Borivali (Central)CPE Study Circle of WIRC

of
The Institute of Chartered Accountants of India

SME Audits - Documentation & Reporting under

Pankaj Tiwari various regulations
C N K & Associates LLP
August 11, 2019
 Agenda for Today

Background About Audit Documentation

Need for documentation & QRB Observations

Documentation during stages of audit

Relevant Standards on Auditing

Reporting under Various Regulations

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 What is Audit Documentation?

ISA 230 issued by the International Auditing and Assurance Standards Board
defines audit documentation as,
“The record of audit procedures performed, relevant audit evidence obtained,
and conclusions the auditor reached (terms such as “working papers” or
“work papers” are also sometimes used)”.

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 Resources of Audit Documentation

ICAI has issued the following publications for the benefit of small and medium
practitioner CA firms;
➢ Implementation Guide on Audit Documentation. It contains:
• 38 FAQs
• 16 case studies
• Checklist of Documentation requirements

➢ Practitioner Guide to Audit of Small Entities. It contains:

• Templates of audit program
• Checklist for compliance with auditing and accounting standards

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 How many Standards of Auditing are issued by ICAI?
➢ Standards on Quality Control (SQCs) – SQC 1
➢ SA 100- SA 199 Introductory Matters
➢ SA 200-SA 299 General Principles and Responsibilities
➢ SA 300- SA 499 Risk Assessment and Response to Assessed Risks
➢ SA 500-SA 599 Audit Evidence
➢ SA 600- SA 699 Using Work of Others
➢ SA 700-SA 799 Audit Conclusions and Reporting
➢ SA 800- SA 899 Specialized Areas
➢ SREs 2000-SREs 2699 Standards on Review Engagements (SREs)
➢ SAEs 3000- SAEs 3699 Standards on Assurance Engagements (SAEs)
➢ SAEs 3000-SAEs 3399 Applicable to All Assurance Engagements
➢ SAEs 3400- SAEs 3699 Subject Specific Standards
➢ SRSs 4000-SRSs 4699 Standards on Related Services (SRSs)

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 Relevance of this Topic

➢ Audit Documentation acts as an evidence of the Auditor’s basis for a

conclusion about the achievement of the overall objectives of the Auditor
➢ No documentation = No Audit done
➢ Poor documentation depicts poor performance in audit
➢ Significant responsibility cast on auditors under regulatory framework
➢ When things go wrong the onus is on auditors to “prove” that he / she was
not professionally negligent in performing his duties
➢ Auditing Standards neither favour nor discriminate based on size of the
practitioner

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 Essence of documentation

Working papers Not to test

are reflection of
firm process the memory

Guide for new Considered as

team members backbone of audit

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 Case study for understanding the Importance of Audit

In in Audit committee meeting, Independent Directors raised questions on

reasons for decrease in salary growth in actuarial valuation

CFO could not respond to it and hence the same was asked to auditor

Audit file did not document the reasons though discussed orally by audit
team, hence Auditor couldn’t respond

Audit documentation was not proper

Hence, Above lapse in documentation resulted into Board assuming that
audit quality is not up to mark

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 Case study for understanding the Importance of Audit

Facts of the • Client made provision of Rs.10 lakhs for Provision of Doubtful Debts
• Auditor challenged stating his estimate of Provision of Rs.60 lakhs
case • After various discussions held, provision agreed to be made at Rs.40 lakhs

Auditor’s • Documentation to be done if disagreement with client’s working and estimates.

• Upon satisfaction of adequacy of provision, he is not required to keep any record in
opinion his file.

• As per Para 8 of SA 230, the auditor should prepare audit documentation regarding
“Significant matters arising during the audit, the conclusions reached thereon, and
Conclusion significant professional judgments made in reaching those conclusions.”
• The auditor should also have sufficient evidence to support his conclusion.

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 Case study for understanding the Importance of Audit

Facts of the • Audit team, after due discussions, identified and documented
the significant risks, pre-determined standard audit program.
case • However, risk and the program were not cross referenced.

Auditor’s • Cross referencing need not be done.

opinion

Conclusion • ????

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 Case study for understanding the Importance of Audit
Q. During the audit of inventory of a manufacturing company, a working paper had the following details pertaining
to finished stock:
Item Quantity Rate (Rs.) Value (Rs.)
A 36,042.80 42.51 15,32,179
B 3,250.00 165.22 5,36,965
C 1,176.50 146.99 1,72,938
D 82.00 2482.19 2,03,540
E 64.00 1740.52 1,11,393
As a reviewer identify the missing details.

