ACCOUNTING STANDARD INTRODUCTION

Accounting standard represents a codification of the best practices in the field of auditing. Auditing standards are therefore, the performance benchmarks for the auditors. Auditing standards contain guidance for the professionals on how they carry out their professional engagements. They cover the basic principles and essentials procedures to apply those basic principles that relates to the judgment or behavior. Auditing standards are framed to ensure probity, integrity and quality in the professional's work, essential for ensuring the confidence of the society in the financial information being reported by the business enterprises.

NEED FOR ACCOUNTING STANDARDS.

Accounting standards play a critical role in Ensuring application of accepted financial reporting standards thereby lending credibility and wider acceptability to the financial statements. Providing benchmark against which the performance of the members can be measured and evaluated at global level also. Ensuring compliance with the applicable legislative and regulatory framework. Ensuring right approach of the professionals in complex/ emerging areas of audit. Ensuring consistency and quality in the work performed by the professionals

SA AND OBJECTIVES OF AUDIT

FS( financial statements) in accordance with financial reporting framework: The standard on auditing are formulated by the ICAI in the context of an audit of financial statements by an independent auditor. the objective of an audit of financial statements is to enable the auditor to express an opnion whether the financial statements are prepared, in all material aspects, in accordance with an application financial reporting framework. it is undertaken to enhance the degree of confidence of intended users in the financial statements. the standards on auditing, taken together, provide the standards for the auditors work in fulfilling the objective. FS free from material misstatements: In conducting an audit, the overall objective of the auditor is to obtain reasonable assurance about whether the financial statement as a whole are free from material misstatement, whether due to fraud or error, and to report on the financial statements in accordance with the auditor's findings. Owing to the inherent limitations of an audit, there is an unavoidable risk that some material misstatements of the financial statements will not be detected, even though the audit is properly planned and performed in accordance with the SA's. In all cases, when this overall objective has not been or cannot be achieved, the SA's require the auditor to modify the auditor's opinion accordingly or withdraw from the engagement as may be appropriate, depending upon the facts and circumstances of each case engagement as may be appropriate, depending upon the facts and circumstance sin each case.

OBJECTIVES
The objectives of the auditor are to: (a) Form an opinion on the financial statements based on an evaluation of the conclusions drawn from the audit evidence obtained; and (b) Express clearly that opinion through a written report that also describes the basis for the opinion.

REQUIREMENTS
SHALL: The requirements of each SA are contained in a separate section and expressed using the word "shall". COMPLIANCE: THE auditor complies with the requirement of an SA in all cases where they are relevant in the circumstances of the audit. NON-COMLIANCE: the auditor is not required to comply with a requirement that is not relevant in the circumstances of the audit and this does not constitute a departure from the requirement. However the auditor should document the steps undertaken by him to satisfy himself that the process adopted in the circumstances of the audit assisted him in achieving the overall objective.

 DEPARTURE: In exceptional circumstances, the auditor may judge it necessary to

depart from a relevant requirement by performing alternate audit procedures to achieve the aim of that requirement. The need for the auditor to depart from a relevant requirement is expected to arise only where the requirement is for a specific procedure to be performed and, in the specific circumstances of the audit, that procedure would be ineffective. When it is necessary for the auditor to depart from a requirement of an SA, the auditor is required to document how alternative procedures performed achieve the aim of the requirement, and, the reasons for the departure. auditor's report also should draw attention to such departures. However, a mere disclosure in his report does not absolve an auditor from complying with the applicable standard.

SA 200 - OVERALL OBJECTIVES AND CONDUCT OF AUDIT

INTRODUCTION SCOPE OF THIS SA This Standard on Auditing (SA) establishes the independent auditors overall responsibilities when conducting an audit of financial statements in accordance with SAs. Specifically, it sets out the overall objectives of the independent auditor, and explains the nature and scope of an audit designed to enable the independent auditor to meet those objectives. It also explains the scope, authority and structure of the SAs, and includes requirements establishing the general responsibilities of the independent auditor applicable in all audits, including the obligation to comply with the SAs. The independent auditor is referred to as the auditor hereafter. SAs are written in the context of an audit of financial statements by an auditor. They are to be adapted as necessary in the circumstances when applied to audits of other
historical financial information.

