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25 Surbhi Bansal Audit Notes for Ipcc

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    PROFESSIONAL MISCONDUCT

    By: Mrs. Surbhi BansalM.Com., FCA

    Sec.2 (2):

    Members deemed to be in practice: If he(i) Engages himself in practice of accountancy, or

    (ii) Offersto perform audit related services or holdshimself out to the public as an accountant, or

    (iii)Renders professionalservice or assistance in Matters of accountant interest etc., or,

    (iv)Renderssuch other services which as per opinion of the council, to be rendered by C.A. inpractice. (Mgt. consultancy service)

    Explanation : () C.A. who is salaried employer of C.A. in practice shall be deemed to be inpractice for limited purposes of training articled cler!.

    (") C.A. shall be deemed to be in practice if he, in his professional capacity (not inpersonal#employee$s capacity) acts as li%uidator, trustee, e&ecutor, adviser ' same or ta!es

    up an appointment mate by ovt. or court or other legal authority. owever for this purposehis engagement shouldn$t be on a salary*cum* full time basis.

    Significance of certificate of ractice:

    As per +udicial ruling

    (i) -nce a member of ICAI appears before I.. authorities etc. he can so appear only in hiscapacity as a C.A.

    (ii) hus for period of suspension, he can$t practice as I.. practitioner even if he is having lawdegree.

    (iii) hus, a member of ICAI can$t have other capacity, separable from his capacity to practice as amember of the Institute.

    Section !:

    A member in practice can$t use any other designation than that of a Chartered Accountant nor anyother description whether in addition thereto or in substitution therefore. owever they can useany other letter etc. indicating degree of other institutions.

    Section " :/isabilities for purpose of membership :(i) If he isn$t " yrs. or(ii) If he is of unsound mind as per a competent Court, or(iii) 0ndischarged insolvent, or(iv) /ischarged insolvent but hasn$t obtained from the court a certificate starting that his insolvency

    was by misfortune without any misconduct on his part, or(v) Convicted of an offence involving moral turpitude unless he has been granted a pardon etc. or

    (vi) If removed from membership of ICAI due to misconduct.

    If the person fails to disclose the fact that he suffers from any of disabilities aforementioned, it willconstitute professional misconduct on his part.

    Section #$ :1rocedure in en%uires for disciplinary matters :

    Complaint Council /isciplinary Committee Council igh Court (if need arises)

    1

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    Complaint Council whether it is fit /.C. (Ist2chedule)fit for case or not (aving evidences e&planation

    unfit ' than recommended report(1rima facie opinion re+ect supply to council3hether complaint isfit. It is not deciding) Council

    1ass the decision

    4efer to .C(If in Ist2chedule to be removedfrom register for more than 5 yrs.if it falls in IIndschedule)

    (i) At first stage, council is framing +ust prima facie opinion with respect to complaint.(ii) It is not deciding whether C.A is guilty or not.

    (iii) 6ormally no fresh evidences are permitted before council, once the disciplinary committeesubmitted its report to council. owever council may permitted the same at its own discretion.

    (iv) he recommendation report of /.C. in to be given to C. A concerned before submitting it tothe council ' it is also giving opportunity of being heard.

    (v) he C.A. concerned will appear to council either himself or may be represented by someother C.A (not by 7ower)

    (vi) 3ithout any complaint, the council may also ta!e any action suo*moto.

    Section #%:1enalty for falsely claiming to be a member :Any person who :

    (i) 6ot being member of ICAI represents that he is a member of Institute or uses the designationChartered Accountant, or

    (ii) 8eing member of ICAI but not having C-1 represents that he is in practice or practices as CA,2hall be punished.

    Section #! : Maintenance of Branch office :Office:3here name 8oard of firm is affi&ed or which is described as place of business on any

    professional stationary. hus a C.A can have a name plate of himself describing him asChartered Accountant but not that of the firm at his place of residence, as it will be construed asbranch

    As a general rule, 9ach one of such offices should be in separate charge of a member of Institute.

    Exception (&o separate in charge is needed)

    'or eber practicing is illy *reas 'or all ebers

    (i) In plains for period months in winter

    season, '

    (ii) emporary office not to be mentioned asplace of 8usiness '

    (iii) Correspondence continue at permanent office, '.(iv) 8efore coming to plains in every winter '

    at close of such office in plains, inform ICAI.(v) 6ame board of f irm to be displayed at temporary

    office only during these months.

    (i) If second office is located in sameaccommodation or premises or

    (ii) If second office is located in same city, or

    (iii) If second office is 7ocated within 5; !ms.

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    Schedules

    First Schedule Sec!d Schedule

    (order passed by council. Refer to H.C. only if (Straight forward refer to H.C.)

    C.A. is to be remoed from register of members

    for more than ! yrs.)

    P"rt # (1" clauses ) CA in practice P"rt #(1# clauses)

    CA in practice

    P"rt 2 (" clauses ) CA in serice P"rt 2(2 clauses)

    CA general

    P"rt $ (" clauses) CA general

    First Schedule

    Part I (C.A. in Practice)Clause 1 :

    Allows any person to practice in his name as a C.A. unless such person is also a C.A. in practiceand is in partnership with or employed by himself.

    Clause 2 :

    1ays # allows # agrees to pay or allow directly or indirectly any share commission or bro!erage infees or profits of his professional business to any person other than a member or partner or retiredpartner or legal representative of deceased partner.

    3idow can continue to receive a share of firm if partnership agreement contains a

    provision.

    6ow onwards, on death of sole proprietor, the name of the firm will be !ept in abeyance by

    the institute for one year so that to enable the widow of deceased to sell g#w of the firm.

    on or before "=thAug, =>

    Normal Cases6ame will be !ept inabeyance upto one yearsfrom death

    Disputed Casesill one year from the date ofsettlement of dispute providedinformation as to dispute is received

    by ICAI within year of death.

    If firm name is still available withICAI. 0pto ">th Aug, ==(irrespective of time lag betweendate of death ' "=thAug, =>).

    Clause 3 :Accepts # Agrees to accept any part of the profits of the professional wor! of a lawyer, auctioneers,bro!er or other agent who is not a member of institute.

    Clause 4 :9nters into partnership with any person other than C.A. in practice or a person resident withoutIndia who but for his residence would be entitled to be registered or whose %ualification are

    "

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    recogni?ed by ovt.# Council # provided C.A. shares in fee # profits of business of partnership bothwithin and without India.

    his clause applies only to profession of C.A. and not to other business, which is covered by

    clause .

    Clause 5 :

    2ecures, either through the services of a person not %ualified to be his partner or by means whichare not open to a C.A., any professional business.

    Clause 6 :2olicits clients or professional wor! either directly or indirectly, by circular, advertisement, personalcommunication or by any other means.@

    (a) Adv. And note in ress :As a general rule he can+t advertise

    !"cetion :

    (i) change in partnership, address and tel. no. having bare statement of fact and no. ofinsertion and limited distribution of new spares.

    (ii) Classified ad. In +ournal # news letter of institute for sharing professionalwor!#partnership, etc. provided firm name and address is not given.

    (b) !#anel#ent $or allot#ent o$ audit%ro$$. &or' :

    -nly if penal$s e&istence is !nown.

    6o roving en%uiries

    uote fee only if en%uired.

    6o printed # cyclostated copies of fee.

    2houldn$t respond to empanelment re%uiring registration or other fee or other deposit.

    However as per new notification, a C.A. can respond to tender etc. if required b !ovt.a"enc etc. #n t$is case, $e can pa reasonable price for tender document. For earnestmone, if services are restricted to C.A. as per law, t$e can%t deposit ot$erwise t$e can.

    (c) Pulication in telehone % other directories :

    2ection of C.A. belonging to particular town # city.

    6ormal letters, logical order.

    4easonable payment, no restriction on entries.

    6o impression of publicity.

    (d) esondin* to +endors, Adv. % Circulars :

    2houldn$t 4espond to

    (i) adv.

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    (f) Pulication o$ oo's and Articles :6o indication as to association with any firm of C.A.

    (g) Issue o$ *reetin* cards or invitation :/esignation and name of the firm may be printed on invitation provided sent to clients relativesand close friends.

    (h) ovin* in/uiries :

    6o sending of such in%uiries to prospective clients.(i) See'in* &or' $ro# ro$essional collea*ues :

    6ot permissible e&cept in a(ii)i.e. +ournal.

    (+) Scoe o$ eresentation 0%S 225(3) :Merely state that he has acted independently and may indicate willingness but no e&trapublicity. 6o derogatory remar!s against company.

    (!) Accetance o$ &or', e#anatin* $ro# a client introduced other C.A. :2houldn$t accept. Client should come through the introducing C.A.

    (l) Pulic Intervie& :

    6o publicity, details about firm # professional attainments.

    (m)Adv. 0r onde" o. :1rohibition.

    (n) esite :

    CA # CA firm free to create own website (no std.

