CHAPTER NO.

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INTRODUCTION TO INTERNATIONAL STANDARDS
ON AUDITING

Internal auditing is the process carried out in different legal and cultural
environments; within the organizations that differ in purpose, size, structure, and
complexity; as well as by individuals inside or outside the organization. Although
differences might affect the practice of internal auditing in every environment,
conformance with the IIAs International Standards for the Professional Practice of
Internal Auditing is important in congregating the responsibilities of internal
auditors as well as internal audit activity.
If, in case, internal audit activity or internal auditor is proscribed by regulation or
law from conformance with certain sections of the Standards, conformance with all
other sections of Standards and apt disclosures are also required.
If these Standards are used in combination with standards issued by other
regulatory bodies, internal audit communications may also mention the use of
other standards, as suitable. In such a case, if uniformities exist between the
Standards and other standards, internal auditors and the internal audit activity
needs to conform with the Standards, and can conform with the other standards on
being more restrictive.

What are Auditing standards?

In the simplest terms, auditing standards represents a codification of the best
practices in the field of auditing. Auditing Standards are therefore, the performance
benchmarks for the auditor. Auditing standards for the professionals on how they
should carry out their professional engagement, enshrined as the basic principles
and essential procedures to apply those basic principles that relates to judgement or
behaviour. The objective of the auditing of the auditing standards is to a large
extent serving the public interest.

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OBJECTIVES OF THE ISA

The ISA objectives are two-fold:

Analyzing the comparability of national accounting as well as auditing
standards with international standards, determine the degree with which
applicable auditing and accounting standards are complied, and analyze
strengths and weaknesses of the institutional framework in sustaining high-
quality financial reporting.
Assist the country in developing and implementing a country action plan for
improvement of institutional capacity with a view of strengthening the
corporate financial reporting system of the country.

PURPOSE OF STANDARDS

The purpose of these Standards includes:

Delineating the basic principles representing the practice of internal
auditing.
Providing a framework for carrying out and promoting a wide range of
value added internal auditing.
Establishing the basis for the evaluation of internal audit
performance.
Promoting improved organizational operations and processes.

PRINCIPLES OF STANDARDS

The International Standards for the Professional Practice of Internal auditing are
principle-based, obligatory requirements containing:
Statements of basic requirements for the professional practice of internal
auditing as well as for assessing the effectiveness of performance, which are
applicable internationally at individual and organizational levels.
Interpretations, which clarify concepts and terms contained in the
Statements.

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STRUCTURE OF THE STANDARDS

The structure of these standards is segregated between Attribute and Performance

Standards. Attribute Standards include the attributes of individuals and organizations
involved in internal auditing. The Performance Standards, on the other hand, delineate the
nature of internal auditing thus providing quality criteria benchmarked with the performance
of these services can be measured. Moreover, the Attribute and the Performance Standards
are also issued to apply to all internal audit services.

EARLY HISTORY
Groundwork for an international set of standards for auditing began in 1969 with
the publication of a number of reports focusing on international auditing by the
Accountants International Study Group, comparing the situation in Canada, the UK
and US. A few years later, the establishment of the International Accounting
Standards Committee in 1973 generated many calls for a similar body to be set up
on the auditing front.

Amongst the many calls was a well researched argument from Maurice Moonitz,
Director of Accounting Research at AICPA, in his 1978 book International
Auditing Standards which set out the case for a set of standards, and went on to
recommend the establishment of an International Auditing Standards Committee
(IAudSC). The title from Moonitz is useful in comparing the situation worldwide
prior to the adoption of an international set of standards, and in identifying the
various calls for international standards at the time.

In the late 1970s the Council of International Federation of Accountants (IFAC)

created the International Auditing Practices Committee (IAPC) which would be a
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standing committee of the IFAC Council and subsequently the IFAC Board (in
May 2000 the IFAC Council was renamed the IFAC Board).

Between 1980 and 1991 the IAPC issued International Auditing Guidelines (IAG),
and addendums to these. The first International Standard on Auditing (ISA) was
issued in 1991, and this has remained the series to the present day.

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 CHAPTER NO.2
DETAIL STUDY OF STANDARD ON AUDITING
In finalizing the 2012 Handbook of International Quality Control, Auditing,
Review, Other Assurance, and Related Services Pronouncements (the handbook),
editorial and formatting changes were made to some ISAs from the 2010
handbook. A bridging document has been prepared which provides an overview of
these changes.