AN AUDIT OF FINANCIAL STATEMENTS

The purpose of an audit is to enhance the degree of confidence of intended users in the financial statements. This is achieved by the expression of an opinion by the auditor on whether the financial statements are prepared, in all material respects, in accordance with an applicable financial reporting framework. In the case of most general purpose frameworks, that opinion is on whether the financial statements are presented fairly, in all material respects, or give a true and fair view in accordance with the framework. An audit conducted in accordance with SAs and relevant ethical requirements enables the auditor to form that opinion.

OVERALL OBJECTIVES OF THE AUDITOR

In conducting an audit of financial statements, the overall objectives of the auditor are: (a) To obtain reasonable assurance about whether the financial statements as a whole are free from material misstatement, whether due to fraud or error, thereby enabling the auditor to express an opinion on whether the financial statements are prepared, in all material respects, in accordance with an applicable financial reporting framework; and

(b) To report on the financial statements, and communicate as required by the SAs, in accordance with the auditors findings.

In all cases when reasonable assurance cannot be obtained and a qualified opinion in the auditors report is insufficient in the circumstances for purposes of reporting to the intended users of the financial statements, the SAs require that the auditor disclaim an opinion or withdraw from the engagement, where withdrawal is legally permitted.

DEFINITIONS
For purposes of the SAs, the following terms have the meanings attributed below: (a) Applicable financial reporting framework The financial reporting framework adopted by management and, where appropriate, those charged with governance in the preparation and presentation of the financial statements that is acceptable in view of the nature of the entity and the objective of the financial statements, or that is required by law or regulation.

The term fair presentation framework is used to refer to a financial reporting framework that requires compliance with the requirements of the framework and:

(i) Acknowledges explicitly or implicitly that, to achieve fair presentation of the financial statements, it may be necessary for management to provide disclosures beyond those specifically required by the framework; or

(ii) Acknowledges explicitly that it may be necessary for management to depart from a requirement of the framework to achieve fair presentation of the financial statements. Such departures are expected to be necessary only in extremely rare circumstances.

The term compliance framework is used to refer to a financial reporting framework that requires compliance with the requirements of the framework, but

does not contain the acknowledgements in (i) or (ii) above.

(b) Audit evidence Information used by the auditor in arriving at the conclusions on which the auditors opinion is based. Audit evidence includes both information contained in the accounting records underlying the financial statements and other information. For purposes of the SAs:

(i) Sufficiency of audit evidence is the measure of the quantity of audit evidence. The quantity of the audit evidence needed is affected by the auditors assessment of the risks of material misstatement and also by the quality of such audit evidence.

(ii) Appropriateness of audit evidence is the measure of the quality of audit evidence; that is, its relevance and its reliability in providing support for the conclusions on which the auditors opinion is based.

(c) Audit risk The risk that the auditor expresses an inappropriate audit opinion when the financial statements are materially misstated. Audit risk is a function of the risks of material misstatement and detection risk.

(d) Auditor Auditor is used to refer to the person or persons conducting the audit, usually the engagement partner or other members of the engagement team, or, as applicable, the firm. Where an SA expressly intends that a requirement or responsibility be fulfilled by the engagement partner, the term engagement partner rather than auditor is used. Engagement partner and firm are to be

read as referring to their public sector equivalents where relevant.

(e) Detection risk The risk that the procedures performed by the auditor to reduce audit risk to an acceptably low level will not detect a misstatement that exists and that could be material, either individually or when aggregated with other misstatements.

