Standards on Auditing

In order to facilitate understanding of the scope and authority of the pronouncements of the Auditing and Assurance Standards Board (‘AASB’), the ICAI has issued revised preface viz., Preface to Standards on Quality Control for Auditing, Review, Other Assurance and Related Services, which has come into effect from 1st April, 2008. Standards of the following nature issued by the AASB shall be collectively known as ‘the Engagement Standards’:

Standards on Quality Control (SQC) are applicable to the auditing firms which performs Audits and Reviews of Historical Financial information and other Assurance and related services engagements.

Standards on Auditing (SAs), to be applied in the audit of historical financial information.

Standards on Review Engagements (SREs), to be applied in the review of historical financial information.

Standards on Assurance Engagements (SAEs), to be applied in assurance engagements, dealing with subject matters other than historical financial information.

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.

Auditing and Assurance Standard (‘AAS’) have been re-numbered and classified in the above five categories as Standards on Auditing:

AUDITS AND REVIEWS OF HISTORICAL FINANCIAL INFORMATION

* General clarification issued in respect of these standards.

Note: The Auditing & Assurance Standards Board of the ICAI has issued the Standard on Auditing (SA) 610(Revised), “Using the work of Internal Auditors.” The scope of SA-610 has been expanded to include ‘using internal auditors to provide direct assistance under the direction, supervision and review of the external auditor.’ The Revised SA also includes the related conforming amendments to Standard on Quality Control (SQC) 1 and other SAs as a result of the issue of the Revised SA-610. The Revised SA will be effective for audits of financial statements for periods beginning on or after 1st April, 2016.

STANDARD ON QUALITY CONTROL (SQC) 1

QUALITY CONTROL FOR FIRMS THAT PERFORM AUDITS AND REVIEWS OF HISTORICAL FINANCIAL INFORMATION, AND OTHER ASSURANCE AND RELATED SERVICES ENGAGEMENTS (Effective for all engagements relating to accounting periods beginning on or after April 1, 2009)

Introduction

The firm should establish a system of quality control designed to provide it with reasonable assurance that the firm and its personnel comply with professional standards, regulatory, legal requirements, and that reports issued by the firm or engagement partner(s) are appropriate in the circumstances.

Elements of a System of Quality Control

The firm’s system of quality control should include policies and procedures on the following elements:

1. Leadership responsibilities for quality within the firm
2. Ethical requirements
3. Acceptance and continuance of client relationships and specific engagements
4. Human resources
5. Engagement performance
6. Monitoring

Policies and procedures should be documented and communicated.

Leadership Responsibilities for Quality

Policies and procedures should be designed to promote an internal culture that quality is essential in performing engagements., the firm’s highest authority should assume ultimate responsibility for the system of quality control.

Any person or persons assigned responsibility for quality control system should have sufficient and appropriate experience, ability, and the necessary authority.

Ethical Requirements

Policies and procedures to provide with reasonable assurance that all concerned comply with relevant ethical requirements.

Policies and procedures should emphasise the fundamental principles, e.g

• The leadership of the firm, Education and training, Monitoring, and A process for dealing with non-compliance

Independence

Establish policies and procedures to provide with reasonable assurance that all concerned, maintain independence where required by the Code. It should enable the firm to:

1. Communicate its independence requirements and
2. Identify and evaluate circumstances and relationships that create threats to independence, and to take appropriate action to eliminate or reduce those threats to an acceptable level by applying safeguards, or, if considered appropriate, to withdraw from the engagement.

Such policies and procedures should require:

1. Personnel to provide the firm with relevant information about client engagements, the scope of services, to evaluate the overall impact on independence requirements;
2. Personnel to promptly notify circumstances and relationships that create a threat to independence for taking appropriate action and
3. Accumulate and communicate relevant information to appropriate personnel so that:

• All can readily determine about satisfaction of independence requirements;
• Maintain and update records relating to independence; and
• Take appropriate action regarding identified threats to independence.

