Notes on Auditing CA

8/13/2019 Notes on Auditing CA

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NOTES ONAUDITING

AUDIT:

Audit is independent examination of financial statements of an entity with

the objective of expressing opinion whether these financial statements are

free from material (quantitative, qualitative) misstatements (fraud, error).

SCOPE OF AUDIT:

cope of audit refers to the audit procedures necessary to achieve the

objective of audit.

cope of an audit is govern by auditing standards, local laws (i.e. !"#),

and guidance issued by auditors professional organi$ations (i.e. %"A#).

OBJECT OF AN AUDIT:

&esponsibility for the preparation and presentation of financial statement

is of the management of company, the responsibility of an auditor is to

express an opinion on the financial statement based on audit.

Audit enhances the credibility of financial statements.

'uture visibility of company is not guaranteed.

he auditor is not responsible for a subsequent discovery of material

misstatements until and unless it is proved that the auditor is:

egligent or

%nvolved with the management in the fraudulent activities.

An absolute assurance is not provided by auditors because:

*or+ of the auditor is permeated by judgments

ost audit evidences are persuasive rather than conclusive.

Audit is of test nature.

%nternal control has inherent limitations.

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ot all the items in the financial statements are tested. he testing

is based on sampling.

Audit evidence some times indicates what is probable, not certain.

Internal control: internal control is the system design by the

management to prevent, detect and correct fraud and error (fraud and

error can not be completely eliminated but can be reduced lower

acceptable level).

Code of ethics:

%ndependence

%ntegrity

"onfidentiality

bjectivity

echnical standard

#rofessional competence and due care

Professional sketicis!: he auditor should neither assume

management honest or dishonest/ the audit should be conducted with

questioning mind.

"indo# dressin$: howing better financial position than actual.

Tee!in$ and ladin$: isappropriation of cash.

Financial reortin$ fra!e #ork: %t is a frame wor+ that assists the

management in the preparation of financial statements.

%ana$e!ent letter: %t is the letter issued by the auditor to the client

identifies the wea+ness in internal control system. his letter is also called

wea+ness letter.

Ne$ati&e oinion: othing has come to our attention that causes us to

believe that financial statements are not free from material misstatement.

S'fficient: ufficiency is the measure of quantity of audit evidence and

quantity is the measure of ris+ of material misstatement.0igher the ris+

more audit evidence is needed.

Aroriateness: %t is the measure of quality, reliability persuasiveness.

*hat is appropriate is the matter of professional judgment.

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here are certain guide lines 2generali$ations which are used by auditor to

evaluate appropriateness of audit evidence.

Audit evidence in written form is more reliable than oral.

Audit evidence in the form of original is more reliable than photo

copies.

Audit evidence obtained from external sources is more reliable than

audit evidence obtained from internal sources.

Audit evidence obtained directly is more reliable than audit

evidence through inference.

Audit evidence obtained from internal sources is more reliable when

internal controls are effective.

!lement of audit report:

itle

Addressee

pening paragraph

&esponsibility

pinion

ignature

3ate

4ocation

TE(%S OF AUDIT ENGAGE%ENT ISA )*+

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INT(ODUCTION

he auditor and client should agree on the terms of engagement and the

same should be documented in an audit engagement letter and other

suitable form of contract.

%n some jurisdictions the objective and scope is governed by law and in

that cases, sending engagement letter may be informative for their clients.

he auditor response to a request by client to change the terms of

engagement that provides lower level of assurance (i.e. audit to review).

AUDIT ENGAGE%ENT ,ETTE(

An engagement letter formali$es the arrangement reached between theauditor and the client. his letter serves as contract/ outline theresponsibilities of both parties.

he letter is sent preferably before commencement of an audit

%t helps in avoiding misunderstanding in terms of engagement. %t confirms:

he auditor6s acceptance of the appointment,

he objective and scope of the audit,

he extent of auditor6s responsibilities to the client.

CONTENTS OF AN AUDIT ENGAGE%NENT ,ETTE(

bjective of an audit financial statement/

&esponsibility of the financial statement is of management/

cope of an audit is determined by (local laws, professional organi$ations,%A)/

'orm of reports or other communication/

'act that the audit is of test nature and there are limitations of internal

control

*hich create a ris+ that some material misstatements may remain

undetected/

7nrestricted access to records 8asis of fee or any billing arrangements.

Arrangements regarding experts, use of internal auditors

!xpectations regarding management representation will be in writtenconfirmation.

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AUDTI OF CO%PONENTS

%f the auditor of the parent company is also the auditor of the subsidiary ,the factors that would lead to sending a separate engagement letter to asubsidiary would depend on:

*ho appoints the auditor

A separate report is to be issued

4egal requirements

!xtent of wor+ performed by other auditor

3egree of ownership by parent

3egree of independence by subsidiary

RECURRING AUDITS

*hether to send a engagement letter in a recurring audit would dependon:

%ndication as the client misunderstands objective and scope ofaudit

&evised terms of engagement

&ecent change in the senior management

ignificant change in ownership

ignificant change in the nature of client6s business

4egal requirements

"hange in international financial reporting frame wor+ adopted bythe management in the preparing financial statements.

AGREEMENT ON APPLICABLE FINANCIAL REPORTING FRAMEWORK

he terms of engagement should identify the applicable financial reportingframewor+.

he auditor should determine whether the financial reporting framewor+adapted by management in preparing the financial statements isacceptable.

An acceptable financial reporting framewor+ is referred to in %As as theapplicable financial reporting framewor+;.

he auditor should determine whether the financial reporting framewor+adapted by management is acceptable in the view of the nature of theentity.

4egislative and regulatory requirements often identify the applicablefinancial reporting framewor+ for general purpose financial statements.

%n most cases, the applicable financial reporting framewor+ will beestablished by standard setting organi$ations that are authori$ed topromulgated standards in which entity is registered or operates.

"hen sho'ld a'ditor accet en$a$e!ent for a'dit if he has todecide after takin$ in to consideration the financial reortin$fra!e#ork adated -. !ana$e!ent/


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he auditor should accept an engagement for an audit of financialstatements only when the auditor concludes that the financialreporting framewor+ adopted by management is acceptable or whenit is required by law or regulation.

7nless use of the financial reporting framewor+ is required by law or

regulation, the auditor encourages management to address the

deficiencies in the financial reporting framewor+ or to adopt another

financial reporting framewor+ that is acceptable.

*hen law or regulation requires use of a financial reportingframewor+ for general purpose financial statements that the auditorconsiders to be unacceptable, the auditor should accept theengagement only if the deficiencies in the framewor+ can beadequately explained to avoid misleading users.

"hat is the i!ortance of financial reortin$ fra!e#ork/

*ithout an acceptable financial reporting framewor+ management

does not have an appropriate basis for preparing the financial

statements and the auditor does not have suitable criteria for

evaluating the entity6s financial statements.

"hat is the resonsi-ilit. of an a'ditor0 #hen he accets anen$a$e!ent in&ol&in$ alica-le financial reortin$ fra!e#orkesta-lished -. standard settin$ or$ani1ations that are nota'thori1ed to ro!'l$ated standards for $eneral 'rose financialstate!ents of certain t.e of entities/

he auditor may encounter deficiencies in that framewor+ that was

not anticipated when the engagement was initially accepted and that

indicate that the framewor+ is not acceptable for general purpose

financial statements.

%n these circumstances, the auditor should discuss the deficiencies

with management and the ways in which such deficiencies may be

addressed.

%f the deficiencies result in financial statements that are misleading

and there is agreement that management will adopt another financial

reporting framewor+ that is acceptable.

he auditor refers to the change in the financial reporting framewor+

in a new engagement letter.

%f management refuses to adopt another financial reporting

framewor+, the auditor considers the impact of the deficiencies on

the auditor6s report.

ACCEPTANCE OF C2ANGE IN ENGAGE%ENT:

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%f the auditor has been requested by the management to change the

terms of engagement to one which provide lower level assurance, before

the completion of the engagement, the auditor should consider the

reasons for the same.

"hen sho'ld a'ditor accet the chan$e in en$a$e!ent fro!hi$her le&el ass'rance to lo#er le&el ass'rance/

Auditor should accept the change in engagement from higher level

assurance to lower level assurance when:

he change is requested due to misunderstanding as to the nature

of an audit or related services originally requested.

"hange is required due to reasonable circumstances that affect the

entities requirements.

A change would not be considered reasonable if it appeared that the

change relates to information that is incorrect, incomplete or otherwise

unsatisfactory.

he auditor before agreeing to a change would also consider any legal or

contractual obligation.