(f) Financial statements A structured representation of historical financial information, including related notes, intended to communicate an entitys economic resources or obligations at a point in time or the changes therein for a period of time in accordance with a financial reporting framework. The related notes ordinarily comprise a summary of significant accounting policies and other explanatory information. The term financial statements ordinarily refers to a complete set of financial statements as determined by the requirements of the applicable financial reporting framework, but can also refer to a single financial statement. (g) Historical financial information Information expressed in financial terms in relation to a particular entity, derived primarily from that entitys accounting system, about economic events occurring in past time periods or about economic conditions or circumstances at points in time in the past.

(h) Management The person(s) with executive responsibility for the conduct of the entitys operations. For some entities in some jurisdictions, management includes some or all of those charged with governance, for example, executive members of a governance board, or an owner-manager.

(i) Misstatement A difference between the amount, classification, presentation, or disclosure of a reported financial statement item and the amount, classification, presentation, or disclosure that is required for the item to be in accordance with the applicable financial reporting framework. Misstatements can arise from error or fraud.

When the auditor expresses an opinion on whether the financial statements are presented fairly, in all material respects, or give a true and fair view, misstatements also include those adjustments of amounts, classifications, presentation, or disclosures that, in the auditors judgment, are necessary for the financial statements to be presented fairly, in all material respects, or to give a true and fair view.

(j)Premise, relating to the responsibilities of management and, where appropriate, those charged with governance, on which an audit is conducted That management and, where appropriate, those charged with governance have the following responsibilities that are fundamental to the conduct of an audit in accordance with SAs. That is, responsibility:

(i) For the preparation and presentation of the financial statements in accordance with the applicable financial reporting framework; this includes the design, implementation and maintenance of internal control relevant to the preparation and presentation of financial statements that are free from material misstatement,

whether due to fraud or error; and (k) Professional judgment The application of relevant training, knowledge and experience, within the context provided by auditing, accounting and ethical standards, in making informed decisions about the courses of action that are appropriate in the circumstances of the audit engagement. (l) Professional skepticism An attitude that includes a questioning mind, being alert to conditions which may indicate possible misstatement due to error or fraud, and a critical assessment of audit evidence.

(m) Reasonable assurance In the context of an audit of financial statements, a high, but not absolute, level of assurance.

(n) Risk of material misstatement The risk that the financial statements are materially misstated prior to audit. This consists of two components, described as follows at the assertion level: (i) Inherent risk The susceptibility of an assertion about a class of transaction, account balance or disclosure to a misstatement that could be material, either individually or when aggregated with other misstatements, before consideration of any related controls. (ii) Control risk The risk that a misstatement that could occur in an assertion about a class of transaction, account balance or disclosure and that could be material, either individually or when aggregated with other misstatements, will not be prevented, or detected and corrected, on a timely basis by the entitys internal control.

REQUIREMENTS
ETHICAL REQUIREMENTS RELATING TO AN AUDIT OF FINANCIAL STATEMENTS

The auditor shall comply with relevant ethical requirements, including those pertaining to independence, relating to financial statement audit engagements.

PROFESSIONAL SKEPTICISM The auditor shall plan and perform an audit with professional skepticism recognizing that circumstances may exist that cause the financial statements to be materially misstated.

PROFESSIONAL JUDGMENT

The auditor shall exercise professional judgment in planning and performing an audit of financial statements.

SUFFICIENT APPROPRIATE AUDIT EVIDENCE AND AUDIT RISK To obtain reasonable assurance, the auditor shall obtain sufficient appropriate audit evidence to reduce audit risk to an acceptably low level and thereby enable the auditor to draw reasonable conclusions on which to base the auditors opinion.

CONDUCT OF AN AUDIT IN ACCORDANCE WITH SA

The auditor shall comply with all SAs relevant to the audit. An SA is relevant to the audit when the SA is in effect and the circumstances addressed by the SA exist. The auditor shall have an understanding of the entire text of an SA, including its

application and other explanatory material, to understand its objectives and to apply its requirements properly. The auditor shall not represent compliance with SAs in the auditors report unless the auditor has complied with the requirements of this SA and all other SAs relevant to the audit.
OBJECTIVES STATED IN INDIVIDUAL SAS

To achieve the overall objectives of the auditor, the auditor shall use the objectives stated in relevant SAs in planning and performing the audit, having regard to the interrelationships among the SAs, to: (a) Determine whether any audit procedures in addition to those required by the SAs are necessary in pursuance of the objectives stated in the SAs; and (b) Evaluate whether sufficient appropriate audit evidence has been obtained.