List of ISAs
ISA 200, Overall Objectives of the Independent Auditor and the Conduct of
an Audit in Accordance with International Standards on Auditing
ISA 210, Agreeing the Terms of Audit Engagements
ISA 220, Quality Control for an Audit of Financial Statements
ISA 230, Audit Documentation
ISA 240, The Auditor's Responsibilities Relating to Fraud in an Audit of
Financial Statements
ISA 250, Consideration of Laws and Regulations in an Audit of Financial
Statements
ISA 260, Communication with Those Charged with Governance
ISA 265, Communicating Deficiencies in Internal Control to Those Charged
with Governance and Management
ISA 300, Planning an Audit of Financial Statements
ISA 315, Identifying and Assessing the Risks of Material Misstatement
through Understanding the Entity and Its Environment
ISA 320, Materiality in Planning and Performing an Audit
ISA 330, The Auditor's Responses to Assessed Risks
ISA 402, Audit Considerations Relating to an Entity Using a Service
Organization
ISA 450, Evaluation of Misstatements Identified during the Audit
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 ISA 500, Audit Evidence
ISA 501, Audit Evidence-Specific Considerations for Selected Items
ISA 505, External Confirmations
ISA 510, Initial Audit Engagements-Opening Balances
ISA 520, Analytical Procedures
ISA 530, Audit Sampling
ISA 540, Auditing Accounting Estimates, Including Fair Value Accounting
Estimates, and Related Disclosures
ISA 550, Related Parties
ISA 560, Subsequent Events
ISA 570, Going Concern
ISA 580, Written Representations
ISA 600, Special Considerations-Audits of Group Financial Statements
(Including the Work of Component Auditors)
ISA 610, Using the Work of Internal Auditors
ISA 620, Using the Work of an Auditor's Expert
ISA 700, Forming an Opinion and Reporting on Financial Statements
ISA 705, Modifications to the Opinion in the Independent Auditor's Report
ISA 706, Emphasis of Matter Paragraphs and Other Matter Paragraphs in the
Independent Auditor's Report
ISA 710, Comparative Information-Corresponding Figures and Comparative
Financial Statements
ISA 720, The Auditor's Responsibilities Relating to Other Information in
Documents Containing Audited Financial Statements
ISA 800, Special Considerations-Audits of Financial Statements Prepared in
Accordance with Special Purpose Frameworks
ISA 805, Special Considerations-Audits of Single Financial Statements and
Specific Elements, Accounts or Items of a Financial Statement
ISA 810, Engagements to Report on Summary Financial Statements
International Standard on Quality Control (ISQC) 1, Quality Controls for
Firms that Perform Audits and Reviews of Financial Statements, and Other
Assurance and Related Services Engagements

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 STANDARD ON AUDITING 500 AUDIT EVIDENCE

INTRODUCTION
Effective Date

This ISA is effective for audits of financial statements for periods beginning on
or after December 15, 2009.

Scope of this ISA

This International Standard on Auditing (ISA) explains what constitutes audit
evidence in an audit of financial statements, and deals with the auditors
responsibility to design and perform audit procedures to obtain sufficient
appropriate audit evidence to be able to draw reasonable conclusions on which to
base the auditors opinion.

This ISA is applicable to all the audit evidence obtained during the course of the
audit. Other ISAs deal with specific aspects of the audit (for example, ISA 3151 ),
the audit evidence to be obtained in relation to a particular topic (for example, ISA
5702 ), specific procedures to obtain audit evidence (for example, ISA 5203 ), and
the evaluation of whether sufficient appropriate audit evidence has been obtained
(ISA 2004 and ISA 3305 ).

Objective
The objective of the auditor is to design and perform audit procedures in such a
way as to enable the auditor to obtain sufficient appropriate audit evidence to be
able to draw reasonable conclusions on which to base the auditors opinion.

Definitions
For purposes of the ISAs, the following terms have the meanings attributed
below:

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 (a) Accounting records The records of initial accounting entries and supporting
records, such as checks and records of electronic fund transfers; invoices;
contracts; the general and subsidiary ledgers, journal entries and other adjustments
to the financial statements that are not reflected in journal entries; and records such
as work sheets and spreadsheets supporting cost allocations, computations,
reconciliations and disclosures.

(b) Appropriateness (of audit evidence) The measure of the quality of audit
evidence; that is, its relevance and its reliability in providing support for the
conclusions on which the auditors opinion is based.

(c) Audit evidence Information used by the auditor in arriving at the conclusions
on which the auditors opinion is based. Audit evidence includes both information
contained in the accounting records underlying the financial statements and other
information.

(d) Managements expert An individual or organization possessing expertise in a

field other than accounting or auditing, whose work in that field is used by the
entity to assist the entity in preparing the financial statements.

(e) Sufficiency (of audit evidence) The measure of the quantity of audit
evidence. The quantity of the audit evidence needed is affected by the auditors
assessment of the risks of material misstatement and also by the quality of such
audit evidence.

Concept of Audit Evidence

1. Audit evidence is all the information used by the auditor in arriving at the
conclusions on which the audit opinion is based, and includes the information
contained in the accounting records underlying the financial statements and other
information. Auditors are not expected to address all information that may exist.1
Audit evidence, which is cumulative in nature, includes audit evidence obtained
from audit procedures performed during the course of the audit and may include
audit evidence obtained from other sources such as previous audits and a firms
quality control procedures for client acceptance and continuance.

2. Accounting records generally include the records of initial entries and

supporting records, such as checks and records of electronic fund transfers;
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invoices; contracts; the general and subsidiary ledgers, journal entries and other
adjustments to the financial statements that are not reflected in formal journal
entries; and records such as work sheets and spreadsheets supporting cost
allocations, computations, reconciliations and disclosures. The entries in the
accounting records are often initiated, recorded, processed and reported in
electronic form. In addition, the accounting records may be part of integrated
systems that share data and support all aspects of the entitys financial reporting,
operations and compliance objectives.

