18TH SINO-INDIAN JOINT AUDIT SEMINAR ON AUDIT
GUANGZHOU, CHINA FROM 8TH TO 13TH MAY 2011.
STANDARDS
COUNTRY PAPER
ON
AUDITING STANDARDS FOR CORPORATE SECTOR.
INDEX
1.
INTRODUCTION
2.
AUDITING STANDARDS IN CORPORATE SECTOR
3.
DEVELOPMENT OF AUDIT STANDARDS
4.
APPLICABLE AUDIT STANDARDS FOR CORPORATE INDIA
AAS-1 BASIC PRINCIPLES GOVERNING AN AUDIT
4.1.1
AAS-2 OBJECTIVE AND SCOPE OF THE AUDIT OF FINANCIAL
TATEMENTS
4.2
AAS-3 DOCUMENTATION
4.3
AAS-4 THE AUDITOR’S RESPONSIBILITY TO CONSIDER
FRAUD AND ERROR IN AN AUDIT OF FINANCIAL STATEMENTS
4.4
AAS-5 AUDIT EVIDENCE
4.5
AAS-6 RISK ASSESSMENTS AND INTERNAL CONTROL
4.6
AAS-7 RELYING UPON THE WORK OF AN INTERNAL AUDITOR
4.7
AAS-8 AUDIT PLANNING
4.8
AAS-9 USING THE WORK OF AN EXPERT
4.9
AAS-10 USING THE WORK OF ANOTHER AUDITOR
4.10
AAS-11 REPRESENTATIONS BY MANAGEMENT
4.11
AAS-12 RESPONSIBILITY OF JOINT AUDITORS
4.12
AAS-13 AUDIT MATERIALITY
1
AT
4.13
AAS-14 ANALYTICAL PROCEDURES
4.14
AAS-15 AUDIT SAMPLING
4.15
AAS-16 GOING CONCERN
4.16
AAS-17 QUALITY CONTROL FOR AUDIT WORK
4.17
AAS-18 AUDIT OF ACCOUNTING ESTIMATES
4.18
AAS-19 SUBSEQUENT EVENTS
4.19
AAS-20 KNOWLEDGE OF THE BUSINESS
4.20
AAS-21 CONSIDERATION OF LAWS AND REGULATIONS IN AN AUDIT
OF FINANCIAL STATEMENTS
4.21
AAS-22 INITIAL ENGAGEMENTS – OPENING BALANCES
4.22
AAS-23 RELATED PARTIES
4.23
AAS-24 AUDIT CONSIDERATIONS RELATING TO ENTITIES USING
SERVICE ORGANISATIONS
4.24
AAS-25 COMPARATIVES
4.25
AAS-26 TERMS OF AUDIT ENGAGEMENTS
4.26
AAS-27 COMMUNICATIONS OF AUDIT MATTERS WITH THOSE
CHARGED WITH GOVERNANCE
4.27
AAS-28 THE AUDITOR’S REPORT ON FINANCIAL STATEMENTS
4.28
AAS-29 AUDITIG IN A COMPUTER INFORMATION SYSTEMS
ENVIRONMENT
4.29
AAS-30 EXTERNAL CONFIRMATIONS
4.30
AAS-31 ENGAGEMENTS TO COMPILE FINANCIAL INFORMATION
4.31
AAS-32 ENGAGEMENTS TO PERFORM AGREED-UPON PROCEDURES
REGARDING FINANCIAL INFORMATION
4.32
AAS-33 ENGAGEMENTS TO REVIEW FINANCIAL STATEMENTS
4.33
AAS-34 AUDIT EVIDENCE – ADDITIONAL CONSIDERATION FOR
SPECIFIC ITEMS
4.34
AAS-35 EXAMINATION OF PROSPECTIVE FINANCIAL INFORMATION.
5. COMPLIANCE WITH AUDIT STANDARDS
6. CHALLENGES
7. CONCLUSION
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1.1 ECONOMY
The Indian economy comprises of public sector, private sector and joint sector in key and nonkey sectors. Parliamentary financial control is envisaged through audit conducted by the
Comptroller and Auditor General of India (C&AG), who is entrusted with the audit of all
receipts and expenditure of the Union Government and the federal entities and Public Sector
Corporate Entities.
The role of government has also been changing from driver in most of the sectors of the Indian
economy to being a regulator in most of the sectors due to shift in the economy from public
sector to the private sector or public-private partnership. Due to this change, the role of audit
has also been changing which has been addressed by the Comptroller and Auditor General
through appropriate guidelines.
