Chapter 3 Audit Documentation and Audit Evidence - Scanner

Chapter 3 “Audit Documentation and Audit Evidence” ©www.altclasses.
in
Compiled by: Pankaj Garg

Page 1
Chapter 3 “Audit Documentation and Audit Evidence” ©www.altclasses.in
Chapter 3
Audit Documentation and Audit Evidence
"Marks Distribution of Past Exams (New Syllabus)"

16
14
12
10
Marks
8
6
4
2
0
May-18 Nov-18 May-19 Nov-19 May-20 Nov-20 May-21 -
Series1 14 15 9 11
3.1 – Audit Documentation (SA 230)
Q. 1 Define audit documentation. Also give some examples.
Or
Write short note on: Audit Working Papers [May 10 (5 Marks)]
Answer: Audit Documentation:
SA 230 “Audit Documentation” defines the term as “Record of audit

procedures performed, relevant audit evidence obtained and the
conclusions the auditor reached”.
Examples of Audit Documentation:
Audit documentation may be recorded on paper or on electronic or

other media. Examples of audit documentation include:

Page 2
• Audit programmes.
• Analyses.
• Issues memoranda.
• Summaries of significant matters.
• Letters of confirmation and representation.
• Checklists.
• Correspondence (including e-mail) concerning significant
matters.
The auditor may include abstracts or copies of the entity’s
records (for example, significant and specific contracts and
agreements) as part of audit documentation. Audit
documentation, however, is not a substitute for the entity’s
accounting records.
Q. 2 Comment on the following in relation to SAs: “Audit Documentation
Serves a number of additional purposes”. [May 11 (5 Marks)]
Or
Audit documentation serves a number of purposes. Explain with
reference to SA 230. [May 15 (6 Marks)]
Or
Audit documentation provides evidence of the auditor’s basis for a
conclusion about the achievement of the overall objectives of the

Page 3
auditor and evidence that the audit was planned and performed in
accordance with SAs and applicable legal and regulatory requirements.
Explain stating clearly purpose of audit documentation.
[MTP-Aug. 18]
Answer: Purposes of Audit Documentation:
SA 230 “Audit Documentation” deals with the auditor’s
responsibility to prepare audit documentation for an audit of
financial statements. As per SA 230, Audit documentation serves a
number of purposes, including the following:
1. Assisting the engagement team to plan and perform the audit.
2. Assisting members of the engagement team responsible for
supervision to direct and supervise the audit, and to discharge
their review responsibilities.
3. Enabling the engagement team to be accountable for its work.
4. Retaining a record of matters of continuing significance to
future audits.
5. Enabling the conduct of quality control reviews and inspections.
6. Enabling the conduct of external inspections in accordance with
applicable legal, regulatory or other requirements.

Page 4
Q.3 Audit documentation provides evidence of the auditor’s basis for a
conclusion about the achievement of the overall objectives of the
auditor. Explain clearly stating the nature and purpose of Audit
Documentation. [MTP-Oct. 18]
Or
What do you mean by Audit Documentation? Also explain the nature
and purpose of audit documentation. [RTP-May 19]
Or
Discuss the meaning and nature of Audit Documentation. [RTP-Nov. 19]
Answer: Meaning of Audit Documentation: Refer Answer of Q. No. 1.
Nature of Audit Documentation:
financial statements. As per SA 230, the Auditor is required to
prepare documentation that provides:
(a) a sufficient and appropriate record of the basis for the
auditor’s report; and
(b) evidence that the audit was planned and performed in
accordance with SAs and applicable and other regulatory
requirements.
Purposes of Audit Documentation: Refer Answer of Q. No. 2.

Page 5
Q.4 Judging the significance of a matter requires an objective analysis of the
facts and circumstances. Documentation of the professional judgments
made, where significant, serves to explain the auditor’s conclusions and
to reinforce the quality of the judgment. Explain with the help of
examples. [RTP-May 19]
Answer: Documentation of Significant Matters and Related Significant
Professional Judgments:
Judging the significance of a matter requires an objective analysis of
the facts and circumstances. Examples of significant matters
include:
1. Matters that give rise to significant risks (as defined in SA 315).
2. Results of audit procedures indicating (a) that the financial
statements could be materially misstated, or (b) a need to revise
the auditor’s previous assessment of the risks of material
misstatement and the auditor’s responses to those risks.
3. Circumstances that cause the auditor significant difficulty in
applying necessary audit procedures.
4. Findings that could result in a modification to the audit opinion
or the inclusion of an Emphasis of Matter paragraph in the
auditor’s report.
Documentation of the professional judgments made, where
significant, serves to explain the auditor’s conclusions and to

Page 6
reinforce the quality of the judgment. Such matters are of particular
interest to those responsible for reviewing audit documentation,
including those carrying out subsequent audits, when reviewing
matters of continuing significance.
Examples of circumstances in which it is appropriate to

prepare audit documentation relating to the use of
professional judgment
• The rationale for the auditor’s conclusion when a requirement

provides that the auditor ‘shall consider’ certain information or
factors, and that consideration is significant in the context of the
particular engagement.
• The basis for the auditor’s conclusion on the reasonableness of
areas of subjective judgments (for example, the reasonableness
of significant accounting estimates).
• The basis for the auditor’s conclusions about the authenticity of a
document when further investigation (such as making
appropriate use of an expert or of confirmation procedures) is
undertaken in response to conditions identified during the audit
that caused the auditor to believe that the document may not be
authentic.
Q.5 “Audit documentation summary may facilitate effective and efficient

reviews and inspections of the audit documentation, particularly for
large and complex audits”. Explain.

Page 7
Or
“Completion Memorandum” is helpful as part of the audit

documentation. Explain. [May 19 (3 Marks)]
Answer: Completion Memorandum (Audit Documentation Summary):
SA 230 “Audit Documentation” defines the term as “Record of audit

procedures performed, relevant audit evidence obtained and the
conclusions the auditor reached”. Accordingly, auditor may
consider it helpful to prepare and retain as part of the audit
documentation a summary (known as a completion memorandum)
that describes:
(a) the significant matters identified during the audit and

(b) how they were addressed.
Such a summary may facilitate effective and efficient reviews and

inspections of the audit documentation, particularly for large and
complex audits.
Preparation of such a summary may assist the auditor’s

consideration of the significant matters. Further, the preparation of
such a summary may assist the auditor’s consideration of the
significant matters.
It may also help the auditor to consider whether, in light of the

audit procedures performed and conclusions reached, there is any
individual relevant SA objective that the auditor has not met or is
unable to meet that would prevent the auditor from achieving the
auditor’s overall objective.

Page 8
Q.6 Discuss with reference to SAs: Factors effecting form, contents and
extent of audit documentation. [May 13 (5 Marks), MTP-April 19]
Or
The Form, content and extent of audit documents depends on certain

factors. Explain with reference to SA 230. [Nov. 15 (4 Marks)]
Or
The form, content and extent of audit documentation depend on factors

such as the size and complexity of the entity, the nature of the audit
procedures to be performed etc. Explain in detail. [RTP-Nov. 18]
Answer: Factors affecting Form, Content and Extent of Audit
Documentation:
financial statements. Accordingly, the various factors that may
affect form, content and extent of audit documentation are
following
1. The size and complexity of the entity.
2. The nature of the audit procedures to be performed.
3. The identified risks of material misstatement.
4. The significance of the audit evidence obtained.
5. The nature and extent of exceptions identified.

Page 9
6. The need to document a conclusion or the basis for a
conclusion not readily determinable from the documentation
of the work performed or audit evidence obtained.
7. The audit methodology and tools used.
Q.7 R.K & Company is the auditor of PQR Company Ltd. The Managing
Director of the Company demands copies of the working papers from
the auditors. Are the auditors bound to oblige the Managing Director?
[Nov. 10 (4 Marks)]
Answer: Ownership and custody of working papers:
• As per SA 230, “Audit Documentation” working papers are the
property of the auditor. The auditor may, at his discretion, make
portion of or extracts of his working papers available to his
client.
• In the present case, the managing director of the company
demands copies of the working papers from the auditor.
Managing director has no right over the working papers of the
auditors.
Conclusion: Managing Director of the company has no right over
working papers of the auditor. However, the auditor may, at his
discretion, make portion of or extracts of his working papers
available to his company.

Page 10
Q.8 The auditor shall assemble the audit documentation in an audit file and
complete the administrative process of assembling the final audit file
on a timely basis after the date of the auditor’s report. Discuss.
[MTP-March 18, March 19]
Or
Briefly explain the policies and procedures of assembling the final audit
file on a timely basis after the date of auditor's report under SQC-1.
[Nov. 19 (3 Marks)]
Answer: Assembly of Final Audit File:
SA 230 “Audit Documentation” defines audit file as one or more

folders or other storage media, in physical or electronic form,
containing the records that comprise the audit documentation for a
specific engagement.
Requirements of Audit File:
• The auditor shall assemble the audit documentation in an audit

file and complete the administrative process of assembling the
final audit file on a timely basis after the date of the auditor’s
report. (within 60 days as per SQC 1).
• The completion of the assembly of the final audit file after the
date of the auditor’s report is an administrative process that
does not involve the performance of new audit procedures or
the drawing of new conclusions.

Page 11
• Changes may, however, be made to the audit documentation

during the final assembly process if they are administrative in
nature. Examples of such changes include:
1. Deleting or discarding superseded documentation.
2. Sorting, collating and cross referencing working papers.
3. Signing off on completion checklists relating to the file

assembly process.
4. Documenting audit evidence that the auditor has obtained,

discussed and agreed with the relevant members of the
engagement team before the date of the auditor’s report.
• After the assembly, the auditor shall not delete audit

documentation before the end of its retention period.
3.2 – Audit Evidence (SA 500)
Q.9 Audit evidence includes both information contained in the accounting

records underlying the financial statements and other information. Discuss.
[RTP-May 18]
Or
Auditing is a logical process. An auditor is called upon to assess the actualities

of the situation, review the statements of account and give an expert opinion
about the truth and fairness of such accounts. This he cannot do unless he has
examined the financial statements objectively. He needs evidence to obtain
information for arriving at his judgment. Discuss explaining clearly the
detailed meaning of audit evidence. [RTP-Nov. 19]

Page 12
Answer: Audit Evidence:
Auditing is a logical process. An auditor is called upon to assess the
actualities of the situation, review the statements of account and
give an expert opinion about the truth and fairness of such accounts.
This he cannot do unless he has examined the financial statements
objectively. Auditor requires audit evidences to obtain information
for arriving at his judgment.
Meaning of Audit Evidence:
• SA 500 “Audit Evidence” defines audit evidence as information
used by the auditor in arriving at the conclusions on which the
auditor’s opinion is based.
• Audit evidence includes both information contained in the
accounting records underlying the financial statements and
information obtained from other sources.
• Accounting records include the records of initial accounting
entries and supporting records, such as checks and records of
electronic fund transfers; invoices; contracts; the general and
subsidiary ledgers, journal entries and other adjustments to the
financial statements that are not reflected in journal entries; and
records such as work sheets and spreadsheets supporting cost
allocations, computations, reconciliations and disclosures.

