CH - 3 - Audit Documentation and Audit Evidence

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Chapter 3 - Audit Documentation and Audit

Evidence
SA 230 - Audit Documentation
Definition of Audit Documentation
SA 230 on "Audit Documentation", deals with the auditor's responsibility to prepare audit documentation for an
audit of financial statements. The standard does not in any way limit the specific documentation requirements of
other SA’s. In other words, if other SAs prescribe more documentation requirements, those documentations are
also to be maintained.
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Nature and Purposes of Audit Documentation

Auditor’s responsibility for failure to detect fraud and errors
As per SA 240 the responsibility for the prevention and detection of fraud and error rests with the management
through the implementation of an adequate system of internal control. Such a system reduces but does not
eliminate the possibility of fraud and error.
In other words, the auditor is not responsible for prevention, detection and correction of misstatements. Moreover
because of Inherent limitations of auditing it is impossible for an auditor to detect all misstatements whether due
to fraud or error.
However, if there are doubtful situation that some material misstatement exist, auditor should extend his
procedure to confirm/dispel the doubt.
The subsequent discovery of a material misstatement of the financial statements resulting from fraud or error does
not by itself indicate a failure to conduct an audit in accordance with SAs.
“ If there remains a deep laid fraud in the accounts, which in the normal course of examination of accounts may
not come to light,
● It will not be construed as failure of audit,
● provided the auditor was not negligent in carrying out his normal work”
Auditor WILL NOT BE considered as negligent
● If he has carried his work in accordance
○ with SA’s and
○ applicable law and regulations.
Whether the auditor has performed an audit in accordance with SAs and law and regulations is determined by the
● audit procedures performed in the circumstances, the
● sufficiency and appropriateness of the audit evidence obtained as a result thereof
● and the suitability of the auditor’s report based on an evaluation of that evidence in light of the overall
objectives of the auditor.
All this can be checked by AUDIT DOCUMENTATION.
However, the inherent limitations of an audit are not a justification for the auditor to be satisfied with less-than
persuasive audit evidence.
Form, Content and Extent of Audit Documentation

The form, content and extent of audit documentation depend on factors such as:

Basis of conclusion - If the basis of conclusion is not readily determinable, from the documentation of the work
performed, then other supporting documents must also be attached.
(for example auditor’s assessment of risk of material misstatement is a matter of professional judgement and the
basis of this assessment of it is not readily determinable)

Form ,Content and Extent of Audit Documentation
The auditor shall prepare audit documentation that is sufficient to enable an experienced auditor to understand.
a) The nature, timing and extent of the audit procedures:
b) The results of the audit procedures performed, and the audit evidence obtained; and
c) Significant matters arising during the audit and the conclusions reached thereon,significant
professional judgements made in reaching those conclusions
In documenting the nature, timing and extent of audit procedures performed, the auditor of shall record:
● The identifying characteristics of the specific items or matters tested. (Assertions tested)
● Who performed the audit work and the date such work was completed; and
● Who reviewed the audit work performed and the date and extent of such review.
The auditor shall document discussions of significant matters with management, those charged with governance,
and others, including the nature of the significant matters discussed and when and with whom the discussions
took place.
If the auditor identified information that is inconsistent with the auditor's final conclusion regarding a significant
matter, the auditor shall document how the auditor addressed the inconsistency
Experience Auditor
● An individual (whether internal or external to the firm) who has practical audit experience, and a
reasonable understanding of:
○ Audit processes;
○ SAs and applicable legal and regulatory requirements;
○ The business environment in which the entity operates; and
○ Auditing and financial reporting issues relevant to the entity’s industry.
While documenting the nature, timing and extent of audit procedures performed in case of audit of PQR Ltd,
explain the important matters it's auditor should record.
RTP May 2021
Examples of Audit Documentation
● Audit Documentation include:

○ Audit programmes.
○ Analyses.
○ Issues memoranda.
○ Summaries of significant matters.
○ Letters of confirmation and representation.
○ Checklists.
○ Correspondence (including e-mail) concerning significant matters.
Audit documentation is not a substitute for the entity’s accounting records.
The auditor may include copies of the entity’s records (for example, significant and specific contracts and
agreements) as part of audit documentation.
The auditor need not include in audit documentation

● superseded drafts of working papers and financial statements,
● notes that reflect incomplete or preliminary thinking,
● previous copies of documents corrected for typographical or other errors, and duplicates of documents.
Ownership of Audit Documentation
Standard on Quality Control (SQC) 1 provides that,

● unless otherwise specified by law or regulation,
● Audit documentation is the property of the auditor.
The auditor should adopt reasonable procedures for custody and confidentiality of his working papers.
He may at his discretion,

● make portions of, or extracts from, audit documentation available to clients,
● provided such disclosure does not undermine the validity of the work performed, or,
● in the case of assurance engagements, the independence of the auditor or of his personnel.
In the case of a company, the main auditor has to consider the report of the branch auditor and has a right to seek
clarification and to visit the branch but cannot ask for the copy of working paper and therefore, the branch auditor
is under no compulsion to give photocopies of his working paper to the principal auditor.

Audit File
Preparation of Audit Documentation
● Preparing sufficient and appropriate audit documentation on a timely basis helps to

○ enhance the quality of the audit and
○ facilitates the effective review and evaluation of the audit evidence obtained and conclusions
reached before the auditor’s report is finalised.
● Documentation prepared after the audit work has been performed is likely to be less accurate than
documentation prepared at the time such work is performed.
Assembly of final audit file

● The auditor’s 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.
● SQC 1 “Quality Control for Firms that perform Audits and Review of Historical Financial Information, and
other Assurance and related services”, 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.
● 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.
● 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.
○ Deleting or discarding superseded documentation.
○ Sorting, collating and cross referencing working papers.
○ Signing off on completion checklists relating to the file assembly process.
○ 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 of the final audit file has been completed, the auditor shall not delete or discard audit
documentation of any nature before the end of its retention period.

Retention
SQC 1 requires firms to establish policies and procedures for the retention of engagement documentation. The
retention period for audit engagements ordinarily is no shorter than seven years from the date of the auditor’s
report, or, if later, the date of the group auditor’s report.
Completion Memorandum or Audit Documentation Summary

The auditor may consider it helpful to prepare and retain as part of the audit documentation a summary
(sometimes known as a completion memorandum) that describes-
● the significant matters identified during the audit and
● how they were addressed.
● Such a summary may facilitate effective and efficient review and inspection of the audit documentation,
particularly for large and complex audits.
● It may also help the auditor to consider whether he is able to achieve the objectives of the relevant
individual SAs and the overall objective of the audit
Documentation of Significant Matters and Related Significant

Professional Judgements
Judging the significance of a matter requires an objective analysis of the facts and circumstances.
An important factor in determining the form, content and extent of audit documentation of significant matters
is the extent of professional judgement exercised in performing the work and evaluating the results. Higher the
professional judgement , High the extent of documentation involved.

Documentation of the professional judgements

● helps in explaining the auditor’s conclusions and
● Helps to reinforce the quality of the judgement.
● Reviewing audit documentation.
● Carrying out subsequent audits.
Example of Significant matters
1. Results of audit procedures indicating financial statements could be materially misstated

2. Results of audit procedures indicating a need to revise the assessment of risk of material misstatement and
the responses to the same.
3. Situation causing significant difficulty in applying audit procedures.
4. Evidence that could result in modification in the auditor’ opinion
5. Evidence that could lead to inclusion of Emphasis of matter paragraph in auditor’s report.