%f the auditor agrees to a change in engagement, the auditor6s report

would be based on the revised terms and in order to avoid confusions the

report would not include the references of:

riginal engagement/

he procedures that have been performed in the originalengagement except agreed upon procedures.

*hen the terms are changed the auditor and the management should

agree on the revised terms.

he auditor should not agree to changein engagement when there is no

reasonable justification for doing so.

%f the auditor does not agree to a changein engagement and he is not

permitted to continue the original engagement than auditor should

withdraw and consider any legal and contractual obligations.

"hat are the kinds of en$a$e!ent/

here are four +inds of engagement:

-) Audit/

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1) &eview/

5) Agreed upon procedure/

9) "ompilation

"hat is difference a!on$ A'dit0 (e&ie#0 and A$reed 'onroced'res and Co!ilation/

AUDIT (E3IE" AG(EEDUPONP(OCEDU(ES

CO%PI,ATION

O-4ecti&e

oexpressanopinionon '..

o express an opinion on'..

o reportfindings.

o convertdata in toinformationto prepare'.

Scoe #rocedures deemednecessary.

4imited enquires frommanagement.

Analytical reviewprocedures "omparing ledgerbalances with'inancial statements.

Agreementbetweenclient andauditor.

oincorporatefigures fromtrial balanceto '..

Oinion #ositive egative o oAss'rance

&easonable

4imited o o

E5a!le

Annualaudit

0alf yearly review ax return 'inancialstatements

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6UA,IT7 CONT(O, FO( AUDITS OF 2ISTO(ICA,FINANCIA, INFO(%ATION ISA ))+

INT(ODUCTION:

he purpose of this standard is to establish tandards provide guidance

on specific responsibilities of firm personnel regarding @uality "ontrol

#rocedures for audits of historical financial information.

he engagement team should implement quality control procedures that

are applicable to the individual audit engagement.

A firm has an obligation to establish a system of quality control designed

to provide it with reasonable assurance that the firm and its personnel

comply with professional standards and regulatory and legal

requirements, and that the auditors6 reports issued by the firm or

engagement partners are appropriate in the circumstances.

!ngagement teams:


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a. %mplement quality control procedures that are applicable to the

audit engagement/

b. #rovide the firm with relevant information to enable the functioning

of that part of the firm6s system of quality control relating to

independence/ and

c. Are entitled to rely on the firm6s systems (for example, in relation to

capabilities and competence of personnel through their recruitment

and formal training)/

%mportant definitions:

%n this %A, the following terms have the meanings attributed below:

A. !ngagement partner; B the partner or other person in the firm who is

responsible for the audit engagement and its performance, and for the

auditor6s report that is issued on behalf of the firm.

8. !ngagement quality control review; B a process designed to provide an

objective evaluation, before the auditor6s report is issued, of the

significant judgments the engagement team made and the conclusions

they reached in formulating the auditor6s report.

". !ngagement quality control reviewer; B a partner, other person in the

firm, suitably qualified external person, or a team made up of such

individuals, with sufficient and appropriate experience and authority to

objectively evaluate, before the auditor6s report is issued, the significant

judgments the engagement team made and the conclusions they reachedin formulating the auditor6s report.

3. %nspection; B in relation to completed audit engagements, procedures

designed to provide evidence of compliance by engagement teams with

the firm6s quality control policies and procedures.

!. onitoring; B a process comprising an ongoing consideration and

evaluation of the firm6s system of quality control, including a periodic

inspection of a selection of completed engagements, designed to enable

the firm to obtain reasonable assurance that its system of quality control

is operating effectively.

'. &easonable assurance; B in the context of this %A, a high, but not

absolute, level of assurance.

C. taff; B professionals, other than partners, including any experts the firm

employs.

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0. uitably qualified external person; B an individual outside the firm with

the capabilities and competence to act as an engagement partner, for

example a partner of another firm, or an employee (with appropriate

experience) of either a professional accountancy body whose members

may perform audits of historical financial information or of an organi$ation

that provides relevant quality control services.

What are the responsibiities o! a partner re"ar#in" the

ea#ership !or $%ait& o! an a%#it'

he engagement partner should ta+e responsibility for the overall quality

on each audit engagement to which that partner is assigned.

he engagement partner sets an example regarding audit quality to the

other members of the engagement team through all stages of the audit

engagement. rdinarily, this example is provided through the actions of

the engagement partner and through appropriate messages to the

engagement team. uch actions and messages emphasi$e:

a) he importance of:

#erforming wor+ that complies with professional standards and

regulatory and legal requirements/

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"omplying with the firm6s quality control policies and procedures

as applicable/ and

%ssuing auditor6s reports that are appropriate in the circumstances/

and

b) he fact that quality is essential in performing audit engagements

What are the responsibiities o! an en"a"e(ent partner re"ar#in"

ethi)a re$%ire(ents'

he engagement partner should consider whether members of the

engagement team have complied with ethical requirements.

!thical requirements relating to audit engagements ordinarily comprise

#arts A and 8 of the %'A" "ode:

PART A: GENERAL APPLICATION OF THE CODE

-DD %ntroduction and 'undamental #rinciples

--D %ntegrity

-1D bjectivity

-5D #rofessional "ompetence and 3ue "are

-9D "onfidentiality

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1?D bjectivityBAll ervices

1D %ndependenceBAssurance !ngagements

he engagement partner remains alert for evidence of nonEcompliance

with ethical requirements.

%f matters come to the engagement partner6s attention through the firm6s

systems or otherwise that indicate that members of the engagement team

have not complied with ethical requirements, the partner, in consultation

with others in the firm, determines the appropriate action.

he engagement partner and, where appropriate, other members of the

engagement team, document issues identified and how they were

resolved.

What are the responsibiities o! an en"a"e(ent partner *ith

respe)t to in#epen#en)e re$%ire(ent that app& to a%#it

en"a"e(ent'

he engagement partner should form a conclusion on compliance with

independence requirements that apply to the audit engagement. %n doing

so, the engagement partner should:

btain relevant information regarding creation of threats

!valuate information

a+e appropriate actions

3ocument "onclusions

he engagement partner may identify a threat to independence regarding

the audit engagement that safeguards may not be able to eliminate or

reduce to an acceptable level. %n that case, the engagement partner

consults within the firm to determine appropriate action, which may

include eliminating the activity or interest that creates the threat, or

withdrawing from the audit engagement. uch discussion and conclusions

are documented


a))eptan)e an# )ontin%ation o! )ient reationship an# spe)i!i)

a%#it en"a"e(ent'

he engagement partner should be satisfied that appropriate procedures

regarding the acceptance and continuance of client relationships and

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specific audit engagements have been followed, and that conclusions

reached in this regard are appropriate and have been documented

&egardless of whether the engagement partner initiated that process, the

partner determines whether the most recent decision remains appropriate

Acceptance and continuance of client relationships and specific audit

engagements include considering:

FF he integrity of the principal owners, +ey management and

those charged with governance of the entity/

FF *hether the engagement team is competent to perform the

audit engagement and has the necessary time and resources/ and

FF *hether the firm and the engagement team can comply with

ethical requirements

Deciding whether to continue c!ient re!tion"hi# inc!ude" con"idertion

o$ "igni$icnt %tter" tht h&e ri"en during the current or #re&iou" udit

engge%ent' nd their i%#!iction" $or continuing the re!tion"hi#( For

e)%#!e' c!ient %* h&e "trted to e)#nd it" +u"ine"" o#ertion" into

n re where the $ir% doe" not #o""e"" the nece""r* ,now!edge or

e)#erti"e(

*here the engagement partner obtains information that would have

caused the firm to decline the audit engagement if that information had

been available earlier, the engagement partner should communicate that

information promptly to the firm, so that the firm and the engagement

partner can ta+e the necessary action.

What are the responsibiities o! an en"a"e(ent partner *ith

respe)t to assi"n(ent o! en"a"e(ent tee(s'

he engagement partner should be satisfied that the engagement team

collectively has the appropriate capabilities, competence and time to

perform the audit engagement in accordance with professional standards

and regulatory and legal requirements, and to enable an auditor6s report

that is appropriate in the circumstances to be issued.

he appropriate capabilities and competence expected of the engagement

team as a whole include the following:

An understanding of, and practical experience with, audit

engagements of a similar nature and complexity through

appropriate training and participation.

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An understanding of professional standards and regulatory

and legal requirements.

Appropriate technical +nowledge, including +nowledge of

relevant information technology.

Gnowledge of relevant industries in which the client operates.

Ability to apply professional judgment.

An understanding of the firm6s quality control policies and

procedures.

