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8/19/2019 Standards on Auditing Part 6 2
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Standards on Auditing-Part 6IPCC Paper 6, Auditing & Assurance, Volume 2
CA. Anurag Singal
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Learning Objectives
SA-570 SA-580 SA-600
SA-610 SA-620
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Scope of this SA
Deals with the auditor’s responsibility in the auditof financial statements w.r.t.
Management’s use of the Going Concern assumption in the preparation and presentation offinancial statements.
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Overall Objectives of the SA
To obtain sufficient appropriate audit evidence about the appropriateness ofmanagement’s use of the going concern assumption
To conclude, based on the audit evidence obtained, whether a materialuncertainty exists related to events or conditions that may castsignificant doubt on the entity’s ability to continue as a going concern
To determine the implications for the auditor’s report
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Going Concern Assumption
An entity is viewed as continuing in business for the foreseeablefuture.
General purpose financial statements are prepared on a goingconcern basis, unless management either intends to liquidatethe entity or to cease operations
When the use of the going concern assumption is appropriate,
assets and liabilities are recorded on the basis that the entity willbe able to realize its assets and discharge its liabilities in thenormal course of business.
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Responsibilities of Management
7
The financial reporting framework may require the management to makean assessment of the entity’s ability to continue as a going concern andprepare the financial statements on a going concern basis
Management’s responsibility includes a responsibility to assess theentity’s ability to continue as a going concern even if the financialreporting framework does not include an explicit requirement to do so.
Making a judgment, at a particular point in time, about inherently uncertainfuture outcomes of events or conditions.
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Responsibilities of the Auditor
8
The auditor’s responsibility is to obtain sufficient appropriate audit evidence about theappropriateness of management’s use of the going concern assumption
To conclude whether there is a material uncertainty about the entity’s ability to continue asa going concern
The potential effects of inherent limitations on the auditor’s ability to detect material
misstatements are greater for future events or conditions that may cause an entity to ceaseto continue as a going concern.
The absence of any reference to going concern uncertainty in an auditor’s report cannot beviewed as a guarantee as to the entity’s ability to continue as a going concern.
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Risk Assessment Procedures and
Related Activities
9
The auditor shall consider whether there are events or conditions that maycast significant doubt on the entity’s ability to continue as a going concern.
He will check whether management has already performed a preliminaryassessment of the entity’s ability to continue as a going concern
The auditor shall remain alert throughout the audit for audit evidence ofevents or conditions that may cast significant doubt on the entity’s ability tocontinue as a going concern.
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Financial Indicators
10
Net liability or
net currentliability position.
Adverse keyfinancial ratios.
Arrears ordiscontinuanceof dividends.
Inability to pay
creditors on duedates.
Change fromcredit to cash-
on-deliverytransactions with
suppliers.
Inability tocomply with the
terms of loanagreements.
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Operating Indicators
11
Management intentionsto liquidate the entity or
to cease operations.
Shortages of importantsupplies.
Emergence of a highlysuccessful competitor.
Loss of a major market,key customer(s),
franchise, license, or
principal supplier(s).
Loss of keymanagement without
replacement.
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Others
12
Non-compliance withcapital or other
statutoryrequirements.
Uninsured orunderinsured
catastrophes whenthey occur.
Pending legal orregulatory
proceedings against
the entity that may, ifsuccessful, result inclaims that the entityis unlikely to be able
to satisfy.
Changes in law orregulation or
government policyexpected toadversely affect the
entity.
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Evaluating Management’s Assessment
13
The entity’s ability to continue as a going concern.
the auditor shall cover the same period as that used by management to
make its assessment as required by the applicable financial reportingframework
Period covered is less than 12 months from the date of the financialstatements as defined in SA 560, the auditor shall request managementto extend its assessment period to at least 12 months.
the auditor shall consider whether management’s assessment includes allrelevant information of which the auditor is aware as a result of the audit.
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Audit Conclusions and Reporting
15
In the auditor’s judgment, a material uncertainty existsrelated to events or conditions that, individually orcollectively, may cast significant doubt on the entity’sability to continue as a going concern.
A material uncertainty exists when the magnitude of itspotential impact and likelihood of occurrence is such that,in the auditor’s judgment, appropriate disclosure of thenature and implications of the uncertainty is necessary
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Communication with Those Charged
with Governance
Governance events orconditions identified that
may cast significant doubton the entity’s ability to
continue as a going
concern.