3. Management is responsible for the preparation of the financial statements based

upon the accounting records of the entity. The auditor obtains some audit evidence
by testing the accounting records, for example, through analysis and review,
reperforming procedures followed in the financial reporting process, and
reconciling related types and applications of the same information. Through the
performance of such audit procedures, the auditor may determine that the
accounting records are internally consistent and agree to the financial statements.
However, because accounting records alone do not provide sufficient audit
evidence on which to base an audit opinion on the financial statements, the auditor
obtains other audit evidence.

4. Other information that the auditor may use as audit evidence includes minutes of
meetings; confirmations from third parties; analysts reports; comparable data
about competitors (benchmarking); controls manuals; information obtained by the
auditor from such audit procedures as inquiry, observation, and inspection; and
other information developed by, or available to, the auditor that permits the auditor
to reach conclusions through valid reasoning.

Audit Procedures for Obtaining Audit Evidence

The auditor obtains audit evidence to draw reasonable conclusions on which to
base the audit opinion by performing audit procedures to:

(a) Obtain an understanding of the entity and its environment, including its
internal control, to assess the risks of material misstatement at the financial
statement and assertion levels (audit procedures performed for this purpose are
referred to in the ISAs as risk assessment procedures);

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 (b) When necessary or when the auditor has determined to do so, test the operating
effectiveness of controls in preventing, or detecting and correcting, material
misstatements at the assertion level (audit procedures performed for this purpose
are referred to in the ISAs as tests of controls); and

(c) Detect material misstatements at the assertion level (audit procedures

performed for this purpose are referred to in the ISAs as substantive procedures
and include tests of details of classes of transactions, account balances, and
disclosures and substantive analytical procedures). 20. The auditor always
performs risk assessment procedures to provide a satisfactory basis for the
assessment of risks at the financial statement and assertion levels. Risk assessment
procedures by themselves do not provide sufficient appropriate audit evidence on
which to base the audit opinion, however, and are supplemented by further audit
procedures in the form of tests of controls, when necessary, and substantive
procedures.

2. Tests of controls are necessary in two circumstances. When the auditors risk
assessment includes an expectation of the operating effectiveness of controls, the
auditor is required to test those controls to support the risk assessment. In addition,
when substantive procedures alone do not provide sufficient appropriate audit
evidence, the auditor is required to perform tests of controls to obtain audit
evidence about their operating effectiveness.

3. The auditor plans and performs substantive procedures to be responsive to the

related assessment of the risks of material misstatement, which includes the results
of tests of controls, if any. The auditors risk assessment is judgmental, however,
and may not be sufficiently precise to identify all risks of material misstatement.
Further, there are inherent limitations to internal control, including the risk of
management override, the possibility of human error and the effect of systems
changes. Therefore, substantive procedures for material classes of transactions,
account balances, and disclosures are always required to obtain sufficient
appropriate audit evidence.

4. The auditor uses one or more types of audit procedures described in paragraphs
26-38 below. These audit procedures, or combinations thereof, may be used as risk
assessment procedures, tests of controls or substantive procedures, depending on

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the context in which they are applied by the auditor. In certain circumstances, audit
evidence obtained from previous audits may provide audit evidence where the
auditor performs audit procedures to establish its continuing relevance.

5. The nature and timing of the audit procedures to be used may be affected by the
fact that some of the accounting data and other information may be available only
in electronic form or only at certain points or periods in time. Source documents,
such as purchase orders, bills of lading, invoices, and checks, may be replaced with
electronic messages. For example, entities may use electronic commerce or image
processing systems. In electronic commerce, the entity and its customers or
suppliers use connected computers over a public network, such as the Internet, to
transact business electronically. Purchase, shipping, billing, cash receipt, and cash
disbursement transactions are often consummated entirely by the exchange of
electronic messages between the parties. In image processing systems, documents
are scanned and converted into electronic images to facilitate storage and
reference, and the source documents may not be retained after conversion. Certain
electronic information may exist at a certain point in time. However, such
information may not be retrievable after a specified period of time if files are
changed and if backup files do not exist. An entitys data retention policies may
require the auditor to request retention of some information for the auditors review
or to perform audit procedures at a time when the information is available.

6. When the information is in electronic form, the auditor may carry out certain of
the audit procedures described below through CAATs.

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 STANDARD ON AUDITING 501 Audit Evidence-Specific
Considerations for Selected Items

INTRODUCTION
Effective Date

This SA is effective for audits of financial statements for periods beginning on

or after April 1, 2010.

SCOPE OF THIS SA
This Standard on Auditing (SA) deals with specific considerations by the auditor
in obtaining sufficient appropriate audit evidence in accordance with SA 330 3 ,
SA 500 4 and other relevant SAs, with respect to certain aspects of inventory,
litigation and claims involving the entity, and segment information in an audit of
financial statements.

OBJECTIVE
The objective of the auditor is to obtain sufficient appropriate audit evidence
regarding the:

(a) Existence and condition of inventory;

(b) Completeness of litigation and claims involving the entity; and (c) Presentation
and disclosure of segment information in accordance with the applicable financial
reporting framework.