Responsibiities o! an en"a"e(ent partner *ith respe)t to

en"a"e(ent per!or(an)e

he engagement partner should ta+e responsibility for the direction,

supervision and performance of the audit engagement/

he engagement partner directs the audit engagement by informing the

members of the engagement team of:

a) heir responsibilities/

b) he nature of the entity6s business/

c) &is+Erelated issues/

d) #roblems that may arise/ and

e) he detailed approach to the performance of the engagement.

What are the #%ties o! en"a"e(ent tea( *ith respe)t to

per!or(an)e'

he engagement team6s responsibilities include:

aintaining an objective state of mind and an appropriate level of

professional s+epticism,

#erforming the wor+ delegated to them in accordance with theethical principle of due care.

embers of the engagement team are encouraged to raise

questions with more experienced team members.

Appropriate communication occurs within the engagement team.

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%t is important that all members of the engagement team

understand the objectives of the wor+ they are to perform.

Appropriate teamEwor+ing and training are necessary to assist less

experienced members of the engagement team to clearly

understand the objectives of the assigned wor+.

En$a$e!ent artners resonsi-ilities re$ardin$ s'er&ision:

he audit is supervised over all by engagement partner, but more

practical supervision is given within the audit team by senior staff to more

junior staff. it includes:

rac+ing the progress of the audit engagement/

"onsidering the capabilities and competence of individual members

of the engagement team, whether they have sufficient time to carry

out their wor+, whether they understand their instructions, and

whether the wor+ is being carried out in accordance with the

planned approach to the audit engagement/

Addressing significant issues arising during the audit engagement,

considering their significance and modifying the planned approach

appropriately/

%dentifying matters for consultation or consideration by more

experienced engagement team members during the audit

engagement.

En$a$e!ent artners resonsi-ilities re$ardin$ re&ie#:

&eview responsibilities are determined on the basis that more

experienced team members, including the engagement partner, review

wor+ performed by less experienced team members.

&eviewers consider whether:

he wor+ has been performed in accordance with professional

standards and regulatory and legal requirements/

ignificant matters have been raised for further consideration/

Appropriate consultations have ta+en place and the resulting

conclusions have been documented and implemented/

here is a need to revise the nature, timing and extent of wor+

performed/

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he wor+ performed supports the conclusions reached and is

appropriately documented/

he evidence obtained is sufficient and appropriate to support the

auditor6s report/ and

he objectives of the engagement procedures have been achieved.

8efore the audit report is issued, the engagement partner must be sure

that sufficient and appropriate audit evidence has been obtained to

support audit opinion.

he engagement partner need not review all audit documentation.

0owever, the partner documents the extent and timing of the reviews.

%ssues arising from the reviews are resolved to the satisfaction of the

engagement partner. *here more than one partner is involved in theconduct of an audit engagement, it is important that the responsibilities of

the respective partners are clearly defined and understood by the

engagement team.

En$a$e!ent artners resonsi-ilities re$ardin$ cons'ltation:

he engagement partner should:

a. 8e responsible for the engagement team underta+ing appropriate

consultation on difficult or contentious matters/

b. 8e satisfied that members of the engagement team have

underta+en appropriate consultation during the course of the

engagement, both within the engagement team and between the

engagement team and others at the appropriate level within or

outside the firm/

c. 8e satisfied that the nature and scope of, and conclusions resulting

from such consultations are documented and agreed with the party

consulted/ and

d. 3etermine that conclusions resulting from consultations have beenimplemented.

!ffective consultation with other professionals requires that

those consulted be given all the relevant facts that will

enable them to provide informed advice on technical, ethical

or other matters.

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*here appropriate, the engagement team consults

individuals with appropriate +nowledge seniority and

experience within the firm or, where applicable, outside the

firm.

"onsulting outside the firm (where the firm lacks appropriate internalresources)

3ocumentation of consultations involving difficult and

contentious matters(he documentation is sufficiently

complete and detailed to enable an understanding of:

a) he issue on which consultation was sought/ and

b) he results of the consultation, including any decisions

ta+en, the basis for those decisions and how they were

implemented

3ifference of opinion : these should be resolved according to

firms policies and procedures. And matter involving different

opinion should be brought in attention to engagement

partner by team members.


en"a"e(ent $%ait& )ontro re+ie*'

!ngagement quality control is mandatory for listed company only.

!ngagement quality control reviewer may be partner or outsider.

!ngagement quality control reviewer is performed before the

issuance of audit report.

%t is the responsibility of an engagement partner to appoint

engagement quality control reviewer.

An engagement quality control review should include an objective

evaluation of:

a. he significant judgments made by the engagement team/ and

b. he conclusions reached in formulating the auditor6s report.

An engagement quality control review ordinarily involves discussion

with the engagement partner/

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A review of the information and the auditor6s report, and, in

particular, consideration of whether the auditor6s report is

appropriate/

%t also involves a review of selected audit documentation relating to

the significant judgments the engagement team made and theconclusions they reached/

he extent of the review depends on the complexity of the audit

engagement and the ris+ that the auditor6s report might not be

appropriate in the circumstances/

he significance and disposition of corrected and uncorrected

misstatements identified during the audit/

*hether appropriate consultation has ta+en place on matters

involving differences of opinion or other difficult or contentiousmatters, and the conclusions arising from those consultations/

he matters to be communicated to management and those

charged with governance/

he review does not reduce the responsibilities of the engagement

partner.

En"a"e(ent partner responsibiit& re"ar#in" (onitorin",

he audit engagement partner is required to consider the result of

monitoring of the firms quality control system and consider whether they

have any impact o he specific audit he is conducting.

he engagement partner considers :

a. *hether deficiencies noted in that information may affect the audit

engagement/ and

b. *hether the measures the firm too+ to rectify the situation are

sufficient in the context of that audit.

A deficiency in the firm6s system of quality control does not indicate that aparticular audit engagement was not performed in accordance with

professional standards and regulatory and legal requirements, or that the

auditor6s report was not appropriate.

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AUDIT DOCUMENTATION ISA -./

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INTRODUCTION:

DOCUMENTATION, 3ocumentation refers to the wor+ing papers +ept by

the auditor as regards audit planning, procedures performed, information

and explanations obtained from client and the conclusions drawn from the

wor+ performed.

E0perien)e# a%#itor: means an individual who has a reasonable

understanding of

-. Audit processes,

1. %As and applicable legal and regulatory requirements,

5. he business environment in which the entity operates, and

9. Auditing and financial reporting issues relevant to the entity6s

industry.

he auditor should prepare, on a timely basis, audit documentation that

provides:

A sufficient and appropriate record of the basis for the auditor6s

report/ and

!vidence that the audit was performed in accordance with %As and

applicable legal and regulatory requirements.

What are the ob1e)ti+es or i(portan)e or reasons o!

#o)%(entation'

#reparing sufficient and appropriate audit documentation on a timely

basis helps to enhance the quality of the audit and facilitates the effective

review and evaluation of the audit evidence obtained and conclusions

reached before the auditor6s report is finali$ed.

3ocumentation prepared at the time the wor+ is performed is li+ely to be

more accurate than documentation prepared subsequently.

#reparation of audit program and performance of procedures in

accordance with audit program assist in planning and performing audit.

!nabling the audit team to be accountable for its wor+/

&etaining a record of matters of continuing significance to future audits/

*or+ing paper assist in supervision and review of audit wor+.

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&ecord the audit evidence resulting from the audit wor+ performed to

support the auditor6s opinion, including representation that the

examination was conducted in accordance with %nternational tandards on

Auditing. %n this context wor+ing papers will facilitate ensuring following

matters:

"onclusions drawn are consistent with result of wor+ performed/

!rrors and irregularities found are documented/

#roposed audit adjustments have been recorded/

#oints of further investigation are noted/

After the issuance of audit report wor+ing paper are the only tangible

proof the auditor has, to demonstrate that the examination has been

conducted in accordance with %As.

here is always possibility that the auditor will have to prove the

adequacy and appropriateness of the tests in the court.

What are the so(e o! the (etho#s %se# b& the a%#it to ens%re

hi"h $%ait& o! *or2in" papers' Or

What are the )hara)teristi)s *hi)h (a2e the #o)%(entation se!

e0panator&'

*or+ing paper are signed, dated and indexed/

All subsidiaries are cross referenced/

4ead schedule agree with trial balance and financial statements/

*or+ has been done in accordance with audit programme/

ime spent has been recorded/

Form, Content and Extent of Audit Documentation

Working papers shoul !e sufficientl" complete an etaile. If through the stu" of

working papers alone# another auitor who has no pre$ious e%perience with the client

is a!le to unerstan:

The nature# timing# an e%tent of the auit proceures performe to compl"

with I&'s an applica!le legal an regulator" reuirements)

The results of the auit proceures an the auit e$ience o!taine) an

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&ignificant matters arising uring the auit an the conclusions reache

thereon.