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    Advertises his professional attainment or services or uses any designation or e&pression otherthan Chartered Accountant on professional. documents, visiting cards, letter heads or sign boardsunless it be a degree of an 0niversity established by law in India or recogni?ed by the Centralovernment or a title indicating membership of ICAI or any other institute recogni?ed by Centralovt.#by Council.

    e can$t use words li!e income*ta& consultant, cost consultant or management consultant.

    Can$t use BMember of 1arliament$, etc. in addition to that of Chartered Accountant.

    1ersons eligible otherwise, sub+ect to permission may practice as advocates but can$t use

    designation Chartered Accountant@ and Advocate@ simultaneously.

    6ame, description and address of member (firm) may appear in any directory or list of

    members of a particular body (alphabetically). e may provide appropriate directorship heldand reasonable personal details (outside Interest) but not name of clients and services offeredby his firm.

    1hotograph and brief particulars in maga?ine (6o payment#6o Adv.).

    Advertisement is permissible (not bolder than substance)

    (i) 4ecruiting staff in own office.(ii) 4ecruiting staff or ac%uiring#disposing business#property on behalf of client.(iii) 2ale of 8usiness#1roperty acting as trustee, li%uidator or receiver.

    2uccess in e&ams may be given without any undesirable publicity w.r.t member#firm#cler!.

    May appear on .D. films#4adio, etc. describe themselves as Chartered Accountant

    %ualification but no reference, as to name#address#services of firm. It is a duty of C. A to insurethat host doesn$t refer to any such thin!.

    1ublicity is permitted for appointment of position of local#national importance, etc. hey may

    mention membership of ICAI but not firm.

    0se of glow sign*board#light or large si?e board is not proper. e may have a name board of

    himself at residence but not of a firm.

    1rospectus of the company in which he is a director shouldn$t advertise his professional

    attainment.

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    Applies to all audit assignment including internal concurrent, ta& audit, healthy practice for

    special audit u#s F"("A) of I.. Act also.

    -utgoing should sent a reply as soon as possible (6o violation of confidentiality).

    /uty of communication is absolute ' re%uired is every case, even when appointment is made

    by government or when if previous auditor !nows about the appointment.

    he incoming auditor should communicate with previous auditor who was there in same

    capacity.

    a!e care of new point in AA2*F.

    Clause 7 :Accepts an appointment as auditor of a company without ascertaining from it whether re%uirementof section ""5, in respect of such appointment have been duly complied with.

    Clause 18 :Charges#offers to change accepts#offers to accept w.r.t. any professional employment, fee basedon a G of profits or which are contingent upon findings or results of such employment, e&cept incases which are permitted.

    6ot contingent if fi&ed by court#public authority.

    9&ception (may by G of profits) :

    (i) 4eceiver or li%uidator (G of reali?ation).(ii) Auditor of Co*op. 2ociety (G of paid up#wor!ing capital, gross#net income#profit.

    (iii) Daluer.

    Clause 11 :9ngage in any 8usiness (occupation other than profession of C.A. unless permitted by council soto engage.

    owever, he can always become director (not M./.) in a company provided he#his partner is notinterested in such co., as an auditor.

    9eneral Per#ission;(i) 9mployment under C.A.#C.A. firm.

    (ii) 1rivate tutorship.

    (iii) Authorship of 8oo!s#Articles.

    (iv) olding 7ife Insurance Agency licence (4enewal Commission.).

    (v) Attending class and appearing in any e&ams.

    (vi) olding public elective office (M.1., M.7.A.)

    (vii) onorary office of charitable H educational institute.

    (viii) 6otary public, ustice of peace, 2pecial 9&ecutive Magistrate and li!e.

    (i&) 1art time tutorship under coaching organi?ation of institute.

    (&) Daluation of paper, paper setter, head*e&aminer or moderator for any e&am.

    (&i) 9ditorship of professional +ournal.

    (&ii) Acting as 2urveyor#7oss Assessor under Insurance Act.

    (&iii) 4ecovery consultant

    (&i) Insurance bro!erage.

    9Seci$ic Per#ission;

    ()

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    (K) 1art time#) 1art time#> (";;" edition)

    I I2

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    (iii) -ther terms of appointment.

    Clause 13 :Allows a person not C.A. or a member not his partner to sign on his or his firm behalf, any 8#2,1'7 A#c. report of financial statement,

    PA+ < II

    In relation to C.A. in service

    (a) If pays#allows#agrees to pay directly#indirectly to any person any share in emoluments of theemployment underta!en by member.

    (b) Accepts#agrees to accept any part of fees, payment or gain from a lawyer, C.A., bro!erengaged by company, firm or person or agent or customer of such company, firm or personby way of commission or gratification.

    (c) /iscloses confidential information ac%uired in the course of his employment e&cept as andwhen re%uired by law#permitted by employer.

    PA+ < III

    In relation to C.A. (*enerall)

    (i) If he includes in any statement, return or form to be submitted to council, particulars!nowing them to be false.

    (ii) If he, not being a fellow styles himself as a fellow.(iii) /oesn$t supply information called for, or doesn$t comply with re%uirement as!ed for, by

    council or any of its committees.

    S!C=> SC-!>0?!&eferred to H.C. for decisions

    PA+ < I

    Pro$essional #isconduct in relation to C.A. in ractice.

    Clause 1 :

    /iscloses information ac%uired in the course of his professional engagement to any person otherthan his client, without consent of his client or otherwise than as re%uired by any law for the timebeing in force.

    4e%uest for disclosure must come from client.

    Dut in relation to unlawful act b client :

    (i) 6o duty on C.A. to inform I.. Authorities.(ii) 6o duty to shield him from conse%uences of ta& frauds.(iii) /isclosure immediately. If small fraud may be made with submission of current return.(iv) enuine mista!e#omission client won$t ob+ect to ma!e complete disclosure.(v)

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    (b) Intimation by member to I.. authorities about disassociation can start investigationagainst client.

    (&i) 2ummon the member to e&amine him on oath, legal e&pert advice is ta!en.

    (&ii)

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    4efer to AA2 .

    Clause 18 :

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    A Chartered will be guilty of professional misconduct, if he accepts statutory auditorship of

    120# listed Co.#ovt Co.#-ther 1ublic Co. having turnover e&ceeding 5; crores in a year andaccepts any other wor! or services with regard to same underta!ing on a remuneration whichin total e&ceeds the fees payable for carrying out the statutory audit of the same.

    As auditor of a concern while he is indebted to the concern or has given any guarantee for

    limits fi&ed in the statute ' in other cases e&ceeding 4s. ;,;;;.

    12

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    AUDITIN% AND ASSURANCE STANDARD

    **S 1 $

    B*S/0 R/&0/2ES 3O4ER&/&3 *& *56/

    6ocuentation : he auditor should maintain documentation of the important matters.

    /ntegrity7 Ob8ectivity and /ndependence :

    Auditor should be interest free. e must possess %ualities such as honesty, sincereness,

    fairness, ob+ectivity, etc.

    S9ills and 0opetence :Auditor must have ade%uate training, competence and e&perience.

    0onfidentiality :Auditor must not disclose any confidential information regarding his client to anythird party. owever, he may disclose, if H

    (i) here is a specific permission of client or

    (ii) 4e%uired by law.

    or9 perfored by others :Auditor may rely on wor! done by others i.e. other auditors or e&pertsor his assistants provided he e&ercised due s!ill and care and there is nothing to doubt.

    lanning :

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    **S; #

    OB

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    **S; ,

    6O05ME&*/O&

    N/ocumentationN refers to the wor!ing papers prepared or obtained by the auditor and retained by himin connection with the performance of his audit.

    $. 'or and 0ontent of =or9ing papers * hese are affected by matters such as H

    a. he nature of the engagement

    b. he form of auditors reportc. he nature and comple&ity of the clients business.

    d. he nature and condition of the clients records and degree of reliance on internal controls, and

    e. he need in particular circumstances for direction, supervision and review of wor! performedby assistants.

    #. reparation of =or9ing papers *

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    h. 7etters or representation or confirmation received from the client.

    i. Copies of letters or notes concerning audit matters communicated to or discussed with the client,including the terms of the engagement and material wea!ness in relevant internal controls.

    +. Conclusions reached by the auditor concerning significant aspects of the audit.

    !. Copies of the financial information being reported on, and the related audit reports. .

    I. 4eports of branch auditors, internal. auditors and stoc! auditors etc.

    -. O=nership and 0ustody of or9ing apers

    3or!ing papers are the property of the auditor. e may, at his discretion, ma!e any portions ore&tracts from his wor!ing papers available to the client. he auditor should adopt reasonableprocedures for custody and confidentiality of his wor!ing papers and should retain them for a timesufficient to meet the needs of his practice and satisfy any pertinent legal or professionalre%uirements of records retention.

    .e.f >$?>%?#>>- On=ards

    It is to be considered in auditing of financial information.