Page 13
• Other information which the auditor may use as audit evidence
includes, for example minutes of the meetings, written
confirmations from trade receivables and trade payables,
manuals containing details of internal control, annual reports
etc. A combination of tests of accounting records and other
information is generally used by the auditor to support his
opinion on the financial statements.
Q.10 Most of the auditor’s work in forming the auditor’s opinion consists of
obtaining and evaluating audit evidence. Explain. [RTP-Nov. 18]
Or
Audit evidence is necessary to support the auditor’s opinion and report.
It is cumulative in nature and is primarily obtained from audit
procedures performed during the course of the audit. Most of the
auditor’s work in forming the auditor’s opinion consists of obtaining
and evaluating audit evidence. Explain. [RTP-Nov. 19]
Answer: Obtaining and Evaluating Audit Evidence:
• SA 500 “Audit Evidence” defines audit evidence as information
used by the auditor in arriving at the conclusions on which the
auditor’s opinion is based.
• Audit evidence includes both information contained in the
accounting records underlying the financial statements and
information obtained from other sources.

Page 14
• Accounting records include the records of initial accounting
entries and supporting records, such as checks and records of
electronic fund transfers; invoices; contracts; the general and
subsidiary ledgers, journal entries and other adjustments to the
financial statements that are not reflected in journal entries; and
records such as work sheets and spreadsheets supporting cost
allocations, computations, reconciliations and disclosures.
• Other information which the auditor may use as audit evidence
includes, for example minutes of the meetings, written
confirmations from trade receivables and trade payables,
manuals containing details of internal control, annual reports
etc. A combination of tests of accounting records and other
information is generally used by the auditor to support his
opinion on the financial statements.
• As per SA 500 “Audit Evidence” audit procedures performed to
collect audit evidences include the following:
(a) Risk assessment Procedures
(b) Further Audit procedures: It comprises of
1. Test of Controls, and
2. Substantive Procedures: consists of -
• Tests of Details,
• Substantive Analytical Procedures

Page 15
• Audit procedures to obtain audit evidence also include
inspection, observation, confirmation, recalculation, re-
performance and analytical procedures, often in some
combination, in addition to inquiry.
Q.11 What do you mean by sufficient appropriate audit evidence? State

various factors that help the auditor to ascertain as to what is sufficient
appropriate audit evidence. [Nov. 10 (6 Marks)]
Or
State various factors that help the auditor to ascertain as to what is

sufficient and appropriate audit evidence. [Nov. 17 (4 Marks)]
Or
The quantity of audit evidence needed is affected by the auditor’s

assessment of the risks of misstatement. Auditor’s judgment as to
sufficiency may be affected by few factors. Explain. [RTP-May 18]
Or
The quantity of audit evidence needed is affected by the auditor’s

assessment of the risks of misstatement (the higher the assessed risks,
the more audit evidence is likely to be required) and also by the quality
of such audit evidence (the higher the quality, the less may be
required). Obtaining more audit evidence, however, may not
compensate for its poor quality. Analyse and Explain stating clearly the
factors affecting the auditor’s judgement as to sufficiency of audit
evidence. [RTP-May 19]

Page 16
Answer: Sufficient Appropriate Audit Evidence:
SA 500 defines audit evidence as information used by the auditor
in arriving at the conclusions on which the auditor’s opinion is
based. The auditor shall design and perform audit procedures that
are appropriate in the circumstances for the purpose of obtaining
sufficient appropriate audit evidence.
Sufficiency: It refers to the quantity of audit evidence. It is affected
by the auditor’s assessment of the risks of material misstatement
and also by the quality of such audit evidence.
Appropriateness: It refers to the measure of the quality of audit
evidence. That is its relevance and its reliability in providing
support for the conclusions on which the auditor’s opinion is
based.
Factors affecting Sufficiency and Appropriateness:
(a) The degree of risk of misstatement which may be affected by
factors such as:
• the nature of the item;
• the adequacy of internal control;
• the nature or size of the business carried on by the entity;

Page 17
• situations which may exert an unusual influence on
management;
• the financial position of the entity.
(b) The materiality of the item.
(c) The experience gained during previous audits.
(d) The results of auditing procedures, including fraud and errors
which may have been found.
(e) The type of information available.
(f) The trend indicated by accounting ratios and analysis.
Q.12 What are the audit procedures to obtain audit evidence? Mention the
same in brief.
Or
Explain the tests of controls and substantive procedures as audit
procedures of obtaining sufficient appropriate audit evidence for
forming an audit opinion.
Or
Write short note on: Substantive Procedures.
[May 10 (5 Marks), Nov. 14 (4 Marks)]

Page 18
Answer: Audit procedures to obtain Audit Evidence:
As per SA 500 “Audit Evidence” audit procedures required to

obtain audit evidence:
1. Risk assessment procedures:
• SA 315 defines risk assessment procedures as audit

procedures performed to obtain understanding of the entity
and its environment including the entity internal control, to
identify and assess the risk of material misstatement whether
due to fraud or error at the financial statement and assertion level.
• Components of risk assessment procedures comprises of

inquiries, observation, inspection and analytical procedures.
2. Further audit procedures: comprises of Test of Controls and

Substantive Procedures.
(A) Tests of Controls: SA 330 defines tests of controls as audit

procedures designed to evaluate the operating effectiveness
of controls in preventing, or detecting and correcting,
material misstatements at the assertion level.
Components of tests of controls generally comprises of

inspection, inquiry and re-performances.
(B) Substantive Procedures: SA 330 defines substantive

procedures as audit procedures designed to detect the
material misstatements at the assertion level.
• Substantive procedures comprise of tests of details and

substantive analytical procedures.

Page 19
• Tests of details may be performed through inspection of

documents, inquiry, external confirmations,
recalculations etc.
• Substantive analytical procedures involve consideration

of relationships among financial as well as non-financial
data and consideration of comparison with prior period
data, anticipated results or industry averages.
Q.13 “The nature and timing of the audit procedures to be used may be
affected by the fact that some of the accounting data and other
information may be available only in electronic form or only at certain
points or periods in time”. Explain.
Answer: Factors affecting nature and timing of Audit Procedure:
As per SA 500 “Audit Evidence” audit procedures performed to

collect audit evidences include the following:
(a) Risk assessment Procedures
(b) Further Audit procedures: It comprises of
1. Test of Controls, and
2. Substantive Procedures: consists of -
• Tests of Details,
• Substantive Analytical Procedures
Nature and timing of audit procedures affected by:

Page 20
• Availability of audit evidence in electronic form only.
• Availability of audit evidence at certain points/ periods in time.
For example, source documents, such as purchase orders and

invoices, may exist only in electronic form when an entity uses
electronic commerce, or may be discarded after scanning when an
entity uses image processing systems to facilitate storage and
reference.
Certain electronic information may not be retrievable after a

specified period of time, for example, if files are changed and if
backup files do not exist. Accordingly, the auditor may find it
necessary as a result of an entity’s data retention policies to
request retention of some information for the auditor’s review or
to perform audit procedures at a time when the information is
available.
Q.14 Explain various methods to obtain audit evidence. [May 11 (8 Marks)]
Or
Write short note on: Methods to obtain audit evidence.
[May 15 (4 Marks)]
Or
Mr. A was appointed statutory auditor of P Ltd. but he was not able to
gather the sufficient audit evidences. Discuss how he should proceed to
gather more audit evidences. [Nov. 15 (6 Marks)]

Page 21
Answer: Methods to obtain audit evidence:
As per SA 500 “Audit Evidence” the following methods can be used

by the auditor for the purpose of obtaining audit evidence:
(a) Inspection: It involves examining records or documents,

whether internal or external, in paper form, electronic form,
or other media, or a physical examination of an asset.
(b) Observation: It consists of looking at a process or procedure

being performed by others, for example, the auditor’s
observation of inventory counting by the entity’s personnel.
(c) External Confirmation: It represents audit evidence

obtained by the auditor as a direct written response to the
auditor from a third party (the confirming party), in paper
form, or by electronic or other medium.
(d) Recalculation: It consists of checking mathematical accuracy

of documents or records. It may be performed manually or
electronically.
(e) Re-performance: It involves the auditor’s independent

execution of procedures or controls that were originally
performed as part of the entity’s internal control.
(f) Analytical Procedures: It consists of evaluations of financial

information made by a study of relationships among both
financial and non-financial data.
(g) Inquiry: It consists of seeking information of knowledgeable

persons, both financial and non- financial, within the entity or
outside the entity.

Page 22
Q.15 Discuss the following: Inquiry is one of the audit procedure to obtain
audit evidence. [May 13 (5 Marks)]
Or
Evaluating responses to inquiries is an integral part of the inquiry
process. Explain. [RTP-May 18]
Answer: Inquiry as audit procedure to obtain audit evidence:
• As per SA 500 “Audit Evidence” auditor may obtain audit
evidences by performing a number of methods including the
inquiry. Inquiry consists of seeking information of
knowledgeable persons, both financial and non- financial, within
the entity or outside the entity.
• Inquiry is used extensively throughout the audit in addition to
other audit procedures.
• Inquiries may range from formal written inquiries to informal
oral inquiries. However in case oral inquiries, the auditor may
consider it necessary to obtain written representations from
management and, where appropriate, TCWG to confirm
responses to such inquiries.
• Evaluating responses to inquiries is an integral part of the
inquiry process.

Page 23
• Responses to inquiries may provide the auditor with

information not previously possessed or with corroborative
audit evidence. Alternatively, responses might provide
information that differs significantly from other information that
the auditor has obtained. In some cases, responses to inquiries
provide a basis for the auditor to modify or perform additional
audit procedures.
Q.16 Distinguish between: Internal Evidence and External Evidence.
[Nov. 08 (6 Marks)]
Answer: Internal Evidence vs. External Evidence:
Internal Evidence External Evidence
Meaning Internal evidence is one External evidence is one

that has been created which originates from
within the client’s outside the client’s
organization. organisation.
Examples Examples are: Duplicate For example: purchase

sales invoice, Minute invoice, forwarding note,
books, inventory reports confirmations, bank
etc. statement, lease
agreement etc.
Reliability Generally, less reliable Generally, more reliable

vis-a-vis External vis-a-vis Internal Evidence
Evidence

Page 24
Q.17 Discuss the principles which are useful in assessing the reliability of
audit evidence.
Or
Write short note on following: Reliability of audit Evidence.
[Nov. 11 (4 Marks)]
Or
Discuss the following: The reliability of audit evidence is influenced by
its source, sample size and selection of items for testing.
[Nov. 13 (5 Marks)]
Or
With reference to SA 500, "Audit Evidence", discuss the different
sources and their reliability, of audit evidence. [May 17 (6 Marks)]
Or
“Even when information to be used as audit evidence is obtained from
sources external to the entity, circumstances may exist that could affect
its reliability”. Explain. Also state clearly generalisations about the
reliability of audit evidence. [RTP-May 18]

Page 25
Answer: Reliability of Audit Evidence:
As per SA 500 “Audit Evidence” reliability of audit evidence is
guided by following principles:
(a) The reliability of audit evidence is increased when it is obtained
from independent sources outside the entity.
(b) The reliability of audit evidence that is generated internally is
increased when the related controls, imposed by the entity are
effective.
(c) Audit evidence obtained directly by the auditor is more reliable
than audit evidence obtained indirectly.
(d) Audit evidence in documentary form, whether paper, electronic,
or other medium, is more reliable than evidence obtained
orally.
(e) Audit evidence provided by original documents is more reliable
than audit evidence provided by photocopies, or documents
that have been filmed, digitised or otherwise transformed into
electronic form, the reliability of which may depend on the
controls over their preparation and maintenance.