It consiers that working papers are sufficientl" complete.

You are asked to advise form and contents of audit working papers?

The form an content of working papers will $ar" from entit" to entit".

No matter what t"pe of client we are auiting# following points must !e taken into

consieration to ecie the form an contents of working papers.

The form# content an e%tent of auit ocumentation epen on factors such as:

The nature of the auit proceures to !e performe)

The ientifie risks of material misstatement)

The e%tent of *ugment reuire in performing the work an e$aluating the

results)

The significance of the auit e$ience o!taine)

The nature an e%tent of e%ceptions ientifie)

The nee to ocument a conclusion or the !asis for a conclusion not reail"

etermina!le from the ocumentation of the work performe or auit e$ience

o!taine) an

The auit methoolog" an tools use.

It is# howe$er# neither necessar" nor practica!le to ocument e$er" matter the auitor

consiers uring the auit.

Oral e%planations !" the auitor# on their own# o not represent aeuate support for

the work the auitor performe or conclusions the auitor reache# !ut ma" !e use

to e%plain or clarif" information containe in the auit ocumentation.

What are the qualities of good working papers?

Working paper shoul !e sufficientl" complete an etaile enough to pro$ie o$er

all unerstaning of the auit.

Working papers shoul !e:

Clear

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Concise

Complete

Neat

Well ine%e

Informati$e

CONTENTS OF WORKING PAPERS:

Give a brief description of two broad classifications used for audit files?

In case of recurring auit# working paper files are classifie as:

+ermanent auit file) an

Current auit file

What is permanent file and what information this file usually contains?

List the documents or papers, which would normally be retained in the permanent file?

+ermanent auit file:

+ermanent auit files are use to accumulate information of continuing importance to

succeeing auits# an are upate e$er" "ear.

Instea of o!taining certain ocumentation for each "ear,s working file# the auitor places

them in separate file as a part of each "ear,s auit e$ience.

The use of separate file sa$e the time !" pro$iing central reference point in respect of

matters of continuing auit importance.

The permanent auit files contain information of continuing importance an are upate

uring each auit. The information inclues:

&tatutor" material

The rules an regulations of the enterprise

Copies of ocuments of continuing importance (e.g. letter of engagement-

'resses of the registere office an other premises

ist of !ooks an other recors an where the" are kept

/istor" of the organi0ation

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ist of important accounting matters

Other information of a continuing nature.

Current audit file:

Current auit files inclue information relating to a single auit (accounting- perio. The

information inclues:

' cop" of the financial statements

'n ine% to the file

' escription of the internal control s"stem

'n auit programme

' scheule for each of the !alance sheet items showing the opening !alance

1o$ement uring the perio an the closing !alance

' scheule for each of the income statement (profit an loss account- items showing its

makeup

' statutor" checklist

' scheule of important statistics# copies of all communications with other people

etters of representation

Conclusions reache !" the auitor concerning significant aspects of the auit

'n"thing else that contri!utes to the auit e$ience for the current "ear2s auit.

Documentation of te Identif!in" Caracteri#tic# of S$ecific Item# or %atter# &ein"

Te#ted

%n documenting the nature, timing and extent of audit proceduresperformed, the auditor should record the identifying characteristics of thespecific items or matters being tested.

&ecording the identifying characteristics serves a number of purposes. 'orexample:

%t enables the audit team to be accountable for its wor+ andfacilitates the investigation of exceptions or inconsistencies.

%dentifying characteristics will vary with the nature of the audit procedureand the item or matter being tested.

What is the responsibility regarding documentation of significant matters identified during

the audit and what are the advantages in this regard?

he auditor may consider it helpful to prepare and retain as part of theaudit documentation a summary that describes the significant matters

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identified during the audit and how they were addressed, or that includescrossEreferences to other relevant supporting audit documentation thatprovides such information.

uch a summary may facilitate effective and efficient reviews andinspections of the audit documentation, particularly for large andcomplex audits.

'urther, the preparation of such a summary may assist theauditor6s consideration of the significant matters.

he auditor should document discussions of significant matters withmanagement and others on a timely basis.

%f the auditor has identified information that contradicts or is inconsistentwith the auditor6s final conclusion regarding a significant matter, theauditor should document how the auditor addressed the contradiction orinconsistency in forming the final conclusion.

Doc'!entation of Deart'res fro! Basic Princiles or EssentialProced'res

*here, in exceptional circumstances, the auditor judges it necessary to

depart from a basic principle or an essential procedure that is relevant inthe circumstances of the audit, the auditor should document how thealternative audit procedures performed to achieve the objective of theaudit, and the reasons for the departure.

his involves the auditor documenting how the alternative auditprocedures performed were sufficient and appropriate to replace thatbasic principle or essential procedure.

Identification of Pre$arer and Re'ie(er

he auditor should record:

*ho performed the audit wor+ and the date such wor+ wascompleted/ and

*ho reviewed the audit wor+ performed and the date and extent of

such review/

A##em)*! of te Fina* Audit Fi*e

he auditor should complete the assembly of the final audit file on atimely basis after the date of the auditor6s report.

As %@" - indicates, =D days after the date of the auditor6s report isordinarily an appropriate time limit within which to complete the assemblyof the final audit file.

he completion of the assembly of the final audit file after the date of theauditor6s report is an administrative process that does not involve theperformance of new audit procedures or the drawing of new conclusions.

"hanges may, however, be made to the audit documentation during the

final assembly process if they are administrative in nature. !xamples ofsuch changes include:

3eleting or discarding superseded documentation.

orting, collating and crossEreferencing wor+ing papers.

igning off on completion chec+lists relating to the file assemblyprocess.

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3ocumenting audit evidence that the auditor has obtaineddiscussed and agreed with the relevant members of the audit teambefore the date of the auditor6s report.

After the assembly of the final audit file has been completed, the auditorshould not delete or discard audit documentation before the end of itsretention period.

he retention period for audit engagements ordinarily is no shorter thanfive years from the date of the auditor6s report, or, if later, the date of thegroup auditor6s report.

*hen the auditor finds it necessary to modify existing auditdocumentation or add new audit documentation after the assembly of thefinal audit file has been completed, the auditor should, regardless of thenature of the modifications or additions, document:

*hen and by whom they were made, and (where applicable)reviewed/

he specific reasons for ma+ing them/ and

heir effect, if any, on the auditor6s conclusions.

Chan$es to A'dit Doc'!entation in E5cetional Circ'!stancesafter the Date of the A'ditor8s (eort

*hen exceptional circumstances arise after the date of the auditor6sreport that require the auditor to perform new or additional auditprocedures or that lead the auditor to reach new conclusions, the auditorshould document:

he circumstances encountered/

he new or additional audit procedures performed, audit evidenceobtained, and conclusions reached/ and

*hen and by whom the resulting changes to audit documentationwere made, and (where applicable) reviewed.

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T3E AUDITOR4S RESPONSIBILIT5 TO CONSIDER

FRAUD IN AN AUDIT OF FINANCIAL STATEMENTS

ISA -6/

%&37"%:

The purpose of this I&' is to pro$ie guiance on:

The auitor,s responsi!ilit" to consier frau in an auit of financial statements)

The 'uitor,s

+roceures in Response to 'ssesse Risks are to !e applie in relation to the risks of

material misstatement ue to frau)

Caracteri#tic# of Fraud

How frauds are distinguished from errors?

The istinguishing factor !etween frau an error is whether the unerl"ing action

that results in the misstatement of the financial statements is intentional or

unintentional. Error: The term 3error4 refers to an unintentional misstatement in financial

statements.

' mistake in gathering or processing ata from which financial statements are

prepare)

'n incorrect accounting estimate arising from o$ersight or misinterpretation

of facts

' mistake in the application of accounting principles relating to measurement#

recognition# classification# presentation or isclosure)

Fraud:The term 3frau4 refers to an intentional act !" one or more

Ini$iuals among management# those charge with go$ernance# (1anagement

frau- 5mplo"ees# (5mplo"ee frau- or

Thir parties#

In$ol$ing the use of eception to o!tain an un*ust or illegal a$antage)

The auitor is concerne with frau that causes a material misstatement in the financial

statements.