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 Regulatory Requirements

➢ Mandatory reporting in audit report

• Compliance with Auditing Standards is mandatory u/s 143 (10) of Companies Act 2013.
• National Financial Reporting Authority to have powers to recommend Standards on Auditing
(section 132)
➢ Class action suit under Companies Act, 2013
• Class action suit on auditor / audit firm
• To prove innocence the auditor requires proper documentation
➢ Quality assurance of audit
• To ensure that the audit complies with the professional standards as provided by SQC – 1
➢ Audit of listed entities
• Peer review certificate is must for audit of listed entity under SEBI Regulation

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 GAP in Documentation

Quality Review Board’ (QRB) reviews:

‘

15% of observations are on account of non-compliance with SA 230 – Audit

The key points raised are given in the next slide :
(Documentation source: activity report of QRB for the year 2017-18).

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 Key points identified by QRB (SA 230)

Failure to prepare Significant

Failure to prepare
sufficient appropriate observations without
adequate
audit evidence for reference of source
documentation
audit procedure documents

Lack of documents to
No documentation for Lack of proper
ensure that firm
verification of key segregation and
adhered with the
management indexation of working
ethical standards laid
estimated papers
down by ICAI

Contingent liability No back up /

Improper / no linking disclosed does not mismatch for
of documents reconcile with work comments given in
papers CARO

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 Stages of Documentation Components of
in an Audit Documentation

➢ Independence of Firm
Pre Audit ➢ Audit Engagement
Documentation ➢ Audit Planning & Programme
➢ Analysis of Financial & Non financial information

➢ IFC over Financial Reporting

Documentation ➢ Risk assessment Procedures performed
in the course of ➢ Designing of Further Audit Procedures
Audit ➢ Changes due to re-assessment of ROMM
➢ Audit evidence obtained

Audit ➢ Documents of FS and Auditor’s Report

Completion ➢ Written representations
Documentation ➢ Documentation to be done for Additional audit
procedures performed after Audit report Date for
Facts known post Audit report date.

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 Audit Files

• Section flaps (for arrangement of papers)

• Client information
• Process related to key areas (including IFC)
Permanent • Financial ratios & financial statement including audit reports of last 3 years
• Secretarial records and agreements
Audit Files

• Section flaps
• Area wise checklist including compliance with AS, CARO, Companies Act,
• 2013 etc.
• Sampling size and materiality
Current • Management letter (key points)
• Letter of representation from management
Audit Files • Review sheets of seniors including remarks for matters resolved

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 Scope of SA 230 Objectives of SA 230

To be adapted Sufficient &

Auditor’s appropriate record
also to audits
responsibility basis for auditor’s
of other
to prepare report
historical
audit doc for
financial
an audit of FS
information
Objective of Prepare
Documentation
SA 230 that provides
Specific
requirements Additional Evidence that audit
of other SA do docs under was planned and
not limit other laws & performed in
applicability of regulations accordance with
this SA SAs

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 Nature and Purpose of SA 230

Planning &
performance

Create Supervision &

Accountability direction

Audit
Documentation
Evidence of
QC review
audit planning

Basis of External
Conclusion Inspection

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 Form, content and extent of documentation

No previous Sufficient to enable

connection with Experienced Auditor to
audit
understand

Result of audit Significant matters,

NTE of audit procedures procedures
to comply with SAs and conclusions & significant
and audit evidence professional judgments
laws and regulation
obtained w.r.t conclusions

❑ Identifying characteristics of specific

items or matters tested
❑ Who performed audit work and when
was it completed
❑ Who reviewed such work performed
❑ When it was reviewed

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 Relevant Factors
Relevant
legislations
applicable
Records
Quality of to client
Audit maintained
assistants by the
involved
client

Factors
Determining
form, content Internal
Status of and extent control in
client
Operation

Nature of
business Nature of
activity of engagement
Client

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 Specific documentation

Specific documentation

Documentation of key matters

Management letter Non-compliances
post report

➢ Significant matters discussed ➢ Circumstances encountered

➢ Reasons for departure from
with the management ➢ Impact on reporting
any relevant requirements
➢ When and with whom the ➢ When and by whom the
➢ Alternate procedures
discussion took place changes were made and
performed
➢ Basis of conclusion reviewed

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 Documentations under other SAs:
➢ SA 200: Basic Principles Governing an Audit
• Evidence that the audit was carried out in accordance with the basic principles
➢ SA 220: Quality Control for Audit Work
• Audit evidence obtained from substantive procedures & the conclusions drawn therefrom, including the
results of consultations
➢ SA 240: The Auditors responsibilities relating to fraud in an audit of FS
• Understanding of the entity & environment, assessment of the risks of material misstatement required by SA
315
• Management’s response & communication to TCWG
• Regulatory requirements like Companies Act, 2013, RBI etc.
• Reasons for conclusion & reporting
➢ SA 250: Consideration of Laws and Regulations in an audit of FS
• Various checklists e.g. Companies Act, IGAAP, RBI & NHB, Corporate Governance etc.
➢ SA 260: Communication with those charged with Governance
• Oral, email, formal communication, Audit committee presentations & WRs (retention of copy)