1.2 CORPORATE SECTOR
The Corporate sector in India comprises of Joint Stock Companies. The Companies are
governed by the Companies Act 1956 (a Union legislation). Some of the companies are
listed on the Stock Exchange which are regulated by the Securities and Exchange Board of
India (SEBI)
There are 24 numbers of Stock Exchanges in India the important ones being the Bombay
Stock Exchange (BSE) and National Stock Exchange (NSE). The total turnover of Stock
Exchanges in India in 2009-10 was Indian Rupees 55184.70 billion with the National Stock
Exchange accounting for 74.98 % and Bombay Stock Exchange accounting for 24.98 % of the
total turnover.
1.3 AUDIT AND ACCOUNTING
1.3.1 The Supreme Audit Institution of India (SAI India), is headed by the Comptroller and
Auditor General of India (C&AG) who is a constitutional authority and has been assigned his
duties and powers through the Constitution of India and the Comptroller and Auditor
General’s (Duties Powers and Conditions of Service) Act (CAG’s (DPC) Act) passed by the
Parliament in 1971.
The Comptroller and Auditor General of India is entrusted with audit of receipts and
expenditure from the Consolidated Fund of India and of the States and Union Territories
having legislative assembly, financial statements of the Government departments and
Companies, accounts of stores and stock of Government offices and departments, Corporations
3
established by the order of Indian Parliament, bodies financed by the Consolidated Fund of
India and the Rural and Urban Local Bodies.
The SAI India is also responsible for the compilation of accounts of the State
Governments, rendering accounting information and assistance to the State Governments.
The Regulations on Audit and Accounts issued by SAI INDIA define the scope and extent
of audit including laying down for the guidance of Government Departments, the general
principles of Government Accounting and the broad principles in regard to audit of receipts
and expenditure. These Regulations apply to the entities to which the audit and accounts
jurisdiction of the SAI India extends.
The Regulations while defining the objectives, scope and extent of audit, general principles
of Government accounting and broad principles of Government Audit also explain the three
types of audit namely financial audit, compliance audit and performance audit, which the SAI
India has been primarily engaged in. These regulations contain the guiding principles of
auditing standards which are the norms to be followed by auditors while conducting audit and
also details guidance on audit evidence, audit notes, inspection reports and audit reports. The
Regulations authorize the SAI India to utilize, in special circumstances, if required, specialized
skills from external sources in carrying out its mandate both on the audit and accounts side.
1.3.2 CORPORATE SECTOR
The Indian Companies Act, 1956 also empowers the SAI India to appoint / reappoint auditors
to the Government Companies, direct the manner in which accounts shall be audited, and to
give suitable instructions to the Auditors. The SAI India also conducts a supplementary or test
audit of the accounts to comment upon or supplement the audit report of the statutory auditors
thus appointed by the SAI India.
The Institute of Chartered Accountants of India (ICAI) regulates the profession of chartered
accountancy in India. The objectives of the Auditing and Assurance Standards Board (AASB)
are to issue auditing standards for the private sector. The Board issues Statements on Standard
Auditing Practices (SAPs) and Auditing and Assurance Standards (AAS) under the authority
of the Council. Auditing standards represent a codification of the best practices of the
profession, which already exist. Auditing Standards help the members in proper and optimum
discharge of their professional duties and promote uniformity in practice as also comparability.
Thus the role of C&AG & ICAI are harmonized in auditing of Public sector corporates.
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2. AUDIT STANDARDS IN CORPORATE SECTOR
2.1 INSTITUTIONAL ARRANGEMENTS
The 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 laid down the foundation for the profession of auditing. The extent of
reliance placed by the public on the auditors has created an impression among the public that
nothing can go wrong with an organisation 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.
The International Federation of Accountants (IFAC) was established in 1973 with the
objective of “worldwide development and enhancement of the accountancy profession of high
quality in the public interest”. The International Auditing and Assurance Standards Board
(IAASB), earlier known as the International Auditing Practices Committee, of the IFAC was
established to “improve the quality and uniformity of practice throughout the world”, by, inter
alia, issuing International Standards on Auditing (ISAs) and guidance on the application of the
ISAs.
The Institute of Chartered Accountants of India has taken numerous steps to ensure that its
members discharge their duties with due professional care, competence and sincerity. One of
the steps is the establishment of the Auditing Practices Committee, or the Auditing and
Assurance Standards Board (AASB). One of the main objectives of the Board is to issue
Auditing Standards. The Board issues Statements on Standard Auditing Practices and Auditing
and Assurance Standards under the authority of the Council.
