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DOCUMENTATION (AAS 3)
OVERVIEW
Introduction
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DOCUMENTATION (AAS 3)
INTRODUCTION
Document evidence that audit carried out in accordance with basic principles (AAS2) Documentation refers to working papers prepared or obtained by auditor Working papers aid in : Planning and performance of audit Supervision and review of audit work Providing evidence of audit work performed
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DOCUMENTATION (AAS 3)
audit plan,
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DOCUMENTATION (AAS 3)
Form & content affected by : nature of engagement form of auditors report nature & complexity of clients business
nature & conditions of clients records & degree of reliance on internal controls
need in particular circumstances for direction, supervision and review of work performed by assistants
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DOCUMENTATION (AAS 3)
Standardisation of working papers (e.g. checklists, specimen letters, standard organisation of working papers) Working Paper sufficiently complete and detailed Significant matters together with auditors conclusion thereon Ensure working papers obtained from client properly prepared Permanent & current audit files (PAF & CAF)
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DOCUMENTATION (AAS 3)
PAF includes
DOCUMENTATION (AAS 3)
CAF includes:
DOCUMENTATION (AAS 3)
Working Papers Property of auditor Extracts of working papers available to client at auditors discretion. Reasonable procedures for custody & confidentiality of working papers Retention of working papers
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Caption changed from Documentation to Audit Documentation Fallout of Enron Changes to Audit Documentation New concept of Experienced Auditor Identification of Prepares & Reviewer Retention period - 10 years vis--vis 8 years prescribed by Companies Act
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(AAS) 6 (REVISED)
RISK ASSESSMENT AND INTERNAL CONTROL
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Introduction
Inherent Risk
Accounting & Internal Control Systems
Control Risk
Detection Risk
Understanding of accounting & internal control system and audit risk Sufficient to plan & develop an effective audit approach Professional judgment to assess audit risk & design audit procedures Applicability 1.4.2002
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AAS 6 (Revised) - Risk Assessment and Internal Control Introduction Certain terminologies:
Inappropriate opinion
Inherent Risk Control risk Detection risk Control environment Control procedures Internal Control System Accounting System
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Relate inherent risk assessment to material account balance & classes of transactions in developing audit program. High inherent risk assessments are made taking into account factors relevant both to F/S as a whole & to specific assertions. Reasons for assessing inherent risk as not high should be documented.
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AAS 6 (Revised) - Risk Assessment and Internal Control Assessing Inherent Risk
At Level of F/S
integrity of management management experience & knowledge & changes in management during period unusual pressures on management
AAS 6 (Revised) - Risk Assessment and Internal Control Assessing Inherent Risk
At Level of Account Balance & Class of Transactions quality of accounting system F/S susceptible to misstatement
AAS 6 (Revised) - Risk Assessment and Internal Control Inherent Limitations of Internal Controls
Reasonable but not absolute assurance Control be cost effective Addressing unusual transactions
Human error
Collusion by employees & third parties Management overriding control Manipulation in estimates & judgments in FS.
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AAS 6 (Revised) - Risk Assessment and Internal Control Understanding Accounting & Internal Control Systems
CAKE inquiries of appropriate level of personnel inspection of documents & records observation of activities & operation
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AAS 6 (Revised) - Risk Assessment and Internal Control Accounting Systems - Understanding
major classes of transactions how such transactions initiated significant accounting records, supporting
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AAS 6 (Revised) - Risk Assessment and Internal Control Control Environment - Understanding
Managements attitudes, awareness & actions regarding internal controls & their importance in entity.
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Preliminary Assessment of Control Risk At assertion level for each material account balance or class of transaction.
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Control risk assessed at high level for some or all assertions where accounting & internal controls not effective or evaluating not efficient.
Preliminary assessment of control risk for a FS assertion high unless: internal controls identified tests of control to support assessment planned
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AAS 6 (Revised) - Risk Assessment and Internal Control Control Risk Documentation of Understanding & Assessment of Control Risk Document : understanding of entitys accounting & internal control system; assessment of control risk.
Tests of Control Audit evidence re. effectiveness of accounting & internal control system & operation of controls
throughout period.