    2ufficient ' appropriate documentation to provide a record of basis for auditors report and todemonstrate that audit was performed in accordance with AA2 and applicable legal and regulatoryre%uirements.

    /ocumentation (wor!ing papers) is the record of audit procedures performed, relevant auditevidence obtained ' conclusions the auditor reached.

    It may be recorded on paper or electronic or other media.

    Audit documentation for a specific audit engagement is assembled in an audit file.

    Purose o$ A.>:

    (i) Assisting Audit team to plan ' perform the audit

    (ii)Assisting members of audit team to direct # supervise the wor! etc as per AA2*K.

    (iii) /emonstrating the accountability of Audit team for its wor!.

    (iv) 4etaining a record of matters of continuing significance to future audits of the entity.(v)9nabling an e&perienced auditor to conduct reviews as per statement on 1eer 4eview.

    (vi) 9nabling an e&perienced auditor to conduct e&ternal reviews as per applicable legal orother re%uirement.

    For#, Content and !"tent o$ Audit >ocu#entation:

    Auditor should prepare documentation that enables an e&perienced auditor, having noprevious connection with the audit, to understand.

    (vii) 6ature, timing, e&tent (69) and results of Audit procedures

    (viii) Audit 9vidence obtained

    (i&) he conclusions reached on significant matters.

    (&) In relation to audit procedures designed to address identified ris! of materialmisstatements, conclusions that are not otherwise readily determinable from thedocumentation of procedures or evidences.

    Auditor to document (a) -ral discussion and (b) Management response.

    If auditor has identified audit evidence that contradicts # is inconsistent with auditor$s finalconclusion regarding a significant matter, he (auditor) should document how he addressed thecontradiction.

    Audit to record

    1%

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    (i) 3ho performed the audit wor! ' date of such wor!

    (ii) 3ho reviewed specific audit documentation ' date of such review.

    Auditor should record the identifying characteristics of the specific items tested.

    If in e&ceptional circumstances, auditor departs from basic principle or procedure in an AA2, heshould document the reasons for the same.

    After date of audit report, if (in e&ceptional situations) auditor performs new procedures etc. he

    should document the changes necessary including:(i) 3hen ' by whom such charges were made ' reviewed (if applicable)

    (ii) 2pecific reasons for the changes, '

    (iii) he effect (if any) of changes on auditors conclusion.

    After completing Audit file, auditor shouldn$t delete any documentation. owever he may ma!eaddition he should ta!e care of above, same is the case with documentation of new informationreceived after A.4$s date.

    Auditor, should (regarding documentation)

    (i) Maintain its confidentiality ' sale custody.

    (ii) 1rotect its integrity(iii) 9nable its accessibility ' retrievability, '

    (iv) 9nable its retention for a period sufficient to meet the needs of the firm ' legal andprofessional re%uirements (sub+ect to legal re%uirements but not shorter than ; yearsfrom date of audit report).

    e should adopt proper control procedures to maintain integrity, accessibility and retrievabilityof data whether documentation is in paper, electronic or other media.

    1'

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    **S; %

    E *56/OR@S RESO&S/B/2/A O 0O&S/6ER 'R*56 *&6 ERROR /& *& *56/O'

    '/&*&0/*2 S*EME&S

    $. 'raud ; fraud refers to intentional misrepresentation of financial information by one or moreindividuals among employees, management, those charged with governance, or third parties. A

    fraud may involvea. Manipulation or falsification of accounting recordsb. Misappropriation of assetsc. 2uppression or omission of effects of transactions from records or documentsd. 3rong accounting procedurese. Misapplication of accounting policies

    #. Error * It refers to unintentional mista!es in financial statements.

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    and error, the auditor should perform procedures to determine whether the financial statementsare materially misstated. 3hen the auditor identifies a misstatement, he should consider whethersuch a misstatement might be indicative of a fraud and if there is such an indication, he shouldconsider the implication of the misstatement in relation to other aspects of the audit, particularlythe reliability of management representation.

    3hen the auditor confirms that, or is unable to conclude whether, the financial statements arematerially misstated due to fraud or error, he should consider a necessity for a disclosure in thefinancial statements and if ade%uate disclosures are not made, the necessity for a suitable

    disclosure in audit report.". 6ocuentation ;he auditor should document fraud ris! factors identified and his response to

    such factors.

    D. Manageent representation ;he auditor should obtain a management representation that

    a. It is responsible for the implementation and operation of accounting and internal controlsystems that are designed to prevent and detect fraud and error

    b. It believes that the effect of uncorrected misstatements, both individually and in aggregate, isimmaterial

    c. It has disclosed to the auditor all facts relating to frauds or suspected frauds !nown to thethem and

    d. It has disclosed to the auditor the results of its assessment of the ris! that the financial

    statements may be materially misstated as a result of fraud or error.

    $>. 0ounication ;3hen the auditor identifies a misstatement resulting from fraud or error, ,heshould communicate that information to the appropriate level of management on a timely basis,and consider the need to report such matters to those charged with governance and if re%uired toregulatory and enforcement authorities. he auditor should communicate to the management anymaterial wea!ness in internal control related to the prevention or detection of fraud and error,which has come to his attention as a result of the performance of the audit.

    $$. *uditor unable to coplete the engageent ;If the auditor concludes that it is not possible tocontinue performing the audit due to material misstatements, he should consider the professionaland legal responsibilities applicable in the circumstances including responsibilities to personswho made the audit appointment or regulatory authorities. he AA2 specifies that in such

    circumstances the auditor should consider the possibility of withdrawal from the engagement.he AA2 also specifies that if fraud or suspected fraud was a factor in the e&isting auditorswithdrawal from the engagement, the e&isting auditor should estate the facts relating to thesematters to the incoming auditor.

    1

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    **S 1 - *56/ E4/6E&0E

    Sufficient and *ppropriate : 2ufficiency refer to %uantum of evidences, whereas appropriatenessrefer to %uality. 9vidences should be seen in totality.

    Obtaining the Evidences rocedures

    0opliance Substantive3hether internal control 4egarding completeness, accuracyhave been designed and and validity of transactions andthese are operating balances.effectively throughout theperiod.

    Reliability of Evidences :

    9&ternal 9vidences more reliable.

    Internal 9vidences reliable if internal controls are effective.

    3ritten are more reliable than oral.

    0onsistency : If evidences from one source are inconsistent with those obtained from othersources, auditor is re%uired to perform e&tended procedures.

    Methods :a. /nspection 1 It involves e&amination of records, documents or assets, etc.

    b. 0oputation 1 i.e. to chec! the arithmetical accuracy of data and records.

    c. *nalytical Revie= rocedures 19&amination of significant ratios and trends.

    d. /nuiry and confiration 1 obtaining appropriate informations from persons orally or Inwritten form.

    e. Observation 1 witnessing a process being performed by others.

    2#

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    **S; C

    R/S *SSESSME& *&6 /&ER&*2 0O&RO2S

    According to this standard, it is the responsibility of the management to develop and operate. anade%uate. system of accounting and internal control. he auditor should ac%uaint himself with theaccounting system and internal control system in order to develop an effective audit plan. he auditorshould use his professional +udgment to assess audit ris! and to design audit procedures to ensure

    that it is reduced to an acceptably low level.$. *ccounting Syste * Accounting system refers to the series of tas!s and records of an entity by

    which transactions are processed as a means of maintaining final records. he auditor shouldobtain an understanding of the accounting system sufficient to identify and understand

    a. Ma+or classes of transactions

    b. Manner of initiation of transaction

    c. 2ignificant accounting records, supporting documents and specific accounts in the financialstatements and

    d. he accounting and financial reporting process.

    #. /nternal 0ontrol Syste * It refers to all the policies and procedures adopted by themanagement of the entity to assist in achieving managements ob+ective of:

    a. Conducting the business in an orderly and effective mannerb. Adherence to management policies.

    c. 2afeguarding of assets and

    d. /efection of fraud and error in a timely manner

    Fhe /nternal 0ontrol Syste coprises of

    i. he 0ontrol Environent ;It refers to the overall attitude, awareness and actions of thedirectors. and management regarding the internal control system and its importance inthe entity.

    //. 0ontrol rocedures ; Control procedures are additional policies and proceduresestablished by the management to achieve entitys specific ob+ectives. hese proceduresinclude preparation of periodic reports, approving and controlling access to documents and

    records etc.

    ,. *udit Ris9s ; Auditors ris! is the ris! that the auditor may give an inappropriateopinion when the financial statements are materially misstated. Audit ris! has three componentsvi?. inherent ris!, control ris! and detection ris!.*

    %. /nherent Ris9 ;Inherent ris! is the susceptibility of an account balance or class oftransaction to a material misstatement either individually or when aggregated with misstatementsof other balances or classes, assuming that there were no internal controls. he auditor shouldstudy and evaluate the degree of inherent ris! in order to determine the audit plan. e shouldalso consider other factors, which might compensate for an otherwise high degree of inherentris!.