2.2. DEVELOPMENT OF AUDITING STANDARDS
Auditing Standards represent codification of the existing best practices of the profession, and
help the members in proper and optimum discharge of their professional duties and promote
uniformity in practice as also comparability.
The following is the procedure for formulating Auditing Standards by the Auditing and
Assurance Standards Board of the ICAI:
5
1. Identification of areas where Auditing Standards need to be formulated and the priority in
regard to their selection.
2. Preparation of the Auditing Standards under the assistance of study groups comprising of a
cross section of members of the ICAI.
3. Exposure Draft of the proposed Auditing Standard is prepared by the Board and issued for
comments of the members.
4. Draft of the proposed Auditing Standard is finalised by the Board after receipt of comments
and submitted to the Council of the ICAI.
5. Final draft of the proposed Auditing Standard is considered by Council the auditing standard
is then issued under the authority of the Council, keeping into consideration the applicable
laws, customs, usages and business environment in the country.
2.3 HARMONISATION WITH INTERNATIONAL AUDITING STANDARDS
The Auditing Standards issued by the Institute of Chartered Accountants of India (ICAI) are in
harmony with the International Standards on Auditing. The IAASB of the IFAC has issued
thirty nine Engagement Standards, comprising one Standard on Quality control (ISQC), thirty
two ISAs, two International Standards on Review Engagements (ISREs), two International
Standards on Assurance Engagements (ISAEs) and two International Standards on Related
Services (ISRSs). The ICAI has issued thirty five auditing standards corresponding to the
Engagement Standards issued by the IAASB of the IFAC and three auditing standards are in
the pipeline. Further, the Council of the Institute of Chartered Accountants of India has also
approved the following technical drafts:
● Preface to the Standards on Quality Control, Auditing, Review, Other Assurance and
Related Services
● Due Process of the Auditing and Assurance Standards Board
● Revised Classification and Numbering Pattern of the Auditing and Assurance Standards
● Framework for Assurance Engagements
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3. APPLICABLE AUDIT STANDARDS FOR CORPORATE INDIA
The applicable audit standards for Corporate India are briefly explained as follows.
3.1 AAS 1: BASIC PRINCIPLES GOVERNING AN AUDIT
Corresponding International Statement on Auditing (ISA): ISA 200 "OBJECTIVES & GENERAL
PRINCIPLES GOVERNING AN AUDIT OF FINANCIAL STATEMENTS"
The auditor, while carrying out independent audit of the financial statements should adhere to
the basic principles governing an audit. These principles are integrity, objectivity and
independence,
confidentiality,
skill
and
competence,
work
performed
by
others
documentation, planning, audit evidence, accounting system and internal control, audit
conclusions and reporting
3.2 AAS 2: OBJECTIVE AND SCOPE OF THE AUDIT OF FINANCIAL
STATEMENTS
Corresponding ISA: ISA 200 "Objectives & General Principles Governing an Audit of Financial
Statements"
The objective of an independent audit is to enable the auditor to express an opinion on the
financial statements as to whether they reflect true and fair view of financial position and
operating results of the enterprise and the state of affairs of the enterprise. The scope of audit is
determined by audit engagement, pronouncements of the Institute of Chartered Accountants of
India (ICAI) and legal and regulatory requirements. The auditor’s opinion does not assure of
future viability of the enterprise.
3.3 AAS 3: DOCUMENTATION
Corresponding ISA: ISA 230 "Documentation"
The auditor should make suitable documentation during the conduct of audit which refers to
the working papers that the auditor obtains in connection with the performance of their audit.
Working papers aid in planning, performance, supervision and review of their audit work. It
provides evidence of their work performed.
3.4 AAS 4: AUDITOR’S RESPONSIBILITY TO CONSIDER FRAUD AND ERROR IN
THE AUDIT OF FINANCIAL STATEMENTS
Corresponding ISA: ISA 240 "The Auditor’s Responsibility to Consider Fraud and Error in an Audit of
Financial Statements"
The primary responsibility of prevention and detection of frauds and errors is of the
management as well as those charged with governance. The Auditor has to obtain reasonable
7
assurance that financial information is properly stated in all material aspects and should
consider the risk of material misstatements in the financial statements resulting from fraud or
error. While assessing inherent risk and control risk, the auditor should consider how financial
statements may be materially misstated as a result of frauds and errors and should design
substantive procedures to reduce the detection risk to an acceptably low level.
3.5 AAS: 5: AUDIT EVIDENCE
Corresponding ISA: ISA 500 "AUDIT EVIDENCE"
The auditor is required to obtain sufficient appropriate audit evidence to enable them to draw
reasonable conclusions there from on which to base their opinion on the financial information.