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Tests of Control
Tests of Control
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AAS 6 (Revised) - Risk Assessment and Internal Control Detection Risk Consider assessed levels of inherent & control risks in determining nature, timing & extent of substantive procedures. To reduce audit risk to an acceptably low level consider: nature of substantive procedure timing of substantive procedure extent of substantive procedures Inverse relationship between detection risk & combined level of inherent and control risk
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Regardless of assessed levels of inherent and control risks, some substantive procedures performed Higher assessment of inherent & control risks means more of substantive procedures Qualified or declaimer of opinion when detection risk regarding an assertion for material balance or transaction cannot be reduced to an acceptable level,
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AAS 6 (Revised) - Risk Assessment and Internal Control Audit Risk in Small Business
Inadequate segregation of duties & lack of supervisory controls Audit evidence may have to be obtained entirely through substantive procedures.
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Communicate material weaknesses in accounting & internal control at an appropriate level of management.
Ordinarily in writing
Important to indicate that only weaknesses which have come to the auditors attention as a result of audit have been reported.
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AAS 6 (Revised) - Risk Assessment and Internal Control Matters for Discussion
Complex CIS environment-need for specialist Extent of substantive procedures should reflect reliance/nonreliance on internal controls
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AAS - 21
CONSIDERATION OF LAWS AND REGULATIONS IN AN AUDIT OF FINANCIAL STATEMENTS
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Responsibility of Management
Auditors consideration Procedures when noncompliance discovered Communicating/Reporting noncompliance Withdrawal from Engagement
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Consideration of laws & regulations in an audit of FS. Noncompliance of laws & regulations by entity materially affecting F/S Term `noncompliance refers to acts of omission or commission by entity being audited, either intentional or unintentional contrary to prevailing laws & regulations.
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fines
Payments for unspecified services or loans to consultants, related parties, employees or government employees Purchases at prices significantly above or below market price Unusual payments in cash & other unusual transactions
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Unusual transactions with companies registered in tax havens Payments without proper exchange control documentation Unauthorized or improperly recorded transactions Media comment
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Noncompliance generally based on experts advice but ultimately determined by a court of law. Auditor likely to be aware of those noncompliances
AAS 21 - CONSIDERATION OF LAWS & REGULATIONS IN AN AUDIT OF FS Responsibility of Management for Compliance
Achieved by: Monitoring legal requirements Internal control systems Establishing legal department and/or engaging legal advisor. Maintaining register of significant laws affecting entity & records of noncompliances. Appropriating responsibilities to internal audit & audit committee.
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AAS 21 - CONSIDERATION OF LAWS & REGULATIONS IN AN AUDIT OF FS Auditors Consideration Audit does not prevent noncompliance but may act as a deterrent. Risk from noncompliance higher due to: inherent limitations of accounting & internal control systems persuasive rather than conclusive audit evidence override of controls by management etc. Recognition of conditions or events leading to noncompliance. Statutory requirements may require to report compliance with certain provisions of laws & regulations.
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Understanding legal & regulation framework: CAKE inquiring & discussing with management Identifying instances of noncompliance: inquiring with management inspecting correspondences-regulatory authorities
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Sufficient appropriate audit evidence regarding compliance affecting amounts & disclosures in FS Other procedures (besides above) outside scope of
audit.
Written representations from management. In absence of evidence to contrary entitled to assume compliance .
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AAS 21 - CONSIDERATION OF LAWS & REGULATIONS IN AN AUDIT OF FS Procedures When Noncompliance Discovered
Obtain understanding of nature of act & circumstances to evaluate possible effect of noncompliance on FS Evaluating possible effect on F/S, consider: potential financial consequences whether they require disclosure whether they affect true & fair view Document findings & discuss with management.
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AAS 21 - CONSIDERATION OF LAWS & REGULATIONS IN AN AUDIT OF FS Procedures When Noncompliance Discovered
Consult entitys lawyers or other lawyers on possible effects/consequences Effect of lack of evidence on auditors report. Reliability of management representations in light of noncompliance.
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To Management
To Users of Auditors Report Qualified or adverse opinion. when material noncompliance not properly reflected in FS. Qualified or disclaimer of opinion. if precluded from obtaining sufficient appropriate audit evidence regarding material noncompliance. .
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No remedial action on material noncompliance Involvement of highest authority affecting reliability of management representations Communication to incoming auditor re.detailed reasons & attendant circumstances leading to withdrawal
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How many Acts are there - mind boggling! Peculiar Acts Laws & Regulations affecting F/S Sufficient understanding of laws & regulations
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Introduction
Modified Reports
Limitation on Scope Disagreement with Management Statement on Qualifications in Auditors Report Matters for Discussion
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Clear written expression of opinion on FS taken as a whole. BASED ON CONCLUSIONS DRAWN FROM AUDIT EVIDENCE OBTAINED
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a) Title
b) Addressee
c) Opening or introductory paragraph d) Scope paragraph e) Opinion paragraph f) Date of report g) Place of signature, and h) Auditors signature
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Opening or introductory Paragraph Financial statements of entity audited, including date and period covered FS responsibility of entitys management and responsibility of auditor to express an opinion on FS.