    /nherent 2iitations of /nternal 0ontrols

    he ob+ectives of internal control can only be reasonably, and not absolutely, achieved due to thefollowing limitations inherent in the system:

    a. Managements concern about the operating system

    b. ransactions of unusual nature may be missed by most controls

    c. 1otential of human error

    d. Circumvention of controls through collusion

    e. Abuse of control by the person who is himself responsible for e&ercising it f. Inade%uacy ofprocedures due to changes in conditions and

    g. Manipulations by management.

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    -. 0ontrol Ris9.; Control ris! is the ris! that a misstatements could occur in an account balance orclass of transaction and that could be material, either individually or when aggregated with othermisstatements, will not be prevented or detected and corrected on a timely basis by theaccounting and internal control system.

    /. reliinary *ssessent of 0ontrol Ris9In order to ma!e a preliminary assessment of the control ris!, the auditor should obtain anunderstanding of the accounting system and related internal controls.

    he preliminary assessment of control ris! is the process of evaluating the li!ely effectiveness

    of an entitys accounting on internal control system in preventing or detecting and correctingmaterial misstatements. hus the auditor should assess the control ris! as high when

    a. he entitys accounting and#or internal control system are#is not effective or

    b. It would be inefficient to evaluate the effectiveness of the accounting and internal controlsystem.

    //. est of 0ontrols

    ests of controls are performed by an auditor to obtain audit evidence about the effectiveness of the

    a. 3hether the accounting and internal control systems are suitably designed to prevent ordetect and control material misstatements and

    b. -peration of internal controls throughout the period.

    est of control may include the following procedures:

    Inspection of the documents and records

    In%uiries about and observation of internal controls that leave no audit trail

    4e*doing on a test basis, activities performed automatically by the system and

    esting of internal controls operating on computeri?ed applications.

    ///. 'inal assessent of control ris9-n the basis of the results of the test of control the auditor should evaluate whether thepreliminary assessment of control ris! was correct or do they need to be revised. e shouldaccordingly determine any modification in the nature, timing and e&tent of audit procedures.

    C. Relationship bet=een assessent of /nternal and 0ontrol Ris9s ;he auditor should ma!e acombined ,assessment of the inherent and control ris!s. his is because the management oftenreacts to inherent ris! situations by designing suitable accounting and internal control system toprevent or detect and correct material misstatement.

    !. 6etection Ris9 ;/etection ris! is the ris! that an auditors substantive procedures will not detecta misstatement that e&ists in an account balance or class of transactions that could be material,either individually or when aggregated with misstatements in other balances or classes.

    here is an inverse relationship between detection ris! and the combined level of inherent andcontrol ris!s. hus when inherent and control ris!s are high, acceptable detection ris! should below to reduce the audit ris! to an acceptably low level. It should, however, be noted that theassessed levels of inherent and control ris! cannot be sufficiently low to eliminate the need toperform substantive procedures.

    3hen the auditor determines that the detection ris! regarding material assertion in the financialstatements cannot be reduced to an acceptably low level, the auditor should e&press a %ualifiedopinion or a disclaimer of opinion as may be appropriate.

    ". /nternal 0ontrols /n a Sall Business * here may be inade%uate segregation of functionsamong a small number of persons who perform accounting procedures.. owever through aneffective supervision by the owner or manager of the business who has direct personal!nowledge of the business and its transactions, this limitation can be neutrali?ed. 8ut whereeffective supervision is lac!ing, the auditor should largely depend upon subtractive procedures toform his opinion as regards financial information.

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    D. 0ounication of ea9nesses in /nternal 0ontrol * Any material wea!ness in the internalcontrol noticed by the auditor during the course of his evaluation or audit procedures should becommunicated in writing to the management in a timely manner. owever, such communicationshould ma!e it clear that the audit e&amination has not been designed to determine theade%uacy of internal controls.

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    AAS& '

    RELIN% UPON TE *OR+ OF AN INTERNAL AUDITOR

    hough wor! of internal auditor can be useful to the statutory auditor, the statutory auditor alone will beresponsible for his report and for determination of the nature, timing and e&tent of the auditing procedures.

    Scope and Ob8ective of /nternal audit function:

    It depends on the si?e and structure of the enterprise and the re%uirements of its management. heinternal audit broadly covers following areas:

    a. 4eview of accounting system and internal controlsb. 9&amination for management of financial and operating information.

    c. 9&amination of the economy, efficiency and effectiveness of the operations.

    d. 1hysical e&amination and verification.

    Relationship bet=een internal and external auditors:a. Although the internal and e&ternal audit functions are different as regard their role and

    ob+ectives, the e&ternal auditor can usefully draw on the wor! of internal auditor to determine thenature, timing and e&tent of the auditing procedures.

    b. owever, the e&ternal auditor should carefully sub+ect the relevance of the internal controlsystem to his own e&amination.

    c. he e&ternal auditor will alone be responsible for his report and the reliance on the internal

    auditors wor! will in no way reduce his responsibility.3eneral evaluation of /nternal audit function:he e&ternal auditors evaluation and conclusions as to the internal audit function should ta!e intoaccount the following:

    a. Organlsational status :3hether the internal auditor reports directly to top management and isfree of any other operating responsibility, whether there are any restrictions as regards the wor!of the internal auditor should be evaluated by e&ternal auditor.

    b. Scope of coverage:he nature and depth of coverage of the internal auditors assignment vis*a*vis the management should be ascertained and how the management acts upon hisrecommendations.

    c. echnical copetence: 3hether the internal audit is under the charge of persons with

    appropriate professional training and proficiency should be considered.d. 6ue rofessional care:3hether the internal audit function is property planned, supervisedN

    reviewed and documented should be ascertained.

    0oordination:3hen the internal auditors wor! is to be relied upon. he e&ternal auditor shouldascertain the internal audit plan and discuss with him at an early stage to determine the areas wherereliance may be placed. he internal. and e&ternal auditors should meet at regular intervals to ensureeffective coordination. hey should share the information, which may help each other.

    Evaluating specific internal audit =or9:e should review the internal auditors wor! ta!ing into account the following factors

    a. he scope of wor! and related audit programme are ade%uate for the e&ternal auditors purpose.

    b. he wor! was properly planned and the wor! of .assistants was properly supervised, reviewed

    and documented.

    c. 2ufficient appropriate evidence was obtained.

    d. Conclusions reached are appropriate in circumstances and any reportO prepared are consistentwith the results of the wor! performed.

    e. Any e&ceptions disclosed by the internal auditors procedures are properly resolved.

    he e&ternal auditors conclusions as to the review of the specific wor! should be documented. eshould also test the wor! of the internal auditor on which he intends to rely. he nature, timing ande&tent of his tests will depend on his evaluation of internal audit function.

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    **S; "

    *56/ 2*&&/&3

    he first step in audit process is planning. 9very audit should be carefully planned to ensure highesttechnical standards ma!e best use of audit personnel and achieve utmost efficiency. Audit plan helps to:

    a. 9nsure that appropriate attention is devoted to important areas of audit.

    b. 2ee that potential problems are promptly identified.

    c. 9nsure that wor! is completed on time.

    d. Coordinate the wor! done by other auditors and e&perts.e. 0tili?e the assistants properly.

    'actors to be considered =hile planning the audit are:

    a. Comple&ity of the audit.

    b. 9nvironment in which the entity operates.

    c. 1revious e&perience with the client.

    d. Pnowledge of clients business.

    no=ledge of the client@s business:It will enable the auditor to identify the events, transactions andpractices, that in his +udgment, may have a significant effect on the financial information. he auditorcan obtain such !nowledge from:

    a. the clients annual report to its shareholders

    b. minutes of meetings of shareholders, 8oard of /irectors etcc. internal financial management reports

    d. previous years audit wor!ing papers

    e. discussion with client

    f. the clients policy and procedures manual

    g. consideration to the state of economy and its affect on clients business and h. visit of the clientspremises and plant facilities.

    6evelopent of an overall plan:he overall plan should cover the following:

    a. erms of audit engagement and statutory responsibilities.

    b. 6ature and timing of reports or other communication.

    c. 4elevant legal and statutory re%uirements.

    d. Accounting policies of client and changes therein.

    e. 9ffect of new accounting or auditing pronouncements on the audit.

    f. Identification of critical audit areas.

    g. Conditions re%uiring special attention.

    h. /egree of reliance as regards accounting system and internal control.

    i. 1ossible rotation of emphasis on specific audit areas.

    +. 6ature, timing and e&tent of audit evidence to be obtained.

    !. 3or! of internal auditors and reliance to be placed on them.

    I. Consideration to branch auditors report.

    m. Allocation of wor! between +oint auditors and the procedures for its control and review.

    n. 9stablishing and coordinating the staff re%uirements.