Two types of intentional misstatements are rele$ant to the auitor# that is#

6. Misstatements resulting from fraudulent financial reporting: in$ol$es intentional

misstatements incluing

Omissions of amounts or isclosures in financial statements to ecei$e

financial statement users

7rauulent financial reporting can !e cause !" the efforts of management to

manage earnings in orer to ecei$e financial statement users !" influencingtheir perceptions as to the entit",s performance an profita!ilit" an

8. Misstatements resulting from misappropriation of assets: in$ol$es

The theft of an entit",s assets)

5m!e00ling receipts (for e%ample# misappropriating collections on accounts

recei$a!le or i$erting receipts in respect of written9off accounts to personal

!ank accounts-)

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&tealing ph"sical assets or intellectual propert" (for e%ample# stealing

in$entor" for personal use or for sale# stealing scrap for resale# colluing with

a competitor !" isclosing technological ata in return for pa"ment-)

Causing an entit" to pa" for goos an ser$ices not recei$e (for e%ample#

pa"ments to fictitious $enors# kick!acks pai !" $enors to the entit",s

purchasing agents in return for inflating prices# pa"ments to fictitious

emplo"ees-) an

Using an entit",s assets for personal use (for e%ample# using the entit",s

assets as collateral for a personal loan or a loan to a relate part"-.

easons to commit fraud! involves

'. 7rau in$ol$es incenti$e or pressure to commit frau#

Ini$iuals ma" ha$e an incenti$e to misappropriate assets for e%ample#

!ecause the ini$iuals are li$ing !e"on their means.

7rauulent financial reporting ma" !e committe !ecausemanagement is

uner pressure# from sources outsie or insie the entit"# to achie$e an

e%pecte (an perhaps unrealistic- earnings target

. ' percei$e opportunit" to o so

' percei$e opportunit" for frauulent financial reporting ormisappropriation of assets ma" e%ist when an ini$iual !elie$es internal

control can !e o$errien# for e%ample# !ecause the ini$iual is in a

position of trust or has knowlege of specific weaknesses in internal control.

an

C. &ome rationali0ation of the act

Ini$iuals ma" !e a!le to rationali0e committing a frauulent act. &ome

ini$iuals possess an attitue# character or set of ethical $alues that allow

them knowingl" an intentionall" to commit a ishonest act.

/owe$er# e$en otherwise honest ini$iuals can commit frau in an

en$ironment that imposes sufficient pressure on them.

Re#$on#i)i*itie# of To#e Car"ed (it Go'ernance and of %ana"ement The primar" responsi!ilit" for the pre$ention an etection of frau rests with !oth those

charge with go$ernance an with management of entit".

It is important that management# with the o$ersight of those charge with go$ernance# place a

strong emphasis on frau pre$ention# which ma" reuce opportunities for frau to take place#

an frau eterrence# which coul persuae ini$iuals not to commit frau !ecause of the

likelihoo of etection an punishment.

This in$ol$es a culture of honest" an ethical !eha$ior.

Creating a culture of honest" an ethical !eha$ior inclues:

&etting the proper tone)

Creating a positi$e workplace en$ironment)

/iring# training an promoting appropriate emplo"ees)

Reuiring perioic confirmation !" emplo"ees of their responsi!ilities an

Taking appropriate action in response to actual# suspecte or allege frau

Inerent +imitation# of an Audit in te Context of Fraud

Owing to the inherent limitations of an auit# there is an una$oia!le risk that some material

misstatements of the financial statements will not !e etecte# e$en though the auit is

properl" planne an performe in accorance with I&'s.

The su!seuent isco$er" of a material misstatement of the financial statements resulting

from frau oes not# in an of itself# inicate a failure to compl" with I&'s.

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The risk of not etecting a material misstatement resulting from frau is higher than the risk

of not etecting a material misstatement resulting from error !ecause frau ma" in$ol$e

sophisticate an carefull" organi0e schemes esigne to conceal it.

&uch attempts at concealment ma" !e e$en more ifficult to etect when accompanie !"

collusion.

"ollusion may cause the auditor to believe that audit evidence is

persuasive when it is, in fact, false.

The uditor-" +i!it* to detect $rud de#end" on $o!!owing $ctor":

he s+illfulness of the person responsible for,

he frequency and extent of manipulation,

he degree of collusion involved,

he relative si$e of individual amounts manipulated, and

he seniority of those individuals involved.

Accounting estimates are caused by fraud

he ris+ of the auditor not detecting a material misstatement resulting

from management fraud is greater than for employee fraud, because

management is frequently in a position to directly or indirectly manipulate

accounting records and present fraudulent financial information.

Re#$on#i)i*itie# of te Auditor for Detectin" %ateria* %i##tatement Due to

Fraud 'n auitor conucting an auit in accorance with I&'s o!tains reasona!le assurance(not a!solute assurance- that the financial statements taken as a whole are free from

material misstatement# whether cause !" frau or error)

/ence# an auitor is not an can not !e hel responsi!le for the pre$ention (not

etection- of frau.

The auitor shoul maintain an attitue of professional skepticism throughout the

auit# recogni0ing the possi!ilit" that a material misstatement ue to frau coul

e%ist.

&u!seuent isco$er" of material misstatement in financial statements ue to frau

oes not necessaril" mean that auitor was negligent.

This can !e ue to inherent limitation of an auit. Whether an auitor has performe an auit in accorance with I&'s is etermine !":

The aeuac" of auit proceures performe in circumstances an

The suita!ilit" of auit report !ase on results of those proceures

Di#cu##ion amon" te En"a"ement Team

1em!ers of the engagement team shoul iscuss the suscepti!ilit" of the entit",s

financial statements to material misstatement ue to frau.

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The iscussion inclues the engagement partner who uses professional *ugment#

prior e%perience with the entit" an knowlege of current e$elopments to eterminewhich other mem!ers of the engagement team are inclue in the iscussion.

Orinaril"# the iscussion in$ol$es the ke" mem!ers of the engagement team.

The iscussion pro$ies an opportunit" for more e%perience engagement team

mem!ers to share their insights a!out how an where the financial statements ma" !esuscepti!le to material misstatement ue to frau.

The engagement partner shoul consier which matters are to !e communicate tomem!ers of the engagement team not in$ol$e in the iscussion.

he discussion ordinarily includes:

An exchange of ideas among engagement team members

about

0ow and where they believe the entity6s financial

statements may be susceptible to material

misstatement due to fraud,

0ow management could perpetrate and conceal

fraudulent financial reporting, and

0ow assets of the entity could be misappropriated/

A consideration of external and internal factors that may

create an incentive or pressure for management or others to

commit fraud/

A consideration of management6s involvement in overseeing

employees with access to cash or other assets susceptible to

misappropriation/

A consideration of any unusual or unexplained changes

lifestyle of management or employees/

A consideration of any allegations of fraud that have come to

the auditor6s attention/ and

A consideration of the ris+ of management override of

controls/

It is important that after the initial iscussion while planning the auit# an also at inter$als

throughout the auit.

Ri# A##e##ment Procedure#

'uitor performs the following proceures to o!tain information that is use to ientif" the

risks of material misstatement ue to frau:

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"# $akes inquiries of management, of those charged with governance, and of others

within the entity as appropriate for identifying and responding to the risks of fraud

and the internal control that management has established to mitigate these risks

%# &onsiders whether one or more fraud risk factors are present'

(# &onsiders any unusual or une)pected relationships that have been identified in

performing analytical procedures'

*# &onsiders other information that may be helpful in identifying the risks of materialmisstatement due to fraud'

-. In/uirie# and O)tainin" an 0nder#tandin" of O'er#i"t Exerci#ed )! To#e Car"ed

(it Go'ernance

1atters that ma" !e iscusse as part of these inuires inclue:

Whether there are su!siiar" locations# !usiness segments# t"pes of transaction#

account !alances or financial statement categories where the possi!ilit" of error ma"!e high# or where the possi!ilit" frau risk factors ma" !e e%ist# an how the" are

!eing aresse !" management.

The work of entit",s internal auit function an whether internal auit has ientifie

frau or an" material weakness in the s"stem of internal control)

/ow management communicate to emplo"ees its $iew on responsi!le !usiness

practice an ethical !eha$ior# such as through ethics policies or coe of conuct)

If entit" has esta!lishe a programme that inclues step to pre$ent an etect frau#

we enuire of those persons o$erseeing such programmes as to whether to programhas ientifie frau risk factors)

The auitor shoul make inuiries of those charge with go$ernance to etermine

whether the" ha$e knowlege of an" actual# suspecte or allege frau affecting the

entit".

1. Con#ideration of Fraud Ri# Factor#

During the auit# auitor consier whether e$ents or conitions that pro$ie an opportunit"# a

moti$e or a means to commit frau are present or inication that frau ma" alrea" occurre#

&uch e$ents or conitions are referre to as 3frau risk factors4.

