Questions on Standards on Auditing - IPC:
Just For Practice-summary questions on all Standards of Auditing
Question 1: “The auditors should consider the effect of subsequent events on the financial statement and on auditor’s report” according to SA 560 – Comment.
Answer: Effect of Subsequent Events: SA 560 “Subsequent Events”, establishes standards on the auditor’s responsibility regarding subsequent events.
According to it, ‘subsequent events’ refer to those events which occur between the date of financial statements and the date of the auditor’s report, and facts that become known to the auditor after the date of the auditor’s report. It lays down the standard that the auditor should consider the effect of subsequent events on the financial statements and on the auditor’s report.
The auditor should obtain sufficient appropriate evidence that all events upto the date of the auditor’s report requiring adjustment or disclosure have been identified and to identify such events. The auditor should-
(i) Obtain an understanding of any procedures management has established to ensure that subsequent events are identified.
(ii) Inquire of management and, where appropriate, those charged with governance as to whether any subsequent events have occurred which might affect the financial statements.
Examples of inquiries of management on specific matters are:
Whether new commitments, borrowings or guarantees have been entered into.
Whether sales or acquisitions of assets have occurred or are planned.
Whether there have been increases in capital or issuance of debt instruments, such as the issue of new shares or debentures, or an agreement to merge or liquidate has been made or is planned.
Whether there have been any developments regarding contingencies.
Whether there have been any developments regarding risk areas and contingencies.
Whether any unusual accounting adjustments have been made or are contemplated.
Whether any events have occurred or are likely to occur which will bring in to question the appropriateness of accounting policies used in the financial statements as would be the case, for example, if such events call into question the validity of the going concern assumption.
Whether any events have occurred that are relevant to the measurement of estimates or provisions made in the financial statements.
Whether any events have occurred that are relevant to the recoverability of assets.
Read minutes, if any, of the meetings, of the entity’s owners, management and those charged with governance, that have been held after the date of the financial statements and inquiring about matters discussed at any such meetings for which minutes are not yet available.
Read the entity’s latest subsequent interim financial statements, if any.
Read the entity’s latest available budgets, cash flow forecasts and other related management reports for periods after the date of the financial statements.
Inquire, or extend previous oral or written inquiries, of the entity’s legal counsel concerning litigation and claims.
When the auditor identifies events that require adjustment of, or disclosure in, the financial statements, the auditor shall determine whether each such event is appropriately reflected in those financial statements. If such events have not been considered by the management and which in the opinion of the auditor are material, the auditor shall modify his report accordingly.
Question 2: Standards collectively known as the Engagements Standards issued by AASB under the authority of the council of ICAI–Discuss.
Answer Engagement Standards: The following standards issued by the Auditing and Assurance Standards Board under the authority of the Council are collectively known as the Engagement Standards-
(i) Standards on Auditing (SAs), to be applied in the audit of historical financial information.
(ii) Standards on Review Engagements (SREs), to be applied in the review of historical financial information.
(iii) Standards on Assurance Engagements (SAEs), to be applied in assurance engagements, dealing with subject matters other than historical financial information.
(iv) Standards on Related Services (SRSs), to be applied to engagements involving application of agreed-upon procedures to information, compilation engagements, and other related services engagements, as may be specified by the ICAI.
Question 3: The auditor shall communicate all significant findings with those charged with Governance.
Answer: Communication of Findings with Those Charged with Governance: As per SA-260 “Communication with Those Charged with Governance”, the auditor shall communicate the following significant findings from the audit, with those charged with governance-
(i) The auditor’s views about significant qualitative aspects of the entity’s accounting practices, including accounting policies, accounting estimates and financial statement disclosures. When applicable, the auditor shall explain to those charged with governance why the auditor considers a significant accounting practice, that is acceptable under the applicable financial reporting framework, not to be most appropriate to the particular circumstances of the entity;
(ii) Significant difficulties, if any, encountered during the audit;
(iii) Unless all of those charged with governance are involved in managing the entity:
(1) Significant matters, if any, arising from the audit that were discussed, or subject to correspondence with management; and
(2) Written representations the auditor is requesting; and
(iv) Other matters, if any, arising from the audit that, in the auditor’s professional judgment, are significant to the oversight of the financial reporting process.
Question 4: What are the factors affecting form, contents and extent of audit?
Answer :
Factors Affecting Form, Contents and Extent of audit: As per SA-230 on “Audit Documentation”, the form, content and extent of audit documentation depend on the following factors-
(i) The size and complexity of the entity.
(ii) The nature of the audit procedures to be performed.
(iii) The identified risks of material misstatement.
(iv) The significance of the audit evidence obtained.
(v) The nature and extent of exceptions identified.
(vi) The need to document a conclusion or the basis for a conclusion not readily determinable from the documentation of the work performed or audit evidence obtained.
(vii) The audit methodology and tools used.
Question 5: What are the Risk Factors while applying Sampling Techniques?
Answer: As per SA 530 “Audit Sampling”, sampling risk is the risk that the auditor’s conclusion based on a sample may be different from the conclusion if the entire population were subjected to the same audit procedure. Sampling risk can lead to two types of erroneous conclusions-
In the case of a test of controls, that controls are more effective than they actually are, or in the case of tests of details, that a material misstatement does not exists when infact it does. The auditor is primarily concerned with this type of erroneous conclusion because it affects audit effectiveness and is more likely to lead to an inappropriate audit opinion.
In the case of test of controls, the controls are less effective than they actually are, or in the case of tests of details, that a material misstatements exists when infact it does not. This type of erroneous conclusion affects audit efficiency as it would usually lead to additional work to establish that initial conclusions were incorrect.