Provide reasonable assurance that it is notified about breaches of independence requirements, and to enable it to take appropriate actions to resolve such situations, which include:

• All to promptly notify on becoming aware about the breaches of independence;
• All to promptly communicate identified breaches of these policies and procedures to:

• The one who needs to address the breach; and
• Those who need to take appropriate action; and

• Promptly communicate to all about the actions taken to resolve the matter;
• Annually, the firm should obtain written confirmation of compliance with its policies and procedures on independence from all firm personnel;
• Setting out criteria for determining the safeguards to reduce the familiarity threat to an acceptable level over a long period of time; and
• For all audits of financial statements of listed entities, requiring the rotation of the engagement partner after a specified period in compliance with the Code. Partner should be rotated after a pre-defined period, normally not more than seven years.

Acceptance and Continuance of Client Relationships and Specific Engagements

Policies and procedures for the acceptance and continuance of client relationships and specific engagements, designed to provide it with reasonable assurance to undertake or continue relationships and engagements only where it:

• Has considered the integrity of the client
• Is competent capable and has time and resources to do so; and
• Can comply with the ethical requirements and it should document how the issues regarding ethical requirements were resolved.

Policies and procedures on the continuance of the engagement and the client relationship should include consideration of:

1. The professional and legal responsibilities that apply to the declining engagement circumstances, including whether there is a requirement to report to the person who made the appointment or, to regulatory authorities;

and

2. The possibility of withdrawing from the engagement or from both the engagement and the client relationship.

Human Resources

Policies and procedures designed to provide it with reasonable assurance that it has sufficient personnel with the capabilities, competence, and commitment to ethical principles necessary to perform its engagements in accordance with professional standards and regulatory and legal requirements, and to enable all to issue reports that are appropriate in the circumstances.

Assignment of Engagement Teams

The firm should assign responsibility for each engagement to an engagement partner. with policies and procedures requiring that:

• The identity and role of the engagement partner are communicated to key members of the client’s management and those charged with governance;
• The engagement partner has the appropriate capabilities, competence, authority and time to perform the role; and
• The responsibilities of the engagement partner are clearly defined and communicated to that partner.

The firm should assign appropriate staff with capabilities, competence and time to perform engagements with professional standards and regulatory and legal requirements

Engagement Performance

Policies and procedures designed to provide with reasonable assurance that engagements are performed in accordance with professional standards and regulatory and legal requirements,

Consultation

Policies and procedures designed to provide with reasonable assurance that:

• Appropriate consultation takes place on difficult or contentious matters;
• Sufficient resources are available to enable appropriate consultation;
• The nature and scope of consultations are documented; and
• Conclusions from consultations are documented and implemented.

Differences of Opinion

Policies and procedures for dealing with and resolving differences of opinion within the engagement team, with those consulted. Conclusions should be documented and implemented.

Engagement Quality Control Review

• Require an engagement quality control review for all audits of financial statements of listed entities;
• Set out criteria against which all other audits and reviews of historical financial information, and other assurance and related services engagements should be evaluated to determine whether an engagement quality control review should be performed; and
• Require an engagement quality control review for all engagements meeting the criteria established in compliance with sub-paragraph.

Policies and procedures setting out

• The nature, timing and extent of an engagement quality control review;
• Criteria for the eligibility of engagement quality control reviewers; and
• Documentation requirements for an engagement quality control review.

Nature, timing and extent of the Engagement Quality Control Review Criteria for the Eligibility of Engagement Quality Control Reviewers

Policies and procedures should address the appointment of engagement quality control reviewers and establish their eligibility through:

• The technical qualifications, experience and authority; and
• The degree to which a quality control reviewer can be consulted on the engagement without compromising the reviewer’s objectivity.

Documentation of the Engagement Quality Control Review

Policies and procedures on documentation of the engagement quality control review should require that:

• The procedures quality control reviewer have been performed;
• The quality control review completed before the report is issued; and
• The reviewer is not aware of any unresolved matters about inappropriate conclusions.

Engagement Documentation

Completion of the Assembly of final Engagement Files

Policies and procedures for engagement teams to complete the assembly of final engagement files on a timely basis after the engagement reports have been finalised.

Confidentiality, Safe Custody, Integrity, Accessibility and Retrievability of Engagement Documentation

Policies and procedures designed to maintain the confidentiality, safe custody, integrity, accessibility and retrievability of engagement documentation.