Page 26
3.3 - The Auditor’s Responses to Assessed Risks (SA 330)
Q.18 A higher level of assurance may be sought about the operating
effectiveness of controls when the approach adopted consists primarily
of tests of controls, in particular where it is not possible or practicable
to obtain sufficient appropriate audit evidence only from substantive
procedures. Explain. [RTP-Nov. 18]
Answer: Performing Test of controls:
• As per SA 330 “Responses to Assessed Risks” tests of controls
may be defined as audit procedure designed to evaluate the
operating effectiveness of controls in preventing, or detecting
and correcting, material misstatements at the assertion level.
• The auditor shall design and perform tests of controls to obtain
sufficient appropriate audit evidence as to the operating
effectiveness of relevant controls when:
(a) He expects that the controls are operating effectively, or
(b) Substantive procedures alone cannot provide sufficient
appropriate audit evidence at the assertion level.
• In designing and performing tests of controls, the auditor shall:
(a) Perform other audit procedures in combination with inquiry to
obtain audit evidence about the operating effectiveness of the
controls, including:

Page 27
(i) How the controls were applied at relevant times during
the audit.
(ii) The consistency with which they are applied.
(iii) By whom or by what means they were applied.
(b) Determine whether the controls to be tested depend upon
other controls (indirect controls) and if so, whether it is
necessary to obtain audit evidence supporting the effective
operation of those indirect controls.
Q. 19 Write short note on: Factors warranting re-testing of internal controls.
Answer: Factors warranting re-test of controls:
As per SA 330 on “The Auditor’s Responses to Assessed Risks”, if
the auditor plans to use audit evidence from a previous audit
about the operating effectiveness of specific controls, he shall
establish the continuing relevance of that evidence by obtaining
audit evidence about whether significant changes in those controls
have occurred subsequent to the previous audit.
The auditor’s decision on whether to rely on audit evidence
obtained in previous audits for control is a matter of professional
judgment.
Factors that may warrant a re-test of controls are-

Page 28
1. A deficient control environment.
2. Deficient monitoring of controls.
3. A significant manual element to the relevant controls.
4. Personnel changes that significantly affect the application of
the control.
5. Changing circumstances that indicate the need for changes in
the control.
6. Deficient general IT-controls.
Q.20 Irrespective of the assessed risks of material misstatement, the auditor
shall design and perform substantive procedures for each material
class of transactions, account balance, and disclosure. Analyse and
explain. [RTP-Nov. 18]
Or
“A multinational co. wants to appoint you to carry the statutory audit.”
Discuss with reference to SA 330 the substantive procedures to be
performed to assess the risk of material misstatement.
[Nov. 18 (6 Marks)]

Page 29
Answer: Substantive Procedure to be performed to assess the risk of
material misstatement:
Substantive procedures are audit procedure designed to detect
material misstatements at the assertion level. Substantive
procedures comprise:
(i) Tests of details (of classes of transactions, account balances,
and disclosures), and
(ii) Substantive analytical procedures.
SA 330 “Responses to Assessed Risks” deals with the auditor’s
responsibility to design and implement responses to the risks of
material misstatements identified and assessed by the auditor in
accordance with SA 315. Accordingly,
• Irrespective of the assessed risks of material misstatement, the
auditor shall design and perform substantive procedures for
each material class of transactions, account balance, and
disclosure.
• Depending on the circumstances, the auditor may determine

that:
(i) Per forming only substantive analytical procedures will be

sufficient to reduce audit risk to an acceptably low level. For
example, where the auditor’s assessment of risk is supported
by audit evidence from tests of controls.

Page 30
(ii) Only tests of details are appropriate.
(iii) A combination of substantive analytical procedures and tests
of details are most responsive to the assessed risks.
• Substantive analytical procedures are generally more
applicable to large volumes of transactions that tend to be
predictable over time.
• Because the assessment of the risk of material misstatement
takes account of internal control, the extent of substantive
procedures may need to be increased when the results from
tests of controls are unsatisfactory. However, increasing the
extent of an audit procedure is appropriate only if the audit
procedure itself is relevant to the specific risk.
• In designing tests of details, the extent of testing is ordinarily
thought of in terms of the sample size.
Note: Question asked in Nov. 18 seems to be drafted wrongly,
as Substantive procedures are performed as a response to
risk of material misstatement. To assess risk of material
misstatement, procedures performed are known as Risk
Assessment Procedures and covered by SA 315.

Page 31
Q.21 “External confirmation procedures frequently are relevant when
addressing assertions associated with account balances and their
elements, but need not be restricted to these items.” Explain.
Or
Point out any eight areas where external confirmation used as an audit
evidence. [May 15 (4 Marks)]
Answer: Areas where external confirmations may be used:
As per SA 330 “Responses to Assessed Risks” External

confirmation procedures frequently are relevant when addressing
assertions associated with account balances and their elements,
but need not be restricted to these items.
For example, the auditor may request external confirmation of the

terms of agreements, contracts, or transactions between an entity
and other parties.
Other situations where external confirmation procedures may

provide relevant audit evidence in responding to assessed risks of
material misstatement include:
1. Bank balances and other information relevant to banking

relationships.
2. Accounts receivable balances and terms.
3. Inventories held by third parties at bonded warehouses for

processing or on consignment.

Page 32
4. Property title deeds held by lawyers or financiers for safe

custody or as security.
5. Investments held for safekeeping by third parties, or

purchased from stockbrokers but not delivered at the balance
sheet date.
6. Amounts due to lenders, including relevant terms of

repayment and restrictive covenants.
7. Accounts payable balances and terms.
Q.22 “When deviations from controls upon which the auditor intends to rely
are detected, the auditor shall make specific inquiries to understand
these matters and their potential consequences” Explain.
Answer: Specific inquiries by auditor when deviations from controls

are detected
As per SA 330 “Responses to Assessed Risks”, when deviations

from controls upon which the auditor intends to rely are detected,
the auditor shall make specific inquiries to understand these
matters and their potential consequences, and shall determine
whether:
(a) The test of controls that have been performed provide an

appropriate basis for reliance on the controls;
(b) Additional test of controls is necessary; or
(c) The potential risks of misstatement need to be addressed

using substantive procedures.

Page 33
Q.23 State the factors that may assist the auditor in determining whether
external confirmation procedures are to be performed as substantive
audit procedures
Answer: Factors that may assist in determining use of external
confirmations as substantive audit procedures:
As per SA 330 “Responses to Assessed Risks” factors that may
assist the auditor in determining whether external confirmation
procedures are to be External Confirmations performed as
substantive audit procedures include:
1. The confirming party’s knowledge of the subject matter –
responses may be more reliable if provided by a person at the
confirming party who has the requisite knowledge about the
information being confirmed.
2. The ability or willingness of the intended confirming
party to respond – for example, the confirming party:
• May not accept responsibility for responding to a
confirmation request;
• May consider responding too costly or time consuming;
• May have concerns about the potential legal liability
resulting from responding;
• May account for transactions in different currencies; or

Page 34
• May operate in an environment where responding to
confirmation requests is not a significant aspect of day-to-
day operations.
In such situations, confirming parties may not respond, may
respond in a casual manner or may attempt to restrict the
reliance placed on the response.
3. The objectivity of the intended confirming party – if the
confirming party is a related party of the entity, responses to
confirmation requests may be less reliable.
Q.24 Discuss the various points which auditor needs to consider in
determining whether it is appropriate to use audit evidence about
operating effectiveness of controls obtained in previous audit, and if so,
the length of the time period that may elapsed before retesting.
[Nov. 19 (4 Marks)]
Answer: Considerations in determining appropriateness of using audit
evidence about operating effectiveness of controls obtained in
previous audit:
SA 330 “Responses to Assessed Risks” deals with the auditor’s
responsibility to design and implement responses to the risks of
material misstatements identified and assessed by the auditor in

Page 35
accordance with SA 315. Accordingly, in determining whether it is
appropriate to use audit evidence about the operating effectiveness
of controls obtained in previous audits, and, if so, the length of the
time period that may elapse before retesting a control, the auditor
shall consider the following:
(a) The effectiveness of other elements of internal control,
including the control environment, the entity’s monitoring of
controls, and the entity’s risk assessment process;
(b) The risks arising from the characteristics of the control,
including whether it is manual or automated;
(c) The effectiveness of general IT-controls;
(d) The effectiveness of the control and its application by the
entity, including the nature and extent of deviations in the
application of the control noted in previous audits, and
whether there have been personnel changes that significantly
affect the application of the control;
(e) Whether the lack of a change in a particular control poses a
risk due to changing circumstances; and
(f) The risks of material misstatement and the extent of reliance
on the control.

Page 36
3.4 - Written Representations (SA 580)
Q.25 Explain clearly meaning of Management Representation and objective
of the auditor regarding written representation.
Or
Explain clearly objective of the auditor regarding written
representation. [RTP-Nov. 19]
Or
Audit evidence is all the information used by the auditor in arriving at
the conclusions on which the audit opinion is based. Written
representations are necessary information that the auditor requires in
connection with the audit of the entity’s financial statements.
Accordingly, similar to responses to inquiries, written representations
are audit evidence. Explain stating clearly objectives of the auditor
regarding written representation. [RTP-May 20]
Answer: Written Representation:
• SA 580 “Written Representation” defines the term as a written
statement by management provided to the auditor to confirm
certain matters or to support other audit evidence.
• Written representations in this context do not include financial
statements, the assertions therein or supporting books and
records.

Page 37
• Written representations are necessary information that the

auditor requires in connection with the audit, hence they are
recognised as audit evidence as a response to inquiries.
• Although written representations provide necessary audit

evidence, they do not provide sufficient appropriate audit
evidence on their own about any of the matters with which they
deal.
• Auditor requires the written representation from the

management to support other audit evidence relevant to the
Financial Statements. or specific assertions in the Financial
Statements.
Objective of Auditor regarding Written representation:
(a) To obtain written representations from management that

management believes that it has fulfilled the fundamental
responsibilities that constitute the premise on which an audit is
conducted;
(b) To support other audit evidence relevant to the financial

statements or specific assertions in the financial statements by
means of written representations, if determined necessary by the
auditor or required by other SAs; and
(c) To respond appropriately to written representations provided by

management or if management does not provide the written
representations requested by the auditor.

Page 38
Q. 26 “Although written representations provide necessary audit evidence

yet they do not provide sufficient appropriate audit evidence on their
own about any of the matters with which they deal”. Discuss.
Answer: Meaning and Nature of Written Representations:
Refer Answer of Q. No. 25.
Q.27 The auditor P of PAR and Co., a firm of Chartered Accountants is

conducting audit of AB Industries Ltd. The auditor requests
management to provide Banker’s certificate in support of Fixed
deposits whereas management provides only written representation
on the matter.
Analyse how would you deal as an auditor. [RTP-May 18]
Answer: Management Representation:
• SA 580 “Written Representation” defines the term as a written

statement by management provided to the auditor to confirm
certain matters or to support other audit evidence.
• Although written representations provide necessary audit

evidence, they do not provide sufficient appropriate audit
evidence on their own about any of the matters with which they
deal. Furthermore, the fact that management has provided
reliable written representations does not affect the nature or
extent of other audit evidence that the auditor obtains about the
fulfillment of management’s responsibilities, or about specific
assertions.