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 Documentations under other SAs:
➢ SA 299: Responsibility of Joint Auditors
• Joint responsibility statement
➢ SA 300: Planning an Audit of financial statements
• Pre audit meeting, overall audit strategy, plan & significant changes & reasons
➢ SA 315: Identifying and assessing the risk of material misstatement through understanding the
entity and Its Environment
• Discussion among the engagement team and the significant decisions reached;
• Understanding of the entity’s environment and internal control (IC) components;
• Sources of information from which the understanding was obtained
• Risk assessment procedures performed
• Identified & assessed risks of material misstatement at the FS level and at the assertion level;
• Risks identified, and related controls about which the auditor has obtained an understanding
• Reporting on IFC over FS u/s 143 (3) (i) of the Companies Act, 2013

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 Documentations under other SAs:
➢ SA 320: Materiality in Planning and Performing an Audit
• Audit docs shall include the following amounts & the factors considered in their determination:
• Materiality for the FS as a whole (overall)
• If applicable, the materiality level or levels for particular classes of transactions, account balances or disclosure;
• Performance materiality; and
• Any revision of materiality levels as the audit progressed & reasons thereof
➢ SA 330: Auditor’s Response to Assessed Risks
• The overall responses to address the assessed risks of material misstatement at the FS level, and the nature, timing and
extent of the further audit procedures performed;
• The linkage of those procedures with the assessed risks at the assertion level; and
• The results of the audit procedures, including the conclusions where these are not otherwise clear.

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 Documentations under other SAs:
➢ SA 505: External Confirmations
• If the auditor agrees to management's request not to seek external confirmation regarding a particular matter,
the auditor should document the reasons for acceding to the management’s request.
➢ SA 540: Auditing Accounting Estimates
• The basis for the auditor’s conclusions about the reasonableness of accounting estimates and their disclosure
that give rise to significant risks; and
• Indicators of possible management bias, if any
➢ SA 550: Related Parties
• Auditor shall include the names of the identified related parties and the nature of the related party
relationships.
➢ SA 580: Written Representations
• Auditor is required to document identification of significant issues relating to the competence, integrity, ethical
values or diligence of management or about its commitment to or enforcement of these. Matters where auditor
has relied upon the management’s explanation and information.

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 Documentations under other SAs:
➢ SA 600: Using the work of Another Auditor
• Components whose financial information was audited by other auditors & their significance to financial
information of the entity as a whole;
• names of other auditors;
• conclusions reached that individual components are not material.
• Procedures performed and conclusions reached regarding components. For example, auditor would document
the results of discussions with other auditor and review of written summary of other auditor’s procedures.
• Any limiting procedures
• Conclusions reached
• Manner of dealing with modified report of OA while finalizing the PA’s report
➢ SA 610: Using the Work Of Internal Auditor
• When the external auditor uses specific work of the internal auditors, the external auditor shall document
conclusions regarding the evaluation of the adequacy of the work of the internal auditors, and the audit
procedures performed by the external auditor on that work

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 References in other Standards on Auditing
Departure from a Relevant Requirement (SA 200) :
“If, in exceptional circumstances, the auditor judges it necessary to depart from a relevant
requirement in a SA, the auditor shall document how the alternative audit procedures
performed achieve the aim of that requirement, and the reasons for the departure”

Matters Arising after the Date of the Auditor’s Report (SA 560) :
If, in exceptional circumstances, the auditor performs new or additional audit procedures or
draws new conclusions after the date of the auditor’s report, the auditor shall document:
• The circumstances encountered;
• The new or additional audit procedures performed, audit evidence obtained, and
conclusions reached, and their effect on the auditor’s report; and
• When and by whom the resulting changes to audit documentation were made and reviewed.

