
• Whether any events have occurred that are relevant to the recoverability of assets.

Question 55.
On the basis of this assumption, the financial statements of a company are prepared. Explain. Also describe the objectives of the auditor regarding going concern. [RTP-May 19]
Or
When the use of the going concern basis of accounting is appropriate, assets and liabilities are recorded on the basis that the entity will be able to realize its assets and discharge its liabilities in the normal course of business. Explain stating also the objective of the auditor regarding going concern. [RTP-Nov. 19]
Answer:
Going Concern Basis of Accounting
As per AS-1 “Disclosure of Accounting Policies, financial statements are prepared on the basis of three assumptions

• Going Concern
• consistency and
• Accrual.

Under the going concern basis of accounting, the financial statements are prepared on the assumption that the entity is a going concern and will continue its operations for the foreseeable future. When the use of the going concern basis of accounting is appropriate, assets and liabilities are recorded on the basis that the entity will be able to realize its assets and discharge its liabilities in the normal course of business.

Objectives of the auditor:
As per SA 570 “Going Concern”, objectives of the auditor regarding going concern are:

• To obtain written representations from management and, where appropriate, those charged with governance that they believe that they have fulfilled their responsibility for the preparation of the financial statements and for the completeness of the information provided to the auditor;
• To support other audit evidence relevant to the financial statements or specific assertions in the financial statements by means of written representations, if determined necessary by the auditor or required by other SAs; and
• To respond appropriately to written representations provided by management and, where appropriate, those charged with governance, or if management or, where appropriate, those charged with governance do not provide the written representations requested by the auditor.

Question 56.
Write short note on: Procedures to be performed by the auditor in expressing opinion on ‘going concern’ assumption. [Nov. 10 (4 Marks)]
Or
Explain with reference to relevant SA: Appropriateness of going concern assumption.
Answer:
Procedures to be performed in expressing opinion on going concern assumption:
SA 570 “Going Concern” deals with the auditor’s responsibility with respect to management’s use of the going concern assumption in the preparation and presentation of the financial statements.

As per SA 570, auditor may perform the following procedures for this purpose:

• Analysing and discussing cash flow, profit and other relevant forecasts with management.
• Analysing and discussing the entity’s latest available interim financial statements.
• Reading the terms of debentures and loan agreements and determining whether any have been breached.
• Reading minutes of the meetings of shareholders, those charged with governance and relevant committees for reference to financing difficulties.
• Inquiring of the entity’s legal counsel regarding the existence of litigation and claims and the reasonableness of management’s assessments of their outcome and the estimate of their financial implications.
• Confirming the existence, legality and enforceability of arrangements to provide or maintain financial support with related and third parties and assessing the financial ability of such parties to provide additional funds.
• Evaluating the entity’s plans to deal with unfilled customer orders.
• Performing audit procedures regarding subsequent events to identify those that either mitigate or otherwise affect the entity’s ability to continue as a going concern.
• Confirming the existence, terms and adequacy of borrowing facilities.
• Obtaining and reviewing reports of regulatory actions.
• Determining the adequacy of support for any planned disposals of assets.

Question 57.
Explain going concern assumption with reference to SA 570. State some financial events or conditions that may case doubt about going concern assumption. [May 12 (8 Marks)]
Answer:
Financial Indicators to be considered for evaluation of Going Concern Assumption:
SA 5 70 “Going Concern” deals with the auditor’s responsibility in the audit of financial statements with respect to management’s use of the going concern assumption in the preparation and presentation of the financial statements.

As per SA 570, financial indicators to be considered for evaluation of going concern are listed below:

• Net liability or net current liability position.
• Fixed-term borrowings approaching maturity without realistic prospects of renewal or repayment; or excessive reliance on short-term borrowings to finance long-term assets.
• Indications of withdrawal of financial support by creditors.
• Negative operating cash flows indicated by historical or prospective financial statements.
• Adverse key financial ratios.
• Substantial operating losses or significant deterioration in the value of assets used to generate cash flows.
• Arrears or discontinuance of dividends.
• Inability to pay creditors on due dates.
• Inability to comply with the terms of loan agreements.
• Change from credit to cash-on-delivery transactions with suppliers.
• Inability to obtain financing for essential new product development or other essential investments.

Question 58.
Discuss with reference to SAs: Operating conditions that may cast doubt going concern assumption. [May 14 (5 Marks)]
Answer:
Operating conditions that may cast doubt going concern assumption:
SA 5 70 “Going Concern” deals with the auditor’s responsibility in the audit of financial statements with respect to management’s use of the going concern assumption in the preparation and presentation of the financial statements.