SA 500 Audit Evidence

Meaning of Audit Evidence
Information contained in the accounting records
Accounting records include
● the records of initial accounting entries and supporting records, such as checks and records of electronic
fund transfers;
● Invoices;
● Contracts
● the ledgers, journal entries and other adjustments to the financial statements.
● records such as worksheets and spreadsheets supporting cost allocations, computations, reconciliations
and disclosures.
Other information
Other information that authenticates the accounting records and also supports the auditor’s rationale behind the
true and fair presentation of the financial statements:
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 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.
Other Points related to Audit Evidence and Its Nature.
It is cumulative in nature
Primarily obtained from audit procedures performed during the course of the audit.
It may, however, also include information obtained from other sources such as previous audits.
Audit evidence comprises both

● information that supports and corroborates management’s assertions, and
● any information that contradicts such assertions.
The absence of information (for example, management’s refusal to provide a requested representation) also
constitutes audit evidence.
Relation of Audit Evidence and Opinion of the Auditor
There exists a very important relationship between Audit Evidence and the opinion of the Auditor.
While conducting an audit of a company,

● the auditor obtains audit evidence and
● With the help of that audit evidence obtained, the auditor forms an audit opinion on the financial
statements of that company.
Audit evidence is necessary to support the auditor’s opinion and report.
As explained in SA 200, “Overall Objectives of the Independent Auditor and the Conduct of an Audit in Accordance
with Standards on Auditing”, reasonable assurance is obtained when the auditor has obtained sufficient
appropriate audit evidence to reduce audit risk to an acceptably low level.

Sufficiency of Audit Evidence

● Sufficiency is the measure of the quantity of audit evidence.
● 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.
Factors to determine Sufficiency
Materiality
It may be defined as the significance of classes of transactions, account balances and presentation and disclosures
to the users of the financial statements.
Less evidence would be required in case assertions are less material to users of the financial statements.
But on the other hand if assertions are more material to the users of the financial statements, more evidence
would be required.
Risk of material misstatement

It may be defined as the risk that the financial statements are materially misstated prior to audit.

Less evidence would be required in case assertions that have a lower risk of material misstatement.
But on the other hand, if assertions have a higher risk of material misstatement, more evidence would be required.
Size of a population
It refers to the number of items included in the population.
Less evidence would be required in case of smaller, more homogeneous population but on the other hand in case
of larger, more heterogeneous populations, more evidence would be required.
Appropriateness of Audit Evidence

Appropriateness is the measure of the quality of audit evidence; that is, its relevance and its reliability in providing
support for the conclusions on which the auditor’s opinion is based.
Relevance
Relevance means the relationship of the evidence with audit procedure and the assertion being checked.
A given set of audit procedures may provide audit evidence that is relevant to certain assertions, but not others.
For example, confirmation of balance from a customer is a relevant evidence as regards existence of receivable, but
it may not be relevant as regards collectability of the balance due from customer.
Also, physical observation of inventories is relevant evidence relating to existence, but is not appropriate evidence
to ensure that the entity owns the inventories.
On the other hand, audit evidence from different sources or of a different nature may often be relevant to the same
assertion. For example Checking the terms of the agreement and confirming the same from the third party.
The term competence is also used in place of relevance.
One more example of relevance: To Check if a purchase is complete you don't look at the Purchase contract. For
checking the completeness of purchase we will check that goods or services were received. For this we will check
various documents and records related to receiving goods like stock registers .
Reliability of Audit Evidence
You measure reliability by deciding whether the evidence is credible.

As an auditor, you should adopt an attitude of professional skepticism.
In order to obtain reliable audit evidence, information produced by the entity that is used for performing audit
procedures needs to be sufficiently complete and accurate.
As per SA 500 "Audit Evidence", the reliability of information to be used as audit evidence, and therefore of the
audit evidence itself, is influenced by its
● source and
● its nature, (Direct, indirect, oral, written or original, photocopies) and
● the circumstances under which it is obtained,
● including the controls over its preparation and maintenance where relevant.
Generalisations about the reliability of various kinds of audit evidence are subject to important exceptions.
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.
For example, information obtained from an independent external source may not be reliable if the source is not
knowledgeable, or a management's expert may lack objectivity.
While recognising that exceptions may exist, the following generalisations about the reliability of audit evidence
may be useful
1. The reliability of audit evidence is increased when it is obtained from independent sources outside the
entity.
2. 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.
3. Audit evidence obtained directly by the auditor (for example, observation of the application of a control) is
more reliable than audit evidence obtained indirectly or by inference (for example, inquiry about the
application of a control).
4. Audit evidence in documentary form, whether paper, electronic, or other medium, is more reliable than
evidence obtained orally (for example, a contemporaneously written record of a meeting is more reliable
than a subsequent oral representation of the matters discussed).
5. Audit evidence provided by original documents is more reliable than audit evidence provided by
photocopies or facsimiles, 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.
6. Circumstances prevailing in the organisation can have a severe impact on the reliability of the audit
evidence.
Correct / Incorrect Marks 2 January 2021 Exam Question