Question 6 : What are the Auditor’s Responsibilities in Respect of Corresponding Figures?
Answer: As per SA 710 “Comparative Information—Corresponding Figures and Comparative Financial Statements”, in respect of corresponding figures, the auditor shall determine whether the financial statements include the comparative information required by the applicable financial reporting framework and whether such information is appropriately classified. For this purpose, the auditor shall evaluate whether-
The comparative information agrees with the amounts and other disclosures presented in the prior period; and
The accounting policies reflected in the comparative information are consistent with those applied in the current period or, if there have been changes in accounting policies, whether those changes have been properly accounted for and adequately presented and disclosed.
If the auditor becomes aware of a possible material misstatement in the comparative information while performing the current period audit, the auditor shall perform such additional audit procedures as are necessary in the circumstances to obtain sufficient appropriate audit evidence to determine whether a material misstatement exists. If the auditor had audited the prior period’s financial statements, the auditor shall also follow the relevant requirements of SA 560 “Subsequent Events”.
As required by SA 580, “Written Representations”, the auditor shall request written representations for all periods referred to in the auditor’s opinion. The auditor shall also obtain a specific written representation regarding any prior period item that is separately disclosed in the current year’s Statement of Profit and Loss.
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Question 7: How to Identify Significant Related Party Transaction Outside Business?
Answer: As per SA 550 on “Related Parties”, for identified significant related party transactions outside the entity’s normal course of business, the auditor shall:
(i) Inspect the underlying contracts or agreements, if any, and evaluate whether:
(1) The business rationale (or lack thereof) of the transactions suggests that they may have been entered into to engage in fraudulent financial reporting or to conceal misappropriation of assets;
(2) The terms of the transactions are consistent with management’s explanations; and
(3) The transactions have been appropriately accounted for and disclosed in accordance with the applicable financial reporting framework; and
(ii) Obtain audit evidence that the transactions have been appropriately authorized and approved.
Question 8 Explain Self-revealing Errors?
Answer: These are such errors the existence of which becomes apparent in the process of compilation of accounts.
A few illustrations of such errors are given hereunder, showing how they become apparent-
(i)Omission to post a part of a journal entry to the ledger.
Trial balance is thrown out of agreement.
(ii)Wrong totaling of the Purchase Register.
Control Account (e.g., the Sundry Creditors Account) balances and the aggregate of the balances in the personal ledger will disagree.
(iii)A failure to record in the cash book amounts paid in to or withdrawn from the bank.
Bank reconciliation statement will show up error.
(iv)A mistake in recording amount received from X in the account of Y.
Statements of account of parties will reveal mistake.
From the above, it is clear that certain apparent errors balance almost automatically by double entry accounting procedure and by following established practices that lie within the accounting system but not being generally considered to be a part of it, like bank reconciliation or sending monthly statements of account for confirmation.
Question 9 How to identify Non-compliance of Laws and Regulations by Management?
Answer: As per SA 250 on “Consideration of Laws and Regulation in an Audit of Financial Statements”, the following are examples or matters indicating to the auditor about non-compliance with laws and regulations by management-
(i) Investigations by regulatory organisations and government departments or payment of fines or penalties.
(ii) Payments for unspecified services or loans to consultants, related parties, employees or government employees.
(iii) Sales commissions or agent’s fees that appear excessive in relation to those ordinarily paid by the entity or in its industry or to the services actually received.
(iv) Purchasing at prices significantly above or below market price.
(v) Unusual payments in cash, purchases in the form of cashiers’ cheques payable to bearer or transfers to numbered bank accounts.
(vi) Unusual payments towards legal and retainership fees.
(vii) Unusual transactions with companies registered in tax havens.
(viii) Payments for goods or services made other than to the country from which the goods or services originated.
(ix) Payments without proper exchange control documentation.
(x) Existence of an information system which fails, whether by design or by accident, to provide an adequate audit trail or sufficient evidence.
(xi) Unauthorised transactions or improperly recorded transactions
Question 10: What are the Operating Conditions Casting Doubt about Going Concern Assumption?
Answer: The following are examples of operating events or conditions that, may cast significant doubt about the going concern assumption-
Management intentions to liquidate the entity or to cease operations.
Loss of key management without replacement.
Loss of a major market, key customer(s), franchise, license, or principals supplier(s).
Labour difficulties.
Shortages of important supplies.
Emergence of a highly successful competitor.
Question 11: Explain Professional Skepticism?
Answer : As per SA 200, “Overall Objectives of the Independent Auditor and the Conduct of an Audit in Accordance with Standards on Auditing”, professional skepticism is an attitude that includes a questioning mind, being alert to conditions which may indicate possible misstatement due to error or fraud, and a critical assessment of audit evidence.
Therefore, professional scepticism is necessary to the critical assessment of audit evidence. This includes questioning contradictory audit evidence and the reliability of documents and responses to inquiries and other information obtained from management and those charged with governance.
It also includes consideration of the sufficiency and appropriateness of audit evidence obtained in the light of the circumstances, for example in
the case where fraud risk factors exist and a single document, of a nature that is susceptible to fraud, is the sole supporting evidence for a material financial statement amount.
Further, while obtaining reasonable assurance, the auditor is responsible for maintaining professional scepticism throughout the audit, considering the potential for management override of controls and recognizing the fact that audit procedures that are effective for detecting error may not be effective in detecting fraud.
This requirement is also designed to assist the auditor in identifying and assessing the risks of material misstatement due to fraud and in designing procedures to detect such misstatement.
Credits: CA Abhishek Bansal
source: Telegram
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