Whether the events orconditions constitute amaterial uncertainty?
Whether the use of thegoing concern assumption
is appropriate in thepreparation and
presentation of thefinancial statements?
The adequacy of related
disclosures in the financialstatements.
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Significant Delay in the Approval of
Financial Statements
Auditor shall inquire as to the reasons for the delay.
When the auditor believes that the delay could berelated to events or conditions relating to the goingconcern assessment, the auditor shall perform thoseadditional audit procedures necessary
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Question
List theindications uponwhich the Auditor
should assessthe
appropriatenessof going concern
assumption.
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Financial Indicators
19
Net liability or
net currentliability position.
Adverse keyfinancial ratios.
Arrears ordiscontinuanceof dividends.
Inability to paycreditors on due
dates.
Change fromcredit to cash-on-delivery
transactions withsuppliers.
Inability tocomply with the
terms of loanagreements.
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Operating Indicators
20
Management intentionsto liquidate the entity orto cease operations.
Shortages of importantsupplies.
Emergence of a highlysuccessful competitor.
Loss of a major market,key customer(s),
franchise, license, orprincipal supplier(s).
Loss of key
management withoutreplacement.
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Others
21
Non-compliance withcapital or other
statutoryrequirements.
Uninsured orunderinsured
catastrophes whenthey occur.
Pending legal orregulatory
proceedings againstthe entity that may, ifsuccessful, result inclaims that the entityis unlikely to be able
to satisfy.
Changes in law orregulation or
government policyexpected to
adversely affect theentity.
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Question
It is now an accepted fact that anauditor cannot take the “Going
concern” assumption for granted.The problem has become acute inview of ever growing sickness in
our industries.
You are required to prepare achecklist designed to test the
assumption that a particular client
organization is in fact a goingconcern
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Answer-1
Checklist: If the answers to
the following questions are“Yes”, then the going concernassumption may not be
appropriate, subject to otherfindings of the auditor.
1. Capital structure andfinancial aspects:
a. Does the concern have ahigh Debt Equity Ratio?
b. Is the concern heavily orincreasingly dependent upon
short-term finance?
c. Is the company utilizing theborrowing facility to the
maximum or whether there isany scope for further
borrowing?
d. Are leasing arrangementspreferred to capital
expenditure?
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Answer-3
3.Working capitalaspects:
a. Is there a gradualand significant decline
in current ratio, i.e.
current assets Currentliabilities?
b. Are purchasesbeing deferred,
thereby reducing
stocks to dangerouslylow levels?
c. Is there a markedslow down in the
collection of sundryDebtors?
d. Is there any inabilityto take advantage of
cash discounts fromcreditors?
e. Is there any
increase in the timetaken to pay creditors?
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Answer-4
4.Profit and Loss Account Aspects:
a. Does theconcern incur
substantial cashlosses?
b. Is there a steadydecline in the rate
of profitability?
c. Is there a growthbeyond limits such
that the company isover trading?
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SA-580 (Revised)
Written Representations
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Scope of this SA
Deals with the auditor’s responsibility toobtain written representations frommanagement
and, where appropriate, those charged withgovernance.
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Overall Objectives of the Auditor
To obtain written representations from management and, whereappropriate, those charged with governance that they believe that they havefulfilled their responsibility for the preparation of the financial statements
the completeness of the information provided to the auditor
To respond appropriately to written representations provided bymanagement and, where appropriate, those charged with governance
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Written Representations
30
A written statement by management provided tothe auditor to confirm certain matters or tosupport other audit evidence.
Written representations in this context do notinclude financial statements, the assertionstherein, or supporting books and records.
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Written Representations as Audit
Evidence
Necessary information that the auditor requires in connection with the audit of the entity’sfinancial statements
Written representations are audit evidence.
They do not provide sufficient appropriate audit evidence on their own about any of the
matters with which they deal.
The fact that management has provided reliable written representations does not affect thenature or extent of other audit evidence that the auditor obtains about the fulfillment ofmanagement’s responsibilities, or about specific assertions.