Retention of Engagement Documentation

Policies and procedures should be in place for the retention of engagement documentation for a period sufficient to meet the needs of the firm or as required by law or regulation, which should be not be shorter than 7 years from the date of report.

Ownership of Engagement Documentation

Monitoring

Policies and procedures relating to the system of quality control are relevant, adequate, operating effectively and complied with in practice. Such policies and procedures should include an ongoing consideration and evaluation of the firm’s system of quality control, including a periodic inspection of a selection of completed engagements.

Evaluate the effect of deficiencies noted as a result of the monitoring process and should determine

• Instances that do not necessarily indicate that system of quality control is insufficient to provide it with reasonable assurance that it complies with professional standards and regulatory and legal requirements, and are appropriate in the circumstances; or
• Systemic, repetitive or other significant deficiencies that require prompt corrective action.

The firm should communicate to relevant engagement partners and other appropriate personnel deficiencies noted as a result of the monitoring process and recommendations for appropriate remedial action.

The firm’s evaluation of each type of deficiency should result in recommendations for one or more of the following:

• Taking appropriate remedial action in relation to an individual engagement or personnel;
• The communication of the findings to those responsible for training and professional development;
• Changes to the quality control policies and procedures; and
• Disciplinary action against those who fail to comply with the policies and procedures of the firm, especially those who do so repeatedly.

Firm should determine what further action is appropriate to comply with relevant professional standards and regulatory and legal requirements including obtaining legal advice.

Annually, the firm should communicate the results of the monitoring of its quality control system to appropriate individuals within the firm, including the firm’s chief executive officer or, if appropriate, its managing partner(s) to enable them to take prompt and appropriate action necessary in accordance with their defined roles and responsibilities. Information communicated should include the following:

• A description of the monitoring procedures performed.
• The conclusions drawn from the monitoring procedures.
• Where relevant, a description of systemic, repetitive or other significant deficiencies and of the actions taken to resolve or amend those deficiencies.

Complaints and Allegations

Policies and procedures to provide it with reasonable assurance:

• Complaints and allegations that the work performed by the firm fails to comply with professional standards and regulatory and legal requirements; and
• Allegations of non-compliance with the firm’s system of quality control.

(SA) – 230: Audit Documentation

Scope: This standard deals with auditors responsibilities in preparation of audit documentation while auditing financial statements. Specific documentation requirements of other Standards on auditing do not limit its scope.

Nature and Purpose: Audit Documentation provides evidence as to whether the overall objective of the auditor was achieved as well as whether it was planned and performed in accordance with Standards of Auditing as also applicable legal and regulatory requirements.

It assists in planning, performing, fixation of accountability and responsibility, supervision and review of audits. Retaining the records for future audits, as also conduct of quality controls (SQC 1).

Definitions: Audit Documentation: The record of audit procedures performed, relevant audit evidence obtained and conclusions the auditor reached (working papers, work papers).

Audit File: One or more folders or other storage media in physical or electronic form, containing the records that comprise of the audit documentation for a specific engagement.

Experienced Auditor: An Individual (whether Internal or external to the firm) who has practical audit experience and a reasonable understanding of audit processes, SAs and applicable legal and regulatory requirements, the business environment in which the entity operates and auditing and financial reporting issues relevant to the entity’s industry.

Form, Content and Extent in addition to the Nature and Purpose

An auditor should prepare audit documentation sufficient to enable an experienced auditor having no previous connection with the audit to understand.

1. Nature, timing and extent of audit procedures:

• Identifying characteristics of specific items and matters tested.
• Who performed the audit and the date of completion.
• Who reviewed the report, the date and extent of review.

2. Results of the audit procedures performed and evidence obtained:

• Document discussions of significant matters.
• Nature of the significant matters – when and with whom discussed.

3. Significant matters arising during the audit:

• Document how the inconsistencies have been addressed.
• In case of departure from the standard, the relevant requirements and the reason for departure, the alternative audit procedures performed to achieve the aim of that requirement.