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 Some important points to ponder:
➢ Balance between cost & benefit
• Difficulty in implementation (challenges like competent staff, evidence, client
insensitiveness)
• Costs involved
• Time factor
➢ Not valid reasons for auditor to omit audit procedure for which there is no alternative or to be
satisfied with less persuasive audit evidence
➢ Avoid collecting unnecessary docs and missing out on important
➢ Collect all docs – judgment is used by auditor
➢ Use of accounting estimates
➢ Relied on work done by others/experts/internal auditors
➢ Joint Auditors’ responsibility

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 Some important points to ponder:
➢ Specific consideration in case of audit of consolidated FS
• Reliance on component auditor
• Tests carried out by principal auditor
➢ Backup for audit opinion (SA 700, 705 & 706)
➢ Ownership of Documentation – sharing with others?
➢ Creates more opportunities to offer new services
➢ Improves writing/ communication skills of staff.
➢ Factor while estimating billing/cost
➢ Available software tools

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 Assembly and Retention

SQC-1 requires firm to establish policies and procedures for timely completion
of assembly of audit files and retention of engagement documentation

If not prescribed under any Law

Assembly Retention

In the specific case of audit

Should be completed in
engagements, period is no
not more than 60 days
shorter than seven years
in case of audit
from the date of report

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 Examples of audit documents:

What to document? What not to document?

➢ Appointment formalities and communication with ➢ Now let’s understand what is not required as Audit
previous auditor (code of conduct) Documentation:
➢ Engagement letter (SA 210) ➢ Superseded working papers/ drafts
➢ Minutes Pre-audit meeting ➢ Notes that reflect incomplete or preliminary thinking
➢ Audit Program/Plan (SA 300) ➢ Duplicate documents
➢ Process notes & Test of IC systems & Calculation of ➢ Copies of vouchers/ Ledger accounts unless critical
materiality levels & Sample selection
➢ Audit working papers (docs/evidence obtained)
➢ Analysis & conclusion thereon (SA 520 Analytical
Procedures)
➢ Issues memoranda
➢ Summary of significant queries
➢ Management’s responses & basis of conclusion
➢ Confirmation letter & representation letters
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 Reporting under various Regulations

Section 143 (3) of Companies Act, 2013 read with Rule 11 of Companies
(Audit and Auditors) Rules, 2014

Section 143 (11) of Companies Act, 2013 on Companies (Auditor’s Report)

Order, 2016

Section 143 (3) (i) of Companies Act, 2013 on Internal Financial Controls over
Financial Reporting

Master Direction - Non-Banking Financial Companies Auditor’s Report

(Reserve Bank) Directions, 2016

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 Section 143 (3) of Companies Act, 2013

a) whether he has sought and obtained all the information and explanations
b) whether, in his opinion, proper books of account as required by law have been kept by the company
c) whether the company’s balance sheet and profit and loss account dealt with in the report are in
agreement with the books of account and returns
d) whether, in his opinion, the financial statements comply with the accounting standards
e) the observations or comments of the auditors on financial transactions or matters which have
any adverse effect on the functioning of the company [Going Concern]
f) whether any director is disqualified from being appointed as a director under sub-section (2) of
section 164
g) any qualification, reservation or adverse remark relating to the maintenance of accounts and other
matters connected therewith
h) whether the company has adequate internal financial controls system in place and the operating
effectiveness of such controls
i) such other matters as may be prescribed- Rule-11 [ 3 Matters to be reported]
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 Section 143 (11) of Companies Act, 2013 on Companies
(Auditor’s Report) Order, 2016
As per Para 3 of CARO 2016, the auditor's report on the accounts of a company to which
this Order applies shall include a statement on the following matters, namely:-
➢Fixed Assets/Property, Plant & Equipment's
➢Inventory
➢Loans given by the company (Secured and Unsecured) (Section 189 of Companies Act, 2013)
➢Statutory Dues (Disputed and Undisputed)
➢Compliance with sections 177 and 188 of Companies Act, 2013 in connection with Related Party
transactions
➢Reporting on Fraud by the company or any fraud on the company by it ‘s officers or employees
➢Compliance of Section 185 and Section 186 of Companies Act, 2013

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 Reporting under NBFC-Master Directions

Master Direction - Non-Banking Financial Companies Auditor’s Report (Reserve Bank)

Directions, 2016
➢Additional report to the Board of Directors of the Company on the matters specified;- depending upon
the type of NBFC- Deposit accepting/not accepting deposits;
➢Exception report to Reserve Bank of India- not compliance to any directions etc.

Master Direction- Non-Banking Financial Company Returns (Reserve Bank) Directions, 2016
➢ Certificate from Statutory Auditor every year to certify the continuity of the NBFC business;
➢Format of the certificate prescribed in the direction itself – mainly on certifying the Net Owned fund
and composition of Financial Asset to total asset & Financial Income to Total Income;
➢ Time line-One month from the date of finalisation of Balance Sheet. Not later than 31st December.

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 “The skills of an accountant can
always be ascertained by an
inspection of his working papers”

~ Robert H Montgomery,
Montgomery’s Auditing, 1912

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Thank You

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