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Management from Whom Written
Representations Requested
32
The auditor shall request writtenrepresentations from management withappropriate responsibilities for thefinancial statements and knowledge ofthe matters concerned
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Written Representations about Management’s
Responsibilities
33
Preparation of theFinancial
Statements
The auditor shall requestmanagement to provide aWR that it has fulfilled its
responsibility for thepreparation of the financialstatements in accordancewith the applicable FRF,
including where relevanttheir fair presentation, asset out in the terms of the
audit engagement
InformationProvided and
Completeness ofTransactions
It has provided the auditorwith all relevant information
and access as agreed inthe terms of the audit
engagement
All transactions have beenrecorded and are reflectedin the financial statements
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Other Written Representations
34
In addition to
such requiredrepresentations,the auditor
determines thatit is necessary
to obtain one or
more writtenrepresentations
to support otheraudit evidencerelevant to the
financialstatements
or one or more
specificassertions in thefinancial
statements, theauditor shallrequest such
other writtenrepresentations.
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Date of and Period s) Covered by
Written Representations
35
The date of the writtenrepresentations shall beas near as practicable to,but not after, the date ofthe auditor’s report on
the financial statements.
The writtenrepresentations shall be
for all financialstatements and period(s)
referred to in the
auditor’s report.
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Form of Written Representations
36
The writtenrepresentations
shall be in the formof a representationletter addressed to
the auditor.
If law or regulationrequires
management tomake written publicstatements about
its responsibilities,
the auditordetermines thatsuch statements
provide some or allof therepresentations
the relevantmatters covered by
such statementsneed not be
included in therepresentation
letter.
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Doubt as to the Reliability of Written Representations
37
If the auditor has concerns about the competence, integrity, ethicalvalues or diligence of management, or about its commitment to orenforcement of these, the auditor shall determine
Whether written representations are inconsistent with other auditevidence, the auditor shall perform audit procedures to attempt toresolve the matter
If the auditor concludes that the written representations are notreliable, the auditor shall take appropriate actions, includingdetermining the possible effect on the opinion in the auditor’s report
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Requested Written Representations
Not Provided
38
Discuss the matter with management
Re-evaluate the integrity of management andevaluate the effect that this may have on thereliability of representations
Take appropriate actions, including determining thepossible effect on the opinion in the auditor’s report
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Effect on Auditors Report
that the written representations required are not reliable ORmanagement does not provide the written representations
The auditor concludes that there is sufficient doubt about theintegrity of management such
The auditor shall disclaim an opinion on the financialstatements
Audit Procedures on Written
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Audit Procedures on Written
Representations
YES
Written Representation =necessary audit evidence
Written Representation ≠sufficient appropriate evidence
WRITTEN REPRESENTATION= AUDIT EVIDENCE ?
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Question
Discuss the position of anauditor in case he choosesto rely upon the certificates
from the management in
respect of Closing Stock,Cash in Hand etc.
List the circumstancesunder which he will be
justified in accepting and
relying upon the certificates.
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Answer-1
Role of managementrepresentations:
a. Management representationsare generally given for certifying
the value of inventories, provisionfor Liabilities, Disclosure of
contingent Liabilities, etc. Theseare intended to impress upon the
Directors their responsibility foraccounts.
b. Mere Possession of suchcertificates does not absolve the
auditor from carrying out a properaudit. These certificates can onlyact as second line of defense for
an auditor who has carried out hiswork with reasonable care, skill
and diligence.
c. The auditor should not seek or
accept certificates from themanagement when the subjectmatter is such that it is capable ofdirect verification by the auditor
himself.
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Answer-2
Situations whenmanagement certificates can
be justifiable:
a. The subject matter shouldnot be capable of direct
verification by the Auditor.
b. The matter relates toitems which are beyond the
competence of aprofessionally qualified
Accountant.
c. There are proper recordsand reliable internal checksin the client’s system that
can enable the directors toprepare and issue thecertificates.
d. The certificate should beprima facie in agreement
with the records maintained.
e. The certificate should beput to common-sense tests
by the auditor.