COMPLYING WITH RELEVANT REQUIREMENTS Subject to paragraph 23, the auditor shall comply with each requirement of an SA unless, in the circumstances of the audit: (a) The entire SA is not relevant; or (b) The requirement is not relevant because it is conditional and the condition does not exist. In exceptional circumstances, the auditor may judge it necessary to depart from a relevant requirement in an SA. In such circumstances, the auditor shall perform alternative audit procedures to achieve the aim of that requirement. The need for the auditor to depart from a relevant requirement is expected to arise only where the requirement is for a specific procedure to be performed and, in the specific

circumstances of the audit, that procedure would be ineffective in achieving the aim of the requirement.

FAILURE TO ACHIEVE AN OBJECTIVE If an objective in a relevant SA cannot be achieved, the auditor shall evaluate whether this prevents the auditor from achieving the overall objectives of the auditor and thereby requires the auditor, in accordance with the SAs, to modify the auditors opinion or withdraw from the engagement. Failure to achieve an objective represents a significant matter requiring documentation in accordance with SA 230

APPLICATION AND OTHER EXPLANATORY MATERIAL

AN AUDIT OF FINANCIAL STATEMENTS

The auditors opinion on the financial statements deals with whether the financial statements are prepared, in all material respects, in accordance with the applicable financial reporting framework. Such an opinion is common to all audits of financial statements. The auditors opinion therefore does not assure, for example, the future viability of the entity nor the efficiency or effectiveness with which management has conducted the affairs of the entity. In some cases, however, the applicable laws and regulations may require auditors to provide opinions on other specific matters, such as the effectiveness of internal control, or the consistency of a separate management report with the financial statements. While the SAs include requirements and guidance in relation to such matters to the extent that they are relevant to forming an opinion on the financial statements, the auditor would be required to undertake further work if the auditor had additional responsibilities to provide such opinions.

PREPARATION OF THE FINANCIAL STATEMENTS An audit in accordance with SAs is conducted on the premise that management and, where appropriate, those charged with governance have responsibility: For the preparation and presentation of the financial statements in accordance with the applicable financial reporting framework; this includes the design, implementation and maintenance of internal control relevant to the preparation and presentation of financial statements that are free from material misstatement, whether due to fraud or error; and

To provide the auditor with: (i) All information, such as records and documentation, and other matters that are relevant to the preparation and presentation of the financial statements; (ii) Any additional information that the auditor may request from management and, where appropriate, those charged with governance; and (iii) Unrestricted access to those within the entity from whom the auditor determines it necessary to obtain audit evidence. As part of their responsibility for the preparation and presentation of the financial statements, management and, where appropriate, those charged with governance are responsible for:

The identification of the applicable financial reporting framework, in the context of any relevant laws or regulations.

The preparation and presentation of the financial statements in accordance with that framework.

An adequate description of that framework in the financial statements.

The preparation of the financial statements requires management to exercise judgment in making accounting estimates that are reasonable in the circumstances, as well as to select and apply appropriate accounting policies. These judgments are made in the context of the applicable financial reporting framework.

2. ETHICAL REQUIREMENTS RELATING TO AN AUDIT OF FINANCIAL STATEMENTS

The auditor is subject to relevant ethical requirements, including those pertaining to independence, relating to financial statement audit engagements. Relevant ethical requirements ordinarily comprise the Code of Ethics issued by the Institute of Chartered Accountants of India.