Page 39
• In the present case, auditor requests management to provide
Banker’s certificate in support of Fixed deposits whereas
management provides only written representation on the
matter.
Conclusion: Auditor would further request the management to
provide him with the Banker’s certificate in support of fixed
deposits held by the company.
Q.28 Discuss with reference to SAs: What do you mean by “Written
Representations”? As an auditor, how would you deal if management
does not provide requested written representations?
[May 14 (5 Marks)]
Answer: Meaning of Written Representation:
Refer Answer of Q. No. 25.
Auditor’s duties if management refuses to provide written
representation:
If the management does not provide one or more of the requested
written representation, the auditor shall:
1. Discuss the matter with management and
2. Re-evaluate the reliability and integrity of management.

Page 40
3. Take appropriate action including the determining the possible
effect on the opinion.
4. Under these circumstances the auditor shall issue a disclaimer
of opinion.
3.5 - Audit Evidence - Specific Considerations for Selected Items (SA 501)
Q.29 Explain the procedures to be performed by auditor to obtain sufficient
and appropriate audit evidence regarding the existence and condition
of inventory.
Or
How would an auditor proceed to obtain sufficient appropriate audit
evidence regarding the existence and condition of inventory? Also,
state reporting requirements in this respect.
Or
ABC Ltd is engaged in manufacturing of different type of yarns. On-
going through its financial statements for the past years, it is observed
that inventory is material to the financial statements. You as an
auditor of the company wanted to obtain sufficient appropriate audit
evidence regarding the existence and condition of the inventory as
appearing in the financial statements. Discuss, how would you proceed
as an auditor. [MTP-March 18]

Page 41
Answer: Procedure to be performed to obtain sufficient and

appropriate evidence regarding existence and condition of
inventory:
SA 501 “Audit Evidence – Specific Considerations for selected

items” deals with specific considerations by the auditor in
obtaining sufficient and appropriate audit evidence, with respect
to certain aspects of inventory, litigation and claims, and
segment information in an audit of financial statements.
Accordingly, when inventory is material to the F. S., the auditor

shall obtain sufficient appropriate audit evidence regarding the
existence and condition of inventory by:
(a) Attendance at physical inventory counting, unless

impracticable, to:
• Evaluate management instructions & procedures for

recording & controlling the results of the entity’s physical
inventory counting;
• Observe the performance of management’s count

procedures;
• Inspect the inventory;
• Perform test counts;
(b) Performing audit procedures over the entity’s final inventory

records to determine whether they accurately reflect actual
inventory count results.

Page 42
Q.29A Explain clearly the examples of matters relevant in planning
attendance at physical inventory counting. [RTP-May 20]
Answer: Matters relevant in planning attendance at physical inventory

counting:
1. Nature of inventory.
2. Stages of completion of work in progress.
3. The risks of material misstatement related to inventory.
4. The nature of the internal control related to inventory.
5. Whether adequate procedures are expected to be established

and proper instructions issued for physical inventory counting.
6. The timing of physical inventory counting.
7. Whether the entity maintains a perpetual inventory system.
8. The locations at which inventory is held, including the

materiality of the inventory and the risks of material
misstatement at different locations, in deciding at which
locations attendance is appropriate.
9. Whether the assistance of an auditor’s expert is needed.
Q.30 Explain the auditor’s procedures w.r.t. determination of existence and

condition of inventory under the following circumstances:
(a) Inventory count conducted at a date other than balance sheet.
(b) To attend the inventory is impracticable.

Page 43
Answer: Auditor’s procedures w.r.t. determination of existence and
condition of inventory:
to certain aspects of inventory, litigation and claims, and segment
information in an audit of financial statements.
Inventory count conducted a date other than balance sheet:
If physical inventory counting is conducted at a date other than
the date of the financial statements, the auditor shall, in addition
to the general procedures, perform audit procedures to obtain
audit evidence about whether changes in inventory between the
count date and the date of the financial statements are properly
recorded.
To attend the inventory is impracticable:
• If attendance at physical inventory counting is impracticable,
the auditor shall perform alternative audit procedures to
obtain sufficient appropriate audit evidence regarding the
existence and condition of inventory.
• If it is not possible to do so, the auditor shall modify the
opinion in the auditor’s report in accordance with SA 705.

Page 44
Q.31 “P India” Ltd. is a manufacturer of various sports products. The
company is having several cases of litigation pending in courts. The
auditor wanted to identify litigation and claims, which may give rise to
risk of material misstatements. Suggest the audit procedures in the
given case. [May 19 (4 Marks)]
Answer: Audit Procedure for identifying litigation and claim:
to certain aspects of inventory, litigation and claims, and segment
information in an audit of financial statements. Accordingly,
• The auditor shall design and perform audit procedures in
order to identify litigation and claims involving the entity
which may give rise to a risk of material misstatement,
including:
(a) Inquiry of management and, where applicable, others
within the entity, including in-house legal counsel;
(b) Reviewing minutes of meetings of those charged with
governance and correspondence between the entity and its
external legal counsel; and

Page 45
(c) Reviewing legal expense accounts.
• If the auditor assesses a risk of material misstatement
regarding litigation or claims that have been identified, or
when audit procedures performed indicate that other material
litigation or claims may exist, the auditor shall, in addition to
the procedures required by other SAs, seek direct
communication with the entity’s external legal counsel. If law,
regulation or the respective legal professional body prohibits
the entity’s external legal counsel from communicating directly
with the auditor, the auditor shall perform alternative audit
procedures.
• The auditor shall modify the opinion in the auditor’s report in
accordance with SA 705, if:
(a) management refuses to give the auditor permission to
communicate or meet with the entity’s external legal
counsel, or the entity’s external legal counsel refuses to
respond appropriately to the letter of inquiry, or is
prohibited from responding; and
(b) the auditor is unable to obtain sufficient appropriate audit
evidence by performing alternative audit procedures.

Page 46
3.6 - External Confirmation (SA 505)
Q.31A Define the following:
(i) Positive confirmation request

(ii) Negative confirmation request
(iii) Non-response
(iv) Exception [RTP-May 20]
Answer: Definition of various terms:
SA 505 “External Confirmations” defines the various terms as

follows:
(i) Positive confirmation request – A request that the

confirming party respond directly to the auditor indicating
whether the confirming party agrees or disagrees with the
information in the request, or providing the requested
information.
(ii) Negative confirmation request – A request that the
confirming party respond directly to the auditor only if the
confirming party disagrees with the information provided in
the request.
(iii) Non-response – A failure of the confirming party to respond,
or fully respond, to a positive confirmation request, or a
confirmation request returned undelivered.
(iv) Exception – A response that indicates a difference between
information requested to be confirmed, or contained in the
entity’s records, and information provided by the confirming
party.

Page 47
Q.32 What is meant by external confirmation? Mention four situations
where external confirmation may be useful for auditors.
or
Explain the process of External Confirmation. Give some examples
where external confirmation may be used as audit evidence.
[Nov. 11 (8 Marks)]
Answer: External Confirmation:
SA 505 “External Conformation” deals with the auditor’s use of

external confirmation procedures to obtain audit evidence.
Meaning of External Conformation: SA 505 defined external

confirmation as Audit evidence obtained as a direct written
response to the auditor from a third party (the confirming party),
in paper form, or by electronic or other medium. External
Confirmation is of two types:
1. Positive Confirmation request: A request that the

confirming party respond directly to the auditor indicating
whether the confirming party agrees or disagrees with the
information in the request, or providing the requested
information
2. Negative Confirmation request: A request that the

confirming party respond directly to the auditor only if the
confirming party disagrees with the information provided in
the request.

Page 48
Process of obtaining External Conformation:
(a) Determining the information to be confirmed or requested:
It may be with respect to
• Account balances & their elements.
• Terms of agreements/ contracts/ transactions.
(b) Selecting the appropriate confirming party
(c) Designing the confirmation requests: It also includes
determining that requests are properly addressed, and
contain return information for responses to be sent directly
to the auditor.
(d) Sending the requests, including follow-up requests when
applicable, to the confirming party.
Situations where External Confirmation may be used: Refer
answer of Q. No. 16.
Q.32A When using external confirmation procedures, the auditor shall
maintain control over external confirmation requests including
sending the requests, including follow-up requests when applicable,
to the confirming party. Explain the other points as to when using
external confirmation procedures, the auditor would be required to
maintain control over external confirmation requests. [RTP-May 20]

Page 49
Answer: Control over External Confirmation requests:
As per SA 505 “External Confirmations” when using external
confirmation procedures, the auditor shall maintain control over
external confirmation requests, including:
(a) Determining the information to be confirmed or requested;
(b) Selecting the appropriate confirming party;
(c) Designing the confirmation requests, including determining
that requests are properly addressed and contain return
information for responses to be sent directly to the auditor;
and
(d) Sending the requests, including follow-up requests when
applicable, to the confirming party.
Q.33 What are the factors to be considered while designing a confirmation
request. [Nov. 12 (8 Marks)]
Answer: Factors to be considered while designing a confirmation
request:
SA 505 “External Conformation” deals with the auditor’s use of
external confirmation procedures to obtain audit evidence.
Accordingly, while designing a confirmation request auditor
should consider the following factors:
(i) Assertion being addressed.

Page 50
(ii) Specific identified Risk of Material Misstatement.
(iii) Layout & presentation of request.
(iv) Prior experience on the audit.
(v) Method of communication.
(vi) Management authorisation/encouragement to Confirming
Party to respond to auditor.
(vii) Ability of Confirming Party to provide/confirm requested
information.
Q.34 The auditor of H Ltd. wanted to obtain confirmation from its
creditors. But the management made a request to the auditor not to
seek confirmation from certain creditors citing disputes. Can the
auditor of H Ltd. Accede to this request?
Answer: Management refusal to allow auditor to send confirmation

request:
• SA 505, “External Confirmations”, establishes standards on

the auditor’s use of external confirmation as a means of
obtaining audit evidence. It requires that the auditor should
employ external confirmation procedures in consultation
with the management.
• The auditor may come across certain situations in which the

management may request him not to seek external
confirmation from certain parties because of some reasons,

Page 51
for example, due to a dispute with the particular creditor or

debtor.
• In such cases, if management refuses to allow the auditor to

send a confirmation request, the auditor shall:
1. Inquire as to management’s reasons for the refusal, and

seek audit evidence as to their validity and
reasonableness;
2. Evaluate the implications of management’s refusal on the

auditor’s assessment of the relevant risks of material
misstatement, including the risk of fraud, and on the
nature, timing and extent of other audit procedures; and
3. Perform alternative audit procedures designed to obtain

relevant and reliable audit evidence.
• If the auditor concludes that management’s refusal to allow

the auditor to send a confirmation request is unreasonable,
or the auditor is unable to obtain relevant and reliable audit
evidence from alternative audit procedures, the auditor shall
communicate with TCWG in accordance with SA 260. The
auditor also shall determine the implications for the audit
and the auditor’s opinion in accordance with SA 705.
• The auditor should also ask the management to submit its

request in a written form, detailing therein the reasons for
such a request.