'uitor ientifies frau risk factors that ma" inicate the possi!ilit" of either frauulentfinancial reporting or misappropriation of asset. 7or e%ample:

The nee to meet e%pectations of thir parties to o!tain aitional euit" financing

ma" create pressure to commit frau)

The granting of significant !onuses if unrealistic profit targets are met ma" create an

incenti$e to commit frau) an

'n ineffecti$e control en$ironment ma" create an opportunit" to commit frau.

The si0e# comple%it"# an ownership characteristics of the entit" ha$e a significant influence

on the consieration of rele$ant frau risk factors.

+he following are e)amples of risk factors relating to misstatements arising from

fraudulent financial reporting#

The risk factors are classifie !ase on the three conitions generall" present when material

misstatements ue to frau occur: Incenti$es;pressures#

Opportunities# an

'ttitues;rationali0ations

Incentives/Pressures

1. Financial stability or profitability is treatened by economic! industry! or entity operating

conditions! suc as te following:

a. /igh egree of competition or market saturation# accompanie !" eclining margins

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!. /igh $ulnera!ilit" to rapi changes# such as changes in technolog"# prouct

o!solescence# or interest rates

c. &ignificant eclines in customer eman an increasing !usiness failures in either the

inustr" or o$erall econom".

. Operating losses making the threat of !ankruptc"# foreclosure# or hostile takeo$erimminent

e. Recurring negati$e cash flows from operations or an ina!ilit" to generate cash flowsfrom operations while reporting earnings an earnings growth

f. Rapi growth or unusual profita!ilit" especiall" compare to that of other companies

in the same inustr".

g. New accounting# statutor"# or regulator" reuirements

". #$cessive pressure e$ists for management to meet te re%uirements or e$pectations of tird

parties due to te following:

a. +rofita!ilit" e%pectations of in$estment anal"sts# institutional in$estors# significant

creitors# or other e%ternal parties (particularl" e%pectations that are unul"

aggressi$e or unrealistic-)

!. Nee to o!tain aitional e!t or euit" financing to sta" competiti$e# incluing

financing of ma*or research an e$elopment or capital e%penitures.

c. 1arginal a!ilit" to meet e%change listing reuirements or e!t repa"ment or othere!t co$enant reuirements)

. +ercei$e or real a$erse effects of reporting poor financial results on significant

pening transactions# such as !usiness com!inations or contract awars)

&. Information available indicates tat te personal financial situation of management or tosecarged wit governance is treatened by te entity's financial performance arising from te

following:

a. &ignificant financial interests in the entit")

!. &ignificant portions of their compensation (for e%ample# !onuses# stock options# an

earn9out arrangements- !eing contingent upon achie$ing aggressi$e targets for stock

price# operating results# financial position# or cash flow.

c. +ersonal guarantees of e!ts of the entit"

(. Tere is e$cessive pressure on management or operating personnel to meet financial targetsestablised by tose carged wit governance! including sales or profitability incentive

goals.

)pportunities

6. The nature of the inustr" or the entit",s operations pro$ies opportunities to engage in

frauulent financial reporting that can arise from the following:

a. &ignificant relate9part" transactions not in the orinar" course of !usiness or with

relate entities not auite or auite !" another firm.

!. ' strong financial presence or a!ilit" to ominate a certain inustr" sector that allows

the entit" to ictate terms or conitions to suppliers or customers that ma" result in

inappropriate or non9arm,s length transactions.c. 'ssets# lia!ilities# re$enues# or e%penses !ase on significant estimates that in$ol$e

su!*ecti$e *ugments or uncertainties that are ifficult to corro!orate.. &ignificant# unusual# or highl" comple% transactions# especiall" those close to perio

en that pose ifficult 3su!stance o$er form4 uestions.e. &ignificant operations locate or conucte across international !orers in

*urisictions where iffering !usiness en$ironments an cultures e%ist.

f. Use of !usiness intermeiaries for which there appears to !e no clear !usiness

*ustification)

g. &ignificant !ank accounts or su!siiar" or !ranch operations in ta%9ha$en

*urisictions for which there appears to !e no clear !usiness *ustification.

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8. There is ineffecti$e monitoring of management as a result of the following:

a. Domination of management !" a single person or small group (in a non owner9

manage !usiness- without compensating controls)

!. Ineffecti$e o$ersight !" those charge with go$ernance o$er the financial reporting

process an internal control.nown histor" of $iolations of securities laws or other laws an regulations# or

claims against the entit"# its senior management# or those charge with go$ernancealleging frau or $iolations of laws an regulations.

. 5%cessi$e interest !" management in maintaining or increasing the entit",s stock

price or earnings tren)

e. ' practice !" management of committing to anal"sts# creitors# an other thirparties to achie$e aggressi$e or unrealistic forecasts)

f. 1anagement failing to correct known material weaknesses in internal control on a

timel" !asis)

g. 'n interest !" management in emplo"ing inappropriate means to minimi0e reporte

earnings for ta%9moti$ate reasons)

h. ow morale among senior management)

i. The owner9manager makes no istinction !etween personal an !usiness

transactions)

*. Dispute !etween shareholers in a closel" hel entit")

k. Recurring attempts !" management to *ustif" marginal or inappropriate accountingon the !asis of materialit")

l. The relationship !etween management an the current or preecessor auitor isstraine# as e%hi!ite !" the following:

i. 7reuent isputes with the current or preecessor auitor on accounting#auiting# or reporting matters)

ii. Unreasona!le emans on the auitor# such as unreasona!le time constraints

regaring the completion of the auit or the issuance of the auitor,s report.

iii. 7ormal or informal restrictions on the auitor that inappropriatel" limit

access to people or information or the a!ilit" to communicate effecti$el"

with those charge with go$ernance.

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iv. 3omineering management behavior in dealing with the

auditor, especially involving attempts to influence the scope

of the auditor6s wor+ or the selection or continuance of

personnel assigned to or consulted on the audit engagement

(isk Factors Arisin$ fro! %isstate!ents Arisin$ fro!%isaroriation of Assets

&is+ factors that relate to misstatements arising from misappropriation of

assets are also classified according to the three conditions generally

present when fraud exists:

%ncentives2pressures,

pportunities, and

Attitudes2rationali$ations

Incenti&e".Pre""ure"

-. #ersonal financial obligations may create pressure on management or

employees with access to cash or other assets susceptible to theft to

misappropriate those assets.

1. Adverse relationships between the entity and employees with access to

cash or other assets susceptible to theft may motivate those employees

to misappropriate those assets. 'or example, adverse relationships may

be created by the following:

a. Gnown or anticipated future employee layoffs.

b. &ecent or anticipated changes to employee compensation or benefit

plans.

c. #romotions, compensation, or other rewards inconsistent with

expectations.

O##ortunitie"

-. "ertain characteristics or circumstances may increase the susceptibility of

assets to misappropriation. 'or example, opportunities to misappropriateassets increase when there are the following:

a. 4arge amounts of cash on hand or processed.

b. %nventory items those are small in si$e, of high value, or in high

demand/

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c. !asily convertible assets, such as bearer bonds, diamonds, or

computer chips/

d. 'ixed assets which are small in si$e, mar+etable, or lac+ing

observable identification of ownership.

1. %nadequate internal control over assets may increase the susceptibility of

misappropriation of those assets. 'or example, misappropriation of assets

may occur because there is the following:

a. %nadequate segregation of duties or independent chec+s/

b. %nadequate oversight of senior management expenditures, such as

travel and other reEimbursements.

c. %nadequate management oversight of employees responsible for

assets, for example, inadequate supervision or monitoring of

remote locations.

d. %nadequate job applicant screening of employees with access to

assets.

e. %nadequate record +eeping with respect to assets.

f. %nadequate system of authori$ation and approval of transactions (for

example, in purchasing).

g. %nadequate physical safeguards over cash, investments, inventory,

or fixed assets.

h. 4ac+ of complete and timely reconciliations of assets.

i. 4ac+ of timely and appropriate documentation of transactions, for

example, credits for merchandise returns.

j. 4ac+ of mandatory vacations for employees performing +ey control

functions.

+. %nadequate management understanding of information technology,

which enables information technology employees to perpetrate a

misappropriation.

l. %nadequate access controls over automated records, including

controls over and review of computer systems event logs.

Attitude".Rtion!i/tion"

a. 3isregard for the need for monitoring or reducing ris+s related to

misappropriations of assets.