Evidence is obtained through the performance of compliance and substantive procedures.
3.6 AAS–6: RISK ASSESSMENTS AND INTERNAL CONTROL
Corresponding ISA: ISA 400 "RISKS ASSESSMENTS AND INTERNAL CONTROLS"
The auditor should use professional judgment to assess audit risk and design audit procedures
to ensure that it is reduced to an acceptably low level. Audit risk has three components:
INHERENT RISK, CONTROL RISK AND DETECTION RISK.
3.7 AAS 7: RELIANCE ON THE WORK OF THE INTERNAL AUDITOR
Corresponding ISA: ISA 610 "CONSIDERING THE WORK OF INTERNAL AUDITING"
The external auditor’s general evaluation of the internal audit function will assist them in
determining the extent to which they can place reliance upon the work of the internal auditor.
External auditor must ascertain internal auditor’s tentative plan for the year and discuss it with
them at an early stage to determine areas where they could consider relying upon the work of
the internal auditor.
3.8 AAS 8: AUDIT PLANNING
Corresponding ISA: ISA 300 "PLANNING AN AUDIT OF FINANCIAL STATEMENTS"
Audit Planning involves developing an overall plan for the expected scope and conduct of the
audit and developing an audit programme showing the nature, timing and extent of audit
procedures duly considering factors such as complexity of the audit, the environment in which
the entity operates their previous experience with the client and knowledge of the client’s
business.
8
3.9 AAS 9: USING THE WORK OF AN EXPERT
Corresponding ISA: ISA 620 "USING THE WORK OF AN EXPERT"
When the auditor uses the work of an expert employed by them, s/he is using that work in the
employee’s capacity as an expert rather than delegating the work to an assistant on the audit.
The auditor should seek reasonable assurance that the expert’s work constitutes appropriate
audit evidence in support of the financial information.
3.10 AAS 10: USING THE WORK OF ANOTHER AUDITOR
Corresponding ISA: ISA 600 "USING THE WORK OF ANOTHER AUDITOR"
When the principal auditor uses the work of another auditor, the principal auditor should
determine how the work of the other auditor will affect the audit. The auditor should consider
the significant findings of the other auditor and there should be proper co–ordination and
communication between the two auditors.
3.11 AAS 11: REPRESENTATIONS BY MANAGEMENT
Corresponding ISA: ISA 580 "MANAGEMENT REPRESENTATIONS"
During the course of an audit, management makes many representations to the auditor, either
unsolicited or in response to specific enquiries. Management representations both oral and
written constitute an important form of audit evidence. Representations should be obtained
from management in writing on matters material to financial information, when other
sufficient appropriate audit evidence cannot reasonably be expected to exist. Representations
by management cannot be a
substitute for other audit evidence. If a representation by
management is contradicted by other evidence, the auditor should examine the circumstances
and, when necessary, reconsider the reliability of other representations made by management.
3.12 AAS 12: RESPONSIBILITY OF JOINT AUDITORS
Where joint auditors are appointed, they should, by mutual discussion, divide the audit work
among themselves. The division of work would usually be in terms of audit of identifiable
units or specified areas. In some cases, due to the nature of the business of the entity under
audit, such a division of work may not be possible. In such situations, the division of work
may be with reference to items of assets or liabilities or income or expenditure or with
reference to periods of time. Each joint auditor is responsible only for the work allocated to
them, whether or not s/he has prepared a separate report on the work performed by them. All
9
the joint auditors are jointly and severally responsible in respect of the audit work which is not
divided amongst them.
3.13 AAS 13: AUDIT MATERIALITY
Corresponding ISA: ISA 320 "AUDIT MATERIALITY"
Information is material if its misstatement (i.e., omission or erroneous statement) could
influence the economic decisions of users taken on the basis of the financial information.
Materiality depends on the size and nature of the item, judged in the particular circumstances
of its misstatement. Materiality should be considered by the auditor when determining the
nature, timing and extent of audit procedures and while evaluating the effect of misstatements.
The auditor’s assessment of materiality and audit risk may be different at the time of initially
planning the engagement from that at the time of evaluating the results of their audit
procedures.
3.14 AAS 14: ANALYTICAL PROCEDURES
Corresponding ISA: ISA 520 "ANALYTICAL PROCEDURES"
The auditor should apply analytical procedures at the planning and overall review stages of the
audit. Analytical procedures are the analysis of significant ratios and trends including the
resulting investigation of fluctuations and relationships that are inconsistent with other relevant
information or which deviate from predicted amounts. When analytical procedures identify
significant fluctuations or relationships that are inconsistent with other relevant information or
that deviate from predicted amounts, the auditor should investigate and obtain adequate
explanations and appropriate corroborative evidence.