Page 52
Q.35 Write short note on: Reliability of external confirmations.
[Nov. 10 (4 Marks)]
Answer: Reliability of external Confirmations:
As per SA 505 “External Confirmation”, the reliability of external
confirmations depends among other
factors, upon the application of appropriate procedures by the
auditor in designing the external confirmation request,
performing the external confirmation procedures, and evaluating
the results of
the external confirmation procedures. The factors that affect the
reliability of confirmations include:
(a) The control which the auditor exercises over confirmation
request and responses;
(b) The character of respondents; and
(c) Any restrictions included in the response or imposed by the
management.
If the auditor determines that a response to a confirmation
request is not reliable, the auditor shall evaluate the implications
on the assessment of the relevant risks of material misstatement,
including the risk of fraud, and on the related nature, timing and
extent of other audit procedures.

Page 53
3.7 – Initial Audit Engagement – Opening Balances (SA 510)
Q.36 Write short note on: Initial audit Engagement. [May 12 (4 Marks)]
Answer: Initial Audit Engagements:
As per SA 510 “Initial Audit Engagements - Opening Balances”,
initial audit engagement is an engagement in which either:
(i) The financial statements for the prior period were not
audited; or
(ii) The financial statements for the prior period were audited by
a predecessor auditor.
Audit Procedures in case of Initial Audit Engagement: Refer Q.
No. 37
Q.37 Discuss the objective of Auditor with respect to Opening balances – in
conducting an initial audit engagement.
Answer: Objectives of Auditor w.r.t. Opening balances in vase pf Initial
audit engagement:
As per SA 510 “Initial Audit Engagements- Opening Balances”, the
objective of the Auditor while conducting an initial audit
engagement with respect to opening balances is to obtain
sufficient appropriate audit evidence so that the-

Page 54
(i) opening balances of the preceding period have been correctly
brought forward to the current period;
(ii) opening balances do not contain any misstatement that
materially affect the current period’s financial statements; and
(iii) appropriate accounting policies reflected in the opening
balances have been consistently applied in the current period’s
financial statements, or changes thereto are properly
accounted for and adequately presented and disclosed in
accordance with the applicable financial reporting framework.
Q.38 What are the audit procedures to be followed by a statutory auditor in
the audit of opening balances if the financial statements for the
preceding year were audited by another auditor.
Or
Discuss with reference to SA ‘510’ Initial Audit Engagements - Opening
Balances", the procedures the auditor should undertake in respect of
opening balances for a new audit engagement. [May 17 (5 Marks)]
Answer: Audit procedures for verification of opening balances in case
of initial audit engagement:
As per SA 510 “Initial Audit Engagements- Opening Balances”,
while verifying the opening balances in case of initial audit
engagement, auditor need to perform following procedures:

Page 55
• The auditor shall read the most recent financial statements,
if any, and the predecessor auditor’s report thereon, if any, for
information relevant to opening balances, including
disclosures.
• The auditor shall obtain sufficient appropriate audit evidence
about whether the opening balances contain misstatements
that materially affect the current period’s F.S. by:
(a) Determining whether the prior period’s closing balances
have been correctly brought forward to the current period
or, when appropriate, any adjustments have been
disclosed as prior period items in the current year’s
Statement of Profit and Loss;
(b) Determining whether the opening balances reflect the

application of appropriate accounting policies; and
(c) Performing one or more of the following:
(i) Where the prior year F.S. were audited, perusing the
copies of the audited F.S. including the other relevant
documents relating to the prior period F.S.;
(ii) Evaluating whether audit procedures performed in
the current period provide evidence relevant to the
opening balances; or
(iii) Performing specific audit procedures to obtain
evidence regarding the opening balances.

Page 56
• If the auditor obtains audit evidence that the opening balances
contain misstatements that could materially affect the current
period’s F.S., the auditor shall perform such additional audit
procedures as are appropriate in the circumstances to
determine the effect on the current period’s F.S.
• If the auditor concludes that such misstatements exist in the
current period’s F.S., the auditor shall communicate the
misstatements with the appropriate level of management and
TCWG in accordance with SA 450.
Q.39 M/s Pankaj & Associates, Chartered Accountants, have been appointed
as an auditor of ABC Limited. CA Pankaj did not apply any audit
procedures regarding opening balances. He argued that since financial
statements were audited by the predecessor auditor therefore he is not
required to verify them. Is CA Pankaj correct in his approach?
[Nov. 18 (5 Marks)]
Answer: Auditor’s procedures w.r.t. Opening balances in case of Initial
audit engagement:
• As per SA 510 “Initial Audit Engagements- Opening Balances”, in
case of initial audit engagement auditor shall obtain sufficient
appropriate audit evidence about whether the opening balances
contain misstatements that materially affect the current
period’s F.S. by:

Page 57
(a) Determining whether the prior period’s closing balances
have been correctly brought forward to the current period
or, when appropriate, any adjustments have been disclosed
as prior period items in the current year’s Statement of
Profit and Loss;
(b) Determining whether the opening balances reflect the
application of appropriate accounting policies; and
(c) Performing one or more of the following:
(i) Where the prior year F.S. were audited, perusing the
copies of the audited F.S. including the other relevant
documents relating to the prior period F.S.;
(ii) Evaluating whether audit procedures performed in the
current period provide evidence relevant to the
opening balances; or
(iii) Performing specific audit procedures to obtain
evidence regarding the opening balances.
• In the present case, M/s Pankaj & Associates, Chartered
Accountants, have been appointed as an auditor of ABC Limited.
CA Pankaj did not apply any audit procedures regarding opening
balances. He argued that since financial statements were audited
by the predecessor auditor therefore, he is not required to verify
them.
Conclusion: Approach of Mr. Pankaj is not correct. He needs to apply
the procedures as stated in SA 510.

Page 58
Q.40 Auditors of M/s Tender India (P) Ltd. were changed for the accounting
year 2019-20. The closing inventory of the company as on 31.3.2019
amounting to Rs. 100 lacs continued as it is and became closing
inventory as on 31.3.2020. The auditors of the company propose to
exclude from their audit programme the audit of closing inventory of
Rs. 100 lacs on the understanding that it pertains to the preceding year
which was audited by another auditor. [MTP-Oct. 19]
Answer: Verification of Inventory:
• As per SA 510 “Initial Audit Engagements – Opening Balances”, in
conducting an initial audit engagement, the objective of the
auditor with respect to opening balances is to obtain sufficient
appropriate audit evidence about whether-
(i) Opening balances contain misstatements that materially
affect the current period’s financial statements; and
(ii) Appropriate accounting policies reflected in the opening
balances have been consistently applied in the current
period’s financial statements, or changes thereto are
properly accounted for and adequately presented and
disclosed in accordance with the applicable financial
reporting framework.

Page 59
• When the financial statements for the preceding period were
audited by predecessor auditor, the current auditor may be able
to obtain sufficient appropriate audit evidence regarding opening
balances by perusing the copies of the audited financial
statements including the other relevant documents relating to
the prior period financial statements such as supporting
schedules to the audited financial statements. Ordinarily, the
current auditor can place reliance on the closing balances
contained in the financial statements for the preceding period,
except when during the performance of audit procedures for the
current period the possibility of misstatements in opening
balances is indicated.
• General principles governing verification of assets require that
the auditor should confirm that assets have been correctly valued
as on the Balance Sheet date.
• The contention of the management that the inventory has not
undergone any change cannot be accepted, it forms part of
normal duties of auditor to ensure that the figures on which he is
expressing opinion are correct and properly valued. Moreover, it
is also quite likely that the inventory lying as it is might have
deteriorated and the same need to be examined. The auditor is
advised not to exclude the audit of closing inventory from his
audit programme.

Page 60
3.8 – Related Parties (SA 550)
Q.40A The nature of related party relationships and transactions may, in
some circumstances, give rise to higher risks of material
misstatement of the financial statements than transactions with
unrelated parties. Explain with the help of at least three examples.
[RTP-May 20]
Answer: Nature of Related Party Relationships & Transactions:
Many related party transactions are in the normal course of

business. In such circumstances, they may carry no higher risk of
material misstatement of the financial statements than similar
transactions with unrelated parties.
However, the nature of related party relationships and

transactions may, in some circumstances, give rise to higher risks
of material misstatement of the financial statements than
transactions with unrelated parties. For example:
(a) Related parties may operate through an extensive and

complex range of relationships and structures, with a
corresponding increase in the complexity of related party
transactions.
(b) Information systems may be ineffective at identifying or

summarising transactions and outstanding balances between
an entity and its related parties.

Page 61
(c) Related party transactions may not be conducted under
normal market terms and conditions; for example, some
related party transactions may be conducted with no
exchange of consideration.
Q.41 Explain the responsibilities of auditor in relation to related parties.
or
There are specific accounting and disclosure requirements for related
party relationships, transactions and balances to enable users of the
financial statements to understand their nature and effects on the
financial statements. Analyse and explain stating the responsibility of
auditor in this regard. [RTP-May 19]
Answer: Responsibilities of Auditor in relation to related parties:
SA 550 “Related Parties” deals with the auditor’s responsibilities
regarding related party relationships and transactions when
performing an audit of financial statements. Accordingly,
• Many financial reporting frameworks establish specific
accounting and disclosure requirements for related party
relationships, transactions and balances to enable users of the
financial statements to understand their nature and effects on
the financial statements.

Page 62
• Where the applicable FRF establishes such requirements, the

auditor has a responsibility to perform audit procedures to
identify, assess and respond to the RMM arising from the
entity’s failure to appropriately account for or disclose related
party relationships, transactions or balances in accordance
with the requirements of the framework.
• Even if the applicable FRF establishes minimal or no related
party requirements, the auditor nevertheless needs to obtain
an understanding of the entity’s related party relationships
and transactions sufficient to be able to conclude whether the
financial statements, insofar as they are affected by those
relationships and transactions:
(a) achieve a true and fair presentation; or
(b) are not misleading.
• In addition, an understanding of the entity’s related party
relationships and transactions is relevant to the auditor’s
evaluation of whether one or more fraud risk factors are
present as required by SA 240 because fraud may be more
easily committed through related parties.
• Owing to 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
the SAs. In the context of related parties, the potential effects of
inherent limitations on the auditor’s ability to detect material
misstatements are greater for such reasons as the following:

Page 63
(a) Management may be unaware of the existence of all
related party relationships and transactions, particularly
if the applicable financial reporting framework does not
establish related party requirements.
(b) Related party relationships may present a greater
opportunity for collusion, concealment or manipulation
by management.
• Planning and performing the audit with professional
skepticism as required by SA 200 is therefore particularly
important in this context, given the potential for undisclosed
related party relationships and transactions.
Q.42 Write short note on: Identification of significant related party
transaction outside business. [Nov. 13 (4 Marks)]
Or
Discuss the following: With reference to SA 550 “Identification of
significant related party transaction outside the entity’s normal
course of business. [May 16 (5 Marks)]

Page 64
Answer: Identification of Significant Related Party Transaction
outside business:
SA 550 “Related Parties” deals with the auditor’s
responsibilities regarding related party relationships and
transactions when performing an audit of financial statements.
Accordingly, for identified significant related party transactions
outside the entity’s normal course of business, the auditor shall:
(a) Inspect underlying contracts/agreements and evaluate
whether:
• Business rationale (or lack thereof) suggests that
transactions entered to engage in fraudulent financial
reporting or to conceal misappropriation of assets.
• Terms of transactions consistent with management’s
explanations.
• Transactions appropriately accounted for/disclosed in
accordance with FRF.
(b) Obtain evidence that transactions have been appropriately
authorised & approved.