The Code establishes the following as the fundamental principles of professional ethics relevant to the auditor when conducting an audit of financial statements and provides a conceptual framework for applying those principles; (a) Integrity; (b) Objectivity; (c) Professional competence and due care; (d) Confidentiality; and (e) Professional behavior. In the case of an audit engagement it is in the public interest and, therefore, required by the Code of Ethics, that the auditor be independent of the entity subject to the audit. The Code describes independence as comprising both independence of mind and independence in appearance. The auditors independence from the entity safeguards the auditors ability to form an audit

3. PROFESSIONAL SKEPTICISM
Professional skepticism includes being alert to, for example:

Audit evidence that contradicts other audit evidence obtained. Information that brings into question the reliability of documents and responses to inquiries to be used as audit evidence. Conditions that may indicate possible fraud. Circumstances that suggest the need for audit procedures in addition to those required by the SAs. Maintaining professional skepticism throughout the audit is necessary if the auditor is, for example, to reduce the risks of: Overlooking unusual circumstances. Over generalising when drawing conclusions from audit observations. procedures and evaluating the results thereof. Professional skepticism is necessary to the critical assessment of audit evidence. This includes questioning contradictory audit evidence and the reliability of documents and responses to inquiries and other information obtained from management and those charged with governance. It also includes consideration of the sufficiency and appropriateness of audit evidence obtained in the light of the circumstances, for example in the case where fraud risk factors exist and a single document, of a nature that is susceptible to fraud, is the sole supporting evidence for a material financial statement amount.

The auditor may accept records and documents as genuine unless the auditor has reason to believe the contrary. Nevertheless, the auditor is required to consider the reliability of information to be used as audit evidence. In cases of doubt about the reliability of information or indications of possible fraud (for example, if conditions identified during the audit cause the auditor to believe that a document may not be authentic or that terms in a document may have been falsified), the SAs require that the auditor investigate further and determine what modifications or additions to audit procedures are necessary to resolve the matter13. The auditor cannot be expected to disregard past experience of the honesty and integrity of the entitys management and those charged with governance. Nevertheless, a belief that management and those charged with governance are honest and have integrity does not relieve the auditor of the need to maintain professional skepticism or allow the auditor to be satisfied with less-thanpersuasive audit evidence when obtaining reasonable assurance.

4. PROFESSIONAL JUDGMENT
Professional judgment is essential to the proper conduct of an audit. This is because interpretation of relevant ethical requirements and the SAs and the informed decisions required throughout the audit cannot be made without the application of relevant knowledge and experience to the facts and circumstances. Professional judgment is necessary in particular regarding decisions about:

Materiality and audit risk. The nature, timing, and extent of audit procedures used to meet the requirements of the SAs and gather audit evidence.

Evaluating whether sufficient appropriate audit evidence has been obtained, and whether more needs to be done to achieve the objectives of the SAs and thereby, the overall objectives of the auditor.

The evaluation of managements judgments in applying the entitys applicable financial reporting framework.

The drawing of conclusions based on the audit evidence obtained, for example, assessing the reasonableness of the estimates made by management in preparing the financial statements.

Professional judgment needs to be exercised throughout the audit. It also needs to be appropriately documented. In this regard, the auditor is required to prepare audit

documentation sufficient to enable an experienced auditor, having no previous connection with the audit, to understand the significant professional judgments made in reaching conclusions on significant matters arising during the audit

5. INHERENT LIMITATIONS OF AN AUDIT

The auditor is not expected to, and cannot, reduce audit risk to zero and cannot therefore obtain absolute assurance that the financial statements are freefrom material misstatement due to fraud or error. This is because there are inherent limitations of an audit, which result in most of the audit evidence on which the auditor draws conclusions and bases the auditors opinion being persuasive rather than conclusive. The inherent limitations of an audit arise from The nature of financial reporting; The nature of audit procedures; and

The need for the audit to be conducted within a reasonable period of time and at
a reasonable cost.