As per SA 570, operating conditions that may cast doubt going concern assumption are listed below:

• Management intentions to liquidate the entity or to cease operations.
• Loss of key management without replacement.
• Loss of a major market, key customer(s), franchise, license, or principal supplier(s).
• Labour difficulties.
• Shortages of important supplies.
• Emergence of a highly successful competitor.

Objective Type Questions (True/False, Correct/Incorrect)

Question 1.
Inspection consists of looking at a process or procedure being performed by others.
Answer:
Statement is incorrect.

• 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.
• 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.

Question 2.
Purchase invoice is an example of internal evidence.
Answer:
Statement is incorrect.

• Internal evidence is one that has been created within the client’s organization.
• Purchase invoice is external evidence as it originates from outside the entity.

Question 3.
Sufficiency is the measure of the quality of audit evidence.
Answer:
Statement is incorrect.

• Sufficiency refers to the quantity of audit evidence.
• Appropriateness is the measure of quality of audit evidence.

Question 4.
Substantive procedure may be defined as an audit procedure designed to evaluate the operating effectiveness of controls in preventing, or detecting and correcting material misstatements at the assertion level.
Answer:
Statement is incorrect.

• SA 330 defines substantive procedures as audit procedures designed to detect the material misstatements at the assertion level.
• Audit procedures designed to evaluate the operating effectiveness of controls in preventing, or detecting and correcting material misstatements at the assertion level are known as Tests of Control.

Question 5.
As per SA 570, the objective of the Auditor is to obtain sufficient appropriate audit evidence about the appropriateness of management’s use of consistency assumption in the preparation and presentation of the financial statements.
Answer:
Statement is incorrect.
As per SA 570 “Going Concern”, objective of the auditor is to obtain sufficient appropriate audit evidence about the appropriateness of management’s use of going concern basis of accounting in the preparation of the financial statements.

Question 6.
If the auditor believes that the concern will not continue as going concern, he should issue disclaimer of opinion. [May 07 (2 Marks)]
Answer:
Statements is incorrect, as per SA 570 “Going Concern” If the financial statements have been prepared on a going concern basis but, in the auditor’s judgment, management’s use of the going concern assumption in the financial statements is inappropriate, the auditor shall express an adverse opinion.

Question 7.
If internal control is satisfactory, external evidence is more reliable than internal evidence. [Nov. 07 (2 Marks)]
Answer:
Statement is incorrect, as per SA 500 “Audit Evidence” 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.

Question 8.
Management Certificate obtained by the Auditor is enough for verification of Inventories. [Nov. 08 (2 Marks)]
Answer:
Statement is incorrect.

• As per SA 580 “Written Representation” the representations received from management are recognised as audit evidence, but they do not constitute Sufficient and appropriateness.
• Auditor is required to seek corroborative audit evidence from other sources inside or outside the entity, to evaluate whether such representations are reasonable and consistent with other evidences. Representation received from Management cannot be a substitute for other audit evidence that the auditor could reasonably expect to be available.

Question 9.
SA 580 is related to materiality. [Nov. 08 (2 Marks)]
Answer:
Statement is false, SA 580 is related with “Written Representation”. Materiality is dealt by SA 320.

Question 10.
Audit working papers to be kept at least for 3 years. [Nov. 08 (2 Marks)]
Answer:
Statement is false. SA 230 “Audit Documentation” requires that audit working papers is to be kept for 7 years from the date of audit report.

Question 11.
“Taking management representation is a convenient, economical and equally acceptable auditing method even where the direct access by auditor to audit evidence is possible”. [June 09 (2 Marks)]
Answer:
Statement is incorrect.

• As per SA 580 “Written Representation” the representations received from management are recognised as audit evidence, but they do not constitute Sufficient and appropriateness.
• Auditor is required to seek corroborative audit evidence from other sources inside or outside the entity, to evaluate whether such representations are reasonable and consistent with other evidences. Representation received from Management cannot be a substitute for other audit evidence that the auditor could reasonably expect to be available.

Question 12.
It is no part of subsequent auditor’s duty to verify the opening balances of ledger accounts of current year, on the basis of balance sheet audited by previous auditor. [June 09 (2 Marks)]
Answer:
Statement is false as SA 510 “Initial Audit Engagements – Opening Balances” states that in conducting an initial audit engagement, the objective of the auditor with respect to opening balances is to obtain sufficient appropriate audit evidence about whether Opening balances contain misstatements that materially affect the current period’s financial statements.