Page 65
3.9 – Concept of True and Fair View
Q.43 Discuss the concept of “True and Fair”.
[May 05 (8 Marks), Nov. 12 (6 Marks)]
Answer: True and Fair View:
• The concept of “true and fair” is a fundamental concept in

auditing. The phrase “true and fair” in the auditor's report
signifies that the auditor is required to express his opinion as to
whether the state of affairs and the results of the entity as
ascertained by him in the course of his audit are truly and fairly
represented in the accounts under audit.
• What constitutes “true and fair” has not been defined in the
legislation.
• Sec. 128(1) of Companies Act 2013 provides that every

company shall prepare and keep at its registered office books of
account and other relevant books and papers and financial
statement for every financial year which gives a true and fair
view of the state of the affairs of the company.
• Sec. 129(1) of Companies Act, 2013 provides that the financial

statements shall give a true and fair view of the state of affairs of
the company or companies, comply with the accounting
standards notified under section 133 and shall be in the form or
forms as may be provided for different class or classes of
companies in Schedule III.

Page 66
• Sec. 143(2) of Companies Act, 2013 requires the auditor to make

a report to the members of the company indicating therein that,
to the best of his information and knowledge, the accounts and
financial statements give a true and fair view of the state of the
company’s affairs as at the end of its financial year & profit or
loss & cash flow for the year & other matters as may be
prescribed.
In specific terms to ensure truth and fairness, auditor is required to

examine the accounts with a view to verify that all assets and
liabilities, income and expenses are stated at the amounts which
are in accordance with accounting principles and policies and no
material item has been omitted.
Q.44 What constitutes true and fair view is a matter of auditor’s judgment,
but some specific points must be seen by the auditor to ensure true and
fair view.
Answer: Specific points to be seen to ensure true and fair view:
The concept of “true and fair” is a fundamental concept in auditing.

The phrase “true and fair” in the auditor's report signifies that the
auditor is required to express his opinion as to whether the state of
affairs and the results of the entity as ascertained by him in the
course of his audit are truly and fairly represented in the accounts
under audit.
What constitutes “true and fair” has not been defined in the
legislation. In specific terms to ensure truth and fairness, an auditor has
to see that:

Page 67
(i) the assets are neither undervalued or overvalued
(ii) no material asset is omitted;
(iii) the charge on assets, if any, is disclosed;
(iv) material liabilities should not be omitted, and liabilities are

neither undervalued or overvalued;
(v) accounting policies have been followed consistently;
(vi) all unusual, exceptional, non-recurring items have been

disclosed separately;
(vii) accounts have been drawn as per requirement of Schedule

III to the Companies Act; and
(viii) the accounts have been drawn in compliance to the relevant

AS.
(ix) In case of deviation from AS, disclosure should be made of

the reasons for such deviation and financial effects, if any
arising due to such deviation.
3.10 – Subsequent Events (SA 560)
Q.45 Write short note on: Subsequent Events.
or
Explain the meaning of term “Subsequent Events” as used in SA 560.

Should all types of subsequent events be considered by the auditor in
attest functions. [May 12 (8 Marks)]

Page 68
Answer: Subsequent Events:
SA 560 “Subsequent Events” defined the term as:
(a) Events occurring between the date of the financial
statements and the date of the auditor’s report, and
(b) Facts that become known to the auditor after the date of
the auditor’s report.
Consideration of Subsequent events by the auditor:
In respect of subsequent events, auditor is required to consider
the followings:
(a) Obtain sufficient appropriate audit evidence about
whether events occurring between the date of the financial
statements and the date of the auditor’s report that require
adjustment of, or disclosure in, the financial statements as
per the requirement of AS-4 “Events Occurring after the
Balance Sheet Date” are appropriately reflected in those
financial statements; and
(b) Respond appropriately to facts that become known to the
auditor after the date of the auditor’s report, that, had they
been known to the auditor at that date, may have caused
the auditor to amend the auditor’s report.

Page 69
Q.46 “The auditor should consider the effect of subsequent events on the
financial statements and auditor’s report according to SA 560”.
Comment. [MTP-Oct. 19]
Or
The auditor shall perform audit procedures designed to obtain

sufficient appropriate audit evidence that all events occurring
between the date of the financial statements and the date of the
auditor’s report that require adjustment of, or disclosure in, the
financial statements have been identified. Explain. [RTP-May 19]
Answer: Consideration of Effect of subsequent Events:
SA 560 “Subsequent Events” requires the auditor to obtain

sufficient appropriate audit evidence about whether events
occurring between the date of the financial statements and the
date of the auditor’s report that require adjustment of, or
disclosure in, the financial statements are appropriately reflected
in those financial statements. For this purpose, auditor shall
perform the following:
(a) Obtain an understanding of the procedures through which

management has identified subsequent events.
(b) Inquiring of management as to occurrence of Subsequent

events which affect the financial statements.
(c) Read minutes of management meetings that have been held

after the date of the financial statements.

Page 70
(d) Read the entity’s latest subsequent interim financial
statements, if any.
(e) If auditor identifies events that require adjustment or
disclosure in the financial statements, the auditor should
determine whether each such event is appropriately reflected
in the financial statements.
(f) The auditor shall request the management to provide a
“Written Representation” that all events occurring
subsequent to the date of the financial statements and
requires adjustment or disclosure have been adjusted or
disclosed.
Q.46A The auditor has no obligation to perform any audit procedures
regarding the financial statements after the date of the auditor’s
report. However, when, after the date of the auditor’s report but
before the date the financial statements are issued, a fact becomes
known to the auditor that, had it been known to the auditor at the
date of the auditor’s report, may have caused the auditor to amend
the auditor’s report. Explain the auditor’s obligation in the above
situation. [RTP-May 20]

Page 71
Answer: Audit Procedures regarding Facts Which Become Known to
the Auditor After the Date of the Auditor’s Report but Before
the Date the F.S. are Issued:
As per SA 560 “Subsequent Events” the auditor has no obligation
to perform any audit procedures regarding the financial
statements after the date of the auditor’s report. However, when,
after the date of the auditor’s report but before the date the
financial statements are issued, a fact becomes known to the
auditor that, had it been known to the auditor at the date of the
auditor’s report, may have caused the auditor to amend the
auditor’s report, the auditor shall:
(a) Discuss the matter with management and, where
appropriate, those charged with governance.
(b) Determine whether the financial statements need
amendment and, if so,
(c) Inquire how management intends to address the matter in
the financial statements.
Q.47 Enquiry from management is helpful for auditor to evaluate
subsequent events. Discuss specific enquiries in reference of SA 560,
which might have effect on the financial statements.
[Nov. 14 (5 Marks)]
Or

Page 72
In the context of SA 560 “Subsequent events”, state specific enquiries
on matters by an auditor which may have effect on Financial
Statements. [Nov. 17 (5 Marks)]
Answer: Specific enquiries to be conducted in reference to SA 560:
SA 560 “Subsequent Events” requires the auditor to obtain
sufficient & appropriate audit evidence to ensure that events
which require adjustments or disclosure in the financial
statements have been identified. For this purpose, auditor is
required to inquire the management as to occurrence of
Subsequent events which affect the financial statements. Specific
inquiries as specified by SA 560 include the following:
1. Whether new commitments, borrowings or guarantees have
been entered into.
2. Whether sales or acquisitions of assets have occurred or are
planned.
3. Whether there have been increases in capital or issuance of
debt instruments, such as the issue of new shares or
debentures, or an agreement to merge or liquidate has been
made or is planned.
4. Whether any assets have been appropriated by government or
destroyed, for example, by fire or flood.

Page 73
5. Whether there have been any developments regarding

contingencies.
6. Whether any unusual accounting adjustments have been made

or are contemplated.
7. Whether any events have occurred or are likely to occur that

will bring into question the appropriateness of accounting
policies used in the financial statements, as would be the case,
for example, if such events call into question the validity of the
going concern assumption.
8. Whether any events have occurred that are relevant to the

measurement of estimates or provisions made in the financial
statements.
9. Whether any events have occurred that are relevant to the

recoverability of assets.
3.11 – Going Concern (SA 570)
Q.48 On the basis of which assumption, the financial statements of a company are
prepared. Explain. Also describe the objectives of the auditor regarding going
concern. [RTP-May 19]
Or
When the use of the going concern basis of accounting is appropriate, assets
and liabilities are recorded on the basis that the entity will be able to realize
its assets and discharge its liabilities in the normal course of business.
Explain stating also the objective of the auditor regarding going concern.
[RTP-Nov. 19]

Page 74
Answer: Going Concern Basis of Accounting
As per AS-1 “Disclosure of Accounting Policies, financial statements

are prepared on the basis of three assumptions (i) Going Concern
(ii) consistency and (iii) Accrual. Under the going concern basis of
accounting, the financial statements are prepared on the
assumption that the entity is a going concern and will continue its
operations for the foreseeable future. When the use of the going
concern basis of accounting is appropriate, assets and liabilities are
recorded on the basis that the entity will be able to realize its assets
and discharge its liabilities in the normal course of business.
Objectives of the auditor: As per SA 570 “Going Concern”,

objectives of the auditor regarding going concern are:
(i) To obtain written representations from management and,

where appropriate, those charged with governance that they
believe that they have fulfilled their responsibility for the
preparation of the financial statements and for the
completeness of the information provided to the auditor;
(ii) To support other audit evidence relevant to the financial
statements or specific assertions in the financial statements
by means of written representations, if determined necessary
by the auditor or required by other SAs; and
(iii) To respond appropriately to written representations
provided by management and, where appropriate, those
charged with governance, or if management or, where
appropriate, those charged with governance do not provide
the written representations requested by the auditor

Page 75
Q.49 Write short note on: Procedures to be performed by the auditor in
expressing opinion on ‘going concern’ assumption. [Nov. 10 (4 Marks)]
Or
Explain with reference to relevant SA: Appropriateness of going
concern assumption.
Answer: Procedures to be performed in expressing opinion on going
concern assumption:
SA 570 “Going Concern” deals with the auditor’s responsibility
with respect to management’s use of the going concern
assumption in the preparation and presentation of the financial
statements. As per SA 570, auditor may perform the following
procedures for this purpose:
1. Analysing and discussing cash flow, profit and other relevant
forecasts with management.
2. Analysing and discussing the entity’s latest available interim
financial statements.
3. Reading the terms of debentures and loan agreements and
determining whether any have been breached.
4. Reading minutes of the meetings of shareholders, those charged
with governance and relevant committees for reference to
financing difficulties.