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REQUIREMENTS INVENTORY
1.When inventory is material to the financial statements, the auditor shall obtain
sufficient appropriate audit evidence regarding the existence and condition of
inventory by:

(a) Attendance at physical inventory counting, unless impracticable, to

(i) Evaluate managements instructions and procedures for recording and

controlling the results of the entitys physical inventory counting;

(ii) Observe the performance of managements count procedures;

(iii) Inspect the inventory; and

(iv) Perform test counts; and

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

2. If physical inventory counting is conducted at a date other than the date of the
financial statements, the auditor shall, in addition to the procedures required by
paragraph 4, perform audit procedures to obtain audit evidence about whether
changes in inventory between the count date and the date of the financial
statements are properly recorded.

3. If the auditor is unable to attend physical inventory counting due to unforeseen

circumstances, the auditor shall make or observe some physical counts on an
alternative date, and perform audit procedures on intervening transactions.

4. If attendance at physical inventory counting is impracticable, the auditor shall

perform alternative audit procedures to obtain sufficient appropriate audit evidence
regarding the existence and condition of inventory. If it is not possible to do so, the
auditor shall modify the opinion in the auditors report in accordance with SA 705

8. When inventory under the custody and control of a third party is material to the
financial statements, the auditor shall obtain sufficient appropriate audit evidence
regarding the existence and condition of that inventory by performing one or both
of the following:

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 (a) Request confirmation from the third party as to the quantities and condition of
inventory held on behalf of the entity. (Ref: Para. A15)
(b) Perform inspection or other audit procedures appropriate in the circumstances.

LITIGATION AND CLAIMS

1. The auditor shall design and perform audit procedures in order to identify
litigation and claims involving the entity which may give rise to a risk of material
misstatement, including:

(a) Inquiry of management and, where applicable, others within the entity,
including in-house legal counsel;

(b) Reviewing minutes of meetings of those charged with governance and

correspondence between the entity and its external legal counsel; and

(c) Reviewing legal expense accounts.

2. If the auditor assesses a risk of material misstatement regarding litigation or

claims that have been identified, or when audit procedures performed indicate that
other material litigation or claims may exist, the auditor shall, in addition to the
procedures required by other SAs, seek direct communication with the entitys
external legal counsel. The auditor shall do so through a letter of inquiry, prepared
by management and sent by the auditor, requesting the entitys external legal
counsel to communicate directly with the auditor. If law, regulation or the
respective legal professional body prohibits the entitys external legal counsel from
communicating directly with the auditor, the auditor shall perform alternative audit
procedures.

3. The auditor shall request management and, where appropriate, those charged
with governance to provide written representations that all known actual or
possible litigation and claims whose effects should be considered when preparing
the financial statements have been disclosed to the auditor and appropriately
accounted for and disclosed in accordance with the applicable financial reporting
framework. Segment Information

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 4. The auditor shall obtain sufficient appropriate audit evidence regarding the
presentation and disclosure of segment information in accordance with the
applicable financial reporting framework by: (Ref: Para. A26)

(a) Obtaining an understanding of the methods used by management in

determining segment information, and: (Ref: Para. A27)

(i) Evaluating whether such methods are likely to result in disclosure in

accordance with the applicable financial reporting framework; and

(ii) Where appropriate, testing the application of such methods; and

(b) Performing analytical procedures or other audit procedures appropriate in the

circumstances.

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 STANDARD ON AUDITING 505 External Confirmations

INTRODUCTION
Effective Date

This ISA is effective for audits of financial statements for periods beginning
on or after [date].

SCOPE OF THIS ISA

This International Standard on Auditing (ISA) establishes requirements and
provides guidance for the performance of external confirmation procedures when
the auditor determines that confirmation of information with third parties will be
used as a means of obtaining audit evidence.

External Confirmations as a Response to Assessed Risks

ISA 315, Identifying and Assessing the Risks of Material Misstatement Through
Understanding the Entity and Its Environment requires the auditor to identify and
assess the risks of material misstatement of the financial statements to provide a
basis for designing and performing further audit procedures

ISA 330, The Auditors Responses to Assessed Risks requires the auditor to
obtain more persuasive audit evidence the higher the auditors assessment of risk.
Consequently, as the assessed risk of material misstatement increases, the auditor
may increase the quantity of the evidence or obtain evidence that is more relevant
or reliable.

When designing the nature, timing and extent of audit procedures, different
procedures may be effective in addressing the assessed risks of material
misstatement at the financial statement assertion level. The auditors selection of
audit procedures from a number of possible effective procedures is a matter of
professional judgment and depends on a number of factors, including:

The nature and significance of the assessed risk;

The relevance of the audit procedures in addressing the assessed risk;

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 The likely persuasiveness of the audit evidence to be obtained;

Whether the audit procedures also may provide evidence relating to other
assessed risks or corroborate evidenced obtained by performing other audit
procedures; and

The cost of the procedures relative to the quantity and/or quality of audit
evidence that might be obtained. The auditor may determine that seeking external
confirmations is an effective response to address risk of material misstatement at
the financial statement assertion level on the basis of these factors. (Ref: Para.A7)

OBJECTIVES

The objectives of the auditor are:

(a) To determine whether and to what extent, in the circumstances of the audit, to
request external confirmation of information as a means of obtaining sufficient
appropriate audit evidence in response to an assessed risk of financial statement
misstatement; and, if so,

(b) To design and perform effective external confirmation procedures.