THE NATURE OF FINANCIAL REPORTING The preparation of financial statements involves judgment by management in applying the requirements of the entitys applicable financial reporting framework to the facts and circumstances of the entity. In addition, many financial statement items involve subjective decisions or assessments or a degree of uncertainty, and there may be a range of acceptable interpretations or judgments that may be made. Consequently, some financial statement items are subject to an inherent level of variability which cannot be eliminated by the application of additional auditing procedures. For example, this is often the case with respect to certain accounting estimates. Nevertheless, the SAs require the auditor to give specific consideration to whether accounting estimates are reasonable in the context of the applicable financial reporting framework and related disclosures, and to the qualitative aspects of the entitys accounting practices, including indicators of possible bias in managements judgments.

THE NATURE OF AUDIT PROCEDURES

There are practical and legal limitations on the auditors ability to obtain audit evidence. For example:

There is the possibility that management or others may not provide, intentionally or unintentionally, the complete information that is relevant to the preparation and presentation of the financial statements or that has been requested by the auditor. Accordingly, the auditor cannot be certain of the completeness of information, even though the auditor has performed audit procedures to obtain

assurance that all relevant information has been obtained. Fraud may involve sophisticated and carefully organised schemes designed to conceal it. Therefore, audit procedures used to gather audit evidence may be ineffective for detecting an intentional misstatement that involves, for example, collusion to falsify documentation which may cause the auditor to believe that audit evidence is valid when it is not. The auditor is neither trained as nor expected to be an expert in the authentication of documents.

An audit is not an official investigation into alleged wrongdoing. Accordingly, the auditor is not given specific legal powers, such as the power of search, which may be necessary for such an investigation.

TIMELINESS OF FINANCIAL REPORTING AND THE BALANCE BETWEEN BENEFIT AND COST The matter of difficulty, time, or cost involved is not in itself a valid basis for the auditor to omit an audit procedure for which there is no alternative or to be satisfied with audit evidence that is less than persuasive. Appropriate planning assists in making sufficient time and resources available for the conduct of the audit. Notwithstanding this, the relevance of information, and thereby its value, tends to diminish over time, and there is a balance to be struck between the reliability of information and its cost. This is recognised in certain financial reporting frameworks (see, for example, the Framework for the Preparation and Presentation of Financial Statements issued by the Institute of Chartered Accountants of India (ICAI)). Therefore, there is an expectation by users of financial statements that the auditor will form an opinion on the financial

statements within a reasonable period of time and at a reasonable cost, recognising that it is impracticable to address all information that may exist or to pursue every matter exhaustively on the assumption that information is in error or fraudulent until proved otherwise. Plan the audit so that it will be performed in an effective manner;

Direct audit effort to areas most expected to contain risks of material misstatement, whether due to fraud or error, with correspondingly less effort directed at other areas; and

Use testing and other means of examining populations for misstatements.

In light of the approaches described in paragraph A49, the SAs contain requirements for the planning and performance of the audit and require the auditor, among other things, to:

Have a basis for the identification and assessment of risks of material misstatement at the financial statement and assertion levels by performing risk assessment procedures and related activities20; and

Use testing and other means of examining populations in a manner that provides a reasonable basis for the auditor to draw conclusions about the population.

OTHER MATTERS THAT AFFECT THE INHERENT LIMITATIONS OF AN AUDIT

In the case of certain assertions or subject matters, the potential effects of the inherent limitations on the auditors ability to detect material misstatements are particularly significant. Such assertions or subject matters include:

Fraud, particularly fraud involving senior management or collusion. See SA 240 for further discussion.

The existence and completeness of related party relationships and transactions. See SA 550 22 for further discussion.

The occurrence of non-compliance with laws and regulations. See SA 250 23 for further discussion.

Because of the inherent limitations of an audit, there is an unavoidable risk that some material misstatements of the financial statements may not be detected, even though the audit is properly planned and performed in accordance with SAs. Accordingly, the subsequent discovery of a material misstatement of the financial statements resulting from fraud or error does not by itself indicate a failure to conduct an audit in accordance with SAs. However, the inherent limitations of an audit are not a justification for the auditor to be satisfied with less-than-persuasive audit evidence.

BIBLIOGRAPHY
http://www.knowledgebible.com icai.org www.caclubindia.com Discussion Audit AAS en.wikipedia.org www.ifac.org