Sufficiency is the measure of the quantity of audit evidence.

Sources of Audit Evidence
Some audit evidence is obtained by performing audit procedures to test the accounting records.
Through the performance of such audit procedures, the auditor may determine that the accounting records are
internally consistent and agree to the financial statements.
More assurance is ordinarily obtained from consistent audit evidence obtained from different sources or of a
different nature than from items of audit evidence considered individually.
Information from sources independent of the entity that the auditor may use as audit evidence may include
confirmations from third parties, analysts’ reports, and comparable data about competitors.
Audit Procedures to Obtain Audit Evidence
Audit evidence to draw reasonable conclusions on which to base the auditor’s opinion is obtained by performing
➔ Risk assessment procedures; and
➔ Further audit procedures, which comprise:
◆ Tests of controls, when required by the SAs or when the auditor has chosen to do so; and
◆ Substantive procedures, including tests of details and substantive analytical procedures.
➔ The audit procedures described below may be used as
◆ risk assessment procedures,
◆ tests of controls or
◆ substantive procedures,
● Depending on the context in which they are applied by the auditor.
Audit procedures to obtain audit evidence can include
1. Inspection
2. Observation
3. External Confirmation
4. Recalculation
5. Reperformance
6. Analytical Procedure
7. Enquiry
Inspection
● examining records or documents,
○ whether internal or external,

○ in paper form, electronic form, or other media, or

● a physical examination of an asset.
● Inspection of records and documents provides audit evidence
○ of varying degrees of reliability,
○ depending on their nature and source and,
● Example - Documentation related to authorisation
Observation
● Observation consists of witnessing a process or procedure being performed by others.
● For example, the auditor may observe the counting of inventories being performed by client's personnel.
External Confirmation
An external confirmation 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.
External confirmation procedures frequently are relevant when addressing assertions associated with certain
account balances and their elements. However, external confirmations need not be restricted to account balances
only.
External confirmation procedures also are used to obtain audit evidence about the absence of certain conditions.
Recalculation
Recalculation consists of checking the mathematical accuracy of documents or records. Recalculation may be
performed manually or electronically.
Re-performance
Re-performance involves the auditor’s independent execution of procedures or controls that were originally
performed as part of the entity’s internal control.
Analytical Procedures
● Analytical procedures consist of evaluations of financial information by a study of relationships among both
financial and non- financial data.
● Analytical Procedures refers to studying significant ratios and trends and investigating unusual
fluctuations.
Inquiry

Types of Audit Evidence


Management’s expert
An individual or organisation possessing expertise in a field other than accounting or auditing, whose work in that
field is used by the entity to assist the entity in preparing the financial statements.
When information to be used as audit evidence has been prepared using the work of a management’s expert, the
auditor shall, to the extent necessary, having regard to the significance of that expert’s work for the auditor’s
purposes,:
● Evaluate the competence, capabilities and objectivity of that expert;

● Obtain an understanding of the work of that expert; and
● Evaluate the appropriateness of that expert’s work as audit evidence for the relevant assertion.