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b. 3isregard for internal control over misappropriation of assets by

overriding existing controls or by failing to correct +nown internal

control deficiencies.

c. 8ehavior indicating displeasure or dissatisfaction with the entity or

its treatment of the employee.

d. "hanges in behavior or lifestyle that may indicate assets have been

misappropriated.

e. olerance of petty theft.

.7 Consi#eration o! Un%s%a or Une0pe)te# Reationships

When performing anal"tical proceures to o!tain an unerstaning of the entit" an its

en$ironment# incluing its internal control# the auitor shoul consier unusual or une%pecte

relationships that ma" inicate risks of material misstatement ue to frau.

'nal"tical proceures ma" !e helpful in ientif"ing the e%istence of unusual transactions ore$ents# an amounts# ratios# an trens that might inicate matters that ha$e financial

statement an auit implications.

2. Con#ideration of Oter Information

When o!taining an unerstaning of the entit" an its en$ironment# incluing its internal

control# the auitor shoul consier whether other information o!taine inicates risks of

material misstatement ue to frau.

The iscussion among team mem!ers ma" pro$ie information that is helpful in ientif"ing

such risks.

Identification and A##e##ment of te Ri## of %ateria* %i##tatement Due to Fraud

When ientif"ing an assessing the risks of material misstatement

't the financial statement le$el# an

't the assertion le$el for classes of transactions# account !alances an isclosures# The auitor shoul ientif" an assess the risks of material misstatement ue to frau.

Those assesse risks that coul result in a material misstatement ue to frau are significant

risks an accoringl"# to the e%tent not alrea" one so# the auitor shoul e$aluate the

esign of the entit",s relate controls#

It is important for the auitor to o!tain an unerstaning of the controls that management has

esigne an implemente to pre$ent an etect frau !ecause in esigning an

implementing such controls# management ma" make informe *ugments on the nature an

e%tent of the controls it chooses to implement# an the nature an e%tent of the risks it

chooses to assume.

The auitor ma" learn# for e%ample# that management has consciousl" chosen to accept the

risks associate with a lack of segregation of uties.

This ma" often !e the case in small entities where the owner pro$ies a"9to9a" super$ision

of operations.

Ri## of Fraud in Re'enue Reco"nition

1aterial misstatements ue to frauulent financial reporting often result from:

'n o$erstatement of re$enues)

7or e%ample# through premature re$enue recognition or recoring

fictitious re$enues) or

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'n unerstatement of re$enues)

7or e%ample# through improperl" shifting re$enues to a later perio)

Therefore# the auitor orinaril" presumes that there are risks of frau in re$enue

recognition an consiers which t"pes of re$enue# re$enue transactions or assertions

ma" gi$e rise to such risks.

Re#$on#e# to te Ri## of %ateria* %i##tatement Due to Fraud Te auditor sould determine overall responses to address te assessed ris-s of

material misstatement due to fraud

o *t te financial statement level and sould design and

o Perform furter audit procedures wose nature! timing and e$tent are

responsive to te assessed ris-s at te assertion level

The auitor respons to the risks of material misstatement ue to frau in the following wa"s:

' response that has an o$erall effect on how the auit is conucte# that is# increase

professional skepticism an a response in$ol$ing more general consierations apart

from the specific proceures otherwise planne.

' response to ientifie risks at the assertion le$el in$ol$ing the nature# timing an

e%tent of auit proceures to !e performe. ' response to ientifie risks in$ol$ing the performance of certain auit proceures

to aress the risks of material misstatement ue to frau in$ol$ing management

o$errie of controls# gi$en the unpreicta!le wa"s in which such o$errie coul

occur.

The response to aress the assesse risks of material misstatement ue to frau ma" affect

the auitor,s professional skepticism in the following wa"s:

Increase sensiti$it" in the selection of the nature an e%tent of ocumentation to !e

e%amine in support of material transactions.

Increase recognition of the nee to corro!orate management e%planations or

representations concerning material matters.

O'era** Re#$on#e#:

In etermining o$erall responses to aress the risks of material misstatement ue to frau at

the financial statement le$el the auitor shoul:

Consier the assignment an super$ision of personnel)

Consier the accounting policies use !" the entit") an

Incorporate an element of unpreicta!ilit" in the selection of the nature# timing an

e%tent of auit proceures.

The auitor ma" respon to ientifie risks of material misstatement ue to frau !"

assigning aitional ini$iuals with speciali0e skill an knowlege)

The auitor consiers management,s selection an application of significant accounting

policies# particularl" those relate to su!*ecti$e measurements an comple% transactions)

Ini$iuals within the entit" who are familiar with the auit proceures normall" performe

on engagements ma" !e more a!le to conceal frauulent financial reporting. Therefore# theauitor incorporates an element of unpreicta!ilit" in the selection of the nature# e%tent an

timing of auit proceures to !e performe.

Audit Procedure# Re#$on#i'e to Ri## of %ateria* %i##tatement Due to Fraud at te

A##ertion +e'e*

The auitor,s responses to aress the assesse risks of material misstatement ue to frau at the

assertion le$el ma" inclue changing the nature# timing# an e%tent of auit proceures in the

following wa"s:

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The nature of auit proceures to !e performe ma" nee to !e change to o!tain

auit e$ience that is more relia!le an rele$ant or to o!tain aitional corro!orati$e

information.

7or e%ample: If the auitor ientifies that management is uner pressure to meet

earnings e%pectations# there ma" !e a relate risk that management is inflating sales

!" entering into sales agreements that inclue terms that preclue re$enue

recognition or !" in$oicing sales !efore eli$er". In these circumstances# the auitorma"# for e%ample# esign e%ternal confirmations not onl" to confirm outstaning

amounts# !ut also to confirm the etails of the sales agreements# incluing ate# an"

rights of return an eli$er" terms. In aition# the auitor might fin it effecti$e to

supplement such e%ternal confirmations with inuiries of non9financial personnel inthe entit" regaring an" changes in sales agreements an eli$er" terms.

The timing of su!stanti$e proceures ma" nee to !e moifie. The auitor ma"

conclue that performing su!stanti$e testing at or near the perio en !etter

aresses an assesse risk of material misstatement ue to frau.

The e%tent of the proceures applie reflects the assessment of the risks of material

misstatement ue to frau.

7or e%ample# increasing sample si0es or performing anal"tical proceures at a more

etaile le$el ma" !e appropriate.

Audit Procedure# Re#$on#i'e to %ana"ement O'erride of Contro*#

1anagement is in a uniue position to perpetrate frau !ecause of management,s a!ilit" toirectl" or inirectl" manipulate accounting recors an prepare frauulent financial

statements !" o$erriing controls that otherwise appear to !e operating effecti$el".

To respon to the risk of management o$errie of controls# the auitor shoul esign an

perform auit proceures to:'. Test the appropriateness of *ournal entries recore in the general leger an other

a*ustments mae in the preparation of financial statements)

. Re$iew accounting estimates for !iases that coul result in material misstatement ue

to frau) an

C. O!tain an unerstaning of the !usiness rationale of significant transactions that theauitor !ecomes aware of that are outsie of the normal course of !usiness for the

entit"# or that otherwise appear to !e unusual gi$en the auitor,s unerstaning of the

entit" an its en$ironment)

A. 3ourna* Entrie# and Oter Ad4u#tment#

The auitor ma":

O!tains an unerstaning of the entit",s financial reporting process an the controls

o$er *ournal entries an other a*ustments)

5$aluates the esign of the controls o$er *ournal entries an other a*ustments an

etermines whether the" ha$e !een implemente)

1akes inuiries of ini$iuals in$ol$e in the financial reporting process a!out

inappropriate or unusual acti$it" relating to the processing of *ournal entries an

other a*ustments) Determines the timing of the testing) an

Ientifies an selects *ournal entries an other a*ustments for testing.

Te caracteristics of fraudulent ournal entries or oter adustments

'ppropriate *ournal entries or other a*ustments oftenha$e uniue ientif"ing characteristics.

&uch characteristics ma"inclue entries

1ae to unrelate# unusual# or selom9use accounts#

1ae !" ini$iuals who t"picall" o not make *ournal entries#

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Recore at the en of the perio or as post9closing entries that ha$e little or no

e%planation or escription#

1ae either !efore or uring the preparation of the financial statements that o not

ha$e account num!ers# or

Containing roun num!ers or consistent ening num!ers)

Te nature and comple$ity of te accounts

Inappropriate *ournal entries or a*ustments ma" !e applie to accounts that

Contain transactions that are comple% or unusual in nature#

Contain significant estimates an perio9en a*ustments#

/a$e !een prone to misstatements in the past#

/a$e not !een reconcile on a timel" !asis or contain un9reconcile ifferences#

Contain inter9compan" transactions# or

're otherwise associate with an ientifie risk of material misstatement ue to

frau.