Matters arising after the date of the Auditor's Report

If, in the exceptional circumstances, auditor performs new or additional audit procedures or draws new conclusions after the date of the auditor’s report, the auditor shall document:

• Circumstances encountered
• Newer additional procedures performed, evidence obtained, conclusions reached and its effect on auditor’s report.
• When and by whom the resulting changes to audit documentation were made and reviewed.

Additional Points

• Assembling of the final Audit file should be completed on a timely basis after the date of the auditor’s report.
• After assembling the same, the auditor shall not delete or discard documentation of any nature before the end of its retention period.
• In case the auditor finds it necessary to modify existing or add new documentation post assembly, he should specify the reasons for them and when and by whom it was made and reviewed.

Application and Other Explanatory Material

• Timely preparation enhances quality, review, evaluation of the audit evidence and conclusions reached before finalisation of the auditor’s report. Documentation prepared after audit work is less accurate than that prepared during audit.
• Form, content and extent depends on size and complexity of the entity, nature of procedures performed, risks, exceptions, audit methodology, tools used and professional judgment.
• Audit documentation may be recorded on paper or on electronic or other media. Examples: Audit programmes, checklists, analysis, correspondence.
• Audit documentation should not include superseded drafts of working papers and financial statements, notes reflecting incomplete and preliminary thinking.
• Oral explanations can clarify or explain information contained in audit documentation.
• It is not necessary nor practicable for the auditor to document every matter considered or professional judgment made.
• Judging the significance of a matter requires an objective analysis of the facts and circumstances.
• Summary describing significant matters identified during the audit and how they were addressed, or that includes cross-references to other relevant supporting audit documentation that provides such information.
• The identifying characteristics should be recorded which helps serve a number of purposes.
• Documentation also includes records prepared by the entity’s personnel .
• Retention period of audit engagements is no shorter than seven years from the date of the auditor’s report.
• Unless otherwise stated audit documentation is the property of the auditor. He may make disclosures but these should not affect his independence nor invalidate his work.

(SA) 250 – Consideration of Laws and Regulations in an Audit of Financial Statements

Scope:- This Standard on Auditing (SA) deals with the auditor’s responsibility to consider laws and regulations while performing an audit of financial statements and not compliance with specific laws or regulations.

Effect of Laws & Regulations

The effect on financial statements depends on the fact that whether they are directly or indirectly related to the operational business. Non-compliance of the same shall attract fines, litigations or other consequences.

Responsibility of Management

The management must ensure that entity’s operations are conducted in accordance and with compliance of the various provisions of laws and regulations that determine the reported amounts and disclosures. The management should:-

In larger companies the policies and procedures are assigned to:

• An Internal Audit function, An Audit Committee, Compliance function.

Responsibility of the Auditor

This SA is designed to assist the auditor in identifying material misstatement of the financial statements. He is responsible for obtaining a reasonable assurance that the financial statements as a whole are free from any material misstatement. However, due to inherent limitations of audit there exists an unavoidable risk.

Effective date: Audit of Financial Statements for period beginning on or after 1st April, 2009.

Objectives:- The objectives of an auditor are:-

• To obtain sufficient audit evidence regarding compliance with provisions of laws and regulations,
• To perform audit procedures to help identify areas to non-compliance,
• To respond appropriately to non-compliance or suspected compliance,
• To maintain an attitude of professional skepticism.

Definition of Non-compliance

Acts of omission or commission by the entity either intentional or unintentional which are contrary in nature other than personal misconduct.

Duties of Auditor

• Obtain knowledge about legal and regulatory framework
• Know-how the entity is complying with the same
• Obtain Audit evidence w.r.t. compliance
• Conduct audit procedures to identity non-compliance
• Ensure compliance by management
• Inspect correspondence, if any, with authorities
• Remain alert to suspection, if any
• Obtain written representations from management where necessary.

Audit Procedures when Non-compliance is Identified or Suspected

Firstly understand the nature of act and circumstances and then evaluate the possible effects. Then if there is any suspection, discuss the same with those charged with governance and if sufficient information is not obtained then the auditor can seek legal advice.

SA – 260 Communication with those charged with Governance

The auditor shall communicate with those charged with governance and if there exist any audit committee or supervisory board, the auditor shall communicate the matter to them.