Page 76
5. Inquiring of the entity’s legal counsel regarding the existence of
litigation and claims and the reasonableness of management’s
assessments of their outcome and the estimate of their financial
implications.
6. Confirming the existence, legality and enforceability of
arrangements to provide or maintain financial support with
related and third parties and assessing the financial ability of
such parties to provide additional funds.
7. Evaluating the entity’s plans to deal with unfilled customer
orders.
8. Performing audit procedures regarding subsequent events to
identify those that either mitigate or otherwise affect the
entity’s ability to continue as a going concern.
9. Confirming the existence, terms and adequacy of borrowing
facilities.
10. Obtaining and reviewing reports of regulatory actions.
11. Determining the adequacy of support for any planned disposals
of assets.
Q.50 Explain going concern assumption with reference to SA 570. State some
financial events or conditions that may case doubt about going concern
assumption. [May 12 (8 Marks)]

Page 77
Answer: Financial Indicators to be considered for evaluation of Going
Concern Assumption:
SA 570 “Going Concern” deals with the auditor’s responsibility in
the audit of financial statements with respect to management’s use
of the going concern assumption in the preparation and
presentation of the financial statements. As per SA 570, financial
indicators to be considered for evaluation of going concern are
listed below:
1. Net liability or net current liability position.
2. Fixed-term borrowings approaching maturity without realistic
prospects of renewal or repayment; or excessive reliance on
short-term borrowings to finance long-term assets.
3. Indications of withdrawal of financial support by creditors.
4. Negative operating cash flows indicated by historical or
prospective financial statements.
5. Adverse key financial ratios.
6. Substantial operating losses or significant deterioration in the
value of assets used to generate cash flows.
7. Arrears or discontinuance of dividends.
8. Inability to pay creditors on due dates.
9. Inability to comply with the terms of loan agreements.

Page 78
10. Change from credit to cash-on-delivery transactions with
suppliers.
11. Inability to obtain financing for essential new product
development or other essential investments.
Q.51 Discuss with reference to SAs: Operating conditions that may case
doubt going concern assumption. [May 14 (5 Marks)]
Answer: Operating Conditions that may cast doubt going concern

assumption:
SA 570 “Going Concern” deals with the auditor’s responsibility in

the audit of financial statements with respect to management’s
use of the going concern assumption in the preparation and
presentation of the financial statements. As per SA 570, operating
conditions that may cast doubt going concern assumption are
listed below:
1. Management intentions to liquidate the entity or to cease

operations.
2. Loss of key management without replacement.
3. Loss of a major market, key customer(s), franchise, license, or

principal supplier(s).
4. Labour difficulties.
5. Shortages of important supplies.
6. Emergence of a highly successful competitor.

Page 79
Objective Type Questions (True/False, Correct/Incorrect)
Q. 1 Inspection consists of looking at a process or procedure being

performed by others.
Answer: Statement is Incorrect.
• Inspection involves examining records or documents, whether

internal or external, in paper form, electronic form, or other
media, or a physical examination of an asset.
• Observation consists of looking at a process or procedure being

performed by others, for example, the auditor’s observation of
inventory counting by the entity’s personnel.
Q. 2 Purchase invoice is an example of internal evidence.
• Internal evidence is one that has been created within the client’s
organization.
• Purchase invoice is external evidence as it originates from

outside the entity.
Q. 3 Sufficiency is the measure of the quality of audit evidence.
Answer: Statement is incorrect.
• Sufficiency refers to the quantity of audit evidence.
• Appropriateness is the measure of quality of audit evidence.

Page 80
Q. 4 Substantive procedure may be defined as an audit procedure designed

to evaluate the operating effectiveness of controls in preventing or
detecting and correcting material misstatements at the assertion level.
• SA 330 defines substantive procedures as audit procedures

designed to detect the material misstatements at the
assertion level.
• Audit procedures designed to evaluate the operating

effectiveness of controls in preventing, or detecting and
correcting material misstatements at the assertion level are
known as Tests of Control.
Q.5 As per SA 570, the objective of the Auditor is to obtain sufficient

appropriate audit evidence about the appropriateness of
management’s use of consistency assumption in the preparation and
presentation of the financial statements.
As per SA 570 “Going Concern”, objective of the auditor is to obtain

sufficient appropriate audit evidence about the appropriateness of
management’s use of going concern basis of accounting in the
preparation of the financial statements.
Q.6 If the auditor believes that the concern will not continue as going
concern, he should issue disclaimer of opinion. [May 07 (2 Marks)]

Page 81
Answer: Statements is incorrect, as per Sa 570 “Going Concern” If the

financial statements have been prepared on a going concern basis
but, in the auditor’s judgment, management’s use of the going
concern assumption in the financial statements is inappropriate,
the auditor shall express an adverse opinion.
Q.7 If internal control is satisfactory, external evidence is more reliable

than internal evidence. [Nov. 07 (2 Marks)]
Answer: Statement is incorrect, as per SA 500 “Audit Evidence” the

reliability of audit evidence that is generated internally is
increased when the related controls, including those over its
preparation and maintenance, imposed by the entity are
effective.
Q.8 Management Certificate obtained by the Auditor is enough for

verification of Inventories. [Nov. 08 (2 Marks)]
• As per SA 580 “Written Representation” the representations

received from management are recognised as audit evidence,
but they do not constitute Sufficient and appropriateness.
• Auditor is required to seek corroborative audit evidence from

other sources inside or outside the entity, to evaluate whether
such representations are reasonable and consistent with other
evidences. Representation received from Management cannot
be a substitute for other audit evidence that the auditor could
reasonably expect to be available.

Page 82
Q.9 SA 580 is related to materiality. [Nov. 08 (2 Marks)]
Answer: Statement is false, SA 580 is related with “Written
Representation”. Materiality is dealt by SA 320.
Q.10 Audit working papers to be kept at least for 3 years.
[Nov. 08 (2 Marks)]
Answer: Statement is false. SA 230 “Audit Documentation” requires that
audit working papers is to be kept for 7 years from the date of
audit report.
Q.11 “Taking management representation is a convenient, economical and
equally acceptable auditing method even where the direct access by
auditor to audit evidence is possible”. [June 09 (2 Marks)]

• Auditor is required to seek corroborative audit evidence from
other sources inside or outside the entity, to evaluate whether
such representations are reasonable and consistent with other
evidences. Representation received from Management cannot
be a substitute for other audit evidence that the auditor could
reasonably expect to be available.

Page 83
Q.12 It is no part of subsequent auditor’s duty to verify the opening
balances of ledger accounts of current year, on the basis of balance
sheet audited by previous auditor. [June 09 (2 Marks)]
Answer: Statement is false as SA 510 “Initial Audit Engagements – Opening
Balances” states that in conducting an initial audit engagement,
the objective of the auditor with respect to opening balances is to
obtain sufficient appropriate audit evidence about whether
Opening balances contain misstatements that materially affect the
current period’s financial statements.
Q.13 A company which has been unable to negotiate borrowings from its
bankers claims that it will be able to continue as a ‘going concern’.
[Nov. 09 (2 Marks)]
Answer: Statement will be considered true if after applying the procedures as
stated in SA 570 “Going Concern” auditor concludes that inability of
company to negotiate borrowings from bankers is due to the reasons
other than company financial weakness. Otherwise the statement will
be considered as false as there will be a sufficient doubt over the ability
of the company to continue as a going concern without the financial
support.
Q.14 The auditee firm has no right to compel the auditor to provide copies
of the working papers. [Nov. 09 (2 Marks)]

Page 84
Answer: Statement is correct.
• SA 230 “Audit Documentation” states that unless otherwise
specified by law or regulation, audit documentation is the
property of the auditor.
• He may at his discretion make portions of working papers
available to client.
Q.15 Confirmations received by the auditor directly from third parties are
conclusive evidence in support of a transaction. [May 10 (2 Marks)]
Confirmations received directly from the third parties by the
auditor are more reliable but same cannot be treated as conclusive
evidence.
Q.16 Compliance procedures are tests designed to obtain audit evidence as
to completeness, accuracy and validity of data produced by accounting
system. [May 13 (2 Marks)]
• Compliance procedures are tests designed to obtain reasonable
assurance that those internal controls on which audit reliance is to
be placed are in effect.
• Here auditor is concerned with assertions that the control exists and
is operating effectively.

Page 85
Q.17 Branch auditor of a company should give photocopies of his working
papers on demand by Company Auditor. [Nov. 13 (2 Marks)]
Answer: Statement is Incorrect. SA 230 “Audit Documentation” states that
unless otherwise specified by law or regulation, audit
documentation is the property of the auditor. He may at his
discretion make portions of working papers available to client.
The main auditors of an enterprise do not have right of access to
the audit working papers of the branch auditors.
In the case of a company, the statutory auditor has to consider
the report of the branch auditor and has a right to seek
clarifications and/or to visit the branch if he deems it necessary
to do so for the performance of the duties as auditor. An auditor
can rely on the work of another auditor, without having any right
of access to the audit working papers of the other auditor.
Q.18 Financial statements should show “True and Correct” view of the
affairs of the entity. [Nov. 13 (2 marks)]
• Section 129(1) of the Companies Act, 2013 states that every
balance sheet of a company shall give a true and fair view of
the state of affairs of the company at the end of the financial
year.

Page 86
• Section 129(1) of the Companies Act, 2013 states that every
profit and loss account of a company shall give a true and fair
view of the profit or loss of the company for the financial year.
Q.19 An Auditor is bound to provide copies of the working papers to the
CEO of the company. [Nov. 14 (2 Marks)]
Answer: Statement is Incorrect. SA 230 “Audit Documentation” states that
unless otherwise specified by law or regulation, audit
documentation is the property of the auditor.
He may at his discretion make portions of working papers
available to client.
Q.20 The Auditor shall express an unqualified opinion if the Auditor is
unable to obtain sufficient audit evidence regarding the opening
balances. [Nov. 14 (2 Marks)]
SA 510 “Initial Audit Engagements—Opening Balances”, states
that if the auditor is unable to obtain sufficient appropriate audit
evidence regarding the opening balances, the auditor shall express
a qualified opinion or a disclaimer of opinion, as appropriate.

Page 87
Q.21 Written representation by management as to the quality of inventory
is substitute for verification. [May 15 (2 Marks)]
• As per SA 580 “Written representation” the objectives of the
written representation is to support other audit evidence
relevant to the financial statements or specific assertions in the
financial statements.
• Written representations cannot be considered as sufficient and
appropriate hence cannot be a substitute for other evidence that
the auditor could expect to be reasonably available.
Q.22 Working papers are property of client, as it contains client’s
information’s. [Nov. 15 (2 Marks)]
property of the auditor. He may at his discretion make portions
of working papers available to client.
• Working papers cannot be considered as property of the client,
irrespective of the matter that it contains client’s information.

Page 88
Q.23 Substantive procedures do not test the balance of accounts.
[May 16 (2 Marks)]
• Substantive procedures comprise of tests of details and
substantive analytical procedures.
• Tests of details comprise of details of transactions and account
balances.
Q.24 Evaluating responses to enquiries is an integral part of the inquiry
process. [May 16 (2 Marks)]
• As per SA – 500 “Audit Evidence” inquiry consists of seeking
information of knowledgeable persons, both financial and non-
financial, within the entity or outside the entity.
• Evaluating responses to inquiries is an integral part of the
inquiry process.
Q.25 One of the techniques used for gathering evidence is substantial
review. [Nov. 16 (2 Marks)]
Technique used for obtaining evidence is analytical review
procedure which consists of studying significant ratios and trends.