DEFINITIONS

7. For the purpose of this ISA, the following terms have the meanings attributed
below: (a) External confirmation Audit evidence relating to assertions in the
financial statements or related disclosures either as a direct response to the auditor
from a confirming party as a result of a positive or a negative confirmation request,
or the lack of response to a negative confirmation request. (b) External
confirmation process The process of performing procedures directed toward
obtaining audit evidence in the form of an external confirmation.

(c) Negative confirmation request A request for information that asks the
confirming party to respond directly to the auditor only in the event of
disagreement with the information provided in the request.

(d) Positive confirmation request A request for information that asks the
confirming party to respond directly to the auditor, whether he or she agrees with
the information presented, or to provide information requested by the auditor.

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(e) Non-response When the confirming party does not reply, or does not fully
reply, to a positive confirmation request, or when a positive or negative
confirmation request is returned undeliverable.

(f) Exception A response to a positive or negative confirmation request indicating

that there is a difference between the information contained in the entitys records
and the information reported by the confirming party.

REQUIREMENTS
Seeking External Confirmations
In assessing the appropriateness of requesting external confirmation of
information as a means of obtaining sufficient appropriate audit evidence, the
auditor shall evaluate whether external confirmations likely will provide relevant
and reliable audit evidence in response to an assessed risk of financial statement
misstatement.

The auditor shall seek external confirmations when that is the only means of
obtaining sufficient appropriate audit evidence in response to an assessed risk of
financial statement misstatement. If, in this circumstance, the auditor determines
that external confirmation will not provide reliable audit evidence, the scope of the
auditors work has been limited and the auditor shall consider the possible impact
on the auditors report in accordance with ISA 705, Modifications to the Opinion
in the Independent Auditors Report.

External Confirmation Process

When the auditor decides to request positive or negative confirmations, the
auditor shall plan, design, undertake and control the external confirmation
procedures, including:

(a) Identification of the member or members of the audit team responsible for
controlling the external confirmation process, the resources assigned and the
timing of the related procedures;

(b) Selection of items for which external confirmations will be requested;

(c) Design and preparation of the confirmation requests;

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(d) Communication of the confirmation requests to the appropriate confirming
party;

(e) Consideration of the results (responses, non-responses and exceptions) of

confirmation requests; and (f) Evaluation of the evidence obtained from the
confirmation requests.

The auditor shall only use negative confirmations to reduce the risk of financial
statement misstatement to an acceptable level without also performing other
substantive procedures when:

(a) The assessed risk of material misstatement associated with the relevant
financial statement assertion is low;

(b) A large number of small balances is involved;

(c) A substantial number of errors is not expected; and

(d) The auditor believes that respondents will not disregard the confirmation
requests. Management Request to Not Confirm

When management requests that the auditor not send a positive or negative
confirmation request, the auditor shall evaluate whether there are valid reasons for
such request. The existence of a dispute between the entity and the confirming
party, in and of itself, is not a valid reason for not requesting confirmation of a
balance or other information.

When the auditor is prevented from requesting confirmation, the auditor shall
perform appropriate alternative procedures and shall consider the possible impact
on the auditors report in accordance with ISA 705.

Considering the Results of the External Confirmation Process

When the auditor requests confirmation of multiple items in a single confirmation

request, the auditor shall evaluate the results for each item individually.

If the auditor has concerns about the reliability of an external confirmation, then
the auditor shall appropriately respond to such concerns. If the information in an

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oral external confirmation is significant, then the auditor shall request that the
parties involved submit written confirmation of the specific information directly to
the auditor.

The auditor shall perform alternative audit procedures for non-responses.

When the auditor determines that a response to a positive confirmation request is

the only means of obtaining sufficient appropriate audit evidence to respond to an
assessed risk of financial statement misstatement, and the auditor does not obtain
such confirmation, the auditor shall determine the implications for the audit and the
auditors report.

The auditor shall investigate exceptions to determine whether they represent

misstatements or acceptable differences.

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 STANDARD ON AUDITING 510 Initial Audit
Engagements-Opening Balances

Operative Date Aus 0.3

This Auditing Standard is operative for financial reporting periods

commencing on or after 1 January 2010.

INTRODUCTION

SCOPE OF THIS AUDITING STANDARD

1. This Auditing Standard deals with the auditors responsibilities relating to

opening balances in an initial audit engagement. In addition to financial statement
amounts, opening balances include matters requiring disclosure that existed at the
beginning of the period, such as contingencies and commitments. When the
financial report includes comparative financial information, the requirements and
guidance in ASA 7101 also apply. ASA 3002 includes additional requirements and
guidance regarding activities prior to starting an initial audit

OBJECTIVE

In conducting an initial audit engagement, the objective of the auditor is to obtain

sufficient appropriate audit evidence about whether:

(a) Opening balances contain misstatements that materially affect the current
periods financial report; and

(b) Appropriate accounting policies reflected in the opening balances have been
consistently applied in the current periods financial report, or changes thereto are
appropriately accounted for and adequately presented and disclosed in accordance
with the applicable financial reporting framework.

DEFINITIONS

For purposes of the Australian Auditing Standards, the following terms have the
meanings attributed below:

(a) Initial audit engagement means an engagement in which either:

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(i) The financial report for the prior period was not audited; or

(ii) The financial report for the prior period was audited by a predecessor auditor.