SA 505 - External Confirmation
Question - Explain the process of external confirmation. Give some examples where external confirmation can be
used as audit evidence. (M. Imp)
According to SA 505 on
External confirmation may be defined as an 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.
When using external confirmation procedures, the auditor shall maintain control over external control requests,
including:
1. Selecting the items for which confirmations are needed. (कौन से आइटमस के लिए )
2. Determining the information to be confirmed or requested; (क्या)
3. Selecting the appropriate confirming party; (किस से )
4. 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 (Properly Designed,
Addressed, return information)
5. Sending the requests, including follow-up requests when applicable, to the confirming party. (भ़जो और फोलो
उप रखो)
Examples of situations where external confirmations may be used include the following
● Bank balances and other information from bankers.
● Accounts receivable balances.
● Stocks held by third parties.
● Property title deeds held by third parties.
● Investments purchased but delivery not taken.
● Loans from lenders.
● Accounts payable balances.
● Long outstanding share application money.
● Terms of Agreement or transaction with the third parties
External confirmation procedures are restricted to the items of addressing assertions associated with account
balances & their elements only. - (Correct / Incorrect - November 2020 2 Marks)
Question
While conducting the audit of Amrit Ltd. the auditor A of ABC and Associates, Chartered Accountants
observed that there are a large number of trade receivables standing in the books of account as on 31 st

March. The auditor wanted to send confirmation requests to a few large trade receivables but the
management refused the auditor to send confirmation requests. How would the auditor proceed? -
November 2020 4 Marks
Answer - (Answer is as per the suggested answer issued by ICAI, you can download the same from www.icai.org)
In the given case of Amrit Ltd, the auditor wanted to send confirmation requests to a few large trade receivables
but the management did not want the auditor to send confirmation requests.
If the 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 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 those charged with governance in accordance with SA 260.
The auditor shall also determine the implication for the audit and the auditor’s opinion in accordance with SA
705.

What are the factors that are to be considered while designing a confirmation request? (8 Marks)
As per SA -505 "External Confirmations", the design of a confirmation request may directly affect the confirmation
response rate, and the reliability and the nature of the audit evidence obtained from responses.
The following factors should be considered while designing a confirmation request: -

a. The assertions being addressed.
b. Specific identified risks of material misstatement, including fraud risks.
c. The layout and presentation of the confirmation request.
d. Prior experience on the audit or similar engagements.
e. The method of communication (कैसे बताए )
f. Management's authorisation to the confirming parties to respond to the auditor. Confirming parties may
only be willing to respond to a confirmation request containing management's authorisation. (क्यों तझ
ु को
चाहें )
g. The ability of the confirming party to provide the requested information (यारा बता ना पाए – ability)

Negative confirmations provide less persuasive audit evidence than positive confirmations. Accordingly, the
auditor shall not use negative confirmation requests as the sole substantive audit procedure to address an
assessed risk of material misstatement at the assertion level unless all of the following are present:
● The auditor has assessed the risk of material misstatement as low and has obtained sufficient appropriate
audit evidence regarding the operating effectiveness of controls relevant to the assertion;
● The population of items subject to negative confirmation procedures comprises a large number of small,
homogeneous, account balances, transactions or conditions;
● A very low exception rate is expected; and
● The auditor is not aware of circumstances or conditions that would cause recipients of negative
confirmation requests to disregard such requests.

Question
When attending an inventory count, the auditor selects a sample of items from physical inventory and traces
them to inventory records. Which of the following assertion is mainly being checked
● Existence
● Completeness
● Valuation
● Presentation and disclosure
What will be your answer if auditor select sample from inventory records and trace them to physical inventories

Results of the External Confirmation Procedures
Reliability of Responses to Confirmation Requests
● If the auditor identifies factors that give rise to doubts about the reliability of the response to a confirmation
request, the auditor shall obtain further audit evidence to resolve those doubts.
● 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.
Evaluating the Evidence Obtained
The auditor shall evaluate whether the results of the external confirmation procedures provide relevant and
reliable audit evidence, or whether performing further audit procedures is necessary.
External Confirmation as a Substantive Procedure
Factors that may assist the auditor in determining whether external confirmation procedures are to be 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 (In
the given situations, confirming parties may not respond, may respond in a casual manner or may attempt
to restrict the reliance placed on the response.)
○ 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
○ may operate in an environment where responding to confirmation requests is not a significant
aspect of day-to-day operations.
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.