    6eveloping the audit prograe :he auditor should prepare a written audit programme setting forth the procedures that are needed tobe implemented while carrying out the audit plan. e may ta!e into account the reliance to be placedon internal controls.

    he auditor has some fle&ibility in deciding when to perform audit procedures. 8ut, sometimes he mayhave no discretion as to timing, such as, observing the stoc! ta!ing by the clients personnel. heaudit programme should consider previous years audit programmes and should be modified, ifnecessary.

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    **S; D

    5S/&3 E OR O' *& EGER

    An auditor during the course of an audit may have to place reliance on the wor! of an e&pert. Ane&pert is a person who possesses special s!ill, !nowledge: and e&perience in a particular field, otherthan accounting and auditing.

    6eterining the &eed to use the or9 of an Expert:/uring the audit, an auditor may see! to obtain, either independently or from the client, audit evidence

    by way of reports, opinions, valuations and statements of e&perts, such as value of certain types ofassets, actuarial valuation etc. In determining whether to use the wor! of an e&pert, the auditor shouldconsider the materiality of an item, the nature and comple&ity of item etc.

    S9ills and 0opetence of Expert :he auditor should satisfy himself regarding the e&perts s!ill and competence by considering hisprofessional %ualifications, e&perience and reputation in the field in which the auditor is see!ingevidence.

    Ob8ectivity of the Expert :he auditor should consider the ob+ectivity of the e&pert. 2uch ob+ectivity may be affected if the e&pertis an employee of the client or is otherwise related to the client.

    Evaluation of the or9 of an Expert: ,he auditor should see! reasonable assurance that the e&perts wor! constitutes appropriate auditevidence in support of the financial information. e should see whether the e&pert has used thesource data, which are appropriate in the given circumstances. e should also obtain anunderstanding of various assumptions and methods used by e&pert to determine theirreasonableness. In case the wor! of the e&pert does not support the related representation in thefinancial statement, the auditor should attempt to resolve the inconsistency by discussions with theclient and the e&pert. e may apply additional procedures, including engaging another e&pert.

    9ven after performing necessary audit procedures, the auditor concludes, that the wor! of the e&pertis inconsistent with the information in the financial statement or the wor! of e&pert does not constituteappropriate audit evidence, he should e&press a %ualified opinion, a disclaimer of opinion or an

    adverse opinion, as appropriate.

    Reference to Expert in *udit Report :In case of an un%ualified report, the auditor should not refer to the wor! of an e&pert. In case of%ualified opinion, he may refer to or describe the wor! of the e&pert to e&plain the nature of hisreservation. e, may refer the name of the e&pert sub+ect to prior consent of the report.

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    **S;$>

    5S/&3 E OR O' *&OER *56/OR

    AA2*; is applicable only to components audits and it e&cludes +oint audit form its purview.

    he procedures laid down in AA2*; are applicable where the financial statement of a component ofbusiness,

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    **S 1 $$ Manageent Representation

    Manageent Representation 1 written # oral confirmation by them w.r.t. items included in financialstatement.

    Exaple :(i)

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    **S;$#

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    **S 1 $, *56/ M*ER/*2/A

    Materiality :

    Material items are those which may influence the +udgement of users of statement.

    It may be %uantitative # %ualitative.

    It depends upon H(i) 2i?e of item (ii) 6ature of item, (iii) 2tatutory provisions, etc.

    Materiality to be considered from both point of views H(i) Individual A#c. and(ii) -verall financial statement.

    Auditor to consider materiality while H(i) /etermining 69 of audit procedure and(ii) 9valuating effect of misstatement.

    elationshi et&een @aterialit and Audit ris'

    /egree of audit 4is! and Materiality 7evel.

    Reason H enerally management # employees don$t commit fraud in high value items.Moreover, as a general practice, auditor chec!s high value items in detail. hus it is less ris!ythat high value < ' 9 may not be detected. hus high materiality level leaves audit ris! atlower degree. hus inverse relation.

    rocedure and considerations by *uditor 1

    Auditor decides upon mat level during planning stage which may be c$an"ed duringprogress of audit. May be increased#decreased for specific A#c.

    If A41 indicates misstatements, auditor should adopt other procedures to estimate it.

    Aggregate uncorrected misstatement R

    (i) 2pecific misstatement identified by Auditor S(ii) Aggregate uncorrected misstatements (not identified) S(iii) 6et effect of uncorrected misstatement identified during previous year$s audit.

    Auditor concludes aggregate uncorrected misstatement are material

    As! management to ad+ust f. st.

    Mgt. does Mgt. refuses

    -P %ualify # adverse

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    **S;$%*&*2A/0*2 RO0E65RES

    NAnalytical review procedureN refers to analysis of significant ratios and trends including the resultinginvestigation of fluctuations and relationships that are inconsistent with other relevant information orwhich deviates from predicted amounts. he auditor should apply analytical review procedures at theplanning and the overall stages of audit.

    &ature and purpose of *nalytical rocedures:

    Analytical review procedures includes both inter*firm and intra firm comparisons. he latter is vis*a*vis:

    a. Comparable information for prior periods.

    b. 1redictive estimates prepared by auditor e.g. estimation of depreciation change.

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

    d. 2imilar industry information * entitys ratio of sales to debtors with industry averages.

    It depends on the auditors +udgment as to the nature of procedures, methods arid level Jfapplications.

    urposes I stages of application of *nalytical Revie= rocedures:

    he analytical review procedures can be used by the auditor for the following purposes # at followingstages:

    i. 3hile planning the nature, timing and e&tent of other audit procedures.

    ii. As a means of substantiating the financial assertion relating to business transactions.

    iii. -verall review of the financial statements in the final review stage of the audit.

    Stage / ; lanning the audit:

    Analytical review procedures assist in understanding the business and in identifying areas of potentialris!. It may indicate aspects of the business of which the auditor was not aware,

    Stage // ; *nalytical revie= tas9s as useful substantive procedures:

    he following are the factors that need to be considered while applying analytical procedures assubstantive tests:

    . 9&tent of reliance that can be placed on analytical procedures and results derived thereof.

    ". 6ature and comple&ity of the business.

    . 4eliability of information available

    F. 4elevance of information available.5. 2ources from which information is available i.e. internal#e&ternal sources.

    J. Comparability of the information available.

    K. Pnowledge gained by the auditor in the previous years audit.

    >. Auditors understanding of the effectiveness of the accounting and internal control systems andtypes of problems that in prior periods have given rise to accounting ad+ustments.

    Extent of reliance that can be placed on *nalytical rocedures:

    he e&tent of reliance that the auditor places on the results of analytical procedures depends on thefollowing factors:

    . Materiality of the items involved..

    ". -ther audit procedures directed towards the same audit ob+ectives e.g. other procedures

    performed by the auditor in reviewing the collectability of accounts receivable.. Accuracy with which the e&pected results of analytical procedures can be predicted.

    F. he auditor should also test the control over the preparation of information used in applyinganalytical procedures.

    State /// ; Overall revie= at the end of the audit:

    he auditor should apply analytical procedures at the end of the audit when of in overall conclusion asto the consistency financial statement with that of auditors !nowledge of the business. he drawnthereof is intended to corroborate the evidences found during the audit of individual element orcomponents, of the financial statement. 3here, based on analytical pr ocedures, the auditor

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    concludes that he has to apply further procedures before forming conclusions, then he has to applysuch procedures which he considers deemed fit.

    /nvestigation of unusual ites:

    3hen analytical procedures identify ma+or fluctuations or relationships that are inconsistent with otherrelevant information, the auditor should investigate and see! e&planation from management and othercorroborative evidences.

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    **S 1 $-*56/ S*M2/&3

    Saple 65S MEER

    *udit Sapling 1 Meanin"H Application of audit procedure on ess t$an /001 of items within aclass of tr.#A#c. 8alance

    It may be statistical or non2statistical.

    It re%uires s3ill and competenceon part of auditor.

    Auditor should try his level best to choose sample which should be true representative ofpopulation.

    Choosing all items above certain amount is not sampling.

    6esign of *udit Saple 1 It depends on following :(i) Audit Ob4ective * 2pecific ob+ective and procedures.

    (ii) 5opulation *It should be appropriate.

    (iii) 6tratification * /ividing $etero"eneous (different characteristics) population in more$omo"eneous (similar characteristics) sub*population.

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    Sapling Ris9 ; It arises from possibility that auditor$s conclusion based upon sample may bedifferent from conclusion that would have been reached if complete population were sub+ected tosame audit procedure.

    If auditor willing to accept less ris! large si?e of sample to be chosen.

    It is always there in sampling..

    Sapling Ris9

    In Compliance

    1rocedure

    4is! of under reliance 4is! of over reliance

    In 2ubstantive1rocedure

    4is! of incorrect re+ection 4is! of incorrect acceptance

    7ess ris!y More ris!y

    7eads to more wor! to be May lead to erroneous opinionperformed by auditor by auditor.

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    AAS < 16

    oin* Concern

    3oing 0oncern :an entity is said to be going concern if it is li!ely to continue in e&istence forforeseeable future.

    It is a fundamental accounting assumption (A2*).