3.15 AAS 15: AUDIT SAMPLING
Corresponding ISA: ISA 530 "AUDIT SAMPLING AND OTHER SELECTIVE TESTING
PROCEDURES"
When using either statistical or non–statistical sampling methods, the auditor should design
and select an audit sample, perform audit procedures thereon, and evaluate sample results so as
to provide sufficient appropriate audit evidence. The auditor should select sample items in
such a way that the sample can be expected to be representative of the population. After
having carried out, on each sample item, those audit procedures that are appropriate to the
particular audit objective, the auditor should analyse any errors detected in the sample, project
the errors found in the sample to the population and reassess the sampling risk.
10
3.16 AAS 16: GOING CONCERN
Corresponding ISA: ISA 570 "GOING CONCERN"
When planning and performing audit procedures and in evaluating the results thereof, the
auditor should consider the appropriateness of the going concern assumption underlying the
preparation of the financial statements. An entity’s continuance as a going concern for
foreseeable future, generally a period not to exceed one year after the balance sheet date, is
assumed in preparation of financial statements in absence of information to the contrary.
3.17 AAS 17: QUALITY CONTROL FOR AUDIT WORK
Corresponding ISA : ISA 220 "QUALITY CONTROL FOR AUDIT WORK"
Quality control policies and procedures should be implemented at both the level – of audit firm
and on individual audits. The audit firm should implement quality control policies and
procedures designed to ensure that all audits are conducted in accordance with Statements on
Auditing and Assurance Standards. The objectives of quality control policies to be adopted
will incorporate Professional Requirements, Skills and Competence, Assignment, Delegation,
Consultation, Acceptance and Retention of Clients, and Monitoring.
3.18 AAS 18: AUDIT OF ACCOUNTING ESTIMATES
Corresponding ISA: ISA 540 "AUDIT OF ACCOUNTING ESTIMATES"
The auditor should obtain sufficient appropriate audit evidence regarding reasonableness of
accounting estimates. Accounting estimate means an approximation of the amount of an item
in the absence of a precise means of measurement. The determination of an accounting
estimate may be simple or complex, depending upon the nature of the item.
3.19 AAS 19: SUBSEQUENT EVENTS
Corresponding ISA: ISA 560 "SUBSEQUENT EVENTS"
Subsequent events are significant events occurring between the balance sheet date and the date
of the auditor’s report. The auditor should consider the effect of subsequent events on the
financial statements and on the auditor’s report.
3.20 AAS 20: KNOWLEDGE OF THE BUSINESS
Corresponding ISA: ISA 310 "KNOWLEDGE OF THE BUSINESS"
The auditor should obtain knowledge of the business in performing an audit of financial
statements, sufficient to enable the auditor to identify and understand the events, transactions
11
and practices that, in the auditor’s judgment, may have a significant effect on the financial
statements or on the examination or audit report and helps in assessing inherent and control
risks and in determining the nature, timing and extent of audit procedures, identifying
problems, planning and performing the audit effectively and efficiently and evaluating audit
evidence.
3.21 AAS 21: CONSIDERATION OF LAWS AND REGULATIONS IN AN AUDIT OF
FINANCIAL STATEMENTS
Corresponding ISA: ISA 250 "CONSIDERATION OF LAWS AND REGULATIONS IN AN AUDIT OF
FINANCIAL STATEMENTS"
The auditor should recognise that non–compliance by the entity with laws and regulations may
materially affect the financial statements. It is management’s responsibility to ensure that the
entity’s operations are conducted in accordance with laws and regulations. The auditor is not
responsible for preventing non–compliance. The auditor should obtain a general understanding
of the legal and regulatory framework applicable to the entity and how the entity is complying
with that framework. The auditor should obtain written representations that management has
disclosed all known actual or possible non–compliance with laws and regulations whose
effects should be considered when preparing financial statements.
3.22 AAS 22: INITIAL ENGAGEMENTS — OPENING BALANCES
Corresponding ISA: ISA 510 "INITIAL ENGAGEMENTS – OPENING BALANCES"
For initial audit engagements, the auditor should obtain sufficient appropriate audit evidence
that the closing balances of the preceding period have been correctly brought forward to the
current period, the opening balances do not contain misstatements that materially affect the
financial statements for the current period and appropriate accounting policies are consistently
applied. The auditor should consider whether the accounting policies followed in the preceding
period, as per which the opening balances have been arrived at, were appropriate and that
those policies are consistently applied.