(b) Opening balances means those account balances that exist at the beginning of
the period. Opening balances are based upon the closing balances of the prior
period and reflect the effects of transactions and events of prior periods and
accounting policies applied in the prior period. Opening balances also include
matters requiring disclosure that existed at the beginning of the period, such as
contingencies and commitments.

(c) Predecessor auditor means the auditor from a different audit firm, who audited
the financial report of an entity in the prior period and who has been replaced by
the current auditor.

MAIN FEATURES

This Auditing Standard establishes requirements and provides application and

other explanatory material regarding the auditors responsibilities relating to
opening balances in an initial audit engagement. This Auditing Standard:

(a) establishes requirements and provides guidance regarding opening balances

when the financial report for the prior period was not audited, or the financial
report for the prior period was audited by a predecessor auditor;

(b) provides audit procedures for the auditor to obtain audit evidence about:
whether the opening balances contain misstatements

whether the accounting policies reflected in the opening

balances have been consistently applied in the current periods financial report;
and whether changes in the accounting policies have been

properly accounted for and adequately presented and disclosed; and

(c) establishes requirements and provides guidance on audit conclusions and the
auditors report.

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REQUIREMENTS

Audit Procedures Opening Balances

The auditor shall read the most recent financial report, if any, and the
predecessor auditors report thereon, if any, for information relevant to opening
balances, including disclosures.

The auditor shall obtain sufficient appropriate audit evidence about whether the
opening balances contain misstatements that materially affect the current periods
financial report

(a) Determining whether the prior periods closing balances have been correctly
brought forward to the current period or, when appropriate, have been restated;

(b) Determining whether the opening balances reflect the application of

appropriate accounting policies; and

(c) Performing one or more of the following:

(i) Where the prior year financial report was audited, reviewing the predecessor
auditors working papers to obtain evidence regarding the opening balances;

(ii) Evaluating whether audit procedures performed in the current period provide
evidence relevant to the opening balances; or

(iii) Performing specific audit procedures to obtain evidence regarding the opening
balances.

If the auditor obtains audit evidence that the opening balances contain
misstatements that could materially affect the current periods financial report, the
auditor shall perform such additional audit procedures as are appropriate in the
circumstances to determine the effect on the current periods financial report. If the
auditor concludes that such misstatements exist in the current periods financial
report, the auditor shall communicate the misstatements with the appropriate level
of management and those charged with governance in accordance with ASA 450.

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Consistency of Accounting Policies

The auditor shall obtain sufficient appropriate audit evidence about whether the
accounting policies reflected in the opening balances have been consistently
applied in the current periods financial report, and whether changes in the
accounting policies have been appropriately accounted for and adequately
presented and disclosed in accordance with the applicable financial reporting
framework. Relevant Information in the Predecessor Auditors Report

If the prior periods financial report was audited by a predecessor auditor and
there was a modification to the opinion, the auditor shall evaluate the effect of the
matter giving rise to the modification in assessing the risks of material
misstatement in the current periods financial report in accordance with ASA 315

AUDIT CONCLUSIONS AND REPORTING OPENING BALANCES

If the auditor is unable to obtain sufficient appropriate audit evidence regarding

the opening balances, the auditor shall express a qualified opinion or disclaim an
opinion on the financial report, as appropriate, in accordance with ASA 705.5

If the auditor concludes that the opening balances contain a misstatement that
materially affects the current periods financial report, and the effect of the
misstatement is not appropriately accounted for or not adequately presented or
disclosed, the auditor shall express a qualified opinion or an adverse opinion, as
appropriate, in accordance with ASA 705.

If the auditor concludes that:

(a) the current periods accounting policies are not consistently applied in relation
to opening balances in accordance with the applicable financial reporting
framework; or

(b) a change in accounting policies is not appropriately accounted for or not

adequately presented or disclosed in accordance with the applicable financial
reporting framework, the auditor shall express a qualified opinion or an adverse
opinion as appropriate in accordance with ASA 705.

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Modification to the Opinion in the Predecessor Auditors Report

If the predecessor auditors opinion regarding the prior periods financial report
included a modification to the auditors opinion that remains relevant and material
to the current periods financial report, the auditor shall modify the auditors
opinion on the current periods financial report in accordance with ASA 705 and
ASA 710.

APPLICATION AND OTHER EXPLANATORY MATERIAL AUDIT

PROCEDURES

Considerations Specific to Public Sector Entities

A1. In the public sector, there may be legal or regulatory limitations on the
information that the current auditor can obtain from a predecessor auditor. For
example, if a public sector entity that has previously been audited by a statutorily
appointed auditor (for example, an Auditor-General, or other suitably qualified
person appointed on behalf of the Auditor-General) is privatised, the amount of
access to working papers or other information that the statutorily appointed auditor
can provide a newly appointed auditor that is in the private sector may be
constrained by privacy laws or regulations. In situations where such
communications are constrained, audit evidence may need to be obtained through
other means and, if sufficient appropriate audit evidence cannot be obtained,
consideration given to the effect on the auditors opinion.