    *uditor+s 0onsideration : whether going concern assumption adopted by management holds goods.

    here may be indicators when auditor should adopt e&tended procedures.

    I!dic"trs : Fi!"!ci"l O,er"ti!- Other

    1. *egatie net worth+wor,ing cap. 1. -oss of ,ey management 1. ending legal proceedings

    .without replacement.

    2. Arrears + discontinuance of 2. -oss of ma/or mar,et or 2. Change in 0ot. olicy

    iidends or supplier. affecting the entity

    adersely.

    ". Aderse financial ratio ". -abour unrest stri,es etc. ". *oncompliance with

    Statutory re3uirements

    $. Substantial losses (operating). $. -oss of ma/or licence4

    franchise4 etc.

    !. 5orrowings approaching maturity but

    no prospects of renewal +repayment

    %. Short term borrowing for long

    term asset financing.

    '. *o payment to creditors on due date.

    . *o compliance with terms in loan

    agreement.

    . *egatie cash flow from operation.

    1#. Rearrangement with creditors for

    reduction liability.

    11. Change from creditors to cash on

    deliery transaction with supplier.

    2uch indications may be mitigated (compensating) by some positive factors.

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    *udit procedures 1 0onclusion and ReportingIf doubt regarding oing Concern Assumption

    -btain Audit 9vidence

    9valuate those 9vidences ' Conclude whether

    3oing 0oncern is 3oing concern is 3oing concern*ppropriate inappropriate uestion is not

    resolved

    /ue to -therwise he effect is 3hether financial

    Mitigatory material and statements disclose

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    amounts due to suppliers are 4s. crores and they are overdue. he balancing figure in the8alance 2heet refers to loan from

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    **S; $!I5*2/A 0O&RO2 'OR *56/ OR

    Ob8ective * o establish standards on %uality control:a. 1olicies and procedures of an audit firm for audit wor! generally, andb. 1rocedures regarding the wor! delegated to assistants on an individual audit.

    Meaning of certain ters

    a. Auditor * he person with final responsibility for the audit.b. Audit firm * A proprietary or a partnership firm providing audit service.c. 1ersonnel * All partners and professional staff engaged in the audit practiced of the firm.d. Assistants * 1ersonnel involved in an audit other than auditor.

    /pleentation of Iuality 0ontrol * he audit firm should implement %uality control policies toensure that all audits are conducted in accordance with Auditing and Assurance 2tandard (AA2s).

    Essential factors for incorporating uality control in audit =or9 * .

    a. 1rofessional 4e%uirements * Adherence to basic principles such as independence, integrity,ob+ectivity, confidentiality, etc.

    b. 2!ills and competence * Audit personnel should have re%uired degree of s!ill and competence.

    c. Assignment * Audit wor! should be assigned only to competent personnel.

    d. /elegation * here is to be sufficient direction, supervision and review of wor! at all levels.e. Consultation * Consultancy within and outside the firm with e&perts.

    f. Acceptance and 4etention of clients * 9valuation of prospective client and review of e&isting clientshould be done.

    g. Monitoring * Continued ade%uacy and effectiveness of %uality control policies should be monitored.

    he firms %uality control policy should be effectively communicated to its personnel.

    Iuality control for /ndividual *udits * he %uality control policies applicable to firm should beimplemented for individual audits to the e&tent applicable. he audit wor! should be delegated toassistants with professional competence and should be appropriately directed and supervised. Auditassistants should be informed of the nature of business, accounting policies, possible accounting orauditing problems. hey should be e&plained of what is e&pected of them and how to achieve it. hey

    should be informed about the importance of audit programme, time budgets and overall audit plan.Supervision * 1ersons with supervisory responsibilities shoulda. Monitor the progress of auditb. 8ecome informed of and address significant accounting and auditing %uestions raised during the auditc. 4esolve the differences of professional +udgment and consider the level of consultation as appropriate.

    Revie= * 4eview of wor! of audit staff should be carried out to ensure that the:a. 3or! has been performed as per the audit programme.b. 3or! performed has been ade%uately documented.c. All significant matters have been resolved or are reflected in audit conclusions.d. -b+ectives of the audit procedures have been achieved, ande. Conclusions e&pressed are consistent with the wor! performed.

    Matters to be revie=ed On a tiely basisa. -verall audit plan and the audit programme.b. Assessment of inherent and control ris!s.c. Changes to be made to audit plan and programme.d. /ocumentation of the audit evidence obtained from substantive procedures and the conclusions drawn

    there from.e. Any amendment to the financial statement arising out *of the auditors e&amination, and the auditors

    proposed observations # report.

    1ersons not connected with audit may be re%uested to perform additional procedures before issuingthe auditors report.

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    **S;$"

    *56/ O' *00O5&/&3 ES/M*ES

    *ccounting Estiate *An appro&imation of an item in the absence of a precise means ofmeasurement.

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    AAS < 17Suse/uent !vents

    Subseuent Event : 2ignificant events occurring between 8alance sheet date and Auditor 4eport$s date.

    *uditors duty and *udit procedures :

    9nsure that all events upto A4 date re%uiring ad+ustment#disclosure (as per A2*F) in f. statement havebeen identified and incorporated.

    4eview management$s procedure for identification of sub events.

    In%uiring entity$s lawyer regarding litigation.

    4eading entity$s latest interim f.st., budgets. Cash flow statements#forecasts, etc.

    4eading minutes of meetings of shareholders, 8.-./. and other e&ecutive committees.

    In%uiring management about significance of sub events.

    If another auditor audits the component of entity, principal auditor should ma!e similar en%uiries andprocedures w.r.t component regarding events between another auditors report and principal auditor$sreport.

    Reporting : If management doesn$t agree for such events which as per auditors opinion should be incorporatedthen %ualify # adverse report.

    (,$ ? , 1 % ? C) *S 1 % Events occurring after B?S 6ate

    'vents Confirmin" 'vents confirmin" 'vents affectin" Conditions e&isted conditions which arise going concern

    At 8#2 date after 8#2 date

    Ad+ustment in f. st. 6o ad+ustment. If material, Ad+usted in

    Then only disclosure. f. st.

    $#

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    AAS 28 =?!>! =F +-! 0SI!SS

    Obtaining the 9no=ledge ;

    Auditor should obtain !nowledge of the business to identify#understand the events transactions

    and practices that may have a significant effect on financial statements or audit report.

    eneral !nowledge of economy and industry (level of auditor$s !nowledge is less than that of

    management).

    Pnowledge at the start of the engagement updation during audit.

    Continuous need for !nowledge (!nowledge is refined and added in later stages of Audit).

    In continuous engagement, he$ll update information to identify significant changes since last

    audit.

    Sources : 'or !.*.:(i) 1revious 9&perience.

    (ii) /iscussion with people with entity.

    (iii) /iscussion with internal auditor.

    (iv) /iscussion with other auditor (Advisor).

    (v) /iscussion with !nowledgeable people outside entity.

    (vi) 1ublication.

    (vii) 7egislation and 4egulation.

    (viii) Disits to entity#plant.

    (i&) /ocuments produced by entity (minutes, manuals, plans), etc.

    no=ledge assist hi in follo=ing :i) Assess ris! and problems

    ii) 1lan and perform audit effectively.

    iii) 9valuating audit evidence.

    8etter service to clients.

    $1

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    AAS < 21

    Consideration o$ ?a& and e*ulation in an audit o$ $.st.

    &on;0opliance : Act of commission ; omissionby entity (intentional # unintentional), which arecontrarto prevailing laws or regulation.

    Management$s responsibility to ensure that entity$s operations are conducted as per lawsand re"ulations.

    Management$s responsibility forprevention and detectionof non*compliance. Management should H

    (i) Monitor legal re%uirements.

    (ii) /esign and operate proper I.C.

    (iii) /evelop publicise and follow code of conduct.

    (iv) raining to employees.

    (v) Monitor compliance with code of conduct.

    (vi) 9stablish legal department.

    (vii) Maintain register of significant laws.

    (viii) In larger entity, to ensure these responsibilities may be assigned to Internal auditor orAudit committee.

    *uditor+s 0onsideration :

    Auditor is#can notbe held responsiblefor preventing non*compliance.

    he ris3of non*detention of non*compliance is $i"$er.

    8ut audit may reveal condition#events compliance.

    hus he should accordingly plan and perform audit.

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    0ounication ? Reporting of non;copliance :

    T M"!"-ee!t T Users / A.R.

    I/ he

    T Re-ul"tr0

    Authrities

    Communicate it to

    59 and Senior mgt. Concludes that 8s unable to determine

    *oncompliance has noncompliance due to

    7at. :ffect on f.st. limitations imposed by

    or3ualify+aderse

    7gt.+:ntity Circumstances

    ;ualify + disclaim Consider its

    :ffect on AR

    9nly if re3uired

    by statute etc.

    ithdra=al fro Engageent :

    e may withdraw if management doesn$t ta!e remedial steps considered necessary byauditor, even if non*compliance is not material to f.st.

    e may see! legal advice (e.". Management involvement in non*compliance)

    3hen incoming auditor communicates, tell him reasonsof such withdrawal (not of its

    affairs)

    $"

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    **S 1 ## J/nitial Engageents 1 Opening Balance

    /nitial Engageents :(i) 3hen financial statements are audited for sttime or(ii) 2ome other auditor audited the financial statement for preceding period.