3.23 AAS 23: RELATED PARTIES
Corresponding ISA: ISA 550 "RELATED PARTIES"
The auditor should perform audit procedures designed to obtain sufficient appropriate audit
evidence regarding the identification and disclosure by management of related parties and the
related party transactions that are material to the financial statements. Auditor needs to have a
12
level of knowledge of the entity’s business and industry that will enable identification of the
events, transactions and practices that may have a material effect on the financial statements.
3.24 AAS 24: AUDIT CONSIDERATIONS RELATING TO ENTITIES USING
SERVICE ORGANISATIONS
Corresponding ISA: ISA 402 "AUDITING CONSIDERATION RELATING TO ENTITIES USING
SERVICE ORGANISATION"
The auditor should consider how a service organisation affects the client’s accounting and
internal control systems so as to plan the audit and develop an effective audit approach. The
policies and procedures established and executed by service organisations are physically and
operationally separate from the client’s organisation. When the service organisation executes
the client’s transactions and maintains accountability, the client may deem it necessary to rely
on policies and procedures of the service organisation.
3.25 AAS 25: COMPARATIVES
Corresponding ISA: ISA 710 "COMPARATIVES"
Existence of differences in financial reporting frameworks results in comparative financial
information being presented differently in each framework. The auditor should obtain
sufficient appropriate audit evidence that the corresponding figures meet the requirements of
the relevant financial reporting framework. This involves verifying whether the accounting
policies used for the corresponding figures are consistent with those of the current period and
whether corresponding figures agree with the amounts and other disclosures presented in the
prior period.
3.26 AAS 26: TERMS OF AUDIT ENGAGEMENTS
Corresponding ISA: ISA 210 "TERMS OF AUDIT ENGAGEMENT"
The auditor and the client should agree on the terms of the engagement. The agreed terms
would need to be recorded in an audit engagement letter or other suitable form of contract. The
form and content of audit engagement letter may vary for each client, but it would generally
include reference to the objectives of the audit; Management’s responsibility for the financial
statements, selection and application of appropriate accounting policies and accounting
standards.
13
3.27 AAS 27: COMMUNICATION OF AUDIT MATTERS WITH THOSE CHARGED
WITH GOVERNANCE
Corresponding ISA: ISA 260 "COMMUNICATION OF AUDIT MATTERS WITH THOSE CHARGED
WITH GOVERNANCE"
The auditor should communicate audit matters to those charged with governance of an entity.
Such matters may include Overall scope of the audit, the selection of or changes in, significant
accounting policies, the potential effect on the financial statements of any significant risks and
exposures, such as pending litigation, adjustments to financial statements arising out of audit
that have, or could have, a significant effect on the entity’s financial statements; material
uncertainties related to events and conditions that may cast significant doubt on the entity’s
ability to continue as a going concern, disagreements with management about matters that
could be significant to the entity’s financial statements or the auditor’s report; expected
modifications to the auditor’s report.
3.28 AAS 28: AUDITOR’S REPORT ON FINANCIAL STATEMENTS
Corresponding ISA: ISA 700 "THE AUDITOR’S REPORT ON FINANCIAL STATEMENTS"
The auditor should review and assess the conclusions drawn from the audit evidence obtained
as the basis for the clearly written expression of an opinion on the financial statements. The
auditor’s report includes basic elements such as Title, Addressee, Opening or introductory
paragraph, Scope paragraph (describing the nature of an audit), Opinion paragraph, Date of the
report, Place of signature, and the Auditor’s signature. Unqualified opinion should be
expressed when the auditor concludes that the financial statements give a true and fair view.
The Auditor’s report is considered to be qualified, disclaimer or adverse opinion when it
contains matters which affect their opinion.
3.29 AAS 29: AUDITING
ENVIRONMENT
IN
A
COMPUTER
INFORMATION
SYSTEMS
Corresponding ISA: ISA 401 "AUDITING IN A COMPUTER INFORMATION SYSTEMS
ENVIRONMENT"
The overall objective and scope of an audit does not change in a Computer Information
Systems (CIS) environment. However, the use of a computer changes the processing, storage,
retrieval and communication of financial information and may affect the accounting and
internal control systems employed by the entity. The auditor should consider the effect of a
CIS environment on the audit. The auditor should have sufficient knowledge of the computer
information systems to plan, direct, supervise, control and review the work performed.