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Answer-3
In case of Third partycertificates e.g. Bankers,
Architects, Agents etc. thefollowing rules of reliance
may be taken into account:
a. The party issuing thecertificate is reputable and
trustworthy,
b. The certificates relate toan item which is normallydealt with or held by such
party,
c. The auditor himself is notin a position to verify the
item because of its technicalnature or because it would
be too costly or cumbersomefor him to do so,
d. The certificate prima facieis reliable and reasonable,
and
e. Reference to the thirdparty if available in the booksand documents of the client
as in possession of theconcerned goods, property
or securities belonging to theclients
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SA-600Using the Work of Another
Auditor
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Scope of this SA
When the principal auditor uses thework of another auditor, the principalauditor should determine how thework of the other auditor wil l affectthe audit
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Definition
48
Principal auditor
• The auditor withresponsibility forreporting on thefinancial informationof an entity
• when that financialinformation includesthe financialinformation of oneor morecomponents auditedby another auditor.
Other auditor
• An auditor, otherthan the principalauditor, withresponsibility forreporting on thefinancial informationof a component
• which is included inthe financialinformation auditedby the principalauditor.
Component
• A division, branch,subsidiary, jointventure, associatedenterprises or otherentity
• whose financialinformation isincluded in thefinancial informationaudited by theprincipal auditor.
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Considerations by Principal Auditor
50
When planning to use the work of another auditor, the principal auditorshould consider the professional competence of the other auditor
The principal auditor would inform the other auditor of matters such as areasrequiring special consideration, procedures for the identification of inter-component transactions that may require disclosure and the time-table forcompletion of audit
The principal auditor might discuss with the other auditor the audit proceduresapplied or review a written summary of the other auditor’s procedures andfindings which may be in the form of a completed questionnaire or check-list
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Considerations by Principal Auditor-2
51
He may also decide that supplemental tests of the records or the financial statementsof the component are necessary.
The principal auditor should document in his working papers the componentswhose financial information was audited by other auditors;
Their significance to the financial information of the entity as a whole; thenames of the other auditors; and any conclusions reached that individualcomponents are not material.
The principal auditor should enquire about the limitations on his work
In case of foreign component, consider another auditors qualification and experience
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Co-ordination Between Auditors
52
There should besufficient liaison
between theprincipal auditorand the other
auditor.
The principalauditor may find itnecessary to issue
writtencommunication(s)
to the otherauditor.
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Reporting Considerations
53
When the
principalauditorconcludes thatthe work of theother auditor
cannot be used
the principalauditor has notbeen able to
performsufficient
additionalprocedures
regarding thefinancial
information ofthe componentaudited by the
other auditor
the principalauditor should
express a
qualifiedopinion ordisclaimer of
opinionbecause thereis a limitation
on the scope ofaudit.
If anotherauditor issues
modifiedauditor's report,
the principalauditor shouldconsider
whether thesubject of themodification isof such nature
andsignificance
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Division of Responsibility
54
When the principal auditor has tobase his opinion on the financial
information of the entity as awhole
relying upon the statements andreports of the other auditors, hisreport should state clearly the
division of responsibility
for the financial information ofthe entity by indicating the extentto which the financial information
of components audited by theother auditors have beenincluded in the financialinformation of the entity
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Reporting
Reporting
If work of anotherauditor used in
preparation of FS.Qualified opinion
Is not able toperform sufficient
additionalprocedures
Disclaimer ofopinion
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Question-1
Write shortnotes on
coordinationbetweenprincipal
auditor and
other auditor.
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Answer
57
There should besufficient liaison
between the
principal auditorand the other
auditor.
The principalauditor may find it
necessary toissue writtencommunication(s)
to the otherauditor.
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Question-2
Discuss thereporting
considerationsof the principalauditor under
SA 600.
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SA-610Using The Work of Internal
Auditor
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Scope of this SA
Deals with the external auditor’s responsibilities
Regarding the work of internal auditors when theexternal auditor has determined, in accordance withSA 315, that the internal audit function is likely to be
relevant
R l i hi b h I l A di
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Relationship between the Internal Audit
Function and the External Auditor
62
The role and objectives of the internalaudit function are determined by
management and, where applicable,TCWG.
Irrespective of the degree of autonomyand objectivity of the internal audit
function, such function is not independentof the entity as is required of the externalauditor when expressing an opinion on
financial statements.
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Objectives of the external auditor
Where the entity has an internal audit function
a) Whether, and to what extent, to use specific work of the internal auditors; and
b) If so, whether such work is adequate for the purposes of the audit.
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Internal Audit Function
65
An appraisal activity established or provided as a service to theentity.
Its functions include, amongst other things, examining, evaluatingand monitoring the adequacy and effectiveness of internal control.
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Internal Auditors
66
Those individuals who perform the activities of the internal audit function.