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Scope Paragraph Audit conducted in accordance with auditing standards generally accepted in India. Audit planned & performed to obtain reasonable assurance that FS are free of material misstatement.. Terms of Engagement Matters prescribed by Legislation / Pronoucement of ICAI
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Scope Paragraph Auditors report should describe audit as including: a) Examining, on a test basis, evidence to support amounts & disclosures in FS b) Assessing accounting principles used in preparation of FS c) Assessing significant estimates made by management in preparation of FS d) Evaluating overall FS presentation. Audit provides a reasonable basis for opinion.
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Opinion Paragraph Clearly indicate financial reporting framework used to prepare the FS FS give a true and fair view in accordance with that financial reporting framework FS comply with statutory requirements.
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Date of Report Date on which auditor signs report. Not earlier than the date on which FS are signed or approved by management. Place of Signature Specific location, where audit report signed.
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Where firm is appointed as auditor, report signed in personal name of auditor and in name of the audit firm.
Partners/proprietors membership number
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True and fair view Relevant GAAP Statutory Requirement Disclosures Change Effect & Disclosures
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Auditors report considered modified when it includes: a) Matters That Do Not Affect Auditors Opinion Emphasis of matter b) Matters That Do Affect Auditors Opinion Qualified opinion
Disclaimer of opinion
Adverse opinion
NIRC / ICAI 9.7.2005
Matters That Do Not Affect Auditors Opinion Paragraph to highlight material matter regarding a going concern problem where going concern question not resolved and adequate disclosures made in FS. Paragraph if significant uncertainty, resolution of which is dependent upon future events and which may affect FS.
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Matters That Do Affect Auditors Opinion A qualified opinion when: disagreement with management is not so material and pervasive as to require an adverse opinion Limitation on scope is not so material and pervasive as to require disclaimer of opinion. subject to or except for
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Matters That Do Affect Auditors Opinion Disclaimer of opinion when limitation on scope is material and pervasive Adverse opinion when disagreement is material and pervasive to FS
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Matters That Do Affect Auditors Opinion Other than unqualified opinion: Clear description of all substantive reasons Unless impracticable quantification of possible effect(s) individually and in aggregate on FS
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Matters Acceptability of accounting policies selected Method of their application, Adequacy of disclosures in FS.
Qualification in Auditors Report General Considerations Aspects considered while Qualifying Reports
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Introduction Skills and Competence Planning Assessment of Risk Audit Procedures Documentation
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Effective Date:
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When does a CIS environment exist? A CIS environment exists where: One or more computer(s) of any type or size is (are) involved in processing of financial information Whether operated by entity or a third party
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Overall objective & scope of an audit does not change in CIS environment, but may effect: Procedures followed, in obtaining sufficient understanding of accounting and internal control system Evaluation of inherent & control risk
Factors determining evaluation of CIS environment Extent to which CIS environment used in accounting system System of Internal Control in existence Existence or non-existence of audit trail
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Sufficient knowledge of CIS to plan, direct, supervise, control and review work Consider specialized CIS skills needed Compliance with AAS 9 Using the Work of an Expert,
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Understanding significance & complexity of : CIS environment Complexities of CIS activities Availability of data for use in audit Understanding would include : CIS Infrastructure Complexity of processing like automated computation & generation of entries Determination of availability of data
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Understand CIS environment influencing assessment of inherent & control risk E.g. Lack of transaction trails Uniform processing of transactions Potential for errors and irregularities
Evaluate reliability of Accounting and Internal Control System to: Ensure authorized, correct & complete data available for processing Timely detection and correction of errors Ensure accuracy and completeness of output Prevent unauthorized amendments to programs
Assessment of inherent and control risks for material FS assertions - AAS 6 (Revised) Pervasive & account specific effect of inherent & control risks in a CIS environment
Adequate procedures exist to ensure data transmitted is correct and complete Cross verifications of records, reconciliation statements & control systems Use of manual audit procedures or computer assisted audit techniques, or a combination of both to obtain sufficient evidential matter
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Document
Audit plan,
Nature, timing and extent of audit procedures performed Conclusions drawn from evidence obtained
Audit Electronic evidence adequately and safely stored and retrievable in its entirety
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Auditors also need sophisticated CAAT tools to test controls under CIS environment Can audit be outsourced out of the country in a CIS environment ?
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