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3.30 AAS 30: EXTERNAL CONFIRMATIONS
Corresponding ISA: ISA 505 "EXTERNAL CONFIRMATIONS"
External confirmation is the process of obtaining and evaluating audit evidence through a
direct communication from a third party in response to a request for information about a
particular item. Before making use of external confirmations, the auditor should consider
materiality, the assessed level of inherent and control risk, and how the evidence from other
planned audit procedures will reduce audit risk to an acceptably low level. The auditor should
employ external confirmation procedures in consultation with the management. External
confirmations are mostly sought for account balances and their components but they are not to
be restricted to these items only.
3.31 AAS 31: ENGAGEMENTS TO COMPILE FINANCIAL INFORMATION
Corresponding ISA: ISA 930 "ENGAGEMENTS TO COMPILE FINANCIAL INFORMATION"
In such types of engagements, the accountant uses accounting expertise as against auditing
expertise to collect, classify and summarise financial information. The accountant should
comply with the "Code of Ethics", issued by ICAI. It should be ensured that there is a clear
understanding between the client and the accountant regarding the terms of the engagement by
means of an engagement letter or such other suitable form of contract. Accountant should
obtain a general knowledge of the business and operations of the entity and should be familiar
with the accounting principles. If any accounting standard is not complied with, the fact should
be disclosed in the notes to accounts. If the accountant becomes aware of any material
misstatement, s/he must report this to the management or must withdraw from the engagement
if the management doesn’t act.
3.32 AAS 32: ENGAGEMENTS TO PERFORM AGREED-UPON PROCEDURES
REGARDING FINANCIAL INFORMATION
Corresponding ISA: ISA 920 "ENGAGEMENTS TO PERFORM AGREED–UPON PROCEDURES
REGARDING FINANCIAL INFORMATION"
In an engagement to perform agreed–upon procedures, the auditor is engaged by the client to
issue a report of factual findings, based on specified procedures performed on specified
matters of a financial statement. As the auditor simply provides a report of the factual findings
of agreed–upon procedures, no assurance is expressed by them in the report. The auditor
should comply with the Code of Ethics. The terms of the engagement should be well defined
so as to avoid any misunderstandings. The auditor should plan the work so that an effective
15
engagement will be performed and documentation of important matters to be done which
provides evidence to support the report of factual findings. The report should also clearly
mention that no audit or review has been performed.
3.33 AAS 33: ENGAGEMENTS TO REVIEW FINANCIAL STATEMENTS
Corresponding International Standard on Review Engagements (ISREs) 2400: "ENGAGEMENTS TO
REVIEW FINANCIAL STATEMENTS"
This standard provides extensive guidance on the procedures and enquiries to be employed by
the auditors on quarterly unaudited financial results of companies listed on stock exchanges in
India which are subject to limited review by the chartered accountants. Unlike an audit, a
review engagement is based mainly on analytical procedures and inquiries conducted by the
auditor. This standard deals with issues such as scope of the review engagement, level of
assurance, terms of engagement, planning, documentation, review procedures, conclusions and
reporting requirements in the review engagements.
In planning a review of financial statements, the auditor should obtain or update the
knowledge of the business including consideration of the entity’s organisation, accounting
systems, operating characteristics and the nature of its assets, liabilities, revenues and
expenses. The auditor should apply judgment in determining the specific nature, timing and
extent of review procedures.
3.34 AAS 34: AUDIT EVIDENCE — ADDITIONAL CONSIDERATION FOR
SPECIFIC ITEMS
Corresponding ISA: ISA 501 "AUDIT EVIDENCE — ADDITIONAL CONSIDERATIONS FOR
SPECIFIC ITEMS"
The objective of this standard is to establish standards on auditor’s responsibilities, audit
procedures and provide guidance with respect to certain specific financial statement amounts
and other disclosures. It provides guidance with respect to definition, procedures, management
representations and audit conclusions and reporting for each of following parts. This standard
assists the auditor to obtain audit evidence with respect to following aspects:
PART A: ATTENDANCE AT PHYSICAL INVENTORY COUNTING
When inventory is material to the financial statements, the auditor should obtain sufficient
appropriate audit evidence regarding its existence and condition by attendance at physical
inventory counting unless impracticable.
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PART B: INQUIRY REGARDING LITIGATION AND CLAIMS
The auditor should carry out audit procedures in order to become aware of any litigation and
claims involving the entity which may have a material effect on the financial statements.