Question 13.
A company which has been unable to negotiate borrowings from its bankers claims that it will be able to continue as a ‘going concern’. [Nov. 09 (2 Marks)]
Answer:
Statement will be considered true if after applying the procedures as stated in SA 570 “Going Concern” auditor concludes that inability of company to negotiate borrowings from bankers is due to the reasons other than company financial weakness. Otherwise the statement will be considered as false as there will be a sufficient doubt over the ability of the company to continue as a going concern without the financial support.

Question 14.
The auditee firm has no right to compel the auditor to provide copies of the working papers. [Nov. 09 (2 Marks)]
Answer:
Statement is correct.

• SA 230 “Audit Documentation” states that unless otherwise specified by law or regulation, audit documentation is the property of the auditor.
• He may at his discretion make portions of working papers available to client.

Question 15.
Confirmations received by the auditor directly from third parties are conclusive evidence in support of a transaction. [May 10 (2 Marks)]
Answer:
Statement is incorrect.
Confirmations received directly from the third parties by the auditor are more reliable but same cannot be treated as conclusive evidence.

Question 16.
Compliance procedures are tests designed to obtain audit evidence as to completeness, accuracy and validity of data produced by accounting system. [May 13 (2 Marks)]
Answer:
Statement is incorrect.

• Compliance procedures are tests designed to obtain reasonable assurance that those internal controls on which audit reliance is to be placed are in effect.
• Here auditor is concerned with assertions that the control exists and is operating effectively.

Question 17.
Branch auditor of a company should give photocopies of his working papers on demand by Company Auditor. [Nov. 13 (2 Marks)]
Answer:
Statement is incorrect,

• SA 2 30 “Audit Documentation” states that unless otherwise specified by law or regulation, audit documentation is the property of the auditor. He may at his discretion make portions of working papers available to client. The main auditors of an enterprise do not have right of access to the audit working papers of the branch auditors.
• In the case of a company, the statutory auditor has to consider the report of the branch auditor and has a right to seek clarifications and/or to visit the branch if he deems it necessary to do so for the performance of the duties as auditor. An auditor can rely on the work of another auditor, without having any right of access to the audit working papers of the other auditor.

Question 18.
Financial statements should show “True and Correct” view of the affairs of the entity. [Nov. 13 [2 Marks)]
Answer:
Statement is incorrect.

• Section 129(1) of the Companies Act, 2013 states that every balance sheet of a company shall give a true and fair view of the state of affairs of the company at the end of the financial year.
• Section 129(1) of the Companies Act, 2013 states that every profit and loss account of a company shall give a true and fair view of the profit or loss of the company for the financial year.

Question 19.
An Auditor is bound to provide copies of the working papers to the CEO of the company. [Nov. 14 (2 Marks)]
Answer:
Statement is Incorrect. SA230 “Audit Documentation” states that unless otherwise specified bylaw or regulation, audit documentation is the property of the auditor.
He may at his discretion make portions of working papers available to client.

Question 20.
The Auditor shall express an unqualified opinion if the Auditor is unable to obtain sufficient audit evidence regarding the opening balances. [Nov. 14 (2 Marks)]
Answer:
Statement is incorrect.
SA 510 “Initial Audit Engagements – Opening Balances”, states that if the auditor is unable to obtain sufficient appropriate audit evidence regarding the opening balances, the auditor shall express a qualified opinion or a disclaimer of opinion, as appropriate.

Question 21.
Written representation by management as to the quality of inventory is substitute for verification. [May 15 (2 Marks)]
Answer:
Statement is incorrect.

• As per SA 580 “Written representation” the objectives of the written representation is to support other audit evidence relevant to the financial statements or specific assertions in the financial statements.
• Written representations cannot be considered as sufficient and appropriate hence cannot be a substitute for other evidence that the auditor could expect to be reasonably available.

Question 22.
Working papers are property of client, as it contains client’s informations. [Nov. 15 (2 Marks)]
Answer:
Statement is incorrect.

• SA 230 “Audit Documentation” states that unless otherwise specified by law or regulation, audit documentation is the property of the auditor. He may at his discretion make portions of working papers available to client.
• Working papers cannot be considered as property of the client, irrespective of the matter that it contains client’s information.

Question 23.
Substantive procedures do not test the balance of accounts. [May 16 (2 Marks)]
Answer:
Statement is incorrect.