Page 89
Q.26 It is necessary for the auditor to maintain professional skepticism

throughout the audit. [Nov. 16 (2 Marks)]
As per SA 200 “Overall Objectives of the Independent Auditor and

Conduct of Audit in accordance with Standards on Auditing”
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.
• Using inappropriate assumptions in determining the nature,
timing, and extent of the audit procedures and evaluating the
results thereof.
Q.27 "Substantive procedures" may be defined as audit procedures

designed to evaluate the operating effectiveness of controls in
preventing, detecting and correcting material misstatements.
[May 17 (2 Marks)]

designed to detect the material misstatements at the assertion level.
• Audit procedures designed to evaluate the operating

effectiveness of controls in preventing, or detecting and
correcting material misstatements at the assertion level are
known as Tests of Control.

Page 90
Q.28 Written representation can be a substitute for other audit evidence.
[Nov. 17 (2 Marks)]

• Auditor requires the written representation from the

management to support other audit evidence relevant to the
Financial Statements. or specific assertions in the Financial
Statements.
Q.29 As per SA 230 on “Audit Documentations”, the working papers are not
the property of the auditor. [May 18-RTP]

of working papers available to client.
• The auditor should retain them long enough to meet the needs
of his practice and legal or professional requirement.
30 The Audit engagement documentations should ordinarily be retained by the

auditor for minimum of six years from the date of the auditor’s report or is
later, the date of the group auditor’s report, which ever.
[May 18 (2 Marks)]

Page 91
As per requirements of SQC 1 “Quality Control for Firms that

perform Audits and Reviews of Historical Financial Information,
and Other Assurance and Related Services Engagements” and SA
230 “Audit Documentation” audit engagement documentations
should be kept for a minimum of 7 years from the date of audit
report.
31 Mr. A is a statutory auditor of ABC Ltd. The branch of ABC Ltd. is

audited by Mr. B, another chartered Accountant. Mr. A requests for the
photocopies of the audit documentation of Mr. B pertaining of the
branch audit. [May 18 (2 Marks)]

of working papers available to client. The main auditors of an
enterprise do not have right of access to the audit working
papers of the branch auditors.
• In the case of a company, the statutory auditor has to consider
the report of the branch auditor and has a right to seek
clarifications and/or to visit the branch if he deems it necessary
to do so for the performance of the duties as auditor. An auditor
can rely on the work of another auditor, without having any
right of access to the audit working papers of the other auditor.

Page 92
32 Audit documentation is a substitute for the entity’s accounting
records. [RTP-Nov. 18, May 19]
• The auditor may include copies of the entity’s records (for
example, significant and specific contracts and agreements) as
part of audit documentation.
• Audit documentation is not a substitute for the entity’s
accounting records.
33 An appropriate time limit within which to complete the assembly of
the final audit file is ordinarily not more than 30 days after the date of
the auditor’s report. [RTP-Nov. 18, May 19]
• As per SQC 1 “Quality Control for Firms that perform Audits
and Review of Historical Financial Information, and other
Assurance and related services”, firms are required to establish
policies and procedures for the timely completion of the
assembly of audit files.
• An appropriate time limit within which to complete the
assembly of the final audit file is ordinarily not more than 60
days after the date of the auditor’s report.

Page 93
34 An auditor is not concerned with consistency of accounting policies
relating to opening balances. [Nov. 18 (2 Marks)]
As per SA 510 “Initial Audit Engagement – Opening Balances”, the
auditor shall obtain sufficient appropriate audit evidence about
• whether the accounting policies reflected in the opening
balances have been consistently applied in the current period’s
financial statements, and
• whether changes in the accounting policies have been properly
accounted for and adequately presented and disclosed in
accordance with the applicable financial reporting framework.
35 Audit evidence obtained from external confirmation is always reliable.
[Nov. 18 (2 Marks)]
• As per SA 505 “External Confirmations” depending on the

circumstances of the audit, audit evidence in the form of
external confirmations received directly by the auditor from
confirming parties may be more reliable than evidence
generated internally by the entity.
• All responses carry some risk of interception, alteration or
fraud. Such risk exists regardless of whether a response is
obtained in paper form, or by electronic or other medium.

Page 94
36 Positive Confirmation request is a request where the confirming party
respond only if it disagrees with the information provided in the
request. [May 19 (2 Marks)]
• As per SA 505 “External Confirmations” a request where the
confirming party respond only if it disagrees with the
information provided in the request, is known as Negative
Confirmation request.
• Positive Confirmation request is request that the confirming
party respond directly to the auditor indicating whether the
confirming party agrees or disagrees with the information in
the request, or providing the requested information
37 Subjective examination connotes critical examination and scrutiny of
the accounting statements. [RTP-Nov. 19]
• Objective examination connotes critical examination and
scrutiny of the accounting statements of the undertaking with a
view to assessing how far the statements present the actual
state of affairs in the correct context and whether they give a
true and fair view about the financial results and state of affairs.

Page 95
38 Inquiry alone provides sufficient audit evidence of the absence of a
material misstatement at the assertion level and of the operating
effectiveness of controls. [RTP-Nov. 19]
• Although inquiry may provide important audit evidence, and
may even produce evidence of a misstatement, inquiry alone
ordinarily does not provide sufficient audit evidence of the
absence of a material misstatement at the assertion level, nor of
the operating effectiveness of controls.
39 All entities that are under common control by a state (i.e., national,
regional or local government) are considered related party.
[Nov. 19 (2 Marks)]
• As per SA 550 “Related Parties”, entities that are under common
control by a state (i.e., a national, regional or local government)
are not considered related unless they engage in significant
transactions or share resources to a significant extent with one
another.

Page 96
40 The auditor's substantive procedure at the assertion level means
substantive analytical procedures only. [Nov. 19 (2 Marks)]
designed to detect the material misstatements at the assertion
level.
• The auditor’s substantive procedures at the assertion level may
be tests of details, substantive analytical procedures, or a
combination of both.
• The decision about which audit procedures to perform,
including whether to use substantive analytical procedure, is
based on the audtior’s judgment about the expected
effectiveness and efficiency of the available audit procedures to
reduce audit risk at the assertion level to an acceptably low
level.
----------------------

Page 97
Notes
__________________________________________________________________________________________________
__________________________________________________________________________________________________
__________________________________________________________________________________________________
__________________________________________________________________________________________________
__________________________________________________________________________________________________
__________________________________________________________________________________________________
__________________________________________________________________________________________________
__________________________________________________________________________________________________
__________________________________________________________________________________________________
__________________________________________________________________________________________________
__________________________________________________________________________________________________
__________________________________________________________________________________________________
__________________________________________________________________________________________________
__________________________________________________________________________________________________
__________________________________________________________________________________________________
__________________________________________________________________________________________________
__________________________________________________________________________________________________
__________________________________________________________________________________________________
__________________________________________________________________________________________________
__________________________________________________________________________________________________
__________________________________________________________________________________________________
__________________________________________________________________________________________________

Page 98
__________________________________________________________________________________________________
__________________________________________________________________________________________________
__________________________________________________________________________________________________
__________________________________________________________________________________________________
__________________________________________________________________________________________________
__________________________________________________________________________________________________
__________________________________________________________________________________________________
__________________________________________________________________________________________________
__________________________________________________________________________________________________
__________________________________________________________________________________________________
__________________________________________________________________________________________________
__________________________________________________________________________________________________
__________________________________________________________________________________________________
__________________________________________________________________________________________________
__________________________________________________________________________________________________
__________________________________________________________________________________________________
__________________________________________________________________________________________________
__________________________________________________________________________________________________
__________________________________________________________________________________________________
__________________________________________________________________________________________________
__________________________________________________________________________________________________
__________________________________________________________________________________________________
__________________________________________________________________________________________________

Page 99
__________________________________________________________________________________________________
__________________________________________________________________________________________________
__________________________________________________________________________________________________
__________________________________________________________________________________________________
__________________________________________________________________________________________________
__________________________________________________________________________________________________
__________________________________________________________________________________________________
__________________________________________________________________________________________________
__________________________________________________________________________________________________
__________________________________________________________________________________________________
---------------------------

Page 100

Chapter 3 Audit Documentation and Audit Evidence - Scanner

Uploaded by

Copyright:

Available Formats

Chapter 3 Audit Documentation and Audit Evidence - Scanner

Uploaded by

Document Information

Original Description:

Copyright

Available Formats

Share this document

Share or Embed Document

Sharing Options

Did you find this document useful?

Is this content inappropriate?

Copyright:

Available Formats

Chapter 3 Audit Documentation and Audit Evidence - Scanner

Uploaded by

Copyright:

Available Formats

Chapter 3 “Audit Documentation and Audit Evidence” ©www.altclasses.

Compiled by: Pankaj Garg

Audit Documentation and Audit Evidence

"Marks Distribution of Past Exams (New Syllabus)"

3.1 – Audit Documentation (SA 230)

Q. 1 Define audit documentation. Also give some examples.

Write short note on: Audit Working Papers [May 10 (5 Marks)]

Answer: Audit Documentation:

SA 230 “Audit Documentation” defines the term as “Record of audit

Examples of Audit Documentation:

Audit documentation may be recorded on paper or on electronic or

Compiled by: Pankaj Garg

• Summaries of significant matters.

• Letters of confirmation and representation.

• Correspondence (including e-mail) concerning significant

The auditor may include abstracts or copies of the entity’s

records (for example, significant and specific contracts and

agreements) as part of audit documentation. Audit

documentation, however, is not a substitute for the entity’s

Q. 2 Comment on the following in relation to SAs: “Audit Documentation

Serves a number of additional purposes”. [May 11 (5 Marks)]

Audit documentation serves a number of purposes. Explain with

reference to SA 230. [May 15 (6 Marks)]

Audit documentation provides evidence of the auditor’s basis for a

conclusion about the achievement of the overall objectives of the

Compiled by: Pankaj Garg

accordance with SAs and applicable legal and regulatory requirements.

Explain stating clearly purpose of audit documentation.

Answer: Purposes of Audit Documentation:

SA 230 “Audit Documentation” deals with the auditor’s

responsibility to prepare audit documentation for an audit of

financial statements. As per SA 230, Audit documentation serves a

number of purposes, including the following:

1. Assisting the engagement team to plan and perform the audit.

2. Assisting members of the engagement team responsible for

supervision to direct and supervise the audit, and to discharge

their review responsibilities.

3. Enabling the engagement team to be accountable for its work.

4. Retaining a record of matters of continuing significance to

5. Enabling the conduct of quality control reviews and inspections.

6. Enabling the conduct of external inspections in accordance with

applicable legal, regulatory or other requirements.

Compiled by: Pankaj Garg

Q.3 Audit documentation provides evidence of the auditor’s basis for a

conclusion about the achievement of the overall objectives of the

auditor. Explain clearly stating the nature and purpose of Audit

Documentation. [MTP-Oct. 18]

What do you mean by Audit Documentation? Also explain the nature

and purpose of audit documentation. [RTP-May 19]

Discuss the meaning and nature of Audit Documentation. [RTP-Nov. 19]

Answer: Meaning of Audit Documentation: Refer Answer of Q. No. 1.

Nature of Audit Documentation:

SA 230 “Audit Documentation” deals with the auditor’s

responsibility to prepare audit documentation for an audit of

financial statements. As per SA 230, the Auditor is required to

prepare documentation that provides:

(a) a sufficient and appropriate record of the basis for the

auditor’s report; and

(b) evidence that the audit was planned and performed in