&. Accountin" E#timate#

In re$iewing accounting estimates for !iases that coul result in material misstatement ue to

frau the auitor:

Consiers whether ifferences !etween estimates !est supporte !" auit e$iencean the estimates inclue in the financial statements# e$en if the" are ini$iuall"

reasona!le# inicate a possi!le !ias on the part of the entit",s management# in which

case the auitor reconsiers the estimates taken as a whole) an

+erforms a retrospecti$e re$iew of management *ugments an assumptions relate

to significant accounting estimates reflecte in the financial statements of the prior

"ear.

The o!*ecti$e of this re$iew is to etermine whether there is an inication of apossi!le !ias on the part of management# an it is not intene to call into uestion

the auitor,s professional *ugments mae in the prior "ear that were !ase on

information a$aila!le at the time.C. &u#ine## Rationa*e for Si"nificant Tran#action#

The auitor o!tains an unerstaning of the !usiness *ustification for significant transactionsthat are outsie the normal course of !usiness for the entit"# or that otherwise appear to !e

unusual gi$en the auitor,s unerstaning of the entit" an its en$ironment an other

information o!taine uring the auit.

Whether the form of such transactions appears o$erl" comple% (for e%ample# the

transaction in$ol$es multiple entities within a consoliate group or multiple

unrelate thir parties-.

Whether management has iscusse the nature of an accounting for such

transactions with those charge with go$ernance of the entit"# an whether there is

aeuate ocumentation.

Whether the transactions in$ol$e pre$iousl" unientifie relate parties or parties

that o not ha$e the su!stance or the financial strength to support the transaction

without assistance from the entit" uner auit.

E'a*uation of Audit E'idence

The auitor# !ase on the auit proceures performe an the auit e$ience o!taine#

e$aluates whether the assessments of the risks of material misstatement at the assertion le$el

remain appropriate.

This e$aluation is primaril" a ualitati$e matter !ase on the auitor,s *ugment.

&uch an e$aluation ma" pro$ie further insight a!out the risks of material misstatement ue

to frau an whether there is a nee to perform aitional or ifferent auit proceures.

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0en te auditor identifies a misstatement! te auditor sould consider weter suc a

misstatement may be indicative of fraud and if tere is suc an indication!

Te auditor sould consider te implications of te misstatement in relation to oter aspects

of te audit! particularly te reliability of management representations.

Exam$*e# of Circum#tance# tat Indicate te Po##i)i*it! of Fraud

The following are e%amples of circumstances that ma" inicate the possi!ilit" that the

financial statements ma" contain a material misstatement resulting from frau.

6. Discrepancies in the accounting recors# incluing the following:

Transactions that are not recore in a complete or timel" manner or are improperl"

recore as to amount# accounting perio# classification# or entit" polic".

Unsupporte or unauthori0e !alances or transactions.

ast9minute a*ustments that significantl" affect financial results.

5$ience of emplo"ees, access to s"stems an recors inconsistent with that

necessar" to perform their authori0e uties.

Tips or complaints to the auitor a!out allege frau.

8. Conflicting or missing e$ience# incluing the following:

1issing ocuments.

Documents that appear to ha$e !een altere. Una$aila!ilit" of other than photocopie or electronicall" transmitte ocuments

when ocuments in original form are e%pecte to e%ist.

&ignificant une%plaine items on reconciliations.

Unusual !alance sheet changes or changes in trens or important financial statement

ratios or relationships# for e%ample recei$a!les growing faster than re$enues.

Inconsistent# $ague# or implausi!le responses from management or emplo"ees arising

from inuiries or anal"tical proceures.

Unusual iscrepancies !etween the entit",s recors an confirmation replies.

arge num!ers of creit entries an other a*ustments mae to accounts recei$a!le

recors.

Une%plaine or inaeuatel" e%plaine ifferences !etween the accounts recei$a!lesu!9leger an the control account# or !etween the customer statements an the

accounts recei$a!le su!9leger.

1issing or non9e%istent cancelle checks in circumstances where cancelle checks

are orinaril" returne to the entit" with the !ank statement.

1issing in$entor" or ph"sical assets of significant magnitue.

Una$aila!le or missing electronic e$ience# inconsistent with the entit",s recor

retention practices or policies.

7ewer responses to confirmations than anticipate or a greater num!er of responses

than anticipate.

Ina!ilit" to prouce e$ience of ke" s"stems e$elopment an program changetesting an implementation acti$ities for current9"ear s"stem changes an

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Complaints !" management a!out the conuct of the auit or management

intimiation of engagement team mem!ers# particularl" in connection with the

auitor,s critical assessment of auit e$ience or in the resolution of potential

isagreements with management.

Unusual ela"s !" the entit" in pro$iing reueste information.

Unwillingness to facilitate auitor access to ke" electronic files for testing through

the use of computer9assiste auit techniues.

Denial of access to ke" IT operations staff an facilities# incluing securit"#

operations# an s"stems e$elopment personnel.

'n unwillingness to a or re$ise isclosures in the financial statements to make

them more complete an unerstana!le.

'n unwillingness to aress ientifie weaknesses in internal control on a timel"

!asis.

=. Other inclues the following:

Unwillingness !" management to permit the auitor to meet pri$atel" with thosecharge with go$ernance.

'ccounting policies that appear to !e at $ariance with inustr" norms.

7reuent changes in accounting estimates that o not appear to result from changescircumstances.

Tolerance of $iolations of the entit",s coe of conuct.

What is the responsibility of an auditor regarding fraud which is not material in nature

and what is the responsibility of an auditor when fraud is committed by higher

management?

If the auitor !elie$es that a misstatement is or ma" !e the result of frau# !ut the effect of the

misstatement is not material to the financial statements# the auitor e$aluates the

implications# especiall" those ealing with the organi0ational position of the ini$iual(s-

in$ol$e.

Con$ersel"# if the matter in$ol$es higher9le$el management# e$en though the amount itself is

not material to the financial statements# it ma" !e inicati$e of a more per$asi$e pro!lem#

7or e%ample# implications a!out the integrit" of management. In such circumstances# the auitor re9e$aluates the assessment of the risks of material

misstatement ue to frau an its resulting impact on the nature# timing# an e%tent of auit

proceures to respon to the assesse risks.

The auitor also reconsiers the relia!ilit" of e$ience pre$iousl" o!taine since there ma"

!e ou!ts a!out the completeness an truthfulness of representations mae an a!out the

genuineness of accounting recors an ocumentation.

The auitor also consiers the possi!ilit" of collusion in$ol$ing emplo"ees# management or

thir parties when reconsiering the relia!ilit" of e$ience.

$odification of report

When the auitor confirms that# or is una!le to conclue whether# the financial statements are

materiall" misstate as a result of frau) The auitor shoul consier the implications for the auit:

Whether frau is material an

Whether there is nee for moification)

%ana"ement Re$re#entation#

The auitor shoul o!tain written representations from management that:

It acknowleges its responsi!ilit" for the esign an implementation of internal

control to pre$ent an etect frau)

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It has isclose to the auitor the results of its assessment of the risk that the financial

statements ma" !e materiall" misstate as a result of frau)

It has isclose to the auitor its knowlege of frau or suspecte frau affecting the

entit" in$ol$ing:

1anagement)

5mplo"ees who ha$e significant roles in internal control) or

Others where the frau coul ha$e a material effect on the financialstatements) an

It has isclose to the auitor its knowlege of an" allegations of frau# or suspecte

frau# affecting the entit",s financial statements communicate !" emplo"ees# former

emplo"ees# anal"sts# regulators or others.

Communication# (it %ana"ement and To#e Car"ed (it Go'ernance

If the auitor has ientifie a frau or has o!taine information that inicates that a frau ma"

e%ist# the auitor shoul communicate these matters as soon as practica!le to the appropriate

le$el of management.

If the auitor has ientifie frau in$ol$ing:

1anagement)

5mplo"ees who ha$e significant roles in internal control) or Others where the frau results in a material misstatement in the financial statements#

The auitor shoul communicate these matters to those charge with ?o$ernance as soon as

practica!le.

If the integrit" or honest" of management or those charge with go$ernance is ou!te# the

auitor consiers seeking legal a$ice to assist in the etermination of the appropriate course

of action.

The auitor shoul make those charge with go$ernance an management aware# as soon as

practica!le# an at the appropriate le$el of responsi!ilit"# of material weaknesses in the

esign or implementation of internal control to pre$ent an etect frau which ma" ha$e

come to the auitor,s attention.

Auditor 0na)*e to Continue

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