Reporting Non-compliance in the Auditor’s Report on Financial Statements

• The auditor shall express a qualified or adverse opinion on the financial statements in case of non-compliance.
• If he is precluded from obtaining sufficient appropriate audit evidence, the auditor shall express a qualified opinion or disclaim an opinion.
• If he is unable to determine as to how exactly non-compliance has occurred, he shall evaluate the effect on auditor’s opinion in accordance with proposed SA 705.

Reporting Non-compliance to Regulatory and Enforcement Authorities

The auditor has to determine whether he has the responsibility to report the identified or suspected non-compliance to parties outside the entity.

Documentation

• Copies of records or documents relating to identified or suspected non-compliance.
• Minutes of discussions with management and 
  those charged with governance or parties outside the entity.

(SA) – 700

Forming an Opinion and Reporting on Financial Statements (Earlier known as ‘The Auditor’s Report on Financial Statements’)

Scope

This SA deals with the auditor’s responsibility to form an opinion on the financial statements and with the form and content of the auditor’s report issued as a result of an audit of financial statements.

It also promotes consistency in the auditor’s report.

Effective date

For audits of financial statements for periods beginning on or after 1-4-2012

Objectives

• To form an opinion on the Financial Statements (FS) based on an evaluation of conclusion drawn from the audit evidence obtained.
• To give a clear written report that describes the basis for the opinion.

Requirements

• Prepared in all material respects and in accordance with the applicable financial reporting framework.
• To conclude that the Financial Statements are free from material misstatement, whether due to fraud or error after taking into account:

1. Obtaining sufficient appropriate audit evidence 
   (SA 330)
2. Uncorrected misstatement are not material, individually or in aggregate (SA 450) and
3. Evaluation as to FS are prepared, in all material respects, in accordance with the requirements of the applicable financial reporting framework which is based on:-

• Consideration of the qualitative aspects of the entity’s accounting practices, including indicators of possible bias in management’s judgment.
• Significant accounting policies are disclosed.
• Accounting policies are appropriate and consistent with applicable financial reporting framework.
• Estimates made are reasonable.
• Information is relevant, reliable, comparable and understandable.
• Consider overall presentation, structure, contents and whether related notes represent the underlying transactions and events to achieve fair presentation.

4. Financial statements adequately refer to or describe the applicable financial reporting framework.

Form of Opinion

• Unmodified Opinion : An unqualified opinion should be expressed when the auditor concludes that the financial statements give a true and fair view in accordance with the financial reporting framework used for preparation and presentation of the financial statements.
• Modified Opinion :In the following situations auditor’s report may have to be modified :

1. In respect of the matters that do not affect the auditor’s opinion, the auditor should modify the report by adding a paragraph to highlight a matter.

For example Corporate Debt Restructuring pending with banks affecting "going concern" or a legal dispute which involves significant uncertainty affecting the financial statements and the same has already been incorporated by management in financial statement. In such matters, the opinion paragraph would refer to the fact that the auditor’s opinion is not qualified in this respect.

2. In respect of the matters that do affect the auditor’s opinion:-

A ‘qualified opinion’ should be expressed when the auditor concludes that an unqualified opinion cannot be expressed but that the effect of any disagreement with the management is not so material and pervasive as to require an adverse opinion, or limitation on scope is not material and pervasive as to require a disclaimer of opinion.

A ‘disclaimer of opinion’ should be expressed when the possible effect of a limitation on scope is so material and pervasive that the auditor is unable to obtain sufficient appropriate audit evidence and is hence, unable to express an opinion on the financial statements.

An ‘adverse opinion’ should be expressed when the effect of a disagreement is so material and pervasive to the financial statements that the auditor concludes that a qualification of the report is inadequate to disclose the misleading or incomplete nature of the financial statements

• Opinion other than an unqualified opinion:Whenever the auditor requires an opinion other than unqualified, a description of all the substantive reasons should be included in the report and quantification of the possible effect(s), individually and in aggregate, on the financial statements should be mentioned in the report.
• Limitation on Scope: The SA also requires that in case there is a limitation on scope that requires expression of a qualified opinion or a disclaimer of opinion, the auditor’s report should describe the limitation and indicate the possible adjustments that might have been necessary had the limitations not existed.