A2. If the statutorily appointed auditor outsources an audit of a public sector entity
to a private sector audit firm, and the statutorily appointed auditor appoints an
audit firm other than the firm that audited the financial report of the public sector
entity in the prior period, this is not usually regarded as a change in auditors for the
statutorily appointed auditor. Depending on the nature of the outsourcing
arrangement, however, the audit engagement may be considered an initial audit
engagement from the perspective of the private sector auditor in fulfilling their
responsibilities, and therefore this Auditing Standard applies. Opening Balances

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 A3. The nature and extent of audit procedures necessary to obtain sufficient
appropriate audit evidence regarding opening balances depend on such matters as:
The accounting policies followed by the entity.

The nature of the account balances, classes of transactions

and disclosures and the risks of material misstatement in the current periods
financial report. The significance of the opening balances relative to the

current periods financial report.

Whether the prior periods financial report was audited and

if so , whether the predecessor auditors opinion was modified. A4. If the prior
periods financial report was audited by a predecessor auditor, the auditor may be
able to obtain sufficient appropriate audit evidence regarding the opening balances
by reviewing the predecessor auditors working papers. Whether such a review
provides sufficient appropriate audit evidence is influenced by the professional
competence and independence of the predecessor auditor.

A5. Relevant ethical and professional requirements guide the current auditors
communications with the predecessor auditor.

A6. For current assets and liabilities, some audit evidence about opening balances
may be obtained as part of the current periods audit procedures. For example, the
collection (payment) of opening accounts receivable (accounts payable) during the
current period will provide some audit evidence of their existence, rights and
obligations, completeness and valuation at the beginning of the period. In the case
of inventories, however, the current periods audit procedures on the closing
inventory balance provide little audit evidence regarding inventory on hand at the
beginning of the period. Therefore, additional audit procedures may be necessary,
and one or more of the following may provide sufficient appropriate audit
evidence: Observing a current physical inventory count and

reconciling it to the opening inventory quantities. Performing audit procedures

on the valuation of the

opening inventory items. Performing audit procedures on gross profit and cut-of

26
 STANDARD ON AUDITING 520 ANALYTICAL
PROCEDURES

INTRODUCTION

Effective Date

This ISA is effective for audits of financial statements for periods beginning
on or after December 15, 2009.

SCOPE OF THIS ISA

This International Standard on Auditing (ISA) deals with the auditors use of
analytical procedures as substantive procedures (substantive analytical
procedures). It also deals with the auditors responsibility to perform analytical
procedures near the end of the audit that assist the auditor when forming an overall
conclusion on the financial statements. ISA 3151 deals with the use of analytical
procedures as risk assessment procedures. ISA 330 includes requirements and
guidance regarding the nature, timing and extent of audit procedures in response to
assessed risks; these audit procedures may include substantive analytical
procedures

OBJECTIVES

The objectives of the auditor are:

(a) To obtain relevant and reliable audit evidence when using substantive analytical
procedures; and

(b) To design and perform analytical procedures near the end of the audit that
assist the auditor when forming an overall conclusion as to whether the financial
statements are consistent with the auditors understanding of the entity.

DEFINITION

For the purposes of the ISAs, the term analytical procedures means evaluations
of financial information through analysis of plausible relationships among both
financial and non-financial data. Analytical procedures also encompass such

27
investigation as is necessary of identified fluctuations or relationships that are
inconsistent with other relevant information or that differ from expected values by
a significant amount.

REQUIREMENTS
SUBSTANTIVE ANALYTICAL PROCEDURES

When designing and performing substantive analytical procedures, either alone or

in combination with tests of details, as substantive procedures in accordance with
ISA 330,3 the auditor shall:

(a) Determine the suitability of particular substantive analytical procedures for

given assertions, taking account of the assessed risks of material misstatement and
tests of details, if any, for these assertions;

(b) Evaluate the reliability of data from which the auditors expectation of
recorded amounts or ratios is developed, taking account of source, comparability,
and nature and relevance of information available, and controls over preparation;

(c) Develop an expectation of recorded amounts or ratios and evaluate whether the
expectation is sufficiently precise to identify a misstatement that, individually or
when aggregated with other misstatements, may cause the financial statements to
be materially misstated; and

(d) Determine the amount of any difference of recorded amounts from expected
values that is acceptable without further investigation as required by paragraph 7.

ANALYTICAL PROCEDURES THAT ASSIST WHEN FORMING AN

OVERALL CONCLUSION

The auditor shall design and perform analytical procedures near the end of the
audit that assist the auditor when forming an overall conclusion as to whether the
financial statements are consistent with the auditors understanding of the entity.

Investigating Results of Analytical Procedures

28
 If analytical procedures performed in accordance with this ISA identify
fluctuations or relationships that are inconsistent with other relevant information or
that differ from expected values by a significant amount, the auditor shall
investigate such differences by:

(a) Inquiring of management and obtaining appropriate audit evidence relevant to

managements responses; and

(b) Performing other audit procedures as necessary in the circumstances.

Application and Other Explanatory Material

Definition of Analytical Procedures (Ref: Para. 4)

A1. Analytical procedures include the consideration of comparisons of the entitys

financial information with, for example:

Comparable information for prior periods.

Anticipated results of the entity, such as budgets or forecasts, or expectations of

the auditor, such as an estimation of depreciation.

Similar industry information, such as a comparison of the entitys ratio of sales to

accounts receivable with industry averages or with other entities of comparable
size in the same industry.