PART C: VALUATION AND DISCLOSURE OF LONG- TERM INVESTMENTS
Audit procedures regarding long–term investments ordinarily include obtaining audit evidence
with respect to their ownership and existence as to whether the entity has the ability to
continue to hold the investments on a long-term basis and discussing with management
whether the entity will continue to hold the investments as long–term investments and
obtaining written representations to that effect.
PART D: SEGMENT INFORMATION
The auditor considers segment information in relation to financial statements taken as a whole,
and is not required to apply auditing procedures that would be necessary to express an opinion
on the segment information standing alone. Audit procedures regarding segment information
ordinarily consist of analytical procedures and other audit tests appropriate in the
circumstances.
3.35 AAS 35:
INFORMATION
THE
EXAMINATION
OF
PROSPECTIVE
FINANCIAL
Corresponding ISAE: ISAE 3400 "The Examination of Prospective Financial Information"
In an engagement to examine prospective financial information, the auditor should obtain
sufficient appropriate evidence as to whether:
a. management’s best–estimate assumptions are not unreasonable and, in the case of
hypothetical assumptions, such assumptions are consistent with the purpose of
information
b. prospective financial information is properly prepared on the basis of assumptions
c. prospective financial information is properly presented and all material
assumptions are adequately disclosed, including whether they are best–estimate
assumptions or hypothetical assumptions and
d. prospective financial information is prepared on a consistent basis with historical
financial statements, using appropriate accounting principles
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AUDITOR SHOULD:

not accept, or should withdraw from, an engagement when assumptions are clearly
unrealistic or when s/he believes that prospective financial information will be
inappropriate for its intended use

obtain a sufficient level of knowledge of business and become familiar with
entity’s process to be able to evaluate whether all significant assumptions required
for preparation of prospective financial information have been identified

consider extent to which reliance on entity’s historical financial information is
justified. Auditor should consider period of time covered by prospective financial
information. Sufficient appropriate evidence supporting such assumptions would be
obtained from internal and external sources

would consider whether, when hypothetical assumptions are used, all significant
implications of such assumptions have been taken into consideration

should obtain written representations from management regarding intended use of
prospective financial information, completeness of significant management
assumptions and management’s acceptance of its responsibility for prospective
financial information

should assess the presentation and disclosures in prospective financial statement are
adequate

should document matters, which are important in providing evidence to support his
report on examination of prospective financial information, and evidence that such
examination was carried out in accordance with this AAS
4. COMPLIANCE WITH AUDITING STANDARDS
While discharging their attest functions, it is the duty of the members of the ICAI to ensure
that the Auditing Standards are followed in the audit of financial information covered by their
audit reports. If for any reason the member is unable to perform an audit in accordance with
the generally accepted auditing standards, his report should draw attention to any material
departures therefrom, failing which he would be held guilty of professional misconduct under
clause 9 of Part 1 of the Second Schedule to the Chartered Accountants Act, 1949.
5. CHALLENGES
The accounting and auditing structure in corporate sector faced a challenge when a scam broke
out in the major IT Company called Satyam. The company had falsified its financial
statements by inflating its revenues and cash assets. The auditors had either not detected the
misstatements or had colluded with the company to falsify the financial statements. The scam
may have perhaps been possible because the auditors had continued their engagement with the
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Company over a considerable period and were also advising the Company in financial
matters. The financial scam was the result of non-application of the Auditing Standards, as the
auditors had developed related party relations with the Company by advising the Company in
financial matters which lead to development of conflict of interest.. Subsequent to the
revelation of the financial scam, the ICAI issued directions that henceforth the working papers
of the auditors engaged in audit would be subjected to peer review i.e. the work of one auditor
would be reviewed by another auditor to see whether the audit was conducted in consonance
with the Auditing Standards and with due diligence so that such financial scams could be
detected earlier. The ICAI has also taken a decision to rotate the auditors engaged in the audit
of corporate sector on regular basis to ensure that the auditors carry out their work with due
diligence, fully knowing that their work / audit report would be reviewed by subsequently
engaged auditors.
The SAI India appoints the Auditors from the ICAI for the audit of Public Sector Companies
on rotation basis. SAI India also gives directions to these auditors on how to conduct the audit
of these Public Sector Companies. The Audit Reports submitted by these Auditors is also
subjected to Supplementary Audit by the SAI India. Therefore the problem of rotation of
auditors in the Public Sector companies has already been addressed by the SAI India.
6. CONCLUSION
Audit in public sector corporate has withstood the test of time and has succeeded in giving
reasonable assurance to the stakeholders.
The existing arrangement of audit in Public Sector Corporate Entities harmonises the strengths
of private sector auditors and public sector auditors.
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