SA 501 - Audit Evidence – Additional Considerations for

Specific Items
Inventory
SAAE Regarding Existence and condition of inventory
When inventory is material to the financial statements, 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:
i. Evaluate management's instructions and procedures for recording and controlling the results of
the entity's physical inventory counting;
ii. Observe the performance of management's count procedures;
iii. Inspect the inventory; and
iv. Perform test counts; and
b. Performing audit procedures over the entity's final inventory records to determine whether they accurately
reflect actual inventory count results. (Count results is reflected in the records)
Attendance at Physical Inventory Counting
Attendance at Physical Inventory Counting Involves:

a. Inspecting the inventory to ascertain its existence and evaluate its condition, and performing test counts;
b. Observing compliance with management’s instructions and the performance of procedures for recording
and controlling the results of the physical inventory count; and
c. Obtaining audit evidence as to the reliability of management’s count procedures.
Matters Relevant in Planning Attendance at Physical Inventory Counting
Matters relevant in planning attendance at physical inventory counting include,

● Nature of inventory.
● Stages of completion of work in progress.
● The risks of material misstatement related to inventory.
● The nature of the internal control related to inventory.
● Whether adequate procedures are expected to be established and proper instructions issued for physical
inventory counting.
● The timing of physical inventory counting.
● Whether the entity maintains a perpetual inventory system.
● 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
● Whether the assistance of an auditor’s expert is needed.
Physical Inventory Counting Conducted Other than at the Date of the Financial
Statements
If physical inventory counting is conducted at a date other than the date of the financial statements, the auditor
shall, in addition to the procedures required above, 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.
If the Auditor is unable to Attend Physical Inventory Counting due to Unforeseen

Circumstances
If the auditor is unable to attend physical inventory counting due to unforeseen circumstances, the auditor shall
make or observe some physical counts on an alternative date, and perform audit procedures on intervening
transactions.

In some cases where attendance is impracticable, alternative audit procedures, for example inspection of
documentation of the subsequent sale of specific inventory items acquired or purchased prior to the physical
inventory counting, may provide sufficient appropriate audit evidence about the existence and condition of
inventory.
In other cases, however, it may not be possible to obtain sufficient appropriate audit evidence regarding the
existence and condition of inventory by performing alternative audit procedures. In such cases, SA 705 requires the
auditor to modify the opinion in the auditor’s report as a result of the scope limitation.

Inventory under the custody and control of a third party


Modification in the opinion
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,
the auditor shall modify the opinion in the auditor’s report in accordance with SA 705.
Written Representations

The auditor shall request management and, where appropriate, those charged with governance to provide written
representations that
● all known actual or possible litigation and claims
● whose effects should be considered when preparing the financial statements
● have been
○ disclosed to the auditor and
○ appropriately accounted for and disclosed in accordance with the applicable financial reporting
framework.
Segment Information
Obtain sufficient appropriate audit evidence regarding the presentation and disclosure of
segment information.
The auditor shall obtain sufficient appropriate audit evidence regarding the presentation and disclosure of
segment information in accordance with the applicable financial reporting framework by
● Obtaining an understanding of the methods used by management in determining segment information,

and (Auditor un methods ki understanding obtain karega jinhe use karke management segment information determine karti hai)
○ Evaluating whether such methods are likely to result in disclosure in accordance with the
applicable financial reporting framework
○ Where appropriate, testing the application of such methods; and
● Performing analytical procedures or other audit procedures appropriate in the circumstances.
Understanding of the Methods Used by Management
Example of matters
● that may be relevant
● when obtaining an understanding of the methods
● used by management in determining segment information and
● whether such methods are likely to result in disclosure in accordance with the applicable financial
reporting framework include:
Sales, transfers and charges between segments, and elimination of inter segment amounts.
Comparisons with budgets and other expected results, for example, operating profits as a
percentage of sales.
The allocation of assets and costs among segments.
Consistency with prior periods, and the adequacy of the disclosures with respect to inconsistencies