Auditor’s Report

For Audits conducted in accordance with SA’s Auditor’s Report :

We draw attention of the readers to the illustrative formats of reporting issued by the ICAI.

AASB of The Institute of Chartered Accountants’ of India vide its announcement dated 16th December, 2014 has given illustrative formats of the Independent Auditor’s Report on standalone Financial statements under the Companies Act, 2013 and Rules thereunder:

The Auditing and Assurance Standards Board is issuing the following illustrative formats of the Independent Auditor’s Report on the Standalone Financial Statements under the Companies Act, 2013 and the Rules thereunder. These illustrative formats were approved by the Council of the Institute of Chartered Accountants of India (ICAI) at its Meeting held in November 2014. These illustrative formats would be added to the respective Appendices of Standard on Auditing (SA) 700, Forming An Opinion and Reporting On Financial Statements and Standard on Auditing (SA) 705, Modifications to the Opinion in the Independent Auditor’s Report, issued by ICAI.

AASB of The Institute of Chartered Accountants’ of India vide its announcement dated 1st May, 2015 has given illustrative formats of the Independent Auditor’s Report on consolidated financial statements under the Companies Act, 2013 and Rules thereunder

While reporting on the consolidated financial statements (CFS) of a company under the Companies Act 2013, the auditors may draw guidance from the aforementioned formats and suitably reword the same, as required, to meet the circumstances of audit of CFS. The auditors of CFS, while reporting in respect of the provisions of, inter alia, section 143(3) and section 143(11) of the Companies Act, 2013 in their report on CFS, are also advised to:

• Consider the observations and comments as given in this regard in the auditors’ reports of the component auditors.
• Include in their report or draw suitable reference to, negative/adverse comments, if any, in respect of section 143(3) and section 143(11) of the Act relating to a component, as appearing in the component auditors’ report.

The auditors of CFS are also advised to apply concept of materiality and professional judgment as provided in the Standards on Audit while reporting on the Consolidated Financial Statements.

The following illustrative formats of an auditors’ report on CFS, covering some of the clauses of section 143(3) of the Companies Act, 2013 (and where the auditor does not have the responsibility for reporting on internal financial controls over financial reporting under section 143(3)(i) of the Companies Act, 2013), are being issued herewith just to provide a broad guidance on how such a report may be prepared. These formats may be applied for the FY 2014-15 and until further announcement. It is reiterated that the auditors of CFS may suitably reword/redraft these formats to suit the circumstances of their audit engagement.

Reporting on Internal Financial Controls – Section 143(3)(i) of the Companies Act, 2013 has introduced the requirement of reporting by the auditors on whether the company has an adequate internal financial controls system in place and the operating effectiveness of such controls with effect from the financial year beginning 1st April, 2015. As per the “Guidance Note on Audit of Internal Financial Controls over Financial Reporting” issued by the ICAI, the reporting on Internal Financial Controls is only in the context of the audit of the financial statements. Hence, reporting by the auditors will be restricted to adequacy and effectiveness of internal financial controls relating to financial reporting. The Guidance Note covers aspects such as scope of reporting on financial controls under the Companies Act, 2013, essential components of internal controls, technical guidance on audit of internal financial controls and implementation guidance on audit of internal financial controls. Appendices to the Guidance Note include illustrative engagement letter, illustrative management representation letter, illustrative reports on internal financial controls, illustrative risks of material misstatements, related control objectives and control activities. The illustrative formats of the report on internal financial controls also include an illustrative format in case of audit of consolidated financial statements.

Report on Fraud Reporting – Section 143(12) of the Companies Act, 2013 has introduced the requirement of reporting by auditors on frauds. The Auditing & Assurance Board of the ICAI has issued the “Revised Guidance Note on Reporting Fraud under section 143(12) of the Companies Act, 2013.” Section 143(12) and Rule 13 of the Companies (Audit and Auditors) Rule, 2014 have been amended with effect from 14th December, 2015. The amended provisions require reporting by the auditor to the Central Government only for individual frauds of ₹ 1 crore and above. The amended provisions have also made certain changes in the procedure and particulars of reporting under this section. The Revised Guidance Note has been issued to take into account the requirements of these amendments.