    Opening Balance :

    A#c. 8alances e&isting at beginning of the period i.e.closing balance of preceding period b#f tocurrent period.

    It reflects the effect of :(i) ransaction # 9vents of preceding period, and(ii) A#c. policies applied in preceding period.

    Evidence :-btain sufficient app. evidence that :8a Correctl b;f.(b) -pening 8alance don%tcontain misstatementsaffecting current pd. f.st. and(c) Consistentapplication of appropriateA;c. polic.

    *udit rocedure :

    e should consider :(i) A#c. policy followed by entity.(ii) ype of preceding period$s. A.4. H clean # modified(iii) 6ature of opening 8alance H ris! of misstatement.(iv) Materiality of opening balance for current pd$s f.s.t.

    'inancial Stateent for preceding period

    Audited b some ot$er Auditor Not Audited

    2ufficient App. evidence (for -p. bal.) 9&tended 1rocedureby having audited financial statement (i) 0* K 02:Audit 9vidence as

    part of audit procedure during or current year.

    (ii) Others : may chec! recordsenerally reliance /uring C.T. audit, underlying op. balance or on them indication of see! e&ternal

    misstatement in confirmations.opening balance

    9&tended procedures

    *udit 0onclusion K Reporting : If unable to obtain sufficient app. evidence regarding opening balance H %ualified #

    disclaimer.

    If opening balance contain misstatement affecting C.T. financial statement and which isnot properly incorporated disclosed in financial statement H %ualified # adverse.

    $$

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    **S;#,

    RE2*E6 *R/ES

    he auditor should perform audit procedures designed to obtain sufficient appropriate audit evidenceregarding the identification and disclosure by management of related parties and the related partytransactions that are material to the financial statements.

    Existence and 6isclosure of Related arties :. e should *

    a. 4eview the entity$s procedures for identification of related parties.b. 4eview his wor!ing papers for the prior year for names of !nown related parties.

    c. 4eview shareholders records to determine the names of principal shareholders orappropriate, obtain a list of principal shareholders form the share register,

    d. 4eview the +oint venture and other relevant agreements entered into by the entity.

    e. 4eview statutory records li!e memorandum and articles of association, minutes of board andshareholders$ meetings and other relevant records such as register of director$s interest.

    ". 3here the financial reporting framewor! re%uires disclosure of related party relationships, theauditor should satisfy himself that the disclosure is ade%uate.

    ransactions =ith Related arties :

    . he auditor should review information provided by directors and !ey management personnel ofthe entity identifying related party transactions. /uring the course of the audit, the auditor shouldcarry out detailed procedures, which may identify the e&istence of transactions with relatedparties.

    ". he auditor needs to be alert for transactions, which appear unusual in the circumstances andmay indicate the e&istence of previously unidentified related parties.

    Exaine /dentified related party transactions:

    . In e&amining the identified related party transactions, the auditor should obtain sufficientappropriate audit evidence as to whether these transactions have been properly recorded anddisclosed.

    ". iven the nature of related party relationships, evidence of related party transactions may be

    limited. 8ecause of such transactions, the auditor would consider performing procedures such as:a. Confirming the terms and amount of the transaction with the related party.b. -btaining confirmation from persons associated with the transaction, such as, ban!s, lawyers,

    guarantors and agents.

    Manageent Representations:he auditor should obtain a written representation from management regarding:

    a. he completeness, accuracy and validity of information provided regarding the identification ofrelated parties and

    b. he ade%uacy of related party disclosure in the financial statements.

    *udit conclusion and Reporting:

    If he is unable to obtain sufficient appropriate audit evidence concerning related parties andtransactions with such parties or concludes that their disclosure in the financial statements in notade%uate, he should e&press a %ualified opinion or a disclaimer of opinion in his audit report, as maybe appropriate.

    $!

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    **S;#%

    *56/ 0O&S/6ER*/O&S RE2*/&3 O E&/ES 5S/&3 SER4/0E OR3*&/S*/O&S

    he Auditor should consider how a service organisation affects the client$s accounting and internalcontrol systems so as to plan and develop an effective audit approach.

    0onsiderations for he *uditor of the 0lient3hen the services provided by service organisations are limited to recording and processing oftransactions of the client and the client retains authori?ation and maintenance of accountability, the

    client might be able to implement effective policies and procedures within its organisations. owever,the client may have to rely upon the policies and procedures of the service organisation where thelatter e&ecutes the transactions and maintains accountability on behalf of the client.

    3hile planning his audit, the auditor should determine the significance of activities performed by theservice organisation and their relevance to the audit. In doing so the auditor should consider:

    6ature of the services provided.

    erms of contract.

    Material financial statement assertions that are affected by the use of the service organisation.

    Inherent ris!s associated with those assertions.

    9&tent to which the client$s systems interact with those of the service organisation.

    Client$s internal controls that are applied to the transactions processed by the service organisation.

    he capability and financial strength of the service organisation.

    /ocumentation of systems manual of the service organisation.

    Information available on general controls and computer systems controls relevant to the client$sapplication.

    4eports of the auditor or internal auditor of the service organisation.

    3hen the auditor of the client concludes that the activities of the service organisation are significant tothe entity and to his audit, he should obtain sufficient understanding of the service organisation$saccounting and internal control system. If the information he is able to gather is insufficient, he should

    consider the need to re%uest the auditor of the service organisation to furnish him information onspecified areas.

    Service Organisation+s *uditor+s Report3hen the auditor of the client uses the report of the auditor of service organisation, he shouldconsider:a) he professional competence of the reporting auditor and

    b) 6ature and content of the report.

    he report submitted to the client$s auditor would ordinarily be one of the two types as follow:

    ype * ; Report of Suitability of 6esign

    he contents of this report are

    a. A description of the service organisation$s accounting and internal control 2ystem andb. An opinion by the service organisation$s auditor that

    i. he above description is accurate

    ii. he systems controls have been placed in operation and

    iii. he accounting and internal control systems are suitably designed to achieve their statedob+ectives.

    2uch reports help the auditor of the client in obtaining an understanding of the accounting and internalcontrol systems installed and operated by the service organisation.

    $%

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    ype B ;Report on Suitability of 6esign and Operating Effectiveness

    he contents of the report area. A description of the service organisation$s accounting and internal control systems

    b. An opinion by the service organisation$s auditor that:

    i. he above description is accurate

    ii. he systems controls have been placed in operation

    iii. he accounting and internal control systems are, suitably designed to achieve the statedob+ectives and

    iv. he accounting and internal control systems are operating effectively based on the results ofthe tests of control.

    In addition to the report on operating effectiveness, the service organisations auditor should identifythe tests of controls performed and their results.

    he clients auditor should consider whether the controls tested by the other auditor are relevant to theclients transactions. he clients auditor can also use such reports as an evidence of lower controlris! assessment. 8ased on the control ris! assessment, the clients auditor determines the nature,timing and e&tent of substantive procedures. e may also re%uest the auditor of the serviceorganisation to perform substantive tests in certain areas. owever the audit report of the clientshould not contain reference to the report received from the service organisations auditor.

    $'

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    AAS < 25 C=@PAA+IB!S

    C=@PAA+IB!S FIACIA? !P=+I < FA@!=

    0oparatives :

    0orresponding figures 0oparative f. st.

    Amount and other disclosures for preceding Amount and other disclosures for1eriod are included as part of Current year preceding period are included for

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    **S;#C

    ERMS O' *56/ E&3*3EME&

    he auditor and the client should * agree on the terms of the engagement. he agreement should bein writing.

    *udit Engageent 2etters: he auditor should send an engagement letter, preferably before thecommencement of the engagement, to help avoid any misunderstanding.

    rincipal contents of audit engagement lettera. -b+ective of Audit of financial statements.

    b. Managements responsibility for the financial statements.

    c. Managements responsibility for selection and consistent application of accounting policies andaccounting standards.

    d. Managements responsibility for preparing the financial statements on a going concern basis.

    e. Managements responsibility for ma!ing +udgements and estimates that are reasonable andprudent.

    f. Managements responsibility for the maintenance of ade%uate records and internal controls.

    g. he scope of audit, including reference to applicable legislation, regulations, etc.

    h. he fact that having regard to test nature of an audit, persuasive rather than conclusive nature ofaudit evidence together with inherent limitations of internal control system, there is anunavoidable ris! that some fraud and error may remain undetected.

    i. 0nrestricted access to whatever records, documentation and other information re%uested inconnection with audit.