• Substantive procedures comprise of tests of details and substantive analytical procedures.
• Tests of details comprise of details of transactions and account balances.

Question 24.
Evaluating responses to enquiries is an integral part of the inquiry process. [May 16 (2 Marks)]
Answer:
Statement is correct.

• As per SA – 500 “Audit Evidence” inquiry consists of seeking information of knowledgeable persons, both financial and non-financial, within the entity or outside the entity.
• Evaluating responses to inquiries is an integral part of the inquiry process.

Question 25.
One of the techniques used for gathering evidence is substantial review. [Nov. 16 (2 Marks)]
Answer:
Statement is incorrect.
Technique used for obtaining evidence is analytical review procedure which consists of studying significant ratios and trends.

Question 26.
It is necessary for the auditor to maintain professional skepticism throughout the audit. [Nov. 16 (2 Marks)]
Answer:
Statement is correct.
As per SA 200 “Overall Objectives of the Independent Auditor and Conduct of Audit in accordance with Standards on Auditing” maintaining professional skepticism throughout the audit is necessary if the auditor is, for example, to reduce the risks of:

• Overlooking unusual circumstances.
• Over generalising when drawing conclusions from audit observations.
• Using inappropriate assumptions in determining the nature, timing, and extent of the audit procedures and evaluating the results thereof.

Question 27.
“Substantive procedures” may be defined as audit procedures designed to evaluate the operating effectiveness of controls in preventing, detecting and correcting material misstatements. [May 17 (2 Marks)]
Answer:
Statement is incorrect.

• SA 330 defines substantive procedures as audit procedures designed to detect the material misstatements at the assertion level.
• Audit procedures designed to evaluate the operating effectiveness of controls in preventing, or detecting and correcting material misstatements at the assertion level are known as Tests of Control.

Question 28.
Written representation can be a substitute for other audit evidence. [Nov. 17 (2 Marks)]
Answer:
Statement is incorrect.

• As per SA 580 “Written Representation” the representations received from management are recognised as audit evidence, but they do not constitute sufficient and appropriateness.
• Auditor requires the written representation from the management to support other audit evidence relevant to the Financial Statements or specific assertions in the Financial Statements.

Question 29.
As per SA 230 on “Audit Documentations”, the working papers are not the property of the auditor. [May 18-RTP]
Answer:
Statement is incorrect.

• SA 230 “Audit Documentation” states that unless otherwise specified by law or regulation, audit documentation is the property of the auditor. He may at his discretion make portions of working papers available to client.
• The auditor should retain them long enough to meet the needs of his practice and legal or professional requirement.

Question 30.
The Audit engagement documentations should ordinarily be retained by the auditor for minimum of six years from the date of the auditor’s report or is later, the date of the group auditor’s report, which ever. [May 18 (2 Marks)]
Answer:
Statement is incorrect.
As per requirements of SQC1 “Quality Control for Firms that perform Audits and Reviews of Historical Financial Information, and Other Assurance and Related Services Engagements” and SA 230 “Audit Documentation” audit engagement documentations should be kept for a minimum of 7 years from the date of audit report.

Question 31.
Mr. A is a statutory auditor of ABC Ltd. The branch of ABC Ltd. is audited by Mr. B, another chartered Accountant. Mr. A requests for the photocopies of the audit documentation of Mr. B pertaining of the branch audit. [May 18 (2 Marks)]
Answer:
Statement is Incorrect.

• SA 230 “Audit Documentation” states that unless otherwise specified by law or regulation, audit documentation is the property of the auditor. He may at his discretion make portions of working papers available to client. The main auditors of an enterprise do not have right of access to the audit working papers of the branch auditors.
• In the case of a company, the statutory auditor has to consider the report of the branch auditor and has a right to seek clarifications and/or to visit the branch if he deems it necessary to do so for the performance of the duties as auditor. An auditor can rely on the work of another auditor, without having any right of access to the audit working papers of the other auditor.

Question 32.
Audit documentation is a substitute for the entity’s accounting records. [RTP-Nov. 18, May 19]
Answer:
Statement is incorrect.

• The auditor may include copies of the entity’s records (for example, significant and specific contracts and agreements) as part of audit documentation.
• Audit documentation is not a substitute for the entity’s accounting records.

Question 33.
An appropriate time limit within which to complete the assembly of the final audit file is ordinarily not more than 30 days after the date of the auditor’s report. [RTP-Nov. 18, May 19]
Answer:
Statement is incorrect.