SA 580 - WRITTEN REPRESENTATIONS

Meaning

NPV is a firm of Chartered Accountants conducting audit of Trivedi 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. Discuss how you would deal as an auditor.
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.
Applying the above to the given problem, the auditor , NPV a firm of Chartered Accountants, would further request
the management to provide him with the Banker’s certificate in support of fixed deposits held by the company.
Objective of Auditor

Descriptive Question Marks 3 January 2021 Exam Question

Explain the objectives of the auditor regarding written representations.
From Whom
Auditors shall request written representations from management
● with appropriate responsibilities for the financial statements and
● knowledge of the matters concerned.
People from whom written representation is to be requested may vary depending on the governance structure
of the entity, and relevant law or regulations; however, management (rather than TCWG) is often the responsible
party.
Written representations may therefore be requested from the entity’s CEO and CFO, or other equivalent persons in
entities that do not use such titles. In some circumstances , however, other parties, such as TCWG , are also
responsible for the preparation and presentation of the financial statements.
In some cases, however,

- management may decide to make inquiries of others
- who participate in preparing and presenting the financial statements and assertions therein,
- including individuals who have specialized knowledge relating to the matters about which written
representations are requested.
- Such individuals may include:
● An actuary responsible for actuarially determined accounting measurements.
● Staff engineers who may have responsibility for and specialized knowledge about environmental
liability measurements.
● Internal counsel who may provide information essential to provisions for legal claims.
Qualifying language used in Written Representation

In some cases, management may include in the written representations qualifying language to the effect that
representations are made to the best of its knowledge and belief.
It is reasonable for the auditor to accept such wording if the auditor is satisfied that the representations are being
made by those with appropriate responsibilities and knowledge of the matters included in the representations.
Can an auditor accept written representation with qualifying language / words?

Yes, if the auditor is
_________________________________________________________________________________________________________________
_________________________________________________________________________________________________________________
_________________________________________________________________________________________________________________

Written Representations about Management's Responsibilities

The auditor shall request management to provide a written representation that
● It has fulfilled its responsibility for the preparation of the financial statements in accordance with the
applicable financial reporting framework.
● All transactions have been recorded and are reflected in the financial statements.
● It has provided the auditor with all relevant information and access as agreed in the terms of the audit
engagement, and
Audit evidence obtained during the audit that management has fulfilled the responsibilities is not sufficient
without obtaining confirmation from management about the same.
Other Written Representations

Other SAs require the auditor to request written representations. If, in addition to such required representations,
the auditor determines that it is necessary to obtain one or more written representations to support other audit
evidence relevant to the financial statements or one or more specific assertions in the financial statements, the
auditor shall request such other written representations.
(In short, auditor can take any written representation that is necessary to support audit evidence or assertion w.r.t
financial statements)
Reconfirmation of responsibilities
The auditor may also ask management to reconfirm its acknowledgement and understanding of those
representations. This is particularly appropriate when:
● Those who signed the terms of the audit engagement on behalf of the entity no longer have the relevant
responsibilities.
● The terms of the audit engagement were prepared in a previous year.
● There is any indication that management misunderstands those responsibilities; or
● Changes in circumstances make it appropriate to do so.
Date of and Period(s) Covered by Written Representations
● The date of the written representations shall be as near as practicable to, but not after, the date of the
auditor’s report on the financial statements.
● The written representations shall be for all financial statements and period(s) referred to in the auditor’s
report.
● The auditor’s report cannot be dated, before the date of the written representations, Because written
representations are necessary audit evidence, the auditor’s opinion cannot be expressed.