    *dditional atters in the engageent letter

    a. 1lanning of the audit

    b. 3ritten confirmation from management in connection with audit

    c. 4e%uest for the client to confirm the terms of engagement by ac!nowledging the receipt of theengagement letter.

    d. Any other reports or letters the auditor e&pects to issue.

    e.

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    basis for re%uesting change in engagement.

    8efore agreeing to change, the auditor should consider, any legal or contractual implications ofthe change.

    3here the terms of engagement are changed, the auditor and client would agree on new terms.

    he auditor would not agree to change of engagement if there is no reasonable +ustification fordoing so.

    If the auditor is unable to agree to a change of the engagement and is not permitted to continuethe original engagement, he should withdraw from the engagement and consider any obligationto report the circumstances necessitating the withdrawal to other parties, vi?. 8oard of directorsor shareholders.

    !#

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    **S;#!

    0OMM5&/0*/O&S O' *56/ M*ERS / OSE 0*R3E6 /3O4ER&*&0E

    3overnance: he term governance@ is used to describe the role of persons entrusted withsupervision, control and direction of an entity.

    *udit Matters of 3overnance interest: hose matters that arise form the audit of financialstatements and are in the opinion of the auditor, both important and relevant to those charged withgovernance in overseeing the financial reporting and disclosures process.

    Relevant ersons:a. he auditor should determine relevant persons who are charged with governance and with whom

    the audit matters of governance interest and to be communicated.

    b. he auditor uses his +udgment to determine the relevant persons.

    c. e considers the governance structure of the entity the circumstances of engagement, relevantlegislations, etc.

    d. e also considers the importance and sensitivity of the audit matters.

    e. 3here it is not possible to identify the relevant persons, the auditor comes to an agreement withthe entity with whom the audit matters of governance are to be communicated.

    f. Communications of governance matters may be included in the audit engagement latter.

    g. he engagement letter may include the form of communications and the relevant persons withwhom such communications shall be made.

    *udit atters o$ governance interest to be counicated.a. he general approach and overall scope of audit

    b. Any e&pected limitation or any additional re%uirements

    c. he selection of or changes in, significant accounting policies and practices, that have or couldhave a material effect on the entitys financial statements.

    d. Audit ad+ustments that could have a significant effect on the entitys financial statements or

    auditors report.e. Material uncertainties that may cast a doubt on the going concern assumption.

    f. /isagreement with management that could be significant to entitys financial statement orauditors report.

    g. 9&pected modifications to the auditors report.

    h. Material wea!ness in the internal control system.

    i. uestions regarding managements integrity and fraud involving management.

    iely counications:he auditor should communicate the audit matters of governance intereston a timely basis. his enables those charged with governance to ta!e appropriate action.

    'ors o$ counications:he communications can be made orally or in writing. he form is

    affected by factors such as:*a. he si?e, operating structure, legal structure and communications process of the entity.

    b. he nature, sensitivity and significance of the audit matters to be communicated.

    c. he arrangement made with respectN to periodic meetings or reporting of audit matters ofgovernance interest.

    Oral 0ounications of audit atters: In this case, the auditor should document in the wor!ingpaper the matters communicated and any responses to those matters.

    !1

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    Other atters:Communications between the auditor and those charged with governance cannot beregarded as a substitute for such %ualified, adverse or disclaimer of opinion.

    0onfidentiality: he re%uirements of professional pronouncements, legislations or regulations mayimpose obligations of confidentiality that restrict the auditors communications of audit matters ofgovernance interest. In such cases the auditor may wish to consult a legal counsel.

    2a=s and regulations:he re%uirements of professional pronouncements, legislations or regulationsmay impose obligations on the auditor to ma!e communications on governance related matters.

    hese additional communications re%uirements may affect the form, content and timing ofcommunications with those charged with governance.

    !2

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    **S;#"

    he *uditor+s Report on 'inancial Stateents

    Basic eleents of an *uditor+s Report

    a. itle:It may be appropriate to use the term Auditor@ to distinguish the auditor$s report from reportissued by others.

    b. *ddressee: he auditor$s report should be appropriately addressed as re%uired by thecircumstances of the engagement and applicable laws and regulations.

    c. Opening or /ntroductory paragraph:he report should identify the financial statements thathave been audited including the date and period covered by the financial statements. he reportshould include a statement of responsibility of the entity$s management and of the auditor.

    d. Scope paragraph:he report should describe the scope of the audit by stating that the auditwas conducted in accordance with the auditing standards generally accepted in India. he reportshould include a statement that the audit provides a reasonable basis for opinion.

    e. Opinion paragraph:he report should clearly indicate the financial reporting framewor! used toprepare the financial statements and e&press an opinion on the true and fair view in accordancewith that financial reporting framewor! and where appropriate the compliance with the statutory

    and #or regulatory re%uirements.f. 6ate of the report:he report should be dated as of the completion date of the audit, which

    should not be earlier than the date on which the financial statements are signed or approved bythe management.

    g. lace of signature:he report should name the specific location which is ordinarily the citywhere the audit report is signed.

    h. *uditor+s signature:he report should be signed in the name of the firm, the personal name ofthe both as appropriate.

    *uditor+s Report

    he auditor should incorporate in his report, the matters specified by a statute or regulator and#or

    report in the form prescribed by them in addition to the re%uirements prescribedabove.

    An un%ualified opinion should be e&pressed when the auditor concludes that the financial statementsgive a true and fair view in accordance with the financial reporting framewor! used forpreparation and presentation of the financial statements.

    0nder following situations auditor$s report may have to be modified:

    Matters that do not affect the auditor$s opinion.

    Matters that do affect the auditor$s opinion including %ualified opinion, disclaimer of opinion oradverse opinion.

    In respect of matters that do not affect the auditor$s opinion, the auditor should modify the report byadding a paragraph to highlight a matter for e&ample some uncertainty regarding agoing concern problem which is unresolved ,or a significant uncertainty the resolutionof which is dependent on future events and which may significantly affect the financialstatements and the same has already been incorporated by management in financialstatement. In such matters, the opinion paragraph would refer to the fact that theauditor$s opinion is not %ualified in this respect.

    Matters that do affect the auditor$s opinion: he AA2 specifies that in respect of matters that do affectthe auditor$s opinion

    a. A B%ualified opinion$ should be e&pressed when the auditor concludes that an un%ualified opinioncannot be e&pressed but that the effect of any disagreement with the management is not so

    !"

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    material and pervasive as to re%uire a adverse opinion, or limitation on scope is not material andpervasive as to re%uire a disclaimer of opinion.

    b. A disclaimer of opinion should be e&pressed when the possible effect of a limitation on scope isso material and pervasive that the auditor is unable to obtain sufficient appropriate audit evidenceand is hence unable to e&press an opinion on the financial statements.

    c. An adverse opinion should be e&pressed when the effect of a disagreement is so material andpervasive to the financial statements that the auditor concludes that a %ualification of the report isinade%uate to disclose the misleading or incomplete nature of the financial statements.

    Opinion other than an unualified opinion:3henever the auditor re%uires an opinion other thanun%ualified, a description of all the substantive reasons should be included in thereport and %uantification of the possible effect(s), individually and in aggregate, on thefinancial statements should be mentioned in the report.

    2iitation on Scope:he AA2 also re%uires that in case there is a limitation on scope that re%uirese&pression of a %ualified opinion or a disclaimer of opinion, the auditors report shoulddescribe the limitation and indicate the possible ad+ustments that might have beennecessary had the limitations not e&isted.

    !$

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    **S; #D

    /&'ORM*/O& SASEMS E&4/RO&ME&

    0oputer /nforation Systes (0/S):CI2 environment. is one where one or more computers ofany type or si?e is involved in the processing of financial information of significance to the audit,where those computers are operated by the entity or by a third party.

    'actors to deterine the effect of 0/S@ environent on the audita. he e&tent to which CI2 environment is used to record, compile and analyse accountinginformation.

    b. he system of internal control in e&istence in the entity with regard to flow of complete and correctdata to the processing centre and the processing, analysis and reporting tas!s underta!en in theinstallation.

    c. he impact of computer based accounting system on the audit trail that would otherwise e&ist in amanual system.

    S9ills and copetence needed in 0/S environent:he auditor should have sufficient !nowledgeof the CI2 to plan, direct, supervise, control and review the wor! performed. e should considerwhether any speciali?ed s!ills are needed in the conduct of the audit.

    If the use of professional possessing speciali?ed s!ill is planned, the auditor should in accordancewith AA2* = N0sing the wor! of an e&pertN obtain sufficient, appropriate audit evidence that the wor!performed by the e&pert is ade%uate for the purpose of the audit.

    lanning an audit in 0/S environent@a. he auditor should obtain an understanding of the accounting and internal control systems,

    sufficient to plan the audit and to determine the nature, timing and the e&tent of audit procedures.

    b. In planning the portions of the audit, which may be affected by the environment, the auditor shouldobtain an understanding of the significance and comple&ity of the CI2 activities and the


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