• As per SQC 1 “Quality Control for Firms that perform Audits and Review of Historical Financial Information, and other Assurance and related services”, firms are required 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.

Question 34.
An auditor is not concerned with consistency of accounting policies relating to opening balances. [Nov. 18 (2 Marks)]
Answer:
Statement is incorrect.
As per SA 510 “Initial Audit Engagement – Opening Balances”, the auditor shall obtain sufficient appropriate audit evidence about

• whether the accounting policies reflected in the opening balances have been consistently applied in the current period’s financial statements, and
• whether changes in the accounting policies have been properly accounted for and adequately presented and disclosed in accordance with the applicable financial reporting framework.

Question 35.
Audit evidence obtained from external confirmation is always reliable. [Nov. 18 (2 Marks)]
Answer:
Statement is incorrect.

• As per SA 505 “External Confirmations” depending on the circumstances of the audit, audit evidence in the form of external confirmations received directly by the auditor from confirming parties may be more reliable than evidence generated internally by the entity.
• All responses carry some risk of interception, alteration or fraud. Such risk exists regardless of whether a response is obtained in paper form, or by electronic or other medium.

Question 36.
Positive Confirmation request is a request where the confirming party respond only if it disagrees with the information provided in the request. [May 19 (2 Marks)]
Answer:
Statement is incorrect.

• As per SA 505 “External Confirmations” a request where the confirming party respond only if it disagrees with the information provided in the request, is known as Negative Confirmation request.
• Positive Confirmation request is request that the confirming party respond directly to the auditor indicating whether the confirming party agrees or disagrees with the information in the request, or providing the requested information.

Question 37.
Subjective examination connotes critical examination and scrutiny of the accounting statements. [RTP-Nov. 19]
Answer:
Statement is incorrect.
Objective examination connotes critical examination and scrutiny of the accounting statements of the undertaking with a view to assessing how far the statements present the actual state of affairs in the correct context and whether they give a true and fair view about the financial results and state of affairs.

Question 38.
Inquiry alone provides sufficient audit evidence of the absence of a material misstatement at the assertion level and of the operating effectiveness of controls. [RTP-Nov. 19]
Answer:
Statement is incorrect.
Although inquiry may provide important audit evidence, and may even produce evidence of a misstatement, inquiry alone ordinarily does not provide sufficient audit evidence of the absence of a material misstatement at the assertion level, nor of the operating effectiveness of controls.

Question 39.
All entities that are under common control by a state (i.e., national, regional or local government) are considered related party. [Nov. 19 (2 Marks)]
Answer:
Statement is incorrect.
As per SA 550 “Related Parties”, entities that are under common control by a state [i.e., a national, regional or local government) are not considered related unless they engage in significant transactions or share resources to a significant extent with one another.

Question 40.
The auditor’s substantive procedure at the assertion level means substantive analytical procedures only. [Nov. 19 (2 Marks)]
Answer:
Statement is incorrect.

• SA 330 defines substantive procedures as audit procedures designed to detect the material misstatements at the assertion level.
• The auditor’s substantive procedures at the assertion level may be tests of details, substantive analytical procedures, or a combination of both.
• The decision about which audit procedures to perform, including whether to use substantive analytical procedure, is based on the auditor’s judgment about the expected effectiveness and efficiency of the available audit procedures to reduce audit risk at the assertion level to an acceptably low level.

Question 41.
SQC1 requires engagement partner 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 30 days after the date of the auditor’s report. [MTP-May 20]
Answer:
Statement is incorrect.

• SQC1 “Quality Control for Firms that perform Audits and Review of Historical Financial Information, and other Assurance and related services”, 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.

Question 42.
If the auditor is unable to obtain sufficient appropriate audit evidence regarding the opening balances, the auditor shall include an Emphasis of Matter paragraph in the auditor’s report. [MTP-May 20]
Answer:
Statement is incorrect.
As per SA 510, “Initial Audit Engagements – Opening Balances”, if the auditor is unable to obtain sufficient appropriate audit evidence regarding the opening balances, the auditor shall express a qualified opinion or a disclaimer of opinion, as appropriate, in accordance with SA 705.

Question 43.
External confirmation procedures are restricted to the items of addressing assertions associated with account balances & their elements only. [Nov. 20 (2 Marks)]
Answer:
Statement is incorrect.

• External confirmation procedures frequently are relevant when addressing assertions associated with account balances and their elements, but need not be restricted to these items.
• For example, the auditor may request external confirmation of the terms of agreements, contracts, or transactions between an entity and other parties.