Form of Written Representations
The written representations shall be in the form of a representation letter addressed to the auditor.
Management to make written public statements about its

responsibilities
If law or regulation requires management to make written public statements about its responsibilities, and the
auditor determines that such statements provide some or all of the representations required, the relevant matters
covered by such statements need not be included in the representation letter.
Doubt as to the Reliability of Written Representations.
If the auditor has concerns about the

● competence, integrity, ethical values or diligence of management, or
● about its commitment to or enforcement of these,
the auditor shall determine the effect that such concerns may have on
● the reliability of representations (oral or written) and
● audit evidence in general.
In particular, if written representations are inconsistent with other audit evidence,

- the auditor shall perform audit procedures to attempt to resolve the matter.
The auditor may consider

- whether the risk assessment remains appropriate and, if not,
- revise the risk assessment and
- determine the nature, timing and extent of further audit procedures to respond to the assessed
risks.
If the matter remains unresolved, the auditor shall reconsider the assessment of the
● competence, integrity, ethical values or diligence of management, or
● about its commitment to or enforcement of these,
and shall determine the effect that this may have on
● the reliability of representations (oral or written) and
● audit evidence in general.
If the auditor concludes that the written representations are not reliable,
- the auditor shall take appropriate actions,
- including determining the possible effect on the opinion in the auditor’s report in accordance with SA 705

Requested Written Representations Not Provided
What do you mean by "Written Representations"? As an auditor, how will you deal if management does not
provide requested written representations?
Answer
Written Representations: As per SA 580, "Written Representation", is a written statement by management provided
to the auditor to confirm certain matters or to support other audit evidence.
These representations are an important source of audit evidence.
If management modifies or does not provide the requested written representations, it may alert the auditor to
the possibility that one or more significant issues may exist.
If management does not provide one or more of the requested written representations,
● the auditor shall discuss the matter with management;

● re-evaluate the integrity of management and evaluate the effect that this may have on the reliability of
representations (oral or written) and audit evidence in general; and
● take appropriate actions, including determining the possible effect on the opinion in the auditor's report.
The auditor shall disclaim an opinion on the financial statements if management does not provide the written
representations.
If management does not provide one or more of the requested written representations,
● the auditor shall _______________ the matter with management;
● ________________ the integrity of management and evaluate the effect that this may have on the reliability of representations (oral or
written) and audit evidence in general; and
● _______________ appropriate actions, including determining the possible effect on the opinion in the auditor's report.
The auditor shall __________________________ on the financial statements if management does not provide the written representations.


CH - 3 - Audit Documentation and Audit Evidence

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Chapter 3 - Audit Documentation and Audit

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Nature and Purposes of Audit Documentation

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Auditor’s responsibility for failure to detect fraud and errors

● It will not be construed as failure of audit​,

Auditor WILL NOT BE considered as negligent

● If he has carried his work in accordance

○ with SA’s and

○ applicable law and regulations.

● audit procedures performed in the circumstances, the

● sufficiency and appropriateness of the audit evidence obtained as a result thereof

All this can be checked by AUDIT DOCUMENTATION.

Form, Content and Extent of Audit Documentation

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Form ,Content and Extent of Audit Documentation

RTP May 2021

Examples of Audit Documentation

● Audit Documentation include:

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Audit documentation is not a substitute for the entity’s accounting records.

The auditor need not include in audit documentation

Ownership of Audit Documentation

Standard on Quality Control (SQC) 1 provides that,

He may at his discretion,

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Preparation of Audit Documentation

● Preparing sufficient and appropriate audit documentation on a timely basis helps to

Assembly of final audit file

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Completion Memorandum or Audit Documentation Summary

Documentation of Signiﬁcant Matters and Related Signiﬁcant

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Documentation of the professional judgements

Example of Significant matters

1. Results of audit procedures indicating financial statements could be materially misstated

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SA 500 Audit Evidence

Information contained in the accounting records

Accounting records include

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● minutes of the meetings,

Other Points related to Audit Evidence and Its Nature.

Audit evidence comprises both

Relation of Audit Evidence and Opinion of the Auditor

While conducting an audit of a company,

Audit evidence is necessary to support the auditor’s opinion and report.

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Sufficiency of Audit Evidence

Factors to determine Sufficiency

Risk of material misstatement

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Appropriateness of Audit Evidence

The term competence is also used in place of relevance.

Reliability of Audit Evidence

You measure reliability by deciding whether the evidence is credible.

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● It will not be construed as failure of audit,