Internal auditors may belong to an internal audit department or equivalentfunction.
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Determining whether and to what extent to use
the work of the Internal Auditors
67
Whether the work of theinternal auditors is likely
to be adequate forpurposes of the audit
The planned effect of thework of the internalauditors on the nature,timing or extent of the
external auditor’sprocedures.
The external auditorshall evaluate:
A)The objectivity of theinternal audit function;
B)The technicalcompetence of theinternal auditors;
C)Whether the work ofthe internal auditors islikely to be carried outwith due professional
care; and
D)Whether there is likelyto be effective
communication betweenthe internal auditors and
the external auditor.
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Determining Whether and to What Extent to
Use the Work of the Internal Auditors-2
68
In determiningthe plannedeffect of the
work of theinternal
auditors on thenature, timing
or extent of theexternalauditor’s
procedures, theexternal auditorshall consider:
The nature andscope of
specific workperformed
The assessedrisks of materialmisstatement
at the assertionlevel for
particularclasses of
transactions,account
balances, anddisclosures;
and
The degree ofsubjectivity
involved in theevaluation of
the auditevidencegathered
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Using Specific Work of the Internal Auditors
69
The external auditor shall
evaluate and perform auditprocedures on that work to
determine its adequacy
The work was performed by
internal auditors havingadequate technical training
and proficiency;
The work was properlysupervised, reviewed and
documented;
Adequate audit evidencehas been obtained to enablethe internal auditors to draw
reasonable conclusions;
Conclusions reached areappropriate in the
circumstances and anyreports prepared by the
internal auditors areconsistent with the results of
the work performed; and
Any exceptions or unusualmatters disclosed by the
internal auditors are properlyresolved.
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Documentation
70
When the externalauditor uses specificwork of the internal
auditors,
the external auditorshall documentconclusions regardingthe evaluation of the
adequacy of the work ofthe internal auditors,
the audit proceduresperformed by the
external auditor on thatwork
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Question
What aspects should beconsidered in the evaluation of
internal Audit function?
Or You have been appointed asauditor of a large industrial
company which has anestablished internal audit
department. You are required to
state the main aspects youwould consider to find out theeffectiveness of the department.
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Answer
72
Whether the work of theinternal auditors is likely
to be adequate forpurposes of the audit
The planned effect of thework of the internal
auditors on the nature,timing or extent of the
external auditor’sprocedures.
The external auditorshall evaluate:
A)The objectivity of theinternal audit function;
B)The technicalcompetence of theinternal auditors;
C)Whether the work ofthe internal auditors islikely to be carried outwith due professional
care; and
D)Whether there is likelyto be effective
communication betweenthe internal auditors and
the external auditor.
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SA-620
(REVISED)USING THE WORK OF AN
AUDITOR’S EXPERT
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Scope of this SA
Deals with the auditor’s responsibilities regarding theuse of an individual or organization's work
In a field of expertise other than accounting orauditing, when that work is used to assist the auditorin obtaining sufficient appropriate audit evidence
Applicability
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Applicability
75
Situations where the auditor useswork of an individual or organizationpossessing expertise in a field other
than accounting or auditing,
whose work in that field is used bythe entity to assist in preparing the
financial statements(amanagement’s expert)
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The Auditor’s Responsibility for the
Audit Opinion
The auditor has sole responsibility for the audit opinion expressed, and that responsibilityis not reduced by the auditor’s use of the work of an auditor’s expert.
Nonetheless, if the auditor using the work of an auditor’s expert, having followed thisSA, concludes that the work of that expert is adequate for the auditor’s purposes,
the auditor may accept that expert’s findings or conclusions in the expert’s field asappropriate audit evidence.
Objective of the Auditor
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Objective of the Auditor
To determine whether to use the workof an auditor’s expert and
If using the work of an auditor’s expert,to determine whether that work is
adequate for the auditor’s purposes
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DEFINITION
A dit ’ E t
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Auditor’s Expert
79
An individual or organisation possessing expertise in a field other thanaccounting or auditing,
Experts work is used by the auditor to assist the auditor in obtainingsufficient appropriate audit evidence.
An auditor’s expert may be either an auditor’s internal expert (who is a partner orstaff, including temporary staff, of the auditor’s firm or a network firm), or anauditor’s external expert.