A2. Analytical procedures also include consideration of relationships, for example:

Among elements of financial information that would be expected to conform to a

predictable pattern based on the entitys experience, such as gross margin
percentages.

Between financial information and relevant non-financial information, such as

payroll costs to number of employees.

A3. Various methods may be used to perform analytical procedures. These

methods range from performing simple comparisons to performing complex
analyses using advanced statistical techniques. Analytical procedures may be
applied to consolidated financial statements, components and individual elements
of information.

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SUBSTANTIVE ANALYTICAL PROCEDURES

A4. The auditors substantive procedures at the assertion level may be tests of
details, substantive analytical procedures, or a combination of both. The decision
about which audit procedures to perform, including whether to use substantive
analytical procedures, is based on the auditors judgment about the expected
effectiveness and efficiency of the available audit procedures to reduce audit risk at
the assertion level to an acceptably low level.

A5. The auditor may inquire of management as to the availability and reliability of
information needed to apply substantive analytical procedures, and the results of
any such analytical procedures performed by the entity. It may be effective to use
analytical data prepared by management, provided the auditor is satisfied that such
data is properly prepared.

A6. Substantive analytical procedures are generally more applicable to large

volumes of transactions that tend to be predictable over time. The application of
planned analytical procedures is based on the expectation that relationships among
data exist and continue in the absence of known conditions to the contrary.
However, the suitability of a particular analytical procedure will depend upon the
auditors assessment of how effective it will be in detecting a misstatement that,
individually or when aggregated with other misstatements, may cause the financial
statements to be materially misstated.

A7. In some cases, even an unsophisticated predictive model may be effective as

an analytical procedure. For example, where an entity has a known number of
employees at fixed rates of pay throughout the period, it may be possible for the
auditor to use this data to estimate the total payroll costs for the period with a high
degree of accuracy, thereby providing audit evidence for a significant item in the
financial statements and reducing the need to perform tests of details on the
payroll. The use of widely recognized trade ratios (such as profit margins for
different types of retail entities) can often be used effectively in substantive
analytical procedures to provide evidence to support the reasonableness of
recorded amounts.

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 A8. Different types of analytical procedures provide different levels of assurance.
Analytical procedures involving, for example, the prediction of total rental income
on a building divided into apartments, taking the rental rates, the number of
apartments and vacancy rates into consideration, can provide

persuasive evidence and may eliminate the need for further verification by means
of tests of details, provided the elements are appropriately verified. In contrast,
calculation and comparison of gross margin percentages as a means of confirming
a revenue figure may provide less persuasive evidence, but may provide useful
corroboration if used in combination with other audit procedures.

A9. The determination of the suitability of particular substantive analytical

procedures is influenced by the nature of the assertion and the auditors assessment
of the risk of material misstatement. For example, if controls over sales order
processing are deficient, the auditor may place more reliance on tests of details
rather than on substantive analytical procedures for assertions related to
receivables.

A10. Particular substantive analytical procedures may also be considered suitable

when tests of details are performed on the same assertion. For example, when
obtaining audit evidence regarding the valuation assertion for accounts receivable
balances, the auditor may apply analytical procedures to an aging of customers
accounts in addition to performing tests of details on subsequent cash receipts to
determine the collectability of the receivables.

Analytical Procedures that Assist When Forming an Overall Conclusion

A17. The conclusions drawn from the results of analytical procedures designed
and performed in accordance with paragraph 6 are intended to corroborate
conclusions formed during the audit of individual components or elements of the
financial statements. This assists the auditor to draw reasonable conclusions on
which to base the auditors opinion.

A18. The results of such analytical procedures may identify a previously

unrecognized risk of material misstatement. In such circumstances, ISA 315
requires the auditor to revise the auditors assessment of the risks of material
misstatement and modify the further planned audit procedures accordingly.10

31
 A19. The analytical procedures performed in accordance with paragraph 6 may be
similar to those that would be used as risk assessment procedures.

Investigating Results of Analytical Procedures

A20. Audit evidence relevant to managements responses may be obtained by

evaluating those responses taking into account the auditors understanding of the
entity and its environment, and with other audit evidence obtained during the
course of the audit.

A21. The need to perform other audit procedures may arise when, for example,
management is unable to provide an explanation, or the explanation, together with
the audit evidence obtained relevant to managements response, is not considered
adequate.

CHAPTER NO.5
CONCLUSION
32
 As the trade and commerce grew extensively globally, the involvement of public
money therein also increased manifolds. This in turn created a demand from the
investors to have the accounts of the business ventures examined by a person
independent of the owners and management of the business to ensure that they
were correct and reliable. Such a demand laid down the foundation for the
profession of auditing.

The extent of reliance placed by the public on the auditors has increased so much
with time that it is, unreasonably of course, felt by the public that nothing can go
wrong with an organization which has been audited. Though the fact that an audit
has been carried out is not a guarantee as to the future viability of an enterprise, it
is extremely important that the auditors carry out their assignments with utmost
professional care and sincerity, to uphold the faith posed by the public in them.

INDEX

SR.N CONTENT PAGE NO.

O

33
1 INTRODUCTION

2 PURPOSE AND STRUCTURE OF

STANDARD ON AUDITING

3 HISTORY OF STANDARD ON
AUDITING

4 DIFFERENT STANDARD ON
AUDITING

5 CONCLUSION

34