M t’ E t
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Management’s Expert
80
An individual or organisation possessing expertise in a field otherthan accounting or auditing,
whose work in that field is used by the entity to assist the entity inpreparing the financial statements.
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Nature, Timing and Extent of Audit
Procedures
82
The nature ofthe matter towhich that
expert’s workrelates;
The risks ofmaterial
misstatementin the matter
Thesignificance
of thatexpert’s work
The auditor’s
knowledge ofand
experiencewith previous
workperformed bythat expert;
and
Whether thatexpert issubject to the
auditor’sfirm’s quality
controlpolicies andprocedures.
The Competence, Capabilities and Objectivity
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of the Auditor’s Expert
83
The auditor shall evaluatewhether the auditor’s expert
has the necessarycompetence, capabilities and
objectivity for the auditor’s
purposes.
In the case of an auditor’s
external expert, theevaluation of objectivity shall
include inquiry regardinginterests and relationshipsthat may create a threat to
that expert’s objectivity.
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Agreement with the Auditor’s Expert
85
The nature, scope andobjectives of that expert’s
work
The respective roles andresponsibilities of the
auditor and that expert
The nature, timing andextent of communication
between the auditor andthat expert, including theform of any report to beprovided by that expert
The need for the
auditor’s expert toobserve confidentialityrequirements.
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Evaluating the Adequacy of the
Auditor’s Expert’s Work
86
The relevanceand
reasonablenessand their
consistencywith other audit
evidence
use ofsignificant
assumptionsand methods,the relevance
andreasonableness
of thoseassumptions
and methods in
thecircumstance
work involvesthe use of
source data thatis significant tothat expert’s
work, therelevance,
completeness,and accuracy of
that source
data.
Agree with thatexpert on thenature and
extent of furtherwork to be
performed bythat expert
Perform furtheraudit
proceduresappropriate to
thecircumstances.
Reference to the Auditor’s Expert in
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the Auditor’s Report
If the auditor makesreference to the work of an
auditor’s expert in theauditor’s report
such reference isrelevant to an
understanding of amodification to theauditor’s opinion,
the auditor shall indicatein the auditor’s reportthat such reference doesnot reduce the auditor’s
responsibility for thatopinion.
The auditor shall not refer tothe work of an auditor’s
expert in an auditor’s reportcontaining an unmodifiedopinion unless required bylaw or regulation to do so.
If such reference isrequired by law or
regulation,
the auditor shall indicatein the auditor’s reportthat the reference doesnot reduce the auditor’s
responsibility for theaudit opinion
Reporting
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Reporting
Reference to auditor's expert in audit report
if unmodified opinion
- no reference reqd.
- But if reqd by law,heshould state that suchref. does not reduces
auditor's responsibilities
if modified opinion
- reference should begiven in audit report
indicating that such ref.does not reduces
auditor'sresponsibilities.
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Answer
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Answer
a. The auditor can seekaudit evidence from an
expert, eitherindependently or inconjunction with the
client.
b. Such audit evidence
may be in the form ofreports, opinions,
valuations and otherstatements like legalopinions concerning
interpretations ofagreements, statutes,
regulations,notifications, etc.
c. Where the expert’sopinion is inconsistentwith the provisions oflaw, then the auditor
should deal with such
inconsistency suitably.He may do it by
discussing the issuewith the Auditee client
or the concernedexpert.
d. However, the auditorshould ensure that the
expert’s is prima faciedependable under thecircumstances before
relying upon the same.
A 2
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Answer-2
a. The auditor should seethat the advocate’s opinionis prima facie dependable.
b. The situation describedabove clearly brings out theinconsistency between the
opinion and the legalprovisions with regard to
certain items.
Such inconsistency couldhave been detected and
corrected if
the auditor has soughtassurance as to the
appropriateness of thesource data, assumptionsinvolved therein and themethods adopted by the
expert.
c. The auditor could havedetected the inconsistencyin legal opinions if he hadgone through the same
carefully.
This is evident havingregard to the wide differencein the liability worked out by
the assessing authority.
(Rs 5 cr Vs Rs 15 cr)
d. Under the circumstances,the auditor should haverejected the opinion and
insisted upon making properprovision.
The opinion is basicallyerroneous.
Lesson Summary
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Lesson Summary
SA-570 SA-580 SA-600
SA-610 SA-620
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Thank You